EXHIBIT 99
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2003 AND 2002
<Table>
<Caption>
(IN MILLIONS,
EXCEPT SHARE DATA)
2003 2002
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash investments................................. $ 795 $ 1,067
Receivables............................................... 1,674 1,546
Inventories............................................... 1,019 1,056
Prepaid expenses and other................................ 316 281
------- -------
Total current assets................................... 3,804 3,950
Property and equipment, net................................. 2,339 2,315
Goodwill.................................................... 4,491 4,297
Other intangible assets, net................................ 344 354
Other assets................................................ 1,171 1,134
------- -------
Total Assets........................................... $12,149 $12,050
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable............................................. $ 334 $ 321
Accounts payable.......................................... 715 541
Accrued liabilities....................................... 1,050 1,070
------- -------
Total current liabilities.............................. 2,099 1,932
Long-term debt.............................................. 3,848 4,316
Deferred income taxes and other............................. 746 508
------- -------
Total Liabilities...................................... 6,693 6,756
------- -------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred shares authorized: 1,000,000; issued: 20,000.... -- --
Common shares authorized: 1,400,000,000; issued:
2003 -- 458,380,000; 2002 -- 488,890,000............... 458 489
Paid-in capital........................................... 1,443 2,207
Retained earnings......................................... 3,299 2,784
Accumulated other comprehensive income (loss)............. 421 (22)
Less: Restricted stock awards............................. (165) (164)
------- -------
Total Shareholders' Equity............................. 5,456 5,294
------- -------
Total Liabilities and Shareholders' Equity............. $12,149 $12,050
======= =======
</Table>
See notes to consolidated financial statements.
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME -- SEE NOTE B
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
<Table>
<Caption>
(IN MILLIONS, EXCEPT
PER SHARE DATA)
2003 2002 2001
------- ------ ------
Net sales................................................... $10,571 $8,831 $7,705
Cost of sales............................................... 7,330 6,040 5,377
------- ------ ------
Gross profit......................................... 3,241 2,791 2,328
Selling, general and administrative expenses................ 1,776 1,393 1,230
(Income) from planned disposition of a business............. -- (16) --
(Income) charge for litigation settlement, net.............. (72) 147 --
Goodwill impairment charge.................................. 53 -- --
Amortization of goodwill.................................... -- -- 87
------- ------ ------
Operating profit..................................... 1,484 1,267 1,011
------- ------ ------
Other income (expense), net:
Impairment charge for:
Securities of Furnishings International Inc. .......... -- -- (460)
Investments............................................ (19) (24) (70)
Other, net................................................ 76 (42) 34
Interest expense.......................................... (261) (235) (237)
------- ------ ------
(204) (301) (733)
------- ------ ------
Income from continuing operations before income taxes
and minority interest............................... 1,280 966 278
Income taxes................................................ 477 327 95
------- ------ ------
Income from continuing operations before minority
interest............................................ 803 639 183
Minority interest........................................... 13 -- --
------- ------ ------
Income from continuing operations.................... 790 639 183
Income from discontinued operations and gain, net of income
taxes..................................................... 16 43 16
Cumulative effect of accounting change, net................. -- (92) --
------- ------ ------
Net income........................................... $ 806 $ 590 $ 199
======= ====== ======
Earnings per common share:
Basic:
Income from continuing operations...................... $ 1.65 $ 1.32 $ .40
Income from discontinued operations and gain, net of
income taxes.......................................... .03 .09 .03
Cumulative effect of accounting change, net............ -- (.19) --
------- ------ ------
Net income............................................. $ 1.68 $ 1.22 $ .43
======= ====== ======
Diluted:
Income from continuing operations...................... $ 1.61 $ 1.24 $ .39
Income from discontinued operations and gain, net of
income taxes.......................................... .03 .08 .03
Cumulative effect of accounting change, net............ -- (.18) --
------- ------ ------
Net income............................................. $ 1.64 $ 1.15 $ .42
======= ====== ======
</Table>
See notes to consolidated financial statements.
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
<Table>
<Caption>
(IN MILLIONS)
2003 2002 2001
------- ------- -------
CASH FLOWS FROM (FOR):
OPERATING ACTIVITIES:
Net income................................................ $ 806 $ 590 $ 199
Depreciation and amortization............................. 244 220 269
Interest on pay-in-kind notes receivable.................. -- -- (29)
Deferred income taxes..................................... 179 64 (95)
Gain on disposition of businesses, net.................... (89) -- --
Loss on early retirement of debt.......................... 7 -- --
(Gain) loss on disposition of investments, net............ (40) 53 (17)
European charges.......................................... 54 -- --
Cumulative effect of accounting change, net............... -- 92 --
Litigation settlement, net................................ (72) 147 --
Impairment charges:
Securities of Furnishings International Inc. .......... -- -- 460
Investments............................................ 19 24 70
Goodwill............................................... 142 -- --
Other non-cash items, net................................. 135 47 72
Increase in receivables................................... (126) (99) (87)
Decrease in inventories................................... 39 11 48
Increase in accounts payable and accrued liabilities,
net.................................................... 123 76 77
------- ------- -------
Net cash from operating activities................... 1,421 1,225 967
------- ------- -------
FINANCING ACTIVITIES:
Increase in principally bank debt......................... 46 375 474
Payment of principally bank debt....................... (135) (1,179) (2,235)
Retirement of notes....................................... (452) -- (87)
Purchase of Company common stock for:
Retirement............................................. (779) (166) (67)
Long-term stock incentive award plan................... (48) (31) (49)
Issuance of Company common stock.......................... 37 598 --
Issuance of notes, net.................................... -- 1,438 2,050
Cash dividends paid....................................... (286) (268) (244)
------- ------- -------
Net cash (for) from financing activities............. (1,617) 767 (158)
------- ------- -------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired........... (239) (736) (589)
Capital expenditures...................................... (271) (285) (274)
Purchases of marketable securities........................ (377) (582) (425)
Proceeds from disposition of:
Marketable securities.................................. 421 306 422
Businesses, net of cash disposed....................... 284 21 232
Equity investment...................................... 75 -- --
Proceeds (purchases) of other investments, net............ 11 (51) (30)
Decrease (increase) in long-term notes receivable, net.... 19 (22) 8
Other, net................................................ (51) 53 (11)
------- ------- -------
Net cash (for) investing activities.................. (128) (1,296) (667)
------- ------- -------
Effect of exchange rates on cash and cash investments....... 52 59 1
------- ------- -------
(DECREASE) INCREASE FOR THE YEAR............................ (272) 755 143
Balance at January 1........................................ 1,067 312 169
------- ------- -------
Balance at December 31...................................... $ 795 $ 1,067 $ 312
======= ======= =======
</Table>
See notes to consolidated financial statements.
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
<Table>
<Caption>
(IN MILLIONS, EXCEPT PER SHARE DATA)
PREFERRED COMMON ACCUMULATED
SHARES SHARES OTHER RESTRICTED
($1 PAR ($1 PAR PAID-IN RETAINED COMPREHENSIVE STOCK
TOTAL VALUE) VALUE) CAPITAL EARNINGS INCOME (LOSS) AWARDS
------ --------- ------- ------- -------- ------------- ----------
BALANCE, JANUARY 1, 2001................. $3,286 $ -- $445 $ 631 $2,520 $(170) $(140)
Net income............................... 199 199
Cumulative translation adjustments....... (46) (46)
Unrealized gain on marketable securities,
net of income tax of $16............... 27 27
------
Total comprehensive income............. 180
Shares issued............................ 816 17 799
Shares repurchased....................... (67) (3) (64)
Cash dividends declared.................. (250) (250)
Stock-based compensation................. (7) 15 (22)
------ ----- ---- ------ ------ ----- -----
BALANCE, DECEMBER 31, 2001............... 3,958 -- 459 1,381 2,469 (189) (162)
Net income............................... 590 590
Cumulative translation adjustments....... 239 239
Unrealized loss on marketable securities,
net of income tax credit of $9......... (14) (14)
Minimum pension liability, net of income
tax credit of $34...................... (58) (58)
------
Total comprehensive income............. 757
Shares issued............................ 1,016 38 978
Shares repurchased....................... (166) (8) (158)
Cash dividends declared.................. (275) (275)
Stock-based compensation................. 4 6 (2)
------ ----- ---- ------ ------ ----- -----
BALANCE, DECEMBER 31, 2002............... 5,294 -- 489 2,207 2,784 (22) (164)
Net income............................... 806 806
Cumulative translation adjustments....... 393 393
Unrealized gain on marketable securities,
net of income tax of $31............... 53 53
Minimum pension liability, net of income
tax credit of $1....................... (3) (3)
------
Total comprehensive income............. 1,249
Shares issued............................ 64 5 59
Shares repurchased....................... (779) (35) (744)
Settlement of stock-price guarantees..... (67) (67)
Cash dividends declared.................. (291) (291)
Stock-based compensation................. (14) (1) (12) (1)
------ ----- ---- ------ ------ ----- -----
BALANCE, DECEMBER 31, 2003............... $5,456 $ -- $458 $1,443 $3,299 $ 421 $(165)
====== ===== ==== ====== ====== ===== =====
</Table>
See notes to consolidated financial statements.
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of Masco Corporation and all majority-owned subsidiaries. All
significant intercompany transactions have been eliminated. Corporations that
are 20 to 50 percent owned are accounted for using the equity method of
accounting. Corporations that are less than 20 percent owned are accounted for
using the cost method of accounting unless the Company exercises significant
influence over the investee.
Use of Estimates and Assumptions in the Preparation of Financial
Statements. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of any contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results may differ
from these estimates and assumptions.
Revenue Recognition. The Company recognizes revenue as title to products
is transferred to customers or services are rendered, net of applicable
provisions for discounts, returns and allowances. The Company generally
recognizes customer program costs, including cooperative advertising and
customer incentives, as a reduction to net sales. Amounts billed for shipping
and handling are included in net sales, while costs incurred for shipping and
handling are included in cost of sales.
Foreign Currency. The financial statements of the Company's foreign
subsidiaries are measured using the local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at exchange rates as
of the balance sheet date. Revenues and expenses are translated at average
exchange rates in effect during the year. The resulting cumulative translation
adjustments have been recorded in other comprehensive income. Realized foreign
currency transaction gains and losses are included in the consolidated
statements of income.
Cash and Cash Investments. The Company considers all highly liquid
investments with an initial maturity of three months or less to be cash and cash
investments.
Receivables. The Company does significant business with a number of
individual customers, including certain home centers. The Company monitors its
exposure for credit losses and maintains related allowances for doubtful
accounts. Allowances are estimated based upon specific customer balances where a
risk of default has been identified and also include a provision for
non-customer specific defaults based upon historical collection, return and
write-off activity. A separate allowance is maintained for customer incentive
rebates and is generally based upon sales activity. Accounts and notes
receivable are presented net of certain allowances (including allowances for
doubtful accounts) of $84 million and $69 million at December 31, 2003 and 2002,
respectively.
Property and Equipment. Property and equipment, including significant
betterments to existing facilities, are recorded at cost. Upon retirement or
disposal, the cost and accumulated depreciation are removed from the accounts
and any gain or loss is included in the consolidated statements of income.
Maintenance and repair costs are charged against earnings as incurred.
Customer Promotion Costs. The Company records estimated reductions to
revenue for customer programs and incentive offerings, including special pricing
arrangements, promotions and other volume-based incentives. In-store displays
that are owned by the Company and used to market the Company's products are
included in other assets in the consolidated balance sheets and are amortized
over the expected useful life of three years; related amortization expense is
classified in selling expense in the consolidated statements of income.
Depreciation. Depreciation is computed principally using the straight-line
method over the estimated useful lives of the assets. Annual depreciation rates
are as follows: buildings and land improvements, 2 to
1
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A. ACCOUNTING POLICIES -- (CONTINUED)
10 percent, and machinery and equipment, 5 to 33 percent. Depreciation expense
was $192 million, $164 million and $145 million in 2003, 2002 and 2001,
respectively.
Goodwill and Other Intangible Assets. On January 1, 2002, Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," became effective. In accordance with SFAS No. 142, the Company is no
longer recording amortization expense related to goodwill and other
indefinite-lived intangible assets. The Company has provided a supplemental
disclosure of adjusted net income and basic and diluted earnings per common
share for the twelve months ended December 31, 2001 in Note I to the
consolidated financial statements. The Company performs impairment testing of
goodwill and other indefinite-lived intangible assets in the fourth quarter of
each year or as an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount.
The Company compares fair value of the reporting units to the carrying value of
the reporting units. Fair value is determined using a discounted cash flow
method. Intangible assets with finite useful lives are amortized using the
straight-line method over their estimated useful lives.
Fair Value of Financial Instruments and Derivative Instruments. The
carrying value of financial instruments reported in the consolidated balance
sheets for current assets, current liabilities and long-term variable-rate debt
approximates fair value. The fair value of financial instruments that are
carried as non-current investments (other than those accounted for using the
equity method of accounting) is based principally on information from investment
fund managers and other assumptions, on quoted market prices for those or
similar investments, by estimating the fair value of consideration to be
received or by discounting future cash flows using a discount rate that reflects
the risk of the underlying investments. The fair value of the Company's
long-term fixed-rate debt instruments is based principally on quoted market
prices for the same or similar issues or the current rates available to the
Company for debt with similar terms and remaining maturities. The aggregate
market value of non-current investments and long-term debt at December 31, 2003
was approximately $956 million and $4,129 million, as compared with the
aggregate carrying value of $980 million and $3,849 million, respectively, and
at December 31, 2002 such aggregate market value was approximately $875 million
and $4,572 million, as compared with the aggregate carrying value of $963
million and $4,316 million, respectively.
The Company has limited involvement with derivative financial instruments
and does not use derivatives for trading purposes. The Company may use
derivative financial instruments to manage exposures to fluctuations in earnings
and cash flows resulting from changes in foreign currency exchange rates and
interest rates. Derivative financial instruments are recorded in the
consolidated balance sheet as either an asset or liability measured at fair
value. For each derivative instrument that is designated and qualifies as a fair
value hedge, the gain or loss on the derivative instrument as well as the
offsetting loss or gain on the hedged item attributable to the hedged risk are
recognized in determining current earnings during the period of the change in
fair values. For derivative instruments not designated as hedging instruments,
the gain or loss is recognized in determining current earnings during the period
of change.
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 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. Accordingly, options granted, modified or settled
subsequent to January 1, 2003 are accounted for using the fair value method and
options granted prior to January 1, 2003 continue to be accounted for using the
intrinsic value method. In 2003, 5,121,800 option shares, including restoration
option shares, net of cancellations, were awarded and the related expense of $3
million was included in the Company's consolidated statement of income for the
year ended December 31, 2003. The following table illustrates the pro forma
effect on net income and earnings per
2
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A. ACCOUNTING POLICIES -- (CONTINUED)
common share as if the fair value method were applied to all previously issued
stock options, in millions, except per common share amounts:
<Table>
<Caption>
2003 2002 2001
----- ----- ----
Net income, as reported..................................... $ 806 $ 590 $199
Add:
Stock-based employee compensation expense included in
reported net income, net of tax........................ 41 21 20
Deduct:
Stock-based employee compensation expense, net of tax..... (41) (21) (20)
Stock-based employee compensation expense determined under
the fair value based method for stock options granted
prior to 2003, net of tax.............................. (12) (17) (18)
----- ----- ----
Pro forma net income........................................ $ 794 $ 573 $181
===== ===== ====
Earnings per common share:
Basic as reported......................................... $1.68 $1.22 $.43
Basic pro forma........................................... $1.66 $1.18 $.39
Diluted as reported....................................... $1.64 $1.15 $.42
Diluted pro forma......................................... $1.62 $1.12 $.38
</Table>
For SFAS No. 123 calculation purposes, the weighted average grant date fair
values of option shares, including restoration options, granted in 2003, 2002
and 2001, were $8.89, $6.66 and $7.94, respectively. The fair values of these
options were estimated at the grant dates using a Black-Scholes option pricing
model with the following assumptions for 2003, 2002 and 2001, respectively:
risk-free interest rate -- 3.3%, 3.8% and 5.2%; dividend yield -- 2.3%, 2.7% and
2.1%; volatility factor -- 37%, 37% and 36%; and expected option life -- 7
years, 6 years and 6 years.
Reclassifications. Certain prior-year amounts have been reclassified to
conform to the 2003 presentation in the consolidated financial statements. The
results of operations related to 2003 dispositions of businesses and 2004
businesses held for sale have been reclassified and separately stated in the
accompanying consolidated statements of income for 2003, 2002 and 2001. The
assets and liabilities of these 2003 discontinued operations and 2004 businesses
held for sale as of December 31, 2003 and 2002 have not been reclassified in the
accompanying consolidated balance sheet and related notes. In the Company's
consolidated statements of cash flows, the cash flows from discontinued
operations are not separately classified.
Recently Issued Accounting Pronouncements. In January 2003, the Financial
Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities," which clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements." FIN 46 requires that a company that has a controlling interest in a
variable interest entity consolidate the assets, liabilities and results of
operations of the variable interest entity in the company's consolidated
financial statements. The adoption of certain provisions of FIN 46, relating to
variable interest entities formed prior to February 2003, has been extended to
2004. The Company believes that FIN 46 will not have a material impact on the
Company's consolidated financial statements.
In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The revisions to SFAS No. 132
require enhanced disclosures regarding
3
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A. ACCOUNTING POLICIES -- (CONCLUDED)
pensions and other postretirement benefits. Most of the enhanced disclosure
requirements were effective for the year ended December 31, 2003; certain
disclosure provisions are effective beginning in 2004.
B. DISCONTINUED OPERATIONS
On January 1, 2002, SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," became effective. This statement addresses the
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 broadens the presentation of discontinued operations to include a
component of the Company, which comprises operations and cash flows, that can be
clearly distinguished from the rest of the Company. Based on SFAS No. 144, the
Company has accounted for the 2003 dispositions of businesses and 2004
businesses held for sale as discontinued operations. See Note A -- Accounting
Policies -- Reclassifications.
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 the 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 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 $286 million and notes receivable of $3 million.
Selected financial information for these discontinued operations is as
follows for the years ended December 31, 2003 (prior to disposition), 2002 and
2001, in millions:
<Table>
<Caption>
2003 2002 2001
---- ---- ----
Net sales................................................... $198 $271 $269
==== ==== ====
Income (loss) before income taxes........................... $ 21 $ 29 $ (4)
Gain on dispositions of businesses, net..................... 89 -- --
Income taxes................................................ (44) (11) --
---- ---- ----
Income (loss) from discontinued operations and gain, net
of income taxes........................................ $ 66 $ 18 $ (4)
==== ==== ====
</Table>
Income taxes in the table above include income taxes on the gain on
disposal of discontinued operations of $37 million in the year ended December
31, 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 $114 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
$3 million.
The Company reviews its business portfolio on an ongoing basis as part of
its corporate strategic planning and, in the first quarter of 2004, has
determined that several European businesses are not core to the Company's
long-term growth strategy and, accordingly, has embarked on a plan of
disposition. These businesses had an approximate net book value of $330 million.
The Company expects aggregate net proceeds from the dispositions to approximate
$250 million. The dispositions are expected to be completed by March 31, 2005
and the Company expects to recognize a modest net loss upon the disposition of
all of these businesses. First quarter 2004 results will include a charge to
reflect those businesses that are expected to be divested at a loss. Any gains
resulting from the disposition of individual businesses will be recognized as
such transactions are completed.
4
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B. DISCONTINUED OPERATIONS -- (CONCLUDED)
Selected financial information for these discontinued operations is as
follows for the years ended December 31, 2003, 2002 and 2001, in millions:
<Table>
<Caption>
2003 2002 2001
---- ---- ----
Net sales................................................... $365 $318 $310
==== ==== ====
(Loss) income before income taxes........................... (64) 35 27
Income benefit (tax)........................................ 14 (10) (7)
---- ---- ----
(Loss) income from discontinued operations, net of tax.... $(50) $ 25 $ 20
==== ==== ====
</Table>
(Loss) income before income taxes includes a non-cash, pre-tax goodwill
impairment charge of $89 million for the year ended December 31, 2003.
Total assets and liabilities of 2004 discontinued operations consisted
primarily of the following at December 31, 2003, in millions:
<Table>
Accounts receivable......................................... $ 70
Inventory................................................... 53
Property, plant and equipment, net.......................... 166
Goodwill.................................................... 68
Other assets................................................ 43
----
Total assets.............................................. $400
====
Accounts payable............................................ $ 33
Accrued salaries, wages and related benefits................ 7
Other accrued expenses...................................... 32
----
$ 72
====
</Table>
C. ACQUISITIONS
During 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 consolidated financial statements from the
respective dates of acquisition. The aggregate net purchase price of these
acquisitions was $63 million, and included cash of $57 million and debt of $6
million.
Certain recent purchase agreements provide for the payment of additional
consideration in either cash or common stock, contingent upon whether certain
conditions are met, including the operating performance of the acquired business
and the price of the Company's common stock. Common shares that are contingently
issuable at December 31, 2003 have been included in the computation of diluted
earnings per common share for 2003. The Company also paid an additional $182
million of acquisition-related consideration, including amounts to satisfy share
price guarantees, contingent consideration and other purchase price adjustments,
in 2003, relating to previously acquired companies.
During 2002, the Company acquired several businesses. The aggregate net
purchase price of these 2002 acquisitions was $1.2 billion, including cash of
$699 million, assumed debt of $81 million and Company common stock valued at
$399 million. The excess of the aggregate acquisition costs for these purchase
5
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C. ACQUISITIONS -- (CONCLUDED)
acquisitions over the fair value of identifiable net assets acquired, totaling
approximately $1 billion, represented acquired goodwill.
The results of these 2002 acquisitions are included in the consolidated
financial statements from the respective dates of acquisition. Had these
companies been acquired effective January 1, 2001 and 2002, pro forma unaudited
consolidated net sales, income before cumulative effect of accounting change,
net income and diluted earnings per common share would have been as follows, in
millions, except per common share amounts:
<Table>
<Caption>
TWELVE MONTHS
ENDED
DECEMBER 31,
---------------
2002 2001
------ ------
Net sales................................................... $9,670 $8,824
Income before cumulative effect of accounting change, net... $ 728 $ 259
Net income.................................................. $ 636 $ 259
Diluted earnings per common share........................... $ 1.21 $ .53
</Table>
During 2001, the Company acquired several businesses through purchase
acquisitions. The aggregate net purchase price of these acquisitions was $1.7
billion, including cash of $560 million, assumed debt of $312 million and
Company capital stock valued at $785 million. The excess of the aggregate costs
for these acquisitions over the fair value of identifiable net assets acquired,
totaling approximately $1.2 billion, represented acquired goodwill.
As a result of recent acquisition agreements, the Company leases operating
facilities from certain related parties, primarily former owners (and current
General Managers) of companies acquired.
D. EUROPEAN CHARGES
During 2003, the Company recorded a non-cash, pre-tax charge which reduced
operating profit by approximately $35 million with respect to a United Kingdom
business unit in the Decorative Architectural Products segment. The charge
relates 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 in years prior to 2003. The
Company also determined that goodwill related to this business unit was impaired
and recorded an additional $5 million charge in the third quarter of 2003.
Finally, the Company 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 2003 charges
aggregating approximately $15 million related principally to inventories and
receivables.
During 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.
The Company completed its review of the business unit in the fourth quarter of
2003 and determined that no further adjustment was necessary.
The Company is implementing changes to its operational and financial
structure in Europe which include: reorganizing its European business operations
into product groups; the addition of group operating and financial personnel;
training and evaluation related to internal controls; and the expansion of both
external and internal audit involvement.
6
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
E. INVENTORIES
<Table>
<Caption>
(IN MILLIONS)
AT DECEMBER 31,
---------------
2003 2002
------ ------
Finished goods.............................................. $ 472 $ 497
Raw material................................................ 405 410
Work in process............................................. 142 149
------ ------
$1,019 $1,056
====== ======
</Table>
Inventories are stated at the lower of cost or net realizable value, with
cost determined principally by use of the first-in, first-out method. Cost in
inventory includes purchased parts, materials, direct labor and applied
manufacturing overhead.
F. INVESTMENTS
EQUITY INVESTMENTS
In April 2003, the Company completed the sale of its 42 percent equity
investment in Emco Limited, a Canadian distributor of plumbing and related
products with approximate 2002 sales of $860 million, for cash proceeds of $75
million. The sale resulted in a pre-tax gain of $5 million.
In December 2002, the Company acquired an additional 37 percent ownership
of Hansgrohe AG, a German manufacturer of plumbing-related products, resulting
in a majority ownership of approximately 64 percent. Accordingly, the assets and
liabilities of Hansgrohe AG have been included in the Company's consolidated
financial statements at December 31, 2003 and 2002. For the year ended December
31, 2002, the Company recorded equity earnings from Hansgrohe AG; the Company
began consolidating the majority interest in the operating results of Hansgrohe
AG in January 2003.
FINANCIAL INVESTMENTS
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 long-term
assets are the following financial investments, in millions:
<Table>
<Caption>
AT DECEMBER 31,
---------------
2003 2002
----- -----
Marketable equity securities................................ $392 $216
Bond funds.................................................. 125 230
Private equity funds........................................ 332 346
Metaldyne Corporation....................................... 76 68
TriMas Corporation.......................................... 25 25
Equity investments.......................................... -- 68
Other investments........................................... 9 9
---- ----
Total..................................................... $959 $962
==== ====
</Table>
In November 2000, the Company reduced its common equity ownership in
Metaldyne Corporation (formerly MascoTech, Inc.) through a recapitalization
merger with an affiliate of Heartland Industrial Partners, L.P. The Company
currently owns 6 percent of the common equity of Metaldyne. The Company
7
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
F. INVESTMENTS -- (CONTINUED)
also holds preferred stock of Metaldyne, which accrues dividends at the rate of
15 percent per year. In June 2002, Metaldyne sold approximately 66 percent of
the fully diluted common equity of its TriMas Corporation subsidiary to
Heartland Industrial Partners, L.P. The Company exercised its right to its
proportionate share and acquired approximately 6 percent of TriMas Corporation
for $25 million.
The Company's investments in marketable equity securities and bond funds at
December 31, 2003 and 2002 were as follows, in millions:
<Table>
<Caption>
PRE-TAX
-----------------------
COST UNREALIZED UNREALIZED RECORDED
BASIS GAINS LOSSES BASIS
----- ---------- ---------- --------
DECEMBER 31, 2003
Marketable equity securities.................... $361 $35 $ (4) $392
Bond funds...................................... $115 $10 $ -- $125
DECEMBER 31, 2002
Marketable equity securities.................... $264 $ 2 $(50) $216
Bond funds...................................... $225 $ 5 $ -- $230
</Table>
The following table summarizes the gross unrealized losses and fair value
of the Company's investments in marketable securities, aggregated by investment
category and length of time that the individual securities have been in a
continuous unrealized loss position, at December 31, 2003, in millions:
<Table>
<Caption>
12 MONTHS OR MORE
------------------
FAIR UNREALIZED
VALUE LOSS
----- ----------
Marketable equity securities................................ $117 $(4)
---- ---
Total temporarily impaired securities....................... $117 $(4)
==== ===
</Table>
Investments in marketable equity securities and bond funds are accounted
for as available-for-sale. Accordingly, the Company records these investments at
fair value, and unrealized gains and losses (that are deemed to be temporary)
are recognized, net of tax effects, through shareholders' equity, as a component
of other comprehensive income (loss). Realized gains and losses and charges for
other-than-temporary impairments are included in determining net income, with
related purchase costs based on specific identification. The Company has
investments in over 100 different equity securities and bond funds at December
31, 2003; the unrealized loss is primarily related to one marketable equity
security, Furniture Brands International common stock, which was received in
June 2002 from the Company's investment in Furnishings International Inc. debt.
The Company reviews industry analyst reports, key ratios and statistics, market
analyses and other factors for each investment to determine if an unrealized
loss is other than temporary. The unrealized loss related to this security is
three percent of the market value of this investment and one percent of the
total market value of the Company's investments in marketable equity securities.
Based on the Company's review, the Company considers the unrealized loss related
to this investment to be temporary.
The Company's investments in private equity funds and other investments are
carried at cost and are evaluated for impairment at each reporting period or
when circumstances, including the maturity of the fund, indicate an impairment
may exist. At December 31, 2003, the carrying value of the Company's investments
in private equity funds exceeded the estimated market value, as determined by
the fund managers, by approximately $24 million.
8
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
F. INVESTMENTS -- (CONCLUDED)
Income (loss) from financial investments is included in other, net within
other income and (expense), net, and is summarized as follows, in millions:
<Table>
<Caption>
2003 2002 2001
---- ---- ----
Realized gains from marketable securities................... $ 38 $ 13 $ 45
Realized losses from marketable securities.................. (15) (52) (32)
Dividend income from marketable securities.................. 16 9 3
Income (expense) from other investments, net................ 17 -- 4
Dividend income from other investments...................... 9 8 5
Termination of interest ratelock............................ -- (14) --
---- ---- ----
Income (loss) from financial investments.................. $ 65 $(36) $ 25
==== ==== ====
Impairment charge:
Marketable equity securities.............................. $ (3) $ (6) $(70)
Private equity funds...................................... (16) (18) --
---- ---- ----
Total.................................................. $(19) $(24) $(70)
==== ==== ====
</Table>
During 2003, the Company recognized impairment charges aggregating $19
million related to investments in an equity security and private equity funds.
In the fourth quarter of 2002, the Company recognized impairment charges of $24
million principally related to certain of its investments in private equity
funds and other financial investments. During 2001, the Company recognized
impairment charges of $70 million related to principally technology-related
marketable equity securities.
G. DERIVATIVES
During 2003, the Company entered into interest rate swaps for the purpose
of reducing interest expense related to certain fixed-rate debt. The derivative
contracts are with two major creditworthy institutions, thereby minimizing the
risk of credit loss. The interest rate swaps are designated a fair-value hedge
and the interest rate differential on interest rate swaps used to hedge existing
debt is recognized as an adjustment to interest expense or income over the term
of the agreement.
The average variable rates are based on the London Interbank Offered Rate
("LIBOR") plus a fixed adjustment factor. The average effective rate on the
interest rate swaps is 2.25%. At December 31, 2003, the interest rate swap
agreements covered a notional amount of $850 million of the Company's fixed rate
debt due July 15, 2012 with an interest rate of 5.875%. The amount recognized as
a reduction of interest expense was approximately $3 million for the year ended
December 31, 2003. The interest rate swaps are considered 100 percent effective;
therefore, the favorable market valuation adjustment of $7 million is recorded
in other assets with a corresponding increase in long-term debt in the Company's
consolidated balance sheet at December 31, 2003.
At December 31, 2003, certain of the Company's European operations had
entered into foreign currency forward contracts with notional amounts of $10
million and $7 million to manage exposure to currency fluctuations in the United
States dollar and Great Britain pound, respectively. Based on year-end market
prices, no asset or liability was recorded, as the forward price is
substantially the same as the contract price. The counterparties to the
Company's forward contracts are major financial institutions. In the unlikely
event that the counterparties fail to meet the terms of a foreign currency
contract, the Company's exposure is limited to the foreign currency rate
differential.
9
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
H. PROPERTY AND EQUIPMENT
<Table>
<Caption>
(IN MILLIONS)
AT DECEMBER 31,
---------------
2003 2002
------ ------
Land and improvements....................................... $ 197 $ 180
Buildings................................................... 979 930
Machinery and equipment..................................... 2,421 2,351
------ ------
3,597 3,461
Less: accumulated depreciation.............................. 1,258 1,146
------ ------
$2,339 $2,315
====== ======
</Table>
The Company leases certain equipment and plant facilities under
noncancellable operating leases. Rental expense, recorded in the consolidated
statements of income, for the Company totaled approximately $123 million, $132
million and $118 million during 2003, 2002 and 2001, respectively. Future
minimum lease payments at December 31, 2003 were approximately as follows:
2004 -- $90 million; 2005 -- $68 million; 2006 -- $48 million; 2007 -- $36
million; and 2008 and beyond -- $110 million.
I. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the years ended December
31, 2003 and 2002, by segment, are as follows, in millions:
<Table>
<Caption>
BALANCE PRE-TAX BALANCE
DECEMBER 31, IMPAIRMENT DECEMBER 31,
2001 ADDITIONS(a) CHARGE OTHER(b) 2002
------ ------ ----- ---- ------
Cabinets and Related
Products.................. $ 521 $ 26 $ (19) $ 58 $ 586
Plumbing Products........... 234 204 (8) 30 460
Installation and Other
Services.................. 958 746 -- (11) 1,693
Decorative Architectural
Products.................. 452 5 (31) -- 426
Other Specialty Products.... 1,069 78 (59) 44 1,132
------ ------ ----- ---- ------
Total..................... $3,234 $1,059 $(117) $121 $4,297
====== ====== ===== ==== ======
</Table>
<Table>
<Caption>
BALANCE PRE-TAX BALANCE
DECEMBER 31, DISCONTINUED IMPAIRMENT DECEMBER 31,
2002 ADDITIONS(a) OPERATIONS CHARGE OTHER(b) 2003
------ ---- ---- ----- ---- ------
Cabinets and Related
Products............ $ 586 $ 99 $ -- $ (51) $ 74 $ 708
Plumbing Products..... 460 17 -- (36) 57 498
Installation and Other
Services............ 1,693 14 -- -- (6) 1,701
Decorative
Architectural
Products............ 426 -- (16) (24) 12 398
Other Specialty
Products............ 1,132 38 -- (31) 47 1,186
------ ---- ---- ----- ---- ------
Total............... $4,297 $168 $(16) $(142) $184 $4,491
====== ==== ==== ===== ==== ======
</Table>
10
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
I. GOODWILL AND OTHER INTANGIBLE ASSETS -- (CONTINUED)
(a) Additions principally include acquisitions and contingent consideration for
prior acquisitions of $45 million and $123 million, respectively, for 2003
and $1,016 million and $43 million, respectively, for 2002.
(b) Other principally includes foreign currency translation adjustments,
reclassifications and other purchase price adjustments related to the
finalization of certain purchase price allocations.
The Company completed the annual impairment testing of goodwill and other
indefinite-lived intangible assets in the fourth quarter of 2003. This test
indicated that other indefinite-lived intangible assets were not impaired;
however, goodwill recorded for certain of the Company's European businesses was
impaired principally due to the continuing weakness in certain European markets.
The Company recognized a non-cash, pre-tax impairment charge of $137 million
($113 million after-tax). The Company also recorded a non-cash goodwill
impairment charge of $5 million related to a European business, as discussed in
Note D. The goodwill impairment charge related to the discontinued operations
was $89 million for the year ended December 31, 2003.
The Company completed the transitional goodwill and other indefinite-lived
intangible assets impairment testing in 2002. This evaluation indicated that
other indefinite-lived intangible assets were not impaired; however, goodwill
recorded for certain of the Company's businesses, principally in Europe, was
impaired. Certain of the Company's European businesses had been affected by weak
market and economic conditions. On adoption of SFAS No. 142, a non-cash, pre-tax
impairment charge of $117 million ($92 million, net of income tax credit of $25
million), was recognized as a cumulative effect of change in accounting
principle, effective January 1, 2002. The goodwill impairment charge related to
the discontinued operations was $54 million, recognized as a cumulative effect
of change in accounting principle.
The income tax credit for 2003 and 2002 was reduced due to a portion of the
impaired goodwill being non-deductible for tax purposes.
Other indefinite-lived intangible assets of $255 million at December 31,
2003 primarily include registered trademarks. The carrying value of the
Company's definite-lived intangible assets is $89 million at December 31, 2003
(net of accumulated amortization of $53 million) and principally includes
customer relationships and non-compete agreements, with a weighted average
amortization period of nine years. Amortization expense related to the
definite-lived intangible assets was $25 million in both 2003 and 2002.
At December 31, 2003, amortization expense related to the definite-lived
intangible assets during each of the next five years was approximately as
follows: 2004 -- $19 million; 2005 -- $15 million; 2006 -- $11 million;
2007 -- $8 million; and 2008 -- $6 million.
11
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
I. GOODWILL AND OTHER INTANGIBLE ASSETS -- (CONCLUDED)
The following table illustrates 2001 net income and earnings per common
share assuming goodwill was not subject to amortization during 2001, in
millions, except per share data:
<Table>
Net income as reported...................................... $199
Goodwill amortization, net of tax........................... 78
----
Net income as adjusted...................................... $277
====
Earnings per common share:
Basic as reported......................................... $.43
Goodwill amortization, net of tax......................... .17
----
Basic as adjusted......................................... $.60
====
Diluted as reported....................................... $.42
Goodwill amortization, net of tax......................... .16
----
Diluted as adjusted....................................... $.58
====
</Table>
J. OTHER ASSETS
<Table>
<Caption>
(IN MILLIONS)
AT DECEMBER 31,
---------------
2003 2002
------ ------
Financial investments (Note F).............................. $ 959 $ 962
In-store displays........................................... 99 53
Debenture expense........................................... 23 27
Notes receivable............................................ 13 32
Other, net.................................................. 77 60
------ ------
Total..................................................... $1,171 $1,134
====== ======
</Table>
K. ACCRUED LIABILITIES
The Company's accrued liabilities were comprised as follows, in millions:
<Table>
<Caption>
AT DECEMBER 31,
---------------
2003 2002
------ ------
Salaries, wages and commissions............................. $ 191 $ 167
Insurance................................................... 157 128
Advertising and sales promotion............................. 128 133
Employee retirement plans................................... 89 93
Dividends payable........................................... 76 71
Interest.................................................... 75 83
Litigation.................................................. 69 146
Property, payroll and other taxes........................... 48 39
Contingent acquisition-related payments..................... 27 37
Income taxes................................................ 15 4
Other....................................................... 175 169
------ ------
$1,050 $1,070
====== ======
</Table>
12
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
L. LONG-TERM DEBT
<Table>
<Caption>
(IN MILLIONS)
AT DECEMBER 31,
---------------
2003 2002
------ ------
Notes and debentures:
6.125%, due Sept. 15, 2003................................ $ -- $ 200
6%, due May 3, 2004....................................... 266 500
6.75%, due Mar. 15, 2006.................................. 800 800
4.625%, due Aug. 15, 2007................................. 300 300
5.75%, due Oct. 15, 2008.................................. 100 100
5.875%, due July 15, 2012................................. 850 850
7.125%, due Aug. 15, 2013................................. 200 200
6.625%, due Apr. 15, 2018................................. 114 114
7.75%, due Aug. 1, 2029................................... 296 296
6.5%, due Aug. 15, 2032................................... 300 300
Zero Coupon Convertible Senior Notes due 2031............... 798 773
Notes payable to banks...................................... -- --
Other....................................................... 158 204
------ ------
4,182 4,637
Less: current portion....................................... 334 321
------ ------
$3,848 $4,316
====== ======
</Table>
All of the notes and debentures above are senior indebtedness and, other
than bank notes and Zero Coupon Convertible Senior Notes, are nonredeemable.
In July 2001, the Company issued Zero Coupon Convertible Senior Notes due
2031 ("Notes"), resulting in gross proceeds of approximately $750 million. If
the Notes were outstanding in July 2031, the accreted value would be $1.9
billion. The issue price per Note was $394.45 per $1,000 principal amount which
represents a yield to maturity of 3 1/8% compounded semi-annually. The Company
will not pay cash interest on the Notes prior to maturity except in certain
circumstances, including possible contingent interest payments that are not
expected to be material. Holders of the Notes in the aggregate can convert the
Notes into approximately 24 million shares of Company common stock if the
average price of Company common stock for a period of 20 trading days exceeds
119 1/3%, declining by 1/3% each year hereafter, of the accreted value of a Note
($426 per $1,000 principal amount at maturity as of December 31, 2003) divided
by the conversion rate of 12.7243 shares for each $1,000 principal amount at
maturity of the Note or $39.94 per common share at December 31, 2003. The Notes
also become convertible if the Company's credit rating is reduced to below
investment grade, or if certain actions are taken by the Company.
In 2002, the Company amended the terms of the Notes 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 per Note, 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 in July 2002.
In addition, holders of the Notes have the option to require that the Notes
be repurchased by the Company on January 20, 2005 and 2007; July 20, 2011; and
every five years thereafter. The Company at its option can satisfy any such
repurchase with Company common stock or cash. If the Notes were to be put back
13
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
L. LONG-TERM DEBT -- (CONCLUDED)
to the Company, the Company expects to settle the Notes for cash, and
accordingly, the Notes are not included in the calculation of diluted earnings
per common share. The Company currently has the ability to refinance any such
repurchase with other long-term debt.
Before July 20, 2002, the Company could not redeem the Notes. From July 20,
2002 to January 25, 2007, the Company may redeem all, but not part, of the Notes
at their accreted value subject to the Company's stock price achieving the
conversion price as noted above. The Company may, at any time on or after
January 25, 2007, redeem all or part of the Notes at their accreted value.
Debt issuance costs related to the Notes totaled $15 million and were
amortized using the straight-line method through July 20, 2002.
At December 31, 2003, debt agreements with banks syndicated in the United
States relate to a $1.25 billion Amended and Restated 5-year Revolving Credit
Agreement with a group of banks due and payable in November 2005 and a $750
million 364-day Revolving Credit Agreement that expires in November 2004. These
agreements allow for borrowings denominated in U.S. dollars or European euros.
There were no borrowings under either agreement during 2003. Interest is payable
on borrowings under these agreements based on various floating rate options as
selected by the Company (approximately 2.4 percent for the year ended December
31, 2002).
Certain debt agreements contain limitations on additional borrowings; at
December 31, 2003, the Company had additional borrowing capacity, subject to
availability, of up to $2.5 billion. Certain debt agreements also contain a
requirement for maintaining a certain level of net worth; at December 31, 2003,
the Company's net worth exceeded such requirement by approximately $2 billion.
At December 31, 2003, the maturities of long-term debt during each of the
next five years (assuming the Company will finance the put option, if exercised,
related to the Zero Coupon Notes with the 5-year Revolver) were approximately as
follows: 2004 -- $334 million; 2005 -- $842 million; 2006 -- $813 million;
2007 -- $307 million; and 2008 -- $105 million.
In December 2002, the Company replenished the amount of debt and equity
securities issuable under its unallocated shelf registration statement with the
Securities and Exchange Commission pursuant to which the Company is able to
issue up to a combined $2 billion of debt and equity securities. In addition,
the Company increased its shelf registration related to common stock that can be
issued in connection with acquisitions to 50 million shares.
Interest paid was approximately $282 million, $204 million and $246 million
in 2003, 2002 and 2001, respectively.
M. SHAREHOLDERS' EQUITY
In December 2003, the Company's Board of Directors authorized the
repurchase of up to 50 million shares of the Company's common stock in
open-market transactions or otherwise, replacing a previous Board of Directors
authorization established in 2002. At December 31, 2003, the Company had
remaining authorization to repurchase up to 48 million shares of its common
stock in open-market transactions or otherwise. Approximately 35 million, 8
million and 3 million common shares were repurchased and retired in 2003, 2002
and 2001, respectively, at a cost aggregating approximately $779 million, $166
million and $67 million in 2003, 2002 and 2001, respectively.
On the basis of amounts paid (declared), cash dividends per common share
were $.58 ($.60) in 2003, $.54 1/2 ($.55) in 2002 and $.52 1/2 ($.53) in 2001,
respectively. In 2003, the Company increased its quarterly
14
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
M. SHAREHOLDERS' EQUITY -- (CONCLUDED)
cash dividend by 14 percent (a larger percentage than in recent years) to $.16
per common share from $.14 per common share.
In May 2002, the Company sold 22 million shares of Company common stock in
a public offering, resulting in proceeds to the Company of $598 million (net of
issuance costs of $14 million).
In 1995, the Company's Board of Directors announced the approval of a
Shareholder Rights Plan. The Rights were designed to enhance the Board's ability
to protect the Company's shareholders against, among other things, unsolicited
attempts to acquire control of the Company that do not offer an adequate price
to all shareholders or are otherwise not in the best interests of the
shareholders. The Rights were issued to shareholders of record in December 1995
and will expire in December 2005.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The Company's total comprehensive income (loss) was as follows, in
millions:
<Table>
<Caption>
TWELVE MONTHS
ENDED
DECEMBER 31,
-------------
2003 2002
------ ----
Net income.................................................. $ 806 $590
Other comprehensive income (loss):
Cumulative translation adjustments........................ 393 239
Unrealized gain (loss) on marketable securities, net of
income tax effect...................................... 53 (14)
Minimum pension liability, net of income tax credit....... (3) (58)
------ ----
Total comprehensive income............................. $1,249 $757
====== ====
</Table>
The unrealized gain (loss) on marketable equity securities and bond funds
is net of income tax (credit) of $31 million and $(9) million for the years
ended December 31, 2003 and 2002, respectively. The minimum pension liability is
net of income tax (credit) of $(1) million and $(34) million for the years ended
December 31, 2003 and 2002, respectively.
The components of accumulated other comprehensive income (loss) were as
follows, in millions:
<Table>
<Caption>
AT DECEMBER 31,
----------------
2003 2002
------ ------
Unrealized gain (loss) on marketable securities............. $ 26 $(27)
Minimum pension liability................................... (61) (58)
Cumulative translation adjustments.......................... 456 63
---- ----
Accumulated other comprehensive income (loss)............... $421 $(22)
==== ====
</Table>
Unrealized loss on marketable equity securities and bond funds is reported
net of income tax (credit) of $15 million and $(16) million at December 31, 2003
and 2002, respectively.
The minimum pension liability is reported net of tax credit of $35 million
and $34 million at December 31, 2003 and 2002, respectively.
Realized gains (losses) on marketable securities of $13 million and $(30)
million, net of tax effect, for 2003 and 2002, respectively, were included in
determining net income and were reclassified from accumulated other
comprehensive income.
15
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
N. STOCK OPTIONS AND AWARDS
The Company's 1991 Long Term Stock Incentive Plan (the "Plan") provides for
the issuance of stock-based incentives in various forms. At December 31, 2003,
outstanding stock-based incentives were primarily in the form of restricted
long-term stock awards, stock appreciation rights, phantom stock awards and
stock options. Additionally, the Company's 1997 Non-Employee Directors Stock
Plan (the "1997 Plan") provides for the payment of compensation to non-employee
Directors partially in Company common stock.
RESTRICTED LONG-TERM STOCK AWARDS
The Company granted long-term stock awards, net of cancellations, for
2,153,000 shares, 1,315,000 shares and 2,582,000 shares of Company common stock
during 2003, 2002 and 2001, respectively, to key employees and non-employee
Directors of the Company. These long-term stock awards do not cause net share
dilution inasmuch as the Company reacquires an equal number of shares on the
open market. The weighted average grant date fair value per share of long-term
stock awards granted during 2003, 2002 and 2001 was $19, $23 and $23,
respectively. Compensation expense for the annual vesting of long-term stock
awards was $50 million (including $15 million of accelerated expense due to the
unexpected passing of the Company's President and Chief Operating Officer), $29
million and $26 million in 2003, 2002 and 2001, respectively. The unvested stock
awards, aggregating approximately $165 million (10 million common shares) and
$164 million (10 million common shares) at December 31, 2003 and 2002,
respectively, are included in shareholders' equity and are being expensed over
the respective vesting periods, principally 10 years.
STOCK APPRECIATION RIGHTS AND PHANTOM STOCK AWARDS
In 2003 and 2002, the Company issued stock appreciation rights ("SARs") to
foreign employees with cash compensation linked to the value of 287,800 shares
and 332,000 shares, respectively, of Company common stock. The Company also
issued phantom stock awards linked to the value of 160,500 shares, 25,700 shares
and 64,600 shares of Company common stock for the years ended December 31, 2003,
2002 and 2001, respectively. Compensation expense related to SARs and phantom
stock awards for 2003, 2002 and 2001 was $12 million, $3 million and $5 million,
respectively.
STOCK OPTIONS
Fixed stock options are granted to key employees and non-employee Directors
of the Company. The exercise price equals the market price of Company common
stock on the date of grant. These options generally become exercisable in
installments beginning on the first or second anniversary from the date of grant
and expire no later than 10 years after the grant date.
During 2003, the Company granted stock options for 4,509,100 shares of
Company common stock and restoration stock options for 567,200 shares with grant
date exercise prices ranging from $23 to $28 (the market prices on the grant
dates). During 2002, the Company granted stock options for 4,980,600 shares of
Company common stock and restoration stock options for 1,051,400 shares with
grant date exercise prices ranging from $20 to $29 (the market prices on the
grant dates). During 2001, the Company granted stock options for 3,251,000
shares of Company common stock and restoration stock options for 717,600 shares
with grant date exercise prices ranging from $21 to $26 (the market prices on
the grant dates). The Company also granted stock options for 48,000 shares,
48,000 shares and 128,000 shares of Company common stock in 2003, 2002 and 2001,
respectively, to non-employee Directors of the Company with exercise prices of
$23, $27 and $22, respectively (the market prices on the grant dates). The
Company recorded $3 million of stock option expense in the consolidated
statement of income for the year ended December 31, 2003, for stock options
granted, modified or settled subsequent to January 1, 2003.
16
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
N. STOCK OPTIONS AND AWARDS -- (CONCLUDED)
A summary of the status of the Company's fixed stock options for the three
years ended December 31, 2003 is presented below, shares in millions:
<Table>
<Caption>
2003 2002 2001
---- ---- ----
Option shares outstanding, January 1........................ 26 22 22
Weighted average exercise price........................... $21 $21 $19
Option shares granted, including restoration options........ 5 6 4
Weighted average exercise price........................... $27 $21 $22
Option shares exercised..................................... 4 2 3
Weighted average exercise price........................... $20 $19 $12
Option shares canceled...................................... 1 -- 1
Weighted average exercise price........................... $22 $20 $25
Option shares outstanding, December 31...................... 26 26 22
Weighted average exercise price........................... $22 $21 $21
Weighted average remaining option term (in years)......... 6 7 7
Option shares exercisable, December 31...................... 10 9 6
Weighted average exercise price........................... $22 $23 $23
</Table>
The following table summarizes information for option shares outstanding
and exercisable at December 31, 2003, shares in millions:
<Table>
<Caption>
OPTION SHARES OUTSTANDING OPTION SHARES EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED AVERAGE
NUMBER OF REMAINING WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
RANGE OF PRICES SHARES OPTION TERM EXERCISE PRICE SHARES EXERCISE PRICE
- --------------- --------- ---------------- ---------------- --------- ----------------
$14-18 2 2 Years $16 1 $16
19-22 16 7 Years 20 6 20
23-27 1 6 Years 25 -- 25
28-31 7 7 Years 28 3 29
------ -- ------- --- -- ---
$14-31 26 6 Years $22 10 $22
====== == ======= === == ===
</Table>
At December 31, 2003, a total of 10,167,000 shares and 503,000 shares of
Company common stock were available under the Plan and the 1997 Plan,
respectively, for the granting of stock options or restricted long-term stock
awards.
17
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
O. EMPLOYEE RETIREMENT PLANS
The Company sponsors defined-benefit and defined-contribution pension plans
for most of its employees. In addition, substantially all salaried employees
participate in non-contributory profit-sharing plans, to which payments are
determined annually by the Compensation Committee of the Board of Directors.
Aggregate charges to earnings under the Company's pension, retirement and
profit-sharing plans were $106 million in 2003, $74 million in 2002 and $64
million in 2001.
Net periodic pension cost for the Company's domestic qualified
defined-benefit pension plans includes the following components, in millions:
<Table>
<Caption>
2003 2002 2001
---- ---- ----
Service cost................................................ $ 12 $ 10 $ 9
Interest cost............................................... 30 19 15
Expected return on plan assets.............................. (24) (17) (13)
Amortization of transition asset............................ -- -- (1)
Amortization of prior-service cost.......................... -- -- 1
Amortization of net loss.................................... 6 2 1
---- ---- ----
NET PERIODIC PENSION COST................................... $ 24 $ 14 $ 12
==== ==== ====
</Table>
The following table provides a reconciliation of changes in the projected
benefit obligation, fair value of plan assets and funded status of the Company's
domestic qualified defined-benefit pension plans at December 31, in millions:
<Table>
<Caption>
2003 2002
----- -----
CHANGES IN PROJECTED BENEFIT OBLIGATION:
Projected benefit obligation at January 1................. $ 456 $ 204
Service cost.............................................. 11 9
Interest cost............................................. 30 16
Plan amendments........................................... 3 --
Actuarial loss............................................ 30 24
Business combinations..................................... -- 212
Settlements............................................... (4) --
Benefit payments.......................................... (29) (9)
----- -----
PROJECTED BENEFIT OBLIGATION AT DECEMBER 31............ $ 497 $ 456
===== =====
CHANGES IN FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets at January 1.................... $ 273 $ 146
Actual return on plan assets.............................. 77 (15)
Business combinations..................................... -- 129
Company contributions..................................... 43 23
Settlements............................................... (4) --
Benefit payments.......................................... (29) (9)
Expenses/other............................................ -- (1)
----- -----
FAIR VALUE OF PLAN ASSETS AT DECEMBER 31............... $ 360 $ 273
===== =====
</Table>
18
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
O. EMPLOYEE RETIREMENT PLANS -- (CONTINUED)
<Table>
<Caption>
2003 2002
----- -----
FUNDED STATUS OF QUALIFIED DEFINED-BENEFIT PENSION PLANS:
Plan assets (less than) projected benefit obligation at
December 31............................................ $(137) $(183)
Unamortized prior-service cost............................ 7 5
Unamortized net loss...................................... 98 127
----- -----
NET (LIABILITY) RECOGNIZED............................. $ (32) $ (51)
===== =====
</Table>
The following represents amounts recognized in the Company's consolidated
balance sheets at December 31, in millions:
<Table>
<Caption>
2003 2002
----- -----
Prepaid benefit cost........................................ $ 23 $ 15
Accrued benefit liability................................... (120) (161)
Intangible assets........................................... 7 6
Accumulated other comprehensive income...................... 58 89
----- -----
NET (LIABILITY) RECOGNIZED................................ $ (32) $ (51)
===== =====
</Table>
Information for domestic qualified defined-benefit pension plans with an
accumulated benefit obligation in excess of plan assets is as follows at
December 31, in millions:
<Table>
<Caption>
2003 2002
---- ----
Projected benefit obligation................................ $497 $456
Accumulated benefit obligation.............................. 457 419
Fair value of plan assets................................... 360 273
</Table>
PLAN ASSETS
Following is a summary of the Company's domestic qualified defined-benefit
pension plan weighted average asset allocation at December 31:
<Table>
<Caption>
2003 2002
---- ----
Equity securities........................................... 87% 85%
Debt securities............................................. 8% 8%
Real estate................................................. -- --
Other....................................................... 5% 7%
--- ---
Total..................................................... 100% 100%
=== ===
</Table>
The investment objectives of the Company's domestic qualified
defined-benefit pension plans are: 1) to invest the portfolio to earn a return,
net of fees, greater than or equal to the long-term rate of return used by the
Plan's actuary; and 2) to maintain liquidity sufficient to meet Plan
obligations. Target allocations are: equity securities (84%), debt securities
(10%) and other investments (6%).
Plan assets include approximately 1.4 million shares of Company common
stock valued at $39 million at December 31, 2003 and 629,000 shares of Company
common stock valued at $13 million at December 31, 2002.
19
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
O. EMPLOYEE RETIREMENT PLANS -- (CONCLUDED)
CASH FLOWS
The Company expects to contribute approximately $54 million to its domestic
qualified defined-benefit pension plans in 2004. The Company also expects to
contribute $3 million to its non-qualified supplemental defined-benefit pension
plans in 2004.
The major assumptions used in accounting for the Company's domestic
defined-benefit pension plans are as follows:
<Table>
<Caption>
2003 2002 2001
---- ---- ----
Discount rate for obligations............................... 6.25% 6.75% 7.5%
Expected return on plan assets.............................. 8.5% 8.5% 9.0%
Rate of compensation increase............................... 4.5% 4.5% 4.5%
Discount rate for net periodic pension cost................. 6.75% 7.5% 7.75%
</Table>
The Company determined the expected long-term rate of return on plan assets
by reviewing an analysis of expected and historical rates of return of various
asset classes based on the current asset allocation of the trust assets. The
measurement date used to determine the defined-benefit pension expense is
January 1.
OTHER
The Company also sponsors qualified defined-benefit pension plans for
certain of its foreign employees. Net periodic pension cost for these plans was
approximately $5 million in 2003 and $2 million in 2002. The projected benefit
obligation and fair value of plan assets was approximately $101 million and $59
million at December 31, 2003 and $59 million and $37 million at December 31,
2002, respectively. The projected benefit obligation exceeded the plan assets by
approximately $42 million at December 31, 2003 and a net liability of
approximately $16 million was recognized. The projected benefit obligation
exceeded the plan assets by approximately $22 million at December 31, 2002 and a
net liability of approximately $1 million was recognized.
In addition to the Company's qualified defined-benefit pension and
retirement plans, the Company has non-qualified unfunded supplemental pension
plans covering certain employees, which provide for benefits in addition to
those provided by the qualified pension plans. The actuarial present value of
accumulated benefit obligations and projected benefit obligations related to
these non-qualified plans totaled $105 million and $110 million at December 31,
2003 and $74 million and $82 million at December 31, 2002, respectively. Net
periodic pension cost for these plans was $13 million, $10 million and $9
million in 2003, 2002 and 2001, respectively.
The Company sponsors certain post-retirement benefit plans that provide
medical, dental and life insurance coverage for eligible retirees and dependents
in the United States based on age and length of service. The aggregate present
value of the unfunded accumulated post-retirement benefit obligation
approximated $5 million at both December 31, 2003 and 2002.
20
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
P. SEGMENT INFORMATION
The Company's reportable segments were as follows:
Cabinets and Related Products -- principally includes assembled and
ready-to-assemble kitchen and bath cabinets; home office workstations;
entertainment centers; storage products; bookcases; and kitchen utility
products.
Plumbing Products -- principally includes faucets; plumbing fittings
and valves; bathtubs and shower enclosures; and spas.
Installation and Other Services -- principally includes the sale,
installation and distribution of insulation and other building products.
Decorative Architectural Products -- principally includes paints and
stains; and door, window and other hardware.
Other Specialty Products -- principally includes windows, window frame
components and patio doors; staple gun tackers, staples and other fastening
tools; hydronic radiators and heat convectors; and venting and ventilation
systems.
The above products and services are sold and provided to the home
improvement and home construction markets through mass merchandisers, hardware
stores, home centers, builders, distributors and other outlets for consumers and
contractors.
The Company's operations are principally located in North America and
Europe. The Company's country of domicile is the United States of America.
Corporate assets consist primarily of real property, equipment, cash and
cash investments and other investments.
The Company's segments are based on similarities in products and services
and represent the aggregation of operating units for which financial information
is regularly evaluated by the Company's corporate operating executives in
determining resource allocation and assessing performance and is periodically
reviewed by the Board of Directors. Accounting policies for the segments are the
same as those for the Company. The Company primarily evaluates performance based
on operating profit and, other than general corporate expense, allocates
specific corporate overhead to each segment. Income and expense related to the
Behr litigation has also been excluded from the evaluation of segment operating
profit.
21
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
P. SEGMENT INFORMATION -- (CONTINUED)
The following table presents information about the Company by segment and
geographic area, in millions:
<Table>
<Caption>
NET SALES (1)(2)(3)(4)(5) OPERATING PROFIT (5)(9)(11) ASSETS AT DECEMBER 31 (6)(10)
------------------------- --------------------------- -----------------------------
2003 2002 2001 2003 2002 2001 2003 2002 2001
------- ------ ------ ------- ------- ------- -------- -------- -------
The Company's operations by
segment are:
Cabinets and Related
Products.................... $ 2,879 $2,644 $2,417 $ 441 $ 367 $ 245 $ 2,353 $ 2,123 $1,984
Plumbing Products............. 2,684 2,068 1,773 343 341 245 2,160 1,952 1,280
Installation and Other
Services.................... 2,411 1,845 1,692 368 304 243 2,378 2,314 1,400
Decorative Architectural
Products.................... 1,449 1,292 1,163 210 307 256 1,089 1,292 1,229
Other Specialty Products...... 1,148 982 660 178 193 118 2,195 2,062 1,877
------- ------ ------ ------ ------ ------ ------- ------- ------
Total....................... $10,571 $8,831 $7,705 $1,540 $1,512 $1,107 $10,175 $ 9,743 $7,770
======= ====== ====== ====== ====== ====== ======= ======= ======
The Company's operations by
geographic area are:
North America................. $ 8,763 $7,686 $6,745 $1,433 $1,347 $1,011 $ 7,081 $ 6,995 $5,886
International, principally
Europe...................... 1,808 1,145 960 107 165 96 3,094 2,748 1,884
------- ------ ------ ------ ------ ------ ------- ------- ------
Total, as above............. $10,571 $8,831 $7,705 1,540 1,512 1,107 10,175 9,743 7,770
======= ====== ======
General corporate expense, net(7).......................... (112) (98) (96)
Income (charge) for litigation settlement, net(8).......... 72 (147) --
Expense related to accelerated benefits.................... (16) -- --
------ ------ ------
Operating profit, as reported.............................. 1,484 1,267 1,011
Other income (expense), net................................ (204) (301) (733)
------ ------ ------
Income from continuing operations before income taxes and
minority interest........................................ $1,280 $ 966 $ 278
====== ====== ======
Corporate assets......................................................................... 1,974 2,307 1,251
------- ------- ------
Total assets......................................................................... $12,149 $12,050 $9,021
======= ======= ======
</Table>
<Table>
<Caption>
DEPRECIATION AND
PROPERTY ADDITIONS AMORTIZATION(5)
------------------- ------------------
2003 2002 2001 2003 2002 2001
---- ----- ---- ---- ---- ----
The Company's operations by segment are:
Cabinets and Related Products................... $ 54 $ 69 $ 93 $ 56 $ 54 $ 64
Plumbing Products............................... 77 176 56 62 45 48
Installation and Other Services................. 31 66 66 33 27 61
Decorative Architectural Products............... 35 46 62 22 20 23
Other Specialty Products........................ 81 73 91 32 28 26
---- ----- ---- ---- ---- ----
278 430 368 205 174 222
Unallocated amounts principally related to
corporate assets............................. 7 17 4 17 24 22
Assets of acquisitions.......................... (14) (162) (98) -- -- --
---- ----- ---- ---- ---- ----
Total........................................ $271 $ 285 $274 $222 $198 $244
==== ===== ==== ==== ==== ====
</Table>
22
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
P. SEGMENT INFORMATION -- (CONCLUDED)
(1) Included in net sales in 2003, 2002 and 2001 were export sales from the
U.S. of $184 million, $153 million and $151 million, respectively.
(2) Intra-company sales between segments represented less than one percent of
consolidated net sales in 2003, 2002 and 2001.
(3) Includes net sales to one customer in 2003, 2002 and 2001 of $2,457
million, $2,276 million and $2,039 million, respectively. Such net sales
were included in the following segments: Cabinets and Related Products,
Plumbing Products, Decorative Architectural Products and Other Specialty
Products.
(4) Net sales from the Company's operations in the U.S. were $8,561 million,
$7,479 million and $6,613 million in 2003, 2002 and 2001, respectively.
(5) Net sales, operating profit and depreciation and amortization for 2003,
2002 and 2001 exclude the results of businesses sold in 2003 and 2004
discontinued operations.
(6) Long-lived assets of the Company's operations in the U.S. and Europe were
$4,859 million and $2,130 million, $4,875 million and $1,848 million and
$3,999 million and $1,335 million at December 31, 2003, 2002 and 2001,
respectively.
(7) General corporate expense includes those expenses not specifically
attributable to the Company's business segments.
(8) The income (charge) for litigation settlement relates to litigation
discussed in Note T regarding the Company's subsidiary, Behr Process
Corporation, which is included in the Decorative Architectural Products
segment.
(9) Included in segment operating profit for 2003 are goodwill impairment
charges as follows: Plumbing Products -- $17 million, Decorative
Architectural Products -- $5 million and Other Specialty Products -- $31
million. The goodwill impairment charges were related to the Company's
European businesses.
(10) Assets at December 31, 2002 and 2001 include the assets of businesses sold
in 2003 and 2004 discontinued operations.
(11) Operating profit excluding goodwill amortization expense for 2001 was as
follows: Cabinets and Related Products -- $257 million, Plumbing
Products -- $252 million, Installation and Other Services -- $287 million,
Decorative Architectural Products -- $268 million and Other Specialty
Products -- $130 million.
23
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Q. OTHER INCOME (EXPENSE), NET
Other, net, which is included in other income (expense), net, included the
following, in millions:
<Table>
<Caption>
2003 2002 2001
---- ---- ----
Income from cash and cash investments....................... $ 8 $ 8 $ 5
Other interest income....................................... 8 6 35
Income (loss) from financial investments (Note F)........... 65 (36) 25
Loss on early retirement of debt............................ (7) -- --
Gain from sale of equity investment......................... 5 -- --
Equity earnings............................................. -- 14 6
Other items, net............................................ (3) (34) (37)
--- ---- ----
Total other, net.......................................... $76 $(42) $ 34
=== ==== ====
</Table>
Other items, net in 2003, 2002 and 2001 also include realized foreign
currency exchange transaction losses of $4 million, $3 million and $5 million,
respectively, as well as other miscellaneous expenses.
Other interest income for 2001 includes $29 million from the 12%
pay-in-kind junior debt securities of FII.
24
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
R. INCOME TAXES
<Table>
<Caption>
(IN MILLIONS)
2003 2002 2001
------ ---- ----
Income from continuing operations before income taxes and
minority interest:
U.S. ..................................................... $1,172 $827 $209
Foreign................................................... 108 139 69
------ ---- ----
$1,280 $966 $278
====== ==== ====
Provision for income taxes on income from continuing
operations before minority interest:
Currently payable:
U.S. Federal........................................... $ 214 $220 $148
State and local........................................ 44 29 17
Foreign................................................ 19 25 26
Deferred:
U.S. Federal........................................... 174 43 (95)
Foreign................................................ 26 10 (1)
------ ---- ----
$ 477 $327 $ 95
====== ==== ====
Deferred tax assets at December 31:
Receivables............................................... $ 22 $ 9
Inventories............................................... 21 24
Accrued liabilities....................................... 146 152
Long-term liabilities..................................... 57 70
Capital loss carryforward................................. 62 109
Other assets.............................................. 12 42
------ ----
320 406
------ ----
Deferred tax liabilities at December 31:
Property and equipment.................................... 360 339
Intangibles............................................... 114 52
Other..................................................... 75 30
------ ----
549 421
------ ----
Net deferred tax liability at December 31................... $ 229 $ 15
====== ====
</Table>
State and local taxes were lower in 2001 due principally to an $8 million
($5 million, net of federal tax) favorable settlement of contested liabilities.
At December 31, 2003 and 2002, net deferred tax liability consisted of net
short-term deferred tax assets included in prepaid expenses and other of $181
million and $171 million, respectively, and net long-term deferred tax
liabilities of $410 million and $186 million, respectively.
During 2001, the Company recorded a non-cash charge for the write-down of
certain investments, including securities of Furnishings International Inc. and
principally technology-related marketable equity securities that created a
capital loss carryforward for tax purposes of $109 million ($311 million
pre-tax) at
25
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
R. INCOME TAXES -- (CONCLUDED)
December 31, 2002. Principally as a result of the gain from the sale of certain
operating assets in 2003, this capital loss carryforward decreased to $62
million ($176 million pre-tax) at December 31, 2003. The Company believes that
the capital loss carryforward will be utilized before its expiration on December
31, 2007, principally through future income and gains from investments and other
identified tax-planning strategies, including the potential sale of certain
operating assets. As a result, a valuation allowance was not recorded at
December 31, 2003 or 2002.
The following is a reconciliation of the U.S. federal statutory rate to the
provision for income taxes on income from continuing operations before minority
interest:
<Table>
<Caption>
2003 2002 2001
---- ---- ----
U.S. federal statutory rate................................. 35% 35% 35%
State and local taxes, net of federal tax benefit........... 2 2 4
Higher (lower) taxes on foreign earnings.................... (1) (2) 4
Foreign goodwill impairment providing no tax benefit........ 1 -- --
Amortization in excess of tax............................... -- -- 4
Change in valuation allowance, net.......................... -- -- (12)
Other, net.................................................. -- (1) (1)
-- -- ---
Effective tax rate........................................ 37% 34% 34%
== == ===
</Table>
Income taxes paid were approximately $328 million, $302 million and $193
million in 2003, 2002 and 2001, respectively.
Earnings of non-U.S. subsidiaries generally become subject to U.S. tax upon
the remittance of dividends and under certain other circumstances. Provision has
not been made at December 31, 2003 for U.S. or additional foreign withholding
taxes on approximately $739 million of remaining undistributed net income of
non-U.S. subsidiaries, as such income is intended to be permanently reinvested;
it is not practical to estimate the amount of deferred tax liability on such
income.
26
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
S. EARNINGS PER COMMON SHARE
The following are reconciliations of the numerators and denominators used
in the computations of basic and diluted earnings per common share, in millions:
<Table>
<Caption>
2003 2002 2001
---- ---- ----
Numerator (basic and diluted):
Income from continuing operations......................... $790 $639 $183
Income from discontinued operations and gain, net......... 16 43 16
Cumulative effect of accounting change, net............... -- (92) --
---- ---- ----
Net income................................................ $806 $590 $199
==== ==== ====
Denominator:
Basic common shares (based on weighted average)........... 479 485 459
Add:
Contingent common shares............................... 9 26 13
Stock option dilution.................................. 3 3 3
---- ---- ----
Diluted common shares..................................... 491 514 475
==== ==== ====
</Table>
The 16,667 shares of outstanding preferred stock, which are convertible
into 16,667,000 shares of Company common stock and carry substantially the same
attributes as Company common stock, including voting rights and dividends, have
been treated as if converted in the computation of basic and diluted common
shares.
Approximately 24 million common shares for 2003, 2002 and 2001, related to
the Zero Coupon Convertible Senior Notes due 2031, were not included in the
computation of diluted earnings per common share since, at December 31, 2003,
2002 and 2001, they were not convertible according to their terms. Additionally,
7.9 million common shares, 3.5 million common shares and 2.4 million common
shares for 2003, 2002 and 2001, 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 was greater than the
Company's average common stock price during the period.
T. OTHER COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is subject to lawsuits and pending or asserted claims with
respect to matters arising in the ordinary course of business.
As the Company reported in previous filings, late in the second half 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. As a result, in
the third quarter of 2002, the Company took a litigation charge of approximately
$68 million for the estimated cost of the Washington Settlement. This charge did
not reflect any offsets for amounts the Company expected to receive from Behr's
insurers. The charge included $55 million for the payment of claims, notice,
claims administration and plaintiff's litigation costs, and $13 million for
Class Counsel fees. In the first quarter of 2003, the Company recorded income of
approximately $13 million, principally to reflect an agreement with Behr's
insurers to fund a portion of the Class Counsel fees, notice and claims
administration costs and plaintiff's litigation costs. Pursuant to the terms of
the Washington Settlement and orders entered by the trial court in October and
December 2003, the
27
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
T. OTHER COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Company and Behr's insurers made partial payments totaling $2 million on 412
claims that had been recommended for payment by the claims administrator. The
deadline for claims in the Washington Settlement was January 17, 2004. Until all
claims are processed, the Company has determined that no further adjustment of
its original estimate would be appropriate. The Company expects that the
evaluation, processing and payment of claims will be completed by September 30,
2004. The total amount of the insurers' contribution related to these claims
will not be reasonably estimable until the claims process is completed. The
remaining accrual for claims and administration costs is approximately $53
million, reflecting the receipt of approximately $13 million in 2003 from Behr's
insurers.
In the third quarter of 2002, the Company also took a litigation charge of
$96 million for the estimated cost of the National Settlement, which included
$66 million for the payment of claims, $25 million for Class Counsel fees and $5
million for notice and claims administration costs. As with the Washington
Settlement, the charge did not reflect any offsets for amounts the Company
expected to receive from Behr's insurers. In the fourth quarter of 2002, the
Company recorded income of $19 million to reflect an agreement with Behr's
insurers to fund a portion of the Class Counsel fees, and notice and claims
administration costs. The filing deadline for claims in the National Settlement
was September 2, 2003 and the Company received approximately 3,700 claims, which
was a fraction of the number originally projected. The Company estimated the
average cost per claim received and, as a result, estimated 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 $58 million in the
third quarter of 2003. The total amount of the insurers' contribution related to
these claims will not be reasonably estimable until the claims process is
completed. The remaining accrual at December 31, 2003 related to claims and
administrative costs is approximately $10 million. The Company expects to
complete the processing, evaluation and payment of such claims by June 30, 2004.
In addition, the Company recorded $2 million in 2002 for additional legal
costs; the $2 million was paid by the Company in 2003.
WARRANTY
Certain of the Company's products and product finishes and services are
generally covered by a warranty to be free from defects in material and
workmanship for periods ranging from one year to lifetime, under certain
circumstances, of the original purchaser. At the time of sale, the Company
accrues a warranty liability for estimated costs to provide products, parts or
service to repair or replace products in satisfaction of warranty obligations.
The Company's estimate of costs to service its warranty obligations is based on
historical experience and expectations of future conditions. To the extent that
the Company experiences any changes in warranty claim activity or costs
associated with servicing those claims, its warranty liability is adjusted
accordingly.
The following is a reconciliation of the Company's warranty liability, in
millions:
<Table>
<Caption>
2003 2002
---- ----
Balance at January 1........................................ $ 65 $ 57
Accruals for warranties issued during the year.............. 34 26
Accruals related to pre-existing warranties................. 23 11
Settlements made (in cash or kind) during the year.......... (35) (30)
Other, net (foreign exchange impact)........................ 3 1
---- ----
Balance at December 31...................................... $ 90 $ 65
==== ====
</Table>
28
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
T. OTHER COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
ACQUISITION-RELATED COMMITMENTS
The Company, as part of certain recent acquisition agreements, provides for
the payment of additional consideration in either cash or Company common stock,
contingent upon whether certain conditions are met, including the operating
performance of the acquired business and the price of the Company's common
stock.
Stock Price Guarantees
Stock price guarantees as of December 31, 2003 are summarized as follows in
millions, except per share data:
<Table>
<Caption>
SHARES ISSUED SETTLEMENT
- ---------------- MINIMUM OPTIONS(a)
# OF ISSUE STOCK PRICE --------------
SHARES PRICE GUARANTEE SHARES CASH MATURITY DATE
- ------ ------ ----------- ------ ---- ----------------
17 $25.21 $31.20 2 $62 7/31/04
1 $30.00 $40.00 1 20 12/31/04-4/30/05
-- -- ---
18 3 $82
== == ===
</Table>
(a) Amounts computed based on the ten-day average of the high and low Company
common stock prices ending December 31, 2003 of $27.50. Shares contingently
issuable under these guarantees are included in the calculation of diluted
earnings per common share.
Contingent Purchase Price
As part of certain recent acquisition agreements, the Company has
additional consideration payable in cash of approximately $40 million contingent
on the operating performance of the acquired businesses.
As part of the acquisition agreement, certain minority shareholders of
Hansgrohe AG hold an option expiring in December 2007 to require the Company to
purchase additional shares in Hansgrohe either with cash or common stock. The
option value is based on Hansgrohe's operating results and, if exercised at
December 31, 2003, would have approximated $21 million; if the option were
settled in stock, the common shares to be issued at December 31, 2003 would have
approximated 824,000.
The Company continues to guarantee the value of 1.6 million shares of
Company common stock at a stock price of $40 per share related to a 2001
divestiture (through June 2004). The liability for this guarantee, which
approximated $20 million and $30 million at December 31, 2003 and 2002,
respectively, has been recorded in accrued liabilities and is marked to market
each reporting period.
INVESTMENTS
With respect to the Company's investments in private equity funds, the
Company, at December 31, 2003, has, under certain circumstances, commitments to
contribute additional capital to such funds of up to $88 million.
SHAREHOLDERS' EQUITY
During 2000, approximately 300 of the Company's key employees purchased
from the Company 8.4 million shares of Company common stock for cash totaling
$156 million under an Executive Stock Purchase Program ("Program"). The stock
was purchased at $18.50 per share, the approximate market price of the common
stock at the time of purchase.
29
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
T. OTHER COMMITMENTS AND CONTINGENCIES -- (CONCLUDED)
Participants in the Program financed their purchases with five-year full
recourse personal loans, at a market interest rate, from a bank syndicate. Each
participant is fully responsible at all times for repaying their bank loans when
they become due and is personally responsible for 100 percent of any loss in the
market value of the purchased stock, except that in the event of death, if the
participant is in a loss position, the participant's estate may transfer the
purchased stock to the Company and require the Company to assume responsibility
for the loan. The Company has guaranteed repayment of the loans, for which the
aggregate amount outstanding was approximately $160 million at December 31,
2003, only in the event of a default by a participant. As a further inducement
for continued employment beyond the end of this five-year Program, each
participant received, as part of the Program, a restricted stock award vesting
over a ten-year period. All of these key employees, in order to participate in
this Program, were also required to sign a one-year post-employment non-
competition agreement with the Company businesses that employ them.
RESIDUAL VALUE GUARANTEES
The Company has residual value guarantees resulting from operating leases
primarily related to certain of the Company's trucks and other vehicles, in the
Installation and Other Services segment. The operating leases are generally for
a minimum term of 12 months and are renewable monthly after the first 12 months.
At the end of the first 12 months, if the Company cancels the leases, the
Company must pay the lessor the difference between the guaranteed residual value
and the fair market value of the related trucks. The aggregate value of the
residual value guarantees, assuming the fair value at lease termination is zero,
is approximately $76 million at December 31, 2003.
OTHER MATTERS
The Company enters into contracts, which include reasonable and customary
indemnifications that are standard for the industries in which it operates. Such
indemnifications include claims against builders for issues relating to the
Company's products and workmanship. In conjunction with divestitures and other
transactions, the Company generally provides reasonable and customary
indemnifications relating to various items including: the enforceability of
trademarks; legal and environmental issues; provisions for sales returns; and
asset valuations. The Company has never had to pay a material amount related to
these indemnifications and evaluates the probability that amounts may be
incurred and appropriately records an estimated liability when probable.
U. PLANNED DISPOSITION OF BUSINESSES -- 2000
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. A non-cash, pre-tax charge of $90 million was recorded in December
2000. During 2002 and 2001, the Company completed the sale of its StarMark
Cabinetry, Inc., Inrecon and American Metal Products businesses for cash
proceeds of $247 million, which approximated their combined book values.
In the fourth quarter of 2002, the Company recognized a pre-tax gain of $16
million related to certain long-lived assets which were written down in December
2000 as part of the Company's plan for disposition.
The sales and results of operations of the businesses sold in 2002 and 2001
are included in the Company's results of continuing operations through the date
of disposition. These businesses contributed sales of $11 million and $237
million in 2002 and 2001, respectively, and operating (loss) profit of $(.4)
million and $13 million in 2002 and 2001, respectively; the changes in sales and
operating (loss) profit include the effect of dispositions completed in 2002 and
2001.
30
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
V. SECURITIES OF FURNISHINGS INTERNATIONAL INC.
During 2001, management of Furnishings International Inc. ("FII") advised
the Company that it was pursuing the disposition of all of its businesses and
that the expected consideration from the sale of such businesses would not be
sufficient to pay amounts due to the Company in accordance with the terms of the
junior debt securities. Accordingly, the Company reevaluated the carrying value
of its securities of FII and, in the third quarter of 2001, recorded a $460
million pre-tax, non-cash charge to write down this investment to approximately
$133 million, which represented the approximate fair value of the consideration
ultimately expected to be received from FII for the repayment of the
indebtedness. During 2002, FII substantially completed the disposition of its
operations. The fair value of the remaining net assets of FII represented
proceeds for the Company's investment in securities of FII. The remaining net
assets were primarily comprised of notes receivable and other assets of $75
million, four million shares of Furniture Brands International common stock
valued at $121 million (which was the market value at June 28, 2002), net of
pension obligations of approximately $75 million and other accrued liabilities
of $12 million.
31
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
W. INTERIM FINANCIAL INFORMATION (UNAUDITED)
<Table>
<Caption>
(IN MILLIONS, EXCEPT PER SHARE DATA)
QUARTERS ENDED
------------------------------------------------------------
TOTAL YEAR DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
---------- ----------- ------------ ------- --------
2003:
Net sales............................ $10,571 $2,768 $2,823 $2,628 $2,352
Gross profit......................... $ 3,241 $ 852 $ 874 $ 807 $ 708
Income from continuing operations.... $ 790 $ 154 $ 258 $ 220 $ 158
Net income........................... $ 806 $ 92 $ 319 $ 229 $ 166
Earnings per common share:
Basic:
Income from continuing
operations.................... $ 1.65 $ .33 $ .54 $ .46 $ .32
Net income...................... $ 1.68 $ .20 $ .67 $ .48 $ .34
Diluted:
Income from continuing
operations.................... $ 1.61 $ .32 $ .53 $ .44 $ .30
Net income...................... $ 1.64 $ .19 $ .65 $ .46 $ .32
2002:
Net sales............................ $ 8,831 $2,339 $2,361 $2,164 $1,967
Gross profit......................... $ 2,791 $ 711 $ 754 $ 718 $ 608
Income from continuing operations.... $ 639 $ 184 $ 110 $ 202 $ 143
Net income........................... $ 590 $ 195 $ 123 $ 214 $ 58
Earnings per common share:
Basic:
Income from continuing
operations.................... $ 1.32 $ .37 $ .22 $ .42 $ .31
Net income...................... $ 1.22 $ .39 $ .25 $ .45 $ .12
Diluted:
Income from continuing
operations.................... $ 1.24 $ .35 $ .21 $ .40 $ .30
Net income...................... $ 1.15 $ .37 $ .24 $ .43 $ .12
</Table>
Income per common share amounts for the four quarters of 2003 and 2002 do
not total to the per common share amounts for the years ended December 31, 2003
and 2002 due to the timing of common stock repurchases and the effect of
contingently issuable common shares.
Fourth quarter 2003 net income includes a $113 million after-tax ($137
million pre-tax), non-cash goodwill impairment charge. Third quarter 2003 net
income includes a $54 million after-tax ($91 million pre-tax) gain from the
disposition of certain businesses. Third quarter 2003 also includes adjustments
of $59 million related to European accounting charges including a $5 million
non-cash goodwill impairment charge.
First quarter 2002 net income includes a $92 million after-tax ($117
million pre-tax), non-cash goodwill impairment charge recognized as a cumulative
effect of accounting change effective January 1, 2002. Third quarter 2002 net
income includes a $104 million after-tax ($166 million pre-tax) charge for the
Behr litigation settlement. Fourth quarter 2002 net income includes a $12
million after-tax ($19 million pre-tax) insurance recovery relating to the Behr
litigation settlement.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The financial and business analysis below provides information which the
Company believes is relevant to an assessment and understanding of the Company's
consolidated financial position, results of operations and cash flows. This
financial and business analysis should be read in conjunction with the
consolidated financial statements and related notes.
The following discussion and certain other sections of this 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 and competitive market conditions; 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 "Executive Level Overview," "Critical
Accounting Policies and Estimates" and "Outlook for the Company" sections, 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.
EXECUTIVE LEVEL OVERVIEW
The Company is engaged principally in the manufacture and sale of home
improvement and building products. These products are sold to the home
improvement and home construction markets through mass merchandisers, hardware
stores, home centers, builders, distributors and other outlets for consumers and
contractors. The Company also supplies and installs insulation and other
building products for builders in the new construction market.
Factors that affect the Company's results of operations include the levels
of home improvement and residential construction activity principally in North
America and Europe (including repair and remodeling and new construction), the
Company's ability to effectively manage its overall cost structure, fluctuations
in European currencies (primarily the European euro and Great Britain pound),
the importance of and the Company's relationships with home centers (including
The Home Depot, which represented approximately 23 percent of the Company's
sales in 2003) as distributors of home improvement and building products and the
Company's ability to maintain its leadership positions in its markets in the
face of increasing global competition. Historically, the Company has been able
to largely offset the impact on its revenues of cyclical declines in new
construction and home improvement markets through new product introductions and
acquisitions as well as market share gains.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based on the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Company to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of any contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The Company regularly reviews its estimates, which are based
on historical experience and on various other factors and assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of certain assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates and assumptions.
The Company believes that the following critical accounting policies are
affected by significant judgments and estimates used in the preparation of its
consolidated financial statements.
33
The Company records estimated reductions to revenue for customer programs
and incentive offerings, including special pricing arrangements, promotions and
other volume-based incentives. Allowances for doubtful accounts receivable are
maintained for estimated losses resulting from the inability of customers to
make required payments. Inventories are recorded at the lower of cost or net
realizable value with expense estimates made for obsolescence or unsaleable
inventory equal to the difference between the recorded cost of inventories and
their estimated market value based on assumptions about future demand and market
conditions. On an on-going basis, the Company monitors these estimates and
records adjustments for differences between estimates and actual experience.
Historically, actual results have not significantly deviated from those
determined using these estimates.
The Company maintains investments in marketable equity securities and bond
funds, which aggregated $517 million, and a number of private equity funds,
which aggregated $332 million, at December 31, 2003. The investments in private
equity funds are carried at cost and are evaluated for impairment at each
reporting period, or when circumstances indicate an impairment may exist, using
information made available by the fund managers and other assumptions. The
investments in marketable equity securities and bond funds are carried at fair
value, and unrealized gains and unrealized losses (that are deemed to be
temporary) are recorded as a component of shareholders' equity, net of tax
effect, in other comprehensive income (loss). The Company records an impairment
charge to earnings when an investment has experienced a decline in value that is
deemed to be other-than-temporary. Future changes in market conditions, the
performance of underlying investments or new information provided by private
equity fund managers could affect the recorded values of such investments and
the amounts realized upon liquidation.
The Company records the excess of purchase cost over the fair value of net
tangible assets of acquired companies as goodwill or other identifiable
intangible assets. 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. In the fourth quarter of 2003, the Company completed the annual
impairment testing of goodwill and other indefinite-lived intangible assets
utilizing a discounted cash flow method. This test indicated that goodwill
related to certain European businesses was impaired. The Company recognized a
non-cash, pre-tax impairment charge of $48 million ($42 million after-tax) in
the fourth quarter of 2003. In the third quarter of 2003, the Company also
recognized a non-cash impairment charge of $5 million related to a business unit
in the United Kingdom, as discussed in Business Segment Results. Intangible
assets with finite useful lives are amortized over their estimated lives. The
Company evaluates the remaining useful lives of amortizable intangible assets at
each reporting period to determine whether events and circumstances warrant a
revision to the remaining periods of amortization.
Determining market values using a 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 methodology are reasonable, different
assumptions could result in a different outcome. In estimating future cash
flows, the Company relies on internally generated five-year forecasts for sales
and operating profits, including capital expenditures and generally a three
percent long-term assumed growth rate of cash flows for periods after the
five-year forecast. The Company generally develops these forecasts based on
recent sales data for existing products, planned timing of new product launches,
housing starts and repair and remodeling estimates for existing homes.
In the fourth quarter of 2003, the Company estimated that future discounted
cash flows projected for most of its individual business units were greater than
the carrying values related to business units with goodwill and other
indefinite-lived intangible assets. Any increases in estimated discounted cash
flows would have no impact on the reported value of goodwill.
Accounting for defined-benefit pension plans involves estimating the cost
of benefits to be provided in the future, based on vested years of service, and
attributing those costs over the time period each employee works. Pension costs
and obligations of the Company are developed from actuarial valuations. Inherent
in these
34
valuations are key assumptions regarding inflation, expected return on plan
assets, mortality rates, compensation increases and discount rates for
obligations. The Company considers current market conditions, including changes
in interest rates, in selecting these assumptions. The Company selects these
assumptions with assistance from outside advisors such as consultants, lawyers
and actuaries. Changes in assumptions used could result in changes to the
related pension costs and obligations within the Company's consolidated
financial statements in any given period.
In 2003, the Company decreased its discount rate for obligations to 6.25
percent from 6.75 percent, which reflects the decline in long-term interest
rates. The assumed asset return is 8.5 percent, reflecting the expected
long-term return on plan assets.
The Company's underfunded amount for the difference between the projected
benefit obligation and plan assets decreased to $137 million from $183 million
in 2002. This is primarily the result of asset returns above projections and
Company contributions. The plan assets in 2003 had a net gain of approximately
23 percent as compared with an increase of 21 percent for the largest 1,000 Plan
Benchmark.
The Company's projected benefit obligation relating to the unfunded
non-qualified supplemental pension plans was $110 million for 2003 compared with
$82 million for 2002. The Company's underfunded amount for the difference
between the projected benefit obligation and plan assets for its foreign pension
plans was $42 million for 2003 compared with $22 million for 2002.
The Company expects pension expense for its defined-benefit plans to
decrease by approximately $7 million in 2004, principally due to higher asset
returns achieved in 2003 compared with the projection. If the Company assumed
that the future return on plan assets was 8 percent instead of 8.5 percent, the
pension expense for 2004 would increase by approximately $2 million.
The Company has considered future income and gains from investments and
other identified tax-planning strategies, including the potential sale of
certain operating assets, in assessing the need for establishing a valuation
allowance against its deferred tax assets at December 31, 2003, particularly
related to its after-tax capital loss carryforward of $62 million. Should the
Company determine that it would not be able to realize all or part of its
deferred tax assets in the future, a valuation allowance would be recorded in
the period such determination is made.
Certain of the Company's products and product finishes and services are
generally covered by a warranty to be free from defects in material and
workmanship for periods ranging from one year to lifetime, under certain
circumstances, of the original purchaser. At the time of the sale, the Company
accrues a warranty liability for estimated costs to provide products, parts or
services to repair or replace products in satisfaction of warranty obligations.
The Company's estimate of costs to service its warranty obligations is based on
historical experience and expectations of future conditions. To the extent the
Company experiences any changes in warranty claim activity or costs associated
with servicing those claims, its warranty liability is adjusted accordingly.
The Company is subject to lawsuits and pending or asserted claims
(including income taxes) with respect to matters generally arising in the
ordinary course of business. Liabilities and costs associated with these matters
require estimates and judgments based on the professional knowledge and
experience of management and its legal counsel. When estimates of the Company's
exposure for lawsuits and pending or asserted claims meet the criteria of SFAS
No. 5, "Accounting for Contingencies," amounts are recorded as charges to
earnings. The ultimate resolution of any such exposure to the Company may differ
due to subsequent developments.
The Company used estimates for the number of claims expected and the
average cost per claim to determine the liability related to the Behr litigation
settlement in 2002. In 2003, the Company received a fraction of the claims
originally estimated and reduced its accrual for litigation settlement by $58
million.
35
CORPORATE DEVELOPMENT STRATEGY
Acquisitions over the last several years have enabled the Company to build
a unique critical mass that has given the Company a strong position in the
markets it serves and has increased the Company's importance to its customers.
The Company is now intensifying its focus on leveraging the critical mass to
build greater value for its shareholders. Going forward, the Company will have a
more balanced growth strategy of internal growth, share repurchases and fewer
acquisitions with increased emphasis on cash flow and return on invested
capital. As part of its strategic planning, the Company continues to review all
of its businesses to determine which businesses are core to continuing
operations.
The Company reviews its business portfolio on an ongoing basis as part of
its corporate strategic planning and, in the first quarter of 2004, has
determined that several European businesses are not core to the Company's
long-term growth strategy and, accordingly, has embarked on a plan of
disposition. These businesses had combined 2003 net sales in excess of $350
million and an approximate net book value of $330 million. The Company expects
aggregate net proceeds from the dispositions to approximate $250 million. The
dispositions are expected to be completed by March 31, 2005 and the Company
expects to recognize a modest net loss upon the disposition of all of these
businesses. First quarter 2004 results will include a charge to reflect those
businesses that are expected to be divested at a loss. Any gains resulting from
the disposition of individual businesses will be recognized as such transactions
are completed.
During 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 consolidated financial statements from the
respective dates of acquisition. The aggregate net purchase price of these
acquisitions was $63 million, and included cash of $57 million and debt of $6
million. The Company also paid an additional $182 million of acquisition-related
consideration, including amounts to satisfy share price guarantees, contingent
consideration and other purchase price adjustments, in 2003, relating to
previously acquired companies.
These acquisitions provide the Company with opportunities to broaden its
product and service offerings and enter new markets, and contributed
approximately $50 million in net sales for the year ended December 31, 2003. See
Note C to the consolidated financial statements for additional information
regarding acquisitions.
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 the 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 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 $286 million and notes receivable of $3 million.
The sales and results of operations of the businesses sold in 2003 are
included in the Company's results from discontinued operations through the date
of disposition. These businesses contributed net sales of $198 million, $271
million and $269 million in 2003, 2002 and 2001, respectively, and income (loss)
before income taxes of $21 million, $29 million and $(4) million in 2003, 2002
and 2001, respectively.
The sales and results of operations of the 2004 businesses held for sale
are included in the Company's results from discontinued operations. These
businesses contributed net sales of $365 million, $318 million and $310 million
in 2003, 2002 and 2001, respectively, and (loss) income before income taxes of
$(64) million, $35 million and $28 million in 2003, 2002 and 2001, respectively.
(Loss) income before income taxes includes a non-cash, pre-tax goodwill
impairment charge of $89 million for the year ended December 31, 2003.
36
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has largely funded its growth through cash
provided by a combination of its operations, long-term bank debt and other
borrowings, and by the issuance of Company common stock, including issuances for
certain mergers and acquisitions.
Bank credit lines are maintained to ensure the availability of funds. The
credit lines with banks syndicated in the United States at December 31, 2003
include a $1.25 billion Amended and Restated 5-year Revolving Credit Agreement
due and payable in November 2005 and a $750 million 364-day Revolving Credit
Agreement that expires in November 2004. These agreements allow for borrowings
denominated in U.S. dollars or European euros. The previous 364-day revolving
credit agreement expired in November 2003. There were no borrowings under either
agreement during 2003. Interest is payable on borrowings under these agreements
based on various floating rate options as selected by the Company.
Certain debt agreements contain limitations on additional borrowings; at
December 31, 2003, the Company had additional borrowing capacity, subject to
availability, of up to $2.5 billion. Certain debt agreements also contain a
requirement for maintaining a certain level of net worth; at December 31, 2003,
the Company's net worth exceeded such requirement by approximately $2 billion.
In December 2002, the Company replenished the amount of debt and equity
securities issuable under its unallocated shelf registration statement with the
Securities and Exchange Commission pursuant to which the Company is able to
issue up to a combined $2 billion of debt and equity securities. In addition,
the Company increased its shelf registration related to common stock that can be
issued in connection with acquisitions to 50 million shares.
The Company had cash and cash investments of $795 million at December 31,
2003 as a result of strong cash flows from operations and the disposition of
certain businesses in 2003.
During 2003, the Company increased its quarterly common stock dividend 14
percent to $.16 per common share. This marks the 45th consecutive year in which
dividends have been increased. Although the Company is aware of the greater
interest in yield by many investors and has maintained an increased dividend
payout in recent years, the Company continues to believe that its shareholders'
long-term interests are best served by investing a significant portion of its
earnings in the future growth of the Company.
Maintaining high levels of liquidity and cash flow are among the Company's
financial strategies. The Company's total debt as a percent of total
capitalization decreased to 43 percent at December 31, 2003 from 47 percent at
December 31, 2002. The Company's working capital ratio was 1.8 to 1 and 2.0 to 1
at December 31, 2003 and 2002, respectively.
The Company has limited involvement with derivative financial instruments
and does not use derivatives for trading purposes. The derivatives used by the
Company for the year ended December 31, 2003 consist of interest rate swaps
entered into late in 2003, for the purpose of effectively converting a portion
of fixed-rate debt to floating-rate debt which is expected to reduce interest
expense, given current interest rates. Certain of the Company's European
operations also entered into foreign exchange forward contracts for the purpose
of managing exposure to currency fluctuations related to the United States
dollar and the Great Britain pound. Generally, under interest rate swaps, the
Company agrees with a counterparty to exchange the difference between fixed-rate
and floating-rate interest amounts calculated by reference to an agreed notional
principal amount. The derivative contracts are with two major creditworthy
institutions, thereby minimizing the risk of credit loss. The interest rate
swaps are considered a fair-value hedge and the interest rate differential on
interest rate swaps used to hedge existing debt is recognized as an adjustment
to interest expense or income over the term of the agreement. For fair-value
hedge transactions, changes in the fair value of the derivative and changes in
the fair value of the item hedged are recorded in determining earnings.
The average variable interest rates are based on the London Interbank
Offered Rate ("LIBOR") plus a fixed adjustment factor. The average effective
rate on the interest rate swaps is 2.25%. The interest rate swap agreements
cover a notional amount of $850 million of the Company's fixed-rate debt due
July 15, 2012 at an interest rate of 5.875%. The hedge is considered 100 percent
effective because all of the critical terms of the
37
derivative financial instruments match those of the hedged item. Accordingly, no
gain or loss on the value of the hedge was recognized in the Company's statement
of income for the year ended December 31, 2003. The amount recognized as an
adjustment (reduction) of interest expense was approximately $3 million for the
year ended December 31, 2003.
CASH FLOWS
Significant sources and (uses) of cash in the past three years are
summarized as follows, in millions:
<Table>
<Caption>
2003 2002 2001
------ ------ ----
Net cash from operating activities.......................... $1,421 $1,225 $967
(Decrease) increase in debt, net............................ (541) 634 202
Proceeds from disposition of:
Businesses, net of cash disposed.......................... 284 21 232
Equity investment......................................... 75 -- --
Issuance of Company common stock............................ 37 598 --
Acquisition of businesses, net of cash acquired............. (239) (736) (589)
Capital expenditures........................................ (271) (285) (274)
Cash dividends paid......................................... (286) (268) (244)
Purchase of Company common stock for:
Retirement................................................ (779) (166) (67)
Long-term stock incentive award plan...................... (48) (31) (49)
Proceeds (purchases) of marketable equity securities, bond
funds and other investments, net.......................... 55 (327) (33)
Decrease (increase) in long-term notes receivable, net...... 19 (22) 8
Effect of exchange rates.................................... 52 59 1
Other, net.................................................. (51) 53 (11)
------ ------ ----
Cash (decrease) increase.................................. $ (272) $ 755 $143
====== ====== ====
</Table>
The Company's cash and cash investments decreased $272 million to $795
million at December 31, 2003, from $1,067 million at December 31, 2002.
Net cash provided by operations in 2003 of $1.4 billion consisted primarily
of net income adjusted for non-cash items, including depreciation and
amortization of $244 million, income of $72 million related to the litigation
settlement, a $142 million charge (including $5 million recorded in the third
quarter of 2003) related to goodwill impairment, a $19 million charge for the
impairment of certain investments and other non-cash items. Excluding working
capital of acquired companies at the time of acquisition, net working capital
decreased by approximately $36 million.
The Company expects cash flows from operations to continue to increase due
to improvements in inventory and working capital management as well as
continuing strong business trends. Days sales in accounts receivable at December
31, 2003 were comparable to 2002 levels, days sales in inventory decreased to 47
days at December 31, 2003 from 56 days at December 31, 2002, and accounts
payable days increased to 36 days at December 31, 2003 compared with 33 days at
December 31, 2002, primarily due to the Company's working capital improvement
initiatives.
Cash used for financing activities in 2003 was $1.6 billion, and included
cash outflows of $286 million for cash dividends paid, $452 million for the
retirement of notes (including interest expense and loss on early retirement),
$779 million for the acquisition and retirement of Company common stock in
open-market transactions, $48 million for the acquisition of Company common
stock for the Company's long-term stock incentive award plan, $89 million
principally for the net payment of other debt and $37 million from the issuance
of Company common stock for the exercise of stock options.
38
At December 31, 2003, the Company had remaining Board of Directors'
authorization to repurchase up to an additional 48 million shares of its common
stock in open-market transactions or otherwise. In January 2004, the Company
repurchased an additional five million shares of Company common stock.
Cash used for investing activities was $128 million in 2003 and included
$271 million for capital expenditures, $239 million for acquisitions and
additional acquisition-related consideration relating to previously acquired
companies and $32 million for other net cash outflows. Cash provided by
investing activities in 2003 included $284 million of proceeds from the
disposition of businesses, $55 million from the net sales of marketable equity
securities, bond funds and other investments and $75 million from the sale of
the equity investment in Emco.
The Company continues to invest in automating its manufacturing operations
and increasing its productivity, in order to be a more efficient producer and to
improve customer service. Capital expenditures for 2003 were $271 million,
compared with $285 million for 2002 and $274 million for 2001; for 2004, capital
expenditures, excluding those of any potential 2004 acquisitions or
divestitures, are expected to approximate $350 million. Depreciation and
amortization expense for 2003 totaled $244 million, compared with $220 million
for 2002 and $269 million for 2001; for 2004, depreciation and amortization
expense, excluding any potential 2004 acquisitions or divestitures, is expected
to approximate $270 million. Amortization expense totaled $32 million, $39
million and $106 million in 2003, 2002 and 2001, respectively, including
goodwill amortization of $93 million in 2001.
Costs of environmental responsibilities and compliance with existing
environmental laws and regulations have not had, nor in the opinion of the
Company are they expected to have, a material effect on the Company's capital
expenditures, financial position or results of operations.
The Company believes that its present cash balance and cash flows from
operations are sufficient to fund its near-term working capital and other
investment needs. The Company believes that its longer-term working capital and
other general corporate requirements will be satisfied through cash flows from
operations and, to the extent necessary, from bank borrowings, future financial
market activities and proceeds from asset sales.
CONSOLIDATED RESULTS OF OPERATIONS
The Company reports its financial results in accordance with generally
accepted accounting principles ("GAAP") in the United States. 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.
39
SALES AND OPERATIONS
Net sales for 2003 were $10.6 billion, representing an increase of 20
percent over 2002. Excluding results from acquisitions and divestitures, net
sales increased nine percent (including a two percent increase relating to the
effect of currency translation) compared with 2002. The increase in net sales in
2003 is principally due to higher unit sales volume of certain products,
particularly assembled cabinets, architectural coatings, installation services,
vinyl windows and faucets. The following table reconciles reported net sales to
net sales excluding acquisitions and divestitures, in millions:
<Table>
<Caption>
TWELVE MONTHS
ENDED
DECEMBER 31,
----------------
2003 2002
------- ------
Net sales, as reported...................................... $10,571 $8,831
-- Acquisitions........................................... (1,334) (320)
-- Divestitures(a)........................................ -- (13)
------- ------
Net sales, excluding acquisitions and divestitures.......... 9,237 8,498
-- Currency translation................................... (168) --
------- ------
Net sales, excluding acquisitions, divestitures and the
effect of currency........................................ $ 9,069 $8,498
======= ======
</Table>
(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.
The Company's gross profit margins were 30.7 percent, 31.6 percent and 30.2
percent for the years ended December 31, 2003, 2002 and 2001, respectively. The
decline in the 2003 gross profit margins reflects increased sales in segments
with somewhat lower margins, relatively higher International sales (which have
lower gross profit margins), new product launch costs as well as increased
energy costs which impacted material, freight and other operating costs.
Selling, general and administrative expenses excluding general corporate
expense as a percent of sales were 15.7 percent in 2003 compared with 14.7
percent in both 2002 and 2001, with the 2003 increase reflecting increased
advertising and promotion costs as well as increased insurance and pension
costs.
Operating profit margins, as reported, were 14.0 percent, 14.3 percent and
13.1 percent in 2003, 2002 and 2001, respectively. Operating profit margins
excluding general corporate expense, the income/charge for litigation settlement
(2003 and 2002), the goodwill impairment charge (2003), income related to the
planned disposition of businesses (2002) and goodwill amortization expense
(2001) were 14.9 percent, 16.9 percent and 15.5 percent in 2003, 2002 and 2001,
respectively. The overall decline in the 2003 operating profit margins is
primarily due to increased energy, insurance, pension, advertising and promotion
costs as well as adjustments as discussed in the Business Segment Results
related to certain United Kingdom business units.
OTHER INCOME (EXPENSE), NET
In 2003 and 2002, the Company recorded $19 million and $24 million,
respectively, of pre-tax, non-cash charges for the write-down of certain private
equity funds and other financial investments.
Other, net in 2003 include $23 million of realized gains, net from the sale
of marketable equity securities, dividend income of $25 million and $17 million
of income, net regarding private equity funds. Other, net in 2003 also include a
$5 million gain from the sale of the Company's equity investment in Emco, $7
million of losses on the early retirement of debt, realized foreign currency
exchange losses of $4 million and other miscellaneous expenses.
Other, net in 2002 include $39 million of realized losses, net from the
sale of marketable equity securities and dividend income of $17 million. In
addition, the Company incurred $14 million of losses related to interest
40
ratelock transactions entered into in anticipation of the Company issuing
fixed-rate debt in 2002. Other items, net in 2002 include realized foreign
currency exchange losses of $3 million and other miscellaneous expenses.
In 2001, the Company recorded an aggregate $530 million pre-tax, non-cash
charge for the write-down of certain investments, including $460 million for the
securities of Furnishings International Inc. ("FII") held by the Company and $70
million for an other-than-temporary decline in the fair value of principally
technology-related marketable equity securities investments.
Other interest income for 2001 includes $29 million from the 12%
pay-in-kind junior debt securities of FII.
Other, net in 2001 include $13 million of realized gains, net from the sale
of marketable equity securities, dividend income of $8 million and $4 million of
income, net regarding private equity funds. Other items, net in 2001 also
include realized foreign currency exchange losses of $5 million and other
miscellaneous expenses.
Interest expense was $261 million, $235 million and $237 million in 2003,
2002 and 2001, respectively. The increase in interest expense in 2003 is
primarily due to increased fixed-rate borrowings in the last half of 2002.
INCOME AND EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS
Income from continuing operations and diluted earnings per common share for
2003 were $790 million and $1.61 per common share. Income from continuing
operations for 2003 includes a pre-tax, non-cash goodwill impairment charge of
$53 million ($47 million or $.10 per common share, after-tax). Income from
continuing operations and diluted earnings per common share for 2002 were $639
million and $1.24 per common share. Income from continuing operations in 2002
was negatively affected by a $147 million pre-tax charge for a litigation
settlement ($92 million or $.18 per common share, after-tax). Income from
continuing operations and diluted earnings per common share for 2001 were $183
million and $.39 per common share. Income from continuing operations for 2001
included a $530 million pre-tax ($344 million or $.72 per common share,
after-tax), non-cash charge for the write-down of certain investments.
The Company's effective tax rate for income from continuing operations was
37 percent in 2003 compared with 34 percent in both 2002 and 2001. The increase
in 2003 was due principally to a lower tax benefit related to the goodwill
impairment charge as well as an increase in domestic earnings (relative to total
earnings), which are taxed at a higher rate than earnings from the Company's
foreign operations. The Company estimates that its effective tax rate should
approximate 36 percent for 2004.
OUTLOOK FOR THE COMPANY
Favorable sales performance has continued in early 2004 and, based on
current business trends, the Company believes that it will achieve record sales
and earnings for the full year 2004 from continuing operations, excluding any
disposition charge. The Company expects certain operating expenses will continue
to increase in 2004, including such items as energy, insurance and certain
material and freight costs.
The Company has embarked on a plan of disposition for several of its
European businesses which are not core to the Company's long-term growth
strategy. The dispositions are expected to be completed by March 31, 2005 and
the Company expects to recognize a modest net loss upon the disposition of all
of these businesses.
41
BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS
The following table sets forth the Company's net sales and operating profit
information by business segment and geographic area, dollars in millions.
<Table>
<Caption>
PERCENT
INCREASE
-----------
2003 2002
VS. VS.
2003 2002 2001 2002 2001
------- ------ ------ ---- ----
NET SALES:
Cabinets and Related Products............................. $ 2,879 $2,644 $2,417 9% 9%
Plumbing Products......................................... 2,684 2,068 1,773 30% 17%
Installation and Other Services........................... 2,411 1,845 1,692 31% 9%
Decorative Architectural Products......................... 1,449 1,292 1,163 12% 11%
Other Specialty Products.................................. 1,148 982 660 17% 49%
------- ------ ------
TOTAL................................................... $10,571 $8,831 $7,705 20% 15%
======= ====== ======
North America............................................. $ 8,763 $7,686 $6,745 14% 14%
International, principally Europe......................... 1,808 1,145 960 58% 19%
------- ------ ------
TOTAL................................................... $10,571 $8,831 $7,705 20% 15%
======= ====== ======
</Table>
<Table>
<Caption>
2003 2003(b) 2002 2001(c) 2001(d)
------ ------ ------ ------ ------
OPERATING PROFIT:(A)
Cabinets and Related Products.......................... $ 441 $ 441 $ 367 $ 257 $ 245
Plumbing Products...................................... 343 360 341 252 245
Installation and Other Services........................ 368 368 304 287 243
Decorative Architectural Products...................... 210 215 307 268 256
Other Specialty Products............................... 178 209 193 130 118
------ ------ ------ ------ ------
TOTAL................................................ $1,540 $1,593 $1,512 $1,194 $1,107
General corporate expense, net......................... (112) (112) (98) (96) (96)
Income (charge) for litigation settlement, net......... 72 72 (147) -- --
Expense related to accelerated benefits................ (16) (16) -- -- --
------ ------ ------ ------ ------
TOTAL, AS REPORTED................................... $1,484 $1,537 $1,267 $1,098 $1,011
North America.......................................... $1,433 $1,433 $1,347 $1,080 $1,011
International, principally Europe...................... 107 160 165 114 96
------ ------ ------ ------ ------
TOTAL................................................ 1,540 1,593 1,512 1,194 1,107
General corporate expense, net......................... (112) (112) (98) (96) (96)
Income (charge) for litigation settlement, net......... 72 72 (147) -- --
Expense related to accelerated benefits................ (16) (16) -- -- --
------ ------ ------ ------ ------
TOTAL, AS REPORTED................................... $1,484 $1,537 $1,267 $1,098 $1,011
</Table>
<Table>
<Caption>
2003 2003(b) 2002 2001(c) 2001(d)
----- ----- ----- ----- -----
OPERATING PROFIT MARGIN:(A)
Cabinets and Related Products........................... 15.3% 15.3% 13.9% 10.6% 10.1%
Plumbing Products....................................... 12.8% 13.4% 16.5% 14.2% 13.8%
Installation and Other Services......................... 15.3% 15.3% 16.5% 17.0% 14.4%
Decorative Architectural Products....................... 14.5% 14.8% 23.8% 23.0% 22.0%
Other Specialty Products................................ 15.5% 18.2% 19.7% 19.7% 17.9%
North America........................................... 16.4% 16.4% 17.5% 16.0% 15.0%
International, principally Europe....................... 5.9% 8.8% 14.4% 11.9% 10.0%
TOTAL................................................. 14.6% 15.1% 17.1% 15.5% 14.4%
TOTAL OPERATING PROFIT MARGIN, AS REPORTED.............. 14.0% N/A 14.3% N/A 13.1%
</Table>
(A) Before: general corporate expense; accelerated benefit expense related to
the unexpected passing of the Company's President and Chief Operating
Officer in 2003; and income (charge) regarding the Behr litigation
settlement (related to the Decorative Architectural Products segment).
(B) Excluding goodwill impairment charge. The 2003 goodwill impairment charge
was as follows: Plumbing Products -- $17 million; Decorative Architectural
Products -- $5 million and Other Specialty Products -- $31 million.
(C) Excluding goodwill amortization.
(D) Including goodwill amortization.
42
BUSINESS SEGMENT RESULTS DISCUSSION
Changes in operating profit margins in the following Business Segment and
Geographic Area Results discussion exclude general corporate expense, the
income/charge for the litigation settlement, net, the goodwill impairment charge
in 2003 and goodwill amortization expense in 2001.
CABINETS AND RELATED PRODUCTS
Net sales of Cabinets and Related Products increased 9 percent in 2003
compared with 2002 due primarily to increased sales volume of assembled cabinets
largely through North American retail distribution channels at major home
centers and through the new construction market in the United States, as well as
a more favorable product mix. Net sales of Cabinets and Related Products
increased 9 percent in 2002 compared with 2001 due to increased sales volume of
cabinets largely through expansion of North American retail distribution
channels at major home centers as well as new product introductions. This
segment was favorably influenced by a weaker U.S. dollar in 2003 and 2002, which
affected the translation of local currencies of European operations included in
this segment.
Operating profit margins were 15.3 percent, 13.9 percent and 10.6 percent
for the years ended December 31, 2003, 2002 and 2001, respectively. Operating
profit margins in 2003 reflect the positive effect of higher sales volume as
well as lower fixed costs resulting from the rationalization of existing
manufacturing capacity. Operating profit margins in 2002 were positively
influenced by increased unit sales volume, profit improvement initiatives and
the reduction of both plant shutdown costs and other asset write-downs, offset
in part by costs related to a discontinued product line. Operating profit
margins in 2001 were negatively influenced by plant shutdown costs, the
under-absorption of fixed costs, higher energy costs, increased bad debt expense
and the lower results of European operations.
PLUMBING PRODUCTS
Net sales of Plumbing Products increased 30 percent in 2003 compared with
2002 primarily due to acquisitions (principally the acquisition of the majority
interest in Hansgrohe in December 2002) as well as the effect of a weaker U.S.
dollar which had a favorable impact on the translation of local currencies of
European operations included in this segment. Net sales of Plumbing Products
increased 17 percent in 2002 compared with 2001 due to the favorable influence
of new product introductions, which contributed to higher unit sales volume of
faucets to retailers in 2002 as well as increased growth in the wholesale
distribution channels. The increase in sales of Plumbing Products in 2002 also
includes the influence of inventory reduction programs of certain key customers
in the first six months of 2001, which reduced sales in 2001 and favorably
influenced the 2002 versus 2001 comparisons.
Operating profit margins were 13.4 percent, 16.5 percent and 14.2 percent
for the years ended December 31, 2003, 2002 and 2001, respectively. Operating
profit margins in 2003 include the effect of a recently acquired company that
has lower margins than the segment average as well as inventory adjustments and
a decline in operating margins of certain European operations, including a
non-cash, pre-tax charge of approximately $4 million relating to a United
Kingdom business unit as discussed below. Operating profit margins in 2002
include the favorable effect of a $16 million pre-tax gain relating to the
reclassification of certain assets to held and used in accordance with SFAS No.
144. Operating profit margins in 2002 were favorably affected by the leveraging
of fixed costs over increased unit sales volume as well as the Company's profit
improvement initiatives. Operating profit margins in 2001 were negatively
affected by competitive pricing pressures and the lower results of European
companies.
During 2003, the Company 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.
This overstatement was corrected in the third quarter of 2003. The Company made
the appropriate personnel changes and completed its review of the business unit
in the fourth quarter of 2003 and determined that no further adjustment was
necessary.
43
INSTALLATION AND OTHER SERVICES
Net sales of Installation and Other Services increased 31 percent in 2003
compared with 2002 and 9 percent in 2002 compared with 2001. The increase in net
sales for this segment in 2003 and 2002 was principally attributable to
acquisitions (principally the acquisition of Service Partners in September 2002)
and a stronger new-housing market as well as increased sales of non-insulation
products. Operating profit margins were 15.3 percent, 16.5 percent and 17.0
percent for the years ended December 31, 2003, 2002 and 2001, respectively. The
decline in operating profit margins in 2003 is primarily attributable to adverse
weather conditions (which reduced sales) experienced in the first half of 2003
as well as increased sales of generally lower-margin non-insulation products.
DECORATIVE ARCHITECTURAL PRODUCTS
Net sales of Decorative Architectural Products increased 12 percent in 2003
compared with 2002. Net sales of Decorative Architectural Products increased 11
percent in 2002 compared with 2001. The increases in net sales in 2003 and 2002
are primarily due to higher unit sales volume of paints, stains and decorative
hardware through North American retail distribution channels.
Operating profit margins were 14.8 percent, 23.8 percent and 23.0 percent
for the years ended December 31, 2003, 2002 and 2001, respectively. Operating
profit margins for this segment in 2003 were impacted by increased advertising
costs, including additional costs associated with new in-store paint display
centers, and fixed asset and inventory adjustments reflecting excess, obsolete
and resourced products related to decorative hardware. Operating profit margins
for 2003 also include the effect of a non-cash, pre-tax charge of approximately
$55 million related to a United Kingdom business unit discussed below.
During 2003, the Company recorded a non-cash, pre-tax charge which reduced
operating profit by approximately $35 million with respect to a United Kingdom
business unit in the Decorative Architectural Products segment. The charge
relates primarily to a business system implementation failure which allowed
former management to circumvent internal controls and artificially inflate the
unit's operating profit in years prior to 2003. The Company also determined that
goodwill was impaired and recorded a $5 million charge in the third quarter of
2003.
Finally, the Company 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 2003 charges
aggregating approximately $15 million principally related to inventories and
receivables.
The Company is implementing changes to its operational and financial
structure in Europe which include: reorganizing its European business operations
into product groups; the addition of group operating and financial personnel;
training and evaluation related to internal controls; and the expansion of both
external and internal audit involvement.
OTHER SPECIALTY PRODUCTS
Net sales of Other Specialty Products increased 17 percent in 2003 compared
with 2002, principally due to acquisitions as well as increased sales of vinyl
windows. Net sales of Other Specialty Products increased 49 percent in 2002
compared with 2001, principally due to acquisitions as well as increased sales
of vinyl windows. A weaker U.S. dollar in 2003 also had a favorable effect on
the translation of local currencies of European operations included in this
segment.
Operating profit margins were 18.2 percent, 19.7 percent and 19.7 percent
for the years ended December 31, 2003, 2002 and 2001, respectively. The
operating margin decline in this segment is primarily due to increased material
and insurance costs as well as lower results of European operations. The
improvement in operating profit margins in 2002 was primarily due to lower
levels of bad debt expense and asset write-downs in 2002 compared with 2001. The
operating profit margins in 2001 were also negatively affected by the lower
results of European operations.
44
GEOGRAPHIC AREA RESULTS DISCUSSION
NORTH AMERICA
Net sales from North American operations increased 14 percent in 2003 over
2002, primarily due to acquisitions as well as increased unit sales volume of
assembled cabinets, installed sales of non-insulation products, paints and
stains, and vinyl windows. Net sales from North American operations increased 14
percent in 2002 over 2001, primarily due to acquisitions as well as increased
sales of certain products, including cabinets, paints and stains, vinyl windows
and faucets.
Operating profit margins were 16.4 percent, 17.5 percent and 16.0 percent
for the years ended December 31, 2003, 2002 and 2001, respectively. The decline
in operating profit margins for 2003 principally reflects increased sales in
segments that have somewhat lower operating profit margins, increased energy
costs as well as increased advertising and promotion costs. The improvement in
operating profit margins for 2002 principally reflects the leveraging of fixed
costs over increased sales volume, product mix and the influence of the
Company's profit improvement initiatives.
INTERNATIONAL, PRINCIPALLY EUROPE
Net sales of the Company's International operations increased 58 percent in
2003 compared with 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 had a positive effect on the translation of
European results in 2003 compared with 2002, increasing European net sales in
2003 by approximately 16 percent. Net sales of the Company's International
operations increased 19 percent in 2002 compared with 2001 primarily due to
acquisitions as well as the favorable impact of foreign exchange rates.
Operating profit margins were 8.8 percent, 14.4 percent and 11.9 percent
for the years ended December 31, 2003, 2002 and 2001, respectively. Operating
profit margins for International operations for 2003 were adversely affected by
the non-cash, pre-tax charges relating to accounting irregularities discussed
previously, as well as lower margins of recently acquired companies. Operating
profit margins for International operations for 2002 benefited from profit
improvement initiatives. Operating profit margins for 2001 include the effect of
plant start-up and system implementation costs.
OTHER MATTERS
COMMITMENTS AND CONTINGENCIES
Litigation
The Company is subject to lawsuits and pending or asserted claims with
respect to matters generally arising in the ordinary course of business. Note T
to the consolidated financial statements discusses the settlements in 2002 of
claims pending in the United States against the Company and its subsidiary, Behr
Process Corporation, with respect to several exterior wood coating products
previously manufactured by Behr.
Other Commitments
With respect to the Company's investments in private equity funds, the
Company, at December 31, 2003, has, under certain circumstances, commitments to
contribute additional capital to such funds of up to $88 million.
During 2000, approximately 300 of the Company's key employees purchased
from the Company 8.4 million shares of Company common stock for cash totaling
$156 million under an Executive Stock Purchase Program ("Program"). The stock
was purchased at $18.50 per share, the approximate market price of the common
stock at the time of purchase. Participants in the Program financed their
purchases with five-year full recourse personal loans, at a market interest
rate, from a bank syndicate. Each participant is fully responsible at all times
for repaying their bank loans when they become due and is personally responsible
for 100 percent of any loss in the market value of the purchased stock. The
Company has guaranteed repayment of the loans, for which the aggregate amount
outstanding was approximately $160 million at December 31,
45
2003, in the event of a default by a participant. The Company believes that the
likelihood of any significant defaults by participants on payment of these loans
is remote.
The Company enters into contracts, which include reasonable and customary
indemnifications that are standard for the industries in which it operates. Such
indemnifications include claims against builders for issues relating to the
Company's products and workmanship. In conjunction with divestitures and other
transactions, the Company occasionally provides reasonable and customary
indemnifications relating to various items, including: the enforceability of
trademarks; legal and environmental issues; provisions for sales returns; and
asset valuations. The Company has never had to pay a material amount related to
these indemnifications and evaluates the probability that amounts may be
incurred and appropriately records an estimated liability when probable.
Warranty
Certain of the Company's products and product finishes and services are
generally covered by a warranty to be free from defects in material and
workmanship for periods ranging from one year to the lifetime, under certain
circumstances, of the original purchaser. At the time of sale, the Company
accrues a warranty liability for estimated costs to provide products, parts or
service to repair or replace products in satisfaction of warranty obligations.
The Company's estimate of costs to service its warranty obligations is based on
historical experience and expectations of future conditions. To the extent that
the Company experiences any changes in warranty claim activity or costs
associated with servicing those claims, its warranty liability is adjusted
accordingly. See Note T to the consolidated financial statements for the tabular
disclosure.
A significant portion of the Company's business is at the consumer retail
level through home centers and major retailers. A consumer may return a product
to a retail outlet that is a warranty return. However, certain retail outlets do
not distinguish between warranty and other types of returns when they claim a
return deduction from the Company. The Company's revenue recognition policy
takes into account this type of return when recognizing income, and deductions
are recorded at the time of sale.
Acquisition-Related Commitments
The Company, as part of recent purchase agreements for certain companies
acquired, provides for the payment of additional consideration in either cash or
Company common stock, contingent upon whether certain conditions are met,
including the operating performance of the acquired business and the price of
the Company's common stock. Shares that are contingently issuable under these
guarantees are included in the calculation of diluted earnings per common share.
See Note T to the consolidated financial statements for additional information.
As part of other recent acquisition agreements, the Company has additional
consideration payable in cash of approximately $40 million contingent on the
operating performance of the acquired businesses.
46
CONTRACTUAL OBLIGATIONS
The following table provides payment obligations related to current
contracts for the year ended December 31, 2003, in millions:
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
-----------------------------------------------
LESS THAN 2-3 4-5 MORE THAN
1 YEAR YEARS YEARS 5 YEARS TOTAL
--------- ------ ----- --------- ------
Long-term debt.......................... $334 $1,655 $412 $1,781 $4,182
Operating leases........................ 90 116 36 110 352
Private equity funds.................... 30 30 28 -- 88
Acquisition-related commitments......... 27 13 -- -- 40
Defined-benefit plans................... 57 -- -- -- 57
Purchase commitments(a)................. 28 7 -- -- 35
---- ------ ---- ------ ------
Total................................. $566 $1,821 $476 $1,891 $4,754
==== ====== ==== ====== ======
</Table>
(a) Does not include contracts that do not require volume commitments or open
or pending purchase orders.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN
46 requires that a company that has a controlling financial interest in a
variable interest entity consolidate the assets, liabilities and results of
operations of the variable interest entity in the company's consolidated
financial statements. The adoption of certain provisions of FIN 46, relating to
variable interest entities formed prior to February 2003, has been extended to
2004. The Company believes that FIN 46 will not have a material impact on the
Company's consolidated financial statements.
In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The revisions to SFAS No. 132
require enhanced disclosures regarding pensions and other postretirement
benefits. Most of the enhanced disclosure requirements were effective for the
year ended December 31, 2003; certain disclosure provisions are effective
beginning in 2004.
47
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has considered the provisions of Financial Reporting Release
No. 48, "Disclosure of Accounting Policies for Derivative Financial Instruments
and Derivative Commodity Instruments, and Disclosure of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments and Derivative Commodity Instruments."
The Company is exposed to the impact of changes in interest rates and
foreign currency exchange rates in the normal course of business and to market
price fluctuations related to its marketable equity securities, bond funds and
other investments. The Company has limited involvement with derivative financial
instruments and uses such instruments only to the extent necessary to manage
exposure to fluctuations in interest rates and foreign currency fluctuations.
The Company does not use derivatives for trading purposes. See Note G to the
consolidated financial statements for additional information regarding the
Company's derivative instruments.
The derivatives used by the Company for the year ended December 31, 2003
consist of interest rate swaps entered into late in 2003, for the purpose of
effectively converting a portion of fixed-rate debt to floating-rate debt which
is expected to reduce interest expense, given current interest rates. Certain of
the Company's European operations also entered into foreign exchange forward
contracts for the purpose of managing exposure to currency fluctuations related
to the United States dollar and the Great Britain pound.
At December 31, 2003, the Company performed sensitivity analyses to assess
the potential loss in the fair values of market risk sensitive instruments
resulting from a hypothetical change of 200 basis points in average interest
rates, a 10 percent change in foreign currency exchange rates or a 10 percent
decline in the market value of the Company's long-term investments. Based on the
analyses performed, such changes would not be expected to materially affect the
Company's financial position, results of operations or cash flows.
48
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
<Table>
<Caption>
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
--------------------------------------
2003 2002 2001 2000 1999
------ ------ ---- ------ ----
EARNINGS BEFORE INCOME TAXES AND FIXED CHARGES:
Income from continuing operations before income
taxes and cumulative effect of accounting
change, net..................................... $1,280 $ 966 $278 $ 824 $805
(Deduct) add equity in undistributed (earnings)
loss of fifty-percent-or-less-owned companies... -- (10) (1) (10) (19)
Add interest on indebtedness, net.................. 253 228 230 190 119
Add amortization of debt expense................... 12 13 10 2 1
Add estimated interest factor for rentals.......... 32 24 21 17 14
------ ------ ---- ------ ----
Earnings before income taxes and cumulative effect
of accounting change, net and fixed charges..... $1,577 $1,221 $538 $1,023 $920
====== ====== ==== ====== ====
FIXED CHARGES:
Interest on indebtedness........................... $ 253 $ 226 $236 $ 198 $122
Amortization of debt expense....................... 12 13 10 2 1
Estimated interest factor for rentals.............. 32 24 21 17 14
------ ------ ---- ------ ----
Total fixed charges............................. $ 297 $ 263 $267 $ 217 $137
------ ------ ---- ------ ----
PREFERRED STOCK DIVIDENDS(a)......................... $ 16 $ 14 $ 7 -- --
------ ------ ---- ------ ----
Combined fixed charges and preferred stock
dividends....................................... $ 313 $ 277 $274 $ 217 $137
====== ====== ==== ====== ====
RATIO OF EARNINGS TO FIXED CHARGES................... 5.3 4.6 2.0 4.7 6.7
====== ====== ==== ====== ====
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS(b)(c).................... 5.0 4.4 2.0 4.7 6.7
====== ====== ==== ====== ====
</Table>
- ---------------
(a) Represents amount of income before provision for income taxes required to
meet the preferred stock dividend requirements of the Company.
(b) Excluding the 2003 pre-tax income for litigation settlement of $72 million
and the non-cash, pre-tax goodwill impairment charge of $53 million, the
2002 pre-tax charge for litigation settlement, net of $147 million, the
2001 pre-tax non-cash charge of $530 million and the 2000 pre-tax non-cash
charge of $145 million, the Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends would be 5.0, 4.9, 3.9 and 5.4 for 2003, 2002,
2001 and 2000, respectively.
(c) Prior years have not been adjusted to exclude goodwill amortization
expense.
49
MASCO CORPORATION
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
<Table>
<Caption>
(IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- --------------------- ---------- ----------
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- -------- ---------- ----------
(A) (B)
Allowance for doubtful accounts,
deducted from accounts
receivable in the balance sheet:
2003............................ $69 $23 $(2) $ (6) $84
=== === === ==== ===
2002............................ $56 $16 $ 4 $ (7) $69
=== === === ==== ===
2001............................ $36 $33 $ 5 $(18) $56
=== === === ==== ===
</Table>
(a) Allowance of companies acquired and companies disposed of, net.
(b) Deductions, representing uncollectible accounts written off, less
recoveries of accounts written off in prior years.
50
SELECTED FINANCIAL DATA
The following table sets forth summary consolidated financial information
for the Company's continuing operations, for the years and dates indicated.
<Table>
<Caption>
(IN MILLIONS, EXCEPT PER SHARE DATA)
2003 2002 2001 2000 1999
------- ---------- ---------- ---------- ----------
Net sales(1)............................. $10,571 $ 8,831 $7,705 $6,506 $5,577
Operating profit(1),(2),(3),(4).......... $ 1,484 $ 1,267 $1,011 $ 888 $ 807
Income from continuing
operations(1),(2),(3),(5),(6),(7)...... $ 790 $ 547 $ 183 $ 540 $ 502
Per share of common stock:
Income from continuing
operations(1),(2),(3),(5),(6),(7)
Basic............................... $ 1.65 $ 1.13 $ 0.40 $ 1.22 $ 1.15
Diluted............................. $ 1.61 $ 1.06 $ 0.39 $ 1.20 $ 1.12
Dividends declared..................... $ 0.60 $ 0.55 $ 0.53 $ 0.50 $ 0.46
Dividends paid......................... $ 0.58 $ 0.54 1/2 $ 0.52 1/2 $ 0.49 $ 0.45
At December 31:
Total assets........................... $12,149 $12,050 $9,021 $7,604 $6,517
Long-term debt......................... $ 3,848 $ 4,316 $3,628 $3,018 $2,431
Shareholders' equity................... $ 5,456 $ 5,294 $3,958 $3,286 $3,019
</Table>
(1) Amounts have been restated to exclude discontinued operations announced in
early 2004.
(2) The year 2003 includes a non-cash goodwill impairment charge of $47 million
after-tax ($53 million pre-tax) and income of $45 million after-tax ($72
million pre-tax) related to the litigation settlement.
(3) The year 2002 includes a $92 million after-tax ($147 million pre-tax), net
charge for the Behr litigation settlement, including $19 million of pre-tax
income recorded for reimbursements from liability insurers.
(4) Operating profit for 1999-2001 includes goodwill amortization expense as
follows: 2001 -- $87 million, 2000 -- $60 million and 1999 -- $39 million.
(5) The year 2002 includes a $92 million after-tax ($117 million pre-tax),
non-cash goodwill impairment charge recognized as a cumulative effect of a
change in accounting principle.
(6) The year 2001 includes a $344 million after-tax ($530 million pre-tax),
non-cash charge for the write-down of certain investments, principally
securities of Furnishings International Inc.
(7) The year 2000 includes a $94 million after-tax ($145 million pre-tax),
non-cash charge for the planned disposition of businesses and the write-down
of certain investments.
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Masco Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 9.01 (c) present fairly, in all material respects, the
financial position of Masco Corporation and its subsidiaries at December 31,
2003 and 2002, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 9.01 (c) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Detroit, Michigan
February 18, 2004, except for Note B, as to which
the date is November 9, 2004