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MAS > SEC Filings for MAS > Form 10-Q on 30-Apr-2014All Recent SEC Filings

Show all filings for MASCO CORP /DE/

Form 10-Q for MASCO CORP /DE/


30-Apr-2014

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FIRST QUARTER 2014 VERSUS FIRST QUARTER 2013



                              SALES AND OPERATIONS



The following table sets forth the Company's net sales and operating profit
margins by business segment and geographic area, dollars in millions:



                                      Three Months Ended     Percent (Decrease)
                                          March 31,               Increase
                                       2014         2013       2014 vs. 2013

Net Sales:

Cabinets and Related Products       $      237    $    236                    - %
Plumbing Products                          800         762                    5 %
Installation and Other Services            335         312                    7 %
Decorative Architectural Products          441         432                    2 %
Other Specialty Products                   152         134                   13 %
Total                               $    1,965    $  1,876                    5 %
North America                       $    1,556    $  1,510                    3 %
International, principally Europe          409         366                   12 %
Total                               $    1,965    $  1,876                    5 %




                                               Three Months Ended
                                                   March 31,
                                               2014          2013

Operating Profit (Loss) Margins: (A)
Cabinets and Related Products                    (5.1 )%       (1.7 )%
Plumbing Products                                14.9 %        11.3 %
Installation and Other Services                  (1.2 )%       (1.3 )%
Decorative Architectural Products                17.2 %        20.6 %
Other Specialty Products                          3.3 %        (0.7 )%
North America                                     8.3 %         9.3 %
International, principally Europe                13.4 %         7.1 %
Total                                             9.4 %         8.8 %
Total operating profit margin, as reported        7.7 %         7.0 %


(A) Before general corporate expense, net; see Note L to the condensed consolidated financial statements.

We report our financial results in accordance with generally accepted accounting principles ("GAAP") in the United States. 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.


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NET SALES

Net sales increased five percent for the three-month period ended March 31, 2014, from the comparable period of 2013. Excluding the favorable effect of currency translation and the acquisition of a small U.K. door business, net sales increased four percent in the first quarter of 2014 compared to the first quarter of 2013. The following table reconciles reported net sales to net sales, excluding acquisitions and the effect of currency translation, in millions:

                                                              Three Months Ended
                                                                  March 31,
                                                            2014             2013

Net sales, as reported                                  $       1,965    $       1,876
Acquisitions                                                       (2 )              -
Net sales, excluding acquisitions                               1,963            1,876
Currency translation                                              (13 )              -
Net sales, excluding acquisitions and the effect of
currency translation                                    $       1,950    $       1,876

North American net sales were positively impacted by increased sales volume of installation and other services, plumbing products, paints and stains, windows and builders' hardware, which, in the aggregate, increased North American sales by five percent for the three-month period ended March 31, 2014, from the comparable period of 2013. Net sales were also positively affected by net selling price increases, primarily related to cabinets, installation and other services and windows, which increased sales by two percent for the three-month period ended March 31, 2014, from the comparable period of 2013. Such increases were offset by lower sales volume and a less favorable product mix of cabinets and lower selling prices of paints and stains, which, in the aggregate, reduced North American sales by two percent from the comparable period of 2013. Our North American sales were also negatively affected by inclement weather in portions of the United States.

A weaker U.S. dollar increased International net sales by five percent in the three-month period ended March 31, 2014 compared to the same period of 2013. In local currencies, net sales from International operations increased seven percent for the three-month period ended March 31, 2014 primarily due to increased sales volume of International cabinets, plumbing products and windows and selling price increases for International plumbing products.

Net sales of Cabinets and Related Products were flat due to increased selling prices of North American cabinets and increased sales volume of International cabinets, which offset lower sales volume and a less favorable product mix of North American cabinets.

Net sales of Plumbing Products increased due to increased sales volume of both North American and International operations, which, on a combined basis, increased sales by four percent for the three-month period ended March 31, 2014, from the comparable period of 2013. A weaker U.S. dollar increased sales by one percent in the three-month period ended March 31, 2014 from the comparable period of 2013. Such increases were partially offset by the exit of the bathware business.


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Net sales of Installation and Other Services increased for the three-month period ended March 31, 2014, compared to the same period of 2013, primarily due to increased sales volume related to a higher level of activity in new home construction, as well as increased sales volume of commercial sales. Net sales in this segment were also positively affected by increased selling prices. Such increases were partially offset by a less favorable product mix.

Net sales of Decorative Architectural Products increased for the three-month period ended March 31, 2014, compared to the same period of 2013, due to increased sales volume of paints and stains and builders' hardware, partially offset by lower selling prices of paints and stains and a less favorable product mix.

Net sales of Other Specialty Products increased for the three-month period ended March 31, 2014, compared to the same period of 2013, due to a more favorable product mix and increased selling prices of North American windows in the Western U.S. and increased sales volume of North American and International windows. A weaker U.S. dollar increased sales by two percent in the three-month period ended March 31, 2014 compared to 2013.

OPERATING MARGINS

Our gross profit margins were 27.8 percent for the three-month period ended March 31, 2014 compared with 27.1 percent for the comparable period of 2013. Selling, general and administrative expenses, as a percentage of sales, were 20.1 percent for the three-month period ended March 31, 2014 compared to 20.0 percent for the comparable period of 2013.

Gross profit margins for the three-month period ended March 31, 2014 were positively affected by increased sales volume and lower business rationalization costs, as well as a more favorable relationship between selling prices and commodity costs and the benefits associated with business rationalization activities and other cost savings initiatives.

We have been focused on the strategic rationalization of our businesses, including business consolidations, plant closures, headcount reductions and other initiatives. Operating profit for the three-month period ended March 31, 2014 includes $5 million of costs and charges related to our business rationalizations and other initiatives. For the three-month period ended March 31, 2013, we incurred costs and charges of $8 million related to these initiatives.

Operating margins in the Cabinets and Related Products segment for the three-month period ended March 31, 2014 were negatively affected by lower North American sales volume and the related under-absorption of fixed costs, as well as a less favorable product mix of North American cabinets. Such declines more than offset a more favorable relationship between selling prices and commodity costs and the benefits associated with business rationalization activities and other cost savings initiatives. This segment was also negatively affected by inefficiencies related to detrimental weather in portions of the United States.

Operating margins in the Plumbing Products segment for the three-month period ended March 31, 2014 were positively impacted by increased sales volume, a more favorable product mix and the benefits associated with business rationalization activities and other cost savings initiatives.


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Operating margins in the Installation and Other Services segment for the three-month period ended March 31, 2014 were positively impacted by increased sales volume and the related absorption of fixed costs, a more favorable relationship between selling prices and commodity costs and the benefits associated with business rationalization activities and other cost savings initiatives. This segment was negatively affected by weather-related inefficiencies in portions of the United States.

Operating margins in the Decorative Architectural Products segment for the three-month period ended March 31, 2014 were negatively affected by an unfavorable relationship between selling prices and commodity costs and increased advertising costs, as well as a less favorable product mix, partially offset by increased sales volume.

Operating margins in the Other Specialty Products segment for the three-month period ended March 31, 2014 reflect a more favorable product mix, a more favorable relationship between selling prices and commodity costs, lower business rationalization costs and increased sales volume. Such improvements to operating margins were partially offset by increased expenses related to ERP system implementation.

OTHER INCOME (EXPENSE), NET

Interest expense for the three-month period ended March 31, 2014 decreased $4 million from the comparable period of 2013 primarily due to the repurchase and retirement of $200 million of 7.125% Notes on August 15, 2013, the scheduled retirement date.

Other, net, for the three-month period ended March 31, 2014 included gains of $1 million related to distributions from private equity funds and $2 million of loss from equity investments. Other, net, for the three-month period ended March 31, 2013 included gains of $3 million related to distributions from private equity funds and $7 million of income from equity investments.

Other, net, for the three-month period ended March 31, 2014 included $2 million of currency transaction losses. Other items, net, for the three-month period ended March 31, 2013 included $3 million of currency transaction gains.

INCOME PER COMMON SHARE FROM CONTINUING OPERATIONS - Attributable to Masco
Corporation

Income for the three-month period ended March 31, 2014 was $76 million compared with $62 million for the comparable period of 2013. Diluted earnings per common share for the three-month period ended March 31, 2014 was $.21 per common share compared with $.17 per common share for the comparable period of 2013.

Our effective tax rate was five percent for the three months ended March 31, 2014, primarily due to the decrease in the valuation allowance resulting from the partial utilization of our U.S. Federal net operating loss carryforward and from a $15 million state income tax benefit on uncertain tax positions due to the expiration of applicable statutes of limitations in various states.


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A return to sustainable profitability in the U.S. is required before we would change our judgment regarding the need for a valuation allowance against our deferred tax assets. It is reasonably possible that the continued improvements in our U.S. operations could result in the objective positive evidence necessary to warrant the reversal of all or a portion of the valuation allowance, up to approximately $550 million, as early as the second half of 2014. Until such time, the profits from our U.S. operations will be offset by the net operating loss carryforward resulting in a lower U.S. effective tax rate.

OTHER FINANCIAL INFORMATION

Our current ratio was 2.0 to 1 and 1.9 to 1 at March 31, 2014 and December 31, 2013, respectively.

For the three months ended March 31, 2014, cash of $244 million was used for operating activities. First quarter 2014 and 2013 cash from operations was affected by an expected and annually recurring seasonal first quarter increase in accounts receivable and inventories compared with December 31, 2013.

For the three months ended March 31, 2014, net cash used for financing activities was $66 million and included $27 million for the payment of cash dividends and $39 million for the acquisition of Company common stock in open-market transactions to offset the dilutive impact of long-term stock awards granted in 2014. Net cash used for investing activities was $6 million, including $26 million for capital expenditures, partially offset by net proceeds from the sale of fixed assets of $5 million and net proceeds from the sale of short-term bank cash deposits of $15 million.

Our cash, cash investments and short-term bank deposits were $1.2 billion and $1.5 billion at March 31, 2014 and December 31, 2013, respectively. Our cash and cash investments consist of overnight interest bearing money market demand and time deposit accounts, money market mutual funds and government securities. Our short-term bank deposits consist of time deposits with maturities of 12 months or less.

Of the $1.2 billion and the $1.5 billion of cash, cash investments and short-term bank deposits held at March 31, 2014 and December 31, 2013, $601 million and $622 million, respectively, is held in foreign subsidiaries. If these funds were needed for our operations in the U.S., their repatriation into the U.S. may result in additional U.S. income taxes or foreign withholding taxes. The amount of such taxes is dependent on the income tax laws and circumstances at the time of distribution.

On March 28, 2013, the Company entered into a credit agreement (the "Credit Agreement") with a bank group, with an aggregate commitment of $1.25 billion and a maturity date of March 28, 2018. See Note H to the financial statements.

Based on the debt to total capitalization covenant in the Credit Agreement, at March 31, 2014, the Company had additional borrowing capacity, subject to availability, of up to $1.2 billion. Additionally, at March 31, 2014, the Company could absorb a reduction to shareholders' equity of approximately $796 million and remain in compliance with the debt to total capitalization covenant.


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We were in compliance with all covenants and had no borrowings under our credit agreement at March 31, 2014.

We believe that our present cash balance, cash flows from operations and, to the extent necessary, bank borrowings and future financial market activities, are sufficient to fund our working capital and other investment needs.

OUTLOOK FOR THE COMPANY

We are making progress on our 2014 strategic priorities, which include growing share of our market-leading brands, accelerating customer-focused innovation pipeline, further penetrating international markets and driving operational leverage through our focus on cost containment. We believe that new home construction will show continued growth in 2014 and that repair and remodel activity will grow modestly, and big ticket items will continue to show improvement. We also expect the positive trend of the European economic recovery to continue.

We believe we are well positioned to grow our key brands and to gain market share in 2014. As we move through the year, we will continue to focus on the customer and execute against our priorities by improving our enterprise leverage, driving a high performance culture and focusing on continuous improvement in all we do.

FORWARD-LOOKING STATEMENTS

Statements contained in this report that reflect our views about our future performance constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as "believe," "anticipate," "appear," "may," "will," "should," "intend," "plan," "estimate," "expect," "assume," "seek," "should," "forecast," and similar references to future periods. These views 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 our reliance on new home construction and home improvement, our reliance on key customers, the cost and availability of raw materials, uncertainty in the international economy, shifts in consumer preferences and purchasing practices, our ability to improve our underperforming businesses, and our ability to maintain our competitive position in our industries. 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. Our 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.


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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 March 31, 2014, 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 March 31, 2014, 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.


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