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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 June 30, 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 July 31, 2004
----- ---------------------
Common Stock, par value $1 per share 433,278,000
MASCO CORPORATION
INDEX
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
June 30, 2004 and December 31, 2003 1
Condensed Consolidated Statements of
Income for the Three Months and Six
Months Ended June 30, 2004 and 2003 2
Condensed Consolidated Statements of
Cash Flows for the Six Months Ended
June 30, 2004 and 2003 3
Notes to Condensed Consolidated
Financial Statements 4-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 16-21
Item 4. Controls and Procedures 22
Part II. Other Information 23-26
Item 1. Legal Proceedings
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities
Item 4. Submission of Matters to a Vote of Security
Holders
Item 6. Exhibits and Reports on Form 8-K
3
MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 2004 AND DECEMBER 31, 2003
(DOLLARS IN MILLIONS EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2004 2003
-------- ------------
ASSETS
Current assets:
Cash and cash investments $ 527 $ 795
Accounts and notes receivable, net 1,929 1,674
Prepaid expenses and other 277 316
Inventories:
Raw material 396 405
Work in process 146 142
Finished goods 592 472
------- -------
1,134 1,019
------- -------
Total current assets 3,867 3,804
Property and equipment, net 2,165 2,339
Goodwill 4,443 4,491
Other intangible assets, net 334 344
Assets held for sale 319 ---
Other assets 1,149 1,171
------- -------
Total assets $12,277 $12,149
======= =======
LIABILITIES
Current liabilities:
Notes payable $ 136 $ 334
Accounts payable 869 715
Accrued liabilities 1,045 1,050
------- -------
Total current liabilities 2,050 2,099
Long-term debt 4,297 3,848
Liabilities held for sale 98 ---
Deferred income taxes and other 812 746
------- -------
Total liabilities 7,257 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 - 434,460,000; 2003 - 458,380,000 434 458
Paid-in capital 818 1,443
Retained earnings 3,583 3,299
Accumulated other comprehensive income (loss) 381 421
Less: Restricted stock awards (196) (165)
------- -------
Total shareholders' equity 5,020 5,456
------- -------
Total liabilities and
shareholders' equity $12,277 $12,149
======= =======
See notes to condensed consolidated financial statements.
1
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2004 2003 2004 2003
------ ------ ------ ------
Net sales $3,061 $2,628 $5,867 $4,980
Cost of sales 2,087 1,821 4,042 3,465
------ ------ ------ ------
Gross profit 974 807 1,825 1,515
Selling, general and administrative expenses 504 433 989 853
(Income) regarding litigation settlement (7) --- (28) (13)
------ ------ ------ ------
Operating profit 477 374 864 675
------ ------ ------ ------
Other income (expense), net:
Interest expense (52) (67) (105) (134)
Other, net 41 34 93 47
------ ------ ------ ------
(11) (33) (12) (87)
------ ------ ------ ------
Income from continuing operations before
income taxes and minority interest 466 341 852 588
Income taxes 167 119 307 204
------ ------ ------ ------
Income from continuing operations
before minority interest 299 222 545 384
Minority interest 5 2 10 6
------ ------ ------ ------
Income from continuing operations 294 220 535 378
(Loss) income from discontinued operations,
after income taxes (33) 9 (106) 17
------ ------ ------ ------
Net income $ 261 $ 229 $ 429 $ 395
====== ====== ====== ======
Earnings per common share:
Basic:
Income from continuing operations $ .66 $ .46 $1.19 $ .78
(Loss) income from discontinued
operations, after income taxes (.08) .02 (.24) .04
----- ----- ----- -----
Net income $ .59 $ .48 $ .95 $ .81
===== ===== ===== =====
Diluted:
Income from continuing operations $ .65 $ .44 $1.16 $ .75
(Loss) income from discontinued
operations, after income taxes (.07) .02 (.23) .03
----- ----- ----- -----
Net income $ .58 $ .46 $ .93 $ .79
===== ===== ===== =====
Cash dividends declared and paid per
common share $ .16 $ .14 $ .32 $ .28
===== ===== ===== =====
See notes to condensed consolidated financial statements.
2
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(DOLLARS IN MILLIONS)
SIX MONTHS ENDED
JUNE 30,
----------------
2004 2003
------ ------
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $ 715 $ 516
(Increase) in receivables (348) (181)
(Increase) in inventories (174) (75)
Increase in accounts payable and accrued
liabilities, net 291 219
------ ------
Total cash from operating activities 484 479
------ ------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Issuance of notes, net of issuance costs 299 ---
Increase in debt 120 10
Payment of debt (20) (53)
Issuance of Company common stock 22 7
Retirement of notes (266) ---
Proceeds from settlement of swaps 55 ---
Purchase of Company common stock for:
Retirement (679) (411)
Long-term stock incentive award plan (40) (48)
Cash dividends paid (149) (140)
------ ------
Total cash (for) financing activities (658) (635)
------ ------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures (124) (139)
Purchases of marketable securities (242) (137)
Proceeds (purchases) of other investments, net 22 (10)
Proceeds from disposition of:
Marketable securities 300 287
Equity investment --- 75
Acquisition of companies, net of cash acquired (13) (199)
Other, net 18 (31)
------ ------
Total cash (for) investing activities (39) (154)
------ ------
Effect of foreign exchange rates on cash and
cash investments (10) 29
------ ------
CASH AND CASH INVESTMENTS:
(Decrease) for the period (223) (281)
Cash at businesses held for sale (45) ---
At January 1 795 1,067
------ ------
At June 30 $ 527 $ 786
====== ======
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
June 30, 2004 and the results of operations for the three months and six
months ended June 30, 2004 and 2003 and changes in cash flows for the six
months ended June 30, 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 June 30, 2004, the assets and
liabilities of the businesses held for sale have been reclassified and
separately stated. The assets and liabilities of the businesses held for
sale have not been reclassified in the related accompanying condensed
consolidated balance sheet as at December 31, 2003. In the Company's
condensed consolidated statements of cash flows for the six months ended
June 30, 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 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 six months of 2004, 517,000 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 stock options, in millions except per common share data:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income, as reported $261 $229 $429 $395
Add:
Stock-based employee
compensation expense
included in reported
net income, net of tax 10 7 20 22
Deduct:
Stock-based employee
compensation expense,
net of tax (10) (7) (20) (22)
Stock-based employee
compensation expense
determined under
the fair value method
for stock options
granted prior to
2003, net of tax (3) (3) (6) (7)
---- ---- ---- ----
Pro forma net income $258 $226 $423 $388
==== ==== ==== ====
Earnings per common share:
Basic as reported $.59 $.48 $.95 $.81
Basic pro forma $.58 $.47 $.94 $.80
Diluted as reported $.58 $.46 $.93 $.79
Diluted pro forma $.57 $.45 $.92 $.77
5
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
B. In the first quarter of 2004, the Company determined that several European
businesses were not core to the Company's long-term growth strategy and,
accordingly, embarked on a plan to sell such businesses. The dispositions
are expected to be completed by March 31, 2005. In the first quarter of
2004, the Company recognized a pre-tax charge of $64 million for those
businesses that are expected to be divested at a loss. In the second
quarter of 2004, the Company recognized an additional pre-tax charge of
$44 million principally related to certain businesses that are expected to
be disposed of at a loss that are located in Spain. The Company has
reduced its estimate of expected proceeds for those operations as a result
of lower-than-expected operating results. Any gains resulting from the
disposition of individual businesses, which are expected later this year,
will be recognized as such transactions are completed, and the Company
continues to expect that the gains will substantially offset the charges
recognized in the first half of 2004. The Company continues to expect net
proceeds to exceed $300 million. 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.
Selected financial information for discontinued operations is as follows
for the three months and six months ended June 30, 2004 and 2003, in
millions:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2004 2003 2004 2003
----- ----- ----- -----
Net sales $ 108 $ 159 $ 203 $ 306
===== ===== ===== =====
Income before income taxes $ 12 $ 14 $ 18 $ 27
Impairment of assets held
for sale (44) -- (108) --
Income taxes (1) (5) (16) (10)
----- ----- ----- -----
(Loss) income from
discontinued operations,
after income taxes $ (33) $ 9 $(106) $ 17
===== ===== ===== =====
The after-tax charge for the impairment of assets held for sale is $44
million or $.10 per common share and $120 million (including $12 million
of expensed deferred tax assets) or $.26 per common share for the three
months and six months ended June 30, 2004, respectively. 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 six months of 2004, the
Company also recorded approximately $6 million ($4 million in the second
quarter of 2004) of severance and termination benefit expenses related to
the discontinued operations, included in income before income taxes in the
above table. The Company expects such costs to approximate $10 million in
aggregate, the balance of which are expected to be recognized over the
next nine months.
The impairment of assets held for sale primarily includes the write-down
of goodwill of $61 million and fixed assets of $32 million for the six
months ended June 30, 2004.
6
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note B - concluded:
Total assets and liabilities held for sale consist primarily of the
following at June 30, 2004 (after the impairment charges recorded in the
first half of 2004), in millions:
Accounts receivable $ 83
Inventories 53
Property and equipment, net 127
Goodwill 5
Other assets 51
----
Total assets $319
====
Accounts payable $ 45
Accrued salaries, wages and
related benefits 40
Other accrued expenses 13
----
Total liabilities $ 98
====
The discontinued operations were previously included in each of the
Company's segments, except the Installation and Other Services segment.
C. The changes in the carrying amount of goodwill for the six-month period
ended June 30, 2004, by segment, are as follows, in millions:
BALANCE HELD FOR BALANCE
DEC. 31, 2003 ADDITIONS(A) SALE (B) OTHER(C) JUNE 30, 2004
------------- ------------ -------- -------- -------------
Cabinets and Related
Products $ 708 $ -- $ (63) $ (6) $ 639
Plumbing Products 498 -- -- 3 501
Installation and Other
Services 1,701 7 -- -- 1,708
Decorative Architectural
Products 398 -- -- 3 401
Other Specialty Products 1,186 7 (3) 4 1,194
------ ----- ----- ---- ------
Total $4,491 $ 14 $ (66) $ 4 $4,443
====== ===== ===== ==== ======
(A) Additions include several relatively small acquisitions in the
Installation and Other Services segment and contingent consideration
for a prior acquisition in the Other Specialty Products segment.
(B) During the first six months of 2004, the Company reclassified the
goodwill related to businesses held for sale. The Company also
recognized charges for those businesses expected to be divested at a
loss; the charge included a write-down of goodwill of $61 million.
(C) 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 June 30, 2004. The carrying value of the Company's
definite-lived intangible assets is $79 million at June 30, 2004 (net of
accumulated amortization of $55 million) and principally includes customer
relationships and non-compete agreements. Amortization expense for
definite-lived intangible assets was $5 million and $10 million for the
three months and six months ended June 30, 2004, respectively.
D. Depreciation and amortization expense is $118 million and $105 million for
the six months ended June 30, 2004 and 2003, respectively.
7
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 assets are the following financial investments, in millions:
JUNE 30, DECEMBER 31,
2004 2003
-------- ------------
Marketable equity securities $366 $392
Bond funds 98 125
Private equity funds 325 332
Metaldyne Corporation 80 76
TriMas Corporation 25 25
Other investments 9 9
---- ----
Total $903 $959
==== ====
The Company's investments in marketable equity securities and bond funds
at June 30, 2004 and December 31, 2003 are as follows, in millions:
PRE-TAX
---------------------
UNREALIZED UNREALIZED RECORDED
COST BASIS GAINS LOSSES BASIS
---------- ---------- --------- -------
JUNE 30, 2004
Marketable equity securities $356 $ 33 $(23) $366
Bond funds $ 91 $ 7 $ -- $ 98
DECEMBER 31, 2003
Marketable equity securities $361 $ 35 $ (4) $392
Bond funds $115 $ 10 $ -- $125
The following table summarizes the gross unrealized losses and fair value
of the Company's investments in temporarily-impaired marketable equity
securities, aggregated by investment category and length of time that such
securities have been in a continuous unrealized loss position at June 30,
2004, in millions:
12 MONTHS OR LESS
-------------------
UNREALIZED
FAIR VALUE (LOSS)
---------- ----------
Marketable equity securities $153 $(23)
---- ----
Total temporarily-impaired securities $153 $(23)
==== ====
8
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note E - concluded:
The Company has investments in over 100 different marketable equity
securities and bond funds at June 30, 2004. The Company reviews industry
analyst reports, key ratios and statistics, market analyses and other
factors for each investment to determine if an unrealized loss is other
than temporary. The unrealized loss at June 30, 2004 is primarily related
to one marketable equity security, Furniture Brands International common
stock, which was received in June 2002 from the Company's investment in
Furnishings International Inc. debt. This security was in an unrealized
gain position at the end of the first quarter of 2004. Based on its
review, the Company considers the unrealized loss related to this
investment 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Realized gains from
marketable securities $ 16 $ 19 $ 35 $ 27
Realized losses from
marketable securities (7) (10) (10) (10)
Dividend income from
marketable securities 4 4 9 9
Income from other
investments, net 5 4 18 3
Dividend income from
other investments 3 2 5 4
---- ---- ---- ----
Income from financial
investments, net $ 21 $ 19 $ 57 $ 33
==== ==== ==== ====
F. The Company's total comprehensive income is as follows, in millions:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income $261 $229 $429 $395
Other comprehensive income
(loss):
Cumulative translation
adjustments 3 137 (25) 176
Unrealized (loss) gain on
marketable securities, net (24) 39 (15) 22
---- ---- ---- ----
Total comprehensive income $240 $405 $389 $593
==== ==== ==== ====
The unrealized (loss) gain on marketable securities is net of income tax
(credits) of $(15) million and $(9) million for the three months and six
months ended June 30, 2004, respectively, and $23 million and $13 million
for the three months and six months ended June 30, 2003, respectively.
9
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:
JUNE 30, DECEMBER 31,
2004 2003
-------- ------------
Unrealized gain on marketable securities, net $ 11 $ 26
Minimum pension liability (61) (61)
Cumulative translation adjustments 431 456
---- ----
Accumulated other comprehensive income (loss) $381 $421
==== ====
Unrealized gain on marketable securities is reported net of income tax of
$6 million and $15 million at June 30, 2004 and December 31, 2003,
respectively.
The minimum pension liability is reported net of income tax credit of $35
million at both June 30, 2004 and December 31, 2003.
G. The Company owns 64 percent of Hansgrohe AG. The minority interest of $77
million and $70 million at June 30, 2004 and December 31, 2003,
respectively, is recorded in the caption deferred income taxes and other
liabilities on the Company's condensed consolidated balance sheets.
H. In the first half of 2004, the Company retired the remaining $266 million
of 6% notes due May 2004.
At June 30, 2004, the Company has borrowed $124 million under the
Revolving Credit Agreement.
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 variable-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 June 30, 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%. The interest rate swaps
are considered 100 percent effective; therefore, the market valuation of
$59 million at June 30, 2004 is recorded in other assets with a
corresponding increase to long-term debt in the Company's condensed
consolidated balance sheet at June 30, 2004.
10
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Service cost $ 3 $ 3 $ 6 $ 7
Interest cost 9 9 16 19
Expected return on plan assets (7) (7) (13) (15)
Amortization of net loss 1 3 3 4
---- ---- ---- ----
Net periodic pension cost $ 6 $ 8 $ 12 $ 15
==== ==== ==== ====
Net periodic pension cost for the Company's non-qualified unfunded
supplemental pension plans was $5 million and $9 million for the three
months and six months ended June 30, 2004, respectively, and $2 million
and $5 million for the three months and six months ended June 30, 2003,
respectively.
In the first six months of 2004, the Company contributed $60 million
to its domestic qualified defined-benefit pension plans.
11
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
J. The following table presents information about the Company by segment and
geographic area, in millions:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------ ------------------------------------
2004 2003 2004 2003 2004 2003 2004 2003
------------------------------------ ------------------------------------
NET SALES (A) OPERATING PROFIT NET SALES (A) OPERATING PROFIT
------------------------------------ ------------------------------------
The Company's operations by
segment were (B):
Cabinets and Related Products $ 797 $ 695 $ 137 $ 110 $1,576 $1,353 $ 246 $ 192
Plumbing Products 785 675 117 95 1,524 1,298 213 181
Installation and Other Services 686 585 88 88 1,316 1,127 169 165
Decorative Architectural Products 451 393 101 55 821 681 165 110
Other Specialty Products 342 280 71 50 630 521 116 87
------ ------ ------ ------ ------ ------ ------ ------
Total $3,061 $2,628 $ 514 $ 398 $5,867 $4,980 $ 909 $ 735
====== ====== ====== ====== ====== ====== ====== ======
The Company's operations by
geographic area were:
North America $2,531 $2,198 $ 442 $ 373 $4,802 $4,125 $ 771 $ 649
International, principally Europe 530 430 72 25 1,065 855 138 86
------ ------ ------ ------ ------ ------ ------ ------
Total $3,061 $2,628 514 398 $5,867 $4,980 909 735
====== ====== ====== ======
General corporate expense, net (45) (29) (81) (57)
Gain on sale of corporate fixed assets 1 -- 8 --
Income regarding litigation
settlement (C) 7 -- 28 13
Income (expense) related to
accelerated benefits (D) -- 5 -- (16)
------ ------ ------ ------
Operating profit 477 374 864 675
Other income (expense), net (11) (33) (12) (87)
------ ------ ------ ------
Income from continuing operations
before income taxes and minority
interest $ 466 $ 341 $ 852 $ 588
====== ====== ====== ======
(A) Intra-segment sales were not material.
(B) In accordance with SFAS No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets," the Company has accounted for the 2004 planned
disposition of certain European businesses as discontinued operations.
Accordingly, the assets and liabilities of those operations have been
reclassified from the segments above. The reclassified assets are as
follows: Cabinets and Related Products - $242 million; Plumbing Products -
$16 million; Decorative Architectural Products - $35 million; and Other
Specialty Products - $107 million.
(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.
(D) 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, with an adjustment in the second quarter of 2003.
12
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Income from cash and
cash investments $ 1 $ 2 $ 3 $ 4
Other interest income 1 1 3 3
Income from financial
investments, net (Note E) 21 19 57 33
Gain from sale of equity
investment -- 5 -- 5
Other items, net 18 7 30 2
---- ---- ---- ----
$ 41 $ 34 $ 93 $ 47
==== ==== ==== ====
Other items, net for the three months and six months ended June 30, 2004
include $6 million and $12 million, respectively, of currency transaction
gains. Other items, net for the three months and six months ended June 30,
2004 also include a $5 million gain from the sale of non-operating assets.
In the second quarter of 2003, the Company completed the sale of its 42
percent equity investment in Emco Limited for cash proceeds of
approximately $75 million. The sale resulted in a pre-tax gain of $5
million.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Numerator (basic and diluted):
Income from continuing
operations $ 294 $ 220 $ 535 $ 378
(Loss) income from
discontinued operations,
after tax (33) 9 (106) 17
----- ----- ----- -----
Net income as reported $ 261 $ 229 $ 429 $ 395
===== ===== ===== =====
Denominator:
Basic common shares (based
on weighted average) 443 482 450 487
Add:
Contingent common shares 6 15 6 15
Stock option dilution 4 2 4 1
----- ----- ----- -----
Diluted common shares 453 499 460 503
===== ===== ===== =====
Income per common share amounts for the first two quarters of 2004 and
2003 do not total to the per common share amounts for the six months ended
June 30, 2004 and 2003 due to the timing of stock repurchases and the
effect of contingently issuable shares.
For both the three months and six months ended June 30, 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 June 30, 2004 and 2003, they
were not convertible according to their terms.
13
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note L - concluded:
Additionally, 1.9 million and 2.9 million common shares for the three
months and six months ended June 30, 2004, respectively, and 4.1 million
and 7.7 million common shares for the three months and six months ended
June 30, 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 was greater than the
Company's average common stock price for these periods.
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 following is a reconciliation of the Company's Behr Process Settlement
liability, in millions:
2004
------------------------------
WASHINGTON STATE NATIONAL
SETTLEMENT SETTLEMENT
---------------- ----------
Balance at January 1 $ 53 $ 10
Payments on claims (8) --
Insurance proceeds (7) (1)
Adjustment of accrual (20) --
---- ----
Balance at June 30 $ 18 $ 9
==== ====
The deadlines for filing claims were September 2, 2003 for the National
Settlement and January 17, 2004 for the Washington State Settlement.
In the first quarter of 2004, the Company estimated the average cost per
claim received related to the Washington State Settlement, and, as a
result, estimated that the remaining unpaid claims and administration
costs would be approximately $20 million less than originally estimated.
Accordingly, the Company reduced the litigation accrual (recognizing
income) by $20 million in the first quarter of 2004.
Proceeds from insurance carriers are recognized as income when Behr and
its carriers agree on such amounts. 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 March 31,
2005.
14
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONCLUDED)
Note N - concluded:
STOCK PRICE GUARANTEES. Stock price guarantees as of June 30, 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
- --------------------------------------------------------------------
16 $25.21 $31.20 1 $ 12 7/31/04
1 $30.00 $40.00 -- 16 12/31/04-4/30/05
-- -- ----
17 1 $ 28
== == ====
(A) Amounts are calculated based on the ten-day average of the high and low
Company common stock prices ending June 30, 2004 of $30.42. Shares
contingently issuable under these agreements are included in the
calculation of diluted earnings per common share.
In early August 2004, the Company recorded the issuance of
approximately 160,000 shares of Company common stock related to the stock
price guarantee, which matured on July 31, 2004.
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 period 28
Accruals related to pre-existing warranties 6
Settlements made (in cash or kind) during the period (18)
Discontinued operations (3)
Other, net (including foreign exchange impact) (6)
----
Balance at June 30 $ 97
====
SHAREHOLDERS' EQUITY. In 2000, participants in the Executive Stock Purchase
Program ("Program") financed their purchases of Company common stock with
five-year full recourse personal loans, at a market interest rate, from a bank
syndicate. The Company has guaranteed repayment of the loans, for which the
aggregate amount outstanding was $88 million at June 30, 2004 and $160 million
at December 31, 2003, in the event of a default by a participant in the Program.
15
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER 2004 AND THE FIRST SIX MONTHS 2004 VERSUS
SECOND QUARTER 2003 AND THE FIRST SIX MONTHS 2003
SALES AND OPERATING PROFIT MARGINS
The following table sets forth the Company's net sales and operating
profit margins by segment and geographic area, dollars in millions:
THREE MONTHS ENDED
JUNE 30, PERCENT INCREASE
------------------ ----------------
2004 2003 2004 VS. 2003
------------------ ----------------
NET SALES:
Cabinets and Related Products $ 797 $ 695 15%
Plumbing Products 785 675 16%
Installation and Other Services 686 585 17%
Decorative Architectural Products 451 393 15%
Other Specialty Products 342 280 22%
------ ------
Total $3,061 $2,628 16%
====== ======
North America $2,531 $2,198 15%
International, principally Europe 530 430 23%
------ ------
Total $3,061 $2,628 16%
====== ======
SIX MONTHS ENDED
JUNE 30,
------------------
2004 2003
------------------
NET SALES:
Cabinets and Related Products $1,576 $1,353 16%
Plumbing Products 1,524 1,298 17%
Installation and Other Services 1,316 1,127 17%
Decorative Architectural Products 821 681 21%
Other Specialty Products 630 521 21%
------ ------
Total $5,867 $4,980 18%
====== ======
North America $4,802 $4,125 16%
International, principally Europe 1,065 855 25%
------ ------
Total $5,867 $4,980 18%
====== ======
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2004 2003 2004 2003
------------------ ------------------
OPERATING PROFIT MARGIN: (A)
Cabinets and Related Products 17.2% 15.8% 15.6% 14.2%
Plumbing Products 14.9% 14.1% 14.0% 13.9%
Installation and Other Services 12.8% 15.0% 12.8% 14.6%
Decorative Architectural Products 22.4% 14.0% 20.1% 16.2%
Other Specialty Products 20.8% 17.9% 18.4% 16.7%
North America 17.5% 17.0% 16.1% 15.7%
International, principally Europe 13.6% 5.8% 13.0% 10.1%
Total 16.8% 15.1% 15.5% 14.8%
TOTAL OPERATING PROFIT MARGIN,
AS REPORTED 15.6% 14.2% 14.7% 13.6%
(A) Before general corporate expense of $45 million and $81 million for the
three-month and six-month periods ended June 30, 2004, respectively, and
before income regarding the litigation settlement related to the
Decorative Architectural Products segment of $7 million and $28 million
for the three-month and six-month periods ended June 30, 2004,
respectively. Before general corporate expense of $29 million and $57
million for the three-month and six-month periods ended June 30, 2003,
respectively. Before accelerated benefit (income) expense related to the
unexpected passing of the Company's President and Chief Operating Officer
of $(5) million and $16 million for the three-month and six-month periods
ended June 30, 2003, respectively, and before insurance income regarding
the litigation settlement related to the Decorative Architectural Products
segment of $13 million for the six-month period ended June 30, 2003.
16
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 increased 16 percent and 18 percent, respectively, for the
three-month and six-month periods ended June 30, 2004 from the comparable
periods in 2003. The following table reconciles reported net sales to net sales,
excluding acquisitions and divestitures, in millions:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2004 2003 2004 2003
------ ------ ------ ------
Net sales, as reported $3,061 $2,628 $5,867 $4,980
Acquisitions (12) --- (28) ---
------ ------ ------ ------
Net sales, excluding
acquisitions 3,049 2,628 5,839 4,980
Currency translation (38) --- (111) ---
------ ------ ------ ------
Net sales, excluding
acquisitions and the
effect of currency
translation $3,011 $2,628 $5,728 $4,980
====== ====== ====== ======
Net sales of Cabinets and Related Products increased 15 percent and 16
percent, respectively, in the three-month and six-month periods ended June 30,
2004 compared with the same periods in 2003, primarily due to increased sales
volume of assembled cabinets largely through North American retail distribution
channels at major home centers and through the new construction market in the
United States, as well as a more favorable product mix.
Net sales of Plumbing Products increased 16 percent and 17 percent,
respectively, in the three-month and six-month periods ended June 30, 2004
compared with the same periods in 2003, primarily due to increased sales volume
in the retail markets in North America and Europe and in the new construction
markets in North America. In addition, the favorable impact of a weaker U.S.
dollar increased International sales included in this segment in 2004 compared
with 2003.
Net sales of Installation and Other Services increased 17 percent in both
the three-month and six-month periods ended June 30, 2004 compared with the same
periods in 2003, primarily due to increased sales volume of non-insulation
products, increased selling prices for insulation products and continued
increases in new residential construction and housing starts. Net sales in this
segment in the first half of 2003 were negatively affected by adverse weather
conditions in certain markets.
Net sales of Decorative Architectural Products increased 15 percent and 21
percent, respectively, in the three-month and six-month periods ended June 30,
2004 compared with the same periods of 2003, primarily due to increased sales
volume of paints and stains as well as increased sales of decorative hardware.
17
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales of Other Specialty Products increased 22 percent and 21 percent,
respectively, in the three-month and six-month periods ended June 30, 2004
compared with the same periods of 2003, primarily due to increased sales of
vinyl and fiberglass windows and doors in North America. In addition, the
favorable impact of a weaker U.S. dollar increased International sales included
in this segment in 2004 compared with 2003.
Net sales from North American operations for the three-month and six-month
periods ended June 30, 2004 increased 15 percent and 16 percent, respectively,
compared with the same periods of 2003, primarily due to the reasons discussed
above. Net sales from International operations for the three-month and six-month
periods ended June 30, 2004 increased 23 percent and 25 percent, respectively,
compared with the same periods of 2003, primarily due to increased sales of
cabinets and plumbing products, as well as a weaker U.S. dollar, principally
against the Euro, which increased International sales by approximately nine
percent and 13 percent for the three-month and six-month periods ended June 30,
2004.
OPERATING MARGINS
The Company's gross profit margins increased to 31.8 percent and 31.1
percent, respectively, for the three-month and six-month periods ended June 30,
2004 from 30.7 percent and 30.4 percent, respectively, for the comparable
periods in 2003. The increase in gross profit margins reflects increased sales
volume, offset in part by increased sales in segments which have somewhat lower
margins as well as increased material costs. In addition, operating results for
2003 were reduced by a $23 million non-cash, pre-tax charge related to a
European business unit in the Decorative Architectural Products segment. The
charge resulted from a business system implementation failure which allowed
former management of the business to circumvent internal controls and
artificially inflate the unit's operating profit in years prior to 2003.
Selling, general and administrative expenses as a percentage of sales were
16.5 percent and 16.9 percent, respectively, for the three-month and six-month
periods ended June 30, 2004 and 16.5 percent and 17.1 percent, respectively, for
the comparable periods of the prior year. Selling, general and administrative
expenses in 2004 have been negatively impacted by costs and expenses associated
with complying with the new requirements of the Sarbanes-Oxley legislation.
Selling, general and administrative expenses in the three-month and six-month
periods ended June 30, 2003 include $(5) million and $16 million, respectively,
of accelerated benefit (income) expense related to the unexpected passing of the
Company's President and Chief Operating Officer.
Operating profit for the three-month and six-month periods ended June 30,
2004 includes $7 million and $28 million of income regarding the Behr litigation
settlement. Operating profit in the six-month period ended June 30, 2003 also
benefited from $13 million of Behr litigation income.
Operating profit margins for the Cabinets and Related Products segment for
the three-month and six-month periods ended June 30, 2004 were 17.2 percent and
15.6 percent, respectively, compared with 15.8 percent and 14.2 percent for the
same periods in 2003, and reflect the positive impact of higher sales volume and
a more favorable product mix offset in part by increased material costs related
to wood and particleboard products.
Operating profit margins for the Plumbing Products segment were 14.9
percent and 14.0 percent, respectively, for the three-month and six-month
periods ended June 30, 2004 compared with 14.1 percent and 13.9 percent for the
same periods of 2003, primarily due to increased sales volume as well as a more
favorable product mix.
18
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating profit margins for the Installation and Other Services segment
were 12.8 percent for both the three-month and six-month periods ended June 30,
2004 compared with 15.0 percent and 14.6 percent for the same periods of 2003.
The operating profit margin decline in this segment is primarily attributable to
increased material costs as well as an increase in sales of generally
lower-margin non-insulation products. Historically, the Company has generally
been able to increase its selling prices to reflect certain material cost
increases. Typically, the benefits of such selling price increases are reflected
in subsequent periods as there is a time lag resulting from existing contractual
obligations.
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 the 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 22.4 percent and 20.1 percent, respectively, for the three-month and
six-month periods ended June 30, 2004 compared with 14.0 percent and 16.2
percent for the same periods of 2003. The margin improvement includes the effect
of increased sales volume of paints and stains and decorative hardware offset in
part by increased material and promotion costs. As previously discussed,
operating profit in this segment for the second quarter of 2003 was also
negatively affected by a non-cash, pre-tax charge of $23 million related to a
European business unit. The charge resulted from a business system
implementation failure which allowed former management of the business to
circumvent internal controls and artificially inflate the unit's operating
profit in years prior to 2003.
Operating profit margins for the Other Specialty Products segment were
20.8 percent and 18.4 percent, respectively, for the three-month and six-month
periods ended June 30, 2004 compared with 17.9 percent and 16.7 percent for the
same periods of 2003. The margin improvement is primarily attributable to
increased sales of vinyl and fiberglass windows and doors.
The Company's operating profit margins, as reported, were 15.6 percent and
14.7 percent, respectively, for the three-month and six-month periods ended June
30, 2004 compared with 14.2 percent and 13.6 percent for the same periods of
2003. The Company's operating profit margins, excluding the Behr litigation
income of $7 million and $28 million for the three-month and six-month periods
ended June 30, 2004, respectively, and $13 million for the six-month period
ended June 30, 2003 and the accelerated benefit (income) expense of $(5) million
and $16 million for the three-month and six-month periods ended June 30, 2003,
respectively, were 15.4 percent and 14.2 percent for the three-month and
six-month periods ended June 30, 2004, respectively, and 14.0 percent and 13.6
percent for the three-month and six-month periods ended June 30, 2003. The
Company's operating profit margins increased for the three-month and six-month
periods ended June 30, 2004 compared with the same periods of 2003, principally
due to the reasons discussed above.
19
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER INCOME (EXPENSE), NET
Other, net, for the three-month and six-month periods ended June 30, 2004
includes $9 million and $25 million, respectively, of realized gains, net, from
the sale of marketable securities, dividend income of $7 million and $14
million, respectively, and $5 million and $18 million, respectively, of income,
net, regarding other investments. Other items, net for the three months and six
months ended June 30, 2004 include $6 million and $12 million, respectively, of
currency transaction gains. Other items, net for the three months and six months
ended June 30, 2004 also include a $5 million gain from the sale of
non-operating assets.
Other, net, for the three-month and six-month periods ended June 30, 2003
includes $9 million and $17 million, respectively, of realized gains, net, from
the sale of marketable securities, dividend income of $6 million and $13
million, respectively, and $4 million and $3 million, respectively, of income,
net, regarding other investments. Other, net, for the three-month and six-month
periods ended June 30, 2003 also includes $5 million of gain from the sale of
the Company's equity investment in Emco Limited.
Interest expense for the three-month and six-month periods ended June 30,
2004 decreased $15 million and $29 million, respectively, to $52 million and
$105 million, compared with interest expense of $67 million and $134 million,
respectively, for the same periods 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 from continuing operations for the three-month and six-month
periods ended June 30, 2004 was $294 million and $535 million, respectively,
compared with $220 million and $378 million, respectively, for the comparable
periods of 2003. Diluted earnings per common share from continuing operations
for the three-month and six-month periods ended June 30, 2004 were $.65 and
$1.16 per common share, respectively, compared with $.44 and $.75 per common
share, respectively, for the comparable periods of 2003. The Company's effective
tax rate was 35.8 percent and 36.0 percent, respectively, for the three-month
and six-month periods ended June 30, 2004, compared with 34.9 percent and 34.7
percent, respectively, for the same periods 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 in
countries with higher tax rates.
OTHER FINANCIAL INFORMATION
The Company's current ratio was 1.9 to 1 at June 30, 2004 compared with
1.8 to 1 at December 31, 2003.
20
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the six months ended June 30, 2004, cash of $484 million was provided
by operating activities. Cash used for financing activities was $658 million,
including $266 million for the retirement of notes, $149 million for cash
dividends paid, $679 million for the acquisition and retirement of Company
common stock in open-market transactions and $40 million for the acquisition of
Company common stock for the Company's long-term stock incentive award plan.
Cash provided by financing activities included $299 million from the issuance of
notes (net of issuance costs), $100 million from a net increase in bank debt,
$55 million from interest rate swap transactions and $22 million from the
issuance of Company common stock for the exercise of stock options. Cash used
for investing activities was $39 million and primarily included $124 million for
capital expenditures. Cash provided by investing activities primarily included
$80 million from the net sales of marketable securities and other investments.
Cash at businesses held for sale was $45 million at June 30, 2004.
In the first half of 2004, the Company retired the remaining $266 million
of 6% notes due May 2004. At June 30, 2004, the Company has borrowed $124
million under the Revolving Credit Agreement.
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
to the Condensed Consolidated Financial Statements discusses specific claims
pending against the Company and its subsidiary, Behr Process Corporation, with
respect to certain 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.
OUTLOOK FOR THE COMPANY
The Company continues to experience better than expected sales performance
as sales of assembled cabinets, paints and stains, installation services, vinyl
windows and plumbing products have remained strong thus far in 2004. The
Company also expects that certain operating expenses for the year will continue
to increase, particularly for certain material, freight, energy and insurance
costs, as well as costs associated with complying with the new requirements of
the Sarbanes-Oxley legislation. Based on current business trends and the record
sales and earnings achieved in the first half of 2004, the Company continues
to be optimistic and expects to achieve record sales and earnings for the
full-year of 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.
21
MASCO CORPORATION
ITEM 4. CONTROLS AND PROCEDURES
a. Evaluation of Disclosure Controls and Procedures.
The Company's principal executive officer and principal financial officer
have concluded, based on an evaluation of the Company's "disclosure
controls and procedures" (as defined in the Securities Exchange Act of
1934 Rules 13a-15(e) or 15d-15(e)) as required by paragraph (b) of
Exchange Act Rules 13a-15 or 15d-15, that, as of June 30, 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.
22
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
Report.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The following table provides information regarding the repurchase of
Company common stock for the six months ended June 30, 2004, in millions except
average price paid per common share data:
TOTAL NUMBER OF MAXIMUM NUMBER OF
SHARES PURCHASED SHARES THAT MAY
TOTAL NUMBER AVERAGE PRICE AS PART OF YET BE PURCHASED
OF SHARES PAID PER PUBLICLY ANNOUNCED UNDER THE PLANS
PERIOD PURCHASED(A) COMMON 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
4/1/04-
4/30/04 7 $29.00 5 28
5/1/04-
5/31/04 3 $27.97 3 25
6/1/04-
6/30/04 1 $29.82 1 24
-- --
Total for
the year 26 $28.16 24
(A) Includes 2 million shares (i) acquired on the open market for the
incentive stock award plans, (ii) surrendered for the exercise of stock
options or (iii) withheld for the payment of taxes upon vesting of stock
awards.
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 AND 5 ARE NOT APPLICABLE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 11, 2004 at which the
stockholders voted upon (1) the election of three nominees for Class I Directors
and two nominees for Class II Directors, (2) approval of the 2004 Restricted
Stock Award Program in order to qualify grants of restricted stock under Section
162(m) of the Internal Revenue Code and (3) ratification of the selection of
PricewaterhouseCoopers LLP as independent auditors for the Company for 2004. The
following is a tabulation of the votes.
23
MASCO CORPORATION
PART II. OTHER INFORMATION - CONTINUED
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONCLUDED)
ELECTION OF CLASS I DIRECTORS:
For Withheld
--- --------
Peter A. Dow 380,613,857 6,560,741
Anthony F. Earley, Jr. 380,309,304 6,865,294
Wayne B. Lyon 385,172,069 2,002,529
ELECTION OF CLASS II DIRECTORS:
For Withheld
--- --------
David L. Johnston 385,656,721 1,517,877
J. Michael Losh 378,567,857 8,606,741
APPROVAL OF THE 2004 RESTRICTED STOCK AWARD PROGRAM IN ORDER TO QUALIFY GRANTS
OF RESTRICTED STOCK UNDER SECTION 162(M) OF THE INTERNAL REVENUE CODE:
Abstentions and
For Against Broker Non-Votes
--- ------- ----------------
351,805,991 34,749,412 619,195
APPROVAL OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT
AUDITORS FOR THE COMPANY FOR 2004:
Abstentions and
For Against Broker Non-Votes
--- ------- ----------------
377,062,635 9,919,451 192,512
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
10a - 1997 Non-Employee Directors Stock Plan (Amended May 11, 2004)
10b - 2004 Restricted Stock Award Program
12 - Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
31a - Certification of Chief Executive Officer required by Rule
13a-14(a) or 15d-14(a) of the Securities and Exchange Act
of 1934
31b - Certification of 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
24
MASCO CORPORATION
PART II. OTHER INFORMATION - CONTINUED
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONCLUDED)
(b) REPORTS ON FORM 8-K:
FILED:
None.
FURNISHED, NOT FILED:
Report on Form 8-K dated May 3, 2004, furnishing a press release
reporting the Company's financial results for the first quarter of
2004 and providing supplemental information prepared for use in
connection with the investor conference and webcast.
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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: AUGUST 5, 2004 BY: /s/ Timothy Wadhams
--------------------------
Timothy Wadhams
Senior Vice President and
Chief Financial Officer
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MASCO CORPORATION
EXHIBIT INDEX
EXHIBIT
-------
Exhibit 10a 1997 Non-Employee Directors Stock Plan (Amended May 11, 2004)
Exhibit 10b 2004 Restricted Stock Award Program
Exhibit 12 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
Exhibit 31a Certification of Chief Executive Officer required by Rule 13a-14
(a) or 15d-14(a) of the Securities and Exchange Act of 1934
Exhibit 31b Certification of Chief Financial Officer required by Rule 13a-14
(a) or 15d-14(a) of the Securities and Exchange Act of 1934
Exhibit 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