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, 1996. 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, 1996 Common stock, par value $1 per share 160,602,000
MASCO CORPORATION INDEX Page No. Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheet - June 30, 1996 and December 31, 1995 1 Condensed Consolidated Statement of Income for the Three Months and Six Months Ended June 30, 1996 and 1995 2 Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 1996 and 1995 3 Notes to Condensed Consolidated Financial Statements 4-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 Unaudited Information Regarding Equity Affiliates for the Three Months and Six Months Ended June 30, 1996 and 1995 12 Part II. Other Information and Signature 13
MASCO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET June 30, 1996 and December 31, 1995 (Dollars in thousands) June 30, December 31, ASSETS 1996 1995 Current assets: Cash and cash investments $ 73,030 $ 60,470 Accounts and notes receivable, net 492,600 439,900 Prepaid expenses and other 73,050 72,370 Inventories: Finished goods 128,140 130,070 Raw material 179,940 171,670 Work in process 91,280 90,020 399,360 391,760 Total current assets 1,038,040 964,500 Equity investments in MascoTech, Inc. 201,360 202,380 Equity investments in other affiliates 59,340 62,570 Property and equipment, net 884,050 856,690 Excess of cost over acquired net assets 414,720 343,510 Other noncurrent assets 288,050 296,310 Net assets of discontinued operations 1,033,200 1,052,670 Total assets $3,918,760 $3,778,630 LIABILITIES Current liabilities: Notes payable $ 23,220 $ 25,690 Accounts payable 118,910 125,230 Accrued liabilities 334,710 294,930 Total current liabilities 476,840 445,850 Long-term debt 1,622,040 1,577,100 Deferred income taxes and other 106,410 100,250 Total liabilities 2,205,290 2,123,200 SHAREHOLDERS' EQUITY Common stock, par value $1 per share Authorized shares: 400,000,000 160,540 160,380 Preferred stock, par value $1 per share Authorized shares: 1,000,000 --- --- Paid-in capital 131,800 128,550 Retained earnings 1,434,550 1,366,330 Cumulative translation adjustments (13,420) 170 Total shareholders' equity 1,713,470 1,655,430 Total liabilities and shareholders' equity $3,918,760 $3,778,630 See notes to condensed consolidated financial statements. 1
MASCO CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME For the Three Months and Six Months Ended June 30, 1996 and 1995 (Amounts in thousands except per share data) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30 June 30 1996 1995 1996 1995 <S> <C> <C> <C> <C> Net sales $ 787,000 $ 714,000 $1,551,000 $1,435,000 Cost of sales 496,570 449,120 976,900 887,950 Gross profit 290,430 264,880 574,100 547,050 Selling, general and administrative expenses 169,770 159,630 339,300 317,670 Amortization of excess of cost over acquired net assets 2,690 2,030 5,300 4,300 Operating profit 117,970 103,220 229,500 225,080 Other (income) expense, net: Interest expense 16,500 19,110 34,000 35,660 Equity (earnings) loss from MascoTech, Inc. 5,570 (4,540) (3,300) (8,310) Other, net (14,000) (6,980) (17,900) (14,530) 8,070 7,590 12,800 12,820 Income from continuing operations before income taxes 109,900 95,630 216,700 212,260 Income taxes 41,900 38,220 86,700 84,930 Income from continuing operations 68,000 57,410 130,000 127,330 Income from operations of discontinued segment (net of income taxes of $3,990 and $6,980 for the three months and six months ended June 30, 1995, respectively) --- 5,990 --- 10,470 Net income $ 68,000 $ 63,400 $ 130,000 $ 137,800 Earnings per share: Continuing operations $.42 $.36 $.81 $.80 Discontinued operations -- .04 -- .07 Earnings per share $.42 $.40 $.81 $.87 Cash dividends declared and paid per share $.19 $.18 $.38 $.36 Average shares outstanding 160,500 158,800 160,500 158,800 </TABLE> See notes to condensed consolidated financial statements. 2
MASCO CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS For the Six Months Ended June 30, 1996 and 1995 (Dollars in thousands) Six Months Ended June 30 1996 1995 CASH FLOWS FROM (FOR) OPERATING ACTIVITIES: Cash provided by continuing operations $168,800 $148,880 (Increase) in receivables (39,500) (59,590) (Increase) decrease in inventories 1,950 (39,540) Decrease in prepaid expenses 340 5,650 Increase (decrease) in current liabilities 18,970 (20,730) Total cash from operating activities of continuing operations 150,560 34,670 CASH FLOWS FROM (FOR) INVESTING ACTIVITIES: Acquisition of companies (100,000) --- Capital expenditures (50,840) (81,380) Proceeds from sale of Formica investment --- 74,470 Proceeds from sales of investments 23,870 --- Other, net (11,090) (12,860) Total cash (for) investing activities of continuing operations (138,060) (19,770) Discontinued operations, net 19,470 (12,850) Total cash (for) investing activities (118,590) (32,620) CASH FLOWS FROM (FOR) FINANCING ACTIVITIES: Increase in debt 300,420 369,960 Payment of debt (258,910) (308,770) Cash dividends paid (60,920) (56,980) Total cash from (for) financing activities of continuing operations (19,410) 4,210 CASH AND CASH INVESTMENTS: Increase for the period 12,560 6,260 At January 1 60,470 36,530 At June 30 $ 73,030 $ 42,790 See notes to condensed consolidated financial statements. 3
MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS A. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to present fairly its financial position as at June 30, 1996 and the results of operations for the three months and six months ended June 30, 1996 and 1995 and cash flows for the six months ended June 30, 1996 and 1995. The statement of income for the three months and six months ended June 30, 1995, statement of cash flows for the six months ended June 30, 1995 and related notes have been reclassified to present the Company's home furnishings products segment as discontinued operations. The condensed consolidated balance sheet as of June 30, 1996 and December 31, 1995 also reflects the home furnishings products segment as discontinued operations. The condensed consolidated balance sheet at December 31, 1995 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Earnings per share are calculated based on the weighted average common shares outstanding. B. On April 1, 1996, the Company entered into an agreement for the sale of its home furnishings products businesses to Furnishings International Inc. The Company classified its home furnishings products segment as discontinued operations in late November 1995. Furnishings International's investors currently include 399 Venture Partners, certain members of Furnishings International's management, the Company and certain affiliates of Travelers Group Inc. On August 5, 1996, the Company finalized the sale of its home furnishings products businesses to Furnishings International Inc. Total proceeds to Masco from the sale are in excess of $1.0 billion with approximately $710 million of the purchase price in cash. The balance consists of junior debt securities, preferred stock and 15 percent of the common stock of Furnishings International. In addition, Masco received certain transferable rights to acquire additional equity in Furnishings International. The Company's discontinued home furnishings products segment had net income of approximately $16.0 million for the six months ended June 30, 1996 (excluded from results of operations for 1996 as it was considered in determining the $650 million loss recorded in late 1995). C. Other (income) expense, net consists of the following, in thousands: Three Months Ended Six Months Ended June 30 June 30 1996 1995 1996 1995 Interest expense $16,500 $19,110 $34,000 $35,660 Equity (earnings) loss from MascoTech, Inc. 5,570 (4,540) (3,300) (8,310) Equity earnings, other (1,880) (2,470) (3,900) (4,730) Interest income and gains from marketable securities and cash investments (7,890) (3,930) (11,600) (6,110) Other, net (4,230) (580) (2,400) (3,690) $ 8,070 $ 7,590 $12,800 $12,820 4
MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Note C - Continued: Interest expense for the three months and six months ended June 30, 1996 and 1995 is presented net of interest expense allocated to discontinued operations of $8.9 million and $9.0 million and $19.8 million and $20.9 million, respectively. The equity loss in the 1996 second quarter results from the Company's equity share (approximately $11.7 million pre-tax) of losses regarding the disposition of metal stamping businesses of MascoTech, Inc. Included in equity earnings from MascoTech for the six months ended June 30, 1996 is approximately $5.0 million of pre-tax income related to a MascoTech accounting change in the first quarter of 1996. Other, net in the 1996 second quarter includes an approximate $4.4 million gain from the sale of certain common shares of TriMas Corporation. Included in other, net for the six months ended June 30, 1995, was a $15.9 million gain from the sale of the Company's investment in Formica Corporation in the first quarter of 1995; this gain was largely offset by charges for product line disposals. D. Late in the second quarter of 1996, the Company acquired the Moore Group Ltd., a United Kingdom manufacturer of kitchen and bath cabinets and Horst Breuer GmbH, a German manufacturer of shower enclosures, for approximately $100 million. The acquisitions were accounted for as purchase transactions. These companies had combined annual net sales in 1995 of approximately $100 million. 5
MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) E. The following presents the combined unaudited financial statements of the Company, MascoTech, Inc. and TriMas Corporation as one entity, with Masco Corporation as the parent company. The statement of income for the three months and six months ended June 30, 1995 and the statement of cash flows for the six months ended June 30, 1995 have been reclassified to present the Company's home furnishings products segment as discontinued operations. The balance sheet as of June 30, 1996 and December 31, 1995 also reflects the home furnishings products segment as discontinued operations. Intercompany transactions have been eliminated. Amounts, except per share data, are in thousands. Combined Balance Sheet June 30, December 31, Assets 1996 1995 Current assets: Cash and cash investments $ 199,050 $ 169,240 Accounts and notes receivable, net 776,610 727,300 Prepaid expenses and other 55,740 56,280 Deferred income taxes 55,400 95,650 Net current assets of businesses held for disposition 39,190 62,410 Inventories: Finished goods 190,930 198,680 Raw material 236,570 230,290 Work in process 139,550 142,700 567,050 571,670 Total current assets 1,693,040 1,682,550 Equity investments in affiliates 207,090 199,330 Property and equipment, net 1,465,370 1,496,840 Excess of cost over acquired net assets 639,940 618,190 Net noncurrent assets of businesses held for disposition 20,720 104,510 Net assets of discontinued operations 1,033,200 1,052,670 Other noncurrent assets 380,900 390,300 Total assets $5,440,260 $5,544,390 Liabilities and Shareholders' Equity Current liabilities: Notes payable $ 25,770 $ 31,050 Accounts payable 219,870 249,330 Accrued liabilities 462,520 406,570 Total current liabilities 708,160 686,950 Long-term debt 2,257,820 2,466,210 Deferred income taxes and other 279,960 271,030 Other interests in combined affiliates 480,850 464,770 Equity of shareholders of Masco Corporation 1,713,470 1,655,430 Total liabilities and shareholders' equity $5,440,260 $5,544,390 6
MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Note E - Continued: <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30 June 30 Combined Statement of Income 1996 1995 1996 1995 <S> <C> <C> <C> <C> Net sales $1,286,260 $1,306,730 $2,566,050 $2,612,490 Costs and expenses, net: Cost of sales 884,440 922,070 1,771,660 1,821,600 Selling, general and administrative expenses 229,160 229,650 461,820 459,480 Charge on disposition of businesses, net 29,520 1,000 31,520 2,500 Other (income) expense, net: Interest expense 26,160 35,920 54,280 70,900 Other income, net (19,040) (18,170) (28,100) (30,520) 7,120 17,750 26,180 40,380 1,150,240 1,170,470 2,291,180 2,323,960 Income from continuing operations before income taxes and other interests 136,020 136,260 274,870 288,530 Income taxes 60,580 60,130 119,250 126,310 Other interests in combined affiliates 7,440 18,720 28,700 34,890 Income from continuing operations 68,000 57,410 126,920 127,330 Income from operations of discontinued segment (net of income taxes) --- 5,990 --- 10,470 Cumulative effect of an accounting change, net --- --- 3,080 --- Net income $ 68,000 $ 63,400 $ 130,000 $ 137,800 Earnings per share: Continuing operations $.42 $.36 $.79 $.80 Discontinued segment -- .04 -- .07 Cumulative effect of an accounting change -- -- .02 -- Earnings per share $.42 $.40 $.81 $.87 Cash dividends declared and paid per share $.19 $.18 $.38 $.36 Average shares outstanding 160,500 158,800 160,500 158,800 </TABLE> 7
MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (concluded) Note E - Concluded: Six Months Ended June 30 Combined Statement of Cash Flows 1996 1995 Cash Flows From (For) Operating Activities: Cash provided by continuing operations $ 230,080 $ 196,430 (Increase) in receivables (62,400) (88,900) (Increase) decrease in inventories 8,860 (43,640) Decrease in marketable securities, net 14,000 53,230 Decrease in prepaid expenses 1,370 14,970 Increase (decrease) in current liabilities 36,700 (42,440) Total cash from operating activities 228,610 89,650 Cash Flows From (For) Investing Activities: Capital expenditures (81,530) (126,930) Acquisitions, net of cash acquired (104,470) (22,810) Proceeds from sale of subsidiaries 184,020 37,400 Proceeds from sales of investments 23,870 --- Proceeds from sale of Formica investment --- 74,470 Discontinued operations, net 19,470 (12,850) Net assets held for disposition (820) 7,790 Other, net 48,070 33,980 Total cash from (for) investing activities 88,610 (8,950) Cash Flows From (For) Financing Activities: Increase in debt 301,140 543,710 Payment of debt (516,760) (590,650) Cash dividends paid (71,790) (67,310) Total cash (for) financing activities (287,410) (114,250) Cash and Cash Investments: Increase (decrease) for the period 29,810 (33,550) At January 1 169,240 206,150) At June 30 $ 199,050 $ 172,600 8
MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SECOND QUARTER 1996 AND THE FIRST SIX MONTHS 1996 VERSUS SECOND QUARTER 1995 AND THE FIRST SIX MONTHS 1995 Net sales from continuing operations increased 10 percent and 8 percent for the second quarter and six months ended June 30, 1996, respectively, from the comparable periods in 1995. After adjusting for a 1995 acquisition and divestitures of two small operations, net sales for the second quarter and six months ended June 30, 1996 increased 8 percent and 6 percent, respectively, from the comparable 1995 periods. Cost of sales as a percentage of sales increased to 63.1 percent from 62.9 percent and to 63.0 percent from 61.9 percent for the second quarter and six months ended June 30, 1996, respectively, from the comparable periods in 1995; these increases primarily reflect the influence of a higher percentage of lower margin sales to total sales, under-utilized plant capacity and softness in the Company's European markets. Selling, general and administrative expenses as a percentage of sales decreased to 21.6 percent from 22.4 percent and to 21.9 percent from 22.1 percent for the second quarter and six months ended June 30, 1996, respectively, from the comparable periods in 1995; these decreases are primarily the result of higher promotional and advertising costs in the prior periods. The Company's operating profit margins from continuing operations improved in the second quarter of 1996 as compared with the second quarter of 1995 and declined for the first six months of 1996 as compared with the first six months of 1995. Included in other (income) expense, net for the second quarter of 1996 were equity losses from MascoTech, Inc. of $5.6 million, as compared with equity earnings of $4.5 million for the comparable period of 1995. Excluding the Company's $11.7 million pre-tax ($7.2 million after-tax) equity share of MascoTech's second quarter charge resulting from the disposition of its metal stamping businesses, second quarter 1996 equity earnings from MascoTech were $6.1 million. Equity earnings from MascoTech for the six months ended June 30, 1996 of $3.3 million reflect the Company's equity share of the above-mentioned charge as well as the Company's approximate $5.0 million equity share of MascoTech's first quarter 1996 non-recurring income resulting from the cumulative effect of the adoption of a new accounting rule. Excluding these unusual recordings, equity earnings from MascoTech were $10.0 million for the six months ended June 30, 1996, as compared with equity earnings of $8.3 million for the comparable 1995 period. Other (income) expense, net for the second quarter of 1996 includes a $4.4 million gain from the sale of certain common shares of TriMas Corporation and gains aggregating $6.0 million from the sale of certain of the company's long- term investments. Included in other, net for the six months ended June 30, 1995, was a $15.9 million gain from the sale of the Company's investment in Formica Corporation in the first quarter of 1995; this gain was largely offset by charges for product line disposals. 9
After-tax income from continuing operations for the second quarter of 1996 increased 18 percent to $68.0 million from $57.4 million in the comparable 1995 period, and income from continuing operations per share increased 17 percent to $.42 from $.36. After-tax income from continuing operations for the six months ended June 30, 1996, increased 2 percent to $130.0 million from $127.3 million in the comparable 1995 period, and income from continuing operations per share increased 1 percent to $.81 from $.80. Including discontinued operations, net income for the second quarter of 1996 increased 7 percent to $68.0 million from $63.4 million in the comparable 1995 period, and earnings per share increased 5 percent to $.42 from $.40. Including discontinued operations, net income for the first six months of 1996 decreased 6 percent to $130.0 million from $137.8 million in the comparable 1995 period, and earnings per share decreased 7 percent to $.81 from $.87. The Company's effective tax rate decreased to approximately 38 percent for the second quarter of 1996 from 40 percent for the comparable period in 1995. Such decrease reflects the reduced results of European operations as well as the second quarter 1996 realization of capital gains from the sale of certain of the Company's long-term investments which were offset by capital loss benefits resulting from the disposition of the Company's home furnishings products businesses. On April 1, 1996, the Company entered into an agreement for the sale of its home furnishings products businesses to Furnishings International Inc. The Company classified its home furnishings products segment as discontinued operations in late November 1995. Furnishings International's investors currently include 399 Venture Partners, certain members of Furnishings International's management, the Company and certain affiliates of Travelers Group Inc. On August 5, 1996, the Company finalized the sale of its home furnishings products businesses to Furnishings International Inc. Total proceeds to Masco from the sale are in excess of $1.0 billion with approximately $710 million of the purchase price in cash. The balance consists of junior debt securities, preferred stock and 15 percent of the common stock of Furnishings International. In addition, Masco received certain transferable rights to acquire additional equity in Furnishings International. The Company expects to realize an increase of approximately $.04 in quarterly per share earnings related to additional income from proceeds of the transaction. The Company intends to use $550 million of the proceeds from the sale of the home furnishings products businesses to reduce debt. The balance of the proceeds will eventually be reinvested in the future growth of the Company. The Company's Executive Vice President and President-Building Products, Raymond F. Kennedy, was appointed as President and Chief Operating Officer in August 1996. The Company's former President and Chief Operating Officer, Wayne B. Lyon, has joined Furnishings International as its full-time Chairman, President and Chief Executive Officer. The Company has on file with the Securities and Exchange Commission, an unallocated shelf registration pursuant to which the Company is able to issue up to a combined $759 million of debt and equity securities. 10
At June 30, 1996 current assets were 2.2 times current liabilities. First and second quarter 1996 cash from operations was affected by an expected and recurring first-half increase in accounts receivable. As the annual increase in accounts receivable is historically experienced in the first half of the year, cash flows from operations in the remaining two quarters of 1996 should not be affected by significant increases in accounts receivable. 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 working capital and other investment needs. The Company's founder and Chairman Emeritus, Alex Manoogian, passed away on July 10, 1996 at the age of 95. 11
UNAUDITED INFORMATION REGARDING EQUITY AFFILIATES FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995 Equity investments in affiliates consist primarily of the following approximate common stock and partnership interests at June 30: 1996 1995 MascoTech, Inc. 45% 44% Hans Grohe, a German partnership 27% 27% TriMas Corporation 4% 5% The Company has an approximate 39 percent voting interest in MascoTech at June 30, 1996, after including the voting interests of the preferred stockholders of MascoTech. The following presents the condensed financial data of MascoTech, Inc. Amounts are in thousands. Three Months Ended Six Months Ended June 30 June 30 1996 1995 1996 1995 Sales - Net $345,060 $439,290 $718,980 $884,300 Gross Profit $ 57,930 $ 69,250 $119,370 $145,710 Net Income (Loss) (After Preferred Stock Dividends) $ (9,900) $ 11,860 $ 9,300 $ 22,080 12
PART II. OTHER INFORMATION MASCO CORPORATION Items 1, 2, 3, and 5 are not applicable. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders was held on May 22, 1996 at which the three nominees for the Company's Board of Directors identified in the Company's proxy statement dated April 29, 1996 were elected, and the Board of Directors recommendation of Coopers & Lybrand L.L.P. as independent auditors for the Company for the year 1996 was approved. Following is a tabulation of shares voted: Election of Directors Lillian Bauder(1) John A. Morgan(1) Joseph L. Hudson, Jr. For 134,137,296 132,656,577 134,127,120 Withheld 7,322,650 8,803,369 7,332,826 (1) Re-elected Ratification of the Selection of Coopers & Lybrand L.L.P. as Independent Auditors for the Company for the Year 1996 For 141,058,751 Against 144,927 Abstentions and Broker Non-voters 256,268 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 11 - Computation of Earnings Per Share 12 - Computation of Ratio of Earnings to Fixed Charges 27 - Financial Data Schedule (b) Reports on Form 8-K: Report on Form 8-K dated April 1, 1996, reporting under Item 5 the issuance of a press release relating to the agreement to sell the Company's Home Furnishings Group to Furnishings International Inc. and the Company's first quarter 1996 results. 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 13, 1996 By: /s/Robert B. Rosowski Robert B. Rosowski Vice President-Controller (Chief Accounting Officer and Authorized Signatory) 13
MASCO CORPORATION EXHIBIT INDEX Exhibit Exhibit 11 Computation of Earnings Per Share Exhibit 12 Computation of Ratio of Earnings to Fixed Charges Exhibit 27 Financial Data Schedule 14