Masco Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Amounts are in millions except per-share data. Masco’s continuing operations comprise Plumbing Products and Decorative Architectural Products; cabinetry and window businesses are reported as discontinued operations following divestitures.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $1,764 | $1,839 | $3,345 | $3,352 |
| Gross profit | $628 | $673 | $1,175 | $1,195 |
| Gross margin | 35.6% | 36.6% | 35.1% | 35.7% |
| Operating profit | $339 | $347 | $564 | $544 |
| Continuing income attributable to Masco | $210 | $211 | $343 | $318 |
| Diluted continuing EPS | $0.80 | $0.72 | $1.27 | $1.08 |
| Net income attributable to Masco, including discontinued operations | $224 | $240 | $754 | $356 |
Q2 sales fell 4% year over year; first-half sales were essentially flat. Segment trends diverged: Q2 Plumbing Products sales declined 14% to $868, while Decorative Architectural Products sales rose 8% to $896. For the first half, the respective changes were down 7% and up 9%. Q2 operating profit declined despite lower SG&A, with gross margin pressured by lower volume, unfavorable mix and commodity costs, including tariffs. Cost savings helped offset those pressures.
Cash flow and liquidity: First-half operating cash flow was $290, versus $213 in 2019. Investing activities provided $799, primarily from Cabinetry and Milgard sale proceeds; financing activities used $694, including $602 for share repurchases and $73 for dividends. Cash and cash investments were $1,089 at June 30, up from $697 at year-end. Current assets were $3,225 and current liabilities $2,154; the reported current ratio was 1.5 versus 1.8 at year-end, partly reflecting reclassification of $400 of 3.50% notes due April 2021 to current notes payable.
Debt: Balance-sheet notes payable were $407 and long-term debt was $2,372 at June 30. The company had no borrowings under its $1.0 billion revolving credit facility and was in compliance with its covenants. The filing reports aggregate short- and long-term debt carrying value of approximately $2.8 billion and estimated market value of approximately $3.1 billion.
Material changes and unusual items
- First-half net income includes $411 of income from discontinued operations, largely reflecting a $585 gain on the Cabinetry divestiture and a $17 post-closing gain on Milgard. Continuing operations provide a clearer view of ongoing performance.
- Cabinetry was sold in February 2020 for approximately $989 in total proceeds, including $853 net of cash disposed and preferred stock valued at $136. The preferred stock was carried at $140 at quarter-end after $4 of dividend income.
- Masco acquired SmarTap for approximately $24 in cash; the business is included in Plumbing Products.
- First-half share repurchases totaled $602 for 16.5 million shares. The company reported approximately $900 remaining under its repurchase authorization at June 30.
- First-half operating cash flow benefited from deferral of $192 in income tax payments to July 2020 under COVID-related IRS guidance; the company also recorded $179 of tax expense related to the Cabinetry sale gain.
Outlook, risks and contingencies
Management gave no quantified earnings or sales guidance. It anticipated continued adverse effects in 2020 from economic contraction, unemployment and possible renewed restrictions, while expecting demand to be supported during recovery by its repair-and-remodel-oriented, lower-ticket products. Management said the Q2 pandemic impact was less severe than anticipated, but described demand reductions, facility closures or slowdowns, backlogs and potential supply-chain disruption. The duration, severity and possible resurgence of COVID-19 make the financial impact uncertain.
Management said cash, operating cash flow and available credit were sufficient for near-term needs. Key cited risks include pandemic-related demand and operating disruption, supplier availability, tariffs and material costs, housing and repair-and-remodel activity, and credit-facility covenant compliance. The company is involved in ordinary-course claims and litigation and stated that a material adverse outcome was considered remote, while noting outcomes cannot be assured. It also guaranteed certain former Cabinetry obligations under a supply-chain finance arrangement; Cabinetry exited the program in June, the guarantee was expected to end after remaining payments in Q4 2020, and no significant loss was considered probable.
Investor verification priorities
- Separate continuing-operations results from discontinued-operation gains when assessing earnings quality and year-over-year performance.
- Track COVID-19 effects on demand, plant capacity, backlogs and sourcing, especially in Plumbing Products and international markets.
- Confirm payment of deferred taxes and monitor cash conversion, working capital and liquidity after sale proceeds and large repurchases.
- Review the terms, valuation and collectability of the buyer’s preferred stock, and the remaining Cabinetry guarantee exposure.
- Monitor 2021 note maturities, leverage and covenant headroom, as well as the pace of share repurchases and dividends.