Masco Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Masco designs, manufactures and distributes branded home-improvement and building products across Plumbing, Decorative Architectural, Cabinetry, and Windows and Other Specialty Products. The filing also provides unaudited fourth-quarter results.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $7.357 billion | $7.142 billion |
| Gross profit / margin | $2.456 billion / 33.4% | $2.253 billion / 31.5% |
| Operating profit / margin | $1.053 billion / 14.3% | $914 million / 12.8% |
| Income from continuing operations attributable to Masco | $491 million | $357 million |
| Diluted continuing-operations EPS | $1.47 | $1.03 |
| Net cash from operating activities | $726 million | $699 million |
| Capital expenditures | $180 million | $158 million |
Sales increased 3% reported and 4% excluding acquisitions and currency translation. Gross margin improved 1.9 percentage points. Management attributed improvement mainly to higher sales volume, a more favorable selling-price/commodity-cost relationship, operating efficiencies and cost savings. Results also reflected higher warranty costs, strategic growth spending, ERP implementation and insurance costs.
Segment sales and operating profit: Plumbing Products $3.526 billion and $642 million; Decorative Architectural Products $2.092 billion and $430 million; Cabinetry Products $970 million and $93 million; Windows and Other Specialty Products $769 million and a $3 million operating loss. Segment operating profit is before corporate expense; consolidated operating profit was $1.053 billion.
Fourth quarter: Sales were $1.759 billion versus $1.715 billion; gross profit was $573 million versus $532 million; continuing-operations income was $98 million versus $76 million; diluted continuing-operations EPS was $0.30 versus $0.22.
Liquidity, debt and capital allocation
- Cash, cash investments and short-term bank deposits totaled approximately $1.2 billion at year-end, including $618 million held by foreign subsidiaries. Current ratio was 2.0, up from 1.4.
- Year-end debt was approximately $3.0 billion, versus $3.4 billion in 2015; total debt was 104% of total capitalization. The filing reports a $750 million revolving credit facility, no borrowings under it, and compliance with its covenants.
- Operating cash flow of $726 million less $180 million of capital expenditures implies approximately $546 million of free cash flow, a derived non-GAAP measure.
- Masco issued $900 million of notes in 2016 and used proceeds plus cash to retire $1.3 billion of higher-coupon notes early. The early retirement generated $40 million of debt-extinguishment expense recorded in interest expense.
- Repurchased 14.9 million shares for $459 million and paid $128 million in cash dividends. The quarterly dividend increased about 5%; $12.9 million of share repurchase authorization remained, with management expecting to use it in 2017, subject to market conditions.
Changes, outlook and material risks
- Plumbing sales rose 6%; Decorative Architectural sales rose 4%; Cabinetry sales fell 5%, partly reflecting deliberate exits from lower-margin business; Windows and Other Specialty sales rose 2%, but the segment moved from $57 million operating profit to a $3 million loss.
- Masco reported a $31 million increase in estimated future warranty claims in its Windows and Other Specialty segment. Total warranty liability increased to $192 million from $152 million.
- Management described demand fundamentals for repair and remodeling and new-home construction as positive, and expected continued demand for its branded products. No specific consolidated sales or earnings guidance was provided. Planned 2017 capital expenditures were approximately $200 million, excluding acquisitions.
- Milgard, the U.S. windows business, faced operational inefficiencies and difficulty hiring and retaining labor; implementation of its ERP system was complex and costly. Management cautioned that remediation plans may not succeed.
- Customer concentration is significant: The Home Depot represented approximately $2.48 billion, or 34% of 2016 sales; Lowe’s represented less than 10%. Loss or purchasing changes at major customers could materially affect results.
- Other key exposures include cyclical home-improvement and housing markets, commodity availability and prices, foreign-exchange movements, supplier dependence, competition and channel shifts, product liability and litigation, and implementation of technology systems. The U.K.’s planned exit from the EU and potential tax reform were identified as uncertainties.
- Masco reported no goodwill impairment in 2016. The effective tax rate was 36%; the 2014 comparison was unusually affected by a $529 million tax benefit from valuation-allowance releases. The filing warns that unresolved tax positions and potential tax-law changes may affect future tax expense.
- The company’s financial statements and internal control over financial reporting received unqualified auditor opinions; management also concluded controls were effective.
Most important facts for investors to verify
- Whether margin gains and sales growth persist after favorable volume and commodity-cost effects, and how price competition affects profitability.
- Progress at Milgard on labor, production efficiency and ERP implementation, alongside subsequent warranty claims and reserve adequacy.
- Exposure to The Home Depot and Lowe’s, including any changes in sales mix, pricing terms or distribution-channel strategy.
- Cash generation, debt maturities and covenant headroom after substantial buybacks, dividends and the 2016 refinancing.
- Actual 2017 capital spending, repurchases and demand trends compared with management’s outlook; the filing provides no quantified sales or EPS forecast.
- Potential developments in litigation, uncertain tax positions, pension funding and foreign-exchange or commodity exposure.