Masco Corporation — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filing dated February 8, 2018. Masco designs, manufactures and distributes branded home-improvement and building products, including plumbing fixtures, paint, cabinets, windows and spas. Results are for continuing operations unless noted.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $7.644 billion | $7.357 billion |
| Gross profit / gross margin | $2.611 billion / 34.2% | $2.456 billion / 33.4% |
| Operating profit / reported margin | $1.169 billion / 15.3% | $1.053 billion / 14.3% |
| Net income attributable to Masco | $533 million | $491 million |
| Diluted EPS from continuing operations | $1.66 | $1.47 |
| Operating cash flow | $751 million | $789 million |
| Capital expenditures | $173 million | $180 million |
| Cash, cash investments and short-term bank deposits | $1.302 billion | $1.191 billion |
| Total debt, including current portion | $3.085 billion | $2.997 billion |
| Current ratio | 2.0 | 2.0 |
Operating cash flow less capital expenditures was approximately $578 million in 2017, calculated from the reported figures. The company reported $1.169 billion of consolidated operating profit after $105 million of general corporate expense; segment operating profit before that expense totaled $1.274 billion. The effective tax rate was 34%, versus 36% in 2016. Masco shareholders’ equity remained negative at $60 million, although total equity was positive at $176 million, including noncontrolling interests.
Cash generation was below 2016, with working capital investment—particularly higher inventory—among the factors cited. The company paid $129 million in cash dividends and repurchased 9.2 million shares for $331 million. It reported $1.3 billion remaining under its $1.5 billion repurchase authorization. Debt was refinanced in 2017, and the company reported no revolver borrowings and compliance with credit-agreement covenants at year-end.
Material changes versus 2016
- Sales increased 4%; growth reflected higher volume, pricing and favorable mix, partly offset by divestitures and unfavorable international plumbing mix.
- Gross margin rose 0.8 percentage points and reported operating margin rose 1.0 percentage point. Management cited volume, cost savings and improved price-to-commodity-cost relationships; increased strategic growth spending and other expenses partly offset the improvement.
- Plumbing Products sales increased 6% to $3.735 billion and segment operating profit rose to $698 million. Decorative Architectural Products sales increased 5% to $2.205 billion, while segment profit was nearly flat at $434 million.
- Cabinetry Products sales fell 4% to $934 million; segment profit declined to $90 million from $93 million. Windows and Other Specialty Products sales were flat at $770 million, while segment profit improved to $52 million from a $3 million loss.
- Operating cash flow declined $38 million. Cash and cash investments increased, while total debt was broadly similar year over year.
Outlook, management commentary and risks
- Management said industry fundamentals remained supportive of long-term growth, but provided no specific 2018 sales or earnings forecast. It emphasized branded-product investment, innovation, cost and productivity initiatives, acquisitions and active portfolio management.
- Management expected 2018 capital expenditures of approximately $220 million and depreciation and amortization of approximately $135 million, excluding acquisitions. It anticipated an effective tax rate of approximately 26% following U.S. tax reform.
- Masco expected to complete its approximately $550 million Kichler lighting acquisition in the first quarter of 2018, funded with cash. It also anticipated using $200–$300 million for share repurchases or acquisitions in 2018, in addition to Kichler.
- Unusual 2017 items included a $107 million debt-extinguishment loss recorded in interest expense and a $64 million loss on the Moores divestiture, partly offset by a $51 million gain on the Arrow divestiture. Moores also triggered recognition of $58 million of pension actuarial losses, net of tax, previously recorded in accumulated other comprehensive loss.
- Key risks include cyclical repair-and-remodel and new-home markets; The Home Depot accounted for about 33% of 2017 sales, while Lowe’s accounted for less than 10%; commodity-cost volatility and supplier availability; currency and international exposure; and litigation, product warranties and regulation. Management identified ongoing ERP implementation and the ability to sustain improvement at its U.S. window business as risks.
- Masco reported $205 million of total warranty liability at year-end. It stated that ordinary-course litigation was not considered likely to have a material adverse effect, while noting outcomes remain uncertain. It also reported no goodwill or indefinite-lived intangible impairment in 2017.
Important facts for investors to verify
- Whether sales growth and margin improvement can continue amid commodity-cost changes, increased growth spending and cyclical housing demand.
- The outlook for Cabinetry and the sustainability of the U.S. window business recovery, including warranty experience and ERP execution.
- The effect of customer concentration and any changes in purchasing, channel strategy or vendor relationships at The Home Depot and Lowe’s.
- Kichler’s closing, purchase price, financing and integration, as well as the returns from planned repurchases and other capital allocation.
- Actual 2018 tax rate and cash taxes versus management’s estimate, and the company’s capacity to manage debt, pension funding and planned investment.