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Slide 1: Masco Corporation Building a Dynamic Future 2004 Annual Report
Slide 2: About Masco Masco Corporation is a world leader in the manufacture of home improvement and building products. Masco is also a leading provider of services that include the sale and installation of insulation and other building products. We provide brand-name, value-added products and services for the home and family that can be used with confidence and displayed with pride. ON THE COVER To enhance market share growth and pricing power, Masco continues to intensify its focus on newproduct development. In our decorative architectural products segment, Behr Process Corporation recently introduced a variety of new exterior wood finishes, including one specifically designed for log homes—achieving very favorable market recognition. Additionally, the cover design showcases Milgard Windows, featuring its popular Fiberglass WoodClad™ windows. TABLE OF CONTENTS Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Building on Leadership Brands . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Building a Dynamic Future. . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Financial Highlights for 2004 . . . . . . . . . . . . . . . . . . . . . . . . . 5 Strategic Redirection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Leveraging Synergies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Portfolio Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 New-Product Development . . . . . . . . . . . . . . . . . . . . . . . . . 16 Customer Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Asia Sourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Improving Shareholder Returns. . . . . . . . . . . . . . . . . . . . . . 22 Corporate Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Future Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Forty-Eight Years of Sales Growth . . . . . . . . . . . . . . . . . . . . . . . 26 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Corporate Leadership. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Division Operating Executives . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Form 10-K Information for Shareholders . . . . . . . . . . . . . Inside Back Cover FORWARD-LOOKING STATEMENTS Our Annual Report to Shareholders contains statements reflecting our views about the Company’s future performance. These statements are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from the results discussed in such forward-looking statements. Readers should refer to the comment at the beginning of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K included herein, which explains that various factors may affect our projected performance. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. NON-GAAP DISCLOSURE The Company believes that certain non-GAAP (Generally Accepted Accounting Principles) 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 of ongoing operations. 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. For a reconciliation of 2004 sales growth excluding acquisitions and divestitures, please refer to page 19 of the Form 10-K included herein.
Slide 3: BUILDING A DYNAMIC FUTURE Financial Highlights Dollars in Millions Except Per Common Share Data Net Sales 1, 2 Operating Profit Income from Continuing Operations1, 2 48-Year 5-Year Growth Growth 2004 Rate Rate vs 2003 16% 17% 14% 17% 14% 6% 17% 1, 2 2004 $12,074 $ 1,569 $ 930 2003 $10,571 $ 1,484 $ 790 1999 $5,577 $ 807 $ 502 9% 19% $3,019 1956 $ 11 $ 1 $ 4% 9% $ 5 0 13% 18% Income from Continuing Operations as a % of : Net Sales 3 Shareholders’ Equity Shareholders’ Equity Per Common Share Data: Income from Continuing Operations1, 2 Cash Dividends Paid 1 8% 17% 12% - 1% $ 5,423 7% 15% $ 5,456 16% 14% 16% 13% 8% 27% 14% $ 2.04 $ 0.66 $ 1.61 $ 0.58 $ 1.12 $ 0.45 $0.005/16 $0.001/16 Amounts, except for shareholders’ equity, have been restated to exclude discontinued operations. The year 2004 includes a non-cash goodwill impairment charge of $141 million after tax ($168 million pre-tax) and income of $19 million after tax ($30 million pre-tax) related to the Behr litigation settlement. The year 2003 includes a non-cash goodwill impairment charge of $47 million after tax ($53 million pre-tax) and income of $45 million after tax ($72 million pre-tax) related to the Behr litigation settlement. Based on shareholders’ equity as of the beginning of the year. 2 3 FIVE YEARS OF SALES GROWTH ’04 ’03 ’02 ’01 ’00 In Millions 2004 Annual Report ~ 1
Slide 4: BUILDING A DYNAMIC FUTURE Building on Leadership Brands CABINETS AND RELATED PRODUCTS Masco is the largest U.S. manufacturer of kitchen and bath cabinetry, offering approximately 300 styles in more than 20 lines from our U.S. companies: KraftMaid, Merillat, Mill’s Pride, Texwood and Zenith. Our European cabinet companies include The Aran Group, The Moores Group and Tvilum-Scanbirk. This segment includes assembled and ready-to-assemble kitchen and bath cabinets; home office workstations; entertainment centers; storage products; bookcases; and kitchen utility products. Net Sales Dollars In Millions PLUMBING PRODUCTS Masco is a world leader in the manufacture of plumbing products. This segment includes faucets; plumbing fittings and valves; showerheads and hand showers; bathtubs and shower enclosures; and spas. Leading faucet brands include Bristan™, Damixa®, Delta®, Hansgrohe®, Mariani™, Newport Brass® and Peerless®. Leading plumbing specialty brands include Alsons®, Aqua Glass®, BrassCraft®, Brasstech®, Cobra®, Ginger®, Gummers™, Heritage™, Hot Spring®, NewTeam™ and PlumbShop®. INSTALLATION AND OTHER SERVICES Masco provides a variety of installation services for homebuilders across the U.S. and in Canada. Included in this segment are the sale and installation principally of insulation as well as cabinetry, fireplaces, gutters, bath accessories, garage doors, shelving and windows. Under the Masco Contractor Services umbrella, this segment includes installation industry leaders such as Cary Insulation, Gale Insulation, Quality Insulation, Sacramento Building Products and Williams Insulation. DECORATIVE ARCHITECTURAL PRODUCTS This segment includes paints and stains; and door, window and other hardware. Market leaders in paints and stains include Behr Process Corporation and Masterchem Industries, with top-selling brands Behr®, Behr Premium Plus®, Casual Colors®, Expressions™, Kilz® and Hammerite®. Leading hardware brands include Bath Unlimited®, Brainerd®, Franklin Brass®, and Liberty® in the U.S. and Avocet™ in Europe. This segment also includes Vapor Technologies, which provides coatings technology and manufacturing process equipment for many Masco products. OTHER SPECIALTY PRODUCTS The Other Specialty Products segment includes windows, window frame components and patio doors; electronic locksets; staple gun tackers, staples and other fastening tools; and hydronic radiators and heat convectors. Companies in this segment include Arrow Fastener, Computerized Security Systems, Faucet Queens and Milgard Manufacturing in the U.S., and The Brugman Group, Cambrian Windows, Duraflex, Griffin Windows, Premier Manufacturing, Superia Radiatoren and Vasco in Europe. 2 ~ Masco Corporation
Slide 5: Masco Contractor Services Aqua Glass tub, Delta faucet, Milgard windows Delta faucet Merillat cabinetry Bath Unlimited accessories Alsons shower system Behr paint Delta faucet, Hüppe collapsible shower doors, Mirolin tub Texwood cabinetry Hot Spring spa 2004 Annual Report ~ 3
Slide 6: BUILDING A DYNAMIC FUTURE March 2005 Building a Dynamic Future We are pleased to report that in 2004 your Company achieved record sales, net income and earnings per common share, and Masco’s share price reached an all-time high. Our success was in large part due to a change in strategic direction to focus on increasing shareholder value by improving the Company’s return on invested capital (ROIC) through strong internal growth, share repurchases and balance sheet simplification. The new strategic direction, which we announced in early 2003, was designed to benefit our shareholders by leveraging the critical mass of brands that we developed in 1997 through 2002 through our acquisition of a number of leading home improvement and building product companies. During this period of rapid growth, our goal was to broaden our product and services offerings to customers and consumers, to make Masco more important to a dramatically consolidating customer base, including home centers and homebuilders, and to address the increasing globalization of our markets. While we were successful in building what we believe is one of the world’s leading providers of home improvement and building products and services during the period prior to 2003, we did not create satisfactory shareholder value, we increased debt as a percentage of total capitalization and we experienced a decline in ROIC. Our recent change in strategic direction has focused the resources of the Company on improving return to shareholders and contributed significantly to our record results in 2004. Richard A. Manoogian Chairman and Chief Executive Officer Alan H. Barry President and Chief Operating Officer 4 ~ Masco Corporation
Slide 7: Financial Highlights for 2004 NET SALES AND OPERATING PROFIT Net sales from continuing operations were a record $12.1 billion, a 14 percent increase over the $10.6 billion that we achieved in 2003. Since the Company had no acquisitions of significant size during the past year, virtually all of this increase was from internal growth. NET SALES AND OPERATING PROFIT Dollars in Millions Year 2004 2003 2002 2001 2000 1999 5-Year Growth Rate Amounts have been restated to exclude discontinued operations. Net Sales $12,074 10,571 8,831 7,705 6,506 5,577 17% Operating Profit $1,569 1,484 1,267 1,011 888 807 14% Net sales from North American operations, accounting for 82 percent of the Company’s sales, increased 13 percent to $9.9 billion in 2004 from $8.8 billion in 2003. Net sales from International operations, principally in Europe, increased 21 percent to $2.2 billion in 2004 from $1.8 billion in 2003. Income from continuing operations for 2004 was $930 million compared with $790 million in 2003, including non-cash, after-tax charges for goodwill impairment of $141 million ($168 million pre-tax) and $47 million ($53 million pre-tax) in 2004 and 2003, respectively. Earnings from continuing operations were $2.04 per common share compared with $1.61 per common share in 2003. Excluding the charges for goodwill impairment, earnings from continuing operations were $2.35 per common share and $1.70 per common share for 2004 and 2003, respectively. 2004 Annual Report ~ 5
Slide 8: BUILDING A DYNAMIC FUTURE Our operating profit margins from continuing operations, as reported, were 13.0 percent in 2004, compared with 14.0 percent in 2003. Excluding goodwill impairment charges, operating profit margins were 14.4 percent and 14.5 percent in 2004 and 2003, respectively. These margins were adversely affected by increased commodity costs not recovered due to the normal delay from a timing standpoint in implementing selling price increases to customers, costs associated with the Sarbanes-Oxley legislation, increased energy and freight costs, stronger foreign currencies resulting in increased International sales that have lower margins, product mix and relatively higher sales in product segments with somewhat lower margins. CASH FLOW In 2004, the Company achieved free cash flow (defined as cash from operations less capital expenditures and before dividends) of over $1 billion, for the second consecutive year. Our cash flow has benefited from improved balance sheet management, particularly related to working capital management. CAPITAL EXPENDITURES Capital expenditures for the year, including discontinued operations, were $310 million compared with $271 million for 2003. We continue to invest capital to support internal growth opportunities across our businesses. Depreciation and amortization for 2004 was $237 million compared with $244 million for 2003. LIQUIDITY The Company ended 2004 in a strong financial position with cash and marketable securities in excess of $1.5 billion, even after using approximately $900 million to repurchase common shares for retirement. In keeping with our commitment to reduce the Company’s financial investments, our marketable equity securities and bond funds portfolio was reduced to $263 million at year-end compared with $517 million at the end of 2003. The Company renegotiated its debt agreements with its banks and replaced its then existing credit agreements with a $2.0 billion five-year revolving credit agreement payable in November 2009. At year-end, there were no borrowings under this new agreement. 6 ~ Masco Corporation
Slide 9: Hansgrohe faucets 2004 Annual Report ~ 7
Slide 10: BUILDING A DYNAMIC FUTURE BALANCE SHEET Our focus on balance sheet management in 2004 resulted in the following: • Accounts receivable at the end of 2004 were 49 days, compared with 53 days for 2003; • Year-end inventories increased slightly to 49 days, compared with 48 days in 2003; • Accounts payable days at year-end improved to 36 days, compared with 35 days in 2003, as the Company continues to negotiate more favorable supplier terms; and • Working capital at year-end (defined as accounts receivable and inventories less accounts payable) improved to 16.8 percent of sales, from 18.1 percent a year earlier. CAPITALIZATION Consistent with our commitment to improve ROIC, we continued to aggressively manage our capital base by repurchasing 31 million common shares in 2004 for approximately $900 million. In the past two years, our common shares outstanding have been reduced by 66 million through share repurchases. Debt as a percent of total capitalization at the end of 2004 was 44 percent, compared with 43 percent at year-end 2003. Ginger mirror and light fixtures, Mirolin bathtub, Newport Brass vanity & plumbing fixtures 8 ~ Masco Corporation
Slide 11: Strategic Redirection During the past two years, Masco has undertaken a critical forward-looking strategic planning initiative designed to identify opportunities to further strengthen the Company, grow our market leadership positions and enhance long-term shareholder value. STRATEGIC AGENDA STRATEGIC AGENDA 2004 Goals Return on Invested Capital Average Annual Internal Sales Growth Average Annual Sales Growth through Acquisitions Average Annual Operating Profit Margins Cash Flow Average Annual Return to Shareholders, including Dividends Improve 6–8% 5% or less 13–15% Above Average 2004 Results 12.0% compared with 11.1% in 2003 14% Less than 1% 13.0% Free cash flow exceeded $1 billion 12–15% 29% 2004 Annual Report ~ 9
Slide 12: BUILDING A DYNAMIC FUTURE LEADERSHIP PRODUCTS AND SERVICES Dollars in Millions Cabinets and Related Products Installation and Other Services Plumbing Products Decorative Architectural Products Other Specialty Products Leadership Sales Other Sales Total Sales 2004 Sales $ 3,131 2,771 2,468 1,606 1,159 $11,135 939 $12,074 Percent of Total 26% 23% 20% 13% 10% 92% 8% 100% Your Company spent a number of years and significant resources developing a critical mass of businesses that provide leadership products and services and highly recognized brands. These brands target diverse price points and distribution channels in the home improvement and building products and services industries. That strategy proved effective, solidifying our position in the marketplace while simultaneously improving our importance to customers. Today, over 90 percent of our sales are represented by products and services that we believe are leaders in their respective market niches—a position unmatched by any other company in the markets in which we compete. Having built this critical mass, we are now focused on improving value for our shareholders by: • Leveraging synergies; • Refining our business portfolio; • Enhancing new-product development; • Focusing on key customers; and • Sourcing products and components from Asia. 10 ~ Masco Corporation
Slide 13: Delta faucet, KraftMaid cabinetry 2004 Annual Report ~ 11
Slide 14: BUILDING A DYNAMIC FUTURE Milgard windows 12 ~ Masco Corporation
Slide 15: Leveraging Synergies We are leveraging synergies among operating companies through the establishment of product platforms, each under the direction of a Group President with responsibility for the performance of operating companies within these platforms. These product platforms are: • Cabinets; • Plumbing Products; • Decorative Architectural Products, including coatings; • Installation Services; and • Other Specialty Products, including windows. In each of these platforms, global steering committees are focusing on sourcing initiatives, shared best practices, cost-reduction efforts, joint marketing programs and manufacturing rationalization. This process is perhaps best illustrated by Masco Contractor Services (MCS), which today supplies and installs products in approximately 50 percent of the new homes built in the United States. We are leveraging our unique installation services capabilities and relationships to enhance our sales of other products by offering our builder customers installation of more than 20 separate categories of products. We are excited about the opportunities to provide logistical advantages to our builder customers by installing both insulation and non-insulation products, including Masco-manufactured products such as cabinets and windows. Through our broad installation and distribution system, Masco is the only company that currently offers homebuilders nationwide installation services. Although MCS is the undisputed leader in providing installation services, our services revenues currently represent only a small portion of the installation costs of building a home, offering significant opportunities for future growth. 2004 Annual Report ~ 13
Slide 16: BUILDING A DYNAMIC FUTURE Portfolio Review In order to improve profitability and improve returns on capital deployed, we continue to review our portfolio of companies, concentrating on those that fully support our strategic alignment and competitive core, perform to our expectations and are less susceptible to foreign competition. Through consolidations and divestitures in 2004, we reduced the number of operating units from 63 to 47; we expect further consolidation as we continue to streamline our operations. During 2004 and early 2005, Masco divested the following six European companies: Alma Küchen, The Alvic Group, Gebhardt Ventilatoren, Jüng Pumpen, E. Missel, and SKS Group. ORGANIZATION RESTRUCTURING In 2004, we also consolidated a number of our operating companies: • We structured our plumbing products operations into a single platform and have several consolidations underway. • We have refined the organizational structure and the strategic focus of our cabinet businesses to better serve our builder customers and our retail customers. • PowerShot, a manufacturer of fastening products, was assimilated into Arrow Fastener. • European operations were structured into three platforms, resulting in the reduction of reporting units from 29 to 19. These organizational changes should enable Masco to continue to drive worldwide synergies and cost savings in the future. 14 ~ Masco Corporation
Slide 17: ACQUISITION STRATEGY Historically, Masco’s goal has been to grow the Company’s sales through acquisition at an average annual rate of five to 10 percent. As part of our strategic redirection, we have reduced our annual sales growth target through acquisition to five percent or less. Likely candidates would be “bolt-on” acquisitions that meet our financial criteria and add a product extension, geographic presence or a new service or manufacturing capacity to one of our existing product or services platforms. There were no significant acquisitions in 2004. Watkins Hot Spring Solana spa 2004 Annual Report ~ 15
Slide 18: BUILDING A DYNAMIC FUTURE New-Product Development To enhance market share growth, in recent years we have intensified our focus on new-product development. We estimate that currently 25 to 30 percent of our manufactured product sales come from products that have been introduced during the past three years. Milgard Windows continued its new-product initiatives and, in 2004, in order to expand to markets in the eastern U.S., introduced its new double- and single-hung windows and fiberglass French and sliding doors. Fiberglass is relatively new to the window market and provides dimensional stability that is impervious to outside elements. The unique combination of fiberglass with a finely crafted interior wood veneer was hailed by Woman’s Day Special Interest Publications as the most innovative new product of 2004. In architectural products, Behr also introduced several new products in 2004, including Behr Semi-Transparent Concrete Stain, Behr Wet-Look Sealer and Log Home and Barn Finishes. A number of exciting new plumbing products have been introduced in early ˆ 2005. These include the Simply PUR™ filtration faucet, a faucet system developed in partnership with Procter & Gamble that offers a convenient and easily changeable filter, and the H2Okinetics Technology™ that changes the shape of water droplets to create a warmer, more luxurious shower experience, using less water. Behr paint, Milgard windows 16 ~ Masco Corporation
Slide 19: ˆ Delta Simply PUR™ filtration faucet 2004 Annual Report ~ 17
Slide 20: BUILDING A DYNAMIC FUTURE For 2005, Bath Unlimited is launching three new bath-accessory designs available to builders, architects and specifiers: an old-world style, a traditional design and a Southwest theme; and Hansgrohe introduced Citterio™, a new high-end line of faucets. In Installation Services, MCS is installing a variety of new products, including closet organizers manufactured by other Masco operating companies. In addition, MCS introduced its new Diamond Class Level for its Environments for Living® program, that offers significant improvements in comfort and energy savings to homeowners. SM THE SEVEN PILLARS OF THE ENVIRONMENTS FOR LIVING® PROGRAM 18 ~ Masco Corporation
Slide 21: Customer Programs Customer programs are driven by research in consultation with our builder, retailer and wholesaler customers. These programs are designed to provide incentives for mutual growth and to help our customers better market our products to consumers. For example, a recent study conducted by our Builder Cabinet Group identified consumer model-home shopping and buying behaviors to help our builder customers ensure that their cabinet choices, design centers and marketing programs present products and upgrade options in ways that best address consumers’ needs and interests. KEY RETAILER PROGRAM Since 1986, the Key Retailer Program has grown significantly with 2004 sales reaching $3.7 billion, compared with $3.4 billion in 2003. Building on the customized programs that we offer to our retailer customers, we have established valueadded programs at both the corporate and operating company levels. These newly expanded programs include: transportation, logistics, inventory replenishment, technology, consumer research, product development, visual merchandising, advertising and brand management. BUILDER ALLIANCE PROGRAM Since its establishment in 1987, the Masco Builder Alliance Program has been continually enhanced to reflect the needs of the marketplace and the voice of our customers. 2004 Annual Report ~ 19
Slide 22: BUILDING A DYNAMIC FUTURE The Masco Builder Alliance Program serves builder customers through a wide range of customized initiatives, including Masco database management, targeted product-based rebate programs, design center support services and other valueadded services. In 2004, Masco continued to finalize a number of national arrangements with key homebuilders that incentivize our customers to make us their primary installer of insulation and other building products. Arrangements have now been executed with five of the top 10 U.S. homebuilders with additional arrangements expected to be finalized in 2005. We continue to increase sales through penetration of non-insulation installation services. Masco Contractor Services, Milgard windows 20 ~ Masco Corporation
Slide 23: Asia Sourcing As Asian countries have become major manufacturing centers with lower costs for labor, land and facilities, we have expanded our operations there, and now have approximately 1,400 employees and approximately 400,000 square feet of manufacturing and distribution space in China. In 2004, we outsourced over $400 million of products and components compared with over $200 million in 2003, resulting in significant cost savings. Our established capabilities in China provide a base for further expansion of manufacturing and assembly in that country, and are already allowing Masco to serve Asian consumers as the markets for our products grow. Moores cabinetry 2004 Annual Report ~ 21
Slide 24: BUILDING A DYNAMIC FUTURE Improving Shareholder Returns We continue to focus on initiatives that enable the Company to create value for our shareholders. In 2003, the Company established a goal of achieving a 15 percent ROIC by 2008 or sooner. For the 12 months ended December 31, 2004, ROIC was 12.0 percent compared with 11.1 percent in 2003. In both 2004 and 2003, the Company returned more than $1 billion to shareholders through share repurchases and dividends. SHARE REPURCHASE The Company has continued its active share-repurchase program; in 2004 approximately 31 million common shares were repurchased and retired. During the first two months of 2005, the Company repurchased an additional six million shares of Company common stock (including approximately two million shares which were subsequently reissued for the long-term stock incentive award plan). We believe that our shares continue to be attractively valued and, depending on market conditions and other factors, we expect to continue to be relatively aggressive in our share-repurchase program. DIVIDENDS In 2004, the quarterly cash dividend was increased to $.18 from $.16 per common share. This 12.5 percent increase reflects our favorable long-term outlook, strong balance sheet and cash flow, and recent positive changes in the tax law. This marks the 46th consecutive year in which dividends have been increased. 22 ~ Masco Corporation
Slide 25: Corporate Responsibility SUSTAINABILITY REPORT In an effort to inform our shareholders of Masco’s economic, environmental and social performance, in 2004 we published our first Corporate Sustainability Report, which can be viewed on Masco’s web site at www.masco.com. Sustainability is the concept that guides Masco in measuring and continuously improving our performance with the intent of ensuring that our business activities contribute to the wellbeing of society and the environment. The report is intended to provide stakeholders with a balanced and reasonable picture of Masco’s sustainability practices, outcomes and activities. GOVERNANCE Independent Directors In 2004, we continued to enhance our corporate governance through the addition of a new independent director, Dennis W. Archer, Chairman of Dickinson Wright PLLC, a Detroit-based law firm, former two-term mayor of the city of Detroit and former Associate Justice of the Michigan Supreme Court. His addition to the Board increased the number of independent directors from seven to eight. All members of the Audit Committee, Organization and Compensation Committee and Corporate Governance and Nominating Committee are independent. Code of Business Ethics To reinforce our commitment to ethical business practices, we are continuing to develop processes and systems to enhance our ability to communicate requirements, confirm compliance and train employees in ethical behaviors and expectations related to our Code of Business Ethics program. For example, in 2003 we installed a toll-free employee ethics “hotline” and introduced comprehensive Internet-based ethical and legal compliance training programs to our U.S. employees. We have translated our Code of Business Ethics into additional languages for distribution internationally, and are adapting our ethical and legal compliance training for our International operations. 2004 Annual Report ~ 23
Slide 26: BUILDING A DYNAMIC FUTURE Future Outlook We continue to view the future with excitement and optimism, and we expect continued improvement in both sales and earnings in 2005. In addition to the strategic initiatives outlined in this report, your Company continues to benefit from a broad offering of brand-name products and increasingly diversified installation services, new-product development and strong representation in all channels of distribution for our products. Despite the market advantages that we have established and maintained, Masco continues to face a number of challenges, including increasing commodity costs and pricing pressures and competition from certain import products. Macro-economic factors, such as slower economic growth, relatively higher commodity, energy and freight costs, and anticipated increases in mortgage interest rates, may have a negative impact on our businesses. Nevertheless, we believe that our market leadership positions, our market share growth, our business mix of new construction and remodeling and our broad array of leading brand-name products and services will enable us to achieve another year of record sales and earnings in 2005. We greatly appreciate the proven commitment, capabilities and enthusiasm of our over 60,000 employees who contribute to the achievement of our financial and operational objectives. We look forward to their continued efforts as we strive to make 2005 another record year with sustained increases in returns to our shareholders. Richard A. Manoogian Chairman and Chief Executive Officer Alan H. Barry President and Chief Operating Officer 24 ~ Masco Corporation
Slide 27: Ginger mirror and lighting, Liberty hardware, Merillat cabinetry, Newport Brass faucet 2004 Annual Report ~ 25
Slide 28: BUILDING A DYNAMIC FUTURE Forty-Eight Years of Sales Growth 26 ~ Masco Corporation
Slide 29: Masco Brands ® ® ® ® ® SM TM ™ ® ™ ® ™ ® ® ® ™ ™ ™ ™ ™ ™ ® ® ® ™ ™ ® Quality ® ™ ™ ® 2004 Annual Report ~ 27
Slide 30: BUILDING A DYNAMIC FUTURE Selected Financial Data Dollars In Millions Except Per Common Share Data 2004 Net sales $12,074 Operating profit 1, 2, 3, 4, 5 $ 1,569 Income from continuing operations1, 2, 3, 4, 5, 6, 7, 8 $ 930 Per share of common stock: Income from continuing operations1, 2, 3, 4, 5, 6, 7, 8: Basic $2.09 Diluted $2.04 Dividends declared $0.68 Dividends paid $0.66 Income from continuing operations as a % of 1, 2, 3, 4, 5, 6, 7, 8: Net sales 8% Shareholders’ equity 9 17% At December 31: Total assets $12,541 Long-term debt $ 4,187 Shareholders’ equity $ 5,423 Book value per common share $ 11.89 1 2 1 2003 $10,571 $ 1,484 $ 790 $1.65 $1.61 $0.60 $0.58 7% 15% $12,173 $ 3,848 $ 5,456 $ 11.11 2002 $ 8,831 $ 1,267 $ 547 $1.13 $1.06 $0.55 $0.54 1/2 6% 14% $12,050 $ 4,316 $ 5,294 $ 10.30 2001 $ 7,705 $ 1,011 $ 183 $0.40 $0.39 $0.53 $0.52 1/2 2% 6% $ 9,021 $ 3,628 $ 3,958 $ 8.33 2000 $ 6,506 $ 888 $ 540 $1.22 $1.20 $0.50 $0.49 8% 18% $ 7,604 $ 3,018 $ 3,286 $ 7.27 3 4 5 6 7 8 9 Amounts have been restated to exclude discontinued operations. The year 2004 includes a non-cash goodwill impairment charge of $141 million after tax ($168 million pre-tax) and income of $19 million after tax ($30 million pre-tax) related to the Behr litigation settlement. The year 2003 includes a non-cash goodwill impairment charge of $47 million after tax ($53 million pre-tax) and income of $45 million after tax ($72 million pre-tax) related to the Behr litigation settlement. The year 2002 includes a $92 million after tax ($147 million pre-tax), net charge for the Behr litigation settlement and pre-tax income of $16 million for the planned disposition of a business. Operating profit for 2001 and 2000 includes goodwill amortization of $87 million and $60 million, respectively. The year 2002 includes a $92 million after-tax ($117 million pre-tax), non-cash goodwill impairment charge recognized as a cumulative effect of a change in accounting principle. The year 2001 includes a $344 million after-tax ($530 million pre-tax), non-cash charge for the write-down of certain investments, principally securities of Furnishings International Inc. The year 2000 includes a $94 million after-tax ($145 million pre-tax), non-cash charge for the planned disposition of businesses and the write-down of certain investments. Based on shareholders’ equity as of the beginning of the year. OPERATING PROFIT AS A PERCENT OF NET SALES1, 2 20043 As reported Before general corporate expense As reconciled 1 2 20034 14.0% 15.1% 14.9% 20025 14.3% 15.5% 17.0% 20016 13.1% 14.4% 15.5% 20006 13.6% 15.2% 16.1% 13.0% 14.6% 15.7% Amounts have been restated to exclude discontinued operations. General corporate expense is reported in Note P to the Consolidated Financial Statements contained in our Annual Report on Form 10-K included herein. The year 2004 includes a non-cash, pre-tax goodwill impairment charge of $168 million and pre-tax income of $30 million related to the Behr litigation settlement. 3 MASCO COMMON SHARE MARKET PRICE—P/E RATIO Market Price High Low $37.02 28.44 29.43 26.94 27.00 $25.88 16.59 17.25 17.76 14.50 Earnings Per Common Share1 $2.04 1.61 1.06 .39 1.20 Price/ Earnings Ratio High Low 18 18 28 69 23 – – – – – 13 10 16 46 12 4 The year 2003 includes a non-cash, pre-tax goodwill impairment charge of $53 million and pre-tax income of $72 million related to the Behr litigation settlement. The year 2002 includes a pre-tax net charge of $147 million for the Behr litigation settlement, and pre-tax income of $16 million related to the planned disposition of a business. Operating profit for 2001 and 2000 includes goodwill amortization expense of $87 million and $60 million, respectively. Year 2004 2003 2002 2001 2000 1 5 6 Amounts are calculated using income from continuing operations and have been restated to exclude discontinued operations. 28 ~ Masco Corporation
Slide 31: Corporate Leadership DIRECTORS DENNIS W. ARCHER4 Chairman Dickinson Wright PLLC, a law firm Director since 2004 CORPORATE OFFICERS AND OPERATING EXECUTIVES WILLIAM T. ANDERSON Vice President–Controller European Operations JOHN R. LEEKLEY Senior Vice President and General Counsel RONALD W. AYERS Group President RICHARD A. MANOOGIAN Chairman of the Board and Chief Executive Officer THOMAS G. DENOMME1, 3, 4 Retired Vice Chairman and Chief Administrative Officer Chrysler Corporation Director since 1998 ALAN H. BARRY President and Chief Operating Officer KAREN R. MENDELSOHN Vice President–Sales and Marketing PETER A. DOW 1, 2 Retired Vice Chairman, Chief Operating Officer and Executive Committee Chairman Campbell-Ewald, an advertising company Director since 2001 DR. LILLIAN BAUDER Vice President DONALD J. MILROY Group Vice President JOHN C. CALKINS Vice President–Corporate Services JERRY W. MOLLIEN Vice President–Corporate Taxes ANTHONY F. EARLEY, JR.1, 4 Chairman, Chief Executive Officer, President and Chief Operating Officer DTE Energy Company Director since 2001 THOMAS N. CHIEFFE Group Vice President RICHARD G. MOSTELLER Vice President and Senior Financial Advisor SAMUEL A. CYPERT Vice President–Investor Relations VERNE G. ISTOCK 1, 2, 4 SHARON J. ROTHWELL Vice President-Corporate Affairs Retired Chairman/President Bank One Corporation Director since 1997 DONALD J. DEMARIE, JR. Group President ROBERT B. ROSOWSKI Vice President and Treasurer DAVID L. JOHNSTON2, 4 President and Vice Chancellor of the University of Waterloo in Ontario, Canada Director since 2003 WAYNE DEVINE Group Vice President BARRY J. SILVERMAN Vice President–Associate General Counsel DAVID A. DORAN Vice President–Taxes JOHN G. SZNEWAJS Vice President–Business Development J. MICHAEL LOSH1 Interim Chief Financial Officer Cardinal Health, Inc. Director since 2003 CHARLES A. DOWD, JR. Group President DANIEL R. FOLEY Vice President–Human Resources DAVID W. VAN HISE Vice President–International WAYNE B. LYON Retired Chairman LifeStyle Furnishings International Ltd. Director since 1988 JERRY VOLAS Group Vice President LAU FRANDSEN President–Masco Europe THOMAS VOSS Executive Vice President–Europe RICHARD A. MANOOGIAN 3 EUGENE A. GARGARO, JR. Vice President and Secretary Chairman of the Board and Chief Executive Officer Masco Corporation Director since 1964 TED GOOLD Group Vice President TIMOTHY WADHAMS Senior Vice President and Chief Financial Officer MARY ANN VAN LOKEREN 2, 4 Chairman and Chief Executive Officer Krey Distributing Company, a beverage distribution firm Director since 1997 CLAY H. KIEFABER Group Vice President ALFONS WALDER Group Vice President LARRY J. LA BO Vice President–Controller North American Operations JOHN C. WILLS Group President 1 2 3 4 Member of Audit Committee Member of Organization and Compensation Committee Member of Executive Committee Member of Corporate Governance and Nominating Committee 2004 Annual Report ~ 29
Slide 32: BUILDING A DYNAMIC FUTURE Division Operating Executives ALLAN ABRAMS VASKEN ALTOUNIAN OLE LUND ANDERSEN A. JAMES ARUFFO ROBERT BALL MARC BICKLER NICHOLAS BILLIG FRANK BUSAM ROGER A. CARLSON JEFFREY D. FILLEY KLAUS GROHE STEVEN M. HAMMOCK LARRY B. HIGGINS DAVID B. HUMENIK ECKHARD KEILL STANLEY G. KORTE STEVE LEE JOSEPH MAHON NICHOLAS MATTEN JIM McCARTHY REINHARD METZGER MARK MOORE JAN NUYTS DOMINIC PRIMUCCI STEVEN P. RAIA RENZO RASTELLI BASTIAN SCHAEFER WILLIAM F. SCHMIDT RONALD D. SMITH JAMES J. SWEENEY, JR. TODD TALBOT DONALD K. WOODY CERTIFICATIONS Richard A. Manoogian and Timothy Wadhams have provided certifications to the Securities and Exchange Commission as required by Section 302 of the Sarbanes-Oxley Act of 2002. These certifications are included as Exhibits 31.a and 31.b to the Company’s Form 10-K for the year ended December 31, 2004. As required by the New York Stock Exchange (NYSE), on May 25, 2004, Richard A. Manoogian submitted the annual CEO certification to the NYSE that stated he was not aware of any violation by the Company of the NYSE corporate governance listing standards. RESPONSIBILITY FOR FINANCIAL STATEMENTS Management is responsible for the fairness and integrity of the Company’s consolidated financial statements. In order to meet this responsibility, management maintains formal policies and procedures that are consistent with high standards of accounting and administrative practices, which are regularly communicated within the organization. In addition, management maintains a program of internal auditing within the Company to examine and evaluate the adequacy and effectiveness of established internal controls as related to Company policies, procedures and objectives. The accompanying report of the Company’s independent registered public accounting firm states their opinion on the Company’s consolidated financial statements, management’s assessment of internal controls over financial reporting, and the effectiveness of internal controls over financial reporting, based on audits conducted in accordance with auditing standards established by the Public Company Accounting Oversight Board. The Audit Committee of the Board of Directors meets periodically with both management and the independent registered public accounting firm to provide oversight with respect to the Company’s financial reporting process and system of internal controls. 30 ~ Masco Corporation
Slide 33: Information for Shareholders COMPANY PROFILE Masco Corporation is one of the world’s largest manufacturers of brand-name consumer products for the home and family. The Company is also a leading provider of services that include the sale and installation of insulation and other building products. Our products include faucets, kitchen and bath cabinets, architectural coatings (paints and stains), bath and shower units, spas and hot tubs, showering and plumbing specialties, windows and electronic locksets and other hardware. The Company has approximately 6,300 shareholders of record and 62,000 employees. Masco’s principal manufacturing facilities are located throughout the United States. International operations are primarily located in Europe. and optional cash payments regarding the Plan should be sent to: The Bank of New York Dividend Reinvestment Department P.O. Box 1958 Newark, NJ 07101-1958 Duplicate Mailings Shares owned by one person, but held in different forms of the same name (e.g., John Smith, John B. Smith, J.B. Smith), may result in duplicate mailings of shareholder information at added expense to the Company. Please notify The Bank of New York by calling 800-5244458 in order to eliminate such duplication. Multiple shareholders who reside at one address and hold their shares through a bank or broker may receive only one Annual Report and Proxy Statement. This “householding” procedure reduces duplicate mailings and Company expenses. Shareholders who wish to opt out of householding should contact their bank or broker. EXECUTIVE OFFICES Masco Corporation 21001 Van Born Road Taylor, MI 48180 Phone: 313-274-7400 Fax: 313-792-4177 Other Inquiries All other shareholder inquiries, including those regarding lost, stolen or destroyed stock certificates, should be directed to: The Bank of New York Shareholder Relations Department P.O. Box 11258 Church Street Station New York, NY 10286 800-524-4458 E-Mail Address: shareowners@bankofny.com INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP 400 Renaissance Center Detroit, MI 48243 STOCK EXCHANGE INFORMATION Masco Corporation common stock is traded on the New York Stock Exchange under the symbol MAS. TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT Answers to many of your shareholder questions and requests for forms are available by visiting The Bank of New York’s web site at www.stockbny.com. INTERNET Current information on Masco Corporation can be found by visiting our home page on the Internet at www.masco.com. Transfer and Address Changes Send certificates for transfer and address changes to: The Bank of New York Receive and Deliver Department P.O. Box 11002 Church Street Station New York, NY 10286 INVESTOR RELATIONS CONTACT Additional information about the Company is available without charge to shareholders who direct a request to: Samuel A. Cypert Vice President–Investor Relations Masco Corporation 21001 Van Born Road Taylor, MI 48180 Dividend Reinvestment Plan Masco Corporation has appointed The Bank of New York to serve as agent for its Dividend Reinvestment Plan. All enrollments, terminations, sales, requests for certificates ANNUAL MEETING OF SHAREHOLDERS The 2005 Annual Meeting of Shareholders of Masco Corporation will be held at the executive offices of the Company on May 10, 2005 at 10:00 a.m., E.D.T.
Slide 34: m Masco Corporation 21001 Van Born Road Taylor, MI 48180 313.274.7400 www.masco.com