Masco Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. Masco designs, manufactures and sells branded home improvement and building products. The comparisons below are primarily with fiscal 2014; amounts are in U.S. dollars.
Business context and material changes
- Masco completed the tax-free spin-off of its Installation and Other Services businesses as TopBuild Corp. on June 30, 2015. The continuing company is more focused on branded products and less exposed to new-home construction, but has greater sales concentration in home centers and a larger international sales mix.
- Masco acquired ENDLESS POOLS, expanding its aquatic fitness offering, and Evolution Manufacturing, expanding its U.K. window business. Combined acquisition cash outlay was $41 million, net of cash acquired.
- Management’s priorities are developing core businesses, pursuing cross-business opportunities and actively managing the portfolio. It cited operating efficiencies, cost savings, product innovation and disciplined capital allocation.
Financial performance
| Metric | 2015 | 2014 | Change / context |
|---|---|---|---|
| Net sales | $7.142 billion | $7.006 billion | Up 2% reported; up 5% excluding acquisitions and currency translation |
| Gross profit margin | 31.5% | 29.4% | Improved with volume, cost savings and selling-price/commodity-cost dynamics |
| Operating profit | $914 million | $721 million | Reported margin rose to 12.8% from 10.3%; adjusted operating profit was $927 million versus $776 million |
| Income from continuing operations attributable to Masco | $357 million | $821 million | 2014 included a $529 million tax benefit from releasing deferred-tax valuation allowances |
| Diluted EPS from continuing operations | $1.03 | $2.28 | Declined substantially, principally reflecting the unusual 2014 tax benefit |
| Net cash from operating activities | $699 million | $602 million | Up $97 million |
| Capital expenditures | $158 million | $128 million | 2016 estimate: approximately $190 million, excluding acquisitions |
Reported net income attributable to Masco was $355 million in 2015, versus $856 million in 2014. The 2015 effective tax rate was 43% expense; 2014 was a 71% tax benefit. In addition to the prior-year valuation-allowance release, 2015 taxes included a $21 million charge for certain TopBuild deferred tax assets and a $19 million charge related to potential repatriation of foreign earnings.
Segments and operating trends
- Cabinets: Sales rose 3% to $1.025 billion; operating profit improved to $51 million from a $62 million loss. Management cited rationalization savings, better mix and pricing, while cabinet volumes remained weak.
- Plumbing: Sales rose 1% to $3.341 billion; operating profit was $512 million, unchanged. Currency translation reduced sales, while volume and selling-price/commodity-cost dynamics helped; unfavorable mix and certain expenses weighed on results.
- Decorative Architectural Products: Sales rose 1% to $2.020 billion; operating profit increased to $403 million from $360 million. Paint and stain and builders’ hardware volumes and efficiencies supported results.
- Other Specialty Products: Sales rose 8% to $756 million; operating profit increased to $57 million from $47 million, led by North American windows and acquisitions.
- North American sales increased 5% to $5.645 billion. International sales, principally Europe, fell 8% to $1.497 billion as currency translation offset growth in local currencies.
Liquidity, debt and capital allocation
- Cash and cash investments were $1.468 billion, with an additional $248 million in short-term bank deposits. Management separately described approximately $1.7 billion of combined cash, investments and deposits.
- Total debt was approximately $3.423 billion: $1.005 billion current notes payable and $2.418 billion long-term debt. Debt as a percentage of total capitalization was 98%, versus 75% in 2014; the filing attributes the sharp equity decline primarily to the TopBuild spin-off.
- The current ratio was 1.3 versus 1.6 in 2014, partly reflecting a $500 million increase in short-term notes payable. The company had no borrowings under its $750 million revolving credit facility and was in compliance with its financial covenants at year-end.
- Debt maturities include $1.005 billion in 2016. Management said it intended to repay $300 million to $500 million of debt over the next several quarters.
- Operating cash flow funded investment and shareholder returns. Masco repurchased 17.2 million shares for $456 million in 2015, paid $126 million in dividends, and raised its quarterly dividend to $0.095 per share. It expected to repurchase up to $500 million of stock in 2016.
Outlook, risks and unusual items
- Management expected steady demand as repair-and-remodel activity and new-home construction continued to improve, and described long-term market fundamentals as positive. No specific revenue or earnings guidance was provided.
- For 2016, the filing estimated capital expenditures of about $190 million, depreciation and amortization of about $140 million, and rationalization charges of about $8 million. It anticipated approximately $25 million of contributions to qualified and non-qualified pension plans; a separate pension note estimates $45 million for qualified plans plus benefit payments for other plans.
- Key risks include cyclical housing and remodeling demand, intense competition and pricing pressure, raw-material availability and cost volatility, foreign-exchange exposure, and reliance on major customers. The Home Depot represented approximately 33% of 2015 sales ($2.4 billion); Lowe’s represented less than 10%.
- Other material considerations include the $1.005 billion 2016 debt maturity, pension underfunding, potential tax consequences associated with the TopBuild spin-off, and ordinary-course litigation, warranty and product-liability exposure. Management said it believed a material adverse litigation outcome was remote, while acknowledging outcomes remain uncertain.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also reported effective internal controls.
Most important facts for investors to verify
- Separate recurring operating performance from the large 2014 deferred-tax benefit when comparing earnings and EPS.
- Review the plan and funding sources for the $1.005 billion 2016 debt maturity and the stated debt-reduction target.
- Assess whether cabinet-business profitability can be sustained and whether housing and remodeling demand improves as management expects.
- Monitor customer concentration, especially The Home Depot, and the impact of currency movements on international results.
- Check the progress and cash cost of planned buybacks, dividends, capital investment and pension contributions against operating cash generation.
- Review the TopBuild spin-off tax matters agreement and any developments that could affect the expected tax treatment.