Masco Corporation — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020. The filing also reports quarterly results; it is an annual report, not a standalone fourth-quarter filing. Masco designs, manufactures and distributes branded home-improvement and building products. Continuing operations are reported in Plumbing Products and Decorative Architectural Products.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $7.188 billion | $6.707 billion |
| Gross profit / gross margin | $2.587 billion / 36.0% | $2.371 billion / 35.4% |
| Operating profit / margin | $1.295 billion / 18.0% | $1.088 billion / 16.2% |
| Income from continuing operations attributable to Masco | $810 million | $639 million |
| Diluted continuing-operations EPS | $3.04 | $2.20 |
| Net income attributable to Masco, including discontinued operations | $1.224 billion | $935 million |
| Cash from operating activities | $953 million | $833 million |
| Capital expenditures | $114 million | $162 million |
| Cash and cash investments at year-end | $1.326 billion | $697 million |
| Long-term debt at year-end | $2.792 billion | $2.771 billion |
Interest expense was $144 million, down from $159 million. The effective tax rate was 24%, compared with 25%. SG&A was 18.0% of sales versus 19.0%. The company reported $1.3 billion in total assets and $421 million in total equity, versus a $56 million equity deficit a year earlier. The current ratio was 1.8 at both year-ends; debt as a percentage of total capitalization was 87%, down from 102%.
Business results and material changes
- Sales rose 7% year over year, driven mainly by higher sales volume in paints and coatings, plumbing products and, to a lesser extent, builders’ hardware. Higher volume and cost savings supported improved gross and operating margins; pricing pressure, commodity costs and tariffs partly offset these benefits.
- Plumbing Products sales were $4.136 billion, up 4%; segment operating profit was $806 million, versus $708 million.
- Decorative Architectural Products sales were $3.052 billion, up 12%; segment operating profit was $583 million, versus $480 million. Higher paint and coatings volume was a key driver.
- North American sales increased 9% to $5.805 billion. International sales, principally Europe, were approximately flat at $1.383 billion.
- Masco completed the Cabinetry divestiture in February 2020, receiving approximately $989 million in total consideration, including $853 million net of cash disposed and preferred stock. It recorded a $585 million gain in discontinued operations. FY2020 discontinued-operations income was $414 million, so total net income includes significant disposal-related effects and is not directly comparable with continuing-operations earnings.
- 2020 acquisitions included Kraus, Work Tools and SmarTap, for combined consideration including approximately $175 million cash and $5 million debt. The acquisition of a 75.1% interest in ESS closed January 4, 2021; approximately $52 million had been paid in advance at year-end.
Liquidity, capital allocation and outlook
Operating cash flow was $953 million. The company repurchased 18.8 million shares for approximately $727 million and paid $145 million in cash dividends. It issued $300 million of 2.0% notes due 2030 and an additional $100 million of 4.5% notes due 2047, using proceeds to retire $400 million of 3.5% notes due 2021. No borrowings were outstanding under its $1.0 billion revolving credit facility at year-end, and Masco reported compliance with its covenants.
Management expects approximately $800 million of share repurchases in 2021, subject to its plans and circumstances, and anticipated capital expenditures of approximately $150 million. It intended to raise the annual dividend to $0.94 per share beginning in the second quarter of 2021, subject to Board declaration. Management expressed confidence in the company’s long-term strategy and financial position, but did not provide specific 2021 sales or earnings guidance and emphasized uncertainty about the pandemic’s near-term effects.
Risks, contingencies and unusual items
- COVID-19 caused facility closures or reduced capacity, supply-chain disruption and production backlogs. Demand for home repair and remodeling products was strong in 2020, but management cautioned that these demand levels might not continue.
- The Home Depot accounted for approximately $2.8 billion, or 39%, of continuing-operations sales. Masco’s North American Behr retail business grants The Home Depot brand exclusivity; a material loss of this customer could harm results.
- Material-cost volatility, tariffs, supplier dependence, transportation constraints, foreign-exchange movements, competition and shifts toward e-commerce could pressure sales or margins.
- Masco plans to terminate its qualified domestic defined-benefit pension plans in 2021. It expected approximately $450 million of pre-tax actuarial losses to be recognized upon termination, with pension expense for qualified plans forecast at approximately $470 million in 2021 versus $30 million in 2020. It anticipated approximately $140 million of domestic qualified-plan contributions and an approximately $895 million qualified-plan benefit payment/settlement in 2021.
- Goodwill and indefinite-lived intangible asset tests found no impairment in 2020. Management disclosed that a 10% decline in estimated reporting-unit fair values would have caused a $6 million impairment in one reporting unit. The auditor identified goodwill impairment testing as a critical audit matter.
- Masco described ordinary-course litigation and product-liability matters, but said a material adverse outcome was remote; outcomes remain inherently uncertain. The filing lists $84 million of uncertain tax positions, including interest and penalties.
Important facts for investors to verify
- Separate ongoing performance from discontinued operations and the $585 million Cabinetry disposal gain; review continuing-operations sales, earnings and cash generation.
- Assess whether elevated 2020 repair-and-remodel demand and segment margin improvements are sustainable, including the effects of pricing, tariffs and input costs.
- Monitor the 2021 pension-plan termination, related expense recognition, contributions and settlement execution.
- Evaluate customer concentration and the commercial implications of The Home Depot relationship and Behr exclusivity.
- Track integration and performance of the 2020 acquisitions and the completed ESS acquisition, alongside planned buybacks, dividends and debt obligations.
The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting as of December 31, 2020.