NAVIGATION

MASCO CORPORATION BUSINESS AND FINANCIAL HIGHLIGHTS

April 01, 2006

Second Quarter 2006

  • Net sales from continuing operations increased three percent with North American sales increasing four percent. International sales were flat; in local currencies, International sales increased one percent compared with the second quarter of 2005. Net sales growth slowed from the 2006 first quarter rate as a result of recent declines in housing activity and a moderation in consumer spending.

  • Key retailer sales from continuing operations increased one percent in the 2006 second quarter compared with an increase of nine percent in the 2005 second quarter and an increase of seven percent in the 2006 first quarter. The Company believes that retail sales in the second quarter of 2006 were negatively impacted by higher energy costs, which adversely affected consumers, particularly those with lower incomes.

  • Sales of North American assembled cabinets and non-insulation installation products both were particularly strong with double-digit increases. Sales of major faucet brands were up a combined mid-single digit. Sales of certain products were negatively impacted by slowing housing starts and, in addition, Installation Services were impacted by shortages of materials.

  • While the Company's 2006 second quarter operating earnings exceeded its expectations, nevertheless results continued to be adversely affected by increases in commodity, energy and freight costs, as well as recent declines in housing activity and a moderation in consumer spending, partially offset by profit improvement programs and selling price increases. The Company has implemented and continues to implement additional selling price increases in an effort to offset continuing commodity and energy-related cost increases.

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

  • Cabinets and Related Products sales increased three percent;

  • Plumbing Products sales increased two percent;

  • Installation and Other Services sales increased six percent;

  • Decorative Architectural Products sales increased four percent; and

  • Other Specialty Products sales declined two percent.

  • Income from continuing operations for the second quarter of 2006, excluding the non-cash impairment charge for financial investments and the costs and charges related to profit improvement programs, was $289 million or $.72 per common share. Income from continuing operations for the second quarter of 2005 was $267 million or $.62 per common share.

  • Income from continuing operations for the second quarter of 2006 was $217 million or $.54 per common share, including a $78 million non-cash, pre-tax impairment charge for financial investments and $26 million pre-tax of costs and charges related to profit improvement programs.

  • Based on a review of new information from a private equity fund manager and the continued deterioration of conditions in the automotive supplier and transportation products markets, the Company determined that the decline in the estimated value of certain of its financial investments was other-than-temporary. Accordingly, in the second quarter of 2006, the Company recognized a non-cash, pre-tax impairment charge aggregating $78 million for its investments, primarily related to Metaldyne Corporation and the Heartland Industrial Partners private equity fund.

  • As part of its profit improvement programs, the Company announced a plant closure in the Plumbing Products segment in January 2006. In the second quarter of 2006, the Company incurred $11 million ($28 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 second quarter of 2006, the Company incurred $15 million 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.

  • The second quarters of 2006 and 2005 benefited from net gains from the sale of financial investments of $.02 and $.04 per common share, respectively.

  • The second quarters of 2006 and 2005 included currency transaction gains (losses) of $.01 and ($.02) per common share, respectively.

  • Net income for the second quarter of 2006 was $219 million or $.54 per common share and included $2 million of income related to discontinued operations. Net income for the second quarter of 2005 was $274 million or $.64 per common share and included $7 million of income related to discontinued operations.

  • 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 2005.

  • Gross margins were 29.1 percent in the 2006 second quarter compared with 29.5 percent in the 2005 second quarter. Operating profit margins, as reported, were 13.1 percent in the second quarter of 2006 compared with 14.1 percent in the second quarter of 2005. Operating profit margins in the second quarter of 2006 were negatively affected by the costs and charges related to the Company's profit improvement programs. Excluding these charges of $26 million pre-tax in 2006 and the income regarding litigation settlement of $3 million pre-tax in 2005, operating profit margins were 13.9 percent and 14.0 percent for the second quarters of 2006 and 2005, respectively.

  • SG&A expenses as a percent of sales, including general corporate expense, were 15.7 percent in the 2006 second quarter compared with 15.5 percent in the 2005 second quarter.

  • General corporate expense was 1.6 percent of sales in the second quarter of 2006 compared with 1.5 percent in the comparable period of 2005.

  • In April 2006, the Company completed the sale of two relatively small businesses for net proceeds of $50 million; aggregate net sales for these businesses were $46 million for the year ended December 31, 2005 and $11 million in 2006 through the date of sale. The Company recognized a net gain of $2 million in the second quarter of 2006 from these transactions included in other, net, from continuing operations.

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

  • Inventory days at the end of the second quarter were 51 days compared with 50 days a year ago.

  • Accounts payable days at the end of the second quarter were 36 days compared with 38 days a year ago.

  • Working capital at June 30, 2006 (defined as accounts receivable and inventories less accounts payable) was 18.1 percent of the last twelve months' sales compared with 17.8 percent a year earlier.

  • The Company's tax rate was 34.8 percent for the second quarter of 2006, compared with 35.5 percent for the comparable period of the prior year. The Company currently estimates that its tax rate for the full-year 2006 should approximate 34 to 35 percent. The Company's 2005 tax rate on income from continuing operations, excluding goodwill impairment charges and the adjustment of deferred taxes related to certain European operations, would have been 35 percent.

  • At the end of the quarter, the Company had a strong balance sheet with approximately $700 million in cash and marketable securities and $2 billion in unused bank lines.

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

  • For the twelve months ended June 30, 2006 and June 30, 2005, return on invested capital (as reported) was 12.9 percent and 11.7 percent, respectively. For the twelve months ended June 30, 2006 and June 30, 2005, return on invested capital (as reconciled) was 13.4 percent and 12.9 percent, respectively. The Company continues to believe that, excluding the costs and charges related to the plant closures and other profit improvement programs, which are expected to aggregate approximately $70 million pre-tax in 2006, it will approximate its 15 percent return on invested capital goal by the end of 2006, and its approximate 18 percent goal by 2010.

  • In May 2006, the Company's Board of Directors authorized the repurchase of up to 50 million shares for retirement of the Company's common stock in open-market transactions or otherwise, replacing the previous Board of Directors' authorization established in 2005.

  • The Company repurchased and retired approximately 10 million shares of Company common stock in each of the first and second quarters of 2006. The Company had approximately 45 million common shares remaining under its repurchase authorization at June 30, 2006.

  • The Company's diluted common shares for purposes of calculating earnings per common share were 402 million for the second quarter of 2006 compared with 430 million for the second quarter of 2005.

Full-Year Outlook

  • The Company continues to believe that it will achieve mid-single digit organic sales growth in 2006. The Company's previously communicated full-year earnings guidance of $2.40 to $2.50 per common share was based on housing starts declining five percent from 2005 levels. Based on current business trends, the Company now expects that full-year housing starts will experience a greater decline than previously forecast of approximately eight percent and, as a result, its earnings may be closer to the lower-end of its guidance range of $2.40 to $2.50 per common share. This guidance includes share repurchases of 20 million common shares through June 30, 2006 and assumes no additional share repurchases, no further significant commodity and energy-related cost increases, and excludes costs and charges related to profit improvement programs and any other items.

  • The Company expects to incur additional costs and charges throughout 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 $78 million ($.13 per common share), earnings from continuing operations are expected to be in a range of $2.16 to $2.26 per common share for the full-year 2006.

  • As previously announced the Company now provides annual earnings guidance and will no longer provide quarterly earnings guidance.

  • 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 second quarter of 2006, the Company returned $380 million to shareholders through dividends and share repurchases and has returned $788 million in the first half of 2006.

  • Diluted common shares for the computation of earnings per common share at July 1, 2006 are 398 million. This excludes the impact of any third 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.