1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 1-5794
MASCO CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 38-1794485
(State of Incorporation) (I.R.S. Employer Identification No.)
21001 VAN BORN ROAD, TAYLOR, MICHIGAN 48180
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 313-274-7400
Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $1.00 Par Value New York Stock Exchange, Inc.
Series A Participating Cumulative
Preferred Stock Purchase Rights New York Stock Exchange, Inc.
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant on March 15, 1999 (based on the closing sale
price of $25 15/16 of the Registrant's Common Stock, as reported on the New York
Stock Exchange Composite Tape on such date) was approximately $8,540,219,000.
Number of shares outstanding of the Registrant's Common Stock at March 15, 1999:
339,232,000 shares of Common Stock, par value $1.00 per share
Portions of the Registrant's definitive Proxy Statement to be filed for its 1999
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Business.................................................... 2
2. Properties.................................................. 6
3. Legal Proceedings........................................... 8
4. Submission of Matters to a Vote of Security Holders......... 8
Supplementary Item. Executive Officers of Registrant........ 8
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 9
6. Selected Financial Data..................................... 9
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
8. Financial Statements and Supplementary Data................. 20
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 44
PART III
10. Directors and Executive Officers of the Registrant.......... 44
11. Executive Compensation...................................... 44
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 44
13. Certain Relationships and Related Transactions.............. 44
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 45
Signatures.................................................. 49
FINANCIAL STATEMENT SCHEDULES
Masco Corporation Financial Statement Schedule.............. F-1
MascoTech, Inc. and Subsidiaries Consolidated Financial
Statements and Financial Statement Schedule............... F-3
1
3
PART I
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. 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 bath and shower enclosure units,
spas and hot tubs, other shower, bath and plumbing specialties and accessories,
door locks and other builders' hardware, radiators and heat convectors, 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, and recently, through internet
retailers, to consumers and contractors. The Company also supplies and installs
insulation and other building products directly to builders and consumers. The
Company's operations are categorized into three segments: Kitchen and Bath
Products, Environmental Products and Services and Builders' Hardware and Other
Specialty Products.
SEGMENTS
The following table sets forth for the three years ended December 31, 1998,
the contribution of the Company's segments to net sales and operating profit, in
thousands:
NET SALES
--------------------------------------
1998 1997 1996
---------- ---------- ----------
Kitchen and Bath Products.................. $3,294,000 $2,940,000 $2,519,000
Environmental Products and Services........ 485,000 348,000 295,000
Builders' Hardware and Other Specialty
Products................................. 566,000 472,000 423,000
---------- ---------- ----------
Total................................. $4,345,000 $3,760,000 $3,237,000
========== ========== ==========
OPERATING PROFIT(1)
--------------------------------------
1998 1997 1996
---------- ---------- ----------
Kitchen and Bath Products.................. $ 613,000 $ 539,000 $ 462,000
Environmental Products and Services........ 69,000 50,000 41,000
Builders' Hardware and Other Specialty
Products................................. 84,000 80,000 63,000
---------- ---------- ----------
Total................................. $ 766,000 $ 669,000 $ 566,000
========== ========== ==========
(1) Amounts are before general corporate expense.
Additional financial information concerning the Company's operations by
segments as of and for the three years ended December 31, 1998 is set forth in
the Note to the Company's Consolidated Financial Statements captioned "Segment
Information," included in Item 8 of this Report.
2
4
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, designed for the
"do-it-yourself" market (DIY), 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
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 $884 million in 1998, $815 million
in 1997 and $757 million in 1996. 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, with Moen, Price Pfister, Kohler 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 and 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, England and Spain
with sales to European consumers, wholesalers and builders through distribution
channels that parallel domestic distribution. Sales of kitchen and bath cabinets
were approximately $1,334 million in 1998, $1,083 million in 1997 and $832
million in 1996. Management believes that the Company is the largest
manufacturer of kitchen and bath cabinetry in the United States. Significant
competitors are Aristokraft, Shrock, American Woodmark and Omega.
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 AQUA GLASS(R)
acrylic and gelcoat bath and shower units and whirlpools, which 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 under the brand names AMERICAN SHOWER & BATH(TM)
and TRAYCO(TM) to the home improvement market through hardware stores and home
centers. HUPPE(R) luxury bath and shower enclosures are manufactured and sold by
the Company through wholesale channels primarily in Germany. HERITAGE(TM)
ceramic and acrylic bath fixtures are sold in the United Kingdom directly to
selected retailers. 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.
Direct sales to home center retailers in all of the Company's product lines
have been increasing in recent years, and in 1998 sales to The Home Depot were
$499 million, approximately 11.5 percent of the Company's 1998 sales volume.
Builders, distributors, wholesalers and other retailers represent other channels
of distribution for the Company's products.
3
5
ENVIRONMENTAL PRODUCTS AND SERVICES
The Company manufactures heating, ventilating and air conditioning
accessories under the trademark AMP,(TM) including grilles, registers, diffusers
and Type B Gas Vents, which are sold through wholesale distribution and home
centers. GEBHARDT(TM) commercial ventilating products are manufactured and
distributed by the Company in Europe. The Company manufactures residential
hydronic radiators and heat convectors under the brand names VASCO(R) and
BRUGMAN(TM) and distributes to the European market from operations in Belgium
and Holland. 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.
BUILDERS' HARDWARE AND OTHER SPECIALTY PRODUCTS
Builders' Hardware and 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. JUNG(TM) water pumps are manufactured and distributed by
the Company in Europe. 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. The Company also manufactures electronic lock sets for
use by the banking industry on safes, ATMs, vaults and related cabinetry and
hardware. Key domestic competitors to Baldwin and Weiser in the lock set
business are Kwikset and Schlage. Imported products are also becoming a
significant factor in this market.
The Company has recently begun to utilize 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.
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, although from
time to time various operations may encounter shortages or unusual price
increases.
INTERNATIONAL OPERATIONS
Through its subsidiaries, the Company also has home improvement and
building products manufacturing plants in Austria, Belgium, Canada, Denmark,
England, France, Germany, Holland,
4
6
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 international operations
were expanded in 1998 through the acquisition of four manufacturers. Vasco
Corporation, based in Belgium, and The Brugman Group, headquartered in Holland,
are both leading European manufacturers of residential hydronic radiators and
heat convectors. Mirolin Industries Corporation is a leading Canadian
manufacturer of tubs, shower enclosures and whirlpools and Heritage Bathrooms,
PLC is a manufacturer and distributor of residential bath products including
bathtubs, toilets, bidets, sinks, faucets and showers and a full range of bath
accessories, based in England.
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, 1998, 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, 1998, the Company employed approximately 31,700 people.
Satisfactory relations have generally prevailed between the Company and its
employees.
EQUITY INVESTMENTS
The Company has equity investments in certain affiliated companies. One of
these companies, MascoTech, Inc., was formed in July, 1984 when the Company
distributed to its stockholders shares of MascoTech common stock as a special
dividend. The Company's ownership in MascoTech is currently approximately 17
percent. MascoTech is a diversified industrial manufacturing company utilizing
advanced metalworking capabilities to supply metal formed components used in
vehicle engine and drivetrain applications, specialty fasteners, towing systems,
packaging and sealing products and other industrial products. MascoTech's net
sales for 1998 were approximately $1.6 billion.
Further information about the Company's equity investments is set forth in
the Note to the Company's Consolidated Financial Statements captioned "Equity
Investments in Affiliates" included in Item 8 of this Report.
5
7
ITEM 2. PROPERTIES.
The following list sets forth the location of the Company's principal
manufacturing facilities and identifies the segments utilizing such facilities.
Arizona..................... Tucson (3)
California.................. Carlsbad (1), Corona (1), Costa Mesa (3), Los Angeles (1),
Pico Rivera (1), Rancho Dominguez (1), Torrance (3) and
Vista (1)
Colorado.................... Longmont (1)
Delaware.................... New Castle (1)
Illinois.................... Chicago (3)
Indiana..................... Cumberland (1), Greensburg (1) and Kendallville (3)
Iowa........................ Northwood (1)
Kentucky.................... Henderson (1), Morgantown (1) and Mt. Sterling (1)
Michigan.................... Adrian (1), Hillsdale (1), Lapeer (1) and Troy (3)
Minnesota................... Lakeville (1)
Mississippi................. Olive Branch (2)
Nevada...................... Las Vegas (1)
New Jersey.................. Moorestown (1), Passaic (1) and West Berlin (3)
North Carolina.............. Thomasville (1)
Ohio........................ Jackson (1), Loudonville (1), Middlefield (1) and Orwell (1)
Oklahoma.................... Chickasha (1) and Durant (1)
Oregon...................... Klamath Falls (1)
Pennsylvania................ Reading (1 and 3)
South Dakota................ Rapid City (1) and Sioux Falls (1)
Tennessee................... Adamsville (1), Jackson (1) and McEwen (1)
Texas....................... Cedar Hill (1), Duncanville (1) and Lancaster (1)
Virginia.................... Atkins (1), Culpeper (1), Lynchburg (1) and Mt. Jackson (1)
Austria..................... Furstenfeld (3)
Belgium..................... Brussels (3), Dilsen (2) and St. Niklaas (3)
Canada...................... Cambridge (1), London (1) and St. Thomas (1), Ontario
Denmark..................... Herlev (3) and Odense (1)
England..................... Brighouse (1), Brownhills (1), Corby (1), Warminster (1) and
Wetherby (1)
France...................... Sevres (1)
Germany..................... Ahaus (1), Bad Zwischenahn (1), Bielefeld (3), Duisburg (3),
Dortmund (3), Foehren (3), Iserlohn (1), Kulmbach (3),
Netzschkau (2), Neuwied (1), Rheine (2), Steinhagen (3),
Stuttgart (2) and Waldenburg (2)
Holland..................... Tubbergen (2)
Italy....................... Lacchiarella (1) and Zingonia (1)
Mexico...................... Mexicali (2)
Poland...................... Krakow (2) and Kobierzyce (2)
Spain....................... Alcaudete (1), Barcelona (1) and Vic (1)
Taiwan...................... Tai Chung (1)
Turkey...................... Czerkezkoy (1)
Segments identified in the preceding table are: (1) Kitchen and Bath Products,
(2) Environmental Products and Services and (3) Builders' Hardware and Other
Specialty Products. Multiple footnotes within the same parentheses indicate that
significant activities relating to more than one segment are conducted at that
location.
6
8
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) from which the Company supplies and installs
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.
California.................. Commerce
Florida..................... Deerfield Beach and Ocala
Illinois.................... Wheeling and Wood Dale
Indiana..................... Auburn, Elkhart, Frankfort, Fort Wayne, Goshen
and North Vernon
Kentucky.................... Nicholasville
Louisiana................... Baton Rouge
Massachusetts............... Plymouth
Michigan.................... Burton, Canton, China Township, Detroit,
Farmington Hills, Fraser, Green Oak Township,
Hamburg, Holland, Livonia, Royal Oak, Troy,
Warren and Ypsilanti
New Jersey.................. Edison and Netcong
Ohio........................ Bucyrus, Canal Fulton, Lakewood, Lima, Minerva,
Newburgh Heights and Port Clinton
Oklahoma.................... Tulsa
Pennsylvania................ Ridgway
Texas....................... Houston and Longview
Wisconsin................... Mosinee
Australia................... Hampton Park, Victoria and Wakerley, Queensland
Canada...................... Fort Erie and Oakville, Ontario
Czech Republic.............. Oslavany
England..................... Leicester and Wolverhampton
Germany..................... Neunkirchen, Nurnberg and Zell am Harmersbach
Italy....................... Poggio Rusco and Valmadrera
Mexico...................... Mexico City
Spain....................... Almusaffes
MascoTech's principal manufacturing facilities range in size from
approximately 10,000 square feet to 310,000 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
production requirements.
7
9
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. 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).
OFFICER
NAME POSITION AGE SINCE
---- -------- --- -------
Richard A. Manoogian................... Chairman of the Board and Chief 62 1962
Executive Officer
Raymond F. Kennedy..................... President and Chief Operating Officer 56 1989
Dr. Lillian Bauder..................... Vice President -- Corporate Affairs 59 1996
David A. Doran......................... Vice President -- Taxes 57 1984
Daniel R. Foley........................ Vice President -- Human Resources 57 1996
Eugene A. Gargaro, Jr. ................ Vice President and Secretary 56 1993
John R. Leekley........................ Senior Vice President and General 55 1979
Counsel
Richard G. Mosteller................... Senior Vice President -- Finance 66 1962
Robert B. Rosowski..................... Vice President -- Controller and 58 1973
Treasurer
Executive officers, who are elected by the Board of Directors, serve for a
term of one year or less. Each elected executive officer has been employed in a
managerial capacity with the Company for over five years except for Mr. Foley
and Dr. Bauder. Mr. Foley was employed by MascoTech, Inc. as its Vice President
- -- Human Resources from 1994 to 1996 and was President of Executive Business
Partners, Inc., a training and consulting firm, from 1993 to 1994. From 1984 to
1996, Dr. Bauder served as President and Chief Executive Officer of Cranbrook
Educational Community.
8
10
PART II
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:
MARKET PRICE(1)
---------------------------------- DIVIDENDS
QUARTER HIGH LOW DECLARED(1)
- ------- -------------- ------------- -----------
1998
Fourth................................. $30 7/8 $20 3/4 $.11
Third.................................. 33 22 11/16 .22(2)
Second................................. 30 15/32 26 15/16 --(2)
First.................................. 29 29/32 24 9/16 .10 1/2
----
Total............................... $.43 1/2
====
1997
Fourth................................. $26 29/32 $20 23/32 $.10 1/2
Third.................................. 24 1/8 20 9/32 .10 1/2
Second................................. 21 11/16 17 1/2 .10
First.................................. 18 13/16 16 7/8 .10
----
Total............................... $.41
====
(1) After giving effect to the Company's 100% stock distribution in July 1998.
(2) The cash dividend ordinarily declared in the second quarter of the fiscal
year was declared early in the third quarter of 1998.
On March 15, 1999, there were 6,258 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 the payment of future dividends will
continue to depend upon the Company's earnings, capital requirements, financial
condition and other factors.
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:
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1998 1997 1996
--------------------- --------------------- ---------------------
Net sales.................. $4,345,000 $3,760,000 $3,237,000
Income from continuing
operations(1)............ $ 476,000 $ 382,400 $ 295,200
Per share of common
stock:(2)
Income from continuing
operations:(1)
Basic............... $1.44 $1.20 $.94
Diluted............. $1.39 $1.15 $.91
Dividends declared....... $ .43 1/2 $ .41 $.39
Dividends paid........... $ .43 $ .40 1/2 $.38 1/2
At December 31:
Total assets............. $5,167,350 $4,333,760 $3,701,650
Long-term debt........... $1,391,420 $1,321,470 $1,236,320
Shareholders' equity..... $2,728,580 $2,229,020 $1,839,810
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1995 1994
--------------------- ---------------------
Net sales.................. $2,927,000 $2,583,000
Income from continuing
operations(1)............ $ 200,050 $ 172,710
Per share of common
stock:(2)
Income from continuing
operations:(1)
Basic............... $.64 $.55
Diluted............. $.62 $.54
Dividends declared....... $.37 $.35
Dividends paid........... $.36 1/2 $.34 1/2
At December 31:
Total assets............. $3,778,630 $4,177,100
Long-term debt........... $1,577,100 $1,587,160
Shareholders' equity..... $1,655,430 $2,118,330
(1) The year 1994 includes a $79 million after-tax ($.25 per diluted share)
non-cash equity investment charge.
(2) After giving effect to 100 percent stock distribution in July 1998.
9
11
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 changes in general
economic conditions, the timely resolution of the year 2000 issue and other
factors 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 for 1998, aided by acquisitions, both
increased 16 percent to $4,345 million and $681 million, respectively. Net
income and diluted earnings per share for 1998 were $476 million and $1.39,
representing increases of 24 percent and 21 percent, respectively, over 1997.
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 impacted by these expenses.
During 1998, the Company acquired Vasco Corporation and The Brugman Group,
both of which are European manufacturers of residential hydronic radiators and
heat convectors, and Heritage Bathrooms PLC, a European manufacturer and
distributor of residential bath products.
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, 1997, pro forma unaudited
consolidated net sales and net income would have approximated $4,422 million and
$481 million for 1998 and $3,911 million and $394 million for 1997,
respectively, and pro forma unaudited consolidated diluted earnings per share
would have approximated $1.40 and $1.18 for 1998 and 1997, respectively.
10
12
The Company also acquired several other smaller home improvement and
building products companies in 1998.
The combined purchase price for 1998 acquisitions, net of cash acquired,
aggregated approximately $323 million. The acquisitions were accounted for as
purchase transactions.
In July 1998, the Company completed the sale of its Thermador subsidiary.
Thermador is a U.S. manufacturer of kitchen appliances with annual net sales of
approximately $140 million.
DISCONTINUED OPERATIONS
In late November 1995, the Company's Board of Directors approved a formal
plan to dispose of the Company's home furnishings products segment. 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 and are stated at face value; 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.
PROFIT MARGINS
Operating profit margin, before general corporate expense, decreased to
17.6 percent in 1998 following an increase to 17.8 percent in 1997 from 17.5
percent in 1996 (general corporate expense includes those expenses not
specifically attributable to the Company's business segments). The decrease in
1998 over 1997 is principally due to the influence of product mix and increased
goodwill amortization from recent acquisitions, offset in part by a reduction in
selling, general and administrative expenses as a percentage of sales. The
Company's operating profit margin from faucet sales is somewhat higher than that
from 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 offerings.
General corporate expense in 1998 was $86 million, as compared with $82
million in 1997 and $85 million in 1996. General corporate expense as a
percentage of sales decreased to 2.0 percent in 1998 from 2.2 percent in 1997
and 2.6 percent in 1996. Operating profit margin, after general corporate
expense, was 15.6 percent, 15.6 percent and 14.8 percent in 1998, 1997 and 1996,
respectively.
Net income as a percentage of sales increased to 11.0 percent in 1998 from
10.2 percent and 9.1 percent in 1997 and 1996, respectively. After-tax profit
return on shareholders' equity as measured by net income increased to 21.4
percent in 1998 from 20.8 percent and 17.8 percent in 1997 and 1996,
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.
11
13
Bank credit lines are maintained to ensure availability of short-term
funds. At December 31, 1998, 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 net
worth. At December 31, 1998, the Company was in compliance with these
limitations and requirements, and the Company's net worth exceeded the most
restrictive of such provisions by approximately $715 million.
In July 1998, the Company effected a two-for-one stock split in the form of
a 100 percent stock distribution to shareholders, which resulted in the issuance
of approximately 170 million shares of common stock and reduced paid-in-capital
by approximately $170 million. Following the issuance of the common shares for
the stock split, the Company declared an increased quarterly cash dividend of
$.11 per common share on its post-split shares, which marks the 40th consecutive
year in which dividends have been increased.
The Company called for redemption its $178 million of 5.25% convertible
subordinated debentures due 2012 in February 1998. Substantially all holders
exercised their right to convert these debentures into Company common stock (at
the pre-stock split conversion price of $42.28 per share), resulting in the
issuance of approximately 4.2 million shares of Company common stock in February
1998 (8.4 million shares after giving effect to the stock split).
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 33 percent at December 31, 1998
from approximately 36 percent at December 31, 1997. The conversion of the
Company's $178 million convertible subordinated debentures contributed to this
improvement. The Company's total debt as a percent of total capitalization ratio
was 37 percent and 38 percent at December 31, 1998 and 1997, respectively. The
Company's working capital ratio was 2.2 to 1 at December 31, 1998 compared with
2.6 to 1 at December 31, 1997; excluding $200 million of 6.625% notes due
September 15, 1999, the Company's working capital ratio was 2.6 to 1 at December
31, 1998.
CASH FLOWS
Significant sources and uses of cash in the past three years are summarized
as follows, in thousands:
CASH SOURCES (USES) 1998 1997 1996
------------------- -------- -------- --------
Net cash from operating activities.............. $419,090 $405,030 $340,140
Cash proceeds from sale of:
Subsidiary and TriMas investment.............. 137,640 -- --
Discontinued operations....................... -- -- 707,630
MascoTech investments, net.................... -- 45,580 115,000
Acquisition of companies, net of cash
acquired...................................... (322,880) (186,920) (173,110)
Capital expenditures............................ (188,960) (167,400) (138,540)
Purchase of Company common stock for:
Treasury...................................... (43,330) -- --
Long-term incentive award plan................ (46,800) (29,110) (14,030)
Increase (decrease) in debt, net................ 327,680 7,890 (368,160)
Cash dividends paid............................. (145,290) (131,680) (123,530)
Other, net...................................... (36,740) 24,210 67,860
-------- -------- --------
Cash increase (decrease)................... $100,410 $(32,400) $413,260
======== ======== ========
CASH FLOWS FROM OPERATING ACTIVITIES
Cash from operating activities was $419.1 million in 1998 as compared with
$405.0 million in 1997 and $340.1 million in 1996. During 1998, the Company's
accounts receivable and inventories increased
12
14
by $141.1 million and $44.0 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
benefitting from larger, more cost-effective purchasing.
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES
Cash used for investing activities was $410.9 million in 1998 compared with
cash used for investing activities of $284.5 million in 1997 and cash from
investing activities of $578.8 million in 1996.
Cash flows from investing activities for 1998 included $137.6 million of
aggregate proceeds from the sale of the Company's Thermador subsidiary and the
sale of its common stock investment in TriMas Corporation to MascoTech in the
public tender offer. The Company recorded gains aggregating $59.3 million as a
result of these transactions.
Cash flows for investing activities included $322.9 million for the 1998
acquisitions of Vasco Corporation, The Brugman Group, Heritage Bathrooms PLC and
several other smaller home improvement and building products companies.
Capital expenditures totalled $189.0 million in 1998 compared with $167.4
million in 1997 and $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 1999, excluding those of
potential 1999 acquisitions, to exceed $200 million. Depreciation and
amortization expense for 1998 totalled $136.3 million, compared with $116.1
million for 1997 and $99.7 million for 1996; for 1999, depreciation and
amortization expense, excluding 1999 acquisitions, is expected to approximate
$160 million.
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 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. 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. 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.
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 FROM (FOR) FINANCING ACTIVITIES
Cash from financing activities was $92.3 million in 1998 as compared with
cash used for financing activities of $152.9 million in 1997 and $505.7 million
in 1996.
Cash from financing activities for 1998 included $250 million from the
issuance of 6.625% debentures due April 2018, $100 million from the issuance of
5.75% notes due October 2008 and a net increase in other debt of $86.3 million.
After giving effect to the issuance of these debt securities, the
13
15
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 $409 million of debt and equity securities.
Cash used for financing activities for 1998 included $108.6 million for the
early retirement of certain of the Company's 9% notes and the payment of a
premium associated with this early retirement, $43.3 million for the acquisition
of approximately 1.9 million shares of Company common stock in open-market
transactions and $46.8 million for the acquisition of Company common stock for
the Company's long-term incentive award plan. At December 31, 1998, the Company
had remaining authorization to repurchase up to an additional 12.5 million of
its shares in open-market transactions or otherwise.
During 1996, the Company retired $250 million of 9% notes due in 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.
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 asset sales and from bank borrowings.
CONSOLIDATED RESULTS OF OPERATIONS
Sales and Operations
Net sales for 1998 were $4,345 million, representing an increase of 16
percent over 1997. After adjusting for acquisitions and divestitures, net sales
for 1998 increased 10 percent over 1997. Net sales for 1997 increased 16 percent
to $3,760 million from $3,237 million in 1996; after adjusting for acquisitions,
net sales increased 7 percent in 1997 over 1996.
Cost of sales as a percentage of sales for 1998 increased to 64.3 percent
compared with 63.3 percent for 1997 and 1996. The increase in the cost of sales
percentage for 1998 as compared with 1997 and 1996 was primarily attributable to
product sales mix and acquisitions, which offset the benefits resulting from
increased sales volume and new product introductions.
Excluding amortization of acquired goodwill ($28.5 million, $18.7 million,
and $12.1 million in 1998, 1997 and 1996, respectively), selling, general and
administrative expenses as a percentage of sales were 19.4 percent in 1998
compared with 20.6 percent and 21.5 percent for 1997 and 1996, respectively. The
downward trend in the selling, general and administrative expenses percentage
results from the Company's continuation of cost-containment initiatives and the
leveraging of fixed costs over a higher sales base.
Other Income (Expense), Net
Included in other income (expense), net are equity earnings from MascoTech,
Inc. of $15.4 million for 1998 as compared with equity earnings from MascoTech
of $14.6 million and $13.9 million for 1997 and 1996, respectively.
Included under other income (expense), net in other, net is interest income
for 1998, 1997 and 1996 of $41.5 million, $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 a $151 million note receivable from MascoTech, which was paid
on September 30, 1997.
Included under other income (expense), net in other, net in 1998 were
pre-tax gains aggregating approximately $59 million from sales of the Company's
Thermador subsidiary ($30 million) and the
14
16
Company's investment in TriMas Corporation ($29 million). Also included in
other, net for 1998 were $7.0 million of dividend income from the Company's
investment in Furnishings International's 13% cumulative preferred stock and an
approximate $12 million pre-tax charge related to the early retirement of
long-term debt.
Included under other income (expense), net in other, net in 1997 were $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 non-operating assets
and charges aggregating approximately $30 million, principally for the
adjustment of the Company's Payless Cashways investment to its estimated fair
value.
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.
Net Income and Earnings Per Share
Net income for 1998 was $476 million compared with $382 million for 1997
and $295 million for 1996. After adjusting for the two-for-one stock split in
July 1998, diluted earnings per share for 1998 were $1.39, compared with $1.15
for 1997 and $.91 for 1996. The Company's effective tax rate decreased to 37.0
percent in 1998 from 39.4 percent in 1997 and 41.3 percent in 1996 due
principally to the increased utilization of foreign tax credits and the
utilization of a portion of the Company's capital loss carryforward benefit. The
Company estimates that its effective tax rate will approximate 37 percent for
1999.
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 1999. 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 actively pursue acquisition candidates that complement or
support the Company's core competencies.
15
17
NET SALES BY PRODUCT GROUP AND GEOGRAPHIC AREA
The following table sets forth the Company's net sales by product group and
geographic area, in millions.
PERCENT CHANGE
-----------------
NET SALES 1998 1997
------------------------------ VS. VS.
1998 1997 1996 1997 1996
------ ------ ------ ---- ----
Kitchen and Bath Products:
Faucets........................... $ 884 $ 815 $ 757 8% 8%
Cabinets.......................... 1,334 1,083 832 23% 30%
Other............................. 1,076 1,042 930 3% 12%
------ ------ ------
Total Kitchen and Bath
Products..................... 3,294 2,940 2,519 12% 17%
Environmental Products and
Services.......................... 485 348 295 39% 18%
Builders' Hardware and Other
Specialty Products................ 566 472 423 20% 12%
------ ------ ------
Total.......................... $4,345 $3,760 $3,237 16% 16%
====== ====== ======
North America....................... $3,506 $3,072 $2,680 14% 15%
Europe.............................. 839 688 557 22% 24%
------ ------ ------
Total, as above................ $4,345 $3,760 $3,237 16% 16%
====== ====== ======
BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS
The following tables set forth net sales and operating profit information
by segment and geographic area.
1998 1997
----- -----
Sales increases, year-to-year, excluding acquisitions
and divestitures:
Kitchen and Bath Products.......................... 9% 7%
Environmental Products and Services................ 17% 15%
Builders' Hardware and Other Specialty Products.... 13% 0%
North America...................................... 11% 8%
Europe............................................. 0% (5%)
Operating profit increases, year-to-year*:
Kitchen and Bath Products.......................... 14% 17%
Environmental Products and Services................ 38% 22%
Builders' Hardware and Other Specialty Products.... 5% 27%
North America...................................... 13% 19%
Europe............................................. 24% 14%
1998 1997 1996
----- ----- -----
Operating profit margins*:
Kitchen and Bath Products.......................... 18.6% 18.3% 18.3%
Environmental Products and Services................ 14.2% 14.4% 13.9%
Builders' Hardware and Other Specialty Products.... 14.8% 16.9% 14.9%
North America...................................... 18.3% 18.6% 17.9%
Europe............................................. 14.7% 14.4% 15.6%
*Before general corporate expense.
16
18
Business Segment Results
After adjusting for acquisitions and divestitures, increases in net sales
for the Company's Kitchen and Bath Products segment 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 results of this business segment for 1998 were favorably influenced by
higher unit sales volume, offset in part by a moderation in gross profit margin
due to the influence of product sales mix, acquisitions and stronger than
anticipated demand for cabinets. For 1997 compared with 1996, higher unit sales
volumes contributed to improved operating results of the Company's U.S. cabinet,
other kitchen and bath and faucet businesses. 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.
After adjusting for acquisitions and divestitures, increases in net sales
for the Company's Environmental Products and Services segment for 1998 and 1997
principally include the influence of higher installation sales of fiberglass
insulation. Operating results of the Company's Environmental Products and
Services segment for 1998 were affected in part by higher fiberglass insulation
costs, which offset the favorable influence of European acquisitions. Operating
results for 1996 were lower due in part to plant reorganization charges.
After adjusting for acquisitions, net sales for the Company's Builders'
Hardware and Other Specialty Products segment increased in 1998 due largely to
increased hardware sales. Operating profit in 1998 was adversely influenced by
lower results of certain of the Company's hardware businesses, which faced
operational challenges and weakness in the domestic hospitality market, and
lower results of European operations. Operating margin for this segment in 1997
benefitted from increased sales of certain higher margin builders' hardware
products and improved results of certain of the Company's other specialty
businesses.
Operating results of the Company's business segments for 1998, 1997 and
1996 benefitted from the leveraging of fixed selling, general and administrative
expenses over higher sales.
Geographic Area Results
Results of North American operations for 1998, 1997 and 1996 benefitted
from acquisitions and increased sales volume of existing businesses, driven in
part by favorable demographic and economic conditions principally in the United
States, including complementary population trends, modest economic growth and
relatively low unemployment and interest rates. These conditions have favorably
influenced the housing market in the United States, including housing starts,
existing home sales and repair and remodeling activities.
European results for 1998 were favorably influenced by acquisitions.
Results of existing European operations have been adversely influenced in recent
years, in part due to softness in the Company's European markets, 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 1998 compared with
1997 as well as 1997 compared with 1996, lowering European net sales by
approximately 2 percent and 12 percent, respectively.
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," becomes effective for all
fiscal quarters for all fiscal years beginning after June 15, 1999 (effective
January 1, 2000 for the Company). SFAS No. 133 should not have a material effect
on the Company's financial statements.
The American Institute of Certified Public Accountants' Statement of
Position No. 98-5, "Reporting on the Costs of Start-Up Activities," is effective
for fiscal years beginning after December 15, 1998 and will not have a material
effect on the Company's financial statements.
17
19
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, 1998. 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, 1998, 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.
YEAR 2000
The year 2000 ("Y2K") issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's systems or equipment that have date-sensitive software using only
two digits may recognize a date using "00" as the year 1900 rather than the year
2000. The resulting system failures or miscalculations may cause disruption of
operations, including, among other things, a temporary inability to process
transactions or send and receive electronic data with third parties or engage in
similar normal business activities.
In 1997, the Company formed an internal review team to address the Y2K
issue. This team, consisting of existing employees of the Company, has developed
a Year 2000 compliance program (the "Y2K Program") which includes: assessing and
monitoring the compliance of all applications, operating systems and hardware on
mainframe, mid-range, personal computer and network platforms; addressing issues
related to non-information technology embedded software and equipment; and
addressing the compliance of key business partners. Executive management
regularly monitors the status of the Company's Y2K Program.
The first component of the Y2K Program is to identify the computer systems
and other equipment with embedded technology that are susceptible to failures or
errors as a result of the Y2K issue. This effort is substantially complete.
The second component involves the actual remediation or replacement of
non-compliant systems and equipment. For its information technology, the Company
generally utilizes mid-range, non-mainframe based computing environments which
are complemented by a series of local-area networks that are connected via a
wide-area network. Substantially all operating systems related to the mid-range
systems and networks have been updated to comply with Y2K requirements. In
addition, upgraded or modified versions of the Company's financial,
manufacturing, human resource, and other packaged software applications which
are Y2K compliant are in the process of being tested and integrated into the
Company's overall system. The Company presently expects that this integration
will be substantially completed by June 1999.
The Company utilizes some microcomputers and software in its various
manufacturing processes throughout the world. The Company is currently assessing
potential Y2K issues in those processes. General findings to date indicate that
problems usually relate to old personal computers or embedded microprocessors
that must be replaced. Although there can be no assurance that the Company will
identify and correct every Y2K issue found in the computer applications used in
its manufacturing processes, the Company believes that it has in place a
comprehensive program to identify and correct any such problems, and expects to
have substantially completed the remediation of all of its manufacturing systems
by June 1999.
The Company is also reviewing its building and utility systems (i.e.,
telephones, security, electrical) to determine any Y2K issues as part of its Y2K
Program. Many of these systems are Y2K
18
20
compliant. While the Company is working with suppliers of these systems and has
no reason to expect that they will not meet their Y2K compliance targets, there
is no guarantee that they will do so.
The third component of the Y2K Program, which was initiated in late 1997,
involves communication with significant suppliers and customers to determine the
extent to which the Company is vulnerable to such parties' failure to remediate
their own Y2K issues. The Company's efforts with respect to specific issues
identified, including the development of contingency plans, will depend in part
upon its assessment of the risk that such issues could have a material adverse
impact on the Company. Senior management at the Company's operating subsidiaries
have been charged with identifying third party Y2K risks which could materially
disrupt the subsidiaries' business operations. The Company is assisting its
subsidiaries in developing contingency plans where such risks have been
identified. Contingency plans may include securing alternate sources of supply,
increasing inventory levels, stockpiling raw and packaging materials and other
appropriate measures. Once developed, contingency plans will be continually
refined as additional information is updated. The Company has requested that
such contingency plans be completed no later than June 30, 1999. The Company
will continue to monitor and evaluate the progress of its subsidiaries on this
critical matter.
The most reasonably likely worst case Y2K scenario for the Company is a
failure on the part of a significant customer or supplier to remediate their own
Y2K issues which results in a disruption of Company operations. However, because
the Company's customer base is broad enough to minimize the impact of the
failure of any single customer interface, and the contingency plans described
above will mitigate supply problems, the Company currently does not believe that
it has any material exposure to significant business interruption as a result of
Y2K issues. The estimated total cost of the Y2K Program is between $10 million
and $17 million, which includes planned upgrades. This cost, more than half of
which has been incurred and expensed at December 31, 1998, is not expected to be
material to the Company's results of operations or financial position. This cost
and the timing in which the Company plans to complete the Y2K Program, are based
on management's best estimates, at the present time. Accordingly, there can be
no absolute assurance that the Company will timely identify and remediate all
significant Y2K issues, that remedial efforts will not involve significant time
and expense, or that such issues will not have an adverse effect on the
Company's financial position, results of operations or cash flows.
19
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Masco Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a)(1) present fairly, in all material respects, the
financial position of Masco Corporation and its subsidiaries at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item
14(a)(2)(i) presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Detroit, Michigan
February 17, 1999
20
22
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997
-------------- --------------
Current Assets:
Cash and cash investments................................. $ 541,740,000 $ 441,330,000
Receivables............................................... 700,130,000 559,050,000
Inventories............................................... 558,990,000 515,000,000
Prepaid expenses and other................................ 61,760,000 111,340,000
-------------- --------------
Total current assets................................. 1,862,620,000 1,626,720,000
Equity investment in MascoTech, Inc. ....................... 59,830,000 52,780,000
Equity investments in other affiliates...................... 165,020,000 175,300,000
Securities of Furnishings International Inc................. 434,640,000 393,140,000
Property and equipment...................................... 1,164,250,000 1,037,320,000
Acquired goodwill, net...................................... 1,036,290,000 729,190,000
Other assets................................................ 444,700,000 319,310,000
-------------- --------------
Total assets......................................... $5,167,350,000 $4,333,760,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable............................................. $ 254,010,000 $ 68,460,000
Accounts payable.......................................... 171,250,000 166,310,000
Accrued liabilities....................................... 421,320,000 385,230,000
-------------- --------------
Total current liabilities............................ 846,580,000 620,000,000
Long-term debt.............................................. 1,391,420,000 1,321,470,000
Deferred income taxes and other............................. 200,770,000 163,270,000
-------------- --------------
Total liabilities.................................... 2,438,770,000 2,104,740,000
-------------- --------------
Shareholders' Equity:
Common shares authorized: 900,000,000; issued:
1998-339,330,000; 1997-165,570,000..................... 339,330,000 165,570,000
Preferred shares authorized: 1,000,000.................... -- --
Paid-in capital........................................... 294,060,000 304,560,000
Retained earnings......................................... 2,111,760,000 1,784,370,000
Other comprehensive income (loss)......................... (16,570,000) (25,480,000)
-------------- --------------
Total shareholders' equity........................... 2,728,580,000 2,229,020,000
-------------- --------------
Total liabilities and shareholders' equity........... $5,167,350,000 $4,333,760,000
============== ==============
See notes to consolidated financial statements.
21
23
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
-------------- -------------- --------------
Net sales...................................... $4,345,000,000 $3,760,000,000 $3,237,000,000
Cost of sales.................................. 2,793,990,000 2,378,250,000 2,048,070,000
-------------- -------------- --------------
Gross profit......................... 1,551,010,000 1,381,750,000 1,188,930,000
Selling, general and administrative expenses... 842,000,000 775,930,000 696,290,000
Amortization of acquired goodwill.............. 28,510,000 18,720,000 12,140,000
-------------- -------------- --------------
Operating profit..................... 680,500,000 587,100,000 480,500,000
-------------- -------------- --------------
Other income (expense), net:
Re: MascoTech, Inc.:
Equity earnings........................... 15,360,000 14,580,000 13,860,000
Gain from change in investment............ -- 29,500,000 --
Gain from sale of investments, net........ -- -- 67,800,000
Equity earnings, other affiliates............ 13,840,000 9,560,000 6,230,000
Other, net................................... 130,560,000 70,010,000 8,990,000
Interest expense............................. (85,260,000) (79,850,000) (74,680,000)
-------------- -------------- --------------
74,500,000 43,800,000 22,200,000
-------------- -------------- --------------
Income before income taxes........... 755,000,000 630,900,000 502,700,000
Income taxes................................... 279,000,000 248,500,000 207,500,000
-------------- -------------- --------------
Net income........................... $ 476,000,000 $ 382,400,000 $ 295,200,000
============== ============== ==============
Earnings per share:
Basic................................ $1.44 $1.20 $.94
============== ============== ==============
Diluted.............................. $1.39 $1.15 $.91
============== ============== ==============
See notes to consolidated financial statements.
22
24
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------- ------------- -------------
Cash Flows From (For):
Operating Activities:
Net income.................................. $ 476,000,000 $ 382,400,000 $ 295,200,000
Depreciation and amortization............... 136,320,000 116,050,000 99,680,000
Unremitted equity earnings of affiliates.... (24,070,000) (19,470,000) (12,310,000)
Interest accrual on pay-in-kind notes
receivable................................ (41,500,000) (36,800,000) (13,970,000)
Deferred income taxes....................... 45,900,000 34,880,000 28,850,000
Gain from:
Sale of subsidiary and TriMas
investment............................. (59,300,000) -- --
Sale of MascoTech investments, net........ -- -- (67,800,000)
Change in MascoTech investment............ -- (29,500,000) --
Increase in receivables..................... (100,820,000) (41,560,000) (7,510,000)
Increase in inventories..................... (39,300,000) (38,770,000) (1,890,000)
Increase in accounts payable and accrued
liabilities, net.......................... 30,240,000 44,960,000 38,410,000
Other, net.................................. (4,380,000) (7,160,000) (18,520,000)
------------- ------------- -------------
Net cash from operating activities... 419,090,000 405,030,000 340,140,000
------------- ------------- -------------
Investing Activities:
Acquisition of companies, net of cash
acquired.................................. (322,880,000) (186,920,000) (173,110,000)
Capital expenditures........................ (188,960,000) (167,400,000) (138,540,000)
Cash proceeds from sale of:
Subsidiary and TriMas investment.......... 137,640,000 -- --
Discontinued operations................... -- -- 707,630,000
MascoTech investments, net................ -- 45,580,000 115,000,000
Other, net.................................. (36,740,000) 24,210,000 67,860,000
------------- ------------- -------------
Net cash from (for) investing
activities........................ (410,940,000) (284,530,000) 578,840,000
------------- ------------- -------------
Financing Activities:
Issuance of 6.625% debentures............... 250,000,000 -- --
Issuance of 5.75% notes..................... 100,000,000 -- --
Increase in other debt...................... 172,310,000 90,550,000 537,380,000
Retirement of 9% notes...................... (108,620,000) -- (250,000,000)
Payment of other debt....................... (86,010,000) (82,660,000) (655,540,000)
Purchase of Company common stock for:
Treasury.................................. (43,330,000) -- --
Long-term incentive award plan............ (46,800,000) (29,110,000) (14,030,000)
Cash dividends paid......................... (145,290,000) (131,680,000) (123,530,000)
------------- ------------- -------------
Net cash from (for) financing
activities........................ 92,260,000 (152,900,000) (505,720,000)
------------- ------------- -------------
Cash and Cash Investments:
Increase (decrease) for the year............... 100,410,000 (32,400,000) 413,260,000
At January 1................................... 441,330,000 473,730,000 60,470,000
------------- ------------- -------------
At December 31................................. $ 541,740,000 $ 441,330,000 $ 473,730,000
============= ============= =============
See notes to consolidated financial statements.
23
25
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
COMMON OTHER
SHARES RETAINED COMPREHENSIVE
TOTAL ($1 PAR VALUE) PAID-IN CAPITAL EARNINGS INCOME (LOSS)
-------------- -------------- --------------- -------------- --------------
Balance, January 1, 1996.... $1,655,430,000 $160,380,000 $ 128,550,000 $1,366,330,000 $ 170,000
Comprehensive income:
Net income................ 295,200,000 -- -- 295,200,000 --
Cumulative translation
adjustments............. 2,350,000 -- -- -- 2,350,000
--------------
Total comprehensive
income.................... 297,550,000
Shares issued............... 11,950,000 490,000 11,460,000 -- --
Cash dividends declared..... (125,120,000) -- -- (125,120,000) --
-------------- ------------ ------------- -------------- ------------
Balance, December 31,
1996...................... 1,839,810,000 160,870,000 140,010,000 1,536,410,000 2,520,000
Comprehensive income:
Net income................ 382,400,000 -- -- 382,400,000 --
Cumulative translation
adjustments............. (28,000,000) -- -- -- (28,000,000)
--------------
Total comprehensive
income.................... 354,400,000 -- -- -- --
Shares issued............... 169,250,000 4,700,000 164,550,000 -- --
Cash dividends declared..... (134,440,000) -- -- (134,440,000)
-------------- ------------ ------------- -------------- ------------
Balance, December 31,
1997...................... 2,229,020,000 165,570,000 304,560,000 1,784,370,000 (25,480,000)
Comprehensive income:
Net income................ 476,000,000 -- -- 476,000,000 --
Cumulative translation
adjustments............. 8,910,000 -- -- -- 8,910,000
--------------
Total comprehensive
income.................... 484,910,000 -- -- -- --
Shares issued............... 206,590,000 5,670,000 200,920,000 -- --
100 percent stock
distribution.............. -- 169,980,000 (169,980,000) -- --
Shares repurchased.......... (43,330,000) (1,890,000) (41,440,000) -- --
Cash dividends declared..... (148,610,000) -- -- (148,610,000) --
-------------- ------------ ------------- -------------- ------------
Balance, December 31,
1998...................... $2,728,580,000 $339,330,000 $ 294,060,000 $2,111,760,000 $(16,570,000)
============== ============ ============= ============== ============
See notes to consolidated financial statements.
24
26
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. Per share data and
certain data regarding common shares outstanding for prior periods have been
adjusted for the two-for-one stock split, effected in the form of a 100 percent
stock distribution, in July 1998. Certain amounts for prior years have been
reclassified to conform with 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 any 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 certain 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, 1998 and 1997, accounts and notes receivable are presented net of
allowances for doubtful accounts of $21.5 million and $19.8 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 income. Maintenance and
repair costs are charged to expense as incurred.
Depreciation and Amortization. Depreciation is computed principally using
the straight-line method over the estimated useful lives of the assets. Annual
depreciation rates are as follows: buildings and land improvements, 2 to 10
percent, and machinery and equipment, 5 to 33 percent. Depreciation was $88.5
million, $81.4 million and $71.7 million in 1998, 1997 and 1996, 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, 1998 and 1997 such accumulated amortization totalled $108.0 million
and $82.8 million, respectively. At each balance sheet date, management
evaluates the recoverability of acquired goodwill by comparing 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, 1998 and 1997. 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
$47.8 million, $34.6 million and $28.0 million in 1998, 1997 and 1996,
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 reflects the risk of the underlying investments. The fair value of the
Company's long-term debt instruments was based principally on quoted market
25
27
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING POLICIES -- (CONCLUDED)
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, 1998 was approximately $650 million and $1,416 million, as compared
with the Company's aggregate carrying value of $639 million and $1,391 million,
respectively, and at December 31, 1997 the aggregate market value 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.
ACQUISITIONS
During 1998, the Company acquired Vasco Corporation and The Brugman Group,
both of which are European manufacturers of residential hydronic radiators and
heat convectors, and Heritage Bathrooms PLC, a European manufacturer and
distributor of residential bath products.
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, 1997, pro forma unaudited
consolidated net sales and net income would have approximated $4,422 million and
$481 million for 1998 and $3,911 million and $394 million for 1997,
respectively, and pro forma unaudited consolidated diluted earnings per share
would have approximated $1.40 and $1.18 for 1998 and 1997, respectively.
The Company also acquired several other smaller home improvement and
building products companies in 1998.
The combined purchase price for 1998 acquisitions, net of cash acquired,
aggregated approximately $323 million. The acquisitions were accounted for as
purchase transactions.
INVENTORIES
(IN THOUSANDS)
AT DECEMBER 31
--------------------
1998 1997
-------- --------
Raw material............................................ $236,330 $229,040
Finished goods.......................................... 183,910 161,920
Work in process......................................... 138,750 124,040
-------- --------
$558,990 $515,000
======== ========
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:
AT DECEMBER 31
------------------------
1998 1997 1996
---- ---- ----
MascoTech, Inc. ......................................... 17% 17% 21%
Emco Limited............................................. 42% 42% --
Hans Grohe, a German partnership......................... 27% 27% 27%
TriMas Corporation....................................... -- 4% 4%
26
28
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY INVESTMENTS IN AFFILIATES -- (CONTINUED)
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 in affiliates at December 31, 1998 (which may differ from the
amounts that could then have been realized upon disposition), based upon quoted
market prices at that date, was $199 million, as compared with the Company's
related aggregate carrying value of $172 million. The Company's carrying value
in common stock of these equity affiliates exceeded its equity in the underlying
net book value by approximately $77 million at December 31, 1998. 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.
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. Under the sale agreement, the Company received approximately $266
million, with $115 million cash 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.
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.
On January 22, 1998, MascoTech announced the completion of its acquisition
of TriMas Corporation. The Company recorded a gain in the first quarter of 1998,
as a result of selling its common stock investment in TriMas to MascoTech in the
public tender offer.
27
29
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY INVESTMENTS IN AFFILIATES -- (CONCLUDED)
Approximate combined condensed financial data of the above-listed
affiliates at December 31, 1998 and 1997 and for the three years then ended, are
summarized in U.S. dollars as follows, in thousands:
1998 1997 1996
---------- ---------- ----------
Net sales................................................ $2,732,560 $2,745,570 $2,136,740
========== ========== ==========
Income from continuing operations before income taxes.... $ 203,750 $ 287,380 $ 181,710
========== ========== ==========
Net income attributable to common shareholders........... $ 142,870 $ 172,690 $ 109,500
========== ========== ==========
The Company's net equity in above net income............. $ 29,200 $ 24,140 $ 20,090
========== ========== ==========
Cash dividends received by the Company from affiliates... $ 5,130 $ 4,670 $ 7,780
========== ========== ==========
At December 31:
Current assets......................................... $ 832,350 $ 973,900
Current liabilities.................................... (412,720) (436,250)
---------- ----------
Working capital..................................... 419,630 537,650
Property and equipment................................. 839,080 776,470
Other assets........................................... 968,400 504,810
Long-term liabilities.................................. (1,741,490) (980,990)
---------- ----------
Shareholders' equity................................ $ 485,620 $ 837,940
========== ==========
Equity in undistributed earnings of affiliates of $57 million at December
31, 1998, $43 million at December 31, 1997 and $32 million at December 31, 1996
are included in consolidated retained earnings.
SECURITIES OF FURNISHINGS INTERNATIONAL INC.
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, including $708 million in cash, $285 million
of junior debt securities and equity securities aggregating $57 million.
Securities of Furnishings International Inc. are summarized as follows:
(IN THOUSANDS)
AT DECEMBER 31
-------------------
1998 1997
-------- --------
Junior debt securities (12% pay-in-kind)............. $377,270 $335,770
Preferred stock (13% cumulative).....................
Common stock (15% ownership)......................... 57,370 57,370
Convertible preferred stock..........................
-------- --------
$434,640 $393,140
======== ========
The junior debt securities mature in 2008 and are stated at face value. 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.
28
30
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
(IN THOUSANDS)
AT DECEMBER 31
------------------------
1998 1997
---------- ----------
Land and improvements................................. $ 74,440 $ 70,120
Buildings............................................. 507,170 465,920
Machinery and equipment............................... 1,230,100 1,089,330
---------- ----------
1,811,710 1,625,370
Less, accumulated depreciation........................ 647,460 588,050
---------- ----------
$1,164,250 $1,037,320
========== ==========
ACCRUED LIABILITIES
(IN THOUSANDS)
AT DECEMBER 31
----------------------
1998 1997
-------- --------
Salaries, wages and related benefits.................... $105,260 $ 96,160
Advertising and sales promotion......................... 78,250 86,170
Insurance............................................... 55,360 48,930
Income taxes............................................ 45,260 3,240
Dividends payable....................................... 37,330 34,000
Interest................................................ 27,060 26,990
Property, payroll and other taxes....................... 25,840 21,520
Other................................................... 46,960 68,220
-------- --------
$421,320 $385,230
======== ========
LONG-TERM DEBT
(IN THOUSANDS)
AT DECEMBER 31
------------------------
1998 1997
---------- ----------
Notes and Debentures:
6.625%, due September 15, 1999...................... $ 200,000 $ 200,000
9%, due October 1, 2001......................... 77,030 175,000
6.125%, due September 15, 2003...................... 200,000 200,000
5.75%, due October 15, 2008........................ 100,000 --
7.125%, due August 15, 2013......................... 200,000 200,000
6.625%, due April 15, 2018.......................... 250,000 --
European bank debt.................................... 505,970 329,300
Convertible subordinated debentures, 5.25%, due
2012................................................ -- 177,920
Other, principally acquisition-related................ 112,430 107,710
---------- ----------
1,645,430 1,389,930
Less, current portion................................. 254,010 68,460
---------- ----------
$1,391,420 $1,321,470
========== ==========
All of the notes and debentures above are nonredeemable.
29
31
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT -- (CONCLUDED)
European bank debt relates to borrowings of local currency for European
acquisitions and expansion. At December 31, 1998, approximately $239 million of
European debt related to a term loan facility expiring in 2002. The balance of
$267 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, 1998).
The Company called the 5.25% convertible subordinated debentures due 2012
for redemption in February 1998. Substantially all holders exercised their right
to convert these debentures into Company common stock (at the pre-stock split
conversion price of $42.28 per share), resulting in the issuance of
approximately 4.2 million shares of Company common stock in February 1998 (8.4
million shares after giving effect to the stock split).
Certain debt agreements contain limitations on additional borrowings and
requirements for maintaining a certain level of net worth. At December 31, 1998,
the Company was in compliance with these limitations and requirements, and the
Company's net worth exceeded the most restrictive of such provisions by
approximately $715 million.
At December 31, 1998, the maturities of long-term debt during each of the
next five years, assuming that the bank debt is refinanced, were approximately
as follows: 1999-$254.0 million; 2000-$66.9 million; 2001-$94.3 million;
2002-$10.1 million; and 2003-$206.1 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 at December 31, 1998. Interest is payable on borrowings under this
agreement based upon various floating rate options 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 $409 million of debt and equity securities.
Interest paid was approximately $85 million, $75 million and $102 million
in 1998, 1997 and 1996, respectively. Amounts paid in 1996 include interest
pertaining to discontinued operations.
SHAREHOLDERS' EQUITY
In July 1998, the Company effected a two-for-one stock split in the form of
a 100 percent stock distribution to shareholders, which resulted in the issuance
of approximately 170 million shares of common stock and reduced paid-in-capital
by approximately $170 million.
On the basis of amounts paid (declared) and after giving effect to the
stock split, cash dividends per share were $.43 ($.43 1/2) in 1998, $.40 1/2
($.41) in 1997 and $.38 1/2 ($.39) in 1996.
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.
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
30
32
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SHAREHOLDERS' EQUITY -- (CONCLUDED)
cumulative translation adjustments in shareholders' equity, included in other
comprehensive income (loss).
During 1998, the Company acquired approximately 1.9 million of its common
shares in open-market transactions at a cost aggregating $43.3 million. At
December 31, 1998, the Company had remaining authorization to repurchase up to
12.5 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, 1998,
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
1,149,000, 1,581,000 and 1,080,000 shares of Company common stock during 1998,
1997 and 1996, 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 1998, 1997 and 1996 was $26, $21 and $15,
respectively. Early vesting of certain of these awards is contingent upon the
market price of Company common stock equalling or exceeding certain price
targets within specific time periods, including a $50 price target by February
2003. Compensation expense for the annual vesting of long-term stock awards was
$17.0 million, $14.0 million and $14.9 million in 1998, 1997 and 1996,
respectively. The unamortized costs of unvested stock awards, aggregating
approximately $127 million at December 31, 1998, 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 at the grant date, equals the market price
of Company common stock on the date of grant. These options generally become
exercisable in installments beginning in the third year and extending through
the eighth year after grant.
During 1997, the Company granted original stock options for 5,680,000
shares of Company common stock with an exercise price of $19 1/2 per share
(equal to the market price on the grant date). During 1998 and 1997, the Company
also granted restoration stock options for 692,000 and 278,000 shares of Company
common stock with grant date exercise prices ranging from $25 to $31 and $17 1/2
to $26, respectively (the market prices on the grant dates), and stock options
for 64,000 and 56,000 shares of Company common stock to non-employee Directors
of the Company with exercise prices of $29 and $19 1/2, respectively.
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 arrangements for the Chief Executive Officer and in
April 1996 granted the Chief Executive Officer a 10-year option, with a $20 1/2
exercise price when the market price was $13 15/16 per share, to purchase two
million shares of Company common stock. This option became exercisable in 1997
when the price of Company common stock exceeded $20 1/2 per share.
31
33
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS AND AWARDS -- (CONTINUED)
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 through 1998 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 $16 (equal to the market price on
the grant date). Such options were granted for approximately 3,230,000 shares of
Company common stock. In addition, in 1996 when the market price of Company
common stock was $16 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 $25 per share in late 1997.
A summary of the status of the Company's stock options granted for the
three years ended December 31, 1998 is presented below.
(SHARES IN THOUSANDS)
1998 1997 1996
------ ------ ------
Option shares outstanding, January 1............... 16,200 14,616 10,912
Weighted average exercise price.................. $17 $14 $12
Option shares granted, including restoration
options.......................................... 756 6,014 5,360
Weighted average exercise price.................. $28 $20 $18
Option shares exercised............................ 2,486 4,276 934
Weighted average exercise price.................. $13 $13 $11
Option shares cancelled............................ 74 154 722
Weighted average exercise price.................. $10 $11 $11
Option shares outstanding, December 31............. 14,396 16,200 14,616
Weighted average exercise price.................. $18 $17 $14
Weighted average remaining option term (in
years)........................................ 6.6 7.2 5.5
Option shares exercisable, December 31............. 3,781 4,588 5,614
Weighted average exercise price.................. $17 $16 $12
Of the 3,781,000 option shares exercisable at December 31, 1998, 946,000
were exercisable at per share prices ranging from $10 to $15, with a weighted
average exercise price of $10; 793,000 were exercisable at per share prices
ranging from $16 to $20, with a weighted average exercise price of $18; and
2,042,000 were exercisable at per share prices ranging from $21 to $30 with a
weighted average exercise price of $21.
At December 31, 1998, a combined total of 12,085,000 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 72,000 shares of Company common stock were granted in 1998 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, 1998, a combined total of 825,000 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 income. Had stock
option compensation expense been determined pursuant to the methodology of
32
34
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS AND AWARDS -- (CONCLUDED)
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 $.02, $.02 and $.01 in
1998, 1997 and 1996, respectively.
For SFAS No. 123 calculation purposes, the weighted average grant date fair
values of options, including restoration options (which have a vesting period of
approximately one year), granted in 1998, 1997 and 1996 were $6.00, $6.27 and
$5.60, 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 1998, 1997 and 1996, respectively: risk free interest
rate -- 4.9%, 6.7% and 6.7%; dividend yield -- 2.1%, 2.5% and 2.5%; volatility
factor -- 28%, 27% and 25%; and expected option life -- 3 years, 7 years and 7
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 1998, 1997 or 1996. At December 31, 1998, there were 4,695,000
of such shares available for granting future awards under this plan.
Common share and per share data in this note have been adjusted for the
two-for-one stock split, effected in the form of a 100 percent stock
distribution, in July 1998.
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 $32.8 million
in 1998, $23.9 million in 1997 and $24.4 million in 1996.
Net periodic pension cost for the Company's qualified pension plans
includes the following components, in thousands:
1998 1997 1996
-------- -------- -------
Service cost..................................... $ 8,530 $ 7,090 $ 6,220
Interest cost.................................... 11,260 10,170 9,450
Expected return on plan assets................... (11,870) (11,140) (9,590)
Amortization of transition asset................. (620) (620) (620)
Amortization of prior-service cost............... 320 330 300
Amortization of net loss......................... 1,530 770 230
-------- -------- -------
Net periodic pension cost........................ $ 9,150 $ 6,600 $ 5,990
======== ======== =======
33
35
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE RETIREMENT PLANS -- (CONCLUDED)
The following table provides a reconciliation of changes in the projected
benefit obligation, fair value of plan assets and funded status of the Company's
qualified pension plans at December 31, in thousands:
1998 1997
-------- --------
Changes in projected benefit obligation:
Benefit obligation at January 1........................ $152,320 $129,540
Service cost........................................... 8,140 6,680
Interest cost.......................................... 11,260 10,170
Plan amendments........................................ (1,720) (300)
Actuarial loss......................................... 11,780 11,650
Benefit payments....................................... (5,800) (5,420)
-------- --------
Projected Benefit obligation at December 31......... $175,980 $152,320
======== ========
Changes in fair value of plan assets:
Fair value of plan assets at January 1................. $106,520 $102,040
Actual return on plan assets........................... 6,110 6,760
Cash contributions..................................... 6,460 3,590
Benefit payments....................................... (5,800) (5,420)
Expenses/other......................................... (430) (450)
-------- --------
Fair value of plan assets at December 31............ $112,860 $106,520
======== ========
Funded status of qualified pension plans:
Plan assets (less than) projected benefit obligation at
December 31......................................... $(63,120) $(45,800)
Unamortized net asset at transition.................... (2,180) (2,800)
Unamortized prior-service cost......................... 4,150 3,110
Unamortized net loss................................... 52,930 40,340
-------- --------
Net liability recognized............................ $ (8,220) $ (5,150)
======== ========
The major assumptions used in accounting for the Company's pension plans
are as follows:
1998 1997 1996
------ ----- -----
Discount rate for obligations......................... 6.75% 7.0% 7.5%
Expected return on plan assets........................ 11.0 % 11.0% 11.0%
Rate of compensation increase......................... 5.0 % 5.0% 5.0%
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 $37.0 million and $46.2 million, and $30.8 million and
$39.1 million at December 31, 1998 and 1997, respectively. Net periodic pension
cost for these plans was $7.1 million, $4.7 million and $4.9 million in 1998,
1997 and 1996, 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, 1998,
the aggregate present value of the unfunded accumulated postretirement benefit
obligation approximated $3 million.
34
36
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT INFORMATION
The Company's operations in the 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; bathtubs and shower tub
enclosures; whirlpools and spas; and bath accessories.
Environmental Products and Services -- grilles, registers, diffusers for
heating/cooling systems; hydronic radiators and heat convectors;
insulation; and venting and ventilation systems.
Builders' Hardware and Other Specialty Products -- builders' hardware,
including mechanical and electronic lock sets; rolling shutters; 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. The Company's country of domicile is the United States.
Corporate assets consist primarily of real property, cash and cash
investments and other investments.
Pursuant to a corporate services agreement to provide MascoTech, Inc. with
certain corporate staff and administrative services, the Company charges a fee
approximating .8 percent of MascoTech net sales. The fees charged to MascoTech
approximated $8 million in 1998, $6 million in 1997 and $7 million in 1996, and
are included as a reduction of general corporate expense. The fees charged to
MascoTech in 1998 include fees related to TriMas Corporation, which was acquired
by MascoTech in January 1998. Fees charged for corporate services provided to
TriMas Corporation for 1997 and 1996 were $4 million and $3 million,
respectively.
The Company's segments are based on similarities in products and services
and represent the aggregation of similar operating units for which financial
information is regularly evaluated by the corporate operating executives in
determining resource allocation and assessing performance and is periodically
reviewed by the Board of Directors. Accounting policies for the segments are the
same as those for the Company. The Company evaluates performance based on
operating profit or loss and, other than general corporate expense, allocates
specific corporate overhead to each segment.
35
37
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT INFORMATION -- (CONCLUDED)
The following table presents information about the Company by segment and
geographic area:
(IN THOUSANDS)
NET SALES(1)(2)(3) OPERATING PROFIT ASSETS AT DECEMBER 31
------------------------------------ ------------------------------ ------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
---------- ---------- ---------- -------- -------- -------- ---------- ---------- ----------
The Company's
operations by
segment were:
Kitchen and Bath
Products...... $3,294,000 $2,940,000 $2,519,000 $613,000 $539,000 $462,000 $2,220,000 $2,023,000 $1,646,000
Environmental
Products and
Services...... 485,000 348,000 295,000 69,000 50,000 41,000 668,000 293,000 260,000
Builders'
Hardware and
Other
Specialty
Products...... 566,000 472,000 423,000 84,000 80,000 63,000 508,000 541,000 372,000
---------- ---------- ---------- -------- -------- -------- ---------- ---------- ----------
Total......... $4,345,000 $3,760,000 $3,237,000 $766,000 $669,000 $566,000 $3,396,000 $2,857,000 $2,278,000
========== ========== ========== ======== ======== ======== ========== ========== ==========
The Company's
operations by
geographic area
were (4):
North America... $3,506,000 $3,072,000 $2,680,000 $643,000 $570,000 $479,000 $2,221,000 $2,146,000 $1,667,000
Europe.......... 839,000 688,000 557,000 123,000 99,000 87,000 1,175,000 711,000 611,000
---------- ---------- ---------- -------- -------- -------- ---------- ---------- ----------
Total, as
above....... $4,345,000 $3,760,000 $3,237,000 766,000 669,000 566,000 3,396,000 2,857,000 2,278,000
========== ========== ==========
General corporate expense, net............................ (86,000) (82,000) (85,000)
-------- -------- --------
Operating profit, after general corporate expense......... 680,000 587,000 481,000
Other income (expense), net............................... 75,000 44,000 22,000
-------- -------- --------
Income before income taxes (5)............................ $755,000 $631,000 $503,000
======== ======== ========
Equity investments in and receivable from affiliates....................................... 225,000 228,000 220,000
Securities of Furnishings International Inc................................................ 435,000 393,000 356,000
Corporate assets........................................................................... 1,111,000 856,000 848,000
---------- ---------- ----------
Total assets......................................................................... $5,167,000 $4,334,000 $3,702,000
========== ========== ==========
PROPERTY ADDITIONS(6)
------------------------------
1998 1997 1996
-------- -------- --------
The Company's operations by segment were:
Kitchen and Bath Products.................................................................. $119,000 $149,000 $116,000
Environmental Products and Services........................................................ 77,000 27,000 21,000
Builders' Hardware and Other Specialty Products............................................ 22,000 34,000 21,000
-------- -------- --------
Total.................................................................................. $218,000 $210,000 $158,000
======== ======== ========
DEPRECIATION AND
AMORTIZATION
------------------------------------
1998 1997 1996
---------- ---------- ----------
The Company's operations by segment were:
Kitchen and Bath Products............................ $ 74,000 $69,000 $58,000
Environmental Products and Services.................. 23,000 13,000 9,000
Builders' Hardware and Other Specialty Products...... 20,000 15,000 12,000
---------- ---------- ----------
Total............................................ $117,000 $97,000 $79,000
========== ========== ==========
(1) Included in net sales in 1998, 1997 and 1996 are export sales from the U.S.
of $66.8 million, $58.8 million and $46.2 million, respectively.
(2) Intra-company sales among segments and geographic areas represented less
than one percent of consolidated net sales in 1998, 1997 and 1996.
(3) Includes net sales to one customer in 1998 and 1997 of $499 million and $392
million, respectively.
(4) Net sales from the Company's operations in the U.S. were $3,348 million,
$2,907 million and $2,524 million in 1998, 1997 and 1996, respectively.
Long-lived assets of the Company's operations in the U.S. and Europe were
$1,179 million and $813 million, $1,116 million and $467 million and $806
million and $409 million at December 31, 1998, 1997 and 1996, respectively.
(5) Income before income taxes and net income pertaining to non-U.S. operations
were $120 million and $60 million, $93 million and $45 million, and $82
million and $40 million for 1998, 1997 and 1996, respectively.
(6) Property additions include assets of acquired companies.
36
38
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER INCOME (EXPENSE), NET
(IN THOUSANDS)
1998 1997 1996
-------- -------- --------
Re: MascoTech, Inc.:
Equity earnings............................... $ 15,360 $ 14,580 $ 13,860
-------- -------- --------
Gain from change in investment................ -- 29,500 --
-------- -------- --------
Gain from sale of investments, net............ -- -- 67,800
-------- -------- --------
Equity earnings, other affiliates............... 13,840 9,560 6,230
-------- -------- --------
Other, net:
Income from cash and cash investments......... 21,540 17,280 6,910
Other interest income......................... 46,340 47,550 20,710
Other items................................... 62,680 5,180 (18,630)
-------- -------- --------
130,560 70,010 8,990
-------- -------- --------
Interest expense................................ (85,260) (79,850) (74,680)
-------- -------- --------
$ 74,500 $ 43,800 $ 22,200
======== ======== ========
Other interest income for 1998, 1997 and 1996 includes $41.5 million, $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 includes $7.5 million and
$1.7 million, respectively, of interest income from a $151 million note
receivable from MascoTech, which was paid on September 30, 1997.
Other items in 1998 include pre-tax gains aggregating approximately $59
million from sales of the Company's Thermador subsidiary ($30 million) and the
Company's investment in TriMas Corporation ($29 million). Also included in other
items for 1998 were $7.0 million of dividend income from the Company's
investment in Furnishings International's 13% cumulative preferred stock and an
approximate $12 million pre-tax charge related to the early retirement of
long-term debt.
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 non-operating 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.
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.
Interest expense in 1996 is presented net of interest expense pertaining to
discontinued operations of $21.8 million.
37
39
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
(IN THOUSANDS)
1998 1997 1996
--------- --------- --------
Income before income taxes:
U.S......................................... $ 635,320 $ 537,760 $420,560
Foreign..................................... 119,680 93,140 82,140
--------- --------- --------
$ 755,000 $ 630,900 $502,700
========= ========= ========
Provision for income taxes:
Currently payable:
U.S. Federal............................. $ 167,000 $ 146,940 $119,250
State and local.......................... 19,000 25,570 18,280
Foreign.................................. 47,100 41,110 41,120
Deferred:
U.S. Federal............................. 33,490 28,240 27,880
Foreign.................................. 12,410 6,640 970
--------- --------- --------
$ 279,000 $ 248,500 $207,500
========= ========= ========
Deferred tax assets at December 31:
Intangibles................................. $ 18,160 $ 24,110
Inventories................................. 12,210 11,380
Accrued liabilities......................... 46,720 54,650
Capital loss carryforward................... 117,760 149,470
Other, principally equity investments....... 44,600 34,940
--------- ---------
239,450 274,550
Valuation allowance......................... (156,700) (174,960)
--------- ---------
82,750 99,590
--------- ---------
Deferred tax liabilities at December 31:
Property and equipment...................... 166,880 149,220
Other....................................... 25,230 13,830
--------- ---------
192,110 163,050
--------- ---------
Net deferred tax liability at December 31..... $ 109,360 $ 63,460
========= =========
At December 31, 1998 and 1997, net deferred tax liability consists of net
short-term deferred tax assets of $15.4 million and $19.0 million, respectively,
and net long-term deferred tax liabilities of $124.8 million and $82.5 million,
respectively.
A valuation allowance of approximately $156.7 million and $175.0 million
was recorded at December 31, 1998 and 1997, 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 $117.8 million and $149.5 million after-tax capital loss
carryforward at December 31, 1998 and 1997, respectively, on the disposition of
the Company's home furnishings products segment and a $38.9 million and $25.5
million benefit of a capital nature on the Company's equity and other
investments at December 31, 1998 and 1997, respectively.
38
40
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES -- (CONCLUDED)
The following is a reconciliation of the U.S. Federal statutory rate:
1998 1997 1996
---- ---- ----
U.S. Federal statutory rate................................. 35% 35% 35%
State and local taxes, net of federal tax benefit........... 2 2 2
Higher taxes on foreign earnings............................ 2 3 3
Dividends-received deduction................................ -- (1) --
Amortization in excess of tax............................... 1 1 1
Change in valuation allowance............................... (2) (2) 1
Other, net.................................................. (1) 1 (1)
-- -- --
Effective tax rate........................................ 37% 39% 41%
== == ==
Income taxes paid were approximately $160 million, $178 million and $201
million in 1998, 1997 and 1996, respectively. Amounts paid in 1996 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, 1998 for U.S. or additional foreign withholding
taxes on approximately $30.8 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
The following are reconciliations of the numerators and denominators used
in the computations of basic and diluted earnings per share (after giving effect
to the 100 percent stock distribution in July 1998), in thousands:
1998 1997 1996
-------- -------- --------
Numerator:
Basic (Net income)............................ $476,000 $382,400 $295,200
Add convertible debenture interest, net (1)... 700 5,880 5,880
-------- -------- --------
Diluted (Net income).......................... $476,700 $388,280 $301,080
======== ======== ========
Denominator:
Basic shares (based on weighted average)...... 331,700 319,400 315,000
Add:
Contingently issued shares................. 7,200 6,600 6,200
Stock option dilution...................... 3,800 3,200 1,800
Convertible debentures (1)................. 1,000 8,400 8,400
-------- -------- --------
Diluted shares................................ 343,700 337,600 331,400
======== ======== ========
(1) 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.
39
41
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED FINANCIAL STATEMENTS (UNAUDITED)
For 1998, the following presents, as one entity with Masco Corporation as
the parent company, the combined unaudited financial statements of the Company
and MascoTech, Inc., and for 1997 and 1996, the combined unaudited financial
statements of the Company, MascoTech and TriMas Corporation. Intercompany
transactions have been eliminated. Amounts, except per share data, are in
thousands. (MascoTech completed its acquisition of TriMas Corporation in early
1998.)
AT DECEMBER 31
-----------------------
1998 1997
---------- ----------
COMBINED BALANCE SHEETS
Assets
Current assets:
Cash and cash investments........................... $ 571,130 $ 587,820
Marketable securities............................... -- 45,970
Receivables......................................... 923,470 768,030
Prepaid expenses and other.......................... 70,110 85,250
Deferred income taxes............................... 41,950 80,520
Inventories:
Raw material..................................... 298,910 286,120
Finished goods................................... 271,720 237,340
Work in process.................................. 186,710 162,460
---------- ----------
757,340 685,920
---------- ----------
Total current assets........................... 2,364,000 2,253,510
Equity investments in affiliates...................... 258,580 280,970
Securities of Furnishings International Inc........... 434,640 393,140
Property and equipment................................ 1,842,380 1,654,840
Acquired goodwill, net................................ 1,816,950 925,120
Other assets.......................................... 497,950 421,170
---------- ----------
Total assets................................... $7,214,500 $5,928,750
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable....................................... $ 258,830 $ 72,340
Accounts payable.................................... 281,260 264,980
Accrued liabilities................................. 556,550 535,300
---------- ----------
Total current liabilities...................... 1,096,640 872,620
Long-term debt........................................ 2,779,660 1,959,440
Deferred income taxes and other....................... 399,130 365,470
Other interests in combined affiliates................ 210,490 502,200
---------- ----------
Total liabilities.............................. 4,485,920 3,699,730
Equity of shareholders of Masco Corporation........... 2,728,580 2,229,020
---------- ----------
Total liabilities and shareholders' equity..... $7,214,500 $5,928,750
========== ==========
40
42
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
COMBINED STATEMENTS OF INCOME
Net sales............................................. $ 5,967,620 $ 5,323,450 $ 5,095,710
Cost of sales......................................... (3,990,040) (3,535,070) (3,476,820)
Selling, general and administrative expenses.......... (1,074,690) (990,850) (933,250)
Gains (charge) on disposition of businesses, net...... (15,580) 4,980 (31,520)
----------- ----------- -----------
Operating profit............................... 887,310 802,510 654,120
----------- ----------- -----------
Other income (expense), net:
Interest expense.................................... (166,760) (114,300) (115,460)
Other, net.......................................... 163,610 153,290 106,810
----------- ----------- -----------
(3,150) 38,990 (8,650)
----------- ----------- -----------
Income before income taxes and other
interests................................... 884,160 841,500 645,470
Income taxes.......................................... (326,830) (347,110) (279,830)
Other interests in combined affiliates................ (81,330) (111,990) (70,440)
----------- ----------- -----------
Net income..................................... $ 476,000 $ 382,400 $ 295,200
=========== =========== ===========
Earnings per share:
Basic............................................... $1.44 $1.20 $.94
=========== =========== ===========
Diluted............................................. $1.39 $1.15 $.91
=========== =========== ===========
41
43
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- (CONCLUDED)
FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
COMBINED STATEMENTS OF CASH FLOWS
Cash Flows From (For) Operating Activities:
Net income.......................................... $ 476,000 $ 382,400 $ 295,200
Depreciation and amortization....................... 219,960 185,190 167,080
Interest accrual on pay-in-kind notes receivable.... (41,500) (36,800) (13,970)
Unremitted equity earnings of affiliates............ (16,820) (9,060) (12,730)
Deferred income taxes............................... 45,790 57,230 39,590
(Gains) charge on disposition of businesses, net.... (14,720) (4,980) 31,520
Gain from change in investment...................... (7,000) (4,980) --
Other interests in net income of combined
affiliates, net.................................. 81,330 111,990 70,440
(Increase) decrease in receivables.................. (107,520) (40,250) 1,230
(Increase) decrease in inventories.................. (58,940) (41,870) 14,870
Increase in accounts payable and accrued
liabilities, net................................. 24,180 46,200 93,700
Discontinued operations, net........................ -- -- (19,240)
Other, net.......................................... (2,090) (16,360) (26,080)
----------- ----------- -----------
Net cash from operating activities.......... 598,670 628,710 641,610
----------- ----------- -----------
Cash Flows From (For) Investing Activities:
Acquisition of other interests in TriMas
Corporation...................................... (869,680) -- --
Acquisitions, net of cash acquired.................. (377,770) (198,020) (247,800)
Capital expenditures................................ (295,260) (250,740) (207,600)
Cash proceeds from sale of:
Discontinued operations.......................... -- -- 707,630
Subsidiaries..................................... 108,020 76,560 223,720
Proceeds from redemption of debt by affiliates...... 80,500 -- --
Other, net.......................................... (31,680) (37,810) (20,170)
----------- ----------- -----------
Net cash from (for) investing activities.... (1,385,870) (410,010) 455,780
----------- ----------- -----------
Cash Flows From (For) Financing Activities:
Increase in debt.................................... 1,630,340 121,380 570,520
Payment of debt..................................... (550,650) (155,230) (1,063,720)
Purchase of Company common stock for:
Treasury......................................... (106,880) (14,970) (14,040)
Long-term incentive award plan................... (46,800) (29,110) (14,030)
Cash dividends paid................................. (155,500) (151,970) (146,340)
----------- ----------- -----------
Net cash from (for) financing activities.... 770,510 (229,900) (667,610)
----------- ----------- -----------
Cash and Cash Investments:
Increase (decrease) for the year.................... (16,690) (11,200) 429,780
At January 1........................................ 587,820 599,020 169,240
----------- ----------- -----------
At December 31...................................... $ 571,130 $ 587,820 $ 599,020
=========== =========== ===========
42
44
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
INTERIM FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
QUARTERS ENDED
AUDITED -------------------------------------------------------
YEAR DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
---------- ----------- ------------ ---------- ----------
1998:
Net sales............ $4,345,000 $1,099,000 $1,122,000 $1,085,000 $1,039,000
Gross profit......... $1,551,010 $ 372,710 $ 404,900 $ 393,600 $ 379,800
Net income........... $ 476,000 $ 122,500 $ 125,900 $ 117,000 $ 110,600
Earnings per share:
Basic.............. $1.44 $.37 $.38 $.35 $.34
Diluted............ $1.39 $.36 $.37 $.34 $.32
1997:
Net sales............ $3,760,000 $ 990,000 $1,003,000 $ 913,000 $ 854,000
Gross profit......... $1,381,750 $ 363,450 $ 369,000 $ 334,800 $ 314,500
Net income........... $ 382,400 $ 105,500 $ 101,800 $ 91,600 $ 83,500
Earnings per share:
Basic.............. $1.20 $.33 $.32 $.29 $.26
Diluted............ $1.15 $.31 $.30 $.28 $.26
43
45
ITEM 9. CHANGES IN THE DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
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 1999 Annual
Meeting of Stockholders, to be filed on or before April 30, 1999, and such
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, to be
filed on or before April 30, 1999, and such information is incorporated herein
by reference.
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 1999 Annual Meeting of Stockholders, to be
filed on or before April 30, 1999, and such information is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, to be
filed on or before April 30, 1999, and such information is incorporated herein
by reference.
44
46
PART IV
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,
1998 and 1997, and for the years ended December 31, 1998, 1997 and
1996, consist of the following:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders' Equity
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
(i) Financial Statement Schedule of the Company appended hereto,
as required for the years ended December 31, 1998, 1997 and
1996, consists of the following:
II. Valuation and Qualifying Accounts
(ii) (A) MascoTech, Inc. and Subsidiaries Consolidated Financial
Statements appended hereto, at December 31, 1998 and 1997,
and for the years ended December 31, 1998, 1997 and 1996,
consist of the following:
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Cash Flows
Consolidated Statement of Shareholders' Equity
Notes to Consolidated Financial Statements
(B) MascoTech, Inc. and Subsidiaries Financial Statement
Schedule appended hereto, for the years ended December 31,
1998, 1997 and 1996, consists of the following:
II. Valuation and Qualifying Accounts
(3) Exhibits.
3.i Restated Certificate of Incorporation of Masco Corporation
and amendments thereto.(7)
3.ii Bylaws of Masco Corporation, as amended.(filed herewith)
4.a.i Indenture dated as of December 1, 1982 between Masco
Corporation and Morgan Guaranty Trust Company of New York,
as Trustee,(5) and Directors' resolutions establishing Masco
Corporation's: (i) 9% Notes Due October 1, 2001(5), (ii)
6 5/8 Notes Due September 15, 1999(6), (iii) 6 1/8 Notes Due
September 15, 2003 (filed herewith), (iv) 7 1/8% Debentures
Due August 15, 2013 (filed herewith), (v) 6.625% Debentures
Due April 15, 2018 (filed herewith) and (vi) 5.75% Notes Due
2008. (filed herewith)
4.a.ii Agreement of Appointment and Acceptance of Successor Trustee
dated as of July 25, 1994 among Masco Corporation, Morgan
Guaranty Trust Company of New York and The First National
Bank of Chicago.(1)
4.a.iii Supplemental Indenture dated as of July 26, 1994 between
Masco Corporation and The First National Bank of Chicago.(1)
4.b $750,000,000 Amended and Restated Credit Agreement dated as
of November 14, 1996 among Masco Corporation, the banks
party thereto and Morgan Guaranty Trust Company of New York,
as agent(5) and Amendment No. 1 dated April 30, 1997(6) and
Amendment dated as of March 30, 1998.(7)
45
47
4.c Rights Agreement dated as of December 6, 1995, between Masco
Corporation and The Bank of New York, as Rights Agent(3) and
Amendment No. 1 to Rights Agreement dated as of September
23, 1998.(8)
4.d Indenture dated as of November 1, 1986 between Masco
Industries, Inc. (now known as MascoTech, Inc.) and Morgan
Guaranty Trust Company of New York, as Trustee, and
Directors' resolutions establishing Masco Industries, Inc.'s
4 1/2% Convertible Subordinated Debentures Due 2003,
Agreement of Appointment and Acceptance of Successor Trustee
dated as of August 4, 1994 among MascoTech, Inc., Morgan
Guaranty Trust Company of New York and The First National
Bank of Chicago and Supplemental Indenture dated as of
August 5, 1994 among MascoTech, Inc. and The First National
Bank of Chicago. (all filed herewith)
4.e $1,300,000,000 Credit Agreement dated as of January 16, 1998
among MascoTech, Inc., MascoTech Acquisition, Inc., the
banks party thereto from time to time, The First National
Bank of Chicago, as Administrative Agent, Bank of America
NT&SA and NationsBank, N.A., as Syndication Agents and
Amendment No. 1 thereto dated as of February 10, 1998.(6)
4.f DM 350,000,000 Multicurrency Revolving Credit Facility dated
September 14, 1998 among Masco GmbH, as Borrower, Masco
Corporation, as Guarantor, Commerzbank Aktiengesellschaft,
as Arranger, and Commerzbank International S.A., as Agent
for the banks party thereto. (filed herewith)
4.g DM 400,000,000 Term Loan Facility dated July 9, 1997 among
Masco GmbH, as Borrower, Masco Corporation, as Guarantor,
Commerzbank Aktiengesellschaft, as Arranger, and Commerzbank
International S.A., as Agent for the banks party thereto,
and Amendment dated as of June 12, 1998 to Credit Agreement.
(filed herewith)
NOTE: Other instruments, notes or extracts from agreements
defining the rights of holders of long-term debt of Masco
Corporation or its subsidiaries have not been filed since
(i) in each case the total amount of long-term debt
permitted thereunder does not exceed 10 percent of Masco
Corporation's consolidated assets, and (ii) such
instruments, notes and extracts will be furnished by Masco
Corporation to the Securities and Exchange Commission upon
request.
10.a Assumption and Indemnification Agreement dated as of May 1,
1984 between Masco Corporation and Masco Industries, Inc.
(now known as MascoTech, Inc.).(3)
10.b Corporate Services Agreement dated as of January 1, 1987
between Masco Corporation and Masco Industries, Inc. (now
known as MascoTech, Inc.)(6), Amendment No. 1 dated as of
October 31, 1996(4), and related letter agreement dated
January 22, 1998.(6)
10.c Corporate Opportunities Agreement dated as of May 1, 1984
between Masco Corporation and Masco Industries, Inc. (now
known as MascoTech, Inc.)(3) and Amendment No. 1 dated as of
October 31, 1996(4).
10.d Stock Repurchase Agreement dated as of May 1, 1984 between
Masco Corporation and Masco Industries, Inc. (now known as
MascoTech, Inc.) and related letter dated September 20,
1985, Amendment to Stock Repurchase Agreement dated as of
December 20, 1990, and amendment to Stock Repurchase
Agreement included in Agreement dated as of November 23,
1993. (all filed herewith)
46
48
NOTE: Exhibits 10.e through 10.r constitute the management
contracts and executive compensatory plans or arrangements
in which certain of the Directors and executive officers of
the Company participate.
10.e Masco Corporation 1991 Long Term Stock Incentive Plan
(Restated July 10, 1998). (filed herewith)
10.f Masco Corporation 1988 Restricted Stock Incentive Plan
(Restated December 6, 1995).(3)
10.g Masco Corporation 1988 Stock Option Plan (Restated December
6, 1995).(3)
10.h Masco Corporation Supplemental Executive Retirement and
Disability Plan.(2)
10.i Masco Corporation 1997 Annual Incentive Compensation
Plan.(6)
10.j Masco Corporation 1997 Non-Employee Directors Stock Plan.
(as amended July 10, 1998). (filed herewith)
10.k MascoTech, Inc. 1991 Long Term Stock Incentive Plan
(Restated July 15, 1998). (filed herewith)
10.l MascoTech, Inc. 1984 Restricted Stock Incentive Plan
(Restated December 6, 1995).(3)
10.m MascoTech, Inc. 1984 Stock Option Plan (Restated December 6,
1995).(3)
10.n MascoTech, Inc. 1997 Annual Incentive Compensation Plan.(6)
10.o MascoTech, Inc. 1997 Non-Employee Directors Stock Plan.(6)
10.p Description of the Masco Corporation Program for Estate,
Financial Planning and Tax Assistance.(6)
10.q Amended and Restated Securities Purchase Agreement dated as
of November 23, 1993 ("Securities Purchase Agreement")
between MascoTech, Inc. and Masco Corporation, including
form of Note, Agreement dated as of November 23, 1993
relating thereto, and Amendment No. 1 to the Securities
Purchase Agreement dated as of October 31, 1996. (all filed
herewith)
10.r Registration Agreement dated as of March 31, 1993, between
Masco Corporation and Masco Industries, Inc. (now known as
MascoTech, Inc.). (filed herewith)
10.s Stock Purchase Agreement between Masco Corporation and Masco
Industries, Inc. (now known as MascoTech, Inc.) dated as of
December 23, 1991 (regarding Masco Capital Corporation)(5)
and Amendment thereto dated May 21, 1997.(6)
10.t 12% Senior Note Due 2008 by Furnishings International Inc.
to Masco Corporation and Registration Rights Agreement dated
as of August 5, 1996 between Furnishings International Inc.
and Masco Corporation.(5)
10.u Stock Purchase Agreement dated as of October 15, 1996
between Masco Corporation and MascoTech, Inc.(4)
12 Computation of Ratio of Earnings to Fixed Charges. (filed
herewith)
21 List of Subsidiaries. (filed herewith)
23.a Consent of PricewaterhouseCoopers LLP relating to Masco
Corporation's Financial Statements and Financial Statement
Schedule. (filed herewith)
23.b Consent of PricewaterhouseCoopers LLP relating to MascoTech,
Inc.'s Financial Statements and Financial Statement
Schedule. (filed herewith)
47
49
27 Financial Data Schedule as of and for the year ended
December 31, 1998. (filed herewith)
- -------------------------
(1) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
(2) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1994.
(3) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1995.
(4) Incorporated by reference to the Exhibits filed with Masco Corporation's
Current Report on Form 8-K dated November 13, 1996.
(5) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1996.
(6) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1997.
(7) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
(8) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
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.
None.
48
50
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 26, 1999
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.
PRINCIPAL EXECUTIVE OFFICER:
/s/ RICHARD A. MANOOGIAN Chairman of the Board and Chief
- --------------------------------------------- Executive Officer
RICHARD A. MANOOGIAN
PRINCIPAL FINANCIAL OFFICER:
/s/ RICHARD G. MOSTELLER Senior Vice President -- Finance
- ---------------------------------------------
RICHARD G. MOSTELLER
PRINCIPAL ACCOUNTING OFFICER:
/s/ ROBERT B. ROSOWSKI Vice President -- Controller and
- --------------------------------------------- Treasurer
ROBERT B. ROSOWSKI
/s/ THOMAS G. DENOMME Director
- ---------------------------------------------
THOMAS G. DENOMME
/s/ JOSEPH L. HUDSON, JR. Director
- ---------------------------------------------
JOSEPH L. HUDSON, JR.
/s/ VERNE G. ISTOCK Director
- ---------------------------------------------
VERNE G. ISTOCK
/s/ RAYMOND F. KENNEDY President and Chief Operating
- --------------------------------------------- Officer and Director
RAYMOND F. KENNEDY
/s/ MARY ANN KREY Director
- ---------------------------------------------
MARY ANN KREY
/s/ WAYNE B. LYON Director
- ---------------------------------------------
WAYNE B. LYON
/s/ JOHN A. MORGAN Director
- ---------------------------------------------
JOHN A. MORGAN
/s/ ARMAN SIMONE Director
- ---------------------------------------------
ARMAN SIMONE
/s/ PETER W. STROH Director
- ---------------------------------------------
PETER W. STROH
March 26, 1999
49
51
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, 1998, 1997 and
1996:
PAGE
----
II. Valuation and Qualifying Accounts....................... F-2
MascoTech, Inc. and Subsidiaries Consolidated Financial
Statements and Financial Statement Schedule............... F-3
F-1
52
MASCO CORPORATION
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ----------- ------------------------ ----------- -----------
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- -------------------------------- ----------- ---------- ---------- ----------- -----------
(A) (B)
Allowance for doubtful accounts,
deducted from accounts
receivable in the balance
sheet:
1998....................... $19,760,000 $4,130,000 $1,220,000 $(3,590,000) $21,520,000
=========== ========== ========== =========== ===========
1997....................... $17,950,000 $2,650,000 $2,500,000 $(3,340,000) $19,760,000
=========== ========== ========== =========== ===========
1996....................... $16,260,000 $5,060,000 $ 640,000 $(4,010,000) $17,950,000
=========== ========== ========== =========== ===========
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.
F-2
53
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of MascoTech, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(2)(ii)(A) present fairly, in all material respects,
the financial position of MascoTech, Inc. and its subsidiaries at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item
14(a)(2)(ii)(B) presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
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.
PRICEWATERHOUSECOOPERS, LLP
Detroit, Michigan
February 19, 1999
F-3
54
MASCOTECH, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997
-------------- --------------
Current assets:
Cash and cash investments................................. $ 29,390,000 $ 41,110,000
Marketable securities..................................... -- 45,970,000
Receivables............................................... 223,340,000 125,930,000
Inventories............................................... 198,350,000 73,860,000
Deferred and refundable income taxes...................... 26,590,000 36,270,000
Prepaid expenses and other assets......................... 23,710,000 13,310,000
-------------- --------------
Total current assets................................. 501,380,000 336,450,000
Equity and other investments in affiliates.................. 93,560,000 263,300,000
Property and equipment, net................................. 678,130,000 417,030,000
Excess of cost over net assets of acquired companies........ 764,220,000 65,610,000
Notes receivable and other assets........................... 53,250,000 62,290,000
-------------- --------------
Total assets......................................... $2,090,540,000 $1,144,680,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 114,830,000 $ 70,120,000
Accrued liabilities....................................... 135,230,000 114,650,000
-------------- --------------
Total current liabilities............................ 250,060,000 184,770,000
Convertible subordinated debentures......................... 310,000,000 310,000,000
Other long-term debt........................................ 1,078,240,000 282,000,000
Deferred income taxes....................................... 88,140,000 114,650,000
Other long-term liabilities................................. 110,220,000 42,600,000
-------------- --------------
Total liabilities.................................... 1,836,660,000 934,020,000
-------------- --------------
Shareholders' equity:
Preferred stock, $1 par:
Authorized: 25 million; Outstanding: None.............. -- --
Common stock, $1 par:
Authorized: 250 million; Outstanding: 45.8 million and
47.3 million......................................... 45,780,000 47,250,000
Paid-in capital........................................... 16,820,000 41,060,000
Retained earnings......................................... 245,860,000 157,790,000
Accumulated other comprehensive loss...................... (7,460,000) (2,560,000)
Less: Restricted stock awards............................. (47,120,000) (32,880,000)
-------------- --------------
Total shareholders' equity........................... 253,880,000 210,660,000
-------------- --------------
Total liabilities and shareholders' equity........... $2,090,540,000 $1,144,680,000
============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
55
MASCOTECH, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
--------------- ------------- ---------------
Net sales..................................... $ 1,635,500,000 $ 922,130,000 $ 1,281,220,000
Cost of sales................................. (1,208,930,000) (735,470,000) (1,048,110,000)
--------------- ------------- ---------------
Gross profit............................. 426,570,000 186,660,000 233,110,000
Selling, general and administrative
expenses.................................... (204,180,000) (89,930,000) (132,260,000)
Gains (charge) on disposition of businesses,
net......................................... (15,580,000) 4,980,000 (31,520,000)
--------------- ------------- ---------------
Operating profit......................... 206,810,000 101,710,000 69,330,000
--------------- ------------- ---------------
Other income (expense), net:
Interest expense, Masco Corporation......... -- (7,500,000) --
Other interest expense...................... (81,500,000) (29,030,000) (29,970,000)
Equity and other income from affiliates..... 10,150,000 43,360,000 40,460,000
Gain from disposition of an equity
affiliate................................ -- 46,160,000 --
Gains from changes in investments in equity
affiliates............................... -- 18,190,000 --
Deferred gain recognized from disposition of
business................................. 7,000,000 -- --
Other, net.................................. 2,060,000 17,400,000 (2,600,000)
--------------- ------------- ---------------
(62,290,000) 88,580,000 7,890,000
--------------- ------------- ---------------
Income before income taxes and cumulative
effect of accounting change, net....... 144,520,000 190,290,000 77,220,000
Income taxes.................................. 47,050,000 75,050,000 37,300,000
--------------- ------------- ---------------
Income before cumulative effect of
accounting change, net................. 97,470,000 115,240,000 39,920,000
Cumulative effect of accounting change (net of
income taxes)............................... -- -- 11,700,000
--------------- ------------- ---------------
Net income............................... $ 97,470,000 $ 115,240,000 $ 51,620,000
=============== ============= ===============
Preferred stock dividends..................... -- $ 6,240,000 $ 12,960,000
=============== ============= ===============
Earnings attributable to common stock.... $ 97,470,000 $ 109,000,000 $ 38,660,000
=============== ============= ===============
BASIC DILUTED BASIC DILUTED BASIC DILUTED
----- ------- ----- ------- ----- -------
Earnings per common share:
Income before cumulative effect of
accounting change, net................. $2.23 $1.83 $2.70 $2.12 $ .54 $ .50
Cumulative effect of accounting change,
net.................................... -- -- -- -- .23 .22
----- ----- ----- ----- ----- -----
Earnings attributable to common stock.... $2.23 $1.83 $2.70 $2.12 $ .77 $ .72
===== ===== ===== ===== ===== =====
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
56
MASCOTECH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
-------------- ------------ -------------
CASH FROM (USED FOR):
OPERATING ACTIVITIES:
Net income................................... $ 97,470,000 $115,240,000 $ 51,620,000
Adjustments to reconcile net income to net
cash provided by operating activities:
(Gains) charge on disposition of
businesses, net......................... 15,580,000 (4,980,000) 31,520,000
Gains from disposition or other changes in
investments in equity affiliates........ (7,000,000) (64,350,000) --
Depreciation and amortization.............. 83,640,000 43,460,000 44,470,000
Equity earnings, net of dividends.......... (6,080,000) (27,180,000) (31,650,000)
Deferred income taxes...................... (110,000) 17,520,000 8,640,000
Decrease (increase) in marketable
securities, net......................... 45,970,000 (8,210,000) (24,890,000)
(Increase) decrease in receivables......... (6,700,000) 2,670,000 10,200,000
(Increase) decrease in inventories......... (19,640,000) 1,950,000 19,190,000
Decrease (increase) in prepaid expenses and
other current assets.................... 1,240,000 (1,280,000) 38,650,000
(Decrease) increase in accounts payable and
accrued liabilities..................... (6,060,000) 11,140,000 9,320,000
Other, net................................. 2,290,000 (7,480,000) (28,060,000)
-------------- ------------ -------------
Net cash from operating activities.... 200,600,000 78,500,000 129,010,000
-------------- ------------ -------------
FINANCING ACTIVITIES:
Increase in debt............................. 1,162,670,000 7,080,000 5,220,000
Payment of debt.............................. (410,660,000) (16,590,000) (114,900,000)
Payment of note due to Masco Corporation..... -- (45,580,000) --
Retirement of preferred stock................ -- (8,360,000) --
Retirement of Company Common Stock........... (63,550,000) (6,610,000) (14,040,000)
Repurchase of Company Common Stock and
warrants from Masco Corporation for cash... -- -- (116,000,000)
Payment of dividends......................... (12,240,000) (15,900,000) (22,940,000)
Other, net................................... (13,480,000) (9,070,000) (8,610,000)
-------------- ------------ -------------
Net cash from (used for) financing
activities......................... 662,740,000 (95,030,000) (271,270,000)
-------------- ------------ -------------
INVESTING ACTIVITIES:
Cash received from sale of businesses........ 25,020,000 76,560,000 223,720,000
Acquisition of businesses, net of cash
acquired................................... (879,370,000) (11,100,000) (47,200,000)
Capital expenditures......................... (106,300,000) (54,780,000) (42,390,000)
Receipt of cash from notes receivable........ 4,880,000 17,330,000 9,300,000
Proceeds from redemptions of debt by
affiliates................................. 80,500,000 -- --
Other, net................................... 210,000 10,230,000 1,850,000
-------------- ------------ -------------
Net cash from (used for) investing
activities......................... (875,060,000) 38,240,000 145,280,000
-------------- ------------ -------------
CASH AND CASH INVESTMENTS:
Increase (decrease) for the year............. (11,720,000) 21,710,000 3,020,000
At January 1................................. 41,110,000 19,400,000 16,380,000
-------------- ------------ -------------
At December 31........................ $ 29,390,000 $ 41,110,000 $ 19,400,000
============== ============ =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
57
MASCOTECH, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
OTHER COMPREHENSIVE
INCOME
-----------------------
FOREIGN
CURRENCY MINIMUM RESTRICTED TOTAL
PREFERRED COMMON PAID-IN RETAINED TRANSLATION PENSION STOCK SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS AND OTHER LIABILITY AWARDS EQUITY
--------- -------- --------- -------- ----------- --------- ---------- -------------
Balances, January 1, 1996.... $ 10,800 $55,520 $ 307,910 $ 32,380 $ 8,570 $ -- $(17,050) $ 398,130
Comprehensive income:
Net income............... 51,620 51,620
Foreign currency
translation............ (5,080) (5,080)
Unrealized gain/(loss) on
securities (net of tax,
$3,040)................ 4,560 4,560
---------
Total comprehensive
income................... 51,100
Preferred stock
dividends................ (12,960) (12,960)
Common stock dividends..... (9,980) (9,980)
Retirement of common stock
and warrants..... ....... (18,720) (263,600) (282,320)
Exercise of stock
options.................. 450 3,490 3,940
Restricted stock awards,
net of amortization...... (9,090) (9,090)
-------- -------- --------- -------- ------- -------- -------- ---------
Balances, December 31,
1996....................... 10,800 37,250 47,800 61,060 8,050 -- (26,140) 138,820
Comprehensive income:
Net income............... 115,240 115,240
Foreign currency
translation............ (9,220) (9,220)
Unrealized gain/(loss) on
securities (net of tax
benefit, $(920))....... (1,390) (1,390)
---------
Total comprehensive
income................... 104,630
Preferred stock
dividends................ 150 2,850 (6,240) (3,240)
Common stock dividends..... (12,270) (12,270)
Retirement of common
stock.................... (330) (6,280) (6,610)
Retirement of preferred
stock.................... (450) (7,910) (8,360)
Conversion of outstanding
preferred
stock.................... (10,350) 9,750 600 --
Exercise of stock
options.................. 430 4,000 4,430
Restricted stock awards,
net of amortization...... (6,740) (6,740)
-------- -------- --------- -------- ------- -------- -------- ---------
Balances, December 31,
1997....................... -- 47,250 41,060 157,790 (2,560) -- (32,880) 210,660
Comprehensive income:
Net income............... 97,470 97,470
Foreign currency
translation............ 6,410 6,410
Minimum pension liability
(net of tax benefit,
$(6,700)).............. (10,700) (10,700)
Unrealized gain/(loss) on
securities (net of tax
benefit, $(420))....... (610) (610)
---------
Total comprehensive
income................... 92,570
Common stock dividends..... (9,400) (9,400)
Retirement of common
stock.................... (3,640) (60,170) (63,810)
Exercise of stock
options.................. 1,160 14,750 15,910
Restricted stock awards,
net of amortization...... (14,240) (14,240)
Common stock issued for
acquisition of
business................. 1,010 21,180 22,190
-------- -------- --------- -------- ------- -------- -------- ---------
Balances, December 31, 1998.. -- $45,780 $ 16,820 $245,860 $ 3,240 $(10,700) $(47,120) $ 253,880
======== ======== ========= ======== ======= ======== ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
58
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 Company has a corporate services agreement with Masco Corporation,
which at December 31, 1998 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 $8.7 million
in 1998, $5.5 million in 1997 and $7.1 million in 1996.
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 and Derivative Financial Instruments. 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. The Company may enter into S&P futures
contracts which 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. The Company may enter into interest rate swap agreements
to limit the effect of increases in the interest rates on any floating rate
debt. For interest rate instruments that effectively hedge interest rate
exposures, the net cash amounts paid or received on the agreements are
recognized as an adjustment to interest expense.
Receivables. Receivables are presented net of allowances for doubtful
accounts of approximately $3.4 million and $1.2 million at December 31, 1998 and
1997, 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
F-8
59
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 not held for disposition at December
31, 1998.
At December 31, 1998 and 1997, accumulated amortization of the excess of
cost over net assets of acquired companies and patents was $56.4 million and
$33.2 million, respectively. Amortization expense was $31.8 million, $9.3
million and $8.5 million in 1998, 1997 and 1996, 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
at December 31, 1998 for U.S. or additional foreign withholding taxes on
approximately $90 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. Effective January 1,
1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting and displaying comprehensive
income and its components. The Company displays comprehensive income in the
Statement of Shareholders' Equity and has reclassified all prior periods as
required.
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information." SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." The adoption of SFAS No. 131 did not affect results of operations
or financial position but did affect the disclosure of segment information (see
"Segment Information" note).
Effective December 31, 1998, the Company adopted SFAS No. 132, "Employer's
Disclosure about Pensions and Other Postretirement Benefits." The provisions of
SFAS No. 132 revise employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of these plans.
Prior periods have been reclassified to conform to these and other
presentations adopted in calendar year 1998.
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.
On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 is effective for quarters of all fiscal years beginning after June
15, 1999 (January 1, 2000 for the Company). SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in
F-9
60
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. The
Company is currently evaluating the impact SFAS No. 133 will have on its
financial statements, if any.
The American Institute of Certified Public Accountants' Statement of
Position No. 98-5, "Reporting on the Costs of Start-up Activities," became
effective on January 1, 1999 and will not have a material impact on the
Company's financial statements.
EARNINGS PER SHARE:
The following are reconciliations of the numerators and denominators used
in the computations of basic and diluted earnings per common share:
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
1998 1997 1996
-------- -------- --------
Weighted average number of shares outstanding............... 43,630 40,300 50,190
======== ======== ========
Income before cumulative effect of accounting change, net... $ 97,470 $115,240 $ 39,920
Less: Preferred stock dividends............................. -- (6,240) (12,960)
-------- -------- --------
Earnings used for basic earnings per share
computation....................................... $ 97,470 $109,000 $ 26,960
======== ======== ========
Basic earnings per share before cumulative effect of
accounting change, net.................................... $2.23 $2.70 $.54
======== ======== ========
Total shares used for basic earnings per share
computation............................................... 43,630 40,300 50,190
Dilutive securities:
Stock options and warrants................................ 1,060 1,250 1,430
Assumed conversion of preferred stock at January 1,
1997................................................... -- 5,210 --
Convertible debentures.................................... 10,000 10,000 --
Contingently issuable shares.............................. 3,830 2,160 2,170
-------- -------- --------
Total shares used for diluted earnings per share
computation....................................... 58,520 58,920 53,790
======== ======== ========
Earnings used for basic earnings per share computation...... $ 97,470 $109,000 $ 26,960
Add back of preferred stock dividends....................... -- 6,240 --
Add back of debenture interest.............................. 9,530 9,530 --
-------- -------- --------
Earnings used for diluted earnings per share
computation....................................... $107,000 $124,770 $ 26,960
======== ======== ========
Diluted earnings per share before cumulative effect of
accounting change, net.................................... $1.83 $2.12 $.50
======== ======== ========
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.
SUPPLEMENTARY CASH FLOWS INFORMATION:
Significant transactions not affecting cash were: in 1998, the issuance of
$22 million of Company Common Stock in partial exchange for the assets of an
acquired company; the acquisition of TriMas for cash and the assumption of
liabilities of approximately $179 million; in 1997, the conversion of the
Company's outstanding shares of Dividend Enhanced Convertible Preferred Stock
for approximately ten million shares of Company Common Stock (see "Shareholders'
Equity" note); the exchange of
F-10
61
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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; and in 1996, in addition to cash received, approximately $25
million comprised of both common stock and warrants, 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 ten million shares of the Company's Common Stock (see "Shareholders'
Equity" note).
Income taxes paid (refunded) were $38 million, $44 million and $(12)
million in 1998, 1997 and 1996, respectively. Interest paid was $79 million, $39
million and $30 million in 1998, 1997 and 1996, respectively.
ACQUISITIONS:
In January 1998, the Company completed the acquisition of TriMas
Corporation ("TriMas") by purchasing all the outstanding shares of TriMas not
already owned by the Company for approximately $920 million. The Company
previously owned 37 percent of TriMas.
The results for 1998 reflect TriMas sales and operating results from the
date of acquisition. The acquisition has been accounted for as a purchase and
the excess of the aggregate purchase price over the fair value of net assets
acquired of approximately $680 million is being amortized over 40 years.
The following unaudited pro forma results of operations reflect this
transaction as if it had occurred on January 1, 1997. The unaudited pro forma
data does not purport to be indicative of the results which would actually have
been reported if the transaction had occurred on such date (in thousands except
per share amounts).
FOR THE YEARS ENDED
DECEMBER 31
------------------------
1998 1997
---------- ----------
Net sales............................................. $1,671,500 $1,590,040
========== ==========
Net income............................................ $ 97,100 $ 115,260
========== ==========
Diluted earnings per common share..................... $1.83 $2.12
========== ==========
In transactions accounted for as purchases, the Company acquired additional
businesses in 1998 for an aggregate purchase price of approximately $77 million.
These businesses have annual sales of approximately $60 million and their
results of operations have been included in the consolidated financial
statements from the dates of acquisition.
DISPOSITIONS OF BUSINESSES:
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). 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. In addition, the
Company received approximately $30 million of contingent consideration ($5
million in 1997 and $25 million in 1998) based on the subsequent operating
performance of the businesses sold. This gain, which is non-taxable, is included
in the caption "gains (charge) on disposition of businesses, net" in the
consolidated statement of income.
F-11
62
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 of
$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 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.
In the second quarter of 1998, the Company recorded a non-cash charge
aggregating approximately $41 million pre-tax (approximately $22 million
after-tax) to reflect the write-down of certain long-lived assets principally
related to the plan to dispose of certain businesses and to accrue exit costs of
approximately $8 million, of which approximately $7 million relates to
severance. The disposition of these businesses is expected to occur in 1999 with
the cash portion of the proceeds applied to reduce the Company's indebtedness
and to provide capital to invest in its remaining businesses. The expected
proceeds from the sale of the businesses to be disposed was estimated by the
Company's management based on a variety of factors including: historical and
projected operating performance, competitive market position, perceived
strategic value to potential acquirors, tangible asset values and other relevant
factors. In addition, management's estimate of the expected proceeds included
input from independent parties familiar with business valuations of this nature.
The dispositions of these businesses do not meet the criteria for
discontinued operations treatment for accounting purposes; accordingly, the
sales and results of operations of these businesses will be included in
continuing operations until disposition. These businesses had annual sales of
$115 million, $130 million and $517 million in 1998, 1997 and 1996,
respectively, and operating profit of $12 million, $16 million and $19 million
in 1998, 1997 and 1996, respectively.
Future periods will include the operating results of the businesses to be
sold and any additional costs to be incurred in connection with the sale of the
remaining businesses which cannot be accrued at December 31, 1998, as well as
the result of differences between estimated and actual proceeds. In addition,
management expects that certain of the businesses to be disposed may be sold for
gains; such gains will be recognized when realized.
INVENTORIES:
(IN THOUSANDS)
AT DECEMBER 31
-------------------
1998 1997
-------- -------
Finished goods............................................ $ 87,810 $22,160
Work in process........................................... 47,960 22,990
Raw material.............................................. 62,580 28,710
-------- -------
$198,350 $73,860
======== =======
F-12
63
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EQUITY AND OTHER INVESTMENTS IN AFFILIATES:
Equity and other investments in affiliates consist of the following common
stock interests in publicly traded affiliates:
AT DECEMBER 31
--------------------
1998 1997 1996
---- ---- ----
TriMas Corporation.......................................... -- 37% 41%
Emco Limited................................................ -- -- 43%
Titan International, Inc. .................................. 16% 15% 12%
Delco Remy International, Inc. (voting)..................... 17% 18% 26%
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. The above companies are accounted for
under the equity method.
The carrying amount of investments in affiliates at December 31, 1998 and
1997 and quoted market values at December 31, 1998 for publicly traded
affiliates (which may differ from the amounts that could have been realized upon
disposition) are as follows:
(IN THOUSANDS)
1998
QUOTED 1998 1997
MARKET CARRYING CARRYING
VALUE AMOUNT AMOUNT
------- -------- --------
Common stock:
TriMas Corporation.............................. $ -- $ -- $137,740
Titan International, Inc........................ 31,500 46,900 44,080
Delco Remy International, Inc................... 29,690 10,920 9,320
------- ------- --------
Investments in publicly traded affiliates (common
stock holdings)................................. 61,190 57,820 191,140
MSX International, Inc. debt...................... -- -- 47,500
Other non-public affiliates....................... -- 35,740 24,660
------- ------- --------
Total............................................. $61,190 $93,560 $263,300
======= ======= ========
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 had an investment in Emco subordinated notes which were
classified as available-for-sale and, as a result, were included in other assets
at fair value at December 31, 1997. The notes were subsequently redeemed in
1998.
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. As a result of the
F-13
64
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
change in the Company's common equity ownership interest in DRI, the Company
recognized a pre-tax gain of approximately $5 million.
In addition to its equity 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 provider of
technology-based business services and product development services.
Equity in undistributed earnings of affiliates of $6 million at December
31, 1998, $68 million at December 31, 1997 and $57 million at December 31, 1996
are included in consolidated retained earnings.
Approximate combined condensed financial data of the Company's equity
affiliates (including TriMas through the date of acquisition in early 1998 and
Emco through the date of disposition September 30, 1997) accounted for under the
equity method are as follows:
(IN THOUSANDS)
AT DECEMBER 31
-----------------------
1998 1997
--------- ----------
Current assets......................................... $ 948,370 $1,117,940
Current liabilities.................................... (451,200) (520,900)
--------- ----------
Working capital...................................... 497,170 597,040
Property and equipment, net............................ 473,460 612,060
Excess of cost over net assets of acquired companies... 112,640 371,190
Other assets........................................... 236,420 145,000
Long-term debt......................................... (846,330) (702,390)
Deferred income taxes and other long-term
liabilities.......................................... (52,030) (82,610)
--------- ----------
Shareholders' equity................................. $ 421,330 $ 940,290
========= ==========
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31
--------------------------------------
1998 1997 1996
---------- ---------- ----------
Net sales.................................. $2,764,860 $3,484,540 $2,959,980
========== ========== ==========
Operating profit........................... $ 125,730 $ 264,590 $ 269,440
========== ========== ==========
Earnings attributable to common stock...... $ 32,480 $ 108,230 $ 128,820
========== ========== ==========
Equity and other income from affiliates consists of the following:
(IN THOUSANDS)
FOR THE YEARS ENDED
DECEMBER 31
-----------------------------
1998 1997 1996
------- ------- -------
The Company's equity in affiliates' earnings
available for common shareholders................ $ 7,340 $31,330 $35,190
Interest and dividend income....................... 2,810 12,030 5,270
------- ------- -------
Equity and other income from affiliates............ $10,150 $43,360 $40,460
======= ======= =======
F-14
65
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT, NET:
(IN THOUSANDS)
AT DECEMBER 31
----------------------
1998 1997
---------- --------
Cost:
Land and land improvements............................ $ 33,160 $ 19,820
Buildings............................................. 179,870 116,270
Machinery and equipment............................... 777,710 545,590
---------- --------
990,740 681,680
Less: Accumulated depreciation.......................... 312,610 264,650
---------- --------
$ 678,130 $417,030
========== ========
Depreciation expense totalled $52 million, $34 million and $37 million in
1998, 1997 and 1996, respectively.
ACCRUED LIABILITIES:
(IN THOUSANDS)
AT DECEMBER 31
----------------------
1998 1997
---------- --------
Salaries, wages and commissions......................... $ 16,550 $ 9,160
Vacation, holiday and bonus............................. 19,420 8,530
Income taxes............................................ 8,790 7,760
Interest................................................ 4,300 1,740
Insurance............................................... 22,470 24,740
Property, payroll and other taxes....................... 5,490 3,340
Pension................................................. 13,600 6,900
Other................................................... 44,610 52,480
---------- --------
$ 135,230 $114,650
========== ========
LONG-TERM DEBT:
(IN THOUSANDS)
AT DECEMBER 31
----------------------
1998 1997
---------- --------
4 1/2% Convertible Subordinated Debentures, due 2003 and
convertible into Company Common Stock at $31 per
share................................................. $ 310,000 $310,000
Bank revolving credit agreement......................... 500,000 245,000
Bank term loan.......................................... 475,000 --
Other................................................... 108,060 39,880
---------- --------
1,393,060 594,880
Less: Current portion of long-term debt................. 4,820 2,880
---------- --------
Long-term debt.......................................... $1,388,240 $592,000
========== ========
In connection with the TriMas acquisition in early 1998 (see "Acquisitions"
note), the Company entered into a new $1.3 billion credit facility. This
facility includes a $500 million term loan with remaining principal payments as
follows: 1999 -- $40 million; 2000 -- $60 million; 2001 -- $75 million;
2002 -- $190 million; and 2003 -- $110 million. The credit facility also
includes an $800 million revolver
F-15
66
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
which terminates in 2003. The Company has the ability and intent to refinance
amounts due in 1999 on a long-term basis utilizing the revolver.
Other debt at December 31, 1998 principally consists of borrowings
denominated in foreign currencies under the revolving credit agreement by the
Company's subsidiaries. At December 31, 1998, there was $233 million unused
under the revolving credit agreement.
The interest rates applicable to the revolver and term loan are principally
at alternative floating rates which approximated 6.3 percent at December 31,
1998. Interest rate swaps covering a notional amount of $400 million of the
Company's floating rate debt were entered into in 1998 at an aggregate interest
rate of approximately seven percent including the current borrowing spread under
the Company's revolving credit agreement. These swap agreements expire at
various dates between 2000 and 2007.
The 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 taxes and scheduled debt payments. In addition, there
are limitations on dividends, share repurchases and subordinated debt
repurchases. Under the most restrictive of these provisions, approximately $39
million would have been available at December 31, 1998 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 maturities of debt as at December 31, 1998 during the next five years
are as follows (in millions): 1999 -- $45; 2000 -- $67; 2001 -- $79;
2002 -- $194; and 2003 -- $923.
SHAREHOLDERS' EQUITY:
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. 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.
The Company repurchased and retired approximately 3.6 million shares of its
common stock in 1998, 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 1996, pursuant to Board
of Directors' authorized repurchase programs. At December 31, 1998, the Company
may repurchase approximately 4.6 million additional shares of Company Common
Stock pursuant to repurchase authorization.
On the basis of amounts paid (declared), cash dividends per common share
were $.26 ($.20) in 1998, $.22 ($.28) in 1997 and $.18 ($.18) in 1996.
F-16
67
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK OPTIONS AND AWARDS:
The Company's Long Term Stock Incentive Plan (the "Plan") provides for the
issuance of stock-based incentives in various forms. At December 31, 1998,
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
908,000, 565,000 and 480,000 shares of Company Common Stock during 1998, 1997
and 1996, respectively, to key employees of the Company and affiliated
companies. The weighted average fair value per share of long-term stock awards
granted during 1998, 1997 and 1996 on the date of grant was $19, $19 and $14,
respectively. Compensation expense for the vesting of long-term stock awards was
approximately $5.2 million, $4.7 million and $2.3 million in 1998, 1997 and
1996, respectively. The unamortized value of unvested stock awards, aggregating
approximately $47 million at December 31, 1998, are generally amortized over
ten-year vesting periods and are recorded in the financial statements as 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 ten 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 ten years after grant or in
installments beginning in the third year and extending through the eighth year
after grant.
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, 1998 is presented
below.
(SHARES IN THOUSANDS)
1998 1997 1996
------ ----- -----
Option shares outstanding, January 1........................ 3,770 4,290 3,440
Weighted average exercise price........................... $10 $10 $ 8
Option shares granted....................................... 1,480 80 1,370
Weighted average exercise price........................... $19 $20 $15
Option shares exercised..................................... (1,160) (500) (450)
Weighted average exercise price........................... $10 $ 8 $ 7
Option shares canceled...................................... (140) (100) (70)
Weighted average exercise price........................... $15 $16 $ 5
Option shares outstanding, December 31...................... 3,950 3,770 4,290
Weighted average exercise price........................... $14 $10 $10
Weighted average remaining option term (in years)......... 6.6 4.7 5.3
Option shares exercisable, December 31...................... 750 1,430 1,710
Weighted average exercise price........................... $ 9 $ 9 $ 9
The following table summarizes information about stock options outstanding
at December 31, 1998:
(SHARES IN THOUSANDS)
NUMBER NUMBER
RANGE OF OUTSTANDING WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/98 REMAINING LIFE EXERCISE PRICE AT 12/31/98 EXERCISE PRICE
- ----------------- ----------- ---------------- ----------------- ----------- ----------------
$4.50 -- $14 1,200 2.6 $ 5.46 455 $ 5.33
$14 -- $18 1,226 7.6 $14.54 250 $14.56
$18 -- $25.125 1,524 8.9 $19.20 45 $22.10
----- ---
Total Outstanding 3,950 Total Exercisable 750
===== ===
F-17
68
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1998, options have been granted and are outstanding with
exercise prices ranging from $4.50 to $25.125 per share, the fair market values
at the dates of grant.
At December 31, 1998, 1997 and 1996, a combined total of 3,820,000,
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 $6.30, $7.70 and $6.20 in 1998, 1997 and 1996, respectively. Had stock
option compensation expense been determined pursuant to the methodology of SFAS
No. 123, "Accounting for Stock-Based Compensation," the pro forma effects on the
Company's earnings per share would have been a reduction of approximately $.04,
$.02 and $.01 in 1998, 1997 and 1996, respectively.
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:
1998 1997 1996
---- ---- ----
Risk-free interest rate.................................. 5.5% 6.5% 6.5%
Dividend yield........................................... 1.3% 1.4% 1.1%
Volatility factor........................................ 28.8% 35.0% 39.0%
Expected option life (in years).......................... 5.5 5.5 5.5
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 Board of Directors. Aggregate charges to income
under these plans were $15 million in 1998, $9 million in 1997 and $11 million
in 1996.
Net periodic pension cost for the Company's defined-benefit pension plans
includes the following components for the three years ended December 31, 1998:
(IN THOUSANDS)
1998 1997 1996
-------- ------- -------
Service cost...................................... $ 6,470 $ 3,480 $ 5,230
Interest cost..................................... 11,380 6,650 6,490
Expected return on assets......................... (11,430) (6,600) (5,940)
Amortization of transition asset.................. (170) (120) (120)
Amortization of prior-service cost................ 750 690 640
Amortization of net loss.......................... 670 410 710
-------- ------- -------
Net periodic pension cost......................... $ 7,670 $ 4,510 $ 7,010
======== ======= =======
Major assumptions used in accounting for the Company's defined-benefit
pension plans are as follows:
1998 1997 1996
------ ------ ------
Discount rate for obligations....................... 6.75% 7.25% 7.50%
Rate of increase in compensation levels............. 5.00% 5.00% 5.00%
Expected long-term rate of return on plan assets.... 11.00% 11.00% 11.00%
F-18
69
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following provides a reconciliation of the changes in the
defined-benefit pension plans' projected benefit obligations and fair value of
assets for each of the two years ended December 31, 1998, and the funded status
as of December 31, 1998 and 1997:
(IN THOUSANDS)
1998 1997
--------- --------
CHANGES IN PROJECTED BENEFIT OBLIGATIONS
Benefit obligations at January 1........................ $ (99,150) $(89,620)
Acquisitions.......................................... (63,720) --
Service cost.......................................... (5,900) (3,180)
Interest cost......................................... (11,380) (6,650)
Plan amendments....................................... (650) (2,200)
Actuarial loss........................................ (9,580) (2,140)
Benefit payments...................................... 6,350 4,640
--------- --------
Projected benefit obligations at December 31............ $(184,030) $(99,150)
--------- --------
CHANGES IN PLAN ASSETS
Fair value of plan assets at January 1.................. $ 63,020 $ 59,710
Actual return on plan assets.......................... 1,890 3,100
Acquisitions.......................................... 46,420 --
Contributions......................................... 6,430 5,210
Benefit payments...................................... (6,350) (4,640)
Expenses/Other........................................ (650) (360)
--------- --------
Fair value of plan assets at December 31................ $ 110,760 $ 63,020
========= ========
FUNDED STATUS
Plan assets less than projected benefits at December
31.................................................... $ (73,270) $(36,130)
Unamortized transition asset.......................... (1,100) (800)
Unamortized prior-service cost........................ 7,640 8,210
Unamortized net loss.................................. 36,600 21,340
--------- --------
Net liability recognized at December 31................. $ (30,130) $ (7,380)
========= ========
The following provides the amounts related to the plans at December 31,
1998 and 1997:
(IN THOUSANDS)
1998 1997
-------- --------
Accrued benefit liability................................ $(51,370) $(24,960)
Intangible asset......................................... 10,540 10,620
Accumulated other comprehensive income................... 10,700 6,960
-------- --------
Net liability recognized............................... $(30,130) $ (7,380)
======== ========
F-19
70
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Postretirement Benefits. The Company provides postretirement medical and
life insurance benefits, none of which are funded, for certain of its active and
retired employees. Net periodic postretirement benefit cost includes the
following components for the years ended December 31, 1998, 1997 and 1996:
(IN THOUSANDS)
1998 1997 1996
------ ------ ------
Service cost.......................................... $ 300 $ 300 $ 400
Interest cost......................................... 1,200 1,400 1,600
Net amortization...................................... (100) 700 800
------ ------ ------
Net periodic postretirement benefit cost.............. $1,400 $2,400 $2,800
====== ====== ======
The following provides a reconciliation of the changes in the
postretirement benefit plans' benefit obligations for each of the two years
ended December 31, 1998 and the status as of December 31, 1998 and 1997:
(IN THOUSANDS)
1998 1997
-------- --------
CHANGES IN BENEFIT OBLIGATIONS
Benefit obligations at January 1......................... $(12,400) $(20,000)
Acquisitions........................................... (4,400) --
Service cost........................................... (300) (300)
Interest cost.......................................... (1,200) (1,400)
Employee contributions................................. (100) (100)
Actuarial gain/(loss).................................. (1,900) 8,100
Benefit payments....................................... 1,200 1,300
Curtailment............................................ 200 --
-------- --------
Benefit obligations at December 31....................... $(18,900) $(12,400)
======== ========
STATUS
Benefit obligations at December 31....................... $(18,900) $(12,400)
Unamortized transition obligation...................... 9,300 10,300
Unrecognized prior-service cost........................ 500 500
Unrecognized net gain.................................. (6,200) (9,000)
-------- --------
Net liability at December 31............................. $(15,300) $(10,600)
======== ========
The discount rate, as of December 31, 1998, used in determining the
accumulated postretirement benefit obligation decreased from 7.25 percent in
1997 to 6.75 percent in 1998. The assumed health care cost trend rate in 1998
was 8.5 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 obligations would increase by $1.2
million and the aggregate of the service and interest cost components of net
periodic postretirement benefit obligations cost would increase by $.1 million.
If the assumed medical cost trend rates were decreased by one percent, the
accumulated postretirement benefit obligations would decrease by $1.1 million
and the aggregate of the service and interest cost components of net periodic
postretirement benefit cost would decrease by $.1 million.
F-20
71
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION:
The Company has defined a segment as a component, with business activity
resulting in revenue and expense, that has separate financial information
evaluated regularly by the Company's chief operating decision maker in
determining resource allocation and assessing performance. The Company has five
operating segments involving the manufacture and sale of the following:
Specialty Metal Formed Products -- Precision products, principally
engine and drivetrain components and subassemblies, generally produced
using advanced metalworking technologies with significant proprietary
content for the transportation industry.
Towing Systems -- Vehicle hitches, jacks, winches, couplers and related
towing accessories.
Specialty Fasteners -- Cold formed fasteners and related metallurgical
processing.
Specialty Packaging and Sealing Products -- Industrial container
closures, pressurized gas cylinders and metallic and nonmetallic
gaskets.
Specialty Industrial Products -- Specialty drills, cutters and
specialized metal finishing services, and flame-retardant facings and
jacketings and pressure-sensitive tapes.
The Company purchased TriMas in January 1998 and the segment data for 1998
reflects TriMas as though the transaction had occurred on January 1, 1998,
consistent with the Company's internal management reporting.
Included in the Specialty Metal Formed Products segment are sales to one
customer of $184 million, $156 million and $155 million in 1998, 1997 and 1996,
respectively; sales to another customer, attributed mainly to the Specialty
Metal Formed Products segment, of $140 million and $232 million in 1997 and
1996, respectively; sales to a third customer, attributed mainly to the
Specialty Metal Formed Products segment, of $79 million and $146 million in 1997
and 1996, respectively; and sales to a fourth customer, attributed mainly to the
Specialty Metal Formed Products segment, of $62 million and $122 million in 1997
and 1996, respectively. Specialty Metal Formal Products' operating profit for
1997 was reduced by $17 million of nonrecurring charges.
The Company's export sales approximated $142 million, $71 million and $75
million in 1998, 1997 and 1996, respectively.
Intersegment transactions represent principally transactions occurring in
the ordinary course of business.
F-21
72
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SPECIALTY (IN THOUSANDS)
SPECIALTY PACKAGING SPECIALTY COMPANIES
METAL FORMED TOWING SPECIALTY AND SEALING INDUSTRIAL SOLD OR HELD
PRODUCTS SYSTEMS FASTENERS PRODUCTS PRODUCTS FOR SALE TOTAL
------------ -------- --------- ----------- ---------- ------------ ----------
1998
- -------------------------
Revenue from external
customers.............. $760,000 $238,000 $226,000 $223,000 $110,000 $115,000 $1,672,000
Intersegment revenue..... 5,000 6,000 3,000 -- 1,000 3,000 18,000
Depreciation and
amortization........... 34,000 9,000 10,000 11,000 5,000 6,000 75,000
Segment operating
profit................. 106,000 34,000 38,000 46,000 16,000 12,000 252,000
Segment net assets....... 494,000 281,000 328,000 423,000 140,000 102,000 1,768,000
Capital expenditures..... 63,000 8,000 14,000 16,000 4,000 3,000 108,000
1997
- -------------------------
Revenue from external
customers.............. 711,000 -- 44,000 -- 37,000 130,000 922,000
Intersegment revenue..... 9,000 -- 1,000 -- -- 2,000 12,000
Depreciation and
amortization........... 29,000 -- 1,000 -- 2,000 6,000 38,000
Segment operating
profit................. 88,000 -- 8,000 -- 7,000 16,000 119,000
Segment net assets....... 444,000 -- 17,000 -- 18,000 109,000 588,000
Capital expenditures..... 46,000 -- 1,000 -- 2,000 5,000 54,000
1996
- -------------------------
Revenue from external
customers.............. 668,000 -- 43,000 -- 53,000 517,000 1,281,000
Intersegment revenue..... 9,000 -- 3,000 -- -- -- 12,000
Depreciation and
amortization........... 26,000 -- 1,000 -- 2,000 15,000 44,000
Segment operating
profit................. 93,000 -- 8,000 -- 3,000 19,000 123,000
Segment net assets....... 429,000 -- 17,000 -- 12,000 215,000 673,000
Capital expenditures..... 24,000 -- 3,000 -- 1,000 13,000 41,000
The following table presents the Company's revenues for each of the years ended
December 31 and net assets at each year ended December 31 by geographic area,
attributed to each subsidiary's continent of domicile. Revenue and net assets
from no single foreign country was material to the consolidated revenues and net
assets of the Company.
(IN THOUSANDS)
1998 1997 1996
---------------------- ---------------------- ----------------------
SALES NET ASSETS SALES NET ASSETS SALES NET ASSETS
-------- ---------- -------- ---------- -------- ----------
Europe................................. $149,000 $171,000 $100,000 $111,000 $170,000 $129,000
Australia.............................. 18,000 10,000 -- -- -- --
Other North America.................... 16,000 12,000 -- -- -- --
-------- -------- -------- -------- -------- --------
Total foreign........................ $183,000 $193,000 $100,000 $111,000 $170,000 $129,000
======== ======== ======== ======== ======== ========
F-22
73
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of reportable segment revenue from
external customers, segment operating profit and segment net assets to the
Company's consolidated totals:
(IN THOUSANDS)
1998 1997 1996
---------- -------- ----------
REVENUE FROM EXTERNAL CUSTOMERS
Revenue from external customers for reportable segments.... $1,672,000 $922,000 $1,281,000
TriMas sales prior to acquisition.......................... (36,000) -- --
---------- -------- ----------
Total net sales..................................... $1,636,000 $922,000 $1,281,000
========== ======== ==========
(IN THOUSANDS)
1998 1997 1996
---------- -------- ----------
OPERATING PROFIT
Total operating profit for reportable segments............. $ 252,000 $119,000 $ 123,000
General corporate expense.................................. (24,000) (22,000) (22,000)
Loss on disposition of businesses.......................... (41,000) -- (32,000)
MSTI earnout............................................... 25,000 5,000 --
TriMas operating profit prior to acquisition............... (5,000) -- --
---------- -------- ----------
Total operating profit.............................. $ 207,000 $102,000 $ 69,000
========== ======== ==========
(IN THOUSANDS)
1998 1997 1996
---------- -------- ----------
NET ASSETS AT DECEMBER 31
Total net operating assets for reportable segments......... $1,768,000 $588,000 $ 673,000
Corporate net assets....................................... 72,000 372,000 371,000
---------- -------- ----------
Total net assets.................................... $1,840,000 $960,000 $1,044,000
========== ======== ==========
The information that the chief operating decision maker utilizes includes
total net assets as presented in the table above. Total net assets is defined by
the Company as total assets less current liabilities.
OTHER SIGNIFICANT ITEMS
(IN THOUSANDS)
1998 1997 1996
---------- -------- ----------
DEPRECIATION AND AMORTIZATION
Segment totals............................................. $ 75,000 $ 38,000 $ 44,000
Adjustments................................................ 9,000 5,000 1,000
---------- -------- ----------
Consolidated totals................................. $ 84,000 $ 43,000 $ 45,000
========== ======== ==========
The above adjustments to depreciation and amortization are principally the
result of compensation expense related to stock award amortization and prepaid
debenture expense amortization.
F-23
74
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER INCOME (EXPENSE), NET:
(IN THOUSANDS)
1998 1997 1996
-------- -------- -------
Other, net:
Net realized and unrealized gains (losses) from
marketable securities.............................. $ 3,330 $ 13,130 $ (160)
Interest income....................................... 4,180 3,440 1,160
Other, net............................................ (5,450) 830 (3,600)
-------- -------- -------
$ 2,060 $ 17,400 $(2,600)
======== ======== =======
INCOME TAXES:
(IN THOUSANDS)
1998 1997 1996
-------- -------- -------
Income before income taxes and cumulative effect of
accounting change, net:
Domestic.............................................. $115,630 $173,410 $59,870
Foreign............................................... 28,890 16,880 17,350
-------- -------- -------
$144,520 $190,290 $77,220
======== ======== =======
Provision for income taxes:
Currently payable:
Federal............................................ $ 28,210 $ 40,290 $16,170
State and local.................................... 3,950 6,810 4,650
Foreign............................................ 15,000 10,430 7,840
Deferred:
Principally federal................................ 590 18,840 8,300
Foreign............................................ (700) (1,320) 340
-------- -------- -------
Income taxes on income before cumulative effect of
accounting change, net........................... $ 47,050 $ 75,050 $37,300
======== ======== =======
The components of deferred taxes at December 31, 1998 and 1997 are as
follows:
(IN THOUSANDS)
1998 1997
-------- --------
Deferred tax assets:
Inventories......................................... $ 2,990 $ 2,440
Accrued liabilities and other long-term
liabilities....................................... 51,910 35,660
Expected capital loss benefit from disposition of
businesses........................................ 7,910 --
-------- --------
62,810 38,100
-------- --------
Deferred tax liabilities:
Property and equipment.............................. 101,640 64,630
Other, principally equity investments in
affiliates........................................ 26,170 62,240
-------- --------
127,810 126,870
-------- --------
Net deferred tax liability............................. $ 65,000 $ 88,770
======== ========
F-24
75
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:
(IN THOUSANDS)
1998 1997 1996
------- ------- -------
U.S. federal statutory rate........................ 35% 35% 35%
------- ------- -------
Tax at U.S. federal statutory rate................. $50,580 $66,600 $27,020
State and local taxes, net of federal tax
benefit.......................................... 2,570 4,430 3,020
Higher effective foreign tax rate.................. 4,210 3,200 2,100
Non-taxable additional consideration from
previously sold business......................... (8,190) (1,710) --
Disposition of businesses.......................... (2,400) -- 5,780
Amortization in excess of tax, net................. 1,390 (760) (140)
Other, net......................................... (1,110) 3,290 (480)
------- ------- -------
Income taxes before cumulative effect of
accounting change, net........................ $47,050 $75,050 $37,300
======= ======= =======
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 and interest rate swap agreements, are
intended to reduce the market risk associated with the Company's marketable
equity securities portfolio and floating rate debt.
The Company's investment in S&P 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
F-25
76
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
contract cost. The average monthly notional amount of S&P futures contracts in
1997 was approximately $17 million. 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. There were no contracts
outstanding at December 31, 1998 or 1997.
Interest rate swap agreements covering a notional amount of $400 million of
the Company's floating rate debt were entered into in 1998 at an aggregate
interest rate of approximately seven percent including the current borrowing
spread under the Company's revolving credit agreement. The fair value of the
swap agreements was not recognized in the consolidated financial statements
since they are accounted for as hedges of the floating rate exposure. These swap
agreements expire at various dates in 2000 to 2007.
The estimated fair value of the interest rate swap agreements, based on
current market rates, approximated a net payable of $11 million at December 31,
1998. Exposure to credit loss could occur when the fair value of the agreements
is a net receivable.
The interest rate swaps are with major banks of high credit quality;
therefore, the risk of non-performance by the counterparties is considered to be
negligible.
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1998 and 1997 are as follows:
(IN THOUSANDS)
1998 1997
------------------------ --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- -------- --------
Cash and cash investments........................ $ 29,390 $ 29,390 $ 41,110 $ 41,110
Marketable securities, notes receivable and other
assets......................................... $ 5,290 $ 4,480 $ 80,760 $ 81,590
Long-term debt:
Bank debt...................................... $1,051,260 $1,051,260 $267,000 $267,000
4 1/2% Convertible Subordinated Debentures..... $ 310,000 $ 251,100 $310,000 $269,700
Other long-term debt........................... $ 26,980 $ 25,580 $ 15,000 $ 14,500
F-26
77
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INTERIM AND OTHER SUPPLEMENTAL FINANCIAL DATA (UNAUDITED):
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE QUARTERS ENDED
-------------------------------------------------------------------------
DECEMBER SEPTEMBER JUNE MARCH
31ST 30TH 30TH 31ST
-------- --------- -------- --------
1998:
- -----------------------------------------
Net sales................................ $401,760 $399,500 $433,480 $400,760
Gross profit............................. $104,960 $100,150 $117,070 $104,390
Net income:
Income................................. $18,120 $ 16,790 $ 29,820 $ 32,740
Income attributable to common stock.... $18,120 $ 16,790 $ 29,820 $ 32,740
Per common share:
Basic.......................... $.43 $.38 $.68 $.74
Diluted........................ $.36 $.33 $.54 $.60
Market price per common share:
High................................... $18 3/4 $24 1/8 $26 7/16 $23 1/4
Low.................................... $15 1/4 $16 1/4 $22 5/16 $17 11/16
1997:
- -----------------------------------------
Net sales................................ $233,620 $222,030 $233,040 $233,440
Gross profit............................. $42,020 $ 34,350 $ 53,990 $ 56,300
Net income:
Income................................. $19,270 $ 38,660 $ 24,650 $ 32,660
Income attributable to common stock.... $19,270 $ 38,660 $ 21,650 $ 29,420
Per common share:
Basic.......................... $.43 $.86 $.61 $.83
Diluted........................ $.37 $.70 $.46 $.59
Market price per common share:
High................................... $21 5/16 $22 1/2 $23 1/2 $21 1/4
Low.................................... $16 1/2 $20 $18 1/2 $16
In January 1998, the Company completed the acquisition of TriMas
Corporation ("TriMas") by purchasing all the outstanding shares of TriMas not
already owned by the Company for approximately $920 million. The results for
1998 reflect TriMas sales and operating results from the date of acquisition.
Results for first quarter 1998 benefitted from pre-tax gains aggregating
approximately $12 million which resulted from partial recognition of a deferred
gain related to the 1997 divestiture of a business and gains from the Company's
marketable securities portfolio.
Second quarter results for 1998 were impacted by the charge (approximately
$41 million pre-tax) principally related to the disposition of certain
businesses. This charge more than offset the gain (approximately $25 million
pre-tax) related to additional consideration received by the Company in the
second quarter of 1998 resulting from the disposition of MascoTech Stamping
Technologies, Inc. ("MSTI") in 1996.
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.
F-27
78
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 MSTI, which was sold
in the second quarter 1996.
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.
The 1998 and 1997 income (loss) per common share amounts for the quarters
may not total to the full year amounts due to the purchase and retirement of
shares throughout the year.
F-28
79
MASCOTECH, INC.
FINANCIAL STATEMENT SCHEDULES
PURSUANT TO ITEM 14(a)(2) OF FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1998
Schedules, as required for the years ended December 31, 1998, 1997 and 1996:
PAGE
----
II. Valuation and Qualifying Accounts....................... F-30
F-29
80
MASCOTECH, INC.
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------- ---------- -------------------------- ---------- -------------
ADDITIONS
--------------------------
CHARGED
BALANCE AT CHARGED (CREDITED)
BEGINNING TO COSTS TO OTHER BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- --------------------------------- ---------- ------------ ---------- ---------- -------------
(A) (B)
Allowance for doubtful accounts,
deducted from accounts
receivable in the balance
sheet:
1998........................... $1,180,000 $750,000 $2,590,000 $1,110,000 $3,410,000
========== ======== ========== ========== ==========
1997........................... $2,000,000 $500,000 $ 60,000 $1,380,000 $1,180,000
========== ======== ========== ========== ==========
1996........................... $1,880,000 $890,000 $ 20,000 $ 790,000 $2,000,000
========== ======== ========== ========== ==========
NOTES:
(A) Allowance of companies acquired, and other adjustments, net in 1998 and
1997. Allowance of companies reclassified for businesses held for
disposition, and other adjustments, net in 1996.
(B) Deductions, representing uncollectible accounts written off, less recoveries
of accounts written off in prior years.
F-30
81
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.i
Restated Certificate of Incorporation of Masco Corporation
and amendments thereto.(7)
3.ii
Bylaws of Masco Corporation, as amended.(filed herewith)
4.a.i
Indenture dated as of December 1, 1982 between Masco
Corporation and Morgan Guaranty Trust Company of New York,
as Trustee,(5) and Directors' resolutions establishing Masco
Corporation's: (i) 9% Notes Due October 1, 2001(5), (ii)
6 5/8 Notes Due September 15, 1999(6), (iii) 6 1/8 Notes Due
September 15, 2003 (filed herewith), (iv) 7 1/8% Debentures
Due August 15, 2013 (filed herewith), (v) 6.625% Debentures
Due April 15, 2018 (filed herewith) and (vi) 5.75% Notes Due
2008. (filed herewith)
4.a.ii
Agreement of Appointment and Acceptance of Successor Trustee
dated as of July 25, 1994 among Masco Corporation, Morgan
Guaranty Trust Company of New York and The First National
Bank of Chicago.(1)
4.a.iii
Supplemental Indenture dated as of July 26, 1994 between
Masco Corporation and The First National Bank of Chicago.(1)
4.b
$750,000,000 Amended and Restated Credit Agreement dated as
of November 14, 1996 among Masco Corporation, the banks
party thereto and Morgan Guaranty Trust Company of New York,
as agent(5) and Amendment No. 1 dated April 30, 1997(6) and
Amendment dated as of March 30, 1998.(7)
4.c
Rights Agreement dated as of December 6, 1995, between Masco
Corporation and The Bank of New York, as Rights Agent(3) and
Amendment No. 1 to Rights Agreement dated as of September
23, 1998.(8)
4.d
Indenture dated as of November 1, 1986 between Masco
Industries, Inc. (now known as MascoTech, Inc.) and Morgan
Guaranty Trust Company of New York, as Trustee, and
Directors' resolutions establishing Masco Industries, Inc.'s
4 1/2% Convertible Subordinated Debentures Due 2003,
Agreement of Appointment and Acceptance of Successor Trustee
dated as of August 4, 1994 among MascoTech, Inc., Morgan
Guaranty Trust Company of New York and The First National
Bank of Chicago and Supplemental Indenture dated as of
August 5, 1994 among MascoTech, Inc. and The First National
Bank of Chicago. (all filed herewith)
4.e
$1,300,000,000 Credit Agreement dated as of January 16, 1998
among MascoTech, Inc., MascoTech Acquisition, Inc., the
banks party thereto from time to time, The First National
Bank of Chicago, as Administrative Agent, Bank of America
NT&SA and NationsBank, N.A., as Syndication Agents and
Amendment No. 1 thereto dated as of February 10, 1998.(6)
4.f
DM 350,000,000 Multicurrency Revolving Credit Facility dated
September 14, 1998 among Masco GmbH, as Borrower, Masco
Corporation, as Guarantor, Commerzbank Aktiengesellschaft,
as Arranger, and Commerzbank International S.A., as Agent
for the banks party thereto. (filed herewith)
4.g
DM 400,000,000 Term Loan Facility dated July 9, 1997 among
Masco GmbH, as Borrower, Masco Corporation, as Guarantor,
Commerzbank Aktiengesellschaft, as Arranger, and Commerzbank
International S.A., as Agent for the banks party thereto,
and Amendment dated as of June 12, 1998 to Credit Agreement.
(filed herewith)
NOTE:
Other instruments, notes or extracts from agreements
defining the rights of holders of long-term debt of Masco
Corporation or its subsidiaries have not been filed since
(i) in each case the total amount of long-term debt
permitted thereunder does not exceed 10 percent of Masco
Corporation's consolidated assets, and (ii) such
instruments, notes and extracts will be furnished by Masco
Corporation to the Securities and Exchange Commission upon
request.
10.a
Assumption and Indemnification Agreement dated as of May 1,
1984 between Masco Corporation and Masco Industries, Inc.
(now known as MascoTech, Inc.).(3)
82
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.b
Corporate Services Agreement dated as of January 1, 1987
between Masco Corporation and Masco Industries, Inc. (now
known as MascoTech, Inc.)(6), Amendment No. 1 dated as of
October 31, 1996(4), and related letter agreement dated
January 22, 1998.(6)
10.c
Corporate Opportunities Agreement dated as of May 1, 1984
between Masco Corporation and Masco Industries, Inc. (now
known as MascoTech, Inc.)(3) and Amendment No. 1 dated as of
October 31, 1996(4).
10.d
Stock Repurchase Agreement dated as of May 1, 1984 between
Masco Corporation and Masco Industries, Inc. (now known as
MascoTech, Inc.) and related letter dated September 20,
1985, Amendment to Stock Repurchase Agreement dated as of
December 20, 1990, and amendment to Stock Repurchase
Agreement included in Agreement dated as of November 23,
1993. (all filed herewith)
NOTE:
Exhibits 10.e through 10.r constitute the management
contracts and executive compensatory plans or arrangements
in which certain of the Directors and executive officers of
the Company participate.
10.e
Masco Corporation 1991 Long Term Stock Incentive Plan
(Restated July 10, 1998). (filed herewith)
10.f
Masco Corporation 1988 Restricted Stock Incentive Plan
(Restated December 6, 1995).(3)
10.g
Masco Corporation 1988 Stock Option Plan (Restated December
6, 1995).(3)
10.h
Masco Corporation Supplemental Executive Retirement and
Disability Plan.(2)
10.i
Masco Corporation 1997 Annual Incentive Compensation
Plan.(6)
10.j
Masco Corporation 1997 Non-Employee Directors Stock Plan.
(as amended July 10, 1998). (filed herewith)
10.k
MascoTech, Inc. 1991 Long Term Stock Incentive Plan
(Restated July 15, 1998). (filed herewith)
10.l
MascoTech, Inc. 1984 Restricted Stock Incentive Plan
(Restated December 6, 1995).(3)
10.m
MascoTech, Inc. 1984 Stock Option Plan (Restated December 6,
1995).(3)
10.n
MascoTech, Inc. 1997 Annual Incentive Compensation Plan.(6)
10.o
MascoTech, Inc. 1997 Non-Employee Directors Stock Plan.(6)
10.p
Description of the Masco Corporation Program for Estate,
Financial Planning and Tax Assistance.(6)
10.q
Amended and Restated Securities Purchase Agreement dated as
of November 23, 1993 ("Securities Purchase Agreement")
between MascoTech, Inc. and Masco Corporation, including
form of Note, Agreement dated as of November 23, 1993
relating thereto, and Amendment No. 1 to the Securities
Purchase Agreement dated as of October 31, 1996. (all filed
herewith)
10.r
Registration Agreement dated as of March 31, 1993, between
Masco Corporation and Masco Industries, Inc. (now known as
MascoTech, Inc.). (filed herewith)
10.s
Stock Purchase Agreement between Masco Corporation and Masco
Industries, Inc. (now known as MascoTech, Inc.) dated as of
December 23, 1991 (regarding Masco Capital Corporation)(5)
and Amendment thereto dated May 21, 1997.(6)
10.t
12% Senior Note Due 2008 by Furnishings International Inc.
to Masco Corporation and Registration Rights Agreement dated
as of August 5, 1996 between Furnishings International Inc.
and Masco Corporation.(5)
10.u
Stock Purchase Agreement dated as of October 15, 1996
between Masco Corporation and MascoTech, Inc.(4)
12
Computation of Ratio of Earnings to Fixed Charges. (filed
herewith)
83
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
21
List of Subsidiaries. (filed herewith)
23.a
Consent of PricewaterhouseCoopers LLP relating to Masco
Corporation's Financial Statements and Financial Statement
Schedule. (filed herewith)
23.b
Consent of PricewaterhouseCoopers LLP relating to MascoTech,
Inc.'s Financial Statements and Financial Statement
Schedule. (filed herewith)
27
Financial Data Schedule as of and for the year ended
December 31, 1998. (filed herewith)
- -------------------------
(1) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
(2) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1994.
(3) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1995.
(4) Incorporated by reference to the Exhibits filed with Masco Corporation's
Current Report on Form 8-K dated November 13, 1996.
(5) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1996.
(6) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1997.
(7) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
(8) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
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.
None.