NAVIGATION

MASCO CORPORATION BUSINESS AND FINANCIAL HIGHLIGHTS

February 23, 2005

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, The Alvic Group, Alma Kuchen, E. Missel and SKS Group and the remaining 2004 planned dispositions of certain other European businesses as discontinued operations.

Fourth Quarter 2004

  • Net sales from continuing operations for the quarter increased 10 percent to over $3.0 billion, primarily from organic growth, with North American sales increasing eight percent and International sales increasing 17 percent. In local currencies, International sales increased seven percent compared with the fourth 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 $247 million (excluding a non-cash, after-tax charge of $141 million for goodwill impairment pertaining to certain European operations) compared with $196 million (excluding a non-cash, after-tax charge of $42 million for goodwill impairment pertaining to certain European operations) for the fourth quarter of 2003. Reported income from continuing operations, including the goodwill impairment charges, was $106 million and $154 million for the fourth quarter of 2004 and 2003, respectively.

  • Excluding the charges for goodwill impairment in both periods, earnings from continuing operations were $.55 per common share for the fourth quarter of 2004 and $.41 per common share for the fourth quarter of 2003.

  • Including the charges for goodwill impairment in both periods, earnings from continuing operations were $.23 per common share for the fourth quarter of 2004 and $.32 per common share for the fourth quarter of 2003.

  • Expected results for the fourth quarter of 2004 were adversely impacted by lower than anticipated margins in the installation and other services segment as well as certain other businesses principally resulting from the time lag in implementing price increases related to material cost increases. As previously communicated the Company has experienced substantial cost increases for insulation over the past 16 months and significant cost increases as well for non-insulation products that the Company installs. Historically, the Company has generally been able to increase its selling prices to reflect certain material cost increases. However, the Company has not yet been able to increase selling prices to offset all such cost increases contributing to a decline in operating profit margin. In developing the previous fourth quarter guidance it was anticipated that margins would be in the range of 14.0 to 14.5 percent versus the 12.0 percent actually achieved in this segment.

  • Results for the fourth quarter of 2004 benefited from pre-tax gains from the sale of financial investments of $40 million or $.06 per common share after tax partially offset by a pre-tax impairment charge of $21 million or $.03 per common share after tax related to the Company's investment in Furniture Brands International common stock. Results also benefited from a reduction in the Company's tax rate related to the utilization of foreign tax credits generated in the fourth quarter on distributions of foreign earnings which benefited earnings by $.02 per common share.

  • In the fourth quarter of 2004, the Company repatriated cash related to accumulated earnings from certain of its foreign subsidiaries to the United States of approximately $500 million.

  • 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 fourth quarter of 2004, the Company completed the additional sale of three of these businesses: Alma Kuchen, E. Missel and SKS Group.

  • Sales to key retail customers in the quarter were comparable to the fourth quarter of 2003, partially reflecting the impact of adverse weather in certain parts of the country, which contributed to relatively slow sales of architectural coatings. The Company's other distribution channels experienced strong growth in the fourth quarter of 2004.

  • Sales increases by segment, which were substantially all organic growth, in the 2004 fourth quarter versus the 2003 fourth quarter were:

    • Cabinets and Related Products sales increased 12 percent;

    • Plumbing Products sales increased 9 percent;

    • Installation and Other Services sales increased 12 percent;

    • Decorative Architectural Products sales increased 2 percent; and

    • Other Specialty Products sales increased 9 percent.


  • Gross margins were 29.7 percent in the fourth quarter of 2004 compared with 30.8 percent in the fourth quarter of 2003. Operating profit margins as reported were 7.1 percent in the fourth quarter of 2004 compared with 12.1 percent in the fourth quarter of 2003. Excluding non-cash, pre-tax charges for goodwill impairment of $168 million in the fourth quarter of 2004 and $48 million in the fourth quarter of 2003 and pre-tax income related to the Behr litigation of $1 million in the fourth quarter of 2003, operating profit margins were 12.6 percent in the fourth quarter of 2004 compared with 13.8 percent in the fourth quarter of 2003.

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

  • SG&A expenses as a percent of sales, including general corporate expense, were 17.1 percent in the fourth quarter of 2004 and 16.9 percent in the fourth quarter of 2003. The increase was the result of higher general corporate expense.

  • General corporate expense was 2.0 percent of sales in the fourth quarter of 2004 compared with 1.0 percent in the comparable period of 2003. The increase includes $8 million of incremental external costs and expenses (principally professional fees) associated with complying with the new requirements of the Sarbanes-Oxley Legislation, as well as $5 million of increased expense associated with stock options.

  • The Company's tax rate, on income from continuing operations for the fourth quarter, excluding goodwill impairment charges and excluding the impact of the distribution of foreign earnings in 2004, was 36.6 percent in 2004 compared to 38.5 percent in the fourth quarter of 2003. The decrease results primarily from lower foreign taxes in the fourth quarter of 2004. The reported tax rates on income from continuing operations of 46.1 percent and 43.0 percent for the fourth quarter of 2004 and 2003, respectively, principally reflect the impact of a lower tax benefit on goodwill impairment.

  • The Company's diluted common shares for purposes of calculating earnings per common share were 451 million for the fourth quarter of 2004 compared with 481 million for the fourth quarter of 2003.


Full-Year 2004

  • Net sales from continuing operations for 2004 increased 14 percent to $12.1 billion compared with $10.6 billion for 2003. North American sales increased 13 percent and International sales increased 21 percent. In local currencies, International sales increased 10 percent.

  • Excluding the charges for goodwill impairment, earnings from continuing operations for 2004 were $2.35 per common share, compared with the Company's most recent guidance of $2.31 to $2.35 per common share, and $1.70 per common share for 2003.

  • For the full-year 2004, income from continuing operations was $930 million compared with $790 million in 2003, including non-cash, after-tax charges for goodwill impairment of $141 million and $47 million in 2004 and 2003, respectively. Earnings from continuing operations were $2.04 per common share compared with $1.61 per common share in 2003, including the non-cash, after-tax charges for goodwill impairment.

  • Sales of the Company's products continued strong in 2004 with low double- digit increases in internal sales growth of assembled cabinets, installation services, faucets, architectural coatings and vinyl and fiberglass windows and doors.

  • For the full-year 2004, key retailer sales were $3.7 billion, an increase of approximately 10 percent over $3.4 billion for 2003.

  • Sales increases by segment, which were substantially all organic growth, for 2004 versus 2003 were:

    • Cabinets and Related Products sales increased 14 percent;

    • Plumbing Products sales increased 14 percent;

    • Installation and Other Services sales increased 15 percent;

    • Decorative Architectural Products sales increased 11 percent; and

    • Other Specialty Products sales increased 17 percent.


  • Gross margins were 30.8 percent in 2004 compared with 30.7 percent in 2003. Operating profit margins as reported were 13.0 percent in 2004 compared with 14.0 percent in 2003. Excluding non-cash, pre-tax goodwill impairment charges of $168 million in 2004 and $53 million in 2003, income related to the Behr litigation of $30 million in 2004 and $72 million in 2003, accelerated benefit expense of $16 million in 2003 and the European charges of $54 million in 2003, operating profit margins were 14.1 percent in 2004 compared with 14.5 percent in 2003.

  • Full-year 2004 gross margins and operating margins include the effect of:

    • Increased commodity costs which were not offset due to the delay in implementing selling price increases;
    • Increased energy and freight costs;
    • Stronger foreign currencies resulting in increased International sales which have lower margins;
    • Product mix and relatively higher sales in segments with somewhat lower margins;
    • Costs associated with complying with the new requirements of the Sarbanes-Oxley Legislation; and
    • Increased expense associated with stock options.


  • The Company's installation business continues to be constrained by the lack of adequate availability of fiberglass insulation. The high level of demand for fiberglass insulation as a result of the strength of the new residential construction market has outpaced the industry's capacity to produce additional product.

  • SG&A expenses as a percent of sales, including general corporate expense, were 16.7 percent in 2004 compared with 16.8 percent in 2003.

  • General corporate expense was 1.6 percent of sales in 2004 compared with 1.1 percent in 2003. The increase is primarily attributable to $34 million of incremental external costs and expenses (principally professional fees) associated with complying with the new requirements of the Sarbanes-Oxley Legislation, as well as $18 million of increased expense associated with stock options.

  • The Company's tax rate on income from continuing operations, excluding goodwill impairment charges and excluding the impact of the distribution of foreign earnings in 2004, was 36.2 percent in 2004 and in 2003. The reported tax rates on income from continuing operations of 37.5 percent and 37.3 percent for 2004 and 2003, respectively, were adversely impacted by lower tax benefits on goodwill impairment charges recorded in the fourth quarter of both periods. The Company anticipates that its tax rate on income from continuing operations for 2005 will approximate 35 percent.

  • Accounts receivable days at December 31, 2004 were 49 days compared with 53 days a year ago.

  • Inventory days were 49 days at December 31, 2004 compared with 48 days at December 31, 2003.

  • Accounts payable days at December 31, 2004 were 36 days compared with 35 days at December 31, 2003, as the Company continues to negotiate more favorable supplier terms.

  • Working capital at December 31, 2004 (defined as accounts receivable and inventories less accounts payable) improved to 16.8 percent of sales from 18.1 percent a year earlier.

  • At the end of the year, the Company had a strong balance sheet, with $1.5 billion in cash and marketable securities and $2.0 billion in unused bank lines.

  • In 2004, the Company generated approximately $330 million of cash from the net disposition of financial investments and $172 million net from the disposition of certain European businesses.

  • Debt as a percent of total capital was 44 percent at December 31, 2004 compared with 43 percent at December 31, 2003.

  • For the twelve months ended December 31, 2004 and December 31, 2003, return on invested capital was 12.0 percent and 11.1 percent, respectively. For the twelve months ended December 31, 2004 and December 31, 2003, return on invested capital (as reconciled) was 12.9 percent and 11.3 percent, respectively.

  • Capital expenditures including discontinued operations were $310 million or 2.5 percent of sales in 2004, compared with $271 million or 2.4 percent of sales in 2003. Depreciation and amortization was $237 million in 2004 compared with $244 million in 2003.

  • The Company repurchased 31 million shares of its common stock during 2004, of which 4 million shares were repurchased in the fourth quarter. The Company had 17 million common shares remaining at December 31, 2004 under the December 2003 Board of Directors repurchase authorization of 50 million shares.

  • In 2004, the Company returned $1.2 billion to shareholders through share repurchases (31 million shares) and dividends. In 2003, the Company returned $1.1 billion to shareholders through share repurchases (35 million shares) and dividends.

  • The Company increased its quarterly dividend in 2004 by 12.5 percent from $.16 to $.18 per common share. The new quarterly dividend reflects the Company's favorable long-term outlook, strong balance sheet and cash flow and recent tax law changes, and makes 2004 the 46th consecutive year in which dividends have been increased.

  • The Company's diluted common shares for purposes of calculating earnings per common share were 456 million for the year ended December 31, 2004 compared with 491 million for the year ended December 31, 2003.

  • The Company's marketable securities at year-end had an aggregate cost basis and a market value of $227 million and $263 million, respectively, including unrealized gains of $36 million at December 31, 2004.

  • The Company's free cash flow (defined as cash from operations less capital expenditures and before dividends) exceeded $1.1 billion in both 2004 and 2003.

  • The Company renegotiated its debt agreements with its banks and entered into a $2.0 billion five-year revolving credit agreement payable in November 2009. At December 31, 2004, there were no borrowings under this agreement.

  • In December 2004, the Company completed an exchange of New Zero Coupon Notes ("New Notes") for its Old Zero Coupon Notes ("Old Notes") with over 99 percent of the Notes being exchanged by holders.

  • The New Notes have substantially the same terms as the Old Notes, except upon conversion of the New Notes, the Company will pay the conversion price, to the accreted value of the Notes, in cash and any value greater than the accreted value will be settled in cash or shares of Company common stock, which substantially limits the potential dilution that had related to the Old Notes.


2005 Outlook

  • The Company believes that it will achieve further organic sales growth in 2005, and, based on current business trends, believes that it will achieve record sales and earnings for 2005 with full-year earnings from continuing operations expected to be at an all-time record in a range of $2.40 to $2.50 per common share.

  • The Company's guidance is based on housing starts declining five percent from 2004 levels, share repurchases of a minimum 12 million common shares, modest margin improvement reflecting selling price increases offsetting rising commodity costs and anticipated income from the sale of financial investments. The guidance also assumes no further significant commodity cost increases.

  • The Company experienced greater-than-expected commodity cost increases in late 2004 which reduced expected gross margins in the fourth quarter. These higher costs are continuing in 2005 and will likely have an adverse impact on first half results. The Company is implementing additional price increases on a number of its products and believes by the end of the second quarter that most of these commodity cost increases will be largely offset.

    The Company believes that the impact of these recent cost increases and shortages of certain materials will reduce earnings by approximately $.05 to $.10 per common share in the first half of 2005, largely in the first quarter.

  • Based on current business trends, the Company anticipates that first quarter 2005 earnings from continuing operations (seasonally the lowest quarter of the year) reflecting higher commodity costs are expected to be in a range of $.44 to $.47 per common share, compared with first quarter 2004 earnings from continuing operations of $.52 per common share, which included $.03 per common share of income related to the Behr litigation and $.07 per common share of previously disclosed other income, principally net gains on the sale of financial investments.

  • Based on the current market price for the Company's common stock, diluted common shares for the computation of earnings per common share at January 1, 2005 are 449 million. This excludes the impact of any 2005 repurchases of common stock.


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.