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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 2003. COMMISSION FILE NUMBER 1-5794
MASCO CORPORATION
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 38-1794485
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
21001 VAN BORN ROAD, TAYLOR, MICHIGAN 48180
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(313) 274-7400
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(TELEPHONE NUMBER)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS.
YES X NO
----- -----
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN EXCHANGE ACT RULE 12B-2).
YES X NO
----- -----
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICAL DATE.
SHARES OUTSTANDING AT
CLASS MAY 1, 2003
----- ---------------------
COMMON STOCK, PAR VALUE $1 PER SHARE 476,594,000
MASCO CORPORATION
INDEX
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 2003 and December 31, 2002 1
Condensed Consolidated Statements of
Income for the Three Months Ended
March 31, 2003 and 2002 2
Condensed Consolidated Statements of
Cash Flows for the Three Months Ended
March 31, 2003 and 2002 3
Notes to Condensed Consolidated
Financial Statements 4-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13-17
Item 4. Disclosure Controls and Procedures 17
Part II. Other Information and Signature 18-19
Disclosure Control Certifications 20-21
MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 2003 AND DECEMBER 31, 2002
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
------------------------
MARCH 31, DECEMBER 31,
ASSETS 2003 2002
------ ----------- ------------
Current assets:
Cash and cash investments $ 748,450 $ 1,066,570
Accounts and notes receivable, net 1,683,740 1,546,360
Prepaid expenses and other 272,550 281,220
Inventories:
Raw material 425,520 410,040
Finished goods 536,940 496,630
Work in process 160,740 148,950
----------- -----------
1,123,200 1,055,620
----------- -----------
Total current assets 3,827,940 3,949,770
Equity investments 70,110 67,810
Property and equipment, net 2,364,930 2,315,060
Goodwill, net 4,346,310 4,297,150
Other intangible assets, net 351,710 353,870
Other assets 1,009,320 1,066,770
----------- -----------
Total assets $11,970,320 $12,050,430
=========== ===========
LIABILITIES
-----------
Current liabilities:
Notes payable $ 301,050 $ 321,180
Accounts payable 657,150 541,590
Accrued liabilities 988,600 1,069,680
----------- -----------
Total current liabilities 1,946,800 1,932,450
Long-term debt 4,321,770 4,316,470
Deferred income taxes and other 502,630 507,670
----------- -----------
Total liabilities 6,771,200 6,756,590
----------- -----------
Commitments and contingencies
SHAREHOLDERS' EQUITY
--------------------
Preferred shares, par value $1 per share
Authorized shares: 1,000,000; issued:
2003 - 20,000; 2002 - 20,000 20 20
Common shares, par value $1 per share
Authorized shares: 1,400,000,000; issued:
2003 - 478,590,000; 2002 - 488,890,000 478,590 488,890
Paid-in capital 2,030,350 2,207,080
Retained earnings 2,879,780 2,783,490
Accumulated other comprehensive income (loss) 60 (21,700)
Less: Restricted stock awards, net (189,680) (163,940)
----------- -----------
Total shareholders' equity 5,199,120 5,293,840
----------- -----------
Total liabilities and
shareholders' equity $11,970,320 $12,050,430
=========== ===========
See notes to condensed consolidated financial statements.
1
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---------- ----------
Net sales $2,498,300 $2,100,000
Cost of sales 1,744,540 1,454,050
---------- ----------
Gross profit 753,760 645,950
Selling, general and administrative expenses 452,380 355,350
(Income) regarding litigation settlement (13,520) ---
---------- ----------
Operating profit 314,900 290,600
---------- ----------
Other income (expense), net:
Interest expense (67,600) (55,100)
Other, net 12,550 (7,900)
---------- ----------
(55,050) (63,000)
---------- ----------
Income before income taxes, minority
interest and cumulative effect of
accounting change, net 259,850 227,600
Income taxes 90,400 77,400
---------- ----------
Income before minority interest and
cumulative effect of accounting change, net 169,450 150,200
Minority interest 3,650 ---
---------- ----------
Income before cumulative effect of accounting
change, net 165,800 150,200
Cumulative effect of accounting change, net --- (92,400)
---------- ----------
Net income $ 165,800 $ 57,800
========== ==========
Earnings per common share:
Basic:
Income before cumulative effect of
accounting change, net $.34 $ .32
Cumulative effect of accounting change,
net -- (.20)
---- -----
Net income $.34 $ .12
==== =====
Diluted:
Income before cumulative effect of
accounting change, net $.32 $ .31
Cumulative effect of accounting change,
net -- (.19)
---- -----
Net income $.32 $ .12
==== =====
Cash dividends declared and paid
per common share $.14 $ .135
==== ======
See notes to condensed consolidated financial statements.
2
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
------------------------
THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
---------- ---------
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $ 222,330 $ 225,390
(Increase) in receivables (113,520) (180,780)
(Increase) decrease in inventories (59,010) 5,910
Increase in accounts payable and accrued
liabilities, net 50,940 85,740
---------- ---------
Total cash from operating activities 100,740 136,260
---------- ---------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt 10,760 53,640
Payment of debt (37,230) (104,890)
Purchase of Company common stock for:
Retirement (213,860) ---
Long-term stock incentive award plan (47,370) (21,380)
Cash dividends paid (70,950) (64,310)
---------- ---------
Total cash (for) financing activities (358,650) (136,940)
---------- ---------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures (77,980) (56,670)
Purchases of marketable securities (43,500) (131,380)
Purchases of other investments, net (9,650) (620)
Proceeds from disposition of:
Marketable securities 99,090 114,660
Business --- 15,430
Acquisition of companies, net of cash acquired (51,650) (10,280)
Decrease (increase) in long-term notes
receivable 11,680 (9,510)
Other, net 6,120 2,020
---------- --------
Total cash (for) investing activities (65,890) (76,350)
---------- ---------
Effect of exchange rates on cash and cash investments 5,680 3,200
---------- ---------
CASH AND CASH INVESTMENTS:
Decrease for the quarter (318,120) (73,830)
At January 1 1,066,570 311,990
---------- ---------
At March 31 $ 748,450 $ 238,160
========== =========
See notes to condensed consolidated financial statements.
3
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, of a normal
recurring nature, necessary to present fairly its financial position as
at March 31, 2003 and the results of operations and changes in cash flows
for the three months ended March 31, 2003 and 2002. The condensed
consolidated balance sheet at December 31, 2002 was derived from audited
financial statements.
Certain prior-year amounts have been reclassified to conform to the 2003
presentation in the condensed consolidated financial statements.
STOCK OPTIONS AND AWARDS. The Company has elected to change its method of
accounting for stock-based compensation and has implemented the fair
value method prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation" effective January 1, 2003. The Company is using the
prospective method, as defined by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment to
SFAS No. 123," for determining stock-based compensation expense. In the
first quarter of 2003, no stock options were awarded. The following table
illustrates the pro forma effect on net income and earnings per common
share as if the fair value method were applied to all previously issued
and outstanding and unvested stock options, in thousands, except per
common share amounts:
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
Net income, as reported $165,800 $ 57,800
Add:
Stock-based employee compensation (stock
awards) expense included in reported
net income, net of related tax effects 15,000 5,100
Deduct:
Stock-based employee compensation (stock
awards) expense, net of related tax effects (15,000) (5,100)
Stock-based employee compensation expense
determined under the fair value based
method for stock options issued prior to
January 1, 2003, net of related tax effects (3,200) (3,900)
-------- --------
Pro forma net income $162,600 $ 53,900
======== ========
Earnings per common share:
Basic as reported $ .34 $.12
Basic pro forma $ .33 $.12
Diluted as reported $ .32 $.12
Diluted pro forma $ .31 $.11
4
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
B. The changes in the carrying amount of goodwill for the quarter ended
March 31, 2003, by segment, are as follows, in thousands:
BALANCE BALANCE
DECEMBER 31, 2002 ADDITIONS(A) OTHER(B) MARCH 31, 2003
----------------- ------------ -------- --------------
Cabinets and Related
Products $ 586,380 $ --- $ 8,460 $ 594,840
Plumbing Products 441,810 6,340 4,740 452,890
Installation and Other
Services 1,693,170 2,330 (11,550) 1,683,950
Decorative Architectural
Products 428,500 20 (100) 428,420
Other Specialty Products 1,147,290 34,120 4,800 1,186,210
---------- ------- -------- ----------
Total $4,297,150 $42,810 $ 6,350 $4,346,310
========== ======= ======== ==========
(A) Additions to the carrying amount of goodwill include acquisitions
and other purchase price adjustments. Additions principally
include 2003 acquisitions and the recording of approximately $7
million of additional contingent consideration for prior purchase
acquisitions.
(B) Other changes to the carrying amount of goodwill principally
include foreign currency translation adjustments,
reclassifications and other purchase price adjustments related to
the finalization of certain purchase price allocations.
Other indefinite-lived intangible assets include registered trademarks of
$251.1 million at March 31, 2003. The carrying value of the Company's
definite-lived intangible assets is $100.6 million at March 31, 2003 (net
of accumulated amortization of $52.6 million) and principally includes
customer relationships and non-compete agreements.
C. Depreciation and amortization expense is $58 million and $50 million for
the three months ended March 31, 2003 and 2002, respectively.
D. The Company owns 64 percent of Hansgrohe AG. The minority interest of $52
million and $47 million at March 31, 2003 and December 31, 2002,
respectively, is recorded in the balance sheet caption deferred income
taxes and other liabilities on the Company's condensed consolidated
balance sheet.
E. In the first quarter of 2003, the Company acquired PowerShot Tool
Company, Inc. (Other Specialty Products segment) and several relatively
small installation service companies (Installation and Other Services
segment). PowerShot Tool Company is a manufacturer of fastening products,
including staple guns, glue guns, hammer tackers and riveting products,
headquartered in New Jersey. The results of these acquisitions are
included in the condensed consolidated financial statements from the
respective dates of acquisition. The aggregate net purchase price of
these acquisitions was $44 million, and included cash of $41 million and
debt of $3 million. The Company also paid an additional $11 million of
acquisition-related consideration, including contingent consideration, in
the first quarter of 2003, relating to previously acquired companies.
5
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
F. The following are reconciliations of the numerators and denominators used
in the computations of basic and diluted earnings per common share, in
thousands:
THREE MONTHS ENDED
MARCH 31,
--------------------
2003 2002
-------- --------
Numerator (basic and diluted):
Income before cumulative effect of
accounting change, net $165,800 $150,200
Cumulative effect of accounting change, net --- (92,400)
-------- --------
Net income as reported $165,800 $ 57,800
======== ========
Denominator:
Basic common shares (based on weighted
average) 491,500 467,200
Add:
Contingent common shares 27,900 13,300
Stock option dilution 200 3,400
-------- --------
Diluted common shares 519,600 483,900
======== ========
For both the three months ended March 31, 2003 and 2002, approximately 24
million common shares related to the Zero Coupon Convertible Senior Notes
due 2031 were not included in the computation of diluted earnings per
common share since, at March 31, 2003 and 2002, they were not convertible
according to their terms.
Additionally, 23.2 million common shares and 2.8 million common shares
for the three months ended March 31, 2003 and 2002, respectively, related
to stock options were excluded from the computation of diluted earnings
per common share due to their anti-dilutive effect, since the option
exercise price was greater than the Company's average common stock price
for both quarters.
G. The Company maintains investments in marketable securities (including
marketable equity securities and bond funds) and a number of private
equity funds principally as part of its tax planning strategies, as any
gains enhance the utilization of tax capital loss carryforwards. Included
in other long-term assets are the following financial investments, in
thousands:
MARCH 31, DECEMBER 31,
2003 2002
-------- ------------
Marketable equity securities $199,600 $216,400
Bond funds 171,870 229,930
Private equity funds 354,170 345,650
Metaldyne Corporation 69,470 67,780
TriMas Corporation 25,000 25,000
Other investments 9,060 8,890
-------- --------
Total $829,170 $893,650
======== ========
6
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note G - concluded:
The Company's investments in marketable equity securities and bond funds
at March 31, 2003 and December 31, 2002 were as follows, in thousands:
PRE-TAX
----------------------
UNREALIZED UNREALIZED RECORDED
COST BASIS GAINS LOSSES BASIS
---------- ---------- ---------- --------
MARCH 31, 2003
Marketable equity securities $274,610 $1,130 $(76,140) $199,600
Bond funds $167,280 $5,000 $ (410) $171,870
DECEMBER 31, 2002
Marketable equity securities $264,160 $2,210 $(49,970) $216,400
Bond funds $225,560 $4,600 $ (230) $229,930
Income (loss) from financial investments is included in other, net within
other income (expense), net, and is summarized as follows, in thousands:
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
-------- --------
Realized gains from marketable securities $ 8,140 $ 4,920
Realized losses from marketable securities --- (18,030)
Dividend income from marketable securities 5,120 950
(Expense) income from other investments,
net (1,710) 3,290
Dividend income from other investments 2,000 1,170
-------- --------
Income (loss) from financial investments $ 13,550 $ (7,700)
======== ========
H. Other, net, which is included in other income (expense), net, includes
the following, in thousands:
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
-------- --------
Equity earnings $ 490 $ 1,880
Income from cash and cash investments 2,520 840
Other interest income 1,860 880
Income (loss) from financial investments 13,550 (7,700)
Other items, net (5,870) (3,800)
-------- --------
$ 12,550 $ (7,900)
======== ========
7
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
I. The following table presents information about the Company by segment and
geographic area, in millions:
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2003 2002 2003 2002
---------------------------------------
NET SALES (1) OPERATING PROFIT
----------------- -----------------
The Company's operations by
segment were:
Cabinets and Related Products $ 699 $ 656 $ 84 $ 67
Plumbing Products 613 464 84 72
Installation and Other
Services 542 390 77 64
Decorative Architectural
Products 360 359 62 73
Other Specialty Products 284 231 43 39
------ ------ ---- ----
Total $2,498 $2,100 $350 $315
====== ====== ==== ====
The Company's operations by
geographic area were:
North America $1,993 $1,795 $283 $277
International, principally
Europe 505 305 67 38
------ ------ ---- ----
Total $2,498 $2,100 350 315
====== ======
General corporate expense, net (28) (24)
Accelerated benefits (2) (21) --
Income regarding litigation settlement (3) 14 --
---- ----
Operating profit 315 291
Other income(expense), net (55) (63)
---- ----
Income before income taxes,
minority interest and
cumulative effect of
accounting change, net $260 $228
==== ====
(1) Intra-segment sales were not material.
(2) Due to the unexpected passing of the Company's President and Chief
Operating Officer, certain benefits were accelerated and expensed
in the first quarter of 2003.
(3) The Company recorded income of $13.5 million regarding the
litigation discussed in Note K related to the Company's
subsidiary, Behr Process Corporation. Behr is included in the
Decorative Architectural Products segment.
J. The Company's total comprehensive income was as follows, in thousands:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2003 2002
-------- --------
Net income $165,800 $ 57,800
Other comprehensive income (loss):
Cumulative translation adjustments 38,780 (14,110)
Unrealized (loss) gain on marketable
securities (17,020) 12,160
-------- --------
Total comprehensive income $187,560 $ 55,850
======== ========
The unrealized gain (loss) on marketable securities is net of income tax
(credit) of $(10,000) and $7,140 for the three months ended March 31,
2003 and 2002, respectively.
8
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note J - concluded:
The components of accumulated other comprehensive income (loss) were as
follows, in thousands:
MARCH 31, DECEMBER 31,
2003 2002
-------- ------------
Unrealized loss on marketable securities $(44,360) $(27,340)
Minimum pension liability (57,900) (57,900)
Cumulative translation adjustments 102,320 63,540
-------- --------
Accumulated other comprehensive income (loss) $ 60 $(21,700)
======== ========
Unrealized loss on marketable securities is reported net of income tax
credit of $26.1 million and $16.1 million at March 31, 2003 and December
31, 2002, respectively.
The minimum pension liability is reported net of income tax credit of
$34.0 million at both March 31, 2003 and December 31, 2002.
K. LITIGATION. The Company is subject to lawsuits and pending or asserted
claims with respect to matters generally arising in the ordinary course
of business.
In May 1998, a civil suit was filed in the Grays Harbor County,
Washington Superior Court against Behr Process Corporation, a subsidiary
of the Company. The case involves four exterior wood coating products,
which represent a relatively small part of Behr's total sales. The
plaintiffs allege, among other things, that after applying these
products, the wood surfaces suffered excessive mildewing in the very
humid climate of western Washington. The trial court certified the case
as a class action, including all purchasers of the products who reside in
nineteen counties in western Washington. Behr denies the allegations. In
May 2000, the court entered a default against Behr as a discovery
sanction. Thereafter, the jury returned a verdict awarding damages to the
named plaintiffs. The damages awarded for the eight homeowner claims
(excluding one award to the owners of a vacation resort) ranged
individually from $14,500 to $38,000. The awards were calculated using a
formula based on the product used, the nature and square footage of wood
surface and certain other allowances. In addition, the court granted the
plaintiffs' motion for attorneys' fees. Behr appealed the trial court
judgment to the Court of Appeals of Washington. On September 13, 2002,
the Court of Appeals issued its opinion, ruling in favor of plaintiffs on
substantially all issues. The opinion was unexpected in light of the
unprecedented and disproportionate extent of the default sanction ordered
by the trial court and the belief by the Company and its outside legal
counsel that the rulings by the trial court had errors that would be
reversed by the appellate review. Following the trial court judgment in
the Washington case, Behr and the Company were served with 21 complaints
filed by consumers in state courts in Alabama, Alaska, California,
Illinois, New Jersey, New York, Oregon, and Washington, and in British
Columbia, Canada and Ontario, Canada. The complaints allege that certain
of Behr's exterior wood coating products fail to perform as warranted,
resulting in damage to the plaintiffs' wood surfaces. Trial courts in
Washington and Illinois certified their cases as national class actions.
A trial court in Oregon certified its case as a statewide class action.
In addition, the Company has been advised that one state is conducting an
investigation into the effectiveness of certain of these products.
9
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note K - continued:
Behr and attorneys representing class members agreed to a settlement of
the nineteen-county Washington lawsuit (the "Washington Settlement"), to
which the trial court granted preliminary approval on December 13, 2002.
A fairness hearing was held on March 17, 2003, at which the trial court
granted final approval to the Washington Settlement, awarded class
counsel fees of $12.5 million and dismissed the Grays Harbor County,
Washington case with prejudice. No class members objected to the terms of
the Washington Settlement. The period to appeal final approval expired
with no appeal being filed. Under the terms of the Washington Settlement,
eligible class members who successfully complete the claims process will
receive a cash award based on the product used, the type and square
footage of wood surface and certain other allowances. The awards will be
calculated using the damage formulas in the judgment entered by the trial
court. The Company will pay cash awards to class members, the costs of
notice to the class, the costs to administer the claims process and
certain other expenses, up to an aggregate maximum of $55 million. In
addition, the Company will pay the class counsel fees of $12.5 million
awarded by the trial court. Based upon the sales volume of the related
products during the class period, the damage formulas ordered by the
trial court, the expected class size, the estimated number of claims that
would be filed on a timely basis, the estimated average cost per claim,
and the experience of the Company's legal counsel with class action
settlements, the Company estimates that the total cost of the Washington
Settlement will approximate the maximum, $67.5 million, excluding amounts
that the Company has recovered or expects to recover from liability
insurers and other third parties.
The settlement of all other class actions pending in the U.S. (the
"National Settlement") received preliminary court approval on October 29,
2002. A fairness hearing was held on March 6, 2003, at which the court
heard arguments in support of the named plaintiffs' request for final
approval of the settlement and arguments of 15 class members who filed
objections to the settlement. On May 7, 2003, the court granted final
approval to the National Settlement, awarded class counsel fees of $25
million and dismissed all cases pending in California with prejudice.
Class members who objected to the settlement have the right to file an
appeal within 60 days following entry of the judgment of final approval.
Pursuant to the terms of the National Settlement, all other cases pending
in the United States will be dismissed with prejudice upon expiration of
the 60-day period if no appeal of the judgment of final approval is
filed.
10
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note K - continued:
The National Settlement provides that eligible class members who
successfully complete the claims process can elect to receive either a
merchandise certificate for a discount on the purchase of Behr products,
or a cash award based on the product used, the square footage of wood
surface, proof of purchase, the interval of time between product
application and the appearance of mildew, and the extent of mildew
damage. The Company will pay a settlement amount of up to $107.5 million,
which will include total cash payments to eligible class members, the
cost of notice to the class, the cost to administer the claims process,
and the face value of merchandise certificates issued to eligible
claimants up to $7.5 million. If the aggregate face value of merchandise
certificates issued exceeds $7.5 million, the excess will not be credited
against the $107.5 million settlement amount but will be settled by
issuance of additional merchandise certificates. The National Settlement
also provides that the Company will pay class counsel fees awarded by the
trial court, up to a maximum of $25 million. Based upon the sales volume
of the related products during the class period, the expected class size,
the estimated number of claims that would be filed on a timely basis, the
estimated size and mix of claims (merchandise certificate versus cash),
the estimated average cost per claim and the experience of the Company's
legal counsel with class action settlements, the Company estimates that
the cost of the National Settlement will range from $96 million to $136
million (including adjustments due to a $107.5 million limit), excluding
amounts that the Company has recovered or expects to recover from
liability insurers. This estimate includes costs (for notice and claims
administration) of $5 to $6 million, the class counsel fees of $25
million, merchandise certificate costs ranging from $5 to $11 million,
and cash awards ranging from $61 to $102 million.
Management believes, based on the advice of outside counsel, that the
National Settlement described above will be implemented without
substantial changes, although there can be no assurance in that regard.
The Company estimates that the combined cost of both settlements and the
Company's additional legal costs (estimated at $2 million) will range
from $166 million to $206 million. The Company concluded that no amount
within that range is more likely than any other, and therefore reflected
$166 million as a liability in the third quarter 2002 condensed
consolidated financial statements in accordance with accounting
principles generally accepted in the United States. Following court
approval, the Company expects that payment of the settlements will
commence in the third quarter of 2003 and will be completed by the first
quarter of 2004.
In November 2002, Behr and two of its liability insurers reached an
agreement regarding the insurers' contribution to fund the National
Settlement. Subject to the limits of Behr's liability policies, the
insurers will pay 80% of the notice costs, claims administration costs
and attorney fees awarded to the plaintiffs. The Company recorded income
of $19.2 million in the fourth quarter of 2002 to reflect the insurers'
agreement to fund these costs. Subject to policy limits, the insurers
will also fund varying percentages of any claims paid, depending on the
type of claim (merchandise certificate or cash) and policy years in which
the products were applied. The amount of the insurers' contribution
related to claims will not be reasonably estimable until the claims
process is implemented following final court approval.
11
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONCLUDED)
Note K - concluded:
In February 2003, Behr and the insurers also reached agreement on funding
the Washington Settlement, with terms similar to those of the funding
agreement for the National Settlement. Subject to policy limits, the
insurers will pay 80% of the notice costs, claims administration costs
and attorney fees awarded to the plaintiffs, and a varying percentage of
claims paid depending on the policy year of product application. The
Company recorded income of $13.5 million in the first quarter of 2003 to
reflect the insurers agreement to fund these costs. The amount of the
insurers' contribution related to claims will not be reasonably estimable
until the claims process is implemented following final court approval.
STOCK PRICE GUARANTEES. Stock price guarantees as of March 31, 2003 are
summarized as follows, in thousands, except per share data:
SHARES ISSUED SETTLEMENT
- ---------------- MINIMUM ADDITIONAL OPTIONS(A)
# OF ISSUE STOCK PRICE GUARANTEE FOR ------------------ MATURITY
SHARES PRICE GUARANTEE EARNOUT TARGETS SHARES CASH DATE
- -------------------------------------------------------------------------------------
1,712 $25.98 $26.29 $2.63 947 $ 17,634 6/30/03
11,631 $24.07 $27.52 --- 5,559 103,516 9/10/03-11/6/03
16,667 $25.21 $31.20 --- 11,261 209,671 7/31/04
1,600 $30.00 $40.00 --- 1,837 34,208 12/31/04-4/30/05
- ------ ------ ---------
31,610 19,604 $365,029
====== ====== ========
(A) Amounts are computed based on the March 31, 2003 stock price for
Company common stock of $18.62. Shares contingently issuable under
these agreements are included in the calculation of diluted
earnings per common share.
In the second quarter of 2003, the Company will pay, in cash, the stock
price guarantee associated with approximately four million shares of
Company common stock, not included in the above table. Based on the
Company's stock price and exchange rates at the end of the first quarter
2003, the Company anticipates the payment to approximate $140 million.
The share equivalent for this guarantee is not included in the
calculation of diluted earnings per common share.
L. Subsequent event - In the second quarter of 2003, the Company completed
the sale of its 42 percent equity interest in Emco Limited for cash
proceeds of approximately $75 million. The sale will result in a pre-tax
gain of approximately $5 million to the Company.
12
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2003 VERSUS FIRST QUARTER 2002
SALES AND OPERATIONS
The following table sets forth the Company's net sales and operating
profit margins by segment and geographic area, dollars in millions:
PERCENT INCREASE
THREE MONTHS ENDED ----------------
MARCH 31, 2003
------------------ VS.
2003 2002 2002
------------------ ----
NET SALES:
Cabinets and Related Products $ 699 $ 656 7%
Plumbing Products 613 464 32%
Installation and Other
Services 542 390 39%
Decorative Architectural
Products 360 359 --
Other Specialty Products 284 231 23%
------ ------
Total $2,498 $2,100 19%
====== ======
North America $1,993 $1,795 11%
International, principally
Europe 505 305 66%
------ ------
Total $2,498 $2,100 19%
====== ======
THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
------------------
OPERATING PROFIT MARGINS: (A)
Cabinets and Related Products 12.0% 10.2%
Plumbing Products 13.7% 15.5%
Installation and Other
Services 14.2% 16.4%
Decorative Architectural
Products 17.2% 20.3%
Other Specialty Products 15.1% 16.9%
North America 14.2% 15.4%
International, principally
Europe 13.3% 12.5%
Total 14.0% 15.0%
Operating profit margins,
as reported 12.6% 13.8%
(A) Before general corporate expense, net of $28 million, accelerated
benefits related to the unexpected passing of the Company's President and
Chief Operating Officer of $21 million and insurance income regarding the
litigation settlement related to the Decorative Architectural Products
segment of $13.5 million for the three months ended March 31, 2003.
Before general corporate expense, net of $24 million for the three months
ended March 31, 2002.
13
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET SALES
Aided by acquisitions, net sales for the three months ended March 31,
2003 increased 19 percent from the comparable period in 2002. Excluding
acquisitions and divestitures ($311.3 million for 2003 acquisitions and $11.2
million for 2002 divestitures), net sales for the three months ended March 31,
2003 increased 5 percent from the comparable period in 2002.
Net sales of Cabinets and Related Products increased 7 percent in the
first quarter of 2003 compared with 2002, primarily due to increased sales
volume of assembled cabinets largely through North American retail distribution
channels at major home centers as well as a more favorable product mix.
Net sales of Plumbing Products increased 32 percent in the first quarter
of 2003 compared with 2002, primarily due to acquisitions.
Net sales of Installation and Other Services increased 39 percent in the
first quarter of 2003 compared with 2002, primarily due to acquisitions
(principally the acquisition of Service Partners in September 2002), which more
than offset the effect of adverse weather conditions in certain markets in the
first quarter of 2003.
Net sales of Decorative Architectural Products were comparable with the
first quarter of 2002.
Net sales of Other Specialty Products increased 23 percent in the first
quarter of 2003 compared with 2002, primarily due to acquisitions as well as
increased sales of vinyl windows.
Net sales from North American and International operations for the first
quarter of 2003 increased 11 percent and 66 percent, respectively, as compared
with the first quarter of 2002, primarily due to acquisitions. In the first
quarter of 2003, International sales continued to be positively affected by a
weaker U.S. dollar, principally against the Euro, which increased International
sales by approximately 20 percent.
OPERATING MARGINS
The Company's gross profit margins decreased to 30.2 percent for the
first quarter of 2003 from 30.8 percent for the comparable period in 2002. The
decrease in gross profit margins reflects lower sales volume due to adverse
weather conditions, increased energy costs which impacted material, freight and
other operating costs, new product launch costs, plant start-up costs, as well
as relatively higher International sales and sales in segments which have
somewhat lower margins. Selling, general and administrative expenses as a
percentage of sales were 18.1 percent for the first quarter of 2003 and 16.9
percent for the comparable period of the prior year. Selling, general and
administrative expenses in the first quarter of 2003 include $21 million of
accelerated benefit expense relating to the unexpected passing of the Company's
President and Chief Operating Officer. Selling, general and administrative
expense for the first quarter of 2003 also includes the effect of increased
insurance, pension and promotional costs. Operating income in the first quarter
of 2003 also benefited from $13.5 million of income regarding the Behr
litigation settlement.
14
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating profit margins for the Cabinets and Related Products segment
for the first quarter of 2003 were 12.0 percent compared with 10.2 percent in
2002, and reflects the positive impact of higher sales volume as well as lower
fixed costs resulting from plant closures in 2002. Operating profit margins for
this segment in 2002 were negatively affected by costs related to a discontinued
product line and incremental costs associated with plant closures in 2002.
Operating profit margins for the Plumbing Products segment were 13.7
percent in the first quarter of 2003 compared with 15.5 percent in the first
quarter of 2002, primarily due to a less favorable product mix, including
relatively higher International sales, as well as increased energy costs.
Operating profit margins for the Installation and Other Services segment
were 14.2 percent in the first quarter of 2003 compared with 16.4 percent in the
first quarter of 2002. The operating margin decline in this segment is primarily
attributable to adverse weather conditions in certain markets, which reduced
sales volume, as well as increased energy costs.
Operating profit margins for the Decorative Architectural Products
segment were 17.2 percent for the first quarter of 2003 compared with 20.3
percent in the first quarter of 2002. The margin decline is primarily attributed
to increased material and energy costs as well as additional costs associated
with the new in-store paint display centers and costs associated with a new
product launch.
Operating profit margins for the Other Specialty Products segment were
15.1 percent in the first quarter of 2003 compared with 16.9 percent in the
first quarter of 2002. The margin decline is primarily attributed to plant
start-up costs.
The Company's operating profit margins, after general corporate expense,
were 12.6 percent for the first quarter of 2003 as compared with 13.8 percent
for the first quarter of 2002. The Company's operating profit margins decreased
in the first quarter of 2003 as compared with the first quarter of 2002, due
principally to a decrease in gross profit margin and an increase in selling,
general and administrative expenses as a percent of sales as described above.
OTHER INCOME (EXPENSE), NET
Other, net for the first quarter of 2003 includes $8.1 million of
realized gains from the sale of marketable securities, dividend income of $7.1
million and $1.7 million of expense, net regarding other investments.
Other, net for the first quarter of 2002 includes $13.1 million of
realized losses, net from the sale of marketable securities, dividend income of
$2.1 million and $3.3 million of income, net regarding other investments.
Interest expense for the first quarter of 2003 increased $12.5 million to
$67.6 million as compared with interest expense of $55.1 million in the first
quarter of 2002 primarily due to increased fixed-rate borrowings in the last
half of 2002.
15
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET INCOME AND EARNINGS PER COMMON SHARE
Net income for the first quarter of 2003 was $165.8 million and diluted
earnings per common share were $.32 compared with $.12 per common share for the
comparable period of 2002 (including a $.19 non-cash goodwill impairment charge
recognized as a cumulative effect of accounting change). The Company's effective
tax rate for the three months ended March 31, 2003 was 34.8 percent, as compared
with 34.0 percent for the same period in 2002. The Company estimates that its
effective tax rate should approximate 35 percent for 2003.
OTHER FINANCIAL INFORMATION
The Company's current ratio was 2.0 to 1 at both March 31, 2003 and
December 31, 2002.
For the three months ended March 31, 2003, cash of $100.7 million was
provided by operating activities. Cash used for financing activities was $358.6
million, including $71.0 million for cash dividends paid, $213.9 million for the
acquisition and retirement of Company common stock in open-market transactions
and $47.4 million for the acquisition of Company common stock for the Company's
long-term stock incentive award plan. Cash used for investing activities was
$65.9 million, including $78.0 million for capital expenditures and $51.7
million related to acquisitions. Cash provided by investing activities included
$45.9 million for the net sales of marketable securities and other investments.
The aggregate of the preceding items and the currency effect on cash of $5.7
million represents a net cash outflow of $318.1 million.
In aggregate, the cost basis of the Company's portfolio of marketable
securities and bond funds exceeded the market value by approximately $70 million
at March 31, 2003. Included in the portfolio were four million shares of
Furniture Brands International common stock, which comprised approximately $43
million of the difference between cost and market value. The Company received
the four million shares of Furniture Brands International common stock as
proceeds from the liquidation of Furnishings International, Inc. in the second
quarter of 2002. At the end of April 2003, the cost basis of the portfolio
exceeded the market value by approximately $28 million, of which Furniture
Brands International common stock comprised $24 million.
First quarter 2003 cash from operations was affected by an expected and
annually recurring first quarter increase in accounts receivable as compared
with December 31, 2002.
The Company is subject to lawsuits and claims pending or asserted with
respect to matters generally arising in the ordinary course of business. Note K
of the Condensed Consolidated Financial Statements discusses specific claims
pending against the Company and its subsidiary, Behr Process Corporation, with
respect to several of Behr's exterior wood coating products.
The Company believes that its present cash balance, its cash flows from
operations and, to the extent necessary, bank borrowings and future financial
market activities, are sufficient to fund its working capital and other
investment needs.
16
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUTLOOK FOR THE COMPANY
The Company continues to believe that, in the present uncertain economic
environment, it is prudent to be conservative in forecasting for business
planning purposes and to anticipate a possible slow-down in housing starts and
continued moderation of consumer spending. The Company also expects that
operating expenses for the year will increase, particularly for such items as
energy, insurance and pension costs. The Company's favorable sales performance
has continued early in the second quarter with April sales up nearly 20 percent
and, based on current business trends, the Company continues to be guardedly
optimistic and expects to achieve record sales and earnings for the year 2003.
FORWARD-LOOKING STATEMENTS
Certain sections of this Quarterly Report contain statements reflecting
the Company's views about its future performance and constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. These
views involve risks and uncertainties that are difficult to predict and,
accordingly, the Company's actual results may differ materially from the results
discussed in such forward-looking statements. Readers should consider that
various factors, including changes in general economic conditions, competitive
market conditions and pricing pressures, relationships with key customers,
industry consolidation of retailers, wholesalers and builders, shifts in
distribution, the influence of e-commerce and other factors discussed in the
Company's Annual Report on Form 10-K and its other filings with the Securities
and Exchange Commission, may affect the Company's performance. The Company
undertakes no obligation to update publicly any forward-looking statements as a
result of new information, future events or otherwise.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
a. Evaluation of Disclosure Controls and Procedures
Based on their evaluation of the Company's disclosure controls and
procedures conducted within 90 days of the date of filing this
report on Form 10-Q, the Company's Chief Executive Officer and the
Chief Financial Officer have concluded that the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c)
and 15d-14(c) promulgated under the Securities Exchange Act of
1934) are designed to be and are adequate to ensure that
information required to be disclosed by the Company in the reports
it files or submits under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported, within
the time periods specified in the rules and forms of the
Securities and Exchange Commission.
b. Change in Internal Controls
There were no significant changes in the Company's internal
controls or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of
their evaluation.
17
PART II. OTHER INFORMATION
MASCO CORPORATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding this item is set forth in Note K to the Company's
Condensed Consolidated Financial Statements included in Part I, Item 1 of this
Report.
ITEMS 2 THROUGH 5 ARE NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
12 - Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends
99 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act
(B) REPORTS ON FORM 8-K:
Report on Form 8-K dated January 17, 2003, regarding an
unsolicited below-market mini-tender offer.
Report on Form 8-K dated February 5, 2003, announcing
the unexpected passing of the Company's President and
Chief Operating Officer, Raymond F. Kennedy.
18
PART II. OTHER INFORMATION
MASCO CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MASCO CORPORATION
-----------------
(Registrant)
DATE: MAY 9, 2003 BY: /s/ Timothy Wadhams
--------------------- ----------------------------------
Timothy Wadhams
Vice President and
Chief Financial Officer
19
MASCO CORPORATION
CERTIFICATIONS
I, Richard A. Manoogian, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Masco Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003 By: /s/ Richard A. Manoogian
---------------------------
Richard A. Manoogian
Chief Executive Officer
20
MASCO CORPORATION
CERTIFICATIONS
I, Timothy Wadhams, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Masco Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003 By: /s/ Timothy Wadhams
----------------------------
Timothy Wadhams
Vice President and
Chief Financial Officer
21
MASCO CORPORATION
EXHIBIT INDEX
EXHIBIT
Exhibit 12 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
Exhibit 99 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act