NAVIGATION

Masco Corporation Business And Financial Highlights

February 12, 2008

In accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company has accounted for the 2007 disposition of a European business unit in the Decorative Architectural Products segment and the September 2006 disposition of a business unit in the Other Specialty Products segment as discontinued operations.  

In April 2007 and July 2007, the Company also completed the sale of two relatively small business units in the Plumbing Products segment; these business units were included in continuing operations through their respective dates of sale.

Fourth Quarter 2007
  • Net sales from continuing operations declined eight percent, with North American sales declining 13 percent and International sales increasing 11 percent.  In local currencies, International sales increased one percent compared with the fourth quarter of 2006.

  • Key retailer sales from continuing operations declined five percent in the 2007 fourth quarter compared with a decline of one percent for the nine months ended September 30, 2007 and a decline of seven percent in the 2006 fourth quarter.  

  • Sales changes by segment in the fourth quarter of 2007 versus the fourth quarter of 2006 were:

    • Cabinets and Related Products sales declined 11 percent;
    • Plumbing Products sales increased three percent;
    • Installation and Other Services sales declined 19 percent;
    • Decorative Architectural Products sales declined one percent; and
    • Other Specialty Products sales declined 12 percent.

  • Fourth quarter 2007 results were adversely affected by lower sales volume of installation and other services, assembled cabinets and windows and doors in the new home construction market and a decline in consumer spending for home improvement products.

  • Fourth quarter 2007 results were positively affected by increased retail sales of paints and stains and International plumbing products.

  • The Company has been focused on the rationalization of its businesses, including sourcing programs, business consolidations, plant closures, headcount reductions, plant start-ups, systems implementations and other initiatives.  During the fourth quarters of 2007 and 2006, the Company incurred costs and charges of $19 million pre-tax ($.03 per common share, after tax) and $5 million pre-tax ($.01 per common share, after tax), respectively, related to these initiatives.

  • During the fourth quarter of 2007, the Company recognized non-cash, pre-tax impairment charges for goodwill and other intangible assets aggregating $227 million ($208 million or $.58 per common share, after tax).  The impairment charges for goodwill and other intangible assets principally related to changes in the long-term outlook for certain business units in the Other Specialty Products segment and one business unit in the Plumbing Products segment.  During the fourth quarter of 2006, the Company recognized non-cash, pre-tax impairment charges for goodwill aggregating $307 million ($307 million or $.79 per common share, after tax).

  • Income from continuing operations was $.19 per common share and $.35 per common share for the fourth quarters of 2007 and 2006, respectively, excluding non-cash impairment charges for goodwill and other intangible assets.

  • Loss from continuing operations was $140 million or $.39 per common share and $169 million or $.44 per common share for the fourth quarters of 2007 and 2006, respectively, including non-cash impairment charges for goodwill and other intangible assets.

  • Net loss for the fourth quarter of 2007, including discontinued operations, was $151 million or $.42 per common share. Net loss for the fourth quarter of 2006, including discontinued operations, was $187 million or $.49 per common share.  

  • The Company's diluted common shares for purposes of calculating (loss) earnings per common share were 360 million for the fourth quarter of 2007 compared with 385 million for the fourth quarter of 2006.  For the fourth quarters of 2007 and 2006, one million and five million, respectively, of contingent common shares were not included in the computation of diluted (loss) per common share due to their anti-dilutive effect.

  • Results benefited from net gains related to financial investments of $3 million pre-tax ($.01 per common share, after tax) and $8 million pre-tax ($.01 per common share, after tax) in the fourth quarters of 2007 and 2006, respectively.

  • Gross margins were 25.6 percent in the fourth quarter of 2007 compared with 25.2 percent in the fourth quarter of 2006.

  • Operating (loss) profit margins, as reported, were (1.4) percent in the fourth quarter of 2007 compared with (1.9) percent in the fourth quarter of 2006.  Excluding non-cash, pre-tax impairment charges for goodwill and other intangible assets of $227 million and pre-tax costs and charges related to business rationalizations and other initiatives of $19 million, operating profit margins were 7.7 percent in the fourth quarter of 2007.   Excluding non-cash, pre-tax impairment charges for goodwill of $307 million and pre-tax costs and charges related to profit improvement programs of $5 million, operating profit margins were 8.8 percent in the fourth quarter of 2006.

  • SG&A expenses as a percent of sales, including general corporate expense, were 18.5 percent in the fourth quarter of 2007 compared with 16.7 percent in the fourth quarter of 2006, reflecting increased bad debt expense, principally related to the new home construction market, and increased severance and other employee separation-related costs, as well as lower sales volume.

  • General corporate expense was 1.4 percent of sales in the 2007 fourth quarter and 1.7 percent in the 2006 fourth quarter.   

  • Excluding the impairment charges for goodwill and other intangible assets in 2007 and 2006, as anticipated, the Company's tax rate was 40 percent in the fourth quarter of 2007 compared with 28 percent in the fourth quarter of 2006.  The lower tax rate for the fourth quarter of 2006 was the result of the reinstatement of the research and development credit by Congress in the fourth quarter of 2006 and a change in the mix of taxable earnings and lower tax rates.

    Full-Year 2007

  • Net sales from continuing operations for 2007 declined seven percent to $11.8 billion compared with $12.7 billion for 2006.  North American sales declined 12 percent and International sales increased 15 percent.  In local currencies, International sales increased five percent.   

  • For the full-year 2007, key retailer sales from continuing operations declined two percent compared with 2006.

  • Sales changes by segment for 2007 versus 2006 were:
    • Cabinets and Related Products sales declined 14 percent;
    • Plumbing Products sales increased five percent;
    • Installation and Other Services sales declined 17 percent;
    • Decorative Architectural Products sales increased three percent; and
    • Other Specialty Products sales declined 12 percent.

  • Results were adversely affected by lower sales volume of installation and other services, assembled cabinets and windows and doors in the new home construction market and a decline in consumer spending for home improvement products.

  • Results were positively affected by increased retail sales of paints and stains and International plumbing products.

  • Income from continuing operations was $1.62 per common share and $1.99 per common share for 2007 and 2006, respectively, excluding non-cash impairment charges for goodwill and other intangible assets.

  • Income from continuing operations was $397 million or $1.06 per common share and $478 million or $1.20 per common share for the years ended December 31, 2007 and 2006, respectively, including non-cash impairment charges for goodwill and other intangible assets.

  • Net income for 2007 was $386 million or $1.03 per common share, including loss from discontinued operations, net of $11 million.  Net income for 2006 was $488 million or $1.22 per common share, including income from discontinued operations, net of $13 million.

  • The Company has been focused on the rationalization of its businesses, including sourcing programs, business consolidations, plant closures, headcount reductions, plant start-ups, systems implementations and other initiatives.  During 2007 and 2006, the Company incurred net costs and charges of $79 million pre-tax ($.13 per common share, after tax, net of an $8 million gain from the sale of fixed assets) and $47 million pre-tax ($.08 per common share, after tax), respectively, related to these initiatives.   

  • During 2007, the Company recognized non-cash, pre-tax impairment charges for goodwill and other intangible assets aggregating $227 million ($208 million or $.56 per common share, after tax).  The impairment charges for goodwill and other intangible assets principally related to changes in the long-term outlook for certain business units in the Other Specialty Products segment and one business unit in the Plumbing Products segment.  During 2006, the Company recognized non-cash, pre-tax impairment charges for goodwill aggregating $317 million ($317 million or $.79 per common share, after tax).

  • During 2007, the Company recognized non-cash, pre-tax impairment charges for financial investments aggregating $22 million ($.04 per common share, after tax).  During 2006, the Company recognized non-cash, pre-tax impairment charges for financial investments aggregating $101 million ($.16 per common share, after tax).

  • Full-year results benefited from net gains related to financial investments of $43 million pre-tax ($.07 per common share, after tax) and $34 million pre-tax ($.05 per common share, after tax) in 2007 and 2006, respectively.

  • Gross margins were 27.3 percent in 2007 compared with 27.6 percent in 2006.  Operating profit margins, as reported, were 8.1 percent in 2007 compared with 9.0 percent in 2006.  Full-year 2007 gross margins and operating profit margins were adversely impacted by the slowdown in the new home construction market and a decline in consumer spending for home improvement products.

  • Excluding non-cash, pre-tax impairment charges for goodwill and other intangible assets aggregating $227 million and pre-tax costs and net charges related to business rationalizations and other initiatives of $79 million, operating profit margins were 10.7 percent in 2007. Excluding non-cash, pre-tax impairment charges for goodwill aggregating $317 million and pre-tax costs and charges related to profit improvement programs of $47 million, operating profit margins were 11.8 percent in 2006.  

  • SG&A expenses as a percent of sales, including general corporate expense, were 17.2 percent in 2007 compared with 16.1 percent in 2006.  Higher SG&A expenses in 2007 reflect increased bad debt expense, principally related to the new home construction market, increased systems implementation costs and increased severance costs.

  • General corporate expense was 1.5 percent of sales in 2007 compared with 1.6 percent in 2006.   

  • The Company's reported tax rate on income from continuing operations, excluding the impairment charges for goodwill and other intangible assets was 36 percent in 2007 and 33 percent in 2006.  The Company anticipates that its tax rate on income from continuing operations for 2008 will approximate 42 to 43 percent.  The increase in the expected tax rate for 2008 is primarily due to U.S. tax on anticipated dividend distributions of low tax foreign earnings.  These dividends are being distributed to utilize the favorable provisions of the U.S. income tax law that are scheduled to expire at December 31, 2008.  The Company estimates that its tax rate on income from continuing operations for 2009 will approximate 35 to 36 percent.

  • Accounts receivable days at December 31, 2007 were 49 days compared with 50 days a year ago.

  • Inventory days were 48 days at December 31, 2007 compared with 49 days a year ago.

  • Accounts payable days were 43 days at December 31, 2007 compared with 40 days a year ago.

  • Working capital at December 31, 2007 and 2006 (defined as accounts receivable and inventories less accounts payable) was 15.4 percent of sales, and 16.1 percent of sales, respectively.

  • For the twelve months ended December 31, 2007 and 2006, return on invested capital (ROIC) (as reported) was 8.6 percent and 9.8 percent, respectively.  For the twelve months ended December 31, 2007 and 2006, ROIC (as reconciled) was 10.3 percent and 12.4 percent, respectively.  While the Company remains highly committed to the continued improvement in its ROIC, recent macro business trends have resulted in a reduction in operating profit over the last several quarters, which has negatively impacted ROIC.  The Company continues to believe that it will achieve its long-term ROIC goal of 18 percent and will provide guidance as to the timing when there is more clarity in the recovery of the housing and home improvement markets.

  • Capital expenditures, including discontinued operations, were $248 million or 2.1 percent of sales in 2007, compared with $388 million or 3.1 percent of sales in 2006.  Depreciation and amortization was $248 million in 2007 compared with $244 million in 2006.  

  • During 2007, the Company repurchased 31 million shares (2 million in the fourth quarter of 2007) of Company common stock.  The Company had 41 million common shares remaining at December 31, 2007 under its repurchase authorization.

  • During 2007, the Company returned $1.2 billion to shareholders through common share repurchases and dividends.  For the five-year period (2003-2007) ended December 31, 2007, the Company has returned over $6 billion to shareholders through the repurchase of 157 million common shares and dividends.

  • In 2007, the Company increased its quarterly dividend by five percent from $.22 to $.23 per common share.  The increased quarterly dividend reflects the Company's favorable long-term outlook, strong balance sheet and cash flow and makes 2007 the 49th consecutive year in which dividends have been increased.

  • The Company's diluted common shares for purposes of calculating earnings per common share were 373 million for the year ended December 31, 2007 compared with 400 million for the year ended December 31, 2006.

  • The Company's free cash flow (defined as cash from operations less capital expenditures and before dividends) for 2007 was approximately $980 million.  For the five-year period (2003-2007) ended December 31, 2007, the Company's free cash flow aggregated $5 billion.  

  • The Company, as previously announced, acquired Erickson Construction Company and Guy Evans, Inc., which provide products and installation services to the new home construction market.  The Company also acquired several relatively small installation service businesses.  These acquisitions had annual net sales of over $200 million in 2006 and the total net purchase price of these acquisitions was $202 million.

  • During 2007, the Company also generated $108 million of cash from the net disposition of financial investments and $45 million from the net disposition of certain businesses.

  • At the end of the year, the Company had a strong balance sheet, with over $900 million in cash and cash investments and $2 billion in unused bank lines.

  • Debt as a percent of total capital was 50 percent at December 31, 2007 compared with 53 percent at December 31, 2006.  

    Outlook for 2008

  • Economic conditions remain difficult in a number of the Company's markets.  Housing starts declined 25 percent in 2007, due to excessive inventories of homes and less attractive mortgage terms.  The Company expects a further decline in housing starts in 2008 and continued softness in sales of existing homes.  In addition, the Company anticipates a decline in consumer spending for home improvement products, and notwithstanding recent actions by the Federal Reserve and the government to stimulate economic growth, the Company believes that 2008 will be a difficult year for the overall U.S. economy.  In the fourth quarter of 2007, the Company also experienced a softening of demand for certain of its International products due to declining European economies. As a result, the Company currently estimates that the Company's 2008 sales will decline high-single to low-double digits compared with 2007.

  • While forecasting future business conditions in the current uncertain economic environment remains challenging, the Company currently believes that 2008 earnings will be in a range of $.85 to $1.15 per common share and that free cash flow (cash from operations after capital expenditures, which are estimated at $240 million, and before dividends) will continue to be relatively strong and approximate $700 million which is two times the Company's 2007 dividend payments of $347 million.  This guidance reflects the Company's estimate that 2008 housing starts will decline an additional 25 to 33 percent, to a range of 900,000 to one million units, compared with 1.3 million units in 2007.  The Company also expects that consumer spending for home improvement products will continue to decline and that demand for certain of the Company's International products, which increased five percent in local currencies in 2007, will moderate.  In addition, the Company's guidance reflects an estimated full-year 2008 tax rate of approximately 42 to 43 percent (due to the U.S. tax on the anticipated repatriation of foreign earnings to utilize favorable provisions of the U.S. tax law) which, compared to the Company's normalized tax rate of 36 percent, will reduce earnings by approximately $.11 per common share, as well as continued relatively higher costs for certain commodities, including copper and commodities impacted by energy costs.

  • The Company expects to continue its strategy of returning a minimum of $1 billion annually to shareholders, on average, through share repurchases and dividends as part of its ongoing commitment to value creation.  The Company has returned over $6 billion to shareholders over the last five calendar years, including the repurchase of 157 million common shares and dividends.  

  • 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, 2008 were 360 million.  This excludes the impact of any 2008 repurchases of common stock.  Since January 1, 2008, the Company has repurchased three million common shares.

  • The Company expects market conditions in its industry, in the next several quarters, to be very challenging.  The Company is confident of its strategy of dividend increases and share repurchases while concentrating on organic growth, improving returns and generating superior cash flow.  The Company's strategy, together with the leveraging of the combined market strength of its retail service, distribution and installation capabilities, brands and scale, will allow Masco to continue to drive long-term growth and value for its shareholders.

    Statements contained herein that reflect the Company's views about its future performance constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995.  These views involve risks and uncertainties that are difficult to predict and, accordingly, the Company's results may differ materially from the results discussed in such forward-looking statements.  For an explanation of various factors that may affect our performance, refer to our most recent Annual Report on Form 10-K (particularly the "Risk Factors" section) and to any subsequent Quarterly Reports on Form 10-Q, all of which are on file with the Securities and Exchange Commission.  The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.  The Company believes that certain non-GAAP performance measures and ratios that may be contained herein, 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 the Company is contained in the Company's filings with the Securities and Exchange Commission and is available on Masco's website at www.masco.com.