Masco Corporation — Q1 2014 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2014, compared with the same 2013 period. Masco sells home-improvement and building products and services across five segments. Dollar amounts below are in millions unless otherwise noted.
Key financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $1,965 | $1,876 |
| Gross profit / margin | $547 / 27.8% | $508 / 27.1% |
| Operating profit / reported margin | $152 / 7.7% | $132 / 7.0% |
| Income from continuing operations attributable to Masco | $76 | $62 |
| Net income attributable to Masco | $74 | $53 |
| Diluted earnings per share | $0.21 | $0.15 |
| Net cash used for operating activities | $244 | $210 |
- Sales rose 5% as reported and 4% excluding currency translation and acquisitions. Operating profit increased 15%; gross margin improved 0.7 percentage points.
- Interest expense declined to $56 from $60, while other income (expense), net, moved to a $59 expense from a $47 expense. The prior-year period included greater equity-investment income.
- Loss from discontinued operations was $2 versus $9. The 2014 charge related to prior discontinued operations; Tvilum was sold in Q4 2013.
- Cash and cash investments were $906 at quarter-end, with short-term bank deposits of $305, for combined funds of about $1.2 billion, down from about $1.5 billion at year-end 2013. Cash used in operations reflected seasonal increases in receivables and inventory.
- Long-term debt was $3,421 and notes payable were $6. The company reported a 2.0-to-1 current ratio and no borrowings under its $1.25 billion credit agreement; up to $1.2 billion of additional borrowing capacity was available, subject to availability and covenants.
Material changes and operating drivers
- North American sales increased 3%; international sales, principally Europe, increased 12%, including a 5% benefit from currency translation. International sales increased 7% in local currencies.
- Plumbing Products sales grew 5% and operating margin rose to 14.9% from 11.3%. Installation and Other Services sales grew 7%, while its operating loss was $4 in both periods.
- Cabinets and Related Products sales were nearly flat, but its operating loss widened to $12 from $4. Decorative Architectural Products sales rose 2%, while operating profit fell to $76 from $89. Other Specialty Products sales rose 13% and operating profit improved to $5 from a $1 loss.
- Management cited higher volume, cost savings and a more favorable selling-price/commodity-cost relationship as contributors to gross-margin improvement. Inclement U.S. weather hurt some North American sales and contributed to inefficiencies in cabinets and installation services. Rationalization and other initiative costs were $5, down from $8.
Outlook, risks and unusual items
- Management expected continued growth in U.S. new-home construction, modest growth in repair and remodeling, improvement in big-ticket items, and continued European recovery. It gave no quantified earnings or revenue guidance.
- Management identified priorities including growing leading brands, customer-focused innovation, international expansion and cost containment, and said it believed the company was positioned to gain market share.
- The effective tax rate was 5%, mainly reflecting partial use of U.S. federal net operating loss carryforwards and a $15 state tax benefit from the expiration of statutes of limitation. Masco said a reversal of up to about $550 of deferred-tax valuation allowance could be possible as early as the second half of 2014 if sufficient evidence of sustainable U.S. profitability emerges.
- Risks cited include dependence on housing and home improvement markets and key customers, raw-material cost and availability, international economic uncertainty, changing consumer preferences, and the ability to improve underperforming businesses and remain competitive. Ordinary-course litigation includes product liability, environmental, construction-defect and other claims; management did not expect the matters to have a material adverse effect, but outcomes are uncertain.
- The company disclosed an accounting error involving private-equity fund investments, which had been recorded using cost rather than the equity method. Prior periods were revised; management said the error was not material to any prior period and that it did not affect cash flows. A separate prior cash-classification error was also revised, with no effect on results of operations.
- Masco was in compliance with credit-agreement covenants. Disclosure controls were deemed effective, and management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales and margin improvement persist after weather effects, currency translation and the seasonally weak first quarter.
- Progress in the loss-making Cabinets and Installation segments and the effect of continuing rationalization and cost-saving initiatives.
- Operating cash conversion and working-capital trends as seasonal receivables and inventory increases unwind.
- The basis for any future deferred-tax valuation-allowance release, and the remaining effects of the disclosed accounting revisions.
- Debt, credit-agreement availability and covenant headroom, as well as potential tax costs of repatriating funds held by foreign subsidiaries.