<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 JUNE 30, 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 AUGUST 1, 1999
----- ---------------------
COMMON STOCK, PAR VALUE $1 PER SHARE 337,697,200
<PAGE> 2
MASCO CORPORATION
INDEX
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet -
June 30, 1999 and December 31, 1998 1
Condensed Consolidated Statement of
Income for the Three Months and Six
Months Ended June 30, 1999 and 1998 2
Condensed Consolidated Statement of
Cash Flows for the Six Months Ended
June 30, 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 10-15
Unaudited Information Regarding Equity
Investments for the Three Months and
Six Months Ended June 30, 1999 and 1998 16
Part II. Other Information and Signature 17-18
<PAGE> 3
MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1999 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
----------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
---------- ------------
<S> <C> <C>
Current assets:
Cash and cash investments $ 78,360 $ 541,740
Accounts and notes receivable, net 845,370 700,130
Prepaid expenses and other 71,500 61,760
Inventories:
Raw material 238,290 236,330
Finished goods 242,570 183,910
Work in process 145,890 138,750
---------- ----------
626,750 558,990
---------- ----------
Total current assets 1,621,980 1,862,620
Equity investment in MascoTech, Inc. 64,750 59,830
Equity investments in other affiliates 164,080 165,020
Securities of Furnishings International Inc. 457,280 434,640
Property and equipment, net 1,253,910 1,164,250
Acquired goodwill, net 1,342,200 1,036,290
Other noncurrent assets 491,740 444,700
---------- ----------
Total assets $5,395,940 $5,167,350
========== ==========
LIABILITIES
Current liabilities:
Notes payable $ 253,000 $ 254,010
Accounts payable 186,600 171,250
Accrued liabilities 479,350 421,320
---------- ----------
Total current liabilities 918,950 846,580
Long-term debt 1,506,840 1,391,420
Deferred income taxes and other 204,630 200,770
---------- ----------
Total liabilities 2,630,420 2,438,770
---------- ----------
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share
Authorized shares: 900,000,000 336,810 339,330
Preferred stock, par value $1 per share
Authorized shares: 1,000,000 --- ---
Paid-in capital 194,770 294,060
Retained earnings 2,300,480 2,111,760
Other comprehensive income (loss) (66,540) (16,570)
---------- ----------
Total shareholders' equity 2,765,520 2,728,580
---------- ----------
Total liabilities and
shareholders' equity $5,395,940 $5,167,350
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 4
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $1,269,000 $1,085,000 $2,416,000 $2,124,000
Cost of sales 812,600 691,400 1,542,900 1,350,600
---------- ---------- ---------- ----------
Gross profit 456,400 393,600 873,100 773,400
Selling, general and administrative
expenses 241,300 213,000 464,100 420,500
Amortization of acquired goodwill 10,100 6,800 18,300 12,800
---------- ---------- ---------- ----------
Operating profit 205,000 173,800 390,700 340,100
---------- ---------- ---------- ----------
Other income (expense), net:
Interest expense (25,000) (20,700) (47,800) (41,200)
Equity earnings from
MascoTech, Inc. 4,400 5,100 8,400 10,300
Other, net 35,500 30,600 65,900 63,900
---------- ---------- ---------- ----------
14,900 15,000 26,500 33,000
---------- ---------- ---------- ----------
Income before income taxes 219,900 188,800 417,200 373,100
Income taxes 81,300 71,800 154,300 145,500
---------- ---------- ---------- ----------
Net income $ 138,600 $ 117,000 $ 262,900 $ 227,600
========== ========== ========== ==========
Earnings per share:
Basic $ .42 $ .35 $ .79 $ .69
===== ===== ===== =====
Diluted $ .41 $ .34 $ .77 $ .66
===== ===== ===== =====
Cash dividends per share:
Declared $ .11 $ -- $ .22 $.105
===== ===== ===== =====
Paid $ .11 $.105 $ .22 $ .21
===== ===== ===== =====
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $ 269,020 $ 221,590
Increase in receivables (80,570) (97,110)
Increase in inventories (30,010) (34,160)
Increase in accounts payable and
accrued liabilities, net 7,070 15,770
--------- ---------
Total cash from operating activities 165,510 106,090
--------- ---------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Acquisition of companies, net of cash acquired (405,360) (189,370)
Capital expenditures (122,630) (74,610)
Proceeds from sale of TriMas investment --- 54,640
Other, net (4,370) (57,060)
--------- ---------
Total cash (for) investing activities (532,360) (266,400)
--------- ---------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt 168,470 131,320
Purchase of Company common stock (106,760) ---
Issuance of 6.625% debentures --- 250,000
Retirement of 9% notes, including
retirement premium --- (108,620)
Payment of debt (83,780) (66,610)
Cash dividends paid (74,460) (70,520)
--------- ---------
Total cash from (for) financing activities (96,530) 135,570
--------- ---------
CASH AND CASH INVESTMENTS:
Decrease for the period (463,380) (24,740)
At January 1 541,740 441,330
--------- ---------
At June 30 $ 78,360 $ 416,590
========= =========
</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 June 30, 1999 and the results of operations for the three months and
six months ended June 30, 1999 and 1998 and changes in cash flows for
the six months ended June 30, 1999 and 1998. The condensed consolidated
balance sheet at December 31, 1998 was derived from audited financial
statements.
B. The following are reconciliations of the numerators and denominators
used in the computations of basic and diluted earnings per share, in
thousands:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income for basic shares $138,600 $117,000 $262,900 $227,600
Add convertible debenture
interest, net --- --- --- 700
-------- -------- -------- --------
Net income for diluted shares $138,600 $117,000 $262,900 $228,300
======== ======== ======== ========
Denominator:
Basic shares (based on weighted
average) 329,700 333,500 331,200 331,100
Add:
Contingently issued award shares 7,300 6,500 7,300 6,800
Stock option dilution 3,600 4,200 3,800 4,000
Convertible debentures --- --- --- 1,900
-------- -------- -------- --------
Diluted shares 340,600 344,200 342,300 343,800
======== ======== ======== ========
</TABLE>
C. During the second quarter of 1999, the Company acquired Avocet Hardware
PLC, a U.K. supplier of locks and other builders' hardware, The Cary
Group, a U.S.-based insulation services company and The GMU Group, a
manufacturer and distributor of kitchen cabinets and cabinet components,
headquartered in Zumaya, Spain. 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 $405 million and the acquisitions were accounted for as
purchase transactions. Combined 1998 annual net sales of the above
companies were approximately $350 million.
The Company continues to be active in its acquisition efforts, and
expects that several acquisitions may be completed and announced in the
last half of 1999.
4
<PAGE> 7
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. Other income (expense), net consists of the following, in thousands:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest expense $(25,000) $(20,700) $(47,800) $(41,200)
Equity earnings from
MascoTech, Inc. 4,400 5,100 8,400 10,300
Equity earnings, other 2,300 2,700 3,900 4,000
Income from cash and
cash investments 1,200 4,600 6,500 8,200
Other interest income 12,800 10,800 25,600 21,900
Other, net 19,200 12,500 29,900 29,800
-------- -------- -------- --------
$ 14,900 $ 15,000 $ 26,500 $ 33,000
======== ======== ======== ========
</TABLE>
Included in other interest income for the three months and six months
ended June 30, 1999 and 1998 is interest income of approximately $11.3
million and $22.6 million and approximately $10.1 million and $20.2
million, respectively, from the 12% pay-in-kind junior debt securities
of Furnishings International Inc. (approximately $377 million principal
amount at December 31, 1998).
Other, net for the three months and six months ended June 30, 1999
consists primarily of income and gains, net regarding certain
non-operating assets; the 1998 second quarter and first six months
included approximately $16.0 million and $26.4 million of such income
and gains, net, respectively.
Also included in other, net for the six months ended June 30, 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
1998 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
<PAGE> 8
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
------------------------------------ ------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
------------------------------------ ------------------------------------
Net Sales (1) Operating Profit Net Sales (1) Operating Profit
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The Company's operations by segment were:
Kitchen and Bath Products $ 907 $ 841 $ 174 $ 157 $1,768 $1,654 $ 339 $ 312
Environmental Products and Services 181 107 28 16 319 201 50 30
Builders' Hardware and
Other Specialty Products 181 137 25 22 329 269 46 40
------ ------ ------ ------ ------ ------ ------ ------
Total $1,269 $1,085 $ 227 $ 195 $2,416 $2,124 $ 435 $ 382
====== ====== ====== ====== ====== ====== ====== ======
The Company's operations by geographic
area were:
North America $1,002 $ 887 $ 188 $ 165 $1,926 $1,744 $ 363 $ 325
Europe 267 198 39 30 490 380 72 57
------ ------ ------ ------ ------ ------ ------ ------
Total, as above $1,269 $1,085 227 195 $2,416 $2,124 435 382
====== ====== ====== ======
General corporate expense, net (22) (21) (44) (42)
------ ------ ------ ------
Operating profit, after general
corporate expense 205 174 391 340
Other income (expense), net 15 15 26 33
------ ------ ------ ------
Income before income taxes $ 220 $ 189 $ 417 $ 373
====== ====== ====== ======
</TABLE>
(1) Intra-company sales among segments and geographic areas were not material.
6
<PAGE> 9
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. The Company's total comprehensive income was as follows, in thousands:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $138,600 $117,000 $262,900 $227,600
Other comprehensive income (loss),
currency translation adjustments (25,460) (5,410) (49,970) (4,650)
-------- -------- -------- --------
Total comprehensive income $113,140 $111,590 $212,930 $222,950
======== ======== ======== ========
</TABLE>
At June 30, 1999, certain foreign currencies, including the German deutsche
mark, British pound and Dutch guilder, declined relative to the U.S. dollar
from their respective relationships with the U.S. dollar at March 31, 1999
and December 31, 1998, respectively.
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
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash investments $ 112,350 $ 571,130
Receivables 1,092,390 923,470
Prepaid expenses and other 72,250 70,110
Deferred income taxes 40,650 41,950
Inventories:
Raw material 286,540 298,910
Finished goods 313,090 271,720
Work in process 195,700 186,710
---------- ----------
795,330 757,340
---------- ----------
Total current assets 2,112,970 2,364,000
Equity investments in affiliates 263,020 258,580
Securities of Furnishings International Inc. 457,280 434,640
Property and equipment, net 1,915,100 1,842,380
Acquired goodwill, net 2,097,810 1,816,950
Other noncurrent assets 537,960 497,950
---------- ----------
Total assets $7,384,140 $7,214,500
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 256,550 $ 258,830
Accounts payable 289,920 281,260
Accrued liabilities 626,570 556,550
---------- ----------
Total current liabilities 1,173,040 1,096,640
Long-term debt 2,820,910 2,779,660
Deferred income taxes and other 407,120 399,130
Other interests in combined affiliates 217,550 210,490
Equity of shareholders of Masco Corporation 2,765,520 2,728,580
---------- ----------
Total liabilities and shareholders' equity $7,384,140 $7,214,500
========== ==========
</TABLE>
7
<PAGE> 10
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note G - Continued:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
COMBINED STATEMENT OF INCOME 1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $1,702,700 $1,516,400 $3,295,360 $2,951,200
---------- ---------- ---------- ----------
Costs and expenses, net:
Cost of sales 1,132,610 1,005,730 2,192,550 1,956,340
---------- ---------- ---------- ----------
Selling, general and
administrative expenses 307,620 289,750 585,760 548,810
---------- ---------- ---------- ----------
Other income (expense), net:
Interest expense (44,610) (41,480) (87,630) (80,590)
Other income, net 36,320 34,860 64,800 82,960
---------- ---------- ---------- ----------
(8,290) (6,620) (22,830) 2,370
---------- ---------- ---------- ----------
1,448,520 1,302,100 2,801,140 2,502,780
---------- ---------- ---------- ----------
Income before income taxes and
other interests 254,180 214,300 494,220 448,420
Income taxes 94,030 72,410 189,990 168,610
---------- ---------- ---------- ---------
Income before other interests 160,150 141,890 304,230 279,810
Other interests in combined affiliates 21,550 24,890 41,330 52,210
---------- ---------- ---------- ----------
Net income $ 138,600 $ 117,000 $ 262,900 $ 227,600
========== ========== ========== ==========
Earnings per share:
Basic $ .42 $ .35 $ .79 $ .69
===== ===== ===== =====
Diluted $ .41 $ .34 $ .77 $ .66
===== ===== ===== =====
Cash dividends per share:
Declared $ .11 $ -- $ .22 $.105
===== ===== ===== =====
Paid $ .11 $.105 $ .22 $ .21
===== ===== ===== =====
</TABLE>
8
<PAGE> 11
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
Note G - Concluded:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
------------------------
COMBINED STATEMENT OF CASH FLOWS 1999 1998
--------- -----------
<S> <C> <C>
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $ 370,750 $ 355,900
Increase in receivables (119,400) (120,050)
Increase in inventories (19,030) (36,790)
Decrease in marketable securities, net --- 36,750
Increase in accounts payable and
accrued liabilities, net 17,740 28,640
--------- -----------
Total cash from operating activities 250,060 264,450
--------- -----------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Acquisition of companies, net of cash acquired (405,360) (207,250)
Capital expenditures (194,960) (124,400)
Acquisition of other interests in TriMas
Corporation --- (868,310)
Proceeds from redemption of debt by affiliate --- 80,500
Proceeds from sale of subsidiaries 90,470 25,020
Other, net (5,690) (107,150)
--------- -----------
Total cash (for) investing activities (515,540) (1,201,590)
--------- -----------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt 172,730 1,390,230
Payment of debt (162,780) (518,060)
Purchase of Company common stock (123,040) ---
Cash dividends paid (80,210) (75,630)
--------- -----------
Total cash from (for) financing activities (193,300) 796,540
--------- -----------
CASH AND CASH INVESTMENTS:
Decrease for the period (458,780) (140,600)
At January 1 571,130 587,820
--------- -----------
At June 30 $ 112,350 $ 447,220
========= ===========
</TABLE>
9
<PAGE> 12
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER 1999 AND THE FIRST SIX MONTHS 1999 VERSUS
SECOND QUARTER 1998 AND THE FIRST SIX MONTHS 1998
SALES AND OPERATIONS
Net sales increased 17 percent and 14 percent for the three months and
six months ended June 30, 1999, respectively, from the comparable periods in
1998. Excluding acquisition and divestiture of companies, net sales increased 10
percent for both the three month and six month periods ended June 30, 1999 from
the comparable periods in 1998; these increases in net sales are principally due
to increases in unit sales volume of cabinets, other kitchen and bath products
and builders' hardware, and higher installation sales of fiberglass insulation.
Sales of Kitchen and Bath Products for the three months and six months
ended June 30, 1999 were $907 million and $1,768 million, respectively,
representing increases of 8 percent and 7 percent, respectively, from the
comparable periods in 1998; excluding acquisition and divestiture of companies,
net sales of this segment increased 8 percent for both the three month and six
month periods ended June 30, 1999.
Sales of Environmental Products and Services for the three months and
six months ended June 30, 1999 were $181 million and $319 million, respectively,
representing increases of 69 percent and 59 percent, respectively, from the
comparable periods in 1998; excluding acquisition of companies, net sales of
this segment increased 24 percent and 28 percent, respectively, for the three
months and six months ended June 30, 1999.
Sales of Builders' Hardware and Other Specialty Products for the three
months and six months ended June 30, 1999 were $181 million and $329 million,
respectively, representing increases of 32 percent and 22 percent, respectively,
from the comparable periods in 1998; excluding acquisition of companies, net
sales of this segment increased 11 percent and 12 percent, respectively, for the
three months and six months ended June 30, 1999.
Net sales from North American operations for the three months and six
months ended June 30, 1999 were $1,002 million and $1,926 million, respectively,
representing increases of 13 percent and 10 percent, respectively, from the
comparable periods in 1998; excluding acquisition and divestiture of companies,
net sales from these operations increased 13 percent and 12 percent,
respectively, from the comparable periods in 1998. Net sales from European
operations for the three months and six months ended June 30, 1999 were $267
million and $490 million, respectively, representing increases of 35 percent and
29 percent, respectively, from the comparable periods in 1998; excluding
acquisition of companies, net sales from these operations were approximately
flat when compared with the prior year periods.
10
<PAGE> 13
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SALES AND OPERATIONS, CONTINUED
The Company's operating profit margins in the second quarter and first
half of 1999 approximated those of the comparable 1998 periods. Cost of sales as
a percentage of sales increased to 64.0 percent from 63.7 percent and to 63.9
percent from 63.6 percent for the second quarter and six months ended June 30,
1999, respectively, from the comparable periods in 1998; selling, general and
administrative expenses as a percentage of sales decreased to 19.0 percent from
19.7 percent and to 19.2 percent from 19.8 percent for the second quarter and
six months ended June 30, 1999, respectively, from the comparable periods 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, before general corporate expense, were 17.9 percent and 18.0
percent for the second quarter and six months ended June 30, 1999, respectively,
as compared with 18.0 percent for both of the comparable 1998 periods; these
margins before general corporate expense and goodwill amortization were 18.7
percent and 18.8 percent for the second quarter and six months ended June 30,
1999, respectively, as compared with 18.6 percent for both of the comparable
1998 periods. Operating profit margins, after general corporate expense, were
16.2 percent for both the second quarter and six months ended June 30, 1999, as
compared with 16.0 percent for both of the comparable 1998 periods.
OTHER INCOME (EXPENSE), NET
Included in other income (expense), net for the second quarter and six
months ended June 30, 1999 were equity earnings from MascoTech, Inc. of $4.4
million and $8.4 million, respectively, as compared with equity earnings of $5.1
million and $10.3 million for the comparable periods of the prior year.
Included in other interest income for the three months and six months
ended June 30, 1999 and 1998 is interest income of approximately $11.3 million
and $22.6 million and approximately $10.1 million and $20.2 million,
respectively, from the 12% pay-in-kind junior debt securities of Furnishings
International Inc. (approximately $377 million principal amount at December 31,
1998).
Other, net for the three months and six months ended June 30, 1999
consists primarily of income and gains, net regarding certain non-operating
assets; the 1998 second quarter and first six months included approximately
$16.0 million and $26.4 million of such income and gains, net, respectively.
Also included in other, net for the six months ended June 30, 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 1998 gain was
largely offset by an approximate $12 million pre-tax charge related to the early
retirement of long-term debt, and by pre-tax charges aggregating approximately
$11 million principally related to certain asset writedowns.
NET INCOME AND EARNINGS PER SHARE
Net income for the second quarter of 1999 increased 18 percent to $138.6
million from $117.0 million in the comparable 1998 period. Diluted earnings per
share for the second quarter of 1999 increased 21 percent to $.41 from $.34 for
the comparable period of 1998.
Net income for the six months ended June 30, 1999 increased 16 percent
to $262.9 million from $227.6 million in the comparable 1998 period. Diluted
earnings per share for the six months ended June 30, 1999 increased 17 percent
to $.77 from $.66 for the comparable period of 1998.
11
<PAGE> 14
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NET INCOME AND EARNINGS PER SHARE, CONTINUED
The Company's effective tax rate was 37.0 percent for the second quarter
and six months ended June 30, 1999, as compared with 38.0 percent and 39.0
percent, respectively, for the comparable periods of the prior year. The
reduction in the Company's effective tax rate includes the benefit of increased
utilization of foreign tax credits.
CORPORATE DEVELOPMENT
During the second quarter of 1999, the Company acquired Avocet Hardware
PLC, a U.K. supplier of locks and other builders' hardware, The Cary Group, a
U.S.-based insulation services company and The GMU Group, a manufacturer and
distributor of kitchen cabinets and cabinet components, headquartered in Zumaya,
Spain. 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 $405 million and the acquisitions were accounted for as purchase
transactions. Combined 1998 annual net sales of the above companies were
approximately $350 million.
The Company continues to be active in its acquisition efforts, and
expects that several acquisitions may be completed and announced in the last
half of 1999.
OTHER FINANCIAL INFORMATION
At June 30, 1999, current assets were 1.8 times current liabilities;
excluding $200 million of 6.625% notes due Septemmber 15, 1999, the Company's
working capital ratio was 2.0 to 1.
For the six months ended June 30, 1999, cash of $165.5 million was
provided by operating activities. Cash used for investing activities was $532.4
million, including $405.4 million for acquisition of companies, $122.6 million
for capital expenditures and $4.4 million for other cash outflows. Cash used
for financing activities was $96.5 million, including $106.8 million for the
purchase of Company common stock, $74.5 million for cash dividends paid and
$84.8 million for the net increase in debt. The aggregate of the preceding items
represents a net cash outflow of $463.4 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 and second quarter 1999 cash from operations was affected by an
expected and annually recurring first-half 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 six months of 1999, the Company repurchased
approximately 4 million of its common shares in open-market transactions. At
June 30, 1999, the Company had remaining authorization to repurchase up to an
additional 8.5 million shares of its common stock in open-market transactions or
otherwise.
During August 1999, the Company issued $300 million of 7.75% debentures
due August 2029. After giving effect to the issuance of these debentures, the
Company has on file with the Securities and Exchange Commission, an unallocated
shelf registration pursuant to which the Company is able to issue up to a
combined $109 million of debt and equity securities.
The Company believes that 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.
12
<PAGE> 15
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OTHER MATTERS
EURO CONVERSION
A single currency called the euro was introduced in Europe on January 1,
1999. Eleven of the fifteen member countries of the European Union adopted the
euro as their common legal currency as of that date. Fixed conversion rates
between these participating countries' existing currencies (the "legacy
currencies") and the euro were established as of that date. The legacy
currencies will remain legal tender as denominations of the euro until at least
January 1, 2002 (but not intended to be later than July 1, 2002). During this
transition period, parties may settle non-cash transactions using either the
euro or a participating country's legacy currency. Cash transactions will
continue to be settled in the legacy currencies of participating countries until
January 1, 2002, when euro-denominated currency will be issued. The Company is
currently making changes to existing systems to facilitate a smooth transition
to the new currency and believes that conversion to the euro will not have a
material effect on the Company's financial position or results of operations.
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.
The second component involves the actual remediation or replacement of
non-compliant systems and equipment. For its information technology, the Company
generally utilizes mid-range, non-mainframe based computing environments which
are complemented by a series of local-area networks that are connected via a
wide-area network. Substantially all operating systems related to the mid-range
systems and networks have been updated to comply with Y2K requirements. In
addition, upgraded or modified versions of the Company's financial,
manufacturing, human resource, and other packaged software applications which
are Y2K compliant are in the process of being tested and integrated into the
Company's overall system. The Company believes it has substantially completed
this integration.
13
<PAGE> 16
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OTHER MATTERS, CONTINUED
The Company utilizes some microcomputers and software in its various
manufacturing processes throughout the world. The Company has assessed potential
Y2K issues in those processes. General findings to date indicate that problems
usually relate to old personal computers or embedded microprocessors that must
be replaced. Although there can be no assurance that the Company will identify
and correct every Y2K issue found in the computer applications used in its
manufacturing processes, the Company believes that it has in place a
comprehensive program to identify and correct any such problems and believes
that its operations have substantially completed the remediation of all of their
manufacturing systems.
The Company is also reviewing its building and utility systems (i.e.,
telephones, security, electrical) to determine any Y2K issues as part of its Y2K
Program. Many of these systems are Y2K compliant. While the Company is working
with suppliers of these systems and has no reason to expect that they will not
meet their Y2K compliance targets, there is no guarantee that they will do so.
The third component of the Y2K Program, which was initiated in late
1997, involves communication with significant suppliers and customers to
determine the extent to which the Company is vulnerable to such parties' failure
to remediate their own Y2K issues. The Company's efforts with respect to
specific issues identified, including the development of contingency plans,
depend in part upon its assessment of the risk that such issues could have a
material adverse impact on the Company. Senior management at the Company's
operating subsidiaries have been charged with identifying third party Y2K risks
which could materially disrupt the subsidiaries' business operations. The
Company is assisting its subsidiaries in developing contingency plans where such
risks have been identified. Contingency plans may include securing alternate
sources of supply, increasing inventory and staffing levels, stockpiling raw and
packaging materials and other appropriate measures. The Company's operations
have made substantial progress in the development of contingency plans and will
continue to refine them throughout the remainder of the year. The Company will
continue to monitor and evaluate the progress of its subsidiaries on this
critical matter.
The most reasonably likely worst case Y2K scenario for the Company is a
failure on the part of a significant customer or supplier to remediate their own
Y2K issues which results in a disruption of Company operations. However, because
the Company's customer base is broad enough to minimize the impact of the
failure of any single customer interface, and the contingency plans described
above should mitigate supply problems, the Company currently does not believe
that it has any material exposure to significant business interruption as a
result of Y2K issues. The estimated total cost of the Y2K Program is between $15
million and $20 million, which includes planned upgrades. This cost, most of
which has been incurred and expensed at June 30, 1999, is not expected to be
material to the Company's results of operations or financial position. This
cost, and the timing in which the Company plans to complete the Y2K Program, are
based on management's best estimates, at the present time. Accordingly, there
can be no absolute assurance that the Company will timely identify and remediate
all significant Y2K issues, that remedial efforts will not involve significant
time and expense, or that such issues will not have an adverse effect on the
Company's financial position, results of operations or cash flows.
14
<PAGE> 17
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONCLUDED)
OTHER MATTERS, CONTINUED
FORWARD-LOOKING STATEMENT
Statements in this quarterly report on Form 10-Q may include certain
forward-looking statements regarding the Company's future sales and earnings
growth potential. Actual results may vary materially because of external factors
such as interest rate fluctuations, changes in consumer spending and other
factors over which management has no control. Additional information about the
Company's products, markets and conditions, which could affect the Company's
future performance, is contained in the Company's filings with the Securities
and Exchange Commission.
15
<PAGE> 18
MASCO CORPORATION
UNAUDITED INFORMATION REGARDING EQUITY INVESTMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Equity investments in affiliates consist primarily of the following
approximate common stock and partnership interests at June 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Emco Limited, a Canadian company 42% 42%
MascoTech, Inc. 17% 17%
Hans Grohe, a German partnership 27% 27%
</TABLE>
The following presents condensed financial data of MascoTech, Inc.
Amounts are in thousands.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $436,510 $433,480 $885,170 $834,240
======== ======== ======== ========
Gross Profit $113,690 $117,070 $229,710 $221,460
======== ======== ======== ========
Net Income $ 26,110 $ 29,820 $ 49,970 $ 62,560
======== ======== ======== ========
</TABLE>
16
<PAGE> 19
MASCO CORPORATION
PART II. OTHER INFORMATION
ITEMS 1 THROUGH 3 AND ITEM 5 ARE NOT APPLICABLE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 19, 1999 at which
the stockholders voted upon the election of four nominees for Class
II Directors, and ratification of the selection of
PricewaterhouseCoopers LLP as independent auditors for the Company
for 1999. The following is a tabulation of the votes.
Election of Class II Directors
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
Joseph L. Hudson, Jr. 296,425,270 1,120,619
Verne G. Istock 296,431,005 1,114,884
Raymond F. Kennedy 296,437,231 1,108,658
John A. Morgan 296,435,876 1,110,013
</TABLE>
Approval of the appointment of PricewaterhouseCoopers LLP as
independent auditors for the Company for 1999.
<TABLE>
<CAPTION>
Abstentions and
For Against Broker Non-Votes
-------- ------- ----------------
<S> <C> <C> <C>
296,824,502 71,583 649,804
</TABLE>
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.
17
<PAGE> 20
MASCO CORPORATION
PART II. OTHER INFORMATION, CONCLUDED
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MASCO CORPORATION
(Registrant)
DATE: AUGUST 6, 1999 BY: /s/ RICHARD G. MOSTELLER
------------------------ --------------------------------------
Richard G. Mosteller
Senior Vice-President - Finance
(Chief Financial Officer
and Authorized Signatory)
18
<PAGE> 21
MASCO CORPORATION
EXHIBIT INDEX
EXHIBIT
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 Financial Data Schedule
<PAGE> 1
EXHIBIT 12
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
-----------------------------------------------------------
SIX
MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ------------------------------------------------
1999 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS BEFORE INCOME TAXES
AND FIXED CHARGES:
Income from continuing
operations before income
taxes $417,200 $755,000 $630,900 $502,700 $351,790 $292,830
Deduct/add equity in
undistributed (earnings)/
loss of equity affiliates (10,080) (24,070) (19,470) (12,310) (17,770) 106,200
Add interest on indebtedness,
net 48,330 86,230 80,390 74,790 73,400 60,360
Add amortization of debt
expense 720 1,230 1,260 1,400 1,930 2,220
Add estimated interest factor
for rentals 5,940 10,000 8,150 6,150 4,970 4,220
-------- -------- -------- -------- -------- --------
Earnings before income
taxes and fixed charges $462,110 $828,390 $701,230 $572,730 $414,320 $465,830
======== ======== ======== ======== ======== ========
FIXED CHARGES:
Interest on indebtedness
regarding continuing
operations $ 50,250 $ 90,320 $ 83,520 $ 77,250 $ 76,460 $ 63,220
Amortization of debt expense 720 1,230 1,260 1,400 1,930 2,220
Estimated interest factor
for rentals 5,940 10,000 8,150 6,150 4,970 4,220
-------- -------- -------- -------- -------- --------
Fixed Charges $ 56,910 $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
=== === === === === ===
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MASCO
CORPORATION'S JUNE 30, 1999 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 78,360
<SECURITIES> 0
<RECEIVABLES> 845,370<F1>
<ALLOWANCES> 0
<INVENTORY> 626,750
<CURRENT-ASSETS> 1,621,980
<PP&E> 1,253,910<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,395,940
<CURRENT-LIABILITIES> 918,950
<BONDS> 1,506,840
0
0
<COMMON> 336,810
<OTHER-SE> 2,428,710
<TOTAL-LIABILITY-AND-EQUITY> 5,395,940
<SALES> 2,416,000
<TOTAL-REVENUES> 2,416,000
<CGS> 1,542,900
<TOTAL-COSTS> 1,542,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,800
<INCOME-PRETAX> 417,200
<INCOME-TAX> 154,300
<INCOME-CONTINUING> 262,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 262,900
<EPS-BASIC> .79
<EPS-DILUTED> .77
<FN>
<F1>Receivables and property and equipment are presented net of allowances
for doubtful accounts and accumulated depreciation and amortization,
respectively.
</FN>
</TABLE>
