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
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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
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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
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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
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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
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MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, of a normal
recurring nature, necessary to present fairly its financial position as at
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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
<PAGE>
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
<PAGE>
MASCO CORPORATION
EXHIBIT INDEX
Exhibit
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 Financial Data Schedule
Exhibit 12
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
(Thousands of Dollars)
Three
Months
Ended
March 31, Year Ended December 31
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 $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
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 328,170
<SECURITIES> 0
<RECEIVABLES> 786,160<F1>
<ALLOWANCES> 0
<INVENTORY> 572,200
<CURRENT-ASSETS> 1,747,570
<PP&E> 1,183,350<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,144,630
<CURRENT-LIABILITIES> 857,480
<BONDS> 1,350,220
0
0
<COMMON> 338,670
<OTHER-SE> 2,406,870
<TOTAL-LIABILITY-AND-EQUITY> 5,144,630
<SALES> 1,147,000
<TOTAL-REVENUES> 1,147,000
<CGS> 730,300
<TOTAL-COSTS> 730,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,800
<INCOME-PRETAX> 197,300
<INCOME-TAX> 73,000
<INCOME-CONTINUING> 124,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 124,300
<EPS-PRIMARY> .37
<EPS-DILUTED> .36
<FN>
<F1>Receivables and property and equipment are presented net of allowances for
doubtful accounts and accumulated depreciation and amortization, respectively.
</FN>
</TABLE>
