01—Abstract
Summary
Summary of the 10-K filed March 16, 2005. Cited figures are marked; the original filing is the authoritative source.
Masco Corporation manufactures, sells and installs home improvement and building products, with emphasis on brand name products holding leadership positions in their markets.
Net sales for 2004 were $12.07 billiona, up from $10.57 billion in 2003, and reported operating profit was $1.57 billion versus $1.48 billion. Income from continuing operations was $930 million, or $2.04 per diluted share, compared with $790 million, or $1.61 per diluted share, in 2003. Results were reduced by a non-cash, pre-tax goodwill impairment charge of $168 million, mainly tied to European businesses, while a $30 million pre-tax Behr litigation settlement income partly offset this.
Net income was $893 millionb. The company reported a material weakness in internal control over financial reporting as of December 31, 2004, tied to the integration of two business units. PricewaterhouseCoopers issued an adverse opinion on internal control, though it concluded the weakness did not result in a material misstatement of the 2004 financial statements.
Management's disclosure controls were concluded to be not effective, and the company describes remediation steps in progress. Management also reports incremental external costs of approximately $34 millionc associated with Section 404 compliance. Looking ahead, management expects mid-to-high-single-digit organic growth in 2005 and record sales and earnings, while noting that rising commodity costs and a delay in price increases will weigh on first-half 2005 earnings, largely in the first quarter.
The company plans at least 12 million share repurchases in 2005, and it reported cash and cash investments of $1.26 billiond at year-end. Home Depot accounted for approximately 22 percent of 2004 sales.
02—Key points
Key Highlights
- Net sales rose to $12.07 billion in 2004 from $10.57 billion in 2003, and diluted income from continuing operations per share was $2.04 versus $1.61.
- A $168 million pre-tax ($141 million after tax) non-cash goodwill impairment charge, related to certain European businesses, reduced 2004 results.
- Management concluded internal control over financial reporting was not effective at December 31, 2004, due to a material weakness; PricewaterhouseCoopers issued an adverse opinion on internal control.
- Home Depot was the largest customer, with sales of $2.6 billion, approximately 22 percent of total 2004 sales.
- The company repurchased $903 million of common stock in 2004 and expects to repurchase at least 12 million shares in 2005; the quarterly dividend was raised 12.5 percent to $.18.
- Operating cash flow was $1.45 billion in 2004, and capital expenditures were $310 million, with 2005 capital expenditures expected to approximate $400 million.
- Management expects mid-to-high-single-digit organic sales growth in 2005, but first-half 2005 earnings will be pressured by commodity costs, largely in the first quarter.
03—Questions
Frequently Asked Questions
Why did Masco's income from continuing operations rise in 2004?
Income from continuing operations increased to $930 million from $790 million in 2003. The increase reflects higher net sales of $12.07 billion, up from $10.57 billion, driven mainly by higher unit sales volumes of assembled cabinets, architectural coatings, installation services, windows and patio doors, and faucets. These gains were partly offset by a $168 million goodwill impairment charge in 2004.
What is the material weakness, and has it affected the financial statements?
The material weakness arose in connection with the integration of two business units, where the company did not maintain effective controls over the conversion of certain accounting functions. It allowed business unit management to override controls over manual journal entries and resulted in ineffective account reconciliations for accounts payable. The company determined the control deficiencies did not result in a material misstatement of its 2004 consolidated financial statements, but management concluded internal control over financial reporting was not effective as of December 31, 2004.
How concentrated is Masco's customer base?
The company is significantly dependent on The Home Depot, its largest customer, with 2004 sales of $2.6 billion, or approximately 22 percent of total sales. The company states that the loss of a substantial portion of these sales would have a material adverse impact.
What does Masco expect for 2005?
Management expects mid-to-high-single-digit organic growth in 2005, resulting in record sales and earnings. It expects housing starts to decline five percent from 2004 levels, plans share repurchases of at least 12 million common shares, and anticipates modest margin improvement. Commodity cost increases and a delay in offsetting them with price increases are expected to weigh on first-half 2005 results, largely in the first quarter.
How much did the European businesses affect 2004 results?
The company decided in the first quarter of 2004 to dispose of several European businesses that were not core to its long-term strategy, which had combined 2003 net sales in excess of $350 million. It recognized pre-tax charges of $139 million for businesses expected to be divested at a loss and a $168 million goodwill impairment charge, mostly tied to European operations. Management expects aggregate net proceeds of approximately $250 million from these dispositions, of which $172 million was received in 2004.
04—Continue