Masco Corporation 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly report for Masco Corporation for the period ended September 30, 1999. Masco is a manufacturer and distributor of home improvement products, including kitchen and bath products, builders' hardware, and insulation services. The financial statements for all periods presented have been restated to reflect the pooling of interests accounting for three major acquisitions completed in the third quarter of 1999: Behr Process Corporation, Mill's Pride, L.L.P., and Thermal Concepts, Inc.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 1999 | Nine Months Ended Sep 30, 1999 |
|---|---|---|
| Net Sales | $1,704 million | $4,662 million |
| Operating Profit | $145.3 million | $646.1 million |
| Net Income | $64.9 million | $390.9 million |
| Diluted EPS | $0.15 | $0.88 |
| Cash from Operations (9mo) | $287.8 million | |
| Long-Term Debt | $2,420.4 million | |
| Cash and Cash Investments | $145.5 million |
Margins: Consolidated operating profit margins were 9.9% for the quarter and 15.3% for the nine-month period. Excluding unusual pre-tax expenses related to acquisitions, adjusted margins were 19.1% and 18.7%, respectively.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 23% for the quarter and 18% for the nine-month period compared to 1998. Organic growth (excluding acquisitions) was 13% and 12%, respectively.
- Profitability Decline: Reported net income decreased significantly compared to the prior year ($64.9M vs. $152.8M for the quarter). This decline is primarily due to $190.2 million in pre-tax unusual expenses ($126.4 million after-tax) associated with the pooling of interests acquisitions and asset dispositions.
- Adjusted Performance: Excluding unusual expenses, adjusted net income for the quarter was $191.3 million (EPS $0.43) and for the nine months was $517.3 million (EPS $1.16), representing growth over the prior year.
- Balance Sheet: Total assets increased to $6.65 billion from $5.62 billion, driven by acquisitions and goodwill. Long-term debt increased to $2.42 billion from $1.64 billion to finance acquisitions.
Guidance, Outlook, and Risks
Management Commentary: Management attributes the reported earnings decline to one-time acquisition costs. The company increased its quarterly cash dividend to $0.12 per share, marking the 41st consecutive year of dividend increases. The share buy-back program was canceled due to pooling of interests requirements.
Acquisitions: In addition to the pooling acquisitions, Masco completed several purchase acquisitions totaling approximately $841 million, including Arrow Fastener Company and H&H Tube.
Risks and Contingencies:
- Year 2000 (Y2K): The company estimates total Y2K remediation costs between $15 million and $20 million, most of which has been incurred. Management believes operations are substantially compliant but notes risks related to third-party suppliers and customers.
- Euro Conversion: The company is transitioning systems for the Euro introduction but does not expect a material effect on financial position.
- Forward-Looking Statements: Future results may vary due to interest rate fluctuations and changes in consumer spending.
Investor Verification Checklist
- Acquisition Accounting: Verify the impact of the "pooling of interests" accounting method on restated historical data and share counts (104 million shares issued).
- Unusual Expenses: Confirm the specific breakdown of the $190.2 million pre-tax unusual expense to understand the non-recurring nature of the earnings decline.
- Debt Levels: Review the increase in long-term debt to $2.42 billion and the issuance of $300 million in 7.75% debentures due in 2029.
- Adjusted EPS: Compare reported EPS ($0.15) against management's adjusted EPS ($0.43) to assess underlying operational performance.
- Y2K Exposure: Assess the company's contingency plans regarding third-party suppliers and the potential for operational disruption.