Masco - 10-Q quarterly report FY

 

(Exact name of Registrant as Specified in Charter)

(313) 274-7400
(Registrant’s telephone number, including area code)

     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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes       o No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated þ       Accelerated o       Non-accelerated o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes       þ No

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

Note B – concluded:

Long-term stock awards are granted to key employees and non-employee Directors of the Company and do not cause net share dilution inasmuch as the Company continues the practice of repurchasing and retiring an equal number of shares on the open market.

The Company’s long-term stock award activity was as follows, shares in millions:

At March 31, 2007, there was $200 million of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of seven years.

The total market value (at the vesting date) of stock award shares which vested during the three months ended March 31, 2007 was $32 million.

Note E – concluded:

Income from financial investments, net, included in other, net, within other income (expense), net, was as follows, in millions:

Note F – concluded:

The Company’s total comprehensive income was as follows, in millions:

The unrealized (loss) gain on marketable securities, net, is net of income tax (benefit) of $(4) million and $1 million for the three months ended March 31, 2007 and 2006, respectively.

Note G – concluded:

The components of accumulated other comprehensive income were as follows, in millions:

The Company recognized $2 million pre-tax of net loss from accumulated other comprehensive income for the three months ended March 31, 2007.

Other items, net, for the first quarter of 2006 included $4 million of currency transaction gains.

Note M – concluded:

Note O – concluded:

The Company files income tax returns in the U.S. Federal jurisdiction, and various local, state and foreign jurisdictions. The Internal Revenue Service (“IRS”) has substantially completed their examination of the Company’s consolidated U.S. Federal tax returns through 2005. The proposed adjustments by the IRS are not material. Beginning with the 2006 consolidated U.S. Federal tax return, the Company has been selected by the IRS to participate in the Compliance Assurance Program (“CAP”). CAP, a pilot program of the IRS, is a real-time audit of the Federal tax return that allows the IRS, working in conjunction with the Company, to determine tax return compliance with the Federal tax law prior to filing the return. This program provides the Company with greater certainty about its tax liability for a given year within months, rather than years, of filing its annual tax return and greatly reduces the need for recording Federal unrecognized tax benefits. With few exceptions, the Company is no longer subject to state or foreign income tax examinations on filed returns for years before 2002.

The Company records interest and penalties on its unrecognized tax benefits in income tax expense. As of January 1, 2007, the Company had accrued approximately $19 million for interest and penalties.

During the first quarter of 2007, no material change in the unrecognized tax benefits or related accrued interest and penalties was recorded, and the Company does not anticipate that it is reasonably possible that any material increase or decrease in its unrecognized tax benefits will occur within twelve months.

     The following table sets forth the Company’s net sales and operating profit margins by business segment and geographic area, dollars in millions:

     The Company reports its financial results in accordance with generally accepted accounting principles (“GAAP”) in the United States. However, the Company believes that certain non-GAAP performance measures and ratios, 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.

     Net sales in the first quarter of 2007 decreased nine percent from the comparable period in 2006. Excluding results from acquisitions, net sales decreased ten percent (including a two percent increase relating to the effect of currency translation) compared with 2006. The following table reconciles reported net sales to net sales excluding acquisitions and the effect of currency translation, in millions:

     Net sales from North American operations decreased in the first quarter of 2007, primarily due to the continued decline in the new home construction market and a moderation in consumer spending. North American net sales for the first quarter of 2007 were negatively affected by lower sales volume of installation and other services, assembled cabinets and windows and doors in the new home construction market. In addition, net sales were negatively affected by lower retail sales volume of ready-to-assemble and assembled cabinets, partially offset by increased retail sales volume of paints and stains and plumbing products.

     Net sales from International operations increased in the first quarter of 2007, due to a weaker U.S. dollar, which increased International net sales by 11 percent. In local currencies, net sales from International operations increased 10 percent, primarily due to increased sales of plumbing products.

     Net sales of Cabinets and Related Products decreased in the first quarter of 2007, primarily due to lower sales volume of assembled cabinets in the new home construction market and lower sales volume of ready-to-assemble and assembled cabinets in the North American retail market. These results are partially offset by a weaker U.S. dollar, which had a positive effect on the translation of local currencies of European operations included in this segment.

     Net sales of Plumbing Products increased in the first quarter of 2007, due to increased sales volume of certain European operations and increased selling prices, as well as a weaker U.S. dollar, which had a positive effect on the translation of local currencies of European operations included in this segment.

     Net sales of Installation and Other Services decreased in the first quarter of 2007, primarily due to lower sales volume related to the continued slowdown in the new home construction market.

     Net sales of Decorative Architectural Products increased in the first quarter of 2007, primarily due to higher retail sales volume of paints and stains and builders’ hardware.

     Net sales of Other Specialty Products decreased in the first quarter of 2007, primarily due to lower sales volume of windows and doors related to the continued slowdown in the new home construction market, particularly in the western United States, offset in part by a weaker U.S. dollar, which had a positive effect on the translation of local currencies of European operations included in this segment.

     The Company’s gross profit margin was 26.2 percent for the first quarter of 2007 compared with 27.6 percent for the comparable period in 2006. Selling, general and administrative expenses as a percentage of sales were 17.3 percent for the first quarter of 2007 and 16.4 percent for the comparable period of the prior year. First quarter 2007 operating profit margins were negatively 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, a less favorable product mix and increased commodity costs, partially offset by increased retail 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 and $17 million, respectively, related to profit improvement programs.

     The decline in operating profit margin for the Cabinets and Related Products segment for the first quarter of 2007 reflects lower sales volume in the new home construction and retail markets and increased commodity costs, as well as severance and plant start-up costs.

     In the first quarter of 2006, the operating profit margin for the Plumbing Products segment included $17 million of costs and charges related to profit improvement programs; excluding such charges, operating profit margin in this segment would have been 10.4 percent for the first quarter of 2006. The decline in operating profit margin for the Plumbing Products segment for the first quarter of 2007, compared with 10.4 percent for the first quarter of 2006, reflects increased commodity costs, as well as a less favorable product mix and severance costs.

     The decline in operating profit margin for the Installation and Other Services segment for the first quarter of 2007 is primarily due to lower sales volume related to the continued slowdown in the new home construction market, as well as costs related to systems implementations and severance.

     The increase in operating profit margin for the Decorative Architectural Products segment for the first quarter of 2007 is primarily due to increased sales of paints and stains and builders' hardware.

     The decline in operating profit margin for the Other Specialty Products segment for the first quarter of 2007 reflects lower sales volume of windows and doors, partially offset by a more favorable product mix.

     Other, net, for the first quarter of 2007 included $7 million of realized gains, net, from marketable securities, $5 million of dividend income and $15 million of income from other investments, net.

     On January 11, 2007, 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.

     In addition, immediately prior to its sale, Metaldyne Corporation distributed shares of TriMas Corporation common stock as a dividend to the holders of Metaldyne common stock; the Company recognized $4 million of dividend income from other investments.

     Other, net, for the first quarter of 2006 included $5 million of realized gains, net, from the sale of marketable securities, $6 million of dividend income and $1 million of income from other investments, net. Other, net, also included currency transaction gains of $4 million for the first quarter of 2006.

     Interest expense for the first quarter of 2007 decreased $1 million to $63 million compared with $64 million for the first quarter of 2006.

     Income and diluted earnings per common share from continuing operations before the cumulative effect of accounting change, net, for the first quarter of 2007 were $142 million and $.37 per common share compared with $207 million and $.50 per common share for the comparable period of 2006. The Company’s effective tax rate for the three months ended March 31, 2007 was 36.0 percent compared with 34.5 percent for the same period in 2006. The Company estimates that its effective tax rate for the full-year 2007 should approximate 35 to 36 percent.

     The Company’s current ratio was 1.9 to 1 and 1.5 to 1 at March 31, 2007 and December 31, 2006, respectively. The improvement in the current ratio was primarily due to the payment of $825 million of Zero Coupon Convertible Senior Notes and $300 million of floating-rate notes in the first quarter of 2007.

     For the three months ended March 31, 2007, cash of $88 million was provided by operating activities. Cash used for financing activities was $887 million, and included $87 million for the payment of cash dividends, $274 million for the acquisition of Company common stock in open-market transactions, $300 million for the retirement of floating-rate notes due March 9, 2007 and $825 million related to the Zero Coupon Convertible Senior Notes put option. Cash provided by financing activities included $12 million from the issuance of Company common stock, primarily for the exercise of stock options and $596 million from the issuance of notes (net of issuance costs). Net cash used for investing activities included $55 million for capital expenditures, offset in part by $48 million of net proceeds from the sale of financial investments.

     First quarter 2007 cash from operations was affected by an expected and annually recurring first quarter increase in accounts receivable and inventories compared with December 31, 2006.

     The Company is subject to lawsuits and claims pending or asserted with respect to matters generally arising in the ordinary course of business. Note M to the Condensed Consolidated Financial Statements discusses certain specific claims pending against the Company.

     The Company believes that its present cash balance, cash flows from operations and, to the extent necessary, bank borrowings and future financial market activities, are sufficient to fund its working capital and other investment needs.

     New home construction has declined dramatically in the last 12 months due to previous excessive speculative buying, rapidly rising home prices in recent years reducing the affordability and less attractive mortgage terms. Housing starts declined by 13 percent in 2006 compared with 2005 to approximately 1.8 million units. In the first quarter 2007, actual housing starts declined approximately 30 percent from the first quarter of 2006 to an annualized rate of approximately 1.4 million to 1.5 million units. Even with the recent decline in new home construction, the inventory of unsold new and existing homes has increased to unprecedented levels.

     The Company is proactively managing its business for the current difficult economic times in our markets by pursuing a variety of initiatives to further reduce costs and improve operating profits. Initiatives already started include headcount reductions, sourcing programs, restructuring of certain businesses including consolidations, manufacturing rationalization and other profit improvement programs. While the Company’s earnings outlook for 2007 includes costs related to these initiatives, as well as start-up costs related to plant capacity additions, systems implementations costs, higher interest expense and as yet unrecovered commodity cost increases, the Company believes that implementing these initiatives should improve the Company’s earnings outlook for 2008 and beyond.

     The Company remains committed to its long-term growth strategy, concentrating on organic sales growth, improving return on invested capital and generating significant returns to shareholders. We continue to drive our growth initiatives including leveraging installation services, developing new channels of distribution, pursuing new markets in emerging economies and emphasizing new product development.

     Certain sections of this Quarterly Report 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, accordingly, the Company’s actual results may differ materially from the results discussed in such forward-looking statements. Readers should consider that various factors, including those discussed in Item 1A, “Risk Factors,” the “Executive Level Overview,” and “Critical Accounting Policies and Estimates” sections in the Company’s Annual Report on Form 10-K and its other filings with the Securities and Exchange Commission may affect the Company’s performance. The Company undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise.

     Information regarding certain legal proceedings involving the Company is set forth in Note M to the Company’s Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report.

     Information regarding risk factors of the Company is set forth in Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

     The following table provides information regarding the repurchase of Company common stock for the three months ended March 31, 2007, shares in millions:

SIGNATURE

     Pursuant to the requirements 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.

May 3, 2007