Masco Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Masco sells plumbing products and decorative architectural products, primarily in North America and Europe. All dollar amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $2.127B | $2.352B | $4.106B | $4.553B |
| Gross profit | $769M | $769M | $1.438B | $1.473B |
| Gross margin | 36.2% | 32.7% | 35.0% | 32.4% |
| Operating profit | $403M | $408M | $718M | $761M |
| Operating margin | 18.9% | 17.3% | 17.5% | 16.7% |
| Net income attributable to Masco | $263M | $278M | $468M | $511M |
| Diluted earnings per share | $1.16 | $1.18 | $2.07 | $2.15 |
Q2 sales declined 10% year over year (9% excluding currency), primarily from lower volume; higher prices partly offset the decline. For the first half, sales also fell 10% reported and 9% excluding currency. Q2 gross profit was flat despite lower sales, while first-half gross profit declined $35M. Higher prices, cost savings and lower transportation costs supported margins; volume declines, input costs and unfavorable mix weighed on results. SG&A rose to $366M in Q2 and $720M for the first half; as a share of sales, it increased 190 basis points in both periods.
Q2 segment sales were $1.225B for Plumbing Products, down 11%, and $902M for Decorative Architectural Products, down 8%. Segment operating profit was $244M for Plumbing, up 3%, and $180M for Decorative Architectural, down 6%. First-half segment sales declined 10% and 9%, respectively; operating profit declined 3% and 10%.
Cash flow, debt and liquidity
- First-half operating cash flow was $448M, versus $174M a year earlier. Capital expenditures were $133M; operating cash flow less capital expenditures was $315M.
- Cash and cash investments were $380M at June 30, 2023, down from $452M at year-end 2022. The current ratio was 1.7 to 1.
- Long-term debt was $2.946B and short-term notes payable were $79M. Masco repaid the remaining $200M of its 364-day term loan at maturity in April. Hansgrohe borrowed €70M ($77M) for working capital; the borrowing remained outstanding at a weighted-average rate of 4.173% at quarter-end.
- The $1.0B revolving credit facility, maturing in 2027, had no borrowings outstanding at June 30. Masco reported compliance with its covenants. Management said cash, operating cash flow and available borrowing capacity were sufficient for near-term needs.
- Financing cash outflows included $129M of dividends, $81M of share repurchases, $200M of term-loan repayment and $49M of dividends to noncontrolling interests. Investing cash outflow was $137M.
Changes, outlook and notable items
- Management cited lower market demand and continued exposure to elevated commodity, other input and employee-related costs. It noted some easing in certain costs and said it seeks to offset pressures through productivity, pricing and other initiatives.
- No specific earnings or sales forecast was provided. Masco anticipated approximately $350M of 2023 cash use for share repurchases, including purchases to offset equity compensation dilution; approximately $1.9B remained under the $2.0B authorization at June 30.
- On July 21, 2023, Masco agreed to acquire Sauna360 Group Oy for an estimated €125M, net of cash acquired and subject to customary adjustments and regulatory approval. Closing was expected in Q3 2023; the business would be reported in Plumbing Products.
- Prior-year other income included $28M in Q2 and $24M in the first half from revaluation of Kraus acquisition contingent consideration; this benefit did not recur in 2023. First-half 2023 effective tax rate was 24%, favorably affected by $12M of tax benefits, primarily related to uncertain tax positions and stock-based compensation.
- Management described ordinary-course litigation and product-safety matters as unlikely to have a material adverse effect, while noting outcomes cannot be assured. The company reported no material change to its 2022 annual-report risk factors. Key risks include residential repair and remodeling demand, competition, input costs and supply, international operations, acquisitions, workforce and cybersecurity.
Important facts for investors to verify
- Whether weaker sales volumes persist and how pricing, product mix and geographic demand evolve.
- Whether margin gains from pricing, savings and lower freight can offset input, labor and marketing costs.
- Cash conversion, capital spending, working-capital movements and the effect of supplier-finance arrangements; $64M was confirmed under the program at quarter-end, of which $20M was owed to participating financial institutions.
- Debt, covenant headroom and liquidity, including the use and repayment terms of Hansgrohe’s short-term borrowing.
- Execution, regulatory approval, funding and integration of the Sauna360 acquisition, and actual share repurchases relative to the stated 2023 expectation.