NAVIGATION

MASCO CORPORATION BUSINESS AND FINANCIAL HIGHLIGHTS

August 03, 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) and the 2004 planned dispositions of certain European businesses as discontinued operations.

Second Quarter 2004

  • Net sales from continuing operations for the quarter increased 16 percent with North American sales increasing 15 percent and International sales increasing 23 percent. In local currencies, International sales increased 14 percent compared with the second quarter of 2003. The Company's organic sales growth of 16 percent benefited from market share gains, new products and positive economic conditions impacting the new home construction and home improvement markets.
  • All of the Company's business segments, including its European operations, experienced strong sales growth. Sales of assembled cabinets, paints and stains, installation services, vinyl windows and plumbing products were particularly strong.
  • Income from continuing operations for the quarter was $294 million compared with $220 million for the second quarter of 2003.
  • Earnings from continuing operations increased to a second quarter record of $.65 per common share (exceeding the Company's recently increased guidance of $.58 to $.60 per common share) compared with $.44 per common share for the 2003 second quarter.
  • Results for the second quarter of 2004 include income related to insurance proceeds from the Behr litigation of $.01 per common share, after tax and incremental income from the sale of marketable securities and other non-operating assets of $.01 per common share, after tax compared with the second quarter of 2003. Income from the sale of marketable securities and other non-operating assets aggregated $.03 per common share, after tax and $.02 per common share, after tax in the second quarters of 2004 and 2003, respectively. In the second quarter of 2004, the Company generated approximately $120 million of cash from the net disposition of marketable securities.
  • 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. The second quarter 2004 results include after-tax income from their operations of $11 million, and an additional after-tax charge aggregating $44 million ($.10 per common share) for those businesses that are expected to be divested at a loss, both of which are included in discontinued operations. The charge (reduction in expected proceeds) principally relates to operations located in Spain and is primarily the result of lower-than-expected operating results of those operations. Any gains resulting from the disposition of individual businesses, which are expected later this year, will be recognized as such transactions are completed, and the Company continues to expect that the gains will substantially offset the 2004 charges. Including the operating results of these discontinued operations and the second quarter charge mentioned above, net income for the quarter increased to $261 million compared with $229 million for the 2003 second quarter; and earnings increased to $.58 per common share compared with $.46 per common share for the second quarter of 2003.
  • Second quarter 2003 results were negatively affected by adverse weather conditions (particularly impacting new home construction and retail sales in certain parts of the country) and by a non-cash charge of $23 million ($.03 per common share, after tax) resulting from a system failure at one of the Company's European operations.
  • Sales to key retail customers in the quarter, from continuing operations, increased 14 percent compared with a seven percent increase in the second quarter of 2003.
  • Sales increases by segment, which were substantially all organic growth, in the 2004 second quarter versus the 2003 second quarter were:
    • Cabinets and Related Products sales increased 15 percent;
    • Plumbing Products sales increased 16 percent;
    • Installation and Other Services sales increased 17 percent;
    • Decorative Architectural Products sales increased 15 percent; and
    • Other Specialty Products sales increased 22 percent.
  • Gross margins were 31.8 percent in the second quarter of 2004 compared with 30.7 percent in the second quarter of 2003.
  • Operating profit margins as reported were 15.6 percent in the second quarter of 2004 compared with 14.2 percent in the second quarter of 2003. Excluding income related to insurance proceeds from the Behr litigation of $7 million in 2004 and the European charge of $23 million and accelerated benefit income of $5 million in 2003, operating profit margins were 15.4 percent for the second quarter of 2004 compared with 14.9 percent for the second quarter of 2003.
  • Results in the second 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 experienced improved operating profit margins in all of its segments except the Installation and Other Services segment. The lower margins in the Installation and Other Services segment are primarily attributed to 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 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.
  • SG&A expenses as a percent of sales, including general corporate expense, were 16.5 percent for the second quarters of both 2004 and 2003.
  • General corporate expense was 1.5 percent of sales in the second quarter of 2004 compared with 1.1 percent in the comparable period of 2003. The increase is primarily attributable to approximately $10 million of incremental costs and expenses associated with complying with the new requirements of the Sarbanes-Oxley Legislation.
  • Inventory days were 52 days at June 30, 2004 compared with 57 days at June 30, 2003.
  • Accounts receivable days at the end of the second quarter were 54 days compared with 53 days a year ago.
  • Accounts payable days at the end of the second quarter improved to 38 days from 32 days a year ago, as the Company continues to negotiate more favorable supplier terms.
  • Working capital at June 30, 2004 (defined as accounts receivable and inventories less accounts payable) improved to 19.2 percent of the last twelve months of sales from 22.0 percent a year earlier.
  • The Company's tax rate was 35.8 percent for the second quarter of 2004 compared with 34.9 percent for the comparable period of the prior year. The increase in the tax rate was due principally to a change in the mix of foreign earnings to countries with higher tax rates. 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 $1.0 billion in cash and marketable securities and $1.9 billion in unused bank lines.
  • Debt as a percent of total capitalization was 47 percent at both June 30, 2004 and 2003.
  • For the twelve months ended June 30, 2004 and June 30, 2003, return on invested capital was 12.2 percent and 9.8 percent, respectively. For the twelve months ended June 30, 2004 and June 30, 2003, return on invested capital (as reconciled) was 12.0 percent and 10.8 percent, respectively. The Company continues to believe that it will achieve its 15 percent return on invested capital goal by 2008.
  • The Company repurchased nine million common shares during the quarter and had 24 million common shares remaining at June 30, 2004 under the December 2003 Board of Directors repurchase authorization of 50 million shares.
  • In the first six months of 2004, the Company has returned over $800 million to shareholders through share repurchases (24 million shares) and dividends. In 2003, the Company returned in excess of $1 billion to shareholders through share repurchases (35 million shares) and dividends.
  • The Company's diluted common shares for purposes of calculating earnings per common share were 453 million for the second quarter of 2004 compared with 499 million for the second 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 July 1, 2004 are 451 million; this excludes the impact of any repurchases of common stock subsequent to June 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 $2.25 to $2.30 per common share. The new earnings guidance represents an increase from the previous guidance of $2.00 to $2.10 per common share.
  • Based on current business trends, the Company anticipates that third quarter 2004 earnings from continuing operations will be in a range of $.57 to $.60 per common share, compared with relatively strong third quarter 2003 earnings of $.53 per common share.
  • The new guidance assumes that 2004 housing starts will approximate 2003 levels. The Company estimates that a one percent change in housing starts equates to approximately a $.02 impact on earnings per common share. Earnings guidance for 2004 also includes a reduction of approximately $.05 per common share 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. This 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 costs and expenses associated with complying with the new requirements of the Sarbanes-Oxley Legislation. This new guidance also includes realized income related to the Behr litigation of $.04 per common share in the first half of 2004, but excludes any future Behr litigation income (as such amounts cannot be predicted), any gains or charges for businesses to be divested, any other possible unusual items and any share repurchases subsequent to June 30, 2004.
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.