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, 1998. 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, 1998
Common stock, par value $1 per share 339,225,000
MASCO CORPORATION
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet -
September 30, 1998 and December 31, 1997 1
Condensed Consolidated Statement of
Income for the Three Months and
Nine Months Ended September 30, 1998
and 1997 2
Condensed Consolidated Statement of
Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 3
Notes to Condensed Consolidated
Financial Statements 4-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10-15
Unaudited Information Regarding Equity
Investments for the Three Months and
Nine Months Ended September 30, 1998
and 1997 16
Part II. Other Information and Signature 17
MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1998 and December 31, 1997
(Dollars in thousands)
September 30, December 31,
ASSETS 1998 1997
Current assets:
Cash and cash investments $ 442,880 $ 441,330
Accounts and notes receivable, net 734,660 559,050
Prepaid expenses and other 111,320 111,340
Inventories:
Raw material 242,850 229,040
Finished goods 176,460 161,920
Work in process 131,410 124,040
550,720 515,000
Total current assets 1,839,580 1,626,720
Equity investment in MascoTech, Inc. 57,160 52,780
Equity investments in other affiliates 161,300 175,300
Securities of Furnishings International Inc. 423,910 393,140
Property and equipment, net 1,119,580 1,037,320
Acquired goodwill, net 974,600 729,190
Other noncurrent assets 440,070 319,310
Total assets $5,016,200 $4,333,760
LIABILITIES
Current liabilities:
Notes payable $ 261,130 $ 68,460
Accounts payable 155,210 166,310
Accrued liabilities 456,860 385,230
Total current liabilities 873,200 620,000
Long-term debt 1,292,990 1,321,470
Deferred income taxes and other 186,160 163,270
Total liabilities 2,352,350 2,104,740
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share
Authorized shares: 900,000,000 340,270 165,570
Preferred stock, par value $1 per share
Authorized shares: 1,000,000 --- ---
Paid-in capital 319,230 304,560
Retained earnings 2,026,370 1,784,370
Cumulative translation adjustments (22,020) (25,480)
Total shareholders' equity 2,663,850 2,229,020
Total liabilities and
shareholders' equity $5,016,200 $4,333,760
See notes to condensed consolidated financial statements.
1
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Three Months and Nine Months Ended September 30, 1998 and 1997
(Dollars in thousands except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
Net sales $1,122,000 $1,003,000 $3,246,000 $2,770,000
Cost of sales 717,100 634,000 2,067,700 1,751,700
Gross profit 404,900 369,000 1,178,300 1,018,300
Selling, general and
administrative expenses 216,900 205,100 637,400 573,300
Amortization of acquired
goodwill 7,400 5,400 20,200 12,900
Operating profit 180,600 158,500 520,700 432,100
Other income (expense), net:
Interest expense (22,600) (20,700) (63,800) (58,200)
Re: MascoTech, Inc.:
Equity earnings 2,700 1,300 13,000 11,600
Interest income --- 2,500 --- 7,500
Gain from change in
investment --- --- --- 29,500
Other, net 36,400 28,300 100,300 39,000
16,500 11,400 49,500 29,400
Income before income
taxes 197,100 169,900 570,200 461,500
Income taxes 71,200 68,100 216,700 184,600
Net income $ 125,900 $ 101,800 $ 353,500 $ 276,900
Earnings per share:
Basic $ .38 $ .32 $1.07 $ .87
Diluted $ .37 $ .30 $1.03 $ .84
Cash dividends per share:
Paid $ .11 $.10 $.32 $.30
Declared $ .22 $.105 $.325 $.305
See notes to condensed consolidated financial statements.
2
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1997
(Dollars in thousands)
Nine Months Ended
September 30
1998 1997
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $ 351,270 $298,940
(Increase) in receivables (144,260) (66,960)
(Increase) in inventories (37,220) (21,520)
(Increase) decrease in prepaid
expenses and other 1,730 (34,770)
Increase in current liabilities 37,060 11,400
Total cash from operating activities 208,580 187,090
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Acquisition of companies, net of cash acquired (237,600) (186,920)
Capital expenditures (122,230) (102,950)
Proceeds from sale of subsidiary 83,000 ---
Proceeds from sale of TriMas investment 54,640 ---
Collection of MascoTech note receivable --- 45,580
0ther, net (77,390) 56,090
Total cash (for) investing activities (299,580) (188,200)
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt, principally European bank debt 175,820 85,720
Issuance of 6.625% debentures 250,000 ---
Retirement of 9% notes (108,620) ---
Payment of other debt (72,150) (62,240)
Cash dividends paid (108,070) (96,930)
Other, net (44,430) (20,130)
Total cash from (for) financing activities 92,550 (93,580)
CASH AND CASH INVESTMENTS:
Increase (decrease) for the period 1,550 (94,690)
At January 1 441,330 473,730
At September 30 $ 442,880 $379,040
See notes to condensed consolidated financial statements.
3
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, of a normal
recurring nature, necessary to present fairly its financial position as
at September 30, 1998 and the results of operations for the three months
and nine months ended September 30, 1998 and 1997 and cash flows for the
nine months ended September 30, 1998 and 1997. The condensed
consolidated balance sheet at December 31, 1997 was derived from audited
financial statements. Shares and per share data in the financial
statements and notes have been adjusted to reflect the July 1998 100
percent stock distribution to shareholders and to conform with the
earnings per share presentation required under Statement of Financial
Accounting Standards ("SFAS") No. 128. Certain amounts for the prior year
periods have been reclassified to conform to the current year
presentation.
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
1998 1997 1998 1997
Numerator:
Basic (net income) $125,900 $101,800 $353,500 $276,900
Add convertible debenture
interest, net --- 1,500 700 4,400
Diluted (net income) $125,900 $103,300 $354,200 $281,300
Denominator:
Basic shares (based on
weighted average) 333,200 321,600 331,700 317,800
Add:
Contingent award shares 7,100 6,500 7,000 6,600
Stock option dilution 3,700 3,900 3,700 2,900
Convertible debentures --- 8,400 1,300 8,400
Diluted shares 344,000 340,400 343,700 335,700
C. In June 1998, the Company effected a stock split in the form of a 100
percent stock distribution (one additional share for every share held).
Following the issuance of the common shares for the stock split, the
Company declared an increased quarterly dividend of $.11 per common share
on its post-split shares. Such dividend is the equivalent of $.22 per
share quarterly prior to the stock split; the Company had been previously
paying a $.21 per share quarterly dividend on its pre-split shares.
D. In the third quarter of 1998, the Company acquired The Brugman Group, a
European manufacturer of residential hydronic radiators and heat
convectors. During the second quarter of 1998, the Company acquired
General Accessory Manufacturing Company, a manufacturer of stainless
steel commercial washroom accessories and bathroom partitions, and
Mirolin Industries, Inc., a Canadian manufacturer of tubs, shower
enclosures and whirlpools. During the first quarter of 1998, the Company
acquired Vasco Corporation, a European manufacturer of residential
decorative hydronic radiators and heat convectors. The aggregate net
purchase price of these cash acquisitions was approximately $238 million
and was principally financed with bank debt.
The above acquisitions were accounted for as purchase transactions.
Combined 1997 annual net sales of companies acquired in 1998 through
September were approximately $150 million.
4
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
E. In July 1998, the Company completed the sale of its Thermador subsidiary,
a U.S. manufacturer of kitchen appliances, with annualized 1998 net sales
of approximately $140 million. All significant accounts have been
eliminated effective from the date of disposal.
F. The Company called for redemption its $178 million of 5.25% convertible
subordinated debentures due 2012 in February 1998. Substantially all
holders exercised their right to convert these debentures into Company
common stock (at the conversion price of $21.14 per share), resulting in
the issuance of approximately 8.4 million shares of Company common stock
in February 1998.
During the first quarter of 1998, the Company retired approximately $98
million face value of its outstanding 9% notes due 2001 (of a total face
value of $175 million at December 31, 1997), using a portion of its
available cash. The Company recognized an approximate $12 million pre-
tax charge in the first quarter of 1998 related to the early retirement
of long-term debt.
During the second quarter of 1998, the Company issued $250 million of
6.625% debentures due April 2018. In October 1998, the Company issued
$100 million of 5.75% notes due October 15, 2008. The proceeds from
these financings were used for general corporate purposes, including
working capital, repayment of debt and expenditures for development
activities.
G. Other income (expense), net consists of the following, in thousands:
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
Interest expense $(22,600) $(20,700) $(63,800) $(58,200)
Re: MascoTech, Inc.:
Equity earnings 2,700 1,300 13,000 11,600
Interest income --- 2,500 --- 7,500
Gain from change in
investment --- --- --- 29,500
Equity earnings, other 4,600 1,500 8,600 5,100
Income from cash and
cash investments 6,800 4,200 15,000 12,100
Other interest income 11,500 9,900 33,400 29,100
Other, net 13,500 12,700 43,300 (7,300)
$ 16,500 $ 11,400 $ 49,500 $ 29,400
Included in other interest income is interest income from the 12% pay-in-
kind junior debt securities of Furnishings International Inc.
(approximately $336 million principal amount at December 31, 1997). Such
interest income approximated $10.6 million and $9.0 million,
respectively, for the third quarter of 1998 and 1997 and $30.8 million
and $27.0 million, respectively, for the nine months ended September 30,
1998 and 1997.
Included in other, net for the three months ended September 30, 1998 is
an approximate $30 million pre-tax gain from the sale of the Company's
Thermador subsidiary. Such gain was partly offset by pre-tax expense
aggregating approximately $26 million, principally related to the
disposition of certain non-operating assets.
Other, net for the nine months ended September 30, 1998 includes income
and gains, net regarding certain non-operating assets of $18.5 million,
as compared with similar income of $23.4 million for the comparable
period of the prior year. Also included in other, net for the nine months
ended September 30, 1998 is a first quarter $29 million pre-tax gain from
the sale of the Company's investment in TriMas Corporation to MascoTech,
Inc. in the public tender offer. Such gain was partly offset by an
approximate $12 million pre-tax charge related to the early retirement of
long-term debt.
5
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note G - Continued:
In June 1997, MascoTech, Inc., an equity affiliate, redeemed all of its
outstanding convertible preferred stock in exchange for the issuance of
approximately 10 million shares of its common stock. This issuance
reduced the Company's common equity ownership in MascoTech to 17 percent
from 21 percent, and increased the Company's equity in MascoTech's net
book value by approximately $29.5 million. As a result, the Company
recognized a pre-tax gain of approximately $29.5 million during the
second quarter of 1997.
Other, net for the nine months ended September 30, 1997 includes charges
aggregating $29.5 million, primarily for the adjustment of the Company's
Payless Cashways investment to its estimated fair value.
Interest income from MascoTech for the three months and nine months ended
September 30, 1997 resulted from the $151 million note receivable due
from MascoTech, which was paid on September 30, 1997.
H. The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," in the first quarter of 1998.
Accordingly, the Company's total comprehensive income was as follows, in
thousands:
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
Net income $125,900 $101,800 $353,500 $276,900
Other comprehensive income,
currency translation
adjustments 8,110 (4,210) 3,460 (20,740)
Total comprehensive
income $134,010 $ 97,590 $356,960 $256,160
I. During June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 is
effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999 (effective January 1, 2000 for the Company). SFAS 133
requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. The Company
anticipates that the adoption of SFAS 133 will not have a significant
effect on the Company's results of operations or its financial position.
6
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
J. For 1998, the following presents, as one entity with Masco Corporation as
the parent company, the combined unaudited financial statements of the
Company and MascoTech, Inc., and for 1997, the combined unaudited
financial statements of the Company, MascoTech and TriMas Corporation.
Intercompany transactions have been eliminated. Amounts, except per
share data, are in thousands. (MascoTech completed its acquisition of
TriMas Corporation in the first quarter of 1998.)
Combined Balance Sheet
September 30, December 31,
Assets 1998 1997
Current assets:
Cash and cash investments $ 471,900 $ 587,820
Marketable securities 2,540 45,970
Receivables 959,040 768,030
Prepaid expenses and other 108,200 85,250
Deferred income taxes 47,490 80,520
Inventories:
Raw material 300,920 286,120
Finished goods 262,000 237,340
Work in process 174,850 162,460
737,770 685,920
Total current assets 2,326,940 2,253,510
Equity and other investments in
affiliates 254,200 280,970
Securities of Furnishings International Inc. 423,910 393,140
Property and equipment, net 1,791,600 1,654,840
Acquired goodwill, net 1,728,700 925,120
0ther noncurrent assets 499,110 421,170
Total assets $7,024,460 $5,928,750
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 265,690 $ 72,340
Accounts payable 269,880 264,980
Accrued liabilities 613,240 535,300
Total current liabilities 1,148,810 872,620
Long-term debt 2,618,140 1,959,440
Deferred income taxes and other 370,660 365,470
Other interests in combined affiliates 223,000 502,200
Equity of shareholders of Masco Corporation 2,663,850 2,229,020
Total liabilities and shareholders'
equity $7,024,460 $5,928,750
7
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note J - Continued:
Three Months Ended Nine Months Ended
September 30 September 30
Combined Statement of Income 1998 1997 1998 1997
Net sales $1,518,380 $1,386,760 $4,469,580 $3,954,710
Costs and expenses, net:
Cost of sales 1,013,330 929,870 2,969,670 2,625,200
Selling, general and
administrative expenses 275,460 259,220 824,270 732,390
Other income (expense), net:
Interest expense (44,030) (29,020) (124,620) (84,230)
Other income, net 37,140 38,500 120,100 116,150
(6,890) 9,480 (4,520) 31,920
1,295,680 1,179,610 3,798,460 3,325,670
Income before income taxes
and other interests 222,700 207,150 671,120 629,040
Income taxes 82,760 85,840 251,370 262,900
Income before other
interests 139,940 121,310 419,750 366,140
Other interests in combined
affiliates 14,040 19,510 66,250 89,240
Net income $ 125,900 $ 101,800 $ 353,500 $ 276,900
Earnings per share:
Basic $ .38 $ .32 $1.07 $ .87
Diluted $ .37 $ .30 $1.03 $ .84
Cash dividends per share:
Paid $ .11 $.10 $.32 $.30
Declared $ .22 $.105 $.325 $.305
8
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (concluded)
Note J - Concluded:
Nine Months Ended
September 30
Combined Statement of Cash Flows 1998 1997
Cash Flows From (For) Operating Activities:
Cash provided by operations $ 527,240 $ 497,770
(Increase) in receivables (155,950) (84,210)
(Increase) in inventories (47,110) (14,200)
(increase) decrease in prepaid expenses 1,730 (34,770)
Decrease in marketable securities 43,430 5,590
Increase in current liabilities 66,300 12,330
Total cash from operating activities 435,640 382,510
Cash Flows From (For) Investing Activities:
Acquisition of other interests in
TriMas Corporation (869,680) ---
Acquisition of companies, net of cash acquired (277,540) (205,470)
Capital expenditures (196,480) (153,460)
Proceeds from redemption of debt by affiliate 80,500 ---
Proceeds from sale of subsidiaries 108,020 76,560
Other, net (121,350) 58,350
Total cash (for) investing activities (1,276,530) (224,020)
Cash Flows From (For) Financing Activities:
Increase in debt 1,460,470 123,120
Payment of debt (526,750) (152,830)
Cash dividends paid (115,500) (113,150)
Other, net (93,250) (42,700)
Total cash from (for) financing activities 724,970 (185,560)
Cash and Cash Investments:
(Decrease) for the period (115,920) (27,070)
At January 1 587,820 599,020
At September 30 $ 471,900 $ 571,950
9
MASCO CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 1998 AND THE FIRST NINE MONTHS 1998 VERSUS
THIRD QUARTER 1997 AND THE FIRST NINE MONTHS 1997
SALES AND OPERATIONS
Net sales increased 12 percent and 17 percent for the three months and
nine months ended September 30, 1998, respectively, from the comparable
periods in 1997. Excluding acquisition and disposition of companies during
1998 and 1997, net sales for the three months and nine months ended September
30, 1998 increased 12 percent and 11 percent, respectively, from the
comparable periods in 1997; these increases in net sales are principally due
to increases in sales volume of cabinets, faucets and other kitchen and bath
products.
Sales of Kitchen and Bath Products for the three months and nine months
ended September 30, 1998 were $834 million and $2,488 million, respectively,
representing increases of 9 percent and 15 percent, respectively, from the
comparable periods in 1997; excluding acquisition and disposition of
companies, net sales of this segment increased 12 percent and 10 percent,
respectively, from the comparable periods in 1997.
Sales of Other Specialty Products for the three months and nine months
ended September 30, 1998 were $288 million and $758 million, respectively,
representing increases of 22 percent and 24 percent, respectively, from the
comparable periods in 1997; excluding acquisition and disposition of
companies, net sales of this segment increased 12 percent and 14 percent,
respectively, from the comparable periods in 1997.
Net sales from North American operations for the three months and nine
months ended September 30, 1998 were $896 million and $2,641 million,
respectively, representing increases of 10 percent and 15 percent,
respectively, from the comparable periods in 1997; excluding acquisition and
disposition of companies, net sales from these operations increased 13 percent
and 12 percent, respectively, from the comparable periods in 1997. Net sales
from European operations for the three months and nine months ended September
30, 1998 were $226 million and $605 million, respectively, representing
increases of 22 percent and 27 percent, respectively, from the comparable
periods in 1997; excluding acquisition and disposition of companies, net sales
from these operations were relatively flat in the first two quarters of 1998
and up 6 percent in the third quarter of 1998 when compared with the prior
year periods. A stronger U.S. dollar, principally against the German Deutsche
Mark, had a negative effect on the translation of European sales for the first
six months of 1998, as compared with the first six months of 1997.
The Company's operating profit margins improved for the three months and
nine months ended September 30, 1998 from the comparable 1997 periods. Cost
of sales as a percentage of sales, influenced by product mix and acquisitions,
increased to 63.9 percent from 63.2 percent and to 63.7 percent from 63.2
percent for the third quarter and nine months ended September 30, 1998,
respectively, from the comparable periods in 1997; selling, general and
administrative expenses as a percentage of sales decreased to 19.3 percent
from 20.4 percent and to 19.6 percent from 20.7 percent for the third quarter
and nine months ended September 30, 1998, respectively, from the comparable
periods in 1997. The decrease in the selling, general and administrative
expenses percentage in 1998 includes the
10
MASCO CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
SALES AND OPERATIONS, concluded
Company's cost-control initiatives and the leveraging of fixed costs over a
higher sales base. The Company's operating profit margins, before general
corporate expense, were 18.1 percent and 18.0 percent for the third quarter
and nine months ended September 30, 1998, respectively, as compared with 17.8
percent for both of the comparable 1997 periods. Operating profit margins,
after general corporate expense, were 16.1 percent and 16.0 percent, for the
third quarter and nine months ended September 30, 1998, respectively, as
compared with 15.8 percent and 15.6 percent for the comparable 1997 periods,
respectively.
OTHER INCOME (EXPENSE), NET
Included in other income (expense), net for the third quarter and nine
months ended September 30, 1998 were equity earnings from MascoTech, Inc. of
$2.7 million and $13.0 million, respectively, as compared with equity earnings
of $1.3 million and $11.6 million for the comparable periods of the prior
year, respectively. Included in MascoTech's net income for the third quarter
and nine months ended September 30, 1997 was a $29.3 million after-tax gain
related to the delivery to the Company of 9.9 million shares of Emco Limited
common stock; the Company's recording of equity earnings from MascoTech for
the three months and nine months ended September 30, 1997 excludes the effect
of such gain due to the related-party nature of the transaction.
Included in other interest income is interest income from the 12% pay-in-
kind junior debt securities of Furnishings International Inc. (approximately
$336 million principal amount at December 31, 1997). Such interest income
approximated $10.6 million and $9.0 million, respectively, for the third
quarter of 1998 and 1997 and $30.8 million and $27.0 million, respectively,
for the nine months ended September 30, 1998 and 1997.
Included in other, net for the three months ended September 30, 1998 is
an approximate $30 million pre-tax gain from the sale of the Company's
Thermador subsidiary. Such gain was partly offset by pre-tax expense
aggregating approximately $26 million, principally related to the disposition
of certain non-operating assets.
Other, net for the nine months ended September 30, 1998 includes income
and gains, net regarding certain non-operating assets of $18.5 million, as
compared with similar income of $23.4 million for the comparable period of the
prior year. Also included in other, net for the nine months ended September
30, 1998 is a first quarter $29 million pre-tax gain from the sale of the
Company's investment in TriMas Corporation to MascoTech, Inc. in the public
tender offer. Such gain was partly offset by an approximate $12 million pre-
tax charge related to the early retirement of long-term debt.
In June 1997, MascoTech, Inc. redeemed all of its outstanding convertible
preferred stock in exchange for the issuance of approximately 10 million
shares of its common stock. This issuance reduced the Company's common equity
ownership in MascoTech to 17 percent from 21 percent, and increased the
Company's equity in MascoTech's net book value by approximately $29.5 million.
As a result, the Company recognized a pre-tax gain of approximately $29.5
million during the second quarter of 1997.
Other, net for the nine months ended September 30, 1997 includes charges
aggregating $29.5 million, primarily for the adjustment of the Company's
Payless Cashways investment to its estimated fair value.
11
MASCO CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
OTHER INCOME (EXPENSE), NET, concluded
Included in other income (expense), net for the three months and nine
months ended September 30, 1997 was $2.5 million and $7.5 million,
respectively, of interest income from the $151.4 million receivable balance
due from MascoTech, which was paid on September 30, 1997.
NET INCOME AND EARNINGS PER SHARE
Net income for the third quarter of 1998 increased 24 percent to $125.9
million from $101.8 million in the comparable 1997 period. Basic and diluted
earnings per share for the third quarter of 1998 increased 19 percent and 23
percent, respectively, to $.38 and $.37 from $.32 and $.30, respectively, for
the comparable period of 1997.
Net income for the nine months ended September 30, 1998 increased 28
percent to $353.5 million from $276.9 million in the comparable 1997 period.
Basic and diluted earnings per share for the nine months ended September 30,
1998 each increased 23 percent to $1.07 and $1.03 from $.87 and $.84,
respectively, for the comparable period of 1997.
The Company's effective tax rate for the three months and nine months
ended September 30, 1998 was 36.1 percent and 38.0 percent, respectively, as
compared with 40.1 percent and 40.0 percent for the comparable periods of the
prior year. The reduction in the Company's effective tax rate is primarily
due to the improved utilization of foreign tax credits. The Company
estimates that its effective tax rate for 1998 will approximate 38.0 percent.
OTHER FINANCIAL INFORMATION
During June 1998, the Company's Board of Directors adopted a resolution
for a stock split, effected in the form of a 100 percent stock distribution
(one additional share for every share held) to shareholders of record on June
19, 1998 and issued on July 10, 1998. Following the issuance of the common
shares for the stock-split, the Company declared an increased quarterly
dividend of $.11 per common share on its post-split shares, which marks the
40th consecutive year in which dividends have been increased. Late in the
third quarter of 1998, the Company declared another quarterly dividend of $.11
per common share.
At September 30, 1998, current assets were 2.1 times current liabilities;
excluding $200 million of 6.625% notes due September 15, 1999, current assets
were 2.7 times current liabilities.
For the nine months ended September 30, 1998, cash of $208.6 million was
provided by operating activities. Cash used for investing activities was
$299.6 million, including $237.6 million for acquisition of companies, $122.2
million for capital expenditures and $77.4 million for other cash outflows;
cash from investing activities included $83.0 million from the sale of the
Company's Thermador subsidiary and $54.6 million from the sale of the
Company's TriMas investment. Financing activities provided cash of $92.6
million, including $250.0 million from the issuance of 6.625% debentures and an
increase in debt of $175.8 million (principally European bank debt for
acquisitions); cash used for financing activities included $108.6 million for
the early retirement of certain of the Company's 9% notes and the payment of a
premium associated with this early retirement, $72.1 million for the payment
of other debt, $108.1 million for cash dividends paid and $44.4 million for
other cash outflows. The aggregate of the preceding items represents a net cash
inflow of $1.6 million. Changes in working capital and debt as indicated on
the statement of cash flows exclude the effect of acquisition and disposition
of companies, other than as mentioned above.
12
MASCO CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
OTHER FINANCIAL INFORMATION, concluded
The Company called for redemption its $178 million of 5.25% convertible
subordinated debentures due 2012 in February 1998. Substantially all holders
exercised their right to convert these debentures into Company common stock
(at the conversion price of $21.14 per share), resulting in the issuance of
approximately 8.4 million shares of Company common stock in February 1998.
During the second quarter of 1998, the Company issued $250 million of
6.625% debentures due April 2018. In October 1998, the Company issued $100
million of 5.75% notes due October 15, 2008. The proceeds from these
financings were used for general corporate purposes, including working capital,
repayment of debt and expenditures for development activities. After giving
effect to the issuance of these debt securities, the Company has on file with
the Securities and Exchange Commission (SEC), an unallocated shelf registration
pursuant to which the Company is able to issue up to a combined $409 million of
debt and equity securities.
During October 1998, the Company repurchased approximately two million of
its common shares in open-market transactions. At November 1, 1998, the
Company had remaining authorization to repurchase up to an additional 12.7
million shares of its common stock in open-market transactions or otherwise.
The Company believes that its present cash balance, its cash flows from
operations and, to the extent necessary, future financial market activities
and bank borrowings, are sufficient to fund its future working capital and
other investment needs.
YEAR 2000 UPDATE
The year 2000 ("Y2K") issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any
of the Company's systems or equipment that have date-sensitive software using
only two digits may recognize a date using "00" as the year 1900 rather than
the year 2000. The resulting system failures or miscalculations may cause
disruption of operations, including, among other things, a temporary inability
to process transactions or send and receive electronic data with third parties
or engage in similar normal business activities.
In 1997, the Company formed an internal review team to address the Y2K
issue. This team, consisting of existing employees of the Company, has
developed a Year 2000 compliance program (the "Y2K Program") which includes:
assessing and monitoring the compliance of all applications, operating systems
and hardware on mainframe, mid-range, personal computer and network platforms;
addressing issues related to non-information technology embedded software and
equipment; and addressing the compliance of key business partners. Executive
management regularly monitors the status of the Company's Y2K Program.
The first component of the Y2K Program is to identify the computer
systems and other equipment with embedded technology that are susceptible to
failures or errors as a result of the Y2K issue. This effort is substantially
complete.
13
MASCO CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
YEAR 2000 UPDATE, (concluded)
The second component involves the actual remediation or replacement of
non-compliant systems and equipment. For its information technology, the
Company generally utilizes mid-range, non-mainframe based computing
environments which are complemented by a series of local-area networks that
are connected via a wide-area network. Substantially all operating systems
related to the mid-range systems and networks have been updated to comply with
Y2K requirements. In addition, upgraded or modified versions of the Company's
financial, manufacturing, human resource, and other packaged software
applications which are Y2K compliant are in the process of being tested and
integrated into the Company's overall system. The Company presently expects
that this integration will be substantially completed by June 1999.
The Company utilizes some microcomputers and software in its various
manufacturing processes throughout the world. The Company is currently
assessing potential Y2K issues in those processes. General findings to date
indicate that problems usually relate to old personal computers or embedded
microprocessors that must be replaced. Although there can be no assurance
that the Company will identify and correct every Y2K issue found in the
computer applications used in its manufacturing processes, the Company
believes that it has in place a comprehensive program to identify and correct
any such problems, and expects to have substantially completed the remediation
of all of its manufacturing systems by June 1999.
The Company is also reviewing its building and utility systems (i.e.,
telephones, security, electrical) to determine any Y2K issues as part of its
Y2K Program. Many of these systems are Y2K compliant. While the Company is
working with suppliers of these systems and has no reason to expect that they
will not meet their Y2K compliance targets, there is no guarantee that they
will do so.
The third component of the Y2K Program, which was initiated in late 1997,
involves communication with significant suppliers and customers to determine
the extent to which the Company is vulnerable to such parties' failure to
remediate their own Y2K issues. The Company's efforts with respect to
specific issues identified, including the development of contingency plans,
will depend in part upon its assessment of the risk that such issues could
have a material adverse impact on the Company. The Company will continue to
monitor and evaluate the progress of its suppliers and customers on this
critical matter.
Although a failure on the part of the Company's significant customers or
suppliers to resolve their Y2K issues in a timely manner may affect Company
operations, the Company currently does not believe that any material exposure
to significant business interruption exists as a result of Y2K compliance
issues; therefore, the Company has not adopted any formal contingency plan in
the event its Y2K Program is not completed in a timely manner. The estimated
total cost of the Y2K Program is between $10 million and $15 million. This
cost, approximately one-half of which has been incurred and expensed at
September 30, 1998, which includes planned upgrades, is not expected to be
material to the Company's results of operations or financial position. This
cost and the timing in which the Company plans to complete the Y2K Program,
are based on management's best estimates, at the present time. Accordingly,
there can be no absolute assurance that the Company will timely identify and
remediate all significant Y2K issues, that remedial efforts will not involve
significant time and expense, or that such issues will not have an adverse
effect on the Company's financial position, results of operations or cash
flow.
14
MASCO CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (concluded)
Statements in this quarterly report on Form 10-Q include certain forward-
looking statements regarding the Company's future sales and earnings growth
potential. Actual results may vary materially because of external factors
such as interest rate fluctuations, changes in consumer spending and other
factors over which management has no control. Additional information about
the Company's products, markets and conditions, which could affect the
Company's future performance, is contained in the Company's filings with the
SEC.
15
UNAUDITED INFORMATION REGARDING EQUITY INVESTMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Equity investments in affiliates consist primarily of the following
approximate common stock and partnership interests at September 30:
1998 1997
Emco Limited, a Canadian company 42% 42%
MascoTech, Inc. 16% 17%
Hans Grohe, a German partnership 27% 27%
TriMas Corporation -- 4%
The following presents the condensed financial data of MascoTech, Inc.
Amounts are in thousands.
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
Net Sales $399,500 $222,030 $1,223,740 $688,510
Gross Profit $100,150 $ 34,350 $ 321,610 $144,640
Net Income (After
Preferred Stock
Dividends) $ 16,790 $ 38,660 $ 79,350 $ 89,730
On January 22, 1998, MascoTech announced the completion of its
acquisition of TriMas Corporation. The Company recognized a $29 million pre-
tax gain in the first quarter of 1998, as a result of selling its common stock
investment in TriMas to MascoTech in the public tender offer.
Included in MascoTech's net income for the third quarter and nine months
ended September 30, 1997 was a $29.3 million after-tax gain related to the
delivery to the Company of 9.9 million shares of Emco Limited common stock;
the Company's recording of equity earnings from MascoTech for the three months
and nine months ended September 30, 1997 excludes the effect of such gain due
to the related-party nature of the transaction.
16
PART II. OTHER INFORMATION
MASCO CORPORATION
Items 1 through 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
4 - Amendment No. 1 dated as of September 23, 1998 to the
Rights Agreement.
12 - Computation of Ratio of Earnings to Fixed Charges.
27a- Financial Data Schedule as of and for the year-to-date
period ended September 30, 1998.
(b) Reports on Form 8-K:
None
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 11, 1998 By: /s/ RICHARD G. MOSTELLER
Richard G. Mosteller
Senior Vice-President - Finance
(Chief Financial Officer
and Authorized Signatory)
17
MASCO CORPORATION
EXHIBIT INDEX
Exhibit
Exhibit 4 Amendment No. 1 dated as September 23, 1998 to the Rights
Agreement.
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule as of and for the year-to-date period
ended September 30, 1998.