Masco Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Unaudited financial statements; dollar amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $2,232 | $2,150 | $6,457 | $6,175 |
| Gross profit | $611 | $607 | $1,819 | $1,724 |
| Operating profit | $202 | $212 | $594 | $532 |
| Income before taxes from continuing operations | $152 | $160 | $435 | $377 |
| Net income attributable to Masco | $543 | $109 | $756 | $240 |
| Diluted EPS from continuing operations | $1.51 | $0.31 | $2.11 | $0.71 |
- Sales grew 4% in Q3 and 5% year to date; excluding currency effects and acquisitions, nine-month sales rose 4%. Q3 operating margin was 9.1% versus 9.9%; nine-month margin was 9.2% versus 8.6%. Gross margin was 27.4% and 28.2%, respectively, compared with 28.2% and 27.9% in 2013.
- Q3 and nine-month earnings include a major tax benefit: a $517 million release of valuation allowances on U.S. federal and certain state deferred tax assets, partly offset by a $51 million tax adjustment. Management cited a $466 million net Q3 tax benefit, or $1.32 per share. Earnings growth therefore substantially reflects a noncash tax item, not just operating improvement.
- Nine-month operating cash flow was $306 million, versus $350 million in 2013. Investing activities used $60 million, including $82 million of capital expenditures; financing activities used $160 million, including $86 million of dividends and $39 million of share repurchases.
- At September 30, cash and cash investments were $1,282 million and short-term bank deposits were $275 million, totaling about $1.6 billion. Current assets were $4,001 million and current liabilities $2,415 million; the current ratio was 1.7, down from 1.9 at year-end 2013.
- Notes payable were $505 million and long-term debt $2,919 million, or $3,424 million total, compared with $3,427 million at year-end. The current debt balance includes the reclassification of $500 million of 4.8% notes due June 2015. The $1.25 billion revolving credit facility was undrawn; the company reported up to $1.2 billion of additional borrowing capacity, subject to availability, and compliance with covenants.
Changes and segment performance
- Q3 sales increased across most segments; Cabinets and Related Products rose 2%, Plumbing 4%, Installation and Other Services 8%, Decorative Architectural Products was flat, and Other Specialty Products rose 8%. For the first nine months, segment sales ranged from a 1% decline in Cabinets to 11% growth in Other Specialty Products.
- Plumbing Products’ operating margin improved to 16.5% in Q3 from 14.4%; Installation and Other Services was 5.0% versus 4.9%. Cabinets reported a $35 million Q3 operating loss, including $28 million of facility-related charges. Decorative Architectural Products’ margin declined to 17.4% from 17.8%.
- Operating profit improved year to date despite lower Q3 operating profit. Benefits from sales volume, pricing relative to commodity costs, and cost initiatives were offset in Q3 by rationalization charges and pressure in some segments.
Outlook, risks and unusual items
- Management expected continued 2014 growth in new-home construction, modest repair-and-remodel growth, improvement in big-ticket items, and continued European recovery. No specific numerical sales or earnings guidance was provided.
- Management raised its estimate of full-year 2014 rationalization charges to approximately $58 million from $10 million, citing corporate actions and the planned sale of two cabinet facilities. The facilities had a net book value of about $10 million; a $28 million Q3 charge was recorded to reflect estimated fair value.
- On September 30, Masco announced a proposed tax-free spin-off of all Installation and Other Services businesses, expected in mid-2015. Completion depends on approvals, tax counsel’s opinion, registration effectiveness, financing and other conditions. The filing highlights execution, cost, management-distraction and potential tax risks.
- The company revised prior-period financial statements for an error in accounting for certain private-equity fund investments (cost method instead of equity method). It said the error was not material to prior periods and did not affect cash flows.
- Masco said ordinary-course legal claims were not expected to have a material adverse effect, but noted outcomes remain uncertain. It also reported that disclosure controls were effective and no material change in internal control occurred during the quarter.
Important facts for investors to verify
- How much of reported earnings and EPS reflects the deferred-tax valuation-allowance release, and what assumptions support future tax-asset realization?
- Whether cabinet operations recover from the Q3 loss and whether planned facility sales and rationalization actions deliver expected savings.
- Progress, costs, financing, tax qualification and timing of the proposed Services Business spin-off.
- Ability to generate operating cash flow, manage the $500 million notes due in June 2015, and sustain liquidity and covenant compliance.
- Whether housing, repair-and-remodel, European-market and customer inventory trends develop as management anticipated.