10-Q 1 k64100e10-q.txt FORM 10-Q FOR PERIOD ENDING JUNE 30, 2001 1 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, 2001. 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 July 30, 2001 ----- ---------------------- Common Stock, Par Value $1 Per Share 460,199,000
2 MASCO CORPORATION INDEX
PAGE NO. -------- Part I. Financial Information Item 1. Financial Statements: Condensed Consolidated Balance Sheet - June 30, 2001 and December 31, 2000 1 Condensed Consolidated Statement of Income for the Three Months and Six Months Ended June 30, 2001 and 2000 2 Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2001 and 2000 3 Notes to Condensed Consolidated Financial Statements 4-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-13 Part II. Other Information and Signature 14-16
3 MASCO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 2001 AND DECEMBER 31, 2000 (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31, ASSETS 2001 2000 ------ ---------- ------------ Current assets: Cash and cash investments $ 106,490 $ 169,430 Accounts and notes receivable, net 1,336,820 1,099,150 Prepaid expenses and other 150,430 126,620 Inventories: Raw material 394,960 348,420 Finished goods 441,840 377,270 Work in process 186,370 187,270 ---------- ---------- 1,023,170 912,960 ---------- ---------- Total current assets 2,616,910 2,308,160 Equity investments in affiliates 83,910 87,460 Securities of Furnishings International Inc. 572,550 533,670 Property and equipment, net 1,949,610 1,906,840 Acquired goodwill, net 2,745,480 2,190,770 Other noncurrent assets 856,520 717,100 ---------- ---------- Total assets $8,824,980 $7,744,000 ========== ========== LIABILITIES Current liabilities: Notes payable $ 208,950 $ 210,950 Accounts payable 313,340 250,460 Accrued liabilities 662,120 616,640 ---------- ---------- Total current liabilities 1,184,410 1,078,050 Long-term debt 3,685,760 3,018,240 Deferred income taxes and other 226,290 221,650 Commitments and contingencies --- --- ---------- ---------- Total liabilities 5,096,460 4,317,940 ---------- ---------- SHAREHOLDERS' EQUITY Common stock, par value $1 per share Authorized shares: 900,000,000 459,860 444,750 Preferred shares authorized: 1,000,000 --- --- Paid-in capital 863,270 631,120 Retained earnings 2,652,420 2,519,940 Other comprehensive income (loss) (247,030) (169,750) ---------- ---------- Total shareholders' equity 3,728,520 3,426,060 ---------- ---------- Total liabilities and shareholders' equity $8,824,980 $7,744,000 ========== ==========
See notes to condensed consolidated financial statements. 1 4 MASCO CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ---------------------- ---------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net sales $2,085,000 $1,871,000 $3,996,000 $3,617,000 Cost of sales 1,429,100 1,244,200 2,766,600 2,415,400 ---------- ---------- ---------- ---------- Gross profit 655,900 626,800 1,229,400 1,201,600 Selling, general and administrative expenses 354,300 309,600 688,000 601,700 Amortization of acquired goodwill 23,100 15,900 46,100 30,100 ---------- ---------- ---------- ---------- Operating profit 278,500 301,300 495,300 569,800 ---------- ---------- ---------- ---------- Other income (expense), net: Interest expense (59,400) (47,700) (117,700) (86,500) Equity earnings from MascoTech, Inc. --- 4,200 --- 8,500 Other, net (5,100) 36,600 13,400 78,600 ---------- ---------- ---------- ---------- (64,500) (6,900) (104,300) 600 ---------- ---------- ---------- ---------- Income before income taxes 214,000 294,400 391,000 570,400 Income taxes 75,000 109,000 137,000 211,000 ---------- ---------- ---------- ---------- Net income $ 139,000 $ 185,400 $ 254,000 $ 359,400 ========== ========== ========== ========== Earnings per share: Basic $ .31 $ .42 $ .56 $ .82 ===== ===== ===== ===== Diluted $ .30 $ .41 $ .55 $ .80 ===== ===== ===== ===== Cash dividends declared and paid per share $ .13 $ .12 $ .26 $ .24 ===== ===== ===== =====
See notes to condensed consolidated financial statements. 2 5 MASCO CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30 ------------------------- 2001 2000 ----------- --------- CASH FLOWS FROM (FOR) OPERATING ACTIVITIES: Cash provided by operations $ 376,990 $ 360,580 Increase in receivables (128,460) (117,640) Increase in inventories (79,130) (110,400) Increase in accounts payable and accrued liabilities, net 43,520 68,550 ----------- --------- Total cash from operating activities 212,920 201,090 ----------- --------- CASH FLOWS FROM (FOR) FINANCING ACTIVITIES: Issuance of 6.75% notes 800,000 --- Issuance of 6% notes 500,000 --- Increase in debt 407,950 841,010 Payment of debt (1,324,890) (136,820) Purchase of Company common stock for: Retirement (34,460) --- Long-term stock incentive award plan (22,950) (20,560) Cash dividends paid (119,560) (107,260) ----------- --------- Total cash from financing activities 206,090 576,370 ----------- --------- CASH FLOWS FROM (FOR) INVESTING ACTIVITIES: Acquisition of companies, net of cash acquired (233,650) (509,950) Capital expenditures (132,810) (169,840) Investments in non-operating assets, net (100,080) (160,600) Other, net (15,410) (45,030) ----------- --------- Total cash (for) investing activities (481,950) (885,420) ----------- --------- CASH AND CASH INVESTMENTS: (Decrease) for the period (62,940) (107,960) At January 1 169,430 230,780 ----------- --------- At June 30 $ 106,490 $ 122,820 =========== =========
See notes to condensed consolidated financial statements. 3 6 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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, 2001 and the results of operations for the three months and six months ended June 30, 2001 and 2000 and changes in cash flows for the six months ended June 30, 2001 and 2000. The condensed consolidated balance sheet at December 31, 2000 was derived from audited financial statements. As a result of the Financial Accounting Standards Board Emerging Issues Task Force ("EITF") Issue Number 00-10, "Accounting for Shipping and Handling Fees and Costs," in late 2000, the Company changed its policy for the classification of shipping and handling costs. The change resulted in the reclassification of shipping and handling costs from selling, general and administrative expenses to cost of sales. Prior year amounts have been reclassified for this change in policy. This reclassification did not result in a change in net income or earnings per share. B. The following are reconciliations of the numerators and denominators used in the computations of basic and diluted earnings per share, in thousands:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- Numerator: Net income $139,000 $185,400 $254,000 $359,400 ======== ======== ======== ======== Denominator: Basic shares (based on weighted average) 451,000 441,500 451,300 440,400 Add: Contingent shares 9,000 7,100 8,900 7,100 Stock option dilution 2,800 1,600 2,900 1,600 -------- -------- -------- -------- Diluted shares 462,800 450,200 463,100 449,100 ======== ======== ======== ========
C. In the first quarter of 2001, the Company completed the previously announced acquisition of BSI Holdings, Inc. BSI Holdings is headquartered in Carmel, California and is a provider of installed insulation and other products within the United States and Canada. During the second quarter of 2001, the Company acquired several small companies. In July 2001, the Company completed the acquisition of Milgard Manufacturing, Inc., a manufacturer of vinyl windows in the western United States, headquartered in Tacoma, Washington. These acquisitions have combined annualized net sales of over $1.2 billion. The aggregate net purchase price of these acquisitions was approximately $1.7 billion, including assumed debt of approximately $310 million, and shares of Company capital stock (15 million common shares in the first six months of 2001 and 16,700 convertible preferred shares (convertible into 16.7 million common shares)) with an aggregate value of $725 million. The convertible preferred shares carry the same attributes as Company common stock, including voting rights and dividends and will be treated as if converted at a 1 share of preferred stock to 1,000 shares of common stock ratio for earnings per share computations. Certain recent acquisition agreements provide for the payment of additional consideration, contingent upon certain conditions being met. Such additional consideration totaled $30 million during the first half of 2001, and has been recorded as additional acquired goodwill. 4 7 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) D. In December 2000, the Company adopted a plan to dispose of several businesses that the Company believes are not core to its long-term growth strategies. In the third quarter of 2001, the Company is expected to report a modest gain, net from the July 2001 sale of Inrecon, a Birmingham, Michigan-based company specializing in the repair, remodeling and restoration of residential, commercial and institutional facilities damaged by fire, wind, water and other disasters. Inrecon has annual sales of approximately $200 million. E. Other income (expense), net consists of the following, in thousands:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 -------------------- --------------------- 2001 2000 2001 2000 -------- -------- --------- -------- Interest expense $(59,400) $(47,700) $(117,700) $(86,500) Equity earnings from MascoTech, Inc. --- 4,200 --- 8,500 Equity earnings, other 2,100 700 700 1,700 Income from cash and cash investments 1,100 800 2,800 2,200 Other interest income 17,300 14,900 33,400 29,000 Other, net (25,600) 20,200 (23,500) 45,700 -------- -------- --------- -------- $(64,500) $ (6,900) $(104,300) $ 600 ======== ======== ========= ========
Other interest income for the three months and six months ended June 30, 2001 and 2000 included $15.6 million and $30.3 million and $12.8 million and $25.6 million, respectively, of interest income from indebtedness of Furnishings International Inc. Other, net expense for the three months and six months ended June 30, 2001 includes expense related to the disposition of certain non-operating assets. Other, net for the three months and six months ended June 30, 2000 results primarily from income and gains, net regarding certain non-operating assets. Interest expense for the three months and six months ended June 30, 2001 increased $11.7 million and $31.2 million, respectively, compared with interest expense for the three months and six months ended June 30, 2000. The increase in interest expense pertains to borrowings primarily related to recent acquisitions. 5 8 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F. 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 ------------------------------------ ------------------------------------ 2001 2000 2001 2000 2001 2000 2001 2000 ------------------------------------ ------------------------------------ Net Sales (1) Operating Profit(2) Net Sales (1) Operating Profit(2) ------------------------------------ ------------------------------------ The Company's operations by segment were: Cabinets and Related Products $ 625 $ 655 $ 74 $ 101 $1,230 $1,286 $ 141 $ 188 Plumbing Products 449 489 64 94 868 962 115 186 Decorative Architectural Products 430 377 87 79 760 684 144 143 Installation and Other Services 449 199 65 28 875 382 116 53 Other Specialty Products 132 151 12 25 263 303 27 50 ------ ------ ------ ------ ------ ------ ------ ------ Total $2,085 $1,871 $ 302 $ 327 $3,996 $3,617 $ 543 $ 620 ====== ====== ====== ====== ====== ====== ====== ====== The Company's operations by geographic area were: North America $1,796 $1,532 $ 272 $ 282 $3,404 $2,946 $ 481 $ 533 International, principally Europe 289 339 30 45 592 671 62 87 ------ ------ ------ ------ ------ ------ ------ ------ Total $2,085 $1,871 302 327 $3,996 $3,617 543 620 ====== ====== ====== ====== General corporate expense, net (24) (25) (48) (50) ------ ------ ------ ------ Operating profit, after general corporate expense 278 302 495 570 Other income (expense), net (64) (7) (104) 1 ------ ------ ------ ------ Income before income taxes $ 214 $ 295 $ 391 $ 571 ====== ====== ====== ======
(1) Intra-company sales among segments were not material. (2) Amortization of acquired goodwill is included in determining operating profit. 6 9 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) G. The Company's total comprehensive income was as follows, in thousands:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- Net income $139,000 $185,400 $254,000 $359,400 Other comprehensive income (loss) (20,990) (70,710) (77,280) (89,860) -------- -------- -------- -------- Total comprehensive income $118,010 $114,690 $176,720 $269,540 ======== ======== ======== ========
H. During March 2001, the Company issued $800 million of 6 3/4% notes due 2006. Early in the second quarter of 2001, the Company increased its shelf registration to $2 billion of debt and equity securities. In early May 2001, the Company issued $500 million of 6% notes due 2004. In July 2001, the Company issued Zero Coupon Convertible Senior Notes due 2031 ("Notes"), resulting in gross proceeds of approximately $750 million. The Notes have a stated annual yield to maturity of 3 1/8 percent. Holders of the Notes can convert each $1,000 principal amount at maturity note into 12.72 shares of Company common stock if the closing price of Company common stock exceeds specified levels or if other specified events occur. This conversion ratio is the equivalent of an initial conversion price of $31 per share. Holders of the Notes can also require the Company to purchase their Notes on certain specified dates. The Company may not redeem the Notes before July 20, 2002, and may redeem all of the Notes after such date subject to certain conditions specified in the indenture relating thereto. Additionally, beginning January 20, 2007, subject to specified conditions relating to the market price of the Notes, the Company may be required to pay contingent interest at the greater of the Company's regular quarterly cash dividend for equivalent common shares or .125% of the average market price of a note over a specified period of time. Proceeds from the debt issuances were used principally to retire outstanding variable-rate bank debt. 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 $750 million of debt and equity securities. I. On January 1, 2001, Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" became effective. SFAS No. 133 did not have a material effect on the Company's financial statements. In June 2001, the Financial Accounting Standards Board ("FASB") approved Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires, among other things, that the purchase method of accounting for business combinations be used for all business combinations initiated after June 30, 2001. SFAS 142 addresses the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 requires, among other things, that goodwill and other indefinite-lived intangible assets no longer be amortized and that such assets be tested for impairment at least annually. SFAS 142 is effective for fiscal years beginning after December 15, 2001. Effective January 1, 2002, the Company will no longer amortize goodwill, although periodic tests for possible impairment will be made. For the remainder of 2001, the Company will continue to amortize goodwill related to business combinations that occurred prior to July 1, 2001. The Company is currently evaluating the impact these standards will have on its financial statements. 7 10 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED) J. The Company is subject to lawsuits and claims pending or asserted 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 the state courts in Alabama, Alaska, California, Illinois, New Jersey, New York, Oregon, and Washington, and in British Columbia 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. Discovery in the lawsuits has only recently begun. Proceedings in the eleven California actions will be coordinated in the San Joaquin, California Superior Court. Behr and the Company are defending 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. 8 11 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SECOND QUARTER 2001 AND THE FIRST SIX MONTHS 2001 VERSUS SECOND QUARTER 2000 AND THE FIRST SIX MONTHS 2000 SALES AND OPERATIONS The following tables set forth the Company's net sales and operating profit margin information by segment and geographic area, dollars in millions:
Percent Increase (Decrease) Three Months Ended ---------------- June 30, 2001 2001 ------------------ vs. vs. 2001 2000 2000 2000(A) ------------------ ---------------- NET SALES: Cabinets and Related Products $ 625 $ 655 (5%) (3%) Plumbing Products 449 489 (8%) (7%) Decorative Architectural Products 430 377 14% 8% Installation and Other Services 449 199 126% 18% Other Specialty Products 132 151 (13%) (8%) ------ ------ Total $2,085 $1,871 11% 0% ====== ====== North America $1,796 $1,532 17% 2% International, principally Europe 289 339 (15%) (12%) ------ ------ Total $2,085 $1,871 11% 0% ====== ======
Six Months Ended June 30, ---------------- 2001 2000 ---------------- NET SALES: Cabinets and Related Products $1,230 $1,286 (4%) (4%) Plumbing Products 868 962 (10%) (10%) Decorative Architectural Products 760 684 11% 4% Installation and Other Services 875 382 129% 19% Other Specialty Products 263 303 (13%) (8%) ------ ------ Total $3,996 $3,617 10% (2%) ====== ====== North America $3,404 $2,946 16% 0% International, principally Europe 592 671 (12%) (13%) ------ ------ Total $3,996 $3,617 10% (2%) ====== ======
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2001 2000 2001 2000 ------------------ ------------------ OPERATING PROFIT MARGIN: (B) Cabinets and Related Products 11.8% 15.4% 11.5% 14.6% Plumbing Products 14.3% 19.2% 13.2% 19.3% Decorative Architectural Products 20.2% 21.0% 18.9% 20.9% Installation and Other Services 14.5% 14.1% 13.3% 13.9% Other Specialty Products 9.1% 16.6% 10.3% 16.5% North America 15.1% 18.4% 14.1% 18.1% International, principally Europe 10.4% 13.3% 10.5% 13.0% Total 14.5% 17.4% 13.6% 17.1%
(A) Percentage change in sales, excluding acquisitions and divestitures. (B) Before general corporate expense, but including goodwill amortization. 9 12 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NET SALES Net sales for the three months and six months ended June 30, 2001 increased 11 percent and 10 percent, respectively, from the comparable periods in 2000. Excluding acquisitions and divestitures, net sales were flat and decreased 2 percent for the three months and six months ended June 30, 2001, respectively, compared with the comparable periods of the prior year. While the Company experienced some moderation of the negative influence of customer inventory reduction programs in the second quarter of 2001, the Company continued to experience weak economic and business conditions in its markets, including a softening in sales of home improvement products in North America and Europe, competitive market conditions and pricing pressures and the continued effect of a strong U.S. dollar. Changes in net sales in the following segment and geographic area discussion exclude the influence of acquisitions and divestitures. The previously mentioned conditions contributed to sales declines for the three months and six months ended June 30, 2001 from the comparable periods of the prior year of 3 percent and 4 percent, respectively, in the Cabinets and Related Products segment, 7 percent and 10 percent, respectively, in the Plumbing Products segment, and 8 percent for both periods in the Other Specialty Products segment. For the three months and six months ended June 30, 2001, net sales of the Company's Installation and Other Services segment increased 18 percent and 19 percent, respectively, principally due to broader geographic U.S. market penetration, and net sales of the Company's Decorative Architectural Products segment increased 8 percent and 4 percent, respectively, due largely to higher unit sales volume of paints and stains. Net sales from North American operations increased 2 percent for the second quarter of 2001 and were flat for the six months ended June 30, 2001 as compared with the comparable periods of 2000. Net sales from International operations decreased 12 percent for the second quarter of 2001 and 13 percent for the six months ended June 30, 2001 as compared with the comparable periods of 2000. A stronger U.S. dollar, principally against the Euro, had an unfavorable effect on the translation of International sales, lowering International sales by 6 percent for both the second quarter and six months ended June 30, 2001. OPERATING PROFIT MARGIN Cost of sales as a percentage of sales increased to 68.5 percent and 69.2 percent for the three months and six months ended June 30, 2001, respectively, from 66.5 percent and 66.8 percent for the comparable periods in 2000. Including amortization of acquired goodwill ($23.1 million and $46.1 million for the three months and six months ended June 30, 2001, respectively), selling, general and administrative expenses as a percentage of sales for the three months and six months ended June 30, 2001 increased to 18.1 percent and 18.4 percent, respectively, from 17.4 percent and 17.5 percent for the comparable periods in 2000. Excluding amortization of acquired goodwill, selling, general and administrative expenses as a percentage of sales were 17.0 percent and 17.2 percent for the three months and six months ended June 30, 2001, respectively, as compared with 16.5 percent and 16.6 percent for the comparable periods of the prior year. The Company's operating profit margin, before general corporate expense, for the three months and six months ended June 30, 2001 was 14.5 percent and 13.6 percent, respectively, as compared with 17.4 percent and 17.1 percent for the comparable periods of 2000. Operating profit margin, after general corporate expense, for the three months and six months ended June 30, 2001, was 13.3 percent and 12.4 percent, respectively, as compared with 16.1 percent and 15.8 percent for the comparable periods of 2000. The Company's operating profit margin decreased in the second quarter and the first six months of 2001 as compared with the comparable periods of 2000, due principally to higher cost of sales and selling, general and administrative expenses as a percentage of sales and higher goodwill amortization related to recent acquisitions. 10 13 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The increase in cost of sales as a percentage of sales reflects the under-absorption of fixed costs, in part related to the higher level of capital expenditures in recent years, as well as sales declines in all of the Company's business segments except the Installation and Other Services segment and the Decorative Architectural Products segment. Cost of sales as a percentage of sales was also negatively influenced by overall product mix, including a higher percentage of lower gross-margin installation sales to total sales, the lower results of the Company's Plumbing Products segment and European businesses, new product launch costs in the Cabinets and Related Products segment and higher energy costs. Gross margin of the Company's Plumbing Products segment continues to be negatively affected by competitive market conditions, pricing pressures and product mix. Recent initiatives including investments in new product and system development and the re-pricing of certain of the Company's faucet units have also contributed to the recent increase in the cost of sales percentage for the Plumbing Products segment. Such initiatives should serve to increase unit sales volume which should lower the cost of sales percentage in future periods. The increase in selling, general and administrative expenses as a percentage of sales results largely from the allocation of fixed costs over a lower than expected sales base, increased goodwill amortization and an increase in the Company's provision for uncollectible accounts receivable. OTHER INCOME (EXPENSE), NET Other interest income for the three months and six months ended June 30, 2001 and 2000 included $15.6 million and $30.3 million and $12.8 million and $25.6 million, respectively, of interest income from indebtedness of Furnishings International Inc. The Company's investment in Furnishings International at June 30, 2001 was $594 million, consisting of $537 million of pay-in-kind debt securities and other indebtedness and $57 million of preferred and common stock. The furniture industry in general continues to be adversely affected by the ongoing economic weakness in its markets as well as by import competition. As a result, the Company continues to review whether a non-cash charge should be taken with respect to a portion of this investment. Other, net expense for the three months and six months ended June 30, 2001 includes expense related to the disposition of certain non-operating assets. Other, net for the three months and six months ended June 30, 2000 results primarily from income and gains, net regarding certain non-operating assets. Interest expense for the three months and six months ended June 30, 2001 increased $11.7 million and $31.2 million, respectively, compared with interest expense for the three months and six months ended June 30, 2000. The increase in interest expense pertains to borrowings primarily related to recent acquisitions. NET INCOME AND EARNINGS PER SHARE Net income for the second quarter of 2001 decreased 25 percent to $139.0 million from $185.4 million in the comparable 2000 period. Diluted earnings per share for the second quarter of 2001 decreased 27 percent to $.30 from $.41 for the comparable period of 2000. Net income for the six months ended June 30, 2001 decreased 29 percent to $254.0 million from $359.4 million in the comparable 2000 period. Diluted earnings per share for the six months ended June 30, 2001 decreased 31 percent to $.55 from $.80 for the comparable period of 2000. 11 14 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's effective tax rate for both the second quarter and six months ended June 30, 2001 was 35 percent as compared with 37 percent for both of the comparable periods of the prior year. The Company estimates that its effective tax rate should approximate or be slightly below 35.0 percent for the year 2001. OTHER FINANCIAL INFORMATION The Company's current ratio was 2.2 to 1 at June 30, 2001 as compared with 2.1 to 1 at December 31, 2000. For the six months ended June 30, 2001, cash of $212.9 million was provided by operating activities. Cash provided by financing activities was $206.1 million, including $383.1 million from a net increase in long-term debt. Cash used for financing activities included $34.5 million for the acquisition of Company common stock in open-market transactions, $22.9 million for the acquisition of Company common stock for the Company's long-term stock incentive award plan, and $119.6 million for cash dividends paid. Cash used for investing activities was $481.9 million, including $233.6 million for acquisitions, $132.8 million for capital expenditures, $100.1 million for investments in non-operating assets and $15.4 million for other cash outflows. The aggregate of the preceding items represents a net cash outflow of $62.9 million. Changes in working capital and debt as indicated on the statement of cash flows exclude the working capital and debt of acquired companies at the time of acquisition. First and second quarter 2001 cash from operations was affected by an expected and annually recurring seasonal first-half increase in accounts receivable (although there was no significant increase in receivable days). Typically, accounts receivable reach their lowest level at year-end. During the first six months of 2001, the Company repurchased approximately 1.4 million of its shares in open-market transactions for retirement. At June 30, 2001, the Company had remaining Board of Directors authorization to repurchase up to an additional 26 million shares of its common stock for retirement in open-market transactions or otherwise. During March 2001, the Company issued $800 million of 6 3/4% notes due 2006. Early in the second quarter of 2001, the Company increased its shelf registration to $2 billion. In early May 2001, the Company issued $500 million of 6% notes due 2004. In July 2001, the Company issued Zero Coupon Convertible Senior Notes due 2031 ("Notes"), resulting in gross proceeds of approximately $750 million. Note H of the Consolidated Financial Statement sets forth additional information regarding these notes. Proceeds from the debt issuances were used principally to retire outstanding variable-rate bank debt. 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 $750 million of debt and equity securities. The Company is subject to lawsuits and claims pending or asserted with respect to matters generally arising in the ordinary course of business. Note J of the 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. 12 15 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") approved Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires, among other things, that the purchase method of accounting for business combinations be used for all business combinations initiated after June 30, 2001. SFAS 142 addresses the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 requires, among other things, that goodwill and other indefinite-lived intangible assets no longer be amortized and that such assets be tested for impairment at least annually. SFAS 142 is effective for fiscal years beginning after December 15, 2001. Effective January 1, 2002, the Company will no longer amortize goodwill, although periodic tests for possible impairment will be made. For the remainder of 2001, the Company will continue to amortize goodwill related to business combinations that occurred prior to July 1, 2001. The Company is currently evaluating the impact these standards will have on its financial statements. OUTLOOK FOR THE COMPANY The Company believes that net sales of its North American businesses have generally bottomed early in the 2001 second quarter. Although the Company expects that economic recovery in North America may be slow and gradual, the Company should begin to show at least moderate improvement in future quarters. The Company anticipates that its European businesses may continue to experience economic softness for the next several quarters. 13 16 PART II. OTHER INFORMATION MASCO CORPORATION ITEM 1. LEGAL PROCEEDINGS Information regarding this item is set forth in Note J 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 July 31, 2001, the Company completed its previously announced acquisition of Milgard Manufacturing, Inc. The shareholders of the acquired company received 16,700 unregistered shares of Masco convertible preferred stock as part of the consideration paid for this acquisition. The convertible preferred shares carry the same attributes as Masco common stock, including voting rights and dividends. The Company relied on the exemption from registration under Section 4(2) of the Securities Act of 1933. ITEMS 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 16, 2001 at which the stockholders voted upon the election of three nominees for Class I Directors; approval of an amendment to Article Fourth of the Company's Certificate of Incorporation; and ratification of the selection of PricewaterhouseCoopers LLP as independent auditors for the Company for 2001. The following is a tabulation of the votes.
Election of Class I Directors: For Withheld ----------- ----------- Peter A. Dow 356,498,507 4,439,285 Anthony F. Earley, Jr. 356,472,431 4,465,361 Wayne B. Lyon 356,351,867 4,585,925
Approval of an Amendment to Article Fourth of the Company's Certificate of Incorporation:
Abstentions and For Against Broker Non-Votes ----------- ----------- ---------------- 341,915,233 17,548,718 1,473,841
Approval of the appointment of PricewaterhouseCoopers LLP as independent auditors for the Company for 2001:
Abstentions and For Against Broker Non-Votes ----------- ----------- ---------------- 357,954,995 1,373,341 1,263,400
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: 3.i - Restated Certificate of Incorporation of Masco Corporation and amendments thereto (filed herewith). 4.a.v.- Director's resolutions establishing the Company's 6% Notes Due 2004 (filed herewith) under the Indenture dated as of February 12, 2001 between Masco Corporation and Bank One Trust Company, National Association, as Trustee (which Indenture has been filed as an Exhibit to the Company's Form 10-K for the year ended December 31, 2000). 14 17 PART II. OTHER INFORMATION MASCO CORPORATION 4.a.vi.- First Supplemental Indenture dated as of July 20, 2001 between Masco Corporation and Bank One Trust Company, National Association, as Trustee, relating to the Company's Zero Coupon Convertible Senior Notes Due 2031 (filed herewith), to the Indenture dated as of February 12, 2001 between Masco Corporation and Bank One Trust Company, National Association, as Trustee (which Indenture has been filed as an Exhibit to the Company's Form 10-K for the year ended December 31, 2000). 12 - Computation of Ratio of Earnings to Fixed Charges (b) REPORTS ON FORM 8-K: None. 15 18 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, 2001 BY: /s/ Richard G. Mosteller ---------------------- -------------------------------------- Richard G. Mosteller Senior Vice-President - Finance (Chief Financial Officer and Authorized Signatory) 16 19 MASCO CORPORATION EXHIBIT INDEX EXHIBIT ------- Exhibit 3.i Restated Certificate of Incorporation of Masco Corporation and amendments thereto (filed herewith). Exhibit 4.a.v. Director's resolutions establishing the Company's 6% Notes Due 2004 (filed herewith) under the Indenture dated as of February 12, 2001 between Masco Corporation and Bank One Trust Company, National Association, as Trustee (which Indenture has been filed as an Exhibit to the Company's Form 10-K for the year ended December 31, 2000). Exhibit 4.a.vi. First Supplemental Indenture dated as of July 20, 2001 between Masco Corporation and Bank One Trust Company, National Association, as Trustee, relating to the Company's Zero Coupon Convertible Senior Notes Due 2031 (filed herewith), to the Indenture dated as of February 12, 2001 between Masco Corporation and Bank One Trust Company, National Association, as Trustee (which Indenture has been filed as an Exhibit to the Company's Form 10-K for the year ended December 31, 2000). Exhibit 12 Computation of Ratio of Earnings to Fixed Charges