1
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 June 30, 1998. Commission File Number 1-5794
MASCO CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 38-1794485
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21001 Van Born Road, Taylor, Michigan 48180
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(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 August 1, 1998
----- ---------------------
Common stock, par value $1 per share 340,161,000
2
MASCO CORPORATION
INDEX
PAGE NO.
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet -
June 30, 1998 and December 31, 1997 1
Condensed Consolidated Statement of
Income for the Three Months and
Six Months Ended June 30, 1998
and 1997 2
Condensed Consolidated Statement of
Cash Flows for the Six Months Ended
June 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 10-13
Unaudited Information Regarding Equity
Investments for the Three Months and
Six Months Ended June 30, 1998 and 1997 14
Part II. Other Information and Signature 15-17
3
MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1998 AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
------ ---------- ------------
Current assets:
Cash and cash investments $ 416,590 $ 441,330
Accounts and notes receivable, net 674,850 559,050
Prepaid expenses and other 143,690 111,340
Inventories:
Raw material 257,130 229,040
Finished goods 127,860 161,920
Work in process 175,890 124,040
---------- ------------
560,880 515,000
---------- ------------
Total current assets 1,796,010 1,626,720
Equity investment in MascoTech, Inc. 52,710 52,780
Equity investments in other affiliates 156,780 175,300
Securities of Furnishings International Inc. 413,290 393,140
Property and equipment, net 1,073,170 1,037,320
Acquired goodwill, net 918,310 729,190
Other noncurrent assets 356,650 319,310
---------- ------------
Total assets $4,766,920 $ 4,333,760
========== ============
LIABILITIES
Current liabilities:
Notes payable $ 24,450 $ 68,460
Accounts payable 156,800 166,310
Accrued liabilities 384,620 385,230
---------- ------------
Total current liabilities 565,870 620,000
Long-term debt 1,417,860 1,321,470
Deferred income taxes and other 180,800 163,270
---------- ------------
Total liabilities 2,164,530 2,104,740
---------- ------------
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share
Authorized shares: 900,000,000 340,030 165,570
Preferred stock, par value $1 per share
Authorized shares: 1,000,000 --- ---
Paid-in capital 317,030 304,560
Retained earnings 1,975,460 1,784,370
Cumulative translation adjustments (30,130) (25,480)
---------- ------------
Total shareholders' equity 2,602,390 2,229,020
---------- ------------
Total liabilities and
shareholders' equity $4,766,920 $ 4,333,760
========== ============
See notes to condensed consolidated financial statements.
1
4
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- -----------------------
1998 1997 1998 1997
---------- -------- ---------- -----------
Net sales $1,085,000 $913,000 $2,124,000 $ 1,767,000
Cost of sales 691,400 578,200 1,350,600 1,117,700
---------- -------- ---------- -----------
Gross profit 393,600 334,800 773,400 649,300
Selling, general and administrative
expenses 213,000 187,200 420,500 368,200
Amortization of acquired goodwill 6,800 3,800 12,800 7,500
---------- -------- ---------- -----------
Operating profit 173,800 143,800 340,100 273,600
---------- -------- ---------- -----------
Other income (expense), net:
Interest expense (20,700) (18,900) (41,200) (37,400)
Re: MascoTech, Inc.:
Equity earnings 5,100 4,300 10,300 10,300
Interest income --- 2,500 --- 5,000
Gain from change in investment --- 29,500 --- 29,500
Other, net 30,600 (8,800) 63,900 10,600
---------- -------- ---------- -----------
15,000 8,600 33,000 18,000
---------- -------- ---------- -----------
Income before income taxes 188,800 152,400 373,100 291,600
Income taxes 71,800 60,800 145,500 116,500
---------- -------- ---------- -----------
Net income $ 117,000 $ 91,600 $ 227,600 $ 175,100
========== ======== ========== ===========
Earnings per share:
Basic $ .35 $ .29 $ .69 $ .55
========== ======== ========== ===========
Diluted $ .34 $ .28 $ .66 $ .54
========== ======== ========== ===========
Cash dividends per share:
Declared -- $ .10 $ .105 $ .20
========== ======== ========== ===========
Paid $ .105 $ .10 $ .21 $ .20
========== ======== ========== ===========
See notes to condensed consolidated financial statements.
2
5
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30,1998 and 1997
(Dollars in thousands)
--------------------
SIX MONTHS ENDED
JUNE 30
-----------------------
1998 1997
-------- --------
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $221,590 $193,190
(Increase) in receivables (97,110) (69,420)
(Increase) in inventories (34,160) (9,480)
Increase (decrease) in current liabilities, net 15,770 (6,830)
-------- --------
Total cash from operating activities 106,090 107,460
-------- --------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Acquisition of companies, net of cash acquired (189,370) (87,850)
Capital expenditures (74,610) (64,760)
Proceeds from sale of TriMas investment 54,640 ---
0ther, net (57,060) (17,030)
-------- --------
Total cash (for) investing activities (266,400) (169,640)
-------- --------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt 131,320 17,170
Issuance of 6.625% debentures 250,000 ---
Retirement of 9% notes, including retirement
premium (108,620) ---
Payment of debt (66,610) (31,060)
Cash dividends paid (70,520) (64,490)
-------- --------
Total cash from (for) financing activities 135,570 (78,380)
-------- --------
CASH AND CASH INVESTMENTS:
(Decrease) for the period (24,740) (140,560)
At January 1 441,330 473,730
-------- --------
At June 30 $416,590 $333,170
======== ========
See notes to condensed consolidated financial statements.
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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 June 30, 1998 and the results of operations for the three months and
six months ended June 30, 1998 and 1997 and cash flows for the six
months ended June 30, 1998 and 1997. The condensed consolidated balance
sheet at December 31, 1997 was derived from audited financial
statements. Shares and per share data 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 SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- ------------------
1998 1997 1998 1997
-------- -------- -------- ---------
Numerator:
Basic (net income) $117,000 $ 91,600 $227,600 $ 175,100
Add convertible debenture
interest, net --- 1,400 700 2,900
Diluted (net income) $117,000 $ 93,000 $228,300 $ 178,000
Denominator:
Basic shares (based on weighted
average) 333,500 316,000 331,100 316,000
Add:
Contingently issued award shares 6,500 6,400 6,800 6,400
Stock option dilution 4,200 2,800 4,000 2,600
Convertible debentures --- 8,400 1,900 8,400
Diluted shares 344,200 333,600 343,800 333,400
Diluted earnings per share in the first and second quarters of 1997 were
$.26 and $.28, respectively, which when totaled equal $.54. Based on the
above reconciliation for the six months ended June 30, 1997, however,
diluted earnings per share approximates $.535.
C. 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 to be 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. 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. 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 Belgium-based manufacturer of residential decorative
hydronic radiators and heat convectors. The aggregate net purchase price
of these acquisitions was approximately $189 million and was principally
financed with bank debt.
In July 1998, the Company acquired The Brugman Group, a European
manufacturer of residential hydronic radiators and heat convectors.
The above acquisitions were accounted for as purchase transactions.
Combined 1997 annual net sales of companies acquired in 1998 through
July were approximately $150 million.
4
7
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
E. In July 1998, the Company completed the sale of its Thermador
subsidiary. Thermador is a U.S. manufacturer of kitchen appliances, with
annualized 1998 net sales of approximately $140 million. The 1998 third
quarter is expected to include a modest pre-tax gain, net from the sale.
F. The Company called for redemption its $178 million of 5.25% convertible
subordinated debentures due 2012 on February 12, 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% debentures 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 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.
G. Other income (expense), net consists of the following, in thousands:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
Interest expense $(20,700) $(18,900) $(41,200) $(37,400)
Re: MascoTech, Inc.:
Equity earnings 5,100 4,300 10,300 10,300
Interest income --- 2,500 --- 5,000
Gain from change in
investment --- 29,500 --- 29,500
Equity earnings, other 2,700 1,700 4,000 3,500
Income from cash and
cash investments 4,600 3,600 8,200 7,900
Other interest income 10,800 9,500 21,900 19,400
Other, net 12,500 (23,600) 29,800 (20,200)
-------- -------- -------- --------
$ 15,000 $ 8,600 $ 33,000 $ 18,000
======== ======== ======== ========
Included in other, net for the six months ended June 30, 1998 is a $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 largely offset by an approximate $12 million pre-tax charge
related to the early retirement of long-term debt, and by pre-tax
charges aggregating approximately $11 million principally related to
certain asset writedowns.
Other, net for the three months and six months ended June 30, 1998
includes income and gains, net regarding certain non-operating assets of
$16.0 million and $26.4 million, respectively, as compared with $7.4
million and $12.4 million of such income and gains, net for the
comparable periods of the prior year.
Included in other interest income for the three months and six months
ended June 30, 1998 and 1997 is interest income of approximately $10.1
million and $20.2 million and approximately $9.0 million and $18.0
million, respectively, from the 12% pay-in- kind junior debt securities
of Furnishings International Inc. (approximately $336 million principal
amount at December 31, 1997).
5
8
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE G - CONTINUED:
In late June 1997, MascoTech, Inc., an equity affiliate, redeemed all of
its outstanding convertible preferred stock in exchange for
approximately 10 million shares of its common stock. This redemption
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 in the second quarter of 1997 includes charges aggregating
$29.5 million, which offset the above-mentioned MascoTech gain,
primarily for the adjustment of the Company's Payless Cashways
investment to its estimated fair value.
During the first half of 1997, the Company recognized interest income at
6.625% on the $151.4 million receivable balance due from MascoTech.
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 SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ -----------------
1998 1997 1998 1997
-------- -------- -------- --------
Net income $117,000 $ 91,600 $227,600 $175,100
Other comprehensive income, currency
translation adjustments (5,410) (2,370) (4,650) (16,530)
-------- -------- -------- --------
Total comprehensive income $111,590 $ 89,230 $222,950 $158,570
I. On June 15, 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 (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
9
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
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
---------- ------------
Current assets:
Cash and cash investments $ 447,220 $ 587,820
Marketable securities 9,220 45,970
Receivables 909,950 768,030
Prepaid expenses and other 142,300 85,250
Deferred income taxes 48,240 80,520
Inventories:
Raw material 318,130 286,120
Finished goods 203,220 237,340
Work in process 217,370 162,460
---------- ----------
738,720 685,920
---------- ----------
Total current assets 2,295,650 2,253,510
Equity and other investments in affiliates 246,540 280,970
Securities of Furnishings International Inc. 413,290 393,140
Property and equipment, net 1,695,070 1,654,840
Acquired goodwill, net 1,665,230 925,120
0ther noncurrent assets 416,500 421,170
---------- ----------
Total assets $6,732,280 $5,928,750
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 27,920 $ 72,340
Accounts payable 270,640 264,980
Accrued liabilities 532,550 535,300
---------- ----------
Total current liabilities 831,110 872,620
Long-term debt 2,721,520 1,959,440
Deferred income taxes and other 361,600 365,470
Other interests in combined affiliates 215,660 502,200
Equity of shareholders of Masco Corporation 2,602,390 2,229,020
---------- ----------
Total liabilities and shareholders' equity $6,732,280 $5,928,750
========== ==========
7
10
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note J - Continued:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
COMBINED STATEMENT OF INCOME 1998 1997 1998 1997
---------- ---------- ---------- ----------
Net sales $1,516,400 $1,322,650 $2,951,200 $2,567,950
---------- ---------- ---------- ----------
Costs and expenses, net:
Cost of sales 1,005,730 873,370 1,956,340 1,695,330
Selling, general and
administrative expenses 289,750 239,650 548,810 473,170
---------- ---------- ---------- ----------
Other income (expense), net:
Interest expense (41,480) (27,670) (80,590) (55,210)
Other income, net 34,860 32,780 82,960 77,650
---------- ---------- ---------- ----------
(6,620) 5,110 2,370 22,440
---------- ---------- ---------- ----------
1,302,100 1,107,910 2,502,780 2,146,060
---------- ---------- ---------- ----------
Income before income taxes and
other interests 214,300 214,740 448,420 421,890
Income taxes 72,410 89,360 168,610 177,060
---------- ---------- ---------- ----------
Income before other interests 141,890 125,380 279,810 244,830
Other interests in combined affiliates 24,890 33,780 52,210 69,730
---------- ---------- ---------- ----------
Net income $ 117,000 $ 91,600 $ 227,600 $ 175,100
========== ========== ========== ==========
Earnings per share:
Basic $ .35 $ .29 $ .69 $ .55
========== ========== ========== ==========
Diluted $ .34 $ .28 $ .66 $ .54
========== ========== ========== ==========
Cash dividends per share:
Declared -- $ .10 $ .105 $ .20
========== ========== ========== ==========
Paid $ .105 $.10 $ .21 $ .20
========== ========== ========== ==========
8
11
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (concluded)
Note J - Concluded:
SIX MONTHS ENDED
JUNE 30
---------------------
COMBINED STATEMENT OF CASH FLOWS 1998 1997
---------- ---------
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $ 355,900 $ 318,470
(Increase) in receivables (120,050) (84,030)
(Increase) in inventories (36,790) (5,600)
Decrease in marketable securities, net 36,750 3,380
Increase (decrease) in current liabilities, net 28,640 (10,030)
---------- ---------
Total cash from operating activities 264,450 222,190
---------- ---------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Acquisition of other interests in TriMas
Corporation (868,310) ---
Acquisition of companies, net of cash acquired (207,250) (105,980)
Capital expenditures (124,400) (94,810)
Proceeds from redemption of debt by affiliate 80,500 ---
Proceeds from sale of subsidiaries 25,020 76,560
Other, net (107,150) (79,820)
---------- ---------
Total cash (for) investing activities (1,201,590) (204,050)
---------- ---------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt 1,390,230 37,290
Payment of debt (518,060) (110,080)
Cash dividends paid (75,630) (76,800)
---------- ---------
Total cash from (for) financing activities 796,540 (149,590)
---------- ---------
CASH AND CASH INVESTMENTS:
Increase (decrease) for the period (140,600) (131,450)
At January 1 587,820 599,020
---------- ---------
At June 30 $ 447,220 $ 467,570
========== =========
9
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MASCO CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER 1998 AND THE FIRST SIX MONTHS 1998 VERSUS
SECOND QUARTER 1997 AND THE FIRST SIX MONTHS 1997
SALES AND OPERATIONS
Net sales increased 19 percent and 20 percent for the three months and
six months ended June 30, 1998, respectively, from the comparable periods in
1997. Excluding acquisition of companies during 1998 and 1997, net sales for the
three months and six months ended June 30, 1998 increased 9 percent and 10
percent, respectively, from the comparable periods in 1997; these increases in
net sales are principally due to increases in unit sales volume of cabinets,
other kitchen and bath products and faucets.
Sales of Kitchen and Bath Products for the three months and six months
ended June 30, 1998 were $841 million and $1,654 million, respectively,
representing increases of 18 percent and 19 percent, respectively, from the
comparable periods in 1997; excluding acquisition of companies, net sales of
this segment increased 9 percent and 10 percent, respectively for the three
months and six months ended June 30, 1998.
Sales of Other Specialty Products for the three months and six months
ended June 30, 1998 were $244 million and $470 million, respectively,
representing increases of 21 percent and 25 percent, respectively, from the
comparable periods in 1997; excluding acquisition of companies, net sales of
this segment increased 6 percent and 9 percent, respectively, for the three
months and six months ended June 30, 1998.
Net sales from North American operations for the second quarter and six
months ended June 30, 1998 were $887 million and $1,744 million, respectively,
representing increases of 17 percent and 18 percent, respectively, from the
comparable periods in 1997; excluding acquisition of companies, net sales from
these operations increased 10 percent and 11 percent, respectively, from the
comparable periods in 1997. Net sales from European operations for the second
quarter and six months ended June 30, 1998 were $198 million and $380 million,
respectively, representing increases of 30 percent, from the comparable periods
in 1997; excluding acquisition of companies, net sales from these operations
were flat 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 in the first half of 1998, as compared with the
first half of 1997; excluding acquisition of companies, European net sales for
the second quarter and six months ended June 30, 1998 in local currencies
increased by approximately 10 percent.
The Company's operating profit margins improved in the second quarter
and first half of 1998 from the comparable 1997 periods. Cost of sales as a
percentage of sales increased slightly to 63.7 percent from 63.3 percent and to
63.6 percent from 63.3 percent for the second quarter and six months ended June
30, 1998, respectively, from the comparable periods in 1997; selling, general
and administrative expenses as a percentage of sales decreased to 19.7 percent
from 20.5 percent and to 19.8 percent from 20.8 percent for the second quarter
and six months ended June 30, 1998, respectively, from the comparable periods in
1997. The decrease in the selling, general and administrative expenses
percentage in 1998 includes the 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 18.0 percent for both the
second quarter and six months ended June 30, 1998, respectively, as compared
with 18.0 percent and 17.8 percent for the comparable 1997 periods. Operating
profit margins, after general corporate expense, were 16.0 percent for both the
second quarter and six months ended June 30, 1998, as compared with 15.8 percent
and 15.5 percent for the comparable 1997 periods.
10
13
MASCO CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
OTHER INCOME (EXPENSE), NET
Included in other income (expense), net for the second quarter and six
months ended June 30, 1998 were equity earnings from MascoTech, Inc. of $5.1
million and $10.3 million, respectively, as compared with equity earnings of
$4.3 million and $10.3 million for the comparable periods of the prior year.
Included in other, net for the six months ended June 30, 1998 is a $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 largely
offset by an approximate $12 million pre-tax charge related to the early
retirement of long-term debt, and by pre-tax charges aggregating approximately
$11 million principally related to certain asset writedowns.
Other, net for the three months and six months ended June 30, 1998
includes income and gains, net regarding certain non-operating assets of $16.0
million and $26.4 million, respectively, as compared with $7.4 million and $12.4
million of such income and gains, net for the comparable periods of the prior
year.
Included in other interest income for the three months and six months
ended June 30, 1998 and 1997 is interest income of approximately $10.1 million
and $20.2 million and approximately $9.0 million and $18.0 million,
respectively, from the 12% pay-in-kind junior debt securities of Furnishings
International Inc. (approximately $336 million principal amount at December 31,
1997).
In late June 1997, MascoTech redeemed all of its outstanding convertible
preferred stock in exchange for approximately 10 million shares of its common
stock. This redemption 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 in the second quarter of 1997 includes charges aggregating
$29.5 million, which offset the above-mentioned MascoTech gain, primarily for
the adjustment of the Company's Payless Cashways investment to its estimated
fair value.
Included in other income (expense), net for the three months and six
months ended June 30, 1997 is $2.5 million and $5.0 million, respectively, of
interest income from the $151.4 million receivable balance due from MascoTech.
11
14
MASCO CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NET INCOME AND EARNINGS PER SHARE
Net income for the second quarter of 1998 increased 28 percent to $117
million from $91.6 million in the comparable 1997 period. Basic and diluted
earnings per share for the second quarter of 1998 each increased 21 percent, to
$.35 and $.34 from $.29 and $.28, respectively, for the comparable period of
1997.
Net income for the six months ended June 30, 1998 increased 30 percent
to $227.6 million from $175.1 million in the comparable 1997 period. Basic and
diluted earnings per share for the six months ended June 30, 1998 increased 25
percent and 22 percent, respectively, to $.69 and $.66 from $.55 and $.54,
respectively, for the comparable period of 1997.
The Company's effective tax rate for the three months and six months
ended June 30, 1998 was 38.0 percent and 39.0 percent, respectively, as compared
with 39.9 percent and 40.0 percent for the comparable periods of the prior year.
The reduction in the Company's effective tax rate is principally due to the
improved utilization of foreign tax credits and the utilization of a portion of
the Company's capital loss carryforward benefit. The Company estimates that its
effective tax rate for 1998 will approximate 39.0 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 to be 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. 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.
At June 30, 1998, current assets were 3.2 times current liabilities.
For the six months ended June 30, 1998, cash of $106.1 million was
provided by operating activities. Cash used for investing activities was $266.4
million, including $189.4 million for acquisition of companies, $74.6 million
for capital expenditures and $57.0 million for other cash outflows; cash from
investing activities included $54.6 million from the sale of the Company's
TriMas investment. Financing activities provided cash of $135.6 million,
including $250 million from the issuance of 6.625% debentures and an increase in
debt of $131.3 million (primarily European bank debt for an acquisition); 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, $66.6 million for the payment of debt and $70.5
million for cash dividends paid. The aggregate of the preceding items represents
a net cash outflow of $24.7 million. Changes in working capital and debt as
indicated on the statement of cash flows exclude the effect of acquisition of
companies, other than as mentioned above.
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MASCO CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (concluded)
First and second quarter 1998 cash from operations was affected by an
expected and recurring first-half increase in accounts receivable. As the annual
increase in accounts receivable is historically experienced in the first half of
the year, cash flows from operations in the remaining two quarters of 1998 are
not expected to be affected by significant increases in accounts receivable.
The Company called for redemption its $178 million of 5.25% convertible
subordinated debentures due 2012 on February 12, 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.
The Company has on file with the Securities and Exchange Commission, an
unallocated shelf registration pursuant to which the Company is able to issue up
to a combined $509 million of debt and equity securities.
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.
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UNAUDITED INFORMATION REGARDING EQUITY INVESTMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Equity investments in affiliates consist primarily of the following
approximate common stock and partnership interests at June 30:
1998 1997
---- ----
Emco Limited, a Canadian company 42% --
MascoTech, Inc. 17% 17%
Hans Grohe, a German partnership 27% 27%
TriMas Corporation -- 4%
During October 1996, the Company completed the sale to MascoTech of 17
million shares of MascoTech common stock and warrants to purchase 10 million
shares of MascoTech common stock. Under the sale agreement, the Company received
approximately $266 million, with $115 million cash paid at closing. The $151
million balance of the consideration was paid by MascoTech to the Company on
September 30, 1997; as provided for in the sale agreement, MascoTech at that
date delivered to the Company 9.9 million shares (approximately 42 percent) of
the outstanding common stock of Emco Limited and $45.6 million in cash. Emco
Limited is a leading Canadian distributor and manufacturer of building products
for the residential, commercial and industrial construction markets.
The following presents the condensed financial data of MascoTech, Inc.
Amounts are in thousands.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net Sales $433,480 $233,040 $834,240 $466,480
======== ======== ======== ========
Gross Profit $117,070 $ 53,990 $221,460 $110,290
======== ======== ======== ========
Net Income (After
Preferred Stock
Dividends) $ 29,820 $ 21,650 $ 62,560 $ 51,070
======== ======== ======== ========
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.
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PART II. OTHER INFORMATION
MASCO CORPORATION
Item 1. Legal Proceedings
During the second quarter of 1998, a subsidiary of the Company was
issued a proposed civil penalty in excess of $100,000 by a county
wastewater agency for alleged past exceedances of wastewater
discharge limitations. The subsidiary and the agency are in the
process of finalizing a consent decree to resolve this matter, and
the costs of any penalties will be immaterial to the Company. The
subsidiary is now in compliance with all applicable wastewater
discharge requirements.
Items 2 & 3 are not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on May 20, 1998 at
which the stockholders voted upon the election of three nominees
for Class I Directors and the approval of the appointment of one
additional Class II Director and one additional Class III
Director; an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of
Company common stock to 900,000,000; and ratification of the
selection of Coopers & Lybrand L.L.P. (now known as
PricewaterhouseCoopers) as independent auditors for the Company
for 1998. The following is a tabulation of the votes.
ELECTION OF CLASS I DIRECTORS
FOR WITHHELD
----------- ---------
Wayne B. Lyon 142,067,512 3,059,918
Arman Simone 142,077,224 3,050,206
Peter W. Stroh 142,057,391 3,070,039
APPOINTMENT OF CLASS II DIRECTOR
Raymond F. Kennedy 143,332,079 1,795,351
APPOINTMENT OF CLASS III DIRECTOR
Thomas G. Denomme 142,097,254 3,030,176
APPROVAL OF AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
COMPANY COMMON STOCK TO 900,000,000.
For 108,357,421
Against 34,260,304
Abstentions and
Broker Non-voters 2,509,705
APPROVAL OF COOPERS & LYBRAND L.L.P. TO ACT AS INDEPENDENT
AUDITORS FOR THE COMPANY FOR 1998.
For 142,712,485
Against 24,392
Abstentions and
Broker Non-voters 2,390,553
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Part II. OTHER INFORMATION (Concluded)
MASCO CORPORATION
Item 5. OTHER INFORMATION
In accordance with new Rule 14a-4(c)(1) under the Securities Exchange
Act of 1934, management proxies for the Company's 1999 Annual Meeting
of Stockholders intend to use their discretionary voting authority with
respect to any proposal presented at the meeting by a stockholder who
does not provide the Company with written notice of such proposal prior
to December 29, 1998.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
3i - Restated Certificate of Incorporation of Masco
Corporation and amendments thereto.
4a - Director's resolutions establishing Masco
Corporation's 6.625% Debentures due April 15, 2018
under the Indenture dated as of December 1, 1982
between Masco Corporation and The First National Bank
of Chicago, as successor Trustee to Morgan Guaranty
Trust Company of New York, which Indenture has been
filed as an Exhibit to Masco Corporation's Annual
Report on Form 10-K for the year ended December 31,
1997.
4b - Amendment dated as of March 30, 1998 to the
$750,000,000 Amended and Restated Credit Agreement
dated as of November 14, 1996 among Masco
Corporation, the banks party thereto and Morgan
Guaranty Trust Company of New York, as agent.
12 - Computation of Ratio of Earnings to Fixed Charges.
27a- Financial Data Schedule as of and for the
year-to-date period ended June 30, 1998.
27b- Financial Data Schedule as of and for the
year-to-date period ended March 31, 1998, amended for
the 100 percent stock distribution to shareholders in
July 1998.
27c- Financial Data Schedule as of and for the
year-to-date periods ended December 31, 1997,
September 30, 1997, June 30, 1997 and March 31, 1997,
amended for the 100 percent stock distribution to
shareholders in July 1998.
27d- Financial Data Schedule as of and for the
year-to-date periods ended December 31, 1996,
September 30, 1996, June 30, 1996 and March 31, 1996,
amended for the 100 percent stock distribution to
shareholders in July 1998.
27e- Financial Data Schedule as of and for the year ended
December 31, 1995, amended for the 100 percent stock
distribution to shareholders in July 1998.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONCLUDED)
(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: AUGUST 13, 1998 BY: /s/ Richard G. Mosteller
----------------------- -------------------------------------
Richard G. Mosteller
Senior Vice-President - Finance
(Chief Financial Officer
and Authorized Signatory)
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MASCO CORPORATION
EXHIBIT INDEX
EXHIBIT
Exhibit 3i - Restated Certificate of Incorporation of Masco Corporation
and amendments thereto.
Exhibit 4a - Director's resolutions establishing Masco Corporation's 6.625%
Debentures due April 15, 2018 under the Indenture dated as of
December 1, 1982 between Masco Corporation and The First National
Bank of Chicago, as successor Trustee to Morgan Guaranty Trust
Company of New York, which Indenture has been filed as an Exhibit
to Masco Corporation's Annual Report on Form 10-K for the year
ended December 31, 1997.
Exhibit 4b - Amendment dated as of March 30, 1998 to the $750,000,000
Amended and Restated Credit Agreement dated as of November 14,
1996 among Masco Corporation, the banks party thereto and Morgan
Guaranty Trust Company of New York, as agent.
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27a Financial Data Schedule as of and for the year-to-date period
ended June 30, 1998.
Exhibit 27b Financial Data Schedule as of and for the year-to-date period
ended March 31, 1998, amended for the 100 percent stock
distribution to shareholders in July 1998.
Exhibit 27c Financial Data Schedule as of and for the year-to-date
periods ended December 31, 1997, September 30, 1997, June 30,
1997 and March 31, 1997, amended for the 100 percent stock
distribution to
shareholders in July 1998.
Exhibit 27d Financial Data Schedule as of and for the year-to-date
periods ended December 31, 1996, September 30, 1996, June 30,
1996 and March 31, 1996, amended for the 100 percent stock
distribution to
shareholders in July 1998.
Exhibit 27e Financial Data Schedule as of and for the year ended December
31, 1995, amended for the 100 percent stock distribution to
shareholders in July 1998.