FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 2002. COMMISSION FILE NUMBER 1-5794
MASCO CORPORATION
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(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 MAY 1, 2002
----- -----------
COMMON STOCK, PAR VALUE $1 PER SHARE 460,588,000
MASCO CORPORATION
INDEX
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet -
March 31, 2002 and December 31, 2001 1
Condensed Consolidated Statement of
Income for the Three Months Ended
March 31, 2002 and 2001 2
Condensed Consolidated Statement of
Cash Flows for the Three Months Ended
March 31, 2002 and 2001 3
Notes to Condensed Consolidated
Financial Statements 4-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10-14
Part II. Other Information and Signature 15-16
MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2002 AND DECEMBER 31, 2001
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
------------------------
(UNAUDITED)
MARCH 31, DECEMBER 31,
ASSETS 2002 2001
------ ---------- ------------
Current assets:
Cash and cash investments $ 238,160 $ 311,990
Accounts and notes receivable, net 1,377,180 1,204,210
Prepaid expenses and other 171,000 197,620
Inventories:
Raw material 369,680 392,820
Finished goods 381,580 356,360
Work in process 145,990 163,920
---------- ----------
897,250 913,100
---------- ----------
Total current assets 2,683,590 2,626,920
Equity investments 83,800 82,290
Securities of Furnishings International Inc. 142,550 132,550
Property and equipment, net 2,009,720 2,016,730
Acquired goodwill, net 3,271,220 3,234,000
Other intangible assets, net 308,600 309,890
Other assets 843,410 780,950
---------- ----------
Total assets $9,342,890 $9,183,330
========== ==========
LIABILITIES
-----------
Current liabilities:
Notes payable $ 130,690 $ 129,860
Accounts payable 402,540 322,280
Accrued liabilities 782,720 784,420
---------- ----------
Total current liabilities 1,315,950 1,236,560
Long-term debt 3,576,350 3,627,630
Deferred income taxes and other 217,760 199,310
---------- ----------
Total liabilities 5,110,060 5,063,500
---------- ----------
Commitments and contingencies
SHAREHOLDERS' EQUITY
--------------------
Preferred shares, par value $1 per share
Authorized shares: 1,000,000; issued:
2002 -- 20,000; 2001 -- 20,000 20 20
Common shares, par value $1 per share
Authorized shares: 1,400,000,000; issued:
2002 -- 460,520,000; 2001 -- 459,050,000 460,520 459,050
Paid-in capital 1,408,570 1,380,820
Retained earnings 2,553,960 2,468,230
Accumulated other comprehensive income (loss) (190,240) (188,290)
---------- ----------
Total shareholders' equity 4,232,830 4,119,830
---------- ----------
Total liabilities and
shareholders' equity $9,342,890 $9,183,330
========== ==========
See notes to condensed consolidated financial statements.
1
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------
THREE MONTHS ENDED MARCH 31
---------------------------
2002 2001
---------- ----------
Net sales $2,100,000 $1,896,000
Cost of sales 1,454,050 1,341,840
---------- ----------
Gross profit 645,950 554,160
Selling, general and administrative expenses 355,350 318,760
Amortization of acquired goodwill --- 23,000
---------- ----------
Operating profit 290,600 212,400
---------- ----------
Other income (expense), net:
Interest expense (55,100) (58,300)
Other, net (7,900) 22,900
---------- ----------
(63,000) (35,400)
---------- ----------
Income before income taxes 227,600 177,000
Income taxes 77,400 62,000
---------- ----------
Net income $ 150,200 $ 115,000
========== ==========
Earnings per common share:
Basic $.32 $.25
==== ====
Diluted $.31 $.25
==== ====
Cash dividends declared and paid
per common share $.135 $.13
===== ====
SUPPLEMENTAL DISCLOSURE:
Net income as reported $ 115,000
Goodwill amortization, net of tax 19,300
----------
Net income as adjusted $ 134,300
==========
Earnings per common share:
Basic as reported $.25
Goodwill amortization, net of tax .04
----
Basic as adjusted $.29
====
Diluted as reported $.25
Goodwill amortization, net of tax .04
----
Diluted as adjusted $.29
====
See notes to condensed consolidated financial statements.
2
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(DOLLARS IN THOUSANDS)
------------------------
THREE MONTHS ENDED
MARCH 31
------------------------
2002 2001
--------- ---------
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $ 225,390 $ 138,300
(Increase) in receivables (180,780) (96,630)
Decrease (increase) in inventories 5,910 (45,560)
Increase (decrease) in accounts payable and
accrued liabilities, net 85,740 (27,810)
--------- ---------
Total cash from (for) operating
activities 136,260 (31,700)
--------- ---------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in principally bank debt 53,640 284,930
Payment of principally bank debt (104,890) (819,300)
Issuance of 6.75% notes --- 800,000
Purchase of Company common stock for:
Retirement --- (25,190)
Long-term stock incentive award plan (21,380) (22,950)
Cash dividends paid (64,310) (59,790)
--------- ---------
Total cash (for) from financing
activities (136,940) 157,700
--------- ---------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures (56,670) (65,260)
Purchases of marketable securities (131,380) (174,390)
Purchases of other investments, net (620) (2,470)
Proceeds from disposition of:
Marketable securities 114,660 96,440
Business 15,430 ---
Acquisition of companies, net of cash acquired (10,280) (80,630)
Other, net (4,290) 20,310
--------- --------
Total cash (for) investing activities (73,150) (206,000)
--------- ---------
CASH AND CASH INVESTMENTS:
Decrease for the quarter (73,830) (80,000)
At January 1 311,990 169,430
--------- ---------
At March 31 $ 238,160 $ 89,430
========= =========
See notes to condensed consolidated financial statements.
3
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, of a normal
recurring nature, necessary to present fairly its financial position as
at March 31, 2002 and the results of operations and changes in cash flows
for the three months ended March 31, 2002 and 2001. The condensed
consolidated balance sheet at December 31, 2001 was derived from audited
financial statements.
On January 1, 2002, Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," became effective. In
accordance with SFAS No. 142, the Company is no longer recording
amortization expense related to goodwill and other indefinite-lived
intangible assets. The Company has provided a supplemental disclosure of
adjusted net income and basic and diluted earnings per common share for
the three months ended March 31, 2001 on the statement of income to
exclude goodwill amortization expense.
The Company is expected to complete the first step of the transitional
goodwill impairment testing by June 30, 2002. If any impairment is
indicated, the Company will record such impairment as a cumulative effect
of a change in accounting principle effective January 1, 2002 in
accordance with SFAS No. 142.
The changes in the carrying amount of goodwill for the quarter ended
March 31, 2002, by segment, are as follows, in thousands:
BALANCE BALANCE
DECEMBER 31, 2001 ADDITIONS(A) OTHER(B) MARCH 31, 2002
----------------- ----------- -------- --------------
Cabinets and Related
Products $ 553,060 $ --- $ (5,200) $ 547,860
Plumbing Products 175,930 2,500 (1,850) 176,580
Installation and Other
Services 957,920 7,290 --- 965,210
Decorative Architectural
Products 454,240 --- (2,100) 452,140
Other Specialty Products 1,092,850 40,700 (4,120) 1,129,430
---------- --------- -------- ----------
Total $3,234,000 $ 50,490 $(13,270) $3,271,220
========== ========= ======== ==========
(A) Additions to the carrying amount of goodwill include acquisitions
and other purchase price adjustments. For the three months ended
March 31, 2002, additions principally include the payment of
approximately $25 million of additional contingent consideration in
Company common stock and cash for prior purchase acquisitions and
other purchase price adjustments related to the finalization of
certain purchase price allocations.
(B) Other changes to the carrying amount of goodwill principally include
foreign currency translation adjustments.
Other indefinite-lived intangible assets include registered trademarks of
$220 million at March 31, 2002. The carrying value of the Company's
definite-lived intangible assets is $88.5 million at March 31, 2002
(including accumulated amortization of $18.2 million) and principally
includes customer relationships and non-compete agreements.
On January 1, 2002, SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" became effective. The adoption of SFAS No.
144 did not have a material effect on the Company's consolidated
financial statements.
4
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note A -- concluded:
Emerging Issues Task Force ("EITF") Issue No. 01-9, "Accounting for
Consideration Given by a Vendor to a Customer," became effective for
the Company in the first quarter of 2002. EITF No. 01-9 requires that
certain expenses, including co-operative advertising expenses and other
customer related incentives, be recorded as a reduction in sales unless
certain conditions are met. The adoption of EITF No. 01-9 resulted in
the reclassification of $15 million of co-operative advertising
expenses from selling expense to a reduction in sales for the three
months ended March 31, 2001. This reclassification did not result in a
change in net income or earnings per common share.
Certain prior-year amounts have been reclassified to conform to the
2002 presentation in the condensed consolidated financial statements.
B. The following are reconciliations of the numerators and denominators
used in the computations of basic and diluted earnings per common
share, in thousands:
THREE MONTHS ENDED
MARCH 31
-------------------------
2002 2001
-------- --------
Numerator:
Net income as reported $150,200 $115,000
======== ========
Denominator:
Basic common shares (based on weighted
average) 467,200 451,900
Add:
Contingent common shares 13,300 9,000
Stock option dilution 3,400 2,800
-------- --------
Diluted common shares 483,900 463,700
======== ========
For the three months ended March 31, 2002, approximately 24 million
common shares related to the Zero Coupon Convertible Senior Notes due
2031 were not included in the computation of diluted earnings per
common share since, at March 31, 2002, they were not convertible
according to their terms.
C. In December 2000, the Company adopted a plan to dispose of several
businesses that the Company believed were not core to its long-term
growth strategies. In the first quarter of 2002, the Company sold its
subsidiary, StarMark Cabinetry, Inc., for approximate book value.
StarMark was included in the Cabinets and Related Products segment and
had annual sales of approximately $50 million. Net assets of businesses
held for disposition were approximately $115 million at March 31, 2002.
5
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
D. The Company reevaluated the carrying value of its investment in
securities of Furnishings International Inc. ("FII") and, in the third
quarter of 2001, recorded a $460 million pre-tax, non-cash charge to
write down this investment to its estimated fair value of approximately
$133 million, which represents the approximate fair value of
consideration ultimately expected to be received from FII for the
repayment of the indebtedness. The ultimate consideration has been
estimated by the Company based on the Company's analysis of FII's
recent indicated plans to dispose of its businesses and other assets.
Management of FII expects the disposition process to be substantially
complete by the end of 2002; however, due to various factors, the
disposition process and the determination of the consideration
ultimately to be received by the Company may extend beyond the end of
2002. In January 2002, the Company entered into a $30 million
subordinated revolving credit agreement with FII, with interest payable
at the prime rate, to assist FII with its temporary cash requirements
incident to the liquidation process. Such arrangement is collateralized
by a lien on certain assets. At March 31, 2002, $9 million was
outstanding under this credit agreement; such amount was repaid by FII
in April 2002.
E. Other income (expense), net consists of the following, in thousands:
THREE MONTHS ENDED
MARCH 31
-------------------------
2002 2001
-------- --------
Interest expense $(55,100) $(58,300)
Equity earnings (loss) 1,900 (1,400)
Income from cash and cash investments 800 1,700
Other interest income 900 16,100
Other, net (11,500) 6,500
-------- --------
$(63,000) $(35,400)
======== ========
Other interest income for the three months ended March 31, 2001
included $14.7 million of interest income from the 12% pay-in-kind
junior debt securities of FII. The recording of such interest income
was discontinued effective July 1, 2001 due to the impairment of the
Company's investment in FII.
Realized gains (losses) and dividend income from marketable securities
included in other, net above were as follows, in thousands:
THREE MONTHS ENDED
MARCH 31
-------------------------
2002 2001
-------- --------
Realized gains $ 4,920 $ 17,230
Realized losses (18,030) (4,430)
-------- --------
Net realized gains (losses) $(13,110) $ 12,800
======== ========
Dividend income $ 950 $ 780
======== ========
Other, net for the three months ended March 31, 2002 and 2001 also
includes $3.3 million and $3.7 million, respectively, of income and
gains, net regarding other investments.
6
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
F. Subsequent Event - In May 2002, the Company sold approximately 22
million shares (up to 25.3 million shares including the underwriters'
over-allotment option) of Company common stock in a public offering at
an initial price of $27.85 per common share, resulting in gross
proceeds of approximately $613 million. The Company plans to use the
proceeds from the equity issuance to reduce indebtedness and for other
general corporate purposes. 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 $1.4
billion of debt and equity securities.
G. The following table presents information about the Company by segment
and geographic area, in millions:
THREE MONTHS ENDED MARCH 31
---------------------------------------
2002 2001 2002 2001
---------------------------------------
Net Sales (1) Operating Profit (2)
--------------- --------------------
The Company's operations by
segment were:
Cabinets and Related
Products $ 656 $ 601 $ 67 $ 66
Plumbing Products 464 416 72 49
Installation and Other
Services 390 426 64 52
Decorative Architectural
Products 359 322 73 55
Other Specialty Products 231 131 39 14
------ ------ ---- ----
Total $2,100 $1,896 $315 $236
====== ====== ==== ====
The Company's operations by
geographic area were:
North America $1,795 $1,593 $277 $205
International, principally
Europe 305 303 38 31
------ ------ ---- ----
Total $2,100 $1,896 315 236
====== ======
General corporate expense,
net (24) (24)
---- ----
Operating profit, after
general corporate expense 291 212
Other (expense), net (63) (35)
---- ----
Income before income taxes $228 $177
==== ====
(1) Intra-company sales among segments were not material.
(2) Operating profit excluding goodwill amortization expense for the
three months ended March 31, 2001 was: Cabinets and Related
Products - $70 million, Plumbing Products - $50 million,
Installation and Other Services - $63 million, Decorative
Architectural Products - $58 million and Other Specialty Products
- $18 million.
H. The Company's total comprehensive income was as follows, in thousands:
THREE MONTHS ENDED
MARCH 31
-------------------------
2002 2001
-------- --------
Net income $150,200 $115,000
Other comprehensive income (loss):
Cumulative translation adjustments (14,110) (42,360)
Unrealized gain (loss) on marketable
securities, net of income tax
(credit) of $7,140 and $(8,170),
respectively 12,160 (13,930)
-------- --------
Total comprehensive income $148,250 $ 58,710
======== ========
7
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
I. The Company is subject to lawsuits and pending or asserted claims 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
state courts in Alabama, Alaska, California, Illinois, New Jersey, New
York, Oregon, and Washington, and in British Columbia, Canada and
Ontario, Canada. The complaints allege that 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. Proceedings in the California
actions are being coordinated in the San Joaquin, California Superior
Court.
The Multnomah County, Oregon Circuit Court issued an order granting
plaintiffs' motion for state class certification in the Oregon case. In
addition, the Grays Harbor County, Washington Superior Court issued an
order granting plaintiffs' motion for national class certification in
the Washington case. As a result of that decision, the cases in all of
the other states, except for New Jersey and Illinois, have been stayed.
The New Jersey case was dismissed without prejudice. On May 9, 2002, a
Washington Appeals Court Commissioner granted a petition filed by Behr
and the Company for immediate appellate review of the Washington
decision.
8
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONCLUDED)
Note I - concluded:
Behr and the Company are continuing to defend 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.
9
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2002 VERSUS FIRST QUARTER 2001
SALES AND OPERATIONS
The following table sets 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 ----------------
March 31, 2002 2002
------------------ vs. vs.
2002 2001 2001 2001(A)
------------------ ---- -------
NET SALES:
Cabinets and Related Products $ 656 $ 601 9% 7%
Plumbing Products 464 416 12% 11%
Installation and Other
Services 390 426 (8%)(B) 6%
Decorative Architectural
Products 359 322 11% 11%
Other Specialty Products 231 131 76% (5%)
------ ------
Total $2,100 $1,896 11% 8%
====== ======
North America $1,795 $1,593 13% 11%
International, principally
Europe 305 303 1% (6%)
------ ------
Total $2,100 $1,896 11% 8%
====== ======
Three Months Ended March 31,
------------------------------
2002 2001(D) 2001(E)
------------------------------
OPERATING PROFIT MARGIN: (C)
Cabinets and Related Products 10.2% 11.6% 11.0%
Plumbing Products 15.5% 12.0% 11.8%
Installation and Other
Services 16.4% 14.8% 12.2%
Decorative Architectural
Products 20.3% 18.0% 17.1%
Other Specialty Products 16.9% 13.7% 10.7%
North America 15.4% 14.0% 12.9%
International, principally
Europe 12.5% 11.9% 10.2%
Total 15.0% 13.7% 12.4%
(A) Percentage change in sales, excluding acquisitions and divestitures.
(B) Reflects the effect of a divestiture.
(C) Before general corporate expense.
(D) Three months ended March 31, 2001 excluding goodwill amortization expense.
(E) Three months ended March 31, 2001 including goodwill amortization expense.
10
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET SALES
Net sales for the three months ended March 31, 2002 increased 11 percent
from the comparable period in 2001. Excluding acquisitions and divestitures,
first quarter 2002 net sales increased 8 percent from the comparable period of
the prior year due principally to improved economic and business conditions in
certain of the Company's markets, which contributed to higher unit sales volume
and sell-through to end-user customers of certain products, particularly
faucets, cabinets and architectural coatings.
Changes in net sales in the following segment and geographic area
discussion exclude the impact of acquisitions and divestitures.
Improved economic and business conditions contributed to sales increases
in the first quarter of 2002 from the comparable period of the prior year of 7
percent, 11 percent, 6 percent and 11 percent in the Cabinets and Related
Products, Plumbing Products, Installation and Other Services and Decorative
Architectural Products segments, respectively. Net sales of the Company's Other
Specialty Products segment decreased 5 percent in the first quarter of 2002 due
principally to the negative effect of a stronger U.S. dollar on the translation
of local currencies of European operations included in this segment.
Net sales from North American and International operations for the first
quarter of 2002 increased 11 percent and decreased 6 percent, respectively, as
compared with the first quarter of 2001. In the first quarter of 2002,
International sales continued to be impacted by a stronger U.S. dollar,
principally against the Euro, which lowered International sales by approximately
4 percent, and by continued weak market and economic conditions, particularly in
Germany.
OPERATING MARGINS
The Company's gross profit margin increased to 30.8 percent for the first
quarter of 2002 from 29.2 percent for the comparable period in 2001. The
increase in gross profit margin reflects sales volume increases in all of the
Company's business segments except the Other Specialty Products segment, a more
favorable product mix, gross margins of certain acquired companies, which were
higher than the Company average, and the favorable influence of the Company's
profit improvement initiatives. Selling, general and administrative expenses as
a percentage of sales were 16.9 percent for the first quarter of 2002 and 16.8
percent for the comparable period of the prior year.
Changes in operating profit margin in the following discussion exclude
goodwill amortization expense.
The Company's operating profit margin, after general corporate expense,
was 13.8 percent for the first quarter of 2002 as compared with 12.4 percent for
the first quarter of 2001. Operating profit margin, before general corporate
expense, was 15.0 percent for the first quarter of 2002 as compared with 13.7
percent for the first quarter of 2001. The Company's operating profit margin
increased in the first quarter of 2002 as compared with the first quarter of
2001, due principally to a lower cost of sales percentage and a corresponding
increase in gross profit margin as described above. Operating profit margin in
the Cabinets and Related Products segment for the first quarter of 2002 includes
the effect of costs related to a discontinued product line and the recent plant
closures. Operating profit margin in the Installation and Other Services segment
for the first quarter of 2002 includes the effect of cost reductions resulting
from integration activities related to a significant acquisition in early 2001,
as well as the effect of the disposition of a lower margin business in July
2001.
11
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER INCOME (EXPENSE), NET
Included in other interest income for the three months ended March 31,
2001 is $14.7 million of interest income from the 12% pay-in-kind junior debt
securities of Furnishings International Inc. The recording of such interest
income was discontinued effective July 1, 2001 due to the impairment of the
Company's investment in Furnishings International Inc.
Other, net for the first quarter of 2002 includes $13.1 million of
realized losses, net from the sale of marketable securities, dividend income
from marketable securities of $1.0 million and $3.3 million of income and gains,
net regarding other investments. Other, net for the first quarter of 2001
included $12.8 million of realized gains, net from the sale of marketable
securities, dividend income from marketable securities of $.8 million and $3.7
million of income and gains, net regarding other investments.
Interest expense for the first quarter of 2002 decreased $3.2 million to
$55.1 million as compared with interest expense of $58.3 million in the first
quarter of 2001 due primarily to lower variable-rate borrowings in the first
quarter of 2002 compared with the first quarter of 2001.
NET INCOME AND EARNINGS PER COMMON SHARE
Net income for the first quarter of 2002 was $150.2 million and diluted
earnings per common share increased to $.31 compared with $.25 per common share
($.29 excluding goodwill amortization expense) for the comparable period of
2001, due principally to the previously mentioned items. The Company's effective
tax rate for the three months ended March 31, 2002 was 34.0 percent, as compared
with 35.0 percent (33.0 percent excluding goodwill amortization expense) for the
comparable period of the prior year. The Company estimates that its effective
tax rate should approximate 34.0 percent for 2002.
OTHER FINANCIAL INFORMATION
The Company's current ratio was 2.0 to 1 at March 31, 2002, as compared
with 2.1 to 1 at December 31, 2001.
For the three months ended March 31, 2002, cash of $136.3 million was
provided by operating activities. Cash used for financing activities was $136.9
million, including $51.2 million from a net decrease in long-term debt,
primarily related to payments of bank debt, $64.3 million for cash dividends
paid and $21.4 million for the acquisition of Company common stock for the
Company's long-term incentive award plan. Cash used for investing activities was
$73.2 million, including $56.7 million for capital expenditures, $10.3 million
related to acquisitions, $17.3 million for the net purchases of marketable
securities and other investments, and $4.3 million for other cash outflows. Cash
provided by investing activities included $15.4 million from the disposition of
a business. The aggregate of the preceding items represents a net cash outflow
of $73.8 million.
First quarter 2002 cash from operations was affected by an expected and
annually recurring first quarter increase in accounts receivable as compared
with December 31, 2001 and an increase in days sales in accounts receivable due
to an extension of payment terms with a major customer. Most of the annual
increase in accounts receivable is typically experienced in the first half of
the year.
12
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In May 2002, the Company sold approximately 22 million shares (up to 25.3
million shares including the underwriters' over-allotment option) of Company
common stock in a public offering at an initial price of $27.85 per common
share, resulting in gross proceeds of approximately $613 million. The Company
plans to use the proceeds from the equity issuance to reduce indebtedness and
for other general corporate purposes. 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 $1.4 billion of debt and
equity securities.
The Company reevaluated the carrying value of its investment in
securities of Furnishings International Inc. ("FII") and, in the third quarter
of 2001, recorded a $460 million pre-tax, non-cash charge to write down this
investment to its estimated fair value of approximately $133 million, which
represents the approximate fair value of consideration ultimately expected to be
received from FII for the repayment of the indebtedness. The ultimate
consideration has been estimated by the Company based on the Company's analysis
of FII's recent indicated plans to dispose of its businesses and other assets.
Management of FII expects the disposition process to be substantially complete
by the end of 2002; however, due to various factors, the disposition process and
the determination of the consideration ultimately to be received by the Company
may extend beyond the end of 2002. In January 2002, the Company entered into a
$30 million subordinated revolving credit agreement with FII, with interest
payable at the prime rate, to assist FII with its temporary cash requirements
incident to the liquidation process. Such arrangement is collateralized by a
lien on certain assets. At March 31, 2002, $9 million was outstanding under this
credit agreement; such amount was repaid by FII in April 2002.
The Company is subject to lawsuits and claims pending or asserted with
respect to matters generally arising in the ordinary course of business. Note I
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.
OUTLOOK FOR THE COMPANY
The Company's internal sales growth has trended upward in recent
quarters, with improvement in both sales and incoming orders. The upward trend
in sales includes increased sales to retailers with above-average increases in
sales of assembled cabinets, faucets and architectural coatings. Recently
implemented profit improvement programs are also expected to continue to
contribute to margin enhancement. Because the first quarter is seasonally a low
quarter for the Company, sales and earnings per common share in the last three
quarters of 2002 should average higher than the first quarter results.
13
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 2002, Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," became effective. In accordance
with SFAS No. 142, the Company is no longer recording amortization expense
related to goodwill and other indefinite-lived intangible assets. The Company is
expected to complete the first step of the transitional goodwill impairment
testing by June 30, 2002. If any impairment is indicated, the Company will
record such impairment as a cumulative effect of a change in accounting
principle effective January 1, 2002 in accordance with SFAS No. 142.
On January 1, 2002, SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" became effective. The adoption of SFAS No. 144
did not have a material effect on the Company's consolidated financial
statements.
Emerging Issues Task Force ("EITF") Issue No. 01-9, "Accounting for
Consideration Given by a Vendor to a Customer," became effective for the Company
in the first quarter of 2002. EITF No. 01-9 requires that certain expenses,
including co-operative advertising expenses and other customer related
incentives, be recorded as a reduction in sales unless certain conditions are
met. The adoption of EITF No. 01-9 resulted in the reclassification of $15
million of co-operative advertising expenses from selling expense to a reduction
in sales for the three months ended March 31, 2001. This reclassification did
not result in a change in net income or earnings per common share.
FORWARD-LOOKING STATEMENTS
Certain sections of this Quarterly Report contain statements reflecting
the Company's views about its future performance and constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. These
views involve risks and uncertainties that are difficult to predict and,
accordingly, the Company's actual results may differ materially from the results
discussed in such forward-looking statements. Readers should consider that
various factors, including changes in general economic conditions, competitive
market conditions and pricing pressures, relationships with key customers,
industry consolidation of retailers, wholesalers and builders, shifts in
distribution, the influence of e-commerce and other factors discussed in the
Company's Annual Report on Form 10-K and its other filings with the Securities
and Exchange Commission, may affect the Company's performance. The Company
undertakes no obligation to update publicly any forward-looking statements as a
result of new information, future events or otherwise.
14
PART II. OTHER INFORMATION
MASCO CORPORATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding this item is set forth in Note I 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 March 7, 2002 the Company issued 765,360 unregistered shares of Masco
Corporation common stock to former shareholders of a 1999 acquired company, in
satisfaction of the Company's contingent payment obligations under the original
Stock Purchase Agreement entered into with such former shareholders. The Company
relied on the exemption from registration under Section 4(2) of the Securities
Act of 1933.
ITEMS 3 THROUGH 5 ARE NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
12 - Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
(b) REPORTS ON FORM 8-K:
None.
15
PART II. OTHER INFORMATION
MASCO CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MASCO CORPORATION
(Registrant)
DATE: MAY 15, 2002 BY:
--------------------- ------------------------------------
Timothy Wadhams
Vice-President and
Chief Financial Officer
MASCO CORPORATION
EXHIBIT INDEX
EXHIBIT
Exhibit 12 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends