Masco Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Masco sells building and home-improvement products through Plumbing Products, Decorative Architectural Products, Cabinetry Products, and Windows and Other Specialty Products. Amounts below are in millions of dollars except per-share data and percentages.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $2,057 | $2,001 | $3,834 | $3,721 |
| Gross profit | $737 | $700 | $1,345 | $1,269 |
| Operating profit | $357 | $335 | $610 | $569 |
| Net income attributable to Masco | $158 | $150 | $298 | $259 |
| Diluted EPS | $0.49 | $0.45 | $0.92 | $0.77 |
| Gross margin | 35.8% | 35.0% | 35.1% | 34.1% |
| Reported operating margin | 17.4% | 16.7% | 15.9% | 15.3% |
Q2 sales rose 3%; excluding currency effects, sales increased 4%. Six-month sales also rose 3% as reported and 4% excluding currency. North America sales increased 4% in both periods, while reported international sales declined 1%, primarily due to the stronger U.S. dollar. Sales gains in Plumbing and Decorative Architectural Products contrasted with declines in Cabinetry.
For the six months, operating cash flow was $155, down from $190 in 2016. Cash provided by operations was $536, but increases in receivables ($335) and inventory ($132) absorbed cash. Investing activities provided $124, including $126 of Arrow sale proceeds, against $77 of capital expenditures. Financing activities used $305, including debt retirement, share repurchases, and dividends. Cash and cash investments were $992 at quarter-end; short-term bank deposits were $144.
At June 30, total liabilities were $5,419, including $2,967 of long-term debt and $117 of notes payable. The company issued $600 of long-dated notes and retired $535 of higher-coupon notes during the quarter. Its $750 revolving credit facility was undrawn, and Masco reported compliance with its covenants. Management reported a 2.0-to-1 current ratio and said current cash and operating cash flows should meet near-term needs. Total equity was $70; Masco shareholders’ equity remained in deficit at $131, offset by $201 of noncontrolling interest.
Material changes and notable items
- Gross margin improved, which management attributed mainly to higher sales volume, cost savings, and the absence of a $10 warranty estimate adjustment recorded in Q2 2016.
- Q2 interest expense increased to $153 from $87, including a $107 loss on early debt extinguishment. The comparable 2016 period included a $40 extinguishment loss.
- The Q2 Arrow Fastener divestiture generated $126 in proceeds and a $49 gain, recorded in other income. Arrow had been included in Windows and Other Specialty Products.
- Q2 segment sales changes: Plumbing +3%, Decorative Architectural +5%, Cabinetry -4%, and Windows and Other Specialty +4%. Six-month changes were +4%, +4%, -3%, and +2%, respectively.
- The Board authorized up to $1.5 billion of share repurchases in May 2017. Masco repurchased $134 of shares in the first six months and had approximately $1.486 billion remaining under the new authorization at June 30. Cash dividends were $0.20 per share for the six months.
Outlook, risks, and contingencies
Management expressed confidence in long-term demand drivers and its strategy of investing in branded products, innovation, productivity, and disciplined capital allocation, but provided no specific financial guidance. It cited risks including housing and home-improvement activity, competition and key-customer dependence, execution of strategic initiatives, the underperforming U.S. window business, raw-material cost and availability, suppliers, and international operations.
Masco said ordinary-course claims and litigation were not expected to have a material adverse effect, while noting outcomes cannot be assured and could affect results. No material changes to the risk factors in its 2016 Form 10-K were reported. The company anticipated no material effect from adopting the new revenue-recognition standard in 2018; it expected the new lease standard in 2019 to increase reported assets and liabilities, with the magnitude still under evaluation.
Important facts for investors to verify
- Whether working-capital growth, particularly receivables and inventories, reverses or continues to constrain operating cash flow.
- The recurring earnings and cash-flow picture after removing the $49 Arrow gain and $107 debt-extinguishment charge.
- Progress in Cabinetry and the U.S. window business, and the sustainability of margin gains amid commodity costs and growth investments.
- Debt refinancing effects, total liquidity, and continued compliance with the revolving-credit covenants.
- Potential exposure from warranty claims and litigation; management’s contingency assessment is not a guarantee of outcomes.