Masco Corporation — Q3 2022 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. Masco operates through Plumbing Products and Decorative Architectural Products, selling primarily in North America and Europe.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $2.204 billion | $2.204 billion | $6.757 billion | $6.353 billion |
| Gross profit | $695 million | $753 million | $2.168 billion | $2.244 billion |
| Gross margin | 31.5% | 34.2% | 32.1% | 35.3% |
| Operating profit | $351 million | $385 million | $1.112 billion | $1.187 billion |
| Net income attributable to Masco | $218 million | $220 million | $729 million | $278 million |
| Diluted earnings per share | $0.97 | $0.89 | $3.13 | $1.07 |
- Q3 reported sales were flat year over year. Management said sales increased 3% excluding acquisitions, divestitures, and currency translation; higher prices were offset by lower volume and unfavorable currency translation.
- Nine-month reported sales increased 6%; excluding acquisitions, divestitures, and currency translation, sales increased 9%. Higher selling prices were the main contributor.
- Q3 operating margin declined to 15.9% from 17.5%; nine-month operating margin declined to 16.5% from 18.7%. Higher commodity, input, transportation, and marketing costs, plus lower Q3 volume and unfavorable currency, weighed on results; pricing partly offset the pressure.
- Q3 net income attributable to Masco decreased slightly, while diluted EPS increased from $0.89 to $0.97. For the nine-month comparison, the substantial increase in earnings primarily reflects the absence of 2021’s $406 million pension settlement expense and $168 million debt-extinguishment loss, as well as 2022 income from revaluing acquisition contingent consideration.
Segments
- Plumbing Products: Sales were flat in Q3 and up 4% for the first nine months. Segment operating profit fell 11% in both periods, to $220 million and $686 million, respectively. Pricing helped offset higher costs, currency effects, and lower Q3 volume.
- Decorative Architectural Products: Sales increased 1% in Q3 and 10% year to date. Operating profit declined 9% in Q3 to $151 million and was essentially flat year to date at $498 million. Pricing supported results, offset by input, transportation, and marketing costs and lower volume in some product categories.
Cash flow, liquidity, and capital
- Nine-month operating cash flow was $520 million, down from $595 million. Working capital uses included higher receivables and inventory.
- Capital expenditures were $137 million. Cash and cash investments were $464 million at September 30, 2022, versus $926 million at December 31, 2021.
- Financing activities used $802 million, including $914 million for share repurchases, $195 million for dividends, and $100 million of term-loan repayment; the company received $500 million from the term loan. Investing activities used $144 million.
- Current assets were $3.264 billion and current liabilities were $2.224 billion; the current ratio was 1.5, compared with 1.8 at year-end 2021. The filing attributes the decline primarily to the 364-day term loan.
- At quarter-end, notes payable were $405 million and long-term debt was $2.946 billion. The $500 million unsecured delayed-draw term loan is due April 26, 2023; Masco repaid another $65 million after quarter-end. The $1.0 billion revolving credit facility matures in 2027, and no revolving borrowings were outstanding at September 30. Masco reported compliance with its credit covenants.
- Equity was negative $436 million, versus positive $56 million at December 31, 2021. The company repurchased and retired approximately 16.6 million shares for $914 million during the first nine months and had $214 million remaining under the existing authorization at September 30. On October 20, the board approved a new $2.0 billion repurchase authorization.
Outlook, risks, and unusual items
- Masco provided no numerical earnings or sales guidance in the supplied filing text. Management said demand may weaken and identified elevated input and transportation costs, supply-chain disruption, and employee-cost inflation and hiring constraints. It noted some recent cost moderation and plans to use productivity, pricing, and other initiatives to offset pressures.
- Management expressed confidence in the business’s long-term fundamentals, brands, cash generation, innovation, and capital-allocation approach, while cautioning that actual results may differ from forward-looking statements.
- The company cited risks including residential repair and remodeling activity, new-home construction, materials availability and cost, suppliers, customer reliance, international operations, weather and climate, talent, and cybersecurity. It reported no material changes to the risk factors in its 2021 Form 10-K.
- Masco said ordinary-course claims and litigation include product liability, employment, environmental, intellectual-property, and other matters. It believes a material adverse outcome is remote, but provides no assurance of prevailing.
- The potential Kraus acquisition earn-out is up to $50 million in 2023, subject to 2022 performance targets. At September 30, Masco considered the targets unlikely to be met and estimated the liability at nil, versus $24 million at December 31, 2021.
- Other notable comparisons include the 2021 pension-plan settlement and early debt retirement, the 2021 Hüppe divestiture, and 2022 contingent-consideration revaluation income. Nine-month 2022 other income included $24 million from that revaluation.
Key facts for investors to verify
- Whether sales volumes and demand continue to weaken, and whether pricing can offset cost inflation without further margin erosion.
- Whether cost, transportation, and supply-chain pressures moderate as management expects, and how foreign-exchange movements affect international results.
- Repayment and refinancing of the remaining short-term term-loan balance due in April 2023, and continued compliance with debt covenants.
- The basis for the nil Kraus earn-out estimate and whether the 2022 performance conditions ultimately trigger payment.
- The cash-flow impact of working capital, dividends, and the new share-repurchase authorization, alongside the company’s negative equity position.