Masco Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise stated. Masco operates Plumbing Products and Decorative Architectural Products. Its former cabinetry and window businesses are reported as discontinued operations following divestitures.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Net sales | $1.581 billion | $1.513 billion (+4%) |
| Gross profit / margin | $547 million / 34.6% | $522 million / 34.5% |
| Operating profit | $225 million | $197 million |
| Continuing income attributable to Masco | $133 million; diluted EPS $0.48 | $107 million; diluted EPS $0.36 |
| Net income attributable to Masco, including discontinued operations | $530 million; diluted EPS $1.92 | $116 million; diluted EPS $0.39 |
| Operating cash flow | $(92) million | $(131) million |
| Cash and cash investments | $767 million | $697 million at Dec. 31, 2019 |
| Long-term debt | $2.771 billion | $2.771 billion at Dec. 31, 2019 |
Q1 net income included $397 million of income from discontinued operations, principally a $585 million gain on the Cabinetry sale, net of related operating results and tax. It is therefore not representative of continuing-business earnings. Current ratio was 1.8 at both March 31, 2020 and December 31, 2019. Total equity was negative $165 million, versus negative $56 million at year-end.
Cash flow: investing activities provided $807 million, including $853 million of Cabinetry sale proceeds net of cash disposed; financing activities used $639 million, principally $602 million of share repurchases and $37 million of dividends. The company acquired SmarTap for approximately $24 million. Operating cash use reflected seasonal receivables growth; the company also recorded $189 million of income taxes payable from the Cabinetry sale and planned to defer eligible tax payments from April to July under COVID-related IRS guidance.
Masco had no borrowings outstanding under its $1.0 billion revolving credit facility and was in compliance with its covenants at quarter-end. The facility matures in 2024; covenants require an adjusted net leverage ratio no greater than 4.0 to 1.0 and interest coverage of at least 2.5 to 1.0. Cash included $256 million held by foreign subsidiaries.
Changes and operating drivers
- North American sales rose 7%; international sales fell 6% as reported, or 3% in local currencies. Plumbing Products sales increased 2% and Decorative Architectural Products sales increased 9%.
- Gross margin improved 0.1 percentage point. Higher volume and pricing helped, partly offset by commodity costs, particularly tariffs. SG&A declined to 20.4% of sales from 20.9%.
- Segment operating profit increased to $157 million in Plumbing Products from $153 million, and to $95 million in Decorative Architectural Products from $73 million. The latter benefited in part from the absence of a $9 million prior-year trademark impairment.
- Interest expense declined to $35 million from $39 million, following the 2019 repayment of 7.125% notes due in March 2020. Other expense increased to $51 million from $44 million, including $9 million of foreign-currency transaction losses and $8 million of pension and post-retirement costs.
- Cabinetry was sold on February 18, 2020 for approximately $989 million of total consideration, including $853 million net cash proceeds and preferred stock valued at $136 million. The preferred stock has a $150 million liquidation preference and is carried using a cost-based measurement approach with observable-price adjustments.
- Masco repurchased and retired 14.2 million shares for approximately $602 million during the quarter. About $900 million remained under its repurchase authorization at March 31. The quarterly dividend was $0.135 per share, compared with $0.120 a year earlier.
Outlook, risks, and contingencies
Management expected COVID-19 to significantly and adversely affect results in Q2 2020 and potentially later quarters through reduced demand, customer closures or restrictions, facility closures, staffing constraints, and supply-chain disruption. Many businesses remained open under applicable critical-infrastructure designations, but these could change. Management said the near-term impact could be adverse, while expressing confidence in longer-term demand for its lower-ticket, repair-and-remodel-oriented portfolio. No quantified earnings or sales guidance was provided.
Management considered cash, operating cash flow, and available borrowing capacity sufficient for near-term needs, but said the pandemic’s evolving duration and effects made the future financial impact difficult to estimate. Other cited risks include housing and remodeling activity, tariffs and material availability, dependence on customers and suppliers, international operations, and execution of strategic initiatives.
Ordinary-course claims and litigation include product liability, employment, environmental, and other matters. The company said a material adverse outcome was remote, while noting there can be no assurance of favorable outcomes. A Cabinetry supply-chain-finance guarantee remained in place: the buyer owed $33 million under the program at quarter-end, supported by a $10 million letter of credit; the guarantee was expected to end after remaining payments, anticipated in Q4 2020. No significant loss was considered probable. Cabinetry sale consideration remained subject to final working-capital adjustments.
Important facts for investors to verify
- Whether COVID-related demand, operating restrictions, and supply-chain disruptions materially changed results after March 31, 2020.
- Final Cabinetry sale working-capital adjustments, realization and terms of the preferred-stock investment, and the status of the related guarantee.
- Cash conversion and tax-payment timing, especially given seasonal working-capital use and the planned tax deferrals.
- Subsequent share-repurchase activity and liquidity against the $900 million remaining authorization, debt, and credit-facility covenants.
- Continuing-business performance separately from the substantial one-time Cabinetry disposal gain included in reported net income.