Masco Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are to the same periods in 2016. Amounts are in millions of dollars unless otherwise stated. Masco sells building and home-improvement products through Plumbing Products, Decorative Architectural Products, Cabinetry Products, and Windows and Other Specialty Products.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $1,936 | $1,877 | $5,770 | $5,598 |
| Gross profit | $650 | $614 | $1,995 | $1,883 |
| Operating profit | $295 | $269 | $905 | $838 |
| Net income attributable to Masco | $148 | $134 | $446 | $393 |
| Diluted EPS | $0.46 | $0.40 | $1.38 | $1.17 |
- Sales increased 3% in both periods; excluding dispositions and currency, sales grew 3% in Q3 and 4% year to date.
- Gross margin was 33.6% in Q3 and 34.6% for nine months, versus 32.7% and 33.6%. Reported operating margin was 15.2% and 15.7%, versus 14.3% and 15.0%.
- Segment sales for Q3: Plumbing Products $951 (+6%); Decorative Architectural Products $553 (+3%); Cabinetry Products $229 (-4%); Windows and Other Specialty Products $203 (flat). Year-to-date changes were +5%, +4%, -3%, and +1%, respectively.
- Operating cash flow was $467 for nine months, versus $483. Investing activities provided $157, including $128 proceeds from the Arrow sale; financing activities used $518. Capital expenditures were $113.
Balance sheet, debt and liquidity
- At September 30, cash and cash investments were $1,141 and short-term bank deposits $77, totaling $1,218. Total assets were $5,483; current assets $3,308 and current liabilities $1,708. The reported current ratio was 1.9, compared with 2.0 at year-end 2016.
- Debt consisted of $2,969 long-term debt and $117 notes payable, or $3,086 combined, compared with $2,997 at December 31, 2016. Management reported approximately $3.4 billion estimated fair value of short- and long-term debt versus $3.1 billion carrying value.
- Masco issued $300 of 3.5% notes due 2027 and $300 of 4.5% notes due 2047, then retired $535 of older notes. The early retirements generated a $107 debt-extinguishment loss recorded in interest expense. Nine-month interest expense was $239 versus $186; Q3 expense was $43 in both years.
- The $750 revolving credit facility had no borrowings at quarter-end; Masco reported compliance with its financial covenants. Cash, cash investments and short-term deposits were approximately $1.2 billion, including $721 held by foreign subsidiaries.
- Share repurchases totaled $312 for nine months; cash dividends paid were $96. Total equity was $60, versus a $103 deficit at year-end 2016.
Material changes and notable items
- Q3 and nine-month profit growth reflected higher sales, cost savings, and lower warranty costs compared with 2016, when the Windows and Other Specialty Products business recorded $10 and $21 warranty-estimate increases. Higher strategic investment and an unfavorable relationship between selling prices and commodity costs were offsets.
- Masco sold Arrow Fastener in Q2 for $128 proceeds and recognized a $51 gain year to date. Its results had been included in Windows and Other Specialty Products before the sale.
- Q3 effective tax rate was 38%, versus 36%; the filing attributes the increase primarily to a shift toward earnings in higher-tax jurisdictions. The nine-month rate was 34%, versus 35%, with share-based-payment tax benefits contributing to the decrease.
- In May, the board authorized up to $1.5 billion of share repurchases. By September 30, $1.3 billion remained. An accelerated repurchase transaction begun in August was expected to be completed in October, with additional shares anticipated at no added cost.
Outlook, risks and contingencies
- Management gave no quantified earnings or sales guidance. It described underlying demand drivers as strong and emphasized branded-product investment, innovation, productivity, operational excellence, and disciplined capital allocation as long-term growth priorities.
- Management said current cash and operating cash flows should fund near-term working-capital and investment needs; longer-term requirements are expected to be met through operating cash flow and, if needed, borrowing or capital-market activity.
- Risks identified include home-improvement and new-construction demand, competition and brand strength, key-customer reliance, execution of strategic initiatives, improvement of the underperforming U.S. window business, raw-material costs and availability, suppliers, and international operations. Severe hurricanes adversely affected several businesses during the period.
- Cabinetry sales were pressured by weaker U.S. builder and dealer demand and the exit from U.K. accounts; margins also faced commodity costs and anti-dumping and countervailing duties. Masco reported ordinary-course litigation and other claims, but said a material adverse outcome was considered remote; outcomes remain uncertain.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting. The filing said there were no material changes to the risk factors in the 2016 Form 10-K.
Important facts for investors to verify
- Whether sales growth and margin performance persist after hurricane-related disruption and as input costs and selling prices change.
- Progress in the Cabinetry and U.S. windows businesses, including the effects of duties, customer demand, and warranty claims.
- Cash conversion and working-capital needs, particularly the increases in receivables and inventory during the first nine months.
- Debt refinancing costs, covenant headroom, and the impact of ongoing share repurchases and dividends on liquidity.
- Completion and final share count for the accelerated repurchase, and the treatment of unusual items such as the Arrow gain and debt-extinguishment loss when assessing recurring performance.