FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 2003. 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 BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN EXCHANGE ACT RULE 12B-2).
YES X NO
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICAL DATE.
SHARES OUTSTANDING AT
CLASS NOVEMBER 1, 2003
----- ---------------------
COMMON STOCK, PAR VALUE $1 PER SHARE 463,152,000
MASCO CORPORATION
INDEX
PAGE NO.
Part I. Financial Information
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets -
September 30, 2003 and December 31, 2002 1
Condensed Consolidated Statements of
Income for the Three Months and Nine
Months Ended September 30, 2003 and 2002 2
Condensed Consolidated Statements of
Cash Flows for the Nine Months Ended
September 30, 2003 and 2002 3
Notes to Condensed Consolidated
Financial Statements 4-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 16-23
Item 4. Disclosure Controls and Procedures 23
Part II. Other Information and Signature 24-25
Disclosure Control Certifications 28-30
MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
ASSETS 2003 2002
------------- ------------
Current assets:
Cash and cash investments $ 907,710 $ 1,066,570
Accounts and notes receivable, net 1,830,360 1,546,360
Prepaid expenses and other 262,750 281,220
Inventories:
Raw material 374,710 410,040
Finished goods 511,880 496,630
Work in process 139,310 148,950
------------ ------------
1,025,900 1,055,620
------------ ------------
Total current assets 4,026,720 3,949,770
Equity investments --- 67,810
Property and equipment, net 2,295,120 2,315,060
Goodwill, net 4,505,280 4,297,150
Other intangible assets, net 348,310 353,870
Other assets 1,025,150 1,066,770
------------ ------------
Total assets $ 12,200,580 $ 12,050,430
============ ============
LIABILITIES
Current liabilities:
Notes payable $ 500,040 $ 321,180
Accounts payable 706,320 541,590
Accrued liabilities 1,096,200 1,069,680
------------ ------------
Total current liabilities 2,302,560 1,932,450
Long-term debt 3,836,280 4,316,470
Deferred income taxes and other 657,150 507,670
------------ ------------
Total liabilities 6,795,990 6,756,590
------------ ------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred shares, par value $1 per share
Authorized shares: 1,000,000; issued:
2003 -- 20,000; 2002 -- 20,000 20 20
Common shares, par value $1 per share
Authorized shares: 1,400,000,000; issued:
2003 -- 464,540,000; 2002 -- 488,890,000 464,540 488,890
Paid-in capital 1,656,400 2,207,080
Retained earnings 3,282,700 2,783,490
Accumulated other comprehensive income (loss) 179,060 (21,700)
Less: Restricted stock awards, net (178,130) (163,940)
------------ ------------
Total shareholders' equity 5,404,590 5,293,840
------------ ------------
Total liabilities and
shareholders' equity $ 12,200,580 $ 12,050,430
============ ============
See notes to condensed consolidated financial statements.
1
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales $ 2,917,900 $ 2,446,700 $ 8,073,790 $ 6,728,230
Cost of sales 2,014,980 1,666,200 5,603,660 4,572,840
----------- ----------- ----------- -----------
Gross profit 902,920 780,500 2,470,130 2,155,390
Selling, general and administrative
expenses 481,150 368,850 1,371,490 1,068,690
(Income) charge regarding litigation
settlement (57,600) 166,000 (71,120) 166,000
----------- ----------- ----------- -----------
Operating profit 479,370 245,650 1,169,760 920,700
----------- ----------- ----------- -----------
Other income (expense), net:
Interest expense (66,780) (61,060) (201,820) (170,280)
Other, net 6,500 (15,220) 51,130 (40,140)
----------- ----------- ----------- -----------
(60,280) (76,280) (150,690) (210,420)
----------- ----------- ----------- -----------
Income from continuing operations
before income taxes and minority
interest 419,090 169,370 1,019,070 710,280
Income taxes 155,200 52,670 363,680 236,120
----------- ----------- ----------- -----------
Income from continuing operations
before minority interest 263,890 116,700 655,390 474,160
Minority interest (2,380) --- (8,170) ---
----------- ----------- ----------- -----------
Income from continuing operations 261,510 116,700 647,220 474,160
Income/gain from discontinued operations,
net of income taxes 57,260 6,100 66,900 13,140
Cumulative effect of accounting change, net --- --- --- (92,400)
----------- ----------- ----------- -----------
Net income $ 318,770 $ 122,800 $ 714,120 $ 394,900
=========== =========== =========== ===========
Earnings per common share:
Basic:
Income from continuing operations $ .55 $ .24 $ 1.34 $ .99
Income/gain from discontinued
operations, net of income taxes .12 .01 .14 .03
Cumulative effect of accounting
change, net -- -- -- (.19)
----------- ----------- ----------- -----------
Net income $ .67 $ .25 $ 1.48 $ .82
=========== =========== =========== ===========
Diluted:
Income from continuing operations $ .53 $ .22 $ 1.30 $ .93
Income/gain from discontinued
operations, net of income taxes .12 .01 .13 .03
Cumulative effect of accounting
change, net -- -- -- (.18)
----------- ----------- ----------- -----------
Net income $ .65 $ .24 $ 1.44 $ .78
=========== =========== =========== ===========
Cash dividends per common share:
Declared $ .16 $ .14 $ .44 $ .41
=========== =========== =========== ===========
Paid $ .14 $ .135 $ .42 $ .405
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
2
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------
2003 2002
----------- -----------
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $ 816,580 $ 828,940
(Increase) in receivables (310,430) (352,690)
Decrease (increase) in inventories 890 (7,200)
Increase in accounts payable and
accrued liabilities, net 417,290 221,780
----------- -----------
Total cash from operating activities 924,330 690,830
----------- -----------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Retirement of notes (299,560) ---
Increase in bank debt 10,820 90,440
Payment of bank debt (83,650) (807,620)
Issuance of notes --- 1,082,090
Issuance of Company common stock --- 598,340
Purchase of Company common stock for:
Retirement (555,310) (60,540)
Long-term stock incentive award plan (48,100) (31,260)
Cash dividends paid (208,700) (196,500)
----------- -----------
Total cash (for) from financing activities (1,184,500) 674,950
----------- -----------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures (197,850) (175,450)
Purchases of marketable securities (244,580) (457,270)
Proceeds from disposition of:
Marketable securities 377,170 195,370
Businesses, net of cash disposed 281,600 15,430
Equity investment 75,400 ---
Purchases of other investments, net (12,050) (42,410)
Acquisition of companies, net of cash acquired (208,280) (660,790)
Decrease in long-term notes receivable 17,320 24,480
Other, net (14,890) 4,610
----------- -----------
Total cash from (for) investing activities 73,840 (1,096,030)
----------- -----------
Effect of foreign exchange rates on cash and
cash investments 27,470 18,350
----------- -----------
CASH AND CASH INVESTMENTS:
(Decrease) increase for the period (158,860) 288,100
At January 1 1,066,570 311,990
----------- -----------
At September 30 $ 907,710 $ 600,090
=========== ===========
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, except for the adjustments for accounting
irregularities and asset impairments discussed in Note N, necessary to
present fairly its financial position as at September 30, 2003 and the
results of operations for the three months and nine months ended
September 30, 2003 and 2002 and changes in cash flows for the nine months
ended September 30, 2003 and 2002. The condensed consolidated balance
sheet at December 31, 2002 was derived from audited financial statements.
Certain prior-year amounts have been reclassified to conform to the 2003
presentation in the condensed consolidated financial statements. The
results of operations related to discontinued operations have been
reclassified in the condensed consolidated statements of income for 2002
and 2003. The assets and liabilities of these discontinued operations as
of December 31, 2002 have not been reclassified in the accompanying
condensed consolidated balance sheet. In the Company's condensed
consolidated statements of cash flows, the cash flows of discontinued
operations are not separately classified.
4
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note A -- concluded:
STOCK OPTIONS AND AWARDS. The Company elected to change its method of
accounting for stock-based compensation and implemented the fair value
method prescribed by Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation" effective January 1,
2003. The Company is using the prospective method, as defined by SFAS No.
148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure -- an amendment to SFAS No. 123," for determining stock-based
compensation expense. In the first nine months of 2003, 630,000 option
shares, including restoration option shares, were awarded and the related
expense of $.5 million and $.6 million was included in the Company's
condensed consolidated statements of income for the three-month and
nine-month periods ended September 30, 2003, respectively. The following
table illustrates the pro forma effect on net income and earnings per
common share as if the fair value method were applied to all previously
issued stock options, in thousands except per common share amounts:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income, as reported $ 318,770 $ 122,800 $ 714,120 $ 394,900
Add:
Stock-based employee
compensation (stock awards
and options) expense included
in reported net income,
net of related tax effects 7,230 5,400 29,430 15,500
Deduct:
Stock-based employee
compensation (stock
awards and options) expense,
net of related tax effects (7,230) (5,400) (29,430) (15,500)
Stock-based employee compensation
expense determined under the fair
value based method for stock
options issued prior to
January 1, 2003, net of
related tax effects (3,240) (4,500) (9,730) (13,400)
--------- --------- --------- ---------
Pro forma net income $ 315,530 $ 118,300 $ 704,390 $ 381,500
========= ========= ========= =========
Earnings per common share:
Basic as reported $ .67 $ .25 $ 1.48 $ .82
Basic pro forma $ .67 $ .24 $ 1.46 $ .79
Diluted as reported $ .65 $ .24 $ 1.44 $ .78
Diluted pro forma $ .65 $ .23 $ 1.42 $ .75
5
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
B. On September 30, 2003, the Company completed the sale of its
Baldwin Hardware and Weiser Lock businesses to The Black & Decker
Corporation. Baldwin and Weiser were included in the Decorative
Architectural Products segment and manufacture a wide range of
architectural and decorative products, including builders' hardware and
locksets. In a separate transaction on September 30, 2003, the Company
also completed the sale of the Company's Marvel Group to members of the
Marvel management team. Marvel manufactures office workstations and
machine stands, and was included in the Other Specialty Products segment.
The sale of these businesses reflects the Company's continuing commitment
to deploy the Company's assets in businesses that support its operating
strategies and provide the greatest opportunities to create value for the
Company's shareholders. Total proceeds from the sale of these companies
were $289 million, including cash of $284 million and notes receivable of
$5 million.
Selected financial information for these discontinued operations is as
follows for the three months and nine months ended September 30, 2003 and
2002, in thousands:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 67,970 $ 71,290 $ 198,030 $ 203,770
========= ========= ========= =========
Income before income taxes $ 5,650 $ 9,830 $ 20,910 $ 21,220
Gain on disposal of discontinued
operations 90,530 --- 90,530 ---
Income taxes (38,920) (3,730) (44,540) (8,080)
--------- --------- --------- ---------
Income from discontinued
operations $ 57,260 $ 6,100 $ 66,900 $ 13,140
========= ========= ========= =========
Income taxes in the table above include income taxes on the gain on
disposal of discontinued operations of $36.8 million for the three months
and nine months ended September 30, 2003. Total assets of discontinued
operations sold in September 2003 consisted primarily of accounts
receivable of $44 million, inventories of $41 million, property and
equipment, net of $108 million and other assets of $18 million (including
goodwill of $16 million). Total liabilities of discontinued operations
consisted primarily of accounts payable of $12 million, accrued salaries,
wages and related benefits of $5 million and other accrued expenses of $9
million.
6
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
C. The changes in the carrying amount of goodwill for the nine months ended
September 30, 2003, by segment, are as follows, in thousands:
BALANCE DISCONTINUED BALANCE
DEC. 31, 2002 ADDITIONS(A) OPERATIONS OTHER(B) SEPT. 30, 2003
------------- ------------ ------------ -------- --------------
Cabinets and Related Products $ 586,380 $ 93,480 $ --- $ 30,460 $ 710,320
Plumbing Products 441,810 10,430 --- 27,870 480,110
Installation and Other Services 1,693,170 13,160 --- (11,020) 1,695,310
Decorative Architectural Products 428,500 60 (15,690) (1,390) 411,480
Other Specialty Products 1,147,290 39,080 --- 21,690 1,208,060
---------- ---------- --------- -------- ----------
Total $4,297,150 $ 156,210 $ (15,690) $ 67,610 $4,505,280
========== ========== ========= ======== ==========
(A) Additions principally include acquisitions and the recording
of approximately $110 million of additional contingent
consideration for prior purchase acquisitions.
(B) Other principally includes foreign currency translation
adjustments, reclassifications and other purchase price
adjustments related to the finalization of certain purchase
price allocations. For the nine months ended September 30,
2003, the Company recorded in the third quarter of 2003 a
non-cash, pre-tax goodwill impairment charge of $5 million
related to a United Kingdom business unit in the Decorative
Architectural Products segment.
Other indefinite-lived intangible assets include registered trademarks of
$251.8 million at September 30, 2003. The carrying value of the Company's
definite-lived intangible assets was $96.5 million at September 30, 2003
(net of accumulated amortization of $48.0 million) and principally
includes customer relationships and non-compete agreements.
7
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
D. Depreciation and amortization expense was $176 million and $156 million
for the nine months ended September 30, 2003 and 2002, respectively.
E. The Company owns 64 percent of Hansgrohe AG. The minority interest of $59
million and $47 million at September 30, 2003 and December 31, 2002,
respectively, is recorded in the balance sheet caption deferred income
taxes and other liabilities on the Company's condensed consolidated
balance sheets.
F. In the first nine months of 2003, the Company acquired PowerShot Tool
Company, Inc. (Other Specialty Products segment), and several relatively
small installation service companies (Installation and Other Services
segment). PowerShot Tool Company is a manufacturer of fastening products,
including staple guns, glue guns, hammer tackers and riveting products,
headquartered in New Jersey. The results of these acquisitions are
included in the condensed consolidated financial statements from the
respective dates of acquisition. The aggregate net purchase price of
these acquisitions was $59 million, and included cash of $54 million and
debt of $5 million. The Company also paid an additional $154 million of
acquisition-related consideration, including amounts to satisfy share
price guarantees, contingent consideration and other purchase price
adjustments, in the first nine months of 2003, relating to previously
acquired companies.
8
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
G. 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Numerator:
Income from continuing
operations, net $ 261,510 $ 116,700 $ 647,220 $ 474,160
Income from discontinued
operations, net 57,260 6,100 66,900 13,140
Cumulative effect of
accounting change, net --- --- --- (92,400)
--------- --------- --------- ---------
Net income $ 318,770 $ 122,800 $ 714,120 $ 394,900
========= ========= ========= =========
Denominator:
Basic common shares (based
on weighted average) 474,300 494,700 482,600 480,400
Add:
Contingent common shares 12,200 25,300 11,700 24,300
Stock option dilution 2,600 1,900 2,000 2,800
--------- --------- --------- ---------
Diluted common shares 489,100 521,900 496,300 507,500
========= ========= ========= =========
Income per common share amounts for the first three quarters of 2003 and
2002 do not total to the per common share amounts for the nine months
ended September 30, 2003 and 2002 due to the timing of stock repurchases
and the effect of contingently issuable shares.
For both the three months and nine months ended September 30, 2003 and
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 September 30, 2003 and 2002,
they were not convertible according to their terms.
Additionally, for the three months and nine months ended September 30,
2003, 3.4 million and 6.9 million common shares, respectively, and 3.5
million and 3.3 million common shares for the three months and nine
months ended September 30, 2002, respectively, related to stock options
were excluded from the computation of diluted earnings per common share
due to their anti-dilutive effect, since the option exercise price for
such option shares was greater than the Company's average common stock
price for such periods.
9
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
H. The Company maintains investments in marketable securities (including
marketable equity securities and bond funds) and a number of private
equity funds principally as part of its tax planning strategies, as any
gains enhance the utilization of tax capital loss carryforwards. Included
in other assets are the following financial investments, in thousands:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Marketable equity securities $252,790 $216,400
Bond funds 118,460 229,930
Private equity funds 356,800 345,650
Metaldyne Corporation 73,780 67,780
TriMas Corporation 25,000 25,000
Other investments 9,250 8,890
-------- --------
Total $836,080 $893,650
======== ========
The Company's investments in marketable equity securities and bond funds
at September 30, 2003 and December 31, 2002 are as follows, in thousands:
PRE-TAX
------------------------
UNREALIZED UNREALIZED RECORDED
COST BASIS GAINS LOSSES BASIS
---------- ---------- ---------- --------
SEPTEMBER 30, 2003
Marketable equity
securities $276,810 $7,540 $(31,560) $252,790
Bond funds $111,600 $6,860 $ --- $118,460
DECEMBER 31, 2002
Marketable equity
securities $264,160 $2,210 $(49,970) $216,400
Bond funds $225,560 $4,600 $ (230) $229,930
Income (loss) from financial investments is included in other, net within
other income (expense), net, and is summarized as follows, in thousands:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Realized gains from
marketable securities $ 10,120 $ 3,440 $ 36,680 $ 9,380
Realized losses from
marketable securities (3,030) (1,850) (12,800) (36,580)
Dividend income from
marketable securities 3,040 1,540 12,500 2,830
Income (expense) from
other investments, net 6,290 (1,300) 8,890 1,660
Termination of interest
ratelock --- (13,840) --- (13,840)
Dividend income from
other investments 2,530 3,590 6,280 5,060
-------- -------- -------- --------
Income (loss) from
financial
investments $ 18,950 $ (8,420) $ 51,550 $(31,490)
======== ======== ======== ========
Impairment charge:
Investment in private
equity funds $ (9,300) $ --- $ (9,300) $ ---
======== ======== ======== ========
10
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
I. Other, net, which is included in other income (expense), net, includes
the following, in thousands:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Equity earnings $ --- $ 5,680 $ 490 $ 12,920
Income from cash and
cash investments 1,840 2,120 6,740 3,920
Other interest income 2,070 1,840 4,950 3,340
Income (loss) from
financial investments 18,950 (8,420) 51,550 (31,490)
Impairment charge:
Investment in private
equity funds (9,300) --- (9,300) ---
Loss on early retirement
of debt (2,670) --- (2,670) ---
Gain from sale of equity
investment --- --- 4,840 ---
Other items, net (4,390) (16,440) (5,470) (28,830)
-------- -------- -------- --------
$ 6,500 $(15,220) $ 51,130 $(40,140)
======== ======== ======== ========
In the second quarter of 2003, the Company completed the sale of its 42
percent equity investment in Emco Limited for cash proceeds of
approximately $75 million. The sale resulted in a pre-tax gain of $4.8
million.
In the third quarter of 2003, the Company purchased and retired $88.9
million of notes due May 2004. The Company paid and expensed a premium of
$2.7 million on the purchase of such notes.
11
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
J. The following table presents information about the Company by segment and
geographic area, in millions:
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
---------------------------------------------------------------------------------
2003 2002 2003 2002 2003 2002 2003 2002
---------------------------------------------------------------------------------
NET SALES (1) OPERATING PROFIT(2) NET SALES (1) OPERATING PROFIT(2)
----------------------------------------- -------------------------------------
The Company's operations by segment were (3):
Cabinets and Related Products $ 802 $ 738 $ 122 $ 114 $ 2,244 $ 2,076 $ 319 $ 281
Plumbing Products 683 535 95 83 1,962 1,508 272 242
Installation and Other Services 642 489 110 82 1,769 1,277 275 217
Decorative Architectural Products 441 376 53 88 1,155 1,056 165 256
Other Specialty Products 350 309 70 69 944 811 169 163
------- ------- ------- ------- ------- ------- ------- -------
Total $ 2,918 $ 2,447 $ 450 $ 436 $ 8,074 $ 6,728 $ 1,200 $ 1,159
======= ======= ======= ======= ======= ======= ======= =======
The Company's operations by geographic area were:
North America $ 2,369 $ 2,043 $ 431 $ 380 $ 6,494 $ 5,678 $ 1,080 $ 1,019
International, principally Europe 549 404 19 56 1,580 1,050 120 140
------- ------- ------- ------- ------- ------- ------- -------
Total, as above $ 2,918 $ 2,447 450 436 $ 8,074 $ 6,728 1,200 1,159
======= ======= ======= =======
General corporate expense, net (28) (25) (85) (73)
Income (charge) for litigation settlement (4) 58 (166) 71 (166)
Expense related to accelerated benefits (5) --- --- (16) ---
------- ------- ------- -------
Operating profit, as reported 480 245 1,170 920
Other (expense), net (60) (76) (151) (210)
------- ------- ------- -------
Income from continuing operations
before income taxes and minority
interest $ 420 $ 169 $ 1,019 $ 710
======= ======= ======= =======
(1) Intra-company sales among segments were not material.
(2) Operating results reflect charges of $35 million and $23 million in the
third quarter and second quarter of 2003, respectively, for a United
Kingdom business unit in the Decorative Architectural Products segment
and $7 million in the third quarter of 2003 for a United Kingdom business
unit in the Plumbing Products segment.
(3) Assets in the Cabinets and Related Products segment increased by $197
million in the first nine months of 2003, primarily due to contingent
consideration payments.
(4) The income (charge) for litigation settlement relates to litigation
discussed in Note L regarding the Company's subsidiary, Behr Process
Corporation, which is included in the Decorative Architectural Products
segment.
(5) Due to the unexpected passing of the Company's President and Chief
Operating Officer, certain benefits were accelerated and expensed in the
first nine months of 2003.
12
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
K. The Company's total comprehensive income (loss) was as follows, in
thousands:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income $ 318,770 $ 122,800 $ 714,120 $ 394,900
Other comprehensive income
(loss):
Cumulative translation
adjustments 8,420 (11,210) 184,240 130,640
Unrealized gain (loss) on
marketable securities (5,050) (46,050) 16,520 (40,760)
--------- --------- --------- ---------
Total comprehensive
income (loss) $ 322,140 $ 65,540 $ 914,880 $ 484,780
========= ========= ========= =========
The unrealized gain (loss) on marketable securities is net of income tax
(credit) of $(3.0) million and $9.7 million for the three months and nine
months ended September 30, 2003, respectively, and $(27.0) million and
$(23.9) million for the three months and nine months ended September 30,
2002, respectively.
The components of accumulated other comprehensive income (loss), net of
income tax, at September 30, 2003 and December 31, 2002 were as follows,
in thousands:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Unrealized loss on marketable securities $ (10,820) $ (27,340)
Minimum pension liability (57,900) (57,900)
Cumulative translation adjustments 247,780 63,540
--------- ---------
Accumulated other comprehensive income
(loss) $ 179,060 $ (21,700)
========= =========
Unrealized loss on marketable securities is reported net of income tax
credit of $6.3 million and $16.1 million at September 30, 2003 and
December 31, 2002, respectively.
The minimum pension liability is reported net of income tax credit of $34
million at both September 30, 2003 and December 31, 2002.
13
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
L. The Company is subject to lawsuits and claims pending or asserted with
respect to matters arising in the ordinary course of business.
As the Company reported in previous filings, in the fourth quarter of
2002, the Company and its subsidiary, Behr Process Corporation, agreed to
two Settlements (the National Settlement and the Washington Settlement)
to resolve all class action lawsuits pending in the United States
involving certain exterior wood coating products formerly manufactured by
Behr. In the Washington Settlement, the Company and Behr's insurers have
paid Class Counsel fees of $12.5 million awarded by the trial court. In
addition, pursuant to the terms of the Washington Settlement and an order
entered by the trial court in October 2003, the Company and Behr's
insurers made partial payments totaling $1.4 million on 355 claims that
had been recommended for payment by the claims administrator. The total
amount of the insurers' contribution related to claims will not be
reasonably estimable until the claims process is completed. The filing
deadline for claims in the Washington Settlement is January 17, 2004.
Until all claims are received and processed, the Company has determined
that its original estimate of $67.5 million is still the best estimate of
the Company's ultimate liability for the Washington Settlement.
In the third quarter of 2002, the Company estimated that the cost of the
National Settlement would range from $96 million to $136 million
(including $66 million for the payment of claims), excluding amounts that
the Company has recovered or expects to recover from liability insurers.
The Company and Behr's insurers have paid Class Counsel fees of $25
million awarded by the trial court. In the National Settlement, fourteen
class members filed notices of appeal of the trial court's judgment of
final approval. All appeals relative to the National Settlement were
dismissed on September 15, 2003. In addition, all other cases pending in
the United States have been dismissed with prejudice. The filing deadline
for claims in the National Settlement was September 2, 2003 and the
Company received approximately 3,700 claims, which is a fraction of the
180,000 claims originally projected. Implementation of the claims payment
process did not begin until all appeals were resolved. The Company
determined the average amount to be paid for merchandise certificates
based on claims received. The Company also has estimated the average cost
per cash claim received. As a result, the Company estimates that the
total cost of claims related to the National Settlement will approximate
$8 million compared with the $66 million recorded in the third quarter of
2002. Accordingly, the Company reduced the litigation accrual by $57.6
million in the third quarter of 2003.
14
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONCLUDED)
M. Stock price guarantees as of September 30, 2003 are summarized as
follows, in thousands except per share data:
SHARES ISSUED SETTLEMENT
-------------- MINIMUM OPTIONS(A)
# OF ISSUE STOCK PRICE ---------------- MATURITY
SHARES PRICE GUARANTEE SHARES CASH DATE
----------------------------------------------------------------------
16,667 $25.21 $31.20 4,549 $111,502 7/31/04
1,600 $30.00 $40.00 1,011 24,784 12/31/04-4/30/05
------ ----- --------
18,267 5,560 $136,286
====== ===== ========
(A) Amounts are computed based on the ten-day average of the high and
low Company common stock prices ending September 30, 2003 of
$24.51. Shares contingently issuable under these agreements are
included in the calculation of diluted earnings per common share.
In the second quarter of 2003, the Company paid, in cash, the stock price
guarantee associated with approximately four million shares of Company
common stock and an additional stock price guarantee for the achievement
of earnout targets, not included in the above table. The payments
approximated $140 million in aggregate.
In July 2003, the Company paid, in cash, the stock price guarantee
associated with approximately 1.7 million shares of Company common stock,
not included in the table above. The payment approximated $4 million.
In November 2003, the Company paid approximately $21 million, in cash,
related to the stock price guarantee associated with approximately 11.6
million shares of Company common stock, not included in the above table.
N. In the second quarter of 2003, the Company recorded a non-cash pre-tax
charge which reduced operating profit by approximately $23 million with
respect to a United Kingdom business unit in the Decorative Architectural
Products segment. In the third quarter of 2003, the Company recorded an
additional $12 million of charges related to 2002, and an additional $3
million of charges related to the first half of 2003. As previously
disclosed, the charges relate primarily to a business system
implementation failure which allowed former management of the business
unit to circumvent internal controls and artificially inflate the unit's
operating profit. The Company also determined that goodwill was impaired
and recorded an additional $5 million charge in the third quarter of
2003.
In addition, the Company has determined that the strategic plan for this
business unit, relative to certain product offerings and customer focus,
should be changed. This revision in operating strategy resulted in third
quarter 2003 charges aggregating approximately $15 million related to
inventories and receivables.
In the third quarter of 2003, the Company also detected that an employee
at a United Kingdom business unit in the Plumbing Products segment had
circumvented internal controls and overstated operating results by
approximately $4 million in 2002 and by approximately $3 million in the
first half of 2003. The Company is continuing to review the operation and
its internal controls to determine if additional changes are required.
Upon completion of the review, the Company will determine if any
impairment of assets exists, including goodwill (approximately $28
million at September 30, 2003).
15
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2003 AND THE FIRST NINE MONTHS 2003 VERSUS
THIRD QUARTER 2002 AND THE FIRST NINE MONTHS 2002
SALES AND OPERATIONS
The following tables set forth the Company's net sales and operating
profit margin information from continuing operations by segment and geographic
area, dollars in millions:
THREE MONTHS ENDED
SEPTEMBER 30 PERCENT INCREASE
------------------ ----------------
2003 2002 2003 VS. 2002
------------------ ----------------
NET SALES:
Cabinets and Related Products $ 802 $ 738 9%
Plumbing Products 683 535 28%
Installation and Other Services 642 489 31%
Decorative Architectural Products 441 376 17%
Other Specialty Products 350 309 13%
------ ------
Total $2,918 $2,447 19%
====== ======
North America $2,369 $2,043 16%
International, principally Europe 549 404 36%
------ ------
Total $2,918 $2,447 19%
====== ======
NINE MONTHS ENDED
SEPTEMBER 30
------------------
2003 2002
------------------
NET SALES:
Cabinets and Related Products $2,244 $2,076 8%
Plumbing Products 1,962 1,508 30%
Installation and Other Services 1,769 1,277 39%
Decorative Architectural Products 1,155 1,056 9%
Other Specialty Products 944 811 16%
------ ------
Total $8,074 $6,728 20%
====== ======
North America $6,494 $5,678 14%
International, principally Europe 1,580 1,050 50%
------ ------
Total $8,074 $6,728 20%
====== ======
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ ------------------
2003 2002 2003 2002
------------------ ------------------
OPERATING PROFIT MARGIN: (A)
Cabinets and Related Products 15.2% 15.4% 14.2% 13.5%
Plumbing Products 13.9% 15.5% 13.9% 16.0%
Installation and Other Services 17.1% 16.8% 15.5% 17.0%
Decorative Architectural Products 12.0% 23.4% 14.3% 24.2%
Other Specialty Products 20.0% 22.3% 17.9% 20.1%
North America 18.2% 18.6% 16.6% 17.9%
International, principally Europe 3.5% 13.9% 7.6% 13.3%
Total 15.4% 17.8% 14.9% 17.2%
TOTAL OPERATING PROFIT MARGIN,
AS REPORTED 16.4% 10.0% 14.5% 13.7%
(A) Before: general corporate expense of $28 million and $85 million for the
three-month and nine-month periods ended September 30, 2003,
respectively; accelerated benefit expense related to the unexpected
passing of the Company's President and Chief Operating Officer of $16
million for the nine-month period ended September 30, 2003; and income
regarding the Behr litigation settlement (related to the Decorative
Architectural Products segment) of $57.6 million and $71.1 million for
the three-month and nine-month periods ended September 30, 2003,
respectively. Before general corporate expense of $25 million and $73
million for the three-month and nine-month periods ended September 30,
2002, respectively, and the charge for the Behr litigation settlement of
$166 million related to the Decorative Architectural Products segment for
both the three-month and nine-month periods ended September 30, 2002.
16
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reports its financial results in accordance with generally
accepted accounting principles (GAAP). However, the Company believes that
certain non-GAAP performance measures and ratios, used in managing the business,
may provide users of this financial information with additional meaningful
comparisons between current results and results in prior periods. Non-GAAP
financial measures and ratios should be viewed in addition to, and not as an
alternative for, the Company's reported results.
NET SALES
Net sales for the three-month and nine-month periods ended September 30,
2003 increased 19 percent and 20 percent, respectively, from the comparable
periods in 2002. Excluding acquisitions and divestitures, net sales increased
10 percent and 8 percent for the three-month and nine-month periods ended
September 30, 2003, respectively, over the comparable periods of the prior year.
The following table reconciles reported net sales to net sales, excluding
acquisitions and divestitures, in thousands:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales, as reported $ 2,917,900 $ 2,446,700 $ 8,073,790 $ 6,728,230
- Acquisitions (272,100) (49,850) (979,990) (128,960)
- Divestitures (A) --- (840) --- (12,910)
----------- ----------- ----------- -----------
Net sales, excluding
acquisitions and
divestitures 2,645,800 2,396,010 7,093,800 6,586,360
- Currency translation (43,610) --- (166,650) ---
----------- ----------- ----------- -----------
Net sales, excluding
acquisitions,
divestitures and the
effect of currency $ 2,602,190 $ 2,396,010 $ 6,927,150 $ 6,586,360
=========== =========== =========== ===========
(A) Refers to divestitures completed prior to January 1, 2003.
Divestitures completed subsequent to January 1, 2003 are
considered discontinued operations in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." Sales related to discontinued operations are not included
in the Company's net sales, as reported, for any period presented.
Net sales of Cabinets and Related Products increased 9 percent and 8
percent for the three-month and nine-month periods ended September 30, 2003,
respectively, from the comparable periods of the prior year, due to increased
sales volume of assembled cabinets largely through North American retail
distribution channels at major home centers and through the new housing
construction market in the United States, as well as a more favorable product
mix.
Net sales of Plumbing Products increased 28 percent and 30 percent for
the three-month and nine-month periods ended September 30, 2003, respectively,
from the comparable periods of the prior year, primarily due to acquisitions
(principally the acquisition of a majority interest in Hansgrohe in December
2002).
17
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales of Installation and Other Services increased 31 percent and 39
percent for the three-month and nine-month periods ended September 30, 2003,
respectively, from the comparable periods of the prior year, primarily due to
acquisitions (principally the acquisition of Service Partners in September 2002)
as well as increased sales of non-insulation installed products.
Net sales of Decorative Architectural Products increased 17 percent and 9
percent for the three-month and nine-month periods ended September 30, 2003,
respectively, from the comparable periods of the prior year, due largely to
higher unit sales volume of paints and stains.
Net sales of Other Specialty Products increased 13 percent and 16 percent
for the three-month and nine-month periods ended September 30, 2003,
respectively, from the comparable periods of the prior year, primarily due to
acquisitions as well as increased sales of vinyl windows.
Net sales from North American operations increased 16 percent and 14
percent for the three-month and nine-month periods ended September 30, 2003,
respectively, from the comparable periods of 2002, primarily due to acquisitions
as well as increased sales volume of assembled cabinets, installed sales of
non-insulation products, paints and stains and vinyl windows.
Net sales from International operations increased 36 percent and 50
percent for the three-month and nine-month periods ended September 30, 2003,
respectively, from the comparable periods of 2002, primarily due to acquisitions
as well as a weaker U.S. dollar which had a favorable influence on the
translation of International sales in 2003. A weaker U.S. dollar, principally
against the Euro, increased International sales by approximately 11 percent and
17 percent for the three-month and nine-month periods ended September 30, 2003,
respectively.
OPERATING MARGINS
The Company's gross profit margins decreased to 30.9 percent and 30.6
percent for the three-month and nine-month periods ended September 30, 2003,
respectively, from 31.9 percent and 32.0 percent for the comparable periods in
2002, respectively. The decrease in gross profit margins reflects increased
sales in segments which have somewhat lower gross margins, relatively higher
International sales (which have lower gross margins), new product launch costs
as well as increased energy costs which impacted material, freight and other
operating costs. In addition, operating results for the three-month and
nine-month periods ended September 30, 2003 were reduced by non-cash, pre-tax
charges of $42 million and $65 million, respectively, relating to two United
Kingdom business units, one in the Decorative Architectural Products segment and
the other in the Plumbing Products segment, discussed below.
Selling, general and administrative expenses as a percentage of sales
increased to 16.5 percent and 17.0 percent for the three-month and nine-month
periods ended September 30, 2003, respectively, as compared with 15.1 percent
and 15.9 percent for the comparable periods of the prior year, respectively.
Selling, general and administrative expenses for the nine-month period ended
September 30, 2003 include $16 million of accelerated benefit expense related
to the unexpected passing of the Company's President and Chief Operating
Officer. Selling, general and administrative expenses for the three-month and
nine-month periods ended September 30, 2003 include the effect of increased
insurance, pension and advertising and promotion costs as well as adjustments
related to certain United Kingdom operations.
18
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating profit for the three-month and nine-month periods ended
September 30, 2003 includes the effect of recently acquired companies that have
lower operating margins than the Company's average. Operating profit for the
three-month and nine-month periods ended September 30, 2003 also benefited from
$57.6 million and $71.1 million, respectively, of income regarding the Behr
litigation settlement. The filing deadline for the National Settlement was
September 2, 2003. The Company received a fraction of the projected claims and
currently estimates the cost to approximate $8 million compared with the $66
million originally recorded by the Company in the third quarter of 2002;
accordingly the Company recorded $57.6 million of income in the third quarter
of 2003.
Operating profit margins for the Cabinets and Related Products segment
were 15.2 percent and 14.2 percent for the three-month and nine-month periods
ended September 30, 2003, respectively, compared with 15.4 percent and 13.5
percent for the comparable periods of the prior year, respectively. Operating
profit margins in this segment reflect the positive impact of higher sales
volume as well as lower fixed costs resulting from the rationalization of
existing manufacturing capacity.
Operating profit margins for the Plumbing Products segment were 13.9
percent for both the three-month and nine-month periods ended September 30,
2003, compared with 15.5 percent and 16.0 percent for the comparable periods of
the prior year, with such decrease primarily due to a non-cash, pre-tax charge
of approximately $7 million relating to a United Kingdom business unit as
discussed below. Operating profit margins in this segment also include the
effect of a recently acquired company that has lower margins than the segment
average.
Operating profit margins for the Installation and Other Services segment
were 17.1 percent and 15.5 percent for the three-month and nine-month periods
ended September 30, 2003, respectively, compared with 16.8 percent and 17.0
percent for the comparable periods of the prior year. The year-to-date operating
margin decline in this segment is primarily attributable to adverse weather
conditions experienced in the first half of 2003 as well as increases in sales
of lower-margin non-insulation installed products.
Operating profit margins for the Decorative Architectural Products
segment were 12.0 percent and 14.3 percent for the three-month and nine-month
periods ended September 30, 2003, respectively, compared with 23.4 percent and
24.2 percent for the comparable periods of the prior year. Operating profit
margins for this segment were impacted by increased material costs as well as
increased advertising costs, including additional costs associated with new
in-store paint display centers. Operating profit margins in this segment for
the three-month and nine-month periods ended September 30, 2003 also include
the effect of a non-cash, pre-tax charge of approximately $35 million and
$58 million, respectively, related to a United Kingdom business unit discussed
below.
19
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the second quarter of 2003, the Company recorded a non-cash, pre-tax
charge which reduced operating profit by approximately $23 million with respect
to a United Kingdom business unit in the Decorative Architectural Products
segment. The Company's recently completed review determined that an additional
$12 million of charges related to 2002, resulting from accounting
irregularities, should be recorded in the third quarter of 2003. In addition,
the review disclosed that first half 2003 results were overstated by
approximately $3 million. These overstatements were corrected in the third
quarter of 2003. This analysis concluded that the previously disclosed business
system implementation failure allowed former management to circumvent internal
controls and artificially inflate the unit's operating profit. The Company also
determined that goodwill was impaired and recorded a $5 million charge. As
previously noted, the Company replaced management personnel at the business unit
and has implemented corrective action to prevent this situation from occurring
at the unit in the future.
In addition, the Company completed a review of the business plan for the
business unit with the new management team and has determined that the plan,
relative to certain product offerings and customer focus, should be changed.
This revision in operating strategy resulted in third quarter 2003 charges
aggregating approximately $15 million related to inventories and receivables.
In the third quarter of 2003, the Company also detected that an employee
at a United Kingdom business unit in the Plumbing Products segment had
circumvented internal controls and overstated operating results by approximately
$4 million in 2002 and by approximately $3 million in the first half of 2003.
These overstatements were corrected in the third quarter of 2003. The Company
made the appropriate personnel changes and is continuing to review the operation
and its internal controls to determine if any additional changes are required.
Upon completion of the review, the Company will determine if any impairment of
assets exists, including goodwill (approximately $28 million at September 30,
2003).
Operating profit margins for the Other Specialty Products segment were
20.0 percent and 17.9 percent for the three-month and nine-month periods ended
September 30, 2003, respectively, compared with 22.3 percent and 20.1 percent
for the comparable periods of the prior year. The margin decline in this segment
is primarily attributable to increased material and promotion costs as well as
plant start-up costs.
Operating profit margins for North American operations were 18.2 percent
and 16.6 percent for the three-month and nine-month periods ended September 30,
2003, respectively, compared with 18.6 percent and 17.9 percent for the
comparable periods of the prior year. The decrease in operating profit margins
is principally attributed to increased sales in segments that have somewhat
lower operating margins and increased energy costs, as well as increased
advertising and promotion costs.
Operating profit margins for International operations were 3.5 percent and 7.6
percent for the three-month and nine-month periods ended September 30, 2003,
respectively, compared with 13.9 percent and 13.3 percent for the comparable
periods of the prior year, with such declines due principally to the items
previously discussed as well as lower margins of recently acquired companies.
20
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER INCOME (EXPENSE), NET
Other, net for the three-month and nine-month periods ended September 30,
2003 includes $7.1 million and $23.9 million, respectively, of realized gains,
net from the sale of marketable securities, dividend income of $5.6 million and
$18.8 million, respectively, and $6.3 million and $8.9 million of income
(expense), net regarding other investments, respectively. Other, net for 2003
also includes a $9.3 million impairment charge recorded in the third quarter
of 2003 for the write-down of an investment in a private equity fund. Other,
net for the three-month and nine-month periods ended September 30, 2002
included $1.6 million and $(27.2) million, respectively, of realized gains
(losses), net from the sale of marketable securities, dividend income of
$5.1 million and $7.9 million, respectively, and $(1.3) million and
$1.6 million, respectively, of income (expense), net regarding other
investments. In addition, in the third quarter of 2002, the Company incurred
$13.8 million of losses related to interest ratelock transactions entered into
in anticipation of the Company issuing fixed rate debt in the third quarter
of 2002.
Interest expense for the three-month and nine-month periods ended
September 30, 2003 was $66.8 million and $201.8 million, respectively, compared
with $61.1 million and $170.3 million for the comparable periods of the prior
year, primarily due to increased fixed rate borrowings in the last half of 2002.
DISCONTINUED OPERATIONS
On September 30, 2003, the Company completed the sale of its Baldwin
Hardware and Weiser Lock businesses. Baldwin and Weiser were included in the
Decorative Architectural Products segment and manufacture a wide range of
architectural and decorative products, including builders' hardware and
locksets. In a separate transaction on September 30, 2003, the Company also
completed the sale of its Marvel Group. Marvel manufactures office workstations
and machine stands, and was included in the Other Specialty Products segment.
The sale of these businesses reflects the Company's continuing commitment to
deploy its assets in businesses that support its operating strategies and
provide the greatest opportunities to create value for the Company's
shareholders. Total proceeds from the sale of these companies were $289 million,
including cash of $284 million and notes receivable of $5 million.
Income (after tax) from discontinued operations for the third quarter and
nine months ended September 30, 2003 was $57.3 million and $66.9 million,
respectively ($.12 per common share and $.13 per common share, respectively),
including the pre-tax gain, net from sale of the businesses of $90.5 million.
INCOME AND EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS
Income (after tax) from continuing operations for the three months ended
September 30, 2003 increased to $261.5 million and diluted earnings per common
share from continuing operations increased to $.53 compared with $.22 for the
comparable period of 2002. Income (after tax) from continuing operations for the
nine-month period ended September 30, 2003 was $647.2 million and related
diluted earnings per common share was $1.30 compared with $.93 per common share
for the comparable period of the prior year.
21
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The three-month and nine-month periods ended September 30, 2003 were
favorably affected by income related to the litigation settlement of $57.6
million and $71.1 million, respectively. The three-month and nine-month periods
ended September 30, 2002 were impacted by the charge for the litigation
settlement of $166 million.
The Company's effective tax rate for continuing operations was 37.0
percent and 35.7 percent for the three-month and nine-month periods ended
September 30, 2003, respectively. The rate increase reflects an increase in the
proportion of domestic income (which is taxed at a higher effective rate than
foreign income) as a result of recent acquisitions and charges related to United
Kingdom operations. The Company's effective tax rate, excluding the charge for
litigation settlement, was 34.1 percent and 34.0 percent for the three-month and
nine-month periods ended September 30, 2002, respectively, prior to the
accounting change effect. The Company estimates that its effective tax rate
should approximate 36 percent for the full year 2003.
OTHER FINANCIAL INFORMATION
The Company's current ratio was 1.7 to 1 at September 30, 2003, as
compared with 2.0 to 1 at December 31, 2002. The decline is due to the
reclassification of $411 million of debt due May 3, 2004 to current notes
payable from long-term debt in the second quarter of 2003.
For the nine months ended September 30, 2002, cash of $924.3 million was
provided by operating activities. Cash used for financing activities was
$1,184.5 million, including primarily $208.7 million for cash dividends paid,
$299.6 million for the retirement of notes, $555.3 million for the acquisition
and retirement of Company common stock in open-market transactions and $48.1
million for the acquisition of Company common stock for the Company's long-term
stock incentive award plan. Cash provided by investing activities was $73.8
million, including primarily $281.6 million of proceeds from the disposition of
businesses, $120.5 million from the net sales of marketable securities and other
investments and $75.4 million from the sale of the equity investment in Emco.
Cash used for investing activities included primarily $197.9 million for capital
expenditures and $208.3 million related to acquisitions, including contingent
consideration (earnouts and share price guarantees). The aggregate of the
preceding items and the foreign currency effect on cash of $27.5 million
represents a net cash decrease of $158.9 million.
In September 2003, the Company increased its quarterly cash dividend by
14 percent (a larger percentage increase than in recent years) to $.16 from $.14
per common share. This marks the 45th consecutive year in which dividends have
been increased.
The Company is subject to lawsuits and claims pending or asserted with
respect to matters generally arising in the ordinary course of business. Note L
of the Condensed Consolidated Financial Statements discusses specific claims
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.
22
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUTLOOK FOR THE COMPANY
The Company's favorable sales performance has continued early in the
fourth quarter with October sales up nearly 17 percent, including strong
internal sales growth. Assuming that current business trends continue for the
remainder of the year, the Company expects to achieve record sales and earnings
for 2003. The Company continues to improve its working capital management and
cash flows. Due to seasonal factors, the Company expects margins in the fourth
quarter to be modestly lower than margins achieved in the second and third
quarters of 2003.
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.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
conducted an evaluation of the Company's disclosure controls and procedures as
required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15 as of the end
of the period covered by this report. Based upon that evaluation:
a. they have concluded that the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) or
15d-15(e)) are designed to be and are adequate to ensure that
information required to be disclosed by the Company in the reports
it files or submits under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported, within
the time periods specified in the rules and forms of the
Securities and Exchange Commission; and
b. they have identified no change in the Company's internal control
over financial reporting that occurred during the period covered
by this report that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over
financial reporting. Reference is made in this regard to the
discussion in Management's Discussion and Analysis regarding
United Kingdom business units in the Decorative Architectural
Products segment and the Plumbing Products segment, although such
officers do not believe the matters described in that discussion
are reasonably likely to materially affect the Company's internal
controls over financial reporting.
23
MASCO CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding this item is set forth in Note L to the
Company's Condensed Consolidated Financial Statements included in Part I, Item 1
of this Report.
ITEMS 2 THROUGH 5 ARE NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
12 - Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
31a - Certification by Chief Executive Officer
31b - Certification by Chief Financial Officer
32 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act
(b) REPORTS ON FORM 8-K:
None.
24
MASCO CORPORATION
PART II. OTHER INFORMATION, CONCLUDED
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MASCO CORPORATION
(Registrant)
DATE: NOVEMBER 6, 2003 BY: /s/ Timothy Wadhams
---------------------- -------------------------------------
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
Exhibit 31a Certification of Chief Executive Officer
Exhibit 31b Certification of Chief Financial Officer
Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act