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 SEPTEMBER 30, 1999. 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
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(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, 1999
----- ----------------
COMMON STOCK, PAR VALUE $1 PER SHARE 443,341,000
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MASCO CORPORATION
INDEX
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet -
September 30, 1999 and December 31, 1998 1
Condensed Consolidated Statement of
Income for the Three Months and
Nine Months Ended September 30, 1999
and 1998 2
Condensed Consolidated Statement of
Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 3
Notes to Condensed Consolidated
Financial Statements 4-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11-18
Unaudited Information Regarding Equity
Investments for the Three Months and
Nine Months Ended September 30, 1999
and 1998 19
Part II. Other Information and Signature 20-21
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MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
------ ------------- ------------
Current assets:
Cash and cash investments $ 145,520 $ 553,150
Accounts and notes receivable, net 1,124,870 800,280
Prepaid expenses and other 112,320 81,640
Inventories:
Raw material 305,410 262,410
Finished goods 327,620 236,610
Work in process 144,580 147,910
---------- ----------
777,610 646,930
---------- ----------
Total current assets 2,160,320 2,082,000
Equity investment in MascoTech, Inc. 68,200 59,830
Equity investments in other affiliates 135,500 165,020
Securities of Furnishings International Inc. 469,220 434,640
Property and equipment, net 1,579,960 1,357,830
Acquired goodwill, net 1,734,580 1,055,790
Other noncurrent assets 499,940 463,740
---------- ----------
Total assets $6,647,720 $5,618,850
========== ==========
LIABILITIES
Current liabilities:
Notes payable $ 147,380 $ 309,320
Accounts payable 255,430 196,930
Accrued liabilities 567,510 470,090
---------- ----------
Total current liabilities 970,320 976,340
Long-term debt 2,420,410 1,638,290
Deferred income taxes and other 213,900 230,180
---------- ----------
Total liabilities 3,604,630 2,844,810
---------- ----------
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share
Authorized shares: 900,000,000 443,240 443,280
Preferred stock, par value $1 per share
Authorized shares: 1,000,000 --- ---
Paid-in capital 595,190 584,530
Retained earnings 2,038,510 1,762,800
Other comprehensive income (loss) (33,850) (16,570)
---------- ----------
Total shareholders' equity 3,043,090 2,774,040
---------- ----------
Total liabilities and
shareholders' equity $6,647,720 $5,618,850
========== ==========
See notes to condensed consolidated financial statements.
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MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net sales $1,704,000 $1,380,000 $4,662,000 $3,953,000
Cost of sales 1,082,000 869,600 2,942,600 2,484,700
---------- ---------- ---------- ----------
Gross profit 622,000 510,400 1,719,400 1,468,300
Selling, general and administrative
expenses 463,600 269,200 1,041,600 783,200
Amortization of acquired goodwill 13,100 7,500 31,700 20,600
---------- ---------- ---------- ----------
Operating profit 145,300 233,700 646,100 664,500
---------- ---------- ---------- ----------
Other income (expense), net:
Interest expense (31,700) (31,100) (86,500) (85,300)
Equity earnings from
MascoTech, Inc. 3,900 2,700 12,300 13,000
Other, net (4,300) 36,500 63,500 100,700
---------- ---------- ---------- ----------
(32,100) 8,100 (10,700) 28,400
---------- ---------- ---------- ----------
Income before income taxes 113,200 241,800 635,400 692,900
Income taxes 48,300 89,000 244,500 265,600
---------- ---------- ---------- ----------
Net income $ 64,900 $ 152,800 $ 390,900 $ 427,300
========== ========== ========== ==========
Earnings per share:
Basic $ .15 $ .35 $ .90 $ .98
===== ===== ===== =====
Diluted $ .15 $ .34 $ .88 $ .95
===== ===== ===== =====
Cash dividends per share:
Declared $ .12 $.22 $ .34 $.325
===== ==== ===== =====
Paid $ .11 $.11 $ .33 $. 32
===== ==== ===== =====
See notes to condensed consolidated financial statements.
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MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30
1999 1998
----------- ---------
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $ 487,370 $ 443,730
Increase in receivables (184,550) (172,720)
Increase in inventories (63,560) (73,000)
Increase in accounts payable and
accrued liabilities, net 48,510 60,870
----------- ---------
Total cash from operating activities 287,770 258,880
----------- ---------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Acquisition of companies, net of cash acquired (792,920) (237,600)
Capital expenditures (246,980) (155,080)
Proceeds from sale of subsidiary --- 83,000
Proceeds from sale of TriMas investment --- 54,640
Other, net (37,100) (71,620)
----------- ---------
Total cash (for) investing activities (1,077,000) (326,660)
----------- ---------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in other debt 878,140 213,440
Issuance of 7.75% debentures 300,000 ---
Issuance of 6.625% debentures --- 250,000
Retirement of 6.625% notes (200,000) ---
Retirement of 9% notes, including
retirement premium --- (108,620)
Payment of other debt (391,840) (92,720)
Cash dividends and shareholder distributions (111,630) (153,070)
Purchase of Company common stock (106,760) ---
Other, net 13,690 (44,430)
----------- ---------
Total cash from financing activities 381,600 64,600
----------- ---------
CASH AND CASH INVESTMENTS:
Decrease for the period (407,630) (3,180)
At January 1 553,150 450,650
----------- ---------
At September 30 $ 145,520 $ 447,470
=========== =========
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
September 30, 1999 and the results of operations for the three months and
nine months ended September 30, 1999 and 1998 and cash flows for the nine
months ended September 30, 1999 and 1998. The condensed consolidated
balance sheet at December 31, 1998 was based upon audited financial
statements.
B. The following is a discussion of 1999 acquisitions.
Pooling Acquisitions:
During the third quarter of 1999, the Company completed mergers with Behr
Process Corporation, a manufacturer of premium architectural coatings;
Mill's Pride, L.L.P., a manufacturer of ready-to-assemble and assembled
kitchen and bath cabinetry, bath vanities, home office workstations and
entertainment centers, storage products, bookcases and kitchen utility
products; and Thermal Concepts, Inc., a U.S.-based insulation services
company. The Company issued approximately 104 million shares of common
stock for all of the outstanding shares of these companies. The
transactions have been accounted for as poolings of interests and,
accordingly, the consolidated financial statements and related shares and
per share data for all periods presented have been restated to include the
accounts and operations of the pooled companies. The Company's net sales
and net income prior to these poolings for the first six months of 1999
were $2,416 million and $262.9 million, respectively. The Company's net
sales and net income prior to the poolings for the three months and nine
months ended September 30, 1998 were $1,122 million and $125.9 million and
$3,246 million and $353.5 million, respectively. For the year ended
December 31, 1998, pooled companies had net sales and net income of
approximately $935 million and $89 million, respectively.
Purchase Acquisitions:
During the third quarter of 1999, the Company acquired Arrow Fastener
Company, a U.S.-based manufacturer of manual and electric staple gun
tackers and staples and other hand tools, H&H Tube, a U.S.-based
manufacturer of brass, copper, steel and aluminum tubes and Superia
Radiatoren N.V., a Belgian-based manufacturer of standard plate radiators.
The Company also acquired a 75 percent share of Inrecon L.L.C., a
U.S.-based company specializing in repair and restoration of residential,
commercial and institutional facilities damaged by fire, wind, water and
storms. The Company had acquired the initial 25 percent in 1997. With this
acquisition, Inrecon has become a wholly owned subsidiary of the Company.
During the second quarter of 1999, the Company acquired Avocet Hardware
PLC, a U.K. supplier of locks and other builders' hardware, the Cary Group,
a U.S.-based insulation services company and The GMU Group, a manufacturer
and distributor of kitchen cabinets and cabinet components, headquartered
in Zumaya, Spain. In the first quarter of 1999, the Company acquired
A&J Gummers, a U.K. manufacturer of shower valve products, and The Faucet
Queens, Inc., a U.S.-based supplier of plumbing accessories and hardware
products.
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MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note B - Concluded:
The aggregate net purchase price of these purchase acquisitions was
approximately $841 million and included 1.6 million shares of Company
common stock valued at $48 million. Combined 1998 annual net sales of the
above purchase acquisitions were approximately $610 million.
C. 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
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Numerator:
Basic (net income) $ 64,900 $152,800 $390,900 $427,300
Add convertible debenture
interest, net --- --- --- 700
-------- -------- -------- --------
Diluted (net income) $ 64,900 $152,800 $390,900 $428,000
======== ======== ======== ========
Denominator:
Basic shares (based on weighted
average) 435,100 437,000 435,300 436,000
Add:
Contingent award shares 7,400 7,100 7,300 7,000
Stock option dilution 3,100 3,700 3,300 3,700
Convertible debentures --- --- --- 1,300
-------- -------- -------- --------
Diluted shares 445,600 447,800 445,900 448,000
======== ======== ======== ========
D. Other income (expense), net consists of the following, in thousands:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Interest expense $(31,700) $(31,100) $(86,500) $(85,300)
Equity earnings from
MascoTech, Inc. 3,900 2,700 12,300 13,000
Equity earnings, other 1,800 4,600 5,700 8,600
Income from cash and
cash investments 1,100 6,800 7,600 15,000
Other interest income 13,500 11,500 39,100 33,400
Other, net (20,700) 13,600 11,100 43,700
-------- -------- -------- --------
$(32,100) $ 8,100 $(10,700) $ 28,400
======== ======== ======== ========
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MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note D - Concluded:
Included in other interest income is interest income from the 12%
pay-in-kind junior debt securities of Furnishings International Inc.
(approximately $377 million principal amount at December 31, 1998). Such
interest income approximated $12.0 million and $10.6 million, respectively,
for the third quarter of 1999 and 1998 and $34.6 million and $30.8 million,
respectively, for the nine months ended September 30, 1999 and 1998.
Other, net for the three months ended September 30, 1999 includes pre-tax
expense aggregating $33.5 million, principally related to the disposition
of certain non-operating assets and the pooling of interests acquisitions.
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. 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.
E. The Company's total comprehensive income was as follows, in thousands:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Net income $ 64,900 $152,800 $390,900 $427,300
Other comprehensive income (loss),
currency translation adjustments 32,690 8,110 (17,280) 3,460
-------- -------- -------- --------
Total comprehensive income $ 97,590 $160,910 $373,620 $430,760
======== ======== ======== ========
F. During August 1999, the Company issued $300 million of 7.75% debentures due
August 2029. After giving effect to the issuance of these debentures, 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 $109 million of debt and equity securities.
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MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
G. During the third quarter of 1999, the Company realigned its business
segments. Accounting policies for the segments are the same as those for
the Company. The Company evaluates performance based on operating profit or
loss and, other than general corporate expense, allocates specific
corporate overhead to each segment.
The Company's operations in the segments detailed below consist principally
of the manufacture, installation, and sale of the following home
improvement products:
North America:
Kitchen and Bath Products - kitchen and bath cabinets; faucets;
plumbing fittings; bathtubs and shower tub enclosures; whirlpools and
spas; and bath accessories.
Builders' Hardware and Other Specialty Products-architectural
coatings; builders' hardware, including mechanical and electronic lock
sets; grilles, registers, diffusers for heating/cooling systems;
insulation; staple gun tackers and staples and other hand tools; and
water pumps.
International - kitchen and bath cabinets; faucets; plumbing fittings;
shower enclosures; bath accessories; builders' hardware, including
mechanical lock sets; hydronic radiators and heat convectors; venting and
ventilation systems; rolling shutters; and water pumps.
The following table presents information about the Company by segment, in
millions.
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------------ --------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
------------------------------------ --------------------------------------
NET SALES (1) OPERATING PROFIT NET SALES (1) OPERATING PROFIT
------------------------------------ --------------------------------------
The Company's operations by
segment were:
North America:
Kitchen and Bath Products $ 894 $ 794 $ 133 $ 160 $2,554 $2,358 $ 470 $ 469
Builders' Hardware and Other
Specialty Products 524 360 (8) 61 1,331 989 129 169
International 286 226 43 35 777 606 114 91
------ ------ ------ ------ ------ ------ ------ ------
Total $1,704 $1,380 168 256 $4,662 $3,953 713 729
====== ====== ====== ======
General corporate expense, net (23) (22) (67) (64)
------ ------ ------- ------
Operating profit, after general
corporate expense 145 234 646 665
Other income (expense), net (32) 8 (11) 28
------ ------ ------ ------
Income before income taxes $ 113 $ 242 $ 635 $ 693
====== ====== ====== ======
Assets of the Company's operations for the Kitchen and Bath Products -
North America, Builders' Hardware and Other Specialty Products - North
America and International segments at September 30, 1999 were $2,081
million, $1,677 million and $1,478 million, respectively, and at December
31, 1998 were $1,843 million, $830 million and $1,175 million,
respectively. Corporate assets at September 30, 1999 and December 31, 1998
were $1,412 million and $1,771 million, respectively. Corporate assets
include equity investments, Securities of Furnishings International Inc.
and other corporate assets.
(1) Intra-company sales among segments were not material.
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MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. The following presents the combined unaudited financial statements of the
Company and MascoTech, Inc. as one entity with Masco Corporation as the
parent company. Intercompany transactions have been eliminated. Amounts,
except per share data, are in thousands.
COMBINED BALANCE SHEET
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
---------- ----------
Current assets:
Cash and cash investments $ 157,870 $ 582,540
Receivables 1,363,060 1,023,620
Prepaid expenses and other 115,630 89,990
Deferred income taxes 40,730 41,950
Inventories:
Raw material 352,470 324,990
Finished goods 402,820 324,420
Work in process 195,220 195,870
---------- ----------
950,510 845,280
---------- ----------
Total current assets 2,627,800 2,583,380
Equity and other investments in affiliates 242,200 258,580
Securities of Furnishings International Inc. 469,220 434,640
Property and equipment, net 2,292,000 2,035,960
Acquired goodwill, net 2,536,780 1,836,450
Other noncurrent assets 540,390 516,990
---------- ----------
Total assets $8,708,390 $7,666,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 152,430 $ 314,140
Accounts payable 357,640 306,940
Accrued liabilities 704,410 605,320
---------- ----------
Total current liabilities 1,214,480 1,226,400
Long-term debt 3,794,770 3,026,530
Deferred income taxes and other 414,180 428,540
Other interests in combined affiliates 241,870 210,490
Equity of shareholders of Masco Corporation 3,043,090 2,774,040
---------- ----------
Total liabilities and shareholders' equity $8,708,390 $7,666,000
========== ==========
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MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note H - Continued:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
COMBINED STATEMENT OF INCOME 1999 1998 1999 1998
---------- ---------- ---------- ----------
Net sales $2,100,490 $1,776,380 $5,937,680 $5,176,580
---------- ---------- ---------- ----------
Costs and expenses, net:
Cost of sales 1,379,150 1,165,830 3,889,230 3,386,670
---------- ---------- ---------- ----------
Selling, general and
administrative expenses 527,730 327,860 1,227,690 970,470
---------- ---------- ---------- ----------
Other income (expense), net:
Interest expense (51,020) (52,530) (145,650) (146,120)
Other income, net (270) 37,240 66,430 120,500
---------- ---------- ---------- ----------
(51,290) (15,290) (79,220) (25,620)
---------- ---------- ---------- ----------
1,958,170 1,508,980 5,196,140 4,382,760
---------- ---------- ---------- ----------
Income before income taxes and
other interests 142,320 267,400 741,540 793,820
Income taxes 60,750 100,560 292,640 300,270
---------- ---------- ---------- ----------
Income before other interests 81,570 166,840 448,900 493,550
Other interests in combined
affiliates 16,670 14,040 58,000 66,250
---------- ---------- ---------- ----------
Net income $ 64,900 $ 152,800 $ 390,900 $ 427,300
========== ========== ========== ==========
Earnings per share:
Basic $ .15 $ .35 $ .90 $ .98
===== ===== ===== =====
Diluted $ .15 $ .34 $ .88 $ .95
===== ===== ===== =====
Cash dividends per share:
Declared $ .12 $.22 $ .34 $.325
===== ==== ===== =====
Paid $ .11 $.11 $ .33 $ .32
===== ==== ===== =====
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MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
Note H - Concluded:
NINE MONTHS ENDED
SEPTEMBER 30
COMBINED STATEMENT OF CASH FLOWS 1999 1998
----------- -----------
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $ 624,900 $ 619,700
(Increase) in receivables (205,900) (184,410)
(Increase) in inventories (52,460) (82,890)
Decrease in marketable securities --- 43,430
Increase in current liabilities 35,200 90,110
----------- -----------
Total cash from operating activities 401,740 485,940
----------- -----------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Acquisition of other interests in
TriMas Corporation --- (869,680)
Acquisition of companies, net of cash acquired (880,590) (277,540)
Capital expenditures (347,780) (229,330)
Proceeds from redemption of debt by affiliate --- 80,500
Proceeds from sale of subsidiaries 90,470 108,020
Other, net (35,840) (115,580)
----------- -----------
Total cash (for) investing activities (1,173,740) (1,303,610)
----------- -----------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt 1,200,380 1,498,090
Payment of debt (627,030) (547,320)
Purchase of Company common stock (126,290) (36,150)
Cash dividends paid (120,900) (160,500)
Other, net 21,170 (57,100)
----------- -----------
Total cash from financing activities 347,330 697,020
----------- -----------
CASH AND CASH INVESTMENTS:
(Decrease) for the period (424,670) (120,650)
At January 1 582,540 597,140
----------- -----------
At September 30 $ 157,870 $ 476,490
=========== ===========
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MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 1999 AND THE FIRST NINE MONTHS 1999 VERSUS
THIRD QUARTER 1998 AND THE FIRST NINE MONTHS 1998
CORPORATE DEVELOPMENT
The following is a discussion of 1999 acquisitions.
POOLING ACQUISITIONS
During the third quarter of 1999, the Company completed mergers with Behr
Process Corporation, a manufacturer of premium architectural coatings; Mill's
Pride, L.L.P., a manufacturer of ready-to-assemble and assembled kitchen and
bath cabinetry, bath vanities, home office workstations and entertainment
centers, storage products, bookcases and kitchen utility products; and Thermal
Concepts, Inc., a U.S.-based insulation services company. The Company issued
approximately 104 million shares of common stock for all of the outstanding
shares of these companies. The transactions have been accounted for as poolings
of interests and, accordingly, the consolidated financial statements and related
shares and per share data for all periods presented have been restated to
include the accounts and operations of the pooled companies. The Company's net
sales and net income prior to these poolings for the first six months of 1999
were $2,416 million and $262.9 million, respectively. The Company's net sales
and net income prior to the poolings for the three months and nine months ended
September 30, 1998 were $1,122 million and $125.9 million and $3,246 million and
$353.5 million, respectively. For the year ended December 31, 1998, pooled
companies had net sales and net income of approximately $935 million and $89
million, respectively.
PURCHASE ACQUISITIONS
During the third quarter of 1999, the Company acquired Arrow Fastener
Company, a U.S.-based manufacturer of manual and electric staple guns and
supplies and other hand tools, H&H Tube, a U.S.-based manufacturer of brass,
copper, steel and aluminum tubes and Superia Radiatoren N.V., a Belgian-based
manufacturer of standard plate radiators. The Company also acquired a 75 percent
share of Inrecon L.L.C., a U.S.-based company specializing in repair and
restoration of residential, commercial and institutional facilities damaged by
fire, wind, water and storms. The Company had acquired the initial 25 percent in
1997. With this acquisition, Inrecon has become a wholly owned subsidiary of the
Company.
During the second quarter of 1999, the Company acquired Avocet Hardware
PLC, a U.K. supplier of locks and other builders' hardware, the Cary Group, a
U.S.-based insulation services company and The GMU Group, a manufacturer and
distributor of kitchen cabinets and cabinet components, headquartered in Zumaya,
Spain. In the first quarter of 1999, the Company acquired A&J Gummers, a
U.K. manufacturer of shower valve products, and The Faucet Queens, Inc., a
U.S.-based supplier of plumbing accessories and hardware products.
The aggregate net purchase price of these purchase acquisitions was
approximately $841 million and included 1.6 million shares of Company common
stock valued at $48 million. Combined 1998 annual net sales of the above
purchase acquisitions were approximately $610 million.
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MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SALES AND OPERATIONS
SALES
Net sales increased 23 percent and 18 percent for the three months and nine
months ended September 30, 1999, respectively, from the comparable periods in
1998. Excluding purchase acquisition and disposition of companies during 1999
and 1998, net sales for the three months and nine months ended September 30,
1999 increased 13 percent and 12 percent, respectively, from the comparable
periods in 1998. These increases in net sales include increases in unit sales
volume of cabinets, architectural coatings, other kitchen and bath products, and
higher installation sales of fiberglass insulation.
Sales of Kitchen and Bath Products from the Company's North American
operations for the three months and nine months ended September 30, 1999 were
$894 million and $2,554 million, respectively, representing increases of 13
percent and 8 percent, respectively, from the comparable periods in 1998;
excluding purchase acquisition and disposition of companies, net sales of this
segment increased 12 percent and 11 percent, respectively, from the comparable
periods in 1998.
Sales of Builders' Hardware and Other Specialty Products from the Company's
North American operations for the three months and nine months ended September
30, 1999 were $524 million and $1,331 million, respectively, representing
increases of 46 percent and 35 percent, respectively, from the comparable
periods in 1998; excluding purchase acquisition of companies, net sales of this
segment increased 23 percent for both the three month and nine month periods
ended September 30, 1999.
Net sales from International operations for the three months and nine
months ended September 30, 1999 were $286 million and $777 million,
respectively, representing increases of 27 percent and 28 percent, respectively,
from the comparable periods in 1998; excluding purchase acquisition of
companies, net sales from these operations were approximately flat when compared
with the prior year periods.
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MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SALES AND OPERATIONS, CONCLUDED
OPERATING PROFIT MARGINS
The Company's consolidated operating profit margins, before general
corporate expense, were 9.9 percent and 15.3 percent for the third quarter and
nine months ended September 30, 1999, respectively. The Company's operating
profit margins, before general corporate expense for the third quarter and nine
months ended September 30, 1999 were negatively affected by unusual pre-tax
expense aggregating $156.7 million, principally related to the third quarter
1999 pooling of interests acquisitions. Excluding unusual pre-tax expense,
consolidated operating profit margins, before general corporate expense, for the
three months and nine months ended September 30, 1999 were 19.1 percent and 18.7
percent, respectively, as compared with 18.6 percent and 18.4 percent for the
comparable periods of the prior year.
Operating profit margins, before general corporate expense, of the
Company's North American Kitchen and Bath Products operating segment for the
three months and nine months ended September 30, 1999 were 14.9 percent and 18.4
percent, respectively. Excluding unusual pre-tax expense, operating profit
margins, before general corporate expense, for the three months and nine months
ended September 30, 1999 were 19.7 percent and 20.1 percent, respectively, as
compared with 20.2 percent and 19.9 percent, respectively, for the comparable
periods of the prior year.
Operating profit margins, before general corporate expense, of the
Company's North American Builders' Hardware and Other Specialty Products
operating segment for the three months and nine months ended September 30, 1999
were -1.5 percent and 9.7 percent, respectively. Excluding unusual pre-tax
expense, operating profit margins, before general corporate expense, for the
three months and nine months ended September 30, 1999 were 20.2 percent and 18.2
percent, respectively, as compared with 16.9 percent and 17.1 percent,
respectively, for the comparable periods of the prior year.
Operating profit margins, before general corporate expense, of the
Company's International operating segment for the three months and nine months
ended September 30, 1999 were 15.0 percent and 14.7 percent, respectively, as
compared with 15.5 percent and 15.0 percent, respectively, for the comparable
periods of the prior year.
OTHER INCOME (EXPENSE), NET
Included in other income (expense), net for the third quarter and nine
months ended September 30, 1999 were equity earnings from MascoTech, Inc. of
$3.9 million and $12.3 million, respectively, as compared with equity earnings
of $2.7 million and $13.0 million for the comparable periods of the prior year.
Included in other interest income is interest income from the 12%
pay-in-kind junior debt securities of Furnishings International Inc.
(approximately $377 million principal amount at December 31, 1998). Such
interest income approximated $12.0 million and $10.6 million, respectively, for
the third quarter of 1999 and 1998 and $34.6 million and $30.8 million,
respectively, for the nine months ended September 30, 1999 and 1998.
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MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OTHER INCOME (EXPENSE), NET, CONCLUDED
Other, net for the three months ended September 30, 1999 includes $33.5
million of unusual pre-tax expense, principally related to the disposition of
certain non-operating assets and the pooling of interests acquisitions.
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. 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.
NET INCOME AND EARNINGS PER SHARE
Net income for the three months and nine months ended September 30, 1999
was $64.9 million and $390.9 million, and diluted earnings per share was $.15
and $.88, respectively. Excluding $126.4 million of after-tax unusual expense
($190.2 million pre-tax) related primarily to pooling of interests acquisitions,
net income for the three months and nine months ended September 30, 1999 was
$191.3 million and $517.3 million, and diluted earnings per share was $.43 and
$1.16, respectively. Net income for the three months and nine months ended
September 30, 1998 was $152.8 million and $427.3 million, and diluted earnings
per share was $.34 and $.95, respectively.
The Company's effective tax rate for the three months and nine months
ended September 30, 1999 was 42.7 percent and 38.5 percent, respectively, as
compared with 36.8 percent and 38.3 percent, respectively, for the comparable
periods of the prior year.
OTHER FINANCIAL INFORMATION
At September 30, 1999, current assets were 2.2 times current
liabilities. The Company's long-term debt as a percent of total capitalization
ratio was 43.2 percent at September 30, 1999 as compared with 35.9 percent at
December 31, 1998.
During August 1999, the Company issued $300 million of 7.75% debentures
due August 2029. After giving effect to the issuance of these debentures, 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 $109 million of debt and equity securities.
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MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OTHER FINANCIAL INFORMATION, CONCLUDED
During the first six months of 1999, the Company repurchased
approximately 4 million of its common shares in open-market transactions. As a
result of pooling of interests acquisition requirements, the Company has
canceled its share buy-back program.
For the nine months ended September 30, 1999, cash of $287.8 million was
provided by operating activities. Cash used for investing activities was
$1,077.0 million, including $792.9 million for acquisition of companies, $247.0
million for capital expenditures and $37.1 million for other cash outflows.
Financing activities provided cash of $381.6 million, including $300.0 million
from the issuance of 7.75% debentures, $878.1 million from an increase in other
debt (primarily bank debt to finance purchase acquisitions) and $13.7 million
from other cash inflows; cash used for financing activities included $200.0
million for the retirement of 6.625% notes due September 15, 1999, $391.8
million for the payment of other debt, $111.6 million for cash dividends and
shareholder distributions and $106.8 million for the purchase of Company common
stock. The aggregate of the preceding items represents a net cash outflow of
$407.6 million. Changes in working capital and debt as indicated on the
statement of cash flows exclude the effect of purchase acquisitions and
disposition of companies, other than as mentioned above.
During the third quarter of 1999, the Company increased the quarterly
cash dividend to $.12 from $.11 per common share. This marks the 41st
consecutive year in which dividends have been increased.
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.
OTHER MATTERS
EURO CONVERSION
A single currency called the euro was introduced in Europe on January 1,
1999. Eleven of the fifteen member countries of the European Union adopted the
euro as their common legal currency as of that date. Fixed conversion rates
between these participating countries' existing currencies (the "legacy
currencies") and the euro were established as of that date. The legacy
currencies will remain legal tender as denominations of the euro until at least
January 1, 2002 (but not intended to be later than July 1, 2002). During this
transition period, parties may settle non-cash transactions using either the
euro or a participating country's legacy currency. Cash transactions will
continue to be settled in the legacy currencies of participating countries until
January 1, 2002, when euro-denominated currency will be issued. The Company is
currently making changes to existing systems to facilitate a smooth transition
to the new currency and believes that conversion to the euro will not have a
material effect on the Company's financial position or results of operations.
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MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OTHER MATTERS, CONTINUED
YEAR 2000
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 a team to address the Y2K issue. This team,
consisting of 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.
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 believes it has substantially completed
this integration.
The Company utilizes some microcomputers and software in its various
manufacturing processes throughout the world. The Company has assessed 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 believes
that its operations have substantially completed the remediation of all of their
manufacturing systems.
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MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OTHER MATTERS, CONTINUED
YEAR 2000, CONCLUDED
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,
depend in part upon its assessment of the risk that such issues could have a
material adverse impact on the Company. Senior management at the Company's
operating subsidiaries have been charged with identifying third party Y2K risks
which could materially disrupt the subsidiaries' business operations. The
Company is assisting its subsidiaries in developing contingency plans where such
risks have been identified. Contingency plans may include securing alternate
sources of supply, increasing inventory and staffing levels, stockpiling raw and
packaging materials and other appropriate measures. The Company's operations
have made substantial progress in the development of contingency plans and will
continue to refine them throughout the remainder of the year. The Company will
continue to monitor and evaluate the progress of its subsidiaries on this
critical matter.
The most reasonably likely worst case Y2K scenario for the Company is a
failure on the part of a significant customer or supplier to remediate their own
Y2K issues which results in a disruption of Company operations. However, because
the Company's customer base is broad enough to minimize the impact of the
failure of any single customer interface, and the contingency plans described
above should mitigate supply problems, the Company currently does not believe
that it has any material exposure to significant business interruption as a
result of Y2K issues. The estimated total cost of the Y2K Program is between $15
million and $20 million, which includes planned upgrades. This cost, most of
which has been incurred and expensed at September 30, 1999, 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 flows.
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MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONCLUDED)
OTHER MATTERS, CONCLUDED
FORWARD-LOOKING STATEMENT
Statements in this quarterly report on Form 10-Q may 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 Securities
and Exchange Commission.
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UNAUDITED INFORMATION REGARDING EQUITY INVESTMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Equity investments in affiliates consist primarily of the following
approximate common stock and partnership interests at September 30:
1999 1998
---- ----
Emco Limited, a Canadian company 42% 42%
MascoTech, Inc. 17% 16%
Hans Grohe, a German company 27% 27%
The following presents the condensed financial data of MascoTech, Inc.
Amounts are in thousands.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
Net Sales $399,300 $399,500 $1,284,470 $1,223,740
======== ======== ========== ==========
Gross Profit $ 99,340 $100,150 $ 329,050 $ 321,610
======== ======== ========== ==========
Net Income $ 20,200 $ 16,790 $ 70,170 $ 79,350
======== ======== ========== ==========
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22
PART II. OTHER INFORMATION
MASCO CORPORATION
ITEMS 1, 3, 4 AND 5 ARE NOT APPLICABLE.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the third quarter of 1999, Masco Corporation completed four
acquisitions pursuant to which the sellers of the acquired companies
received unregistered Masco common stock as consideration. The sellers
included individuals, private trusts, investment management funds and
institutions, each of whom represented to Masco that they were
"accredited investors" (as defined in Rule 501 under the Securities
Act of 1933). The acquisitions were: Inrecon, L.L.C., completed on
August 12; Behr Process Corporation and Mill's Pride, L.L.P., each
completed on August 31; and Thermal Concepts, Inc., completed on
September 1. The total consideration paid for these acquisitions
included an aggregate of 105,547,346 shares of Masco common stock.
Masco claims exemptions from registration under Section 4(2) of the
Securities Act of 1933 and Rule 506 under the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
4a - Registration Rights Agreement Among Masco Corporation and
The Investors Listed Therein dated as of August 31, 1999.
27a - Financial Data Schedule as of and for the year-to-date
period ended September 30, 1999.
27b - Financial Data Schedule as of and for the year-to-date
period ended June 30, 1999, restated for pooling of
interests acquisitions in the third quarter of 1999.
27c - Financial Data Schedule as of and for the year-to-date
period ended March 31, 1999, restated for pooling of
interests acquisitions in the third quarter of 1999.
27d - Financial Data Schedule as of and for the year-to-date
periods ended December 31, 1998, September 30, 1998, June
30, 1998 and March 31, 1998, restated for pooling of
interests acquisitions in the third quarter of 1999.
(B) REPORTS ON FORM 8-K:
On September 13, 1999, Masco Corporation filed a Form 8-K
reporting, in response to Item 2, Masco's acquisition of The Arrow
Fastener Company, Inrecon, L.L.C., Superia Radiatoren, N.V., Behr
Process Corporation and Mill's Pride, L.L.P.
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23
PART II. OTHER INFORMATION, CONCLUDED
MASCO CORPORATION
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 15, 1999 BY:/s/ Robert B. Rosowski
------------------------- -------------------------------
Robert B. Rosowski
Vice President - Controller
and Treasurer
(Chief Accounting Officer
and Authorized Signatory)
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MASCO CORPORATION
EXHIBIT INDEX
EXHIBIT
-------
Exhibit 4a Registration Rights Agreement Among Masco Corporation and the
Investors Listed Therein dated as of August 31, 1999.
Exhibit 27a Financial Data Schedule as of and for the year-to-date period
ended September 30, 1999.
Exhibit 27b Financial Data Schedule as of and for the year-to-date period
ended June 30, 1999, restated for pooling of interests
acquisitions in the third quarter of 1999.
Exhibit 27c Financial Data Schedule as of and for the year-to-date period
ended March 31, 1999, restated for pooling of interests
acquisitions in the third quarter of 1999.
Exhibit 27d Financial Data Schedule as of and for the year-to-date periods
ended December 31, 1998, September 30, 1998, June 30, 1998 and
March 31, 1998, restated for pooling of interests acquisitions
in the third quarter of 1999.