<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, 2000. 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, 2000
----- ----------------
Common stock, par value $1 per share 446,277,000
<PAGE> 2
MASCO CORPORATION
INDEX
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet -
September 30, 2000 and December 31, 1999 1
Condensed Consolidated Statement of
Income for the Three Months and Nine
Months Ended September 30, 2000 and 1999 2
Condensed Consolidated Statement of
Cash Flows for the Nine Months Ended
September 30, 2000 and 1999 3
Notes to Condensed Consolidated
Financial Statements 4-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10-16
Unaudited Information Regarding Equity
Investments for the Three Months and Nine
Months Ended September 30, 2000 and 1999 17
Part II. Other Information and Signature 18-19
<PAGE> 3
MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 2000 1999
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash investments $ 181,230 $ 230,780
Accounts and notes receivable, net 1,182,360 1,002,630
Prepaid expenses and other 130,300 106,500
Inventories:
Raw material 340,320 307,060
Finished goods 377,660 290,440
Work in process 194,480 172,370
---------- ----------
912,460 769,870
---------- ----------
Total current assets 2,406,350 2,109,780
Equity investment in MascoTech, Inc. 77,060 69,930
Equity investments in other affiliates 122,700 133,550
Securities of Furnishings International Inc. 541,510 481,270
Property and equipment, net 1,827,260 1,624,360
Acquired goodwill, net 2,148,510 1,742,930
Other noncurrent assets 761,670 473,100
---------- ----------
Total assets $7,885,060 $6,634,920
========== ==========
LIABILITIES
-----------
Current liabilities:
Notes payable $ 888,520 $ 62,300
Accounts payable 254,330 243,810
Accrued liabilities 715,170 540,320
---------- ----------
Total current liabilities 1,858,020 846,430
Long-term debt 2,277,040 2,431,270
Deferred income taxes and other 233,450 220,720
---------- ----------
Total liabilities 4,368,510 3,498,420
---------- ----------
SHAREHOLDERS' EQUITY
--------------------
Common stock, par value $1 per share
Authorized shares: 900,000,000 453,170 443,510
Preferred stock, par value $1 per share
Authorized shares: 1,000,000 --- ---
Paid-in capital 764,840 601,990
Retained earnings 2,529,160 2,151,520
Other comprehensive income (loss) (230,620) (60,520)
---------- ----------
Total shareholders' equity 3,516,550 3,136,500
---------- ----------
Total liabilities and
shareholders' equity $7,885,060 $6,634,920
========== ==========
</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, 2000 AND 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales $1,893,000 $1,704,000 $5,510,000 $4,662,000
Cost of sales 1,215,900 1,082,000 3,538,500 2,942,600
---------- ---------- ---------- ----------
Gross profit 677,100 622,000 1,971,500 1,719,400
Selling, general and administrative
expenses 359,200 463,600 1,053,700 1,041,600
Amortization of acquired goodwill 17,700 13,100 47,800 31,700
---------- ---------- ---------- ----------
Operating profit 300,200 145,300 870,000 646,100
---------- ---------- ---------- ----------
Other income (expense), net:
Interest expense (50,700) (31,700) (137,200) (86,500)
Equity earnings from
MascoTech, Inc. 3,000 3,900 11,500 12,300
Other, net 45,000 (4,300) 123,600 63,500
---------- ---------- ---------- ----------
(2,700) (32,100) (2,100) (10,700)
---------- ---------- ---------- ----------
Income before income taxes 297,500 113,200 867,900 635,400
Income taxes 110,100 48,300 321,100 244,500
---------- ---------- ---------- ----------
Net income $ 187,400 $ 64,900 $ 546,800 $ 390,900
========== ========== ========== ==========
Earnings per share:
Basic $ .42 $ .15 $1.24 $ .90
===== ===== ===== =====
Diluted $ .41 $ .15 $1.21 $ .88
===== ===== ===== =====
Cash dividends per share:
Declared $ .13 $ .12 $ .37 $ .34
===== ===== ===== =====
Paid $ .12 $ .11 $ .36 $ .33
===== ===== ===== =====
</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, 2000 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------
2000 1999
----------- ------------
<S> <C> <C>
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $ 574,410 $ 487,370
Increase in receivables (117,800) (184,550)
Increase in inventories (95,340) (63,560)
Increase in accounts payable and
accrued liabilities, net 131,180 48,510
----------- -----------
Total cash from operating activities 492,450 287,770
----------- -----------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt 971,210 1,178,140
Proceeds from sale of Company common stock
to key employees 156,000 ---
Purchase of Company common stock for:
Treasury (77,750) ---
Long-term stock incentive award plan (38,090) (106,760)
Payment of debt (299,020) (591,840)
Cash dividends paid (163,480) (111,630)
Other, net --- 13,690
----------- -----------
Total cash from financing activities 548,870 381,600
----------- -----------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Acquisition of companies, net of cash acquired (512,150) (792,920)
Capital expenditures (253,500) (246,980)
Investments in non-operating assets, net (256,700) (18,940)
Other, net (68,520) (18,160)
----------- -----------
Total cash (for) investing activities (1,090,870) (1,077,000)
----------- -----------
CASH AND CASH INVESTMENTS:
Decrease for the period (49,550) (407,630)
At January 1 230,780 553,150
----------- -----------
At September 30 $ 181,230 $ 145,520
=========== ===========
</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, 2000 and the results of operations for the three months
and nine months ended September 30, 2000 and 1999 and changes in cash
flows for the nine months ended September 30, 2000 and 1999. The
condensed consolidated balance sheet at December 31, 1999 was derived
from audited financial statements.
The consolidated financial statements include the accounts of Masco
Corporation and all majority-owned subsidiaries. All significant
intercompany transactions have been eliminated. Corporations that are 20
to 50 percent owned are accounted for by the equity method of accounting;
ownership less than 20 percent is accounted for on the cost basis unless
the Company exercises significant influence over the investee. Capital
transactions by equity affiliates, which change the Company's ownership
interest at amounts differing from the Company's carrying amount, are
reflected in other income or expense and the investment in affiliates
accounts.
The Company generally recognizes revenue as products are shipped to
customers or services are rendered, net of applicable provisions for
discounts, returns and allowances. The Company provides for its estimate
of potential bad debt and warranty expense at the time of revenue
recognition.
Inventories are stated at the lower of cost or net realizable value, with
cost determined principally by use of the first-in, first-out method.
Cost in inventory includes purchased parts, materials, direct labor and
applied manufacturing overhead.
The financial statements of the Company's foreign subsidiaries are
measured using the local currency as the functional currency. Assets and
liabilities of these subsidiaries are translated at exchange rates as of
the balance sheet date. Revenues and expenses are translated at average
rates of exchange in effect during the year. The resulting cumulative
translation adjustments have been recorded as a separate component of
shareholders' equity. Realized foreign currency transaction gains and
losses are included in consolidated net income.
Additional accounting policy disclosures are set forth in the Notes to
Consolidated Financial Statements included in Part II, Item 8 of the
Company's Annual Report on Form 10-K/A for the year ended December 31,
1999.
Certain amounts in the financial statements and notes thereto have been
reclassified to conform to September 30, 2000 classification.
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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income $187,400 $ 64,900 $546,800 $390,900
======== ======== ======== ========
Denominator:
Basic shares (based on weighted
average) 448,000 435,100 442,900 435,300
Add:
Contingently issued award shares 8,000 7,400 7,500 7,300
Stock option dilution 1,200 3,100 1,500 3,300
-------- -------- -------- --------
Diluted shares 457,200 445,600 451,900 445,900
======== ======== ======== ========
</TABLE>
4
<PAGE> 7
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. During the second quarter of 2000, the Company acquired Masterchem
Industries, Inc., a manufacturer and supplier of paint primer and paint
primer-related products, and several smaller companies. In the first
quarter of 2000, the Company acquired Tvilum-Scanbirk A/S, a Danish
manufacturer of ready-to-assemble products including cabinetry, shelving,
storage units and workstations, and a smaller company.
The aggregate net purchase price of these purchase acquisitions,
excluding assumed debt of approximately $70 million, was approximately
$600 million and included approximately four million shares of Company
common stock valued at approximately $90 million. Combined 1999 annual
net sales of the above companies was approximately $400 million.
Certain purchase agreements provide for the payment of additional
consideration, contingent upon certain conditions being met. Such
additional consideration would be recorded as additional purchase price.
The excess of the aggregate acquisition costs for these purchase
acquisitions over the fair value of net assets acquired totaled
approximately $480 million, and has been recorded as acquired goodwill,
to be amortized over periods not exceeding forty years.
D. During the third quarter of 2000, the Company reported that it has
agreed to participate in a transaction in which an affiliate of Heartland
Industrial Partners, L.P. has agreed to acquire MascoTech, Inc., an 18
percent owned affiliate of the Company. As part of the transaction, the
Company would receive cash and preferred stock and retain an approximate
ten percent minority interest, and MascoTech's option to issue
subordinated debt securities to the Company would be reduced from $200
million to $100 million. A special committee of the Company's Board of
Directors was advised by investment bankers and special legal counsel in
the committee's negotiation of the Company's participation in this
transaction. If the transaction is completed in the fourth quarter of
2000, as anticipated, the Company is expected to report an after-tax gain
from the sale.
E. Other income (expense), net consists of the following, in thousands:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- ---------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Interest expense $(50,700) $(31,700) $(137,200) $(86,500)
Equity earnings from
MascoTech, Inc. 3,000 3,900 11,500 12,300
Equity earnings, other 900 1,800 2,600 5,700
Income from cash and
cash investments 1,100 1,100 3,300 7,600
Other interest income 16,100 13,500 45,100 39,100
Other, net 26,900 (20,700) 72,600 11,100
-------- -------- --------- --------
$ (2,700) $(32,100) $ (2,100) $(10,700)
======== ======== ========= ========
</TABLE>
Included in other interest income for the three months and nine months
ended September 30, 2000 and 1999 is interest income of approximately
$13.2 million and $38.8 million, and approximately $12.0 million and
$34.6 million, respectively, from the 12% pay-in-kind junior debt
securities of Furnishings International Inc. (approximately $424 million
principal amount at December 31, 1999).
Other, net for the three month and nine month periods ended September 30,
2000 results primarily from income and gains, net regarding certain
non-operating assets. Other, net for the three months ended September 30,
1999 includes pre-tax expense aggregating $33.5 million, principally
related to the disposition of certain non-operating assets and
pooling-of-interests transactions.
5
<PAGE> 8
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. The following table presents information about the Company by segment and
geographic area, in millions.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
2000 1999 2000 1999 2000 1999 2000 1999
----------------------------------------- ---------------------------------------
Net Sales (1) Operating Profit(2)(4) Net Sales (1) Operating Profit(2)(4)
----------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The Company's operations by
segment were (3):
Cabinets and Related Products $ 659 $ 571 $ 94 $ 44 $ 1,945 $ 1,632 $ 282 $ 215
Plumbing Products 463 478 84 97 1,425 1,372 270 300
Decorative Architectural Products 396 335 86 (25) 1,080 895 229 74
Insulation Installation and
Other Services 227 156 35 23 609 346 88 52
Other Specialty Products 148 164 26 29 451 417 76 72
------- ------- ------- ------- ------- ------- ------- -------
Total $ 1,893 $ 1,704 $ 325 $ 168 $ 5,510 $ 4,662 $ 945 $ 713
======= ======= ======= ======= ======= ======= ======= =======
The Company's operations by
geographic area were:
North America $ 1,574 $ 1,411 $ 286 $ 129 $ 4,520 $ 3,872 $ 819 $ 609
International, principally Europe 319 293 39 39 990 790 126 104
------- ------- ------- ------- ------- ------- ------- -------
Total, as above $ 1,893 $ 1,704 325 168 $ 5,510 $ 4,662 945 713
======= ======= ======= =======
General corporate expense, net (25) (23) (75) (67)
------- ------- ------- -------
Operating profit, after general
corporate expense 300 145 870 646
Other income (expense), net (3) (32) (2) (11)
------- ------- ------- -------
Income before income taxes $ 297 $ 113 $ 868 $ 635
======= ======= ======= =======
</TABLE>
(1) Intra-company sales among segments were not material.
(2) Operating profit shown is after reduction for amortization of acquired
goodwill.
(3) Significant increases in assets of certain segments from December 31,
1999 were as follows: Cabinets and Related Products - $387 million,
Decorative Architectural Products - $392 million and Insulation
Installation and Other Services - $164 million.
(4) Operating profit in the 1999 periods for Cabinets and Related Products
and Decorative Architectural Products includes unusual expense primarily
related to transactions accounted for as poolings of interests.
6
<PAGE> 9
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. The Company's total comprehensive income was as follows, in thousands:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ ---------------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net income $187,400 $ 64,900 $ 546,800 $390,900
Other comprehensive income (loss) (80,240) 32,690 (170,100) (17,280)
-------- -------- --------- --------
Total comprehensive income $107,160 $ 97,590 $ 376,700 $373,620
======== ======== ========= ========
</TABLE>
H. The Company is subject to lawsuits and claims pending or asserted with
respect to matters arising in the ordinary course of business.
In May 1998, a civil suit was filed in the Grays Harbor County,
Washington Superior Court against Behr Process Corporation, a subsidiary
of the Company. The case involves four exterior wood coating products,
which represent a relatively small part of Behr's total sales. The
plaintiffs allege, among other things, that after applying these
products, the wood surfaces suffered excessive mildewing in the unique
humid climate of western Washington. The trial court certified the case
as a class action, including all purchasers of the products who reside in
nineteen counties in western Washington. Behr denies the allegations.
Although Behr believes that the subject products have been purchased by
thousands of consumers in western Washington, consumer complaints in the
past have been relatively small compared to the total volume of products
sold. In May 2000, the court entered a default against Behr as a
discovery sanction. Thereafter, the jury returned a verdict awarding
damages to the named plaintiffs. The damages awarded for the eight
homeowner claims (excluding one award to the owners of a vacation resort)
ranged individually from $14,500 to $38,000. The awards were calculated
using a formula based on the product used, the nature and square footage
of wood surface and certain other allowances. Under the verdict, the same
formula will be used for calculating awards on claims that may be
submitted by the subject purchasers of these products. In July 2000, the
court awarded additional damages of $10,000 per claim to the eight
homeowner claims, under the Washington Consumer Protection Act. This
increased the total damages awarded on the homeowner claims to
approximately $263,000. The court denied the plaintiffs' request for an
award of additional damages on claims that may be submitted by other
class members. In addition, the court granted the plaintiffs' motion for
attorneys' fees.
Behr has filed a notice of appeal of the judgment. At this time, the
Company is not in a position to estimate reliably the number of class
members, the number of claims that may be filed or the awards that class
members may seek. Although Behr is not able to estimate the amount of any
potential liability, Behr believes that there have been numerous rulings
by the trial court that constitute reversible error and that there are
valid defenses to the lawsuit.
7
<PAGE> 10
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note H - Concluded:
Behr and the Company have been served with ten complaints filed by
consumers in the Superior Courts for the Counties of Alameda, Los
Angeles, San Joachin, San Mateo, and Solano, California; one complaint
filed by a consumer in the Mobile County, Alabama Circuit Court; and one
complaint filed by consumers in the Grays Harbor County, Washington
Superior Court. The complaints allege that some of Behr's exterior wood
coating products fail to perform as warranted resulting in damage to the
plaintiffs' wood surfaces. Some of the complaints seek nationwide class
action certification; others seek class certification for one state or
region. Proceedings in the California actions have been stayed pending
the selection of one court in which all of the actions will be
coordinated.
In addition, Behr and the Company recently received a letter from two
Oregon consumers alleging misrepresentation and breach of warranties in
the sale of unspecified Behr products. The letter states that the
consumers intend to file a class action lawsuit in Oregon.
Two of Behr's liability insurers are participating in Behr's defense of
the class actions subject to a reservation of rights. One insurer has
filed a declaratory judgment action in the Orange County, California
Superior Court seeking a declaration that the claims asserted in the
class action complaints are not covered by Behr's insurance policies.
The Company is investigating the allegations in the complaints and
believes that there are substantial grounds for denial of class
certification and that there are substantial defenses to the claims.
I. In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin Number 101, "Revenue Recognition in Financial
Statements" (SAB 101). The guidelines in SAB 101 must be adopted during
the fourth quarter of 2000. The Company does not believe the adoption of
SAB 101 will have a material effect on its financial statements.
J. During the third quarter of 2000, approximately 300 of the Company's key
employees purchased from the Company 8.4 million shares of Company common
stock totaling $156.0 million under a recently adopted Executive Stock
Purchase Program ("Program"). The stock was purchased for cash at $18.50
per share, the approximate market price of the common stock at the time
of purchase. The Program was made available worldwide to the Company's
senior divisional and corporate management members.
Participants in the Program financed their purchases with five-year full
recourse personal loans, at a market interest rate, from a bank
syndicate. Each participant is fully responsible at all times for
repaying their bank loans when they become due and is personally
responsible for 100 percent of any loss in the market value of the
purchased stock. The Company has guaranteed repayment of the loans only
in the event of a default by the participant. In order to subsidize the
effective interest rate on the participants' loan and as a further
inducement for continued employment beyond the end of this five-year
Program, each participant received, as part of the Program, a restricted
stock grant vesting over a ten-year period. All of these key employees,
in order to participate in this Program, were also required to sign a
one-year non-competition agreement for the Company businesses which
employ them.
The Executive Stock Purchase Program is a voluntary plan designed to
increase at-risk stock ownership on the part of senior management, and
thereby further align the Company's management team with the interests of
its shareholders.
8
<PAGE> 11
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
K. In November 2000, the Company entered into two new Revolving Credit
Agreements with a group of banks. Such new agreements include a $1.25
billion 364-Day Revolving Credit Agreement and a $1.25 billion 5-Year
Revolving Credit Agreement. Interest is payable on borrowings under these
agreements based on various floating rate options as selected by the
Company. Proceeds from the new facilities were used to pay the
outstanding balances on the Company's $750 million Amended and Restated
Credit Agreement, due to expire in November 2001 and the Company's $1
billion Amended and Restated Credit Agreement due to expire in March
2001; both of the existing agreements were terminated in November 2000.
9
<PAGE> 12
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2000 AND THE FIRST NINE MONTHS 2000 VERSUS
THIRD QUARTER 1999 AND THE FIRST NINE MONTHS 1999
SALES AND OPERATIONS
The following tables set forth the Company's net sales and operating
profit margin information by segment and geographic area, dollars in millions:
<TABLE>
<CAPTION>
Percent Increase
(Decrease)
Three Months Ended ------------------
September 30, 2000 2000
------------------ vs. vs.
2000 1999 1999 1999 (A)
------------------ ------------------
<S> <C> <C> <C> <C>
NET SALES:
Cabinets and Related Products $ 659 $ 571 15% 3%
Plumbing Products 463 478 (3%) (6%)
Decorative Architectural Products 396 335 18% 9%
Insulation Installation and Other
Services 227 156 46% 18%
Other Specialty Products 148 164 (10%) (6%)
------ ------
Total $1,893 $1,704 11% 2%
====== ======
North America $1,574 $1,411 12% 7%
International, principally Europe 319 293 9% (18%)
------ ------
Total, as above $1,893 $1,704 11% 2%
====== ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------
2000 1999
----------------
<S> <C> <C> <C> <C>
NET SALES:
Cabinets and Related Products $1,945 $1,632 19% 8%
Plumbing Products 1,425 1,372 4% 1%
Decorative Architectural Products 1,080 895 21% 14%
Insulation Installation and Other
Services 609 346 76% 27%
Other Specialty Products 451 417 8% (7%)
------ ------
Total $5,510 $4,662 18% 7%
====== ======
North America $4,520 $3,872 17% 9%
International, principally Europe 990 790 25% (8%)
------ ------
Total, as above $5,510 $4,662 18% 7%
====== ======
</TABLE>
(A) Percentage change in sales excluding purchase acquisitions and divestitures.
10
<PAGE> 13
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
------------- --------------
<S> <C> <C> <C> <C>
OPERATING PROFIT MARGIN:(A)
Cabinets and Related Products 14.3% 7.7% (B) 14.5% 13.2%(B)
Plumbing Products 18.1% 20.3% 18.9% 21.9%
Decorative Architectural Products 21.7% (7.5%)(B) 21.2% 8.3%(B)
Insulation Installation and Other
Services 15.4% 14.7% 14.5% 15.0%
Other Specialty Products 17.6% 17.7% 16.9% 17.3%
North America 18.2% 9.1% 18.1% 15.7%
International, principally Europe 12.2% 13.3% 12.7% 13.2%
Total 17.2% 9.9% 17.2% 15.3%
</TABLE>
(A) Before general corporate expense, but including goodwill amortization.
(B) After unusual expense primarily related to transactions accounted for as
poolings of interests.
Net sales for the three month and nine month periods ended September 30,
2000 increased 11 percent and 18 percent, respectively, from the comparable
periods in 1999. Excluding purchase acquisitions and divestitures, net sales
increased 2 percent and 7 percent for the three month and nine month periods
ended September 30, 2000, respectively, over the comparable periods of the prior
year. These increases in net sales were negatively impacted by a softening of
incoming orders for certain of the Company's home improvement products in North
America and Europe and by a stronger U.S. dollar, principally against the euro,
which had an unfavorable effect on the translation of International sales for
such periods.
Cost of sales as a percentage of sales increased to 64.2 percent for both
the three months and nine months ended September 30, 2000, from 63.5 percent and
63.1 percent, respectively, for the comparable periods in 1999. The increase in
cost of sales as a percentage of sales includes the under-absorption of costs
related to a slower than anticipated new product launch, plant start-up and
relocation costs, higher commodity and energy costs and a less favorable product
mix. Excluding amortization of acquired goodwill ($17.7 million and $47.8
million for the three months and nine months ended September 30, 2000,
respectively), selling, general and administrative expenses as a percentage of
sales for the three months and nine months ended September 30, 2000 were 19.0
percent and 19.1 percent, respectively, as compared with 27.2 percent and 22.3
percent for the comparable periods in 1999. Selling, general and administrative
expense in 1999 includes the influence of unusual expense primarily related to
transactions accounted for as poolings of interests. Excluding the effect of the
1999 unusual expense, the Company's selling, general and administrative expense
as a percentage of sales increased modestly in the third quarter of 2000 as
compared with the third quarter of 1999 and approximated the 1999 percentage for
the nine months ended September 30, 2000.
11
<PAGE> 14
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's operating profit margins, before general corporate expense,
were 17.2 percent for both the three months and nine months ended September 30,
2000, as compared with 9.9 percent and 15.3 percent, respectively, for the
comparable periods in 1999. Operating profit margins in 1999 were negatively
influenced by unusual pre-tax expense aggregating $156.7 million primarily
related to transactions accounted for as poolings of interests. Excluding such
unusual expense from the 1999 periods, operating profit margins for 2000 were
lower for the three months and nine months ended September 30, 2000 than such
margins for the comparable 1999 periods. Operating profit margins, after general
corporate expense, were 15.9 percent and 15.8 percent for the three months and
nine months ended September 30, 2000, respectively, as compared with 8.5 percent
and 13.9 percent, respectively, for the comparable periods in 1999. The
Company's operating profit margins decreased in the three months and nine months
ended September 30, 2000, respectively, as compared with the comparable periods
in 1999, due to the items discussed above and in the following section.
SEGMENT AND GEOGRAPHIC AREA RESULTS
Changes in net sales in the following segment and geographic area
discussion exclude the influence of purchase acquisitions and divestitures.
Net sales of the Cabinets and Related Products segment for the three
months and nine months ended September 30, 2000 increased 3 percent and 8
percent, respectively, from the comparable periods of the prior year. These
increases principally include higher unit sales volume offset in part by the
negative influence of a stronger U.S. dollar, which affected the translation of
European operations included in this segment. Operating profit margins in 1999
were negatively influenced by the previously mentioned unusual expense primarily
related to a transaction accounted for as a pooling of interests. Excluding such
unusual expense from the 1999 periods, operating profit margins for the three
months and nine months ended September 30, 2000 were slightly lower than such
margins for the comparable periods of 1999. This year's operating profit margins
were negatively affected by lower than anticipated sales as well as by the
under-absorption of costs associated with a slower than anticipated new product
launch and higher energy costs.
Net sales of the Plumbing Products segment for the three months and nine
months ended September 30, 2000 decreased 6 percent and increased 1 percent,
respectively, from the comparable periods of the prior year. Operating profit of
the Plumbing Products segment decreased 13 percent and 10 percent, respectively,
for the three months and nine months ended September 30, 2000 from the
comparable periods of the prior year. Operating results of this segment for the
third quarter of 2000 were negatively affected by product mix, including an
increased percentage of lower margin faucet units, and for the third quarter and
nine months ended September 30, 2000 by product mix, inventory reduction
programs by customers, higher energy and material costs and a stronger U.S.
dollar, which affected the translation of European operations included in this
segment.
Decorative Architectural Products sales for the three months and nine
months ended September 30, 2000 increased 9 percent and 14 percent,
respectively, from the comparable periods of the prior year due largely to
higher unit sales volume of these products. Operating profit margins in 1999
were negatively influenced by the previously mentioned unusual expense related
to a transaction accounted for as a pooling of interests. Excluding such unusual
expense from the 1999 periods, operating profit margin for the third quarter of
2000 was lower than the operating profit margin for the third quarter of 1999
and for the nine months ended September 30, 2000 approximated such margin for
the comparable 1999 period. Operating profit margins for the third quarter and
nine months ended September 30, 2000 were negatively influenced by plant
start-up and relocation costs and higher energy costs.
12
<PAGE> 15
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sales of the Company's Insulation Installation and Other Services segment
for the three months and nine months ended September 30, 2000 increased 18
percent and 27 percent, respectively, from the comparable periods of the prior
year due to broader geographic U.S. market penetration and increased sales
volume in existing markets.
Other Specialty Products sales for the three month and nine month periods
ended September 30, 2000 decreased 6 percent and 7 percent, respectively, from
the comparable periods of the prior year. These decreases resulted principally
from the negative influence of a stronger U.S. dollar, which affected the
translation of the relatively high concentration of European operations included
in this segment.
Net sales from North American operations for the three months and nine
months ended September 30, 2000 increased 7 percent and 9 percent, respectively,
from the comparable periods in 1999. Net sales from International operations for
the three months and nine months ended September 30, 2000 decreased 18 percent
and 8 percent, respectively, from the comparable periods in 1999. A stronger
U.S. dollar, principally against the euro, had an unfavorable effect on the
translation of International sales in the three month and nine month periods
ended September 30, 2000, lowering International sales for such periods over 10
percent. The Company anticipates that unfavorable foreign currency translation
effects may continue for the balance of the year.
OTHER INCOME (EXPENSE), NET
Equity earnings from MascoTech, Inc. for the three months and nine months
ended September 30, 2000, respectively, were $3.0 million and $11.5 million as
compared with equity earnings from MascoTech of $3.9 million and $12.3 million
for the comparable periods of 1999.
Included in other interest income for the three months and nine months
ended September 30, 2000 and 1999 is $13.2 million and $38.8 million, and $12.0
million and $34.6 million, respectively, of interest income from the 12%
pay-in-kind junior debt securities of Furnishings International Inc.
(approximately $424 million principal amount at December 31, 1999).
Other, net for the three month and nine month periods ended September 30,
2000 results primarily from income and gains, net regarding certain
non-operating assets. Other, net for the three months ended September 30, 1999
includes $33.5 million of pre-tax expense, principally related to the
disposition of certain non-operating assets and pooling-of-interests
transactions.
Interest expense for the three months and nine months ended September 30,
2000 was $50.7 million and $137.2 million, respectively, as compared with $31.7
million and $86.5 million for the comparable periods of 1999. The year 2000
increases primarily relate to variable-interest rate borrowings for recent
acquisitions.
NET INCOME AND EARNINGS PER SHARE
Net income for the three months and nine months ended September 30, 2000
was $187.4 million and $546.8 million, respectively, as compared with $64.9
million and $390.9 million, respectively, for the comparable periods of 1999.
Diluted earnings per share for the three months and nine months ended September
30, 2000 were $.41 and $1.21, respectively, as compared with $.15 and $.88,
respectively, for the comparable periods of 1999. Net income and diluted
earnings per share for the 1999 periods were negatively affected by $126.4
million of after-tax unusual expense, principally related to transactions
accounted for as poolings of interests.
The Company's effective tax rate for both the three months and nine
months ended September 30, 2000 was 37.0 percent, as compared with 42.7 percent
and 38.5 percent, respectively, for the comparable periods of the prior year.
The Company estimates that its effective tax rate should approximate 37.0
percent for 2000.
13
<PAGE> 16
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUTLOOK FOR THE COMPANY
The Company experienced a continued softening of incoming orders for
certain home improvement products in North America and Europe during the third
quarter of 2000. This slowdown combined with the stronger U.S. dollar, higher
energy costs, continued new product launch and plant relocation costs, less
favorable product mix and customer inventory reduction programs negatively
impacted the Company's sales and earnings for the three month and nine month
periods ended September 30, 2000.
Although the Company continues to expect increases in sales and earnings
for the calendar year 2000 compared with 1999, if the economic and business
factors which negatively impacted the third quarter of 2000 continue, the
Company anticipates that its fourth quarter 2000 earnings may be approximately
$.34 to $.37 per diluted share.
OTHER FINANCIAL INFORMATION
The Company's current ratio was 1.3 to 1 at September 30, 2000, and was
negatively influenced by recent short-term acquisition-related borrowings; such
ratio was 2.5 to 1 at December 31, 1999.
In November 2000, the Company entered into two new Revolving Credit
Agreements with a group of banks. Such new agreements include a $1.25 billion
364-Day Revolving Credit Agreement and a $1.25 billion 5-Year Revolving Credit
Agreement. Interest is payable on borrowings under these agreements based on
various floating rate options as selected by the Company. Proceeds from the new
facilities were used to pay the outstanding balances on the Company's $750
million Amended and Restated Credit Agreement, due to expire in November 2001
and the Company's $1 billion Amended and Restated Credit Agreement due to expire
in March 2001; both of the existing agreements were terminated in November 2000.
After giving effect to these refinancings, the Company's current ratio was 1.9
to 1 at September 30, 2000.
The Company has on file with the Securities and Exchange Commission
("SEC"), an unallocated shelf registration pursuant to which the Company is able
to issue up to a combined $1.5 billion of debt and equity securities.
For the nine months ended September 30, 2000, cash of $492.5 million was
provided by operating activities. Cash provided by financing activities was
$548.9 million, including $971.2 million from an increase in bank debt largely
for acquisitions, and $156.0 million from the sale of 8.4 million shares of
Company common stock to key employees for the Executive Stock Purchase Program.
Cash used for financing activities included $299.0 million for the payment of
debt, $77.7 million for the acquisition of approximately 4 million shares of
Company common stock in open-market transactions, $38.1 million for the
acquisition of Company common stock for the Company's long-term stock incentive
award plan, and $163.5 million for cash dividends paid. Cash used for investing
activities was $1,090.9 million, including $512.2 million for acquisitions,
$253.5 million for capital expenditures, $256.7 million for investments in
non-operating assets, net and $68.5 million for other cash outflows. The
aggregate of the preceding items represents a net cash outflow of $49.5 million.
Changes in working capital and debt as indicated on the statement of cash flows
exclude the working capital and debt of acquired companies at the time of
acquisition.
During April 2000, the Company's Board of Directors authorized the
repurchase of up to 40 million shares of Company common stock in open-market
transactions or otherwise. Pursuant to this authorization, approximately 11
million common shares were repurchased through October 2000.
14
<PAGE> 17
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is subject to lawsuits and claims pending or asserted with
respect to matters generally arising in the ordinary course of business. Note H
of the Condensed Consolidated Financial Statements discusses specific claims
pending against the Company and its subsidiary, Behr Process Corporation, with
respect to several of Behr's exterior wood coating products.
During the third quarter of 2000, the Company increased the quarterly
cash dividend to $.13 from $.12 per common share. This marks the 42nd
consecutive year in which dividends have been increased.
The Company believes that its present cash balance, its cash flows from
operations and, to the extent necessary, bank borrowings and future financial
market activities, are sufficient to fund its working capital and other
investment needs.
OTHER MATTERS
MascoTech, Inc. Transaction
During the third quarter of 2000, the Company reported that it has agreed
to participate in a transaction in which an affiliate of Heartland Industrial
Partners, L.P. has agreed to acquire MascoTech, Inc., an 18 percent owned
affiliate of the Company. As part of the transaction, the Company would receive
cash and preferred stock and retain an approximate ten percent minority
interest, and MascoTech's option to issue subordinated debt securities to the
Company would be reduced from $200 million to $100 million. A special committee
of the Company's Board of Directors was advised by investment bankers and
special legal counsel in the committee's negotiation of the Company's
participation in this transaction. If the transaction is completed in the fourth
quarter of 2000, as anticipated, the Company is expected to report an after-tax
gain from the sale.
Executive Stock Program
During the third quarter of 2000, approximately 300 of the Company's key
employees purchased from the Company 8.4 million shares of Company common stock
totaling $156.0 million under a recently adopted Executive Stock Purchase
Program ("Program"). The stock was purchased for cash at $18.50 per share, the
approximate market price of the common stock at the time of purchase. The
Program was made available worldwide to the Company's senior divisional and
corporate management members.
Participants in the Program financed their purchases with five-year full
recourse personal loans, at a market interest rate, from a bank syndicate. Each
participant is fully responsible at all times for repaying their bank loans when
they become due and is personally responsible for 100 percent of any loss in the
market value of the purchased stock. The Company has guaranteed repayment of the
loans only in the event of a default by the participant. In order to subsidize
the effective interest rate on the participants' loan and as a further
inducement for continued employment beyond the end of this five-year Program,
each participant received, as part of the Program, a restricted stock grant
vesting over a ten-year period. All of these key employees, in order to
participate in this Program, were also required to sign a one-year
non-competition agreement for the Company businesses which employ them.
The Executive Stock Purchase Program is a voluntary plan designed to
increase at-risk stock ownership on the part of senior management, and thereby
further align the Company's management team with the interests of its
shareholders.
15
<PAGE> 18
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
European Currency Transition
The Company is currently completing changes to existing systems to
facilitate a smooth transition to the euro. The Company believes that conversion
to the euro, when required, will not have a material effect on the Company's
financial position or results of operations.
16
<PAGE> 19
MASCO CORPORATION
UNAUDITED INFORMATION REGARDING EQUITY INVESTMENTS
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Equity investments in affiliates consist primarily of the following
approximate common stock and partnership interests at September 30:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Emco Limited, a Canadian company 42% 42%
MascoTech, Inc. 18% 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- ------------------------
2000 1999 2000 1999
-------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Net Sales $393,770 $399,300 $1,295,480 $1,284,470
======== ======== ========== ==========
Gross Profit $ 95,410 $ 99,340 $ 328,890 $ 329,050
======== ======== ========== ==========
Net Income $ 17,860 $ 20,200 $ 69,860 $ 70,170
======== ======== ========== ==========
</TABLE>
17
<PAGE> 20
MASCO CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding this item is set forth in Note H to the
Company's Condensed Consolidated Financial Statements included in Part I, Item 1
of this Report.
Items 2 through 5 are not applicable.
Item 6. Exhibits and Reports On Form 8-K
(a) Exhibits:
4h - $1.25 billion 364-Day Revolving Credit
Agreement dated as of November 6, 2000 among
Masco Corporation and Masco Europe S.A.R.L., as
borrowers, the banks party thereto, Commerzbank
AG, New York and Grand Cayman Branches, and
Citibank, N.A., as Syndication Agents, BNP
Paribas, as Documentation Agent, and Bank One,
NA, as Administrative Agent (filed herewith)
4i - $1.25 billion 5-Year Revolving Credit
Agreement dated as of November 6, 2000 among
Masco Corporation and Masco Europe S.A.R.L., as
borrowers, the banks party thereto, Commerzbank
AG, New York and Grand Cayman Branches, and
Citibank, N.A., as Syndication Agents, BNP
Paribas, as Documentation Agent, and Bank One,
NA, as Administrative Agent (filed herewith)
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 November 9, 2000, filing the
Company's press release announcing its results for the
third quarter ended September 30, 2000.
18
<PAGE> 21
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: November 14, 2000 By: /s/ Richard G. Mosteller
---------------------- ---------------------------------------
Richard G. Mosteller
Senior Vice-President - Finance
(Chief Financial Officer
and Authorized Signatory)
19
<PAGE> 22
MASCO CORPORATION
EXHIBIT INDEX
Exhibit
-------
Exhibit 4h $1.25 billion 364-Day Revolving Credit Agreement dated
as of November 6, 2000 among Masco Corporation and Masco
Europe S.A.R.L., as borrowers, the banks party thereto,
Commerzbank AG, New York and Grand Cayman Branches, and
Citibank, N.A., as Syndication Agents, BNP Paribas, as
Documentation Agent, and Bank One, NA, as Administrative
Agent (filed herewith)
Exhibit 4i $1.25 billion 5-Year Revolving Credit Agreement dated
as of November 6, 2000 among Masco Corporation and Masco
Europe S.A.R.L., as borrowers, the banks party thereto,
Commerzbank AG, New York and Grand Cayman Branches, and
Citibank, N.A., as Syndication Agents, BNP Paribas, as
Documentation Agent, and Bank One, NA, as Administrative
Agent (filed herewith)
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 Financial Data Schedule
