NAVIGATION

Masco Corporation Business and Financial Highlights

February 14, 2007

Fourth Quarter 2006

  • Net sales from continuing operations for the quarter declined six percent to $2.9 billion, with North American sales declining 10 percent and International sales increasing 17 percent. In local currencies, International sales increased seven percent compared with the fourth quarter of 2005.

  • Sales of cabinets, windows and doors and the installation of insulation were particularly weak when compared with the fourth quarter of 2005, primarily due to the accelerating decline in the new home construction market in the last six months of 2006. Sales of major faucet brands combined and architectural coatings increased in the low-single and mid-single digits, respectively.

  • Key retailer sales from continuing operations declined seven percent in the 2006 fourth quarter, were flat in the third quarter, and increased one percent and seven percent in the second and first quarters of 2006, respectively. The Company believes that retail sales in the last six months of 2006 were negatively impacted by a moderation in consumer spending for certain "big ticket" home improvement items, such as cabinets.

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

  • Cabinets and Related Products sales declined 12 percent;

  • Plumbing Products sales increased three percent;

  • Installation and Other Services sales declined nine percent;

  • Decorative Architectural Products sales increased four percent; and

  • Other Specialty Products sales declined 14 percent.

  • As part of its profit improvement program, the Company announced a plant closure in the Plumbing Products segment in January 2006. The Company incurred $4 million pre-tax of costs and charges related to this plant closure and other profit improvement programs in the Plumbing Products segment in the fourth quarter of 2006. In addition, the Company incurred $1 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 Company recognized non-cash, pre-tax impairment charges for goodwill aggregating $321 million ($321 million after tax). These charges, principally related to the Company's European manufacturer of ready-to-assemble cabinets (Tvilum-Scanbirk), reflect the long-term outlook for the business unit, including declining demand for certain products, as well as decreased operating profit margins. In 2005, the Company recognized non-cash, pre-tax impairment charges for goodwill aggregating $69 million ($69 million after tax).

  • The Company also recognized non-cash, pre-tax impairment charges for financial investments aggregating $15 million ($10 million after tax).

  • Income from continuing operations was $.38 per common share and $.50 per common share in the fourth quarters of 2006 and 2005, respectively, excluding the non-cash impairment charges for goodwill in 2006 and 2005 and financial investments and costs and charges related to profit improvement programs in 2006.

  • (Loss) from continuing operations for the fourth quarter of 2006 was $(186) million or $(.48) per common share, including non-cash impairment charges for goodwill and financial investments and costs and charges related to profit improvement programs. Income from continuing operations for the fourth quarter of 2005 was $.33 per common share, including non-cash impairment charges for goodwill.

  • Net (loss) for the fourth quarter of 2006, including discontinued operations, was $(187) million or $(.49) per common share. Net income for the fourth quarter of 2005 was $173 million or $.41 per common share and included income from discontinued operations of $33 million or $.08 per common share.

    The Company's diluted common shares for purposes of calculating (loss) earnings per common share were 385 million for the fourth quarter of 2006 compared with 419 million for the fourth quarter of 2005. For the fourth quarter of 2006, four million contingent common shares and one million stock option shares were not included in the computation of diluted (loss) per common share due to their anti-dilutive effect. Dilutive common shares used for the reconciliation of income of $.38 per common share were 390 million.

  • Gross margins were 25.2 percent in the fourth quarter of 2006 compared with 27.5 percent in the fourth quarter of 2005. Operating (loss) profit margins, as reported, were (2.3) percent in the fourth quarter of 2006 compared with 10.2 percent in the fourth quarter of 2005. Excluding non-cash, pre-tax impairment charges for goodwill of $321 million, costs and charges related to profit improvement programs of $5 million and income regarding litigation settlement of $1 million, operating profit margins were 8.7 percent in the fourth quarter of 2006. Excluding non-cash, pre-tax impairment charges for goodwill of $69 million, operating profit margins were 12.4 percent in the fourth quarter of 2005.

  • Results were adversely affected by an accelerating decline in the new home construction market, a moderation in consumer spending for certain "big ticket" home improvement items, such as cabinets and higher commodity costs, partially offset by profit improvement programs and selling price increases.

  • SG&A expenses as a percent of sales, including general corporate expense, were 16.7 percent in the fourth quarter of 2006 and 15.2 percent in the fourth quarter of 2005. Higher SG&A expenses in 2006 reflect increased stock-based compensation expense and increased information systems implementation costs and other expenses.

  • General corporate expense was 1.7 percent of sales in the fourth quarter of 2006 compared with 1.5 percent in the comparable period of 2005.

  • The reported tax on loss from continuing operations in the fourth quarter of 2006 of $58 million and the reported tax rate on income from continuing operations of 47 percent for the fourth quarter of 2005, principally reflect the impact of goodwill impairment charges not being deductible for tax purposes. Excluding the goodwill impairment charges in 2006 and 2005 and adjustments of deferred taxes related to certain European operations in 2005, the Company's tax rate was 29 percent and 35 percent in the fourth quarters of 2006 and 2005, respectively. The decrease in the tax rate was the result of reinstating the research and development credit by Congress in the fourth quarter of 2006 and a change in the mix of taxable earnings to taxing jurisdictions with lower tax rates. The Company's lower effective tax rate in the fourth quarter of 2006 favorably impacted (loss) per common share by $.03.

    Full-Year 2006

    • Net sales from continuing operations for 2006 increased two percent to $12.8 billion compared with $12.6 billion for 2005. North American sales increased one percent and International sales increased five percent. In local currencies, International sales increased four percent.

    • For the full-year 2006, key retailer sales from continuing operations were flat compared with 2005.

    • Sales changes by segment for 2006 versus 2005 were:

      • Cabinets and Related Products sales declined one percent;

      • Plumbing Products sales increased four percent;

      • Installation and Other Services sales increased three percent;

      • Decorative Architectural Products sales increased six percent; and

      • Other Specialty Products sales declined five percent.

    • Income from continuing operations was $2.22 per common share and $2.26 per common share for 2006 and 2005, respectively, excluding non-cash impairment charges for goodwill and financial investments and costs and charges related to profit improvement programs. Including these charges, income from continuing operations, as reported, was $461 million or $1.15 per common share and $866 million or $2.01 per common share, for 2006 and 2005, respectively.

    • As part of its profit improvement program, the Company has been focused on the rationalization of its Plumbing Products segment. As a result, in 2005, the Company incurred $12 million pre-tax of charges related to headcount reductions and the discontinuance of a product line. In addition, the Company announced a plant closure in the Plumbing Products segment in January 2006. During 2006, the Company incurred $39 million pre-tax of costs and charges (primarily accelerated depreciation and severance expense) related to this plant closure and other profit improvement programs in the Plumbing Products segment.

      The Company originally estimated that costs and charges for profit improvement programs related to its Plumbing Products segment would approximate $70 million compared with the actual charges of $39 million. The reduced amount reflects the fourth quarter sale of a manufacturing facility in the Plumbing Products segment which was originally planned for closure.

      In addition, in 2006, the Company incurred $8 million pre-tax of costs and charges (including the write-down of inventory and accelerated depreciation) related to the closure of a relatively small ready-to-assemble cabinet manufacturing facility in the Cabinets and Related Products segment.

    • During 2006, the Company recognized non-cash, pre-tax impairment charges for goodwill aggregating $331 million ($331 million after tax). These charges, principally related to the Company's European manufacturer of ready-to-assemble cabinets (Tvilum-Scanbirk), reflect the long-term outlook for the business unit, including declining demand for certain products, as well as decreased operating profit margins. In 2005, the Company recognized non-cash, pre-tax impairment charges for goodwill aggregating $69 million ($69 million after tax).

    • During 2006, the Company recognized non-cash, pre-tax impairment charges for financial investments aggregating $101 million ($66 million after tax), related to investments in Metaldyne, TriMas, certain private equity funds and other investments. During 2005, the Company recognized non-cash, pre-tax impairment charges for financial investments of $45 million ($29 million after tax) related to its investment in Furniture Brands International common stock and certain private equity fund investments.

    • Gross margins were 27.5 percent in 2006 compared with 28.5 percent in 2005. Operating profit margins, as reported, were 8.8 percent in 2006 compared with 12.5 percent in 2005. Excluding non-cash, pre-tax impairment charges for goodwill aggregating $331 million, costs and charges related to profit improvement programs of $47 million and income regarding litigation settlement of $1 million, operating profit margins were 11.8 percent in 2006. Excluding non-cash, pre-tax impairment charges for goodwill aggregating $69 million, costs and charges related to profit improvement programs of $12 million and income regarding litigation settlement of $6 million, operating profit margins were 13.1 percent in 2005.

    • Full-year 2006 gross margins and operating profit margins were adversely impacted by the slowdown in the new home construction market, a moderation in consumer spending for certain "big ticket" home improvement items, such as cabinets, the continuing negative impact of higher commodity costs, as well as a less favorable product mix.

    • SG&A expenses as a percent of sales, including general corporate expense, were 16.1 percent in 2006 compared with 15.5 percent in 2005. Higher SG&A expenses in 2006 reflect increased stock-based compensation expense, in part reflecting the adoption of SFAS No. 123R, and increased information systems implementation costs and other expenses.

    • General corporate expense was 1.6 percent of sales in 2006 compared with 1.5 percent in 2005.

    • The Company's reported tax rate on income from continuing operations, excluding the impairment charges for goodwill was 33 percent in 2006 and 35 percent in 2005. The Company's lower-than-expected effective tax rate for 2006 favorably impacted earnings per common share by $.05, as a result of the U.S. and foreign tax effect on distributed earnings. The Company anticipates that its tax rate on income from continuing operations for 2007 will approximate 35 to 36 percent.

    • Accounts receivable days at December 31, 2006 were 50 days compared with 48 days a year ago.

    • Inventory days were 49 days at December 31, 2006 compared with 46 days a year ago.

    • Accounts payable days were 39 days at December 31, 2006 compared with 36 days a year ago.

    • Working capital at December 31, 2006 and 2005 (defined as accounts receivable and inventories less accounts payable) was 16.1 percent of sales, and 15.9 percent of sales, respectively.

    • For the twelve months ended December 31, 2006 and 2005, return on invested capital (ROIC) (as reported) was 9.8 percent and 13.0 percent, respectively. For the twelve months ended December 31, 2006 and 2005, ROIC (as reconciled) was 12.4 percent and 13.4 percent, respectively. While the Company remains highly committed to the continued improvement in its ROIC, recent business trends resulted in a reduction in earnings for 2006, which negatively impacted ROIC in 2006. The Company, however, continues to believe that it will achieve its ROIC goal of 18 percent by 2010.

    • Capital expenditures, including discontinued operations, were $388 million or 3.0 percent of sales in 2006, compared with $282 million or 2.2 percent of sales in 2005. As previously communicated, this increase is principally related to capacity expansion and facility acquisitions. Depreciation and amortization was $244 million in 2006 compared with $241 million in 2005.

    • During 2006, the Company repurchased 29 million shares (2 million in the fourth quarter of 2006) of Company common stock. The Company had 36 million common shares remaining at December 31, 2006 under its repurchase authorization.

    • During 2006, the Company returned $1.2 billion to shareholders through common share repurchases (29 million) and dividends. For the four-year period (2003-2006) ended December 31, 2006, the Company has returned $4.8 billion to shareholders through the repurchase of 126 million common shares and dividends.

    • In 2006, the Company increased its quarterly dividend by 10 percent from $.20 to $.22 per common share. The increased quarterly dividend reflects the Company's favorable long-term outlook, strong balance sheet and cash flow and recent tax law changes, and makes 2006 the 48th consecutive year in which dividends have been increased.

    • The Company's diluted common shares for purposes of calculating earnings per common share were 400 million for the year ended December 31, 2006 compared with 430 million for the year ended December 31, 2005.

    • The Company's free cash flow for 2006 exceeded $800 million. For the four-year period (2003-2006) ended December 31, 2006, the Company's free cash flow (defined as cash from operations less capital expenditures and before dividends) aggregated $4.2 billion.

    • During 2006, the Company also generated $71 million of cash from the net disposition of financial investments and $160 million from the net disposition of certain businesses.

    • 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 2007 debt maturities, including the put option related to the Zero Coupon Notes.

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

    • Debt as a percent of total capital was 53 percent at December 31, 2006 compared with 49 percent at December 31, 2005.

    • In January 2007, the Company repurchased for cash of $825 million, the accreted value (94 percent of the total outstanding) of its Zero Coupon Notes which were put to the Company in accordance with the terms of the Notes. Had this payment taken place at December 31, 2006, debt as a percent of total capital would have been 48 percent.

    2007 Outlook

    • New home construction has declined dramatically in the last 12 months due to previous excessive speculative buying, rapidly rising home prices in recent years reducing affordability and less attractive mortgage terms. Even with the recent decline in single-family housing starts, the inventory of unsold new homes has increased to unprecedented levels. The uncertainty that home builders may cut production even further to reduce this inventory, and given the large percentage of Masco sales that go to the new home construction market, combined with the unpredictability of commodity costs, makes it very difficult for the Company to provide earnings per common share guidance for 2007.

    • Also negatively impacting the Company's earnings outlook for 2007 are plant and system implementation start-up costs, costs and charges related to additional profit improvement programs, including severance costs from headcount reductions, higher interest expense, a moderation at retail of the sale of certain "big ticket" home improvement items, such as cabinets, and as yet unrecovered commodity cost increases.

    • Housing starts declined by approximately 13 percent in 2006 compared with 2005 to 1.8 million units. Late in 2006, the housing starts run rate was between approximately 1.5 to 1.6 million units, which is more than 20 percent below the 2005 levels. If housing starts improve from these levels, commodity costs moderate, and home improvement retail sales improve, then the Company's earnings per common share could be $1.80 or even higher for 2007. On the other hand, if housing starts decline even further than current depressed levels, as some observers predict, and commodity costs escalate, the Company's earnings per common share for 2007 could decline to $1.50 or less.

    • With housing starts currently running nearly 20 percent below year ago levels, the Company currently expects first quarter 2007 sales to decline low double digits from last year's strong quarter and full-year sales to decline mid single digits.

    • The Company expects the low point in its earnings for the year to be in the first quarter, seasonally its lowest quarter, when earnings may decline 50 percent or more from last year's first quarter earnings of $.50 per common share when housing starts were strong.

    • 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, 2007 were 390 million. This excludes the impact of any 2007 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.