Masco Corporation — Q2 2013 Form 10-Q
Business context and period. This unaudited report covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. Masco sells products and services across Cabinets and Related Products, Plumbing Products, Installation and Other Services, Decorative Architectural Products, and Other Specialty Products. Amounts below are in millions of dollars except per-share data and percentages.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $2,149 | $1,945 | $4,025 | $3,751 |
| Gross profit | $609 | $521 | $1,117 | $1,005 |
| Gross margin | 28.3% | 26.8% | 27.8% | 26.8% |
| Operating profit, reported | $188 | $54 | $320 | $163 |
| Operating margin, reported | 8.7% | 2.8% | 8.0% | 4.3% |
| Income (loss) from continuing operations attributable to Masco | $82 | $(51) | $138 | $(9) |
| Diluted continuing-operations EPS | $0.23 | $(0.15) | $0.38 | $(0.03) |
| Net income (loss) attributable to Masco | $77 | $(75) | $124 | $(42) |
| Net cash from (for) operating activities | — | $59 | $(4) |
Sales rose 10% in Q2 and 7% in the first half. Management attributed growth mainly to higher sales volume, notably in North America, and selling-price increases; acquisitions and currency translation had no significant effect. Gross margin improved, while SG&A as a share of sales fell to 19.6% for Q2 and 19.8% for the first half, from 20.2% and 20.5%. Management cited higher volume and, for the first half, improved selling-price-to-commodity-cost relationships.
Q2 segment sales increased across all five segments. Installation and Other Services led growth at 21%; Plumbing Products and Decorative Architectural Products each rose 9%. Segment operating margins improved notably in Cabinets and Related Products and Installation and Other Services, both moving from losses in the prior-year quarter to profits. These segment measures are before corporate expense and specified items; reported operating profit also reflects those items.
Balance sheet, liquidity, and debt
- At June 30, 2013, cash and cash investments were $1,223, versus $1,351 at year-end 2012; $483 was held in foreign subsidiaries, and repatriation could incur additional taxes.
- Current assets were $3,479 and current liabilities $2,042; the company reported a 1.7-to-1 current ratio, unchanged from year-end.
- Notes payable were $207 and long-term debt $3,421. The filing reports aggregate short- and long-term debt carrying value of approximately $3.6 billion and estimated market value of approximately $3.9 billion.
- Operating cash flow was $59 for the first half. Receivables increased by $348 and inventories by $69, partly offset by a $177 increase in accounts payable and accrued liabilities. Management described the seasonal working-capital build as expected.
- Cash used in financing was $127, including $54 of dividends, $34 of dividends to noncontrolling interests, and $35 of share repurchases. Cash used in investing was $51, including $59 of capital expenditures.
- A new $1.25 billion revolving credit agreement runs to March 28, 2018. No borrowings were outstanding at June 30; $95 of letters of credit reduced availability. Masco reported covenant compliance and up to $910 of additional borrowing capacity, subject to availability.
Material changes and unusual items
- Prior-year results included a $75 litigation settlement charge, materially affecting the comparison of operating profit and continuing-operations income.
- Q2 net income attributable to Masco was $77, including a $5 loss from discontinued operations. First-half discontinued-operations loss was $14, versus $33 in 2012.
- In Q1 2013, Masco decided Tvilum, its Danish ready-to-assemble cabinet business, was no longer core and began a disposition plan. It recorded a $10 impairment of assets held for sale; no additional impairment was recorded in Q2.
- Business rationalization and other initiative costs were $18 in Q2 and $26 in the first half, compared with $7 and $18 a year earlier. The company raised its expected full-year 2013 rationalization charges to approximately $55 from $40, citing additional Plumbing Products plant closures and headcount reductions.
- Interest expense declined by $8 in Q2 and $12 in the first half, primarily reflecting the 2012 retirement of $791 of 5.875% Notes, partly offset by issuance of 5.95% Notes due 2022.
- The first-half 2013 effective tax rate was 25%. The company continued to maintain a full valuation allowance against U.S. federal deferred tax assets, while noting that continued improvement could support reversal of some or all of it as early as the end of 2014.
Outlook, risks, and contingencies
Management expressed confidence in the long-term fundamentals of new-home construction and home improvement, citing stronger construction activity, home-price stabilization, affordability, and demographics. It highlighted strategic priorities including brand investment, cost reduction, improving the Cabinets and Installation businesses, innovation, lean operations, and strengthening the balance sheet. The filing gives no specific sales or earnings forecast.
Management planned to use available cash to retire $200 of 7.125% Notes due August 15, 2013, and stated that cash, operating cash flow, and, if needed, borrowing or future capital-market activity should be sufficient for working capital and investment needs. Principal risks identified include reliance on housing and home-improvement markets and key customers, raw-material costs and availability, international economic uncertainty, changing consumer preferences, and execution in underperforming businesses. The company is also subject to ordinary-course litigation and other claims; it believed outcomes were unlikely to have a material adverse effect, but noted that judgments or settlements could materially affect results. Management reported disclosure controls as effective and no material change in internal control over financial reporting; no material changes to the prior annual report’s risk factors were reported.
Important facts for investors to verify
- Whether sales and margin gains persist, particularly as housing-related demand and product mix change.
- Progress and cash costs of the revised $55 full-year rationalization program, including the announced plant closures and headcount reductions.
- Completion and financial impact of the planned Tvilum disposition, including any further impairment or disposal loss.
- Cash conversion and working-capital requirements, given the substantial first-half receivables increase and decline in cash balances.
- Debt repayment and refinancing actions, covenant headroom, and the impact of the 2018 revolving-facility terms.
- U.S. profitability trends and evidence supporting any future release of the federal deferred-tax valuation allowance.
- Developments in litigation, warranty obligations, commodity and currency exposures, and taxes on repatriating foreign cash.