Table	of	Contents

# UNITED	STATES	SECURITIES	AND	EXCHANGE	COMMISSION

# ANNUAL	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)	OF THE	SECURITIES	EXCHANGE	ACT	OF	1934

For	the	Fiscal	Year	Ended	December	31,	2012

# MASCO	CORPORATION

(Exact	name	of	Registrant	as	Specified	in	its	Charter)

Delaware

(State	of	Incorporation)

21001	Van	Born	Road,	Taylor,	Michigan

(Address	of	Principal	Executive	Offices)

# Commission	File	Number	1-5794

(I.R.S.	Employer	Identification	No.)

(Zip	Code)

Registrant's	telephone	number,	including	area	code:	313-274-7400

Securities	Registered	Pursuant	to	Section	12(b)	of	the	Act:

Name	of	Each	Exchange

Securities	Registered	Pursuant	to	Section	12(g)	of	the	Act:

Indicate	by	check	mark	if	the	registrant	is	a	well-known	seasoned	issuer,	as	defined	in	Rule	405	of	the	Securities	Act.				Yes		 þ								No			¨

Indicate	by	check	mark	if	the	registrant	is	not	required	to	file	reports	pursuant	to	Section	13	or	Section	15(d)	of	the	Act.				Yes ¨									No		þ

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.				Yes		þ								No			¨

Indicate	by	check	mark	whether	the	registrant	has	submitted	electronically	and	posted	on	its	corporate	Web	site,	if	any,	every	Interactive	Data	File required	to	be	submitted	and	posted	pursuant	to	Rule	405	of	Regulation	S-T	during	the	preceding	12	months	(or	such	shorter	period	that	the	registrant was	required	to	submit	and	post	such	files).				Yes		þ								No		¨

Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	is	not	contained	herein,	and	will	not	be	contained,	to	the best	of	Registrant's	knowledge,	in	definitive	proxy	or	information	statements	incorporated	by	reference	in	Part	III	of	this	Form	10-K	or	any	amendment	to this	Form	10-K.				þ

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.	(Check	one):

Large	accelerated	filer		þ

Accelerated	filer			¨

Non-accelerated	filer		¨

Smaller	reporting	company		¨

(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).				Yes		 ¨									No		þ

The	aggregate	market	value	of	the	Registrant's	Common	Stock	held	by	non-affiliates	of	the	Registrant	on	June	29,	2012	(based	on	the	closing	sale	price of	$13.87	of	the	Registrant's	Common	Stock,	as	reported	by	the	New	York	Stock	Exchange	on	such	date)	was	approximately	$4,812,763,000.

Number	of	shares	outstanding	of	the	Registrant's	Common	Stock	at	January	31,	2013:

# DOCUMENTS	INCORPORATED	BY	REFERENCE

Portions	of	the	Registrant's	definitive	Proxy	Statement	to	be	filed	for	its	2013	Annual	Meeting	of	Stockholders	are	incorporated	by	reference	into	Part	III	of this	Form	10-K.

# PART	I

# Item	1. Business.

Masco	Corporation	manufactures,	distributes	and	installs	home	improvement	and	building	products,	with	an	emphasis	on	brand-name	consumer products	and	services	holding	leadership	positions.	We	are	among	the	largest	manufacturers	in	North	America	of	a	number	of	home	improvement	and building	products,	including	faucets,	cabinets,	architectural	coatings	and	windows,	and	we	are	one	of	the	largest	installers	of	insulation	for	new	home construction.	We	provide	broad	product	offerings	in	a	variety	of	styles	and	price	points	and	distribute	products	through	multiple	channels,	including directly	to	homebuilders	and	wholesale	and	retail	channels.	Approximately	78	percent	of	our	2012	sales	were	generated	by	our	North	American operations.

In	2012,	new	home	construction	increased	approximately	25	percent;	however,	with	the	significant	decline	in	new	home	construction	over	the	past several	years,	the	demand	for	new	homes	remains	below	the	historic	average.	Consumer	spending	for	big	ticket	home	improvements	continued	to	be depressed	during	the	year.	Additionally,	we	experienced	a	negative	mix	shift	for	certain	products,	with	consumers	demanding	more	value-priced products.	All	of	these	factors	continue	to	impact	our	results.

Throughout	2012,	we	have	pursued	four	strategic	initiatives	to	improve	our	performance.	First,	we	are	extending	and	expanding	our	product leadership	positions	by	leveraging	our	brands	and	introducing	innovative	new	and	improved	products.	We	are	gaining	share	in	our	North	American plumbing	business	with	our	DELTA ®,	PEERLESS ®,	and	BRIZO ®	brands,	and	internationally	with	our	Hansgrohe ®	products.	We	continued	to	extend	the Delta	and	Peerless	brands	to	additional	product	categories,	introducing	toilets	in	2012,	and	we	also	pursued	international	opportunities	for	these	brands. In	2012,	Masco	Contractor	Services	achieved	share	gains	in	insulation	for	new	home	construction,	retrofit	and	commercial	channels.	Behr ®	paint experienced	growth	in	the	Pro ®	paint	segment,	and	is	pursuing	international	opportunities.	Milgard,	our	manufacturer	of	windows	in	the	western	U.S.,	and our	U.K.	Window	Group	continue	to	gain	share	in	their	markets.

Our	second	strategic	initiative	is	to	improve	our	performance	by	reducing	costs,	primarily	through	supply	chain	savings,	and	implementing	lean principles	and	production	process	improvements.	Over	the	last	several	years,	we	have	closed	33	facilities	and	reduced	headcount	by	over	31,000, enabling	us	to	achieve	significant	fixed	cost	reductions.	We	have	improved	our	global	supply	chain	by	leveraging	our	size	to	realize	purchasing	cost savings,	simplifying	the	purchasing	process,	and	coordinating	logistical	operations.	At	several	of	our	businesses,	we	have	implemented	new	ERP systems	to	improve	operations,	including	customer	service	and	inventory	management,	and	to	reduce	costs.

Our	third	strategic	initiative	is	to	improve	our	under-performing	businesses,	particularly	our	Cabinet	and	Installation	businesses,	which	were impacted	by	the	downturn	in	new	home	construction	and	the	reduced	consumer	spending	for	big	ticket	home	improvement	items.	While	our	Cabinet businesses,	including	our	European	operations,	continue	to	experience	challenges,	in	2012	this	segment	significantly	reduced	its	operating	losses compared	to	2011.	In	our	Installation	segment,	we	experienced	significant	operating	profit	improvement	in	2012,	generated	by	incremental	new	home construction	activity,	cost	reductions	from	lean	processes,	leveraging	of	our	new	ERP	system,	and	supply	chain	savings.

Our	fourth	strategic	initiative	is	strengthening	our	balance	sheet	through	net	debt	reduction	and	maintaining	strong	liquidity.	This	year,	we	reduced our	debt	by	approximately	$400	million	through	the	retirement	of	notes	due	in	July.	We	had	approximately	$1.4	billion	of	cash	at	December	31,	2012.

We	believe	that	we	have	managed	our	businesses	successfully	through	the	economic	crisis	and	subsequent	recession	of	recent	years.	We	believe that	our	focus	on	our	strategic	initiatives	of	expanding	our	market	leadership	positions,	reducing	costs,	improving	our	underperforming	businesses

and	strengthening	our	balance	sheet	will	improve	our	performance	and	position	us	well	as	the	economy	recovers.

# Our	Business	Segments

We	report	our	financial	results	in	five	business	segments	aggregated	by	similarity	in	products	and	services.	The	following	table	sets	forth	the contribution	of	our	segments	to	net	sales	and	operating	profit	(loss)	for	the	three	years	ended	December	31,	2012.	Additional	financial	information concerning	our	operations	by	segment	and	by	geographic	regions,	as	well	as	general	corporate	expense,	net,	as	of	and	for	the	three	years	ended December	31,	2012,	is	set	forth	in	Note	O	to	our	consolidated	financial	statements	included	in	Item	8	of	this	Report.

|  |  | Net	Sales	(1) |  |
| :--- | :--- | :--- | :--- |
|  | 2012 | 2011 | 2010 |
| Cabinets\tand\tRelated\tProducts | $1,189 | $1,231 | $1,464 |
| Plumbing\tProducts | \t 2,955 | \t 2,913 | \t 2,692 |
| Installation\tand\tOther\tServices | \t 1,209 | \t 1,077 | \t 1,041 |
| Decorative\tArchitectural\tProducts | \t 1,818 | \t 1,670 | \t 1,693 |
| Other\tSpecialty\tProducts | 574 | 576 | 596 |
| Total | $7,745 | $7,467 | $7,486 |

|  | Operating	Profit	(Loss)	(1)(2)(3)(4) | Operating	Profit	(Loss)	(1)(2)(3)(4) |  |
| :--- | :--- | :--- | :--- |
|  | 2012 | 2011 | 2010 |
| Cabinets\tand\tRelated\tProducts | $(120) | $(206) | $(250) |
| Plumbing\tProducts | 307 | 322 | 331 |
| Installation\tand\tOther\tServices | (19) | (79) | (798) |
| Decorative\tArchitectural\tProducts | 329 | 196 | 345 |
| Other\tSpecialty\tProducts | (31) | (401) | 19 |
| Total | $466 | $(168) | $(353) |

(1) Amounts	exclude	discontinued	operations.

(2) Operating	profit	(loss)	is	before	general	corporate	expense,	net,	and	gain	on	sale	of	fixed	assets,	net.

(3) Operating	profit	(loss)	is	before	net	charges	of	$77	million	regarding	the	2012	litigation	settlement,	primarily	in	the	Installation	and	Other	Services segment	and	$9	million	regarding	the	2011	litigation	settlements	in	the	Cabinets	and	Related	Products	and	the	Other	Specialty	Products	segments.

(4) Operating	profit	(loss)	includes	impairment	charges	for	goodwill	and	other	intangible	assets	as	follows:	For	2012	–	Other	Specialty	Products	–	$42 million.	For	2011	–	Cabinets	and	Related	Products	–	$44	million;	Plumbing	Products	–	$1	million;	Decorative	Architectural	Products	–	$75	million; and	Other	Specialty	Products	–	$374	million.	For	2010	–	Plumbing	Products	–	$1	million;	and	Installation	and	Other	Services	–	$697	million.

All	of	our	operating	segments,	except	the	Plumbing	Products	segment,	normally	experience	stronger	sales	during	the	second	and	third	calendar quarters,	corresponding	with	the	peak	season	for	new	home	construction	and	repair	and	remodel	activity.

# Cabinets	and	Related	Products

In	North	America,	we	manufacture	and	sell	value-priced,	stock	and	semi-custom	assembled	cabinetry	for	kitchen,	bath,	storage,	home	office	and home	entertainment	applications	in	a	broad	range

of	styles	and	price	points	to	address	consumer	preferences.	We	have	also	expanded	our	product	offerings	in	this	segment	to	include	the	manufacture and	sale	of	kitchen	countertops,	as	well	as	an	integrated	bathroom	vanity	and	countertop	solution.	In	Europe,	we	manufacture	and	sell	assembled	and ready-to-assemble	kitchen,	bath,	storage,	home	office	and	home	entertainment	cabinetry.	These	products	are	sold	in	the	United	States	and	in	Europe ®	brands	are	sold	primarily	to	dealers,	home	centers	and	mass	merchants	and	our MERILLAT ®,	MOORES™	and	QUALITY	CABINETS™	brands	are	sold	primarily	to	distributors	and	homebuilders	for	both	home	improvement	and	new home	construction.	Cabinet	sales	are	significantly	affected	by	levels	of	activity	in	both	new	home	construction	and	retail	consumer	spending,	particularly spending	for	major	kitchen	and	bathroom	renovation	projects.	A	significant	portion	of	our	sales	for	home	improvement	are	made	through	home	center retailers. ®

New	home	construction	has	declined	significantly	over	the	past	several	years,	and	our	Cabinet	segment	has	been	particularly	affected	by	this downturn.	This	segment	has	also	been	negatively	affected	by	a	downturn	in	repair	and	remodel,	particularly	by	consumers	who	continue	to	defer expenditures	for	big-ticket	items	and,	when	purchasing,	are	demanding	more	value-priced	products.	Although	home	construction	is	improving	and	is expected	to	continue	to	improve,	the	demand	for	new	homes	remains	below	the	historic	average.	The	size	of	new	homes	has	decreased	and	demand has	increased	for	multi-family	housing	units,	which	are	smaller	than	single-family	housing	units	and	require	fewer	cabinets	for	the	kitchen	and	bathrooms. Further,	consumer	spending	for	big	ticket	home	improvements	continues	to	be	depressed.	In	response,	we	have	implemented	a	strategy	to	increase	our sales	in	this	segment	through	brand	building,	new	product	introductions	and	product	innovation.	We	have	also	reviewed	our	cost	structure,	which	resulted in	the	closure	of	several	manufacturing	plants	in	this	segment	and	exited	our	North	American	ready-to-assemble	cabinet	product	line.	Additionally,	we continue	to	focus	on	improving	cabinet	production	efficiencies	at	lower	volumes.

The	cabinet	manufacturing	industry	in	the	United	States	and	Europe	is	highly	competitive,	with	several	large	competitors	and	numerous	local	and regional	competitors.	In	recent	years,	we	have	experienced	significant	competition	in	the	form	of	promotional	pricing,	discounts,	and	new	product	offerings by	our	competitors,	which	have	impacted	the	segment's	results	of	operations.	We	are	also	experiencing	significant	competition	from	foreign manufacturers,	particularly	in	our	European	cabinet	operations.	In	addition	to	price,	we	believe	that	competition	in	this	industry	is	based	largely	on	product quality,	responsiveness	to	customer	needs,	product	features	and	selection.	Our	North	American	competitors	include	American	Woodmark	Corporation and	Fortune	Brands	Home	&	Security,	Inc.

# Plumbing	Products

The	businesses	in	our	Plumbing	Products	segment	sell	a	wide	variety	of	faucet	and	showering	devices	that	are	manufactured	by	or	for	us.	The majority	of	our	plumbing	products	are	sold	in	North	America	and	Europe	under	the	brand	names	DELTA ®,	PEERLESS ®,	HANSGROHE ®,	AXOR ®, BRIZO ,	BRASSTECH ®,	BRISTAN™,	GINGER ®,	NEWPORT	BRASS ®,	ALSONS ®	and	PLUMB	SHOP ®.	Our	products	include	single-handle	and	double- handle	faucets,	showerheads,	handheld	showers	and	valves,	and,	in	2012,	we	introduced	toilets.	These	products	are	sold	to	major	retail	accounts	and	to wholesalers	and	distributors	that,	in	turn,	sell	our	products	to	plumbers,	building	contractors,	remodelers,	smaller	retailers	and	others. ®

Other	plumbing	products	manufactured	and	sold	by	us	include	products	branded	as	AQUA	GLASS ®,	MIROLIN ®	and	AMERICAN	SHOWER	& BATH™	such	brands	use	innovex	acrylic	and	gelcoat	for	tub	and	shower	systems,	bath	and	shower	enclosure	units,	shower	trays	and	laundry	tubs, which	are	sold	primarily	to	wholesale	plumbing	distributors	and	home	center	retailers	for	home	improvement	and	new	home	construction	in	North ®	and	other	trademarks	directly	to	independent	dealers.	Major competitors	include	Kohler,	Aquatic,	Maax	and	Jacuzzi.	We	sell	HÜPPE ®	shower	enclosures	through ®

wholesale	channels	primarily	in	Western	Europe.	HERITAGE™	ceramic	and	acrylic	bath	fixtures	and	faucets	are	principally	sold	in	the	United	Kingdom directly	to	selected	retailers.

Also	included	in	the	Plumbing	Products	segment	are	brass	and	copper	plumbing	system	components	and	other	plumbing	specialties,	which	are sold	to	plumbing,	heating	and	hardware	wholesalers	and	to	home	center	retailers,	hardware	stores,	building	supply	outlets	and	other	mass merchandisers.	These	products	are	marketed	in	North	America	for	the	wholesale	trade	under	the	BRASSCRAFT ®	and	BRASSTECH ®	trademarks	and	for the	"do-it-yourself"	consumers	under	the	BRASSCRAFT	MASTER	PLUMBER ®	and	PLUMB	SHOP ®	trademarks,	and	are	also	sold	under	private	label.

We	believe	that	our	plumbing	products	are	among	the	leaders	in	sales	in	North	America	and	Europe,	with	American	Standard,	Kohler,	Moen	and Pfister	as	major	brand	competitors.	We	also	have	several	European	competitors,	primarily	in	Germany,	including	Friedrich	Grohe.	We	face	significant competition	from	private	label	products	(including	house	brands	sold	by	certain	of	our	customers).	Many	of	the	faucet	and	showering	products	with	which our	products	compete	are	manufactured	by	foreign	manufacturers	that	are	putting	downward	pressures	on	price,	particularly	in	the	emerging	markets	we are	entering.	The	businesses	in	our	Plumbing	Products	segment	source	products	from	Asia	and	manufacture	products	in	the	United	States,	Europe	and Asia.	Certain	businesses	in	our	Plumbing	Product	segment	are	also	experiencing	a	shift	in	the	mix	of	products	we	sell	toward	more	value-priced	or opening	price	point	products,	which	impacts	our	profitability.	In	addition	to	price,	we	believe	that	competition	for	our	plumbing	products	is	based	largely	on brand	reputation,	product	quality,	product	innovation	and	features,	and	breadth	of	product	offering.

A	substantial	portion	of	our	plumbing	products	contain	brass,	the	major	components	of	which	are	copper	and	zinc.	We	have	encountered	price volatility	for	brass,	brass	components	and	any	components	containing	copper	and	zinc;	therefore,	we	have	implemented	a	hedging	strategy	to	minimize the	impact	of	this	volatility.	Legislation	enacted	in	California,	Vermont	and	Maryland	mandates	new	standards	for	acceptable	lead	content	in	plumbing products	sold	in	those	states.	Federal	legislation	mandating	a	national	standard	for	lead	content	in	plumbing	products	will	become	effective	in	January 2014.	Faucet	and	water	supply	valve	manufacturers,	including	our	plumbing	product	companies,	will	be	required	to	obtain	adequate	supplies	of	lead-free brass	or	suitable	alternative	materials	for	continued	production	of	faucets	and	certain	of	our	plumbing	products.	Over	the	last	several	years,	our	Delta Faucet	business	introduced	the	DIAMOND™	SEAL	TECHNOLOGY,	which	reduces	the	number	of	potential	leak	points	in	a	faucet,	simplifies	installation and	satisfies	legislation	regarding	the	acceptable	lead	content	in	plumbing	products.

# Installation	and	Other	Services

Our	Installation	and	Other	Services	segment	sells	installed	building	products	and	distributes	building	products	primarily	to	the	new	home construction	market,	and,	to	a	lesser	extent,	the	retrofit	and	commercial	construction	markets,	throughout	the	United	States.	In	addition	to	insulation,	we sell	installed	gutters,	after-paint	products,	garage	doors	and	fireplaces.	The	installation	and	distribution	of	insulation	comprised	approximately	eleven percent,	nine	percent	and	nine	percent	of	our	consolidated	net	sales	in	2012,	2011	and	2010,	respectively.	Installed	building	products	are	supplied primarily	to	custom	and	production	homebuilders	by	our	network	of	branches	located	across	the	United	States.	Our	distributed	products	include insulation,	insulation	accessories,	roofing	and	gutters,	among	others.	Distributed	products	are	sold	primarily	to	contractors	and	dealers	(including	lumber yards)	from	distribution	centers	in	various	parts	of	the	United	States.

There	has	been	a	significant	decrease	in	demand	in	the	new	home	construction	industry	over	the	past	several	years.	Additionally,	the	size	of	new homes	has	decreased,	and	demand	has	increased	for	multi-family	housing	units	such	as	apartments	and	condominiums,	which	are	often	smaller	than single-family	housing	units.	The	effect	of	these	trends	has	resulted	in	the	use	of	less	insulation.	In	response,

we	have	expanded	our	ability	to	serve	the	residential	retrofit	and	light	commercial	markets.	Within	the	Installation	and	Other	Services	segment,	we	have several	initiatives	related	to	improved	residential	energy	efficiency,	including	retrofit	installation	services	(primarily	insulation)	delivered	directly	to homeowners,	as	well	as	through	retailers	and	dealer	outlets.

In	addition	to	price,	we	believe	that	competition	in	this	industry	is	based	largely	on	customer	service	and	the	quality	of	installation	service.	We believe	that	we	are	the	largest	national	provider	of	installed	insulation	in	the	new	home	construction	industry	in	the	United	States.	Our	competitors	include several	regional	contractors,	as	well	as	numerous	local	contractors	and	lumber	yards.	We	believe	that	our	capabilities	and	financial	resources	are substantial	compared	to	regional	and	local	contractors.

# Decorative	Architectural	Products

We	produce	architectural	coatings	including	paints,	primers,	specialty	paint	products,	stains	and	waterproofing	products.	The	products	are	sold	in ®	to	"do-it-yourself"	and	professional	customers through	home	centers,	paint	stores	and	other	retailers.	Net	sales	of	architectural	coatings	comprised	approximately	20	percent	of	our	consolidated	net sales	in	each	of	2012,	2011	and	2010.	Competitors	in	the	architectural	coatings	market	include	large	national	and	international	brands	such	as	Benjamin Moore,	Glidden,	Olympic,	Sherwin-Williams,	Valspar	and	Zinsser,	as	well	as	many	regional	and	other	national	brands.	In	addition	to	price,	we	believe	that competition	in	this	industry	is	based	largely	on	product	quality,	technology	and	product	innovation,	customer	service	and	brand	reputation.	In	2012,	we enhanced	our	paint	formulations	with	a	zero-VOC	PREMIUM	PLUS ®	paint	and	greater	stain-blocking	properties	in	our	PREMIUM	PLUS	ULTRA ®	paint. ®

Our	BEHR	products	are	sold	through	The	Home	Depot,	this	segment's	and	our	largest	customer.	The	loss	of	this	segment's	sales	to	The	Home Depot	would	have	a	material	adverse	effect	on	this	segment's	business	and	on	our	consolidated	business	as	a	whole.

Titanium	dioxide	is	a	major	ingredient	in	the	manufacture	of	paint.	The	industry	has	experienced	cost	increases	for	titanium	dioxide	as	a	result	of surges	in	global	demand	and	production	capacity	limitations,	which	has	impacted	our	operating	results	in	this	segment.	Petroleum	products	are	also	used in	the	manufacture	of	architectural	coatings.	Significant	increases	in	the	cost	of	crude	oil	and	natural	gas	lead	to	higher	raw	material	costs	(e.g.,	for resins,	solvents	and	packaging,	as	well	as	titanium	dioxide),	which	can	adversely	affect	the	segment's	results	of	operations.

Our	Decorative	Architectural	Products	segment	also	includes	LIBERTY ®	and	BRAINERD ®	branded	cabinet,	door,	window	and	other	hardware, which	is	manufactured	for	us	and	sold	to	home	centers,	other	retailers,	original	equipment	manufacturers	and	wholesale	markets.	Key	competitors	in North	America	include	Amerock,	Top	Knobs	and	house	brands.	Decorative	bath	hardware	and	shower	accessories	are	sold	under	the	brand	names DELTA ®,	FRANKLIN	BRASS ®	and	DECOR	BATHWARE ®	to	distributors,	home	centers	and	other	retailers.	Competitors	include	Moen,	Gatco	and	house brands	sold	by	certain	of	our	customers.

# Other	Specialty	Products

We	manufacture	and	sell	vinyl,	fiberglass	and	aluminum	windows	and	patio	doors,	as	well	as	the	ESSENCE	SERIES ®	windows	and	doors,	which combines	a	wood	interior	with	a	fiberglass	exterior,	under	the	MILGARD ®	brand	name	for	home	improvements	and	new	home	construction,	principally	in the	western	United	States.	MILGARD	products	are	sold	primarily	through	dealers	and,	to	a	lesser	extent,	directly	to	production	and	custom	homebuilders and	through	lumber	yards	and	home	centers.	This	segment's	competitors	in	North	America	include	national	brands,	such	as	Jeld-Wen,	Marvin,	Pella	and Andersen,	and	numerous	regional	brands.

In	the	United	Kingdom,	we	manufacture	and	sell	windows,	related	products	and	components	under	several	brand	names	including	GRIFFIN™, CAMBRIAN™,	PREMIER™	and	DURAFLEX™.

Sales	are	primarily	through	dealers	and	wholesalers	to	the	repair	and	remodeling	markets,	although	our	DURAFLEX	products	are	also	sold	to	other window	fabricators.	United	Kingdom	competitors	include	many	small	and	mid-sized	firms	and	a	few	large,	vertically	integrated	competitors.	In	addition	to price,	we	believe	that	competition	in	this	industry	is	based	largely	on	customer	service	and	product	quality.

We	manufacture	and	sell	a	complete	line	of	manual	and	electric	staple	gun	tackers,	staples	and	other	fastening	tools	under	the	brand	names ®.	We	sell	these	products	through	various	distribution	channels	including	home	centers	and	other	retailers	and	wholesalers. ®

Our	principal	North	American	competitor	in	this	product	line	is	Stanley	Black	&	Decker.

# Additional	Information

We	hold	U.S.	and	foreign	patents,	patent	applications,	licenses,	trademarks,	trade	names,	trade	secrets	and	proprietary	manufacturing	processes. As	a	manufacturer	and	distributor	of	brand	name	products,	we	view	our	trademarks	and	other	intellectual	property	rights	as	important,	but	do	not	believe that	there	is	any	reasonable	likelihood	of	a	loss	of	such	rights	that	would	have	a	material	adverse	effect	on	our	present	business	as	a	whole.

We	are	subject	to	U.S.	and	foreign	government	regulations,	particularly	those	pertaining	to	health	and	safety	(including	protection	of	employees	and consumers),	climate	disruption	and	environmental	issues.	In	addition	to	our	responsibilities	for	environmental	remediation,	our	businesses	are	subject	to other	requirements	regarding	protection	of	the	environment	and	worker	health	and	safety.	Our	businesses	are	subject	to	requirements	relating	to	the emission	of	volatile	organic	compounds	which	may	impact	our	sourcing	of	particleboard,	require	that	we	install	special	equipment	in	manufacturing facilities	or	that	we	reformulate	paint	products.	As	described	above,	our	Plumbing	Products	segment	is	subject	to	restrictions	on	lead	content	in	some	of its	products.	Compliance	with	such	laws	and	regulations	could	significantly	affect	product	performance	as	well	as	our	production	costs.	We	monitor applicable	laws	and	regulations	relating	to	the	protection	of	the	environment,	climate	disruption	and	worker	health	and	safety,	and	incur	ongoing	expense relating	to	compliance.	We	do	not	expect	compliance	with	the	federal,	state	and	local	regulations	relating	to	the	discharge	of	materials	into	the environment,	or	otherwise	relating	to	the	protection	of	the	environment	and	worker	health	and	safety,	will	result	in	material	capital	expenditures	or	have	a material	adverse	effect	on	our	earnings	or	competitive	position.

We	do	not	consider	backlog	orders	to	be	material	in	any	of	our	segments.

At	December	31,	2012,	we	employed	approximately	30,000	people.	We	have	generally	experienced	satisfactory	relations	with	our	employees.

# Available	Information

Our	website	is	www.masco.com.	Our	periodic	reports	and	all	amendments	to	those	reports	required	to	be	filed	or	furnished	pursuant	to Section	13(a)	or	Section	15(d)	of	the	Securities	Exchange	Act	of	1934	are	available	free	of	charge	through	our	website	as	soon	as	reasonably	practicable after	those	reports	are	electronically	filed	with	or	furnished	to	the	Securities	and	Exchange	Commission.	This	Report	is	being	posted	on	our	website concurrently	with	its	filing	with	the	Securities	and	Exchange	Commission.	Material	contained	on	our	website	is	not	incorporated	by	reference	into	this Report.

# Item	1A. Risk	Factors.

There	are	a	number	of	business	risks	and	uncertainties	that	could	affect	our	business.	These	risks	and	uncertainties	could	cause	our	actual	results to	differ	from	past	performance	or	expected	results.

We	consider	the	following	risks	and	uncertainties	to	be	most	relevant	to	our	specific	business	activities.	Additional	risks	and	uncertainties	not	presently known	to	us,	or	that	we	currently	believe	to	be	immaterial,	also	may	adversely	impact	our	business,	financial	condition	and	results	of	operations.

# A	significant	portion	of	our	business	relies	on	home	improvement	and	new	home	construction	activity,	both	of	which	remain	at	low	levels.

A	significant	portion	of	our	business	relies	on	home	improvement	(including	repair	and	remodel)	and	new	home	construction	activity,	principally	in North	America	and	Europe.	The	economic	decline	in	the	past	four	years	adversely	affected	our	home	improvement	businesses.	Persistent	low	levels	of consumer	confidence	and	depressed	home	prices,	and	elevated	levels	of	unemployment	and	underemployment,	have	limited	consumers'	discretionary spending	and	have	made	consumers	reluctant	to	make	investments	in	existing	homes,	including	large	kitchen	and	bath	remodeling	projects.	The significant	number	of	households	with	negative	equity	in	their	homes,	and	more	conservative	residential	lending	practices	for	home	equity	loans	often used	to	finance	repairs	and	remodeling,	have	limited	the	ability	of	consumers	to	finance	home	improvements.	Additionally,	sales	of	existing	homes,	which significantly	impact	our	home	improvement	business,	continue	to	be	below	normal	levels.	New	home	construction	is	cyclical	in	nature.	Although	home construction	is	improving	and	is	expected	to	continue	to	improve,	the	demand	for	new	homes	remains	below	the	historic	average,	and	stringent standards	continue	to	be	imposed	on	homebuyers	seeking	financing.

We	cannot	predict	the	type	or	timing	of	a	recovery	in	home	improvement,	nor	the	strength	of	a	recovery	in	new	home	construction.	Depressed consumer	spending	for	home	improvements	and	continued	below-normal	levels	of	new	home	construction	may	adversely	affect	our	results	of	operations and	our	financial	position.

# Continued	uncertainty	regarding	an	economic	recovery	could	result	in	our	taking	additional	significant	non-cash	charges,	which	may	reduce	our	financial resources	and	flexibility	and	could	negatively	affect	our	earnings	and	reduce	shareholders'	equity.

We	have	recorded	significant	goodwill	and	other	intangible	assets	related	to	prior	business	combinations	on	our	balance	sheet.	The	valuation	of these	assets	is	largely	dependent	upon	the	expectations	for	future	performance	of	our	businesses.	In	recent	years,	we	have	recorded	significant	non- cash	impairment	charges	for	financial	investments,	goodwill	and	other	intangible	assets.	We	have	also	recorded	valuation	allowances	related	to	our deferred	tax	assets.	A	further	decline	in	the	expectation	of	our	future	performance,	or	a	further	deterioration	in	expectations	regarding	the	timing	and	the extent	of	the	recovery	of	new	home	construction	and	home	improvement,	may	cause	us	to	recognize	additional	non-cash,	pre-tax	impairment	charges	for goodwill	and	other	indefinite-lived	intangible	assets	or	other	long-lived	assets,	which	are	not	determinable	at	this	time.	If	the	value	of	goodwill	or	other intangible	assets	is	impaired,	our	earnings	and	shareholders'	equity	would	be	adversely	affected.

Further,	our	credit	agreement	contains	financial	covenants	we	must	comply	with,	including	covenants	regarding	limits	on	our	debt	to	total capitalization	ratio.	If	we	are	required	to	record	additional	non-cash	impairment	charges,	our	shareholders'	equity	would	be	reduced,	and	our	borrowing capacity	under	our	credit	agreement	may	be	limited.	In	the	past	we	have	negotiated	amendments	to	our	credit	agreement	to	allow	for	the	add-back	to shareholders'	equity	for	impairment	charges	we	have	taken.	There	can	be	no	assurance	that	in	the	future	we	would	be	able	to	further	amend	our	credit agreement,	that	alternative	financing	would	be	available	on	acceptable	terms	and	at	acceptable	rates,	or	that	we	would	be	permitted	to	obtain	alternative financing	under	the	terms	of	our	existing	financing	arrangements.

# If	we	do	not	maintain	strong	brands	or	respond	to	changing	consumer	preferences	and	purchasing	practices,	we	could	lose	share	and	our	results	could	be adversely	affected.

Our	competitive	advantage	is	due,	in	part,	to	our	ability	to	maintain	our	strong	brands	and	to	develop	and	introduce	innovative	new	and	improved products.	While	we	continue	to	invest	in	brand	building	and	brand	awareness,	these	initiatives	may	not	be	successful.	The	uncertainties	associated	with developing	and	introducing	new	and	improved	products,	such	as	gauging	changing	consumer	preferences	and	successfully	developing,	manufacturing, marketing	and	selling	these	products,	may	impact	the	success	of	our	product	introductions.	If	our	new	or	improved	products	do	not	gain	widespread acceptance,	we	could	lose	share,	which	could	negatively	impact	our	operating	results.

Further,	the	volatile	and	challenging	economic	environment	of	recent	years	has	caused	shifts	in	consumer	preferences	and	purchasing	practices and	changes	in	the	business	models	and	strategies	of	our	customers.	Such	shifts	have	altered	the	quantity,	type	and	prices	of	products	demanded	by	the end-consumer	and	our	customers.	For	example,	the	size	of	new	homes	has	decreased,	and	demand	has	increased	for	multi-family	housing	units	such	as apartments	and	condominiums,	which	are	often	smaller	than	single-family	housing	units.	The	effect	of	these	trends	has	resulted	in	smaller	kitchens	and smaller	and	fewer	bathrooms,	each	with	fewer	cabinets	and	faucets,	as	well	as	the	use	of	less	insulation.	We	have	experienced	a	negative	mix	shift	for certain	products,	with	consumers	demanding	more	value-priced	products	and	fewer	higher	margin	products.	All	of	these	shifts	have	negatively	impacted our	sales	and	profitability,	and	it	is	uncertain	whether	these	shifts	represent	long-term	changes	in	consumer	preferences.

Consumers	are	increasingly	using	the	internet	and	mobile	technology	to	research	home	improvement	products	and	enhance	their	purchasing	and ownership	experience	for	these	products.	E-commerce	is	a	rapidly	developing	area,	and	development	of	a	successful	e-commerce	strategy	involves significant	time	and	resources.	If	we	are	unable	to	successfully	execute	our	e-commerce	strategies,	our	brands	may	lose	share.

If	we	do	not	timely	and	effectively	identify	and	respond	to	these	changing	consumer	preferences	and	purchasing	practices,	our	relationships	with our	customers	could	be	harmed,	the	demand	for	our	brands	and	products	could	be	reduced	and	our	results	of	operations	could	be	negatively	affected.

# Our	actions	to	improve	our	underperforming	businesses	have	been	costly	and	may	not	be	effective.

The	downturn	in	home	improvement	and	new	home	construction	activity	in	the	past	four	years	has	impacted	our	results,	particularly	in	our	Cabinets and	Related	Products	and	our	Installation	and	Other	Services	segments	and	in	our	European	cabinet	businesses.	Further,	the	economic	decline	has	also negatively	affected	certain	businesses	in	our	Plumbing	Products	segment.	There	is	no	assurance	that	our	efforts	to	improve	these	underperforming businesses	through	initiatives	to	reduce	costs	and	increase	sales	will	be	successful.	Our	cost-saving	initiatives,	including	rationalizing	our	businesses, closing	plants,	reducing	headcount	and	implementing	new	systems,	have	been	complex,	time-consuming	and	expensive.	The	consolidation	of	our	North American	Cabinet	businesses,	in	particular,	has	involved	the	integration	of	multiple	manufacturing	processes	and	information	technology	platforms.	If	we cannot	successfully	implement	these	cost-saving	initiatives,	we	may	not	fully	achieve	their	anticipated	benefits.

Our	strategy	to	increase	our	sales	in	the	Cabinets	and	Related	Products	segment	through	brand	building,	new	product	introductions	and	product innovation	requires	time	to	develop,	implement	and	assess.	Further,	this	segment	faces	significant	pricing	and	promotional	pressures.	We	have	also taken	several	actions	to	improve	the	operations	of	our	European	cabinet	businesses.	If	we	cannot	successfully	implement	these	initiatives	at	all	of	our Cabinet	businesses,	our	results	of	operations	may	continue	to	be	negatively	impacted.

Further,	if	the	eventual	economic	recovery	is	fast-paced	and	robust,	we	may	not	be	able	to	ramp	up	our	reduced	manufacturing	and	installation capacity	in	a	timely	fashion,	and	our	ability	to	respond	to	increased	demand	could	be	limited,	which	could	result	in	lost	share	and,	ultimately,	could negatively	impact	our	operating	results.

# We	rely	on	key	customers	and	may	encounter	conflicts	within	and	between	our	distribution	channels.

The	size	and	importance	of	individual	customers	to	our	businesses	has	increased	as	customers	in	our	major	distribution	channels	have consolidated	or	exited	the	business.	In	2012,	sales	to	our	largest	customer,	The	Home	Depot,	were	$2.1	billion	(approximately	28	percent	of	consolidated net	sales).	Lowe's	is	our	second	largest	customer.	In	2012,	sales	to	Lowe's	were	less	than	ten	percent	of	our	consolidated	net	sales.	These	home	center customers	may	reduce	the	number	of	vendors	they	purchase	from	and	can	make	significant	changes	in	their	volume	of	purchases.	Additionally,	home centers	can	significantly	affect	the	prices	we	receive	for	our	products	and	services,	our	cost	of	doing	business	with	them,	and	the	terms	and	conditions	on which	we	do	business.	Although	homebuilders,	dealers	and	other	retailers	represent	other	channels	of	distribution	for	our	products	and	services,	the	loss of	a	substantial	portion	of	our	sales	to	The	Home	Depot	or	the	loss	of	our	sales	to	Lowe's	would	have	a	material	adverse	effect	on	our	business.

As	some	of	our	customers	expand	their	markets	and	their	targeted	customers,	conflicts	between	our	existing	distribution	channels	have	and	will continue	to	occur,	which	could	impact	our	results	of	operations.	In	addition,	we	may	undermine	the	business	relationships	we	have	with	customers	who purchase	our	products	through	traditional	wholesale	channels	as	we	increase	the	amount	of	business	we	transact	directly	with	our	customers.	In	addition, our	large	retail	customers	are	increasingly	requesting	product	exclusivity,	which	may	affect	our	ability	to	offer	products	to	other	customers	and	may diminish	our	ability	to	leverage	economies	of	scale.

# We	face	significant	competition.

Our	products	and	services	face	significant	competition,	and	this	competition	is	further	intensified	during	economic	downturns.	We	believe	that	we compete	on	the	basis	of	price,	product	and	service	quality,	brand	reputation,	customer	service	and	product	features	and	innovation.	Some	home	centers are	increasing	their	purchases	of	select	products	in	our	segments	directly	from	low-cost	foreign	manufacturers	for	sale	as	private	label	and	house	brand merchandise.	Additionally,	home	centers,	which	have	historically	concentrated	their	sales	efforts	on	retail	consumers	and	remodelers,	are	increasingly marketing	directly	to	professional	contractors	and	installers,	which	may	impact	our	margins	on	our	products	that	contractors	and	installers	would otherwise	buy	through	our	dealers	and	wholesalers.

In	our	other	distribution	channels,	we	compete	with	foreign	manufacturers	in	a	variety	of	our	product	groups.	These	foreign	manufacturers	are putting	downward	pressures	on	price,	particularly	in	the	emerging	markets	we	are	entering.	In	our	Cabinets	and	Related	Products	segment,	we	have experienced	significant	competition	in	the	form	of	promotional	pricing,	discounts,	and	new	product	offerings	by	our	competitors,	which	have	impacted	our results	of	operations.	In	some	of	our	segments,	we	are	also	experiencing	a	shift	in	the	mix	of	products	we	sell	toward	more	value-priced	or	opening	price point	products,	which	may	impact	our	ability	to	maintain	or	gain	share	and	our	profitability.

Our	ability	to	maintain	our	competitive	position	in	our	industries	and	to	grow	our	businesses	depends	upon	successfully	maintaining	our relationships	with	major	customers,	implementing	growth	strategies	and	entering	new	geographic	areas,	including	successful	international	penetration, capitalizing	on	and	strengthening	our	brands,	managing	our	cost	structure,	accommodating	shorter	life-cycles	for	our	products,	and	developing	and innovating	products,	none	of	which	is	assured.

# Increased	commodity	costs	and	limited	availability	of	commodities	could	affect	our	operating	results.

We	buy	various	commodities	to	manufacture	our	products,	including,	among	others,	wood,	brass	(made	of	copper	and	zinc),	titanium	dioxide	and resins.	Fluctuations	in	the	availability	and	prices	of	these	commodities	could	increase	our	costs	to	manufacture	our	products.	Further,	increases	in	energy costs	not	only	increase	our	production	costs,	but	also	the	cost	to	transport	our	products,	each	of	which	could	negatively	affect	our	financial	condition	and operating	results.

It	has	been,	and	likely	will	continue	to	be,	difficult	for	us	to	pass	on	to	customers	cost	increases	to	cover	our	increased	commodity	and	production costs.	Our	existing	arrangements	with	customers,	competitive	considerations	and	customer	resistance	to	price	increases	may	delay	or	make	us	unable	to adjust	selling	prices.	If	we	are	not	able	to	increase	the	prices	of	our	products	or	achieve	cost	savings	to	offset	increased	commodity	and	production	costs, our	financial	condition	and	operating	results	could	be	negatively	impacted.	If	we	are	able	to	increase	our	selling	prices,	sustained	price	increases	for	our products	may	lead	to	sales	declines	and	loss	of	share,	particularly	if	our	competitors	do	not	increase	their	prices.	When	commodity	prices	decline,	we may	receive	pressure	from	our	customers	to	reduce	prices	for	our	products	and	services.

To	reduce	the	price	volatility	associated	with	certain	anticipated	commodity	purchases,	we	use	derivative	instruments,	including	commodity	futures and	swaps.	We	may	incur	net	substantial	costs	as	part	of	our	strategy	to	hedge	against	price	volatility	of	certain	commodities	we	purchase	and	we	may make	commitments	to	purchase	these	commodities	at	prices	that	subsequently	exceed	their	market	prices,	which	could	adversely	affect	our	financial condition	and	operating	results.

# We	are	dependent	on	third-party	suppliers	and	manufacturers,	and	the	loss	of	a	key	supplier	or	manufacturer	could	negatively	affect	our	operating	results.

Our	ability	to	offer	a	wide	variety	of	products	depends	on	our	ability	to	obtain	an	adequate	supply	of	products	and	components	from	manufacturers and	other	suppliers.	We	rely	heavily	or,	in	certain	cases,	exclusively,	on	outside	suppliers	for	some	of	our	products	and	key	components.	Failure	by	our suppliers	to	provide	us	quality	products	on	commercially	reasonable	terms,	or	to	comply	with	legal	requirements,	could	have	a	material	adverse	effect	on our	financial	condition	or	operating	results.	Resourcing	these	products	and	components	to	another	supplier	could	take	time	and	involve	significant	costs. Accordingly,	the	loss	of	a	key	supplier,	or	a	substantial	decrease	in	the	availability	of	products	or	components	from	our	suppliers,	could	disrupt	our business	and	adversely	impact	our	operating	results.

Further,	we	manufacture	products	in	Asia	and	source	products	and	components	from	third	parties	in	Asia.	The	distances	involved	in	these arrangements,	together	with	differences	in	business	practices,	shipping	and	delivery	requirements,	the	limited	number	of	suppliers,	and	laws	and regulations,	have	increased	the	difficulty	of	managing	our	supply	chain,	the	complexity	of	our	supply	chain	logistics	and	the	potential	for	interruptions	in our	production	scheduling.	If	we	are	unable	to	effectively	manage	our	supply	chain,	our	operating	results	could	be	negatively	affected.

# International	political,	monetary,	economic	and	social	developments	affect	our	business.

Over	20	percent	of	our	sales	are	made	outside	of	North	America	(principally	in	Europe)	and	are	transacted	in	currencies	other	than	U.S.	dollars (principally	the	euro	and	the	British	pound	sterling).	Increased	international	sales	make	up	an	important	part	of	our	future	strategic	plans.	In	addition,	we manufacture	products	in	Asia	and	source	products	and	components	from	third	parties	in	Asia.	Our	international	business	faces	risks	associated	with changes	in	political,	monetary,	economic	and	social	environments,	labor	conditions	and	practices,	the	laws,	regulations	and	policies	of	foreign governments,	cultural	differences	and	differences	in	enforcement	of	contract	and	intellectual	property	rights.	U.S.	laws	and	regulations	affecting	activities of	U.S.	companies	doing	business	abroad,

including	tax	laws,	laws	regulating	various	business	practices,	and	trade	regulations	which	may	include	duties	and	tariffs	can	also	impact	our	international business.	Our	international	operating	results	may	be	influenced	by	economic	conditions	in	Europe,	including	uncertainty	regarding	the	European sovereign	debt	crisis,	and	competitive	pricing	pressures	on	certain	products.	The	financial	reporting	of	our	consolidated	operating	results	is	affected	by fluctuations	in	currency	exchange	rates,	which	may	present	challenges	in	comparing	operating	performance	from	period	to	period	and	in	forecasting future	performance.

# We	have	investments	in	financial	assets,	including	assets	that	are	not	readily	marketable	and	involve	financial	risk.

We	continue	to	reduce	our	investment	in	private	equity	funds.	Since	there	is	no	active	trading	market	for	investments	in	private	equity	funds,	they are	for	the	most	part	illiquid.	These	investments,	by	their	nature,	can	also	have	a	relatively	higher	degree	of	business	risk,	including	financial	leverage, than	other	financial	investments.	Future	changes	in	market	conditions,	the	future	performance	of	the	underlying	investments	or	new	information	provided by	private	equity	fund	managers	could	affect	the	recorded	values	of	such	investments	or	the	amounts	realized	upon	liquidation.

# Claims	and	litigation	could	be	costly.

We	are,	from	time	to	time,	involved	in	various	claims,	litigation	matters	and	regulatory	proceedings	that	arise	in	the	ordinary	course	of	our	business and	which	could	have	a	material	adverse	effect	on	us.	These	matters	may	include	contract	disputes,	automobile	liability	and	other	personal	injury	claims, warranty	disputes,	environmental	claims	or	proceedings,	other	tort	claims,	employment	and	tax	matters	and	other	proceedings	and	litigation,	including class	actions.

We	are	subject	to	product	safety	regulations,	recalls	and	direct	claims	for	product	liability	that	can	result	in	significant	liability	and,	regardless	of	the ultimate	outcome,	can	be	costly	to	defend	or	manage.	Also,	we	increasingly	rely	on	other	manufacturers	to	provide	us	with	products	or	components	for products	that	we	sell.	Due	to	the	difficulty	of	controlling	the	quality	of	products	or	components	sourced	from	other	manufacturers,	we	are	exposed	to	risks relating	to	the	quality	of	such	products	and	to	limitations	on	our	recourse	against	such	suppliers.

We	have	also	experienced	class	action	lawsuits	in	recent	years	predicated	upon	claims	for	antitrust	violations,	product	liability	and	wage	and	hour issues.	We	have	generally	denied	liability	and	have	vigorously	defended	these	cases.	Due	to	their	scope	and	complexity,	however,	these	lawsuits	can	be particularly	costly	to	defend	and	resolve,	and	we	have	and	may	continue	to	incur	significant	costs	as	a	result	of	these	types	of	lawsuits.

Increasingly,	our	homebuilder	customers	are	subject	to	construction	defect	and	home	warranty	claims	in	the	ordinary	course	of	their	business.	Our contractual	arrangements	with	these	customers	may	include	our	agreement	to	defend	and	indemnify	them	against	various	liabilities.	These	claims,	often asserted	several	years	after	completion	of	construction,	can	result	in	complex	lawsuits	or	claims	against	the	homebuilders	and	many	of	their subcontractors,	including	us,	and	may	require	us	to	incur	defense	and	indemnity	costs	even	when	our	products	or	services	are	not	the	principal	basis	for the	claims.

Although	we	intend	to	defend	all	claims	and	litigation	matters	vigorously,	given	the	inherently	unpredictable	nature	of	claims	and	litigation,	we cannot	predict	with	certainty	the	outcome	or	effect	of	any	claim	or	litigation	matter.

We	maintain	insurance	against	some,	but	not	all,	of	these	risks	of	loss	resulting	from	claims	and	litigation.	We	may	elect	not	to	obtain	insurance	if we	believe	the	cost	of	available	insurance	is	excessive	relative	to	the	risks	presented.	The	levels	of	insurance	we	maintain	may	not	be	adequate	to

fully	cover	any	and	all	losses	or	liabilities.	If	any	significant	accident,	judgment,	claim	or	other	event	is	not	fully	insured	or	indemnified	against,	it	could have	a	material	adverse	impact	on	our	business,	financial	condition	and	results	of	operations.

See	Note	T	to	the	consolidated	financial	statements	included	in	Item	8	of	this	Report	for	additional	information	about	litigation	involving	our businesses.

# Compliance	with	government	regulation	and	industry	standards	could	impact	our	capital	expenditures	and	operating	results.

We	are	subject	to	U.S.	and	foreign	government	regulations,	particularly	those	pertaining	to	health	and	safety	(including	protection	of	employees	and consumers),	climate	disruption	and	environmental	issues.	In	addition	to	complying	with	current	requirements	and	requirements	that	will	become	effective at	a	future	date,	even	more	stringent	requirements	could	be	imposed	on	our	industries	in	the	future.	Additionally,	some	of	our	products	must	be	certified by	industry	organizations.	Compliance	with	these	regulations	and	industry	standards	may	require	us	to	alter	our	manufacturing	and	installation	processes and	our	sourcing,	which	could	adversely	impact	our	competitive	position.	Further,	if	we	do	not	effectively	and	timely	comply	with	such	regulations	and industry	standards,	our	operating	results	could	be	negatively	affected.

# The	long-term	performance	of	our	businesses	relies	on	our	ability	to	attract,	develop	and	retain	talented	personnel.

To	be	successful,	we	must	attract,	develop	and	retain	highly	qualified	and	talented	personnel	who	have	the	experience,	knowledge	and	expertise	to successfully	implement	our	key	business	strategies,	particularly	our	international	business	expansion	and	the	development	of	e-commerce	capabilities. We	compete	for	employees	with	a	broad	range	of	employers	in	many	different	industries,	including	large	multinational	firms,	and	we	invest	significant resources	in	recruiting,	developing,	motivating	and	retaining	them.	The	failure	to	attract,	develop,	motivate	and	retain	key	employees	could	negatively affect	our	competitive	position	and	our	operating	results.	Further,	as	the	housing	market	recovers,	if	we	are	unable	to	recruit,	train	and	retain	sufficient skilled	labor,	we	may	not	be	able	to	adequately	satisfy	increased	demand	for	our	products	and	services,	which	could	impact	our	operating	results.

# Item	1B. Unresolved	Staff	Comments.

# None.

# Item	2. Properties.

The	table	below	lists	our	principal	North	American	properties	for	segments	other	than	Installation	and	Other	Services.

| Business	Segment | Manufacturing | Warehouse	and<br>Distribution |
| :--- | :--- | :--- |
| Cabinets\tand\tRelated\tProducts | 10 | 9 |
| Plumbing\tProducts | 21 | 4 |
| Decorative\tArchitectural\tProducts | 8 | 8 |
| Other\tSpecialty\tProducts | 10 | 6 |
| Totals | 49 | 27 |

Most	of	our	North	American	facilities	range	from	single	warehouse	buildings	to	complex	manufacturing	facilities.	We	own	most	of	our	North American	manufacturing	facilities,	none	of	which

are	subject	to	significant	encumbrances.	A	substantial	number	of	our	warehouse	and	distribution	facilities	are	leased.

Our	Installation	and	Other	Services	segment	operates	approximately	180	installation	branch	locations	and	approximately	70	distribution	centers	in the	United	States,	most	of	which	are	leased.

The	table	below	lists	our	principal	properties	outside	of	North	America.

| Business	Segment | Manufacturing | Warehouse	and<br>Distribution |
| :--- | :--- | :--- |
| Cabinets\tand\tRelated\tProducts | 2 | 8 |
| Plumbing\tProducts | 12 | 27 |
| Decorative\tArchitectural\tProducts | — | — |
| Other\tSpecialty\tProducts | 7 | — |
| Totals | 21 | 35 |

Most	of	our	international	facilities	are	located	in	China,	Denmark,	Germany	and	the	United	Kingdom.	We	generally	own	our	international manufacturing	facilities,	none	of	which	are	subject	to	significant	encumbrances.	A	substantial	number	of	our	international	warehouse	and	distribution facilities	are	leased.

Our	corporate	headquarters	are	located	in	Taylor,	Michigan	and	are	owned	by	us.	We	own	an	additional	building	near	our	corporate	headquarters that	is	used	by	our	Masco	Technical	Services	(research	and	development)	department.

Each	of	our	operating	divisions	assesses	the	manufacturing,	distribution	and	other	facilities	needed	to	meet	its	operating	requirements.	Our buildings,	machinery	and	equipment	have	been	generally	well	maintained	and	are	in	good	operating	condition.	We	believe	our	facilities	have	sufficient capacity	and	are	adequate	for	our	production	and	distribution	requirements.

# Item	3. Legal	Proceedings.

Information	regarding	legal	proceedings	involving	us	is	set	forth	in	Note	T	to	our	consolidated	financial	statements	included	in	Item	8	of	this	Report and	is	incorporated	herein	by	reference.

# Item	4. Mine	Safety	Disclosures.

Not	applicable.

# PART	II

# Item	5. Market	for	Registrant's	Common	Equity,	Related	Stockholder	Matters	and	Issuer	Purchases	of	Equity	Securities.

The	New	York	Stock	Exchange	is	the	principal	market	on	which	our	common	stock	is	traded.	The	following	table	indicates	the	high	and	low	sales prices	of	our	common	stock	as	reported	by	the	New	York	Stock	Exchange	and	the	cash	dividends	declared	per	common	share	for	the	periods	indicated:

| Quarter | Market	Price<br>High | Low | Dividends<br>Declared |
| :--- | :--- | :--- | :--- |
| 2012 |  |  |  |
| Fourth | $17.19 | $14.06 | $.075 |
| Third | \t 16.48 | \t 11.53 | .075 |
| Second | \t 14.68 | \t 11.55 | .075 |
| First | \t 14.41 | \t 10.75 | .075 |
| Total |  |  | $.30 |
| 2011 |  |  |  |
| Fourth | $10.71 | $6.60 | $.075 |
| Third | \t 12.50 | 6.78 | .075 |
| Second | \t 14.43 | \t 11.73 | .075 |
| First | \t 15.03 | \t 12.41 | .075 |
| Total |  |  | $.30 |

On	January	31,	2013,	there	were	approximately	5,014	holders	of	record	of	our	common	stock.

We	expect	that	our	practice	of	paying	quarterly	dividends	on	our	common	stock	will	continue,	although	the	payment	of	future	dividends	is	at	the discretion	of	our	Board	of	Directors	and	will	depend	upon	our	earnings,	capital	requirements,	financial	condition	and	other	factors.

# Equity	Compensation	Plan	Information

We	grant	equity	under	our	2005	Long	Term	Stock	Incentive	Plan	(the	"2005	Plan").	The	following	table	sets	forth	information	as	of	December	31, 2012	concerning	the	2005	Plan,	which	was	approved	by	our	stockholders.	We	do	not	have	any	equity	compensation	plans	that	have	not	been	approved by	stockholders.

| Number	of<br>Securities	to	be<br>Issued	Upon<br>Exercise	of<br>Outstanding<br>Options,	Warrants<br>and	Rights | Weighted-Average<br>Exercise	Price		of<br>Outstanding	Options,<br>Warrants	and	Rights | Number	of	Securities<br>Remaining	Available<br>for<br>Future	Issuance	Under<br>Equity		Compensation<br>Plans<br>(Excluding	Securities<br>Reflected	in		the<br>First	Column) |
| :--- | :--- | :--- |
| 30,415,783 | $21.27 | 10,718,100 |

The	remaining	information	required	by	this	Item	will	be	contained	in	our	definitive	Proxy	Statement	for	our	2013	Annual	Meeting	of	Stockholders,	to be	filed	on	or	before	April	30,	2013,	and	such	information	is	incorporated	herein	by	reference.

# Performance	Graph

The	table	below	compares	the	cumulative	total	shareholder	return	on	our	common	stock	with	the	cumulative	total	return	of	(i)	the	Standard	& Poor's	500	Composite	Stock	Index	("S&P	500	Index"),	(ii)	The	Standard	&	Poor's	Industrials	Index	("S&P	Industrials	Index")	and	(iii)	the	Standard	& Poor's	Consumer	Durables	&	Apparel	Index	("S&P	Consumer	Durables	&	Apparel	Index"),	from	December	31,	2007	through	December	31,	2012,	when the	closing	price	of	our	common	stock	was	$16.66.	The	graph	assumes	investments	of	$100	on	December	31,	2007	in	our	common	stock	and	in	each	of the	three	indices	and	the	reinvestment	of	dividends.

The	table	below	sets	forth	the	value,	as	of	December	31	for	each	of	the	years	indicated,	of	a	$100	investment	made	on	December	31,	2007	in	each of	our	common	stock,	the	S&P	500	Index,	the	S&P	Industrials	Index	and	the	S&P	Consumer	Durables	&	Apparel	Index	and	includes	the	reinvestment	of dividends.

|  | 2008 | 2009 | 2010 | 2011 | 2012 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Masco | $55.78 | $71.52 | $67.12 | $52.15 | $92.49 |
| S&amp;P\t500\tIndex | $63.45 | $79.90 | $91.74 | $93.67 | $108.55 |
| S&amp;P\tIndustrials\tIndex | $60.60 | $72.83 | $92.04 | $91.50 | $105.47 |
| S&amp;P\tConsumer\tDurables\t&amp;\tApparel\tIndex | $66.43 | $90.54 | $118.19 | $127.31 | $154.72 |

In	July	2007,	our	Board	of	Directors	authorized	the	purchase	of	up	to	50	million	shares	of	our	common	stock	in	open-market	transactions	or otherwise.	At	December	31,	2012,	we	had	remaining	authorization	to	repurchase	up	to	24	million	shares.	During	the	first	quarter	of	2012,	we	repurchased and	retired	one	million	shares	of	our	common	stock,	for	cash	aggregating	$8	million	to	offset	the	dilutive	impact	of	the	2012	grant	of	one	million	shares	of long-term	stock	awards.	We	have	not	purchased	any	shares	since	March	2012.

| Item	6.<br>Selected	Financial	Data. |  |  |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | Dollars\tin\tMillions\t(Except\tPer\tCommon\tShare\tData) | Dollars\tin\tMillions\t(Except\tPer\tCommon\tShare\tData) | Dollars\tin\tMillions\t(Except\tPer\tCommon\tShare\tData) |  |
|  | 2012 | 2011 | 2010 | 2009 | 2008 |
| Net\tSales\t(1) | $7,745 | $7,467 | $7,486 | $7,657 | $9,338 |
| Operating\tprofit\t(loss)\t(1)(2)(3)(4)(5)(6) | $271 | $(295) | $(463) | $70 | $149 |
| Loss\tfrom\tcontinuing\toperations\tattributable\tto\tMasco\tCorporation\t(1)(2)(3)(4)(5) |  |  |  |  |  |
| (6) | $(76) | $(465) | $(1,022) | $(130) | $(329) |
| Loss\tper\tcommon\tshare\tfrom\tcontinuing\toperations: |  |  |  |  |  |
| Basic | $(.22) | $(1.34) | $(2.94) | $(.38) | $(.95) |
| Diluted | $(.22) | $(1.34) | $(2.94) | $(.38) | $(.95) |
| Dividends\tdeclared | $.30 | $.30 | $.30 | $.30 | $.93 |
| Dividends\tpaid | $.30 | $.30 | $.30 | $.46 | $.925 |
| At\tDecember\t31: |  |  |  |  |  |
| Total\tassets | $6,875 | $7,297 | $8,140 | $9,175 | $9,483 |
| Long-term\tdebt | \t 3,422 | \t 3,222 | 4,032 | \t 3,604 | 3,915 |
| Shareholders'\tequity | 534 | 742 | 1,582 | \t 2,817 | 2,981 |

(2) The	year	2012	includes	non-cash	impairment	charges	for	other	intangible	assets	aggregating	$27	million	after	tax	($42	million	pre-tax).

(3) The	year	2011	includes	non-cash	impairment	charges	for	goodwill	and	other	intangible	assets	aggregating	$335	million	after	tax	($494	million	pre- tax).

(4) The	year	2010	includes	non-cash	impairment	charges	for	goodwill	and	other	intangible	assets	aggregating	$586	million	after	tax	($698	million	pre- tax).	The	year	2010	also	includes	a	valuation	allowance	on	U.S.	deferred	tax	assets	of	$372	million.

(5) The	year	2009	includes	non-cash	impairment	charges	for	goodwill	aggregating	$180	million	after	tax	($262	million	pre-tax).

(6) The	year	2008	includes	non-cash	impairment	charges	for	goodwill	and	other	intangible	assets	aggregating	$412	million	after	tax	($415	million	pre- tax).

# Item	7. Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations.

The	financial	and	business	analysis	below	provides	information	which	we	believe	is	relevant	to	an	assessment	and	understanding	of	our consolidated	financial	position,	results	of	operations	and	cash	flows.	This	financial	and	business	analysis	should	be	read	in	conjunction	with	the consolidated	financial	statements	and	related	notes.

The	following	discussion	and	certain	other	sections	of	this	Report	contain	statements	reflecting	our	views	about	our	future	performance	and constitute	"forward-looking	statements"	under	the	Private	Securities	Litigation	Reform	Act	of	1995.	Forward-looking	statements	can	be	identified	by	words such	as	"anticipate,"	"intend,"	"plan,"	"believe,"	"estimate,"	"expect,"	"assume,"	"seek,"	"appear,"	"may,"	"should,"	"will,"	"forecast"	and	similar	references	to future	periods.	These	views	involve	risks	and	uncertainties	that	are	difficult	to	predict	and,	accordingly,	our	actual	results	may	differ	materially	from	the results	discussed	in	such	forward-looking	statements.	We	caution	you	against	relying	on	any	of	these	forward-looking	statements.	In	addition	to	the various	factors	included	in	the	"Executive	Level	Overview,"	"Critical	Accounting	Policies	and	Estimates"	and	"Outlook	for	the	Company"	sections,	our future	performance	may	be	affected	by	our	reliance	on	new	home	construction	and	home	improvement,	our	reliance	on	key	customers,	the	cost	and availability	of	raw	materials,	shifts	in	consumer	preferences	and	purchasing	practices,	our	ability	to	improve	our	underperforming	businesses	and	our ability	to	maintain	our	competitive	position	in	our	industries.	These	and	other	factors	are	discussed	in	detail	in	Item	1A	"Risk	"Factors"	of	this	Report.	Any forward-looking	statement	made	by	us	in	this	Report	speaks	only	as	of	the	date	on	which	it	was	made.	Factors	or	events	that	could	cause	our	actual results	to	differ	may	emerge	from	time	to	time,	and	it	is	not	possible	for	us	to	predict	all	of	them.	Unless	required	by	law,	we	undertake	no	obligation	to update	publicly	any	forward-looking	statements	as	a	result	of	new	information,	future	events	or	otherwise.

# Executive	Level	Overview

We	manufacture,	distribute	and	install	home	improvement	and	building	products.	These	products	are	sold	for	home	improvement	and	new	home construction	through	mass	merchandisers,	hardware	stores,	home	centers,	homebuilders,	distributors	and	other	outlets	for	consumers	and	contractors and	direct	to	the	consumer.

2012	Results.				Net	sales	were	positively	affected	by	increased	new	home	construction	and	repair	and	remodel	(except	for	big	ticket	items)	in	the U.S.,	partially	offset	by	slowing	economic	conditions	in	Europe	and	a	stronger	U.S.	dollar.	Our	results	of	operations	were	positively	affected	by	a	more favorable	relationship	between	selling	prices	and	commodity	costs	and	most	of	our	businesses	were	positively	affected	by	the	benefits	associated	with the	business	rationalizations	and	cost	savings	initiatives	that	we	have	implemented	over	the	last	several	years.

Our	Cabinets	and	Related	Products	segment	continues	to	be	negatively	affected	by	continuing	competitive	market	conditions	in	repair	and	remodel in	the	U.S.	and	softness	in	Europe.	Our	Plumbing	Products	segment	results	were	positively	affected	by	the	benefits	of	increased	sales	volume	of	our North	American	operations	partially	offset	by	lower	sales	volume	and	a	less	favorable	product	mix	related	to	our	international	operations.	The	Decorative Architectural	Products	segment	was	positively	affected	by	a	more	favorable	relationship	between	selling	prices	and	commodity	costs	and	lower	program costs.	The	Installation	and	Other	Services	segment	was	positively	affected	by	increased	sales	volume.	The	Other	Specialty	Products	segment	was positively	affected	by	a	more	favorable	relationship	between	selling	prices	and	commodity	costs,	partially	offset	by	the	exit	of	certain	geographies.	The Other	Specialty	Products	segment	was	also	negatively	affected	by	incremental	warranty	expenses	of	$12	million	and	the	impairment	of	a	registered trademark	of	$42	million.

# Critical	Accounting	Policies	and	Estimates

Our	discussion	and	analysis	of	our	financial	condition	and	results	of	operations	are	based	upon	our	consolidated	financial	statements,	which	have been	prepared	in	accordance	with	accounting	principles	generally	accepted	in	the	United	States	of	America	("GAAP").	The	preparation	of	these	financial statements	requires	us	to	make	certain	estimates	and	assumptions	that	affect	the	reported	amounts	of	assets	and	liabilities,	disclosure	of	any	contingent assets	and	liabilities	at	the	date	of	the	financial	statements	and	the	reported	amounts	of	revenues	and	expenses	during	the	reporting	periods.	We regularly	review	our	estimates	and	assumptions,	which	are	based	upon	historical	experience,	as	well	as	current	economic	conditions	and	various	other factors	that	we	believe	to	be	reasonable	under	the	circumstances,	the	results	of	which	form	the	basis	for	making	judgments	about	the	carrying	values	of certain	assets	and	liabilities	that	are	not	readily	apparent	from	other	sources.	Actual	results	may	differ	from	these	estimates	and	assumptions.

We	believe	that	the	following	critical	accounting	policies	are	affected	by	significant	judgments	and	estimates	used	in	the	preparation	of	our consolidated	financial	statements.

# Revenue	Recognition	and	Receivables

We	recognize	revenue	as	title	to	products	and	risk	of	loss	is	transferred	to	customers	or	when	services	are	rendered.	We	record	revenue	for unbilled	services	performed	based	upon	estimates	of	material	and	labor	incurred	in	the	Installation	and	Other	Services	segment;	such	amounts	are recorded	in	Receivables.	We	record	estimated	reductions	to	revenue	for	customer	programs	and	incentive	offerings,	including	special	pricing	and	co- operative	advertising	arrangements,	promotions	and	other	volume-based	incentives.	We	maintain	allowances	for	doubtful	accounts	receivable	for estimated	losses	resulting	from	the	inability	of	customers	to	make	required	payments.	In	addition,	we	monitor	our	customer	receivable	balances	and	the credit	worthiness	of	our	customers	on	an	on-going	basis.	During	downturns	in	our	markets,	declines	in	the	financial	condition	and	creditworthiness	of customers	impact	the	credit	risk	of	the	receivables	involved	and	we	have	incurred	bad	debt	expense	related	to	customer	defaults.	Our	bad	debt	expense was	$14	million,	$12	million	and	$18	million	for	the	years	ended	December	31,	2012,	2011	and	2010,	respectively.

# Inventories

We	record	inventories	at	the	lower	of	cost	or	net	realizable	value,	with	expense	estimates	made	for	obsolescence	or	unsaleable	inventory	equal	to the	difference	between	the	recorded	cost	of	inventories	and	their	estimated	market	value	based	upon	assumptions	about	future	demand	and	market conditions.	On	an	on-going	basis,	we	monitor	these	estimates	and	record	adjustments	for	differences	between	estimates	and	actual	experience. Historically,	actual	results	have	not	significantly	deviated	from	those	determined	using	these	estimates.

# Financial	Investments

We	follow	accounting	guidance	that	defines	fair	value,	establishes	a	framework	for	measuring	fair	value	and	expands	disclosures	about	fair	value measurements	for	our	financial	investments	and	liabilities.	This	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.

If	applicable,	we	record	investments	in	available-for-sale	securities	at	fair	value,	and	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	in	our	consolidated	balance	sheet.

In	the	past,	we	have	invested	excess	cash	in	auction	rate	securities.	Auction	rate	securities	are	investment	securities	that	have	interest	rates	which are	reset	every	7,	28	or	35	days.	At	December	31,	2012,	our	investment	in	auction	rate	securities	was	$22	million;	we	have	not	increased	our	investment in	auction	rate	securities	since	2007.	The	fair	value	of	auction	rate	securities	is	estimated,	on	a	recurring	basis,	using	a	discounted	cash	flow	model (Level	3	input).	If	we	changed	the	discount	rate	used	in	the	fair	value	estimate	by	75	basis	points,	the	value	of	the	auction	rate	securities	would	change by	approximately	$1	million.

We	have	maintained	investments	in	a	number	of	private	equity	funds,	which	aggregated	$69	million	at	December	31,	2012.	We	carry	our investments	in	private	equity	funds	and	other	private	investments	at	cost.	It	is	not	practicable	for	us	to	estimate	a	fair	value	for	private	equity	funds	and other	private	investments	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.	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.	Due	to	the	significant	unobservable	inputs,	the	fair	value	measurements	used	to	evaluate	impairment	are	a	Level	3	input.

Impairment	indicators	we	consider	include	the	following:	whether	there	has	been	a	significant	deterioration	in	earnings	performance,	asset	quality or	business	prospects;	a	significant	adverse	change	in	the	regulatory,	economic	or	technological	environment;	a	significant	adverse	change	in	the general	market	condition	or	geographic	area	in	which	the	investment	operates;	industry	and	sector	performance;	current	equity	and	credit	market conditions;	and	any	bona	fide	offers	to	purchase	the	investment	for	less	than	the	carrying	value.	We	also	consider	specific	adverse	conditions	related	to the	financial	health	of	and	business	outlook	for	the	fund,	including	industry	and	sector	performance.	The	significant	assumptions	utilized	in	analyzing	a fund	for	potential	other-than-temporary	impairment	include	current	economic	conditions,	market	analysis	for	specific	funds	and	performance	indicators	in residential	and	commercial	construction,	bio-technology,	health	care	and	information	technology	sectors	in	which	the	applicable	funds'	investments operate.

At	December	31,	2012,	we	have	investments	in	15	venture	capital	funds,	with	an	aggregate	carrying	value	of	$16	million.	The	venture	capital	funds invest	in	start-up	or	smaller,	early-stage	established	businesses,	principally	in	the	information	technology,	bio-technology	and	health	care	sectors.	At December	31,	2012,	we	also	have	investments	in	21	buyout	funds,	with	an	aggregate	carrying	value	of	$53	million.	The	buyout	funds	invest	in	later- stage,	established	businesses	and	no	buyout	fund	has	a	concentration	in	a	particular	sector.

Since	there	is	no	active	trading	market	for	these	investments,	they	are	for	the	most	part	illiquid.	These	investments,	by	their	nature,	can	also	have	a relatively	higher	degree	of	business	risk,	including	financial	leverage,	than	other	financial	investments.	The	timing	of	distributions	from	the	funds,	which depends	on	particular	events	related	to	the	underlying	investments,	as	well	as	the	funds'	schedules	for	making	distributions	and	their	needs	for	cash,	can be	difficult	to	predict.	As	a	result,	the	amount	of	income	we	record	from	these	investments	can	vary	substantially	from	quarter	to	quarter.	Future	changes in	market	conditions,	the	future	performance	of	the	underlying	investments	or	new	information	provided	by	private	equity	fund	managers	could	affect	the recorded	values	of	these	investments	and	the	amounts	realized	upon	liquidation.

We	record	an	impairment	charge	to	earnings	when	an	investment	has	experienced	a	decline	in	fair	value	that	is	deemed	to	be	other-than- temporary.

# Goodwill	and	Other	Intangible	Assets

We	record	the	excess	of	purchase	cost	over	the	fair	value	of	net	tangible	assets	of	acquired	companies	as	goodwill	or	other	identifiable	intangible assets.	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	complete	the	impairment	testing	of	goodwill	utilizing	a	discounted	cash	flow	method.	We	selected	the	discounted	cash flow	methodology	because	we	believe	that	it	is	comparable	to	what	would	be	used	by	other	market	participants.	We	have	defined	our	reporting	units	and completed	the	impairment	testing	of	goodwill	at	the	operating	segment	level,	as	defined	by	accounting	guidance.	Our	operating	segments	are	reporting units	that	engage	in	business	activities	for	which	discrete	financial	information,	including	five-year	forecasts,	is	available.

Determining	market	values	using	a	discounted	cash	flow	method	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	generally	a	one	to	three	percent	long-term	assumed annual	growth	rate	of	cash	flows	for	periods	after	the	five-year	forecast.	We	generally	develop	these	forecasts	based	upon,	among	other	things,	recent sales	data	for	existing	products,	planned	timing	of	new	product	launches,	estimated	housing	starts	and	estimated	repair	and	remodel	activity.

In	2012,	we	utilized	estimated	housing	starts,	from	independent	industry	sources,	growing	from	current	levels	to	1.5	million	units	in	2017	(terminal growth	year)	and	operating	profit	margins	improving	to	approximate	historical	levels	for	those	business	units	by	2017	(terminal	growth	year).	We	utilize our	weighted	average	cost	of	capital	of	approximately	9.5	percent	as	the	basis	to	determine	the	discount	rate	to	apply	to	the	estimated	future	cash	flows. In	2012,	due	to	market	conditions	and	based	upon	our	assessment	of	the	risks	impacting	each	of	our	businesses,	we	applied	a	risk	premium	to	increase the	discount	rate	to	a	range	of	11	percent	to	13	percent	for	most	of	our	reporting	units.

In	the	fourth	quarter	of	2012,	we	estimated	that	future	discounted	cash	flows	projected	for	all	of	our	reporting	units	were	greater	than	the	carrying values.	Any	increases	in	estimated	discounted	cash	flows	would	have	no	effect	on	the	reported	value	of	goodwill.

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.

In	2012,	we	did	not	recognize	any	non-cash,	pre-tax	impairment	charges	for	goodwill.

A	ten	percent	decrease	in	the	estimated	fair	value	of	our	reporting	units	at	December	31,	2012	would	not	have	resulted	in	any	additional	analysis of	goodwill	impairment	for	any	additional	business	unit.

We	review	our	other	indefinite-lived	intangible	assets	for	impairment	annually,	in	the	fourth	quarter,	or	as	events	occur	or	circumstances	change that	indicate	the	assets	may	be	impaired	without	regard	to	the	reporting	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.	In

2012,	we	recognized	non-cash,	pre-tax	impairment	charges	for	other	indefinite-lived	intangible	assets	of	$42	million	($27	million,	after	tax)	attributable	to our	Other	Specialty	Products	segment.

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	identifiable	intangible	assets	at	each	reporting	period	to	determine	whether	events	and	circumstances	warrant	a	revision	to	the remaining	periods	of	amortization.

# Stock-Based	Compensation

Our	2005	Plan	provides	for	the	issuance	of	stock-based	incentives	in	various	forms	to	employees	and	non-employee	Directors.	At	December	31, 2012,	outstanding	stock-based	incentives	were	in	the	form	of	long-term	stock	awards,	stock	options,	phantom	stock	awards	and	stock	appreciation	rights.

# Long-Term	Stock	Awards

We	grant	long-term	stock	awards	to	key	employees	and	non-employee	Directors	and	do	not	cause	net	share	dilution	inasmuch	as	we	generally continue	the	practice	of	repurchasing	and	retiring	an	equal	number	of	shares	on	the	open	market.	We	measure	compensation	expense	for	stock	awards at	the	market	price	of	our	common	stock	at	the	grant	date.	There	was	$72	million	(8	million	common	shares)	of	total	unrecognized	compensation	expense related	to	unvested	stock	awards	at	December	31,	2012,	which	was	included	as	a	reduction	of	common	stock	and	paid-in	capital.	Effective	January	1, 2010,	the	vesting	period	for	stock	awards	awarded	after	January	1,	2010	is	five	years.	For	stock	awards	granted	prior	to	January	1,	2006,	we	recognize this	expense	over	the	vesting	period	of	the	stock	awards,	typically	five	to	ten	years,	or	for	executive	grantees	that	are,	or	will	become,	retirement-eligible during	the	vesting	period,	we	recognize	the	expense	over	five	years	or	immediately	upon	a	grantee's	retirement.	Effective	January	1,	2006,	we	recognize this	expense	ratably	over	the	shorter	of	the	vesting	period	of	the	stock	awards,	typically	five	to	ten	years	(except	for	stock	awards	held	by	grantees	age 66	or	older,	which	vest	over	five	years),	or	the	length	of	time	until	the	grantee	becomes	retirement-eligible	at	age	65.	Pre-tax	compensation	expense	for the	annual	vesting	of	long-term	stock	awards	was	$35	million	for	2012.

# Stock	Options

We	grant	stock	options	to	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	ten	years after	the	grant	date.

We	measure	compensation	expense	for	stock	options	using	a	Black-Scholes	option	pricing	model.	We	recognize	this	compensation	expense 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.	Pre-tax	compensation	expense	for	stock	options	was	$15	million	for	2012.

We	estimated	the	fair	value	of	stock	options	at	the	grant	date	using	a	Black-Scholes	option	pricing	model	with	the	following	assumptions	for	2012: risk-free	interest	rate	–	1.09%,	dividend	yield	–	2.57%,	volatility	factor	–	50.97%	and	expected	option	life	–	six	years.	For	expense	calculation	purposes, the	weighted	average	grant-date	fair	value	of	option	shares	granted	in	2012	was	$4.44	per	option	share.

If	we	increased	our	assumptions	for	the	risk-free	interest	rate	and	the	volatility	factor	by	50	percent,	the	expense	related	to	the	fair	value	of	stock options	granted	in	2012	would	increase	by	44	percent.	If	we	lowered	our	assumptions	for	the	risk-free	interest	rate	and	the	volatility	factor	by	50	percent, the	expense	related	to	the	fair	value	of	stock	options	granted	in	2012	would	decrease	by	55	percent.

# Employee	Retirement	Plans

Effective	January	1,	2010,	we	froze	all	future	benefit	accruals	under	substantially	all	of	our	domestic	qualified	and	non-qualified	defined-benefit pension	plans.	As	a	result	of	this	action,	the	liabilities	for	these	plans	were	remeasured;	in	addition,	certain	assumptions	appropriate	for	on-going	plans (e.g.,	turnover,	mortality	and	compensation	increases)	have	been	modified	or	eliminated	for	the	remeasurement.

Accounting	for	defined-benefit	pension	plans	involves	estimating	the	cost	of	benefits	to	be	provided	in	the	future,	based	upon	vested	years	of service,	and	attributing	those	costs	over	the	time	period	each	employee	works.	We	develop	our	pension	costs	and	obligations	from	actuarial	valuations. Inherent	in	these	valuations	are	key	assumptions	regarding	inflation,	expected	return	on	plan	assets,	mortality	rates	and	discount	rates	for	obligations and	expenses.	We	consider	current	market	conditions,	including	changes	in	interest	rates,	in	selecting	these	assumptions.	Changes	in	assumptions used	could	result	in	changes	to	reported	pension	costs	and	obligations	within	our	consolidated	financial	statements.

In	December	2012,	we	decreased	our	discount	rate	for	obligations	to	an	average	of	3.80	percent	from	4.40	percent.	The	discount	rate	for obligations	is	based	upon	the	expected	duration	of	each	defined-benefit	pension	plan's	liabilities	matched	to	the	December	31,	2012	Towers	Watson Rate	Link	curve.	The	discount	rates	we	use	for	our	defined-benefit	pension	plans	ranged	from	1.75	percent	to	4.50	percent,	with	the	most	significant portion	of	the	liabilities	having	a	discount	rate	for	obligations	of	3.40	percent	or	higher.	The	assumed	asset	return	was	primarily	7.25	percent,	reflecting the	expected	long-term	return	on	plan	assets.

Our	net	underfunded	amount	for	our	qualified	defined-benefit	pension	plans,	which	is	the	difference	between	the	projected	benefit	obligation	and plan	assets,	increased	to	$462	million	at	December	31,	2012	from	$439	million	at	December	31,	2011,	primarily	due	to	lower	rates	of	return	in	the	bond market	in	2012.	In	accordance	with	accounting	guidance,	the	underfunded	amount	has	been	recognized	on	our	consolidated	balance	sheets	at December	31,	2012	and	2011.	Qualified	domestic	pension	plan	assets	in	2012	had	a	net	gain	of	approximately	17	percent	compared	to	average	gains	of 13	percent	for	the	Investor	Force	Defined	Benefit	Plan	Universe.

Our	projected	benefit	obligation	for	our	unfunded	non-qualified	defined-benefit	pension	plans	was	$181	million	at	December	31,	2012	compared with	$174	million	at	December	31,	2011.	In	accordance	with	accounting	guidance,	this	unfunded	amount	has	been	recognized	on	our	consolidated balance	sheets	at	December	31,	2012	and	2011.

At	December	31,	2012,	we	reported	a	net	liability	of	$643	million,	of	which	$181	million	was	related	to	our	non-qualified,	supplemental	retirement plans,	which	are	not	subject	to	the	funding	requirements	of	the	Pension	Protection	Act	of	2006.	In	accordance	with	the	Pension	Protection	Act,	the Adjusted	Funding	Target	Attainment	Percentage	("AFTAP")	for	the	various	defined-benefit	pension	plans	ranges	from	71	percent	to	84	percent.

We	expect	pension	expense	for	our	qualified	defined-benefit	pension	plans	to	be	$23	million	in	2013	compared	with	$27	million	in	2012.	If	we assumed	that	the	future	return	on	plan	assets	was	one-half	percent	lower	than	the	assumed	asset	return	and	the	discount	rate	decreased	by	50	basis points,	the	2013	pension	expense	would	increase	by	$4	million.	We	expect	pension	expense	for	our	non-qualified	defined-benefit	pension	plans	to	be	$8 million	in	2013	compared	with	$9	million	in	2012.

We	anticipate	that	we	will	be	required	to	contribute	approximately	$50	million	to	$60	million	in	2013	to	our	qualified	and	non-qualified	defined-benefit plans.

# Income	Taxes

The	accounting	guidance	for	income	taxes	requires	that	the	future	realization	of	deferred	tax	assets	depends	on	the	existence	of	sufficient	taxable income	in	future	periods.	Possible	sources	of	taxable	income	include	taxable	income	in	carryback	periods,	the	future	reversal	of	existing	taxable temporary	differences	recorded	as	a	deferred	tax	liability,	tax-planning	strategies	that	generate	future	income	or	gains	in	excess	of	anticipated	losses	in the	carryforward	period	and	projected	future	taxable	income.

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

In	the	fourth	quarter	of	2010,	we	recorded	a	$372	million	valuation	allowance	against	our	U.S.	Federal	deferred	tax	assets	as	a	non-cash	charge	to income	tax	expense.	In	reaching	this	conclusion,	we	considered	the	weaker	retail	sales	of	certain	of	our	building	products	and	the	slower	than	anticipated recovery	in	the	U.S.	housing	market	which	led	to	U.S.	operating	losses	and	significant	U.S.	goodwill	impairment	charges,	that	primarily	occurred	in	the fourth	quarter	of	2010,	causing	us	to	be	in	a	three-year	cumulative	U.S.	loss	position.

During	2012	and	2011,	objective	and	verifiable	negative	evidence,	such	as	U.S.	operating	losses	and	significant	impairment	charges	for	U.S. goodwill	in	2011	and	other	intangible	assets,	continued	to	outweigh	positive	evidence	necessary	to	reduce	the	valuation	allowance.	As	a	result,	we recorded	increases	of	$65	million	and	$89	million	in	the	valuation	allowance	related	to	our	U.S.	Federal	deferred	tax	assets	as	a	non-cash	charge	to income	tax	expense	in	2012	and	2011,	respectively.

Recording	the	valuation	allowance	does	not	restrict	our	ability	to	utilize	the	future	deductions	and	net	operating	losses	associated	with	the	deferred tax	assets	assuming	taxable	income	is	recognized	in	future	periods.

A	rebound	in	the	U.S.	housing	market	from	the	recent	historic	lows	and	retail	sales	of	building	products	improving	from	their	current	levels	should have	a	positive	impact	on	our	operating	results	in	the	U.S.	A	return	to	sustained	profitability	in	the	U.S.	should	result	in	objective	positive	evidence thereby	warranting	the	potential	reversal	of	all	or	a	portion	of	the	valuation	allowance.

The	$203	million	and	$156	million	of	deferred	tax	assets	at	December	31,	2012	and	2011,	respectively,	for	which	there	is	no	valuation	allowance recorded,	are	anticipated	to	be	realized	through	the	future	reversal	of	existing	taxable	temporary	differences	recorded	as	deferred	tax	liabilities.

Should	we	determine	that	we	would	not	be	able	to	realize	our	remaining	deferred	tax	assets	in	the	future,	an	adjustment	to	the	valuation	allowance would	be	recorded	in	the	period	such	determination	is	made.	The	need	to	maintain	a	valuation	allowance	against	deferred	tax	assets	may	cause	greater volatility	in	our	effective	tax	rate.

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

While	we	believe	we	have	adequately	provided	for	our	uncertain	tax	positions,	amounts	asserted	by	taxing	authorities	could	vary	from	our	liability for	uncertain	tax	positions.	Accordingly,	additional

provisions	for	tax-related	matters,	including	interest	and	penalties,	could	be	recorded	in	income	tax	expense	in	the	period	revised	estimates	are	made	or the	underlying	matters	are	settled	or	otherwise	resolved.

# Other	Commitments	and	Contingencies

Warranty.				At	the	time	of	sale,	we	accrue	a	warranty	liability	for	the	estimated	cost	to	provide	products,	parts	or	services	to	repair	or	replace products	in	satisfaction	of	warranty	obligations.	Our	estimate	of	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	product	manufacturing	metrics	and	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.

A	majority	of	our	business	is	at	the	consumer	retail	level	through	home	centers	and	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.

We	are	subject	to	lawsuits	and	pending	or	asserted	claims	in	the	ordinary	course	of	our	business.	Liabilities	and	costs	associated	with	these matters	require	estimates	and	judgments	based	upon	our	professional	knowledge	and	experience	and	that	of	our	legal	counsel.	When	estimates	of	our exposure	for	lawsuits	and	pending	or	asserted	claims	meet	the	criteria	for	recognition	under	accounting	guidance,	amounts	are	recorded	as	charges	to earnings.	The	ultimate	resolution	of	these	exposures	may	differ	due	to	subsequent	developments.	See	Note	T	to	our	consolidated	financial	statements	for information	regarding	certain	of	our	legal	proceedings.

# Corporate	Development	Strategy

Our	current	business	strategy	includes	the	rationalization	of	our	business	units,	including	consolidations,	and	increasing	synergies	among	our business	units.	Going	forward,	we	expect	to	maintain	a	balanced	growth	strategy	with	emphasis	on	cash	flow,	organic	growth	with	fewer	acquisitions	and growth	through	new	product	development	and	greenfield	locations	related	to	certain	Installation	and	Other	Services	businesses.

As	part	of	our	strategic	planning,	we	continue	to	review	all	of	our	businesses	to	determine	which	businesses	may	not	be	core	to	our	long-term growth	strategy.	As	a	result,	during	2012,	we	sold	several	business	units	in	the	Installation	and	Other	Services	segment.	These	businesses	were	related to	commercial	drywall	installation,	millwork	and	framing;	accordingly,	we	accounted	for	these	businesses	as	discontinued	operations	in	2012	and	2011. See	Note	B	to	the	consolidated	financial	statements	for	more	information.

# Liquidity	and	Capital	Resources

Historically,	we	have	largely	funded	our	growth	through	cash	provided	by	our	operations,	long-term	bank	debt	and	the	issuance	of	notes	in	the financial	markets,	and	by	the	issuance	of	our	common	stock,	including	issuances	for	certain	mergers	and	acquisitions.

Maintaining	high	levels	of	liquidity	and	focusing	on	cash	generation	are	among	our	financial	strategies;	as	a	result,	we	have	cash	of	approximately $1.4	billion	at	December	31,	2012.	Our	total

debt	as	a	percent	of	total	capitalization	was	87	percent	and	84	percent	at	December	31,	2012	and	2011,	respectively.

We	maintain	a	Credit	Agreement	(the	"Credit	Agreement")	with	a	bank	group,	with	an	aggregate	commitment	of	$1.25	billion	and	a	maturity	date	of January	10,	2014.	The	Credit	Agreement	provides	for	an	unsecured	revolving	credit	facility	available	to	us	and	one	of	our	foreign	subsidiaries,	in	U.S. dollars,	European	euros	and	certain	other	currencies.

We	have	entered	into	two	amendments	of	the	Credit	Agreement.	The	amendments	provided	for	the	add-back	to	shareholders'	equity	in	our	debt	to capitalization	covenant	of	certain	non-cash	charges,	changes	to	the	valuation	allowance	on	our	deferred	tax	assets	included	in	income	tax	expense,	and certain	future	non-cash	charges.	The	second	amendment	also	revised	the	permitted	ratio	of	consolidated	EBITDA	to	the	consolidated	interest	expense	to 2.25	to	1.00	through	December	31,	2012,	increasing	to	2.50	to	1.00	with	respect	to	each	quarter	thereafter.

At	December	31,	2012,	we	had	additional	borrowing	capacity,	subject	to	availability,	of	up	to	$873	million.	Alternatively,	at	December	31,	2012,	we could	absorb	a	reduction	to	shareholders'	equity	of	approximately	$470	million	and	remain	in	compliance	with	the	debt	to	total	capitalization	covenant.	We were	in	compliance	with	all	Credit	Agreement	covenants	and	we	had	no	borrowings	under	the	Credit	Agreement	at	December	31,	2012.

On	March	5,	2012,	we	issued	$400	million	of	5.95%	Notes	due	March	15,	2022	("the	Notes").	Including	the	interest	rate	swap	amortization,	the effective	interest	rate	for	the	Notes	is	approximately	6.5%.	The	Notes	are	senior	indebtedness	and	are	redeemable	at	the	Company's	option.

In	January	2012,	we	repurchased	$46	million	of	5.875%	Notes	due	July	15,	2012	in	open-market	transactions;	we	paid	a	premium	of	$1	million	for the	repurchase.	In	July	2012,	we	retired	all	of	our	$745	million	of	5.875%	Notes	on	the	scheduled	retirement	date.

We	had	cash	and	cash	investments	of	approximately	$1.4	billion	at	December	31,	2012.	Our	cash	and	cash	investments	consist	of	overnight interest	bearing	money	market	demand	and	time	deposit	accounts,	money	market	mutual	funds	containing	government	securities	and	treasury obligations.	While	we	attempt	to	diversify	these	investments	in	a	prudent	manner	to	minimize	risk,	it	is	possible	that	future	changes	in	the	financial markets	could	affect	the	security	or	availability	of	these	investments.

Of	the	$1.4	billion	and	the	$1.7	billion	of	cash	and	cash	investments	we	held	at	December	31,	2012	and	2011,	respectively,	$572	million	and	$551 million,	respectively,	is	held	in	our	foreign	subsidiaries.	If	these	funds	were	needed	for	our	operations	in	the	U.S.,	their	repatriation	into	the	U.S.	may result	in	additional	U.S.	income	taxes	or	foreign	withholding	taxes.	The	amount	of	such	taxes	is	dependent	on	the	income	tax	laws	and	circumstances	at the	time	of	distribution.

We	have	maintained	investments	in	available-for-sale	and	marketable	securities	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	capital	tax	losses.	We	determined	that	the	longer	maturity	of	private equity	funds	would	be	advantageous	and	complement	our	investment	in	more	liquid	available-for-sale	and	marketable	securities	to	balance	risk.	Since	we have	significantly	reduced	our	capital	tax	losses	in	part	by	generating	capital	gains	from	investments	and	other	sources,	we	have	and	will	continue	to reduce	our	investments	in	long-term	financial	assets.

We	utilize	derivative	and	hedging	instruments	to	manage	our	exposure	to	currency	fluctuations,	primarily	related	to	the	European	euro	and	the	U.S. dollar;	commodity	cost	fluctuations,	primarily	zinc	and	copper;	and	interest	rate	fluctuations,	primarily	related	to	debt	issuances.	We	review	our	hedging program,	derivative	positions	and	overall	risk	management	on	a	regular	basis.

During	2012,	we	paid	quarterly	dividends	of	$.075	per	common	share.

Our	working	capital	ratio	was	1.7	to	1	and	1.5	to	1	at	December	31,	2012	and	2011,	respectively.	The	increase	in	the	working	capital	ratio	is primarily	due	to	the	payment	of	$791	million	of	5.875%	Notes	in	July	2012,	which	were	included	in	current	liabilities	at	December	31,	2011,	partially	offset by	the	short-term	classification	of	$200	million	Notes	due	August	2013.

# Cash	Flows

Significant	sources	and	(uses)	of	cash	in	the	past	three	years	are	summarized	as	follows,	in	millions:

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Net\tcash\tfrom\toperating\tactivities | $ 281 | $ 239 | $ 465 |
| Retirement\tof\tnotes | (791) | (58) | (359) |
| Issuance\tof\tnotes,\tnet\tof\tissuance\tcosts | 396 | — | 494 |
| Payment\tfor\tsettlement\tof\tswaps | (25) | — | — |
| Proceeds\tfrom\tdisposition\tof: |  |  |  |
| Businesses,\tnet\tof\tcash\tdisposed | 9 | — | — |
| Property\tand\tequipment | 67 | 24 | 18 |
| Proceeds\tfrom\tfinancial\tinvestments,\tnet | 40 | 94 | 42 |
| Tax\tbenefit\tfrom\tstock-based\tcompensation | — | — | 4 |
| Cash\tdividends\tpaid | (107) | (107) | (108) |
| Capital\texpenditures | (119) | (151) | (137) |
| Purchase\tof\tCompany\tcommon\tstock | (8) | (30) | (45) |
| Decrease\tin\tdebt,\tnet | (1) | (5) | (2) |
| Dividends\tpaid\tto\tnoncontrolling\tinterest | (40) | (18) | (15) |
| Acquisition\tof\tbusinesses,\tnet\tof\tcash\tacquired | — | (10) | — |
| Effect\tof\texchange\trates\ton\tcash\tand\tcash\tinvestments | 17 | (18) | (14) |
| Other,\tnet | (24) | (19) | (41) |
| Cash\t(decrease)\tincrease | $(305) | $(59) | $ 302 |

Net	cash	provided	by	operations	of	$281	million	consisted	primarily	of	net	(loss)	adjusted	for	non-cash	and	certain	other	items,	including depreciation	and	amortization	expense	of	$214	million,	a	$42	million	charge	for	the	impairment	of	other	intangible	assets,	a	$50	million	net	change	in deferred	taxes	and	other	non-cash	items,	including	stock-based	compensation	expense	and	amortization	expense	related	to	in-store	displays.

We	continue	to	emphasize	balance	sheet	management,	including	working	capital	management	and	cash	flow	generation.	Days	sales	in	accounts receivable	were	47	days	at	both	December	31,	2012	and	2011,	and	days	sales	in	inventories	were	52	days	at	both	December	31,	2012	and	2011. Accounts	payable	days	were	66	days	at	December	31,	2012	and	63	days	at	December	31,	2011;	the	increase	in	payable	days	is	due	to	our	improved management	of	accounts	payable.	Working	capital	(defined	as	accounts	receivable	and	inventories	less	accounts	payable)	as	a	percent	of	sales	was 12.1	percent	at	December	31,	2012	and	12.2	percent	at	December	31,	2011.

Net	cash	used	for	financing	activities	was	$576	million,	primarily	due	to	the	retirement	of	$791	million	of	5.875%	Notes	due	July	15,	2012,	$107 million	for	cash	dividends	paid,	$25	million	for	the	settlement	of	interest	rate	swaps	and	$8	million	for	the	acquisition	of	our	common	stock	to	generally offset	the	dilutive	impact	of	long-term	stock	awards	granted	in	2012,	partially	offset	by	the	issuance	of	Notes	for	$396	million,	net	of	issuance	costs.

At	December	31,	2012,	we	had	remaining	authorization	from	our	Board	of	Directors	to	repurchase	up	to	an	additional	24	million	shares	of	our common	stock	in	open-market	transactions	or	otherwise.	We	believe	that	our	present	cash	balance	and	cash	flows	from	operations	are	sufficient	to	fund our	near-term	working	capital	and	other	investment	needs.	We	believe	that	our	longer-term	working	capital	and	other	general	corporate	requirements	will be	satisfied	through	cash	flows	from	operations	and,	to	the	extent	necessary,	from	bank	borrowings	and	future	financial	market	activities.	Consistent	with past	practice,	we	anticipate	repurchasing	shares	in	2013	to	offset	any	dilution	from	long-term	stock	awards	granted	or	stock	options	exercised	as	part	of our	compensation	programs.

Net	cash	used	for	investing	activities	was	$27	million,	and	included	$119	million	for	capital	expenditures.	Cash	provided	by	investing	activities included	primarily	$67	million	of	net	proceeds	from	the	disposition	of	property	and	equipment	and	$40	million	from	the	net	sale	of	financial	investments.

We	invest	in	automating	our	manufacturing	operations	to	increase	our	productivity,	improve	customer	service	and	support	new	product	innovation. Capital	expenditures	for	2012	were	$119	million,	compared	with	$151	million	for	2011	and	$137	million	for	2010;	for	2013,	capital	expenditures,	excluding any	potential	2013	acquisitions,	are	expected	to	be	approximately	$165	million.	Depreciation	and	amortization	expense	for	2012	totaled	$214	million, compared	with	$263	million	for	2011	and	$279	million	for	2010;	for	2013,	depreciation	and	amortization	expense,	excluding	any	potential	2013 acquisitions,	is	expected	to	be	approximately	$210	million.	Amortization	expense	totaled	$12	million,	$17	million	and	$18	million	in	2012,	2011	and	2010, respectively.

Costs	of	environmental	responsibilities	and	compliance	with	existing	environmental	laws	and	regulations	have	not	had,	nor	do	we	expect	them	to have,	a	material	effect	on	our	capital	expenditures,	financial	position	or	results	of	operations.

# Consolidated	Results	of	Operations

We	report	our	financial	results	in	accordance	with	GAAP	in	the	United	States.	However,	we	believe	that	certain	non-GAAP	performance	measures and	ratios,	used	in	managing	the	business,	may	provide	users	of	this	financial	information	with	additional	meaningful	comparisons	between	current results	and	results	in	prior	periods.	Non-GAAP	performance	measures	and	ratios	should	be	viewed	in	addition	to,	and	not	as	an	alternative	for,	our reported	results.

# Sales	and	Operations

Net	sales	for	2012	were	$7.7	billion,	which	increased	four	percent	compared	with	2011.	Excluding	results	from	acquisitions	and	the	negative	effect of	currency	translation,	net	sales	increased	five	percent	compared	with	2011.	The	following	table	reconciles	reported	net	sales	to	net	sales	excluding acquisitions	and	the	effect	of	currency	translation,	in	millions:

|  | Twelve	Months |  |
| :--- | :--- | :--- |
|  | Ended\tDecember\t31 | Ended\tDecember\t31 |
|  | \t\t\t\t2012 | \t\t\t\t2011 |
| Net\tsales,\tas\treported | $7,745 | $7,467 |
| –\tAcquisitions | (16) | — |
| Net\tsales,\texcluding\tacquisitions | 7,729 | 7,467 |
| –\tCurrency\ttranslation | 119 | — |
| Net\tsales,\texcluding\tacquisitions\tand\tthe\teffect\tof\tcurrency | $7,848 | $7,467 |

Net	sales	for	2012	were	positively	affected	by	increased	sales	volume	of	installed	products,	North	American	plumbing	products,	paints	and	stains, builders'	hardware	and	windows,	which,	in	aggregate,

increased	sales	by	approximately	four	percent	compared	to	2011.	Net	sales	for	2012	were	also	positively	affected	by	selling	price	increases,	which increased	sales	by	approximately	three	percent.	Net	sales	for	2012	were	negatively	affected	by	the	planned	exit	of	certain	cabinet	and	window	product lines	in	certain	geographic	areas.	A	stronger	U.S.	dollar	decreased	sales	by	two	percent	compared	to	2011.

Net	sales	for	2011	were	adversely	affected	by	lower	sales	volume	of	installed	products,	cabinets,	paints	and	stains,	builders'	hardware	and windows,	which,	in	aggregate,	reduced	sales	by	approximately	three	percent	compared	to	2010.	Net	sales	for	2011	were	also	adversely	affected	by	the planned	exit	of	certain	cabinet	product	lines,	which	reduced	sales	by	approximately	two	percent	compared	to	2010.	Such	declines	were	partially	offset	by selling	price	increases,	primarily	related	to	plumbing	products	and	paints	and	stains,	which	increased	sales	by	approximately	three	percent.	A	weaker U.S.	dollar	increased	sales	by	one	percent	compared	to	2010.

Our	gross	profit	margins	were	25.2	percent,	23.9	percent	and	24.5	percent	in	2012,	2011	and	2010,	respectively.	The	2012	gross	profit	margin reflects	a	more	favorable	relationship	between	selling	prices	and	commodity	costs	as	well	as	increased	sales	volume.	The	decrease	in	the	2011	gross profit	margin	reflects	lower	sales	volume	and	a	less	favorable	relationship	between	selling	prices	and	commodity	costs.	Both	2012	and	2011	reflect	the benefits	associated	with	business	rationalizations	and	other	cost	savings	initiatives.

Selling,	general	and	administrative	expenses	as	a	percent	of	sales	were	20.2	percent	in	2012	compared	with	21.2	percent	in	2011	and	21.3 percent	in	2010.	Selling,	general	and	administrative	expenses	as	a	percent	of	sales	in	2012	reflect	increased	sales	volume	and	lower	business rationalization	costs.	Selling,	general	and	administrative	expenses	as	a	percent	of	sales	in	2011	reflect	increased	expenses	related	to	growth	initiatives, offset	by	lower	business	rationalization	expenses.	Both	2012	and	2011	reflect	the	benefits	associated	with	our	business	rationalizations	and	other	cost savings	initiatives.

Operating	profit	(loss)	in	2012,	2011	and	2010	includes	$78	million,	$121	million	and	$208	million,	respectively,	of	costs	and	charges	related	to business	rationalizations	and	other	cost	savings	initiatives.	Operating	profit	(loss)	in	2012,	2011	and	2010	includes	$42	million,	$494	million	and	$698 million,	respectively,	of	impairment	charges	for	goodwill	and	other	intangible	assets.	Operating	profit	(loss)	in	2012	and	2011	includes	$77	million	and	$9 million,	respectively,	of	net	charges	for	litigation	settlements.	Operating	profit	(loss)	in	2012	includes	$8	million	of	net	gains	related	to	fixed	asset	sales. Operating	profit	(loss)	margins,	as	reported,	were	3.5	percent,	(4.0)	percent	and	(6.2)	percent	in	2012,	2011	and	2010,	respectively.	Operating	profit margins,	excluding	the	items	above,	were	6.1	percent,	4.4	percent	and	5.9	percent	in	2012,	2011	and	2010,	respectively.

Operating	margins	in	2012	were	positively	affected	by	a	more	favorable	relationship	between	selling	prices	and	commodity	costs,	increased	sales volume	and	the	benefits	associated	with	business	rationalizations	and	other	cost	savings	initiatives.

Operating	margins	in	2011	were	negatively	affected	by	a	less	favorable	relationship	between	selling	prices	and	commodity	costs,	a	less	favorable product	mix	and	increased	expenses	related	to	growth	initiatives.	Such	decreases	more	than	offset	lower	business	rationalization	costs	and	the	benefits associated	with	such	expenses.

# Other	Income	(Expense),	Net

Other,	net,	for	2012	included	gains	of	$24	million	from	financial	investments,	net.	During	2012,	we	recognized	non-cash,	pre-tax	impairment charges	aggregating	$2	million	for	an	investment	in	a	private	equity	fund.	Other,	net,	for	2012	also	included	realized	foreign	currency	losses	of	$2	million and	other	miscellaneous	items.

During	2011,	we	recognized	gains	of	$41	million	related	to	the	sale	of	TriMas	common	stock.	We	also	recognized	gains	of	$32	million	related	to distributions	from	private	equity	funds.

Other,	net,	for	2011	also	included	realized	foreign	currency	losses	of	$5	million	and	other	miscellaneous	items.

During	2010,	we	recognized	non-cash,	pre-tax	impairment	charges	aggregating	$34	million	related	to	financial	investments	($28	million	related	to Asahi	Tec	preferred	stock	and	$6	million	related	to	private	equity	funds	and	other	private	investments).

Other,	net,	for	2010	included	$9	million	of	income	from	financial	investments,	net.	Other,	net,	for	2010	also	included	realized	foreign	currency	losses of	$2	million	and	other	miscellaneous	items.

# (Loss)	Income	and	(Loss)	Earnings	Per	Common	Share	from	Continuing	Operations	(Attributable	to	Masco	Corporation)

(Loss)	and	diluted	(loss)	per	common	share	from	continuing	operations	for	2012	were	$(76)	million	and	$(.22)	per	common	share,	respectively. (Loss)	and	diluted	(loss)	per	common	share	from	continuing	operations	for	2011	were	$(465)	million	and	$(1.34)	per	common	share,	respectively.	(Loss) and	diluted	(loss)	per	common	share	from	continuing	operations	for	2010	were	$(1,022)	million	and	$(2.94)	per	common	share,	respectively.	(Loss)	from continuing	operations	for	2012	included	non-cash,	pre-tax	impairment	charges	for	other	intangible	assets	of	$42	million	($27	million	or	$.08	per	common share,	after	tax).	(Loss)	from	continuing	operations	for	2011	included	non-cash,	pre-tax	impairment	charges	for	goodwill	and	other	intangible	assets	of $494	million	($335	million	or	$.96	per	common	share,	after	tax).	(Loss)	from	continuing	operations	for	2010	included	non-cash,	pre-tax	impairment charges	for	goodwill	and	other	intangible	assets	of	$698	million	($586	million	or	$1.68	per	common	share,	after	tax).

Our	effective	tax	rate	for	the	loss	from	continuing	operations	was	a	198	percent	tax	expense,	a	10	percent	tax	benefit,	and	a	32	percent	tax expense	in	2012,	2011	and	2010,	respectively.	Compared	to	our	normalized	effective	tax	rate	of	36	percent,	the	variance	in	the	effective	tax	rate	in	2012, 2011	and	2010	is	due	primarily	to	changes	in	the	U.S.	Federal	valuation	allowance,	reversal	of	an	accrual	for	uncertain	tax	positions	and	intangible	asset impairment	charges	providing	no	tax	benefit.

# Outlook	for	the	Company

We	continue	to	make	progress	on	our	strategic	initiatives,	which	include	expanding	our	product	leadership	positions,	reducing	our	costs,	improving our	Installation	and	Cabinet	segments	and	strengthening	our	balance	sheet.	We	believe	these	initiatives,	coupled	with	the	actions	we	have	taken	over	the past	several	years,	should	position	us	for	improved	results	in	2013,	and	continue	to	believe	that	we	will	outperform	as	new	home	construction	and	repair and	remodel	recover.

We	believe	and	are	confident	that	the	long-term	fundamentals	for	new	home	construction	and	home	improvement	activity	continue	to	be	positive. We	believe	that	our	strong	financial	position,	together	with	our	current	strategy	of	investing	in	leadership	brands,	including	KRAFTMAID	and	MERILLAT cabinets,	DELTA	and	HANSGROHE	faucets,	BEHR	paint	and	MILGARD	windows,	our	continued	focus	on	innovation	and	our	commitment	to	lean principles,	will	allow	us	to	drive	long-term	growth	and	create	value	for	our	shareholders.

# Business	Segment	and	Geographic	Area	Results

The	following	table	sets	forth	our	net	sales	and	operating	profit	(loss)	information	by	business	segment	and	geographic	area,	dollars	in	millions.

(A) Before	general	corporate	expense,	net,	gain	from	sales	of	fixed	assets,	net	and	charge	for	litigation	settlements,	net;	see	Note	O	to	the	consolidated	financial	statements.

(B) Excluding	impairment	charges	for	goodwill	and	other	intangible	assets.	The	2012	impairment	charge	for	other	intangible	assets	was	as	follows:	Other	Specialty	Products	–	$42	million.	The 2011	impairment	charges	for	goodwill	and	other	intangible	assets	were	as	follows:	Cabinets	and	Related	Products	–	$44	million;	Plumbing	Products	–	$1	million;	Decorative	Architectural Products	–	$75	million;	and	Other	Specialty	Products	–	$374	million.	The	2010	impairment	charges	for	goodwill	and	other	intangible	assets	were	as	follows:	Plumbing	Products	–	$1	million;	and Installation	and	Other	Services	–	$697	million.

# Business	Segment	Results	Discussion

Changes	in	operating	profit	margins	in	the	following	Business	Segment	and	Geographic	Area	Results	discussion	exclude	general	corporate expense,	net,	charge	for	litigation	settlements,	net,	gain	from	sales	of	fixed	assets,	net,	and	impairment	charges	for	goodwill	and	other	intangible	assets in	2012,	2011	and	2010.

# Business	Rationalizations	and	Other	Initiatives

Over	the	past	several	years,	we	have	been	focused	on	the	strategic	rationalization	of	our	businesses,	including	business	consolidations,	plant closures,	headcount	reductions,	system	implementations	and	other	cost	savings	initiatives.	For	the	years	ended	December	31,	2012,	2011	and	2010,	we incurred	net	pre-tax	costs	and	charges	related	to	these	initiatives	of	$78	million,	$121	million	and	$208	million,	respectively.

During	2012,	our	North	American	cabinet	business	continued	to	incur	costs	and	charges	of	$33	million	related	to	the	closure	of	its	countertop manufacturing	facility	(as	a	result	of	our	strategic	change	to	a	sourcing	model	for	countertops),	the	closure	of	a	cabinet	components	facility	and	additional headcount	reductions.	Our	Plumbing	Products	segment	incurred	costs	of	$25	million	related	to	a	plant	closure	and	severance	in	our	bathing	systems business	in	North	America	and	a	plant	closure	and	severance	in	Spain.	We	also	incurred	$14	million	in	costs	related	to	severance	actions	at	our corporate	office.	Finally,	we	incurred	$6	million	of	costs	and	charges	across	our	business	units	related	to	other	cost	savings	initiatives.

During	2011,	our	North	American	cabinet	business	continued	to	incur	costs	and	charges	of	$24	million	related	to	the	exit	of	its	ready-to-assemble product	line	and	$6	million	related	to	the	integration	of	its	facilities.	Our	European	manufacturer	of	ready	to	assemble	cabinetry	also	incurred	costs	and charges	of	$9	million	related	to	the	closure	of	one	manufacturing	facility	and	the	severance	related	to	further	headcount	reductions.	Our	Installation	and Other	Services	segment	incurred	costs	and	charges	of	$4	million	related	to	the	closure	of	several	locations	and	further	headcount	reductions.	Our builders'	hardware	business	in	the	Decorative	Architectural	Products	segment	incurred	costs	and	charges	of	$9	million	related	to	the	exit	of	a	product line.	Our	North	American	window	manufacturer	incurred	costs	and	charges	of	$30	million	related	to	the	closure	of	several	manufacturing	facilities.

In	2010,	we	took	several	actions	within	the	Cabinets	and	Related	Products	segment	to	rationalize	our	North	American	manufacturers,	including closing	plants,	exiting	product	lines	and	integrating	our	Builder	and	Retail	Cabinet	Groups.	We	incurred	costs	and	charges	of	$171	million	in	2010	related to	these	actions.

In	the	fourth	quarter	of	2011,	we	decided	to	dispose	of	several	non-core	businesses	in	the	Installation	and	Other	Services	segment.	These businesses	were	related	to	commercial	drywall	installation,	millwork	and	framing,	and	were	classified	as	discontinued	operations	for	all	periods.	During 2012,	we	sold	all	of	these	businesses,	for	net	proceeds	of	$7	million.

Based	on	current	plans,	we	anticipate	costs	and	charges	related	to	our	business	rationalizations	and	other	initiatives	to	approximate	$40	million	in 2013.	We	continue	to	evaluate	our	businesses	and	may	implement	additional	rationalization	programs	based	on	changes	in	our	markets	which	could result	in	further	costs	and	charges.

In	early	February	2013,	we	determined	that	our	Danish	ready-to-assemble	cabinet	business	was	no	longer	core	to	our	long-term	growth	strategy and,	accordingly	we	embarked	on	a	plan	for	disposition.	This	business	unit	had	2012	sales	of	approximately	$250	million	and	an	operating	loss	of approximately	$30	million.	The	disposition	is	expected	to	be	completed	within	the	next	12	months.

# Sales

Net	sales	of	Cabinets	and	Related	Products	decreased	primarily	due	to	lower	sales	volume	of	international	operations,	which	decreased	sales	by three	percent	from	2011.	Such	declines	were	partially	offset	by	increased	sales	volume	of	North	American	operations	and	by	increased	selling	prices, which	increased	sales	by	one	percent	compared	to	2011.	A	stronger	U.S.	dollar	decreased	sales	in	this	segment	by	two	percent	in	2012	compared	to 2011.

Net	sales	in	this	segment	decreased	in	2011	primarily	due	to	lower	sales	volumes	of	North	American	cabinets,	which	reduced	sales	by approximately	four	percent	compared	to	2010.	Sales	in	this	segment	in	2011	were	also	negatively	affected	by	the	planned	exit	of	North	American	ready- to-assemble	and	other	non-core	in-stock	assembled	cabinet	product	lines,	particle	board	and	door	product	lines,	which	reduced	sales	by	approximately 11	percent	compared	to	2010.	Sales	were	also	negatively	affected	by	lower	sales	volume	of	international	cabinets,	which	reduced	sales	in	this	segment by	approximately	two	percent	compared	to	2010.	A	weaker	U.S.	dollar	increased	sales	by	one	percent	in	2011	compared	to	2010.

Net	sales	in	this	segment	in	2010	were	negatively	affected	by	lower	sales	volumes	of	North	American	and	international	cabinets	and	the	planned exit	of	ready-to-assemble	and	other	non-core	in-stock	assembled	cabinet	product	lines,	particle	board	and	door	product	lines.

# Operating	Results

Operating	margins	in	the	Cabinets	and	Related	Products	segment	in	2012	were	positively	affected	by	lower	business	rationalization	expenses	and the	benefits	associated	with	such	expenses	incurred	in	prior	years;	such	benefits	were	partially	offset	by	lower	operating	results	of	international operations.

Operating	margins	in	this	segment	in	2011	were	positively	affected	by	lower	business	rationalization	expenses	and	the	benefits	associated	with such	expenses,	including	benefits	related	to	the	integration	of	the	North	American	cabinet	businesses.	Such	increases	were	partially	offset	by	a	less favorable	relationship	between	selling	prices	and	commodity	costs,	aggressive	promotional	activity	and	lower	sales	volume	and	the	related	under- absorption	of	fixed	costs.

Operating	margins	in	this	segment	in	2010	were	negatively	affected	by	lower	sales	volume	and	the	related	under-absorption	of	fixed	costs,	which reduced	operating	profit	margins	by	approximately	three	percentage	points.	Operating	profit	margins	in	this	segment	in	2010	were	also	negatively affected	by	increased	business	rationalization	expenses	and	a	less	favorable	relationship	between	selling	prices	and	commodity	costs;	such	decreases more	than	offset	the	benefits	associated	with	business	rationalizations	and	other	cost	savings	initiatives.

Net	sales	of	Plumbing	Products	increased	in	2012	primarily	due	to	increased	sales	volume	of	North	American	operations	and	increased	selling prices,	which,	in	aggregate,	increased	sales	by	approximately	five	percent	compared	to	2011.	Lower	sales	volume	of	international	operations	decreased sales	in	this	segment	by	one	percent	from	2011.	A	stronger	U.S.	dollar	decreased	sales	by	three	percent	in	2012	compared	to	2011.

Net	sales	in	this	segment	increased	in	2011	primarily	due	to	increased	selling	prices,	which	increased	sales	by	approximately	three	percent compared	to	2010.	Sales	were	also	positively	affected	by	increased	sales	volume	in	North	America	and	International,	which,	in	aggregate,	increased sales	by

approximately	three	percent	compared	to	2010.	A	weaker	U.S.	dollar	increased	sales	by	two	percent	in	2011	compared	to	2010.

Net	sales	in	this	segment	in	2010	were	positively	affected	by	a	more	favorable	product	mix	to	North	American	retailers	and	wholesalers,	increased selling	prices,	and	sales	of	International	operations.	Such	increases	were	partially	offset	by	lower	sales	volume	to	North	American	retailers	and wholesalers.

Operating	margins	in	the	Plumbing	Products	segment	in	2012	were	negatively	affected	by	lower	sales	volume	and	a	less	favorable	product	mix principally	related	to	international	operations.	Such	declines	more	than	offset	increased	North	American	sales	volume	and	a	more	favorable	relationship between	selling	prices	and	commodity	costs.

Operating	margins	in	this	segment	in	2011	were	negatively	affected	by	a	less	favorable	relationship	between	selling	prices	and	commodity	costs,	a less	favorable	product	mix	and	increased	expenses	related	to	growth	initiatives	which	offset	the	benefits	associated	with	business	rationalizations	and other	cost	savings	initiatives.

Operating	margins	in	this	segment	in	2010	were	positively	affected	by	a	more	favorable	product	mix	and	the	positive	relationship	between	selling prices	and	commodity	costs	and	the	benefits	associated	with	business	rationalizations	and	other	cost	savings	initiatives.

Net	sales	in	the	Installation	and	Other	Services	segment	increased	in	2012	primarily	due	to	increased	sales	volume	related	to	a	higher	level	of activity	in	the	new	home	construction	market	and	increased	commercial	sales.

Net	sales	in	this	segment	increased	in	2011	primarily	due	to	increased	distribution	sales,	increased	selling	prices	and	increased	retrofit	and commercial	sales.	Such	increases	were	partially	offset	by	lower	sales	volume	of	installed	products	related	to	a	continued	decline	in	the	new	home construction	market,	the	downward	trend	in	the	size	and	content	of	new	houses	in	early	2011	and	the	increased	multi-family	construction;	we	gained share	in	single-family	construction.

Net	sales	in	this	segment	decreased	in	2010	primarily	due	to	lower	sales	volume	related	to	reduced	share	in	the	new	home	construction	market. Sales	in	this	segment	were	also	negatively	affected	by	a	downward	trend	in	the	size	and	content	of	new	houses	being	constructed	by	our	builder customers.

Operating	margins	in	the	Installation	and	Other	Services	segment	in	2012	were	positively	affected	by	increased	sales	volume	and	the	related absorption	of	fixed	costs,	as	well	as	the	benefits	associated	with	business	rationalizations	and	other	cost	savings	initiatives.

Operating	margins	in	the	Installation	and	Other	Services	segment	in	2011	were	positively	affected	by	increased	sales	volume,	the	benefits associated	with	business	rationalizations	and	other	cost	savings	initiatives	and	a	more	favorable	relationship	between	selling	prices	and	commodity	costs.

Operating	margins	in	this	segment	in	2010	were	negatively	affected	by	lower	sales	volume	in	the	new	home	construction	market	and	the	related under-absorption	of	fixed	costs,	as	well	as	a	less

favorable	relationship	between	selling	prices	and	commodity	costs.	Such	declines	were	partially	offset	by	the	benefits	associated	with	business rationalization	and	other	cost	savings	initiatives	and	lower	system	implementation	costs	in	2010.

Net	sales	of	Decorative	Architectural	Products	increased	in	2012,	primarily	due	to	increased	selling	prices	of	paints	and	stains,	as	well	as	increased sales	volume	of	paints	and	stains	and	builders'	hardware.

Net	sales	in	this	segment	decreased	in	2011,	primarily	due	to	lower	sales	volume	of	paints	and	stains	and	builders'	hardware.	Such	declines	in 2011	were	partially	offset	by	increased	selling	prices	of	paints	and	stains.

Net	sales	in	this	segment	in	2010	were	negatively	affected	by	lower	sales	volume	of	builders'	hardware	and	lower	selling	prices	of	paints	and stains,	partially	offset	by	a	more	favorable	product	mix	of	paints	and	stains,	related	to	new	product	introductions.

Operating	margins	in	the	Decorative	Architectural	Products	segment	in	2012	reflect	a	more	favorable	product	mix,	a	more	favorable	relationship between	selling	prices	and	commodity	costs	related	to	paints	and	stains	and	lower	program	costs	related	to	builders'	hardware.

Operating	margins	in	this	segment	in	2011	were	negatively	affected	by	a	less	favorable	relationship	between	selling	prices	and	commodity	costs related	to	paints	and	stains	and	increased	expenses	related	to	growth	initiatives.	This	segment	was	also	negatively	affected	by	increased	business rationalization	expenses	related	to	the	exit	of	a	builders'	hardware	product	line.

Operating	margins	in	this	segment	in	2010	were	negatively	affected	by	a	less	favorable	relationship	between	selling	prices	and	commodity	costs related	to	paints	and	stains,	as	well	as	lower	sales	volume	of	builders'	hardware.	Such	declines	more	than	offset	the	benefit	of	a	more	favorable	product mix	of	paints	and	stains,	related	to	new	product	introductions.

Net	sales	of	Other	Specialty	Products	were	flat	in	2012	primarily	due	to	increased	sales	volume	of	windows	in	Western	markets	in	the	U.S.,	a	more favorable	product	mix	and	increased	selling	prices	which	were	offset	by	lower	sales	volume	of	North	American	windows	resulting	from	the	exit	of	certain markets.

Net	sales	in	this	segment	decreased	in	2011	primarily	due	to	lower	sales	volume	of	windows	in	North	America	(due	to	the	expiration	of	the	energy tax	credit	in	2010)	and	the	U.K.,	partially	offset	by	increased	selling	prices	and	increased	sales	related	to	new	product	introductions	and	geographic expansion.	A	weaker	U.S.	dollar	increased	sales	in	this	segment	by	one	percent	compared	to	2010.

Net	sales	in	this	segment	increased	in	2010	primarily	due	to	increased	sales	volume	of	windows	in	North	America,	principally	related	to	the	energy- savings	tax	credit	which	expired	at	the	end	of	2010,	and	increased	sales	volume	of	staple	gun	tackers	and	other	fastening	tools.

Operating	results	in	the	Other	Specialty	Products	segment	in	2012	were	positively	affected	by	the	benefits	associated	with	business rationalizations	and	other	cost	savings	initiatives,	lower	business

rationalization	costs	and	a	more	favorable	relationship	between	selling	prices	and	commodity	costs.	These	items	more	than	offset	the	increased	warranty expense	of	$12	million.

Operating	margins	in	this	segment	in	2011	were	negatively	affected	by	increased	business	rationalization	expenses,	lower	sales	volume	and increased	product	launch	and	geographic	expansion	costs.	Such	decreases	offset	a	more	favorable	relationship	between	selling	prices	and	commodity costs	and	the	benefits	associated	with	business	rationalizations	and	other	cost	savings	initiatives.

Operating	margins	in	this	segment	in	2010	reflect	the	negative	effect	of	a	less	favorable	relationship	between	selling	prices	and	commodity	costs and	a	less	favorable	windows	product	mix.	Such	declines	offset	the	benefits	associated	with	business	rationalizations	and	other	cost	savings	initiatives.

# Geographic	Area	Results	Discussion

# North	America

North	American	net	sales	in	2012	were	positively	impacted	by	increased	sales	volume	of	installation	and	other	services,	plumbing	products,	paints and	stains,	builders'	hardware	and	windows,	which,	in	the	aggregate,	increased	sales	by	approximately	four	percent	compared	to	2011.	Net	sales	were also	positively	affected	by	increased	selling	prices	of	plumbing	products	and	paints	and	stains,	which	increased	sales	by	approximately	three	percent compared	to	2011.

North	American	net	sales	in	2011	were	negatively	impacted	by	lower	sales	volume	of	cabinets,	including	the	planned	exit	of	certain	product	lines, paints	and	stains,	builders'	hardware	and	windows,	which,	in	the	aggregate,	decreased	sales	by	approximately	six	percent	compared	to	2010.	Such declines	were	partially	offset	by	increased	selling	prices	of	plumbing	products	and	paints	and	stains,	which	increased	sales	by	approximately	three percent	compared	to	2010.

North	American	net	sales	in	2010	were	negatively	impacted	by	lower	sales	volume	of	installation	and	other	services,	cabinets,	plumbing	products, and	builders'	hardware,	partially	offset	by	a	more	favorable	product	mix	of	plumbing	products	and	paints	and	stains,	which	increased	sales	by approximately	one	percent	compared	to	2009.

Operating	margins	from	North	American	operations	in	2012	were	positively	affected	by	a	more	favorable	relationship	between	selling	prices	and commodity	costs,	lower	business	rationalization	expenses	and	the	benefits	associated	with	business	rationalization	and	other	cost	savings	initiatives which,	in	aggregate,	increased	operating	margins	by	three	percentage	points.

Operating	margins	from	North	American	operations	in	2011	were	positively	affected	by	lower	business	rationalization	expenses	and	the	benefits associated	with	business	rationalization	and	other	cost	savings	initiatives,	which	increased	operating	margins	by	two	percentage	points.	Such	increases offset	the	negative	impact	of	lower	sales	volume	and	the	related	under-absorption	of	fixed	costs	and	a	less	favorable	relationship	between	selling	prices and	commodity	costs	which,	in	the	aggregate,	decreased	operating	profit	margins	by	one	percentage	point	in	2011	compared	to	2010.

Operating	margins	from	North	American	operations	in	2010	were	negatively	affected	by	lower	sales	volume	and	the	related	under-absorption	of fixed	costs	and	a	less	favorable	relationship	between	selling	prices	and	commodity	costs,	which	decreased	operating	profit	margins	by	two	percentage points	in	2010	compared	to	2009.	Operating	margins	were	also	negatively	affected	by	increased	business	rationalization	costs	and	charges	in	2010 compared	to	2009.

# International,	Principally	Europe

Net	sales	from	international	operations	in	2012	were	flat	in	local	currencies	compared	to	2011,	primarily	due	to	lower	sales	volume	of	international plumbing	products,	cabinets	and	windows,	offset	by	increased	selling	prices.	A	stronger	U.S.	dollar	decreased	International	net	sales	by	six	percent	in 2012	compared	to	2011.

Net	sales	from	international	operations	increased	in	local	currencies	in	2011	by	approximately	three	percent	compared	to	2010,	primarily	due	to increased	sales	volume	and	increased	selling	prices	of	International	plumbing	products,	offset	by	lower	sales	volume	of	International	cabinets.	A	weaker U.S.	dollar	increased	International	net	sales	by	five	percent	in	2011	compared	to	2010.

Net	sales	from	international	operations	increased	in	local	currencies	in	2010,	primarily	due	to	increased	sales	volume	and	increased	selling	prices of	International	plumbing	products	and	windows,	offset	by	lower	sales	volume	of	International	cabinets.

Operating	profit	margins	from	international	operations	in	2012	were	negatively	affected	by	a	less	favorable	product	mix,	partially	offset	by	a	more favorable	relationship	between	selling	prices	and	commodity	costs,	primarily	related	to	international	plumbing	products,	the	benefits	associated	with business	rationalizations	and	other	cost	savings	initiatives.

Operating	profit	margins	from	international	operations	in	2011	were	negatively	affected	by	a	less	favorable	product	mix	and	a	less	favorable relationship	between	selling	prices	and	commodity	costs,	partially	offset	by	the	benefits	associated	with	business	rationalizations	and	other	cost	savings initiatives.

Operating	profit	margins	from	international	operations	in	2010	were	negatively	affected	by	a	less	favorable	product	mix,	partially	offset	by	the benefits	associated	with	business	rationalizations	and	other	cost	savings	initiatives.

# Other	Matters

# Commitments	and	Contingencies

# Litigation

Information	regarding	our	legal	proceedings	is	set	forth	in	Note	T	to	the	consolidated	financial	statements,	which	is	incorporated	herein	by reference.

# Other	Commitments

With	respect	to	our	investments	in	private	equity	funds,	we	had,	at	December	31,	2012,	commitments	to	contribute	up	to	$19	million	of	additional capital	to	such	funds,	representing	our	aggregate	capital	commitment	to	such	funds	less	capital	contributions	made	to	date.	We	are	contractually obligated	to	make	additional	capital	contributions	to	these	private	equity	funds	upon	receipt	of	a	capital	call	from	the	private	equity	fund.	We	have	no control	over	when	or	if	the	capital	calls	will	occur.	Capital	calls	are	funded	in	cash	and	generally	result	in	an	increase	in	the	carrying	value	of	our investment	in	the	private	equity	fund	when	paid.

We	enter	into	contracts,	which	include	reasonable	and	customary	indemnifications	that	are	standard	for	the	industries	in	which	we	operate.	Such indemnifications	include	claims	made	against

builders	by	homeowners	for	issues	relating	to	our	products	and	workmanship.	In	conjunction	with	divestitures	and	other	transactions,	we	occasionally provide	reasonable	and	customary	indemnifications	relating	to	various	items,	including:	the	enforceability	of	trademarks;	legal	and	environmental	issues; and	provisions	for	sales	returns.	We	have	never	had	to	pay	a	material	amount	related	to	these	indemnifications,	and	we	evaluate	the	probability	that amounts	may	be	incurred	and	we	appropriately	record	an	estimated	liability	when	probable.

# Contractual	Obligations

The	following	table	provides	payment	obligations	related	to	current	contracts	at	December	31,	2012,	in	millions:

|  | Year | Years | Years | Years | Other(D) | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Debt\t(A) | $206 | $1,503 | $416 | $1,503 | $— | $3,628 |
| Interest\t(A) | \t 221 | 585 | \t 217 | 628 | — | \t 1,651 |
| Operating\tleases | 91 | 93 | 28 | 48 | — | 260 |
| Currently\tpayable\tincome\ttaxes | 27 | — | — | — | — | 27 |
| Private\tequity\tfunds\t(B) | 10 | 9 | — | — | — | 19 |
| Purchase\tcommitments\t(C) | \t 256 | 10 | — | — | — | 266 |
| Uncertain\ttax\tpositions,\tincluding\tinterest\tand\tpenalties\t(D) | 1 | — | — | — | 67 | 68 |
| Total | $812 | $2,200 | $661 | $2,179 | $67 | $5,919 |

(A) We	assumed	that	all	debt	would	be	held	to	maturity.

(B) There	is	no	schedule	for	the	capital	commitments	to	the	private	equity	funds;	such	allocation	was	estimated.

(C) Excludes	contracts	that	do	not	require	volume	commitments	and	open	or	pending	purchase	orders.

(D) Due	to	the	high	degree	of	uncertainty	regarding	the	timing	of	future	cash	outflows	associated	with	uncertain	tax	positions,	we	are	unable	to	make	a reasonable	estimate	for	the	period	beyond	the	next	year	in	which	cash	settlements	may	occur	with	applicable	tax	authorities.

Refer	to	Footnote	M	of	our	financial	statements	for	defined-benefit	plan	obligations.

Recently	Issued	Accounting	Pronouncements.	On	January	1,	2012,	we	adopted	new	accounting	guidance	requiring	more	prominent presentation	of	other	comprehensive	income	items	in	our	consolidated	financial	statements.	The	adoption	of	this	new	guidance	did	not	have	an	impact	on our	financial	position	or	our	results	of	operations.

# Item	7A. Quantitative	and	Qualitative	Disclosures	about	Market	Risk.

We	have	considered	the	provisions	of	accounting	guidance	regarding	disclosure	of	accounting	policies	for	derivative	financial	instruments	and derivative	commodity	instruments,	and	disclosure	of	quantitative	and	qualitative	information	about	market	risk	inherent	in	derivative	financial	instruments, other	financial	instruments	and	derivative	commodity	instruments.

We	are	exposed	to	the	impact	of	changes	in	interest	rates,	foreign	currency	exchange	rates	and	commodity	costs	in	the	normal	course	of	business and	to	market	price	fluctuations	related	to	our	financial	investments.	We	have	involvement	with	derivative	financial	instruments	and	use	such	instruments to	the	extent	necessary	to	manage	exposure	to	foreign	currency	fluctuations	and	commodity	fluctuations.	See	Note	F	to	the	consolidated	financial statements	for	additional	information	regarding	our	derivative	instruments.

At	December	31,	2012,	we	performed	sensitivity	analyses	to	assess	the	potential	loss	in	the	fair	values	of	market	risk	sensitive	instruments resulting	from	a	hypothetical	change	of	10	percent	in	foreign	currency	exchange	rates,	a	10	percent	decline	in	the	market	value	of	our	long-term investments,	a	10	percent	change	in	commodity	costs,	or	a	10	percent	change	in	interest	rates.	Based	upon	the	analyses	performed,	such	changes would	not	be	expected	to	materially	affect	our	consolidated	financial	position,	results	of	operations	or	cash	flows.

# Item	8. Financial	Statements	and	Supplementary	Data

# Management's	Report	on	Internal	Control	Over	Financial	Reporting

The	management	of	Masco	Corporation	is	responsible	for	establishing	and	maintaining	adequate	internal	control	over	financial	reporting.	Masco Corporation's	internal	control	over	financial	reporting	is	a	process	designed	to	provide	reasonable	assurance	regarding	the	reliability	of	financial	reporting and	the	preparation	of	financial	statements	for	external	purposes	in	accordance	with	accounting	principles	generally	accepted	in	the	United	States	of America.

The	management	of	Masco	Corporation	assessed	the	effectiveness	of	the	Company's	internal	control	over	financial	reporting	as	of	December	31, 2012	using	the	criteria	set	forth	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(COSO)	in	"Internal	Control	—	Integrated Framework."	Based	on	this	assessment,	management	has	determined	that	the	Company's	internal	control	over	financial	reporting	was	effective	as	of December	31,	2012.

PricewaterhouseCoopers	LLP,	an	independent	registered	public	accounting	firm,	performed	an	audit	of	the	Company's	consolidated	financial statements	and	of	the	effectiveness	of	Masco	Corporation's	internal	control	over	financial	reporting	as	of	December	31,	2012.	Their	report	expressed	an unqualified	opinion	on	the	effectiveness	of	Masco	Corporation's	internal	control	over	financial	reporting	as	of	December	31,	2012	and	expressed	an unqualified	opinion	on	the	Company's	2012	consolidated	financial	statements.	This	report	appears	under	Item	8.	Financial	Statements	and Supplementary	Data	under	the	heading	Report	of	Independent	Registered	Public	Accounting	Firm.

# Report	of	Independent	Registered	Public	Accounting	Firm

To	the	Board	of	Directors	and	Shareholders of	Masco	Corporation:

In	our	opinion,	the	consolidated	financial	statements	listed	in	the	index	appearing	under	Item	15(a)(1)	present	fairly,	in	all	material	respects,	the financial	position	of	Masco	Corporation	and	its	subsidiaries	at	December	31,	2012	and	2011,	and	the	results	of	their	operations	and	their	cash	flows	for each	of	the	three	years	in	the	period	ended	December	31,	2012	in	conformity	with	accounting	principles	generally	accepted	in	the	United	States	of America.	In	addition,	in	our	opinion,	the	financial	statement	schedule	listed	in	the	index	appearing	under	Item	15(a)(2)	presents	fairly,	in	all	material respects,	the	information	set	forth	therein	when	read	in	conjunction	with	the	related	consolidated	financial	statements.	Also	in	our	opinion,	the	Company maintained,	in	all	material	respects,	effective	internal	control	over	financial	reporting	as	of	December	31,	2012,	based	on	criteria	established	in	Internal Control	—	Integrated	Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(COSO).	The	Company's management	is	responsible	for	these	financial	statements	and	financial	statement	schedule,	for	maintaining	effective	internal	control	over	financial reporting	and	for	its	assessment	of	the	effectiveness	of	internal	control	over	financial	reporting,	included	in	Management's	Report	on	Internal	Control	over Financial	Reporting	appearing	under	Item	8.	Our	responsibility	is	to	express	opinions	on	these	financial	statements,	on	the	financial	statement	schedule, and	on	the	Company's	internal	control	over	financial	reporting	based	on	our	integrated	audits.	We	conducted	our	audits	in	accordance	with	the	standards of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we	plan	and	perform	the	audits	to	obtain	reasonable assurance	about	whether	the	financial	statements	are	free	of	material	misstatement	and	whether	effective	internal	control	over	financial	reporting	was maintained	in	all	material	respects.	Our	audits	of	the	financial	statements	included	examining,	on	a	test	basis,	evidence	supporting	the	amounts	and disclosures	in	the	financial	statements,	assessing	the	accounting	principles	used	and	significant	estimates	made	by	management,	and	evaluating	the overall	financial	statement	presentation.	Our	audit	of	internal	control	over	financial	reporting	included	obtaining	an	understanding	of	internal	control	over financial	reporting,	assessing	the	risk	that	a	material	weakness	exists,	and	testing	and	evaluating	the	design	and	operating	effectiveness	of	internal control	based	on	the	assessed	risk.	Our	audits	also	included	performing	such	other	procedures	as	we	considered	necessary	in	the	circumstances.	We believe	that	our	audits	provide	a	reasonable	basis	for	our	opinions.

A	company's	internal	control	over	financial	reporting	is	a	process	designed	to	provide	reasonable	assurance	regarding	the	reliability	of	financial reporting	and	the	preparation	of	financial	statements	for	external	purposes	in	accordance	with	generally	accepted	accounting	principles.	A	company's internal	control	over	financial	reporting	includes	those	policies	and	procedures	that	(i)	pertain	to	the	maintenance	of	records	that,	in	reasonable	detail, accurately	and	fairly	reflect	the	transactions	and	dispositions	of	the	assets	of	the	company;	(ii)	provide	reasonable	assurance	that	transactions	are recorded	as	necessary	to	permit	preparation	of	financial	statements	in	accordance	with	generally	accepted	accounting	principles,	and	that	receipts	and expenditures	of	the	company	are	being	made	only	in	accordance	with	authorizations	of	management	and	directors	of	the	company;	and	(iii)	provide reasonable	assurance	regarding	prevention	or	timely	detection	of	unauthorized	acquisition,	use,	or	disposition	of	the	company's	assets	that	could	have	a material	effect	on	the	financial	statements.

Because	of	its	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any evaluation	of	effectiveness	to	future	periods	are	subject	to	the	risk	that	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the degree	of	compliance	with	the	policies	or	procedures	may	deteriorate.

# /s/	PricewaterhouseCoopers	LLP

PricewaterhouseCoopers	LLP Detroit,	Michigan February	15,	2013

# Financial	Statements	and	Supplementary	Data

# MASCO	CORPORATION	and	Consolidated	Subsidiaries

# CONSOLIDATED	BALANCE	SHEETS

|  | (In	Millions,	Except	Share	Data) | (In	Millions,	Except	Share	Data) |
| :--- | :--- | :--- |
| ASSETS | 2012 | 2011 |
| Current\tAssets: |  |  |
| Cash\tand\tcash\tinvestments | $1,351 | $1,656 |
| Receivables | 965 | 914 |
| Inventories | 792 | 769 |
| Prepaid\texpenses\tand\tother | 109 | 70 |
| Assets\theld\tfor\tsale | — | 20 |
| Total\tcurrent\tassets | \t 3,217 | \t 3,429 |
| Property\tand\tequipment,\tnet | \t 1,429 | \t 1,567 |
| Goodwill | \t 1,894 | \t 1,891 |
| Other\tintangible\tassets,\tnet | 151 | 196 |
| Other\tassets | 184 | 209 |
| Assets\theld\tfor\tsale | — | 5 |
| Total\tAssets | $6,875 | $7,297 |
| LIABILITIES\tand\tEQUITY |  |  |
| Current\tLiabilities: |  |  |
| Accounts\tpayable | $819 | $770 |
| Notes\tpayable | 206 | 803 |
| Accrued\tliabilities | 837 | 782 |
| Liabilities\theld\tfor\tsale | — | 8 |
| Total\tcurrent\tliabilities | \t 1,862 | \t 2,363 |
| Long-term\tdebt | \t 3,422 | \t 3,222 |
| Deferred\tincome\ttaxes\tand\tother | \t 1,057 | 970 |
| Total\tLiabilities | \t 6,341 | \t 6,555 |
| Commitments\tand\tcontingencies |  |  |
| Equity: |  |  |
| Masco\tCorporation's\tshareholders'\tequity\tCommon\tshares\tauthorized:\t1,400,000,000;\tissued\tand\toutstanding:\t2012\t– |  |  |
| 349,000,000;\t2011\t–\t347,900,000 | 349 | 348 |
| Preferred\tshares\tauthorized:\t1,000,000;\tissued\tand\toutstanding:\t2012\tand\t2011\t–\tNone | — | — |
| Paid-in\tcapital | 16 | 65 |
| Retained\t(deficit)\tearnings | (102) | 38 |
| Accumulated\tother\tcomprehensive\tincome | 59 | 76 |
| Total\tMasco\tCorporation's\tshareholders'\tequity | 322 | 527 |
| Noncontrolling\tinterest | 212 | 215 |
| Total\tEquity | 534 | 742 |
| Total\tLiabilities\tand\tEquity | $6,875 | $7,297 |

See	notes	to	consolidated	financial	statements.

# CONSOLIDATED	STATEMENTS	OF	OPERATIONS

|  | (In	Millions,	Except	Per	Common	Share	Data) | (In	Millions,	Except	Per	Common	Share	Data) | (In	Millions,	Except	Per	Common	Share	Data) |
| :--- | :--- | :--- | :--- |
|  | 2012 | 2011 | 2010 |
| Net\tsales | $7,745 | $7,467 | $7,486 |
| Cost\tof\tsales | \t 5,794 | \t 5,683 | 5,653 |
| Gross\tprofit | \t 1,951 | \t 1,784 | 1,833 |
| Selling,\tgeneral\tand\tadministrative\texpenses | \t 1,561 | \t 1,576 | 1,598 |
| Charge\tfor\tlitigation\tsettlements,\tnet | 77 | 9 | — |
| Impairment\tcharges\tfor\tgoodwill\tand\tother\tintangible\tassets | 42 | 494 | 698 |
| Operating\tprofit\t(loss) | 271 | (295) | (463) |
| Other\tincome\t(expense),\tnet: |  |  |  |
| Interest\texpense | (254) | (254) | (251) |
| Impairment\tcharges\tfor\tfinancial\tinvestments | (2) | — | (34) |
| Other,\tnet | 27 | 77 | 7 |
|  | (229) | (177) | (278) |
| Income\t(loss)\tfrom\tcontinuing\toperations\tbefore\tincome\ttaxes | 42 | (472) | (741) |
| Income\ttax\texpense\t(benefit) | 83 | (49) | 240 |
| Loss\tfrom\tcontinuing\toperations | (41) | (423) | (981) |
| Loss\tfrom\tdiscontinued\toperations,\tnet | (38) | (110) | (21) |
| Net\tloss | (79) | (533) | (1,002) |
| Less:\tNet\tincome\tattributable\tto\tnoncontrolling\tinterest | 35 | 42 | 41 |
| Net\tloss\tattributable\tto\tMasco\tCorporation | $(114) | $(575) | $(1,043) |
| Loss\tper\tcommon\tshare\tattributable\tto\tMasco\tCorporation: |  |  |  |
| Basic: |  |  |  |
| Loss\tfrom\tcontinuing\toperations | $(.22) | $(1.34) | $(2.94) |
| Loss\tfrom\tdiscontinued\toperations,\tnet | (.11) | (.32) | (.06) |
| Net\tloss | $(.33) | $(1.66) | $(3.00) |
| Diluted: |  |  |  |
| Loss\tfrom\tcontinuing\toperations | $(.22) | $(1.34) | $(2.94) |
| Loss\tfrom\tdiscontinued\toperations,\tnet | (.11) | (.32) | (.06) |
| Net\tloss | $(.33) | $(1.66) | $(3.00) |
| Amounts\tattributable\tto\tMasco\tCorporation: |  |  |  |
| Loss\tfrom\tcontinuing\toperations | $(76) | $(465) | $(1,022) |
| Loss\tfrom\tdiscontinued\toperations,\tnet | (38) | (110) | (21) |
| Net\tloss | $(114) | $(575) | $(1,043) |

# CONSOLIDATED	STATEMENTS	OF	COMPREHENSIVE	LOSS

|  | 2012 | 2011 | (In	Millions)<br>2010 |
| :--- | :--- | :--- | :--- |
| Net\tloss | $(79) | $(533) | $(1,002) |
| Less:\tNet\tincome\tattributable\tto\tnoncontrolling\tInterest | 35 | 42 | 41 |
| Net\tloss\tattributable\tto\tMasco\tCorporation | $(114) | $(575) | $(1,043) |
| Other\tcomprehensive\tincome\t(loss),\tnet\tof\ttax: |  |  |  |
| Cumulative\ttranslation\tadjustment | $28 | $(30) | $(57) |
| Unrealized\tgain\t(loss)\ton\tinterest\trate\tswaps,\tnet\tof\tincome\ttax\tof\t$—,\t$—\tand\t$—,\trespectively | 2 | (23) | — |
| Unrealized\t(loss)\tgain\ton\tmarketable\tsecurities,\tnet\tof\tincome\ttax\tof\t$—,\t$—\tand\t$—,\trespectively | — | (38) | 1 |
| Unrecognized\tpension\tprior\tservice\tcost\tand\tnet\tloss,\tnet\tof\tincome\ttax\t(benefit)\tof\t$(9),\t$5\tand\t$—, |  |  |  |
| respectively | (45) | (113) | (53) |
| Other\tcomprehensive\tloss | (15) | (204) | (109) |
| Less:\tOther\tcomprehensive\tincome\t(loss)\tattributable\tto\tthe\tnoncontrolling\tinterest | 2 | (7) | (16) |
| Other\tcomprehensive\tloss\tattributable\tto\tMasco\tCorporation | $(17) | $(197) | $(93) |
| Total\tcomprehensive\tloss | $(94) | $(737) | $(1,111) |
| Less:\tTotal\tcomprehensive\tincome\tattributable\tto\tnoncontrolling\tinterest | 37 | 35 | 25 |
| Total\tcomprehensive\tloss\tattributable\tto\tMasco\tCorporation | $(131) | $(772) | $(1,136) |

# CONSOLIDATED	STATEMENTS	OF	CASH	FLOWS

|  | 2012 | 2011 | (In	Millions)<br>2010 |
| :--- | :--- | :--- | :--- |
| CASH\tFLOWS\tFROM\t(FOR)\tOPERATING\tACTIVITIES: |  |  |  |
| Net\tloss | $(79) | $(533) | $(1,002) |
| Depreciation\tand\tamortization | 214 | 263 | 279 |
| Deferred\tincome\ttaxes | 50 | (112) | 168 |
| Non-cash\tloss\ton\tdisposition\tof\tbusinesses,\tnet | 4 | — | — |
| (Gain)\ton\tdisposition\tof\tinvestments,\tnet | (24) | (71) | (8) |
| Impairment\tcharges: |  |  |  |
| Financial\tinvestments | 2 | — | 34 |
| Goodwill\tand\tother\tintangible\tassets | 42 | 494 | 698 |
| Long-lived\tassets | — | — | 67 |
| Discontinued\toperations | 3 | 86 | 23 |
| Stock-based\tcompensation | 61 | 61 | 62 |
| Other\titems,\tnet | (28) | 53 | 29 |
| (Increase)\tdecrease\tin\treceivables | (50) | (60) | 80 |
| (Increase)\tdecrease\tin\tinventories | (16) | (54) | 2 |
| Increase\tin\taccounts\tpayable\tand\taccrued\tliabilities,\tnet | 102 | 112 | 33 |
| Net\tcash\tfrom\toperating\tactivities | 281 | 239 | 465 |
| CASH\tFLOWS\tFROM\t(FOR)\tFINANCING\tACTIVITIES: |  |  |  |
| Increase\tin\tdebt | 4 | 4 | 4 |
| Payment\tof\tdebt | (5) | (9) | (6) |
| Issuance\tof\tnotes,\tnet\tof\tissuance\tcosts | 396 | — | 494 |
| Credit\tAgreement\tcosts | — | (1) | (9) |
| Retirement\tof\tnotes | (791) | (58) | (359) |
| Payment\tfor\tsettlement\tof\tswaps | (25) | — | — |
| Purchase\tof\tCompany\tcommon\tstock | (8) | (30) | (45) |
| Tax\tbenefit\tfrom\tstock-based\tcompensation | — | — | 4 |
| Dividends\tpaid\tto\tnoncontrolling\tinterest | (40) | (18) | (15) |
| Cash\tdividends\tpaid | (107) | (107) | (108) |
| Net\tcash\tfor\tfinancing\tactivities | (576) | (219) | (40) |
| CASH\tFLOWS\tFROM\t(FOR)\tINVESTING\tACTIVITIES: |  |  |  |
| Capital\texpenditures | (119) | (151) | (137) |
| Acquisition\tof\tbusinesses,\tnet\tof\tcash\tacquired | — | (10) | — |
| Proceeds\tfrom\tdisposition\tof: |  |  |  |
| Marketable\tsecurities | — | 49 | 22 |
| Businesses,\tnet\tof\tcash\tdisposed | 9 | — | — |
| Property\tand\tequipment | 67 | 24 | 18 |
| Other\tfinancial\tinvestments,\tnet | 40 | 45 | 20 |
| Other,\tnet | (24) | (18) | (32) |
| Net\tcash\tfor\tinvesting\tactivities | (27) | (61) | (109) |
| Effect\tof\texchange\trate\tchanges\ton\tcash\tand\tcash\tinvestments | 17 | (18) | (14) |
| CASH\tAND\tCASH\tINVESTMENTS: |  |  |  |
| (Decrease)\tincrease\tfor\tthe\tyear | (305) | (59) | 302 |
| At\tJanuary\t1 | \t 1,656 | \t 1,715 | 1,413 |
| At\tDecember\t31 | $1,351 | $1,656 | $1,715 |

# CONSOLIDATED	STATEMENTS	OF	SHAREHOLDERS'	EQUITY

|  | Total | Common<br>Shares<br>($1	par	value) | Paid-In<br>Capital | Retained<br>(Deficit)<br>Earnings | Accumulated<br>Other<br>Comprehensive<br>Income | (In	Millions,	Except	Per	Share	Data)<br>Noncontrolling<br>Interest |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Balance,\tJanuary\t1,\t2010 | $2,817 | $350 | $42 | $1,871 | $366 | $188 |
| Total\tcomprehensive\t(loss)\tincome | (1,111) |  |  | (1,043) | (93) | 25 |
| Shares\tissued | — | 2 | (2) |  |  |  |
| Shares\tretired: |  |  |  |  |  |  |
| Repurchased | (45) | (3) | (42) |  |  |  |
| Surrendered\t(non-cash) | (6) |  | (6) |  |  |  |
| Cash\tdividends\tdeclared | (108) |  |  | (108) |  |  |
| Dividends\tpaid\tto\tnoncontrolling\tinterest | (15) |  |  |  |  | (15) |
| Stock-based\tcompensation | 50 |  | 50 |  |  |  |
| Balance,\tDecember\t31,\t2010 | $1,582 | $349 | $42 | $720 | $273 | $198 |
| Total\tcomprehensive\t(loss)\tincome | (737) |  |  | (575) | (197) | 35 |
| Shares\tissued | — | 2 | (2) |  |  |  |
| Shares\tretired: |  |  |  |  |  |  |
| Repurchased | (30) | (2) | (28) |  |  |  |
| Surrendered\t(non-cash) | (8) | (1) | (7) |  |  |  |
| Cash\tdividends\tdeclared | (107) |  |  | (107) |  |  |
| Dividends\tpaid\tto\tnoncontrolling\tinterest | (18) |  |  |  |  | (18) |
| Stock-based\tcompensation | 60 |  | 60 |  |  |  |
| Balance,\tDecember\t31,\t2011 | $742 | $348 | $65 | $38 | $76 | $215 |
| Total\tcomprehensive\t(loss)\tincome | (94) |  |  | (114) | (17) | 37 |
| Shares\tissued | (1) | 3 | (4) |  |  |  |
| Shares\tretired: |  |  |  |  |  |  |
| Repurchased | (8) | (1) | (7) |  |  |  |
| Surrendered\t(non-cash) | (8) | (1) | (7) |  |  |  |
| Cash\tdividends\tdeclared | (107) |  | (81) | (26) |  |  |
| Dividends\tpaid\tto\tnoncontrolling\tinterest | (40) |  |  |  |  | (40) |
| Stock-based\tcompensation | 50 |  | 50 |  |  |  |
| Balance,\tDecember\t31,\t2012 | $534 | $349 | $16 | $(102) | $59 | $212 |

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# A.		ACCOUNTING	POLICIES

Principles	of	Consolidation.				The	consolidated	financial	statements	include	the	accounts	of	Masco	Corporation	and	all	majority-owned subsidiaries.	All	significant	intercompany	transactions	have	been	eliminated.	The	Company	consolidates	the	assets,	liabilities	and	results	of	operations	of variable	interest	entities,	for	which	the	Company	is	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	the	Company	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.				The	Company	recognizes	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.	The	Company	records	revenue	for	unbilled	services	performed	based	upon material	and	labor	incurred	in	the	Installation	and	Other	Services	segment;	such	amounts	are	recorded	in	Receivables.	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.				The	Company	records	estimated	reductions	to	revenue	for	customer	programs	and	incentive	offerings,	including special	pricing	and	co-operative	advertising	arrangements,	promotions	and	other	volume-based	incentives.	In-store	displays	that	are	owned	by	the Company	and	used	to	market	the	Company's	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	the	Company's	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	date.	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	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.				The	Company	considers	all	highly	liquid	investments	with	an	initial	maturity	of	three	months	or	less	to	be	cash	and cash	investments.

Receivables.				The	Company	does	significant	business	with	a	number	of	customers,	including	certain	home	centers	and	homebuilders.	The Company	monitors	its	exposure	for	credit	losses	on	its	customer	receivable	balances	and	the	credit	worthiness	of	its	customers	on	an	on-going	basis	and records	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	the	Company's	markets,	declines	in	the	financial	condition	and	creditworthiness	of	customers	impacts	the	credit	risk	of	the	receivables	involved	and	the Company	has	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	$74	million	and $61	million	at	December	31,

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS	(Continued)

# A.		ACCOUNTING	POLICIES	(Continued)

2012	and	2011,	respectively.	Receivables	include	unbilled	revenue	related	to	the	Installation	and	Other	Services	segment	of	$18	million	and	$17	million	at December	31,	2012	and	2011,	respectively.

Property	and	Equipment.				Property	and	equipment,	including	significant	betterments	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.

The	Company	reviews	its	property	and	equipment	as	an	event	occurs	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	the	Company	would	recognize	an	impairment	loss	for	the	difference	between	the	carrying	amount	and	the	current	fair value.	Further,	the	Company	evaluates	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	$202	million,	$246	million	and	$261	million	in	2012,	2011	and	2010,	respectively.	Such	depreciation	expense	included	accelerated depreciation	of	$28	million	(primarily	in	the	Cabinets	and	Related	Products	and	Plumbing	Products	segments),	$59	million	(primarily	in	the	Cabinets	and Related	Products	and	Other	Specialty	Products	segments)	and	$43	million	(primarily	in	the	Cabinets	and	Related	Products	segment)	in	2012,	2011	and 2010,	respectively.

Goodwill	and	Other	Intangible	Assets.				The	Company	performs	its	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.	The Company	has	defined	its	reporting	units	and	completed	the	impairment	testing	of	goodwill	at	the	operating	segment	level.	The	Company's	operating segments	are	reporting	units	that	engage	in	business	activities,	for	which	discrete	financial	information,	including	five-year	forecasts,	are	available.	The Company	compares	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).

Determining	market	values	using	a	discounted	cash	flow	method	requires	the	Company	to	make	significant	estimates	and	assumptions,	including long-term	projections	of	cash	flows,	market	conditions	and	appropriate	discount	rates.	The	Company's	judgments	are	based	upon	historical	experience, current	market	trends,	consultations	with	external	valuation	specialists	and	other	information.	In	estimating	future	cash	flows,	the	Company	relies	on internally	generated	five-year	forecasts	for	sales	and	operating	profits,	including	capital	expenditures,	and	generally	a	one	to	three	percent	long-term assumed	annual	growth	rate	of	cash	flows	for	periods	after	the	five-year	forecast.	The	Company	utilizes	its	weighted	average	cost	of	capital	of approximately	9.5	percent	as	the	basis	to	determine	the	discount	rate	to	apply	to	the	estimated	future	cash	flows.	In	2012,	due	to	market	conditions,	the Company	increased	the	discount	rate	to	a	range	of	11	percent	to	13	percent	for	most	of	its	reporting	units.	The	Company	records	an	impairment	to goodwill	(adjusting	the	value	to	the	estimated	fair	value)	if	the	book	value	exceeds	the	estimated	fair	value.

The	Company	reviews	its	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	reporting	unit.	The	Company	considers	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.	The	Company	evaluates	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.	See	Note	H	for	additional	information	regarding	Goodwill	and	Other	Intangible	Assets.

Fair	Value	Accounting.				The	Company	follows	accounting	guidance	for	its	financial	investments	and	liabilities	which	defines	fair	value, establishes	a	framework	for	measuring	fair	value	and	prescribes	disclosures	about	fair	value	measurements.	The	Company	also	follows	this	guidance	for its	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	the	Company's	investments	in	marketable	securities, private	equity	funds	and	other	private	investments.

The	Company	uses	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.	For	each	derivative	financial	instrument	that	is	designated	and	qualifies	as	a	fair- value	hedge,	the	gain	or	loss	on	the	derivative	instrument,	as	well	as	the	offsetting	loss	or	gain	on	the	hedged	item	attributable	to	the	hedged	risk,	are recognized	in	determining	current	earnings	during	the	period	of	the	change	in	fair	values.	For	derivative	instruments	not	designated	as	hedging instruments,	the	gain	or	loss	is	recognized	in	determining	current	earnings	during	the	period	of	the	change	in	fair	value.

Warranty.				At	the	time	of	sale,	the	Company	accrues	a	warranty	liability	for	the	estimated	cost	to	provide	products,	parts	or	services	to	repair	or replace	products	in	satisfaction	of	warranty	obligations.	The	Company's	estimate	of	costs	to	service	its	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	product	manufacturing	metrics	and	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.	The	Company	believes	that	the	warranty	accrual	is	appropriate;	however,	actual	claims	incurred	could	differ	from	the	original estimates	thereby	requiring	adjustments	to	previously	established	accruals.

A	majority	of	the	Company's	business	is	at	the	consumer	retail	level	through	home	centers	and	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	the	Company.	The	Company's	revenue	recognition	policy	takes	into	account	this	type	of	return	when	recognizing	revenue,	and deductions	are	recorded	at	the	time	of	sale.

Product	Liability.				The	Company	provides	for	expenses	associated	with	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.

# A.		ACCOUNTING	POLICIES	(Concluded)

Stock-Based	Compensation.				The	Company	measures	compensation	expense	for	stock	awards	at	the	market	price	of	the	Company's	common stock	at	the	grant	date.	Effective	January	1,	2006,	such	expense	is	being	recognized	ratably	over	the	shorter	of	the	vesting	period	of	the	stock	awards, typically	5	to	10	years	(except	for	stock	awards	held	by	grantees	age	66	or	older,	which	vest	over	five	years),	or	the	length	of	time	until	the	grantee becomes	retirement-eligible	at	age	65.	For	stock	awards	granted	prior	to	January	1,	2006,	such	expense	is	being	recognized	over	the	vesting	period	of the	stock	awards,	typically	10	years,	or	for	executive	grantees	that	are,	or	will	become,	retirement-eligible	during	the	vesting	period,	the	expense	is	being recognized	over	five	years	or	immediately	upon	a	grantee's	retirement.

The	Company	measures	compensation	expense	for	stock	options	using	a	Black-Scholes	option	pricing	model.	Such	expense	is	being	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.	The	Company	utilizes	the	shortcut	method	to	determine	the	tax	windfall	pool	associated	with	stock	options.

Noncontrolling	Interest.				The	Company	owns	68	percent	of	Hansgrohe	AG	at	both	December	31,	2012	and	2011.	The	aggregate	noncontrolling interest,	net	of	dividends,	at	December	31,	2012	and	2011	has	been	recorded	as	a	component	of	equity	on	the	Company's	consolidated	balance	sheets.

Interest	and	Penalties	on	Uncertain	Tax	Positions.				 The	Company	records	interest	and	penalties	on	its	uncertain	tax	positions	in	income	tax expense.

Reclassifications.				Certain	prior-year	amounts	have	been	reclassified	to	conform	to	the	2012	presentation	in	the	consolidated	financial statements.	In	the	Company's	consolidated	statements	of	cash	flows,	the	cash	flows	from	discontinued	operations	are	not	separately	classified.

Recently	Issued	Accounting	Pronouncements.				On	January	1,	2012,	the	Company	adopted	new	accounting	guidance	requiring	more prominent	presentation	of	other	comprehensive	income	items	in	the	Company's	consolidated	financial	statements.	The	adoption	of	this	new	guidance	did not	have	an	impact	on	the	Company's	financial	position	or	its	results	of	operations.

# B.		DISCONTINUED	OPERATIONS

The	presentation	of	discontinued	operations	includes	components	of	the	Company	that	the	Company	intends	to	sell,	which	comprises	operations and	cash	flows	that	can	be	clearly	distinguished	from	the	rest	of	the	Company.	The	Company	has	accounted	for	the	business	units	identified	in	2011	as discontinued	operations.

During	2011,	the	Company	determined	that	several	businesses	in	the	Installation	and	Other	Services	segment	were	not	core	to	the	Company's long-term	growth	strategy.	These	businesses	provide	commercial	drywall	installation,	millwork	and	framing	services.	During	2012,	the	Company disposed	all	of	these	businesses	for	net	proceeds	of	$7	million.

Losses	from	these	2011	discontinued	operations	were	included	in	loss	from	discontinued	operations,	net,	in	the	consolidated	statements	of operations.

# B.		DISCONTINUED	OPERATIONS	(Concluded)

Selected	financial	information	for	the	discontinued	operations	during	the	period	owned	by	the	Company,	were	as	follows,	in	millions:

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $71 | $93 | $106 |
| Operating\tloss\tfrom\tdiscontinued\toperations | $(13) | $(22) | $ (13) |
| Impairment\tof\tassets\theld\tfor\tsale | (3) | (86) | (23) |
| Loss\ton\tdisposal\tof\tdiscontinued\toperations,\tnet | (6) | (3) | — |
| Loss\tbefore\tincome\ttax | (22) | (111) | (36) |
| Income\ttax\texpense\t(benefit) | 16 | (1) | (15) |
| Loss\tfrom\tdiscontinued\toperations,\tnet | $(38) | $(110) | $ (21) |

Included	in	the	impairment	of	assets	held	for	sale,	net	in	2011	is	the	impairment	of	indefinite	and	definite-lived	intangible	assets	of	$56	million,	the impairment	of	goodwill	of	$13	million	and	the	impairment	of	fixed	and	other	assets	of	$17	million.	Included	in	the	loss	on	disposal	of	discontinued operations,	net	in	2011	is	$3	million	expense	reflecting	the	adjustment	of	certain	assets	related	to	businesses	disposed	in	prior	years.

The	unusual	relationship	between	income	tax	expense	and	loss	before	income	tax	in	2012	results	primarily	from	the	increase	in	the	deferred	tax liability	associated	with	the	abandonment	of	tax	basis	in	indefinite-lived	intangibles	due	to	the	disposition	of	certain	discontinued	operations.

The	unusual	relationship	between	income	taxes	and	loss	before	income	taxes	in	2011	resulted	primarily	from	certain	losses	providing	no	current tax	benefit.

The	income	tax	benefit	recorded	in	2010	relates	primarily	to	the	allocation	of	an	income	tax	benefit	to	impairment	charges	on	goodwill	and	other indefinite-lived	intangible	assets	of	certain	discontinued	operations.

Also	during	2011,	the	Company	decided	to	exit	a	product	line	in	builders'	hardware	in	the	Decorative	Architectural	Products	segment	with	net	sales of	$1	million	and	an	operating	loss	of	$15	million	in	2011	(including	$8	million	to	write-down	inventory	related	to	satisfaction	of	contractual	obligations).	In the	first	quarter	of	2012,	the	Company	disposed	of	this	product	line.	This	business	was	included	in	continuing	operations	through	the	date	of	disposal.

# C.		ACQUISITIONS

In	late	2011,	the	Company	acquired	a	small	manufacturer	of	hot	tubs	in	the	Plumbing	Products	segment;	this	business	allows	the	Company	to expand	its	spa	offering	into	additional	price	point	categories.	The	total	net	cash	purchase	price	was	$10	million	in	2011.	The	results	of	this	acquisition	are included	in	the	consolidated	financial	statements	from	the	date	of	acquisition.

Certain	purchase	agreements	provided	for	the	payment	of	additional	consideration	in	cash,	contingent	upon	whether	certain	conditions	are	met, including	the	operating	performance	of	the	acquired	business.	At	December	31,	2012	and	2011,	there	was	no	outstanding	contingent	consideration.

# D.		INVENTORIES

|  |  | (In	Millions) |
| :--- | :--- | :--- |
|  |  | At\tDecember\t31 |
|  | 2012 | 2011 |
| Finished\tgoods | $419 | $ 390 |
| Raw\tmaterial | \t 278 | 280 |
| Work\tin\tprocess | 95 | 99 |
| Total | $792 | $ 769 |

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.

# E.		FAIR	VALUE	OF	FINANCIAL	INVESTMENTS	AND	LIABILITIES

Accounting	Policy.				The	Company	follows	accounting	guidance	that	defines	fair	value,	establishes	a	framework	for	measuring	fair	value	and prescribes	disclosures	about	fair	value	measurements	for	its	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.	The	Company	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.

Financial	Investments.				The	Company	has	maintained	investments	in	available-for-sale	securities	and	a	number	of	private	equity	funds	and	other private	investments,	principally	as	part	of	its	tax	planning	strategies,	as	any	gains	enhance	the	utilization	of	any	current	and	future	tax	capital	losses.

# E.		FAIR	VALUE	OF	FINANCIAL	INVESTMENTS	AND	LIABILITIES	(Continued)

Financial	investments	included	in	other	assets	were	as	follows,	in	millions:

|  | At	December	31 | At	December	31 |
| :--- | :--- | :--- |
|  | 2012 | 2011 |
| Auction\trate\tsecurities | $ 22 | $22 |
| Total\trecurring\tinvestments | 22 | 22 |
| Private\tequity\tfunds | 69 | 86 |
| Other\tinvestments | 4 | 4 |
| Total\tnon-recurring\tinvestments | 73 | 90 |
| Total | $ 95 | $112 |

The	Company's	investments	in	available-for-sale	securities	at	December	31,	2012	and	2011	were	as	follows,	in	millions:

|  | Cost	Basis | Unrealized<br>Gains | Unrealized<br>Losses | Recorded<br>Basis |
| :--- | :--- | :--- | :--- | :--- |
| December\t31,\t2012 | $19 | $3 | $— | $22 |
| December\t31,\t2011 | $19 | $3 | $— | $22 |

The	Company's	investments	in	private	equity	funds	and	other	private	investments	are	carried	at	cost.	At	December	31,	2012,	the	Company	has investments	in	15	venture	capital	funds,	with	an	aggregate	carrying	value	of	$16	million.	The	venture	capital	funds	invest	in	start-up	or	smaller,	early- stage	established	businesses,	principally	in	the	information	technology,	bio-technology	and	health	care	sectors.	At	December	31,	2012,	the	Company also	has	investments	in	21	buyout	funds,	with	an	aggregate	carrying	value	of	$53	million.	The	buyout	funds	invest	in	later-stage,	established	businesses and	no	buyout	fund	has	a	concentration	in	a	particular	sector.

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.	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	marketable	securities,	the	Company	reviews,	on	a	recurring	basis,	industry	analyst	reports,	key	ratios	and	statistics,	market	analyses	and	other factors	for	each	investment	to	determine	if	an	unrealized	loss	is	other-than-temporary.

In	the	past,	the	Company	invested	excess	cash	in	auction	rate	securities.	Auction	rate	securities	are	investment	securities	that	have	interest	rates which	are	reset	every	7,	28	or	35	days.	The	fair	values	of	the	auction	rate	securities	held	by	the	Company	have	been	estimated,	on	a	recurring	basis, 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	assumptions	for	credit defaults,	since	the	auction	rate	securities	are	backed	by	credit	default	swap	agreements.

During	2011,	the	Company	sold	1,974,000	shares	of	its	investment	in	TriMas	common	stock	for	cash	of	$43	million;	at	December	31,	2012	and 2011,	the	Company	did	not	own	any	shares	of	TriMas	common	stock.

Financial	investments	and	(liabilities)	measured	at	fair	value	on	a	recurring	basis	at	each	reporting	period	and	the	amounts	for	each	level	within	the fair	value	hierarchy	were	as	follows,	in	millions:

|  |  |  | Fair	Value	Measurements	Using |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Dec.\t31,\n2012 | Quoted\nMarket\nPrices\n(Level\t1) | Significant\nOther\nObservable\nInputs\n(Level\t2) | Significant\nUnobservable\nInputs\n(Level\t3) |
| Auction\trate\tsecurities | $22 | $— | $— | $22 |
| Total | $22 | $— | $— | $22 |

|  |  |  | Fair	Value	Measurements	Using |  |
| :--- | :--- | :--- | :--- | :--- |
|  |  | Quoted | Significant |  |
|  |  | Market | Other | Significant |
|  |  | Prices | Observable | Unobservable |
|  | Dec.\t31, | (Level | Inputs | Inputs |
|  | 2011 | 1) | (Level\t2) | (Level\t3) |
| Auction\trate\tsecurities | $22 | $— | $— | $22 |
| Total | $22 | $— | $— | $22 |

The	following	table	summarizes	the	changes	in	Level	3	financial	investments	measured	at	fair	value	on	a	recurring	basis,	in	millions:

|  | 2012 | 2011 |
| :--- | :--- | :--- |
| Fair\tvalue\tJanuary\t1 | $22 | $22 |
| Total\tlosses\tincluded\tin\tearnings |  |  |
| Unrealized\tlosses | — | — |
| Purchases,\tissuances,\tsettlements | — | — |
| Transfers\tfrom\tLevel\t3\tto\tLevel\t2 | — | — |
| Fair\tvalue\tat\tDecember\t31 | $22 | $22 |

Non-Recurring	Fair	Value	Measurements.				It	is	not	practicable	for	the	Company	to	estimate	a	fair	value	for	private	equity	funds	and	other private	investments	because	there	are	no	quoted	market	prices,	and	sufficient	information	is	not	readily	available	for	the	Company	to	utilize	a	valuation model	to	determine	the	fair	value	for	each	fund.	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.

Impairment	indicators	the	Company	considers	include	the	following:	whether	there	has	been	a	significant	deterioration	in	earnings	performance, asset	quality	or	business	prospects;	a	significant	adverse	change	in	the	regulatory,	economic	or	technological	environment;	a	significant	adverse	change in	the	general	market	condition	or	geographic	area	in	which	the	investment	operates;	industry	and	sector	performance;	current	equity	and	credit	market conditions;	and	any	bona	fide	offers	to	purchase	the	investment	for	less	than	the	carrying	value.	The	Company	also	considers	specific	adverse	conditions related	to	the	financial	health	of	and	business	outlook	for	the	fund,	including	industry	and	sector	performance.	The	significant	assumptions	utilized	in analyzing	a	fund	for	potential

other-than-temporary	impairment	include	current	economic	conditions,	market	analysis	for	specific	funds	and	performance	indicators	in	the	residential and	commercial	construction,	bio-technology,	health	care	and	information	technology	sectors	in	which	the	applicable	funds'	investments	operate.	Since there	is	no	active	trading	market	for	these	investments,	they	are	for	the	most	part	illiquid.	These	investments,	by	their	nature,	can	also	have	a	relatively higher	degree	of	business	risk,	including	financial	leverage,	than	other	financial	investments.	Future	changes	in	market	conditions,	the	future performance	of	the	underlying	investments	or	new	information	provided	by	private	equity	fund	managers	could	affect	the	recorded	values	of	such investments	and	the	amounts	realized	upon	liquidation.	Due	to	the	significant	unobservable	inputs,	the	fair	value	measurements	used	to	evaluate impairment	are	a	Level	3	input.

Financial	investments	measured	at	fair	value	on	a	non-recurring	basis	during	2012	and	the	amounts	for	each	level	within	the	fair	value	hierarchy were	as	follows,	in	millions:

|  | Dec.	31,<br>2012 | Quoted<br>Market<br>Prices<br>(Level	1) | Other<br>Observable<br>Inputs<br>(Level	2) | Significant<br>Unobservable<br>Inputs<br>(Level	3) | Total<br>Gains<br>(Losses) |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Private\tequity\tfunds | $2 | $— | $— | $2 | $(2) |
|  | $2 | $— | $— | $2 | $(2) |

During	2011,	there	were	no	financial	investments	measured	on	a	non-recurring	basis.	None	of	the	Company's	investments	in	private	equity	funds, for	which	fair	value	was	determined,	had	unrealized	losses	in	2012	or	2011.

The	remaining	private	equity	investments	in	2012	with	an	aggregate	carrying	value	of	$67	million,	were	not	reviewed	for	impairment,	as	there	were no	indicators	of	impairment	or	identified	events	or	changes	in	circumstances	that	would	have	a	significant	adverse	effect	on	the	fair	value	of	the investment.	The	Company	did	not	have	any	transfers	between	Level	1	and	Level	2	financial	assets	in	2012	or	2011.

Realized	Gains	(Losses)	and	Impairment	Charges.				During	July	2012,	based	on	information	from	a	fund	manager,	the	Company	determined that	the	decline	in	estimated	value	of	one	private	equity	fund	(with	an	aggregate	carrying	value	of	$4	million	prior	to	impairment)	was	other-than- temporary	and,	accordingly,	recognized	non-cash	pre-tax	impairment	charges	of	$2	million.	During	2010,	based	on	information	from	the	fund	managers, the	Company	determined	that	the	decline	in	the	estimated	value	of	three	private	equity	funds	(with	an	aggregate	carrying	value	of	$6	million	prior	to impairment)	was	other-than-temporary	and,	accordingly,	recognized	non-cash,	pre-tax	impairment	charges	of	$4	million.	During	2010,	the	Company	also determined	that	the	decline	in	the	estimated	value	of	one	private	investment	was	other-than-temporary	and,	accordingly,	recognized	a	non-cash,	pre-tax impairment	charge	of	$2	million.

# E.		FAIR	VALUE	OF	FINANCIAL	INVESTMENTS	AND	LIABILITIES	(Concluded)

Income	from	financial	investments,	net,	included	in	other,	net,	within	other	income	(expense),	net,	and	impairment	charges	for	financial	investments were	as	follows,	in	millions:

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Realized\tgains\tfrom\tmarketable\tsecurities | $— | $41 | $10 |
| Realized\tlosses\tfrom\tmarketable\tsecurities | \t — | \t — | (8) |
| Income\tfrom\tother\tinvestments,\tnet | \t 24 | \t 32 | 7 |
| Income\tfrom\tfinancial\tinvestments,\tnet | $24 | $73 | $9 |
| Impairment\tcharges: |  |  |  |
| Asahi\tTec | $— | $— | $(28) |
| Private\tequity\tfunds | (2) | \t — | (4) |
| Other\tprivate\tinvestments | \t — | \t — | (2) |
| Total\timpairment\tcharges | $ (2) | $— | $(34) |

During	2010,	the	Company	and	Asahi	Tec	agreed	to	amend	the	preferred	stock	to	include	a	more	favorable	conversion	feature	into	common	stock and	to	include	a	mandatory	conversion	date	of	February	28,	2011.	As	a	result	of	the	amendment,	the	Company	recognized	a	$28	million	impairment	loss based	on	the	current	fair	value	of	the	preferred	stock	on	an	if-converted	basis	in	2010.	During	the	last	six	months	of	2010,	the	Company	converted	all	its holdings	of	Asahi	Tec	preferred	stock	into	common	stock	which	was	sold,	in	its	entirety,	in	open	market	transactions.	The	Company	realized	cash proceeds	of	$11	million	and	realized	losses	aggregating	$8	million	in	2010.	As	a	result	of	the	disposition	of	the	Asahi	Tec	common	stock,	the	Company received	a	tax	refund	of	$16	million	in	2011	relating	to	the	utilization	of	a	loss	carryback	to	offset	taxes	paid	on	prior	capital	gains.

The	impairment	charges	related	to	the	Company's	financial	investments	recognized	during	2012	and	2010	were	based	upon	then-current	estimates for	the	fair	value	of	certain	financial	investments;	such	estimates	could	change	in	the	near-term	based	upon	future	events	and	circumstances.

The	fair	value	of	the	Company's	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	the	Company	for	debt	with	similar	terms	and	remaining	maturities.	The	aggregate	estimated	market value	of	short-term	and	long-term	debt	at	December	31,	2012	was	approximately	$4.0	billion,	compared	with	the	aggregate	carrying	value	of	$3.6	billion. The	aggregate	estimated	market	value	of	short-term	and	long-term	debt	at	December	31,	2011	was	approximately	$4.0	billion,	compared	with	the aggregate	carrying	value	of	$4.0	billion.

# F.		DERIVATIVE	INSTRUMENTS	AND	HEDGING	ACTIVITIES

The	Company	is	exposed	to	global	market	risk	as	part	of	its	normal	daily	business	activities.	To	manage	these	risks,	the	Company	enters	into various	derivative	contracts.	These	contracts	include	interest	rate	swap	agreements,	foreign	currency	exchange	contracts	and	contracts	intended	to hedge	the	Company's	exposure	to	copper	and	zinc.	The	Company	reviews	its	hedging	program,	derivative	positions	and	overall	risk	management	on	a regular	basis.

Interest	Rate	Swap	Agreements.				In	March	2012,	in	connection	with	the	issuance	of	$400	million	of	debt,	the	Company	terminated	the	interest rate	swap	hedge	relationships	that	it	had	entered	into	in	August	2011.	These	interest	rate	swaps	were	designated	as	cash	flow	hedges	and	effectively

# F.		DERIVATIVE	INSTRUMENTS	AND	HEDGING	ACTIVITIES	(Continued)

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	the	Company's	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,	2012,	the	balance	remaining	was	$21	million.	At	December	31,	2011,	the	interest	rate	swaps	were	considered	100 percent	effective;	therefore,	the	market	valuation	of	$23	million	was	recorded	in	other	comprehensive	income	in	the	Company's	statement	of shareholders'	equity	with	a	corresponding	increase	to	accrued	other	in	the	Company's	condensed	consolidated	balance	sheet	at	December	31,	2011.

In	2012,	the	Company	recognized	a	decrease	in	interest	expense	of	$6	million,	offset	by	interest	expense	of	$2	million	related	to	the	cash	flow hedge	terminated	in	March	2012.	In	2011	and	2010,	the	Company	recognized	a	decrease	in	interest	expense	of	$10	million	and	$12	million,	respectively, related	to	the	amortization	of	gains	resulting	from	the	terminations	(in	2008	and	2004)	of	two	fair	value	interest	rate	swap	agreements.

Foreign	Currency	Contracts.				The	Company's	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	during	2012,	2011	and	2010,	the	Company,	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	the	Company's	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	contracts,	the	Company's	exposure is	limited	to	the	aggregate	foreign	currency	rate	differential	with	such	institutions.

Metals	Contracts.				During	2012,	2011	and	2010,	the	Company	entered	into	several	contracts	to	manage	its	exposure	to	increases	in	the	price	of copper	and	zinc.	Gains	(losses)	related	to	these	contracts	are	recorded	in	the	Company's	consolidated	statements	of	operations	in	cost	of	sales.

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

|  | 2012 | Twelve	Months	Ended	December	31,<br>2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Foreign\tCurrency\tContracts |  |  |  |
| Exchange\tContracts | $(2) | $3 | $3 |
| Forward\tContracts | — | 3 | (2) |
| Metals\tContracts | 2 | (7) | 7 |
| Total\t(losses)\tgains | $— | $(1) | $8 |

# F.		DERIVATIVE	INSTRUMENTS	AND	HEDGING	ACTIVITIES	(Concluded)

The	Company	presents	its	net	derivatives	due	to	the	right	of	offset	by	its	counterparties	under	master	netting	arrangements	in	current	assets	or accrued	liabilities	in	the	consolidated	balance	sheet.	The	notional	amounts	being	hedged	and	the	fair	value	of	those	derivative	instruments,	on	a	gross basis,	is	as	follows,	in	millions:

|  | Notional<br>Amount | Assets | Liabilities |
| :--- | :--- | :--- | :--- |
| Foreign\tCurrency\tContracts |  |  |  |
| Exchange\tContracts | $172 |  |  |
| Current\tliabilities |  | $— | $5 |
| Forward\tContracts | 76 |  |  |
| Current\tassets |  | 1 | 1 |
| Metals\tContracts | 35 |  |  |
| Current\tliabilities |  | 1 | 2 |
| Total |  | $2 | $8 |

|  | Amount | Assets | Liabilities |
| :--- | :--- | :--- | :--- |
| Foreign\tCurrency\tContracts |  |  |  |
| Exchange\tContracts | $108 |  |  |
| Current\tassets |  | $8 | $— |
| Forward\tContracts | 76 |  |  |
| Current\tassets |  | 1 | — |
| Current\tliabilities |  | 1 | 2 |
| Metals\tContracts | 67 |  |  |
| Current\tassets |  | 2 | — |
| Current\tliabilities |  | — | 4 |
| Total |  | $12 | $6 |

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

# G.		PROPERTY	AND	EQUIPMENT

|  |  | (In	Millions) |
| :--- | :--- | :--- |
|  |  | At\tDecember\t31 |
|  | 2012 | 2011 |
| Land\tand\timprovements | $150 | $183 |
| Buildings | 892 | \t 1,004 |
| Machinery\tand\tequipment | \t 2,189 | \t 2,159 |
|  | \t 3,231 | \t 3,346 |
| Less:\tAccumulated\tdepreciation | \t 1,802 | \t 1,779 |
| Total | $1,429 | $1,567 |

# G.		PROPERTY	AND	EQUIPMENT	(Concluded)

The	Company	leases	certain	equipment	and	plant	facilities	under	noncancellable	operating	leases.	Rental	expense	recorded	in	the	consolidated statements	of	operations	totaled	approximately	$96	million,	$103	million	and	$111	million	during	2012,	2011	and	2010,	respectively.	Future	minimum lease	payments	at	December	31,	2012	were	approximately	as	follows:	2013	–	$91	million;	2014	–	$43	million;	2015	–	$30	million;	2016	–	$20	million; 2017	–	$14	million;	and	2018	and	beyond	–	$62	million.

The	Company	leases	operating	facilities	from	certain	related	parties,	primarily	former	owners	(and	in	certain	cases,	current	management personnel)	of	companies	acquired.	The	Company	recorded	rental	expense	to	such	related	parties	of	approximately	$5	million,	$5	million	and	$6	million	in 2012,	2011	and	2010,	respectively.

As	a	result	of	its	business	rationalization	activities	over	the	last	several	years,	at	December	31,	2012	and	2011,	the	Company	was	holding	several facilities	for	sale,	within	the	Cabinets	and	Related	Products	segment	and	the	Other	Specialty	Products	segment.	At	December	31,	2012	and	2011,	the	net book	value	of	those	facilities	was	approximately	$14	million	and	$49	million,	respectively,	and	approximates	fair	value.	Fair	value	was	estimated	using	a market	approach,	considering	the	estimated	fair	values	for	the	other	comparable	buildings	in	the	areas	where	the	facilities	are	located,	Level	3	inputs.

In	the	fourth	quarter	of	2012,	the	Company	determined	that	the	estimated	fair	value	calculated	for	one	business	unit	in	the	Cabinets	and	Related Products	segment	and	one	business	unit	in	the	Plumbing	Products	segment	was	lower	than	the	net	book	value	of	each	of	those	business	units.	The Company	assessed	the	long-lived	assets	associated	with	these	business	units	and	determined	that	no	impairment	was	necessary	at	December	31,	2012.

# H.		GOODWILL	AND	OTHER	INTANGIBLE	ASSETS

The	changes	in	the	carrying	amount	of	goodwill	for	2012	and	2011,	by	segment,	were	as	follows,	in	millions:

|  | Gross<br>Goodwill	At<br>December	31,<br>2012 | Accumulated<br>Impairment<br>Losses | Net<br>Goodwill	At<br>December	31,<br>2012 |
| :--- | :--- | :--- | :--- |
| Cabinets\tand\tRelated\tProducts | $589 | $(408) | $181 |
| Plumbing\tProducts | 544 | (340) | 204 |
| Installation\tand\tOther\tServices | 1,806 | (762) | 1,044 |
| Decorative\tArchitectural\tProducts | 294 | (75) | 219 |
| Other\tSpecialty\tProducts | 980 | (734) | 246 |
| Total | $4,213 | $(2,319) | $1,894 |

|  | Gross |  | Net |  |  | Net |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Goodwill\tAt | Accumulated | Goodwill\tAt | Pre-tax |  | Goodwill\tAt |
|  | December\t31, | Impairment | December\t31, | Impairment |  | December\t31, |
|  | 2011 | Losses | 2011 | Charge | Other(C) | 2012 |
| Cabinets\tand\tRelated\tProducts | $589 | $(408) | $181 | $— | $— | $181 |
| Plumbing\tProducts | 541 | (340) | 201 | — | 3 | 204 |
| Installation\tand\tOther\tServices | 1,806 | (762) | 1,044 | — | — | 1,044 |
| Decorative\tArchitectural\tProducts | 294 | (75) | 219 | — | — | 219 |
| Other\tSpecialty\tProducts | 980 | (734) | 246 | — | — | 246 |
| Total | $4,210 | $(2,319) | $1,891 | $— | $3 | $1,894 |

# H.		GOODWILL	AND	OTHER	INTANGIBLE	ASSETS	(Continued)

|  | Gross |  | Net |  |  |  |  | Net |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Goodwill\tAt | Accumulated | Goodwill\tAt |  |  | Pre-tax |  | Goodwill\tAt |
|  | December\t31, | Impairment | December\t31, |  | Discontinued | Impairment |  | December\t31, |
|  | 2010 | Losses | 2010 | Additions(A) | Operations(B) | Charge | Other(C) | 2011 |
| Cabinets\tand\tRelated\tProducts | $587 | $(364) | $223 | $— | $— | $(44) | $2 | $181 |
| Plumbing\tProducts | 536 | (340) | 196 | 9 | — | — | (4) | 201 |
| Installation\tand\tOther\tServices | 1,819 | (762) | 1,057 | — | (13) | — | — | 1,044 |
| Decorative\tArchitectural\tProducts | 294 | — | 294 | — | — | (75) | — | 219 |
| Other\tSpecialty\tProducts | 980 | (367) | 613 | — | — | (367) | — | 246 |
| Total | $4,216 | $(1,833) | $2,383 | $9 | $(13) | $(486) | $(2) | $1,891 |

(A) Additions	include	acquisitions.

(B) During	2011,	the	Company	reclassified	the	goodwill	related	to	the	business	units	held	for	sale.	Subsequent	to	the	reclassification,	the	Company recognized	a	charge	for	those	business	units	expected	to	be	divested	at	a	loss;	the	charge	included	a	write-down	of	goodwill	of	$13	million.

(C) Other	principally	includes	the	effect	of	foreign	currency	translation	and	purchase	price	adjustments	related	to	prior-year	acquisitions.

In	the	fourth	quarters	of	2012	and	2011,	the	Company	completed	its	annual	impairment	testing	of	goodwill	and	other	indefinite-lived	intangible assets.	The	impairment	test	in	2012	indicated	there	was	no	impairment	of	goodwill	for	any	of	the	Company's	reporting	units.

The	impairment	test	in	2011	indicated	that	goodwill	recorded	for	certain	of	the	Company's	reporting	units	was	impaired.	The	Company	recognized the	non-cash,	pre-tax	impairment	charges,	in	continuing	operations,	for	goodwill	of	$486	million	($330	million,	after	tax)	for	2011.	In	2011,	the	pre-tax impairment	charge	in	the	Cabinets	and	Related	Products	segment	relates	to	the	European	ready-to-assemble	cabinet	manufacturer	and	reflects	the declining	demand	for	certain	products,	as	well	as	decreased	operating	margins.	The	pre-tax	impairment	charge	in	the	Decorative	Architectural	Products segment	relates	to	the	builders'	hardware	business	and	reflects	increasing	competitive	conditions	for	that	business.	The	pre-tax	impairment	charge	in	the Other	Specialty	Products	segment	relates	to	the	North	American	window	and	door	business	and	reflects	the	continuing	weak	level	of	new	home construction	activity	in	the	western	U.S.,	the	reduced	levels	of	repair	and	remodel	activity	and	the	expectation	that	recovery	in	these	segments	will	be modestly	slower	than	anticipated.	The	Company	then	assessed	the	long-lived	assets	associated	with	these	business	units	and	determined	no	impairment was	necessary	at	December	31,	2011.

Other	indefinite-lived	intangible	assets	were	$132	million	and	$174	million	at	December	31,	2012	and	2011,	respectively,	and	principally	included registered	trademarks.	In	2012	and	2011,	the	impairment	test	indicated	that	the	registered	trademark	for	a	North	American	business	unit	in	the	Other Specialty	Products	segment	and	the	registered	trademark	for	a	North	American	business	unit	in	the	Plumbing	Products	segment	(2011	only)	were impaired	due	to	changes	in	the	long-term	outlook	for	the	business	units.	The	Company	recognized	non-cash,	pre-tax	impairment	charges	for	other indefinite-lived	intangible	assets	of	$42	million	($27	million,	after	tax)	and	$8	million	($5	million,	after	tax)	in	2012	and	2011,	respectively.	In	2010,	the Company	recognized	non-cash,	pre-tax	impairment	charges	for	other	indefinite-lived	intangible	assets	of	$10	million	($6	million	after	tax)	related	to	the Installation	and	Other	Services	segment	($9	million	pre-tax)	and	the	Plumbing	Products	segment	($1	million	pre-tax).

# H.		GOODWILL	AND	OTHER	INTANGIBLE	ASSETS	(Concluded)

The	carrying	value	of	the	Company's	definite-lived	intangible	assets	was	$19	million	at	December	31,	2012	(net	of	accumulated	amortization	of	$57 million)	and	$22	million	at	December	31,	2011	(net	of	accumulated	amortization	of	$54	million)	and	principally	included	customer	relationships	and	non- compete	agreements,	with	a	weighted	average	amortization	period	of	6	years	in	both	2012	and	2011.	Amortization	expense	related	to	the	definite-lived intangible	assets	of	continuing	operations	was	$6	million	in	each	of	2012,	2011	and	2010.

# I.		OTHER	ASSETS

|  | At	December	31 | (In	Millions) |
| :--- | :--- | :--- |
|  | 2012 | 2011 |
| Financial\tinvestments\t(Note\tE) | $95 | $ 112 |
| In-store\tdisplays,\tnet | 35 | 34 |
| Debenture\texpense | 25 | 28 |
| Notes\treceivable | 2 | 1 |
| Other | 27 | 34 |
| Total | $184 | $ 209 |

In-store	displays	are	amortized	using	the	straight-line	method	over	the	expected	useful	life	of	three	to	five	years;	the	Company	recognized amortization	expense	related	to	in-store	displays	of	$21	million,	$24	million	and	$33	million	in	2012,	2011	and	2010,	respectively.	Cash	spent	for	displays was	$23	million,	$17	million	and	$32	million	in	2012,	2011	and	2010,	respectively.

# J.		ACCRUED	LIABILITIES

|  | 2012 | (In	Millions)<br>At	December	31<br>2011 |
| :--- | :--- | :--- |
| Notes\tand\tdebentures: |  |  |
| 5.875%,\tdue\tJuly\t15,\t2012 | $— | $791 |
| 7.125%,\tdue\tAug.\t15,\t2013 | 200 | 200 |
| \t\t\t\t4.8%,\tdue\tJune\t15,\t2015 | 500 | 500 |
| 6.125%,\tdue\tOct.\t3,\t2016 | \t 1,000 | \t 1,000 |
| \t\t5.85%,\tdue\tMar.\t15,\t2017 | 300 | 300 |
| 6.625%,\tdue\tApr.\t15,\t2018 | 114 | 114 |
| 7.125%,\tdue\tMar.\t15,\t2020 | 500 | 500 |
| \t\t5.95%,\tdue\tMarch\t15,\t2022 | 400 | — |
| \t\t7.75%,\tdue\tAug.\t1,\t2029 | 296 | 296 |
| \t\t\t\t6.5%,\tdue\tAug.\t15,\t2032 | 300 | 300 |
| Other | 18 | 24 |
|  | \t 3,628 | \t 4,025 |
| Less:\tCurrent\tportion | 206 | 803 |
| Total\tLong-term\tdebt | $3,422 | $3,222 |

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	the	Company's	option.

On	March	5,	2012,	the	Company	issued	$400	million	of	5.95%	Notes	("the	Notes")	due	March	15,	2022.	Including	the	interest	rate	swap amortization,	the	effective	interest	rate	for	the	Notes	is	approximately	6.5%,	see	Note	F.	The	Notes	are	senior	indebtedness	and	are	redeemable	at	the Company's	option.

In	January	2012,	the	Company	repurchased	$46	million	of	5.875%	Notes	due	July	15,	2012	in	open-market	transactions;	the	Company	paid	a premium	of	$1	million	for	the	repurchase.	In	July	2012,	the	Company	retired	all	of	its	$745	million	of	5.875%	Notes	on	the	scheduled	retirement	date.

On	June	21,	2010,	the	Company	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	January	10,	2014.	On	February	11,	2011,	the	Company	entered	into	an	amendment	(deemed	to	be	effective	and applicable	as	of	December	31,	2010)	of	the	Credit	Agreement	with	its	bank	group	(the	"Amendment").

On	February	13,	2012,	the	Company	entered	into	another	amendment	(deemed	to	be	effective	and	applicable	as	of	December	31,	2011)	of	the Credit	Agreement	(the	"Second	Amendment").	The	Credit	Agreement	contains	financial	covenants	requiring	the	Company	to	maintain	a	maximum	debt	to total	adjusted	capitalization	ratio	of	65	percent.	The	Second	Amendment	provides	for	the	add-back	to	shareholders'	equity	in	the	Company's	debt	to capitalization	covenant	of	(i)	certain	non-cash	charges	(including	impairment	charges	for	financial	investments	and	goodwill	and	other	intangible	assets) and	(ii)	changes	to	the	valuation	allowance	on	the	Company's	deferred	tax	assets	included	in	income	tax	expense.	The	Second	Amendment	also	permits the	Company	to	add	back,	if	incurred,	up	to	$250	million	in	the	aggregate	of	future	non-cash	charges	subsequent	to	December	31,	2011.	The	Second Amendment	revised	the	permitted	ratio	of	consolidated	EBITDA	to	consolidated	interest	expense	to	2.25	to	1.00	through	December	31,	2012,	increasing to	2.50	to	1.00	with	respect	to	each	quarter	thereafter.

# K.		DEBT	(Concluded)

The	Credit	Agreement	provides	for	an	unsecured	revolving	credit	facility	available	to	the	Company	and	one	of	its	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.	The Company	can	also	borrow	swingline	loans	up	to	$150	million	and	obtain	Letters	of	Credit	of	up	to	$250	million.	Any	outstanding	Letters	of	Credit	reduce the	Company's	borrowing	capacity.	At	December	31,	2012,	the	Company	had	$78	million	of	outstanding	and	unused	Letters	of	Credit,	reducing	the Company's	borrowing	capacity	by	such	amount.

Revolving	credit	loans	bear	interest	under	the	Credit	Agreement,	at	the	Company's	option:	at	(A)	a	rate	per	annum	equal	to	the	greatest	of	(i)	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	the then-applicable	corporate	credit	ratings	of	the	Company;	or	(B)	LIBOR	plus	an	applicable	margin	based	upon	the	then-applicable	corporate	credit	ratings of	the	Company.	The	foreign	currency	revolving	credit	loans	bear	interest	at	a	rate	equal	to	LIBOR	plus	an	applicable	margin	based	upon	the	then- applicable	corporate	credit	ratings	of	the	Company.

Based	on	the	limitations	of	the	debt	to	total	capitalization	covenant,	at	December	31,	2012	the	Company	had	additional	borrowing	capacity,	subject to	availability,	of	up	to	$873	million.	Additionally,	at	December	31,	2012,	the	Company	could	absorb	a	reduction	to	shareholders'	equity	of	approximately $470	million	and	remain	in	compliance	with	the	debt	to	total	capitalization	covenant.

In	order	to	borrow	under	the	Credit	Agreement,	there	must	not	be	any	default	in	the	Company's	covenants	in	the	Credit	Agreement	(i.e.,	in	addition to	the	two	financial	covenants,	principally	limitations	on	subsidiary	debt,	negative	pledge	restrictions,	legal	compliance	requirements	and	maintenance	of properties	and	insurance)	and	the	Company's	representations	and	warranties	in	the	Credit	Agreement	must	be	true	in	all	material	respects	on	the	date	of borrowing	(i.e.,	principally	no	material	adverse	change	or	litigation	likely	to	result	in	a	material	adverse	change,	since	December	31,	2009,	in	each	case, no	material	ERISA	or	environmental	non-compliance	and	no	material	tax	deficiency).

At	December	31,	2012	and	2011,	the	Company	was	in	compliance	with	all	covenants	and	had	no	borrowings	under	the	Credit	Agreement.

# L.		STOCK-BASED	COMPENSATION

The	Company's	2005	Long	Term	Stock	Incentive	Plan	(the	"2005	Plan")	provides	for	the	issuance	of	stock-based	incentives	in	various	forms	to employees	and	non-employee	Directors	of	the	Company.	At	December	31,	2012,	outstanding	stock-based	incentives	were	in	the	form	of	long-term	stock awards,	stock	options,	phantom	stock	awards	and	stock	appreciation	rights.

# L.		STOCK-BASED	COMPENSATION	(Continued)

Pre-tax	compensation	expense	(income)	and	the	income	tax	benefit	related	to	these	stock-based	incentives	were	as	follows,	in	millions:

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Long-term\tstock\tawards | $35 | $39 | $37 |
| Stock\toptions | \t 15 | \t 21 | \t 22 |
| Phantom\tstock\tawards\tand\tstock\tappreciation\trights | \t 11 | 1 | 3 |
| Total | $61 | $61 | $62 |
| Income\ttax\tbenefit\t(37\tpercent\ttax\trate\t–\tbefore\tvaluation\tallowance) | $23 | $23 | $23 |

At	December	31,	2012,	a	total	of	10,718,100	shares	of	Company	common	stock	were	available	under	the	2005	Plan	for	the	granting	of	stock options	and	other	long-term	stock	incentive	awards.

Long-Term	Stock	Awards.				Long-term	stock	awards	are	granted	to	key	employees	and	non-employee	Directors	of	the	Company	and	do	not cause	net	share	dilution	inasmuch	as	the	Company	continues	the	practice	of	repurchasing	and	retiring	an	equal	number	of	shares	on	the	open	market.

The	Company's	long-term	stock	award	activity	was	as	follows,	shares	in	millions:

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Unvested\tstock\taward\tshares\tat\tJanuary\t1 | \t 10 | \t 10 | 9 |
| Weighted\taverage\tgrant\tdate\tfair\tvalue | $17 | $19 | $21 |
| Stock\taward\tshares\tgranted | 1 | 2 | 3 |
| Weighted\taverage\tgrant\tdate\tfair\tvalue | $12 | $13 | $14 |
| Stock\taward\tshares\tvested | 2 | 2 | 2 |
| Weighted\taverage\tgrant\tdate\tfair\tvalue | $18 | $20 | $23 |
| Stock\taward\tshares\tforfeited | 1 | \t — | \t — |
| Weighted\taverage\tgrant\tdate\tfair\tvalue | $17 | $18 | $20 |
| Unvested\tstock\taward\tshares\tat\tDecember\t31 | 8 | \t 10 | \t 10 |
| Weighted\taverage\tgrant\tdate\tfair\tvalue | $16 | $17 | $19 |

At	December	31,	2012,	2011	and	2010,	there	was	$72	million,	$107	million	and	$127	million,	respectively,	of	unrecognized	compensation	expense related	to	unvested	stock	awards;	such	awards	had	a	weighted	average	remaining	vesting	period	of	four	years	for	2012,	four	years	for	2011	and	five years	for	2010.

The	total	market	value	(at	the	vesting	date)	of	stock	award	shares	which	vested	during	2012,	2011	and	2010	was	$27	million,	$28	million	and	$22 million,	respectively.

Stock	Options.				Stock	options	are	granted	to	key	employees	of	the	Company.	The	exercise	price	equals	the	market	price	of	the	Company's 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.	The	2005	Plan	does	not	permit	the	granting	of	restoration	stock	options,	except	for restoration	options	resulting	from	options	previously	granted	under	the	1991	Plan.	Restoration	stock	options	become	exercisable	six	months	from	the date	of	grant.

The	Company	granted	1,080,750	of	stock	option	shares,	including	restoration	stock	option	shares,	during	2012	with	a	grant	date	exercise	price	of approximately	$12	per	share.	During	2012,	5,894,710	stock	option	shares	were	forfeited	(including	options	that	expired	unexercised).

The	Company's	stock	option	activity	was	as	follows,	shares	in	millions:

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Option\tshares\toutstanding,\tJanuary\t1 | 36 | 37 | 36 |
| Weighted\taverage\texercise\tprice | $21 | $21 | $23 |
| Option\tshares\tgranted,\tincluding\trestoration\toptions | 1 | 2 | 5 |
| Weighted\taverage\texercise\tprice | $12 | $13 | $14 |
| Option\tshares\texercised | 1 | — | — |
| Aggregate\tintrinsic\tvalue\ton\tdate\tof\texercise\t(A) | $5\tmillion | $1\tmillion | $1\tmillion |
| Weighted\taverage\texercise\tprice | $10 | $8 | $8 |
| Option\tshares\tforfeited | 6 | 3 | 4 |
| Weighted\taverage\texercise\tprice | $19 | $22 | $23 |
| Option\tshares\toutstanding,\tDecember\t31 | 30 | 36 | 37 |
| Weighted\taverage\texercise\tprice | $21 | $21 | $21 |
| Weighted\taverage\tremaining\toption\tterm\t(in\tyears) | 5 | 5 | 6 |
| Option\tshares\tvested\tand\texpected\tto\tvest,\tDecember\t31 | 30 | 36 | 37 |
| Weighted\taverage\texercise\tprice | $21 | $21 | $22 |
| Aggregate\tintrinsic\tvalue\t(A) | $ 55\tmillion | $ 12\tmillion | $23\tmillion |
| Weighted\taverage\tremaining\toption\tterm\t(in\tyears) | 5 | 5 | 6 |
| Option\tshares\texercisable\t(vested),\tDecember\t31 | 23 | 24 | 22 |
| Weighted\taverage\texercise\tprice | $24 | $25 | $25 |
| Aggregate\tintrinsic\tvalue\t(A) | $ 22\tmillion | $4\tmillion | $4\tmillion |
| Weighted\taverage\tremaining\toption\tterm\t(in\tyears) | 4 | 4 | 4 |

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

At	December	31,	2012,	2011	and	2010,	there	was	$15	million,	$33	million	and	$45	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	two	years	in	2012	and	three	years	in	2011	and	2010.

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,	was	as	follows:

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Weighted\taverage\tgrant\tdate\tfair\tvalue | $4.44 | $5.07 | $5.30 |
| Risk-free\tinterest\trate | 1.09% | 2.69% | 2.76% |
| Dividend\tyield | 2.57% | 2.35% | 2.17% |
| Volatility\tfactor | 50.97% | 49.03% | 46.03% |
| Expected\toption\tlife | \t 6\tyears | \t 6\tyears | \t 6\tyears |

# L.		STOCK-BASED	COMPENSATION	(Concluded)

The	following	table	summarizes	information	for	stock	option	shares	outstanding	and	exercisable	at	December	31,	2012,	shares	in	millions:

|  |  | Average | Weighted |  | Weighted |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | Remaining | Average |  | Average |
| Range\tof\nPrices | Number\tof\nShares | Option\nTerm | Exercise\nPrice | Number\tof\nShares | Exercise\nPrice |
| $8-23 | 15 | \t6\tYears | $14 | 8 | $15 |
| $24-28 | 6 | \t2\tYears | $27 | 6 | $27 |
| $29-32 | 9 | \t3\tYears | $30 | 9 | $30 |
| $33-38 | \t\t— | \t3\tYears | $34 | \t\t— | $34 |
| $8-38 | 30 | \t5\tYears | $21 | 23 | $24 |

Phantom	Stock	Awards	and	Stock	Appreciation	Rights	("SARs").				The	Company	grants	phantom	stock	awards	and	SARs	to	certain	non-U.S. employees.

Phantom	stock	awards	are	linked	to	the	value	of	the	Company's	common	stock	on	the	date	of	grant	and	are	settled	in	cash	upon	vesting,	typically over	5	to	10	years.	The	Company	accounts	for	phantom	stock	awards	as	liability-based	awards;	the	compensation	expense	is	initially	measured	as	the market	price	of	the	Company's	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.	The	Company	recognized	expense	of	$7	million,	$2	million	and $2	million	related	to	the	valuation	of	phantom	stock	awards	for	2012,	2011	and	2010,	respectively.	In	2012,	2011	and	2010,	the	Company	granted 162,310	shares,	349,550	shares	and	299,650	shares,	respectively,	of	phantom	stock	awards	with	an	aggregate	fair	value	of	$2	million,	$4	million	and	$4 million,	respectively,	and	paid	$3	million,	$2	million	and	$1	million	of	cash	in	2012,	2011	and	2010,	respectively,	to	settle	phantom	stock	awards.

SARs	are	linked	to	the	value	of	the	Company's	common	stock	on	the	date	of	grant	and	are	settled	in	cash	upon	exercise.	The	Company	accounts 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. The	Company	recognized	expense	(income)	of	$4	million,	$(1)	million	and	$1	million	related	to	the	valuation	of	SARs	for	2012,	2011	and	2010, respectively.	During	2012	and	2011,	the	Company	did	not	grant	any	SARs.	During	2010,	the	Company	granted	SARs	for	429,300	shares,	with	an aggregate	fair	value	of	$2	million	in	2010.

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

|  | 2012 | 2011 | 2012 | 2011 |
| :--- | :--- | :--- | :--- | :--- |
| Accrued\tcompensation\tcost\tliability | $11 | $7 | $6 | $3 |
| Unrecognized\tcompensation\tcost | $5 | $4 | $1 | $1 |
| Equivalent\tcommon\tshares | 1 | 1 | 2 | 2 |

# M.		EMPLOYEE	RETIREMENT	PLANS

The	Company	sponsors	qualified	defined-benefit	and	defined-contribution	retirement	plans	for	most	of	its	employees.	In	addition	to	the	Company's qualified	defined-benefit	pension	plans,	the	Company	has	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.	Aggregate	charges	to	earnings	under	the	Company's	defined-benefit	and	defined-contribution	retirement	plans	were	$36	million	and	$43 million	in	2012,	$34	million	and	$31	million	in	2011	and	$34	million	and	$47	million	in	2010,	respectively.

In	addition,	the	Company	participates	in	20	regional	multi-employer	pension	plans,	principally	related	to	building	trades;	none	of	the	plans	are considered	significant.	The	aggregate	expense	recognized	through	contributions	by	the	Company	to	these	plans	was	approximately	$4	million,	$3	million and	$3	million	in	2012,	2011	and	2010,	respectively.

In	March	2009,	based	on	management's	recommendation,	the	Board	of	Directors	approved	a	plan	to	freeze	all	future	benefit	accruals	under substantially	all	of	the	Company's	domestic	qualified	and	non-qualified	defined-benefit	pension	plans.	The	freeze	was	effective	January	1,	2010.

Changes	in	the	projected	benefit	obligation	and	fair	value	of	plan	assets,	and	the	funded	status	of	the	Company's	defined-benefit	pension	plans were	as	follows,	in	millions:

|  | Qualified | Non-Qualified | Qualified | Non-Qualified |
| :--- | :--- | :--- | :--- | :--- |
| Changes\tin\tprojected\tbenefit\tobligation: |  |  |  |  |
| Projected\tbenefit\tobligation\tat\tJanuary\t1 | $943 | $174 | $868 | $163 |
| Service\tcost | 2 | — | 2 | — |
| Interest\tcost | 42 | 7 | 44 | 8 |
| Actuarial\tloss\t(gain),\tnet | 100 | 11 | 70 | 13 |
| Foreign\tcurrency\texchange | 9 | — | (2) | — |
| Benefit\tpayments | (40) | (11) | (39) | (10) |
| Projected\tbenefit\tobligation\tat\tDecember\t31 | $1,056 | $181 | $943 | $174 |
| Changes\tin\tfair\tvalue\tof\tplan\tassets: |  |  |  |  |
| Fair\tvalue\tof\tplan\tassets\tat\tJanuary\t1 | $504 | $— | $509 | $— |
| Actual\treturn\ton\tplan\tassets | 75 | — | (1) | — |
| Foreign\tcurrency\texchange | 4 | — | — | — |
| Company\tcontributions | 55 | 11 | 38 | 10 |
| Expenses,\tother | (4) | — | (3) | — |
| Benefit\tpayments | (40) | (11) | (39) | (10) |
| Fair\tvalue\tof\tplan\tassets\tat\tDecember\t31 | $594 | $— | $504 | $— |
| Funded\tstatus\tat\tDecember\t31: | $(462) | $(181) | $(439) | $(174) |

# M.		EMPLOYEE	RETIREMENT	PLANS	(Continued)

Amounts	in	the	Company's	consolidated	balance	sheets	were	as	follows,	in	millions:

|  | At	December	31,	2012 |  | At	December	31,	2011 |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Qualified | Non-Qualified | Qualified | Non-Qualified |
| Accrued\tliabilities | $(3) | $(12) | $(3) | $(12) |
| Deferred\tincome\ttaxes\tand\tother | (459) | (169) | (436) | (162) |
| Total\tnet\tliability | $(462) | $(181) | $(439) | $(174) |

Amounts	in	accumulated	other	comprehensive	income	before	income	taxes	were	as	follows,	in	millions:

|  | At	December	31,	2012 |  | At	December	31,	2011 |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Qualified | Non-Qualified | Qualified | Non-Qualified |
| Net\tloss | $467 | $53 | $424 | $43 |
| Net\ttransition\tobligation | 1 | — | 1 | — |
| Net\tprior\tservice\tcost | 2 | — | (1) | — |
| Total | $470 | $53 | $424 | $43 |

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

|  | Qualified | Non-Qualified | Qualified | Non-Qualified |
| :--- | :--- | :--- | :--- | :--- |
| Projected\tbenefit\tobligation | $ 1,056 | $181 | $943 | $174 |
| Accumulated\tbenefit\tobligation | $ 1,054 | $181 | $941 | $174 |
| Fair\tvalue\tof\tplan\tassets | $594 | $— | $504 | $— |

The	projected	benefit	obligation	was	in	excess	of	plan	assets	for	all	of	the	Company's	qualified	defined-benefit	pension	plans	at	December	31, 2012	and	2011.

Net	periodic	pension	cost	for	the	Company's	defined-benefit	pension	plans	was	as	follows,	in	millions:

|  | Qualified | Non-<br>Qualified | Qualified | Non-<br>Qualified | Qualified | Non-<br>Qualified |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Service\tcost | $2 | $— | $2 | $— | $3 | $— |
| Interest\tcost | 42 | 7 | 44 | 8 | 45 | 9 |
| Expected\treturn\ton\tplan\tassets | (31) | — | (33) | — | (34) | — |
| Recognized\tprior\tservice\tcost | — | — | — | — | (1) | — |
| Recognized\tnet\tloss | 14 | 2 | 10 | 1 | 10 | — |
| Net\tperiodic\tpension\tcost | $27 | $9 | $23 | $9 | $23 | $9 |

The	Company	expects	to	recognize	$18	million	of	pre-tax	net	loss	from	accumulated	other	comprehensive	income	into	net	periodic	pension	cost	in 2013	related	to	its	defined-benefit	pension	plans.

Plan	Assets.				The	Company's	qualified	defined-benefit	pension	plan	weighted	average	asset	allocation,	which	is	based	upon	fair	value,	was	as

# follows:

|  | At	December	31 |  |
| :--- | :--- | :--- |
|  | 2012 | 2011 |
| Equity\tsecurities | 44% | 44% |
| Debt\tsecurities | 41% | 39% |
| Other | 15% | 17% |
| Total | \t100% | \t 100% |

Plan	assets	included	600,000	and	1.2	million	shares	of	Company	common	stock	valued	at	$10	million	and	$12	million	at	December	31,	2012	and 2011,	respectively.

The	Company's	qualified	defined-benefit	pension	plans	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,	2012.

Common	and	Preferred	Stocks	and	Short-Term	and	Other	Investments: 	Valued	at	the	closing	price	reported	on	the	active	market	on	which	the individual	securities	are	traded,	or	based	on	the	active	market	for	similar	securities.	For	certain	Short-Term	and	Other	Investments,	there	is	no	active trading	market	and	they	are	for	the	most	part	illiquid.	Due	to	the	significant	unobservable	inputs,	the	fair	value	measurements	used	to	estimate	fair	value are	Level	3	inputs.

Private	Equity	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	for	the	most	part	illiquid.	Due	to	the	significant unobservable	inputs,	the	fair	value	measurements	used	to	estimate	fair	value	are	a	Level	3	input.

Corporate	Debt	Securities:	Valued	based	on	the	active	market	for	similar	securities	or	on	estimated	fair	value	based	on	a	model	for	similar securities.

Government	and	Other	Debt	Securities:	Valued	based	on	either	the	closing	price	reported	on	the	active	market	on	which	the	individual	securities are	traded,	the	market	for	similar	securities	or	on	estimated	fair	value.

Common	Collective	Trust	Fund:	Valued	based	on	a	unit	value	basis,	which	approximates	fair	value	as	of	December	31,	2012	and	2011, respectively.	Such	basis	is	determined	by	reference	to	the	respective	fund's	underlying	assets,	which	are	primarily	marketable	equity	and	fixed	income securities.	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	the	Company	believes	its	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,	2012	and	2011,	in	millions.

|  |  | Assets	at	Fair	Value	as	of	December	31,	2012 | Assets	at	Fair	Value	as	of	December	31,	2012 |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Level\t1 | Level\t2 | Level\t3 | Total |
| Common\tand\tPreferred\tStocks: |  |  |  |  |
| United\tStates | $127 | $61 | $— | $188 |
| International | 61 | 10 | — | 71 |
| Private\tEquity\tand\tHedge\tFunds |  |  |  |  |
| United\tStates | — | — | 52 | 52 |
| International | — | — | 11 | 11 |
| Corporate\tDebt\tSecurities: |  |  |  |  |
| United\tStates | — | 25 | — | 25 |
| International | — | 73 | — | 73 |
| Government\tand\tOther\tDebt\tSecurities: |  |  |  |  |
| United\tStates | 51 | 42 | — | 93 |
| International | 24 | 29 | — | 53 |
| Common\tCollective\tTrust\tFund—United\tStates | — | 12 | — | 12 |
| Short-Term\tand\tOther\tInvestments |  |  |  |  |
| United\tStates | 1 | — | — | 1 |
| International | — | — | 15 | 15 |
| Total\tAssets\tat\tFair\tValue | $264 | $252 | $78 | $594 |

|  |  | Assets	at	Fair	Value	as	of	December	31,	2011 | Assets	at	Fair	Value	as	of	December	31,	2011 |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Level\t1 | Level\t2 | Level\t3 | Total |
| Common\tand\tPreferred\tStocks: |  |  |  |  |
| United\tStates | $119 | $38 | $— | $157 |
| International | 56 | 9 | — | 65 |
| Private\tEquity\tand\tHedge\tFunds |  |  |  |  |
| United\tStates | — | — | 52 | 52 |
| International | — | — | 7 | 7 |
| Corporate\tDebt\tSecurities: |  |  |  |  |
| United\tStates | — | 15 | — | 15 |
| International | — | 55 | — | 55 |
| Government\tand\tOther\tDebt\tSecurities: |  |  |  |  |
| United\tStates | 46 | 31 | — | 77 |
| International | 24 | 29 | — | 53 |
| Common\tCollective\tTrust\tFund—United\tStates | — | 8 | — | 8 |
| Short-Term\tand\tOther\tInvestments |  |  |  |  |
| United\tStates | 2 | — | — | 2 |
| International | — | — | 13 | 13 |
| Total\tAssets\tat\tFair\tValue | $247 | $185 | $72 | $504 |

The	table	below	sets	forth	a	summary	of	changes	in	the	fair	value	of	the	qualified	defined-benefit	pension	plan	level	3	assets,	in	millions.

|  | Year	Ended<br>December	31,	2012 | Year	Ended<br>December	31,	2011 |
| :--- | :--- | :--- |
| Fair\tValue,\tJanuary\t1 | $72 | $73 |
| Purchases | 9 | 10 |
| Sales | (8) | (12) |
| Transfers\tfrom\tLevel\t2\tto\tLevel\t3 | — | 2 |
| Unrealized\tgains\t(losses) | 5 | (1) |
| Fair\tValue,\tDecember\t31 | $78 | $72 |

Assumptions.				Major	assumptions	used	in	accounting	for	the	Company's	defined-benefit	pension	plans	were	as	follows:

|  |  | December	31 |  |
| :--- | :--- | :--- | :--- |
|  | 2012 | 2011 | 2010 |
| Discount\trate\tfor\tobligations | 3.80% | 4.40% | 5.30% |
| Expected\treturn\ton\tplan\tassets | 7.25% | 7.25% | 7.25% |
| Rate\tof\tcompensation\tincrease | —% | —% | 1.00% |
| Discount\trate\tfor\tnet\tperiodic\tpension\tcost | 4.40% | 5.30% | 5.80% |

The	discount	rate	for	obligations	for	2012	and	2011	was	based	upon	the	expected	duration	of	each	defined-benefit	pension	plan's	liabilities matched	to	the	December	31,	2012	and	2011	Towers	Watson	Rate	Link	Curve.	At	December	31,	2012,	such	rates	for	the	Company's	defined-benefit pension	plans	ranged	from	1.75	percent	to	4.50	percent,	with	the	most	significant	portion	of	the	liabilities	having	a	discount	rate	for	obligations	of	3.40 percent	or	higher.	At	December	31,	2011,	such	rates	for	the	Company's	defined-benefit	pension	plans	ranged	from	2.00	percent	to	5.50	percent,	with	the most	significant	portion	of	the	liabilities	having	a	discount	rate	for	obligations	of	4.20	percent	or	higher.	The	decline	in	the	weighted	average	discount	rate over	the	last	several	years	is	principally	the	result	of	lower	long-term	interest	rates	in	the	bond	markets.	The	weighted	average	discount	rates	were	also affected	by	the	freezing	of	all	future	benefit	accruals	for	substantially	all	of	the	Company's	domestic	qualified	and	non-qualified	defined-benefit	plans, which	shortened	the	period	of	future	payments.

For	2012	and	2011,	the	Company	determined	the	expected	long-term	rate	of	return	on	plan	assets	of	7.25	percent	based	upon	an	analysis	of expected	and	historical	rates	of	return	of	various	asset	classes	utilizing	the	current	and	long-term	target	asset	allocation	of	the	plan	assets.	The	projected asset	return	at	both	December	31,	2012	and	2011	also	considered	near	term	returns,	including	current	market	conditions	and	also	that	pension	assets are	long-term	in	nature.	The	actual	annual	rate	of	return	on	the	Company's	pension	plan	assets	was	6.9	percent	and	3.2	percent	for	the	10-year	periods ended	December	31,	2012	and	2011,	respectively.	Although	these	rates	of	return	are	less	than	the	Company's	current	expected	long-term	rate	of	return on	plan	assets,	the	Company	notes	that	the	10-year	period	ended	December	31,	2012	includes	one	significant	decline	in	the	equity	markets.	In	2012, actual	annual	rate	of	return	on	the	Company's	pension	plan	assets	was	17	percent.	Accordingly,	the	Company	believes	a	7.25	percent	expected	long- term	rate	of	return	is	reasonable.

The	investment	objectives	seek	to	minimize	the	volatility	of	the	value	of	the	Company's	plan	assets	relative	to	pension	liabilities	and	to	ensure	plan assets	are	sufficient	to	pay	plan	benefits.	In

2012	and	2011,	the	Company	achieved	its	targeted	asset	allocation:	45	percent	equities,	25	percent	fixed-income,	15	percent	global	assets	(combination of	equity	and	fixed-income)	and	15	percent	alternative	investments	(such	as	private	equity,	commodities	and	hedge	funds).	The	asset	allocation	of	the investment	portfolio	was	developed	with	the	objective	of	achieving	the	Company's	expected	rate	of	return	and	reducing	volatility	of	asset	returns,	and considered	the	freezing	of	future	benefits.	The	equity	portfolios	are	invested	in	individual	securities	or	funds	that	are	expected	to	mirror	broad	market returns	for	equity	securities.	The	fixed-income	portfolio	is	invested	in	corporate	bonds,	bond	index	funds	or	U.S.	Treasury	securities.	The	increased allocation	to	fixed-income	securities	partially	matches	the	bond-like	and	long-term	nature	of	the	pension	liabilities.	It	is	expected	that	the	alternative investments	would	have	a	higher	rate	of	return	than	the	targeted	overall	long-term	return	of	7.25	percent.	However,	these	investments	are	subject	to greater	volatility,	due	to	their	nature,	than	a	portfolio	of	equities	and	fixed-income	investments,	and	would	be	less	liquid	than	financial	instruments	that trade	on	public	markets.	This	portfolio	is	expected	to	yield	a	long-term	rate	of	return	of	7.25	percent.

The	fair	value	of	the	Company's	plan	assets	is	subject	to	risk	including	significant	concentrations	of	risk	in	the	Company's	plan	assets	related	to equity,	interest	rate	and	operating	risk.	In	order	to	ensure	plan	assets	are	sufficient	to	pay	benefits,	a	portion	of	plan	assets	is	allocated	to	equity investments	that	are	expected,	over	time,	to	earn	higher	returns	with	more	volatility	than	fixed-income	investments	which	more	closely	match	pension liabilities.	Within	equity,	risk	is	mitigated	by	targeting	a	portfolio	that	is	broadly	diversified	by	geography,	market	capitalization,	manager	mandate	size, investment	style	and	process.

In	order	to	minimize	asset	volatility	relative	to	the	liabilities,	a	portion	of	plan	assets	are	allocated	to	fixed-income	investments	that	are	exposed	to interest	rate	risk.	Rate	increases	generally	will	result	in	a	decline	in	fixed-income	assets,	while	reducing	the	present	value	of	the	liabilities.	Conversely, rate	decreases	will	increase	fixed	income	assets,	partially	offsetting	the	related	increase	in	the	liabilities.

Potential	events	or	circumstances	that	could	have	a	negative	effect	on	estimated	fair	value	include	the	risks	of	inadequate	diversification	and	other operating	risks.	To	mitigate	these	risks,	investments	are	diversified	across	and	within	asset	classes	in	support	of	investment	objectives.	Policies	and practices	to	address	operating	risks	include	ongoing	manager	oversight,	plan	and	asset	class	investment	guidelines	and	instructions	that	are communicated	to	managers,	and	periodic	compliance	and	audit	reviews	to	ensure	adherence	to	these	policies.	In	addition,	the	Company	periodically seeks	the	input	of	its	independent	advisor	to	ensure	the	investment	policy	is	appropriate.

Other.				The	Company	sponsors	certain	post-retirement	benefit	plans	that	provide	medical,	dental	and	life	insurance	coverage	for	eligible	retirees and	dependents	in	the	United	States	based	upon	age	and	length	of	service.	The	aggregate	present	value	of	the	unfunded	accumulated	post-retirement benefit	obligation	was	$12	million	and	$14	million	at	December	31,	2012	and	2011,	respectively.

Cash	Flows.				At	December	31,	2012,	the	Company	expected	to	contribute	approximately	$36	million	to	its	qualified	defined-benefit	pension	plans to	meet	ERISA	requirements	in	2013.	The	Company	also	expected	to	pay	benefits	of	$7	million	and	$12	million	to	participants	of	its	foreign	and	non- qualified	(domestic)	defined-benefit	pension	plans,	respectively,	in	2013.

# M.		EMPLOYEE	RETIREMENT	PLANS	(Concluded)

At	December	31,	2012,	the	benefits	expected	to	be	paid	in	each	of	the	next	five	years,	and	in	aggregate	for	the	five	years	thereafter,	relating	to	the Company's	defined-benefit	pension	plans,	were	as	follows,	in	millions:

|  | Qualified<br>Plans | Qualified<br>Plans |
| :--- | :--- | :--- |
| 2013 | $44 | $12 |
| 2014 | $45 | $12 |
| 2015 | $46 | $12 |
| 2016 | $47 | $12 |
| 2017 | $49 | $12 |
| 2018-2022 | $265 | $58 |

# N.		SHAREHOLDERS'	EQUITY

In	July	2007,	the	Company's	Board	of	Directors	authorized	the	repurchase	for	retirement	of	up	to	50	million	shares	of	the	Company's	common stock	in	open-market	transactions	or	otherwise.	At	December	31,	2012,	the	Company	had	remaining	authorization	to	repurchase	up	to	24	million	shares. During	2012,	the	Company	repurchased	and	retired	one	million	shares	of	Company	common	stock,	for	cash	aggregating	$8	million	to	offset	the	dilutive impact	of	the	2012	grant	of	one	million	shares	of	long-term	stock	awards.	The	Company	repurchased	and	retired	two	million	common	shares	in	2011	and three	million	common	shares	in	2010	for	cash	aggregating	$30	million	and	$45	million	in	2011	and	2010,	respectively.

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

|  | At	December	31 | At	December	31 |
| :--- | :--- | :--- |
|  | 2012 | 2011 |
| Cumulative\ttranslation\tadjustments | $ 501 | $ 482 |
| Unrealized\tloss\ton\tmarketable\tsecurities,\tnet | (12) | (12) |
| Unrealized\tloss\ton\tinterest\trate\tswaps | (21) | (23) |
| Unrecognized\tprior\tservice\tcost\tand\tnet\tloss,\tnet | (409) | (371) |
| Accumulated\tother\tcomprehensive\tincome | $59 | $76 |

The	unrealized	loss	on	marketable	securities,	net,	is	reported	net	of	income	tax	expense	of	$14	million	at	both	December	31,	2012	and	2011.	The unrecognized	prior	service	cost	and	net	loss,	net,	is	reported	net	of	income	tax	benefit	of	$109	million	and	$100	million	at	December	31,	2012	and	2011, respectively.

# O.		SEGMENT	INFORMATION

# The	Company's	reportable	segments	are	as	follows:

Cabinets	and	Related	Products	–	principally	includes	assembled	and	ready-to-assemble	kitchen	and	bath	cabinets;	home	office	workstations; entertainment	centers;	storage	products;	bookcases;	and	kitchen	utility	products.

# O.		SEGMENT	INFORMATION	(Continued)

Plumbing	Products	–	principally	includes	faucets;	plumbing	fittings	and	valves;	showerheads	and	hand	showers;	bathtubs	and	shower	enclosures; and	spas.

Installation	and	Other	Services	–	principally	includes	the	sale,	installation	and	distribution	of	insulation	and	other	building	products.

Decorative	Architectural	Products	–	principally	includes	paints	and	stains;	and	cabinet,	door,	window	and	other	hardware.

Other	Specialty	Products	–	principally	includes	windows,	window	frame	components	and	patio	doors;	staple	gun	tackers,	staples	and	other fastening	tools.

The	above	products	and	services	are	sold	to	the	home	improvement	and	new	home	construction	markets	through	mass	merchandisers,	hardware stores,	home	centers,	builders,	distributors	and	other	outlets	for	consumers	and	contractors.

The	Company's	operations	are	principally	located	in	North	America	and	Europe.	The	Company's	country	of	domicile	is	the	United	States	of America.

Corporate	assets	consist	primarily	of	real	property,	equipment,	cash	and	cash	investments	and	other	investments.

The	Company's	segments	are	based	upon	similarities	in	products	and	services	and	represent	the	aggregation	of	operating	units,	for	which	financial information	is	regularly	evaluated	by	the	Company's	corporate	operating	executives	in	determining	resource	allocation	and	assessing	performance	and	is periodically	reviewed	by	the	Board	of	Directors.	Accounting	policies	for	the	segments	are	the	same	as	those	for	the	Company.	The	Company	primarily evaluates	performance	based	upon	operating	profit	(loss)	and,	other	than	general	corporate	expense,	allocates	specific	corporate	overhead	to	each segment.	The	evaluation	of	segment	operating	profit	(loss)	also	excludes	the	charge	for	litigation	settlements,	net,	and	the	gain	on	sale	of	fixed	assets, net.

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

|  | 2012 | Net	Sales<br>(1)	(2)	(3)	(4)	(5)<br>2011 | 2010 | 2012 | Operating	Profit<br>(Loss)	(5)		(6)<br>2011 | 2010 | 2012 | Assets	at<br>December	31	(9)		(10)<br>2011 | 2010 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| The\tCompany's\toperations\tby\tsegment\twere: |  |  |  |  |  |  |  |  |  |
| Cabinets\tand\tRelated\tProducts | $1,189 | $1,231 | $1,464 | $(120) | $(206) | $(250) | $903 | $1,009 | $1,108 |
| Plumbing\tProducts | \t 2,955 | \t 2,913 | \t 2,692 | 307 | 322 | 331 | \t 2,012 | \t 1,959 | \t 1,866 |
| Installation\tand\tOther\tServices | \t 1,209 | \t 1,077 | \t 1,041 | (19) | (79) | (798) | \t 1,444 | \t 1,427 | \t 1,537 |
| Decorative\tArchitectural\tProducts | \t 1,818 | \t 1,670 | \t 1,693 | 329 | 196 | 345 | 799 | 770 | 851 |
| Other\tSpecialty\tProducts | 574 | 576 | 596 | (31) | (401) | 19 | 704 | 768 | \t 1,182 |
| Total | $7,745 | $7,467 | $7,486 | $ 466 | $(168) | $(353) | $5,862 | $5,933 | $6,544 |
| The\tCompany's\toperations\tby\tgeographic\tarea |  |  |  |  |  |  |  |  |  |
| were: |  |  |  |  |  |  |  |  |  |
| North\tAmerica | $6,046 | $5,669 | $5,823 | $ 360 | $(259) | $(507) | $4,363 | $4,441 | $5,063 |
| International,\tprincipally\tEurope | \t 1,699 | \t 1,798 | \t 1,663 | 106 | 91 | 154 | \t 1,499 | \t 1,492 | \t 1,481 |
| Total,\tas\tabove | $7,745 | $7,467 | $7,486 | 466 | (168) | (353) | \t 5,862 | \t 5,933 | \t 6,544 |
| General\tcorporate\texpense,\tnet\t(7) |  |  |  | (126) | (118) | (110) |  |  |  |
| Charge\tfor\tlitigation\tsettlements,\tnet\t(8) | Charge\tfor\tlitigation\tsettlements,\tnet\t(8) | Charge\tfor\tlitigation\tsettlements,\tnet\t(8) | Charge\tfor\tlitigation\tsettlements,\tnet\t(8) | (77) | (9) | — |  |  |  |
| Gain\tfrom\tsales\tof\tfixed\tassets,\tnet |  |  |  | 8 | — | — |  |  |  |
| Operating\tprofit\t(loss),\tas\treported | Operating\tprofit\t(loss),\tas\treported | Operating\tprofit\t(loss),\tas\treported | Operating\tprofit\t(loss),\tas\treported | 271 | (295) | (463) |  |  |  |
| Other\tincome\t(expense),\tnet |  |  |  | (229) | (177) | (278) |  |  |  |
| Income\t(loss)\tfrom\tcontinuing\toperations\tbefore\tincome\ttaxes | Income\t(loss)\tfrom\tcontinuing\toperations\tbefore\tincome\ttaxes | Income\t(loss)\tfrom\tcontinuing\toperations\tbefore\tincome\ttaxes | Income\t(loss)\tfrom\tcontinuing\toperations\tbefore\tincome\ttaxes | $42 | $(472) | $(741) |  |  |  |
| Corporate\tassets |  |  |  |  |  |  | \t 1,013 | \t 1,339 | \t 1,596 |
| Assets\theld\tfor\tsale | Assets\theld\tfor\tsale | Assets\theld\tfor\tsale | Assets\theld\tfor\tsale |  |  |  | — | 25 | — |
| Total\tassets |  |  |  |  |  |  | $6,875 | $7,297 | $8,140 |

|  | 2012 | Property	Additions	(5)<br>2011 | 2010 | 2012 | Depreciation	and<br>Amortization	(5)<br>2011 | 2010 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| The\tCompany's\toperations\tby\tsegment\twere: |  |  |  |  |  |  |
| Cabinets\tand\tRelated\tProducts | $17 | $26 | $34 | $68 | $78 | $112 |
| Plumbing\tProducts | 67 | 85 | 65 | 69 | 68 | 63 |
| Installation\tand\tOther\tServices | 11 | 9 | 6 | 30 | 32 | 33 |
| Decorative\tArchitectural\tProducts | 11 | 8 | 9 | 15 | 15 | 18 |
| Other\tSpecialty\tProducts | 11 | 17 | 18 | 21 | 48 | 26 |
|  | \t 117 | \t 145 | \t 132 | \t 203 | \t 241 | \t 252 |
| Unallocated\tamounts,\tprincipally\trelated\tto\tcorporate\tassets | 2 | 6 | 4 | 11 | 16 | 20 |
| Total | $119 | $151 | $136 | $214 | $257 | $272 |

(2) Excluded	from	net	sales	were	intra-company	sales	between	segments	of	approximately	two	percent	of	net	sales	in	each	of	2012,	2011	and	2010.

(3) Included	in	net	sales	were	sales	to	one	customer	of	$2,143	million,	$1,984	million	and	$1,993	million	in	2012,	2011	and	2010,	respectively.	Such net	sales	were	included	in	the	following	segments:	Cabinets	and	Related	Products,	Plumbing	Products,	Decorative	Architectural	Products	and Other	Specialty	Products.

(5) Net	sales,	operating	(loss)	profit,	property	additions	and	depreciation	and	amortization	expense	for	2012,	2011	and	2010	excluded	the	results	of businesses	reported	as	discontinued	operations	in	2012,	2011	and	2010.

(6) Included	in	segment	operating	profit	(loss)	for	2012	was	an	impairment	charge	for	other	intangible	assets	as	follows:	Other	Specialty	Products	– $42	million.	Included	in	segment	operating	(loss)	profit	for	2011	were	impairment	charges	for	goodwill	and	other	intangible	assets	as	follows: Cabinets	and	Related	Products	–	$44	million;	Plumbing	Products	–	$1	million;	Decorative	Architectural	Products	–	$75	million;	and	Other	Specialty Products	–	$374	million.	Included	in	segment	operating	(loss)	profit	for	2010	were	impairment	charges	for	goodwill	and	other	intangible	assets	as follows:	Plumbing	Products	–	$1	million;	and	Installation	and	Other	Services	–	$697	million.

(7) General	corporate	expense,	net	included	those	expenses	not	specifically	attributable	to	the	Company's	segments.

(8) The	charge	for	litigation	settlement,	net	in	2012	primarily	relates	to	a	business	in	the	Installation	and	Other	Services	segment	and	in	2011	relates	to business	units	in	the	Cabinets	and	Related	Products	and	the	Other	Specialty	Products	segments.

# O.		SEGMENT	INFORMATION	(Concluded)

(10) Segment	assets	for	2012	and	2011	excluded	the	assets	of	businesses	reported	as	discontinued	operations	in	the	respective	years.

# P.		SEVERANCE	COSTS

As	part	of	the	Company's	continuing	review	of	its	operations,	actions	were	taken	during	2012,	2011	and	2010	to	respond	to	market	conditions.	The Company	recorded	charges	related	to	severance	and	early	retirement	programs	of	$36	million,	$17	million	and	$14	million	for	the	years	ended December	31,	2012,	2011	and	2010,	respectively.	Such	charges	are	principally	reflected	in	the	statement	of	operations	in	selling,	general	and administrative	expenses	and	were	paid	when	incurred.

# Q.	OTHER	INCOME	(EXPENSE),	NET

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

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Income\tfrom\tcash\tand\tcash\tinvestments | $6 | $8 | $6 |
| Other\tinterest\tincome | 1 | 1 | 1 |
| Income\tfrom\tfinancial\tinvestments,\tnet\t(Note\tE) | \t 24 | \t 73 | 9 |
| Other\titems,\tnet | (4) | (5) | (9) |
| Total\tother,\tnet | $27 | $77 | $7 |

Other	items,	net,	included	realized	foreign	currency	transaction	losses	of	$2	million,	$5	million	and	$2	million	in	2012,	2011	and	2010,	respectively, as	well	as	other	miscellaneous	items.

# R.		INCOME	TAXES

|  | 2012 | 2011 | (In	Millions)<br>2010 |
| :--- | :--- | :--- | :--- |
| Income\t(loss)\tfrom\tcontinuing\toperations\tbefore\tincome\ttaxes: |  |  |  |
| U.S. | $(84) | $(575) | $(928) |
| Foreign | 126 | 103 | 187 |
|  | $42 | $(472) | $(741) |
| Income\ttax\texpense\t(benefit)\ton\tincome\t(loss)\tfrom\tcontinuing\toperations: |  |  |  |
| Currently\tpayable: |  |  |  |
| U.S.\tFederal | $— | $— | $(24) |
| State\tand\tlocal | (2) | (1) | 22 |
| Foreign | 51 | 63 | 59 |
| Deferred: |  |  |  |
| U.S.\tFederal | 31 | (103) | 190 |
| State\tand\tlocal | 7 | — | (7) |
| Foreign | (4) | (8) | — |
|  | $83 | $(49) | $ 240 |
| Deferred\ttax\tassets\tat\tDecember\t31: |  |  |  |
| Receivables | $14 | $14 |  |
| Inventories | 24 | 28 |  |
| Other\tassets,\tprincipally\tstock-based\tcompensation | 118 | 121 |  |
| Accrued\tliabilities | 156 | 141 |  |
| Long-term\tliabilities | 253 | 260 |  |
| Net\toperating\tloss\tcarryforward | 400 | 260 |  |
| Tax\tcredit\tcarryforward | 25 | 20 |  |
|  | 990 | 844 |  |
| Valuation\tallowance | (787) | (688) |  |
|  | 203 | 156 |  |
| Deferred\ttax\tliabilities\tat\tDecember\t31: |  |  |  |
| Property\tand\tequipment | 180 | 178 |  |
| Intangibles | 286 | 192 |  |
| Investment\tin\tforeign\tsubsidiaries | 8 | — |  |
| Other | 9 | 25 |  |
|  | 483 | 395 |  |
| Net\tdeferred\ttax\tliability\tat\tDecember\t31 | $ 280 | $ 239 |  |

At	December	31,	2012	and	2011,	the	net	deferred	tax	liability	consisted	of	net	short-term	deferred	tax	assets	included	in	prepaid	expenses	and other	of	$41	million	and	$11	million,	respectively,	and	net	long-term	deferred	tax	liabilities	included	in	deferred	income	taxes	and	other	of	$321	million	and $250	million,	respectively.

The	current	portion	of	the	state	and	local	income	tax	benefit	includes	a	$14	million	and	$10	million	tax	benefit	from	the	reversal	of	an	accrual	for uncertain	tax	positions	resulting	primarily	from	the	expiration	of	applicable	statutes	of	limitations	and	favorable	settlements	on	state	audits	in	2012	and

# R.		INCOME	TAXES	(Continued)

2011,	respectively.	The	deferred	portion	of	the	state	and	local	taxes	includes	a	$26	million	and	$31	million	non-cash	charge	to	income	tax	expense resulting	from	a	change	in	the	valuation	allowance	against	state	and	local	deferred	tax	assets	in	2012	and	2011,	respectively.

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

In	the	fourth	quarter	of	2010,	the	Company	recorded	a	$372	million	valuation	allowance	against	its	U.S.	Federal	deferred	tax	assets	as	a	non-cash charge	to	income	tax	expense.	In	reaching	this	conclusion,	the	Company	considered	the	weaker	retail	sales	of	certain	of	its	building	products	and	the slower	than	anticipated	recovery	in	the	U.S.	housing	market	which	led	to	U.S.	operating	losses	and	significant	U.S.	goodwill	impairment	charges,	that primarily	occurred	in	the	fourth	quarter	of	2010,	causing	the	Company	to	be	in	a	three-year	cumulative	U.S.	loss	position.

During	2012	and	2011,	objective	and	verifiable	negative	evidence,	such	as	U.S.	operating	losses	and	significant	impairment	charges	for	U.S. goodwill	in	2011	and	other	intangible	assets,	continued	to	outweigh	positive	evidence	necessary	to	reduce	the	valuation	allowance.	As	a	result,	the Company	recorded	increases	of	$65	million	and	$89	million	in	the	valuation	allowance	against	its	U.S.	Federal	deferred	tax	assets	as	a	non-cash	charge to	income	tax	expense	in	2012	and	2011,	respectively.

Recording	the	valuation	allowance	does	not	restrict	the	Company's	ability	to	utilize	the	future	deductions	and	net	operating	losses	associated	with the	deferred	tax	assets	assuming	taxable	income	is	recognized	in	future	periods.

A	rebound	in	the	U.S.	housing	market	from	the	recent	historic	lows	and	retail	sales	of	building	products	improving	from	their	current	levels	should have	a	positive	impact	on	the	Company's	operating	results	in	the	U.S.	A	return	to	sustained	profitability	in	the	U.S.	should	result	in	objective	positive evidence	thereby	warranting	the	potential	reversal	of	all	or	a	portion	of	the	valuation	allowance.

The	$203	million	and	$156	million	of	deferred	tax	assets	at	December	31,	2012	and	2011,	respectively,	for	which	there	is	no	valuation	allowance recorded,	is	anticipated	to	be	realized	through	the	future	reversal	of	existing	taxable	temporary	differences	recorded	as	deferred	tax	liabilities.

Of	the	deferred	tax	asset	related	to	the	net	operating	loss	and	tax	credit	carryforwards	at	December	31,	2012	$411	million	will	expire	between	2020 and	2032	and	$14	million	is	unlimited.	Of	the	deferred	tax	asset	related	to	the	net	operating	loss	and	tax	credit	carryforwards	at	December	31,	2011	$269 million	will	expire	between	2020	and	2031	and	$11	million	is	unlimited.

The	tax	benefit	from	certain	stock-based	compensation	is	not	recognized	as	a	deferred	tax	asset	until	the	tax	deduction	reduces	cash	taxes. Accordingly,	as	of	December	31,	2012,	the	Company	has

not	recorded	a	$27	million	deferred	tax	asset	on	additional	net	operating	losses	that,	when	realized,	will	be	recorded	to	paid-in	capital.

A	tax	provision	has	not	been	provided	at	December	31,	2012	for	U.S.	income	taxes	or	additional	foreign	withholding	taxes	on	approximately	$10 million	of	undistributed	earnings	of	certain	foreign	subsidiaries	that	are	considered	to	be	permanently	reinvested.	It	is	not	practicable	to	determine	the amount	of	deferred	tax	liability	on	such	earnings	as	the	actual	U.S.	tax	would	depend	on	income	tax	laws	and	circumstances	at	the	time	of	distribution.

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

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| U.S.\tFederal\tstatutory\ttax\trate\t–\texpense\t(benefit) | 35% | \t(35)% | \t(35)% |
| State\tand\tlocal\ttaxes,\tnet\tof\tU.S.\tFederal\ttax\tbenefit | 8 | \t — | 1 |
| (Lower)\thigher\ttaxes\ton\tforeign\tearnings | (9) | 1 | (1) |
| U.S.\tand\tforeign\ttaxes\ton\tdistributed\tand\tundistributed\tforeign\tearnings | 2 | \t — | \t — |
| Goodwill\tand\tother\tintangible\tassets\timpairment\tcharges\tproviding\tno\ttax\tbenefit | 3 | 6 | 18 |
| U.S.\tFederal\tvaluation\tallowance | \t154 | 19 | 50 |
| Other,\tnet | 5 | (1) | (1) |
| Effective\ttax\trate\t–\texpense\t(benefit) | \t198% | \t(10)% | 32% |

A	reconciliation	of	the	beginning	and	ending	liability	for	uncertain	tax	positions,	including	related	interest	and	penalties,	is	as	follows:

|  | Uncertain<br>Tax	Positions | Interest	and<br>Penalties | Total |
| :--- | :--- | :--- | :--- |
| Balance\tat\tJanuary\t1,\t2011 | $71 | $23 | $94 |
| Current\tyear\ttax\tpositions: |  |  |  |
| Additions | 6 |  | 6 |
| Reductions | (1) |  | (1) |
| Prior\tyear\ttax\tpositions: |  |  |  |
| Additions | 6 |  | 6 |
| Reductions | (1) |  | (1) |
| Settlements\twith\ttax\tauthorities | (4) | (2) | (6) |
| Lapse\tof\tapplicable\tstatute\tof\tlimitations | (16) |  | (16) |
| Interest\tand\tpenalties\trecognized\tin\tincome\ttax\texpense |  | (1) | (1) |
| Balance\tat\tDecember\t31,\t2011 | $61 | $20 | $81 |
| Current\tyear\ttax\tpositions: |  |  |  |
| Additions | 6 |  | 6 |
| Prior\tyear\ttax\tpositions: |  |  |  |
| Reductions | (4) |  | (4) |
| Settlements\twith\ttax\tauthorities | — |  | — |
| Lapse\tof\tapplicable\tstatute\tof\tlimitations | (12) |  | (12) |
| Interest\tand\tpenalties\trecognized\tin\tincome\ttax\texpense | — | (3) | (3) |
| Balance\tat\tDecember\t31,\t2012 | $51 | $17 | $68 |

If	recognized,	$34	million	and	$40	million	of	the	liability	for	uncertain	tax	positions	at	December	31,	2012	and	2011,	respectively,	net	of	any	U.S. Federal	tax	benefit,	would	impact	the	Company's	effective	tax	rate.

At	December	31,	2012	and	2011,	$74	and	$86	million	of	the	total	liability	for	uncertain	tax	positions,	including	related	interest	and	penalties,	is recorded	in	deferred	income	taxes	and	other,	$1	and	$1	million	is	recorded	in	accrued	liabilities	and	$7	and	$6	million	is	recorded	in	other	assets, respectively.

The	Company	files	income	tax	returns	in	the	U.S.	Federal	jurisdiction,	and	various	local,	state	and	foreign	jurisdictions.	The	Company	continues	to participate	in	the	Compliance	Assurance	Program	("CAP").	CAP	is	a	real-time	audit	of	the	U.S.	Federal	income	tax	return	that	allows	the	Internal Revenue	Service	("IRS"),	working	in	conjunction	with	the	Company,	to	determine	tax	return	compliance	with	the	U.S.	Federal	tax	law	prior	to	filing	the return.	This	program	provides	the	Company	with	greater	certainty	about	its	tax	liability	for	a	given	year	within	months,	rather	than	years,	of	filing	its annual	tax	return	and	greatly	reduces	the	need	for	recording	a	liability	for	U.S.	Federal	uncertain	tax	positions.	The	IRS	has	completed	their	examination of	the	Company's	consolidated	U.S.	Federal	tax	returns	through	2011.	With	few	exceptions,	the	Company	is	no	longer	subject	to	state	or	foreign	income tax	examinations	on	filed	returns	for	years	before	2000.

# R.		INCOME	TAXES	(Concluded)

As	a	result	of	tax	audit	closings,	settlements	and	the	expiration	of	applicable	statutes	of	limitations	in	various	jurisdictions	within	the	next	12	months, the	Company	anticipates	that	it	is	reasonably	possible	the	liability	for	uncertain	tax	positions	could	be	reduced	by	approximately	$6	million.

# S.		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:

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Numerator\t(basic\tand\tdiluted): |  |  |  |
| Loss\tfrom\tcontinuing\toperations | $(76) | $(465) | $(1,022) |
| Allocation\tto\tunvested\trestricted\tstock\tawards | (2) | (3) | (3) |
| Loss\tfrom\tcontinuing\toperations\tattributable\tto\tcommon\tshareholders | (78) | (468) | (1,025) |
| Loss\tfrom\tdiscontinued\toperations,\tnet | (38) | (110) | (21) |
| Net\tloss\tavailable\tto\tcommon\tshareholders | $(116) | $(578) | $(1,046) |
| Denominator: |  |  |  |
| Basic\tcommon\tshares\t(based\ton\tweighted\taverage) | 349 | 348 | 349 |
| Add: |  |  |  |
| Contingent\tcommon\tshares | — | — | — |
| Stock\toption\tdilution | — | — | — |
| Diluted\tcommon\tshares | 349 | 348 | 349 |

The	Company	follows	accounting	guidance	regarding	determining	whether	instruments	granted	in	share-based	payment	transactions	are participating	securities.	This	accounting	guidance	clarifies	that	share-based	payment	awards	that	entitle	their	holders	to	receive	non-forfeitable	dividends prior	to	vesting	should	be	considered	participating	securities.	The	Company	has	granted	restricted	stock	awards	that	contain	non-forfeitable	rights	to dividends	on	unvested	shares;	such	unvested	restricted	stock	awards	are	considered	participating	securities.	As	participating	securities,	the	unvested shares	are	required	to	be	included	in	the	calculation	of	the	Company's	basic	earnings	per	common	share,	using	the	"two-class	method."	The	two-class method	of	computing	earnings	per	common	share	is	an	allocation	method	that	calculates	earnings	per	share	for	each	class	of	common	stock	and participating	security	according	to	dividends	declared	and	participation	rights	in	undistributed	earnings.	For	the	years	ended	December	31,	2012,	2011 and	2010,	the	Company	allocated	dividends	to	the	unvested	restricted	stock	awards	(participating	securities).

At	December	31,	2011	and	2010,	the	Company	did	not	include	any	common	shares	related	to	the	Zero	Coupon	Convertible	Senior	Notes	("Notes") in	the	calculation	of	diluted	earnings	per	common	share,	as	the	price	of	the	Company's	common	stock	at	December	31,	2010	did	not	exceed	the equivalent	accreted	value	of	the	Notes.

Additionally,	30	million	common	shares,	36	million	common	shares	and	37	million	common	shares	for	2012,	2011	and	2010,	respectively,	related	to stock	options	were	excluded	from	the	computation	of	diluted	earnings	per	common	share	due	to	their	antidilutive	effect.

Common	shares	outstanding	included	on	the	Company's	balance	sheet	and	for	the	calculation	of	earnings	per	common	share	do	not	include unvested	stock	awards	(8	million	shares	and	10	million

# S.		EARNINGS	PER	COMMON	SHARE	(Concluded)

common	shares	at	December	31,	2012	and	2011,	respectively);	shares	outstanding	for	legal	requirements	included	all	common	shares	that	have	voting rights	(including	unvested	stock	awards).

# T.		OTHER	COMMITMENTS	AND	CONTINGENCIES

Litigation.				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,	construction	defect,	insurance	coverage, personnel	and	employment	disputes	and	other	matters,	including	class	actions.	We	believe	we	have	adequate	defenses	in	these	matters	and	that	the outcome	of	these	matters	is	not	likely	to	have	a	material	adverse	effect	on	us.	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.

In	July	2012,	the	Company	reached	a	settlement	agreement	related	to	the	Columbus	Drywall	litigation.	The	Company	and	its	insulation	installation companies	named	in	the	suit	agreed	to	pay	$75	million	in	return	for	dismissal	with	prejudice	and	full	release	of	all	claims.	The	Company	and	its	insulation installation	companies	continue	to	deny	that	the	challenged	conduct	was	unlawful	and	admit	no	wrongdoing	as	part	of	the	settlement.	A	settlement	was reached	to	eliminate	the	considerable	expense	and	uncertainty	of	this	lawsuit.	The	Company	recorded	the	settlement	expense	in	the	second	quarter	of 2012	and	the	amount	was	paid	in	the	fourth	quarter	of	2012.

Warranty.				At	the	time	of	sale,	the	Company	accrues	a	warranty	liability	for	the	estimated	cost	to	provide	products,	parts	or	services	to	repair	or replace	products	in	satisfaction	of	warranty	obligations.	During	the	third	quarter	of	2012,	a	business	in	the	Other	Specialty	Products	segment	recorded	a $12	million	increase	in	expected	future	warranty	claims	resulting	from	the	completion	of	an	analysis	prepared	by	the	Company	based	upon	its	periodic assessment	of	recent	business	unit	specific	operating	trends	including,	among	others,	home	ownership	demographics,	sales	volumes,	manufacturing quality,	an	analysis	of	recent	warranty	claim	activity	and	an	estimate	of	current	costs	to	service	anticipated	claims.

Changes	in	the	Company's	warranty	liability	were	as	follows,	in	millions:

|  | 2012 | 2011 |
| :--- | :--- | :--- |
| Balance\tat\tJanuary\t1 | $102 | $107 |
| Accruals\tfor\twarranties\tissued\tduring\tthe\tyear | 42 | 28 |
| Accruals\trelated\tto\tpre-existing\twarranties | 16 | 8 |
| Settlements\tmade\t(in\tcash\tor\tkind)\tduring\tthe\tyear | (38) | (38) |
| Other,\tnet\t(including\tcurrency\ttranslation) | (4) | (3) |
| Balance\tat\tDecember\t31 | $118 | $102 |

Investments.				With	respect	to	the	Company's	investments	in	private	equity	funds,	the	Company	had,	at	December	31,	2012,	commitments	to contribute	up	to	$19	million	of	additional	capital	to	such	funds	representing	the	Company's	aggregate	capital	commitment	to	such	funds	less	capital contributions	made	to	date.	The	Company	is	contractually	obligated	to	make	additional	capital	contributions	to	certain	of	its	private	equity	funds	upon receipt	of	a	capital	call	from	the	private	equity	fund.	The	Company	has	no	control	over	when	or	if	the	capital	calls	will	occur.	Capital	calls	are	funded 84

# T.		OTHER	COMMITMENTS	AND	CONTINGENCIES	(Concluded)

in	cash	and	generally	result	in	an	increase	in	the	carrying	value	of	the	Company's	investment	in	the	private	equity	fund	when	paid.

Other	Matters.				The	Company	enters	into	contracts,	which	include	reasonable	and	customary	indemnifications	that	are	standard	for	the industries	in	which	it	operates.	Such	indemnifications	include	customer	claims	against	builders	for	issues	relating	to	the	Company's	products	and workmanship.	In	conjunction	with	divestitures	and	other	transactions,	the	Company	occasionally	provides	reasonable	and	customary	indemnifications relating	to	various	items	including:	the	enforceability	of	trademarks;	legal	and	environmental	issues;	provisions	for	sales	returns;	and	asset	valuations. The	Company	has	never	had	to	pay	a	material	amount	related	to	these	indemnifications	and	evaluates	the	probability	that	amounts	may	be	incurred	and appropriately	records	an	estimated	liability	when	probable.

# U.		SUBSEQUENT	EVENT

In	early	February	2013,	the	Company	determined	that	its	Danish	ready-to-assemble	cabinet	business	was	no	longer	core	to	our	long-term	growth strategy	and,	accordingly	the	Company	embarked	on	a	plan	for	disposition.	This	business	unit	had	2012	sales	of	approximately	$250	million	and	an operating	loss	of	approximately	$30	million.	The	disposition	is	expected	to	be	completed	within	the	next	12	months.

# V.		INTERIM	FINANCIAL	INFORMATION	(UNAUDITED)

|  | Year | December	31 | September	30 | June	30 | March	31 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| 2012 |  |  |  |  |  |
| Net\tsales | $7,745 | $1,890 | $1,976 | $2,004 | $ 1,875 |
| Gross\tprofit | $1,951 | $446 | $500 | $520 | $485 |
| (Loss)\tincome\tfrom\tcontinuing\toperations | $(76) | $(79) | $22 | $(57) | $38 |
| Net\t(loss)\tincome | $(114) | $(87) | $15 | $(75) | $33 |
| (Loss)\tearnings\tper\tcommon\tshare: |  |  |  |  |  |
| Basic: |  |  |  |  |  |
| (Loss)\tincome\tfrom\tcontinuing\toperations | $(.22) | $(.23) | $.06 | $(.17) | $.11 |
| Net\t(loss)\tincome | $(.33) | $(.25) | $.04 | $(.22) | $.09 |
| Diluted: |  |  |  |  |  |
| (Loss)\tincome\tfrom\tcontinuing\toperations | $(.22) | $(.23) | $.06 | $(.17) | $.11 |
| Net\t(loss)\tincome | $(.33) | $(.25) | $.04 | $(.22) | $.09 |
| 2011 |  |  |  |  |  |
| Net\tsales | $7,467 | $1,738 | $1,978 | $1,998 | $ 1,753 |
| Gross\tprofit | $1,784 | $332 | $495 | $532 | $425 |
| (Loss)\tincome\tfrom\tcontinuing\toperations | $(465) | $(494) | $56 | $14 | $(41) |
| Net\t(loss)\tincome | $(575) | $(573) | $36 | $8 | $(46) |
| (Loss)\tearnings\tper\tcommon\tshare: |  |  |  |  |  |
| Basic: |  |  |  |  |  |
| (Loss)\tincome\tfrom\tcontinuing\toperations | $(1.34) | $(1.42) | $.16 | $.04 | $(.12) |
| Net\t(loss)\tincome | $(1.66) | $(1.65) | $.10 | $.02 | $(.13) |
| Diluted: |  |  |  |  |  |
| (Loss)\tincome\tfrom\tcontinuing\toperations | $(1.34) | $(1.42) | $.16 | $.04 | $(.12) |
| Net\t(loss)\tincome | $(1.66) | $(1.65) | $.10 | $.02 | $(.13) |

(Loss)	earnings	per	common	share	amounts	for	the	four	quarters	of	2012	and	2011	may	not	total	to	the	earnings	per	common	share	amounts	for the	years	ended	December	31,	2012	and	2011	due	to	the	allocation	of	income	to	unvested	stock	awards.

Fourth	quarter	2012	loss	from	continuing	operations	and	net	loss	include	non-cash	impairment	charges	for	other	intangible	assets	of	$27	million after	tax	($42	million	pre-tax).	Income	(loss)	from	continuing	operations	and	net	(loss)	income	include	after-tax	gains	from	financial	investments	of	$10 million	($16	million	pre-tax),	$1	million	($2	million	pre-tax)	and	$3	million	($4	million	pre-tax)	in	the	first,	third	and	fourth	quarters,	respectively.	Income (loss)	from	continuing	operations	and	net	(loss)	income	include	after-tax	charge	(income)	from	litigation	settlements	of	$(1)	million	($(2)	million	pre-tax), $75	million	($75	million	pre-tax),	$—	million	($1	million	pre-tax)	and	$2	million	($3	million	pre-tax)	in	the	first,	second,	third	and	fourth	quarters, respectively.

Fourth	quarter	2011	loss	from	continuing	operations	and	net	loss	include	non-cash	impairment	charges	for	goodwill	and	other	intangible	assets	of $335	million	after	tax	($494	million	pre-tax).	Income	(loss)	from	continuing	operations	and	net	(loss)	income	include	after-tax	gains	from	financial investments	of	$11	million	($17	million	pre-tax),	$21	million	($33	million	pre-tax),	$13	million	($19

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS	(Concluded)

# V.		INTERIM	FINANCIAL	INFORMATION	(UNAUDITED)	(Concluded)

million	pre-tax)	and	$3	million	($4	million	pre-tax)	in	the	first,	second,	third	and	fourth	quarters,	respectively.	Income	(loss)	from	continuing	operations	and net	(loss)	income	include	after-tax	charge	(income)	from	litigation	settlements	of	$3	million,	($5	million	pre-tax),	$—	million	($1	million	pre-tax)	and	$2 million	($3	million	pre-tax)	in	the	second,	third	and	fourth	quarters,	respectively.

# Item	9. Changes	in	and	Disagreements	with	Accountants	on	Accounting	and	Financial	Disclosure.

# Item	9A. Controls	and	Procedures.

(a)	Evaluation	of	Disclosure	Controls	and	Procedures.

The	Company,	with	the	participation	of	the	Chief	Executive	Officer	and	Chief	Financial	Officer,	conducted	an	evaluation	of	its	disclosure	controls and	procedures	as	required	by	Exchange	Act	Rules	13a-15(b)	and	15d-15(b)	as	of	December	31,	2012.	Based	on	this	evaluation,	the	Company's management,	including	the	Chief	Executive	Officer	and	Chief	Financial	Officer,	concluded	that	the	Company's	disclosure	controls	and	procedures	were effective.

(b)	Management's	Report	on	Internal	Control	over	Financial	Reporting.

Management's	report	on	the	Company's	internal	control	over	financial	reporting	(as	such	term	is	defined	in	Rules	13a-15(f)	and	15d-15(f)	under the	Exchange	Act)	is	included	in	this	Report	under	Item	8.	Financial	Statements	and	Supplementary	Data,	under	the	heading,	"Management's	Report	on Internal	Control	over	Financial	Reporting"	and	is	incorporated	herein	by	reference.	The	report	of	our	independent	registered	public	accounting	firm	is	also included	under	Item	8,	under	the	heading,	"Report	of	Independent	Registered	Public	Accounting	Firm"	and	is	incorporated	herein	by	reference.

(c)	Changes	in	Internal	Control	over	Financial	Reporting.

In	connection	with	the	evaluation	of	the	Company's	"internal	control	over	financial	reporting"	that	occurred	during	the	quarter	ended	December	31, 2012,	which	is	required	under	the	Securities	Exchange	Act	of	1934	by	paragraph	(d)	of	Exchange	Rules	13a-15	or	15d-15	(as	defined	in	paragraph	(f)	of Rule	13a-15),	management	determined	that	there	was	no	change	that	materially	affected	or	is	reasonably	likely	to	materially	affect	internal	control	over financial	reporting.

# Item	9B. Other	Information.

# PART	III

# Item	10. Directors,	Executive	Officers	and	Corporate	Governance.

Our	Code	of	Business	Ethics	applies	to	all	employees,	officers	and	directors	including	our	Principal	Executive	Officer,	Principal	Financial	Officer and	Principal	Accounting	Officer,	and	is	posted	on	our	website	at	www.masco.com.	Other	information	required	by	this	Item	will	be	contained	in	our definitive	Proxy	Statement	for	the	2013	Annual	Meeting	of	Stockholders,	to	be	filed	on	or	before	April	30,	2013,	and	such	information	is	incorporated herein	by	reference.

# Item	11. Executive	Compensation.

Information	required	by	this	Item	will	be	contained	in	our	definitive	Proxy	Statement	for	the	2013	Annual	Meeting	of	Stockholders,	to	be	filed	on	or before	April	30,	2013,	and	such	information	is	incorporated	herein	by	reference.

# Item	12. Security	Ownership	of	Certain	Beneficial	Owners	and	Management	and	Related	Stockholder	Matters.

# Item	13. Certain	Relationships	and	Related	Transactions,	and	Director	Independence.

# Item	14. Principal	Accountant	Fees	and	Services.

# PART	IV

# Item	15. Exhibits	and	Financial	Statement	Schedules.

# (a) Listing	of	Documents.

(1) Financial	Statements.	Our	consolidated	financial	statements	included	in	Item	8	hereof,	as	required	at	December	31,	2012	and	2011, and	for	the	years	ended	December	31,	2012,	2011	and	2010,	consist	of	the	following:

# (2) Financial	Statement	Schedule.

(i) Our	Financial	Statement	Schedule	appended	hereto,	as	required	for	the	years	ended	December	31,	2012,	2011	and	2010, consists	of	the	following:

# II.	Valuation	and	Qualifying	Accounts

See	separate	Exhibit	Index	beginning	on	page	93.

# SIGNATURES

Pursuant	to	the	requirements	of	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934,	the	Registrant	has	duly	caused	this	Report	to	be signed	on	its	behalf	by	the	undersigned,	thereunto	duly	authorized.

By: /S/	JOHN	G.	SZNEWAJS

John	G.	Sznewajs

	 Vice	President,	Treasurer	and	Chief	Financial	Officer

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	Report	has	been	signed	below	by	the	following	persons	on	behalf	of	the Registrant	and	in	the	capacities	and	on	the	date	indicated.

# Principal	Executive	Officer:

/S/	TIMOTHY	WADHAMS

Timothy	Wadhams

# Principal	Financial	Officer:

/S/	JOHN	G.	SZNEWAJS

President,	Chief	Executive	Officer

and	Director

Vice	President,	Treasurer	and

Chief	Financial	Officer

# Principal	Accounting	Officer:

/S/	JOHN	P.	LINDOW John	P.	Lindow Vice	President	–	Controller

# SCHEDULE	II.	VALUATION	AND	QUALIFYING	ACCOUNTS

| Description | Balance	at<br>Beginning<br>of	Period | Charged	to<br>Costs	and<br>Expenses | Charged<br>to	Other<br>Accounts | Deductions |  | Balance	at<br>End	of<br>Period |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Allowances\tfor\tdoubtful\taccounts,\tdeducted\tfrom\taccounts\treceivable\tin\tthe\tbalance |  |  |  |  |  |  |
| sheet: |  |  |  |  |  |  |
| 2012 | \t\t $30\t\t\t\t $ | 11\t\t\t\t $ | — | \t $(8)\t(a)\t\t $ | \t $(8)\t(a)\t\t $ | 33 |
| 2011 | \t\t $36\t\t\t\t $ | 8\t\t\t\t $ | — | \t $(14) | (a)\t\t $ | 30 |
| 2010 | \t\t $41\t\t\t\t $ | 15\t\t\t\t $ | — | \t $(20)\t(a)\t\t $ | \t $(20)\t(a)\t\t $ | 36 |
| Valuation\tAllowance\ton\tdeferred\ttax\tassets: |  |  |  |  |  |  |
| 2012 | \t\t $688\t\t\t\t $ | 113\t\t\t\t $ | (14)\t(b)\t\t $ | (14)\t(b)\t\t $ | — | \t $787 |
| 2011 | \t\t $462\t\t\t\t $ | 178\t\t\t\t $ | 48\t\t(b) | \t $ | — | \t $688 |
| 2010 | \t\t $43\t\t\t\t $ | 400\t\t\t\t $ | 19\t\t(b)\t\t $ | 19\t\t(b)\t\t $ | — | \t $462 |

(a) Deductions,	representing	uncollectible	accounts	written	off,	less	recoveries	of	accounts	written	off	in	prior	years.

(b) Valuation	allowance	on	deferred	tax	assets	recorded	primarily	in	other	comprehensive	income	and	paid	in	capital.

# EXHIBIT	INDEX

# The	Company	will	furnish	to	its	stockholders	a	copy	of	any	of	the	above	exhibits	not	included	herein	upon	the	written	request	of	such stockholder	and	the	payment	to	the	Company	of	the	reasonable	expenses	incurred	by	the	Company	in	furnishing	such	copy	or	copies.



Question: what was the percentage cumulative return of masco for the five year period ending 2012?
Calculation: masco_end_2012 = 92.49
masco_start_2012 = 100
percent_cumulative_return = (masco_end_2012 - masco_start_2012) / masco_start_2012
answer = percent_cumulative_return * 100
Answer: -7.51%