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(Exact name of Registrant as Specified in its Charter)
iDelaware
i38-1794485
(State
or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
i17450 College Parkway,
iLivonia,
iMichigan
i48152
(Address
of Principal Executive Offices)
(Zip Code)
(i313) i274-7400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol
Name of each exchange on which registered
iCommon Stock, $1.00 par value
iMAS
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒iYes☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒iYes☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
i☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
See
notes to condensed consolidated financial statements.
6
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
A. iACCOUNTING
POLICIES
In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to fairly state our financial position at June 30, 2022, our results of operations and comprehensive income (loss) for the three and six months ended June 30, 2022 and 2021, cash flows for the six months ended June 30, 2022 and 2021 and changes in shareholders' equity for the three and six months ended June 30, 2022 and 2021. The condensed consolidated balance sheet at December
31, 2021 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted ("GAAP") in the United States of America.
i
Recently Adopted Accounting Pronouncements. In August 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own
Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 simplifies the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. We adopted this standard for annual periods beginning January 1, 2022. The adoption of this new standard did not impact our financial position or results of operations.
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Acquired Contract Assets and Contract Liabilities from Contracts
with Customers.” ASU 2021-08 requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with Topic 606 as if the acquirer had originated the contracts. We adopted this standard for annual periods beginning January 1, 2022. The adoption of this new standard did not impact our financial position or results of operations.
B. iACQUISITIONS
In
the third quarter of 2021, we acquired all of the share capital of Steamist, Inc. ("Steamist") for approximately $i56 million in cash. Steamist is a manufacturer of residential steam bath products that are complementary to many of our plumbing products. This business is included in our Plumbing Products segment. In connection with this acquisition, we recognized $i31 million
of definite-lived intangible assets, primarily related to customer relationships. The definite-lived intangible assets are being amortized on a straight-line basis over a weighted average amortization period of i11 years. We also recognized $i29 million
of goodwill, which is not tax deductible, and is related primarily to the expected synergies from combining the operations into our business. Working capital and other adjustments were finalized with the seller in the fourth quarter of 2021, resulting in no significant changes.
In the first quarter of 2021, we acquired a i75.1 percent equity interest in Easy Sanitary Solutions B.V. ("ESS"), for approximately €i47 million
($i58 million), including $i52 million of cash and $i6 million
of debt that will be paid out over itwo years less any pending or settled indemnity matters. The cash payment was made to a third-party notary on December 29, 2020 for the acquisition of this equity interest in advance of the transaction closing on January 4, 2021. ESS is a manufacturer of shower channel drains and offers a wide range of products for barrier-free showering and bathroom wall niches. This business is included in our Plumbing
Products segment. In connection with this acquisition, we recognized $i32 million of definite-lived intangible assets, primarily related to customer relationships. The definite-lived intangible assets are being amortized on a straight-line basis over a weighted average amortization period of i10
years. We also recognized $i35 million of goodwill, which is not tax deductible, and is related primarily to the expected synergies from combining the operations into our business.
The remaining i24.9
percent equity interest in ESS is subject to a call and put option that is exercisable by us or the sellers, respectively, any time after December 31, 2023. The redemption value of the call and put option is the same and based on a floating EBITDA value. The call and put options were determined to be embedded within the redeemable noncontrolling interest and were recorded as temporary equity in the condensed consolidated balance sheet. We elected to adjust the redeemable noncontrolling interest to its full redemption amount directly into retained deficit.
7
MASCO
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
B. ACQUISITIONS, Concluded
In the fourth quarter of 2020, we acquired substantially all of the net assets of Kraus USA Inc. ("Kraus"), a designer and distributor of sinks, faucets and accessories for the kitchen and bathroom, for approximately $i103 million and an
additional cash payment of up to $i50 million to be paid in 2023, contingent upon the achievement of certain financial performance metrics for the year ending December 31, 2022. As of the closing date of the acquisition, the contingent consideration was assigned a fair value of approximately $i8 million.
Refer to Note G for additional information regarding the measurement of the contingent consideration liability. This business expands our product offerings to our customers and our online presence under the Kraus brand. This business is included in our Plumbing Products segment. In connection with this acquisition, we recognized $i25 million of indefinite-lived intangible assets, which is related to trademarks, and $i49 million
of definite-lived intangible assets, primarily related to customer relationships. The definite-lived intangible assets are being amortized on a straight-line basis over a weighted average amortization period of i10 years. We also recognized $i20 million
of goodwill, which is generally tax deductible, and is related primarily to the expected synergies from combining the operations into our business. During the first quarter of 2021, we revised the allocation of the purchase price to certain identifiable assets and liabilities based on analysis of information as of the acquisition date, which resulted in a $i1 million decrease to goodwill.
C. iDIVESTITURES
On
May 31, 2021, we completed the divestiture of our Hüppe GmbH ("Hüppe") business, a manufacturer of shower enclosures and shower trays. In connection with the divestiture, we recognized a loss of $ii18/ million
for the three and six months ended June 30, 2021, which is included in other, net in our condensed consolidated statements of operations. This loss resulted primarily from the recognition of $i23 million of currency translation losses that were previously included within accumulated other comprehensive income. During the six months ended June 30, 2022, we recorded a $i2 million
pre-tax post-closing gain related to the finalization of working capital items in other, net in our condensed consolidated statement of operations. The sale of Hüppe did not represent a strategic shift that will have a major effect on our operations and financial results and therefore was not presented as discontinued operations. Prior to the divestiture, the results of the business were included in our Plumbing Products segment.
D. iREVENUE
i
Our
revenues are derived primarily from sales to customers in North America and Internationally, principally Europe. Net sales from these geographic markets, by segment, were as follows, in millions:
We recognized $i8 million of revenue for the three months ended June 30, 2022 and we reversed $i1
million of revenue for the three months ended June 30, 2021 related to performance obligations settled in previous quarters of the same year. We recognized $i8 million and $i13
million of revenue for the three and six months ended June 30, 2022, respectively, and $i3 million and $i4
million of revenue for the three and six months ended June 30, 2021, respectively, related to performance obligations settled in previous years.
i
Changes in the allowance for credit losses deducted from accounts receivable were as follows, in millions:
(A)
As a result of Hüppe being divested in May 2021, both gross goodwill and accumulated impairment losses for the Plumbing Products segment were reduced by $i39 million.
(B) Other consists of the effect of foreign currency translation.
The carrying value of our other indefinite-lived intangible assets was $i108
million and $i109 million at June 30, 2022 and December 31, 2021, respectively, and principally included registered trademarks. The carrying value of our definite-lived intangible assets was $i261
million (net of accumulated amortization of $i79 million) and $i279 million (net of accumulated amortization of $i75
million) at June 30, 2022 and December 31, 2021, respectively, and principally included customer relationships.
G. iFAIR VALUE OF FINANCIAL INSTRUMENTS
Kraus Acquisition Contingent Consideration. As described in Note B,
we may be obligated to pay up to an additional $i50 million in 2023 for the Kraus acquisition contingent upon the achievement of certain financial performance metrics for the year ending December 31, 2022. The measurement of the liability for contingent consideration is based on significant inputs that are not observable in the market, and are therefore classified as Level 3 inputs. Examples of utilized unobservable
inputs are estimated future revenues and earnings of the acquired business and an applicable discount rate. The estimate of the liability may fluctuate if there are changes in the forecast of the acquired business' future revenues and earnings, as a result of actual levels achieved, or in the discount rate used to determine the present value of contingent future cash flows. All subsequent remeasurements from the initial estimate at the time of acquisition are recorded in other, net in our condensed consolidated statements of operations, as described in Note N. As of June 30, 2022, we do not believe the financial performance metrics will be met and the fair value of the liability was estimated to be inil,
using probability weighted discounted cash flows and a discount rate that reflects the uncertainty surrounding the expected outcomes, which we believe is appropriate and representative of a market participant assumption. The fair value of the liability was estimated to be $i24 million as of December 31, 2021.
Fair Value of Debt.
The fair value of our short-term and long-term fixed-rate debt instruments is based principally upon modeled market prices for the same or similar issues, which are Level 1 inputs. The 364-day term loan has an interest rate that resets monthly and the fair value of this instrument approximates the carrying value at June 30, 2022. The aggregate estimated market value of our short-term and long-term debt at June 30, 2022 was approximately $i3.1 billion, compared with the aggregate carrying
value of $i3.5 billion. The aggregate estimated market value of our short-term and long-term debt at December 31, 2021 was approximately $i3.2
billion, compared with the aggregate carrying value of $i3.0 billion.
10
MASCO
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
H. iWARRANTY LIABILITY
i
Changes
in our warranty liability were as follows, in millions:
Settlements
made (in cash or kind) during the period
(i16)
(i31)
Other,
net (including currency translation and acquisitions)
(i2)
(i2)
Balance
at end of period
$
i83
$
i80
/
I. iDEBT
On
April 26, 2022, we entered into a revolving credit agreement (the “2022 Credit Agreement”) with an aggregate commitment of $i1.0 billion and a maturity date of April 26, 2027. Under the 2022 Credit Agreement, at our request and subject to certain conditions, we can increase the aggregate commitment up to an additional $i500 million
with the current lenders or new lenders. Upon entry into the 2022 Credit Agreement, our credit agreement dated March 13, 2019, as amended, with an aggregate commitment of $i1.0 billion, was terminated.
The 2022 Credit Agreement provides for an unsecured revolving credit facility available to us and one of our foreign subsidiaries,
in U.S. dollars, European euros, British Pounds Sterling, Canadian dollars and certain other currencies for revolving credit loans, swingline loans and letters of credit. Borrowings under the revolving credit loans denominated in any agreed upon currency other than U.S. dollars are limited to the equivalent of $i500 million. We can also borrow swingline loans up to $i125
million and obtain letters of credit of up to $i25 million. Outstanding letters of credit under the 2022 Credit Agreement reduce our borrowing capacity and we had ino
outstanding letters of credit at June 30, 2022.
Revolving credit loans denominated in U.S. dollars bear interest under the 2022 Credit Agreement at our option, at (A) SOFR rate for the interest period in effect for the borrowing, plus i0.1%, plus an applicable margin based upon our then-applicable corporate credit ratings; or (B) a rate per annum equal to the greatest of (i) the U.S. prime rate, (ii) the Federal Reserve Bank of New York effective rate plus i0.50%
and (iii) the adjusted term SOFR rate for a one month interest period, plus i1.0%; plus an applicable margin based upon our then-applicable corporate credit ratings. Foreign currency revolving credit loans denominated in Canadian dollars bear interest at a rate per annum equal to the greater of (i) the rate equal to the PRIMCAN Index rate and (ii) the CDOR rate for a one month interest period, plus i1.0%;
plus an applicable margin based upon our then-applicable corporate credit ratings. Foreign currency revolving credit loans denominated in British Pounds Sterling bear interest at a rate per annum equal to the Daily Simple SONIA, plus an applicable margin based upon our then-applicable corporate credit ratings. Foreign currency revolving credit loans denominated in European euros bear interest at the adjusted EURIBOR rate, plus an applicable margin based upon our then-applicable corporate credit ratings. The various benchmarks are subject to applicable floors.
The 2022 Credit Agreement contains financial covenants requiring us to maintain (A) a net leverage ratio, as adjusted for certain items, not exceeding i4.0
to 1.0, and (B) an interest coverage ratio, as adjusted for certain items, not less than i2.5 to 1.0.
In order for us to borrow under the 2022 Credit Agreement, there must not be any default in our covenants in the 2022 Credit Agreement (i.e., in addition to the two financial covenants described above, principally limitations on subsidiary debt, negative pledge restrictions, and requirements relating to legal compliance, maintenance of our properties and insurance) and our representations and warranties in the 2022 Credit Agreement must be true in all material respects
on the date of borrowing (i.e., principally no material adverse change or litigation likely to result in a material adverse change, since December 31, 2021, no material ERISA or environmental non-compliance, and no material tax deficiency). We were in compliance with all covenants and no borrowings were outstanding at June 30, 2022.
11
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
I. DEBT,
Concluded
On April 26, 2022, we entered into a 364-day $i500 million senior unsecured delayed draw term loan due April 26, 2023 with a syndicate of lenders. The senior unsecured term loan and commitments thereunder are subject to prepayment or termination at our option and the loans will bear interest at SOFR plus a spread adjustment and i0.70%. The
covenants, including the financial covenants, are substantially the same as those in the 2022 Credit Agreement.
On March 4, 2021, we issued $i600 million of i1.500%
Notes due February 15, 2028, $i600 million of i2.000% Notes due February 15, 2031
and $i300 million of i3.125% Notes due February 15, 2051. We received proceeds of $i1,495 million,
net of discount, for the issuance of these Notes. The Notes are senior indebtedness and are redeemable at our option at the applicable redemption price. On March 22, 2021, proceeds from the debt issuances, together with cash on hand, were used to repay and early retire our $i326 million i5.950%
Notes due March 15, 2022, $i500 million i4.450% Notes due April 1, 2025, and
$i500 million i4.375% Notes due April 1, 2026. In connection with these early retirements, we incurred a loss on debt extinguishment
of $i168 million for the six months ended June 30, 2021, which was recorded as interest expense in the condensed consolidated statement of operations.
J. iSTOCK-BASED
COMPENSATION
Our 2014 Long Term Stock Incentive Plan provides for the issuance of stock-based incentives in various forms to our employees and non-employee Directors. At June 30, 2022, outstanding stock-based incentives were in the form of restricted stock units, performance restricted stock units, stock options, long-term stock awards and phantom stock awards.
i
Pre-tax
compensation expense for these stock-based incentives was as follows, in millions:
Restricted
Stock Units. Restricted stock units are granted to our key employees and non-employee Directors. These grants did not cause net share dilution due to our practice of repurchasing and retiring an equal number of shares in the open market.
We granted i605,100 restricted stock units in the six months ended June
30, 2022 with a weighted average grant date fair value of $i59 per share.
12
MASCO CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
J. STOCK-BASED COMPENSATION, Continued
i
Our restricted stock unit activity was as follows, units in millions:
At
June 30, 2022 and 2021, there was $i25 million and $i20
million, respectively, of unrecognized compensation expense related to unvested restricted stock units; such units had a weighted average remaining vesting period of iitwo
years/ at both June 30, 2022 and 2021.
The total market value (at the vesting date) of restricted stock units which vested was $i19 million
and $i7 million during the six months ended June 30, 2022 and 2021, respectively.
Performance Restricted Stock Units. Under our Long Term Incentive Program,
we grant performance restricted stock units to certain senior executives. These performance restricted stock units will vest and share awards will be issued at no cost to the employees, subject to our achievement of specified performance metrics established by our Compensation Committee over a ithree-year performance period and the recipient's continued employment through the share award date.
During the six months
ended June 30, 2022, we granted i91,820 performance restricted stock units with a grant date fair value of approximately $i55
per share and i167,903 shares were issued. iNo
performance restricted stock units were forfeited during the six months ended June 30, 2022. During the six months ended June 30, 2021, we granted i85,360 performance restricted stock units with a grant date fair value of approximately $i53
per share and i104,757 shares were issued. iNo
performance restricted stock units were forfeited during the six months ended June 30, 2021.
Stock Options. Stock options are granted to certain key employees.
We granted i337,790 shares of stock options in the six months ended June
30, 2022 with a grant date weighted average exercise price of approximately $i59 per share.
13
MASCO CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
J. STOCK-BASED COMPENSATION, Continued
i
Our stock option activity was as follows, shares in millions:
Option
shares vested and expected to vest, June 30
i3
i3
Weighted
average exercise price
$
i39
$
i36
Aggregate
intrinsic value (A)
$
i39 million
$
i62
million
Weighted average remaining option term (in years)
i6
i6
Option
shares exercisable (vested), June 30
i2
i2
Weighted
average exercise price
$
i34
$
i30
Aggregate
intrinsic value (A)
$
i35 million
$
i49
million
Weighted average remaining option term (in years)
i5
i5
(A) Aggregate
intrinsic value is calculated using our stock price at each respective date, less the exercise price (grant date price), multiplied by the number of shares.
/
At June 30, 2022 and 2021, there was $i3
million and $i5 million, respectively, of unrecognized compensation expense (using the Black-Scholes option pricing model at the grant date) related to unvested stock options; such options had a weighted average remaining vesting period of iitwo
years/ at both June 30, 2022 and 2021.
14
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
J. STOCK-BASED COMPENSATION, Concluded
i
The
weighted average grant date fair value of option shares granted and the assumptions used to estimate those values using a Black-Scholes option pricing model were as follows:
Long-Term Stock Awards. Prior to the amendment of our 2014 Long Term Stock Incentive Plan in December 2019, we granted long-term stock awards to our key employees and non-employee Directors. We did not grant shares of long-term stock awards in the six months ended June 30, 2022 and 2021.
Our long-term stock award activity was as follows, shares in millions:
At
June 30, 2022 and 2021, there was $i6 million and $i15
million, respectively, of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of ione year and itwo
years at June 30, 2022 and 2021, respectively.
The total market value (at the vesting date) of stock award shares which vested was $i21 million and $i27
million during the six months ended June 30, 2022 and 2021, respectively.
15
MASCO
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
K. iEMPLOYEE RETIREMENT PLANS
Net periodic pension cost for our defined-benefit pension plans, with the exception of service cost, is recorded in other, net, in our condensed consolidated statements of operations. iNet
periodic pension cost for our defined-benefit pension plans was as follows, in millions:
In
December 2019, our Board of Directors approved the termination of our qualified domestic defined-benefit pension plans. In the second quarter of 2021, we settled these plans and made a final contribution of $i101 million. The settlement loss included $i447 million
of pre-tax actuarial losses that were reclassified out of accumulated other comprehensive income during both the three and six months ended June 30, 2021.
16
MASCO
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
L. iRECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME
i
The
reclassifications from accumulated other comprehensive income to the condensed consolidated statements of operations were as follows, in millions:
Amounts Reclassified
Accumulated
Other Comprehensive Income
Three Months Ended June 30,
Six Months Ended June 30,
Statement of Operations Line Item
2022
2021
2022
2021
Settlement and amortization of defined-benefit pension and other post-retirement benefits (A):
Actuarial
losses, net
$
i1
$
i9
$
i3
$
i16
Other,
net
Settlement loss
i—
i447
i—
i447
Other,
net
Tax (benefit)
i—
(i98)
(i1)
(i100)
Net
of tax
$
i1
$
i358
$
i2
$
i363
Interest
rate swaps (B)
$
i—
$
i—
$
i—
$
i2
Interest
expense
Tax expense
i—
i—
i—
i5
Net
of tax
$
i—
$
i—
$
i—
$
i7
(A) In
the second quarter of 2021, we settled our qualified domestic defined-benefit pension plans and recognized $i447 million of pre-tax actuarial losses from accumulated other comprehensive income and $i96 million
of income tax benefit, which included $i11 million of related disproportionate tax expense. Additionally, the amortization of defined-benefit pension and other post-retirement benefits included $i3 million,
net of tax, due to the disposition of pension plans in connection with the divestiture of Hüppe.
(B) Upon full repayment and retirement of the i5.950% Notes due March 15, 2022 in the first quarter of 2021, we recognized the remaining interest rate swap loss and related disproportionate tax expense.
/
In
addition to the above amounts, we reclassified $i23 million of currency translation losses from accumulated other comprehensive income to the condensed consolidated statements of operations in conjunction with the divestiture of Hüppe in the second quarter of 2021.
17
MASCO
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
M. iSEGMENT INFORMATION
i
Information
by segment and geographic area was as follows, in millions:
Net
periodic pension and post-retirement benefit expense (B)
(i3)
(i415)
(i5)
(i426)
Loss
on sale of businesses, net
(i3)
(i18)
(i1)
(i18)
Income
from cash and cash investments
i1
i—
i1
i—
Gain
on preferred stock redemption (C)
i—
i14
i—
i14
Dividend
income
i—
i3
i—
i6
Equity
investment income, net
i—
i—
i—
i2
Other
items, net
i—
(i1)
(i1)
(i1)
Total
other, net
$
i17
$
(i415)
$
i16
$
(i421)
(A) In
the three and six months ended June 30, 2022 we recognized $i28 million and $i24 million,
respectively, of income from the revaluation of contingent consideration related to a prior acquisition. Refer to Note G for additional information.
(B) In the second quarter of 2021, we settled our qualified domestic defined-benefit pension plans and recognized $i406 million of additional pension expense.
/
(C) In
May 2021, we received, in cash, $i166 million for the redemption of the AC Products Holding, Inc. preferred stock, including all accrued but unpaid dividends, and recognized a gain of $i14 million.
18
MASCO
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
O. iINCOME (LOSS) PER COMMON SHARE
i
Reconciliations
of the numerators and denominators used in the computations of basic and diluted income (loss) per common share were as follows, in millions:
Less:
Allocation to redeemable noncontrolling interest
i1
i—
i—
i6
Less:
Allocation to unvested restricted stock awards
i1
i—
i2
i—
Net
income (loss) attributable to common shareholders
$
i276
$
(i36)
$
i509
$
i52
Denominator:
Basic
common shares (based upon weighted average)
i231
i252
i235
i254
Add:
Stock option dilution
i2
i—
i2
i2
Diluted
common shares
i233
i252
i237
i256
/
For
the three and six months ended June 30, 2022, we allocated dividends and undistributed earnings to the unvested restricted stock awards. For the three and six months ended June 30, 2021, we allocated dividends to the unvested restricted stock awards.
i
The following stock options and restricted stock units were excluded from the computation of weighted-average diluted common shares outstanding due to their anti-dilutive
effect, in thousands:
Effective
February 10, 2021, our Board of Directors authorized the repurchase, for retirement, of up to $i2.0 billion of shares of our common stock in open-market transactions or otherwise. In May 2022, we entered into an accelerated stock repurchase transaction whereby we agreed to repurchase a total of $i500 million
of our common stock with an initial delivery of approximately i7.9 million shares. This transaction was completed on June 28, 2022, at which time we received, at no additional cost, approximately i1.6 million
additional shares of our common stock resulting from changes in the volume weighted average stock price of our common stock over the term of the transaction, less a discount. In total, we repurchased and retired approximately i16.6 million shares of our common stock in the six months ended June 30, 2022 for approximately $i914 million.
This included i0.6 million shares to offset the dilutive impact of restricted stock units granted in the six months ended June 30, 2022. At June 30, 2022, we had $i214
million remaining under the 2021 authorization.
On the basis of amounts paid (declared), cash dividends per common share were $i0.280 ($i0.280)
and $i0.560 ($i0.560) for the three and six months ended June 30, 2022, respectively, and $i0.235
($i0.235) and $i0.375 ($i0.235)
for the three and six months ended June 30, 2021, respectively.
19
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Concluded)
P. iOTHER
COMMITMENTS AND CONTINGENCIES
We are involved in claims and litigation, including class actions, mass torts and regulatory proceedings, which arise in the ordinary course of our business. The types of matters may include, among others: competition, product liability, employment, warranty, advertising, contract, personal injury, environmental, intellectual property, product compliance and insurance coverage. We believe we have adequate defenses in these matters. We are also subject to product safety regulations, product recalls and direct claims for product liabilities. We believe the likelihood that the outcome of these claims, litigation and product safety matters would have a material adverse effect on us is remote. However, there is no assurance that we will prevail in these matters, and we
could, in the future, incur judgments or penalties, enter into settlements of claims or revise our expectations regarding the outcome of these matters, which could materially impact our results of operations.
Q. iINCOME TAXES
Our 2021 income tax expense was impacted by the elimination of disproportionate tax effects
from accumulated other comprehensive income resulting in income tax expense of $i5 million in the first quarter and $i11 million
in the second quarter, related to our debt retirement and pension plan termination, respectively.
20
MASCO
CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Recent Trends
We are experiencing, and may continue to experience, higher commodity and other input costs, higher transportation costs and supply chain disruptions, particularly disruptions related to our ability to source products, components and raw materials. We are also experiencing and may continue
to experience employee-related cost inflation and constraints in hiring qualified employees. We aim to offset the potential unfavorable impact of these items with productivity improvement and other initiatives.
In addition, the COVID-19 pandemic continues to disrupt global economic activity, including our workforce and operations, as well as the operations of our customers and suppliers. There remains uncertainty regarding the ongoing COVID-19 pandemic and the resulting impact on our future operations and financial results.
We continue to execute our strategies of leveraging our strong brand portfolio, industry-leading positions and the Masco Operating System, our methodology to drive growth and productivity, to create long-term shareholder value. We remain confident in the fundamentals of our business and long-term strategy. We believe that our strong financial position and cash
flow generation, together with our investments in our industry-leading branded building products, our continued focus on innovation and disciplined capital allocation, will allow us to drive long-term growth and create value for our shareholders.
SECOND QUARTER 2022 AND THE FIRST SIX MONTHS 2022 VERSUS
SECOND QUARTER 2021 AND THE FIRST SIX MONTHS 2021
Consolidated Results of Operations
We report our financial results in accordance with generally accepted accounting principles in the United States of America ("GAAP"). However, we believe that certain non-GAAP performance measures and ratios used
in managing the business may provide users of this financial information with additional meaningful comparisons between current results and results in prior periods. Non-GAAP performance measures and ratios should be viewed in addition to, and not as an alternative for, our reported results under GAAP.
The following discussion of consolidated results of operations refers to the three and six months ended June 30, 2022 compared to the same periods of 2021.
21
SALES
AND OPERATIONS
Net Sales
Below is a summary of our net sales, in millions, for the three and six months ended June 30, 2022 and 2021:
Net
sales, excluding acquisitions and divestitures
2,347
2,167
180
4,542
4,117
425
Currency translation
57
—
57
88
—
88
Net
sales, excluding acquisitions, divestitures and the effect of currency translation
$
2,404
$
2,167
$
237
$
4,630
$
4,117
$
513
Net
sales for the three months ended June 30, 2022 were $2.4 billion, which increased eight percent compared to the three months ended June 30, 2021. Excluding acquisitions, divestitures and the effect of currency translation, net sales increased 11 percent. Net sales for the six months ended June 30, 2022 were $4.6 billion, which increased 10 percent compared to the six months ended June 30, 2021. Excluding acquisitions, divestitures and the effect of currency translation, net sales increased 12 percent.
Net
sales for the three and six months ended June 30, 2022 increased primarily due to:
•Higher net selling prices across the entire company which increased sales by 10 percent and nine percent for the three and six months ended June 30, 2022, respectively.
•Higher sales volume of plumbing products and paints and other coating products which increased sales by two percent and four percent for the three and six months ended June 30, 2022, respectively.
These amounts were partially offset by:
•Unfavorable
foreign currency translation which decreased sales by three percent and two percent for the three and six months ended June 30, 2022, respectively.
•Lower sales volume of lighting and builders' hardware products which decreased sales one percent for both periods.
•The divestiture of our Hüppe business which decreased sales one percent for both periods.
Gross Profit and Gross Margin
Below is a summary of our gross profit, in millions, and gross margin for the three and six months ended June 30, 2022 and 2021:
For
the three and six months ended June 30, 2022, gross profit margin was negatively impacted by:
•Increased commodity and other input costs and transportation costs.
These amounts were partially offset by:
•Favorable net selling prices.
•Increased sales volume.
Selling, General and Administrative Expenses
Below is a summary of our selling, general and administrative expenses, in millions, and selling,
general and administrative expenses as a percentage of net sales for the three and six months ended June 30, 2022 and 2021:
For
the six months ended June 30, 2022, the decrease in interest expense is primarily due to the absence of the $168 million loss on debt extinguishment which was recorded as additional interest expense in connection with the early retirement of debt in the first quarter of 2021.
Other, net
Below is a summary of our other, net, in millions, for the three and six months ended June 30, 2022 and 2021:
Other,
net, for the three and six months ended June 30, 2022 included:
•$28 million and $24 million, respectively, of income from the revaluation of contingent consideration related to a prior acquisition.
These amounts were partially offset by:
•$6 million and $2 million, respectively, of realized foreign currency transaction losses.
•$3 million and $5 million, respectively, of net periodic pension and post-retirement benefit expense.
Other, net, for the three and six months ended
June 30, 2021 included:
•$415 million and $426 million, respectively, of net periodic pension and post-retirement benefit expense, which includes $406 million of settlement loss related to the termination of our qualified domestic defined-benefit pension plans for both periods.
•$18 million loss related to the divestiture of Hüppe for both periods.
These amounts were partially offset by:
•$14 million gain recognized on the redemption of the preferred stock of ACProducts Holding, Inc. for both periods and $3 million and $6 million, respectively, of related dividend
income.
24
INCOME TAXES
Below is a summary of our income tax expense, in millions, and our effective tax rate for the three and six months ended June 30,
2022 and 2021:
Our 2021 income tax expense was impacted by the elimination of disproportionate tax effects from accumulated other comprehensive income resulting in income tax expense of $5 million
in the first quarter and $11 million in the second quarter, related to our debt retirement and pension plan termination, respectively.
NET INCOME (LOSS) AND INCOME (LOSS) PER COMMON SHARE — ATTRIBUTABLE TO MASCO CORPORATION
Below is a summary of our net income (loss) and diluted income (loss) per common share, in millions, except per share data, for the three and six months ended June 30, 2022 and 2021:
The following table sets forth our net sales and operating profit information by Business Segment and Geographic Area, dollars in millions.
Three
Months Ended June 30,
Percent Change
Six Months Ended June 30,
Percent Change
2022
2021
2022
vs.
2021
2022
2021
2022
vs.
2021
Net
Sales:
Plumbing Products
$
1,373
$
1,329
3
%
$
2,732
$
2,578
6
%
Decorative
Architectural Products
979
850
15
%
1,821
1,571
16
%
Total
$
2,352
$
2,179
8
%
$
4,553
$
4,149
10
%
North
America
$
1,905
$
1,717
11
%
$
3,639
$
3,246
12
%
International, principally Europe
447
462
(3)
%
914
903
1
%
Total
$
2,352
$
2,179
8
%
$
4,553
$
4,149
10
%
Three
Months Ended June 30,
Percent Change
Six Months Ended June 30,
Percent Change
2022
2021
2022
vs.
2021
2022
2021
2022
vs.
2021
Operating
Profit: (A)
Plumbing Products
$
238
$
273
(13)
%
$
466
$
525
(11)
%
Decorative
Architectural Products
192
188
2
%
347
330
5
%
Total
$
430
$
461
(7)
%
$
813
$
855
(5)
%
North
America
$
356
$
370
(4)
%
$
656
$
678
(3)
%
International, principally Europe
74
91
(19)
%
157
177
(11)
%
Total
430
461
(7)
%
813
855
(5)
%
General
corporate expense, net
(22)
(24)
(8)
%
(52)
(53)
(2)
%
Total operating profit
$
408
$
437
(7)
%
$
761
$
802
(5)
%
(A) Before
general corporate expense, net; see Note M to the condensed consolidated financial statements.
BUSINESS SEGMENT RESULTS DISCUSSION
The following discussion of Business Segment and Geographic Area Results discussion refers to the three and six months ended June 30, 2022 compared to the same periods of 2021. Changes in operating profit in the following Business Segment and Geographic Area Results discussion exclude general corporate expense, net.
26
Plumbing
Products
Sales
Net sales in the Plumbing Products segment increased three percent and six percent for the three and six months ended June 30, 2022, respectively. Favorable net selling prices increased sales by seven percent for both periods. Higher sales volume increased sales by one percent and three percent for the three and six months ended June 30, 2022, respectively. Such increases were partially offset by unfavorable foreign currency translation which decreased sales by four percent and three percent for the three and six months ended June 30, 2022, respectively, and the divestiture of Hüppe, which decreased sales by one percent
in both periods.
Operating Results
Operating profit in the Plumbing Products segment for the three and six months ended June 30, 2022 was negatively impacted by increased commodity and other input costs, transportation, employee-related and marketing costs as well as unfavorable foreign currency translation. These amounts were partially offset by favorable net selling prices and to a lesser extent increased sales volume.
Decorative Architectural Products
Sales
Net sales in the Decorative Architectural Products
segment increased 15 percent and 16 percent for the three and six months ended June 30, 2022, respectively. This increase was due primarily to favorable net selling prices of paints and other coating products, lighting products, and builders' hardware products as well as higher sales volume of paints and other coating products and favorable sales mix of lighting products. These positive impacts were slightly offset by lower sales volume of lighting products and builders' hardware products.
Operating Results
Operating profit in the Decorative Architectural Products segment for the three and six months ended June 30, 2022 was positively impacted by favorable net selling prices and increased sales volume.
These positive impacts were partially offset by increased commodity and other input costs, transportation and marketing costs.
GEOGRAPHIC AREA RESULTS DISCUSSION
North America
Sales
North American net sales increased 11 percent and 12 percent for the three and six months ended June 30, 2022, respectively. Favorable net selling prices across all of our product categories and higher sales volume of paints and other coating products increased sales by 13 percent and 12 percent for the three and six months ended June 30, 2022, respectively.
Additionally, higher sales volume of plumbing products increased sales by one percent for only the six months ended June 30, 2022. These positive impacts were slightly offset by lower sales volume in lighting products and builders' hardware products, which decreased sales by two percent and one percent for the three and six months ended June 30, 2022, respectively.
Operating Results
Operating profit in North America for the three and six months ended June 30, 2022 was negatively impacted by increased commodity and other input costs, transportation, and marketing costs. These amounts were partially offset by favorable net selling prices and increased sales
volume.
27
International, Principally Europe
Sales
International net sales decreased three percent for the three months ended June 30, 2022 and increased one percent for the six months ended June 30, 2022. In local currencies (including
sales in currencies outside their respective functional currencies), net sales increased eight percent and 10 percent for the three and six months ended June 30, 2022, respectively. Favorable net selling prices of plumbing products increased sales by seven percent for both the three and six months ended June 30, 2022. Higher sales volume of plumbing products increased sales by four percent and seven percent for the three and six months ended June 30, 2022, respectively. These positive impacts were partially offset by the divestiture of our Hüppe business, which decreased sales three percent and four percent for the three and six months ended June 30, 2022, respectively.
Operating Results
International
operating profit for the three and six months ended June 30, 2022 was negatively impacted by increased commodity and other input costs, transportation, and employee-related costs as well as unfavorable foreign currency translation. These amounts were partially offset by favorable net selling prices and increased sales volume.
Liquidity and Capital Resources
Our current ratio was 1.4 to 1 and 1.8 to 1 at June 30, 2022 and December 31, 2021, respectively. The decrease in our current ratio is primarily due to the 364-day $500 million term loan that we entered
into on April 26, 2022.
For the six months ended June 30, 2022, net cash provided by operating activities was $174 million. Our cash flows from operations primarily benefited from operating profit, partially offset by changes in working capital, primarily higher receivables and inventory balances.
For the six months ended June 30, 2022, net cash used for financing activities was $568 million, primarily due to $914 million for the repurchase and retirement of our common stock (including 0.6 million shares repurchased to offset the dilutive impact of restricted stock units granted in 2022), $131 million for the payment of cash dividends, and $17 million for
employee withholding taxes paid on stock-based compensation. These uses of cash were partially offset by $500 million in proceeds from the 364-day term loan.
For the six months ended June 30, 2022, net cash used for investing activities was $74 million, comprised primarily of $70 million of capital expenditures.
Our cash and cash investments were $440 million and $926 million at June 30, 2022 and December 31, 2021, respectively. Our cash and cash investments consist of overnight interest-bearing money market demand accounts, time deposit accounts and money market mutual funds containing government securities and treasury obligations. While we attempt
to diversify these investments in a prudent manner to minimize risk, it is possible that future changes in the financial markets could affect the security or availability of these investments. Of the cash and cash investments held at June 30, 2022 and December 31, 2021, $330 million and $490 million, respectively, was held in our foreign subsidiaries. If these funds were needed for our operations in the U.S., their repatriation into the U.S. would not result in significant additional U.S. income tax or foreign withholding tax, as we have recorded such taxes on substantially all undistributed foreign earnings, except for those that are legally restricted.
During the three months ended June
30, 2022, we declared a cash dividend to a noncontrolling interest of $79 million that will be paid in the second half of 2022.
On April 26, 2022, we entered into a revolving credit agreement (the “2022 Credit Agreement”) with an aggregate commitment of $1.0 billion and a maturity date of April 26, 2027. Under the 2022 Credit Agreement, at our request and subject to certain conditions, we can increase the aggregate commitment up to an additional $500 million with the current lenders or new lenders. Upon entry into the 2022 Credit Agreement, our credit agreement dated March 13, 2019, as amended, with an aggregate commitment of $1.0 billion, was terminated.
28
The
2022 Credit Agreement contains financial covenants requiring us to maintain (A) a net leverage ratio, as adjusted for certain items, not exceeding 4.0 to 1.0, and (B) an interest coverage ratio, as adjusted for certain items, not less than 2.5 to 1.0. We were in compliance with all covenants and no borrowings were outstanding under our 2022 Credit Agreement at June 30, 2022.
On April 26, 2022, we entered into a 364-day $500 million senior unsecured delayed draw term loan due April 26, 2023 with a syndicate of lenders. The senior unsecured term loan and commitments thereunder are subject to prepayment or termination at our option and the loans will bear interest at SOFR plus a spread adjustment and 0.70%. The covenants, including the financial
covenants, are substantially the same as those in the 2022 Credit Agreement.
On March 4, 2021, we issued $600 million of 1.500% Notes due February 15, 2028, $600 million of 2.000% Notes due February 15, 2031 and $300 million of 3.125% Notes due February 15, 2051. We received proceeds of $1,495 million, net of discount, for the issuance of these Notes. The Notes are senior indebtedness and are redeemable at our option at the applicable redemption price. On March 22, 2021, proceeds from the debt issuances, together with cash on hand, were used to repay and early retire our $326 million 5.950% Notes due March 15, 2022, $500 million 4.450% Notes due April
1, 2025, and $500 million 4.375% Notes due April 1, 2026. In connection with these early retirements, we incurred a loss on debt extinguishment of $168 million, which was recorded as interest expense in the condensed consolidated statement of operations.
As part of our ongoing efforts to improve our cash flow and related liquidity, we work with suppliers to optimize our terms and conditions, including extending payment terms. We also facilitate a voluntary supply chain finance program (the "program") to provide certain of our suppliers with the opportunity to sell receivables due from us to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. A third party administers the program; our responsibility is limited to making payment on the terms originally negotiated with our supplier, regardless of whether
the supplier sells its receivable to a financial institution. We do not enter into agreements with any of the participating financial institutions in connection with the program. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the program.
All outstanding payments owed under the program are recorded within accounts payable in our condensed consolidated balance sheets. The amounts owed to participating financial institutions under the program and included in accounts payable were $56 million and $43 million at June 30, 2022 and December 31, 2021, respectively. We account for all payments made under the program as a reduction to our cash flows from operations and reported within our (decrease) increase in accounts
payable and accrued liabilities, net, line within our condensed consolidated statements of cash flows. The amounts settled through the program and paid to participating financial institutions were $108 million and $93 million during the six months ended June 30, 2022 and 2021, respectively. A downgrade in our credit rating or changes in the financial markets could limit the financial institutions’ willingness to commit funds to, and participate in, the program. We do not believe such risk would have a material impact on our working capital or cash flows, as substantially all of our payments are made outside of the program.
We believe that our present cash balance, cash flows from operations, and borrowing availability under our 2022 Credit Agreement are sufficient to fund our near-term
working capital and other investment needs. We believe that our longer-term working capital and other general corporate requirements will be satisfied through cash flows from operations and, to the extent necessary, from bank borrowings and future financial market activities.
This Report contains statements that reflect our views about our future performance and constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as "outlook,""believe,""anticipate,""appear,""may,""will,""should,""intend,""plan,""estimate,""expect,""assume,""seek,""forecast," and similar references to future periods. Our views about future performance involve risks and uncertainties that are difficult to predict and, accordingly, our actual results may differ materially from the results discussed in our forward-looking statements. We caution you against relying on any of these forward-looking statements.
Our
future performance may be affected by the levels of residential repair and remodel activity, and to a lesser extent, new home construction, our ability to maintain our strong brands and reputation and to develop innovative products, our ability to maintain our competitive position in our industries, our reliance on key customers, the duration of the ongoing COVID-19 pandemic, including its impact on domestic and international economic activity, consumer discretionary spending, our employees and our supply chain, the cost and availability of materials, our dependence on third-party suppliers and service providers, extreme weather events and changes in climate, risks associated with our international operations and global strategies, our ability to achieve the anticipated benefits of our strategic initiatives, our ability to successfully execute our acquisition strategy and integrate businesses that we have and may acquire, our ability to attract, develop and retain talented
and diverse personnel, risks associated with our reliance on information systems and technology and risks associated with cybersecurity vulnerabilities, threats and attacks.
These and other factors are discussed in detail in Item 1A. "Risk Factors" in our most recent Annual Report on Form 10-K, as well as in other filings we make with the Securities and Exchange Commission. Any forward-looking statement made by us speaks only as of the date on which it was made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. Unless required by law, we undertake no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise.
30
MASCO
CORPORATION
Item 4.
CONTROLS AND PROCEDURES
a. Evaluation of Disclosure Controls and Procedures.
The Company’s principal executive officer and principal financial officer have concluded, based on an evaluation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15 that, as of June 30, 2022, the
Company's disclosure controls and procedures were effective.
b. Changes in Internal Control over Financial Reporting.
In connection with the evaluation of the Company's internal control over financial reporting that occurred during the quarter ended June 30, 2022, which is required under the Securities Exchange Act of 1934 by paragraph (d) of Exchange Rules 13a-15 or 15d-15 (as defined in paragraph (f) of Rule 13a-15), management determined that there was no change that materially affected or is reasonably likely to materially affect internal control over financial reporting.
31
MASCO
CORPORATION
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
Information regarding legal proceedings involving us is set forth in Note P to our condensed consolidated financial statements included in Part I, Item 1 of this Report and is incorporated herein by reference.
Item 1A. Risk
Factors
There have been no material changes to the risk factors of the Company set forth in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information regarding the repurchase of our common stock for the three months ended June 30, 2022 under the 2021 share
repurchase authorization:
Period
Total Number Of Shares Purchased
Average Price Paid Per Common Share
Total Number Of Shares Purchased As Part Of Publicly Announced Plans or Programs
Maximum Value Of Shares That May Yet Be Purchased Under The Plans
Or Programs
4/1/22 - 4/30/22
984,503
$
50.80
984,503
$
714,466,545
5/1/22 - 5/31/22 (A)
7,905,506
$
63.28
7,905,506
$
214,216,545
6/1/22
- 6/30/22 (A)
1,545,468
$
—
1,545,468
$
214,216,545
Total for the quarter
10,435,477
$
52.73
10,435,477
$
214,216,545
(A) In
May 2022, we entered into an accelerated stock repurchase transaction whereby we agreed to repurchase a total of $500 million of our common stock with an initial delivery of approximately 7.9 million shares. This transaction was completed on June 28, 2022, at which time we received, at no additional cost, approximately 1.6 million additional shares of our common stock resulting from changes in the volume weighted average stock price of our common stock over the term of the transaction, less a discount. The average price paid per common share in May 2022 does not reflect the holdback shares that we received upon completion of the accelerated stock repurchase transaction. If we had received the additional approximately 1.6 million shares at inception of the accelerated stock repurchase transaction, the total number of shares purchased under this transaction would have been approximately 9.5 million with an average price
paid per common share of approximately $52.93.
The following financial information from Masco Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Consolidated Statements
of Shareholders' Equity, and (vi) Notes to Condensed Consolidated Financial Statements.
104
–
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)
33
MASCO CORPORATION
PART II.
OTHER INFORMATION, Concluded
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
