KEY RATING DRIVERS
The rating for
The company's credit metrics have improved significantly from the lows reported during fiscal 2011. Leverage as measured by debt to EBITDA declined from 6.9x at year-end 2011 to 5.1x at the end of 2012 and 3.5x at the conclusion of 2013. Similarly, interest coverage increased from 2.3x in 2011 to 2.8x in 2012 and 4.1x in 2013.
The Positive Outlook reflects Fitch's expectation that
EXPECTED CONTINUED IMPROVEMENT IN MASCO'S U.S. END-MARKETS
Housing metrics all showed improvement in 2013. Preliminary data show that total housing starts increased 18.3%. Existing home sales gained 9.2% to 5.09 million in 2013, while new home sales grew 16.6% to 428,000. Average single-family new home prices, which dropped 1.8% in 2011, increased 8.7% in 2012 and rose 9.8% to
Housing metrics should increase in 2014 due to faster economic growth (prompted by improved household net worth, industrial production and consumer spending), and consequently some acceleration in job growth (as unemployment rates decrease to 6.9% for 2014 from an average of 7.5% in 2013), despite somewhat higher interest rates, as well as more measured home price inflation. Total housing starts should increase 16.5% and top 1 million. New home sales are forecast to advance about 20%, while existing home volume increases 2%.
Fitch projects home improvement spending will advance 6% in 2014 following an estimated 5% growth in 2013 and a 5% increase in 2012. The continued improvement in the housing market, as well as strong home price appreciation seen last year, are likely to drive higher spending on home renovation projects in 2014. However, growth patterns in the near term are likely to be slightly below what the industry experienced during 1999-2006 (7% average annual spending growth), due to slower growth in the U.S. economy and only moderately improved housing market conditions.
Fitch expects spending for discretionary big-ticket remodelling projects will continue to lag the overall growth in the home improvement sector somewhat, as credit availability remains relatively constrained and homeowners remain cautious in their spending. However, there are signs that homeowners are somewhat more willing to undertake larger discretionary projects and purchases.
BROAD PRODUCT PORTFOLIO
SOLID LIQUIDITY POSITION
The company continues to have solid liquidity, with cash and equivalents of
The company reduced debt by
FREE CASH FLOW GENERATION
BALANCE SHEET IMPROVEMENT
The company has taken steps to improve its balance sheet.
Management indicates that investing in the business remains a top priority for the company, with CAPEX totaling about 2%-2.5% of revenues during the next few years. The company also intends to pay down debt in the near term. In addition to these activities, the company is focused on small bolt-on acquisitions. At some point, Fitch expects
Fitch does not anticipate changes in management's strategy (including management's commitment to an investment grade rating) with the retirement of
Future ratings and Outlooks will be influenced by broad end-market trends, as well as company specific activity, particularly FCF trends and uses, and liquidity position.
An upgrade of the ratings to 'BB+' may be considered if the housing and home improvement markets continue to rebound and the company shows sustained improvement in financial results and credit metrics, including debt to EBITDA levels in the 3.0x-3.5x range, interest coverage that is consistently above 4.5x, and FCF margins above 2.5%.
On the other hand, a negative rating action may be considered if the recovery in the U.S. housing and home improvement markets dissipate, leading to weaker than expected credit metrics, including EBITDA margins below 10%, debt to EBITDA levels consistently above 6x and interest coverage falls below 2.5x.
Fitch has affirmed the following ratings for
--IDR at 'BB';
--Senior unsecured debt at 'BB';
--Unsecured revolving credit facility at 'BB'.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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