1
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, 2001. Commission File Number 1-5794
MASCO CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its Charter)
Delaware 38-1794485
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21001 Van Born Road, Taylor, Michigan 48180
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(Address of principal executive offices) (Zip Code)
(313) 274-7400
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(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
Indicate 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 30, 2001
----- ----------------------
Common Stock, Par Value $1 Per Share 460,199,000
2
MASCO CORPORATION
INDEX
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet -
June 30, 2001 and December 31, 2000 1
Condensed Consolidated Statement of
Income for the Three Months and Six
Months Ended June 30, 2001 and 2000 2
Condensed Consolidated Statement of
Cash Flows for the Six Months Ended
June 30, 2001 and 2000 3
Notes to Condensed Consolidated
Financial Statements 4-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9-13
Part II. Other Information and Signature 14-16
3
MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2001 AND DECEMBER 31, 2000
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
ASSETS 2001 2000
------ ---------- ------------
Current assets:
Cash and cash investments $ 106,490 $ 169,430
Accounts and notes receivable, net 1,336,820 1,099,150
Prepaid expenses and other 150,430 126,620
Inventories:
Raw material 394,960 348,420
Finished goods 441,840 377,270
Work in process 186,370 187,270
---------- ----------
1,023,170 912,960
---------- ----------
Total current assets 2,616,910 2,308,160
Equity investments in affiliates 83,910 87,460
Securities of Furnishings International Inc. 572,550 533,670
Property and equipment, net 1,949,610 1,906,840
Acquired goodwill, net 2,745,480 2,190,770
Other noncurrent assets 856,520 717,100
---------- ----------
Total assets $8,824,980 $7,744,000
========== ==========
LIABILITIES
Current liabilities:
Notes payable $ 208,950 $ 210,950
Accounts payable 313,340 250,460
Accrued liabilities 662,120 616,640
---------- ----------
Total current liabilities 1,184,410 1,078,050
Long-term debt 3,685,760 3,018,240
Deferred income taxes and other 226,290 221,650
Commitments and contingencies --- ---
---------- ----------
Total liabilities 5,096,460 4,317,940
---------- ----------
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share
Authorized shares: 900,000,000 459,860 444,750
Preferred shares authorized: 1,000,000 --- ---
Paid-in capital 863,270 631,120
Retained earnings 2,652,420 2,519,940
Other comprehensive income (loss) (247,030) (169,750)
---------- ----------
Total shareholders' equity 3,728,520 3,426,060
---------- ----------
Total liabilities and
shareholders' equity $8,824,980 $7,744,000
========== ==========
See notes to condensed consolidated financial statements.
1
4
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net sales $2,085,000 $1,871,000 $3,996,000 $3,617,000
Cost of sales 1,429,100 1,244,200 2,766,600 2,415,400
---------- ---------- ---------- ----------
Gross profit 655,900 626,800 1,229,400 1,201,600
Selling, general and administrative
expenses 354,300 309,600 688,000 601,700
Amortization of acquired goodwill 23,100 15,900 46,100 30,100
---------- ---------- ---------- ----------
Operating profit 278,500 301,300 495,300 569,800
---------- ---------- ---------- ----------
Other income (expense), net:
Interest expense (59,400) (47,700) (117,700) (86,500)
Equity earnings from
MascoTech, Inc. --- 4,200 --- 8,500
Other, net (5,100) 36,600 13,400 78,600
---------- ---------- ---------- ----------
(64,500) (6,900) (104,300) 600
---------- ---------- ---------- ----------
Income before income taxes 214,000 294,400 391,000 570,400
Income taxes 75,000 109,000 137,000 211,000
---------- ---------- ---------- ----------
Net income $ 139,000 $ 185,400 $ 254,000 $ 359,400
========== ========== ========== ==========
Earnings per share:
Basic $ .31 $ .42 $ .56 $ .82
===== ===== ===== =====
Diluted $ .30 $ .41 $ .55 $ .80
===== ===== ===== =====
Cash dividends declared and
paid per share $ .13 $ .12 $ .26 $ .24
===== ===== ===== =====
See notes to condensed consolidated financial statements.
2
5
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30
-------------------------
2001 2000
----------- ---------
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $ 376,990 $ 360,580
Increase in receivables (128,460) (117,640)
Increase in inventories (79,130) (110,400)
Increase in accounts payable and
accrued liabilities, net 43,520 68,550
----------- ---------
Total cash from operating activities 212,920 201,090
----------- ---------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Issuance of 6.75% notes 800,000 ---
Issuance of 6% notes 500,000 ---
Increase in debt 407,950 841,010
Payment of debt (1,324,890) (136,820)
Purchase of Company common stock for:
Retirement (34,460) ---
Long-term stock incentive award plan (22,950) (20,560)
Cash dividends paid (119,560) (107,260)
----------- ---------
Total cash from financing activities 206,090 576,370
----------- ---------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Acquisition of companies, net of cash acquired (233,650) (509,950)
Capital expenditures (132,810) (169,840)
Investments in non-operating assets, net (100,080) (160,600)
Other, net (15,410) (45,030)
----------- ---------
Total cash (for) investing activities (481,950) (885,420)
----------- ---------
CASH AND CASH INVESTMENTS:
(Decrease) for the period (62,940) (107,960)
At January 1 169,430 230,780
----------- ---------
At June 30 $ 106,490 $ 122,820
=========== =========
See notes to condensed consolidated financial statements.
3
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MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 2001 and the results of operations for the three months and
six months ended June 30, 2001 and 2000 and changes in cash flows for the
six months ended June 30, 2001 and 2000. The condensed consolidated
balance sheet at December 31, 2000 was derived from audited financial
statements. As a result of the Financial Accounting Standards Board
Emerging Issues Task Force ("EITF") Issue Number 00-10, "Accounting for
Shipping and Handling Fees and Costs," in late 2000, the Company changed
its policy for the classification of shipping and handling costs. The
change resulted in the reclassification of shipping and handling costs
from selling, general and administrative expenses to cost of sales. Prior
year amounts have been reclassified for this change in policy. This
reclassification did not result in a change in net income or earnings per
share.
B. The following are reconciliations of the numerators and denominators used
in the computations of basic and diluted earnings per share, in
thousands:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Numerator:
Net income $139,000 $185,400 $254,000 $359,400
======== ======== ======== ========
Denominator:
Basic shares (based on weighted
average) 451,000 441,500 451,300 440,400
Add:
Contingent shares 9,000 7,100 8,900 7,100
Stock option dilution 2,800 1,600 2,900 1,600
-------- -------- -------- --------
Diluted shares 462,800 450,200 463,100 449,100
======== ======== ======== ========
C. In the first quarter of 2001, the Company completed the previously
announced acquisition of BSI Holdings, Inc. BSI Holdings is headquartered
in Carmel, California and is a provider of installed insulation and other
products within the United States and Canada. During the second quarter
of 2001, the Company acquired several small companies. In July 2001, the
Company completed the acquisition of Milgard Manufacturing, Inc., a
manufacturer of vinyl windows in the western United States, headquartered
in Tacoma, Washington. These acquisitions have combined annualized net
sales of over $1.2 billion.
The aggregate net purchase price of these acquisitions was approximately
$1.7 billion, including assumed debt of approximately $310 million, and
shares of Company capital stock (15 million common shares in the first
six months of 2001 and 16,700 convertible preferred shares (convertible
into 16.7 million common shares)) with an aggregate value of $725
million. The convertible preferred shares carry the same attributes as
Company common stock, including voting rights and dividends and will be
treated as if converted at a 1 share of preferred stock to 1,000 shares
of common stock ratio for earnings per share computations.
Certain recent acquisition agreements provide for the payment of
additional consideration, contingent upon certain conditions being met.
Such additional consideration totaled $30 million during the first half
of 2001, and has been recorded as additional acquired goodwill.
4
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MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. In December 2000, the Company adopted a plan to dispose of several
businesses that the Company believes are not core to its long-term growth
strategies. In the third quarter of 2001, the Company is expected to
report a modest gain, net from the July 2001 sale of Inrecon, a
Birmingham, Michigan-based company specializing in the repair, remodeling
and restoration of residential, commercial and institutional facilities
damaged by fire, wind, water and other disasters. Inrecon has annual
sales of approximately $200 million.
E. Other income (expense), net consists of the following, in thousands:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- ---------------------
2001 2000 2001 2000
-------- -------- --------- --------
Interest expense $(59,400) $(47,700) $(117,700) $(86,500)
Equity earnings from
MascoTech, Inc. --- 4,200 --- 8,500
Equity earnings, other 2,100 700 700 1,700
Income from cash and
cash investments 1,100 800 2,800 2,200
Other interest income 17,300 14,900 33,400 29,000
Other, net (25,600) 20,200 (23,500) 45,700
-------- -------- --------- --------
$(64,500) $ (6,900) $(104,300) $ 600
======== ======== ========= ========
Other interest income for the three months and six months ended June 30,
2001 and 2000 included $15.6 million and $30.3 million and $12.8 million
and $25.6 million, respectively, of interest income from indebtedness of
Furnishings International Inc.
Other, net expense for the three months and six months ended June 30,
2001 includes expense related to the disposition of certain non-operating
assets. Other, net for the three months and six months ended June 30,
2000 results primarily from income and gains, net regarding certain
non-operating assets.
Interest expense for the three months and six months ended June 30, 2001
increased $11.7 million and $31.2 million, respectively, compared with
interest expense for the three months and six months ended June 30, 2000.
The increase in interest expense pertains to borrowings primarily related
to recent acquisitions.
5
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MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. 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
------------------------------------ ------------------------------------
2001 2000 2001 2000 2001 2000 2001 2000
------------------------------------ ------------------------------------
Net Sales (1) Operating Profit(2) Net Sales (1) Operating Profit(2)
------------------------------------ ------------------------------------
The Company's operations by
segment were:
Cabinets and Related Products $ 625 $ 655 $ 74 $ 101 $1,230 $1,286 $ 141 $ 188
Plumbing Products 449 489 64 94 868 962 115 186
Decorative Architectural Products 430 377 87 79 760 684 144 143
Installation and Other Services 449 199 65 28 875 382 116 53
Other Specialty Products 132 151 12 25 263 303 27 50
------ ------ ------ ------ ------ ------ ------ ------
Total $2,085 $1,871 $ 302 $ 327 $3,996 $3,617 $ 543 $ 620
====== ====== ====== ====== ====== ====== ====== ======
The Company's operations by
geographic area were:
North America $1,796 $1,532 $ 272 $ 282 $3,404 $2,946 $ 481 $ 533
International, principally Europe 289 339 30 45 592 671 62 87
------ ------ ------ ------ ------ ------ ------ ------
Total $2,085 $1,871 302 327 $3,996 $3,617 543 620
====== ====== ====== ======
General corporate expense, net (24) (25) (48) (50)
------ ------ ------ ------
Operating profit, after general
corporate expense 278 302 495 570
Other income (expense), net (64) (7) (104) 1
------ ------ ------ ------
Income before income taxes $ 214 $ 295 $ 391 $ 571
====== ====== ====== ======
(1) Intra-company sales among segments were not material.
(2) Amortization of acquired goodwill is included in determining operating
profit.
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MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. The Company's total comprehensive income was as follows, in thousands:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income $139,000 $185,400 $254,000 $359,400
Other comprehensive income (loss) (20,990) (70,710) (77,280) (89,860)
-------- -------- -------- --------
Total comprehensive income $118,010 $114,690 $176,720 $269,540
======== ======== ======== ========
H. During March 2001, the Company issued $800 million of 6 3/4% notes due
2006. Early in the second quarter of 2001, the Company increased its
shelf registration to $2 billion of debt and equity securities. In early
May 2001, the Company issued $500 million of 6% notes due 2004.
In July 2001, the Company issued Zero Coupon Convertible Senior Notes due
2031 ("Notes"), resulting in gross proceeds of approximately $750
million. The Notes have a stated annual yield to maturity of 3 1/8
percent. Holders of the Notes can convert each $1,000 principal amount at
maturity note into 12.72 shares of Company common stock if the closing
price of Company common stock exceeds specified levels or if other
specified events occur. This conversion ratio is the equivalent of an
initial conversion price of $31 per share. Holders of the Notes can also
require the Company to purchase their Notes on certain specified dates.
The Company may not redeem the Notes before July 20, 2002, and may redeem
all of the Notes after such date subject to certain conditions specified
in the indenture relating thereto. Additionally, beginning January 20,
2007, subject to specified conditions relating to the market price of the
Notes, the Company may be required to pay contingent interest at the
greater of the Company's regular quarterly cash dividend for equivalent
common shares or .125% of the average market price of a note over a
specified period of time.
Proceeds from the debt issuances were used principally to retire
outstanding variable-rate bank debt. The Company now has on file with the
Securities and Exchange Commission an unallocated shelf registration
pursuant to which the Company is able to issue up to a combined $750
million of debt and equity securities.
I. On January 1, 2001, Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
became effective. SFAS No. 133 did not have a material effect on the
Company's financial statements.
In June 2001, the Financial Accounting Standards Board ("FASB") approved
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS 141 requires, among other things, that the purchase method of
accounting for business combinations be used for all business
combinations initiated after June 30, 2001. SFAS 142 addresses the
accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS 142 requires, among other things, that goodwill and
other indefinite-lived intangible assets no longer be amortized and that
such assets be tested for impairment at least annually. SFAS 142 is
effective for fiscal years beginning after December 15, 2001.
Effective January 1, 2002, the Company will no longer amortize goodwill,
although periodic tests for possible impairment will be made. For the
remainder of 2001, the Company will continue to amortize goodwill related
to business combinations that occurred prior to July 1, 2001.
The Company is currently evaluating the impact these standards will have
on its financial statements.
7
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MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
J. The Company is subject to lawsuits and claims pending or asserted with
respect to matters arising in the ordinary course of business.
In May 1998, a civil suit was filed in the Grays Harbor County,
Washington Superior Court against Behr Process Corporation, a subsidiary
of the Company. The case involves four exterior wood coating products,
which represent a relatively small part of Behr's total sales. The
plaintiffs allege, among other things, that after applying these
products, the wood surfaces suffered excessive mildewing in the very
humid climate of western Washington. The trial court certified the case
as a class action, including all purchasers of the products who reside in
nineteen counties in western Washington. Behr denies the allegations.
Although Behr believes that the subject products have been purchased by
thousands of consumers in western Washington, consumer complaints in the
past have been relatively small compared to the total volume of products
sold. In May 2000, the court entered a default against Behr as a
discovery sanction. Thereafter, the jury returned a verdict awarding
damages to the named plaintiffs. The damages awarded for the eight
homeowner claims (excluding one award to the owners of a vacation resort)
ranged individually from $14,500 to $38,000. The awards were calculated
using a formula based on the product used, the nature and square footage
of wood surface and certain other allowances. Under the verdict, the same
formula will be used for calculating awards on claims that may be
submitted by the subject purchasers of these products. In July 2000, the
court awarded additional damages of $10,000 per claim to the eight
homeowner claims under the Washington Consumer Protection Act. This
increased the total damages awarded on the homeowner claims to
approximately $263,000. The court denied the plaintiffs' request for an
award of additional damages on claims that may be submitted by other
class members. In addition, the court granted the plaintiffs' motion for
attorneys' fees.
Behr is appealing the judgment. At this time, the Company is not in a
position to estimate reliably the number of class members, the number of
claims that may be filed or the awards that class members may seek.
Although Behr is not able to estimate the amount of any potential
liability, Behr believes that there have been numerous rulings by the
trial court that constitute reversible error and that there are valid
defenses to the lawsuit. The Company has made no provision for any
potential loss in the Company's consolidated financial statements.
Behr has also been served with 21 complaints filed by consumers in the
state courts in Alabama, Alaska, California, Illinois, New Jersey, New
York, Oregon, and Washington, and in British Columbia and Ontario,
Canada. The complaints allege that some of Behr's exterior wood coating
products fail to perform as warranted, resulting in damage to the
plaintiffs' wood surfaces. Some of the complaints seek nationwide class
action certification; others seek class action certification for one
state or region. Discovery in the lawsuits has only recently begun.
Proceedings in the eleven California actions will be coordinated in the
San Joaquin, California Superior Court.
Behr and the Company are defending the lawsuits and believe that there
are substantial grounds for denial of class action certification and that
there are substantial defenses to the claims.
Two of Behr's liability insurers are participating in Behr's defense of
the class actions subject to a reservation of rights. One insurer has
filed a declaratory judgment action in the Orange County, California
Superior Court seeking a declaration that the claims asserted in the
class action complaints are not covered by Behr's insurance policies. The
other insurer was named as a defendant in the suit and has filed
cross-claims against Behr seeking a similar declaration.
8
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MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER 2001 AND THE FIRST SIX MONTHS 2001 VERSUS
SECOND QUARTER 2000 AND THE FIRST SIX MONTHS 2000
SALES AND OPERATIONS
The following tables set forth the Company's net sales and operating
profit margin information by segment and geographic area, dollars in millions:
Percent Increase
(Decrease)
Three Months Ended ----------------
June 30, 2001 2001
------------------ vs. vs.
2001 2000 2000 2000(A)
------------------ ----------------
NET SALES:
Cabinets and Related Products $ 625 $ 655 (5%) (3%)
Plumbing Products 449 489 (8%) (7%)
Decorative Architectural
Products 430 377 14% 8%
Installation and Other Services 449 199 126% 18%
Other Specialty Products 132 151 (13%) (8%)
------ ------
Total $2,085 $1,871 11% 0%
====== ======
North America $1,796 $1,532 17% 2%
International, principally
Europe 289 339 (15%) (12%)
------ ------
Total $2,085 $1,871 11% 0%
====== ======
Six Months Ended
June 30,
----------------
2001 2000
----------------
NET SALES:
Cabinets and Related Products $1,230 $1,286 (4%) (4%)
Plumbing Products 868 962 (10%) (10%)
Decorative Architectural
Products 760 684 11% 4%
Installation and Other Services 875 382 129% 19%
Other Specialty Products 263 303 (13%) (8%)
------ ------
Total $3,996 $3,617 10% (2%)
====== ======
North America $3,404 $2,946 16% 0%
International, principally
Europe 592 671 (12%) (13%)
------ ------
Total $3,996 $3,617 10% (2%)
====== ======
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2001 2000 2001 2000
------------------ ------------------
OPERATING PROFIT MARGIN: (B)
Cabinets and Related Products 11.8% 15.4% 11.5% 14.6%
Plumbing Products 14.3% 19.2% 13.2% 19.3%
Decorative Architectural
Products 20.2% 21.0% 18.9% 20.9%
Installation and Other Services 14.5% 14.1% 13.3% 13.9%
Other Specialty Products 9.1% 16.6% 10.3% 16.5%
North America 15.1% 18.4% 14.1% 18.1%
International, principally
Europe 10.4% 13.3% 10.5% 13.0%
Total 14.5% 17.4% 13.6% 17.1%
(A) Percentage change in sales, excluding acquisitions and divestitures.
(B) Before general corporate expense, but including goodwill amortization.
9
12
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET SALES
Net sales for the three months and six months ended June 30, 2001
increased 11 percent and 10 percent, respectively, from the comparable periods
in 2000. Excluding acquisitions and divestitures, net sales were flat and
decreased 2 percent for the three months and six months ended June 30, 2001,
respectively, compared with the comparable periods of the prior year. While the
Company experienced some moderation of the negative influence of customer
inventory reduction programs in the second quarter of 2001, the Company
continued to experience weak economic and business conditions in its markets,
including a softening in sales of home improvement products in North America and
Europe, competitive market conditions and pricing pressures and the continued
effect of a strong U.S. dollar.
Changes in net sales in the following segment and geographic area
discussion exclude the influence of acquisitions and divestitures.
The previously mentioned conditions contributed to sales declines for the
three months and six months ended June 30, 2001 from the comparable periods of
the prior year of 3 percent and 4 percent, respectively, in the Cabinets and
Related Products segment, 7 percent and 10 percent, respectively, in the
Plumbing Products segment, and 8 percent for both periods in the Other Specialty
Products segment. For the three months and six months ended June 30, 2001, net
sales of the Company's Installation and Other Services segment increased 18
percent and 19 percent, respectively, principally due to broader geographic U.S.
market penetration, and net sales of the Company's Decorative Architectural
Products segment increased 8 percent and 4 percent, respectively, due largely to
higher unit sales volume of paints and stains.
Net sales from North American operations increased 2 percent for the
second quarter of 2001 and were flat for the six months ended June 30, 2001 as
compared with the comparable periods of 2000. Net sales from International
operations decreased 12 percent for the second quarter of 2001 and 13 percent
for the six months ended June 30, 2001 as compared with the comparable periods
of 2000. A stronger U.S. dollar, principally against the Euro, had an
unfavorable effect on the translation of International sales, lowering
International sales by 6 percent for both the second quarter and six months
ended June 30, 2001.
OPERATING PROFIT MARGIN
Cost of sales as a percentage of sales increased to 68.5 percent and 69.2
percent for the three months and six months ended June 30, 2001, respectively,
from 66.5 percent and 66.8 percent for the comparable periods in 2000. Including
amortization of acquired goodwill ($23.1 million and $46.1 million for the three
months and six months ended June 30, 2001, respectively), selling, general and
administrative expenses as a percentage of sales for the three months and six
months ended June 30, 2001 increased to 18.1 percent and 18.4 percent,
respectively, from 17.4 percent and 17.5 percent for the comparable periods in
2000. Excluding amortization of acquired goodwill, selling, general and
administrative expenses as a percentage of sales were 17.0 percent and 17.2
percent for the three months and six months ended June 30, 2001, respectively,
as compared with 16.5 percent and 16.6 percent for the comparable periods of the
prior year.
The Company's operating profit margin, before general corporate expense,
for the three months and six months ended June 30, 2001 was 14.5 percent and
13.6 percent, respectively, as compared with 17.4 percent and 17.1 percent for
the comparable periods of 2000. Operating profit margin, after general corporate
expense, for the three months and six months ended June 30, 2001, was 13.3
percent and 12.4 percent, respectively, as compared with 16.1 percent and 15.8
percent for the comparable periods of 2000. The Company's operating profit
margin decreased in the second quarter and the first six months of 2001 as
compared with the comparable periods of 2000, due principally to higher cost of
sales and selling, general and administrative expenses as a percentage of sales
and higher goodwill amortization related to recent acquisitions.
10
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MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The increase in cost of sales as a percentage of sales reflects the
under-absorption of fixed costs, in part related to the higher level of capital
expenditures in recent years, as well as sales declines in all of the Company's
business segments except the Installation and Other Services segment and the
Decorative Architectural Products segment. Cost of sales as a percentage of
sales was also negatively influenced by overall product mix, including a higher
percentage of lower gross-margin installation sales to total sales, the lower
results of the Company's Plumbing Products segment and European businesses, new
product launch costs in the Cabinets and Related Products segment and higher
energy costs.
Gross margin of the Company's Plumbing Products segment continues to be
negatively affected by competitive market conditions, pricing pressures and
product mix. Recent initiatives including investments in new product and system
development and the re-pricing of certain of the Company's faucet units have
also contributed to the recent increase in the cost of sales percentage for the
Plumbing Products segment. Such initiatives should serve to increase unit sales
volume which should lower the cost of sales percentage in future periods.
The increase in selling, general and administrative expenses as a
percentage of sales results largely from the allocation of fixed costs over a
lower than expected sales base, increased goodwill amortization and an increase
in the Company's provision for uncollectible accounts receivable.
OTHER INCOME (EXPENSE), NET
Other interest income for the three months and six months ended June 30,
2001 and 2000 included $15.6 million and $30.3 million and $12.8 million and
$25.6 million, respectively, of interest income from indebtedness of Furnishings
International Inc.
The Company's investment in Furnishings International at June 30, 2001
was $594 million, consisting of $537 million of pay-in-kind debt securities
and other indebtedness and $57 million of preferred and common stock. The
furniture industry in general continues to be adversely affected by the ongoing
economic weakness in its markets as well as by import competition. As a result,
the Company continues to review whether a non-cash charge should be taken with
respect to a portion of this investment.
Other, net expense for the three months and six months ended June 30,
2001 includes expense related to the disposition of certain non-operating
assets. Other, net for the three months and six months ended June 30, 2000
results primarily from income and gains, net regarding certain non-operating
assets.
Interest expense for the three months and six months ended June 30, 2001
increased $11.7 million and $31.2 million, respectively, compared with interest
expense for the three months and six months ended June 30, 2000. The increase in
interest expense pertains to borrowings primarily related to recent
acquisitions.
NET INCOME AND EARNINGS PER SHARE
Net income for the second quarter of 2001 decreased 25 percent to $139.0
million from $185.4 million in the comparable 2000 period. Diluted earnings per
share for the second quarter of 2001 decreased 27 percent to $.30 from $.41 for
the comparable period of 2000. Net income for the six months ended June 30, 2001
decreased 29 percent to $254.0 million from $359.4 million in the comparable
2000 period. Diluted earnings per share for the six months ended June 30, 2001
decreased 31 percent to $.55 from $.80 for the comparable period of 2000.
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MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's effective tax rate for both the second quarter and six
months ended June 30, 2001 was 35 percent as compared with 37 percent for both
of the comparable periods of the prior year. The Company estimates that its
effective tax rate should approximate or be slightly below 35.0 percent for the
year 2001.
OTHER FINANCIAL INFORMATION
The Company's current ratio was 2.2 to 1 at June 30, 2001 as compared
with 2.1 to 1 at December 31, 2000.
For the six months ended June 30, 2001, cash of $212.9 million was
provided by operating activities. Cash provided by financing activities was
$206.1 million, including $383.1 million from a net increase in long-term debt.
Cash used for financing activities included $34.5 million for the acquisition of
Company common stock in open-market transactions, $22.9 million for the
acquisition of Company common stock for the Company's long-term stock incentive
award plan, and $119.6 million for cash dividends paid. Cash used for investing
activities was $481.9 million, including $233.6 million for acquisitions, $132.8
million for capital expenditures, $100.1 million for investments in
non-operating assets and $15.4 million for other cash outflows. The aggregate of
the preceding items represents a net cash outflow of $62.9 million. Changes in
working capital and debt as indicated on the statement of cash flows exclude the
working capital and debt of acquired companies at the time of acquisition.
First and second quarter 2001 cash from operations was affected by an
expected and annually recurring seasonal first-half increase in accounts
receivable (although there was no significant increase in receivable days).
Typically, accounts receivable reach their lowest level at year-end.
During the first six months of 2001, the Company repurchased
approximately 1.4 million of its shares in open-market transactions for
retirement. At June 30, 2001, the Company had remaining Board of Directors
authorization to repurchase up to an additional 26 million shares of its common
stock for retirement in open-market transactions or otherwise.
During March 2001, the Company issued $800 million of 6 3/4% notes due
2006. Early in the second quarter of 2001, the Company increased its shelf
registration to $2 billion. In early May 2001, the Company issued $500 million
of 6% notes due 2004. In July 2001, the Company issued Zero Coupon Convertible
Senior Notes due 2031 ("Notes"), resulting in gross proceeds of approximately
$750 million. Note H of the Consolidated Financial Statement sets forth
additional information regarding these notes.
Proceeds from the debt issuances were used principally to retire
outstanding variable-rate bank debt. The Company now has on file with the
Securities and Exchange Commission an unallocated shelf registration pursuant to
which the Company is able to issue up to a combined $750 million of debt and
equity securities.
The Company is subject to lawsuits and claims pending or asserted with
respect to matters generally arising in the ordinary course of business. Note J
of the Consolidated Financial Statements discusses specific claims pending
against the Company and its subsidiary, Behr Process Corporation, with respect
to several of Behr's exterior wood coating products.
The Company believes that its present cash balance, its cash flows from
operations and, to the extent necessary, bank borrowings and future financial
market activities, are sufficient to fund its working capital and other
investment needs.
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MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") approved
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141
requires, among other things, that the purchase method of accounting for
business combinations be used for all business combinations initiated after June
30, 2001. SFAS 142 addresses the accounting for goodwill and other intangible
assets subsequent to their acquisition. SFAS 142 requires, among other things,
that goodwill and other indefinite-lived intangible assets no longer be
amortized and that such assets be tested for impairment at least annually. SFAS
142 is effective for fiscal years beginning after December 15, 2001.
Effective January 1, 2002, the Company will no longer amortize goodwill,
although periodic tests for possible impairment will be made. For the remainder
of 2001, the Company will continue to amortize goodwill related to business
combinations that occurred prior to July 1, 2001.
The Company is currently evaluating the impact these standards will have
on its financial statements.
OUTLOOK FOR THE COMPANY
The Company believes that net sales of its North American businesses have
generally bottomed early in the 2001 second quarter. Although the Company
expects that economic recovery in North America may be slow and gradual, the
Company should begin to show at least moderate improvement in future quarters.
The Company anticipates that its European businesses may continue to experience
economic softness for the next several quarters.
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PART II. OTHER INFORMATION
MASCO CORPORATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding this item is set forth in Note J to the Company's
Condensed Consolidated Financial Statements included in Part I, Item 1 of this
Report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 31, 2001, the Company completed its previously announced
acquisition of Milgard Manufacturing, Inc. The shareholders of the acquired
company received 16,700 unregistered shares of Masco convertible preferred stock
as part of the consideration paid for this acquisition. The convertible
preferred shares carry the same attributes as Masco common stock, including
voting rights and dividends. The Company relied on the exemption from
registration under Section 4(2) of the Securities Act of 1933.
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 16, 2001 at which the
stockholders voted upon the election of three nominees for Class I Directors;
approval of an amendment to Article Fourth of the Company's Certificate of
Incorporation; and ratification of the selection of PricewaterhouseCoopers LLP
as independent auditors for the Company for 2001. The following is a tabulation
of the votes.
Election of Class I Directors:
For Withheld
----------- -----------
Peter A. Dow 356,498,507 4,439,285
Anthony F. Earley, Jr. 356,472,431 4,465,361
Wayne B. Lyon 356,351,867 4,585,925
Approval of an Amendment to Article Fourth of the Company's Certificate
of Incorporation:
Abstentions and
For Against Broker Non-Votes
----------- ----------- ----------------
341,915,233 17,548,718 1,473,841
Approval of the appointment of PricewaterhouseCoopers LLP as independent
auditors for the Company for 2001:
Abstentions and
For Against Broker Non-Votes
----------- ----------- ----------------
357,954,995 1,373,341 1,263,400
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
3.i - Restated Certificate of Incorporation of Masco
Corporation and amendments thereto (filed herewith).
4.a.v.- Director's resolutions establishing the Company's 6% Notes
Due 2004 (filed herewith) under the Indenture dated as of
February 12, 2001 between Masco Corporation and Bank One
Trust Company, National Association, as Trustee (which
Indenture has been filed as an Exhibit to the Company's
Form 10-K for the year ended December 31, 2000).
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PART II. OTHER INFORMATION
MASCO CORPORATION
4.a.vi.- First Supplemental Indenture dated as of July 20, 2001
between Masco Corporation and Bank One Trust Company,
National Association, as Trustee, relating to the
Company's Zero Coupon Convertible Senior Notes Due 2031
(filed herewith), to the Indenture dated as of February
12, 2001 between Masco Corporation and Bank One Trust
Company, National Association, as Trustee (which
Indenture has been filed as an Exhibit to the Company's
Form 10-K for the year ended December 31, 2000).
12 - Computation of Ratio of Earnings to Fixed Charges
(b) REPORTS ON FORM 8-K:
None.
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PART II. OTHER INFORMATION
MASCO CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MASCO CORPORATION
-----------------
(Registrant)
DATE: AUGUST 7, 2001 BY: /s/ Richard G. Mosteller
---------------------- --------------------------------------
Richard G. Mosteller
Senior Vice-President - Finance
(Chief Financial Officer
and Authorized Signatory)
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MASCO CORPORATION
EXHIBIT INDEX
EXHIBIT
-------
Exhibit 3.i Restated Certificate of Incorporation of Masco Corporation
and amendments thereto (filed herewith).
Exhibit 4.a.v. Director's resolutions establishing the Company's 6% Notes
Due 2004 (filed herewith) under the Indenture dated as of
February 12, 2001 between Masco Corporation and Bank One Trust
Company, National Association, as Trustee (which Indenture has
been filed as an Exhibit to the Company's Form 10-K for the
year ended December 31, 2000).
Exhibit 4.a.vi. First Supplemental Indenture dated as of July 20, 2001
between Masco Corporation and Bank One Trust Company, National
Association, as Trustee, relating to the Company's Zero Coupon
Convertible Senior Notes Due 2031 (filed herewith), to the
Indenture dated as of February 12, 2001 between Masco
Corporation and Bank One Trust Company, National Association,
as Trustee (which Indenture has been filed as an Exhibit to
the Company's Form 10-K for the year ended December 31, 2000).
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges