NAVIGATION

MASCO CORPORATION BUSINESS AND FINANCIAL HIGHLIGHTS

May 01, 2007

First Quarter 2007

  • Net sales from continuing operations declined nine percent, with North American sales declining 15 percent and International sales increasing 21 percent. In local currencies, International sales increased 10 percent compared with the first quarter of 2006.

  • Key retailer sales from continuing operations declined two percent in the 2007 first quarter compared with an increase of seven percent in the 2006 first quarter and a decline of seven percent in the 2006 fourth quarter.

  • Sales changes by segment in the first quarter of 2007 versus the first quarter of 2006 were:
    • Cabinets and Related Products sales declined 19 percent;

    • Plumbing Products sales increased seven percent;

    • Installation and Other Services sales declined 21 percent;

    • Decorative Architectural Products sales increased seven percent; and

    • Other Specialty Products sales declined 13 percent.
  • International sales were strong, particularly for plumbing products, due to stronger European economies, market share gains and the favorable effect of currency translation.

  • Income from continuing operations was $142 million or $.37 per common share and $207 million or $.50 per common share in the first quarters of 2007 and 2006, respectively.

  • Net income in the first quarter of 2007 was $143 million or $.37 per common share, including income from discontinued operations, net, of $1 million. Net income in the first quarter of 2006 was $204 million or $.50 per common share after giving recognition to the cumulative effect of an accounting change, net, of $3 million or $.01 per common share related to stock-based compensation.

  • In addition, results benefited from net gains of $.04 and $.01 per common share related to financial investments in the first quarters of 2007 and 2006, respectively.

  • First quarter 2007 results, seasonally the lowest quarter of the year, were adversely affected by lower sales volume of installation and other services, assembled cabinets and windows and doors in the new home construction market, lower retail sales volume of ready-to-assemble and assembled cabinets and a less favorable product mix. Results were aided by increased sales volume of paints and stains and increased sales from International operations, particularly plumbing products.

  • 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 first quarters of 2007 and 2006, the Company incurred costs and charges of $25 million pre-tax ($.04 per common share, after tax) and $17 million pre-tax ($.03 per common share, after tax), respectively, related to profit improvement programs. Offsetting these charges in the first quarter of 2007 were lower stock-based compensation expense and gain on the sale of corporate fixed assets aggregating $12 million pre-tax ($.02 per common share, after tax) and the previously discussed income related to financial investments of $.04 per common share, after tax.

  • Gross margins were 26.2 percent in the first quarter of 2007 compared with 27.6 percent in the first quarter of 2006. Operating profit margins, as reported, were 8.9 percent in the first quarter of 2007 compared with 11.2 percent in the first quarter of 2006. Operating profit margins in the first quarters of 2007 and 2006 include the negative effect of reduced sales volume in 2007 and costs and charges related to profit improvement programs in both years.

  • SG&A expenses as a percent of sales, including general corporate expense, were 17.3 percent in the 2007 first quarter compared with 16.4 percent in the 2006 first quarter.

  • General corporate expense was 1.8 percent of sales in the first quarter of 2007 compared with 1.5 percent in the comparable period of 2006.

  • Although actual SG&A expenses declined by $20 million in the first quarter of 2007 compared with the first quarter of 2006, SG&A expenses as a percent of sales increased in the first quarter of 2007 due to sales volume declines and severance costs.

  • During the quarter, the acquisition of Metaldyne by Asahi Tec Corporation ("Asahi Tec"), a Japanese automotive supplier, was finalized. The combined fair value of the Asahi Tec common and preferred stock, as well as the derivative related to the conversion feature on the preferred stock, received in exchange for the Company's investment in Metaldyne, was $72 million. At March 31, 2007, the Company has recognized a combined net gain of $4 million (including the transaction gain and the subsequent valuation of the derivative) in income from financial investments, net.

  • Accounts receivable days at the end of the first quarter were 52 days compared with 50 days a year ago.

  • Inventory days at the end of the first quarter were 50 days compared with 49 days a year ago.

  • Accounts payable days at the end of the first quarter were 42 days compared with 37 days a year ago.

  • Working capital at March 31, 2007 (defined as accounts receivable and inventories less accounts payable) improved to 17.4 percent of the last twelve months' sales from 17.6 percent a year earlier.

  • The Company's tax rate was 36.0 percent in the first quarter of 2007 compared with 34.5 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 $1.2 billion in cash and marketable securities and $2 billion in unused bank lines.

  • For the twelve months ended March 31, 2007 and March 31, 2006, return on invested capital (as reported) was 8.8 percent and 12.9 percent, respectively. For the twelve months ended March 31, 2007 and March 31, 2006, return on invested capital (as reconciled) was 11.3 percent and 13.3 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 negatively impacted ROIC. The Company continues to believe that it will achieve its ROIC goal of 18 percent by 2010.

  • During the quarter, the Company repurchased approximately nine million shares of Company common stock. The Company had approximately 27 million common shares remaining under its repurchase authorization at March 31, 2007.

  • During the quarter, holders of $1.8 billion (94 percent) principal amount at maturity of the Zero Coupon Convertible Senior Notes ("Notes") required the Company to repurchase their Notes at a cash value of $825 million.

  • During the first quarter, the Company also retired $300 million of floating-rate notes due March 9, 2007. On March 14, 2007, the Company issued $300 million of floating-rate notes due 2010 and $300 million of fixed-rate 5.85% notes due 2017. These debt issuances provided net proceeds of $596 million and were in consideration of the March 2007 and upcoming August 2007 debt maturities. Debt as a percent of total capitalization was 51 percent and 46 percent at March 31, 2007 and 2006, respectively.

  • The Company's diluted common shares for purposes of calculating earnings per common share were 388 million for the first quarter of 2007 compared with 411 million for the first quarter of 2006.

  • During the quarter, the Board of Directors increased the quarterly dividend from $.22 to $.23 per common share, making 2007 the 49th consecutive year in which dividends have been increased.
Outlook for 2007
  • While results in the first quarter of 2007 were substantially below the strong first quarter of 2006, reflecting a decline of approximately 30 percent in housing starts, sales and earnings were better than the Company anticipated when it issued its full-year 2007 earnings guidance in February. At that time, the Company anticipated that first quarter net sales would be down low-double digits, compared with the actual decline of nine percent.

  • Economic conditions, however, remain uncertain in the Company's markets, and certain commodity costs, which had stabilized or declined, have recently increased once again. 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. Even with the recent decline in new home construction, the inventory of unsold new and existing homes has remained at unprecedented high levels. As a result, the Company has lowered its 2007 housing starts estimate to between approximately 1.4 million to 1.5 million. In addition, we continue to see a moderation in consumer spending for certain "big ticket" home improvement items, such as cabinets, and currently estimate that 2007 full-year sales will decline low-to-mid single digits compared with 2006.

  • The Company believes that the negative impacts of its downward revision in estimated housing starts to a range of approximately 1.4 million to 1.5 million from approximately 1.5 million to 1.7 million, assumed in its original guidance given in February, and increased commodity costs will be largely offset by a combination of the stronger-than-expected first quarter results, the continued strength related to International operations, including the favorable effect of currency translation, share repurchases and the profit improvement programs we are pursuing. Accordingly, at this time the Company, assuming no further escalation in commodity costs, estimates that 2007 full-year earnings will approximate $1.50 to $1.70 per common share, instead of its original guidance of "$1.50 or less to $1.80 per common share or more." The above guidance includes approximately $60 million pre-tax ($.10 per common share, after tax) of costs related to plant start-up, severance, systems implementations and plant closures.

  • 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 addition, the first quarter of 2007, the Company returned $361 million to shareholders through share repurchases (nine million common shares) and dividends.

  • Diluted common shares for the computation of earnings per common share at April 1, 2007 were 383 million. This excludes the impact of any subsequent repurchases of common stock.
Statements contained herein that reflect the Company's views about its future performance 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, accordingly, the Company's results may differ materially from the results discussed in such forward-looking statements. For an explanation of various factors that may affect our performance, refer to our most recent Annual Report on Form 10-K (particularly the "Risk Factors" section) and to any subsequent Quarterly Reports on Form 10-Q, all of which are on file with the Securities and Exchange Commission. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. The Company believes that certain non-GAAP performance measures and ratios that may be contained herein, used in managing the business, may provide users of this financial information with additional meaningful comparisons between current results and results in prior periods. Non-GAAP performance measures and ratios should be viewed in addition to, and not as an alternative for, the Company's reported results under accounting principles generally accepted in the United States. Additional information about the Company is contained in the Company's filings with the Securities and Exchange Commission and is available on Masco's website at www.masco.com.