Masco Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; unaudited. Masco designs, manufactures and distributes branded building products. The June 30, 2015 spin-off of Installation and Other Services as TopBuild materially changed the company’s business mix; that business is presented as discontinued operations.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $1.839bn | $1.834bn | $5.427bn | $5.340bn |
| Gross profit / margin | $589m / 32.0% | $522m / 28.5% | $1.721bn / 31.7% | $1.579bn / 29.6% |
| Operating profit / reported margin | $258m / 14.0% | $181m / 9.9% | $702m / 12.9% | $555m / 10.4% |
| Income from continuing operations attributable to Masco | $111m | $533m | $281m | $735m |
| Diluted continuing-operations EPS | $0.32 | $1.48 | $0.81 | $2.04 |
| Operating cash flow | Not separately presented for the quarter | $422m | $306m |
Sales were flat in Q3 and up 2% for the nine-month period. Excluding acquisitions and currency translation, sales increased 3% and 5%, respectively. In Q3, North American sales rose 3%, while international sales fell 9%, principally because of the stronger U.S. dollar. Gross margin and operating profit improved, supported by higher volume, cost savings, a better relationship between selling prices and commodity costs, and lower rationalization charges.
Segment Q3 sales and operating profit: Cabinets and Related Products $253m and $21m (sales down 5%; profit improved from a $35m loss); Plumbing Products $853m and $137m; Decorative Architectural Products $527m and $102m; Other Specialty Products $206m and $23m. Plumbing profit was pressured by mix and higher marketing, trade-show and legal expenses; Decorative Architectural and Other Specialty Products improved.
Cash, debt and balance-sheet position
- At September 30, cash and cash investments were $1.279bn and short-term bank deposits were $255m, totaling approximately $1.5bn. About $651m was held in foreign subsidiaries and could incur taxes if repatriated.
- Gross notes payable and long-term debt totaled approximately $3.424bn ($6m current and $3.418bn long-term), versus $3.424bn at December 31, 2014 ($505m current and $2.919bn long-term). The company issued $500m of 4.45% notes due 2025 and retired $500m of 4.8% notes in 2015.
- The amended revolving credit facility has a $750m commitment, matures May 2020, and had no borrowings at quarter-end; $42m of standby letters of credit were outstanding. Masco reported compliance with its financial covenants. Current ratio was 2.3, versus 1.7 at year-end 2014.
- Cash declined $104m during the first nine months. Financing uses included $407m of share repurchases, $94m of dividends, and the $500m note retirement; financing sources included $497m net proceeds from new notes and $200m received from TopBuild. Investing cash use was $144m, including $112m of capital expenditures and $41m for acquisitions.
- Total equity fell to $28m from $1.128bn at year-end 2014, primarily reflecting the TopBuild separation and share repurchases; Masco shareholders’ equity was a deficit of $159m.
Material changes, outlook and risks
- Comparability of earnings: 2014 results included a $517m tax valuation-allowance release in Q3, producing a $470m net tax benefit ($1.33 per share). This largely explains why reported 2015 earnings and EPS were substantially below 2014 despite higher operating profit. 2015 nine-month tax expense included an $18m noncash valuation allowance against TopBuild deferred tax assets.
- Rationalization and related costs were $2m in Q3 and $9m for nine months in 2015, compared with $41m and $54m in 2014; the prior-year amounts included a $28m facility impairment and corporate severance.
- Management expected steady demand as repair-and-remodel activity and new-home construction improved, and cited positive long-term industry fundamentals. It provided no specific numerical sales, earnings or margin guidance in the supplied filing text.
- Management highlighted strategy priorities of leveraging opportunities across businesses, improving core businesses and actively managing the portfolio. It also cited branded-product investment, innovation, operational excellence and disciplined capital allocation.
- Risks include dependence on housing and home-improvement markets and key customers, raw-material cost and availability, international economic uncertainty, foreign-exchange exposure, consumer preferences, underperforming businesses and competitive pressures. After the spin-off, Masco said it was less reliant on new construction, more reliant on home-improvement spending, had greater concentration in its two largest customers, and had a greater proportion of sales outside the U.S.
- The company described ordinary-course litigation and other claims, including product liability, environmental, construction-defect and employment matters; it considered a material adverse outcome remote but gave no assurance of prevailing. Management reported effective disclosure controls and no material change in internal control during the quarter.
Key facts for investors to verify
- Assess underlying earnings and tax-normalized comparisons, particularly the effect of the unusual 2014 tax benefit and the 2015 TopBuild-related tax charge.
- Review whether organic growth and margin gains persist after adjusting for acquisitions, currency, rationalization charges and the TopBuild spin-off.
- Monitor debt, liquidity, covenant headroom, foreign-held cash and the company’s substantial repurchases relative to its small reported total equity.
- Check customer concentration and exposure to housing demand, foreign currencies, commodity prices and litigation; confirm whether management provides subsequent quantified guidance.