UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
COMMISSION FILE NUMBER 1-5794
MASCO CORPORATION
(Exact name of Registrant as Specified in Charter)
DELAWARE 1-5794 38-1794485
-------- ------ ----------
(State or Other (Commission File Number) (IRS Employer
Jurisdiction Identification No.)
of Incorporation)
21001 VAN BORN ROAD, TAYLOR, MICHIGAN 48180
------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(313) 274-7400
-------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[x] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[x] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Shares Outstanding at May 1, 2005
----- ---------------------------------
Common stock, par value $1.00 per share 433,700,000
MASCO CORPORATION
INDEX
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 2005 and December 31, 2004 1
Condensed Consolidated Statements of
Income for the Three Months Ended
March 31, 2005 and 2004 2
Condensed Consolidated Statements of
Cash Flows for the Three Months Ended
March 31, 2005 and 2004 3
Notes to Condensed Consolidated
Financial Statements 4-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12-16
Item 4. Controls and Procedures 17-18
Part II. Other Information 19-20
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
Item 6. Exhibits
Signature
MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 2005 AND DECEMBER 31, 2004
(DOLLARS IN MILLIONS EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2005 2004
--------- ------------
ASSETS
Current assets:
Cash and cash investments $ 940 $ 1,256
Accounts and notes receivable, net 1,902 1,732
Prepaid expenses and other 269 282
Inventories:
Raw material 427 406
Finished goods 590 577
Work in process 174 149
--------- ------------
1,191 1,132
--------- ------------
Total current assets 4,302 4,402
Property and equipment, net 2,243 2,272
Goodwill 4,364 4,408
Other intangible assets, net 321 326
Other assets 905 1,133
--------- ------------
Total assets $ 12,135 $ 12,541
========= ============
LIABILITIES
Current liabilities:
Notes payable $ 882 $ 80
Accounts payable 892 837
Accrued liabilities 1,202 1,230
--------- ------------
Total current liabilities 2,976 2,147
Long-term debt 3,407 4,187
Deferred income taxes and other 744 784
--------- ------------
Total liabilities 7,127 7,118
--------- ------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred shares, par value $1 per share
Authorized shares: 1,000,000; issued:
2005 - None; 2004 - None - -
Common shares, par value $1 per share
Authorized shares: 1,400,000,000; issued:
2005 - 435,020,000; 2004 - 446,720,000 435 447
Paid-in capital 252 642
Retained earnings 4,029 3,880
Accumulated other comprehensive income 512 627
Less: Restricted stock awards (220) (173)
--------- ------------
Total shareholders' equity 5,008 5,423
--------- ------------
Total liabilities and
shareholders' equity $ 12,135 $ 12,541
========= ============
See notes to condensed consolidated financial statements.
1
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
------ ------
Net sales $2,969 $2,806
Cost of sales 2,128 1,955
------ ------
Gross profit 841 851
Selling, general and administrative expenses 500 485
(Income) regarding litigation settlement (2) (21)
------ ------
Operating profit 343 387
------ ------
Other income (expense), net:
Interest expense (59) (53)
Other, net 37 52
------ ------
(22) (1)
------ ------
Income from continuing operations
before income taxes and minority
interest 321 386
Income taxes 104 140
------ ------
Income from continuing operations before
minority interest 217 246
Minority interest 5 5
------ ------
Income from continuing operations 212 241
Income (loss) from discontinued operations,
net of income taxes 19 (73)
------ ------
Net income $ 231 $ 168
====== ======
Earnings per common share:
Basic:
Income from continuing operations $ .49 $ .53
Income (loss) from discontinued
operations, net of income taxes .05 (.16)
------ ------
Net income $ .53 $ .37
====== ======
Diluted:
Income from continuing operations $ .48 $ .52
Income (loss) from discontinued
operations, net of income taxes .04 (.16)
------ ------
Net income $ .52 $ .36
====== ======
Cash dividends per common share:
Declared $ .20 $ .16
====== ======
Paid $ .18 $ .16
====== ======
See notes to condensed consolidated financial statements.
2
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
------ ------
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $ 294 $ 246
(Increase) in receivables (163) (236)
(Increase) in inventories (72) (73)
Increase in accounts payable and accrued
liabilities, net 60 161
------ ------
Total cash from operating activities 119 98
------ ------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt 1 6
Payment of debt (28) (16)
Issuance of notes, net of issuance costs - 299
Retirement of notes - (5)
Proceeds from settlement of swaps - 55
Purchase of Company common stock for retirement (465) (422)
Issuance of Company common stock 10 10
Cash dividends paid (80) (76)
------ ------
Total cash (for) financing activities (562) (149)
------ ------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures (58) (55)
Purchases of marketable securities (52) (169)
Proceeds from other investments, net 9 13
Proceeds from disposition of:
Marketable securities 112 109
Businesses, net of cash disposed 63 -
Other, net 9 17
------ ------
Total cash from (for) investing activities 83 (85)
------ ------
Effect of exchange rates on cash and cash
investments 6 (3)
------ ------
CASH AND CASH INVESTMENTS:
Decrease for the quarter (354) (139)
Cash at businesses held for sale - (32)
At January 1 (including discontinued operations) 1,294 795
------ ------
At March 31 $ 940 $ 624
====== ======
See notes to condensed consolidated financial statements.
3
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, of a normal
recurring nature, necessary to present fairly its financial position as at
March 31, 2005 and the results of operations and changes in cash flows for
the three months ended March 31, 2005 and 2004. The condensed consolidated
balance sheet at December 31, 2004 was derived from audited financial
statements.
Certain prior-year amounts have been reclassified to conform to the 2005
presentation in the condensed consolidated financial statements. The
results of operations related to discontinued operations have been
separately stated in the accompanying condensed consolidated statements of
income for the three months ended March 31, 2005 and 2004. In the
Company's condensed consolidated statements of cash flows for the three
months ended March 31, 2005 and 2004, the cash flows of discontinued
operations are not separately classified.
4
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note A - concluded:
STOCK OPTIONS AND AWARDS. In December 2004, the FASB issued a revision to
SFAS No. 123 ("SFAS No. 123R"), "Accounting for Stock-Based Compensation,"
which supersedes Accounting Principles Bulletin ("APB") No. 25,
"Accounting for Stock Issued to Employees." SFAS No. 123R requires
companies to measure and recognize the cost (fair value) of employee
services received in exchange for stock options. SFAS No. 123R also
clarifies and expands guidance in several areas including measuring fair
value and classification of employee stock-based compensation, including
stock options, restricted stock awards and stock appreciation rights. In
April 2005, the Securities and Exchange Commission amended the compliance
dates for SFAS No. 123R and extended the implementation date to the
beginning of a company's next fiscal year beginning after June 15, 2005.
Based on the amended compliance dates, the Company will adopt SFAS No.
123R effective January 1, 2006. The Company is currently evaluating which
implementation method it will use and the impact the provisions of SFAS
No. 123R will have on its consolidated financial statements. The Company
has been using the fair value method for options granted, modified or
settled subsequent to January 1, 2003. In the first quarter of 2005,
86,600 option shares, including restoration option shares, were awarded.
The following table illustrates the pro forma effect on net income and
earnings per common share for the three months ended March 31, 2005 and
2004, as if the fair value method were applied to all previously issued,
outstanding and unvested stock options, in millions except per common
share data:
THREE MONTHS ENDED
MARCH 31,
--------------------
2005 2004
---- ----
Net income, as reported $231 $168
Add:
Stock-based employee compensation expense
included in reported net income, net of tax 13 10
Deduct:
Stock-based employee compensation expense,
net of tax (13) (10)
Stock-based employee compensation expense
determined under the fair value method
for stock options granted prior to 2003,
net of tax (2) (3)
---- ----
Pro forma net income $229 $165
==== ====
Earnings per common share:
Basic as reported $.53 $.37
Basic pro forma $.53 $.36
Diluted as reported $.52 $.36
Diluted pro forma $.52 $.35
5
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
B. In early 2005, in separate transactions, the Company disposed of its
Gebhardt Consolidated and GMU Group businesses in Europe. Gebhardt
Consolidated supplies ventilation products and GMU Group manufactures
cabinets. Total gross proceeds from the sale of Gebhardt Consolidated and
the GMU Group were $130 million; $89 million in cash proceeds was received
during the first quarter of 2005 and the remaining $41 million was
collected in early April 2005. The Company recognized a pre-tax net gain
(included in discontinued operations) on the disposition of these
businesses of $11 million, principally related to Gebhardt Consolidated.
The assets and liabilities held for sale at December 31, 2004 of $163
million and $44 million, respectively, have been included in the other
assets and deferred income taxes and other captions on the condensed
consolidated balance sheet. Net proceeds from the dispositions completed
in 2005 and 2004 aggregated $282 million.
Selected financial information for discontinued operations, during the
period owned by the Company, is as follows for the three months ended
March 31, 2005 and 2004, in millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
---- ----
Net sales $ 17 $ 95
==== ====
Income from discontinued operations $ 3 $ 6
Gain on disposal of discontinued operations, net 11 --
Impairment of assets held for sale -- (64)
---- ----
Income (loss) before income taxes 14 (58)
Income tax benefit (expense) 5 (15)
---- ----
Income (loss) from discontinued operations,
net of income taxes $ 19 $(73)
==== ====
The unusual relationship between income tax benefit and income (loss)
before income taxes (including the net gain on disposal of discontinued
operations) in 2005 results from the gain requiring no current tax expense
and the reversal of deferred tax liabilities of the discontinued
operations which are no longer expected to be incurred. The after-tax
charge for the impairment of assets held for sale in the first quarter of
2004 was $76 million and included $12 million for the expensing of
deferred tax assets of the discontinued operations.
C. The changes in the carrying amount of goodwill for the quarter ended March
31, 2005, by segment, are as follows, in millions:
BALANCE BALANCE
DEC. 31, 2004 ADDITIONS(A) OTHER(B) MAR. 31, 2005
------------- ------------ -------- -------------
Cabinets and Related
Products $ 644 $ -- $ (24) $ 620
Plumbing Products 514 -- (15) 499
Installation and Other
Services 1,710 -- -- 1,710
Decorative Architectural
Products 344 -- (4) 340
Other Specialty Products 1,196 12 (13) 1,195
------ ----- -------- ------
Total $4,408 $ 12 $ (56) $4,364
====== ===== ======== ======
(A) Additions include contingent consideration for prior acquisitions.
(B) Other principally includes foreign currency translation adjustments.
6
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note C - concluded:
Other indefinite-lived intangible assets include registered trademarks of
$254 million at March 31, 2005. The carrying value of the Company's
definite-lived intangible assets is $67 million at March 31, 2005 (net of
accumulated amortization of $69 million) and principally includes customer
relationships and non-compete agreements.
D. Depreciation and amortization expense is $62 million and $59 million for
the three months ended March 31, 2005 and 2004, respectively.
E. The Company maintains investments in marketable securities 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:
MARCH 31, DECEMBER 31,
2005 2004
--------- ------------
Marketable securities:
Furniture Brands International $ 87 $100
Other 98 163
Private equity funds 303 308
Metaldyne Corporation 87 84
TriMas Corporation 46 46
Other investments 9 9
---- ----
Total $630 $710
==== ====
The Company's investments in marketable securities at March 31, 2005 and
December 31, 2004 are as follows, in millions:
PRE-TAX
----------------------
UNREALIZED UNREALIZED RECORDED
COST BASIS GAINS LOSSES BASIS
---------- ---------- ---------- --------
March 31, 2005 $193 $ 7 $ (15) $ 185
December 31, 2004 $227 $36 $ -- $ 263
The fair value of the Company's investments in temporarily-impaired
marketable securities was $109 million; such investments have been in an
unrealized loss position for less than twelve months at March 31, 2005.
The Company has investments in 50 different marketable securities at March
31, 2005. 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 at March 31, 2005 is primarily related to one marketable security,
Furniture Brands International (NYSE: FBN) common stock (four million
shares). In the fourth quarter of 2004, the Company recognized an
impairment charge of $21 million related to its investment in FBN and
reduced the cost basis from $30.25 per share to $25.05 per share, the
market value at December 31, 2004. Based on its review, the Company
considers the unrealized loss at March 31, 2005, related to this
investment, to be temporary.
7
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note E - concluded:
Income from financial investments, included in other, net, within other
income (expense), net, is as follows, in millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
---- ----
Realized gains from marketable securities $ 27 $ 19
Realized losses from marketable securities (1) (3)
Dividend income from marketable securities 1 5
Income from other investments, net 15 13
Dividend income from other investments 3 2
---- ----
Income from financial investments, net $ 45 $ 36
==== ====
F. The Company's total comprehensive income is as follows, in millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
---- ----
Net income $231 $168
Other comprehensive income (loss):
Cumulative translation adjustments (87) (28)
Unrealized (loss) gain on marketable
securities, net (28) 9
---- ----
Total comprehensive income $116 $149
==== ====
The unrealized (loss) gain, net on marketable securities is net of income
tax (credit) of $(16) million and $6 million for the three months ended
March 31, 2005 and 2004, respectively.
The components of accumulated other comprehensive income are as follows,
in millions:
MARCH 31, DECEMBER 31,
2005 2004
-------- ------------
Cumulative translation adjustments $583 $670
Unrealized (loss) gain on marketable
securities, net (5) 23
Minimum pension liability (66) (66)
---- ----
Accumulated other comprehensive income $512 $627
==== ====
The unrealized (loss) gain, net on marketable securities is reported net
of income tax (credit) of $(3) million and $13 million at March 31, 2005
and December 31, 2004, respectively.
The minimum pension liability is reported net of income tax credit of $38
million at both March 31, 2005 and December 31, 2004.
G. The Company owns 64 percent of Hansgrohe AG. The minority interest of $80
million at both March 31, 2005 and December 31, 2004 is recorded in the
caption deferred income taxes and other liabilities on the Company's
condensed consolidated balance sheets.
8
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
H. The Company's effective tax rate for the three months ended March 31, 2005
was 32.4 percent compared with 36.3 percent for the same period in 2004.
The decrease in the tax rate for the first quarter of 2005 compared to the
first quarter of 2004 is principally due to the adjustment of estimated
tax accruals, principally for actual tax results related to International
operations. The Company estimates that its effective tax rate for the
full-year 2005 should approximate 35 percent.
I. The net periodic pension cost for the Company's qualified defined-benefit
pension plans is as follows, in millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
---- ----
Service cost $ 4 $ 3
Interest cost 10 7
Expected return on plan assets (10) (6)
Amortization of net loss 2 2
---- ----
Net periodic pension cost $ 6 $ 6
==== ====
Net periodic pension cost for the Company's non-qualified unfunded
supplemental pension plans was $5 million and $4 million for the three
months ended March 31, 2005 and 2004, respectively.
J. The following table presents information about the Company by segment and
geographic area, in millions:
THREE MONTHS ENDED MARCH 31,
----------------------------------
2005 2004 2005 2004
------ ------ ---- ----
NET SALES(A) OPERATING PROFIT
--------------- ----------------
The Company's operations by
segment were:
Cabinets and Related Products $ 838 $ 779 $124 $109
Plumbing Products 760 739 79 96
Installation and Other
Services 693 630 80 81
Decorative Architectural
Products 371 370 59 64
Other Specialty Products 307 288 45 45
------ ------ ---- ----
Total $2,969 $2,806 $387 $395
====== ====== ==== ====
The Company's operations by
geographic area were:
North America $2,405 $2,271 $326 $329
International, principally
Europe 564 535 61 66
------ ------ ---- ----
Total $2,969 $2,806 387 395
====== ======
General corporate expense, net (46) (36)
Income regarding litigation settlement (B) 2 21
Gain on sale of corporate fixed assets - 7
---- ----
Operating profit 343 387
Other income (expense), net (22) (1)
---- ----
Income from continuing operations before
income taxes and minority interest $321 $386
==== ====
(A) Intra-segment sales were not material.
(B) The Company recorded income regarding the litigation discussed in Note M
related to the Company's subsidiary, Behr Process Corporation. Behr is
included in the Decorative Architectural Products segment.
9
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
K. Other, net, which is included in other income (expense), net, includes the
following, in millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
---- ----
Income from cash and cash investments $ 6 $ 2
Other interest income 1 2
Income from financial investments, net (Note E) 45 36
Other items, net (15) 12
---- ----
$ 37 $ 52
==== ====
Other items, net, for the first quarter of 2005 primarily include $13
million of currency translation losses. Other items, net, for the first
quarter of 2004 include $6 million of currency translation gains.
L. The following are reconciliations of the numerators and denominators used
in the computations of basic and diluted earnings per common share, in
millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
---- ----
Numerator (basic and diluted):
Income from continuing operations $212 $241
Income (loss) from discontinued operations,
net of income tax 19 (73)
---- ----
Net income, as reported $231 $168
==== ====
Denominator:
Basic common shares (based on weighted
average) 434 457
Add:
Contingent common shares 4 7
Stock option dilution 5 4
---- ----
Diluted common shares 443 468
==== ====
At March 31, 2005, the Company did not include any common shares related
to the Zero Coupon Convertible Senior Notes ("Notes") in the calculation
of diluted earnings per common share, as the price of the Company's common
stock at March 31, 2005 did not exceed the equivalent accreted value of
the Notes.
Additionally, .4 million common shares and 3.1 million common shares for
the three months ended March 31, 2005 and 2004, respectively, related to
stock options were excluded from the computation of diluted earnings per
common share due to their anti-dilutive effect, since the option exercise
price for those shares was greater than the Company's average common stock
price during such periods.
In the first quarter of 2005, the Company repurchased and retired
approximately 13 million shares of Company common stock, for cash
aggregating approximately $465 million. At March 31, 2005, the Company has
approximately 47 million common shares remaining under the March 2005
Board of Directors repurchase authorization.
10
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONCLUDED)
M. The Company is subject to lawsuits and pending or asserted claims with
respect to matters generally 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 State
Settlement) to resolve all class action lawsuits pending in the United
States involving certain exterior wood coating products formerly
manufactured by Behr Process Corporation.
The following is a reconciliation of the Company's Behr Process Settlement
liability, in millions:
2005
------------------------------
WASHINGTON STATE NATIONAL
SETTLEMENT SETTLEMENT
---------------- ----------
Balance at January 1 $ 11 $ 8
Payments on claims (3) (1)
Insurance proceeds (2) --
---- ----
Balance at March 31 $ 6 $ 7
==== ====
The Company expects that the evaluation, processing and payment of claims
for both the Washington State Settlement and the National Settlement
should be completed by June 30, 2005.
As previously disclosed, several lawsuits have been brought against the
Company and a number of its insulation installation companies in the
federal court in Atlanta, Georgia, alleging that certain practices violate
provisions of federal and state antitrust laws. The Company believes that
the conduct of the Company and its insulation installation companies,
which have been the subject of these lawsuits, has not violated any
antitrust laws.
As previously disclosed, European governmental authorities are
investigating possible anticompetitive business practices relating to the
plumbing and heating industries in Europe. The investigations involve a
number of European companies, including certain of the Company's European
manufacturing divisions and a number of other large businesses. In
addition, several private antitrust lawsuits have been filed in the United
States against the Company and several other companies that are being
investigated, which appears to be an outgrowth of the European
investigations. The Company believes that it will not incur material
liability as a result of the matters that are subject to these
investigations or as a result of any such lawsuits.
N. The following is a reconciliation of the Company's warranty liability, in
millions:
2005
----
Balance at January 1 $100
Accruals for warranties issued during the quarter 13
Accruals related to pre-existing warranties 1
Settlements made (in cash or kind) during the quarter (13)
Other, net (including foreign exchange impact) (1)
----
Balance at March 31 $100
====
11
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2005 VERSUS FIRST QUARTER 2004
SALES AND OPERATIONS
The following table sets forth the Company's net sales and operating
profit margins by segment and geographic area, dollars in millions:
THREE MONTHS ENDED
MARCH 31, PERCENT INCREASE
------------------ -----------------
2005 2004 2005 VS. 2004
------ ------ -----------------
NET SALES:
Cabinets and Related Products $ 838 $ 779 8%
Plumbing Products 760 739 3%
Installation and Other
Services 693 630 10%
Decorative Architectural
Products 371 370 --%
Other Specialty Products 307 288 7%
------ ------
Total $2,969 $2,806 6%
====== ======
North America $2,405 $2,271 6%
International, principally Europe 564 535 5%
------ ------
Total $2,969 $2,806 6%
====== ======
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
------ ------
OPERATING PROFIT MARGINS: (A)
Cabinets and Related Products 14.8% 14.0%
Plumbing Products 10.4% 13.0%
Installation and Other
Services 11.5% 12.9%
Decorative Architectural
Products 15.9% 17.3%
Other Specialty Products 14.7% 15.6%
North America 13.6% 14.5%
International, principally Europe 10.8% 12.3%
Total 13.0% 14.1%
Operating profit margins, as
reported 11.6% 13.8%
(A) Before general corporate expense, net, of $46 million and income regarding
the litigation settlement related to the Decorative Architectural Products
segment of $2 million for the three months ended March 31, 2005. Before
general corporate expense, net, of $36 million, gain on sale of corporate
fixed assets of $7 million and income regarding the litigation settlement
related to the Decorative Architectural Products segment of $21 million
for the three months ended March 31, 2004.
12
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reports its financial results in accordance with generally
accepted accounting principles ("GAAP") 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.
NET SALES
Net sales for the three months ended March 31, 2005 increased six percent
from the comparable period in 2004. Excluding results from acquisitions, net
sales also increased six percent (including a one percent increase relating to
the effect of currency translation). The following table reconciles reported net
sales to net sales excluding acquisitions and the effect of currency
translation, in millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
------- -------
Net sales, as reported $ 2,969 $ 2,806
Acquisitions (5) --
------- -------
Net sales, excluding acquisitions 2,964 2,806
Currency translation (23) --
------- -------
Net sales, excluding acquisitions and the effect
of currency translation $ 2,941 $ 2,806
======= =======
Net sales of Cabinets and Related Products increased eight percent in the
first quarter of 2005 compared with 2004, primarily due to increased sales
volume in the new construction markets as well as certain selling price
increases. The results of this segment were negatively affected by
lower-than-expected consumer spending impacting certain products sold through
retail markets.
Net sales of Plumbing Products increased three percent in the first
quarter of 2005 compared with 2004, primarily due to the favorable impact of a
weaker U.S. dollar which increased International net sales included in this
segment as well as increased sales through the Company's wholesale distribution
channel. Such increases principally offset sales declines in this segment due to
lower-than-expected consumer spending impacting certain products sold through
retail markets.
Net sales of Installation and Other Services increased 10 percent in the
first quarter of 2005 compared with 2004, primarily due to selling price
increases, increased sales volume of non-insulation products and a continued
strong new-housing market.
Net sales of Decorative Architectural Products were flat in the first
quarter of 2005 compared with 2004, primarily due to lower-than-expected
consumer spending impacting certain products sold through retail markets.
Net sales of Other Specialty Products increased seven percent in the first
quarter of 2005 compared with 2004, primarily due to an increase in the sales
volume of doors and windows to North American new construction markets.
13
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales from North American and International operations for the first
quarter of 2005 increased six percent and five percent, respectively, compared
with the first quarter of 2004. North American sales were positively affected by
increased sales volume of assembled cabinets, doors and windows and installation
sales. Such increases principally offset sales declines due to
lower-than-expected consumer spending impacting certain products sold through
retail markets. In the first quarter of 2005, International sales continued to
be positively affected by a weaker U.S. dollar, principally against the Euro,
which increased International net sales by four percent.
OPERATING MARGINS
The Company's gross profit margins were 28.3 percent for the first quarter
of 2005 compared with 30.3 percent for the comparable period in 2004. Selling,
general and administrative expenses as a percentage of sales were 16.8 percent
for the first quarter of 2005 and 17.3 percent for the comparable period of the
prior year. Operating profit in the first quarters of 2005 and 2004 also
benefited from $2 million and $21 million, respectively, of income regarding the
Behr litigation settlement. First quarter 2005 results were adversely affected
by lower-than-expected consumer spending impacting certain of the Company's
products sold through retail markets, product mix, as well as recent increases
in commodity, energy and freight costs, much of which have not yet been
recovered due to the lag in implementing selling price increases to customers.
Operating profit margins for the Cabinets and Related Products segment for
the first quarter of 2005 were 14.8 percent compared with 14.0 percent in the
first quarter of 2004, and reflect the positive impact of increased sales volume
and selling prices as well as operational improvements made throughout 2004.
Operating profit margins for the Plumbing Products segment were 10.4
percent in the first quarter of 2005 compared with 13.0 percent in the first
quarter of 2004, primarily due to relatively higher International sales with
lower margins, increased commodity costs and a product mix shift to lower-margin
products in North America.
Operating profit margins for the Installation and Other Services segment
were 11.5 percent in the first quarter of 2005 compared with 12.9 percent in the
first quarter of 2004. The operating profit margin decline in this segment is
primarily attributable to material cost increases as well as increased sales and
installation of generally lower-margin, non-insulation products.
Within the Installation and Other Services segment, the availability of
fiberglass insulation to support the Company's installation and distribution
activities was constrained during 2004 and this situation has continued into
2005. The high level of demand for fiberglass insulation, as a result of the
continued strength of the new residential construction market, has outpaced the
industry's capacity to produce additional product. The Company believes that
these conditions will persist and is working with its diverse supplier base to
secure the appropriate amount of material. At the current time, the Company
believes that it will be able to do so, but if the Company cannot obtain the
required amount of material, this could have a negative impact on its
operations.
Operating profit margins for the Decorative Architectural Products segment
were 15.9 percent for the first quarter of 2005 compared with 17.3 percent in
the first quarter of 2004. The decline in operating margin is primarily due to
increased material costs as well as lower-than-expected sales volumes of paints
and stains.
14
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating profit margins for the Other Specialty Products segment were
14.7 percent in the first quarter of 2005 compared with 15.6 percent in the
first quarter of 2004 and reflect increased commodity costs and lower results of
the European operations included in this segment.
The Company's operating profit margins, as reported, were 11.6 percent for
the first quarter of 2005 compared with 13.8 percent for the first quarter of
2004. Excluding the income regarding litigation settlement of $2 million and $21
million in 2005 and 2004, respectively, operating profit margins were 11.5
percent for the first quarter of 2005 compared with 13.0 percent for the first
quarter of 2004.
OTHER INCOME (EXPENSE), NET
Other, net, for the first quarter of 2005 includes $26 million of net
realized gains from the sale of marketable securities, dividend income of $4
million and $15 million of income, net, regarding other investments. Other, net,
also includes currency translation losses of $13 million for the first quarter
of 2005.
Other, net, for the first quarter of 2004 includes $16 million of net
realized gains from the sale of marketable securities, dividend income of $7
million and $13 million of income, net regarding other investments. Other, net,
also includes currency translation gains of $6 million for the first quarter of
2004.
Interest expense for the first quarter of 2005 increased $6 million to $59
million compared with $53 million in the first quarter of 2004, primarily due to
the effect of increasing interest rates.
INCOME AND EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS
Income and diluted earnings per common share from continuing operations
for the first quarter of 2005 were $212 million and $.48 per common share
compared with $241 million and $.52 per common share for the comparable period
of 2004. The Company's effective tax rate for the three months ended March 31,
2005 was 32.4 percent compared with 36.3 percent for the same period in 2004.
The decrease in the tax rate for the first quarter of 2005 compared to the first
quarter of 2004 is principally due to the adjustment of estimated tax accruals,
principally for actual tax results related to International operations. The
Company estimates that its effective tax rate for the full-year 2005 should
approximate 35 percent.
OTHER FINANCIAL INFORMATION
The Company's current ratio was 1.4 to 1 and 2.1 to 1 at March 31, 2005
and December 31, 2004, respectively, due to the reclassification of $800 million
of 6.75% notes that will become due and payable on March 15, 2006.
For the three months ended March 31, 2005, cash of $119 million was
provided by operating activities. Cash used for financing activities was $562
million, including $80 million for cash dividends paid, $465 million for the
acquisition and retirement of Company common stock in open-market transactions
and $27 million for the net payment of debt. Cash provided by financing
activities includes $10 million from the issuance of Company common stock,
primarily for the exercise of stock options. Net cash provided by investing
activities was $83 million, primarily including $63 million of net proceeds from
the disposition of businesses and $69 million from the net sale of financial
investments. Cash used for investing activities also includes $58 million for
capital expenditures.
15
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
First quarter 2005 cash from operations was affected by an expected and
annually recurring first quarter increase in accounts receivable compared with
December 31, 2004.
The Company is subject to lawsuits and claims pending or asserted with
respect to matters generally arising in the ordinary course of business. Note M
to the Condensed Consolidated Financial Statements discusses specific claims
pending against the Company.
The Company believes that its present cash balance, cash flows from
operations and, to the extent necessary, bank borrowings and future financial
market activities, are sufficient to fund its working capital and other
investment needs.
OUTLOOK FOR THE COMPANY
The Company experienced significant commodity cost increases during 2004,
which reduced gross margins. Higher commodity costs experienced in 2004 have
continued into 2005 and have impacted 2005 first quarter results. The Company
has already implemented and continues to implement additional selling price
increases on a number of its products, and believes that by the second half of
2005, many of these commodity cost increases should be largely offset by such
price increases.
The Company believes that the impact of the delay in offsetting these
recent cost increases with increased selling prices, and the shortage of certain
materials will negatively impact earnings in the first half of 2005. This impact
has been reflected in the Company's guidance.
The Company continues to believe that it will achieve further organic
sales growth in 2005, and, based on current business trends, believes that it
will achieve mid-single-digit organic growth in 2005 despite being negatively
affected by a slowdown in its retail markets.
The Company expects its 2005 results to be impacted by share repurchases
(13 million common shares repurchased in the first quarter of 2005), modest
margin improvement in the second half of the year reflecting selling price
increases and anticipated income from the sale of financial investments.
FORWARD-LOOKING STATEMENTS
Certain sections of this Quarterly Report contain statements reflecting
the Company's views about its future performance and constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. These
views involve risks and uncertainties that are difficult to predict and,
accordingly, the Company's actual results may differ materially from the results
discussed in such forward-looking statements. Readers should consider that
various factors, including changes in general economic conditions, competitive
market conditions and pricing pressures, relationships with key customers,
industry consolidation of retailers, wholesalers and builders, shifts in
distribution, the influence of e-commerce and other factors discussed in the
Company's Annual Report on Form 10-K and its other filings with the Securities
and Exchange Commission, may affect the Company's performance. The Company
undertakes no obligation to update publicly any forward-looking statements as a
result of new information, future events or otherwise.
16
MASCO CORPORATION
ITEM 4. CONTROLS AND PROCEDURES
a. Evaluation of Disclosure Controls and Procedures.
The Company's principal executive officer and principal financial officer
have concluded, based on an evaluation of the Company's "disclosure
controls and procedures" (as defined in the Securities Exchange Act of
1934 Rules 13a-15(e) or 15d-15(e)), as required by paragraph (b) of
Exchange Act Rules 13a-15 or 15d-15, that, as of March 31, 2005, the
Company's disclosure controls and procedures were effective and designed
to ensure that information required to be disclosed by the Company in the
reports it files under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
b. Changes in Internal Control Over Financial Reporting.
In connection with the evaluation required by paragraph (d) of Exchange
Rules 13a-15 or 15d-15 that occurred during the Company's last fiscal
quarter, management identified a change in internal control over financial
reporting that has materially affected or is reasonably likely to
materially affect internal control over financial reporting.
A material weakness was disclosed in the Company's 2004 Annual Report on
Form 10-K. The material weakness originated when, during the integration
of two business units, the Company had not maintained effective controls
over the conversion of certain accounting functions.
In the 2004 Annual Report on Form 10-K we identified various steps that
had been or were in the process of being taken with respect to the
previously disclosed material weakness. As a result of the steps that have
been taken, we have remediated this material weakness. The steps we have
taken and additional steps we are also taking to improve internal controls
with respect to this business unit are:
- All significant accounts impacted by the control lapse have been
properly reconciled.
- The unvouchered payables account is being manually monitored, and
timely adjustments are being made on a monthly basis. In addition, an
information systems consultant has been retained to address technical
information systems issues to enable systematic and timely
reconciliation of unvouchered payables. Upon implementation, this
solution will replace the current manual process.
- A number of the staff training and process improvement initiatives at
the business unit that had been identified have been implemented and
the remaining initiatives are in the process of being implemented.
These initiatives generally are intended to streamline and standardize
processing of accounts payable.
- Business unit management has filled one of three identified financial
management positions and is actively recruiting for the other two
positions.
- Group controller monitoring activities have been expanded to include
the performance of extended review procedures over key account
reconciliations and significant journal entries on a quarterly basis.
This review was completed for the first fiscal quarter of 2005.
- The group president has expanded and reinforced the need for timeliness
and transparency of communication around significant financial and
business matters between the business unit and group oversight
management.
17
MASCO CORPORATION
ITEM 4. CONTROLS AND PROCEDURES
- The Company is in the process of extending the risk management
framework of its information technology risk management program to
major business change initiatives (such as business integrations) at
all of the Company's business units. In addition, as part of the
Company's actions to improve controls over significant change
initiatives at all business units, management implemented during the
first quarter a process to identify planned and actual significant
business changes, a screening process to evaluate their risk, and a
review process to evaluate control design associated with the change.
The subject business unit was included in the changes implemented
during the first quarter and will be included as the risk management
framework is implemented throughout the Company.
We believe that the controls as modified are appropriate and are designed
and operating effectively for the achievement of financial reporting
objectives.
18
MASCO CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding legal proceedings involving the Company is set forth
in Note M to the Company's Condensed Consolidated Financial Statements included
in Part I, Item 1 of this Quarterly Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information regarding the repurchase of
Company common stock for the three months ended March 31, 2005, in millions
except average price paid per common share data:
Total Number of Maximum Number of
Shares Purchased Shares That May
Total Number Average Price as Part of Yet Be Purchased
of Shares Paid Per Publicly Announced Under the Plans
Period Purchased(A) Common Share Plans or Programs or Programs
- ------------- ------------ ------------- ------------------ -----------------
1/1/05-
1/31/05 3 $35.99 2 15
2/1/05-
2/28/05 4 $35.35 4 11
3/1/05-
3/31/05 7 $34.06 7 47
-- --
Total for
the quarter 14 $34.72 13 47
(A) Includes one million shares (i) surrendered for the exercise of stock
options or (ii) withheld for the payment of taxes upon vesting of stock
awards.
In March 2005, the Company's Board of Directors authorized the repurchase of up
to an additional 50 million shares of the Company's common stock in open market
transactions or otherwise, which replaced the December 2003 authorization. At
the date of the new repurchase authorization, the Company had seven million
shares remaining under the 2003 authorization.
ITEMS 3 THROUGH 5 ARE NOT APPLICABLE.
ITEM 6. EXHIBITS
12- Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
31a- Certification by Chief Executive Officer Required by Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
31b- Certification by Chief Financial Officer Required by Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
32- Certification Required by Rule 13a-14(b) or 15d-14(b) of the
Securities Exchange Act of 1934 and Section 1350 of Chapter 63
of Title 18 of the United States Code
19
MASCO CORPORATION
PART II. OTHER INFORMATION, CONCLUDED
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MASCO CORPORATION
By: /s/ Timothy Wadhams
--------------------------------
Name: Timothy Wadhams
Title: Senior Vice President and
Chief Financial Officer
May 10, 2005
20
MASCO CORPORATION
EXHIBIT INDEX
EXHIBIT
Exhibit 12 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
Exhibit 31a Certification by Chief Executive Officer Required by Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
Exhibit 31b Certification by Chief Financial Officer Required by Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
Exhibit 32 Certification Required by Rule 13a-14(b) or 15d-14(b) of the
Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of
Title 18 of the United States Code