ITEM 1. BUSINESS.
Masco Corporation is engaged principally in the manufacture, sale and installation of home improvement and building products. Masco believes that it is the largest domestic manufacturer of faucets, kitchen and bath cabinets and plumbing supplies and that it is a leading domestic producer of a number of other home improvement and building products. Masco was incorporated under the laws of Michigan in 1929 and in 1968 was reincorporated under the laws of Delaware. Except as the context otherwise indicates, the terms "Masco" and the "Company" refer to Masco Corporation and its consolidated subsidiaries.
The Company is among the country's largest manufacturers of brand name consumer products designed for the home improvement and home building industries. In addition to faucets, kitchen and bath cabinets and plumbing supplies, the Company manufactures and sells kitchen appliances, bath and shower enclosure units, spas and hot tubs, other shower, bath and plumbing specialties and accessories, door locks and other builders' hardware, air treatment products, venting and ventilating equipment and water pumps. These products are sold through mass merchandisers, home centers, hardware stores, distributors, wholesalers and other outlets to consumers and contractors. The Company also supplies and installs insulation and other building products direct to builders and consumers. The Company's operations are categorized into two industry segments: Kitchen and Bath Products and Other Specialty Products.
INDUSTRY SEGMENTS
The following table sets forth for the three years ended December 31, 1997, the contribution of the Company's industry segments to net sales and operating profit:
(1) Results exclude the home furnishings products segment, which was classified as discontinued operations in 1995 and sold in 1996. See the Note to the Company's Consolidated Financial Statements captioned "Discontinued Operations," included in Item 8 of this Report.
(2) Amounts are before general corporate expense.
Additional financial information concerning the Company's operations by industry segments as of and for the three years ended December 31, 1997 is set forth in the Note to the Company's Consolidated Financial Statements captioned "Segment Information," included in Item 8 of this Report.
KITCHEN AND BATH PRODUCTS
The Company manufactures a variety of single and double handle faucets. DELTA(R) and PEERLESS(R) single and double handle faucets are used on kitchen, lavatory and other sinks and in bath and shower installations. DELTA faucets are sold through manufacturers' representatives to major
retail accounts and to distributors who sell the faucets to plumbers, building contractors, remodelers, smaller 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) faucets and accessories are produced for the decorator markets and are sold through wholesalers, distributor showrooms and other outlets. ALSONS(R) hand showers and shower heads and MIXET(R) valves and accessories are distributed through manufacturers' representatives to the wholesale market and to retailers.
Sales of faucets worldwide approximated $815 million in 1997, $757 million in 1996 and $698 million in 1995. The percentage of operating profit on faucets is somewhat higher than that on other products offered by the Company. The Company believes that the simplicity, quality and reliability of its faucet mechanisms, manufacturing efficiencies and capabilities, its marketing and merchandising activities, and the development of a broad line of products have accounted for the continued strength of its faucet sales. Management believes that Masco's faucet operations hold a leadership position in the United States market. The faucet market in the United States is very competitive, with Moen, Price Pfister, Sterling and American Standard as major brand competitors. Competition from import products is also a factor in the Company's markets.
The Company manufactures economy, 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), QUALITY CABINETS(R), STARMARK(R) and FIELDSTONE(R), with sales to distributors, home centers, dealers and direct to builders for both the home improvement and new construction markets. In addition to its domestic manufacturing, the Company manufactures cabinetry in Germany, where sales are made primarily through Company-owned showrooms to consumers, and in England, with sales primarily to builders for the new construction market. Sales of kitchen and bath cabinets were approximately $1,083 million in 1997, $832 million in 1996 and $758 million in 1995. During 1997, the Company acquired Texwood Industries, Inc., a domestic manufacturer of kitchen and bath cabinetry. Management believes that the Company is the largest manufacturer of kitchen and bath cabinetry in the United States. Significant competitors are American Woodmark Corporation, Aristokraft, Inc., WCI Group and Triangle Pacific Corporation.
The Company's brass and copper plumbing system components and other plumbing specialties are sold to plumbing, heating and hardware wholesalers and to home centers, hardware stores, building supply outlets and other mass merchandisers. These products are marketed for the wholesale trade under the BRASSCRAFT(R) trademark and for the "do-it-yourself" market under the PLUMB SHOP(R), HOME PLUMBER(R) and MELARD(TM) trademarks and are also sold under private label.
Other Kitchen and Bath Products sold by the Company include THERMADOR(R) cooktops, ovens, ranges and related cooking equipment and refrigerators, which are marketed through appliance distributors and dealers. The Company's AQUA GLASS(R) acrylic and gelcoat bath and shower units and whirlpools are sold primarily to wholesale plumbing distributors for use in the home improvement and new home construction markets. Other bath and shower enclosure units, shower trays and laundry tubs are sold to the home improvement market through hardware stores and home centers under the brand names AMERICAN SHOWER & BATH(TM) and TRAYCO(TM). HUPPE(R) luxury bath and shower enclosures are manufactured and sold by the Company through wholesale channels primarily in Germany. The Company manufactures bath and shower accessories, vanity mirrors and bath storage products and sells these products under the brand name ZENITH PRODUCTS(R) and other trademarks to home centers, hardware stores and mass merchandisers for the "do-it-yourself" market. The Company's spas and hot tubs are sold under the brand name HOT SPRING SPA(R) and other trademarks directly to retailers for sale to residential customers. In early 1997, the Company acquired Franklin Brass Manufacturing Company, a leading manufacturer of bath accessories and bath safety products.
Direct sales to home center retailers in all of the Company's product lines have been increasing in recent years, and in 1997 sales to The Home Depot were $392 million, approximately 10 percent of the
Company's 1997 sales volume. Builders, distributors, wholesalers and other retailers represent other channels of distribution for the Company's products.
OTHER SPECIALTY PRODUCTS
The Company's Other Specialty Products include premium BALDWIN(R) quality brass trim and mortise lock sets, knobs and trim and other builders' hardware which are manufactured and sold for the home improvement and new home construction markets. WEISER(R) lock sets and related hardware are sold through contractor supply outlets, hardware distributors and home centers. SAFLOK(TM) electronic lock sets and WINFIELD(TM) mechanical lock sets are sold primarily to the hospitality market. During 1997, the Company acquired LaGard Inc., whose electronic lock sets are used primarily by the banking industry on safes, ATMs, vaults and cabinetry, and Liberty Hardware Manufacturing Corporation, a producer of quality cabinet and builders' hardware. Key domestic competitors to Baldwin and Weiser in the lock set business are Black & Decker Corporation and Schlage Lock Company. Imported products are also becoming a major factor in this market.
The Company has recently begun to incorporate on many of its decorative brass faucets and other products a durable coating that offers anti-tarnish protection, under the trademarks BRILLIANCE(R) and THE LIFETIME FINISH FROM BALDWIN(R). This innovative finish is currently available on certain of the Company's kitchen and bath products and door hardware.
The Company manufactures ventilation products under the trademark AMP(R), including grilles, registers, diffusers and humidifiers which are sold through wholesale distribution and home centers. GEBHARDT(TM) commercial ventilating products and JUNG(TM) water pumps are manufactured and distributed by the Company in Europe. Through local offices of Gale Industries, Inc. in various parts of the United States, the Company also supplies and installs insulation and other building products primarily for the residential home building industry.
COMPETITIVE FACTORS
The major domestic and foreign markets for the Company's products are highly competitive. Competition in all of the Company's product lines is based primarily on performance, quality, style, delivery, customer service and price, with the relative importance of such factors varying among products. A number of companies of varying size compete with one or more of the Company's product lines.
GENERAL INFORMATION
No material portion of the Company's business is seasonal or has special working capital requirements, although the Company maintains a higher investment in inventories for certain of its businesses than the average manufacturing company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Cash Flows from Operating Activities," included in Item 7 of this Report. The Company does not consider backlog orders to be material and no material portion of its business is 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
Through its subsidiaries, the Company also has home improvement and building products manufacturing plants in Austria, Belgium, Canada, Denmark, England, France, Germany, Italy, Mexico, Poland, Spain, Taiwan and Turkey. Home improvement and building products manufactured by the Company outside of the United States include faucets and accessory products, bath and shower
enclosures, bath accessories, kitchen and bath cabinets, decorative accessories, door lock sets and related hardware, floor registers, humidifiers, ventilating equipment, submersible water pumps and special insulation materials. The Company's European operations were expanded through the recent acquisition of three manufacturers. In 1997, the Company acquired The SKS Group, a leading German manufacturer and distributor of roller shutters and aluminum balcony railings, and The Alvic Group, a leading Spanish manufacturer and distributor of kitchen and bath cabinetry and components. In early 1998, the Company acquired Vasco Corporation, a leading European manufacturer of residential decorative hydronic radiators and heat convectors, based in Belgium.
The Company's foreign operations are subject to political, monetary, economic and other risks attendant generally to international businesses. These risks generally vary from country to country. Financial information concerning the Company's export sales and foreign and domestic operations, including the net sales, operating profit and assets which are attributable to the Company's operations in North America and in other geographic areas, as of and for the three years ended December 31, 1997, is set forth in Item 8 of this Report in the Note to the Company's Consolidated Financial Statements captioned "Segment Information."
PATENTS AND TRADEMARKS
The Company holds a number of United States and foreign patents covering various design features and valve constructions used in certain of its faucets, and also holds a number of other patents and patent applications, licenses, trademarks and tradenames. As a manufacturer of brand name consumer products, the Company views its trademarks and other proprietary rights as important, but does not believe that there is any reasonable likelihood of a loss of such rights that would have a material adverse effect on the Company's present business as a whole.
EMPLOYEES
At December 31, 1997, the Company employed approximately 28,100 people. Satisfactory relations have generally prevailed between the Company and its employees.
EQUITY INVESTMENTS
Information about the Company's equity investments is also set forth in the Note to the Company's Consolidated Financial Statements captioned "Equity Investments in Affiliates" included in Item 8 of this Report.
MascoTech, Inc.
In 1984, the Company 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 the Company distributed to its stockholders certain shares of MascoTech common stock as a special dividend. In October 1996, the Company reduced its common equity interest in MascoTech from 45 percent to 21 percent through the sale to MascoTech of MascoTech common stock and warrants to purchase shares of MascoTech common stock for total consideration of approximately $266 million. Payment of $115 million of the purchase price was made in cash at closing and the balance of approximately $151 million was paid by MascoTech on September 30, 1997, in accordance with its agreement, in the form of 9.9 million shares (approximately 42%) of the outstanding common stock of Emco Limited and $45.6 million in cash. As part of that transaction, the Company granted MascoTech a right of first refusal, which expires September 30, 2000, to purchase the remaining shares of MascoTech common stock held by the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in Item 7 of this Report, regarding the effect of this transaction on the Company. Emco is a Canadian manufacturer and distributor of home improvement and building products. See the discussion of "Emco Limited" below. MascoTech's conversion of its
outstanding preferred stock into MascoTech common stock in mid-1997 further reduced the Company's ownership in MascoTech to approximately 17 percent.
MascoTech is a leading supplier of metalworked components primarily for vehicle engine and drivetrain applications and automotive aftermarket products for the transportation industry. MascoTech's net sales for 1997 were approximately $922 million. Approximately 72 percent of MascoTech's transportation-related products sales in 1997 were original equipment automotive products and services.
In January 1998, MascoTech acquired the remaining 63 percent of TriMas Corporation that it did not previously own, including approximately 1.6 million shares (4%) owned by the Company, for approximately $920 million. TriMas is a diversified proprietary products company with leadership positions in commercial, industrial and consumer niche markets. TriMas had sales of approximately $668 million and net income of approximately $66 million for the twelve months ended December 31, 1997.
TriMas' products include specialty fasteners, towing systems, specialty container products and other industrial products.
Emco Limited
The Company owns approximately 42 percent of the outstanding common stock of Emco Limited, as a result of the transactions described above under "Equity Investments -- MascoTech, Inc." Emco is a leading Canadian distributor and manufacturer of building products for the residential, commercial and industrial construction markets, including roofing materials, wood fiber products and sinks, and a distributor of plumbing and related products. Emco had sales of CDN $1.26 billion for the twelve months ended December 31, 1997.
Hans Grohe
The Company has a 27 percent partnership interest in Hans Grohe GmbH & Co. KG, a German manufacturer of faucets, handheld showers, shower heads, shower cabins and other shower accessories.
ITEM 2.
ITEM 2. PROPERTIES.
The following list sets forth the location of the Company's principal manufacturing facilities and identifies the industry segments utilizing such facilities.
Industry segments identified in the preceding table are: (1) Kitchen and Bath Products and (2) Other Specialty Products. Multiple footnotes within the same parentheses indicate that significant activities relating to both segments are conducted at that location.
The three principal faucet manufacturing plants are located in Greensburg, Indiana, Chickasha, Oklahoma and Jackson, Tennessee. The faucet manufacturing plants and the majority of the Company's
other manufacturing facilities range in size from approximately 10,000 square feet to 900,000 square feet. The Company owns most of its manufacturing facilities and none of the Company-owned properties is subject to significant encumbrances. In addition to its manufacturing facilities, the Company operates approximately 90 facilities (the majority of which are leased) which supply and install insulation and other building products. The Company's corporate headquarters are located in Taylor, Michigan and are owned by the Company. An additional building near its corporate headquarters is used by the Company's corporate research and development department.
The Company's buildings, machinery and equipment have been generally well maintained, are in good operating condition, and are adequate for current production requirements.
The following list sets forth the location of MascoTech's principal manufacturing facilities, and reflects its early 1998 acquisition of TriMas.
MascoTech's principal manufacturing facilities range in size from approximately 10,000 square feet to 420,000 square feet, substantially all of which are owned by MascoTech and are not subject to significant encumbrances. The MascoTech executive offices are located in Taylor, Michigan, and are provided by the Company to MascoTech under a corporate services agreement.
MascoTech's buildings, machinery and equipment have been generally well maintained, are in good operating condition, and are adequate for current requirements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to claims and litigation in the ordinary course of business, but does not believe that any such claim or litigation will have a material adverse effect on its consolidated financial position.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
SUPPLEMENTARY ITEM. EXECUTIVE OFFICERS OF REGISTRANT (PURSUANT TO INSTRUCTION 3 TO ITEM 401(B) OF REGULATION S-K).
Executive officers, who are elected by the Board of Directors, serve for a term of one year or less. Each elected executive officer has been employed in a managerial capacity with the Company for over five years except for Messrs. Foley and Gargaro and Dr. Bauder. Mr. Foley was employed by MascoTech, Inc. as its Vice President -- Human Resources from 1994 to 1996 and was President of Executive Business Partners, Inc., a training and consulting firm, from 1993 to 1994. Mr. Gargaro joined the Company as its Vice President and Secretary in October, 1993. Prior to joining the Company, Mr. Gargaro was a partner at the Detroit law firm of Dykema Gossett PLLC. Mr. Gargaro has served as a director and Secretary of MascoTech, Inc. since 1984. From 1984 to 1996, Dr. Bauder served as President and Chief Executive Officer of Cranbrook Educational Community.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The New York Stock Exchange is the principal market on which the Company's Common Stock is traded. The following table indicates the high and low sales prices of the Company's Common Stock as reported on the New York Stock Exchange Composite Tape and the cash dividends declared per share for the periods indicated:
On March 13, 1998, there were approximately 6,400 holders of record of the Company's Common Stock.
The Company expects that its practice of paying quarterly dividends on its Common Stock will continue, although future dividends will continue to depend upon the Company's earnings, capital requirements, financial condition and other factors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth summary consolidated financial information for the Company's continuing operations, for the years and dates indicated:
(1) The year 1994 includes a $79 million after-tax ($.49 per diluted share) non-cash equity investment charge.
(2) Income from continuing operations per share prior to 1997 have been restated to conform to the 1997 presentation.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The financial and business analysis below provides information which the Company believes is relevant to an assessment and understanding of the Company's consolidated financial position and results of operations. This financial and business analysis should be read in conjunction with the consolidated financial statements and related notes.
The following discussion and other sections of this Report on Form 10-K contain statements reflecting the Company's views about its future performance and constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. These views involve risks and uncertainties that are difficult to predict and may cause the Company's actual results to differ materially from the results discussed in such forward-looking statements. Readers should consider that various factors including those discussed in the "Overview" and "Outlook for the Company" sections below may affect the Company's ability to attain the projected performance. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
OVERVIEW
The Company is engaged principally in the manufacture, sale and installation of home improvement and building products. These products are sold to the home improvement and home construction markets through mass merchandisers, home centers, hardware stores, distributors, wholesalers and other outlets for consumers and contractors.
Factors which affect the Company's results of operations include the levels of home improvement and residential construction activity principally in the U.S. and Europe (including repair and remodeling and new construction), cost management, fluctuations in European currencies (primarily the German Deutsche Mark and British Pound), the increasing importance of home centers as distributors of home improvement and building products and the Company's ability to maintain its leadership positions in its markets with increasing global competition. Historically, the Company has been able to largely offset cyclical declines in housing markets through new product introductions and acquisitions as well as market share gains.
Net sales and operating profit from continuing operations for 1997 were $3,760 million and $587 million, representing increases of 16 percent and 22 percent, respectively, over 1996. Net income from continuing operations for 1997 was $382 million representing an increase of 30 percent over 1996. Basic and diluted earnings per share for 1997 were $2.39 and $2.30, respectively, representing increases of 28 percent and 26 percent, respectively, over 1996 amounts. Increases in net sales typically result in operating profit improvements that exceed the net sales increases on a percentage basis due to the allocation of fixed and semi-fixed costs and expenses over a higher sales base.
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 and expenses 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.
During 1997, the Company acquired Texwood Industries, Inc., a U.S. manufacturer of kitchen and bath cabinetry, and five other home improvement and building products companies, including two companies in Europe.
The results of operations for these acquisitions are included in the consolidated financial statements from the dates of acquisition. Had these companies been acquired effective January 1, 1996, pro forma unaudited consolidated net sales and net income would have approximated $3,909 million and $390 million for 1997 and $3,575 million and $309 million for 1996, respectively, and pro forma
unaudited consolidated diluted earnings per share would have approximated $2.33 and $1.87 for 1997 and 1996, respectively.
The combined purchase price for these acquisitions, including assumed debt, aggregated approximately $430 million and included approximately 2.9 million shares of Company common stock valued at approximately $119 million, with the balance in cash and a short-term note. The acquisitions were accounted for as purchase transactions.
DISCONTINUED OPERATIONS
In late November 1995, the Company's Board of Directors approved a formal plan to dispose of the Company's home furnishings products segment. An aggregate provision of $650 million was recorded in the fourth quarter of 1995 for the estimated loss on the discontinued operations through the expected disposal date, the reduction of assets to their estimated net realizable value and the anticipated liabilities related to the disposal. The majority of the charge from the disposition of the home furnishings products segment resulted in a capital loss for tax purposes. The ultimate tax benefit from the disposition cannot be determined currently and is reported if and when taxable capital gains are realized.
During August 1996, the Company completed the sale of its home furnishings products segment to Furnishings International Inc. Total proceeds to the Company from the sale were $1,050 million with approximately $708 million of the purchase price in cash. The balance consisted of $285 million of 12 percent pay-in-kind junior debt securities, and equity securities totalling $57 million, consisting of 13 percent cumulative preferred stock, with a stated value of $55 million, 15 percent of the common stock of Furnishings International and convertible preferred stock.
The junior debt securities mature in 2008; the Company is recording the 12 percent pay-in-kind interest income from these securities. The Company records dividend income from the 13 percent cumulative preferred stock when such dividends are declared. The convertible preferred stock represents transferable rights for up to a 25 percent common ownership, although the Company is restricted from maintaining an ownership in excess of 20 percent of Furnishings International's common equity. As such, the Company will not acquire additional common equity, except for purposes of resale only. Of the cash proceeds received from this sale, approximately $550 million was applied to reduce bank debt.
Under a transitional services agreement, the Company provided corporate-related services for a fee to Furnishings International through April 1997. Substantially all of these services were discontinued after such date.
PROFIT MARGINS
Operating profit margin, before general corporate expense, improved to 17.8 percent in 1997 from 17.5 percent in 1996 and 16.8 percent in 1995 (general corporate expense includes those expenses not specifically attributable to the Company's business segments). The improvement in 1997 is principally due to a reduction in selling, general and administrative expenses as a percentage of sales. The Company's operating margin from faucet sales is somewhat higher than that on other products offered by the Company due to the simplicity, quality and reliability of its faucet mechanisms, manufacturing efficiencies and capabilities, extensive marketing and merchandising activities and breadth of product offering.
General corporate expense in 1997 was $82 million, as compared with $85 million in 1996 and $90 million in 1995. General corporate expense as a percentage of sales decreased to 2.2 percent in 1997 from 2.6 percent in 1996 and 3.1 percent in 1995. Operating profit margin, after general corporate expense, was 15.6 percent, 14.8 percent and 13.7 percent in 1997, 1996 and 1995, respectively.
Net income from continuing operations as a percentage of sales increased to 10.2 percent in 1997 from 9.1 percent and 6.8 percent in 1996 and 1995, respectively. After-tax profit return on shareholders'
equity as measured by net income from continuing operations increased to 20.8 percent in 1997 from 17.8 percent and 9.4 percent in 1996 and 1995, respectively.
FINANCIAL CONDITION
Over the years, the Company has largely funded its growth through cash provided by a combination of operations and long-term bank and other borrowings, and by the issuance of common stock for certain acquisitions. At December 31, 1997, the Company's shelf-registration statement permits the issuance of up to a combined $759 million of debt and equity securities.
Bank credit lines are maintained to ensure availability of short-term funds on an as-needed basis. At December 31, 1997, the Company had available $750 million under its bank revolving-credit facility. Any outstanding balances under this facility are due and payable in November 2001. Certain debt agreements contain limitations on additional borrowings and requirements for maintaining a certain level of tangible net worth. At December 31, 1997, the Company was in compliance with these limitations and requirements, and the Company's tangible net worth exceeded the most restrictive of such provisions by approximately $171 million.
Maintaining high levels of liquidity and cash flow are among the Company's financial strategies. The Company's long-term debt as a percent of total capitalization ratio improved to approximately 36 percent at December 31, 1997 from approximately 39 percent at December 31, 1996. (On a pro forma basis, the Company's long-term debt as a percent of total capitalization ratio would have been approximately 32 percent, assuming conversion of the Company's $178 million of convertible debentures; this conversion was completed in February 1998.) Aggregate short-term and long-term debt at December 31, 1997 was $146 million higher than the 1996 aggregate amount due primarily to acquisition-related debt. The Company's working capital ratio was 2.6 to 1 at December 31, 1997 compared with 2.8 to 1 at December 31, 1996; excluding a $53 million short-term, acquisition-related note payable which was paid in early 1998, the Company's working capital ratio was 2.8 to 1 at December 31, 1997.
CASH FLOWS
Significant sources and uses of cash in the past three years are shown in the following table, in thousands:
CASH FLOWS FROM OPERATING ACTIVITIES
Continuing operations generated $64.9 million and $144.1 million more cash in 1997 than in 1996 and 1995, respectively, primarily due to increased earnings. During 1997, the Company's accounts receivable and inventories increased by $92.2 million and $103.1 million, respectively, primarily as a
result of acquisitions and higher actual and anticipated sales volume. 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 benefiting from larger, more cost-effective purchasing.
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES
Investing activities of continuing operations used cash of $313.6 million in 1997 compared with cash provided from investing activities of $564.8 million in 1996. Cash flows from investing activities for 1996 included an aggregate $822.6 million of cash proceeds from the sales of discontinued operations and certain MascoTech, Inc. investments.
During October 1996, the Company completed the sale to MascoTech of 17 million shares of MascoTech common stock and warrants to purchase 10 million shares of MascoTech common stock. Under the sale agreement, the Company received approximately $266 million, with $115 million cash paid at closing. The $151 million balance of the consideration was paid by MascoTech to the Company on September 30, 1997; as provided for in the sale agreement, MascoTech at that date delivered to the Company 9.9 million shares (approximately 42 percent) of the outstanding common stock of Emco Limited and $45.6 million in cash. MascoTech recognized a $29.3 million after-tax gain from the delivery to the Company of the Emco Limited common stock. The Company's recording of equity earnings from MascoTech for 1997 excludes the effect of such gain due to the related-party nature of the transaction. Emco Limited is a leading Canadian distributor and manufacturer of home improvement and building products. MascoTech holds an option, expiring in 2002, to require the Company to purchase up to $200 million aggregate amount of subordinated debt securities of MascoTech.
For the 1997 acquisitions of Texwood Industries and five other companies, the combined purchase price was approximately $430 million, including the assumption of debt and issuance of a short-term note aggregating $123 million, 2.9 million shares of Company common stock valued at approximately $119 million and $187 million of cash paid.
Capital expenditures totalled $167.4 million in 1997 compared with $138.5 million in 1996. These amounts primarily pertain to expenditures for additional facilities related to increased demand for existing products as well as for new Masco products. The Company also continues to invest in automating its manufacturing operations and increasing its productivity, in order to be a more efficient producer and improve customer service and response time. The Company expects capital expenditures for 1998, excluding those of potential 1998 acquisitions, to approximate the 1997 level. Depreciation and amortization expense for 1997 totalled $116.1 million, compared with $99.7 million for 1996; for 1998, depreciation and amortization expense, excluding 1998 acquisitions, is expected to be approximately $128 million.
Costs of environmental responsibilities and compliance with existing environmental laws and regulations have not had, nor in the opinion of the Company are they expected to have, a materially adverse effect on the Company's capital expenditures, financial position, or results of operations.
CASH FLOWS FOR FINANCING ACTIVITIES
Cash used for financing activities decreased to $123.8 million in 1997 from $491.7 million in 1996. During 1996, the Company paid the $250 million of 9 percent notes due April 15, 1996 through borrowings under its bank revolving-credit agreement and applied approximately $550 million of the proceeds from the 1996 sale of the home furnishings products segment to reduce bank debt.
During 1997, the Company increased its dividend rate 5 percent to $.21 per share quarterly. This marks the 39th consecutive year in which dividends have been increased.
The Company believes that its present cash balance and cash flows from operations are sufficient to fund its near-term working capital and other investment needs. The Company believes that its longer-term working capital and other general corporate requirements will be satisfied through cash
flows from operations and, to the extent necessary, future financial market activities, from proceeds from assets sales and from bank borrowings.
CONSOLIDATED RESULTS OF OPERATIONS
Sales and Operations
Net sales for 1997 were $3,760 million, representing an increase of 16 percent over 1996. After adjusting for acquisitions, net sales for 1997 increased 7 percent over 1996. After adjusting for acquisitions, net sales of the Company's North American operations for 1997 increased 8 percent over 1996. Net sales for 1996 increased 11 percent to $3,237 million from $2,927 million in 1995; after adjusting for acquisitions and the divestiture of two small operations, net sales increased 7 percent in 1996 over 1995.
Cost of sales as a percentage of sales for 1997 remained unchanged at 63.3 percent compared with 1996 when it increased from 63.1 percent for 1995. The modest increase in the cost of sales percentage for 1997 and 1996 as compared with 1995 was primarily attributable to softness in the Company's European markets, expenses associated with manufacturing process improvement initiatives and product sales mix, which offset the benefits resulting from increased sales volume and new product introductions.
Excluding amortization of acquired goodwill ($18.7 million, $12.1 million, and $10.0 million in 1997, 1996 and 1995, respectively), selling, general and administrative expenses as a percentage of sales were 20.6 percent in 1997 compared with 21.5 percent and 22.8 percent for 1996 and 1995, respectively. The downward trend in the selling, general and administrative expenses percentage results from the Company's continuation of cost-containment initiatives, the substitution of contingent incentive-based compensation for the reduction in fixed compensation for certain executives and the leverage of fixed and semi-fixed costs over a higher sales base. The Company expects selling, general and administrative expenses as a percentage of sales to approximate 20.0 percent by the end of 1998.
Other Income (Expense), Net
Equity earnings from MascoTech, Inc. in 1997 reflect the Company's mid-1997 and late-1996 reductions in common equity ownership. Equity earnings from MascoTech were $14.6 million for 1997 as compared with equity earnings of $13.9 million and $18.2 million for 1996 and 1995, respectively. Equity earnings from MascoTech in 1996 include the Company's $11.7 million pre-tax equity share of MascoTech's loss from the sale of its metal stamping businesses.
During the second quarter of 1997, MascoTech effected conversion of all of its publicly held outstanding convertible preferred stock with the issuance of approximately 10 million shares of its common stock. This conversion reduced the Company's common equity ownership in MascoTech to 17 percent from 21 percent, and increased the Company's equity in MascoTech's net book value by approximately $29.5 million. As a result, the Company recognized a pre-tax gain of $29.5 million during the second quarter of 1997.
During 1996, the Company recognized a $67.8 million net pre-tax gain ($40.7 million after-tax) from the fourth quarter 1996 sale to MascoTech of 17 million shares of MascoTech common stock and warrants to purchase 10 million shares of MascoTech common stock. This gain was largely offset by $36.3 million of fourth quarter 1996 charges primarily related to adjustments of miscellaneous assets to their estimated fair value.
Included in other, net under other income (expense), net is income from cash and cash investments of $17.3 million, $6.9 million and $2.6 million for 1997, 1996 and 1995, respectively; the increase in 1997 resulted from a higher average cash and cash investments balance during 1997 as compared with 1996 and 1995. The Company's cash balance for 1997 included residual proceeds from transactions in the latter part of 1996, including the sale of certain MascoTech investments, the sale of the Company's home furnishings businesses and European borrowings.
Included in other, net under other income (expense), net is interest income for 1997 and 1996 of $36.8 million and $14.0 million, respectively, from the 12% pay-in-kind junior debt securities of Furnishings International Inc. Such interest income began to accrue in August 1996 upon the sale of the Company's home furnishings businesses. Also included in other, net in 1997 and 1996 is interest income of $7.5 million and $1.7 million, respectively, from the $151 million note receivable from MascoTech, which was paid on September 30, 1997.
Included in other, net under other income (expense), net in 1997 are $10.8 million of dividend income from the Company's investment in Furnishings International's 13% cumulative preferred stock, net gains aggregating approximately $28 million related to the sales of certain assets and charges aggregating approximately $30 million, principally for the adjustment of the Company's Payless Cashways investment to its estimated fair value.
Included in other, net under other income (expense), net for 1995 was a $15.9 million gain from the sale of the Company's investment in Formica Corporation; this gain was offset primarily by charges for asset disposals.
Net Income and Earnings Per Share
After-tax income from continuing operations for 1997 was $382 million compared with $295 million for 1996 and $200 million for 1995. Basic and diluted earnings per share from continuing operations for 1997 were $2.39 and $2.30, respectively, as compared with basic and diluted earnings per share from continuing operations of $1.87 and $1.82 and $1.28 and $1.25, respectively, for 1996 and 1995. The Company's effective tax rate decreased to 39.4 percent in 1997 from 41.3 percent in 1996 due to the net utilization of the Company's capital loss carryforward benefit, recognized primarily in the fourth quarter of 1997. The 1995 tax rate of 43.1 percent was higher due primarily to an increase in higher-taxed foreign income as a percentage of total income. The Company estimates that its effective tax rate will approximate 40 percent for 1998.
OUTLOOK FOR THE COMPANY
Assuming that the U.S. economy maintains its present rate of moderate growth and interest rates remain relatively stable, the Company expects further increases in both sales and earnings for 1998. The Company believes that its results will be favorably affected in the future with its efforts to: continue to invest in new manufacturing technologies and productivity improvement initiatives in order to contain costs and increase efficiency; maintain a lower level of selling, general and administrative expenses, as a percent of sales; introduce new products and marketing initiatives to increase market share and share of customer; and to actively pursue acquisition candidates that complement or support the Company's core competencies.
NET SALES BY PRODUCT GROUP AND GEOGRAPHIC AREA
The following table sets forth the Company's net sales from continuing operations by product group and geographic area, in millions.
BUSINESS SEGMENT RESULTS
Kitchen and Bath Products
Net sales of the Company's Kitchen and Bath Products increased 17 percent in 1997 over 1996 and 10 percent in 1996 over 1995; after adjusting for acquisitions, net sales increased 7 percent for each of the last two years, 1997 over 1996 and 1996 over 1995. These increases are largely due to higher unit sales volume of cabinets, faucets and other kitchen and bath products, and to a lesser extent, new product introductions and selling price increases.
Operating profit of the Company's Kitchen and Bath Products, before general corporate expense, was $539 million, $462 million and $411 million in 1997, 1996 and 1995, respectively. Operating margin, before general corporate expense, remained unchanged at 18.3 percent for 1997 and 1996 compared with 18.0 percent in 1995. Higher unit sales volumes in 1997 contributed to improved operating results of the Company's U.S. cabinet, other kitchen and bath and faucet businesses, including the leveraging of fixed and semi-fixed selling, general and administrative expenses over a higher sales base. These improved results were offset by the weaker results of the Company's European operations included in this segment and the modestly lower margins of companies acquired in 1997.
Operating results of this business segment showed a net improvement in 1996 over 1995 as a result of higher unit sales volume, increased efficiency and utilization of new and existing manufacturing facilities and the leverage of fixed and semi-fixed selling, general and administrative expenses over a higher sales base, which more than offset the modestly weaker results of the Company's U.S. cabinet businesses and the lower results of European operations. Operating results of the Company's U.S. cabinet businesses were modestly weaker in 1996 and 1995 due to the influence of a higher percentage of lower margin sales to total sales and the recognition of certain expenses for various initiatives undertaken to improve manufacturing processes and customer service and to shorten product delivery time.
Other Specialty Products
Net sales of the Company's Other Specialty Products increased 14 percent in 1997 over 1996 and 11 percent in 1996 over 1995. After adjusting for acquisitions, net sales increased 7 percent in 1997 over 1996 and, after adjusting for acquisitions and divestitures, increased 7 percent in 1996 over 1995. Operating profit of the Company's Other Specialty Products, before general corporate expense, was
$130 million, $104 million, and $82 million in 1997, 1996 and 1995, respectively. Operating margin, before general corporate expense, improved to 15.9 percent in 1997 from 14.5 percent in 1996 and 12.7 percent in 1995.
The upward trend in operating results for this segment principally includes the benefits of higher installation sales of fiberglass insulation and higher unit sales volume of mechanical and electronic lock sets. Operating results of this segment benefited in 1996 from the leverage of fixed and semi-fixed selling, general and administrative expenses over a higher sales base and the divestiture of two underperforming operations. Operating results were negatively affected in 1997, 1996 and 1995 by lower results of European operations.
GEOGRAPHIC AREA RESULTS
North America
Net sales of North American operations increased 15 percent in 1997 over 1996 and 10 percent in 1996 over 1995. Net sales of North American operations, after adjusting for acquisitions, increased 8 percent in 1997 over 1996 and, after adjusting for acquisitions and divestitures, increased 9 percent in 1996 over 1995. Operating profit from North American operations, before general corporate expense, was $570 million, $479 million and $407 million for 1997, 1996 and 1995, respectively. Operating margin, before general corporate expense, improved to 18.6 percent in 1997 from 17.9 percent in 1996 and 16.7 percent in 1995.
Operating results of North American operations in 1997 and 1996 benefited from higher sales volume which was partly driven by an increase in U.S. housing transactions, including higher levels of new construction and existing home sales. Operating results of North American operations in 1995 were lower, in part due to plant start-up costs related to a major new faucet facility and product sales mix. Operating results of the Company's Canadian operations improved in 1997 over 1996 after being relatively flat in 1996 over 1995.
Europe
Net sales of European operations increased 24 percent in 1997 over 1996 and 15 percent in 1996 over 1995; after adjusting for acquisitions, net sales decreased 5 percent in 1997 as compared with 1996 and decreased 1 percent in 1996 as compared with 1995. Operating profit from European operations, before general corporate expense, was $99 million, $87 million and $86 million for 1997, 1996 and 1995, respectively. Operating margin from European operations, before general corporate expense, decreased to 14.4 percent in 1997 following a decline to 15.6 percent in 1996 from 17.7 percent in 1995.
Results of European operations were lower over the past three years, in part due to softness in the Company's European markets beginning in mid-1995, competitive pricing pressures on certain products and the influence of a higher percentage of lower margin sales to total sales. In addition, a stronger U.S. dollar had a negative effect on the translation of European results in 1997 compared with 1996 and 1996 compared with 1995, lowering European net sales by approximately 12 percent and 3 percent, respectively. Excluding acquisitions, net sales of European operations increased approximately 6 percent in local currencies.
OTHER MATTERS
The Company is currently working to resolve the potential impact of the year 2000 on the processing of date-sensitive information by the Company's computerized information and other systems. The year 2000 issue is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. Based on preliminary information, costs of addressing the year
2000 issue are not currently expected to have a materially adverse impact on the Company's financial position, results of operations or cash flows in future periods.
On January 22, 1998, MascoTech, Inc. announced the completion of its acquisition of TriMas Corporation. The Company will record in the first quarter of 1998, as a result of selling its common stock investment in TriMas to MascoTech in the public tender offer, an approximate $29 million pre-tax gain.
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting of Comprehensive Income," SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," and SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits," become effective in 1998 and should not have a material effect on the Company's financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company considered the provisions of Financial Reporting Release No. 48 "Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments." The Company had no holdings of derivative financial or commodity-based instruments at December 31, 1997. A review of the Company's other financial instruments and risk exposures at that date revealed that the Company had exposure to interest rate and foreign currency exchange rate risks. At December 31, 1997, the Company performed sensitivity analyses to assess the potential effect of these risks and concluded that near-term changes in interest rates and foreign currency exchange rates should not materially affect the Company's financial position, results of operations or cash flows.
Other discussion regarding the Company's business risks is presented in the "Overview" caption above and in Item 1 "Business" of this Form 10-K.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Masco Corporation:
We have audited the accompanying consolidated balance sheets of Masco Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 1997 and the financial statement schedule as listed in Item 14(a)(2) of the Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Masco Corporation and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 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 13, 1998
MASCO CORPORATION
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 1997 AND 1996
ASSETS
See notes to consolidated financial statements.
MASCO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
See notes to consolidated financial statements.
MASCO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
See notes to consolidated financial statements.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include the accounts of Masco Corporation and all majority-owned subsidiaries. All significant intercompany transactions have been eliminated. The Company classified its home furnishings products segment as discontinued operations in 1995. (See "Discontinued Operations" note.) Accordingly, the financial statements and related notes present the home furnishings products segment as discontinued operations. Certain amounts for prior years have been reclassified to conform to the current year presentation.
Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates and assumptions.
Cash and Cash Investments. The Company considers all highly liquid investments with a maturity of three months or less to be cash and cash investments.
Receivables. The Company does significant business with a number of individual customers, including home centers. The Company monitors its exposure for credit losses and maintains adequate allowances for doubtful accounts; the Company does not believe that significant credit risks exist. At December 31, 1997 and 1996 accounts and notes receivable are presented net of allowances for doubtful accounts of $19.8 million and $17.9 million, respectively.
Property and Equipment. Property and equipment, including significant betterments to existing facilities, are recorded at cost. Upon retirement or disposal, the cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the statement of operations. Maintenance and repair costs are charged to expense as incurred.
Depreciation and Amortization. Depreciation is computed principally using the straight-line method over the estimated useful lives of the assets. Annual depreciation rates are as follows: buildings and land improvements, 2 to 10 percent, and machinery and equipment, 5 to 33 percent. Depreciation was $81.4 million, $71.7 million and $65.3 million in 1997, 1996 and 1995, respectively.
Acquired goodwill, resulting from acquisitions of companies, is being amortized using the straight-line method over periods not exceeding 40 years; at December 31, 1997 and 1996 such accumulated amortization totalled $82.8 million and $70.2 million, respectively. At each balance sheet date, management evaluates the recoverability of acquired goodwill by measuring the carrying value of the asset to the associated current and projected annual sales, operating profit and undiscounted annual cash flows; management also considers business prospects, market trends and other economic factors in performing this evaluation. Based on this evaluation, there was no permanent impairment related to acquired goodwill at December 31, 1997 and 1996. 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 totalled $34.6 million, $28.0 million and $24.8 million in 1997, 1996 and 1995, 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 underlying investments. The fair value of the Company's long-term debt instruments was based principally on
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING POLICIES -- (CONCLUDED) 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, 1997 was approximately $509 million and $1,386 million, as compared with the Company's aggregate carrying value of $498 million and $1,321 million, respectively, and at December 31, 1996 the aggregate market value was approximately $631 million and $1,248 million, as compared with the Company's aggregate carrying value of $601 million and $1,236 million, respectively.
ACQUISITIONS
During 1997, the Company acquired Texwood Industries, Inc., a U.S. manufacturer of kitchen and bath cabinetry, and five other home improvement and building products companies, including two companies in Europe.
The results of operations for these acquisitions are included in the consolidated financial statements from the dates of acquisition. Had these companies been acquired effective January 1, 1996, pro forma unaudited consolidated net sales and net income would have approximated $3,909 million and $390 million for 1997 and $3,575 million and $309 million for 1996, respectively, and pro forma unaudited consolidated diluted earnings per share would have approximated $2.33 and $1.87 for 1997 and 1996, respectively.
The combined purchase price for these acquisitions, including assumed debt, aggregated approximately $430 million and included approximately 2.9 million shares of Company common stock, with the balance in cash and a short-term note. The acquisitions were accounted for as purchase transactions. The net cash paid for companies acquired in 1997 is as follows, in thousands:
DISCONTINUED OPERATIONS
In late November 1995, the Company's Board of Directors approved a formal plan to dispose of the Company's home furnishings products segment. An aggregate provision of $650 million was recorded in the fourth quarter of 1995 for the estimated loss on the discontinued operations through the expected disposal date, the reduction of assets to their estimated net realizable value and the anticipated liabilities related to the disposal.
Basic and diluted earnings per share for 1995 from discontinued operations were both $.05. Basic and diluted loss per share for 1995 from the loss on disposition of discontinued operations were $4.15 and $4.05, respectively.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DISCONTINUED OPERATIONS -- (CONCLUDED) During August 1996, the Company completed the sale of its home furnishings products segment to Furnishings International Inc. Total proceeds to the Company from the sale were, in millions:
The junior debt securities mature in 2008. The convertible preferred stock represents transferable rights for up to a 25 percent common ownership, although the Company is restricted from maintaining an ownership in excess of 20 percent of Furnishings International's common equity. As such, the Company will not acquire additional common equity, except for purposes of resale only. Of the cash proceeds received from this sale, approximately $550 million was applied to reduce bank debt.
Under a transitional services agreement, the Company provided corporate-related services for a fee to Furnishings International through April 1997. Substantially all of these services were discontinued after such date.
INVENTORIES
Inventories are stated at the lower of cost or net realizable value, with cost determined principally by use of the first-in, first-out method.
EQUITY INVESTMENTS IN AFFILIATES
Equity investments in affiliates consist primarily of the following common equity and partnership interests:
Excluding the partnership interest in Hans Grohe, for which there is no quoted market value, the aggregate market value of the Company's equity investments at December 31, 1997 (which may differ from the amounts that could then have been realized upon disposition), based upon quoted market prices at that date, was $319 million, as compared with the Company's related aggregate carrying value
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY INVESTMENTS IN AFFILIATES -- (CONTINUED) of $182 million. The Company's carrying value in common stock of these equity affiliates exceeds its equity in the underlying net book value by approximately $79 million at December 31, 1997. This excess is being amortized over a period not to exceed 40 years.
During the second quarter of 1997, MascoTech effected conversion of all of its publicly held outstanding convertible preferred stock with the issuance of approximately 10 million shares of its common stock. This conversion reduced the Company's common equity ownership in MascoTech to 17 percent from 21 percent, and increased the Company's equity in MascoTech's net book value by approximately $29.5 million.
MascoTech holds an option expiring in 2002 to require the Company to purchase up to $200 million aggregate amount of subordinated debt securities of MascoTech.
During the fourth quarter of 1996, the Company completed the sale to MascoTech of 17 million shares of MascoTech common stock and warrants to purchase 10 million shares of MascoTech common stock. This transaction reduced the Company's common equity ownership in MascoTech from 45 percent to 21 percent and resulted in a fourth quarter 1996 pre-tax gain of $67.8 million ($40.7 million after-tax). Under the sale agreement, the Company received approximately $266 million, with $115 million paid at closing. The Company earned interest income at 6.625% on the $151 million balance of the consideration, which was paid by MascoTech to the Company on September 30, 1997; as provided for in the sale agreement, MascoTech at that date delivered to the Company 9.9 million shares (approximately 42 percent) of the outstanding common stock of Emco Limited and $45.6 million in cash. MascoTech recognized a $29.3 million after-tax gain from the delivery to the Company of the Emco Limited common stock. The Company's recording of equity earnings from MascoTech for 1997 excludes the effect of such gain due to the related-party nature of the transaction. Emco Limited is a leading Canadian distributor and manufacturer of home improvement and building products.
On January 22, 1998, MascoTech announced the completion of its acquisition of TriMas Corporation. The Company will record in the first quarter of 1998, as a result of selling its common stock investment in TriMas to MascoTech in the public tender offer, an approximate $29 million pre-tax gain.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY INVESTMENTS IN AFFILIATES -- (CONCLUDED) Approximate combined condensed financial data of the above-listed affiliates, including Emco Limited at December 31, 1997 and for the year then ended, are summarized in U.S. dollars as follows, in thousands:
Equity in undistributed earnings of affiliates of $43 million at December 31, 1997, $32 million at December 31, 1996 and $30 million at December 31, 1995 are included in consolidated retained earnings.
PROPERTY AND EQUIPMENT
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCRUED LIABILITIES
LONG-TERM DEBT
All of the notes above are nonredeemable.
European bank debt relates to borrowings of local currency for acquisitions and expansion, primarily in Germany. At December 31, 1997, approximately $222 million of European debt related to a term loan facility expiring in 2002. The balance of $107 million represents borrowings under lines of credit primarily expiring in 2002. Interest is payable on European borrowings based upon various floating rates as selected by the Company (approximately 4 percent at December 31, 1997).
The Company called the 5.25% subordinated debentures due 2012 for redemption on February 12, 1998. Substantially all holders exercised their right to convert these debentures into Company common stock (at the conversion price of $42.28 per share), resulting in the issuance of approximately 4.2 million shares of Company common stock in February 1998.
Certain debt agreements contain limitations on additional borrowings and requirements for maintaining a certain level of tangible net worth. At December 31, 1997, the Company was in compliance with these limitations and requirements, and the Company's tangible net worth exceeded the most restrictive of such provisions by approximately $171 million.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT -- (CONCLUDED) At December 31, 1997, the maturities of long-term debt during each of the next five years were approximately as follows: 1998-$68.5 million; 1999-$232.0 million; 2000-$16.0 million; 2001-$186.6 million; and 2002-$5.6 million.
The Company has a $750 million bank revolving-credit agreement, with any outstanding balance due and payable in November 2001. There was no outstanding balance as of December 31, 1997. Interest is payable on borrowings under this agreement based upon various floating rates as selected by the Company.
The Company has on file with the Securities and Exchange Commission an unallocated shelf registration pursuant to which the Company is able to issue up to a combined $759 million of debt and equity securities.
Interest paid was approximately $75 million, $102 million and $115 million in 1997, 1996 and 1995, respectively. Amounts paid in 1996 and 1995 include interest pertaining to discontinued operations.
SHAREHOLDERS' EQUITY
On the basis of amounts paid (declared), cash dividends per share were $.81 ($.82) in 1997, $.77 ($.78) in 1996 and $.73 ($.74) in 1995.
In December 1995, the Company's Board of Directors announced the approval of a Shareholder Rights Plan. The Rights were designed to enhance the Board's ability to protect the Company's shareholders against, among other things, unsolicited attempts to acquire control of the Company that do not offer an adequate price to all shareholders or are otherwise not in the best interests of the shareholders. The Rights were issued to shareholders of record in December 1995 and will expire in December 2005.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SHAREHOLDERS' EQUITY -- (CONCLUDED) Financial statements of non-U.S. operations are translated into U.S. dollars using exchange rates in effect at year-end for assets and liabilities and using weighted average exchange rates in effect during the year for results of operations. Adjustments resulting from such translation are reflected as cumulative translation adjustments in shareholders' equity.
At December 31, 1997, the Company had remaining authorization to repurchase up to 7.2 million shares of its common stock in open-market transactions or otherwise.
STOCK OPTIONS AND AWARDS
The Company's 1991 Long Term Stock Incentive Plan (the "Plan") provides for the issuance of stock-based incentives in various forms. At December 31, 1997, outstanding stock-based incentives were primarily in the form of restricted long-term stock awards and stock options.
The Company granted long-term stock awards, net of cancellations, for 790,000, 540,000 and 1,250,000 shares of Company common stock during 1997, 1996 and 1995, respectively, to key employees of the Company and to non-employee Directors of the Company. These long-term stock awards do not cause net share dilution inasmuch as the Company reacquires an equal number of shares on the open market. The weighted average grant date fair value per share of long-term stock awards granted during 1997, 1996 and 1995 was $42, $31 and $27, respectively. Compensation expense for the annual vesting of long-term stock awards was $14.0 million, $14.9 million and $13.3 million in 1997, 1996 and 1995, respectively. The unamortized costs of unvested stock awards, aggregating approximately $95.5 million at December 31, 1997, are included in other assets and are being amortized over the typical 10-year vesting periods.
Fixed stock options are granted to key employees of the Company and to non-employee Directors of the Company, and have a maximum term of 10 years. The exercise price of each fixed option, other than the option described below to the Company's Chief Executive Officer granted during 1996 at an exercise price in excess of the current market price, equals the market price of Company common stock on the date of grant. These options generally vest in installments beginning in the third year and extending through the eighth year after grant.
During 1997, the Company granted original stock options for 2,840,000 shares of Company common stock with an exercise price of $39 per share (equal to the market price on the grant date). Twenty percent of such options became exercisable in late 1997 when the Company's common stock price exceeded $50 per share for the required period. An additional twenty percent will become exercisable if the price of Company common stock exceeds $55 for the required period by May 2000; the remaining sixty percent (eighty percent if the $55 target was not exceeded) of such options will become exercisable if the price of Company common stock reaches $60 per share for the required period by May 2001. If neither target is met, the remaining eighty percent of such options become exercisable in March 2007; however, the recipients of these options have stated that they will not exercise them unless they become exercisable earlier as a result of meeting the price targets. The Company also granted restoration stock options for 139,000 shares of Company common stock with grant date exercise prices ranging from $35 to $52 (the market prices on the grant dates) and stock options for 28,000 shares of Company common stock to non-employee Directors of the Company with an exercise price of $39.
To demonstrate his commitment to increase the market value of Company common stock for the benefit of shareholders, in 1996 the Company's Chief Executive Officer requested that his annual salary and bonus be reduced indefinitely to $1 per year effective January 1, 1996. The Compensation Committee of the Board of Directors, in acceding to this request, considered alternative compensation MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS AND AWARDS -- (CONTINUED) arrangements for the Chief Executive Officer and in April 1996 granted the Chief Executive Officer a 10-year option, with a $41 exercise price when the market price was $27 7/8 per share, to purchase one million shares of Company common stock. This option became exercisable in 1997 when the price of Company common stock exceeded $41 per share.
As a demonstration of their commitment to enhance shareholder value and alignment with shareholder interests, in 1996 other officers and certain other key employees of the Company voluntarily accepted an effective 15 percent salary reduction with salaries frozen indefinitely at that level. This reduction in compensation was replaced with stock options and career stock awards. The stock options were granted with an exercise price of $32 (equal to the market price on the grant date). Annual vestings of such stock options commenced in 1997 as a result of the Company common stock price exceeding $41 per share for the required period. Such options were granted for approximately 1,615,000 shares of Company common stock. In addition, in 1996 when the market price of Company common stock was $32 per share, the executive officers were granted career stock awards; annual vestings of such awards commenced in 1997 as a result of the Company common stock price exceeding $50 per share for the required period in late 1997.
A summary of the status of the Company's stock options granted for the three years ended December 31, 1997 is presented below.
Of the 2,294,000 option shares exercisable at December 31, 1997, 1,004,000 were exercisable at per share prices ranging from $21 to $25, with a weighted average exercise price of $21; 290,000 were exercisable at per share prices ranging from $28 to $39, with a weighted average exercise price of $32; and 1,000,000 were exercisable at $41 per share.
At December 31, 1997, a combined total of 5,668,000 shares of Company common stock was available for the granting of stock options and long-term stock awards under the Plan.
During 1997, the Company adopted the "1997 Non-Employee Directors Stock Plan" (the "Directors Stock Plan"), which provides for the payment of compensation to non-employee Directors in part in Company common stock. Approximately 51,000 shares of Company common stock were granted in 1997 in the form of stock options and long-term stock awards under this plan. Such options and long-term stock awards are included in the information provided above. At December 31, 1997, a
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS AND AWARDS -- (CONCLUDED) combined total of 449,000 shares of Company common stock was available for the granting of stock options and long-term stock awards under the Directors Stock Plan.
The Company has elected to continue to apply the provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," and, accordingly, the Company's stock options do not constitute compensation expense in the determination of net income in the statement of operations. Had stock option compensation expense been determined pursuant to the methodology of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," the pro forma effect would have been a reduction in the Company's diluted earnings per share of approximately $.05 and $.03 in 1997 and 1996, respectively, with no effect in 1995.
For SFAS 123 calculation purposes, the weighted average grant date fair values of options granted in 1997, 1996 and 1995 were $12.54, $11.20 and $8.44, respectively. The fair values of these options were estimated at the grant dates using a Black-Scholes option pricing model with the following assumptions for 1997, 1996 and 1995, respectively: risk free interest rate -- 6.7%, 6.7% and 6.5%; dividend yield -- 2.5% (all years); volatility factor -- 27%, 25% and 27%; and expected option life -- 7 years (all years).
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 1997, 1996 or 1995. At December 31, 1997, there were 4,695,000 of such shares available for granting future awards under this plan.
The data in this note include discontinued operations.
EMPLOYEE RETIREMENT PLANS
The Company sponsors defined-benefit pension plans and defined-contribution retirement plans for most of its employees. In addition, substantially all salaried employees participate in non-contributory profit-sharing plans, to which payments are determined annually by the Directors. Aggregate charges to income under the Company's pension and profit-sharing plans were $23.9 million in 1997, $24.4 million in 1996 and $24.0 million in 1995.
Net periodic pension cost for the Company's qualified pension plans includes the following components:
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE RETIREMENT PLANS -- (CONCLUDED) The funded status of the Company's qualified pension plans is summarized as follows, in thousands, at December 31:
Major assumptions used in accounting for the Company's pension plans are as follows:
In addition to the Company's qualified pension plans, the Company has non-qualified unfunded supplemental pension plans covering certain employees, which provide for pension benefits in addition to those provided by the qualified pension plans. The actuarial present value of accumulated benefit obligations and projected benefit obligations related to these non-qualified pension plans totalled $30.8 million and $39.1 million, and $24.7 million and $30.2 million at December 31, 1997 and 1996, respectively; net periodic pension cost for these plans was $4.7 million, $4.9 million and $3.7 million in 1997, 1996 and 1995, respectively.
The Company sponsors certain postretirement benefit plans that provide medical, dental and life insurance coverage for eligible retirees and dependents in the United States based on age and length of service. At December 31, 1997, the aggregate present value of the unfunded accumulated postretirement benefit obligation approximated $4.0 million.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT INFORMATION
The Company's operations in the industry segments detailed below consist of the manufacture, installation and sale of the following home improvement and building products:
Kitchen and Bath Products -- kitchen and bath cabinets; kitchen appliances; faucets; plumbing fittings; bath and shower tubs and enclosures; whirlpools and spas; and bath accessories.
Other Specialty Products -- builders' hardware, including mechanical and electronic lock sets; venting and ventilating equipment; insulation; rolling shutters; balcony railing systems; and water pumps.
These products are sold to the home improvement and home construction markets through mass merchandisers, hardware stores, home centers, distributors, wholesalers and other outlets for consumers and contractors.
The Company's operations are principally located in North America and Europe.
Corporate assets consist primarily of real property, cash and cash investments and other investments.
Pursuant to a corporate services agreement to provide MascoTech, Inc. and TriMas Corporation with certain corporate staff and administrative services, the Company charges a fee approximating .8 percent of MascoTech and TriMas net sales. The fees charged to MascoTech and TriMas approximated $6 million and $4 million in 1997, $7 million and $3 million in 1996 and $9 million and $3 million in 1995, respectively, and are included as a reduction of general corporate expense.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT INFORMATION -- (CONCLUDED)
The following table presents information about the Company by industry segment and geographic area:
(1) Included in net sales in 1997, 1996 and 1995 are export sales from the U.S. of $58.8 million, $46.2 million and $40.9 million, respectively.
(2) Intra-company sales among segments and geographic areas represented less than one percent of consolidated net sales in 1997, 1996 and 1995.
(3) Includes net sales to one customer in 1997 of $392 million.
(4) Income from continuing operations before income taxes and net income pertaining to continuing foreign operations were $93 million and $45 million, $82 million and $40 million, and $96 million and $52 million for 1997, 1996 and 1995, respectively.
(5) Property additions include assets of acquired companies.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER INCOME (EXPENSE), NET
During the second quarter of 1997, MascoTech effected conversion of all of its publicly held outstanding convertible preferred stock with the issuance of approximately 10 million shares of its common stock. This conversion reduced the Company's common equity ownership in MascoTech to 17 percent from 21 percent, and increased the Company's equity in MascoTech's net book value by approximately $29.5 million. As a result, the Company recognized a pre-tax gain of $29.5 million during the second quarter of 1997.
Other interest income for 1997 and 1996 includes $36.8 million and $14.0 million, respectively, from the 12% pay-in-kind junior debt securities of Furnishings International Inc. Such interest income began to accrue in August 1996 upon the sale of the Company's home furnishings businesses. Other interest income for 1997 and 1996 also includes $7.5 million and $1.7 million, respectively of interest income from the $151 million note receivable from MascoTech which was paid on September 30, 1997.
Other items in 1997 include $10.8 million of dividend income from the Company's investment in Furnishings International's 13% cumulative preferred stock and net gains aggregating approximately $28 million related to the sales of certain assets, as well as charges aggregating approximately $30 million principally for the adjustment of the Company's Payless Cashways investment to its estimated fair value. Other items in 1996 include $36.3 million of fourth quarter charges primarily related to adjustments of miscellaneous assets to their estimated fair value.
Interest expense in 1996 and 1995 is presented net of interest expense pertaining to discontinued operations of $21.8 million and $44.0 million, respectively.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Net deferred tax liability at December 31, 1997 and 1996 consists of net short-term deferred tax assets of $19.0 million and $14.5 million, respectively, and net long-term deferred tax liabilities of $82.5 million and $43.1 million, respectively.
A valuation allowance of approximately $175.0 million and $206.3 million was recorded at December 31, 1997 and 1996, respectively, primarily due to the Company's inability to quantify the major portion of its capital loss carryforward which may ultimately be realized. Such capital loss benefit resulted from a $149.5 million and $164.0 million after-tax capital loss carryforward on the disposition of the Company's home furnishings products segment at December 31, 1997 and 1996, respectively, and a $25.5 million and $42.3 million after-tax future deductible temporary difference of a capital nature on the Company's equity and other investments at December 31, 1997 and 1996, respectively.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES -- (CONCLUDED) The following is a reconciliation of the U.S. federal statutory rate to the effective tax rate allocated to income from continuing operations before income tax:
Income taxes paid were approximately $178 million, $201 million and $170 million in 1997, 1996 and 1995, respectively. Amounts paid in 1996 and 1995 include taxes on discontinued operations.
Earnings of non-U.S. subsidiaries generally become subject to U.S. tax upon the remittance of dividends and under certain other circumstances. Provision has not been made at December 31, 1997 for U.S. or additional foreign withholding taxes on approximately $6.0 million of remaining undistributed net income of non-U.S. subsidiaries, as such income is intended to be permanently reinvested; it is not practical to estimate the amount of deferred tax liability on such income.
EARNINGS PER SHARE
At December 31, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which replaces the presentation of primary and fully diluted earnings per share, as computed under Accounting Principles Board ("APB") Opinion No. 15, with a presentation of basic and diluted earnings per share. The financial statements have been retroactively restated to conform with the earnings per share presentation required under SFAS No. 128.
The following are reconciliations of the numerators and denominators used in the computations of basic and diluted earnings per share, in thousands:
(1) Effect of convertible debentures in 1995 was antidilutive. The Company called these debentures for redemption on February 12, 1998. Substantially all holders exercised their right to convert these debentures into Company common stock.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED FINANCIAL STATEMENTS (UNAUDITED)
The following presents the combined financial statements of the Company, MascoTech, Inc. and TriMas Corporation as one entity, with Masco Corporation as the parent company. These combined financial statements present the Company's former home furnishings products segment as discontinued operations. (See "Discontinued Operations" note.) Intercompany transactions have been eliminated. Amounts, except earnings per share, are in thousands.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED FINANCIAL STATEMENTS (UNAUDITED)-- (CONTINUED)
Basic and diluted earnings per share for 1995 from discontinued operations were both $.05. Basic and diluted loss per share for 1995 from the loss on disposition of discontinued operations were $4.15 and $4.05, respectively.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- (CONCLUDED)
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
INTERIM FINANCIAL INFORMATION (UNAUDITED)
Fourth quarter net income in 1997 benefited (approximately $.02 per diluted share) from a reduction in the effective tax rate to 38.0% from 40.0% due primarily to the net utilization of the Company's capital loss carryforward benefit.
The fourth quarter of 1996 includes a $67.8 million net pre-tax gain from the sale of certain MascoTech, Inc. investments ($40.7 million after-tax or $.25 per diluted share). This gain was principally offset by fourth quarter charges aggregating $49.1 million pre-tax ($37.5 million after-tax or $.23 per diluted share) primarily for adjustments of miscellaneous assets to their estimated fair value.
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 1998 Annual Meeting of Stockholders, to be filed on or before April 30, 1998, 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 1998 Annual Meeting of Stockholders, to be filed on or before April 30, 1998, 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 1998 Annual Meeting of Stockholders, to be filed on or before April 30, 1998, 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 1998 Annual Meeting of Stockholders, to be filed on or before April 30, 1998, 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, 1997 and 1996, and for the years ended December 31, 1997, 1996 and 1995, consist of the following:
Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
(3) Exhibits.
- ------------------------- (1) Incorporated by reference to the Exhibits filed with Masco Corporation's Current Report on Form 8-K dated November 13, 1996.
(2) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1995.
(3) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1994.
(4) Incorporated by reference to the Exhibits filed with Masco Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
(5) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1993.
(6) Incorporated by reference to the Exhibits filed with Masco Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.
(7) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1996.
THE COMPANY WILL FURNISH ITS STOCKHOLDERS A COPY OF ANY OF THE ABOVE EXHIBITS NOT INCLUDED HEREIN UPON THE WRITTEN REQUEST OF SUCH STOCKHOLDER AND THE PAYMENT TO THE COMPANY OF THE REASONABLE EXPENSES INCURRED BY THE COMPANY IN FURNISHING SUCH COPY OR COPIES.
(B) REPORTS ON FORM 8-K.
(1) A Current Report on Form 8-K dated October 9, 1997 was filed by Masco Corporation during the quarter ended December 31, 1997 reporting under Item 5, "Other Events" the Company's acquisition of approximately 42% of the outstanding shares of Emco Limited.
(2) A Current Report on Form 8-K dated February 23, 1998 was filed by Masco Corporation during the quarter ended March 31, 1998 reporting under Item 5. "Other Events" the Company's redemption on February 12, 1998 of all of its outstanding 5 1/4% Convertible Subordinated Debentures Due 2012 and the announcement of its 1997 earnings.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. MASCO CORPORATION
By /s/ RICHARD G. MOSTELLER
------------------------------------ RICHARD G. MOSTELLER Senior Vice President -- Finance
March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
March 27, 1998
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, 1997, 1996 and 1995:
MASCO CORPORATION
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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, 1997 and 1996, and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 1997 and the financial statement schedule as listed in Item 14(a)(2)(ii)(A) and (B) of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
As discussed in the footnotes to the consolidated financial statements, effective January 1, 1996, the Company changed its method of accounting for the impairment of long-lived assets and for long-lived assets to be disposed of.
COOPERS & LYBRAND L.L.P.
Detroit, Michigan February 17, 1998
MASCOTECH, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
ASSETS
The accompanying notes are an integral part of the consolidated financial statements.
MASCOTECH, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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, 1997, 1996 AND 1995
The accompanying notes are an integral part of the consolidated financial statements.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING POLICIES:
Principles of Consolidation. The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All significant intercompany transactions have been eliminated. Corporations that are 20 to 50 percent owned are accounted for by the equity method of accounting; ownership less than 20 percent is accounted for on the cost basis unless the Company exercises significant influence over the investee. Capital transactions by equity affiliates, which change the Company's ownership interest at amounts differing from the Company's carrying amount, are reflected in other income or expense and the investment in affiliates account.
The consolidated balance sheet at December 31, 1996 reflects the segregation of net current and net non-current assets related to the disposition of the Company's Technical Services Group ("TSG").
The Company has a corporate services agreement with Masco Corporation, which at December 31, 1997 owned approximately 17 percent of the Company's Common Stock. Under the terms of the agreement, the Company pays fees to Masco Corporation for various corporate staff support and administrative services, research and development and facilities. Such fees, which are determined principally as a percentage of net sales, aggregated approximately $5.5 million in 1997, $7.1 million in 1996, and $9.1 million in 1995.
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from such estimates and assumptions.
Cash and Cash Investments. The Company considers all highly liquid debt instruments with an initial maturity of three months or less to be cash and cash investments. The carrying amount reported in the balance sheet for cash and cash investments approximates fair value.
Marketable Securities. The Company's marketable equity securities holdings are categorized as trading and, as a result, are stated at fair value. Changes in the fair value of trading securities are recognized in earnings. Derivative financial instruments, consisting principally of S&P 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 in earnings.
Receivables. Receivables are presented net of allowances for doubtful accounts of approximately $1.2 million and $2.0 million at December 31, 1997 and 1996, 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
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
comparing anticipated undiscounted future cash flows from operating activities with the carrying amount of the excess of cost over net assets of acquired companies. The factors considered by management in performing this assessment include current operating results, business prospects, market trends, potential product obsolescence, competitive activities and other economic factors. Based on this assessment, there was no permanent impairment related to the excess of cost over net assets of acquired companies at December 31, 1997.
At December 31, 1997 and 1996, accumulated amortization of the excess of cost over net assets of acquired companies and patents was $33.2 million and $29.4 million, respectively. Amortization expense was $9.3 million, $8.5 million and $13.7 million in 1997, 1996 and 1995, respectively.
Income Taxes. The Company records income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109 ("SFAS No. 109"), "Accounting for Income Taxes." SFAS No. 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS No. 109 generally allows consideration of all expected future events other than enactments of changes in the tax law or tax rates. A provision has not been made for U.S. or additional foreign withholding taxes on approximately $49 million of undistributed earnings of foreign subsidiaries as those earnings are intended to be permanently reinvested. Generally, such earnings become subject to U.S. tax upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability on such undistributed earnings.
New Accounting Pronouncements and Reclassifications. At December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which replaces the presentation of primary and fully diluted earnings per share, as computed under Accounting Principles Board Opinion No. 15, with a presentation of basic and diluted earnings per share. The financial statements have been retroactively restated to conform with the earnings per share presentation required under SFAS No. 128.
In addition, the Company has reclassified the unamortized cost of unvested restricted stock awards from other assets to a separate component of shareholders' equity (see "Stock Options and Awards" note). Prior periods have been reclassified to conform to this and other presentations adopted in calendar year 1997.
At January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which resulted in a pre-tax gain (because the fair value of the businesses being held for sale at January 1, 1996 exceeded the carrying value for such businesses) of $16.7 million ($11.7 million after-tax), recorded as the cumulative effect of an accounting change. The pro forma effect of the retroactive application of the change on the financial statements for 1995 has not been presented because the new method did not have a material effect on the reported earnings.
In 1998, the Company will adopt the disclosure requirements of SFAS No. 130, "Reporting of Comprehensive Income," SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," and SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." The adoption of these disclosures will not impact earnings per common share in 1998.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EARNINGS PER SHARE:
The following are reconciliations of the numerators and denominators used in the computations of basic and diluted earnings per share:
Diluted earnings per share reflect the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Company's preferred stock and convertible debentures did not have a dilutive effect on earnings per share in 1996 and 1995.
SUPPLEMENTARY CASH FLOWS INFORMATION:
Significant transactions not affecting cash were: in 1997: the conversion of the Company's outstanding shares of Dividend Enhanced Convertible Preferred Stock on June 27, 1997 for approximately 10 million shares of Company Common Stock (see "Shareholders' Equity" note); the exchange of approximately 9.9 million shares of the outstanding common stock of Emco Limited ("Emco") with a value of approximately $106 million, in addition to the cash payment of approximately $46 million, in payment of a promissory note due to Masco Corporation; in 1996: in addition to cash received, approximately $25 million comprised of both common stock and warrants (with a portion of the common stock subsequently sold for approximately $14 million of cash), as consideration from the sale of MascoTech Stamping Technologies, Inc.; in addition to the cash payment by the Company of $121 million, notes approximating $159 million were issued for the purchase of 18 million shares of the Company's Common Stock and warrants to purchase 10 million shares of the Company's Common Stock (see "Shareholders' Equity" note); in 1995: in addition to cash received, approximately
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$34 million comprised of both notes receivable due from, and a 29 percent equity interest in, the acquiring company, as consideration for a non-core business unit.
Income taxes paid (refunded) were $44 million, $(12) million and $11 million in 1997, 1996 and 1995, respectively. Interest paid was $39 million, $30 million and $55 million in 1997, 1996 and 1995, respectively.
DISPOSITIONS OF OPERATIONS:
In late 1994, the Company adopted a plan to dispose, by sale or liquidation, a number of businesses, including its architectural products, defense and certain of its transportation-related products and services businesses, as part of its long-term strategic plan to increase the focus on its core operating capabilities. The Company has completed the disposition of such businesses.
During 1995, the Company divested a number of such businesses, in separate transactions, for aggregate proceeds of approximately $180 million, which resulted in net gains of approximately $25 million. These net gains were substantially offset by reductions in the estimated net proceeds the Company expected to receive from certain remaining businesses to be sold, aggregating approximately $12 million, and by certain exit costs incurred in 1995 aggregating approximately $8 million.
In May 1996, the Company sold MascoTech Stamping Technologies, Inc. ("MSTI"), a wholly owned subsidiary, to Tower Automotive, Inc. ("Tower") resulting in an after-tax loss of approximately $26 million ($.49 per common share), including after-tax losses of approximately $1 million related to the closure of a MSTI manufacturing facility not included in the sale. The Company received initial consideration of approximately $80 million, consisting principally of $55 million in cash, 785,000 shares of Tower common stock and warrants to purchase additional Tower common stock (200,000 shares at $18 per share expiring May 31, 1999). The Company applied the cash proceeds (including approximately $14 million received from the subsequent sale of 600,000 shares of Tower common stock) to reduce its indebtedness. The Company may receive additional consideration (up to $30 million), of which approximately $5 million was earned in 1997, contingent upon the future earnings of MSTI through May 31, 1999.
On January 3, 1997, the Company sold its Technical Services Group (comprised of the Company's engineering and technical business services units) to MSX International, Inc. Also included in this transaction were the net assets of APX International which were acquired by the Company in November 1996 for approximately $44 million. The sale resulted in total proceeds to the Company of approximately $145 million, subject to certain adjustments, consisting of cash, $30 million of subordinated debentures, $18 million of preferred stock and an approximate 45 percent common equity interest in MSX International, Inc. valued at $2 million. In January 1998, the Company received $48 million of cash from MSX International, Inc. in payment of the subordinated debentures and other amounts due MascoTech resulting in a realized gain in the first quarter 1998 (gain recognition was deferred at the time of the transaction pending cash receipt) of approximately $7 million. The remaining deferred gain of approximately $20 million will be recognized upon the liquidation of the common and preferred stock holdings for cash. The net assets of the Technical Services Group and APX International are reflected on the consolidated balance sheet as net assets of businesses held for disposition at December 31, 1996. The Company did not reflect any revenues or expenses in the consolidated statement of income related to APX International from the date of acquisition through January 3, 1997 as control was deemed to be temporary.
The disposition of businesses did not meet the criteria for discontinued operations treatment for accounting purposes; accordingly, the sales and results of operations of these businesses were included in continuing operations until disposition. Businesses held for sale or sold, including MSTI and TSG,
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
had sales of $0, $412 million and $874 million in 1997, 1996 and 1995, respectively, and operating income (losses) before gains (charge) on disposition of businesses, net of $0, $(13) million and $5 million in 1997, 1996 and 1995, respectively.
Amounts included in the consolidated balance sheet for net assets of businesses held for disposition consist of the following at December 31, 1996:
INVENTORIES:
EQUITY AND OTHER INVESTMENTS IN AFFILIATES:
Equity and other investments in affiliates consist primarily of the following common stock interests in publicly traded affiliates:
TriMas Corporation ("TriMas") is a diversified manufacturer of commercial, industrial and consumer products (see "Subsequent Event" note). Emco Limited ("Emco") is a Canadian-based manufacturer and distributor of building and other industrial products. Titan International, Inc. ("Titan") is a manufacturer of wheels, tires and other products for agricultural, construction and off-highway equipment markets. Delco Remy International, Inc. ("DRI") is a manufacturer of automotive electronic motors and other components.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The carrying amount of investments in affiliates at December 31, 1997 and 1996 and quoted market values at December 31, 1997 for publicly traded affiliates (which may differ from the amounts that could have been realized upon disposition) are as follows:
In June 1995, Titan sold newly issued common stock in a public offering and issued common stock as a result of the conversion of convertible securities. The Company recognized pre-tax income of approximately $5.1 million as a result of the change in the Company's common equity ownership interest in Titan. In December 1996, Titan called for redemption its 4 3/4% Convertible Subordinated Notes which resulted in the issuance of approximately 4.5 million common shares, reducing the Company's common equity ownership interest in Titan to approximately 12 percent. As a result, the investment in Titan at December 31, 1996 was accounted for as available-for-sale. In March 1997, Titan repurchased approximately 5.6 million shares of its common stock, increasing the Company's common equity ownership interest in Titan to approximately 15 percent. As a result, the investment in Titan has been accounted for under the equity method of accounting.
In March 1997, TriMas called for redemption its 5% Convertible Subordinated Debentures which resulted in the issuance of approximately 4.7 million common shares, reducing the Company's common equity ownership in TriMas to approximately 37 percent. The Company recognized pre-tax income of approximately $13 million as a result of the change in the Company's common equity ownership interest in TriMas.
In September 1997, the Company exercised its option and exchanged its equity holdings in Emco, with a value approximating $106 million, and approximately $46 million in cash to satisfy the indebtedness to Masco Corporation incurred in 1996 in connection with the Company's purchase and retirement of certain of its securities held by Masco Corporation. This transaction resulted in a pre-tax gain of approximately $46 million. In addition, the Company has an investment in Emco subordinated notes which are classified as available-for-sale and, as a result, are recorded at fair value. As a result of the sale of Emco equity, the Emco subordinated notes were reclassified to other assets in 1997. The Company has recorded unrealized gains of approximately $1 million and $2 million in 1997 and 1996, respectively, which have been recorded as an adjustment to shareholders' equity.
In December 1997, DRI completed an initial public offering reducing the Company's common equity ownership interest in DRI to approximately 12 percent on a diluted basis (the Company owns approximately 18 percent of the voting common stock). As a result of the change in the Company's
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
common equity ownership interest in DRI, the Company recognized pre-tax income of approximately $5 million.
In addition to its equity and other investments in publicly traded affiliates, the Company has equity and other investment interests in privately held automotive related companies, including the Company's common equity ownership in Saturn Electronics & Engineering, Inc., a manufacturer of electromechanical and electronic automotive components, and MSX International, Inc., a transportation-focused engineering and technical services company.
Equity in undistributed earnings of affiliates of $68 million at December 31, 1997, $57 million at December 31, 1996 and $38 million at December 31, 1995 are included in consolidated retained earnings.
Approximate combined condensed financial data of the Company's equity affiliates accounted for under the equity method are as follows:
Equity and other income from affiliates consists of the following:
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT, NET:
Depreciation expense totalled $34 million, $37 million and $38 million in 1997, 1996 and 1995, respectively.
ACCRUED LIABILITIES:
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LONG-TERM DEBT:
The interest rates applicable to the Company's revolving credit agreement at December 31, 1997 are principally at alternative floating rates provided for in the agreement (approximately six percent at December 31, 1997).
In connection with the TriMas acquisition in early 1998 (see "Subsequent Event" note), the Company entered into a new $1.3 billion credit facility. This facility includes a $500 million term loan with principal payments as follows: 1998 - $25 million; 1999 - $40 million; 2000 - $60 million; 2001 - $75 million; and 2002 - $190 million. The remainder of the term loan and the $800 million revolver terminate in 2003. The Company has the ability and intent to refinance amounts due in 1998 on a long-term basis.
The interest rates applicable to the new credit facility are principally at alternative floating rates which would have approximated 6.5 percent at December 31, 1997. The new credit facility requires the maintenance of a specified level of shareholders' equity plus subordinated debt, with limitations on the ratios of total debt to cash flow (as defined) and cash flow less capital expenditures (as defined) to interest plus scheduled debt payments. In addition, there are limitations on dividends, share repurchases and subordinated debt repurchases. Under the most restrictive of these provisions, approximately $40 million would have been available at December 31, 1997 for the payment of cash dividends and the acquisition of Company capital stock. The facility is collateralized by a pledge of the stock of TriMas.
The note held by Masco Corporation was part of the consideration paid by the Company in 1996 for the purchase of 17 million shares of MascoTech common stock and warrants to purchase 10 million shares of MascoTech common stock from Masco Corporation. In September 1997, the Company exercised its option and exchanged its equity holdings in Emco Limited, with a value approximating $106 million, and approximately $46 million in cash to Masco Corporation to satisfy this indebtedness.
The maturities of debt as at December 31, 1997 during the next five years are as follows (not taking into account the new credit facility) (in millions): 1998 - $3; 1999 - $4; 2000 - $2; 2001 - $.7; and 2002 - $.5.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHAREHOLDERS' EQUITY:
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On June 27, 1997, the Company completed the conversion of all remaining issued and outstanding shares of its Dividend Enhanced Convertible Preferred Stock (DECS). Holders of DECS received in exchange for each share of DECS .955 of a share of the Company's Common Stock, par value $1.00 per share, resulting in the issuance of approximately 10 million shares of Company Common Stock.
On October 31, 1996, the Company purchased from Masco Corporation 17 million shares of MascoTech common stock and warrants to purchase 10 million shares of MascoTech common stock, for cash and notes approximating $266 million. As part of this 1996 transaction, Richard A. Manoogian, Chairman of both Masco Corporation and MascoTech, also sold to MascoTech one million shares of MascoTech common stock (at the then current market price) for approximately $13.6 million. In addition, as part of this transaction, Masco Corporation's agreement to purchase from the Company, at the Company's option, up to $200 million of subordinated debentures was extended through 2002, and the corporate services agreement with Masco Corporation was extended until September 30, 1998. Masco Corporation also agreed that MascoTech will have the right of first refusal to purchase the approximate 7.8 million shares of MascoTech common stock that Masco Corporation continues to hold, should Masco Corporation decide to dispose of such shares.
In addition, the Company repurchased and retired approximately .3 million shares of its common stock and approximately .5 million shares of its preferred stock in 1997, and approximately one million shares of its common stock in each of 1996 and 1995 in open-market purchases, pursuant to a Board of Directors' authorized repurchase program. At December 31, 1997, the Company may repurchase approximately three million additional shares of Company Common Stock pursuant to this repurchase authorization.
On the basis of amounts paid (declared), cash dividends per common share were $.22 ($.28) in 1997, $.18 ($.18) in 1996 and $.14 ($.11) in 1995.
STOCK OPTIONS AND AWARDS:
The Company's Long Term Stock Incentive Plan (the "Plan") provides for the issuance of stock-based incentives in various forms. At December 31, 1997, outstanding stock-based incentives are in the form of restricted long-term stock awards and stock options.
Pursuant to the Plan, the Company granted long-term stock awards, net, for 565,000, 480,000 and 461,000 shares of Company Common Stock during 1997, 1996 and 1995, respectively, to key employees of the Company and affiliated companies. The weighted average fair value per share of long-term stock awards granted during 1997, 1996 and 1995 on the date of grant was $19, $14 and $12, respectively. Compensation expense for the vesting of long-term stock awards was approximately $4.7 million, $2.3 million and $4.8 million in 1997, 1996 and 1995, respectively. The unamortized costs of unvested stock awards, aggregating approximately $33 million at December 31, 1997, are being amortized over the ten-year vesting periods and are a deduction from shareholders' equity.
Fixed stock options are granted to key employees of the Company and affiliated companies and have a maximum term of 10 years. The exercise price of each fixed option equals the market price of Company Common Stock on the date of grant. These options either vest no later than 10 years after grant or in installments beginning in the third year and extending through the eighth year after grant.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Company's stock options granted under the Plan or prior plans for the three years ended December 31, 1997 is presented below.
At December 31, 1997, options have been granted and are outstanding with exercise prices ranging from $4 1/2 to $25 per share, the fair market values at the dates of grant.
At December 31, 1997 and 1996, a combined total of 5,223,000 and 4,656,000 shares, respectively, of Company Common Stock were available for the granting of options and incentive awards under the above plans.
The Company has elected to continue to apply the provisions of Accounting Principles Board Opinion No. 25 and, accordingly, no stock option compensation expense is included in the determination of net income in the statement of income. The weighted average fair value on the date of grant of options granted was $7.70 and $6.20 in 1997 and 1996, respectively. Had stock option compensation expense been determined pursuant to the methodology of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the pro forma effects on the Company's earnings per share would have approximated $.02 and $.01 in 1997 and 1996, respectively, and had no effect in 1995.
The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
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 million in 1997, $11 million in 1996 and $13 million in 1995.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic pension cost for the Company's defined-benefit pension plans includes the following components for the three years ended December 31, 1997:
Major assumptions used in accounting for the Company's defined-benefit pension plans are as follows:
The funded status of the Company's defined-benefit pension plans at December 31, 1997 and 1996 is as follows:
Postretirement Benefits. The Company provides postretirement medical and life insurance benefits for certain of its active and retired employees.
The Company records its postretirement benefit plans in accordance with Statement of Financial Accounting Standards No. 106 ("SFAS No. 106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions." This statement requires the accrual method of accounting for postretirement health care and life insurance based on actuarially determined costs to be recognized over the period from the date of hire to the full eligibility date of employees who are expected to qualify for such benefits. In conjunction with SFAS No. 106, the Company recognizes the transition obligation on a
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
prospective basis with the net transition obligation amortized over its remaining life. Net periodic postretirement benefit cost includes the following components for the years ended December 31, 1997, 1996 and 1995:
Postretirement benefit obligations, none of which is funded, are summarized as follows at December 31, 1997 and 1996:
The discount rate used in determining the accumulated postretirement benefit obligation was 7.25 percent in both 1997 and 1996. The change in the accumulated postretirement benefit obligation and the unrecognized net gain amounts is the result of the change in the actuarial assumptions concerning the health care cost trend rate. The assumed health care cost trend rate in 1997 was nine percent, decreasing to an ultimate rate in the year 2007 of five percent. If the assumed medical cost trend rates were increased by one percent, the accumulated postretirement benefit obligation would increase by $.7 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost would increase by $.1 million.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION:
The Company's business segments involve the sale of the following products and services:
Transportation-Related Products and Services:
Precision products, generally produced using advanced metalworking technologies with significant proprietary content, and aftermarket products for the transportation industry.
Engineering and technical business services.
Specialty Products:
Other Industrial -- Principally doors, windows, security grilles and office panels and partitions for commercial and residential markets.
The Company's export sales approximated $71 million, $75 million and $85 million in 1997, 1996 and 1995, respectively.
Corporate assets consist primarily of cash and cash investments, marketable securities, equity and other investments in affiliates and notes receivable.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(A) Included within this segment are sales to one customer of $140 million, $232 million and $397 million in 1997, 1996 and 1995, respectively; sales to another customer of $79 million, $146 million and $182 million in 1997, 1996 and 1995, respectively; sales to a third customer of $62 million, $122 million and $178 million in 1997, 1996 and 1995, respectively; and sales to a fourth customer of $156 million, $155 million and $136 million in 1997, 1996 and 1995, respectively.
(B) Operating profit in 1996 includes a $32 million pre-tax loss principally from the sale of MascoTech Stamping Technologies, Inc. ("MSTI"). Operating profit in 1997 includes approximately $5 million of additional pre-tax consideration earned from the sale of MSTI which was sold in 1996. These items impacted the Company's Transportation-Related Products and Services industry segment. The Company may receive additional consideration contingent upon the future earnings of MSTI through May 31, 1999. Operating profit in 1995 includes $25 million in net gains resulting from sales of non-core businesses. These net gains were substantially offset by reductions in the estimated proceeds the Company expected to receive from businesses to be sold, aggregating $12 million, and by certain exit costs incurred in 1995 aggregating approximately $8 million. The net gains (charge) impact the Company's industry segments as follows: Transportation-Related Products and Services - $21 million and Specialty Products - $(2) million. The remaining $(14) million of the net gains (charge) was allocated to General Corporate Expense.
(C) Assets employed at December 31, 1996 and 1995 include net assets related to the disposition of certain operations (see "Dispositions of Operations" note).
(D) Property additions include approximately $2 million and $14 million in 1996 and 1995, respectively, of capital expenditures for those businesses held for disposition related to the plan adopted in late 1994.
(E) Depreciation and amortization expense includes approximately $5 million in 1995 of expense for those businesses held for disposition related to the plan adopted in late 1994.
(F) The Company's foreign operations are located principally in Western Europe.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER INCOME (EXPENSE), NET:
INCOME TAXES:
The components of deferred taxes at December 31, 1997 and 1996 are as follows:
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of tax computed at the U.S. federal statutory rate to the provision for income taxes allocated to income before income taxes and cumulative effect of accounting change, net:
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.
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 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. The Company's market risk is subject to the price differential between the contract market value and contract cost. The average monthly notional amount of derivative contracts in 1997 was approximately $17 million and there were no contracts outstanding at December 31, 1997.
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.
The carrying amounts and fair values of the Company's financial instruments at December 31, 1997 and 1996 are as follows:
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INTERIM AND OTHER SUPPLEMENTAL FINANCIAL DATA (UNAUDITED):
Results for the first and fourth quarters 1997 include pre-tax gains of approximately $13 million and $5 million, respectively, as a result of equity transactions by affiliates of the Company.
Results for the first, second, third and fourth quarters 1997 include pre-tax marketable securities gains (losses) of approximately $5.0 million, $4.0 million, $4.4 million and $(.3) million, respectively.
Results for the third quarter 1997 include a pre-tax gain of approximately $46 million related to the transfer of the Company's equity holdings in Emco Limited to Masco Corporation. This gain was partially offset by pre-tax costs approximating $14 million associated with a plant closure and the Company's share of a special charge recorded by an equity affiliate and other expenses.
Results for the fourth quarter 1997 include approximately $5 million pre-tax of additional consideration earned from the sale of MascoTech Stamping Technologies, Inc. which was sold in the second quarter 1996.
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
Results for the fourth quarter 1997 were negatively impacted by charges aggregating approximately $10 million pre-tax principally related to severance, the Company's share of a charge recorded by an equity affiliate, write-off of deferred charges and loss on disposition of fixed assets.
Convertible securities were anti-dilutive in the first quarter 1996 for purposes of computing diluted earnings per common share and earnings per common share on income before accounting change.
Results for the second quarter 1996 include an after-tax loss of approximately $26 million related to the sale of MascoTech Stamping Technologies, Inc.
Net income for the first quarter of 1996 includes an after-tax gain of approximately $12 million as a result of the adoption of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective January 1, 1996 which was recorded as a cumulative effect of an accounting change.
The 1997 and 1996 income (loss) per common share amounts for the quarters do not total to the full year amounts due to the purchase and retirement of shares throughout the year.
SUBSEQUENT EVENT:
In January 1998, the Company completed its tender offer for all of the outstanding shares of common stock of TriMas Corporation not held by the Company for approximately $920 million in accordance with the terms of the Company's previously announced acquisition agreement with TriMas.
The acquisition will be accounted for as a purchase in 1998. The purchase price will be allocated to the previously unowned assets acquired and liabilities assumed based upon their estimated fair values. The excess of the purchase price over the net assets acquired will be amortized over a period not exceeding 40 years. The purchase price allocation will be determined during 1998 when appraisals, other studies and additional information become available. Results of operations for TriMas will be included with those of the Company for periods subsequent to the date of the acquisition.
TriMas is a diversified proprietary products company with leadership positions in commercial, industrial and consumer niche markets.
The following is summarized financial data of TriMas as of and for the year ended December 31, 1997:
MASCOTECH, INC.
FINANCIAL STATEMENT SCHEDULE
PURSUANT TO ITEM 14(A)(2) OF FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1997
Schedule, as required for the years ended December 31, 1997, 1996 and 1995:
MASCOTECH, INC.
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(A) Allowance of companies acquired, and other adjustments, net in 1997 and 1995. Allowance of companies reclassified for businesses held for disposition, and other adjustments, net in 1996 and 1995.
(B) Deductions, representing uncollectible accounts written off, less recoveries of accounts written off in prior years.
EXHIBIT INDEX
(1) Incorporated by reference to the Exhibits filed with Masco Corporation's Current Report on Form 8-K dated November 13, 1996.
(2) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1995.
(3) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1994.
(4) Incorporated by reference to the Exhibits filed with Masco Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
(5) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1993.
(6) Incorporated by reference to the Exhibits filed with Masco Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.
(7) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1996.