-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R/B5AcX2aYcvrG8KLcrlgUnBgDQcpUW52ryCAgxJT+VlE3S2umRKdlaTakJdqLoY PVpE3olR3Lvz/MUXOc3vBA== 0000950124-01-503973.txt : 20020410 0000950124-01-503973.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950124-01-503973 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MASCO CORP /DE/ CENTRAL INDEX KEY: 0000062996 STANDARD INDUSTRIAL CLASSIFICATION: MILLWOOD, VENEER, PLYWOOD & STRUCTURAL WOOD MEMBERS [2430] IRS NUMBER: 381794485 STATE OF INCORPORATION: DE FISCAL YEAR END: 0405 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05794 FILM NUMBER: 1785252 BUSINESS ADDRESS: STREET 1: 21001 VAN BORN RD CITY: TAYLOR STATE: MI ZIP: 48180 BUSINESS PHONE: 3132747400 MAIL ADDRESS: STREET 1: 21001 VAN BORN ROAD CITY: TAYLOR STATE: MI ZIP: 48180 FORMER COMPANY: FORMER CONFORMED NAME: MASCO SCREW PRODUCTS CO DATE OF NAME CHANGE: 19731025 10-Q 1 k66076e10-q.txt FORM 10-Q FOR QUARTER ENDING SEPTEMBER 30, 2001 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 September 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 November 1, 2001 ----- --------------------- Common Stock, Par Value $1 Per Share 458,919,000 MASCO CORPORATION INDEX
PAGE NO. -------- Part I. Financial Information Item 1. Financial Statements: Condensed Consolidated Balance Sheet - September 30, 2001 and December 31, 2000 1 Condensed Consolidated Statement of Operations for the Three Months and Nine Months Ended September 30, 2001 and 2000 2 Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2001 and 2000 3 Notes to Condensed Consolidated Financial Statements 4-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-18 Part II. Other Information and Signature 19-20
MASCO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED) SEPTEMBER 30, DECEMBER 31, ASSETS 2001 2000 ------ ------------ ------------ Current assets: Cash and cash investments $ 146,310 $ 169,430 Accounts and notes receivable, net 1,319,470 1,099,150 Inventories: Raw material 391,940 348,420 Finished goods 425,190 377,270 Work in process 184,420 187,270 ---------- ---------- 1,001,550 912,960 Prepaid expenses and other 149,660 126,620 ---------- ---------- Total current assets 2,616,990 2,308,160 Equity investment in affiliates 86,580 87,460 Securities of Furnishings International Inc. 112,550 533,670 Property and equipment, net 2,006,220 1,906,840 Acquired goodwill, net 3,516,620 2,190,770 Other noncurrent assets 874,270 717,100 ---------- ---------- Total assets $9,213,230 $7,744,000 ========== ========== LIABILITIES ----------- Current liabilities: Notes payable $ 194,940 $ 210,950 Accounts payable 286,450 250,460 Accrued liabilities 683,260 616,640 ---------- ---------- Total current liabilities 1,164,650 1,078,050 Long-term debt 3,823,050 3,018,240 Deferred income taxes and other 118,830 221,650 Commitments and contingencies --- --- ---------- ---------- Total liabilities 5,106,530 4,317,940 ---------- ---------- SHAREHOLDERS' EQUITY -------------------- Common stock, par value $1 per share Authorized shares: 900,000,000 458,820 444,750 Preferred stock, par value $1 per share Authorized shares: 1,000,000 20 --- Paid-in capital 1,351,660 631,120 Retained earnings 2,469,220 2,519,940 Other comprehensive income (loss) (173,020) (169,750) ---------- ---------- Total shareholders' equity 4,106,700 3,426,060 ---------- ---------- Total liabilities and shareholders' equity $9,213,230 $7,744,000 ========== ==========
See notes to condensed consolidated financial statements. 1 MASCO CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ----------- Net sales $2,247,000 $1,893,000 $6,243,000 $5,510,000 Cost of sales 1,530,300 1,265,700 4,296,900 3,681,100 ---------- ---------- ---------- ---------- Gross profit 716,700 627,300 1,946,100 1,828,900 Selling, general and administrative expenses 361,900 309,400 1,049,900 911,100 Amortization of acquired goodwill 23,900 17,700 70,000 47,800 ---------- ---------- ---------- ---------- Operating profit 330,900 300,200 826,200 870,000 ---------- ---------- ---------- ---------- Other income (expense), net: Interest expense (61,600) (50,700) (179,300) (137,200) Equity earnings from MascoTech, Inc. --- 3,000 --- 11,500 Impairment charge for: Securities of Furnishings International Inc. (460,000) --- (460,000) --- Other non-operating assets (70,000) --- (70,000) --- Other, net (21,100) 45,000 (7,700) 123,600 ---------- ---------- ---------- ---------- (612,700) (2,700) (717,000) (2,100) ---------- ---------- ---------- ---------- Income (loss) before income taxes (281,800) 297,500 109,200 867,900 Income taxes (credit) (98,800) 110,100 38,200 321,100 ---------- ---------- ---------- ---------- Net income (loss) $ (183,000) $ 187,400 $ 71,000 $ 546,800 ========== ========== ========== ========== Earnings (loss) per share: Basic $(.39) $ .42 $ .16 $1.24 ===== ===== ===== ===== Diluted $(.39) $ .41 $ .15 $1.21 ===== ===== ===== ===== Cash dividends per share: Declared $--- $ .13 $ .26 $ .37 ===== ===== ===== ===== Paid $ .13 $ .12 $ .39 $ .36 ===== ===== ===== =====
See notes to condensed consolidated financial statements. 2 MASCO CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30 -------------------------- 2001 2000 ----------- ------------ CASH FLOWS FROM (FOR) OPERATING ACTIVITIES: Cash provided by operations $ 707,070 $ 574,410 Increase in receivables (164,740) (117,800) Increase in inventories (26,140) (95,340) Increase in accounts payable and accrued liabilities, net 36,870 131,180 ----------- ----------- Total cash from operating activities 553,060 492,450 ----------- ----------- CASH FLOWS FROM (FOR) FINANCING ACTIVITIES: Issuance of 6.75% notes 800,000 --- Issuance of 6% notes 500,000 --- Issuance of Zero Coupon Convertible Senior notes 750,000 --- Increase in principally bank debt 412,340 971,210 Payment of principally bank debt (2,015,020) (299,020) Proceeds from sale of Company common stock to key employees --- 156,000 Purchase of Company common stock for: Retirement (69,180) (77,750) Long-term stock incentive award plan (30,440) (38,090) Cash dividends paid (179,540) (163,480) ----------- ----------- Total cash from financing activities 168,160 548,870 ----------- ----------- CASH FLOWS FROM (FOR) INVESTING ACTIVITIES: Acquisition of companies, net of cash acquired (573,650) (512,150) Capital expenditures (200,590) (253,500) Investments in non-operating assets, net (121,750) (256,700) Proceeds from disposition of business 189,630 --- Other, net (37,980) (68,520) ----------- ----------- Total cash (for) investing activities (744,340) (1,090,870) ----------- ----------- CASH AND CASH INVESTMENTS: Decrease for the period (23,120) (49,550) At January 1 169,430 230,780 ----------- ----------- At September 30 $ 146,310 $ 181,230 =========== ===========
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 September 30, 2001 and the results of operations for the three months and nine months ended September 30, 2001 and 2000 and changes in cash flows for the nine months ended September 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 per share results. 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 NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------- ------------------ 2001 2000 2001 2000 --------- -------- -------- -------- Numerator: Net income (loss) $(183,000) $187,400 $ 71,000 $546,800 ========= ======== ======== ======== Denominator: Basic shares (based on weighted average) 468,100 448,000 456,900 442,900 Add: Contingent shares --- 8,000 14,500 7,500 Stock option dilution --- 1,200 2,800 1,500 --------- -------- -------- -------- Diluted shares 468,100 457,200 474,200 451,900 ========= ======== ======== ========
Income (loss) per share amounts for the first three quarters of 2001 do not total to the per share amounts for the nine months ended September 30, 2001 due to the timing of capital stock issuances and acquisitions for which capital stock is contingently issuable. For the three months ended September 30, 2001, 20.8 million contingent shares and 2.5 million stock option shares were not included in the computation of diluted (loss) per share due to their antidilutive effect. For the three months and nine months ended September 30, 2001, 19.4 million and 6.5 million, respectively, of weighted average shares issuable upon the redemption of the Zero Coupon Convertible Senior Notes due 2031 were not included in the computation of diluted earnings (loss) per share due to their antidilutive effect. 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 in the United States and Canada. In July 2001, the Company completed the acquisition of Milgard Manufacturing, Inc., a leading manufacturer of windows and sliding doors in the western United States, headquartered in Tacoma, Washington. BSI Holdings is included in the Installation and Other Services segment and Milgard Manufacturing is included in the Other Specialty Products segment. 4 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note C - Concluded: The results of these purchase acquisitions, together with several smaller acquisitions, are included in the consolidated financial statements from the date of acquisition. Had these companies been acquired and had Inrecon (see Note D) been disposed of effective January 1, 2000, pro forma unaudited consolidated net sales and net income would have approximated $6,373 million and $84 million and $6,330 million and $582 million for the nine months ended September 30, 2001 and 2000, respectively. Pro forma unaudited consolidated diluted earnings per share would have increased by $.02 for the nine months ended September 30, 2001 and would have declined slightly for the nine months ended September 30, 2000. 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 and 16,700 convertible preferred shares (convertible into 16.7 million common shares)) with an aggregate value of $785 million. The convertible preferred shares carry the same attributes as Company common stock, including voting rights and dividends and have been treated as if converted at a ratio of 1 share of preferred stock to 1,000 shares of common stock for basic and diluted earnings per share computations. The excess of the aggregate acquisition costs for these purchase acquisitions over the fair value of net assets acquired, totaling approximately $1.4 billion, represents acquired goodwill; amortization expense for this acquired goodwill will approximate $15 million for the twelve months ended December 31, 2001. Certain recent acquisition agreements provide for the payment of additional consideration in either cash or stock, contingent upon whether certain conditions are met. Such additional cash consideration totaled approximately $30 million during the first nine months of 2001, and has been recorded as additional acquired goodwill. The additional shares that are contingently issuable have been included in the computation of diluted earnings per share for the nine months ended September 30, 2001. 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 sold its subsidiary, Inrecon, for approximate book value. Inrecon, with annual sales of approximately $200 million, is 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 and was included in the Installation and Other Services segment. The Company originally anticipated the remaining dispositions to be substantially complete by the end of 2001; due to various factors, including the weakened economic environment and uncertainty in financial markets since the September 11, 2001 tragedy, the disposition process is taking longer than anticipated. 5 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) E. Other income (expense), net consists of the following, in thousands:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 --------------------- --------------------- 2001 2000 2001 2000 --------- -------- --------- --------- Interest expense $ (61,600) $(50,700) $(179,300) $(137,200) Equity earnings from MascoTech, Inc. --- 3,000 --- 11,500 Equity earnings, other 3,000 900 3,700 2,600 Income from cash and cash investments 1,900 1,100 4,700 3,300 Other interest income 100 16,100 33,500 45,100 Impairment charge for: Securities of Furnishings International Inc. (460,000) --- (460,000) --- Other non-operating assets (70,000) --- (70,000) --- Other, net (26,100) 26,900 (49,600) 72,600 --------- -------- --------- --------- $(612,700) $ (2,700) $(717,000) $ (2,100) ========= ======== ========= =========
Other interest income for the nine months ended September 30, 2001 included $30.3 million of interest income from indebtedness of Furnishings International Inc. (no such interest income was recorded for the three months ended September 30, 2001); other interest income for the three months and nine months ended September 30, 2000 included $13.2 million and $38.8 million, respectively, of such income. In the third quarter of 2001, the Company recorded an aggregate $530 million pre-tax, non-cash charge for the write-down of certain investments, including the Company's investments in Furnishings International Inc. and other non-operating assets. The furniture industry in general and Furnishings International in particular has been adversely affected in recent months by the ongoing economic weakness in its markets, the bankruptcies of a number of major retailers and import competition. In light of these factors, the Company reevaluated the carrying value of its investment in Furnishings International and recorded a $460 million pre-tax, non-cash charge to write down this investment to its estimated current fair value. At September 30, 2001, after giving effect to such charge, the Company's investment in Furnishings International was approximately $130 million. The Company also recorded a $70 million pre-tax, non-cash charge for an other-than-temporary decline in the fair value of certain of the Company's, principally technology-related, investments. Approximately $310 million of the above asset write-down may create a capital loss carryforward when realized for tax purposes. The Company believes it is more likely than not that such capital loss carryforward will be utilized before its expiration, principally through future income and gains from non-operating assets and other identified tax-planning strategies, including the potential sale of certain operating assets. As a result, a valuation allowance was not recorded in the third quarter of 2001 against the approximate $115 million deferred tax asset generated from the write-down of these investments. Other, net expense for the three months and nine months ended September 30, 2001 increased $53.0 million and $122.2 million, respectively, as compared with other, net income for the three months and nine months ended September 30, 2000. The increase in other, net expense is principally due to a reduction in income and gains, net regarding certain non-operating assets. 6 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note E - Concluded: Interest expense for the three months and nine months ended September 30, 2001 increased $10.9 million and $42.1 million, respectively, compared with interest expense for the three months and nine months ended September 30, 2000. The increase in interest expense pertains to borrowings primarily related to recent acquisitions. 7 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) F. The following table presents information about the Company by segment and geographic area, in millions.
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 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 (3): Cabinets and Related Products $ 688 $ 659 $ 76 $ 94 $1,918 $1,945 $ 217 $ 282 Plumbing Products 458 463 72 84 1,326 1,425 187 270 Installation and Other Services 417 227 66 35 1,292 609 182 88 Decorative Architectural Products 401 396 81 86 1,161 1,080 225 229 Other Specialty Products 283 148 60 26 546 451 87 76 ------ ------ ------ ------ ------ ------ ------ ------ Total $2,247 $1,893 $ 355 $ 325 $6,243 $5,510 $ 898 $ 945 ====== ====== ====== ====== ====== ====== ====== ====== The Company's operations by geographic area were: North America $1,904 $1,574 $ 319 $ 286 $5,308 $4,520 $ 800 $ 819 International, principally Europe 343 319 36 39 935 990 98 126 ------ ------ ------ ------ ------ ------ ------ ------ Total, as above $2,247 $1,893 355 325 $6,243 $5,510 898 945 ====== ====== ====== ====== General corporate expense, net (24) (25) (72) (75) ------ ------ ------ ------ Operating profit, after general corporate expense 331 300 826 870 Other income (expense), net (613) (3) (717) (2) ------ ------ ------ ------ Income (loss) before income taxes $ (282) $ 297 $ 109 $ 868 ====== ====== ====== ======
(1) Intra-company sales among segments were not material. (2) Operating profit shown is after the inclusion of amortization of acquired goodwill. (3) Significant increases in assets of certain segments in the first nine months of 2001 were as follows: Installation and Other Services - $557 million and Other Specialty Products - $1,015 million. 8 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) G. The Company's total comprehensive income (loss) was as follows, in thousands:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------- --------------------- 2001 2000 2001 2000 --------- -------- --------- --------- Net income (loss) $(183,000) $187,400 $ 71,000 $ 546,800 Other comprehensive income (loss), net 74,010 (80,240) (3,270) (170,100) --------- -------- --------- --------- Total comprehensive income (loss) $(108,990) $107,160 $ 67,730 $ 376,700 ========= ======== ========= =========
H. In March 2001, the Company issued $800 million of 6 3/4% notes due 2006. In 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%. Holders of the Notes in the aggregate can convert the Notes into approximately 24 million 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 including July 20, 2002. 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 bank debt. The Company currently has on file with the Securities and Exchange Commission an unallocated shelf registration for up to a combined $750 million of debt and equity securities. In November 2001, the Company amended and restated its $1.25 billion 364-day Revolving Credit Agreement, which was due to expire in November 2001, to become a $1.0 billion 364-day Revolving Credit Agreement which expires in November 2002. Interest is payable on borrowings under this agreement based on various floating rate options as selected by the Company. I. On January 1, 2001, Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" became effective. The adoption of 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 possible impairment at least annually. SFAS 142 is effective for fiscal years beginning after December 15, 2001. 9 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note I - Concluded: 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; goodwill related to business combinations completed subsequent to July 1, 2001 is not being amortized. The Company is currently evaluating whether these standards will have any additional impact on its financial statements. In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS 143 requires the recognition of the fair value of an asset retirement obligation in the period in which the obligation is incurred. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS 143 should not have a material effect on the Company's financial statements. In August 2001, the FASB approved SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 broadens the presentation of discontinued operations to include any component of an entity which comprises operations and cash flows that can be clearly distinguished from the rest of the entity. The adoption of SFAS 144, which is effective January 1, 2002, should not have a material effect on the Company's financial statements. 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. 10 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONCLUDED) Note J - Concluded: 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 is continuing. Proceedings in the California actions are being 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. 11 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRD QUARTER 2001 AND THE FIRST NINE MONTHS 2001 VERSUS THIRD QUARTER 2000 AND THE FIRST NINE 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 ---------------- September 30 2001 2001 ------------------ vs. vs. 2001 2000 2000 2000(A) ------------------ ----------------- NET SALES: Cabinets and Related Products $ 688 $ 659 4% (1%) Plumbing Products 458 463 (1%) (2%) Installation and Other Services 417 227 84% 10% Decorative Architectural Products 401 396 1% 2% Other Specialty Products 283 148 91% (7%) ------ ------ Total $2,247 $1,893 19% 0% ====== ====== North America $1,904 $1,574 21% 1% International, principally Europe 343 319 8% (5%) ------ ------ Total, as above $2,247 $1,893 19% 0% ====== ====== Nine Months Ended September 30, ------------------ 2001 2000 ------------------ NET SALES: Cabinets and Related Products $1,918 $1,945 (1%) (3%) Plumbing Products 1,326 1,425 (7%) (7%) Installation and Other Services 1,292 609 112% 10% Decorative Architectural Products 1,161 1,080 8% 3% Other Specialty Products 546 451 21% (8%) ------ ------ Total $6,243 $5,510 13% (2%) ====== ====== North America $5,308 $4,520 17% (1%) International, principally Europe 935 990 (6%) (11%) ------ ------ Total, as above $6,243 $5,510 13% (2%) ====== ====== Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2001 2000 2001 2000 ------------------ ----------------- OPERATING PROFIT MARGIN:(B) Cabinets and Related Products 11.0% 14.3% 11.3% 14.5% Plumbing Products 15.7% 18.1% 14.1% 18.9% Installation and Other Services 15.8% 15.4% 14.1% 14.5% Decorative Architectural Products 20.2% 21.7% 19.4% 21.2% Other Specialty Products 21.2% 17.6% 15.9% 16.9% North America 16.8% 18.2% 15.1% 18.1% International, principally Europe 10.5% 12.2% 10.5% 12.7% Total 15.8% 17.2% 14.4% 17.2%
(A) Percentage change in sales excluding purchase acquisitions and divestitures. (B) Before general corporate expense, but including goodwill amortization. 12 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NET SALES Net sales for the three month and nine month periods ended September 30, 2001 increased 19 percent and 13 percent, respectively, from the comparable periods in 2000. Excluding purchase acquisitions and divestitures, net sales were flat for the three months ended September 30, 2001 and decreased 2 percent for the nine month period ended September 30, 2001, respectively, over the comparable periods of the prior year. The Company continued to experience weak economic and business conditions in its markets in the third quarter of 2001, including a softness 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 nine months ended September 30, 2001 from the comparable periods of the prior year of 1 percent and 3 percent, respectively, in the Cabinets and Related Products segment, 2 percent and 7 percent, respectively, in the Plumbing Products segment, and 7 percent and 8 percent, respectively, in the Other Specialty Products segment. For the three months and nine months ended September 30, 2001, net sales of the Company's Installation and Other Services segment increased 10 percent in each period, largely due to broader geographic U.S. market penetration, and net sales of the Company's Decorative Architectural Products segment increased 2 percent and 3 percent, respectively. Net sales from North American operations increased 1 percent for the third quarter of 2001 and decreased 1 percent for the nine months ended September 30, 2001 as compared with the comparable periods of 2000. Net sales from International operations decreased 5 percent for the third quarter of 2001 and 11 percent for the nine months ended September 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 2 percent and 5 percent for the three months and nine months ended September 30, 2001, respectively. OPERATING PROFIT MARGIN Cost of sales as a percentage of sales increased to 68.1 percent and 68.8 percent for the three months and nine months ended September 30, 2001, from 66.9 percent and 66.8 percent for the comparable periods in 2000. Including amortization of acquired goodwill ($23.9 million and $70.0 million for the three months and nine months ended September 30, 2001, respectively), selling, general and administrative expenses as a percentage of sales for the three months and nine months ended September 30, 2001 were 17.2 percent and 17.9 percent, respectively, as compared with 17.3 percent and 17.4 percent for the comparable periods in 2000. Excluding amortization of acquired goodwill, selling, general and administrative expenses as a percentage of sales were 16.1 percent and 16.8 percent for the three months and nine months ended September 30, 2001, respectively, as compared with 16.3 percent and 16.5 percent for the comparable periods of the prior year. 13 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's operating profit margins, before general corporate expense, were 15.8 percent and 14.4 percent for the three months and nine months ended September 30, 2001, respectively, as compared with 17.2 percent for the comparable periods in 2000. Operating profit margins, after general corporate expense, were 14.7 percent and 13.2 percent for the three months and nine months ended September 30, 2001, respectively, as compared with 15.9 percent and 15.8 percent, respectively, for the comparable periods in 2000. The Company's operating profit margin decreased in the third quarter and the nine months ended September 30, 2001, as compared with the comparable periods in 2000, due principally to higher cost of sales as a percentage of sales and higher goodwill amortization related to recent acquisitions, offset in part by the higher operating profit margins of certain recent acquisitions. The increase in cost of sales as a percentage of sales for the three months and nine months ended September 30, 2001 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 for the three months and nine months ended September 30, 2001 was also negatively influenced by overall product mix, including a higher percentage of lower gross-margin Installation and Other Services sales to total sales, the lower results of the Company's Plumbing Products segment and European businesses and new product launch costs in the Cabinets and Related Products segment. 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. These initiatives contributed to a modest increase in unit sales volume in the third quarter of 2001 over the comparable period of 2000. The Company anticipates that, in total, these initiatives should lower the cost of sales percentage in future periods. The increase in selling, general and administrative expenses as a percent of sales for the nine months ended September 30, 2001 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 nine months ended September 30, 2001 included $30.3 million of interest income from indebtedness of Furnishings International Inc. (no such interest income was recorded for the three months ended September 30, 2001); other interest income for the three months and nine months ended September 30, 2000 included $13.2 million and $38.8 million, respectively, of such income. 14 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In the third quarter of 2001, the Company recorded an aggregate $530 million pre-tax, non-cash charge for the write-down of certain investments, including the Company's investments in Furnishings International Inc. and other non-operating assets. The furniture industry in general and Furnishings International in particular has been adversely affected in recent months by the ongoing economic weakness in its markets, the bankruptcies of a number of major retailers and import competition. In light of these factors, the Company reevaluated the carrying value of its investment in Furnishings International and recorded a $460 million pre-tax, non-cash charge to write down this investment to its estimated current fair value. At September 30, 2001, after giving effect to such charge, the Company's investment in Furnishings International was approximately $130 million. The Company also recorded a $70 million pre-tax, non-cash charge for an other-than-temporary decline in the fair value of certain of the Company's, principally technology-related, investments. Approximately $310 million of the above asset write-down may create a capital loss carryforward when realized for tax purposes. The Company believes it is more likely than not that such capital loss carryforward will be utilized before its expiration, principally through future income and gains from non-operating assets and other identified tax-planning strategies, including the potential sale of certain operating assets. As a result, a valuation allowance was not recorded in the third quarter of 2001 against the approximate $115 million deferred tax asset generated from the write-down of these investments. Other, net expense for the three months and nine months ended September 30, 2001 increased $53.0 million and $122.2 million, respectively, as compared with other, net income for the three months and nine months ended September 30, 2000. The increase in other, net expense is primarily due to a reduction in income and gains, net regarding certain non-operating assets. Interest expense for the three months and nine months ended September 30, 2001 increased $10.9 million and $42.1 million, respectively, compared with interest expense for the three months and nine months ended September 30, 2000. The increase in interest expense pertains to borrowings primarily related to recent acquisitions. NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE Net income (loss) for the three months and nine months ended September 30, 2001 was $(183.0) million and $71.0 million, respectively, as compared with $187.4 million and $546.8 million, respectively, for the comparable periods of 2000. Diluted earnings (loss) per share for the three months and nine months ended September 30, 2001 were $(.39) and $.15, respectively, as compared with $.41 and $1.21, respectively, for the comparable periods of 2000. Net income (loss) for the three months and nine months ended September 30, 2001 includes an after-tax non-cash charge of $344 million ($530 million pre-tax) for the write-down of certain investments; excluding the effect of such charge, net income for the three months and nine months ended September 30, 2001 was $161 million and $415 million, respectively. The Company's effective tax rate for both the three months and nine months ended September 30, 2001 was 35.0 percent, as compared with 37.0 percent for both of the comparable periods of the prior year. The Company estimates that its effective tax rate should approximate 35.0 percent for 2001. 15 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER FINANCIAL INFORMATION The Company's current ratio was 2.2 to 1 at September 30, 2001, as compared with 2.1 to 1 at December 31, 2000. The Company's ratio of earnings to fixed charges was 1.5 at September 30, 2001, as compared to 4.9 at December 31, 2000, as reported in Exhibit 12 filed with this Quarterly Report on Form 10-Q; excluding the pre-tax, non-cash charge of $530 million for the write-down of certain investments recorded in the third quarter of 2001, such ratio was 4.1 at September 30, 2001. For the nine months ended September 30, 2001, cash of $553.1 million was provided by operating activities. Cash provided by financing activities was $168.2 million, including $447.3 million from a net increase in long-term debt. Cash used for financing activities included $69.2 million for the acquisition of Company common stock in open-market transactions, $30.4 million for the acquisition of Company common stock for the Company's long-term stock incentive award plan, and $179.5 million for cash dividends paid. Cash used for investing activities was $744.3 million, including $573.7 million for acquisitions, $200.6 million for capital expenditures, $121.7 million for investments in non-operating assets, net and $37.9 million for other cash outflows. Cash provided by investing activities included $189.6 million of proceeds from the disposition of a business. The aggregate of the preceding items represents a net cash outflow of $23.1 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. During the first nine months of 2001, the Company repurchased approximately 3.3 million of its shares in open-market transactions for retirement. At September 30, 2001, the Company had remaining Board of Directors authorization to repurchase up to an additional 24 million shares of its common stock for retirement in open-market transactions or otherwise. In March 2001, the Company issued $800 million of 6 3/4% notes due 2006. In 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 Condensed Consolidated Financial Statements sets forth additional information regarding these Notes. Proceeds from the debt issuances were used principally to retire outstanding bank debt. The Company currently has on file with the Securities and Exchange Commission an unallocated shelf registration for up to a combined $750 million of debt and equity securities; the Company intends to increase the shelf registration in the fourth quarter of 2001 to an aggregate of $2 billion. In November 2001, the Company amended and restated its $1.25 billion 364-day Revolving Credit Agreement, which was due to expire in November 2001, to become a $1.0 billion 364-day Revolving Credit Agreement which expires in November 2002. Interest is payable on borrowings under this agreement based on various floating rate options as selected by the Company. In early November 2001, the Company increased the quarterly cash dividend to $.135 from $.13 per common share. This marks the 43rd consecutive year in which dividends have been increased. 16 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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. 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 possible 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; goodwill related to business combinations completed subsequent to July 1, 2001 is not being amortized. The Company is currently evaluating whether these standards will have any additional impact on its financial statements. In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS 143 requires the recognition of the fair value of an asset retirement obligation in the period in which the obligation is incurred. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS 143 should not have a material effect on the Company's financial statements. In August 2001, the FASB approved SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 broadens the presentation of discontinued operations to include any component of an entity which comprises operations and cash flows that can be clearly distinguished from the rest of the entity. The adoption of SFAS 144, which is effective January 1, 2002, should not have a material effect on the Company's financial statements. OUTLOOK FOR THE COMPANY The Company believes, even if present negative business and economic conditions continue in 2002, that earnings from operations for the full year 2002 should exceed such earnings for 2001. 17 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 may involve risks and uncertainties that are difficult to predict and may cause the Company's actual results to differ materially from the results discussed in such forward-looking statements. Readers should consider that various factors, including changes in general economic conditions, nature of competition, relationships with key customers, industry consolidation, influence of e-commerce and other factors may affect the Company's projected performance. 18 MASCO CORPORATION PART II. OTHER INFORMATION 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. ITEMS 2 THROUGH 5 ARE NOT APPLICABLE. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS: 12 - Computation of Ratio of Earnings to Fixed Charges (B) REPORTS ON FORM 8-K: None. 19 MASCO CORPORATION PART II. OTHER INFORMATION, CONCLUDED SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MASCO CORPORATION (Registrant) DATE: NOVEMBER 13, 2001 BY: /s/ Robert B. Rosowski ----------------------- ------------------------------------- Robert B. Rosowski Vice-President-Controller and Treasurer (Chief Accounting Officer and Authorized Signatory) 20 MASCO CORPORATION EXHIBIT INDEX EXHIBIT ------- Exhibit 12 Computation of Ratio of Earnings to Fixed Charges EX-12 3 k66076ex12.txt COMPUTATION OF EARNIGNS EXHIBIT 12 MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS) ---------------------------------------------------------------- NINE MONTHS ENDED YEAR ENDED DECEMBER 31 SEPT. 30, ------------------------------------------------------ 2001 2000 1999 1998 1997 1996 -------- ---------- ---------- ---------- -------- -------- EARNINGS BEFORE INCOME TAXES AND FIXED CHARGES: Income before income taxes* $109,200 $ 893,400 $ 904,100 $ 905,500 $733,800 $575,600 Deduct/add equity in undistributed (earnings)/loss of fifty-percent-or- less-owned companies 190 (9,640) (18,720) (24,070) (19,470) (12,310) Add interest on indebtedness, net 177,110 193,000 121,520 115,700 94,780 78,790 Add amortization of debt expense 5,490 2,430 1,350 2,130 2,310 1,400 Add estimated interest factor for rentals 17,290 18,760 16,080 11,430 9,270 7,120 -------- ---------- ---------- ---------- -------- -------- Earnings before income taxes and fixed charges $309,280 $1,097,950 $1,024,330 $1,010,690 $820,690 $650,600 ======== ========== ========== ========== ======== ======== FIXED CHARGES: Interest on indebtedness $184,070 $ 202,630 $ 129,860 $ 119,750 $ 97,910 $ 81,250 Amortization of debt expense 5,490 2,430 1,350 2,130 2,310 1,400 Estimated interest factor for rentals 17,290 18,760 16,080 11,430 9,270 7,120 -------- ---------- ---------- ---------- -------- -------- $206,850 $ 223,820 $ 147,290 $ 133,310 $109,490 $ 89,770 ======== ========== ========== ========== ======== ======== Ratio of earnings to fixed charges 1.5 4.9 7.0 7.6 7.5 7.2 === === === === === ===
* Income before income taxes for the nine months ended September 30, 2001 includes a $530 million pre-tax, non-cash charge for the write-down of certain investments. -----END PRIVACY-ENHANCED MESSAGE-----