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, 2017 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, 2017.

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, 2017. Their report expressed an unqualified opinion on the effectiveness of Masco Corporation's internal control over financial reporting as of December 31, 2017 and expressed an unqualified opinion on the Company's 2017 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:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Masco Corporation and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), cash flows, and shareholders’ equity for each of the three years in the period ended December 31, 2017, including the related notes and the financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, 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 the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.

Definition and Limitations of Internal Control over Financial Reporting

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

PricewaterhouseCoopers LLP

Detroit, Michigan

February 8, 2018

We have served as the Company’s auditor since 1959.

Financial Statements and Supplementary Data

MASCO CORPORATION and Consolidated Subsidiaries

CONSOLIDATED BALANCE SHEETS

December 31, 2017 and 2016

(In Millions, Except Share Data)

	2017				2016
ASSETS
Current Assets:
Cash and cash investments	$	1,194			$	990
Short-term bank deposits	108				201
Receivables	1,021				917
Inventories	796				712
Prepaid expenses and other	96				114
Total current assets	3,215				2,934
Property and equipment, net	1,129				1,060
Goodwill	841				832
Other intangible assets, net	187				154
Other assets	116				157
Total assets	$	5,488			$	5,137
LIABILITIES
Current Liabilities:
Accounts payable	$	824			$	800
Notes payable	116				2
Accrued liabilities	688				658
Total current liabilities	1,628				1,460
Long-term debt	2,969				2,995
Other liabilities	715				785
Total liabilities	5,312				5,240
Commitments and contingencies (Note S)
EQUITY
Masco Corporation's shareholders' equity: Common shares, par value $1 per share Authorized shares: 1,400,000,000; Issued and outstanding: 2017 – 310,400,000; 2016 – 318,000,000	310				318
Preferred shares authorized: 1,000,000; Issued and outstanding: 2017 and 2016 – None	—				—
Paid-in capital	—				—
Retained deficit	(305		)		(381		)
Accumulated other comprehensive loss	(65		)		(235		)
Total Masco Corporation's shareholders' deficit	(60		)		(298		)
Noncontrolling interest	236				195
Total equity (deficit)	176				(103		)
Total liabilities and equity	$	5,488			$	5,137

See notes to consolidated financial statements.

MASCO CORPORATION and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2017, 2016 and 2015

(In Millions, Except Per Common Share Data)

	2017				2016				2015
Net sales	$	7,644			$	7,357			$	7,142
Cost of sales	5,033				4,901				4,889
Gross profit	2,611				2,456				2,253
Selling, general and administrative expenses	1,442				1,403				1,339
Operating profit	1,169				1,053				914
Other income (expense), net:
Interest expense	(278		)		(229		)		(225		)
Other, net	(6		)		6				—
	(284		)		(223		)		(225		)
Income from continuing operations before income taxes	885				830				689
Income tax expense	305				296				293
Income from continuing operations	580				534				396
Loss from discontinued operations, net	—				—				(2		)
Net income	580				534				394
Less: Net income attributable to noncontrolling interest	47				43				39
Net income attributable to Masco Corporation	$	533			$	491			$	355
Income (loss) per common share attributable to Masco Corporation:
Basic:
Income from continuing operations	$	1.68			$	1.49			$	1.04
Loss from discontinued operations, net	—				—				(0.01		)
Net income	$	1.68			$	1.49			$	1.03
Diluted:
Income from continuing operations	$	1.66			$	1.47			$	1.03
Loss from discontinued operations, net	—				—				(0.01		)
Net income	$	1.66			$	1.47			$	1.02
Amounts attributable to Masco Corporation:
Income from continuing operations	$	533			$	491			$	357
Loss from discontinued operations, net	—				—				(2		)
Net income	$	533			$	491			$	355

See notes to consolidated financial statements.

MASCO CORPORATION and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Years Ended December 31, 2017, 2016 and 2015

(In Millions)

	2017				2016				2015
Net income	$	580			$	534			$	394
Less: Net income attributable to noncontrolling interest	47				43				39
Net income attributable to Masco Corporation	$	533			$	491			$	355
Other comprehensive income (loss), net of tax (Note N):
Cumulative translation adjustment	$	133			$	(78	)		$	(96	)
Interest rate swaps	3				1				2
Pension and other post-retirement benefits	63				(15		)		26
Realized loss on available-for-sale securities	—				12				—
Other comprehensive income (loss)	199				(80		)		(68		)
Less: Other comprehensive income (loss) attributable to the noncontrolling interest:
Cumulative translation adjustment	$	28			$	(10	)		$	(16	)
Pension and other post-retirement benefits	1				—				2
	29				(10		)		(14		)
Other comprehensive income (loss) attributable to Masco Corporation	$	170			$	(70	)		$	(54	)
Total comprehensive income	$	779			$	454			$	326
Less: Total comprehensive income attributable to noncontrolling interest	76				33				25
Total comprehensive income attributable to Masco Corporation	$	703			$	421			$	301

See notes to consolidated financial statements.

MASCO CORPORATION and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2017, 2016 and 2015

(In Millions)

	2017				2016				2015
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net income	$	580			$	534			$	394
Depreciation and amortization	127				134				133
Display amortization	25				25				20
Deferred income taxes	10				130				212
Employee withholding taxes paid on stock-based compensation	33				40				36
(Gain) on disposition of investments, net	(4		)		(4		)		(7		)
Loss on disposition of businesses, net	13				—				—
Pension and other postretirement benefits	(38		)		(78		)		(18		)
Impairment of financial investments, net	2				—				—
Impairment of property and equipment, net	—				—				2
Stock-based compensation	38				29				41
Increase in receivables	(127		)		(120		)		(104		)
(Increase) decrease in inventories	(76		)		(39		)		17
Increase in accounts payable and accrued liabilities, net	53				71				82
Debt extinguishment costs	104				40				—
Other, net	11				27				2
Net cash from operating activities	751				789				810
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Retirement of notes	(535		)		(1,300		)		(500		)
Purchase of Company common stock	(331		)		(459		)		(456		)
Cash dividends paid	(129		)		(128		)		(126		)
Dividends paid to noncontrolling interest	(35		)		(31		)		(36		)
Cash distributed to TopBuild Corp.	—				—				(63		)
Issuance of TopBuild Corp. debt	—				—				200
Issuance of notes, net of issuance costs	593				889				497
Debt extinguishment costs	(104		)		(40		)		—
Increase in debt	2				3				4
Issuance of Company common stock	—				1				2
Employee withholding taxes paid on stock-based compensation	(33		)		(40		)		(36		)
Payment of debt	(5		)		(4		)		(4		)
Credit Agreement and other financing costs	—				—				(3		)
Net cash for financing activities	(577		)		(1,109		)		(521		)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures	(173		)		(180		)		(158		)
Acquisition of businesses, net of cash acquired	(89		)		—				(41		)
Proceeds from disposition of:
Businesses, net of cash disposed	128				—				—
Short-term bank deposits	218				251				279
Property and equipment	24				—				18
Other financial investments	7				32				10
Purchases of short-term bank deposits	(106		)		(211		)		(253		)
Other, net	(34		)		(16		)		(44		)
Net cash for investing activities	(25		)		(124		)		(189		)
Effect of exchange rate changes on cash and cash investments	55				(34		)		(15		)
CASH AND CASH INVESTMENTS:
Increase (decrease) for the year	204				(478		)		85
At January 1	990				1,468				1,383
At December 31	$	1,194			$	990			$	1,468

See notes to consolidated financial statements.

MASCO CORPORATION and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

For the Years Ended December 31, 2017, 2016 and 2015

(In Millions, Except Per Common Share Data)

	Total				Common Shares ($1 par value)				Paid-In Capital				Retained Earnings (Deficit)				Accumulated Other Comprehensive (Loss) Income				Noncontrolling Interest
Balance, January 1, 2015	$	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
Total comprehensive income	779												533				170				76
Shares issued	(19		)		2				(21		)
Shares retired:
Repurchased	(331		)		(9		)		(8		)		(314		)
Surrendered (non-cash)	(15		)		(1		)						(14		)
Cash dividends declared	(129		)										(129		)
Dividends paid to noncontrolling interest	(35		)																		(35		)
Stock-based compensation	29								29
Balance, December 31, 2017	$	176			$	310			$	—			$	(305	)		$	(65	)		$	236

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 statement 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 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, 2017 and 2016. 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. 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 $44 million and $40 million at December 31, 2017 and 2016, 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.

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.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A. ACCOUNTING POLICIES (Continued)

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, computer hardware and software, 17 to 33 percent, and machinery and equipment, 5 to 33 percent. Depreciation expense was $116 million, $124 million and $116 million in 2017, 2016 and 2015, 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 two 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 8.0 percent as the basis to determine the discount rate to apply to the estimated future cash flows. In 2017, 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 10.0 percent to 13.0 percent for our reporting units.

If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized to the extent that a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit.

We review our other indefinite-lived intangible assets for impairment annually, in the fourth quarter, 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 G to the consolidated financial statements for additional information regarding goodwill and other intangible assets.

Fair Value Accounting. We use derivative financial instruments to manage certain exposure to fluctuations in earnings and cash flows resulting from changes in foreign currency exchange rates, and occasionally from changes in 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 to satisfy our 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 factors described above. We believe that the warranty accrual is appropriate; however, actual claims incurred could differ from our original estimates which would require us to adjust our previously established accruals. Refer to Note S to the consolidated financial statements for additional information on our warranty accrual.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A. ACCOUNTING POLICIES (Continued)

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 an estimate of these amounts is recorded as a deduction to net sales 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 or 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 recognize forfeitures related to stock awards and stock options as they occur.

Noncontrolling Interest. We owned 68 percent of Hansgrohe SE at both December 31, 2017 and 2016. The aggregate noncontrolling interest, net of dividends, at December 31, 2017 and 2016 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).

Accounting for Global Intangible Low-taxed Income ("GILTI"). We record the tax effects of GILTI related to our foreign operations as a component of income tax expense (benefit) in the period the tax arises.

Reclassifications. Certain prior year amounts have been reclassified to conform to the 2017 presentation in the consolidated financial statements. In our consolidated statements of cash flows, the cash flows from discontinued operations are not separately classified.

Recently Adopted Accounting Pronouncements. In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value, as opposed to the lower of cost or market. We adopted ASU 2015-11 on January 1, 2017. The adoption of the new standard did not have an impact on our financial position or results of operations.

In March 2016, the FASB issued 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, simplifies the accounting requirements for forfeitures and employers' tax withholding requirements, and modifies the presentation of certain items on the statement of cash flows. We adopted ASU 2016-09 on January 1, 2017, using the retrospective options for reclassifying excess tax benefit from stock-based compensation and employee withholding taxes paid on stock-based compensation within our statements of cash flows. The adoption of the remaining requirements did not have an impact on our financial position or results of operations. As a result of this adoption, we increased cash flows from (for) operating activities and decreased cash flows from (for) financing activities by $63 million and $111 million for the years ended December 31, 2016 and 2015, respectively. Subsequent to adoption, tax effects related to employee share-based payments were recorded to income tax expense, thus increasing the volatility in our effective tax rate.

In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business," which narrows the definition of what constitutes a business for acquisition and divestiture purposes. We early adopted ASU 2017-01 effective October 1, 2017. The adoption of the new standard did not have an impact on our financial position or results of operations.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A. ACCOUNTING POLICIES (Continued)

In January 2017, the FASB issued 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 in the reporting unit. We early adopted ASU 2017-04 effective January 1, 2017. The adoption of the new standard did not have an impact on our financial position or results of operations.

Recently Issued Accounting Pronouncements. In May 2014, the FASB issued a new standard for revenue recognition, Accounting Standards Codification ("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 will adopt this standard on its effective date, January 1, 2018, under the full retrospective method of adoption. The adoption of the standard will not have a material impact on our financial position or results of operations. We have finalized our accounting policy, trained our business units on the new standard and finalized our internal controls under the new standard. We did not experience significant issues in our implementation process.

In January 2016, the FASB issued 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. The adoption of this standard will not have a material impact on our financial position or results of operations.

In February 2016, the FASB issued a new standard for leases, 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 currently 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.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which modifies the methodology for recognizing loss impairments on certain types of financial instruments. The new methodology requires an entity to estimate the credit losses expected over the life of an exposure. Additionally, ASU 2016-13 amends the current available-for-sale security other-than-temporary impairment model for debt securities. ASU 2016-13 is effective for us for annual periods beginning January 1, 2020. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Asset Transfers of Assets Other than Inventory," which no longer allows the tax effects of intra-entity asset transfers (intercompany sales) of assets other than inventory to be deferred until the transferred asset is sold to a third party or otherwise recovered through use. The new standard requires the tax expense from the sale of the asset in the seller’s tax jurisdiction and the corresponding basis differences in the buyer’s jurisdiction to be recognized when the transfer occurs even though the pre-tax effects of the transaction are eliminated in consolidation. ASU 2016-16 is effective for us for annual periods beginning January 1, 2018. The adoption of this standard will not have a material impact on our financial position or results of operations.

In March 2017, the FASB issued ASU 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which modifies the presentation of net periodic pension and post-retirement benefit cost ("net benefit cost") in the income statement and the components eligible for capitalization as assets. ASU 2017-07 is effective for us for annual periods beginning January 1, 2018. The adoption of the new standard will not have a material impact on our financial position or results of operations. For full year 2017 and 2016, we expect $26 million and $32 million of expense to be retrospectively reclassified from operating profit to other income (expense), net, within our results of operations.

In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting," which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. ASU 2017-09 is effective for us for annual periods beginning January 1, 2018, and is applied prospectively. Upon adoption, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A. ACCOUNTING POLICIES (Concluded)

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which improves and simplifies accounting rules around hedge accounting and better portrays the economic results of an entity’s risk management activities in its financial statements. ASU 2017-12 is effective for us for annual periods beginning January 1, 2019. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.

B. DIVESTITURES

In the fourth quarter of 2017 we divested Moores Furniture Group Limited ("Moores"), a manufacturer of kitchen and bathroom furniture in the United Kingdom. In connection with the divestiture we recognized a loss of $64 million for the year ended December 31, 2017, included in other, net, within other income (expense), net in our consolidated statement of operations. This loss resulted primarily from the recognition of $58 million of defined-benefit pension plan actuarial losses, net of tax, that were previously included within accumulated other comprehensive loss, due to the transfer of the plan assets and obligations to the purchaser in connection with the sale of the business. Prior to divestiture, the results of this business are included within income from continuing operations before income taxes in the consolidated statement of operations and reported as part of our Cabinetry Products segment.

In the second quarter of 2017 we divested Arrow Fastener Co., LLC ("Arrow"), a manufacturer and distributor of fastening tools, for proceeds of $128 million. In connection with the divestiture we recognized a gain of $51 million for the year ended December 31, 2017, included in other, net, within other income (expense), net in our consolidated statement of operations. Prior to divestiture, the results of this business are included within income from continuing operations before income taxes in the consolidated statement of operations and reported as part of our Windows and Other Specialty Products segment.

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 from discontinued operations, net, in the consolidated statement of operations.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. DIVESTITURES (Concluded)

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

	Year Ended December 31, 2015
Net sales	$	762
Cost of sales	603
Gross profit	159
Selling, general and administrative expenses	148
Income from discontinued operations	$	11
Other discontinued operations results:
Loss on disposal of discontinued operations, net	(1		)
Income before income tax	10
Income tax expense (1)	(12		)
Loss from discontinued operations, net	$	(2	)

(1)	The unusual relationship between income tax expense and income before income tax 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, 2015
Depreciation and amortization	$	6
Capital expenditures	$	7

We did not have any assets or liabilities related to discontinued operations at either December 31, 2017 or 2016.

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.

C. ACQUISITIONS

In the fourth quarter of 2017, we acquired Mercury Plastics, Inc., a plastics processor and manufacturer of water handling systems for appliance and faucet applications, for approximately $89 million in cash. This business is included in the Plumbing Products segment. This acquisition enhances our ability to develop faucet technology and provides continuity of supply of quality faucet components. In connection with this acquisition, we recognized $38 million of goodwill, which is tax deductible, and is related primarily to the expected synergies from combining the operations into our business.

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.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

C. ACQUISITIONS (Concluded)

In December 2017, we signed a definitive agreement to acquire The L.D. Kichler Co., a leader in decorative residential and light commercial lighting products, ceiling fans and LED lighting systems. This business will expand our product offerings to repair and remodel customers. We expect this transaction to close in the first quarter of 2018, at which time we expect to pay approximately $550 million for the business, using cash on hand. We intend to report this business in our Decorative Architectural Products segment.

D. INVENTORIES

	(In Millions) At December 31
	2017				2016
Finished goods	$	414			$	366
Raw materials	277				254
Work in process	105				92
Total	$	796			$	712

Inventories, which include purchased parts, materials, direct labor and applied 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. 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 may include interest rate swap agreements, foreign currency contracts and metals contracts. 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 an approximate $2 million loss was recognized in our consolidated statement of operations in other, net, within other income (expense), 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, 2017, the balance remaining in accumulated other comprehensive loss was $8 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, enter 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.

Metals Contracts. From time to time, we have entered into 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.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

E. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Concluded)

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

	Year Ended December 31,
	2017				2016				2015
Foreign currency contracts:
Exchange contracts	$	(1	)		$	—			$	4
Forward contracts	1				—				(3		)
Metals contracts	—				5				(17		)
Interest rate swaps	(4		)		(2		)		(2		)
Total	$	(4	)		$	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, 2017
	Notional Amount				Balance Sheet
Foreign currency contracts:
Exchange contracts	$	14
Accrued liabilities					$	—
Forward contracts	43
Receivables					—
Accrued liabilities					—

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

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

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

F. PROPERTY AND EQUIPMENT

	(In Millions) At December 31
	2017				2016
Land and improvements	$	110			$	111
Buildings	681				712
Computer hardware and software	327				315
Machinery and equipment	1,547				1,480
	2,665				2,618
Less: Accumulated depreciation	(1,536		)		(1,558		)
Total	$	1,129			$	1,060

We lease certain equipment and plant facilities under noncancellable operating leases. Rental expense recorded in the consolidated statements of operations totaled approximately $66 million, $63 million and $60 million during 2017, 2016 and 2015, respectively.

At December 31, 2017, future minimum lease payments were as follows, in millions:

2018	$	50
2019	39
2020	32
2021	25
2022	20
2023 and beyond	91

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

G. 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, 2017				Accumulated Impairment Losses				Net Goodwill At December 31, 2017
Plumbing Products	$	574			$	(340	)		$	234
Decorative Architectural Products	294				(75		)		219
Cabinetry Products	181				—				181
Windows and Other Specialty Products	718				(511		)		207
Total	$	1,767			$	(926	)		$	841

	Gross Goodwill At December 31, 2016				Accumulated Impairment Losses				Net Goodwill At December 31, 2016				Additions (A)				Divestitures (B)				Other (C)				Net Goodwill At December 31, 2017
Plumbing Products	$	519			$	(340	)		$	179			$	38			$	—			$	17			$	234
Decorative Architectural Products	294				(75		)		219				—				—				—				219
Cabinetry Products	240				(59		)		181				—				—				—				181
Windows and Other Specialty Products	987				(734		)		253				—				(47		)		1				207
Total	$	2,040			$	(1,208	)		$	832			$	38			$	(47	)		$	18			$	841

	Gross Goodwill At December 31, 2015				Accumulated Impairment Losses				Net Goodwill At December 31, 2015				Other (C)				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

(A)	Additions consist of acquisitions.

(B)	Included within divestitures is the disposition of Moores in the Cabinetry Products segment, which includes $59 million of both gross goodwill and accumulated impairment losses, and the disposition of Arrow in the Windows and Other Specialty Products segment, which includes $270 million of gross goodwill and $223 million of accumulated impairment losses.

(C)	Other consists of 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 2017, 2016 and 2015. There was no impairment of goodwill for any of our reporting units for any of these years.

Other indefinite-lived intangible assets were $140 million and $136 million at December 31, 2017 and 2016, respectively, and principally included registered trademarks. In 2017, 2016 and 2015, the impairment test indicated there was no impairment of other indefinite-lived intangible assets for any of our business units. As a result of our 2017 and 2015 acquisitions, other indefinite lived intangible assets increased by $5 million and $7 million, respectively, as of the acquisition dates.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

G. GOODWILL AND OTHER INTANGIBLE ASSETS (Concluded)

The carrying value of our definite-lived intangible assets was $47 million (net of accumulated amortization of $10 million) at December 31, 2017 and $18 million (net of accumulated amortization of $16 million) at December 31, 2016 and principally included customer relationships with a weighted average amortization period of 12 years in 2017 and 10 years in 2016. Amortization expense related to the definite-lived intangible assets of continuing operations was $4 million, $4 million and $6 million in 2017, 2016 and 2015, respectively. As a result of our 2017 and 2015 acquisitions, definite-lived intangible assets increased by $26 million and $17 million, respectively, as of the acquisition dates.

At December 31, 2017, amortization expense related to the definite-lived intangible assets during each of the next five years was as follows: 2018 – $6 million; 2019 – $5 million; 2020 – $5 million, 2021 – $5 million and 2022 –$5 million.

H. OTHER ASSETS

	(In Millions) At December 31
	2017				2016
Equity method investments	$	11			$	13
Private equity funds	2				5
In-store displays, net	31				42
Deferred tax assets (Note Q)	48				68
Other	24				29
Total	$	116			$	157

In-store displays are amortized using the straight-line method over the expected useful life of three to five years, and we recognized amortization expense related to in-store displays of $25 million, $25 million and $20 million in 2017, 2016 and 2015, respectively. Cash spent for displays was $14 million, $11 million and $43 million in 2017, 2016 and 2015, respectively, and is included in other, net within investing activities on the consolidated statements of cash flows.

I. ACCRUED LIABILITIES

	(In Millions) At December 31
	2017				2016
Salaries, wages and commissions	$	196			$	191
Advertising and sales promotion	157				146
Interest	42				51
Warranty (Note S)	59				56
Employee retirement plans	50				52
Insurance reserves	40				41
Property, payroll and other taxes	27				19
Dividends payable	33				32
Other	84				70
Total	$	688			$	658

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

J. DEBT

	(In Millions) At December 31
	2017				2016
Notes and debentures:
6.625%, due April 15, 2018	$	114			$	114
7.125%, due March 15, 2020	201				500
3.500%, due April 1, 2021	399				399
5.950%, due March 15, 2022	326				400
4.450%, due April 1, 2025	500				500
4.375%, due April 1, 2026	498				498
3.500%, due November 15, 2027	300				—
7.750%, due August 1, 2029	234				296
6.500%, due August 15, 2032	200				300
4.500%, due May 15, 2047	299				—
Other	33				9
Prepaid debt issuance costs	(19		)		(19		)
	3,085				2,997
Less: Current portion	116				2
Total long-term debt	$	2,969			$	2,995

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 June 21, 2017, we issued $300 million of 3.5% Notes due November 15, 2027 and $300 million of 4.5% Notes due May 15, 2047. We received proceeds of $599 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 June 27, 2017, proceeds from the debt issuances, together with cash on hand, were used to repay and early retire $299 million of our 7.125% Notes due March 15, 2020, $74 million of our 5.95% Notes due March 15, 2022, $62 million of our 7.75% Notes due August 1, 2029, and $100 million of our 6.5% Notes due August 15, 2032. In connection with these early retirements, we incurred a loss on debt extinguishment of $107 million, which was recorded as interest expense.

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.

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.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

J. DEBT (Concluded)

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, 2017, 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, 2017.

At December 31, 2017, the debt maturities during each of the next five years were as follows: 2018 – $116 million; 2019– $2 million; 2020 – $203 million; 2021 – $402 million and 2022 – $329 million.

Interest paid was $175 million, $198 million and $216 million in 2017, 2016 and 2015, respectively. These amounts exclude $104 million and $40 million of debt extinguishment costs related to the early retirement of debt, which were recorded as interest expense and paid in 2017 and 2016, respectively.

Fair Value of Debt. The fair value of our short-term and long-term fixed-rate debt instruments is based principally upon modeled market prices for the same or similar issues, which are Level 1 inputs. The aggregate estimated market value of short-term and long-term debt at December 31, 2017 was approximately $3.3 billion, compared with the aggregate carrying value of $3.1 billion. 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.

K. 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, 2017, outstanding stock-based incentives were in the form of long-term stock awards, stock options, restricted stock units, phantom stock awards and stock appreciation rights.

Pre-tax compensation expense for these stock-based incentives were as follows, in millions:

	2017				2016				2015
Long-term stock awards	$	24			$	23			$	23
Stock options	3				2				5
Restricted stock units	2				—				—
Phantom stock awards and stock appreciation rights	9				4				11
Total	$	38			$	29			$	39

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

K. STOCK-BASED COMPENSATION (Continued)

At December 31, 2017, 15.4 million shares of our common stock were available under the 2014 Plan for the granting of long-term stock incentive awards, stock options and restricted stock units.

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, as we repurchase and retire an equal number of shares in the open market. We granted 853,690 shares of long-term stock awards during 2017.

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

	2017				2016				2015
Unvested stock award shares at January 1	4				5				6
Weighted average grant date fair value	$	20			$	17			$	18
Stock award shares granted	1				1				1
Weighted average grant date fair value	$	34			$	26			$	26
Stock award shares vested	2				2				2
Weighted average grant date fair value	$	18			$	16			$	17
Stock award shares forfeited	—				—				—
Weighted average grant date fair value	$	24			$	20			$	18
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	3				4				5
Weighted average grant date fair value	$	24			$	20			$	17

(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, 2017, 2016 and 2015, there was $46 million, $43 million and $42 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, 2017, 2016 and 2015.

The total market value (at the vesting date) of stock award shares which vested during 2017, 2016 and 2015 was $45 million, $43 million and $54 million, respectively.

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

We granted 397,350 shares of stock options during 2017 with a grant date weighted-average exercise price of approximately $34 per share. During 2017, no stock option shares were forfeited (including options that expired unexercised).

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

K. STOCK-BASED COMPENSATION (Continued)

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

	2017				2016				2015
Option shares outstanding, January 1	7				12				18
Weighted average exercise price	$	15			$	17			$	21
Option shares granted	—				—				—
Weighted average exercise price	$	34			$	26			$	26
Option shares exercised	2				5				5
Aggregate intrinsic value on date of exercise (A)	$	47	million		$	64	million		$	50	million
Weighted average exercise price	$	15			$	21			$	17
Option shares forfeited	—				—				3
Weighted average exercise price	$	—			$	—			$	29
Forfeitures upon spin off (B)	—				—				—
Weighted average exercise price	$	—			$	—			$	19
Modifications upon spin off (C)	—				—				2
Option shares outstanding, December 31	5				7				12
Weighted average exercise price	$	16			$	15			$	17
Weighted average remaining option term (in years)	4				4				3
Option shares vested and expected to vest, December 31	5				7				12
Weighted average exercise price	$	16			$	15			$	17
Aggregate intrinsic value (A)	$	147	million		$	118	million		$	133	million
Weighted average remaining option term (in years)	4				4				3
Option shares exercisable (vested), December 31	4				6				10
Weighted average exercise price	$	13			$	13			$	18
Aggregate intrinsic value (A)	$	123	million		$	102	million		$	113	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, 2017, 2016 and 2015, there was $7 million, $6 million and $6 million, respectively, of unrecognized compensation expense (using the Black-Scholes option pricing model at the grant date) related to unvested stock options; such options had a weighted average remaining vesting period of three years at December 31, 2017 and 2016 and two years at December 31, 2015.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

K. STOCK-BASED COMPENSATION (Continued)

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:

	2017				2016				2015
Weighted average grant date fair value	$	9.68			$	6.43			$	9.67
Risk-free interest rate	2.16		%		1.41		%		1.75		%
Dividend yield	1.19		%		1.49		%		1.32		%
Volatility factor	30.00		%		29.00		%		42.00		%
Expected option life	6 years				6 years				6 years

The following table summarizes information for stock option shares outstanding and exercisable at December 31, 2017, 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		3		3 Years		$12		4		$12
$	20 - 23		1		7 Years		$22		—		$22
$	26 - 34		1		9 Years		$29		—		$26
$	7 - 34		5		4 Years		$16		4		$13

Restricted Stock Units. In March 2017, our Organization and Compensation Committee ("Compensation Committee") of the Board of Directors approved a Long Term Incentive Program ("LTIP Program"), replacing our previous Long Term Cash Incentive Plan. Under the LTIP Program, we granted restricted stock units to certain senior executives. These restricted stock units will vest and share awards will be issued at no cost to the recipients, subject to our achievement of specified return on invested capital performance goals over a three-year period that have been established by the Compensation Committee for the performance period and the recipient's continued employment through the share award date. Restricted stock units are granted at a target number; based on our performance, the number of restricted stock units that vest can be adjusted downward to zero and upward to a maximum of 200%. We granted 124,780 restricted stock units during 2017, with a grant date fair value of approximately $34 per share. No restricted stock units were forfeited during 2017.

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 $6 million, $2 million and $5 million related to phantom stock awards in 2017, 2016 and 2015, respectively. In 2017, 2016 and 2015, we granted 104,580 shares, 140,710 shares and 134,560 shares, respectively, of phantom stock awards with an aggregate fair value of $4 million each year, and paid cash of $5 million in both 2017 and 2016 and $6 million in 2015 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 $3 million, $2 million and $6 million related to SARs in 2017, 2016 and 2015, respectively. During 2017, 2016 and 2015, we did not grant any SARs.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

K. STOCK-BASED COMPENSATION (Concluded)

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,
	2017				2016				2017				2016
Accrued compensation cost liability	$	12			$	10			$	7			$	8
Unrecognized compensation cost	$	4			$	4			$	—			$	—
Equivalent common shares	—				—				—				1

L. 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 Compensation Committee.

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

	2017				2016				2015
Defined-contribution plans	$	55			$	58			$	52
Defined-benefit pension plans	29				34				32
	$	84			$	92			$	84

In addition to the pre-tax expense related to our defined-benefit pension plans, we recognized $58 million of actuarial losses, net of tax, that were previously included within accumulated other comprehensive loss due to the disposition of a pension plan in connection with the divestiture of Moores, which was recorded within other income (expense), net.

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

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

L. EMPLOYEE RETIREMENT PLANS (Continued)

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:

	2017								2016
	Qualified				Non-Qualified				Qualified				Non-Qualified
Changes in projected benefit obligation:
Projected benefit obligation at January 1	$	1,055			$	170			$	1,059			$	174
Service cost	3				—				3				—
Interest cost	36				6				41				7
Actuarial loss, net	34				7				50				1
Foreign currency exchange	20				—				(29		)		—
Benefit payments	(43		)		(13		)		(69		)		(12		)
Divestitures	(144		)		—				—				—
Projected benefit obligation at December 31	$	961			$	170			$	1,055			$	170
Changes in fair value of plan assets:
Fair value of plan assets at January 1	$	717			$	—			$	658			$	—
Actual return on plan assets	77				—				58				—
Foreign currency exchange	8				—				(20		)		—
Company contributions	52				13				100				12
Expenses, other	(7		)		—				(10		)		—
Benefit payments	(43		)		(13		)		(69		)		(12		)
Divestitures	(109		)		—				—				—
Fair value of plan assets at December 31	$	695			$	—			$	717			$	—
Funded status at December 31	$	(266	)		$	(170	)		$	(338	)		$	(170	)

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

	At December 31, 2017								At December 31, 2016
	Qualified				Non-Qualified				Qualified				Non-Qualified
Other assets	$	1			$	—			$	2			$	—
Accrued liabilities	(1		)		(13		)		(1		)		(12		)
Other liabilities	(266		)		(157		)		(339		)		(158		)
Total net liability	$	(266	)		$	(170	)		$	(338	)		$	(170	)

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

	At December 31, 2017								At December 31, 2016
	Qualified				Non-Qualified				Qualified				Non-Qualified
Net loss	$	442			$	59			$	519			$	54
Net transition obligation	—				—				1				—
Net prior service cost	3				—				3				—
Total	$	445			$	59			$	523			$	54

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

L. EMPLOYEE RETIREMENT PLANS (Continued)

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

	At December 31
	2017								2016
	Qualified				Non-Qualified				Qualified				Non-Qualified
Projected benefit obligation	$	945			$	170			$	1,044			$	170
Accumulated benefit obligation	$	945			$	170			$	1,044			$	170
Fair value of plan assets	$	679			$	—			$	704			$	—

The projected benefit obligation was in excess of plan assets for all of our qualified defined-benefit pension plans at December 31, 2017 and 2016 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:

	2017								2016								2015
	Qualified				Non-Qualified				Qualified				Non-Qualified				Qualified				Non-Qualified
Service cost	$	3			$	—			$	3			$	—			$	3			$	—
Interest cost	44				6				49				7				47				7
Expected return on plan assets	(46		)		—				(44		)		—				(46		)		—
Recognized net loss	19				3				17				2				18				3
Net periodic pension cost	$	20			$	9			$	25			$	9			$	22			$	10

We expect to recognize $20 million of pre-tax net loss from accumulated other comprehensive loss into net periodic pension cost in 2018 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 accumulated other comprehensive 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 accumulated other comprehensive 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:

	2017			2016
Equity securities	55	%		49	%
Debt securities	28	%		32	%
Other	17	%		19	%
Total	100	%		100	%

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."

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

L. EMPLOYEE RETIREMENT PLANS (Continued)

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, 2017 compared to December 31, 2016.

Common and Preferred Stocks and Short-Term and Other Investments: Valued at the closing price reported 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, both of which require 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 reported 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 unfunded commitments of $2 million and no 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.

Buy-in Annuity: Valued based on the associated benefit obligation for which the buy-in annuity covers the benefits, which approximates fair value. Such basis is determined based on various assumptions, including the discount rate, long-term rate of return on plan assets and mortality rate.

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 tables set forth, by level within the fair value hierarchy, the qualified defined-benefit pension plan assets at fair value as of December 31, 2017 and 2016, as well as those valued at NAV using the practical expedient, which approximates fair value, in millions.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

L. EMPLOYEE RETIREMENT PLANS (Continued)

	At December 31, 2017
	Level 1				Level 2				Level 3				Valued at NAV				Total
Plan Assets
Common and Preferred Stocks:
United States	$	144			$	—			$	—			$	47			$	191
International	66				—				—				125				191
Private Equity and Hedge Funds:
United States	—				—				36				—				36
International	—				—				24				35				59
Corporate Debt Securities:
United States	31				26				—				—				57
International	—				7				—				21				28
Government and Other Debt Securities:
United States	15				7				—				31				53
International	31				28				—				—				59
Common Collective Trust Fund – United States	—				6				—				—				6
Buy-in Annuity - International	—				12				—				—				12
Short-Term and Other Investments:
United States	2				—				—				—				2
International	—				1				—				—				1
Total Plan Assets	$	289			$	87			$	60			$	259			$	695

	At December 31, 2016
	Level 1				Level 2				Level 3				Valued 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

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

L. EMPLOYEE RETIREMENT PLANS (Continued)

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

	2017				2016
Fair Value, January 1	$	79			$	88
Purchases	6				6
Sales	(31		)		(19		)
Unrealized gains	6				4
Fair Value, December 31	$	60			$	79

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

	2017			2016			2015
Discount rate for obligations	3.30	%		3.50	%		4.00	%
Expected return on plan assets	7.25	%		7.25	%		7.25	%
Rate of compensation increase	—	%		—	%		—	%
Discount rate for net periodic pension cost	3.50	%		4.00	%		3.80	%

The discount rate for obligations for 2017, 2016 and 2015 was based upon the expected duration of each defined-benefit pension plan's liabilities matched to the December 31, 2017, 2016 and 2015 Willis Towers Watson Rate Link Curve. At December 31, 2017, such rates for our defined-benefit pension plans ranged from 1.5 percent to 3.6 percent, with the most significant portion of the liabilities having a discount rate for obligations of 3.4 percent or higher. 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 decreases in the weighted average discount rates from 2015 to 2016, and from 2016 to 2017, are principally the result of lower long-term interest rates in the bond markets.

For 2017, 2016 and 2015, 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, 2017, 2016 and 2015 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 13.9 percent, positive 8.3 percent and negative 1.8 percent in 2017, 2016 and 2015, respectively. For the 10-year period ended December 31, 2017, the actual annual rate of return on our pension plan assets was 4.3 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, 2017 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 2017, 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)

L. 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 based upon age and length of service. Substantially all of these plans were frozen as of January 1, 2010. The aggregate present value of the unfunded accumulated post-retirement benefit obligation was $10 million and $9 million at December 31, 2017 and 2016, respectively.

Cash Flows. At December 31, 2017, we expect to contribute approximately $45 million to our domestic qualified defined-benefit pension plans in 2018, which will exceed ERISA requirements. We also expect to contribute approximately $3 million and $13 million to our foreign and non-qualified (domestic) defined-benefit pension plans, respectively, in 2018.

At December 31, 2017, 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
2018	$	47			$	13
2019	$	48			$	12
2020	$	49			$	12
2021	$	50			$	12
2022	$	50			$	13
2023 - 2027	$	262			$	56

M. SHAREHOLDERS' EQUITY

In May 2017, our Board of Directors authorized the repurchase, for retirement, of up to $1.5 billion of shares of our common stock in open-market transactions or otherwise, replacing the previous Board of Directors' authorization established in 2014. During 2017, we repurchased and retired 9.2 million shares of our common stock (including 0.9 million shares to offset the dilutive impact of long-term stock awards granted in 2017), for cash aggregating $331 million. At December 31, 2017, we had $1.3 billion remaining under the 2017 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 0.7 million shares to offset the dilutive impact of long-term stock awards granted in 2015).

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.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

M. SHAREHOLDERS' EQUITY (Concluded)

On the basis of amounts paid (declared), cash dividends per common share were $0.405 ($0.410) in 2017, $0.385 ($0.390) in 2016 and $0.365 ($0.370) in 2015

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

	At December 31
	2017				2016
Cumulative translation adjustments, net	$	282			$	177
Unrealized loss on interest rate swaps, net	(12		)		(15		)
Unrecognized net loss and prior service cost, net	(335		)		(397		)
Accumulated other comprehensive loss	$	(65	)		$	(235	)

The cumulative translation adjustment, net, is reported net of income tax benefit of $2 million at December 31, 2016. The unrealized loss on interest rate swaps, net, is reported net of income tax expense of $4 million and $2 million at December 31, 2017 and 2016, respectively. The unrecognized net loss and prior service cost, net, is reported net of income tax benefit of $154 million and $164 million at December 31, 2017 and 2016, respectively.

N. 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)		2017				2016				2015				Statement of Operations Line Item
Amortization of defined benefit pension and other postretirement benefits:
Actuarial losses, net		$	86			$	19			$	21			Other income (expense), net and selling, general and administrative expenses
Tax (benefit)		(13		)		(7		)		(8		)
Net of tax (A)		$	73			$	12			$	13
Interest rate swaps		$	4			$	2			$	2			Interest expense
Tax (benefit)		(1		)		(1		)		—
Net of tax		$	3			$	1			$	2
Available-for-sale securities		$	—			$	(3	)		$	—			Other, net
Tax expense (B)		—				15				—
Net of tax		$	—			$	12			$	—

(A) The 2017 amortization of defined benefit pension and other postretirement benefits includes $58 million, net of tax, due to the disposition of a pension plan in connection with the divestiture of Moores and was recorded within other income (expense), net. Other costs were primarily recorded in selling, general and administrative expenses.

(B) The tax expense related to the available-for-sale securities in 2016 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 Q to the consolidated financial statements for additional information.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

O. 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, exercise pools and water handling systems.

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

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, and, until the divestiture of Arrow, staple gun tackers, staples and other fastening tools.

The above products are sold to the residential repair and remodel and new home construction markets through home center retailers, online 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.

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 (7)
	2017				2016				2015				2017				2016				2015				2017				2016				2015
Our operations by segment were:
Plumbing Products	$	3,735			$	3,526			$	3,341			$	698			$	642			$	512			$	2,260			$	2,009			$	1,972
Decorative Architectural Products	2,205				2,092				2,020				434				430				403				961				894				874
Cabinetry Products	934				970				1,025				90				93				51				524				537				567
Windows and Other Specialty Products	770				769				756				52				(3		)		57				673				743				748
Total	$	7,644			$	7,357			$	7,142			$	1,274			$	1,162			$	1,023			$	4,418			$	4,183			$	4,161
Our operations by geographic area were:
North America	$	6,069			$	5,834			$	5,645			$	1,072			$	961			$	841			$	3,211			$	3,001			$	2,925
International, principally Europe	1,575				1,523				1,497				202				201				182				1,207				1,182				1,236
Total, as above	$	7,644			$	7,357			$	7,142			1,274				1,162				1,023				4,418				4,183				4,161
General corporate expense, net (6)													(105		)		(109		)		(109		)
Operating profit, as reported													1,169				1,053				914
Other income (expense), net													(284		)		(223		)		(225		)
Income from continuing operations before income taxes													$	885			$	830			$	689
Corporate assets																									1,070				954				1,503
Total assets																									$	5,488			$	5,137			$	5,664

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

O. SEGMENT INFORMATION (Concluded)

	Property Additions (5)												Depreciation and Amortization (5)
	2017				2016				2015				2017				2016				2015
Our operations by segment were:
Plumbing Products	$	115			$	110			$	87			$	63			$	57			$	56
Decorative Architectural Products	19				22				16				16				16				16
Cabinetry Products	14				8				6				14				21				24
Windows and Other Specialty Products	13				30				41				21				21				18
	161				170				150				114				115				114
Unallocated amounts, principally related to corporate assets	12				10				1				13				19				13
Total	$	173			$	180			$	151			$	127			$	134			$	127

(1)	Included in net sales were export sales from the U.S. of $232 million, $226 million and $217 million in 2017, 2016 and 2015, respectively.

(2)	Excluded from net sales were intra-company sales between segments of less than one percent in 2017, 2016 and 2015.

(3)	Included in net sales were sales to one customer of $2,535 million, $2,480 million and $2,378 million in 2017, 2016 and 2015, respectively. Such net sales were included in each of our segments.

(4)	Net sales from our operations in the U.S. were $5,821 million, $5,605 million and $5,407 million in 2017, 2016 and 2015, respectively.

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

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

(7)	Long-lived assets of our operations in the U.S. and Europe were $1,582 million and $482 million, $1,508 million and $417 million, and $1,487 million and $427 million at December 31, 2017, 2016 and 2015, respectively.

P. OTHER INCOME (EXPENSE), NET

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

	2017				2016				2015
Loss on sales of businesses, net (A)	$	(13	)		$	—			$	—
Income from cash and cash investments and short-term bank deposits	4				4				3
Equity investment income, net	1				2				2
Realized gain from auction rate securities	—				3				—
Realized gains from private equity funds	3				5				6
Impairment of private equity funds	(2		)		—				—
Foreign currency transaction losses	—				(3		)		(14		)
Other items, net	1				(5		)		3
Total other, net	$	(6	)		$	6			$	—

(A) Included in loss on sales of businesses, net is a loss of $64 million related to the divestiture of Moores and a gain of $51 million related to the divestiture of Arrow.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Q. INCOME TAXES

									(In Millions)
	2017				2016				2015
Income from continuing operations before income taxes:
U.S.	$	731			$	614			$	496
Foreign	154				216				193
	$	885			$	830			$	689
Income tax expense on income from continuing operations:
Currently payable:
U.S. Federal	$	196			$	73			$	10
State and local	31				24				27
Foreign	68				69				56
Deferred:
U.S. Federal	10				140				192
State and local	(1		)		2				3
Foreign	1				(12		)		5
	$	305			$	296			$	293
Deferred tax assets at December 31:
Receivables	$	8			$	10
Inventories	13				17
Other assets, including stock-based compensation	36				58
Accrued liabilities	45				53
Long-term liabilities	169				280
Net operating loss carryforward	53				51
Capital loss carryforward	1				—
Tax credit carryforward	8				9
	333				478
Valuation allowance	(47		)		(45		)
	286				433
Deferred tax liabilities at December 31:
Property and equipment	98				127
Intangibles	139				222
Investment in foreign subsidiaries	7				15
Other	20				21
	264				385
Net deferred tax asset at December 31	$	22			$	48

The net deferred tax asset consisted of net deferred tax assets (included in other assets) of $48 million and $68 million, and net deferred tax liabilities (included in other liabilities) of $26 million and $20 million, at December 31, 2017 and 2016, respectively.

The current portion of the state and local income tax includes a $5 million, $8 million and $5 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 2017, 2016 and 2015, respectively. The deferred portion of the state and local taxes includes a $(1) million, $5 million and $(1) million tax (benefit) expense resulting from a change in the valuation allowance against state and local deferred tax assets in 2017, 2016 and 2015, respectively. The deferred portion of the foreign taxes includes $6 million and $12 million tax expense from a change in the valuation allowance against foreign deferred tax assets in 2016 and 2015, respectively.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Q. INCOME TAXES (Continued)

Due to the enactment of the Tax Cuts and Jobs Act (“Tax Act”) on December 22, 2017, we recorded a $20 million tax benefit from the elimination of a deferred tax liability previously recorded on undistributed foreign earnings as a result of the change from a worldwide to a territorial system of taxation. This tax benefit was offset by a $3 million tax charge resulting from the re-measurement of our remaining net deferred tax assets due to a reduction in the U.S. Federal corporate tax rate from 35 percent to 21 percent.

In addition, the Tax Act requires a mandatory deemed repatriation of undistributed foreign earnings resulting in a toll charge of 15.5 percent on earnings related to cash and liquid assets and 8 percent on earnings for non-liquid assets. Due to the ability to offset positive foreign earnings with existing foreign deficits, we do not anticipate paying any toll charge related to our undistributed foreign earnings.

The $64 million loss from the divestiture of Moores that was recorded in the fourth quarter of 2017 provided no tax benefit.

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 allocation strategy includes reinvesting in our business, balancing share repurchases with potential acquisitions and maintaining an appropriate dividend. In order to provide greater flexibility in the execution of our capital allocation 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, deferred tax balance on investments 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. As a result of the enactment of the Tax Act, no deferred tax is required at December 31, 2017 on our foreign taxable temporary differences, other than foreign withholding taxes.

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

We continue to maintain a valuation allowance on certain state and foreign deferred tax assets as of December 31, 2017. 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.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Q. INCOME TAXES (Continued)

Of the $61 million and $60 million deferred tax asset related to the net operating loss and tax credit carryforwards at December 31, 2017 and 2016, respectively, $33 million and $35 million will expire between 2021 and 2036 and $28 million and $25 million are unlimited, respectively.

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

	2017			2016			2015
U.S. Federal statutory tax rate	35	%		35	%		35	%
State and local taxes, net of U.S. Federal tax benefit	2			2			3
Lower taxes on foreign earnings	(1	)		(2	)		(1	)
U.S. and foreign taxes on distributed and undistributed foreign earnings	1			1			3
Domestic production deduction	(2	)		(1	)		—
Stock-based compensation	(2	)		—			—
Business divestitures with no tax impact	4			—			—
Change in U.S. Federal tax law	(2	)		—			—
U.S. Federal valuation allowance	—			—			3
Other, net	(1	)		1			—
Effective tax rate	34	%		36	%		43	%

Income taxes paid were $258 million, $190 million and $107 million in 2017, 2016 and 2015, 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, 2016	$	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
Current year tax positions:
Additions	13				—				13
Reductions	—				—				—
Prior year tax positions:
Additions	3				—				3
Reductions	(1		)		—				(1		)
Lapse of applicable statute of limitations	(7		)		—				(7		)
Interest and penalties recognized in income tax expense	—				(1		)		(1		)
Balance at December 31, 2017	$	54			$	8			$	62

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Q. INCOME TAXES (Concluded)

If recognized, $43 million and $30 million of the liability for uncertain tax positions at December 31, 2017 and 2016, respectively, net of any U.S. Federal tax benefit, would impact our effective tax rate.

Of the $62 million and $55 million total liability for uncertain tax positions (including related interest and penalties) at December 31, 2017 and 2016, respectively, $59 million and $54 million are recorded in other liabilities, respectively, and $3 million and $1 million is recorded as a net offset to other assets at December 31, 2017 and 2016, respectively.

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 Process ("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 2016. With few exceptions, we are no longer subject to state or foreign income tax examinations on filed returns for years before 2006.

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 $8 million.

R. 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:

	2017				2016				2015
Numerator (basic and diluted):
Income from continuing operations	$	533			$	491			$	357
Less: Allocation to unvested restricted stock awards	5				6				5
Income from continuing operations attributable to common shareholders	528				485				352
Loss from discontinued operations, net	—				—				(2		)
Less: Allocation to unvested restricted stock awards	—				—				—
Loss from discontinued operations attributable to common shareholders	—				—				(2		)
Net income available to common shareholders	$	528			$	485			$	350
Denominator:
Basic common shares (based upon weighted average)	314				326				338
Add: Stock option dilution	4				4				3
Diluted common shares	318				330				341

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, 2017, 2016 and 2015, we allocated dividends and undistributed earnings to the participating securities.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

R. EARNINGS PER COMMON SHARE (Concluded)

Additionally, 354,000, 338,000 and 5 million common shares for 2017, 2016 and 2015, 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 (3 million common shares and 4 million common shares at December 31, 2017 and 2016, respectively); shares outstanding for legal requirements included all common shares that have voting rights (including unvested stock awards).

S. OTHER COMMITMENTS AND CONTINGENCIES

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

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

	2017				2016
Balance at January 1	$	192			$	152
Accruals for warranties issued during the year	63				66
Accruals related to pre-existing warranties	9				33
Settlements made (in cash or kind) during the year	(59		)		(56		)
Other, net (including currency translation)	—				(3		)
Balance at December 31	$	205			$	192

During 2016, a business in the Windows and Other Specialty Products segment recorded $31 million for increases in its estimate of expected future warranty claims relating to previously sold windows and doors. The change in estimate resulted from the adoption of an improved warranty valuation model and the availability of additional information used to support the estimate of costs to service claims and recent warranty claims trends, including a shift to increased cost to repair.

Investments. With respect to our investments in private equity funds, we had, at December 31, 2017, 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 claims made against builders by homeowners for issues relating to our products and workmanship. In conjunction with divestitures and other transactions, we occasionally provide reasonable and customary indemnifications. We have never had to pay a material amount related to these indemnifications, and we evaluate the probability that amounts may be incurred and record an estimated liability when it is probable and reasonably estimable.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)

T. 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
2017
Net sales	$	7,644			$	1,874			$	1,936			$	2,057			$	1,777
Gross profit	$	2,611			$	616			$	650			$	737			$	608
Net income	$	533			$	87			$	148			$	158			$	140
Earnings per common share:
Basic:
Net income	$	1.68			$	0.28			$	0.47			$	0.50			$	0.44
Diluted:
Net income	$	1.66			$	0.27			$	0.46			$	0.49			$	0.43
2016
Net sales	$	7,357			$	1,759			$	1,877			$	2,001			$	1,720
Gross profit	$	2,456			$	573			$	614			$	700			$	569
Net income	$	491			$	98			$	134			$	150			$	109
Earnings per common share:
Basic:
Net income	$	1.49			$	0.30			$	0.41			$	0.45			$	0.33
Diluted:
Net income	$	1.47			$	0.30			$	0.40			$	0.45			$	0.32

Earnings per common share amounts for the four quarters of December 31, 2017 and 2016 may not total to the earnings per common share amounts for the years ended December 31, 2017 and 2016 due to the allocation of income to participating securities.