NAVIGATION

Q1 2008 Business & Financial Highlights

April 29, 2008

As previously disclosed, in the first quarter of 2008, the Company determined that several European business units are not core to the Company's long-term growth strategy and accordingly, embarked on a plan of disposition. The dispositions are expected to be completed within the next twelve months.

In accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company has accounted for the 2008 business units held for sale and the 2007 disposition of a European business unit as discontinued operations.

First Quarter 2008

  • Net sales from continuing operations declined 13 percent, with North American sales declining 16 percent and International sales increasing one percent. In local currencies, International sales declined eight percent compared with the first quarter of 2007.

  • Key retailer sales from continuing operations decreased ten percent in the 2008 first quarter compared with a decline of two percent in the 2007 first quarter and a decline of five percent in the 2007 fourth quarter.

  • Sales changes by segment in the first quarter of 2008 versus the first quarter of 2007 were:

    • Cabinets and Related Products sales declined 14 percent;

    • Plumbing Products sales declined three percent;

    • Installation and Other Services sales declined 24 percent;

    • Decorative Architectural Products sales declined 10 percent; and

    • Other Specialty Products sales declined 22 percent.

  • The first quarter of 2008 results were adversely affected by significantly lower sales volume to the new home construction market and a continued decline in consumer spending for home improvement products.

  • The Company has been focused on the rationalization of its businesses, including sourcing programs, business consolidations, plant closures, headcount reductions and other initiatives. During the first quarters of 2008 and 2007, the Company incurred costs and charges of $9 million pre-tax ($.02 per common share, after tax) and $25 million pre-tax ($.04 per common share, after tax), respectively, related to these initiatives. Since late 2006, the Company has aggressively reduced its cost structure including closing 11 manufacturing facilities, reducing headcount by 15,000 (which exceeds 25 percent of North American headcount) and reducing installation branches by over 20 percent.

  • Results included non-cash impairment charges for financial investments of $26 million pre-tax ($.05 per common share, after tax) and currency losses of $10 million pre-tax ($.02 per common share, after tax) in the first quarter of 2008. The first quarter of 2008 results also included the negative impact of a higher tax rate (53 percent in the first quarter of 2008 compared to 37 percent in the first quarter of 2007) of $.03 per common share. In aggregate, these items reduced the first quarter of 2008 earnings by $.10 per common share.

  • Results benefited from net gains related to financial investments of $22 million pre-tax ($.04 per common share, after tax) in the first quarter of 2007.

  • Income from continuing operations was $24 million or $.07 per common share and $137 million or $.35 per common share in the first quarters of 2008 and 2007, respectively.

  • Net income in the first quarter of 2008 was $2 million or $.01 per common share, including loss from discontinued operations, net, of $22 million. Net income in the first quarter of 2007 was $143 million or $.37 per common share, including income from discontinued operations, net, of $6 million.

  • The Company reviews its business portfolio on an ongoing basis as part of its corporate strategic planning and, as previously disclosed, has determined that several of its European business units are not core to the Company's long-term growth strategy and, accordingly, has embarked on a plan of disposition. These business units had combined 2007 net sales in excess of $235 million and aggregate operating profit of $13 million (excluding an impairment charge for goodwill of $108 million). The Company expects proceeds from the dispositions to exceed $140 million. The dispositions are expected to be completed within the next twelve months.

  • In the first quarter of 2008, the Company recognized a charge for discontinued operations expected to be sold at a loss of $49 million pre-tax ($.08 per common share, after tax), included in (loss) from discontinued operations. Any gains resulting from the disposition of individual business units will be recognized as such transactions are completed.

  • Gross margins were 25.7 percent in the first quarter of 2008 compared with 26.3 percent in the first quarter of 2007. Operating profit margins were 6.5 percent in the first quarter of 2008 compared with 9.0 percent in the first quarter of 2007. Operating profit margins in the first quarter of 2008 were negatively affected by lower sales volumes and increasing costs for certain commodities, including metals and commodities impacted by energy costs.

  • SG&A expenses as a percent of sales, including general corporate expense, were 19.1 percent in the 2008 first quarter compared with 17.3 percent in the 2007 first quarter, reflecting lower sales volume, as well as increased bad debt expense, principally related to the new home construction market.

  • General corporate expense was 1.8 percent of sales in both the first quarters of 2008 and 2007.

  • Accounts receivable days at the end of both the first quarters of 2008 and 2007 were 52 days.

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

  • Accounts payable days at the end of the first quarter were 44 days compared with 42 days a year ago.

  • Working capital at March 31, 2008 (defined as accounts receivable and inventories less accounts payable) was 17.3 percent of the last twelve months' sales compared with 17.4 percent a year earlier.

  • For the twelve months ended March 31, 2008 and 2007, return on invested capital (as reported) was 8.5 percent and 8.8 percent, respectively. For the twelve months ended March 31, 2008 and 2007, return on invested capital (as reconciled) was 9.2 percent and 11.3 percent, respectively. While the Company remains 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 market.

  • The Company's tax rate was 53 percent in the first quarter of 2008 compared to 37 percent in the comparable period of the prior year. The Company anticipates that its tax rate on income from continuing operations for 2008 will approximate 48 to 49 percent. The increase in the expected tax rate for 2008 is primarily due to the U.S. tax on anticipated dividend distributions of low-taxed 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.

  • At the end of the quarter, the Company had a strong balance sheet with over $600 million of cash and $2 billion in unused bank lines.

  • Debt as a percent of total capitalization was 51 percent at both March 31, 2008 and 2007.

  • During the quarter, the Company repurchased five million shares of Company common stock.

  • The Company's diluted common shares for purposes of calculating earnings per common share were 356 million for the first quarter of 2008 compared with 388 million for the first quarter of 2007.

  • The Company expects to continue its current strategy of returning $1 billion annually to shareholders, on average, through share repurchases and dividends as part of its ongoing commitment to value creation. As previously mentioned, management expects to recommend to Masco's Board of Directors later this year that we increase Masco's dividend for the 50th consecutive year! This reflects our current expectation, from a macro standpoint, that the decline in new home construction and the home improvement products markets will bottom in 2008 and at least modestly improve in 2009. In the first quarter of 2008, the Company returned $184 million to shareholders through share repurchases (five million common shares) and dividends. Given the current operating environment, however, 2008 dividends and share repurchases may not aggregate $1 billion.

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.

Outlook for 2008

  • Business conditions remain difficult in a number of the Company's markets. The Company continues to estimate that 2008 housing starts will decline an additional 25 to 33 percent, to a range of 900,000 to one million units, compared to 1.3 million units in 2007. (In the first quarter of 2008, housing starts declined 30 percent). While the Company's view on housing starts for 2008 has not changed since it developed its earnings guidance earlier this year, the Company currently believes that consumer spending for home improvement products and demand for certain of the Company's International products will be weaker than originally anticipated. (In the first quarter of 2008, the Company's sales to its key retail customers declined by ten percent and its International sales declined eight percent in local currencies.) As a result, the Company currently estimates that its 2008 percentage sales decline will be low-double digits to mid-teens compared to 2007. The Company's previous guidance estimated that its 2008 percentage sales decline would be high-single to low-double digits.

  • 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 $.50 to $.65 per common share. This compares to the Company's previous guidance of $.85 to $1.15 per common share. The Company estimates that free cash flow (cash from operations, after capital expenditures and before dividends) will continue to be strong and approximate $640 million, compared to its previous estimate of $700 million.

  • The Company's revised guidance also reflects increasingly competitive market conditions for its services and products and increasing costs for freight and logistics and for certain commodities, including metals and commodities impacted by energy costs.

  • The Company's revised guidance also estimates that its full-year tax rate will approximate 48 to 49 percent (due to the U.S. tax on the anticipated repatriation of low-taxed foreign earnings to utilize favorable provisions of the U.S. tax law) which, compared to the Company's normalized tax rate of approximately 36 percent, will reduce earnings by approximately $.17 per common share. The Company's original guidance estimated that the 2008 full-year tax rate would approximate 42 to 43 percent and reduce earnings by $.11 per common share compared to the Company's normalized tax rate. The increase in the estimated 2008 tax rate reflects a decrease in the Company's projected 2008 pre-tax income from continuing operations. The Company estimates that its tax rate on income from continuing operations for 2009 will approximate 35 to 36 percent.

  • The Company's revised guidance includes: the first quarter of 2008 impairment charges for financial investments and currency losses; the impact of discontinued operations; and the benefit of the first quarter 2008 share repurchases. These items, together with the expected increase in the tax rate, decrease full-year estimated earnings by approximately $.27 per common share, net. (Relative to these items, the Company's original guidance reflected that earnings would be reduced by $.11 per common share, based on the expectation that the full-year tax rate would increase to 42 to 43 percent).

  • Although the Company expects market conditions in its industry, over the next several quarters, to be very challenging, the Company is confident that the long-term fundamentals for the new home construction and home improvement products markets are positive. The Company believes that its current strategy of dividend increases and share repurchases, concentrating on organic growth, improving returns and generating superior cash flow, 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.

  • Based on the current market price for the Company's common stock, diluted common shares for the computation of earnings per common share at April 1, 2008 were 354 million. This excludes the impact of any April 2008 repurchases of common stock.

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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.