Masco Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Dollar amounts are in millions except per-share data. Comparisons are with the corresponding 2020 periods.
Business context and results
Masco sells plumbing products and decorative architectural products, primarily in North America and Europe. Q2 sales growth was led by plumbing volume and international sales. Management said consumer demand remained strong in the first half of 2021 as operations largely returned to normal capacity.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $2,179 | $1,764 | $4,149 | $3,345 |
| Gross profit | $791 | $628 | $1,491 | $1,175 |
| Gross margin | 36.3% | 35.6% | 35.9% | 35.1% |
| Operating profit | $437 | $339 | $802 | $564 |
| Income (loss) attributable to Masco from continuing operations | $(36) | $210 | $58 | $343 |
| Diluted EPS from continuing operations | $(0.14) | $0.80 | $0.20 | $1.27 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $239 | $290 |
Reported Q2 sales increased 24%; sales excluding acquisitions, divestitures and currency effects increased 18%. Q2 Plumbing Products sales rose 53% and Decorative Architectural Products sales fell 5%. Segment operating profit was $273 for Plumbing Products and $188 for Decorative Architectural Products.
For the first half, cash provided by operations before working-capital changes was $610; working-capital movements included a $238 increase in receivables and a $147 increase in inventory. Investing activities provided $122, including cash received on preferred-stock redemption, while financing activities used $909.
At June 30, cash and cash investments were $769; current assets were $3,259 and current liabilities $1,778, with a reported current ratio of 1.8. Long-term debt was $2,950 and notes payable were $10. The $1.0 billion revolving credit facility had no borrowings outstanding, and Masco reported compliance with its covenants. Shareholders’ equity attributable to Masco was negative $154; total equity was $60.
Material changes and unusual items
- Q2’s $36 attributable loss from continuing operations chiefly reflects a $406 pension settlement loss recorded in other expense after termination and settlement of the qualified domestic pension plans. Masco also made a final pension contribution of $101. The settlement loss was a major noncash accounting charge.
- First-half interest expense was $227, including a $168 loss on early debt extinguishment. Masco issued $1.5 billion of new long-term notes at coupons of 1.500%, 2.000% and 3.125%, and used proceeds plus cash to retire $1.326 billion of older notes. Q2 interest expense was $25, versus $35 a year earlier.
- The May divestiture of Hüppe generated an $18 loss, including recognition of currency translation losses. Redemption of the ACProducts preferred stock generated $166 cash proceeds and a $14 gain.
- Q2 income tax expense was $12 despite a $3 pretax loss, primarily because of an $11 tax expense tied to pension-related accumulated other comprehensive income reclassification. The first-half effective tax rate was 36%, versus 24% in the prior-year period.
- Masco repurchased and retired 12.2 million shares for approximately $750 in the first half and paid $96 of cash dividends. A $350 accelerated repurchase transaction was completed in July, after quarter-end.
- Prior-year comparisons include $411 of first-half income from discontinued operations, principally gains on the 2020 Cabinetry and Milgard divestitures; 2021 had no discontinued-operations income.
Management outlook, risks and contingencies
Management gave no quantified revenue, earnings or margin guidance. It expressed confidence in business fundamentals, its long-term strategy, cash generation and disciplined capital allocation. Management expects to address cost pressures through productivity and other initiatives.
Masco reported elevated commodity and transportation costs, supply-chain disruptions affecting sourcing, and labor-cost inflation and hiring constraints; it said these pressures could continue. Other risks cited include residential repair and remodeling and new-home activity, COVID-19 effects, materials availability and tariffs, customer concentration, competition, acquisitions and integration, and technology and talent risks. The company said it believes cash, operating cash flow and available borrowing capacity are sufficient for near-term needs. It reported ordinary-course litigation and product-safety matters, while stating that a material adverse outcome was considered remote; outcomes remain uncertain.
Subsequent events: Masco acquired Steamist for approximately $56 in cash in July 2021. The filing also states the June accelerated share repurchase was completed July 29, with additional shares delivered then.
Important facts for investors to verify
- How underlying sales, pricing and segment margins develop as commodity, freight and labor costs rise; Q2 Decorative Architectural Products sales declined.
- The size and comparability of pension, debt-extinguishment and divestiture charges, and their effects on reported earnings, taxes and cash flow.
- Debt maturities, refinancing economics, covenant headroom and liquidity after the refinancing, share repurchases and dividends.
- Working-capital trends, particularly receivables and inventory, and whether operating cash flow converts into sustained free cash flow.
- Acquisition performance and integration, including ESS, Kraus, Work Tools and the post-quarter Steamist acquisition; also monitor Hüppe divestiture and any contingent consideration.