Masco Corporation Business And Financial Highlights
n accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has accounted for the 2007 planned disposition of a European business unit in the Decorative Architectural Products segment and the September 2006 disposition of a business unit in the Other Specialty Products segment as discontinued operations.
In April 2007 and July 2007, the Company completed the sale of two relatively small business units in the Plumbing Products segment; these business units were included in continuing operations through their respective dates of sales.
Second Quarter 2007
* Net sales from continuing operations declined six percent, with North American sales declining 10 percent and International sales increasing 14 percent. In local currencies, International sales increased six percent compared with the second quarter of 2006.
* Key retailer sales from continuing operations increased two percent in the 2007 second quarter compared with a decline of two percent in the 2007 first quarter and an increase of one percent in the 2006 second quarter.
* Retail sales of paints and stains and plumbing products were strong in the second quarter of 2007.
* International sales were strong, particularly for plumbing products, due to stronger European economies, market share gains and the favorable effect of currency translation.
* Sales changes by segment in the second quarter of 2007 versus the second quarter of 2006 were:
o Cabinets and Related Products sales declined 15 percent;
o Plumbing Products sales increased five percent;
o Installation and Other Services sales declined 14 percent;
o Decorative Architectural Products sales increased five percent; and
o Other Specialty Products sales declined 11 percent.
* Second quarter 2007 results were adversely affected by lower sales volume of installation and other services, assembled cabinets and windows and doors in the new home construction market and a continued moderation in consumer spending for certain “big ticket” home improvement items, such as cabinets, as well as a less favorable product mix and increased commodity costs. Results were aided by increased sales volume of paints and stains and International operations, particularly plumbing products.
* Income from continuing operations was $186 million or $.50 per common share and $215 million or $.53 per common share in the second quarters of 2007 and 2006, respectively.
* Net income in the second quarter of 2007 was $189 million or $.51 per common share, including income from discontinued operations, net, of $3 million. Net income in the second quarter of 2006 was $219 million or $.54 per common share, including income from discontinued operations, net, of $4 million.
* As part of its profit improvement programs, the Company has been focused on the rationalization of its businesses, including sourcing programs, business consolidations, plant closures, headcount reductions and other initiatives. During the second quarters of 2007 and 2006, the Company incurred costs and charges of $23 million pre-tax ($.04 per common share, after tax) and $26 million pre-tax ($.05 per common share, after tax), respectively, related to profit improvement programs.
* The Company also had non-cash impairment charges related to financial investments of $10 million pre-tax ($.02 per common share, after tax) and $78 million pre-tax ($.13 per common share, after tax) in the second quarters of 2007 and 2006, respectively.
* Results benefited from net gains related to financial investments of $6 million pre-tax ($.01 per common share, after tax) and $11 million pre-tax ($.02 per common share, after tax) in the second quarters of 2007 and 2006, respectively.
* Gross margins were 28.8 percent in the second quarter of 2007 compared with 29.1 percent in the second quarter of 2006. Operating profit margins, as reported, were 11.6 percent in the second quarter of 2007 compared with 13.1 percent in the second quarter of 2006. Operating profit margins in the second quarters of 2007 and 2006 include the negative effect of increased commodity costs and costs and charges related to profit improvement programs in both years, as well as reduced sales volume in 2007.
* SG&A expenses as a percent of sales, including general corporate expense, were 17.2 percent in the 2007 second quarter compared with 15.7 percent in the 2006 second quarter. SG&A expenses as a percent of sales increased in the second quarter of 2007 due to sales volume declines, increased advertising costs, severance costs and increased stock-based compensation expense.
* General corporate expense was 1.6 percent of sales in both the 2007 and 2006 second quarters.
* Accounts receivable days at the end of the second quarter were 50 days compared with 49 days a year ago.
* Inventory days were 51 days at the end of both the second quarters of 2007 and 2006.
* Accounts payable days at the end of the second quarter were 42 days compared with 37 days a year ago.
* Working capital at June 30, 2007 (defined as accounts receivable and inventories less accounts payable) was 17.9 percent of the last twelve months’ sales compared with 18.1 percent a year earlier.
* The Company’s tax rate was 35.9 percent in the second quarter of 2007 compared with 34.8 percent in the comparable period of the prior year. The Company anticipates that its tax rate on income from continuing operations in 2007 will approximate 35 to 36 percent.
* At the end of the quarter, the Company had a strong balance sheet with over $900 million in cash and marketable securities and $2 billion in unused bank lines. The Company has $300 million of debt maturing August 15, 2007.
* For the twelve months ended June 30, 2007 and June 30, 2006, return on invested capital (as reported) was 8.1 percent and 12.9 percent, respectively. For the twelve months ended June 30, 2007 and June 30, 2006, return on invested capital (as reconciled) was 10.5 percent and 13.4 percent, respectively. While the Company remains committed to the continued improvement in its ROIC, recent business trends have resulted in a reduction in operating profit over the last several quarters, which has negatively impacted ROIC. The Company continues to believe that it will achieve its ROIC goal of approximately 18 percent by 2010.
* During the quarter, the Company repurchased 13 million shares of Company common stock.
* The Company, as previously announced, acquired Erickson Construction Company and Guy Evans, Inc., which provide products and installation services to the new home construction market. These acquisitions have annual net sales of approximately $200 million.
* The Company’s diluted common shares for purposes of calculating earnings per common share were 374 million for the second quarter of 2007 compared with 402 million for the second quarter of 2006.
Outlook for 2007
* While results in the second quarter of 2007 were below the second quarter of 2006, reflecting a decline of over 20 percent in housing starts (following a first quarter comparative decline of 30 percent), results were better than the Company anticipated when it updated its full-year 2007 earnings guidance in May. Results in the second quarter of 2007 were aided by recent acquisitions, the favorable effect of currency translation, profit improvement programs and selling price increases, partially offsetting commodity cost increases and lower sales volume.
* Economic conditions, however, remain uncertain in the Company’s markets. Housing starts have declined dramatically in the last 12 months due to previous excessive speculative buying, rapidly rising home prices in recent years reducing affordability and less attractive mortgage terms. The subprime mortgage issues that have plagued the new home construction market in recent months have made it more difficult to obtain a mortgage, adding to an already difficult market for new homes. As a result, the Company has reduced its 2007 housing starts estimate to approximately 1.4 million, or the low end of its previous range of 1.4 to 1.5 million. In addition, the Company continues to see a moderation in consumer spending for certain “big ticket” home improvement items, such as cabinets, and currently estimates that the Company’s 2007 full-year sales will decline mid single digits compared with 2006, a change from the Company’s previous estimate of a decline of low-to-mid single digits.
* The Company believes that the negative impact to its results of this reduction in estimated housing starts to approximately 1.4 million will be largely offset by a combination of the stronger-than-expected first half results, the continued favorable effect of currency translation, share repurchases, recent acquisitions, selling prices increases, market share gains and the profit improvement programs it is pursuing. Accordingly, at this time, the Company, assuming no escalation in commodity costs, estimates that 2007 full-year earnings from continuing operations will approximate $1.60 to $1.70 per common share, instead of its guidance given in May of approximately $1.50 to $1.70 per common share. This guidance includes costs of approximately $70 million pre-tax ($.12 per common share, after tax), compared with $.10 per common share in the Company’s previous guidance, related to plant start-up, severance, systems implementations and other initiatives.
* In the first half of 2007, the Company returned $815 million to shareholders through dividends and share repurchases (22 million shares).
* The Company expects to continue to return a minimum of $1 billion annually to shareholders, on average, through share repurchases and dividends as part of its ongoing commitment to value creation. The Company has returned $4.8 billion to shareholders over the last four calendar years, including the repurchases of 126 million common shares and dividends.
* In July 2007, the Company’s Board of Directors authorized the repurchase of up to 50 million shares for retirement of the Company’s common stock in open-market transactions or otherwise. This authorization replaces the previous Board of Directors’ 50 million share repurchase authorization established in May 2006 under which 36 million shares had been repurchased.
* Diluted common shares for the computation of earnings per common share at July 1, 2007 were 372 million. This excludes the impact of any subsequent repurchases of common stock.
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