Masco(MAS) - 2022 Q4 - Annual Report

PART I Item 1. Business. Masco Corporation, a global leader in branded home improvement and building products, drives core business potential, manages its portfolio, and develops human capital - Masco Corporation is a global leader in branded home improvement and building products, including BEHR® paint, DELTA® and HANSGROHE® faucets, KICHLER® lighting, LIBERTY® hardware, and HOT SPRING® spas[16] - The company's 2022 strategic pillars focused on driving core business potential, leveraging enterprise opportunities, and actively managing its portfolio[17][18] - In 2022, Masco repurchased approximately 16.6 million shares and increased its quarterly dividend by approximately 19 percent[17] - Masco reports financial results in two segments: Plumbing Products and Decorative Architectural Products, with the latter experiencing stronger sales in Q2 and Q3 due to seasonality[18] - The company employed approximately 19,000 people as of December 31, 2022, focusing on talent development, diversity, equity, and inclusion (DE&I), and future workforce strategies[28][37] Workforce Representation Statistics (U.S. as of December 31, 2022) | Category | Women | Racially / Ethnically Diverse Individuals | | :------- | :---- | :-------------------------------------- | | Leadership Team | 33% | 26% | | Salaried Workforce | 36% | 30% | | Hourly Workforce | 37% | 55% | Item 1A. Risk Factors. Masco Corporation faces various risks including strategic dependencies on residential markets, operational challenges from supply chain and cost volatility, and competitive pressures - Strategic risks include reliance on residential repair and remodeling and new home construction, sensitive to economic factors like consumer confidence, home prices, interest rates, and natural disasters[40][41][42] - Operational risks stem from dependence on third-party suppliers for raw materials and components, leading to potential disruptions, cost increases, and supply chain complexities, especially with foreign suppliers (primarily China)[44][45][46] - Variability in raw material costs (e.g., brass, resins, titanium dioxide, zinc) and energy prices can negatively impact results, and the company may struggle to pass these increases to customers[47][48] - International operations expose the company to foreign currency risks, trade policy changes, economic instability, and political unrest, with 20% of 2022 sales from continuing operations outside North America[50][51] - Competitive risks include maintaining strong brands, developing innovative products, responding to shifts towards e-commerce, and managing significant customer concentration (The Home Depot accounted for 38% of consolidated net sales in 2022)[56][57][58][60][61][62][63][64] - Technology risks involve cybersecurity attacks and reliance on information systems, while litigation and regulatory risks cover various claims, product safety, and compliance with extensive laws[66][68][69][70][71][74][75] Item 1B. Unresolved Staff Comments. There are no unresolved staff comments to report - No unresolved staff comments were reported[78] Item 2. Properties. As of December 31, 2022, Masco Corporation's principal properties include 30 manufacturing and 30 warehouse/distribution facilities globally, with most manufacturing facilities owned Principal Properties as of December 31, 2022 | Region | Manufacturing | Warehouse and Distribution | | :----- | :------------ | :------------------------- | | North America | 22 | 12 | | International | 8 | 16 | | Total | 30 | 30 | - Most North American and international manufacturing facilities are owned, while a substantial number of warehouse and distribution facilities are leased[80][82] - The corporate headquarters is leased in Livonia, Michigan, and an office in Luxembourg serves as headquarters for most foreign operations[83] Item 3. Legal Proceedings. Information regarding Masco Corporation's legal proceedings is incorporated by reference from Note U to the consolidated financial statements - Legal proceedings information is detailed in Note U to the consolidated financial statements[85] Item 4. Mine Safety Disclosures. Mine safety disclosures are not applicable to Masco Corporation - Mine Safety Disclosures are not applicable[86] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Masco Corporation's common stock trades on the NYSE under MAS, with approximately 2,600 holders of record as of January 31, 2023, and the company actively repurchases shares and pays quarterly dividends - Masco's common stock is traded on the New York Stock Exchange under the ticker symbol MAS[89] - As of January 31, 2023, there were approximately 2,600 holders of record of common stock[89] - The Board of Directors declared a quarterly dividend of $0.285 per share in Q1 2023, intending to increase the annual dividend to $1.14 per share[90] Share Repurchases (Year Ended December 31, 2022) | Metric | Value | | :----- | :---- | | Shares Repurchased | 16.6 million | | Cost of Repurchases | ~$914 million | | Remaining Authorization (as of Dec 31, 2022) | $2.0 billion | Cumulative Total Shareholder Return (December 31, 2017 - December 31, 2022) | Index | 2018 | 2019 | 2020 | 2021 | 2022 | | :----------------------------- | :--- | :---- | :---- | :---- | :---- | | Masco | $66.55 | $109.22 | $125.01 | $159.81 | $106.21 | | S&P 500 Index | $93.76 | $120.84 | $140.49 | $178.27 | $143.61 | | S&P Industrials Index | $85.00 | $107.81 | $117.52 | $140.32 | $130.35 | | S&P Consumer Durables & Apparel Index | $86.69 | $114.67 | $135.78 | $164.21 | $114.07 | Item 6. [Reserved] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Masco Corporation's 2022 financial performance saw net sales increase by 4% to $8.7 billion, driven by higher selling prices despite lower volumes and unfavorable currency, while gross margin and operating profit declined due to cost inflation - Masco's strategy focuses on driving the full potential of core businesses, leveraging enterprise opportunities, and actively managing its portfolio, with investments in brands, innovative products, capital, and operational excellence[99] - Recent trends indicate lower market demand, elevated commodity and input costs, increased transportation costs, supply chain disruptions, and employee-related cost inflation, which the company aims to offset with productivity improvements and pricing strategies[101] Consolidated Results of Operations Net Sales (in millions) | Year | Net Sales, as reported | Change YoY | | :--- | :--------------------- | :--------- | | 2022 | $8,680 | +4% | | 2021 | $8,375 | | - Excluding acquisitions, divestitures, and currency translation, net sales increased 6% in 2022, primarily due to higher net selling prices (9% increase), partially offset by lower sales volume (3% decrease) and unfavorable foreign currency translation (2% decrease)[105][106][107] Gross Profit and Gross Margin (in millions) | Year | Gross Profit | Gross Margin | | :--- | :----------- | :----------- | | 2022 | $2,713 | 31.3% | | 2021 | $2,863 | 34.2% | | Change | $(150) | (290) bps | - The 2022 gross profit margin was negatively impacted by increased commodity and transportation costs, higher costs from production inefficiencies and obsolete inventory charges, lower sales volume, and unfavorable sales mix, partially offset by higher net selling prices[106][108] Selling, General and Administrative Expenses (in millions) | Year | SG&A Expenses | SG&A as % of Net Sales | | :--- | :------------ | :--------------------- | | 2022 | $1,390 | 16.0% | | 2021 | $1,413 | 16.9% | | Change | $(23) | (90) bps | - SG&A as a percentage of net sales improved in 2022 due to higher net sales from favorable selling prices and lower variable compensation, partially offset by increased marketing costs[109][111] Operating Profit (in millions) | Year | Operating Profit, as reported | Operating Profit Margin, as reported | | :--- | :---------------------------- | :----------------------------------- | | 2022 | $1,297 | 14.9% | | 2021 | $1,405 | 16.8% | | Change | $(108) | (190) bps | - Operating profit in 2022 was negatively impacted by increased commodity and transportation costs, production inefficiencies, lower sales volume, unfavorable foreign currency translation, increased marketing costs, and unfavorable sales mix, partially offset by higher net selling prices, lower variable compensation, and reduced goodwill impairment charges[110][112] Other Income (Expense), Net (in millions) | Item | 2022 | 2021 | Change | | :-------------------------------- | :--- | :--- | :----- | | Interest Expense | $(108) | $(278) | $170 | | Other, net | $4 | $(439) | $443 | - The decrease in interest expense was primarily due to the absence of a $168 million loss on debt extinguishment recorded in 2021[114] - 'Other, net' improved significantly in 2022 due to $24 million income from contingent consideration revaluation, compared to 2021 which included $430 million net periodic pension and post-retirement benefit expense (including a $399 million settlement loss) and an $18 million loss from the Hüppe divestiture[115][116] Income Tax Expense and Effective Tax Rate (in millions) | Year | Income Tax Expense | Effective Tax Rate | | :--- | :----------------- | :----------------- | | 2022 | $288 | 24% | | 2021 | $210 | 31% | | Change | $78 | (7)% | - The 2021 effective tax rate was higher due to $16 million from the elimination of disproportionate tax effects related to debt retirement and pension plan termination, and $18 million from losses with no tax benefit in certain jurisdictions[118] Income and Diluted EPS from Continuing Operations (in millions, except per share data) | Year | Income from continuing operations | Diluted income per common share from continuing operations | | :--- | :-------------------------------- | :--------------------------------------------------------- | | 2022 | $844 | $3.63 | | 2021 | $410 | $1.62 | | Change | $434 | $2.01 | Business Segment and Geographic Area Results Net Sales by Segment and Geographic Area (in millions) | Category | 2022 | 2021 | Percent Change (2022 vs. 2021) | | :-------------------------- | :--- | :--- | :----------------------------- | | Net Sales: | | | | | Plumbing Products | $5,252 | $5,135 | 2% | | Decorative Architectural Products | $3,428 | $3,240 | 6% | | Total | $8,680 | $8,375 | 4% | | North America | $6,978 | $6,624 | 5% | | International, principally Europe | $1,702 | $1,751 | (3)% | | Total | $8,680 | $8,375 | 4% | Operating Profit by Segment and Geographic Area (in millions) | Category | 2022 | 2021 | Percent Change (2022 vs. 2021) | | :-------------------------- | :--- | :--- | :----------------------------- | | Operating Profit: | | | | | Plumbing Products | $819 | $929 | (12)% | | Decorative Architectural Products | $565 | $581 | (3)% | | Total | $1,384 | $1,510 | (8)% | | North America | $1,116 | $1,214 | (8)% | | International, principally Europe | $268 | $296 | (9)% | | Total | $1,384 | $1,510 | (8)% | - Plumbing Products sales increased 2% in 2022 due to favorable net selling prices (7%) and higher international plumbing sales volume (2%), partially offset by unfavorable foreign currency translation (4%) and lower North America plumbing sales volume (2%)[127][128] - Operating profit for Plumbing Products was negatively impacted by increased commodity and transportation costs, production inefficiencies, and unfavorable foreign currency translation[128] - Decorative Architectural Products sales increased 6% in 2022, primarily from favorable net selling prices, partially offset by lower sales volume[129] - Operating profit for Decorative Architectural Products was negatively impacted by increased commodity and transportation costs, lower sales volume, and production inefficiencies, but partially offset by favorable net selling prices and lower goodwill impairment charges[130] - North America net sales increased 5% in 2022, driven by favorable net selling prices (10%), partially offset by lower sales volume (5%)[131] - North America operating profit was negatively impacted by increased costs and lower sales volume, but partially offset by favorable net selling prices[132] - International net sales decreased 3% in 2022, but increased 8% in local currencies, driven by favorable net selling prices (6%) and higher plumbing sales volume (5%)[133] - International operating profit was negatively impacted by increased costs, unfavorable foreign currency translation, and wage inflation[134] Liquidity and Capital Resources - Masco's capital allocation strategy includes reinvesting in the business, balancing share repurchases with potential acquisitions, and maintaining a relevant dividend[135] Cash and Cash Investments (in millions) | Year | Cash and Cash Investments | | :--- | :------------------------ | | 2022 | $452 | | 2021 | $926 | - The current ratio decreased from 1.8 to 1 in 2021 to 1.6 to 1 in 2022, primarily due to a 364-day $500 million term loan[137] - Total debt as a percent of total capitalization increased from 98% in 2021 to 109% in 2022[137] Capital Expenditures (in millions) | Year | Capital Expenditures | | :--- | :------------------- | | 2022 | $224 | | 2021 | $128 | | 2023 (expected) | ~$250 | - The increase in capital expenditures in 2022 was primarily due to capacity expansion plans in the Plumbing Products and Decorative Architectural Products segments[139] - In 2022, Masco entered into a new $1.0 billion revolving credit agreement maturing in April 2027 and a 364-day $500 million senior unsecured term loan, of which $300 million was repaid in 2022[142][145] - The company pursues a balanced growth strategy through organic growth and strategic acquisitions, while actively divesting businesses that do not align with its long-term strategy[146][147] - In 2021, Masco acquired a 75.1% equity interest in Easy Sanitary Solutions B.V. for €47 million ($58 million) and Steamist, Inc. for $56 million in cash, both included in the Plumbing Products segment[148] - In 2021, Masco divested its Hüppe GmbH business, recognizing an $18 million loss; a $2 million post-closing gain was recorded in 2022[149] Cash Flows Summary (in millions) | Activity | 2022 | 2021 | | :-------------------------- | :--- | :--- | | Net cash from operating activities | $840 | $930 | | Net cash for financing activities | $(1,066) | $(1,298) | | Net cash for investing activities | $(230) | $(12) | | Cash decrease for the year | $(474) | $(400) | - Operating cash flow in 2022 benefited from operating profit, partially offset by changes in working capital, primarily lower accounts payable[158] - Financing activities were dominated by share repurchases ($914 million) and term loan payments ($300 million)[159] - Investing activities were primarily capital expenditures ($224 million)[160] Contractual Obligations (as of December 31, 2022, in millions) | Obligation | Total | 2023 | 2024-2025 | 2026-2027 | Beyond 2027 | | :-------------------------- | :---- | :--- | :-------- | :-------- | :---------- | | Debt | $3,159 | $205 | $6 | $304 | $2,644 | | Interest | $1,225 | $101 | $194 | $192 | $738 | | Operating leases | $381 | $50 | $89 | $68 | $174 | | Currently payable income taxes | $48 | $48 | — | — | — | | Purchase commitments | $537 | $438 | $64 | $35 | — | | Uncertain tax positions | $92 | — | — | — | $92 | | Total | $5,442 | $842 | $353 | $599 | $3,556 | Critical Accounting Policies and Estimates - Revenue is recognized when control of products is transferred, typically at shipment or delivery, with variable consideration (e.g., incentives) included only when a significant reversal is improbable[168][219][220] - Goodwill and other indefinite-lived intangible assets are tested for impairment annually in Q4 using a discounted cash flow method, requiring significant estimates for cash flows and discount rates[169][170][171][173][174][175][177][200][322] - In 2022, a $19 million goodwill impairment and a $7 million intangible asset impairment were recognized in the Decorative Architectural Products segment due to competitive conditions, higher costs, and increased cost of capital[322] - Deferred taxes are recorded for temporary differences, with a valuation allowance applied if realization of deferred tax assets is not more likely than not; tax benefits from uncertain tax positions are recognized only if there's a greater than 50% likelihood of being sustained[179][180][270][271] Recently Adopted and Issued Accounting Pronouncements - Masco adopted ASU 2020-06 (simplifying convertible instrument accounting) and ASU 2021-08 (accounting for acquired contract assets/liabilities) effective January 1, 2022, with no material impact on financial position or results[275][276] - ASU 2022-04 (disclosure of supplier finance program obligations) is effective January 1, 2023, and will modify disclosures but not materially impact financial statements[277] Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Masco Corporation is exposed to market risks from interest rate and foreign currency fluctuations, but sensitivity analyses indicate no material impact from hypothetical 10% changes - Masco is exposed to market risks from changes in interest rates and foreign currency exchange rates, primarily USD, EUR, GBP, CAD, CNY, and MXN[184] - Sensitivity analyses as of December 31, 2022, showed that a hypothetical 10% change in foreign currency rates, a 10% decline in long-term investments, or a 100 basis point change in interest rates would not materially affect the company's financial position, results, or cash flows[185] Item 8. Financial Statements and Supplementary Data This section presents Masco Corporation's audited consolidated financial statements for 2022, 2021, and 2020, with management and auditors affirming the effectiveness of internal controls - Management assessed and determined that Masco's internal control over financial reporting was effective as of December 31, 2022, based on COSO criteria[188] - PricewaterhouseCoopers LLP issued an unqualified opinion on the effectiveness of internal control over financial reporting and on the consolidated financial statements for the period ended December 31, 2022[189][192] - A critical audit matter identified was the goodwill impairment assessments, due to significant management judgment in fair value measurements and the auditor's effort in evaluating the discounted cash flow model and assumptions[199][200][201] Consolidated Balance Sheets Consolidated Balance Sheets (in millions) | Asset/Liability/Equity | Dec 31, 2022 | Dec 31, 2021 | | :--------------------- | :----------- | :----------- | | ASSETS | | | | Cash and cash investments | $452 | $926 | | Receivables | $1,149 | $1,171 | | Inventories | $1,236 | $1,216 | | Total current assets | $2,946 | $3,422 | | Property and equipment, net | $975 | $896 | | Goodwill | $537 | $568 | | Other intangible assets, net | $350 | $388 | | Total assets | $5,187 | $5,575 | | LIABILITIES | | | | Accounts payable | $877 | $1,045 | | Notes payable | $205 | $10 | | Accrued liabilities | $807 | $884 | | Total current liabilities | $1,889 | $1,939 | | Long-term debt | $2,946 | $2,949 | | Total liabilities | $5,429 | $5,497 | | EQUITY | | | | Total Masco Corporation's shareholders' deficit | $(480) | $(179) | | Total equity | $(262) | $56 | Consolidated Statements of Operations Consolidated Statements of Operations (in millions, except per common share data) | Item | 2022 | 2021 | 2020 | | :------------------------------------------ | :--- | :--- | :--- | | Net sales | $8,680 | $8,375 | $7,188 | | Gross profit | $2,713 | $2,863 | $2,587 | | Operating profit | $1,297 | $1,405 | $1,295 | | Income from continuing operations before income taxes | $1,193 | $688 | $1,131 | | Income tax expense | $288 | $210 | $269 | | Net income attributable to Masco Corporation | $844 | $410 | $1,224 | | Diluted income per common share from continuing operations | $3.63 | $1.62 | $3.04 | | Diluted net income per common share | $3.63 | $1.62 | $4.59 | Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Comprehensive Income (Loss) (in millions) | Item | 2022 | 2021 | 2020 | | :------------------------------------------ | :--- | :--- | :--- | | Net income attributable to Masco Corporation | $844 | $410 | $1,224 | | Other comprehensive (loss) income, net of tax | $(6) | $359 | $55 | | Total comprehensive income attributable to Masco Corporation | $838 | $784 | $1,261 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (in millions) | Cash Flow Activity | 2022 | 2021 | 2020 | | :------------------------------------------ | :--- | :--- | :--- | | Net cash from operating activities | $840 | $930 | $953 | | Net cash for financing activities | $(1,066) | $(1,298) | $(886) | | Net cash (for) from investing activities | $(230) | $(12) | $531 | | (Decrease) increase in cash and cash investments for the year | $(474) | $(400) | $629 | | Cash and cash investments at December 31 | $452 | $926 | $1,326 | Consolidated Statements of Shareholders' Equity Consolidated Statements of Shareholders' Equity (in millions) | Item | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | | :------------------------------------------ | :----------- | :----------- | :----------- | | Total Masco Corporation's shareholders' equity (deficit) | $(480) | $(179) | $421 | | Noncontrolling interest | $218 | $235 | $226 | | Total equity | $(262) | $56 | $647 | A. ACCOUNTING POLICIES - Masco's consolidated financial statements include all majority-owned subsidiaries and variable interest entities where it is the primary beneficiary, with intercompany transactions eliminated[217] - Revenue is recognized when control of products transfers to customers, typically at shipment or delivery, with variable consideration (e.g., incentives) estimated and included only if a significant reversal is improbable[219][220] - Goodwill and indefinite-lived intangible assets are tested for impairment annually in the fourth quarter using a discounted cash flow method, requiring significant estimates and assumptions for cash flows and discount rates[239][240] - Deferred taxes are recorded for future tax consequences of temporary differences between financial statement and tax carrying values, with a valuation allowance established if realization of deferred tax assets is not more likely than not[270] B. ACQUISITIONS - In 2021, Masco's Hansgrohe SE subsidiary acquired a 75.1% equity interest in Easy Sanitary Solutions B.V. (ESS), a shower channel drain manufacturer, for approximately €47 million ($58 million), recognizing $32 million in definite-lived intangible assets and $35 million in goodwill[282] - Also in 2021, Masco acquired Steamist, Inc., a residential steam bath product manufacturer, for approximately $56 million in cash, recognizing $31 million in definite-lived intangible assets and $29 million in goodwill[281] - In 2020, Masco acquired Kraus USA Inc. for approximately $103 million (plus potential $50 million contingent consideration), recognizing $25 million in indefinite-lived intangible assets (trademarks), $49 million in definite-lived intangible assets, and $20 million in goodwill[284] C. DIVESTITURES - On May 31, 2021, Masco divested its Hüppe GmbH business, a shower enclosure manufacturer, recognizing an $18 million loss in 'other, net' for the year ended December 31, 2021, primarily from reclassified currency translation losses[290] - In 2020, Masco completed the divestiture of its Milgard Windows and Doors business and Masco Cabinetry LLC, which were classified as discontinued operations due to representing a strategic shift[291][292][295] Income from Discontinued Operations, Net (in millions) | Item | 2022 | 2021 | 2020 | | :------------------------------------------ | :--- | :--- | :--- | | Net sales | $— | $— | $101 | | Income from discontinued operations, net | $— | $— | $414 | D. REVENUE Net Sales by Geographic Market and Segment (in millions) | Geographic Market | Plumbing Products (2022) | Decorative Architectural Products (2022) | Total (2022) | | :---------------- | :----------------------- | :--------------------------------------- | :----------- | | North America | $3,550 | $3,428 | $6,978 | | International | $1,702 | $— | $1,702 | | Total | $5,252 | $3,428 | $8,680 | - Masco recognized increases to revenue of $20 million, $9 million, and $7 million in 2022, 2021, and 2020, respectively, for variable consideration related to performance obligations settled in previous periods[301] Allowance for Credit Losses (in millions) | Item | 2022 | 2021 | | :------------------------------------------ | :--- | :--- | | Balance at January 1 | $6 | $7 | | Provision for expected credit losses | $5 | $1 | | Write-offs charged against allowance | $(4) | $(2) | | Balance at end of year | $8 | $6 | E. INVENTORIES Components of Inventory (in millions) | Component | Dec 31, 2022 | Dec 31, 2021 | | :---------- | :----------- | :----------- | | Finished goods | $715 | $702 | | Raw materials | $408 | $383 | | Work in process | $113 | $131 | | Total | $1,236 | $1,216 | - Inventories are stated at the lower of cost or net realizable value, with cost primarily determined using the first-in, first-out (FIFO) method[307] F. LEASES - Masco holds operating and finance leases for corporate offices, manufacturing facilities, warehouses, vehicles, and equipment, with terms up to 20 years and renewal options[308] Components of Lease Cost (in millions) | Lease Cost Type | 2022 | 2021 | 2020 | | :---------------- | :--- | :--- | :--- | | Operating lease cost | $56 | $48 | $47 | | Short-term lease cost | $10 | $8 | $7 | | Variable lease cost | $5 | $4 | $3 | | Finance lease cost (amortization + interest) | $4 | $4 | $4 | Weighted-Average Lease Information (as of December 31) | Metric | 2022 | 2021 | 2020 | | :-------------------------- | :------- | :------- | :------- | | Operating leases remaining term | 10 years | 9 years | 10 years | | Finance leases remaining term | 9 years | 9 years | 10 years | | Operating leases discount rate | 4.8% | 4.0% | 4.4% | | Finance leases discount rate | 3.3% | 3.3% | 3.3% | Future Maturities of Lease Liabilities (as of December 31, 2022, in millions) | Year | Operating Leases | Finance Leases | | :--- | :--------------- | :------------- | | 2023 | $50 | $3 | | 2024 | $47 | $3 | | 2025 | $42 | $3 | | 2026 | $38 | $3 | | 2027 | $30 | $3 | | Thereafter | $174 | $11 | | Total Lease Payments | $381 | $26 | G. PROPERTY AND EQUIPMENT Components of Property and Equipment, Net (in millions) | Component | Dec 31, 2022 | Dec 31, 2021 | | :-------------------------- | :----------- | :----------- | | Land and improvements | $67 | $67 | | Buildings | $579 | $514 | | Computer hardware and software | $265 | $259 | | Machinery and equipment | $1,255 | $1,199 | | Less: Accumulated depreciation | $(1,191) | $(1,143) | | Total | $975 | $896 | H. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill by Segment (as of December 31, 2022, in millions) | Segment | Gross Goodwill | Accumulated Impairment Losses | Net Goodwill | | :-------------------------- | :------------- | :---------------------------- | :----------- | | Plumbing Products | $611 | $(301) | $310 | | Decorative Architectural Products | $366 | $(139) | $227 | | Total | $977 | $(440) | $537 | - In Q4 2022, Masco recognized a $19 million non-cash goodwill impairment charge and a $7 million non-cash impairment charge for other indefinite-lived intangible assets within the Decorative Architectural Products segment, attributed to competitive market conditions, higher inflationary costs, and increased cost of capital in its lighting business[322] - Other indefinite-lived intangible assets, principally registered trademarks, totaled $102 million at December 31, 2022[321] - Definite-lived intangible assets, primarily customer relationships, had a carrying value of $248 million (net of $94 million accumulated amortization) at December 31, 2022, with a weighted average amortization period of 15 years[323] I. FAIR VALUE OF FINANCIAL INSTRUMENTS - The contingent consideration liability related to the Kraus acquisition was nil as of December 31, 2022, as financial performance metrics were not met; its fair value was $24 million at December 31, 2021[325] - The aggregate estimated market value of Masco's short-term and long-term debt was approximately $2.7 billion at December 31, 2022, compared to a carrying value of $3.2 billion[326] J. OTHER ASSETS Components of Other Assets (in millions) | Component | Dec 31, 2022 | Dec 31, 2021 | | :-------------------------- | :----------- | :----------- | | Deferred tax assets | $60 | $57 | | Equity method investments | $10 | $18 | | Other investments | $12 | $7 | | Other | $31 | $32 | | Total | $113 | $114 | K. ACCRUED LIABILITIES Components of Accrued Liabilities (in millions) | Component | Dec 31, 2022 | Dec 31, 2021 | | :-------------------------- | :----------- | :----------- | | Advertising and sales promotion | $295 | $297 | | Salaries, wages and commissions | $136 | $195 | | Deferred revenue | $61 | $67 | | Income taxes payable | $48 | $34 | | Employee retirement plans | $41 | $49 | | Operating lease liabilities | $39 | $38 | | Warranty | $34 | $31 | | Interest | $30 | $29 | | Product returns | $25 | $23 | | Insurance reserves | $20 | $27 | | Property, payroll and other taxes | $16 | $32 | | Other | $62 | $62 | | Total | $807 | $884 | L. DEBT Outstanding Debt (in millions) | Debt Type | Dec 31, 2022 | Dec 31, 2021 | | :------------------------------------------ | :----------- | :----------- | | Notes and debentures | $2,946 | $2,924 | | 364-day term loan, due April 26, 2023 | $200 | $— | | Other | $25 | $35 | | Prepaid debt issuance costs | $(20) | $(23) | | Total | $3,151 | $2,959 | | Less: Current portion | $(205) | $(10) | | Total long-term debt | $2,946 | $2,949 | - Debt maturities for the next five years are: $205 million (2023), $3 million (2024), $3 million (2025), $2 million (2026), and $302 million (2027)[336] - Masco entered into a new $1.0 billion revolving credit agreement on April 26, 2022, maturing April 26, 2027, replacing the previous agreement, and includes financial covenants for net leverage ratio (not exceeding 4.0 to 1.0) and interest coverage ratio (not less than 2.5 to 1.0)[337][343] - A 364-day $500 million senior unsecured delayed draw term loan was also entered into on April 26, 2022, with $300 million repaid during 2022[345] - In March 2021, Masco issued $1.5 billion in new notes and used proceeds, along with cash, to early retire $1.326 billion in existing debt, incurring a $168 million loss on debt extinguishment[346] M. STOCK-BASED COMPENSATION - Masco's 2014 Long Term Stock Incentive Plan provides stock-based incentives (RSUs, PRSUs, stock options, long-term stock awards, phantom stock awards) to employees and non-employee Directors[351] Pre-tax Stock-Based Compensation Expense (in millions) | Incentive Type | 2022 | 2021 | 2020 | | :-------------------------- | :--- | :--- | :--- | | Restricted stock units | $32 | $28 | $13 | | Performance restricted stock units | $3 | $10 | $5 | | Stock options | $7 | $7 | $7 | | Long-term stock awards | $6 | $10 | $14 | | Phantom stock awards | $1 | $6 | $4 | | Total | $49 | $61 | $43 | - As of December 31, 2022, 11.7 million shares were available for granting under the 2014 Plan[352] Stock Option Activity (shares in thousands) | Item | 2022 | 2021 | 2020 | | :------------------------------------------ | :--- | :--- | :--- | | Outstanding stock options at January 1 | 2,692 | 2,488 | 3,006 | | Granted | 338 | 332 | 421 | | Exercised | (32) | (128) | (878) | | Forfeited | (10) | — | (61) | | Outstanding stock options at December 31 | 2,988 | 2,692 | 2,488 | N. EMPLOYEE RETIREMENT PLANS - Masco sponsors non-contributory defined-contribution retirement plans for salaried employees and qualified/non-qualified defined-benefit pension plans for certain employees and former employees[368] Pre-tax Retirement Plan Expense (in millions) | Plan Type | 2022 | 2021 | 2020 | | :-------------------------- | :--- | :--- | :--- | | Defined-contribution plans | $39 | $57 | $46 | | Defined-benefit pension plans | $12 | $435 | $38 | | Total | $51 | $492 | $84 | - In Q2 2021, Masco settled its qualified domestic defined-benefit pension plans, making a final contribution of $101 million and recognizing a $447 million pre-tax actuarial loss reclassified from accumulated other comprehensive income[368] Defined-Benefit Pension Plan Funded Status (in millions) | Item | Dec 31, 2022 | Dec 31, 2021 | | :------------------------------------------ | :----------- | :----------- | | Projected benefit obligation (Qualified) | $115 | $178 | | Projected benefit obligation (Non-Qualified) | $112 | $148 | | Fair value of plan assets (Qualified) | $78 | $99 | | Fair value of plan assets (Non-Qualified) | $— | $— | | Funded status (Qualified) | $(37) | $(79) | | Funded status (Non-Qualified) | $(112) | $(148) | Weighted Average Major Assumptions for Defined-Benefit Pension Plans (as of December 31) | Assumption | 2022 | 2021 | 2020 | | :-------------------------- | :----- | :----- | :----- | | Discount rate for obligations | 4.50% | 1.80% | 1.70% | | Expected return on plan assets | 4.50% | 3.00% | 2.00% | O. SHAREHOLDERS' EQUITY - In 2022, Masco repurchased and retired 16.6 million shares of common stock for $914 million; a new $2.0 billion share repurchase authorization was approved in October 2022, with $2.0 billion remaining at year-end[397] - Cash dividends per common share were $1.120 in 2022, $0.845 in 2021, and $0.545 in 2020[399] Components of Accumulated Other Comprehensive Income (in millions) | Component | Dec 31, 2022 | Dec 31, 2021 | | :------------------------------------------ | :----------- | :----------- | | Cumulative translation adjustments, net | $261 | $312 | | Unrecognized net loss and prior service cost, net | $(35) | $(80) | | Accumulated other comprehensive income | $226 | $232 | P. RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME Reclassifications from Accumulated Other Comprehensive Income to Statements of Operations (in millions) | Item | 2022 | 2021 | 2020 | Statement of Operations Line Item | | :------------------------------------------ | :--- | :--- | :--- | :-------------------------------- | | Settlement and amortization of defined-benefit pension and other post-retirement benefits (net of tax) | $4 | $365 | $19 | Other, net | | Interest rate swaps (net of tax) | $— | $7 | $1 | Interest expense | - In 2021, $23 million of currency translation losses were reclassified from accumulated other comprehensive income to the consolidated statement of operations due to the divestiture of Hüppe[405] Q. SEGMENT INFORMATION - Masco's reportable segments are Plumbing Products (faucets, showerheads, bath units, spas, etc.) and Decorative Architectural Products (paints, coatings, lighting fixtures, hardware)[408][409] - Products are sold primarily for residential repair and remodel, and new home construction markets, through various channels including home center retailers, online retailers, and wholesalers[410] Segment and Geographic Area Information (in millions) | Category | Net Sales (2022) | Operating Profit (2022) | Assets (2022) | | :-------------------------- | :--------------- | :---------------------- | :------------ | | By Segment: | | | | | Plumbing Products | $5,252 | $819 | $3,096 | | Decorative Architectural Products | $3,428 | $565 | $1,780 | | By Geographic Area: | | | | | North America | $6,978 | $1,116 | $3,552 | | International, principally Europe | $1,702 | $268 | $1,324 | - Sales to The Home Depot, Masco's largest customer, were $3,298 million in 2022, representing approximately 38% of consolidated net sales[416] R. OTHER INCOME (EXPENSE), NET Components of Other, Net (in millions) | Item | 2022 | 2021 | 2020 | | :------------------------------------------ | :--- | :--- | :--- | | Contingent consideration | $24 | $(16) | $— | | Net periodic pension and post-retirement benefit expense | $(10) | $(430) | $(35) | | Equity investment (loss) income, net | $(6) | $11 | $3 | | Foreign currency transaction losses | $(3) | $(4) | $(10) | | Income from cash and cash investments | $2 | $1 | $3 | | Loss on sale of business, net | $(1) | $(18) | $— | | Gain on preferred stock redemption | $— | $14 | $— | | Dividend income | $— | $6 | $10 | | Other items, net | $(2) | $(3) | $9 | | Total other, net | $4 | $(439) | $(20) | - The significant change in 'Other, net' from $(439) million in 2021 to $4 million in 2022 was largely due to $24 million income from contingent consideration revaluation in 2022, compared to $430 million pension expense (including a $406 million settlement loss) and an $18 million loss on business sale in 2021[419][420] S. INCOME TAXES Income from Continuing Operations Before Income Taxes (in millions) | Geographic | 2022 | 2021 | 2020 | | :-------------------------- | :--- | :--- | :--- | | U.S. | $873 | $374 | $892 | | Foreign | $320 | $314 | $239 | | Total | $1,193 | $688 | $1,131 | Income Tax Expense (in millions) | Type | 2022 | 2021 | 2020 | | :-------------------------- | :--- | :--- | :--- | | Currently payable (U.S. Federal, State/local, Foreign) | $303 | $278 | $272 | | Deferred (U.S. Federal, State/local, Foreign) | $(15) | $(68) | $(3) | | Total Income Tax Expense | $288 | $210 | $269 | Effective Tax Rate Reconciliation to U.S. Federal Statutory Tax Rate | Item | 2022 | 2021 | 2020 | | :------------------------------------------ | :----- | :----- | :----- | | U.S. Federal statutory tax rate | 21% | 21% | 21% | | State and local taxes, net of U.S. Federal tax benefit | 2% | 4% | 3% | | Higher taxes on foreign earnings | 2% | 3% | 1% | | Disproportionate tax effects | — | 2% | — | | Effective tax rate | 24% | 31% | 24% | - Masco maintains a valuation allowance of $15 million on certain state and foreign deferred tax assets at December 31, 2022, primarily due to cumulative loss positions in those jurisdictions[427] - The liability for uncertain tax positions (including interest and penalties) was $94 million at December 31, 2022; approximately $13 million of this liability is anticipated to be reduced within the next 12 months due to tax audit closings and statute of limitation expirations[434][435][437] T. INCOME PER COMMON SHARE Income Per Common Share Reconciliation (in millions, except per common share data) | Item | 2022 | 2021 | 2020 | | :------------------------------------------ | :--- | :--- | :--- | | Income from continuing operations attributable to common shareholders | $842 | $406 | $804 | | Net income attributable to common shareholders | $842 | $406 | $1,215 | | Basic common shares (weighted average) | 231 | 249 | 264 | | Diluted common shares | 232 | 251 | 264 | - Unvested restricted stock awards are considered participating securities and are included in the calculation of basic income per common share using the two-class method[440] - Certain stock options, restricted stock units, and performance restricted stock units were excluded from diluted EPS computation due to their anti-dilutive effect[441] U. OTHER COMMITMENTS AND CONTINGENCIES - Masco is involved in various claims and litigation, including class actions, mass torts, and regulatory proceedings, but believes it has adequate defenses and that the likelihood of a material adverse effect is remote[444] Changes in Warranty Liability (in millions) | Item | 2022 | 2021 | | :------------------------------------------ | :--- | :--- | | Balance at January 1 | $80 | $83 | | Accruals for warranties issued during the year | $40 | $38 | | Accruals related to pre-existing warranties | $(3) | $(8) | | Settlements made (in cash or kind) during the year | $(34) | $(31) | | Other, net | $(3) | $(2) | | Balance at December 31 | $80 | $80 | - The company enters into contracts with customary indemnifications, including for claims against builders related to its products, and records estimated liabilities when probable and reasonably estimable[445] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There were no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure were reported[447] Item 9A. Controls and Procedures. Masco Corporation's disclosure controls and procedures were effective as of December 31, 2022, with no material changes to internal control over financial reporting during Q4 2022 - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[448] - Management's report on internal control over financial reporting, included in Item 8, confirmed its effectiveness as of December 31, 2022, and was audited by the independent registered public accounting firm[448] - No changes materially affecting internal control over financial reporting occurred during the quarter ended December 31, 2022[448] Item 9B. Other Information. There is no other information to report under this item - No other information was reported[449] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. There are no disclosures regarding foreign jurisdictions that prevent inspections - No disclosures regarding foreign jurisdictions that prevent inspections were reported[450] PART III Item 10. Directors, Executive Officers and Corporate Governance. Masco Corporation's Code of Ethics applies to all employees, officers, and directors, with further governance details to be provided in the 2023 Proxy Statement - Masco's Code of Ethics applies to all employees, officers, and directors, including key financial officers, and is available on the company website[453] - Additional information on directors, executive officers, and corporate governance will be included in the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[454] Item 11. Executive Compensation. Information regarding executive compensation will be detailed in Masco Corporation's definitive Proxy Statement for the 2023 Annual Meeting of Stockholders - Executive compensation information will be provided in the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[455] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. As of December 31, 2022, Masco Corporation's stockholder-approved equity compensation plans had 2,988,171 outstanding options with a weighted-average exercise price of $39.25, and 11,702,436 securities available for future issuance Equity Compensation Plan Information (as of December 31, 2022) | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance | | :------------------------------------------ | :-------------------------------------------------------------------------- | :---------------------------------------------------------- | :----------------------------------------------------------- | | Equity compensation plans approved by stockholders | 2,988,171 | $39.25 | 11,702,436 | - Masco does not have any equity compensation plans that have not been approved by its stockholders[456] Item 13. Certain Relationships and Related Transactions, and Director Independence. Information regarding certain relationships, related transactions, and director independence will be disclosed in Masco Corporation's definitive Proxy Statement for the 2023 Annual Meeting of Stockholders - Information on certain relationships, related transactions, and director independence will be contained in the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[458] Item 14. Principal Accountant Fees and Services. Details on principal accountant fees and services will be provided in Masco Corporation's definitive Proxy Statement for the 2023 Annual Meeting of Stockholders - Information on principal accountant fees and services will be contained in the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[459] PART IV Item 15. Exhibits and Financial Statement Schedules. This section lists the consolidated financial statements, financial statement schedule, and a comprehensive list of exhibits, many incorporated by reference - The consolidated financial statements for the years ended December 31, 2022, 2021, and 2020 are included in Item 8[465] - Financial Statement Schedule II. Valuation and Qualifying Accounts is appended for the years ended December 31, 2022, 2021, and 2020[463] - A detailed list of exhibits, including stock purchase agreements, indentures, credit agreements, and compensation plans, is provided, with many incorporated by reference from previous SEC filings[464][466][467][469] Item 16. Form 10-K Summary The optional Form 10-K Summary has not been included in this report - The optional summary in Item 16 has not been included in this Form 10-K[470] SIGNATURES SIGNATURES This section contains the required signatures for the Form 10-K report, affirming compliance with the Securities Exchange Act of 1934 - The report is signed by the Principal Executive Officer (Keith J. Allman), Principal Financial Officer (John G. Sznewajs), Principal Accounting Officer (Robin L. Zondervan), and the Board of Directors, dated February 9, 2023[474][475] SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS Schedule II summarizes changes in Masco Corporation's allowances for credit losses and valuation allowance on deferred tax assets for the years ended December 31, 2022, 2021, and 2020 Allowances for Credit Losses Deducted from Accounts Receivable (in millions) | Year | Balance at Beginning of Period | Additions Charged to Costs and Expenses | Deductions | Balance at End of Period | | :--- | :----------------------------- | :-------------------------------------- | :--------- | :----------------------- | | 2022 | $6 | $5 | $(3) | $8 | | 2021 | $7 | $1 | $(2) | $6 | | 2020 | $5 | $3 | $(1) | $7 | Valuation Allowance on Deferred Tax Assets (in millions) | Year | Balance at Beginning of Period | Additions Charged to Costs and Expenses | Additions Charged to Other Accounts | Deductions | Balance at End of Period | | :--- | :----------------------------- | :-------------------------------------- | :---------------------------------- | :--------- | :----------------------- | | 2022 | $17 | $— | $— | $(2) | $15 | | 2021 | $35 | $5 | $— | $(23) | $17 | | 2020 | $38 | $— | $2 | $(5) | $35 | - Deductions for allowances for credit losses represent uncollectible accounts written off, less recoveries; the 2021 deductions for both allowances were impacted by the Hüppe divestiture[479]