Masco Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Financial amounts are in millions of U.S. dollars except per-share data.
Business context and results
Masco sells building and home-improvement products through Plumbing Products, Decorative Architectural Products, Cabinetry Products, and Windows and Other Specialty Products. North America generated $1,535 million of sales and international markets, principally Europe, generated $373 million.
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $1,908 | $1,920 |
| Gross profit / margin | $599 / 31.4% | $619 / 32.2% |
| Operating profit | $211 | $244 |
| Net income attributable to Masco | $116 | $149 |
| Diluted earnings per share | $0.39 | $0.47 |
| Net cash used for operating activities | $131 | $55 |
| Capital expenditures | $38 | $40 |
Financial position and liquidity
- At March 31, cash and cash investments were $316 million, down from $559 million at year-end 2018; $245 million was held at foreign subsidiaries.
- Current assets were $2,758 million and current liabilities were $1,929 million; the current ratio was 1.4, versus 1.6 at December 31, 2018.
- Notes payable were $295 million and long-term debt was $2,771 million, totaling $3,066 million in carrying value. Total liabilities were $5,560 million and total equity was $42 million.
- Masco entered a new $1.0 billion unsecured revolving credit facility maturing March 13, 2024, with an option to increase commitments by up to $500 million. It had $87 million drawn at quarter-end and was in compliance with its covenants.
- Operating cash use reflected the expected seasonal first-quarter increase in receivables and inventory. Financing cash use was $72 million, including $116 million of cash share repurchases and $35 million of dividends; investing cash use was $38 million.
Material changes and segment performance
- Reported sales declined 1%; excluding acquisitions and currency translation, sales declined 2%. Kichler, acquired in March 2018, contributed $65 million to the sales comparison.
- Plumbing Products sales fell 3% to $940 million and segment operating profit declined to $153 million from $163 million.
- Decorative Architectural Products sales rose 5% to $573 million, largely due to Kichler, while segment operating profit fell to $73 million from $89 million.
- Cabinetry Products sales increased 9% to $237 million and segment operating profit improved to $20 million from $6 million.
- Windows and Other Specialty Products sales fell 16% to $158 million; the segment reported an $11 million operating loss versus $4 million of profit a year earlier.
- International sales declined 8%, while North American sales increased 1%. Consolidated gross margin fell 0.8 percentage point; management cited lower volume, higher commodity costs including tariffs, and Kichler’s impact, partly offset by pricing and cost savings.
Outlook, risks, and unusual items
- Management described the start to 2019 as challenging but said it remained confident in the business fundamentals and long-term strategy. No quantified earnings or sales guidance was provided.
- Masco expected to reach a decision by the end of June 2019 on its review of strategic alternatives for the Cabinetry and Windows businesses.
- Q1 included $16 million of noncash impairment charges: $7 million of goodwill impairment tied to the U.K. windows and doors outlook and $9 million for a lighting trademark following revised sales projections.
- Interest expense declined to $39 million from $41 million, primarily following repayment of $114 million of 6.625% notes in 2018. The effective tax rate was 24%, compared with 20%, partly reflecting a smaller stock-based compensation tax benefit.
- Adoption of lease accounting standard ASC 842 added $236 million of operating lease right-of-use assets and $259 million of operating lease liabilities at adoption; the company said adoption did not affect earnings or cash flows.
- Management cited risks including residential repair-and-remodel and new-home activity, raw-material costs and tariffs, suppliers, competition, key customers, international operations, and execution of strategic initiatives. Ordinary-course litigation was considered unlikely to have a material adverse effect, though outcomes are not assured.
Important facts for investors to verify
- Whether sales trends, particularly in Windows and Other Specialty Products and international markets, stabilized after the quarter.
- Whether margin pressure from volume, commodity costs and tariffs was offset by pricing and cost savings in subsequent periods.
- Progress and outcome of the Cabinetry and Windows strategic-alternatives review announced for completion by end-June 2019.
- Cash generation and working-capital seasonality, alongside the effects of share repurchases and dividends on liquidity.
- Debt maturities and covenant headroom, including the $201 million of 7.125% notes reclassified as short-term and due March 15, 2020.
- Assumptions supporting the impairment assessments and any further changes in the outlook for the U.K. windows and doors or lighting businesses.