Masco Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars. Masco sells plumbing, decorative architectural, cabinetry, and windows and other specialty products, primarily in North America and Europe.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $2.275 billion | $2.297 billion | $4.183 billion | $4.217 billion |
| Operating profit | $392 million | $358 million | $603 million | $602 million |
| Net income attributable to Masco | $240 million | $211 million | $356 million | $360 million |
| Diluted earnings per share | $0.82 | $0.68 | $1.21 | $1.15 |
| Gross margin | 34.4% | 32.7% | 33.0% | 32.5% |
| Operating cash flow | Not presented separately | Not presented separately | $213 million | $293 million |
Reported sales declined 1% in both periods. Excluding acquisitions and currency translation, sales were flat for Q2 and down 1% for the first half. Q2 operating profit improved despite slightly lower sales; first-half operating profit was nearly unchanged. Management attributed improved gross margins primarily to pricing and cost savings, partly offset by lower volume and higher commodity costs, including tariffs.
Segments and regional trends
- Q2 sales: Plumbing Products fell 2% to $1.012 billion; Decorative Architectural Products rose 3% to $827 million; Cabinetry Products fell 6% to $251 million; Windows and Other Specialty Products fell 3% to $185 million.
- First-half sales: Plumbing fell 3%, Decorative Architectural rose 4%, Cabinetry rose 1%, and Windows and Other Specialty fell 9%. Kichler, acquired in March 2018, contributed to Decorative Architectural sales growth.
- North American sales rose 1% in both comparison periods. International sales fell 10% in Q2 and 9% in the first half, reflecting lower volumes and currency effects.
- Q2 segment operating profit rose in Plumbing and Decorative Architectural, was flat in Cabinetry, and declined in Windows and Other Specialty. The latter segment recorded a $4 million operating loss for the first half, compared with $12 million profit a year earlier.
Cash, debt, and liquidity
- Cash and cash investments were $325 million at June 30, 2019, down from $559 million at year-end 2018. First-half operating cash flow was $213 million; investing cash use was $63 million, mainly capital expenditures; financing cash use was $386 million.
- First-half financing uses included $289 million of share repurchases, $70 million of cash dividends, and $42 million of dividends to noncontrolling interests. Masco repurchased and retired 7.7 million shares in the first half; $347 million remained under its repurchase authorization at June 30.
- Notes payable and long-term debt totaled approximately $3.002 billion at June 30, versus approximately $2.979 billion at December 31. The company had no borrowings outstanding under its $1.0 billion revolving credit facility at quarter-end and was in compliance with its covenants. Reported debt fair value was approximately $3.2 billion versus $3.0 billion carrying value.
- The current ratio was 1.5 to 1, down from 1.6 to 1 at year-end. Management cited reclassification of $201 million of 7.125% notes due March 2020 and adoption of lease accounting as contributing factors. Total equity was $71 million; Masco shareholders’ equity was a deficit of $91 million.
- Cash held by foreign subsidiaries was $225 million. The company reported $76 million owed to participating financial institutions under its voluntary supplier finance program, included in accounts payable.
Outlook, material items, and risks
- Management expressed confidence in its long-term strategy, branded products, innovation, operational improvement, portfolio management, and capital allocation. It provided no numerical revenue or earnings guidance in the supplied filing text.
- Masco was pursuing sales of its Cabinetry and Windows businesses and expected the sales to conclude within six to nine months, subject to acceptable terms and conditions.
- First-half results included $16 million of non-cash impairment charges: $7 million for goodwill in the Windows and Other Specialty segment, tied to a weaker long-term outlook for the U.K. windows and doors business, and $9 million for a Decorative Architectural lighting trademark, reflecting lower long-term sales projections.
- Masco adopted the new lease standard on January 1, 2019, recording $236 million of operating lease right-of-use assets and related lease liabilities at adoption; the company stated the standard did not affect its statements of operations or cash flows.
- Management cited risks including housing repair and remodeling and new construction activity, raw-material costs and tariffs, suppliers, customer concentration, international operations, competition, execution of strategic initiatives and potential divestitures, and acquisition integration. Ordinary-course litigation was described as unlikely to have a material adverse effect, though outcomes remain uncertain. The filing reported no material changes to the risk factors in the 2018 Form 10-K.
- Disclosure controls were assessed as effective at June 30, 2019, with no material change in internal control over financial reporting reported during the quarter.
Important facts for investors to verify
- Progress, timing, and acceptable terms for the proposed Cabinetry and Windows business sales.
- Whether weaker volumes in windows, cabinetry, and international markets persist, and how pricing and cost savings compare with commodity and tariff pressures.
- Cash-flow generation and liquidity after substantial repurchases and dividends, including the March 2020 note maturity and revolving-credit covenant headroom.
- Further impairment risk in the U.K. windows and doors business or lighting products, given the disclosed outlook-driven impairment charges.
- Reported figures and the company’s explanations in the full filing, particularly segment trends, supplier-finance balances, and contingencies.