NAVIGATION

MASCO CORPORATION BUSINESS AND FINANCIAL HIGHLIGHTS

November 02, 2004

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company has accounted for the 2003 dispositions (Baldwin Hardware, Weiser Lock and The Marvel Group), the 2004 dispositions of Jung Pumpen and The Alvic Group and the remaining 2004 planned dispositions of certain other European businesses as discontinued operations.

Third Quarter 2004

  • Net sales from continuing operations for the quarter increased 12 percent, primarily from organic growth, with North American sales increasing 11 percent and International sales increasing 20 percent. In local currencies, International sales increased nine percent compared with the third quarter of 2003. The Company's sales growth benefited from market share gains, new products and positive economic conditions impacting the new home construction and home improvement markets.
  • Sales of assembled cabinets, installation services, windows and plumbing products were particularly strong in the quarter.
  • Income from continuing operations for the quarter was $289 million compared with $258 million for the third quarter of 2003.

  • Earnings from continuing operations increased to a third quarter record of $.64 per common share (exceeding the Company's recently increased guidance of $.60 to $.63 per common share) compared with $.53 per common share for the 2003 third quarter.

  • Results for the third quarter of 2004 include income from the sale of financial investments of $.01 per common share, after tax, comparable with the third quarter of 2003, and compared with income of $.02 and $.04 per common share in the second quarter and first quarter of 2004, respectively.

  • The Company previously announced, in the first quarter of 2004, the planned disposition of several European businesses that are not core to the Company's long-term growth strategy. During the third quarter of 2004, the Company completed the sale of two of these businesses, Jung Pumpen in Germany and The Alvic Group in Spain. Total proceeds from the sale of these businesses were $191 million. The Company recognized a pre-tax, net gain on the disposition of these businesses of $108 million ($93 million or $.21 per common share, after tax). In addition, the Company recognized an additional pre-tax charge of $31 million related to the remaining businesses held for sale due to lower-than-expected operating results as well as weaker-than-expected demand for the businesses that the Company is divesting (these items are included in discontinued operations). During the third quarter of 2003, the Company recognized a pre-tax gain from the sale of businesses aggregating approximately $91 million and also $6 million from the operating results of these businesses (aggregating $.12 per common share, after-tax; these items are included in results of discontinued operations). Including discontinued operations, net income for the 2004 third quarter increased to $359 million compared with $319 million for the 2003 third quarter, and earnings increased to $.80 per common share compared with $.65 per common share for the third quarter of 2003.

  • Third quarter 2003 earnings from continuing operations, as previously reported, included the negative impact of accounting irregularities and impairment charges related to two businesses in the United Kingdom aggregating $.06 per common share. These items were offset by income from an adjustment of the Behr litigation accrual of $.07 per common share.

  • Sales to key retail customers in the quarter (which were adversely affected by weather in certain parts of the country - particularly sales of architectural coatings), increased six percent compared with an eight percent increase in the third quarter of 2003.

  • Sales increases by segment, which were substantially all organic growth, in the 2004 third quarter versus the 2003 third quarter were:
    • Cabinets and Related Products sales increased 12 percent;
    • Plumbing Products sales increased 12 percent;
    • Installation and Other Services sales increased 15 percent;
    • Decorative Architectural Products sales increased four percent; and
    • Other Specialty Products sales increased 20 percent.
  • Gross margins were 31.2 percent in the third quarter of 2004 compared with 31.0 percent in the third quarter of 2003. Operating profit margins as reported were 15.5 percent in the third quarter of 2004 compared with 16.8 percent in the third quarter of 2003. Excluding income related to the Behr litigation of $2 million in 2004 and $58 million in 2003 and the European charges of $42 million in 2003, operating profit margins were 15.4 percent in the third quarter of 2004 compared with 16.2 percent in the third quarter of 2003.

  • Results in the third quarter of 2004 include the positive impact of higher sales volume, which was partially offset by the negative effect of previously communicated increases in a number of operating expenses, including such items as certain material, freight, energy and insurance costs, as well as costs and expenses associated with complying with the new requirements of the Sarbanes-Oxley Legislation.

  • The Company achieved improved operating profit margins in three of its five segments. The lower margins in the Installation and Other Services segment resulted primarily from increased material costs and an increase in sales of generally lower-margin, non-insulation products. Historically, the Company has generally been able to increase its selling prices in this segment to reflect certain material cost increases. Typically, the benefits of such selling price increases are reflected in subsequent periods as there is a time lag as a result of existing contractual obligations. The lower margins in the Plumbing Products segment are primarily due to increased material costs and an increase in sales of lower margin products offset in part by higher sales volume of certain products.

  • SG&A expenses as a percent of sales, including general corporate expense, were 15.8 percent in the third quarter of 2004 and 16.3 percent in the third quarter of 2003. The decline was principally the result of lower promotion and advertising costs partially offset by higher costs and expenses associated with complying with the new requirements of the Sarbanes-Oxley Legislation.

  • General corporate expense was 1.7 percent of sales in the third quarter of 2004 compared with 1.1 percent in the comparable period of 2003. The increase is partially attributable to approximately $11 million of incremental external costs and expenses (principally professional fees) associated with complying with the new requirements of the Sarbanes-Oxley Legislation.

  • Accounts receivable days at the end of the third quarter were 51 days compared with 53 days a year ago.

  • Inventory days were 49 days at September 30, 2004 compared with 50 days at September 30, 2003.

  • Accounts payable days at the end of the third quarter were 38 days for both 2004 and 2003.

  • Working capital at September 30, 2004 (defined as accounts receivable and inventories less accounts payable) improved to 18.5 percent of the last twelve months of sales from 20.5 percent a year earlier.

  • The Company's tax rate was 36.3 percent for the third quarter of 2004 compared with 37.0 percent for the comparable period of the prior year. The Company anticipates that its tax rate for 2004 will approximate 36 percent.

  • At the end of the quarter, the Company had a strong balance sheet, with $1.3 billion in cash and marketable securities and $2.0 billion in unused bank lines. In the third quarter of 2004, the Company generated approximately $127 million of cash from the net disposition of financial assets.

  • Debt as a percent of total capitalization was 45 percent at both September 30, 2004 and 2003.

  • For the twelve months ended September 30, 2004 and September 30, 2003, return on invested capital was 12.9 percent and 11.3 percent, respectively. For the twelve months ended September 30, 2004 and September 30, 2003, return on invested capital (as reconciled) was 12.8 percent and 10.9 percent, respectively. The Company continues to believe that it will achieve its 15 percent return on invested capital goal by 2008 or sooner.

  • The Company repurchased three million common shares during the quarter and had 21 million common shares remaining at September 30, 2004 under the December 2003 Board of Directors repurchase authorization of 50 million shares.

  • In the first nine months of 2004, the Company has returned approximately $1 billion to shareholders through share repurchases (27 million shares) and dividends. In 2003, the Company returned in excess of $1 billion to shareholders through share repurchases (35 million shares) and dividends.

  • In the third quarter of 2004 the quarterly dividend was increased 12.5 percent from $.16 to $.18 per common share. In 2003, the quarterly dividend was increased 14 percent from $.14 to $.16 per common share. The Company has increased dividends for 46 consecutive years.

  • The Company's diluted common shares for purposes of calculating earnings per common share were 449 million for the third quarter of 2004 compared with 489 million for the third quarter of 2003.

Full-Year Outlook

  • Based on the current market price for the Company's common stock, diluted common shares for the computation of earnings per common share at October 1, 2004 were 448 million; this excludes the impact of any repurchases of common stock subsequent to September 30, 2004.

  • The Company continues to experience better-than-expected sales performance thus far in 2004, and, based on current business trends, believes that it will achieve record sales and earnings for 2004 with full-year earnings from continuing operations in a range of $2.31 to $2.35 per common share. This new guidance represents an increase from the previous guidance of $2.25 to $2.30 per common share.

  • Based on current business trends, the Company anticipates that fourth quarter 2004 earnings from continuing operations will be in a range of $.50 to $.54 per common share, compared with fourth quarter 2003 earnings of $.32 per common share, which included a non-cash charge for goodwill impairment of $.09 per common share. The fourth quarter is seasonally one of the Company's lowest quarters in terms of sales and earnings.

  • Earnings guidance for 2004 also includes a reduction of approximately $.05 per common share on a full-year basis resulting from the absence of earnings related to the European businesses to be divested. These businesses have been treated as discontinued operations effective in the first quarter of 2004, which includes the reclassification of their prior period results to discontinued operations. The new earnings guidance includes the benefit of recent common share repurchases and continues to reflect increases in a number of operating expenses, including such items as certain material, freight, energy and insurance costs, as well as incremental external costs and expenses (principally professional fees) associated with complying with the new requirements of the Sarbanes-Oxley Legislation aggregating approximately $26 million for the nine months ended September 30, 2004. The guidance also includes income related to the Behr litigation of $.04 per common share in the first nine months of 2004 (principally in the first half), but excludes any fourth quarter Behr litigation income (as such amounts cannot be predicted), any gains or charges for businesses to be divested, other possible unusual items and the impact of share repurchases subsequent to September 30, 2004.

  • The Company's marketable securities and bond funds have an aggregate cost basis and a market value of $329 million and $346 million respectively, including unrealized gains of $39 million and unrealized losses of $22 million (principally Furniture Brands International {FBN}) at September 30, 2004.

  • Included in marketable securities are four million shares of Furniture Brands International common stock, which was received in June 2002 from the Company's investment in Furnishings International Inc. debt. The market price of FBN during 2004 has been above and below the Company's cost basis of $30.25 per share. If the price remains significantly below the cost basis, the Company may record an other-than-temporary asset impairment charge in the fourth quarter of 2004. The Company has not included any potential charge in its guidance for the 2004 fourth quarter or full-year earnings estimates.

  • The Financial Accounting Standards Board has implemented accounting rules that would require the Company to include 24 million shares in the calculation of diluted earnings per common share related to the Company's Zero Coupon Convertible Senior Notes due 2031. Currently, the shares related to the Notes are not included in the calculation of diluted earnings per common share, since the Notes are not convertible according to their terms. The Company is considering alternatives to minimize the estimated dilutive impact (approximately $.08 per common share for 2004 and lesser amounts in prior years) of the shares related to the Notes.

Statements contained herein may include certain forward-looking statements regarding Masco's future sales, earnings growth potential and other developments. Actual results may vary materially because of external factors such as interest rate fluctuations, changes in consumer spending and other factors over which management has no control. 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 under accounting principles generally accepted in the United States. Additional information about our products, markets and conditions, which could affect our future performance, is contained in the Company's filings with the Securities and Exchange Commission and is available on Masco's website at www.masco.com. Masco undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.