masco annua lreport2005

Masco Corporation Annual Report 2005

Masco Corporation21001 Van Born Road

Taylor, MI 48180313.274.7400

www.masco.com

Masco

Corporation

AnnualR

eport2005

Building Solutions

On the CoverBuilding Solutions is a strategy that is built on aunique value proposition that is end-user drivenand focuses on continual differentiation basedon understanding our customers and marketopportunities. Masco Corporation is “BuildingSolutions” for our customers through innova-tion to increase shareholder value. The fivebuilding blocks represent our products andservices segments.

TABLE OF CONTENTSFinancial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . 2Our Products and Services Segments

Cabinets and Related Products . . . . . . . . . . . . . . 4Plumbing Products . . . . . . . . . . . . . . . . . . . . . . . . 5Installation and Other Services . . . . . . . . . . . . . . 6Decorative Architectural Products . . . . . . . . . . . 7Other Specialty Products . . . . . . . . . . . . . . . . . . . 8

Financial Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Building Solutions for Our Customers

New Construction . . . . . . . . . . . . . . . . . . . . . . . . 11Home Improvement . . . . . . . . . . . . . . . . . . . . . . 11Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Building Solutions Through Innovation . . . . . . . . . 15Building Solutions to Increase Shareholder Value

Shareholder Returns . . . . . . . . . . . . . . . . . . . . . . 17Financial Highlights . . . . . . . . . . . . . . . . . . . . . . 18Corporate Responsibility and Governance . . . . 19Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Corporate Leadership . . . . . . . . . . . . . . . . . . . . . . . . 22Certifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Forty-Nine Years of Sales Growth . . . . . . . . . . . . . . 24Form 10-KInformation for Shareholders . . . . Inside Back Cover

FORWARD-LOOKING STATEMENTSOur Annual Report to Shareholders containsstatements reflecting our views about theCompany’s future performance. These state-ments are “forward-looking statements” underthe Private Securities Litigation Reform Act of1995. Actual results may differ materially fromthe results discussed in such forward-lookingstatements. For an explanation of various factorsthat may affect our performance, readers shouldrefer to the “Risk Factors” section of our AnnualReport on Form 10-K included herein, as well as the comment at the beginning of“Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”in that Report. The Company undertakes noobligation to update any forward-looking state-ments, whether as a result of new information,future events or otherwise.

NON-GAAP DISCLOSUREThe Company believes that certain non-GAAP(Generally Accepted Accounting Principles) performance measures and ratios, used in managing the business, may provide users ofthis financial information with additional meaningful comparisons between current resultsand results in prior periods of ongoing opera-tions. Non-GAAP performance measures andratios should be viewed in addition to, and not as an alternative for, the Company’sreported results under accounting principlesgenerally accepted in the United States.

Information for ShareholdersCOMPANY PROFILEMasco Corporation is one of the world’s largest man-ufacturers of brand-name consumer products for thehome improvement and new construction markets.The Company is also a leading provider of servicesthat include the sale and installation of insulation andother building products.

Our products include faucets, kitchen and bath cabi-nets, architectural coatings (paints and stains), bathand shower units, spas, showering and plumbingspecialties, windows and electronic locksets and otherhardware.

The Company has approximately 62,000 employeesand over 120 manufacturing facilities. Masco’s princi-pal manufacturing facilities are located throughoutthe United States. International operations are locatedprimarily in Europe.

EXECUTIVE OFFICESMasco Corporation21001 Van Born RoadTaylor, MI 48180Phone: 313-274-7400, Fax: 313-792-4177

INDEPENDENT REGISTERED PUBLICACCOUNTING FIRMPricewaterhouseCoopers LLPPricewaterhouseCoopers Plaza1900 St. AntoineDetroit, MI 48226-2263

STOCK EXCHANGE INFORMATIONMasco Corporation’s common stock is traded on theNew York Stock Exchange under the symbol MAS.

TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENTAnswers to many of your shareholder questions andrequests for forms are available by visiting The Bankof New York’s web site at www.stockbny.com.

Transfer and Address ChangesSend certificates for transfer and address changes to:The Bank of New YorkReceive and Deliver DepartmentP.O. Box 11002New York, NY 10286-1002

Dividend Reinvestment PlanMasco Corporation has appointed The Bank of NewYork to serve as agent for its Dividend ReinvestmentPlan. All enrollments, terminations, sales, requests

for certificates and optional cash payments regardingthe Plan should be sent to:

The Bank of New YorkDividend Reinvestment DepartmentP.O. Box 1958Newark, NJ 07101-1958

Duplicate MailingsShares owned by one person, but held in differentforms of the same name (e.g., John Smith, John B. Smith,J.B. Smith), may result in duplicate mailings of share-holder information at added expense to the Company.

Please notify The Bank of New York by calling 800-524-4458 in order to eliminate such duplication.

Multiple shareholders who reside at one address andhold their shares through a bank or broker may receiveonly one Annual Report and Proxy Statement. This“householding” procedure reduces duplicate mailingsand Company expenses. Shareholders who wish to optout of householding should contact their bank or broker.

Other InquiriesAll other shareholder inquiries, including thoseregarding lost, stolen or destroyed stock certificates,should be directed to:The Bank of New YorkInvestor Services DepartmentP.O. Box 11258New York, NY 10286-1258Phone: 800-524-4458 (in the U.S.)

212-815-3700 (outside of the U.S.)888-269-5221 (hearing inpaired-TTY phone)

E-Mail Address: [email protected]

INTERNET CONTACTCurrent information about Masco Corporation can be found by visiting our home page on the Internet at www.masco.com or via e-mail at [email protected].

INVESTOR RELATIONS CONTACTAdditional information about the Company is avail-able without charge to shareholders who direct arequest to:Maria C. DueyVice President–Investor RelationsMasco Corporation21001 Van Born RoadTaylor, MI 48180

ANNUAL MEETING OF SHAREHOLDERSThe 2006 Annual Meeting of Shareholders of MascoCorporation will be held at the executive offices ofthe Company on May 9, 2006 at 10:00 a.m., E.D.T.

Masco AR Cover 3/6/06 5:34 PM

2005 Masco Corporation Annual ReportBuilding Solutions 1

Dollars In Millions Except Per Common Share Data

49-Year 5-Year 2005Growth Growth vs

Rate Rate 2004 2005 2004 2000 1956

Net Sales 16% 15% 7% $12,642 $11,850 $ 6,388 $ 11

Operating Profit 1, 2 16% 13% -1% $ 1,577 $ 1,592 $ 867 $ 1

Income from Continuing Operations 1, 2, 3 17% 11% -8% $ 872 $ 949 $ 527 $ 0

Income from Continuing Operationsas a % of Net Sales 7% 8% 8% 4%

Per Common Share Data:

Income from ContinuingOperations 14% 12% -2% $ 2.03 $ 2.08 $ 1.17 $0.005/16

Cash Dividends Paid 16% 10% 18% $ 0.78 $ 0.66 $ 0.49 $0.001/16

Amounts exclude discontinued operations.

1 The year 2005 includes a non-cash goodwill impairment charge of $69 million after tax ($69 million pre-tax) and income of $4 million aftertax ($6 million pre-tax) related to the Behr litigation settlement.

2 The year 2004 includes a non-cash goodwill impairment charge of $104 million after tax ($112 million pre-tax) and income of $19 million aftertax ($30 million pre-tax) related to the Behr litigation settlement.

3 The year 2000 includes a non-cash charge of $94 million after tax ($145 million pre-tax) for the planned disposition of businesses and thewrite-down of certain investments.

Financial Highlights

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2005 Masco Corporation Annual Report2 Building Solutions

Building Solutions

Business consolidations, together with divesti-tures, have reduced our business units from 67 inearly 2003 to less than 40 at year-end 2005.

While these initiatives resulted in additionalcosts and charges in 2005 and will result in costsand charges in 2006, we believe that theseactions will have reduced annual costs by $200million by the end of 2007 and will improve theCompany’s long-term earnings outlook.

Going forward, we are greatly encouraged bythe “Building Solutions” that Masco has devel-oped. Building Solutions is a strategy that isbuilt on a unique value proposition that is end-user driven and focuses on continual differenti-ation based on understanding our customersand market opportunities. We continue to exe-cute our strategic plan by Building Solutions forour customers through innovative products,services and processes to increase shareholdervalue.

We are committed to growing with all of ourcustomers by Building Solutions to meet theirneeds. Our added focus on the installation sideof our business creates growth as we offer bothproducts and installation services on a nationalscale for our builder customers. Our capabilitieshave expanded to allow us to offer paint, win-dows and cabinets as part of the installationprocess. Providing both our builder and retailercustomers with consumer-desired products, aswell as other value-added solutions such asconsumer research aimed at converting shop-pers into buyers, remains a top priority.

To Our Shareholders:We are pleased to report that, once again, MascoCorporation achieved record sales in 2005 andthat our share price reached an all-time highearly in the year. It is disappointing, though, toreport that our 2005 earnings did not meet ourinitial expectations. After achieving record salesand income in 2004, it was our goal to continuethat trend. However, in 2005, along with manyother companies, we were adversely affected bysignificant and unanticipated increases in com-modity and raw materials costs.

Energy costs such as oil and natural gas reachedrecord heights last year, compounded by theimpact of the closure of several refineries due tothe tragic Gulf Coast hurricanes. At the sametime, the costs of raw materials including fiber-glass insulation, copper, resins and titaniumdioxide (a key component of paint), alsoincreased to unprecedented levels. We believethat we will offset a great majority of these costincreases by the end of the first half of 2006. Thelag time in implementing selling price increaseswith larger customers in 2005, however, resultedin profit and margin loss this past year.

In addition to implementing price increases, weare addressing these escalating costs throughrestructuring, consolidation, manufacturingrationalization, headcount reductions and otherprofit improvement programs, including sourc-ing from emerging markets in Asia.

During 2005, we consolidated a number of ourbusinesses to leverage synergies, share best prac-tices and reduce costs where possible. We alsodivested companies that did not fit strategically.


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ALAN H. BARRYPresident and Chief Operating Officer

RICHARD A. MANOOGIANChairman of the Board and

Chief Executive Officer

Building Solutions through innovation, we placegreat emphasis on new product and processdevelopment and have established incentiveprograms with additional funding towards thiseffort. You will see many of these outstandingnew products later in this report.

We believe that over 90 percent of our sales arefrom products enjoying a leadership position intheir respective market niches—providing ourcustomers with the market and brand strengthnecessary to remain competitive.

We continue to focus on enhancing BuildingSolutions to increase shareholder value. In 2005,we returned $1.3 billion to shareholders throughshare repurchases (31 million common shares) anddividends. We also increased our dividend by 11percent, making 2005 the 47th consecutive yearin which dividends have been increased.

We recognize that in today’s highly competitiveglobal economy, we must continually review ourstrategies and businesses to maintain an edgeover our competitors and remain important toour customers. We are placing significantemphasis on growing our talent base, providingtop-flight leadership programs to hone the skillsand advance the capabilities of our future lead-ers. We are confident that we are building theright solutions and the right management teamto further strengthen our leading positions in theglobal marketplace.

We are proud of the many achievements thatour Company made in 2005. As we work toachieve our goals moving forward, we want torecognize the commitment and contributions ofour more than 60,000 employees, who continueto play a vital role in Masco Corporation’s ongoing success.

Richard A. ManoogianChairman of the Board and Chief Executive Officer

Alan H. BarryPresident and Chief Operating Officer


Cabinets and Related Products

The Cabinets and Related Products segmentincludes assembled and ready-to-assemble kitchen and bath cabi-nets; home office workstations; entertainment centers; storage prod-ucts; bookcases; and kitchen utility products. The Company believesthat it is the largest U.S. manufacturer of kitchen and bath cabinetry,offering approximately 300 styles in more than 20 product lines.

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Plumbing Products

The Plumbing Products segment includes faucets;plumbing fittings and valves; showerheads and hand showers;bathtubs and shower enclosures; and spas. Masco is a world leader inthe manufacture of plumbing products.

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Installation and Other Services

The Installation and Other Services segmentincludes the sale and installation principally of insulation as well ascabinetry, fireplaces, gutters, garage doors, bath accessories, shelving,windows and paint. Masco provides a variety of installation servicesfor homebuilders across North America.

®

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Decorative ArchitecturalProducts

The Decorative Architectural Products segmentincludes paints and stains; and door, window and other hardware.

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Other Specialty Products

The Other Specialty Products segment includeswindows, window frame components and patio doors; electroniclocksets; staple gun tackers, staples and other fastening tools; andhydronic radiators and heat convectors.

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Financial SummaryAmounts exclude discontinued operations.


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1 MERILLAT SUPERMODEL HOMERESEARCH

2 MASCO CONTRAC-TOR SERVICESBUILDLOGIXSM

3 BEHR PREMIUMSELECT™ PAINT

3

1

2

2

2


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Building Solutions for Our CustomersNew ConstructionThe single-family new home construction markethas been strong for well over a decade, withunderlying fundamentals supporting its futurevitality. Production builders, however, are nowfacing unprecedented challenges, includingaccess to land, labor and capital, as well as regu-latory constraints. Additionally, builders areattempting to develop brands, differentiate prod-ucts, streamline operations and create customersfor life, focusing on total customer satisfaction.

Masco is uniquely positioned to help meettoday’s challenges and partner with our buildercustomers to accomplish their objectives, there-by making us more integral to the basic opera-tions of their business. This unique capabilityoriginates from our position as more than just asupplier of products and services. We are aresource for brands, distribution and installationcapability, with the ability to customize ourapproach to support each of our customers’ spe-cific value propositions and priorities. In short,Masco is valued as a solutions provider by ourcustomers in this channel.

Building Solutions for our new construction cus-tomers include:

• BuildLogixSM is a value-integration processdeveloped by Masco Contractor Services(MCS) to eliminate supply-chain waste andinefficiency, reduce builder cycle times andimprove builder customer satisfaction. TheBuildLogix program defines the sequencing ofproducts and processes in the build cycle withthe goal of increasing Masco’s involvement invarious stages of the construction process.

• Behr Process Corporation, together with MCS,introduced Behr Premium Select™, a new line ofpremium paints exclusively formulated forapplication in single-family new home construc-tion. MCS will offer Behr Premium Select paintas a new installation service for homebuilders.

• Merillat is completing phase two of its SuperModel Home Research. This research providesbuilders with statistically significant anddetailed information about what consumersare looking for in their new homes and whatfeatures are most likely to convert shoppersinto buyers.

Home ImprovementBig box retailers, mass merchandisers, traditionalhome centers, local hardware stores and specialtyretailers and dealers are all competing for agreater share of the consumer’s disposableincome. Consumers are demanding more fromtheir home improvement and repair experience inexchange for their discretionary income.Moreover, as many of the players in the homeimprovement market strive to attract the same target audience, distinctions among the retail for-mats begin to blur, creating consumer confusion.

Success in the home improvement market isdependent on a clear strategic focus that pro-vides an understanding of the breadth anddepth of products, services and experiences thatwill delight the “right” consumer and build

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retailer brand loyalty. Masco’s extensive “good,better, best” product portfolio and broad distri-bution, in combination with the complementarynature of our brands, products and services,enable us to drive meaningful differentiation toaddress the diverse segments of the homeimprovement market.

We also attribute our retail success to extensivetraining programs, conducted by Masco employees,including those that we have instituted in the paintand cabinet departments of certain of our keyretailer customers.

Building Solutions for our home improvementcustomers include:

• Masco’s recent BathScapes® program for amajor Canadian retailer created a total categorysolution for over 400 of their stores acrossCanada. Masco worked with this retailer toreduce the number of product suppliers for thebath section in its stores. According to theretailer, Masco was one of the few companiesin the world with the variety of products tobecome the primary supplier in this category.

• Based on extensive color, demographic andpsychographic research, Behr ProcessCorporation developed the Colores Origenes™

Color Palette to enhance a major retailer’sstrategic initiative to target Hispanic con-sumers. Colores Origenes, created and intro-duced in select markets, includes a unique colorpalette with color cards and support and training materials in Spanish.

ConsumersToday’s consumers are more discriminating anddiverse than at any other time in history.

Consumers will not accept look-alike products,lack of innovation and “joyless” shopping. Theyalso reject impersonal service and demand supe-rior quality. Customization is the ultimate con-sumer preference, with enough options toexcite, but not so many as to overwhelm theselection process.

At Masco, we believe that this ever-more-demanding consumer presents an opportunityfor us to create a competitive advantage for ourproducts and services. We do this by applyinginsights gained from researching and under-standing consumer demographics, attitudinaldata and life-stage and lifestyle preferences.Today’s consumer is more concerned about making their house fit the way they live and less concerned about its resale value. Their home andhome improvement shopping experience mustbe an expression of their values.

Building Solutions that we have provided forconsumers include:

• KraftMaid Cabinetry’s new Venicia™ series ofselectively distributed cabinets, offered at rea-sonable prices, combines the high-end appealof European styling with the practical func-tionality required by North American con-sumers. Venicia cabinets allow consumers tocustomize their own cabinetry solution, frompure minimalist to European transitional.

• Hansgrohe’s Phillipe Starck Collection buildson the success of its Axor Starck™ faucets byjoining with German kitchen-bath productmanufacturer Duravit in product development,cross-marketing and selling. The collaborationprovides consumers with a coordinated luxurybath offering, including tubs, lavatories andbidets, all part of the high-end Axor™ collection.

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1 HANSGROHEPHILLIPE STARCKCOLLECTION

2 BATHSCAPES®

3 BEHR COLORES ORIGENES™

4 KRAFTMAIDCABINETRY’S VENICIA™ SERIES

1

4

1

3

2

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1 MILGARD WINDOWSAND PATIO DOOR

2 DELTA BRIZO™

PASCAL™ CULINARYFAUCET

3 DELTA H2O KINET-ICS TECHNOLOGY™

4 HANSGROHE AXORFAUCET

5 BEHR NANOGUARD®

PAINT LAB

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3

2

5


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Building Solutions Through InnovationIn today’s crowded, complex and global marketplace, companies are finding it increas-ingly difficult to develop a competitive edge.Innovation—doing things differently and applying new ideas to real situations in order tocreate meaningful value for customers andshareholders—is critical to creating that edge.

Innovation involves people, passion, creativityand business savvy. Innovation requires under-standing customer and consumer needs and values, and then developing solutions thatimprove the customer/consumer experienceand our performance. Innovation is also a strategy—one that provides customers with acompelling reason to choose Masco and itsbrands.

Our employees bring tremendous creativity andenthusiasm to creating new solutions. The fol-lowing are just a few of our many outstandingproduct innovations:

• The Brizo™ Pascal™ culinary faucet with SmartTechnology, manufactured by Delta FaucetCompany, is the first faucet designed more as a kitchen “appliance.” It focuses on theactual art of cooking, improving efficiency andease-of-use. Combining hands-free and touch-control technology, water flow is activated by either “tapping” the faucet or using thehands-free option. The Pascal faucet isdesigned for commercial and residentialapplications, providing water conservationand hygiene benefits for professionals andconsumers alike.

• Behr’s kitchen and bath paint withNanoguard® technology is engineered forgreater toughness and moisture resistance in awaterborne latex coating by employing the lat-est advances in materials science. This productis designed to create a harder, more durablesurface that is resistant to water, mildew, stains,and grease in high traffic areas of the home.This product is available in over 2,000 shadesin the Sateen Lustre™ sheen featured in Behr’sPremium Plus® coating lines.

• Milgard Windows fabricates premium qualitywindows and patio doors utilizing fiberglassframes—a material with substantial structuraland thermal performance characteristics.While the exterior color finish is virtuallymaintenance-free, the fiberglass WoodClad™

product series presents a real wood veneeredinterior of elegant, clear vertical-grain DouglasFir. Milgard is also preparing to launch a newline of complex frame shapes by creating fiber-glass radius and arch-top window styles uti-lizing its own innovative proprietary process.


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1 KRAFTMAIDCABINETRY’SVENICIA™ SERIES

2 BRASSCRAFT®

PLUMBING FIXTURES ANDHANSGROHE™

FAUCET

3 NEWPORT BRASS®

FAUCET

2 3

1

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Building Solutions to Increase Shareholder ValueBehind Masco’s growth stands a strategic com-mitment to building greater shareholder value.We have demonstrated this commitmentthrough a variety of actions, including returning$3.6 billion to shareholders, through sharerepurchases and dividends, for the three-yearperiod ended December 31, 2005, increasing ourdividend for 47 consecutive years and continuingto review our corporate strategies and share-holder goals to build even better solutions as wemove forward.

In addition to our focus on achieving our finan-cial objectives for our shareholders, Masco hasalways strived to maintain the highest stan-dards of excellence, accountability and leader-ship. We’re proud of the programs that we havein place to encourage social responsibility—notonly at the corporate level but among our oper-ating companies as well.

Shareholder Returns• We continue to focus on initiatives that

enable the Company to create value for ourshareholders. Through a combination ofgrowth, share repurchases and dividends, webelieve that we will be able to achieve returnsof 12 to 15 percent a year, on average, for thenext several years.

Average Annual Return to ShareholdersOrganic Sales Growth 6-8%Share Repurchase 4-5%Cash Dividends 2%

Total 12-15%Assumes operating margins at 2005 levels.

SHARE REPURCHASES• The Company repurchased 31 million shares

of its common stock during 2005 and had 29 million common shares remaining atDecember 31, 2005 under the March 2005Board of Directors repurchase authorization of50 million shares.

• Masco repurchased 97 million common sharesin the last three years, representing approxi-mately 20 percent of our shares outstanding atthe beginning of this period.

CASH DIVIDENDS• The Company increased its quarterly divi-

dend in 2005 by 11 percent to $.20 from $.18per common share. The new quarterly divi-dend reflects the Company’s favorable long-term outlook, and strong balance sheet

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and cash flow, and makes 2005 the 47th consecutive year in which dividends wereincreased.

CASH RETURNED TO SHAREHOLDERS• In 2005 and 2004, the Company returned

$1.3 billion and $1.2 billion, respectively, toshareholders through share repurchases anddividends.

Financial Highlights• Net sales from continuing operations were a

record $12.6 billion, a seven percent increaseover the $11.9 billion that we achieved in 2004.Since the Company had no significant acquisi-tions during the past year, virtually all of thatincrease was from organic growth.

• Net sales from North American operations,accounting for 83 percent of the Company’ssales, increased eight percent to $10.5 billion in2005 from $9.7 billion in 2004. Net sales of $2.1billion from International operations, primarilyin Europe, increased one percent from 2004.

• Excluding the charges for goodwill impairment in 2005 and 2004, earnings from continuing operations in 2005 were $2.19 percommon share, compared with $2.31 per com-mon share in 2004.

• Operating profit margins, as reported, were12.5 percent in 2005 compared with 13.4 percent


in 2004. Excluding non-cash, pre-tax goodwillimpairment charges and income related to theBehr litigation settlement, operating profit mar-gins were 13.0 percent in 2005 compared with14.1 percent in 2004. Operating margins wereadversely impacted by increased commodity,freight, energy and other petroleum-basedcosts, as well as a less favorable product mix.

• Income from continuing operations for 2005,which was adversely impacted by increasedcosts, declined to $872 million compared with$949 million in 2004, including non-cash, after-tax charges for goodwill impairment of $69million and $104 million in 2005 and 2004,respectively. Earnings from continuing opera-tions were $2.03 per common share in 2005compared with $2.08 per common share in2004, including the non-cash, after-tax chargesfor goodwill impairment.

PROFIT IMPROVEMENT PROGRAMS• During 2005, our profit improvement initiatives

resulted in costs of approximately $30 millionand savings of approximately $40 million.

• The Company continues to reduce costs andadd value through sourcing from emergingmarkets, including Asia. We now have over1,300 employees and 400,000 square feet ofmanufacturing and distribution space inChina. Our Asian sourcing has grown from$200 million in 2003 to $450 million in 2004and in 2005 exceeded our goal of $550 million.We generally save 25 to 30 percent on productsand components that we source from Asia.

CAPITAL EXPENDITURES• Including discontinued operations, capital

expenditures were $282 million or 2.2 percentof sales in 2005 compared with $310 million or 2.5 percent of sales in 2004. Including dis-continued operations, depreciation and amor-tization expense was $241 million in 2005 compared with $237 million in 2004.

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CASH FLOW• In 2005, the Company achieved free cash flow

(defined as cash from operations less capitalexpenditures and before dividends) of over $1 billion, for the third consecutive year.

LIQUIDITY• The Company ended 2005 in a strong financial

position with over $2 billion in cash and mar-ketable securities, even after using $986 millionto repurchase common shares in 2005.

• In 2005, the Company generated $193 millionof cash from the net disposition of financialinvestments and $278 million from the net dis-position of certain businesses.

• During 2005, the Company issued $500 millionof fixed-rate 4.8% notes due 2015. TheCompany issued this debt to take advantage offavorable interest rates and in anticipation of$800 million of debt maturing in March 2006.

BALANCE SHEET• Working capital at December 31, 2005 (defined

as accounts receivable and inventories lessaccounts payable) improved to 15.9 percent ofsales from 16.8 percent a year earlier.

CAPITALIZATION• Debt as a percent of total capital was 49 per-

cent at December 31, 2005 compared with 44percent at December 31, 2004.

RETURN ON INVESTED CAPITAL (ROIC)• For the twelve months ended December 31,

2005 and 2004, return on invested capital (asreported) was 13.0 percent and 12.0 percent,respectively. We continue to believe that wewill approximate our goal of 15 percent ROICby the end of 2006 and 18 percent by 2010.

Corporate Responsibility and Governance• In late 2004, Masco published its first

Corporate Sustainability Report that wasintended to provide stakeholders with a meas-urement of our performance, a balanced andreasonable picture of Masco’s sustainabilitypractices, outcomes and activities as well asour track record in economic, environmentaland social responsibility.

• We also believe in supporting the communi-ties in which we live and operate. As a respon-sible corporate citizen, our Company, directlyand through the Masco Corporation

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Foundation, provides financial and productsupport to not-for-profit organizations thatpromote affordable housing, and cultural andother civic initiatives.

• During a year filled with natural disasters andhuman tragedy brought on by the Pacific RimTsunami and the multiple hurricanes thatimpacted America’s Gulf Coast, Masco wasproud to match employee gifts and respond tothe devastation directly with contributions ofcash and products for rebuilding communitiesand lives. The Foundation also aided the GulfCoast with funding directed to the AmericanRed Cross and the Hands On Network, amongothers, to assist with bringing volunteerresources and related support to the region.

• Masco’s Foundation also helped to rebuildlives through a variety of initiatives includingits major sponsorship of Habitat forHumanity’s® Jimmy Carter Work Project thatbuilt 250 homes for low-income familiesacross the State of Michigan during one weekin June.

• We continue to strengthen our Ethics Program.In 2005, we created a separate position ofCorporate Ethics Officer, expanded our train-ing programs and enhanced our hotline toreach employees worldwide. In addition, wecontinue to successfully advance ethics aware-ness, as evidenced by the promotion of ourhotline and our high on-line training comple-tion rates. We also introduced our on-lineethics training course in Chinese.

• Excluding the Company’s Chief ExecutiveOfficer, all Directors are independent underNew York Stock Exchange standards and allmembers of the Audit Committee,Organization and Compensation Committeeand Corporate Governance and NominatingCommittee are independent.

• We would especially like to thank our formerpresident, Wayne B. Lyon, who retired fromour Board of Directors last year, for his guid-ance and dedication during his many years ofvalued service to the Company.

LeadershipMasco’s greatest strength is its people. Westrongly believe that outstanding performanceis achieved by people who are provided theproper environment in which to excel and grow.We develop and recruit people who are able tocreatively apply their business knowledge with-in a highly competitive global industry. WhileMasco’s culture has evolved, the founding prin-ciples that value individual initiative, innova-tive management and maximum contributionhave not changed.

We are committed to continually identifyingand developing future generations of seniorleadership. Through Masco’s LeadershipProgram and Masters of BusinessAdministration (MBA) Program and other in-house programs, we contribute to the trainingand nourishing of our future leaders.

• The Masco Leadership Program, begun in2000 in partnership with Michigan StateUniversity’s Eli Broad School of Business, pro-vides key employees with a solid educationalfoundation, as well as a practical applicationof operational and leadership skills. Since itsinception, 150 employees, representingnumerous operating companies, have gradu-ated from this innovative program.

• The Masco MBA Program, developed in 1997,is dedicated to developing our high-potentialemployees to take on strategic leadership rolesthroughout the Masco family of companies.Since its inception, 137 employees have grad-uated from this program.

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31 MASCO MBA

PROGRAM

2 MASCO ON-LINEETHICS TRAINING

3 HABITAT FORHUMANITY®

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Corporate LeadershipWILLIAM T. ANDERSONVice President–ControllerCorporate Accounting

RONALD W. AYERSGroup President

GRAHAM BALLSVice President–ControllerEuropean Operations

ALAN H. BARRYPresident andChief Operating Officer

DR. LILLIAN BAUDERVice President

NICHOLAS BILLIGGroup Vice President

JOHN C. CALKINSVice President–Corporate Services

THOMAS N. CHIEFFEGroup Vice President

DONALD J. DEMARIE, JR.Group President

WAYNE DEVINEGroup Vice President

DAVID A. DORANVice President–Taxes

CHARLES A. DOWD, JR.Group President

MARIA C. DUEYVice President–Investor Relations

JEFFREY D. FILLEYGroup Vice President

DANIEL R. FOLEYVice President–Human Resources

LAU FRANDSENPresident–Masco Europe

EUGENE A. GARGARO, JR.Vice President and Secretary

TED GOOLDGroup Vice President

CLAY H. KIEFABERGroup President

LARRY J. LA BOVice President–ControllerNorth American Operations

JOHN R. LEEKLEYSenior Vice President andGeneral Counsel

RICHARD A. MANOOGIANChairman of the Board andChief Executive Officer

KAREN R. MENDELSOHNVice President–Sales and Marketing

DONALD J. MILROYGroup Vice President

JERRY W. MOLLIENVice President–Corporate Taxes

TIMOTHY J. MONTEITHVice President and Chief Information Officer

RICHARD G. MOSTELLERVice President andSenior Financial Advisor

SHARON J. ROTHWELLVice President–Corporate Affairs

JAI SHAHVice President–Strategic Planning

BARRY J. SILVERMANVice President–Associate General Counsel

JOHN G. SZNEWAJSVice President–CorporateDevelopment and Treasurer

DAVID W.VAN HISEVice President–International

JERRY VOLASGroup Vice President

THOMAS VOSSExecutive VicePresident–Europe

TIMOTHY WADHAMSSenior Vice President and Chief Financial Officer

JOHN C.WILLSGroup President

Corporate Officers and Operating Executives

1 Member of Audit Committee2 Member of Organization and Compensation Committee3 Member of Corporate Governance and Nominating Committee

Board ofDirectorsDENNIS W. ARCHER 1, 3

Chairman Dickinson Wright PLLC

THOMAS G. DENOMME 1, 3

Retired Vice Chairman andChief Administrative Officer Chrysler Corporation

PETER A. DOW 1, 2

Retired Vice Chairman, ChiefOperating Officer and ExecutiveCommittee ChairmanCampbell-Ewald

ANTHONY F. EARLEY, JR. 1, 3

Chairman, Chief ExecutiveOfficer, President and ChiefOperating Officer DTE Energy Company

VERNE G. ISTOCK 1, 2, 3

Retired Chairman and PresidentBank One Corporation

DAVID L. JOHNSTON 2, 3

President and Vice Chancellorof the University of Waterloo inOntario, Canada

J. MICHAEL LOSH 1

Retired Chief Financial Officerand Executive Vice PresidentGeneral Motors Corporation

RICHARD A. MANOOGIAN Chairman of the Board andChief Executive OfficerMasco Corporation

MARY ANN VAN LOKEREN 2, 3

Chairman and Chief Executive OfficerKrey Distributing Company

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Richard A. Manoogian and Timothy Wadhamshave provided certifications to the Securitiesand Exchange Commission as required bySection 302 of the Sarbanes-Oxley Act of 2002.These certifications are included as Exhibits31.a and 31.b to the Company’s Form 10-K forthe year ended December 31, 2005.

As required by the New York Stock Exchange(NYSE), on June 7, 2005, Richard A. Manoogiansubmitted the annual Chief Executive Officercertification to the NYSE that stated that he was not aware of any violation by theCompany of the NYSE corporate governancelisting standards.

Responsibility for Financial StatementsManagement is responsible for the fairness andintegrity of the Company’s consolidated finan-cial statements. In order to meet this responsi-bility, management maintains formal policiesand procedures that are consistent with highstandards of accounting and administrativepractices, which are regularly communicatedwithin the organization. In addition, manage-ment maintains a program of internal auditing

within the Company to examine and evaluatethe adequacy and effectiveness of establishedinternal controls as related to Company policies,procedures and objectives. The accompanyingreport of the Company’s IndependentRegistered Public Accounting Firm states theiropinion on the Company’s consolidated finan-cial statements, management’s assessment ofinternal controls over financial reporting andthe effectiveness of internal controls over financial reporting, based on audits conductedin accordance with the standards of the Public Company Accounting Oversight Board (United States).

The Audit Committee of the Board of Directorsmeets periodically with both management andthe independent registered public accountingfirm to provide oversight with respect to theCompany’s financial reporting process and system of internal controls.

Certifications

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Forty-Nine Years of Sales Growth

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On the CoverBuilding Solutions is a strategy that is built on aunique value proposition that is end-user drivenand focuses on continual differentiation basedon understanding our customers and marketopportunities. Masco Corporation is “BuildingSolutions” for our customers through innova-tion to increase shareholder value. The fivebuilding blocks represent our products andservices segments.

TABLE OF CONTENTSFinancial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . 2Our Products and Services Segments

Cabinets and Related Products . . . . . . . . . . . . . . 4Plumbing Products . . . . . . . . . . . . . . . . . . . . . . . . 5Installation and Other Services . . . . . . . . . . . . . . 6Decorative Architectural Products . . . . . . . . . . . 7Other Specialty Products . . . . . . . . . . . . . . . . . . . 8

Financial Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Building Solutions for Our Customers

New Construction . . . . . . . . . . . . . . . . . . . . . . . . 11Home Improvement . . . . . . . . . . . . . . . . . . . . . . 11Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Building Solutions Through Innovation . . . . . . . . . 15Building Solutions to Increase Shareholder Value

Shareholder Returns . . . . . . . . . . . . . . . . . . . . . . 17Financial Highlights . . . . . . . . . . . . . . . . . . . . . . 18Corporate Responsibility and Governance . . . . 19Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Corporate Leadership . . . . . . . . . . . . . . . . . . . . . . . . 22Certifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Forty-Nine Years of Sales Growth . . . . . . . . . . . . . . 24Form 10-KInformation for Shareholders . . . . Inside Back Cover

FORWARD-LOOKING STATEMENTSOur Annual Report to Shareholders containsstatements reflecting our views about theCompany’s future performance. These state-ments are “forward-looking statements” underthe Private Securities Litigation Reform Act of1995. Actual results may differ materially fromthe results discussed in such forward-lookingstatements. For an explanation of various factorsthat may affect our performance, readers shouldrefer to the “Risk Factors” section of our AnnualReport on Form 10-K included herein, as well as the comment at the beginning of“Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”in that Report. The Company undertakes noobligation to update any forward-looking state-ments, whether as a result of new information,future events or otherwise.

NON-GAAP DISCLOSUREThe Company believes that certain non-GAAP(Generally Accepted Accounting Principles) performance measures and ratios, used in managing the business, may provide users ofthis financial information with additional meaningful comparisons between current resultsand results in prior periods of ongoing opera-tions. Non-GAAP performance measures andratios should be viewed in addition to, and not as an alternative for, the Company’sreported results under accounting principlesgenerally accepted in the United States.

Information for ShareholdersCOMPANY PROFILEMasco Corporation is one of the world’s largest man-ufacturers of brand-name consumer products for thehome improvement and new construction markets.The Company is also a leading provider of servicesthat include the sale and installation of insulation andother building products.

Our products include faucets, kitchen and bath cabi-nets, architectural coatings (paints and stains), bathand shower units, spas, showering and plumbingspecialties, windows and electronic locksets and otherhardware.

The Company has approximately 62,000 employeesand over 120 manufacturing facilities. Masco’s princi-pal manufacturing facilities are located throughoutthe United States. International operations are locatedprimarily in Europe.

EXECUTIVE OFFICESMasco Corporation21001 Van Born RoadTaylor, MI 48180Phone: 313-274-7400, Fax: 313-792-4177

INDEPENDENT REGISTERED PUBLICACCOUNTING FIRMPricewaterhouseCoopers LLPPricewaterhouseCoopers Plaza1900 St. AntoineDetroit, MI 48226-2263

STOCK EXCHANGE INFORMATIONMasco Corporation’s common stock is traded on theNew York Stock Exchange under the symbol MAS.

TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENTAnswers to many of your shareholder questions andrequests for forms are available by visiting The Bankof New York’s web site at www.stockbny.com.

Transfer and Address ChangesSend certificates for transfer and address changes to:The Bank of New YorkReceive and Deliver DepartmentP.O. Box 11002New York, NY 10286-1002

Dividend Reinvestment PlanMasco Corporation has appointed The Bank of NewYork to serve as agent for its Dividend ReinvestmentPlan. All enrollments, terminations, sales, requests

for certificates and optional cash payments regardingthe Plan should be sent to:

The Bank of New YorkDividend Reinvestment DepartmentP.O. Box 1958Newark, NJ 07101-1958

Duplicate MailingsShares owned by one person, but held in differentforms of the same name (e.g., John Smith, John B. Smith,J.B. Smith), may result in duplicate mailings of share-holder information at added expense to the Company.

Please notify The Bank of New York by calling 800-524-4458 in order to eliminate such duplication.

Multiple shareholders who reside at one address andhold their shares through a bank or broker may receiveonly one Annual Report and Proxy Statement. This“householding” procedure reduces duplicate mailingsand Company expenses. Shareholders who wish to optout of householding should contact their bank or broker.

Other InquiriesAll other shareholder inquiries, including thoseregarding lost, stolen or destroyed stock certificates,should be directed to:The Bank of New YorkInvestor Services DepartmentP.O. Box 11258New York, NY 10286-1258Phone: 800-524-4458 (in the U.S.)

212-815-3700 (outside of the U.S.)888-269-5221 (hearing inpaired-TTY phone)

E-Mail Address: [email protected]

INTERNET CONTACTCurrent information about Masco Corporation can be found by visiting our home page on the Internet at www.masco.com or via e-mail at [email protected].

INVESTOR RELATIONS CONTACTAdditional information about the Company is avail-able without charge to shareholders who direct arequest to:Maria C. DueyVice President–Investor RelationsMasco Corporation21001 Van Born RoadTaylor, MI 48180

ANNUAL MEETING OF SHAREHOLDERSThe 2006 Annual Meeting of Shareholders of MascoCorporation will be held at the executive offices ofthe Company on May 9, 2006 at 10:00 a.m., E.D.T.

Masco AR Cover 3/6/06 5:34 PM Page 2

Masco Corporation Annual Report 2005

Masco Corporation21001 Van Born Road

Taylor, MI 48180313.274.7400

www.masco.com

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