Item 8. Financial Statements and Supplementary Data.

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our 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.

We assessed the effectiveness of our internal control over financial reporting as of December 31, 2019 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control – Integrated Framework (2013). Based on this assessment, we have determined that our internal control over financial reporting was effective as of December 31, 2019.

PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2019, as stated in their report, which is presented herein. Their report expressed an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2019 and expressed an unqualified opinion on our 2019 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 (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, of comprehensive income (loss), of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes and 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 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, 2019, 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 the accompanying Management’s Report on Internal Control over Financial Reporting. 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.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Goodwill Impairment Assessments

As described in Notes A and H to the consolidated financial statements, the Company’s consolidated goodwill balance was $509 million as of December 31, 2019. Management performs an annual impairment test of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would indicate the carrying value of goodwill may be impaired. Potential impairment is identified by comparing the fair value of a reporting unit to its carrying value, including goodwill. Management estimates fair value by using a discounted cash flow model or a market approach. The determination of fair value using the discounted cash flow model requires management to make significant estimates and assumptions related to forecasted sales and operating profits, and the discount rate.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessments is a critical audit matter are there was significant judgment by management when developing the fair value measurements of the reporting units. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s discounted cash flow model, including significant assumptions related to forecasted sales and the discount rates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the valuation of the Company’s reporting units. These procedures also included, among others, testing management’s process for developing the fair value estimates; evaluating the appropriateness of the model; testing the completeness, accuracy, and relevance of underlying data used in the model; and, evaluating the significant assumptions used by management, including forecasted sales and the discount rates. Professionals with specialized skill and knowledge were used to assist in evaluating the Company’s discount rate assumptions. Evaluating management’s assumption related to forecasted sales involved evaluating whether the assumptions used were reasonable considering (i) the current and past performance of the reporting units, (ii) the consistency with external market and industry data as relates to forecasted sales, and (iii) whether they were consistent with evidence obtained in other areas of the audit.

/s/ PricewaterhouseCoopers LLP

Detroit, Michigan

February 11, 2020

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, 2019 and 2018

(In Millions, Except Share Data)

	2019				2018
ASSETS
Current Assets:
Cash and cash investments	$	697			$	552
Receivables	997				990
Inventories	754				798
Prepaid expenses and other	90				84
Assets held for sale	173				342
Total current assets	2,711				2,766
Property and equipment, net	878				885
Goodwill	509				511
Other intangible assets, net	259				288
Operating lease right-of-use assets	176				—
Other assets	139				90
Assets held for sale	355				853
Total assets	$	5,027			$	5,393
LIABILITIES
Current Liabilities:
Accounts payable	$	697			$	736
Notes payable	2				8
Accrued liabilities	700				645
Liabilities held for sale	149				295
Total current liabilities	1,548				1,684
Long-term debt	2,771				2,971
Other liabilities	751				549
Liabilities held for sale	13				120
Total liabilities	5,083				5,324
Commitments and contingencies (Note T)
EQUITY
Masco Corporation's shareholders' equity:
Common shares, par value $1 per share Authorized shares: 1,400,000,000; Issued and outstanding: 2019 – 275,600,000; 2018 – 293,900,000	276				294
Preferred shares authorized: 1,000,000; Issued and outstanding: 2019 and 2018 – None	—				—
Paid-in capital	—				—
Retained deficit	(332		)		(278		)
Accumulated other comprehensive loss	(179		)		(127		)
Total Masco Corporation's shareholders' deficit	(235		)		(111		)
Noncontrolling interest	179				180
Total equity	(56		)		69
Total liabilities and equity	$	5,027			$	5,393

See notes to consolidated financial statements.

MASCO CORPORATION and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2019**,** 2018 and 2017

(In Millions, Except Per Common Share Data)

	2019				2018				2017
Net sales	$	6,707			$	6,654			$	6,014
Cost of sales	4,336				4,327				3,794
Gross profit	2,371				2,327				2,220
Selling, general and administrative expenses	1,274				1,250				1,191
Impairment charge for other intangible assets	9				—				—
Operating profit	1,088				1,077				1,029
Other income (expense), net:
Interest expense	(159		)		(156		)		(279		)
Other, net	(15		)		(14		)		(32		)
	(174		)		(170		)		(311		)
Income from continuing operations before income taxes	914				907				718
Income tax expense	230				221				245
Income from continuing operations	684				686				473
Income from discontinued operations, net	296				98				107
Net income	980				784				580
Less: Net income attributable to noncontrolling interest	45				50				47
Net income attributable to Masco Corporation	$	935			$	734			$	533
Income per common share attributable to Masco Corporation:
Basic:
Income from continuing operations	$	2.21			$	2.06			$	1.34
Income from discontinued operations, net	1.03				0.32				0.34
Net income	$	3.24			$	2.38			$	1.68
Diluted:
Income from continuing operations	$	2.20			$	2.05			$	1.33
Income from discontinued operations, net	1.02				0.32				0.33
Net income	$	3.22			$	2.37			$	1.66
Amounts attributable to Masco Corporation:
Income from continuing operations	$	639			$	636			$	426
Income from discontinued operations, net	296				98				107
Net income	$	935			$	734			$	533

See notes to consolidated financial statements.

MASCO CORPORATION and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Years Ended December 31, 2019**,** 2018 and 2017

(In Millions)

	2019				2018				2017
Net income	$	980			$	784			$	580
Less: Net income attributable to noncontrolling interest	45				50				47
Net income attributable to Masco Corporation	$	935			$	734			$	533
Other comprehensive (loss) income, net of tax (Note O):
Cumulative translation adjustment	$	6			$	(31	)		$	133
Interest rate swaps	2				2				3
Pension and other post-retirement benefits	(64		)		9				63
Other comprehensive (loss) income, net of tax	(56		)		(20		)		199
Less: Other comprehensive (loss) income attributable to the noncontrolling interest:
Cumulative translation adjustment	$	(1	)		$	(15	)		$	28
Pension and other post-retirement benefits	(3		)		(2		)		1
	(4		)		(17		)		29
Other comprehensive (loss) income attributable to Masco Corporation	$	(52	)		$	(3	)		$	170
Total comprehensive income	$	924			$	764			$	779
Less: Total comprehensive income attributable to noncontrolling interest	41				33				76
Total comprehensive income attributable to Masco Corporation	$	883			$	731			$	703

See notes to consolidated financial statements.

MASCO CORPORATION and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2019**,** 2018 and 2017

(In Millions)

	2019				2018				2017
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net income	$	980			$	784			$	580
Depreciation and amortization	159				156				127
Display amortization	12				21				25
Deferred income taxes	(41		)		4				13
Employee withholding taxes paid on stock-based compensation	23				42				33
Gain on disposition of investments, net	(1		)		(4		)		(4		)
(Gain) loss on disposition of businesses, net	(298		)		—				13
Pension and other postretirement benefits	(45		)		(47		)		(38		)
Impairment of financial investments	—				—				2
Impairment of goodwill and other intangible assets	16				—				—
Stock-based compensation	35				27				38
Increase in receivables	(37		)		(46		)		(140		)
Decrease (increase) in inventories	58				(11		)		(78		)
(Decrease) increase in accounts payable and accrued liabilities, net	(27		)		108				67
Debt extinguishment costs	2				—				104
Other, net	(3		)		(2		)		9
Net cash from operating activities	833				1,032				751
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Retirement of notes	(201		)		(114		)		(535		)
Purchase of Company common stock	(896		)		(654		)		(331		)
Cash dividends paid	(144		)		(134		)		(129		)
Dividends paid to noncontrolling interest	(42		)		(89		)		(35		)
Issuance of notes, net of issuance costs	—				—				593
Debt extinguishment costs	(2		)		—				(104		)
Increase in debt	—				—				2
Proceeds from the exercise of stock options	27				14				—
Employee withholding taxes paid on stock-based compensation	(23		)		(42		)		(33		)
Payment of debt	(8		)		(1		)		(5		)
Credit Agreement and other financing costs	(2		)		—				—
Net cash for financing activities	(1,291		)		(1,020		)		(577		)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures	(162		)		(219		)		(173		)
Acquisition of businesses, net of cash acquired	—				(549		)		(89		)
Proceeds from disposition of:
Businesses, net of cash disposed	722				—				128
Short-term bank deposits	—				108				218
Property and equipment	34				14				24
Other financial investments	1				5				7
Purchases of short-term bank deposits	—				—				(106		)
Other, net	(13		)		(10		)		(34		)
Net cash from (for) investing activities	582				(651		)		(25		)
Effect of exchange rate changes on cash and cash investments	14				4				55
CASH AND CASH INVESTMENTS:
Increase (decrease) for the year	138				(635		)		204
At January 1	559				1,194				990
At December 31	$	697			$	559			$	1,194

See notes to consolidated financial statements.

MASCO CORPORATION and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

For the Years Ended December 31, 2019**,** 2018 and 2017

(In Millions, Except Per Common Share Data)

	Total				Common Shares ($1 par value)				Paid-In Capital				Retained (Deficit) Earnings				Accumulated Other Comprehensive (Loss) Income				Noncontrolling Interest
Balance, January 1, 2017	$	(96	)		$	318			$	—			$	(374	)		$	(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	$	183			$	310			$	—			$	(298	)		$	(65	)		$	236
Reclassification of disproportionate tax effects (Refer to Note O)	—												59				(59		)
Total comprehensive income (loss)	764												734				(3		)		33
Shares issued	(9		)		3				(4		)		(8		)
Shares retired:
Repurchased	(654		)		(19		)		(26		)		(609		)
Surrendered (non-cash)	(19		)										(19		)
Cash dividends declared	(137		)										(137		)
Dividends paid to noncontrolling interest	(89		)																		(89		)
Stock-based compensation	30								30
Balance, December 31, 2018	$	69			$	294			$	—			$	(278	)		$	(127	)		$	180
Total comprehensive income (loss)	924												935				(52		)		41
Shares issued	15				3				12
Shares retired:
Repurchased	(896		)		(20		)		(42		)		(834		)
Surrendered (non-cash)	(10		)		(1		)						(9		)
Cash dividends declared	(146		)										(146		)
Dividends paid to noncontrolling interest	(42		)																		(42		)
Stock-based compensation	30								30
Balance, December 31, 2019	$	(56	)		$	276			$	—			$	(332	)		$	(179	)		$	179

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, 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 control of our products is transferred to our customers, which is generally at the time of shipment or upon delivery based on the contractual terms with our customers. Our customers' payment terms generally range from 30 to 65 days of fulfilling our performance obligations and recognizing revenue.

We provide customer programs and incentive offerings, including special pricing and co-operative advertising arrangements, promotions and other volume-based incentives. These customer programs and incentives are considered variable consideration. We include in revenue variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the variable consideration is resolved. This determination is made based upon known customer program and incentive offerings at the time of sale, and expected sales volume forecasts as it relates to our volume-based incentives. This determination is updated each reporting period.

Certain product sales include a right of return. We estimate future product returns at the time of sale based on historical experience and record a corresponding refund liability. We additionally record an asset, based on historical experience, for the amount of product we expect to return to inventory as a result of the return, which is recorded in prepaid expenses and other in the consolidated balance sheets.

We consider shipping and handling activities performed by us as activities to fulfill the sales of our products. Amounts billed for shipping and handling are included in net sales, while costs incurred for shipping and handling are included in cost of sales. We capitalize incremental costs of obtaining a contract and expense the costs on a straight-line basis over the contractual period if the cost is recoverable, the cost would not have been incurred without the contract and the term of the contract is greater than one year; otherwise, we expense the amounts as incurred. We do not adjust the promised amount of consideration for the effects of a financing component if the period between when we transfer our products or services and when our customers pay for our products or services is expected to be one year or less.

Customer Displays. 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. Occasionally, 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 approximate their fair value. 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.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A. ACCOUNTING POLICIES (Continued)

Receivables. We do significant business with a number of customers, including certain home center retailers. 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 for estimated losses resulting from the inability of our customers to make required payments. 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 $36 million and $33 million at December 31, 2019 and 2018, 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 its carrying amount. If the carrying amount of property and equipment is not recoverable from its undiscounted cash flows, then we would recognize an impairment loss for the difference between the carrying amount and the current fair value. Further, we evaluate the remaining useful lives of property and equipment at each reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods.

Depreciation. Depreciation expense is computed principally using the straight-line method over the estimated useful lives of the assets. Annual depreciation rates are as follows: buildings and land improvements, 2 to 10 percent, computer hardware and software, 17 to 33 percent, and machinery and equipment, 5 to 33 percent. Depreciation expense, including discontinued operations, was $132 million in 2019 and 2018 and $116 million in 2017.

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

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

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

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

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A. ACCOUNTING POLICIES (Continued)

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 primarily 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. In estimating future cash flows, we rely on internally generated five-year forecasts for sales and operating profits, and, currently, a two percent to three percent long-term assumed annual growth rate of cash flows for periods after the five-year forecast. We utilize our weighted average cost of capital of approximately 8.0 percent as the basis to determine the discount rate to apply to the estimated future cash flows. In 2019, 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 12.0 percent for our reporting units. For our Masco Cabinetry reporting unit, we utilized a market approach to determine its fair value instead of the discounted cash flow method, as we were actively marketing the Masco Cabinetry business for sale and on November 14, 2019 we entered into a definitive agreement to sell the business. 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. Potential impairment is identified by comparing the fair value of an other indefinite-lived intangible asset to its carrying value. We utilize a relief-from-royalty model to estimate the fair value of other indefinite-lived intangible assets. 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. We also consider the profitability of the business, among other factors, to determine the royalty rate for use in the impairment assessment. 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 2019, 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 11.0 percent to 13.0 percent for our other indefinite-lived intangible assets.

While we believe that the estimates and assumptions underlying the valuation methodologies are reasonable, different estimates and assumptions could result in different outcomes.

Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. We review our intangible assets with finite useful lives as events occur or circumstances change that would more likely than not reduce the fair value of the assets below its carrying amount. If the carrying amount of the assets is not recoverable from the undiscounted cash flows, then we would recognize an impairment loss for the difference between the carrying amount and the current fair value. We evaluate the remaining useful lives of amortizable intangible assets at each reporting period to determine whether events or circumstances warrant a revision to the remaining periods of amortization.

Refer to Note H 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.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A. ACCOUNTING POLICIES (Continued)

Warranty. We offer 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 T for additional information on our warranty accrual.

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

Litigation. We are involved in claims and litigation, including class actions, mass torts and regulatory proceedings, which arise in the ordinary course of our business. Liabilities and costs associated with these matters require estimates and judgments based upon our professional knowledge and experience and that of our legal counsel. When a liability is probable of being incurred and our exposure in these matters is reasonably estimable, amounts are recorded as charges to earnings. The ultimate resolution of these exposures may differ due to subsequent developments.

Stock-Based Compensation. We issue stock-based incentives in various forms to our employees and non-employee Directors. Outstanding stock-based incentives were in the form of long-term stock awards, stock options, restricted stock units ("RSUs"), phantom stock awards and stock appreciation rights ("SARs"). 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 five years, or the length of time until the grantee becomes retirement-eligible, generally 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, generally at age 65. We measure compensation expense for RSUs at the expected payout of the awards. Such expense is recognized ratably over the three-year vesting period of the units. We recognize forfeitures related to stock awards, stock options and RSUs as they occur.

We initially measure compensation expense for phantom stock awards at the market price of our common stock at the grant date. Such expense is recognized ratably over the vesting period, typically five years. Phantom stock awards are linked to the value of our common stock on the date of grant and are settled in cash upon vesting. We account for phantom stock awards as liability-based awards; 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 measure compensation expense for SARs using a Black-Scholes option pricing model; such expense is recognized ratably over the vesting period, typically five years. 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. 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. Refer to Note L for additional information on stock-based compensation.

Noncontrolling Interest. We owned 68 percent of Hansgrohe SE at both December 31, 2019 and 2018. The aggregate noncontrolling interest, net of dividends, at December 31, 2019 and 2018 has been recorded as a component of equity on our consolidated balance sheets.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A. ACCOUNTING POLICIES (Continued)

Discontinued Operations. We report financial results for discontinued operations separately from continuing operations to distinguish the financial impact of disposal transactions from ongoing operations. Discontinued operations reporting occurs only when the disposal of a component or a group of components represents a strategic shift that will have a major effect on our operations and financial results. In our consolidated statements of cash flows, the cash flow from discontinued operations are not separately classified. Refer to Note B for further information regarding our discontinued operations.

Income Taxes. Deferred taxes are recognized based on the future tax consequences of differences between the financial statement carrying value of assets and liabilities and their respective tax basis. The future realization of deferred tax assets depends on the existence of sufficient taxable income in future periods. Possible sources of taxable income include taxable income in carryback periods, the future reversal of existing taxable temporary differences recorded as a deferred tax liability, tax-planning strategies that generate future income or gains in excess of anticipated losses in the carryforward period and projected future taxable income.

If, based upon all available evidence, both positive and negative, it is more likely than not (more than 50 percent likely) such deferred tax assets will not be realized, a valuation allowance is recorded. Significant weight is given to positive and negative evidence that is objectively verifiable. A company's three-year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable, and the accounting guidance restricts the amount of reliance we can place on projected taxable income to support the recovery of the deferred tax assets.

The current accounting guidance allows the recognition of only those income tax positions that have a greater than 50 percent likelihood of being sustained upon examination by the taxing authorities. We believe that there is an increased potential for volatility in our effective tax rate because this threshold allows for changes in the income tax environment and, to a greater extent, the inherent complexities of income tax law in a substantial number of jurisdictions, which may affect the computation of our liability for uncertain tax positions.

We record interest and penalties on our uncertain tax positions in income tax expense.

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 income (loss). Generally, a disproportionate tax effect will be eliminated and recognized in income tax expense when the circumstances upon which it is premised cease to exist.

The disproportionate tax effect related to various defined-benefit pension plans will be eliminated from accumulated other comprehensive income (loss) at the termination of the related pension plans. The disproportionate tax effect relating to our interest rate swap hedge, which was terminated in 2012, will be eliminated from accumulated other comprehensive income (loss) upon the maturity of the related debt in March 2022.

We record the tax effects of Global Intangible Low-taxed Income related to our foreign operations as a component of income tax expense in the period the tax arises.

Reclassifications. Certain prior year amounts have been reclassified to conform to the 2019 presentation in the consolidated financial statements.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A. ACCOUNTING POLICIES (Concluded)

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

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which improves and simplifies accounting rules around hedge accounting and better portrays the economic results of an entity's risk management activities in its financial statements. We adopted ASU 2017-12 on January 1, 2019. The adoption of the standard did not impact our financial position or results of operations.

In June 2018, the FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," which modifies the accounting for share-based payment awards issued to nonemployees to largely align it with the accounting for share-based payment awards issued to employees. We adopted ASU 2018-07 on January 1, 2019. The adoption of the standard did not impact our financial position or results of operations.

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

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

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for us for annual periods beginning January 1, 2021. Early adoption is permitted. We are currently reviewing the provisions of this new pronouncement and the impact, if any, the adoption of this guidance has on our financial position and results of operations.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. DIVESTITURES

On September 6, 2019, we completed the divestiture of our UK Window Group business ("UKWG"), a manufacturer and distributor of windows and doors, for proceeds of approximately $8 million, of which $2 million net of cash disposed was received upon sale. The remaining $6 million was accounted for as a note receivable that is expected to be collected within the next two years. In connection with the sale, we recognized a loss of $70 million for the year ended December 31, 2019, which is included in income from discontinued operations, net in the consolidated statements of operations.

On November 6, 2019, we completed the divestiture of our Milgard Windows and Doors business ("Milgard"), a manufacturer and distributor of windows and doors for proceeds of approximately $720 million, net of cash disposed, subject to final working capital adjustments. In connection with the sale, we recognized a gain on the divestiture of $368 million for the year ended December 31, 2019, which is included in income from discontinued operations, net in the consolidated statement of operations.

In 2019, we determined that the previously reported Windows and Other Specialty Products segment met the criteria to be classified as a discontinued operation as a result of the combined sale of UKWG and Milgard. These businesses represented all of our windows businesses and all remaining businesses in the Windows and Other Specialty Products segment.

Additionally, on November 14, 2019, we entered into a definitive agreement to sell Masco Cabinetry LLC ("Cabinetry"), a manufacturer of cabinetry products, for approximately $1.0 billion, consisting of $850 million in cash at closing and preferred stock issued by a holding company of the buyer with a liquidation preference of $150 million. The preferred stock will have a coupon of 8 percent until the first anniversary of issuance, 9 percent after the first anniversary and until the second anniversary of issuance,10 percent after the second anniversary of issuance and until the seventh anniversary of issuance, after which the rate will increase by 50 basis points up to a maximum of 15 percent for each period occurring during and after the seventh anniversary until all shares have been redeemed in full. The closing of the sale is expected during the first quarter of 2020, subject to customary closing conditions, and we expect to recognize a gain on the divestiture of approximately $600 million. We determined that the previously reported Cabinetry Products segment met the criteria to be classified as a discontinued operation as Cabinetry represents all of our cabinet businesses and all remaining businesses in the Cabinetry Products segment.

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

As the combined sale of UKWG and Milgard and the planned disposition of Cabinetry each represented a strategic shift that will have a major effect on our operations and financial results, these businesses were presented in discontinued operations separate from continuing operations for all periods presented. In addition, depreciation and amortization, capital expenditures, and significant non-cash operating and investing activities related to discontinued operations were separately disclosed.

The results of the windows businesses recorded in income from discontinued operations before income tax was a loss of $1 million for the year ended December 31, 2019 and income of $40 million and $57 million for the years ended December 31, 2018 and 2017, respectively. The results of the cabinetry business recorded in income from discontinued operations before income tax were income of $107 million, $95 million and $109 million for the years ended December 31, 2019, 2018 and 2017, respectively.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. DIVESTITURES (Continued)

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

	For the Years Ended December 31,
	2019				2018				2017
Net sales	$	1,528			$	1,705			$	1,628
Cost of sales	1,184				1,343				1,236
Gross profit	344				362				392
Selling, general and administrative expenses	232				228				227
Impairment charge for goodwill (A)	7				—				—
Other income (expense), net	1				1				1
Income from discontinued operations	106				135				166
Gain on disposal of discontinued operations, net	298				—				—
Income before income tax	404				135				166
Income tax expense	(108		)		(37		)		(59		)
Income from discontinued operations, net	$	296			$	98			$	107

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

The windows businesses included assets classified as held for sale of $660 million and liabilities classified as held for sale of $257 million in the consolidated balance sheet at December 31, 2018. The cabinetry business included assets classified as held for sale of $528 million and $535 million and liabilities classified as held for sale of $162 million and $158 million in the consolidated balance sheets at December 31, 2019 and 2018, respectively.

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

	December 31, 2019				December 31, 2018
Cash and cash investments	$	—			$	7
Receivables	76				163
Prepaid expenses and other	7				24
Inventories	90				148
Property and equipment, net	157				338
Operating lease right-of-use assets	4				—
Goodwill	181				387
Other intangible assets, net	1				118
Other assets	12				10
Total assets classified as held for sale	$	528			$	1,195
Accounts payable	$	103			$	190
Accrued liabilities	46				105
Other liabilities	13				120
Total liabilities classified as held for sale	$	162			$	415

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. DIVESTITURES (Concluded)

Assets and liabilities classified as held for sale were required to be recorded at the lower of its carrying value or fair value less costs to sell. The estimated fair value less costs to sell of the held for sale businesses exceeded their carrying value, and therefore no adjustment to these long-lived assets was necessary.

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

	For the Years Ended December 31,
	2019				2018				2017
Depreciation and amortization	$	29			$	36			$	34
Capital expenditures	34				38				26
ROU assets obtained in exchange for new lease obligations	3				—				—

In conjunction with the divestiture of Milgard, we have entered into a Transition Services Agreement to provide administrative services subsequent to the separation. The fees for services rendered under the Transition Services Agreement are not expected to be material to our results of operations.

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 before income taxes in the consolidated statement of operations. This divestiture was not accounted for as a discontinued operation.

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 before income taxes in the consolidated statement of operations. This divestiture was not accounted for as a discontinued operation.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

C. ACQUISITIONS

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

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

The goodwill acquired, which is generally tax deductible, is related primarily to the operational and financial synergies we expect to derive from combining Kichler's operations into our business, as well as the assembled workforce. The other intangible assets acquired consist of $59 million of indefinite-lived intangible assets, which is related to trademarks, and $181 million of definite-lived intangible assets. The definite-lived intangible assets consist of $145 million related to customer relationships, which is being amortized on a straight-line basis over 20 years, and $36 million of other definite-lived intangible assets, which is being amortized over a weighted average amortization period of three years.

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.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

D. REVENU****E

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

	Year Ended December 31, 2019
	Plumbing Products				Decorative Architectural Products				Total
Primary geographic markets:
North America	$	2,605			$	2,723			$	5,328
International, principally Europe	1,379				—				1,379
Total	$	3,984			$	2,723			$	6,707

	Year Ended December 31, 2018
	Plumbing Products				Decorative Architectural Products				Total
Primary geographic markets:
North America	$	2,552			$	2,656			$	5,208
International, principally Europe	1,446				—				1,446
Total	$	3,998			$	2,656			$	6,654

	Year Ended December 31, 2017
	Plumbing Products				Decorative Architectural Products				Total (A)
Primary geographic markets:
North America	$	2,362			$	2,206			$	4,568
International, principally Europe	1,370				—				1,370
Total	$	3,732			$	2,206			$	5,938

(A)	Total net sales for 2017 excludes net sales of $76 million relating to divestitures not included in discontinued operations. Divestitures not included in discontinued operations consists of our previously owned Arrow and Moores businesses which were disposed of in 2017.

We recognized increases to revenue of $2 million, $4 million, and $9 million in 2019, 2018, and 2017, respectively, for variable consideration related to performance obligations settled in previous periods.

We record contract assets for items for which we have satisfied our performance obligation but our receipt of payment is contingent upon delivery or other circumstances other than the passage of time. Our contract assets are recorded in prepaid expenses and other in our consolidated balance sheets. Our contract assets generally become unconditional and are reclassified to receivables in the quarter subsequent to each balance sheet date. Our contract asset balance was $2 million at both December 31, 2019 and 2018.

We record contract liabilities primarily for deferred revenue. Our contract liabilities are recorded in accrued liabilities in our consolidated balance sheets. Our contract liabilities are generally recognized to net sales in the immediately subsequent reporting period. Our contract liability balance was $40 million and $39 million at December 31, 2019 and 2018, respectively.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

E. INVENTORIES

	(In Millions) At December 31
	2019				2018
Finished goods	$	485			$	508
Raw materials	211				237
Work in process	58				53
Total	$	754			$	798

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.

F. LEASES

We have operating and finance leases primarily for corporate offices, manufacturing facilities, warehouses, vehicles, and equipment. Our leases have remaining lease terms up to 23 years, some of which may include one or more renewal options with terms to extend the lease for up to an additional 20 years, and some of which may include options to terminate the leases prior to their expiration.

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

	2019
Operating lease cost	$	49
Short-term lease cost	6
Variable lease cost	3
Finance lease cost:
Amortization of right-of-use assets	3
Interest on lease liabilities	1

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

	2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	58
Operating cash flows for finance leases	1
Financing cash flows for finance leases	8
ROU assets obtained in exchange for new lease obligations:
Operating leases	27
Finance leases	—

Certain other information related to leases was as follows:

	At December 31, 2019
Weighted-average remaining lease term:
Operating leases	10 years
Finance leases	11 years
Weighted-average discount rate:
Operating leases	4.6	%
Finance leases	3.4	%

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

F. LEASES (Concluded)

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

	At December 31, 2019
	Operating Leases				Finance Leases
Property and equipment, net	$	—			$	29
Notes payable	—				2
Accrued liabilities	38				—
Long-term debt	—				28
Other liabilities	162				—

Gross ROU assets under finance leases recorded within property and equipment, net were $42 million, and accumulated amortization associated with these leases was $13 million, at December 31, 2019.

At December 31, 2019, future maturities of lease liabilities (under ASC 842) were as follows, in millions:

	Operating Leases				Finance Leases
Year ending December 31,
2020	$	45			$	3
2021	39				3
2022	31				3
2023	21				3
2024	16				4
Thereafter	101				20
Total lease payments	253				36
Less: imputed interest	(53		)		(6		)
Total	$	200			$	30

Rental expense (under ASC 840) recorded in the consolidated statements of operations totaled approximately $63 million and $49 million during 2018 and 2017, respectively.

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

G. PROPERTY AND EQUIPMENT

	(In Millions) At December 31
	2019				2018
Land and improvements	$	64			$	64
Buildings	497				470
Computer hardware and software	232				220
Machinery and equipment	1,103				1,088
	1,896				1,842
Less: Accumulated depreciation	(1,018		)		(957		)
Total	$	878			$	885

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

H. GOODWILL AND OTHER INTANGIBLE ASSETS

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

	Gross Goodwill At December 31, 2019				Accumulated Impairment Losses				Net Goodwill At December 31, 2019
Plumbing Products	$	566			$	(340	)		$	226
Decorative Architectural Products	358				(75		)		283
Total	$	924			$	(415	)		$	509

	Gross Goodwill At December 31, 2018				Accumulated Impairment Losses				Net Goodwill At December 31, 2018				Additions (A)				Other (B)				Net Goodwill At December 31, 2019
Plumbing Products	$	568			$	(340	)		$	228			$	—			$	(2	)		$	226
Decorative Architectural Products	358				(75		)		283				—				—				283
Total	$	926			$	(415	)		$	511			$	—			$	(2	)		$	509

	Gross Goodwill At December 31, 2017				Accumulated Impairment Losses				Net Goodwill At December 31, 2017				Additions (A)				Other (B)				Net Goodwill At December 31, 2018
Plumbing Products	$	574			$	(340	)		$	234			$	—			$	(6	)		$	228
Decorative Architectural Products	294				(75		)		219				64				—				283
Total	$	868			$	(415	)		$	453			$	64			$	(6	)		$	511

(A)	Additions consist of acquisitions.

**(B)**Other consists of the effect of foreign currency translation.

Other indefinite-lived intangible assets were $76 million and $86 million at December 31, 2019 and 2018, respectively, and principally included registered trademarks. During the first quarter of 2019, we recognized a $9 million impairment charge related to a registered trademark in our Decorative Architectural Products segment due to a change in the long-term net sales projections of lighting products. As a result of our 2018 acquisition, other indefinite-lived intangible assets increased by $59 million as of the acquisition date.

We completed our annual impairment testing of goodwill and other indefinite-lived intangible assets in the fourth quarters of 2019, 2018 and 2017. There was no impairment of goodwill for any of our reporting units or of our other indefinite-lived intangible assets in any of these years, other than as disclosed above.

The carrying value of our definite-lived intangible assets was $183 million (net of accumulated amortization of $48 million) at December 31, 2019 and $202 million (net of accumulated amortization of $26 million) at December 31, 2018 and principally included customer relationships with a weighted average amortization period of 17 years in 2019 and 16 years in 2018. Amortization expense, including discontinued operations, related to the definite-lived intangible assets was $23 million, $20 million and $4 million in 2019, 2018 and 2017, respectively. As a result of our 2018 acquisition, definite-lived intangible assets increased by $181 million, as of the acquisition date.

At December 31, 2019, amortization expense related to the definite-lived intangible assets during each of the next five years was as follows: 2020 – $24 million; 2021 – $16 million; 2022 – $12 million, 2023 – $11 million and 2024 –$11 million.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

I. OTHER ASSETS

	(In Millions) At December 31
	2019				2018
Equity method investments	$	11			$	11
Private equity funds	—				1
In-store displays, net	5				10
Deferred tax assets (Note R)	99				42
Other	24				26
Total	$	139			$	90

We recognized amortization expense, including discontinued operations, related to in-store displays of $12 million, $21 million and $25 million in 2019, 2018 and 2017, respectively. Cash spent for displays was $11 million, $10 million and $14 million in 2019, 2018 and 2017, respectively, and is included in other, net within investing activities on the consolidated statements of cash flows.

J. ACCRUED LIABILITIES

	(In Millions) At December 31
	2019				2018
Salaries, wages and commissions	$	141			$	143
Advertising and sales promotion	189				170
Interest	36				40
Warranty (Note T)	31				29
Employee retirement plans	41				40
Insurance reserves	37				31
Property, payroll and other taxes	18				14
Dividends payable	37				36
Deferred revenue	40				39
Product returns	25				22
Operating lease liabilities	38				—
Other	67				81
Total	$	700			$	645

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

K. DEBT

	(In Millions) At December 31
	2019				2018
Notes and debentures:
7.125%, due March 15, 2020	$	—			$	201
3.500%, due April 1, 2021	399				399
5.950%, due March 15, 2022	326				326
4.450%, due April 1, 2025	500				500
4.375%, due April 1, 2026	498				498
3.500%, due November 15, 2027	300				300
7.750%, due August 1, 2029	235				235
6.500%, due August 15, 2032	200				200
4.500%, due May 15, 2047	299				299
Other	30				38
Prepaid debt issuance costs	(14		)		(17		)
	2,773				2,979
Less: Current portion	2				8
Total long-term debt	$	2,771			$	2,971

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

On December 19, 2019, proceeds from the UKWG and Milgard divestitures were used to repay and early retire $201 million of our 7.125% Notes due March 15, 2020. In connection with this early retirement, we incurred a loss on debt extinguishment of $2 million for the year ended 2019, which was recorded in interest expense.

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

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

The Credit Agreement provides for an unsecured revolving credit facility available to us and one of our foreign subsidiaries, in U.S. dollars, European euros, British Pounds Sterling, Canadian dollars and certain other currencies for revolving credit loans, swingline loans and letters of credit. Borrowings under the revolving credit loans denominated in any agreed upon currency other than U.S. dollars are limited to $500 million, equivalent. We can also borrow swingline loans up to $100 million and obtain letters of credit of up to $25 million; outstanding letters of credit under the Credit Agreement reduce our borrowing capacity. At December 31, 2019, we had no outstanding standby letters of credit under the Credit Agreement.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

K. DEBT (Concluded)

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

The Credit Agreement contains financial covenants requiring us to maintain (A) a net leverage ratio, as adjusted for certain items, not exceeding 4.0 to 1.0, and (B) a minimum interest coverage ratio, as adjusted for certain items, not less than 2.5 to 1.0.

In order for us to borrow under the Credit Agreement, there must not be any default in our covenants in the Credit Agreement (i.e., in addition to the two financial covenants, principally limitations on subsidiary debt, negative pledge restrictions, legal compliance requirements and maintenance of properties and insurance) and our representations and warranties in the Credit Agreement must be true in all material respects on the date of borrowing (i.e., principally no material adverse change or litigation likely to result in a material adverse change, since December 31, 2018, no material ERISA or environmental non-compliance, and no material tax deficiency). We were in compliance with all covenants and no borrowings were outstanding at December 31, 2019.

At December 31, 2019, the debt maturities during each of the next five years were as follows: 2020 – $2 million; 2021– $402 million; 2022 – $329 million; 2023 – $3 million and 2024 – $3 million.

Interest paid was $157 million, $155 million and $175 million in 2019, 2018 and 2017, respectively. These amounts exclude $2 million and $104 million of debt extinguishment costs related to the early retirement of debt, which were recorded as interest expense and paid in 2019 and 2017, 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 our short-term and long-term debt at December 31, 2019 was approximately $3.0 billion, compared with the aggregate carrying value of $2.8 billion. The aggregate estimated market value was approximately $3.0 billion, at December 31, 2018, which equaled the aggregate carrying value of short-term and long-term debt at that date.

L. STOCK-BASED COMPENSATION

Our 2014 Long Term Stock Incentive Plan (the "2014 Plan") provides for the issuance of stock-based incentives in various forms to our employees and non-employee Directors. At December 31, 2019, outstanding stock-based incentives were in the form of long-term stock awards, stock options, restricted stock units, and phantom stock awards.

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

	2019				2018				2017
Long-term stock awards	$	20			$	20			$	21
Stock options	4				3				3
Restricted stock units	3				4				2
Phantom stock awards and stock appreciation rights	4				(2		)		8
Total	$	31			$	25			$	34

At December 31, 2019, 13.9 million shares of our common stock were available under the 2014 Plan for the granting of long-term stock awards, stock options and restricted stock units.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

L. STOCK-BASED COMPENSATION (Continued)

Long-Term Stock Awards. Long-term stock awards are granted to our key employees and non-employee Directors and do not cause net share dilution, as we repurchase and retire at least an equal number of shares in the open market. We granted 636,030 shares of long-term stock awards during 2019.

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

	2019				2018				2017
Unvested stock award shares at January 1	2				3				4
Weighted average grant date fair value	$	30			$	24			$	20
Stock award shares granted	1				1				1
Weighted average grant date fair value	$	36			$	41			$	34
Stock award shares vested	1				2				2
Weighted average grant date fair value	$	25			$	21			$	18
Stock award shares forfeited	—				—				—
Weighted average grant date fair value	$	35			$	31			$	24
Unvested stock award shares at December 31	2				2				3
Weighted average grant date fair value	$	34			$	30			$	24

At December 31, 2019, 2018 and 2017, there was $41 million, $46 million and $46 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, 2019, 2018 and 2017.

The total market value (at the vesting date) of stock award shares which vested during 2019, 2018 and 2017 was $31 million, $56 million and $45 million, respectively.

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

We granted 561,280 shares of stock options during 2019 with a grant date weighted-average exercise price of approximately $36 per share. During 2019, 108,086 stock option shares were forfeited (including options that expired unexercised).

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

L. STOCK-BASED COMPENSATION (Continued)

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

	2019				2018				2017
Option shares outstanding, January 1	4				5				7
Weighted average exercise price	$	21			$	16			$	15
Option shares granted	1				—				—
Weighted average exercise price	$	36			$	42			$	34
Option shares exercised	2				1				2
Aggregate intrinsic value on date of exercise (A)	$	33	million		$	55	million		$	47	million
Weighted average exercise price	$	13			$	11			$	15
Option shares forfeited	—				—				—
Weighted average exercise price	$	34			$	31			$	—
Option shares outstanding, December 31	3				4				5
Weighted average exercise price	$	27			$	21			$	16
Weighted average remaining option term (in years)	6				5				4
Option shares vested and expected to vest, December 31	3				4				5
Weighted average exercise price	$	27			$	21			$	16
Aggregate intrinsic value (A)	$	63	million		$	36	million		$	147	million
Weighted average remaining option term (in years)	6				5				4
Option shares exercisable (vested), December 31	2				3				4
Weighted average exercise price	$	21			$	16			$	13
Aggregate intrinsic value (A)	$	47	million		$	34	million		$	123	million
Weighted average remaining option term (in years)	4				4				3

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

At December 31, 2019, 2018 and 2017, there was $9 million, $8 million and $7 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, 2019, 2018 and 2017.

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:

	2019				2018				2017
Weighted average grant date fair value	$	8.81			$	12.34			$	9.68
Risk-free interest rate	2.57		%		2.72		%		2.16		%
Dividend yield	1.35		%		1.02		%		1.19		%
Volatility factor	25.00		%		29.00		%		30.00		%
Expected option life	6 years				6 years				6 years

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

L. STOCK-BASED COMPENSATION (Concluded)

The following table summarizes information for stock option shares outstanding and exercisable at December 31, 2019, 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
$	10 - 12		—		1 year		$11		—		$11
$	18 - 26		2		4 years		$21		2		$20
$	30 - 42		1		8 years		$37		—		$36
$	10 - 42		3		6 years		$27		2		$21

Restricted Stock Units. Under our Long Term Incentive Program, we grant restricted stock units to certain senior executives. These restricted stock units will vest and share awards will be issued at no cost to the employees, subject to our achievement of specified return on invested capital performance goals over a three-year period that have been established by our Organization and Compensation Committee of the Board of Directors ("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% of the target number. During 2019, we granted 126,680 restricted stock units with a grant date fair value of approximately $39 per share, and 15,600 restricted stock units were forfeited. At December 31, 2019, there were 147,199 shares vested, but unissued. During 2018, we granted 113,260 restricted stock units with a grant date fair value of approximately $42 per share, and 11,600 restricted stock units were forfeited. During 2017, we granted 124,780 restricted stock units with a grant date fair value of approximately $34 per share.

Phantom Stock Awards and Stock Appreciation Rights. Certain non-U.S. employees are granted phantom stock awards and historically have been granted SARs.

We recognized expense of $4 million in 2019, income of $1 million in 2018, and expense of $6 million in 2017 related to phantom stock awards. In 2019, 2018 and 2017, we granted 79,500, 98,140, and 104,580 shares, respectively, of phantom stock awards with an aggregate fair value of $3 million in 2019 and $4 million in both 2018 and 2017, and paid cash of $3 million in 2019, $6 million in 2018, and $5 million in 2017 to settle phantom stock awards.

We recognized income of $1 million in 2018 and expense of $2 million in 2017 related to SARs. During 2019, 2018 and 2017, we did not grant any SARs. We paid cash of $2 million, $5 million, and $4 million in 2019, 2018, and 2017, respectively, to settle SARs. At December 31, 2019, there were no outstanding SARs.

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

	Phantom Stock Awards								Stock Appreciation Rights
	At December 31,								At December 31,
	2019				2018				2019				2018
Accrued compensation cost liability	$	5			$	4			$	—			$	2
Unrecognized compensation cost	$	3			$	2			$	—			$	—
Equivalent common shares	—				—				—				—

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

M. EMPLOYEE RETIREMENT PLANS

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

Pre-tax expense included in income from continuing operations related to our retirement plans was as follows, in millions:

	2019				2018				2017
Defined-contribution plans	$	40			$	37			$	43
Defined-benefit pension plans	24				17				29
	$	64			$	54			$	72

In addition to the pre-tax expense related to our defined-benefit pension plans, in 2017 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. In December 2019, our Board of Directors approved a resolution to terminate our qualified domestic defined-benefit pension plans. As a result of this decision, the projected benefit obligations for these plans were increased to reflect the incremental cost to terminate the plans.

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:

	2019								2018
	Qualified				Non-Qualified				Qualified				Non-Qualified
Changes in projected benefit obligation:
Projected benefit obligation at January 1	$	896			$	155			$	961			$	170
Service cost	3				—				3				—
Interest cost	33				6				30				6
Actuarial loss (gain), net	149				13				(48		)		(9		)
Foreign currency exchange	(3		)		—				(7		)		—
Benefit payments	(44		)		(13		)		(43		)		(12		)
Projected benefit obligation at December 31	$	1,034			$	161			$	896			$	155
Changes in fair value of plan assets:
Fair value of plan assets at January 1	$	670			$	—			$	695			$	—
Actual return on plan assets	105				—				(25		)		—
Foreign currency exchange	(1		)		—				(4		)		—
Company contributions	56				13				52				12
Expenses, other	(6		)		—				(5		)		—
Benefit payments	(44		)		(13		)		(43		)		(12		)
Fair value of plan assets at December 31	$	780			$	—			$	670			$	—
Funded status at December 31	$	(254	)		$	(161	)		$	(226	)		$	(155	)

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

M. EMPLOYEE RETIREMENT PLANS (Continued)

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

	At December 31, 2019								At December 31, 2018
	Qualified				Non-Qualified				Qualified				Non-Qualified
Other assets	$	1			$	—			$	1			$	—
Accrued liabilities	(1		)		(13		)		(1		)		(13		)
Other liabilities	(254		)		(148		)		(226		)		(142		)
Total net liability	$	(254	)		$	(161	)		$	(226	)		$	(155	)

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

	At December 31, 2019								At December 31, 2018
	Qualified				Non-Qualified				Qualified				Non-Qualified
Net loss	$	520			$	57			$	448			$	47
Net prior service cost	4				—				3				—
Total	$	524			$	57			$	451			$	47

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

	At December 31
	2019								2018
	Qualified				Non-Qualified				Qualified				Non-Qualified
Projected benefit obligation	$	1,019			$	161			$	882			$	155
Accumulated benefit obligation	1,019				161				882				155
Fair value of plan assets	763				—				655				—

The projected benefit obligation was in excess of plan assets for all of our qualified defined-benefit pension plans at December 31, 2019 and 2018 which had an accumulated benefit obligation in excess of plan assets.

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

	2019								2018								2017
	Qualified				Non-Qualified				Qualified				Non-Qualified				Qualified				Non-Qualified
Service cost	$	3			$	—			$	3			$	—			$	3			$	—
Interest cost	39				6				36				6				44				6
Expected return on plan assets	(44		)		—				(48		)		—				(46		)		—
Recognized net loss	18				2				17				3				19				3
Net periodic pension cost	$	16			$	8			$	8			$	9			$	20			$	9

We expect to recognize $26 million of pre-tax net loss from accumulated other comprehensive loss into net periodic pension cost in 2020 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.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

M. EMPLOYEE RETIREMENT PLANS (Continued)

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

	2019			2018
Equity securities	41	%		34	%
Debt securities	54	%		49	%
Other	5	%		17	%
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."

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, 2019 compared to December 31, 2018.

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 net asset value ("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. As there are no remaining investments valued at NAV, 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 no unfunded commitments or other restrictions associated with these investments.

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

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, 2019 and 2018, 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)

M. EMPLOYEE RETIREMENT PLANS (Continued)

	At December 31, 2019
	Level 1				Level 2				Level 3				Valued at NAV				Total
Plan Assets
Common and Preferred Stocks:
United States	$	85			$	—			$	—			$	82			$	167
International	47				—				—				110				157
Private Equity and Hedge Funds:
United States	—				—				2				—				2
International	—				—				17				—				17
Corporate Debt Securities:
United States	74				—				—				124				198
International	—				1				—				—				1
Government and Other Debt Securities:
United States	—				3				—				148				151
International	29				38				—				—				67
Common Collective Trust Fund – United States	—				4				—				—				4
Buy-in Annuity - International	—				12				—				—				12
Short-Term and Other Investments:
United States	2				—				—				—				2
International	2				—				—				—				2
Total Plan Assets	$	239			$	58			$	19			$	464			$	780

	At December 31, 2018
	Level 1				Level 2				Level 3				Valued at NAV				Total
Plan Assets
Common and Preferred Stocks:
United States	$	81			$	—			$	—			$	21			$	102
International	37				—				—				89				126
Private Equity and Hedge Funds:
United States	—				—				32				—				32
International	—				—				27				34				61
Corporate Debt Securities:
United States	34				—				—				102				136
International	—				1				—				—				1
Government and Other Debt Securities:
United States	—				2				—				130				132
International	29				33				—				—				62
Common Collective Trust Fund – United States	—				4				—				—				4
Buy-in Annuity - International	—				11				—				—				11
Short-Term and Other Investments:
United States	1				—				—				—				1
International	2				—				—				—				2
Total Plan Assets	$	184			$	51			$	59			$	376			$	670

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

M. EMPLOYEE RETIREMENT PLANS (Continued)

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

	2019				2018
Fair Value, January 1	$	59			$	60
Purchases	4				6
Sales	(41		)		(12		)
Unrealized (losses) gains	(3		)		5
Fair Value, December 31	$	19			$	59

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

	2019			2018			2017
Discount rate for obligations	2.50	%		3.80	%		3.30	%
Expected return on plan assets	3.00	%		7.00	%		7.25	%
Rate of compensation increase	—	%		—	%		—	%
Discount rate for net periodic pension cost	3.80	%		3.30	%		3.50	%

The discount rate for obligations for 2019, 2018 and 2017 is based primarily upon the expected duration of each defined-benefit pension plan's liabilities matched to the December 31, 2019, 2018 and 2017 Willis Towers Watson Rate Link Curve. At December 31, 2019, such rates for our defined-benefit pension plans ranged from 1.1 percent to 3.0 percent, with the most significant portion of the liabilities having a discount rate for obligations of 2.4 percent or higher. At December 31, 2018, such rates for our defined-benefit pension plans ranged from 1.5 percent to 4.2 percent, with the most significant portion of the liabilities having a discount rate for obligations of 4.1 percent or higher. 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. The decrease in the weighted average discount rate from 2019 to 2018 is principally the corresponding cost to terminate the domestic qualified defined-benefit pension plans, as well as, lower long-term interest rates in the bond markets. The increase in the weighted average discount rate from 2017 to 2018 is principally the result of higher long-term interest rates in the bond markets.

For 2019, we determined the expected long-term rate of return on plan assets of 3.00 percent for our domestic qualified defined-benefit pension plans 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 and the decision to terminate these plans in 2021. For 2019 our weighted average projected long-term rate of return on plan assets for the foreign qualified defined-benefit pension plans was 3.9 percent. For 2018 and 2017, our projected long-term rate of return on plan assets were 7.00 percent and 7.25 percent, respectively. The projected asset return at December 31, 2019, 2018 and 2017 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 17.7 percent, negative 4.9 percent and positive 13.9 percent in 2019, 2018 and 2017, respectively. For the 10-year period ended December 31, 2019, the actual annual rate of return on our pension plan assets was 7.4 percent.

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 2019, we made substantial progress toward achieving our targeted asset allocation: 30 percent equities, 65 percent fixed-income, and 5 percent alternative investments (such as private equity, commodities and hedge funds).

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

M. EMPLOYEE RETIREMENT PLANS (Concluded)

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 3.00 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. In anticipation of our decision to terminate the domestic qualified defined-benefit pension plans, we sold the majority of our alternative investments. Plan assets associated with private equity and hedge funds were $19 million at December 31, 2019, compared to $93 million at December 31, 2018.

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 significant 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, 2019 and 2018, respectively.

Cash Flows. At December 31, 2019, we expect to contribute approximately $50 million to our domestic qualified defined-benefit pension plans in 2020, which will exceed ERISA requirements. We also expect to contribute approximately $1 million and $13 million in 2020 to our foreign and non-qualified (domestic) defined-benefit pension plans, respectively.

At December 31, 2019, 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
2020	$	49			$	13
2021	834				12
2022	5				12
2023	5				12
2024	6				12
2025 - 2029	32				53

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

N. SHAREHOLDERS' EQUITY

In September 2019, our Board of Directors authorized the repurchase, for retirement, of up to $2.0 billion of shares of our common stock in open-market transactions or otherwise, replacing the previous authorization established by our Board of Directors in 2017. In November 2019, we entered into an accelerated stock repurchase transaction whereby we agreed to repurchase a total of $400 million of our common stock with an initial delivery of 7.3 million shares. This transaction will be completed in February 2020, at which time we anticipate we will receive, at no additional cost, 1.2 million additional shares of our common stock resulting from expected changes in the volume weighted average stock price of our common stock over the term of the transaction.

During 2019, we repurchased and retired 20.1 million shares of our common stock (including 0.6 million shares to offset the dilutive impact of long-term stock awards granted in 2019), for cash aggregating $896 million. At December 31, 2019, we had $1.5 billion remaining under the 2019 authorization. During 2018, we repurchased and retired 18.6 million shares of our common stock (including 0.7 million shares to offset the dilutive impact of long-term stock awards granted in 2018) for cash aggregating $654 million. 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.

On the basis of amounts paid (declared), cash dividends per common share were $0.495 ($0.510) in 2019, $0.435 ($0.450) in 2018 and $0.405 ($0.410) in 2017.

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

	At December 31
	2019				2018
Cumulative translation adjustments, net	$	273			$	266
Unrealized loss on interest rate swaps, net	(8		)		(10		)
Unrecognized net loss and prior service cost, net	(444		)		(383		)
Accumulated other comprehensive loss	$	(179	)		$	(127	)

The cumulative translation adjustment, net, is reported net of income tax benefit of $1 million and $2 million at December 31, 2019 and 2018, respectively. The unrealized loss on interest rate swaps, net, is reported net of income tax expense of $4 million at both December 31, 2019 and 2018. The unrecognized net loss and prior service cost, net, is reported net of income tax benefit of $117 million and $98 million at December 31, 2019 and 2018, respectively.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

O. RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE LOSS

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

Accumulated Other Comprehensive Loss		2019				2018				2017				Statement of Operations Line Item
Amortization of defined-benefit pension and other postretirement benefits:
Actuarial losses, net		$	20			$	20			$	86			Other income (expense), net
Tax (benefit)		(5		)		(5		)		(13		)
Net of tax (A)		$	15			$	15			$	73
Interest rate swaps		$	2			$	2			$	4			Interest expense
Tax (benefit)		—				—				(1		)
Net of tax		$	2			$	2			$	3

(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.

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

P. SEGMENT INFORMATION

Our reportable segments are as follows:

Plumbing Products – principally includes faucets, plumbing system components and valves, showerheads and handheld showers, tubs and shower bases and enclosures, toilets, spas, exercise pools and water handling systems.

Decorative Architectural Products – principally includes paints and other coating products, lighting fixtures and LED lighting systems, and cabinet and other hardware.

The above products are sold to the residential repair and remodel and to a lesser extent the new home construction markets through home center retailers, online retailers, mass merchandisers, hardware stores, homebuilders, distributors 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.

Other than those assets specifically identified within a segment, corporate assets consist primarily of property and equipment, right-of-use assets, deferred tax assets, 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 and, other than general corporate expense, allocate specific corporate overhead to each segment.

As described in Note B, our previously reported Windows and Other Specialty Products as well as Cabinetry Products segments have been classified as discontinued operations, which required retrospective application to the balance sheets and statements of operations, as well as, additional disclosures of certain cash flow financial information for all periods presented. Amounts for shared general and administrative operating expenses that were allocated to these businesses in prior periods have been re-allocated to general corporate expense.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

P. SEGMENT INFORMATION (Continued)

Divestitures not included in discontinued operations consists of our previously owned Arrow and Moores businesses which were disposed of in 2017, but were not accounted for as discontinued operations.

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

	Net Sales (1)(2)(3)(4)												Operating Profit (5)												Assets at December 31 (6)
	2019				2018				2017				2019				2018				2017				2019				2018				2017
Our operations by segment were:
Plumbing Products	$	3,984			$	3,998			$	3,732			$	708			$	715			$	702			$	2,375			$	2,253			$	2,298
Decorative Architectural Products	2,723				2,656				2,206				480				456				438				1,526				1,534				965
Total	$	6,707			$	6,654			$	5,938			$	1,188			$	1,171			$	1,140			$	3,901			$	3,787			$	3,263
Our operations by geographic area were:
North America	$	5,328			$	5,208			$	4,568			$	987			$	954			$	924			$	2,785			$	2,729			$	2,131
International, principally Europe	1,379				1,446				1,370				201				217				216				1,116				1,058				1,132
Total, as above	6,707				6,654				5,938				1,188				1,171				1,140				3,901				3,787				3,263
Divestitures not included in discontinued operations	—				—				76				—				—				(6		)
Net sales, as reported	$	6,707			$	6,654			$	6,014
General corporate expense, net (5)													(100		)		(94		)		(105		)
Operating profit, as reported													1,088				1,077				1,029
Other income (expense), net													(174		)		(170		)		(311		)
Income from continuing operations before income taxes													$	914			$	907			$	718
Corporate assets																									598				411				1,069
Assets held for sale																									528				1,195				1,202
Total assets																									$	5,027			$	5,393			$	5,534

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

P. SEGMENT INFORMATION (Concluded)

	Property Additions (7)												Depreciation and Amortization
	2019				2018				2017				2019				2018				2017
Our operations by segment were:
Plumbing Products	$	108			$	120			$	115			$	80			$	77			$	63
Decorative Architectural Products	18				54				19				41				35				16
	126				174				134				121				112				79
Unallocated amounts, principally related to corporate assets	2				7				12				9				8				13
Divestitures not included in discontinued operations	—				—				1				—				—				1
Discontinued operations	34				38				26				29				36				34
Total	$	162			$	219			$	173			$	159			$	156			$	127

(1)	Included in net sales were export sales from the U.S. of $244 million, $237 million and $207 million in 2019, 2018 and 2017, respectively.

(2)	Excluded from net sales were intra-company sales between segments of less than one percent in 2019, 2018 and 2017.

(3)	Included in net sales were sales to one customer of $2,481 million, $2,457 million and $2,341 million in 2019, 2018 and 2017, respectively. Such net sales were included in each of our segments.

(4)	Net sales from our operations in the U.S. were $5,127 million, $5,034 million and $4,352 million in 2019, 2018 and 2017, respectively.

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

(6)	Long-lived assets of our operations in the U.S. and Europe were $1,198 million and $470 million, $1,119 million and $446 million, and $777 million and $431 million at December 31, 2019, 2018 and 2017, respectively.

(7)	Property additions exclude amounts paid for long-lived assets as part of acquisitions. Refer to Note C for further information.

Q. OTHER INCOME (EXPENSE), NET

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

	2019				2018				2017
Loss on sales of businesses, net (A)	$	—			$	—			$	(13	)
Income from cash and cash investments and short-term bank deposits	3				5				4
Equity investment income, net	1				3				1
Realized gains from private equity funds	—				1				3
Impairment of private equity funds	—				—				(2		)
Foreign currency transaction gains (losses)	2				(8		)		—
Net periodic pension and post-retirement benefit cost	(21		)		(14		)		(26		)
Other items, net	—				(1		)		1
Total other, net	$	(15	)		$	(14	)		$	(32	)

(A) Included in loss on sales of businesses, net for 2017 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)

R. INCOME TAXES

									(In Millions)
	2019				2018				2017
Income from continuing operations before income taxes:
U.S.	$	684			$	670			$	562
Foreign	230				237				156
	$	914			$	907			$	718
Income tax expense:
Currently payable:
U.S. Federal	$	155			$	115			$	142
State and local	46				29				22
Foreign	70				74				67
Deferred:
U.S. Federal	(23		)		12				12
State and local	(15		)		—				—
Foreign	(3		)		(9		)		2
	$	230			$	221			$	245
Deferred tax assets at December 31:
Receivables	$	7			$	3
Inventories	15				16
Other assets, including stock-based compensation	15				23
Accrued liabilities	48				58
Long-term liabilities	176				149
Net operating loss carryforward	63				51
Tax credit carryforward	9				9
	333				309
Valuation allowance	(38		)		(43		)
	295				266
Deferred tax liabilities at December 31:
Property and equipment	73				87
Operating lease right-of-use assets	42				—
Intangibles	71				139
Investment in foreign subsidiaries	10				9
Other	22				14
	218				249
Net deferred tax asset at December 31	$	77			$	17

The net deferred tax asset consisted of net deferred tax assets (included in other assets) of $99 million and $42 million, and net deferred tax liabilities (included in other liabilities) of $22 million and $25 million, at December 31, 2019 and 2018, respectively.

We continue to maintain a valuation allowance on certain state and foreign deferred tax assets as of December 31, 2019. Should we determine that we would not be able to realize our remaining deferred tax assets, or the deferred tax assets that currently have a valuation allowance become realizable 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)

R. INCOME TAXES (Continued)

The current portion of the state and local income tax includes an $8 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 in 2019, 2018 and 2017, respectively. The deferred portion of the state and local taxes includes a $1 million tax benefit in 2019, 2018 and 2017, resulting from changes in valuation allowances against state and local deferred tax assets. The deferred portion of the foreign taxes includes a $4 million and $2 million tax benefit in 2019 and 2018, respectively, from a change in the valuation allowances against foreign deferred tax assets.

Due to the enactment of the Tax Cuts and Jobs Act of 2017 ("2017 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 2017 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 did not pay 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.

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 may repatriate earnings from certain foreign subsidiaries. Our deferred tax balance on investment in foreign subsidiaries reflects the impact of all taxable temporary differences, including those related to substantially all undistributed foreign earnings, except those that are legally restricted. As a result of the enactment of the 2017 Tax Act, our deferred tax balance on investment in foreign subsidiaries consists primarily of foreign withholding taxes.

Of the $72 million and $60 million deferred tax assets related to the net operating loss and tax credit carryforwards at December 31, 2019 and 2018, respectively, $44 million and $32 million, respectively, will expire between 2021 and 2036 and $28 million has no expiration.

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

	2019			2018			2017
U.S. Federal statutory tax rate	21	%		21	%		35	%
State and local taxes, net of U.S. Federal tax benefit	3			3			2
Higher (lower) taxes on foreign earnings	2			2			(1	)
U.S. and foreign taxes on distributed and undistributed foreign earnings	1			1			1
Domestic production deduction	—			—			(1	)
Stock-based compensation	(1	)		(2	)		(3	)
Business divestitures with no tax impact	—			—			5
Change in U.S. Federal tax law	—			—			(3	)
Other, net	(1	)		(1	)		(1	)
Effective tax rate	25	%		24	%		34	%

Income taxes paid were $384 million, $231 million and $258 million in 2019, 2018 and 2017, respectively.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

R. INCOME TAXES (Concluded)

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, 2018	$	54			$	8			$	62
Current year tax positions:
Additions	13				—				13
Reductions	(1		)		—				(1		)
Prior year tax positions:
Additions	1				—				1
Reductions	(1		)		—				(1		)
Lapse of applicable statute of limitations	(8		)		—				(8		)
Interest and penalties recognized in income tax expense	—				1				1
Balance at December 31, 2018	$	58			$	9			$	67
Current year tax positions:
Additions	14				—				14
Reductions	(1		)		—				(1		)
Prior year tax positions:
Additions	1				—				1
Lapse of applicable statute of limitations	(9		)		—				(9		)
Interest and penalties recognized in income tax expense	—				1				1
Balance at December 31, 2019	$	63			$	10			$	73

If recognized, $50 million and $46 million of the liability for uncertain tax positions at December 31, 2019 and 2018, respectively, net of any U.S. Federal tax benefit, would impact our effective tax rate.

Of the $73 million and $67 million total liability for uncertain tax positions (including related interest and penalties) at December 31, 2019 and 2018, respectively, $68 million and $64 million are recorded in other liabilities, respectively, and $5 million and $3 million are recorded as a net offset to other assets, 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 2018. With few exceptions, we are no longer subject to state or foreign income tax examinations on filed returns for years before 2016.

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 $9 million.

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

S. INCOME 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:

	2019				2018				2017
Numerator (basic and diluted):
Income from continuing operations	$	639			$	636			$	426
Less: Allocation to unvested restricted stock awards	4				6				4
Income from continuing operations attributable to common shareholders	635				630				422
Income from discontinued operations, net	296				98				107
Less: Allocation to unvested restricted stock awards	2				1				1
Income from discontinued operations, net attributable to common shareholders	294				97				106
Net income attributable to common shareholders	$	929			$	727			$	528
Denominator:
Basic common shares (based upon weighted average)	287				305				314
Add: Stock option dilution	1				2				4
Diluted common shares	288				307				318

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 income per common share, using the "two-class method." The two-class method of computing income per common share is an allocation method that calculates income 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, 2019, 2018 and 2017, we allocated dividends and undistributed earnings to the participating securities.

Additionally, 854,000, 710,000 and 354,000 common shares for 2019, 2018 and 2017, respectively, related to stock options and 20,000 common shares for 2018, related to restricted stock units were excluded from the computation of diluted income per common share due to their antidilutive effect.

Common shares outstanding included on our balance sheet and for the calculation of income per common share do not include unvested stock awards (2 million common shares at both December 31, 2019 and 2018); shares outstanding for legal requirements included all common shares that have voting rights (including unvested stock awards).

MASCO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

T. OTHER COMMITMENTS AND CONTINGENCIES

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

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

	2019				2018
Balance at January 1	$	81			$	78
Accruals for warranties issued during the year	34				34
Accruals related to pre-existing warranties	1				(2		)
Settlements made (in cash or kind) during the year	(31		)		(29		)
Other, net (including currency translation)	(1		)		—
Balance at December 31	$	84			$	81

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)

U. 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
2019
Net sales		$	6,707			$	1,639			$	1,716			$	1,839			$	1,513
Gross profit		$	2,371			$	565			$	611			$	673			$	522
Income from continuing operations		$	639			$	158			$	163			$	211			$	107
Net income (1)		$	935			$	453			$	126			$	240			$	116
Income per common share:
Basic:
Income from continuing operations		$	2.21			$	0.56			$	0.57			$	0.73			$	0.36
Net income		$	3.24			$	1.60			$	0.44			$	0.82			$	0.39
Diluted:
Income from continuing operations		$	2.20			$	0.56			$	0.56			$	0.72			$	0.36
Net income		$	3.22			$	1.59			$	0.44			$	0.82			$	0.39
2018
Net sales		$	6,654			$	1,635			$	1,665			$	1,838			$	1,516
Gross profit		$	2,327			$	568			$	570			$	648			$	541
Income from continuing operations		$	636			$	172			$	150			$	178			$	136
Net income		$	734			$	194			$	180			$	211			$	149
Income per common share:
Basic:
Income from continuing operations		$	2.06			$	0.57			$	0.49			$	0.58			$	0.43
Net income		$	2.38			$	0.65			$	0.59			$	0.69			$	0.48
Diluted:
Income from continuing operations		$	2.05			$	0.57			$	0.49			$	0.57			$	0.43
Net income		$	2.37			$	0.64			$	0.58			$	0.68			$	0.47

(1)	Net income includes $295 million and $(37) million of income (loss) from discontinued operations, net for the quarters ended December 31, 2019 and September 30, 2019, respectively, which includes the gain (loss) on the sale of the Milgard and UKWG divestitures, respectively.

Income per common share amounts for the four quarters of December 31, 2019 and 2018 may not total to the income per common share amounts for the years ended December 31, 2019 and 2018 due to the allocation of income to participating securities.