Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2016
 
Commission file number: 1-5794
 
Masco Corporation
(Exact name of Registrant as Specified in its Charter) 
Delaware
 
38-1794485
(State of
 
(IRS Employer
Incorporation)
 
Identification No.)
21001 Van Born Road, Taylor, Michigan
 
48180
(Address of Principal Executive Offices)
 
(Zip Code)

(313) 274-7400
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes   o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes   o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
o Yes   x No
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 
Class
 
Shares Outstanding at September 30, 2016
Common stock, par value $1.00 per share
 
328,307,161
 
 
 
 
 
 


MASCO CORPORATION

INDEX



 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Table of Contents
MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)


September 30, 2016 and December 31, 2015
(In Millions, Except Share Data)
 
 
September 30, 2016
 
December 31, 2015
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash investments
$
1,041

 
$
1,468

Short-term bank deposits
182

 
248

Receivables
1,054

 
853

Prepaid expenses and other
87

 
72

Inventories:
 

 
 

Finished goods
422

 
358

Raw material
243

 
238

Work in process
93

 
91

 
758

 
687

Total current assets
3,122

 
3,328

Property and equipment, net
1,049

 
1,027

Goodwill
841

 
839

Other intangible assets, net
155

 
160

Other assets
206

 
310

Total assets
$
5,373

 
$
5,664

 
 
 
 
LIABILITIES
 

 
 

Current liabilities:
 

 
 

Notes payable
$
3

 
$
1,004

Accounts payable
866

 
749

Accrued liabilities
642

 
650

Total current liabilities
1,511

 
2,403

Long-term debt
2,993

 
2,403

Other liabilities
766

 
800

Total liabilities
5,270

 
5,606

 
 
 
 
Commitments and contingencies (Note P)


 


 
 
 
 
EQUITY
 

 
 

Masco Corporation’s shareholders’ equity:
 

 
 

Common shares, par value $1 per share
Authorized shares: 1,400,000,000;
Issued and outstanding: 2016 – 324,500,000; 2015 – 330,500,000
325

 
330

Preferred shares authorized: 1,000,000;
Issued and outstanding: 2016 and 2015 – None
—

 
—

Paid-in capital
—

 
—

Retained deficit
(253
)
 
(300
)
Accumulated other comprehensive loss
(170
)
 
(165
)
Total Masco Corporation’s shareholders’ deficit
(98
)
 
(135
)
Noncontrolling interest
201

 
193

Total equity
103

 
58

Total liabilities and equity
$
5,373

 
$
5,664



See notes to condensed consolidated financial statements.

1
Table of Contents
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)


For the Three and Nine Months Ended September 30, 2016 and 2015
(In Millions, Except Per Common Share Data)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net sales
$
1,877

 
$
1,839

 
$
5,598

 
$
5,427

Cost of sales
1,263

 
1,250

 
3,715

 
3,706

Gross profit
614

 
589

 
1,883

 
1,721

Selling, general and administrative expenses
345

 
331

 
1,045

 
1,019

Operating profit
269

 
258

 
838

 
702

Other income (expense), net:
 

 
 

 
 

 
 

Interest expense
(43
)
 
(54
)
 
(186
)
 
(171
)
Other, net
1

 
(6
)
 
5

 
(2
)
 
(42
)
 
(60
)
 
(181
)
 
(173
)
Income from continuing operations before income taxes
227

 
198

 
657

 
529

Income tax expense
(81
)
 
(77
)
 
(229
)
 
(219
)
Income from continuing operations
146

 
121

 
428

 
310

Loss from discontinued operations, net
—

 
—

 
—

 
(1
)
Net income
146

 
121

 
428

 
309

Less: Net income attributable to noncontrolling interest
12

 
10

 
35

 
29

Net income attributable to Masco Corporation
$
134

 
$
111

 
$
393

 
$
280

 
 
 
 
 
 
 
 
Income per common share attributable to Masco Corporation:
 
 

 
 

 
 

Basic:
 

 
 

 
 

 
 

Income from continuing operations
$
.41

 
$
.33

 
$
1.18

 
$
.81

Loss from discontinued operations, net
—

 
—

 
—

 
—

Net income
$
.41

 
$
.33

 
$
1.18

 
$
.81

Diluted:
 

 
 

 
 

 
 

Income from continuing operations
$
.40

 
$
.32

 
$
1.17

 
$
.81

Loss from discontinued operations, net
—

 
—

 
—

 
—

Net income
$
.40

 
$
.32

 
$
1.17

 
$
.80

 
 
 
 
 
 
 
 
Amounts attributable to Masco Corporation:
 

 
 

 
 

 
 

Income from continuing operations
$
134

 
$
111

 
$
393

 
$
281

Loss from discontinued operations, net
—

 
—

 
—

 
(1
)
Net income
$
134

 
$
111

 
$
393

 
$
280

 










See notes to condensed consolidated financial statements.

2
Table of Contents
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)


For the Three and Nine Months Ended September 30, 2016 and 2015
(In Millions)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
146

 
$
121

 
$
428

 
$
309

Less: Net income attributable to noncontrolling interest
12

 
10

 
35

 
29

Net income attributable to Masco Corporation
$
134

 
$
111

 
$
393

 
$
280

Other comprehensive income (loss), net of tax (Note K):
 

 
 

 
 

 
 

Cumulative translation adjustment
$
(1
)
 
$
(17
)
 
$
(10
)
 
$
(70
)
Interest rate swaps
—

 
—

 
1

 
1

Pension and other post-retirement benefits
3

 
4

 
9

 
11

Realized gain on available-for-sale securities
—

 
—

 
(1
)
 
—

Other comprehensive income (loss)
2

 
(13
)
 
(1
)
 
(58
)
Less: Other comprehensive income (loss) attributable to noncontrolling interest
2

 
(1
)
 
4

 
(10
)
Other comprehensive income (loss) attributable to Masco Corporation
$
—

 
$
(12
)
 
$
(5
)
 
$
(48
)
Total comprehensive income
$
148

 
$
108

 
$
427

 
$
251

Less: Total comprehensive income attributable to the noncontrolling interest
14

 
9

 
39

 
19

Total comprehensive income attributable to Masco Corporation
$
134

 
$
99

 
$
388

 
$
232

 




























See notes to condensed consolidated financial statements.

3
Table of Contents
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


For the Nine Months Ended September 30, 2016 and 2015
(In Millions) 
 
 
Nine Months Ended
September 30,
 
2016
 
2015
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
 

 
 

Cash provided by operations
$
569

 
$
581

Increase in receivables
(245
)
 
(245
)
Increase in inventories
(73
)
 
(41
)
Increase in accounts payable and accrued liabilities, net
131

 
127

Net cash from operating activities
382

 
422

 
 
 
 
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
 

 
 

Retirement of notes
(1,300
)
 
(500
)
Purchase of Company common stock
(242
)
 
(407
)
Cash dividends paid
(95
)
 
(94
)
Dividend payment to noncontrolling interest
(31
)
 
(36
)
Cash distributed to TopBuild Corp.
—

 
(63
)
Issuance of TopBuild Corp. debt
—

 
200

Issuance of notes, net of issuance costs
889

 
497

Issuance of Company common stock
1

 
2

Excess tax benefit from stock-based compensation
21

 
32

Decrease in debt, net
(2
)
 
(1
)
Credit Agreement and other financing costs
—

 
(3
)
Net cash for financing activities
(759
)
 
(373
)
 
 
 
 
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(117
)
 
(112
)
Acquisition of companies, net of cash acquired
—

 
(41
)
Proceeds from disposition of:
 

 
 

Short-term bank deposits
223

 
251

Other financial investments
14

 
7

Property and equipment
—

 
13

Purchases of:
 

 
 

Short-term bank deposits
(151
)
 
(225
)
Other, net
(9
)
 
(37
)
Net cash for investing activities
(40
)
 
(144
)
 
 
 
 
Effect of exchange rate changes on cash and cash investments
(10
)
 
(9
)
 
 
 
 
CASH AND CASH INVESTMENTS:
 

 
 

Decrease for the period
(427
)
 
(104
)
At January 1
1,468

 
1,383

At September 30
$
1,041

 
$
1,279

 
See notes to condensed consolidated financial statements.

4
Table of Contents
MASCO CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)


For the Nine Months Ended September 30, 2016 and 2015
(In Millions, Except Per Common Share Data)
 
 
 
Total
 
Common
Shares
($1 par value)
 
Paid-In
Capital
 
Retained Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
 Loss
 
Noncontrolling
Interest
Balance, January 1, 2015
$
1,128

 
$
345

 
$
—

 
$
690

 
$
(111
)
 
$
204

Total comprehensive income (loss)
251

 
 

 
 

 
280

 
(48
)
 
19

Shares issued
(9
)
 
3

 
(12
)
 
 

 
 

 
 

Shares retired:
 

 
 

 
 

 
 

 
 

 
 

Repurchased
(407
)
 
(15
)
 
(29
)
 
(363
)
 
 

 
 

Surrendered (non-cash)
(18
)
 
(1
)
 


 
(17
)
 
 

 
 

Cash dividends declared
(94
)
 
 

 
 

 
(94
)
 
 

 
 

Dividend payment to noncontrolling interest
(36
)
 
 

 
 

 
 

 
 

 
(36
)
Separation of TopBuild Corp.
(828
)
 
 
 
 
 
(828
)
 
 
 
 
Stock-based compensation
41

 
 

 
41

 
 

 
 

 
 

Balance, September 30, 2015
$
28

 
$
332

 
$
—

 
$
(332
)
 
$
(159
)
 
$
187

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2016
$
58

 
$
330

 
$
—

 
$
(300
)
 
$
(165
)
 
$
193

Total comprehensive income (loss)
427

 
 

 
 

 
393

 
(5
)
 
39

Shares issued
(24
)
 
3

 
(27
)
 
 

 
 

 
 

Shares retired:
 

 
 

 
 

 
 

 
 

 
 

Repurchased
(252
)
 
(8
)
 
(8
)
 
(236
)
 
 

 
 

Surrendered (non-cash)
(14
)
 


 
 

 
(14
)
 
 

 
 

Cash dividends declared
(96
)
 
 

 
 

 
(96
)
 
 

 
 

Dividend payment to noncontrolling interest
(31
)
 
 

 
 

 
 

 
 

 
(31
)
Stock-based compensation
35

 
 

 
35

 
 

 
 

 
 

Balance, September 30, 2016
$
103

 
$
325

 
$
—

 
$
(253
)
 
$
(170
)
 
$
201

 



















See notes to condensed consolidated financial statements.

5
Table of Contents
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


A. ACCOUNTING POLICIES
 
In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to present fairly our financial position as at September 30, 2016, and our results of operations and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2016 and 2015, and cash flows and changes in shareholders’ equity for the nine-month periods ended September 30, 2016 and 2015.  The condensed consolidated balance sheet at December 31, 2015 was derived from audited financial statements.
 
Reclassification. Certain prior year amounts have been reclassified to conform to the 2016 presentation in the condensed consolidated financial statements. 

Revision of Previously Issued Financial Statements. We have revised the previously reported balances on our condensed 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 condensed consolidated statements of operations or condensed consolidated statements of cash flows. This revision is not considered material to our prior period financial statements.
 
Recently Issued 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,” that 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 2014, the 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. ASC 606 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 results of operations. 

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. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
    
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 to be limited to the reclassification of certain items within our statement of cash flows, which we intend to adopt retrospectively.




6
Table of Contents
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


A. ACCOUNTING POLICIES (Concluded)
    
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. ASC 2016-15 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 statement of cash flows.

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

On September 30, 2014, we announced a plan to spin off 100 percent of our Installation and Other Services businesses into an independent, publicly-traded company named TopBuild Corp. (“TopBuild”) through a tax-free distribution of the stock of TopBuild to our stockholders.  We initiated the spin off as TopBuild was no longer considered core to our long-term growth strategy in branded building products. We completed the spin off on June 30, 2015 at which time we accounted for it as a discontinued operation. Losses from this discontinued operation were included in loss from discontinued operations, net, in the condensed consolidated statement of operations for the three-month and nine-month periods ended September 30, 2015.
 
The major classes of line items constituting loss from discontinued operations, net, were as follows, in millions:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net sales
$
—

 
$
—

 
$
—

 
$
762

Cost of sales
—

 
—

 
—

 
603

Gross profit
—

 
—

 
—

 
159

Selling, general and administrative expenses
—

 
—

 
—

 
148

Income from discontinued operations
$
—

 
$
—

 
$
—

 
$
11

Loss on disposal of discontinued operations, net 
—

 
(1
)
 
—

 
(1
)
(Loss) income before income tax
—

 
(1
)
 
—

 
10

Income tax benefit (expense) (A)
—

 
1

 
—

 
(11
)
Loss from discontinued operations, net
$
—

 
$
—

 
$
—

 
$
(1
)
 
(A) The unusual relationship between income tax expense and income before income tax for the nine-month period ended September 30, 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:
 
Nine Months Ended
September 30,
 
2016
 
2015
Depreciation and amortization
$
—

 
$
6

Capital expenditures
$
—

 
$
7

 
In conjunction with the spin off, we entered into a Transition Services Agreement with TopBuild under which we provide administrative services to TopBuild subsequent to the separation.  The fees for services rendered under the Transition Services Agreement are not material to our results of operations. 


7
Table of Contents
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


C. GOODWILL AND OTHER INTANGIBLE ASSETS
 
The changes in the carrying amount of goodwill for the nine-month period ended September 30, 2016, by segment, were as follows, in millions: 
 
Gross Goodwill At September 30, 2016
 
Accumulated
Impairment
Losses
 
Net Goodwill At September 30, 2016
Plumbing Products
$
528

 
$
(340
)
 
$
188

Decorative Architectural Products
294

 
(75
)
 
219

Cabinetry Products
240

 
(59
)
 
181

Windows and Other Specialty Products
987

 
(734
)
 
253

Total
$
2,049

 
$
(1,208
)
 
$
841

 
Gross Goodwill At December 31, 2015
 
Accumulated
Impairment
Losses
 
Net Goodwill At December 31, 2015
 
Other(A)
 
Net Goodwill At September 30, 2016
Plumbing Products
$
525

 
$
(340
)
 
$
185

 
$
3

 
$
188

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

 
$
2

 
$
841

 
 
(A)    Other principally includes the effect of foreign currency translation.
 
The carrying value of our other indefinite-lived intangible assets was $136 million and $137 million at September 30, 2016 and December 31, 2015, respectively, and principally included registered trademarks. The carrying value of our definite-lived intangible assets was $19 million (net of accumulated amortization of $17 million) and $23 million (net of accumulated amortization of $49 million) at September 30, 2016 and December 31, 2015, respectively, and principally included customer relationships. 

D. DEPRECIATION AND AMORTIZATION
 
Depreciation and amortization expense, including discontinued operations, was $100 million for both of the nine-month periods ended September 30, 2016 and 2015. 

E. FAIR VALUE OF FINANCIAL INVESTMENTS
 
We have maintained investments in available-for-sale securities, equity method investments and a number of private equity funds, principally as part of our tax planning strategies, as any gains enhance the utilization of any current and future tax capital losses. Financial investments were as follows, in millions:
 
September 30, 2016
 
December 31, 2015
Prepaid expenses and other:
 
 
 
Auction rate securities
$
12

 
$
—

 
 
 
 
Other assets:
 
 
 
Auction rate securities
—

 
22

Equity method investments
14

 
13

Private equity funds
7

 
10

Other investments
3

 
3

Total
$
36

 
$
48

 


8
Table of Contents
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


E. FAIR VALUE OF FINANCIAL INVESTMENTS (Concluded)

Recurring Fair Value Measurements.  Our auction rate securities are measured at fair value on a recurring basis, and have been estimated using a discounted cash flow model (Level 3 input).  The significant inputs in the discounted cash flow model used to value the auction rate securities include: expected maturity of auction rate securities, discount rate used to determine the present value of expected cash flows and the assumptions for credit defaults, since the auction rate securities are backed by credit default swap agreements.
 
In the second quarter of 2016, $10 million of our auction rate securities were called by our counterparty and redeemed at a value that approximated our recorded basis. Our investments in auction rate securities had a recorded basis of $12 million and $22 million at September 30, 2016 and December 31, 2015, respectively, which included cost basis of $10 million and $19 million and pre-tax unrealized gains of $2 million and $3 million at each respective date.
 
Non-Recurring Fair Value Measurements.  During the nine-month periods ended September 30, 2016 and 2015, we did not measure any financial investments at fair value on a non-recurring basis, as there was no other-than-temporary decline in the estimated value of these investments.
 
We did not have any transfers between Level 1 and Level 2 financial assets in the nine-month periods ended September 30, 2016 or 2015.
    
Realized Gains (Losses).  Income from financial investments, net, included in other, net, within other income (expense), net, was as follows, in millions: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Realized gains from auction rate securities
$
—

 
$
—

 
$
1

 
$
—

Realized gains from private equity funds
1

 
1

 
2

 
5

Equity investment income, net
—

 
—

 
1

 
2

Total income from financial investments, net
$
1

 
$
1

 
$
4

 
$
7

 
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 September 30, 2016 was approximately $3.3 billion, compared with the aggregate carrying value of $3.0 billion.  The aggregate estimated market value of short-term and long-term debt at December 31, 2015 was approximately $3.6 billion, compared with the aggregate carrying value of $3.4 billion.

F. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 
We are exposed to global market risk as part of our normal daily business activities.  To manage these risks, we enter into various derivative contracts.  These contracts include interest rate swap agreements, foreign currency contracts and metals contracts intended to hedge our exposure to copper and zinc. We review our hedging program, derivative positions and overall risk management on a regular basis.
 
Interest Rate Swap Agreements.  In 2012, in connection with the issuance of $400 million of debt, we terminated the interest rate swap hedge relationships that we had entered into in 2011.  These interest rate swaps were designated as cash flow hedges and effectively fixed interest rates on the forecasted debt issuance to variable rates based on 3-month LIBOR.  Upon termination, the ineffective portion of the cash flow hedges of 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.

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 of our European operations, entered into foreign currency forward contracts and foreign currency exchange contracts.

9
Table of Contents
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


F. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Concluded)

Gains (losses) related to foreign currency forward and exchange contracts are recorded in our condensed consolidated statements of operations in other, net, within 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.  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 condensed consolidated statements of operations in cost of sales.
 
The pre-tax gains (losses) included in our condensed consolidated statements of operations are as follows, in millions:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Foreign currency contracts:
 

 
 

 
 

 
 

Exchange contracts
$
—

 
$
—

 
$
—

 
$
3

Forward contracts
—

 
1

 
—

 
(3
)
Metals contracts
1

 
(9
)
 
5

 
(14
)
Interest rate swaps
—

 
—

 
(1
)
 
(1
)
Total gain (loss)
$
1

 
$
(8
)
 
$
4

 
$
(15
)

We present our derivatives net by counterparty, due to the right of offset under master netting arrangements, in the condensed consolidated balance sheets.  The notional amounts being hedged and the fair value of those derivative instruments are as follows, in millions:
 
At September 30, 2016
 
Notional
Amount
 
Balance Sheet
Foreign currency contracts:
 

 
 

Exchange contracts
$
7

 
 

Accrued liabilities
 

 
$
—

Forward contracts
28

 
 

Accrued liabilities
 

 
(1
)
Other liabilities
 
 
(1
)
Metals contracts
13

 
 

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 (significant other observable inputs).


10
Table of Contents
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


G. WARRANTY LIABILITY
 
Changes in our warranty liability were as follows, in millions: 
 
Nine Months Ended
September 30, 2016
 
Twelve Months Ended December 31, 2015
Balance at January 1
$
152

 
$
135

Accruals for warranties issued during the period
48

 
56

Accruals related to pre-existing warranties
36

 
15

Settlements made (in cash or kind) during the period
(43
)
 
(50
)
Other, net (including currency translation)
(1
)
 
(4
)
Balance at end of period
$
192

 
$
152


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

H. DEBT

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 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 reduced 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 Euro 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 September 30, 2016, we had no 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 greatest 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.


11
Table of Contents
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


H. DEBT (Concluded)

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 had no borrowing under the Amended Credit Agreement at September 30, 2016. 

I. STOCK-BASED COMPENSATION
 
Our 2014 Long Term Stock Incentive Plan (the “2014 Plan”) provides for the issuance of stock-based incentives in various forms to our employees and non-employee Directors.  At September 30, 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: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Long-term stock awards
$
5

 
$
6

 
$
17

 
$
19

Stock options
1

 
1

 
2

 
5

Phantom stock awards and stock appreciation rights
4

 
—

 
6

 
6

Total
$
10

 
$
7

 
$
25

 
$
30

Income tax benefit (37 percent tax rate)
$
4

 
$
3

 
$
9

 
$
11

 
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 provided we continue the practice of repurchasing and retiring an equal number of shares in the open market.  We granted 1,050,380 shares of long-term stock awards in the nine-month period ended September 30, 2016.


12
Table of Contents
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


I. STOCK-BASED COMPENSATION (Continued)

Our long-term stock award activity was as follows, shares in millions: 
 
Nine Months Ended
September 30,
 
2016
 
2015
Unvested stock award shares at January 1
5

 
6

Weighted average grant date fair value
$
17

 
$
18

 
 
 
 
Stock award shares granted
1

 
1

Weighted average grant date fair value
$
26

 
$
26

 
 
 
 
Stock award shares vested
2

 
2

Weighted average grant date fair value
$
16

 
$
17

 
 
 
 
Stock award shares forfeited
—

 
—

Weighted average grant date fair value
$
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 September 30
4

 
5

Weighted average grant date fair value
$
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 September 30, 2016 and 2015, there was $49 million and $47 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 both September 30, 2016 and 2015.
 
The total market value (at the vesting date) of stock award shares which vested during the nine-month periods ended September 30, 2016 and 2015 was $43 million and $54 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 of stock option shares in the nine-month period ended September 30, 2016 with a grant date exercise price approximating $26 per share. In the nine-month period ended September 30, 2016, no stock option shares were forfeited (including options that expired unexercised).

13
Table of Contents
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


I. STOCK-BASED COMPENSATION (Continued)

Our stock option activity was as follows, shares in millions: 
 
 
Nine Months Ended
September 30,
 
 
2016
 
 
2015
Option shares outstanding, January 1
 
12

 
 
18

Weighted average exercise price (A)
$
17

 
$
21

 
 
 
 
 
 
Option shares granted
 
—

 
 
—

Weighted average exercise price
$
26

 
$
26

 
 
 
 
 
 
Option shares exercised
 
5

 
 
3

Aggregate intrinsic value on date of exercise (B) 
$
64 million

 
$
32 million

Weighted average exercise price
$
21

 
$
17

 
 
 
 
 
 
Option shares forfeited
 
—

 
 
3

Weighted average exercise price
$
—

 
$
29

 
 
 
 
 
 
Forfeitures upon spin off (C) 
 
—

 
 
—

Weighted average exercise price
$
—

 
$
19

 
 
 
 
 
 
Modification upon spin off (A) 
 
—

 
 
2

 
 
 
 
 
 
Option shares outstanding, September 30
 
7

 
 
14

Weighted average exercise price
$
15

 
$
17

Weighted average remaining option term (in years)
 
4

 
 
4

 
 
 
 
 
 
Option shares vested and expected to vest, September 30
 
7

 
 
14

Weighted average exercise price
$
15

 
$
17

Aggregate intrinsic value (B) 
$
137 million

 
$
111 million

Weighted average remaining option term (in years)
 
4

 
 
4

 
 
 
 
 
 
Option shares exercisable (vested), September 30
 
6

 
 
12

Weighted average exercise price
$
13

 
$
18

Aggregate intrinsic value (B) 
$
117 million

 
$
96 million

Weighted average remaining option term (in years)
 
3

 
 
3

 
 
(A)
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. The modification contributed to the lower exercise price.
(B)
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.
(C)
In connection with the spin off of TopBuild, TopBuild employees forfeited their outstanding Masco equity awards.


14
Table of Contents
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


I. STOCK-BASED COMPENSATION (Concluded)

At September 30, 2016 and 2015, there was $7 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 September 30, 2016 and two years at September 30, 2015.

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: 
 
Nine Months Ended
September 30,
 
2016
 
2015
Weighted average grant date fair value
$
6.43

 
$
9.67

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

 
6 years


J. EMPLOYEE RETIREMENT PLANS
 
Net periodic pension cost for our defined-benefit pension plans was as follows, in millions: 
 
Three Months Ended September 30,
 
2016
 
2015
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Service cost
$
1

 
$
—

 
$
—

 
$
—

Interest cost
13

 
1

 
13

 
1

Expected return on plan assets
(15
)
 
—

 
(12
)
 
—

Amortization of net loss
5

 
1

 
5

 
1

Net periodic pension cost
$
4

 
$
2

 
$
6

 
$
2

 
Nine Months Ended September 30,
 
2016
 
2015
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Service cost
$
2

 
$
—

 
$
2

 
$
—

Interest cost
34

 
5

 
36

 
5

Expected return on plan assets
(34
)
 
—

 
(35
)
 
—

Amortization of net loss
12

 
2

 
14

 
2

Net periodic pension cost
$
14

 
$
7

 
$
17

 
$
7


In the second quarter of 2016, we contributed $51 million to certain qualified defined-benefit pension plans, which was not included in our previous 2016 expected contributions. At September 30, 2016, we now expect to contribute a total of approximately $96 million to our qualified defined-benefit pension plans in 2016.    

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


15
Table of Contents
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


K. RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE LOSS
 
The reclassifications from accumulated other comprehensive loss to the condensed consolidated statements of operations were as follows, in millions: 
 
 
Amounts Reclassified
 
 
Accumulated Other Comprehensive Loss
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Statement of Operations Line Item
 
2016
 
2015
 
2016
 
2015
 
Amortization of defined benefit pension and other postretirement benefits:
 
 

 
 

 
 

 
 

 
 
Actuarial losses, net
 
$
6

 
$
6

 
$
14

 
$
16

 
Selling, general and administrative expenses
Tax (benefit)
 
(3
)
 
(2
)
 
(5
)
 
(5
)
 
 
Net of tax
 
$
3

 
$
4

 
$
9

 
$
11

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
—

 
$
—

 
$
1

 
$
1

 
Interest expense
Tax (benefit)
 
—

 
—

 
—

 
—

 
 
Net of tax
 
$
—

 
$
—

 
$
1

 
$
1

 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
 
$
—

 
$
—

 
$
(1
)
 
$
—

 
Other, net
Tax expense
 
—

 
—

 
—

 
—

 
 
Net of tax
 
$
—

 
$
—

 
$
(1
)
 
$
—

 
 


16
Table of Contents
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


L. SEGMENT INFORMATION
 
Information by segment and geographic area was as follows, in millions: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
Net Sales(A)
 
Operating Profit (Loss)
 
Net Sales(A)
 
Operating Profit (Loss)
Operations by segment (B):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Plumbing Products
$
899

 
$
853

 
$
174

 
$
137

 
$
2,635

 
$
2,495

 
$
491

 
$
386

Decorative Architectural Products
536

 
527

 
111

 
102

 
1,649

 
1,600

 
355

 
318

Cabinetry Products
239

 
253

 
19


21

 
736


771

 
77

 
32

Windows and Other Specialty Products
203

 
206

 
(10
)
 
23

 
578

 
561

 
(9
)
 
50

Total
$
1,877

 
$
1,839

 
$
294

 
$
283

 
$
5,598

 
$
5,427

 
$
914

 
$
786

Operations by geographic area:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

North America
$
1,497

 
$
1,462

 
$
235

 
$
234

 
$
4,445

 
$
4,298

 
$
749

 
$
645

International, principally Europe
380

 
377

 
59

 
49

 
1,153

 
1,129

 
165

 
141

Total
$
1,877

 
$
1,839

 
294

 
283

 
$
5,598

 
$
5,427

 
914

 
786

General corporate expense, net
 

 
 

 
(25
)
 
(25
)
 
 

 
 

 
(76
)
 
(84
)
Operating profit
 

 
 

 
269

 
258

 
 

 
 

 
838

 
702

Other income (expense), net
 

 
 

 
(42
)
 
(60
)
 
 
 
 
 
(181
)
 
(173
)
Income from continuing operations before income taxes
 

 
 

 
$
227

 
$
198

 
 

 
 

 
$
657

 
$
529

 
 
(A)
Inter-segment sales were not material.
(B)
In the first quarter of 2016, we renamed our Cabinetry Products and Windows and Other Specialty Products segments. The name change did not impact the review of financial information by our corporate operating executive or the composition of the segments.

M. SEVERANCE COSTS
 
We recorded charges related to severance of $1 million and $5 million for the three-month and nine-month periods ended September 30, 2016, respectively, and $1 million and $8 million for the three-month and nine-month periods ended September 30, 2015, respectively. Such 2016 charges are reflected in the condensed consolidated statements of operations in selling, general and administrative expenses and cost of sales while 2015 charges are principally reflected in selling, general and administrative expenses. 
 
N. OTHER INCOME (EXPENSE), NET
 
Other, net, which is included in other income (expense), net, was as follows, in millions: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Income from cash and cash investments
$
1

 
$
1

 
$
3

 
$
2

Income from financial investments, net (Note E)
1

 
1

 
4

 
7

Foreign currency transaction losses
(3
)
 
(8
)
 
(1
)
 
(13
)
Other items, net
2

 
—

 
(1
)
 
2

Total other, net
$
1

 
$
(6
)
 
$
5

 
$
(2
)


17
Table of Contents
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


O. EARNINGS PER COMMON SHARE
 
Reconciliations of the numerators and denominators used in the computations of basic and diluted earnings per common share were as follows, in millions: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Numerator (basic and diluted):
 

 
 

 
 

 
 

Income from continuing operations
$
134

 
$
111

 
$
393

 
$
281

Less: Allocation to unvested restricted stock awards
2

 
2

 
5

 
4

Income from continuing operations attributable to common shareholders
132

 
109

 
388

 
277

 
 
 
 
 
 
 
 
Loss from discontinued operations, net
—

 
—

 
—

 
(1
)
Less: Allocation to unvested restricted stock awards
—

 
—

 
—

 
—

Loss from discontinued operations attributable to common shareholders
—

 
—

 
—

 
(1
)
 
 
 
 
 
 
 
 
Net income available to common shareholders
$
132

 
$
109

 
$
388

 
$
276

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Basic common shares (based upon weighted average)
326

 
335

 
328

 
340

Add: Stock option dilution
3

 
3

 
4

 
4

Diluted common shares
329

 
338

 
332

 
344

 
For the three-month and nine-month periods ended September 30, 2016 and 2015, we allocated dividends and undistributed earnings to the unvested restricted stock awards.
 
Additionally, 609,000 common shares for the nine-month period ended September 30, 2016 and 4 million and 6 million common shares for the three-month and nine-month periods ended September 30, 2015, respectively, related to stock options were excluded from the computation of diluted earnings per common share due to their antidilutive effect.

On September 30, 2014, we announced that our Board of Directors authorized the repurchase of up to 50 million shares for retirement of our common stock in open-market transactions or otherwise, replacing the previous Board of Directors authorization established in 2007. In the first nine months of 2016, we repurchased and retired 8.3 million shares of our common stock (including 1.1 million shares to offset the dilutive impact of long-term stock awards granted in the first half of the year), for approximately $252 million of which $242 million was paid in cash during the first nine months of 2016. At September 30, 2016, we had 19.4 million shares remaining under the authorization.

On the basis of amounts paid (declared), cash dividends per common share were $0.095 ($0.100) and $0.285 ($0.290) for the three-month and nine-month periods ended September 30, 2016, respectively, and $0.090 ($0.095) and $0.270 ($0.275) for the three-month and nine-month periods ended September 30, 2015, respectively. 

P. OTHER COMMITMENTS AND CONTINGENCIES
 
We are subject to claims, charges, litigation and other proceedings in the ordinary course of our business, including those arising from or related to contractual matters, intellectual property, personal injury, environmental matters, product liability, product recalls, construction defect, insurance coverage, personnel and employment disputes, anti-trust issues and other matters, including class actions.  We believe we have adequate defenses in these matters and that the likelihood that the outcome of these matters would have a material adverse effect on us is remote.  However, there is no assurance that we will prevail in these matters, and we could, in the future, incur judgments, enter into settlements of claims or revise our expectations regarding the outcome of these matters, which could materially impact our results of operations. 

18
Table of Contents
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Concluded)

Q. INCOME TAXES
 
Our effective tax rate was 36 percent and 35 percent for the three-month and nine-month periods ended September 30, 2016, respectively, and 39 percent and 41 percent for the three-month and nine-month periods ended September 30, 2015, respectively.  The decrease in the 2016 rates results primarily from the tax benefit of the domestic production deduction which allows a deduction for certain qualified production activities within the U.S. This deduction was not available in 2015 due to the utilization of our U.S. Federal loss carryforward. Additionally, the decrease in the nine-month rate is impacted by an $18 million valuation allowance against the deferred tax assets of TopBuild recorded as a non-cash charge to income tax expense in the second quarter of 2015. The TopBuild deferred tax assets have been impaired by our decision to spin off TopBuild into a separate company that on a stand-alone basis as of June 30, 2015, the spin off date, was unlikely to be able to realize the value of such deferred tax assets as a result of its history of losses.



19
Table of Contents

 
MASCO CORPORATION
 
 
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
THIRD QUARTER 2016 AND THE FIRST NINE MONTHS 2016 VERSUS
THIRD QUARTER 2015 AND THE FIRST NINE MONTHS 2015

SALES AND OPERATIONS
 
The following table sets forth our net sales and operating profit margins by business segment and geographic area, dollars in millions: 
 
Three Months Ended September 30,
 
Percent Change
 
2016
 
2015
 
2016 vs. 2015
Net Sales:
 

 
 

<