Item 8. Financial Statements and Supplementary Data.

Management's Report on Internal Control Over Financial Reporting

The management of Masco Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Masco Corporation's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

The management of Masco Corporation assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2016 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control – Integrated Framework." Based on this assessment, management has determined that the Company's internal control over financial reporting was effective as of December 31, 2016.

PricewaterhouseCoopers LLP, an independent registered public accounting firm, performed an audit of the Company's consolidated financial statements and of the effectiveness of Masco Corporation's internal control over financial reporting as of December 31, 2016. Their report expressed an unqualified opinion on the effectiveness of Masco Corporation's internal control over financial reporting as of December 31, 2016 and expressed an unqualified opinion on the Company's 2016 consolidated financial statements. This report appears under 'Item 8. Financial Statements and Supplementary Data' under the heading "Report of Independent Registered Public Accounting Firm."

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

of Masco Corporation:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) (1) present fairly, in all material respects, the financial position of Masco Corporation and its subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Detroit, Michigan

February 9, 2017

Financial Statements and Supplementary Data

MASCO CORPORATION and Consolidated Subsidiaries

CONSOLIDATED BALANCE SHEETS

at December 31, 2016 and 2015

	(In Millions, Except Share Data)
	2016				2015
ASSETS
Current Assets:
Cash and cash investments	$	990			$	1,468
Short-term bank deposits	201				248
Receivables	917				853
Inventories	712				687
Prepaid expenses and other	114				72
Total current assets	2,934				3,328
Property and equipment, net	1,060				1,027
Goodwill	832				839
Other intangible assets, net	154				160
Other assets	157				310
Total Assets	$	5,137			$	5,664
LIABILITIES and EQUITY
Current Liabilities:
Accounts payable	$	800			$	749
Notes payable	2				1,004
Accrued liabilities	658				650
Total current liabilities	1,460				2,403
Long-term debt	2,995				2,403
Other liabilities	785				800
Total Liabilities	5,240				5,606
Commitments and contingencies (Note U)
Equity:
Masco Corporation's shareholders' equity Common shares authorized: 1,400,000,000; issued and outstanding: 2016 – 318,000,000; 2015 – 330,500,000	318				330
Preferred shares authorized: 1,000,000; issued and outstanding: 2016 and 2015 – None	—				—
Paid-in capital	—				—
Retained deficit	(381		)		(300		)
Accumulated other comprehensive loss	(235		)		(165		)
Total Masco Corporation's shareholders' deficit	(298		)		(135		)
Noncontrolling interest	195				193
Total Equity	(103		)		58
Total Liabilities and Equity	$	5,137			$	5,664

See notes to consolidated financial statements.

MASCO CORPORATION and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

for the years ended December 31, 2016, 2015 and 2014

	(In Millions, Except Per Common Share Data)
	2016				2015				2014
Net sales	$	7,357			$	7,142			$	7,006
Cost of sales	4,901				4,889				4,946
Gross profit	2,456				2,253				2,060
Selling, general and administrative expenses	1,403				1,339				1,347
Income from litigation settlements	—				—				(9		)
Impairment charge for other intangible assets	—				—				1
Operating profit	1,053				914				721
Other income (expense), net:
Interest expense	(229		)		(225		)		(225		)
Other, net	6				—				11
	(223		)		(225		)		(214		)
Income from continuing operations before income taxes	830				689				507
Income tax expense (benefit)	296				293				(361		)
Income from continuing operations	534				396				868
(Loss) income from discontinued operations, net	—				(2		)		35
Net income	534				394				903
Less: Net income attributable to noncontrolling interest	43				39				47
Net income attributable to Masco Corporation	$	491			$	355			$	856
Income (loss) per common share attributable to Masco Corporation:
Basic:
Income from continuing operations	$	1.49			$	1.04			$	2.31
(Loss) income from discontinued operations, net	—				(0.01		)		0.10
Net income	$	1.49			$	1.03			$	2.40
Diluted:
Income from continuing operations	$	1.47			$	1.03			$	2.28
(Loss) income from discontinued operations, net	—				(0.01		)		0.10
Net income	$	1.47			$	1.02			$	2.38
Amounts attributable to Masco Corporation:
Income from continuing operations	$	491			$	357			$	821
(Loss) income from discontinued operations, net	—				(2		)		35
Net income	$	491			$	355			$	856

See notes to consolidated financial statements.

MASCO CORPORATION and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

for the years ended December 31, 2016, 2015 and 2014

	(In Millions)
	2016				2015				2014
Net income	$	534			$	394			$	903
Less: Net income attributable to noncontrolling interest	43				39				47
Net income attributable to Masco Corporation	$	491			$	355			$	856
Other comprehensive income (loss), net of tax (Note O):
Cumulative translation adjustment	$	(78	)		$	(96	)		$	(124	)
Interest rate swaps	1				2				1
Pension and other post-retirement benefits	(15		)		26				(140		)
Realized loss on available-for-sale securities	12				—				—
Other comprehensive (loss)	(80		)		(68		)		(263		)
Less: Other comprehensive income (loss) attributable to the noncontrolling interest:
Cumulative translation adjustment	$	(10	)		$	(16	)		$	(31	)
Pension and other post-retirement benefits	—				2				(6		)
	(10		)		(14		)		(37		)
Other comprehensive (loss) attributable to Masco Corporation	$	(70	)		$	(54	)		$	(226	)
Total comprehensive income	$	454			$	326			$	640
Less: Total comprehensive income attributable to noncontrolling interest	33				25				10
Total comprehensive income attributable to Masco Corporation	$	421			$	301			$	630

See notes to consolidated financial statements.

MASCO CORPORATION and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

for the years ended December 31, 2016, 2015 and 2014

	(In Millions)
	2016				2015				2014
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net income	$	534			$	394			$	903
Depreciation and amortization	134				133				167
Display amortization	25				20				15
Deferred income taxes	130				212				(406		)
(Gain) on disposition of investments, net	(4		)		(7		)		(2		)
Pension and other postretirement benefits	(78		)		(18		)		(36		)
Impairment of property and equipment, net	—				2				27
Stock-based compensation	29				41				47
(Increase) in receivables	(120		)		(104		)		(81		)
(Increase) decrease in inventories	(39		)		17				(75		)
Increase in accounts payable and accrued liabilities, net	71				82				63
Other items, net	44				(73		)		(20		)
Net cash from operating activities	726				699				602
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Retirement of notes	(1,300		)		(500		)		—
Purchase of Company common stock	(459		)		(456		)		(158		)
Cash dividends paid	(128		)		(126		)		(117		)
Dividends paid to noncontrolling interest	(31		)		(36		)		(34		)
Cash distributed to TopBuild Corp.	—				(63		)		—
Issuance of TopBuild Corp. debt	—				200				—
Issuance of notes, net of issuance costs	889				497				—
Debt extinguishment costs	(40		)		—				—
Increase in debt	3				4				4
Issuance of Company common stock	1				2				1
Excess tax benefit from stock-based compensation	23				75				13
Payment of debt	(4		)		(4		)		(6		)
Credit Agreement and other financing costs	—				(3		)		—
Net cash for financing activities	(1,046		)		(410		)		(297		)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures	(180		)		(158		)		(128		)
Acquisition of businesses, net of cash acquired	—				(41		)		(2		)
Proceeds from disposition of:
Short-term bank deposits	251				279				379
Property and equipment	—				18				16
Other financial investments	32				10				64
Purchases of:
Short-term bank deposits	(211		)		(253		)		(399		)
Other financial investments	—				(1		)		(1		)
Other, net	(16		)		(43		)		(29		)
Net cash for investing activities	(124		)		(189		)		(100		)
Effect of exchange rate changes on cash and cash investments	(34		)		(15		)		(45		)
CASH AND CASH INVESTMENTS:
(Decrease) increase for the year	(478		)		85				160
At January 1	1,468				1,383				1,223
At December 31	$	990			$	1,468			$	1,383

See notes to consolidated financial statements.

MASCO CORPORATION and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

for the years ended December 31, 2016, 2015 and 2014

	(In Millions, Except Per Share Data)
	Total				Common Shares ($1 par value)				Paid-In Capital				Retained Earnings (Deficit)				Accumulated Other Comprehensive Income (Loss)				Noncontrolling Interest
Balance, January 1, 2014	$	787			$	349			$	16			$	79			$	115			$	228
Total comprehensive income (loss)	640												856				(226		)		10
Shares issued	(6		)		3				(9		)
Shares retired:
Repurchased	(158		)		(7		)		(28		)		(123		)
Surrendered (non-cash)	(15		)						(15		)
Cash dividends declared	(122		)										(122		)
Dividends paid to noncontrolling interest	(34		)																		(34		)
Stock-based compensation	36								36
Balance, December 31, 2014	$	1,128			$	345			$	—			$	690			$	(111	)		$	204
Total comprehensive income (loss)	326												355				(54		)		25
Shares issued	(15		)		3				(18		)
Shares retired:
Repurchased	(456		)		(17		)		(65		)		(374		)
Surrendered (non-cash)	(18		)		(1		)						(17		)
Cash dividends declared	(126		)										(126		)
Dividends paid to noncontrolling interest	(36		)																		(36		)
Separation of TopBuild Corp.	(828		)										(828		)
Stock-based compensation	83								83
Balance, December 31, 2015	$	58			$	330			$	—			$	(300	)		$	(165	)		$	193
Total comprehensive income (loss)	454												491				(70		)		33
Shares issued	(24		)		3				(27		)
Shares retired:
Repurchased	(459		)		(15		)		(14		)		(430		)
Surrendered (non-cash)	(14		)										(14		)
Cash dividends declared	(128		)										(128		)
Dividends paid to noncontrolling interest	(31		)																		(31		)
Stock-based compensation	41								41
Balance, December 31, 2016	$	(103	)		$	318			$	—			$	(381	)		$	(235	)		$	195

See notes to consolidated financial statements.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. ACCOUNTING POLICIES

Principles of Consolidation. The consolidated financial statements include the accounts of Masco Corporation and all majority-owned subsidiaries. All significant intercompany transactions have been eliminated. We consolidate the assets, liabilities and results of operations of variable interest entities for which we are the primary beneficiary.

Use of Estimates and Assumptions in the Preparation of Financial Statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results may differ from these estimates and assumptions.

Revenue Recognition. We recognize revenue as title to products and risk of loss is transferred to customers or when services are rendered, net of applicable provisions for discounts, returns and allowances. Amounts billed for shipping and handling are included in net sales, while costs incurred for shipping and handling are included in cost of sales.

Customer Promotion Costs. We record estimated reductions to revenue for customer programs and incentive offerings, including special pricing and certain co-operative advertising arrangements, promotions and other volume-based incentives. In-store displays that are owned by us and used to market our products are included in other assets in the consolidated balance sheets and are amortized using the straight-line method over the expected useful life of three to five years; related amortization expense is classified as a selling expense in the consolidated statements of operations.

Foreign Currency. The financial statements of our foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at exchange rates as of the balance sheet dates. Revenues and expenses are translated at average exchange rates in effect during the year. The resulting cumulative translation adjustments have been recorded in the accumulated other comprehensive income (loss) component of shareholders' equity. Realized foreign currency transaction gains and losses are included in the consolidated statements of operations in other income (expense), net.

Cash and Cash Investments. We consider all highly liquid investments with an initial maturity of three months or less to be cash and cash investments.

Short-Term Bank Deposits. We invest a portion of our foreign excess cash in short-term bank deposits. These highly liquid investments have original maturities between three and twelve months and are valued at cost, which approximates fair value at December 31, 2016 and 2015. These short-term bank deposits are classified in the current assets section of our consolidated balance sheets, and interest income related to short-term bank deposits is recorded in our consolidated statements of operations in other income (expense), net.

Receivables. We do significant business with a number of customers, including certain home center retailers and homebuilders. We monitor our exposure for credit losses on our customer receivable balances and the credit worthiness of our customers on an on-going basis and record related allowances for doubtful accounts. Allowances are estimated based upon specific customer balances, where a risk of default has been identified, and also include a provision for non-customer specific defaults based upon historical collection, return and write-off activity. During downturns in our markets, declines in the financial condition and creditworthiness of customers impacts the credit risk of the receivables involved and we have incurred additional bad debt expense related to customer defaults. A separate allowance is recorded for customer incentive rebates and is generally based upon sales activity. Receivables are presented net of certain allowances (including allowances for doubtful accounts) of $40 million and $41 million at December 31, 2016 and 2015, respectively.

Property and Equipment. Property and equipment, including significant improvements to existing facilities, are recorded at cost. Upon retirement or disposal, the cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the consolidated statements of operations. Maintenance and repair costs are charged against earnings as incurred.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A. ACCOUNTING POLICIES (Continued)

We review our property and equipment as events occur or circumstances change that would more likely than not reduce the fair value of the property and equipment below the carrying amount. If the carrying amount of property and equipment is not recoverable from its undiscounted cash flows, then we would recognize an impairment loss for the difference between the carrying amount and the current fair value. Further, we evaluate the remaining useful lives of property and equipment at each reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods.

Depreciation. Depreciation expense is computed principally using the straight-line method over the estimated useful lives of the assets. Annual depreciation rates are as follows: buildings and land improvements, 2 to 10 percent, and machinery and equipment, 5 to 33 percent. Depreciation expense was $124 million, $116 million and $132 million in 2016, 2015 and 2014, respectively.

Goodwill and Other Intangible Assets. We perform our annual impairment testing of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We have defined our reporting units and completed the impairment testing of goodwill at the operating segment level. Our operating segments are reporting units that engage in business activities, for which discrete financial information, including five-year forecasts, are available. We compare the fair value of the reporting units to the carrying value of the reporting units for goodwill impairment testing. Fair value is determined using a discounted cash flow method, which includes significant unobservable inputs (Level 3 inputs), and requires us to make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. Our judgments are based upon historical experience, current market trends, consultations with external valuation specialists and other information. While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, different estimates and assumptions could result in different outcomes. In estimating future cash flows, we rely on internally generated five-year forecasts for sales and operating profits, including capital expenditures, and, currently, a one to three percent long-term assumed annual growth rate of cash flows for periods after the five-year forecast. We utilize our weighted average cost of capital of approximately 8.5 percent as the basis to determine the discount rate to apply to the estimated future cash flows. In 2016, based upon our assessment of the risks impacting each of our businesses, we applied a risk premium to increase the discount rate to a range of 10.5 percent to 13.5 percent for our reporting units.

If the carrying amount of a reporting unit exceeds its fair value, we measure the possible goodwill impairment based upon an allocation of the estimate of fair value of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including any previously unrecognized intangible assets (Step Two Analysis). The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized to the extent that a reporting unit's recorded goodwill exceeds the implied fair value of goodwill.

We review our other indefinite-lived intangible assets for impairment annually in the fourth quarter of each year, or as events occur or circumstances change that indicate the assets may be impaired without regard to the business unit. We consider the implications of both external (e.g., market growth, competition and local economic conditions) and internal (e.g., product sales and expected product growth) factors and their potential impact on cash flows related to the intangible asset in both the near- and long-term.

Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. We evaluate the remaining useful lives of amortizable intangible assets at each reporting period to determine whether events and circumstances warrant a revision to the remaining periods of amortization. Refer to Note H to the consolidated financial statements for additional information regarding goodwill and other intangible assets, net.

Fair Value Accounting. We follow accounting guidance for our financial investments and liabilities, which defines fair value, establishes a framework for measuring fair value and prescribes disclosures about fair value measurements. We also follow this guidance for our non-financial investments and liabilities.

The fair value of financial investments and liabilities is determined at each balance sheet date and future declines in market conditions, the future performance of the underlying investments or new information could affect the recorded values of our investments in available-for-sale securities, private equity funds and other investments.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A. ACCOUNTING POLICIES (Continued)

We use derivative financial instruments to manage certain exposure to fluctuations in earnings and cash flows resulting from changes in foreign currency exchange rates, commodity costs and interest rate exposures. Derivative financial instruments are recorded in the consolidated balance sheets as either an asset or liability measured at fair value, netted by counterparty, where the right of offset exists. The gain or loss is recognized in determining current earnings during the period of the change in fair value. We currently do not have any derivative instruments for which we have designated hedge accounting.

Warranty. We offer full and limited warranties on certain products with warranty periods ranging up to the lifetime of the product to the original consumer purchaser. At the time of sale, we accrue a warranty liability for the estimated future cost to provide products, parts or services to repair or replace products in satisfaction of warranty obligations. Our estimate of future costs to service our warranty obligations is based upon the information available and includes a number of factors, such as the warranty coverage, the warranty period, historical experience specific to the nature, frequency and average cost to service the claim, along with industry and demographic trends.

Certain factors and related assumptions in determining our warranty liability involve judgments and estimates and are sensitive to changes in the aforementioned factors. We believe that the warranty accrual is appropriate; however, actual claims incurred could differ from the original estimates thereby requiring adjustments to previously established accruals. Refer to Note U to the consolidated financial statements for additional information on our warranty accrual.

A significant portion of our business is at the consumer retail level through home center retailers and other major retailers. A consumer may return a product to a retail outlet that is a warranty return. However, certain retail outlets do not distinguish between warranty and other types of returns when they claim a return deduction from us. Our revenue recognition policy takes into account this type of return when recognizing revenue, and deductions are recorded at the time of sale.

Insurance Reserves. We provide for expenses associated with workers' compensation and product liability obligations when such amounts are probable and can be reasonably estimated. The accruals are adjusted as new information develops or circumstances change that would affect the estimated liability. Any obligations expected to be settled within 12 months are recorded in accrued liabilities; all other obligations are recorded in other liabilities.

Stock-Based Compensation. We measure compensation expense for stock awards at the market price of our common stock at the grant date. Such expense is recognized ratably over the shorter of the vesting period of the stock awards, typically 5 to 10 years, or the length of time until the grantee becomes retirement-eligible at age 65.

We measure compensation expense for stock options using a Black-Scholes option pricing model. Such expense is recognized ratably over the shorter of the vesting period of the stock options, typically five years, or the length of time until the grantee becomes retirement-eligible at age 65. We utilize the shortcut method to determine the tax windfall pool associated with stock options.

Noncontrolling Interest. We owned 68 percent of Hansgrohe SE at both December 31, 2016 and 2015. The aggregate noncontrolling interest, net of dividends, at December 31, 2016 and 2015 has been recorded as a component of equity on our consolidated balance sheets.

Interest and Penalties on Uncertain Tax Positions. We record interest and penalties on our uncertain tax positions in income tax expense (benefit).

Reclassifications. Certain prior year amounts have been reclassified to conform to the 2016 presentation in the consolidated financial statements. In our consolidated statements of cash flows, the cash flows from discontinued operations are not separately classified.

Revision of Previously Issued Financial Statements. We have revised the previously reported balances on our consolidated balance sheet as of December 31, 2015 to correct the classification for warranty claims not expected to be settled within the next year. Accrued liabilities decreased and other liabilities increased from the amounts previously reported by $102 million. This revision had no effect on our consolidated statements of operations or consolidated statements of cash flows. This revision is not considered material to our prior period financial statements.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A. ACCOUNTING POLICIES (Continued)

Recently Adopted Accounting Pronouncements. In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2015-02 (“ASU 2015-02”) “Consolidation (Topic 810) — Amendments to the Consolidations Analysis,” which modifies certain aspects of both the variable interest entities and voting interest entities models. We adopted ASU 2015-02 on January 1, 2016. The adoption of the new standard did not have an impact on our financial position or our results of operations.

In April 2015, the FASB issued Accounting Standards Update 2015‑03 (“ASU 2015-03”) “Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs,” which requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. In August 2015, the FASB issued ASU 2015-15 to clarify that debt issuance costs related to line-of-credit arrangements may remain classified as an asset. We retrospectively adopted both ASU 2015-03 and ASU 2015-15 on January 1, 2016. As a result of the retrospective adoption of the standards, we reclassified $15 million of debt issuance costs from other assets to long-term debt, and $1 million of debt issuance costs from other assets to notes payable, as of December 31, 2015.

In May 2015, the FASB issued Accounting Standards Update 2015-07 (“ASU 2015-07”), “Fair Value Measurement (Topic 820) Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent),” in which investments measured at fair value using the net asset value ("NAV") per share method (or its equivalent) as a practical expedient are removed from the fair value hierarchy and are separately presented to permit reconciliation of total pension plan assets. We retrospectively adopted ASU 2015-07 on December 31, 2016. As a result of the adoption, we have removed from the fair value hierarchies (in Note M) the defined-benefit pension plan assets valued using the NAV per share method (or its equivalent) as a practical expedient as of December 31, 2016 and 2015. We have separately presented the value of these assets to permit reconciliation to total pension assets.

In August 2016, the FASB issued Accounting Standards Update 2016-15 (“ASU 2016-15”), “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments,” which is intended to reduce diversity in practice as to how certain transactions are classified in the statement of cash flows. We retrospectively adopted this guidance on December 31, 2016. As a result of the adoption of this standard, we reclassified $40 million of debt extinguishment costs from operating activities to financing activities in our statement of cash flows for the year ended December 31, 2016. There was no impact to our statements of cash flows for the years ended December 31, 2015 and 2014.

Recently Issued Accounting Pronouncements. In May 2014, FASB issued a new standard for revenue recognition, Accounting Standards Codification 606 ("ASC 606"). The purpose of ASC 606 is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability across industries. The standard allows for either a full retrospective or modified retrospective method of adoption. We are finalizing our assessment of the impact of the adoption; however, currently, we do not expect the adoption will have a material impact on our financial position and results of operations. We currently anticipate adopting this standard on its effective date, January 1, 2018, under the full retrospective method of adoption. We have not experienced significant issues in our implementation process and we do not anticipate significant changes to our accounting policies.

In January 2016, the FASB issued Accounting Standards Update 2016-01 (“ASU 2016-01”), “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU 2016-01 is effective for us for annual periods beginning January 1, 2018. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.

In February 2016, the FASB issued a new standard for leases, Accounting Standards Codification 842 (“ASC 842”), which changes the accounting model for identifying and accounting for leases. ASC 842 is effective for us for annual periods beginning January 1, 2019 and requires retrospective application. We expect this standard to increase our total assets and total liabilities; however, we are currently evaluating the magnitude of the impact the adoption of this new standard will have on our financial position and results of operations.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A. ACCOUNTING POLICIES (Concluded)

In March 2016, the FASB issued Accounting Standards Update 2016-09 (“ASU 2016-09”), “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which requires the tax effects related to share-based payments to be recorded through the income statement and simplifies the accounting requirements for forfeitures and employers' tax withholding requirements. ASU 2016-09 is effective for us for annual periods beginning January 1, 2017. We anticipate the impact of the adoption of this ASU will be limited to the reclassification of certain items within our statements of cash flows, which we intend to adopt retrospectively. We expect an increase to our cash flows from (for) operating activities and a decrease to our cash flows from (for) financing activities. Subsequent to adoption, we anticipate volatility in our effective tax rate as any windfall or shortfall tax benefits related to our stock-based compensation incentives will be recorded directly into our results of operations.

In January 2017, the FASB issued Accounting Standards Update 2017-04 ("ASU 2017-04"), "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for us for annual periods beginning January 1, 2020. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. DISCONTINUED OPERATIONS

The presentation of discontinued operations includes a component or group of components that we have or intend to dispose of, and represents a strategic shift that has (or will have) a major effect on our operations and financial results. For spin off transactions, discontinued operations treatment is appropriate following the completion of the spin off.

On September 30, 2014, we announced a plan to spin off 100 percent of our Installation and Other Services businesses into an independent, publicly-traded company named TopBuild Corp. ("TopBuild") through a tax-free distribution of the stock of TopBuild to our stockholders. We initiated the spin off as TopBuild was no longer considered core to our long-term growth strategy in branded building products. On June 30, 2015, immediately prior to the effective time of the spin off, TopBuild paid a cash distribution to us of $200 million using the proceeds of its new debt financing arrangement. This transaction was reported as a financing activity in the consolidated statements of cash flows. We have accounted for the spin off of TopBuild as a discontinued operation. Losses from this discontinued operation were included in (loss) income from discontinued operations, net, in the consolidated statements of operations.

The major classes of line items constituting pre-tax (loss) profit of the discontinued operations, in millions:

	Year Ended December 31
	2016				2015				2014
Net sales (1)	$	—			$	762			$	1,515
Cost of sales (1)	—				603				1,188
Gross profit (1)	—				159				327
Selling, general and administrative expenses (1)	—				148				259
Income from discontinued operations	$	—			$	11			$	68
Other discontinued operations results:
Loss on disposal of discontinued operations, net (2)	—				(1		)		(6		)
Income before income tax	—				10				62
Income tax expense (3)	—				(12		)		(27		)
(Loss) income from discontinued operations, net	$	—			$	(2	)		$	35

(1)	Net sales, cost of sales, gross profit, and selling, general and administrative expenses reflect the results of TopBuild.

(2)	Included in loss on disposal of discontinued operations, net in 2014 are additional costs and charges related to the 2013 sale of Tvilum, our Danish ready-to-assemble cabinet business.

(3)	The unusual relationship between income tax expense and income before income tax for 2015 resulted primarily from certain non-deductible transaction costs related to the spin off of TopBuild.

Other selected financial information for TopBuild during the period owned by us, was as follows, in millions:

	Year Ended December 31
	2016				2015				2014
Depreciation and amortization	$	—			$	6			$	26
Capital expenditures	$	—			$	7			$	13

We did not have any assets or liabilities related to discontinued operations at either December 31, 2016 or 2015.

In conjunction with the spin off, we entered into a Transition Services Agreement with TopBuild under which we provided administrative services to TopBuild subsequent to the separation. This agreement terminated on June 30, 2016. The fees for services rendered under the Transition Services Agreement are not material to our results of operations.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

C. ACQUISITIONS

In the second quarter of 2015, we acquired a U.K. window business for approximately $16 million in cash in the Windows and Other Specialty Products segment. This acquisition will support our U.K. window business' growth strategy by expanding its product offerings into timber-alternative windows and doors.

In the first quarter of 2015, we acquired an aquatic fitness business for approximately $25 million in cash in the Plumbing Products segment. This acquisition will allow our spa business to expand its wellness products platform, open new channels of distribution and access a new customer base.

These acquisitions are not material to us. The results of these acquisitions are included in the consolidated financial statements from the date of their respective acquisition.

D. INVENTORIES

	(In Millions) At December 31
	2016				2015
Finished goods	$	366			$	358
Raw material	254				238
Work in process	92				91
Total	$	712			$	687

Inventories, which include purchased parts, materials, direct labor and applied manufacturing overhead, are stated at the lower of cost or net realizable value, with cost determined by use of the first-in, first-out method.

E. FAIR VALUE OF FINANCIAL INVESTMENTS AND LIABILITIES

Accounting Policy. We follow accounting guidance that defines fair value, establishes a framework for measuring fair value and prescribes disclosures about fair value measurements for financial investments and liabilities. The guidance defines fair value as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." Further, it defines a fair value hierarchy, as follows: Level 1 inputs as quoted prices in active markets for identical assets or liabilities; Level 2 inputs as observable inputs other than Level 1 prices, such as quoted market prices for similar assets or liabilities or other inputs that are observable or can be corroborated by market data; and Level 3 inputs as unobservable inputs that are supported by little or no market activity and that are financial instruments whose value is determined using pricing models or instruments for which the determination of fair value requires significant management judgment or estimation.

Financial investments that are available to be traded on readily accessible stock exchanges (domestic or foreign) are considered to have active markets and have been valued using Level 1 inputs. Financial investments that are not available to be traded on a public market or have limited secondary markets, or contain provisions that limit the ability to sell the investment are considered to have inactive markets and have been valued using Level 2 or 3 inputs. We incorporated credit risk into the valuations of financial investments by estimating the likelihood of non-performance by the counterparty to the applicable transactions. The estimate included the length of time relative to the contract, financial condition of the counterparty and current market conditions. The criteria for determining if a market was active or inactive were based on the individual facts and circumstances.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

E. FAIR VALUE OF FINANCIAL INVESTMENTS AND LIABILITIES (Continued)

Financial Investments. We have maintained investments in available-for-sale securities, equity method investments, and a number of private equity funds and other private investments, principally as part of our tax planning strategies, as any gains enhance the utilization of any current and future tax capital losses.

Financial investments included in other assets were as follows, in millions:

	At December 31
	2016				2015
Auction rate securities	$	—			$	22
Total recurring investments	—				22
Equity method investments	13				13
Private equity funds	5				10
Other investments	—				3
Total	$	18			$	48

Auction Rate Securities. During 2016, all of our auction rate securities were called by our counterparties and redeemed at values that approximated our recorded basis. Our investments in available-for-sale securities included cost basis of $19 million and pre-tax unrealized gains of $3 million and had a recorded basis of $22 million at December 31, 2015.

Equity Method Investments. Investments in private equity fund partnerships, joint ventures and less than majority-owned subsidiaries in which we have significant influence are accounted for under the equity method. Our consolidated statements of operations include our proportionate share of the net income (loss) of our equity method investees. When we record our proportionate share of net income (loss), it increases (decreases) our equity income in our consolidated statement of operations and our carrying value of that investment on our consolidated balance sheet.

During the fourth quarter of 2014, we sold our investment in the private equity fund, Long Point Capital Fund II L.P. (accounted for as an equity method investment) for proceeds of $48 million, which approximated net book value. Such proceeds are included in the consolidated statements of cash flows in proceeds from other financial investments, in the investing activities section.

Private Equity Funds and Other Investments. Our investments in private equity funds and other private investments, where we do not have significant influence, are carried at cost. During 2016, we abandoned our interest in a private investment, resulting in a $3 million loss recorded to our other investments.

Recurring Fair Value Measurements. For financial investments measured at fair value on a recurring basis at each reporting period, the unrealized gains or losses (that are deemed to be temporary) are recognized, net of tax effect, through shareholders' equity, as a component of other comprehensive income (loss). Realized gains and losses and charges for other-than-temporary impairments are included in determining net income, with related purchase costs based upon specific identification.

For the year ended December 31, 2016, all our Level 3 investments were redeemed due to the early redemption of all our auction rate securities which reduced our Level 3 investments by $22 million.

Non-Recurring Fair Value Measurements. It is not practicable for us to estimate the fair value of equity method investments or private equity funds and other private investments where we do not have significant influence, because there are no quoted market prices and sufficient information is not readily available for us to utilize a valuation model to determine the fair value for each fund. Due to the significant unobservable inputs, the fair value measurements used to evaluate impairment are a Level 3 input. These investments are evaluated, on a non-recurring basis, for potential other-than-temporary impairment when impairment indicators are present, or when an event or change in circumstances has occurred, that may have a significant adverse effect on the fair value of the investment.

There were no financial investments measured for impairment on a non-recurring basis during 2016, 2015 or 2014.

We did not have any transfers between Level 1 and Level 2 financial assets in 2016 or 2015.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

E. FAIR VALUE OF FINANCIAL INVESTMENTS AND LIABILITIES (Concluded)

Realized Gains (Losses). Income from financial investments, net, included in other, net, within other income (expense), net, was as follows, in millions:

	2016				2015				2014
Realized gains from auction rate securities	$	3			$	—			$	—
Equity investment income (loss), net	2				2				(2		)
Realized gains from private equity funds	5				6				4
Loss from other investments	(3		)		—				—
Income from financial investments, net	$	7			$	8			$	2

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 or the current rates available to us for debt with similar terms and remaining maturities. The aggregate estimated market value of short-term and long-term debt at December 31, 2016 was approximately $3.3 billion, compared with the aggregate carrying value of $3.0 billion. The aggregate estimated market value of short-term and long-term debt at December 31, 2015 was approximately $3.6 billion, compared with the aggregate carrying value of $3.4 billion.

F. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to global market risk as part of our normal daily business activities. To manage these risks, we enter into various derivative contracts. These contracts include interest rate swap agreements, foreign currency contracts and metals contracts intended to hedge our exposure to copper and zinc. We review our hedging program, derivative positions and overall risk management on a regular basis.

Interest Rate Swap Agreements. In 2012, in connection with the issuance of $400 million of debt, we terminated the interest rate swap hedge relationships that we had entered into in 2011. These interest rate swaps were designated as cash flow hedges and effectively fixed interest rates on the forecasted debt issuance to variable rates based on 3-month LIBOR. Upon termination, the ineffective portion of the cash flow hedges of approximately $2 million loss was recognized in our consolidated statement of operations in other, net. The remaining loss of approximately $23 million from the termination of these swaps is being amortized as an increase to interest expense over the remaining term of the debt, through March 2022. At December 31, 2016, the balance remaining in accumulated other comprehensive loss was $13 million (pre-tax).

Foreign Currency Contracts. Our net cash inflows and outflows exposed to the risk of changes in foreign currency exchange rates arise from the sale of products in countries other than the manufacturing source, foreign currency denominated supplier payments, debt and other payables, and investments in subsidiaries. To mitigate this risk, we, including certain European operations, entered into foreign currency forward contracts and foreign currency exchange contracts.

Gains (losses) related to foreign currency forward and exchange contracts are recorded in our consolidated statements of operations in other income (expense), net. In the event that the counterparties fail to meet the terms of the foreign currency forward or exchange contracts, our exposure is limited to the aggregate foreign currency rate differential with such institutions.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

F. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Concluded)

Metals Contracts. We have entered into several contracts to manage our exposure to increases in the price of copper and zinc. Gains (losses) related to these contracts are recorded in our consolidated statements of operations in cost of sales.

The pre-tax gains (losses) included in our consolidated statements of operations are as follows, in millions:

	Year Ended December 31,
	2016				2015				2014
Foreign currency contracts:
Exchange contracts	$	—			$	4			$	5
Forward contracts	—				(3		)		—
Metals contracts	5				(17		)		(3		)
Interest rate swaps	(2		)		(2		)		(2		)
Total	$	3			$	(18	)		$	—

We present our derivatives net by counterparty, due to the right of offset under master netting arrangements in the consolidated balance sheets. The notional amounts being hedged and the fair value of those derivative instruments are as follows, in millions:

	At December 31, 2016
	Notional Amount				Balance Sheet
Foreign currency contracts
Forward contracts	$	21
Accrued liabilities					$	(2	)
Metals contracts	1
Accrued liabilities					—

	At December 31, 2015
	Notional Amount				Balance Sheet
Foreign currency contracts:
Exchange contracts	$	39
Receivables					$	1
Forward contracts	30
Accrued liabilities					(2		)
Other liabilities					(1		)
Metals contracts	50
Accrued liabilities					(10		)

The fair value of all foreign currency and metals derivative contracts is estimated on a recurring basis, quarterly, using Level 2 inputs.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

G. PROPERTY AND EQUIPMENT

	(In Millions) At December 31
	2016				2015
Land and improvements	$	111			$	115
Buildings	712				672
Machinery and equipment	1,795				1,787
	2,618				2,574
Less: Accumulated depreciation	(1,558		)		(1,547		)
Total	$	1,060			$	1,027

We lease certain equipment and plant facilities under noncancellable operating leases. Rental expense recorded in the consolidated statements of operations totaled approximately $63 million, $60 million and $63 million during 2016, 2015 and 2014, respectively.

At December 31, 2016, future minimum lease payments were as follows, in millions:

2017	$	44
2018	35
2019	25
2020	19
2021	16
2022 and beyond	50

During 2014, we decided to sell two facilities in our Cabinetry Products segment, and we recorded a charge of $28 million, included in cost of sales in the consolidated statement of operations, to reflect the estimated fair value of those two facilities. Fair value was estimated using a market approach, considering the estimated fair values for other comparable buildings in the areas where the facilities are located (Level 3 inputs). These facilities were sold in 2015.

H. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill, by segment, were as follows, in millions:

	Gross Goodwill At December 31, 2016				Accumulated Impairment Losses				Net Goodwill At December 31, 2016
Plumbing Products	$	519			$	(340	)		$	179
Decorative Architectural Products	294				(75		)		219
Cabinetry Products	240				(59		)		181
Windows and Other Specialty Products	987				(734		)		253
Total	$	2,040			$	(1,208	)		$	832

	Gross Goodwill At December 31, 2015				Accumulated Impairment Losses				Net Goodwill At December 31, 2015				Additions (A)				Other (B)				Net Goodwill At December 31, 2016
Plumbing Products	$	525			$	(340	)		$	185			$	—			$	(6	)		$	179
Decorative Architectural Products	294				(75		)		219				—				—				219
Cabinetry Products	240				(59		)		181				—				—				181
Windows and Other Specialty Products	988				(734		)		254				—				(1		)		253
Total	$	2,047			$	(1,208	)		$	839			$	—			$	(7	)		$	832

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

H. GOODWILL AND OTHER INTANGIBLE ASSETS (Concluded)

	Gross Goodwill At December 31, 2014				Accumulated Impairment Losses				Net Goodwill At December 31, 2014				Additions (A)				Other (B)				Net Goodwill At December 31, 2015
Plumbing Products	$	531			$	(340	)		$	191			$	8			$	(14	)		$	185
Decorative Architectural Products	294				(75		)		219				—				—				219
Cabinetry Products	240				(59		)		181				—				—				181
Windows and Other Specialty Products	983				(734		)		249				6				(1		)		254
Total	$	2,048			$	(1,208	)		$	840			$	14			$	(15	)		$	839

(A)	Additions consist of acquisitions.

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

We completed our annual impairment testing of goodwill and other indefinite-lived intangible assets in the fourth quarters of 2016, 2015 and 2014. There was no impairment of goodwill for any of our reporting units for any of these years.

Other indefinite-lived intangible assets were $136 million and $137 million at December 31, 2016 and 2015, respectively, and principally included registered trademarks. In 2016 and 2015, the impairment test indicated there was no impairment of other indefinite-lived intangible assets for any of our business units. In 2014, we recognized an insignificant impairment charge for other indefinite-lived intangible assets. As a result of our 2015 acquisitions, other indefinite lived intangible assets increased by $7 million as of the acquisition dates.

The carrying value of our definite-lived intangible assets was $18 million (net of accumulated amortization of $16 million) at December 31, 2016 and $23 million (net of accumulated amortization of $49 million) at December 31, 2015 and principally included customer relationships with a weighted average amortization period of 10 years in 2016 and 2015. Amortization expense related to the definite-lived intangible assets of continuing operations was $4 million, $6 million and $4 million in 2016, 2015 and 2014, respectively. As a result of our 2015 acquisitions, definite-lived intangible assets increased by $17 million as of the acquisition dates.

At December 31, 2016, amortization expense related to the definite-lived intangible assets during each of the next five years was as follows: 2017 – $3 million; 2018 – $2 million; 2019 – $2 million, 2020 – $2 million and 2021 –$2 million.

I. OTHER ASSETS

	(In Millions) At December 31
	2016				2015
Financial investments (Note E)	$	18			$	48
In-store displays, net	42				56
Deferred tax assets (Note S)	68				184
Other	29				22
Total	$	157			$	310

In-store displays are amortized using the straight-line method over the expected useful life of three to five years; we recognized amortization expense related to in-store displays of $25 million, $20 million and $15 million in 2016, 2015 and 2014, respectively. Cash spent for displays was $11 million, $43 million and $30 million in 2016, 2015 and 2014, respectively, and are included in other, net within investing activities on the consolidated statements of cash flows.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

J. ACCRUED LIABILITIES

	(In Millions) At December 31
	2016				2015
Salaries, wages and commissions	$	191			$	171
Advertising and sales promotion	146				132
Interest	51				62
Warranty (Note U)	56				50
Employee retirement plans	52				48
Insurance reserves	41				44
Property, payroll and other taxes	19				25
Dividends payable	32				32
Other	70				86
Total	$	658			$	650

K. DEBT

	(In Millions) At December 31
	2016				2015
Notes and debentures:
6.125%, due October 3, 2016	$	—			$	1,000
5.850%, due March 15, 2017	—				300
6.625%, due April 15, 2018	114				114
7.125%, due March 15, 2020	500				500
3.500%, due April 1, 2021	399				—
5.950%, due March 15, 2022	400				400
4.450%, due April 1, 2025	500				500
4.375%, due April 1, 2026	498				—
7.750%, due August 1, 2029	296				296
6.500%, due August 15, 2032	300				300
Other	9				13
Prepaid debt issuance costs	(19		)		(16		)
	2,997				3,407
Less: Current portion	2				1,004
Total long-term debt	$	2,995			$	2,403

All of the notes and debentures above are senior indebtedness and, other than the 6.625% notes due 2018 and the 7.75% notes due 2029, are redeemable at our option.

On March 17, 2016, we issued $400 million of 3.5% Notes due April 1, 2021 and $500 million of 4.375% Notes due April 1, 2026. We received proceeds of $896 million, net of discount, for the issuance of these Notes. The Notes are senior indebtedness and are redeemable at our option at the applicable redemption price. On April 15, 2016, proceeds from the debt issuances, together with cash on hand, were used to repay and early retire all of our $1 billion, 6.125% Notes which were due on October 3, 2016 and all of our $300 million, 5.85% Notes which were due on March 15, 2017. In connection with these early retirements, we incurred $40 million of debt extinguishment costs, which we recorded as interest expense.

On June 15, 2015, we repaid and retired all of our $500 million, 4.8% Notes on the scheduled retirement date.

On March 24, 2015, we issued $500 million of 4.45% Notes due April 1, 2025.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

K. DEBT (Concluded)

On March 28, 2013, we entered into a credit agreement (the "Credit Agreement") with a bank group, with an aggregate commitment of $1.25 billion and a maturity date of March 28, 2018. On May 29, 2015 and August 28, 2015, we amended the Credit Agreement with the bank group (the "Amended Credit Agreement"). The Amended Credit Agreement reduces the aggregate commitment to $750 million and extends the maturity date to May 29, 2020. Under the Amended Credit Agreement, at our request and subject to certain conditions, we can increase the aggregate commitment up to an additional $375 million with the current bank group or new lenders.

The Amended Credit Agreement provides for an unsecured revolving credit facility available to us and one of our foreign subsidiaries, in U.S. dollars, European euros and certain other currencies. Borrowings under the revolver denominated in euros are limited to $500 million, equivalent. We can also borrow swingline loans up to $75 million and obtain letters of credit of up to $100 million; any outstanding letters of credit under the Amended Credit Agreement reduce our borrowing capacity. At December 31, 2016, we had no of outstanding standby letters of credit under the Amended Credit Agreement.

Revolving credit loans bear interest under the Amended Credit Agreement, at our option, at (A) a rate per annum equal to the greater of (i) the prime rate, (ii) the Federal Funds effective rate plus 0.50% and (iii) LIBOR plus 1.0% (the "Alternative Base Rate"); plus an applicable margin based upon our then-applicable corporate credit ratings; or (B) LIBOR 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 LIBOR plus an applicable margin based upon our then-applicable corporate credit ratings.

The Amended Credit Agreement contains financial covenants requiring us to maintain (A) a maximum net leverage ratio, as adjusted for certain items, of 4.0 to 1.0, and (B) a minimum interest coverage ratio, as adjusted for certain items, equal to or greater than 2.5 to 1.0.

In order for us to borrow under the Amended Credit Agreement, there must not be any default in our covenants in the Amended 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 Amended 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, 2014, in each case, no material ERISA or environmental non-compliance, and no material tax deficiency). We were in compliance with all covenants and no borrowings have been made at December 31, 2016.

At December 31, 2016, the debt maturities during each of the next five years were as follows: 2017 – $2 million; 2018– $115 million; 2019 – $1 million; 2020 – $501 million and 2021 – $401 million.

Interest paid was $198 million, $216 million and $220 million in 2016, 2015 and 2014, respectively. The amount paid in 2016 excludes $40 million of debt extinguishment costs related to the early retirement of debt.

L. STOCK-BASED COMPENSATION

Our 2014 Long Term Stock Incentive Plan (the "2014 Plan") replaced the 2005 Long Term Stock Incentive Plan in May 2014 and provides for the issuance of stock-based incentives in various forms to employees and non-employee Directors of the Company. At December 31, 2016, outstanding stock-based incentives were in the form of long-term stock awards, stock options, phantom stock awards and stock appreciation rights.

Pre-tax compensation expense and the related income tax benefit for these stock-based incentives were as follows, in millions:

	2016				2015				2014
Long-term stock awards	$	23			$	23			$	33
Stock options	2				5				4
Phantom stock awards and stock appreciation rights	4				11				6
Total	$	29			$	39			$	43
Income tax benefit (37 percent tax rate)	$	11			$	14			$	16

At December 31, 2016, 16.3 million shares of our common stock were available under the 2014 Plan for the granting of stock options and other long-term stock incentive awards.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

L. STOCK-BASED COMPENSATION (Continued)

Long-Term Stock Awards. Long-term stock awards are granted to our key employees and non-employee Directors and do not cause net share dilution inasmuch as we continue the practice of repurchasing and retiring an equal number of shares in the open market. We granted 1,055,380 shares of long-term stock awards during 2016.

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

	2016				2015				2014
Unvested stock award shares at January 1	5				6				8
Weighted average grant date fair value	$	17			$	18			$	17
Stock award shares granted	1				1				1
Weighted average grant date fair value	$	26			$	26			$	22
Stock award shares vested	2				2				2
Weighted average grant date fair value	$	16			$	17			$	17
Stock award shares forfeited	—				—				1
Weighted average grant date fair value	$	20			$	18			$	19
Forfeitures upon spin off (A)	—				1				—
Weighted average grant date fair value	$	—			$	20			$	—
Modification upon spin off (B)	—				1				—
Unvested stock award shares at December 31	4				5				6
Weighted average grant date fair value	$	20			$	17			$	18

(A)	In connection with the spin off of TopBuild, TopBuild employees forfeited their outstanding Masco equity awards.

(B)	Subsequent to the separation of TopBuild, we modified our outstanding equity awards to employees and non-employee Directors such that all individuals received an equivalent fair value both before and after the separation. The modification to the outstanding stock awards was made pursuant to existing anti-dilution provisions in our 2014 Plan and 2005 Long Term Incentive Plan.

At December 31, 2016, 2015 and 2014, there was $43 million, $42 million and $60 million, respectively, of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of three years at December 31, 2016, 2015 and 2014.

The total market value (at the vesting date) of stock award shares which vested during 2016, 2015 and 2014 was $43 million, $54 million and $50 million, respectively.

Stock Options. Stock options are granted to our key employees. The exercise price equals the market price of our common stock at the grant date. These options generally become exercisable (vest ratably) over five years beginning on the first anniversary from the date of grant and expire no later than 10 years after the grant date.

We granted 474,500 shares of stock options during 2016 with a grant date weighted-average exercise price of approximately $26 per share. During 2016, no stock option shares were forfeited (including options that expired unexercised).

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

L. STOCK-BASED COMPENSATION (Continued)

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

	2016				2015				2014
Option shares outstanding, January 1	12				18				24
Weighted average exercise price	$	17			$	21			$	22
Option shares granted	—				—				—
Weighted average exercise price	$	26			$	26			$	22
Option shares exercised	5				5				2
Aggregate intrinsic value on date of exercise (A)	$	64	million		$	50	million		$	22	million
Weighted average exercise price	$	21			$	17			$	16
Option shares forfeited	—				3				4
Weighted average exercise price	$	—			$	29			$	28
Forfeitures upon spin off (B)	—				—				—
Weighted average exercise price	$	—			$	19			$	—
Modifications upon spin off (C)	—				2				—
Option shares outstanding, December 31	7				12				18
Weighted average exercise price	$	15			$	17			$	21
Weighted average remaining option term (in years)	4				3				4
Option shares vested and expected to vest, December 31	7				12				18
Weighted average exercise price	$	15			$	17			$	21
Aggregate intrinsic value (A)	$	118	million		$	133	million		$	110	million
Weighted average remaining option term (in years)	4				3				4
Option shares exercisable (vested), December 31	6				10				15
Weighted average exercise price	$	13			$	18			$	22
Aggregate intrinsic value (A)	$	102	million		$	113	million		$	84	million
Weighted average remaining option term (in years)	3				3				3

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

(B)	In connection with the spin off of TopBuild, TopBuild employees forfeited their outstanding Masco equity awards.

(C)	Subsequent to the separation of TopBuild, we modified our outstanding equity awards to employees and non-employee Directors such that all individuals received an equivalent fair value both before and after the separation. The modification to the outstanding options was made pursuant to existing anti-dilution provisions in our 2014 Plan and 2005 Long Term Incentive Plan.

At December 31, 2016, 2015 and 2014, there was $6 million of unrecognized compensation expense (using the Black-Scholes option pricing model at the grant date) related to unvested stock options; such options had a weighted average remaining vesting period of 3 years at December 31, 2016, and 2 years at both 2015 and 2014.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

L. 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:

	2016				2015				2014
Weighted average grant date fair value	$	6.43			$	9.67			$	9.53
Risk-free interest rate	1.41		%		1.75		%		1.91		%
Dividend yield	1.49		%		1.32		%		1.34		%
Volatility factor	29.00		%		42.00		%		49.00		%
Expected option life	6 years				6 years				6 years

The following table summarizes information for stock option shares outstanding and exercisable at December 31, 2016, shares in millions:

	Option Shares Outstanding								Option Shares Exercisable
	Range of Prices		Number of Shares		Weighted Average Remaining Option Term		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
$	7 - 18		5		3 Years		$12		5		$12
$	20 - 23		1		8 Years		$22		—		$21
$	26 - 27		1		5 Years		$26		1		$27
$	7 - 27		7		4 Years		$15		6		$13

Phantom Stock Awards and Stock Appreciation Rights ("SARs"). We grant phantom stock awards and SARs to certain non-U.S. employees.

Phantom stock awards are linked to the value of our common stock on the date of grant and are settled in cash upon vesting, typically over 5 to 10 years. We account for phantom stock awards as liability-based awards; the compensation expense is initially measured as the market price of our common stock at the grant date and is recognized over the vesting period. The liability is remeasured and adjusted at the end of each reporting period until the awards are fully-vested and paid to the employees. We recognized expense of $2 million related to phantom stock awards in 2016, and $5 million in both 2015 and 2014. In 2016, 2015 and 2014, we granted 140,710 shares, 134,560 shares and 183,530 shares, respectively, of phantom stock awards with an aggregate fair value of $4 million each year, and paid $5 million, $6 million and $5 million of cash in 2016, 2015 and 2014, respectively, to settle phantom stock awards.

SARs are linked to the value of our common stock on the date of grant and are settled in cash upon exercise. We account for SARs using the fair value method, which requires outstanding SARs to be classified as liability-based awards and valued using a Black-Scholes option pricing model at the grant date; such fair value is recognized as compensation expense over the vesting period, typically five years. The liability is remeasured and adjusted at the end of each reporting period until the SARs are exercised and payment is made to the employees or the SARs expire. We recognized expense of $2 million, $6 million and $1 million related to SARs in 2016, 2015 and 2014, respectively. During 2016, 2015 and 2014, we did not grant any SARs.

Information related to phantom stock awards and SARs was as follows, in millions:

	Phantom Stock Awards								Stock Appreciation Rights
	At December 31,								At December 31,
	2016				2015				2016				2015
Accrued compensation cost liability	$	10			$	13			$	8			$	10
Unrecognized compensation cost	$	4			$	4			$	—			$	—
Equivalent common shares	—				1				1				1

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

M. EMPLOYEE RETIREMENT PLANS

We sponsor qualified defined-benefit and defined-contribution retirement plans for most of our employees. In addition to our qualified defined-benefit pension plans, we have unfunded non-qualified defined-benefit pension plans covering certain employees, which provide for benefits in addition to those provided by the qualified pension plans. Substantially all salaried employees participate in non-contributory defined-contribution retirement plans, to which payments are determined annually by the Organization and Compensation Committee of the Board of Directors.

In addition, we participate in one regional multi-employer pension plan, principally related to building trades, which is not considered significant to us.

Pre-tax expense related to our retirement plans was as follows, in millions:

	2016				2015				2014
Defined-contribution plans	$	58			$	52			$	43
Defined-benefit pension plans	34				32				25
	$	92			$	84			$	68

We froze all future benefit accruals under substantially all our domestic and foreign qualified and domestic non-qualified defined benefit pension plans several years ago.

Changes in the projected benefit obligation and fair value of plan assets, and the funded status of our defined-benefit pension plans were as follows, in millions:

	2016								2015
	Qualified				Non-Qualified				Qualified				Non-Qualified
Changes in projected benefit obligation:
Projected benefit obligation at January 1	$	1,059			$	174			$	1,145			$	190
Service cost	3				—				3				—
Interest cost	41				7				41				7
Actuarial (gain) loss, net	50				1				(61		)		(11		)
Foreign currency exchange	(29		)		—				(23		)		—
Benefit payments	(69		)		(12		)		(46		)		(12		)
Projected benefit obligation at December 31	$	1,055			$	170			$	1,059			$	174
Changes in fair value of plan assets:
Fair value of plan assets at January 1	$	658			$	—			$	691			$	—
Actual return on plan assets	58				—				(12		)		—
Foreign currency exchange	(20		)		—				(7		)		—
Company contributions	100				12				38				12
Expenses, other	(10		)		—				(6		)		—
Benefit payments	(69		)		(12		)		(46		)		(12		)
Fair value of plan assets at December 31	$	717			$	—			$	658			$	—
Funded status at December 31:	$	(338	)		$	(170	)		$	(401	)		$	(174	)

Amounts in our consolidated balance sheets were as follows, in millions:

	At December 31, 2016								At December 31, 2015
	Qualified				Non-Qualified				Qualified				Non-Qualified
Other assets	$	2			$	—			$	1			$	—
Accrued liabilities	(1		)		(12		)		(3		)		(12		)
Other liabilities	(339		)		(158		)		(399		)		(162		)
Total net liability	$	(338	)		$	(170	)		$	(401	)		$	(174	)

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

M. EMPLOYEE RETIREMENT PLANS (Continued)

Unrealized loss included in accumulated other comprehensive loss before income taxes was as follows, in millions:

	At December 31, 2016								At December 31, 2015
	Qualified				Non-Qualified				Qualified				Non-Qualified
Net loss	$	519			$	54			$	501			$	56
Net transition obligation	1				—				1				—
Net prior service cost	3				—				2				—
Total	$	523			$	54			$	504			$	56

Information for defined-benefit pension plans with an accumulated benefit obligation in excess of plan assets was as follows, in millions:

	At December 31
	2016								2015
	Qualified				Non-Qualified				Qualified				Non-Qualified
Projected benefit obligation	$	1,044			$	170			$	1,045			$	174
Accumulated benefit obligation	$	1,044			$	170			$	1,045			$	174
Fair value of plan assets	$	704			$	—			$	643			$	—

The projected benefit obligation was in excess of plan assets for all of our qualified defined-benefit pension plans at December 31, 2016 and 2015 which had an accumulated benefit obligation in excess of plan assets.

Net periodic pension cost for our defined-benefit pension plans was as follows, in millions:

	2016								2015								2014
	Qualified				Non-Qualified				Qualified				Non-Qualified				Qualified				Non-Qualified
Service cost	$	3			$	—			$	3			$	—			$	3			$	—
Interest cost	49				7				47				7				47				7
Expected return on plan assets	(44		)		—				(46		)		—				(45		)		—
Recognized net loss	17				2				18				3				11				2
Net periodic pension cost	$	25			$	9			$	22			$	10			$	16			$	9

We expect to recognize $21 million of pre-tax net loss from accumulated other comprehensive loss into net periodic pension cost in 2017 related to our defined-benefit pension plans. For plans in which almost all of the plan's participants are inactive, pre-tax net loss within other comprehensive income (loss) is amortized using the straight-line method over the remaining life expectancy of the inactive plan participants. For plans which do not have almost all inactive participants, pre-tax net loss within other comprehensive income (loss) is amortized using the straight-line method over the average remaining service period of the active employees expected to receive benefits from the plan.

Plan Assets. Our qualified defined-benefit pension plan weighted average asset allocation, which is based upon fair value, was as follows:

	2016			2015
Equity securities	49	%		49	%
Debt securities	32	%		32	%
Other	19	%		19	%
Total	100	%		100	%

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

M. EMPLOYEE RETIREMENT PLANS (Continued)

For our qualified defined-benefit pension plans, we have adopted accounting guidance that defines fair value, establishes a framework for measuring fair value and prescribes disclosures about fair value measurements. Accounting guidance defines fair value as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."

Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2016 compared to December 31, 2015.

Common and Preferred Stocks and Short-Term and Other Investments: Valued at the closing price on the active market on which the individual securities are traded, or based on the active market for similar securities. Certain investments are valued based on NAV, which approximates fair value. Such basis is determined by referencing the respective fund's underlying assets. There are no unfunded commitments or other restrictions associated with these investments.

Private Equity and Hedge Funds: Valued based on an estimated fair value using either a market approach or an income approach, each of which requires a significant degree of judgment. There is no active trading market for these investments and they are generally illiquid. Due to the significant unobservable inputs, the fair value measurements used to estimate fair value are a Level 3 input. Certain investments are valued based on NAV, which approximates fair value. Such basis is determined by referencing the respective fund's underlying assets. There are no unfunded commitments or other restrictions associated with these investments.

Corporate, Government and Other Debt Securities: Valued based on either the closing price on the active market on which the individual securities are traded, or using pricing models maximizing the use of observable inputs for similar securities. This includes basing value on yields currently available on comparable securities of issuers with similar credit ratings. Certain investments are valued based on NAV, which approximates fair value. Such basis is determined by referencing the respective fund's underlying assets. There are no unfunded commitments or other restrictions associated with these investments.

Common Collective Trust Fund: Valued based on an amortized cost basis, which approximates fair value. Such basis is determined by reference to the respective fund's underlying assets, which are primarily cash equivalents. There are no unfunded commitments or other restrictions associated with this fund.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The following table sets forth, by level within the fair value hierarchy, the qualified defined-benefit pension plan assets at fair value as of December 31, 2016 and 2015, as well as those valued at NAV, which approximates fair value, in millions.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

M. EMPLOYEE RETIREMENT PLANS (Continued)

	At December 31, 2016
	Level 1				Level 2				Level 3				Measured at NAV				Total
Plan Assets
Common and Preferred Stocks:
United States	$	142			$	—			$	—			$	118			$	260
International	74				—				—				16				90
Private Equity and Hedge Funds:
United States	—				—				37				—				37
International	—				—				24				32				56
Corporate Debt Securities:
United States	27				28				—				2				57
International	—				26				—				17				43
Government and Other Debt Securities:
United States	46				4				—				—				50
International	27				53				—				—				80
Common Collective Trust Fund – United States	—				4				—				—				4
Short-Term and Other Investments:
United States	2				—				—				—				2
International	5				15				18				—				38
Total Plan Assets	$	323			$	130			$	79			$	185			$	717

	At December 31, 2015
	Level 1				Level 2				Level 3				Measured at NAV				Total
Plan Assets
Common and Preferred Stocks:
United States	$	127			$	33			$	—			$	93			$	253
International	55				7				—				7				69
Private Equity and Hedge Funds:
United States	—				—				49				3				52
International	—				—				20				4				24
Corporate Debt Securities:
United States	18				26				—				—				44
International	—				32				—				16				48
Government and Other Debt Securities:
United States	64				3				—				—				67
International	23				30				—				—				53
Common Collective Trust Fund – United States	—				4				—				—				4
Short-Term and Other Investments:
United States	2				—				—				—				2
International	2				21				19				—				42
Total Plan Assets	$	291			$	156			$	88			$	123			$	658

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

M. EMPLOYEE RETIREMENT PLANS (Continued)

Changes in the fair value of the qualified defined-benefit pension plan Level 3 assets, were as follows, in millions:

	2016				2015
Fair Value, January 1	$	88			$	97
Purchases	6				4
Sales	(19		)		(11		)
Transfers, net	—				—
Unrealized gains (losses)	4				(2		)
Fair Value, December 31	$	79			$	88

Assumptions. Weighted-average major assumptions used in accounting for our defined-benefit pension plans were as follows:

	2016			2015			2014
Discount rate for obligations	3.50	%		4.00	%		3.80	%
Expected return on plan assets	7.25	%		7.25	%		7.25	%
Rate of compensation increase	—			—			—
Discount rate for net periodic pension cost	4.00	%		3.80	%		4.40	%

The discount rate for obligations for 2016, 2015 and 2014 was based upon the expected duration of each defined-benefit pension plan's liabilities matched to the December 31, 2016, 2015 and 2014 Towers Watson Rate Link Curve. At December 31, 2016, such rates for our defined-benefit pension plans ranged from 1.5 percent to 4.0 percent, with the most significant portion of the liabilities having a discount rate for obligations of 3.8 percent or higher. At December 31, 2015, such rates for our defined-benefit pension plans ranged from 2.0 percent to 4.3 percent, with the most significant portion of the liabilities having a discount rate for obligations of 4.0 percent or higher. The decrease in the weighted average discount rate from 2015 to 2016 is principally the result of lower long-term interest rates in the bond markets. At December 31, 2014, such rates for our defined‑benefit pension plans ranged from 2.0 percent to 4.0 percent, with the most significant portion of the liabilities having a discount rate for obligations of 3.7 percent or higher. The increase in the weighted average discount rate from 2014 to 2015 was principally the result of higher long-term interest rates in the bond market.

For 2016, 2015 and 2014, we determined the expected long-term rate of return on plan assets of 7.25 percent based upon an analysis of expected and historical rates of return of various asset classes utilizing the current and long-term target asset allocation of the plan assets. The projected asset return at December 31, 2016, 2015 and 2014 also considered near term returns, including current market conditions as well as that pension assets are long-term in nature. The actual annual rate of return on our pension plan assets was positive 8.3 percent, negative 1.8 percent and positive 3.6 percent in 2016, 2015 and 2014, respectively. For the 10-year period ended December 31, 2016, the actual annual rate of return on our pension plan assets was 3.7 percent. Although this rate of return is less than our current expected long-term rate of return on plan assets, we note that the 10-year period ended December 31, 2016 includes one significant decline in the equity markets in 2008 (of negative 32.1 percent). Accordingly, and based on our target allocation, we believe a 7.25 percent expected long-term rate of return is reasonable.

The investment objectives seek to minimize the volatility of the value of our plan assets relative to pension liabilities and to ensure plan assets are sufficient to pay plan benefits. In 2016, we substantially achieved targeted asset allocation: 50 percent equities, 30 percent fixed-income, and 20 percent alternative investments (such as private equity, commodities and hedge funds).

The asset allocation of the investment portfolio was developed with the objective of achieving our expected rate of return and reducing volatility of asset returns, and considered the freezing of future benefits. The equity portfolios are invested in individual securities or funds that are expected to mirror broad market returns for equity securities. The fixed-income portfolio is invested in corporate bonds, bond index funds and U.S. Treasury securities. It is expected that the alternative investments would have a higher rate of return than the targeted overall long-term return of 7.25 percent. However, these investments are subject to greater volatility, due to their nature, than a portfolio of equities and fixed-income investments, and would be less liquid than financial instruments that trade on public markets. This portfolio is expected to yield a long-term rate of return of 7.25 percent.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

M. EMPLOYEE RETIREMENT PLANS (Concluded)

The fair value of our plan assets is subject to risk including significant concentrations of risk in our plan assets related to equity, interest rate and operating risk. In order to ensure plan assets are sufficient to pay benefits, a portion of plan assets is allocated to equity investments that are expected, over time, to earn higher returns with more volatility than fixed-income investments which more closely match pension liabilities. Within equity, risk is mitigated by targeting a portfolio that is broadly diversified by geography, market capitalization, manager mandate size, investment style and process.

In order to minimize asset volatility relative to the liabilities, a portion of plan assets are allocated to fixed-income investments that are exposed to interest rate risk. Rate increases generally will result in a decline in fixed-income assets, while reducing the present value of the liabilities. Conversely, rate decreases will increase fixed income assets, partially offsetting the related increase in the liabilities.

Potential events or circumstances that could have a negative effect on estimated fair value include the risks of inadequate diversification and other operating risks. To mitigate these risks, investments are diversified across and within asset classes in support of investment objectives. Policies and practices to address operating risks include ongoing manager oversight, plan and asset class investment guidelines and instructions that are communicated to managers, and periodic compliance and audit reviews to ensure adherence to these policies. In addition, we periodically seek the input of our independent advisor to ensure the investment policy is appropriate.

Other. We sponsor certain post-retirement benefit plans that provide medical, dental and life insurance coverage for eligible retirees and dependents in the United States based upon age and length of service. Substantially all of these plans were frozen several years ago. The aggregate present value of the unfunded accumulated post-retirement benefit obligation was $9 million and $10 million at December 31, 2016 and 2015, respectively.

Cash Flows. At December 31, 2016, we expect to contribute approximately $45 million to our domestic qualified defined-benefit pension plans in 2017, which will exceed ERISA requirements. We also expect to contribute $7 million and $12 million to our foreign and non-qualified (domestic) defined-benefit pension plans, respectively, in 2017.

At December 31, 2016, the benefits expected to be paid in each of the next five years, and in aggregate for the five years thereafter, relating to our defined-benefit pension plans, were as follows, in millions:

	Qualified Plans				Non-Qualified Plans
2017	$	49			$	12
2018	$	50			$	12
2019	$	50			$	12
2020	$	52			$	12
2021	$	52			$	12
2022 - 2026	$	272			$	58

N. SHAREHOLDERS' EQUITY

On September 30, 2014, we announced that our Board of Directors authorized the repurchase of up to 50 million shares for retirement of our common stock in open-market transactions or otherwise, replacing the previous Board of Directors authorization established in 2007. At December 31, 2016, we have 12.9 million shares remaining under the authorization.

During 2016, we repurchased and retired 14.9 million shares of our common stock for cash aggregating $459 million (including 1.1 million shares to offset the dilutive impact of long-term stock awards granted in 2016). During 2015, we repurchased and retired 17.2 million shares of our common stock for cash aggregating $456 million (including 741 thousand shares to offset the dilutive impact of long-term stock awards granted in 2015). During 2014, we repurchased and retired 6.7 million shares of our common stock for cash aggregating $158 million (including 1.7 million shares to offset the dilutive impact of long-term stock awards granted in 2014).

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

N. SHAREHOLDERS' EQUITY (Concluded)

On June 30, 2015, we completed the spin off of Top Build as an independent publicly traded company. As a result of the separation, our retained earnings decreased by $828 million in 2015.

On the basis of amounts paid (declared), cash dividends per common share were $0.385 ($0.390) in 2016, $0.365 ($0.370) in 2015 and $0.330 ($0.345) in 2014.

Accumulated Other Comprehensive Loss. The components of accumulated other comprehensive loss attributable to Masco Corporation were as follows, in millions:

	At December 31
	2016				2015
Cumulative translation adjustments, net	$	177			$	245
Unrealized loss on available-for-sale securities, net	—				(12		)
Unrealized loss on interest rate swaps, net	(15		)		(16		)
Unrecognized net loss and prior service cost, net	(397		)		(382		)
Accumulated other comprehensive loss	$	(235	)		$	(165	)

The cumulative translation adjustment, net, is reported net of income tax benefit of $2 million at both December 31, 2016 and 2015. The unrealized loss on available-for-sale securities, net, is reported net of income tax expense of $14 million at December 31, 2015. The $14 million of income tax expense was recognized into our consolidated statement of operations during 2016. Refer to Note S to the consolidated financial statements for additional information. The unrealized loss on interest rate swaps, net, is reported net of income tax expense of $2 million at both December 31, 2016 and 2015. The unrecognized net loss and prior service cost, net, is reported net of income tax benefit of $164 million and $186 million at December 31, 2016 and 2015, respectively.

O. RECLASSIFICATIONS FROM OTHER COMPREHENSIVE INCOME (LOSS)

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

Accumulated Other Comprehensive Income (Loss)		2016				2015				2014				Statement of Operations Line Item
Amortization of defined benefit pension and other postretirement benefits:
Actuarial losses, net		$	19			$	21			$	13			Selling, general and administrative expenses
Tax (benefit)		(7		)		(8		)		(5		)
Net of tax		$	12			$	13			$	8
Interest rate swaps		$	2			$	2			$	2			Interest expense
Tax (benefit)		(1		)		—				(1		)
Net of tax		$	1			$	2			$	1
Available-for-sale securities		$	(3	)		$	—			$	—			Other, net
Tax expense		15				—				—
Net of tax		$	12			$	—			$	—

The tax expense related to the available-for-sale securities includes $14 million related to the disproportionate tax effect that we recognized as a result of the redemption of all of our auction rate securities. Refer to Note S to the consolidated financial statements for additional information.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

P. SEGMENT INFORMATION

Our reportable segments are as follows:

Plumbing Products – principally includes faucets; plumbing fittings and valves; showerheads and hand showers; bathtubs and shower enclosures; toilets; spas; and exercise pools.

Decorative Architectural Products – principally includes paints and other coating products; and cabinet, door, window and other hardware.

Cabinetry Products – principally includes assembled kitchen and bath cabinets; home office workstations; entertainment centers; and storage products.

Windows and Other Specialty Products – principally includes windows; window frame components; patio doors; staple gun tackers; staples; and other fastening tools.

The above products are sold to the home improvement and new home construction markets through home center retailers, mass merchandisers, hardware stores, homebuilders, distributors and other outlets for consumers and contractors and direct to the customer.

Our operations are principally located in North America and Europe. Our country of domicile is the United States of America.

Corporate assets consist primarily of real property, equipment, cash and cash investments and other investments.

Our segments are based upon similarities in products and represent the aggregation of operating units, for which financial information is regularly evaluated by our corporate operating executive in determining resource allocation and assessing performance, and is periodically reviewed by the Board of Directors. Accounting policies for the segments are the same as those for us. We primarily evaluate performance based upon operating profit (loss) and, other than general corporate expense, allocate specific corporate overhead to each segment. The evaluation of segment operating profit (loss) also excludes the income from litigation settlements.

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

	Net Sales (1)(2)(3)(4)(5)												Operating Profit (Loss) (5)(6)												Assets at December 31 (8)
	2016				2015				2014				2016				2015				2014				2016				2015				2014
Our operations by segment were: (9)
Plumbing Products	$	3,526			$	3,341			$	3,308			$	642			$	512			$	512			$	2,009			$	1,972			$	1,989
Decorative Architectural Products	2,092				2,020				1,998				430				403				360				894				874				857
Cabinetry Products	970				1,025				999				93				51				(62		)		537				567				608
Windows and Other Specialty Products	769				756				701				(3		)		57				47				743				748				702
Total	$	7,357			$	7,142			$	7,006			$	1,162			$	1,023			$	857			$	4,183			$	4,161			$	4,156
Our operations by geographic area were:
North America	$	5,834			$	5,645			$	5,377			$	961			$	841			$	643			$	3,001			$	2,925			$	2,861
International, principally Europe	1,523				1,497				1,629				201				182				214				1,182				1,236				1,295
Total, as above	$	7,357			$	7,142			$	7,006			1,162				1,023				857				4,183				4,161				4,156
General corporate expense, net (6)													(109		)		(109		)		(145		)
Income from litigation settlements (7)													—				—				9
Operating profit, as reported													1,053				914				721
Other income (expense), net													(223		)		(225		)		(214		)
Income from continuing operations before income taxes													$	830			$	689			$	507
Corporate assets (10)																									954				1,503				1,576
Assets held for sale																									—				—				1,476
Total assets																									$	5,137			$	5,664			$	7,208

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

P. SEGMENT INFORMATION (Concluded)

	Property Additions (5)												Depreciation and Amortization (5)
	2016				2015				2014				2016				2015				2014
Our operations by segment were: (9)
Plumbing Products	$	110			$	87			$	65			$	57			$	56			$	63
Decorative Architectural Products	22				16				12				16				16				16
Cabinetry Products	8				6				9				21				24				33
Windows and Other Specialty Products	30				41				28				21				18				18
	170				150				114				115				114				130
Unallocated amounts, principally related to corporate assets	10				1				1				19				13				11
Total	$	180			$	151			$	115			$	134			$	127			$	141

(1)	Included in net sales were export sales from the U.S. of $226 million, $217 million and $228 million in 2016, 2015 and 2014, respectively.

(2)	Excluded from net sales were intra-company sales between segments of less than one percent in 2016, 2015 and 2014.

(3)	Included in net sales were sales to one customer of $2,480 million, $2,378 million and $2,310 million in 2016, 2015 and 2014, respectively. Such net sales were included in each of our segments.

(4)	Net sales from our operations in the U.S. were $5,605 million, $5,407 million and $5,112 million in 2016, 2015 and 2014, respectively.

(5)	Net sales, operating profit (loss), property additions and depreciation and amortization expense for 2015 and 2014 excluded the results of businesses reported as discontinued operations.

(6)	General corporate expense, net included those expenses not specifically attributable to our segments.

(7)	The income from litigation settlements in 2014 relates to a business in our Decorative Architectural Products segment.

(8)	Long-lived assets of our operations in the U.S. and Europe were $1,508 million and $417 million, $1,487 million and $427 million, and $1,470 million and $428 million at December 31, 2016, 2015 and 2014, respectively.

(9)	In 2016, we renamed our Cabinetry Products and Windows and Other Specialty Products segments. The name change did not impact the review of financial information by our corporate operating executive or the composition of the segments.

(10)	Corporate assets at December 31, 2014 has not been recasted for the impact of the adoption of Accounting Standards Update 2015-03, as amended by Accounting Standards Update 2015-15, which required the reclassification of certain debt issuance costs from an asset to a liability. Total debt issuance costs subject to reclassification would have been $15 million at December 31, 2014.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Q. SEVERANCE COSTS

As part of our continuing review of our operations, actions were taken during 2016, 2015 and 2014 to respond to market conditions. We recorded charges related to severance and early retirement programs of $8 million, $12 million and $27 million for the years ended December 31, 2016, 2015 and 2014, respectively, and were primarily paid when incurred. Such 2016 charges are reflected in the consolidated statement of operations in selling, general and administrative expenses and cost of sales, while 2015 and 2014 charges are principally reflected in selling, general and administrative expenses.

R. OTHER INCOME (EXPENSE), NET

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

	2016				2015				2014
Income from cash and cash investments and short-term bank deposits	$	4			$	3			$	3
Income from financial investments, net (Note E)	7				8				2
Foreign currency transaction (losses) gains	(3		)		(14		)		5
Other items, net	(2		)		3				1
Total other, net	$	6			$	—			$	11

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

S. INCOME TAXES

									(In Millions)
	2016				2015				2014
Income from continuing operations before income taxes:
U.S.	$	614			$	496			$	270
Foreign	216				193				237
	$	830			$	689			$	507
Income tax expense (benefit) on income from continuing operations:
Currently payable:
U.S. Federal	$	73			$	10			$	3
State and local	24				27				1
Foreign	69				56				67
Deferred:
U.S. Federal	140				192				(401		)
State and local	2				3				(21		)
Foreign	(12		)		5				(10		)
	$	296			$	293			$	(361	)
Deferred tax assets at December 31:
Receivables	$	10			$	9
Inventories	17				17
Other assets, including stock-based compensation	58				78
Accrued liabilities	53				77
Long-term liabilities	280				266
Net operating loss carryforward	51				39
Tax credit carryforward	9				55
	478				541
Valuation allowance	(45		)		(49		)
	433				492
Deferred tax liabilities at December 31:
Property and equipment	127				104
Intangibles	222				212
Investment in foreign subsidiaries	15				8
Other	21				1
	385				325
Net deferred tax asset at December 31	$	48			$	167

The net deferred tax asset consisted of net deferred tax assets (included in other assets) of $68 million and $184 million, and net deferred tax liabilities (included in other liabilities) of $20 million and $17 million, at December 31, 2016 and 2015, respectively.

The current portion of the state and local income tax includes an $8 million, $5 million and $8 million tax benefit from the reversal of an accrual for uncertain tax positions resulting primarily from the expiration of applicable statutes of limitations and favorable settlements on state audits in 2016, 2015 and 2014, respectively. The deferred portion of the state and local taxes includes a $5 million, $(1) million and $(29) million tax expense (benefit) resulting from a change in the valuation allowance against state and local deferred tax assets in 2016, 2015 and 2014, respectively. The deferred portion of the foreign taxes includes $6 million, $12 million and $(6) million tax expense (benefit) from a change in the valuation allowance against foreign deferred tax assets in 2016, 2015 and 2014, respectively.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

S. INCOME TAXES (Continued)

The accounting guidance for income taxes requires us to allocate our provision for income taxes between continuing operations and other categories of earnings, such as other comprehensive income (loss). Subsequent adjustments to deferred taxes originally recorded to other comprehensive income (loss) may reverse in a different category of earnings, such as continuing operations resulting in a disproportionate tax effect within accumulated other comprehensive loss.

We created a $14 million disproportionate tax effect in prior years as the result of allocating a deferred tax charge to other comprehensive income (loss) on the unrealized gain of certain available-for-sale securities that was later reversed through continuing operations by a valuation allowance adjustment, followed by the disposition of the securities while in a full valuation allowance position. Such disproportionate tax effect has remained in accumulated other comprehensive loss until such time as we cease to have an available-for-sale securities portfolio. In the fourth quarter of 2016 as a result of our final auction rate securities being called by our counterparty and redeemed, the disproportionate tax effect was eliminated by recording a $14 million charge to income tax expense included in continuing operations that was offset by a corresponding tax benefit included in other comprehensive income (loss).

In the fourth quarter of 2016, we recorded a $13 million tax benefit from the recognition of a deferred tax asset on certain German net operating losses primarily resulting from a return to sustainable profitability.

During 2015 we recorded a $21 million valuation allowance against certain deferred tax assets related to TopBuild as a non-cash charge to income tax expense. The TopBuild deferred tax assets have been impaired by our decision to spin off TopBuild into a separate company that on a stand-alone basis as of June 30, 2015, the spin off date, was unlikely to be able to realize the value of such deferred tax assets as a result of its history of losses.

Our capital management strategy includes the repurchase of Masco common stock, the payment of dividends, the pay-down of debt and the funding of potential acquisitions both within and outside the U.S. In order to provide greater flexibility in the execution of our capital management strategy, we determined in the fourth quarter of 2015 that we may repatriate earnings from certain foreign subsidiaries that were previously considered permanently reinvested. As a result, we recorded a $19 million charge to income tax expense in 2015 to recognize the required taxes on foreign earnings, including those previously considered permanently reinvested. Our December 31, 2016 and 2015, deferred tax balances on investment in foreign subsidiaries reflects the impact of all taxable temporary differences, including those related to substantially all undistributed foreign earnings, except those that are legally restricted.

The tax benefit from certain stock-based compensation is not recognized as a deferred tax asset until the tax deduction reduces cash taxes. During 2015, we recorded deferred tax assets of $53 million to paid-in capital related to additional net operating losses, previously not recognized, that were used to reduce cash taxes on our 2015 taxable income.

In the third quarter of 2014, we recorded a $517 million tax benefit from the release of the valuation allowance against our U.S. Federal and certain state deferred tax assets due primarily to a return to sustainable profitability in our U.S. operations. In reaching this conclusion, we considered the continued improvement in both the new home construction market and repair and remodel activity in the U.S. and our progress on strategic initiatives to reduce costs and expand our product leadership positions which contributed to the continued improvement in our U.S. operations over the past few years. We recorded an additional $12 million tax benefit during 2014 from the release of the valuation allowances against certain U.K. and Mexican deferred tax assets primarily resulting from a return to sustainable profitability in these jurisdictions.

We continue to maintain a valuation allowance on certain state and foreign deferred tax assets as of December 31, 2016. Should we determine that we would not be able to realize our remaining deferred tax assets in these jurisdictions in the future, an adjustment to the valuation allowance would be recorded in the period such determination is made.

Of the $60 million and $94 million deferred tax asset related to the net operating loss and tax credit carryforwards at December 31, 2016 and December 31, 2015, respectively, $35 million and $67 million will expire between 2021 and 2036 and $25 million and $27 million are unlimited, respectively.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

S. INCOME TAXES (Continued)

A reconciliation of the U.S. Federal statutory tax rate to the income tax expense (benefit) on income from continuing operations was as follows:

	2016			2015			2014
U.S. Federal statutory tax rate – expense	35	%		35	%		35	%
State and local taxes, net of U.S. Federal tax benefit	2			3			(2	)
Lower taxes on foreign earnings	(2	)		(1	)		(5	)
U.S. and foreign taxes on distributed and undistributed foreign earnings	1			3			—
Domestic production deduction	(1	)		—			—
U.S. Federal valuation allowance	—			3			(98	)
Other, net	1			—			(1	)
Effective tax rate – expense (benefit)	36	%		43	%		(71	)%

Income taxes paid were $190 million, $107 million and $80 million in 2016, 2015 and 2014, respectively.

A reconciliation of the beginning and ending liability for uncertain tax positions, including related interest and penalties, is as follows, in millions:

	Uncertain Tax Positions				Interest and Penalties				Total
Balance at January 1, 2015	$	39			$	9			$	48
Current year tax positions:
Additions	10				—				10
Prior year tax positions:
Additions	1				—				1
Reductions	(1		)		—				(1		)
Lapse of applicable statute of limitations	(6		)		—				(6		)
Interest and penalties recognized in income tax expense	—				1				1
Balance at December 31, 2015	$	43			$	10			$	53
Current year tax positions:
Additions	11				—				11
Reductions	(1		)		—				(1		)
Prior year tax positions:
Additions	1				—				1
Reductions	(2		)		—				(2		)
Lapse of applicable statute of limitations	(6		)		—				(6		)
Interest and penalties recognized in income tax expense	—				(1		)		(1		)
Balance at December 31, 2016	$	46			$	9			$	55

If recognized, $30 million and $28 million of the liability for uncertain tax positions at December 31, 2016 and 2015, respectively, net of any U.S. Federal tax benefit, would impact our effective tax rate.

Of the $55 million and $53 million total liability for uncertain tax positions (including related interest and penalties) at December 31, 2016 and 2015, respectively, $54 million and $52 million are recorded in other liabilities, respectively, and $1 million is recorded as a net offset to other assets at both dates.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

S. INCOME TAXES (Concluded)

We file income tax returns in the U.S. Federal jurisdiction, and various local, state and foreign jurisdictions. We continue to participate in the Compliance Assurance Program ("CAP"). CAP is a real-time audit of the U.S. Federal income tax return that allows the Internal Revenue Service ("IRS"), working in conjunction with us, to determine tax return compliance with the U.S. Federal tax law prior to filing the return. This program provides us with greater certainty about our tax liability for a given year within months, rather than years, of filing our annual tax return and greatly reduces the need for recording a liability for U.S. Federal uncertain tax positions. The IRS has completed their examination of our consolidated U.S. Federal tax returns through 2015. With few exceptions, we are no longer subject to state or foreign income tax examinations on filed returns for years before 2005.

As a result of tax audit closings, settlements and the expiration of applicable statutes of limitations in various jurisdictions within the next 12 months, we anticipate that it is reasonably possible the liability for uncertain tax positions could be reduced by approximately $6 million.

T. EARNINGS PER COMMON SHARE

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

	2016				2015				2014
Numerator (basic and diluted):
Income from continuing operations	$	491			$	357			$	821
Less: Allocation to unvested restricted stock awards	6				5				16
Income from continuing operations attributable to common shareholders	485				352				805
(Loss) income from discontinued operations, net	—				(2		)		35
Less: Allocation to unvested restricted stock awards	—				—				(1		)
(Loss) income from discontinued operations attributable to common shareholders	—				(2		)		34
Net income available to common shareholders	$	485			$	350			$	839
Denominator:
Basic common shares (based upon weighted average)	326				338				349
Add: Stock option dilution	4				3				3
Diluted common shares	330				341				352

We follow accounting guidance regarding determining whether instruments granted in share-based payment transactions are participating securities. This accounting guidance clarifies that share-based payment awards that entitle their holders to receive non-forfeitable dividends prior to vesting should be considered participating securities. We have granted restricted stock awards that contain non-forfeitable rights to dividends on unvested shares; such unvested restricted stock awards are considered participating securities. As participating securities, the unvested shares are required to be included in the calculation of our basic earnings per common share, using the "two-class method." The two-class method of computing earnings per common share is an allocation method that calculates earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. For the years ended December 31, 2016, 2015 and 2014, we allocated dividends and undistributed earnings to the participating securities.

Additionally, 338,000 common shares, 5 million common shares and 7 million common shares for 2016, 2015 and 2014, respectively, related to stock options were excluded from the computation of diluted earnings per common share due to their antidilutive effect.

Common shares outstanding included on our balance sheet and for the calculation of earnings per common share do not include unvested stock awards (4 million common shares and 5 million common shares at December 31, 2016 and 2015, respectively); shares outstanding for legal requirements included all common shares that have voting rights (including unvested stock awards).

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

U. OTHER COMMITMENTS AND CONTINGENCIES

Litigation. We are subject to claims, charges, litigation and other proceedings in the ordinary course of our business, including those arising from or related to contractual matters, intellectual property, personal injury, environmental matters, product liability, product recalls, construction defect, insurance coverage, personnel and employment disputes, anti-trust issues and other matters, including class actions. 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.

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

	2016				2015
Balance at January 1	$	152			$	135
Accruals for warranties issued during the year	66				56
Accruals related to pre-existing warranties	33				15
Settlements made (in cash or kind) during the year	(56		)		(50		)
Other, net (including currency translation)	(3		)		(4		)
Balance at December 31	$	192			$	152

During 2016, a business in the Windows and Other Specialty Products segment recorded a $31 million increase as a change in estimate of expected future warranty claims resulting from recent warranty claim trends, including, among other items, the nature and type of claim and estimate of costs to service claims.

Investments. With respect to our investments in private equity funds, we had, at December 31, 2016, commitments to contribute up to $5 million of additional capital to such funds representing our aggregate capital commitment to such funds less capital contributions made to date. We are contractually obligated to make additional capital contributions to certain of our private equity funds upon receipt of a capital call from the private equity fund. We have no control over when or if the capital calls will occur. Capital calls are funded in cash and generally result in an increase in the carrying value of our investment in the private equity fund when paid.

Other Matters. We enter into contracts, which include reasonable and customary indemnifications that are standard for the industries in which we operate. Such indemnifications include customer claims against builders for issues relating to our products and workmanship. In conjunction with divestitures and other transactions, we occasionally provide reasonable and customary indemnifications relating to various items including: the enforceability of trademarks; legal and environmental issues; provisions for sales returns; and asset valuations. We have never had to pay a material amount related to these indemnifications and we evaluate the probability that amounts may be incurred and appropriately record an estimated liability when probable.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)

V. INTERIM FINANCIAL INFORMATION (UNAUDITED)

Our quarterly results attributable to Masco Corporation were as follows:

					Quarters Ended
					(In Millions, Except Per Common Share Data)
	Total Year				December 31				September 30				June 30				March 31
2016
Net sales	$	7,357			$	1,759			$	1,877			$	2,001			$	1,720
Gross profit	$	2,456			$	573			$	614			$	700			$	569
Income from continuing operations	$	491			$	98			$	134			$	150			$	109
Net income	$	491			$	98			$	134			$	150			$	109
Earnings per common share:
Basic:
Income from continuing operations	$	1.49			$	0.30			$	0.41			$	0.45			$	0.33
Net income	$	1.49			$	0.30			$	0.41			$	0.45			$	0.33
Diluted:
Income from continuing operations	$	1.47			$	0.30			$	0.40			$	0.45			$	0.32
Net income	$	1.47			$	0.30			$	0.40			$	0.45			$	0.32
2015
Net sales	$	7,142			$	1,715			$	1,839			$	1,929			$	1,659
Gross profit	$	2,253			$	532			$	589			$	637			$	495
Income from continuing operations	$	357			$	76			$	111			$	109			$	61
Net income	$	355			$	75			$	111			$	105			$	64
Earnings per common share:
Basic:
Income from continuing operations	$	1.04			$	0.23			$	0.33			$	0.32			$	0.17
Net income	$	1.03			$	0.22			$	0.33			$	0.30			$	0.18
Diluted:
Income from continuing operations	$	1.03			$	0.22			$	0.32			$	0.31			$	0.17
Net income	$	1.02			$	0.22			$	0.32			$	0.30			$	0.18

Earnings per common share amounts for the four quarters of December 31, 2016 and 2015 may not total to the earnings per common share amounts for the years ended December 31, 2016 and 2015 due to the allocation of income to participating securities.