-----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, Lb2c93UjfgJGBd+5DVHYifR85dv6bAkmmQx5837RagTXWhQ53P1CmYJXFIsoB78k 5mhA0Pt9F+Pn8lhNuJYaxA== 0000062996-99-000011.txt : 19990514 0000062996-99-000011.hdr.sgml : 19990514 ACCESSION NUMBER: 0000062996-99-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 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: 99620666 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 1ST 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 March 31, 1999. 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 May 1, 1999 Common stock, par value $1 per share 336,944,700 MASCO CORPORATION INDEX Page No. Part I. Financial Information Item 1. Financial Statements: Condensed Consolidated Balance Sheet - March 31, 1999 and December 31, 1998 1 Condensed Consolidated Statement of Income for the Three Months Ended March 31, 1999 and 1998 2 Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 31, 1999 and 1998 3 Notes to Condensed Consolidated Financial Statements 4-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-14 Unaudited Information Regarding Equity Investments for the Three Months Ended March 31, 1999 and 1998 15 Part II. Other Information and Signature 16 MASCO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET March 31, 1999 and December 31, 1998 (Dollars in thousands) March 31, December 31, ASSETS 1999 1998 Current assets: Cash and cash investments $ 328,170 $ 541,740 Accounts and notes receivable, net 786,160 700,130 Prepaid expenses and other 61,040 61,760 Inventories: Raw material 230,890 236,330 Finished goods 201,660 183,910 Work in process 139,650 138,750 572,200 558,990 Total current assets 1,747,570 1,862,620 Equity investment in MascoTech, Inc. 61,440 59,830 Equity investments in other affiliates 163,690 165,020 Securities of Furnishings International Inc. 445,910 434,640 Property and equipment, net 1,183,350 1,164,250 Acquired goodwill, net 1,066,090 1,036,290 Other noncurrent assets 476,580 444,700 Total assets $5,144,630 $5,167,350 LIABILITIES Current liabilities: Notes payable $ 257,420 $ 254,010 Accounts payable 157,510 171,250 Accrued liabilities 442,550 421,320 Total current liabilities 857,480 846,580 Long-term debt 1,350,220 1,391,420 Deferred income taxes and other 191,390 200,770 Total liabilities 2,399,090 2,438,770 SHAREHOLDERS' EQUITY Common stock, par value $1 per share Authorized shares: 900,000,000 338,670 339,330 Preferred stock, par value $1 per share Authorized shares: 1,000,000 --- --- Paid-in capital 249,040 294,060 Retained earnings 2,198,910 2,111,760 Other comprehensive income (loss) (41,080) (16,570) Total shareholders' equity 2,745,540 2,728,580 Total liabilities and shareholders' equity $5,144,630 $5,167,350 See notes to condensed consolidated financial statements. 1 MASCO CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME For the Three Months Ended March 31, 1999 and 1998 (Dollars in thousands except per share data) Three Months Ended March 31 1999 1998 Net sales $1,147,000 $1,039,000 Cost of sales 730,300 659,200 Gross profit 416,700 379,800 Selling, general and administrative expenses 222,800 207,500 Amortization of acquired goodwill 8,200 6,000 Operating profit 185,700 166,300 Other income (expense), net: Interest expense (22,800) (20,500) Equity earnings from MascoTech, Inc. 4,000 5,200 Other, net 30,400 33,300 11,600 18,000 Income before income taxes 197,300 184,300 Income taxes 73,000 73,700 Net income $ 124,300 $ 110,600 Earnings per share: Basic $.37 $.34 Diluted $.36 $.32 Cash dividends declared and paid per share $.11 $.105 See notes to condensed consolidated financial statements. 2 MASCO CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS For the Three Months Ended March 31, 1999 and 1998 (Dollars in thousands) Three Months Ended March 31 1999 1998 CASH FLOWS FROM (FOR) OPERATING ACTIVITIES: Cash provided by operations $ 130,700 $ 102,040 Increase in receivables (78,390) (105,780) Increase in inventories (8,420) (21,780) Decrease in current liabilities, net (2,270) (27,710) Total cash from (for) operating activities 41,620 (53,230) CASH FLOWS FROM (FOR) INVESTING ACTIVITIES: Acquisition of companies, net of cash acquired (62,720) (159,440) Capital expenditures (58,030) (36,430) Proceeds from sale of TriMas investment --- 54,640 Other, net 1,950 8,080 Total cash (for) investing activities (118,800) (133,150) CASH FLOWS FROM (FOR) FINANCING ACTIVITIES: Increase in debt 4,790 120,070 Payment of debt (55,180) (57,460) Purchase of Company common stock (48,770) --- Retirement of 9% notes, including retirement premium --- (107,920) Cash dividends paid (37,230) (34,740) Total cash (for) financing activities (136,390) (80,050) CASH AND CASH INVESTMENTS: Decrease for the quarter (213,570) (266,430) At January 1 541,740 441,330 At March 31 $ 328,170 $ 174,900 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 March 31, 1999 and the results of operations and changes in cash flows for the three months ended March 31, 1999 and 1998. The condensed consolidated balance sheet at December 31, 1998 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. 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 March 31 1999 1998 Numerator: Net income for basic shares $124,300 $110,600 Add convertible debenture interest, net --- 700 Net income for diluted shares $124,300 $111,300 Denominator: Basic shares (based on weighted average) 332,700 327,800 Add: Contingently issued award shares 7,300 8,000 Stock option dilution 3,100 4,000 Convertible debentures --- 3,800 Diluted shares 343,100 343,600 C. Late 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 cash acquisitions was approximately $63 million and the acquisitions were accounted for as purchase transactions. During the second quarter of 1999, in transactions accounted for as purchases, the Company acquired Avocet Hardware PLC, a U.K. supplier of locks and other builders' hardware, and The Cary Group, a U.S.-based insulation services company. The Company has also entered into an agreement to acquire The GMU Group, a manufacturer and distributor of kitchen cabinets and cabinet components, headquartered in Zumaya, Spain. The Company expects to complete this acquisition in the second quarter of 1999. Combined 1998 annual net sales of the above companies were approximately $350 million. 4 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) D. Other income (expense), net consists of the following, in thousands: Three Months Ended March 31 1999 1998 Interest expense $(22,800) $(20,500) Equity earnings from MascoTech, Inc. 4,000 5,200 Equity earnings, other 1,600 1,300 Income from cash and cash investments 5,300 3,600 Other interest income 12,800 11,100 Other, net 10,700 17,300 $ 11,600 $ 18,000 Other interest income for the three months ended March 31, 1999 and 1998 included $11.3 million and $10.1 million, respectively, of interest income from the 12% pay-in-kind junior debt securities of Furnishings International Inc. (approximately $377 million at December 31, 1998). Other, net in the 1999 first quarter results primarily from income and gains regarding certain non-operating assets; the 1998 first quarter included approximately $10 million of such income and gains. Also included in other, net for the first quarter of 1998 was a $29 million pre-tax gain from the sale of the Company's investment in TriMas Corporation to MascoTech, Inc. in the public tender offer. Such gain was largely offset by an approximate $12 million pre-tax charge related to the early retirement of long-term debt, and by pre-tax charges aggregating approximately $11 million principally related to asset writedowns. 5 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) E. The Company's reportable segments and related accounting policies are consistent with those as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The following table presents information about the Company by segment and geographic area, in millions: Three Months Ended March 31 1999 1998 1999 1998 Net Sales (1) Operating Profit The Company's operations by segment were: Kitchen and Bath Products $ 861 $ 813 $ 165 $ 155 Environmental Products and Services 138 94 22 14 Builders' Hardware and Other Specialty Products 148 132 21 18 Total $1,147 $1,039 $ 208 $ 187 The Company's operations by geographic area were: North America $ 924 $ 857 $ 175 $ 160 Europe 223 182 33 27 Total, as above $1,147 $1,039 208 187 General corporate expense, net (22) (21) Operating profit, after general corporate expense 186 166 Other income (expense), net 11 18 Income before income taxes $ 197 $ 184 (1) Intra-company sales among segments and geographic areas were not material. 6 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) F. The Company's total comprehensive income was as follows, in thousands: Three Months Ended March 31 1999 1998 Net income $124,300 $110,600 Other comprehensive income (loss), currency translation adjustments (24,510) 760 Total comprehensive income $ 99,790 $111,360 At March 31, 1999, certain foreign currencies, including the German deutsche mark, Dutch guilder and the Belgian franc, declined relative to the U.S. dollar from their respective relationships with the U.S. dollar at December 31, 1998. G. 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 March 31, December 31, Assets 1999 1998 Current assets: Cash and cash investments $ 348,210 $ 571,130 Receivables 1,060,150 923,470 Prepaid expenses and other 66,300 70,110 Deferred income taxes 41,690 41,950 Inventories: Raw material 293,010 298,910 Finished goods 281,030 271,720 Work in process 194,060 186,710 768,100 757,340 Total current assets 2,284,450 2,364,000 Equity investments in affiliates 257,970 258,580 Securities of Furnishings International Inc. 445,910 434,640 Property and equipment, net 1,853,040 1,842,380 Acquired goodwill, net 1,855,230 1,816,950 Other noncurrent assets 531,940 497,950 Total assets $7,228,540 $7,214,500 Liabilities and Shareholders' Equity Current liabilities: Notes payable $ 261,640 $ 258,830 Accounts payable 273,750 281,260 Accrued liabilities 597,520 556,550 Total current liabilities 1,132,910 1,096,640 Long-term debt 2,754,580 2,779,660 Deferred income taxes and other 391,500 399,130 Other interests in combined affiliates 204,010 210,490 Equity of shareholders of Masco Corporation 2,745,540 2,728,580 Total liabilities and shareholders' equity $7,228,540 $7,214,500 7 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Note G - Continued: Three Months Ended March 31 Combined Statement of Income 1999 1998 Net sales $1,592,660 $1,434,800 Costs and expenses, net: Cost of sales 1,059,940 950,610 Selling, general and administrative expenses 278,140 259,060 Other income (expense), net: Interest expense (43,020) (39,110) Other income, net 28,480 48,100 (14,540) 8,990 1,352,620 1,200,680 Income before income taxes and other interests 240,040 234,120 Income taxes 95,960 96,200 Income before other interests 144,080 137,920 Other interests in combined affiliates 19,780 27,320 Net income $ 124,300 $ 110,600 Earnings per share: Basic $.37 $.34 Diluted $.36 $.32 Cash dividends declared and paid per share $.11 $.105 8 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (concluded) Note G - Concluded: Three Months Ended March 31 Combined Statement of Cash Flows 1999 1998 Cash Flows From (For) Operating Activities: Cash provided by operations $ 185,970 $ 175,250 Increase in receivables (131,080) (139,820) Increase in inventories (6,500) (26,160) Decrease in marketable securities, net --- 27,340 Increase in current liabilities, net 12,800 1,450 Total cash from operating activities 61,190 38,060 Cash Flows From (For) Investing Activities: Capital expenditures (87,970) (61,260) Acquisition of companies, net of cash acquired (62,720) (159,440) Acquisition of other interests in TriMas Corporation --- (865,460) Proceeds from redemption of debt by affiliate --- 56,900 Proceeds from sale of subsidiaries 3,540 --- Other, net (1,180) (18,140) Total cash (for) investing activities (148,330) (1,047,400) Cash Flows From (For) Financing Activities: Increase in debt 59,640 1,105,430 Payment of debt (94,510) (395,190) Purchase of Company common stock (61,050) --- Cash dividends paid (39,860) (37,080) Total cash from (for) financing activities (135,780) 673,160 Cash and Cash Investments: Decrease for the quarter (222,920) (336,180) At January 1 571,130 587,820 At March 31 $ 348,210 $ 251,640 9 MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST QUARTER 1999 VERSUS FIRST QUARTER 1998 SALES AND OPERATIONS Net sales for the three months ended March 31, 1999 increased 10 percent to $1,147 million from $1,039 million for the comparable period in 1998; excluding acquisitions and divestitures, first quarter 1999 net sales also increased 10 percent. The increase in net sales principally includes increases in unit sales volume of cabinets, faucets and other kitchen and bath products, and higher installation sales of fiberglass insulation. For the first quarter of 1999, sales of Kitchen and Bath Products increased 6 percent to $861 million from $813 million in the first quarter of 1998; excluding acquisitions and divestitures, first quarter 1999 net sales for this segment increased 8 percent. Sales of Environmental Products and Services for the first quarter of 1999 were $138 million, representing a 47 percent increase over net sales of $94 million for the first quarter of 1998; excluding acquisitions, net sales for this segment increased 28 percent for the first quarter of 1999. Sales of Builders' Hardware and Other Specialty Products for the first quarter of 1999 were $148 million, representing a 12 percent increase over net sales of $132 million for the first quarter of 1998; there were no recent acquisitions or divestitures applicable to this segment. Net sales from North American operations for the first quarter of 1999 increased 8 percent to $924 million from $857 million for the comparable period in the prior year; excluding acquisitions and divestitures, first quarter 1999 net sales from these operations increased 11 percent. Net sales from European- based operations for the first quarter of 1999 increased 23 percent to $223 million from $182 million for the first quarter of 1998; excluding acquisitions, net sales from European-based operations increased 4 percent for the first quarter of 1999. A weaker U.S. dollar, principally against the German deutsche mark, had a modestly favorable effect on the translation of European sales in the first quarter of 1999 as compared with the first quarter of 1998; excluding recent acquisitions, European net sales in the 1999 first quarter in local currencies increased by approximately 2 percent. Cost of sales as a percentage of sales increased slightly to 63.7 percent for the first quarter of 1999 from 63.4 percent for the comparable period in 1998. Excluding amortization of acquired goodwill ($8.2 million and $6.0 million for the first quarters of 1999 and 1998, respectively), selling, general and administrative expenses as a percentage of sales for the first quarter of 1999 decreased to 19.4 percent from 20.0 percent for the comparable period in 1998. The Company's cost-containment initiatives and the leveraging of fixed costs over a higher sales base contributed to the decrease in selling, general and administrative expenses as a percentage of sales. The Company's operating profit margins improved modestly in the first quarter of 1999 as compared with the first quarter of 1998, principally due to the reduction in selling, general and administrative expenses as a percentage of sales. The Company's operating profit margin, before general corporate expense, was 18.1 percent for the first quarter of 1999 as compared with 18.0 percent for the first quarter of 1998. Operating profit margin, after general corporate expense, was 16.2 percent for the first quarter of 1999 as compared with 16.0 percent for the first quarter of 1998. 10 MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER INCOME (EXPENSE), NET Equity earnings from MascoTech, Inc. for the first quarter of 1999 were $4.0 million as compared with equity earnings from MascoTech of $5.2 million for the comparable period of 1998. Included in other interest income for the three months ended March 31, 1999 and 1998 is $11.3 million and $10.1 million, respectively, of interest income from the 12% pay-in-kind junior debt securities of Furnishings International Inc. (approximately $377 million at December 31, 1998). Other, net in the 1999 first quarter results primarily from income and gains regarding certain non-operating assets; the 1998 first quarter included approximately $10 million of such income and gains. Also included in other, net for the first quarter of 1998 was a $29 million pre-tax gain from the sale of the Company's investment in TriMas Corporation to MascoTech, Inc. in the public tender offer. Such gain was largely offset by an approximate $12 million pre-tax charge related to the early retirement of long-term debt, and by pre-tax charges aggregating approximately $11 million principally related to asset writedowns. NET INCOME AND EARNINGS PER SHARE Net income and diluted earnings per share for the first quarter of 1999 increased 12 percent and 13 percent, respectively, to $124.3 million and $.36 from $110.6 million and $.32, respectively, for the comparable period of 1998. The Company's effective tax rate decreased to 37 percent for the first quarter of 1999 as compared with 40 percent for the comparable period of 1998 due largely to the increased utilization of foreign tax credits. OTHER FINANCIAL INFORMATION At March 31, 1999, current assets were 2.0 times current liabilities; excluding $200 million of 6.625% notes due September 15, 1999, the Company's working capital ratio was 2.4 to 1. For the three months ended March 31, 1999, cash of $41.6 million was provided by operating activities. Cash used for investing activities was $118.8 million, including $62.7 million for acquisitions, $58.0 million for capital expenditures and $1.9 million for other cash inflows. Cash used for financing activities was $136.4 million, including $48.8 million for the purchase of Company common stock, $50.4 million for the net payment of debt and $37.2 million for cash dividends paid. The aggregate of the preceding items represents a net cash outflow of $213.6 million. Changes in working capital and debt as indicated on the statement of cash flows exclude the effect of acquisition of companies, other than as mentioned above. First quarter 1999 cash from operations was affected by an expected and annually recurring first quarter increase in accounts receivable (although there was no significant increase in receivable days). Most of the annual increase in accounts receivable resulting from sales increases is typically experienced in the first half of the year. During the first quarter of 1999, the Company repurchased approximately two million of its common shares in open-market transactions. At March 31, 1999, the Company had remaining authorization to repurchase up to an additional 10.7 million shares of its common stock in open-market transactions or otherwise. 11 MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 $409 million of debt and equity securities. The Company believes that its present cash balance, its cash flows from operations and, to the extent necessary, future financial market activities and bank borrowings, are sufficient to fund its 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 believes that the introduction of the euro could result in increased competitive pressures in Europe due to the heightened transparency of intra-European pricing structures. 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. 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 an internal review 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. 12 MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 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 levels, stockpiling raw and packaging materials and other appropriate measures. Once developed, contingency plans will be continually refined as additional information is updated. The Company has requested that such contingency plans be completed no later than June 30, 1999. The Company will continue to monitor and evaluate the progress of its subsidiaries on this critical matter. 13 MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 $10 million and $17 million, which includes planned upgrades. This cost, more than half of which has been incurred and expensed at March 31, 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. 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 Securities and Exchange Commission. 14 MASCO CORPORATION UNAUDITED INFORMATION REGARDING EQUITY INVESTMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 Equity investments in affiliates consist primarily of the following approximate common stock and partnership interests at March 31: 1999 1998 Emco Limited, a Canadian company 42% 42% MascoTech, Inc. 17% 17% Hans Grohe, a German partnership 27% 27% The following presents condensed financial data of MascoTech, Inc., in thousands. Three Months Ended March 31 1999 1998 Sales - Net $448,660 $400,760 Gross Profit $116,020 $104,390 Net Income $ 23,860 $ 32,740 15 PART II. OTHER INFORMATION MASCO CORPORATION Items 1 through 5 are not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 12 - Computation of Ratio of Earnings to Fixed Charges 27 - Financial Data Schedule (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: May 13, 1999 By: /s/ RICHARD G. MOSTELLER Richard G. Mosteller Senior Vice-President - Finance (Chief Financial Officer and Authorized Signatory) 16 MASCO CORPORATION EXHIBIT INDEX Exhibit Exhibit 12 Computation of Ratio of Earnings to Fixed Charges Exhibit 27 Financial Data Schedule EX-12 2 MASCO CORPORATION 1ST QUARTER 10-Q EXHIBIT 12 Exhibit 12 MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges
(Thousands of Dollars) Three Months Ended March 31, Year Ended December 31 1999 1998 1997 1996 1995 1994 Earnings Before Income Taxes and Fixed Charges: Income from continuing operations before income taxes $197,300 $755,000 $630,900 $502,700 $351,790 $292,830 Deduct/add equity in undistributed (earnings)/ loss of equity affiliates (3,970) (24,070) (19,470) (12,310) (17,770) 106,200 Add interest on indebtedness, net 23,050 86,230 80,390 74,790 73,400 60,360 Add amortization of debt expense 360 1,230 1,260 1,400 1,930 2,220 Add estimated interest factor for rentals 2,770 10,000 8,150 6,150 4,970 4,220 Earnings before income taxes and fixed charges $219,510 $828,390 $701,230 $572,730 $414,320 $465,830 Fixed Charges: Interest on indebtedness regarding continuing operations $ 24,010 $ 90,320 $ 83,520 $ 77,250 $ 76,460 $ 63,220 Amortization of debt expense 360 1,230 1,260 1,400 1,930 2,220 Estimated interest factor for rentals 2,770 10,000 8,150 6,150 4,970 4,220 Fixed Charges $ 27,140 $101,550 $ 92,930 $ 84,800 $ 83,360 $ 69,660 Ratio of earnings to fixed charges 8.1 8.2 7.5 6.8 5.0 6.7
EX-27 3 MASCO CORPORATION 1ST QUARTER 10-Q EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MASCO CORPORATION'S MARCH 31, 1999 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 328,170 0 786,160 0 572,200 1,747,570 1,183,350 0 5,144,630 857,480 1,350,220 0 0 338,670 2,406,870 5,144,630 1,147,000 1,147,000 730,300 730,300 0 0 22,800 197,300 73,000 124,300 0 0 0 124,300 .37 .36 Receivables and property and equipment are presented net of allowances for doubtful accounts and accumulated depreciation and amortization, respectively.
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