Masco Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Masco sells plumbing, decorative architectural, cabinetry, and window and specialty products, primarily in North America and Europe. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $2,297 | $2,066 | $4,217 | $3,844 |
| Gross profit | $750 | $746 | $1,369 | $1,351 |
| Operating profit | $358 | $372 | $602 | $629 |
| Net income attributable to Masco | $211 | $163 | $360 | $301 |
| Diluted EPS | $0.68 | $0.51 | $1.15 | $0.93 |
| Net cash from operating activities | Not presented quarterly | $293 | $155 |
- Sales rose 11% in Q2 and 10% in the first half. Excluding acquisitions, divestitures, and currency translation, sales grew 6% and 5%, respectively.
- Gross margin declined to 32.7% in Q2 from 36.1%, and to 32.5% in the first half from 35.1%. Reported operating margin was 15.6% and 14.3%, versus 18.0% and 16.4%.
- Operating profit fell despite higher sales. Management cited Kichler inventory step-up costs, unfavorable price-versus-commodity-cost relationships and product mix, growth investments, logistics and other expenses. SG&A as a share of sales improved through fixed-cost leverage.
- Attributable net income and EPS increased, while interest expense fell to $38 in Q2 and $79 in the first half from $153 and $196. The 2017 comparisons included $107 of debt-extinguishment costs; 2017 other income also included a $49 gain on the Arrow divestiture.
Financial position and capital allocation
- At June 30, cash and cash investments were $384, down from $1,194 at year-end 2017; short-term bank deposits were nil versus $108. The filing reports a 1.7 current ratio, down from 2.0.
- Long-term debt was $2,970 and notes payable were $2. No revolving-credit borrowings were outstanding at quarter-end; Masco was in compliance with its credit-facility covenants. The $750 revolving facility matures in May 2020.
- First-half operating cash flow was $293. Investing used $544, chiefly for the $548 Kichler acquisition and $103 of capital spending. Financing used $567, including $265 of share repurchases, $114 of note retirement, $65 of cash dividends, and $89 of dividends to noncontrolling interests.
- Masco repurchased and retired 6.7 million shares in the first half; approximately $1.0 billion remained under its authorization at June 30. Cash dividends declared were $0.21 per share for the first half.
- Accounts payable and accrued liabilities increased, while receivables and inventories also rose. The filing attributes the lower current ratio principally to cash used for Kichler, partly offset by acquired working capital.
Material developments and outlook
- Masco acquired substantially all net assets of lighting-products company The L.D. Kichler Co. on March 9 for $548 net of cash acquired, funded with cash on hand. Kichler contributed $108 of Q2 sales and $135 for the period since acquisition. Purchase-price allocation remained preliminary; revised identifiable assets and liabilities may change during the measurement period.
- Decorative Architectural Products sales increased 22% in Q2, primarily reflecting Kichler; Plumbing Products rose 9%. Cabinetry Products increased 7%, while Windows and Other Specialty Products declined 7%, largely reflecting the prior-year Arrow divestiture. Segment operating margins declined year over year across all four segments.
- Management said industry fundamentals remained strong and emphasized branded-product investment, innovation, operational excellence, portfolio management, and disciplined capital allocation. It provided no specific quantified earnings or sales guidance.
- Management believes cash, operating cash flow, and the revolving facility are sufficient for near-term needs. Longer-term needs are expected to be funded through operating cash flow and, if needed, borrowings or capital-market activity.
- Key stated risks include housing and repair/remodel activity, raw-material costs and availability, competition, key-customer and supplier reliance, international exposure, acquisition integration, technology and systems, and sustaining improvement in the U.S. windows business. Ordinary-course litigation and claims were described as unlikely to have a material adverse effect, though outcomes are not assured.
- Masco adopted ASC 606 retrospectively; prior-period comparisons were recast. It also reclassified $59 of disproportionate tax effects from accumulated other comprehensive loss to retained deficit. The Delta Faucet ERP system was implemented in Q2; controls were reported to be operating as intended, with no identified deficiency prompting the change.
Important facts for investors to verify
- Whether pricing and productivity can offset commodity, logistics, labor, warranty, and other cost pressures that reduced margins.
- The final Kichler purchase-price allocation, integration progress, and realized benefits relative to acquisition cost.
- Cash generation, working-capital requirements, and liquidity after the acquisition, repurchases, dividends, and debt retirement.
- Performance trends in Windows and Other Specialty Products and the effect of prior divestitures on reported comparisons.
- Developments in litigation, business risks, and the ERP implementation as described in subsequent filings.