Masco Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited results; amounts are in U.S. dollars. Masco operates across cabinets, plumbing, installation services, decorative architectural products and other specialty products.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $2.260B | $2.149B | $4.225B | $4.025B |
| Gross profit | $661M | $609M | $1.208B | $1.117B |
| Operating profit | $240M | $188M | $392M | $320M |
| Income from continuing operations attributable to Masco | $140M | $83M | $216M | $145M |
| Net income attributable to Masco | $139M | $78M | $213M | $131M |
| Diluted EPS, continuing operations | $0.39 | $0.23 | $0.60 | $0.40 |
| Diluted EPS, net income | $0.39 | $0.22 | $0.59 | $0.36 |
- Q2 and first-half sales rose 5% year over year; excluding currency translation and acquisitions, sales increased 4% in each period.
- Gross margin improved to 29.2% in Q2 and 28.6% for the half, from 28.3% and 27.8%. Reported operating margin increased to 10.6% and 9.3%, from 8.7% and 8.0%.
- Q2 segment sales increased in plumbing (+6%), installation and other services (+8%), decorative architectural (+5%) and other specialty (+11%); cabinets declined 5%. Plumbing operating profit rose to $139M from $102M in Q2. Cabinets reported an $8M Q2 operating loss versus $2M profit.
- First-half operating cash flow was $61M versus $59M. Capital expenditures were $54M, leaving $7M of operating cash flow after capital spending. Cash dividends paid were $54M; share repurchases were $39M.
Balance sheet, debt and liquidity
- At June 30, cash and cash investments were $1.195B and short-term bank deposits $228M, totaling $1.423B, down from $1.544B at December 31, 2013. About $620M was held in foreign subsidiaries and could incur tax or withholding costs if repatriated.
- Notes payable were $507M and long-term debt $2.921B, for carrying debt of about $3.428B. Long-term debt declined $500M, while current notes payable rose from $6M; this reflects classification of $500M of 4.8% notes due June 2015 as short-term. The current ratio was 1.5 versus 1.9 at year-end.
- A $1.25B revolving credit agreement matures in March 2018. Masco reported up to $1.2B of additional borrowing capacity, no borrowings under the agreement and compliance with all covenants. Estimated market value of short- and long-term debt was approximately $3.8B versus carrying value of approximately $3.4B.
Changes, outlook and notable items
- Profitability improved year over year, supported by sales volume, lower rationalization costs, cost savings and favorable selling-price/commodity-cost relationships. Interest expense declined $4M in Q2 and $8M for the half, principally following the 2013 retirement of $200M of 7.125% notes.
- Management expected continued 2014 growth in new-home construction, modest repair-and-remodel growth and continued European recovery. Priorities include brand growth, innovation, international expansion and cost containment. No specific financial guidance was provided.
- Management raised its expected 2014 rationalization charges to approximately $18M from $10M, following corporate-office actions; it said further review could result in additional charges.
- Effective tax rates were 19% for Q2 and 15% for the first half, below the stated normalized rate of 36%. The first-half rate included a $19M benefit, principally from state tax positions reaching statute expiration. Masco said a reversal of up to approximately $550M of deferred-tax valuation allowance could be possible as early as the second half of 2014 if U.S. profitability provides sufficient evidence; this was not assured.
- Masco revised prior-period financial statements for an immaterial error in accounting for certain private-equity investments, changing them from cost to equity method. The revision increased reported 2013 net income by $16M for the full year and $1M for Q2, with no cash-flow effect. A separate previously disclosed cash-classification revision also had no effect on results of operations.
- Tvilum, sold in Q4 2013, was reported as a discontinued operation; first-half 2013 included a $14M net loss from discontinued operations. The filing says ordinary-course legal matters are not expected to have a material adverse effect, while acknowledging outcomes could change. No material changes to the company’s previously reported risk factors were disclosed.
Important facts for investors to verify
- Whether sales momentum and margin improvements persist, especially in the loss-making Cabinets and Related Products segment.
- The 2015 maturity of $500M in notes, refinancing or repayment plans, and liquidity after seasonal working-capital needs.
- Whether U.S. profitability supports any deferred-tax valuation-allowance reversal, and the sustainability of the unusually low effective tax rate.
- Actual 2014 rationalization costs versus the revised $18M estimate and any additional charges.
- Effects of foreign-cash repatriation taxes, commodity and currency movements, and unresolved legal or product-related claims.