Why did Masco's operating profit decline so sharply in 2006?

Operating profit fell to $1.13 billion from $1.57 billion, largely because of a $331 million non-cash goodwill impairment charge, principally related to the European ready-to-assemble cabinet manufacturer Tvilum-Scanbirk. Operating profit was also hurt by an accelerating decline in new home construction in the second half of 2006, moderating consumer spending on big-ticket items such as cabinets, and higher commodity, energy and freight costs.

How concentrated is Masco's customer base?

The filing states that sales to The Home Depot were $2.5 billion, approximately 20 percent of 2006 net sales. The company warns that losing a substantial portion of these sales would have a material adverse impact on the company.

What is Masco's near-term debt and liquidity picture?

At December 31, 2006, Masco had $1.96 billion of cash and cash investments and a $2.0 billion five-year revolving credit agreement expiring February 2011, with up to $1.7 billion of additional borrowing capacity. Current maturities of long-term debt were $1.45 billion, including $825 million of Zero Coupon Convertible Senior Notes put in January 2007, and the company issued $1 billion of 6.125% notes due 2016 in October 2006 to fund 2007 maturities.

What does management expect for 2007?

Management said the 2007 earnings outlook includes costs of restructuring initiatives, plant capacity start-up costs, system implementation costs, higher interest expense and unrecovered commodity cost increases. It expects 2007 capital expenditures of approximately $300 million and an effective tax rate of 35 to 36 percent, and believes its initiatives should improve earnings in 2008 and beyond.

How is Masco returning cash to shareholders?

Masco repurchased $854 million of its common stock in 2006, retiring 29 million shares, and had remaining authorization for up to 36 million additional shares at year-end. It paid $349 million in cash dividends in 2006, and the Board raised the quarterly dividend 10 percent to $.22 per share, marking the 48th consecutive year of dividend increases.

MAS 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 27, 2007. Cited figures are marked; the original filing is the authoritative source.

Masco Corporation manufactures, distributes and installs home improvement and building products, organized into five segments: Cabinets and Related Products, Plumbing Products, Installation and Other Services, Decorative Architectural Products, and Other Specialty Products.

Net sales for 2006 were $12.78 billion^a, up from $12.57 billion in 2005, but operating profit fell to $1.13 billion from $1.57 billion, driven by a $331 million non-cash goodwill impairment charge, mainly tied to its European ready-to-assemble cabinet business, Tvilum-Scanbirk. Income from continuing operations declined to $458 million (diluted EPS of $1.15) from $866 million ($2.01) in 2005. The filing attributes the weakness to an accelerating decline in new home construction in the second half of 2006 and softer consumer spending on big-ticket items such as cabinets, alongside higher commodity costs.

Balance sheet and cash flow remained substantial: cash and cash investments were $1.96 billion^b, operating cash flow was $1.21 billion, and capital expenditures were $388 million. Total debt as a percent of total capitalization rose to 53 percent from 49 percent. In January 2007, holders of $1.8 billion principal amount at maturity of Zero Coupon Convertible Senior Notes required repurchase at a cash value of $825 million.

The company repurchased $854 million^c of its own stock in 2006 and expects to continue repurchases in 2007, and it raised its quarterly dividend 10 percent to $.22 per share. Management expects 2007 earnings to be pressured by restructuring costs, start-up costs, higher interest expense and unrecovered commodity costs, but believes its initiatives should improve earnings in 2008 and beyond.

02—Key points

Key Highlights

Net sales of $12.78 billion in 2006, up from $12.57 billion in 2005, with North America at $10.54 billion and International, principally Europe, at $2.24 billion.
Operating profit fell to $1.13 billion from $1.57 billion, including a $331 million non-cash goodwill impairment charge, $316 million of which was in Cabinets and Related Products.
Diluted EPS from continuing operations was $1.15 versus $2.01 in 2005; income from continuing operations was $458 million, or $461 million before the cumulative effect line in the income statement.
Home Depot accounted for approximately 20 percent of 2006 net sales, or $2.5 billion, making it the largest customer and a material concentration risk.
Cash and cash investments of $1.96 billion at year-end, with $1.21 billion of operating cash flow and $388 million of capital expenditures.
Total debt as a percent of total capitalization increased to 53 percent from 49 percent; January 2007 put of Zero Coupon Convertible Senior Notes required $825 million in cash repurchases.
Share repurchases of $854 million in 2006, with management expecting to continue repurchases in 2007; the quarterly dividend was raised 10 percent to $.22 per share.

03—Questions

Frequently Asked Questions

Why did Masco's operating profit decline so sharply in 2006?
Operating profit fell to $1.13 billion from $1.57 billion, largely because of a $331 million non-cash goodwill impairment charge, principally related to the European ready-to-assemble cabinet manufacturer Tvilum-Scanbirk. Operating profit was also hurt by an accelerating decline in new home construction in the second half of 2006, moderating consumer spending on big-ticket items such as cabinets, and higher commodity, energy and freight costs.
How concentrated is Masco's customer base?
The filing states that sales to The Home Depot were $2.5 billion, approximately 20 percent of 2006 net sales. The company warns that losing a substantial portion of these sales would have a material adverse impact on the company.
What is Masco's near-term debt and liquidity picture?
At December 31, 2006, Masco had $1.96 billion of cash and cash investments and a $2.0 billion five-year revolving credit agreement expiring February 2011, with up to $1.7 billion of additional borrowing capacity. Current maturities of long-term debt were $1.45 billion, including $825 million of Zero Coupon Convertible Senior Notes put in January 2007, and the company issued $1 billion of 6.125% notes due 2016 in October 2006 to fund 2007 maturities.
What does management expect for 2007?
Management said the 2007 earnings outlook includes costs of restructuring initiatives, plant capacity start-up costs, system implementation costs, higher interest expense and unrecovered commodity cost increases. It expects 2007 capital expenditures of approximately $300 million and an effective tax rate of 35 to 36 percent, and believes its initiatives should improve earnings in 2008 and beyond.
How is Masco returning cash to shareholders?
Masco repurchased $854 million of its common stock in 2006, retiring 29 million shares, and had remaining authorization for up to 36 million additional shares at year-end. It paid $349 million in cash dividends in 2006, and the Board raised the quarterly dividend 10 percent to $.22 per share, marking the 48th consecutive year of dividend increases.

04—Continue

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