MASCO CORP /DE/, 10-K filed on 2/9/2017
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2016
Jan. 31, 2017
Jun. 30, 2016
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, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Amendment Flag
false 
 
 
Entity Common Stock, Shares Outstanding
 
320,320,300 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
 
 
$ 10,158,793,000 
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Current Assets:
 
 
Cash and cash investments
$ 990 
$ 1,468 
Short-term bank deposits
201 
248 
Receivables
917 
853 
Inventories
712 
687 
Prepaid expenses and other
114 
72 
Total current assets
2,934 
3,328 
Property and equipment, net
1,060 
1,027 
Goodwill
832 
839 
Other intangible assets, net
154 
160 
Other assets
157 
310 
Total Assets
5,137 
5,664 
Current Liabilities:
 
 
Accounts payable
800 
749 
Notes payable
1,004 
Accrued liabilities
658 
650 
Total current liabilities
1,460 
2,403 
Long-term debt
2,995 
2,403 
Other liabilities
785 
800 
Total Liabilities
5,240 
5,606 
Commitments and contingencies (Note U)
   
   
Masco Corporation's shareholders' equity
 
 
Masco Corporation's shareholders' equity Common shares authorized: 1,400,000,000; issued and outstanding: 2016 – 318,000,000; 2015 – 330,500,000
318 
330 
Preferred shares authorized: 1,000,000; issued and outstanding: 2016 and 2015 – None
Paid-in capital
Retained deficit
(381)
(300)
Accumulated other comprehensive loss
(235)
(165)
Total Masco Corporation's shareholders' deficit
(298)
(135)
Noncontrolling interest
195 
193 
Total Equity
(103)
58 
Total Liabilities and Equity
$ 5,137 
$ 5,664 
CONSOLIDATED BALANCE SHEETS (Parenthetical)
Dec. 31, 2016
Dec. 31, 2015
Statement of Financial Position [Abstract]
 
 
Common shares, shares authorized
1,400,000,000 
1,400,000,000 
Common shares, shares issued
318,000,000 
330,500,000 
Common shares, shares outstanding
318,000,000 
330,500,000 
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, 2016
Dec. 31, 2015
Dec. 31, 2014
Income Statement [Abstract]
 
 
 
Net sales
$ 7,357 
$ 7,142 
$ 7,006 
Cost of sales
4,901 
4,889 
4,946 
Gross profit
2,456 
2,253 
2,060 
Selling, general and administrative expenses
1,403 
1,339 
1,347 
Income from litigation settlements
(9)
Impairment charge for other intangible assets
Operating profit
1,053 
914 
721 
Other income (expense), net:
 
 
 
Interest expense
(229)
(225)
(225)
Other, net
11 
Total other income (expense), net
(223)
(225)
(214)
Income from continuing operations before income taxes
830 
689 
507 
Income tax expense (benefit)
296 
293 
(361)
Income from continuing operations
534 
396 
868 
(Loss) income from discontinued operations, net
(2)
35 
Net income
534 
394 
903 
Less: Net income attributable to noncontrolling interest
43 
39 
47 
Net income attributable to Masco Corporation
491 
355 
856 
Basic:
 
 
 
Income from continuing operations (in dollars per share)
$ 1.49 
$ 1.04 
$ 2.31 
(Loss) income from discontinued operations, net (in dollars per share)
$ 0.00 
$ (0.01)
$ 0.10 
Net income (in dollars per share)
$ 1.49 
$ 1.03 
$ 2.40 
Diluted:
 
 
 
Income from continuing operations (in dollars per share)
$ 1.47 
$ 1.03 
$ 2.28 
(Loss) income from discontinued operations, net (in dollars per share)
$ 0.00 
$ (0.01)
$ 0.10 
Net income (in dollars per share)
$ 1.47 
$ 1.02 
$ 2.38 
Amounts attributable to Masco Corporation:
 
 
 
Income from continuing operations
491 
357 
821 
(Loss) income from discontinued operations, net
(2)
35 
Net income attributable to Masco Corporation
$ 491 
$ 355 
$ 856 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement of Comprehensive Income [Abstract]
 
 
 
Net income
$ 534 
$ 394 
$ 903 
Less: Net income attributable to noncontrolling interest
43 
39 
47 
Net income attributable to Masco Corporation
491 
355 
856 
Other comprehensive (loss) income, net of tax (see Note O):
 
 
 
Cumulative translation adjustment
(78)
(96)
(124)
Interest rate swaps
Pension and other post-retirement benefits
(15)
26 
(140)
Realized loss on available-for-sale securities
12 
Other comprehensive (loss)
(80)
(68)
(263)
Less: Other comprehensive income (loss) attributable to the noncontrolling interest:
 
 
 
Cumulative translation adjustment
(10)
(16)
(31)
Pension and other post-retirement benefits
(6)
Less: Other comprehensive (loss) income attributable to noncontrolling interest
(10)
(14)
(37)
Other comprehensive (loss) attributable to Masco Corporation
(70)
(54)
(226)
Total comprehensive income
454 
326 
640 
Less: Total comprehensive income attributable to noncontrolling interest
33 
25 
10 
Total comprehensive income attributable to Masco Corporation
$ 421 
$ 301 
$ 630 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$ 534 
$ 394 
$ 903 
Depreciation and amortization
134 
133 
167 
Display amortization
25 
20 
15 
Deferred income taxes
130 
212 
(406)
(Gain) on disposition of investments, net
(4)
(7)
(2)
Pension and other postretirement benefits
(78)
(18)
(36)
Impairment of property and equipment, net
27 
Stock-based compensation
29 
41 
47 
(Increase) in receivables
(120)
(104)
(81)
(Increase) decrease in inventories
(39)
17 
(75)
Increase in accounts payable and accrued liabilities, net
71 
82 
63 
Other items, net
44 
(73)
(20)
Net cash from operating activities
726 
699 
602 
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
 
 
 
Retirement of notes
(1,300)
(500)
Purchase of Company common stock
(459)
(456)
(158)
Cash dividends paid
(128)
(126)
(117)
Dividends paid to noncontrolling interest
(31)
(36)
(34)
Cash distributed to TopBuild Corp.
(63)
Issuance of TopBuild Corp. debt
200 
Issuance of notes, net of issuance costs
889 
497 
Debt extinguishment costs
(40)
Increase in debt
Issuance of Company common stock
Excess tax benefit from stock-based compensation
23 
75 
13 
Payment of debt
(4)
(4)
(6)
Credit Agreement and other financing costs
(3)
Net cash for financing activities
(1,046)
(410)
(297)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(180)
(158)
(128)
Acquisition of businesses, net of cash acquired
(41)
(2)
Proceeds from disposition of:
 
 
 
Short-term bank deposits
251 
279 
379 
Property and equipment
18 
16 
Other financial investments
32 
10 
64 
Purchases of:
 
 
 
Short-term bank deposits
(211)
(253)
(399)
Other financial investments
(1)
(1)
Other, net
(16)
(43)
(29)
Net cash for investing activities
(124)
(189)
(100)
Effect of exchange rate changes on cash and cash investments
(34)
(15)
(45)
CASH AND CASH INVESTMENTS:
 
 
 
(Decrease) increase for the year
(478)
85 
160 
At January 1
1,468 
1,383 
1,223 
At December 31
$ 990 
$ 1,468 
$ 1,383 
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, 2013
$ 787 
$ 349 
$ 16 
$ 79 
$ 115 
$ 228 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Total comprehensive income (loss)
640 
 
 
856 
(226)
10 
Shares issued
(6)
(9)
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(158)
(7)
(28)
(123)
 
 
Surrendered (non-cash)
(15)
 
(15)
 
 
 
Cash dividends declared
(122)
 
 
(122)
 
 
Dividends paid to noncontrolling interest
(34)
 
 
 
 
(34)
Stock-based compensation
36 
 
36 
 
 
 
Balance at Dec. 31, 2014
1,128 
345 
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 
$ 0 
$ (381)
$ (235)
$ 195 
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 statements of operations.
Foreign Currency.    The financial statements of our foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at exchange rates as of the balance sheet dates. Revenues and expenses are translated at average exchange rates in effect during the year. The resulting cumulative translation adjustments have been recorded in the accumulated other comprehensive income (loss) component of shareholders' equity. Realized foreign currency transaction gains and losses are included in the consolidated statements of operations in other income (expense), net.
Cash and Cash Investments.    We consider all highly liquid investments with an initial maturity of three months or less to be cash and cash investments.
Short-Term Bank Deposits.    We invest a portion of our foreign excess cash in short-term bank deposits. These highly liquid investments have original maturities between three and twelve months and are valued at cost, which approximates fair value at December 31, 2016 and 2015. These short-term bank deposits are classified in the current assets section of our consolidated balance sheets, and interest income related to short-term bank deposits is recorded in our consolidated statements of operations in other income (expense), net.
Receivables.    We do significant business with a number of customers, including certain home center retailers and homebuilders. We monitor our exposure for credit losses on our customer receivable balances and the credit worthiness of our customers on an on-going basis and record related allowances for doubtful accounts. Allowances are estimated based upon specific customer balances, where a risk of default has been identified, and also include a provision for non-customer specific defaults based upon historical collection, return and write-off activity. During downturns in our markets, declines in the financial condition and creditworthiness of customers impacts the credit risk of the receivables involved and we have incurred additional bad debt expense related to customer defaults. A separate allowance is recorded for customer incentive rebates and is generally based upon sales activity. Receivables are presented net of certain allowances (including allowances for doubtful accounts) of $40 million and $41 million at December 31, 2016 and 2015, respectively.
Property and Equipment.    Property and equipment, including significant improvements to existing facilities, are recorded at cost. Upon retirement or disposal, the cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the consolidated statements of operations. Maintenance and repair costs are charged against earnings as incurred.




A. ACCOUNTING POLICIES (Continued)
We review our property and equipment as events occur or circumstances change that would more likely than not reduce the fair value of the property and equipment below the carrying amount. If the carrying amount of property and equipment is not recoverable from its undiscounted cash flows, then we would recognize an impairment loss for the difference between the carrying amount and the current fair value. Further, we evaluate the remaining useful lives of property and equipment at each reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods.
Depreciation.    Depreciation expense is computed principally using the straight-line method over the estimated useful lives of the assets. Annual depreciation rates are as follows: buildings and land improvements, 2 to 10 percent, and machinery and equipment, 5 to 33 percent. Depreciation expense was $124 million, $116 million and $132 million in 2016, 2015 and 2014, respectively.
Goodwill and Other Intangible Assets.    We perform our annual impairment testing of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We have defined our reporting units and completed the impairment testing of goodwill at the operating segment level. Our operating segments are reporting units that engage in business activities, for which discrete financial information, including five-year forecasts, are available. We compare the fair value of the reporting units to the carrying value of the reporting units for goodwill impairment testing. Fair value is determined using a discounted cash flow method, which includes significant unobservable inputs (Level 3 inputs), and requires us to make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. Our judgments are based upon historical experience, current market trends, consultations with external valuation specialists and other information. While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, different estimates and assumptions could result in different outcomes. In estimating future cash flows, we rely on internally generated five-year forecasts for sales and operating profits, including capital expenditures, and, currently, a one to three percent long-term assumed annual growth rate of cash flows for periods after the five-year forecast. We utilize our weighted average cost of capital of approximately 8.5 percent as the basis to determine the discount rate to apply to the estimated future cash flows. In 2016, based upon our assessment of the risks impacting each of our businesses, we applied a risk premium to increase the discount rate to a range of 10.5 percent to 13.5 percent for our reporting units.
If the carrying amount of a reporting unit exceeds its fair value, we measure the possible goodwill impairment based upon an allocation of the estimate of fair value of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including any previously unrecognized intangible assets (Step Two Analysis). The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized to the extent that a reporting unit's recorded goodwill exceeds the implied fair value of goodwill.
We review our other indefinite-lived intangible assets for impairment annually in the fourth quarter of each year, or as events occur or circumstances change that indicate the assets may be impaired without regard to the business unit. We consider the implications of both external (e.g., market growth, competition and local economic conditions) and internal (e.g., product sales and expected product growth) factors and their potential impact on cash flows related to the intangible asset in both the near- and long-term.
Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. We evaluate the remaining useful lives of amortizable intangible assets at each reporting period to determine whether events and circumstances warrant a revision to the remaining periods of amortization. Refer to Note H to the consolidated financial statements for additional information regarding goodwill and other intangible assets, net.
Fair Value Accounting.    We follow accounting guidance for our financial investments and liabilities, which defines fair value, establishes a framework for measuring fair value and prescribes disclosures about fair value measurements. We also follow this guidance for our non-financial investments and liabilities.
The fair value of financial investments and liabilities is determined at each balance sheet date and future declines in market conditions, the future performance of the underlying investments or new information could affect the recorded values of our investments in available-for-sale securities, private equity funds and other investments.



A. ACCOUNTING POLICIES (Continued)
We use derivative financial instruments to manage certain exposure to fluctuations in earnings and cash flows resulting from changes in foreign currency exchange rates, commodity costs and interest rate exposures. Derivative financial instruments are recorded in the consolidated balance sheets as either an asset or liability measured at fair value, netted by counterparty, where the right of offset exists. The gain or loss is recognized in determining current earnings during the period of the change in fair value. We currently do not have any derivative instruments for which we have designated hedge accounting.
Warranty.    We offer full and limited warranties on certain products with warranty periods ranging up to the lifetime of the product to the original consumer purchaser. At the time of sale, we accrue a warranty liability for the estimated future cost to provide products, parts or services to repair or replace products in satisfaction of warranty obligations. Our estimate of future costs to service our warranty obligations is based upon the information available and includes a number of factors, such as the warranty coverage, the warranty period, historical experience specific to the nature, frequency and average cost to service the claim, along with industry and demographic trends.
Certain factors and related assumptions in determining our warranty liability involve judgments and estimates and are sensitive to changes in the aforementioned factors. We believe that the warranty accrual is appropriate; however, actual claims incurred could differ from the original estimates thereby requiring adjustments to previously established accruals. Refer to Note U to the consolidated financial statements for additional information on our warranty accrual.
A significant portion of our business is at the consumer retail level through home center retailers and other major retailers. A consumer may return a product to a retail outlet that is a warranty return. However, certain retail outlets do not distinguish between warranty and other types of returns when they claim a return deduction from us. Our revenue recognition policy takes into account this type of return when recognizing revenue, and deductions are recorded at the time of sale.
Insurance Reserves.    We provide for expenses associated with workers' compensation and product liability obligations when such amounts are probable and can be reasonably estimated. The accruals are adjusted as new information develops or circumstances change that would affect the estimated liability. Any obligations expected to be settled within 12 months are recorded in accrued liabilities; all other obligations are recorded in other liabilities.
Stock-Based Compensation.    We measure compensation expense for stock awards at the market price of our common stock at the grant date. Such expense is recognized ratably over the shorter of the vesting period of the stock awards, typically 5 to 10 years, or the length of time until the grantee becomes retirement-eligible at age 65.
We measure compensation expense for stock options using a Black-Scholes option pricing model. Such expense is recognized ratably over the shorter of the vesting period of the stock options, typically five years, or the length of time until the grantee becomes retirement-eligible at age 65. We utilize the shortcut method to determine the tax windfall pool associated with stock options.
Noncontrolling Interest.    We owned 68 percent of Hansgrohe SE at both December 31, 2016 and 2015. The aggregate noncontrolling interest, net of dividends, at December 31, 2016 and 2015 has been recorded as a component of equity on our consolidated balance sheets.
Interest and Penalties on Uncertain Tax Positions.    We record interest and penalties on our uncertain tax positions in income tax expense (benefit).
Reclassifications.    Certain prior year amounts have been reclassified to conform to the 2016 presentation in the consolidated financial statements. In our consolidated statements of cash flows, the cash flows from discontinued operations are not separately classified.
Revision of Previously Issued Financial Statements. We have revised the previously reported balances on our consolidated balance sheet as of December 31, 2015 to correct the classification for warranty claims not expected to be settled within the next year. Accrued liabilities decreased and other liabilities increased from the amounts previously reported by $102 million. This revision had no effect on our consolidated statements of operations or consolidated statements of cash flows. This revision is not considered material to our prior period financial statements.



A. ACCOUNTING POLICIES (Continued)

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

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

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

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

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

In January 2016, the FASB issued Accounting Standards Update 2016-01 (“ASU 2016-01”), “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU 2016-01 is effective for us for annual periods beginning January 1, 2018. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
    
In February 2016, the FASB issued a new standard for leases, Accounting Standards Codification 842 (“ASC 842”), which changes the accounting model for identifying and accounting for leases. ASC 842 is effective for us for annual periods beginning January 1, 2019 and requires retrospective application. We expect this standard to increase our total assets and total liabilities; however, we are currently evaluating the magnitude of the impact the adoption of this new standard will have on our financial position and results of operations.


A. ACCOUNTING POLICIES (Concluded)

In March 2016, the FASB issued Accounting Standards Update 2016-09 (“ASU 2016-09”), “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which requires the tax effects related to share-based payments to be recorded through the income statement and simplifies the accounting requirements for forfeitures and employers' tax withholding requirements. ASU 2016-09 is effective for us for annual periods beginning January 1, 2017. We anticipate the impact of the adoption of this ASU will be limited to the reclassification of certain items within our statements of cash flows, which we intend to adopt retrospectively. We expect an increase to our cash flows from (for) operating activities and a decrease to our cash flows from (for) financing activities. Subsequent to adoption, we anticipate volatility in our effective tax rate as any windfall or shortfall tax benefits related to our stock-based compensation incentives will be recorded directly into our results of operations.
    
In January 2017, the FASB issued Accounting Standards Update 2017-04 ("ASU 2017-04"), "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for us for annual periods beginning January 1, 2020. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
DISCONTINUED OPERATIONS
DISCONTINUED OPERATIONS
DISCONTINUED OPERATIONS
The presentation of discontinued operations includes a component or group of components that we have or intend to dispose of, and represents a strategic shift that has (or will have) a major effect on our operations and financial results. For spin off transactions, discontinued operations treatment is appropriate following the completion of the spin off.
On September 30, 2014, we announced a plan to spin off 100 percent of our Installation and Other Services businesses into an independent, publicly-traded company named TopBuild Corp. ("TopBuild") through a tax-free distribution of the stock of TopBuild to our stockholders. We initiated the spin off as TopBuild was no longer considered core to our long-term growth strategy in branded building products. On June 30, 2015, immediately prior to the effective time of the spin off, TopBuild paid a cash distribution to us of $200 million using the proceeds of its new debt financing arrangement. This transaction was reported as a financing activity in the consolidated statements of cash flows. We have accounted for the spin off of TopBuild as a discontinued operation. Losses from this discontinued operation were included in (loss) income from discontinued operations, net, in the consolidated statements of operations.
The major classes of line items constituting pre-tax (loss) profit of the discontinued operations, in millions:
 
Year Ended December 31
 
2016
 
2015
 
2014
Net sales (1)
$

 
$
762

 
$
1,515

Cost of sales (1)

 
603

 
1,188

Gross profit (1)

 
159

 
327

Selling, general and administrative expenses (1)

 
148

 
259

Income from discontinued operations
$

 
$
11

 
$
68

Other discontinued operations results:
 

 
 

 
 

Loss on disposal of discontinued operations, net (2)

 
(1
)
 
(6
)
Income before income tax

 
10

 
62

Income tax expense (3)

 
(12
)
 
(27
)
(Loss) income from discontinued operations, net
$

 
$
(2
)
 
$
35

                                                         
(1)
Net sales, cost of sales, gross profit, and selling, general and administrative expenses reflect the results of TopBuild.
(2)
Included in loss on disposal of discontinued operations, net in 2014 are additional costs and charges related to the 2013 sale of Tvilum, our Danish ready-to-assemble cabinet business.
(3)
The unusual relationship between income tax expense and income before income tax for 2015 resulted primarily from certain non-deductible transaction costs related to the spin off of TopBuild.
Other selected financial information for TopBuild during the period owned by us, was as follows, in millions:
 
Year Ended December 31
 
2016
 
2015
 
2014
Depreciation and amortization
$

 
$
6

 
$
26

Capital expenditures
$

 
$
7

 
$
13

We did not have any assets or liabilities related to discontinued operations at either December 31, 2016 or 2015.
In conjunction with the spin off, we entered into a Transition Services Agreement with TopBuild under which we provided administrative services to TopBuild subsequent to the separation. This agreement terminated on June 30, 2016. The fees for services rendered under the Transition Services Agreement are not material to our results of operations.
ACQUISITIONS
ACQUISITIONS
ACQUISITIONS
In the second quarter of 2015, we acquired a U.K. window business for approximately $16 million in cash in the Windows and Other Specialty Products segment. This acquisition will support our U.K. window business' growth strategy by expanding its product offerings into timber-alternative windows and doors.
In the first quarter of 2015, we acquired an aquatic fitness business for approximately $25 million in cash in the Plumbing Products segment. This acquisition will allow our spa business to expand its wellness products platform, open new channels of distribution and access a new customer base.
These acquisitions are not material to us. The results of these acquisitions are included in the consolidated financial statements from the date of their respective acquisition.
INVENTORIES
INVENTORIES
INVENTORIES
 
                                     (In Millions)
At December 31
 
2016
 
2015
Finished goods
$
366

 
$
358

Raw material
254

 
238

Work in process
92

 
91

Total
$
712

 
$
687



Inventories, which include purchased parts, materials, direct labor and applied manufacturing overhead, are stated at the lower of cost or net realizable value, with cost determined by use of the first-in, first-out method.
FAIR VALUE OF FINANCIAL INVESTMENTS AND LIABILITIES
FAIR VALUE OF FINANCIAL INVESTMENTS AND LIABILITIES
FAIR VALUE OF FINANCIAL INVESTMENTS AND LIABILITIES
Accounting Policy.    We follow accounting guidance that defines fair value, establishes a framework for measuring fair value and prescribes disclosures about fair value measurements for financial investments and liabilities. The guidance defines fair value as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." Further, it defines a fair value hierarchy, as follows: Level 1 inputs as quoted prices in active markets for identical assets or liabilities; Level 2 inputs as observable inputs other than Level 1 prices, such as quoted market prices for similar assets or liabilities or other inputs that are observable or can be corroborated by market data; and Level 3 inputs as unobservable inputs that are supported by little or no market activity and that are financial instruments whose value is determined using pricing models or instruments for which the determination of fair value requires significant management judgment or estimation.
Financial investments that are available to be traded on readily accessible stock exchanges (domestic or foreign) are considered to have active markets and have been valued using Level 1 inputs. Financial investments that are not available to be traded on a public market or have limited secondary markets, or contain provisions that limit the ability to sell the investment are considered to have inactive markets and have been valued using Level 2 or 3 inputs. We incorporated credit risk into the valuations of financial investments by estimating the likelihood of non-performance by the counterparty to the applicable transactions. The estimate included the length of time relative to the contract, financial condition of the counterparty and current market conditions. The criteria for determining if a market was active or inactive were based on the individual facts and circumstances.












E. FAIR VALUE OF FINANCIAL INVESTMENTS AND LIABILITIES (Continued)
Financial Investments.    We have maintained investments in available-for-sale securities, equity method investments, and a number of private equity funds and other private investments, principally as part of our tax planning strategies, as any gains enhance the utilization of any current and future tax capital losses.
Financial investments included in other assets were as follows, in millions:
 
At December 31
 
2016
 
2015
Auction rate securities
$

 
$
22

Total recurring investments

 
22

Equity method investments
13

 
13

Private equity funds
5

 
10

Other investments

 
3

Total
$
18

 
$
48


Auction Rate Securities.    During 2016, all of our auction rate securities were called by our counterparties and redeemed at values that approximated our recorded basis. Our investments in available-for-sale securities included cost basis of $19 million and pre-tax unrealized gains of $3 million and had a recorded basis of $22 million at December 31, 2015.
Equity Method Investments.    Investments in private equity fund partnerships, joint ventures and less than majority-owned subsidiaries in which we have significant influence are accounted for under the equity method. Our consolidated statements of operations include our proportionate share of the net income (loss) of our equity method investees. When we record our proportionate share of net income (loss), it increases (decreases) our equity income in our consolidated statement of operations and our carrying value of that investment on our consolidated balance sheet.
During the fourth quarter of 2014, we sold our investment in the private equity fund, Long Point Capital Fund II L.P. (accounted for as an equity method investment) for proceeds of $48 million, which approximated net book value. Such proceeds are included in the consolidated statements of cash flows in proceeds from other financial investments, in the investing activities section.
Private Equity Funds and Other Investments.    Our investments in private equity funds and other private investments, where we do not have significant influence, are carried at cost. During 2016, we abandoned our interest in a private investment, resulting in a $3 million loss recorded to our other investments.
Recurring Fair Value Measurements.    For financial investments measured at fair value on a recurring basis at each reporting period, the unrealized gains or losses (that are deemed to be temporary) are recognized, net of tax effect, through shareholders' equity, as a component of other comprehensive income (loss). Realized gains and losses and charges for other-than-temporary impairments are included in determining net income, with related purchase costs based upon specific identification.
For the year ended December 31, 2016, all our Level 3 investments were redeemed due to the early redemption of all our auction rate securities which reduced our Level 3 investments by $22 million.
Non-Recurring Fair Value Measurements.    It is not practicable for us to estimate the fair value of equity method investments or private equity funds and other private investments where we do not have significant influence, because there are no quoted market prices and sufficient information is not readily available for us to utilize a valuation model to determine the fair value for each fund. Due to the significant unobservable inputs, the fair value measurements used to evaluate impairment are a Level 3 input. These investments are evaluated, on a non-recurring basis, for potential other-than-temporary impairment when impairment indicators are present, or when an event or change in circumstances has occurred, that may have a significant adverse effect on the fair value of the investment.
There were no financial investments measured for impairment on a non-recurring basis during 2016, 2015 or 2014.
We did not have any transfers between Level 1 and Level 2 financial assets in 2016 or 2015.
E. FAIR VALUE OF FINANCIAL INVESTMENTS AND LIABILITIES (Concluded)
Realized Gains (Losses).    Income from financial investments, net, included in other, net, within other income (expense), net, was as follows, in millions:
 
2016
 
2015
 
2014
Realized gains from auction rate securities
$
3

 
$

 
$

Equity investment income (loss), net
2

 
2

 
(2
)
Realized gains from private equity funds
5

 
6

 
4

Loss from other investments
(3
)
 

 

Income from financial investments, net
$
7

 
$
8

 
$
2



Fair value of debt.    The fair value of our short-term and long-term fixed-rate debt instruments is based principally upon modeled market prices for the same or similar issues or the current rates available to us for debt with similar terms and remaining maturities. The aggregate estimated market value of short-term and long-term debt at December 31, 2016 was approximately $3.3 billion, compared with the aggregate carrying value of $3.0 billion. The aggregate estimated market value of short-term and long-term debt at December 31, 2015 was approximately $3.6 billion, compared with the aggregate carrying value of $3.4 billion.
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 include interest rate swap agreements, foreign currency contracts and metals contracts intended to hedge our exposure to copper and zinc. We review our hedging program, derivative positions and overall risk management on a regular basis.
Interest Rate Swap Agreements.    In 2012, in connection with the issuance of $400 million of debt, we terminated the interest rate swap hedge relationships that we had entered into in 2011. These interest rate swaps were designated as cash flow hedges and effectively fixed interest rates on the forecasted debt issuance to variable rates based on 3-month LIBOR. Upon termination, the ineffective portion of the cash flow hedges of approximately $2 million loss was recognized in our consolidated statement of operations in other, net. The remaining loss of approximately $23 million from the termination of these swaps is being amortized as an increase to interest expense over the remaining term of the debt, through March 2022. At December 31, 2016, the balance remaining in accumulated other comprehensive loss was $13 million (pre-tax).
Foreign Currency Contracts.    Our net cash inflows and outflows exposed to the risk of changes in foreign currency exchange rates arise from the sale of products in countries other than the manufacturing source, foreign currency denominated supplier payments, debt and other payables, and investments in subsidiaries. To mitigate this risk, we, including certain European operations, entered into foreign currency forward contracts and foreign currency exchange contracts.
Gains (losses) related to foreign currency forward and exchange contracts are recorded in our consolidated statements of operations in other income (expense), net. In the event that the counterparties fail to meet the terms of the foreign currency forward or exchange contracts, our exposure is limited to the aggregate foreign currency rate differential with such institutions.












F. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Concluded)
Metals Contracts.    We have entered into several contracts to manage our exposure to increases in the price of copper and zinc. Gains (losses) related to these contracts are recorded in our consolidated statements of operations in cost of sales.
The pre-tax gains (losses) included in our consolidated statements of operations are as follows, in millions:
 
Year Ended December 31,
 
2016
 
2015
 
2014
Foreign currency contracts:
 

 
 

 
 

Exchange contracts
$

 
$
4

 
$
5

Forward contracts

 
(3
)
 

Metals contracts
5

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

 
$
(18
)
 
$


We present our derivatives net by counterparty, due to the right of offset under master netting arrangements in the consolidated balance sheets. The notional amounts being hedged and the fair value of those derivative instruments are as follows, in millions:
 
At December 31, 2016
 
Notional Amount
 
Balance Sheet
Foreign currency contracts
 
 
 

Forward contracts
$
21

 
 
Accrued liabilities
 
 
$
(2
)
Metals contracts
1

 
 
Accrued liabilities
 
 

 
 
At December 31, 2015
 
Notional Amount
 
Balance Sheet
Foreign currency contracts:
 

 
 

Exchange contracts
$
39

 
 

Receivables
 

 
$
1

Forward contracts
30

 
 

Accrued liabilities
 

 
(2
)
Other liabilities
 

 
(1
)
Metals contracts
50

 
 

Accrued liabilities
 

 
(10
)

The fair value of all foreign currency and metals derivative contracts is estimated on a recurring basis, quarterly, using Level 2 inputs.
PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT
 
(In Millions)
At December 31
 
 
2016
 
2015
Land and improvements
$
111

 
$
115

Buildings
712

 
672

Machinery and equipment
1,795

 
1,787

 
2,618

 
2,574

Less: Accumulated depreciation
(1,558
)
 
(1,547
)
Total
$
1,060

 
$
1,027


We lease certain equipment and plant facilities under noncancellable operating leases. Rental expense recorded in the consolidated statements of operations totaled approximately $63 million, $60 million and $63 million during 2016, 2015 and 2014, respectively.
At December 31, 2016, future minimum lease payments were as follows, in millions:
2017
$
44

2018
35

2019
25

2020
19

2021
16

2022 and beyond
50



During 2014, we decided to sell two facilities in our Cabinetry Products segment, and we recorded a charge of $28 million, included in cost of sales in the consolidated statement of operations, to reflect the estimated fair value of those two facilities. Fair value was estimated using a market approach, considering the estimated fair values for other comparable buildings in the areas where the facilities are located (Level 3 inputs). These facilities were sold in 2015.
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, 2016
 
Accumulated
Impairment
Losses
 
Net Goodwill At December 31, 2016
Plumbing Products
$
519

 
$
(340
)
 
$
179

Decorative Architectural Products
294

 
(75
)
 
219

Cabinetry Products
240

 
(59
)
 
181

Windows and Other Specialty Products
987

 
(734
)
 
253

Total
$
2,040

 
$
(1,208
)
 
$
832


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

 
$
(340
)
 
$
185

 
$

 
$
(6
)
 
$
179

Decorative Architectural Products
294

 
(75
)
 
219

 

 

 
219

Cabinetry Products
240

 
(59
)
 
181

 

 

 
181

Windows and Other Specialty Products
988

 
(734
)
 
254

 

 
(1
)
 
253

Total
$
2,047

 
$
(1,208
)
 
$
839

 
$

 
$
(7
)
 
$
832

 
H. GOODWILL AND OTHER INTANGIBLE ASSETS (Concluded)
 
Gross Goodwill At December 31, 2014
 
Accumulated
Impairment
Losses
 
Net Goodwill At December 31, 2014
 
Additions (A)
 
Other (B)
 
Net Goodwill At December 31, 2015
Plumbing Products
$
531

 
$
(340
)
 
$
191

 
$
8

 
$
(14
)
 
$
185

Decorative Architectural Products
294

 
(75
)
 
219

 

 

 
219

Cabinetry Products
240

 
(59
)
 
181

 

 

 
181

Windows and Other Specialty Products
983

 
(734
)
 
249

 
6

 
(1
)
 
254

Total
$
2,048

 
$
(1,208
)
 
$
840

 
$
14

 
$
(15
)
 
$
839

                                                             
(A)
Additions consist of acquisitions.
(B)
Other principally includes the effect of foreign currency translation.
We completed our annual impairment testing of goodwill and other indefinite-lived intangible assets in the fourth quarters of 2016, 2015 and 2014. There was no impairment of goodwill for any of our reporting units for any of these years.
Other indefinite-lived intangible assets were $136 million and $137 million at December 31, 2016 and 2015, respectively, and principally included registered trademarks. In 2016 and 2015, the impairment test indicated there was no impairment of other indefinite-lived intangible assets for any of our business units. In 2014, we recognized an insignificant impairment charge for other indefinite-lived intangible assets. As a result of our 2015 acquisitions, other indefinite lived intangible assets increased by $7 million as of the acquisition dates.
The carrying value of our definite-lived intangible assets was $18 million (net of accumulated amortization of $16 million) at December 31, 2016 and $23 million (net of accumulated amortization of $49 million) at December 31, 2015 and principally included customer relationships with a weighted average amortization period of 10 years in 2016 and 2015. Amortization expense related to the definite-lived intangible assets of continuing operations was $4 million, $6 million and $4 million in 2016, 2015 and 2014, respectively. As a result of our 2015 acquisitions, definite-lived intangible assets increased by $17 million as of the acquisition dates.
At December 31, 2016, amortization expense related to the definite-lived intangible assets during each of the next five years was as follows: 2017 – $3 million; 2018 – $2 million; 2019 – $2 million, 2020 – $2 million and 2021 –$2 million.
OTHER ASSETS
OTHER ASSETS
OTHER ASSETS
 
(In Millions)
At December 31
 
 
2016
 
2015
Financial investments (Note E)
$
18

 
$
48

In-store displays, net
42

 
56

Deferred tax assets (Note S)
68

 
184

Other
29

 
22

Total
$
157

 
$
310


In-store displays are amortized using the straight-line method over the expected useful life of three to five years; we recognized amortization expense related to in-store displays of $25 million, $20 million and $15 million in 2016, 2015 and 2014, respectively. Cash spent for displays was $11 million, $43 million and $30 million in 2016, 2015 and 2014, respectively, and are included in other, net within investing activities on the consolidated statements of cash flows.
ACCRUED LIABILITIES
ACCRUED LIABILITIES
ACCRUED LIABILITIES
 
(In Millions)
At December 31
 
 
2016
 
2015
Salaries, wages and commissions
$
191

 
$
171

Advertising and sales promotion
146

 
132

Interest
51

 
62

Warranty (Note U)
56

 
50

Employee retirement plans
52

 
48

Insurance reserves
41

 
44

Property, payroll and other taxes
19

 
25

Dividends payable
32

 
32

Other
70

 
86

Total
$
658

 
$
650

DEBT
DEBT
DEBT
 
(In Millions)
At December 31
 
 
2016
 
2015
Notes and debentures:
 

 
 

6.125%, due October 3, 2016
$

 
$
1,000

5.850%, due March 15, 2017

 
300

6.625%, due April 15, 2018
114

 
114

7.125%, due March 15, 2020
500

 
500

3.500%, due April 1, 2021
399

 

5.950%, due March 15, 2022
400

 
400

4.450%, due April 1, 2025
500

 
500

4.375%, due April 1, 2026
498

 

7.750%, due August 1, 2029
296

 
296

6.500%, due August 15, 2032
300

 
300

Other
9

 
13

Prepaid debt issuance costs
(19
)
 
(16
)
 
2,997

 
3,407

Less: Current portion
2

 
1,004

Total long-term debt
$
2,995

 
$
2,403


All of the notes and debentures above are senior indebtedness and, other than the 6.625% notes due 2018 and the 7.75% notes due 2029, are redeemable at our option.
On March 17, 2016, we issued $400 million of 3.5% Notes due April 1, 2021 and $500 million of 4.375% Notes due April 1, 2026. We received proceeds of $896 million, net of discount, for the issuance of these Notes. The Notes are senior indebtedness and are redeemable at our option at the applicable redemption price. On April 15, 2016, proceeds from the debt issuances, together with cash on hand, were used to repay and early retire all of our $1 billion, 6.125% Notes which were due on October 3, 2016 and all of our $300 million, 5.85% Notes which were due on March 15, 2017. In connection with these early retirements, we incurred $40 million of debt extinguishment costs, which we recorded as interest expense.
On June 15, 2015, we repaid and retired all of our $500 million, 4.8% Notes on the scheduled retirement date.
On March 24, 2015, we issued $500 million of 4.45% Notes due April 1, 2025.
K. DEBT (Concluded)
On March 28, 2013, we entered into a credit agreement (the "Credit Agreement") with a bank group, with an aggregate commitment of $1.25 billion and a maturity date of March 28, 2018. On May 29, 2015 and August 28, 2015, we amended the Credit Agreement with the bank group (the "Amended Credit Agreement"). The Amended Credit Agreement reduces the aggregate commitment to $750 million and extends the maturity date to May 29, 2020. Under the Amended Credit Agreement, at our request and subject to certain conditions, we can increase the aggregate commitment up to an additional $375 million with the current bank group or new lenders.
The Amended Credit Agreement provides for an unsecured revolving credit facility available to us and one of our foreign subsidiaries, in U.S. dollars, European euros and certain other currencies. Borrowings under the revolver denominated in euros are limited to $500 million, equivalent. We can also borrow swingline loans up to $75 million and obtain letters of credit of up to $100 million; any outstanding letters of credit under the Amended Credit Agreement reduce our borrowing capacity. At December 31, 2016, we had no of outstanding standby letters of credit under the Amended Credit Agreement.
Revolving credit loans bear interest under the Amended Credit Agreement, at our option, at (A) a rate per annum equal to the greater of (i) the prime rate, (ii) the Federal Funds effective rate plus 0.50% and (iii) LIBOR plus 1.0% (the "Alternative Base Rate"); plus an applicable margin based upon our then-applicable corporate credit ratings; or (B) LIBOR plus an applicable margin based upon our then-applicable corporate credit ratings. The foreign currency revolving credit loans bear interest at a rate equal to LIBOR plus an applicable margin based upon our then-applicable corporate credit ratings.
The Amended Credit Agreement contains financial covenants requiring us to maintain (A) a maximum net leverage ratio, as adjusted for certain items, of 4.0 to 1.0, and (B) a minimum interest coverage ratio, as adjusted for certain items, equal to or greater than 2.5 to 1.0.
In order for us to borrow under the Amended Credit Agreement, there must not be any default in our covenants in the Amended Credit Agreement (i.e., in addition to the two financial covenants, principally limitations on subsidiary debt, negative pledge restrictions, legal compliance requirements and maintenance of properties and insurance) and our representations and warranties in the Amended Credit Agreement must be true in all material respects on the date of borrowing (i.e., principally no material adverse change or litigation likely to result in a material adverse change, since December 31, 2014, in each case, no material ERISA or environmental non-compliance, and no material tax deficiency). We were in compliance with all covenants and no borrowings have been made at December 31, 2016.
At December 31, 2016, the debt maturities during each of the next five years were as follows: 2017 – $2 million; 2018$115 million; 2019 – $1 million; 2020 – $501 million and 2021 – $401 million.
Interest paid was $198 million, $216 million and $220 million in 2016, 2015 and 2014, respectively. The amount paid in 2016 excludes $40 million of debt extinguishment costs related to the early retirement of debt.
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, 2016, outstanding stock-based incentives were in the form of long-term stock awards, stock options, phantom stock awards and stock appreciation rights.
Pre-tax compensation expense and the related income tax benefit for these stock-based incentives were as follows, in millions:
 
2016
 
2015
 
2014
Long-term stock awards
$
23

 
$
23

 
$
33

Stock options
2

 
5

 
4

Phantom stock awards and stock appreciation rights
4

 
11

 
6

Total
$
29

 
$
39

 
$
43

Income tax benefit (37 percent tax rate)
$
11

 
$
14

 
$
16


At December 31, 2016, 16.3 million shares of our common stock were available under the 2014 Plan for the granting of stock options and other long-term stock incentive awards.
L. STOCK-BASED COMPENSATION (Continued)
Long-Term Stock Awards.    Long-term stock awards are granted to our key employees and non-employee Directors and do not cause net share dilution inasmuch as we continue the practice of repurchasing and retiring an equal number of shares in the open market. We granted 1,055,380 shares of long-term stock awards during 2016.
Our long-term stock award activity was as follows, shares in millions:

 
2016
 
2015
 
2014
Unvested stock award shares at January 1
5

 
6

 
8

Weighted average grant date fair value
$
17

 
$
18

 
$
17

Stock award shares granted
1

 
1

 
1

Weighted average grant date fair value
$
26

 
$
26

 
$
22

Stock award shares vested
2

 
2

 
2

Weighted average grant date fair value
$
16

 
$
17

 
$
17

Stock award shares forfeited

 

 
1

Weighted average grant date fair value
$
20

 
$
18

 
$
19

Forfeitures upon spin off (A)

 
1

 

Weighted average grant date fair value
$

 
$
20

 
$

Modification upon spin off (B)

 
1

 

Unvested stock award shares at December 31
4

 
5

 
6

Weighted average grant date fair value
$
20

 
$
17

 
$
18

                                                            
(A)
In connection with the spin off of TopBuild, TopBuild employees forfeited their outstanding Masco equity awards.
(B)
Subsequent to the separation of TopBuild, we modified our outstanding equity awards to employees and non-employee Directors such that all individuals received an equivalent fair value both before and after the separation. The modification to the outstanding stock awards was made pursuant to existing anti-dilution provisions in our 2014 Plan and 2005 Long Term Incentive Plan.
At December 31, 2016, 2015 and 2014, there was $43 million, $42 million and $60 million, respectively, of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of three years at December 31, 2016, 2015 and 2014.
The total market value (at the vesting date) of stock award shares which vested during 2016, 2015 and 2014 was $43 million, $54 million and $50 million, respectively.
Stock Options.    Stock options are granted to our key employees. The exercise price equals the market price of our common stock at the grant date. These options generally become exercisable (vest ratably) over five years beginning on the first anniversary from the date of grant and expire no later than 10 years after the grant date.
We granted 474,500 shares of stock options during 2016 with a grant date weighted-average exercise price of approximately $26 per share. During 2016, no stock option shares were forfeited (including options that expired unexercised).









L. STOCK-BASED COMPENSATION (Continued)

Our stock option activity was as follows, shares in millions:
 
2016
 
2015
 
2014
Option shares outstanding, January 1
12

 
18

 
24

Weighted average exercise price
$
17

 
$
21

 
$
22

Option shares granted

 

 

Weighted average exercise price
$
26

 
$
26

 
$
22

Option shares exercised
5

 
5

 
2

Aggregate intrinsic value on date of exercise (A)
$
64
 million
 
$
50
 million
 
$
22
 million
Weighted average exercise price
$
21

 
$
17

 
$
16

Option shares forfeited

 
3

 
4

Weighted average exercise price
$

 
$
29

 
$
28

Forfeitures upon spin off (B)

 

 

Weighted average exercise price
$

 
$
19

 
$

Modifications upon spin off (C)

 
2

 

Option shares outstanding, December 31
7

 
12

 
18

Weighted average exercise price
$
15

 
$
17

 
$
21

Weighted average remaining option term (in years)
4
 
3
 
4
Option shares vested and expected to vest, December 31
7

 
12

 
18

Weighted average exercise price
$
15

 
$
17

 
$
21

Aggregate intrinsic value (A)
$
118
 million
 
$
133
 million
 
$
110
 million
Weighted average remaining option term (in years)
4
 
3
 
4
Option shares exercisable (vested), December 31
6

 
10

 
15

Weighted average exercise price
$
13

 
$
18

 
$
22

Aggregate intrinsic value (A)
$
102
 million
 
$
113
 million
 
$
84
 million
Weighted average remaining option term (in years)
3
 
3
 
3
                                                                     
(A)
Aggregate intrinsic value is calculated using our stock price at each respective date, less the exercise price (grant date price) multiplied by the number of shares.
(B)
In connection with the spin off of TopBuild, TopBuild employees forfeited their outstanding Masco equity awards.
(C)
Subsequent to the separation of TopBuild, we modified our outstanding equity awards to employees and non-employee Directors such that all individuals received an equivalent fair value both before and after the separation. The modification to the outstanding options was made pursuant to existing anti-dilution provisions in our 2014 Plan and 2005 Long Term Incentive Plan.
At December 31, 2016, 2015 and 2014, there was $6 million of unrecognized compensation expense (using the Black-Scholes option pricing model at the grant date) related to unvested stock options; such options had a weighted average remaining vesting period of 3 years at December 31, 2016, and 2 years at both 2015 and 2014.










L. STOCK-BASED COMPENSATION (Concluded)

The weighted average grant date fair value of option shares granted and the assumptions used to estimate those values using a Black-Scholes option pricing model were as follows:
 
2016
 
2015
 
2014
Weighted average grant date fair value
$
6.43

 
$
9.67

 
$
9.53

Risk-free interest rate
1.41
%
 
1.75
%
 
1.91
%
Dividend yield
1.49
%
 
1.32
%
 
1.34
%
Volatility factor
29.00
%
 
42.00
%
 
49.00
%
Expected option life
6 years

 
6 years

 
6 years


The following table summarizes information for stock option shares outstanding and exercisable at December 31, 2016, shares in millions:
 
Option Shares Outstanding
 
Option Shares Exercisable
 
Range of
Prices
 
Number of
Shares
 
Weighted
Average
Remaining
Option
Term
 
Weighted
Average
Exercise
Price
 
Number of
Shares
 
Weighted
Average
Exercise
Price
$
7 - 18
 
5
 
3 Years
 
$12
 
5
 
$12
$
20 - 23
 
1
 
8 Years
 
$22
 
 
$21
$
26 - 27
 
1
 
5 Years
 
$26
 
1
 
$27
$
7 - 27
 
7
 
4 Years
 
$15
 
6
 
$13


Phantom Stock Awards and Stock Appreciation Rights ("SARs").    We grant phantom stock awards and SARs to certain non-U.S. employees.
Phantom stock awards are linked to the value of our common stock on the date of grant and are settled in cash upon vesting, typically over 5 to 10 years. We account for phantom stock awards as liability-based awards; the compensation expense is initially measured as the market price of our common stock at the grant date and is recognized over the vesting period. The liability is remeasured and adjusted at the end of each reporting period until the awards are fully-vested and paid to the employees. We recognized expense of $2 million related to phantom stock awards in 2016, and $5 million in both 2015 and 2014. In 2016, 2015 and 2014, we granted 140,710 shares, 134,560 shares and 183,530 shares, respectively, of phantom stock awards with an aggregate fair value of $4 million each year, and paid $5 million, $6 million and $5 million of cash in 2016, 2015 and 2014, respectively, to settle phantom stock awards.
SARs are linked to the value of our common stock on the date of grant and are settled in cash upon exercise. We account for SARs using the fair value method, which requires outstanding SARs to be classified as liability-based awards and valued using a Black-Scholes option pricing model at the grant date; such fair value is recognized as compensation expense over the vesting period, typically five years. The liability is remeasured and adjusted at the end of each reporting period until the SARs are exercised and payment is made to the employees or the SARs expire. We recognized expense of $2 million, $6 million and $1 million related to SARs in 2016, 2015 and 2014, respectively. During 2016, 2015 and 2014, we did not grant any SARs.
Information related to phantom stock awards and SARs was as follows, in millions:
 
Phantom
Stock
Awards
 
Stock
Appreciation
Rights
 
At December 31,
 
At December 31,
 
2016
 
2015
 
2016
 
2015
Accrued compensation cost liability
$
10

 
$
13

 
$
8

 
$
10

Unrecognized compensation cost
$
4

 
$
4

 
$

 
$

Equivalent common shares

 
1

 
1

 
1

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 Organization and Compensation Committee of the Board of Directors.
In addition, we participate in one regional multi-employer pension plan, principally related to building trades, which is not considered significant to us.
Pre-tax expense related to our retirement plans was as follows, in millions:
 
2016
 
2015
 
2014
Defined-contribution plans
$
58

 
$
52

 
$
43

Defined-benefit pension plans
34

 
32

 
25

 
$
92

 
$
84

 
$
68


We froze all future benefit accruals under substantially all our domestic and foreign qualified and domestic non-qualified defined benefit pension plans several years ago.
Changes in the projected benefit obligation and fair value of plan assets, and the funded status of our defined-benefit pension plans were as follows, in millions:
 
2016
 
2015
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Changes in projected benefit obligation:
 

 
 

 
 

 
 

Projected benefit obligation at January 1
$
1,059

 
$
174

 
$
1,145

 
$
190

Service cost
3

 

 
3

 

Interest cost
41

 
7

 
41

 
7

Actuarial (gain) loss, net
50

 
1

 
(61
)
 
(11
)
Foreign currency exchange
(29
)
 

 
(23
)
 

Benefit payments
(69
)
 
(12
)
 
(46
)
 
(12
)
Projected benefit obligation at December 31
$
1,055

 
$
170

 
$
1,059

 
$
174

Changes in fair value of plan assets:
 

 
 

 
 

 
 

Fair value of plan assets at January 1
$
658

 
$

 
$
691

 
$

Actual return on plan assets
58

 

 
(12
)
 

Foreign currency exchange
(20
)
 

 
(7
)
 

Company contributions
100

 
12

 
38

 
12

Expenses, other
(10
)
 

 
(6
)
 

Benefit payments
(69
)
 
(12
)
 
(46
)
 
(12
)
Fair value of plan assets at December 31
$
717

 
$

 
$
658

 
$

Funded status at December 31:
$
(338
)
 
$
(170
)
 
$
(401
)
 
$
(174
)

Amounts in our consolidated balance sheets were as follows, in millions:
 
At December 31, 2016
 
At December 31, 2015
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Other assets
$
2

 
$

 
$
1

 
$

Accrued liabilities
(1
)
 
(12
)
 
(3
)
 
(12
)
Other liabilities
(339
)
 
(158
)
 
(399
)
 
(162
)
Total net liability
$
(338
)
 
$
(170
)
 
$
(401
)
 
$
(174
)


M. EMPLOYEE RETIREMENT PLANS (Continued)
Unrealized loss included in accumulated other comprehensive loss before income taxes was as follows, in millions:
 
At December 31, 2016
 
At December 31, 2015
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Net loss
$
519

 
$
54

 
$
501

 
$
56

Net transition obligation
1

 

 
1

 

Net prior service cost
3

 

 
2

 

Total
$
523

 
$
54

 
$
504

 
$
56


Information for defined-benefit pension plans with an accumulated benefit obligation in excess of plan assets was as follows, in millions:
 
At December 31
 
2016
 
2015
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Projected benefit obligation
$
1,044

 
$
170

 
$
1,045

 
$
174

Accumulated benefit obligation
$
1,044

 
$
170

 
$
1,045

 
$
174

Fair value of plan assets
$
704

 
$

 
$
643

 
$


The projected benefit obligation was in excess of plan assets for all of our qualified defined-benefit pension plans at December 31, 2016 and 2015 which had an accumulated benefit obligation in excess of plan assets.
Net periodic pension cost for our defined-benefit pension plans was as follows, in millions:
 
2016
 
2015
 
2014
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Service cost
$
3

 
$

 
$
3

 
$

 
$
3

 
$

Interest cost
49

 
7

 
47

 
7

 
47

 
7

Expected return on plan assets
(44
)
 

 
(46
)
 

 
(45
)
 

Recognized net loss
17

 
2

 
18

 
3

 
11

 
2

Net periodic pension cost
$
25

 
$
9

 
$
22

 
$
10

 
$
16

 
$
9


We expect to recognize $21 million of pre-tax net loss from accumulated other comprehensive loss into net periodic pension cost in 2017 related to our defined-benefit pension plans. For plans in which almost all of the plan's participants are inactive, pre-tax net loss within other comprehensive income (loss) is amortized using the straight-line method over the remaining life expectancy of the inactive plan participants. For plans which do not have almost all inactive participants, pre-tax net loss within other comprehensive income (loss) is amortized using the straight-line method over the average remaining service period of the active employees expected to receive benefits from the plan.
Plan Assets.    Our qualified defined-benefit pension plan weighted average asset allocation, which is based upon fair value, was as follows:
 
2016
 
2015
Equity securities
49
%
 
49
%
Debt securities
32
%
 
32
%
Other
19
%
 
19
%
Total
100
%
 
100
%




M. EMPLOYEE RETIREMENT PLANS (Continued)
For our qualified defined-benefit pension plans, we have adopted accounting guidance that defines fair value, establishes a framework for measuring fair value and prescribes disclosures about fair value measurements. Accounting guidance defines fair value as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."
Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2016 compared to December 31, 2015.
        Common and Preferred Stocks and Short-Term and Other Investments: Valued at the closing price on the active market on which the individual securities are traded, or based on the active market for similar securities. Certain investments are valued based on NAV, which approximates fair value. Such basis is determined by referencing the respective fund's underlying assets. There are no unfunded commitments or other restrictions associated with these investments.
        Private Equity and Hedge Funds: Valued based on an estimated fair value using either a market approach or an income approach, each of which requires a significant degree of judgment. There is no active trading market for these investments and they are generally illiquid. Due to the significant unobservable inputs, the fair value measurements used to estimate fair value are a Level 3 input. Certain investments are valued based on NAV, which approximates fair value. Such basis is determined by referencing the respective fund's underlying assets. There are no unfunded commitments or other restrictions associated with these investments.
        Corporate, Government and Other Debt Securities: Valued based on either the closing price on the active market on which the individual securities are traded, or using pricing models maximizing the use of observable inputs for similar securities. This includes basing value on yields currently available on comparable securities of issuers with similar credit ratings. Certain investments are valued based on NAV, which approximates fair value. Such basis is determined by referencing the respective fund's underlying assets. There are no unfunded commitments or other restrictions associated with these investments.
        Common Collective Trust Fund: Valued based on an amortized cost basis, which approximates fair value. Such basis is determined by reference to the respective fund's underlying assets, which are primarily cash equivalents. There are no unfunded commitments or other restrictions associated with this fund.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following table sets forth, by level within the fair value hierarchy, the qualified defined-benefit pension plan assets at fair value as of December 31, 2016 and 2015, as well as those valued at NAV, which approximates fair value, in millions.











M. EMPLOYEE RETIREMENT PLANS (Continued)
 
At December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Measured at NAV
 
Total
Plan Assets
 
 
 
 
 
 
 
 
 
Common and Preferred Stocks:
 
 
 
 
 
 
 
 
 
United States
$
142

 
$

 
$

 
$
118

 
$
260

International
74