Summary of MASCO CORP /DE/

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FIRST QUARTER 2009 VERSUS FIRST QUARTER 2008
                              SALES AND OPERATIONS
   The following table sets forth the Company's net sales and operating
(loss) profit margins by business segment and geographic area, dollars in
millions:

                                                            Three Months Ended             Percent (Decrease)
                                                                March 31,                       Increase
                                                          2009              2008              2009 vs. 2008
Net Sales:
Cabinets and Related Products                           $     395          $   596                (34%)
Plumbing Products                                             606              821                (26%)
Installation and Other Services                               317              486                (35%)
Decorative Architectural Products                             386              379                 2%
Other Specialty Products                                      115              168                (32%)

Total                                                   $   1,819          $ 2,450                (26%)


North America                                           $   1,434          $ 1,893                (24%)
International, principally Europe                             385              557                (31%)

Total                                                   $   1,819          $ 2,450                (26%)


                                                             Three Months Ended
                                                                  March 31,
                                                            2009              2008
Operating (Loss) Profit Margins: (A)
Cabinets and Related Products                                (7.1 %)           4.7 %
Plumbing Products                                             5.0 %           12.1 %
Installation and Other Services                             (11.4 %)          (1.2 %)
Decorative Architectural Products                            19.4 %           19.5 %
Other Specialty Products                                     (6.1 %)           4.8 %

North America                                                 1.3 %            7.9 %
International, principally Europe                             3.9 %            9.7 %
Total                                                         1.9 %            8.3 %
Operating (loss) profit margins, as reported                  (.4 %)           6.3 %

(A) Before general
corporate
expense, net,
of $33 million
and $43 million
for the three
months ended
March 31, 2009
and 2008,
respectively.
Before the
charge for
defined-benefit
plan
curtailment of
$8 million for
the three
months ended
March 31, 2009.

The Company reports its financial results in accordance with generally accepted accounting principles ("GAAP") in the United States. However, 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.

Table of Contents

                               MASCO CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
                                   NET SALES
   Net sales in the first quarter of 2009 decreased 26 percent from the
comparable period in 2008. Excluding results from acquisitions and the effect of
currency translation, net sales decreased 23 percent compared to 2008. The
following table reconciles reported net sales to net sales excluding
acquisitions and the effect of currency translation, in millions:

                                                                      Three Months Ended
                                                                          March 31,
                                                                     2009             2008
Net sales, as reported                                            $    1,819         $ 2,450
Acquisitions                                                              (6 )             -


Net sales, excluding acquisitions                                      1,813           2,450
Currency translation                                                      85               -


Net sales, excluding acquisitions and the effect of currency
translation                                                       $    1,898         $ 2,450

Net sales from North American operations decreased in the first quarter of 2009, primarily due to the continuing decline in the new home construction market, which reduced sales by approximately 14 percent compared to 2008 and a continued decline in consumer spending for home improvement products, which reduced sales by approximately 12 percent compared to 2008. North American net sales for the first quarter of 2009 were negatively affected by lower sales volume of installation and other services, certain plumbing products, cabinets, and windows and doors, as well as a less favorable product mix, partially offset by selling price increases.
In local currencies, net sales from International operations decreased in the first quarter of 2009 by approximately 18 percent compared to 2008, primarily due to lower sales volume of plumbing products, cabinets and windows. Net sales from International operations decreased due to a stronger U.S. dollar, which decreased International net sales by 13 percent. Such sales declines were partially offset by selling price increases of approximately three percent.
Net sales of Cabinets and Related Products decreased in the first quarter of 2009, due to lower sales volume of cabinets in the new home construction and retail markets, as well as a less favorable product mix, which, combined, reduced sales in this segment by approximately 31 percent compared to 2008. A stronger U.S. dollar decreased sales in this segment by three percent compared to 2008. In local currencies, net sales of International operations also reduced sales in this segment. Such sales declines were partially offset by selling price increases and acquisitions.
Net sales of Plumbing Products decreased in the first quarter of 2009, due to lower sales volume to North American retailers and wholesalers, as well as a less favorable product mix, which reduced sales by approximately 13 percent compared to 2008. In local currencies, net sales of International operations reduced sales in this segment by approximately ten percent compared to 2008. A stronger U.S. dollar decreased sales in this segment by seven percent compared to 2008. Such sales declines were partially offset by selling price increases.

Table of Contents

MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales of Installation and Other Services decreased in the first quarter of 2009, primarily due to significantly lower sales volume related to the continuing slowdown in the new home construction market.
Net sales of Decorative Architectural Products increased in the first quarter of 2009, primarily due to increased sales volume and late 2008 selling price increases related to paints and stains, which offset lower retail sales volume of builders' hardware.
Net sales of Other Specialty Products decreased in the first quarter of 2009, primarily due to lower sales volume of windows and doors related to the continuing slowdown in the new home construction market, particularly in the western United States, which decreased sales in this segment by approximately 20 percent compared to 2008. In local currencies, net sales of International operations reduced sales in this segment by approximately four percent compared to 2008. A stronger U.S. dollar decreased sales in this segment by six percent compared to 2008.
OPERATING MARGINS The Company's gross profit margin was 22.9 percent for the first quarter of 2009 compared with 25.7 percent for the comparable period in 2008. Selling, general and administrative expenses declined to $415 million in the first quarter of 2009 from $476 million in the first quarter of 2008; however, as a percentage of sales, such expenses were 22.8 percent for the first quarter of 2009 and 19.4 percent for the comparable period of 2008, reflecting lower sales volume and the related under-absorption of fixed costs. Selling, general and administrative costs also increased in 2009 due to increased severance and system implementation charges, as well as increased bad debt expense of $2 million, principally related to the new home construction market. The first quarter of 2009 operating margin was negatively affected by lower sales volume of the Company's products discussed above and increased material costs, partially offset by increased selling prices.
The Company has been focused on the strategic rationalization of its businesses, including business consolidations, plant closures, headcount reductions, system implementations and other initiatives. Operating
(loss) profit in the first quarter of 2009 and 2008 includes $24 million and $9 million, respectively, of costs and charges related to the Company's business rationalizations and other initiatives. During the first quarter of 2009, the Company closed two manufacturing facilities, reduced headcount by 3,000 employees and reduced installation branches by six locations. Based on current plans, the Company anticipates costs and charges related to the Company's business rationalizations and other initiatives to approximate $70 million in 2009. The Company continues to evaluate its businesses and may implement additional rationalization programs based on changes in the Company's markets which could result in further costs and charges. The operating loss in the Cabinets and Related Products segment for the first quarter of 2009 reflects lower sales volume in the new home construction and retail markets and the related under-absorption of fixed costs and a less favorable product mix which, on a combined basis, reduced operating margins by approximately nine percentage points compared to 2008. In 2009, operating margins were also negatively affected by increased bad debt expense and severance and plant closure costs.

Table of Contents

MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The decrease in operating profit margin in the Plumbing Products segment for the first quarter of 2009 reflects lower sales volume and a less favorable product mix, partially offset by increased selling prices.
The increase in operating loss in the Installation and Other Services segment for the first quarter of 2009 is primarily due to lower sales volume and the related under-absorption of fixed costs, as well as increased system implementation expenses.
The decrease in operating profit margin in the Decorative Architectural Products segment for the first quarter of 2009 is primarily due to higher material costs, which were partially offset by increased selling prices, as well as lower advertising costs related to builders' hardware.
The operating loss in the Other Specialty Products segment for the first quarter of 2009 reflects lower sales volume of windows and doors and the related under-absorption of fixed costs, as well as increased severance and plant closure costs.
OTHER INCOME (EXPENSE), NET In the first quarter of 2009, the Company recognized non-cash, pre-tax impairment charges aggregating $3 million related to financial investments in private equity funds.
Other, net, for the first quarter of 2009 included currency losses of $2 million.
In the first quarter of 2008, the Company recognized non-cash, pre-tax impairment charges aggregating $26 million related to financial investments in TriMas Corporation common stock ($22 million) and a private equity fund ($4 million).
Other, net, for the first quarter of 2008 included $3 million of realized losses, net, from the sale of marketable securities, and currency losses of $11 million.
Interest expense was $56 million for both the first quarter of 2009 and 2008.
(LOSS) INCOME AND (LOSS) EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS
(Loss) and diluted (loss) per common share from continuing operations for the first quarter of 2009 were $(81) million or $(.23) per common share compared with income of $18 million or $.04 per common share for the comparable period of 2008. In the first quarter of 2009, the Company incurred tax expense of $8 million on a pre-tax loss of $(66) million primarily due to an increase in the valuation allowance related to the net operating loss carryforward and losses in certain jurisdictions providing no tax benefit. The Company's effective tax rate for the three months ended March 31, 2008 was 57 percent, reflecting the repatriation of foreign earnings.
OTHER FINANCIAL INFORMATION The Company's current ratio was 1.8 to 1 and 2.1 to 1 at March 31, 2009 and December 31, 2008, respectively.

Table of Contents

MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three months ended March 31, 2009, cash of $48 million was used for operating activities. Cash used for financing activities was $98 million, and included $85 million for the payment of cash dividends and $11 million for the acquisition of Company common stock in open-market transactions to offset the dilutive impact of stock awards. Net cash used for investing activities was $38 million and included $27 million for capital expenditures and $8 million for the purchase of businesses, offset in part by $6 million of net proceeds from the sale of financial investments.
First quarter 2009 cash from operations was affected by an expected and annually recurring seasonal first quarter increase in accounts receivable compared with December 31, 2008.
The Company's cash and cash investments decreased to $813 million at March 31, 2009 from $1,028 million at December 31, 2008. The Company's cash and cash investments consist of overnight interest bearing money market demand and time deposit accounts, money market mutual funds and government securities. While the Company attempts to diversify these investments in a prudent manner to minimize risk, it is possible that the recent global turmoil in the financial markets could result in failures of additional financial institutions or other events and thereby affect the security or availability of these investments.
At March 31, 2009, the Five-Year Revolving Credit Agreement contains limitations on additional borrowings; the Company had additional borrowing capacity of up to $319 million. At March 31, 2009, the Five-Year Revolving Credit Agreement also contains a requirement for maintaining a certain level of net worth; the Company's net worth exceeded such requirement by $780 million.
At the Company's request, in late April 2009, the Company and its Bank Group modified the terms of its Five-Year Revolving Credit Facility, which expires February 2011. After reviewing its anticipated liquidity position, the Company requested that the maximum amount the Company could borrow under this facility be reduced to $1.25 billion from $2.0 billion; in addition, the debt to total capitalization ratio has been increased from 60 percent to 65 percent. The debt to total capitalization ratio and the minimum net worth covenant have also been amended to allow the add-back, if incurred, of up to the first $500 million of certain non-cash charges, including goodwill and other intangible asset impairment charges that would negatively impact shareholders' equity. As a result, under the terms of the Amended Credit Facility, the Company's borrowing capacity increased to $1.25 billion. The Company incurred approximately $2 million of fees and expenses associated with the Amendment. The Company, if the facility is utilized, will incur higher borrowing costs as a result of the Amendment.
The Company also announced the reduction of its quarterly dividend to $.075 per common share ($.30 per common share annually) from $.235 per common share ($.94 per common share annually).
The Company is subject to lawsuits and claims pending or asserted with respect to matters generally arising in the ordinary course of business. Note O to the condensed consolidated financial statements discusses certain specific claims pending against the Company.
The Company believes that its present cash balance, cash flows from operations and, to the extent necessary, bank borrowings and future financial market activities, are sufficient to fund its working capital and other investment needs.

Table of Contents

MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUTLOOK FOR THE COMPANY Business conditions remain difficult in the Company's markets. The Company estimates that 2009 housing starts will decline 40 percent to approximately 550,000 units. The Company also anticipates that consumer spending for home improvement products and demand for certain of the Company's International products will continue at depressed levels in the near-term.
Although the Company is confident that the long-term fundamentals for the new home construction and home improvement markets are positive, the Company expects that market conditions will be extremely challenging over the next several quarters, given the continued uncertainty in the global economic and financial markets. Accordingly, the Company will focus on liquidity preservation to ensure its ability to fund its business operations, growth opportunities that may arise and a relatively modest debt maturity due in early 2010.
The Company believes that its financial position (including cash of over $800 million at March 31, 2009, its ability to generate positive cash flow during 2009 and unused bank lines) together with its current strategy of investing in leadership brands, innovative growth and flexible and scalable supply chains, will allow the Company to drive long-term growth and create value for our shareholders.
FORWARD-LOOKING STATEMENTS Certain sections of this Quarterly Report contain statements reflecting the Company's views about its future performance and 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 actual results may differ materially from the results discussed in such forward-looking statements. Readers should consider that various factors, including those discussed in Item 1A, "Risk Factors," the "Executive Level Overview," and "Critical Accounting Policies and Estimates" sections in the Company's Annual Report on Form 10-K and its other filings with the Securities and Exchange Commission may affect the Company's performance. The Company undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise.

Table of Contents

MASCO CORPORATION