UNITED STATES

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

 

FORM 10-Q

		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				(IRS Employer
Jurisdiction				Identification No.)
of Incorporation)
21001 Van Born Road, Taylor, Michigan				48180
(Address of Principal Executive Offices)				(Zip Code)

(313) 274-7400

(Registrant’s telephone number, including area code)

     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		Non-accelerated filer o		Smaller reporting company 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 October 25, 2011
Common stock, par value $1.00 per share		357,800,000

 

 

MASCO CORPORATION

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets September 30, 2011 and December 31, 2010			1
Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2011 and 2010			2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010			3
Consolidated Statements of Shareholders’ Equity September 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			28-30
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
Signature
EX-12
EX-31.A
EX-31.B
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

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

		September 30,				December 31,
		2011				2010
ASSETS
Current assets:
Cash and cash investments		$	1,610			$	1,715
Receivables			1,133				888
Prepaid expenses and other			118				129
Inventories:
Finished goods			457				393
Raw material			297				246
Work in process			96				93
			850				732
Total current assets			3,711				3,464
Property and equipment, net			1,656				1,737
Goodwill			2,387				2,383
Other intangible assets, net			256				269
Other assets			202				287
Total assets		$	8,212			$	8,140
LIABILITIES
Current liabilities:
Notes payable		$	806			$	66
Accounts payable			866				602
Accrued liabilities			813				819
Total current liabilities			2,485				1,487
Long-term debt			3,224				4,032
Deferred income taxes and other			1,016				1,039
Total liabilities			6,725				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 — 347,800,000; 2010 — 348,600,000			348				349
Preferred shares authorized: 1,000,000; issued and outstanding: 2011 — None; 2010 — None			—				—
Paid-in capital			50				42
Retained earnings			638				720
Accumulated other comprehensive income			231				273
Total Masco Corporation’s shareholders’ equity			1,267				1,384
Noncontrolling interest			220				198
Total equity			1,487				1,582
Total liabilities and equity		$	8,212			$	8,140

See notes to condensed consolidated financial statements.

MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Net sales		$	2,006			$	1,957			$	5,800			$	5,857
Cost of sales			1,511				1,463				4,348				4,325
Gross profit			495				494				1,452				1,532
Selling, general and administrative expenses			393				392				1,238				1,233
Operating profit			102				102				214				299
Other income (expense), net:
Interest expense			(63	)			(63	)			(190	)			(188	)
Impairment charge for financial investments			—				—				—				(33	)
Other, net			22				(1	)			74				(2	)
			(41	)			(64	)			(116	)			(223	)
Income before income taxes			61				38				98				76
Income tax expense			12				31				63				53
Net income			49				7				35				23
Less: Net income attributable to noncontrolling interest			13				12				37				32
Net income (loss) attributable to Masco Corporation		$	36			$	(5	)		$	(2	)		$	(9	)
Earnings (loss) per common share attributable to Masco Corporation:
Basic:
Net income (loss)		$	.10			$	(.02	)		$	(.01	)		$	(.03	)
Diluted:
Net income (loss)		$	.10			$	(.02	)		$	(.01	)		$	(.03	)
Amounts attributable to Masco Corporation:
Net income (loss)		$	36			$	(5	)		$	(2	)		$	(9	)

See notes to condensed consolidated financial statements.

MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For the Nine Months Ended September 30, 2011 and 2010
(In Millions)

		Nine Months Ended
		September 30,
		2011				2010
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations		$	210			$	333
Increase in receivables			(245	)			(136	)
Increase in inventories			(118	)			(64	)
Increase in accounts payable and accrued liabilities, net			248				103
Net cash from operating activities			95				236
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt			—				2
Payment of debt			(3	)			(3	)
Issuance of Notes, net of issuance costs			—				494
Retirement of Notes			(58	)			(359	)
Purchase of Company common stock			(30	)			(45	)
Cash dividends paid			(80	)			(81	)
Dividend payment to noncontrolling interest			(18	)			(15	)
Credit Agreement costs			(1	)			(9	)
Net cash for financing activities			(190	)			(16	)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures			(106	)			(88	)
Proceeds from disposition of:
Marketable securities			49				5
Other financial investments, net			43				6
Property and equipment			19				16
Purchases of other financial investments			(7	)			—
Other, net			(7	)			(26	)
Net cash for investing activities			(9	)			(87	)
Effect of exchange rate changes on cash and cash investments			(1	)			(9	)
CASH AND CASH INVESTMENTS:
(Decrease) increase for the period			(105	)			124
At January 1			1,715				1,413
At September 30		$	1,610			$	1,537

See notes to condensed consolidated financial statements.

MASCO CORPORATION and Consolidated Subsidiaries (Unaudited)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Periods Ended September 30, 2011 and September 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			23												(9	)							32
Cumulative translation adjustments			(37	)															(28	)			(9	)
Unrealized (loss) on marketable securities, net of income tax (benefit) of $(1)			(4	)															(4	)
Unrecognized prior service cost and net
loss, net of income tax of $3			5																5
Total comprehensive loss			(13	)
Shares issued			(1	)			1				(2	)
Shares retired:
Repurchased			(45	)			(3	)			(42	)
Surrendered (non-cash)			(6	)							(6	)
Cash dividends declared			(81	)											(81	)
Dividend payment to noncontrolling interest			(15	)																			(15	)
Stock-based compensation			44								44
Balance, September 30, 2010		$	2,700			$	348			$	36			$	1,781			$	339			$	196
Balance, January 1, 2011			1,582				349				42				720				273				198
Net (loss) income			35												(2	)							37
Cumulative translation adjustments			8																5				3
Unrealized (loss) on marketable securities, net of income tax of $—			(38	)															(38	)
Unrealized (loss) on interest rate swaps, net of income tax of $—			(17	)															(17	)
Unrecognized prior service cost and net loss, net of income tax of $—			8																8
Total comprehensive income			(4	)
Shares issued			—				2				(2	)
Shares retired:
Repurchased			(30	)			(2	)			(28	)
Surrendered (non-cash)			(8	)			(1	)			(7	)
Cash dividends declared			(80	)											(80	)
Dividend payment to noncontrolling interest			(18	)																			(18	)
Stock-based compensation			45								45
Balance, September 30, 2011		$	1,487			$	348			$	50			$	638			$	231			$	220

See notes to consolidated financial statements.

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

A. Accounting Policies

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 September 30, 2011 and the results of operations for the three months and nine months ended September 30, 2011 and 2010 and cash flows and shareholders’ equity for the nine months ended September 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.
		In June 2011, new accounting guidance was issued regarding the presentation and disclosure of comprehensive income. The new guidance will require presentation of other comprehensive income items in the Company’s consolidated statement of income; such items will no longer be included in the statement of shareholders’ equity. The new guidance will also require additional disclosure for reclassification of items from other comprehensive income to the Company’s statement of income. The new guidance will be effective for the Company January 1, 2012. The Company does not expect this guidance to have a material impact on the Company’s financial condition or its results of operations.
		In September 2011, new accounting guidance was issued regarding impairment testing of goodwill. The new guidance would allow the Company to make a qualitative determination regarding potential goodwill impairment before performing the quantitative impairment test. The new guidance will be effective for the Company January 1, 2012. The Company does not anticipate utilizing the qualitative provisions of the new guidance.

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

B. Goodwill and Other Intangible Assets

B.

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

		Gross Goodwill				Accumulated				Net Goodwill
		At				Impairment				At
		Sep. 30, 2011				Losses				Sep. 30, 2011
Cabinets and Related Products		$	588			$	(364	)		$	224
Plumbing Products			539				(340	)			199
Installation and Other Services			1,819				(762	)			1,057
Decorative Architectural Products			294				—				294
Other Specialty Products			980				(367	)			613
Total		$	4,220			$	(1,833	)		$	2,387

		Gross Goodwill				Accumulated				Net Goodwill
		At				Impairment				At								At
		Dec. 31, 2010				Losses				Dec. 31, 2010				Other(A)				Sep. 30, 2011
Cabinets and Related Products		$	587			$	(364	)		$	223			$	1			$	224
Plumbing Products			536				(340	)			196				3				199
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			$	4			$	2,387

(A) Other principally includes the effect of foreign currency translation.

		Other indefinite-lived intangible assets were $185 million at both September 30, 2011 and December 31, 2010, respectively, and principally included registered trademarks. The carrying value of the Company’s definite-lived intangible assets was $71 million (net of accumulated amortization of $80 million) at September 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.
		As a result of continued losses in the commercial businesses in the Installation and Other Services segment, at September 30, 2011, the Company recorded a pre-tax impairment charge of $7 million related to certain intangible assets for these businesses. The Company then assessed the goodwill associated with these businesses and determined no impairment was necessary at September 30, 2011.

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

C. Depreciation and Amortization Expense

C.

Depreciation and amortization expense was $188 million and $209 million for the nine months ended September 30, 2011 and 2010, respectively.

D. Fair Value of Financial Investments and Liabilities

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:

		September 30,				December 31,
		2011				2010
Auction rate securities		$	22			$	22
TriMas Corporation common stock			—				40
Total recurring investments			22				62
Private equity funds			92				106
Other investments			5				13
Total non-recurring investments			97				119
Total		$	119			$	181

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

						Pre-tax
						Unrealized				Unrealized				Recorded
		Cost Basis				Gains				Losses				Basis
September 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
										Significant
						Quoted				Other				Significant
						Market				Observable				Unobservable
		Sep. 30,				Prices				Inputs				Inputs
		2011				(Level 1)				(Level 2)				(Level 3)
Auction rate securities		$	22			$	—			$	—			$	22
Total		$	22			$	—			$	—			$	22

						Fair Value Measurements Using
										Significant
						Quoted				Other				Significant
						Market				Observable				Unobservable
		Dec. 31,				Prices				Inputs				Inputs
		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 nine months ended September 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 September 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 nine months ended September 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 nine months of 2011 or in the full-year 2010.

Income and impairment charges for financial investments were as follows, in millions:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Realized gains (losses)
from:
TriMas Corporation common stock		$	—			$	—			$	41			$	—
Private equity funds			19				—				28				—
Other financial investments			—				(3	)			—				(2	)
Total realized gains		$	19			$	(3	)		$	69			$	(2	)
Impairment charges:
Asahi Tec Preferred Stock		$	—			$	—			$	—			$	(28	)
Private equity funds			—				—				—				(3	)
Other private investments			—				—				—				(2	)
Total impairment charges		$	—			$	—			$	—			$	(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 September 30, 2011 was approximately $3.9 billion, compared with the aggregate carrying value of $4.0 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.

E. Derivatives

E.

In August 2011, the Company entered into new interest rate swap agreements to hedge the volatility in interest payments associated with the expected debt issuance planned to occur in 2012. These interest rate swaps are designed as cash flow hedges and effectively fix interest rates on the forecasted debt issuance based on 3-month LIBOR. The average fixed rate on the interest rate swaps is 2.8%. At September 30, 2011, the interest rate swap agreements covered a notional amount of $400 million, which we expect to issue in connection with the maturity of the Company’s $791 million fixed-rate debt due July 15, 2012 with an interest rate of 5.875%. At September 30, 2011, the interest rate swaps are considered 100 percent effective; therefore, the market valuation of $17 million is recorded in other comprehensive income in the Company’s statement of shareholders’ equity with a corresponding increase to accrued liabilities in the Company’s condensed consolidated balance sheet at September 30, 2011.

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

Note E — concluded:

		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. Based upon period-end market prices, the Company had recorded assets (liabilities) of $5 million and $(2) million to reflect contract prices at September 30, 2011 and December 31, 2010, respectively. Such gains (losses) are partially offset by gains (losses) 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 nine months ended September 30, 2011 and 2010, the Company had recorded gains net of $1 million and $2 million, respectively, related to these foreign currency exchange contracts. For the three months ended September 30, 2011 and 2010, the Company had recorded gains (losses) net of $8 million and $(8) million, respectively, related to these foreign currency exchange contracts.
		During 2011 and 2010, the Company, including certain of its 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 $— million and $3 million to reflect contract prices at September 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 nine months ended September 30, 2011 and 2010, the Company had recorded gains (losses) net of $3 million and $(1) million, respectively, related to these foreign currency exchange contracts. For the three months ended September 30, 2011 and 2010, the Company had recorded gains net of $2 million and $1 million, respectively, related to these foreign currency exchange contracts.
		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 (liabilities) assets of $(5) million and $7 million to reflect contract prices at September 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 nine months ended September 30, 2011 and 2010, the Company had recorded (losses) gains net of $(10) million and $3 million, respectively, related to these commodity contracts. For the three months ended September 30, 2011 and 2010, the Company had recorded (losses) gains net of $(11) million and $4 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).

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

F. Warranty

F.

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

		Nine Months Ended				Twelve Months Ended
		September 30, 2011				December 31, 2010
Balance at January 1		$	107			$	109
Accruals for warranties issued during the period			20				42
Accruals related to pre-existing warranties			7				(4	)
Settlements made (in cash or kind) during the period			(29	)			(37	)
Other, net			(2	)			(3	)
Balance at end of period		$	103			$	107

G. Debt

G.		Based on the limitations of the debt to total capitalization covenant, at September 30, 2011, the Company had additional borrowing capacity, subject to availability, of up to $979 million. Additionally, at September 30, 2011, the Company could absorb a reduction to shareholders’ equity of approximately $527 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, and, 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 September 30, 2011.
		At September 30, 2011, no principal amount at maturity of Zero Coupon Convertible Senior Notes due 2031 (“Notes”) was outstanding. During the third quarter of 2011, holders of $108.1 million principal amount at maturity with an accreted value of $58.1 million of Notes required the Company to repurchase the Notes for cash of $57.9 million; the remaining Notes were retired.

H. Stock-Based Compensation

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 September 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								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Long-term stock awards		$	9			$	9			$	28			$	28
Stock options			6				6				17				17
Phantom stock awards and stock appreciation rights			(5	)			1				(3	)			—
Total		$	10			$	16			$	42			$	45
Income tax benefit (before valuation allowance)		$	4			$	6			$	16			$	17

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

Note H — continued:

		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:

		Nine Months Ended
		September 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			2				2
Weighted average grant date fair value		$	20			$	23
Stock award shares forfeited			—				—
Weighted average grant date fair value		$	18			$	19
Unvested stock award shares at September 30			10				10
Weighted average grant date fair value		$	17			$	19

		At September 30, 2011 and 2010, there was $122 million and $136 million, respectively, of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of five years in both periods.
		The total market value (at the vesting date) of stock award shares which vested during the nine months ended September 30, 2011 and 2010 was $28 million and $22 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 nine months ended September 30, 2011 with a grant date exercise price approximating $13 per share. In the first nine months of 2011, 2,830,000 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:

		Nine Months Ended
		September 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			3				4
Weighted average exercise price		$	22			$	23
Option shares outstanding, September 30			36				37
Weighted average exercise price		$	21			$	21
Weighted average remaining option term (in years)			6				6
Option shares vested and expected to vest, September 30			36				37
Weighted average exercise price		$	21			$	22
Aggregate intrinsic value (A)		$—million				$15 million
Weighted average remaining option term (in years)			6				6
Option shares exercisable (vested), September 30			24				22
Weighted average exercise price		$	24			$	25
Aggregate intrinsic value (A)		$—million				$3 million
Weighted average remaining option term (in years)			4				4

(A) Aggregate intrinsic value is calculated using the Company’s stock price at each respective date, less the exercise price (grant date price) multiplied by the number of shares.

		At September 30, 2011 and 2010, there was $39 million and $50 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:

		Nine Months Ended
		September 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

I. Employee Retirement Plans

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 nine months ended September 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 September 30,
		2011								2010
		Qualified				Non-Qualified				Qualified				Non-Qualified
Service cost		$	1			$	—			$	2			$	—
Interest cost			12				2				11				3
Expected return on plan assets			(9	)			—				(9	)			—
Amortization of prior service cost			—				—				—				—
Amortization of net loss			2				1				3				—
Net periodic pension cost		$	6			$	3				7				3

		Nine Months Ended September 30,
		2011								2010
		Qualified				Non-Qualified				Qualified				Non-Qualified
Service cost		$	2			$	—			$	4			$	—
Interest cost			34				6				34				7
Expected return on plan assets			(25	)			—				(27	)			—
Amortization of prior service cost			—				—				—				—
Amortization of net loss			7				1				8				—
Net periodic pension cost		$	18			$	7			$	19			$	7

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)

J. Segment Information

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

		Three Months Ended September 30,																Nine Months Ended September 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		$	307			$	357			$	(34	)		$	(61	)		$	944			$	1,160			$	(111	)		$	(113	)
Plumbing Products			768				686				91				97				2,239				2,031				270				267
Installation and Other Services			315				292				(27	)			(22	)			863				874				(93	)			(87	)
Decorative Architectural Products			455				463				88				104				1,322				1,357				247				300
Other Specialty Products			161				159				12				11				432				435				2				16
Total		$	2,006			$	1,957			$	130			$	129			$	5,800			$	5,857			$	315			$	383
The Company’s operations by geographic area were:
North America		$	1,524			$	1,528			$	80			$	79			$	4,420			$	4,617			$	178			$	257
International, principally Europe			482				429				50				50				1,380				1,240				137				126
Total		$	2,006			$	1,957				130				129			$	5,800			$	5,857				315				383
General corporate expense, net											(27	)			(27	)											(95	)			(84	)
Charge for litigation settlement (B)											(1	)			—												(6	)			—
Operating profit											102				102												214				299
Other income (expense), net											(41	)			(64	)											(116	)			(223	)
Income before income taxes										$	61			$	38											$	98			$	76