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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, 2020
or
☐ 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, 2020
Common stock, par value $1.00 per share |  | 261,675,891

MASCO CORPORATION
INDEX

|  | Page No.
PART I. | FINANCIAL INFORMATION |
Item 1. | Financial Statements (Unaudited): |
| Condensed Consolidated Balance Sheets — as at Sept ember 30, 2020 and December 31, 2019 | 1
| Condensed Consolidated Statements of Operations for the Three and Nine Months Ended Sep tember 30, 2020 and 2019 | 2
| Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2020 and 2019 | 3
| Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 | 4
| Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019 | 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 | 29
PART II. | OTHER INFORMATION | 30
Item 1. | Legal Proceedings | 30
Item 1A. | Risk Factors | 30
Item 6. | Exhibits | 31
| Signature | 32

MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, 2020 and December 31, 2019
(In Millions, Except Share Data)

| September 30, 2020 |  | December 31, 2019
ASSETS |  |  |
Current Assets: |  |  |
Cash and cash investments | $ | 1,326 |  |  | $ | 697 |
Receivables | 1,262 |  |  | 997 |
Prepaid expenses and other | 88 |  |  | 90 |
Assets held for sale | — |  |  | 173 |
Inventories: |  |  |
Finished goods | 514 |  |  | 485 |
Raw material | 255 |  |  | 211 |
Work in process | 42 |  |  | 58 |
| 811 |  |  | 754 |
Total current assets | 3,487 |  |  | 2,711 |
Property and equipment, net | 878 |  |  | 878 |
Operating lease right-of-use assets | 156 |  |  | 176 |
Goodwill | 528 |  |  | 509 |
Other intangible assets, net | 253 |  |  | 259 |
Other assets | 273 |  |  | 139 |
Assets held for sale | — |  |  | 355 |
Total assets | $ | 5,575 |  |  | $ | 5,027 |
LIABILITIES |  |  |
Current Liabilities: |  |  |
Accounts payable | $ | 933 |  |  | $ | 697 |
Notes payable | 5 |  |  | 2 |
Accrued liabilities | 799 |  |  | 700 |
Liabilities held for sale | — |  |  | 149 |
Total current liabilities | 1,737 |  |  | 1,548 |
Long-term debt | 2,787 |  |  | 2,771 |
Noncurrent operating lease liabilities | 143 |  |  | 162 |
Other liabilities | 567 |  |  | 589 |
Liabilities held for sale | — |  |  | 13 |
Total liabilities | 5,234 |  |  | 5,083 |
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: 2020 – 260,500,000; 2019 – 275,600,000 | 261 |  |  | 276 |
Preferred shares authorized: 1,000,000; Issued and outstanding: 2020 and 2019 – None | — |  |  | — |
Paid-in capital | 21 |  |  | — |
Retained earnings (deficit) | 15 |  |  | (332) |
Accumulated other comprehensive loss | (156) |  |  | (179) |
Total Masco Corporation's shareholders' equity (deficit) | 141 |  |  | (235) |
Noncontrolling interest | 200 |  |  | 179 |
Total equity | 341 |  |  | (56) |
Total liabilities and equity | $ | 5,575 |  |  | $ | 5,027 |

See notes to condensed consolidated financial statements.
1

MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three and Nine Months Ended September 30, 2020 and 2019
(In Millions, Except Per Common Share Data)

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Net sales | $ | 1,983 |  |  | $ | 1,716 |  |  | $ | 5,328 |  |  | $ | 5,068 |
Cost of sales | 1,231 |  |  | 1,105 |  |  | 3,401 |  |  | 3,262 |
Gross profit | 752 |  |  | 611 |  |  | 1,927 |  |  | 1,806 |
Selling, general and administrative expenses | 328 |  |  | 322 |  |  | 939 |  |  | 964 |
Impairment charge for other intangible assets | — |  |  | — |  |  | — |  |  | 9 |
Operating profit | 424 |  |  | 289 |  |  | 988 |  |  | 833 |
Other income (expense), net: |  |  |  |  |  |  |
Interest expense | (40) |  |  | (39) |  |  | (110) |  |  | (119) |
Other, net | (4) |  |  | (9) |  |  | (22) |  |  | (17) |
| (44) |  |  | (48) |  |  | (132) |  |  | (136) |
Income from continuing operations before income taxes | 380 |  |  | 241 |  |  | 856 |  |  | 697 |
Income tax expense | 87 |  |  | 66 |  |  | 202 |  |  | 181 |
Income from continuing operations | 293 |  |  | 175 |  |  | 654 |  |  | 516 |
(Loss) income from discontinued operations, net | — |  |  | (37) |  |  | 411 |  |  | 1 |
Net income | 293 |  |  | 138 |  |  | 1,065 |  |  | 517 |
Less: Net income attributable to noncontrolling interest | 18 |  |  | 12 |  |  | 36 |  |  | 35 |
Net income attributable to Masco Corporation | $ | 275 |  |  | $ | 126 |  |  | $ | 1,029 |  |  | $ | 482 |
Income (loss) per common share attributable to Masco Corporation: |  |  |  |  |  |  |
Basic: |  |  |  |  |  |  |
Income from continuing operations | $ | 1.05 |  |  | $ | .57 |  |  | $ | 2.31 |  |  | $ | 1.66 |
(Loss) income from discontinued operations, net | — |  |  | (.13) |  |  | 1.54 |  |  | — |
Net income | $ | 1.05 |  |  | $ | .44 |  |  | $ | 3.85 |  |  | $ | 1.66 |
Diluted: |  |  |  |  |  |  |
Income from continuing operations | $ | 1.05 |  |  | $ | .56 |  |  | $ | 2.31 |  |  | $ | 1.65 |
(Loss) income from discontinued operations, net | — |  |  | (.12) |  |  | 1.54 |  |  | — |
Net income | $ | 1.05 |  |  | $ | .44 |  |  | $ | 3.85 |  |  | $ | 1.65 |
Amounts attributable to Masco Corporation: |  |  |  |  |  |  |
Income from continuing operations | $ | 275 |  |  | $ | 163 |  |  | $ | 618 |  |  | $ | 481 |
(Loss) income from discontinued operations, net | — |  |  | (37) |  |  | 411 |  |  | 1 |
Net income | $ | 275 |  |  | $ | 126 |  |  | $ | 1,029 |  |  | $ | 482 |

See notes to condensed consolidated financial statements.
2

MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
For the Three and Nine Months Ended September 30, 2020 and 2019
(In Millions)

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Net income | $ | 293 |  |  | $ | 138 |  |  | $ | 1,065 |  |  | $ | 517 |
Less: Net income attributable to noncontrolling interest | 18 |  |  | 12 |  |  | 36 |  |  | 35 |
Net income attributable to Masco Corporation | $ | 275 |  |  | $ | 126 |  |  | $ | 1,029 |  |  | $ | 482 |
Other comprehensive income (loss), net of tax (Note L): |  |  |  |  |  |  |
Cumulative translation adjustment | $ | 32 |  |  | $ | (13) |  |  | $ | 15 |  |  | $ | (11) |
Interest rate swaps | — |  |  | — |  |  | 1 |  |  | 1 |
Pension and other post-retirement benefits | 5 |  |  | 4 |  |  | 15 |  |  | 12 |
Other comprehensive income (loss), net of tax | 37 |  |  | (9) |  |  | 31 |  |  | 2 |
Less: Other comprehensive income (loss) attributable to noncontrolling interest | 9 |  |  | (8) |  |  | 8 |  |  | (7) |
Other comprehensive income (loss) attributable to Masco Corporation | $ | 28 |  |  | $ | (1) |  |  | $ | 23 |  |  | $ | 9 |
Total comprehensive income | $ | 330 |  |  | $ | 129 |  |  | $ | 1,096 |  |  | $ | 519 |
Less: Total comprehensive income attributable to noncontrolling interest | 27 |  |  | 4 |  |  | 44 |  |  | 28 |
Total comprehensive income attributable to Masco Corporation | $ | 303 |  |  | $ | 125 |  |  | $ | 1,052 |  |  | $ | 491 |

See notes to condensed consolidated financial statements.
3

MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 2020 and 2019
(In Millions)

| Nine Months Ended September 30,
| 2020 |  | 2019
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES: |  |  |
Cash provided by operations | $ | 590 |  |  | $ | 754 |
Increase in receivables | (294) |  |  | (136) |
Increase in inventories | (66) |  |  | (27) |
Increase in accounts payable and accrued liabilities, net | 343 |  |  | 14 |
Net cash from operating activities | 573 |  |  | 605 |
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES: |  |  |
Retirement of notes | (400) |  |  | — |
Purchase of Company common stock | (602) |  |  | (440) |
Cash dividends paid | (108) |  |  | (105) |
Dividends paid to noncontrolling interest | (23) |  |  | (42) |
Issuance of notes, net of issuance costs | 415 |  |  | — |
Debt extinguishment costs | (5) |  |  | — |
Proceeds from the exercise of stock options | 26 |  |  | 23 |
Employee withholding taxes paid on stock-based compensation | (25) |  |  | (21) |
Increase (decrease) in debt, net | 1 |  |  | (3) |
Credit Agreement and other financing costs | — |  |  | (2) |
Net cash for financing activities | (721) |  |  | (590) |
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES: |  |  |
Capital expenditures | (72) |  |  | (111) |
Acquisition of business, net of cash acquired | (24) |  |  | — |
Proceeds from disposition of: |  |  |
Businesses, net of cash disposed | 868 |  |  | 2 |
Other financial investments | 2 |  |  | 1 |
Property and equipment | — |  |  | 15 |
Other, net | (4) |  |  | (11) |
Net cash from (for) investing activities | 770 |  |  | (104) |
Effect of exchange rate changes on cash and cash investments | 7 |  |  | 10 |
CASH AND CASH INVESTMENTS: |  |  |
Increase (decrease) for the period | 629 |  |  | (79) |
At January 1 | 697 |  |  | 559 |
At September 30 | $ | 1,326 |  |  | $ | 480 |

See notes to condensed consolidated financial statements.
4

MASCO CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
For the Three and Nine Months Ended September 30, 2020 and 2019
(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 |

5

MASCO CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (Concluded)
For the Three and Nine Months Ended September 30, 2020 and 2019
(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, 2020 | $ | (56) |  |  | $ | 276 |  |  | $ | — |  |  | $ | (332) |  |  | $ | (179) |  |  | $ | 179 |
Cumulative effect of adoption of new credit loss standard (refer to Note A) | (1) |  |  |  |  |  |  | (1) |  |  |  |  |
Adjusted balance, January 1, 2020 | $ | (57) |  |  | $ | 276 |  |  | $ | — |  |  | $ | (333) |  |  | $ | (179) |  |  | $ | 179 |
Total comprehensive income (loss) | 514 |  |  |  |  |  |  | 530 |  |  | (20) |  |  | 4 |
Shares issued | 11 |  |  | 1 |  |  | 10 |  |  |  |  |  |  |
Shares retired: |  |  |  |  |  |  |  |  |  |  |
Repurchased | (602) |  |  | (14) |  |  | (28) |  |  | (560) |  |  |  |  |
Surrendered (non-cash) | (13) |  |  |  |  |  |  | (13) |  |  |  |  |
Cash dividends declared | (36) |  |  |  |  |  |  | (36) |  |  |  |  |
Stock-based compensation | 18 |  |  |  |  | 18 |  |  |  |  |  |  |
Balance, March 31, 2020 | $ | (165) |  |  | $ | 263 |  |  | $ | — |  |  | $ | (412) |  |  | $ | (199) |  |  | $ | 183 |
Total comprehensive income | 252 |  |  |  |  |  |  | 224 |  |  | 15 |  |  | 13 |
Shares retired: |  |  |  |  |  |  |  |  |  |  |
Repurchased | — |  |  | (3) |  |  | 3 |  |  |  |  |  |  |
Cash dividends declared | (35) |  |  |  |  |  |  | (35) |  |  |  |  |
Dividends paid to noncontrolling interest | (23) |  |  |  |  |  |  |  |  |  |  | (23) |
Stock-based compensation | 8 |  |  |  |  | 8 |  |  |  |  |  |  |
Balance, June 30, 2020 | $ | 37 |  |  | $ | 260 |  |  | $ | 11 |  |  | $ | (223) |  |  | $ | (184) |  |  | $ | 173 |
Total comprehensive income | 330 |  |  |  |  |  |  | 275 |  |  | 28 |  |  | 27 |
Shares issued | 3 |  |  | 1 |  |  | 2 |  |  |  |  |  |  |
Cash dividends declared | (37) |  |  |  |  |  |  | (37) |  |  |  |  |
Stock-based compensation | 8 |  |  |  |  | 8 |  |  |  |  |  |  |
Balance, September 30, 2020 | $ | 341 |  |  | $ | 261 |  |  | $ | 21 |  |  | $ | 15 |  |  | $ | (156) |  |  | $ | 200 |

See notes to condensed consolidated financial statements.
6

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, 2020, our results of operations and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2020 and 2019, cash flows for the nine-month period ended September 30, 2020 and 2019 and changes in shareholders' equity for the three-month and nine-month periods ended September 30, 2020 and 2019. The condensed consolidated balance sheet at December 31, 2019 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted ("GAAP") in the United States of America.
Reclassifications. Certain prior year amounts have been reclassified to conform to the 2020 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.
Stock-Based Compensation. We issue stock-based incentives in various forms to our employees and non-employee Directors. Outstanding stock-based incentives were in the form of long-term stock awards, stock options, restricted stock units ("RSUs"), performance restricted stock units ("PRSUs") and phantom stock awards.
In December 2019, our Organization and Compensation Committee of the Board of Directors (the "Compensation Committee") amended the terms of equity awards under our 2014 Long Term Stock Incentive Plan to provide that newly issued stock options, RSUs and phantom stock awards vest over a three-year period and redefined retirement-eligibility as age 65 or age 55 with at least 10 years of continuous service.
As such, compensation expense for equity awards granted in 2020 and thereafter is recognized ratably over the shorter of the vesting period, typically three years, or the length of time until the grantee becomes retirement eligible.
In February 2020, our Compensation Committee approved the grant of RSUs under the Company’s 2014 Long Term Stock Incentive Plan. We measure compensation expense for RSUs at the market price of our common stock at the grant date.
Allowance for Credit Losses. We do business with a number of customers, including certain home center retailers. We monitor our exposure for credit losses on our customer receivable balances and other financial investments measured at amortized cost and the credit worthiness of our customers on an on-going basis, including requiring the completion of credit applications and performing periodic reviews of our open accounts receivable. We record allowances for doubtful accounts for estimated losses resulting from the inability of our customers to fulfill their required payment obligation to us. Allowances are estimated at each of our businesses based upon specific customer balances, where a risk of loss has been identified, and also include a provision for losses based upon historical collection experience and write-off activity as well as reasonable and supportable forecast information that considers macro-economic factors and industry-specific trends associated with our businesses, among others. Our receivables balances are generally due in less than one year.
Recently Adopted Accounting Pronouncements. In June 2016, the Financial Accounting Standards Board ("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. We adopted ASU 2016-13 and recorded a cumulative-effect adjustment to opening retained earnings on January 1, 2020. The adoption of the standard did not have 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. We adopted ASU 2018-15 prospectively beginning on January 1, 2020. The adoption of the standard did not have an impact on our financial position or results of operations.
7

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
A. ACCOUNTING POLICIES (Concluded)
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. We early adopted ASU 2019-12 on January 1, 2020. The adoption of the standard did not have an impact on our financial position or results of operations.
Recently Issued Accounting Pronouncements. In January 2020, the FASB issued ASU 2020-01, "Investments—Equity Securities (Topic 321)," "Investments—Equity Method and Joint Ventures (Topic 323)," and "Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815," which clarifies that an entity should consider observable transactions when either applying or discontinuing the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321. ASU 2020-01 clarifies that for certain forward contracts or purchased options to acquire investments, an entity should not consider whether, upon settlement of the forward contract or exercise of the purchased option, the underlying securities would be accounted for under the equity method or the fair value option. ASU 2020-01 is effective for us for annual periods beginning January 1, 2021. Early adoption is permitted. We plan to adopt this standard for annual periods beginning January 1, 2021 and do not anticipate that the adoption of this new standard will have a material impact on our financial position or results of operations.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides optional guidance and expedients for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are intended to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update are elective and are effective upon issuance. We are currently assessing whether and how we will elect to apply ASU 2020-04.
B. ACQUISITIONS
In the first quarter of 2020, we acquired all of the share capital of SmarTap A.Y Ltd. ("SmarTap") for approximately $24 million in cash. SmarTap is a developer of a smart bathing system that monitors and controls the temperature and flow of water. This acquisition provides an adaptable solution for a wide range of products as it is compatible with showerheads, hand showers, spouts and shower jets. This business is included in the Plumbing Products segment. In connection with this acquisition, we recognized $10 million of definite-lived intangible assets, primarily related to technology, which is being amortized on a straight-line basis over a weighted average amortization period of 5 years. We also recognized $12 million of goodwill, which is not tax deductible, and is related primarily to the expected synergies from combining the operations into our business. During the three-month period ended September 30, 2020, we revised the allocation of the purchase price to certain identifiable assets based on analysis of information as of the acquisition date that has been made available through September 30, 2020, which resulted in a $2 million increase to goodwill.
C. DISCONTINUED OPERATIONS
On September 6, 2019, we completed the divestiture of our UK Window Group business ("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 two years of the divestiture. 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 November 6, 2019, we completed the divestiture of our Milgard Windows and Doors business ("Milgard"), a manufacturer and distributor of windows and doors.
In the third quarter of 2019, we determined that the previously reported Windows and Other Specialty Products segment met the criteria to be classified as a discontinued operation as a result of the combined sale of UKWG and Milgard. These businesses represented all of our windows businesses and all remaining businesses in the Windows and Other Specialty Products segment.
8

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
C. DISCONTINUED OPERATIONS (Continued)
During the second quarter of 2020, a $17 million pre-tax post-closing adjustment related to the finalization of working capital items was recorded to (loss) income from discontinued operations, net in the condensed consolidated statement of operations, as a gain on the divestiture of Milgard. Of the $17 million, we received $15 million in cash as of September 30, 2020, which is presented in investing activities on the condensed consolidated statement of cash flow as proceeds from disposition of businesses, net of cash disposed. The remaining $2 million is accounted for as a short-term receivable; payable in two monthly installments before December 31, 2020. All post-closing adjustments related to our divestiture of Milgard were finalized with the buyer in the second quarter of 2020.
On November 14, 2019, we entered into a definitive agreement to sell Masco Cabinetry LLC ("Cabinetry"), a manufacturer of cabinetry products. We completed the divestiture of Cabinetry on February 18, 2020 for proceeds of approximately $989 million, including $853 million, net of cash disposed. The remaining $136 million was accounted for as preferred stock issued by a holding company of the buyer; refer to Note G for additional information. The working capital adjustment was finalized with the buyer in the second quarter of 2020, resulting in no significant changes to net proceeds. In connection with the sale, we recognized a gain on the divestiture of $585 million for the nine months ended September 30, 2020, which is included in (loss) income from discontinued operations, net in the condensed consolidated statement of operations.
In the fourth quarter of 2019, we determined that the previously reported Cabinetry Products segment met the criteria to be classified as a discontinued operation, as Cabinetry represented all of our cabinet businesses and all remaining businesses in the Cabinetry Products segment.
We determined that the assets and liabilities for Cabinetry met the held for sale criteria in accordance with ASC 205-20, Discontinued Operations in 2019. Accordingly, the Cabinetry business' assets and liabilities were classified in the condensed consolidated balance sheet at December 31, 2019 as assets held for sale or liabilities held for sale. We ceased recording depreciation and amortization for the held for sale assets upon meeting the held for sale criteria.
As the combined sale of UKWG and Milgard and the sale of Cabinetry represented a strategic shift that will have a major effect on our operations and financial results, these businesses were presented in discontinued operations separate from continuing operations for the three and nine months ended September 30, 2020 and 2019, as applicable. In addition, depreciation and amortization, capital expenditures, and significant non-cash operating and investing activities related to discontinued operations were separately disclosed.
The results of the windows businesses recorded in income (loss) from discontinued operations before income tax was income of $6 million and $7 million for the three and nine months ended September 30, 2019, respectively. The results of the cabinetry business recorded in income (loss) from discontinued operations before income tax was income of $28 million for the three months ended September 30, 2019 and a loss of $8 million and income of $86 million for the nine months ended September 30, 2020 and 2019, respectively.
9

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
C. DISCONTINUED OPERATIONS (Continued)
The major classes of line items constituting income from discontinued operations, net, in millions:

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Net sales | $ | — |  |  | $ | 403 |  |  | $ | 101 |  |  | $ | 1,234 |
Cost of sales | — |  |  | 314 |  |  | 78 |  |  | 959 |
Gross profit | — |  |  | 89 |  |  | 23 |  |  | 275 |
Selling, general and administrative expenses | — |  |  | 56 |  |  | 31 |  |  | 176 |
Impairment charge for goodwill (A) | — |  |  | — |  |  | — |  |  | 7 |
Other income (expense), net | — |  |  | 1 |  |  | — |  |  | 1 |
Income (loss) from discontinued operations | — |  |  | 34 |  |  | (8) |  |  | 93 |
(Loss) gain on disposal of discontinued operations | — |  |  | (70) |  |  | 602 |  |  | (70) |
(Loss) income before income tax | — |  |  | (36) |  |  | 594 |  |  | 23 |
Income tax expense (B) | — |  |  | (1) |  |  | (183) |  |  | (22) |
(Loss) income from discontinued operations, net | $ | — |  |  | $ | (37) |  |  | $ | 411 |  |  | $ | 1 |

(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 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 Cabinetry discontinued operations, were as follows, in millions:

|  |  | December 31, 2019
Receivables |  |  | $ | 76 |
Prepaid expenses and other |  |  | 7 |
Inventories |  |  | 90 |
Property and equipment, net |  |  | 157 |
Operating lease right-of-use assets |  |  | 4 |
Goodwill |  |  | 181 |
Other intangible assets, net |  |  | 1 |
Other assets |  |  | 12 |
Total assets classified as held for sale |  |  | $ | 528 |
Accounts payable |  |  | $ | 103 |
Accrued liabilities |  |  | 46 |
Noncurrent operating lease liabilities |  |  | 3 |
Other liabilities |  |  | 10 |
Total liabilities classified as held for sale |  |  | $ | 162 |

10

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
C. DISCONTINUED OPERATIONS (Concluded)
Other selected financial information for Cabinetry, Milgard and UKWG during the period owned by us, were as follows, in millions:

|  | Nine Months Ended September 30,
|  | 2020 |  | 2019
Depreciation and amortization |  | $ | — |  |  | $ | 27 |
Capital expenditures |  | 1 |  |  | 27 |
ROU assets obtained in exchange for new lease obligations |  | — |  |  | 3 |

In conjunction with the divestiture of Milgard and Cabinetry, we entered into Transition Services Agreements to provide administrative services to the buyers. As of September 30, 2020, our Transition Service Agreement with Milgard concluded. The fees for services rendered under each of the Transition Service Agreements were not material and are not expected to be material to our results of operations for Milgard and Cabinetry, respectively.
As a part of the Cabinetry Transition Services Agreement, we guaranteed Cabinetry's obligations to a third-party while Cabinetry continued to participate in our voluntary supply chain finance program to the extent Cabinetry under its new ownership became delinquent on its payments. As of September 30, 2020, the amount Cabinetry and its new owners owed under the program was less than the $10 million letter of credit provided to the third-party by the new owners in conjunction with the Transition Services Agreement. Cabinetry exited our program in June 2020 and as of the date of filing, all outstanding invoices have been paid. As such, there is no remaining exposure and no losses were recognized under the guarantee.
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, 2020
| Plumbing Products |  | Decorative Architectural Products |  | Total
Primary geographic markets: |  |  |  |  |
North America | $ | 757 |  |  | $ | 842 |  |  | $ | 1,599 |
International, principally Europe | 384 |  |  | — |  |  | 384 |
Total | $ | 1,141 |  |  | $ | 842 |  |  | $ | 1,983 |

| Nine Months Ended September 30, 2020
| Plumbing Products |  | Decorative Architectural Products |  | Total
Primary geographic markets: |  |  |  |  |
North America | $ | 1,973 |  |  | $ | 2,364 |  |  | $ | 4,337 |
International, principally Europe | 991 |  |  | — |  |  | 991 |
Total | $ | 2,964 |  |  | $ | 2,364 |  |  | $ | 5,328 |

| Three Months Ended September 30, 2019
| Plumbing Products |  | Decorative Architectural Products |  | Total
Primary geographic markets: |  |  |  |  |
North America | $ | 664 |  |  | $ | 710 |  |  | $ | 1,374 |
International, principally Europe | 342 |  |  | — |  |  | 342 |
Total | $ | 1,006 |  |  | $ | 710 |  |  | $ | 1,716 |

11

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
D. REVENUE (Concluded)

| Nine Months Ended September 30, 2019
| Plumbing Products |  | Decorative Architectural Products |  | Total
Primary geographic markets: |  |  |  |  |
North America | $ | 1,923 |  |  | $ | 2,110 |  |  | $ | 4,033 |
International, principally Europe | 1,035 |  |  | — |  |  | 1,035 |
Total | $ | 2,958 |  |  | $ | 2,110 |  |  | $ | 5,068 |

Our contract asset balance was $2 million at both September 30, 2020 and December 31, 2019. Our contract liability balance was $25 million and $40 million at September 30, 2020 and December 31, 2019, respectively.
We reversed $6 million and $2 million of revenue for the three-month periods ended September 30, 2020 and 2019, respectively, related to performance obligations settled in previous quarters of the same year. We recognized $1 million and $6 million of revenue for the three-month and nine-month periods ended September 30, 2020, respectively, and $1 million of revenue for the nine-month period ended September 30, 2019 related to performance obligations settled in previous years.
Changes in the allowance for credit losses deducted from accounts receivable were as follows, in millions:

| Nine Months Ended September 30, 2020
Balance at January 1 (after adopting ASU 2016-13) | $ | 5 |
Provision for expected credit losses during the period | 2 |
Write-offs charged against the allowance | (1) |
Recoveries of amounts previously written off | 1 |
Balance at end of period | $ | 7 |

E. DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense, including discontinued operations, was $99 million and $124 million for the nine-month periods ended September 30, 2020 and 2019, respectively.
F. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the nine-month period ended September 30, 2020, by segment, were as follows, in millions:

| Gross Goodwill At September 30, 2020 |  | Accumulated Impairment Losses |  | Net Goodwill At September 30, 2020 |  |  |  |  |  |
Plumbing Products | $ | 585 |  |  | $ | (340) |  |  | $ | 245 |  |  |  |  |  |  |
Decorative Architectural Products | 358 |  |  | (75) |  |  | 283 |  |  |  |  |  |  |
Total | $ | 943 |  |  | $ | (415) |  |  | $ | 528 |  |  |  |  |  |  |

| Gross Goodwill At December 31, 2019 |  | Accumulated Impairment Losses |  | Net Goodwill At December 31, 2019 |  | Acquisitions |  | Other (A) |  |  |  | Net Goodwill At September 30, 2020
Plumbing Products | $ | 566 |  |  | $ | (340) |  |  | $ | 226 |  |  | $ | 14 |  |  | $ | 5 |  |  |  |  | $ | 245 |
Decorative Architectural Products | 358 |  |  | (75) |  |  | 283 |  |  | — |  |  | — |  |  |  |  | 283 |
Total | $ | 924 |  |  | $ | (415) |  |  | $ | 509 |  |  | $ | 14 |  |  | $ | 5 |  |  |  |  | $ | 528 |

(A) Other consists of the effect of foreign currency translations.
12

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
F. GOODWILL AND OTHER INTANGIBLE ASSETS (Concluded)
The carrying value of our other indefinite-lived intangible assets was $76 million at both September 30, 2020 and December 31, 2019, 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 $177 million (net of accumulated amortization of $66 million) and $183 million (net of accumulated amortization of $48 million) at September 30, 2020 and December 31, 2019, respectively, and principally included customer relationships.
G. FAIR VALUE OF FINANCIAL INVESTMENTS
In conjunction with our divestiture of Cabinetry, we received preferred stock of ACProducts Holding, Inc., the holding company of the buyer, with a liquidation preference of $150 million. The preferred stock has a coupon of 8 percent until the first anniversary of issuance, 9 percent after the first anniversary and until the second anniversary of issuance, and 10 percent after the second anniversary of issuance and until the seventh anniversary of issuance. After which, the rate will increase by 50 basis points up to a maximum of 15 percent for each annual period occurring during and after the seventh anniversary until all shares have been redeemed in full.
We do not have the ability to exercise significant influence, and the fair value of this security is not readily available. We have elected to measure this investment at cost (less impairment, if any) adjusted for observable price changes in orderly transactions for the identical or similar investments of the same issuer for subsequent measurements of fair value. As the preferred stock was received in conjunction with the sale of Cabinetry, we determined the cost to be the fair value of the preferred stock at the time of sale.
The fair value of the preferred stock was measured on a non-recurring basis, and estimated using discounted cash flow and option pricing models (Level 3 inputs). The significant unobservable inputs used to value the preferred stock included: time to exit (deemed maturity) since the preferred stock is not mandatorily redeemable, discount rate used to determine the present value of expected cash flows, which included the spread on company specific debt and the risk-free rate of return, the liquidation preference and the coupon rate. On the date of acquisition, the fair value of this investment was determined to be $136 million and was included in other assets in our condensed consolidated balance sheet.
Dividends earned on this investment are included within other income (expense), net in our condensed consolidated statement of operations with a corresponding increase to our basis in the investment. We had dividend income of $3 million and $7 million for the three-month and nine-month periods ended September 30, 2020, respectively. As such, the preferred stock was reported at the carrying value of $143 million in other assets in our condensed consolidated balance sheet at September 30, 2020.
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, 2020 was approximately $3.2 billion, compared with the aggregate carrying value of $2.8 billion. The aggregate estimated market value of our short-term and long-term debt at December 31, 2019 was approximately $3.0 billion, compared with the aggregate carrying value of $2.8 billion.
13

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
H. WARRANTY LIABILITY
Changes in our warranty liability were as follows, in millions:

| Nine Months Ended September 30, 2020 |  | Twelve Months Ended December 31, 2019
Balance at January 1 | $ | 84 |  |  | $ | 81 |
Accruals for warranties issued during the period | 25 |  |  | 34 |
Accruals related to pre-existing warranties | 1 |  |  | 1 |
Settlements made (in cash or kind) during the period | (24) |  |  | (31) |
Other, net (including currency translation) | (1) |  |  | (1) |
Balance at end of period | $ | 85 |  |  | $ | 84 |

I. DEBT
On September 18, 2020, we issued $300 million of 2.0% Notes due October 1, 2030 (the "2030 Notes") and received proceeds of $300 million, net of discount, for the issuance of the 2030 Notes. Also on September 18, 2020, we issued an incremental $100 million of our existing 4.5% Notes due May 15, 2047 (the "2047 Notes") and received proceeds of $119 million, including a premium, for the issuance of the 2047 Notes. The incremental $100 million will form a single series with the existing $300 million of 4.5% Notes due May 15, 2047. The 2030 Notes and 2047 Notes are senior indebtedness and are redeemable at our option at the applicable redemption price. On September 29, 2020, proceeds from the debt issuances were used to repay and early retire $400 million of our 3.5% Notes due April 1, 2021. In connection with this early retirement, we incurred a loss on debt extinguishment of $6 million, which was recorded as interest expense.
On March 13, 2019, we entered into a credit agreement (the “Credit Agreement”) 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 lenders 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, 2020, 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) if available, adjusted LIBO Rate plus 1.0% (the "Alternative Base Rate"); plus an applicable margin based upon our then-applicable corporate credit ratings; or (B) if available, 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, if available, plus an applicable margin based upon our then-applicable corporate credit ratings.
The Credit Agreement contains financial covenants requiring us to maintain (A) a net leverage ratio, as adjusted for certain items, not exceeding 4.0 to 1.0, and (B) a minimum interest coverage ratio, as adjusted for certain items, not less than 2.5 to 1.0.
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, 2020.
14

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
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, 2020, outstanding stock-based incentives were in the form of long-term stock awards, stock options, restricted stock units, performance 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,
| 2020 |  | 2019 |  | 2020 |  | 2019
Long-term stock awards | $ | 4 |  |  | $ | 6 |  |  | $ | 11 |  |  | $ | 16 |
Stock options | 1 |  |  | 1 |  |  | 6 |  |  | 3 |
Restricted stock units | 1 |  |  | — |  |  | 12 |  |  | — |
Performance restricted stock units | 2 |  |  | — |  |  | 3 |  |  | 2 |
Phantom stock awards and stock appreciation rights | 1 |  |  | 1 |  |  | 3 |  |  | 3 |
Total | $ | 9 |  |  | $ | 8 |  |  | $ | 35 |  |  | $ | 24 |

Long-Term Stock Awards. Prior to the amendment of our 2014 Long Term Stock Incentive Plan in December 2019, we granted long-term stock awards to our key employees and non-employee Directors. These grants did not cause net share dilution due to our practice of repurchasing and retiring an equal number of shares in the open market. We did not grant shares of long-term stock awards in the nine-month period ended September 30, 2020.
Our long-term stock award activity was as follows, shares in millions:

| Nine Months Ended September 30,
| 2020 |  | 2019
Unvested stock award shares at January 1 | 2 |  |  | 2 |
Weighted average grant date fair value | $ | 34 |  |  | $ | 30 |
Stock award shares granted | — |  |  | 1 |
Weighted average grant date fair value | $ | — |  |  | $ | 36 |
Stock award shares vested | 1 |  |  | 1 |
Weighted average grant date fair value | $ | 32 |  |  | $ | 25 |
Stock award shares forfeited | — |  |  | — |
Weighted average grant date fair value | $ | 35 |  |  | $ | 32 |
Unvested stock award shares at September 30 | 1 |  |  | 2 |
Weighted average grant date fair value | $ | 36 |  |  | $ | 34 |

At September 30, 2020 and 2019, there was $25 million and $49 million, respectively, of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of two years and three years at September 30, 2020 and 2019, respectively.
The total market value (at the vesting date) of stock award shares which vested was $31 million during both the nine-month periods ended September 30, 2020 and 2019.
15

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
J. STOCK-BASED COMPENSATION (Continued)
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. Beginning in 2020, stock options become exercisable (vest ratably) over three years beginning on the first anniversary from the grant date. Stock options granted prior to 2020 become exercisable (vest ratably) over five years.
We granted 420,840 stock options in the nine-month period ended September 30, 2020 with a grant date weighted average exercise price of approximately $48 per share. In the nine-month period ended September 30, 2020, 16,240 stock options were forfeited (including options that expired unexercised).
Our stock option activity was as follows, shares in millions:

|  | Nine Months Ended September 30,
|  | 2020 |  |  | 2019
Option shares outstanding, January 1 |  | 3 |  |  |  | 4 |
Weighted average exercise price | $ | 27 |  |  | $ | 21 |
Option shares granted |  | 1 |  |  |  | 1 |
Weighted average exercise price | $ | 48 |  |  | $ | 36 |
Option shares exercised |  | 1 |  |  |  | 2 |
Aggregate intrinsic value on date of exercise (A) | $ | 29 million |  | $ | 29 million
Weighted average exercise price | $ | 17 |  |  | $ | 12 |
Option shares forfeited |  | — |  |  |  | — |
Weighted average exercise price | $ | 42 |  |  | $ | 34 |
Option shares outstanding, September 30 |  | 3 |  |  |  | 3 |
Weighted average exercise price | $ | 34 |  |  | $ | 26 |
Weighted average remaining option term (in years) |  | 7 |  |  | 6
Option shares vested and expected to vest, September 30 |  | 2 |  |  |  | 3 |
Weighted average exercise price | $ | 33 |  |  | $ | 26 |
Aggregate intrinsic value (A) | $ | 54 million |  | $ | 48 million
Weighted average remaining option term (in years) |  | 7 |  |  | 6
Option shares exercisable (vested), September 30 |  | 1 |  |  |  | 2 |
Weighted average exercise price | $ | 28 |  |  | $ | 21 |
Aggregate intrinsic value (A) | $ | 35 million |  | $ | 39 million
Weighted average remaining option term (in years) |  | 5 |  |  | 4

(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 September 30, 2020 and 2019, there was $7 million and $9 million, respectively, 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, 2020 and 2019.
16

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,
| 2020 |  | 2019
Weighted average grant date fair value | $ | 10.67 |  |  | $ | 8.81 |
Risk-free interest rate | 1.53 | % |  | 2.57 | %
Dividend yield | 1.14 | % |  | 1.35 | %
Volatility factor | 24.00 | % |  | 25.00 | %
Expected option life | 6 years |  | 6 years

Restricted Stock Units. Restricted stock units are granted to our key employees and non-employee Directors. These grants did not cause net share dilution due to our practice of repurchasing and retiring an equal number of shares in the open market. The grant date fair value is based on the fair value of our common stock. These units will vest and be settled in shares ratably over three years.
We granted 437,170 restricted stock units in the nine-month period ended September 30, 2020 with a weighted average grant date fair value of $47 per share. In the nine-month period ended September 30, 2020, 7,930 restricted stock units were forfeited.
At September 30, 2020, there was $8 million of unrecognized compensation expense related to unvested restricted stock units; such units had a weighted average remaining vesting period of two years.
Performance Restricted Stock Units. Under our Long Term Incentive Program, we grant performance restricted stock units to certain senior executives. These performance restricted stock units will vest and share awards will be issued at no cost to the employees, subject to our achievement of specified performance metrics established by our Compensation Committee over a three-year performance period and the recipient's continued employment through the share award date. During the nine-month period ended September 30, 2020, we granted 133,390 performance restricted stock units with a grant date fair value of approximately $34 per share and 151,724 shares were issued. No performance restricted stock units were forfeited during the nine-month period ended September 30, 2020. During the nine-month period ended September 30, 2019, we granted 126,680 performance restricted stock units with a grant date fair value of approximately $39 per share and 15,600 performance restricted stock units were forfeited.
17

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
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,
| 2020 |  | 2019
| Qualified |  | Non-Qualified |  | Qualified |  | Non-Qualified
Service cost | $ | 1 |  |  | $ | — |  |  | $ | 1 |  |  | $ | — |
Interest cost | 5 |  |  | 2 |  |  | 11 |  |  | 2 |
Expected return on plan assets | (6) |  |  | — |  |  | (12) |  |  | — |
Amortization of net loss | 7 |  |  | — |  |  | 4 |  |  | 1 |
Net periodic pension cost | $ | 7 |  |  | $ | 2 |  |  | $ | 4 |  |  | $ | 3 |

| Nine Months Ended September 30,
| 2020 |  | 2019
| Qualified |  | Non-Qualified |  | Qualified |  | Non-Qualified
Service cost | $ | 2 |  |  | $ | — |  |  | $ | 2 |  |  | $ | — |
Interest cost | 18 |  |  | 4 |  |  | 30 |  |  | 5 |
Expected return on plan assets | (17) |  |  | — |  |  | (34) |  |  | — |
Amortization of net loss | 18 |  |  | 2 |  |  | 14 |  |  | 2 |
Net periodic pension cost | $ | 21 |  |  | $ | 6 |  |  | $ | 12 |  |  | $ | 7 |

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. In December 2019, our Board of Directors approved the termination of our qualified domestic defined-benefit pension plans in 2021.
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 |  | Amounts Reclassified |  |
Accumulated Other Comprehensive Loss | Three Months Ended September 30, |  | Nine Months Ended September 30, |  | Statement of Operations Line Item
2020 |  | 2019 |  | 2020 |  | 2019 |
Amortization of defined-benefit pension and other post-retirement benefits: |  |  |  |  |  |  |  |  |
Actuarial losses, net | $ | 7 |  |  | $ | 5 |  |  | $ | 20 |  |  | $ | 16 |  |  | Other income (expense), net
Tax (benefit) | (2) |  |  | (1) |  |  | (5) |  |  | (4) |  |  |
Net of tax | $ | 5 |  |  | $ | 4 |  |  | $ | 15 |  |  | $ | 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.
18

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
M. SEGMENT INFORMATION
Information by segment and geographic area was as follows, in millions:

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2020 |  | 2019 |  | 2020 |  | 2019 |  | 2020 |  | 2019 |  | 2020 |  | 2019
| Net Sales (A) |  | Operating Profit (Loss) |  | Net Sales (A) |  | Operating Profit (Loss)
Operations by segment: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Plumbing Products | $ | 1,141 |  |  | $ | 1,006 |  |  | $ | 271 |  |  | $ | 179 |  |  | $ | 2,964 |  |  | $ | 2,958 |  |  | $ | 583 |  |  | $ | 530 |
Decorative Architectural Products | 842 |  |  | 710 |  |  | 179 |  |  | 134 |  |  | 2,364 |  |  | 2,110 |  |  | 475 |  |  | 380 |
Total | $ | 1,983 |  |  | $ | 1,716 |  |  | $ | 450 |  |  | $ | 313 |  |  | $ | 5,328 |  |  | $ | 5,068 |  |  | $ | 1,058 |  |  | $ | 910 |
Operations by geographic area: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
North America | $ | 1,599 |  |  | $ | 1,374 |  |  | $ | 368 |  |  | $ | 262 |  |  | $ | 4,337 |  |  | $ | 4,033 |  |  | $ | 899 |  |  | $ | 759 |
International, principally Europe | 384 |  |  | 342 |  |  | 82 |  |  | 51 |  |  | 991 |  |  | 1,035 |  |  | 159 |  |  | 151 |
Total | $ | 1,983 |  |  | $ | 1,716 |  |  | 450 |  |  | 313 |  |  | $ | 5,328 |  |  | $ | 5,068 |  |  | 1,058 |  |  | 910 |
General corporate expense, net |  |  |  |  | (26) |  |  | (24) |  |  |  |  |  |  | (70) |  |  | (77) |
Operating profit |  |  |  |  | 424 |  |  | 289 |  |  |  |  |  |  | 988 |  |  | 833 |
Other income (expense), net |  |  |  |  | (44) |  |  | (48) |  |  |  |  |  |  | (132) |  |  | (136) |
Income from continuing operations before income taxes |  |  |  |  | $ | 380 |  |  | $ | 241 |  |  |  |  |  |  | $ | 856 |  |  | $ | 697 |

(A) Inter-segment sales were not material.
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,
| 2020 |  | 2019 |  | 2020 |  | 2019
Income from cash and cash investments | $ | — |  |  | $ | 1 |  |  | $ | 2 |  |  | $ | 2 |
Equity investment income, net | 1 |  |  | 1 |  |  | 1 |  |  | 1 |
Foreign currency transaction gains (losses) | 1 |  |  | (5) |  |  | (6) |  |  | (3) |
Net periodic pension and post-retirement benefit cost | (9) |  |  | (6) |  |  | (25) |  |  | (17) |
Dividend income | 3 |  |  | — |  |  | 7 |  |  | — |
Other items, net | — |  |  | — |  |  | (1) |  |  | — |
Total other, net | $ | (4) |  |  | $ | (9) |  |  | $ | (22) |  |  | $ | (17) |

19

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
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,
| 2020 |  | 2019 |  | 2020 |  | 2019
Numerator (basic and diluted): |  |  |  |  |  |  |
Income from continuing operations | $ | 275 |  |  | $ | 163 |  |  | $ | 618 |  |  | $ | 481 |
Less: Allocation to unvested restricted stock awards | 1 |  |  | 1 |  |  | 5 |  |  | 3 |
Income from continuing operations attributable to common shareholders | 274 |  |  | 162 |  |  | 613 |  |  | 478 |
(Loss) income from discontinued operations, net | — |  |  | (37) |  |  | 411 |  |  | 1 |
Less: Allocation to unvested restricted stock awards | — |  |  | — |  |  | 3 |  |  | — |
(Loss) income from discontinued operations, net attributable to common shareholders | — |  |  | (37) |  |  | 408 |  |  | 1 |
Net income attributable to common shareholders | $ | 274 |  |  | $ | 125 |  |  | $ | 1,021 |  |  | $ | 479 |
Denominator: |  |  |  |  |  |  |
Basic common shares (based upon weighted average) | 261 |  |  | 286 |  |  | 265 |  |  | 289 |
Add: Stock option dilution | — |  |  | 1 |  |  | 1 |  |  | 1 |
Diluted common shares | 261 |  |  | 287 |  |  | 266 |  |  | 290 |

For the three-month and nine-month periods ended September 30, 2020 and 2019, we allocated dividends and undistributed earnings to the unvested restricted stock awards.
Additionally, 106,000 and 685,000 common shares for the three-month and nine-month periods ended September 30, 2020, respectively, and 855,000 and 1.2 million common shares for the three-month and nine-month periods ended September 30, 2019, respectively, related to stock options, and 20,000 common shares related to performance 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.
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. In the first nine months of 2020, we repurchased and retired 16.5 million shares of our common stock for approximately $602 million. This included 0.4 million shares to offset the dilutive impact of restricted stock units granted in the first nine months of the year as well as 1.2 million shares received at no additional cost from the settlement of the accelerated stock repurchase transaction initiated in November 2019. At September 30, 2020, we had $900 million remaining under the 2019 repurchase authorization.
On the basis of amounts paid (declared), cash dividends per common share were $0.135 ($0.140) and $0.405 ($0.410) for the three-month and nine-month periods ended September 30, 2020, respectively, and $0.120 ($0.135) and $0.360 ($0.375) for the three-month and nine-month periods ended September 30, 2019, respectively.
20

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Concluded)
P. OTHER COMMITMENTS AND CONTINGENCIES
We are involved in claims and litigation, including class actions, mass torts 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 23 percent and 27 percent for the three-month periods and 24 percent and 26 percent for the nine-month periods ended September 30, 2020 and 2019, respectively. The decrease in the rate was primarily due to a $10 million and $13 million reduction in income tax expense in the three-month and nine-month periods ended September 30, 2020, respectively, resulting from IRS guidance released during the third quarter of 2020 that allows us to exclude certain high-taxed foreign income from the U.S. tax effects on Global Intangible Low-taxed Income.
21

MASCO CORPORATION
Item 2. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2020 AND THE FIRST NINE MONTHS 2020 VERSUS THIRD QUARTER 2019 AND THE FIRST NINE MONTHS 2019

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
| 2020 |  | 2019 |  | 2020 | vs. | 2019
Net Sales: |  |  |  |  |  |  |
Plumbing Products | $ | 1,141 |  |  | $ | 1,006 |  |  | 13 | %
Decorative Architectural Products | 842 |  |  | 710 |  |  | 19 | %
Total | $ | 1,983 |  |  | $ | 1,716 |  |  | 16 | %
North America | $ | 1,599 |  |  | $ | 1,374 |  |  | 16 | %
International, principally Europe | 384 |  |  | 342 |  |  | 12 | %
Total | $ | 1,983 |  |  | $ | 1,716 |  |  | 16 | %

| Nine Months Ended September 30, |  | Percent Change
| 2020 |  | 2019 |  | 2020 | vs. | 2019
Net Sales: |  |  |  |  |  |  |
Plumbing Products | $ | 2,964 |  |  | $ | 2,958 |  |  | — | %
Decorative Architectural Products | 2,364 |  |  | 2,110 |  |  | 12 | %
Total | $ | 5,328 |  |  | $ | 5,068 |  |  | 5 | %
North America | $ | 4,337 |  |  | $ | 4,033 |  |  | 8 | %
International, principally Europe | 991 |  |  | 1,035 |  |  | (4) | %
Total | $ | 5,328 |  |  | $ | 5,068 |  |  | 5 | %

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Operating Profit (Loss): (A) |  |  |  |  |  |  |
Plumbing Products | $ | 271 |  |  | $ | 179 |  |  | $ | 583 |  |  | $ | 530 |
Decorative Architectural Products | 179 |  |  | 134 |  |  | 475 |  |  | 380 |
Total | $ | 450 |  |  | $ | 313 |  |  | $ | 1,058 |  |  | $ | 910 |
North America | $ | 368 |  |  | $ | 262 |  |  | $ | 899 |  |  | $ | 759 |
International, principally Europe | 82 |  |  | 51 |  |  | 159 |  |  | 151 |
Total | 450 |  |  | 313 |  |  | 1,058 |  |  | 910 |
General corporate expense, net | (26) |  |  | (24) |  |  | (70) |  |  | (77) |
Operating profit | $ | 424 |  |  | $ | 289 |  |  | $ | 988 |  |  | $ | 833 |

(A) Before general corporate expense, net; see Note M to the condensed consolidated financial statements.
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We report our financial results in accordance with generally accepted accounting principles ("GAAP") in the United States of America. 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, 2020 compared to the same periods of 2019.
NET SALES
Net sales increased 16 percent for the three-month period ended September 30, 2020 and five percent for the nine-month period ended September 30, 2020. Excluding the effect of currency translation, net sales increased 15 percent and five percent fo r the three-month and nine-month periods ended September 30, 2020, respectively. The following table reconciles reported net sales to net sales, excluding the effect of currency translation, in millions:

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Net sales, as reported | $ | 1,983 |  |  | $ | 1,716 |  |  | $ | 5,328 |  |  | $ | 5,068 |
Currency translation | (13) |  |  | — |  |  | 9 |  |  | — |
Net sales, excluding the effect of currency translation | $ | 1,970 |  |  | $ | 1,716 |  |  | $ | 5,337 |  |  | $ | 5,068 |

North American net sales increased 16 percent and eight percent for the three-month and nine-month periods ended September 30, 2020. Higher sales volume of paints and other coating products, plumbing products and builders' hardware products, in aggregate, increased sales by 17 percent and nine percent for the three-month and nine-month periods, respectively. Such increases were slightly offset by lower net selling prices of paints and other coating products, which decreased sales by one percent for both periods.
International net sales increased 12 percent for the three-month period ended September 30, 2020. In local currencies (including sales in currencies outside their respective functional currencies), net sales increased nine percent. Higher sales volume of plumbing products increased sales by nine percent. International net sales decreased four percent for the nine-month period ended September 30, 2020. In local currencies, net sales decreased four percent. Lower sales volume and unfavorable sales mix of plumbing products, in aggregate, decreased sales by four percent.
Net sales in the Plumbing Products segment increased 13 percent for the three-month period ended September 30, 2020. Higher sales volume increased sales by 12 percent. Favorable foreign currency translation further increased sales by one percent. Net sales in the Plumbing Products segment was flat for the nine-month period ended September 30, 2020. Higher sales volume and net selling prices, in aggregate, increased net sales by one percent, offset by unfavorable sales mix, which decreased sales by one percent.
Net sales in the Decorative Architectural Products segment increased 19 percent for the three-month period ended September 30, 2020, due mostly to higher sales volume of paints and other coating products, and to a lesser extent, builders' hardware products and lighting products. This increase was slightly offset by unfavorable net selling prices of paints and other coating products and builders' hardware products. Net sales in the Decorative Architectural Products segment increased 12 percent for the nine-month period ended September 30, 2020, due mostly to higher sales volume of paints and other coating products, and to a lesser extent, builders' hardware products. This increase was slightly offset by unfavorable net selling prices of paints and other coating products and lower sales volume of lighting products.
23

OPERATING PROFIT
Our gross profit margin was 37.9 percent and 36.2 percent for the three-month and nine-month periods ended September 30, 2020, respectively, compared to 35.6 percent for both comparable periods of 2019. Gross profit margins for the three-month period ended September 30, 2020 were positively impacted by increased sales volume, cost savings initiatives, including actions taken to mitigate the coronavirus disease 2019 ("COVID-19") pandemic impact, as well as decreased commodity costs, partially attributed to tariff mitigation. Such increases were partially offset by lower net selling prices. Gross profit margins for the nine-month period ended September 30, 2020 were positively impacted by increased sales volume and cost savings initiatives, including actions taken to mitigate the impact of the COVID-19 pandemic. Such increases were partially offset by lower net selling prices, unfavorable sales mix and increased commodity costs, primarily attributed to tariffs.
Selling, general and administrative expenses, as a percentage of sales, were 16.5 percent and 17.6 percent for the three-month and nine-month periods ended September 30, 2020, respectively, compared to 18.8 percent and 19.0 percent for the comparable periods of 2019. Selling, general and administrative expenses were positively impacted by cost containment activities including those actions taken to mitigate the COVID-19 pandemic impact and leverage of fixed expenses due primarily to increased sales volume.
Operating profit in the Plumbing Products segment for the three-month period ended September 30, 2020 was positively impacted by increased sales volume, cost savings initiatives, including actions taken to mitigate the COVID-19 pandemic impact and decreased commodity costs, partially attributed to tariff mitigation. Operating profit in the Plumbing Products segment for the nine-month period ended September 30, 2020 was positively impacted by cost savings initiatives, including actions taken to mitigate the COVID-19 pandemic impact, favorable net selling prices and higher sales volume. These positive impacts were partially offset by increases in commodity costs, primarily attributed to tariffs.
Operating profit in the Decorative Architectural Products segment for the three-month period ended September 30, 2020 benefited primarily from increased sales volume, as well as cost savings initiatives, including actions taken to mitigate the COVID-19 pandemic impact and decreased commodity costs. These positive impacts were partially offset by lower net selling prices. Operating profit in the Decorative Architectural Products segment for the nine-month period ended September 30, 2020 benefited primarily from increased sales volume, as well as cost savings initiatives, including actions taken to mitigate the COVID-19 pandemic impact. Additionally, operating profit was positively impacted by the non-recurrence of a 2019 non-cash impairment charge related to an other indefinite-lived intangible asset for a trademark associated with lighting products. These positive impacts were partially offset by unfavorable net selling prices and higher fixed expenses in our lighting business.
OTHER INCOME (EXPENSE), NET
Interest expense for the three-month and nine-month periods ended September 30, 2020 was $40 million and $110 million, respectively, compared to $39 million and $119 million for the three-month and nine-month periods ended September 30, 2019, respectively. In the third quarter of 2020, we recognized a loss on debt extinguishment of $6 million on the early retirement of our 3.5% Notes due April 1, 2021, which was recorded to interest expense. This increase was offset by lower interest charges due to the extinguishment of our 7.125% Notes due March 15, 2020 in the fourth quarter of 2019.
Other, net, for the three-month and nine-month periods ended September 30, 2020 included $9 million and $25 million, respectively, of net periodic pension and post-retirement benefit cost, $3 million and $7 million, respectively, of dividend income related to preferred stock of ACProducts Holding, Inc., and $1 million of foreign currency transaction gains for the three-month period and $6 million of foreign currency transaction losses for the nine-month period. 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 and $5 million and $3 million, respectively of foreign currency transaction losses.
24

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, 2020 was $275 million and $618 million, respectively, compared to $163 million and $481 million for the comparable periods of 2019. Diluted income per common share for the three-month and nine-month periods ended September 30, 2020 was $1.05 and $2.31, respectively, per common share, compared with $0.56 and $1.65, respectively, per common share for the comparable periods of 2019.
Our effective tax rate was 23 percent and 24 percent for the three-month and nine-month periods ended September 30, 2020, respectively. Our tax rates were lower than our normalized tax rate of 26 percent due primarily to a $10 million reduction in income tax expense in both periods, resulting from IRS guidance released during the third quarter of 2020, that allows us to exclude certain high-taxed foreign income from the U.S. tax effects on Global Intangible Low-taxed Income. Also, our effective tax rate for the nine-month period was lower than our normalized tax rate due to an additional $5 million income tax benefit on stock-based compensation.
Our effective tax rate was 27 percent and 26 percent for the three-month and nine-month periods ended September 30, 2019, respectively. Our normalized tax rate for 2019 was 26 percent.
OTHER FINANCIAL INFORMATION
Our current ratio was 2.0 to 1 and 1.8 to 1 at September 30, 2020 and December 31, 2019, respectively. The increase in our current ratio is due primarily to increased cash on hand as a result of the temporary suspension of our share repurchase activity beginning in the first quarter of 2020. We have announced our intention to resume our share repurchase activity in the fourth quarter as part of our strategic initiative to drive long-term shareholder value. We anticipate using approximately $100 million of cash for share repurchases in the fourth quarter, for a total of approximately $700 million of share repurchases in 2020.
For the nine-month period ended September 30, 2020, net cash provided by operating activities was $573 million. Cash provided by operations of $590 million was affected by the income tax expense of $179 million resulting from the gain recorded in connection with the divestiture of Cabinetry. Additionally, cash from operating activities was affected by increased receivables and payables as a result of increased demand for our products in the third quarter of 2020.
For the nine-month period ended September 30, 2020, net cash used for financing activities was $721 million, primarily due to $602 million for the repurchase and retirement of our common stock (including 0.4 million shares repurchased to offset the dilutive impact of restricted stock units granted in 2020), $400 million for the early retirement of our 3.5% Notes due April 1, 2021, $108 million for the payment of cash dividends, $23 million for dividends paid to noncontrolling interest and $25 million for employee withholding taxes paid on stock-based compensation. These uses of cash were partially offset by the issuances of $300 million of 2.0% Notes due October 1, 2030 and an incremental $100 million on our existing 4.5% Notes due May 15, 2047 that was issued at a premium of $19 million and $26 million of proceeds from the exercise of stock options.
For the nine-month period ended September 30, 2020, net cash provided by investing activities was $770 million, comprised of $853 million of proceeds from the sale of Cabinetry, net of cash disposed, and $15 million from the finalization of working capital items on the sale of Milgard, partially offset by $72 million for capital expenditures and $24 million for the acquisition of SmarTap, net of cash acquired.
Our cash and cash investments were $1.3 billion and $697 million at September 30, 2020 and December 31, 2019, 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 $1.3 billion and $697 million of cash and cash investments held at September 30, 2020 and December 31, 2019, $324 million and $297 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.
25

On September 18, 2020, we issued $300 million of 2.0% Notes due October 1, 2030 and received proceeds of $300 million, net of discount, for the issuance of the 2030 Notes. Also on September 18, 2020, we issued an incremental $100 million on our existing 4.5% Notes due May 15, 2047 and received proceeds of $119 million, including a premium, for the issuance of the 2047 Notes. The incremental $100 million will form a single series with the existing $300 million of 4.5% Notes due May 15, 2047. The 2030 Notes and 2047 Notes are senior indebtedness and are redeemable at our option at the applicable redemption price. On September 29, 2020, proceeds from the debt issuances were used to repay and early retire $400 million of our 3.5% Notes due April 1, 2021. In connection with this early retirement, we incurred a loss on debt extinguishment of $6 million, which was recorded as interest expense.
On March 13, 2019, we entered into a credit agreement (the "Credit Agreement") 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 lenders 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 net leverage ratio, as adjusted for certain items, not exceeding 4.0 to 1.0, and (B) a minimum interest coverage ratio, as adjusted for certain items, not less 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, 2020.
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 $47 million and $29 million at September 30, 2020 and December 31, 2019, 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 $97 million and $92 million for our continuing operations during the nine-month periods ended September 30, 2020 and 2019, 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.
The COVID-19 pandemic did not impact our financial performance during the third quarter of 2020 to the extent we anticipated. Operational activity that was previously slowed at certain of our facilities, as a result of the pandemic, have largely resumed operations at normal capacities enabling them to progress on the fulfillment of production and distribution backlogs that developed in the first half of the year as well as to meet current consumer demand.
Many, but not all, of our businesses remained operating in the first nine months of 2020 because the products we provide are critical to infrastructure sectors and the day-to-day operations of homes and businesses in our communities as defined by applicable local orders. However, certain of our facilities experienced full closures ranging from a few days to several weeks, and if certain governmental orders are reimposed or if we are required to close a facility for employee safety reasons, we could experience new or extended closures which might adversely impact our ability to produce and distribute our products. Finally, we may experience supply chain disruptions, particularly disruptions related to our ability to source plumbing, lighting and builders’ hardware products.
26

We may experience an adverse impact to our fourth quarter of 2020 results due to economic contraction as a result of high unemployment levels and remaining or potential renewed shelter-in-place and social distancing orders. However, given our portfolio of lower ticket, repair and remodel-oriented products, we expect that demand for our products will continue to be solid as we recover from the COVID-19 pandemic.
We believe that our present cash balance, cash flows from operations, and borrowing availability under our Credit Agreement are sufficient to fund our near-term working capital and other investment needs. We anticipate 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. However, due to the highly uncertain nature, severity and duration or resurgence of the COVID-19 pandemic and its impact on our customers, suppliers and employees, we are unable to fully estimate the extent of the impact it may have on our future financial condition.
In preparing this Form 10-Q, including our financial statements contained in this report, we made certain estimates and assumptions that affect or could have affected the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. As the impact of the COVID-19 pandemic to our business becomes more certain, we will update and refine our estimates and assumptions, which could affect the reported amounts of assets and liabilities and related disclosures, and future revenues and expenses.
We continue to be committed to the safety and well-being of our employees during this time, and, led by our cross-functional COVID-19 task force, we have employed best practices and followed guidance from the World Health Organization and the Centers for Disease Control and Prevention. We have implemented and are continuing to implement alternative work arrangements to support the health and safety of our employees, including working remotely and avoiding large gatherings. In addition, we have modified work areas and workstations to provide protective measures for employees, are staggering shifts, requiring the use of face coverings, practicing social distancing and increasing the cleaning of our facilities, and in the event that we learn of an employee testing positive for COVID-19, we are completing contact tracing and requiring impacted employees to self-quarantine.
OUTLOOK FOR THE COMPANY
We continue to execute our strategies of leveraging our strong brand portfolio, industry-leading positions and the Masco Operating System, our methodology to drive growth and productivity, to create long-term shareholder value. We believe that our strong financial position and cash flow generation, together with our investments in our industry-leading branded building products, our continued focus on innovation and disciplined capital allocation, will allow us to drive long-term growth and create value for our shareholders. While we continue to remain uncertain regarding the short-term impact that the COVID-19 pandemic may have on our businesses, we remain confident in the fundamentals of our businesses and long-term strategy.
27

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 innovative products, our ability to maintain our competitive position in our industries, our reliance on key customers, the length and severity of the ongoing COVID-19 pandemic, including its impact on domestic and international economic activity, consumer demand for our products, our production capabilities, our employees and our supply chain, the cost and availability of materials and the imposition of tariffs, our dependence on third-party suppliers, risks associated with our international operations and global strategies, our ability to achieve the anticipated benefits of our strategic initiatives, 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.
28

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, 2020, 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, 2020, 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.
29

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
In addition to the other information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Except as set forth in our Quarterly Report on Form 10-Q for the quarter period ended June 30, 2020, there have been no material changes to our risk factors from those disclosed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
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MASCO CORPORATION
PART II. OTHER INFORMATION, Continued
Item 6. Exhibits

| 4.1 | – | Resolutions establishing the terms of the 2.000% Notes Due 2030 and form of global note. Incorporated by reference to Exhibit 4.1 to Masco Corporation’s Current Report on Form 8-K dated and filed on September 18, 2020.
| 4.2 | – | Resolutions establishing the terms of the 4.500% Notes Due 2047 and form of global note. Incorporated by reference to Exhibit 4.2 to Masco Corporation’s Current Report on Form 8-K dated and filed on September 18, 2020.
| 4.3 | – | Second Supplemental Indenture dated as of September 18, 2020 to the Indenture dated as of February 12, 2001 between Masco Corporation and The Bank of New York Mellon Trust Company, N.A., as successor trustee under agreement originally with Bank One Trust Company, National Association, as Trustee, as supplemented. Incorporated by reference to Exhibit 4.3 to Masco Corporation’s Current Report on Form 8-K dated and filed on September 18, 2020.
| 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, 2020, 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)

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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 28, 2020
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