-----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, HY2YJDD9QxbAcHl5GhVKk6pkAJiN7ZcQUObP7ZgbL/K2/Utv82XN/4hlT/tL7767 p72k1xd8i+T2Pi6hLBmujQ== 0000950124-06-002528.txt : 20060505 0000950124-06-002528.hdr.sgml : 20060505 20060505140047 ACCESSION NUMBER: 0000950124-06-002528 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060505 DATE AS OF CHANGE: 20060505 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: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05794 FILM NUMBER: 06812119 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 k05021e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED MARCH 31, 2006 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006 COMMISSION FILE NUMBER: 1-5794 MASCO CORPORATION (Exact name of Registrant as Specified in Charter) DELAWARE 38-1794485 (State or Other Jurisdiction (IRS Employer of Incorporation) Identification No.)
21001 VAN BORN ROAD, TAYLOR, MICHIGAN 48180 (Address of Principal Executive Offices) (Zip Code)
(313) 274-7400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes No - --- --- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large accelerated X Accelerated Non-accelerated --- --- --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes x No - --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Shares Outstanding at May 1, 2006 ----- --------------------------------- Common stock, par value $1.00 per share 397,200,000
MASCO CORPORATION INDEX
PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets - March 31, 2006 and December 31, 2005 1 Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2006 and 2005 2 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 3 Notes to Condensed Consolidated Financial Statements 4-15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16-21 Item 4. Controls and Procedures 22 PART II. OTHER INFORMATION 23-24 Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 6. Exhibits Signature
MASCO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) MARCH 31, 2006 AND DECEMBER 31, 2005 (IN MILLIONS EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, 2006 2005 --------- ------------ ASSETS Current assets: Cash and cash investments $ 682 $ 1,964 Accounts and notes receivable, net 1,965 1,716 Prepaid expenses and other 316 316 Inventories: Raw material 463 427 Finished goods 617 525 Work in process 176 175 ------- ------- 1,256 1,127 ------- ------- Total current assets 4,219 5,123 Property and equipment, net 2,228 2,173 Goodwill 4,189 4,171 Other intangible assets, net 304 307 Other assets 815 785 ------- ------- Total assets $11,755 $12,559 ======= ======= LIABILITIES Current liabilities: Notes payable $ 1,179 $ 832 Accounts payable 945 837 Accrued liabilities 1,242 1,225 ------- ------- Total current liabilities 3,366 2,894 Long-term debt 2,780 3,915 Deferred income taxes and other 927 902 ------- ------- Total liabilities 7,073 7,711 ------- ------- Commitments and contingencies SHAREHOLDERS' EQUITY Common shares, par value $1 per share Authorized shares: 1,400,000,000; issued and outstanding: 2006 - 400,404,000; 2005 - 419,040,000 400 419 Paid-in capital -- -- Retained earnings 3,932 4,286 Accumulated other comprehensive income 350 328 Less: Restricted stock awards -- (185) ------- ------- Total shareholders' equity 4,682 4,848 ------- ------- Total liabilities and shareholders' equity $11,755 $12,559 ======= =======
See notes to condensed consolidated financial statements. 1 MASCO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (IN MILLIONS EXCEPT PER COMMON SHARE DATA)
THREE MONTHS ENDED MARCH 31, --------------- 2006 2005 ------ ------ Net sales $3,186 $2,914 Cost of sales 2,306 2,086 ------ ------ Gross profit 880 828 Selling, general and administrative expenses 523 495 (Income) regarding litigation settlement -- (2) ------ ------ Operating profit 357 335 ------ ------ Other income (expense), net: Interest expense (64) (59) Other, net 34 37 ------ ------ (30) (22) ------ ------ Income from continuing operations before income taxes, minority interest and cumulative effect of accounting change, net 327 313 Income taxes 113 101 ------ ------ Income from continuing operations before minority interest and cumulative effect of accounting change, net 214 212 Minority interest 6 5 ------ ------ Income from continuing operations before cumulative effect of accounting change, net 208 207 (Loss) income from discontinued operations, net of income taxes (1) 24 Cumulative effect of accounting change, net (3) -- ------ ------ Net income $ 204 $ 231 ====== ====== Earnings per common share: Basic: Income from continuing operations before cumulative effect of accounting change, net $ .51 $ .48 (Loss) income from discontinued operations, net of income taxes -- .06 Cumulative effect of accounting change, net (.01) -- ------ ------ Net income $ .50 $ .53 ====== ====== Diluted: Income from continuing operations before cumulative effect of accounting change, net $ .51 $ .47 (Loss) income from discontinued operations, net of income taxes -- .06 Cumulative effect of accounting change, net (.01) -- ------ ------ Net income $ .50 $ .52 ====== ====== Cash dividends per common share: Declared $ .22 $ .20 ====== ====== Paid $ .20 $ .18 ====== ======
See notes to condensed consolidated financial statements. 2 MASCO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (IN MILLIONS)
THREE MONTHS ENDED MARCH 31, ---------------- 2006 2005 ------- ------ CASH FLOWS FROM (FOR) OPERATING ACTIVITIES: Cash provided by operations $ 314 $ 294 (Increase) in receivables (256) (163) (Increase) in inventories (125) (72) Increase in accounts payable and accrued liabilities, net 98 60 ------- ------ Net cash from operating activities 31 119 ------- ------ CASH FLOWS FROM (FOR) FINANCING ACTIVITIES: Increase in debt 39 1 Payment of debt (12) (28) Retirement of debt (827) -- Purchase of Company common stock (324) (465) Issuance of Company common stock 7 10 Cash dividends paid (84) (80) ------- ------ Net cash (for) financing activities (1,201) (562) ------- ------ CASH FLOWS FROM (FOR) INVESTING ACTIVITIES: Capital expenditures (110) (58) Purchases of marketable securities (79) (52) Proceeds from marketable securities 90 112 (Cash paid for) proceeds from disposition of: Other investments, net (1) 9 Businesses, net of cash disposed -- 63 Other, net (13) 9 ------- ------ Net cash (for) from investing activities (113) 83 ------- ------ Effect of exchange rates on cash and cash investments 1 6 ------- ------ CASH AND CASH INVESTMENTS: Decrease for the quarter (1,282) (354) Cash at businesses held for sale -- 38 At January 1 1,964 1,256 ------- ------ At March 31 $ 682 $ 940 ======= ======
See notes to condensed consolidated financial statements. 3 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to present fairly its financial position as at March 31, 2006 and the results of operations and changes in cash flows for the three months ended March 31, 2006 and 2005. The condensed consolidated balance sheet at December 31, 2005 was derived from audited financial statements. Certain prior-year amounts have been reclassified to conform to the 2006 presentation in the condensed consolidated financial statements. The results of operations related to 2005 discontinued operations have been separately stated in the accompanying condensed consolidated statements of income for the three months ended March 31, 2005. In the Company's condensed consolidated statements of cash flows for the three months ended March 31, 2005, the 2005 cash flows of discontinued operations are not separately classified. STOCK OPTIONS AND AWARDS. On January 1, 2003, the Company elected to prospectively change its method of accounting for stock-based compensation using the transition method defined by Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition Disclosure - an Amendment of SFAS No. 123," and implemented the fair value method for determining stock-based compensation expense. Accordingly, options granted, modified or settled subsequent to January 1, 2003 were accounted for using the fair value method, and options granted prior to January 1, 2003 were accounted for using the intrinsic value method. The following table illustrates the pro forma effect on net income and earnings per common share for the three months ended March 31, 2005, as if the fair value method were applied to all previously issued, outstanding and unvested stock options, in millions except per common share data:
THREE MONTHS ENDED MARCH 31, 2005 ------------------ Net income, as reported $231 Add: Stock-based employee compensation expense included in reported net income, net of tax 13 Deduct: Stock-based employee compensation expense, net of tax (13) Stock-based employee compensation expense determined under the fair value method for stock options granted prior to 2003, net of tax (2) ---- Pro forma net income $229 ==== Earnings per common share: Basic as reported $.53 Basic pro forma $.53 Diluted as reported $.52 Diluted pro forma $.52
4 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) B. Effective January 1, 2006, the Company adopted SFAS No. 123R, "Share-Based Payment," using the Modified Prospective Application ("MPA") method. The MPA method requires the Company to record expense for unvested stock options that were awarded prior to January 1, 2003 through the remaining vesting periods. The MPA method does not require the restatement of prior-year information. The Company is currently evaluating which tax election method it will use to determine the tax windfall or shortfall associated with stock options; such evaluation will be completed by the fourth quarter of 2006. The Company's 2005 Long Term Stock Incentive Plan (the "2005 Plan") replaced the 1991 Long Term Stock Incentive Plan (the "1991 Plan") in May 2005 and provides for the issuance of stock-based incentives in various forms. At March 31, 2006, outstanding stock-based incentives were in the form of restricted long-term stock awards, stock options, phantom stock awards and stock appreciation rights. Additionally, the Company's 1997 Non-Employee Directors Stock Plan (the "1997 Plan") provides for the payment of part of the compensation to non-employee Directors in Company common stock. Pre-tax compensation expense related to stock-based incentives was as follows for the three months ended March 31, 2006 and 2005, in millions:
2006 2005 ---- ---- Restricted long-term stock awards $18 $11 Stock options 9 8 Stock appreciation rights and phantom stock awards 2 1 --- --- Total $29 $20 === ===
The income tax benefit related to stock-based compensation expense recognized for the three months ended March 31, 2006 was $11 million. In the first quarter of 2006, the Company recognized additional pre-tax expense of $7 million ($4 million after tax, or $.01 per common share) related to the adoption of SFAS No. 123R. In addition, in the first quarter of 2006, the Company recorded expense of $3 million (net of income tax benefit of $2 million) as a cumulative effect of accounting change, net. At March 31, 2006, a total of 23,978,900 shares and 382,300 shares of Company common stock were available under the 2005 Plan and the 1997 Plan, respectively, for the granting of stock options and other restricted long-term stock incentive awards. RESTRICTED LONG-TERM STOCK AWARDS Long-term stock awards are granted to key employees and non-employee Directors of the Company and do not cause net share dilution inasmuch as the Company continues the practice of repurchasing and retiring an equal number of shares on the open market. 5 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note B - continued: The following table summarizes the long-term stock award activity for the three months ended March 31, 2006, shares in millions: 2006 ---- Non-vested stock award shares at January 1, 2006 9 Granted 1 Vested (1) Forfeited -- --- Non-vested stock award shares at March 31, 2006 9 === Weighted average grant date fair value (per share) $30
The Company continues to measure compensation cost for stock awards at the market price of the Company's common stock at the grant date. Effective January 1, 2006, such cost is being expensed ratably over the shorter of the vesting period of the stock awards, typically 10 years, or the length of time until the grantee becomes retirement-eligible at age 65. For stock awards granted prior to January 1, 2006, such cost is being expensed over the vesting period of the stock awards, typically 10 years, or for executive grantees that are, or will become, retirement-eligible, the expense is being recognized over five years. There was $219 million of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of seven years. There was $185 million of unrecognized compensation cost which was included as a reduction of shareholders' equity at December 31, 2005; such cost was reclassified on January 1, 2006 in accordance with SFAS No. 123R. As of January 1, 2006, the Company estimated a forfeiture rate for long-term stock awards and applied that rate to all previously expensed stock awards; such application did not result in a change in expense to be recorded as a cumulative effect of accounting change. The total market value (at the vesting date) of stock award shares which vested during the three months ended March 31, 2006 was $34 million. STOCK OPTIONS Stock options are granted to key employees and non-employee Directors of the Company. The exercise price equals the market price of Company common stock at the grant date. These options generally become exercisable (vest ratably) over five years beginning on the first anniversary from the date of grant and expire no later than 10 years after the grant date. Restoration stock options under the 1991 Plan become exercisable six months from the date of grant. The 2005 Plan does not permit the granting of restoration stock options, except for restoration options resulting from options previously granted under the 1991 Plan. The Company granted 136,000 of primarily restoration stock option shares in the first quarter of 2006 with a grant date exercise price range of $29-$33 per share. In the first quarter of 2006, 250,000 stock option shares were forfeited. 6 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note B - continued: A summary of the status of the Company's stock options for the three months ended March 31, 2006 is presented below, shares in millions:
2006 ------------ Option shares outstanding, January 1 27 Weighted average exercise price $ 26 Option shares granted, including restoration options -- Weighted average exercise price $ 31 Option shares exercised 1 Aggregate intrinsic value on date of exercise $ 7 million Weighted average exercise price $ 21 Option shares forfeited -- Weighted average exercise price $ 27 Option shares outstanding, March 31 26 Weighted average exercise price $ 26 Weighted average remaining option term (in years) 6 Option shares vested and expected to vest, March 31 26 Weighted average exercise price $ 26 Aggregate intrinsic value (A) $171 million Weighted average remaining option term (in years) 6 Option shares exercisable (vested), March 31 15 Weighted average exercise price $ 25 Aggregate intrinsic value (A) $118 million Weighted average remaining option term (in years) 4
(A) Aggregate intrinsic value is computed using the Company's stock price at March 31, 2006 less the exercise price (grant date price) multiplied by the number of shares. The Company measures compensation cost for stock options using a Black-Scholes option pricing model. The expense for unvested stock options at January 1, 2006 is based on grant-date fair value of those awards as calculated for pro forma disclosures under SFAS No. 123. Effective January 1, 2006, such cost is being expensed ratably over the shorter of the vesting period of the stock options, typically five years, or the length of time until the grantee becomes retirement-eligible at age 65. For stock options granted prior to January 1, 2006, such cost is being expensed ratably over the vesting period of the stock options, typically five years. As of March 31, 2006, there was $95 million of aggregate unrecognized compensation expense (using the Black-Scholes option pricing model) related to unvested stock options; such options had a weighted average vesting period of over three years. As of January 1, 2006, the Company estimated a forfeiture rate for stock options and applied that rate to all previously expensed stock options; such application did not result in a change in expense to be recorded as a cumulative effect of accounting change. 7 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note B - concluded: The following table summarizes the weighted average grant date fair values of option shares granted in the three months ended March 31, 2006 and the assumptions used to estimate those values using a Black-Scholes option pricing model:
2006 ------- Weighted average grant date fair value $ 6.33 Risk-free interest rate 4.70% Dividend yield 2.60% Volatility factor 26.00% Expected option life 4 years
PHANTOM STOCK AWARDS AND STOCK APPRECIATION RIGHTS The Company issues phantom stock awards and stock appreciation rights ("SARs") to certain non-U.S. employees. Phantom stock awards are linked to the value of the Company's common stock on the date of grant and are settled in cash upon vesting, typically over 10 years. The Company continues to account for phantom stock awards as liability awards; the compensation cost is initially measured as the market price of the Company's common stock at the grant date and is expensed ratably over the vesting period. The liability is remeasured and adjusted at the end of each reporting period until the award is fully-vested and paid to the employees. For the three months ended March 31, 2006, the Company granted 91,000 shares of phantom stock awards with an aggregate fair value of $3 million and paid $2 million in cash to settle phantom stock awards. SARs are linked to the value of the Company's common stock and are settled in cash upon exercise. On January 1, 2006, the Company changed its method of accounting for SARs, in accordance with the provisions of SFAS No. 123R, from the intrinsic value method to the fair value method. The fair value method requires outstanding SARs to be classified as liability awards and valued using a Black-Scholes model at the grant date; such fair value is expensed ratably over the vesting period, typically five years. The liability is remeasured and adjusted at the end of each reporting period until the SARs are exercised and payment is made to the employees or the SARs expire. As a result of implementing this change, the Company recorded expense of $3 million (net of income tax benefit of $2 million) as a cumulative effect of accounting change, net; the Company also recorded expense of $2 million related to the valuation of SARs at March 31, 2006. The Company did not grant any SARs in the first three months of 2006. The following table summarizes information related to phantom stock awards and SARs at March 31, 2006, in millions:
PHANTOM STOCK STOCK APPRECIATION AWARDS RIGHTS ------------- ------------------ Accrued compensation cost liability $12 $11 Unrecognized compensation cost $ 4 $ 4 Outstanding 1 1
8 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) C. The changes in the carrying amount of goodwill for the three months ended March 31, 2006, by segment, were as follows, in millions:
BALANCE BALANCE DEC. 31, 2005 OTHER(A) MAR. 31, 2006 ------------- -------- ------------- Cabinets and Related Products $ 547 $ 4 $ 551 Plumbing Products 461 3 464 Installation and Other Services 1,718 -- 1,718 Decorative Architectural Products 311 1 312 Other Specialty Products 1,134 10 1,144 ------ --- ------ Total $4,171 $18 $4,189 ====== === ======
(A) Other principally includes foreign currency translation adjustments. Other indefinite-lived intangible assets included registered trademarks of $254 million at both March 31, 2006 and December 31, 2005. The carrying value of the Company's definite-lived intangible assets was $50 million and $53 million at March 31, 2006 and December 31, 2005, respectively (net of accumulated amortization of $61 million and $58 million at March 31, 2006 and December 31, 2005, respectively) and principally included customer relationships and non-compete agreements. D. Depreciation and amortization expense was $63 million and $62 million for the three months ended March 31, 2006 and 2005, respectively. E. The Company has maintained investments in marketable securities and a number of private equity funds, principally as part of its tax planning strategies, as any gains enhance the utilization of any current and future tax capital losses. Included in other assets were the following financial investments, in millions:
MARCH 31, DECEMBER 31, 2006 2005 --------- ------------ Marketable securities $111 $115 Private equity funds 266 262 Metaldyne Corporation 97 94 TriMas Corporation 46 46 Other investments 12 12 ---- ---- Total $532 $529 ==== ====
The Company's investments in marketable securities at March 31, 2006 and December 31, 2005 were as follows, in millions:
PRE-TAX ----------------------- UNREALIZED UNREALIZED RECORDED COST BASIS GAINS LOSSES BASIS ---------- ---------- ---------- -------- March 31, 2006 $87 $24 $-- $111 December 31, 2005 $94 $21 $-- $115
The Company had investments in 26 different marketable securities at March 31, 2006. 9 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note E - concluded: Income from financial investments, net, included in other, net, within other income (expense), net, was as follows, in millions:
THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ---- ---- Realized gains from marketable securities $ 8 $27 Realized losses from marketable securities (3) (1) Dividend income from marketable securities 1 1 Income from other investments, net 1 15 Dividend income from other investments 5 3 --- --- Income from financial investments, net $12 $45 === ===
F. In the first quarter of 2006, the Company retired $800 million of 6.75% notes due March 15, 2006. The Company reclassified to current liabilities from long-term debt, $854 million of Zero Coupon Convertible Notes, as the next put option date is January 20, 2007, and $300 million of floating-rate notes due March 2007. G. The following is a reconciliation of the Company's retained earnings, in millions:
MARCH 31, DECEMBER 31, 2006 2005 --------- ------------ Balance at January 1 $4,286 $3,880 Net income 204 940 Shares issued 6 -- Shares retired: Repurchased (313) (197) Surrendered (10) -- Cash dividends declared (90) (337) Stock-based compensation expense 25 -- Reclassification of stock award activity (176) -- ------ ------ Balance at end of period $3,932 $4,286 ====== ======
The Company's total comprehensive income was as follows, in millions:
THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ---- ---- Net income $204 $231 Other comprehensive income (loss): Cumulative translation adjustments, net 20 (87) Unrealized gain (loss) on marketable securities, net 2 (28) ---- ---- Total comprehensive income $226 $116 ==== ====
The unrealized gain (loss) on marketable securities, net, is net of income tax (benefit) of $1 million and $(16) million for the three months ended March 31, 2006 and 2005, respectively. 10 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note G - concluded: The components of accumulated other comprehensive income were as follows, in millions:
MARCH 31, DECEMBER 31, 2006 2005 --------- ------------ Cumulative translation adjustments, net $ 439 $ 419 Unrealized gain on marketable securities, net 15 13 Minimum pension liability, net (104) (104) ----- ----- Accumulated other comprehensive income $ 350 $ 328 ===== =====
The unrealized gain on marketable securities, net, is reported net of income tax of $9 million and $8 million at March 31, 2006 and December 31, 2005, respectively. The minimum pension liability, net is reported net of income tax benefit of $61 million at both March 31, 2006 and December 31, 2005. H. The Company owns 64 percent of Hansgrohe AG. The aggregate minority interest, net of dividends, of $96 million and $89 million at March 31, 2006 and December 31, 2005, respectively, is recorded in the caption deferred income taxes and other liabilities on the Company's condensed consolidated balance sheets. I. The net periodic pension cost for the Company's qualified defined-benefit pension plans was as follows, in millions:
THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ---- ---- Service cost $ 5 $ 4 Interest cost 11 10 Expected return on plan assets (12) (10) Amortization of net loss 2 2 ---- ---- Net periodic pension cost $ 6 $ 6 ==== ====
Net periodic pension cost for the Company's non-qualified unfunded supplemental defined-benefit pension plans was $4 million and $5 million for the three months ended March 31, 2006 and 2005, respectively. 11 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) J. The following table presents information about the Company by segment and geographic area, in millions:
THREE MONTHS ENDED MARCH 31, ---------------------------------- 2006 2005 2006 2005 ------ ------ ---- ---- NET SALES(A) OPERATING PROFIT --------------- ---------------- The Company's operations by segment were: Cabinets and Related Products $ 852 $ 783 $121 $116 Plumbing Products 797 760 66 79 Installation and Other Services 806 693 95 80 Decorative Architectural Products 409 371 77 59 Other Specialty Products 322 307 46 45 ------ ------ ---- ---- Total $3,186 $2,914 $405 $379 ====== ====== ==== ==== The Company's operations by geographic area were: North America $2,669 $2,369 $348 $319 International, principally Europe 517 545 57 60 ------ ------ ---- ---- Total $3,186 $2,914 405 379 ====== ====== General corporate expense, net (48) (46) Income regarding litigation settlement (B) -- 2 ---- ---- Operating profit 357 335 Other income (expense), net (30) (22) ---- ---- Income from continuing operations before income taxes, minority interest and cumulative effect of accounting change, net $327 $313 ==== ====
(A) Intra-segment sales were not material. (B) The income regarding litigation settlement relates to litigation discussed in Note M related to the Company's subsidiary, Behr Process Corporation, which is included in the Decorative Architectural Products segment. K. Other, net, which is included in other income (expense), net, included the following, in millions:
THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ---- ---- Income from cash and cash investments $14 $ 5 Other interest income 1 1 Income from financial investments, net (Note E) 12 45 Other items, net 7 (14) --- ---- Total other, net $34 $ 37 === ====
Other items, net, for the first quarter of 2006 primarily included $4 million of currency transaction gains. Other items, net, for the first quarter of 2005 included $13 million of currency transaction losses. 12 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) L. The following are reconciliations of the numerators and denominators used in the computations of basic and diluted earnings per common share, in millions:
THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ---- ---- Numerator (basic and diluted): Income from continuing operations before cumulative effect of accounting change, net $208 $207 (Loss) income from discontinued operations, net of income taxes (1) 24 Cumulative effect of accounting change, net (3) -- ---- ---- Net income $204 $231 ==== ==== Denominator: Basic common shares (based on weighted average) 406 434 Add: Contingent common shares 3 4 Stock option dilution 2 5 ---- ---- Diluted common shares 411 443 ==== ====
At March 31, 2006, the Company did not include any common shares related to the Zero Coupon Convertible Senior Notes ("Notes") in the calculation of diluted earnings per common share, as the price of the Company's common stock at March 31, 2006 did not exceed the equivalent accreted value of the Notes. Additionally, 12.9 million common shares and 0.4 million common shares for the three months ended March 31, 2006 and 2005, respectively, related to stock options were excluded from the computation of diluted earnings per common share due to their antidilutive effect. Effective January 1, 2006, the Company changed its method of calculating the dilutive effect of stock options in accordance with the provisions of SFAS No. 123R. Such calculation now includes the unrecognized compensation expense associated with unvested stock options. In the first quarter of 2006, the Company repurchased and retired approximately 10 million shares of Company common stock, for cash aggregating $324 million. At March 31, 2006, the Company had 19 million shares of its common stock remaining under the March 2005 Board of Directors repurchase authorization. M. The Company is subject to lawsuits and pending or asserted claims with respect to matters generally arising in the ordinary course of business. As the Company reported in previous filings, late in the second half of 2002, the Company and its subsidiary, Behr Process Corporation, agreed to two Settlements (the National Settlement and the Washington State Settlement) to resolve all class action lawsuits pending in the United States involving certain exterior wood coating products formerly manufactured by Behr. The Company expects that the evaluation, processing and payment of claims for both the National Settlement and the Washington State Settlement should be completed in 2006. 13 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note M - concluded: As previously disclosed, several lawsuits have been brought against the Company and a number of its insulation installation companies in the federal courts in Atlanta, Georgia, and Ft. Meyers, Florida, alleging that certain practices violate provisions of federal and state antitrust laws; the complaints are requesting class action certification. The Company is vigorously defending these cases and believes that the conduct of the Company and its insulation installation companies, which have been the subject of these lawsuits, has not violated any antitrust laws. As previously disclosed, a lawsuit has been brought against the Company and its Milgard Manufacturing subsidiary alleging design defects in certain Milgard aluminum windows; the complaint is requesting class action certification. The Company is vigorously defending the case and believes that its window products have not been manufactured with the alleged design defects. As previously disclosed, European governmental authorities are investigating possible anticompetitive business practices relating to the plumbing and heating industries in Europe. The investigations involve a number of European companies, including certain of the Company's European manufacturing divisions and a number of other large businesses. In addition, several private antitrust lawsuits have been filed in the United States against the Company and several other companies that are being investigated, which appear to be an outgrowth of the European investigations. The Company believes that it will not incur material liability as a result of the matters that are subject to these investigations or as a result of any such lawsuits. N. The following is a reconciliation of the Company's warranty liability, in millions:
MARCH 31, DECEMBER 31, 2006 2005 --------- ------------ Balance at January 1 $105 $100 Accruals for warranties issued during the period 16 67 Accruals related to pre-existing warranties 1 1 Settlements made (in cash or kind) during the period (14) (57) Other, net (including foreign exchange impact) (1) (6) ---- ---- Balance at end of period $107 $105 ==== ====
O. In April 2006, the Company completed the sale of two relatively small businesses, the results of which will be included in continuing operations through the date of sale; aggregate net sales for these businesses were $46 million for the year ended December 31, 2005. Cambridge Brass is a supplier of plumbing fittings in North America and was included in the Plumbing Products segment. Faucet Queens is a supplier of home hardware and repair products to food and drug stores in North America and was included in the Other Specialty Products segment. Gross proceeds from the sale of these businesses was approximately $49 million; total assets and liabilities were $52 million and $6 million, respectively, at March 31, 2006. These businesses had combined net sales and operating profit of $11 million and $1 million, respectively, for the three months ended March 31, 2006. In the first quarter of 2006, the Company recognized, in discontinued operations, $1 million of additional expenses related to the disposition of businesses completed in 2005. 14 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONCLUDED) P. As part of the Company's strategy of value creation, the Company announced a plant closure in the Plumbing Products segment in January 2006. In the first quarter of 2006, the Company incurred $17 million of costs and charges (primarily accelerated depreciation and severance expense) associated with this plant closure and other profit improvement programs in the Plumbing Products segment. The Company expects to incur additional costs throughout 2006 and currently anticipates that total costs for the full-year will approximate $70 million. 15 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST QUARTER 2006 VERSUS FIRST QUARTER 2005 SALES AND OPERATIONS The following table sets forth the Company's net sales and operating profit margins by business segment and geographic area, dollars in millions:
THREE MONTHS ENDED PERCENT INCREASE MARCH 31, (DECREASE) ------------------ ---------------- 2006 2005 2006 VS. 2005 ------ ------ ---------------- NET SALES: Cabinets and Related Products $ 852 $ 783 9% Plumbing Products 797 760 5% Installation and Other Services 806 693 16% Decorative Architectural Products 409 371 10% Other Specialty Products 322 307 5% ------ ------ Total $3,186 $2,914 9% ====== ====== North America $2,669 $2,369 13% International, principally Europe 517 545 (5%) ------ ------ Total $3,186 $2,914 9% ====== ======
THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ---- ---- OPERATING PROFIT MARGINS: (A) Cabinets and Related Products 14.2% 14.8% Plumbing Products 8.3% 10.4% Installation and Other Services 11.8% 11.5% Decorative Architectural Products 18.8% 15.9% Other Specialty Products 14.3% 14.7% North America 13.0% 13.5% International, principally Europe 11.0% 11.0% Total 12.7% 13.0% Operating profit margins, as reported 11.2% 11.5%
(A) Before general corporate expense, net, of $48 million for the three months ended March 31, 2006. Before general corporate expense, net, of $46 million and income regarding the litigation settlement related to the Decorative Architectural Products segment of $2 million for the three months ended March 31, 2005. 16 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company reports its financial results in accordance with generally accepted accounting principles ("GAAP") in the United States. However, the Company believes that certain non-GAAP performance measures and ratios, used in managing the business, may provide users of this financial information with additional meaningful comparisons between current results and results in prior periods. Non-GAAP performance measures and ratios should be viewed in addition to, and not as an alternative for, the Company's reported results. NET SALES Net sales in the first quarter of 2006 increased nine percent from the comparable period in 2005. Excluding results from acquisitions, net sales also increased nine percent (including a two percent decrease relating to the effect of currency translation) compared with 2005. The following table reconciles reported net sales to net sales excluding acquisitions and the effect of currency translation, in millions:
THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ------ ------ Net sales, as reported $3,186 $2,914 Acquisitions (6) -- ------ ------ Net sales, excluding acquisitions 3,180 2,914 Currency translation 45 -- ------ ------ Net sales, excluding acquisitions and the effect of currency translation $3,225 $2,914 ====== ======
Net sales of Cabinets and Related Products increased nine percent in the first quarter of 2006 compared with 2005, primarily due to increased sales volume of assembled cabinets in the new construction and retail markets, offset in part by a stronger U.S. dollar which had a negative effect on the translation of local currencies of European operations included in this segment. Net sales of Plumbing Products increased five percent in the first quarter of 2006 compared with 2005, primarily due to increased sales volume through the Company's wholesale distribution channel, as well as increased sales to certain retail customers, offset in part by a stronger U.S. dollar which had a negative effect on the translation of local currencies of European operations included in this segment. Net sales of Installation and Other Services increased 16 percent in the first quarter of 2006 compared with 2005, primarily due to increased sales volume of non-insulation products, selling price increases and a continued strong new-housing market. Net sales of Decorative Architectural Products increased 10 percent in the first quarter of 2006 compared with 2005, primarily due to increased sales volume and selling price increases of paints and stains. Net sales of Other Specialty Products increased five percent in the first quarter of 2006 compared with 2005, primarily due to increased sales of doors and windows to North American new construction markets, offset in part by a stronger U.S. dollar which had a negative effect on the translation of local currencies of European operations included in this segment. 17 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net sales from North American and International operations in the first quarter of 2006 increased 13 percent and decreased five percent, respectively, compared with the first quarter of 2005. North American sales were positively affected by increased sales volume of assembled cabinets, paints and stains and installation services, as well as increased selling prices of paints and stains and installation services. For the first quarter of 2006, International sales were negatively affected by a stronger U.S. dollar, principally against the Euro, which decreased International net sales by eight percent. OPERATING MARGINS The Company's gross profit margin was 27.6 percent for the first quarter of 2006 compared with 28.4 percent for the comparable period in 2005. Selling, general and administrative expenses as a percentage of sales were 16.4 percent for the first quarter of 2006 and 17.0 percent for the comparable period of the prior year. First quarter 2006 results were positively affected by increases in certain selling prices, as well as increased sales volume of assembled cabinets, paints and stains and installation services, which partially offset commodity cost increases and a less favorable product mix in certain segments. Operating profit in 2006 was negatively affected by charges of $17 million related to the Company's profit improvement programs in the Plumbing Products segment. Operating profit for the first quarter of 2005 benefited from $2 million of income regarding the Behr litigation settlement. Operating profit margin for the Cabinets and Related Products segment for the first quarter of 2006 was 14.2 percent compared with 14.8 percent for the first quarter of 2005, and reflects continued manufacturing and distribution inefficiencies due to increased demand for assembled cabinets in North America, as well as a less favorable product mix. Operating profit margin for the Plumbing Products segment was 8.3 percent for the first quarter of 2006 compared with 10.4 percent for the first quarter of 2005. Operating profit margin in this segment was adversely affected by charges of $17 million related to the Plumbing Products profit improvement programs, as well as commodity and freight cost increases and a less favorable product mix. Operating profit margin for the Installation and Other Services segment was 11.8 percent for the first quarter of 2006 compared with 11.5 percent for the first quarter of 2005. The slight improvement in operating profit margin in this segment is primarily attributable to selling price increases, offset in part by increased sales volume of generally lower-margin, non-insulation products. Within the Installation and Other Services segment, the availability of fiberglass insulation to support the Company's installation and distribution activities continues to be constrained. The high level of demand for fiberglass insulation as a result of the continued strong new construction market has outpaced the industry's capacity to produce additional product. The Company believes that these conditions will persist through 2006 and is working with its diverse supplier base to secure the appropriate amount of material. At the current time, the Company believes that it will be able to do so, but if the Company cannot obtain the required amount of material, this could have a negative impact on its operations. Operating profit margin for the Decorative Architectural Products segment was 18.8 percent for the first quarter of 2006 compared with 15.9 percent for the first quarter of 2005. The improvement in operating profit margin is primarily due to increased selling prices, as well as higher sales volume of paints and stains which offset commodity cost increases. 18 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating profit margin for the Other Specialty Products segment was 14.3 percent for the first quarter of 2006 compared with 14.7 percent for the first quarter of 2005 and reflects a less favorable product mix. The Company's operating profit margin, as reported, was 11.2 percent for the first quarter of 2006 compared with 11.5 percent for the first quarter of 2005. Operating profit margin for the first quarter of 2006 included the negative effect of $17 million of charges related to profit improvement programs in the Plumbing Products segment. Excluding the $17 million of charges in 2006 and the $2 million of income regarding litigation settlement in 2005, operating profit margin was 11.7 percent and 11.4 percent for the first quarters of 2006 and 2005, respectively. OTHER INCOME (EXPENSE), NET Other, net, for the first quarter of 2006 included $5 million of realized gains, net, from the sale of marketable securities, dividend income of $6 million and $1 million of income from other investments, net. Other, net, also included currency transaction gains of $4 million for the first quarter of 2006. Other, net, for the first quarter of 2005 included $26 million of realized gains, net from the sale of marketable securities, dividend income of $4 million and $15 million of income from other investments, net. Other, net, also included currency transaction losses of $13 million for the first quarter of 2005. Interest expense for the first quarter of 2006 increased $5 million to $64 million compared with $59 million for the first quarter of 2005, primarily due to the issuance of fixed-rate notes in June 2005, as well as the effect of increasing interest rates. INCOME AND EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS Income and diluted earnings per common share from continuing operations before the cumulative effect of accounting change, net for the first quarter of 2006 were $208 million and $.51 per common share compared with $207 million and $.47 per common share for the comparable period of 2005, respectively. The Company's effective tax rate for the three months ended March 31, 2006 was 34.6 percent compared with 32.3 percent for the same period in 2005. The lower tax rate for the first quarter of 2005 compared to the first quarter of 2006 resulted primarily from certain adjustments to estimated tax accruals related to International operations recognized in the first quarter of 2005. The Company estimates that its effective tax rate for the full-year 2006 should approximate 34 to 35 percent. OTHER FINANCIAL INFORMATION The Company's current ratio was 1.3 to 1 and 1.8 to 1 at March 31, 2006 and December 31, 2005, respectively, due to the reclassification to current liabilities from long-term debt, $854 million of Zero Coupon Convertible Notes, as the next put option date is January 20, 2007, and $300 million of floating-rate notes due March 2007. 19 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the three months ended March 31, 2006, cash of $31 million was provided by operating activities. Cash used for financing activities was $1,201 million, and included $84 million for the payment of cash dividends, $324 million for the acquisition of Company common stock in open-market transactions and $827 million (including accrued interest) for the retirement of 6.75% notes due March 15, 2006. Cash provided by financing activities included $7 million from the issuance of Company common stock, primarily for the exercise of stock options, and $27 million from the net increase in debt. Net cash used for investing activities was $113 million, and included $110 million for capital expenditures, offset in part by $10 million of net proceeds from the sale of financial investments. First quarter 2006 cash from operations was affected by an expected and annually recurring first quarter increase in accounts receivable and inventories compared with December 31, 2005. Effective January 1, 2006, the Company adopted SFAS No. 123R, "Share-Based Payment." Note B to the Company's Condensed Consolidated Financial Statements discusses the accounting policies regarding stock options and awards. The Company is subject to lawsuits and claims pending or asserted with respect to matters generally arising in the ordinary course of business. Note M to the Condensed Consolidated Financial Statements discusses specific claims pending against the Company. The Company believes that its present cash balance, cash flows from operations and, to the extent necessary, bank borrowings and future financial market activities, are sufficient to fund its working capital and other investment needs. OUTLOOK FOR THE COMPANY In late 2005 and into 2006, the Company has experienced additional commodity cost increases; the Company believes such increases will adversely affect its 2006 operating performance. The Company has already implemented and continues to implement additional price increases for a number of its products, and believes that by the end of the first half of 2006, many of these cost increases will be largely offset by such price increases. The Company remains committed to its strategy of value creation and is focused on the simplification of its business model, cash flow generation, improvement in return on invested capital and the return of cash to shareholders through share repurchases and dividends. Consistent with this strategy, the Company is pursuing a variety of initiatives to offset cost increases and increase operating profit, including sourcing programs, the restructuring of certain of its businesses (including consolidations), manufacturing rationalization, headcount reductions and other profit improvement programs. As part of its strategy of value creation, the Company announced a plant closure in the Plumbing Products segment in January 2006. The Company incurred $17 million of costs associated with this plant closure and other profit improvement programs in the first quarter of 2006 and expects to incur additional costs throughout 2006. Implementing these initiatives should improve the Company's earnings outlook for 2007 and beyond. 20 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 involve risks and uncertainties that are difficult to predict and, accordingly, the Company's actual results may differ materially from the results discussed in such forward-looking statements. Readers should consider that various factors, including those discussed in Item 1A, "Risk Factors," the "Executive Level Overview," and "Critical Accounting Policies and Estimates" sections in the Company's Annual Report on Form 10-K and its other filings with the Securities and Exchange Commission may affect the Company's performance. The Company undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise. 21 MASCO CORPORATION ITEM 4. CONTROLS AND PROCEDURES a. Evaluation of Disclosure Controls and Procedures. The Company's principal executive officer and principal financial officer have concluded, based on an evaluation of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)), as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, that, as of March 31, 2006, the Company's disclosure controls and procedures were effective. b. Changes in Internal Control Over Financial Reporting. In connection with the evaluation of the Company's "internal control over financial reporting" that occurred during the quarter ended March 31, 2006, which is required under the Securities Exchange Act of 1934 by paragraph (d) of Exchange Rules 13a-15 or 15d-15, (as defined in paragraph (f) of Rule 13a-15), management determined that there was no change that has materially affected or is reasonably likely to materially affect internal control over financial reporting. 22 MASCO CORPORATION PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Information regarding legal proceedings involving the Company is set forth in Note M to the Company's Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report. ITEM 1A. RISK FACTORS Information regarding risk factors of the Company is set forth in Item 1A., "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2005. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The following table provides information regarding the repurchase of Company common stock for the three months ended March 31, 2006, in millions except average price paid per common share data:
Total Number of Maximum Number of Shares Purchased Shares That May Total Number Average Price as Part of Yet Be Purchased of Shares Paid Per Publicly Announced Under the Plans Period Purchased(A) Common Share Plans or Programs or Programs - ------ ------------ ------------- ------------------ ----------------- 1/1/06-1/31/06 3 $30.07 3 26 2/1/06-2/28/06 4 $30.26 3 23 3/1/06-3/31/06 4 $31.13 4 19 --- --- Total for the quarter 11 $30.54 10
(A) Includes one million shares (i) surrendered for the exercise of stock options or (ii) withheld for the payment of taxes upon the vesting of stock awards or the exercise of stock options. ITEMS 3 THROUGH 5 ARE NOT APPLICABLE. ITEM 6. EXHIBITS 12 - Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 31a - Certification by Chief Executive Officer Required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934 31b - Certification by Chief Financial Officer Required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934 32 - Certification Required by Rule 13a-14(b) or 15d-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code 23 MASCO CORPORATION PART II. OTHER INFORMATION, CONCLUDED SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MASCO CORPORATION By: /s/ Timothy Wadhams ------------------------------------ Name: Timothy Wadhams Title: Senior Vice President and Chief Financial Officer May 5, 2006 24 MASCO CORPORATION EXHIBIT INDEX
EXHIBIT - ------- Exhibit 12 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends Exhibit 31a Certification by Chief Executive Officer Required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934 Exhibit 31b Certification by Chief Financial Officer Required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934 Exhibit 32 Certification Required by Rule 13a-14(b) or 15d-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code
EX-12 2 k05021exv12.txt COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12 MASCO CORPORATION COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(DOLLARS IN MILLIONS) ----------------------------------------------------- THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------- 2006 2005 2004 2003 2002 2001 --------- ------ ------ ------ ------ ----- EARNINGS BEFORE INCOME TAXES, PREFERRED STOCK DIVIDENDS AND FIXED CHARGES: Income from continuing operations before income taxes, minority interest and cumulative effect of accounting change, net $327 $1,412 $1,542 $1,247 $ 933 $256 Deduct equity in undistributed (earnings) of fifty-percent-or- less-owned companies -- (1) (1) -- (10) (1) Add interest on indebtedness, net 63 246 214 252 226 230 Add amortization of debt expense 2 6 6 13 13 10 Add estimated interest factor for rentals 12 40 34 31 24 21 ---- ------ ------ ------ ------ ---- Earnings before income taxes, minority interest, cumulative effect of accounting change, net, fixed charges and preferred stock dividends $404 $1,703 $1,795 $1,543 $1,186 $516 ==== ====== ====== ====== ====== ==== FIXED CHARGES: Interest on indebtedness $ 64 $ 244 $ 214 $ 253 $ 225 $234 Amortization of debt expense 2 6 6 13 13 10 Estimated interest factor for rentals 12 40 34 31 24 21 ---- ------ ------ ------ ------ ---- Total fixed charges $ 78 $ 290 $ 254 $ 297 $ 262 $265 ==== ====== ====== ====== ====== ==== PREFERRED STOCK DIVIDENDS(A) $ -- $ -- $ 8 $ 16 $ 14 $ 7 ---- ------ ------ ------ ------ ---- Combined fixed charges and preferred stock dividends $ 78 $ 290 $ 262 $ 313 $ 276 $272 ==== ====== ====== ====== ====== ==== Ratio of earnings to fixed charges 5.2 5.9 7.1 5.2 4.5 1.9 ==== ====== ====== ====== ====== ==== Ratio of earnings to combined fixed charges and preferred stock dividends(B)(C) 5.2 5.9 6.9 4.9 4.3 1.9 ==== ====== ====== ====== ====== ====
(A) Represents amount of income before provision for income taxes required to meet the preferred stock dividend requirements of the Company. (B) Excluding the 2005 pre-tax income of $6 million related to the Behr litigation settlement, the non-cash, pre-tax goodwill impairment charge of $69 million and the pre-tax impairment charge of $45 million relating to financial investments, the 2004 pre-tax income of $30 million related to the Behr litigation settlement, the non-cash, pre-tax goodwill impairment charge of $112 million, and the pre-tax impairment charge of $21 million related to a marketable security, the 2003 pre-tax income of $72 million related to the Behr litigation settlement and the non-cash, pre-tax goodwill impairment charge of $53 million, the 2002 pre-tax net charge of $147 million related to the Behr litigation settlement, and the 2001 non-cash, pre-tax charge of $530 million, the Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends would be 6.2, 7.2, 4.9, 4.8 and 3.8 for the years 2005, 2004, 2003, 2002 and 2001, respectively. (C) The year 2001 includes goodwill amortization expense. 25 EX-31.(A) 3 k05021exv31wxay.txt SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31A MASCO CORPORATION CERTIFICATION REQUIRED BY RULE 13A-14(A) OR 15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 I, Richard A. Manoogian, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Masco Corporation (the Registrant); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 5, 2006 By: /s/ Richard A. Manoogian ------------------------------------ Richard A. Manoogian Chief Executive Officer 26 EX-31.(B) 4 k05021exv31wxby.txt SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31B MASCO CORPORATION CERTIFICATION REQUIRED BY RULE 13A-14(A) OR 15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 I, Timothy Wadhams, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Masco Corporation (the Registrant); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 5, 2006 By: /s/ Timothy Wadhams ------------------------------------ Timothy Wadhams Senior Vice President and Chief Financial Officer 27 EX-32 5 k05021exv32.txt SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER EXHIBIT 32 MASCO CORPORATION CERTIFICATION REQUIRED BY RULE 13A-14(B) OR 15D-14(B) OF THE SECURITIES EXCHANGE ACT OF 1934 AND SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE The certification set forth below is being submitted in connection with the Masco Corporation Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006 (the "Report") for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code. Richard A. Manoogian, the Chief Executive Officer, and Timothy Wadhams, the Senior Vice President and Chief Financial Officer, of Masco Corporation, each certifies that, to the best of his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and results of operations of Masco Corporation. Date: May 5, 2006 /s/ Richard A. Manoogian ---------------------------------------- Name: Richard A. Manoogian Title: Chief Executive Officer /s/ Timothy Wadhams Date: May 5, 2006 ---------------------------------------- Name: Timothy Wadhams Title: Senior Vice President and Chief Financial Officer 28 -----END PRIVACY-ENHANCED MESSAGE-----