Masco Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.
Business context and results
Masco sells plumbing products and decorative architectural products, primarily in North America and Europe. Management reported continued strong consumer demand, while noting supply-chain constraints and rising input costs.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $2,204 | $1,983 | $6,353 | $5,328 |
| Gross profit | $753 | $752 | $2,244 | $1,927 |
| Gross margin | 34.2% | 37.9% | 35.3% | 36.2% |
| Operating profit | $385 | $424 | $1,187 | $988 |
| Income from continuing operations attributable to Masco | $220 | $275 | $278 | $618 |
| Diluted EPS from continuing operations | $0.89 | $1.05 | $1.07 | $2.31 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $595 | $573 |
Financial position and liquidity
- At September 30, 2021, cash and cash investments were $854, versus $1,326 at December 31, 2020. Total debt was approximately $2,960, comprising $10 of notes payable and $2,950 of long-term debt.
- Current assets were $3,404 and current liabilities were $1,879; the reported current ratio was 1.8 to 1. Masco had no borrowings outstanding under its $1.0 billion revolving credit facility and was in compliance with its covenants.
- Nine-month investing cash flow was $43 provided; financing cash flow was $1,095 used. Capital expenditures were $82. Cash fell by $472 over the period.
- Financing included $878 of share repurchases and $154 of cash dividends. Masco had $1.3 billion remaining under its $2.0 billion 2021 repurchase authorization at September 30.
Material changes versus prior periods
- Sales increased 11% in Q3 and 19% year to date. Excluding acquisitions, divestitures and currency translation, management reported growth of 9% and 15%, respectively.
- Q3 Plumbing Products sales rose 16%, while Decorative Architectural Products sales rose 4%. Nine-month segment sales rose 32% and 3%, respectively. Segment operating profit was lower year over year in Q3 for both businesses, but higher year to date.
- Higher commodity and transportation costs pressured gross margins. In Q3, consolidated operating profit fell despite sales growth; management cited cost inflation, labor and marketing costs, and lower sales volume in some product categories.
- Nine-month 2021 continuing-operations earnings were substantially affected by unusual expenses: a $406 pension settlement loss, a $168 debt-extinguishment loss recorded in interest expense, and an $18 loss on the Hüppe divestiture. Other items included a $14 contingent-consideration revaluation expense and a $14 gain on redemption of preferred stock. The 2020 comparison also includes $411 of income from discontinued operations, so reported net income is not directly comparable.
- Masco issued $1.5 billion of long-dated notes in March 2021 and used the proceeds with cash on hand to retire $1.326 billion of higher-coupon debt early. The refinancing reduced quarterly interest expense, but the extinguishment loss increased nine-month interest expense.
- Cash from operations was $595, compared with $573 in the prior-year period. Higher operating profit supported cash generation, partly offset by working-capital changes and pension contributions.
Outlook, commentary and risks
Masco provided no specific numerical sales or earnings guidance in this filing. Management expressed confidence in its long-term strategy, brands and cash-flow generation, and said current cash, operating cash flows and available borrowing capacity should support near-term working-capital and investment needs.
Management expected elevated commodity and transportation costs, supply-chain disruptions, and labor-cost inflation and hiring constraints to continue. It planned to mitigate these pressures through productivity and other initiatives. Forward-looking risks also include residential repair and remodeling and new-home activity, COVID-19 impacts, materials availability and tariffs, supplier and customer concentration, international operations, acquisitions and integration, and talent and technology risks.
The filing describes ordinary-course claims and litigation, including product liability and regulatory matters; management considered a material adverse effect remote but noted outcomes could affect results. The company reported no material changes to the risk factors in its 2020 Form 10-K.
Important facts for investors to verify
- How much of reported sales growth and segment performance reflects underlying volume and pricing versus acquisitions, divestitures and currency.
- Whether pricing and productivity can offset continued commodity, freight, labor and supply-chain pressures, particularly given the Q3 gross-margin decline.
- The earnings and cash-flow effects of the pension-plan settlement and debt refinancing, and the treatment of these items in any adjusted performance measures.
- Debt maturity, interest costs and liquidity needs after the refinancing, alongside ongoing buybacks, dividends and acquisition spending.
- The eventual Kraus contingent consideration, which could reach $50 million and was valued at $22 million at September 30, 2021, and the redemption terms for the remaining ESS noncontrolling interest.