Masco Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; comparisons are to the corresponding 2015 periods. Masco reports four building-products segments. The 2015 comparison includes the Installation and Other Services business as discontinued operations following its June 2015 spin-off as TopBuild.
Financial performance
| Metric | Q2 2016 | Q2 2015 | H1 2016 | H1 2015 |
|---|---|---|---|---|
| Net sales | $2.001B | $1.929B | $3.721B | $3.588B |
| Gross margin | 35.0% | 33.0% | 34.1% | 31.5% |
| Reported operating profit | $335M | $279M | $569M | $444M |
| Reported operating margin | 16.7% | 14.5% | 15.3% | 12.4% |
| Net income attributable to Masco | $150M | $105M | $259M | $169M |
| Diluted EPS from continuing operations | $0.45 | $0.31 | $0.77 | $0.48 |
| Cash from operating activities | — | $114M | $139M |
Sales increased 4% in both Q2 and H1; management reported 4% growth in each period excluding acquisitions and currency effects. Gross and operating margins improved, which the company attributed to higher volume, cost savings and a more favorable relationship between selling prices and commodity costs. SG&A declined as a percentage of sales. Q2 interest expense was $87M versus $61M; H1 was $143M versus $117M.
Segments and material changes
- Plumbing Products: Q2 sales rose 9% and H1 sales 6%. Segment operating margins increased to 20.4% from 16.3% in Q2 and 18.3% from 15.2% in H1.
- Decorative Architectural Products: Q2 sales were essentially flat; H1 sales rose 4%. Higher promotions and lower paint selling prices partly offset volume and cost-savings benefits.
- Cabinetry Products: Q2 sales fell 3% and H1 sales fell 4%, reflecting weaker volume, including the strategic exit from some low-margin direct-to-builder business. Segment margins nevertheless improved, supported by cost reductions, mix and pricing.
- Windows and Other Specialty Products: Q2 sales rose 3% and H1 sales 6%, but Q2 segment operating loss was $2M versus $21M profit a year earlier. Management cited increased warranty costs, higher labor and ERP implementation costs, partly offset by pricing and cost relationships.
Cash, debt and liquidity
- At June 30, cash and cash investments were $956M and short-term bank deposits were $135M, totaling approximately $1.1B; combined balances were $1.7B at year-end 2015. Cash and cash investments alone were $956M versus $1.468B at year-end.
- Current assets were $3.057B and current liabilities $1.632B; the reported current ratio was 1.9:1, up from 1.3:1 at December 31, 2015.
- Notes payable and long-term debt totaled approximately $3.0B at June 30, compared with approximately $3.4B at year-end 2015. In March, Masco issued $400M of 3.5% notes due 2021 and $500M of 4.375% notes due 2026. In April, it used proceeds and cash to retire $1.0B of 6.125% notes and $300M of 5.85% notes early.
- The early retirements generated $40M of debt-extinguishment expense recorded in interest expense. The $750M revolving credit facility had no borrowings at quarter-end; Masco reported compliance with its financial covenants.
- H1 investing cash flow was $45M, including $79M of capital expenditures and $117M of net proceeds from short-term bank deposits. Financing cash outflow was $662M, including debt retirement, $168M of share repurchases and $63M of dividends to shareholders.
Outlook, risks and unusual items
- Management expressed confidence in continued steady demand as repair-and-remodel activity and new-home construction improve, and cited positive long-term housing fundamentals. No quantified earnings, sales or margin guidance was provided.
- A Windows and Other Specialty Products business recorded a $10M increase in estimated future warranty claims in Q2 based on recent claim trends. Total warranty liability was $167M at June 30, versus $152M at year-end 2015.
- Management identified risks including housing-market activity, brands and product innovation, key-customer reliance, competition, raw-material cost and availability, suppliers, international operations, cabinetry performance and execution of strategic initiatives. The filing reported no material changes to the risk factors in the 2015 Form 10-K.
- Masco said ordinary-course legal claims and proceedings were not expected to have a material adverse effect, while noting outcomes cannot be assured. Disclosure controls were deemed effective. A phased Milgard ERP deployment changed certain internal controls; the company said the implementation was not prompted by an identified control deficiency.
Key facts for investors to verify
- Whether stronger margins and sales growth continue, particularly given cabinetry volume declines and the Q2 Windows segment loss.
- The trajectory and estimation assumptions for warranty claims, including the $10M Q2 estimate increase.
- The ongoing interest burden and cash-flow effects following the debt refinancing and $40M extinguishment charge.
- Cash generation after capital spending, pension contributions and shareholder distributions; Masco expected approximately $96M of 2016 contributions to qualified pension plans.
- Progress and control impacts from the Milgard ERP implementation, alongside management’s housing-demand outlook and stated market risks.