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, 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 JULY 31, 2002
----- -------------
COMMON STOCK, PAR VALUE $1 PER SHARE 484,500,000
MASCO CORPORATION
INDEX
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet -
June 30, 2002 and December 31, 2001 1
Condensed Consolidated Statement of
Income for the Three Months and Six
Months Ended June 30, 2002 and 2001 2
Condensed Consolidated Statement of
Cash Flows for the Six Months Ended
June 30, 2002 and 2001 3
Notes to Condensed Consolidated
Financial Statements 4-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12-19
Part II. Other Information and Signature 20-21
MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2002 AND DECEMBER 31, 2001
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
------------------------
(UNAUDITED)
JUNE 30, DECEMBER 31,
ASSETS 2002 2001
------------ ------------
Current assets:
Cash and cash investments $ 628,750 $ 311,990
Accounts and notes receivable, net 1,520,630 1,204,210
Prepaid expenses and other 176,100 197,620
Inventories:
Raw material 400,410 392,820
Finished goods 440,180 356,360
Work in process 148,540 163,920
------------ ------------
989,130 913,100
------------ ------------
Total current assets 3,314,610 2,626,920
Equity investments 94,360 82,290
Securities of Furnishings International Inc. -- 132,550
Property and equipment, net 2,096,200 2,016,730
Acquired goodwill, net 3,426,590 3,234,000
Other intangible assets, net 301,320 309,890
Other assets 1,185,000 780,950
------------ ------------
Total assets $ 10,418,080 $ 9,183,330
============ ============
LIABILITIES
Current liabilities:
Notes payable $ 134,510 $ 129,860
Accounts payable 469,130 322,280
Accrued liabilities 925,120 784,420
------------ ------------
Total current liabilities 1,528,760 1,236,560
Long-term debt 3,635,480 3,627,630
Deferred income taxes and other 172,060 199,310
------------ ------------
Total liabilities 5,336,300 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 - 484,490,000; 2001 - 459,050,000 484,490 459,050
Paid-in capital 2,030,280 1,380,820
Retained earnings 2,608,140 2,468,230
Accumulated other comprehensive income (loss) (41,150) (188,290)
------------ ------------
Total shareholders' equity 5,081,780 4,119,830
------------ ------------
Total liabilities and
shareholders' equity $ 10,418,080 $ 9,183,330
============ ============
See notes to condensed consolidated financial statements.
1
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------- -------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 2,314,000 $ 2,064,000 $ 4,414,000 $ 3,960,000
Cost of sales 1,549,650 1,435,000 3,003,700 2,776,840
----------- ----------- ----------- -----------
Gross profit 764,350 629,000 1,410,300 1,183,160
Selling, general and administrative
expenses 369,250 333,380 724,600 652,140
Amortization of acquired goodwill -- 23,100 -- 46,100
----------- ----------- ----------- -----------
Operating profit 395,100 272,520 685,700 484,920
----------- ----------- ----------- -----------
Other income (expense), net:
Interest expense (54,200) (59,400) (109,300) (117,700)
Other, net (16,200) 880 (24,100) 23,780
----------- ----------- ----------- -----------
(70,400) (58,520) (133,400) (93,920)
----------- ----------- ----------- -----------
Income before income taxes and
cumulative effect of accounting
change, net 324,700 214,000 552,300 391,000
Income taxes 110,400 75,000 187,800 137,000
----------- ----------- ----------- -----------
Income before cumulative effect of
accounting change, net 214,300 139,000 364,500 254,000
----------- ----------- ----------- -----------
Cumulative effect of accounting change
(net of income taxes of $24,400) -- -- 92,400 --
----------- ----------- ----------- -----------
Net income $ 214,300 $ 139,000 $ 272,100 $ 254,000
=========== =========== =========== ===========
Earnings per common share:
Basic:
Income before cumulative effect of
accounting change $ .45 $ .31 $ .77 $ .56
Cumulative effect of accounting change -- -- (.20) --
----------- ----------- ----------- -----------
Net income $ .45 $ .31 $ .57 $ .56
=========== =========== =========== ===========
Diluted:
Income before cumulative effect of
accounting change $ .43 $ .30 $ .74 $ .55
Cumulative effect of accounting change -- -- (.19) --
----------- ----------- ----------- -----------
Net income $ .43 $ .30 $ .55 $ .55
=========== =========== =========== ===========
Cash dividends declared and paid per common
share $ .135 $ .13 $ .27 $ .26
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Net income as reported $ 139,000 $ 254,000
Goodwill amortization, net of tax 19,400 38,700
----------- -----------
Net income as adjusted $ 158,400 $ 292,700
=========== ===========
Earnings per common share:
Basic as reported $ .31 $ .56
Goodwill amortization, net of tax .04 .09
----------- -----------
Basic as adjusted $ .35 $ .65
=========== ===========
Diluted as reported $ .30 $ .55
Goodwill amortization, net of tax .04 .08
----------- -----------
Diluted as adjusted $ .34 $ .63
=========== ===========
See notes to condensed consolidated financial statements.
2
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(DOLLARS IN THOUSANDS)
------------------------
SIX MONTHS ENDED
JUNE 30
---------------------------
2002 2001
----------- -----------
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $ 524,650 $ 376,990
(Increase) in receivables (253,380) (128,460)
(Increase) in inventories (42,640) (79,130)
Increase in accounts payable and
accrued liabilities, net 160,120 43,520
----------- -----------
Total cash from operating activities 388,750 212,920
----------- -----------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in principally bank debt 63,360 407,950
Payment of principally bank debt (686,430) (1,324,890)
Issuance of 5.875% notes 490,770 --
Issuance of Company common stock 598,340 --
Issuance of 6.75% notes -- 800,000
Issuance of 6% notes -- 500,000
Purchase of Company common stock for:
Retirement -- (34,460)
Long-term stock incentive award plan (29,000) (22,950)
Cash dividends paid (128,750) (119,560)
----------- -----------
Total cash from financing activities 308,290 206,090
----------- -----------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures (117,260) (132,810)
Purchases of marketable securities (248,320) (262,880)
Proceeds from disposition of:
Marketable securities 154,950 170,550
Business 15,430 --
Acquisition of companies, net of cash
acquired (202,560) (241,050)
Purchases of other investments, net (36,780) (7,750)
Other, net 54,260 (8,010)
----------- -----------
Total cash (for) investing activities (380,280) (481,950)
----------- -----------
CASH AND CASH INVESTMENTS:
Increase (decrease) for the period 316,760 (62,940)
At January 1 311,990 169,430
----------- -----------
At June 30 $ 628,750 $ 106,490
=========== ===========
See notes to condensed consolidated financial statements.
3
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, of a normal
recurring nature, necessary to present fairly its financial position as
at June 30, 2002 and the results of operations for the three months and
six months ended June 30, 2002 and 2001 and changes in cash flows for the
six months ended June 30, 2002 and 2001. The condensed consolidated
balance sheet data 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, as of January 1, 2002, 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 and six months ended June
30, 2001 on the condensed consolidated statement of income to exclude
goodwill amortization expense. The Company will test the impairment of
goodwill and other indefinite-lived intangible assets on an annual basis
utilizing a discounted cash flow model in the fourth quarter of each
year. Intangible assets with finite useful lives will be amortized over
their useful lives. The Company will evaluate the remaining useful life
of amortizable intangible assets for each reporting period to determine
whether events and circumstances warrant a revision to the remaining
periods of amortization.
The Company completed the two-step transitional goodwill impairment
testing in the second quarter of 2002. The first step of the test was to
perform an assessment of whether there is an indication that goodwill is
impaired. To the extent that an indication of impairment existed, the
Company performed a second test to measure the amount of the impairment.
The Company tested for impairment of its reporting units by comparing
fair value to carrying value. Fair value was determined using a
discounted cash flow method. This evaluation indicated that goodwill
recorded for certain of the Company's business units, principally in
Europe, was impaired. Certain of the Company's European businesses have
been affected by continued weak market and economic conditions. On
adoption of SFAS No. 142, a non-cash impairment charge of $92.4 million
($.19 per common share), net of income tax benefit of $24.4 million, was
recognized as a cumulative effect of change in accounting principle in
the first half of 2002, effective January 1, 2002. Impairment
adjustments, if any, recorded in the future, generally are required to be
recorded as operating expenses.
4
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note A - continued:
The changes in the carrying amount of goodwill for the six months ended
June 30, 2002, by segment, are as follows, in thousands:
PRE-TAX
BALANCE IMPAIRMENT BALANCE
DECEMBER 31, 2001 ADDITIONS(A) LOSS OTHER(B) JUNE 30, 2002
----------------- ------------ ---------- -------- -------------
Cabinets and Related
Products $ 553,060 $ -- $ (18,800) $ 39,540 $ 573,800
Plumbing Products 175,930 69,110 (7,500) 13,340 250,880
Installation and Other
Services 957,920 47,200 -- -- 1,005,120
Decorative Architectural
Products 454,240 4,560 (31,200) 9,450 437,050
Other Specialty Products 1,092,850 105,420 (59,300) 20,770 1,159,740
---------- ---------- --------- -------- ----------
Total $3,234,000 $ 226,290 $(116,800) $ 83,100 $3,426,590
========== ========== ========= ======== ==========
(A) Additions to the carrying amount of goodwill include acquisitions and
other purchase price adjustments. For the six months ended June 30,
2002, additions principally include acquisitions of $165 million, the
payment of approximately $33 million of additional contingent
consideration for prior years' acquisitions and other 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 June 30, 2002. The carrying value of the Company's
definite-lived intangible assets is $81.3 million at June 30, 2002
(including accumulated amortization of $32.6 million) and principally
includes customer relationships and non-compete agreements, with a
weighted average amortization period of 11 years. Amortization expense
related to the definite-lived intangible assets was approximately $9
million for the six months ended June 30, 2002.
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 $21 million and $36 million of co-operative
advertising expenses from selling expense to a reduction in sales for
the three months and six months ended June 30, 2001, respectively. This
reclassification did not result in a change in net income or earnings
per common share.
In June 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 146, "Accounting for Costs from Exit or Disposal Activities"
which requires, among other things, that a liability for costs
associated with an exit or disposal activity be recognized when the
liability is incurred. The adoption of SFAS No. 146, which is effective
for all exit or disposal activities subsequent to December 31, 2002.
The Company is currently evaluating the impact SFAS No. 146 will have
on its consolidated financial statements.
5
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note A - concluded:
Certain prior-year amounts have been reclassified to conform to the
2002 presentation in the condensed consolidated financial statements.
B. Depreciation and amortization expense was $107 million and $132 million
for the six months ended June 30, 2002 and 2001, respectively.
C. The Company's investment in marketable equity securities (including 4
million shares of Furniture Brands International common stock received
in 2002 from Furnishings International Inc. ("FII")) at June 30, 2002
and December 31, 2001 were as follows, in thousands:
Unrealized Unrealized Recorded
Cost Basis Gains Losses Basis
---------- ---------- ---------- --------
June 30, 2002 $311,310 $5,820 $(17,750) $299,380
December 31, 2001 $126,350 $2,510 $(22,800) $106,060
D. In the second quarter of 2002, the Company completed the acquisition of
several home improvement products companies including Newport Brass,
Bristan Limited, Cambrian Windows Limited, Duraflex Limited, Premier
Manufacturing Limited and several, relatively small, installation
service companies. The results of these purchase acquisitions are
included in the consolidated financial statements from the respective
dates of acquisition. Newport Brass is a U.S. company headquartered in
California and is a manufacturer of premium price-point plumbing
products, plumbing specialties and bath accessories. Bristan Limited is
a provider of kitchen and bath faucets, showers and bath accessories.
Cambrian Windows Limited is a manufacturer of vinyl window frames and
Duraflex Limited is an extruder of vinyl window frame components.
Premier Manufacturing Limited is a manufacturer of vinyl window frames,
door frames and sunrooms. Bristan Limited, Cambrian Windows Limited,
Duraflex Limited and Premier Manufacturing Limited are headquartered in
the United Kingdom. The aggregate net purchase price of these
acquisitions was $280 million, including cash of $180 million, 1.7
million shares of Company common stock valued at $45 million and
assumed debt of $55 million.
Newport Brass and Bristan Limited will be included in the Plumbing
Products segment. Cambrian Windows Limited, Duraflex Limited and
Premier Manufacturing Limited will be included in the Other Specialty
Products segment. The purchase price allocations are preliminary, and
as such are estimates. Such allocations for these businesses could
change upon the completion of asset valuations, which are on-going as
of the date of this filing.
6
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
E. 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 SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Numerator:
Income before cumulative
effect of accounting
change, net $214,300 $139,000 $364,500 $254,000
Cumulative effect of
accounting change, net -- -- 92,400 --
-------- -------- -------- --------
Net income $214,300 $139,000 $272,100 $254,000
======== ======== ======== ========
Denominator:
Basic common shares (based
on weighted average) 479,200 451,000 473,200 451,300
Add:
Contingent common shares 16,100 9,000 15,900 8,900
Stock option dilution 3,200 2,800 3,400 2,900
-------- -------- -------- --------
Diluted common shares 498,500 462,800 492,500 463,100
======== ======== ======== ========
For the three months and six months ended June 30, 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 June 30, 2002, they were not convertible
according to their terms. Additionally, 2.7 million shares for the
three months and six months ended June 30, 2002 and 2.1 million shares
for the three months and six months ended June 30, 2001 related to
stock options were excluded from the computation of diluted earnings
per common share due to their anti-dilutive effect.
F. 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.
G. As disclosed in the Company's 2001 Form 10-K, the carrying value of the
Company's investment in Furnishings International Inc. ("FII") was
adjusted in 2001 to the estimated fair value of proceeds expected to be
received from the liquidation of FII in satisfaction of amounts due to
the Company for its investment in pay-in-kind junior subordinated debt
securities of FII and certain advances to FII (collectively "FII
debt").
During the second quarter of 2002, FII completed the disposition of its
operations. In addition, certain non-Masco shareholders of FII agreed
to and are in the process of contributing their FII shares back to FII
and, as a result, Masco will be the majority shareholder of FII. The
remaining assets of FII, principally 4.0 million shares of Furniture
Brands International common stock and notes receivable, net of
remaining liabilities, principally insurance and pension obligations,
represent the proceeds available for the settlement of FII debt and
have been recorded in the Company's June 30, 2002 condensed
consolidated financial statements, including the elimination of amounts
due from FII.
Although the Company believes the fair value of these assets net of
liabilities exceeds the Company's carrying value at June 30, 2002, no
gain will be recognized until the underlying assets are disposed of or
otherwise converted to cash.
7
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
H. Other income (expense), net consists of the following, in thousands:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Interest expense $ (54,200) $ (59,400) $(109,300) $(117,700)
Equity earnings 5,400 2,100 7,300 700
Income from cash and
cash investments 1,100 1,100 1,900 2,800
Other interest income 600 17,300 1,500 33,400
Other, net (23,300) (19,620) (34,800) (13,120)
--------- --------- --------- ---------
$ (70,400) $ (58,520) $(133,400) $ (93,920)
========= ========= ========= =========
Other interest income for the three months and six months ended June 30,
2001 included $15.6 million and $30.3 million, respectively, of interest
income from indebtedness 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 SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Realized gains $ 1,020 $ 6,180 $ 5,940 $ 23,410
Realized losses (16,700) (16,060) (34,730) (20,490)
--------- --------- --------- ---------
Net realized gains
(losses) $ (15,680) $ (9,880) $ (28,790) $ 2,920
========= ========= ========= =========
Dividend income $ 340 $ 430 $ 1,290 $ 1,210
========= ========= ========= =========
Other, net for the three months and six months ended ended June 30, 2002
and 2001 also includes $(.3) million and $3.0 million and $(.9) million
and $2.8 million, respectively, of income and gains (losses), net
regarding other investments.
I. In May 2002, the Company sold 22 million shares of Company common stock
in a public offering, resulting in net proceeds to the Company of $598.3
million (net of issuance costs of $14.3 million). On June 24, 2002, the
Company issued $500 million of 5-7/8% notes due 2012, resulting in net
proceeds of $490.8 million, net of debt issuance costs of $9.2 million,
which are being amortized through 2012.
The Company used the proceeds from the equity and debt issuances to
reduce bank 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 $900 million of debt and equity securities.
On July 19, 2002, the Company announced that it amended the terms of its
Zero Coupon Convertible Senior Notes ("Notes") due July 20, 2031 to
permit an additional date, April 20, 2004, on which holders, at their
option, can cause the Company to repurchase the Notes, at the then
accreted value of $429.57, payable by the Company in cash on April 26,
2004. Under the original terms of the Notes, holders of $26.4 million of
Notes required the Company to repurchase, for $10.7 million cash, the
accreted value of such Notes on July 23, 2002.
8
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
J. The following table presents information about the Company by segment and
geographic area, in millions:
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
------------------------------------ ------------------------------------
2002 2001 2002 2001 2002 2001 2002 2001
------------------------------------ ------------------------------------
Net Sales (1) Operating Profit(2) Net Sales (1) Operating Profit(2)
------------------------------------ ------------------------------------
The Company's operations by segment were:
Cabinets and Related Products $ 682 $ 621 $ 100 $ 74 $1,338 $1,222 $ 167 $ 140
Plumbing Products 509 446 87 60 973 862 159 109
Installation and Other Services 398 449 71 64 788 875 135 116
Decorative Architectural Products 440 417 105 87 799 739 178 142
Other Specialty Products 285 131 56 12 516 262 95 26
------ ------ ------ ------ ------ ------ ------ ------
Total $2,314 $2,064 $ 419 $ 297 $4,414 $3,960 $ 734 $ 533
====== ====== ====== ====== ====== ====== ====== ======
The Company's operations by geographic
area were:
North America $1,973 $1,775 $ 373 $ 267 $3,768 $3,368 $ 650 $ 472
International, principally Europe 341 289 46 30 646 592 84 61
------ ------ ------ ------ ------ ------ ------ ------
Total $2,314 $2,064 419 297 $4,414 $3,960 734 533
====== ====== ====== ======
General corporate expense, net (24) (24) (48) (48)
------ ------ ------ ------
Operating profit, after general
corporate expense 395 273 686 485
Other (expense), net (70) (59) (134) (94)
------ ------ ------ ------
Income before income taxes and cumulative
effect of accounting change, net $ 325 $ 214 $ 552 $ 391
====== ====== ====== ======
(1) Intra-company sales among segments were not material.
(2) Operating profit excluding goodwill amortization expense for the three
months and six months ended June 30, 2001 was: Cabinets and Related
Products - $77 million and $147 million, Plumbing Products - $62 million
and $112 million, Installation and Other Services - $75 million and $138
million, Decorative Architectural Products - $90 million and $148 million
and Other Specialty Products - $16 million and $34 million.
9
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
K. The Company's total comprehensive income was as follows, in thousands:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income $214,300 $139,000 $272,100 $254,000
Other comprehensive income
(loss):
Cumulative translation
adjustments 155,960 (33,020) 141,850 (75,380)
Unrealized gain (loss) on
marketable securities, net
of income tax (credit) of
$3,110 and $(1,110),
respectively (6,870) 12,030 5,290 (1,900)
-------- -------- -------- --------
Total comprehensive income $363,390 $118,010 $419,240 $176,720
======== ======== ======== ========
L. Excluding goodwill amortization expense, the Company's adjusted net
income and basic and diluted earnings per common share for the years
ended December 31, 2001, 2000 and 1999 were, in thousands except per
share data:
YEAR ENDED DECEMBER 31,
2001 2000 1999
----------- ----------- -----------
Net income as reported $ 198,500 $ 591,700 $ 569,600
Goodwill amortization, net of tax 78,200 55,680 39,320
----------- ----------- -----------
Net income as adjusted $ 276,700 $ 647,380 $ 608,920
=========== =========== ===========
Earnings per common share:
Basic as reported $ .43 $ 1.34 $ 1.31
Goodwill amortization, net of tax .17 .13 .09
----------- ----------- -----------
Basic as adjusted $ .60 $ 1.47 $ 1.40
=========== =========== ===========
Diluted as reported $ .42 $ 1.31 $ 1.28
Goodwill amortization, net of tax .16 .12 .09
----------- ----------- -----------
Diluted as adjusted $ .58 $ 1.43 $ 1.37
=========== =========== ===========
M. 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.
10
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONCLUDED)
Note M - concluded:
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.
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.
11
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER 2002 AND THE FIRST SIX MONTHS 2002 VERSUS
SECOND QUARTER 2001 AND THE FIRST SIX MONTHS 2001
SALES AND OPERATING PROFIT MARGINS
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 ----------------
June 30, 2002 2002
------------------ vs. vs.
2002 2001 2001 2001(A)
------------------ ----------------
NET SALES:
Cabinets and Related Products $ 682 $ 621 10% 10%
Plumbing Products 509 446 14% 13%
Installation and Other Services 398 449 (11%)(B) 2%
Decorative Architectural Products 440 417 6% 6%
Other Specialty Products 285 131 118% 0%
------ ------
Total $2,314 $2,064 12% 8%
====== ======
North America $1,973 $1,775 11% 9%
International, principally Europe 341 289 18% 5%
------ ------
Total $2,314 $2,064 12% 8%
====== ======
Six Months Ended
June 30,
------------------
2002 2001
------------------
NET SALES:
Cabinets and Related Products $1,338 $1,222 9% 9%
Plumbing Products 973 862 13% 12%
Installation and Other Services 788 875 (10%)(B) 4%
Decorative Architectural Products 799 739 8% 8%
Other Specialty Products 516 262 97% (2%)
------ ------
Total $4,414 $3,960 11% 8%
====== ======
North America $3,768 $3,368 12% 10%
International, principally Europe 646 592 9% (1%)
------ ------
Total $4,414 $3,960 11% 8%
====== ======
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001(D) 2001(E) 2002 2001(D) 2001(E)
---------------------- ----------------------
OPERATING PROFIT MARGIN: (C)
Cabinets and Related Products 14.7% 12.4% 11.9% 12.5% 12.0% 11.5%
Plumbing Products 17.1% 13.9% 13.5% 16.3% 13.0% 12.6%
Installation and Other Services 17.8% 16.7% 14.3% 17.1% 15.8% 13.3%
Decorative Architectural Products 23.9% 21.6% 20.9% 22.3% 20.0% 19.2%
Other Specialty Products 19.6% 12.2% 9.2% 18.4% 13.0% 9.9%
North America 18.9% 16.0% 15.0% 17.3% 15.1% 14.0%
International, principally Europe 13.5% 12.5% 10.4% 13.0% 12.2% 10.3%
Total 18.1% 15.5% 14.4% 16.6% 14.6% 13.5%
(A) Percentage change in sales, excluding acquisitions and divestitures.
(B) Reflects the effect of a divestiture.
(C) Before general corporate expense.
(D) Excluding goodwill amortization expense.
(E) Including goodwill amortization expense.
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 six-month periods ended June 30, 2002
increased 12 percent and 11 percent, respectively, from the comparable periods
in 2001. Excluding acquisitions and divestitures, net sales for both the
three-month and six-month periods ended June 30, 2002 increased 8 percent from
the comparable periods 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, architectural coatings and cabinets.
OPERATING MARGINS
The Company's gross profit margin increased to 33.0 percent and 32.0
percent for the three-month and six-month periods ended June 30, 2002,
respectively, from 30.5 percent and 29.9 percent for the comparable periods in
2001, respectively. The increase in gross profit margin reflects sales volume
increases in all of the Company's business segments except the Other Specialty
Products segment, gross margins of certain acquired companies, which were higher
than the Company average, the favorable influence of the Company's profit
improvement initiatives and a more favorable product mix. Selling, general and
administrative expenses as a percentage of sales were 16.0 percent and 16.4
percent for the three-month and six-month periods ended June 30, 2002,
respectively, compared with 16.2 percent and 16.5 percent for the comparable
periods of the prior year, respectively.
The Company's operating profit margin, after general corporate expense
and excluding goodwill amortization expense in 2001, was 17.1 percent and 15.5
percent for the three-month and six-month periods ended June 30, 2002,
respectively, as compared with 14.3 percent and 13.4 percent for the comparable
periods of 2001, respectively. Operating profit margin, before general corporate
expense and excluding goodwill amortization expense in 2001, was 18.1 percent
and 16.6 percent for the three-month and six-month periods ended June 30, 2002,
respectively, as compared with 15.5 percent and 14.6 percent for the comparable
periods of 2001, respectively. The Company's operating profit margin increased
in the second quarter and first six months of 2002 as compared with the
comparable periods of 2001, due principally to a lower cost of sales percentage
aided also by fixed costs spread over a higher sales level.
SEGMENT AND GEOGRAPHIC AREA RESULTS
Changes in net sales in the following discussion exclude the impact of
acquisitions and divestitures. Changes in operating profit margin in the
following discussion exclude goodwill amortization expense.
Net sales of Cabinets and Related Products increased 10 percent and 9
percent for the three-month and six-month periods ended June 30, 2002 from the
comparable periods of the prior year due to increased sales volume of cabinets,
largely through North American retail distribution channels and, to a lesser
extent, increased sales to builders. Operating profit margins for the Cabinets
and Related Products segment were 14.7 percent and 12.5 percent for the
three-month and six-month periods ended June 30, 2002, respectively, compared
with 12.4 percent and 12.0 percent for the comparable periods of the prior year,
respectively. The increase in operating profit margins is primarily due to
increased unit sales volume and profit improvement initiatives, offset in part
by costs related to a discontinued product line and recent plant closures.
13
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEGMENT AND GEOGRAPHIC AREA RESULTS (CONTINUED)
Net sales of Plumbing Products increased 13 percent and 12 percent for
the three-month and six-month periods ended June 30, 2002, respectively, from
the comparable periods of the prior year. These increases represent the
favorable influence of the Company's re-pricing and repositioning strategy of
certain faucet units, which was initiated in 2001 and contributed to higher unit
sales volume of faucets and market share gains in 2002. The increase in sales of
Plumbing Products in 2002 also includes the influence of inventory reduction
programs of certain key customers in 2001, which reduced sales for 2001 and
favorably influenced the 2002 versus 2001 comparisons. Operating profit margins
for the Plumbing Products segment were 17.1 percent and 16.3 percent for the
three-month and six-month periods ended June 30, 2002, respectively, compared
with 13.9 percent and 13.0 percent for the comparable periods of the prior year.
The increase in operating profit margins is primarily due to the leveraging of
fixed costs over increased unit sales volume, the Company's profit improvement
initiatives and the benefit of investments in new products and systems
development initiated in the prior year.
Net sales of Installation and Other Services increased 2 percent and 4
percent for the three-month and six-month periods ended June 30, 2002,
respectively, from the comparable periods of the prior year. The increase in net
sales of this segment during 2002 occurred despite the unfavorable influence of
lower pricing to customers related to reduced insulation material costs, which
partially offset volume increases and sales increases of non-insulation
products. Operating profit margins for the Installation and Other Services
segment were 17.8 percent and 17.1 percent for the three-month and six-month
periods ended June 30, 2002, respectively, compared with 16.7 percent and 15.8
percent for the comparable periods of the prior year. Operating profit margins
in the Installation and Other Services segment for 2002 benefited from 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.
Net sales of Decorative Architectural Products increased 6 percent and 8
percent for the three-month and six-month periods ended June 30, 2002,
respectively, from the comparable periods of the prior year due largely to
higher unit sales volume of paints, stains and decorative hardware. Operating
profit margins for the Decorative Architectural Products segment were 23.9
percent and 22.3 percent for the three-month and six-month periods ended June
30, 2002, respectively, compared with 21.6 percent and 20.0 percent for the
comparable periods of the prior year. The improvement in operating profit
margins for this segment reflect the leveraging of fixed costs over higher unit
sales volume, the influence of the Company's profit improvement initiatives,
product mix and reduced bad debt expense in 2002.
Net sales of Other Specialty Products were flat for the second quarter of
2002 and decreased 2 percent for the six months ended June 30, 2002,
respectively, from the comparable periods of the prior year. Operating profit
margins were 19.6 percent and 18.4 percent for the three-month and six-month
periods ended June 30, 2002, respectively, compared with 12.2 percent and 13.0
percent for the comparable periods of the prior year. The improvement in
operating profit margins reflects the positive influence of recent acquisitions,
which have higher operating profit margins than the segment average, and reduced
bad debt expense and asset write-downs in 2002.
14
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEGMENT AND GEOGRAPHIC AREA RESULTS (CONCLUDED)
Net sales from North American operations increased 9 percent and 10
percent for the three-month and six-month periods ended June 30, 2002,
respectively, as compared with the comparable periods of 2001. Operating profit
margins for North American operations were 18.9 percent and 17.3 percent for the
three-month and six-month periods ended June 30, 2002, respectively, compared
with 16.0 percent and 15.1 percent for the comparable periods of the prior year.
The increase in operating profit margins principally includes the leveraging of
fixed costs over increased unit sales volume, the positive influence of recent
acquisitions, which have higher operating profit margins than the Company
average, product mix and the influence of the Company's profit improvement
initiatives. Operating profit margins for 2001 include asset write-downs and bad
debt expense.
Net sales from International operations increased 5 percent for the
second quarter of 2002 and decreased 1 percent for the six months ended June 30,
2002 as compared with the comparable periods of 2001. A weaker U.S. dollar had a
favorable influence on the translation of International sales in the second
quarter of 2002. International sales in local currencies were flat for the
second quarter of 2002 and decreased 1 percent for the six months ended June 30,
2002, reflecting the continuing softness in European markets. Operating profit
margins for International operations, benefiting from profit improvement
initiatives, were 13.5 percent and 13.0 percent for the three-month and
six-month periods ended June 30, 2002, respectively, compared with 12.5 percent
and 12.2 percent for the comparable periods of the prior year.
OTHER INCOME (EXPENSE), NET
Included in other interest income for the three months and six months
ended June 30, 2001 is $15.6 million and $30.3 million of interest income from
indebtedness 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 three months and six months ended June 30, 2002
includes $15.7 million and $28.8 million, respectively, of realized losses, net
from the sale of marketable securities, dividend income from marketable
securities of $.3 million and $1.3 million, respectively, and $(.3) million and
$3.0 million of income and gains (losses), net regarding other investments,
respectively. Other, net for the three-month and six-month periods ended June
30, 2001 included $(9.9) million and $2.9 million, respectively, of realized
gains (losses), net from the sale of marketable securities, dividend income from
marketable securities of $.4 million and $1.2 million, respectively, and $(.9)
million and $2.8 million, respectively, of income and gains (losses), net
regarding other investments.
Interest expense for the three months and six months ended June 30, 2002
was $54.2 million and $109.3 million, respectively, compared with $59.4 million
and $117.7 million for the comparable periods of the prior year. Interest
expense in 2002 includes amortization of debt issuance costs related to the Zero
Coupon Convertible Senior Notes issued in July 2001. The debt issuance costs are
being amortized through July 2002. The decrease in interest expense in 2002 is
primarily due to lower variable-rate borrowings in the first half of 2002
compared with 2001.
15
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INCOME BEFORE THE CUMULATIVE EFFECT OF ACCOUNTING CHANGE AND
EARNINGS PER COMMON SHARE
Net income for the second quarter of 2002 increased to $214.3 million and
diluted earnings per common share increased to $.43 compared with $.30 per
common share ($.34 excluding goodwill amortization expense) for the comparable
period of 2001, due principally to the previously mentioned items. Income before
the cumulative effect of accounting change for the six-month period ended June
30, 2002 was $364.5 million and related diluted earnings per common share was
$.74 compared with $.55 per common share ($.63 excluding goodwill amortization
expense) for the comparable period of the prior year.
The Company's effective tax rate for both the second quarter and six
months ended June 30, 2002 was 34.0 percent, prior to the accounting change
effect, as compared with 35.0 percent (33.2 percent and 33.0 percent for the
three months and six months ended June 30, 2001, respectively, excluding
goodwill amortization expense) for both of the comparable periods of the prior
year. The Company estimates that its effective tax rate should approximate 34.0
percent for 2002, prior to the accounting change effect.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
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
adopted a new Critical Accounting Policy regarding goodwill and other
indefinite-lived intangible assets, see Note A of the Condensed Consolidated
Financial Statements.
The Company completed the two-step transitional goodwill impairment
testing in the second quarter of 2002. The first step of the test was to perform
an assessment of whether there is an indication that goodwill is impaired. To
the extent that an indication of impairment existed, the Company performed a
second test to measure the amount of the impairment. The Company tested for
impairment of its reporting units by comparing fair value to carrying value.
Fair value was determined using a discounted cash flow method. This evaluation
indicated that goodwill recorded for certain of the Company's business units,
principally in Europe, was impaired. Certain of the Company's European
businesses have been affected by continued weak market and economic conditions.
On adoption of SFAS No. 142, a non-cash impairment charge of $92.4 million ($.19
per common share), net of income tax benefit of $24.4 million, was recognized as
a cumulative effect of change in accounting principle in the first half of 2002,
effective January 1, 2002.
Determining market values using the discounted cash flow method requires
the Company to make significant estimates and assumptions including long-term
projections of cash flows, market conditions and appropriate discount rates. The
Company's judgments are based on historical experience, current market trends
and other information. While the Company believes that the estimates and
assumptions underlying the valuation model are reasonable, different assumptions
could result in a different outcome.
OTHER FINANCIAL INFORMATION
The Company's current ratio was 2.2 to 1 at June 30, 2002, as compared
with 2.1 to 1 at December 31, 2001.
16
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER FINANCIAL INFORMATION (CONTINUED)
For the six months ended June 30, 2002, cash of $388.8 million was
provided by operating activities. Cash provided by financing activities was
$308.3 million, including $490.8 million from the issuance of 5-7/8% notes, and
$598.3 million from the issuance of Company common stock. Cash used for
financing activities was $623.1 million for a net decrease in long-term debt,
primarily related to payments of bank debt, $128.7 million for cash dividends
paid and $29.0 million for the acquisition of Company common stock for the
Company's long-term incentive award plan. Cash used for investing activities was
$380.3 million, including $117.3 million for capital expenditures, $202.6
million related to acquisitions and $130.1 million for the net purchases of
marketable securities and other investments. Cash provided by investing
activities included $15.4 million from the disposition of a business and $54.3
million from other items. The aggregate of the preceding items represents a net
cash inflow of $316.8 million.
First and second quarter 2002 cash from operations was affected by an
expected and annually recurring second quarter increase in accounts receivable
as compared with December 31, 2001. Days sales in accounts receivable increased
to 59 days from 54 days at June 30, 2001, primarily due to an extension of
payment terms with a major customer.
In May 2002, the Company sold 22 million shares of Company common stock
in a public offering, resulting in net proceeds to the Company of $598.3 million
(net of issuance costs of $14.3 million). On June 24, 2002, the Company issued
$500 million of 5-7/8% notes due 2012, resulting in net proceeds of $490.8
million, net of debt issuance costs of $9.2 million, which are being amortized
through 2012.
The Company used the proceeds from the equity and debt issuances to
reduce bank 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
$900 million of debt and equity securities.
On July 19, 2002, the Company announced that it amended the terms of its
Zero Coupon Convertible Senior Notes ("Notes") due July 20, 2031 to permit an
additional date, April 20, 2004, on which holders, at their option, can cause
the Company to repurchase the Notes, at the then accreted value of $429.57,
payable by the Company in cash on April 26, 2004. Under the original terms of
the Notes, holders of $26.4 million of Notes required the Company to repurchase,
for $10.7 million cash, the accreted value of such Notes on July 23, 2002.
As disclosed in the Company's 2001 Form 10-K, the carrying value of the
Company's investment in Furnishings International Inc. ("FII") was adjusted in
2001 to the estimated fair value of proceeds expected to be received from the
liquidation of FII in satisfaction of amounts due to the Company for its
investment in pay-in-kind junior subordinated debt securities of FII and certain
advances to FII (collectively "FII debt").
17
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER FINANCIAL INFORMATION (CONCLUDED)
During the second quarter of 2002, FII completed the disposition of its
operations. In addition, certain non-Masco shareholders of FII agreed to and are
in the process of contributing their FII shares back to FII and, as a result,
Masco will be the majority shareholder of FII. The remaining assets of FII,
principally 4.0 million shares of Furniture Brands International common stock
and notes receivable, net of remaining liabilities, principally insurance and
pension obligations, represent the proceeds available for the settlement of FII
debt and have been recorded in the Company's June 30, 2002 condensed
consolidated financial statements, including the elimination of amounts due from
FII.
Although the Company believes the fair value of these assets net of
liabilities exceeds the Company's carrying value at June 30, 2002, no gain will
be recognized until the underlying assets are disposed of or otherwise converted
to cash.
The Company is subject to lawsuits and claims pending or asserted with
respect to matters generally arising in the ordinary course of business. Note M
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 faucets, assembled cabinets and architectural coatings. Recently
implemented profit improvement programs are also expected to continue to
contribute to margin enhancement. Due to seasonal factors and product mix, the
Company expects margins in the second half of 2002 to be modestly lower than
margins achieved in the second quarter.
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. See
"Cumulative Effect of Accounting Change" for additional discussion regarding the
adoption of this standard.
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.
18
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENTLY ISSUED ACCOUNTING STANDARDS (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 $21
million and $36 million of co-operative advertising expenses from selling
expense to a reduction in sales for the three months and six months ended June
30, 2001, respectively. This reclassification did not result in a change in net
income or earnings per common share.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs from
Exit or Disposal Activities" which requires, among other things, that a
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred. The adoption of SFAS No. 146, which is effective
for all exit or disposal activities subsequent to December 31, 2002. The
Company is currently evaluating the impact SFAS No. 146 will have on its
consolidated financial statements.
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.
19
PART II. OTHER INFORMATION
MASCO CORPORATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding this item is set forth in Note M to the Company's
Condensed Consolidated Financial Statements included in Part I, Item 1 of this
Report.
ITEMS 2, 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 15, 2002 at which the
stockholders voted upon the election of two nominees for Class II Directors,
approval of the Company's 2002 Annual Incentive Compensation Plan, and
ratification of the selection of PricewaterhouseCoopers LLP as independent
auditors for the Company for 2002. The following is a tabulation of the votes.
ELECTION OF CLASS II DIRECTORS:
For Withheld
--- --------
Verne G. Istock 369,151,146 5,528,426
Raymond F. Kennedy 370,323,298 4,356,274
APPROVAL OF THE COMPANY'S 2002 ANNUAL INCENTIVE COMPENSATION PLAN:
Abstentions and
For Against Broker Non-Votes
--- ------- ----------------
359,018,157 12,910,746 2,750,669
APPROVAL OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT
AUDITORS FOR THE COMPANY FOR 2002:
Abstentions and
For Against Broker Non-Votes
--- ------- ----------------
365,842,563 7,408,908 1,428,101
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
4.a. Director's resolutions establishing the Company's 5-7/8
Notes Due 2012 (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).
4.b. Amendment No. 1 dated as of July 19, 2002 (filed herewith)
to the First Supplemental Indenture dated as of July 20,
2001 between Masco Corporation and Bank One Trust Company,
National Association (which Supplemental Indenture has been
filed as an Exhibit to the Company's Quarterly Report of
Form 10-Q for the quarter ended June 30, 2001).
12 - Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
(b) REPORTS ON FORM 8-K:
Reports on Form 8-K dated May 15, 2002 and June 27, 2002,
filing the opinion of John R. Leekley regarding the
Company's Registration Statements on Form S-3.
Report on Form 8-K dated June 24, 2002, filing the
Company's press release regarding five acquisitions
(furnished, not filed).
20
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 13, 2002 BY: /s/ Timothy Wadhams
--------------- ----------------------------
Timothy Wadhams
Vice-President and
Chief Financial Officer
21
MASCO CORPORATION
EXHIBIT INDEX
EXHIBIT
Exhibit 4a Director's resolutions establishing the Company's 5-7/8 Notes Due
2012 (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 4b Amendment No. 1 dated as of July 19, 2002 (filed herewith) to the
First Supplemental Indenture dated as of July 20, 2001 between
Masco Corporation and Bank One Trust Company, National Association
(which Supplemental Indenture has been filed as an Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2001).
Exhibit 12 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends