-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DhK+CMeBm0J7wegdj0WX6OFcf3WIdulPAooPyTPt9EbTn4D7rO7BKRa/YHTYno0V QuWtwaFFiqnIZs7RG5m9lQ== 0000062996-98-000008.txt : 19981116 0000062996-98-000008.hdr.sgml : 19981116 ACCESSION NUMBER: 0000062996-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MASCO CORP /DE/ CENTRAL INDEX KEY: 0000062996 STANDARD INDUSTRIAL CLASSIFICATION: HEATING EQUIP, EXCEPT ELEC & WARM AIR & PLUMBING FIXTURES [3430] IRS NUMBER: 381794485 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05794 FILM NUMBER: 98748031 BUSINESS ADDRESS: STREET 1: 21001 VAN BORN RD CITY: TAYLOR STATE: MI ZIP: 48180 BUSINESS PHONE: 3132747400 MAIL ADDRESS: STREET 1: 21001 VAN BORN ROAD CITY: TAYLOR STATE: MI ZIP: 48180 FORMER COMPANY: FORMER CONFORMED NAME: MASCO SCREW PRODUCTS CO DATE OF NAME CHANGE: 19731025 10-Q 1 MASCO CORPORATION 3RD QUARTER 10-Q 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. EX-4 2 MASCO CORPORATION 3RD QUARTER 10-Q EXHIBIT 4 AMENDMENT NO. 1 TO RIGHTS AGREEMENT AMENDMENT NO. 1 dated as of September 23, 1998 to the Rights Agreement dated as of December 6, 1995 (the "Rights Agreement") between Masco Corporation, a Delaware corporation (the "Company"), and The Bank of New York, as Rights Agent (the "Rights Agent"). W I T N E S S E T H WHEREAS, the parties hereto desire to amend the Rights Agreement in certain respects; NOW, THEREFORE, the parties hereto agree as follows: Section 1. Defined Terms; References. (a) Unless otherwise specifically defined herein, each term used herein which is defined in the Rights Agreement has the meaning assigned to such term in the Rights Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Rights Agreement shall, after this Amendment becomes effective, refer to the Rights Agreement as amended hereby. (b) Section 1 of the Rights Agreement is hereby amended by deleting the definition of "Continuing Directors" contained therein. (c) Section 1 of the Rights Agreement is hereby amended by restating in its entirety the following definition to read in full as follows: "Acquiring Person" means any Person who, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding, but shall not include the Company, any of its Subsidiaries, any employee benefit plan of the Company or any of its Subsidiaries or any Person organized, appointed or established by the Company or any of its Subsidiaries for or pursuant to the terms of any such plan; provided, however, that (a) if the majority of Directors determines (whether prior to or after the date that in the absence of such determination would be a Distribution Date) in good faith that a Person who otherwise would be an "Acquiring Person" became such inadvertently, and if such Person as promptly as practicable divests itself of Beneficial Ownership of a sufficient number of shares of Common Stock so that such Person is no longer an "Acquiring Person," then such Person shall not be deemed to be or to have become an "Acquiring Person" for any purposes of this Agreement; and (b) no Person shall become an "Acquiring Person" solely as a result of an acquisition of shares of Common Stock by the Company which, by reducing the number of shares of Common Stock outstanding, increases the proportionate number of shares of Common Stock beneficially owned by such Person (together with any Affiliate and Associate of such Person) to 15% or more of the shares of Common Stock then outstanding; provided, however, that if a Person shall become the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding by reason of such share acquisition by the Company and shall thereafter (together with any Affiliate and Associate) become the Beneficial Owner of any additional shares of Common Stock (other than pursuant to a stock dividend, stock split, recapitalization or similar transaction that does not affect the percentage of outstanding Common Stock beneficially owned by such Person) which causes the proportionate number of shares of Common Stock beneficially owned by such Person to increase to 15% or more of the shares of Common Stock then outstanding, then such Person shall be deemed to be an "Acquiring Person". (d) Section 1 of the Rights Agreement is hereby amended by deleting from the definition of "Distribution Date" both instances of the word "Continuing". Section 2. Exercise of Rights; Expiration Date of Rights. Section 7(d) of the Rights Agreement is hereby amended by inserting the words "a majority of" after the words "a transfer which" and deleting the word "Continuing" from clause (iii)(B) in the first sentence thereof. Section 3. Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights. Section 11 of the Rights Agreement is hereby amended by: 2 (a) replacing the words "a majority of the Continuing Directors has determined to be" in the first sentence of subsection (a)(iii) thereof with the word "are"; (b) replacing each instance of the words "(as determined by the Continuing Directors based upon the advice of a nationally recognized investment banking firm selected by the Continuing Directors)" in subsection (a)(iii) thereof with the words "(based upon the advice of a nationally recognized investment banking firm)"; (c) deleting the second sentence of subsection (a)(iii) thereof; (d) replacing the words "first and/or second sentence of this Section 11(a)(iii)" in the third sentence of subsection (a)(iii) thereof with the words "preceding sentence"; (e) replacing the words "Substitution Period in order to seek any authorization of additional shares and/or" in the third sentence of subsection (a)(iii) thereof with the words "30-day period set forth above in order"; (f) replacing the words "such first and/or second" in the third sentence of subsection (a)(iii) thereof with the words "the preceding"; (g) deleting the words ", or, if at the time of such selection there is an Acquiring Person, by a majority of the Continuing Directors" from the second sentence of subsection (d)(i) thereof; (h) replacing the words "majority of the Continuing Directors" in the third sentence of subsection (d)(i) thereof with the words "nationally recognized investment banking firm"; (i) deleting the words "by a majority of the Continuing Directors, or, if there are no Continuing Directors," from the fourth sentence of subsection (d)(i) thereof; (j) deleting the words "selected by the Board of Directors" from the fourth sentence of subsection (d)(i) thereof; (k) deleting the words "by a majority of the Continuing Directors then in office, or, if there are no Continuing Directors," from subsection (d)(iii) thereof; and 3 (l) deleting the words "selected by the Board of Directors" from subsection (d)(iii) thereof. Section 4. Fractional Rights and Fractional Shares. Section 14(a) of the Rights Agreement is hereby amended by: (a) deleting the words ", or, if at the time of such selection there is an Acquiring Person, by a majority of the Continuing Directors" from the penultimate sentence thereof; and (b) replacing the words "majority of the Continuing Directors" in the last sentence thereof with the words "nationally recognized investment banking firm". Section 5. Redemption. Section 23(a) of the Rights Agreement is hereby amended by: (a) deleting the word "Continuing" in the first sentence thereof; and (b) deleting the proviso from the first sentence thereof and the semicolon immediately preceding such proviso. Section 6. Exchange. (a) Section 24(a) of the Rights Agreement is hereby amended by deleting the word "Continuing" in the first sentence thereof. (b) Section 24(b) of the Rights Agreement is hereby amended by replacing the word "Continuing" in the first sentence thereof with the words "majority of the". Section 7. Supplements and Amendments. Section 27 of the Rights Agreement is hereby amended in its entirety to read in full as follows: Prior to the Distribution Date, the Company may, and the Rights Agent shall, if the Company so directs, supplement or amend any provision of this Agreement in any respect without the approval of any holders of certificates representing shares of Common Stock. At any time when the Rights are no longer redeemable, the Company may, and the Rights Agent shall if the Company so directs, supplement or amend this Agreement without the approval of any holders of Right Certificates in order to cure any ambiguity or correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein; provided that no such supplement or amendment may (a) adversely affect the interests of the holders of Rights as such (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person), (b) cause 4 this Agreement again to become amendable other than in accordance with this sentence, or (c) cause the Rights again to become redeemable. Upon the delivery of a certificate from an appropriate officer of the Company which states that the proposed supplement or amendment is in compliance with the terms of this Section, the Rights Agent shall execute such supplement or amendment. Prior to the Distribution Date, the interest of the holders of Rights shall be deemed coincident with the interests of the holders of Common Stock. Section 8. Determination and Actions by the Board of Directors, Etc . Section 29 of the Rights Agreement is hereby amended by: (a) deleting the first parenthetical clause from the second sentence thereof; and (b) deleting the second parenthetical clause and the words "or the Continuing Directors" from the last sentence thereof. Section 9. Severability. Section 31 of the Rights Agreement is hereby amended by deleting the proviso contained therein and the semicolon that immediately precedes such proviso. Section 10. Form of Right Certificate. Exhibit B to the Rights Agreement is hereby amended by deleting the word "Continuing" in subparagraph (a) of the seventh paragraph thereof. Section 11. Summary of Terms. Exhibit C to the Rights Agreement is hereby amended by: (a) deleting the words "Continuing" from the first sentence of the footnote thereto; (b) deleting the second and third sentences of the footnote thereto; (c) deleting the word "Continuing" under the heading "Exchange"; (d) deleting both instances of the word "Continuing" under the heading "Redemption". (e) restating the language under the heading "Amendments" in its entirety to read in full as follows: Prior to the Distribution Date, the Rights Agreement may be amended in any respect. 5 After the Distribution Date, the Rights Agreement may be amended by the Board of Directors in any respect that does not (i) adversely affect the Rights holders (other than any Acquiring Person and certain affiliated persons), (ii) cause the Rights Agreement again to become amendable other than in accordance with this paragraph or (iii) cause the Rights again to become redeemable. Section 12. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Delaware without regard to any applicable conflicts of law rules, except that the rights and obligations of the Rights Agent shall be governed by the laws of the State of New York. Section 13. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Section 14. Effectiveness. This Amendment shall become effective upon execution by each of the parties hereto of a counterpart hereof. 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. MASCO CORPORATION By: /s/Richard A. Manoogian Name: Richard A. Manoogian Title: Chairman THE BANK OF NEW YORK By:/s/John Sivertsen Name: John Sivertsen Title: Vice President 7 EX-12 3 MASCO CORPORATION 3RD QUARTER 10-Q EXHIBIT 12 Exhibit 12 MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges
(Thousands of Dollars) Nine Months Ended September 30, Year Ended December 31, 1998 1997 1996 1995 1994 1993 Earnings Before Income Taxes and Fixed Charges: Income from continuing operations before income taxes $570,200 $630,900 $502,700 $351,790 $292,830 $349,190 Deduct/add equity in undistributed (earnings)/loss of equity affiliates (17,280) (19,470) (12,310) (17,770) 106,200 (13,750) Add interest on indebtedness, net 64,380 80,390 74,790 73,400 60,360 62,860 Add amortization of debt expense 880 1,260 1,400 1,930 2,220 2,650 Add estimated interest factor for rentals 7,660 8,150 6,150 4,970 4,220 3,190 Earnings before income taxes and fixed charges $625,840 $701,230 $572,730 $414,320 $465,830 $404,140 Fixed Charges: Interest on indebtedness regarding continuing operations $ 66,620 $ 83,520 $ 77,250 $ 76,460 $ 63,220 $ 63,600 Amortization of debt expense 880 1,260 1,400 1,930 2,220 2,650 Estimated interest factor for rentals 7,660 8,150 6,150 4,970 4,220 3,190 $ 75,160 $ 92,930 $ 84,800 $ 83,360 $ 69,660 $ 69,440 Ratio of earnings to fixed charges 8.3 7.5 6.8 5.0 6.7 5.8
EX-27 4 MASCO CORPORATION 3RD QUARTER 10-Q EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MASCO CORPORATION'S SEPTEMBER 30, 1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 SEP-30-1998 442,880 0 734,660 0 550,720 1,839,580 1,119,580 0 5,016,200 873,200 1,292,990 0 0 340,270 2,323,580 5,016,200 3,246,000 3,246,000 2,067,700 2,067,700 0 0 63,800 570,200 216,700 353,500 0 0 0 353,500 1.07 1.03 Receivables and property and equipment are presented net of allowances for doubtful accounts and accumulated depreciation and amortization, respectively.
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