Masco Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing; it also reports fourth-quarter results. Masco manufactures, distributes and installs home-improvement and building products across five segments. Approximately 81% of FY 2013 sales came from North America.
Financial performance
| Metric | FY 2013 | FY 2012 | Change / context |
|---|---|---|---|
| Net sales | $8.173 billion | $7.495 billion | Up 9%; up 8% excluding acquisitions and currency effects |
| Gross profit / margin | $2.255 billion / 27.6% | $1.956 billion / 26.1% | Margin improved 1.5 percentage points |
| SG&A as a percentage of sales | 19.4% | 20.5% | Improved with higher volume and cost savings |
| Operating profit / reported margin | $673 million / 8.2% | $302 million / 4.0% | 2013 included $48 million of rationalization and cost-saving charges; 2012 included $42 million of intangible impairment and $77 million of litigation charges |
| Operating margin excluding specified items | 8.8% | 6.5% | Company-presented non-GAAP measure |
| Income from continuing operations attributable to Masco | $282 million; $0.78 diluted EPS | Loss of $53 million; loss of $0.16 diluted EPS | Returned to profitability |
| Net income attributable to Masco | $272 million | Loss of $114 million | Includes discontinued-operations losses of $10 million and $61 million, respectively |
| Cash from operating activities | $645 million | $281 million | Up $364 million |
| Capital expenditures | $126 million | $119 million | Management expected approximately $200 million in 2014 |
| Debt at year-end | $3.427 billion total; $3.421 billion long-term | $3.628 billion total; $3.422 billion long-term | Retired $200 million of notes due August 2013 |
| Cash, cash investments and short-term deposits | Approximately $1.5 billion | Approximately $1.4 billion | $622 million was held in foreign subsidiaries |
| Working-capital ratio | 1.9 to 1 | 1.7 to 1 | Improved, partly reflecting repayment of notes classified as current in 2012 |
Fourth quarter: Net sales were $1.998 billion versus $1.831 billion in Q4 2012. Income from continuing operations was $39 million versus a $70 million loss; net income was $45 million versus a $87 million loss.
Segments and material changes
- Plumbing Products: Sales rose 8% to $3.183 billion; operating profit increased to $394 million from $307 million. Higher volume, selling prices and a more favorable price-to-commodity relationship helped, partly offset by product mix and the loss of some bath-products business.
- Installation and Other Services: Sales rose 17% to $1.412 billion and the segment returned to profit, reporting $37 million versus a $19 million loss. Higher new-home activity, retrofit and commercial sales, and cost improvements contributed.
- Cabinets and Related Products: Sales rose 8% to $1.014 billion; operating loss narrowed to $10 million from $89 million. The business remained loss-making despite higher volume, pricing and cost reductions.
- Decorative Architectural Products: Sales rose 6% to $1.927 billion; operating profit increased to $351 million from $329 million. Volume gains were partly offset by lower paint and stain pricing, input costs and higher promotional and advertising expenses.
- Other Specialty Products: Sales rose 11% to $637 million; operating profit was $35 million versus a $31 million loss. Higher window volume and cost improvements were partly offset by weakness in fastening tools.
- North American sales increased 10% to $6.634 billion; international sales increased 6% to $1.539 billion, including favorable currency translation.
Outlook, risks and unusual items
- Management expected continued improvement in North American and international new-home construction and repair-and-remodel activity in 2014, but provided no specific sales or earnings forecast. Prior-year housing activity improved, although housing starts slowed in the second half of 2013.
- Management planned to continue investment in brands and innovation, cost reduction, operational improvement and balance-sheet strength. It expected approximately $10 million of 2014 rationalization charges, $175 million of depreciation and amortization, and $60 million to $70 million of pension contributions.
- Masco completed the sale of its Danish ready-to-assemble cabinet business in December 2013 for net proceeds of $17 million. The business had 2012 sales of approximately $250 million and an operating loss of approximately $30 million; the sale was reported in discontinued operations. A related Danish entity disposal generated an $18 million currency-translation expense in continuing operations.
- The company retained a full valuation allowance against U.S. federal deferred tax assets. It said a reversal of up to approximately $550 million could be possible as early as the second half of 2014 if sustained U.S. profitability provides sufficient evidence; this was not assured.
- Masco’s $1.25 billion revolving credit facility matures in 2018. It had no borrowings under the facility at year-end, reported up to $1.2 billion of additional borrowing capacity subject to availability, and was in compliance with its covenants. Total debt as a percentage of total capitalization was 82%, down from 87%.
- Key exposures include cyclical housing and remodeling markets, customer concentration, competition and pricing pressure, commodity costs and supply availability, foreign exchange, product liability, warranty and litigation claims, and regulatory requirements. The Home Depot represented about 28% of sales ($2.28 billion); Lowe’s was the second-largest customer at less than 10%.
- The filing reports a non-material prior-period classification error: certain foreign short-term bank deposits had been classified as cash. The reclassification did not affect earnings or total current assets.
Important facts for investors to verify
- Whether the improvement in housing demand and operating margins continues, especially in Cabinets and Installation.
- Progress toward reducing debt and maintaining covenant headroom, considering upcoming debt maturities and the concentration of cash overseas.
- Whether U.S. profitability supports any deferred-tax-valuation-allowance release; the potential amount and timing remain uncertain.
- Exposure to The Home Depot and Lowe’s, and the effect of customer pricing demands and channel changes.
- Developments in litigation, product warranties, commodity costs, and the execution of the 2014 capital and cost-improvement plans.