FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 2003. COMMISSION FILE NUMBER 1-5794
MASCO CORPORATION
- ------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 38-1794485
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
21001 VAN BORN ROAD, TAYLOR, MICHIGAN 48180
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(313) 274-7400
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(TELEPHONE NUMBER)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS.
YES X NO
----- -----
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN EXCHANGE ACT RULE 12B-2).
YES X NO
----- -----
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICAL DATE.
SHARES OUTSTANDING AT
CLASS JULY 31, 2003
----- ---------------------
COMMON STOCK, PAR VALUE $1 PER SHARE 469,997,000
MASCO CORPORATION
INDEX
PAGE NO.
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
June 30, 2003 and December 31, 2002 1
Condensed Consolidated Statements of
Income for the Three Months and Six
Months Ended June 30, 2003 and 2002 2
Condensed Consolidated Statements of
Cash Flows for the Six Months Ended
June 30, 2003 and 2002 3
Notes to Condensed Consolidated
Financial Statements 4-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13-18
Item 4. Controls and Procedures 18
Part II. Other Information and Signature 19-20
MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 2003 AND DECEMBER 31, 2002
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
------------------------
<Table>
<Caption>
JUNE 30 DECEMBER 31
ASSETS 2003 2002
------ ----------- -----------
Current assets:
Cash and cash investments $ 785,440 $ 1,066,570
Accounts and notes receivable, net 1,775,960 1,546,360
Prepaid expenses and other 263,130 281,220
Inventories:
Raw material 436,510 410,040
Finished goods 564,210 496,630
Work in process 161,130 148,950
----------- -----------
1,161,850 1,055,620
----------- -----------
Total current assets 3,986,380 3,949,770
Equity investments --- 67,810
Property and equipment, net 2,424,600 2,315,060
Goodwill, net 4,507,530 4,297,150
Other intangible assets, net 348,290 353,870
Other assets 1,013,180 1,066,770
----------- -----------
Total assets $12,279,980 $12,050,430
=========== ===========
LIABILITIES
-----------
Current liabilities:
Notes payable $ 809,050 $ 321,180
Accounts payable 676,520 541,590
Accrued liabilities 1,152,530 1,069,680
----------- -----------
Total current liabilities 2,638,100 1,932,450
Long-term debt 3,816,730 4,316,470
Deferred income taxes and other 517,540 507,670
----------- -----------
Total liabilities 6,972,370 6,756,590
----------- -----------
Commitments and contingencies
SHAREHOLDERS' EQUITY
--------------------
Preferred shares, par value $1 per share
Authorized shares: 1,000,000; issued:
2003 -- 20,000; 2002 -- 20,000 20 20
Common shares, par value $1 per share
Authorized shares: 1,400,000,000; issued:
2003 -- 470,440,000; 2002 -- 488,890,000 470,440 488,890
Paid-in capital 1,803,690 2,207,080
Retained earnings 3,041,310 2,783,490
Accumulated other comprehensive income (loss) 175,690 (21,700)
Less: Restricted stock awards, net (183,540) (163,940)
----------- -----------
Total shareholders' equity 5,307,610 5,293,840
----------- -----------
Total liabilities and
shareholders' equity $12,279,980 $12,050,430
=========== ===========
</Table>
See notes to condensed consolidated financial statements.
1
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net sales $2,787,650 $2,314,000 $5,285,950 $4,414,000
Cost of sales 1,934,360 1,549,650 3,678,900 3,003,700
---------- ---------- ---------- ----------
Gross profit 853,290 764,350 1,607,050 1,410,300
Selling, general and administrative
expenses 464,280 369,250 916,660 724,600
(Income) regarding litigation settlement --- --- (13,520) ---
---------- ---------- ---------- ----------
Operating profit 389,010 395,100 703,910 685,700
---------- ---------- ---------- ----------
Other income (expense), net:
Interest expense (67,460) (54,200) (135,060) (109,300)
Other, net 33,840 (16,200) 46,390 (24,100)
---------- ---------- ---------- ----------
(33,620) (70,400) (88,670) (133,400)
---------- ---------- ---------- ----------
Income before income taxes, minority
interest and cumulative effect of
accounting change, net 355,390 324,700 615,240 552,300
Income taxes 123,700 110,400 214,100 187,800
---------- ---------- ---------- ----------
Income before minority interest and
cumulative effect of accounting change,
net 231,690 214,300 401,140 364,500
Minority interest 2,140 --- 5,790 ---
---------- ---------- ---------- ----------
Income before cumulative effect of
accounting change, net 229,550 214,300 395,350 364,500
Cumulative effect of accounting change,
net --- --- --- 92,400
---------- ---------- ---------- ----------
Net income $ 229,550 $ 214,300 $ 395,350 $ 272,100
========== ========== ========== ==========
Earnings per common share:
Basic:
Income before cumulative effect of
accounting change, net $ .48 $ .45 $ .81 $ .77
Cumulative effect of accounting
change, net -- -- -- (.20)
----- ----- ----- -----
Net income $ .48 $ .45 $ .81 $ .57
===== ===== ===== =====
Diluted:
Income before cumulative effect of
accounting change, net $ .46 $ .43 $ .79 $ .74
Cumulative effect of accounting
change, net -- -- -- (.19)
----- ----- ----- -----
Net income $ .46 $ .43 $ .79 $ .55
===== ===== ===== =====
Cash dividends declared and paid per
common share $ .14 $.135 $ .28 $ .27
===== ===== ===== =====
See notes to condensed consolidated financial statements.
2
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
------------------------
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30
2003 2002
---------- ---------
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $ 516,060 $ 524,650
(Increase) in receivables (180,990) (253,380)
(Increase) in inventories (75,720) (42,640)
Increase in accounts payable and accrued
liabilities, net 219,260 160,120
---------- ---------
Total cash from operating activities 478,610 388,750
---------- ---------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt 10,190 63,360
Payment of debt (53,480) (686,430)
Issuance of 5.875% notes --- 490,770
Issuance of Company common stock --- 598,340
Purchase of Company common stock for:
Retirement (410,540) ---
Long-term stock incentive award plan (48,100) (29,000)
Cash dividends paid (140,120) (128,750)
---------- ---------
Total cash (for) from financing activities (642,050) 308,290
---------- ---------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures (139,020) (117,260)
Purchases of marketable securities (136,960) (248,320)
Purchases of other investments, net (10,130) (36,780)
Proceeds from disposition of:
Marketable securities 286,720 154,950
Business --- 15,430
Equity investment 75,400 ---
Acquisition of companies, net of cash acquired (198,540) (202,560)
Decrease in long-term notes receivable 12,880 41,830
Other, net (37,140) (15,590)
---------- ---------
Total cash (for) investing activities (146,790) (408,300)
---------- ---------
Effect of foreign exchange rates on cash and
cash investments 29,100 28,020
---------- ---------
CASH AND CASH INVESTMENTS:
(Decrease) increase for the period (281,130) 316,760
At January 1 1,066,570 311,990
---------- ---------
At June 30 $ 785,440 $ 628,750
========== =========
</Table>
See notes to condensed consolidated financial statements.
3
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, of a normal
recurring nature, necessary to present fairly its financial position as
at June 30, 2003 and the results of operations for the three months and
six months ended June 30, 2003 and 2002 and changes in cash flows for the
six months ended June 30, 2003 and 2002. The condensed consolidated
balance sheet at December 31, 2002 was derived from audited financial
statements.
Certain prior-year amounts have been reclassified to conform to the 2003
presentation in the condensed consolidated financial statements.
STOCK OPTIONS AND AWARDS. The Company elected to change its method of
accounting for stock-based compensation and implemented the fair value
method prescribed by Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation" effective January 1,
2003. The Company is using the prospective method, as defined by SFAS No.
148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure -- an amendment to SFAS No. 123," for determining stock-based
compensation expense. In the second quarter of 2003, 528,000 option
shares were awarded and the related expense of $.1 million was included
in the Company's condensed consolidated statements of income for the
three-month and six-month periods ended June 30, 2003. The following
table illustrates the pro forma effect on net income and earnings per
common share as if the fair value method were applied to all previously
issued stock options, in thousands, except per common share amounts:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income, as reported $229,550 $214,300 $395,350 $272,100
Add:
Stock-based employee
compensation (stock awards
and options) expense included
in reported net income,
net of related tax effects 7,200 5,000 22,200 10,100
Deduct:
Stock-based employee
compensation (stock
awards and options) expense,
net of related tax effects (7,200) (5,000) (22,200) (10,100)
Stock-based employee
compensation expense
determined under the fair
value based method for
stock options issued prior
to January 1, 2003, net of
related tax effects (3,300) (5,000) (6,500) (8,900)
-------- -------- -------- --------
Pro forma net income $226,250 $209,300 $388,850 $263,200
======== ======== ======== ========
Earnings per common share:
Basic as reported $.48 $.45 $.81 $.57
Basic pro forma $.47 $.44 $.80 $.56
Diluted as reported $.46 $.43 $.79 $.55
Diluted pro forma $.45 $.42 $.77 $.53
</Table>
4
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
B. The changes in the carrying amount of goodwill for the six-month period
ended June 30, 2003, by segment, are as follows, in thousands:
BALANCE BALANCE
DECEMBER 31, 2002 ADDITIONS(A) OTHER(B) JUNE 30, 2003
----------------- ------------ -------- -------------
Cabinets and Related
Products $ 586,380 $ 93,530 $ 26,920 $ 706,830
Plumbing Products 441,810 6,340 25,930 474,080
Installation and Other
Services 1,693,170 7,480 (10,940) 1,689,710
Decorative Architectural
Products 428,500 60 2,570 431,130
Other Specialty Products 1,147,290 39,080 19,410 1,205,780
---------- -------- -------- ----------
Total $4,297,150 $146,490 $ 63,890 $4,507,530
========== ======== ======== ==========
(A) Additions principally include 2003 acquisitions and the recording
of approximately $106 million of additional contingent
consideration for prior purchase acquisitions.
(B) Other changes to the carrying amount of goodwill principally
include foreign currency translation adjustments,
reclassifications and other purchase price adjustments related to
the finalization of certain purchase price allocations.
Other indefinite-lived intangible assets include registered trademarks of
$251.7 million at June 30, 2003. The carrying value of the Company's
definite-lived intangible assets is $96.6 million at June 30, 2003 (net
of accumulated amortization of $58.3 million) and principally includes
customer relationships and non-compete agreements.
C. Depreciation and amortization expense is $117 million and $107 million
for the six months ended June 30, 2003 and 2002, respectively.
D. The Company owns 64 percent of Hansgrohe AG. The minority interest of $57
million and $47 million at June 30, 2003 and December 31, 2002,
respectively, is recorded in the balance sheet caption deferred income
taxes and other liabilities on the Company's condensed consolidated
balance sheets.
E. In the first six months of 2003, the Company acquired PowerShot Tool
Company, Inc. (Other Specialty Products segment) and several relatively
small installation service companies (Installation and Other Services
segment). PowerShot Tool Company is a manufacturer of fastening
products, including staple guns, glue guns, hammer tackers and riveting
products, headquartered in New Jersey. The results of these
acquisitions are included in the condensed consolidated financial
statements from the respective dates of acquisition. The aggregate net
purchase price of these acquisitions was $52 million, and included cash
of $48 million and debt of $4 million. The Company also paid an
additional $151 million of acquisition-related consideration, including
amounts to satisfy share price guarantees, contingent consideration and
other purchase price adjustments, in the first six months of 2003,
relating to previously acquired companies.
5
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
F. The following are reconciliations of the numerators and denominators
used in the computations of basic and diluted earnings per common share,
in thousands:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Numerator (basic and diluted):
Income before cumulative
effect of accounting
change, net $229,550 $214,300 $395,350 $364,500
Cumulative effect of
accounting change, net --- --- --- 92,400
-------- -------- -------- --------
Net income as reported $229,550 $214,300 $395,350 $272,100
======== ======== ======== ========
Denominator:
Basic common shares (based
on weighted average) 481,800 479,200 486,700 473,200
Add:
Contingent common shares 15,100 16,100 14,800 15,900
Stock option dilution 1,600 3,200 1,000 3,400
-------- -------- -------- --------
Diluted common shares 498,500 498,500 502,500 492,500
======== ======== ======== ========
</Table>
Income per common share amounts for the first two quarters of 2003 do not
total to the per common share amounts for the six months ended June 30,
2003 due to the timing of stock repurchases and the effect of
contingently issuable shares.
For both the three months and six months ended June 30, 2003 and 2002,
approximately 24 million common shares related to the Zero Coupon
Convertible Senior Notes due 2031 were not included in the computation of
diluted earnings per common share since, at June 30, 2003 and 2002, they
were not convertible according to their terms.
Additionally, 4.1 million and 7.7 million common shares for the three
months and six months ended June 30, 2003, respectively, and 2.7 million
common shares for both the three months and six months ended June 30,
2002 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 for these periods.
G. The Company maintains investments in marketable securities (including
marketable equity securities and bond funds) and a number of private
equity funds principally as part of its tax planning strategies, as any
gains enhance the utilization of tax capital loss carryforwards. Included
in other assets are the following financial investments, in thousands:
<Table>
<Caption>
JUNE 30 DECEMBER 31
2003 2002
-------- -----------
Marketable equity securities $235,210 $216,400
Bond funds 117,740 229,930
Private equity funds 358,280 345,650
Metaldyne Corporation 71,160 67,780
TriMas Corporation 25,000 25,000
Other investments 9,030 8,890
-------- --------
Total $816,420 $893,650
======== ========
</Table>
6
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note G - concluded:
The Company's investments in marketable equity securities and bond funds
at June 30, 2003 and December 31, 2002 are as follows, in thousands:
<Table>
<Caption>
PRE-TAX
---------------------
UNREALIZED UNREALIZED RECORDED
COST BASIS GAINS LOSSES BASIS
---------- ---------- ---------- --------
JUNE 30, 2003
Marketable equity securities $252,000 $8,730 $(25,520) $235,210
Bond funds $110,090 $7,670 $ (20) $117,740
DECEMBER 31, 2002
Marketable equity securities $264,160 $2,210 $(49,970) $216,400
Bond funds $225,560 $4,600 $ (230) $229,930
</Table>
Income (loss) from financial investments is included in other, net within
other income (expense), net, and is summarized as follows, in thousands:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Realized gains from
marketable securities $ 18,420 $ 1,020 $ 26,560 $ 5,940
Realized losses from
marketable securities (9,770) (16,700) (9,770) (34,730)
Dividend income from
marketable securities 4,340 340 9,460 1,290
Income (expense) from
other investments, net 4,310 (330) 2,600 2,960
Dividend income from
other investments 1,750 300 3,750 1,470
-------- -------- -------- --------
Income (loss) from
financial
investments $ 19,050 $(15,370) $ 32,600 $(23,070)
======== ======== ======== ========
</Table>
H. Other, net, which is included in other income (expense), net, includes
the following, in thousands:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Equity earnings $ --- $ 5,400 $ 490 $ 7,280
Income from cash and
cash investments 2,410 1,100 4,930 1,940
Other interest income 1,120 600 2,980 1,480
Income (loss) from
financial investments 19,050 (15,370) 32,600 (23,070)
Gain from sale of equity
investment 4,840 --- 4,840 ---
Other items, net 6,420 (7,930) 550 (11,730)
-------- -------- -------- --------
$ 33,840 $(16,200) $ 46,390 $(24,100)
======== ======== ======== ========
</Table>
In the second quarter of 2003, the Company completed the sale of its 42
percent equity investment in Emco Limited for cash proceeds of
approximately $75 million. The sale resulted in a pre-tax gain of $4.8
million.
7
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
I. The following table presents information about the Company by segment and
geographic area, in millions:
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
------------------------------------ ------------------------------------
2003 2002 2003 2002 2003 2002 2003 2002
------------------------------------ ------------------------------------
NET SALES (1) OPERATING PROFIT(2) NET SALES (1) OPERATING PROFIT(3)
------------------------------------ ------------------------------------
The Company's operations by
segment were(4):
Cabinets and Related Products $ 743 $ 682 $ 113 $ 100 $1,442 $1,338 $ 197 $ 167
Plumbing Products 666 509 93 87 1,279 973 177 159
Installation and Other Services 585 398 88 71 1,127 788 165 135
Decorative Architectural Products 469 440 62 105 829 799 124 178
Other Specialty Products 325 285 57 56 609 516 100 95
------ ------ ------ ------ ------ ------ ------ ------
Total $2,788 $2,314 $ 413 $ 419 $5,286 $4,414 $ 763 $ 734
====== ====== ====== ====== ====== ====== ====== ======
The Company's operations by
geographic area were:
North America $2,262 $1,973 $ 379 $ 373 $4,255 $3,768 $ 662 $ 650
International, principally Europe 526 341 34 46 1,031 646 101 84
------ ------ ------ ------ ------ ------ ------ ------
Total $2,788 $2,314 413 419 $5,286 $4,414 763 734
====== ====== ====== ======
General corporate expense, net (29) (24) (57) (48)
Income (expense) related to
accelerated benefits (3) 5 -- (16) --
Income regarding litigation settlement (5) -- -- 14 --
------ ------ ------ ------
Operating profit 389 395 704 686
Other income (expense), net (34) (70) (89) (134)
------ ------ ------ ------
Income before income taxes, minority
interest and cumulative effect of
accounting change, net $ 355 $ 325 $ 615 $ 552
====== ====== ====== ======
(1) Intra-segment sales were not material.
(2) In the second quarter of 2003, the Company recorded a non-cash pre-tax
charge of approximately $23 million, related to a business system failure
at a European business unit in the Decorative Architectural Products
segment. The charge resulted from system failures at the unit and the
unit management's inadequate response to these failures during efforts to
convert to a new business system in 2001 and 2002. The failures primarily
impacted accurate recognition of cost of sales associated with over
20,000 SKU's at the business unit with a corresponding misstatement of
certain balance sheet accounts.
(3) Due to the unexpected passing of the Company's President and Chief
Operating Officer, certain benefits were accelerated and expensed in the
first quarter of 2003. A portion of the benefit liability (related to an
investment in the Company's common stock) fluctuates based on the market
price of Company common stock. In the second quarter of 2003, the Company
recognized income relating to this liability as the obligation is marked
to market, based on the Company's stock price, at the end of each
reporting period.
(4) Assets in the Cabinets and Related Products segment increased by $180
million in the first six months of 2003, primarily due to contingent
consideration payments.
(5) The Company recorded income of $13.5 million in the first quarter of 2003
regarding the litigation discussed in Note L related to the Company's
subsidiary, Behr Process Corporation. Behr is included in the Decorative
Architectural Products segment.
8
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
J. The Company's total comprehensive income is as follows, in thousands:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income $229,550 $214,300 $395,350 $272,100
Other comprehensive income
(loss):
Cumulative translation
adjustments 137,040 155,960 175,820 141,850
Unrealized gain (loss) on
marketable securities 38,590 (6,870) 21,570 5,290
-------- -------- -------- --------
Total comprehensive income $405,180 $363,390 $592,740 $419,240
======== ======== ======== ========
</Table>
The unrealized gain (loss) on marketable securities is net of income tax
(credit) of $22.7 million and $12.7 million for the three months and six
months ended June 30, 2003, respectively, and $(4.0) million and $3.1
million for the three months and six months ended June 30, 2002,
respectively.
The components of accumulated other comprehensive income (loss) are as
follows, in thousands:
<Table>
<Caption>
JUNE 30 DECEMBER 31
2003 2002
-------- -----------
Unrealized loss on marketable securities, net $ (5,770) $(27,340)
Minimum pension liability (57,900) (57,900)
Cumulative translation adjustments 239,360 63,540
-------- --------
Accumulated other comprehensive income (loss) $175,690 $(21,700)
======== ========
</Table>
Unrealized loss on marketable securities is reported net of income tax
credit of $3.4 million and $16.1 million at June 30, 2003 and December
31, 2002, respectively.
The minimum pension liability is reported net of income tax credit of
$34.0 million at both June 30, 2003 and December 31, 2002.
K. In May 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity," which, among other
things, requires an issuer of certain financial instruments to classify
those financial instruments as liabilities in the issuers' balance sheet.
The adoption of SFAS No. 150 is required for financial instruments
entered into or modified subsequent to May 31, 2003, and for other
financial instruments, the interim period beginning subsequent to June
15, 2003. The adoption of SFAS No. 150 will not have a material effect on
the Company's consolidated financial statements.
9
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
L. The Company is subject to lawsuits and pending or asserted claims with
respect to matters generally arising in the ordinary course of business.
In May 1998, a civil suit was filed in the Grays Harbor County,
Washington Superior Court against Behr Process Corporation, a subsidiary
of the Company. The case involves four exterior wood coating products,
which represent a relatively small part of Behr's total sales. The
plaintiffs allege, among other things, that after applying these
products, the wood surfaces suffered excessive mildewing in the very
humid climate of western Washington. The trial court certified the case
as a class action, including all purchasers of the products who reside in
nineteen counties in western Washington. Behr denies the allegations. In
May 2000, the court entered a default against Behr as a discovery
sanction. Thereafter, the jury returned a verdict awarding damages to the
named plaintiffs. The damages awarded for the eight homeowner claims
(excluding one award to the owners of a vacation resort) ranged
individually from $14,500 to $38,000. The awards were calculated using a
formula based on the product used, the nature and square footage of wood
surface and certain other allowances. In addition, the court granted the
plaintiffs' motion for attorneys' fees. Behr appealed the trial court
judgment to the Court of Appeals of Washington. On September 13, 2002,
the Court of Appeals issued its opinion, ruling in favor of plaintiffs on
substantially all issues. The opinion was unexpected in light of the
unprecedented and disproportionate extent of the default sanction ordered
by the trial court and the belief by the Company and its outside legal
counsel that the rulings by the trial court had errors that would be
reversed by the appellate review. Following the trial court judgment in
the Washington case, Behr and the Company were served with 21 complaints
filed by consumers in state courts in Alabama, Alaska, California,
Illinois, New Jersey, New York, Oregon, and Washington, and in British
Columbia, Canada and Ontario, Canada. The complaints allege that certain
of Behr's exterior wood coating products fail to perform as warranted,
resulting in damage to the plaintiffs' wood surfaces. Trial courts in
Washington and Illinois certified their cases as national class actions.
A trial court in Oregon certified its case as a statewide class action.
In addition, the Company has been advised that one additional state is
conducting an investigation into the effectiveness of certain of these
products.
Behr and attorneys representing class members agreed to a settlement of
the nineteen-county Washington lawsuit (the "Washington Settlement"), to
which the trial court granted preliminary approval on December 13, 2002.
A fairness hearing was held on March 17, 2003, at which the trial court
granted final approval to the Washington Settlement, awarded class
counsel fees of $12.5 million and dismissed the Grays Harbor County,
Washington case with prejudice. No class members objected to the terms of
the Washington Settlement. The period to appeal final approval expired
with no appeal being filed. Under the terms of the Washington Settlement,
eligible class members who successfully complete the claims process will
receive a cash award based on the product used, the type and square
footage of wood surface and certain other allowances. The awards will be
calculated using the damage formulas in the judgment entered by the trial
court. The Company will pay cash awards to class members, the costs of
notice to the class, the costs to administer the claims process and
certain other expenses, up to an aggregate maximum of $55 million. In
addition, the Company will pay the class counsel fees of $12.5 million
awarded by the trial court. Based upon the sales volume of the related
products during the class period, the damage formulas ordered by the
trial court, the expected class size, the estimated number of claims that
would be filed on a timely basis, the estimated average cost per claim,
and the experience of the Company's legal counsel with class action
settlements, the Company estimates that the total cost of the Washington
Settlement will approximate the maximum, $67.5 million, excluding amounts
that the Company has recovered or expects to recover from liability
insurers and other third parties.
10
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note L - continued:
The settlement of all other class actions pending in the U.S. (the
"National Settlement") received preliminary court approval on October 29,
2002. A fairness hearing was held on March 6, 2003, at which the court
heard arguments in support of the named plaintiffs' request for final
approval of the settlement and arguments of 15 class members who filed
objections to the settlement. On May 7, 2003, the court granted final
approval to the National Settlement, awarded class counsel fees of $25
million and dismissed all cases pending in California with prejudice.
Fourteen class members who objected to the National Settlement have filed
notices of appeal of the judgment of final approval. Pursuant to the
terms of the National Settlement, implementation of the claims process
will not begin until all appeals are resolved. All other cases pending in
the United States will be dismissed with prejudice following resolution
of the appeals. The appeals of the National Settlement do not affect the
Washington Settlement, which is currently being implemented.
The National Settlement provides that eligible class members who
successfully complete the claims process can elect to receive either a
merchandise certificate for a discount on the purchase of Behr products,
or a cash award based on the product used, the square footage of wood
surface, proof of purchase, the interval of time between product
application and the appearance of mildew, and the extent of mildew
damage. The Company will pay a settlement amount of up to $107.5 million,
which will include total cash payments to eligible class members, the
cost of notice to the class, the cost to administer the claims process,
and the face value of merchandise certificates issued to eligible
claimants up to $7.5 million. If the aggregate face value of merchandise
certificates issued exceeds $7.5 million, the excess will not be credited
against the $107.5 million settlement amount but will be settled by
issuance of additional merchandise certificates. The National Settlement
also provides that the Company will pay class counsel fees awarded by the
trial court, up to a maximum of $25 million. Based upon the sales volume
of the related products during the class period, the expected class size,
the estimated number of claims that would be filed on a timely basis, the
estimated size and mix of claims (merchandise certificate versus cash),
the estimated average cost per claim and the experience of the Company's
legal counsel with class action settlements, the Company estimates that
the cost of the National Settlement will range from $96 million to $136
million (including adjustments due to a $107.5 million limit), excluding
amounts that the Company has recovered or expects to recover from
liability insurers. This estimate includes costs (for notice and claims
administration) of $5 to $6 million, the class counsel fees of $25
million, merchandise certificate costs ranging from $5 to $11 million,
and cash awards ranging from $61 to $102 million.
Management believes, based on the advice of outside counsel, that the
National Settlement described above will be implemented without
substantial changes, although there can be no assurance in that regard.
The Company estimates that the combined cost of both settlements and the
Company's additional legal costs (estimated at $2 million) will range
from $166 million to $206 million. The Company concluded that no amount
within that range is more likely than any other, and therefore reflected
$166 million as a liability in the third quarter 2002 condensed
consolidated financial statements in accordance with accounting
principles generally accepted in the United States.
11
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONCLUDED)
Note L - concluded:
In November 2002, Behr and two of its liability insurers reached an
agreement regarding the insurers' contribution to fund the National
Settlement. Subject to the limits of Behr's liability policies, the
insurers will pay 80% of the notice costs, claims administration costs
and attorney fees awarded to the plaintiffs. The Company recorded income
of $19.2 million in the fourth quarter of 2002 to reflect the insurers'
agreement to fund these costs. Subject to policy limits, the insurers
will also fund varying percentages of any claims paid, depending on the
type of claim (merchandise certificate or cash) and policy years in which
the products were applied. The amount of the insurers' contribution
related to claims will not be reasonably estimable until the claims
process is implemented following final court approval.
In February 2003, Behr and the insurers also reached agreement on funding
the Washington Settlement, with terms similar to those of the funding
agreement for the National Settlement. Subject to policy limits, the
insurers will pay 80% of the notice costs, claims administration costs
and attorney fees awarded to the plaintiffs, and a varying percentage of
claims paid depending on the policy year of product application. The
Company recorded income of $13.5 million in the first quarter of 2003 to
reflect the insurers agreement to fund these costs. The amount of the
insurers' contribution related to claims will not be reasonably estimable
until the claims process is implemented following final court approval.
M. Stock price guarantees as of June 30, 2003 are summarized as follows,
in thousands, except per share data:
<Table>
<Caption>
SHARES ISSUED SETTLEMENT
- -------------- MINIMUM ADDITIONAL OPTIONS(A)
# OF ISSUE STOCK PRICE GUARANTEE FOR --------------- MATURITY
SHARES PRICE GUARANTEE EARNOUT TARGETS SHARES CASH DATE
- -----------------------------------------------------------------------------
1,712 $25.98 $26.29 $2.63 335 $ 8,098 6/30/03
11,631 $24.07 $27.52 --- 1,601 38,731 9/10/03-11/6/03
16,667 $25.21 $31.20 --- 4,830 116,836 7/31/04
1,600 $30.00 $40.00 --- 1,046 25,296 12/31/04-4/30/05
- ------ --------------
31,610 7,812 $188,961
====== ===== ========
</Table>
(A) Amounts are computed based on the ten-day average of the high and
low Company common stock prices ending June 30, 2003 of $24.19.
Shares contingently issuable under these agreements are included
in the calculation of diluted earnings per common share.
In the second quarter of 2003, the Company paid, in cash, the stock price
guarantee associated with approximately four million shares of Company
common stock and an additional stock price guarantee for the achievement
of earnout targets, not included in the above table. The payments
approximated $140 million in aggregate.
In July 2003, the Company paid, in cash, the stock price guarantee
associated with 1,712,000 shares of Company common stock, included in the
table above. The payment approximated $4 million.
N. Subsequent Event -- In July 2003, the Company announced that a letter of
intent was signed for the sale of the Company's Baldwin Hardware and
Weiser Lock businesses. Baldwin and Weiser had combined 2002 net sales of
approximately $250 million and manufacture and distribute a wide range of
architectural and decorative products, including builders' hardware and
locksets. The transaction is expected to close late in 2003 and is
subject to final negotiation of a definitive purchase agreement,
necessary regulatory clearances and approval from the Boards of Directors
of both companies. The Company expects to realize a gain on this
transaction.
12
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER 2003 AND THE FIRST SIX MONTHS 2003 VERSUS
SECOND QUARTER 2002 AND THE FIRST SIX MONTHS 2002
SALES AND OPERATING PROFIT MARGINS
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
JUNE 30 PERCENT INCREASE
------------------ ----------------
2003 2002 2003 VS. 2002
------------------ --------------
NET SALES:
Cabinets and Related Products $ 743 $ 682 9%
Plumbing Products 666 509 31%
Installation and Other Services 585 398 47%
Decorative Architectural Products 469 440 7%
Other Specialty Products 325 285 14%
------ ------
Total $2,788 $2,314 20%
====== ======
North America $2,262 $1,973 15%
International, principally Europe 526 341 54%
------ ------
Total $2,788 $2,314 20%
====== ======
<Caption>
SIX MONTHS ENDED
JUNE 30
------------------
2003 2002
------------------
NET SALES:
Cabinets and Related Products $1,442 $1,338 8%
Plumbing Products 1,279 973 31%
Installation and Other Services 1,127 788 43%
Decorative Architectural Products 829 799 4%
Other Specialty Products 609 516 18%
------ ------
Total $5,286 $4,414 20%
====== ======
North America $4,255 $3,768 13%
International, principally Europe 1,031 646 60%
------ ------
Total $5,286 $4,414 20%
====== ======
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ------------------
2003 2002 2003 2002
------------------ ------------------
OPERATING PROFIT MARGIN: (A)
Cabinets and Related Products 15.2% 14.7% 13.7% 12.5%
Plumbing Products 14.0% 17.1% 13.8% 16.3%
Installation and Other Services 15.0% 17.8% 14.6% 17.1%
Decorative Architectural Products 13.2% 23.9% 15.0% 22.3%
Other Specialty Products 17.5% 19.6% 16.4% 18.4%
North America 16.8% 18.9% 15.6% 17.3%
International, principally Europe 6.5% 13.5% 9.8% 13.0%
Total 14.8% 18.1% 14.4% 16.6%
Total operating profit margin,
as reported 14.0% 17.1% 13.3% 15.5%
(A) Before general corporate expense of $29 million and $57 million for
the three-month and six-month periods ended June 30, 2003,
respectively, accelerated benefit (income) expense related to the
unexpected passing of the Company's President and Chief Operating
Officer of $(5) million and $16 million for the three-month and
six-month periods ended June 30, 2003, respectively, and insurance
income regarding the litigation settlement related to the Decorative
Architectural Products segment of $13.5 million for the six months
ended June 30, 2003. Before general corporate expense of $24 million
and $48 million for the three-month and six-month periods ended June
30, 2002, respectively.
13
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET SALES
Aided by acquisitions, net sales for both the three-month and six-month
periods ended June 30, 2003 increased 20 percent from the comparable periods in
2002. Excluding acquisitions and divestitures, net sales for the three-month and
six-month periods ended June 30, 2003 increased 7 percent and 6 percent,
respectively, from the comparable periods in 2002. The following table
reconciles reported net sales to net sales, excluding acquisitions and
divestitures, in thousands:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net sales,
as reported $2,787,650 $2,314,000 $5,285,950 $4,414,000
- Acquisitions (333,900) (20,200) (644,800) (20,200)
- Divestitures --- (900) --- (12,100)
---------- ---------- ---------- ----------
Net sales,
excluding acquisitions
and divestitures $2,453,750 $2,292,900 $4,641,150 $4,381,700
========== ========== ========== ==========
</Table>
Net sales of Cabinets and Related Products increased 9 percent and 8
percent, respectively, in the three-month and six-month periods ended June 30,
2003 compared with the same periods in 2002, primarily due 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 Plumbing Products increased 31 percent in both the
three-month and six-month periods ended June 30, 2003 compared with the same
periods in 2002, primarily due to acquisitions.
Net sales of Installation and Other Services increased 47 percent and 43
percent, respectively, in the three-month and six-month periods ended June 30,
2003 compared with the same periods in 2002, primarily due to acquisitions
(principally the acquisition of Service Partners in September 2002). Net sales
in this segment were negatively affected by adverse weather conditions in
certain markets in 2003.
Net sales of Decorative Architectural Products increased 7 percent and 4
percent, respectively, in the three-month and six-month periods ended June 30,
2003 compared with the same periods of 2002, primarily due to increased sales of
paints and stains.
Net sales of Other Specialty Products increased 14 percent and 18
percent, respectively, in the three-month and six-month periods ended June 30,
2003 compared with the same periods of 2002, primarily due to acquisitions as
well as increased sales of vinyl windows.
Net sales from North American operations for the three-month and
six-month periods ended June 30, 2003 increased 15 percent and 13 percent,
respectively, as compared with the same periods of 2002, primarily due to
acquisitions as well as increased sales volume of assembled cabinets, installed
sales of non-insulation products, paints and stains and vinyl windows. Net sales
from International operations for the three-month and six-month periods ended
June 30, 2003 increased 54 percent and 60 percent, respectively, as compared
with the same periods of 2002, primarily due to acquisitions and a weaker U.S.
dollar, principally against the Euro, which increased International sales by
approximately 20 percent for both periods in 2003.
14
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING MARGINS
The Company's gross profit margins decreased to 30.6 percent and 30.4
percent, respectively, for the three-month and six-month periods ended June 30,
2003 from 33.0 percent and 32.0 percent, respectively, for the comparable
periods in 2002. The decrease in gross profit margins reflects lower sales
volume due to adverse weather conditions, relatively higher International sales
(which have lower margins), increased sales in segments which have somewhat
lower margins, new product launch costs, plant start-up costs, as well as
increased energy costs which impacted material, freight and other operating
costs. In addition, operating results were reduced by a $23 million non-cash
pre-tax charge, discussed below, relating to a business system failure at a
European business unit in the Decorative Architectural Products segment.
Selling, general and administrative expenses as a percentage of sales
were 16.7 percent and 17.3 percent, respectively, for the three-month and
six-month periods ended June 30, 2003 and 16.0 percent and 16.4 percent,
respectively, for the comparable periods of the prior year. Selling, general and
administrative expenses in the three-month and six-month periods ended June 30,
2003 include $(5) million and $16 million, respectively, of accelerated benefit
(income) expense relating to the unexpected passing of the Company's President
and Chief Operating Officer. Selling, general and administrative expenses for
the three-month and six-month periods ended June 30, 2003 include the effect of
increased insurance, pension and promotional costs.
Operating profit for the three-month and six-month periods ended June 30,
2003 includes the effect of recently acquired companies which have lower margins
than the Company average. Operating profit in the six-month period ended June
30, 2003 also benefited from $13.5 million of income regarding the Behr
litigation settlement.
Operating profit margins for the Cabinets and Related Products segment
for the three-month and six-month periods ended June 30, 2003 were 15.2 percent
and 13.7 percent, respectively, compared with 14.7 percent and 12.5 percent for
the same periods in 2002, and reflect the positive impact of higher sales volume
as well as lower fixed costs resulting from plant closures in 2002. Operating
profit margins for this segment in 2002 were negatively affected by costs
related to a discontinued product line and incremental costs associated with
plant closures in 2002.
Operating profit margins for the Plumbing Products segment were 14.0
percent and 13.8 percent, respectively, for the three-month and six-month
periods ended June 30, 2003 compared with 17.1 percent and 16.3 percent for the
same periods of 2002, primarily due to a less favorable product mix, including
relatively higher International sales, as well as increased material and energy
costs. Operating profit margins in this segment also include the effect of a
recently acquired company which has lower margins than the segment average.
Operating profit margins for the Installation and Other Services segment
were 15.0 percent and 14.6 percent, respectively, for the three-month and
six-month periods ended June 30, 2003 compared with 17.8 percent and 17.1
percent for the same periods of 2002. The operating margin decline in this
segment is primarily attributable to increases in lower-margin sales of
non-insulation installed products as well as increased energy costs and adverse
weather conditions in certain markets, which reduced sales volume in the first
half of 2003.
Operating profit margins for the Decorative Architectural Products
segment were 13.2 percent and 15.0 percent, respectively, for the three-month
and six-month periods ended June 30, 2003 compared with 23.9 percent and 22.3
percent for the same periods of 2002.
15
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the second quarter of 2003, the Company recorded a non-cash pre-tax
charge which reduced operating profit by approximately $23 million ($.03 per
common share, after tax) with respect to a European business unit in the
Decorative Architectural Products segment. The charge resulted from business
system failures at the unit during efforts to convert to a new business system
in 2001 and 2002 and the unit management's inadequate response to the problem.
The failures primarily impacted the accurate recognition of cost of sales for
the operation's more than 20,000 SKU's of product manufactured and supplied by
its subsidiaries and third parties in Asia, with a corresponding misstatement of
certain balance sheet accounts. The Company has implemented corrective action to
prevent this situation from occurring at the unit in the future, including
replacement of members of the unit's senior management. While this unit remains
profitable, nevertheless the Company is continuing to analyze the business
unit's profitability and cash flow prospects to determine if any impairment of
assets exist, including goodwill (approximately $96 million at June 30, 2003).
The Company is also continuing its review to determine if further corrective
action is warranted with respect to systems implementations and related internal
controls.
In addition, the margin decline in the Decorative Architectural Products
segment was also impacted by increased material and energy costs as well as
increased advertising costs, including additional costs associated with the new
in-store paint display centers and costs associated with a new product launch.
Operating profit margins for the Other Specialty Products segment were
17.5 percent and 16.4 percent, respectively, for the three-month and six-month
periods ended June 30, 2003 compared with 19.6 percent and 18.4 percent for the
same periods of 2002. The margin decline is primarily attributable to increased
material and promotion costs as well as plant start-up costs.
The Company's operating profit margins, after general corporate expense,
were 14.0 percent and 13.3 percent, respectively, for the three-month and
six-month periods ended June 30, 2003 as compared with 17.1 percent and 15.5
percent for the same periods of 2002. The Company's operating profit margins
decreased for the three-month and six-month periods ended June 30, 2003 as
compared with the same periods of 2002, due principally to the reasons discussed
above.
OTHER INCOME (EXPENSE), NET
Other, net for the three-month and six-month periods ended June 30, 2003
includes $8.7 million and $16.8 million, respectively, of realized gains, net
from the sale of marketable securities, dividend income of $6.1 million and
$13.2 million, respectively, and $4.3 million and $2.6 million, respectively, of
income, net regarding other investments. Other, net for the three-month and
six-month periods ended June 30, 2003 also includes $4.8 million of gains from
the sale of the Company's equity investment in Emco Limited.
Other, net for the three-month and six-month periods ended June 30, 2002
includes $15.7 million and $28.8 million, respectively, of realized losses, net
from the sale of marketable securities, dividend income of $.6 million and $2.8
million, respectively, and $(.3) million and $2.9 million, respectively, of
(expense) income, net regarding other investments.
Interest expense for the three-month and six-month periods ended June 30,
2003 increased $13.3 million and $25.8 million, respectively, to $67.5 million
and $135.1 million, compared with interest expense of $54.2 million and $109.3
million, respectively, for the same periods of 2002 primarily due to increased
fixed-rate borrowings in the last half of 2002.
16
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET INCOME AND EARNINGS PER COMMON SHARE
Net income for the three-month and six-month periods ended June 30, 2003
was $229.6 million and $395.4 million, respectively, and diluted earnings per
common share were $.46 and $.79, respectively, compared with $.43 and $.55 per
common share for the comparable periods of 2002 (including a $.19 non-cash
goodwill impairment charge recognized as a cumulative effect of accounting
change in the first quarter of 2002). The Company's effective tax rate for both
the three-month and six-month periods ended June 30, 2003 was 34.8 percent, as
compared with 34.0 percent for the same periods in 2002. The Company estimates
that its effective tax rate should approximate 35 percent for 2003.
OTHER FINANCIAL INFORMATION
The Company's current ratio was 1.5 to 1 at June 30, 2003 and 2.0 to 1 at
December 31, 2002. The decline is the result of the reclassification of $500
million of debt due May 3, 2004 to current notes payable from long-term debt in
the second quarter of 2003.
For the six months ended June 30, 2003, cash of $478.6 million was
provided by operating activities. Cash used for financing activities was $642.0
million, including primarily $140.1 million for cash dividends paid, $410.5
million for the acquisition and retirement of Company common stock in
open-market transactions and $48.1 million for the acquisition of Company common
stock for the Company's long-term stock incentive award plan. Cash used for
investing activities was $146.8 million, including primarily $139.0 million for
capital expenditures and $198.5 million related to acquisitions including
contingent consideration (earnouts and share price guarantees) and other
purchase price adjustments. Cash provided by investing activities included
primarily $139.6 million from the net sales of marketable securities and other
investments and $75.4 million from the sale of the equity investment in Emco.
The aggregate of the preceding items and the foreign currency effect on cash of
$29.1 million represents a net cash outflow of $281.1 million.
In aggregate, the cost basis of the Company's portfolio of marketable
equity securities and bond funds exceeded the market value by approximately $9
million at June 30, 2003. Included in the portfolio were four million shares of
Furniture Brands International common stock, with cost exceeding market value by
approximately $17 million at June 30, 2003. The Company received the Furniture
Brands International common stock as proceeds from the liquidation of
Furnishings International Inc. in the second quarter of 2002.
The Company is subject to lawsuits and claims pending or asserted with
respect to matters generally arising in the ordinary course of business. Note L
of the Condensed Consolidated Financial Statements discusses specific claims
pending against the Company and its subsidiary, Behr Process Corporation, with
respect to certain of Behr's exterior wood coating products.
The Company believes that its present cash balance, its cash flows from
operations and, to the extent necessary, bank borrowings and future financial
market activities, are sufficient to fund its working capital and other
investment needs.
17
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUTLOOK FOR THE COMPANY
The Company continues to believe that, in the present uncertain economic
environment, it is prudent to be conservative in forecasting for business
planning purposes and to anticipate a possible slow-down in housing starts and
continued moderation of consumer spending. The Company also expects that
operating expenses for the year will increase, particularly for such items as
energy, insurance and pension costs. However, the Company's favorable sales
performance has continued early in the third quarter with July sales up nearly
18 percent and, based on current business trends, the Company continues to be
guardedly optimistic and expects to achieve record sales and earnings for 2003.
FORWARD-LOOKING STATEMENTS
Certain sections of this Quarterly Report contain statements reflecting
the Company's views about its future performance and constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. These
views involve risks and uncertainties that are difficult to predict and,
accordingly, the Company's actual results may differ materially from the results
discussed in such forward-looking statements. Readers should consider that
various factors, including changes in general economic conditions, competitive
market conditions and pricing pressures, relationships with key customers,
industry consolidation of retailers, wholesalers and builders, shifts in
distribution, the influence of e-commerce and other factors discussed in the
Company's Annual Report on Form 10-K and its other filings with the Securities
and Exchange Commission, may affect the Company's performance. The Company
undertakes no obligation to update publicly any forward-looking statements as a
result of new information, future events or otherwise.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
conducted an evaluation of the Company's disclosure controls and procedures as
required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15 as of the end
of the period covered by this report. Based upon that evaluation:
a. they have concluded that the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e))
are designed to be and are adequate to ensure that information
required to be disclosed by the Company in the reports it files or
submits under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported, within the time periods
specified in the rules and forms of the Securities and Exchange
Commission; and
b. they have identified no change in the Company's internal control over
financial reporting that occurred during the period covered by this
report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting. Reference is made in this regard to the discussion in
Management's Discussion and Analysis regarding a European business
unit in the Decorative Architectural Products segment, although such
officers do not believe the matters described in that discussion are
reasonably likely to materially affect the Company's internal
controls over financial reporting.
18
PART II. OTHER INFORMATION
MASCO CORPORATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding this item is set forth in Note L to the Company's
Condensed Consolidated Financial Statements included in Part I, Item 1 of this
Report.
ITEMS 2, 3 AND 5 ARE NOT APPLICABLE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 14, 2003 at which the
stockholders voted upon the election of three nominees for Class III Directors
and ratification of the selection of PricewaterhouseCoopers LLP as independent
auditors for the Company for 2003. The following is a tabulation of the votes.
ELECTION OF CLASS III DIRECTORS:
<Table>
<Caption>
For Withheld
--- --------
Thomas G. Denomme 408,556,741 6,889,059
Richard A. Manoogian 404,657,159 10,788,641
Mary Ann Van Lokeren 409,704,385 5,741,415
</Table>
APPROVAL OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT
AUDITORS FOR THE COMPANY FOR 2003:
<Table>
<Caption>
Abstentions and
For Against Broker Non-Votes
--- ------- ----------------
405,022,422 7,731,379 2,691,999
</Table>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
12 - Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
31a - Certification by Chief Executive Officer
31b - Certification by Chief Financial Officer
32 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act
(b) REPORTS ON FORM 8-K:
Report on Form 8-K dated April 8, 2003, announcing the
appointment of Alan Barry as the Company's President and
Chief Operating Officer.
Report on Form 8-K dated May 6, 2003, furnishing the
Company's first quarter of 2003 press release and
supplemental information. (Furnished, not filed.)
Report on Form 8-K dated June 19, 2003, furnishing the
Company's press release confirming the Company's previous
earnings guidance. (Furnished, not filed.)
19
PART II. OTHER INFORMATION
MASCO CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MASCO CORPORATION
(Registrant)
DATE: AUGUST 7, 2003 BY: /s/ Timothy Wadhams
------------------- ------------------------------------
Timothy Wadhams
Vice President and
Chief Financial Officer
20
MASCO CORPORATION
EXHIBIT INDEX
EXHIBIT
-------
Exhibit 12 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
Exhibit 31a Certification of Chief Executive Officer
Exhibit 31b Certification of Chief Financial Officer
Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act