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 September 30, 2001. 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 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 November 1, 2001
----- ---------------------
Common Stock, Par Value $1 Per Share 458,919,000
MASCO CORPORATION
INDEX
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet -
September 30, 2001 and December 31, 2000 1
Condensed Consolidated Statement of
Operations for the Three Months and Nine
Months Ended September 30, 2001 and 2000 2
Condensed Consolidated Statement of
Cash Flows for the Nine Months Ended
September 30, 2001 and 2000 3
Notes to Condensed Consolidated
Financial Statements 4-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12-18
Part II. Other Information and Signature 19-20
MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
ASSETS 2001 2000
------ ------------ ------------
Current assets:
Cash and cash investments $ 146,310 $ 169,430
Accounts and notes receivable, net 1,319,470 1,099,150
Inventories:
Raw material 391,940 348,420
Finished goods 425,190 377,270
Work in process 184,420 187,270
---------- ----------
1,001,550 912,960
Prepaid expenses and other 149,660 126,620
---------- ----------
Total current assets 2,616,990 2,308,160
Equity investment in affiliates 86,580 87,460
Securities of Furnishings International Inc. 112,550 533,670
Property and equipment, net 2,006,220 1,906,840
Acquired goodwill, net 3,516,620 2,190,770
Other noncurrent assets 874,270 717,100
---------- ----------
Total assets $9,213,230 $7,744,000
========== ==========
LIABILITIES
-----------
Current liabilities:
Notes payable $ 194,940 $ 210,950
Accounts payable 286,450 250,460
Accrued liabilities 683,260 616,640
---------- ----------
Total current liabilities 1,164,650 1,078,050
Long-term debt 3,823,050 3,018,240
Deferred income taxes and other 118,830 221,650
Commitments and contingencies --- ---
---------- ----------
Total liabilities 5,106,530 4,317,940
---------- ----------
SHAREHOLDERS' EQUITY
--------------------
Common stock, par value $1 per share
Authorized shares: 900,000,000 458,820 444,750
Preferred stock, par value $1 per share
Authorized shares: 1,000,000 20 ---
Paid-in capital 1,351,660 631,120
Retained earnings 2,469,220 2,519,940
Other comprehensive income (loss) (173,020) (169,750)
---------- ----------
Total shareholders' equity 4,106,700 3,426,060
---------- ----------
Total liabilities and
shareholders' equity $9,213,230 $7,744,000
========== ==========
See notes to condensed consolidated financial statements.
1
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- -----------
Net sales $2,247,000 $1,893,000 $6,243,000 $5,510,000
Cost of sales 1,530,300 1,265,700 4,296,900 3,681,100
---------- ---------- ---------- ----------
Gross profit 716,700 627,300 1,946,100 1,828,900
Selling, general and administrative
expenses 361,900 309,400 1,049,900 911,100
Amortization of acquired goodwill 23,900 17,700 70,000 47,800
---------- ---------- ---------- ----------
Operating profit 330,900 300,200 826,200 870,000
---------- ---------- ---------- ----------
Other income (expense), net:
Interest expense (61,600) (50,700) (179,300) (137,200)
Equity earnings from
MascoTech, Inc. --- 3,000 --- 11,500
Impairment charge for:
Securities of Furnishings
International Inc. (460,000) --- (460,000) ---
Other non-operating assets (70,000) --- (70,000) ---
Other, net (21,100) 45,000 (7,700) 123,600
---------- ---------- ---------- ----------
(612,700) (2,700) (717,000) (2,100)
---------- ---------- ---------- ----------
Income (loss) before
income taxes (281,800) 297,500 109,200 867,900
Income taxes (credit) (98,800) 110,100 38,200 321,100
---------- ---------- ---------- ----------
Net income (loss) $ (183,000) $ 187,400 $ 71,000 $ 546,800
========== ========== ========== ==========
Earnings (loss) per share:
Basic $(.39) $ .42 $ .16 $1.24
===== ===== ===== =====
Diluted $(.39) $ .41 $ .15 $1.21
===== ===== ===== =====
Cash dividends per share:
Declared $--- $ .13 $ .26 $ .37
===== ===== ===== =====
Paid $ .13 $ .12 $ .39 $ .36
===== ===== ===== =====
See notes to condensed consolidated financial statements.
2
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------
2001 2000
----------- ------------
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $ 707,070 $ 574,410
Increase in receivables (164,740) (117,800)
Increase in inventories (26,140) (95,340)
Increase in accounts payable and
accrued liabilities, net 36,870 131,180
----------- -----------
Total cash from operating activities 553,060 492,450
----------- -----------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Issuance of 6.75% notes 800,000 ---
Issuance of 6% notes 500,000 ---
Issuance of Zero Coupon Convertible Senior notes 750,000 ---
Increase in principally bank debt 412,340 971,210
Payment of principally bank debt (2,015,020) (299,020)
Proceeds from sale of Company common stock
to key employees --- 156,000
Purchase of Company common stock for:
Retirement (69,180) (77,750)
Long-term stock incentive award plan (30,440) (38,090)
Cash dividends paid (179,540) (163,480)
----------- -----------
Total cash from financing activities 168,160 548,870
----------- -----------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Acquisition of companies, net of cash acquired (573,650) (512,150)
Capital expenditures (200,590) (253,500)
Investments in non-operating assets, net (121,750) (256,700)
Proceeds from disposition of business 189,630 ---
Other, net (37,980) (68,520)
----------- -----------
Total cash (for) investing activities (744,340) (1,090,870)
----------- -----------
CASH AND CASH INVESTMENTS:
Decrease for the period (23,120) (49,550)
At January 1 169,430 230,780
----------- -----------
At September 30 $ 146,310 $ 181,230
=========== ===========
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 September 30, 2001 and the results of operations for the three months
and nine months ended September 30, 2001 and 2000 and changes in cash
flows for the nine months ended September 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 per share
results.
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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- ------------------
2001 2000 2001 2000
--------- -------- -------- --------
Numerator:
Net income (loss) $(183,000) $187,400 $ 71,000 $546,800
========= ======== ======== ========
Denominator:
Basic shares (based on weighted
average) 468,100 448,000 456,900 442,900
Add:
Contingent shares --- 8,000 14,500 7,500
Stock option dilution --- 1,200 2,800 1,500
--------- -------- -------- --------
Diluted shares 468,100 457,200 474,200 451,900
========= ======== ======== ========
Income (loss) per share amounts for the first three quarters of 2001 do
not total to the per share amounts for the nine months ended September
30, 2001 due to the timing of capital stock issuances and acquisitions
for which capital stock is contingently issuable.
For the three months ended September 30, 2001, 20.8 million contingent
shares and 2.5 million stock option shares were not included in the
computation of diluted (loss) per share due to their antidilutive effect.
For the three months and nine months ended September 30, 2001, 19.4
million and 6.5 million, respectively, of weighted average shares
issuable upon the redemption of the Zero Coupon Convertible Senior Notes
due 2031 were not included in the computation of diluted earnings (loss)
per share due to their antidilutive effect.
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 in the United States and Canada. In July 2001, the Company
completed the acquisition of Milgard Manufacturing, Inc., a leading
manufacturer of windows and sliding doors in the western United States,
headquartered in Tacoma, Washington. BSI Holdings is included in the
Installation and Other Services segment and Milgard Manufacturing is
included in the Other Specialty Products segment.
4
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note C - Concluded:
The results of these purchase acquisitions, together with several smaller
acquisitions, are included in the consolidated financial statements from
the date of acquisition. Had these companies been acquired and had
Inrecon (see Note D) been disposed of effective January 1, 2000, pro
forma unaudited consolidated net sales and net income would have
approximated $6,373 million and $84 million and $6,330 million and $582
million for the nine months ended September 30, 2001 and 2000,
respectively. Pro forma unaudited consolidated diluted earnings per share
would have increased by $.02 for the nine months ended September 30, 2001
and would have declined slightly for the nine months ended September 30,
2000.
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 and 16,700
convertible preferred shares (convertible into 16.7 million common
shares)) with an aggregate value of $785 million. The convertible
preferred shares carry the same attributes as Company common stock,
including voting rights and dividends and have been treated as if
converted at a ratio of 1 share of preferred stock to 1,000 shares of
common stock for basic and diluted earnings per share computations. The
excess of the aggregate acquisition costs for these purchase acquisitions
over the fair value of net assets acquired, totaling approximately $1.4
billion, represents acquired goodwill; amortization expense for this
acquired goodwill will approximate $15 million for the twelve months
ended December 31, 2001.
Certain recent acquisition agreements provide for the payment of
additional consideration in either cash or stock, contingent upon whether
certain conditions are met. Such additional cash consideration totaled
approximately $30 million during the first nine months of 2001, and has
been recorded as additional acquired goodwill. The additional shares that
are contingently issuable have been included in the computation of
diluted earnings per share for the nine months ended September 30, 2001.
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 sold its
subsidiary, Inrecon, for approximate book value. Inrecon, with annual
sales of approximately $200 million, is 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 and was included in the Installation and
Other Services segment. The Company originally anticipated the remaining
dispositions to be substantially complete by the end of 2001; due to
various factors, including the weakened economic environment and
uncertainty in financial markets since the September 11, 2001 tragedy,
the disposition process is taking longer than anticipated.
5
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
E. Other income (expense), net consists of the following, in thousands:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- ---------------------
2001 2000 2001 2000
--------- -------- --------- ---------
Interest expense $ (61,600) $(50,700) $(179,300) $(137,200)
Equity earnings from
MascoTech, Inc. --- 3,000 --- 11,500
Equity earnings, other 3,000 900 3,700 2,600
Income from cash and
cash investments 1,900 1,100 4,700 3,300
Other interest income 100 16,100 33,500 45,100
Impairment charge for:
Securities of Furnishings
International Inc. (460,000) --- (460,000) ---
Other non-operating assets (70,000) --- (70,000) ---
Other, net (26,100) 26,900 (49,600) 72,600
--------- -------- --------- ---------
$(612,700) $ (2,700) $(717,000) $ (2,100)
========= ======== ========= =========
Other interest income for the nine months ended September 30, 2001
included $30.3 million of interest income from indebtedness of
Furnishings International Inc. (no such interest income was recorded for
the three months ended September 30, 2001); other interest income for the
three months and nine months ended September 30, 2000 included $13.2
million and $38.8 million, respectively, of such income.
In the third quarter of 2001, the Company recorded an aggregate $530
million pre-tax, non-cash charge for the write-down of certain
investments, including the Company's investments in Furnishings
International Inc. and other non-operating assets. The furniture industry
in general and Furnishings International in particular has been adversely
affected in recent months by the ongoing economic weakness in its
markets, the bankruptcies of a number of major retailers and import
competition. In light of these factors, the Company reevaluated the
carrying value of its investment in Furnishings International and
recorded a $460 million pre-tax, non-cash charge to write down this
investment to its estimated current fair value. At September 30, 2001,
after giving effect to such charge, the Company's investment in
Furnishings International was approximately $130 million. The Company
also recorded a $70 million pre-tax, non-cash charge for an
other-than-temporary decline in the fair value of certain of the
Company's, principally technology-related, investments.
Approximately $310 million of the above asset write-down may create a
capital loss carryforward when realized for tax purposes. The Company
believes it is more likely than not that such capital loss carryforward
will be utilized before its expiration, principally through future income
and gains from non-operating assets and other identified tax-planning
strategies, including the potential sale of certain operating assets. As
a result, a valuation allowance was not recorded in the third quarter of
2001 against the approximate $115 million deferred tax asset generated
from the write-down of these investments.
Other, net expense for the three months and nine months ended September
30, 2001 increased $53.0 million and $122.2 million, respectively, as
compared with other, net income for the three months and nine months
ended September 30, 2000. The increase in other, net expense is
principally due to a reduction in income and gains, net regarding certain
non-operating assets.
6
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note E - Concluded:
Interest expense for the three months and nine months ended September 30,
2001 increased $10.9 million and $42.1 million, respectively, compared
with interest expense for the three months and nine months ended
September 30, 2000. The increase in interest expense pertains to
borrowings primarily related to recent acquisitions.
7
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
F. The following table presents information about the Company by segment and
geographic area, in millions.
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 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 (3):
Cabinets and Related Products $ 688 $ 659 $ 76 $ 94 $1,918 $1,945 $ 217 $ 282
Plumbing Products 458 463 72 84 1,326 1,425 187 270
Installation and Other Services 417 227 66 35 1,292 609 182 88
Decorative Architectural Products 401 396 81 86 1,161 1,080 225 229
Other Specialty Products 283 148 60 26 546 451 87 76
------ ------ ------ ------ ------ ------ ------ ------
Total $2,247 $1,893 $ 355 $ 325 $6,243 $5,510 $ 898 $ 945
====== ====== ====== ====== ====== ====== ====== ======
The Company's operations by
geographic area were:
North America $1,904 $1,574 $ 319 $ 286 $5,308 $4,520 $ 800 $ 819
International, principally Europe 343 319 36 39 935 990 98 126
------ ------ ------ ------ ------ ------ ------ ------
Total, as above $2,247 $1,893 355 325 $6,243 $5,510 898 945
====== ====== ====== ======
General corporate expense, net (24) (25) (72) (75)
------ ------ ------ ------
Operating profit, after general
corporate expense 331 300 826 870
Other income (expense), net (613) (3) (717) (2)
------ ------ ------ ------
Income (loss) before income taxes $ (282) $ 297 $ 109 $ 868
====== ====== ====== ======
(1) Intra-company sales among segments were not material.
(2) Operating profit shown is after the inclusion of amortization of acquired
goodwill.
(3) Significant increases in assets of certain segments in the first nine
months of 2001 were as follows: Installation and Other Services - $557
million and Other Specialty Products - $1,015 million.
8
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
G. The Company's total comprehensive income (loss) was as follows, in
thousands:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- ---------------------
2001 2000 2001 2000
--------- -------- --------- ---------
Net income (loss) $(183,000) $187,400 $ 71,000 $ 546,800
Other comprehensive income
(loss), net 74,010 (80,240) (3,270) (170,100)
--------- -------- --------- ---------
Total comprehensive income (loss) $(108,990) $107,160 $ 67,730 $ 376,700
========= ======== ========= =========
H. In March 2001, the Company issued $800 million of 6 3/4% notes due
2006. In 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%.
Holders of the Notes in the aggregate can convert the Notes into
approximately 24 million 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
including July 20, 2002. 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 bank debt. The Company currently has on file with the
Securities and Exchange Commission an unallocated shelf registration for
up to a combined $750 million of debt and equity securities.
In November 2001, the Company amended and restated its $1.25 billion
364-day Revolving Credit Agreement, which was due to expire in November
2001, to become a $1.0 billion 364-day Revolving Credit Agreement which
expires in November 2002. Interest is payable on borrowings under this
agreement based on various floating rate options as selected by the
Company.
I. On January 1, 2001, Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
became effective. The adoption of 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 possible impairment at least annually. SFAS 142
is effective for fiscal years beginning after December 15, 2001.
9
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note I - Concluded:
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; goodwill
related to business combinations completed subsequent to July 1, 2001 is
not being amortized.
The Company is currently evaluating whether these standards will have any
additional impact on its financial statements.
In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 requires the recognition of the fair
value of an asset retirement obligation in the period in which the
obligation is incurred. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. The adoption of SFAS 143 should not have a material
effect on the Company's financial statements.
In August 2001, the FASB approved SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 broadens the
presentation of discontinued operations to include any component of an
entity which comprises operations and cash flows that can be clearly
distinguished from the rest of the entity. The adoption of SFAS 144,
which is effective January 1, 2002, should not have a material effect on
the Company's financial statements.
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.
10
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONCLUDED)
Note J - Concluded:
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 is continuing. Proceedings in
the California actions are being 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.
11
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2001 AND THE FIRST NINE MONTHS 2001 VERSUS
THIRD QUARTER 2000 AND THE FIRST NINE 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 ----------------
September 30 2001 2001
------------------ vs. vs.
2001 2000 2000 2000(A)
------------------ -----------------
NET SALES:
Cabinets and Related Products $ 688 $ 659 4% (1%)
Plumbing Products 458 463 (1%) (2%)
Installation and Other Services 417 227 84% 10%
Decorative Architectural Products 401 396 1% 2%
Other Specialty Products 283 148 91% (7%)
------ ------
Total $2,247 $1,893 19% 0%
====== ======
North America $1,904 $1,574 21% 1%
International, principally Europe 343 319 8% (5%)
------ ------
Total, as above $2,247 $1,893 19% 0%
====== ======
Nine Months Ended
September 30,
------------------
2001 2000
------------------
NET SALES:
Cabinets and Related Products $1,918 $1,945 (1%) (3%)
Plumbing Products 1,326 1,425 (7%) (7%)
Installation and Other Services 1,292 609 112% 10%
Decorative Architectural Products 1,161 1,080 8% 3%
Other Specialty Products 546 451 21% (8%)
------ ------
Total $6,243 $5,510 13% (2%)
====== ======
North America $5,308 $4,520 17% (1%)
International, principally Europe 935 990 (6%) (11%)
------ ------
Total, as above $6,243 $5,510 13% (2%)
====== ======
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2001 2000 2001 2000
------------------ -----------------
OPERATING PROFIT MARGIN:(B)
Cabinets and Related Products 11.0% 14.3% 11.3% 14.5%
Plumbing Products 15.7% 18.1% 14.1% 18.9%
Installation and Other Services 15.8% 15.4% 14.1% 14.5%
Decorative Architectural Products 20.2% 21.7% 19.4% 21.2%
Other Specialty Products 21.2% 17.6% 15.9% 16.9%
North America 16.8% 18.2% 15.1% 18.1%
International, principally Europe 10.5% 12.2% 10.5% 12.7%
Total 15.8% 17.2% 14.4% 17.2%
(A) Percentage change in sales excluding purchase acquisitions and divestitures.
(B) Before general corporate expense, but including goodwill amortization.
12
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET SALES
Net sales for the three month and nine month periods ended September 30,
2001 increased 19 percent and 13 percent, respectively, from the comparable
periods in 2000. Excluding purchase acquisitions and divestitures, net sales
were flat for the three months ended September 30, 2001 and decreased 2 percent
for the nine month period ended September 30, 2001, respectively, over the
comparable periods of the prior year. The Company continued to experience weak
economic and business conditions in its markets in the third quarter of 2001,
including a softness 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 nine months ended September 30, 2001 from the comparable
periods of the prior year of 1 percent and 3 percent, respectively, in the
Cabinets and Related Products segment, 2 percent and 7 percent, respectively, in
the Plumbing Products segment, and 7 percent and 8 percent, respectively, in the
Other Specialty Products segment. For the three months and nine months ended
September 30, 2001, net sales of the Company's Installation and Other Services
segment increased 10 percent in each period, largely due to broader geographic
U.S. market penetration, and net sales of the Company's Decorative Architectural
Products segment increased 2 percent and 3 percent, respectively.
Net sales from North American operations increased 1 percent for the
third quarter of 2001 and decreased 1 percent for the nine months ended
September 30, 2001 as compared with the comparable periods of 2000. Net sales
from International operations decreased 5 percent for the third quarter of 2001
and 11 percent for the nine months ended September 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 2 percent and 5 percent for the three months and
nine months ended September 30, 2001, respectively.
OPERATING PROFIT MARGIN
Cost of sales as a percentage of sales increased to 68.1 percent and 68.8
percent for the three months and nine months ended September 30, 2001, from 66.9
percent and 66.8 percent for the comparable periods in 2000. Including
amortization of acquired goodwill ($23.9 million and $70.0 million for the three
months and nine months ended September 30, 2001, respectively), selling, general
and administrative expenses as a percentage of sales for the three months and
nine months ended September 30, 2001 were 17.2 percent and 17.9 percent,
respectively, as compared with 17.3 percent and 17.4 percent for the comparable
periods in 2000. Excluding amortization of acquired goodwill, selling, general
and administrative expenses as a percentage of sales were 16.1 percent and 16.8
percent for the three months and nine months ended September 30, 2001,
respectively, as compared with 16.3 percent and 16.5 percent for the comparable
periods of the prior year.
13
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's operating profit margins, before general corporate expense,
were 15.8 percent and 14.4 percent for the three months and nine months ended
September 30, 2001, respectively, as compared with 17.2 percent for the
comparable periods in 2000. Operating profit margins, after general corporate
expense, were 14.7 percent and 13.2 percent for the three months and nine months
ended September 30, 2001, respectively, as compared with 15.9 percent and 15.8
percent, respectively, for the comparable periods in 2000. The Company's
operating profit margin decreased in the third quarter and the nine months ended
September 30, 2001, as compared with the comparable periods in 2000, due
principally to higher cost of sales as a percentage of sales and higher goodwill
amortization related to recent acquisitions, offset in part by the higher
operating profit margins of certain recent acquisitions.
The increase in cost of sales as a percentage of sales for the three
months and nine months ended September 30, 2001 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 for the
three months and nine months ended September 30, 2001 was also negatively
influenced by overall product mix, including a higher percentage of lower
gross-margin Installation and Other Services sales to total sales, the lower
results of the Company's Plumbing Products segment and European businesses and
new product launch costs in the Cabinets and Related Products segment.
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. These initiatives contributed to a modest increase in
unit sales volume in the third quarter of 2001 over the comparable period of
2000. The Company anticipates that, in total, these initiatives should lower the
cost of sales percentage in future periods.
The increase in selling, general and administrative expenses as a percent
of sales for the nine months ended September 30, 2001 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 nine months ended September 30, 2001
included $30.3 million of interest income from indebtedness of Furnishings
International Inc. (no such interest income was recorded for the three months
ended September 30, 2001); other interest income for the three months and nine
months ended September 30, 2000 included $13.2 million and $38.8 million,
respectively, of such income.
14
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the third quarter of 2001, the Company recorded an aggregate $530
million pre-tax, non-cash charge for the write-down of certain investments,
including the Company's investments in Furnishings International Inc. and other
non-operating assets. The furniture industry in general and Furnishings
International in particular has been adversely affected in recent months by the
ongoing economic weakness in its markets, the bankruptcies of a number of major
retailers and import competition. In light of these factors, the Company
reevaluated the carrying value of its investment in Furnishings International
and recorded a $460 million pre-tax, non-cash charge to write down this
investment to its estimated current fair value. At September 30, 2001, after
giving effect to such charge, the Company's investment in Furnishings
International was approximately $130 million. The Company also recorded a $70
million pre-tax, non-cash charge for an other-than-temporary decline in the fair
value of certain of the Company's, principally technology-related, investments.
Approximately $310 million of the above asset write-down may create a
capital loss carryforward when realized for tax purposes. The Company believes
it is more likely than not that such capital loss carryforward will be utilized
before its expiration, principally through future income and gains from
non-operating assets and other identified tax-planning strategies, including the
potential sale of certain operating assets. As a result, a valuation allowance
was not recorded in the third quarter of 2001 against the approximate $115
million deferred tax asset generated from the write-down of these investments.
Other, net expense for the three months and nine months ended September
30, 2001 increased $53.0 million and $122.2 million, respectively, as compared
with other, net income for the three months and nine months ended September 30,
2000. The increase in other, net expense is primarily due to a reduction in
income and gains, net regarding certain non-operating assets.
Interest expense for the three months and nine months ended September 30,
2001 increased $10.9 million and $42.1 million, respectively, compared with
interest expense for the three months and nine months ended September 30, 2000.
The increase in interest expense pertains to borrowings primarily related to
recent acquisitions.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE
Net income (loss) for the three months and nine months ended September
30, 2001 was $(183.0) million and $71.0 million, respectively, as compared with
$187.4 million and $546.8 million, respectively, for the comparable periods of
2000. Diluted earnings (loss) per share for the three months and nine months
ended September 30, 2001 were $(.39) and $.15, respectively, as compared with
$.41 and $1.21, respectively, for the comparable periods of 2000.
Net income (loss) for the three months and nine months ended September
30, 2001 includes an after-tax non-cash charge of $344 million ($530 million
pre-tax) for the write-down of certain investments; excluding the effect of
such charge, net income for the three months and nine months ended September 30,
2001 was $161 million and $415 million, respectively.
The Company's effective tax rate for both the three months and nine
months ended September 30, 2001 was 35.0 percent, as compared with 37.0 percent
for both of the comparable periods of the prior year. The Company estimates that
its effective tax rate should approximate 35.0 percent for 2001.
15
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER FINANCIAL INFORMATION
The Company's current ratio was 2.2 to 1 at September 30, 2001, as
compared with 2.1 to 1 at December 31, 2000.
The Company's ratio of earnings to fixed charges was 1.5 at September 30,
2001, as compared to 4.9 at December 31, 2000, as reported in Exhibit 12 filed
with this Quarterly Report on Form 10-Q; excluding the pre-tax, non-cash charge
of $530 million for the write-down of certain investments recorded in the third
quarter of 2001, such ratio was 4.1 at September 30, 2001.
For the nine months ended September 30, 2001, cash of $553.1 million was
provided by operating activities. Cash provided by financing activities was
$168.2 million, including $447.3 million from a net increase in long-term debt.
Cash used for financing activities included $69.2 million for the acquisition of
Company common stock in open-market transactions, $30.4 million for the
acquisition of Company common stock for the Company's long-term stock incentive
award plan, and $179.5 million for cash dividends paid. Cash used for investing
activities was $744.3 million, including $573.7 million for acquisitions, $200.6
million for capital expenditures, $121.7 million for investments in
non-operating assets, net and $37.9 million for other cash outflows. Cash
provided by investing activities included $189.6 million of proceeds from the
disposition of a business. The aggregate of the preceding items represents a net
cash outflow of $23.1 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.
During the first nine months of 2001, the Company repurchased
approximately 3.3 million of its shares in open-market transactions for
retirement. At September 30, 2001, the Company had remaining Board of Directors
authorization to repurchase up to an additional 24 million shares of its common
stock for retirement in open-market transactions or otherwise.
In March 2001, the Company issued $800 million of 6 3/4% notes due 2006.
In 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
Condensed Consolidated Financial Statements sets forth additional information
regarding these Notes.
Proceeds from the debt issuances were used principally to retire
outstanding bank debt. The Company currently has on file with the Securities and
Exchange Commission an unallocated shelf registration for up to a combined $750
million of debt and equity securities; the Company intends to increase the shelf
registration in the fourth quarter of 2001 to an aggregate of $2 billion.
In November 2001, the Company amended and restated its $1.25 billion
364-day Revolving Credit Agreement, which was due to expire in November 2001, to
become a $1.0 billion 364-day Revolving Credit Agreement which expires in
November 2002. Interest is payable on borrowings under this agreement based on
various floating rate options as selected by the Company.
In early November 2001, the Company increased the quarterly cash dividend
to $.135 from $.13 per common share. This marks the 43rd consecutive year in
which dividends have been increased.
16
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is subject to lawsuits and claims pending or asserted with
respect to matters generally arising in the ordinary course of business. Note J
of the Condensed Consolidated Financial Statements discusses specific claims
pending against the Company and its subsidiary, Behr Process Corporation, with
respect to several of Behr's exterior wood coating products.
The Company believes that its present cash balance, its cash flows from
operations and, to the extent necessary, bank borrowings and future financial
market activities, are sufficient to fund its working capital and other
investment needs.
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 possible 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; goodwill related to business
combinations completed subsequent to July 1, 2001 is not being amortized.
The Company is currently evaluating whether these standards will have any
additional impact on its financial statements.
In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 requires the recognition of the fair value of
an asset retirement obligation in the period in which the obligation is
incurred. SFAS 143 is effective for fiscal years beginning after June 15, 2002.
The adoption of SFAS 143 should not have a material effect on the Company's
financial statements.
In August 2001, the FASB approved SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 broadens the presentation
of discontinued operations to include any component of an entity which comprises
operations and cash flows that can be clearly distinguished from the rest of the
entity. The adoption of SFAS 144, which is effective January 1, 2002, should
not have a material effect on the Company's financial statements.
OUTLOOK FOR THE COMPANY
The Company believes, even if present negative business and economic
conditions continue in 2002, that earnings from operations for the full year
2002 should exceed such earnings for 2001.
17
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 may involve risks and uncertainties that are difficult to predict and may
cause the Company's actual results to differ materially from the results
discussed in such forward-looking statements. Readers should consider that
various factors, including changes in general economic conditions, nature of
competition, relationships with key customers, industry consolidation, influence
of e-commerce and other factors may affect the Company's projected performance.
18
MASCO CORPORATION
PART II. OTHER INFORMATION
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.
ITEMS 2 THROUGH 5 ARE NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
12 - Computation of Ratio of Earnings to Fixed Charges
(B) REPORTS ON FORM 8-K:
None.
19
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: NOVEMBER 13, 2001 BY: /s/ Robert B. Rosowski
----------------------- -------------------------------------
Robert B. Rosowski
Vice-President-Controller and Treasurer
(Chief Accounting Officer
and Authorized Signatory)
20
MASCO CORPORATION
EXHIBIT INDEX
EXHIBIT
-------
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges