MASCO CORP /DE/, 10-K filed on 2/8/2018
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2017
Jan. 31, 2018
Jun. 30, 2017
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
MASCO CORP /DE/ 
 
 
Entity Central Index Key
0000062996 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
FY 
 
 
Amendment Flag
false 
 
 
Entity Common Stock, Shares Outstanding
 
313,391,500 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
 
 
$ 12,100,656,000 
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current Assets:
 
 
Cash and cash investments
$ 1,194 
$ 990 
Short-term bank deposits
108 
201 
Receivables
1,021 
917 
Inventories
796 
712 
Prepaid expenses and other
96 
114 
Total current assets
3,215 
2,934 
Property and equipment, net
1,129 
1,060 
Goodwill
841 
832 
Other intangible assets, net
187 
154 
Other assets
116 
157 
Total assets
5,488 
5,137 
Current Liabilities:
 
 
Accounts payable
824 
800 
Notes payable
116 
Accrued liabilities
688 
658 
Total current liabilities
1,628 
1,460 
Long-term debt
2,969 
2,995 
Other liabilities
715 
785 
Total liabilities
5,312 
5,240 
Commitments and contingencies (Note S)
   
   
Masco Corporation's shareholders' equity
 
 
Masco Corporation's shareholders' equity: Common shares, par value $1 per share Authorized shares: 1,400,000,000; Issued and outstanding: 2017 – 310,400,000; 2016 – 318,000,000
310 
318 
Preferred shares authorized: 1,000,000; Issued and outstanding: 2017 and 2016 – None
Paid-in capital
Retained deficit
(305)
(381)
Accumulated other comprehensive loss
(65)
(235)
Total Masco Corporation's shareholders' deficit
(60)
(298)
Noncontrolling interest
236 
195 
Total equity (deficit)
176 
(103)
Total liabilities and equity
$ 5,488 
$ 5,137 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Dec. 31, 2017
Dec. 31, 2016
Statement of Financial Position [Abstract]
 
 
Common shares, par value (in dollars per share)
$ 1 
$ 1 
Common shares, shares authorized
1,400,000,000 
1,400,000,000 
Common shares, shares issued
310,400,000 
318,000,000 
Common shares, shares outstanding
310,400,000 
318,000,000 
Preferred shares, shares authorized
1,000,000 
1,000,000 
Preferred shares, shares issued
Preferred shares, shares outstanding
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Income Statement [Abstract]
 
 
 
Net sales
$ 7,644 
$ 7,357 
$ 7,142 
Cost of sales
5,033 
4,901 
4,889 
Gross profit
2,611 
2,456 
2,253 
Selling, general and administrative expenses
1,442 
1,403 
1,339 
Operating profit
1,169 
1,053 
914 
Other income (expense), net:
 
 
 
Interest expense
(278)
(229)
(225)
Other, net
(6)
Total other income (expense), net
(284)
(223)
(225)
Income from continuing operations before income taxes
885 
830 
689 
Income tax expense
305 
296 
293 
Income from continuing operations
580 
534 
396 
Loss from discontinued operations, net
(2)
Net income
580 
534 
394 
Less: Net income attributable to noncontrolling interest
47 
43 
39 
Net income attributable to Masco Corporation
533 
491 
355 
Basic:
 
 
 
Income from continuing operations (in dollars per share)
$ 1.68 
$ 1.49 
$ 1.04 
Loss from discontinued operations, net (in dollars per share)
$ 0.00 
$ 0.00 
$ (0.01)
Net income (in dollars per share)
$ 1.68 
$ 1.49 
$ 1.03 
Diluted:
 
 
 
Income from continuing operations (in dollars per share)
$ 1.66 
$ 1.47 
$ 1.03 
Loss from discontinued operations, net (in dollars per share)
$ 0.00 
$ 0.00 
$ (0.01)
Net income (in dollars per share)
$ 1.66 
$ 1.47 
$ 1.02 
Amounts attributable to Masco Corporation:
 
 
 
Income from continuing operations
533 
491 
357 
Loss from discontinued operations, net
(2)
Net income attributable to Masco Corporation
$ 533 
$ 491 
$ 355 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
Net income
$ 580 
$ 534 
$ 394 
Less: Net income attributable to noncontrolling interest
47 
43 
39 
Net income attributable to Masco Corporation
533 
491 
355 
Other comprehensive income (loss), net of tax (Note N):
 
 
 
Cumulative translation adjustment
133 
(78)
(96)
Interest rate swaps
Pension and other post-retirement benefits
63 
(15)
26 
Realized loss on available-for-sale securities
12 
Other comprehensive income (loss)
199 
(80)
(68)
Less: Other comprehensive income (loss) attributable to the noncontrolling interest:
 
 
 
Cumulative translation adjustment
28 
(10)
(16)
Pension and other post-retirement benefits
Less: Other comprehensive (loss) income attributable to noncontrolling interest
29 
(10)
(14)
Other comprehensive income (loss) attributable to Masco Corporation
170 
(70)
(54)
Total comprehensive income
779 
454 
326 
Less: Total comprehensive income attributable to noncontrolling interest
76 
33 
25 
Total comprehensive income attributable to Masco Corporation
$ 703 
$ 421 
$ 301 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$ 580 
$ 534 
$ 394 
Depreciation and amortization
127 
134 
133 
Display amortization
25 
25 
20 
Deferred income taxes
10 
130 
212 
Employee withholding taxes paid on stock-based compensation
33 
40 
36 
(Gain) on disposition of investments, net
(4)
(4)
(7)
Loss on disposition of businesses, net
13 
Pension and other postretirement benefits
(38)
(78)
(18)
Impairment of financial investments, net
Impairment of property and equipment, net
Stock-based compensation
38 
29 
41 
Increase in receivables
(127)
(120)
(104)
(Increase) decrease in inventories
(76)
(39)
17 
Increase in accounts payable and accrued liabilities, net
53 
71 
82 
Debt extinguishment costs
104 
40 
Other, net
11 
27 
Net cash from operating activities
751 
789 
810 
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
 
 
 
Retirement of notes
(535)
(1,300)
(500)
Purchase of Company common stock
(331)
(459)
(456)
Cash dividends paid
(129)
(128)
(126)
Dividends paid to noncontrolling interest
(35)
(31)
(36)
Cash distributed to TopBuild Corp.
(63)
Issuance of TopBuild Corp. debt
200 
Issuance of notes, net of issuance costs
593 
889 
497 
Debt extinguishment costs
(104)
(40)
Increase in debt
Issuance of Company common stock
Employee withholding taxes paid on stock-based compensation
33 
40 
36 
Payment of debt
(5)
(4)
(4)
Credit Agreement and other financing costs
(3)
Net cash for financing activities
(577)
(1,109)
(521)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(173)
(180)
(158)
Acquisition of businesses, net of cash acquired
(89)
(41)
Proceeds from disposition of:
 
 
 
Businesses, net of cash disposed
128 
Short-term bank deposits
218 
251 
279 
Property and equipment
24 
18 
Other financial investments
32 
10 
Purchases of short-term bank deposits
(106)
(211)
(253)
Other, net
(34)
(16)
(44)
Net cash for investing activities
(25)
(124)
(189)
Effect of exchange rate changes on cash and cash investments
55 
(34)
(15)
CASH AND CASH INVESTMENTS:
 
 
 
Increase (decrease) for the year
204 
(478)
85 
At January 1
990 
1,468 
1,383 
At December 31
$ 1,194 
$ 990 
$ 1,468 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (USD $)
In Millions, unless otherwise specified
Total
Common Shares ($1 par value)
Paid-In Capital
Retained Earnings (Deficit)
Accumulated Other Comprehensive Income (Loss)
Noncontrolling Interest
Balance at Dec. 31, 2014
$ 1,128 
$ 345 
$ 0 
$ 690 
$ (111)
$ 204 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Total comprehensive income (loss)
326 
 
 
355 
(54)
25 
Shares issued
(15)
(18)
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(456)
(17)
(65)
(374)
 
 
Surrendered (non-cash)
(18)
(1)
 
(17)
 
 
Cash dividends declared
(126)
 
 
(126)
 
 
Dividends paid to noncontrolling interest
(36)
 
 
 
 
(36)
Separation of TopBuild Corp.
(828)
 
 
(828)
 
 
Stock-based compensation
83 
 
83 
 
 
 
Balance at Dec. 31, 2015
58 
330 
(300)
(165)
193 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Total comprehensive income (loss)
454 
 
 
491 
(70)
33 
Shares issued
(24)
(27)
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(459)
(15)
(14)
(430)
 
 
Surrendered (non-cash)
(14)
 
 
(14)
 
 
Cash dividends declared
(128)
 
 
(128)
 
 
Dividends paid to noncontrolling interest
(31)
 
 
 
 
(31)
Stock-based compensation
41 
 
41 
 
 
 
Balance at Dec. 31, 2016
(103)
318 
(381)
(235)
195 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Total comprehensive income (loss)
779 
 
 
533 
170 
76 
Shares issued
(19)
(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 at Dec. 31, 2017
$ 176 
$ 310 
$ 0 
$ (305)
$ (65)
$ 236 
ACCOUNTING POLICIES
ACCOUNTING POLICIES
ACCOUNTING POLICIES
Principles of Consolidation.    The consolidated financial statements include the accounts of Masco Corporation and all majority-owned subsidiaries. All significant intercompany transactions have been eliminated. We consolidate the assets, liabilities and results of operations of variable interest entities for which we are the primary beneficiary.
Use of Estimates and Assumptions in the Preparation of Financial Statements.    The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates and assumptions.
Revenue Recognition.    We recognize revenue as title to products and risk of loss is transferred to customers or when services are rendered, net of applicable provisions for discounts, returns and allowances. Amounts billed for shipping and handling are included in net sales, while costs incurred for shipping and handling are included in cost of sales.
Customer Promotion Costs.    We record estimated reductions to revenue for customer programs and incentive offerings, including special pricing and certain co-operative advertising arrangements, promotions and other volume-based incentives. In-store displays that are owned by us and used to market our products are included in other assets in the consolidated balance sheets and are amortized using the straight-line method over the expected useful life of three to five years; related amortization expense is classified as a selling expense in the consolidated statement of operations.
Foreign Currency.    The financial statements of our foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at exchange rates as of the balance sheet dates. Revenues and expenses are translated at average exchange rates in effect during the year. The resulting cumulative translation adjustments have been recorded in the accumulated other comprehensive loss component of shareholders' equity. Realized foreign currency transaction gains and losses are included in the consolidated statements of operations in other income (expense), net.
Cash and Cash Investments.    We consider all highly liquid investments with an initial maturity of three months or less to be cash and cash investments.
Short-Term Bank Deposits.    We invest a portion of our foreign excess cash in short-term bank deposits. These highly liquid investments have original maturities between three and twelve months and are valued at cost, which approximates fair value at December 31, 2017 and 2016. These short-term bank deposits are classified in the current assets section of our consolidated balance sheets, and interest income related to short-term bank deposits is recorded in our consolidated statements of operations in other income (expense), net.
Receivables.    We do significant business with a number of customers, including certain home center retailers and homebuilders. We monitor our exposure for credit losses on our customer receivable balances and the credit worthiness of our customers on an on-going basis and record related allowances for doubtful accounts. Allowances are estimated based upon specific customer balances, where a risk of default has been identified, and also include a provision for non-customer specific defaults based upon historical collection, return and write-off activity. A separate allowance is recorded for customer incentive rebates and is generally based upon sales activity. Receivables are presented net of certain allowances (including allowances for doubtful accounts) of $44 million and $40 million at December 31, 2017 and 2016, respectively.
Property and Equipment.    Property and equipment, including significant improvements to existing facilities, are recorded at cost. Upon retirement or disposal, the cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the consolidated statements of operations. Maintenance and repair costs are charged against earnings as incurred.
We review our property and equipment as events occur or circumstances change that would more likely than not reduce the fair value of the property and equipment below the carrying amount. If the carrying amount of property and equipment is not recoverable from its undiscounted cash flows, then we would recognize an impairment loss for the difference between the carrying amount and the current fair value. Further, we evaluate the remaining useful lives of property and equipment at each reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods.
A. ACCOUNTING POLICIES (Continued)
Depreciation.    Depreciation expense is computed principally using the straight-line method over the estimated useful lives of the assets. Annual depreciation rates are as follows: buildings and land improvements, 2 to 10 percent, computer hardware and software, 17 to 33 percent, and machinery and equipment, 5 to 33 percent. Depreciation expense was $116 million, $124 million and $116 million in 2017, 2016 and 2015, respectively.
Goodwill and Other Intangible Assets.    We perform our annual impairment testing of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We have defined our reporting units and completed the impairment testing of goodwill at the operating segment level. Our operating segments are reporting units that engage in business activities, for which discrete financial information, including five-year forecasts, are available. We compare the fair value of the reporting units to the carrying value of the reporting units for goodwill impairment testing. Fair value is determined using a discounted cash flow method, which includes significant unobservable inputs (Level 3 inputs), and requires us to make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. Our judgments are based upon historical experience, current market trends, consultations with external valuation specialists and other information. While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, different estimates and assumptions could result in different outcomes. In estimating future cash flows, we rely on internally generated five-year forecasts for sales and operating profits, including capital expenditures, and, currently, a two percent long-term assumed annual growth rate of cash flows for periods after the five-year forecast. We utilize our weighted average cost of capital of approximately 8.0 percent as the basis to determine the discount rate to apply to the estimated future cash flows. In 2017, based upon our assessment of the risks impacting each of our businesses, we applied a risk premium to increase the discount rate to a range of 10.0 percent to 13.0 percent for our reporting units.
If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized to the extent that a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit.
We review our other indefinite-lived intangible assets for impairment annually, in the fourth quarter, or as events occur or circumstances change that indicate the assets may be impaired without regard to the business unit. We consider the implications of both external (e.g., market growth, competition and local economic conditions) and internal (e.g., product sales and expected product growth) factors and their potential impact on cash flows related to the intangible asset in both the near- and long-term.
Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. We evaluate the remaining useful lives of amortizable intangible assets at each reporting period to determine whether events and circumstances warrant a revision to the remaining periods of amortization. Refer to Note G to the consolidated financial statements for additional information regarding goodwill and other intangible assets.
Fair Value Accounting.    We use derivative financial instruments to manage certain exposure to fluctuations in earnings and cash flows resulting from changes in foreign currency exchange rates, and occasionally from changes in commodity costs and interest rate exposures. Derivative financial instruments are recorded in the consolidated balance sheets as either an asset or liability measured at fair value, netted by counterparty, where the right of offset exists. The gain or loss is recognized in determining current earnings during the period of the change in fair value. We currently do not have any derivative instruments for which we have designated hedge accounting.
Warranty.    We offer full and limited warranties on certain products with warranty periods ranging up to the lifetime of the product to the original consumer purchaser. At the time of sale, we accrue a warranty liability for the estimated future cost to provide products, parts or services to repair or replace products to satisfy our warranty obligations. Our estimate of future costs to service our warranty obligations is based upon the information available and includes a number of factors, such as the warranty coverage, the warranty period, historical experience specific to the nature, frequency and average cost to service the claim, along with industry and demographic trends.
Certain factors and related assumptions in determining our warranty liability involve judgments and estimates and are sensitive to changes in the factors described above. We believe that the warranty accrual is appropriate; however, actual claims incurred could differ from our original estimates which would require us to adjust our previously established accruals. Refer to Note S to the consolidated financial statements for additional information on our warranty accrual.

A. ACCOUNTING POLICIES (Continued)
A significant portion of our business is at the consumer retail level through home center retailers and other major retailers. A consumer may return a product to a retail outlet that is a warranty return. However, certain retail outlets do not distinguish between warranty and other types of returns when they claim a return deduction from us. Our revenue recognition policy takes into account this type of return when recognizing revenue, and an estimate of these amounts is recorded as a deduction to net sales at the time of sale.
Insurance Reserves.    We provide for expenses associated with workers' compensation and product liability obligations when such amounts are probable and can be reasonably estimated. The accruals are adjusted as new information develops or circumstances change that would affect the estimated liability. Any obligations expected to be settled within 12 months are recorded in accrued liabilities; all other obligations are recorded in other liabilities.
Stock-Based Compensation.    We measure compensation expense for stock awards at the market price of our common stock at the grant date. Such expense is recognized ratably over the shorter of the vesting period of the stock awards, typically 5 or 10 years, or the length of time until the grantee becomes retirement-eligible at age 65. We measure compensation expense for stock options using a Black-Scholes option pricing model. Such expense is recognized ratably over the shorter of the vesting period of the stock options, typically five years, or the length of time until the grantee becomes retirement-eligible at age 65. We recognize forfeitures related to stock awards and stock options as they occur.
Noncontrolling Interest.    We owned 68 percent of Hansgrohe SE at both December 31, 2017 and 2016. The aggregate noncontrolling interest, net of dividends, at December 31, 2017 and 2016 has been recorded as a component of equity on our consolidated balance sheets.
Interest and Penalties on Uncertain Tax Positions.    We record interest and penalties on our uncertain tax positions in income tax expense (benefit).
Accounting for Global Intangible Low-taxed Income ("GILTI"). We record the tax effects of GILTI related to our foreign operations as a component of income tax expense (benefit) in the period the tax arises.
Reclassifications.    Certain prior year amounts have been reclassified to conform to the 2017 presentation in the consolidated financial statements. In our consolidated statements of cash flows, the cash flows from discontinued operations are not separately classified.
Recently Adopted Accounting Pronouncements. In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value, as opposed to the lower of cost or market. We adopted ASU 2015-11 on January 1, 2017. The adoption of the new standard did not have an impact on our financial position or results of operations.
In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which requires the tax effects related to share-based payments to be recorded through the income statement, simplifies the accounting requirements for forfeitures and employers' tax withholding requirements, and modifies the presentation of certain items on the statement of cash flows. We adopted ASU 2016-09 on January 1, 2017, using the retrospective options for reclassifying excess tax benefit from stock-based compensation and employee withholding taxes paid on stock-based compensation within our statements of cash flows. The adoption of the remaining requirements did not have an impact on our financial position or results of operations. As a result of this adoption, we increased cash flows from (for) operating activities and decreased cash flows from (for) financing activities by $63 million and $111 million for the years ended December 31, 2016 and 2015, respectively. Subsequent to adoption, tax effects related to employee share-based payments were recorded to income tax expense, thus increasing the volatility in our effective tax rate.
In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business," which narrows the definition of what constitutes a business for acquisition and divestiture purposes. We early adopted ASU 2017-01 effective October 1, 2017. The adoption of the new standard did not have an impact on our financial position or results of operations.


A. ACCOUNTING POLICIES (Continued)
In January 2017, the FASB issued ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill in the reporting unit. We early adopted ASU 2017-04 effective January 1, 2017. The adoption of the new standard did not have an impact on our financial position or results of operations.
Recently Issued Accounting Pronouncements.   In May 2014, the FASB issued a new standard for revenue recognition, Accounting Standards Codification ("ASC") 606. The purpose of ASC 606 is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability across industries. The standard allows for either a full retrospective or modified retrospective method of adoption. We will adopt this standard on its effective date, January 1, 2018, under the full retrospective method of adoption. The adoption of the standard will not have a material impact on our financial position or results of operations. We have finalized our accounting policy, trained our business units on the new standard and finalized our internal controls under the new standard. We did not experience significant issues in our implementation process.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU 2016-01 is effective for us for annual periods beginning January 1, 2018. The adoption of this standard will not have a material impact on our financial position or results of operations.
In February 2016, the FASB issued a new standard for leases, ASC 842, which changes the accounting model for identifying and accounting for leases. ASC 842 is effective for us for annual periods beginning January 1, 2019 and currently requires retrospective application. We expect this standard to increase our total assets and total liabilities; however, we are currently evaluating the magnitude of the impact the adoption of this new standard will have on our financial position and results of operations.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which modifies the methodology for recognizing loss impairments on certain types of financial instruments. The new methodology requires an entity to estimate the credit losses expected over the life of an exposure. Additionally, ASU 2016-13 amends the current available-for-sale security other-than-temporary impairment model for debt securities. ASU 2016-13 is effective for us for annual periods beginning January 1, 2020. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Asset Transfers of Assets Other than Inventory," which no longer allows the tax effects of intra-entity asset transfers (intercompany sales) of assets other than inventory to be deferred until the transferred asset is sold to a third party or otherwise recovered through use. The new standard requires the tax expense from the sale of the asset in the seller’s tax jurisdiction and the corresponding basis differences in the buyer’s jurisdiction to be recognized when the transfer occurs even though the pre-tax effects of the transaction are eliminated in consolidation. ASU 2016-16 is effective for us for annual periods beginning January 1, 2018. The adoption of this standard will not have a material impact on our financial position or results of operations.
In March 2017, the FASB issued ASU 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which modifies the presentation of net periodic pension and post-retirement benefit cost ("net benefit cost") in the income statement and the components eligible for capitalization as assets. ASU 2017-07 is effective for us for annual periods beginning January 1, 2018. The adoption of the new standard will not have a material impact on our financial position or results of operations. For full year 2017 and 2016, we expect $26 million and $32 million of expense to be retrospectively reclassified from operating profit to other income (expense), net, within our results of operations.
In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting," which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. ASU 2017-09 is effective for us for annual periods beginning January 1, 2018, and is applied prospectively. Upon adoption, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions.

A. ACCOUNTING POLICIES (Concluded)
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which improves and simplifies accounting rules around hedge accounting and better portrays the economic results of an entity’s risk management activities in its financial statements. ASU 2017-12 is effective for us for annual periods beginning January 1, 2019. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
DIVESTITURES
DIVESTITURES
DIVESTITURES
In the fourth quarter of 2017 we divested Moores Furniture Group Limited ("Moores"), a manufacturer of kitchen and bathroom furniture in the United Kingdom. In connection with the divestiture we recognized a loss of $64 million for the year ended December 31, 2017, included in other, net, within other income (expense), net in our consolidated statement of operations. This loss resulted primarily from the recognition of $58 million of defined-benefit pension plan actuarial losses, net of tax, that were previously included within accumulated other comprehensive loss, due to the transfer of the plan assets and obligations to the purchaser in connection with the sale of the business. Prior to divestiture, the results of this business are included within income from continuing operations before income taxes in the consolidated statement of operations and reported as part of our Cabinetry Products segment.
In the second quarter of 2017 we divested Arrow Fastener Co., LLC ("Arrow"), a manufacturer and distributor of fastening tools, for proceeds of $128 million. In connection with the divestiture we recognized a gain of $51 million for the year ended December 31, 2017, included in other, net, within other income (expense), net in our consolidated statement of operations. Prior to divestiture, the results of this business are included within income from continuing operations before income taxes in the consolidated statement of operations and reported as part of our Windows and Other Specialty Products segment.
The presentation of discontinued operations includes a component or group of components that we have or intend to dispose of, and represents a strategic shift that has (or will have) a major effect on our operations and financial results. For spin off transactions, discontinued operations treatment is appropriate following the completion of the spin off.
On September 30, 2014, we announced a plan to spin off 100 percent of our Installation and Other Services businesses into an independent, publicly-traded company named TopBuild Corp. ("TopBuild") through a tax-free distribution of the stock of TopBuild to our stockholders. We initiated the spin off as TopBuild was no longer considered core to our long-term growth strategy in branded building products. On June 30, 2015, immediately prior to the effective time of the spin off, TopBuild paid a cash distribution to us of $200 million using the proceeds of its new debt financing arrangement. This transaction was reported as a financing activity in the consolidated statements of cash flows. We have accounted for the spin off of TopBuild as a discontinued operation. Losses from this discontinued operation were included in loss from discontinued operations, net, in the consolidated statement of operations.












B. DIVESTITURES (Concluded)
The major classes of line items constituting pre-tax (loss) profit of the discontinued operation, in millions:
 
Year Ended December 31, 2015
Net sales
$
762

Cost of sales
603

Gross profit
159

Selling, general and administrative expenses
148

Income from discontinued operations
$
11

Other discontinued operations results:
 

Loss on disposal of discontinued operations, net
(1
)
Income before income tax
10

Income tax expense (1)
(12
)
Loss from discontinued operations, net
$
(2
)
                                                    
(1)
The unusual relationship between income tax expense and income before income tax resulted primarily from certain non-deductible transaction costs related to the spin off of TopBuild.
Other selected financial information for TopBuild during the period owned by us, was as follows, in millions:
 
Year Ended December 31, 2015
Depreciation and amortization
$
6

Capital expenditures
$
7


We did not have any assets or liabilities related to discontinued operations at either December 31, 2017 or 2016.
In conjunction with the spin off, we entered into a Transition Services Agreement with TopBuild under which we provided administrative services to TopBuild subsequent to the separation. This agreement terminated on June 30, 2016. The fees for services rendered under the Transition Services Agreement are not material to our results of operations.
ACQUISITIONS
ACQUISITIONS
ACQUISITIONS
In the fourth quarter of 2017, we acquired Mercury Plastics, Inc., a plastics processor and manufacturer of water handling systems for appliance and faucet applications, for approximately $89 million in cash. This business is included in the Plumbing Products segment. This acquisition enhances our ability to develop faucet technology and provides continuity of supply of quality faucet components. In connection with this acquisition, we recognized $38 million of goodwill, which is tax deductible, and is related primarily to the expected synergies from combining the operations into our business.
In the second quarter of 2015, we acquired a U.K. window business for approximately $16 million in cash in the Windows and Other Specialty Products segment. This acquisition will support our U.K. window business' growth strategy by expanding its product offerings into timber-alternative windows and doors.
In the first quarter of 2015, we acquired an aquatic fitness business for approximately $25 million in cash in the Plumbing Products segment. This acquisition will allow our spa business to expand its wellness products platform, open new channels of distribution and access a new customer base.
These acquisitions are not material to us. The results of these acquisitions are included in the consolidated financial statements from the date of their respective acquisition.




C. ACQUISITIONS (Concluded)
In December 2017, we signed a definitive agreement to acquire The L.D. Kichler Co., a leader in decorative residential and light commercial lighting products, ceiling fans and LED lighting systems. This business will expand our product offerings to repair and remodel customers. We expect this transaction to close in the first quarter of 2018, at which time we expect to pay approximately $550 million for the business, using cash on hand. We intend to report this business in our Decorative Architectural Products segment.
INVENTORIES
INVENTORIES
INVENTORIES
 
(In Millions)
At December 31
 
2017
 
2016
Finished goods
$
414

 
$
366

Raw materials
277

 
254

Work in process
105

 
92

Total
$
796

 
$
712



Inventories, which include purchased parts, materials, direct labor and applied overhead, are stated at the lower of cost or net realizable value, with cost determined by use of the first-in, first-out method.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We are exposed to global market risk as part of our normal, daily business activities. To manage these risks, we enter into various derivative contracts. These contracts may include interest rate swap agreements, foreign currency contracts and metals contracts. We review our hedging program, derivative positions and overall risk management on a regular basis.
Interest Rate Swap Agreements.    In 2012, in connection with the issuance of $400 million of debt, we terminated the interest rate swap hedge relationships that we had entered into in 2011. These interest rate swaps were designated as cash flow hedges and effectively fixed interest rates on the forecasted debt issuance to variable rates based on 3-month LIBOR. Upon termination, the ineffective portion of the cash flow hedges of an approximate $2 million loss was recognized in our consolidated statement of operations in other, net, within other income (expense), net. The remaining loss of approximately $23 million from the termination of these swaps is being amortized as an increase to interest expense over the remaining term of the debt, through March 2022. At December 31, 2017, the balance remaining in accumulated other comprehensive loss was $8 million (pre-tax).
Foreign Currency Contracts.    Our net cash inflows and outflows exposed to the risk of changes in foreign currency exchange rates arise from the sale of products in countries other than the manufacturing source, foreign currency denominated supplier payments, debt and other payables, and investments in subsidiaries. To mitigate this risk, we, including certain European operations, enter into foreign currency forward contracts and foreign currency exchange contracts.
Gains (losses) related to foreign currency forward and exchange contracts are recorded in our consolidated statements of operations in other income (expense), net. In the event that the counterparties fail to meet the terms of the foreign currency forward or exchange contracts, our exposure is limited to the aggregate foreign currency rate differential with such institutions.
Metals Contracts.    From time to time, we have entered into contracts to manage our exposure to increases in the price of copper and zinc. Gains (losses) related to these contracts are recorded in our consolidated statements of operations in cost of sales.







E. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Concluded)
The pre-tax (losses) gains included in our consolidated statements of operations are as follows, in millions:
 
Year Ended December 31,
 
2017
 
2016
 
2015
Foreign currency contracts:
 

 
 

 
 

Exchange contracts
$
(1
)
 
$

 
$
4

Forward contracts
1

 

 
(3
)
Metals contracts

 
5

 
(17
)
Interest rate swaps
(4
)
 
(2
)
 
(2
)
Total
$
(4
)
 
$
3

 
$
(18
)

We present our derivatives net by counterparty, due to the right of offset under master netting arrangements in the consolidated balance sheets. The notional amounts being hedged and the fair value of those derivative instruments are as follows, in millions:
 
At December 31, 2017
 
Notional Amount
 
Balance Sheet
Foreign currency contracts:
 
 
 

Exchange contracts
$
14

 
 
Accrued liabilities
 
 
$

Forward contracts
43

 
 
Receivables
 
 

Accrued liabilities
 
 


 
At December 31, 2016
 
Notional Amount
 
Balance Sheet
Foreign currency contracts:
 

 
 

Forward contracts
$
21

 
 

Accrued liabilities
 

 
$
(2
)
Metals contracts
1

 
 

Accrued liabilities
 

 


The fair value of all foreign currency and metals derivative contracts is estimated on a recurring basis, quarterly, using Level 2 inputs (significant other observable inputs).
PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT
 
(In Millions)
At December 31
 
2017
 
2016
Land and improvements
$
110

 
$
111

Buildings
681

 
712

Computer hardware and software
327

 
315

Machinery and equipment
1,547

 
1,480

 
2,665

 
2,618

Less: Accumulated depreciation
(1,536
)
 
(1,558
)
Total
$
1,129

 
$
1,060


We lease certain equipment and plant facilities under noncancellable operating leases. Rental expense recorded in the consolidated statements of operations totaled approximately $66 million, $63 million and $60 million during 2017, 2016 and 2015, respectively.
At December 31, 2017, future minimum lease payments were as follows, in millions:
2018
$
50

2019
39

2020
32

2021
25

2022
20

2023 and beyond
91

GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill, by segment, were as follows, in millions:
 
Gross Goodwill At December 31, 2017
 
Accumulated
Impairment
Losses
 
Net Goodwill At December 31, 2017
Plumbing Products
$
574

 
$
(340
)
 
$
234

Decorative Architectural Products
294

 
(75
)
 
219

Cabinetry Products
181

 

 
181

Windows and Other Specialty Products
718

 
(511
)
 
207

Total
$
1,767

 
$
(926
)
 
$
841


 
Gross Goodwill At December 31, 2016
 
Accumulated
Impairment
Losses
 
Net Goodwill At December 31, 2016
 
Additions (A)
 
Divestitures (B)
 
Other (C)
 
Net Goodwill At December 31, 2017
Plumbing Products
$
519

 
$
(340
)
 
$
179

 
$
38

 
$

 
$
17

 
$
234

Decorative Architectural Products
294

 
(75
)
 
219

 

 

 

 
219

Cabinetry Products
240

 
(59
)
 
181

 

 

 

 
181

Windows and Other Specialty Products
987

 
(734
)
 
253

 

 
(47
)
 
1

 
207

Total
$
2,040

 
$
(1,208
)
 
$
832

 
$
38

 
$
(47
)
 
$
18

 
$
841


 
Gross Goodwill At December 31, 2015
 
Accumulated
Impairment
Losses
 
Net Goodwill At December 31, 2015
 
Other (C)
 
Net Goodwill At December 31, 2016
Plumbing Products
$
525

 
$
(340
)
 
$
185

 
$
(6
)
 
$
179

Decorative Architectural Products
294

 
(75
)
 
219

 

 
219

Cabinetry Products
240

 
(59
)
 
181

 

 
181

Windows and Other Specialty Products
988

 
(734
)
 
254

 
(1
)
 
253

Total
$
2,047

 
$
(1,208
)
 
$
839

 
$
(7
)
 
$
832

                                                             
(A)
Additions consist of acquisitions.
(B)
Included within divestitures is the disposition of Moores in the Cabinetry Products segment, which includes $59 million of both gross goodwill and accumulated impairment losses, and the disposition of Arrow in the Windows and Other Specialty Products segment, which includes $270 million of gross goodwill and $223 million of accumulated impairment losses.
(C)
Other consists of the effect of foreign currency translation.
We completed our annual impairment testing of goodwill and other indefinite-lived intangible assets in the fourth quarters of 2017, 2016 and 2015. There was no impairment of goodwill for any of our reporting units for any of these years.
Other indefinite-lived intangible assets were $140 million and $136 million at December 31, 2017 and 2016, respectively, and principally included registered trademarks. In 2017, 2016 and 2015, the impairment test indicated there was no impairment of other indefinite-lived intangible assets for any of our business units. As a result of our 2017 and 2015 acquisitions, other indefinite lived intangible assets increased by $5 million and $7 million, respectively, as of the acquisition dates.

G. GOODWILL AND OTHER INTANGIBLE ASSETS (Concluded)
The carrying value of our definite-lived intangible assets was $47 million (net of accumulated amortization of $10 million) at December 31, 2017 and $18 million (net of accumulated amortization of $16 million) at December 31, 2016 and principally included customer relationships with a weighted average amortization period of 12 years in 2017 and 10 years in 2016. Amortization expense related to the definite-lived intangible assets of continuing operations was $4 million, $4 million and $6 million in 2017, 2016 and 2015, respectively. As a result of our 2017 and 2015 acquisitions, definite-lived intangible assets increased by $26 million and $17 million, respectively, as of the acquisition dates.
At December 31, 2017, amortization expense related to the definite-lived intangible assets during each of the next five years was as follows: 2018 – $6 million; 2019 – $5 million; 2020 – $5 million, 2021 – $5 million and 2022 –$5 million.
OTHER ASSETS
OTHER ASSETS
OTHER ASSETS
 
(In Millions)
At December 31
 
2017
 
2016
Equity method investments
$
11

 
$
13

Private equity funds
2

 
5

In-store displays, net
31

 
42

Deferred tax assets (Note Q)
48

 
68

Other
24

 
29

Total
$
116

 
$
157


In-store displays are amortized using the straight-line method over the expected useful life of three to five years, and we recognized amortization expense related to in-store displays of $25 million, $25 million and $20 million in 2017, 2016 and 2015, respectively. Cash spent for displays was $14 million, $11 million and $43 million in 2017, 2016 and 2015, respectively, and is included in other, net within investing activities on the consolidated statements of cash flows.
ACCRUED LIABILITIES
ACCRUED LIABILITIES
ACCRUED LIABILITIES
 
(In Millions)
At December 31
 
2017
 
2016
Salaries, wages and commissions
$
196

 
$
191

Advertising and sales promotion
157

 
146

Interest
42

 
51

Warranty (Note S)
59

 
56

Employee retirement plans
50

 
52

Insurance reserves
40

 
41

Property, payroll and other taxes
27

 
19

Dividends payable
33

 
32

Other
84

 
70

Total
$
688

 
$
658

DEBT
DEBT
DEBT
 
(In Millions)
At December 31
 
2017
 
2016
Notes and debentures:
 

 
 

6.625%, due April 15, 2018
$
114

 
$
114

7.125%, due March 15, 2020
201

 
500

3.500%, due April 1, 2021
399

 
399

5.950%, due March 15, 2022
326

 
400

4.450%, due April 1, 2025
500

 
500

4.375%, due April 1, 2026
498

 
498

3.500%, due November 15, 2027
300

 

7.750%, due August 1, 2029
234

 
296

6.500%, due August 15, 2032
200

 
300

4.500%, due May 15, 2047
299

 

Other
33

 
9

Prepaid debt issuance costs
(19
)
 
(19
)
 
3,085

 
2,997

Less: Current portion
116

 
2

Total long-term debt
$
2,969

 
$
2,995


All of the notes and debentures above are senior indebtedness and, other than the 6.625% notes due 2018 and the 7.75% notes due 2029, are redeemable at our option.    
On June 21, 2017, we issued $300 million of 3.5% Notes due November 15, 2027 and $300 million of 4.5% Notes due May 15, 2047. We received proceeds of $599 million, net of discount, for the issuance of these Notes. The Notes are senior indebtedness and are redeemable at our option at the applicable redemption price. On June 27, 2017, proceeds from the debt issuances, together with cash on hand, were used to repay and early retire $299 million of our 7.125% Notes due March 15, 2020, $74 million of our 5.95% Notes due March 15, 2022, $62 million of our 7.75% Notes due August 1, 2029, and $100 million of our 6.5% Notes due August 15, 2032. In connection with these early retirements, we incurred a loss on debt extinguishment of $107 million, which was recorded as interest expense.    
On March 17, 2016, we issued $400 million of 3.5% Notes due April 1, 2021 and $500 million of 4.375% Notes due April 1, 2026. We received proceeds of $896 million, net of discount, for the issuance of these Notes. The Notes are senior indebtedness and are redeemable at our option at the applicable redemption price. On April 15, 2016, proceeds from the debt issuances, together with cash on hand, were used to repay and early retire all of our $1 billion, 6.125% Notes which were due on October 3, 2016 and all of our $300 million, 5.85% Notes which were due on March 15, 2017. In connection with these early retirements, we incurred $40 million of debt extinguishment costs, which we recorded as interest expense.
On June 15, 2015, we repaid and retired all of our $500 million, 4.8% Notes on the scheduled retirement date.
On March 24, 2015, we issued $500 million of 4.45% Notes due April 1, 2025.
On March 28, 2013, we entered into a credit agreement (the "Credit Agreement") with a bank group, with an aggregate commitment of $1.25 billion and a maturity date of March 28, 2018. On May 29, 2015 and August 28, 2015, we amended the Credit Agreement with the bank group (the "Amended Credit Agreement"). The Amended Credit Agreement reduces the aggregate commitment to $750 million and extends the maturity date to May 29, 2020. Under the Amended Credit Agreement, at our request and subject to certain conditions, we can increase the aggregate commitment up to an additional $375 million with the current bank group or new lenders.



J. DEBT (Concluded)
The Amended Credit Agreement provides for an unsecured revolving credit facility available to us and one of our foreign subsidiaries, in U.S. dollars, European euros and certain other currencies. Borrowings under the revolver denominated in euros are limited to $500 million, equivalent. We can also borrow swingline loans up to $75 million and obtain letters of credit of up to $100 million; any outstanding letters of credit under the Amended Credit Agreement reduce our borrowing capacity. At December 31, 2017, we had no of outstanding standby letters of credit under the Amended Credit Agreement.
Revolving credit loans bear interest under the Amended Credit Agreement, at our option, at (A) a rate per annum equal to the greater of (i) the prime rate, (ii) the Federal Funds effective rate plus 0.50% and (iii) LIBOR plus 1.0% (the "Alternative Base Rate"); plus an applicable margin based upon our then-applicable corporate credit ratings; or (B) LIBOR plus an applicable margin based upon our then-applicable corporate credit ratings. The foreign currency revolving credit loans bear interest at a rate equal to LIBOR plus an applicable margin based upon our then-applicable corporate credit ratings.
The Amended Credit Agreement contains financial covenants requiring us to maintain (A) a maximum net leverage ratio, as adjusted for certain items, of 4.0 to 1.0, and (B) a minimum interest coverage ratio, as adjusted for certain items, equal to or greater than 2.5 to 1.0.
In order for us to borrow under the Amended Credit Agreement, there must not be any default in our covenants in the Amended Credit Agreement (i.e., in addition to the two financial covenants, principally limitations on subsidiary debt, negative pledge restrictions, legal compliance requirements and maintenance of properties and insurance) and our representations and warranties in the Amended Credit Agreement must be true in all material respects on the date of borrowing (i.e., principally no material adverse change or litigation likely to result in a material adverse change, since December 31, 2014, in each case, no material ERISA or environmental non-compliance, and no material tax deficiency). We were in compliance with all covenants and no borrowings have been made at December 31, 2017.
At December 31, 2017, the debt maturities during each of the next five years were as follows: 2018 – $116 million; 2019$2 million; 2020 – $203 million; 2021 – $402 million and 2022 – $329 million.
Interest paid was $175 million, $198 million and $216 million in 2017, 2016 and 2015, respectively. These amounts exclude $104 million and $40 million of debt extinguishment costs related to the early retirement of debt, which were recorded as interest expense and paid in 2017 and 2016, respectively.

Fair Value of Debt.    The fair value of our short-term and long-term fixed-rate debt instruments is based principally upon modeled market prices for the same or similar issues, which are Level 1 inputs. The aggregate estimated market value of short-term and long-term debt at December 31, 2017 was approximately $3.3 billion, compared with the aggregate carrying value of $3.1 billion. The aggregate estimated market value of short-term and long-term debt at December 31, 2016 was approximately $3.3 billion, compared with the aggregate carrying value of $3.0 billion.
STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION
Our 2014 Long Term Stock Incentive Plan (the "2014 Plan") replaced the 2005 Long Term Stock Incentive Plan in May 2014 and provides for the issuance of stock-based incentives in various forms to employees and non-employee Directors of the Company. At December 31, 2017, outstanding stock-based incentives were in the form of long-term stock awards, stock options, restricted stock units, phantom stock awards and stock appreciation rights.
Pre-tax compensation expense for these stock-based incentives were as follows, in millions:
 
2017
 
2016
 
2015
Long-term stock awards
$
24

 
$
23

 
$
23

Stock options
3

 
2

 
5

Restricted stock units
2

 

 

Phantom stock awards and stock appreciation rights
9

 
4

 
11

Total
$
38

 
$
29

 
$
39





K. STOCK-BASED COMPENSATION (Continued)
At December 31, 2017, 15.4 million shares of our common stock were available under the 2014 Plan for the granting of long-term stock incentive awards, stock options and restricted stock units.
Long-Term Stock Awards.    Long-term stock awards are granted to our key employees and non-employee Directors and do not cause net share dilution, as we repurchase and retire an equal number of shares in the open market. We granted 853,690 shares of long-term stock awards during 2017.
Our long-term stock award activity was as follows, shares in millions:

 
2017
 
2016
 
2015
Unvested stock award shares at January 1
4

 
5

 
6

Weighted average grant date fair value
$
20

 
$
17

 
$
18

Stock award shares granted
1

 
1

 
1

Weighted average grant date fair value
$
34

 
$
26

 
$
26

Stock award shares vested
2

 
2

 
2

Weighted average grant date fair value
$
18

 
$
16

 
$
17

Stock award shares forfeited

 

 

Weighted average grant date fair value
$
24

 
$
20

 
$
18

Forfeitures upon spin off (A)

 

 
1

Weighted average grant date fair value
$

 
$

 
$
20

Modification upon spin off (B)

 

 
1

Unvested stock award shares at December 31
3

 
4

 
5

Weighted average grant date fair value
$
24

 
$
20

 
$
17

                                                            
(A)
In connection with the spin off of TopBuild, TopBuild employees forfeited their outstanding Masco equity awards.
(B)
Subsequent to the separation of TopBuild, we modified our outstanding equity awards to employees and non-employee Directors such that all individuals received an equivalent fair value both before and after the separation. The modification to the outstanding stock awards was made pursuant to existing anti-dilution provisions in our 2014 Plan and 2005 Long Term Incentive Plan.
At December 31, 2017, 2016 and 2015, there was $46 million, $43 million and $42 million, respectively, of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of three years at December 31, 2017, 2016 and 2015.
The total market value (at the vesting date) of stock award shares which vested during 2017, 2016 and 2015 was $45 million, $43 million and $54 million, respectively.
Stock Options.    Stock options are granted to certain key employees. The exercise price equals the market price of our common stock at the grant date. These options generally become exercisable (vest ratably) over five years beginning on the first anniversary from the date of grant and expire no later than 10 years after the grant date.
We granted 397,350 shares of stock options during 2017 with a grant date weighted-average exercise price of approximately $34 per share. During 2017, no stock option shares were forfeited (including options that expired unexercised).







K. STOCK-BASED COMPENSATION (Continued)

Our stock option activity was as follows, shares in millions:
 
2017
 
2016
 
2015
Option shares outstanding, January 1
7

 
12

 
18

Weighted average exercise price
$
15

 
$
17

 
$
21

Option shares granted

 

 

Weighted average exercise price
$
34

 
$
26

 
$
26

Option shares exercised
2

 
5

 
5

Aggregate intrinsic value on date of exercise (A)
$
47
 million
 
$
64
 million
 
$
50
 million
Weighted average exercise price
$
15

 
$
21

 
$
17

Option shares forfeited

 

 
3

Weighted average exercise price
$

 
$

 
$
29

Forfeitures upon spin off (B)

 

 

Weighted average exercise price
$

 
$

 
$
19

Modifications upon spin off (C)

 

 
2

Option shares outstanding, December 31
5

 
7

 
12

Weighted average exercise price
$
16

 
$
15

 
$
17

Weighted average remaining option term (in years)
4
 
4
 
3
Option shares vested and expected to vest, December 31
5

 
7

 
12

Weighted average exercise price
$
16

 
$
15

 
$
17

Aggregate intrinsic value (A)
$
147
 million
 
$
118
 million
 
$
133
 million
Weighted average remaining option term (in years)
4
 
4
 
3
Option shares exercisable (vested), December 31
4

 
6

 
10

Weighted average exercise price
$
13

 
$
13

 
$
18

Aggregate intrinsic value (A)
$
123
 million
 
$
102
 million
 
$
113
 million
Weighted average remaining option term (in years)
3
 
3
 
3
                                                                     
(A)
Aggregate intrinsic value is calculated using our stock price at each respective date, less the exercise price (grant date price) multiplied by the number of shares.
(B)
In connection with the spin off of TopBuild, TopBuild employees forfeited their outstanding Masco equity awards.
(C)
Subsequent to the separation of TopBuild, we modified our outstanding equity awards to employees and non-employee Directors such that all individuals received an equivalent fair value both before and after the separation. The modification to the outstanding options was made pursuant to existing anti-dilution provisions in our 2014 Plan and 2005 Long Term Incentive Plan.
At December 31, 2017, 2016 and 2015, there was $7 million, $6 million and $6 million, respectively, of unrecognized compensation expense (using the Black-Scholes option pricing model at the grant date) related to unvested stock options; such options had a weighted average remaining vesting period of three years at December 31, 2017 and 2016 and two years at December 31, 2015.









K. STOCK-BASED COMPENSATION (Continued)

The weighted average grant date fair value of option shares granted and the assumptions used to estimate those values using a Black-Scholes option pricing model were as follows:
 
2017
 
2016
 
2015
Weighted average grant date fair value
$
9.68

 
$
6.43

 
$
9.67

Risk-free interest rate
2.16
%
 
1.41
%
 
1.75
%
Dividend yield
1.19
%
 
1.49
%
 
1.32
%
Volatility factor
30.00
%
 
29.00
%
 
42.00
%
Expected option life
6 years

 
6 years

 
6 years


The following table summarizes information for stock option shares outstanding and exercisable at December 31, 2017, shares in millions:
 
Option Shares Outstanding
 
Option Shares Exercisable
 
Range of
Prices
 
Number of
Shares
 
Weighted
Average
Remaining
Option Term
 
Weighted
Average
Exercise
Price
 
Number of
Shares
 
Weighted
Average
Exercise
Price
$
7 - 18
 
3
 
3 Years
 
$12
 
4
 
$12
$
20 - 23
 
1
 
7 Years
 
$22
 
 
$22
$
26 - 34
 
1
 
9 Years
 
$29
 
 
$26
$
7 - 34
 
5
 
4 Years
 
$16
 
4
 
$13


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

Phantom Stock Awards and Stock Appreciation Rights ("SARs").    We grant phantom stock awards and SARs to certain non-U.S. employees.
Phantom stock awards are linked to the value of our common stock on the date of grant and are settled in cash upon vesting, typically over 5 to 10 years. We account for phantom stock awards as liability-based awards; the compensation expense is initially measured as the market price of our common stock at the grant date and is recognized over the vesting period. The liability is remeasured and adjusted at the end of each reporting period until the awards are fully-vested and paid to the employees. We recognized expense of $6 million, $2 million and $5 million related to phantom stock awards in 2017, 2016 and 2015, respectively. In 2017, 2016 and 2015, we granted 104,580 shares, 140,710 shares and 134,560 shares, respectively, of phantom stock awards with an aggregate fair value of $4 million each year, and paid cash of $5 million in both 2017 and 2016 and $6 million in 2015 to settle phantom stock awards.
SARs are linked to the value of our common stock on the date of grant and are settled in cash upon exercise. We account for SARs using the fair value method, which requires outstanding SARs to be classified as liability-based awards and valued using a Black-Scholes option pricing model at the grant date; such fair value is recognized as compensation expense over the vesting period, typically five years. The liability is remeasured and adjusted at the end of each reporting period until the SARs are exercised and payment is made to the employees or the SARs expire. We recognized expense of $3 million, $2 million and $6 million related to SARs in 2017, 2016 and 2015, respectively. During 2017, 2016 and 2015, we did not grant any SARs.

K. STOCK-BASED COMPENSATION (Concluded)
Information related to phantom stock awards and SARs was as follows, in millions:
 
Phantom Stock Awards
 
Stock Appreciation Rights
 
At December 31,
 
At December 31,
 
2017
 
2016
 
2017
 
2016
Accrued compensation cost liability
$
12

 
$
10

 
$
7

 
$
8

Unrecognized compensation cost
$
4

 
$
4

 
$

 
$

Equivalent common shares

 

 

 
1

EMPLOYEE RETIREMENT PLANS
EMPLOYEE RETIREMENT PLANS
EMPLOYEE RETIREMENT PLANS
We sponsor qualified defined-benefit and defined-contribution retirement plans for most of our employees. In addition to our qualified defined-benefit pension plans, we have unfunded non-qualified defined-benefit pension plans covering certain employees, which provide for benefits in addition to those provided by the qualified pension plans. Substantially all salaried employees participate in non-contributory defined-contribution retirement plans, to which payments are determined annually by the Compensation Committee.
Pre-tax expense related to our retirement plans was as follows, in millions:
 
2017
 
2016
 
2015
Defined-contribution plans
$
55

 
$
58

 
$
52

Defined-benefit pension plans
29

 
34

 
32

 
$
84

 
$
92

 
$
84


In addition to the pre-tax expense related to our defined-benefit pension plans, we recognized $58 million of actuarial losses, net of tax, that were previously included within accumulated other comprehensive loss due to the disposition of a pension plan in connection with the divestiture of Moores, which was recorded within other income (expense), net.
As of January 1, 2010, substantially all our domestic and foreign qualified and domestic non-qualified defined-benefit pension plans were frozen to future benefit accruals.















L. EMPLOYEE RETIREMENT PLANS (Continued)
Changes in the projected benefit obligation and fair value of plan assets, and the funded status of our defined-benefit pension plans were as follows, in millions:
 
2017
 
2016
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Changes in projected benefit obligation:
 

 
 

 
 

 
 

Projected benefit obligation at January 1
$
1,055

 
$
170

 
$
1,059

 
$
174

Service cost
3

 

 
3

 

Interest cost
36

 
6

 
41

 
7

Actuarial loss, net
34

 
7

 
50

 
1

Foreign currency exchange
20

 

 
(29
)
 

Benefit payments
(43
)
 
(13
)
 
(69
)
 
(12
)
Divestitures
(144
)
 

 

 

Projected benefit obligation at December 31
$
961

 
$
170

 
$
1,055

 
$
170

Changes in fair value of plan assets:
 

 
 

 
 

 
 

Fair value of plan assets at January 1
$
717

 
$

 
$
658

 
$

Actual return on plan assets
77

 

 
58

 

Foreign currency exchange
8

 

 
(20
)
 

Company contributions
52

 
13

 
100

 
12

Expenses, other
(7
)
 

 
(10
)
 

Benefit payments
(43
)
 
(13
)
 
(69
)
 
(12
)
Divestitures
(109
)
 

 

 

Fair value of plan assets at December 31
$
695

 
$

 
$
717

 
$

Funded status at December 31
$
(266
)
 
$
(170
)
 
$
(338
)
 
$
(170
)

Amounts in our consolidated balance sheets were as follows, in millions:
 
At December 31, 2017
 
At December 31, 2016
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Other assets
$
1

 
$

 
$
2

 
$

Accrued liabilities
(1
)
 
(13
)
 
(1
)
 
(12
)
Other liabilities
(266
)
 
(157
)
 
(339
)
 
(158
)
Total net liability
$
(266
)
 
$
(170
)
 
$
(338
)
 
$
(170
)

Unrealized loss included in accumulated other comprehensive loss before income taxes was as follows, in millions:
 
At December 31, 2017
 
At December 31, 2016
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Net loss
$
442

 
$
59

 
$
519

 
$
54

Net transition obligation

 

 
1

 

Net prior service cost
3

 

 
3

 

Total
$
445

 
$
59

 
$
523

 
$
54









L. EMPLOYEE RETIREMENT PLANS (Continued)
Information for defined-benefit pension plans with an accumulated benefit obligation in excess of plan assets was as follows, in millions:
 
At December 31
 
2017
 
2016
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Projected benefit obligation
$
945

 
$
170

 
$
1,044

 
$
170

Accumulated benefit obligation
$
945

 
$
170

 
$
1,044

 
$
170

Fair value of plan assets
$
679

 
$

 
$
704

 
$


The projected benefit obligation was in excess of plan assets for all of our qualified defined-benefit pension plans at December 31, 2017 and 2016 which had an accumulated benefit obligation in excess of plan assets.
Net periodic pension cost for our defined-benefit pension plans was as follows, in millions:
 
2017
 
2016
 
2015
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Service cost
$
3

 
$

 
$
3

 
$

 
$
3

 
$

Interest cost
44

 
6

 
49

 
7

 
47

 
7

Expected return on plan assets
(46
)
 

 
(44
)
 

 
(46
)
 

Recognized net loss
19

 
3

 
17

 
2

 
18

 
3

Net periodic pension cost
$
20

 
$
9

 
$
25

 
$
9

 
$
22

 
$
10


We expect to recognize $20 million of pre-tax net loss from accumulated other comprehensive loss into net periodic pension cost in 2018 related to our defined-benefit pension plans. For plans in which almost all of the plan's participants are inactive, pre-tax net loss within accumulated other comprehensive loss is amortized using the straight-line method over the remaining life expectancy of the inactive plan participants. For plans which do not have almost all inactive participants, pre-tax net loss within accumulated other comprehensive loss is amortized using the straight-line method over the average remaining service period of the active employees expected to receive benefits from the plan.
Plan Assets.    Our qualified defined-benefit pension plan weighted average asset allocation, which is based upon fair value, was as follows:
 
2017
 
2016
Equity securities
55
%
 
49
%
Debt securities
28
%
 
32
%
Other
17
%
 
19
%
Total
100
%
 
100
%

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





L. EMPLOYEE RETIREMENT PLANS (Continued)
Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2017 compared to December 31, 2016.
        Common and Preferred Stocks and Short-Term and Other Investments: Valued at the closing price reported on the active market on which the individual securities are traded or based on the active market for similar securities. Certain investments are valued based on NAV, which approximates fair value. Such basis is determined by referencing the respective fund's underlying assets. There are no unfunded commitments or other restrictions associated with these investments.
        Private Equity and Hedge Funds: Valued based on an estimated fair value using either a market approach or an income approach, both of which require a significant degree of judgment. There is no active trading market for these investments and they are generally illiquid. Due to the significant unobservable inputs, the fair value measurements used to estimate fair value are a Level 3 input. Certain investments are valued based on NAV, which approximates fair value. Such basis is determined by referencing the respective fund's underlying assets. There are no unfunded commitments or other restrictions associated with these investments.
        Corporate, Government and Other Debt Securities: Valued based on either the closing price reported on the active market on which the individual securities are traded or using pricing models maximizing the use of observable inputs for similar securities. This includes basing value on yields currently available on comparable securities of issuers with similar credit ratings. Certain investments are valued based on NAV, which approximates fair value. Such basis is determined by referencing the respective fund's underlying assets. There are unfunded commitments of $2 million and no other restrictions associated with these investments.
        Common Collective Trust Fund: Valued based on an amortized cost basis, which approximates fair value. Such basis is determined by reference to the respective fund's underlying assets, which are primarily cash equivalents. There are no unfunded commitments or other restrictions associated with this fund.
        Buy-in Annuity: Valued based on the associated benefit obligation for which the buy-in annuity covers the benefits, which approximates fair value. Such basis is determined based on various assumptions, including the discount rate, long-term rate of return on plan assets and mortality rate.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following tables set forth, by level within the fair value hierarchy, the qualified defined-benefit pension plan assets at fair value as of December 31, 2017 and 2016, as well as those valued at NAV using the practical expedient, which approximates fair value, in millions.
















L. EMPLOYEE RETIREMENT PLANS (Continued)
 
At December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Valued at NAV
 
Total
Plan Assets
 
 
 
 
 
 
 
 
 
Common and Preferred Stocks:
 
 
 
 
 
 
 
 
 
United States
$
144

 
$

 
$

 
$
47

 
$
191

International
66

 

 

 
125

 
191

Private Equity and Hedge Funds:
 
 
 
 
 
 
 
 
 
United States

 

 
36

 

 
36

International

 

 
24

 
35

 
59

Corporate Debt Securities:
 
 
 
 
 
 
 
 
 
United States
31

 
26

 

 

 
57

International

 
7

 

 
21

 
28

Government and Other Debt Securities:
 
 
 
 
 
 
 
 
 
United States
15

 
7

 

 
31

 
53

International
31

 
28

 

 

 
59

Common Collective Trust Fund – United States

 
6

 

 

 
6

Buy-in Annuity - International

 
12

 

 

 
12

Short-Term and Other Investments:
 
 
 
 
 
 
 
 
 
United States
2

 

 

 

 
2

International

 
1

 

 

 
1