Masco Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Financial amounts are in millions of dollars, except per-share data. Comparisons are with the corresponding 2022 periods.
Business context and results
Masco sells plumbing products and decorative architectural products, primarily in North America and Europe. Management cited lower market demand and elevated input and employee costs, while pursuing pricing, productivity and cost-saving measures.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $1,979 | $2,204 | $6,085 | $6,757 |
| Gross profit / margin | $744 / 37.6% | $695 / 31.5% | $2,182 / 35.9% | $2,168 / 32.1% |
| Operating profit / margin | $383 / 19.4% | $351 / 15.9% | $1,101 / 18.1% | $1,112 / 16.5% |
| Net income attributable to Masco | $249 | $218 | $717 | $729 |
| Diluted EPS | $1.10 | $0.97 | $3.17 | $3.13 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $928 | $520 |
Material changes and drivers
- Sales fell 10% in both the quarter and nine-month period. Excluding acquisitions and currency translation, sales declined 11% for Q3 and 10% year to date, mainly from lower sales volume. Pricing partly offset the decline.
- Q3 gross profit and operating profit increased despite lower sales; nine-month gross profit rose modestly while operating profit declined. Lower volume, employee costs and, year to date, unfavorable mix and marketing costs weighed on results. Pricing, cost savings and lower transportation costs provided offsets.
- A $40 million insurance settlement related to a 2021 weather-related supplier disruption increased gross and operating profit in both the three- and nine-month 2023 results. Reported margins and profit therefore include this unusual benefit.
- Segment sales declined in Q3: Plumbing Products $1,191 (down 10%) and Decorative Architectural Products $788 (down 10%). Segment operating profit was $223 and $181, respectively; Decorative Architectural Products benefited from the insurance settlement.
- Nine-month interest expense was $82, unchanged year over year. Other, net was an expense of $14 versus income of $4 in 2022; the prior-year period included $24 of contingent-consideration revaluation income.
Cash, debt and capital allocation
- Cash and cash investments were $560 at September 30, 2023, versus $452 at year-end 2022. Nine-month operating cash flow was $928; investing used $321, including $181 of capital expenditures and $136 for the Sauna360 acquisition. Financing used $498, including $200 repayment of the term loan, $193 of dividends and $126 of share repurchases.
- Current assets were $2,964 and current liabilities $1,662; the company reported a current ratio of 1.8 to 1. Long-term debt was $2,946 and short-term notes payable $66. The revolving credit facility had a $1.0 billion commitment, no borrowings outstanding, and Masco reported compliance with its covenants.
- Hansgrohe had $63 of short-term borrowings outstanding at a weighted-average interest rate of 4.807%. Masco said its cash, operating cash flow and revolver availability were sufficient for near-term needs, while noting uncertainty from changing market conditions.
- Masco acquired Sauna360 for approximately $136 net of cash acquired; it was included in Plumbing Products. The company reported $60 of acquisition goodwill, which is not tax deductible.
- Masco repurchased approximately 2.4 million shares for $126 in the first nine months. Management anticipated approximately $350 of share repurchases for 2023; about $1.9 billion remained under the authorization at September 30.
Outlook, risks and contingencies
The filing gives no specific revenue, earnings or margin guidance. Management said lower demand may continue and that commodity and other input costs, though still elevated, had recently eased in some areas. It intends to address cost and demand pressures through productivity, pricing and other initiatives. The company identified exposure to residential repair and remodeling activity, new construction, materials and supplier availability, competition, international operations, acquisitions, workforce, cybersecurity and other risks. It reported no material change to the risk factors in its 2022 Form 10-K.
Masco is involved in ordinary-course litigation and product-safety matters, including product liability and regulatory proceedings. Management considered a material adverse outcome remote but noted that judgments, penalties or settlements could affect results. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.
Important facts for investors to verify
- How much of the Q3 margin and profit improvement is sustainable after excluding the $40 million insurance settlement.
- Whether volume declines persist and how pricing, mix and demand develop across Plumbing Products, Decorative Architectural Products and geographic markets.
- Progress toward the approximately $350 million 2023 repurchase expectation, alongside dividends, investment needs and debt repayment.
- Integration and performance of Sauna360, including the final purchase-price allocation and expected contribution.
- Developments in input costs, supplier and market conditions, litigation and product-safety matters, and compliance with credit-facility covenants.