THIRD QUARTER 2020 AND THE FIRST NINE MONTHS 2020 VERSUS
THIRD QUARTER 2019 AND THE FIRST NINE MONTHS 2019 SALES AND OPERATIONS
The following table sets forth our net sales and operating profit (loss) by business segment and geographic area, dollars in millions:
Three Months Ended September 30, Percent Change 2020 2019 2020 vs. 2019Net Sales : Plumbing Products $ 1,141$ 1,006 13 % Decorative Architectural Products 842 710 19 % Total $ 1,983$ 1,716 16 % North America $ 1,599$ 1,374 16 % International, principally Europe 384 342 12 % Total $ 1,983$ 1,716 16 % Nine Months Ended September 30, Percent Change 2020 2019 2020 vs. 2019 Net Sales: Plumbing Products $ 2,964$ 2,958 - % Decorative Architectural Products 2,364 2,110 12 % Total $ 5,328$ 5,068 5 % North America $ 4,337$ 4,033 8 % International, principally Europe 991 1,035 (4) % Total $ 5,328$ 5,068 5 % Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Operating Profit (Loss): (A) Plumbing Products $ 271$ 179 $ 583$ 530 Decorative Architectural Products 179 134 475 380 Total $ 450$ 313 $ 1,058 $ 910 North America $ 368$ 262 $ 899$ 759 International, principally Europe 82 51 159 151 Total 450 313 1,058 910 General corporate expense, net (26) (24) (70) (77) Operating profit $ 424$ 289 $ 988$ 833
(A) Before general corporate expense, net; see Note M to the condensed consolidated financial statements.
22 -------------------------------------------------------------------------------- We report our financial results in accordance with generally accepted accounting principles ("GAAP") inthe United States of America . However, we believe that certain non-GAAP performance measures and ratios used in managing the business may provide users of this financial information with additional meaningful comparisons between current results and results in prior periods. Non-GAAP performance measures and ratios should be viewed in addition to, and not as an alternative for, our reported results under GAAP.
The following discussion of consolidated results of operations and segment and
geographic results refers to the three-month and nine-month periods ended
NET SALES Net sales increased 16 percent for the three-month period endedSeptember 30, 2020 and five percent for the nine-month period endedSeptember 30, 2020 . Excluding the effect of currency translation, net sales increased 15 percent and five percent for the three-month and nine-month periods endedSeptember 30, 2020 , respectively. The following table reconciles reported net sales to net sales, excluding the effect of currency translation, in millions: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net sales, as reported $ 1,983$ 1,716 $ 5,328$ 5,068 Currency translation (13) - 9 - Net sales, excluding the effect of currency translation $ 1,970$ 1,716 $ 5,337$ 5,068 North American net sales increased 16 percent and eight percent for the three-month and nine-month periods endedSeptember 30, 2020 . Higher sales volume of paints and other coating products, plumbing products and builders' hardware products, in aggregate, increased sales by 17 percent and nine percent for the three-month and nine-month periods, respectively. Such increases were slightly offset by lower net selling prices of paints and other coating products, which decreased sales by one percent for both periods. International net sales increased 12 percent for the three-month period endedSeptember 30, 2020 . In local currencies (including sales in currencies outside their respective functional currencies), net sales increased nine percent. Higher sales volume of plumbing products increased sales by nine percent. International net sales decreased four percent for the nine-month period endedSeptember 30, 2020 . In local currencies, net sales decreased four percent. Lower sales volume and unfavorable sales mix of plumbing products, in aggregate, decreased sales by four percent. Net sales in the Plumbing Products segment increased 13 percent for the three-month period endedSeptember 30, 2020 . Higher sales volume increased sales by 12 percent. Favorable foreign currency translation further increased sales by one percent. Net sales in the Plumbing Products segment was flat for the nine-month period endedSeptember 30, 2020 . Higher sales volume and net selling prices, in aggregate, increased net sales by one percent, offset by unfavorable sales mix, which decreased sales by one percent. Net sales in the Decorative Architectural Products segment increased 19 percent for the three-month period endedSeptember 30, 2020 , due mostly to higher sales volume of paints and other coating products, and to a lesser extent, builders' hardware products and lighting products. This increase was slightly offset by unfavorable net selling prices of paints and other coating products and builders' hardware products. Net sales in the Decorative Architectural Products segment increased 12 percent for the nine-month period endedSeptember 30, 2020 , due mostly to higher sales volume of paints and other coating products, and to a lesser extent, builders' hardware products. This increase was slightly offset by unfavorable net selling prices of paints and other coating products and lower sales volume of lighting products. 23
-------------------------------------------------------------------------------- OPERATING PROFIT Our gross profit margin was 37.9 percent and 36.2 percent for the three-month and nine-month periods endedSeptember 30, 2020 , respectively, compared to 35.6 percent for both comparable periods of 2019. Gross profit margins for the three-month period endedSeptember 30, 2020 were positively impacted by increased sales volume, cost savings initiatives, including actions taken to mitigate the coronavirus disease 2019 ("COVID-19") pandemic impact, as well as decreased commodity costs, partially attributed to tariff mitigation. Such increases were partially offset by lower net selling prices. Gross profit margins for the nine-month period endedSeptember 30, 2020 were positively impacted by increased sales volume and cost savings initiatives, including actions taken to mitigate the impact of the COVID-19 pandemic. Such increases were partially offset by lower net selling prices, unfavorable sales mix and increased commodity costs, primarily attributed to tariffs. Selling, general and administrative expenses, as a percentage of sales, were 16.5 percent and 17.6 percent for the three-month and nine-month periods endedSeptember 30, 2020 , respectively, compared to 18.8 percent and 19.0 percent for the comparable periods of 2019. Selling, general and administrative expenses were positively impacted by cost containment activities including those actions taken to mitigate the COVID-19 pandemic impact and leverage of fixed expenses due primarily to increased sales volume. Operating profit in the Plumbing Products segment for the three-month period endedSeptember 30, 2020 was positively impacted by increased sales volume, cost savings initiatives, including actions taken to mitigate the COVID-19 pandemic impact and decreased commodity costs, partially attributed to tariff mitigation. Operating profit in the Plumbing Products segment for the nine-month period endedSeptember 30, 2020 was positively impacted by cost savings initiatives, including actions taken to mitigate the COVID-19 pandemic impact, favorable net selling prices and higher sales volume. These positive impacts were partially offset by increases in commodity costs, primarily attributed to tariffs. Operating profit in the Decorative Architectural Products segment for the three-month period endedSeptember 30, 2020 benefited primarily from increased sales volume, as well as cost savings initiatives, including actions taken to mitigate the COVID-19 pandemic impact and decreased commodity costs. These positive impacts were partially offset by lower net selling prices. Operating profit in the Decorative Architectural Products segment for the nine-month period endedSeptember 30, 2020 benefited primarily from increased sales volume, as well as cost savings initiatives, including actions taken to mitigate the COVID-19 pandemic impact. Additionally, operating profit was positively impacted by the non-recurrence of a 2019 non-cash impairment charge related to an other indefinite-lived intangible asset for a trademark associated with lighting products. These positive impacts were partially offset by unfavorable net selling prices and higher fixed expenses in our lighting business. OTHER INCOME (EXPENSE), NET Interest expense for the three-month and nine-month periods endedSeptember 30, 2020 was$40 million and$110 million , respectively, compared to$39 million and$119 million for the three-month and nine-month periods endedSeptember 30, 2019 , respectively. In the third quarter of 2020, we recognized a loss on debt extinguishment of$6 million on the early retirement of our 3.5% Notes dueApril 1, 2021 , which was recorded to interest expense. This increase was offset by lower interest charges due to the extinguishment of our 7.125% Notes dueMarch 15, 2020 in the fourth quarter of 2019. Other, net, for the three-month and nine-month periods endedSeptember 30, 2020 included$9 million and$25 million , respectively, of net periodic pension and post-retirement benefit cost,$3 million and$7 million , respectively, of dividend income related to preferred stock ofACProducts Holding, Inc. , and$1 million of foreign currency transaction gains for the three-month period and$6 million of foreign currency transaction losses for the nine-month period. Other, net, for the three-month and nine-month periods endedSeptember 30, 2019 included$6 million and$17 million , respectively, of net periodic pension and post-retirement benefit cost and$5 million and$3 million , respectively of foreign currency transaction losses. 24
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INCOME AND INCOME PER COMMON SHARE FROM CONTINUING OPERATIONS - ATTRIBUTABLE TO
MASCO CORPORATION Income from continuing operations for the three-month and nine-month periods endedSeptember 30, 2020 was$275 million and$618 million , respectively, compared to$163 million and$481 million for the comparable periods of 2019. Diluted income per common share for the three-month and nine-month periods endedSeptember 30, 2020 was$1.05 and$2.31 , respectively, per common share, compared with$0.56 and$1.65 , respectively, per common share for the comparable periods of 2019. Our effective tax rate was 23 percent and 24 percent for the three-month and nine-month periods endedSeptember 30, 2020 , respectively. Our tax rates were lower than our normalized tax rate of 26 percent due primarily to a$10 million reduction in income tax expense in both periods, resulting fromIRS guidance released during the third quarter of 2020, that allows us to exclude certain high-taxed foreign income from theU.S. tax effects on Global Intangible Low-taxed Income. Also, our effective tax rate for the nine-month period was lower than our normalized tax rate due to an additional$5 million income tax benefit on stock-based compensation. Our effective tax rate was 27 percent and 26 percent for the three-month and nine-month periods endedSeptember 30, 2019 , respectively. Our normalized tax rate for 2019 was 26 percent. OTHER FINANCIAL INFORMATION Our current ratio was 2.0 to 1 and 1.8 to 1 atSeptember 30, 2020 andDecember 31, 2019 , respectively. The increase in our current ratio is due primarily to increased cash on hand as a result of the temporary suspension of our share repurchase activity beginning in the first quarter of 2020. We have announced our intention to resume our share repurchase activity in the fourth quarter as part of our strategic initiative to drive long-term shareholder value. We anticipate using approximately$100 million of cash for share repurchases in the fourth quarter, for a total of approximately$700 million of share repurchases in 2020. For the nine-month period endedSeptember 30, 2020 , net cash provided by operating activities was$573 million . Cash provided by operations of$590 million was affected by the income tax expense of$179 million resulting from the gain recorded in connection with the divestiture of Cabinetry. Additionally, cash from operating activities was affected by increased receivables and payables as a result of increased demand for our products in the third quarter of 2020. For the nine-month period endedSeptember 30, 2020 , net cash used for financing activities was$721 million , primarily due to$602 million for the repurchase and retirement of our common stock (including 0.4 million shares repurchased to offset the dilutive impact of restricted stock units granted in 2020),$400 million for the early retirement of our 3.5% Notes dueApril 1, 2021 ,$108 million for the payment of cash dividends,$23 million for dividends paid to noncontrolling interest and$25 million for employee withholding taxes paid on stock-based compensation. These uses of cash were partially offset by the issuances of$300 million of 2.0% Notes dueOctober 1, 2030 and an incremental$100 million on our existing 4.5% Notes dueMay 15, 2047 that was issued at a premium of$19 million and$26 million of proceeds from the exercise of stock options. For the nine-month period endedSeptember 30, 2020 , net cash provided by investing activities was$770 million , comprised of$853 million of proceeds from the sale of Cabinetry, net of cash disposed, and$15 million from the finalization of working capital items on the sale of Milgard, partially offset by$72 million for capital expenditures and$24 million for the acquisition of SmarTap, net of cash acquired. Our cash and cash investments were$1.3 billion and$697 million atSeptember 30, 2020 andDecember 31, 2019 , respectively. Our cash and cash investments consist of overnight interest-bearing money market demand accounts, time deposit accounts, and money market mutual funds containing government securities and treasury obligations. Of the$1.3 billion and$697 million of cash and cash investments held atSeptember 30, 2020 andDecember 31, 2019 ,$324 million and$297 million , respectively, was held in our foreign subsidiaries. If these funds were needed for our operations in theU.S. , their repatriation into theU.S. would not result in significant additionalU.S. income tax or foreign withholding tax, as we have recorded such taxes on substantially all undistributed foreign earnings, except for those that are legally restricted. 25 -------------------------------------------------------------------------------- OnSeptember 18, 2020 , we issued$300 million of 2.0% Notes dueOctober 1, 2030 and received proceeds of$300 million , net of discount, for the issuance of the 2030 Notes. Also onSeptember 18, 2020 , we issued an incremental$100 million on our existing 4.5% Notes dueMay 15, 2047 and received proceeds of$119 million , including a premium, for the issuance of the 2047 Notes. The incremental$100 million will form a single series with the existing$300 million of 4.5% Notes dueMay 15, 2047 . The 2030 Notes and 2047 Notes are senior indebtedness and are redeemable at our option at the applicable redemption price. OnSeptember 29, 2020 , proceeds from the debt issuances were used to repay and early retire$400 million of our 3.5% Notes dueApril 1, 2021 . In connection with this early retirement, we incurred a loss on debt extinguishment of$6 million , which was recorded as interest expense. OnMarch 13, 2019 , we entered into a credit agreement (the "Credit Agreement") with an aggregate commitment of$1.0 billion and a maturity date ofMarch 13, 2024 . Under the Credit Agreement, at our request and subject to certain conditions, we can increase the aggregate commitment up to an additional$500 million with the current lenders or new lenders. Upon entry into the Credit Agreement, our credit agreement datedMarch 28, 2013 , as amended, with an aggregate commitment of$750 million , was terminated. See Note I to the condensed consolidated financial statements. The Credit Agreement contains financial covenants requiring us to maintain (A) a net leverage ratio, as adjusted for certain items, not exceeding 4.0 to 1.0, and (B) a minimum interest coverage ratio, as adjusted for certain items, not less than 2.5 to 1.0. We were in compliance with all covenants and no borrowings were outstanding under our Credit Agreement atSeptember 30, 2020 . As part of our ongoing efforts to improve our cash flow and related liquidity, we work with suppliers to optimize our terms and conditions, including extending payment terms. We also facilitate a voluntary supply chain finance program (the "program") to provide certain of our suppliers with the opportunity to sell receivables due from us to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. A third party administers the program; our responsibility is limited to making payment on the terms originally negotiated with our supplier, regardless of whether the supplier sells its receivable to a financial institution. We do not enter into agreements with any of the participating financial institutions in connection with the program. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the program. All outstanding payments owed under the program are recorded within accounts payable in our condensed consolidated balance sheets. The amounts owed to participating financial institutions under the program and included in accounts payable for our continuing operations were$47 million and$29 million atSeptember 30, 2020 andDecember 31, 2019 , respectively. We account for all payments made under the program as a reduction to our cash flows from operations and reported within our increase in accounts payable and accrued liabilities, net, line within our condensed consolidated statements of cash flows. The amounts settled through the program and paid to participating financial institutions were$97 million and$92 million for our continuing operations during the nine-month periods endedSeptember 30, 2020 and 2019, respectively. A downgrade in our credit rating or changes in the financial markets could limit the financial institutions' willingness to commit funds to, and participate in, the program. We do not believe such risk would have a material impact on our working capital or cash flows, as substantially all of our payments are made outside of the program. The COVID-19 pandemic did not impact our financial performance during the third quarter of 2020 to the extent we anticipated. Operational activity that was previously slowed at certain of our facilities, as a result of the pandemic, have largely resumed operations at normal capacities enabling them to progress on the fulfillment of production and distribution backlogs that developed in the first half of the year as well as to meet current consumer demand. Many, but not all, of our businesses remained operating in the first nine months of 2020 because the products we provide are critical to infrastructure sectors and the day-to-day operations of homes and businesses in our communities as defined by applicable local orders. However, certain of our facilities experienced full closures ranging from a few days to several weeks, and if certain governmental orders are reimposed or if we are required to close a facility for employee safety reasons, we could experience new or extended closures which might adversely impact our ability to produce and distribute our products. Finally, we may experience supply chain disruptions, particularly disruptions related to our ability to source plumbing, lighting and builders' hardware products. 26
-------------------------------------------------------------------------------- We may experience an adverse impact to our fourth quarter of 2020 results due to economic contraction as a result of high unemployment levels and remaining or potential renewed shelter-in-place and social distancing orders. However, given our portfolio of lower ticket, repair and remodel-oriented products, we expect that demand for our products will continue to be solid as we recover from the COVID-19 pandemic. We believe that our present cash balance, cash flows from operations, and borrowing availability under our Credit Agreement are sufficient to fund our near-term working capital and other investment needs. We anticipate that our longer-term working capital and other general corporate requirements will be satisfied through cash flows from operations and, to the extent necessary, from bank borrowings and future financial market activities. However, due to the highly uncertain nature, severity and duration or resurgence of the COVID-19 pandemic and its impact on our customers, suppliers and employees, we are unable to fully estimate the extent of the impact it may have on our future financial condition. In preparing this Form 10-Q, including our financial statements contained in this report, we made certain estimates and assumptions that affect or could have affected the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. As the impact of the COVID-19 pandemic to our business becomes more certain, we will update and refine our estimates and assumptions, which could affect the reported amounts of assets and liabilities and related disclosures, and future revenues and expenses. We continue to be committed to the safety and well-being of our employees during this time, and, led by our cross-functional COVID-19 task force, we have employed best practices and followed guidance from theWorld Health Organization and theCenters for Disease Control and Prevention . We have implemented and are continuing to implement alternative work arrangements to support the health and safety of our employees, including working remotely and avoiding large gatherings. In addition, we have modified work areas and workstations to provide protective measures for employees, are staggering shifts, requiring the use of face coverings, practicing social distancing and increasing the cleaning of our facilities, and in the event that we learn of an employee testing positive for COVID-19, we are completing contact tracing and requiring impacted employees to self-quarantine. OUTLOOK FOR THE COMPANY We continue to execute our strategies of leveraging our strong brand portfolio, industry-leading positions and the Masco Operating System, our methodology to drive growth and productivity, to create long-term shareholder value. We believe that our strong financial position and cash flow generation, together with our investments in our industry-leading branded building products, our continued focus on innovation and disciplined capital allocation, will allow us to drive long-term growth and create value for our shareholders. While we continue to remain uncertain regarding the short-term impact that the COVID-19 pandemic may have on our businesses, we remain confident in the fundamentals of our businesses and long-term strategy. 27
-------------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS This report contains statements that reflect our views about our future performance and constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as "outlook," "believe," "anticipate," "appear," "may," "will," "should," "intend," "plan," "estimate," "expect," "assume," "seek," "forecast," and similar references to future periods. Our views about future performance involve risks and uncertainties that are difficult to predict and, accordingly, our actual results may differ materially from the results discussed in our forward-looking statements. We caution you against relying on any of these forward-looking statements. Our future performance may be affected by the levels of residential repair and remodel activity and new home construction, our ability to maintain our strong brands and reputation and to develop innovative products, our ability to maintain our competitive position in our industries, our reliance on key customers, the length and severity of the ongoing COVID-19 pandemic, including its impact on domestic and international economic activity, consumer demand for our products, our production capabilities, our employees and our supply chain, the cost and availability of materials and the imposition of tariffs, our dependence on third-party suppliers, risks associated with our international operations and global strategies, our ability to achieve the anticipated benefits of our strategic initiatives, our ability to successfully execute our acquisition strategy and integrate businesses that we have and may acquire, our ability to attract, develop and retain talented personnel, risks associated with our reliance on information systems and technology, and our ability to achieve the anticipated benefits from our investments in new technology. These and other factors are discussed in detail in Item 1A, "Risk Factors" in our most recent Annual Report on Form 10-K, as well as in other filings we make with theSecurities and Exchange Commission . The forward-looking statements in this report speak only as of the date of this report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. Unless required by law, we undertake no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise. 28 --------------------------------------------------------------------------------
MASCO CORPORATION Item 4. CONTROLS AND PROCEDURES a. Evaluation of Disclosure Controls and Procedures. The Company's principal executive officer and principal financial officer have concluded, based on an evaluation of the Company's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15 that, as ofSeptember 30, 2020 , the Company's disclosure controls and procedures were effective.
b. Changes in Internal Control over Financial Reporting.
In connection with the evaluation of the Company's internal control over financial reporting that occurred during the quarter endedSeptember 30, 2020 , which is required under the Securities Exchange Act of 1934 by paragraph (d) of Exchange Rules 13a-15 or 15d-15 (as defined in paragraph (f) of Rule 13a-15), management determined that there was no change that materially affected or is reasonably likely to materially affect internal control over financial reporting. 29
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