01—Abstract
Summary
Summary of the 10-K filed March 14, 2003. Cited figures are marked; the original filing is the authoritative source.
Masco Corporation (Taylor, Michigan) manufactures, sells and installs home improvement and building products, organized into five segments: Cabinets and Related Products, Plumbing Products, Installation and Other Services, Decorative Architectural Products, and Other Specialty Products.
Net sales for 2002 were $9.42 billiona, up from $8.28 billion in 2001, and the company reported 2002 net income of $589.7 million, or $1.15 diluted earnings per share, compared with $198.5 million in 2001. Results were reduced by a $146.8 million pre-tax charge for the Behr Process Corporation litigation settlement (partly offset by a $19.2 million insurance recovery) and a $116.8 million pre-tax goodwill impairment recorded as a cumulative effect of an accounting change. Operating profit before general corporate expense and the litigation charge rose to $1.58 billion from $1.14 billion in 2001.
Growth in 2002 came largely from acquisitions, most notably Service Partners LLC and the increase of the Hansgrohe AG stake from about 27% to 64%. Acquisitions contributed about $370 millionb in net sales, and the aggregate purchase price of 2002 acquisitions was about $1.2 billion. The Home Depot accounted for approximately 25 percent of 2002 sales.
Cash and cash investments rose to $1.07 billionc at year-end, and total debt as a percent of total capitalization decreased to 47 percent from 49 percent. Management described its outlook for 2003 as cautious, citing possible housing downturn risk, higher energy, insurance and pension costs, and a weaker first quarter. Investors should note several contingent items: the Behr settlements were estimated at $166 million to $206 million in total, with $166 million recorded as a liability, and the company holds a $448 million private equity fund portfolio and $446 million in marketable equity securities and bond funds.
Zero coupon convertible notes could require a repurchase of about $800 milliond in April 2004. The company increased its quarterly dividend 4% to $.14 per share, marking 44 consecutive years of dividend increases.
02—Key points
Key Highlights
- Net sales of $9.42 billion in 2002, up from $8.28 billion in 2001; North America accounted for $7.96 billion of the total.
- Net income of $589.7 million ($1.15 diluted EPS) versus $198.5 million in 2001, after a $146.8 million pre-tax Behr litigation settlement charge and a $116.8 million pre-tax goodwill impairment.
- Operating profit before general corporate expense and litigation charge of $1.58 billion, up from $1.14 billion in 2001.
- Acquisitions were a major growth driver, including Service Partners LLC and an increase in Hansgrohe AG ownership to 64%; 2002 acquisitions had aggregate net purchase price of about $1.2 billion.
- The Home Depot represented approximately 25 percent of 2002 sales, a significant customer concentration.
- Net cash from operating activities of $1.22 billion; cash and cash investments reached $1.07 billion at year-end.
- Quarterly dividend increased 4% to $.14 per share, the 44th consecutive annual increase; management characterized its 2003 outlook as cautious.
03—Questions
Frequently Asked Questions
What is the financial impact of the Behr litigation?
The company recorded a $146.8 million pre-tax charge for the litigation settlement in 2002, partly offset by a $19.2 million insurance recovery. The combined cost of the National and Washington settlements plus additional legal costs was estimated at $166 million to $206 million, with $166 million reflected as a liability. Payments were expected to begin in the second quarter of 2003 and finish by the first quarter of 2004.
How much did the company's reliance on The Home Depot affect 2002 results?
Sales to The Home Depot were $2.3 billion in 2002, approximately 25 percent of total sales. The filing states that the company believes the loss of a substantial portion of these sales would have a material adverse impact.
What are the company's main debt and liquidity positions?
Cash and cash investments were $1.07 billion at December 31, 2002. The company had a $1.25 billion five-year revolving credit agreement and a $750 million 364-day revolving credit agreement, both undrawn at year-end. Total debt as a percent of total capitalization decreased to 47 percent from 49 percent. About $800 million of Zero Coupon Convertible Notes could be put to the company in April 2004.
What does management expect for 2003?
Management said it is cautious about 2003 because of the unsettled world political situation, possible housing starts downturn, higher energy costs and moderating consumer spending. It expects operating expenses to rise, particularly for energy, insurance and pension costs, and expects first-quarter earnings to be reduced by a major new product launch and accelerated vesting of deferred compensation after the death of President Raymond F. Kennedy. The company expects its effective tax rate to be about 35 percent for 2003 and capital expenditures of about $300 million.
What happened to Masco's goodwill and investments?
On adoption of SFAS No. 142 effective January 1, 2002, the company recorded a non-cash goodwill impairment charge of $92.4 million after tax ($116.8 million pre-tax), mainly for European reporting units. Goodwill rose to $4.30 billion at year-end 2002 from $3.23 billion, largely due to acquisitions. The company also held $446 million in marketable equity securities and bond funds and $448 million in private equity funds at December 31, 2002.
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