UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

o		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-5794

Masco Corporation

(Exact name of Registrant as Specified in its Charter)

Delaware		38-1794485
(State or Other Jurisdiction		(IRS Employer
of Incorporation)		Identification No.)

21001 Van Born Road, Taylor, Michigan		48180
(Address of Principal Executive Offices)		(Zip Code)

(313) 274-7400

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Smaller reporting company o		Non-accelerated filer o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Shares Outstanding at July 25, 2011
Common stock, par value $1.00 per share		357,900,000

 

 

MASCO CORPORATION

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets June 30, 2011 and December 31, 2010			1
Condensed Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2011 and 2010			2
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010			3
Consolidated Statements of Shareholders’ Equity June 30, 2011 and 2010			4
Notes to Condensed Consolidated Financial Statements			5-19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20-26
Item 4. Controls and Procedures			27
PART II. OTHER INFORMATION			28
Item 1. Legal Proceedings			28
Item 1A. Risk Factors			28
Item 6. Exhibits			29
Signature			30

MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

June 30, 2011 and December 31, 2010
(In Millions, Except Share Data)

		June 30,				December 31,
		2011				2010
ASSETS
Current assets:
Cash and cash investments		$	1,611			$	1,715
Receivables			1,188				888
Prepaid expenses and other			131				129
Inventories:
Finished goods			493				393
Raw material			307				246
Work in process			101				93
			901				732
Total current assets			3,831				3,464
Property and equipment, net			1,698				1,737
Goodwill			2,399				2,383
Other intangible assets, net			266				269
Other assets			224				287
Total assets		$	8,418			$	8,140
LIABILITIES
Current liabilities:
Notes payable		$	65			$	66
Accounts payable			921				602
Accrued liabilities			814				819
Total current liabilities			1,800				1,487
Long-term debt			4,027				4,032
Deferred income taxes and other			1,054				1,039
Total liabilities			6,881				6,558
Commitments and contingencies
EQUITY
Masco Corporation’s shareholders’ equity:
Common shares, par value $1 per share Authorized shares: 1,400,000,000; issued and outstanding: 2011 – 347,500,000; 2010 – 348,600,000			348				349
Preferred shares authorized: 1,000,000; issued and outstanding: 2011 – None; 2010 – None			—				—
Paid-in capital			37				42
Retained earnings			628				720
Accumulated other comprehensive income			302				273
Total Masco Corporation’s shareholders’ equity			1,315				1,384
Noncontrolling interest			222				198
Total equity			1,537				1,582
Total liabilities and equity		$	8,418			$	8,140

See notes to condensed consolidated financial statements.

MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

For the Three Months and Six Months Ended June 30, 2011 and 2010
(In Millions Except Per Common Share Data)
                 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net sales		$	2,022			$	2,048			$	3,794			$	3,900
Cost of sales			1,490				1,502				2,837				2,862
Gross profit			532				546				957				1,038
Selling, general and administrative expenses			441				427				845				841
Operating profit			91				119				112				197
Other income (expense), net:
Interest expense			(64	)			(67	)			(127	)			(125	)
Impairment charge for financial investments			—				(33	)			—				(33	)
Other, net			31				(3	)			52				(1	)
			(33	)			(103	)			(75	)			(159	)
Income before income taxes			58				16				37				38
Income tax expense			38				4				51				22
Net income (loss)			20				12				(14	)			16
Less: Net income attributable to noncontrolling interest			(12	)			(9	)			(24	)			(20	)
Net income (loss) attributable to Masco Corporation		$	8			$	3			$	(38	)		$	(4	)
Earnings (loss) per common share attributable to Masco Corporation:
Basic:
Net income (loss)		$	.02			$	.01			$	(.11	)		$	(.02	)
Diluted:
Net income (loss)		$	.02			$	.01			$	(.11	)		$	(.02	)
Amounts attributable to Masco Corporation:
Net income (loss)		$	8			$	3			$	(38	)		$	(4	)

See notes to condensed consolidated financial statements.

MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For the Six Months Ended June 30, 2011 and 2010
(In Millions)

		Six Months Ended
		June 30,
		2011				2010
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations		$	123			$	212
(Increase) in receivables			(293	)			(204	)
(Increase) in inventories			(151	)			(122	)
Increase in accounts payable and accrued liabilities, net			290				181
Net cash (for) from operating activities			(31	)			67
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt			—				2
Payment of debt			(2	)			(2	)
Credit Agreement costs			(1	)			(9	)
Issuance of Notes, net of issuance costs			—				494
Retirement of Notes			—				(359	)
Purchase of Company common stock			(30	)			(45	)
Dividend payment to noncontrolling interest			(18	)			(15	)
Cash dividends paid			(54	)			(54	)
Net cash (for) from financing activities			(105	)			12
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures			(67	)			(62	)
Proceeds from disposition of:
Marketable securities			49				—
Other financial investments			15				2
Property and equipment			10				6
Purchases of other financial investments			(6	)			—
Other, net			3				(13	)
Net cash from (for) investing activities			4				(67	)
Effect of exchange rate changes on cash and cash investments			28				(41	)
CASH AND CASH INVESTMENTS:
Decrease for the period			(104	)			(29	)
At January 1			1,715				1,413
At June 30		$	1,611			$	1,384

See notes to condensed consolidated financial statements.

MASCO CORPORATION and Consolidated Subsidiaries (Unaudited)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
for the periods ended June 30, 2011 and June 30, 2010

(In Millions, Except Per Share Data)

																		Accumulated
						Common												Other
						Shares				Paid-In				Retained				Comprehensive				Noncontrolling
		Total				($1 par value)				Capital				Earnings				Income				Interest
Balance, January 1, 2010		$	2,817			$	350			$	42			$	1,871			$	366			$	188
Net (loss) income			16												(4	)							20
Cumulative translation adjustments			(131	)															(100	)			(31	)
Unrealized (loss) on marketable securities, net of income tax benefit of $4			(8	)															(8	)
Unrecognized prior service cost and net loss, net of income tax of $1			4																4
Total comprehensive loss			(119	)
Shares issued			(1	)			1				(2	)
Shares retired:
Repurchased			(45	)			(3	)			(42	)
Surrendered (non-cash)			(5	)							(5	)
Cash dividends declared			(54	)											(54	)
Dividend payment to noncontrolling interest			(15	)																			(15	)
Stock-based compensation			30								30
Balance, June 30, 2010		$	2,608			$	348			$	23			$	1,813			$	262			$	162
Balance, January 1, 2011			1,582				349				42				720				273				198
Net (loss) income			(14	)											(38	)							24
Cumulative translation adjustments			80																62				18
Unrealized (loss) on marketable securities, net of income tax of $—			(38	)															(38	)
Unrecognized prior service cost and net loss, net of income tax of $—			5																5
Total comprehensive income			33
Shares issued			—				2				(2	)
Shares retired:
Repurchased			(30	)			(2	)			(28	)
Surrendered (non-cash)			(7	)			(1	)			(6	)
Cash dividends declared			(54	)											(54	)
Dividend payment to noncontrolling interest			(18	)																			(18	)
Stock-based compensation			31								31
Balance, June 30, 2011		$	1,537			$	348			$	37			$	628			$	302			$	222

See notes to consolidated financial statements.

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Organization Consolidation And Presentation Of Financial Statements Disclosure

A.

In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to present fairly its financial position as at June 30, 2011 and the results of operations for the three months and six months ended June 30, 2011 and 2010 and cash flows and shareholders’ equity for the six months ended June 30, 2011 and 2010. The condensed consolidated balance sheet at December 31, 2010 was derived from audited financial statements.

		Recently Issued Accounting Pronouncements
		Effective January 1, 2011, the Company adopted new accounting guidance which addresses how to determine whether a sales arrangement involves multiple deliverables or contains more than one unit of accounting, and how the sales arrangement consideration should be allocated among the separate units of accounting. The Company evaluated this new guidance and the adoption did not have an impact on the Company’s financial position or its results of operations.

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Goodwill And Intangible Assets Disclosure

B.

The changes in the carrying amount of goodwill for the six months ended June 30, 2011, by segment, were as follows, in millions:

		Gross Goodwill				Accumulated				Net Goodwill
		At				Impairment				At
		June 30, 2011				Losses				June 30, 2011
Cabinets and Related Products		$	590			$	(364	)		$	226
Plumbing Products			549				(340	)			209
Installation and Other Services			1,819				(762	)			1,057
Decorative Architectural Products			294				—				294
Other Specialty Products			980				(367	)			613
Total		$	4,232			$	(1,833	)		$	2,399

		Gross Goodwill				Accumulated				Net Goodwill
		At				Impairment				At								At
		Dec. 31, 2010				Losses				Dec. 31, 2010				Other (A)				June 30, 2011
Cabinets and Related Products		$	587			$	(364	)		$	223			$	3			$	226
Plumbing Products			536				(340	)			196				13				209
Installation and Other Services			1,819				(762	)			1,057				—				1,057
Decorative Architectural Products			294				—				294				—				294
Other Specialty Products			980				(367	)			613				—				613
Total		$	4,216			$	(1,833	)		$	2,383			$	16			$	2,399

Other indefinite-lived intangible assets were $186 million and $185 million at June 30, 2011 and December 31, 2010, respectively, and principally included registered trademarks. The carrying value of the Company’s definite-lived intangible assets was $80 million (net of accumulated amortization of $78 million) at June 30, 2011 and $84 million (net of accumulated amortization of $75 million) at December 31, 2010, and principally included customer relationships and non-compete agreements.

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Depreciation And Amortization Expense

C.

Depreciation and amortization expense was $137 million for both the six months ended June 30, 2011 and 2010.

Fair Value Disclosures

D.

The Company has maintained investments in available-for-sale securities and a number of private equity funds, principally as part of its tax planning strategies, as any gains enhance the utilization of any current and future tax capital losses. Financial investments included in other assets were as follows, in millions:

		June 30,				December 31,
		2011				2010
Auction rate securities		$	22			$	22
TriMas Corporation common stock			—				40
Total recurring investments			22				62
Private equity funds			101				106
Other investments			9				13
Total non-recurring investments			110				119
Total		$	132			$	181

The Company’s investments in available-for-sale securities at June 30, 2011 and December 31, 2010 were as follows, in millions:

						Pre-tax
						Unrealized				Unrealized				Recorded
		Cost Basis				Gains				Losses				Basis
June 30, 2011		$	19			$	3			$	—			$	22
December 31, 2010		$	22			$	40			$	—			$	62

Recurring Fair Value Measurements. Financial assets and (liabilities) measured at fair value on a recurring basis at each reporting period and the amounts for each level within the fair value hierarchy were as follows, in millions:

						Fair Value Measurements Using
						Quoted				Significant				Significant
						Market				Other				Observable
		June 30,				Prices				Inputs				Inputs
Unobservable		2011				(Level 1)				(Level 2)				(Level 3)
Auction rate securities		$	22			$	—			$	—			$	22
Total		$	22			$	—			$	—			$	22

						Fair Value Measurements Using
						Quoted				Significant				Significant
						Market				Other				Observable
		Dec. 31,				Prices				Inputs				Inputs
Unobservable		2010				(Level 1)				(Level 2)				(Level 3)
Auction rate securities		$	22			$	—			$	—			$	22
TriMas Corporation			40				40				—				—
Total		$	62			$	40			$	—			$	22

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note D — continued:

		The fair value of the auction rate securities held by the Company have been estimated, on a recurring basis, using a discounted cash flow model (Level 3 input). The significant inputs in the discounted cash flow model used to value the auction rate securities include: expected maturity of auction rate securities, discount rate used to determine the present value of expected cash flows and the assumptions for credit defaults, since the auction rate securities are backed by credit default swap agreements.
		The following tables summarize the changes in Level 3 financial assets measured at fair value on a recurring basis for the six months ended June 30, 2011 and the year ended December 31, 2010, in millions:

		Auction Rate
		Securities
Fair value January 1, 2011		$	22
Total losses included in earnings			—
Unrealized (losses)			—
Purchases			—
Settlements			—
Transfer from Level 3 to Level 2			—
Fair value at June 30, 2011		$	22

During 2010, the Company converted all of its holdings in Asahi Tec preferred stock into common stock, which was sold in its entirety in 2010 in open market transactions.

		Asahi Tec				Auction Rate
		Preferred Stock				Securities				Total
Fair value January 1, 2010		$	71			$	22			$	93
Total losses included in earnings			(28	)			—				(28	)
Unrealized losses			(23	)			—				(23	)
Purchases, issuances, settlements			—				—				—
Transfers from Level 3 to Level 2			(20	)			—				(20	)
Fair value at December 31, 2010		$	—			$	22			$	22

Non-Recurring Fair Value Measurements. For the six months ended June 30, 2011 and 2010, the Company did not measure any financial investments on a non-recurring basis, as there was no other-than-temporary decline in the estimated value of private equity funds. Financial investments measured at fair value on a non-recurring basis during 2010 and the amounts for each level within the fair value hierarchy were as follows, in millions:

						Fair Value Measurements Using
										Significant
						Quoted				Other				Significant
						Market				Observable				Unobservable				Total
		Dec. 31,				Prices				Inputs				Inputs				Gains
		2010				(Level 1)				(Level 2)				(Level 3)				(Losses)
Private equity funds		$	2			$	—			$	—			$	2			$	(4	)
Other private investments			—				—				—				—				(2	)
		$	2			$	—			$	—			$	2			$	(6	)

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note D — concluded:

		The Company did not have any transfers between Level 1 and Level 2 financial assets in the first six months of 2011 or in the full-year 2010.
		Income and impairment charges for financial investments were as follows, in millions:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Realized gains from:
TriMas Corporation common stock		$	27			$	—			$	41			$	—
Private equity funds			6				1				9				1
Total realized gains		$	33			$	1			$	50			$	1
Impairment charges:
Asahi Tec Preferred Stock		$	—			$	(28	)		$	—			$	(28	)
Private equity funds			—				(3	)			—				(3	)
Other private investments			—				(2	)			—				(2	)
Total impairment charges		$	—			$	(33	)		$	—			$	(33	)

The fair value of the Company’s short-term and long-term fixed-rate debt instruments is based principally upon quoted market prices for the same or similar issues or the current rates available to the Company for debt with similar terms and remaining maturities. The aggregate estimated market value of short-term and long-term debt at June 30, 2011 was approximately $4.1 billion, compared with the aggregate carrying value of $4.1 billion. The aggregate estimated market value of short-term and long-term debt at December 31, 2010 was approximately $4.2 billion, compared with the aggregate carrying value of $4.1 billion.

Derivative Instruments And Hedging Activities Disclosure

E.

During 2011 and 2010, the Company entered into foreign currency exchange contracts to hedge currency fluctuations related to intercompany loans denominated in non-functional currencies. At June 30, 2011, the Company had recorded (losses) of $(4) million on the foreign currency exchange contracts, which is partially offset by gains related to the translation of loans and accounts denominated in non-functional currencies. Gains (losses) related to these contracts are recorded in the Company’s consolidated statements of income in other income (expense), net. For the six months ended June 30, 2011 and 2010, the Company had recorded gains net of $— million and $5 million, respectively, related to these foreign currency exchange contracts. For the three months ended June 30, 2011 and 2010, the Company had recorded gains net of $4 million and $1 million, respectively, related to these foreign currency exchange contracts.

During 2011 and 2010, the Company, including certain European operations, also entered into foreign currency forward contracts to manage a portion of its exposure to currency fluctuations in the European euro and the U.S. dollar. Based upon period-end market prices, the Company had recorded liabilities of $2 million and $3 million to reflect contract prices at June 30, 2011 and December 31, 2010, respectively. Gains (losses) related to these contracts are recorded in the Company’s consolidated statements of income in other income (expense), net. For the six months ended June 30, 2011 and 2010, the Company had recorded gains (losses) net of $1 million and $(2) million, respectively, related to these foreign currency exchange contracts. For the three months ended June 30, 2011 and 2010, the Company had recorded (losses) net of $(1) million and $(1) million, respectively, related to these foreign currency exchange contracts.

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note E — concluded:

		In the event that the counterparties fail to meet the terms of the foreign currency forward contracts, the Company’s exposure is limited to the aggregate foreign currency rate differential with such institutions.
		During 2011 and 2010, the Company entered into several contracts to manage its exposure to increases in the price of copper and zinc. Based upon period-end market prices, the Company had recorded assets of $6 million and $7 million to reflect contract prices at June 30, 2011 and December 31, 2010, respectively. Gains (losses) related to these contracts are recorded in the Company’s consolidated statements of income in cost of goods sold. For the six months ended June 30, 2011 and 2010, the Company had recorded (losses) net of $(1) million and $(1) million, respectively, related to these commodity contracts. For the three months ended June 30, 2011 and 2010, the Company had recorded (losses) net of $(1) million and $(2) million, respectively, related to these commodity contracts.
		The fair value of these derivative contracts is estimated on a recurring basis, quarterly, using Level 2 inputs (significant other observable inputs).

Product Warranty Disclosure

F.

Changes in the Company’s warranty liability were as follows, in millions:

		Six Months Ended				Twelve Months Ended
		June 30, 2011				December 31, 2010
Balance at January 1		$	107			$	109
Accruals for warranties issued during the period			14				42
Accruals related to pre-existing warranties			4				(4	)
Settlements made (in cash or kind) during the period			(19	)			(37	)
Other, net			—				(3	)
Balance at end of period		$	106			$	107

Debt Disclosure

G.

Based on the limitations of the debt to total capitalization covenant, at June 30, 2011, the Company had additional borrowing capacity, subject to availability, of up to $987 million. Additionally, at June 30, 2011, the Company could absorb a reduction to shareholders’ equity of approximately $531 million, and remain in compliance with the debt to total capitalization covenant.

In order to borrow under the Credit Agreement, there must not be any default in the Company’s covenants in the credit agreement (i.e., in addition to the two financial covenants, principally limitations on subsidiary debt, negative pledge restrictions, legal compliance requirements and maintenance of properties and insurance) and the Company’s representations and warranties in the credit agreement must be true in all material respects on the date of borrowing (i.e., principally no material adverse change or litigation likely to result in a material adverse change, since December 31, 2009, in each case, no material ERISA or environmental non-compliance and no material tax deficiency). The Company was in compliance with all covenants and no borrowings have been made at June 30, 2011.

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note G — concluded:

At June 30, 2011, there were outstanding $108 million principal amount at maturity of Zero Coupon Convertible Senior Notes due 2031 (“Notes”), with an accreted value of $58 million, which has been classified as short-term debt. Holders of the Notes have the option to require the Notes be repurchased by the Company on July 20, 2011 and every five years thereafter. As of July 25, 2011, holders of $107.7 million principal amount at maturity with an accreted value of $57.9 million of Notes have required the Company to repurchase the Notes for cash.

Disclosure Of Compensation Related Costs Share Based Payments

H.

The Company’s 2005 Long Term Stock Incentive Plan (the “2005 Plan”) provides for the issuance of stock-based incentives in various forms to employees and non-employee Directors of the Company. At June 30, 2011, outstanding stock-based incentives were in the form of long-term stock awards, stock options, phantom stock awards and stock appreciation rights. Pre-tax compensation expense and the related income tax benefit, for these stock-based incentives, were as follows, in millions:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Long-term stock awards		$	9			$	9			$	19			$	19
Stock options			6				6				11				11
Phantom stock awards and stock appreciation rights			(1	)			(4	)			2				(1	)
Total		$	14			$	11			$	32			$	29
Income tax benefit		$	5			$	4			$	12			$	11

Long-Term Stock Awards

		Long-term stock awards are granted to key employees and non-employee Directors of the Company and do not cause net share dilution inasmuch as the Company continues the practice of repurchasing and retiring an equal number of shares on the open market.
		The Company’s long-term stock award activity was as follows, shares in millions:

		Six Months Ended
		June 30,
		2011				2010
Unvested stock award shares at January 1			10				9
Weighted average grant date fair value		$	19			$	21
Stock award shares granted			2				3
Weighted average grant date fair value		$	13			$	14
Stock award shares vested			1				1
Weighted average grant date fair value		$	19			$	23
Stock award shares forfeited			—				—
Weighted average grant date fair value		$	18			$	20
Unvested stock award shares at June 30			11				11
Weighted average grant date fair value		$	17			$	19

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note H — continued:

		At June 30, 2011 and 2010, there was $134 million and $145 million, respectively, of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of five years and six years, respectively.
		The total market value (at the vesting date) of stock award shares which vested during the six months ended June 30, 2011 and 2010 was $23 million and $17 million, respectively.
		Stock Options
		Stock options are granted to key employees of the Company. The exercise price equals the market price of the Company’s common stock at the grant date. These options generally become exercisable (vest ratably) over five years beginning on the first anniversary from the date of grant and expire no later than 10 years after the grant date.
		The Company granted 2,372,500 of stock option shares in the six months ended June 30, 2011 with a grant date exercise price approximating $13 per share. In the first six months of 2011, 2,591,700 stock option shares were forfeited (including options that expired unexercised).

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note H — continued:

     The Company’s stock option activity was as follows, shares in millions:

		Six Months Ended
		June 30,
		2011				2010
Option shares outstanding, January 1			37				36
Weighted average exercise price		$	21			$	23
Option shares granted, including restoration options			2				5
Weighted average exercise price		$	13			$	14
Option shares exercised			—				—
Aggregate intrinsic value on date of exercise (A)		$	1	million		$	1	million
Weighted average exercise price		$	8			$	8
Option shares forfeited			2				3
Weighted average exercise price		$	22			$	23
Option shares outstanding, June 30			37				38
Weighted average exercise price		$	21			$	21
Weighted average remaining option term (in years)			6				6
Option shares vested and expected to vest, June 30			37				37
Weighted average exercise price		$	21			$	21
Aggregate intrinsic value (A)		$	20	million		$	14	million
Weighted average remaining option term (in years)			6				6
Option shares exercisable (vested), June 30			24				22
Weighted average exercise price		$	24			$	25
Aggregate intrinsic value (A)		$	8	million		$	3	million
Weighted average remaining option term (in years)			5				5

At June 30, 2011 and 2010, there was $45 million and $56 million, respectively, of unrecognized compensation expense (using the Black-Scholes option pricing model) related to unvested stock options; such options had a weighted average vesting period of three years in both 2011 and 2010.

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note H — concluded:

The weighted average grant date fair value of option shares granted and the assumptions used to estimate those values using a Black-Scholes option pricing model, were as follows:

		Six Months Ended
		June 30,
		2011				2010
Weighted average grant date fair value		$	5.10			$	5.30
Risk-free interest rate			2.72	%			2.77	%
Dividend yield			2.34	%			2.17	%
Volatility factor			49.00	%			46.01	%
Expected option life		6 years				6 years

Pension And Other Postretirement Benefits Disclosure

I.		The Company sponsors qualified defined-benefit or defined-contribution retirement plans for most of its employees. In addition to the Company’s qualified defined-benefit pension plans, the Company has unfunded non-qualified defined-benefit pension plans covering certain employees, which provide for benefits in addition to those provided by the qualified pension plans. Substantially all salaried employees participate in non-contributory defined-contribution retirement plans, to which payments are determined annually by the Organization and Compensation Committee of the Board of Directors.
		During the six months ended June 30, 2011, the Company adjusted certain employee expense related accruals which resulted in a $5 million reduction to expenses related to the fourth quarter of 2010. The effect was not material to the previously issued financial statements.
		Effective January 1, 2010, the Company froze all future benefit accruals under substantially all of the Company’s domestic qualified and non-qualified defined-benefit pension plans. Future benefit accruals related to the Company’s foreign non-qualified plans were frozen several years ago.
		Net periodic pension cost for the Company’s defined-benefit pension plans was as follows, in millions:

		Three Months Ended June 30,
		2011								2010
		Qualified				Non-Qualified				Qualified				Non-Qualified
Service cost		$	—			$	—			$	1			$	—
Interest cost			11				2				12				2
Expected return on plan assets			(8	)			—				(10	)			—
Amortization of prior service cost			—				—				—				—
Amortization of net loss			3				—				3				—
Net periodic pension cost		$	6			$	2				6				2
		Six Months Ended June 30,
		2011								2010
		Qualified				Non-Qualified				Qualified				Non-Qualified
Service cost		$	1			$	—			$	2			$	—
Interest cost			22				4				23				4
Expected return on plan assets			(16	)			—				(18	)			—
Amortization of prior service cost			—				—				—				—
Amortization of net loss			5				—				5				—
Net periodic pension cost		$	12			$	4			$	12			$	4

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note I — concluded:

At December 31, 2010, the Company reported a net liability of $522 million, of which $163 million was related to our non-qualified, supplemental retirement plans, which are not subject to the funding requirements of the Pension Protection Act. In accordance with the Pension Protection Act of 2006, the Adjusted Funding Target Attainment Percentage (“AFTAP”) for the various defined-benefit pension plans ranges from 62 percent to 86 percent. At December 31, 2010, the Company had one plan that offered accelerated benefits (i.e., lump sum distributions) and the AFTAP for that plan is less than 80 percent; therefore, the plan is prohibited from allowing participants to receive any lump sum distribution in excess of 50 percent of the benefit value. In addition, plan amendments increasing benefits or liabilities for that plan are also prohibited.

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Segment Reporting Disclosure

J.

Information about the Company by segment and geographic area was as follows, in millions:

		Three Months Ended June 30,																Six Months Ended June 30,
		2011				2010				2011				2010				2011				2010				2011				2010
		Net Sales (A)								Operating Profit (Loss)								Net Sales (A)								Operating Profit (Loss)
The Company’s operations by segment were:
Cabinets and Related Products		$	330			$	400			$	(27	)		$	(37	)		$	637			$	803			$	(77	)		$	(52	)
Plumbing Products			761				682				95				86				1,471				1,345				179				170
Installation and Other Services			294				309				(26	)			(23	)			548				582				(66	)			(65	)
Decorative Architectural Products			492				505				90				109				867				894				159				196
Other Specialty Products			145				152				—				11				271				276				(10	)			5
Total		$	2,022			$	2,048			$	132			$	146			$	3,794			$	3,900			$	185			$	254
The Company’s operations by geographic area were:
North America		$	1,563			$	1,659			$	87			$	114			$	2,896			$	3,089			$	98			$	178
International, principally Europe			459				389				45				32				898				811				87				76
Total		$	2,022			$	2,048				132				146			$	3,794			$	3,900				185				254
General corporate expense, net											(36	)			(27	)											(68	)			(57	)
Charge for litigation settlement (B)											(5	)			—												(5	)			—
Operating profit											91				119												112				197
Other income (expense), net											(33	)			(103	)											(75	)			(159	)
Income before income taxes										$	58			$	16											$	37			$	38

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Other Income And Other Expense Disclosure

K.

Other, net, which is included in other income (expense), net, was as follows, in millions:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Income from cash and cash investments		$	1			$	1			$	3			$	2
Income from financial investments (Note D)			33				1				50				1
Other items, net			(3	)			(5	)			(1	)			(4	)
Total other net		$	31			$	(3	)		$	52			$	(1	)