ITEM 1. BUSINESS.
Masco manufactures home improvement, building and home furnishings products for the home and family. Masco believes that it is the largest domestic manufacturer of faucets, plumbing supplies, kitchen and bath cabinets and furniture, and that it is a leading domestic producer of a number of other home improvement, building and home furnishings 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.
INDUSTRY SEGMENTS
The following table sets forth for the three years ended December 31, 1994, the contribution of the Company's industry segments to net sales and operating profit:
(1) Amounts are before general corporate expense.
Additional financial information concerning the Company's operations by industry segments as of and for each of the three years ended December 31, 1994, is set forth in Item 8 of this Report in the Note to the Company's Consolidated Financial Statements captioned "Segment Information."
HOME IMPROVEMENT AND BUILDING PRODUCTS
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 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 for the home improvement and home construction markets through mass merchandisers, hardware stores, home centers and other outlets to consumers and contractors.
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. In
addition to its domestic manufacturing, the Company manufactures faucets in Denmark, Italy and Canada.
Sales of faucets approximated $667 million in 1994, $608 million in 1993 and $528 million in 1992. The percentage of operating profit on faucets is somewhat higher than that on products within the Home Improvement and Building Products Segment as a whole. The Company believes that the simplicity, quality and reliability of its faucet mechanisms, 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 in both the home improvement and new construction markets. In addition to its domestic manufacturing, the Company manufactures cabinetry in Germany and England. Sales of kitchen and bath cabinets were approximately $665 million in 1994, $570 million in 1993 and $515 million in 1992.
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 primarily for the wholesale trade under the BRASS-CRAFT(R) trademark and for the "do-it-yourself" market under the PLUMB SHOP(R) and HOME PLUMBER(R) trademarks and are also sold under private label.
Other kitchen and bath consumer 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 acrylic and gelcoat bath and shower units and whirlpools are sold under the AQUA GLASS(R) trademark primarily to wholesale plumbing distributors for use in the home improvement and new home construction markets. Luxury bath and shower enclosures are manufactured and sold by the Company under the HUPPE(R) trademark. The Company's spas and hot tubs are sold under the HOT SPRING SPA(R) and other trademarks directly to retailers for sale to residential customers.
Other specialty home improvement and building products include premium quality brass rim and mortise locks and knobs, trim and other builders' hardware which are manufactured and sold under the BALDWIN(R) trademark for the home improvement and new home construction markets. WEISER(R) door locks and related hardware are sold through contractor supply outlets, hardware distributors and home centers. SAFLOK(TM) electronic locks and WINFIELD(TM) mechanical locks are sold primarily to the hospitality market.
In 1994 the Company added several plumbing specialties and bath accessories to its line of products through the acquisition of Melard Corporation, Zenith Products Corporation, American Shower & Bath Corporation and NewTeam Group. The Company expanded its kitchen cabinet businesses during 1994 by the acquisition in Germany of Alma Kuchen Aloys Meyer GmbH and Co.
HOME FURNISHINGS PRODUCTS
The Company is the leading domestic manufacturer of brand-name consumer products for the furnishing of the home, including furniture, upholstery and other fabrics, mirrors, lamps and other decorative accessories.
The Company manufactures a broad array of home furnishings products at a wide range of price points and utilizes a variety of distribution channels to market its products. A complete line of traditional, transitional and contemporary wood and upholstered furniture is sold under the HENREDON(R) trademark through Henredon galleries located in furniture stores, and also through designer showrooms, furniture outlets and department stores. DREXEL(R) and HERITAGE(R) wood and upholstered furniture and home furnishings accessories are marketed through Drexel Heritage galleries located in furniture stores, through showcase stores which primarily feature Drexel Heritage
furniture and also through independent furniture outlets. The Lexington Furniture Industries group produces youth-correlated furniture, moderately priced bedroom and dining room groups, occasional and upholstered furniture and woven wicker and rattan products, which are sold through national and regional chains and independent furniture dealers, department stores and interior designers. Universal Furniture Limited manufactures dining room, bedroom, occasional wood and upholstered furniture, which is sold primarily through furniture retailers and department stores under UNIVERSAL(R), BENCHCRAFT(R) and other trademarks. The Company believes that Universal is the largest supplier in the United States of wood dining room furniture, much of which is shipped in unassembled form from the Company's Far East factories to assembly and distribution centers in the United States. The Berkline Corporation, acquired in 1994, manufactures family or home entertainment room motion furniture, which is sold primarily through furniture retailers and department stores under the BERKLINE(R) trademark. The Company also manufactures and sells designer upholstered products and upholstered furniture under private label to furniture stores and other retailers. Sales of the Company's furniture products approximated $1.57 billion in 1994, $1.34 billion in 1993 and $1.19 billion in 1992.
The Company's textile group includes Robert Allen Fabrics, Inc., Ametex Fabrics, Inc., Sunbury Textile Mills, Inc., Ametex U.K. Limited and Ramm, Son & Crocker Limited. Robert Allen markets fabrics, which are used primarily for residential furnishings, through independent sales representatives to designers and retailers. Company-operated and independent showrooms have also been established to sell fabrics and display and sell many of the Company's other home furnishings products. Ametex and Ametex U.K. design and convert moderately priced fabrics for use in commercial and residential furnishings, which are sold through independent sales representatives to furniture and other furnishings manufacturers, fabric jobbers and the hospitality market. Sunbury manufactures high-quality jacquard woven fabrics which are sold through sales representatives primarily to furniture manufacturers and decorative jobbers for furniture and other decorative applications. Ramm, Son & Crocker is a United Kingdom supplier of high-quality printed fabrics to the furniture and decorative fabric markets.
Additional markets for the Company's furnishings business include the hospitality and institutional markets and the design trade. The Company supplies furniture and accessories to contract accounts for the hotel and motel industry as well as for commercial, governmental and institutional applications. The Company's Beacon Hill showrooms, located in design centers, offer wide selections of high-end furniture, fabrics and accessories, many of which are not generally available through traditional retail channels.
GENERAL INFORMATION CONCERNING INDUSTRY SEGMENTS
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 -- Receivables and Inventories," included in Item 7 of this Report. The Company does not consider backlog orders to be a material factor in its industry segments, 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 manufacturing plants in Belgium, Canada, the People's Republic of China, Denmark, France, Germany, Hong Kong, Indonesia, Italy, Malaysia, Mexico, the Philippines, Singapore, Sweden, Taiwan, Turkey and the United Kingdom. Products manufactured by
the Company outside of the United States include faucets and accessory products, bath and shower enclosures, kitchen and bath cabinets, furniture, decorative accessories, door locks and related hardware, ventilating fans and equipment and submersible water pumps.
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 foreign and domestic operations, including the amounts of net sales, operating profit and assets employed which are attributable to the Company's operations in the United States and in foreign countries, as of and for the three years ended December 31, 1994, is set forth in Item 8 of this Report in the Note to the Company's Consolidated Financial Statements captioned "Segment Information." From 1992 through 1994, the Company's annual net export sales from the United States to other countries, as a percentage of consolidated annual net sales, approximated three percent.
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. Masco currently owns approximately 44 percent of the outstanding common stock of MascoTech.
MascoTech is a supplier of powertrain and chassis components, technical engineering and related services and automotive aftermarket products and a manufacturer of architectural products and other specialty products primarily for the defense industry. In 1994, MascoTech had sales of $1.7 billion.
MascoTech has adopted a long term strategic plan to focus on certain core operating capabilities and divest certain other businesses. In late 1993, MascoTech adopted a plan to divest the businesses in its energy segment, which has since been completed. MascoTech's financial statements have been reclassified to present the operating results of the energy segment as discontinued operations. These businesses manufactured specialized tools, equipment and other products for energy-related industries. 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, which have annual sales of approximately $700 million, is expected to occur primarily in 1995 with the cash portion of the proceeds applied to reduce MascoTech's indebtedness and to provide capital to invest in its core businesses. The disposition of these businesses does not meet the criteria for discontinued operations treatment for accounting purposes; accordingly, the sales and results of operations of these businesses will be included in the results of continuing operations through the date of disposition. 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.
MascoTech's core transportation-related businesses manufacture powertrain, chassis and aftermarket products and provide technical engineering and other related services. Powertrain and chassis products include semi-finished transmission shafts, drive gears, engine connecting rods, wheel spindles, front wheel drive and exhaust system components, control arms and heavy stampings and related assemblies for suspension and chassis applications. MascoTech's technical engineering and related services businesses supply engineering and engineering services to support the vehicle development processes of automotive original equipment manufacturers as well as specialty vehicle, marketing, training, visual and other related professional services. Aftermarket products include fuel and emission systems components, windshield wiper blades, constant-velocity joints, brake hardware repair kits and automotive accessories. MascoTech's transportation-related businesses held for disposition manufacture products for vehicle body related applications including automotive trim, luggage racks and accessories and light, medium and specialty metal stampings. These businesses also supply specialty coatings and truck cab body and passenger car convertible assemblies. MascoTech's products
are manufactured using various metalworking technologies, including cold, warm and hot forming, powdered metal forming and stamping. During 1994, sales to various divisions and subsidiaries of Ford Motor Company, Chrysler Corporation and General Motors Corporation accounted for approximately 19 percent, 13 percent and 12 percent, respectively, of MascoTech's net sales (including both core businesses and businesses held for disposition).
Specialty products manufactured by MascoTech include a variety of architectural products for commercial, institutional and residential markets. Products include steel doors and frames; stainable and low maintenance steel doors; wood windows and aluminum-clad wood windows; leaded, etched and beveled glass for decorative windows and entryways; residential entry systems; garage doors; sectional and rolling doors; security grilles; and modular metal partitions. MascoTech's sales of architectural products in 1994 were $277 million. MascoTech's other specialty products consist primarily of defense products, including large diameter cold formed cartridge cases, projectiles and casings for rocket motors and missiles for the United States government and its suppliers. MascoTech also markets waste-water treatment services to other industrial companies principally in southern California. MascoTech's sales in 1994 of these other specialty products were $93 million.
TriMas Corporation
The Company and MascoTech currently own approximately 5 percent and 41 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 industrial container closures, pressurized gas cylinders, specialty industrial gaskets, towing systems products, specialty fasteners, tapes and products for fiberglass insulation, and precision cutting tools.
Hans Grohe
The Company has a partnership interest in Hans Grohe GmbH & Co. KG, a German manufacturer of faucets, handheld showers, shower heads and other shower accessories.
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 trade names. As a manufacturer of brand-name consumer products, the Company views its trademarks as important, but does not believe that there is any reasonable likelihood of a loss of such rights which would have a material adverse effect on the Company's industry segments or its present business as a whole.
COMPETITION
The major domestic and foreign markets for the Company's products in its industry segments are highly competitive. Competition is based primarily on performance, quality, style, 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, 1994, the Company employed approximately 51,300 people. Satisfactory relations have generally prevailed between the Company and its employees.
ITEM 2.
ITEM 2. PROPERTIES.
The following list includes the Company's principal manufacturing facilities by location and the industry segments utilizing such facilities:
Note: Multiple footnotes within the same parenthesis indicate the facility is engaged in activities relating to both segments. Multiple footnotes to the same municipality denote separate facilities in that location. Industry segments in the preceding table are identified as follows: (1) Home Improvement and Building Products Segment, and (2) Home Furnishings Products Segment.
The home furnishings products manufacturing facilities are located primarily in North Carolina, with principal facilities ranging in size from 710,000 to 1,108,000 square feet. The two principal faucet manufacturing plants are located in Greensburg, Indiana and Chickasha, Oklahoma and a new 394,000 square foot faucet manufacturing plant is under construction in Jackson, Tennessee. The faucet manufacturing plants and the majority of the Company's other facilities range from approximately 20,000 to 700,000 square feet. The Company owns most of its manufacturing facilities and none of the properties is subject to significant encumbrances. The Company also maintains approximately 1.5 million square feet of designer and trade showroom space at various locations throughout the United States where it coordinates the display and sale of its home furnishings products and owns 725,000 square feet of showroom space in High Point, North Carolina utilized for furniture industry trade shows. In addition, the Company maintains 357,000 square feet of designer and trade showroom space at various foreign locations. 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 identifies the location of the principal manufacturing facilities of MascoTech and the industry segments utilizing such facilities:
Note: Multiple footnotes within the same parenthesis indicate the facility is engaged in significant activities relating to more than one segment. Multiple footnotes to the same municipality denote separate facilities in that location. Industry segments in the preceding table are identified as follows: (1) transportation-related products; (2) specialty products - architectural and (3) specialty products - other.
MascoTech's largest manufacturing facility is located in Vernon, California and is a multi-plant facility of approximately 920,000 square feet. MascoTech owns the largest plant, comprising approximately 540,000 square feet, and operates the remaining portions of this facility under leases, the earliest of which expires at the end of 1996. Except for the foregoing facility and an additional manufacturing facility covering approximately 605,000 square feet, MascoTech's manufacturing facilities range in size from approximately 10,000 to 325,000 square feet, are owned by MascoTech or leased and are not subject to significant encumbrances. MascoTech's 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 production requirements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Civil suits were filed in December 1992 in a California state court by the California Attorney General, the Natural Resources Defense Counsel and the Environmental Law Foundation against a subsidiary of the Company and approximately 15 other manufacturers or distributors of faucets sold in that state. The suits principally allege that brass faucets unlawfully leach lead into tap water and that the defendants have failed to provide clear and reasonable warnings in violation of California law. The plaintiffs have requested, among other things, that the defendants be enjoined from selling products in California that leach lead into tap water, be ordered to offer restitution to California purchasers of defendants' products, and pay unspecified compensatory and punitive damages. Based upon the Company's present knowledge and subject to future legal and factual developments, the Company does not believe that these suits will result in any material adverse effect on the Company's financial position.
The Company is subject to other 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 Mr. Gargaro. Mr. Gargaro joined the Company as its Vice President and Secretary on October 1, 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 a director and Secretary of TriMas Corporation since 1989. Richard A. Manoogian, the Chairman of the Board and Chief Executive Officer of the Company, is the son of its Chairman Emeritus, Alex Manoogian.
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 March 15, 1995, there were approximately 6,680 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 of the Company, for the years and dates indicated:
(1) After the $79 million after-tax ($.50 per share) non-cash equity investment charge in 1994.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CORPORATE DEVELOPMENT
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.
In early 1994, the Company acquired for common stock, Melard Corporation and Zenith Products Corporation, manufacturers of plumbing specialties and bath accessories, and Berkline Corporation, a manufacturer of popularly priced recliners and motion upholstered furniture, all of which were accounted for as poolings of interests.
In December 1994, the Company acquired Alma Kuchen Aloys Meyer GmbH and Co., a German manufacturer of kitchen cabinets, and NewTeam Group, a United Kingdom manufacturer of handheld showers and other bath accessories, both of which were accounted for as purchase transactions.
The above pooled and purchased companies had annual net sales in 1993 of approximately $320 million.
In January 1995, the Company received approximately $70 million upon the sale of its investment in Formica Corporation. The Company anticipates that the gain from this transaction, however, will be largely offset by charges and reserves for profit improvement programs and asset disposals that should enhance the Company's future performance.
PROFIT MARGINS
Net income and earnings per share for 1994, prior to an unusual non-cash fourth quarter equity investment charge, were $273 million and $1.72, representing increases of 23 percent and 19 percent from $221 million and $1.45 in 1993, respectively. Including the unusual charge of approximately $.50 per share, net income was $194 million, with earnings per share of $1.22. The unusual charge is the Company's equity share of its affiliate MascoTech, Inc.'s $315 million non-cash after-tax charge which results from MascoTech's strategic decision to focus on its core transportation-related business and divest non-core businesses. MascoTech believes that this strategy should strengthen its balance sheet and profitability, which in turn should enhance the value of the Company's investment in MascoTech.
After-tax profit margin on sales and after-tax profit return on shareholders' equity in 1994, before the effect of the above-mentioned unusual equity charge, increased to 6.1 percent and 13.7 percent, respectively, as compared with 5.7 percent and 11.7 percent, respectively, in 1993, and 5.2 percent and 10.2 percent, respectively, in 1992, primarily due to increased product sales resulting from improved market shares and the expanded economy. Including the effect of the equity charge, after-tax profit margin as a percent of net sales and after-tax profit return on shareholders' equity were 4.3 percent and 9.7 percent, respectively, in 1994.
LIQUIDITY AND CAPITAL RESOURCES
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 year-end 1994, current assets were approximately 3.1 times current liabilities.
During 1994, cash of $311 million was provided by operating activities and by $134 million from a net increase in debt; cash decreased by $191 million for the purchase of property and equipment, by $127 million for the acquisition of companies, by $62 million for the repurchase of Company Common Stock, by $109 million for cash dividends and by $15 million for other cash outflows. The aggregate of the preceding items represents a net cash outflow of $59 million in 1994. Cash provided by operating
activities totalled $311 million, $261 million and $204 million in 1994, 1993 and 1992, respectively; the Company has generally reinvested a majority of these funds in its operations.
In late 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 the fourth quarter of 1994.
The Company's anticipated internal cash flow is expected to provide sufficient liquidity 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 its internal cash flow and to the extent necessary in the financial markets.
RECEIVABLES AND INVENTORIES
During 1994, the Company's receivables increased by $135 million. This increase is primarily comprised of receivables from existing operations, which increased by $53 million, principally as a result of increased sales in the fourth quarter of 1994 compared with the same period in 1993, and receivables of acquired companies.
During 1994, the Company's inventories increased by $125 million. This increase is primarily comprised of a $75 million increase in inventories from existing operations which had increased sales, and inventories of acquired companies.
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.
CAPITAL EXPENDITURES AND DEPRECIATION
Capital expenditures totalled $191 million in 1994, compared with $167 million in 1993. 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 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.
Depreciation expense and amortization expense were $88.1 million and $32.5 million, respectively, in 1994, compared with $82.1 million and $33.9 million, respectively, in 1993. The major portion of amortization expense, from the excess of cost over net assets acquired, relates to companies acquired in previous years. These companies have been successful for many years in established markets not subject to rapid technological changes. 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 sales, operating income and annual cash flows with the related annual amortization expense as well as considering the equity of such companies.
EQUITY AND OTHER INVESTMENTS IN AFFILIATES
Equity losses from affiliates were $101.3 million in 1994, compared with equity earnings of $18.7 million in 1993 and $17.3 million in 1992.
In December 1994, MascoTech, an equity affiliate of the Company, 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 $138 million pre-tax ($79 million after-tax) as its equity share of this non-cash charge.
CASH DIVIDENDS
During 1994, the Company increased its dividend rate six percent to $.18 per share quarterly. This marks the 36th consecutive year in which dividends have been increased. Dividend payments over this period have increased at an 18 percent average annual rate. Although the Company is aware of the greater interest in yield by many investors and has maintained an increased dividend payout in recent years, the Company continues to believe that its shareholders' long-term interests are best served by investing a significant portion of its earnings in the future growth of the Company.
RECENTLY ISSUED PROFESSIONAL ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants' Statement of Position 93-7, Reporting on Advertising Costs, becomes effective in 1995. This statement provides guidance on the accounting treatment and reporting of advertising costs and should not have a material effect on the Company's financial statements.
GENERAL FINANCIAL ANALYSIS
1994 VERSUS 1993
Net sales in 1994, aided by acquisitions, increased 15 percent to $4,468 million; excluding acquisitions, net sales increased 7 percent. Sales in 1994 of the Company's Home Improvement and Building Products and Home Furnishings Products each increased 15 percent to $2,523 million and $1,945 million, respectively; excluding acquisitions, sales of Home Improvement and Building Products and Home Furnishings Products increased 8 percent and 6 percent, respectively.
Cost of sales as a percentage of sales decreased modestly to 67.2 percent in 1994 from 67.5 percent in 1993. Selling, general and administrative expenses as a percentage of sales decreased to 21.4 percent in 1994 from 22.1 percent in 1993. Operating profit, after general corporate expense, increased 26 percent to $510 million in 1994, primarily due to increased sales and profit improvement programs.
Operating profit of the Company's Home Improvement and Building Products segment, before general corporate expense, increased 22 percent to $504 million. Operating profit of the Company's Home Furnishings Products segment, before general corporate expense, increased 29 percent to $89 million.
Included in other income and expense for 1994 are equity losses from MascoTech of $106 million, which reflect the Company's $138 million pre-tax equity share of MascoTech's unusual non-cash fourth quarter charge, as compared with $13.2 million of equity earnings from MascoTech in 1993. MascoTech reported a loss from continuing operations and a net loss, after preferred stock dividends, of $234.4 million and $233.1 million, respectively, in 1994, as compared with income from continuing operations and net income, after preferred stock dividends, of $70.9 million and $32.7 million, respectively, in 1993.
Net income and earnings per common share, for 1994 prior to the above-mentioned MascoTech charge, were $273 million and $1.72, representing increases of 23 percent and 19 percent from $221 million and $1.45 in 1993, respectively. Including the above-mentioned charge of approximately $.50 per share, net income was $194 million, with earnings per share of $1.22.
1993 VERSUS 1992
Net sales in 1993 increased 10 percent to $3,886 million. The sales increase was primarily due to increased shipments of kitchen, bath and home furnishings products. Cost of sales as a percentage of sales was 67.5 percent in both 1993 and 1992. Selling, general and administrative expenses as a percentage of sales decreased modestly to 22.1 percent in 1993 from 22.3 percent in 1992. Operating profit increased 13 percent in 1993 from 1992.
The Company's Home Improvement and Building Products sales in 1993 increased 10 percent to $2,188 million while operating profit increased 12 percent to $412 million.
Sales in 1993 of the Company's Home Furnishings Products increased 11 percent to $1,698 million and operating profit increased 15 percent to $69 million.
Included in other income and expense for 1993 are equity earnings from MascoTech, Inc. of $23.2 million, prior to an approximate $10 million after-tax fourth quarter charge which reflects the Company's equity share of MascoTech's loss provision for the disposition of its energy-related businesses and extraordinary loss on the early extinguishment of debt, as compared with $12.6 million of equity earnings in 1992. MascoTech reported income from continuing operations of $70.9 million and $39.0 million in 1993 and 1992, respectively, and net income, after preferred stock dividends, of $32.7 million for 1993 and $29.1 million for 1992. The 1993 results of MascoTech were favorably impacted by internal cost reductions and from increased demand in its transportation industries, which more than offset its fourth quarter special charges of approximately $26 million after-tax.
Included in the fourth quarter of 1993 is a $28.3 million pre-tax gain (approximately $18 million after-tax) on the redemption of MascoTech's 10% exchangeable preferred stock. This gain was principally offset by the Company's approximate $10 million after-tax equity share of MascoTech's above-mentioned fourth quarter special charges, as well as by charges related to certain restructurings of Company operations which should result in future cost savings.
The Company reported increases in net income and earnings per share of 21 percent and 20 percent, respectively, in 1993 as compared with 1992.
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 sheet of Masco Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 1994, and the financial statement schedule as listed in Item 14(a)(2)(i) of this 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 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 Masco Corporation and subsidiaries as of December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 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 17, 1995
MASCO CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1994 AND 1993
ASSETS
See notes to consolidated financial statements.
MASCO CORPORATION
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
See notes to consolidated financial statements.
MASCO CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
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. Certain prior period amounts have been reclassified to conform with the current-year presentation.
Average Shares Outstanding. The average number of common shares outstanding in 1994, 1993 and 1992 approximated 158.8 million, 152.7 million and 151.7 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. Accounts and notes receivable are presented net of allowances for doubtful accounts of $20.1 million at December 31, 1994 and $19.1 million at December 31, 1993.
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 income. 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 $88.1 million, $82.1 million and $79.4 million in 1994, 1993 and 1992, 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, 1994 and 1993, such accumulated amortization totalled $147.3 million and $127.2 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 sales, operating income and annual cash flows with the related annual amortization expense as well as considering the equity of such companies. 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 $32.5 million, $33.9 million and $35.1 million in 1994, 1993 and 1992, 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 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, 1994 was approximately $187 million and $1,483 million, as compared with the Company's carrying value of $152 million and $1,593 million, respectively. The aggregate market value of the Company's long-term investments and long-term debt at December 31, 1993 was approximately $230 million and $1,471 million, as compared with the Company's carrying value of $200 million and $1,418 million, respectively.
Statement of Financial Accounting Standards No. 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments, became effective in 1994. This Standard defines
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING POLICIES -- (CONTINUED) the disclosure requirements for derivative financial instruments, of which the Company has no material holdings.
Recently Issued Professional Accounting Standards. The American Institute of Certified Public Accountants' Statement of Position 93-7, Reporting on Advertising Costs, becomes effective in 1995. This statement provides guidance on the accounting treatment and reporting of advertising costs and should not have a material effect on the Company's financial statements.
ACQUISITIONS
POOLING ACQUISITIONS:
During 1994, the Company issued approximately 6.5 million of its common shares for the acquisitions of Melard Manufacturing Corporation, Zenith Products Corporation and Berkline Corporation. Each of these acquisitions was accounted for as a pooling of interests. Melard and Zenith are manufacturers of plumbing specialties and bath accessories, and Berkline is a manufacturer of recliners and motion upholstered furniture. Prior year financial statements were not restated due to immateriality.
PURCHASE ACQUISITIONS:
In December 1994, the Company acquired Alma Kuchen Aloys Meyer GmbH and Co., a German manufacturer of kitchen cabinets, and NewTeam Group, a United Kingdom manufacturer of handheld showers and other bath accessories, for approximately $100 million.
The Company also acquired several other companies in 1994 for approximately $25 million.
The above pooled and purchased companies had combined net sales in 1993 of approximately $320 million.
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.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY INVESTMENTS IN AFFILIATES
Equity investments in affiliates consist primarily of the following common equity and partnership interests:
MascoTech, Inc. presently has voting preferred shares outstanding, which are to be converted into common shares no later then mid-1997. On an assumed converted basis and utilizing the minimum number of common shares to be so issued, the Company's equity investment in MascoTech would be 38 percent at December 31, 1994 (which equals the Company's voting interest at that date).
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, 1994 (which may differ from the amounts that could then have been realized upon disposition), based upon quoted market prices at that date, was $431 million, as compared with the Company's related aggregate carrying value of $205 million.
The Company's carrying value of its equity investments in MascoTech exceeds its equity in the underlying net book value by approximately $73 million at December 31, 1994. This excess, which principally resulted from repurchases by MascoTech of its common stock, is being amortized over a period not to exceed 40 years. The Company's carrying value of its other equity investments at December 31, 1994 approximates the Company's equity in the underlying net book value in these affiliates.
In March 1993, the Company and MascoTech partially restructured their affiliate relationships through transactions that reduced the Company's common equity interest in MascoTech from 47 percent to approximately 35 percent and resulted in MascoTech's acquisition of the Company's investments in Emco Limited, a Canadian company. The Company received $87.5 million in cash, $100 million of 10% exchangeable preferred stock and seven-year warrants to purchase 10 million common shares of MascoTech at $13 per share. MascoTech received 10 million of its common shares, all $77.5 million of its 12% exchangeable preferred stock, the Company's investments in Emco Limited and a modified option expiring in early 1997 to require the Company to purchase up to $200 million aggregate amount of debt securities in MascoTech.
In November 1993, MascoTech redeemed for cash its $100 million of 10% exchangeable preferred stock issued in March 1993. As a result of this redemption, the Company realized a $28.3 million pre-tax gain.
In December 1993, following MascoTech's call for redemption, the Company converted $130 million of MascoTech's 6% debentures due 2011 into MascoTech common stock, thereby increasing the Company's common equity interest in MascoTech from approximately 35 percent to 42 percent.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY INVESTMENTS IN AFFILIATES -- (CONTINUED) 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 $138 million pre-tax as its equity share of this non-cash charge.
Equity in undistributed earnings of affiliates of $24 million at December 31, 1994, $132 million at December 31, 1993 and $118 million at December 31, 1992 are included in consolidated retained earnings.
PROPERTY AND EQUIPMENT
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCRUED LIABILITIES
LONG-TERM DEBT
At December 31, 1994, all of the outstanding notes other than notes payable to banks are nonredeemable.
The Company intends to refinance the 6.25% notes due June 15, 1995 through borrowings under its bank revolving-credit agreement.
In August 1993, the Company issued $200 million of 7.125% notes due August 15, 2013. In September 1993, the Company issued $200 million of 6.125% notes due September 15, 2003. The proceeds from these financings were used to eliminate floating-rate borrowings under the Company's bank revolving-credit agreement.
The 5.25% subordinated debentures due February 15, 2012 are convertible into common stock at $42.28 per share.
The notes payable to banks at December 31, 1994 relate to a $750 million revolving-credit agreement, with any outstanding balance due and payable in May 1998. Interest is payable on borrowings under this agreement based upon various floating rates as selected by the Company.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT -- (CONTINUED) Certain debt agreements contain limitations on additional borrowings and restrictions on cash dividend payments and common share repurchases. At December 31, 1994, the amount of retained earnings available for cash dividends and common share repurchases approximated $199 million under the most restrictive of these provisions.
At December 31, 1994, the maturities of long-term debt during each of the next five years were approximately as follows: 1995-$214.6 million; 1996-$257.2 million; 1997-$2.6 million; 1998-$105.8 million; and 1999-$200.9 million.
In October 1994, the Company amended its shelf registration statements, on file with the Securities and Exchange Commission, for the purpose of converting these statements to an unallocated shelf registration, which allows for the issuance of up to a combined $800 million of debt and equity securities.
Interest paid was approximately $103 million, $104 million and $121 million in 1994, 1993 and 1992, respectively.
SHAREHOLDERS' EQUITY
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SHAREHOLDERS' EQUITY -- (CONTINUED) On the basis of amounts paid (declared), cash dividends per share were $.69 ($.70) in 1994, $.65 ($.66) in 1993 and $.61 ($.62) in 1992.
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 the fourth quarter of 1994 at an aggregate cost of approximately $62 million.
STOCK OPTIONS AND AWARDS
For the three years ended December 31, 1994, stock option data pertaining to stock option plans for key employees of the Company and affiliated companies are as follows:
Pursuant to restricted stock incentive award plans, the Company granted long-term incentive awards, net, for 598,000, 100,000 and 267,000 shares of Company Common Stock during 1994, 1993 and 1992, respectively, to key employees of the Company and affiliated companies. The unamortized costs of unvested awards under these plans, aggregating approximately $55.3 million at December 31, 1994, are being amortized over the ten-year vesting periods.
At December 31, 1994, a combined total of 10,680,000 shares of Company Common Stock was available for the granting of stock options and incentive awards under the above plans.
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 1994, 1993 or 1992. At December 31, 1994, there were 4,695,000 of such shares available for granting future awards under this plan.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE RETIREMENT PLANS
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 determined annually by the Directors. Aggregate charges to income under the pension and profit-sharing plans were $23.3 million in 1994, $19.2 million in 1993 and $16.9 million in 1992.
Net periodic pension cost for the Company's pension plans includes the following components:
Major assumptions used in accounting for the Company's pension plans are as follows:
The funded status of the Company's pension plans is summarized as follows, in thousands, at December 31:
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, 1994, the aggregate present value of the accumulated postretirement benefit obligation approximated $6 million pre-tax and is being amortized over 20 years.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT INFORMATION
The Company's operations in the industry segments detailed below consisted of the manufacture and sale principally of the following products:
Home improvement and building -- faucets; plumbing fittings; kitchen and bath cabinets; shower tubs, whirlpools and spas; bath accessories; kitchen appliances; builders' hardware; venting and ventilating equipment; and water pumps.
Home furnishings products -- quality furniture, fabrics and other home furnishings products.
Corporate assets consisted primarily of real property 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 $11 million in each of 1994, 1993 and 1992 and is included as a reduction of general corporate expense.
(1) Income before income taxes and net income from foreign operations for 1994, 1993 and 1992 were $114 million and $76 million, $92 million and $55 million, and $88 million and $54 million, respectively.
(2) Property additions include assets of acquired companies.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER INCOME (EXPENSE), NET
Equity earnings from MascoTech for 1994 were $32 million, prior to the Company's $138 million pre-tax equity share of MascoTech's non-cash fourth quarter charge.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Net deferred tax liability at December 31, 1994 and 1993 consists of net short-term deferred tax assets of $44.5 million and $32.1 million, respectively, and net long-term deferred tax liabilities of $66.3 million and $129.0 million, respectively.
The effective tax rate differs from the United States federal statutory rate principally due to: foreign income tax (-1 percent in 1993 and -2 percent in 1992), amortization in excess of tax, net (-2 percent in 1994, -1 percent in 1993 and -2 percent in 1992), dividends-received deduction (2 percent in 1994 and 1 percent in 1993 and 1992), state income tax (-4 percent in 1994, -2 percent in 1993 and -3 percent in 1992) and other (-1 percent in 1994 and 1993).
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES -- (CONTINUED) Income taxes paid were approximately $175 million, $135 million and $97 million in 1994, 1993 and 1992, respectively.
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires the use of an asset and liability method of accounting for income taxes, became effective in January 1993. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and the related basis reported in the consolidated financial statements. Prior to 1993, the Company followed the requirements of Statement of Financial Accounting Standards No. 96, Accounting for Income Taxes.
Provision has not been made for U.S. or additional foreign taxes on approximately $75 million of remaining undistributed earnings of foreign subsidiaries, as those earnings are intended to be permanently reinvested. Generally, such earnings become taxable upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability on foreign undistributed earnings which are intended to be permanently reinvested.
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. 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) -- (CONTINUED)
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
INTERIM FINANCIAL INFORMATION (UNAUDITED)
Fourth quarter 1994 net loss and loss per share reflect the Company's $138 million pre-tax equity share of MascoTech's non-cash fourth quarter charge associated with the planned disposition of its non-core businesses.
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 1995 Annual Meeting of Stockholders, to be filed on or before April 28, 1995, 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 1995 Annual Meeting of Stockholders, to be filed on or before April 28, 1995, 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 1995 Annual Meeting of Stockholders, to be filed on or before April 28, 1995, 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 1995 Annual Meeting of Stockholders, to be filed on or before April 28, 1995, 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, 1994 and 1993, and for the years ended December 31, 1994, 1993 and 1992, consist of the following:
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
(i) Financial Statement Schedule of the Company appended hereto, as required for the years ended December 31, 1994, 1993 and 1992, consists of the following:
II. Valuation and Qualifying Accounts
(ii) (A) MascoTech, Inc. and Subsidiaries Consolidated Financial Statements appended hereto, as required at December 31, 1994 and 1993, and for the years ended December 31, 1994, 1993 and 1992, consist of the following:
Consolidated Balance Sheet
Consolidated Statement of Operations
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
(ii) (B) MascoTech, Inc. and Subsidiaries Financial Statement Schedule appended hereto, as required for the years ended December 31, 1994, 1993 and 1992, consists of the following:
II. Valuation and Qualifying Accounts
(3) Exhibits.
- --------------- (1) Incorporated by reference to the Exhibits filed with Masco Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
(2) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1993.
(3) Incorporated by reference to the Exhibits filed with Masco Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.
(4) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1992.
(5) Incorporated by reference to the Exhibits filed with Masco Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1991.
(6) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1991.
(7) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1990.
(B) REPORTS ON FORM 8-K.
None.
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 28, 1995
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.
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, 1994, 1993 and 1992:
MASCO CORPORATION
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
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, 1994 and 1993, and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 1994, and the financial statement schedule as listed in Item 14(a)(2)(ii) 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 the 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 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, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, 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 17, 1995
MASCOTECH, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1994 AND 1993
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, 1994, 1993 AND 1992
* Anti-dilutive
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, 1994, 1993 AND 1992
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. Capital transactions by equity affiliates, which reduce the Company's ownership interest at amounts differing from the Company's carrying amount, are reflected in other income or expense and equity and other investments in affiliates.
Certain amounts for the years ended December 31, 1993 and 1992 have been reclassified to conform to the presentation adopted in 1994. The balance sheet at December 31, 1994 reflects the segregation of net current and net non-current assets related to the plan, adopted in late 1994, to dispose of certain businesses. The financial statements and related notes have been reclassified to present the energy segment as discontinued operations (see "Dispositions of Operations" note).
The Company has a corporate services agreement with Masco Corporation, which at December 31, 1994 owned approximately 44 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, including net sales related to businesses held for disposition, aggregated approximately $11 million in each of 1994, 1993 and 1992.
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 adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", in 1994. At December 31, 1994 marketable equity securities have been categorized as trading securities, and, as a result, are stated at fair value. At December 31, 1993 marketable equity securities were stated at the lower of cost or market. Derivative financial instruments, consisting principally of S&P 500 futures contracts, are held for purposes other than trading and are carried at market value. Changes in market value of outstanding futures contracts are recognized as incurred.
Receivables. Receivables are presented net of allowances for doubtful accounts of approximately $1.6 million and $5.1 million at December 31, 1994 and 1993, respectively.
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 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
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 not held for disposition at December 31, 1994.
At December 31, 1994 and 1993, accumulated amortization of the excess of cost over net assets of acquired companies and patents was $34.5 million and $86.5 million, respectively. Amortization expense was $22.9 million, $22.2 million and $22.8 million in 1994, 1993 and 1992, respectively, including amortization expense of approximately $1.6 million in both 1993 and 1992 related to discontinued operations.
Income Taxes. In January 1993, the Company adopted 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. There was no income statement impact from the adoption of SFAS No. 109. Provision has not been made for U.S. or additional foreign taxes on approximately $28 million of undistributed earnings of foreign subsidiaries as those earnings are intended to be permanently reinvested. Generally, such earnings become taxable 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 loss per common share in 1994 is based on 58.9 million weighted average shares of common stock outstanding. The effect of stock options and warrants in 1994 would be anti-dilutive. Primary earnings per common share are based on weighted average shares of common stock and common stock equivalents outstanding (including the dilutive effect of stock options and warrants, utilizing the treasury stock method) of 57.4 million and 60.9 million in 1993 and 1992, respectively. Primary earnings (loss) per common share are calculated on earnings (loss) after deducting preferred stock dividends of $13.0 million, $14.9 million and $9.3 million in 1994, 1993 and 1992, respectively.
Fully diluted earnings (loss) per common share are only presented when the assumed conversion of convertible securities is dilutive. Fully diluted earnings per common share in 1993 was calculated based on 68.8 million weighted average common shares outstanding. Convertible securities did not have a dilutive effect on earnings (loss) per common share in 1994 or 1992.
In late 1993, approximately 10.4 million common shares were issued as a result of the conversion of the 6% Convertible Subordinated Debentures (see "Shareholders' Equity" note). If such conversion had taken place at the beginning of 1993, the primary earnings per common and common equivalent share amounts would have approximated the amounts presented for earnings per common and common equivalent share, assuming full dilution, in 1993.
Adoption of Statements of Financial Accounting Standards. The Company expects that the adoption of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan", will not have a material impact on the financial position or the results of operations of the Company when adopted in 1995.
SUPPLEMENTARY CASH FLOWS INFORMATION:
Significant transactions not affecting cash were: in 1993: in addition to the payment by the Company of $87.5 million, the non-cash portion of the issuance of Company Preferred Stock and warrants in exchange for Company Common Stock, Company Preferred Stock and Masco
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Corporation's holdings of Emco Limited common stock and convertible debentures (see "Shareholders' Equity" note); conversion of $187 million of convertible debentures into Company Common Stock (see "Shareholders' Equity" note); and conversion of the Company's TriMas Corporation ("TriMas") convertible preferred stock holdings into TriMas common stock (see "Equity and Other Investments in Affiliates" note).
Income taxes paid were $28 million, $32 million and $23 million in 1994, 1993 and 1992, respectively. Interest paid was $61 million, $82 million and $91 million in 1994, 1993 and 1992, 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 businesses, as part of its long-term strategic plan to increase the focus on its core operating capabilities. The disposition of these businesses is expected to primarily occur in 1995 with the cash portion of the proceeds applied to reduce the Company's indebtedness and to provide capital to invest in its core businesses. The disposition of these businesses does not meet the criteria for discontinued operations treatment for accounting purposes; accordingly, the sales and results of operations of these businesses will be included in continuing operations until disposition. The businesses to be disposed had annual sales of $675 million, $715 million and $675 million in 1994, 1993 and 1992, respectively, and operating profit (loss), before the charge recorded in 1994, of $(2) million, $22 million and $30 million in 1994, 1993 and 1992, respectively.
The expected proceeds from the sale or liquidation of the businesses to be disposed was estimated by the Company's management based on a variety of factors including: historical and projected operating performance, competitive market position, perceived strategic value to potential acquirors, tangible asset values and other relevant factors. In addition, management's estimate of the expected proceeds included input from independent parties familiar with business valuations of this nature. The Company's carrying value of a number of the businesses to be disposed exceeded the estimated proceeds expected from such dispositions. To reflect the estimated loss on the disposition of these businesses, the Company 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 is anticipated. The approximate components of the charge are as follows (in thousands):
Future periods will include the operating results of the businesses to be sold and any additional anticipated costs to be incurred in connection with the sale or liquidation of the remaining businesses which cannot be accrued at December 31, 1994, as well as the result of differences between estimated and actual proceeds. In addition, management expects that certain of the businesses to be disposed may be sold for gains; such gains will be recognized when realized.
In late 1993, the Company adopted a plan to divest the business units in its energy segment. This plan met the criteria for discontinued operations accounting treatment; accordingly, the financial statements and related notes present the Company's energy segment as discontinued operations.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1993, two such business units were sold for approximately $93 million, including the sale of one business unit to the Company's equity affiliate, TriMas, for $60 million cash. The expected loss from the disposition of the Company's energy segment resulted in a fourth quarter 1993 pre-tax charge of approximately $41 million (approximately $22 million after-tax), including a provision for the businesses not sold in 1993 and the deferral of a portion of the gain (approximately $6 million after-tax) related to the sale of the business to TriMas. Certain of the remaining business units were sold 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) relating to the charge established in 1993.
Selected financial information for the Company's discontinued energy segment is as follows for the period up to the decision to discontinue in 1993, and for the year ended December 31, 1992:
The unusual relationship of income taxes to pre-tax income in 1992 results principally from foreign losses for which no tax benefit was recorded.
Amounts included in the consolidated balance sheet for net assets of businesses held for disposition consist of the following at December 31, 1994 and 1993, after reflecting the anticipated loss on disposition:
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:
The carrying amount of investments in affiliates at December 31, 1994 and 1993 and quoted market values at December 31, 1994 for publicly traded affiliates (which may differ from the amounts that could have been realized upon disposition) are as follows:
In 1988, the Company transferred several businesses to TriMas, a publicly traded, diversified manufacturer of commercial, industrial and consumer products. In exchange, the Company received $128 million principal amount of 14% Subordinated Debentures (which were subsequently redeemed resulting in prepayment premium income to the Company of $9 million pre-tax in 1992), $70 million (liquidation value) of 10% Convertible Participating Preferred Stock and 9.3 million shares of TriMas common stock.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the second quarter of 1992, TriMas sold 9.2 million shares of newly issued common stock at $9.75 per share in a public offering, which reduced the Company's common equity ownership interest in TriMas to 28 percent from 41 percent. As a result, the Company recognized a pre-tax gain of $16.7 million from the change in the Company's common equity ownership interest in TriMas. In late 1993, the TriMas 10% Convertible Participating Preferred Stock held by the Company was converted at a conversion price of $9 per share into 7.8 million shares of TriMas common stock, increasing the Company's common equity ownership interest in TriMas to 43 percent. 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.
The Company's holdings in Emco Limited ("Emco") were acquired from Masco Corporation in 1993 (see "Shareholders' Equity" note). Emco is a major, publicly traded, Canadian-based manufacturer and distributor of building and other industrial products with annual sales of approximately $800 million.
At December 31, 1992, the Company had an approximate 47 percent common equity ownership interest in Titan Wheel International, Inc. ("Titan"), a manufacturer of wheels, tires and other products for agricultural, construction and other off-highway equipment markets. In May 1993, Titan completed an initial public offering of three million shares of common stock at $15 per share (including 292,000 shares held by the Company), reducing the Company's common equity ownership interest in Titan to 24 percent. The Company's ownership interest was further reduced in late 1993 to 21 percent as a result of the issuance of additional common shares by Titan in connection with an acquisition by Titan. These transactions resulted in 1993 gains aggregating approximately $12.8 million pre-tax (principally in the second quarter) as a result of the sale of shares held by the Company and from the change in the Company's common equity ownership interest in Titan.
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 America, Inc. ("Delco Remy"), a manufacturer of automotive electric motors and other components in which the Company acquired an interest in mid-1994.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Approximate combined condensed financial data of the Company's equity affiliates, including Delco Remy and Emco subsequent to the Company's investment in these affiliates, are as follows:
Equity and interest income from affiliates consists of the following:
PROPERTY AND EQUIPMENT, NET:
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense totalled $44 million, $48 million and $46 million in 1994, 1993 and 1992, respectively. These amounts include depreciation expense of approximately $8 million in each of 1993 and 1992 related to the discontinued energy segment.
ACCRUED LIABILITIES:
LONG-TERM DEBT:
In 1993, the Company entered into a new $675 million revolving credit agreement with a group of banks, replacing its prior bank credit agreement. During 1994, the Company amended this agreement, resulting in an extension of the due date to July 1998 from January 1997. 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, 1994).
The revolving credit agreement contains restrictions including limitations on intangible assets, ratio of senior debt to earnings and the ratio of debt to equity. At December 31, 1994, the unused portion of the revolving credit agreement was principally available to refinance the 10% Senior Subordinated Notes and other indebtedness. Cash dividends and any acquisition of Company Common Stock and Convertible Preferred Stock could be accomplished with future internal cash flows and through future reductions of cash investments and marketable securities.
In January 1994, the Company issued, in a public offering, $345 million of 4 1/2% Convertible Subordinated Debentures due December 15, 2003. These debentures are convertible into Company Common Stock at $31 per share. The net proceeds of approximately $337 million were used to redeem the $250 million of 10 1/4% Senior Subordinated Notes on February 1, 1994 and to reduce other indebtedness. In the fourth quarter of 1993, the Company recognized a $5.8 million pre-tax
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
extraordinary charge ($3.7 million after-tax) related to the call premium (1.25%) and unamortized prepaid debenture expense associated with the early extinguishment of the $250 million of 10 1/4% Senior Subordinated Notes. The 10% Senior Subordinated Notes are due March 15, 1995 but are classified as non-current at December 31, 1994 as the Company has the intent and the ability to maintain these borrowings on a long-term basis (due to available borrowings under the Company's 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 (in millions): 1995 -- $237; 1996 -- $1; 1997 -- $0; 1998 -- $316; and 1999 -- $0.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SHAREHOLDERS' EQUITY:
On March 31, 1993, the Company acquired from Masco Corporation 10 million shares of Company Common Stock, recorded at $100 million, $77.5 million of the Company's previously outstanding 12% Exchangeable Preferred Stock, and Masco Corporation's holdings of Emco Limited common stock and convertible debentures, recorded at $80.8 million. In exchange, Masco Corporation received $100 million (liquidation value) of the Company's 10% Exchangeable Preferred Stock, seven-year warrants to purchase 10 million shares of Company Common Stock at $13 per share, recorded at $70.8 million, and $87.5 million in cash. The transferable warrants are not exercisable by Masco Corporation if an exercise would increase Masco Corporation's common equity ownership interest in the Company above 35 percent. The cash portion of this transaction is included in the accompanying statement of cash flows as cash used for investing activities of $87.5 million. As part of this transaction, as modified in late 1993, Masco Corporation agreed to purchase from the Company, at the Company's option through March 1997, up to $200 million of subordinated debentures. In late 1993, the Company redeemed the 10% Exchangeable Preferred Stock for its $100 million liquidation value.
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. The net proceeds from this issuance were used to reduce the Company's indebtedness. On July 1, 1997, each of the then outstanding shares of the DECS will convert into one
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Beginning July 1, 1996, 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).
The Company's 6% Convertible Subordinated Debentures were called for redemption in late 1993. Substantially all holders, including Masco Corporation, exercised their right to convert these debentures into Company Common Stock (at a conversion price of $18 per share), resulting in the issuance of approximately 10.4 million shares of Company Common Stock.
During 1994, the Company repurchased and retired approximately four million shares of its common stock in open-market purchases, pursuant to a Board of Directors' authorized repurchase program. At December 31, 1994, the Company may repurchase approximately six million additional shares of Company Common Stock and Convertible Preferred Stock pursuant to this repurchase authorization.
The Company commenced paying cash dividends on its Common Stock in August 1993. On the basis of amounts paid (declared), cash dividends per Common Share were $.10 ($.11) in 1994 and $.04 ($.06) in 1993.
STOCK OPTIONS AND AWARDS:
For the three years ended December 31, 1994, stock option data pertaining to stock option plans for key employees of the Company and affiliated companies are as follows:
At December 31, 1994, 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.
Pursuant to restricted stock incentive plans, the Company granted long-term incentive awards, net, for 213,000, 202,000 and 251,000 shares of Company Common Stock during 1994, 1993 and 1992, respectively, to key employees of the Company and affiliated companies. The unamortized costs of
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
incentive awards, aggregating approximately $22 million at December 31, 1994, are being amortized over the ten-year vesting periods.
At December 31, 1994 and 1993, a combined total of 5,773,000 and 5,631,000 shares, respectively, of Company Common Stock were available for the granting of options and incentive awards under the above plans.
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 $9.8 million in 1994, $10.9 million in 1993 and $10.3 million in 1992, including approximately $.9 million in each of 1993 and 1992 related to the discontinued energy segment.
Net periodic pension cost for the Company's defined-benefit pension plans includes the following components for the three years ended December 31, 1994:
Major assumptions used in accounting for the Company's defined-benefit pension plans are as follows:
In 1995, the Company changed its assumption for the expected long-term rate of return on plan assets to 11 percent.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The funded status of the Company's defined-benefit pension plans at December 31, 1994 and 1993 is as follows (at December 31, 1994, no plans had assets which exceeded accumulated benefits):
Postretirement Benefits. The Company provides postretirement medical and life insurance benefits for certain of its active and retired employees.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106 ("SFAS 106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions", for its postretirement benefit plans. 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 the adoption of SFAS 106, the Company elected to recognize the transition obligation on a prospective basis and accordingly, the net transition obligation is being amortized over 20 years. Net periodic postretirement benefit cost includes the following components for the years ended December 31, 1994 and 1993:
The incremental cost in 1994 and 1993 of accounting for postretirement health care and life insurance benefits under SFAS 106, as compared to 1992, amounted to approximately $2 million in each year.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Postretirement benefit obligations, none of which is funded, are summarized as follows at December 31, 1994 and 1993:
The discount rates used in determining the accumulated postretirement benefit obligation were 8.5 percent and 7.0 percent in 1994 and 1993, respectively. The assumed health care cost trend rate in 1994 was 12 percent, decreasing to an ultimate rate in the year 2000 of seven percent. If the assumed medical cost trend rates were increased by one percent, the accumulated postretirement benefit obligation would increase by $2.1 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost would increase by $.3 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.
SEGMENT INFORMATION:
The Company's business segments involve the production and sale of the following:
Transportation-Related Products:
Precision products, generally produced using advanced metalworking technologies with significant proprietary content, and aftermarket products for the transportation industry.
Specialty Products:
Architectural -- Doors, windows, security grilles and office panels and partitions for commercial and residential markets.
Other -- Products manufactured principally for the defense industry.
Corporate assets consist primarily of cash and cash investments, marketable securities, equity and other investments in affiliates, notes receivable and net assets of the discontinued energy segment.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(A) Included within this segment are sales to one customer of $322 million, $324 million and $268 million in 1994, 1993 and 1992, respectively; sales to another customer of $225 million, $186 million and $184 million in 1994, 1993 and 1992, respectively; and sales to a third customer of $212 million, $222 million and $216 million in 1994, 1993 and 1992, respectively.
(B) Other income (expense), net in 1992, includes approximately $15 million to reflect disposition costs related to idle facilities and other long-term assets.
(C) Operating profit 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 business segments as follows: Transportation-Related Products -- $196 million; Architectural -- $116 million; and Other Specialty Products -- $75 million. The remaining $13 million of the charge is included in General Corporate Expense.
(D) Assets employed at December 31, 1994 include net assets related to the disposition of certain operations (see "Dispositions of Operations" note).
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, 1994 and 1993 are as follows:
Net current and net non-current assets of businesses held for disposition at December 31, 1994 include approximately $60 million of net deferred tax assets, including an expected net capital loss carryforward benefit of approximately $20 million. This capital loss is expected to be realized through the sale of common stock of equity affiliates that result in capital gains, or through the sale of businesses at a gain.
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 extraordinary income (loss):
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, 1994 and 1993 are as follows:
DERIVATIVES
The Company has limited involvement with derivative financial instruments, and does not use derivatives for trading purposes. The derivatives, principally consisting of S&P 500 futures contracts, are intended to reduce the market risk associated with the Company's marketable equity securities portfolio. The Company's investment in futures contracts increases in value as a result of decreases in the underlying index and decreases in value when the underlying index increases. The contracts are financial instruments (with off balance sheet market risk), as they are required to be settled in cash. At December 31, 1994 the notional amount of the derivatives was $33.2 million. The notional amounts do not represent the amounts exchanged by the parties, and thus are not a measure of the exposure of the Company through its use of derivatives. The Company's market risk is subject to the price differential between the contract market value and contract cost.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Futures contracts trade on organized exchanges, and as a result, settlement of such contracts has little credit risk. Initial margin requirements are met in cash or other instruments, and changes in the contract values are settled periodically. Initial margin requirements are recorded as cash investments in the balance sheet. Futures contracts are short-term in nature, usually less than six months. Related gains and losses are reported as income or loss in other income (expense) as part of marketable securities gain or loss. At December 31, 1994, based upon the current index, the Company's obligation amounted to $.3 million and is included in marketable securities.
INTERIM AND OTHER SUPPLEMENTAL FINANCIAL DATA (UNAUDITED):
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Results for the fourth quarter of 1994 include a non-cash pre-tax charge of $400 million ($315 million after-tax or $5.56 per common share in the fourth quarter of 1994) reflecting the anticipated loss on the disposition of certain businesses (see "Dispositions of Operations" note).
Net income (loss) for the fourth quarter of 1994 also includes income aggregating approximately $18 million pre-tax ($11.7 million after-tax or $.21 per common share) relating to the reversal of the charge established in the fourth quarter of 1993 for the disposition of the Company's energy segment (see "Dispositions of Operations" note).
Net income (loss) for the third quarter of 1994 includes $4.4 million pre-tax of extraordinary income ($2.6 million after-tax or $.04 per common share) related to the early extinguishment of convertible debt.
Results for the first, second and third quarters of 1994 include pre-tax gains of approximately $9.8 million, $7.1 million and $1.0 million, respectively, from the sale by the Company of a portion of its common stock holdings of an equity affiliate.
The 1994 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 and a lower dilutive effect from outstanding options and warrants on the year-to-date calculation.
Results for the second quarter of 1993 include pre-tax income of approximately $9 million as a result of gains associated with the sale of common stock through public offerings by equity affiliates. This income was largely offset by costs and expenses related to cost reduction initiatives, the restructuring of certain operations and product lines, adjustments to the carrying value of certain long-term assets, and other costs and expenses.
Results for the third quarter of 1993 were reduced by a charge of approximately $.04 per common share reflecting the increased 1993 federal corporate income tax rate.
The fourth quarter of 1993 net loss includes the effect of a $5.8 million pre-tax extraordinary loss ($3.7 million after-tax or $.06 per common share) related to the early extinguishment of subordinated debt (see "Long-Term Debt" note). The fourth quarter of 1993 net loss also includes an after-tax charge of approximately $22 million ($.38 per common share) related to the disposition of a segment of the Company's business (see "Dispositions of Operations" note).
The 1993 results include the benefit of approximately $11.5 million pre-tax income ($6.7 million after-tax or $.12 per common share), primarily in the third and fourth quarters, resulting from net gains from sales of marketable securities.
The 1993 income (loss) per common share amounts for the quarters do not total to the full year amounts due to the changes in the number of common shares outstanding during the year and the dilutive effect of first, second and third quarter 1993 results.
The calculation of earnings per common and common equivalent share for the fourth quarter of 1993 results in dilution for income from continuing operations, assuming full dilution. Therefore, the fully diluted earnings per share computation is used for all computations, even though the result is anti-dilutive for one of the per share amounts.
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, 1994 and 43 percent at December 31, 1993. The
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
interests of the other common shareholders are reflected below as "Equity of other shareholders of TriMas." All significant intercompany transactions have been eliminated.
FINANCIAL STATEMENT SCHEDULE
PURSUANT TO ITEM 14(A)(2)(II)(B) OF FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1994
Schedules, as required for the years ended December 31, 1994, 1993 and 1992:
MASCOTECH, INC.
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTES:
(A) Allowance of companies reclassified for businesses held for disposition in 1994, and for discontinuance of Energy-related segment in 1993.
(B) Deductions, representing uncollectible accounts written off, less recoveries of accounts written off in prior years.
EXHIBIT INDEX