(EDGAR Online via COMTEX) -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER 2020 AND THE FIRST SIX MONTHS 2020 VERSUS SECOND QUARTER 2019 AND THE FIRST SIX 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 June 30, Percent Change 2020 2019 2020 vs. 2019 Net Sales: Plumbing Products $ 868 $ 1,012 (14) % Decorative Architectural Products 896 827 8 % Total $ 1,764 $ 1,839 (4) % North America $ 1,480 $ 1,488 (1) % International, principally Europe 284 351 (19) % Total $ 1,764 $ 1,839 (4) % Six Months Ended June 30, Percent Change 2020 2019 2020 vs. 2019 Net Sales: Plumbing Products $ 1,823 $ 1,952 (7) % Decorative Architectural Products 1,522 1,400 9 % Total $ 3,345 $ 3,352 - % North America $ 2,738 $ 2,659 3 % International, principally Europe 607 693 (12) % Total $ 3,345 $ 3,352 - % Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Operating Profit (Loss): (A) Plumbing Products $ 155 $ 198 $ 312 $ 351 Decorative Architectural Products 201 173 296 246 Total $ 356 $ 371 $ 608 $ 597 North America $ 321 $ 316 $ 531 $ 497 International, principally Europe 35 55 77 100 Total 356 371 608 597 General corporate expense, net (17) (24) (44) (53) Operating profit $ 339 $ 347 $ 564 $ 544
(A) Before general corporate expense, net; see Note M to the condensed consolidated financial statements.
We report our financial results in accordance with generally accepted accounting principles ("GAAP") in the 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 six-month periods ended June 30, 2020 compared to the same period of 2019.
NET SALES Net sales decreased four percent for the three-month period ended June 30, 2020 and were flat for the six-month period ended June 30, 2020. Excluding acquisitions and the effect of currency translation, net sales decreased three percent for the three-month period ended June 30, 2020 and were flat for the six-month period ended June 30, 2020. The following table reconciles reported net sales to net sales, excluding acquisitions and the effect of currency translation, in millions: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Net sales, as reported $ 1,764 $ 1,839 $ 3,345 $ 3,352 Acquisitions - - - - Net sales, excluding acquisitions 1,764 1,839 3,345 3,352 Currency translation 13 - 22 - Net sales, excluding acquisitions and the effect of currency translation $ 1,777 $ 1,839 $ 3,367 $ 3,352
North American net sales decreased one percent for the three-month period ended June 30, 2020. Lower sales volume of plumbing products and lighting products and unfavorable net selling prices of paints and other coating products, in aggregate, decreased sales by six percent for the three-month period. Such decreases were mostly offset by higher sales volume of paints and other coating products, which increased sales by six percent for the three-month period. North American net sales increased three percent for the six-month period ended June 30, 2020. Higher sales volume of paints and other coating products increased sales by six percent for the six-month period. Such increases were partially offset by lower sales volume of plumbing products and lighting products and unfavorable net selling prices of paints and other coating products, which, in aggregate, decreased sales by three percent for the six-month period.
International net sales decreased 19 percent and 12 percent for the three-month and six-month periods ended June 30, 2020, respectively. In local currencies (including sales in currencies outside their respective functional currencies), net sales decreased 17 percent and 10 percent, respectively. Lower sales volume and unfavorable sales mix of plumbing products, in aggregate, decreased sales by 17 percent and 11 percent for the three-month and six-month periods, respectively. Such decreases were slightly offset by favorable net selling prices of plumbing products which increased sales by one percent for both the three and six-month periods.
Net sales in the Plumbing Products segment decreased 14 percent and seven percent for the three-month and six-month periods ended June 30, 2020, respectively. Lower sales volume and unfavorable sales mix, in aggregate, decreased sales by 14 percent and six percent, respectively. Foreign currency translation decreased sales by one percent for both the three and six-month periods.
Net sales in the Decorative Architectural Products segment increased eight percent and nine percent for the three-month and six-month periods ended June 30, 2020, respectively. Net sales increased due to higher sales volume of paints and other coating products for both periods. This increase was partially offset by lower sales volume of lighting products and unfavorable net selling prices of paints and other coating products for both periods.
Our gross profit margin was 35.6 percent and 35.1 percent for the three-month and six-month periods ended June 30, 2020, respectively, compared with 36.6 percent and 35.7 percent for the comparable period of 2019. Gross profit margins for the three-month period ended June 30, 2020 were negatively impacted by decreased sales volume, unfavorable sales mix, and increased commodity costs, primarily attributed to tariffs. Such decreases were partially offset by the benefits associated with cost savings initiatives, including lower salaries and wages resulting from actions taken to mitigate the impact of the coronavirus disease 2019 ("COVID 19") pandemic. Gross profit margins for the six-month period ended June 30, 2020 were negatively impacted by increased commodity costs, primarily attributed to tariffs, and unfavorable sales mix. Such decreases were partially offset by increased sales volume.
Selling, general and administrative expenses, as a percentage of sales, were 16.4 percent and 18.3 percent for the three-month and six-month periods ended June 30, 2020, respectively, compared to 17.7 percent and 19.2 percent for the comparable period 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, partially offset by additional legal costs for both periods.
Operating profit in the Plumbing Products segment for the three-month and six-month periods ended June 30, 2020 was negatively impacted by lower sales volume, increases in commodity costs, primarily attributed to tariffs, and unfavorable sales mix. These negative impacts were partially offset by benefits associated with cost savings initiatives, including actions taken to mitigate the COVID-19 pandemic impact, and increased net selling prices.
Operating profit in the Decorative Architectural Products segment for the three-month and six-month periods ended June 30, 2020 was positively impacted by higher sales volume, and the benefits associated with cost savings initiatives, including actions taken to mitigate the COVID-19 pandemic impact for both periods. 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 for the six-month period only. These positive impacts were partially offset by decreased net selling prices of paints and other coating products and higher fixed expenses in our lighting business.
OTHER INCOME (EXPENSE), NET
Interest expense for the three-month and six-month periods ended June 30, 2020 was $35 million and $70 million, respectively, compared to $41 million and $80 million for the three-month and six-month periods ended June 30, 2019. The decrease is due to the extinguishment of our 7.125% Notes due March 15, 2020 in the fourth quarter of 2019 and temporary borrowings on the revolving credit facility for the three-months ended June 30, 2019.
Other, net, for the three-month and six-month periods ended June 30, 2020 included $8 million and $16 million, respectively, of net periodic pension and post-retirement benefit cost, $2 million of foreign currency transaction gains for the three-month period and $7 million of foreign currency transaction losses for the six-month period and $4 million of dividend income related to preferred stock of ACProducts Holding, Inc. for both periods. Other, net, for the three-month and six-month periods ended June 30, 2019 included $6 million and $11 million, respectively, of net periodic pension and post-retirement benefit cost and $2 million of foreign currency transaction gains in both periods.
INCOME AND INCOME PER COMMON SHARE FROM CONTINUING OPERATIONS - ATTRIBUTABLE TO MASCO CORPORATION
Income from continuing operations for the three-month and six-month periods ended June 30, 2020 was $210 million and $343 million, respectively, compared to $211 million and $318 million for the comparable periods of 2019. Diluted income per common share for the three-month and six-month periods ended June 30, 2020 was $0.80 and $1.27, respectively, per common share, compared with $0.72 and $1.08, respectively, per common share for the comparable periods of 2019.
Our effective tax rate was 27 percent and 24 percent for the three-month and six-month periods ended June 30, 2020, respectively. Our three-month rate was higher than our normalized tax rate of 26 percent due primarily to losses in certain foreign jurisdictions providing no income tax benefit and the recording of a valuation allowance against deferred tax assets in certain jurisdictions. Our six-month rate was lower than our normalized tax rate due primarily to an additional $5 million income tax benefit on stock-based compensation and an additional $3 million state income tax benefit from a reduction in the liability for uncertain tax positions resulting from the expiration of statutes of limitation in the first half of 2020.
Our effective tax rate was 26 percent and 25 percent for the three-month and six-month periods ended June 30, 2019, respectively. Our effective tax rate for the six-month period was lower than our normalized tax rate of 26 percent, primarily due to an additional $3 million income tax benefit on stock-based compensation.
OTHER FINANCIAL INFORMATION
Our current ratio was 1.5 to 1 and 1.8 to 1 at June 30, 2020 and December 31, 2019, respectively. The decrease in our current ratio is due primarily to the reclassification of our $400 million, 3.50% Notes due April 1, 2021 to short-term notes payable.
For the six-month period ended June 30, 2020, net cash provided by operating activities was $290 million. Our cash flows from operations benefited from recently issued IRS guidance, in response to the COVID-19 pandemic, that enabled us to defer the $192 million of income taxes payable recognized on the Cabinetry sale and other eligible Federal and State income tax payments normally due in April and June 2020, to July 2020. This benefit was partially offset by the income tax expense of $179 million resulting from the gain recorded in connection with the divestiture of Cabinetry.
For the six-month period ended June 30, 2020, net cash used for financing activities was $694 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), $73 million for the payment of cash dividends, $23 million for dividends paid to noncontrolling interest and $22 million for employee withholding taxes paid on stock-based compensation. These uses of cash were slightly offset by $21 million of proceeds from the exercise of stock options.
For the six-month period ended June 30, 2020, net cash provided by investing activities was $799 million, comprised of $853 million of proceeds from the sale of Cabinetry, net of cash disposed, and $12 million from the finalization of working capital items on the sale of Milgard, partially offset by $45 million for capital expenditures and $24 million for the acquisition of SmarTap, net of cash acquired.
Our cash and cash investments were $1,089 million and $697 million at June 30, 2020 and December 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 $1,089 million and $697 million of cash and cash investments held at June 30, 2020 and December 31, 2019, $227 million and $297 million, respectively, was held in our foreign subsidiaries. If these funds were needed for our operations in the U.S., their repatriation into the U.S. would not result in significant additional U.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.
On March 13, 2019, we entered into a credit agreement (the "Credit Agreement") with an aggregate commitment of $1.0 billion and a maturity date of March 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 dated March 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 at June 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 $34 million and $29 million at June 30, 2020 and December 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 (decrease) 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 $60 million and $64 million for our continuing operations during the six-month periods ended June 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 second quarter of 2020 as significantly as we anticipated. We did, however, experience reduced customer and end-consumer demand for many of our products, as well as slowed operational activity at certain of our facilities, which resulted in production and distribution backlogs and reduced sales.
Many, but not all, of our businesses remained operating in the first half 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 some of these facilities continue to experience partial closures as a result of governmental orders or safety measures we have implemented. In addition, 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.
We anticipate that we will continue to experience an adverse impact to our results in 2020 due to continued 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 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 are employing best practices and following guidance from the World Health Organization and the Centers 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, 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 expect to experience softness in the short-term in our businesses as a result of the COVID-19 pandemic, we remain confident in the fundamentals of our businesses.
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 the Securities 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.
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 of June 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 ended June 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), . . .
Jul 30, 2020
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