Masco Corporation — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018. This is an annual filing; selected fourth-quarter results are also shown below. Masco designs, manufactures and distributes branded home-improvement and building products across four segments: Plumbing Products, Decorative Architectural Products, Cabinetry Products, and Windows and Other Specialty Products.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $8.359 billion | $7.642 billion |
| Gross profit / gross margin | $2.689 billion / 32.2% | $2.612 billion / 34.2% |
| Operating profit / reported margin | $1.211 billion / 14.5% | $1.194 billion / 15.6% |
| Net income attributable to Masco | $734 million | $533 million |
| Diluted EPS | $2.37 | $1.66 |
| Operating cash flow | $1.032 billion | $751 million |
| Cash and cash investments, year-end | $559 million | $1.194 billion |
| Debt, including current portion | About $2.979 billion | About $3.085 billion |
| Current ratio | 1.6 | 2.0 |
Sales rose 9% as reported; excluding acquisitions, divestitures and currency translation, sales increased 5%. Kichler contributed $346 million of 2018 sales. Gross margin declined 2.0 percentage points, primarily from higher commodity and logistics costs, unfavorable mix, and a $40 million Kichler inventory step-up charge. Selling, general and administrative expense fell to 17.7% of sales from 18.6%, helping offset those pressures. Adjusted operating profit, excluding $14 million of rationalization charges and the $40 million Kichler charge, was $1.265 billion, with a 15.1% margin.
Higher net income reflected increased operating profit, lower interest expense (which was elevated in 2017 by a $107 million debt-extinguishment loss), and a lower effective tax rate: 25% in 2018 versus 34% in 2017. The 2018 rate benefited from U.S. tax reform. Fourth-quarter 2018 sales were $2.041 billion versus $1.853 billion; quarterly net income was $194 million versus $80 million, and diluted EPS was $0.64 versus $0.25.
Cash flow from operations increased to $1.032 billion. Investing cash use was $651 million, including $549 million for Kichler and $219 million in capital expenditures; financing cash use was $1.020 billion, including $654 million for share repurchases and $134 million in dividends. Total debt was approximately $2.979 billion; debt was 98% of total capitalization, compared with 94% in 2017. Masco reported $69 million of total equity, including noncontrolling interest, while Masco Corporation shareholders’ equity was a deficit of $111 million. The $750 million revolving credit facility was undrawn at year-end, and Masco reported compliance with its covenants.
Material changes and capital allocation
- Masco acquired Kichler in March 2018 for $549 million net of cash acquired, adding lighting, ceiling fans and related products. Decorative Architectural Products sales increased 20%, largely due to Kichler; segment operating margin declined to 17.2% from 19.9%.
- Plumbing Products sales increased 7%, but segment margin fell to 17.9% from 18.8%. Cabinetry sales rose 2%, while its margin decreased to 9.1% from 9.9%. Windows and Other Specialty Products sales fell 2%, and margin declined to 4.5% from 7.0%.
- Masco repurchased and retired 18.6 million shares for $654 million and raised its quarterly dividend 14%, from $0.105 to $0.12 per share. Management anticipated approximately $600 million of 2019 share repurchases.
- Cash and cash investments fell by $635 million during the year, principally reflecting the acquisition, repurchases and other financing uses. Working-capital days increased for receivables and inventory; working capital as a percentage of sales rose to 14.0% from 13.4%.
Outlook, risks and unusual items
Management said repair-and-remodel fundamentals remained strong and emphasized branded-product investment, innovation, operational improvements, portfolio management and disciplined capital allocation. It forecast approximately $200 million of 2019 capital expenditures and $175 million of depreciation and amortization, excluding potential acquisitions. No specific revenue or earnings guidance was provided.
Masco estimated that, if tariffs on imported materials from China rose to 25% in 2019, potential annual direct cost increases could be approximately $150 million. It planned to mitigate the effect through pricing, supplier negotiations, supply-chain changes and productivity measures. Other significant exposures include cyclical housing and remodeling demand; commodity and logistics cost inflation; competition and e-commerce changes; dependence on large retail customers; foreign exchange and international operations; and supplier, warranty, litigation, cybersecurity and ERP implementation risks.
The Home Depot accounted for approximately 32% of 2018 sales ($2.7 billion); Lowe’s represented less than 10%. Kichler was excluded from the 2018 internal-control assessment during integration, representing approximately 5% of assets and 4% of sales. Management and the auditor reported effective internal control over financial reporting for the assessed scope, and the auditor issued unqualified opinions on the financial statements and internal controls. The filing reported no goodwill impairment in 2018.
Important facts for investors to verify
- Whether pricing and cost-saving actions can offset tariff, commodity, logistics and labor pressures, particularly the potential $150 million tariff exposure.
- Whether Kichler integration delivers anticipated sales and synergies, and how its inventory step-up and acquired intangible-asset amortization affect margins.
- Whether cash generation can support the planned repurchases, dividends, capital spending and pension contributions while maintaining liquidity and covenant headroom.
- How customer concentration, especially The Home Depot’s 32% sales share, and housing-market cyclicality affect sales, margins and negotiating power.
- Whether warranty claims, pension obligations and legal or tax contingencies develop differently from management’s estimates; the filing describes litigation outcomes as uncertain and reports a $217 million total warranty liability.