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, 1999. COMMISSION FILE NUMBER 1-5794 MASCO CORPORATION - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 38-1794485 - -------------------------------------------------------------------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 21001 VAN BORN ROAD, TAYLOR, MICHIGAN 48180 - -------------------------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (313) 274-7400 - -------------------------------------------------------------------------------- (TELEPHONE NUMBER) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ---- ------ INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICAL DATE. <TABLE> <CAPTION> SHARES OUTSTANDING AT CLASS NOVEMBER 1, 1999 ----- ---------------- <S> <C> COMMON STOCK, PAR VALUE $1 PER SHARE 443,341,000 </TABLE>
2 MASCO CORPORATION INDEX <TABLE> <CAPTION> PAGE NO. -------- <S> <C> <C> Part I. Financial Information Item 1. Financial Statements: Condensed Consolidated Balance Sheet - September 30, 1999 and December 31, 1998 1 Condensed Consolidated Statement of Income for the Three Months and Nine Months Ended September 30, 1999 and 1998 2 Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 3 Notes to Condensed Consolidated Financial Statements 4-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-18 Unaudited Information Regarding Equity Investments for the Three Months and Nine Months Ended September 30, 1999 and 1998 19 Part II. Other Information and Signature 20-21 </TABLE>
3 MASCO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, ASSETS 1999 1998 ------ ------------- ------------ <S> <C> <C> Current assets: Cash and cash investments $ 145,520 $ 553,150 Accounts and notes receivable, net 1,124,870 800,280 Prepaid expenses and other 112,320 81,640 Inventories: Raw material 305,410 262,410 Finished goods 327,620 236,610 Work in process 144,580 147,910 ---------- ---------- 777,610 646,930 ---------- ---------- Total current assets 2,160,320 2,082,000 Equity investment in MascoTech, Inc. 68,200 59,830 Equity investments in other affiliates 135,500 165,020 Securities of Furnishings International Inc. 469,220 434,640 Property and equipment, net 1,579,960 1,357,830 Acquired goodwill, net 1,734,580 1,055,790 Other noncurrent assets 499,940 463,740 ---------- ---------- Total assets $6,647,720 $5,618,850 ========== ========== LIABILITIES Current liabilities: Notes payable $ 147,380 $ 309,320 Accounts payable 255,430 196,930 Accrued liabilities 567,510 470,090 ---------- ---------- Total current liabilities 970,320 976,340 Long-term debt 2,420,410 1,638,290 Deferred income taxes and other 213,900 230,180 ---------- ---------- Total liabilities 3,604,630 2,844,810 ---------- ---------- SHAREHOLDERS' EQUITY Common stock, par value $1 per share Authorized shares: 900,000,000 443,240 443,280 Preferred stock, par value $1 per share Authorized shares: 1,000,000 --- --- Paid-in capital 595,190 584,530 Retained earnings 2,038,510 1,762,800 Other comprehensive income (loss) (33,850) (16,570) ---------- ---------- Total shareholders' equity 3,043,090 2,774,040 ---------- ---------- Total liabilities and shareholders' equity $6,647,720 $5,618,850 ========== ========== </TABLE> See notes to condensed consolidated financial statements. 1
4 MASCO CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------- ---------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net sales $1,704,000 $1,380,000 $4,662,000 $3,953,000 Cost of sales 1,082,000 869,600 2,942,600 2,484,700 ---------- ---------- ---------- ---------- Gross profit 622,000 510,400 1,719,400 1,468,300 Selling, general and administrative expenses 463,600 269,200 1,041,600 783,200 Amortization of acquired goodwill 13,100 7,500 31,700 20,600 ---------- ---------- ---------- ---------- Operating profit 145,300 233,700 646,100 664,500 ---------- ---------- ---------- ---------- Other income (expense), net: Interest expense (31,700) (31,100) (86,500) (85,300) Equity earnings from MascoTech, Inc. 3,900 2,700 12,300 13,000 Other, net (4,300) 36,500 63,500 100,700 ---------- ---------- ---------- ---------- (32,100) 8,100 (10,700) 28,400 ---------- ---------- ---------- ---------- Income before income taxes 113,200 241,800 635,400 692,900 Income taxes 48,300 89,000 244,500 265,600 ---------- ---------- ---------- ---------- Net income $ 64,900 $ 152,800 $ 390,900 $ 427,300 ========== ========== ========== ========== Earnings per share: Basic $ .15 $ .35 $ .90 $ .98 ===== ===== ===== ===== Diluted $ .15 $ .34 $ .88 $ .95 ===== ===== ===== ===== Cash dividends per share: Declared $ .12 $.22 $ .34 $.325 ===== ==== ===== ===== Paid $ .11 $.11 $ .33 $. 32 ===== ==== ===== ===== </TABLE> See notes to condensed consolidated financial statements. 2
5 MASCO CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30 1999 1998 ----------- --------- <S> <C> <C> CASH FLOWS FROM (FOR) OPERATING ACTIVITIES: Cash provided by operations $ 487,370 $ 443,730 Increase in receivables (184,550) (172,720) Increase in inventories (63,560) (73,000) Increase in accounts payable and accrued liabilities, net 48,510 60,870 ----------- --------- Total cash from operating activities 287,770 258,880 ----------- --------- CASH FLOWS FROM (FOR) INVESTING ACTIVITIES: Acquisition of companies, net of cash acquired (792,920) (237,600) Capital expenditures (246,980) (155,080) Proceeds from sale of subsidiary --- 83,000 Proceeds from sale of TriMas investment --- 54,640 Other, net (37,100) (71,620) ----------- --------- Total cash (for) investing activities (1,077,000) (326,660) ----------- --------- CASH FLOWS FROM (FOR) FINANCING ACTIVITIES: Increase in other debt 878,140 213,440 Issuance of 7.75% debentures 300,000 --- Issuance of 6.625% debentures --- 250,000 Retirement of 6.625% notes (200,000) --- Retirement of 9% notes, including retirement premium --- (108,620) Payment of other debt (391,840) (92,720) Cash dividends and shareholder distributions (111,630) (153,070) Purchase of Company common stock (106,760) --- Other, net 13,690 (44,430) ----------- --------- Total cash from financing activities 381,600 64,600 ----------- --------- CASH AND CASH INVESTMENTS: Decrease for the period (407,630) (3,180) At January 1 553,150 450,650 ----------- --------- At September 30 $ 145,520 $ 447,470 =========== ========= </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 September 30, 1999 and the results of operations for the three months and nine months ended September 30, 1999 and 1998 and cash flows for the nine months ended September 30, 1999 and 1998. The condensed consolidated balance sheet at December 31, 1998 was based upon audited financial statements. B. The following is a discussion of 1999 acquisitions. Pooling Acquisitions: During the third quarter of 1999, the Company completed mergers with Behr Process Corporation, a manufacturer of premium architectural coatings; Mill's Pride, L.L.P., a manufacturer of ready-to-assemble and assembled kitchen and bath cabinetry, bath vanities, home office workstations and entertainment centers, storage products, bookcases and kitchen utility products; and Thermal Concepts, Inc., a U.S.-based insulation services company. The Company issued approximately 104 million shares of common stock for all of the outstanding shares of these companies. The transactions have been accounted for as poolings of interests and, accordingly, the consolidated financial statements and related shares and per share data for all periods presented have been restated to include the accounts and operations of the pooled companies. The Company's net sales and net income prior to these poolings for the first six months of 1999 were $2,416 million and $262.9 million, respectively. The Company's net sales and net income prior to the poolings for the three months and nine months ended September 30, 1998 were $1,122 million and $125.9 million and $3,246 million and $353.5 million, respectively. For the year ended December 31, 1998, pooled companies had net sales and net income of approximately $935 million and $89 million, respectively. Purchase Acquisitions: During the third quarter of 1999, the Company acquired Arrow Fastener Company, a U.S.-based manufacturer of manual and electric staple gun tackers and staples and other hand tools, H&H Tube, a U.S.-based manufacturer of brass, copper, steel and aluminum tubes and Superia Radiatoren N.V., a Belgian-based manufacturer of standard plate radiators. The Company also acquired a 75 percent share of Inrecon L.L.C., a U.S.-based company specializing in repair and restoration of residential, commercial and institutional facilities damaged by fire, wind, water and storms. The Company had acquired the initial 25 percent in 1997. With this acquisition, Inrecon has become a wholly owned subsidiary of the Company. During the second quarter of 1999, the Company acquired Avocet Hardware PLC, a U.K. supplier of locks and other builders' hardware, the Cary Group, a U.S.-based insulation services company and The GMU Group, a manufacturer and distributor of kitchen cabinets and cabinet components, headquartered in Zumaya, Spain. In the first quarter of 1999, the Company acquired A&J Gummers, a U.K. manufacturer of shower valve products, and The Faucet Queens, Inc., a U.S.-based supplier of plumbing accessories and hardware products. 4
7 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note B - Concluded: The aggregate net purchase price of these purchase acquisitions was approximately $841 million and included 1.6 million shares of Company common stock valued at $48 million. Combined 1998 annual net sales of the above purchase acquisitions were approximately $610 million. C. 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 ------------ ------------ 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Numerator: Basic (net income) $ 64,900 $152,800 $390,900 $427,300 Add convertible debenture interest, net --- --- --- 700 -------- -------- -------- -------- Diluted (net income) $ 64,900 $152,800 $390,900 $428,000 ======== ======== ======== ======== Denominator: Basic shares (based on weighted average) 435,100 437,000 435,300 436,000 Add: Contingent award shares 7,400 7,100 7,300 7,000 Stock option dilution 3,100 3,700 3,300 3,700 Convertible debentures --- --- --- 1,300 -------- -------- -------- -------- Diluted shares 445,600 447,800 445,900 448,000 ======== ======== ======== ======== </TABLE> D. Other income (expense), net consists of the following, in thousands: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------ ------------ 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Interest expense $(31,700) $(31,100) $(86,500) $(85,300) Equity earnings from MascoTech, Inc. 3,900 2,700 12,300 13,000 Equity earnings, other 1,800 4,600 5,700 8,600 Income from cash and cash investments 1,100 6,800 7,600 15,000 Other interest income 13,500 11,500 39,100 33,400 Other, net (20,700) 13,600 11,100 43,700 -------- -------- -------- -------- $(32,100) $ 8,100 $(10,700) $ 28,400 ======== ======== ======== ======== </TABLE> 5
8 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note D - Concluded: Included in other interest income is interest income from the 12% pay-in-kind junior debt securities of Furnishings International Inc. (approximately $377 million principal amount at December 31, 1998). Such interest income approximated $12.0 million and $10.6 million, respectively, for the third quarter of 1999 and 1998 and $34.6 million and $30.8 million, respectively, for the nine months ended September 30, 1999 and 1998. 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 the pooling of interests acquisitions. Included in other, net for the three months ended September 30, 1998 is an approximate $30 million pre-tax gain from the sale of the Company's Thermador subsidiary. Such gain was partly offset by pre-tax expense aggregating approximately $26 million, principally related to the disposition of certain non-operating assets. Other, net for the nine months ended September 30, 1998 includes income and gains, net regarding certain non-operating assets of $18.5 million. Also included in other, net for the nine months ended September 30, 1998 is a first quarter $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 partly offset by an approximate $12 million pre-tax charge related to the early retirement of long-term debt. E. The Company's total comprehensive income was as follows, in thousands: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------ ------------ 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income $ 64,900 $152,800 $390,900 $427,300 Other comprehensive income (loss), currency translation adjustments 32,690 8,110 (17,280) 3,460 -------- -------- -------- -------- Total comprehensive income $ 97,590 $160,910 $373,620 $430,760 ======== ======== ======== ======== </TABLE> F. During August 1999, the Company issued $300 million of 7.75% debentures due August 2029. After giving effect to the issuance of these debentures, the Company has on file with the Securities and Exchange Commission an unallocated shelf registration pursuant to which the Company is able to issue up to a combined $109 million of debt and equity securities. 6
9 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) G. During the third quarter of 1999, the Company realigned its business segments. Accounting policies for the segments are the same as those for the Company. The Company evaluates performance based on operating profit or loss and, other than general corporate expense, allocates specific corporate overhead to each segment. The Company's operations in the segments detailed below consist principally of the manufacture, installation, and sale of the following home improvement products: North America: Kitchen and Bath Products - kitchen and bath cabinets; faucets; plumbing fittings; bathtubs and shower tub enclosures; whirlpools and spas; and bath accessories. Builders' Hardware and Other Specialty Products-architectural coatings; builders' hardware, including mechanical and electronic lock sets; grilles, registers, diffusers for heating/cooling systems; insulation; staple gun tackers and staples and other hand tools; and water pumps. International - kitchen and bath cabinets; faucets; plumbing fittings; shower enclosures; bath accessories; builders' hardware, including mechanical lock sets; hydronic radiators and heat convectors; venting and ventilation systems; rolling shutters; and water pumps. The following table presents information about the Company by segment, in millions. <TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30 ------------------------------------ -------------------------------------- 1999 1998 1999 1998 1999 1998 1999 1998 ------------------------------------ -------------------------------------- NET SALES (1) OPERATING PROFIT NET SALES (1) OPERATING PROFIT ------------------------------------ -------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> The Company's operations by segment were: North America: Kitchen and Bath Products $ 894 $ 794 $ 133 $ 160 $2,554 $2,358 $ 470 $ 469 Builders' Hardware and Other Specialty Products 524 360 (8) 61 1,331 989 129 169 International 286 226 43 35 777 606 114 91 ------ ------ ------ ------ ------ ------ ------ ------ Total $1,704 $1,380 168 256 $4,662 $3,953 713 729 ====== ====== ====== ====== General corporate expense, net (23) (22) (67) (64) ------ ------ ------- ------ Operating profit, after general corporate expense 145 234 646 665 Other income (expense), net (32) 8 (11) 28 ------ ------ ------ ------ Income before income taxes $ 113 $ 242 $ 635 $ 693 ====== ====== ====== ====== </TABLE> Assets of the Company's operations for the Kitchen and Bath Products - North America, Builders' Hardware and Other Specialty Products - North America and International segments at September 30, 1999 were $2,081 million, $1,677 million and $1,478 million, respectively, and at December 31, 1998 were $1,843 million, $830 million and $1,175 million, respectively. Corporate assets at September 30, 1999 and December 31, 1998 were $1,412 million and $1,771 million, respectively. Corporate assets include equity investments, Securities of Furnishings International Inc. and other corporate assets. (1) Intra-company sales among segments were not material. 7
10 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) H. The following presents the combined unaudited financial statements of the Company and MascoTech, Inc. as one entity with Masco Corporation as the parent company. Intercompany transactions have been eliminated. Amounts, except per share data, are in thousands. COMBINED BALANCE SHEET <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, ASSETS 1999 1998 ---------- ---------- <S> <C> <C> Current assets: Cash and cash investments $ 157,870 $ 582,540 Receivables 1,363,060 1,023,620 Prepaid expenses and other 115,630 89,990 Deferred income taxes 40,730 41,950 Inventories: Raw material 352,470 324,990 Finished goods 402,820 324,420 Work in process 195,220 195,870 ---------- ---------- 950,510 845,280 ---------- ---------- Total current assets 2,627,800 2,583,380 Equity and other investments in affiliates 242,200 258,580 Securities of Furnishings International Inc. 469,220 434,640 Property and equipment, net 2,292,000 2,035,960 Acquired goodwill, net 2,536,780 1,836,450 Other noncurrent assets 540,390 516,990 ---------- ---------- Total assets $8,708,390 $7,666,000 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 152,430 $ 314,140 Accounts payable 357,640 306,940 Accrued liabilities 704,410 605,320 ---------- ---------- Total current liabilities 1,214,480 1,226,400 Long-term debt 3,794,770 3,026,530 Deferred income taxes and other 414,180 428,540 Other interests in combined affiliates 241,870 210,490 Equity of shareholders of Masco Corporation 3,043,090 2,774,040 ---------- ---------- Total liabilities and shareholders' equity $8,708,390 $7,666,000 ========== ========== </TABLE> 8
11 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note H - Continued: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------- ---------------------- COMBINED STATEMENT OF INCOME 1999 1998 1999 1998 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net sales $2,100,490 $1,776,380 $5,937,680 $5,176,580 ---------- ---------- ---------- ---------- Costs and expenses, net: Cost of sales 1,379,150 1,165,830 3,889,230 3,386,670 ---------- ---------- ---------- ---------- Selling, general and administrative expenses 527,730 327,860 1,227,690 970,470 ---------- ---------- ---------- ---------- Other income (expense), net: Interest expense (51,020) (52,530) (145,650) (146,120) Other income, net (270) 37,240 66,430 120,500 ---------- ---------- ---------- ---------- (51,290) (15,290) (79,220) (25,620) ---------- ---------- ---------- ---------- 1,958,170 1,508,980 5,196,140 4,382,760 ---------- ---------- ---------- ---------- Income before income taxes and other interests 142,320 267,400 741,540 793,820 Income taxes 60,750 100,560 292,640 300,270 ---------- ---------- ---------- ---------- Income before other interests 81,570 166,840 448,900 493,550 Other interests in combined affiliates 16,670 14,040 58,000 66,250 ---------- ---------- ---------- ---------- Net income $ 64,900 $ 152,800 $ 390,900 $ 427,300 ========== ========== ========== ========== Earnings per share: Basic $ .15 $ .35 $ .90 $ .98 ===== ===== ===== ===== Diluted $ .15 $ .34 $ .88 $ .95 ===== ===== ===== ===== Cash dividends per share: Declared $ .12 $.22 $ .34 $.325 ===== ==== ===== ===== Paid $ .11 $.11 $ .33 $ .32 ===== ==== ===== ===== </TABLE> 9
12 MASCO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED) Note H - Concluded: <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30 COMBINED STATEMENT OF CASH FLOWS 1999 1998 ----------- ----------- <S> <C> <C> CASH FLOWS FROM (FOR) OPERATING ACTIVITIES: Cash provided by operations $ 624,900 $ 619,700 (Increase) in receivables (205,900) (184,410) (Increase) in inventories (52,460) (82,890) Decrease in marketable securities --- 43,430 Increase in current liabilities 35,200 90,110 ----------- ----------- Total cash from operating activities 401,740 485,940 ----------- ----------- CASH FLOWS FROM (FOR) INVESTING ACTIVITIES: Acquisition of other interests in TriMas Corporation --- (869,680) Acquisition of companies, net of cash acquired (880,590) (277,540) Capital expenditures (347,780) (229,330) Proceeds from redemption of debt by affiliate --- 80,500 Proceeds from sale of subsidiaries 90,470 108,020 Other, net (35,840) (115,580) ----------- ----------- Total cash (for) investing activities (1,173,740) (1,303,610) ----------- ----------- CASH FLOWS FROM (FOR) FINANCING ACTIVITIES: Increase in debt 1,200,380 1,498,090 Payment of debt (627,030) (547,320) Purchase of Company common stock (126,290) (36,150) Cash dividends paid (120,900) (160,500) Other, net 21,170 (57,100) ----------- ----------- Total cash from financing activities 347,330 697,020 ----------- ----------- CASH AND CASH INVESTMENTS: (Decrease) for the period (424,670) (120,650) At January 1 582,540 597,140 ----------- ----------- At September 30 $ 157,870 $ 476,490 =========== =========== </TABLE> 10
13 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRD QUARTER 1999 AND THE FIRST NINE MONTHS 1999 VERSUS THIRD QUARTER 1998 AND THE FIRST NINE MONTHS 1998 CORPORATE DEVELOPMENT The following is a discussion of 1999 acquisitions. POOLING ACQUISITIONS During the third quarter of 1999, the Company completed mergers with Behr Process Corporation, a manufacturer of premium architectural coatings; Mill's Pride, L.L.P., a manufacturer of ready-to-assemble and assembled kitchen and bath cabinetry, bath vanities, home office workstations and entertainment centers, storage products, bookcases and kitchen utility products; and Thermal Concepts, Inc., a U.S.-based insulation services company. The Company issued approximately 104 million shares of common stock for all of the outstanding shares of these companies. The transactions have been accounted for as poolings of interests and, accordingly, the consolidated financial statements and related shares and per share data for all periods presented have been restated to include the accounts and operations of the pooled companies. The Company's net sales and net income prior to these poolings for the first six months of 1999 were $2,416 million and $262.9 million, respectively. The Company's net sales and net income prior to the poolings for the three months and nine months ended September 30, 1998 were $1,122 million and $125.9 million and $3,246 million and $353.5 million, respectively. For the year ended December 31, 1998, pooled companies had net sales and net income of approximately $935 million and $89 million, respectively. PURCHASE ACQUISITIONS During the third quarter of 1999, the Company acquired Arrow Fastener Company, a U.S.-based manufacturer of manual and electric staple guns and supplies and other hand tools, H&H Tube, a U.S.-based manufacturer of brass, copper, steel and aluminum tubes and Superia Radiatoren N.V., a Belgian-based manufacturer of standard plate radiators. The Company also acquired a 75 percent share of Inrecon L.L.C., a U.S.-based company specializing in repair and restoration of residential, commercial and institutional facilities damaged by fire, wind, water and storms. The Company had acquired the initial 25 percent in 1997. With this acquisition, Inrecon has become a wholly owned subsidiary of the Company. During the second quarter of 1999, the Company acquired Avocet Hardware PLC, a U.K. supplier of locks and other builders' hardware, the Cary Group, a U.S.-based insulation services company and The GMU Group, a manufacturer and distributor of kitchen cabinets and cabinet components, headquartered in Zumaya, Spain. In the first quarter of 1999, the Company acquired A&J Gummers, a U.K. manufacturer of shower valve products, and The Faucet Queens, Inc., a U.S.-based supplier of plumbing accessories and hardware products. The aggregate net purchase price of these purchase acquisitions was approximately $841 million and included 1.6 million shares of Company common stock valued at $48 million. Combined 1998 annual net sales of the above purchase acquisitions were approximately $610 million. 11
14 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) SALES AND OPERATIONS SALES Net sales increased 23 percent and 18 percent for the three months and nine months ended September 30, 1999, respectively, from the comparable periods in 1998. Excluding purchase acquisition and disposition of companies during 1999 and 1998, net sales for the three months and nine months ended September 30, 1999 increased 13 percent and 12 percent, respectively, from the comparable periods in 1998. These increases in net sales include increases in unit sales volume of cabinets, architectural coatings, other kitchen and bath products, and higher installation sales of fiberglass insulation. Sales of Kitchen and Bath Products from the Company's North American operations for the three months and nine months ended September 30, 1999 were $894 million and $2,554 million, respectively, representing increases of 13 percent and 8 percent, respectively, from the comparable periods in 1998; excluding purchase acquisition and disposition of companies, net sales of this segment increased 12 percent and 11 percent, respectively, from the comparable periods in 1998. Sales of Builders' Hardware and Other Specialty Products from the Company's North American operations for the three months and nine months ended September 30, 1999 were $524 million and $1,331 million, respectively, representing increases of 46 percent and 35 percent, respectively, from the comparable periods in 1998; excluding purchase acquisition of companies, net sales of this segment increased 23 percent for both the three month and nine month periods ended September 30, 1999. Net sales from International operations for the three months and nine months ended September 30, 1999 were $286 million and $777 million, respectively, representing increases of 27 percent and 28 percent, respectively, from the comparable periods in 1998; excluding purchase acquisition of companies, net sales from these operations were approximately flat when compared with the prior year periods. 12
15 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) SALES AND OPERATIONS, CONCLUDED OPERATING PROFIT MARGINS The Company's consolidated operating profit margins, before general corporate expense, were 9.9 percent and 15.3 percent for the third quarter and nine months ended September 30, 1999, respectively. The Company's operating profit margins, before general corporate expense for the third quarter and nine months ended September 30, 1999 were negatively affected by unusual pre-tax expense aggregating $156.7 million, principally related to the third quarter 1999 pooling of interests acquisitions. Excluding unusual pre-tax expense, consolidated operating profit margins, before general corporate expense, for the three months and nine months ended September 30, 1999 were 19.1 percent and 18.7 percent, respectively, as compared with 18.6 percent and 18.4 percent for the comparable periods of the prior year. Operating profit margins, before general corporate expense, of the Company's North American Kitchen and Bath Products operating segment for the three months and nine months ended September 30, 1999 were 14.9 percent and 18.4 percent, respectively. Excluding unusual pre-tax expense, operating profit margins, before general corporate expense, for the three months and nine months ended September 30, 1999 were 19.7 percent and 20.1 percent, respectively, as compared with 20.2 percent and 19.9 percent, respectively, for the comparable periods of the prior year. Operating profit margins, before general corporate expense, of the Company's North American Builders' Hardware and Other Specialty Products operating segment for the three months and nine months ended September 30, 1999 were -1.5 percent and 9.7 percent, respectively. Excluding unusual pre-tax expense, operating profit margins, before general corporate expense, for the three months and nine months ended September 30, 1999 were 20.2 percent and 18.2 percent, respectively, as compared with 16.9 percent and 17.1 percent, respectively, for the comparable periods of the prior year. Operating profit margins, before general corporate expense, of the Company's International operating segment for the three months and nine months ended September 30, 1999 were 15.0 percent and 14.7 percent, respectively, as compared with 15.5 percent and 15.0 percent, respectively, for the comparable periods of the prior year. OTHER INCOME (EXPENSE), NET Included in other income (expense), net for the third quarter and nine months ended September 30, 1999 were equity earnings from MascoTech, Inc. of $3.9 million and $12.3 million, respectively, as compared with equity earnings of $2.7 million and $13.0 million for the comparable periods of the prior year. Included in other interest income is interest income from the 12% pay-in-kind junior debt securities of Furnishings International Inc. (approximately $377 million principal amount at December 31, 1998). Such interest income approximated $12.0 million and $10.6 million, respectively, for the third quarter of 1999 and 1998 and $34.6 million and $30.8 million, respectively, for the nine months ended September 30, 1999 and 1998. 13
16 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OTHER INCOME (EXPENSE), NET, CONCLUDED Other, net for the three months ended September 30, 1999 includes $33.5 million of unusual pre-tax expense, principally related to the disposition of certain non-operating assets and the pooling of interests acquisitions. Included in other, net for the three months ended September 30, 1998 is an approximate $30 million pre-tax gain from the sale of the Company's Thermador subsidiary. Such gain was partly offset by pre-tax expense aggregating approximately $26 million, principally related to the disposition of certain non-operating assets. Other, net for the nine months ended September 30, 1998 includes income and gains, net regarding certain non-operating assets of $18.5 million. Also included in other, net for the nine months ended September 30, 1998 is a first quarter $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 partly offset by an approximate $12 million pre-tax charge related to the early retirement of long-term debt. NET INCOME AND EARNINGS PER SHARE Net income for the three months and nine months ended September 30, 1999 was $64.9 million and $390.9 million, and diluted earnings per share was $.15 and $.88, respectively. Excluding $126.4 million of after-tax unusual expense ($190.2 million pre-tax) related primarily to pooling of interests acquisitions, net income for the three months and nine months ended September 30, 1999 was $191.3 million and $517.3 million, and diluted earnings per share was $.43 and $1.16, respectively. Net income for the three months and nine months ended September 30, 1998 was $152.8 million and $427.3 million, and diluted earnings per share was $.34 and $.95, respectively. The Company's effective tax rate for the three months and nine months ended September 30, 1999 was 42.7 percent and 38.5 percent, respectively, as compared with 36.8 percent and 38.3 percent, respectively, for the comparable periods of the prior year. OTHER FINANCIAL INFORMATION At September 30, 1999, current assets were 2.2 times current liabilities. The Company's long-term debt as a percent of total capitalization ratio was 43.2 percent at September 30, 1999 as compared with 35.9 percent at December 31, 1998. During August 1999, the Company issued $300 million of 7.75% debentures due August 2029. After giving effect to the issuance of these debentures, the Company has on file with the Securities and Exchange Commission an unallocated shelf registration pursuant to which the Company is able to issue up to a combined $109 million of debt and equity securities. 14
17 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OTHER FINANCIAL INFORMATION, CONCLUDED During the first six months of 1999, the Company repurchased approximately 4 million of its common shares in open-market transactions. As a result of pooling of interests acquisition requirements, the Company has canceled its share buy-back program. For the nine months ended September 30, 1999, cash of $287.8 million was provided by operating activities. Cash used for investing activities was $1,077.0 million, including $792.9 million for acquisition of companies, $247.0 million for capital expenditures and $37.1 million for other cash outflows. Financing activities provided cash of $381.6 million, including $300.0 million from the issuance of 7.75% debentures, $878.1 million from an increase in other debt (primarily bank debt to finance purchase acquisitions) and $13.7 million from other cash inflows; cash used for financing activities included $200.0 million for the retirement of 6.625% notes due September 15, 1999, $391.8 million for the payment of other debt, $111.6 million for cash dividends and shareholder distributions and $106.8 million for the purchase of Company common stock. The aggregate of the preceding items represents a net cash outflow of $407.6 million. Changes in working capital and debt as indicated on the statement of cash flows exclude the effect of purchase acquisitions and disposition of companies, other than as mentioned above. During the third quarter of 1999, the Company increased the quarterly cash dividend to $.12 from $.11 per common share. This marks the 41st 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, future financial market activities and bank borrowings, are sufficient to fund its future working capital and other investment needs. OTHER MATTERS EURO CONVERSION A single currency called the euro was introduced in Europe on January 1, 1999. Eleven of the fifteen member countries of the European Union adopted the euro as their common legal currency as of that date. Fixed conversion rates between these participating countries' existing currencies (the "legacy currencies") and the euro were established as of that date. The legacy currencies will remain legal tender as denominations of the euro until at least January 1, 2002 (but not intended to be later than July 1, 2002). During this transition period, parties may settle non-cash transactions using either the euro or a participating country's legacy currency. Cash transactions will continue to be settled in the legacy currencies of participating countries until January 1, 2002, when euro-denominated currency will be issued. The Company is currently making changes to existing systems to facilitate a smooth transition to the new currency and believes that conversion to the euro will not have a material effect on the Company's financial position or results of operations. 15
18 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OTHER MATTERS, CONTINUED YEAR 2000 The year 2000 ("Y2K") issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's systems or equipment that have date-sensitive software using only two digits may recognize a date using "00" as the year 1900 rather than the year 2000. The resulting system failures or miscalculations may cause disruption of operations, including, among other things, a temporary inability to process transactions or send and receive electronic data with third parties or engage in similar normal business activities. In 1997, the Company formed a team to address the Y2K issue. This team, consisting of employees of the Company, has developed a year 2000 compliance program (the "Y2K Program") which includes: assessing and monitoring the compliance of all applications, operating systems and hardware on mainframe, mid-range, personal computer and network platforms; addressing issues related to non-information technology embedded software and equipment; and addressing the compliance of key business partners. Executive management regularly monitors the status of the Company's Y2K Program. The first component of the Y2K Program is to identify the computer systems and other equipment with embedded technology that are susceptible to failures or errors as a result of the Y2K issue. This effort is substantially complete. The second component involves the actual remediation or replacement of non-compliant systems and equipment. For its information technology, the Company generally utilizes mid-range, non-mainframe based computing environments which are complemented by a series of local-area networks that are connected via a wide-area network. Substantially all operating systems related to the mid-range systems and networks have been updated to comply with Y2K requirements. In addition, upgraded or modified versions of the Company's financial, manufacturing, human resource, and other packaged software applications which are Y2K compliant are in the process of being tested and integrated into the Company's overall system. The Company believes it has substantially completed this integration. The Company utilizes some microcomputers and software in its various manufacturing processes throughout the world. The Company has assessed potential Y2K issues in those processes. General findings to date indicate that problems usually relate to old personal computers or embedded microprocessors that must be replaced. Although there can be no assurance that the Company will identify and correct every Y2K issue found in the computer applications used in its manufacturing processes, the Company believes that it has in place a comprehensive program to identify and correct any such problems, and believes that its operations have substantially completed the remediation of all of their manufacturing systems. 16
19 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OTHER MATTERS, CONTINUED YEAR 2000, CONCLUDED The Company is also reviewing its building and utility systems (i.e., telephones, security, electrical) to determine any Y2K issues as part of its Y2K Program. Many of these systems are Y2K compliant. While the Company is working with suppliers of these systems and has no reason to expect that they will not meet their Y2K compliance targets, there is no guarantee that they will do so. The third component of the Y2K Program, which was initiated in late 1997, involves communication with significant suppliers and customers to determine the extent to which the Company is vulnerable to such parties' failure to remediate their own Y2K issues. The Company's efforts with respect to specific issues identified, including the development of contingency plans, depend in part upon its assessment of the risk that such issues could have a material adverse impact on the Company. Senior management at the Company's operating subsidiaries have been charged with identifying third party Y2K risks which could materially disrupt the subsidiaries' business operations. The Company is assisting its subsidiaries in developing contingency plans where such risks have been identified. Contingency plans may include securing alternate sources of supply, increasing inventory and staffing levels, stockpiling raw and packaging materials and other appropriate measures. The Company's operations have made substantial progress in the development of contingency plans and will continue to refine them throughout the remainder of the year. The Company will continue to monitor and evaluate the progress of its subsidiaries on this critical matter. The most reasonably likely worst case Y2K scenario for the Company is a failure on the part of a significant customer or supplier to remediate their own Y2K issues which results in a disruption of Company operations. However, because the Company's customer base is broad enough to minimize the impact of the failure of any single customer interface, and the contingency plans described above should mitigate supply problems, the Company currently does not believe that it has any material exposure to significant business interruption as a result of Y2K issues. The estimated total cost of the Y2K Program is between $15 million and $20 million, which includes planned upgrades. This cost, most of which has been incurred and expensed at September 30, 1999, is not expected to be material to the Company's results of operations or financial position. This cost, and the timing in which the Company plans to complete the Y2K Program, are based on management's best estimates, at the present time. Accordingly, there can be no absolute assurance that the Company will timely identify and remediate all significant Y2K issues, that remedial efforts will not involve significant time and expense, or that such issues will not have an adverse effect on the Company's financial position, results of operations or cash flows. 17
20 MASCO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONCLUDED) OTHER MATTERS, CONCLUDED FORWARD-LOOKING STATEMENT Statements in this quarterly report on Form 10-Q may include certain forward-looking statements regarding the Company's future sales and earnings growth potential. Actual results may vary materially because of external factors such as interest rate fluctuations, changes in consumer spending and other factors over which management has no control. Additional information about the Company's products, markets and conditions, which could affect the Company's future performance, is contained in the Company's filings with the Securities and Exchange Commission. 18
21 UNAUDITED INFORMATION REGARDING EQUITY INVESTMENTS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 Equity investments in affiliates consist primarily of the following approximate common stock and partnership interests at September 30: <TABLE> <CAPTION> 1999 1998 ---- ---- <S> <C> <C> Emco Limited, a Canadian company 42% 42% MascoTech, Inc. 17% 16% Hans Grohe, a German company 27% 27% </TABLE> The following presents the condensed financial data of MascoTech, Inc. Amounts are in thousands. <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 -------------------- ---------------------- 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net Sales $399,300 $399,500 $1,284,470 $1,223,740 ======== ======== ========== ========== Gross Profit $ 99,340 $100,150 $ 329,050 $ 321,610 ======== ======== ========== ========== Net Income $ 20,200 $ 16,790 $ 70,170 $ 79,350 ======== ======== ========== ========== </TABLE> 19
22 PART II. OTHER INFORMATION MASCO CORPORATION ITEMS 1, 3, 4 AND 5 ARE NOT APPLICABLE. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS During the third quarter of 1999, Masco Corporation completed four acquisitions pursuant to which the sellers of the acquired companies received unregistered Masco common stock as consideration. The sellers included individuals, private trusts, investment management funds and institutions, each of whom represented to Masco that they were "accredited investors" (as defined in Rule 501 under the Securities Act of 1933). The acquisitions were: Inrecon, L.L.C., completed on August 12; Behr Process Corporation and Mill's Pride, L.L.P., each completed on August 31; and Thermal Concepts, Inc., completed on September 1. The total consideration paid for these acquisitions included an aggregate of 105,547,346 shares of Masco common stock. Masco claims exemptions from registration under Section 4(2) of the Securities Act of 1933 and Rule 506 under the Securities Act of 1933. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: 4a - Registration Rights Agreement Among Masco Corporation and The Investors Listed Therein dated as of August 31, 1999. 27a - Financial Data Schedule as of and for the year-to-date period ended September 30, 1999. 27b - Financial Data Schedule as of and for the year-to-date period ended June 30, 1999, restated for pooling of interests acquisitions in the third quarter of 1999. 27c - Financial Data Schedule as of and for the year-to-date period ended March 31, 1999, restated for pooling of interests acquisitions in the third quarter of 1999. 27d - Financial Data Schedule as of and for the year-to-date periods ended December 31, 1998, September 30, 1998, June 30, 1998 and March 31, 1998, restated for pooling of interests acquisitions in the third quarter of 1999. (B) REPORTS ON FORM 8-K: On September 13, 1999, Masco Corporation filed a Form 8-K reporting, in response to Item 2, Masco's acquisition of The Arrow Fastener Company, Inrecon, L.L.C., Superia Radiatoren, N.V., Behr Process Corporation and Mill's Pride, L.L.P. 20
23 PART II. OTHER INFORMATION, CONCLUDED MASCO CORPORATION 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 15, 1999 BY:/s/ Robert B. Rosowski ------------------------- ------------------------------- Robert B. Rosowski Vice President - Controller and Treasurer (Chief Accounting Officer and Authorized Signatory) 21
24 MASCO CORPORATION EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT ------- <S> <C> Exhibit 4a Registration Rights Agreement Among Masco Corporation and the Investors Listed Therein dated as of August 31, 1999. Exhibit 27a Financial Data Schedule as of and for the year-to-date period ended September 30, 1999. Exhibit 27b Financial Data Schedule as of and for the year-to-date period ended June 30, 1999, restated for pooling of interests acquisitions in the third quarter of 1999. Exhibit 27c Financial Data Schedule as of and for the year-to-date period ended March 31, 1999, restated for pooling of interests acquisitions in the third quarter of 1999. Exhibit 27d Financial Data Schedule as of and for the year-to-date periods ended December 31, 1998, September 30, 1998, June 30, 1998 and March 31, 1998, restated for pooling of interests acquisitions in the third quarter of 1999. </TABLE>