Masco Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars. Results distinguish continuing operations from businesses reported as discontinued.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales, continuing operations | $1.947B | $1.904B | $5.787B | $5.743B |
| Gross profit | $665M | $623M | $1.974B | $1.911B |
| Operating profit | $316M | $286M | $918M | $870M |
| Income from continuing operations attributable to Masco | $184M | $170M | $546M | $517M |
| Diluted EPS from continuing operations | $0.64 | $0.55 | $1.87 | $1.66 |
| Net income attributable to Masco, including discontinued operations | $126M | $180M | $482M | $540M |
Gross margin was 34.2% in Q3 and 34.1% year to date, versus 32.7% and 33.3% in 2018. SG&A was 17.9% and 18.1% of sales, respectively. Q3 continuing-operations sales rose 2% (3% excluding acquisitions and currency); nine-month sales rose 1% (also 1% excluding acquisitions and currency).
By segment, Q3 sales were up 1% in Plumbing Products and 5% in Decorative Architectural Products, and down 3% in Cabinetry Products. Nine-month sales changed by -1%, +4%, and -1%, respectively. Segment operating profit rose in Q3 for all three segments; for the nine months, it fell in Plumbing and increased in Decorative Architectural Products and Cabinetry Products.
Cash flow, balance sheet and capital allocation
- Nine-month operating cash flow was $605M, versus $654M in 2018. Capital expenditures were $111M; investing cash use was $104M.
- Financing cash use was $590M, including $440M of share repurchases, $105M of cash dividends and $42M of dividends to noncontrolling interests. Cash and cash investments on the balance sheet were $475M at September 30, versus $553M at year-end 2018.
- Current assets were $2.792B and current liabilities $1.909B; the current ratio was 1.5, down from 1.6 at year-end. The filing attributes the decline primarily to reclassification of $201M of notes due in March 2020 as short-term and adoption of lease accounting.
- Short-term and long-term debt totaled approximately $2.979B at carrying value, broadly unchanged from year-end. No borrowings were outstanding under the $1.0B revolving credit facility, and Masco reported compliance with its covenants. Total equity was $23M.
- The Board authorized up to $2.0B in share repurchases in September, replacing the prior authorization; approximately $1.96B remained at quarter-end. Masco repurchased 11.5M shares for about $440M in the first nine months.
Material changes, outlook and risks
- Masco completed the sale of UK Window Group in September for approximately $8M in proceeds, including a $6M note receivable. It recorded a $70M disposal loss, contributing to discontinued-operations losses of $58M in Q3 and $64M year to date. The UK business also had a $7M goodwill impairment in Q1.
- Masco agreed to sell Milgard for approximately $725M; closing was expected in Q4 2019, subject to customary conditions and regulatory review. Management expected a gain of approximately $395M. The combined treatment of UKWG and Milgard as discontinued operations reflects a strategic shift out of the Windows businesses.
- Management said it was pursuing a Cabinetry business sale and expected the Milgard and Cabinetry sales to conclude within three to six months, assuming acceptable terms and conditions. No Cabinetry sale price or gain is provided in the filing.
- Management cited pricing, cost-savings initiatives and the absence of Kichler acquisition inventory step-up costs as contributors to improved gross margin. Higher commodity costs, including tariffs, partially offset those benefits. Cabinetry results also faced unfavorable mix and expenses related to a potential divestiture.
- Other notable items included a $9M intangible-asset impairment in continuing operations, higher pension costs, and $14M of deferred currency translation losses reclassified to earnings on the UKWG disposition. Masco adopted lease accounting in 2019, recording operating lease right-of-use assets and liabilities; management said adoption did not affect results of operations or cash flows.
- Management stated that cash, operating cash flow and available credit were adequate for near-term needs. Key uncertainties include housing repair/remodel and new-home activity, raw-material costs and tariffs, competition, customer and supplier concentration, international operations, and execution and completion of planned divestitures. The filing reported ordinary-course litigation and said a material adverse outcome was considered remote, while noting outcomes could change.
Important facts for investors to verify
- Whether the Milgard sale closed on the expected timeline and produced proceeds and a gain consistent with the stated estimates.
- Whether and on what terms the Cabinetry business was sold; the filing gives no sale price or expected proceeds.
- How continuing-operations growth, segment profitability and cash generation develop after the Windows businesses are removed.
- Debt maturities and liquidity, including repayment or refinancing of the $201M notes due March 2020, and continued compliance with revolving-credit covenants.
- The sustainability of margins given commodity costs and tariffs, and the effects of ongoing repurchases, dividends and divestitures on the balance sheet.