ITEM 1. BUSINESS.
Masco Corporation is engaged principally in the manufacture, sale and installation of home improvement and building products. Masco believes that it is the largest domestic manufacturer of faucets, kitchen and bath cabinets and plumbing supplies and that it is a leading domestic producer of a number of other home improvement and building products. Masco was incorporated under the laws of Michigan in 1929 and in 1968 was reincorporated under the laws of Delaware. Except as the context otherwise indicates, the terms "Masco" and the "Company" refer to Masco Corporation and its consolidated subsidiaries.
The Company is among the country's largest manufacturers of brand-name consumer products designed for the improvement and building of the home, including faucets, kitchen and bath cabinets, kitchen appliances, bath and shower enclosure units, spas and hot tubs, other shower, bath and plumbing specialties and accessories, door locks and other builders' hardware, air treatment products, venting and ventilating equipment and water pumps. These products are sold through mass merchandisers, hardware stores, home centers, distributors, wholesalers and other outlets to consumers and contractors. The Company's operations are categorized into two industry segments: Kitchen and Bath Products and Other Specialty Products.
INDUSTRY SEGMENTS
The following table sets forth for the three years ended December 31, 1996, the contribution of the Company's industry segments to net sales and operating profit:
- ------------------------- (1) Results exclude the home furnishings products segment, which was classified as discontinued operations in 1995. See the Note to the Company's Consolidated Financial Statements captioned "Discontinued Operations," included in Item 8 of this Report.
(2) Amounts are before general corporate expense.
The net sales and operating profit attributable to industry segments for 1995 and 1994 have been restated to conform to the current year classification of the Company's operations into the Kitchen and Bath Products and Other Specialty Products segments. Additional financial information concerning the Company's operations by industry segments as of and for the three years ended December 31, 1996 is set forth in the Note to the Company's Consolidated Financial Statements captioned "Segment Information," included in Item 8 of this Report.
KITCHEN AND BATH PRODUCTS
The Company manufactures a variety of single and double handle faucets. DELTA(R) and PEERLESS(R) single and double handle faucets are used on kitchen, lavatory and other sinks and in bath and shower installations. DELTA faucets are sold primarily through manufacturers' representatives to
distributors who sell the faucets to plumbers, building contractors, remodelers, retailers and others. PEERLESS faucets are sold primarily through manufacturers' representatives directly to retail outlets such as mass merchandisers, home centers and hardware stores and are also sold under private label. The Company's ARTISTIC BRASS(R) and SHERLE WAGNER(TM) faucets and accessories are produced for the decorator markets and are sold through wholesalers, distributor showrooms and other outlets. ALSONS(R) hand showers and shower heads and MIXET(R) valves and accessories are distributed through manufacturers' representatives to the wholesale market and to retailers.
Sales of faucets worldwide approximated $757 million in 1996, $698 million in 1995 and $667 million in 1994. The percentage of operating profit on faucets is somewhat higher than that on other products offered by the Company. The Company believes that the simplicity, quality and reliability of its faucet mechanisms, manufacturing efficiencies and capabilities, its marketing and merchandising activities, and the development of a broad line of products have accounted for the continued strength of its faucet sales.
The Company manufactures stock, semi-custom and custom kitchen and bath cabinetry in a variety of styles and in various price ranges. The Company sells cabinets under a number of trademarks, including MERILLAT(R), KRAFTMAID(R), STARMARK(R) and FIELDSTONE(R), with sales to distributors, home centers, dealers and direct to builders for both the home improvement and new construction markets. In addition to its domestic manufacturing, the Company manufactures cabinetry in Germany, where sales are made primarily through Company-owned showrooms to consumers, and in England, with sales primarily to builders for the new construction market. Sales of kitchen and bath cabinets were approximately $832 million in 1996, $758 million in 1995 and $665 million in 1994.
The Company's brass and copper plumbing system components and other plumbing specialties are sold to plumbing, heating and hardware wholesalers and to home centers, hardware stores, building supply outlets and other mass merchandisers. These products are marketed for the wholesale trade under the BRASSCRAFT(R) trademark and for the "do-it-yourself" market under the PLUMB SHOP(R), HOME PLUMBER(R) and MELARD(TM) trademarks and are also sold under private label.
Other Kitchen and Bath Products sold by the Company include THERMADOR(R) cooktops, ovens, ranges and related cooking equipment and refrigerators, which are marketed through appliance distributors and dealers. The Company's AQUA GLASS(R) acrylic and gelcoat bath and shower units and whirlpools are sold primarily to wholesale plumbing distributors for use in the home improvement and new home construction markets. Other bath and shower enclosure units, shower trays and laundry tubs are sold to the home improvement market through hardware stores and home centers under the brand names AMERICAN SHOWER & BATH(TM) and TRAYCO(TM). HUPPE(R) luxury bath and shower enclosures are manufactured and sold by the Company through wholesale channels primarily in Germany. The Company manufactures bath and shower accessories, vanity mirrors and bath storage products and sells these products under the brand name ZENITH PRODUCTS(R) and other tradenames to home centers, hardware stores and mass merchandisers for the "do-it-yourself" market. The Company's spas and hot tubs are sold under the brand name HOT SPRING SPA(R) and other trademarks directly to retailers for sale to residential customers. In early 1997, the Company acquired Franklin Brass Manufacturing Company, a leading manufacturer of bath accessories and bath safety products.
OTHER SPECIALTY PRODUCTS
The Company's Other Specialty Products include premium BALDWIN(R) quality brass rim and mortise lock sets, knobs and trim and other builders' hardware which are manufactured and sold for the home improvement and new home construction markets. WEISER(R) lock sets and related hardware are sold through contractor supply outlets, hardware distributors and home centers. SAFLOK(TM) electronic lock sets and WINFIELD(TM) mechanical lock sets are sold primarily to the hospitality market. In early 1997, the Company acquired LaGard Inc., whose electronic lock sets are used primarily in containers for the banking industry, such as safes, ATMs, vaults and cabinetry.
The Company has recently begun to incorporate on many of its decorative brass products a durable coating that offers anti-tarnish protection, under the names BRILLIANCE(TM) and THE LIFETIME FINISH(TM). This innovative finish is currently available on certain of the Company's bath and door hardware.
The Company manufactures ventilation products under the tradename AMP(R), including grilles, registers, diffusers and humidifiers which are sold through wholesale distribution and home centers. GEBHARDT(TM) commercial ventilating products and JUNG(TM) water pumps are manufactured and distributed by the Company in Europe. Through local offices across the United States, the Company also installs fiberglass insulation and other building products primarily for the residential home building industry.
RECENT DEVELOPMENTS
In August 1996, the Company completed the sale of its home furnishings products businesses to Furnishings International Inc. These operations were principally engaged in the manufacture and sale of quality furniture, fabrics and other home furnishings. The total proceeds from the sale were $1,050 million, consisting of $708 million in cash, $285 million in junior debt securities due 2008, and the balance in 13% cumulative preferred stock, 15 percent of the common stock of Furnishings International and preferred stock convertible into an additional 25 percent ownership. The Company, however, is restricted from maintaining ownership of Furnishings International in excess of 20 percent, so any additional common stock would be acquired only for resale. The Company's financial statements and related notes reflect a 1995 pre-tax and after-tax charge of $650 million approximating the actual loss on disposition as of the 1996 sale date. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Discontinued Operations" included in Item 7 of this Report and the Note to the Company's Consolidated Financial Statements included in Item 8 of this Report captioned "Discontinued Operations." Unless otherwise noted, reference to the Company excludes information relating to the discontinued operations.
GENERAL INFORMATION
No material portion of the Company's business is seasonal or has special working capital requirements, although the Company maintains a higher investment in inventories for certain of its businesses than the average manufacturing company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Cash Flows from Operating Activities," included in Item 7 of this Report. The Company does not consider backlog orders to be material and no material portion of its business is dependent upon any one customer or subject to renegotiation of profits or termination of contracts at the election of the federal government. Compliance with federal, state and local regulations relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not expected to result in material capital expenditures by the Company or to have a material effect on the Company's earnings or competitive position. In general, raw materials required by the Company are obtainable from various sources and in the quantities desired.
INTERNATIONAL OPERATIONS
The Company, through its subsidiaries, has home improvement and building products manufacturing plants in Belgium, Canada, Denmark, England, France, Germany, Italy, Mexico, Spain, Taiwan and Turkey. Home improvement and building products manufactured by the Company outside of the United States include faucets and accessory products, bath and shower enclosures, bath accessories, kitchen and bath cabinets, decorative accessories, door lock sets and related hardware, floor registers, humidifiers, ventilating equipment, submersible water pumps and special insulation materials. The Company expanded its European operations during 1996 through the acquisition of three manufacturers: The Moore Group Ltd., a leading United Kingdom based manufacturer of kitchen cabinets, Horst
Breuer GmbH, a German manufacturer of shower enclosures and E. Missel GmbH, a leading German manufacturer of proprietary plumbing insulation materials.
The Company's foreign operations are subject to political, monetary, economic and other risks attendant generally to international businesses. These risks generally vary from country to country.
Financial information concerning the Company's export sales and foreign and domestic operations, including the net sales, operating profit and assets which are attributable to the Company's operations in North America and in other geographic areas, as of and for the three years ended December 31, 1996, is set forth in Item 8 of this Report in the Note to the Company's Consolidated Financial Statements captioned "Segment Information."
PATENTS AND TRADEMARKS
The Company holds a number of United States and foreign patents covering various design features and valve constructions used in certain of its faucets, and also holds a number of other patents and patent applications, licenses, trademarks and tradenames. As a manufacturer of brand name consumer products, the Company views its trademarks and other proprietary rights as important, but does not believe that there is any reasonable likelihood of a loss of such rights that would have a material adverse effect on the Company's present business as a whole.
COMPETITION
The major domestic and foreign markets for the Company's products are highly competitive. Competition is based primarily on performance, quality, style, customer service and price, with the relative importance of such factors varying among products. A number of companies of varying size compete with one or more of the Company's product lines.
EMPLOYEES
At December 31, 1996, approximately 22,800 people were employed by the Company. Satisfactory relations have generally prevailed between the Company and its employees.
EQUITY INVESTMENTS
MascoTech, Inc.
In 1984, Masco transferred its industrial businesses to a newly formed subsidiary, MascoTech, Inc. (formerly Masco Industries, Inc.), which became a separate public company in July, 1984 when Masco distributed to its stockholders shares of MascoTech common stock as a special dividend. In October 1996, the Company reduced its common equity interest in MascoTech from 45 percent to 21 percent through the sale to MascoTech of MascoTech common stock and warrants to purchase shares of MascoTech common stock. Payment of $115 million of the purchase price was made in cash at closing and the balance of $151 million is due by September 30, 1997 payable in cash, or at MascoTech's option, in cash and publicly traded securities of Emco Limited held by MascoTech. As part of that transaction, the Company granted MascoTech a right of first refusal, which expires September 30, 2000, to purchase the remaining shares of MascoTech common stock held by the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in Item 7 of this Report, regarding the effect of this transaction on the Company. Emco is a Canadian manufacturer and distributor of home improvement and building products. MascoTech's conversion of its outstanding preferred stock into MascoTech common stock in mid-1997 will further reduce the Company's ownership in MascoTech to approximately 17 percent.
MascoTech is a leading supplier of metalworked and aftermarket products for the transportation industry. MascoTech's net sales for 1996 were approximately $1.3 billion.
During the last decade, MascoTech pursued diversified growth in the transportation-related, architectural and defense markets. Structural changes in recent years in the markets served by MascoTech, combined with the growth opportunities and the capital requirements of certain of MascoTech's transportation-related businesses, led MascoTech to an evaluation of the prospects for all of its businesses. This evaluation resulted in a strategic plan to focus on its core operating capabilities and divest certain other businesses. MascoTech's engine and drivetrain group and aftermarket group constitute its core operating businesses.
In late 1994, MascoTech adopted a plan to dispose of its architectural products, defense and certain of its transportation-related businesses. The disposition of these businesses was completed in 1996. In addition, in 1996, MascoTech disposed of its heavy-gauge stamping operations and in early 1997, it completed the sale of its engineering and technical services businesses. The cash portion of the proceeds from the disposition of these businesses has been applied to reduce MascoTech's indebtedness and to provide capital to invest in its core businesses. The disposition of these businesses did not meet the criteria for discontinued operations treatment for accounting purposes; accordingly, the sales and results of operations of these businesses are included in the results of continuing operations through the date of disposition. Businesses held for sale or sold, including the engineering and technical services businesses and the heavy-gauge stamping operations, had sales of approximately $412 million in 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in Item 7 of this Report, regarding the effect of these actions on the Company.
Approximately 80 percent of MascoTech's transportation-related Products sales in 1996 (including businesses held for disposition) were original equipment automotive products and services. Sales to original equipment manufacturers are made through factory sales personnel and independent sales representatives. During 1996, sales to various divisions and subsidiaries of Ford Motor Company, Chrysler Corporation, General Motors Corporation and New Venture Gear, Inc. accounted for approximately 18 percent, 11 percent, 10 percent and 12 percent, respectively, of MascoTech's net sales (including businesses held for disposition). Sales to the automotive aftermarket are made primarily to distributors utilizing factory sales personnel. Aftermarket products are sold to companies distributing into the traditional, retail and heavy-duty segments of the automotive aftermarket.
MascoTech's engine and drivetrain products include semi-finished transmission shafts, drive gears, engine connecting rods, wheel spindles and front wheel drive components. Aftermarket products include fuel and emission systems components, windshield wiper blades, constant-velocity joints, brake hardware repair kits and other automotive accessories. MascoTech's metalworked products are manufactured using various technologies, including cold, warm and hot forming, powder metal forming, value-added machining, tubular steel fabricating and hydroforming.
TriMas Corporation
The Company and MascoTech currently own approximately 4 percent and 37 percent, respectively, of the outstanding common stock of TriMas Corporation. TriMas is a diversified proprietary products company with leadership positions in commercial, industrial and consumer niche markets, including specialty container products, pressurized gas cylinders, specialty industrial gaskets, towing systems products, specialty fasteners, pressure-sensitive tapes and products for fiberglass insulation, and precision cutting tools.
Hans Grohe
The Company has a 27 percent partnership interest in Hans Grohe GmbH & Co. KG, a German manufacturer of faucets, handheld showers, shower heads and other shower accessories.
ITEM 2.
ITEM 2. PROPERTIES.
The following list sets forth the location of the Company's principal manufacturing facilities and identifies the industry segments utilizing such facilities:
Industry segments identified in the preceding table are: (1) Kitchen and Bath Products and (2) Other Specialty Products. Multiple footnotes within the same parentheses indicate that significant activities relating to more than one segment are conducted at that location.
The three principal faucet manufacturing plants are located in Greensburg, Indiana, Chickasha, Oklahoma and Jackson, Tennessee. The faucet manufacturing plants and the majority of the Company's other manufacturing facilities range in size from approximately 10,000 square feet to 900,000 square feet. The Company owns most of its manufacturing facilities and none of the properties is subject to significant encumbrances. In addition to its manufacturing facilities, the Company operates approximately 65 facilities (the majority of which are leased) which install fiberglass insulation and other building products. The Company's corporate headquarters are located in Taylor, Michigan and are owned by the Company. An additional building near its corporate headquarters is used by the Company's corporate research and development department.
The Company's buildings, machinery and equipment have been generally well maintained, are in good operating condition, and are adequate for current production requirements.
The following list sets forth the location of MascoTech's principal manufacturing facilities:
All of MascoTech's manufacturing facilities are primarily engaged in MascoTech's Transportation -- Related Products operations. MascoTech's principal manufacturing facilities range in size from approximately 10,000 square feet to 320,000 square feet, substantially all of which are owned by MascoTech and are not subject to significant encumbrances. The MascoTech executive offices are located in Taylor, Michigan, and are provided by the Company to MascoTech under a corporate services agreement.
MascoTech's buildings, machinery and equipment have been generally well maintained, are in good operating condition, and are adequate for current requirements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to claims and litigation in the ordinary course of business, but does not believe that any such claim or litigation will have a material adverse effect on its consolidated financial position.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
SUPPLEMENTARY ITEM. EXECUTIVE OFFICERS OF REGISTRANT (PURSUANT TO INSTRUCTION 3 TO ITEM 401(B) OF REGULATION S-K).
Executive officers who are elected by the Board of Directors serve for a term of one year or less. Each elected executive officer has been employed in a managerial capacity with the Company for over five years except for Messrs. Foley and Gargaro and Dr. Bauder. Mr. Foley was employed by MascoTech, Inc. as its Vice President -- Human Resources from 1994 to 1996 and was President of Executive Business Partners, Inc., a training and consulting firm, from 1993 to 1994. From 1991 to 1992, he was Vice President -- Administration and General Counsel at Domino's Pizza, Inc., a company engaged in producing, distributing and retail sales of food products through franchised and company-owned stores. Mr. Gargaro joined the Company as its Vice President and Secretary in October, 1993. Prior to joining the Company, Mr. Gargaro was a partner at the Detroit law firm of Dykema Gossett PLLC. Mr. Gargaro has served as a director and Secretary of MascoTech, Inc., since 1984, and as a director and Secretary of TriMas Corporation since 1989. From 1984 to 1996, Dr. Bauder served as President and Chief Executive Officer of Cranbrook Educational Community.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The New York Stock Exchange is the principal market on which the Company's Common Stock is traded. The following table indicates the high and low sales prices of the Company's Common Stock as reported on the New York Stock Exchange Composite Tape and the cash dividends declared per share for the periods indicated:
On February 28, 1997, there were approximately 5,700 holders of record of the Company's Common Stock.
The Company expects that its practice of paying quarterly dividends on its Common Stock will continue, although future dividends will continue to depend upon the Company's earnings, capital requirements, financial condition and other factors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth summary consolidated financial information for the Company's continuing operations, for the years and dates indicated:
(1) The year 1994 includes a $79 million after-tax ($.50 per share) non-cash equity investment charge.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following financial and business analysis provides information which the Company believes is relevant to an assessment and understanding of the Company's consolidated financial position and results of operations. This financial and business analysis should be read in conjunction with the consolidated financial statements and related notes.
OVERVIEW
The Company is engaged principally in the manufacture, sale and installation of home improvement and building products. These products are sold to the home improvement and home construction markets through mass merchandisers, hardware stores, home centers, distributors, wholesalers and other outlets for consumers and contractors.
Factors which affect the Company's results of operations include the levels of home improvement and residential construction activity principally in the U.S. and Europe (including repair and remodeling and new construction), cost management and the Company's ability to maintain its leadership positions in an increasingly competitive marketplace. Historically, the Company has been able to largely offset cyclical declines in housing markets through new product introductions and market share gains.
Net sales and operating profit from continuing operations for 1996 were $3,237 million and $481 million, representing increases of 11 percent and 19 percent, respectively, over 1995. Net income from continuing operations and income from continuing operations per share for 1996 were $295 million and $1.84, representing increases of 48 percent and 47 percent, respectively, and include the benefits of higher other income in 1996. Increases in net sales typically result in operating profit improvements that exceed the net sales increases due to the allocation of fixed and semi-fixed costs over a higher sales base. The 1996 fourth quarter included after-tax charges (primarily for adjustments of miscellaneous assets to their estimated fair value) of $37.5 million or $.23 per share, which were more than offset by the after-tax gain from the sale of certain MascoTech investments of $40.7 million or $.25 per share.
CORPORATE DEVELOPMENT
Consistent with the Company's objective of building on its European presence, the Company during 1996 acquired: The Moore Group Ltd., a leading United Kingdom manufacturer of kitchen cabinets; Horst Breuer GmbH, a German manufacturer of shower enclosures; and E. Missel GmbH, a leading German manufacturer of proprietary specialty products. The aggregate purchase price for these companies was approximately $173 million, and the acquisitions were accounted for as purchase transactions. These companies had combined annual net sales in 1995 of approximately $140 million.
Acquisitions have historically contributed significantly to Masco's long-term growth, even though generally the initial impact on earnings is minimal after deducting acquisition-related costs such as interest and added depreciation and amortization. The important earnings benefit to Masco arises from subsequent growth of acquired companies, since incremental sales are not handicapped by these expenses.
DISCONTINUED OPERATIONS
In late November 1995, the Company's Board of Directors approved a formal plan to dispose of the Company's home furnishings products segment. Operations that were included in this segment were principally engaged in the manufacture and sale of quality furniture, fabrics and other home furnishings. The appropriate provisions were recorded in the fourth quarter of 1995 for the estimated loss on the discontinued operations through the expected disposal date, the reduction of assets to their estimated net realizable value and the anticipated liabilities related to the disposal. The total provision amounted to $650 million on a pre-tax and after-tax basis. The approximate results of operations for the
period after the decision to discontinue were previously estimated and included in the expense provision established in 1995.
In early August 1996, the Company completed the sale of its home furnishings products businesses to Furnishings International Inc. Furnishings International's investors include 399 Venture Partners (a subsidiary of Citibank), certain members of Furnishings International's management, the Company and certain affiliates of Travelers Group Inc. Total proceeds to the Company from the sale were $1,050 million with approximately $708 million of the purchase price in cash. The balance consisted of $285 million of 12 percent pay-in-kind junior debt securities, and equity securities totalling $57 million, consisting of 13 percent cumulative preferred stock with a stated value of $55 million, 15 percent of the common stock of Furnishings International and convertible preferred stock.
The junior debt securities mature in 2008; the Company is recording the 12 percent pay-in-kind interest income from these securities. The Company will record dividend income from the 13 percent cumulative preferred stock if and when such dividends are declared. The convertible preferred stock represents transferable rights for up to a 25 percent common ownership, although the Company is restricted from maintaining an ownership in excess of 20 percent of Furnishings International's common equity. As such, the Company will not acquire additional common equity, except for purposes of resale only. Of the cash proceeds received from this sale, approximately $550 million was applied to reduce bank debt. The balance of the proceeds will eventually be invested in the future growth of the Company.
Under a transitional services agreement, the Company provides corporate-related services for a fee to Furnishings International through April 1997. Substantially all of these services will be discontinued after such date.
The Company's $650 million pre-tax and after-tax charge for the disposition of the home furnishings products segment, which was recorded at December 31, 1995, approximated the actual loss on disposition as of the 1996 sale date.
The majority of the charge from the disposition of the home furnishings products segment resulted in a capital loss for tax purposes. The ultimate tax benefit from the disposition cannot be determined currently and will be reported in subsequent periods if and when taxable capital gains are realized.
The Company's former President and Chief Operating Officer, Wayne B. Lyon, has retired as a Company employee and joined Furnishings International as its full-time Chairman, President and Chief Executive Officer. The Company's Executive Vice President and President -- Building Products, Raymond F. Kennedy, was appointed President and Chief Operating Officer of the Company in August 1996.
PROFIT MARGINS
Operating profit margin, before general corporate expense, improved to 17.5 percent in 1996 following a decline to 16.8 percent in 1995 from 19.8 percent in 1994. The improvement in 1996 is principally due to a reduction in selling, general and administrative expenses as a percentage of sales. The Company's operating margin from faucet sales is somewhat higher than that on other products offered by the Company due to the simplicity, quality and reliability of its faucet mechanisms, manufacturing efficiencies and capabilities, extensive marketing and merchandising activities and breadth of product offering.
General corporate expense in 1996 was $85 million, as compared with $90 million in 1995 and $80 million in 1994. Operating profit margin, after general corporate expense, was 14.8 percent, 13.7 percent and 16.7 percent in 1996, 1995 and 1994, respectively.
Net income from continuing operations as a percentage of sales increased to 9.1 percent in 1996 from 6.8 percent and 6.7 percent in 1995 and 1994, respectively. After-tax profit return on shareholders'
equity, as measured by net income from continuing operations, increased to 17.8 percent in 1996 from 9.4 percent and 8.6 percent in 1995 and 1994, respectively.
For 1994, net income from continuing operations reflects an unusual after-tax charge of $79 million or approximately $.50 per share for the Company's equity share of its affiliate MascoTech, Inc.'s $315 million non-cash after-tax charge for the divestiture of its non-core businesses. Prior to giving effect to such charge, net income from continuing operations as a percentage of sales and after-tax profit return on shareholders' equity for 1994 were 9.7 percent and 12.5 percent, respectively.
FINANCIAL CONDITION
Over the years, the Company has largely funded its growth through cash provided by a combination of operations and long-term bank and other borrowings. At December 31, 1996, the Company's shelf-registration statement permits the issuance of up to a combined $759 million of debt and equity securities.
Bank credit lines are maintained to ensure availability of short-term funds on an as-needed basis. At December 31, 1996, the Company had available $750 million under its bank revolving-credit facility. Any outstanding balances under this facility are due and payable in November 2001. Certain debt agreements contain limitations on additional borrowings and requirements for maintaining a certain level of tangible net worth. At December 31, 1996, the Company was in compliance with these limitations and requirements, and the Company's tangible net worth exceeded the most restrictive of such provisions by approximately $347 million.
Maintaining high levels of liquidity and cash flow are among the Company's financial strategies. During 1996, the Company strengthened its balance sheet and reduced both its short-term and long-term debt. The Company's working capital ratio was 2.8 to 1 at December 31, 1996 compared with 2.2 to 1 at December 31, 1995. The Company's debt as a percent of total capitalization approximated 39 percent at December 31, 1996 compared with 47 percent at December 31, 1995. The Company's improved financial strength at December 31, 1996 compared with December 31, 1995 is primarily due to the payment of long-term debt from a portion of the cash consideration from the sale of the Company's home furnishings products businesses, the sale of certain MascoTech investments and improved earnings from operations in 1996. The Company's cash balance at December 31, 1996 includes approximately $150 million from European borrowings which should improve the Company's utilization of foreign tax credits in future years.
CASH FLOWS
Significant sources and uses of cash in the past three years are shown in the following table, in thousands:
CASH FLOWS FROM OPERATING ACTIVITIES
Continuing operations generated $79.2 million and $50.0 million more cash in 1996 than in 1995 and 1994, respectively, primarily due to increased earnings and a decreased impact from changes in working capital. During 1996, the Company's accounts receivable and inventories increased by $27.0 million and $20.2 million, respectively, primarily as a result of acquisitions. As compared with the average manufacturing company, the Company maintains a higher investment in inventories, which relates to the Company's business strategies of providing better customer service, establishing efficient production scheduling and benefitting from larger, more cost-effective purchasing.
CASH FLOWS FROM INVESTING ACTIVITIES
Investing activities of continuing operations provided cash of $564.8 million in 1996 compared with cash used for investing activities of $141.3 million in 1995. The increase of $706.1 million is primarily the result of cash proceeds from the sale of discontinued operations and certain MascoTech investments, offset by cash used for the acquisition of three European companies at an aggregate purchase price of approximately $173 million, which was principally provided by European borrowings. The Company anticipates the continued use of cash for the acquisition of companies.
In early August 1996, the Company completed the sale of its home furnishings products segment to Furnishings International Inc. Total proceeds to the Company from the sale were $1,050 million with approximately $708 million of the purchase price in cash. (See Discontinued Operations in this Management's Discussion and Analysis.)
During October 1996, the Company completed the sale to MascoTech, Inc. 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 $266 million, with $115 million cash paid at closing. The Company receives interest income at 6.625 percent on the $151 million balance of the consideration, which is due by September 1997; this amount is included in non-current assets inasmuch as the Company may receive publicly traded securities of Emco Limited held by MascoTech, in payment of a substantial portion of this balance. Emco Limited is a Canadian manufacturer and distributor of home improvement and building products. The Company recorded a 1996 fourth quarter net pre-tax gain of $67.8 million ($40.7 million after-tax) from the sale. This gain was principally offset by fourth quarter charges aggregating $49.1 million pre-tax ($37.5 million after-tax) primarily for adjustments of miscellaneous assets to their estimated fair value. This transaction reduced the Company's common equity ownership in MascoTech from 45 percent to 21 percent. The transaction, when considered along with the conversion by mid-1997 of outstanding MascoTech preferred stock into MascoTech common stock, will reduce the Company's ownership in MascoTech to approximately 17 percent (which equals the Company's voting interest at December 31, 1996). MascoTech holds an option expiring in 2002 to require the Company to purchase up to $200 million aggregate amount of subordinated debt securities of MascoTech. As part of the transaction, Masco Chairman Richard Manoogian also agreed to sell to MascoTech one million shares of his holdings of MascoTech common stock at the then market price of $13 5/8. As a result, his common ownership in MascoTech before the transaction remains approximately the same, at seven percent, following the purchases by MascoTech.
Capital expenditures totalled $138.5 million in 1996 compared with $165.1 million in 1995. These amounts primarily pertain to expenditures for additional facilities related to increased demand for existing products as well as for new Masco products. The Company also continues to invest in automating its manufacturing operations and increasing its productivity, in order to be a more efficient producer and improve customer service and response time. The Company expects capital expenditures for 1997, excluding those of potential 1997 acquisitions, to approximate the 1996 level. Depreciation and amortization expense for 1996 totalled $99.7 million, compared with $90.1 million for 1995; for 1997, depreciation and amortization expense is expected to be approximately $105 million, excluding 1997 acquisitions.
Costs of environmental responsibilities and compliance with existing environmental laws and regulations have not had, nor in the opinion of the Company are they expected to have, a material adverse effect on the Company's capital expenditures, financial position, or results of operations.
CASH FLOWS FOR FINANCING ACTIVITIES
Cash used for financing activities increased to $491.7 million in 1996 from $156.1 million in 1995. During 1996, the Company paid the $250 million of 9 percent notes due April 15, 1996 through borrowings under its bank revolving-credit agreement. The Company later in 1996 applied approximately $550 million of the proceeds from the 1996 sale of the home furnishings products segment to reduce bank debt.
During 1996, the Company increased its dividend rate 5 percent to $.20 per share quarterly. This marks the 38th consecutive year in which dividends have been increased.
The Company believes that its present cash balance and cash flows from operations are sufficient to fund its near-term working capital and other investment needs. The Company believes that its longer-term working capital and other general corporate requirements will be satisfied through cash flows from operations and, to the extent necessary, from future financial market activities, from proceeds from asset sales and from bank borrowings.
CONSOLIDATED RESULTS OF OPERATIONS
Net sales for 1996 were $3,237 million, representing an increase of 11 percent over 1995. After adjusting for acquisitions and the divestiture of two small operations, net sales for 1996 increased 7 percent over 1995. Net sales for 1995 increased 13 percent to $2,927 million from $2,583 million in 1994; after adjusting for acquisitions in 1995 and 1994, net sales for 1995 increased 7 percent.
Cost of sales as a percentage of sales was 63.3 percent in 1996 compared with 63.1 percent and 60.9 percent for 1995 and 1994, respectively. The modest increase in the cost of sales percentage for 1996 over 1995 is primarily attributable to softness in the Company's European markets, expenses associated with manufacturing process improvement initiatives and product sales mix, which offset the benefits resulting from increased sales volume and new product introductions. The increase in the cost of sales percentage for 1995 over 1994 was primarily the result of plant start-up costs related to a major new faucet facility in the U.S. and product sales mix. Product sales mix was primarily occasioned by a higher percentage of lower margin sales to total sales.
Excluding amortization of excess cost over acquired net assets ($12.1 million, $10.0 million and $6.7 million in 1996, 1995 and 1994, respectively), selling, general and administrative expenses as a percentage of sales were 21.5 percent in 1996 compared with 22.8 percent and 22.1 percent for 1995 and 1994, respectively. The decrease in the selling, general and administrative expenses percentage in 1996 results from the Company's cost-reduction initiatives, the substitution of contingent incentive-based compensation for the reduction in compensation for certain executives and the leverage of fixed and semi-fixed costs over a higher sales base. The increase in the selling, general and administrative expenses percentage in 1995 resulted from higher promotional, advertising and insurance costs in 1995 versus 1994.
Included in other income and expense, net are equity earnings from MascoTech of $13.9 million for 1996 as compared with equity earnings of $18.2 million for 1995 and $106.1 million of equity loss from MascoTech in 1994. The decrease in equity earnings from MascoTech for 1996 compared with 1995 principally reflects the Company's $11.7 million pre-tax equity share of MascoTech's loss from the sale of its metal stamping businesses. The Company recognized a $67.8 million net pre-tax gain ($40.7 million after-tax) from the fourth quarter 1996 sale to MascoTech of 17 million shares of MascoTech common stock and warrants to purchase 10 million shares of MascoTech common stock. The equity loss from MascoTech in 1994 reflects the Company's $138 million pre-tax ($79 million
after-tax) equity share of MascoTech's unusual non-cash 1994 fourth quarter charge for the disposition of its non-core businesses.
Included in other income and expense, net for 1996 are $36.3 million of fourth quarter charges primarily related to adjustments of miscellaneous assets to estimated fair value and $14.0 million of interest income from the pay-in-kind notes of Furnishings International Inc.
Other income and expense, net for 1995 includes a $15.9 million gain from the sale of the Company's investment in Formica Corporation; this gain was offset primarily by charges for product line disposals.
After-tax income and income per share from continuing operations for 1996 were $295 million and $1.84 compared with $200 million and $1.25 for 1995 and $173 million and $1.09 for 1994, respectively. Excluding the Company's equity share of the above-mentioned 1994 MascoTech charge, after-tax income and income per share from continuing operations for 1994 were approximately $252 million and $1.59. The Company's effective tax rate decreased to 41.3 percent in 1996 from 43.1 percent in 1995 due primarily to a reduction in higher-taxed foreign income as a percentage of total income. The 1994 tax rate was 41.0 percent.
OUTLOOK FOR THE COMPANY
Assuming that the U.S. economy maintains its present rate of moderate growth and interest rates remain relatively stable, the Company expects improvement in both sales and earnings for 1997. The Company also expects to improve its results in 1997 and in future years: by continuing to invest in new manufacturing technologies and productivity improvement initiatives in order to reduce costs and increase efficiency; by maintaining a lower level of selling, general and administrative expenses; by introducing new products and marketing initiatives to increase market share and share of customer; and by actively pursuing acquisition candidates that complement or support the Company's core competencies.
NET SALES BY PRODUCT SEGMENT AND GEOGRAPHIC AREA
The following table sets forth the Company's net sales from continuing operations by product group and geographic area, in millions.
BUSINESS SEGMENT RESULTS
Kitchen and Bath Products
Net sales of the Company's Kitchen and Bath Products increased 10 percent in 1996 over 1995 and 10 percent in 1995 over 1994; after adjusting for acquisitions, net sales increased 7 percent in 1996 over 1995 and 6 percent in 1995 over 1994. These increases are largely due to higher unit sales volume of faucets, cabinets and other kitchen and bath products, and to a lesser extent, selling price increases and new product introductions.
Operating profit of the Company's Kitchen and Bath Products, before general corporate expense, was $462 million, $411 million and $441 million in 1996, 1995 and 1994, respectively. Operating margin, before general corporate expense, improved to 18.3 percent in 1996 following a decline to 18.0 percent in 1995 from 21.2 percent in 1994.
Operating results of this business segment showed a net improvement in 1996 over 1995. This net improvement results from higher unit sales volume, increased efficiency and utilization of new and existing manufacturing facilities and the leverage of fixed and semi-fixed selling, general and administrative expenses over a higher sales base, which more than offset the modestly weaker results of the Company's U.S. cabinet businesses and the lower results of European operations. Operating results of the Company's U.S. cabinet businesses were modestly weaker in 1996 and 1995 due to the influence of a higher percentage of lower margin sales to total sales and the recognition of certain expenses for various initiatives undertaken to improve manufacturing processes and customer service and to shorten product delivery time. Operating results of this business segment were also lower in 1995, as compared with 1994, due to plant start-up costs related to a major new faucet facility in the U.S.
Other Specialty Products
Net sales of the Company's Other Specialty Products increased 11 percent in 1996 over 1995 and 27 percent in 1995 over 1994. After adjusting for acquisitions and divestitures, net sales increased 7 percent in 1996 over 1995 and 11 percent in 1995 over 1994. Operating profit of the Company's Other Specialty Products, before general corporate expense, was $104 million, $82 million and $70 million in 1996, 1995 and 1994, respectively. Operating margin, before general corporate expense, improved to 14.5 percent in 1996 following a decline to 12.7 percent in 1995 from 13.8 percent in 1994.
Operating results of this business segment for 1996 as compared with 1995 benefitted from higher unit sales volume of mechanical and electronic lock sets and higher installation sales of fiberglass insulation, and to a lesser extent, selling price increases and new product introductions. Operating results in 1996 also benefitted from the leverage of fixed and semi-fixed selling, general and administrative expenses over a higher sales base and the divestiture of two under-performing operations. Operating profit as a percentage of sales decreased in 1995 from 1994, in part due to lower unit sales volume of mechanical lock sets. Operating results were negatively affected in 1996 and 1995 by lower results of European operations.
GEOGRAPHIC AREA RESULTS
North America
Net sales of North American operations increased 10 percent in 1996 over 1995 and 9 percent in 1995 over 1994. Net sales of North American operations, after adjusting for acquisitions and divestitures, increased 9 percent in 1996 over 1995 and 5 percent in 1995 over 1994. Operating profit from North American operations, before general corporate expense, was $479 million, $407 million and $437 million for 1996, 1995 and 1994, respectively. Operating margin, before general corporate expense, improved to 17.9 percent in 1996 following a decline to 16.7 percent in 1995 from 19.5 percent in 1994.
Operating results of North American operations in 1996 benefitted from higher sales volume which was partly driven by an increase in U.S. housing transactions, including higher levels of new construction and existing homes sales. Operating results of North American operations in 1995 were
lower, in part due to plant start-up costs related to a major new faucet facility and product sales mix. Operating results of the Company's Canadian operations were relatively flat in 1996 and 1995, as compared with 1994.
European Union
Net sales of European operations increased 15 percent in 1996 over 1995 and 45 percent in 1995 over 1994; after adjusting for acquisitions, net sales decreased 1 percent in 1996 from 1995 and increased 19 percent in 1995 over 1994. Operating profit from European operations, before general corporate expense, was $87 million, $86 million and $74 million for 1996, 1995 and 1994, respectively. Operating margin, before general corporate expense, decreased to 15.6 percent in 1996 following a decline to 17.7 percent in 1995 from 22.0 percent in 1994.
Results of European operations were lower in 1996 and 1995, in part due to softness in the Company's European markets beginning in mid-1995, competitive pricing pressures on certain products and the influence of a higher percentage of lower margin sales to total sales. In addition, a stronger U.S. dollar had a negative effect on the translation of European results in 1996 as compared with 1995, lowering European net sales by approximately 3 percent. A weaker U.S. dollar in 1995 as compared with 1994 resulted in an increase in European net sales of approximately 12 percent.
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," and the American Institute of Certified Public Accountants' Statement of Position No. 96-1, "Environmental Remediation Liabilities," become effective in January 1997 and will not have a material impact on the Company's financial statements.
The Company has elected to continue to apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, stock options do not constitute compensation expense in the determination of net income in the statement of operations. Had stock option compensation expense been determined pursuant to the methodology of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the pro forma effect for 1996 would have been a reduction in the Company's earnings per share of approximately $.03 or less than two percent, which would not have been material.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Masco Corporation:
We have audited the accompanying consolidated balance sheets of Masco Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 1996 and the financial statement schedule as listed in Item 14(a)(2) of the Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Masco Corporation and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Detroit, Michigan February 18, 1997
MASCO CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
See notes to consolidated financial statements.
MASCO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
See notes to consolidated financial statements.
MASCO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
See notes to consolidated financial statements.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include the accounts of Masco Corporation and all majority-owned subsidiaries. All significant intercompany transactions have been eliminated. The Company classified its home furnishings products segment as discontinued operations in 1995. (See "Discontinued Operations" note.) Accordingly, the financial statements and related notes present the home furnishings products segment as discontinued operations. Certain amounts for prior years have been reclassified to conform to the current year presentation.
Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates and assumptions.
Average Shares Outstanding. The average number of common shares outstanding in 1996, 1995 and 1994 approximated 160.6 million, 159.6 million and 158.8 million, respectively.
Cash and Cash Investments. The Company considers all highly liquid investments with an original maturity of three months or less to be cash and cash investments.
Receivables. The Company does significant business with a number of individual customers. The Company monitors its exposure for credit losses and maintains adequate allowances for doubtful accounts. At December 31, 1996 and 1995 accounts and notes receivable are presented net of allowances for doubtful accounts of $17.9 million and $16.3 million, respectively.
Property and Equipment. Property and equipment, including significant betterments to existing facilities, are recorded at cost. Upon retirement or disposal, the cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the statement of operations. Maintenance and repair costs are charged to expense as incurred.
Depreciation and Amortization. Depreciation is computed principally using the straight-line method over the estimated useful lives of the assets. Annual depreciation rates are as follows: buildings and land improvements, 2 to 10 percent, and machinery and equipment, 5 to 33 percent. Depreciation was $71.7 million, $65.3 million and $54.5 million in 1996, 1995 and 1994, respectively.
The excess of cost over net assets of acquired companies is being amortized using the straight-line method over periods not exceeding 40 years; at December 31, 1996 and 1995 such accumulated amortization totalled $70.2 million and $58.1 million, respectively. At each balance sheet date, management assesses whether there has been an impairment in the carrying value of excess of cost over net assets of acquired companies, primarily by comparing current and projected annual sales, operating income and annual cash flows on an undiscounted basis with the related annual amortization expense; management also considers business prospects, market trends and other economic factors in performing this assessment. Based on this assessment, there was no permanent impairment related to the excess of cost over net assets of acquired companies at December 31, 1996 and 1995. Purchase costs of patents are being amortized using the straight-line method over the legal lives of the patents, not to exceed 17 years. Amortization of intangible assets was $28.0 million, $24.8 million and $19.3 million in 1996, 1995 and 1994, respectively.
Fair Value of Financial Instruments. The carrying value of financial instruments reported in the balance sheet for current assets and current liabilities approximates fair value. The fair value of financial instruments that are carried as long-term investments (other than those accounted for by the equity method) was based principally on quoted market prices for those or similar investments or by discounting future cash flows using a discount rate that approximates the risk of the investments. The
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING POLICIES -- (CONCLUDED) fair value of the Company's long-term debt instruments was based principally on quoted market prices for the same or similar issues or the current rates available to the Company for debt with similar terms and remaining maturities. The aggregate market value of the Company's long-term investments and long-term debt at December 31, 1996 was approximately $631 million and $1,248 million, as compared with the Company's aggregate carrying value of $601 million and $1,236 million, respectively, and at December 31, 1995 was approximately $157 million and $1,603 million, as compared with the Company's aggregate carrying value of $116 million and $1,577 million, respectively.
Recently Issued Statements of Financial Accounting Standards. Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," and the American Institute of Certified Public Accountants' Statement of Position No. 96-1, "Environmental Remediation Liabilities," become effective in January 1997 and will not have a material impact on the Company's financial statements.
ACQUISITIONS
During the second quarter of 1996, the Company acquired The Moore Group Ltd., a leading United Kingdom manufacturer of kitchen cabinets, and Horst Breuer GmbH, a German manufacturer of shower enclosures. In the third quarter of 1996, the Company acquired E. Missel GmbH, a leading German manufacturer of proprietary specialty products. The aggregate purchase price for these companies was approximately $173 million and the acquisitions were accounted for as purchase transactions. These companies had combined annual net sales in 1995 of approximately $140 million.
DISCONTINUED OPERATIONS
In late November 1995, the Company's Board of Directors approved a formal plan to dispose of the Company's home furnishings products segment. Operations that were included in this segment were principally engaged in the manufacture and sale of quality furniture, fabrics and other home furnishings. The appropriate provisions were recorded in the fourth quarter of 1995 for the estimated loss on the discontinued operations through the expected disposal date, the reduction of assets to their estimated net realizable value and the anticipated liabilities related to the disposal. The total provision amounted to $650 million on a pre-tax and after-tax basis.
During August 1996, the Company completed the sale of its home furnishings products segment to Furnishings International Inc. Furnishings International's investors include: 399 Venture Partners (a subsidiary of Citibank), certain members of Furnishings International's management, the Company and certain affiliates of Travelers Group Inc. Total proceeds to Masco from the sale were, in millions:
The junior debt securities mature in 2008. The Company will record dividend income from the 13% cumulative preferred stock, with a stated value of $55 million, if and when such dividends are declared. The convertible preferred stock represents transferable rights for up to a 25 percent common ownership, although the Company is restricted from maintaining an ownership in excess of 20 percent of Furnishings International's common equity. As such, the Company will not acquire additional
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DISCONTINUED OPERATIONS -- (CONCLUDED) common equity, except for purposes of resale only. Of the cash proceeds received from this sale, approximately $550 million was applied to reduce bank debt.
Under a transitional services agreement, the Company provides corporate-related services for a fee to Furnishings International through April 1997. Substantially all of these services will be discontinued after such date.
Net sales and income from operations of the discontinued segment for the eleven months ended November 30, 1995 and the year ended December 31, 1994 were $1,852 million and $8.3 million, and $1,885 million and $21.0 million, respectively. Income from operations of the discontinued segment for 1995 and 1994 is net of applicable income taxes of $22.0 million and $8.8 million, respectively. The income tax rate of discontinued operations was higher in 1995 primarily due to higher taxes on foreign operations and decreased foreign tax credits.
INVENTORIES
Inventories are stated at the lower of cost or net realizable value, with cost determined principally by use of the first-in, first-out method.
EQUITY INVESTMENTS IN AFFILIATES
Equity investments in affiliates consist primarily of the following common equity and partnership interests:
Excluding the partnership interest in Hans Grohe, for which there is no quoted market value, the aggregate market value of the Company's equity investments at December 31, 1996 (which may differ from the amounts that could then have been realized upon disposition), based upon quoted market prices at that date, was $166 million, as compared with the Company's related aggregate carrying value of $27 million.
The Company's carrying value of its equity investments at December 31, 1996, approximated the Company's equity in the underlying net book value in these affiliates, except for $20 million of excess carrying value pertaining to the equity investment in MascoTech. Such excess is being amortized over a period not to exceed 40 years.
During October 1996, the Company completed the sale to MascoTech, Inc. of 17 million shares of MascoTech common stock and warrants to purchase 10 million shares of MascoTech common stock.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY INVESTMENTS IN AFFILIATES -- (CONCLUDED) Under the sale agreement, the Company received approximately $266 million, with $115 million cash paid at closing. The Company receives interest income at 6.625 percent on the $151 million balance of the consideration, which is due in September 1997; this amount is included in non-current assets inasmuch as the Company may receive publicly traded securities of Emco Limited held by MascoTech, in payment of a substantial portion of this balance. The Company recorded a 1996 fourth quarter net pre-tax gain of $67.8 million ($40.7 million after-tax) from the sale.
The transaction reduced the Company's common equity ownership in MascoTech from 45 percent to 21 percent. This transaction, when considered along with the conversion in mid-1997 of outstanding MascoTech preferred stock into MascoTech common stock, will reduce the Company's ownership in MascoTech to approximately 17 percent (which equals the Company's voting interest at December 31, 1996). MascoTech holds an option expiring in 2002 to require the Company to purchase up to $200 million aggregate amount of subordinated debt securities of MascoTech.
Approximate combined condensed financial data of the above-listed affiliates are summarized in U.S. dollars as follows, in thousands:
In December 1994, MascoTech announced and recorded a non-cash after-tax charge of $315 million in anticipation of losses associated with the planned disposition of its non-core businesses. As a result, the Company recorded its equity share of this non-cash charge.
Equity in undistributed earnings of affiliates of $32 million at December 31, 1996, $30 million at December 31, 1995 and $17 million at December 31, 1994 are included in consolidated retained earnings.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
ACCRUED LIABILITIES
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT
At December 31, 1996, all of the outstanding notes above are nonredeemable.
The Company paid the 9% notes due April 15, 1996 through borrowings under its bank revolving-credit agreement. The Company later in 1996 applied approximately $550 million of the proceeds from the 1996 sale of the home furnishings products businesses to reduce bank debt.
European bank debt relates to borrowings for acquisitions and expansion primarily in Germany. At December 31, 1996, approximately $134 million of European debt relates to lines of credit in Germany, which are largely due and payable in November 2000. The balance are short-term borrowings, which the Company has classified as long-term since it is currently negotiating to replace such debt with a new term loan expiring in 2002, or it can replace such debt with the utilization of its existing bank revolving-credit agreement. Interest is payable on European borrowings based upon various floating rates as selected by the Company (approximately 4.5 percent at December 31, 1996).
The 5.25% subordinated debentures due February 15, 2012 are convertible into common stock at $42.28 per share.
Certain debt agreements contain limitations on additional borrowings and requirements for maintaining a certain level of tangible net worth. At December 31, 1996, the Company's tangible net worth exceeded the most restrictive of such provisions by approximately $347 million.
At December 31, 1996, the maturities of long-term debt during each of the next five years were approximately as follows: 1997-$7.6 million; 1998-$16.7 million; 1999-$209.5 million; 2000-$154.8 million; and 2001-$277.2 million.
The Company has a $750 million bank revolving-credit agreement, with any outstanding balance due and payable in November 2001. Interest is payable on borrowings under this agreement based upon various floating rates as selected by the Company.
The Company has on file with the Securities and Exchange Commission, an unallocated shelf registration pursuant to which the Company is able to issue up to a combined $759 million of debt and equity securities.
Interest paid was approximately $102 million, $115 million and $103 million in 1996, 1995 and 1994, respectively. Amounts paid include interest pertaining to discontinued operations.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SHAREHOLDERS' EQUITY
On the basis of amounts paid (declared), cash dividends per share were $.77 ($.78) in 1996, $.73 ($.74) in 1995 and $.69 ($.70) in 1994.
In December 1995, the Company's Board of Directors announced the approval of a Shareholder Rights Plan. The Rights were designed to enhance the Board's ability to protect the Company's shareholders against, among other things, unsolicited attempts to acquire control of the Company that do not offer an adequate price to all shareholders or are otherwise not in the best interests of the shareholders. The Rights were issued to shareholders of record in December 1995 and will expire in December 2005.
In 1994, the Company's Board of Directors authorized the repurchase of up to 10 million shares of its common stock in open-market transactions or otherwise. Pursuant to this authorization, approximately 2.8 million common shares were repurchased in 1994 at an aggregate cost of approximately $62 million.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS AND AWARDS
The Company's Long-Term Stock Incentive Plan (the "Plan") provides for the issuance of stock-based incentives in various forms. At December 31, 1996, outstanding stock-based incentives were in the form of restricted long-term stock awards and stock options.
Pursuant to the Plan, the Company granted long-term stock awards, net, for 540,000, 1,250,000 and 598,000 shares of Company common stock during 1996, 1995 and 1994, respectively, to key employees of the Company and affiliated companies. These long-term stock awards do not cause share dilution inasmuch as the Company reacquires an equal number of shares on the open market. The weighted average grant date fair value per share of long-term stock awards granted during 1996 and 1995 was $31 and $27, respectively. Compensation expense for the vesting of long-term stock awards was $14.9 million, $13.3 million and $10.7 million in 1996, 1995 and 1994, respectively. The unamortized costs of unvested stock awards, aggregating approximately $78.3 million at December 31, 1996, are being amortized over the ten-year vesting periods.
Fixed stock options are granted to key employees of the Company and affiliated companies and have a maximum term of 10 years. The exercise price of each fixed option equals the market price of the Company's common stock on the date of grant. These options generally vest in installments beginning in the third year and extending through the eighth year after grant.
To demonstrate his commitment to enhance shareholder value, the Company's Chief Executive Officer requested that his annual salary and bonus be reduced to $1 per year effective January 1, 1996. The Compensation Committee of the Board of Directors, in acceding to this request, considered alternative compensation arrangements for the Chief Executive Officer based upon the Board's own desire to improve shareholder value, and accordingly in April 1996 granted the Chief Executive Officer a ten-year option to purchase one million shares of Company common stock. This option, however, will become exercisable only if the price of Company common stock exceeds $41 per share within three years of the date of grant or, if that target is not exceeded, exceeds $50 per share within five years of the date of grant. The exercise price of this option is set at either $41 or $50 per share, based on whether the three-year or five-year target is met. The option will expire unexercised if neither target price is met.
As a demonstration of their commitment to enhance shareholder value, the officers and other key employees of the Company have also agreed to have a significant portion of their compensation tied to stock options, with a grant date fair value exercise price of $32, which are subject to accelerated exercisability if the price of Company common stock exceeds $41 per share within three years of the date of grant or, if that target is not met, exceeds $50 per share within five years of the date of grant. Such options were granted for approximately 1,615,000 shares of Company common stock in 1996. In addition, the executive officers were granted career stock awards with annual vestings commencing if and when the Company common stock price reaches $50 per share by April 2001; if such stock price is not achieved, then vesting of these awards will commence at retirement.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS AND AWARDS -- (CONCLUDED) A summary of the status of the Company's stock options granted under the Plan or prior plans for the three years ended December 31, 1996 is presented below.
At December 31, 1996, a combined total of 8,188,000 shares of Company common stock was available for the granting of stock options and long-term stock awards under the Plan.
The Company has elected to continue to apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, stock options do not constitute compensation expense in the determination of net income in the statement of operations. Had stock option compensation expense been determined pursuant to the methodology of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the pro forma effect for 1996 would have been a reduction in the Company's earnings per share of approximately $.03 or less than two percent, which would not have been material.
Pursuant to the 1984 Restricted Stock (MascoTech) Incentive Plan, the Company may award to key employees of the Company and affiliated companies, shares of common stock of MascoTech, Inc. held by the Company. No such awards were granted in 1996, 1995 or 1994. At December 31, 1996, there were 4,695,000 of such shares available for granting future awards under this plan.
The data in this note include discontinued operations.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE RETIREMENT PLANS
The Company sponsors defined-benefit pension plans and defined-contribution retirement plans for most of its employees. In addition, substantially all salaried employees participate in noncontributory profit-sharing plans, to which payments are determined annually by the Directors. Aggregate charges to income under the Company's pension and profit-sharing plans were $24.4 million in 1996, $24.0 million in 1995 and $17.5 million in 1994.
Net periodic pension cost for the Company's qualified pension plans includes the following components:
The funded status of the Company's qualified pension plans is summarized as follows, in thousands, at December 31:
Major assumptions used in accounting for the Company's pension plans are as follows:
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE RETIREMENT PLANS -- (CONCLUDED) In addition to the Company's qualified pension plans, the Company has non-qualified unfunded supplemental pension plans covering certain employees, which provide for pension benefits in addition to those provided by the qualified pension plans. The actuarial present value of accumulated benefit obligations and projected benefit obligations related to the Company's non-qualified pension plans totalled $24.7 million and $30.2 million, and $17.6 million and $24.6 million at December 31, 1996 and 1995, respectively; net periodic pension cost for these plans was $4.9 million, $3.7 million and $2.3 million in 1996, 1995, and 1994, respectively.
The Company sponsors certain postretirement benefit plans that provide medical, dental and life insurance coverage for eligible retirees and dependents in the United States based on age and length of service. At December 31, 1996, the aggregate present value of the accumulated postretirement benefit obligation approximated $4.0 million.
SEGMENT INFORMATION
The Company is engaged principally in the manufacture, installation and sale of home improvement and building products. In 1996, the Company categorized its home improvement and building products businesses into the following segments:
Kitchen and Bath Products - kitchen and bath cabinets; kitchen appliances; faucets; plumbing fittings; bath and shower tubs and enclosures; whirlpools and spas; and bath accessories.
Other Specialty Products - builders' hardware, including mechanical and electronic lock sets; venting and ventilating equipment; insulation; and water pumps.
These products are sold to the home improvement and home construction markets through mass merchandisers, hardware stores, home centers, distributors, wholesalers and other outlets for consumers and contractors.
The Company's operations are principally located in North America and Europe. Segment information for 1995 and 1994 has been reclassified to conform to the current year presentation.
Corporate assets consist primarily of real property, cash and cash investments and other investments.
Pursuant to a corporate services agreement to provide MascoTech, Inc. with certain corporate staff and administrative services, the Company charges a fee approximating .8 percent of MascoTech net sales. This fee approximated $7 million in 1996, $9 million in 1995 and $11 million in 1994 and is included as a reduction of general corporate expense.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT INFORMATION -- (CONCLUDED)
The following table presents information about the Company by product segment and geographic area:
(1) Included in net sales in 1996, 1995 and 1994 are export sales from the U.S. of $46.2 million, $40.9 million and $45.5 million, respectively.
(2) Intra-company sales between segments and geographic areas represented less than one percent of consolidated net sales in 1996, 1995 and 1994.
(3) Income from continuing operations before income taxes and net income pertaining to continuing foreign operations were $82 million and $40 million, $96 million and $52 million, and $94 million and $56 million for 1996, 1995 and 1994, respectively.
(4) Property additions include assets of acquired companies.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER INCOME (EXPENSE), NET
Other interest income for 1996 includes $14.0 million of interest income from the 12% pay-in-kind junior debt securities of Furnishings International Inc.
Other items in 1996 include $36.3 million of fourth quarter charges primarily related to adjustments of miscellaneous assets to their estimated fair value.
Interest expense is presented net of interest expense pertaining to discontinued operations of $21.8 million, $44.0 million and $43.2 million in 1996, 1995 and 1994, respectively.
Equity earnings from MascoTech for 1994 were $32 million, prior to the Company's pre-tax equity share of MascoTech's non-cash 1994 fourth quarter charge.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Net deferred tax liability (asset) at December 31, 1996 and 1995 consists of net short-term deferred tax assets of $14.5 million and $44.3 million, respectively, and net long-term deferred tax liabilities of $43.1 million and $44.0 million, respectively.
A valuation allowance of $206.3 million has been recorded at December 31, 1996 due to the Company's inability to quantify the portion of its capital loss benefit which may ultimately be realized. Such capital loss benefit results from a $164.0 million after-tax capital loss carryforward on the disposition of the Company's home furnishings products segment and a $42.3 million after-tax future deductible temporary difference of a capital nature on the Company's equity investments.
At December 31, 1995, the Company had estimated a potential unrecorded deferred tax asset of $230.0 million from the anticipated loss on disposition of its home furnishings products segment. Following this disposition, the Company estimates the potential useable capital loss benefit to be approximately $200.0 million. The 1996 tax provision included $36.0 million of this previously
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES -- (CONCLUDED) unrecorded benefit, which was offset by the $42.3 million tax provision for the valuation allowance provided on the deferred tax asset pertaining to the Company's equity investments.
The following is a reconciliation of the U.S. federal statutory rate to the effective tax rate allocated to income from continuing operations before income tax:
Income taxes paid were approximately $201 million, $170 million and $175 million in 1996, 1995 and 1994, respectively. Amounts paid include taxes on discontinued operations.
Earnings of foreign subsidiaries generally become subject to U.S. tax upon the remittance of dividends and under certain other circumstances. Provision has not been made at December 31, 1996 for U.S. or additional foreign withholding taxes on approximately $32 million of remaining undistributed earnings of foreign subsidiaries, as those earnings are intended to be permanently reinvested; it is not practical to estimate the amount of deferred tax liability on such earnings.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED FINANCIAL STATEMENTS (UNAUDITED)
The following presents the combined financial statements of the Company, MascoTech, Inc. and TriMas Corporation as one entity, with Masco Corporation as the parent company. These combined financial statements present the Company's home furnishings products segment as discontinued operations. (See "Discontinued Operations" note.) Intercompany transactions have been eliminated. Amounts, except earnings per share, are in thousands.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- (CONCLUDED)
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The fourth quarter of 1996 includes a $67.8 million net pre-tax gain from the sale of certain MascoTech, Inc. investments ($40.7 million after-tax or $.25 per share). This gain was principally offset by fourth quarter charges aggregating $49.1 million pre-tax ($37.5 million after-tax or $.23 per share) primarily for adjustments of miscellaneous assets to their estimated fair value.
Fourth quarter 1995 net loss and loss per share reflect the Company's $650 million non-cash pre-tax and after-tax charge for the disposition of its home furnishings products segment.
Quarterly net sales and gross profit amounts exclude net sales and gross profit of the Company's home furnishings products segment, which the Company classified as discontinued operations during the fourth quarter of 1995. Net sales and gross profit of the Company's home furnishings products segment for the 1995 quarters ended March 31, June 30, September 30 and December 31 were $505 million and $128.4 million, $494 million and $121.2 million, $497 million and $115.5 million and $518 million and $123.8 million, respectively.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding executive officers required by this Item is set forth as a Supplementary Item at the end of Part I hereof (pursuant to Instruction 3 to Item 401(b) of Regulation S-K). Other information required by this Item will be contained in the Company's definitive Proxy Statement for its 1997 Annual Meeting of Stockholders, to be filed on or before April 30, 1997, and such information is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this Item will be contained in the Company's definitive Proxy Statement for its 1997 Annual Meeting of Stockholders, to be filed on or before April 30, 1997, and such information is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this Item will be contained in the Company's definitive Proxy Statement for its 1997 Annual Meeting of Stockholders, to be filed on or before April 30, 1997, and such information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this Item will be contained in the Company's definitive Proxy Statement for its 1997 Annual Meeting of Stockholders, to be filed on or before April 30, 1997, and such information is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) LISTING OF DOCUMENTS.
(1) Financial Statements. The Company's Consolidated Financial Statements included in Item 8 hereof, as required at December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995 and 1994, consist of the following:
Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
(3) Exhibits.
- ------------------------- (1) Incorporated by reference to the Exhibits filed with Masco Corporation's Current Report on Form 8-K dated November 13, 1996.
(2) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1995.
(3) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1994.
(4) Incorporated by reference to the Exhibits filed with Masco Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
(5) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1993.
(6) Incorporated by reference to the Exhibits filed with Masco Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.
(7) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1992.
THE COMPANY WILL FURNISH ITS STOCKHOLDERS A COPY OF ANY OF THE ABOVE EXHIBITS NOT INCLUDED HEREIN UPON THE WRITTEN REQUEST OF SUCH STOCKHOLDER AND THE PAYMENT TO THE COMPANY OF THE REASONABLE EXPENSES INCURRED BY THE COMPANY IN FURNISHING SUCH COPY OR COPIES.
(B) REPORTS ON FORM 8-K.
The following Current Report on Form 8-K was filed by Masco Corporation during the quarter ended December 31, 1996:
1. Current Report on Form 8-K dated November 13, 1996 reporting under Item 5. "Other Events" the Company's sale of MascoTech, Inc. common stock and warrants to purchase common stock.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ RICHARD G. MOSTELLER
------------------------------------ RICHARD G. MOSTELLER Senior Vice President -- Finance
March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
March 27, 1997
MASCO CORPORATION
FINANCIAL STATEMENT SCHEDULES
PURSUANT TO ITEM 14(A)(2) OF FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
Schedules, as required, for the years ended December 31, 1996, 1995 and 1994:
MASCO CORPORATION SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTES:
(A) Allowance of companies acquired and companies disposed of, net.
(B) Deductions, representing uncollectible accounts written off, less recoveries of accounts written off in prior years.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of MascoTech, Inc.:
We have audited the accompanying consolidated balance sheet of MascoTech, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 1996 and the financial statement schedule as listed in Item 14(a)(2)(ii)(A) and (B) of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepting auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MascoTech, Inc. and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
As discussed in the footnotes to the consolidated financial statements, effective January 1, 1996, the Company changed its method of accounting for the impairment of long-lived assets and for long-lived assets to be disposed of.
COOPERS & LYBRAND L.L.P.
Detroit, Michigan February 28, 1997
MASCOTECH, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 AND 1995
ASSETS
The accompanying notes are an integral part of the consolidated financial statements.
MASCOTECH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of the consolidated financial statements.
MASCOTECH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of the consolidated financial statements.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING POLICIES:
Principles of Consolidation. The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All significant intercompany transactions have been eliminated. Corporations that are 20 to 50 percent owned are accounted for by the equity method of accounting; ownership less than 20 percent is accounted for on the cost basis unless the Company exercises significant influence over the investee. Capital transactions by equity affiliates, which change the Company's ownership interest at amounts differing from the Company's carrying amount, are reflected in other income or expense and the investment in affiliates account.
The consolidated balance sheet at December 31, 1996 reflects the segregation of net current and net non-current assets related to the disposition of the Company's Technical Services Group ("TSG") and, at December 31, 1995, reflects the segregation of assets related to the plan adopted in late 1994 to dispose of certain businesses.
The Company has a corporate services agreement with Masco Corporation, which at December 31, 1996 owned approximately 21 percent of the Company's Common Stock. Under the terms of the agreement, the Company pays fees to Masco Corporation for various corporate staff support and administrative services, research and development and facilities. Such fees, which are determined principally as a percentage of net sales, aggregated approximately $7 million in 1996, $9 million in 1995, and $11 million in 1994.
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from such estimates and assumptions.
Cash and Cash Investments. The Company considers all highly liquid debt instruments with an initial maturity of three months or less to be cash and cash investments. The carrying amount reported in the balance sheet for cash and cash investments approximates fair value.
Marketable Securities. The Company's marketable equity securities holdings are categorized as either trading or available-for-sale securities, and, as a result, are stated at fair value. Changes in the fair value of trading securities are recognized in earnings and the changes in the fair value of available-for-sale securities are recorded in shareholders' equity, net of deferred taxes.
Receivables. Receivables are presented net of allowances for doubtful accounts of approximately $2.0 million at both December 31, 1996 and 1995.
Inventories. Inventories are stated at the lower of cost or net realizable value, with cost determined principally by use of the first-in, first-out method.
Property and Equipment, Net. Property and equipment additions, including significant betterments, are recorded at cost. Upon retirement or disposal of property and equipment, the cost and accumulated depreciation are removed from the accounts, and any gain or loss is included in income. Repair and maintenance costs are charged to expense as incurred.
Depreciation and Amortization. Depreciation is computed principally using the straight-line method over the estimated useful lives of the assets. Annual depreciation rates are as follows: buildings and land improvements, 2 1/2 to 10 percent, and machinery and equipment, 6 2/3 to 33 1/3 percent. Deferred financing costs are amortized over the lives of the related debt securities. The excess of cost over net assets of acquired companies is amortized using the straight-line method over the period estimated to be benefitted, not exceeding 40 years. At each balance sheet date, management assesses whether there
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
has been a permanent impairment of the excess of cost over net assets of acquired companies by comparing anticipated undiscounted future cash flows from operating activities with the carrying amount of the excess of cost over net assets of acquired companies. The factors considered by management in performing this assessment include current operating results, business prospects, market trends, potential product obsolescence, competitive activities and other economic factors. Based on this assessment, there was no permanent impairment related to the excess of cost over net assets of acquired companies at December 31, 1996.
At December 31, 1996 and 1995, accumulated amortization of the excess of cost over net assets of acquired companies and patents was $29.4 million and $42.3 million, respectively. Amortization expense was $8.5 million, $13.7 million and $22.9 million in 1996, 1995 and 1994, respectively.
Income Taxes. The Company records income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes." SFAS No. 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS No. 109 generally allows consideration of all expected future events other than enactments of changes in the tax law or tax rates. A provision has not been made for U.S. or additional foreign withholding taxes on approximately $47 million of undistributed earnings of foreign subsidiaries as those earnings are intended to be permanently reinvested. Generally, such earnings become subject to U.S. tax upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability on such undistributed earnings.
Earnings (Loss) Per Common Share. Primary earnings per common share are based on the weighted average shares of common stock and common stock equivalents outstanding (including the dilutive effect of options and warrants, utilizing the treasury stock method) of 53.8 million and 57.1 million in 1996 and 1995, respectively. Primary loss per common share in 1994 is based on 58.9 million weighted average shares of common stock outstanding. The effect of options and warrants on earnings per common share in 1994 would be anti-dilutive. Primary earnings (loss) per common share are calculated on earnings (loss) after deducting preferred stock dividends of $13.0 million in each of 1996, 1995 and 1994.
Fully diluted earnings per common share is presented only when the assumed conversion of convertible securities is dilutive. Convertible securities did not have a dilutive effect on earnings (loss) per common share in 1996, 1995 or 1994. Fully diluted earnings per common share is presented in 1996 due to the utilization of the treasury stock method.
In late 1996, the Company purchased from Masco Corporation 17 million shares of MascoTech common stock and warrants to purchase 10 million shares of MascoTech common stock. These shares and warrants have been retired. If such retirement had taken place at the beginning of 1996, the pro forma primary and fully diluted earnings per common and common equivalent share amounts would have been $.78 and $.77, respectively, in 1996.
Recently Issued Accounting Pronouncements. At January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which resulted in a pre-tax gain (because the fair value of the businesses being held for sale at January 1, 1996 exceeded the carrying value for such businesses) of $16.7 million ($11.7 million after-tax), recorded as the cumulative effect of an accounting change. The pro forma effect of the retroactive application of the change on the financial statements for the years prior to 1996 has not been presented because the new method did not have a material effect on the earnings reported for those years. The Company adopted the disclosure requirements of SFAS No. 123, "Accounting for
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock-Based Compensation," effective with the 1996 financial statements, and elected to continue to measure compensation cost using the intrinsic value method, in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost for stock options has been recognized. If compensation cost had been determined based on the estimated fair value of options granted in 1996 and 1995, consistent with the methodology in SFAS No. 123, the pro forma effects on the Company's net income and income per common share would not have been material. SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," and the American Institute of Certified Public Accountants' Statement of Position No. 96-1, "Environmental Remediation Liabilities," become effective in 1997 and will not have a material impact on the Company's financial statements. The Company expects that SFAS No. 128, "Earnings Per Share," will not have a material impact on earnings per share when adopted in 1997.
SUPPLEMENTARY CASH FLOWS INFORMATION:
Significant transactions not affecting cash were: in 1996: in addition to cash received, approximately $25 million comprised of both common stock and warrants (with a portion of the common stock subsequently sold for approximately $14 million of cash), as consideration from the sale of MascoTech Stamping Technologies, Inc.; in addition to the cash payment by the Company of $121 million, notes approximating $159 million were issued for the purchase of 18 million shares of the Company's Common Stock and warrants to purchase 10 million shares of the Company's Common Stock (see "Shareholders' Equity" note); in 1995: in addition to cash received, approximately $34 million comprised of both notes receivable due from, and a 29 percent equity interest in, the acquiring company, as consideration for a non-core business unit.
Income taxes paid (refunded) were $(12) million, $11 million and $28 million in 1996, 1995 and 1994, respectively. Interest paid was $30 million, $55 million and $61 million in 1996, 1995 and 1994, respectively.
DISPOSITIONS OF OPERATIONS:
In late 1994, the Company adopted a plan to dispose, by sale or liquidation, a number of businesses, including its architectural products, defense and certain of its transportation-related products and services businesses, as part of its long-term strategic plan to increase the focus on its core operating capabilities. Through dates of sale, the businesses held for disposition had sales of approximately $90 million, $468 million and $637 million in 1996, 1995 and 1994, respectively, and operating losses before gains (charge) on disposition of businesses, net of $14 million, $11 million and $7 million in 1996, 1995 and 1994, respectively. At December 31, 1996, the Company has substantially completed the disposition of such businesses, and the liability for accrued exit costs approximates $17 million, including approximately $11 million related to post-employment benefits.
The Company's carrying value of a number of the businesses disposed of exceeded the estimated proceeds expected from such dispositions. To reflect the estimated loss on the disposition of these businesses, the Company in 1994 recorded a non-cash charge aggregating $400 million pre-tax (approximately $315 million after-tax or $5.35 per common share) for those businesses for which a loss was anticipated.
During 1995, the Company divested a number of such businesses, in separate transactions, for aggregate proceeds of approximately $180 million, which resulted in net gains of approximately $25 million. These net gains were substantially offset by reductions in the estimated net proceeds the Company expected to receive from certain remaining businesses to be sold, aggregating approximately $12 million, and by certain exit costs incurred in 1995 aggregating approximately $8 million.
In May, 1996, the Company sold MascoTech Stamping Technologies, Inc. (MSTI), a wholly owned subsidiary, to Tower Automotive, Inc. (Tower) resulting in an after-tax loss of approximately $26
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million ($.47 per common share), including after-tax losses of approximately $1 million related to the closure of a MSTI manufacturing facility not included in the sale. The Company received initial consideration of approximately $80 million, consisting principally of $55 million in cash, 785,000 shares of Tower common stock and warrants to purchase additional Tower common stock. The Company applied the cash proceeds (including approximately $14 million received from the subsequent sale of 600,000 shares of Tower common stock) to reduce its indebtedness. The Company may receive additional consideration, contingent upon the future earnings of MSTI over the next three years, which, if entirely earned, would substantially offset the loss.
On January 3, 1997, the Company completed the sale of its Technical Services Group (comprised of the Company's engineering and technical business services units) to MSX International, Inc. Also included in this transaction were the net assets of APX International which were acquired by the Company in November, 1996 for approximately $44 million. The sale will result in total proceeds to the Company of approximately $145 million, subject to certain adjustments, consisting of cash, subordinated debentures, preferred stock and an approximate 45 percent common equity interest in MSX International, Inc. Net proceeds to the Company will approximate $90 million, after taking into account the purchase price for APX International and taxes payable in connection with this transaction. The excess of the consideration received by the Company over the book value of the related net assets has been deferred and will be recognized when cash is received. The net assets of the Technical Services Group and APX International are reflected on the consolidated balance sheet as net assets of businesses held for disposition at December 31, 1996. The Company has not reflected any revenues or expenses in the consolidated statement of operations related to APX International from the date of acquisition through December 31, 1996 as control was deemed to be temporary.
The disposition of businesses held for sale or sold, including MSTI and TSG, did not meet the criteria for discontinued operations treatment for accounting purposes; accordingly, the sales and results of operations of these businesses were included in continuing operations until disposition. Businesses held for sale or sold, including MSTI and TSG, had sales of approximately $412 million, $874 million and $964 million in 1996, 1995 and 1994, respectively, and operating income (losses) before gains (charge) on disposition of businesses, net of $(13) million, $5 million and $8 million in 1996, 1995 and 1994, respectively.
In late 1993, the Company adopted a plan to divest the business units in its energy segment. Certain of the remaining business units were sold in 1994 at prices greater than those used in estimating the loss on disposition in 1993, resulting in a reversal in 1994 of approximately $18 million pre-tax ($11.7 million after-tax) of the charge established in 1993.
Amounts included in the consolidated balance sheet for net assets of businesses held for disposition consist of the following at December 31, 1996 and 1995:
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES:
EQUITY AND OTHER INVESTMENTS IN AFFILIATES:
Equity and other investments in affiliates consist primarily of the following common stock interests in publicly traded affiliates:
TriMas Corporation ("TriMas") is a diversified manufacturer of commercial, industrial and consumer products. Emco Limited ("Emco") is a Canadian-based manufacturer and distributor of building and other industrial products. Titan Wheel International, Inc. ("Titan") is a manufacturer of wheels, tires and other products for agricultural, construction and off-highway equipment markets. At December 31, 1996, the investments in Titan common stock and in Emco convertible and other debt are classified for accounting purposes as available-for-sale securities. Accordingly, these investments have been recorded at fair value which was in excess of their carrying value resulting in unrealized gains of approximately $8 million pre-tax which have been reflected as an adjustment to shareholders' equity, net of deferred taxes of $3 million, at December 31, 1996.
The carrying amount of investments in affiliates at December 31, 1996 and 1995 and quoted market values at December 31, 1996 for publicly traded affiliates (which may differ from the amounts that could have been realized upon disposition) are as follows:
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1994, the Company sold a portion of its common stock holdings in TriMas, decreasing the Company's common equity ownership interest in TriMas to 41 percent, and resulting in a pre-tax gain of $17.9 million.
In June, 1995, Titan sold newly issued common stock in a public offering and issued common stock as a result of the conversion of convertible securities. The Company recognized pre-tax income of approximately $5.1 million as a result of the change in the Company's common equity ownership interest in Titan.
In December, 1996, Titan called for redemption its 4 3/4% Convertible Subordinated Notes which resulted in the issuance of approximately 4.5 million common shares, reducing the Company's common equity ownership interest in Titan to approximately 12 percent. As a result, the investment in Titan has been classified for accounting purposes as available-for-sale.
In addition to its equity and other investments in publicly traded affiliates, the Company has equity and other investment interests in privately held manufacturers of automotive components, including the Company's common equity ownership interest in Delco Remy International, Inc., a manufacturer of automotive electric motors and other components (acquired in 1994), and Saturn Electronics & Engineering, Inc., a manufacturer of electromechanical and electronic automotive components (acquired in 1995).
Equity in undistributed earnings of affiliates of $57 million at December 31, 1996, $38 million at December 31, 1995 and $24 million at December 31, 1994 are included in consolidated retained earnings.
Approximate combined condensed financial data of the Company's equity affiliates accounted for under the equity method are as follows:
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Equity and interest income from affiliates consists of the following:
PROPERTY AND EQUIPMENT, NET:
Depreciation expense totalled $37 million, $38 million and $44 million in 1996, 1995 and 1994, respectively.
ACCRUED LIABILITIES:
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT:
The interest rates applicable to the revolving credit agreement are principally at alternative floating rates provided for in the agreement (approximately six percent at December 31, 1996). In early 1997, the Company amended the revolving credit agreement; as a result, the new $575 million revolving credit agreement is due 2002.
The amended revolving credit agreement requires the maintenance of a specified level of tangible shareholders' equity as defined, with limitations on the ratios of senior debt to earnings and debt to equity (as defined). Under the most restrictive of these provisions, approximately $70 million was available at December 31, 1996 for the payment of cash dividends and the acquisition of Company Capital Stock.
The note held by Masco Corporation was part of the consideration paid by the Company for the purchase of 17 million shares of MascoTech common stock and warrants to purchase 10 million shares of MascoTech common stock from Masco Corporation. Although the note payable to Masco Corporation is due September 30, 1997, it is classified as non-current at December 31, 1996 as the Company has the intent and the ability to refinance this borrowing on a long-term basis.
On March 15, 1995, the Company redeemed at maturity $233 million of its 10% Senior Subordinated Notes utilizing its bank revolving credit agreement. During 1994, the Company recognized extraordinary income of $4.4 million pre-tax ($2.6 million after-tax) related to the early extinguishment of a portion of the 4 1/2% Convertible Subordinated Debentures.
The maturities of debt during the next five years are as follows (taking into account the amended credit agreement and assuming the short-term debt referred to above is refinanced by the amended credit agreement) (in millions): 1997 - $3; 1998 - $3; 1999 - $3; 2000 - $3; and 2001 - $1.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SHAREHOLDERS' EQUITY:
In July, 1993, the Company issued 10.8 million shares of 6% Dividend Enhanced Convertible Stock (DECS, classified as Convertible Preferred Stock) at $20 per share ($216 million aggregate liquidation amount) in a public offering. On July 1, 1997, each of the then outstanding shares of the DECS will convert into one share of Company Common Stock, if not previously redeemed by the Company or converted at the option of the holder, in both cases for Company Common Stock.
Each share of the DECS is convertible at the option of the holder anytime prior to July 1, 1997 into .806 of a share of Company Common Stock, equivalent to a conversion price of $24.81 per share of Company Common Stock. Dividends are cumulative and each share of the DECS has 4/5 of a vote, voting together as one class with holders of Company Common Stock.
The Company, at its option, may redeem the DECS at a call price payable in shares of Company Common Stock principally determined by a formula based on the then current market price of Company Common Stock. Redemption by the Company, as a practical matter, will generally not result in a call price that exceeds one share of Company Common Stock or is less than .806 of a share of Company Common Stock (resulting from the holder's conversion option).
On October 31, 1996, the Company purchased from Masco Corporation 17 million shares of MascoTech common stock and warrants to purchase 10 million shares of MascoTech common stock, for cash and notes approximating $266 million. Payment of the note, which approximates $151 million and bears interest at 6 5/8 percent, is due September 30, 1997 and is payable in cash or at the Company's
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
option partially by the transfer of its holdings in its equity affiliate, Emco Limited. As part of this transaction, Richard A. Manoogian, Chairman of both Masco Corporation and MascoTech, also sold to MascoTech one million shares of MascoTech common stock (at the then current market price) for approximately $13.6 million, for cash and a $7.6 million note bearing interest at 6 5/8 percent, payable on September 30, 1997. In addition, as part of this transaction, Masco Corporation's agreement to purchase from the Company, at the Company's option, up to $200 million of subordinated debentures was extended through 2002, and the corporate services agreement with Masco Corporation was extended until September 30, 1998. Masco Corporation also agreed that MascoTech will have the right of first refusal to purchase the approximate 7.8 million shares of MascoTech common stock that Masco Corporation continues to hold, should Masco Corporation decide to dispose of such shares.
In addition, during each of 1996 and 1995, the Company repurchased and retired approximately one million shares of its common stock in open-market purchases, pursuant to a Board of Directors' authorized repurchase program. At December 31, 1996, the Company may repurchase approximately four million additional shares of Company Common Stock and Convertible Preferred Stock pursuant to this repurchase authorization.
Under a Stock Repurchase Agreement, Masco Corporation has the right to sell to the Company, at approximate fair market value, shares of Company Common Stock following the occurrence of certain events that would result in an increase in Masco Corporation's ownership percentage in excess of 49 percent of the then outstanding shares of Company Common Stock. Such events include repurchases of Company Common Stock initiated by MascoTech or any of its subsidiaries, and reacquisitions of Company Common Stock through forfeitures of shares previously awarded by the Company pursuant to its employee stock incentive plans. In each case, MascoTech has control over the amount of Company Common Stock it would ultimately acquire, including shares subject to repurchase under the Stock Repurchase Agreement. The aforementioned rights expire 30 days from the date notice is given by MascoTech. To the extent these rights have been exercised at any balance sheet date, the Company would reclassify from permanent capital an amount representative of the repurchase obligation.
On the basis of amounts paid (declared), cash dividends per common share were $.18 ($.18) in 1996, $.14 ($.11) in 1995 and $.10 ($.11) in 1994.
STOCK OPTIONS AND AWARDS:
The Company's Long-Term Stock Incentive Plan (the "Plan") provides for the issuance of stock-based incentives in various forms. At December 31, 1996, outstanding stock-based incentives are in the form of restricted long-term stock awards and stock options.
Pursuant to the Plan, the Company granted long-term stock awards, net, for 480,000, 461,000 and 213,000 shares of Company Common Stock during 1996, 1995 and 1994, respectively, to key employees of the Company and affiliated companies. The weighted average grant date fair value per share of long-term stock awards granted during 1996 and 1995 was $14 and $12, respectively. Compensation expense for the vesting of long-term stock awards was approximately $2.3 million, $4.8 million and $3.3 million in 1996, 1995 and 1994, respectively. The unamortized costs of unvested stock awards, aggregating approximately $26 million at December 31, 1996, are being amortized over the ten-year vesting periods.
Fixed stock options are granted to key employees of the Company and affiliated companies and have a maximum term of 10 years. The exercise price of each fixed option equals the market price of Company Common Stock on the date of grant. These options either vest no later than 10 years after grant or in installments beginning in the third year and extending through the eighth year after grant.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock options granted under the Plan or prior plans for the three years ended December 31, 1996 is presented below.
At December 31, 1996, options have been granted and are outstanding with exercise prices ranging from $4 1/2 to $26 per share, the fair market value at the dates of grant.
At December 31, 1996 and 1995, a combined total of 4,656,000 and 5,646,000 shares, respectively, of Company Common Stock were available for the granting of options and incentive awards under the above plans.
The Company has elected to continue to apply the provisions of Accounting Principles Board Opinion No. 25 and, accordingly, no stock option compensation expense is included in the determination of net income in the statement of operations. The weighted average grant date fair value of options granted was $6.20 in 1996. Had stock option compensation expense been determined pursuant to the methodology of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the pro forma effects on the Company's earnings and earnings per common share in 1996, 1995 and 1994 would not have been material.
EMPLOYEE BENEFIT PLANS:
Pension and Profit-Sharing Benefits. The Company sponsors defined-benefit pension plans for most of its employees. In addition, substantially all salaried employees participate in noncontributory profit-sharing plans, to which payments are approved annually by the Directors. Aggregate charges to income under these plans were $11.0 million in 1996, $13.0 million in 1995 and $9.8 million in 1994.
Net periodic pension cost for the Company's defined-benefit pension plans includes the following components for the three years ended December 31, 1996:
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Major assumptions used in accounting for the Company's defined-benefit pension plans are as follows:
The funded status of the Company's defined-benefit pension plans at December 31, 1996 and 1995 is as follows:
Postretirement Benefits. The Company provides postretirement medical and life insurance benefits for certain of its active and retired employees.
The Company records its postretirement benefit plans in accordance with Statement of Financial Accounting Standards No. 106 ("SFAS No. 106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions." This statement requires the accrual method of accounting for postretirement health care and life insurance based on actuarially determined costs to be recognized over the period from the date of hire to the full eligibility date of employees who are expected to qualify for such benefits. In conjunction with SFAS No. 106, the Company recognizes the transition obligation on a prospective basis with the net transition obligation amortized over 20 years. Net periodic postretirement benefit cost includes the following components for the years ended December 31, 1996, 1995 and 1994:
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Postretirement benefit obligations, none of which are funded, are summarized as follows at December 31, 1996 and 1995:
The discount rate used in determining the accumulated postretirement benefit obligation was 7.25 percent in both 1996 and 1995. The assumed health care cost trend rate in 1996 was 12 percent, decreasing to an ultimate rate in the year 2002 of seven percent. If the assumed medical cost trend rates were increased by one percent, the accumulated postretirement benefit obligation would increase by $1.6 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost would increase by $.2 million. Included in the Company's 1994 charge for the disposition of certain businesses are curtailment costs for postretirement benefit obligations relating to these businesses of approximately $3.7 million.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT INFORMATION:
The Company's business segments involve the sale of the following products and services:
Transportation-Related Products and Services:
Precision products, generally produced using advanced metalworking technologies with significant proprietary content, and aftermarket products for the transportation industry.
Engineering and technical business services.
Specialty Products:
Other Industrial -- Principally doors, windows, security grilles and office panels and partitions for commercial and residential markets.
The Company's export sales approximated $75 million, $85 million and $102 million in 1996, 1995 and 1994, respectively.
Corporate assets consist primarily of cash and cash investments, marketable securities, equity and other investments in affiliates and notes receivable.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(A) Included within this segment are sales to one customer of $232 million, $397 million and $361 million in 1996, 1995 and 1994, respectively; sales to another customer of $146 million, $182 million and $225 million in 1996, 1995 and 1994, respectively; sales to a third customer of $122 million, $178 million and $212 million in 1996, 1995 and 1994, respectively; and sales to a fourth customer of $155 million, $136 million and $111 million in 1996, 1995 and 1994, respectively.
(B) Operating profit in 1996 includes a $32 million pre-tax loss principally from the sale of MascoTech Stamping Technologies, Inc. This charge impacted the Company's Transportation-Related Products and Services industry segment. Operating profit in 1995 includes $25 million in net gains resulting from sales of non-core businesses in the third quarter. These net gains were substantially offset by reductions in the estimated proceeds the Company expected to receive from businesses to be sold, aggregating $12 million, and by certain exit costs incurred in 1995 aggregating approximately $8 million. The net gains (charge) impact the Company's industry segments as follows: Transportation-Related Products and Services -- $21 million and Specialty Products -- $(2) million. The remaining $(14) million of the net gains (charge) was allocated to General Corporate Expense. Operating loss in 1994 includes the impact of a pre-tax charge in the amount of $400 million for the disposition of businesses. The charge impacts the Company's industry segments as follows: Transportation-Related Products and Services -- $196 million and Specialty Products -- $191 million. The remaining $13 million of the charge was allocated to General Corporate Expense.
(C) Assets employed at December 31, 1996, 1995 and 1994 include net assets related to the disposition of certain operations (see "Dispositions of Operations" note).
(D) Property additions include approximately $2 million and $14 million in 1996 and 1995, respectively, of capital expenditures for those businesses held for disposition related to the plan adopted in late 1994.
(E) Depreciation and amortization expense include approximately $5 million in 1995 of expense for those businesses held for disposition related to the plan adopted in late 1994.
(F) The Company's foreign operations are located principally in Western Europe.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER INCOME (EXPENSE), NET:
Gains and losses realized from sales of marketable securities and gains from sales of common stock of equity affiliates are determined on a specific identification basis at the time of sale.
INCOME TAXES:
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred taxes at December 31, 1996 and 1995 are as follows:
Net current and non-current assets of businesses held for disposition at December 31, 1995 include approximately $41 million of the foregoing deferred tax assets.
The following is a reconciliation of tax computed at the U.S. federal statutory rate to the provision for income taxes (credit) allocated to income (loss) from continuing operations before income taxes (credit), extraordinary item and cumulative effect of accounting change, net:
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS:
In accordance with Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," the following methods were used to estimate the fair value of each class of financial instruments:
MARKETABLE SECURITIES, NOTES RECEIVABLE AND OTHER ASSETS
Fair values of financial instruments included in marketable securities, notes receivable and other assets were estimated using various methods including quoted market prices and discounted future cash flows based on the incremental borrowing rates for similar types of investments. In addition, for variable-rate notes receivable that fluctuate with the prime rate, the carrying amounts approximate fair value.
LONG-TERM DEBT
The carrying amount of bank debt and certain other long-term debt instruments approximate fair value as the floating rates inherent in this debt reflect changes in overall market interest rates. The fair values of the Company's subordinated debt instruments are based on quoted market prices. The fair values of certain other debt instruments are estimated by discounting future cash flows based on the Company's incremental borrowing rate for similar types of debt instruments.
The carrying amounts and fair values of the Company's financial instruments at December 31, 1996 and 1995 are as follows:
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTERIM AND OTHER SUPPLEMENTAL FINANCIAL DATA (UNAUDITED):
Since dilution occurs in the first quarter 1996, earnings per common share is presented on a fully diluted basis. However, earnings per common share on income before accounting change item is anti-dilutive.
Results for the second quarter 1996 include an after-tax loss of approximately $26 million related to the sale of MascoTech Stamping Technologies, Inc.
Net income for the first quarter of 1996 includes an after-tax gain of approximately $12 million as a result of the adoption of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective January 1, 1996 which was recorded as a cumulative effect of an accounting change.
The 1996 income (loss) per common share amounts for the quarters do not total to the full year amounts due to the purchase and retirement of shares throughout the year.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
Results for the third quarter of 1995 include net gains aggregating approximately $25 million from the sale of certain businesses held for disposition. These net gains were offset by reductions in the estimated net proceeds the Company expected to receive from businesses to be sold, aggregating $12 million and by certain exit costs incurred in 1995 aggregating approximately $8 million.
Results for the second quarter of 1995 include pre-tax income of approximately $5 million as a result of gains associated with the sale of common stock through a public offering by an equity affiliate.
The following supplemental unaudited financial data combine the Company with TriMas and have been presented for analytical purposes. The Company had a common equity ownership interest in TriMas of approximately 41 percent at December 31, 1996 and December 31, 1995. The interests of the other common shareholders are reflected below as "Equity of other shareholders of TriMas." All significant intercompany transactions have been eliminated.
MASCOTECH, INC.
FINANCIAL STATEMENT SCHEDULE
PURSUANT TO ITEM 14(A)(2) OF FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1996
Schedule, as required for the years ended December 31, 1996, 1995 and 1994:
MASCOTECH, INC.
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTES:
(A) Allowance of companies reclassified for businesses held for disposition, and other adjustments, net in 1996, 1995 and 1994. Allowance of companies acquired, and other adjustments, net in 1995.
(B) Deductions, representing uncollectible accounts written off, less recoveries of accounts written off in prior years.
EXHIBIT INDEX
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(1) Incorporated by reference to the Exhibits filed with Masco Corporation's Current Report on Form 8-K dated November 13, 1996.
(2) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1995.
(3) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1994.
(4) Incorporated by reference to the Exhibits filed with Masco Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
(5) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1993.
(6) Incorporated by reference to the Exhibits filed with Masco Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.
(7) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1992.