In 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:
- Cabinets and Related Products sales declined 15 percent;
- Plumbing Products sales increased five percent;
- Installation and Other Services sales declined 14 percent;
- Decorative Architectural Products sales increased five percent; and
- 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.
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.