Masco Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Comparisons are to the same 2019 periods unless noted. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
Business context and results
Masco reported two continuing segments: Plumbing Products and Decorative Architectural Products. Its products are sold primarily in North America and internationally, principally Europe. Cabinetry and its windows businesses were reported as discontinued operations following divestitures.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,983 | $1,716 | $5,328 | $5,068 |
| Gross profit | $752 | $611 | $1,927 | $1,806 |
| Operating profit | $424 | $289 | $988 | $833 |
| Income from continuing operations attributable to Masco | $275 | $163 | $618 | $481 |
| Diluted continuing-operations EPS | $1.05 | $0.56 | $2.31 | $1.65 |
| Net income attributable to Masco, including discontinued operations | $275 | $126 | $1,029 | $482 |
Financial position, cash flow and capital allocation
- Margins: Gross margin was 37.9% in Q3 and 36.2% for the nine months, versus 35.6% in each 2019 comparable period. SG&A was 16.5% and 17.6% of sales, respectively, versus 18.8% and 19.0%.
- Cash flow: Nine-month operating cash flow was $573, compared with $605 in 2019. Investing activities provided $770, largely reflecting $853 of Cabinetry-sale proceeds net of cash disposed and $15 of Milgard post-closing proceeds; capital expenditures were $72. Financing activities used $721.
- Liquidity: Cash and cash investments were $1,326 at September 30, compared with $697 at year-end 2019. Current assets were $3,487 and current liabilities $1,737; the reported current ratio was 2.0, versus 1.8 at year-end.
- Debt: Long-term debt was $2,787, with $5 of notes payable. Masco issued $300 of 2.0% notes due 2030 and $100 of additional 4.5% notes due 2047, then retired $400 of 3.5% notes due 2021, incurring a $6 extinguishment loss. No borrowings were outstanding under its $1.0 billion revolving credit facility, and Masco reported covenant compliance.
- Shareholder returns: The company repurchased and retired $602 of stock during the nine months; $900 remained under its authorization at quarter-end. It said it expected to resume repurchases in Q4, anticipating approximately $100 for the quarter and approximately $700 for full-year 2020 repurchases. Nine-month cash dividends paid were $108.
Material changes and unusual items
- Q3 sales increased 16% (15% excluding currency translation); nine-month sales increased 5%. Q3 growth reflected stronger volumes in both segments. For the nine months, Decorative Architectural Products sales rose 12%, while Plumbing Products sales were flat.
- Management attributed improved margins to higher volume, cost savings and, in Q3, lower commodity costs; lower selling prices and, year to date, unfavorable mix and tariff-related commodity costs partly offset gains.
- Nine-month net income includes $411 of income from discontinued operations, principally reflecting a $585 gain on the Cabinetry divestiture and a $17 Milgard post-closing gain. Continuing-operations income is a more comparable indicator of ongoing results.
- Masco acquired smart-bathing technology developer SmarTap for approximately $24 in cash. It recorded $12 of goodwill and $10 of definite-lived intangible assets.
- Cabinetry-sale consideration included preferred stock with a $150 liquidation preference, carried at $143 at quarter-end. Its valuation uses significant unobservable inputs; Masco recorded $7 of dividend income for the nine months.
Outlook, commentary and risks
Masco provided no specific earnings or sales guidance. Management said it remained confident in its long-term strategy and expected demand for its lower-ticket, repair-and-remodel-oriented products to remain solid, but cautioned that Q4 results could be affected by economic contraction, unemployment and renewed restrictions. It said the pandemic’s impact had been less severe than anticipated in Q3 and that most facilities had returned to normal capacity, while acknowledging possible facility closures and supply disruptions, especially for plumbing, lighting and builders’ hardware.
The company said cash, operating cash flow and available credit were sufficient for near-term needs, but that the pandemic’s severity, duration and possible resurgence made its future financial impact difficult to estimate. Other disclosed risks include residential repair-and-remodel and new-construction activity, material costs and tariffs, supplier and customer concentration, competition, and execution of strategic initiatives. Masco is involved in ordinary-course claims and litigation; it said a material adverse outcome was remote, while noting outcomes cannot be assured. No material risk-factor changes were reported beyond those disclosed in its June 2020 Form 10-Q.
Important facts for investors to verify
- Separate recurring continuing-operations performance from the large, disposal-related contribution to nine-month reported net income.
- Assess whether Q3 volume and margin improvements persist, given management’s cautions on pandemic conditions, pricing, tariffs and supply availability.
- Review the terms, valuation assumptions and collectability associated with the buyer’s preferred stock received in the Cabinetry sale.
- Track the planned Q4 and full-year share repurchases, cash generation, and debt and covenant position.
- Monitor potential litigation outcomes and any changes in pandemic-related operating conditions or estimates.