MASCO CORP /DE/ (Form: 10-Q, Received: 10/30/2019 16:09:27)

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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 September 30, 2019

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

For the transition period from ___________ to ___________

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 or Organization)		(I.R.S. Employer Identification No.)



17450 College Parkway,	Livonia,	Michigan	48152
(Address of Principal Executive Offices)			(Zip Code)

(313) 274-7400

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $1.00 par value	MAS	New York Stock Exchange

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. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No

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



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ Yes ☒ 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 September 30, 2019
Common stock, par value $1.00 per share		286,073,341

MASCO CORPORATION

INDEX



		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets — as at September 30, 2019 and December 31, 2018	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018	2
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018	4
	Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018	5
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 4.	Controls and Procedures	28
PART II.	OTHER INFORMATION	29
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 6.	Exhibits	30
	Signature	31

MASCO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

September 30, 2019 and December 31, 2018

(In Millions, Except Share Data)



	September 30, 2019			December 31, 2018
ASSETS
Current Assets:
Cash and cash investments	$	475		$	553
Receivables	1,177			1,068
Prepaid expenses and other	105			90
Assets held for sale	111			151
Inventories:
Finished goods	558			516
Raw material	277			302
Work in process	89			86
	924			904
Total current assets	2,792			2,766
Property and equipment, net	1,017			1,037
Operating lease right-of-use assets	183			—
Goodwill	687			692
Other intangible assets, net	264			289
Other assets	85			100
Assets held for sale	492			509
Total assets	$	5,520		$	5,393

LIABILITIES
Current Liabilities:
Accounts payable	$	879		$	851
Notes payable	208			8
Accrued liabilities	682			676
Liabilities held for sale	140			149
Total current liabilities	1,909			1,684
Long-term debt	2,771			2,971
Other liabilities	684			561
Liabilities held for sale	133			108
Total liabilities	5,497			5,324

Commitments and contingencies (Note P)

EQUITY
Masco Corporation's shareholders' equity:
Common shares, par value $1 per share Authorized shares: 1,400,000,000; Issued and outstanding: 2019 – 284,100,000; 2018 – 293,900,000	284			294
Preferred shares authorized: 1,000,000; Issued and outstanding: 2019 and 2018 – None	—			—
Paid-in capital	—			—
Retained deficit	(309		)	(278		)
Accumulated other comprehensive loss	(118		)	(127		)
Total Masco Corporation's shareholders' deficit	(143		)	(111		)
Noncontrolling interest	166			180
Total equity	23			69
Total liabilities and equity	$	5,520		$	5,393

See notes to condensed consolidated financial statements.

MASCO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

For the Three and Nine Months Ended September 30, 2019 and 2018

(In Millions, Except Per Common Share Data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net sales	$	1,947		$	1,904		$	5,787		$	5,743
Cost of sales	1,282			1,281			3,813			3,832
Gross profit	665			623			1,974			1,911
Selling, general and administrative expenses	349			337			1,047			1,041
Impairment charge for other intangible assets	—			—			9			—
Operating profit	316			286			918			870
Other income (expense), net:
Interest expense	(39		)	(38		)	(119		)	(117		)
Other, net	(8		)	—			(16		)	(12		)
	(47		)	(38		)	(135		)	(129		)
Income from continuing operations before income taxes	269			248			783			741
Income tax expense	73			67			202			188
Income from continuing operations	196			181			581			553
(Loss) income from discontinued operations, net	(58		)	10			(64		)	23
Net income	138			191			517			576
Less: Net income attributable to noncontrolling interest	12			11			35			36
Net income attributable to Masco Corporation	$	126		$	180		$	482		$	540

Income (loss) per common share attributable to Masco Corporation:
Basic:
Income from continuing operations	$	.64		$	.56		$	1.88		$	1.67
(Loss) income from discontinued operations, net	(.20		)	.03			(.22		)	.07
Net income	$	.44		$	.59		$	1.66		$	1.74
Diluted:
Income from continuing operations	$	.64		$	.55		$	1.87		$	1.66
(Loss) income from discontinued operations, net	(.20		)	.03			(.22		)	.07
Net income	$	.44		$	.58		$	1.65		$	1.73

Amounts attributable to Masco Corporation:
Income from continuing operations	$	184		$	170		$	546		$	517
(Loss) income from discontinued operations, net	(58		)	10			(64		)	23
Net income	$	126		$	180		$	482		$	540

See notes to condensed consolidated financial statements.

MASCO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

For the Three and Nine Months Ended September 30, 2019 and 2018

(In Millions)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Net income	$	138		$	191	$	517		$	576
Less: Net income attributable to noncontrolling interest	12			11		35			36
Net income attributable to Masco Corporation	$	126		$	180	$	482		$	540
Other comprehensive income (loss), net of tax (Note L):
Cumulative translation adjustment	$	(13	)	$	1	$	(11	)	$	(14	)
Interest rate swaps	—			—		1			1
Pension and other post-retirement benefits	4			4		12			12
Other comprehensive (loss) income, net of tax	(9		)	5		2			(1		)
Less: Other comprehensive (loss) income attributable to noncontrolling interest	(8		)	—		(7		)	(12		)
Other comprehensive (loss) income attributable to Masco Corporation	$	(1	)	$	5	$	9		$	11
Total comprehensive income	$	129		$	196	$	519		$	575
Less: Total comprehensive income attributable to noncontrolling interest	4			11		28			24
Total comprehensive income attributable to Masco Corporation	$	125		$	185	$	491		$	551

See notes to condensed consolidated financial statements.

MASCO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For the Nine Months Ended September 30, 2019 and 2018

(In Millions)



	Nine Months Ended September 30,
	2019			2018
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations	$	754		$	729
Increase in receivables	(136		)	(182		)
Increase in inventories	(27		)	(62		)
Increase in accounts payable and accrued liabilities, net	14			169
Net cash from operating activities	605			654

CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Retirement of notes	—			(114		)
Purchase of Company common stock	(440		)	(354		)
Cash dividends paid	(105		)	(98		)
Dividends paid to noncontrolling interest	(42		)	(89		)
Proceeds from the exercise of stock options	23			8
Employee withholding taxes paid on stock-based compensation	(21		)	(38		)
Decrease in debt, net	(3		)	(1		)
Credit Agreement and other financing costs	(2		)	—
Net cash for financing activities	(590		)	(686		)

CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures	(111		)	(160		)
Acquisition of business, net of cash acquired	—			(549		)
Proceeds from disposition of:
Business, net of cash disposed	2			—
Short-term bank deposits	—			108
Other financial investments	1			4
Property and equipment	15			3
Other, net	(11		)	(7		)
Net cash for investing activities	(104		)	(601		)

Effect of exchange rate changes on cash and cash investments	10			8

CASH AND CASH INVESTMENTS:
Decrease for the period	(79		)	(625		)
At January 1	559			1,194
At September 30	$	480		$	569

See notes to condensed consolidated financial statements.

MASCO CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)

For the Three and Nine Months Ended September 30, 2019 and 2018

(In Millions, Except Per Common Share Data)



	Total			Common Shares ($1 par value)			Paid-In Capital			Retained (Deficit) Earnings			Accumulated Other Comprehensive (Loss) Income			Noncontrolling Interest
Balance, January 1, 2018	$	183		$	310		$	—		$	(298	)	$	(65	)	$	236
Reclassification of disproportionate tax effects (Refer to Note L)	—									59			(59		)
Total comprehensive income	208									149			40			19
Shares issued	(13		)	2			(7		)	(8		)
Shares retired:
Repurchased	(150		)	(4		)				(146		)
Surrendered (non-cash)	(19		)							(19		)
Cash dividends declared	(33		)							(33		)
Stock-based compensation	7						7
Balance, March 31, 2018	$	183		$	308		$	—		$	(296	)	$	(84	)	$	255
Total comprehensive income (loss)	171									211			(34		)	(6		)
Shares issued	(1		)				(1		)
Shares retired:
Repurchased	(115		)	(3		)	(8		)	(104		)
Cash dividends declared	(32		)							(32		)
Dividends paid to noncontrolling interest	(89		)													(89		)
Stock-based compensation	9						9
Balance, June 30, 2018	$	126		$	305		$	—		$	(221	)	$	(118	)	$	160
Total comprehensive income	196									180			5			11
Shares issued	3						3
Shares retired:
Repurchased	(89		)	(2		)	(10		)	(77		)
Cash dividends declared	(36		)							(36		)
Stock-based compensation	7						7
Balance, September 30, 2018	$	207		$	303		$	—		$	(154	)	$	(113	)	$	171

MASCO CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (Concluded)

For the Three and Nine Months Ended September 30, 2019 and 2018

(In Millions, Except Per Common Share Data)



	Total			Common Shares ($1 par value)			Paid-In Capital			Retained (Deficit) Earnings			Accumulated Other Comprehensive (Loss) Income			Noncontrolling Interest
Balance, January 1, 2019	$	69		$	294		$	—		$	(278	)	$	(127	)	$	180
Total comprehensive income	128									116			4			8
Shares issued	5			1			4
Shares retired:
Repurchased	(122		)	(3		)	(11		)	(108		)
Surrendered (non-cash)	(10		)	(1		)				(9		)
Cash dividends declared	(35		)							(35		)
Stock-based compensation	7						7
Balance, March 31, 2019	$	42		$	291		$	—		$	(314	)	$	(123	)	$	188
Total comprehensive income	262									240			6			16
Shares issued	2			1			1
Shares retired:
Repurchased	(167		)	(5		)	(10		)	(152		)
Cash dividends declared	(35		)							(35		)
Dividends paid to noncontrolling interest	(42		)													(42		)
Stock-based compensation	9						9
Balance, June 30, 2019	$	71		$	287		$	—		$	(261	)	$	(117	)	$	162
Total comprehensive income (loss)	129									126			(1		)	4
Shares issued	5						5
Shares retired:
Repurchased	(151		)	(3		)	(12		)	(136		)
Cash dividends declared	(38		)							(38		)
Stock-based compensation	7						7
Balance, September 30, 2019	$	23		$	284		$	—		$	(309	)	$	(118	)	$	166

See notes to condensed consolidated financial statements.

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

A. ACCOUNTING POLICIES

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to fairly state our financial position at September 30, 2019, our results of operations and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2019 and 2018, cash flows for the nine-month periods ended September 30, 2019 and 2018, and changes in shareholders' equity for the three-month and nine-month periods ended September 30, 2019 and 2018. The condensed consolidated balance sheet at December 31, 2018 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Reclassifications. Certain prior year amounts have been reclassified to conform to the 2019 presentation in the condensed consolidated financial statements. In our condensed consolidated statements of cash flows, the cash flows from discontinued operations are not separately classified.

Leases. We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets (“ROU assets”), accrued liabilities and other liabilities on our condensed consolidated balance sheet. Finance lease ROU assets are included in property and equipment, net, notes payable, and long-term debt on our condensed consolidated balance sheet.

ROU assets represent our right to use an underlying asset for the duration of the lease term while lease liabilities represent our obligation to make lease payments in exchange for the right to use an underlying asset. ROU assets and lease liabilities are measured based on the present value of fixed lease payments over the lease term at the commencement date. The ROU asset also includes any lease payments made prior to the commencement date and initial direct costs incurred, and is reduced by any lease incentives received. We review our ROU assets as events occur or circumstances change that would indicate the carrying amount of the ROU assets are not recoverable and exceed their fair values. If the carrying amount of the ROU asset is not recoverable from its undiscounted cash flows, then we would recognize an impairment loss for the difference between the carrying amount and the current fair value.

As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate on the commencement date of the lease as the discount rate in determining the present value of future lease payments. We determine the incremental borrowing rate for each lease by using the current yields of our uncollateralized, publicly traded debts with maturity periods similar to the respective lease term, adjusted to a collateralized basis based on third-party data. Our lease terms may include options to extend or terminate the lease when there are relevant economic incentives present that make it reasonably certain that we will exercise that option. We account for any non-lease components separately from lease components.

For operating leases, lease expense for future fixed lease payments is recognized on a straight-line basis over the lease term. For finance leases, lease expense for future fixed lease payments is recognized using the effective interest rate method over the lease term. Variable lease payments are recognized as lease expense in the period incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

Recently Adopted Accounting Pronouncements. In February 2016, the Financial Accounting Standards Board ("FASB") issued a new standard for leases, ASC 842, which changes the accounting model for identifying and accounting for leases. We adopted ASC 842 on January 1, 2019 using the optional transition method, which allows for initial application of the new standard beginning at the adoption date. We elected the package of practical expedients that allows us to forgo reassessing a) whether any existing contracts are or contain leases, b) the lease classification for any existing leases, and c) whether initial direct costs for any existing leases are capitalized. We also elected the practical expedient to use hindsight with respect to lease renewals, terminations, and purchase options when determining the lease term and in assessing impairment of the assets related to leases existing at the time of adoption. As a result of the standard, we recorded $236 million of operating lease ROU assets, $45 million of short-term operating lease liabilities, and $214 million of long-term operating lease liabilities on the date of adoption which includes assets and liabilities that have subsequently been reclassified as held for sale or disposed of. Our accounting for finance leases remained unchanged. The standard did not impact our condensed consolidated statements of operations or statements of cash flows.

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

A. ACCOUNTING POLICIES (Concluded)

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which improves and simplifies accounting rules around hedge accounting and

better portrays the economic results of an entity's risk management activities in its financial statements. We adopted ASU 2017-12 on January 1, 2019. The adoption of the standard did not impact our financial position or results of operations.

In June 2018, the FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," which modifies the accounting for share-based payment awards issued to nonemployees to largely align it with the accounting for share-based payment awards issued to employees.

We adopted ASU 2018-07 on January 1, 2019. The adoption of the standard did not impact our financial position or results of operations.

Recently Issued Accounting Pronouncements. In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which modifies the methodology for recognizing loss impairments on certain types of financial instruments, including receivables. The new methodology requires an entity to estimate the credit losses expected over the life of an exposure. Additionally, ASU 2016-13 amends the current available-for-sale security other-than-temporary impairment model for debt securities. ASU 2016-13 is effective for us for annual periods beginning January 1, 2020. This standard will impact the valuation of our credit losses relating to our receivables, however, we do not anticipate a material effect on our financial position or results of operations.

In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which allows for the capitalization of certain implementation costs incurred in a hosting arrangement that is a service contract. ASU 2018-15 allows for either retrospective adoption or prospective adoption to all implementation costs incurred after the date of adoption. We plan to adopt this standard prospectively effective for annual periods beginning January 1, 2020 and do not anticipate that the adoption of this new standard will have a material impact on our financial position or results of operations.

B. ACQUISITIONS

On March 9, 2018, we acquired substantially all of the net assets of The L.D. Kichler Co. ("Kichler"), a leader in decorative residential and light commercial lighting products, ceiling fans and LED lighting systems. This business expands our product offerings to our customers. The results of this acquisition for the period from the acquisition date are included in the condensed consolidated financial statements and are reported in the Decorative Architectural Products segment. The purchase price, net of $2 million cash acquired, consisted of $549 million paid with cash on hand. Since the acquisition, we revised the allocation of the purchase price to identifiable assets and liabilities based on analysis of information as of the acquisition date that was made available in the year after acquisition. The initial and final allocations of the fair value of the acquisition of Kichler is summarized in the following table, in millions.



	Initial			Final
Receivables	$	101		$	100
Inventories	173			166
Other current assets	5			5
Property and equipment	33			33
Goodwill	46			64
Other intangible assets	243			240
Accounts payable	(24		)	(24		)
Accrued liabilities	(25		)	(30		)
Other liabilities	(4		)	(5		)
Total	$	548		$	549

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

B. ACQUISITIONS (Concluded)

The goodwill acquired, which is generally tax deductible, is related primarily to the operational and financial synergies we expect to derive from combining Kichler's operations into our business, as well as the assembled workforce. The other intangible assets acquired consist of $59 million of indefinite-lived intangible assets, which is

related to trademarks, and $181 million of definite-lived intangible assets. The definite-lived intangible assets consist of $145 million related to customer relationships, which is being amortized on a straight-line basis over 20 years, and $36 million of other definite-lived intangible assets, which is being amortized over a weighted average amortization period of 3 years.

C. DISCONTINUED OPERATIONS

On September 6, 2019, we completed the sale of UK Window Group ("UKWG"), a manufacturer and distributor of windows and doors, for proceeds of approximately $8 million, of which $2 million net of cash disposed was received upon sale. The remaining $6 million was accounted for as a note receivable that is expected to be collected within the next two years. In connection with the sale, we recognized a loss of $70 million for both the three-month and nine-month periods ended September 30, 2019, which is included in (loss) income from discontinued operations, net in the condensed consolidated statements of operations.

Additionally, on September 29, 2019, we entered into a definitive agreement to sell Milgard Manufacturing Incorporated ("Milgard"), a manufacturer and distributor of windows and doors, for approximately $725 million. The closing of the sale is expected to occur during the fourth quarter of 2019, subject to customary closing conditions and regulatory review, and we expect to recognize a gain on the divestiture of approximately $395 million.

We determined that the assets and liabilities for Milgard and UKWG met the held for sale criteria in accordance with ASC 205-20, Discontinued Operations, as of September 30, 2019. Accordingly, these businesses' held for sale assets and liabilities were reclassified in the condensed consolidated balance sheets at September 30, 2019 and December 31, 2018 to assets held for sale or liabilities held for sale. We ceased recording depreciation for the held for sale assets upon meeting the held for sale criteria.

Furthermore, we determined that the combined sale of UKWG and the planned disposition of Milgard represents a strategic shift that will have a major effect on our operations and financial results. These businesses represented all of our window businesses and all remaining businesses in the Windows and Other Specialty Products segment. As a result, these businesses are presented in discontinued operations separate from continuing operations for all periods presented. In addition, depreciation and amortization, capital expenditures, and significant non-cash operating and investing activities related to discontinued operations are separately disclosed.

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

C. DISCONTINUED OPERATIONS (Concluded)

The major classes of line items constituting (loss) income from discontinued operations, net, in millions:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net sales	$	172		$	197		$	515		$	575
Cost of sales	137			153			408			450
Gross profit	35			44			107			125
Selling, general and administrative expenses	29			30			93			93
Impairment charge for goodwill (A)	—			—			7			—
Other income (expense), net	—			—			—			1
Income from discontinued operations	6			14			7			33
(Loss) on disposal of discontinued operations	(70		)	—			(70		)	—
(Loss) income before income tax	(64		)	14			(63		)	33
Income tax benefit (expense) (B)	6			(4		)	(1		)	(10		)
(Loss) income from discontinued operations, net	$	(58	)	$	10		$	(64	)	$	23


(A)	In the first quarter of 2019, we recognized a $7 million non-cash goodwill impairment charge related to a decline in the long-term outlook of our windows and doors business in the United Kingdom.

(B) The unusual relationship between income tax benefit (expense) and (loss) income before income tax for 2019 resulted primarily from a loss

on the sale of UKWG providing no foreign tax benefit.

The carrying amount of major classes of assets and liabilities included as part of the Milgard and UKWG discontinued operations, were as follows, in millions:



	September 30, 2019		December 31, 2018
Cash and cash investments	$	5	$	6
Receivables	60		85
Prepaid expenses and other	13		18
Inventories	33		42
Property and equipment, net	151		186
Operating lease right-of-use assets	30		—
Goodwill	199		206
Other intangible assets, net	112		117
Total assets classified as held for sale	$	603	$	660


Accounts payable	$	66	$	75
Accrued liabilities	74		74
Other liabilities	133		108
Total liabilities classified as held for sale	$	273	$	257

Other selected financial information for Milgard and UKWG during the period owned by us, were as follows, in millions:



	Nine Months Ended
	September 30, 2019		September 30, 2018
Depreciation and amortization	$	17	$	17
Capital expenditures	15		15
ROU assets obtained in exchange for new lease obligations	3		—

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

D. REVENUE

Our revenues are derived primarily from sales to customers in North America and Internationally, principally Europe. Net sales from these geographic markets, by segment, were as follows, in millions:



	Three Months Ended September 30, 2019
	Plumbing Products		Decorative Architectural Products		Cabinetry Products		Total
Primary geographic markets:
North America	$	664	$	710	$	231	$	1,605
International, principally Europe	342		—		—		342
Total	$	1,006	$	710	$	231	$	1,947



	Nine Months Ended September 30, 2019
	Plumbing Products		Decorative Architectural Products		Cabinetry Products		Total
Primary geographic markets:
North America	$	1,923	$	2,110	$	719	$	4,752
International, principally Europe	1,035		—		—		1,035
Total	$	2,958	$	2,110	$	719	$	5,787



	Three Months Ended September 30, 2018
	Plumbing Products		Decorative Architectural Products		Cabinetry Products		Total
Primary geographic markets:
North America	$	653	$	673	$	239	$	1,565
International, principally Europe	339		—		—		339
Total	$	992	$	673	$	239	$	1,904



	Nine Months Ended September 30, 2018
	Plumbing Products		Decorative Architectural Products		Cabinetry Products		Total
Primary geographic markets:
North America	$	1,905	$	2,024	$	724	$	4,653
International, principally Europe	1,090		—		—		1,090
Total	$	2,995	$	2,024	$	724	$	5,743

Our contract asset balance was $2 million at both September 30, 2019 and December 31, 2018. Our contract liability balance was $16 million and $39 million at September 30, 2019 and December 31, 2018, respectively.

We (reversed) recognized $(2) million and $2 million of revenue for the three-month periods ended September 30, 2019 and 2018, respectively, related to performance obligations settled in previous quarters of the same year. We recognized $1 million of revenue for the nine-month period ended September 30, 2019, and $1 million and $4 million of revenue for the three-month and nine-month periods ended September 30, 2018, respectively, related to performance obligations settled in previous years.

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

E. LEASES

We have operating and finance leases primarily for corporate offices, manufacturing facilities, warehouses, vehicles, and equipment. Our leases have remaining lease terms up to 13 years, some of which may include one or more renewal options with terms to extend the lease for up to an additional 20 years, and some of which may include options to terminate the leases prior to their expiration.

The components of lease cost included in income from continuing operations were as follows, in millions:



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	$	13	$	39
Short-term lease cost	2		5
Variable lease cost	1		2
Finance lease cost:
Amortization of right-of-use assets	1		2
Interest on lease liabilities	—		1

Supplemental cash flow information related to leases was as follows, in millions:



	Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	43
Operating cash flows for finance leases	1
Financing cash flows for finance leases	2

ROU assets obtained in exchange for new lease obligations:
Operating leases	$	20
Finance leases	—

Certain other information related to leases was as follows:



	At September 30, 2019
Weighted-average remaining lease term:
Operating leases	10 years
Finance leases	10 years

Weighted-average discount rate:
Operating leases	4.6	%
Finance leases	3.5	%

Supplemental balance sheet information related to leases was as follows, in millions:



	At September 30, 2019
	Operating Leases		Finance Leases
Property and equipment, net	$	—	$	35
Notes payable	—		7
Accrued liabilities	38		—
Long-term debt	—		28
Other liabilities	168		—

Gross ROU assets under finance leases recorded within property and equipment, net were $47 million, and accumulated amortization associated with these leases was $12 million, at September 30, 2019.

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

E. LEASES (Concluded)

At September 30, 2019, future maturities of lease liabilities (under ASC 842) were as follows, in millions:



	Operating Leases			Finance Leases
Year ending December 31,
2019 (excluding the nine months ended September 30, 2019)	$	11		$	6
2020	45			3
2021	39			3
2022	31			3
2023	21			4
Thereafter	114			23
Total lease payments	261			42
Less: imputed interest	(55		)	(7		)
Total	$	206		$	35

At December 31, 2018, future minimum operating lease payments (under ASC 840), including discontinued operations, were as follows, in millions: 2019 – $55 million; 2020 – $47 million; 2021 – $40 million; 2022 – $30 million; 2023 – $20 million; 2024 and beyond – $99 million.

F. DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense, including discontinued operations, was $124 million and $115 million for the nine-month periods ended September 30, 2019 and 2018, respectively.

G. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the nine-month period ended September 30, 2019, by segment, were as follows, in millions:



	Gross Goodwill At September 30, 2019		Accumulated Impairment Losses			Net Goodwill At September 30, 2019
Plumbing Products	$	563	$	(340	)	$	223
Decorative Architectural Products	358		(75		)	283
Cabinetry Products	181		—			181
Total	$	1,102	$	(415	)	$	687



	Gross Goodwill At December 31, 2018		Accumulated Impairment Losses			Net Goodwill At December 31, 2018		Other (A)			Net Goodwill At September 30, 2019
Plumbing Products	$	568	$	(340	)	$	228	$	(5	)	$	223
Decorative Architectural Products	358		(75		)	283		—			283
Cabinetry Products	181		—			181		—			181
Total	$	1,107	$	(415	)	$	692	$	(5	)	$	687

(A) Other consists of the effect of foreign currency translations.

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

G. GOODWILL AND OTHER INTANGIBLE ASSETS (Concluded)

The carrying value of our other indefinite-lived intangible assets was $76 million and $86 million at September 30, 2019 and December 31, 2018, respectively, and principally included registered trademarks. During the first quarter of 2019, we recognized a $9 million impairment charge related to a registered trademark in our Decorative Architectural Products segment due to a change in the long-term net sales projections of lighting products. The carrying value of our definite-lived intangible assets was $188 million (net of accumulated amortization of $44 million) and $203 million (net of accumulated amortization of $27 million) at September 30, 2019 and December 31, 2018, respectively, and principally included customer relationships.

H. WARRANTY LIABILITY

Changes in our warranty liability were as follows, in millions:



	Nine Months Ended September 30, 2019			Twelve Months Ended December 31, 2018
Balance at January 1	$	90		$	87
Accruals for warranties issued during the period	30			39
Accruals related to pre-existing warranties	(2		)	(2		)
Settlements made (in cash or kind) during the period	(27		)	(34		)
Other, net (including currency translation)	(1		)	—
Balance at end of period	$	90		$	90

I. DEBT

On April 16, 2018, we repaid and retired all of our $114 million, 6.625% Notes on the scheduled repayment date.

On March 13, 2019, we entered into a credit agreement (the “Credit Agreement”) with a bank group, with an aggregate commitment of $1.0 billion and a maturity date of March 13, 2024. Under the Credit Agreement, at our request and subject to certain conditions, we can increase the aggregate commitment up to an additional $500 million with the current bank group or new lenders. Upon entry into the Credit Agreement, our credit agreement dated March 28, 2013, as amended, with an aggregate commitment of $750 million, was terminated.

The Credit Agreement provides for an unsecured revolving credit facility available to us and one of our foreign subsidiaries, in U.S. dollars, European euros, British Pounds Sterling, Canadian dollars and certain other currencies for revolving credit loans, swingline loans and letters of credit. Borrowings under the revolving credit loans denominated in any agreed upon currency other than U.S. dollars are limited to $500 million, equivalent. We can also borrow swingline loans up to $100 million and obtain letters of credit of up to $25 million; outstanding letters of credit under the Credit Agreement reduce our borrowing capacity. At September 30, 2019, we had no outstanding standby letters of credit under the Credit Agreement.

Revolving credit loans bear interest under the Credit Agreement, at our option, at (A) a rate per annum equal to the greater of (i) the JPMorgan Chase Bank, N.A. prime rate, (ii) the Federal Reserve Bank of New York effective rate plus 0.50% and (iii) adjusted LIBO Rate plus 1.0% (the "Alternative Base Rate"); plus an applicable margin based upon our then-applicable corporate credit ratings; or (B) adjusted LIBO Rate plus an applicable margin based upon our then-applicable corporate credit ratings. The foreign currency revolving credit loans bear interest at a rate equal to adjusted LIBO Rate plus an applicable margin based upon our then-applicable corporate credit ratings.

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

I. DEBT (Concluded)

In order for us to borrow under the Credit Agreement, there must not be any default in our 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 our 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, 2018, no material ERISA or environmental non-compliance, and no material tax deficiency). We were in compliance with all covenants and no borrowings were outstanding at September 30, 2019.

Fair Value of Debt. The fair value of our short-term and long-term fixed-rate debt instruments is based principally upon modeled market prices for the same or similar issues, which are Level 1 inputs. The aggregate estimated market value of our short-term and long-term debt at September 30, 2019 was approximately $3.2 billion, compared with the aggregate carrying value of $3.0 billion. The aggregate estimated market value was approximately $3.0 billion at December 31, 2018, which equaled the aggregate carrying value of short-term and long-term debt at that date.

J. STOCK-BASED COMPENSATION

Our 2014 Long Term Stock Incentive Plan provides for the issuance of stock-based incentives in various forms to our employees and non-employee Directors. At September 30, 2019, outstanding stock-based incentives were in the form of long-term stock awards, stock options, restricted stock units, and phantom stock awards.

Pre-tax compensation expense included in income from continuing operations for these stock-based incentives was as follows, in millions:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Long-term stock awards	$	5	$	5	$	16	$	16
Stock options	1		1		3		3
Restricted stock units	—		1		2		3
Phantom stock awards and stock appreciation rights	1		1		3		—
Total	$	7	$	8	$	24	$	22

Long-Term Stock Awards. Long-term stock awards are granted to our key employees and non-employee Directors and do not cause net share dilution inasmuch as we continue the practice of repurchasing and retiring an equal number of shares in the open market. We granted 636,030 shares of long-term stock awards in the nine-month period ended September 30, 2019.

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

J. STOCK-BASED COMPENSATION (Continued)

Our long-term stock award activity was as follows, shares in millions:



	Nine Months Ended September 30,
	2019		2018
Unvested stock award shares at January 1	2		3
Weighted average grant date fair value	$	30	$	24

Stock award shares granted	1		1
Weighted average grant date fair value	$	36	$	42

Stock award shares vested	1		2
Weighted average grant date fair value	$	25	$	21

Stock award shares forfeited	—		—
Weighted average grant date fair value	$	32	$	31

Unvested stock award shares at September 30	2		2
Weighted average grant date fair value	$	34	$	30

At September 30, 2019 and 2018, there was $49 million and $50 million, respectively, of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of three years at both September 30, 2019 and 2018.

The total market value (at the vesting date) of stock award shares which vested during the nine-month periods ended September 30, 2019 and 2018 was $31 million and $56 million, respectively.

Stock Options. Stock options are granted to certain key employees. The exercise price equals the market price of our 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.

We granted 561,280 shares of stock options in the nine-month period ended September 30, 2019 with a grant date weighted average exercise price of approximately $36 per share. In the nine-month period ended September 30, 2019, 108,086 stock options were forfeited (including options that expired unexercised).

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

J. STOCK-BASED COMPENSATION (Continued)

Our stock option activity was as follows, shares in millions:



		Nine Months Ended September 30,
		2019		2018
Option shares outstanding, January 1		4		5
Weighted average exercise price	$	21	$	16

Option shares granted		1		—
Weighted average exercise price	$	36	$	42

Option shares exercised		2		1
Aggregate intrinsic value on date of exercise (A)	$	29 million	$	47 million
Weighted average exercise price	$	12	$	11

Option shares forfeited		—		—
Weighted average exercise price	$	34	$	31

Option shares outstanding, September 30		3		4
Weighted average exercise price	$	26	$	20
Weighted average remaining option term (in years)		6		5

Option shares vested and expected to vest, September 30		3		4
Weighted average exercise price	$	26	$	20
Aggregate intrinsic value (A)	$	48 million	$	69 million
Weighted average remaining option term (in years)		6		5

Option shares exercisable (vested), September 30		2		3
Weighted average exercise price	$	21	$	15
Aggregate intrinsic value (A)	$	39 million	$	62 million
Weighted average remaining option term (in years)		4		3


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

At both September 30, 2019 and 2018, there was $9 million of unrecognized compensation expense (using the Black-Scholes option pricing model at the grant date) related to unvested stock options; such options had a weighted average remaining vesting period of three years at both September 30, 2019 and 2018.

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

J. STOCK-BASED COMPENSATION (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,
	2019			2018
Weighted average grant date fair value	$	8.81		$	12.52
Risk-free interest rate	2.57		%	2.71		%
Dividend yield	1.35		%	1.00		%
Volatility factor	25.00		%	29.00		%
Expected option life	6 years			6 years

Restricted Stock Units. Under our Long Term Incentive Program, we grant restricted stock units to certain senior executives. These restricted stock units will vest and share awards will be issued at no cost to the employees, subject to our achievement of specified return on invested capital performance goals over a three-year period that have been established by our Organization and Compensation Committee of the Board of Directors for the performance period and the recipient's continued employment through the share award date. During the nine-month period ended September 30, 2019, we granted 126,680 restricted stock units with a grant date fair value of approximately $39 per share and 15,600 restricted stock units were forfeited. During the nine-month period ended September 30, 2018, we granted 113,260 restricted stock units with a grant date fair value of approximately $42 per share and 11,600 restricted stock units were forfeited.

K. EMPLOYEE RETIREMENT PLANS

Net periodic pension cost for our defined-benefit pension plans, with the exception of service cost, is recorded in other income (expense), net, in our condensed consolidated statement of operations. Net periodic pension cost for our defined-benefit pension plans was as follows, in millions:



	Three Months Ended September 30,
	2019					2018
	Qualified			Non-Qualified		Qualified			Non-Qualified
Service cost	$	1		$	—	$	1		$	—
Interest cost	11			2		8			1
Expected return on plan assets	(12		)	—		(12		)	—
Amortization of net loss	4			1		4			1
Net periodic pension cost	$	4		$	3	$	1		$	2



	Nine Months Ended September 30,
	2019					2018
	Qualified			Non-Qualified		Qualified			Non-Qualified
Service cost	$	2		$	—	$	2		$	—
Interest cost	30			5		28			4
Expected return on plan assets	(34		)	—		(36		)	—
Amortization of net loss	14			2		13			2
Net periodic pension cost	$	12		$	7	$	7		$	6

As of January 1, 2010, substantially all of our domestic and foreign qualified and domestic non-qualified defined-benefit pension plans were frozen to future benefit accruals.

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

L. RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE LOSS

The reclassifications from accumulated other comprehensive loss to the condensed consolidated statements of operations were as follows, in millions:



	Amounts Reclassified
Accumulated Other Comprehensive Loss	Three Months Ended September 30,						Nine Months Ended September 30,						Statement of Operations Line Item
Accumulated Other Comprehensive Loss	2019			2018			2019			2018			Statement of Operations Line Item
Amortization of defined-benefit pension and other post-retirement benefits:
Actuarial losses, net	$	5		$	5		$	16		$	15		Other income (expense), net
Tax (benefit)	(1		)	(1		)	(4		)	(3		)
Net of tax	$	4		$	4		$	12		$	12

Interest rate swaps	$	—		$	—		$	1		$	1		Interest expense
Tax (benefit)	—			—			—			—
Net of tax	$	—		$	—		$	1		$	1

In addition to the above amounts, we reclassified $14 million of deferred currency translation losses from accumulated other comprehensive loss to the condensed consolidated statement of operations in conjunction with the disposition of UKWG in September 2019. In addition, as of March 31, 2018, we adopted ASU 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." As a result of the adoption, we reclassified $59 million of the disproportionate tax benefit related to various defined-benefit plans from accumulated other comprehensive loss to retained deficit.

M. SEGMENT INFORMATION

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



	Three Months Ended September 30,										Nine Months Ended September 30,
	2019		2018		2019			2018			2019		2018		2019			2018
	Net Sales (A)				Operating Profit (Loss)						Net Sales (A)				Operating Profit (Loss)
Operations by segment:
Plumbing Products	$	1,006	$	992	$	179		$	177		$	2,958	$	2,995	$	530		$	534
Decorative Architectural Products	710		673		134			104			2,110		2,024		380			338
Cabinetry Products	231		239		26			23			719		724		79			62
Total	$	1,947	$	1,904	$	339		$	304		$	5,787	$	5,743	$	989		$	934
Operations by geographic area:
North America	$	1,605	$	1,565	$	288		$	253		$	4,752	$	4,653	$	838		$	773
International, principally Europe	342		339		51			51			1,035		1,090		151			161
Total	$	1,947	$	1,904	339			304			$	5,787	$	5,743	989			934
General corporate expense, net					(23		)	(18		)					(71		)	(64		)
Operating profit					316			286							918			870
Other income (expense), net					(47		)	(38		)					(135		)	(129		)
Income from continuing operations before income taxes					$	269		$	248						$	783		$	741


(A)	Inter-segment sales were not material.

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

N. OTHER INCOME (EXPENSE), NET

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Income from cash and cash investments and short-term bank deposits	$	1		$	1		$	2		$	3
Equity investment income, net	1			—			1			2
Foreign currency transaction (losses) gains	(4		)	1			(2		)	(5		)
Net periodic pension and post-retirement benefit cost	(6		)	(2		)	(17		)	(11		)
Other items, net	—			—			—			(1		)
Total other, net	$	(8	)	$	—		$	(16	)	$	(12	)

O. INCOME PER COMMON SHARE

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



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Numerator (basic and diluted):
Income from continuing operations	$	184		$	170	$	546		$	517
Less: Allocation to unvested restricted stock awards	1			1		4			5
Income from continuing operations attributable to common shareholders	183			169		542			512

(Loss) income from discontinued operations, net	(58		)	10		(64		)	23
Less: Allocation to unvested restricted stock awards	—			—		—			—
(Loss) income from discontinued operations attributable to common shareholders	(58		)	10		(64		)	23

Net income available to common shareholders	$	125		$	179	$	478		$	535

Denominator:
Basic common shares (based upon weighted average)	286			304		289			307
Add: Stock option dilution	1			2		1			2
Diluted common shares	287			306		290			309

For the three-month and nine-month periods ended September 30, 2019 and 2018, we allocated dividends and undistributed earnings to the unvested restricted stock awards.

Additionally, 855,000 and 1.2 million common shares for the three-month and nine-month periods ended September 30, 2019, respectively, and 668,000 and 627,000 common shares for the three-month and nine-month periods ended September 30, 2018, respectively, related to stock options and 20,000 common shares related to restricted stock units for the three-month and nine-month periods ended September 30, 2019 were excluded from the computation of diluted income per common share due to their antidilutive effect.

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Concluded)

O. INCOME PER COMMON SHARE (Concluded)

In September 2019, our Board of Directors authorized the repurchase, for retirement, of up to $2.0 billion of shares of our common stock in open-market transactions or otherwise, replacing the previous Board of Directors authorization established in 2017. In the first nine months of 2019, we repurchased and retired 11.5 million shares of our common stock (including 0.6 million shares to offset the dilutive impact of long-term stock awards granted in the first nine months of the year), for approximately $440 million. At September 30, 2019, we had $1.96 billion remaining under the 2019 authorization.

On the basis of amounts paid (declared), cash dividends per common share were $0.120 ($0.135) and $0.360 ($0.375) for the three-month and nine-month periods ended September 30, 2019, respectively, and $0.105 ($0.120) and $0.315 ($0.330) for the three-month and nine-month periods ended September 30, 2018, respectively.

P. OTHER COMMITMENTS AND CONTINGENCIES

We are involved in claims and litigation, including class actions and regulatory proceedings, which arise in the ordinary course of our business. The types of matters may include, among others: competition, product liability, employment, warranty, advertising, contract, personal injury, environmental, intellectual property, and insurance coverage. We believe we have adequate defenses in these matters and that the likelihood that the outcome of these matters would have a material adverse effect on us is remote. However, there is no assurance that we will prevail in these matters, and we could, in the future, incur judgments, enter into settlements of claims or revise our expectations regarding the outcome of these matters, which could materially impact our results of operations.

Q. INCOME TAXES

Our effective tax rate was 27 percent for both of the three-month periods ended September 30, 2019 and 2018.

Our effective tax rate was 26 percent and 25 percent for the nine-month periods ended September 30, 2019 and 2018, respectively. The increase in the rate was primarily due to an additional $9 million income tax benefit on stock-based compensation recognized in the nine-month period ended September 30, 2018.



MASCO CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIRD QUARTER 2019 AND THE FIRST NINE MONTHS 2019 VERSUS THIRD QUARTER 2018 AND THE FIRST NINE MONTHS 2018

SALES AND OPERATIONS

The following table sets forth our net sales and operating profit (loss) by business segment and geographic area, dollars in millions:



	Three Months Ended September 30,				Percent Change
	2019		2018		2019	vs.	2018
Net Sales:
Plumbing Products	$	1,006	$	992	1			%
Decorative Architectural Products	710		673		5			%
Cabinetry Products	231		239		(3			)%
Total	$	1,947	$	1,904	2			%

North America	$	1,605	$	1,565	3			%
International, principally Europe	342		339		1			%
Total	$	1,947	$	1,904	2			%



	Nine Months Ended September 30,				Percent Change
	2019		2018		2019	vs.	2018
Net Sales:
Plumbing Products	$	2,958	$	2,995	(1			)%
Decorative Architectural Products	2,110		2,024		4			%
Cabinetry Products	719		724		(1			)%
Total	$	5,787	$	5,743	1			%

North America	$	4,752	$	4,653	2			%
International, principally Europe	1,035		1,090		(5			)%
Total	$	5,787	$	5,743	1			%



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Operating Profit (Loss): (A)
Plumbing Products	$	179		$	177		$	530		$	534
Decorative Architectural Products	134			104			380			338
Cabinetry Products	26			23			79			62
Total	$	339		$	304		$	989		$	934

North America	$	288		$	253		$	838		$	773
International, principally Europe	51			51			151			161
Total	339			304			989			934
General corporate expense, net	(23		)	(18		)	(71		)	(64		)
Operating profit	$	316		$	286		$	918		$	870

(A) Before general corporate expense, net; see Note M to the condensed consolidated financial statements.

We report our financial results in accordance with generally accepted accounting principles ("GAAP") in the United States. However, we believe that certain non-GAAP performance measures and ratios used in managing the business may provide users of this financial information with additional meaningful comparisons between current results and results in prior periods. Non-GAAP performance measures and ratios should be viewed in addition to, and not as an alternative for, our reported results under GAAP.

The following discussion of consolidated results of operations and segment and geographic results refers to the three-month and nine-month periods ended September 30, 2019 compared to the same periods of 2018.

NET SALES

Net sales increased two percent and one percent for the three-month and nine-month periods ended September 30, 2019, respectively. Excluding acquisitions and the effect of currency translation, net sales increased three percent and one percent for the three-month and nine-month periods ended September 30, 2019, respectively. The following table reconciles reported net sales to net sales, excluding acquisitions and the effect of currency translation, in millions:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019			2018
Net sales, as reported	$	1,947	$	1,904	$	5,787		$	5,743
Acquisitions	—		—		(65		)	—
Net sales, excluding acquisitions	1,947		1,904		5,722			5,743
Currency translation	15		—		70			—
Net sales, excluding acquisitions and the effect of currency translation	$	1,962	$	1,904	$	5,792		$	5,743

North American net sales increased three percent and two percent for the three-month and nine-month periods ended September 30, 2019, respectively. Higher sales volumes of paints and other coatings increased sales by two percent for the three-month period only. Net selling price increases of plumbing products, paints and other coating products, and lighting products, in aggregate, increased sales by two percent for both the three-month and nine-month periods. The acquisition of Kichler in March 2018 increased sales by one percent for the nine-month period only. Such increases were partially offset by lower sales volume of lighting products which decreased sales by one percent for the three-month period only. Lower sales volume of lighting and plumbing products, in aggregate, decreased sales by one percent for the nine-month period only.

International net sales increased one percent for the three-month period ended September 30, 2019. In local currencies (including sales in currencies outside their respective functional currencies), net sales increased five percent. Higher sales volume and net selling prices of plumbing products, in aggregate, increased sales by six percent. Such increases were partially offset by unfavorable sales mix of plumbing products which decreased sales by one percent. International net sales decreased five percent for nine-month period ended September 30, 2019. In local currencies, net sales increased one percent primarily due to favorable net selling prices of plumbing products.

Net sales in the Plumbing Products segment increased one percent for the three-month period ended September 30, 2019. Higher sales volume of International operations increased sales by two percent and net selling prices of North American operations increased sales by two percent. Such increases were partially offset by foreign currency translation which decreased sales by two percent. Lower sales volume of North American operations decreased sales by one percent. Net sales in the Plumbing Products segment decreased one percent for the nine-month period ended September 30, 2019. Foreign currency translation decreased sales by two percent. Lower sales volume of North American operations further decreased sales by one percent. Such decreases were partially offset by favorable net selling prices of North American operations which increased sales by two percent.

Net sales in the Decorative Architectural Products segment increased five percent for the three-month period ended September 30, 2019. Net sales increased due to higher sales volume of paints and other coating products and net selling price increases of paints and other coating products and lighting products. Such increases were partially offset by lower sales volume of lighting products and builders' hardware. Net sales in the Decorative Architectural Products segment increased four percent for the nine-month period ended September 30, 2019. The acquisition of Kichler increased sales by three percent. Net selling price increases of paints and other coating products and lighting products also increased sales. Such increases were partially offset by lower sales volume of lighting products and paints and other coating products.

Net sales in the Cabinetry Products segment decreased three percent and one percent for the three-month and nine-month periods ended September 30, 2019, respectively. Unfavorable sales mix and lower sales volume, in aggregate, decreased sales by five percent and three percent for the three-month and nine-month periods, respectively. Such decreases were partially offset by net selling price increases which increased sales by two percent and three percent for the three-month and nine-month periods, respectively.

OPERATING PROFIT

Our gross profit margins were 34.2 percent and 34.1 percent for the three-month and nine-month periods ended September 30, 2019, respectively, compared with 32.7 percent and 33.3 percent for the comparable periods of 2018. Gross profit margins were positively impacted by increased net selling prices and the absence of the recognition of the inventory step up adjustment established as part of the acquisition of Kichler in 2018. Such increases were partially offset by an increase in commodity costs including tariffs.

Selling, general and administrative expenses, as a percentage of sales, were 17.9 percent and 18.1 percent for the three-month and nine-month periods ended September 30, 2019, respectively, compared to 17.7 percent and 18.1 percent for the comparable periods of 2018.

Operating profit in the Plumbing Products segment for the three-month period ended September 30, 2019 was positively impacted by increased net selling prices, the benefits associated with cost savings initiatives, and higher sales volumes. These positive impacts were partially offset by an increase in commodity costs and severance charges. Operating profit in the Plumbing Products segment for the nine-month period ended September 30, 2019 was negatively impacted by an increase in other expenses (such as trade show costs and severance charges), an increase in commodity costs, and lower sales volume. These negative impacts were partially offset by increased net selling prices and benefits associated with cost savings initiatives.

Operating profit in the Decorative Architectural Products segment for the three-month and nine-month periods ended September 30, 2019 was positively impacted by increased net selling prices of paints and other coating products and lighting products, the absence of the recognition of the inventory step up adjustment established as part of the acquisition of Kichler in 2018, the benefits associated with cost savings initiatives and, for the three-month period only, higher sales volume of paints and other coating products. These positive impacts were partially offset by an increase in commodity costs across the segment and lower sales volume of lighting products, and, for the nine-month period only, lower sales volume of paints and other coating products and a non-cash impairment charge related to an other indefinite-lived intangible asset for a trademark associated with lighting products.

Operating profit in the Cabinetry Products segment for the three-month and nine-month periods ended September 30, 2019 was positively impacted by increased net selling prices, the benefits associated with cost savings initiatives and, for the nine-month period only, a decrease in program launch and display expenses. These positive impacts were primarily offset by unfavorable sales mix and higher variable expenses, including professional fees to support the potential divestiture of the business.

OTHER INCOME (EXPENSE), NET

Interest expense for the three-month and nine-month periods ended September 30, 2019 was $39 million and $119 million, respectively, compared to $38 million and $117 million for the three-month and nine-month periods ended September 30, 2018.

Other, net, for the three-month and nine-month periods ended September 30, 2019 included $6 million and $17 million, respectively, of net periodic pension and post-retirement benefit cost, $4 million and $2 million, respectively, of foreign currency transaction losses, and $1 million of earnings related to equity method investments in both periods. Other, net, for the three-month and nine-month periods ended September 30, 2018 included $2 million and $11 million, respectively, of net periodic pension and post-retirement benefit cost, and $1 million of foreign currency transaction gains and $5 million of foreign currency transaction losses, respectively. The nine-month period ended September 30, 2018 also included $2 million of earnings related to equity method investments.

INCOME AND INCOME PER COMMON SHARE FROM CONTINUING OPERATIONS — ATTRIBUTABLE TO MASCO CORPORATION

Income from continuing operations for the three-month and nine-month periods ended September 30, 2019 was $184 million and $546 million, respectively, compared to $170 million and $517 million, respectively, for the comparable periods of 2018. Diluted income per common share for the three-month and nine-month periods ended September 30, 2019 was 0.64 and 1.87, respectively, per common share, compared with $.55 and $1.66, respectively, per common share for the comparable periods of 2018.

Our effective tax rate was 27 percent and 26 percent for the three-month and nine-month periods ended September 30, 2019, respectively, which were both higher than our normalized tax rate of 25 percent due primarily to losses in certain foreign jurisdictions providing no income tax benefit and a change in mix of earnings from lower to higher tax jurisdictions.

Our effective tax rate was 27 percent and 25 percent for the three-month and nine-month periods ended September 30, 2018, respectively. Our effective tax rate for the three-month period was higher than our normalized tax rate of 25 percent, primarily due to a $3 million income tax expense for non-deductible compensation resulting from IRS guidance issued related to the application of the Tax Cuts and Jobs Act of 2017.

OTHER FINANCIAL INFORMATION

Our current ratio was 1.5 to 1 and 1.6 to 1 at September 30, 2019 and December 31, 2018, respectively. The decrease in our current ratio is due primarily to the reclassification of our $201 million, 7.125% Notes due March 15, 2020 to short-term notes payable, as well as the adoption of ASC 842, which added $45 million of short-term operating lease liabilities to our balance sheet in the first quarter of 2019.

For the nine-month period ended September 30, 2019, net cash provided by operating activities was $605 million.

For the nine-month period ended September 30, 2019, net cash used for financing activities was $590 million, primarily due to $440 million for the repurchase and retirement of our common stock (including 0.6 million shares repurchased to offset the dilutive impact of long-term stock awards granted in 2019), $105 million for the payment of cash dividends, $42 million for dividends paid to noncontrolling interests, and $21 million for employee withholding taxes paid on stock-based compensation. These uses of cash were slightly offset by $23 million of proceeds from the exercise of stock options.

For the nine-month period ended September 30, 2019, net cash used for investing activities was $104 million, primarily for capital expenditures.

Our cash and cash investments were $475 million and $553 million at September 30, 2019 and December 31, 2018, respectively. Our cash and cash investments consist of overnight interest bearing money market demand accounts, time deposit accounts, and money market mutual funds containing government securities and treasury obligations.

Of the $475 million and $553 million of cash and cash investments held at September 30, 2019 and December 31, 2018, $254 million and $270 million, respectively, was held in our foreign subsidiaries. If these funds were needed for our operations in the U.S., their repatriation into the U.S. would not result in significant additional U.S. income tax or foreign withholding tax, as we have recorded such taxes on substantially all undistributed foreign earnings, except for those that are legally restricted.

On March 13, 2019, we entered into a credit agreement (the "Credit Agreement") with a bank group, with an aggregate commitment of $1.0 billion and a maturity date of March 13, 2024. Under the Credit Agreement, at our request and subject to certain conditions, we can increase the aggregate commitment up to an additional $500 million with the current bank group or new lenders. Upon entry into the Credit Agreement, our credit agreement dated March 28, 2013, as amended, with an aggregate commitment of $750 million, was terminated. See Note I to the condensed consolidated financial statements.

The Credit Agreement contains financial covenants requiring us to maintain (A) a maximum net leverage ratio, as adjusted for certain items, of 4.0 to 1.0, and (B) a minimum interest coverage ratio, as adjusted for certain items, equal to or greater than 2.5 to 1.0. We were in compliance with all covenants and no borrowings were outstanding under our Credit Agreement at September 30, 2019.

As part of our ongoing efforts to improve our cash flow and related liquidity, we work with suppliers to optimize our terms and conditions, including extending payment terms. We also facilitate a voluntary supply chain finance program (the "program") to provide certain of our suppliers with the opportunity to sell receivables due from us to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. A third party administers the program; our responsibility is limited to making payment on the terms originally negotiated with our supplier, regardless of whether the supplier sells its receivable to a financial institution. We do not enter into agreements with any of the participating financial institutions in connection with the program. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the program.

All outstanding payments owed under the program are recorded within accounts payable in our condensed consolidated balance sheets. The amounts owed to participating financial institutions under the program and included in accounts payable for our continuing operations were $55 million and $71 million at September 30, 2019 and December 31, 2018, respectively. We account for all payments made under the program as a reduction to our cash flows from operations and reported within our increase in accounts payable and accrued liabilities, net, line within our condensed consolidated statements of cash flows. The amounts settled through the program and paid to participating financial institutions were $181 million and $188 million for our continuing operations during the nine-month periods ended September 30, 2019 and 2018, respectively. A downgrade in our credit rating or changes in the financial markets could limit the financial institutions’ willingness to commit funds to, and participate in, the program. We do not believe such risk would have a material impact on our working capital or cash flows, as substantially all of our payments are made outside of the program.

We believe that our present cash balance, cash flows from operations, and the ability to utilize our Credit Agreement are sufficient to fund our near-term working capital and other investment needs. We believe that our longer-term working capital and other general corporate requirements will be satisfied through cash flows from operations and, to the extent necessary, from bank borrowings and future financial market activities.

OUTLOOK FOR THE COMPANY

We continue to successfully execute our long-term growth strategies by leveraging our strong brand portfolio, industry-leading positions and Masco Operating System, our methodology to drive growth and productivity. We remain confident in the fundamentals of our business and will continue to execute on our strategies to create shareholder value. We believe that our strong financial position and cash flow generation, together with our current strategy of investing in our industry-leading branded building products, our continued focus on innovation and our commitment to operational excellence, the active management of our portfolio and disciplined capital allocation, will allow us to drive long-term growth and create value for our shareholders. Additionally, we have entered into a definitive agreement to sell Milgard Manufacturing Incorporated and are pursuing the sale of our Cabinetry business. We expect these sales to conclude in the next three to six months, assuming they can be completed on acceptable terms and conditions.

FORWARD-LOOKING STATEMENTS

This report contains statements that reflect our views about our future performance and constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as "outlook," "believe," "anticipate," "appear," "may," "will," "should," "intend," "plan," "estimate," "expect," "assume," "seek," "forecast," and similar references to future periods. Our views about future performance involve risks and uncertainties that are difficult to predict and, accordingly, our actual results may differ materially from the results discussed in our forward-looking statements. We caution you against relying on any of these forward-looking statements. Our future performance may be affected by the levels of residential repair and remodel activity and new home construction, our ability to maintain our strong brands and reputation and to develop new products, our ability to maintain our competitive position in our industries, our reliance on key customers, the cost and availability of raw materials and increasing tariffs, our dependence on third-party suppliers, risks associated with international operations and global strategies, our ability to achieve the anticipated benefits of our strategic initiatives, including the potential divestitures of our Cabinetry and Windows businesses, our ability to successfully execute our acquisition strategy and integrate businesses that we have and may acquire, our ability to attract, develop and retain talented personnel, risks associated with our reliance on information systems and technology, and our ability to achieve the anticipated benefits from our investments in new technology. These and other factors are discussed in detail in Item 1A, "Risk Factors" in our most recent Annual Report on Form 10-K, as well as in other filings we make with the Securities and Exchange Commission. The forward-looking statements in this report speak only as of the date of this report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. Unless required by law, we undertake no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise.



MASCO CORPORATION
Item 4.
CONTROLS AND PROCEDURES

a. Evaluation of Disclosure Controls and Procedures.

The Company’s principal executive officer and principal financial officer have concluded, based on an evaluation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15 that, as of September 30, 2019, the Company's disclosure controls and procedures were effective.

b. Changes in Internal Control over Financial Reporting.

In connection with the evaluation of the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2019, which is required under the Securities Exchange Act of 1934 by paragraph (d) of Exchange Rules 13a-15 or 15d-15 (as defined in paragraph (f) of Rule 13a-15), management determined that there was no change that materially affected or is reasonably likely to materially affect internal control over financial reporting.

MASCO CORPORATION

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Information regarding legal proceedings involving us is set forth in Note P to our condensed consolidated financial statements included in Part I, Item 1 of this Report and is incorporated herein by reference.

Item 1A. Risk Factors

There have been no material changes to the risk factors of the Company set forth in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information regarding the repurchase of our common stock for the three-month period ended September 30, 2019 under the 2017 share repurchase authorization:



Period	Total Number Of Shares Purchased	Average Price Paid Per Common Share		Total Number Of Shares Purchased As Part Of Publicly Announced Plans or Programs (A)	Maximum Value Of Shares That May Yet Be Purchased Under The Plans Or Programs
7/1/19-7/31/19	1,389,703	$	38.98	1,389,703	$	292,622,693
8/1/19-8/31/19	816,083	$	39.22	816,083	$	260,615,521
9/1/19-9/17/19	532,678	$	41.99	532,678	$	238,247,676
Total for the quarter	2,738,464	$	39.64	2,738,464	$	238,247,676


(A)	In May 2017, our Board of Directors authorized the repurchase, for retirement, of up to $1.5 billion of shares of our common stock in open-market transactions or otherwise. This authorization was replaced in September 2019.

The following table provides information regarding the repurchase of our common stock for the three-month period ended September 30, 2019 under the 2019 share repurchase authorization:



Period	Total Number Of Shares Purchased	Average Price Paid Per Common Share		Total Number Of Shares Purchased As Part Of Publicly Announced Plans or Programs (A)	Maximum Value Of Shares That May Yet Be Purchased Under The Plans Or Programs
9/18/19-9/30/19	1,034,800	$	40.94	1,034,800	$	1,957,633,549
Total for the quarter	1,034,800	$	40.94	1,034,800	$	1,957,633,549


(A)	In September 2019, our Board of Directors authorized the repurchase, for retirement, of up to $2.0 billion of shares of our common stock in open-market transactions or otherwise, replacing the previous Board of Directors authorization established in 2017.

MASCO CORPORATION

PART II. OTHER INFORMATION, Continued

Item 6. Exhibits




2.1	–	Stock Purchase Agreement, dated September 29, 2019, by and between Masco Corporation and MIWD Holding Company LLC. Disclosure schedules and certain exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Stock Purchase Agreement as filed identifies such schedules and exhibits, including the general nature of their contents. Masco agrees to furnish a copy of any omitted attachment to the Securities and Exchange Commission on a confidential basis upon request. Incorporated by reference to Exhibit 2.1 to Masco Corporation’s Current Report on Form 8-K dated September 29, 2019 and filed on October 3, 2019.

10	–	Separation and Release Agreement dated July 19, 2019 between Amit Bhargava and Masco Corporation

31a	–	Certification by Chief Executive Officer Required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934

31b	–	Certification by Chief Financial Officer Required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934

32	–	Certification Required by Rule 13a-14(b) or 15d-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code

101	–	The following financial information from Masco Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Shareholders' Equity, and (vi) Notes to Condensed Consolidated Financial Statements.

104	–	Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

MASCO CORPORATION

PART II. OTHER INFORMATION, Concluded

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	MASCO CORPORATION

	By:	/s/ John G. Sznewajs
	Name: John G. Sznewajs
	Title: Vice President, Chief Financial Officer

October 30, 2019



Date:	October 30, 2019	By:	/s/ Keith J. Allman
			Keith J. Allman
			President and Chief Executive Officer


1.	I have reviewed this quarterly report on Form 10-Q of Masco Corporation ("the registrant");


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a.	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b.	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c.	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and


d.	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;


a.	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


2.	The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and results of operations of Masco Corporation.