1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended June 30, 1998. 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, 1998 ----- --------------------- Common stock, par value $1 per share 340,161,000
2 MASCO CORPORATION INDEX PAGE NO. Part I. Financial Information Item 1. Financial Statements: Condensed Consolidated Balance Sheet - June 30, 1998 and December 31, 1997 1 Condensed Consolidated Statement of Income for the Three Months and Six Months Ended June 30, 1998 and 1997 2 Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 1998 and 1997 3 Notes to Condensed Consolidated Financial Statements 4-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-13 Unaudited Information Regarding Equity Investments for the Three Months and Six Months Ended June 30, 1998 and 1997 14 Part II. Other Information and Signature 15-17
3 MASCO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 1998 AND DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, ASSETS 1998 1997 ------ ---------- ------------ <S> <C> <C> Current assets: Cash and cash investments $ 416,590 $ 441,330 Accounts and notes receivable, net 674,850 559,050 Prepaid expenses and other 143,690 111,340 Inventories: Raw material 257,130 229,040 Finished goods 127,860 161,920 Work in process 175,890 124,040 ---------- ------------ 560,880 515,000 ---------- ------------ Total current assets 1,796,010 1,626,720 Equity investment in MascoTech, Inc. 52,710 52,780 Equity investments in other affiliates 156,780 175,300 Securities of Furnishings International Inc. 413,290 393,140 Property and equipment, net 1,073,170 1,037,320 Acquired goodwill, net 918,310 729,190 Other noncurrent assets 356,650 319,310 ---------- ------------ Total assets $4,766,920 $ 4,333,760 ========== ============ LIABILITIES Current liabilities: Notes payable $ 24,450 $ 68,460 Accounts payable 156,800 166,310 Accrued liabilities 384,620 385,230 ---------- ------------ Total current liabilities 565,870 620,000 Long-term debt 1,417,860 1,321,470 Deferred income taxes and other 180,800 163,270 ---------- ------------ Total liabilities 2,164,530 2,104,740 ---------- ------------ SHAREHOLDERS' EQUITY Common stock, par value $1 per share Authorized shares: 900,000,000 340,030 165,570 Preferred stock, par value $1 per share Authorized shares: 1,000,000 --- --- Paid-in capital 317,030 304,560 Retained earnings 1,975,460 1,784,370 Cumulative translation adjustments (30,130) (25,480) ---------- ------------ Total shareholders' equity 2,602,390 2,229,020 ---------- ------------ Total liabilities and shareholders' equity $4,766,920 $ 4,333,760 ========== ============ </TABLE> See notes to condensed consolidated financial statements. 1
4 MASCO CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 -------------------- ----------------------- 1998 1997 1998 1997 ---------- -------- ---------- ----------- <S> <C> <C> <C> <C> Net sales $1,085,000 $913,000 $2,124,000 $ 1,767,000 Cost of sales 691,400 578,200 1,350,600 1,117,700 ---------- -------- ---------- ----------- Gross profit 393,600 334,800 773,400 649,300 Selling, general and administrative expenses 213,000 187,200 420,500 368,200 Amortization of acquired goodwill 6,800 3,800 12,800 7,500 ---------- -------- ---------- ----------- Operating profit 173,800 143,800 340,100 273,600 ---------- -------- ---------- ----------- Other income (expense), net: Interest expense (20,700) (18,900) (41,200) (37,400) Re: MascoTech, Inc.: Equity earnings 5,100 4,300 10,300 10,300 Interest income --- 2,500 --- 5,000 Gain from change in investment --- 29,500 --- 29,500 Other, net 30,600 (8,800) 63,900 10,600 ---------- -------- ---------- ----------- 15,000 8,600 33,000 18,000 ---------- -------- ---------- ----------- Income before income taxes 188,800 152,400 373,100 291,600 Income taxes 71,800 60,800 145,500 116,500 ---------- -------- ---------- ----------- Net income $ 117,000 $ 91,600 $ 227,600 $ 175,100 ========== ======== ========== =========== Earnings per share: Basic $ .35 $ .29 $ .69 $ .55 ========== ======== ========== =========== Diluted $ .34 $ .28 $ .66 $ .54 ========== ======== ========== =========== Cash dividends per share: Declared -- $ .10 $ .105 $ .20 ========== ======== ========== =========== Paid $ .105 $ .10 $ .21 $ .20 ========== ======== ========== =========== </TABLE> See notes to condensed consolidated financial statements. 2
5 MASCO CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS For the Six Months Ended June 30,1998 and 1997 (Dollars in thousands) -------------------- <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30 ----------------------- 1998 1997 -------- -------- <S> <C> <C> CASH FLOWS FROM (FOR) OPERATING ACTIVITIES: Cash provided by operations $221,590 $193,190 (Increase) in receivables (97,110) (69,420) (Increase) in inventories (34,160) (9,480) Increase (decrease) in current liabilities, net 15,770 (6,830) -------- -------- Total cash from operating activities 106,090 107,460 -------- -------- CASH FLOWS FROM (FOR) INVESTING ACTIVITIES: Acquisition of companies, net of cash acquired (189,370) (87,850) Capital expenditures (74,610) (64,760) Proceeds from sale of TriMas investment 54,640 --- 0ther, net (57,060) (17,030) -------- -------- Total cash (for) investing activities (266,400) (169,640) -------- -------- CASH FLOWS FROM (FOR) FINANCING ACTIVITIES: Increase in debt 131,320 17,170 Issuance of 6.625% debentures 250,000 --- Retirement of 9% notes, including retirement premium (108,620) --- Payment of debt (66,610) (31,060) Cash dividends paid (70,520) (64,490) -------- -------- Total cash from (for) financing activities 135,570 (78,380) -------- -------- CASH AND CASH INVESTMENTS: (Decrease) for the period (24,740) (140,560) At January 1 441,330 473,730 -------- -------- At June 30 $416,590 $333,170 ======== ======== </TABLE> See notes to condensed consolidated financial statements. 3
6 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS A. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to present fairly its financial position as at June 30, 1998 and the results of operations for the three months and six months ended June 30, 1998 and 1997 and cash flows for the six months ended June 30, 1998 and 1997. The condensed consolidated balance sheet at December 31, 1997 was derived from audited financial statements. Shares and per share data have been adjusted to reflect the July 1998 100 percent stock distribution to shareholders and to conform with the earnings per share presentation required under Statement of Financial Accounting Standards ("SFAS") No. 128. Certain amounts for the prior year periods have been reclassified to conform to the current year presentation. B. The following are reconciliations of the numerators and denominators used in the computations of basic and diluted earnings per share, in thousands: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------- ------------------ 1998 1997 1998 1997 -------- -------- -------- --------- <S> <C> <C> <C> <C> Numerator: Basic (net income) $117,000 $ 91,600 $227,600 $ 175,100 Add convertible debenture interest, net --- 1,400 700 2,900 Diluted (net income) $117,000 $ 93,000 $228,300 $ 178,000 Denominator: Basic shares (based on weighted average) 333,500 316,000 331,100 316,000 Add: Contingently issued award shares 6,500 6,400 6,800 6,400 Stock option dilution 4,200 2,800 4,000 2,600 Convertible debentures --- 8,400 1,900 8,400 Diluted shares 344,200 333,600 343,800 333,400 </TABLE> Diluted earnings per share in the first and second quarters of 1997 were $.26 and $.28, respectively, which when totaled equal $.54. Based on the above reconciliation for the six months ended June 30, 1997, however, diluted earnings per share approximates $.535. C. During June 1998, the Company's Board of Directors adopted a resolution for a stock split, effected in the form of a 100 percent stock distribution (one additional share for every share held) to shareholders of record on June 19, 1998 to be issued on July 10, 1998. Following the issuance of the common shares for the stock split, the Company declared an increased quarterly dividend of $.11 per common share on its post-split shares. Such dividend is the equivalent of $.22 per share quarterly prior to the stock split. The Company had been previously paying a $.21 per share quarterly dividend on its pre-split shares. D. During the second quarter of 1998, the Company acquired General Accessory Manufacturing Company, a manufacturer of stainless steel commercial washroom accessories and bathroom partitions, and Mirolin Industries, Inc., a Canadian manufacturer of tubs, shower enclosures and whirlpools. During the first quarter of 1998, the Company acquired Vasco Corporation, a Belgium-based manufacturer of residential decorative hydronic radiators and heat convectors. The aggregate net purchase price of these acquisitions was approximately $189 million and was principally financed with bank debt. In July 1998, the Company acquired The Brugman Group, a European manufacturer of residential hydronic radiators and heat convectors. The above acquisitions were accounted for as purchase transactions. Combined 1997 annual net sales of companies acquired in 1998 through July were approximately $150 million. 4
7 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) E. In July 1998, the Company completed the sale of its Thermador subsidiary. Thermador is a U.S. manufacturer of kitchen appliances, with annualized 1998 net sales of approximately $140 million. The 1998 third quarter is expected to include a modest pre-tax gain, net from the sale. F. The Company called for redemption its $178 million of 5.25% convertible subordinated debentures due 2012 on February 12, 1998. Substantially all holders exercised their right to convert these debentures into Company common stock (at the conversion price of $21.14 per share), resulting in the issuance of approximately 8.4 million shares of Company common stock in February 1998. During the first quarter of 1998, the Company retired approximately $98 million face value of its outstanding 9% debentures due 2001 (of a total face value of $175 million at December 31, 1997), using a portion of its available cash. The Company recognized an approximate $12 million pre-tax charge related to the early retirement of long-term debt. During the second quarter of 1998, the Company issued $250 million of 6.625% debentures due April 2018. G. Other income (expense), net consists of the following, in thousands: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 -------------------- -------------------- 1998 1997 1998 1997 -------- -------- -------- -------- <S> <C> <C> <C> <C> Interest expense $(20,700) $(18,900) $(41,200) $(37,400) Re: MascoTech, Inc.: Equity earnings 5,100 4,300 10,300 10,300 Interest income --- 2,500 --- 5,000 Gain from change in investment --- 29,500 --- 29,500 Equity earnings, other 2,700 1,700 4,000 3,500 Income from cash and cash investments 4,600 3,600 8,200 7,900 Other interest income 10,800 9,500 21,900 19,400 Other, net 12,500 (23,600) 29,800 (20,200) -------- -------- -------- -------- $ 15,000 $ 8,600 $ 33,000 $ 18,000 ======== ======== ======== ======== </TABLE> Included in other, net for the six months ended June 30, 1998 is 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 certain asset writedowns. Other, net for the three months and six months ended June 30, 1998 includes income and gains, net regarding certain non-operating assets of $16.0 million and $26.4 million, respectively, as compared with $7.4 million and $12.4 million of such income and gains, net for the comparable periods of the prior year. Included in other interest income for the three months and six months ended June 30, 1998 and 1997 is interest income of approximately $10.1 million and $20.2 million and approximately $9.0 million and $18.0 million, respectively, from the 12% pay-in- kind junior debt securities of Furnishings International Inc. (approximately $336 million principal amount at December 31, 1997). 5
8 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE G - CONTINUED: In late June 1997, MascoTech, Inc., an equity affiliate, redeemed all of its outstanding convertible preferred stock in exchange for approximately 10 million shares of its common stock. This redemption reduced the Company's common equity ownership in MascoTech to 17 percent from 21 percent, and increased the Company's equity in MascoTech's net book value by approximately $29.5 million. As a result, the Company recognized a pre-tax gain of approximately $29.5 million during the second quarter of 1997. Other, net in the second quarter of 1997 includes charges aggregating $29.5 million, which offset the above-mentioned MascoTech gain, primarily for the adjustment of the Company's Payless Cashways investment to its estimated fair value. During the first half of 1997, the Company recognized interest income at 6.625% on the $151.4 million receivable balance due from MascoTech. H. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," in the first quarter of 1998. Accordingly, the Company's total comprehensive income was as follows, in thousands: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------ ----------------- 1998 1997 1998 1997 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net income $117,000 $ 91,600 $227,600 $175,100 Other comprehensive income, currency translation adjustments (5,410) (2,370) (4,650) (16,530) -------- -------- -------- -------- Total comprehensive income $111,590 $ 89,230 $222,950 $158,570 </TABLE> I. On June 15, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for the Company). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company anticipates that the adoption of SFAS 133 will not have a significant effect on the Company's results of operations or its financial position. 6
9 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) J. For 1998, the following presents, as one entity with Masco Corporation as the parent company, the combined unaudited financial statements of the Company and MascoTech, Inc., and for 1997, the combined unaudited financial statements of the Company, MascoTech and TriMas Corporation. Intercompany transactions have been eliminated. Amounts, except per share data, are in thousands. (MascoTech completed its acquisition of TriMas Corporation in the first quarter of 1998.) COMBINED BALANCE SHEET <TABLE> <CAPTION> JUNE 30, DECEMBER 31, ASSETS 1998 1997 ---------- ------------ <S> <C> <C> Current assets: Cash and cash investments $ 447,220 $ 587,820 Marketable securities 9,220 45,970 Receivables 909,950 768,030 Prepaid expenses and other 142,300 85,250 Deferred income taxes 48,240 80,520 Inventories: Raw material 318,130 286,120 Finished goods 203,220 237,340 Work in process 217,370 162,460 ---------- ---------- 738,720 685,920 ---------- ---------- Total current assets 2,295,650 2,253,510 Equity and other investments in affiliates 246,540 280,970 Securities of Furnishings International Inc. 413,290 393,140 Property and equipment, net 1,695,070 1,654,840 Acquired goodwill, net 1,665,230 925,120 0ther noncurrent assets 416,500 421,170 ---------- ---------- Total assets $6,732,280 $5,928,750 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 27,920 $ 72,340 Accounts payable 270,640 264,980 Accrued liabilities 532,550 535,300 ---------- ---------- Total current liabilities 831,110 872,620 Long-term debt 2,721,520 1,959,440 Deferred income taxes and other 361,600 365,470 Other interests in combined affiliates 215,660 502,200 Equity of shareholders of Masco Corporation 2,602,390 2,229,020 ---------- ---------- Total liabilities and shareholders' equity $6,732,280 $5,928,750 ========== ========== </TABLE> 7
10 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Note J - Continued: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ---------------------- ---------------------- COMBINED STATEMENT OF INCOME 1998 1997 1998 1997 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net sales $1,516,400 $1,322,650 $2,951,200 $2,567,950 ---------- ---------- ---------- ---------- Costs and expenses, net: Cost of sales 1,005,730 873,370 1,956,340 1,695,330 Selling, general and administrative expenses 289,750 239,650 548,810 473,170 ---------- ---------- ---------- ---------- Other income (expense), net: Interest expense (41,480) (27,670) (80,590) (55,210) Other income, net 34,860 32,780 82,960 77,650 ---------- ---------- ---------- ---------- (6,620) 5,110 2,370 22,440 ---------- ---------- ---------- ---------- 1,302,100 1,107,910 2,502,780 2,146,060 ---------- ---------- ---------- ---------- Income before income taxes and other interests 214,300 214,740 448,420 421,890 Income taxes 72,410 89,360 168,610 177,060 ---------- ---------- ---------- ---------- Income before other interests 141,890 125,380 279,810 244,830 Other interests in combined affiliates 24,890 33,780 52,210 69,730 ---------- ---------- ---------- ---------- Net income $ 117,000 $ 91,600 $ 227,600 $ 175,100 ========== ========== ========== ========== Earnings per share: Basic $ .35 $ .29 $ .69 $ .55 ========== ========== ========== ========== Diluted $ .34 $ .28 $ .66 $ .54 ========== ========== ========== ========== Cash dividends per share: Declared -- $ .10 $ .105 $ .20 ========== ========== ========== ========== Paid $ .105 $.10 $ .21 $ .20 ========== ========== ========== ========== </TABLE> 8
11 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (concluded) Note J - Concluded: <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30 --------------------- COMBINED STATEMENT OF CASH FLOWS 1998 1997 ---------- --------- <S> <C> <C> CASH FLOWS FROM (FOR) OPERATING ACTIVITIES: Cash provided by operations $ 355,900 $ 318,470 (Increase) in receivables (120,050) (84,030) (Increase) in inventories (36,790) (5,600) Decrease in marketable securities, net 36,750 3,380 Increase (decrease) in current liabilities, net 28,640 (10,030) ---------- --------- Total cash from operating activities 264,450 222,190 ---------- --------- CASH FLOWS FROM (FOR) INVESTING ACTIVITIES: Acquisition of other interests in TriMas Corporation (868,310) --- Acquisition of companies, net of cash acquired (207,250) (105,980) Capital expenditures (124,400) (94,810) Proceeds from redemption of debt by affiliate 80,500 --- Proceeds from sale of subsidiaries 25,020 76,560 Other, net (107,150) (79,820) ---------- --------- Total cash (for) investing activities (1,201,590) (204,050) ---------- --------- CASH FLOWS FROM (FOR) FINANCING ACTIVITIES: Increase in debt 1,390,230 37,290 Payment of debt (518,060) (110,080) Cash dividends paid (75,630) (76,800) ---------- --------- Total cash from (for) financing activities 796,540 (149,590) ---------- --------- CASH AND CASH INVESTMENTS: Increase (decrease) for the period (140,600) (131,450) At January 1 587,820 599,020 ---------- --------- At June 30 $ 447,220 $ 467,570 ========== ========= </TABLE> 9
12 MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SECOND QUARTER 1998 AND THE FIRST SIX MONTHS 1998 VERSUS SECOND QUARTER 1997 AND THE FIRST SIX MONTHS 1997 SALES AND OPERATIONS Net sales increased 19 percent and 20 percent for the three months and six months ended June 30, 1998, respectively, from the comparable periods in 1997. Excluding acquisition of companies during 1998 and 1997, net sales for the three months and six months ended June 30, 1998 increased 9 percent and 10 percent, respectively, from the comparable periods in 1997; these increases in net sales are principally due to increases in unit sales volume of cabinets, other kitchen and bath products and faucets. Sales of Kitchen and Bath Products for the three months and six months ended June 30, 1998 were $841 million and $1,654 million, respectively, representing increases of 18 percent and 19 percent, respectively, from the comparable periods in 1997; excluding acquisition of companies, net sales of this segment increased 9 percent and 10 percent, respectively for the three months and six months ended June 30, 1998. Sales of Other Specialty Products for the three months and six months ended June 30, 1998 were $244 million and $470 million, respectively, representing increases of 21 percent and 25 percent, respectively, from the comparable periods in 1997; excluding acquisition of companies, net sales of this segment increased 6 percent and 9 percent, respectively, for the three months and six months ended June 30, 1998. Net sales from North American operations for the second quarter and six months ended June 30, 1998 were $887 million and $1,744 million, respectively, representing increases of 17 percent and 18 percent, respectively, from the comparable periods in 1997; excluding acquisition of companies, net sales from these operations increased 10 percent and 11 percent, respectively, from the comparable periods in 1997. Net sales from European operations for the second quarter and six months ended June 30, 1998 were $198 million and $380 million, respectively, representing increases of 30 percent, from the comparable periods in 1997; excluding acquisition of companies, net sales from these operations were flat when compared with the prior year periods. A stronger U.S. dollar, principally against the German Deutsche Mark, had a negative effect on the translation of European sales in the first half of 1998, as compared with the first half of 1997; excluding acquisition of companies, European net sales for the second quarter and six months ended June 30, 1998 in local currencies increased by approximately 10 percent. The Company's operating profit margins improved in the second quarter and first half of 1998 from the comparable 1997 periods. Cost of sales as a percentage of sales increased slightly to 63.7 percent from 63.3 percent and to 63.6 percent from 63.3 percent for the second quarter and six months ended June 30, 1998, respectively, from the comparable periods in 1997; selling, general and administrative expenses as a percentage of sales decreased to 19.7 percent from 20.5 percent and to 19.8 percent from 20.8 percent for the second quarter and six months ended June 30, 1998, respectively, from the comparable periods in 1997. The decrease in the selling, general and administrative expenses percentage in 1998 includes the Company's cost-control initiatives and the leveraging of fixed costs over a higher sales base. The Company's operating profit margins, before general corporate expense, were 18.0 percent for both the second quarter and six months ended June 30, 1998, respectively, as compared with 18.0 percent and 17.8 percent for the comparable 1997 periods. Operating profit margins, after general corporate expense, were 16.0 percent for both the second quarter and six months ended June 30, 1998, as compared with 15.8 percent and 15.5 percent for the comparable 1997 periods. 10
13 MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) OTHER INCOME (EXPENSE), NET Included in other income (expense), net for the second quarter and six months ended June 30, 1998 were equity earnings from MascoTech, Inc. of $5.1 million and $10.3 million, respectively, as compared with equity earnings of $4.3 million and $10.3 million for the comparable periods of the prior year. Included in other, net for the six months ended June 30, 1998 is 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 certain asset writedowns. Other, net for the three months and six months ended June 30, 1998 includes income and gains, net regarding certain non-operating assets of $16.0 million and $26.4 million, respectively, as compared with $7.4 million and $12.4 million of such income and gains, net for the comparable periods of the prior year. Included in other interest income for the three months and six months ended June 30, 1998 and 1997 is interest income of approximately $10.1 million and $20.2 million and approximately $9.0 million and $18.0 million, respectively, from the 12% pay-in-kind junior debt securities of Furnishings International Inc. (approximately $336 million principal amount at December 31, 1997). In late June 1997, MascoTech redeemed all of its outstanding convertible preferred stock in exchange for approximately 10 million shares of its common stock. This redemption reduced the Company's common equity ownership in MascoTech to 17 percent from 21 percent, and increased the Company's equity in MascoTech's net book value by approximately $29.5 million. As a result, the Company recognized a pre-tax gain of approximately $29.5 million during the second quarter of 1997. Other, net in the second quarter of 1997 includes charges aggregating $29.5 million, which offset the above-mentioned MascoTech gain, primarily for the adjustment of the Company's Payless Cashways investment to its estimated fair value. Included in other income (expense), net for the three months and six months ended June 30, 1997 is $2.5 million and $5.0 million, respectively, of interest income from the $151.4 million receivable balance due from MascoTech. 11
14 MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NET INCOME AND EARNINGS PER SHARE Net income for the second quarter of 1998 increased 28 percent to $117 million from $91.6 million in the comparable 1997 period. Basic and diluted earnings per share for the second quarter of 1998 each increased 21 percent, to $.35 and $.34 from $.29 and $.28, respectively, for the comparable period of 1997. Net income for the six months ended June 30, 1998 increased 30 percent to $227.6 million from $175.1 million in the comparable 1997 period. Basic and diluted earnings per share for the six months ended June 30, 1998 increased 25 percent and 22 percent, respectively, to $.69 and $.66 from $.55 and $.54, respectively, for the comparable period of 1997. The Company's effective tax rate for the three months and six months ended June 30, 1998 was 38.0 percent and 39.0 percent, respectively, as compared with 39.9 percent and 40.0 percent for the comparable periods of the prior year. The reduction in the Company's effective tax rate is principally due to the improved utilization of foreign tax credits and the utilization of a portion of the Company's capital loss carryforward benefit. The Company estimates that its effective tax rate for 1998 will approximate 39.0 percent. OTHER FINANCIAL INFORMATION During June 1998, the Company's Board of Directors adopted a resolution for a stock split, effected in the form of a 100 percent stock distribution (one additional share for every share held) to shareholders of record on June 19, 1998 to be issued on July 10, 1998. Following the issuance of the common shares for the stock-split, the Company declared an increased quarterly dividend of $.11 per common share on its post-split shares. Such dividend is the equivalent of $.22 per share quarterly prior to the stock split. The Company had been previously paying a $.21 per share quarterly dividend on its pre-split shares. At June 30, 1998, current assets were 3.2 times current liabilities. For the six months ended June 30, 1998, cash of $106.1 million was provided by operating activities. Cash used for investing activities was $266.4 million, including $189.4 million for acquisition of companies, $74.6 million for capital expenditures and $57.0 million for other cash outflows; cash from investing activities included $54.6 million from the sale of the Company's TriMas investment. Financing activities provided cash of $135.6 million, including $250 million from the issuance of 6.625% debentures and an increase in debt of $131.3 million (primarily European bank debt for an acquisition); cash used for financing activities included $108.6 million for the early retirement of certain of the Company's 9% notes and the payment of a premium associated with this early retirement, $66.6 million for the payment of debt and $70.5 million for cash dividends paid. The aggregate of the preceding items represents a net cash outflow of $24.7 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. 12
15 MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (concluded) First and second quarter 1998 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 1998 are not expected to be affected by significant increases in accounts receivable. The Company called for redemption its $178 million of 5.25% convertible subordinated debentures due 2012 on February 12, 1998. Substantially all holders exercised their right to convert these debentures into Company common stock (at the conversion price of $21.14 per share), resulting in the issuance of approximately 8.4 million shares of Company common stock in February 1998. 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 $509 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 future working capital and other investment needs. 13
16 UNAUDITED INFORMATION REGARDING EQUITY INVESTMENTS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 Equity investments in affiliates consist primarily of the following approximate common stock and partnership interests at June 30: <TABLE> <CAPTION> 1998 1997 ---- ---- <S> <C> Emco Limited, a Canadian company 42% -- MascoTech, Inc. 17% 17% Hans Grohe, a German partnership 27% 27% TriMas Corporation -- 4% </TABLE> During October 1996, the Company completed the sale to MascoTech of 17 million shares of MascoTech common stock and warrants to purchase 10 million shares of MascoTech common stock. Under the sale agreement, the Company received approximately $266 million, with $115 million cash paid at closing. The $151 million balance of the consideration was paid by MascoTech to the Company on September 30, 1997; as provided for in the sale agreement, MascoTech at that date delivered to the Company 9.9 million shares (approximately 42 percent) of the outstanding common stock of Emco Limited and $45.6 million in cash. Emco Limited is a leading Canadian distributor and manufacturer of building products for the residential, commercial and industrial construction markets. The following presents the condensed financial data of MascoTech, Inc. Amounts are in thousands. <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 -------------------- -------------------- 1998 1997 1998 1997 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net Sales $433,480 $233,040 $834,240 $466,480 ======== ======== ======== ======== Gross Profit $117,070 $ 53,990 $221,460 $110,290 ======== ======== ======== ======== Net Income (After Preferred Stock Dividends) $ 29,820 $ 21,650 $ 62,560 $ 51,070 ======== ======== ======== ======== </TABLE> On January 22, 1998, MascoTech announced the completion of its acquisition of TriMas Corporation. The Company recognized a $29 million pre-tax gain in the first quarter of 1998, as a result of selling its common stock investment in TriMas to MascoTech in the public tender offer. 14
17 PART II. OTHER INFORMATION MASCO CORPORATION Item 1. Legal Proceedings During the second quarter of 1998, a subsidiary of the Company was issued a proposed civil penalty in excess of $100,000 by a county wastewater agency for alleged past exceedances of wastewater discharge limitations. The subsidiary and the agency are in the process of finalizing a consent decree to resolve this matter, and the costs of any penalties will be immaterial to the Company. The subsidiary is now in compliance with all applicable wastewater discharge requirements. Items 2 & 3 are not applicable. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders was held on May 20, 1998 at which the stockholders voted upon the election of three nominees for Class I Directors and the approval of the appointment of one additional Class II Director and one additional Class III Director; an amendment to the Company's Certificate of Incorporation to increase the number of authorized shares of Company common stock to 900,000,000; and ratification of the selection of Coopers & Lybrand L.L.P. (now known as PricewaterhouseCoopers) as independent auditors for the Company for 1998. The following is a tabulation of the votes. ELECTION OF CLASS I DIRECTORS FOR WITHHELD ----------- --------- Wayne B. Lyon 142,067,512 3,059,918 Arman Simone 142,077,224 3,050,206 Peter W. Stroh 142,057,391 3,070,039 APPOINTMENT OF CLASS II DIRECTOR Raymond F. Kennedy 143,332,079 1,795,351 APPOINTMENT OF CLASS III DIRECTOR Thomas G. Denomme 142,097,254 3,030,176 APPROVAL OF AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMPANY COMMON STOCK TO 900,000,000. For 108,357,421 Against 34,260,304 Abstentions and Broker Non-voters 2,509,705 APPROVAL OF COOPERS & LYBRAND L.L.P. TO ACT AS INDEPENDENT AUDITORS FOR THE COMPANY FOR 1998. For 142,712,485 Against 24,392 Abstentions and Broker Non-voters 2,390,553 15
18 Part II. OTHER INFORMATION (Concluded) MASCO CORPORATION Item 5. OTHER INFORMATION In accordance with new Rule 14a-4(c)(1) under the Securities Exchange Act of 1934, management proxies for the Company's 1999 Annual Meeting of Stockholders intend to use their discretionary voting authority with respect to any proposal presented at the meeting by a stockholder who does not provide the Company with written notice of such proposal prior to December 29, 1998. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: 3i - Restated Certificate of Incorporation of Masco Corporation and amendments thereto. 4a - Director's resolutions establishing Masco Corporation's 6.625% Debentures due April 15, 2018 under the Indenture dated as of December 1, 1982 between Masco Corporation and The First National Bank of Chicago, as successor Trustee to Morgan Guaranty Trust Company of New York, which Indenture has been filed as an Exhibit to Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1997. 4b - Amendment dated as of March 30, 1998 to the $750,000,000 Amended and Restated Credit Agreement dated as of November 14, 1996 among Masco Corporation, the banks party thereto and Morgan Guaranty Trust Company of New York, as agent. 12 - Computation of Ratio of Earnings to Fixed Charges. 27a- Financial Data Schedule as of and for the year-to-date period ended June 30, 1998. 27b- Financial Data Schedule as of and for the year-to-date period ended March 31, 1998, amended for the 100 percent stock distribution to shareholders in July 1998. 27c- Financial Data Schedule as of and for the year-to-date periods ended December 31, 1997, September 30, 1997, June 30, 1997 and March 31, 1997, amended for the 100 percent stock distribution to shareholders in July 1998. 27d- Financial Data Schedule as of and for the year-to-date periods ended December 31, 1996, September 30, 1996, June 30, 1996 and March 31, 1996, amended for the 100 percent stock distribution to shareholders in July 1998. 27e- Financial Data Schedule as of and for the year ended December 31, 1995, amended for the 100 percent stock distribution to shareholders in July 1998. 16
19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONCLUDED) (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: AUGUST 13, 1998 BY: /s/ Richard G. Mosteller ----------------------- ------------------------------------- Richard G. Mosteller Senior Vice-President - Finance (Chief Financial Officer and Authorized Signatory) 17
20 MASCO CORPORATION EXHIBIT INDEX EXHIBIT Exhibit 3i - Restated Certificate of Incorporation of Masco Corporation and amendments thereto. Exhibit 4a - Director's resolutions establishing Masco Corporation's 6.625% Debentures due April 15, 2018 under the Indenture dated as of December 1, 1982 between Masco Corporation and The First National Bank of Chicago, as successor Trustee to Morgan Guaranty Trust Company of New York, which Indenture has been filed as an Exhibit to Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1997. Exhibit 4b - Amendment dated as of March 30, 1998 to the $750,000,000 Amended and Restated Credit Agreement dated as of November 14, 1996 among Masco Corporation, the banks party thereto and Morgan Guaranty Trust Company of New York, as agent. Exhibit 12 Computation of Ratio of Earnings to Fixed Charges. Exhibit 27a Financial Data Schedule as of and for the year-to-date period ended June 30, 1998. Exhibit 27b Financial Data Schedule as of and for the year-to-date period ended March 31, 1998, amended for the 100 percent stock distribution to shareholders in July 1998. Exhibit 27c Financial Data Schedule as of and for the year-to-date periods ended December 31, 1997, September 30, 1997, June 30, 1997 and March 31, 1997, amended for the 100 percent stock distribution to shareholders in July 1998. Exhibit 27d Financial Data Schedule as of and for the year-to-date periods ended December 31, 1996, September 30, 1996, June 30, 1996 and March 31, 1996, amended for the 100 percent stock distribution to shareholders in July 1998. Exhibit 27e Financial Data Schedule as of and for the year ended December 31, 1995, amended for the 100 percent stock distribution to shareholders in July 1998.