Masco Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with the three months ended March 31, 2016 unless noted. Amounts are in U.S. dollars.
Business context and results
Masco sells plumbing, decorative architectural, cabinetry, and windows and other specialty products. Net sales rose 3% to $1.777 billion; excluding currency translation, sales increased 5%. North American sales grew 5%, while reported international sales declined 1%, principally due to the stronger U.S. dollar.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $1.777 billion | $1.720 billion |
| Gross profit / gross margin | $608 million / 34.2% | $569 million / 33.1% |
| Operating profit / reported operating margin | $253 million / 14.2% | $234 million / 13.6% |
| Income before taxes | $213 million | $177 million |
| Net income attributable to Masco | $140 million | $109 million |
| Diluted earnings per share | $0.43 | $0.32 |
| Net cash used in operating activities | $149 million | $70 million |
Segment performance
- Plumbing Products: Sales increased 6% to $863 million; operating profit rose to $156 million from $129 million, and segment margin improved to 18.1% from 15.9%.
- Decorative Architectural Products: Sales increased 2% to $505 million; operating profit declined to $101 million from $105 million, with margin at 20.0% versus 21.3%.
- Cabinetry Products: Sales decreased 2% to $231 million; operating profit fell to $16 million from $24 million, and margin declined to 6.9% from 10.2%.
- Windows and Other Specialty Products: Sales were flat at $178 million; operating profit increased to $6 million from $3 million, with margin at 3.4% versus 1.7%.
Cash flow, debt and liquidity
Operating cash flow was negative $149 million, reflecting seasonal increases in receivables and inventory, partly offset by $253 million of cash provided by operations before working-capital movements. Investing cash flow used $26 million, including $37 million of capital expenditures. Financing cash flow used $133 million, principally for $87 million of share repurchases, $32 million of dividends, and $14 million of employee withholding taxes on stock compensation.
Cash and cash investments were $689 million, and short-term bank deposits were $194 million, totaling approximately $0.9 billion at quarter-end, down from $1.2 billion at December 31, 2016. Current assets were $2.958 billion against current liabilities of $1.424 billion; management reported a 2.1-to-1 current ratio. Long-term debt was $2.996 billion, with $3 million of notes payable. The company had no borrowings under its $750 million revolving credit facility and was in compliance with its financial covenants. Management said existing cash and operating cash flows should fund near-term working capital and investment needs.
Total equity was negative $59 million, including a $268 million deficit attributable to Masco shareholders, compared with total equity of negative $103 million at year-end 2016.
Material changes and management commentary
- Gross margin increased 1.1 percentage points, driven primarily by sales volume, improved selling-price-to-commodity-cost relationships, and cost savings. SG&A rose to 20.0% of sales from 19.5%, reflecting higher trade-show and advertising costs and strategic investments.
- Interest expense fell to $43 million from $56 million, which the company attributed to debt repayment and refinancing at more favorable rates. The effective tax rate declined to 30% from 33%, primarily due to a $7 million stock-based compensation tax benefit; adoption of the relevant accounting standard may increase tax-rate volatility.
- Management described repair-and-remodel and new-home-construction fundamentals as positive, and emphasized branded-product investment, innovation, operational excellence, and disciplined capital allocation. The filing gives no quantified earnings or sales guidance.
- The company repurchased 2.8 million shares for approximately $92 million during the quarter, of which $87 million was paid in cash; 10.1 million shares remained authorized for repurchase at March 31.
- Operating profit included $2 million of business-rationalization and other initiative costs, versus $3 million in the prior-year quarter. The Windows and Other Specialty Products segment had recorded substantial estimated warranty-cost increases in the second and third quarters of 2016; warranty liability was $194 million at March 31, 2017.
Risks, contingencies and other items
Masco cited risks including housing and home-improvement demand, competition and brand strength, key-customer reliance, strategic execution, its underperforming U.S. window business, raw-material costs and availability, third-party suppliers, and international operations. It reported ordinary-course claims and proceedings across areas including product liability, environmental matters, construction defects, and employment; management considered a material adverse outcome remote, but gave no assurance of prevailing. The company reported no material changes to its 2016 Form 10-K risk factors. Revenue-recognition adoption was expected in 2018, with no material impact anticipated; lease accounting adoption was expected to increase assets and liabilities, with the magnitude still under evaluation.
Important facts for investors to verify
- Whether the seasonal working-capital outflow reverses and operating cash flow supports the company’s repurchases, dividends, and investment plans.
- Whether Cabinetry Products’ sales and margins recover after exiting lower-margin business, and whether its new-product and cost initiatives improve performance.
- Whether the Windows business improves and whether the $194 million warranty liability adequately reflects future claims and repair costs.
- Debt maturities, covenant headroom, and the sustainability of cash balances, particularly given negative shareholder equity.
- How housing demand, commodity costs, foreign exchange, and stock-based compensation tax effects influence future results; the filing provides no quantified forward guidance.