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 MARCH 31, 2002. COMMISSION FILE NUMBER 1-5794 MASCO CORPORATION - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 38-1794485 - ------------------------------------------------------------------------------ (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 21001 VAN BORN ROAD, TAYLOR, MICHIGAN 48180 - ------------------------------------------------------------------------------ (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (313) 274-7400 - ------------------------------------------------------------------------------ (TELEPHONE NUMBER) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ----- ----- INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICAL DATE. SHARES OUTSTANDING AT CLASS MAY 1, 2002 ----- ----------- COMMON STOCK, PAR VALUE $1 PER SHARE 460,588,000
MASCO CORPORATION INDEX <TABLE> <CAPTION> PAGE NO. -------- <S> <C> <C> Part I. Financial Information Item 1. Financial Statements: Condensed Consolidated Balance Sheet - March 31, 2002 and December 31, 2001 1 Condensed Consolidated Statement of Income for the Three Months Ended March 31, 2002 and 2001 2 Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2002 and 2001 3 Notes to Condensed Consolidated Financial Statements 4-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-14 Part II. Other Information and Signature 15-16 </TABLE>
MASCO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET MARCH 31, 2002 AND DECEMBER 31, 2001 (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ------------------------ <TABLE> <CAPTION> (UNAUDITED) MARCH 31, DECEMBER 31, ASSETS 2002 2001 ------ ---------- ------------ <S> <C> <C> Current assets: Cash and cash investments $ 238,160 $ 311,990 Accounts and notes receivable, net 1,377,180 1,204,210 Prepaid expenses and other 171,000 197,620 Inventories: Raw material 369,680 392,820 Finished goods 381,580 356,360 Work in process 145,990 163,920 ---------- ---------- 897,250 913,100 ---------- ---------- Total current assets 2,683,590 2,626,920 Equity investments 83,800 82,290 Securities of Furnishings International Inc. 142,550 132,550 Property and equipment, net 2,009,720 2,016,730 Acquired goodwill, net 3,271,220 3,234,000 Other intangible assets, net 308,600 309,890 Other assets 843,410 780,950 ---------- ---------- Total assets $9,342,890 $9,183,330 ========== ========== LIABILITIES ----------- Current liabilities: Notes payable $ 130,690 $ 129,860 Accounts payable 402,540 322,280 Accrued liabilities 782,720 784,420 ---------- ---------- Total current liabilities 1,315,950 1,236,560 Long-term debt 3,576,350 3,627,630 Deferred income taxes and other 217,760 199,310 ---------- ---------- Total liabilities 5,110,060 5,063,500 ---------- ---------- Commitments and contingencies SHAREHOLDERS' EQUITY -------------------- Preferred shares, par value $1 per share Authorized shares: 1,000,000; issued: 2002 -- 20,000; 2001 -- 20,000 20 20 Common shares, par value $1 per share Authorized shares: 1,400,000,000; issued: 2002 -- 460,520,000; 2001 -- 459,050,000 460,520 459,050 Paid-in capital 1,408,570 1,380,820 Retained earnings 2,553,960 2,468,230 Accumulated other comprehensive income (loss) (190,240) (188,290) ---------- ---------- Total shareholders' equity 4,232,830 4,119,830 ---------- ---------- Total liabilities and shareholders' equity $9,342,890 $9,183,330 ========== ========== </TABLE> See notes to condensed consolidated financial statements. 1
MASCO CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) ------------------------ <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 --------------------------- 2002 2001 ---------- ---------- <S> <C> <C> Net sales $2,100,000 $1,896,000 Cost of sales 1,454,050 1,341,840 ---------- ---------- Gross profit 645,950 554,160 Selling, general and administrative expenses 355,350 318,760 Amortization of acquired goodwill --- 23,000 ---------- ---------- Operating profit 290,600 212,400 ---------- ---------- Other income (expense), net: Interest expense (55,100) (58,300) Other, net (7,900) 22,900 ---------- ---------- (63,000) (35,400) ---------- ---------- Income before income taxes 227,600 177,000 Income taxes 77,400 62,000 ---------- ---------- Net income $ 150,200 $ 115,000 ========== ========== Earnings per common share: Basic $.32 $.25 ==== ==== Diluted $.31 $.25 ==== ==== Cash dividends declared and paid per common share $.135 $.13 ===== ==== SUPPLEMENTAL DISCLOSURE: Net income as reported $ 115,000 Goodwill amortization, net of tax 19,300 ---------- Net income as adjusted $ 134,300 ========== Earnings per common share: Basic as reported $.25 Goodwill amortization, net of tax .04 ---- Basic as adjusted $.29 ==== Diluted as reported $.25 Goodwill amortization, net of tax .04 ---- Diluted as adjusted $.29 ==== </TABLE> See notes to condensed consolidated financial statements. 2
MASCO CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (DOLLARS IN THOUSANDS) ------------------------ <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 ------------------------ 2002 2001 --------- --------- <S> <C> <C> CASH FLOWS FROM (FOR) OPERATING ACTIVITIES: Cash provided by operations $ 225,390 $ 138,300 (Increase) in receivables (180,780) (96,630) Decrease (increase) in inventories 5,910 (45,560) Increase (decrease) in accounts payable and accrued liabilities, net 85,740 (27,810) --------- --------- Total cash from (for) operating activities 136,260 (31,700) --------- --------- CASH FLOWS FROM (FOR) FINANCING ACTIVITIES: Increase in principally bank debt 53,640 284,930 Payment of principally bank debt (104,890) (819,300) Issuance of 6.75% notes --- 800,000 Purchase of Company common stock for: Retirement --- (25,190) Long-term stock incentive award plan (21,380) (22,950) Cash dividends paid (64,310) (59,790) --------- --------- Total cash (for) from financing activities (136,940) 157,700 --------- --------- CASH FLOWS FROM (FOR) INVESTING ACTIVITIES: Capital expenditures (56,670) (65,260) Purchases of marketable securities (131,380) (174,390) Purchases of other investments, net (620) (2,470) Proceeds from disposition of: Marketable securities 114,660 96,440 Business 15,430 --- Acquisition of companies, net of cash acquired (10,280) (80,630) Other, net (4,290) 20,310 --------- -------- Total cash (for) investing activities (73,150) (206,000) --------- --------- CASH AND CASH INVESTMENTS: Decrease for the quarter (73,830) (80,000) At January 1 311,990 169,430 --------- --------- At March 31 $ 238,160 $ 89,430 ========= ========= </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 March 31, 2002 and the results of operations and changes in cash flows for the three months ended March 31, 2002 and 2001. The condensed consolidated balance sheet at December 31, 2001 was derived from audited financial statements. On January 1, 2002, Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," became effective. In accordance with SFAS No. 142, the Company is no longer recording amortization expense related to goodwill and other indefinite-lived intangible assets. The Company has provided a supplemental disclosure of adjusted net income and basic and diluted earnings per common share for the three months ended March 31, 2001 on the statement of income to exclude goodwill amortization expense. The Company is expected to complete the first step of the transitional goodwill impairment testing by June 30, 2002. If any impairment is indicated, the Company will record such impairment as a cumulative effect of a change in accounting principle effective January 1, 2002 in accordance with SFAS No. 142. The changes in the carrying amount of goodwill for the quarter ended March 31, 2002, by segment, are as follows, in thousands: <TABLE> <CAPTION> BALANCE BALANCE DECEMBER 31, 2001 ADDITIONS(A) OTHER(B) MARCH 31, 2002 ----------------- ----------- -------- -------------- <S> <C> <C> <C> <C> Cabinets and Related Products $ 553,060 $ --- $ (5,200) $ 547,860 Plumbing Products 175,930 2,500 (1,850) 176,580 Installation and Other Services 957,920 7,290 --- 965,210 Decorative Architectural Products 454,240 --- (2,100) 452,140 Other Specialty Products 1,092,850 40,700 (4,120) 1,129,430 ---------- --------- -------- ---------- Total $3,234,000 $ 50,490 $(13,270) $3,271,220 ========== ========= ======== ========== </TABLE> (A) Additions to the carrying amount of goodwill include acquisitions and other purchase price adjustments. For the three months ended March 31, 2002, additions principally include the payment of approximately $25 million of additional contingent consideration in Company common stock and cash for prior purchase acquisitions and other purchase price adjustments related to the finalization of certain purchase price allocations. (B) Other changes to the carrying amount of goodwill principally include foreign currency translation adjustments. Other indefinite-lived intangible assets include registered trademarks of $220 million at March 31, 2002. The carrying value of the Company's definite-lived intangible assets is $88.5 million at March 31, 2002 (including accumulated amortization of $18.2 million) and principally includes customer relationships and non-compete agreements. On January 1, 2002, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" became effective. The adoption of SFAS No. 144 did not have a material effect on the Company's consolidated financial statements. 4
MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note A -- concluded: Emerging Issues Task Force ("EITF") Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer," became effective for the Company in the first quarter of 2002. EITF No. 01-9 requires that certain expenses, including co-operative advertising expenses and other customer related incentives, be recorded as a reduction in sales unless certain conditions are met. The adoption of EITF No. 01-9 resulted in the reclassification of $15 million of co-operative advertising expenses from selling expense to a reduction in sales for the three months ended March 31, 2001. This reclassification did not result in a change in net income or earnings per common share. Certain prior-year amounts have been reclassified to conform to the 2002 presentation in the condensed consolidated financial statements. B. 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 MARCH 31 ------------------------- 2002 2001 -------- -------- <S> <C> <C> Numerator: Net income as reported $150,200 $115,000 ======== ======== Denominator: Basic common shares (based on weighted average) 467,200 451,900 Add: Contingent common shares 13,300 9,000 Stock option dilution 3,400 2,800 -------- -------- Diluted common shares 483,900 463,700 ======== ======== </TABLE> For the three months ended March 31, 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 March 31, 2002, they were not convertible according to their terms. C. In December 2000, the Company adopted a plan to dispose of several businesses that the Company believed were not core to its long-term growth strategies. In the first quarter of 2002, the Company sold its subsidiary, StarMark Cabinetry, Inc., for approximate book value. StarMark was included in the Cabinets and Related Products segment and had annual sales of approximately $50 million. Net assets of businesses held for disposition were approximately $115 million at March 31, 2002. 5
MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) D. The Company reevaluated the carrying value of its investment in securities of Furnishings International Inc. ("FII") and, in the third quarter of 2001, recorded a $460 million pre-tax, non-cash charge to write down this investment to its estimated fair value of approximately $133 million, which represents the approximate fair value of consideration ultimately expected to be received from FII for the repayment of the indebtedness. The ultimate consideration has been estimated by the Company based on the Company's analysis of FII's recent indicated plans to dispose of its businesses and other assets. Management of FII expects the disposition process to be substantially complete by the end of 2002; however, due to various factors, the disposition process and the determination of the consideration ultimately to be received by the Company may extend beyond the end of 2002. In January 2002, the Company entered into a $30 million subordinated revolving credit agreement with FII, with interest payable at the prime rate, to assist FII with its temporary cash requirements incident to the liquidation process. Such arrangement is collateralized by a lien on certain assets. At March 31, 2002, $9 million was outstanding under this credit agreement; such amount was repaid by FII in April 2002. E. Other income (expense), net consists of the following, in thousands: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 ------------------------- 2002 2001 -------- -------- <S> <C> <C> Interest expense $(55,100) $(58,300) Equity earnings (loss) 1,900 (1,400) Income from cash and cash investments 800 1,700 Other interest income 900 16,100 Other, net (11,500) 6,500 -------- -------- $(63,000) $(35,400) ======== ======== </TABLE> Other interest income for the three months ended March 31, 2001 included $14.7 million of interest income from the 12% pay-in-kind junior debt securities of FII. The recording of such interest income was discontinued effective July 1, 2001 due to the impairment of the Company's investment in FII. Realized gains (losses) and dividend income from marketable securities included in other, net above were as follows, in thousands: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 ------------------------- 2002 2001 -------- -------- <S> <C> <C> Realized gains $ 4,920 $ 17,230 Realized losses (18,030) (4,430) -------- -------- Net realized gains (losses) $(13,110) $ 12,800 ======== ======== Dividend income $ 950 $ 780 ======== ======== </TABLE> Other, net for the three months ended March 31, 2002 and 2001 also includes $3.3 million and $3.7 million, respectively, of income and gains, net regarding other investments. 6
MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) F. Subsequent Event - In May 2002, the Company sold approximately 22 million shares (up to 25.3 million shares including the underwriters' over-allotment option) of Company common stock in a public offering at an initial price of $27.85 per common share, resulting in gross proceeds of approximately $613 million. The Company plans to use the proceeds from the equity issuance to reduce indebtedness and for other general corporate purposes. The Company now has on file with the Securities and Exchange Commission an unallocated shelf registration pursuant to which the Company is able to issue up to a combined $1.4 billion of debt and equity securities. G. The following table presents information about the Company by segment and geographic area, in millions: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 --------------------------------------- 2002 2001 2002 2001 --------------------------------------- Net Sales (1) Operating Profit (2) --------------- -------------------- <S> <C> <C> <C> <C> The Company's operations by segment were: Cabinets and Related Products $ 656 $ 601 $ 67 $ 66 Plumbing Products 464 416 72 49 Installation and Other Services 390 426 64 52 Decorative Architectural Products 359 322 73 55 Other Specialty Products 231 131 39 14 ------ ------ ---- ---- Total $2,100 $1,896 $315 $236 ====== ====== ==== ==== The Company's operations by geographic area were: North America $1,795 $1,593 $277 $205 International, principally Europe 305 303 38 31 ------ ------ ---- ---- Total $2,100 $1,896 315 236 ====== ====== General corporate expense, net (24) (24) ---- ---- Operating profit, after general corporate expense 291 212 Other (expense), net (63) (35) ---- ---- Income before income taxes $228 $177 ==== ==== </TABLE> (1) Intra-company sales among segments were not material. (2) Operating profit excluding goodwill amortization expense for the three months ended March 31, 2001 was: Cabinets and Related Products - $70 million, Plumbing Products - $50 million, Installation and Other Services - $63 million, Decorative Architectural Products - $58 million and Other Specialty Products - $18 million. H. The Company's total comprehensive income was as follows, in thousands: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 ------------------------- 2002 2001 -------- -------- <S> <C> <C> Net income $150,200 $115,000 Other comprehensive income (loss): Cumulative translation adjustments (14,110) (42,360) Unrealized gain (loss) on marketable securities, net of income tax (credit) of $7,140 and $(8,170), respectively 12,160 (13,930) -------- -------- Total comprehensive income $148,250 $ 58,710 ======== ======== </TABLE> 7
MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) I. The Company is subject to lawsuits and pending or asserted claims with respect to matters arising in the ordinary course of business. In May 1998, a civil suit was filed in the Grays Harbor County, Washington Superior Court against Behr Process Corporation, a subsidiary of the Company. The case involves four exterior wood coating products, which represent a relatively small part of Behr's total sales. The plaintiffs allege, among other things, that after applying these products, the wood surfaces suffered excessive mildewing in the very humid climate of western Washington. The trial court certified the case as a class action, including all purchasers of the products who reside in nineteen counties in western Washington. Behr denies the allegations. Although Behr believes that the subject products have been purchased by thousands of consumers in western Washington, consumer complaints in the past have been relatively small compared to the total volume of products sold. In May 2000, the court entered a default against Behr as a discovery sanction. Thereafter, the jury returned a verdict awarding damages to the named plaintiffs. The damages awarded for the eight homeowner claims (excluding one award to the owners of a vacation resort) ranged individually from $14,500 to $38,000. The awards were calculated using a formula based on the product used, the nature and square footage of wood surface and certain other allowances. Under the verdict, the same formula will be used for calculating awards on claims that may be submitted by the subject purchasers of these products. In July 2000, the court awarded additional damages of $10,000 per claim to the eight homeowner claims, under the Washington Consumer Protection Act. This increased the total damages awarded on the homeowner claims to approximately $263,000. The court denied the plaintiffs' request for an award of additional damages on claims that may be submitted by other class members. In addition, the court granted the plaintiffs' motion for attorneys' fees. Behr is appealing the judgment. At this time, the Company is not in a position to estimate reliably the number of class members, the number of claims that may be filed or the awards that class members may seek. Although Behr is not able to estimate the amount of any potential liability, Behr believes that there have been numerous rulings by the trial court that constitute reversible error and that there are valid defenses to the lawsuit. The Company has made no provision for any potential loss in the Company's consolidated financial statements. Behr has also been served with 21 complaints filed by consumers in state courts in Alabama, Alaska, California, Illinois, New Jersey, New York, Oregon, and Washington, and in British Columbia, Canada and Ontario, Canada. The complaints allege that some of Behr's exterior wood coating products fail to perform as warranted, resulting in damage to the plaintiffs' wood surfaces. Some of the complaints seek nationwide class action certification; others seek class action certification for one state or region. Proceedings in the California actions are being coordinated in the San Joaquin, California Superior Court. The Multnomah County, Oregon Circuit Court issued an order granting plaintiffs' motion for state class certification in the Oregon case. In addition, the Grays Harbor County, Washington Superior Court issued an order granting plaintiffs' motion for national class certification in the Washington case. As a result of that decision, the cases in all of the other states, except for New Jersey and Illinois, have been stayed. The New Jersey case was dismissed without prejudice. On May 9, 2002, a Washington Appeals Court Commissioner granted a petition filed by Behr and the Company for immediate appellate review of the Washington decision. 8
MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONCLUDED) Note I - concluded: Behr and the Company are continuing to defend the lawsuits and believe that there are substantial grounds for denial of class action certification and that there are substantial defenses to the claims. Two of Behr's liability insurers are participating in Behr's defense of the class actions subject to a reservation of rights. One insurer has filed a declaratory judgment action in the Orange County, California Superior Court seeking a declaration that the claims asserted in the class action complaints are not covered by Behr's insurance policies. The other insurer was named as a defendant in the suit and has filed cross-claims against Behr seeking a similar declaration. 9
MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST QUARTER 2002 VERSUS FIRST QUARTER 2001 SALES AND OPERATIONS The following table sets forth the Company's net sales and operating profit margin information by segment and geographic area, dollars in millions. <TABLE> <CAPTION> Percent Increase (Decrease) Three Months Ended ---------------- March 31, 2002 2002 ------------------ vs. vs. 2002 2001 2001 2001(A) ------------------ ---- ------- <S> <C> <C> <C> <C> NET SALES: Cabinets and Related Products $ 656 $ 601 9% 7% Plumbing Products 464 416 12% 11% Installation and Other Services 390 426 (8%)(B) 6% Decorative Architectural Products 359 322 11% 11% Other Specialty Products 231 131 76% (5%) ------ ------ Total $2,100 $1,896 11% 8% ====== ====== North America $1,795 $1,593 13% 11% International, principally Europe 305 303 1% (6%) ------ ------ Total $2,100 $1,896 11% 8% ====== ====== </TABLE> <TABLE> <CAPTION> Three Months Ended March 31, ------------------------------ 2002 2001(D) 2001(E) ------------------------------ <S> <C> <C> <C> OPERATING PROFIT MARGIN: (C) Cabinets and Related Products 10.2% 11.6% 11.0% Plumbing Products 15.5% 12.0% 11.8% Installation and Other Services 16.4% 14.8% 12.2% Decorative Architectural Products 20.3% 18.0% 17.1% Other Specialty Products 16.9% 13.7% 10.7% North America 15.4% 14.0% 12.9% International, principally Europe 12.5% 11.9% 10.2% Total 15.0% 13.7% 12.4% </TABLE> (A) Percentage change in sales, excluding acquisitions and divestitures. (B) Reflects the effect of a divestiture. (C) Before general corporate expense. (D) Three months ended March 31, 2001 excluding goodwill amortization expense. (E) Three months ended March 31, 2001 including goodwill amortization expense. 10
MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NET SALES Net sales for the three months ended March 31, 2002 increased 11 percent from the comparable period in 2001. Excluding acquisitions and divestitures, first quarter 2002 net sales increased 8 percent from the comparable period of the prior year due principally to improved economic and business conditions in certain of the Company's markets, which contributed to higher unit sales volume and sell-through to end-user customers of certain products, particularly faucets, cabinets and architectural coatings. Changes in net sales in the following segment and geographic area discussion exclude the impact of acquisitions and divestitures. Improved economic and business conditions contributed to sales increases in the first quarter of 2002 from the comparable period of the prior year of 7 percent, 11 percent, 6 percent and 11 percent in the Cabinets and Related Products, Plumbing Products, Installation and Other Services and Decorative Architectural Products segments, respectively. Net sales of the Company's Other Specialty Products segment decreased 5 percent in the first quarter of 2002 due principally to the negative effect of a stronger U.S. dollar on the translation of local currencies of European operations included in this segment. Net sales from North American and International operations for the first quarter of 2002 increased 11 percent and decreased 6 percent, respectively, as compared with the first quarter of 2001. In the first quarter of 2002, International sales continued to be impacted by a stronger U.S. dollar, principally against the Euro, which lowered International sales by approximately 4 percent, and by continued weak market and economic conditions, particularly in Germany. OPERATING MARGINS The Company's gross profit margin increased to 30.8 percent for the first quarter of 2002 from 29.2 percent for the comparable period in 2001. The increase in gross profit margin reflects sales volume increases in all of the Company's business segments except the Other Specialty Products segment, a more favorable product mix, gross margins of certain acquired companies, which were higher than the Company average, and the favorable influence of the Company's profit improvement initiatives. Selling, general and administrative expenses as a percentage of sales were 16.9 percent for the first quarter of 2002 and 16.8 percent for the comparable period of the prior year. Changes in operating profit margin in the following discussion exclude goodwill amortization expense. The Company's operating profit margin, after general corporate expense, was 13.8 percent for the first quarter of 2002 as compared with 12.4 percent for the first quarter of 2001. Operating profit margin, before general corporate expense, was 15.0 percent for the first quarter of 2002 as compared with 13.7 percent for the first quarter of 2001. The Company's operating profit margin increased in the first quarter of 2002 as compared with the first quarter of 2001, due principally to a lower cost of sales percentage and a corresponding increase in gross profit margin as described above. Operating profit margin in the Cabinets and Related Products segment for the first quarter of 2002 includes the effect of costs related to a discontinued product line and the recent plant closures. Operating profit margin in the Installation and Other Services segment for the first quarter of 2002 includes the effect of cost reductions resulting from integration activities related to a significant acquisition in early 2001, as well as the effect of the disposition of a lower margin business in July 2001. 11
MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER INCOME (EXPENSE), NET Included in other interest income for the three months ended March 31, 2001 is $14.7 million of interest income from the 12% pay-in-kind junior debt securities of Furnishings International Inc. The recording of such interest income was discontinued effective July 1, 2001 due to the impairment of the Company's investment in Furnishings International Inc. Other, net for the first quarter of 2002 includes $13.1 million of realized losses, net from the sale of marketable securities, dividend income from marketable securities of $1.0 million and $3.3 million of income and gains, net regarding other investments. Other, net for the first quarter of 2001 included $12.8 million of realized gains, net from the sale of marketable securities, dividend income from marketable securities of $.8 million and $3.7 million of income and gains, net regarding other investments. Interest expense for the first quarter of 2002 decreased $3.2 million to $55.1 million as compared with interest expense of $58.3 million in the first quarter of 2001 due primarily to lower variable-rate borrowings in the first quarter of 2002 compared with the first quarter of 2001. NET INCOME AND EARNINGS PER COMMON SHARE Net income for the first quarter of 2002 was $150.2 million and diluted earnings per common share increased to $.31 compared with $.25 per common share ($.29 excluding goodwill amortization expense) for the comparable period of 2001, due principally to the previously mentioned items. The Company's effective tax rate for the three months ended March 31, 2002 was 34.0 percent, as compared with 35.0 percent (33.0 percent excluding goodwill amortization expense) for the comparable period of the prior year. The Company estimates that its effective tax rate should approximate 34.0 percent for 2002. OTHER FINANCIAL INFORMATION The Company's current ratio was 2.0 to 1 at March 31, 2002, as compared with 2.1 to 1 at December 31, 2001. For the three months ended March 31, 2002, cash of $136.3 million was provided by operating activities. Cash used for financing activities was $136.9 million, including $51.2 million from a net decrease in long-term debt, primarily related to payments of bank debt, $64.3 million for cash dividends paid and $21.4 million for the acquisition of Company common stock for the Company's long-term incentive award plan. Cash used for investing activities was $73.2 million, including $56.7 million for capital expenditures, $10.3 million related to acquisitions, $17.3 million for the net purchases of marketable securities and other investments, and $4.3 million for other cash outflows. Cash provided by investing activities included $15.4 million from the disposition of a business. The aggregate of the preceding items represents a net cash outflow of $73.8 million. First quarter 2002 cash from operations was affected by an expected and annually recurring first quarter increase in accounts receivable as compared with December 31, 2001 and an increase in days sales in accounts receivable due to an extension of payment terms with a major customer. Most of the annual increase in accounts receivable is typically experienced in the first half of the year. 12
MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In May 2002, the Company sold approximately 22 million shares (up to 25.3 million shares including the underwriters' over-allotment option) of Company common stock in a public offering at an initial price of $27.85 per common share, resulting in gross proceeds of approximately $613 million. The Company plans to use the proceeds from the equity issuance to reduce indebtedness and for other general corporate purposes. The Company now has on file with the Securities and Exchange Commission an unallocated shelf registration pursuant to which the Company is able to issue up to a combined $1.4 billion of debt and equity securities. The Company reevaluated the carrying value of its investment in securities of Furnishings International Inc. ("FII") and, in the third quarter of 2001, recorded a $460 million pre-tax, non-cash charge to write down this investment to its estimated fair value of approximately $133 million, which represents the approximate fair value of consideration ultimately expected to be received from FII for the repayment of the indebtedness. The ultimate consideration has been estimated by the Company based on the Company's analysis of FII's recent indicated plans to dispose of its businesses and other assets. Management of FII expects the disposition process to be substantially complete by the end of 2002; however, due to various factors, the disposition process and the determination of the consideration ultimately to be received by the Company may extend beyond the end of 2002. In January 2002, the Company entered into a $30 million subordinated revolving credit agreement with FII, with interest payable at the prime rate, to assist FII with its temporary cash requirements incident to the liquidation process. Such arrangement is collateralized by a lien on certain assets. At March 31, 2002, $9 million was outstanding under this credit agreement; such amount was repaid by FII in April 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 I of the Condensed Consolidated Financial Statements discusses specific claims pending against the Company and its subsidiary, Behr Process Corporation, with respect to several of Behr's exterior wood coating products. The Company believes that its present cash balance, its cash flows from operations and, to the extent necessary, bank borrowings and future financial market activities, are sufficient to fund its working capital and other investment needs. OUTLOOK FOR THE COMPANY The Company's internal sales growth has trended upward in recent quarters, with improvement in both sales and incoming orders. The upward trend in sales includes increased sales to retailers with above-average increases in sales of assembled cabinets, faucets and architectural coatings. Recently implemented profit improvement programs are also expected to continue to contribute to margin enhancement. Because the first quarter is seasonally a low quarter for the Company, sales and earnings per common share in the last three quarters of 2002 should average higher than the first quarter results. 13
MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENTLY ISSUED ACCOUNTING STANDARDS On January 1, 2002, Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," became effective. In accordance with SFAS No. 142, the Company is no longer recording amortization expense related to goodwill and other indefinite-lived intangible assets. The Company is expected to complete the first step of the transitional goodwill impairment testing by June 30, 2002. If any impairment is indicated, the Company will record such impairment as a cumulative effect of a change in accounting principle effective January 1, 2002 in accordance with SFAS No. 142. On January 1, 2002, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" became effective. The adoption of SFAS No. 144 did not have a material effect on the Company's consolidated financial statements. Emerging Issues Task Force ("EITF") Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer," became effective for the Company in the first quarter of 2002. EITF No. 01-9 requires that certain expenses, including co-operative advertising expenses and other customer related incentives, be recorded as a reduction in sales unless certain conditions are met. The adoption of EITF No. 01-9 resulted in the reclassification of $15 million of co-operative advertising expenses from selling expense to a reduction in sales for the three months ended March 31, 2001. This reclassification did not result in a change in net income or earnings per common share. 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. 14
PART II. OTHER INFORMATION MASCO CORPORATION ITEM 1. LEGAL PROCEEDINGS Information regarding this item is set forth in Note I to the Company's Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On March 7, 2002 the Company issued 765,360 unregistered shares of Masco Corporation common stock to former shareholders of a 1999 acquired company, in satisfaction of the Company's contingent payment obligations under the original Stock Purchase Agreement entered into with such former shareholders. The Company relied on the exemption from registration under Section 4(2) of the Securities Act of 1933. ITEMS 3 THROUGH 5 ARE NOT APPLICABLE. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: 12 - Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (b) REPORTS ON FORM 8-K: None. 15
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: MAY 15, 2002 BY: --------------------- ------------------------------------ Timothy Wadhams Vice-President and Chief Financial Officer
MASCO CORPORATION EXHIBIT INDEX EXHIBIT Exhibit 12 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends