NAVIGATION

MASCO CORPORATION BUSINESS AND FINANCIAL HIGHLIGHTS

October 31, 2006

Third Quarter 2006

  • Net sales from continuing operations increased one percent; North American sales decreased one percent and International sales increased 10 percent. In local currencies, International sales increased five percent compared with the third quarter of 2005. Net sales slowed from the first half of 2006 as a result of an accelerating decline in housing activity and a moderation in consumer spending in North America.

  • Key retailer sales from continuing operations were flat in the 2006 third quarter compared with an increase of one percent in the 2005 third quarter and increases of one percent in the 2006 second quarter and seven percent in the 2006 first quarter. The Company believes that retail sales in the third quarter of 2006 were negatively impacted by a softening in demand for larger ticket items.

  • Sales of non-insulation installed products were particularly strong with double-digit increases. Sales of major faucet brands combined and architectural coatings were up mid-single digits. Sales of assembled cabinets were up modestly. Sales of certain products and services, including windows and doors and installation of insulation, were negatively impacted by a slowdown in the new construction market and experienced mid-single-digit declines. Sales of ready-to-assemble cabinets declined double-digits in the quarter.

  • Sales changes by segment in the 2006 third quarter versus the 2005 third quarter were:

    • Cabinets and Related Products sales declined four percent;

    • Plumbing Products sales increased five percent;

    • Installation and Other Services sales increased one percent;

    • Decorative Architectural Products sales increased five percent; and

    • Other Specialty Products sales declined six percent.

  • Results continued to be adversely affected by accelerating declines in housing activity, a moderation in consumer spending and increased commodity costs, partially offset by profit improvement programs and selling price increases.

  • Income from continuing operations, excluding the non-cash impairment charge for financial investments and costs and charges related to profit improvement programs in the third quarters of 2006 and 2005, was $236 million or $.60 per common share and $290 million or $.68 per common share, respectively.

  • Income from continuing operations for the third quarter of 2006 was $225 million or $.57 per common share, including an $8 million non-cash, pre-tax impairment charge for financial investments and $9 million pre-tax of costs and charges related to profit improvement programs. Income from continuing operations for the third quarter of 2005 was $254 million or $.59 per common share, including a $43 million non-cash, pre-tax impairment charge for financial investments and $12 million pre-tax of costs and charges related to profit improvement programs.

  • As part of its profit improvement programs, the Company announced a plant closure in the Plumbing Products segment in January 2006. In the third quarter of 2006, the Company incurred $7 million ($35 million year-to-date) pre-tax of costs and charges related to this plant closure and other profit improvement programs in the Plumbing Products segment. In addition, in the third quarter of 2006, the Company incurred $2 million ($17 million year-to-date) pre-tax of costs and charges related to the closure of a relatively small ready-to-assemble cabinet manufacturing facility in the Cabinets and Related Products segment. In the third quarter of 2005, the Company incurred $12 million pre-tax of costs and charges related to profit improvement programs in the Plumbing Products segment.

  • The third quarters of 2006 and 2005 benefited from net gains from the sale of financial investments of $.01 and $.04 per common share, respectively.

  • The third quarters of 2006 and 2005 both included currency transaction gains of $.01 per common share.

  • Net income for the third quarter of 2006 was $252 million or $.64 per common share and included $27 million of after-tax income or $.07 per common share from discontinued operations (including a $50 million pre-tax net gain). Net income for the third quarter of 2005 was $262 million or $.61 per common share and included $8 million of after-tax income or $.02 per common share from discontinued operations.

  • To summarize the comments related to earnings per common share, we have provided the following table:

  • Gross margins were 28.0 percent in the 2006 third quarter compared with 28.7 percent in the 2005 third quarter. Operating profit margins, as reported, were 12.1 percent in the third quarter of 2006 compared with 13.9 percent in the third quarter of 2005. Operating profit margins in the third quarters of 2006 and 2005 were negatively affected by the costs and charges related to the Company's profit improvement programs. Excluding these charges of $9 million pre-tax and $12 million pre-tax in 2006 and 2005, respectively, and the income regarding litigation settlement of $1 million pre-tax in 2005, operating profit margins were 12.4 percent and 14.2 percent for the third quarters of 2006 and 2005, respectively. The Company's operating profit margins were also negatively affected by lower-than-anticipated sales volume, increased commodity costs and a less favorable product mix.

  • On January 1, 2003, the Company elected to prospectively change its method of accounting for stock-based compensation; accordingly, stock options granted, modified or settled subsequent to January 1, 2003 were accounted for using the fair value method and have been expensed in the Company's financial statements. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" ("SFAS No. 123R"), and began recording expense for unvested stock options awarded prior to January 1, 2003 through the remaining vesting periods. The Company currently estimates that stock-based compensation expense for the full-year 2006 will approximate $100 million pre-tax compared with $75 million pre-tax for the full-year 2005.

  • SG&A expenses as a percent of sales, including general corporate expense, were 15.9 percent in the 2006 third quarter compared with 14.8 percent in the 2005 third quarter. On a year-to-date basis, SG&A expenses as a percent of sales were 16.0 percent at September 30, 2006 compared with 15.7 percent at September 30, 2005. Higher SG&A expenses in 2006 reflect increased stock-based compensation expense and modest increases in information system implementation costs and other expenses.

  • General corporate expense was 1.6 percent of sales in both the third quarters of 2006 and 2005.

  • In September 2006, the Company completed the sale of Computerized Security Systems ("CSS"). This disposition was completed pursuant to the Company's determination that this business unit was not core to the Company's long-term strategy. CSS supplies electronic locksets primarily to hospitality markets in the United States, had annual sales of $73 million and was included in the Other Specialty Products segment. Under generally accepted accounting principles, the net gain on this transaction along with 2006 year-to-date and prior-period operating results are reflected in discontinued operations (CSS contributed $.01 per common share in 2005 and on a full-year basis in 2006, was expected to contribute $.02 per common share). Total net proceeds from the sale were $91 million; the Company recognized a $51 million pre-tax net gain (included in discontinued operations) on the disposition of CSS.

  • The Company received total net proceeds of $145 million and recognized a pre-tax net gain of $53 million related to the sale of several businesses in the first nine months of 2006.

  • Accounts receivable days at the end of the third quarter were 50 days compared with 49 days a year ago.

  • Inventory days at the end of the third quarter were 50 days compared with 47 days a year ago.

  • Accounts payable days at the end of the third quarter were 37 days compared with 36 days a year ago.

  • Working capital at September 30, 2006 (defined as accounts receivable and inventories less accounts payable) was 17.6 percent of the last twelve months' sales compared with 17.7 percent a year earlier.

  • The Company's tax rate was 34.8 percent for the third quarter of 2006, compared with 34.3 percent for the comparable period of the prior year. The Company currently estimates that its tax rate should approximate 34 to 35 percent for the full-year 2006.

  • At the end of the quarter, the Company had a strong balance sheet with $870 million in cash and marketable securities and $2 billion in unused bank lines.

  • Debt as a percent of total capitalization was 46 percent at September 30, 2006 compared with 49 percent at September 30, 2005.

  • For the twelve months ended September 30, 2006 and September 30, 2005, return on invested capital (ROIC) (as reported) was 12.4 percent and 11.9 percent, respectively. For the twelve months ended September 30, 2006 and September 30, 2005, ROIC (as reconciled) was 12.9 percent and 13.0 percent, respectively. While the Company remains highly committed to the continued improvement in its ROIC, based on current business trends, which have resulted in a reduction in anticipated earnings for 2006, the Company does not anticipate that it will achieve its 15 percent ROIC goal by the end of 2006. However, the Company continues to believe that it will achieve its ROIC goal of 18 percent by 2010.

  • Through the first nine months of 2006, the Company has repurchased and retired 27 million shares (7 million in the third quarter of 2006) of Company common stock. The Company had 38 million common shares remaining under its repurchase authorization at September 30, 2006.

  • The Company's diluted common shares for purposes of calculating earnings per common share were 393 million for the third quarter of 2006 compared with 427 million for the third quarter of 2005.

Full-Year Outlook

  • On October 3, 2006, the Company issued $1 billion of fixed-rate 6.125% Notes due 2016, resulting in net proceeds of $988 million. The Note offering was in anticipation of the 2007 debt maturities.

  • The Company's results continued to be adversely affected by accelerating declines in housing activity, a moderation in consumer spending and increased commodity costs, partially offset by profit improvement programs and selling price increases. The Company has implemented additional selling price increases in an effort to at least partially offset commodity cost increases.

  • A softening of incoming orders for building products and services along with a forecasted deeper-than-expected decline in year-over-year single family housing starts for the last several months of 2006 are expected to result in the Company's fourth quarter net sales being down mid-single digits compared with the fourth quarter of 2005. Accordingly, full-year earnings from continuing operations, excluding costs and charges related to profit improvement programs, impairment charges for investments and any other items, may be closer to $2.20 per common share rather than the Company's most recent guidance of $2.25 to $2.30 per common share.

  • The Company expects to incur additional costs and charges during the fourth quarter of 2006 for its profit improvement programs and currently anticipates that total costs and charges related to these programs for the full-year 2006 will aggregate approximately $70 million pre-tax, as previously announced. Including this $70 million of anticipated costs ($.11 per common share), and the non-cash, pre-tax impairment charge for financial investments of $86 million ($.14 per common share), earnings from continuing operations may be closer to $1.95 per common share for the full-year 2006.

  • The Company expects to continue to return a minimum of $1 billion annually to shareholders, on average, through dividends and share repurchases as part of its ongoing commitment to value creation. The Company has returned $3.6 billion to shareholders over the last three calendar years, including dividends and 97 million of share repurchases. In the third quarter of 2006, the Company returned $263 million to shareholders through dividends and share repurchases and has already returned over $1 billion in the first nine months of 2006.

  • Diluted common shares for the computation of earnings per common share at October 1, 2006 are 390 million. This excludes the impact of any fourth quarter 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 housing starts, commodity costs, 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.