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 Jurisdiction of Incorporation)		(IRS Employer Identification No.)
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 26, 2010
Common stock, par value $1.00 per share		358,500,000

 

 

MASCO CORPORATION

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - September 30, 2010 and December 31, 2009			1
Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2010 and 2009			2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009			3
Notes to Condensed Consolidated Financial Statements			4-24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25-31
Item 4. Controls and Procedures			32
PART II. OTHER INFORMATION			33-35
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
Signature
EX-10
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

September 30, 2010 and December 31, 2009
(In Millions, Except Share Data)

		September 30,				December 31,
		2010				2009
ASSETS
Current assets:
Cash and cash investments		$	1,537			$	1,413
Receivables			1,106				983
Prepaid expenses and other			288				312
Inventories:
Finished goods			431				405
Raw material			268				247
Work in process			103				91
			802				743
Total current assets			3,733				3,451
Property and equipment, net			1,838				1,981
Goodwill			3,098				3,108
Other intangible assets, net			282				290
Other assets			302				345
Total assets		$	9,253			$	9,175
LIABILITIES
Current liabilities:
Notes payable		$	66			$	364
Accounts payable			650				578
Accrued liabilities			842				839
Total current liabilities			1,558				1,781
Long-term debt			4,036				3,604
Deferred income taxes and other			959				973
Total liabilities			6,553				6,358
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: 2010 — 348,400,000; 2009 — 350,400,000			348				350
Preferred shares authorized: 1,000,000; issued and outstanding: 2010 — None; 2009 — None			—				—
Paid-in capital			36				42
Retained earnings			1,782				1,871
Accumulated other comprehensive income			339				366
Total Masco Corporation’s shareholders’ equity			2,505				2,629
Noncontrolling interest			195				188
Total equity			2,700				2,817
Total liabilities and equity		$	9,253			$	9,175

See notes to condensed consolidated financial statements.

For the Three Months and Nine Months Ended September 30, 2010 and 2009
(In Millions Except Per Common Share Data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net sales		$	1,957			$	2,084			$	5,857			$	5,894
Cost of sales			1,463				1,517				4,325				4,371
Gross profit			494				567				1,532				1,523
Selling, general and administrative expenses			392				429				1,233				1,263
Charge for defined-benefit plan curtailment			—				—				—				8
Operating profit			102				138				299				252
Other income (expense), net:
Interest expense			(63	)			(56	)			(188	)			(169	)
Impairment charge for financial investments			—				—				(33	)			(10	)
Other, net			(1	)			7				(2	)			22
			(64	)			(49	)			(223	)			(157	)
Income from continuing operations before income taxes			38				89				76				95
Income tax expense			31				26				53				35
Income from continuing operations			7				63				23				60
Loss from discontinued operations, net			—				(23	)			—				(31	)
Net income			7				40				23				29
Less: Net income attributable to noncontrolling interest			12				12				32				27
Net (loss) income attributable to Masco Corporation		$	(5	)		$	28			$	(9	)		$	2
Earnings (loss) per common share attributable to Masco Corporation:
Basic:
(Loss) income from continuing operations		$	(.02	)		$	.14			$	(.03	)		$	.09
Loss from discontinued operations, net			—				(.06	)			—				(.09	)
Net (loss) income		$	(.02	)		$	.08			$	(.03	)		$	.00
Diluted:
(Loss) income from continuing operations		$	(.02	)		$	.14			$	(.03	)		$	.09
Loss from discontinued operations, net			—				(.06	)			—				(.09	)
Net (loss) income		$	(.02	)		$	.08			$	(.03	)		$	.00
Amounts attributable to Masco Corporation:
(Loss) income from continuing operations		$	(5	)		$	51			$	(9	)		$	33
Loss from discontinued operations, net			—				(23	)			—				(31	)
Net (loss) income		$	(5	)		$	28			$	(9	)		$	2

See notes to condensed consolidated financial statements.

For the Nine Months Ended September 30, 2010 and 2009
(In Millions)

		Nine Months Ended
		September 30,
		2010				2009
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations		$	333			$	384
Increase in receivables			(136	)			(187	)
(Increase) decrease in inventories			(64	)			149
Increase in accounts payable and accrued liabilities, net			103				69
Net cash from operating activities			236				415
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt			2				4
Payment of debt			(3	)			(12	)
Issuance of Notes, net of issuance costs			494				—
Retirement of Notes			(359	)			—
Purchase of Company common stock			(45	)			(11	)
Cash dividends paid			(81	)			(139	)
Dividend payment to noncontrolling interest			(15	)			(16	)
Credit Agreement costs			(9	)			—
Net cash for financing activities			(16	)			(174	)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures			(88	)			(70	)
Proceeds from disposition of:
Marketable securities			5				4
Other financial investments, net			6				2
Businesses, net of cash disposed			—				3
Property and equipment			16				20
Acquisition of businesses, net of cash acquired			—				(8	)
Other, net			(26	)			(25	)
Net cash for investing activities			(87	)			(74	)
Effect of exchange rate changes on cash and cash investments			(9	)			4
CASH AND CASH INVESTMENTS:
Increase for the period			124				171
At January 1			1,413				1,028
At September 30		$	1,537			$	1,199

See notes to condensed consolidated financial statements.

MASCO CORPORATION

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, 2010 and the results of operations for the three months and nine months ended September 30, 2010 and 2009 and cash flows for the nine months ended September 30, 2010 and 2009. The condensed consolidated balance sheet at December 31, 2009 was derived from audited financial statements.

Certain prior-year amounts have been reclassified to conform to the 2010 presentation in the condensed consolidated financial statements. The results of operations related to 2009 discontinued operations have been separately stated in the accompanying condensed consolidated statements of income for the three months and nine months ended September 30, 2009. In the Company’s condensed consolidated statements of cash flows for the nine months ended September 30, 2009, cash flows of discontinued operations are not separately classified.

Recently Issued Accounting Pronouncements

Effective January 1, 2010, the Company adopted new FASB guidance regarding how a company determines when an entity is insufficiently capitalized or is not controlled through voting and should be consolidated. The adoption of this guidance did not have any impact on the Company’s consolidated financial condition and results of operations.

B. Discontinued Operations

B.		The Company has accounted for 2009 dispositions as discontinued operations.
		Selected financial information for these discontinued operations was as follows, in millions:

		Three Months Ended				Nine Months Ended
		September 30, 2009				September 30, 2009
Net sales		$	13			$	57
Loss from discontinued operations		$	(2	)		$	(11	)
Loss on disposal of discontinued operations			(22	)			(21	)
Loss before income tax			(24	)			(32	)
Income tax benefit			1				1
Loss from discontinued operations, net		$	(23	)		$	(31	)

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

C. Goodwill and Other Intangible Assets

C.

The changes in the carrying amount of goodwill for the nine months ended September 30, 2010, by segment, were as follows, in millions:

		Gross Goodwill				Accumulated				Net Goodwill
		At				Impairment				At
		Sep. 30, 2010				Losses				Sep. 30, 2010
Cabinets and Related Products		$	588			$	(364	)		$	224
Plumbing Products			539				(340	)			199
Installation and Other Services			1,819				(51	)			1,768
Decorative Architectural Products			294				—				294
Other Specialty Products			980				(367	)			613
Total		$	4,220			$	(1,122	)		$	3,098

		Gross Goodwill				Accumulated				Net Goodwill
		At				Impairment				At								At
		Dec. 31, 2009				Losses				Dec. 31, 2009				Other(A)				Sep. 30, 2010
Cabinets and Related Products		$	590			$	(364	)		$	226			$	(2	)		$	224
Plumbing Products			547				(340	)			207				(8	)			199
Installation and Other Services			1,819				(51	)			1,768				—				1,768
Decorative Architectural Products			294				—				294				—				294
Other Specialty Products			980				(367	)			613				—				613
Total		$	4,230			$	(1,122	)		$	3,108			$	(10	)		$	3,098

 

(A)

Other principally includes the effect of foreign currency translation.

Other indefinite-lived intangible assets were $195 million and $196 million at September 30, 2010 and December 31, 2009, respectively, and principally included registered trademarks. The carrying value of the Company’s definite-lived intangible assets was $87 million (net of accumulated amortization of $73 million) at September 30, 2010 and $94 million (net of accumulated amortization of $67 million) at December 31, 2009, and principally included customer relationships and non-compete agreements.

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

D. Depreciation and Amortization Expense

D.		Depreciation and amortization expense was $209 million and $190 million, respectively, for the nine months ended September 30, 2010 and 2009.

E.

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,
		2010				2009
Asahi Tec Corporation — preferred stock		$	10			$	71
Auction rate securities			22				22
TriMas Corporation common stock			36				17
Total recurring investments			68				110
Private equity funds			115				123
Other investments			9				9
Total non-recurring investments			124				132
Total		$	192			$	242

The Company’s investments in available-for-sale securities at September 30, 2010 and December 31, 2009 were as follows, in millions:

						Pre-tax
						Unrealized				Unrealized				Recorded
		Cost Basis				Gains				Losses				Basis
September 30, 2010		$	35			$	35			$	2			$	68
December 31, 2009		$	71			$	39			$	—			$	110

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

Note E — continued:

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
		2010				(Level 1)				(Level 2)				(Level 3)
Asahi Tec Corporation:
Preferred stock		$	10			$	—			$	10			$	—
Auction rate securities			22				—				—				22
TriMas Corporation			36				36				—				—
Total		$	68			$	36			$	10			$	22

						Fair Value Measurements Using
										Significant
						Quoted				Other				Significant
						Market				Observable				Unobservable
		Dec. 31,				Prices				Inputs				Inputs
		2009				(Level 1)				(Level 2)				(Level 3)
Asahi Tec Corporation:
Preferred stock		$	71			$	—			$	—			$	71
Auction rate securities			22				—				—				22
TriMas Corporation			17				17				—				—
Total		$	110			$	17			$	—			$	93

The Company did not have any transfers between Level 1 and Level 2 financial assets in the first nine months of 2010 or in the full-year 2009.

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 (approximately four percent and six percent at September 30, 2010 and December 31, 2009, respectively) and the assumptions for credit defaults, since the auction rate securities are backed by credit default swap agreements.

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

Note E — continued:

During the second quarter of 2010, Asahi Tec approached the Company with an offer to amend the terms of the preferred stock held by the Company. The request was made by Asahi Tec in order to facilitate early negotiations with their bank group for debt that matures in early 2011. The Company and Asahi Tec agreed to amend the preferred stock to include a more favorable conversion feature into common stock and to include a mandatory conversion date of February 28, 2011. The Company agreed to this amendment based on favorable tax benefits related to the Asahi Tec investment. Prior to this amendment, the Company could have settled in cash or common stock in 2017. As a result of the amendment, the Company recognized a $28 million impairment loss based on the current fair value of the preferred stock on an if-converted basis at June 30, 2010. Also, as a result of the amendment, the Company reversed an unrealized gain of $23 million that was previously included in accumulated other comprehensive income. On a quarterly basis, the Asahi Tec Preferred Stock will now be valued based on the trading price of the Asahi Tec common stock (Level 2 input). During the third quarter of 2010, the Company converted and sold $8 million of its investment in Asahi Tec and recognized a loss on the sale of $3 million for the three months ended September 30, 2010.

In the past, the preferred stock of Asahi Tec was valued primarily using a discounted cash flow model, because there were previously no observable prices in an active market for the same or similar securities. The significant inputs in the discounted cash flow model previously used to value the Asahi Tec preferred stock included: the present value of future dividends, present value of redemption rights, fair value of conversion rights and the discount rate based on credit spreads for Japanese-issued preferred securities (approximately 600 basis points at December 31, 2009) and other market factors.

The following table summarizes the changes in Level 3 financial assets measured at fair value on a recurring basis for the nine months ended September 30, 2010 and the year ended December 31, 2009, in millions:

		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			—				—				—
Settlements			—				—				—
Transfer from Level 3 to Level 2			(20	)			—				(20	)
Fair value at September 30, 2010		$	—			$	22			$	22

		Asahi Tec				Auction Rate
		Preferred Stock				Securities				Total
Fair value January 1, 2009		$	72			$	22			$	94
Total losses included in earnings			—				—				—
Unrealized (losses)			(1	)			—				(1	)
Purchases, issuances, settlements			—				—				—
Fair value at December 31, 2009		$	71			$	22			$	93

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

Note E — continued:

Non-Recurring Fair Value Measurements. Financial investments measured at fair value on a non-recurring basis during the 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				Total
		Sep. 30,				Prices				Inputs				Inputs				Gains
		2010				(Level 1)				(Level 2)				(Level 3)				(Losses)
Private equity funds		$	2			$	—			$	—			$	2			$	(3	)
Other private investments			—				—				—				—				(2	)
		$	2			$	—			$	—			$	2			$	(5	)

						Fair Value Measurements Using
										Significant
						Quoted				Other				Significant
						Market				Observable				Unobservable				Total
		Dec. 31,				Prices				Inputs				Inputs				Gains
		2009				(Level 1)				(Level 2)				(Level 3)				(Losses)
Private equity funds		$	31			$	—			$	—			$	31			$	(10	)
Other private investments			3				—				—				3				—
		$	34			$	—			$	—			$	34			$	(10	)

		During the second quarter of 2010, based on information from the fund manager, the Company determined that the decline in the estimated value of two private equity funds (with an aggregate carrying value of $5 million prior to impairment) was other-than-temporary and, accordingly, recognized non-cash, pre-tax impairment charges of $3 million. The remaining private equity investments, with an aggregate carrying value of $113 million at September 30, 2010, were not evaluated for impairment, as there were no indicators of impairment or identified events or changes in circumstances that would have a significant adverse effect on the fair value of the investments. During the second quarter of 2010, the Company also determined that the decline in the estimated value of one private investment was other-than-temporary and, accordingly, recognized a non-cash, pre-tax impairment charge of $2 million. The Company did not have any transfers between Level 1 and Level 2 financial assets in the first nine months of 2010 or in the full-year 2009.
		During 2009, the Company determined that the decline in the estimated value of certain private equity funds (with an aggregate carrying value of $41 million prior to impairment) was other-than-temporary and, accordingly, recognized non-cash, pre-tax impairment charges of $10 million for the year ended December 31, 2009. The remaining private equity investments, with an aggregate carrying value of $92 million at December 31, 2009, were not evaluated for impairment, as there were no indicators of impairment or identified events or changes in circumstances that would have a significant adverse effect on the fair value of the investments.

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

Note E — concluded:

		Loss from financial investments, net, was $3 million and $2 million, respectively, for the three months and nine months ended September 30, 2010.
		Impairment charges for financial investments were as follows, in millions:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Impairment charges:
Asahi Tec Preferred Stock		$	—			$	—			$	(28	)		$	—
Private equity funds			—				—				(3	)			(10	)
Other private investments			—				—				(2	)			—
Total impairment charges		$	—			$	—			$	(33	)		$	(10	)

		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, 2010 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, 2009 was approximately $3.9 billion, compared with the aggregate carrying value of $4.0 billion.

F.		During 2010 and 2009, the Company entered into foreign currency exchange contracts to hedge currency fluctuations related to intercompany loans denominated in non-functional currencies. At September 30, 2010, the Company had recorded losses of $5 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. At December 31, 2009, the Company had no recorded asset or liability related to foreign currency exchange contracts. 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, 2010 and 2009, the Company had recorded losses of $5 million and $1 million, respectively, related to these foreign currency exchange contracts. For the three months ended September 30, 2010 and 2009, the Company had recorded gains (losses) of $(10) million and $2 million, respectively, related to these foreign currency exchange contracts.
		During 2010 and 2009, 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 $(1) million to reflect contract prices at September 30, 2010 and December 31, 2009, 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, 2010 and 2009, the Company had recorded (losses) of $(1) million and $(2) million, respectively, related to these foreign currency exchange contracts. For the three months ended September 30, 2010 and 2009, the Company had recorded gains (losses) of $1 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.

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

Note F — concluded:

		During 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 $3 million to reflect contract prices at September 30, 2010. Gains (losses) related to these contracts are recorded in the Company’s consolidated statements of income in cost of goods sold. For the three months and nine months ended September 30, 2010, the Company had recorded gains of $4 million and $3 million, respectively, related to these contracts.
		The fair value of these derivative contracts is estimated on a recurring basis, quarterly, using Level 2 inputs (significant other observable inputs).

G.

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

		Nine Months Ended				Twelve Months Ended
		September 30, 2010				December 31, 2009
Balance at January 1		$	109			$	119
Accruals for warranties issued during the period			30				32
Accruals related to pre-existing warranties			(2	)			5
Settlements made (in cash or kind) during the period			(28	)			(44	)
Other, net			(2	)			(3	)
Balance at end of period		$	107			$	109

H. Debt

H.		At September 30, 2010 and December 31, 2009, there were outstanding $108 million principal amount at maturity of Zero Coupon Convertible Senior Notes due 2031, with an accreted value of $57 million and $55 million, respectively.
		The Company retired $300 million of floating rate notes on March 12, 2010, the scheduled maturity date.
		On March 10, 2010, the Company issued $500 million of 7.125% Notes (“Notes”) due March 15, 2020. The Notes are senior indebtedness and are redeemable at the Company’s option.
		During the second quarter of 2010, the Company repurchased $59 million of 5.875% Notes due July 2012, in open-market transactions. The Company paid a premium of $2 million over par value on the purchase of the notes; such expense was included in interest expense.
		On June 21, 2010, the Company entered into a Credit Agreement (the “New Credit Agreement”) dated as of June 21, 2010, with a bank group, with an aggregate commitment of $1.25 billion with a maturity date of January 10, 2014. The Company’s 5-Year Revolving Credit Agreement dated as of November 5, 2004, as amended, with an aggregate commitment of $1.25 billion, was terminated.

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

Note H — concluded:

		The New Credit Agreement provides for an unsecured revolving credit facility available to the Company and one of its foreign subsidiaries, in U.S. dollars, European euros and certain other currencies. Borrowings under the revolver denominated in euros are limited to $500 million, equivalent. The Company can also borrow swingline loans up to $150 million and obtain letters of credit of up to $250 million; any outstanding Letters of Credit reduce the Company’s borrowing capacity. At September 30, 2010, the Company had $100 million of unused Letters of Credit, reducing the Company’s borrowing capacity by such amount.
		Revolving credit loans bear interest under the New Credit Agreement, at the Company’s option: at (A) a rate per annum equal to the greatest of (i) prime rate, (ii) the Federal Funds effective rate plus 0.50% and (iii) LIBOR plus 1.0% (the “Alternative Base Rate”); plus an applicable margin based upon the then applicable corporate credit ratings of the Company; or (B) LIBOR plus an applicable margin based upon the then applicable corporate credit ratings of the Company. The foreign currency revolving credit loans bear interest at a rate equal to LIBOR plus an applicable margin based upon the then applicable corporate credit ratings of the Company.
		The New Credit Agreement contains financial covenants requiring the Company to maintain (A) a maximum debt to total capitalization ratio of 65 percent, and (B) a minimum interest coverage ratio equal to or greater than (i) 2.25 to 1.0 through the quarter ending on September 30, 2011 and (ii) 2.50 to 1.0 thereafter. The debt to total capitalization ratio allows the add-back, if incurred, of up to the first $500 million of certain non-cash charges, including goodwill and other intangible asset impairment charges, occurring from and after April 1, 2010, that would negatively impact shareholders’ equity.
		Based on the limitations of the debt to total capitalization covenant, at September 30, 2010, the Company had additional borrowing capacity, subject to availability, of up to $1.2 billion. Alternatively, at September 30, 2010, the Company could absorb a reduction to shareholders’ equity of approximately $700 million, and remain in compliance with the debt to total capitalization covenant.
		In order to borrow under the New 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 September 30, 2010.

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

I. Stock Based Compensation

I.

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, 2010, 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,
		2010				2009				2010				2009
Long-term stock awards		$	9			$	7			$	28			$	28
Stock options			6				6				17				21
Phantom stock awards and stock appreciation rights			1				3				—				5
Total		$	16			$	16			$	45			$	54
Income tax benefit		$	6			$	6			$	17			$	20

		In June 2009, the Company recognized $6 million of accelerated stock compensation expense (for previously granted stock awards and options) related to the retirement from full-time employment of the Company’s Executive Chairman of the Board of Directors; he continues to serve as a non-executive, non-employee Chairman of the Board of Directors.
		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. Stock awards granted prior to January 1, 2010 have a typical vesting period of 10 years. Stock awards granted subsequent to January 1, 2010 have a vesting period of 5 years.
		The Company’s long-term stock award activity was as follows, shares in millions:

		Nine Months Ended
		September 30,
		2010				2009
Unvested stock award shares at January 1			9				8
Weighted average grant date fair value		$	21			$	26
Stock award shares granted			3				2
Weighted average grant date fair value		$	14			$	8
Stock award shares vested			2				1
Weighted average grant date fair value		$	23			$	26
Stock award shares forfeited			—				—
Weighted average grant date fair value		$	19			$	25
Unvested stock award shares at September 30			10				9
Weighted average grant date fair value		$	19			$	22

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

Note I — continued:

		At September 30, 2010 and 2009, there was $136 million and $135 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 seven years, respectively.
		The total market value (at the vesting date) of stock award shares which vested during the nine months ended September 30, 2010 and 2009 was $22 million and $16 million, respectively.
		Stock Options
		Stock options are granted to key employees and, prior to 2010, to non-employee Directors 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 5,205,100 of stock option shares in the nine months ended September 30, 2010 with a grant date exercise price approximating $14 per share. In the first nine months of 2010, 3,552,100 stock option shares were forfeited (including options that expired unexercised).

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

Note I — continued:

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

		Nine Months Ended
		September 30,
		2010				2009
Option shares outstanding, January 1			36				31
Weighted average exercise price		$	23			$	25
Option shares granted, including restoration options			5				6
Weighted average exercise price		$	14			$	8
Option shares exercised			—				—
Aggregate intrinsic value on date of exercise (A)			$1	million		$	—
Weighted average exercise price		$	8			$	—
Option shares forfeited			4				1
Weighted average exercise price		$	23			$	23
Option shares outstanding, September 30			37				36
Weighted average exercise price		$	21			$	23
Weighted average remaining option term (in years)			6				6
Option shares vested and expected to vest, September 30			37				36
Weighted average exercise price		$	22			$	23
Aggregate intrinsic value (A)			$15	million			$26	million
Weighted average remaining option term (in years)			6				6
Option shares exercisable (vested), September 30			22				21
Weighted average exercise price		$	25			$	26
Aggregate intrinsic value (A)			$3	million		$	—
Weighted average remaining option term (in years)			4				4

At September 30, 2010 and 2009, there was $50 million and $47 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 2010 and 2009.

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

Note I — 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,
		2010				2009
Weighted average grant date fair value		$	5.30			$	2.23
Risk-free interest rate			2.77	%			2.59	%
Dividend yield			2.17	%			3.73	%
Volatility factor			46.01	%			39.07	%
Expected option life		6 years				6 years

J. Employee Retirement Plans

J.		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.
		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.
		Net periodic pension cost for the Company’s defined-benefit pension plans was as follows, in millions:

		Three Months ended September 30,
		2010								2009
		Qualified				Non-Qualified				Qualified				Non-Qualified
Service cost		$	2			$	—			$	3			$	—
Interest cost			11				3				7				2
Expected return on plan assets			(9	)			—				(5	)			—
Amortization of prior service cost			—				—				—				—
Recognized curtailment loss			—				—				—				—
Amortization of net loss			3				—				3				—
Net periodic pension cost		$	7			$	3				8				2

		Nine Months ended September 30,
		2010								2009
		Qualified				Non-Qualified				Qualified				Non-Qualified
Service cost		$	4			$	—			$	9			$	1
Interest cost			34				7				26				5
Expected return on plan assets			(27	)			—				(18	)			—
Amortization of prior service cost			—				—				—				1
Recognized curtailment loss			—				—				3				5
Amortization of net loss			8				—				10				—
Net periodic pension cost		$	19			$	7			$	30			$	12

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

Note J — continued:

		Assumptions
		Major assumptions used in accounting for the Company’s defined-benefit pension plans were as follows:

		December 31,
		2009				2008
Discount rate for obligations			5.8	%			6.1	%
Expected return on plan assets			8.0	%			8.0	%
Discount rate for net periodic pension cost			6.1	%			6.25	%

		The discount rate for obligations was based upon the expected duration of each defined-benefit pension plan’s liabilities matched to the widely used Citigroup Pension Discount Curve and Liability Index for December 31, 2009. Such rates for the Company’s defined benefit pension plans ranged from 2.60 percent to 6.25 percent, with the most significant portion of the liabilities having a discount rate for obligations of 5.60 percent or higher at December 31, 2009. The decline in the weighted average discount rate to 5.8 percent in 2009 from 6.1 percent in 2008 was principally the result of the variation in long-term rates which were highly volatile at the end of 2008 compared to 2009, for the Citigroup Pension Discount Curve, and the freezing of all future benefit accruals under substantially all of the Company’s domestic qualified and non-qualified defined-benefit plans, which shortened the period of future pension payments. The decrease in the discount rate increased our projected benefit obligation by approximately $29 million.
		The Company determined the expected long-term rate of return on plan assets of 8 percent based upon an analysis of expected and historical rates of return of various asset classes utilizing the current and long-term target asset allocation of the plan assets. The projected asset return at December 31, 2009 also considered near term returns, including current market conditions and also that pension assets are long-term in nature. The actual annual rate of return on the Company’s pension plan assets was 3.3 percent and .5 percent for the 10-year periods ended December 31, 2009 and 2008, respectively. Although these rates of return are less than the Company’s current expected long-term rate of return on plan assets, the Company notes that these 10-year periods include two significant declines in the equity markets. Accordingly, the Company believes an 8 percent expected long-term rate of return is reasonable.

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

Note J — concluded:

		The investment objectives seek to minimize the volatility of the value of the Company’s plan assets relative to pension liabilities and to ensure plan assets are sufficient to pay plan benefits. The Company, based upon discussions with its pension investment advisor, reduced its equity allocation to 70 percent from 80 percent; increased its fixed-income allocation to 25 percent from 10 percent and allocated 5 percent to alternative investments. The revised asset allocation of the investment portfolio was developed with the objective of achieving the Company’s expected rate of return and reducing volatility of asset returns, and considered the freezing of future benefits. The equity portfolios are invested in individual securities or funds that are expected to mirror broad market returns for equity securities. The fixed-income portfolio is invested in corporate bonds, bond index funds or U.S. Treasury securities. The increased allocation to fixed-income securities partially matches the bond-like and long-term nature of the pension liabilities. In 2010, the pension investment advisor recommended that, longer term, the Company should achieve the following targeted asset portfolio: 45 percent equities, 25 percent fixed-income, 15 percent global assets (combination of equity and fixed-income) and 15 percent alternative investments (such as private equity, commodities and hedge funds). The Company expects to achieve this allocation by December 31, 2011. This targeted portfolio is expected to yield a long-term rate of return of 8 percent.
		The fair value of the Company’s plan assets is subject to risk including significant concentrations of risk in the Company’s plan assets related to equity, interest rate and operating risk. In order to ensure plan assets are sufficient to pay benefits, a portion of plan assets is allocated to equity investments that are expected over time, to earn higher returns with more volatility than fixed-income investments which more closely match pension liabilities. Within equity, risk is mitigated by targeting a portfolio that is broadly diversified by geography, market capitalization, manager mandate size, investment style and process.
		In order to minimize asset volatility relative to the liabilities, a portion of plan assets are allocated to fixed-income investments that are exposed to interest rate risk. Rate increases generally will result in a decline in fixed-income assets, while reducing the present value of the liabilities. Conversely, rate decreases will increase fixed income assets, partially offsetting the related increase in the liabilities.
		The Company has targeted alternative investments such as hedge funds, private equity funds and commodities that are expected to comprise 15 percent of the pension assets. It is expected that the alternative investments would have a higher rate of return than the targeted overall long-term return of 8 percent. However, these investments are subject to greater volatility, due to their nature, than a portfolio of equities and fixed-income investments, and would be less liquid than financial instruments that trade on public markets.
		Potential events or circumstances that could have a negative effect on estimated fair value include the risks of inadequate diversification and other operating risks. To mitigate these risks, investments are diversified across and within asset classes in support of investment objectives. Policies and practices to address operating risks include ongoing manager oversight, plan and asset class investment guidelines and instructions that are communicated to managers, and periodic compliance and audit reviews to ensure adherence to these policies. In addition, the Company periodically seeks the input of its independent advisor to ensure the investment policy is appropriate.

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

K. Accumulated Other Comprehensive Income

K.

The components of accumulated other comprehensive income attributable to Masco Corporation were as follows, in millions:

		September 30, 2010				December 31, 2009
Cumulative translation adjustments		$	518			$	546
Unrealized gain on marketable securities, net			21				25
Unrecognized prior service cost and net loss, net			(200	)			(205	)
Accumulated other comprehensive income		$	339			$	366

The components of accumulated other comprehensive attributable to noncontrolling interest were as follows, in millions:

		September 30, 2010				December 31, 2009
Cumulative translation adjustments		$	22			$	31
Unrealized gain on marketable securities, net			—				—
Unrecognized prior service cost and net loss, net			—				—
Accumulated other comprehensive income		$	22			$	31

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

Note K — concluded:

The Company’s total comprehensive income was as follows, in millions:

		Three Months Ended								Three Months Ended
		September 30, 2010								September 30, 2009
		Attributable to				Noncontrolling				Attributable to				Noncontrolling
		Masco Corporation				Interest				Masco Corporation				Interest
Net (loss) income		$	(5	)		$	12			$	28			$	12
Other comprehensive income:
Cumulative translation adjustments, net			72				22				18				6
Unrealized gain on marketable securities, net			4				—				16				—
Prior service cost and net loss, net			1				—				—				—
Total comprehensive income		$	72			$	34			$	62			$	18

		Nine Months Ended								Nine Months Ended
		September 30, 2010								September 30, 2009
		Attributable to				Noncontrolling				Attributable to				Noncontrolling
		Masco Corporation				Interest				Masco Corporation				Interest
Net (loss) income		$	(9	)		$	32			$	2			$	27
Other comprehensive income:
Cumulative translation adjustments, net			(28	)			(9	)			30				10
Unrealized (loss) gain on marketable securities, net			(4	)			—				21				—
Prior service cost and net loss, net			5				—				62				—
Total comprehensive (loss) income		$	(36	)		$	23			$	115			$	37

		The unrealized gain (loss) on marketable securities, net, is net of income tax expense (benefit) of $3 million and $(1) million, respectively, for the three months and nine months ended September 30, 2010. The unrealized gain on marketable securities, net, is net of income tax of $8 million and $11 million, respectively, for the three months and nine months ended September 30, 2009. The prior service cost and net loss, net, is net of income tax of $1 million and $3 million for the three months and nine months ended September 30, 2010, respectively. The prior service cost and net loss, net, is net of income tax of $36 million for the nine months ended September 30, 2009.
		On the basis of amounts paid (declared), cash dividends per common share were $.075 ($.075) and $.225 ($.225) for the three months and nine months ended September 30, 2010, respectively. On the basis of amounts paid (declared), cash dividends per common share were $.075 ($.075) and $.385 ($.225) for the three months and nine months ended September 30, 2009, respectively.

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

L. Segment Information

L.

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

		Three Months Ended September 30,																Nine Months Ended September 30,
		2010				2009				2010				2009				2010				2009				2010				2009
		Net Sales(A)								Operating Profit (Loss)								Net Sales(A)								Operating Profit (Loss)
The Company’s operations by segment were:
Cabinets and Related Products		$	357			$	434			$	(61	)		$	(16	)		$	1,160			$	1,248			$	(113	)		$	(56	)
Plumbing Products			686				678				97				93				2,031				1,893				267				202
Installation and Other Services			292				332				(22	)			(34	)			874				961				(87	)			(104	)
Decorative Architectural Products			463				474				104				122				1,357				1,365				300				313
Other Specialty Products			159				166				11				16				435				427				16				16
Total		$	1,957			$	2,084			$	129			$	181			$	5,857			$	5,894			$	383			$	371
The Company’s operations by geographic area were:
North America		$	1,528			$	1,630			$	79			$	123			$	4,617			$	4,694			$	257			$	261
International, principally Europe			429				454				50				58				1,240				1,200				126				110
Total		$	1,957			$	2,084				129				181			$	5,857			$	5,894				383				371
General corporate expense, net											(27	)			(36	)											(84	)			(96	)
Charge for litigation settlement (B)											—				(7	)											—				(7	)
Accelerated stock compensation expense (C)											—				—												—				(6	)
(Loss) on corporate fixed assets, net											—				—												—				(2	)
Charge for defined-benefit plan curtailment (D)											—				—												—				(8	)
Operating profit											102				138												299				252
Other income (expense), net											(64	)			(49	)											(223	)			(157	)
Income from continuing operations before income taxes										$	38			$	89											$	76			$	95