01—Abstract
Summary
Summary of the 10-K filed February 7, 2019. Cited figures are marked; the original filing is the authoritative source.
Masco Corporation, a global leader in designing, manufacturing and distributing branded home improvement and building products, reported 2018 net sales of $8.36 billiona, up from $7.64 billion in 2017, and net income attributable to Masco Corporation of $734 million, or $2.37 per diluted share, versus $533 million and $1.66 in 2017.
Results were driven by the March 2018 acquisition of The L.D. Kichler Co. (purchase price $549 millionb in cash), higher sales volume, and net selling price increases, partly offset by higher commodity costs, logistics and salary expenses, and the inventory step-up from the Kichler acquisition. Operating profit was $1.21 billion (14.5% operating margin, 15.1% as adjusted), and the effective tax rate fell to 25% from 34% reflecting U.S. tax reform.
Cash flow from operations was $1.03 billionc, and the company repurchased and retired 18.6 million shares for $654 million, paid $134 million in cash dividends, and raised its quarterly dividend to $.12 per share from $.105 in the third quarter. Total debt as a percent of total capitalization was 98% at December 31, 2018, up from 94%, and shareholders' equity was $69 million in total equity.
Cash and cash investments were $559 milliond at year end, and the company anticipates using approximately $600 million for share repurchases and capital expenditures of approximately $200 million in 2019. Management flagged risks including reliance on residential repair and remodel activity, concentrated sales to The Home Depot (approximately 32% of consolidated net sales in 2018), commodity and tariff cost pressures, and foreign currency exposure, with 19% of 2018 sales made outside North America.
02—Key points
Key Highlights
- Net sales rose to $8.36 billion in 2018 from $7.64 billion in 2017; net income attributable to Masco was $734 million ($2.37 diluted EPS) versus $533 million ($1.66) a year earlier.
- Operating profit reached $1.21 billion, with operating margin of 14.5% as reported and 15.1% as adjusted for rationalization charges and the $40 million Kichler inventory step-up.
- The Kichler acquisition, completed March 9, 2018 for $549 million in cash, added $346 million of net sales in 2018 and expanded the Decorative Architectural Products segment, which grew 20% to $2.66 billion.
- Operating cash flow was $1.03 billion, funding $654 million of share repurchases (18.6 million shares), $134 million of dividends, and $219 million of capital expenditures.
- The quarterly dividend was increased 14% to $.12 per share in the third quarter of 2018; $636 million remained under the May 2017 $1.5 billion repurchase authorization at year end.
- Total debt as a percent of total capitalization rose to 98% from 94%, and the company was in compliance with its credit agreement covenants with no borrowings outstanding at December 31, 2018.
- The Home Depot accounted for approximately 32% of 2018 consolidated net sales, and management identified tariffs on Chinese imports as a potential cost increase of approximately $150 million annually if tariffs rise to 25% in 2019.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Masco kept $0.11.
- Revenue$6.65B100.0%
- Cost of revenue−$4.33B65.0%
- Gross profit$2.33B35.0%
- Operating costs−$1.25B18.8%
- Operating income$1.08B16.2%
- Interest, other & tax−$343.0M5.2%
- Net income$734.0M11.0%
Where FY2018 revenue went
$6.65B- Cost of revenue: $4.33B, 65% of revenue
- SG&A: $1.25B, 19% of revenue
- Net income: $734.0M, 11% of revenue
- Interest, other & tax: $343.0M, 5.2% of revenue
Kept 11% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 7, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $6.65B$6.01B | +10.6% |
| Cost of Revenue | $4.33B$3.79B | +14.0% |
| Gross Profit | $2.33B$2.22B | +4.8% |
| SG&A Expenses | $1.25B$1.19B | +5.0% |
| Operating Income | $1.08B$1.03B | +4.7% |
| Interest Expense | $156.00M$279.00M | −44.1% |
| Net Income | $734.00M$533.00M | +37.7% |
| EPS (Basic) | $2.38$1.68 | +41.7% |
| EPS (Diluted) | $2.37$1.66 | +42.8% |
| Shares Outstanding (Basic) | 305.00M314.00M | −2.9% |
| Shares Outstanding (Diluted) | 307.00M318.00M | −3.5% |
05—Questions
Frequently Asked Questions
How did Masco perform financially in 2018?
Net sales increased to $8.36 billion from $7.64 billion, and net income attributable to Masco Corporation rose to $734 million, or $2.37 per diluted share, from $533 million, or $1.66 per diluted share. The gross profit margin declined to 32.2% from 34.2%, mainly due to higher commodity costs, logistics and salary expenses, and the Kichler inventory step-up, while SG&A as a percent of sales improved to 17.7% from 18.6%.
What drove the growth in net sales during 2018?
The filing attributes the 9% increase to the acquisitions of Kichler and Mercury Plastics, higher sales volume of plumbing products and cabinetry (about three percent of growth), and net selling price increases for paints, coatings, plumbing products and windows (about two percent). Foreign currency translation added one percent, while the divestitures of Arrow and Moores reduced sales by one percent.
How is Masco returning capital to shareholders?
In 2018 Masco repurchased and retired 18.6 million shares for $654 million and paid $134 million in cash dividends, with dividends declared of $0.450 per share. The company expects to use approximately $600 million for share repurchases in 2019, and $636 million remained under its 2017 authorization at December 31, 2018.
What are the most significant risks to Masco's business?
The filing highlights reliance on residential repair and remodel activity and new home construction, which are cyclical; concentration of sales with The Home Depot (about 32% of 2018 net sales) and Lowe's; commodity price volatility for brass, resins, titanium dioxide, zinc and wood; tariffs on imported materials; and currency exposure, with 19% of 2018 sales made outside North America.
What is the company's financial position at the end of 2018?
Masco had cash and cash investments of $559 million, total assets of $5.39 billion, long-term debt of $2.97 billion, and total equity of $69 million, including a Masco shareholders' deficit of $111 million. The current ratio was 1.6 to 1, down from 2.0 to 1, primarily due to cash paid for the Kichler acquisition.
06—Continue