<PAGE> 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, 1997. 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, 1997
----- ---------------------
Common stock, par value $1 per share 165,188,000
<PAGE> 2
MASCO CORPORATION
INDEX
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet -
September 30, 1997 and December 31, 1996 1
Condensed Consolidated Statement of
Income for the Three Months and
Nine Months Ended September 30, 1997
and 1996 2
Condensed Consolidated Statement of
Cash Flows for the Nine Months Ended
September 30, 1997 and 1996 3
Notes to Condensed Consolidated
Financial Statements 4-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9-13
Unaudited Information Regarding Equity
Investments for the Three Months and
Nine Months Ended September 30, 1997
and 1996 14
Part II. Other Information and Signature 15
<PAGE> 3
MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
------ ---------- ------------
Current assets:
<S> <C> <C>
Cash and cash investments $ 379,040 $ 473,730
Accounts and notes receivable, net 584,450 466,900
Prepaid expenses and other 108,600 77,200
Inventories:
Raw material 214,760 185,500
Finished goods 167,970 135,190
Work in process 114,190 91,250
---------- ----------
496,920 411,940
---------- ----------
Total current assets 1,569,010 1,429,770
Receivable from MascoTech, Inc. --- 151,380
Equity investment in MascoTech, Inc. 50,260 10,150
Equity investments in other affiliates 173,970 57,680
Securities of Furnishings International Inc. 383,590 356,340
Property and equipment, net 1,004,170 940,590
Acquired goodwill, net 733,140 457,350
Other noncurrent assets 309,480 298,390
---------- ----------
Total assets $4,223,620 $3,701,650
========== ==========
LIABILITIES
-----------
Current liabilities:
Notes payable $ 84,270 $ 7,590
Accounts payable 140,920 149,500
Accrued liabilities 416,400 361,350
---------- ----------
Total current liabilities 641,590 518,440
Long-term debt 1,321,250 1,236,320
Deferred income taxes and other 116,650 107,080
---------- ----------
Total liabilities 2,079,490 1,861,840
---------- ----------
SHAREHOLDERS' EQUITY
--------------------
Common stock, par value $1 per share
Authorized shares: 400,000,000 165,170 160,870
Preferred stock, par value $1 per share
Authorized shares: 1,000,000 --- ---
Paid-in capital 284,250 140,010
Retained earnings 1,712,930 1,536,410
Cumulative translation adjustments (18,220) 2,520
---------- ----------
Total shareholders' equity 2,144,130 1,839,810
---------- ----------
Total liabilities and
shareholders' equity $4,223,620 $3,701,650
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 4
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- -----------------
1997 1996 1997 1996
---------- --------- ---------- -------
<S> <C> <C> <C> <C>
Net sales $1,003,000 $843,000 $2,770,000 $2,394,000
Cost of sales 634,000 522,000 1,751,700 1,498,900
---------- -------- ---------- ----------
Gross profit 369,000 321,000 1,018,300 895,100
Selling, general and administrative
expenses 205,100 180,900 573,300 520,200
Amortization of acquired goodwill 5,400 3,300 12,900 8,600
---------- -------- ---------- ----------
Operating profit 158,500 136,800 432,100 366,300
---------- -------- ---------- ----------
Other income (expense), net:
Interest expense (20,700) (20,900) (58,200) (54,900)
Re: MascoTech, Inc.:
Equity earnings 1,300 6,700 11,600 10,000
Interest income 2,500 --- 7,500 ---
Gain from change in investment --- --- 29,500 ---
Other, net 28,300 13,700 39,000 31,600
---------- -------- ---------- ----------
11,400 (500) 29,400 (13,300)
---------- -------- ---------- ----------
Income before income taxes 169,900 136,300 461,500 353,000
Income taxes 68,100 54,500 184,600 141,200
---------- -------- ---------- ----------
Net income $ 101,800 $ 81,800 $ 276,900 $ 211,800
========== ======== ========== ==========
Per share data:
Net income $.62 $.51 $1.71 $1.32
==== ==== ===== =====
Cash dividends paid $.20 $.19 $ .60 $ .57
==== ==== ===== =====
Cash dividends declared $.21 $.20 $ .61 $ .58
==== ==== ===== =====
Average shares outstanding 164,100 160,500 162,200 160,500
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
1997 1996
--------- ------
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
<S> <C> <C>
Cash provided by continuing operations $ 298,940 $258,500
(Increase) in receivables (66,960) (66,650)
(Increase)in inventories (21,520) (7,420)
(Increase) decrease in prepaid expenses
and other (34,770) 1,440
Increase in current liabilities 11,400 17,460
--------- --------
Total cash from operating activities
of continuing operations 187,090 203,330
--------- --------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Acquisition of companies, net of cash acquired (186,920) (173,110)
Capital expenditures (102,950) (80,380)
Collection of MascoTech note receivable 45,580 ---
0ther, net 35,960 40,330
--------- --------
Total cash (for) investing activities
of continuing operations (208,330) (213,160)
Discontinued operations, net --- 29,030
Cash proceeds from sale of discontinued
operations --- 707,630
--------- --------
Total cash from (for) investing activities (208,330) 523,500
--------- --------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt 85,720 136,350
Payment of debt (62,240) (635,720)
Cash dividends paid (96,930) (91,430)
--------- --------
Total cash (for) financing activities
of continuing operations (73,450) (590,800)
--------- --------
CASH AND CASH INVESTMENTS:
Increase (decrease) for the period (94,690) 136,030
At January 1 473,730 60,470
--------- --------
At September 30 $ 379,040 $196,500
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
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, 1997 and the results of operations for the three months
and nine months ended September 30, 1997 and 1996 and cash flows for the
nine months ended September 30, 1997 and 1996. The condensed
consolidated balance sheet at December 31, 1996 was derived from audited
financial statements. Earnings per share are calculated based on the
weighted average common shares outstanding. Certain amounts for the
prior year periods have been reclassified to conform to the current year
presentation.
B. In the third quarter of 1997, the Company acquired: the Alvic Group, a
Spanish manufacturer and distributor of kitchen and bath cabinetry; the
SKS Group, a German manufacturer of rolling shutters and balcony railing
systems; and Texwood Industries Inc., a U.S. manufacturer of kitchen and
bath cabinetry.
In the second quarter of 1997, the Company acquired Liberty Hardware
Manufacturing Corporation, a producer of cabinet and builders' hardware;
during the first quarter of 1997, the Company acquired Franklin Brass
Manufacturing Company, a manufacturer of bath accessories and bath
safety products, and LaGard Inc., a manufacturer of electronic locks.
Combined 1996 annual net sales of companies acquired in the first nine
months of 1997 were approximately $340 million. The combined purchase
price for the above acquisitions aggregated approximately $430 million
and included approximately 2.9 million shares of Company common stock,
with the balance in cash and debt. The acquisitions were accounted for
as purchase transactions. The net cash paid for companies acquired in
the first nine months of 1997 is summarized as follows, in thousands:
Fair value of assets
received, net of cash acquired $467,670
Less liabilities assumed
(including $70 million of debt) 108,390
--------
359,280
Common stock issued 119,360
Note issued (due January 1998) 53,000
--------
Net cash paid $186,920
========
C. The Company expects that Statement of Financial Accounting Standards No.
128 ("SFAS 128"), "Earnings Per Share," will not have a material impact
on the calculatio of earnings per share when adopted at December 31,
1997. Although earlier application of SFAS 128 is not permitted,
disclosure of the pro forma earnings per share amounts computed in
accordance with SFAS 128 is permitted. Accordingly, pro forma basic and
diluted earnings per share under SFAS 128 were $.63 and $.61,
respectively, and $1.74 and $1.67, respectively, for the third quarter
and nine months ended September 30, 1997.
D. On September 30, 1997, MascoTech, Inc. transferred to the Company 9.9
million shares (approximately 42 percent) of the outstanding common
stock of Emco Limited and $45.6 million in cash as payment of the $151
million promissory note issued by MascoTech in October 1996 at the time
of its purchase of certain of its securities held by the Company. Emco
is a leading Canadian distributor and manufacturer of building materials
for the home improvement and construction markets.
4
<PAGE> 7
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. Other income (expense), net consists of the following, in thousands:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest expense $(20,700) $(20,900) $(58,200) $(54,900)
Re: MascoTech, Inc.:
Equity earnings 1,300 6,700 11,600 10,000
Interest income 2,500 --- 7,500 ---
Gain from change in
investment --- --- 29,500 ---
Equity earnings, other 1,500 2,000 5,100 5,900
Income from cash and
cash investments 4,200 2,000 12,100 3,100
Other interest income 9,900 6,200 29,100 8,600
Other, net 12,700 3,500 (7,300) 14,000
-------- -------- -------- --------
$ 11,400 $ (500) $ 29,400 $(13,300)
======== ======== ======== ========
</TABLE>
During the fourth quarter of 1996, the Company completed the sale to
MascoTech, Inc. of 17 million shares of MascoTech common stock and
warrants to purchase 10 million shares of MascoTech common stock. This
transaction reduced the Company's common equity ownership in MascoTech
from 45 percent to 21 percent. Late in the second quarter of 1997,
MascoTech redeemed all of its publicly held outstanding convertible
preferred stock in exchange for approximately 10 million shares of its
common stock. Such redemption reduced the Company's common equity
ownership in MascoTech to 17 percent from 21 percent, and increased the
Company's equity in MascoTech's net book value by approximately $29.5
million. As a result, the Company recognized a pre-tax gain of
approximately $29.5 million during the second quarter of 1997.
Equity earnings from MascoTech for the three months and nine months
ended September 30, 1997 reflect the Company's reduction in common
equity ownership of MascoTech, as discussed above. 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 from the delivery
to the Company of 9.9 million shares of Emco Limited 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. Equity
earnings from MascoTech for the three months and nine months ended
September 30, 1997 were handicapped by the Company's equity share
(approximately $1.7 million pre-tax) of losses associated with a plant
closure and MascoTech's share of a special charge recorded by an equity
affiliate.
Equity earnings from MascoTech, Inc. for the nine months ended September
30, 1996 include the Company's equity share (approximately $11.7 million
pre-tax) of losses resulting from MascoTech's disposition of its metal
stamping businesses during the second quarter of 1996, and approximately
$5.0 million of pre-tax income related to a MascoTech accounting change
in the first quarter of 1996.
Other, net for the nine months ended September 30, 1997 includes second
quarter 1997 charges aggregating approximately $29.5 million, which
entirely offset the above-mentioned MascoTech-related second quarter
1997 gain, primarily for the adjustment of the Company's Payless
Cashways investment to its estimated fair value.
5
<PAGE> 8
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note E - Concluded:
Other, net for the three months and nine months ended September 30,
1997 includes gains aggregating $9.6 million and $25.7 million,
respectively, principally from the sale of marketable securities, as
compared with $6.5 million and $13.1 million, respectively, of gains in
the comparable periods of the prior year. In addition, other, net for
the nine months ended September 30, 1996 included a gain of
approximately $4.4 million from the sale of certain common shares of
TriMas Corporation.
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.
Included in other interest income for the three months and nine months
ended September 30, 1997 is interest income of approximately $9.0
million and $27.0 million, respectively, from the 12% pay-in-kind junior
debt securities of Furnishings International Inc. (approximately $300
million at December 31, 1996). Such interest income began to accrue in
August 1996 upon the sale of the Company's home furnishings businesses.
6
<PAGE> 9
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. The following presents the combined unaudited financial statements of
the Company, MascoTech, Inc. and TriMas Corporation 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
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
---------- -------
Current Assets:
<S> <C> <C>
Cash and cash investments $ 571,950 $ 599,020
Marketable securities 33,690 37,760
Accounts and notes receivable, net 805,780 674,530
Prepaid expenses and other 111,860 81,320
Deferred income taxes 42,810 53,670
Net current assets of businesses held
for disposition --- 85,980
Inventories:
Raw material 269,960 238,250
Finished goods 235,430 209,590
Work in process 152,230 125,950
---------- ----------
657,620 573,790
---------- ----------
Total current assets 2,223,710 2,106,070
Equity investments in affiliates 277,650 221,380
Securities of Furnishings International Inc. 383,590 356,340
Property and equipment, net 1,607,760 1,523,590
Acquired goodwill, net 916,230 660,690
Net noncurrent assets of businesses
held for disposition --- 22,850
0ther assets 467,210 415,280
---------- ----------
Total assets $5,876,150 $5,306,200
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 86,390 $ 16,620
Accounts payable 235,960 241,420
Accrued liabilities 583,480 501,800
---------- ----------
Total current liabilities 905,830 759,840
Long-term debt 1,992,880 2,020,400
Deferred income taxes and other 317,210 300,170
Other interests in combined affiliates 516,100 385,980
Equity of shareholders of Masco Corporation 2,144,130 1,839,810
---------- ----------
Total liabilities and shareholders' equity $5,876,150 $5,306,200
========== ==========
</TABLE>
7
<PAGE> 10
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F - CONTINUED:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- -----------------
COMBINED STATEMENT OF INCOME 1997 1996 1997 1996
---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Net sales $1,386,760 $1,277,660 $3,954,710 $3,843,710
---------- ---------- ---------- ----------
Costs and expenses, net:
Cost of sales 929,870 853,290 2,625,200 2,624,950
---------- ---------- ---------- ----------
Selling, general and
administrative expenses 259,220 236,470 732,390 698,290
---------- ---------- ---------- ----------
Charge on disposition of
businesses, net --- --- --- 31,520
---------- ---------- ---------- ----------
Other (income) expense, net:
Interest expense 29,020 29,410 84,230 83,690
Other income, net (38,500) (20,620) (116,150) (48,720)
---------- ---------- ---------- ----------
(9,480) 8,790 (31,920) 34,970
---------- ---------- ---------- ----------
1,179,610 1,098,550 3,325,670 3,389,730
---------- ---------- ---------- ----------
Income before income taxes,
other interests and cumulative effect
of an accounting change 207,150 179,110 629,040 453,980
Income taxes 85,840 77,350 262,900 196,600
Other interests in combined affiliates 19,510 19,960 89,240 48,660
---------- ---------- ---------- ----------
Income before cumulative effect of
an accounting change 101,800 81,800 276,900 208,720
Cumulative effect of an accounting
change, net --- --- --- 3,080
---------- ---------- ---------- ----------
Net income $ 101,800 $ 81,800 $ 276,900 $ 211,800
========== ========== ========== ==========
Earnings per share:
Income before cumulative effect
of an accounting change $.62 $.51 $1.71 $1.30
Cumulative effect of an accounting
change, net -- -- -- .02
---- ---- ----- -----
Earnings per share $.62 $.51 $1.71 $1.32
==== ==== ===== =====
Cash dividends per share:
Dividends paid $.20 $.19 $ .60 $ .57
==== ==== ===== =====
Dividends declared $.21 $.20 $ .61 $ .58
==== ==== ===== =====
Average shares outstanding 164,100 160,500 162,200 160,500
======= ======= ======= =======
</TABLE>
8
<PAGE> 11
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
NOTE F - CONCLUDED:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------
COMBINED STATEMENT OF CASH FLOWS 1997 1996
----- -----
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
<S> <C> <C>
Cash provided by continuing operations $ 497,770 $ 359,450
(Increase) in receivables (84,210) (70,860)
(Increase) decrease in inventories (14,200) 900
(Increase) decrease in prepaid expenses (34,770) 1,440
(Increase) decrease in marketable securities, net 5,590 (14,270)
Increase in current liabilities 12,330 44,750
--------- ---------
Total cash from operating activities 382,510 321,410
--------- ---------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures (153,460) (125,510)
Acquisition of companies (205,470) (199,050)
Proceeds from sale of subsidiaries 76,560 212,100
Proceeds from sale of discontinued operations --- 707,630
Proceeds from sale of investments --- 31,300
Discontinued operations, net --- 29,030
Other, net 15,650 69,620
--------- ---------
Total cash from (for) investing activities (266,720) 725,120
--------- ---------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt 123,120 156,180
Payment of debt (152,830) (909,020)
Cash dividends paid (113,150) (108,600)
--------- ---------
Total cash (for) financing activities (142,860) (861,440)
--------- ---------
CASH AND CASH INVESTMENTS:
Increase (decrease) for the period (27,070) 185,090
At January 1 599,020 169,240
--------- ---------
At September 30 $ 571,950 $ 354,330
========= =========
</TABLE>
9
<PAGE> 12
MASCO CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 1997 AND THE FIRST NINE MONTHS 1997 VERSUS
THIRD QUARTER 1996 AND THE FIRST NINE MONTHS 1996
SALES AND OPERATIONS
Net sales increased 19 percent and 16 percent for the three months and
nine months ended September 30, 1997, respectively, from the comparable periods
in 1996. Excluding acquisition of companies, net sales for the three months and
nine months ended September 30, 1997 increased 6 percent and 7 percent from the
comparable periods in 1996.
Sales of Kitchen and Bath Products for the three months and nine months
ended September 30, 1997 were $767 million and $2,158 million, respectively,
representing increases of 17 percent and 16 percent, respectively, from the
comparable periods in 1996; excluding acquisition of companies, net sales of
this segment increased 6 percent and 8 percent, respectively, for the three
months and nine months ended September 30, 1997.
Sales of Other Specialty Products for the three months and nine months
ended September 30, 1997 were $236 million and $612 million, respectively,
representing increases of 26 percent and 16 percent, respectively, from the
comparable periods in 1996; excluding acquisition of companies, net sales of
this segment increased 6 percent and 4 percent, respectively, for the three
months and nine months ended September 30, 1997.
Net sales from North American operations for the three months and nine
months ended September 30, 1997 were $818 million and $2,293 million,
respectively, representing increases of 18 percent and 14 percent, respectively,
from the comparable periods in 1996; excluding acquisition of companies, net
sales from North American operations increased 8 percent and 9 percent,
respectively, from the comparable periods in 1996. Net sales from European
operations for the three months and nine months ended September 30, 1997 were
$185 million and $477 million, respectively, representing increases of 22
percent and 27 percent, respectively, from the comparable periods in 1996;
excluding acquisition of companies, net sales from European operations decreased
6 percent and 4 percent, respectively, from the comparable periods in 1996. A
stronger U.S. dollar, principally against the German Deutsche Mark, had a
negative effect on the translation of European sales in the first nine months of
1997, as compared with the first nine months of 1996, lowering European net
sales in both the third quarter and nine months ended September 30, 1997 by more
than 10 percent.
The Company's operating profit margin decreased modestly in the third
quarter of 1997 as compared with the third quarter of 1996, and improved
slightly for the nine months ended September 30, 1997 as compared with the
comparable period in the prior year. Cost of sales as a percentage of sales
increased to 63.2 percent from 61.9 percent and to 63.2 percent from 62.6
percent for the three months and nine months ended September 30, 1997,
respectively, from the comparable periods in 1996; selling, general and
administrative expenses as a percentage of sales decreased to 20.5 percent from
21.5 percent and to 20.7 percent from 21.7 percent for the three months and nine
months ended September 30, 1997, respectively, from the comparable periods in
1996. The decreases in the selling, general and administrative expenses
percentages in 1997 include the Company's cost-control initiatives and the
leveraging of fixed and semi-fixed costs over a higher sales base. Amortization
of acquired goodwill as a percentage of sales increased to .5 percent from .4
percent for both the three months and nine months ended September 30, 1997 as
compared with the same periods in 1996, respectively. The Company's operating
profit margins, before general corporate expense, were 17.8 percent for both the
three months and nine months ended September 30, 1997, as compared with 18.8
percent and 18.1 percent, respectively, for the comparable 1996 periods.
Operating profit margins, after
10
<PAGE> 13
MASCO CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
general corporate expense, were 15.8 percent and 15.6 percent, for the three
months and nine months ended September 30, 1997, respectively, as compared with
16.2 percent and 15.3 percent, respectively, for the comparable 1996 periods.
Comparative percents were influenced by recent acquisitions with margins
generally lower than the Company averages.
OTHER INCOME (EXPENSE), NET
Equity earnings from MascoTech, Inc. for the three months and nine
months ended September 30, 1997 reflect the Company's reduction in common equity
ownership of MascoTech, as discussed below. Included in other income (expense),
net for the third quarter and nine months ended September 30, 1997 were equity
earnings from MascoTech of $1.3 million and $11.6 million, respectively, as
compared with equity earnings of $6.7 million and $10.0 million, respectively,
for the comparable 1996 periods. 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 from the delivery to the Company of 9.9 million shares of Emco
Limited 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. Equity earnings
from MascoTech for the three months and nine months ended September 30, 1997
were handicapped by the Company's equity share (approximately $1.7 million
pre-tax) of losses associated with a plant closure and MascoTech's share of a
special charge recorded by an equity affiliate.
Excluding the Company's $11.7 million pre-tax equity share of
MascoTech's second quarter 1996 disposition charge resulting from the sale of
its metal stamping businesses and the Company's approximate $5.0 million pre-tax
equity share of MascoTech's first quarter 1996 nonrecurring income resulting
from an accounting change, equity earnings from MascoTech for the nine months
ended September 30, 1996 were $16.7 million.
During the fourth quarter of 1996, the Company completed the sale to
MascoTech, Inc. of 17 million shares of MascoTech common stock and warrants to
purchase 10 million shares of MascoTech common stock. This transaction reduced
the Company's common equity ownership in MascoTech from 45 percent to 21
percent. Under the sale agreement, the Company received approximately $266
million, with $115 million paid at closing. The Company earned interest income
at 6.625% on the $151 million balance of the consideration, which was paid by
MascoTech to the Company on September 30, 1997; as provided for in the sale
agreement, MascoTech delivered to the Company 9.9 million shares (approximately
42 percent) of the outstanding common stock of Emco Limited and $45.6 million in
cash. Emco Limited is a leading Canadian distributor and manufacturer of home
improvement and buildings products. The Company, at this time, intends to
maintain its equity investment in Emco and will account for such investment
under the equity method of accounting.
Late in the second quarter of 1997, MascoTech redeemed all of its
publicly held outstanding convertible preferred stock in exchange for
approximately 10 million shares of its common stock. This redemption reduced the
Company's common equity ownership in MascoTech to 17 percent from 21 percent,
and increased the Company's equity in MascoTech's net book value by
approximately $29.5 million. As a result, the Company recognized a pre-tax gain
of approximately $29.5 million during the second quarter of 1997.
Other, net for the nine months ended September 30, 1997 includes charges
aggregating approximately $29.5 million, which entirely offset the
above-mentioned MascoTech second quarter 1997 gain, primarily for the adjustment
of the Company's Payless Cashways investment to its estimated fair value.
11
<PAGE> 14
MASCO CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other, net for the three months and nine months ended September 30, 1997
includes gains aggregating $9.6 million and $25.7 million, respectively,
principally from the sale of marketable securities, as compared with $6.5
million and $13.1 million, respectively, of gains in the comparable
periods of the prior year. In addition, other, net for the nine months ended
September 30, 1996 included a gain of approximately $4.4 million from the sale
of certain common shares of TriMas Corporation.
Income from cash and cash investments for the three months and nine
months ended September 30, 1997 increased to $4.2 million and to $12.1 million,
respectively, from $2.0 million and $3.1 million, respectively for the
comparable periods in 1996; these increases resulted from a higher average cash
and cash investments balance during the first nine months of 1997 as compared
with the first nine months of 1996. The Company's cash balance for the first
nine months of 1997 included residual proceeds from transactions in the latter
part of 1996, including the sale of certain MascoTech investments, the sale of
the Company's home furnishings businesses and European borrowings. The Company
anticipates the continued use of cash for the acquisition of companies.
Other interest income for the three months and nine months ended
September 30, 1997 includes interest income of approximately $9.0 million and
$27.0 million, respectively, from the 12% pay-in-kind junior debt securities of
Furnishings International Inc. (approximately $300 million at December 31,
1996). Such interest income began to accrue in August 1996 upon the sale of the
Company's home furnishings businesses.
NET INCOME AND EARNINGS PER SHARE
Net income for the third quarter of 1997 increased 24 percent to $101.8
million from $81.8 million in the comparable 1996 period, and earnings per share
increased 22 percent to $.62 from $.51. Net income for the nine months ended
September 30, 1997 increased 31 percent to $276.9 million from $211.8 million in
the comparable 1996 period and earnings per share increased 30 percent to $1.71
from $1.32. The Company estimates that its effective tax rate for 1997 will
approximate 40 percent.
OTHER FINANCIAL INFORMATION
At September 30, 1997 current assets were 2.4 times current liabilities.
The ratio of current assets to current liabilities at September 30, 1997 was
affected by a $53.0 million short-term acquisition-related note payable, which
is due in January 1998; excluding the effect of this note payable, current
assets were 2.6 times current liabilities at September 30, 1997.
For the nine months ended September 30, 1997, cash of $187.1 million was
provided by operating activities. Cash used for investing activities was $208.3
million, including $186.9 million for the acquisition of companies and $103.0
million for capital expenditures; cash from investing activities included $45.6
million from the collection of the MascoTech note receivable and $36.0 million
from other cash inflows. Cash used for financing activities was $73.5 million,
including $96.9 million for cash dividends paid and $23.4 million received from
the net increase in debt. The aggregate of the preceding items represents a net
cash outflow of $94.7 million. Changes in working capital and debt as indicated
on the statement of cash flows exclude the effect of acquisition of companies.
12
<PAGE> 15
MASCO CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONCLUDED)
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 $759 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.
During the third quarter of 1997, the Company increased the quarterly
cash dividend to $.21 from $.20 per common share. This marks the 39th
consecutive year in which dividends have been increased.
The Company expects that Statement of Financial Accounting Standards No.
128 ("SFAS 128"), "Earnings Per Share," will not have a material impact on the
calculation of earnings per share when adopted at December 31, 1997. Although
earlier application of SFAS 128 is not permitted, disclosure of the pro forma
earnings per share amounts computed in accordance with SFAS 128 is permitted.
Accordingly, pro forma basic and diluted earnings per share under SFAS 128 were
$.63 and $.61, respectively, and $1.74 and $1.67, respectively, for the three
months and nine months ended September 30, 1997.
13
<PAGE> 16
UNAUDITED INFORMATION REGARDING EQUITY INVESTMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Equity investments in affiliates consist primarily of the following
approximate common stock and partnership interests at September 30:
1997 1996
---- ----
Emco Limited, a Canadian company 42% --
Hans Grohe, a German partnership 27% 27%
MascoTech, Inc. 17% 45%
TriMas Corporation 4% 4%
During the fourth quarter of 1996, the Company completed the sale to
MascoTech, Inc. of 17 million shares of MascoTech common stock and warrants to
purchase 10 million shares of MascoTech common stock. This transaction reduced
the Company's common equity ownership in MascoTech from 45 percent to 21
percent. Under the sale agreement, the Company received approximately $266
million, with $115 million paid at closing. The $151 million balance of the
consideration was paid by MascoTech to the Company on September 30, 1997; as
provided for in the sale agreement, MascoTech, Inc. delivered to the Company 9.9
million shares (approximately 42 percent) of the outstanding common stock of
Emco Limited and $45.6 million in cash. Emco Limited is a leading Canadian
distributor and manufacturer of home improvement and building products.
Late in the second quarter of 1997, MascoTech redeemed all of its
publicly held outstanding convertible preferred stock in exchange for
approximately 10 million shares of its common stock. Such redemption reduced the
Company's common equity ownership in MascoTech to 17 percent from 21 percent.
The following presents the condensed financial data of MascoTech, Inc.
Amounts are in thousands.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $222,030 $290,790 $688,510 $1,009,770
======== ======== ======== ==========
Gross Profit $ 34,350 $ 55,580 $144,640 $ 174,950
======== ======== ======== ==========
Net Income
(After Preferred
Stock Dividends) $ 38,660 $ 16,150 $ 89,730 $ 25,450
======== ======== ======== ==========
</TABLE>
Included in MascoTech's net income for the third quarter and nine months
ended September 30, 1997 was $9.9 million after-tax in charges related to a
plant closure and MascoTech's share of a special charge recorded by an equity
affiliate. Also 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 from the
delivery to the Company of 9.9 million shares of Emco Limited common stock, as
discussed above; 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.
14
<PAGE> 17
PART II. OTHER INFORMATION
MASCO CORPORATION
ITEMS 1, 3, 4 & 5 ARE NOT APPLICABLE.
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable.
(b) Not applicable.
(c) During the third quarter of 1997 the Company issued 2,695,000
shares of common stock in connection with the acquisition of
Texwood Industries Inc., a U.S. manufacturer of kitchen and bath
cabinetry. The shares were issued to the shareholders of Texwood
Industries Inc., in a transaction that did not involve a public
offering and the issuance was therefore exempt under Section 4(2)
of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11 - Computation of Earnings Per Share
12 - Computation of Ratio of Earnings to Fixed Charges
27 - Financial Data Schedule
(b) Reports on Form 8-K:
Report on Form 8-K dated October 10, 1997 reporting under Item 5
the issuance of a press release relating to the receipt from
MascoTech, Inc. of 9.9 million shares (approximately 42 percent)
of the outstanding common stock of Emco Limited and cash in
payment of a promissory note issued by MascoTech in October 1996.
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 12, 1997 BY: /s/ Richard G. Mosteller
--------------------------- -----------------------------------
Richard G. Mosteller
Senior Vice-President - Finance
(Chief Financial Officer
and Authorized Signatory)
15
<PAGE> 18
MASCO CORPORATION
EXHIBIT INDEX
Exhibit
-------
Exhibit 11 Computation of Earnings Per Share
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
1997 1996 1997 1996
------- ------- ------- ------
<S> <C> <C> <C> <C>
Shares for computation of primary
and fully diluted earnings
per share:
Weighted average number of
shares outstanding 164,100 160,500 162,200 160,500
Common stock equivalents:
Shares issuable assuming
conversion of debentures 4,200 4,200 4,200 4,200
Stock options 1,800 900 1,800 900
------- ------- -------- --------
Total shares for primary
and fully diluted earnings
per share computation 170,100 165,600 168,200 165,600
======= ======= ======= =======
Net income, adjusted to basis of
earnings per share:
Net income $101,800 $81,800 $276,900 $211,800
Add back debenture
interest, net 1,500 1,500 4,400 4,400
-------- ------- -------- --------
$103,300 $83,300 $281,300 $216,200
======== ======= ======== ========
Primary and fully diluted
earnings per share $.61 $.50 $1.67 $1.31
==== ==== ===== =====
Earnings per share as reported $.62 $.51 $1.71 $1.32
==== ==== ===== =====
</TABLE>
This calculation is submitted in accordance with Regulation S-K Item
601(b)(11), although not required by APB Opinion No. 15, inasmuch as dilution
for any period was less than three percent.
<PAGE> 1
EXHIBIT 12
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
------------------------------------------------------------
Nine
Months Ended
September 30, Year Ended December 31,
----------------------------------------------
1997 1996 1995 1994 1993 1992
------------ -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS BEFORE INCOME
TAXES AND FIXED CHARGES:
Income from continuing
operations before
income taxes $461,500 $502,700 $351,790 $292,830 $349,190 $296,020
Deduct/add equity in
undistributed (earnings)
/losses of equity
affiliates (12,930) (12,310) (17,770) 106,200 (13,750) (13,210)
Add interest on
indebtedness, net 58,480 74,790 73,400 60,360 62,860 57,190
Add amortization of debt
expense 950 1,400 1,930 2,220 2,650 2,710
Add estimated interest factor
for rentals 5,590 6,150 4,970 4,220 3,190 3,290
-------- -------- -------- -------- -------- --------
Earnings from continuing
operations before income
taxes and fixed charges $513,590 $572,730 $414,320 $465,830 $404,140 $346,000
======== ======== ======== ======== ======== ========
FIXED CHARGES:
Interest on indebtedness
regarding continuing
operations $ 60,230 $ 77,250 $ 76,460 $ 63,220 $ 63,600 $ 69,890
Amortization of debt
expense 950 1,400 1,930 2,220 2,650 2,710
Estimated interest factor
for rentals 5,590 6,150 4,970 4,220 3,190 3,290
-------- -------- -------- -------- -------- --------
$ 66,770 $ 84,800 $ 83,360 $ 69,660 $ 69,440 $ 75,890
======== ======== ======== ======== ======== ========
Ratio of earnings to fixed
charges 7.7 6.8 5.0 6.7 5.8 4.6
=== === === === === ===
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MASCO
CORPORATION'S SEPTEMBER 30, 1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 379,040
<SECURITIES> 0
<RECEIVABLES> 584,450<F1>
<ALLOWANCES> 0
<INVENTORY> 496,920
<CURRENT-ASSETS> 1,569,010
<PP&E> 1,004,170<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,223,620
<CURRENT-LIABILITIES> 641,590
<BONDS> 1,321,250
0
0
<COMMON> 165,170
<OTHER-SE> 1,978,960
<TOTAL-LIABILITY-AND-EQUITY> 4,223,620
<SALES> 2,770,000
<TOTAL-REVENUES> 2,770,000
<CGS> 1,751,700
<TOTAL-COSTS> 1,751,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,200
<INCOME-PRETAX> 461,500
<INCOME-TAX> 184,600
<INCOME-CONTINUING> 276,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 276,900
<EPS-PRIMARY> 1.71
<EPS-DILUTED> 1.67
<FN>
<F1>RECEIVABLES AND PROPERTY AND EQUIPMENT ARE PRESENTED NET OF ALLOWANCES FOR
DOUBTFUL ACCOUNTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION, RESPECTIVELY.
</FN>
</TABLE>
