UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
COMMISSION FILE NUMBER: 1-5794
MASCO CORPORATION
(Exact name of Registrant as Specified in Charter)
DELAWARE 38-1794485
(State or Other Jurisdiction (IRS Employer
of Incorporation) Identification No.)
21001 VAN BORN ROAD, TAYLOR, MICHIGAN 48180
(Address of Principal Executive Offices) (Zip Code)
(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.
x Yes 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 X Accelerated Non-accelerated
--- --- ---
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes x No
- --- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Shares Outstanding at May 1, 2006
----- ---------------------------------
Common stock, par value $1.00 per share 397,200,000
MASCO CORPORATION
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 2006 and December 31, 2005 1
Condensed Consolidated Statements of
Income for the Three Months Ended
March 31, 2006 and 2005 2
Condensed Consolidated Statements of
Cash Flows for the Three Months Ended
March 31, 2006 and 2005 3
Notes to Condensed Consolidated
Financial Statements 4-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 16-21
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION 23-24
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
Item 6. Exhibits
Signature
MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 2006 AND DECEMBER 31, 2005
(IN MILLIONS EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------
ASSETS
Current assets:
Cash and cash investments $ 682 $ 1,964
Accounts and notes receivable, net 1,965 1,716
Prepaid expenses and other 316 316
Inventories:
Raw material 463 427
Finished goods 617 525
Work in process 176 175
------- -------
1,256 1,127
------- -------
Total current assets 4,219 5,123
Property and equipment, net 2,228 2,173
Goodwill 4,189 4,171
Other intangible assets, net 304 307
Other assets 815 785
------- -------
Total assets $11,755 $12,559
======= =======
LIABILITIES
Current liabilities:
Notes payable $ 1,179 $ 832
Accounts payable 945 837
Accrued liabilities 1,242 1,225
------- -------
Total current liabilities 3,366 2,894
Long-term debt 2,780 3,915
Deferred income taxes and other 927 902
------- -------
Total liabilities 7,073 7,711
------- -------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common shares, par value $1 per share
Authorized shares: 1,400,000,000; issued
and outstanding: 2006 - 400,404,000;
2005 - 419,040,000 400 419
Paid-in capital -- --
Retained earnings 3,932 4,286
Accumulated other comprehensive income 350 328
Less: Restricted stock awards -- (185)
------- -------
Total shareholders' equity 4,682 4,848
------- -------
Total liabilities and
shareholders' equity $11,755 $12,559
======= =======
See notes to condensed consolidated financial statements.
1
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(IN MILLIONS EXCEPT PER COMMON SHARE DATA)
THREE MONTHS
ENDED MARCH 31,
---------------
2006 2005
------ ------
Net sales $3,186 $2,914
Cost of sales 2,306 2,086
------ ------
Gross profit 880 828
Selling, general and administrative expenses 523 495
(Income) regarding litigation settlement -- (2)
------ ------
Operating profit 357 335
------ ------
Other income (expense), net:
Interest expense (64) (59)
Other, net 34 37
------ ------
(30) (22)
------ ------
Income from continuing operations before
income taxes, minority interest and
cumulative effect of accounting change, net 327 313
Income taxes 113 101
------ ------
Income from continuing operations before
minority interest and cumulative effect of
accounting change, net 214 212
Minority interest 6 5
------ ------
Income from continuing operations before
cumulative effect of accounting change, net 208 207
(Loss) income from discontinued operations,
net of income taxes (1) 24
Cumulative effect of accounting change, net (3) --
------ ------
Net income $ 204 $ 231
====== ======
Earnings per common share:
Basic:
Income from continuing operations before
cumulative effect of accounting change,
net $ .51 $ .48
(Loss) income from discontinued
operations, net of income taxes -- .06
Cumulative effect of accounting change, net (.01) --
------ ------
Net income $ .50 $ .53
====== ======
Diluted:
Income from continuing operations before
cumulative effect of accounting change,
net $ .51 $ .47
(Loss) income from discontinued
operations, net of income taxes -- .06
Cumulative effect of accounting change, net (.01) --
------ ------
Net income $ .50 $ .52
====== ======
Cash dividends per common share:
Declared $ .22 $ .20
====== ======
Paid $ .20 $ .18
====== ======
See notes to condensed consolidated financial statements.
2
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(IN MILLIONS)
THREE MONTHS
ENDED MARCH 31,
----------------
2006 2005
------- ------
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations $ 314 $ 294
(Increase) in receivables (256) (163)
(Increase) in inventories (125) (72)
Increase in accounts payable and accrued
liabilities, net 98 60
------- ------
Net cash from operating activities 31 119
------- ------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt 39 1
Payment of debt (12) (28)
Retirement of debt (827) --
Purchase of Company common stock (324) (465)
Issuance of Company common stock 7 10
Cash dividends paid (84) (80)
------- ------
Net cash (for) financing activities (1,201) (562)
------- ------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures (110) (58)
Purchases of marketable securities (79) (52)
Proceeds from marketable securities 90 112
(Cash paid for) proceeds from disposition of:
Other investments, net (1) 9
Businesses, net of cash disposed -- 63
Other, net (13) 9
------- ------
Net cash (for) from investing activities (113) 83
------- ------
Effect of exchange rates on cash and cash
investments 1 6
------- ------
CASH AND CASH INVESTMENTS:
Decrease for the quarter (1,282) (354)
Cash at businesses held for sale -- 38
At January 1 1,964 1,256
------- ------
At March 31 $ 682 $ 940
======= ======
See notes to condensed consolidated financial statements.
3
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, of a normal
recurring nature, necessary to present fairly its financial position as at
March 31, 2006 and the results of operations and changes in cash flows for
the three months ended March 31, 2006 and 2005. The condensed consolidated
balance sheet at December 31, 2005 was derived from audited financial
statements.
Certain prior-year amounts have been reclassified to conform to the 2006
presentation in the condensed consolidated financial statements. The
results of operations related to 2005 discontinued operations have been
separately stated in the accompanying condensed consolidated statements of
income for the three months ended March 31, 2005. In the Company's
condensed consolidated statements of cash flows for the three months ended
March 31, 2005, the 2005 cash flows of discontinued operations are not
separately classified.
STOCK OPTIONS AND AWARDS. On January 1, 2003, the Company elected to
prospectively change its method of accounting for stock-based compensation
using the transition method defined by Statement of Financial Accounting
Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation -
Transition Disclosure - an Amendment of SFAS No. 123," and implemented the
fair value method for determining stock-based compensation expense.
Accordingly, options granted, modified or settled subsequent to January 1,
2003 were accounted for using the fair value method, and options granted
prior to January 1, 2003 were accounted for using the intrinsic value
method. The following table illustrates the pro forma effect on net income
and earnings per common share for the three months ended March 31, 2005, as
if the fair value method were applied to all previously issued, outstanding
and unvested stock options, in millions except per common share data:
THREE MONTHS ENDED
MARCH 31, 2005
------------------
Net income, as reported $231
Add:
Stock-based employee compensation expense
included in reported net income, net of tax 13
Deduct:
Stock-based employee compensation expense,
net of tax (13)
Stock-based employee compensation expense
determined under the fair value method
for stock options granted prior to 2003,
net of tax (2)
----
Pro forma net income $229
====
Earnings per common share:
Basic as reported $.53
Basic pro forma $.53
Diluted as reported $.52
Diluted pro forma $.52
4
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
B. Effective January 1, 2006, the Company adopted SFAS No. 123R, "Share-Based
Payment," using the Modified Prospective Application ("MPA") method. The
MPA method requires the Company to record expense for unvested stock
options that were awarded prior to January 1, 2003 through the remaining
vesting periods. The MPA method does not require the restatement of
prior-year information. The Company is currently evaluating which tax
election method it will use to determine the tax windfall or shortfall
associated with stock options; such evaluation will be completed by the
fourth quarter of 2006.
The Company's 2005 Long Term Stock Incentive Plan (the "2005 Plan")
replaced the 1991 Long Term Stock Incentive Plan (the "1991 Plan") in May
2005 and provides for the issuance of stock-based incentives in various
forms. At March 31, 2006, outstanding stock-based incentives were in the
form of restricted long-term stock awards, stock options, phantom stock
awards and stock appreciation rights. Additionally, the Company's 1997
Non-Employee Directors Stock Plan (the "1997 Plan") provides for the
payment of part of the compensation to non-employee Directors in Company
common stock. Pre-tax compensation expense related to stock-based
incentives was as follows for the three months ended March 31, 2006 and
2005, in millions:
2006 2005
---- ----
Restricted long-term stock awards $18 $11
Stock options 9 8
Stock appreciation rights and phantom
stock awards 2 1
--- ---
Total $29 $20
=== ===
The income tax benefit related to stock-based compensation expense
recognized for the three months ended March 31, 2006 was $11 million.
In the first quarter of 2006, the Company recognized additional pre-tax
expense of $7 million ($4 million after tax, or $.01 per common share)
related to the adoption of SFAS No. 123R. In addition, in the first quarter
of 2006, the Company recorded expense of $3 million (net of income tax
benefit of $2 million) as a cumulative effect of accounting change, net.
At March 31, 2006, a total of 23,978,900 shares and 382,300 shares of
Company common stock were available under the 2005 Plan and the 1997 Plan,
respectively, for the granting of stock options and other restricted
long-term stock incentive awards.
RESTRICTED LONG-TERM STOCK AWARDS
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.
5
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note B - continued:
The following table summarizes the long-term stock award activity for the
three months ended March 31, 2006, shares in millions:
2006
----
Non-vested stock award shares at January 1, 2006 9
Granted 1
Vested (1)
Forfeited --
---
Non-vested stock award shares at March 31, 2006 9
===
Weighted average grant date fair value (per share) $30
The Company continues to measure compensation cost for stock awards at the
market price of the Company's common stock at the grant date. Effective
January 1, 2006, such cost is being expensed ratably over the shorter of
the vesting period of the stock awards, typically 10 years, or the length
of time until the grantee becomes retirement-eligible at age 65. For stock
awards granted prior to January 1, 2006, such cost is being expensed over
the vesting period of the stock awards, typically 10 years, or for
executive grantees that are, or will become, retirement-eligible, the
expense is being recognized over five years.
There was $219 million of total unrecognized compensation expense related
to unvested stock awards; such awards had a weighted average remaining
vesting period of seven years. There was $185 million of unrecognized
compensation cost which was included as a reduction of shareholders' equity
at December 31, 2005; such cost was reclassified on January 1, 2006 in
accordance with SFAS No. 123R. As of January 1, 2006, the Company estimated
a forfeiture rate for long-term stock awards and applied that rate to all
previously expensed stock awards; such application did not result in a
change in expense to be recorded as a cumulative effect of accounting
change.
The total market value (at the vesting date) of stock award shares which
vested during the three months ended March 31, 2006 was $34 million.
STOCK OPTIONS
Stock options are granted to key employees and non-employee Directors of
the Company. The exercise price equals the market price of Company common
stock at the grant date. These options generally become exercisable (vest
ratably) over five years beginning on the first anniversary from the date
of grant and expire no later than 10 years after the grant date.
Restoration stock options under the 1991 Plan become exercisable six months
from the date of grant. The 2005 Plan does not permit the granting of
restoration stock options, except for restoration options resulting from
options previously granted under the 1991 Plan.
The Company granted 136,000 of primarily restoration stock option shares in
the first quarter of 2006 with a grant date exercise price range of $29-$33
per share. In the first quarter of 2006, 250,000 stock option shares were
forfeited.
6
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note B - continued:
A summary of the status of the Company's stock options for the three months
ended March 31, 2006 is presented below, shares in millions:
2006
------------
Option shares outstanding, January 1 27
Weighted average exercise price $ 26
Option shares granted, including restoration options --
Weighted average exercise price $ 31
Option shares exercised 1
Aggregate intrinsic value on date of exercise $ 7 million
Weighted average exercise price $ 21
Option shares forfeited --
Weighted average exercise price $ 27
Option shares outstanding, March 31 26
Weighted average exercise price $ 26
Weighted average remaining option term (in years) 6
Option shares vested and expected to vest, March 31 26
Weighted average exercise price $ 26
Aggregate intrinsic value (A) $171 million
Weighted average remaining option term (in years) 6
Option shares exercisable (vested), March 31 15
Weighted average exercise price $ 25
Aggregate intrinsic value (A) $118 million
Weighted average remaining option term (in years) 4
(A) Aggregate intrinsic value is computed using the Company's stock price at
March 31, 2006 less the exercise price (grant date price) multiplied by the
number of shares.
The Company measures compensation cost for stock options using a
Black-Scholes option pricing model. The expense for unvested stock options
at January 1, 2006 is based on grant-date fair value of those awards as
calculated for pro forma disclosures under SFAS No. 123. Effective January
1, 2006, such cost is being expensed ratably over the shorter of the
vesting period of the stock options, typically five years, or the length of
time until the grantee becomes retirement-eligible at age 65. For stock
options granted prior to January 1, 2006, such cost is being expensed
ratably over the vesting period of the stock options, typically five years.
As of March 31, 2006, there was $95 million of aggregate unrecognized
compensation expense (using the Black-Scholes option pricing model) related
to unvested stock options; such options had a weighted average vesting
period of over three years. As of January 1, 2006, the Company estimated a
forfeiture rate for stock options and applied that rate to all previously
expensed stock options; such application did not result in a change in
expense to be recorded as a cumulative effect of accounting change.
7
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note B - concluded:
The following table summarizes the weighted average grant date fair values
of option shares granted in the three months ended March 31, 2006 and the
assumptions used to estimate those values using a Black-Scholes option
pricing model:
2006
-------
Weighted average grant date fair value $ 6.33
Risk-free interest rate 4.70%
Dividend yield 2.60%
Volatility factor 26.00%
Expected option life 4 years
PHANTOM STOCK AWARDS AND STOCK APPRECIATION RIGHTS
The Company issues phantom stock awards and stock appreciation rights
("SARs") to certain non-U.S. employees.
Phantom stock awards are linked to the value of the Company's common stock
on the date of grant and are settled in cash upon vesting, typically over
10 years. The Company continues to account for phantom stock awards as
liability awards; the compensation cost is initially measured as the market
price of the Company's common stock at the grant date and is expensed
ratably over the vesting period. The liability is remeasured and adjusted
at the end of each reporting period until the award is fully-vested and
paid to the employees. For the three months ended March 31, 2006, the
Company granted 91,000 shares of phantom stock awards with an aggregate
fair value of $3 million and paid $2 million in cash to settle phantom
stock awards.
SARs are linked to the value of the Company's common stock and are settled
in cash upon exercise. On January 1, 2006, the Company changed its method
of accounting for SARs, in accordance with the provisions of SFAS No. 123R,
from the intrinsic value method to the fair value method. The fair value
method requires outstanding SARs to be classified as liability awards and
valued using a Black-Scholes model at the grant date; such fair value is
expensed ratably over the vesting period, typically five years. The
liability is remeasured and adjusted at the end of each reporting period
until the SARs are exercised and payment is made to the employees or the
SARs expire. As a result of implementing this change, the Company recorded
expense of $3 million (net of income tax benefit of $2 million) as a
cumulative effect of accounting change, net; the Company also recorded
expense of $2 million related to the valuation of SARs at March 31, 2006.
The Company did not grant any SARs in the first three months of 2006.
The following table summarizes information related to phantom stock awards
and SARs at March 31, 2006, in millions:
PHANTOM STOCK STOCK APPRECIATION
AWARDS RIGHTS
------------- ------------------
Accrued compensation cost liability $12 $11
Unrecognized compensation cost $ 4 $ 4
Outstanding 1 1
8
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
C. The changes in the carrying amount of goodwill for the three months ended
March 31, 2006, by segment, were as follows, in millions:
BALANCE BALANCE
DEC. 31, 2005 OTHER(A) MAR. 31, 2006
------------- -------- -------------
Cabinets and Related Products $ 547 $ 4 $ 551
Plumbing Products 461 3 464
Installation and Other Services 1,718 -- 1,718
Decorative Architectural Products 311 1 312
Other Specialty Products 1,134 10 1,144
------ --- ------
Total $4,171 $18 $4,189
====== === ======
(A) Other principally includes foreign currency translation adjustments.
Other indefinite-lived intangible assets included registered trademarks of
$254 million at both March 31, 2006 and December 31, 2005. The carrying
value of the Company's definite-lived intangible assets was $50 million and
$53 million at March 31, 2006 and December 31, 2005, respectively (net of
accumulated amortization of $61 million and $58 million at March 31, 2006
and December 31, 2005, respectively) and principally included customer
relationships and non-compete agreements.
D. Depreciation and amortization expense was $63 million and $62 million for
the three months ended March 31, 2006 and 2005, respectively.
E. The Company has maintained investments in marketable securities and a
number of private equity funds, principally as part of its tax planning
strategies, as any gains enhance the utilization of any current and future
tax capital losses. Included in other assets were the following financial
investments, in millions:
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------
Marketable securities $111 $115
Private equity funds 266 262
Metaldyne Corporation 97 94
TriMas Corporation 46 46
Other investments 12 12
---- ----
Total $532 $529
==== ====
The Company's investments in marketable securities at March 31, 2006 and
December 31, 2005 were as follows, in millions:
PRE-TAX
-----------------------
UNREALIZED UNREALIZED RECORDED
COST BASIS GAINS LOSSES BASIS
---------- ---------- ---------- --------
March 31, 2006 $87 $24 $-- $111
December 31, 2005 $94 $21 $-- $115
The Company had investments in 26 different marketable securities at March
31, 2006.
9
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note E - concluded:
Income from financial investments, net, included in other, net, within
other income (expense), net, was as follows, in millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
---- ----
Realized gains from marketable securities $ 8 $27
Realized losses from marketable securities (3) (1)
Dividend income from marketable securities 1 1
Income from other investments, net 1 15
Dividend income from other investments 5 3
--- ---
Income from financial investments, net $12 $45
=== ===
F. In the first quarter of 2006, the Company retired $800 million of 6.75%
notes due March 15, 2006. The Company reclassified to current liabilities
from long-term debt, $854 million of Zero Coupon Convertible Notes, as the
next put option date is January 20, 2007, and $300 million of floating-rate
notes due March 2007.
G. The following is a reconciliation of the Company's retained earnings, in
millions:
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------
Balance at January 1 $4,286 $3,880
Net income 204 940
Shares issued 6 --
Shares retired:
Repurchased (313) (197)
Surrendered (10) --
Cash dividends declared (90) (337)
Stock-based compensation expense 25 --
Reclassification of stock award activity (176) --
------ ------
Balance at end of period $3,932 $4,286
====== ======
The Company's total comprehensive income was as follows, in millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
---- ----
Net income $204 $231
Other comprehensive income (loss):
Cumulative translation adjustments, net 20 (87)
Unrealized gain (loss) on marketable
securities, net 2 (28)
---- ----
Total comprehensive income $226 $116
==== ====
The unrealized gain (loss) on marketable securities, net, is net of income
tax (benefit) of $1 million and $(16) million for the three months ended
March 31, 2006 and 2005, respectively.
10
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note G - concluded:
The components of accumulated other comprehensive income were as follows,
in millions:
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------
Cumulative translation adjustments, net $ 439 $ 419
Unrealized gain on marketable
securities, net 15 13
Minimum pension liability, net (104) (104)
----- -----
Accumulated other comprehensive income $ 350 $ 328
===== =====
The unrealized gain on marketable securities, net, is reported net of
income tax of $9 million and $8 million at March 31, 2006 and December 31,
2005, respectively. The minimum pension liability, net is reported net of
income tax benefit of $61 million at both March 31, 2006 and December 31,
2005.
H. The Company owns 64 percent of Hansgrohe AG. The aggregate minority
interest, net of dividends, of $96 million and $89 million at March 31,
2006 and December 31, 2005, respectively, is recorded in the caption
deferred income taxes and other liabilities on the Company's condensed
consolidated balance sheets.
I. The net periodic pension cost for the Company's qualified defined-benefit
pension plans was as follows, in millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
---- ----
Service cost $ 5 $ 4
Interest cost 11 10
Expected return on plan assets (12) (10)
Amortization of net loss 2 2
---- ----
Net periodic pension cost $ 6 $ 6
==== ====
Net periodic pension cost for the Company's non-qualified unfunded
supplemental defined-benefit pension plans was $4 million and $5 million
for the three months ended March 31, 2006 and 2005, respectively.
11
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
J. The following table presents information about the Company by segment and
geographic area, in millions:
THREE MONTHS ENDED MARCH 31,
----------------------------------
2006 2005 2006 2005
------ ------ ---- ----
NET SALES(A) OPERATING PROFIT
--------------- ----------------
The Company's operations by segment were:
Cabinets and Related Products $ 852 $ 783 $121 $116
Plumbing Products 797 760 66 79
Installation and Other Services 806 693 95 80
Decorative Architectural Products 409 371 77 59
Other Specialty Products 322 307 46 45
------ ------ ---- ----
Total $3,186 $2,914 $405 $379
====== ====== ==== ====
The Company's operations by geographic area were:
North America $2,669 $2,369 $348 $319
International, principally Europe 517 545 57 60
------ ------ ---- ----
Total $3,186 $2,914 405 379
====== ======
General corporate expense, net (48) (46)
Income regarding litigation settlement (B) -- 2
---- ----
Operating profit 357 335
Other income (expense), net (30) (22)
---- ----
Income from continuing operations before
income taxes, minority interest and
cumulative effect of accounting change, net $327 $313
==== ====
(A) Intra-segment sales were not material.
(B) The income regarding litigation settlement relates to litigation discussed
in Note M related to the Company's subsidiary, Behr Process Corporation,
which is included in the Decorative Architectural Products segment.
K. Other, net, which is included in other income (expense), net, included the
following, in millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
---- ----
Income from cash and cash investments $14 $ 5
Other interest income 1 1
Income from financial investments, net (Note E) 12 45
Other items, net 7 (14)
--- ----
Total other, net $34 $ 37
=== ====
Other items, net, for the first quarter of 2006 primarily included $4
million of currency transaction gains. Other items, net, for the first
quarter of 2005 included $13 million of currency transaction losses.
12
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
L. The following are reconciliations of the numerators and denominators used
in the computations of basic and diluted earnings per common share, in
millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
---- ----
Numerator (basic and diluted):
Income from continuing operations
before cumulative effect of accounting
change, net $208 $207
(Loss) income from discontinued operations,
net of income taxes (1) 24
Cumulative effect of accounting change, net (3) --
---- ----
Net income $204 $231
==== ====
Denominator:
Basic common shares (based on weighted average) 406 434
Add:
Contingent common shares 3 4
Stock option dilution 2 5
---- ----
Diluted common shares 411 443
==== ====
At March 31, 2006, the Company did not include any common shares related to
the Zero Coupon Convertible Senior Notes ("Notes") in the calculation of
diluted earnings per common share, as the price of the Company's common
stock at March 31, 2006 did not exceed the equivalent accreted value of the
Notes.
Additionally, 12.9 million common shares and 0.4 million common shares for
the three months ended March 31, 2006 and 2005, respectively, related to
stock options were excluded from the computation of diluted earnings per
common share due to their antidilutive effect. Effective January 1, 2006,
the Company changed its method of calculating the dilutive effect of stock
options in accordance with the provisions of SFAS No. 123R. Such
calculation now includes the unrecognized compensation expense associated
with unvested stock options.
In the first quarter of 2006, the Company repurchased and retired
approximately 10 million shares of Company common stock, for cash
aggregating $324 million. At March 31, 2006, the Company had 19 million
shares of its common stock remaining under the March 2005 Board of
Directors repurchase authorization.
M. The Company is subject to lawsuits and pending or asserted claims with
respect to matters generally arising in the ordinary course of business.
As the Company reported in previous filings, late in the second half of
2002, the Company and its subsidiary, Behr Process Corporation, agreed to
two Settlements (the National Settlement and the Washington State
Settlement) to resolve all class action lawsuits pending in the United
States involving certain exterior wood coating products formerly
manufactured by Behr. The Company expects that the evaluation, processing
and payment of claims for both the National Settlement and the Washington
State Settlement should be completed in 2006.
13
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note M - concluded:
As previously disclosed, several lawsuits have been brought against the
Company and a number of its insulation installation companies in the
federal courts in Atlanta, Georgia, and Ft. Meyers, Florida, alleging that
certain practices violate provisions of federal and state antitrust laws;
the complaints are requesting class action certification. The Company is
vigorously defending these cases and believes that the conduct of the
Company and its insulation installation companies, which have been the
subject of these lawsuits, has not violated any antitrust laws.
As previously disclosed, a lawsuit has been brought against the Company and
its Milgard Manufacturing subsidiary alleging design defects in certain
Milgard aluminum windows; the complaint is requesting class action
certification. The Company is vigorously defending the case and believes
that its window products have not been manufactured with the alleged design
defects.
As previously disclosed, European governmental authorities are
investigating possible anticompetitive business practices relating to the
plumbing and heating industries in Europe. The investigations involve a
number of European companies, including certain of the Company's European
manufacturing divisions and a number of other large businesses. In
addition, several private antitrust lawsuits have been filed in the United
States against the Company and several other companies that are being
investigated, which appear to be an outgrowth of the European
investigations. The Company believes that it will not incur material
liability as a result of the matters that are subject to these
investigations or as a result of any such lawsuits.
N. The following is a reconciliation of the Company's warranty liability, in
millions:
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------
Balance at January 1 $105 $100
Accruals for warranties issued during
the period 16 67
Accruals related to pre-existing warranties 1 1
Settlements made (in cash or kind) during
the period (14) (57)
Other, net (including foreign exchange impact) (1) (6)
---- ----
Balance at end of period $107 $105
==== ====
O. In April 2006, the Company completed the sale of two relatively small
businesses, the results of which will be included in continuing operations
through the date of sale; aggregate net sales for these businesses were $46
million for the year ended December 31, 2005. Cambridge Brass is a supplier
of plumbing fittings in North America and was included in the Plumbing
Products segment. Faucet Queens is a supplier of home hardware and repair
products to food and drug stores in North America and was included in the
Other Specialty Products segment. Gross proceeds from the sale of these
businesses was approximately $49 million; total assets and liabilities were
$52 million and $6 million, respectively, at March 31, 2006. These
businesses had combined net sales and operating profit of $11 million and
$1 million, respectively, for the three months ended March 31, 2006.
In the first quarter of 2006, the Company recognized, in discontinued
operations, $1 million of additional expenses related to the disposition of
businesses completed in 2005.
14
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONCLUDED)
P. As part of the Company's strategy of value creation, the Company announced
a plant closure in the Plumbing Products segment in January 2006. In the
first quarter of 2006, the Company incurred $17 million of costs and
charges (primarily accelerated depreciation and severance expense)
associated with this plant closure and other profit improvement programs in
the Plumbing Products segment. The Company expects to incur additional
costs throughout 2006 and currently anticipates that total costs for the
full-year will approximate $70 million.
15
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FIRST QUARTER 2006 VERSUS FIRST QUARTER 2005
SALES AND OPERATIONS
The following table sets forth the Company's net sales and operating profit
margins by business segment and geographic area, dollars in millions:
THREE MONTHS ENDED PERCENT INCREASE
MARCH 31, (DECREASE)
------------------ ----------------
2006 2005 2006 VS. 2005
------ ------ ----------------
NET SALES:
Cabinets and Related Products $ 852 $ 783 9%
Plumbing Products 797 760 5%
Installation and Other Services 806 693 16%
Decorative Architectural Products 409 371 10%
Other Specialty Products 322 307 5%
------ ------
Total $3,186 $2,914 9%
====== ======
North America $2,669 $2,369 13%
International, principally Europe 517 545 (5%)
------ ------
Total $3,186 $2,914 9%
====== ======
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
---- ----
OPERATING PROFIT MARGINS: (A)
Cabinets and Related Products 14.2% 14.8%
Plumbing Products 8.3% 10.4%
Installation and Other Services 11.8% 11.5%
Decorative Architectural Products 18.8% 15.9%
Other Specialty Products 14.3% 14.7%
North America 13.0% 13.5%
International, principally Europe 11.0% 11.0%
Total 12.7% 13.0%
Operating profit margins, as
reported 11.2% 11.5%
(A) Before general corporate expense, net, of $48 million for the three months
ended March 31, 2006. Before general corporate expense, net, of $46 million
and income regarding the litigation settlement related to the Decorative
Architectural Products segment of $2 million for the three months ended
March 31, 2005.
16
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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
Net sales in the first quarter of 2006 increased nine percent from the
comparable period in 2005. Excluding results from acquisitions, net sales also
increased nine percent (including a two percent decrease relating to the effect
of currency translation) compared with 2005. The following table reconciles
reported net sales to net sales excluding acquisitions and the effect of
currency translation, in millions:
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
------ ------
Net sales, as reported $3,186 $2,914
Acquisitions (6) --
------ ------
Net sales, excluding acquisitions 3,180 2,914
Currency translation 45 --
------ ------
Net sales, excluding acquisitions and the effect
of currency translation $3,225 $2,914
====== ======
Net sales of Cabinets and Related Products increased nine percent in the
first quarter of 2006 compared with 2005, primarily due to increased sales
volume of assembled cabinets in the new construction and retail markets, offset
in part by a stronger U.S. dollar which had a negative effect on the translation
of local currencies of European operations included in this segment.
Net sales of Plumbing Products increased five percent in the first quarter
of 2006 compared with 2005, primarily due to increased sales volume through the
Company's wholesale distribution channel, as well as increased sales to certain
retail customers, offset in part by a stronger U.S. dollar which had a negative
effect on the translation of local currencies of European operations included in
this segment.
Net sales of Installation and Other Services increased 16 percent in the
first quarter of 2006 compared with 2005, primarily due to increased sales
volume of non-insulation products, selling price increases and a continued
strong new-housing market.
Net sales of Decorative Architectural Products increased 10 percent in the
first quarter of 2006 compared with 2005, primarily due to increased sales
volume and selling price increases of paints and stains.
Net sales of Other Specialty Products increased five percent in the first
quarter of 2006 compared with 2005, primarily due to increased sales of doors
and windows to North American new construction markets, offset in part by a
stronger U.S. dollar which had a negative effect on the translation of local
currencies of European operations included in this segment.
17
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Net sales from North American and International operations in the first
quarter of 2006 increased 13 percent and decreased five percent, respectively,
compared with the first quarter of 2005. North American sales were positively
affected by increased sales volume of assembled cabinets, paints and stains and
installation services, as well as increased selling prices of paints and stains
and installation services. For the first quarter of 2006, International sales
were negatively affected by a stronger U.S. dollar, principally against the
Euro, which decreased International net sales by eight percent.
OPERATING MARGINS
The Company's gross profit margin was 27.6 percent for the first quarter of
2006 compared with 28.4 percent for the comparable period in 2005. Selling,
general and administrative expenses as a percentage of sales were 16.4 percent
for the first quarter of 2006 and 17.0 percent for the comparable period of the
prior year. First quarter 2006 results were positively affected by increases in
certain selling prices, as well as increased sales volume of assembled cabinets,
paints and stains and installation services, which partially offset commodity
cost increases and a less favorable product mix in certain segments. Operating
profit in 2006 was negatively affected by charges of $17 million related to the
Company's profit improvement programs in the Plumbing Products segment.
Operating profit for the first quarter of 2005 benefited from $2 million of
income regarding the Behr litigation settlement.
Operating profit margin for the Cabinets and Related Products segment for
the first quarter of 2006 was 14.2 percent compared with 14.8 percent for the
first quarter of 2005, and reflects continued manufacturing and distribution
inefficiencies due to increased demand for assembled cabinets in North America,
as well as a less favorable product mix.
Operating profit margin for the Plumbing Products segment was 8.3 percent
for the first quarter of 2006 compared with 10.4 percent for the first quarter
of 2005. Operating profit margin in this segment was adversely affected by
charges of $17 million related to the Plumbing Products profit improvement
programs, as well as commodity and freight cost increases and a less favorable
product mix.
Operating profit margin for the Installation and Other Services segment was
11.8 percent for the first quarter of 2006 compared with 11.5 percent for the
first quarter of 2005. The slight improvement in operating profit margin in this
segment is primarily attributable to selling price increases, offset in part by
increased sales volume of generally lower-margin, non-insulation products.
Within the Installation and Other Services segment, the availability of
fiberglass insulation to support the Company's installation and distribution
activities continues to be constrained. The high level of demand for fiberglass
insulation as a result of the continued strong new construction market has
outpaced the industry's capacity to produce additional product. The Company
believes that these conditions will persist through 2006 and is working with its
diverse supplier base to secure the appropriate amount of material. At the
current time, the Company believes that it will be able to do so, but if the
Company cannot obtain the required amount of material, this could have a
negative impact on its operations.
Operating profit margin for the Decorative Architectural Products segment
was 18.8 percent for the first quarter of 2006 compared with 15.9 percent for
the first quarter of 2005. The improvement in operating profit margin is
primarily due to increased selling prices, as well as higher sales volume of
paints and stains which offset commodity cost increases.
18
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Operating profit margin for the Other Specialty Products segment was 14.3
percent for the first quarter of 2006 compared with 14.7 percent for the first
quarter of 2005 and reflects a less favorable product mix.
The Company's operating profit margin, as reported, was 11.2 percent for
the first quarter of 2006 compared with 11.5 percent for the first quarter of
2005. Operating profit margin for the first quarter of 2006 included the
negative effect of $17 million of charges related to profit improvement programs
in the Plumbing Products segment. Excluding the $17 million of charges in 2006
and the $2 million of income regarding litigation settlement in 2005, operating
profit margin was 11.7 percent and 11.4 percent for the first quarters of 2006
and 2005, respectively.
OTHER INCOME (EXPENSE), NET
Other, net, for the first quarter of 2006 included $5 million of realized
gains, net, from the sale of marketable securities, dividend income of $6
million 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.
Other, net, for the first quarter of 2005 included $26 million of realized
gains, net from the sale of marketable securities, dividend income of $4 million
and $15 million of income from other investments, net. Other, net, also included
currency transaction losses of $13 million for the first quarter of 2005.
Interest expense for the first quarter of 2006 increased $5 million to $64
million compared with $59 million for the first quarter of 2005, primarily due
to the issuance of fixed-rate notes in June 2005, as well as the effect of
increasing interest rates.
INCOME AND EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS
Income and diluted earnings per common share from continuing operations
before the cumulative effect of accounting change, net for the first quarter of
2006 were $208 million and $.51 per common share compared with $207 million and
$.47 per common share for the comparable period of 2005, respectively. The
Company's effective tax rate for the three months ended March 31, 2006 was 34.6
percent compared with 32.3 percent for the same period in 2005. The lower tax
rate for the first quarter of 2005 compared to the first quarter of 2006
resulted primarily from certain adjustments to estimated tax accruals related to
International operations recognized in the first quarter of 2005. The Company
estimates that its effective tax rate for the full-year 2006 should approximate
34 to 35 percent.
OTHER FINANCIAL INFORMATION
The Company's current ratio was 1.3 to 1 and 1.8 to 1 at March 31, 2006 and
December 31, 2005, respectively, due to the reclassification to current
liabilities from long-term debt, $854 million of Zero Coupon Convertible Notes,
as the next put option date is January 20, 2007, and $300 million of
floating-rate notes due March 2007.
19
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For the three months ended March 31, 2006, cash of $31 million was provided
by operating activities. Cash used for financing activities was $1,201 million,
and included $84 million for the payment of cash dividends, $324 million for the
acquisition of Company common stock in open-market transactions and $827 million
(including accrued interest) for the retirement of 6.75% notes due March 15,
2006. Cash provided by financing activities included $7 million from the
issuance of Company common stock, primarily for the exercise of stock options,
and $27 million from the net increase in debt. Net cash used for investing
activities was $113 million, and included $110 million for capital expenditures,
offset in part by $10 million of net proceeds from the sale of financial
investments.
First quarter 2006 cash from operations was affected by an expected and
annually recurring first quarter increase in accounts receivable and inventories
compared with December 31, 2005.
Effective January 1, 2006, the Company adopted SFAS No. 123R, "Share-Based
Payment." Note B to the Company's Condensed Consolidated Financial Statements
discusses the accounting policies regarding stock options and awards.
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 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.
OUTLOOK FOR THE COMPANY
In late 2005 and into 2006, the Company has experienced additional
commodity cost increases; the Company believes such increases will adversely
affect its 2006 operating performance. The Company has already implemented and
continues to implement additional price increases for a number of its products,
and believes that by the end of the first half of 2006, many of these cost
increases will be largely offset by such price increases.
The Company remains committed to its strategy of value creation and is
focused on the simplification of its business model, cash flow generation,
improvement in return on invested capital and the return of cash to shareholders
through share repurchases and dividends.
Consistent with this strategy, the Company is pursuing a variety of
initiatives to offset cost increases and increase operating profit, including
sourcing programs, the restructuring of certain of its businesses (including
consolidations), manufacturing rationalization, headcount reductions and other
profit improvement programs.
As part of its strategy of value creation, the Company announced a plant
closure in the Plumbing Products segment in January 2006. The Company incurred
$17 million of costs associated with this plant closure and other profit
improvement programs in the first quarter of 2006 and expects to incur
additional costs throughout 2006. Implementing these initiatives should improve
the Company's earnings outlook for 2007 and beyond.
20
MASCO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
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.
21
MASCO CORPORATION
ITEM 4. CONTROLS AND PROCEDURES
a. Evaluation of Disclosure Controls and Procedures.
The Company's principal executive officer and principal financial
officer have concluded, based on an evaluation of the Company's
"disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)), as required by
paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, that, as of
March 31, 2006, the Company's disclosure controls and procedures were
effective.
b. Changes in Internal Control Over Financial Reporting.
In connection with the evaluation of the Company's "internal control
over financial reporting" that occurred during the quarter ended March
31, 2006, which is required under the Securities Exchange Act of 1934
by paragraph (d) of Exchange Rules 13a-15 or 15d-15, (as defined in
paragraph (f) of Rule 13a-15), management determined that there was no
change that has materially affected or is reasonably likely to
materially affect internal control over financial reporting.
22
MASCO CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding 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.
ITEM 1A. RISK FACTORS
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, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information regarding the repurchase of
Company common stock for the three months ended March 31, 2006, in millions
except average price paid per common share data:
Total Number of Maximum Number of
Shares Purchased Shares That May
Total Number Average Price as Part of Yet Be Purchased
of Shares Paid Per Publicly Announced Under the Plans
Period Purchased(A) Common Share Plans or Programs or Programs
- ------ ------------ ------------- ------------------ -----------------
1/1/06-1/31/06 3 $30.07 3 26
2/1/06-2/28/06 4 $30.26 3 23
3/1/06-3/31/06 4 $31.13 4 19
--- ---
Total for
the quarter 11 $30.54 10
(A) Includes one million shares (i) surrendered for the exercise of stock
options or (ii) withheld for the payment of taxes upon the vesting of stock
awards or the exercise of stock options.
ITEMS 3 THROUGH 5 ARE NOT APPLICABLE.
ITEM 6. EXHIBITS
12 - Computation of Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends
31a - Certification by Chief Executive Officer Required by Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934
31b - Certification by Chief Financial Officer Required by Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934
32 - Certification Required by Rule 13a-14(b) or 15d-14(b) of the Securities
Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the
United States Code
23
MASCO CORPORATION
PART II. OTHER INFORMATION, CONCLUDED
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.
MASCO CORPORATION
By: /s/ Timothy Wadhams
------------------------------------
Name: Timothy Wadhams
Title: Senior Vice President and
Chief Financial Officer
May 5, 2006
24
MASCO CORPORATION
EXHIBIT INDEX
EXHIBIT
- -------
Exhibit 12 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
Exhibit 31a Certification by Chief Executive Officer Required by
Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
Exhibit 31b Certification by Chief Financial Officer Required by
Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
Exhibit 32 Certification Required by Rule 13a-14(b) or 15d-14(b) of the
Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of
Title 18 of the United States Code