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 For the quarterly period ended March 31, 2009

Masco Corporation

(Exact name of Registrant as Specified in 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

     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).

o 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 April 28, 2009
Common stock, par value $1.00 per share		359,300,000

 

 

MASCO CORPORATION

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - March 31, 2009 and December 31, 2008			1
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2009 and 2008			2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008			3
Notes to Condensed Consolidated Financial Statements			4-22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23-28
Item 4. Controls and Procedures			29
PART II. OTHER INFORMATION			30-31
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Signature
EX-4
EX-12
EX-31.A
EX-31.B
EX-32

MASCO CORPORATION

March 31, 2009 and December 31, 2008
(In Millions, Except Share Data)

		March 31,				December 31,
		2009				2008
ASSETS
Current assets:
Cash and cash investments		$	813			$	1,028
Receivables			1,138				999
Prepaid expenses and other			326				332
Inventories:
Finished goods			476				483
Raw material			310				333
Work in process			115				125
			901				941
Total current assets			3,178				3,300
Property and equipment, net			2,076				2,136
Goodwill			3,361				3,371
Other intangible assets, net			296				299
Other assets			358				377
Total assets		$	9,269			$	9,483
LIABILITIES
Current liabilities:
Notes payable		$	369			$	71
Accounts payable			603				531
Accrued liabilities			821				945
Total current liabilities			1,793				1,547
Long-term debt			3,611				3,915
Deferred income taxes and other			999				1,040
Total liabilities			6,403				6,502
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: 2009 – 350,000,000; 2008 – 351,400,000			350				351
Preferred shares authorized: 1,000,000; issued and outstanding: 2009 – None; 2008 – None			—				—
Paid-in capital			2				—
Retained earnings			2,054				2,162
Accumulated other comprehensive income			304				308
Total Masco Corporation’s shareholders’ equity			2,710				2,821
Noncontrolling interest			156				160
Total equity			2,866				2,981
Total liabilities and equity		$	9,269			$	9,483

See notes to condensed consolidated financial statements.

MASCO CORPORATION

For the Three Months Ended March 31, 2009 and 2008
(In Millions, Except Per Common Share Data)

		Three Months Ended March 31,
		2009				2008
Net sales		$	1,819			$	2,450
Cost of sales			1,403				1,820
Gross profit			416				630
Selling, general and administrative expenses			415				476
Charge for defined-benefit plan curtailment			8				—
Operating (loss) profit			(7	)			154
Other income (expense), net:
Interest expense			(56	)			(56	)
Impairment charges for financial investments			(3	)			(26	)
Other, net			—				(2	)
			(59	)			(84	)
(Loss) income from continuing operations before income taxes			(66	)			70
Income taxes			8				40
(Loss) income from continuing operations			(74	)			30
(Loss) from discontinued operations, net			—				(16	)
Net (loss) income			(74	)			14
Less: Net income attributable to noncontrolling interest			(7	)			(12	)
Net (loss) income attributable to Masco Corporation		$	(81	)		$	2
(Loss) earnings per common share attributable to Masco Corporation:
Basic:
(Loss) income from continuing operations		$	(.23	)		$	.04
(Loss) from discontinued operations, net			—				(.04	)
Net (loss) income		$	(.23	)		$	—
Diluted:
(Loss) income from continuing operations		$	(.23	)		$	.04
(Loss) from discontinued operations, net			—				(.04	)
Net (loss) income		$	(.23	)		$	—
Amounts attributable to Masco Corporation:
(Loss) income from continuing operations		$	(81	)		$	18
(Loss) from discontinued operations, net			—				(16	)
Net (loss) income		$	(81	)		$	2

See notes to condensed consolidated financial statements.

MASCO CORPORATION

For the Three Months Ended March 31, 2009 and 2008
(In Millions)

		Three Months Ended
		March 31,
		2009				2008
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations		$	53			$	190
(Increase) in receivables			(156	)			(174	)
Decrease (increase) in inventories			30				(64	)
Increase (decrease) in accounts payable and accrued liabilities, net			25				(60	)
Net cash (for) operating activities			(48	)			(108	)
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt			1				5
Payment of debt			(3	)			(10	)
Purchase of Company common stock			(11	)			(100	)
Cash dividends paid			(85	)			(84	)
Net cash (for) financing activities			(98	)			(189	)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures			(27	)			(43	)
Proceeds from disposition of:
Marketable securities			3				9
Other financial investments, net			3				4
Businesses, net of cash disposed			—				8
Property and equipment			—				2
Acquisition of businesses, net of cash acquired			(8	)			—
Other, net			(9	)			(1	)
Net cash (for) investing activities			(38	)			(21	)
Effect of exchange rate changes on cash and cash investments			(31	)			34
CASH AND CASH INVESTMENTS:
Decrease for the period			(215	)			(284	)
Cash at businesses held for sale			—				(8	)
At January 1			1,028				922
At March 31		$	813			$	630

See notes to condensed consolidated financial statements.

MASCO CORPORATION

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 March 31, 2009 and the results of operations and changes in cash flows for the three months ended March 31, 2009 and 2008. The condensed consolidated balance sheet at December 31, 2008 was derived from audited financial statements.
		Certain prior-year amounts have been reclassified to conform to the 2009 presentation in the condensed consolidated financial statements. The results of operations related to 2008 discontinued operations have been separately stated in the accompanying condensed consolidated statement of income for the three months ended March 31, 2008. In the Company’s condensed consolidated statements of cash flows for the three months ended March 31, 2008, cash flows of discontinued operations are not separately classified.
		Recently Issued Accounting Pronouncements.
		In April 2009, the Financial Accounting Standards Board (the “FASB”) issued FASB Staff Position No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies,” (“FSP No. FAS 141(R)-1”). FSP No. FAS 141(R)-1 amends and clarifies the accounting, measurement and recognition provisions and the related disclosures arising from contingencies in a business combination under FAS No. 141(R). FSP No. FAS 141(R)-1 is effective for the Company for any business combination that is completed subsequent to January 1, 2009.
		In April 2009, the FASB issued FASB Staff Position No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions that are not Orderly,” (“FSP No. FAS 157-4”). FSP No. FAS 157-4 provides additional guidance for estimating fair value under FAS No. 157 when the volume and level of market activity for an asset or liability have significantly decreased when compared with normal market activity for the asset or liability. If there is a significant decrease in the volume and activity for the asset or liability, transactions or quoted prices may not be determinative of fair value in an orderly transaction and further analysis and adjustment of the transactions or quoted prices may be necessary. FSP No. FAS 157-4 is effective for the quarter ended June 30, 2009 and the Company does not anticipate any significant adjustments to the Company’s estimates of fair value for assets and liabilities measured at fair value upon adoption.
		In April 2009, the FASB issued FASB Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” (“FSP No. FAS 115-2 and FAS 124-2”). FSP No. FAS 115-2 and FAS 124-2 amends the method for determining whether an other-than-temporary impairment exists and the classification of the impairment charge for debt securities and the related disclosures. FSP No. FAS 115-2 and FAS 124-2 is effective for the quarter ended June 30, 2009 and the Company does not anticipate any significant adjustments to the Company’s condensed consolidated financial statements upon adoption.

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

Note A – concluded:

		In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” (“FSP No. FAS 107-1 and APB 28-1”). FSP No. FAS 107-1 and APB 28-1 amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” to require disclosures about the fair value of financial instruments for interim reporting periods. FSP No. FAS 107-1 and APB 28-1 is effective for the quarter ended June 30, 2009 and the Company does not anticipate that this staff position will have a significant effect on its condensed consolidated financial statements.
B.		During the first quarter of 2008, the Company determined that several European business units were not core to the Company’s long-term growth strategy and, accordingly, embarked on a plan of disposition; the dispositions were completed in August 2008. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”), the Company accounted for the 2008 dispositions as discontinued operations.
		In the first quarter of 2008, the Company recognized a charge for those business units that were expected to be divested at a loss, which included estimated expenses for fees expected to be incurred. The impairment of assets related to the discontinued operations primarily includes the write-down of goodwill of $24 million and other assets of $19 million.
		The impairment charge in the first quarter of 2008 included $6 million related to a business unit that was reclassified from discontinued operations to continuing operations in the third quarter of 2008, since the business unit would not be sold. The related assets and liabilities were also reclassified out of assets and liabilities held for sale. In addition, the Company recognized pre-tax income of $6 million for the three months ended September 30, 2008 related to the reversal of the impairment charge recorded in the first quarter of 2008. The income resulted from an adjustment of the assets to the lower of the carrying value, prior to inclusion in assets held for sale, adjusted for depreciation expense, or current market value. As a result, this business unit is reported in continuing operations in 2008 and 2009; the related charge of $6 million is reported in continuing operations in 2008.
		Selected financial information for these discontinued operations was as follows, in millions:

		Three Months Ended
		March 31, 2008
Net sales		$	62
Income from discontinued operations		$	7
Impairment of assets held for sale			(43	)
(Loss) before income tax			(36	)
Income tax benefit			20
(Loss) from discontinued operations, net		$	(16	)

The 2008 discontinued operations were previously included in the Plumbing Products segment and the Other Specialty Products segment.

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

C.

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 March 31, 2009, 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 (income) and the related income tax benefit, for these stock-based incentives, were as follows, in millions:

		Three months ended
		March 31,
		2009				2008
Long-term stock awards		$	8			$	12
Stock options			7				8
Phantom stock awards and stock appreciation rights			—				(1	)
Total		$	15			$	19
Income tax benefit		$	6			$	7

		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:

		Three Months Ended
		March 31,
		2009				2008
Unvested stock award shares at January 1			8				9
Weighted average grant date fair value		$	26			$	28
Stock award shares granted			2				1
Weighted average grant date fair value		$	8			$	22
Stock award shares vested			(1	)			(1	)
Weighted average grant date fair value		$	26			$	27
Stock award shares forfeited			—				—
Weighted average grant date fair value		$	27			$	29
Unvested stock award shares at March 31			9				9
Weighted average grant date fair value		$	22			$	26

		At March 31, 2009 and 2008, there was $160 million and $197 million, respectively, of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of seven years.
		The total market value (at the vesting date) of stock award shares which vested during the three months ended March 31, 2009 and 2008 was $11 million and $20 million, respectively.

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

Note C – continued:

		Stock Options
		The Company granted 5,694,000 of stock option shares in the three months ended March 31, 2009 with a grant date exercise price approximating $8 per share. In the first three months of 2009, 291,000 stock option shares were forfeited (including options that expired unexercised).
		The Company’s stock option activity was as follows, shares in millions:

		Three Months Ended
		March 31,
		2009				2008
Option shares outstanding, January 1			31				26
Weighted average exercise price		$	25			$	27
Option shares granted, including restoration options			6				—
Weighted average exercise price		$	8			$	—
Option shares exercised			—				—
Aggregate intrinsic value on date of exercise (A)		$	—			$	—
Weighted average exercise price		$	—			$	20
Option shares forfeited			—				—
Weighted average exercise price		$	25			$	31
Option shares outstanding, March 31			37				26
Weighted average exercise price		$	23			$	27
Weighted average remaining option term (in years)			7				6
Option shares vested and expected to vest, March 31			36				26
Weighted average exercise price		$	23			$	27
Aggregate intrinsic value (A)		$	—			$	1	million
Weighted average remaining option term (in years)			7				6
Option shares exercisable (vested), March 31			17				14
Weighted average exercise price		$	26			$	25
Aggregate intrinsic value (A)		$	—			$	1	million
Weighted average remaining option term (in years)			4				5

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

Note C – 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:

		Three Months Ended
		March 31, 2009
Weighted average grant date fair value		$	2.22
Risk-free interest rate			2.59	%
Dividend yield			3.74	%
Volatility factor			39.00	%
Expected option life		6 years

D.		The Company sponsors qualified defined-benefit and 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.
		Net periodic pension cost for the Company’s defined-benefit pension plans was as follows, in millions:

		March 31,
		2009								2008
		Qualified				Non-Qualified				Qualified				Non-Qualified
Service cost		$	4			$	—			$	5			$	1
Interest cost			11				2				14				2
Expected return on plan assets			(8	)			—				(16	)			—
Recognized prior service cost			—				1				—				—
Recognized curtailment loss			3				5				—				—
Recognized net loss			5				—				1				—
Net periodic pension cost		$	15			$	8				4				3

In March 2009, based on management’s recommendation, the Board of Directors approved a plan to freeze all future benefit accruals under substantially all of the Company’s domestic qualified and non-qualified defined-benefit pension plans. The freeze is effective January 1, 2010. As a result of this action, the liabilities for the plans impacted by the freeze were remeasured and the Company recognized a charge of $8 million in the first quarter of 2009. In addition, the Company expects net periodic pension costs related to the domestic defined-benefit pension plans that were remeasured to decrease by approximately $14 million in 2009 to $31 million from the original forecast of $45 million at December 31, 2008.

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

     Note D – concluded:

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

		At March 31, 2009
Discount rate for obligations			7.3	%
Expected return on plan assets			8.0	%
Discount rate for net periodic pension cost			6.1	%

		The discount rate for obligations was based upon the expected duration of each defined-benefit pension plan’s liabilities matched to the March 31, 2009 Citigroup Pension Discount Curve. Such rates for the Company’s domestic defined-benefit pension plans that have been frozen ranged from 7.0 percent to 7.4 percent, with the most significant portion of the liabilities having a discount rate for obligations of 7.4 percent at March 31, 2009.
		The Company determined the expected long-term rate of return on plan assets by reviewing an analysis of expected and historical rates of return of various asset classes based upon the current and long-term target asset allocation of the plan assets. The measurement date used to determine the defined-benefit pension expense was March 31.
E.		The changes in the carrying amount of goodwill for the three months ended March 31, 2009, by segment, were as follows, in millions:

		At												At
		Dec. 31, 2008				Additions (A)				Other(B)				Mar. 31, 2009
Cabinets and Related Products		$	225			$	—			$	(2	)		$	223
Plumbing Products			248				3				(11	)			240
Installation and Other Services			1,768				—				—				1,768
Decorative Architectural Products			294				—				—				294
Other Specialty Products			836				—				—				836
Total		$	3,371			$	3			$	(13	)		$	3,361

		Other indefinite-lived intangible assets were $194 million and $195 million at March 31, 2009 and December 31, 2008, respectively, and principally included registered trademarks. The carrying value of the Company’s definite-lived intangible assets was $102 million (net of accumulated amortization of $59 million) at March 31, 2009 and $104 million (net of accumulated amortization of $56 million) at December 31, 2008, and principally included customer relationships and non-compete agreements.
F.		Depreciation and amortization expense was $62 million and $60 million for the three months ended March 31, 2009 and 2008, respectively.

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

G.

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:

		March 31,				December 31,
		2009				2008
Asahi Tec Corporation – common and preferred stock		$	69			$	73
TriMas Corporation common stock			4				3
Auction rate securities			22				22
Marketable securities			—				3
Private equity funds			132				138
Other investments			9				10
Total		$	236			$	249

The Company’s investments in available-for-sale securities at March 31, 2009 and December 31, 2008 (including marketable securities, auction rate securities, Asahi Tec common and preferred stock and TriMas common stock) were as follows, in millions:

						Pre-tax
						Unrealized				Unrealized				Recorded
		Cost Basis				Gains				Losses				Basis
March 31, 2009		$	72			$	23			$	—			$	95
December 31, 2008		$	75			$	26			$	—			$	101

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

Note G – continued:

		The Company’s investments in private equity funds and other private investments are carried at cost. It is not practicable for the Company to estimate a fair value because the private equity funds have no quoted market price and sufficient information is not readily available for the Company to utilize a valuation model to determine the fair value for each fund. These investments are evaluated quarterly for potential other-than-temporary impairment when impairment indicators are present, or when an event or change in circumstances has occurred, that may have a significant adverse effect on the fair value of the investment. Impairment indicators the Company considers include the following: whether there has been a significant deterioration in earnings performance, asset quality or business prospects; a significant adverse change in the regulatory, economic or technological environment; a significant adverse change in the general market condition or geographic area in which the investment operates; industry and sector performance; current equity and credit market conditions; and any bona fide offers to purchase the investment for less than the carrying value. The Company also considers specific adverse conditions related to the financial health of and business outlook for the fund, including industry and sector performance. The significant assumptions utilized in analyzing a fund for potential other-than-temporary impairment include current economic conditions, market analysis for specific funds and performance indicators in the automotive and transportation, residential and commercial construction, bio-technology, health care and information technology sectors in which the applicable funds’ investments operate. Since there is no active trading market for these investments, they are for the most part illiquid. These investments, by their nature, can also have a relatively higher degree of business risk, including financial leverage, than other financial investments. Future changes in market conditions, the future performance of the underlying investments or new information provided by private equity fund managers could affect the recorded values of such investments and the amounts realized upon liquidation. The Company determined that the decline in the estimated value of two private equity fund investments (with a carrying value of $33 million prior to the impairment) was other-than-temporary and, accordingly, recognized a non-cash, pre-tax impairment charge of $3 million for the quarter ended March 31, 2009.
		The remaining private equity investments at March 31, 2009 and December 31, 2008, with an aggregate carrying value of $102 million and $95 million, respectively, 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 G – concluded:

Income (loss) from financial investments, net, included in other, net, within other income (expense), net, and impairment charges for financial investments were as follows, in millions:

		Three Months Ended
		March 31,
		2009				2008
Realized gains from marketable securities		$	—			$	—
Realized losses from marketable securities			—				(3	)
Dividend income from marketable securities			—				—
Income from other investments, net			—				—
Dividend income from other investments			—				—
Income (loss) from financial investments, net		$	—			$	(3	)
Impairment charges:
TriMas Corporation		$	—			$	(22	)
Private equity funds			(3	)			(4	)
Total impairment charges		$	(3	)		$	(26	)

H.		At March 31, 2009 and 2008, the Company had entered into foreign currency exchange contracts to hedge currency fluctuations related to intercompany loans denominated in non-functional currencies. At March 31, 2009 and 2008, the Company had recorded a $1 million and $0 million loss, respectively, on the foreign currency exchange contract, which is more than 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.
		At March 31, 2009 and 2008, the Company, including certain European operations, also had entered into foreign currency forward contracts to manage exposure to currency fluctuations in the European euro and the U.S. dollar. Based upon period-end market prices, the Company had recorded a $3 million gain and a $1 million loss to reflect the contract prices at March 31, 2009 and 2008, respectively. Gains (losses) related to these contracts are recorded in the Company’s consolidated statements of income in other income (expense), net. 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.
I.		At both March 31, 2009 and December 31, 2008, there were outstanding $108 million principal amount of Zero Coupon Convertible Senior Notes due 2031, with an accreted value of $54 million.
		The Company adopted FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement),” (“FSP No. APB 14-1”) effective January 1, 2009. The adoption of FSP No. APB 14-1 will have no impact on 2009 results; the Company recorded a $1 million cumulative effect of accounting change as of January 1, 2007 and the adoption had no impact on the Company’s condensed consolidated financial statements for the periods ended March 31, 2009 and 2008.

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

J.

On January 1, 2008, the Company adopted SFAS No. 157 for its financial assets and liabilities. On January 1, 2009, the Company adopted SFAS No. 157 for its non-financial assets and liabilities; such adoption did not have a significant effect on its condensed consolidated financial statements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” SFAS No. 157 further defines a fair value hierarchy, as follows: Level 1 inputs as quoted prices in active markets for identical assets or liabilities; Level 2 inputs as observable inputs other than Level 1 prices, such as quoted market prices for similar assets or liabilities or other inputs that are observable or can be corroborated by market data; and Level 3 inputs as unobservable inputs that are supported by little or no market activity and that are financial instruments whose value is determined using pricing models or instruments for which the determination of fair value requires significant management judgment or estimation.

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

Note J – continued:

Financial assets and (liabilities) measured at fair value on a recurring basis during the period and the amounts for each level within the fair value hierarchy established by SFAS No. 157, were as follows, in millions:

						Fair Value Measurements Using
										Significant
						Quoted				Other				Significant
						Market				Observable				Unobservable
		Mar. 31,				Prices				Inputs				Inputs
		2009				(Level 1)				(Level 2)				(Level 3)
Asahi Tec Corporation:
Preferred stock		$	68			$	—			$	—			$	68
Common stock			1				1				—				—
Foreign currency exchange contracts (A)			2				—				2				—
Auction rate securities			22				—				—				22
TriMas Corporation			4				4				—				—
Total		$	97			$	5			$	2			$	90

						Fair Value Measurements Using
										Significant
						Quoted				Other				Significant
						Market				Observable				Unobservable
		Dec. 31,				Prices				Inputs				Inputs
		2008				(Level 1)				(Level 2)				(Level 3)
Asahi Tec Corporation:
Preferred stock		$	72			$	—			$	—			$	72
Common stock			1				1				—				—
Foreign currency exchange contracts (A)			(14	)			—				(14	)			—
Auction rate securities			22				—				—				22
Marketable securities			3				3				—				—
TriMas Corporation			3				3				—				—
Other investments			3				—				3				—
Total		$	90			$	7			$	(11	)		$	94

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

Note J – continued:

The following table summarizes the changes in Level 3 financial assets measured at fair value on a recurring basis for the quarter ended March 31, 2009 and the year ended December 31, 2008, in millions:

		Asahi Tec				Auction Rate
		Preferred Stock				Securities				Total
Fair value January 1, 2009		$	72			$	22			$	94
Total losses included in earnings			—				—				—
Unrealized (losses)			(4	)			—				(4	)
Purchases, issuances, settlements			—				—				—
Fair value at March 31, 2009		$	68			$	22			$	90

		Asahi Tec				Auction Rate
		Preferred Stock				Securities				Total
Fair value January 1, 2008		$	55			$	22			$	77
Total losses included in earnings			—				—				—
Unrealized gains			17				—				17
Purchases, issuances, settlements			—				—				—
Fair value at December 31, 2008		$	72			$	22			$	94

The Company also has investments in private equity funds and other private investments which are carried at cost and are evaluated for potential impairment when impairment indicators are present, or when an event or change in circumstances has occurred, that may have a significant adverse effect on the fair value of the investment. There is no active trading market for these investments and they are for the most part illiquid. Due to the significant unobservable inputs, the fair value measurements used to evaluate impairment are a Level 3 input.

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

Note J – concluded:

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 established by SFAS No. 157, were as follows, in millions:

Fair Value Measurements Using

Significant

Quoted

Other

Significant

Market

Observable

Unobservable

Total

Mar. 31,

Prices

Inputs

Inputs

Gains

2009

(Level 1)

(Level 2)

(Level 3)

(Losses)

Private equity funds

$

30

$

—

$

—

$

30

$

(3

)

						Fair Value Measurements Using
										Significant
						Quoted				Other				Significant
						Market				Observable				Unobservable				Total
		Dec. 31,				Prices				Inputs				Inputs				Gains
		2008				(Level 1)				(Level 2)				(Level 3)				(Losses)
Private equity funds		$	43			$	—			$	—			$	43			$	(23	)
Other private investments			4				—				—				4				(3	)
		$	47			$	—			$	—			$	47			$	(26	)

During the first quarter of 2009, the Company determined that the decline in the estimated value of two private equity fund investments was other-than-temporary and, accordingly, recognized a non-cash, pre-tax impairment charge of $3 million. During 2008, the Company determined that the decline in the estimated value of six private equity funds was other-than-temporary and, accordingly, recognized non-cash, pre-tax impairment charges of $23 million for the year ended December 31, 2008.

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

K.

Effective January 1, 2009, the Company adopted SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51,” (“SFAS No. 160”). At March 31, 2009 and December 31, 2008, the Company owns 68 percent of Hansgrohe AG. SFAS No. 160 requires the reclassification of the Company’s noncontrolling interest in Hansgrohe AG to shareholders’ equity from deferred income taxes and other. At December 31, 2008, the Company did not have a balance in paid-in capital due to the repurchases of Company common stock. The Company’s activity in shareholders’ equity was as follows, in millions:

																		Accumulated
																		Other
						Common				Paid-in-				Retained				Comprehensive				Noncontrolling
		Total				Shares				Capital				Earnings				Income				Interest
Balance, January 1, 2008		$	4,142			$	359			$	—			$	2,969			$	661			$	153
Net (loss) income			(352	)											(391	)							39
Cumulative translation adjustments			(221	)															(210	)			(11	)
Unrealized gain on marketable securities, net of income tax of $4			7																7
Prior service cost and net loss, net of income tax benefit of $86			(150	)															(150	)
Total comprehensive (loss) income			(716	)																			28
Shares issued			1				1
Shares retired:
Repurchased			(160	)			(9	)			(71	)			(80	)
Surrendered (non-cash)			(7	)							(7	)
Cash dividends declared			(357	)											(336	)							(21	)
Stock-based compensation			78								78
Balance, December 31, 2008		$	2,981			$	351			$	—			$	2,162			$	308			$	160
Net (loss) income			(74	)											(81	)							7
Cumulative translation adjustments			(79	)															(68	)			(11	)
Unrealized gain on marketable securities, net of income tax of $2			2																2
Prior service cost and net loss, net of income tax of $36			62																62
Total comprehensive (loss) income			(89	)																			(4	)
Shares issued			—				1				(1	)
Shares retired:
Repurchased			(11	)			(2	)			(9	)
Surrendered (non-cash)			(3	)							(3	)
Cash dividends declared			(27	)											(27	)
Stock-based compensation			15								15
Balance, March 31, 2009		$	2,866			$	350			$	2			$	2,054			$	304			$	156

Noncontrolling interest includes accumulated other comprehensive income of $14 million, $25 million and $36 million at March 31, 2009, and December 31, 2008 and January 1, 2008, respectively.

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

Note K — concluded:

In the first quarter of 2009, the Company announced the reduction of its quarterly dividend to $.075 per common share ($.30 per common share annually) from $.235 per common share ($.94 per common share annually). On the basis of amounts paid (declared), cash dividends per common share were $.235 ($.075) and $.23 ($.23) for the three months ended March 31, 2009 and 2008, respectively.

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

		Three Months Ended
		March 31, 2008
		Attributable to				Noncontrolling
		Masco Corporation				Interest
Net income		$	2			$	12
Other comprehensive income:
Cumulative translation adjustments, net			107				17
Unrealized gain on marketable securities, net			7				—
Prior service cost and net loss, net			1				—
Total comprehensive income		$	117			$	29

The unrealized gain on marketable securities, net, is net of income tax of $4 million for the three months ended March 31, 2008.

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

L.

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

		Three Months Ended March 31,
		2009				2008				2009				2008
		Net Sales(A)								Operating (Loss) Profit
The Company’s operations by segment were:
Cabinets and Related Products		$	395			$	596			$	(28	)		$	28
Plumbing Products			606				821				30				99
Installation and Other Services			317				486				(36	)			(6	)
Decorative Architectural
Products			386				379				75				74
Other Specialty Products			115				168				(7	)			8
Total		$	1,819			$	2,450			$	34			$	203
The Company’s operations by geographic area were:
North America		$	1,434			$	1,893			$	19			$	149
International, principally Europe			385				557				15				54
Total		$	1,819			$	2,450				34				203
General corporate expense, net											(33	)			(43	)
Charge for defined-benefit plan curtailment (B)											(8	)			—
Charge for planned disposition of business (C)											—				(6	)
Operating (loss) profit											(7	)			154
Other income (expense), net											(59	)			(84	)
(Loss) income from continuing operations before income taxes										$	(66	)		$	70

M.

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

		Three Months Ended
		March 31,
		2009				2008
Income from cash and cash investments		$	3			$	6
Income (loss) from financial investments, net (Note G)			—				(3	)
Other items, net			(3	)			(5	)
Total other, net		$	—			$	(2	)

Other items, net, for the first quarter of 2009 and 2008 included $2 million and $11 million, respectively, of currency losses.

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

N.

Reconciliations of the numerators and denominators used in the computations of basic and diluted earnings per common share were as follows, in millions:

		Three Months Ended
		March 31,
		2009				2008
Numerator (basic and diluted):
(Loss) income from continuing operations		$	(81	)		$	18
Dividends on restricted stock awards			(1	)			(2	)
(Loss) income from continuing operations attributable to common shareholders		$	(82	)		$	16
(Loss) from discontinued operations, net			—				(16	)
Net (loss) income available to common shareholders		$	(82	)		$	—
Denominator:
Basic common shares (based upon weighted average)			351				356
Add:
Contingent common shares			—				—
Stock option dilution			—				—
Diluted common shares			351				356

Effective January 1, 2009, the Company adopted FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities,” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 clarifies that share-based payment awards that entitle their holders to receive non-forfeitable dividends prior to vesting should be considered participating securities. The Company has granted restricted stock awards that contain non-forfeitable rights to dividends on unvested shares; such stock awards are considered participating securities under FSP EITF 03-6-1. As participating securities, the unvested shares are required to be included in the calculation of the Company’s basic earnings per common share, using the “two-class method.” The two-class method of computing earnings per common share is an allocation method that calculates earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Unvested restricted stock awards were previously included in the Company’s diluted share calculation using the treasury stock method. At March 31, 2009, the Company did not allocate any loss to the unvested stock awards (participating securities), due to the anti-dilutive effect.

At March 31, 2009 and 2008, the Company did not include any common shares related to the Zero Coupon Convertible Senior Notes (“Notes”) in the calculation of diluted earnings per common share, as the price of the Company’s common stock at March 31, 2009 and 2008 did not exceed the equivalent accreted value of the Notes.

Additionally, 37 million common shares and 22 million common shares for the three months ended March 31, 2009 and 2008, respectively, related to stock options were excluded from the computation of diluted earnings per common share due to their antidilutive effect.

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

Note N — concluded:

		In the first quarter of 2009, the Company granted approximately two million shares of stock awards. In the first quarter of 2009, the Company also repurchased and retired approximately two million shares of Company common stock, for cash aggregating $11 million to offset the dilutive impact of stock awards. At March 31, 2009, the Company had 30 million shares of its common stock remaining under the May 2007 Board of Directors repurchase authorization.
O.		The Company is subject to lawsuits and pending or asserted claims with respect to matters generally arising in the ordinary course of business.
		As previously disclosed, a lawsuit has been brought against the Company and a number of its insulation installation companies in the federal court in Atlanta, Georgia alleging that certain practices violate provisions of the federal antitrust laws. In February 2009, the federal court in Atlanta certified a class of 377 insulation contractors. Two additional lawsuits, seeking class action status and alleging anticompetitive conduct, were filed against the Company and a number of its insulation suppliers. One of these lawsuits was filed in a Florida state court and has been dismissed by the court with prejudice. The other lawsuit was filed in federal court in northern California and was subsequently transferred to federal court in Atlanta, Georgia. The Company is vigorously defending the pending cases. Based upon the advice of its outside counsel, the Company believes that the conduct of the Company and its insulation installation companies, which has been the subject of the above-described lawsuits, has not violated any antitrust laws. The Company is unable at this time to reliably estimate any potential liability which might occur from an adverse judgment. There cannot be any assurance that the Company will ultimately prevail in the remaining lawsuits, or, if unsuccessful, that the ultimate liability would not be material and would not have a material adverse effect on its businesses or the methods used by its insulation installation companies in doing business.
		As previously disclosed, European governmental authorities are investigating possible anticompetitive business practices relating to the plumbing and heating industries in Europe. The investigations involve a number of European companies, including certain of the Company’s European manufacturing divisions and a number of other large businesses. The Company believes that it will not incur material liability as a result of the matters that are subject to these investigations.
		Several California-based installation subsidiaries of the Company were named as defendants in an alleged employment related class action lawsuit arising under state law. In March 2009, the Court granted final approval of the $9 million settlement and the Company has since satisfied its payment obligations under the order.

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

P.

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

		Three Months Ended				Twelve Months Ended
		March 31, 2009				December 31, 2008
Balance at January 1		$	119			$	133
Accruals for warranties issued during the period			2				42
Accruals related to pre-existing warranties			1				6
Settlements made (in cash or kind) during the period			(7	)			(53	)
Other, net			(2	)			(9	)
Balance at end of period		$	113			$	119

Q.		The unusual relationship between income tax expense and loss from continuing operations before income taxes in the first quarter of 2009 results primarily from an increase in the valuation allowance on the 2008 net operating loss carryforward of $3 million due to the anticipated continued losses of certain subsidiaries during 2009, losses in certain state and local jurisdictions providing no tax benefit and limitations on the tax benefit of foreign tax credits due to the anticipated U.S. Federal loss carryback.
		During the first quarter of 2009, the Company did not record a material change in its liability for unrecognized tax benefits or related accrued interest and penalties. As a result of tax audit closings, settlements and expiration of applicable statutes of limitations in various jurisdictions within the next 12 months, the Company anticipates that it is reasonably possible that the liability for unrecognized tax benefits could be reduced by approximately $17 million.
R.		Subsequent Event. At the Company’s request, in late April 2009, the Company and its Bank Group modified the terms of its Five-Year Revolving Credit Facility, which expires February 2011. After reviewing its anticipated liquidity position, the Company requested that the maximum amount the Company could borrow under this facility be reduced to $1.25 billion from $2.0 billion; in addition, the debt to total capitalization ratio has been increased from 60 percent to 65 percent. The debt to total capitalization ratio and the minimum net worth covenant have also been amended to allow the add-back, if incurred, of up to the first $500 million of certain non-cash charges, including goodwill and other intangible asset impairment charges that would negatively impact shareholders’ equity. As a result, under the terms of the Amended Credit Facility, the Company’s borrowing capacity increased to $1.25 billion. The Company incurred approximately $2 million of fees and expenses associated with the Amendment. The Company, if the facility is utilized, will incur higher borrowing costs as a result of the Amendment.
		At March 31, 2009, the Company was in compliance with the requirements of the Five-Year Revolving Credit Facility prior to the modifications.

MASCO CORPORATION

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

FIRST QUARTER 2009 VERSUS FIRST QUARTER 2008

SALES AND OPERATIONS

     The following table sets forth the Company’s net sales and operating (loss) profit margins by business segment and geographic area, dollars in millions:

		Three Months Ended								Percent (Decrease)
		March 31,								Increase
		2009				2008				2009 vs. 2008
Net Sales:
Cabinets and Related Products		$	395			$	596			(34%)
Plumbing Products			606				821			(26%)
Installation and Other Services			317				486			(35%)
Decorative Architectural Products			386				379			2%
Other Specialty Products			115				168			(32%)
Total		$	1,819			$	2,450			(26%)
North America		$	1,434			$	1,893			(24%)
International, principally Europe			385				557			(31%)
Total		$	1,819			$	2,450			(26%)
		Three Months Ended
		March 31,
		2009				2008
Operating (Loss) Profit Margins: (A)
Cabinets and Related Products			(7.1	%)			4.7	%
Plumbing Products			5.0	%			12.1	%
Installation and Other Services			(11.4	%)			(1.2	%)
Decorative Architectural Products			19.4	%			19.5	%
Other Specialty Products			(6.1	%)			4.8	%
North America			1.3	%			7.9	%
International, principally Europe			3.9	%			9.7	%
Total			1.9	%			8.3	%
Operating (loss) profit margins, as reported			(.4	%)			6.3	%