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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, 2004. COMMISSION FILE NUMBER 1-5794
MASCO CORPORATION
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 38-1794485
- --------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
21001 VAN BORN ROAD, TAYLOR, MICHIGAN 48180
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(313) 274-7400
- --------------------------------------------------------------------------------
(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, 2004
----- ---------------------
COMMON STOCK, PAR VALUE $1 PER SHARE 438,029,000
MASCO CORPORATION
INDEX
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 2004 and December 31, 2003 1
Condensed Consolidated Statements of
Income for the Three Months Ended
March 31, 2004 and 2003 2
Condensed Consolidated Statements of
Cash Flows for the Three Months Ended
March 31, 2004 and 2003 3
Notes to Condensed Consolidated
Financial Statements 4-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14-18
Item 4. Controls and Procedures 19
Part II. Other Information 20-21
Item 1. Legal Proceedings
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Securities
Item 6. Exhibits and Reports on Form 8-K
Signature
MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 2004 AND DECEMBER 31, 2003
(DOLLARS IN MILLIONS EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
ASSETS
Current assets:
Cash and cash investments $ 624 $ 795
Accounts and notes receivable, net 1,820 1,674
Prepaid expenses and other 270 316
Inventories:
Raw material 371 405
Finished goods 528 472
Work in process 134 142
------- -------
1,033 1,019
------- -------
Total current assets 3,747 3,804
Property and equipment, net 2,153 2,339
Goodwill 4,417 4,491
Other intangible assets, net 338 344
Assets held for sale 331 ---
Other assets 1,263 1,171
------- -------
Total assets $12,249 $12,149
======= =======
LIABILITIES
Current liabilities:
Notes payable $ 313 $ 334
Accounts payable 808 715
Accrued liabilities 986 1,050
------- -------
Total current liabilities 2,107 2,099
Long-term debt 4,197 3,848
Liabilities held for sale 99 ---
Deferred income taxes and other 719 746
------- -------
Total liabilities 7,122 6,693
------- -------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred shares, par value $1 per share
Authorized shares: 1,000,000; issued:
2004 - 20,000; 2003 - 20,000 --- ---
Common shares, par value $1 per share
Authorized shares: 1,400,000,000; issued:
2004 - 442,730,000; 2003 - 458,380,000 443 458
Paid-in capital 1,051 1,443
Retained earnings 3,394 3,299
Accumulated other comprehensive income (loss) 402 421
Less: Restricted stock awards (163) (165)
------- -------
Total shareholders' equity 5,127 5,456
------- -------
Total liabilities and
shareholders' equity $12,249 $12,149
======= =======
See notes to condensed consolidated financial statements.
1
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---------- ----------
Net sales $2,806 $2,352
Cost of sales 1,955 1,644
------ ------
Gross profit 851 708
Selling, general and administrative expenses 485 420
(Income) regarding litigation settlement (21) (13)
------ ------
Operating profit 387 301
------ ------
Other income (expense), net:
Interest expense (53) (67)
Other, net 52 13
------ ------
(1) (54)
------ ------
Income from continuing operations
before income taxes and minority
interest 386 247
Income taxes 140 85
------ ------
Income from continuing operations before
minority interest 246 162
Minority interest 5 4
------ ------
Income from continuing operations 241 158
(Loss) income from discontinued operations,
after income taxes (73) 8
------ ------
Net income $ 168 $ 166
====== ======
Earnings per common share:
Basic:
Income from continuing operations $ .53 $ .32
(Loss) income from discontinued
operations, after income taxes (.16) .02
------ ------
Net income $ .37 $ .34
====== ======
Diluted:
Income from continuing operations $ .52 $ .30
(Loss) income from discontinued
operations, after income taxes (.16) .01
------ ------
Net income $ .36 $ .32
====== ======
Cash dividends declared and paid
per common share $ .16 $ .14
====== ======
See notes to condensed consolidated financial statements.
2
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
------ ------
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $ 246 $ 236
(Increase) in receivables (236) (113)
(Increase) in inventories (73) (59)
Increase in accounts payable and accrued
liabilities, net 161 51
------ ------
Total cash from operating activities 98 115
------ ------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Issuance of notes, net of issuance costs 299 ---
Increase in debt 6 11
Payment of debt (16) (37)
Retirement of notes (5) ---
Proceeds from settlement of swaps 55 ---
Purchase of Company common stock for:
Retirement (422) (214)
Long-term stock incentive award plan --- (48)
Issuance of Company common stock 10 ---
Cash dividends paid (76) (71)
------ ------
Total cash (for) financing activities (149) (359)
------ ------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures (55) (78)
Purchases of marketable securities (169) (43)
Sales (purchases) of other investments, net 13 (10)
Proceeds from disposition of marketable
securities 109 99
Acquisition of companies, net of cash acquired --- (52)
Decrease in long-term notes receivable 1 12
Other, net 16 (8)
------ ------
Total cash (for) investing activities (85) (80)
------ ------
Effect of exchange rates on cash and cash
investments (3) 6
------ ------
CASH AND CASH INVESTMENTS:
Decrease for the quarter (139) (318)
Cash held by discontinued operations (32) ---
At January 1 795 1,067
------ ------
At March 31 $ 624 $ 749
====== ======
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, 2004 and the results of operations and changes in cash flows for
the three months ended March 31, 2004 and 2003. The condensed consolidated
balance sheet at December 31, 2003 was derived from audited financial
statements.
Certain prior-year amounts have been reclassified to conform to the 2004
presentation in the condensed consolidated financial statements. The
results of operations related to discontinued operations have been
reclassified and separately stated in the accompanying condensed
consolidated statements of income for 2004 and 2003. In the Company's
condensed consolidated balance sheet as at March 31, 2004, the assets and
liabilities of these businesses held for sale have been reclassified and
separately stated. The assets and liabilities of these businesses held for
sale as at December 31, 2003 have not been reclassified in the
related accompanying condensed consolidated balance sheet. In the
Company's condensed consolidated statements of cash flows for the three
months ended March 31, 2004 and 2003, the cash flows of discontinued
operations are not separately classified.
4
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note A - concluded:
STOCK OPTIONS AND AWARDS. The Company has implemented the fair value
method of accounting for stock-based compensation prescribed by Statement
of Financial Accounting Standards ("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.
Accordingly, options granted, modified or settled subsequent to January 1,
2003 are accounted for using the fair value method, and options granted
prior to January 1, 2003 continue to be accounted for using the intrinsic
value method. In the first quarter of 2004, 155,000 option shares,
including restoration option shares, 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 millions except per common
share data:
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
---- ----
Net income, as reported $168 $166
Add:
Stock-based employee compensation expense
included in reported net income, net of tax 10 15
Deduct:
Stock-based employee compensation expense,
net of tax (10) (15)
Stock-based employee compensation expense
determined under the fair value method
for stock options granted prior to 2003,
net of tax (3) (3)
---- ----
Pro forma net income $165 $163
==== ====
Earnings per common share:
Basic as reported $.37 $.34
Basic pro forma $.36 $.33
Diluted as reported $.36 $.32
Diluted pro forma $.35 $.31
B. In the first quarter of 2004, the Company determined that several European
businesses are not core to the Company's long-term growth strategy and,
accordingly, has embarked on a plan to sell these businesses. The
dispositions are expected to be completed within the next twelve months.
In the first quarter of 2004, the Company recognized a charge for those
businesses that are expected to be divested at a loss. Any gains resulting
from the disposition of individual businesses, which are expected later
this year, will be recognized as such transactions are completed and are
expected to substantially offset the charge recognized in the first
quarter of 2004. In the third quarter of 2003, the Company completed the
sale of its Baldwin Hardware, Weiser Lock and Marvel Group divisions. In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," the Company has accounted for the 2003 dispositions
and the 2004 planned dispositions as discontinued operations.
5
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note B - concluded:
Selected financial information for these discontinued operations is as
follows for the three months ended March 31, 2004 and 2003, in millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
----- -----
Net sales $ 95 $ 147
===== =====
Income before income taxes $ 6 $ 13
Impairment of assets held for sale (64) --
Income taxes (15) (5)
----- -----
(Loss) income from discontinued operations,
after income taxes $ (73) $ 8
===== =====
The after-tax charge for the impairment of assets held for sale is $76
million or $.16 per common share. The unusual relationship between income
tax expense and income before income taxes (including the loss on
disposition of businesses) in 2004 results primarily from the expected
loss providing no current tax benefit in the countries where the loss is
anticipated to be incurred and from the expensing of deferred tax assets
of the discontinued operations which are no longer expected to be
realized. In the first quarter of 2004, the Company also recorded
approximately $2 million of severance and termination benefit expenses,
included in income before income taxes from discontinued operations. The
Company expects such costs to approximate $10 million in aggregate, which
will be recognized over the next twelve months.
The impairment of assets held for sale primarily includes the
write-downs of goodwill of $29 million and fixed assets of $35 million.
Total assets and liabilities held for sale consist primarily of the
following at March 31, 2004 (after the impairment charge recorded in the
first quarter of 2004), in millions:
Accounts receivable $ 76
Inventories 54
Property and equipment, net 125
Goodwill 37
Other assets 39
----
Total assets $331
====
Accounts payable $ 38
Accrued salaries, wages and
related benefits 27
Other accrued expenses 34
----
Total liabilities $ 99
====
The discontinued operations were previously included in each of the
Company's segments, except the Installation and Other Services segment.
6
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
C. The changes in the carrying amount of goodwill for the quarter ended March
31, 2004, by segment, are as follows, in millions:
BALANCE HELD FOR BALANCE
DEC. 31, 2003 ADDITIONS SALE(A) OTHER(B) MAR. 31, 2004
------------- --------- -------- -------- -------------
Cabinets and Related
Products $ 708 $ --- $ (63) $(10) $ 635
Plumbing Products 498 --- --- 1 499
Installation and Other
Services 1,701 --- --- --- 1,701
Decorative Architectural
Products 398 --- --- 3 401
Other Specialty Products 1,186 --- (3) (2) 1,181
------ ----- ----- ---- ------
Total $4,491 $ --- $ (66) $ (8) $4,417
====== ===== ===== ==== ======
(A) During the first quarter of 2004, the Company reclassified the
goodwill related to businesses held for sale. In late March 2004,
the Company recognized a charge for those businesses expected to be
divested at a loss; the charge included a write-down of goodwill of
$29 million.
(B) Other principally includes 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
$255 million at March 31, 2004. The carrying value of the Company's
definite-lived intangible assets is $83 million at March 31, 2004 (net of
accumulated amortization of $50 million) and principally includes customer
relationships and non-compete agreements.
D. Depreciation and amortization expense is $59 million and $55 million for
the three months ended March 31, 2004 and 2003, respectively.
E. 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
millions:
MARCH 31, DECEMBER 31,
2004 2003
-------- ------------
Marketable equity securities $ 482 $392
Bond funds 128 125
Private equity funds 329 332
Metaldyne Corporation 78 76
TriMas Corporation 25 25
Other investments 9 9
------ ----
Total $1,051 $959
====== ====
7
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note E - concluded:
The Company's investments in marketable equity securities and bond funds
at March 31, 2004 and December 31, 2003 are as follows, in millions:
PRE-TAX
---------------------
UNREALIZED UNREALIZED RECORDED
COST BASIS GAINS LOSSES BASIS
---------- ---------- ---------- --------
MARCH 31, 2004
Marketable equity securities $437 $46 $(1) $482
Bond funds $117 $11 $-- $128
DECEMBER 31, 2003
Marketable equity securities $361 $35 $(4) $392
Bond funds $115 $10 $-- $125
The Company has investments in over 100 different marketable equity
securities and bond funds at March 31, 2004; the unrealized loss is
related to fourteen marketable equity securities with a cost basis of $36
million. These marketable equity securities have primarily been in an
unrealized loss position for less than three months. Based on the
Company's review, the Company considers the unrealized losses related to
these investments to be temporary.
Income from financial investments is included in other, net within other
income (expense), net, and is summarized as follows, in millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
---- ----
Realized gains from marketable securities $ 19 $ 8
Realized losses from marketable securities (3) --
Dividend income from marketable securities 5 5
Income (expense) from other investments,
net 13 (1)
Dividend income from other investments 2 2
---- ----
Income from financial investments, net $ 36 $ 14
==== ====
F. The Company's total comprehensive income is as follows, in millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
---- ----
Net income $168 $166
Other comprehensive income (loss):
Cumulative translation adjustments (28) 39
Unrealized gain (loss) on marketable
securities, net 9 (17)
---- ----
Total comprehensive income $149 $188
==== ====
The unrealized gain (loss) on marketable securities is net of income tax
(credit) of $6 million and $(10) million for the three months ended March
31, 2004 and 2003, respectively.
8
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note F - concluded:
The components of accumulated other comprehensive income (loss) are as
follows, in millions:
MARCH 31, DECEMBER 31,
2004 2003
-------- ------------
Unrealized gain on marketable securities, net $ 35 $ 26
Minimum pension liability (61) (61)
Cumulative translation adjustments 428 456
---- ----
Accumulated other comprehensive income (loss) $402 $421
==== ====
Unrealized gain on marketable securities is reported net of income tax of
$21 million and $15 million at March 31, 2004 and December 31, 2003,
respectively.
The minimum pension liability is reported net of income tax credit of $35
million at both March 31, 2004 and December 31, 2003.
G. The Company owns 64 percent of Hansgrohe AG. The minority interest of $72
million and $70 million at March 31, 2004 and December 31, 2003,
respectively, is recorded in the balance sheet caption deferred income
taxes and other liabilities on the Company's condensed consolidated
balance sheets.
H. On March 9, 2004, the Company issued $300 million of floating rate notes
due 2007, resulting in net proceeds of $299 million. The interest rate is
calculated based on the three-month London Interbank Offered Rate
("LIBOR") plus .25%.
In March 2004, the Company terminated two interest rate swaps relating to
$850 million of fixed rate debt. These swap agreements were accounted for
as fair value hedges. The gain of approximately $45 million from the
termination of these swaps is being amortized as a reduction of interest
expense over the remaining term of the debt, through July 2012.
In late March 2004, the Company entered into new interest rate swaps for
the purpose of converting a portion of fixed rate debt to floating rate
debt, which is expected to reduce interest expense, given current interest
rates. The average variable interest rates are based on LIBOR plus a fixed
adjustment factor. The average effective interest rate on the interest
rate swaps is 2.275%. At March 31, 2004, the interest rate swap agreements
covered a notional amount of $850 million of the Company's fixed rate debt
due July 15, 2012 with an interest rate of 5.875%.
9
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
I. The net periodic pension cost for the Company's qualified defined-benefit
pension plans is as follows, in millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
---- ----
Service cost $ 3 $ 4
Interest cost 7 10
Expected return on plan assets (6) (8)
Amortization of net loss 2 1
---- ----
Net periodic pension cost $ 6 $ 7
==== ====
Net periodic pension cost for the Company's non-qualified unfunded
supplemental pension plans was $4 million and $3 million for the three
months ended March 31, 2004 and 2003, respectively.
J. The following table presents information about the Company by segment and
geographic area, in millions:
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2004 2003 2004 2003
-------------------------------------
NET SALES (A) OPERATING PROFIT
---------------- ----------------
The Company's operations by
segment were:
Cabinets and Related Products $ 779 $ 658 $109 $ 82
Plumbing Products 739 623 96 86
Installation and Other
Services 630 542 81 77
Decorative Architectural
Products 370 288 64 55
Other Specialty Products 288 241 45 37
------ ------ ---- ----
Total $2,806 $2,352 $395 $337
====== ====== ==== ====
The Company's operations by
geographic area were:
North America $2,271 $1,927 $329 $276
International, principally
Europe 535 425 66 61
------ ------ ---- ----
Total $2,806 $2,352 395 337
====== ======
General corporate expense, net (36) (28)
Gain on sale of corporate fixed assets 7 --
Accelerated benefits (B) -- (21)
Income regarding litigation settlement (C) 21 13
---- ----
Operating profit 387 301
Other income (expense), net (1) (54)
---- ----
Income from continuing operations before
income taxes and minority interest $386 $247
==== ====
(A) Intra-segment sales were not material.
(B) 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.
(C) The Company recorded income regarding the litigation discussed in Note N
related to the Company's subsidiary, Behr Process Corporation. Behr is
included in the Decorative Architectural Products segment.
10
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
K. Other, net, which is included in other income (expense), net, includes the
following, in millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
---- ----
Income from cash and cash investments $ 2 $ 2
Other interest income 2 2
Income from financial investments, net 36 14
Other items, net 12 (5)
---- ----
$ 52 $ 13
==== ====
Other items, net for the first quarter of 2004 primarily include $6
million of currency translation gains.
L. The following are reconciliations of the numerators and denominators used
in the computations of basic and diluted earnings per common share, in
millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
---- ----
Numerator (basic and diluted):
Income from continuing operations $241 $158
(Loss) income from discontinued operations,
after income taxes (73) 8
---- ----
Net income $168 $166
==== ====
Denominator:
Basic common shares (based on weighted
average) 457 492
Add:
Contingent common shares 7 28
Stock option dilution 4 --
---- ----
Diluted common shares 468 520
==== ====
For both the three months ended March 31, 2004 and 2003, 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, 2004 and 2003, they were not convertible
according to their terms.
Additionally, 3.1 million common shares and 23.2 million common shares for
the three months ended March 31, 2004 and 2003, 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 for those shares was greater than the Company's average common stock
price during such periods.
In the first quarter of 2004, the Company repurchased and retired
approximately 15 million shares of Company common stock, at a cost
aggregating approximately $422 million. At March 31, 2004, the Company has
approximately 33 million common shares remaining under the December 2003
Board of Directors repurchase authorization.
11
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
M. In the first quarter of 2004, the Company adopted Financial Accounting
Standards Board ("FASB") Interpretation No. 46 - Revised ("FIN 46R"),
"Consolidation of Variable Interest Entities." FIN 46R requires that a
company that is the primary beneficiary of a variable interest entity
consolidate the assets, liabilities and results of operations of the
variable interest entity in the company's consolidated financial
statements. The adoption of FIN 46R did not have a material impact on the
Company's condensed consolidated financial statements.
N. LITIGATION. The Company is subject to lawsuits and pending or asserted
claims with respect to matters generally arising in the ordinary course of
business.
As the Company reported in previous filings, late in the second half of
2002, the Company and its subsidiary, Behr Process Corporation, agreed to
two Settlements (the National Settlement and the Washington State
Settlement) to resolve all class action lawsuits pending in the United
States involving certain exterior wood coating products formerly
manufactured by Behr.
The deadline for claims in the Washington State Settlement was January 17,
2004. In the first quarter of 2004, the Company paid out approximately $2
million for claims and received insurance reimbursements aggregating
approximately $1 million; the insurance reimbursements were recognized as
income. The Company estimated the average cost per claim received and, as
a result, estimated that the remaining unpaid claims and administration
costs related to the Washington State Settlement will approximate $30
million at March 31, 2004. Accordingly, the Company reduced the litigation
accrual (recognized income) by approximately $20 million in the first
quarter of 2004.
The remaining accrual for the National Settlement at March 31, 2004
related to claims and administrative costs is approximately $10 million.
The Company expects that the evaluation, processing and payment of claims
for both the Washington State Settlement and the National Settlement will
be completed by September 30, 2004.
STOCK PRICE GUARANTEES. Stock price guarantees as of March 31, 2004 are
summarized as follows, in millions except per share data:
SHARES ISSUED SETTLEMENT
- -------------- MINIMUM OPTIONS(A)
# OF ISSUE STOCK PRICE ------------- MATURITY
SHARES PRICE GUARANTEE SHARES CASH DATE
- ------------------------------------------------------------------
17 $25.21 $31.20 1 $ 21 7/31/04
1 $30.00 $40.00 -- 16 12/31/04-4/30/05
-- -- ----
18 1 $ 37
== == ====
(A) Amounts are calculated based on the ten-day average of the high and low
Company common stock prices ending March 31, 2004 of $29.92. Shares
contingently issuable under these agreements are included in the
calculation of diluted earnings per common share.
12
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONCLUDED)
Note N - concluded:
WARRANTY. The following is a reconciliation of the Company's warranty
liability, in millions:
2004
----
Balance at January 1 $ 90
Accruals for warranties issued during the quarter 9
Accruals related to pre-existing warranties 6
Settlements made (in cash or kind) during the quarter (7)
Discontinued operations (3)
Other, net (including foreign exchange impact) (4)
----
Balance at March 31 $ 91
====
13
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2004 VERSUS FIRST QUARTER 2003
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, 2004
------------------ VS.
2004 2003 2003
------ ------ ----
NET SALES:
Cabinets and Related Products $ 779 $ 658 18%
Plumbing Products 739 623 19%
Installation and Other
Services 630 542 16%
Decorative Architectural
Products 370 288 28%
Other Specialty Products 288 241 20%
------ ------
Total $2,806 $2,352 19%
====== ======
North America $2,271 $1,927 18%
International, principally Europe 535 425 26%
------ ------
Total $2,806 $2,352 19%
====== ======
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
---- ----
OPERATING PROFIT MARGINS: (A)
Cabinets and Related Products 14.0% 12.5%
Plumbing Products 13.0% 13.8%
Installation and Other
Services 12.9% 14.2%
Decorative Architectural
Products 17.3% 19.1%
Other Specialty Products 15.6% 15.4%
North America 14.5% 14.3%
International, principally Europe 12.3% 14.4%
Total 14.1% 14.3%
Operating profit margins, as
reported 13.8% 12.8%
(A) Before general corporate expense, net, of $36 million and income regarding
the litigation settlement related to the Decorative Architectural Products
segment of $21 million for the three months ended March 31, 2004. 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 income regarding the litigation
settlement related to the Decorative Architectural Products segment of $13
million for the three months ended March 31, 2003.
14
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reports its financial results in accordance with generally
accepted accounting principles ("GAAP") in the United States. However, the
Company believes 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 financial measures and ratios should be viewed in addition to,
and not as an alternative for, the Company's reported results.
NET SALES
Net sales for the three months ended March 31, 2004 increased 19 percent
from the comparable period in 2003.
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,
------------------------
2004 2003
--------- ---------
Net sales, as reported $ 2,806 $ 2,352
Acquisitions (16) ---
--------- ---------
Net sales, excluding acquisitions 2,790 2,352
Currency translation (73) ---
--------- ---------
Net sales, excluding acquisitions and the effect
of currency translation $ 2,717 $ 2,352
========= =========
Net sales of Cabinets and Related Products increased 18 percent in the
first quarter of 2004 compared with 2003, primarily due to increased sales
volume of assembled cabinets and a more favorable product mix. Results were
positively impacted by the continuing strength of new construction markets and
retail distribution channels.
Net sales of Plumbing Products increased 19 percent in the first quarter
of 2004 compared with 2003, primarily due to a more favorable product mix as
well as the favorable impact of a weaker U.S. dollar which increased
International net sales included in this segment.
Net sales of Installation and Other Services increased 16 percent in the
first quarter of 2004 compared with 2003, primarily due to increased sales of
non-insulation products in 2004 and as a result of increased new construction
and housing starts. Adverse weather conditions in the first quarter of 2003
negatively impacted 2003 results.
Net sales of Decorative Architectural Products increased 28 percent in the
first quarter of 2004 compared with 2003, primarily due to increased sales of
paints and stains and certain decorative hardware.
Net sales of Other Specialty Products increased 20 percent in the first
quarter of 2004 compared with 2003, primarily due to a change in product mix,
including increased sales of fiberglass doors and windows as well as increased
sales of vinyl windows. In addition, the favorable impact of a weaker U.S.
dollar increased International net sales included in this segment.
15
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales from North American and International operations for the first
quarter of 2004 increased 18 percent and 26 percent, respectively, compared
with the first quarter of 2003. In the first quarter of 2004, International
sales continued to be positively affected by a weaker U.S. dollar, principally
against the Euro, which increased International net sales by approximately 17
percent.
OPERATING MARGINS
The Company's gross profit margins were 30.3 percent for the first quarter
of 2004 compared with 30.1 percent for the comparable period in 2003. Gross
profit margins in the first quarter of 2004 were adversely impacted by
anticipated increases in certain operating expenses, including increased
material costs, which offset the positive impact of higher sales volume.
Selling, general and administrative expenses as a percentage of sales were 17.3
percent for the first quarter of 2004 and 17.9 percent for the comparable period
of the prior year. Selling, general and administrative expenses in the first
quarter of 2003 included $21 million of accelerated benefit expense relating to
the unexpected passing of the Company's President and Chief Operating Officer.
Selling, general and administrative expenses for the first quarter of 2004
include the effect of higher promotion costs as well as costs and expenses
associated with complying with the new requirements of the Sarbanes-Oxley
legislation. Operating income in the first quarters of 2004 and 2003 also
benefited from $21 million and $13 million, respectively, of income regarding
the Behr litigation settlement.
Operating profit margins for the Cabinets and Related Products segment for
the first quarter of 2004 were 14.0 percent compared with 12.5 percent in the
first quarter of 2003, and reflect the positive impact of higher sales volume
and a more favorable product mix.
Operating profit margins for the Plumbing Products segment were 13.0
percent in the first quarter of 2004 compared with 13.8 percent in the first
quarter of 2003, primarily due to relatively higher International sales with
lower margins, as well as increased material costs.
Operating profit margins for the Installation and Other Services segment
were 12.9 percent in the first quarter of 2004 compared with 14.2 percent in the
first quarter of 2003. The operating margin decline in this segment is primarily
attributable to increased sales of generally lower-margin non-insulation
products as well as increased material costs.
Within the Installation and Other Services segment, the availability of
fiberglass insulation to support the Company's installation and distribution
activities has become constrained in recent months. The high level of demand for
fiberglass insulation as a result of a strong new construction market has
outpaced the industry's capacity to produce additional product. The Company
believes that these conditions will persist over the remainder of 2004 and is
working with its diverse supplier base to secure as much material as possible.
At the current time, the Company does not believe that this material shortage
will have a significant impact on its operations.
Operating profit margins for the Decorative Architectural Products segment
were 17.3 percent for the first quarter of 2004 compared with 19.1 percent in
the first quarter of 2003. The positive impact of higher sales volume of paints
and stains was offset by increased material and display and advertising costs of
certain decorative hardware businesses.
Operating profit margins for the Other Specialty Products segment were
15.6 percent in the first quarter of 2004 compared with 15.4 percent in the
first quarter of 2003.
16
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's operating profit margins, after general corporate expense,
were 13.8 percent for the first quarter of 2004 compared with 12.8 percent for
the first quarter of 2003. Excluding the income regarding litigation settlement
of $21 million and $13 million in 2004 and 2003, respectively, and the
accelerated benefit expense of $21 million in 2003, operating profit margins
were 13.0 percent for the first quarter of 2004 compared with 13.1 percent for
the first quarter of 2003.
OTHER INCOME (EXPENSE), NET
Other, net for the first quarter of 2004 includes $16 million of net
realized gains from the sale of marketable securities, dividend income of $7
million and $13 million of income, net regarding other investments.
Other, net for the first quarter of 2003 includes $8 million of realized
gains from the sale of marketable securities, dividend income of $7 million and
$1 million of expense, net regarding other investments.
Interest expense for the first quarter of 2004 decreased $14 million to
$53 million compared with $67 million in the first quarter of 2003, primarily
due to debt repurchases as well as the effect of the interest rate swap
agreements that converted a certain amount of fixed rate debt to lower variable
rate debt.
INCOME AND EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS
Income and diluted earnings per common share from continuing operations
for the first quarter of 2004 were $241 million and $.52 per common share
compared with $158 million and $.30 per common share for the comparable period
of 2003. The Company's effective tax rate for the three months ended March 31,
2004 was 36.3 percent compared with 34.4 percent for the same period in 2003.
The Company estimates that its effective tax rate should approximate 36 percent
for 2004. The increase in the tax rate is principally due to a change in the mix
of foreign earnings to countries with higher tax rates and an increase in
domestic earnings (relative to total earnings), which are generally taxed at a
higher rate than earnings from the Company's foreign operations.
OTHER FINANCIAL INFORMATION
The Company's current ratio was 1.8 to 1 at both March 31, 2004 and
December 31, 2003.
For the three months ended March 31, 2004, cash of $98 million was
provided by operating activities. Cash used for financing activities was $149
million, including $76 million for cash dividends paid and $422 million for the
acquisition and retirement of Company common stock in open-market transactions.
Cash provided by financing activities included primarily $299 million for the
issuance of notes (net of issuance costs) and $55 million from interest rate
swap transactions. Cash used for investing activities was $85 million, including
$55 million for capital expenditures and $47 million for the net purchase of
marketable securities and other investments. Cash held by discontinued
operations was $32 million at March 31, 2004.
First quarter 2004 cash from operations was affected by an expected and
annually recurring first quarter increase in accounts receivable as compared
with December 31, 2003.
17
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is subject to lawsuits and claims pending or asserted with
respect to matters generally arising in the ordinary course of business. Note N
of the Condensed Consolidated Financial Statements discusses specific claims
against the Company and its subsidiary, Behr Process Corporation, with respect
to certain exterior wood coating products formerly manufactured by Behr.
In the first quarter of 2004, the Company issued $300 million of
three-year notes (floating rate based on LIBOR plus .25%); the Company also has
$261 million of debt due in early May 2004.
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.
OUTLOOK FOR THE COMPANY
The Company's favorable sales performance has continued early in the second
quarter with April sales up in the mid-teens. The Company also expects that
certain operating expenses for the year will continue to increase, particularly
for energy and certain material costs. Based on current business trends, the
Company continues to be optimistic and expects to achieve record sales and
earnings for the year 2004.
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.
18
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
March 31, 2004, the Company's disclosure controls and procedures
were effective and designed to ensure that information required to
be disclosed by the Company in the reports it files under the
Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange
Commission's rules and forms.
b. Changes in Internal Control Over Financial Reporting.
There has been no change in the Company's internal control over
financial reporting identified in connection with the evaluation
required by paragraph (d) of Exchange Rules 13a-15 or 15d-15 that
occurred during the Company's last fiscal quarter (the Company's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
19
MASCO CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding this item is set forth in Note N to the Company's
Condensed Consolidated Financial Statements included in Part I, Item 1 of this
Quarterly Report.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
SECURITIES
The following table provides information regarding the repurchase of
Company common stock for the three months ended March 31, 2004, in millions,
except average price paid per common share data:
Total Number of Maximum Number of
Average Shares Purchased Shares That May
Total Number Price Paid as Part of Yet Be Purchased
of Shares Per Common Publicly Announced Under the Plans
Period Purchased Share Plans or Programs or Programs
- -------- ------------ ---------- ------------------ -----------------
1/1/04-
1/31/04 5 $26.94 5 43
2/1/04-
2/29/04 5 $27.26 5 38
3/1/04-
3/31/04 5 $28.91 5 33
-- --
Total for the
quarter 15 $27.70 15 33
In December 2003, the Company's Board of Directors authorized the
repurchase of up to 50 million shares of the Company's common stock in
open-market transactions or otherwise.
ITEMS 3 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
31a- Certification by Chief Executive Officer required by
Rule 13a-14(a) or 15d-14(a) of the Securities and
Exchange Act of 1934
31b- Certification by Chief Financial Officer required by
Rule 13a-14(a) or 15d-14(a) of the Securities and
Exchange Act of 1934
32 - Certifications required by Rule 13a-14(b) or 15d-14(b)
of the Securities and Exchange Act of 1934 and Section
1350 of Chapter 63 of Title 18 of the United States Code
(b) REPORTS ON FORM 8-K:
Report on Form 8-K dated March 18, 2004, filing the Company's
press release which updated previous earnings guidance and
announced quarterly dividends.
20
MASCO CORPORATION
PART II. OTHER INFORMATION, CONCLUDED
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 5, 2004 BY: /s/ Timothy Wadhams
------------------------------------
Timothy Wadhams
Senior 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 31a Certification by Chief Executive Officer required by Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
Exhibit 31b Certification by Chief Financial Officer required by Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
Exhibit 32 Certifications required by Rule 13a-14(b) or 15d-14(b) of the
Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of
Title 18 of the United States Code