— 2 0 1 4 A N N UA L R E P O R T —
ONE FOCUS
— MA XIMIZING LONG -TERM VALUE —
ii
PLUMBING
#1
Faucet brand in
North America
CABINETS
#1
Kitchen and bath
residential cabinet
manufacturer in
North America
DOORS
#1
Fiberglass
residential entry
door brand in
the United States
among builders
and remodelers
SECURITY
#1
Padlock brand
and
protective security
container brand
in North America
ONE FOCUS
— MA XIMIZING LONG -TERM VALU E —
Total Net Sales
In billions
Operating Income
In millions
Earnings Per Share
3 YEARS’
GROWTH
38%
3 YEARS’
GROWTH
168%
3 YEARS’
GROWTH
205%
S
S
E
N
I
S
U
B
R
U
O
L
E
D
O
M
Our track record since becoming an independent company shows
our continued commitment to creating long-term value. We have
delivered profitable core growth by leveraging our structural
competitive advantages to gain share and build profitable,
growth-oriented segments in a recovering market.
Our focus continues. We are committed to maximizing long-term
value. There are tremendous core growth opportunities ahead for
our company and our shareholders as the market returns to a
steady state. Additionally, we believe we can achieve incremental
growth by deploying our strong balance sheet and cash flow.
See the Letter to Shareholders for more information.
In this Annual Report, all data presented is from continuing operations, and all references to earnings per share, operating income,
EBITDA, net debt to EBITDA and operating margin are on a before charges/gains basis, unless noted otherwise. Reconciliations of
non-GAAP measures are presented on pages 92-97.
1
$2.9Total Net Sales‘11‘14$4.004$161Op Income‘11‘14$4310431$0.57EPS‘11‘14$1.740.001.74$2.9Total Net Sales‘11‘14$4.004$161Op Income‘11‘14$4310431$0.57EPS‘11‘14$1.740.001.74$2.9Total Net Sales‘11‘14$4.004$161Op Income‘11‘14$4310431$0.57EPS‘11‘14$1.740.001.74
O U R B U S I N E S S
MODEL
— SO LI D AN D PROVEN —
Our ability to maximize long-term value is grounded in our solid and
proven business model. We achieve core growth by leveraging
attractive product categories, structural competitive advantages,
consumer-driven innovation and operational excellence, all of which
enable us to continually outperform the market. We believe we can
drive incremental growth by utilizing our strong capital structure.
— B U S I N E S S S EG M E N TS —
— B U S I N E S S M IX —
Composed of trusted, industry-leading brands
that deliver customer-focused innovation
A balanced and diverse business mix
that is driven by the Repair & Remodel
and New Construction markets
12%
10%
33%
45%
SEGMENT NET SALES (1)
% of total FBHS
Cabinets
Doors
Plumbing
Security
BUSINESS MIX
BY END MARKET (1)
Repair & Remodel 47%
New Construction 23%
17%
International
9%
Security
4%
Commercial
BUSINESS MIX
BY CHANNEL (1)
Home Centers
Wholesale
International
Dealer
Other Retail
Builder Direct
31%
29%
17%
15%
5%
3%
DOMESTIC HOME
PRODUCTS MARKET (1)
Repair & Remodel 67%
New Construction 33%
1 Company data for the year ended December 31, 2014.
2
Business Mix By End MarketBusiness Mix By ChannelDomestic Home Products MarketBusiness SegmentsBusiness Mix By End MarketBusiness Mix By ChannelDomestic Home Products MarketBusiness SegmentsBusiness Mix By End MarketBusiness Mix By ChannelDomestic Home Products MarketBusiness SegmentsBusiness Mix By End MarketBusiness Mix By ChannelDomestic Home Products MarketBusiness Segments — B US I N E S S S EG M ENTS AT A G L AN C E —
CABINETS
Our Cabinets segment manufactures custom, semi-custom and stock
cabinetry for the kitchen, bath and other parts of the home.
NET SALES
In billions
OPERATING INCOME
In millions
OUR ADVANTAGES
■ Regional operations result in prompt
service, helping make MasterBrand
Cabinets the largest player in the critical
cabinet dealer channel
■ Multiple brands ensure customers have
unique offerings, reducing channel conflict
■ Market leadership provides ability to
invest in consumer-focused innovation
and to drive profitable growth
PLUMBING
Our Plumbing segment manufactures or assembles and sells
faucets, showers, accessories, garbage disposals and kitchen sinks in
North America and China, predominantly under the Moen brand.
NET SALES
In billions
OPERATING INCOME
In millions
OUR ADVANTAGES
■ Exclusive contracts with many of
the largest builders help secure the
segment’s leading North America
market share position
■ Consumer-focused innovation drives
profitable growth
■ Flexible global supply chain
DOORS
Our Doors segment manufactures and sells fiberglass and steel entry door
systems, patio doors and urethane millwork products.
OUR ADVANTAGES
■ Therma-Tru is a leader in fiberglass entry
doors, the fastest-growing segment of the
entry door market
■ Strong door fabrication network adds
value through assembly and installation
of whole entry door systems
NET SALES
In billions
OPERATING INCOME
In millions
SECURITY
Our Security segment consists of locks, safety and security devices,
electronic security products and protective security containers
manufactured, sourced and distributed by Master Lock and SentrySafe.
NET SALES
In billions
OPERATING INCOME
In millions
OUR ADVANTAGES
■ The iconic, growth-oriented Master Lock
and SentrySafe brands have leading
market share positions and global brand
recognition
■ Consistent flow of consumer-focused
innovation and recently developed
electronic locking capabilities
■ Flexible global supply chain
3
$1.2Business Mix By End MarketBusiness Mix By ChannelDomestic Home Products MarketBusiness Segments‘11‘14$1.8$138‘11$18‘140.01.90138$1.0‘11‘14$1.3$260‘11$138‘140.01.30260$0.3‘11‘14$0.4$29‘11$5‘140.00.4029$0.4‘11‘14$0.5$59‘11$51‘140.00.5059$1.2Business Mix By End MarketBusiness Mix By ChannelDomestic Home Products MarketBusiness Segments‘11‘14$1.8$138‘11$18‘140.01.90138$1.0‘11‘14$1.3$260‘11$138‘140.01.30260$0.3‘11‘14$0.4$29‘11$5‘140.00.4029$0.4‘11‘14$0.5$59‘11$51‘140.00.5059$1.2Business Mix By End MarketBusiness Mix By ChannelDomestic Home Products MarketBusiness Segments‘11‘14$1.8$138‘11$18‘140.01.90138$1.0‘11‘14$1.3$260‘11$138‘140.01.30260$0.3‘11‘14$0.4$29‘11$5‘140.00.4029$0.4‘11‘14$0.5$59‘11$51‘140.00.5059$1.2Business Mix By End MarketBusiness Mix By ChannelDomestic Home Products MarketBusiness Segments‘11‘14$1.8$138‘11$18‘140.01.90138$1.0‘11‘14$1.3$260‘11$138‘140.01.30260$0.3‘11‘14$0.4$29‘11$5‘140.00.4029$0.4‘11‘14$0.5$59‘11$51‘140.00.5059 — LE T TER TO S HAR EH O LD ERS —
Dear Shareholders:
In 2014, Fortune Brands Home & Security continued
to gain share and delivered solid sales and growth in
a market that ran below our expectations. I’m proud
of our teams who executed well, while focusing
on our strategy to maximize shareholder value.
As we cap off our third full year as an independent
company, I’m optimistic about our future. In 2014, we
took several important steps to reposition our portfolio
and make investments in our capacity and capabilities
to set the stage for meaningful long-term growth.
Christopher J. Klein
Chief Executive Officer
Repositioned Portfolio and
Investments in Capacity
We focused on enhancing the growth profile of
our business in order to strengthen us in 2015
and beyond.
■ As the market softened, we capitalized on the
positive long-term view of the U.S. housing
market and repurchased $440 million of our
shares. Our strong cash flow and balance sheet
enabled us to opportunistically repurchase shares
and pay an increased dividend in order to create
meaningful incremental shareholder value.
■ We accelerated investments in our capacity
and capabilities, which will help us maximize
long-term growth from our market share gains as
the home products market gradually returns to
a steady state. These investments were primarily
in cabinets, where we continued to experience
new product successes and take share. Given our
leading share positions in our categories, even
modest market growth drives strong demand
and requires us to have available capacity to
ensure that we can service the business well.
We believe we are now better-positioned to
meet this increasing demand.
■ We sold the Simonton windows business, which
was subscale within our portfolio. This better
positions us to focus on driving profitable growth
for our Therma-Tru door business.
■ We acquired SentrySafe, the market leader in
personal safes, to create a stronger growth
platform in the security segment along with
Master Lock. Additional opportunities for
these leading, growth-oriented brands include
increasing sales, driving innovation, leveraging
global distribution and generating cost synergies.
■ We moved the $150 million Waterloo tool
storage business out of Master Lock into a
stand-alone discontinued operation with a
single domestic manufacturing location for
more focus and efficiency. The tool storage
business has many strengths within its category,
and we believe it has a future. We are continuing
to evaluate strategic alternatives for this business.
We took these deliberate actions in 2014 to enhance
the growth profile of our business, all while gaining
share and delivering solid growth. I am pleased
that we took advantage of the slower market by
investing in capacity to support long-term demand,
4
FINANCIAL HIGHLIGHTS
(In millions, except per-share amounts)
Years ended December 31
Total Net Sales
Operating Income
Earnings Per Share
2014
$4,014
$431
$1.74
Capital Performance
12/31/14
Cash
Debt
Debt-to-Capital
Market Capitalization (in billions)
1 Equity as of September 30, 2011
$192
$670
23%
$7.2
2013
$3,704
$353
$1.37
Spinoff
10/03/11
$77
$520
20% 1
$1.9
2012
$3,135
$212
$0.83
2011
$2,878
$161
$0.57
eliminating lower-growth businesses from our
portfolio and accelerating opportunities in the
security segment. Given our strong positions in
our markets and our now stronger growth profile,
improvements in market demand should provide
us even greater opportunities.
Financial Highlights
Despite a slower housing market in 2014, we posted
solid growth. Net sales were $4.0 billion, an increase
of 8 percent over 2013. Earnings per share were $1.74
versus $1.37 last year, a 27 percent increase.
Our balance sheet remains strong, even as we
completed the SentrySafe acquisition, repurchased
shares and increased our quarterly dividend again.
As of year-end, cash was $192 million and debt was
$670 million, resulting in net debt to EBITDA of
0.9 times.
Segment performance highlights for 2014 include:
■ Cabinets: Sales increased 9 percent to the
prior year, operating profit grew 15 percent
to $138 million and operating margin was
7.7 percent.
5
In 2014, we took
several important
steps to reposition
our portfolio and
make investments
in our capacity
and capabilities to
set the stage for
meaningful long-
term growth.
— LE T TER TO S HAR EH O LD ERS —
C O N T I N U E D
Our growth-oriented portfolio includes products with strong market positions,
making Fortune Brands a leader in our industry.
■ Plumbing: Sales increased 3 percent, operating
profit was up 13 percent to the prior year and
operating margin increased 170 basis points to
19.5 percent.
■ Doors: Sales increased 11 percent, operating
profit nearly doubled from the prior year and
operating margin increased 300 basis points to
7.1 percent.
■ Security: Sales increased 20 percent, operating
profit increased 7 percent from the prior year and
operating margin was 12.3 percent as we began
to integrate SentrySafe into our security business.
Excluding SentrySafe, Master Lock operating
margin was 13.6 percent.
We remain confident in our ability to continue to
outperform the recovering home products market.
We have continued to gain share, and our core
businesses are strong. And as a result of actions
we took in 2014, we are well-positioned to deliver
solid growth as the housing market continues its
recovery. Our strong brands, management teams
and capital structure provide flexibility to both focus
on profitable organic growth and drive incremental
shareholder value.
I’m pleased with the momentum we have built over
the past three years, and there are many more
opportunities ahead as we enter our next phase
of growth. Thank you for your ongoing support as
our teams continue to build a great company with
a strong portfolio of industry-leading brands.
Looking Ahead
Sincerely,
While 2014 housing market growth slowed and
was lower than we expected, the home products
market has experienced three years of solid growth.
We are seeing signs of accelerating strength
across many aspects of the home products
market and believe that 2015 will be stronger
than 2014. In fact, we believe that the market is
entering a new period of multiyear growth.
Christopher J. Klein
Chief Executive Officer
Fortune Brands Home & Security, Inc.
February 25, 2015
6
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
Commission file number 1-35166
Fortune Brands Home & Security, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
62-1411546
(IRS Employer
Identification No.)
520 Lake Cook Road, Deerfield, IL 60015-5611
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (847) 484-4400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange
on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes È
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 È
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 È
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 (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes È
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 annual report on Form 10-K or any amendment to this annual report on Form 10-K. È
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer È 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 Act).
Yes ‘
No È
The aggregate market value of the registrant’s voting common equity held by non-affiliates of the registrant at June 30, 2014 (the
last day of the registrant’s most recent second quarter) was $6,406,202,013. The number of shares outstanding of the registrant’s
common stock, par value $0.01 per share, at February 6, 2015, was 158,667,693.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the registrant’s proxy statement for its Annual Meeting of
Stockholders to be held on April 28, 2015 (to be filed not later than 120 days after the end of the
registrant’s fiscal year) (the “2015 Proxy Statement”) is incorporated by reference into Part III hereof.
Form 10-K Table of Contents
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 Compared to 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 Compared to 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Critical Accounting Policies and Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9.
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule II Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
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PART I
Item 1. Business.
Cautionary Statement Concerning Forward-Looking Statements
This Annual Report on Form 10-K contains certain “forward-looking statements” made pursuant to the
safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”),
and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
regarding business strategies, market potential, future financial performance and other matters.
Statements that include the words “believes,” “expects,” “anticipates,” “intends,” “projects,”
“estimates,” “plans” and similar expressions or future or conditional verbs such as “will,” “should,”
“would,” “may” and “could” are generally forward-looking in nature and not historical facts. Where, in
any forward-looking statement, we express an expectation or belief as to future results or events, such
expectation or belief is based on the current plans and expectations at the time this report is filed with
the Securities and Exchange Commission (the “SEC”) or, with respect to any documents incorporated
by reference, available at the time such document was prepared or filed with the SEC. Although we
believe that these statements are based on reasonable assumptions, they are subject to numerous
factors, risks and uncertainties that could cause actual outcomes and results to be materially different
from those indicated in such statements. These factors include those listed in the section below
entitled “Risk Factors.” Except as required by law, we undertake no obligation to update or revise any
forward-looking statements to reflect changed assumptions, the occurrence of anticipated or
unanticipated events, new information or changes to future results over time or otherwise.
Unless the context otherwise requires, references in this Annual Report on Form 10-K to (i) “Fortune
Brands,” the “Company,” “we,” “our” or “us” refer to Fortune Brands Home & Security, Inc. and its
consolidated subsidiaries, after giving effect to the spin-off of Fortune Brands from Fortune Brands,
Inc. in 2011 and (ii) “Former Parent” refer to Fortune Brands, Inc.
Our Company
We are a leading home and security products company that competes in attractive long-term growth
markets in our categories. With a foundation of market-leading brands across a diversified mix of
channels, and lean and flexible supply chains, as well as a tradition of strong product innovation and
customer service, we are focused on outperforming our markets in both growth and returns, and
driving increased shareholder value. We sell our products through a wide array of sales channels,
including kitchen and bath dealers, wholesalers oriented toward builders or professional remodelers,
industrial and locksmith distributors, “do-it-yourself” remodeling-oriented home centers and other
retail outlets. We believe the Company’s track record reflects the long-term attractiveness and
potential of our categories and our leading brands. Our performance over the past three years
demonstrates the strength of our operating model and our ability to generate profitable growth as
sales volume increases and we leverage our structural competitive advantages to gain share in our
categories.
Our Strategy
Build on leading business and brand positions in attractive growth and return
categories. We believe that we have leading market positions and brands in many of our product
categories. We continue to invest in targeted advertising and other strategic initiatives aimed at
enhancing brand awareness and educating consumers regarding the breadth, features and benefits
of our product lines. We also strive to leverage our brands by expanding into adjacent product
categories and continue to develop new programs through working closely with our customers.
1
Continue to develop innovative products for customers, designers, installers and
consumers. Sustained investments in consumer-driven product innovation and customer service,
along with our lower cost structures, have contributed to our success in winning in the marketplace
and creating consumer demand. MasterBrand Cabinets launched innovative new cabinet door
designs, color palettes and features in a range of styles that allows consumers to create a custom
kitchen look at an affordable price. MasterBrand Cabinets launched new door styles ranging from
transitional styles to acrylics, new color palettes ranging from gray stains to rich brown stains, Omega
full access cabinetry and innovative lighting solutions. MasterBrand Cabinets continues to provide
cabinetry solutions for the whole home ranging from home offices or bathroom vanities to
kitchens. We continue to provide channel support with a responsive website featuring our cabinet
brands in one convenient location that drives leads to our dealerships. Moen offers an extensive line
of eco-friendly faucets and showerheads that carry the EPA’s WaterSense designation. Moen’s track
record of continued innovation includes offerings such as finishes that incorporate Microban anti-
microbial protection, market-leading Spot Resist finish, our touchless Motionsense electronic faucets
and our new pull-out and pull-down faucets with Reflex self-retraction. Therma-Tru has leveraged
advanced materials to deliver products that combine aesthetic beauty and energy efficiency. Therma-
Tru expanded both clear and decorative glass offerings and introduced new styles to its Fiber-Classic
Mahogany collection of fiberglass doors, including additions to the Pulse line of modern style entry
doors. Master Lock has long been an innovative leader in security products, such as the easy-to-use
Dial Speed combination padlocks, and has continued to grow by entering adjacent security
categories such as life safety and commercial electronic access control solutions designed to secure
high value sites such as cellular telephone towers and other facilities. John D. Brush & Co., Inc.
(“SentrySafe”), acquired in July 2014, provides quality and innovative fire-resistant safes that secure
consumers’ property and important documents.
Expand in international markets. We have opportunities to expand sales by further penetrating
international markets, which represented approximately 17% of net sales in 2014. Moen continues to
expand in China. In cabinets, Kitchen Craft remains a leading cabinetry brand in Canada in 2014, while
WoodCrafters provides presence in Mexico. Master Lock continues to expand its presence in Europe
and Asia, while Therma-Tru has made inroads in Canada as consumers transition from traditional entry
door materials to more advanced and energy-efficient fiberglass doors.
Leverage our global supply chains. We are using lean manufacturing, design-to-manufacture
and distributive assembly techniques to make our supply chains more flexible and improve supply
chain quality, cost, response times and asset efficiency. We view our supply chains as a strategic
asset not only to support strong operating leverage as volumes increase, but also to enable the
profitable growth of new products, adjacent market expansion and international growth.
Enhance returns and deploy our cash flow to high-return opportunities. We believe
our most attractive opportunities are to invest in profitable organic growth initiatives, pursue accretive
strategic acquisitions and joint ventures, and return cash to shareholders through a combination of
dividends and repurchases of shares of our common stock under our share repurchase programs.
Both add-on acquisitions and share repurchase opportunities may be particularly attractive in the next
few years.
Our Competitive Strengths
We believe our competitive strengths include the following:
Leading brands. We have leading brands in many of our product categories. We believe that
established brands are meaningful to both consumers and trade customers in their respective
categories and that we have the opportunity to, among other things, expand many of our brands into
adjacent product categories and international markets.
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Strategic focus on attractive consumer-facing categories. We believe we operate in
categories that, while very competitive, are among the more attractive categories in the home
products and security products markets. Some of the key characteristics that make these categories
attractive in our view include the following:
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product quality, innovation, fashion, finish, durability and functionality, which are key
determinants of product selection in addition to price;
established brands, which are meaningful to both consumers and trade customers;
the opportunity to add value to a complex consumer purchasing decision with excellent service
propositions, reliability of products, ease of installation and superior delivery lead times;
the value our products add to a home, particularly with kitchen and bath remodeling and
additions, and the curb appeal offered by stylish entry door systems;
favorable long-term trends in household formations that benefit the outlook for our markets over
time;
the relatively stable demand for plumbing and security products; and
the opportunity to expand into adjacent categories.
Operational excellence. We believe our investments in lean manufacturing and productivity
initiatives have resulted in supply chain flexibility and the ability to cost-effectively add capacity in
order to match demand levels. In 2014, we invested in incremental capacity to support long-term
growth potential and we plan to continue investing in 2015. In addition, our supply chains and lower
cost structures are creating favorable operating leverage as volumes grow without sacrificing
customer service levels. We believe that margin improvement will continue to be driven predominantly
by organic volume growth that can be readily accommodated by additional production shifts and
equipment as necessary.
Commitment to innovation. We have a long track record of successful product and process
innovations that introduce valued new products and services to our customers and consumers. We
are committed to continuing to invest in new product development and enhance customer service to
strengthen our leading brands and penetrate adjacent markets.
Diverse sales end-use mix. We sell in a variety of product categories in the U.S. home and
security products markets. In addition, our exposure to changing levels of U.S. residential new home
construction activity is balanced with repair-and-remodel activity, which comprises a substantial
majority of the overall U.S. home products market and about two-thirds of our U.S. home products
sales. We also benefit from a stable market for plumbing and security products and international sales
growth opportunities.
Diverse sales channels. We sell through a wide array of sales channels, including kitchen and
bath dealers, wholesalers oriented to builders or professional remodelers, industrial and locksmith
distributors, “do-it-yourself” remodeling-oriented home centers and other retail outlets. We also sell
security products to locksmiths, industrial distributors and mass merchants. We are able to leverage
existing sales channels to expand into adjacent product categories. In 2014, sales to our top ten
customers represented less than half of total sales.
Decentralized business model. Our business segments are focused on distinct product
categories and are responsible for their own performance. This structure enables each of our
segments to independently best position itself within each category in which it competes and
reinforces strong accountability for operational and financial performance. Each of our segments
focus on its unique set of consumers, customers, competitors and suppliers, while also sharing best
practices.
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Strong capital structure. We exited 2014 with a strong balance sheet, even as we completed
the $116.7 million acquisition of SentrySafe in July and repurchased $439.8 million of our shares in
2014. As of December 31, 2014, we had $191.9 million of cash and cash equivalents and total debt
was $670.0 million, resulting in a net debt position of $478.1 million. In addition, we had $830.0 million
available under our credit facilities as of December 31, 2014.
Business Segments
We have four business segments: Cabinets, Plumbing, Doors and Security. The following table shows
net sales for each of these segments, including key brands within each segment:
Segment
Cabinets
Plumbing
Doors
Security
Total
2014
Net Sales
(in millions)
Percentage of
Total 2014
Net Sales
Key Brands
$1,788
45% Aristokraft, Kitchen Craft, Kitchen
Classics, Omega, Homecrest,
Diamond, Schrock, Decorá,
Kemper, St. Paul, Thomasville(a),
Martha Stewart Living(a)
1,331
33% Moen, Cleveland Faucet Group
(CFG)
414
481
10% Therma-Tru, Fypon
12% Master Lock, American Lock,
SentrySafe
$4,014
100%
(a) Thomasville is a registered trademark of Hhg Global Designs LLC and Martha Stewart Living is a registered trademark of
Martha Stewart Living Omnimedia, Inc.
Our segments compete on the basis of innovation, fashion, quality, price, service and responsiveness
to distributor, retailer and installer needs, as well as end-user consumer preferences. Our markets are
very competitive. Approximately 17% of 2014 net sales were to international markets, and sales to two
of the Company’s customers, The Home Depot, Inc. (“The Home Depot”) and Lowe’s Companies, Inc.
(“Lowe’s”), each accounted for more than 10% of the Company’s net sales in 2014. Sales to all U.S.
home centers in the aggregate were approximately 30% of net sales in 2014.
Cabinets. Our Cabinets segment manufactures custom, semi-custom and stock cabinetry, as well
as vanities, for the kitchen, bath and other parts of the home through a regional supply chain footprint
to deliver high quality and service to our customers. This segment sells a portfolio of brands that
enables our customers to differentiate themselves against competitors. This portfolio includes brand
names such as Aristokraft, Kitchen Craft, Kitchen Classics, Omega, Homecrest, Diamond, Schrock,
Decorá, Kemper, St. Paul, Thomasville and Martha Stewart Living. Substantially all of this segment’s
sales are in North America. This segment sells directly to kitchen and bath dealers, home centers,
wholesalers and large builders. Sales to The Home Depot and Lowe’s comprised approximately 39%
of net sales of the Cabinets segment in 2014. This segment’s competitors include Masco, American
Woodmark and RSI, as well as a large number of smaller suppliers.
Plumbing. Our Plumbing segment manufactures or assembles and sells faucets, accessories and
kitchen sinks in North America and China, predominantly under the Moen brand. Although this
segment sells plumbing products principally in the U.S., Canada and China, this segment also sells in
Mexico, Southeast Asia and South America. Approximately 26% of 2014 net sales were to
international markets. This segment sells directly through its own sales force and indirectly through
independent manufacturers’ representatives, primarily to wholesalers, home centers, mass
merchandisers and industrial distributors. Sales to The Home Depot and Lowe’s comprised
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approximately 26% of net sales of the Plumbing segment in 2014. This segment’s chief competitors
include Delta (owned by Masco), Kohler, Pfister (owned by Spectrum Brands), American Standard
(owned by LIXIL Group) and imported private-label brands.
Doors. Our Doors segment manufactures and sells fiberglass and steel entry door systems under
the Therma-Tru brand and urethane millwork product lines under the Fypon brand. This segment
benefits from the long-term trend away from traditional materials, such as wood, steel and aluminum,
toward more energy-efficient and durable synthetic materials. Therma-Tru products include fiberglass
and steel residential entry door and patio door systems, primarily for sale in the U.S. and Canada.
This segment’s principal customers are home centers, millwork building products and wholesale
distributors, and specialty dealers that provide products to the residential new construction market, as
well as to the remodeling and renovation markets. Sales to The Home Depot and Lowe’s comprised
approximately 11% of net sales of the Doors segment in 2014. This segment’s competitors include
Masonite, JELD-WEN, Plastpro and Pella.
Security. Our Security segment’s products consist of locks, safety and security devices, and
electronic security products manufactured, sourced and distributed under the Master Lock brand and
fire resistant safes, security containers and commercial cabinets manufactured, sourced and
distributed under the SentrySafe brand. This segment sells products principally in the U.S., Canada,
Europe, Central America and Australia. Approximately 29% of 2014 net sales were to international
markets. This segment manufactures and sells key-controlled and combination padlocks, bicycle and
cable locks, built-in locker locks, door hardware, automotive, trailer and towing locks, electronic
access control solutions, and other specialty safety and security devices for consumer use to
hardware, home center and other retail outlets. In addition, the segment sells lock systems to
locksmiths, industrial and institutional users, and original equipment manufacturers. Sales to The
Home Depot and Lowe’s comprised approximately 16% of the net sales of the Security segment in
2014. Master Lock competes with Abus, W.H. Brady, Hampton, Kwikset (owned by Spectrum
Brands), Schlage (owned by Allegion), Assa Abloy and various imports, and SentrySafe competes
with First Alert, Magnum, Fortress, Stack-On and Fire King.
Annual net sales for each of the last three fiscal years for each of our business segments were as
follows:
(In millions)
Cabinets
Plumbing
Doors
Security
Total
2014
2013
2012
$1,787.5
1,331.0
413.9
481.2
$1,642.2
1,287.0
371.6
402.8
$1,326.6
1,100.7
321.5
386.0
$4,013.6
$3,703.6
$3,134.8
For additional financial information for each of our business segments, refer to Note 18, “Information
on Business Segments,” to the Consolidated Financial Statements in Item 8 of this Annual Report on
Form 10-K.
5
Other Information
Raw materials. The table below indicates the principal raw materials used by each of our
segments. These materials are available from a number of sources. Volatility in the prices of
commodities and energy used in making and distributing our products impacts the cost of
manufacturing our products.
Segment
Cabinets
Plumbing
Doors
Security
Raw Materials
Hardwoods (maple, cherry and oak), plywood
and particleboard
Brass, zinc, copper, resins and stainless steel
Resins, glass, foam, steel, wood and aluminum
Rolled steel and brass
Intellectual property. Product innovation and branding are important to the success of our
business. In addition to the brand protection offered by our trademarks, patent protection helps
distinguish our unique product features in the market by preventing copying and making it more
difficult for competitors to benefit unfairly from our design innovation. We hold U.S. and foreign
patents covering various features used in products sold within all of our business segments. Although
each of our segments relies on a number of patents and patent groups that, in the aggregate, provide
important protections to the Company, no single patent or patent group is material to any of the
Company’s segments.
Employees. As of December 31, 2014, we had approximately 18,000 full-time employees.
Approximately 13% of these employees are covered by collective bargaining agreements, none of
which are subject to agreements that will expire within one year. Employee relations are generally
good.
Information about geographic areas. For additional information about net sales and assets
by geographic areas, refer to Note 18, “Information on Business Segments,” to the Consolidated
Financial Statements in Item 8 of this Annual Report on Form 10-K.
Seasonality. All of our operating segments traditionally experience lower sales in the first quarter
of the year when new home construction, repair-and-remodel activity and security buying are lowest.
As a result of sales seasonality and associated timing of working capital fluctuations, our cash flow
from operating activities is typically higher in the second half of the year.
Environmental matters. We are involved in remediation activities to clean up hazardous wastes
as required by federal and state laws. Liabilities for remediation costs of each site are based on our
best estimate of undiscounted future costs, excluding possible insurance recoveries or recoveries
from other third parties. Uncertainties about the status of laws, regulations, technology and
information related to individual sites make it difficult to develop estimates of environmental
remediation exposures. Some of the potential liabilities relate to sites we own, and some relate to sites
we no longer own or never owned. Several of our subsidiaries have been designated as potentially
responsible parties (“PRP”) under “Superfund” or similar state laws. As of December 31, 2014, nine
such instances have not been dismissed, settled or otherwise resolved. In the calendar year 2014,
our subsidiaries were identified as a PRP in three new instances and we settled two of these new
instances in 2014. In most instances where our subsidiaries are named as a PRP, we enter into cost-
sharing arrangements with other PRPs. We give notice to insurance carriers of potential PRP liability,
but very rarely, if ever, receive reimbursement from insurance for PRP costs. We believe that the cost
of complying with the present environmental protection laws, before considering estimated recoveries
6
either from other PRPs or insurance, will not have a material adverse effect on our results of
operations, cash flows or financial condition. At December 31, 2014 and 2013, we had accruals of
$2.8 million and $4.8 million, respectively, relating to environmental compliance and clean up
including, but not limited to, the above mentioned Superfund sites.
Legal proceedings. We are defendants in lawsuits associated with the normal conduct of our
businesses and operations. It is not possible to predict the outcome of the pending actions and, as
with any litigation, it is possible that some of these actions could be decided unfavorably to us. We
believe that there are meritorious defenses to these actions, which we are vigorously contesting and
that these actions will not have a material adverse effect upon our results of operations, cash flows or
financial condition.
Legal structure. Fortune Brands Home & Security, Inc. is a holding company that was organized
as a Delaware corporation in 1988. Wholly-owned subsidiaries of the Company include MasterBrand
Cabinets, Inc., Moen Incorporated, Fortune Brands Doors, Inc. and Fortune Brands Storage &
Security LLC. As a holding company, Fortune Brands is a legal entity separate and distinct from our
subsidiaries. Accordingly, the rights of the Company, and thus the rights of our creditors (including
holders of debt securities and other obligations) and stockholders to participate in any distribution of
the assets or earnings of any subsidiary is subject to the claims of creditors of the subsidiary, except
to the extent that claims of the Company itself as a creditor of such subsidiary may be recognized, in
which event the Company’s claims may in certain circumstances be subordinate to certain claims of
others. In addition, as a holding company, the source of our unconsolidated revenues and funds is
dividends and other payments from subsidiaries. Our subsidiaries are not limited by long-term debt or
other agreements in their abilities to pay cash dividends or to make other distributions with respect to
their capital stock or other payments to the Company.
Available Information. The Company’s website address is www.FBHS.com. The Company’s
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any
amendments to these reports are available free of charge on the Company’s website as soon as
reasonably practicable after the reports are filed or furnished electronically with the SEC. These
documents also are made available to read and copy at the SEC’s Public Reference Room at
100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the Public Reference
Room by contacting the SEC at 1-800-SEC-0330. Reports filed with the SEC are also made available
on its website at www.sec.gov. We also make available on our website, or in printed form upon
request, free of charge, our Corporate Governance Principles, Code of Business Conduct and Ethics,
Code of Ethics for Senior Financial Officers, Charters for the Committees of our Board of Directors and
certain other information related to the Company.
7
Item 1A. Risk Factors.
You should carefully consider the risks described below and all of the other information included in
this Annual Report on Form 10-K when deciding whether to invest in our common stock or otherwise
evaluating our business. If any of the following risks materialize, our business, financial condition or
operating results could suffer. In this case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
Risks Relating to Our Business
Our business primarily relies on North American home improvement, repair and remodel and new
home construction activity levels, all of which are impacted by risks associated with fluctuations in the
housing market. Downward changes in the general economy, the housing market or other business
conditions could adversely affect our results of operations, cash flows and financial condition.
Our business primarily relies on home improvement, repair and remodel, and new home construction
activity levels, principally in North America. The housing market is sensitive to changes in economic
conditions and other factors, such as the level of employment, consumer confidence, consumer
income, availability of financing and interest rate levels. Adverse changes in any of these conditions
generally, or in any of the markets where we operate, could decrease demand and could adversely
impact our businesses. Consumers may reduce discretionary spending or may prefer lower-priced
value-oriented products. In addition, consumer price consciousness may intensify resulting in the
delay or decrease in home ownership and household formation, as well as cause a shift in demand to
smaller, less expensive homes. The new home construction market is still recovering from a major
downturn in 2008 and 2009, and while improving, the new home construction market remains below
historical levels.
We operate in very competitive consumer and trade brand categories.
The markets in which we operate are very competitive. Although we believe that competition in our
businesses is based largely on product quality, consumer and trade brand reputation, customer
service and product features, as well as fashion, innovation and ease of installation, price is a
significant factor for consumers as well as our trade customers. In addition, some of our competitors
may resort to price competition to sustain market share and manufacturing capacity utilization. Also,
certain large customers continue to offer private-label brands that compete with some of our product
offerings as a lower-cost alternative. The strong competition that we face in all of our businesses may
adversely affect our profitability and revenue levels, as well as our results of operations, cash flows
and financial condition.
Risks associated with strategic acquisitions could adversely affect our results of operations, cash
flows and financial condition.
We consider acquisitions and joint ventures as a means of enhancing shareholder value. Acquisitions
and joint ventures involve risks and uncertainties, including difficulties integrating acquired
companies and operating joint ventures; difficulties retaining the acquired businesses’ customers and
brands; the inability to achieve the expected financial results and benefits of transactions; the loss of
key employees from acquired companies; implementing and maintaining consistent standards,
controls, policies and information systems; and diversion of management’s attention from other
business matters. Future acquisitions could cause us to incur additional debt or issue shares,
resulting in dilution in earnings per share and return on capital.
8
We may not successfully develop new products or improve existing products.
Our success depends on meeting consumer needs and anticipating changes in consumer
preferences with successful new products and product improvements. We aim to introduce products
and new or improved production processes proactively to offset obsolescence and decreases in
sales of existing products. While we devote significant focus to the development of new products, we
may not be successful in product development and our new products may not be commercially
successful. In addition, it is possible that competitors may improve their products more rapidly or
effectively, which could adversely affect our sales. Furthermore, market demand may decline as a
result of consumer preferences trending away from our categories or trending down within our brands
or product categories, which could adversely impact our results of operations, cash flows and
financial condition.
Risks associated with our ability to improve organizational productivity and global supply chain
efficiency and flexibility could adversely affect our results of operations, cash flows and financial
condition.
We regularly evaluate our organizational productivity and global supply chains and assess
opportunities to increase capacity, reduce costs and enhance quality. We strive to enhance quality,
speed and flexibility to meet changing and uncertain market conditions, as well as manage cost
inflation, including wages, pension and medical costs. Our success depends in part on refining our
cost structure and supply chains to promote consistently flexible and low cost supply chains that can
respond to market changes to protect profitability and cash flow or ramp up quickly and effectively to
meet demand. Failure to achieve the desired level of quality, capacity or cost reductions could impair
our results of operations, cash flows and financial condition.
Risks associated with global commodity and energy availability and price volatility, as well as the
possibility of sustained inflation, could adversely affect our results of operations, cash flows and
financial condition.
We are exposed to risks associated with global commodity price volatility arising from restricted or
uneven supply conditions, the sustained expansion and volatility of demand from emerging markets,
potentially unstable geopolitical and economic variables, weather and other unpredictable external
factors. We buy raw materials that contain commodities such as copper, zinc, steel, glass, wood and
petroleum-based products such as resins. In addition, our distribution costs are significantly
impacted by the price of oil and diesel fuel. Decreased availability and increased or volatile prices for
these commodities, as well as energy used in making, distributing and transporting our products,
could increase the costs of our products. While in the past we have been able to mitigate the impact
of these cost increases through productivity improvements and passing on increasing costs to our
customers over time, there is no assurance that we will be able to offset such cost increases in the
future, and the risk of potentially sustained high levels of inflation could adversely impact our results of
operations, cash flows and financial condition. While we may use derivative contracts to limit our
short-term exposure to commodity price volatility, the exposures under these contracts could still be
material to our results of operations, cash flows and financial condition. In addition, in periods of
declining commodity prices, these derivative contracts may have the short-term effect of increasing
our expenditures for these raw materials.
We manufacture, source and sell products internationally and are exposed to risks associated with
doing business globally.
We manufacture, source or sell our products in a number of locations throughout the world,
predominantly in the U.S., Canada, China, Europe and Mexico. Accordingly, we are subject to risks
associated with potential disruption caused by changes in political, economic and social
9
environments, including civil and political unrest, terrorism, possible expropriation, local labor
conditions, changes in laws, regulations and policies of foreign governments and trade disputes with
the U.S., and U.S. laws affecting activities of U.S. companies abroad. Risks inherent to international
operations include: potentially adverse tax laws, uncertainty regarding clearance and enforcement of
intellectual property rights, risks associated with the Foreign Corrupt Practices Act and difficulty
enforcing contracts. While we hedge certain foreign currency transactions, a change in the value of
the currencies will impact our financial statements when translated into U.S. dollars. In addition,
fluctuations in currency can adversely impact the cost position of our products in local currency,
making it more difficult for us to compete. Our success will depend, in part, on our ability to effectively
manage our businesses through the impact of these potential changes. In addition, we source certain
raw materials, components and finished goods from China where we have experienced higher
manufacturing costs and longer lead times due to currency fluctuations, higher wage rates, labor
shortages and higher raw material costs.
Changes in government and industry regulatory standards could adversely affect our results of
operations, cash flows and financial condition.
Government regulations pertaining to health and safety (including protection of employees as well as
consumers) and environmental concerns continue to emerge domestically, as well as internationally.
It is necessary for us to comply with current requirements (including requirements that do not become
effective until a future date), and even more stringent requirements could be imposed on our products
or processes in the future. Compliance with these regulations (such as the restrictions on lead content
in plumbing products and on volatile organic compounds and formaldehyde emissions that are
applicable to many of our businesses) may require us to alter our manufacturing and installation
processes and our sourcing. Such actions could increase our capital expenditures and adversely
impact our results of operations, cash flows and financial condition, and our inability to effectively and
timely meet such regulations could adversely impact our competitive position.
Our inability to secure and protect our intellectual property rights could negatively impact revenues
and brand reputation.
We have many patents, trademarks, brand names and trade names that are important to our
business. Unauthorized use of these intellectual property rights may not only erode sales of our
products, but may also cause significant damage to our brand name and reputation, interfere with our
ability to effectively represent the Company to our customers, contractors and suppliers, and increase
litigation costs. There can be no assurance that our efforts to protect our brands and trademark rights
will prevent violations. In addition, existing patent, trade secret and trademark laws offer only limited
protection, and the laws of some countries in which our products are or may be developed,
manufactured or sold may not fully protect our intellectual property from infringement by others. There
can be no assurance that our efforts to assess possible third party intellectual property rights will
ensure that Company’s ability to manufacture, distribute, market or sell in any given country or
territory. Furthermore, others may assert intellectual property infringement claims against us or
our customers.
Our businesses rely on the performance of wholesale distributors, dealers and other marketing
arrangements and could be adversely affected by poor performance or other disruptions in our
distribution channels and customers.
We rely on a distribution network comprised of consolidating customers. Any disruption to the existing
distribution channels could adversely affect our results of operations, cash flows and financial
condition. The consolidation of distributors or the financial instability or default of a distributor or one
of its major customers could potentially cause such a disruption. In addition to our own sales force,
10
we offer our products through a variety of third-party distributors, representatives and retailers.
Certain of our distributors, representatives or retailers may also market other products that compete
with our products. The loss or termination of one or more of our major distributors, representatives or
retailers, the failure of one or more of our distributors or representatives to effectively promote our
products, or changes in the financial or business condition of these distributors or representatives
could affect our ability to bring products to market.
Our pension costs and funding requirements could increase as a result of volatility in the financial
markets and changes in interest rates and actuarial assumptions.
Increases in the costs of pension benefits may continue and negatively affect our business as a result
of: the effect of potential declines in the stock and bond markets on the performance of our pension
plan assets; potential reductions in the discount rate used to determine the present value of our
benefit obligations; and changes to our investment strategy that may impact our expected return on
pension plan assets assumptions. U.S. generally accepted accounting principles require that we
calculate income or expense for the plans using actuarial valuations. These valuations reflect
assumptions about financial markets and interest rates, which may change based on economic
conditions. Our accounting policy for defined benefit plans may subject earnings to volatility due to
the recognition of actuarial gains and losses and amortization of liability savings, particularly due to
the change in the fair value of pension assets and interest rates. Funding requirements for our U.S.
pension plans may become more significant. However, the ultimate amounts to be contributed are
dependent upon, among other things, interest rates, underlying asset returns and the impact of
legislative or regulatory changes related to pension funding obligations.
Risks associated with the disruption of operations could adversely affect our results of operations,
cash flows and financial condition.
We manufacture a significant portion of the products we sell. Any prolonged disruption in our
operations, whether due to technical or labor difficulties, weather, lack of raw material or component
availability, startup inefficiencies for new operations, disputes with strategic joint venture partners,
destruction of or damage to any facility (as a result of natural disasters, fires and explosions, use and
storage of hazardous materials or other events) or other reasons, could negatively impact our
profitability and competitive position and adversely affect our results of operations, cash flows and
financial condition.
Our inability to obtain raw materials and finished goods in a timely manner from suppliers would
adversely affect our ability to manufacture and market our products.
We purchase raw materials to be used in manufacturing our products and also rely on third-party
manufacturers as a source for finished goods. We typically do not enter into long-term contracts with
our suppliers or sourcing partners. Instead, most raw materials and sourced goods are obtained on a
“purchase order” basis. In addition, in some instances we maintain single-source or limited-source
sourcing relationships, either because multiple sources are not available or the relationship is
advantageous due to performance, quality, support, delivery, capacity or price considerations.
Financial, operating or other difficulties encountered by our suppliers or sourcing partners or changes
in our relationships with them could result in manufacturing or sourcing interruptions, delays and
inefficiencies, and prevent us from manufacturing or obtaining the finished goods necessary to meet
customer demand. If we are unable to meet customer demand, there could be an adverse effect on
our results of operations, cash flows and financial condition.
11
Our failure to attract and retain qualified personnel could adversely affect our results of operations,
cash flows and financial condition.
Our success depends in part on the efforts and abilities of qualified personnel at all levels, including
our senior management team and other key employees. Their motivation, skills, experience, contacts
and industry knowledge significantly benefit our operations and administration. The failure to attract,
motivate and retain members of our senior management team and key employees could have a
negative effect on our results of operations, cash flows and financial condition.
Future tax law changes or the interpretation of existing tax laws may materially impact our effective
income tax rate, the resolution of unrecognized tax benefits and cash tax payments.
Our businesses are subject to income taxation in the U.S., as well as internationally. We are routinely
audited by income tax authorities in many jurisdictions. Although we believe that the recorded tax
estimates are reasonable and appropriate, there are significant uncertainties in these estimates. As a
result, the ultimate outcome from any audit could be materially different from amounts reflected in our
income tax provisions and accruals. Future settlements of income tax audits may have a material
adverse effect on earnings between the period of initial recognition of tax estimates in our financial
statements and the point of ultimate tax audit settlement.
In connection with the divestiture of businesses and the separation from our Former Parent, we have
retained and may further retain tax liabilities and the rights to tax refunds for periods before any
divestiture or separation. As a result, from time to time, we may be required to make payments related
to tax matters associated with these transactions.
Potential liabilities and costs from claims and litigation could adversely affect our results of operations,
cash flows and financial condition.
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 that could have an adverse effect on us. These
matters may include contract disputes, intellectual property disputes, product recalls, personal injury
claims, construction defects and home warranty claims, warranty disputes, environmental claims or
proceedings, other tort claims, employment and tax matters and other proceedings and litigation,
including class actions. It is not possible to predict the outcome of pending or future litigation, and, as
with any litigation, it is possible that some of the actions could be decided unfavorably and could
have an adverse effect on our results of operations, cash flows and financial condition.
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. As a
result of 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.
An impairment in the carrying value of goodwill or other acquired intangible assets could negatively
affect our results of operations and financial condition.
The carrying value of goodwill represents the fair value of acquired businesses in excess of
identifiable assets and liabilities as of the acquisition date. The carrying value of other intangible
assets represents the fair value of trademarks, tradenames and other acquired intangible assets as of
the acquisition date. Goodwill and other acquired intangible assets expected to contribute indefinitely
to our cash flows are not amortized, but must be evaluated for impairment by our management at
least annually. If the carrying value exceeds the implied fair value of goodwill, the goodwill is
12
considered impaired and is reduced to fair value via a non-cash charge to earnings. If the carrying
value of an indefinite-lived intangible asset is greater than its fair value, the intangible asset is
considered impaired and is reduced to fair value via a non-cash charge to earnings. Events and/or
circumstances that could have a potential negative effect on the estimated fair value of our reporting
units and indefinite-lived tradenames include: actual new construction and repair and remodel growth
rates that lag our assumptions, actions of key customers, volatility of discount rates, continued
economic uncertainty, higher levels of unemployment, weak consumer confidence, lower levels of
discretionary consumer spending and a decline in the price of our common stock. If the value of
goodwill or other acquired intangible assets is impaired, our results of operations and financial
condition could be adversely affected.
We may experience delays or outages in our information technology system and computer networks.
We, like most companies, may be subject to information technology system failures and network
disruptions. These may be caused by delays or disruptions due to system updates, natural disasters,
malicious attacks, accidents, power disruptions, telecommunications failures, acts of terrorism or war,
computer viruses, physical or electronic break-ins, or similar events or disruptions. Our businesses
may implement enterprise resource planning systems or add applications to replace outdated
systems and to operate more efficiently. Predictions regarding benefits resulting from the
implementation of these projects are subject to uncertainties. We may not be able to successfully
implement the projects without experiencing difficulties. In addition, any expected benefits of
implementing projects might not be realized or the costs of implementation might outweigh the
benefits realized.
We may be subject to breaches of our information technology systems, which could damage our
reputation and consumer relationships. Such breaches could subject us to significant financial, legal,
and operational consequences.
Information security risks have generally increased in recent years because of the proliferation of new
technologies and the increased sophistication and activities of perpetrators of cyber-attacks. In
particular, our Security business is increasingly utilizing digital elements that allow third parties to use
and store personally identifiable information and other information pertaining to their customers and
their employees and businesses through online services operated by Master Lock. Such information
may include names, passwords, addresses, phone numbers, access to facilities, email addresses,
contact preferences, tax identification numbers and payment account information. We devote
appropriate resources to network security, data encryption, and other security measures to protect
our systems and data, but these security measures cannot provide absolute security. In the event of a
breach, we would be exposed to a risk of loss or litigation and possible liability, which could have an
adverse effect on our business, results of operations, cash flows, and financial condition.
We are subject to credit risk on our accounts receivable.
Our outstanding trade receivables are generally not covered by collateral or credit insurance. While
we have procedures to monitor and limit exposure to credit risk on our trade receivables, there can be
no assurance that such procedures will effectively limit our credit risk and avoid losses, which could
have an adverse effect on our results of operations, cash flows and financial condition. In addition, it
is possible that weak economic conditions may cause significantly higher levels of customer defaults
and bad debt expense in future periods than is contemplated by our current allowances for doubtful
accounts.
There can be no assurance that we will have access to the capital markets on terms acceptable to us.
From time to time we may need to access the long-term and short-term capital markets to obtain
financing. Although we believe that the sources of capital currently in place permit us to finance our
13
operations for the foreseeable future on acceptable terms and conditions, our access to, and the
availability of, financing on acceptable terms and conditions in the future will be impacted by many
factors, including, but not limited to: (i) our financial performance, (ii) our credit ratings or absence of
a credit rating, (iii) the liquidity of the overall capital markets and (iv) the state of the economy,
including the U.S. housing market. There can be no assurance that we will have access to the capital
markets on terms acceptable to us. In addition, a prolonged global economic downturn may also
adversely impact our access to long-term capital markets, result in increased interest rates on our
corporate debt, and weaken operating cash flow and liquidity. Decreased cash flow and liquidity
could potentially adversely impact our ability to pay dividends, fund acquisitions and repurchase
shares in the future.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal executive office is located at 520 Lake Cook Road, Deerfield, Illinois 60015. We operate
25 U.S. manufacturing facilities in 13 states and have 11 manufacturing facilities in international
locations (7 in Mexico, 2 in Asia and 2 in Canada). In addition, we have 26 distribution centers and
warehouses worldwide, of which 23 are leased. The following table provides additional information
with respect to these properties.
Segment
Cabinets
Plumbing
Doors
Security
Totals
Manufacturing
Facilities
Leased
Owned
Distribution Centers
and Warehouses
Total
Owned
Leased
Total
16
3
4
4
27
5
1
2
1
9
21
4
6
5
36
2
1
—
—
3
3
9
1
10
23
5
10
1
10
26
We are of the opinion that the properties are suitable to our respective businesses and have
production capacities adequate to meet the current needs of our businesses.
Item 3. Legal Proceedings.
We are defendants in lawsuits associated with the normal conduct of our businesses and operations.
It is not possible to predict the outcome of the pending actions and, as with any litigation, it is
possible that some of these actions could be decided unfavorably to us. We believe that there are
meritorious defenses to these actions, which we are vigorously contesting, and that these actions will
not have a material adverse effect upon our results of operations, cash flows or financial condition.
Item 4. Mine Safety Disclosures.
Not applicable.
14
Executive Officers of the Registrant.
Name
Age
Position
51 Chief Executive Officer
62 Senior Vice President and Chief Financial Officer
50 President, The Master Lock Company LLC
Christopher J. Klein
E. Lee Wyatt, Jr.
Michael P. Bauer
David B. Lingafelter 50 President, Moen Incorporated
David M. Randich
Mark Savan
Robert K. Biggart
Sheri R. Grissom
Dan Luburic
53 President, MasterBrand Cabinets, Inc.
50 President, Fortune Brands Doors, Inc.
60 Senior Vice President — General Counsel and Secretary
50 Senior Vice President — Human Resources
43 Vice President — Corporate Controller
Christopher J. Klein has served as Chief Executive Officer of Fortune Brands since January 2010.
From April 2009 to December 2009, Mr. Klein served as President and Chief Operating Officer of
Fortune Brands. From February 2009 through April 2009, Mr. Klein served as Senior Vice President of
our Former Parent and, from April 2003 to February 2009, Mr. Klein served as Senior Vice
President — Strategy & Corporate Development of our Former Parent.
E. Lee Wyatt, Jr. has served as Senior Vice President and Chief Financial Officer of Fortune
Brands since July 2011. Mr. Wyatt served as Executive Vice President, Chief Financial Officer of
Hanesbrands Inc., a global consumer goods company, from September 2006 to June 2011.
Michael P. Bauer has served as President of The Master Lock Company LLC since December
2014. From April 2011 through December 2014, Mr. Bauer served as the President of the U.S.
Businesses at Moen Incorporated, a subsidiary of Fortune Brands. Mr. Bauer served as the Vice
President and General Manager of U.S. Retail at Moen Incorporated from January 2010 to April 2011.
David B. Lingafelter has served as President of Moen Incorporated, a subsidiary of Fortune
Brands, since October 2007.
David M. Randich has served as President of MasterBrand Cabinets, Inc., a subsidiary of Fortune
Brands, since October 2012. From November 2007 to October 2012, Mr. Randich served as
President of Therma-Tru Corp., a subsidiary of Fortune Brands.
Mark Savan has served as President, Fortune Brands Doors, Inc., a subsidiary of Fortune Brands,
since January 2013. Mr. Savan also serves as President of Therma-Tru Corp. since October 2012 and
served as President of Fortune Brands Windows, Inc., a subsidiary of Fortune Brands, from October
2006 to September 2014.
Robert K. Biggart has served as Senior Vice President, General Counsel and Secretary of Fortune
Brands since December 2013. From March 2005 through December 2013, Mr. Biggart served as
Senior Vice President — General Counsel of PepsiCo Americas Beverages, a business division of
PepsiCo, Inc., a global food and beverage company.
Sheri R. Grissom has served as Senior Vice President — Human Resources of Fortune Brands
since February 2015. Prior to that, Ms. Grissom served as Executive Vice President — Global Human
Resources of Actuant Corporation, a diversified industrial company, since October 2010.
Dan Luburic has served as Vice President — Corporate Controller of Fortune Brands since October
2011. Prior to that, Mr. Luburic served as Assistant Corporate Controller of our Former Parent from
December 2007 through September 2011.
15
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Market Information, Dividends and Holders of Record
Our common stock is listed on the New York Stock Exchange (the “NYSE”) under the ticker symbol
“FBHS”. The following table presents the high and low prices for our common stock as reported on
the NYSE.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2014
2013
High
Low
High
Low
$47.92
43.51
44.24
46.00
$39.83
37.28
36.65
36.54
$38.16
44.04
43.69
46.08
$29.91
33.20
35.80
37.75
In December 2014, our Board of Directors increased the quarterly cash dividend by 17% to $0.14 per
share of our common stock. We currently expect to pay quarterly cash dividends in the future, but
such payments are dependent upon our financial condition, results of operations, capital
requirements and other factors, including those set forth under “Item 1A. Risk Factors.”
On February 6, 2015, there were 12,942 record holders of the Company’s common stock, par value
$0.01 per share.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Below are the repurchases of common stock by the Company or any “affiliated purchaser”
(as defined in Rule 10b-18(a)(3) under the Exchange Act) for the three months ended December 31,
2014:
Three months ended
December 31, 2014
Total number of
shares purchased(a)
Average price
paid per share
Total number of
shares purchased
as part of publicly
announced plans
or programs(a)
Approximate dollar
value of shares that may
yet be purchased
under the plans or
programs(a)
October 1 – October 31
November 1 – November 30
December 1 – December 31
Total
748,598
—
—
748,598
$38.05
—
—
$38.05
748,598
—
—
748,598
$300,000,000
300,000,000
300,000,000
—
(a)
Information on the Company’s share repurchase programs follows:
Authorization and
announcement date
June 2, 2014
September 30, 2014
Authorization amount of shares of
outstanding common stock
$250 million
$250 million
Expiration date
June 2, 2016
September 30, 2016
16
Stock Performance
FORTUNE BRANDS HOME & SECURITY, INC.
STOCK PRICE PERFORMANCE
(With Dividend Reinvestment)
$400
$350
$300
$250
$200
$150
$100
$50
$0
09/16/2011
12/31/2011
12/31/2012
12/31/2013
12/31/2014
Peer Index
S&P Midcap 400
FBHS
The above graph compares the relative performance of our common stock, the S&P Midcap 400
Index and a Peer Group Index. This graph covers the period from September 16, 2011 (the first day
our common stock began “when-issued” trading on the NYSE) through December 31, 2014. This
graph assumes $100 was invested in the stock or the index on September 16, 2011 and also
assumes the reinvestment of dividends. The foregoing performance graph is being furnished as part
of this Annual Report on Form 10-K solely in accordance with the requirement under Rule 14a-3(b)(9)
to furnish our stockholders with such information, and therefore, shall not be deemed to be filed or
incorporated by reference into any filings by the Company under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended.
Peer Group Index The Peer Group is composed of the following publicly traded companies
corresponding to the Company’s core businesses:
Armstrong World Industries, Inc., Fastenal Company, Leggett & Platt Incorporated, Lennox
International Inc., Masco Corporation, Mohawk Industries, Inc., Newell Rubbermaid Inc., The Sherwin-
Williams Company, Stanley Black & Decker, Inc., USG Corporation and The Valspar Corporation.
Calculation of Peer Group Index
The weighted-average total return of the entire Peer Group, for the period of September 16, 2011 (the
first day of “when-issued” trading on the NYSE of Fortune Brands Home & Security, Inc. common
stock) through December 31, 2014, is calculated in the following manner:
(1)
the total return of each Peer Group member is calculated by dividing the change in market
value of a share of its common stock during the period, assuming reinvestment of any
dividends, by the value of a share of its common stock at the beginning of the period; and
(2) each Peer Group member’s total return is then weighted within the index based on its market
capitalization relative to the market capitalization of the entire index, and the sum of such
weighted returns results in a weighted-average total return for the entire Peer Group Index.
17
Item 6. Selected Financial Data.
Five-year Consolidated Selected Financial Data
(In millions, except per share amounts)
2014
2013
2012
2011
2010
Years Ended December 31,
Income statement data(a)
Net sales
Cost of products sold(a)
Selling, general and administrative
expenses(b)
Amortization of intangible assets
Restructuring charges
Business separation costs
Asset impairment charges
Operating income
Income from continuing operations, net of
tax
Basic earnings per share — continuing
operations
Diluted earnings per share — continuing
operations
Other data(a)
Depreciation and amortization
Cash flow provided by operating activities
Capital expenditures
Proceeds from the disposition of assets
Dividends declared per common share
Dividends paid per common share to Former
$4,013.6
2,646.7
$3,703.6
2,408.5
$3,134.8
2,093.2
$2,877.8
1,985.7
$2,748.5
1,815.1
943.3
13.1
7.0
—
—
403.5
938.7
9.4
2.8
—
21.2
323.0
873.1
7.4
4.7
—
13.2
143.2
273.6
209.0
108.3
1.68
1.64
1.26
1.21
0.67
0.65
797.1
10.2
3.6
2.4
24.0
54.8
5.6
0.03
0.03
733.9
11.1
4.3
—
—
184.1
60.5
0.38
0.38
$
98.8
253.7
(127.5)
0.7
0.50
$
90.4
297.8
(96.7)
2.2
0.42
$ 101.3
282.8
(75.0)
13.5
—
$ 111.5
175.4
(68.5)
3.5
—
$ 111.6
138.9
(58.3)
2.6
—
Parent
—
—
—
3.54
—
Balance sheet data
Total assets
Third party long-term debt
Total invested capital(c)
Short-term loans to Former Parent (included
in total assets above)(d)
Long-term loans from Former Parent(d)
$4,052.9
643.7
2,933.0
$4,178.1
350.0
3,009.2
$3,873.9
297.5
2,710.2
$3,637.9
389.3
2,535.2
$4,257.6
16.8
2,605.5
—
—
—
—
—
—
571.7
—
— 3,214.0
(a)
Income statement data excludes discontinued operations. Other data is derived from the Statement of Cash Flows and therefore includes
discontinued operations. For additional information, refer to Note 18, “Information on Business Segments.”
(b) The Company’s defined benefit expense included pre-tax actuarial (losses) gains in each of the last five years as follows:
Pre-tax actuarial (losses) gains
Portion in cost of products sold
Portion in selling, general and administrative expenses
2014
$(13.7)
(3.0)
(10.7)
2013
$(5.2)
(2.7)
(2.5)
2012
2011
2010
$(42.2)
(14.2)
(28.0)
$(80.0)
(41.0)
(39.0)
$3.5
2.5
1.0
(c) Total invested capital consists of equity and short-term and long-term debt, including loans payable to our Former Parent, net of loans
receivable from our Former Parent.
(d)
In 2011, our Former Parent made equity contributions totaling $2.7 billion to the Company, capitalizing all loan balances with our Former
Parent.
18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
Introduction
This Management’s Discussion and Analysis of Financial Condition and Results of Operations
(“MD&A”) is a supplement to the accompanying consolidated financial statements and provides
additional information on our business, recent developments, financial condition, liquidity and capital
resources, cash flows and results of operations. MD&A is organized as follows:
> Overview: This section provides a general description of our business, and a discussion of
management’s general outlook regarding market demand, our competitive position and product
innovation, as well as recent developments we believe are important to understanding our results
of operations and financial condition or in understanding anticipated future trends.
>
>
>
Basis of Presentation: This section provides a discussion of the basis on which our consolidated
financial statements were prepared.
Results of Operations: This section provides an analysis of our results of operations for each of
the three years ended December 31, 2014, 2013 and 2012.
Liquidity and Capital Resources: This section provides a discussion of our financial condition
and an analysis of our cash flows for each of the three years ended December 31, 2014, 2013
and 2012. This section also provides a discussion of our contractual obligations, other purchase
commitments and customer credit risk that existed at December 31, 2014, as well as a
discussion of our ability to fund our future commitments and ongoing operating activities through
internal and external sources of capital.
> Critical Accounting Policies and Estimates: This section identifies and summarizes those
accounting policies that significantly impact our reported results of operations and financial
condition and require significant judgment or estimates on the part of management in their
application.
Overview
The Company is a leader in home and security products focused on the design, manufacture and
sale of market-leading branded products in the following categories: kitchen and bath cabinetry,
plumbing and accessories, entry door systems, and security products.
For the year ended December 31, 2014, net sales based on country of destination were:
(In millions)
United States
Canada
China and other international
Total
$3,313.1
405.8
294.7
83%
10
7
$4,013.6
100%
We believe the Company has certain competitive advantages including market-leading brands, a
diversified mix of customer channels, and lean and flexible supply chains, as well as a tradition of
strong innovation and customer service. We are focused on outperforming our markets in growth,
profitability and returns in order to drive increased shareholder value. We believe the Company’s
track record reflects the long-term attractiveness and potential of our categories and our leading
brands. As consumer demand and the housing market grow, we expect the benefits of operating
leverage and strategic spending will help us to continue to achieve profitable organic growth.
19
We believe our most attractive opportunities are to invest in profitable organic growth initiatives. We
also believe that as the market grows, we have the potential to generate additional growth from
leveraging our cash flows and balance sheet strength by pursuing accretive strategic acquisitions
and joint ventures, and returning cash to shareholders through a combination of dividends and
repurchases under our share repurchase programs as explained in further detail under “Liquidity and
Capital Resources” below.
The U.S. market for our home products consists of spending on both new home construction and
repair and remodel activities within existing homes, with the substantial majority of the markets we
serve consisting of repair and remodel spending. We believe that the U.S. market for our home
products is in the midst of a multi-year recovery from the U.S. economic recession that ended in mid-
2009 and that a continued recovery will largely depend on consumer confidence, employment, home
prices, stable mortgage rates and credit availability. Over the long term, we believe that the U.S.
home products market will benefit from favorable population and immigration trends, which will drive
demand for new housing units, and from aging existing housing stock that will continue to need to be
repaired and remodeled.
We may be impacted by fluctuations in raw material and transportation costs and promotional activity
among our competitors. We strive to offset the potential unfavorable impact of these items with
productivity initiatives and price increases.
During the past two years ended December 31, 2014, our net sales grew at a compounded annual
rate of 13% as we benefited from an improving U.S. home products market, share gains, growth in
international markets and acquisitions. Operating income grew at a compounded annual rate of 68%
with operating margins improving from 5% in 2012 to 10% in 2014. Growth in operating income was
primarily due to higher sales volume, control and leverage of our operating expenses, changes to our
portfolio of businesses, the benefits of productivity programs, and lower restructuring and impairment
charges.
During 2014, the U.S. home products market grew due to expansion of both new home construction
and repair and remodel activities. We believe new housing construction experienced high-single digit
growth in 2014 compared to 2013 and spending for home repair and remodeling increased
approximately 4 to 5%. In 2014, net sales grew 8% and operating income increased 25% due to
higher sales volume primarily resulting from U.S. home products market growth, the acquisitions of
WoodCrafters Home Products Holding, LLC (“WoodCrafters”) in 2013 and John D. Brush & Co., Inc.
(“SentrySafe”) in 2014, and productivity improvements.
During 2013, the U.S. home products market also grew due to expansion of both new home
construction and repair and remodel activities. We believe new housing construction grew in the high
teens (%) in 2013 compared to 2012 and spending for home repair and remodeling increased
approximately 5% to 6%. We experienced strengthening in larger ticket repair and remodel activities,
which had previously been lagging the overall market, and are particularly impactful to our cabinet
products. In 2013, net sales grew 18% and operating income increased 126% on the benefit of higher
volume from our growth initiatives, improving U.S. home products market conditions and productivity
improvements, as well as the benefit of the acquisition of WoodCrafters.
In December 2014, we acquired Anaheim Manufacturing Company, which markets and sells garbage
disposals, for $30.6 million in cash, subject to certain post-closing adjustments. In July 2014, we
acquired SentrySafe, a leading manufacturer of home safes, for a purchase price of $116.7 million in
cash. The financial results of SentrySafe were included in the Company’s results of operations and
cash flows beginning in August of 2014. The purchase prices were funded from cash on hand and
our existing credit facilities.
20
In December 2014, we committed to a plan to sell the Waterloo tool storage business. In September
2014, we sold the Simonton windows business for $130 million in cash. For additional information on
these discontinued operations, refer to the Basis of Presentation section below.
In June 2013, the Company acquired WoodCrafters, a manufacturer of bathroom vanities and tops,
for a purchase price of $302.0 million. We paid the purchase price using a combination of cash on
hand and borrowings under our existing credit facilities. The financial results of WoodCrafters were
included in the Company’s results of operations and cash flows beginning in the third quarter of 2013.
This acquisition greatly expanded our offering of bathroom cabinetry products.
Basis of Presentation
The consolidated financial statements in this Annual Report on Form 10-K have been derived from the
accounts of the Company and its majority-owned subsidiaries. In September 2014, we sold of all of
the shares of stock of Fortune Brands Windows, Inc., our subsidiary that owned and operated the
Simonton windows business (“Simonton”). In December 2014, we committed to a plan to sell Waterloo
Industries, Inc. (“Waterloo”), our tool storage business, Therefore, in accordance with Accounting
Standards Codification (“ASC”) requirements, the results of operations of Waterloo and Simonton
were reclassified and separately stated as discontinued operations in the accompanying
consolidated statements of comprehensive income for 2014, 2013 and 2012. The assets and liabilities
of Simonton were reclassified as a discontinued operation in the accompanying consolidated balance
sheets as of December 31, 2013. The assets and liabilities of Waterloo were reclassified as a
discontinued operation in the accompanying consolidated balance sheets as of December 31, 2014
and 2013. The cash flows from discontinued operations for 2014, 2013 and 2012 were not separately
classified on the accompanying condensed consolidated statements of cash flows. Information on
Business Segments was revised to exclude this discontinued operation.
Results of Operations
The following discussion of both consolidated results of operations and segment results of operations
refers to the year ended December 31, 2014 compared to the year ended December 31, 2013, and
the year ended December 31, 2013 compared to the year ended December 31, 2012. The discussion
of consolidated results of operations should be read in conjunction with the discussion of segment
results of operations and our financial statements and notes thereto included in this Annual Report on
Form 10-K. Unless otherwise noted, all discussion of results of operations are for continuing
operations.
Years Ended December 31, 2014, 2013 and 2012
(In millions)
Net Sales:
Cabinets
Plumbing
Doors
Security
Total Fortune Brands
Operating Income (Loss):
Cabinets
Plumbing
Doors
Security
Corporate(a)
Total Fortune Brands
2014 % change
2013
% change
2012
$1,787.5
1,331.0
413.9
481.2
$4,013.6
$ 137.9
258.9
29.2
49.4
(71.9)
$ 403.5
8.8%
3.4
11.4
19.5
8.4%
42.0%
13.4
90.8
(10.8)
1.6
24.9%
$1,642.2
1,287.0
371.6
402.8
$3,703.6
$
97.1
228.3
15.3
55.4
(73.1)
$ 323.0
23.8% $1,326.6
1,100.7
16.9
321.5
15.6
386.0
4.4
18.1% $3,134.8
373.7% $
34.9
1,276.9
2.0
26.5
20.5
169.2
(1.3)
54.3
(99.5)
125.6% $ 143.2
(a) Corporate expenses include the components of defined benefit plan expense other than service cost which totaled expense (income) of $4.9
million, $(4.9) million, and $38.7 million for the years ended December 31, 2014, 2013 and 2012, respectively. There are no amounts that
represent the elimination or reversal of transactions between reportable segments.
21
Certain items had a significant impact on our results in 2014, 2013 and 2012. These included the
acquisitions of SentrySafe and WoodCrafters, asset impairment charges, defined benefit plan
recognition of actuarial losses and gains, restructuring and other charges and the impact of changes
in foreign currency exchange rates.
In 2014, financial results included:
>
>
>
>
>
the impact of the WoodCrafters and SentrySafe acquisitions, which added approximately $165
million of net sales (approximately $100 million and $65 million, respectively),
defined benefit plan recognition of actuarial losses, recorded in the Corporate segment, of $13.7
million ($8.7 million after tax) compared to $5.2 million ($3.3 million after tax) in 2013. This change
was primarily due to lower discount rates in 2014, partially offset by the impact of a higher than
expected increase in pension plan assets and lower postretirement liabilities due to plan
amendments to reduce health benefits,
restructuring and other charges of $7.7 million before tax ($4.7 million after tax), primarily
associated with supply chain initiatives,
the impact of foreign exchange, which had an unfavorable impact compared to 2013, of
approximately $25 million on net sales, approximately $13 million on operating income and
approximately $10 million on net income. The effects of foreign exchange on the Company’s
results are principally associated with movements in the Canadian dollar and
loss from discontinued operations of $114.3 million, net of tax, includes the net loss on the sale of
Simonton windows of $111.2 million, as well as restructuring and impairment losses as a result of
the decision to sell the Waterloo tool storage business of $14.1 million, net of tax.
In 2013, financial results included:
>
>
>
>
>
the impact of the WoodCrafters acquisition, which added approximately $115 million of net sales,
asset impairment charges in our Cabinets segment of $21.2 million ($13.8 million after tax)
associated with the abandonment of certain internal use software,
defined benefit plan recognition of actuarial losses, recorded in the Corporate segment, of $5.2
million ($3.3 million after tax) compared to $42.2 million ($26.2 million after tax) in 2012. This
change was primarily due to a higher than expected increase in pension plan assets and higher
discount rates in 2013, as well as lower postretirement liabilities due to plan amendments to
reduce health benefits,
restructuring and other charges of $3.7 million before tax ($2.8 million after tax), primarily
associated with supply chain initiatives,
the impact of foreign exchange, which had an unfavorable impact compared to 2012, of
approximately $7 million on net sales and approximately $1 million on operating income and net
income. The effects of foreign exchange on the Company’s results are principally associated with
movements in the Canadian dollar and
>
income from discontinued operations of $21.9 million, net of tax.
In 2012, financial results included:
>
>
defined benefit plan recognition of actuarial losses, recorded in the Corporate segment, of $42.2
million ($26.2 million after tax), primarily due to a decrease in the discount rate used to value our
pension and other postretirement obligations,
asset impairment charges of $13.2 million ($8.1 million after tax) associated with tradenames in
the Doors segment ($7.3 million before tax) and the Cabinets segment ($5.9 million before tax).
22
These charges were primarily the result of an increase in our market-participant cost of capital
discount rates. One tradename in the Cabinets segment was also impacted by reduced revenue
growth expectations for high-end discretionary cabinet purchases developed during our annual
planning process that was completed in the fourth quarter in 2012,
restructuring and other charges of $13.6 million before tax ($8.9 million after tax), primarily
associated with cabinet manufacturing facility closures and
income from discontinued operations of $11.4 million, net of tax.
>
>
2014 Compared to 2013
Total Fortune Brands
Net sales
Net sales increased $310.0 million, or 8%. The increase was due to the benefit of the acquisitions of
WoodCrafters and SentrySafe (approximately $165 million in aggregate), higher sales volume
primarily from the continuing improvement in U.S. market conditions for home products, price
increases to help mitigate material cost increases, and favorable product mix. These increases were
partially offset by the impact of the planned exit from low margin builder direct cabinet business in the
western U.S. (approximately $53 million) and approximately $25 million of unfavorable foreign
exchange.
Cost of products sold
Cost of products sold increased $238.2 million, or 10%, due to higher sales volume, material cost
increases and higher costs associated with manufacturing capacity increases to support long-term
growth, as well as the $126.0 million impact of the acquisitions of SentrySafe and WoodCrafters.
These cost increases were partially offset by the benefit of productivity improvements.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $4.6 million due to higher volume-related
costs and the $19.0 million impact of the acquisitions of SentrySafe and WoodCrafters, partially offset
by lower employee-related costs. Selling, general and administrative expenses were also unfavorable
due to higher expense from actuarial losses related to defined benefits plans ($10.7 million in 2014
compared to $2.5 million in 2013).
Amortization of intangible assets
Amortization of intangible assets increased $3.7 million due to the acquisitions of WoodCrafters ($2.9
million incremental) and SentrySafe ($0.8 million).
Restructuring charges
Restructuring charges of $7.0 million in 2014 related to severance in Security, Plumbing and
Corporate, partially offset by a benefit from a foreign currency gain associated with dissolution of a
foreign entity in the Plumbing segment. Restructuring charges of $2.8 million in 2013 related to supply
chain initiatives.
23
Asset impairment charge
No asset impairment charges were recorded in 2014 in operating income. In 2013, our Cabinets
segment completed an evaluation of its information technology strategy. As a result of this evaluation,
the segment abandoned certain software developed for internal use and recorded an impairment
charge of $21.2 million, which was recorded in operating income and reduced property, plant and
equipment.
Operating income
Operating income increased $80.5 million, or 25%, primarily due to higher sales volume from our
growth initiatives and improving U.S. home products market conditions, the benefit from the
WoodCrafters and SentrySafe acquisitions (approximately $9 million in aggregate) and improved
product mix. Operating income was unfavorably impacted by planned costs associated with
manufacturing capacity increases to support long-term growth. Operating income was also impacted
by approximately $13 million of unfavorable foreign exchange. In addition, the following items had a
significant impact on operating income trends:
(In millions)
Recognition of defined benefit plan actuarial
losses
Restructuring and other charges
Asset impairment charges
2014
2013
Increase/(decrease)
in operating income
$13.7
7.7
—
$ 5.2
3.7
21.2
$ (8.5)
(4.0)
21.2
Interest expense
Interest expense increased $3.2 million primarily due to higher average borrowings.
Other expense (income), net
Other expense, net, was $1.2 million in 2014, compared to $5.3 million in 2013. The decrease of $4.1
million was primarily due to a $6.2 million impairment charge pertaining to a cost method investment
in 2013, partially offset by a $1.6 million impairment charge pertaining to a different cost method
investment in 2014.
Income taxes
The effective income tax rates for 2014 and 2013 were 30.2% and 32.7%, respectively. The effective
income tax rate for 2014 was favorably impacted by the tax benefit attributable to the Domestic
Production Activity (Internal Revenue Code Section 199) Deduction ($7.6 million), the release of
valuation allowances related to state net operating loss carryforwards ($4.1 million), and a $1.8 million
benefit associated with the extension of the U.S. research and development credit under the Tax
Increase Prevention Act 2014. The effective income tax rate for 2013 was favorably impacted by the
tax benefit attributable to the Domestic Production Activity (Internal Revenue Code Section 199)
Deduction ($5.2 million), $1.6 million of deferred tax benefits associated with the enacted repeal of
the Mexican Business Flat Tax under the 2014 Mexican Tax Reform Package, and a $1.4 million tax
benefit associated with the extension of the U.S. research and development credit under The
American Taxpayer Relief Act of 2012. The effective income tax rate in 2013 was unfavorably
impacted by an increase in the valuation allowance related to an investment impairment charge for
which we could not record an income tax benefit ($2.1 million).
24
Noncontrolling interests
Noncontrolling interest was $1.2 million in 2014 and 2013.
Net income from continuing operations
Net income from continuing operations was $273.6 million in 2014 compared to $209.0 million in
2013. The increase of $64.6 million was primarily due to higher operating income and the impact of
the lower effective income tax rate.
Net (loss) income from discontinued operations
Discontinued operations consist of the results of operations of Simonton and the loss associated with
the sale of the business in 2014, as well as the results of operations of Waterloo. The net loss from
discontinued operations was $114.3 million in 2014, of which $111.2 million was the loss on the sale
of the Simonton windows business, as well as $14.1 million in restructuring and impairment losses
recorded as a result of the decision to sell the Waterloo tool storage business. Income from
discontinued operations was $21.9 million in 2013.
Results By Segment
Cabinets
Net sales increased $145.3 million, or 9%, primarily due to the benefit of the acquisition of
WoodCrafters (approximately $100 million) and strength in the repair and remodel market. Net sales
also benefited from favorable product mix and price increases to help mitigate raw material cost
increases. Net sales were unfavorably affected by the impact of the planned exit from low margin
builder direct business in the western U.S. (approximately $53 million) and approximately $15 million
of unfavorable foreign exchange.
Operating income increased $40.8 million, or 42%, due to the acquisition of WoodCrafters
(approximately $12 million) and the absence in 2014 of the 2013 asset impairment charge of $21.2
million. Operating income also benefited from productivity improvements, lower employee-related
costs, price increases to help mitigate raw material cost increases (wood-related) and improved
product mix. Operating income was unfavorably impacted by higher costs associated with
manufacturing capacity increases to support long-term growth.
Plumbing
Net sales increased $44.0 million, or 3%, due to higher sales volume in the U.S. driven primarily by
improving U.S. market conditions, price increases to help mitigate raw material cost increases and
approximately $13 million in higher international sales, primarily China and Canada. These benefits
were partially offset by approximately $10 million of unfavorable foreign exchange.
Operating income increased $30.6 million, or 13%, due to higher sales volume, price increases to
help mitigate raw material cost increases and cost saving initiatives. These benefits were partially
offset by planned strategic and supply chain initiatives to increase capacity for long-term growth, as
well as unfavorable foreign exchange of approximately $10 million.
Doors
Net sales increased $42.3 million, or 11%, due to higher sales volume driven primarily by improved
conditions in the U.S. home products market, benefits from new distribution partners and price
increases to help mitigate raw material cost increases.
25
Operating income increased $13.9 million, or 91%, due to higher sales volume. Operating income
also benefited from price increases to help mitigate raw material cost increases and cost savings
initiatives, as well as lower employee-related costs. These benefits were partially offset by increased
material costs and higher costs related to planned capacity investments.
Security
Net sales increased $78.4 million, or 19%, due to the benefit of the acquisition of SentrySafe
(approximately $65 million), as well as higher sales volume, including internationally, particularly in
Europe.
Operating income decreased $6.0 million, or 11%, due to $5.7 million of inventory step-up
amortization related to the acquisition of SentrySafe, increased raw material costs, higher selling and
administrative expenses to support long-term growth and $4.1 million of restructuring charges in
2014. Operating income benefited from higher sales volume and lower employee-related costs.
Corporate
Corporate expenses decreased $1.2 million, or 2%, due to lower employee-related costs and
consulting expense, partially offset by recognition of higher actuarial losses recognized in 2014
compared to 2013 (an $8.5 million increase) and $2.0 million of restructuring charges in 2014. The
actuarial losses related to the normal remeasurement of the defined benefit plan liabilities ($13.1
million) and defined benefit plan amendments that required a remeasurement of certain
postretirement benefit liabilities ($0.6 million).
(In millions)
General and administrative expense
Defined benefit plan income
Recognition of defined benefit plan actuarial losses
Total Corporate expenses
2014
2013
$(67.0)
8.8
(13.7)
$(71.9)
$(78.0)
10.1
(5.2)
$(73.1)
In future periods the Company may record, in the Corporate segment, material expense or income
associated with actuarial gains and losses arising from periodic remeasurement of our liabilities for
defined benefit plans. At a minimum the Company will remeasure its defined benefit plan liabilities in
the fourth quarter of each year. Remeasurements due to plan amendments and settlements may also
occur in interim periods during the year. Remeasurement of these liabilities attributable to updating
our liability discount rates and expected return on assets may, in particular, result in material income
or expense recognition.
2013 Compared to 2012
Total Fortune Brands
Net Sales
Net sales increased $568.8 million, or 18%. The increase was due to higher sales volume, primarily
from improved U.S. market conditions for home products, and new product introductions, as well as a
benefit of approximately $115 million from the acquisition of WoodCrafters. Net sales also benefited
from price increases that helped mitigate raw material cost increases.
26
Cost of products sold
Cost of products sold increased $315.3 million, or 15%, due to higher sales volume and the impact of
the WoodCrafters acquisition, partially offset by the benefit of productivity improvements, including
cost savings from previously announced restructuring actions. Cost of products sold also benefited
from lower expense from actuarial losses related to defined benefit plans ($2.7 million in 2013
compared to $14.2 million in 2012).
Selling, general and administrative expenses
Selling, general and administrative expenses increased $65.6 million, or 8%, due to higher volume-
related expenses and planned increases in strategic spending to support growth initiatives that
included approximately $16 million of higher advertising spending. Administrative expenses also
increased due to higher consulting expenses and acquisition-related transaction expenses. Selling,
general and administrative expenses benefited from lower expense from actuarial losses related to
defined benefit plans ($2.5 million in 2013 compared to $28.0 million in 2012).
Amortization of intangible assets
Amortization of intangible assets increased $2.0 million due to $2.9 million of amortization of
identifiable intangible assets associated with the WoodCrafters acquisition, partially offset by the
absence of expense for an identifiable intangible asset that was fully amortized in the second quarter
of 2012.
Restructuring charges
Restructuring charges of $2.8 million and $4.7 million in 2013 and 2012, respectively, were related to
supply chain initiatives.
Asset impairment charges
At the end of the third quarter of 2013, our Cabinets segment completed an evaluation of its
information technology strategy. The evaluation considered opportunities arising from the improving
U.S. home market conditions. As a result of this evaluation, the segment abandoned certain software
developed for internal use in order to redirect financial resources toward developing more flexible
systems that provide industry leading content for consumers and more advanced tools for designers
to deliver a superior purchasing experience for their customers. The abandonment of this internal use
software resulted in a pre-tax impairment charge of $21.2 million, which was recorded in operating
income and reduced property, plant and equipment, and will not materially impact current or future
cash flow or future operating income.
In 2012, we recorded asset impairment charges of $13.2 million related to indefinite-lived tradenames
in the Doors and Cabinets segments.
Operating income
Operating income increased $179.8 million, or 126%, primarily due to higher sales volume from our
growth initiatives and improving U.S. home products market conditions, as well as the acquisition of
WoodCrafters. In addition, the following items had a significant impact on operating income trends:
(In millions)
Recognition of defined benefit plan actuarial
losses
Asset impairment charges
Restructuring and other charges
2013
2012
Increase/(decrease)
in operating income
$5.2
21.2
3.7
$42.2
13.2
13.6
$37.0
(8.0)
9.9
27
Interest expense
Interest expense decreased $1.3 million due to lower average interest rates and external borrowings.
Other expense (income), net
Other expense (income), net, was expense of $5.3 million in 2013, compared to income of $0.5 million
in 2012. The change of $5.8 million was primarily due to a 2013 impairment charge of $6.2 million
pertaining to a cost method investment.
Income taxes
The effective income tax rates for 2013 and 2012 were 32.7% and 19.9%, respectively. The effective
income tax rate in 2013 was favorably impacted by the tax benefit attributable to the Domestic
Production Activity (Internal Revenue Code Section 199) Deduction ($5.2 million), $1.6 million of
deferred tax benefits associated with the enacted repeal of the Mexican Business Flat Tax under the
2014 Mexican Tax Reform Package, and a $1.4 million tax benefit associated with the extension of the
U.S. research and development credit under The American Taxpayer Relief Act of 2012. The effective
income tax rate in 2013 was unfavorably impacted by an increase in the valuation allowance related
to an investment impairment charge for which we could not record an income tax benefit ($2.1
million). The effective income tax rate for 2012 was favorably impacted by a tax benefit related to the
final settlement of a U.S. federal income tax audit covering the 2008 to 2009 years ($11.1 million), a
decrease in valuation allowance due to certain reorganization actions among our foreign subsidiaries
($8.9 million), and the tax benefit attributable to the Domestic Production Activity (Internal Revenue
Code Section 199) Deduction ($2.1 million). The effective rate in 2012 was unfavorably impacted by
an income tax expense on foreign dividends ($12.4 million).
Net income from continuing operations
Net income from continuing operations was $209.0 million in 2013 compared to $108.3 million in
2012. The increase of $100.7 million was primarily due to higher operating income, partially offset by
the impact of the higher effective income tax rate and an increase in other expense (income), net.
Net (loss) income from discontinued operations
Discontinued operations consist of the result of operations of Waterloo and Simonton. The net income
from discontinued operations was $21.9 million in 2013 compared to $11.4 million in 2012.
Results By Segment
Cabinets
Net sales increased $315.6 million, or 24%, due to higher sales volume, primarily from improved U.S.
market conditions in both new construction and repair and remodel activity, and new product
introductions. Net sales also benefited from the acquisition of WoodCrafters (approximately $115
million), price increases that helped mitigate raw material cost increases and improving product mix
from repair and remodel growth.
Operating income increased $76.6 million to $97.1 million due to higher sales volume. Operating
income benefited from productivity improvements, including cost savings from previously announced
restructuring actions, improving product mix from repair and remodel growth, reduced promotional
costs and price increases, as well as the impact of the acquisition of WoodCrafters. Restructuring and
28
other charges decreased by $11.3 million due to the absence in 2013 of the 2012 restructuring action
to close our Martinsville, Virginia cabinet manufacturing facility. Operating income was unfavorably
impacted by an asset impairment charge of $21.2 million (compared to $5.9 million in 2012),
increased costs for raw materials (wood-related), capacity ramp-up costs and higher compensation
expense.
At the end of the third quarter of 2013, the Cabinets segment completed an evaluation of its
information technology strategy. The evaluation considered opportunities arising from improving U.S.
home market conditions. As a result of this evaluation, the segment abandoned certain software
developed for internal use in order to redirect financial resources toward developing more flexible
systems that provided industry leading content for consumers and more advanced tools for designers
to deliver a superior purchasing experience for their customers. The abandonment of this internal use
software resulted in a pre-tax impairment charge of $21.2 million, which was recorded in operating
income and reduced property, plant and equipment, and will not materially impact current or future
cash flow or future operating income.
Plumbing
Net sales increased $186.3 million, or 17%, due to higher sales volume in the U.S. driven primarily by
higher new construction housing starts and improving repair and remodel market conditions, and new
product introductions, as well as approximately $37 million of higher international sales, primarily in
China where we expanded our distributor-owned network and our direct-to-builder effort and
improved performance of the existing Moen stores. Net sales also benefited from price increases that
helped mitigate raw material cost increases.
Operating income increased $59.1 million, or 35%, due to higher sales volume. The impact of
productivity improvements was partially offset by approximately $14 million of higher planned
spending on advertising and brand support.
Doors
Net sales increased $50.1 million, or 16% due to higher sales volume driven primarily by improved
conditions in the U.S. home products market and distribution expansion.
Operating income increased $16.6 million to $15.3 million due to the benefit of higher sales, the
absence of $7.3 million in tradename impairment charges in 2012, productivity improvements and
favorable mix. These benefits were partially offset by higher compensation-related expenses and
marketing costs.
Security
Net sales increased $16.8 million, or 4%, due to new product introductions and higher U.S. retail and
international sales.
Operating income increased $1.1 million, or 2%, due to higher sales volume, partially offset by higher
planned spending on security growth initiatives and an environmental charge.
29
Corporate
Corporate expenses decreased $26.4 million. Corporate expenses benefited from lower defined
benefit actuarial losses ($37.0 million), primarily resulting from increased pension plan assets and
higher discount rates, and favorable defined benefit plan income ($6.6 million). Corporate general
and administrative expenses were unfavorably impacted by higher consulting expense, increased
compensation-related costs and transaction expenses associated with acquisition-related activities.
(In millions)
General and administrative expense
Defined benefit plan income
Recognition of defined benefit plan actuarial losses
Total Corporate expenses
2013
2012
$(78.0)
10.1
(5.2)
$(73.1)
$(60.8)
3.5
(42.2)
$(99.5)
Liquidity and Capital Resources
Our primary liquidity needs are to support working capital requirements, fund capital expenditures
and service indebtedness, as well as to finance acquisitions, repurchase shares of our common stock
and pay dividends to stockholders, as deemed appropriate. Our principal sources of liquidity have
been cash on hand, cash flows from operating activities and availability under our credit agreements.
Our operating income is generated by our subsidiaries. There are no restrictions on the ability of our
subsidiaries to pay dividends or make other distributions to Fortune Brands. In December 2014, our
Board of Directors increased the quarterly cash dividend by 17% to $0.14 per share of our common
stock. All future dividends are subject to the approval of our Board of Directors.
We periodically review our portfolio of brands and evaluate potential strategic transactions to increase
shareholder value. However, we cannot predict whether or when we may enter into acquisitions, joint
ventures or dispositions, make any purchases of shares of our common stock under our share
repurchase programs, or pay dividends, or what impact any such transactions could have on our
results of operations, cash flows or financial condition, whether as a result of the issuance of debt or
equity securities, or otherwise. Our cash flows from operations, borrowing availability and overall
liquidity are subject to certain risks and uncertainties, including those described in the section
“Item 1A. Risk Factors.”
In 2014, we repurchased approximately 11.1 million shares of our outstanding common stock under
the Company’s share repurchase programs for $439.8 million. As of February 6, 2015, the Company’s
total remaining share repurchase authorizations under the remaining programs were approximately
$300 million. The share repurchase programs do not obligate the Company to repurchase any
specific dollar amount or number of shares and may be suspended or discontinued at any time.
In September 2014, the Company completed the sale of Simonton for $130 million in cash.
In July 2014, the Company acquired SentrySafe for a purchase price of $116.7 million in cash. The
purchase price was funded from our existing credit facilities. In December 2014, we acquired
Anaheim Manufacturing Company, which markets and sells garbage disposals, for $30.6 million in
cash, subject to certain post-closing adjustments. We paid the purchase price using a combination of
cash on hand and borrowings under our existing credit facilities.
In June 2013, the Company acquired WoodCrafters, a manufacturer of bathroom vanities and tops,
for a purchase price of $302.0 million. The Company paid the purchase price using a combination of
cash on hand and borrowings under our existing credit facilities.
30
In 2014, we invested in incremental capacity to support long-term growth potential. We expect capital
spending in 2015 to be approximately $130 million.
On December 31, 2014, we had cash and cash equivalents of $191.9 million, of which $178.4 million
was held at non-U.S. subsidiaries. We manage our global cash requirements considering (i) available
funds among the subsidiaries through which we conduct business, (ii) the geographic location of our
liquidity needs, and (iii) the cost to access international cash balances. The repatriation of non-U.S.
cash balances from certain subsidiaries could have adverse tax consequences as we may be
required to pay and record income tax expense on those funds to the extent they were previously
considered indefinitely reinvested.
Our operating cash flows are significantly impacted by the seasonality of our business. We typically
generate our operating cash flow in the third and fourth quarters of each year.
In August 2014, the Company amended its credit agreement to increase total lending commitments
from $1 billion to $1.5 billion. After giving effect to the amendment we have a $975 million committed
revolving credit facility, as well as a $525 million term loan, both of which expire in July 2018. Both
facilities can be used for general corporate purposes. On December 31, 2014 and 2013, our
outstanding borrowings under these facilities were $670.0 million and $350.0 million, respectively. The
interest rates under these facilities are variable based on LIBOR at the time of the borrowing and the
Company’s leverage as measured by a debt to Adjusted EBITDA ratio (as defined in the agreements
governing the facilities). Based upon the Company’s debt to Adjusted EBITDA ratio, the Company’s
borrowing rate will range from LIBOR + 1.0% to LIBOR + 2.0%. At December 31, 2014, we were in
compliance with all covenants under these facilities. The credit facilities also include a minimum
Consolidated Interest Coverage Ratio requirement of 3.0 to 1.0. The Consolidated Interest Coverage
Ratio is defined as the ratio of Adjusted EBITDA to Consolidated Interest Expense. Adjusted EBITDA
is defined as consolidated net income before interest expense, income taxes, depreciation,
amortization of intangible assets, losses from asset impairments, and certain other adjustments.
Consolidated Interest Expense is as disclosed in our financial statements. The credit facilities also
include a Maximum Leverage Ratio of 3.5 to 1.0 as measured by the ratio of our debt to Adjusted
EBITDA. The Maximum Leverage Ratio is permitted to increase to 3.75 to 1.0 for three succeeding
quarters in the event of an acquisition. We believe our operating cash flows, availability under the
credit facility and access to capital markets will provide sufficient liquidity to support the Company’s
financing needs.
Cash Flows
Below is a summary of cash flows for the years ended December 31, 2014, 2013 and 2012.
(In millions)
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Effect of foreign exchange rate changes on cash
2014
2013
2012
$ 253.7
(151.1)
(147.5)
(4.6)
$ 297.8
(396.7)
4.1
0.2
$282.8
(86.7)
15.7
3.4
Net (decrease) increase in cash and cash equivalents
$ (49.5)
$ (94.6)
$215.2
Years Ended December 31, 2014, 2013 and 2012
Net cash provided by operating activities was $253.7 million in 2014 compared to $297.8 million in
2013 and $282.8 million in 2012. The $44.1 million decrease in cash provided by operating activities
from 2013 to 2014 was primarily due to higher incentive compensation and customer program
payments in the first quarter of 2014 compared to 2013 and lower accruals in 2014 (approximately
31
$75 million impact in aggregate), partially offset by lower working capital levels in 2014 to support
sales and absence of the 2013 inventory build that did not repeat in 2014. The $15.0 million increase
in cash provided by operating activities from 2012 to 2013 was primarily due to higher net income of
$111.2 million and $20.3 million in lower pension contributions, partially offset by higher inventory to
support sales growth combined with higher accounts receivable as a result of increased sales in
December 2013 compared to December 2012.
Net cash used in investing activities was $151.1 million in 2014 compared to $396.7 million in 2013
and $86.7 million in 2012. The $245.6 million decrease from 2013 to 2014 was primarily due to the
impact of acquisitions and divestitures, as well as $30.8 million in higher capital expenditures. The
$310.0 million increase from 2012 to 2013 was primarily due to the acquisition of WoodCrafters.
Net cash used in financing activities was $147.5 million in 2014 compared to cash provided by
financing activities of $4.1 million in 2013 and $15.7 million in 2012. The $151.6 million change in cash
used by financing activities from 2013 to 2014 was due to higher share repurchases (a $387.7 million
increase compared to 2013), four dividend payments in 2014 compared to three in 2013 ($27.5
million) and lower proceeds from the exercise of stock options ($21.8 million), partially offset by higher
net borrowings ($282.5 million). The $11.6 million decrease in cash provided by financing activities
from 2012 to 2013 was due to less cash received from stock option exercises ($53.6 million),
dividends paid to stockholders ($49.9 million) and higher stock repurchases in 2013 compared to
2012 ($43.3 million). The decreases were partially offset by the favorable impact of net borrowings of
$116.2 million ($31.3 million in net borrowings in 2013 compared to net debt repayments of $84.9
million in 2012), as well as a higher tax benefit from the exercise of stock-based awards ($14.6
million).
Pension Plans
Subsidiaries of Fortune Brands sponsor their respective defined benefit pension plans that are funded
by a portfolio of investments maintained within our benefit plan trust. In 2014, we contributed $1.5
million to qualified pension plans. Due to higher interest rates and higher than expected returns on
pension plan assets in 2013, we did not make any pension contributions to qualified pension plans in
2013. In 2012, we contributed $20.7 million to qualified pension plans. In 2015, we expect to make
pension contributions of approximately $5 million. As of December 31, 2014, the fair value of our total
pension plan assets was $608.2 million, representing funding of 77% of the accumulated benefit
obligation liability. For the foreseeable future, we believe that we have sufficient liquidity to meet the
minimum funding that may be required by the Pension Protection Act of 2006.
Foreign Exchange
We have operations in various foreign countries, principally Mexico, Canada, China and France.
Therefore, changes in the value of the related currencies affect our financial statements when
translated into U.S. dollars.
32
Contractual Obligations and Other Commercial Commitments
The following table describes our obligations and commitments to make future payments under
contracts, such as debt and lease agreements, and under contingent commitments, such as debt
guarantees, as of December 31, 2014.
(In millions)
Contractual Obligations
Long-term debt
Interest payments on long-term debt(a)
Operating leases
Purchase obligations(b)
Defined benefit plan contributions(c)
Total
Payments Due by Period as of December 31, 2014
Total
Less than
1 year
1-3 years
4-5 years
$ 670.0 $ 26.3 $105.0 $538.7
4.6
13.5
2.5
—
32.7
70.3
366.7
5.8
10.0
23.8
356.7
5.8
18.1
28.7
7.5
—
$1,145.5 $422.6 $159.3 $559.3
After
5 years
$ —
—
4.3
—
—
$4.3
(a)
Interest payments on long-term debt were calculated using the borrowing rate in effect on December 31, 2014.
(b) Purchase obligations include contracts for raw material and finished goods purchases; selling and administrative services; and capital
expenditures.
(c) Pension and postretirement contributions cannot be determined beyond 2015.
Due to the uncertainty of the timing of settlement with taxing authorities, we are unable to make
reasonably reliable estimates of the period of cash settlement of unrecognized tax benefits. Therefore,
$31.0 million of unrecognized tax benefits as of December 31, 2014 have been excluded from the
Contractual Obligations table above. See Note 15, “Income Taxes,” to the Consolidated Financial
Statements in Item 8 of this Annual Report on Form 10-K.
In addition to the contractual obligations and commitments listed and described above, we also had
other commercial commitments for which we are contingently liable as of December 31, 2014. Other
corporate commercial commitments include standby letters of credit of $27.4 million, in the
aggregate, all of which expire in less than one year, and surety bonds of $3.5 million, in the
aggregate, all of which expire in less than one year. These contingent commitments are not expected
to have a significant impact on our liquidity.
Off-Balance Sheet Arrangements
As of December 31, 2014, we did not have any off-balance sheet arrangements that are material or
reasonably likely to be material to our financial condition or results of operations.
Foreign Currency Risk
Certain anticipated transactions, assets and liabilities are exposed to foreign currency risk. Principal
currencies hedged include the Canadian dollar, the Mexican peso and the Chinese yuan. We
regularly monitor our foreign currency exposures in order to maximize the overall effectiveness of our
foreign currency hedge positions.
Derivative Financial Instruments
In accordance with Accounting Standards Codification (“ASC”) requirements for Derivatives and
Hedging, we recognize all derivative contracts as either assets or liabilities on the balance sheet, and
the measurement of those instruments is at fair value. If the derivative is designated as a fair value
hedge and is effective, the changes in the fair value of the derivative and of the hedged item
33
attributable to the hedged risk are recognized in earnings in the same period. If the derivative is
designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative
are recorded in other comprehensive income (“OCI”) and are recognized in the consolidated
statement of income when the hedged item affects earnings. Ineffective portions of changes in the fair
value of cash flow hedges are recognized in earnings.
There was no impact of deferred currency gains/losses on earnings in 2014. Net deferred currency
gains of $2.3 million and $0.6 million were reclassified into earnings for the years ended
December 31, 2013 and 2012, respectively. Based on foreign exchange rates as of December 31,
2014, we estimate that $0.3 million of net currency derivative losses included in OCI as of
December 31, 2014 will be reclassified to earnings within the next twelve months.
Recently Issued Accounting Standards
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern.” This ASU provides guidance about management’s responsibility to evaluate whether there
is substantial doubt about an entity’s ability to continue as a going concern and to provide related
footnote disclosures. This amendment is effective for the annual period ending after December 15,
2016 (calendar year 2017 for Fortune Brands), and for annual periods and interim periods thereafter.
Early application is permitted. We do not expect this standard to have a material effect on our
financial statements.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This ASU
clarifies the accounting for revenue arising from contracts with customers and specifies the
disclosures that an entity should include in its financial statements. The amendment is effective for
annual reporting periods beginning after December 15, 2016 (calendar year 2017 for Fortune
Brands). We are assessing the impact the adoption of this standard will have on our financial
statements.
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of
Disposals of Components of an Entity.” This ASU changes the definition of discontinued operations
and requires expanded disclosures. The amendment is effective for annual periods beginning on or
after December 15, 2014 (calendar year 2015 for Fortune Brands). We do not expect this standard to
have a material effect on our financial statements.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 2, “Significant Accounting Policies,” of the
Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. The
Consolidated Financial Statements are prepared in conformity with U.S. generally accepted
accounting principles (“GAAP”). Preparation of the financial statements requires us to make
judgments, estimates and assumptions that affect the amounts of assets and liabilities reflected in the
financial statements and revenues and expenses reported for the relevant reporting periods. We
believe the policies discussed below are the Company’s critical accounting policies as they include
the more significant, subjective and complex judgments and estimates made when preparing our
consolidated financial statements.
34
Allowances for Doubtful Accounts
Trade receivables are recorded at the stated amount, less allowances for discounts, doubtful
accounts and returns. The allowances for doubtful accounts represent estimated uncollectible
receivables associated with potential customer defaults on contractual obligations (usually due to
customers’ potential insolvency) or discounts related to early payment of accounts receivables by our
customers. The allowances include provisions for certain customers where a risk of default has been
specifically identified. In addition, the allowances include a provision for customer defaults on a
general formula basis when it is determined that the risk of some default is probable and estimable,
but cannot yet be associated with specific customers. The assessment of the likelihood of customer
defaults is based on various factors, including the length of time the receivables are past due,
historical collection experience and existing economic conditions. In accordance with this policy, our
allowance for doubtful accounts was $5.4 million and $5.8 million as of December 31, 2014 and 2013,
respectively.
Inventories
Inventory provisions are recorded to reduce inventory to the lower of cost or market value for obsolete
or slow moving inventory based on assumptions about future demand and marketability of products,
the impact of new product introductions, inventory levels and turns, product spoilage and specific
identification of items, such as product discontinuance, engineering/material changes, or regulatory-
related changes.
Long-lived Assets
In accordance with ASC requirements for Property, Plant and Equipment, a long-lived asset (including
amortizable identifiable intangible assets) or asset group held for use is tested for recoverability
whenever events or changes in circumstances indicate that its carrying amount may not be
recoverable. When such events occur, we compare the sum of the undiscounted cash flows expected
to result from the use and eventual disposition of the asset or asset group to the carrying amount of a
long-lived asset or asset group. The cash flows are based on our best estimate of future cash flows
derived from the most recent business projections. If this comparison indicates that there is an
impairment, the amount of the impairment is calculated based on fair value. Fair value is estimated
primarily using discounted expected future cash flows on a market-participant basis.
In 2014, as a result of our decision to sell the Waterloo tool storage business, we recorded $9.1 million
of pre-tax impairment charges in order to remeasure this business at the estimated fair value less
costs to sell. These charges consisted of $8.1 million for fixed assets and $1.0 million for definite-lived
intangible assets. In 2013, our Cabinets segment abandoned certain software developed for internal
use, which resulted in a pre-tax impairment charge of $21.2 million.
Goodwill and Indefinite-lived Intangible Assets
In accordance with ASC requirements for Intangibles — Goodwill and Other, goodwill is tested for
impairment at least annually in the fourth quarter, and written down when impaired. An interim
impairment test is performed if an event occurs or conditions change that would more likely than not
reduce the fair value of the reporting unit below the carrying value.
We evaluate the recoverability of goodwill using a weighting of the income (80%) and market
(20%) approaches. For the income approach, we use a discounted cash flow model, estimating the
future cash flows of the reporting units to which the goodwill relates and then discount the future cash
flows at a market-participant-derived weighted-average cost of capital. In determining the estimated
future cash flows, we consider current and projected future levels of income based on management’s
35
plans for that business; business trends, prospects and market and economic conditions; and
market-participant considerations. Furthermore, our cash flow projections used to assess impairment
of our goodwill and other intangible assets are significantly influenced by our projection for the
continued recovery of the U.S. home products market, our annual operating plans finalized in the
fourth quarter of each year, and our ability to execute on various planned cost reduction initiatives
supporting operating income improvements. Our projection for the U.S. home products market is
inherently subject to a number of uncertain factors, such as employment, home prices, credit
availability, new home starts and the rate of home foreclosures. For the market approach, we apply
market multiples for peer groups to the current operating results of the reporting units to determine
each reporting unit’s fair value. The Company’s reporting units are operating segments. When the
estimated fair value of a reporting unit is less than its carrying value, we measure and recognize the
amount of the goodwill impairment loss, if any. Impairment losses, limited to the carrying value of
goodwill, represent the excess of the carrying value of a reporting unit’s goodwill over the implied fair
value of that goodwill. The implied fair value of a reporting unit is estimated based on a hypothetical
allocation of each reporting unit’s fair value to all of its underlying assets and liabilities.
The significant assumptions that are used to determine the estimated fair value for goodwill
impairment testing included the following: third-party market forecasts of U.S. new home starts and
home repair and remodel spending; management’s sales, profit and cash flow forecasts; peer
company EBITDA earnings multiples; the market-participant-based weighted-average cost of capital;
and the perpetuity growth rate. Our estimates of reporting unit fair values are based on certain
assumptions that may differ from our historical and future actual operating performance. Specifically,
assumptions related to growth in the new construction and repair and remodel segments of the U.S.
home products markets drive our forecasted sales growth. The market forecasts are developed using
independent third-party forecasts from multiple sources. In addition, estimated future profit margins
and cash flow consider our historical performance at similar levels of sales volume and
management’s future operating plans as reflected in annual and long-term plans that are reviewed
and approved by management.
Purchased intangible assets other than goodwill are amortized over their useful lives unless those
lives are determined to be indefinite. The determination of the useful life of an intangible asset other
than goodwill is based on factors including historical and tradename performance with respect to
consumer name recognition, geographic market presence, market share, and plans for ongoing
tradename support and promotion. Certain of our tradenames have been assigned an indefinite life as
we currently anticipate that these tradenames will contribute cash flows to the Company indefinitely.
Indefinite-lived intangible assets are not amortized, but are evaluated at least annually to determine
whether the indefinite useful life is appropriate. We review indefinite-lived intangible assets for
impairment annually in the fourth quarter, and whenever market or business events indicate there may
be a potential impairment of that intangible. Impairment losses are recorded to the extent that the
carrying value of the indefinite-lived intangible asset exceeds its fair value. The significant
assumptions that are used to determine the estimated fair value for indefinite-lived intangible asset
testing are third-party market forecasts of U.S. new home starts and home repair and remodel
spending; management’s sales and profit margin forecasts; the market-participant weighted-average
cost of capital; and the perpetuity growth rate. Impairment losses are recorded to the extent that the
carrying value of the indefinite-lived intangible asset exceeds its fair value. We measure fair value
using the standard relief-from-royalty approach which estimates the present value of royalty income
that could be hypothetically earned by licensing the brand name to a third party over the remaining
useful life. In addition, beginning for 2012 year-end intangible asset impairment testing, we adopted
the Accounting Standards Update that allows us to first assess qualitative factors to determine
whether it is more likely than not that an indefinite-lived intangible asset is impaired. Qualitative factors
include changes in volume, customers and the industry. If it is deemed more likely than not that an
intangible asset is impaired, we will perform a quantitative impairment test.
36
In 2014 and 2013, we did not record any asset impairment charges in operating income associated
with goodwill or indefinite-lived intangible assets. In 2012, we recorded asset impairment charges of
$13.2 million related to indefinite-lived tradenames in the Doors and Cabinets segments.
The events and/or circumstances that could have a potential negative effect on the estimated fair
value of our reporting units and indefinite-lived tradenames include: actual new construction and
repair and remodel growth rates that lag our assumptions, actions of key customers, volatility of
discount rates, continued economic uncertainty, higher levels of unemployment, weak consumer
confidence, lower levels of discretionary consumer spending and a decrease in royalty rates. We
cannot predict the occurrence of certain events or changes in circumstances that might adversely
affect the carrying value of goodwill and indefinite-lived intangible assets.
Defined Benefit Plans
We have a number of pension plans in the United States, covering many of the Company’s
employees. In addition, the Company provides postretirement health care and life insurance benefits
to certain retirees.
We recognize changes in the fair value of pension plan assets and net actuarial gains or losses in
excess of 10 percent of the greater of the fair value of pension plan assets or each plan’s projected
benefit obligation (the “corridor”) in earnings immediately upon remeasurement, which is at least
annually in the fourth quarter of each year. Net actuarial gains and losses occur when actual
experience differs from any of the assumptions used to value defined benefit plans or when
assumptions change as they may each year. The primary factors contributing to actuarial gains and
losses are changes in the discount rate used to value obligations as of the measurement date and the
differences between expected and actual returns on pension plan assets. This accounting method
results in the potential for volatile and difficult to forecast gains and losses. The pre-tax recognition of
actuarial losses was $13.7 million, $5.2 million and $42.2 million in 2014, 2013 and 2012, respectively.
The total net actuarial losses in accumulated other comprehensive income for all defined benefit
plans were $77.7 million as of December 31, 2014, compared to net actuarial gains of $34.8 million as
of December 31, 2013. The $112.5 million change was primarily due to lower discount rates at
December 31, 2014 compared to December 31, 2013, as well as the adoption of the new Society of
Actuaries RP-2014 mortality tables.
We record amounts relating to these defined benefit plans based on various actuarial assumptions,
including discount rates, assumed rates of return, compensation increases, turnover rates and health
care cost trend rates. We review our actuarial assumptions on an annual basis and make
modifications to the assumptions based on current economic conditions and trends. We believe that
the assumptions utilized in recording our obligations under our plans are reasonable based on our
experience and on advice from our independent actuaries; however, differences in actual experience
or changes in the assumptions may materially affect our financial condition or results of operations.
The expected return on plan assets is determined based on the nature of the plans’ investments, our
current asset allocation and our expectations for long-term rates of return. The weighted-average
long-term expected rate of return on pension plan assets for the years ended December 31, 2014 and
2013 was 6.8% and 7.8%, respectively. Compensation increases reflect expected future
compensation trends. The discount rate used to measure obligations is based on a spot-rate yield
curve on a plan-by-plan basis that matches projected future benefit payments with the appropriate
interest rate applicable to the timing of the projected future benefit payments. The bond portfolio used
for the selection of the discount rate is from the top quartile of bonds rated by nationally recognized
statistical rating organizations, and includes only non-callable bonds and those that are deemed to be
sufficiently marketable with a Moody’s credit rating of Aa or higher. The weighted-average discount
rate for defined benefit liabilities as of December 31, 2014 and 2013 was 4.2% and 5.0%,
respectively.
37
For postretirement benefits, our health care trend rate assumption is based on historical cost
increases and expectations for long-term increases. As of December 31, 2014, for postretirement
medical and prescription drugs in the next year, our assumption was an assumed rate of increase of
7.6% for pre-65 retirees and 7.5% for post-65 retirees, declining until reaching an ultimate assumed
rate of increase of 4.5% per year in 2022. As of December 31, 2013, for postretirement medical and
prescription drugs in the next year, our assumption was an assumed rate of increase of 7.1% for pre-
65 retirees and 7.5% for post-65 retirees, declining until reaching an ultimate assumed rate of
increase of 4.5% per year in 2022.
Below is a table showing pre-tax pension and postretirement expenses, including the impact of
actuarial gains and losses:
(In millions)
Total pension expense
Actuarial loss component of expense above
Total postretirement (income) expense
Actuarial loss component of expense above
Amortization of prior service credit component
2014
2013
$ 13.7
12.5
(25.5)
1.2
$ 0.7
0.8
(20.9)
4.4
2012
$36.9
30.6
13.4
11.6
of expense above
(27.6)
(27.4)
(2.6)
The actuarial losses in 2014 were due to a reduction in the discount rates used to measure plan
benefit obligations, as well as change to the new Society of Actuaries RP-2014 mortality tables and
improvement index (approximately $48 million). The actuarial losses in 2013 were principally due to
plan amendments to reduce retiree health benefits that decreased the benefit obligations. The
actuarial losses in 2012 were principally due to reductions in the discount rates used to measure plan
benefit obligations. Discount rates in 2014 used to determine benefit obligations decreased by an
average of 80 basis points for both pension benefits and postretirement benefits. Discount rates in
2013 used to determine benefit obligations increased by an average of 80 basis points for pension
benefits and increased by an average of 60 basis points for postretirement benefits. Discount rates in
2012 used to determine benefit obligations declined by an average of 70 basis points for pension
benefits and 90 basis points for postretirement benefits. The changes in discount rates was due to
changes in interest rates for the bond portfolio that comprises our spot-rate yield curve. Our spot-rate
yield curve is based on high quality bond interest rates. Our actual return on plan assets in 2014 was
9.8% compared to an actuarial assumption of an average 7.4% expected return. Our actual return on
plan assets in 2013 was 15.2% compared to an actuarial assumption of an average 7.8% expected
return. Significant actuarial losses in future periods would be expected if discount rates decline,
actual returns on plan assets are lower than our expected return, or a combination of both occurs.
A 25 basis point change in our discount rate assumption would lead to an increase or decrease in our
pension and postretirement liability of approximately $29 million. A 25 basis point change in the long-
term rate of return on plan assets used in accounting for our pension plans would have a $1.5 million
impact on pension expense. In addition, if required, actuarial gains and losses will be recorded in
accordance with our defined benefit plan accounting method as previously described. It is not
possible to forecast or predict whether there will be actuarial gains and losses in future periods, and if
required, the magnitude of any such adjustment. These gains and losses are driven by differences in
actual experience or changes in the assumptions that are beyond our control, such as changes in
interest rates and the actual return on pension plan assets.
Income Taxes
In accordance with ASC requirements for Income Taxes, we establish deferred tax liabilities or assets
for temporary differences between financial and tax reporting bases and subsequently adjust them to
38
reflect changes in tax rates expected to be in effect when the temporary differences reverse. We
record a valuation allowance reducing deferred tax assets when it is more likely than not that such
assets will not be realized.
We record liabilities for uncertain income tax positions based on a two-step process. The first step is
recognition, where we evaluate whether an individual tax position has a likelihood of greater than 50%
of being sustained upon examination based on the technical merits of the position, including
resolution of any related appeals or litigation processes. For tax positions that are currently estimated
to have a less than 50% likelihood of being sustained, no tax benefit is recorded. For tax positions that
have met the recognition threshold in the first step, we perform the second step of measuring the
benefit to be recorded. The actual benefits ultimately realized may differ from our estimates. In future
periods, changes in facts, circumstances, and new information may require us to change the
recognition and measurement estimates with regard to individual tax positions. Changes in
recognition and measurement estimates are recorded in the consolidated statement of income and
consolidated balance sheet in the period in which such changes occur. As of December 31, 2014, we
had liabilities for unrecognized tax benefits pertaining to uncertain tax positions totaling $31.0 million.
It is reasonably possible that the unrecognized tax benefits may decrease in the range of $2.0 million
to $7.0 million in the next 12 months primarily as a result of the conclusion of U.S. federal, state and
foreign income tax proceedings.
Customer Program Costs
Customer programs and incentives are a common practice in our businesses. Our businesses incur
customer program costs to obtain favorable product placement, to promote the sale of products and
to maintain competitive pricing. Customer program costs and incentives, including rebates and
promotion and volume allowances, are accounted for in either “net sales” or the category “selling,
general and administrative expenses” at the time the program is initiated and/or the revenue is
recognized. The costs are predominantly recognized in “net sales” and include, but are not limited to,
volume allowances and rebates, promotional allowances, and cooperative advertising programs.
These costs are recorded at the later of the time of sale or the implementation of the program based
on management’s best estimates. Estimates are based on historical and projected experience for
each type of program or customer. Volume allowances are accrued based on management’s
estimates of customer volume achievement and other factors incorporated into customer agreements,
such as new products, store sell-through, merchandising support, levels of returns and customer
training. Management periodically reviews accruals for these rebates and allowances, and adjusts
accruals when circumstances indicate (typically as a result of a change in volume expectations). The
costs typically recognized in “selling, general and administrative expenses” include product displays,
point of sale materials and media production costs.
Litigation Contingencies
Our businesses are subject to risks related to threatened or pending litigation and are routinely
defendants in lawsuits associated with the normal conduct of business. Liabilities and costs
associated with litigation-related loss contingencies require estimates and judgments based on our
knowledge of the facts and circumstances surrounding each matter and the advice of our legal
counsel. We record liabilities for litigation-related losses when a loss is probable and we can
reasonably estimate the amount of the loss in accordance with ASC requirements for
Contingencies. We evaluate the measurement of recorded liabilities each reporting period based on
the then-current facts and circumstances specific to each matter. The ultimate losses incurred upon
final resolution of litigation-related loss contingencies may differ materially from the estimated liability
recorded at any particular balance sheet date. Changes in estimates are recorded in earnings in the
period in which such changes occur.
39
Environmental Matters
We are involved in remediation activities to clean up hazardous wastes as required by federal and
state laws. Liabilities for remediation costs of each site are based on our best estimate of
undiscounted future costs, excluding possible insurance recoveries or recoveries from other third
parties. Uncertainties about the status of laws, regulations, technology and information related to
individual sites make it difficult to develop estimates of environmental remediation exposures. Some of
the potential liabilities relate to sites we own, and some relate to sites we no longer own or never
owned. Several of our subsidiaries have been designated as potentially responsible parties (“PRPs”)
under “Superfund” or similar state laws. As of December 31, 2014, nine such instances have not been
dismissed, settled or otherwise resolved. In the calendar year 2014, our subsidiaries were identified
as a PRP in three new instances and we settled two of these new instances in 2014. In most instances
where our subsidiaries are named as a PRP, we enter into cost-sharing arrangements with other
PRPs. We give notice to insurance carriers of potential PRP liability, but very rarely, if ever, receive
reimbursement from insurance for PRP costs. We believe that the cost of complying with the present
environmental protection laws, before considering estimated recoveries either from other PRPs or
insurance, will not have a material adverse effect on our results of operations, cash flows or financial
condition. At December 31, 2014 and 2013, we had accruals of $2.8 million and $4.8 million,
respectively, relating to environmental compliance and clean up including, but not limited to, the
above mentioned Superfund sites.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to various market risks, including changes in interest rates, foreign currency
exchange rates and commodity prices. Market risk is the potential loss arising from adverse changes
in market rates and prices, such as interest rates, foreign currency exchange rates and commodity
prices. We do not enter into derivatives or other financial instruments for trading or speculative
purposes. We enter into financial instruments to manage and reduce the impact of changes in foreign
currency exchange rates and commodity prices. The counterparties are major financial institutions.
Interest Rate Risk
A hypothetical 100 basis point change in interest rates affecting the Company’s external variable rate
borrowings as of December 31, 2014 would be $6.7 million on a pre-tax basis.
Foreign Exchange Rate Risk
We enter into forward foreign exchange contracts principally to hedge currency fluctuations in
transactions denominated in foreign currencies, thereby limiting our risk that would otherwise result
from changes in exchange rates. The periods of the forward foreign exchange contracts correspond
to the periods of the hedged transactions.
The estimated fair value of foreign currency contracts represents the amount required to enter into
offsetting contracts with similar remaining maturities based on quoted market prices.
The estimated potential loss under foreign exchange contracts from movement in foreign exchange
rates would not have a material impact on our results of operations, cash flows or financial condition.
As part of our risk management procedure, we use a value-at-risk (“VAR”) sensitivity analysis model
to estimate the maximum potential economic loss from adverse changes in foreign exchange rates
over a one-day period given a 95% confidence level. The VAR model uses historical foreign
exchange rates to estimate the volatility and correlation of these rates in future periods. The estimated
maximum one-day loss in the fair value of the Company’s foreign currency exchange contracts using
40
the VAR model was $2.4 million at December 31, 2014. The 95% confidence interval signifies our
degree of confidence that actual losses under foreign exchange contracts would not exceed the
estimated losses. The amounts disregard the possibility that foreign currency exchange rates could
move in our favor. The VAR model assumes that all movements in the foreign exchange rates will be
adverse. These amounts should not be considered projections of future losses, since actual results
may differ significantly depending upon activity in the global financial markets. The VAR model is a
risk analysis tool and should not be construed as an endorsement of the VAR model or the accuracy
of the related assumptions.
Commodity Price Risk
We are subject to commodity price volatility caused by weather, supply conditions, geopolitical and
economic variables, and other unpredictable external factors. From time to time, we use derivative
contracts to manage our exposure to commodity price volatility.
41
Item 8. Financial Statements and Supplementary Data.
Consolidated Statements of Income
Fortune Brands Home & Security, Inc. and Subsidiaries
(In millions, except per share amounts)
NET SALES
Cost of products sold
Selling, general and administrative expenses
Amortization of intangible assets
Restructuring charges
Asset impairment charges
OPERATING INCOME
Interest expense
Other expense (income), net
Income from continuing operations before income taxes
Income taxes
Income from continuing operations, net of tax
(Loss) income from discontinued operations, net of tax
NET INCOME
Less: Noncontrolling interests
For years ended December 31
2014
2013
2012
$4,013.6
2,646.7
943.3
13.1
7.0
—
$3,703.6
2,408.5
938.7
9.4
2.8
21.2
$3,134.8
2,093.2
873.1
7.4
4.7
13.2
403.5
10.4
1.2
391.9
118.3
273.6
(114.3)
159.3
1.2
323.0
143.2
7.2
5.3
310.5
101.5
209.0
21.9
230.9
1.2
8.5
(0.5)
135.2
26.9
108.3
11.4
119.7
1.0
NET INCOME ATTRIBUTABLE TO FORTUNE BRANDS
$ 158.1
$ 229.7
$ 118.7
BASIC EARNINGS (LOSS) PER COMMON SHARE
Continuing operations
Discontinuing operations
Net income attributable to Fortune Brands common shareholders
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Continuing operations
Discontinuing operations
Net income attributable to Fortune Brands common shareholders
Basic average number of shares outstanding
Diluted average number of shares outstanding
Dividends declared per common share
$
$
$
$
$
1.68
(0.70)
0.98
1.64
(0.69)
0.95
161.8
166.3
0.50
$
$
$
$
$
1.26
0.13
1.39
1.21
0.13
1.34
165.5
171.3
0.42
$
$
$
$
$
0.67
0.07
0.74
0.65
0.06
0.71
160.6
166.1
—
See Notes to Consolidated Financial Statements.
42
Consolidated Statements of Comprehensive Income
Fortune Brands Home & Security, Inc. and Subsidiaries
(In millions)
NET INCOME
Other comprehensive (loss) income, before tax:
Foreign currency translation adjustments
Unrealized (losses) gains on derivatives:
Unrealized holding (losses) gains arising during period
Less: reclassification adjustment for gains included in net income
Unrealized (losses) gains on derivatives
Defined benefit plans:
Prior service credit arising during period
Net actuarial (loss) gain arising during period
Less: amortization of prior service credit included in net periodic
pension cost
Defined benefit plans
Other comprehensive (loss) income, before tax
Income tax benefit (expense) related to items of other
comprehensive income(a)
Other comprehensive (loss) income, net of tax
COMPREHENSIVE INCOME
Less: comprehensive income attributable to noncontrolling interest
COMPREHENSIVE INCOME ATTRIBUTABLE
TO FORTUNE BRANDS
For years ended December 31
2014
2013
2012
$ 159.3
$230.9
$119.7
(22.3)
(10.2)
8.4
(1.3)
(0.1)
(1.4)
3.0
(2.0)
1.0
15.3
(112.5)
34.7
111.3
(27.5)
(27.3)
(124.7)
(148.4)
118.7
109.5
46.2
(44.7)
(102.2)
57.1
1.1
64.8
295.7
1.2
0.4
(0.8)
(0.4)
29.4
(7.0)
(2.3)
20.1
28.1
(8.1)
20.0
139.7
1.0
$ 56.0
$294.5
$138.7
(a)
Income tax (expense) benefit on unrealized (losses) gains on derivatives of $(0.2) million, $(0.2) million and $0.1 million and
on defined benefit plans of $46.4 million, $(44.5) million and $(8.2) million in 2014, 2013 and 2012, respectively.
See Notes to Consolidated Financial Statements.
43
Consolidated Balance Sheets
Fortune Brands Home & Security, Inc. and Subsidiaries
(In millions)
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable less allowances for discounts,
doubtful accounts and returns
Inventories
Other current assets
Current assets of discontinued operations
TOTAL CURRENT ASSETS
Property, plant and equipment, net of accumulated depreciation
Goodwill
Other intangible assets, net of accumulated amortization
Other assets
Non-current assets of discontinued operations
TOTAL ASSETS
LIABILITIES AND EQUITY
Current liabilities
Notes payable to banks
Current portion of long-term debt
Accounts payable
Other current liabilities
Current liabilities of discontinued operations
TOTAL CURRENT LIABILITIES
Long-term debt
Deferred income taxes
Accrued defined benefit plans
Other non-current liabilities
Non-current liabilities of discontinued operations
TOTAL LIABILITIES
Commitments (Note 17) and Contingencies (Note 22)
Equity
Common stock(a)
Paid-in capital
Accumulated other comprehensive (loss) income
Retained earnings
Treasury stock
TOTAL FORTUNE BRANDS EQUITY
Noncontrolling interests
TOTAL EQUITY
December 31
2014
2013
$ 191.9
$ 241.4
458.9
462.2
122.8
63.3
1,299.1
539.8
1,467.8
656.5
72.4
17.3
402.8
428.9
127.9
126.4
1,327.4
468.3
1,433.8
628.9
42.0
277.7
$4,052.9
$4,178.1
$
— $
26.3
333.8
322.0
17.5
699.6
643.7
150.6
216.9
75.6
3.4
6.0
—
314.8
357.1
60.8
738.7
350.0
197.4
108.5
73.4
57.0
1,789.8
1,525.0
1.7
2,517.3
(6.7)
279.5
(532.3)
2,259.5
3.6
2,263.1
1.7
2,431.3
95.4
200.8
(79.8)
2,649.4
3.7
2,653.1
TOTAL LIABILITIES AND EQUITY
$4,052.9
$4,178.1
(a) Common stock, par value $0.01 per share, 172.0 million shares and 169.1 million shares issued at December 31, 2014 and
2013, respectively.
See Notes to Consolidated Financial Statements.
44
Consolidated Statements of Cash Flows
Fortune Brands Home & Security, Inc. and Subsidiaries
(In millions)
OPERATING ACTIVITIES
Net income
Non-cash expense (income):
Depreciation
Amortization
Stock-based compensation
Restructuring charges
Loss (gain) on sale of property, plant and equipment
Loss on sale of discontinued operation
Asset impairment charges
Recognition of actuarial losses
Deferred taxes
Changes in assets and liabilities including effects subsequent to
acquisitions:
Increase in accounts receivable
Decrease (increase) in inventories
(Decrease) increase in accounts payable
(Increase) decrease in other assets
(Decrease) increase in accrued taxes
(Decrease) increase in accrued expenses and other liabilities
NET CASH PROVIDED BY OPERATING ACTIVITIES
INVESTING ACTIVITIES
Capital expenditures
Proceeds from the disposition of assets
Proceeds from sale of discontinued operation
Cost of acquisitions, net of cash acquired
Other investing activities
NET CASH USED IN INVESTING ACTIVITIES
FINANCING ACTIVITIES
(Decrease) increase in short-term debt
Issuance of long-term debt
Repayment of long-term debt
Proceeds from the exercise of stock options
Excess tax benefit from the exercise of stock-based compensation
Dividends to stockholders
Treasury stock purchases
Fortune Brands, Inc. payment
Other financing activities, net
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
Effect of foreign exchange rate changes on cash
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Cash paid during the year for:
External interest
Income taxes paid directly to taxing authorities
Income taxes (received from) paid to Fortune Brands, Inc.
Dividends declared but not paid
For years ended December 31
2014
2013
2012
$ 159.3
$ 230.9
$ 119.7
82.9
15.9
29.7
2.5
0.9
83.2
10.7
13.7
0.3
(39.9)
14.5
(9.5)
(24.4)
(0.2)
(85.9)
253.7
(127.5)
0.7
130.0
(147.3)
(7.0)
(151.1)
(6.2)
1,057.0
(737.0)
28.9
29.2
(77.4)
(439.8)
—
(2.2)
(147.5)
(4.6)
77.2
13.2
26.1
0.2
0.8
—
27.4
5.2
(12.7)
(58.5)
(89.7)
39.8
32.2
5.7
—
297.8
(96.7)
2.2
—
(302.0)
(0.2)
(396.7)
1.3
220.0
(190.0)
50.7
26.8
(49.9)
(52.1)
—
(2.7)
4.1
0.2
90.2
11.1
26.9
—
(2.9)
—
15.8
42.2
(4.0)
(33.5)
(18.7)
22.1
5.5
(12.8)
21.2
282.8
(75.0)
13.5
—
(19.5)
(5.7)
(86.7)
1.9
70.0
(156.8)
104.3
12.2
—
(8.8)
(6.0)
(1.1)
15.7
3.4
$ (49.5)
$ 241.4
$ 191.9
$ (94.6)
$ 336.0
$ 241.4
$
9.6
109.1
—
22.1
$
6.7
89.4
(1.2)
20.0
$ 215.2
$ 120.8
$ 336.0
$
7.1
55.9
3.0
—
See Notes to Consolidated Financial Statements.
45
Consolidated Statements of Equity
Fortune Brands Home & Security, Inc. and Subsidiaries
(In millions)
Balance at December 31, 2011
Comprehensive income:
Net income
Other comprehensive income
Stock options exercised
Stock-based compensation
Tax benefit on exercise of stock options
Separation-related adjustments
Treasury stock purchase
Dividends paid to noncontrolling interests
Balance at December 31, 2012
Comprehensive income:
Net income
Other comprehensive income
Stock options exercised
Stock-based compensation
Tax benefit on exercise of stock options(a)
Treasury stock purchase
Dividends ($0.42 per Common share)
Dividends paid to noncontrolling interests
Balance at December 31, 2013
Comprehensive income:
Net income
Other comprehensive income
Stock options exercised
Stock-based compensation
Tax benefit on exercise of stock options
Treasury stock purchase
Dividends ($0.50 per Common share)
Dividends paid to noncontrolling interests
Balance at December 31, 2014
Common
Paid-In
Stock
Capital
$1.6 $2,186.4
Accumulated
Other
Comprehensive
(Loss) Income
$ 10.6
Retained
Earnings
(Deficit)
$ (77.7) $
Treasury
Stock
(0.1)
Non-
controlling
Interests
Total
Equity
$3.7 $2,124.5
—
—
—
—
— 104.4
27.1
—
12.0
—
(5.1)
—
—
—
—
—
$1.6 $2,324.8
—
—
0.1
—
—
—
—
—
—
—
50.7
25.7
30.1
—
—
—
$1.7 $2,431.3
—
—
—
—
—
—
—
—
—
—
29.1
29.2
27.7
—
—
—
$1.7 $2,517.3
—
20.0
—
—
—
—
—
—
$ 30.6
—
64.8
—
—
—
—
—
—
$ 95.4
—
(102.1)
—
—
—
—
—
—
(6.7)
$
118.7
—
—
—
—
—
—
—
—
—
—
(7.7)
—
—
(9.1)
—
$ 41.0 $ (16.9)
—
229.7
—
—
—
—
— (11.2)
—
—
— (51.7)
—
—
$200.8 $ (79.8)
(69.9)
—
—
158.1
—
—
—
—
— (12.7)
—
—
— (439.8)
—
—
$279.5 $(532.3)
(79.4)
—
119.7
1.0
20.0
—
104.4
—
19.4
—
12.0
—
(5.1)
—
(9.1)
—
(1.1)
(1.1)
$3.6 $2,384.7
230.9
1.2
64.8
—
50.8
—
14.5
—
30.1
—
(51.7)
—
(69.9)
—
(1.1)
(1.1)
$3.7 $2,653.1
159.3
1.2
(102.2)
(0.1)
29.1
—
16.5
—
—
27.7
— (439.8)
(79.4)
—
(1.2)
(1.2)
$3.6 $2,263.1
(a)
Includes $4.1 million of adjustments related to previous years’ vested and unvested restricted stock units.
See Notes to Consolidated Financial Statements.
46
Notes to Consolidated Financial Statements
1. Background and Basis of Presentation
The Company is a leading home and security products company with a portfolio of leading branded
products used for residential home repair, remodeling, new construction, security applications and
storage. References to (i) “Fortune Brands,” “the Company,” “we,” “our” and “us” refer to Fortune
Brands Home & Security, Inc. and its consolidated subsidiaries as a whole, unless the context
otherwise requires, after giving effect to the spin-off of Fortune Brands from Fortune Brands, Inc. in
2011 and (ii) “Former Parent” refer to Fortune Brands, Inc..
Basis of Presentation The consolidated financial statements include the accounts of Fortune
Brands and its majority-owned subsidiaries. The Company’s subsidiaries operate on a 52 or 53-week
fiscal year.
The consolidated financial statements included in this Annual Report on Form 10-K were derived
principally from the consolidated financial statements of the Company. In September 2014, we sold all
of the shares of stock of Fortune Brands Windows, Inc., our subsidiary that owned and operated the
Simonton windows business (“Simonton”). In December 2014, we committed to a plan to sell Waterloo
Industries, Inc. (“Waterloo”), our tool storage business. Therefore, in accordance with Accounting
Standards Codification (“ASC”) requirements, the results of operations of Waterloo and Simonton
were reclassified and separately stated as discontinued operations in the accompanying
consolidated statements of comprehensive income for 2014, 2013 and 2012. The assets and liabilities
of Simonton were reclassified as a discontinued operation in the accompanying consolidated balance
sheets as of December 31, 2013. The assets and liabilities of Waterloo were reclassified as a
discontinued operation in the accompanying consolidated balance sheets as of December 31, 2014
and 2013. The cash flows from discontinued operations for 2014, 2013 and 2012 were not separately
classified on the accompanying condensed consolidated statements of cash flows. Information on
Business Segments was revised to exclude this discontinued operation.
2. Significant Accounting Policies
Use of Estimates The presentation of financial statements in accordance with U.S. generally
accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect
reported amounts and related disclosures. Actual results in future periods could differ from those
estimates.
Cash and Cash Equivalents Highly liquid investments with an original maturity of three months
or less are included in cash and cash equivalents.
Allowances for Doubtful Accounts Trade receivables are recorded at the stated amount, less
allowances for discounts, doubtful accounts and returns. The allowances for doubtful accounts
represent estimated uncollectible receivables associated with potential customer defaults on
contractual obligations (usually due to customers’ potential insolvency), or discounts related to early
payment of accounts receivables by our customers. The allowances include provisions for certain
customers where a risk of default has been specifically identified. In addition, the allowances include
a provision for customer defaults on a general formula basis when it is determined the risk of some
default is probable and estimable, but cannot yet be associated with specific customers. The
assessment of the likelihood of customer defaults is based on various factors, including the length of
time the receivables are past due, historical collection experience and existing economic conditions.
In accordance with this policy, our allowance for doubtful accounts was $5.4 million and $5.8 million
as of December 31, 2014 and 2013, respectively.
47
Inventories The majority of our inventories are accounted for using the first-in, first-out inventory
method. Inventory provisions are recorded to reduce inventory to the lower of cost or market value for
obsolete or slow moving inventory based on assumptions about future demand and marketability of
products, the impact of new product introductions, inventory levels and turns, product spoilage and
specific identification of items, such as product discontinuance, engineering/material changes, or
regulatory-related changes.
We also use the last-in, first-out (“LIFO”) inventory method in those product groups in which metals
inventories comprise a significant portion of our inventories. LIFO inventories at December 31, 2014
and 2013 were $197.6 million (with a current cost of $217.5 million) and $200.9 million (with a current
cost of $220.1 million), respectively.
Property, Plant and Equipment Property, plant and equipment are carried at cost.
Depreciation is provided, principally on a straight-line basis, over the estimated useful lives of the
assets. Gains or losses resulting from dispositions are included in operating income. Betterments and
renewals, which improve and extend the life of an asset, are capitalized; maintenance and repair
costs are expensed as incurred. Assets held for use to be disposed of at a future date are
depreciated over the remaining useful life. Assets to be sold are written down to fair value at the time
the assets are being actively marketed for sale. Estimated useful lives of the related assets are
as follows:
Buildings and leasehold improvements
Machinery and equipment
Software
15 to 40 years
3 to 10 years
3 to 7 years
Long-lived Assets In accordance with Accounting Standards Codification (“ASC”) requirements
for Property, Plant and Equipment, a long-lived asset (including amortizable identifiable intangible
assets) or asset group held for use is tested for recoverability whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable. When such events occur, we
compare the sum of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset or asset group to the carrying amount of the long-lived asset or asset group.
The cash flows are based on our best estimate of future cash flows derived from the most recent
business projections. If this comparison indicates that there is an impairment, the amount of the
impairment is calculated based on fair value. Fair value is estimated primarily using discounted
expected future cash flows on a market-participant basis.
Goodwill and Indefinite-lived Intangible Assets In accordance with ASC requirements for
Intangibles — Goodwill and Other, goodwill is tested for impairment at least annually in the fourth
quarter, and written down when impaired. An interim impairment test is performed if an event occurs
or conditions change that would more likely than not reduce the fair value of the reporting unit below
the carrying value.
We evaluate the recoverability of goodwill using a weighting of the income (80%) and market
(20%) approaches. For the income approach, we use a discounted cash flow model, estimating the
future cash flows of the reporting units to which the goodwill relates, and then discounting the future
cash flows at a market-participant-derived weighted-average cost of capital. In determining the
estimated future cash flows, we consider current and projected future levels of income based on
management’s plans for that business; business trends, prospects and market and economic
conditions; and market-participant considerations. Furthermore, our projection for the U.S. home
products market is inherently subject to a number of uncertain factors, such as employment, home
prices, credit availability, new home starts and the rate of home foreclosures. For the market
approach, we apply market multiples for peer groups to the current operating results of the reporting
48
units to determine each reporting unit’s fair value. The Company’s reporting units are operating
segments. When the estimated fair value of a reporting unit is less than its carrying value, we measure
and recognize the amount of the goodwill impairment loss, if any. Impairment losses, limited to the
carrying value of goodwill, represent the excess of the carrying value of a reporting unit’s goodwill
over the implied fair value of that goodwill. The implied fair value of a reporting unit is estimated
based on a hypothetical allocation of each reporting unit’s fair value to all of its underlying assets and
liabilities.
Purchased intangible assets other than goodwill are amortized over their useful lives unless those
lives are determined to be indefinite. The determination of the useful life of an intangible asset other
than goodwill is based on factors including historical and tradename performance with respect to
consumer name recognition, geographic market presence, market share, and plans for ongoing
tradename support and promotion. Certain of our tradenames have been assigned an indefinite life as
we currently anticipate that these tradenames will contribute cash flows to the Company indefinitely.
Indefinite-lived intangible assets are not amortized, but are evaluated at least annually to determine
whether the indefinite useful life is appropriate. We review indefinite-lived intangible assets for
impairment annually in the fourth quarter, and whenever market or business events indicate there may
be a potential impairment of that intangible. Impairment losses are recorded to the extent that the
carrying value of the indefinite-lived intangible asset exceeds its fair value. We measure fair value
using the standard relief-from-royalty approach which estimates the present value of royalty income
that could be hypothetically earned by licensing the brand name to a third party over the remaining
useful life. In addition, beginning for 2012 year-end intangible asset impairment testing, we adopted
the new Accounting Standards Update that allows us to first assess qualitative factors to determine
whether it is more likely than not that an indefinite-lived intangible asset is impaired. Qualitative factors
include changes in volume, customers and the industry. If it is deemed more likely than not that an
intangible asset is impaired, we will perform a quantitative impairment test.
The Company cannot predict the occurrence of certain events or changes in circumstances that
might adversely affect the carrying value of goodwill and indefinite-lived intangible assets. Such
events may include, but are not limited to, the impact of the economic environment; a material
negative change in relationships with significant customers; or strategic decisions made in response
to economic and competitive conditions.
Defined Benefit Plans We have a number of pension plans in the United States, covering many
of the Company’s employees. In addition, the Company provides postretirement health care and life
insurance benefits to certain retirees.
We record amounts relating to these plans based on calculations in accordance with ASC
requirements for Compensation — Retirement Benefits, which include various actuarial assumptions,
including discount rates, assumed rates of return, compensation increases, turnover rates and health
care cost trend rates. We recognize changes in the fair value of pension plan assets and net actuarial
gains or losses in excess of 10 percent of the greater of the fair value of pension plan assets or each
plan’s projected benefit obligation (the “corridor”) in earnings immediately upon remeasurement,
which is at least annually in the fourth quarter of each year. We review our actuarial assumptions on
an annual basis and make modifications to the assumptions based on current economic conditions
and trends. The discount rate used to measure obligations is based on a spot-rate yield curve on a
plan-by-plan basis that matches projected future benefit payments with the appropriate interest rate
applicable to the timing of the projected future benefit payments. The expected rate of return on plan
assets is determined based on the nature of the plans’ investments, our current asset allocation and
our expectations for long-term rates of return. Compensation increases reflect expected future
compensation trends. For postretirement benefits, our health care trend rate assumption is based on
historical cost increases and expectations for long-term increases. The cost or benefit of plan
49
changes, such as increasing or decreasing benefits for prior employee service (prior service cost), is
deferred and included in expense on a straight-line basis over the average remaining service period
of the related employees. We believe that the assumptions utilized in recording obligations under our
plans, which are presented in Note 14, “Defined Benefit Plans,” are reasonable based on our
experience and on advice from our independent actuaries; however, differences in actual experience
or changes in the assumptions may materially affect our financial position and results of operations.
We will continue to monitor these assumptions as market conditions warrant.
Litigation Contingencies Our businesses are subject to risks related to threatened or pending
litigation and are routinely defendants in lawsuits associated with the normal conduct of
business. Liabilities and costs associated with litigation-related loss contingencies require estimates
and judgments based on our knowledge of the facts and circumstances surrounding each matter and
the advice of our legal counsel. We record liabilities for litigation-related losses when a loss is
probable and we can reasonably estimate the amount of the loss in accordance with ASC
requirements for Contingencies. We evaluate the measurement of recorded liabilities each reporting
period based on the then-current facts and circumstances specific to each matter. The ultimate
losses incurred upon final resolution of litigation-related loss contingencies may differ materially from
the estimated liability recorded at any particular balance sheet date. Changes in estimates are
recorded in earnings in the period in which such changes occur.
Income Taxes In accordance with ASC requirements for Income Taxes, we establish deferred tax
liabilities or assets for temporary differences between financial and tax reporting bases and
subsequently adjust them to reflect changes in tax rates expected to be in effect when the temporary
differences reverse. We record a valuation allowance reducing deferred tax assets when it is more
likely than not that such assets will not be realized.
We record liabilities for uncertain income tax positions based on a two-step process. The first step is
recognition, where we evaluate whether an individual tax position has a likelihood of greater than 50% of
being sustained upon examination based on the technical merits of the position, including resolution of any
related appeals or litigation processes. For tax positions that are currently estimated to have a less than
50% likelihood of being sustained, no tax benefit is recorded. For tax positions that have met the
recognition threshold in the first step, we perform the second step of measuring the benefit to be
recorded. The actual benefits ultimately realized may differ from our estimates. In future periods, changes
in facts, circumstances, and new information may require us to change the recognition and measurement
estimates with regard to individual tax positions. Changes in recognition and measurement estimates are
recorded in the consolidated statement of income and consolidated balance sheet in the period in which
such changes occur. As of December 31, 2014, we had liabilities for unrecognized tax benefits pertaining
to uncertain tax positions totaling $31.0 million. It is reasonably possible that the unrecognized tax benefits
may decrease in the range of $2.0 million to $7.0 million in the next 12 months primarily as a result of the
conclusion of U.S. federal, state and foreign income tax proceedings.
Revenue Recognition Revenue is recorded when persuasive evidence that an arrangement
exists, delivery has occurred, the price is fixed or determinable, and collectibility is reasonably
assured. Revenue is recorded net of applicable provisions for discounts, returns and allowances. We
record estimates for reductions to revenue for customer programs and incentives, including price
discounts, volume-based incentives, promotions and cooperative advertising when revenue is
recognized. Sales returns are based on historical returns, current trends and forecasts of product
demand.
Cost of Products Sold Cost of products sold includes all costs to make products saleable, such
as labor costs, inbound freight, purchasing and receiving costs, inspection costs and internal transfer
costs. In addition, all depreciation expense associated with assets used to manufacture products and
make them saleable is included in cost of products sold.
50
Customer Program Costs Customer programs and incentives are a common practice in our
businesses. Our businesses incur customer program costs to obtain favorable product placement, to
promote sales of products and to maintain competitive pricing. Customer program costs and
incentives, including rebates and promotion and volume allowances, are accounted for in either “net
sales” or the category “selling, general and administrative expenses” at the time the program is
initiated and/or the revenue is recognized. The costs are predominantly recognized in “net sales” and
include, but are not limited to, volume allowances and rebates, promotional allowances, and
cooperative advertising programs. These costs are recorded at the later of the time of sale or the
implementation of the program based on management’s best estimates. Estimates are based on
historical and projected experience for each type of program or customer. Volume allowances are
accrued based on management’s estimates of customer volume achievement and other factors
incorporated into customer agreements, such as new product purchases, store sell-through,
merchandising support, levels of returns and customer training. Management periodically reviews
accruals for these rebates and allowances, and adjusts accruals when circumstances indicate
(typically as a result of a change in volume expectations). The costs typically recognized in “selling,
general and administrative expenses” include product displays, point of sale materials and media
production costs. The costs included in the “selling, general and administrative expenses” category
were $43.4 million, $43.5 million and $45.0 million for the years ended December 31, 2014, 2013 and
2012, respectively.
Selling, General and Administrative Expenses Selling, general and administrative
expenses include advertising costs; marketing costs; selling costs, including commissions; research
and development costs; shipping and handling costs, including warehousing costs; and general and
administrative expenses. Shipping and handling costs included in selling, general and administrative
expenses were $169.7 million, $161.2 million and $153.2 million in 2014, 2013 and 2012, respectively.
Advertising costs, which amounted to $200.4 million, $197.1 million and $174.3 million in 2014, 2013
and 2012, respectively, are principally expensed as incurred. Advertising costs include product
displays, media production costs and point of sale materials. Advertising costs recorded as a
reduction to net sales, primarily cooperative advertising, were $66.8 million, $56.8 million and
$49.1 million in 2014, 2013 and 2012, respectively. Advertising costs recorded in selling, general and
administrative expenses were $133.6 million, $140.3 million and $125.2 million in 2014, 2013 and
2012, respectively.
Research and development expenses include product development, product improvement, product
engineering and process improvement costs. Research and development expenses, which were
$46.1 million, $50.8 million and $41.7 million in 2014, 2013 and 2012, respectively, are expensed
as incurred.
Stock-based Compensation Stock-based compensation expense, measured as the fair value
of an award on the date of grant, is recognized in the financial statements over the period that an
employee is required to provide services in exchange for the award. The fair value of each option
award is measured on the date of grant using the Black-Scholes option-pricing model. The fair value
of each performance award is based on the stock price at the date of grant and the probability of
meeting performance targets. The fair value of each restricted stock unit granted is equal to the share
price at the date of grant. See Note 13, “Stock-Based Compensation,” for additional information.
Earnings Per Share Earnings per common share is calculated by dividing net income
attributable to Fortune Brands by the weighted-average number of shares of common stock
outstanding during the year. Diluted earnings per common share include the impact of all potentially
dilutive securities outstanding during the year. See Note 20, “Earnings Per Share,” for further
discussion.
51
Foreign Currency Translation Foreign currency balance sheet accounts are translated into
U.S. dollars at the actual rates of exchange at the balance sheet date. Income and expenses are
translated at the average rates of exchange in effect during the period for the foreign subsidiaries
where the local currency is the functional currency. The related translation adjustments are made
directly to a separate component of the “accumulated other comprehensive income” (“AOCI”) caption
in equity. Transactions denominated in a currency other than the functional currency of a subsidiary
are translated into functional currency with resulting transaction gains or losses recorded in other
expense (income), net.
Derivative Financial Instruments In accordance with ASC requirements for Derivatives and
Hedging, all derivatives are recognized as either assets or liabilities on the balance sheet and
measurement of those instruments is at fair value. If the derivative is designated as a fair value hedge
and is highly effective, the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings in the same period. If the derivative is
designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative
are recorded directly to a separate component of AOCI, and are recognized in the consolidated
statement of income when the hedged item affects earnings. Ineffective portions of changes in the fair
value of cash flow hedges are recognized in earnings.
There was no impact of deferred currency gains/losses on earnings in 2014. Net deferred currency
gains of $2.3 million and $0.6 million were reclassified into earnings for the years ended
December 31, 2013 and 2012, respectively. Based on foreign exchange rates as of December 31,
2014, we estimate that $0.3 million of net currency derivative losses included in AOCI as of
December 31, 2014 will be reclassified to earnings within the next twelve months.
Recently Issued Accounting Standards
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern.” This ASU provides guidance about management’s responsibility to evaluate whether there
is substantial doubt about an entity’s ability to continue as a going concern and to provide related
footnote disclosures. This amendment is effective for the annual period ending after December 15,
2016 (calendar year 2017 for Fortune Brands), and for annual periods and interim periods thereafter.
Early application is permitted. We do not expect this standard to have a material effect on our
financial statements.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This ASU
clarifies the accounting for revenue arising from contracts with customers and specifies the
disclosures that an entity should include in its financial statements. The amendment is effective for
annual reporting periods beginning after December 15, 2016 (calendar year 2017 for Fortune
Brands). We are assessing the impact the adoption of this standard will have on our financial
statements.
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of
Disposals of Components of an Entity.” This ASU changes the definition of discontinued operations
and requires expanded disclosures. The amendment is effective for annual periods beginning on or
after December 15, 2014 (calendar year 2015 for Fortune Brands). We do not expect this standard to
have a material effect on our financial statements.
52
3. Balance Sheet Information
Supplemental information on our year-end consolidated balance sheets is as follows:
(In millions)
Inventories:
Raw materials and supplies
Work in process
Finished products
Total inventories
Property, plant and equipment:
Land and improvements
Buildings and improvements to leaseholds
Machinery and equipment
Construction in progress
Property, plant and equipment, gross
Less: accumulated depreciation
Property, plant and equipment, net of accumulated
depreciation
Other current liabilities:
Accrued salaries, wages and other compensation
Accrued customer programs
Other accrued expenses
Total other current liabilities
2014
2013
$ 178.1
54.0
230.1
$ 462.2
$
48.5
356.3
920.2
71.3
1,396.3
856.5
$ 159.1
49.9
219.9
$ 428.9
$
46.7
337.5
883.1
52.2
1,319.5
851.2
$ 539.8
$ 468.3
$
69.8
102.5
149.7
$ 322.0
$ 118.9
110.8
127.4
$ 357.1
4. Acquisitions
In December 2014, we acquired all of the issued and outstanding shares of capital stock of Anafree
Holdings, Inc., the sole owner of Anaheim Manufacturing Company, which markets and sells garbage
disposals, for $30.6 million in cash, subject to certain post-closing adjustments. We paid the
purchase price using a combination of cash on hand and borrowings under our existing credit
facilities. A preliminary allocation of the purchase price has been reflected in the financial statements
and will be updated as asset and liability valuations are finalized. Final adjustments will reflect the fair
value assigned to the assets, including intangible assets, and assumed liabilities.
In July 2014, the Company acquired 100% of the voting equity of John D. Brush & Co., Inc.
(“SentrySafe”) for a purchase price of $116.7 million in cash. The purchase price was funded from our
existing credit facilities. This acquisition broadens our product offering of security products. Net sales
in the five months ended December 31, 2014 were approximately $65 million and operating income
was not material to the Company. The results of operations of SentrySafe are included in the Security
segment.
These 2014 acquisitions were not material for the purposes of supplemental disclosure and did not
have a material impact on our consolidated financial statements.
In June 2013, the Company acquired Woodcrafters Home Products Holding, LLC (“WoodCrafters”), a
manufacturer of bathroom vanities and tops, for a purchase price of $302.0 million. We paid the
purchase price using a combination of cash on hand and borrowings under our existing credit
facilities. This acquisition greatly expanded our offerings of bathroom cabinetry products. Net sales of
53
WoodCrafters in the first six months of 2014 were approximately $100 million and WoodCrafters’
operating income was not material to the Company. The results of operations of WoodCrafters are
included in the Cabinets segment.
The following table summarizes the final allocation of the WoodCrafters’ purchase price to fair values
of assets acquired and liabilities assumed as of the date of the acquisition.
(In millions)
Accounts receivable
Inventories
Property, plant and equipment
Goodwill
Identifiable intangible assets
Other assets
Total assets
Other current liabilities and accruals
Net assets acquired
$ 41.4
25.7
29.6
143.4
89.4
7.3
336.8
34.8
$302.0
Substantially all of the acquired goodwill was tax deductible. Goodwill primarily represents expected
supply chain synergies. Identifiable intangible assets primarily consisted of customer relationships
($75.9 million) and technology ($9.6 million). The useful lives of these identifiable intangible assets are
18 years and 10 years, respectively.
The following unaudited pro forma summary presents consolidated financial information as if
WoodCrafters had been acquired on January 1, 2012. The unaudited pro forma financial information
is based on historical results of operations and financial position of the Company and WoodCrafters.
The pro forma results include adjustments for the impact of a preliminary allocation of the purchase
price and interest expense associated with debt that would have been incurred in connection with the
acquisition. The unaudited pro forma financial information does not necessarily represent the results
that would have occurred had the acquisition occurred on January 1, 2012. In addition, the unaudited
pro forma information should not be deemed to be indicative of future results.
(In millions)
Net sales
Net income attributable to Fortune Brands
Basic earnings per common share
Diluted earnings per common share
2013
2012
$3,811.0
240.8
1.45
1.41
$
$
$3,314.7
126.6
0.79
0.76
$
$
In December 2012, the Company acquired a company for approximately $20 million in cash.
Purchase price adjustments and the allocation of the purchase price were finalized in the first quarter
of 2013. The acquisition was not material for the purposes of supplemental disclosure and did not
have a material impact on our consolidated financial statements.
5. Discontinued Operations
In August 2014, the Company entered into a stock purchase agreement to sell the Simonton windows
business for $130 million in cash. The sale was completed in September 2014. Simonton is presented
as a discontinued operation in the Company’s financial statements beginning in the third quarter of
2014 in accordance with ASC requirements. Simonton was previously reported in the Advanced
Material Windows & Door Systems segment, which has been renamed the Doors segment.
54
In addition, in December 2014, we committed to a plan to sell our Waterloo tool storage business and
therefore classified it as a discontinued operation. We expect to sell Waterloo by the end of 2015.
Waterloo was previously reported in the Security & Storage segment, which has been renamed the
Security segment.
The consolidated statements of comprehensive income and consolidated balance sheets for all prior
periods have been adjusted to reflect the presentation of Simonton and Waterloo as discontinued
operations.
The following table summarizes the results of the discontinued operations for the years ended
December 31, 2014, 2013 and 2012.
(in millions)
Net sales
(Loss) income from discontinued operations
before income taxes
Income taxes
(Loss) income from discontinued operations,
2014
2013
2012
$ 369.4
$453.8
$456.3
$ (90.8)
23.5
$ 34.4
12.5
$ 18.8
7.4
net tax
$(114.3)
$ 21.9
$ 11.4
The 2014 loss from discontinued operations, net of tax, included a loss on sale of the Simonton
business of $111.2 million as well as $14.1 million of restructuring and impairment charges for
Waterloo in order to remeasure this business at the estimated fair value less costs to sell.
The following table summarizes the major classes of assets and liabilities of Simonton and Waterloo,
which are now reflected as a discontinued operations on the consolidated balance sheet:
(in millions)
Accounts receivable, net
Inventories
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Identifiable intangibles, net
Other non-current assets
Total assets
Accounts payable
Other current liabilities
Total current liabilities
Other non-current liabilities
Total liabilities
December 31, 2014
(Waterloo only)
December 31, 2013
(Simonton and Waterloo)
$40.1
15.9
7.3
63.3
13.3
—
—
4.0
$80.6
$ 8.5
9.0
17.5
3.4
$20.9
$ 74.3
42.6
9.5
126.4
66.2
86.1
123.9
1.5
$404.1
$ 29.0
31.8
60.8
57.0
$117.8
55
6. Goodwill and Identifiable Intangible Assets
We had goodwill of $1,467.8 million and $1,433.8 million as of December 31, 2014 and 2013,
respectively. The increase of $34.0 million was primarily due to the acquisitions of Anaheim
Manufacturing Company and SentrySafe. The change in the net carrying amount of goodwill by
segment was as follows:
(In millions)
Cabinets
Plumbing
Doors
Security
Balance at December 31, 2012(a)
2012 translation adjustments
Acquisition-related adjustments
Balance at December 31, 2013(a)
2013 translation adjustments
Acquisition-related adjustments
Balance at December 31, 2014(a)
$491.8
(2.4)
142.3
$631.7
(2.7)
1.1
$630.1
$569.7
—
—
$569.7
—
25.9
$595.6
$143.0
—
—
$143.0
—
—
$143.0
$90.8
(1.4)
—
$89.4
(1.4)
11.1
$99.1
Total
Goodwill
$1,295.3
(3.8)
142.3
$1,433.8
(4.1)
38.1
$1,467.8
(a) Net of accumulated impairment losses of $399.5 million in the Doors segment.
We also had identifiable intangible assets, principally tradenames, of $656.5 million and $628.9 million
as of December 31, 2014 and December 31, 2013, respectively. The $38.6 million increase in gross
identifiable intangible assets was predominantly due to the acquisition of SentrySafe.
The gross carrying value and accumulated amortization by class of intangible assets as of
December 31, 2014 and 2013 were as follows:
(In millions)
Indefinite-lived intangible
assets — tradenames
Amortizable intangible assets
Tradenames
Customer and contractual
relationships
Patents/proprietary technology
Total
Total identifiable intangibles
As of December 31, 2014
As of December 31, 2013
Gross
Carrying
Amounts
Accumulated
Amortization
Net Book
Value
Gross
Carrying
Amounts
Accumulated
Amortization
Net Book
Value
$542.7
$ (42.0)(a) $500.7
$538.8
$ (42.0)(a) $496.8
14.6
(6.4)
8.2
15.2
(6.0)
9.2
294.2
57.7
366.5
$909.2
(164.0)
(40.3)
(210.7)
$(252.7)
130.2
17.4
155.8
$656.5
260.2
56.4
331.8
$870.6
(156.5)
(37.2)
(199.7)
$(241.7)
103.7
19.2
132.1
$628.9
(a) Accumulated amortization prior to the adoption of revised ASC requirements for Intangibles — Goodwill and Other Assets.
Amortizable intangible assets, principally tradenames and customer relationships, are subject to
amortization over their estimated useful life, 5 to 30 years, based on the assessment of a number of
factors that may impact useful life. These factors include historical and tradename performance with
respect to consumer name recognition, geographic market presence, market share, plans for
ongoing tradename support and promotion and other relevant factors. We expect to record intangible
amortization of approximately $14 million in 2015, trending down to $10 million in 2019.
We review indefinite-lived intangible assets for impairment annually in the fourth quarter, as well as
whenever market or business events indicate there may be a potential impact on a specific intangible
asset. Impairment losses are recorded to the extent that the carrying value of the indefinite-lived
56
intangible asset exceeds its fair value. We measure fair value using the standard relief-from-royalty
approach which estimates the present value of royalty income that could be hypothetically earned by
licensing the brand name to a third party over the remaining useful life.
In 2014 and 2013, we did not record any asset impairment charges associated with goodwill or
indefinite-lived intangible assets. In the fourth quarter of 2012, in conjunction with our annual
impairment testing, we recorded pre-tax indefinite-lived tradename impairment charges of $13.2
million. These charges were recorded on the asset impairment charges line of the income statement.
The impairment charge in our Doors segment was $7.3 million and the impairment charge in our
Cabinets segment was $5.9 million. These charges were primarily the result of an increase in our
market-participant cost of capital discount rates. One tradename in the Cabinets segment was also
impacted by reduced revenue growth expectations for high-end discretionary cabinet purchases
developed during our annual planning process that was completed in the fourth quarter.
7. Asset Impairment Charges
No asset impairment charges were recorded in 2014 in operating income. In 2013, our Cabinets
segment abandoned certain software developed for internal use, which resulted in a pre-tax
impairment charge of $21.2 million, which was recorded in operating income on the asset impairment
charges line of the income statement and reduced property, plant and equipment. For information on
2012 asset impairment charges, refer to Note 6 above.
8. External Debt and Financing Arrangements
In August 2014, the Company amended its credit agreement to increase total lending commitments
from $1 billion to $1.5 billion. As a result of the refinancing, there was no write-off of prepaid debt
issuance costs. After giving effect to the amendment we have a $975 million committed revolving
credit facility, as well as a $525 million term loan, both of which expire in July 2018. Both facilities can
be used for general corporate purposes. On December 31, 2014 and 2013, our outstanding
borrowings in aggregate under the revolving credit facility and term loan were $670.0 million and
$350.0 million, respectively. The interest rates under these facilities are variable based on LIBOR at
the time of the borrowing and the Company’s leverage as measured by a debt to Adjusted EBITDA
ratio. Based upon the Company’s debt to Adjusted EBITDA ratio, the Company’s borrowing rate could
range from LIBOR + 1.0% to LIBOR + 2.0%. The credit facilities also include a minimum Consolidated
Interest Coverage Ratio requirement of 3.0 to 1.0. The Consolidated Interest Coverage Ratio is
defined as the ratio of Adjusted EBITDA to Consolidated Interest Expense. Adjusted EBITDA is
defined as consolidated net income before interest expense, income taxes, depreciation, amortization
of intangible assets, losses from asset impairments, and certain other adjustments. Consolidated
Interest Expense is as disclosed in our financial statements. The credit facilities also include a
Maximum Leverage Ratio of 3.5 to 1.0 as measured by the ratio of our debt to Adjusted EBITDA. The
Maximum Leverage Ratio is permitted to increase to 3.75 to 1.0 for three succeeding quarters in the
event of an acquisition. At December 31, 2014, we were in compliance with our debt covenant ratios.
At December 31, 2014 and 2013, the current portion of long-term debt was $26.3 million and zero,
respectively. In addition, at December 31, 2013, there was $6.0 million of external short-term
borrowings outstanding, comprised of notes payable to banks that are used for general corporate
purposes. The December 31, 2013 amount included a bank line of credit in India, which was repaid
and terminated in 2014, and in China, which was repaid in 2014. These bank lines of credit provide
for unsecured borrowings for working capital of up to $15.7 million and $22.7 million as of
December 31, 2014 and 2013, respectively. The weighted-average interest rates on these borrowings
were 7.6%, 12.3 % and 13.0% in 2014, 2013 and 2012, respectively.
57
The components of external long-term debt were as follows:
(In millions)
$975 million revolving credit agreement due July 2018
$525 million term loan due July 2018
Total debt
Less: current portion
Total long-term debt
2014
$145.0
525.0
670.0
26.3
2013
$ —
350.0
350.0
—
$643.7
$350.0
Term loan amortization payments during the next five years as of December 31, 2014 are $26.3
million in 2015, $52.5 million in 2016, $52.5 million in 2017, $538.7 million in 2018 and zero in 2019.
In our debt agreements, there are normal and customary events of default which would permit the
lenders to accelerate the debt if not cured within applicable grace periods, such as failure to pay
principal or interest when due or a change in control of the Company. There were no events of default
as of December 31, 2014.
As of December 31, 2014, JPMorgan Chase & Co. and its wholly owned subsidiaries (“JPM”) owned
approximately 14% of the Company’s common stock. JPMorgan Chase Bank, N.A., a subsidiary of
JPM, was a lender of $55.6 million of our total debt under our credit facilities and held $0.6 million of
our cash balances. In addition, JPMorgan Investment Management, Inc., another subsidiary of JPM,
manages pension assets in the Company’s Master Retirement Trust, which totaled $25.1 million as of
December 31, 2014. JPMorgan Chase & Co. does not participate in management of the Company nor
do any of its employees sit on our Board of Directors.
9. Financial Instruments
We do not enter into financial instruments for trading or speculative purposes. We principally use
financial instruments to reduce the impact of changes in foreign currency exchange rates and
commodities used as raw materials in our products. The principal derivative financial instruments we
enter into on a routine basis are foreign exchange contracts. Derivative financial instruments are
recorded at fair value. The counterparties to derivative contracts are major financial institutions. We
are subject to credit risk on these contracts equal to the fair value of these instruments. Management
currently believes that the risk of incurring material losses is unlikely and that the losses, if any, would
be immaterial to the Company.
Raw materials used by the Company are subject to price volatility caused by weather, supply
conditions, geopolitical and economic variables, and other unpredictable external factors. From time
to time, we enter into commodity swaps to manage the price risk associated with forecasted
purchases of materials used in our operations. We account for these commodity derivatives as
economic hedges or cash flow hedges. Changes in the fair value of economic hedges are recorded
directly into current period earnings. There were no material commodity swap contracts outstanding
for the years ended December 31, 2014 and 2013.
We enter into foreign exchange contracts primarily to hedge forecasted sales and purchases
denominated in select foreign currencies, thereby limiting currency risk that would otherwise result
from changes in exchange rates. The periods of the foreign exchange contracts correspond to the
periods of the forecasted transactions, which generally do not exceed 12 to 15 months subsequent to
the latest balance sheet date.
For derivative instruments that are designated as fair value hedges, the gain or loss on the derivative
instrument, as well as the offsetting loss or gain on the hedged item, are recognized on the same line
58
of the statement of income. The effective portions of cash flow hedges are reported in other
comprehensive income (“OCI”) and are recognized in the statement of income when the hedged item
affects earnings. The ineffective portion of all hedges is recognized in current period earnings. In
addition, changes in the fair value of all economic hedge transactions are immediately recognized in
current period earnings. Our primary foreign currency hedge contracts pertain to the Canadian dollar,
the Mexican peso and the Chinese yuan. The gross U.S. dollar equivalent notional amount of all
foreign currency derivative hedges outstanding at December 31, 2014 was $270.4 million,
representing a net settlement payable of $0.3 million. Based on foreign exchange rates as of
December 31, 2014, we estimate that $0.3 million of net foreign currency derivative losses included in
OCI as of December 31, 2014 will be reclassified to earnings within the next twelve months.
The fair values of foreign exchange and commodity derivative instruments on the consolidated
balance sheets as of December 31, 2014 and 2013 were:
(In millions)
Location
2014
2013
Fair Value
Assets:
Foreign exchange contracts
Net investment hedges
Liabilities:
Foreign exchange contracts
Other current assets
Other current assets
Total assets
$5.1
0.5
$5.6
$2.1
0.6
$2.7
Other current liabilities
$5.4
$0.3
The effects of derivative financial instruments on the consolidated statements of income in 2014, 2013
and 2012 were:
(In millions)
Type of hedge
Cash flow
Fair value
Total
Gain (Loss) Recognized in Income
Location
2014
2013
2012
Net sales
Cost of products sold
Other income (expense), net
Other income (expense), net
$ — $ — $(0.1)
0.5
1.9
—
—
(0.3)
1.2
0.5
(0.4)
3.6
$ 3.7
$3.1
$ 0.1
For cash flow hedges that are effective, the amounts recognized in OCI were (losses)/gains of $(1.3)
million and $3.0 million in 2014 and 2013, respectively. In the years ended December 31, 2014, 2013
and 2012, the ineffective portion of cash flow hedges recognized in other expense (income), net, was
insignificant.
59
10. Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 and 2013
were as follows:
(In millions)
Assets:
Derivative asset financial instruments (level 2)
Deferred compensation program assets (level 1)
Total assets
Liabilities:
Derivative liability financial instruments (level 2)
Fair Value
2014
2013
$5.6
3.3
$8.9
$2.7
3.5
$6.2
$5.4
$0.3
The principal derivative financial instruments we enter into on a routine basis are foreign exchange
contracts. In addition, from time to time, we enter into commodity swaps. Derivative financial
instruments are recorded at fair value.
ASC requirements for Fair Value Measurements and Disclosures establish a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into three levels. Level 1
inputs, the highest priority, are quoted prices in active markets for identical assets or liabilities. Level
2 inputs reflect other than quoted prices included in level 1 that are either observable directly or
through corroboration with observable market data. Level 3 inputs are unobservable inputs due to
little or no market activity for the asset or liability, such as internally-developed valuation models. We
do not have any assets or liabilities measured at fair value on a recurring basis that are level 3.
The carrying value of the Company’s long-term debt as of December 31, 2014 and 2013 of $643.7
million and $350.0 million, respectively, approximated its fair value. The fair value of the Company’s
long-term debt was determined primarily by using broker quotes, which are level 2 inputs.
In 2014, we did not record impairment charges in operating income. In 2013 and 2012, we recorded
pre-tax intangible asset impairment charges of $21.2 million and $13.2 million, respectively. Refer to
Note 6, “Goodwill and Identifiable Intangible Assets,” and Note 7, “Asset Impairment Charges,” for
additional information. In accordance with ASC requirements for Fair Value Measurements, below is
the disclosure for assets measured at fair value on a non-recurring basis. There were no losses for
indefinite-lived intangible assets in 2014 and 2013.
(in millions)
2012
Indefinite-lived intangible assets
Fair Value Measurements Using
Significant Unobservable
Inputs (level 3)
Total
Losses
$191.3
$13.2
In addition, in 2014, as a result of our decision to sell Waterloo, we recorded $9.1 million of pre-tax
impairment charges in order to remeasure this business at the estimated fair value less costs to sell.
These charges consisted of $8.1 million for fixed assets and $1.0 million for definite-lived intangible
assets. Refer to Note 5, “Discontinued Operations,” for additional information.
60
11. Capital Stock
The Company has 750 million authorized shares of common stock, par value $0.01 per share. The
number of shares of common stock and treasury stock and the share activity for 2014 and 2013 were
as follows:
Common Shares
Treasury Shares
2014
2013
2014
2013
Balance at the beginning of the
year
Stock plan shares issued
Shares surrendered by optionees
Common stock repurchases
166,667,936 163,855,647
4,516,507
(296,100)
(1,408,118)
2,877,761
(288,797)
(11,116,772)
2,404,320
—
288,797
11,116,772
700,102
—
296,100
1,408,118
Balance at the end of the year
158,140,128 166,667,936
13,809,889
2,404,320
In December 2014, our Board of Directors increased the quarterly cash dividend by 17% to $0.14 per
share of our common stock.
The Company has 60 million authorized shares of preferred stock, par value $0.01 per share. At
December 31, 2014, no shares of our preferred stock were outstanding. Our Board of Directors has
the authority, without action by the Company’s stockholders, to designate and issue our preferred
stock in one or more series and to designate the rights, preferences, limitations and privileges of each
series of preferred stock, which may be greater than the rights of the Company’s common stock.
In 2014, we repurchased approximately 11.1 million shares of outstanding common stock under the
Company’s share repurchase programs for $439.8 million. As of December 31, 2014, the Company’s
total remaining share repurchase authorization under the remaining programs was approximately
$300 million. The share repurchase programs do not obligate the Company to repurchase any
specific dollar amount or number of shares and may be suspended or discontinued at any time.
61
12. Accumulated Other Comprehensive (Loss) Income
The reclassifications out of accumulated other comprehensive (loss) income for the year ended
December 31, 2014 and 2013 were as follows:
(In millions)
Details about Accumulated Other
Comprehensive Income Components
Cumulative translation adjustments:
Gains (losses) on cash flow hedges:
Foreign exchange contracts
Commodity contracts
Defined benefit plan items:
Amortization of prior service cost
Recognition of actuarial losses
Curtailment and settlement losses
Total reclassifications for the period
2014
$ 1.5
$ 0.5
(0.4)
—
0.1
(0.1)
$ —
$ 27.5
(13.7)
—
13.8
(5.2)
$ 8.6
$ 10.1
Affected Line Item in the
Consolidated Statements of Income
2013
—
$ 2.3
—
(0.3)
2.0
(0.7)
$ 1.3
$27.3
(5.2)
(0.2)
21.9
(8.4)
$13.5
$14.8
Cost of products sold
Other (expense)
income, net
Cost of products sold
Total before tax
Tax expense
Net of tax
(a)
(a)
(a)
Total before tax
Tax expense
Net of tax
Net of tax
(a) These accumulated other comprehensive (loss) income components are included in the computation of net periodic benefit cost. Refer to
Note 14, “Defined Benefit Plans,” for additional information.
62
Total accumulated other comprehensive (loss) income consists of net income (loss) and other
changes in business equity from transactions and other events from sources other than shareholders.
It includes currency translation gains and losses, unrealized gains and losses from derivative
instruments designated as cash flow hedges, and defined benefit plan adjustments. The components
of and changes in accumulated other comprehensive (loss) income were as follows:
(In millions)
Balance at December 31, 2011
Changes during year
Balance at December 31, 2012
Amounts classified into accumulated other
comprehensive income
Amounts reclassified from accumulated other
comprehensive income into earnings
Net current period other comprehensive (loss) income
Balance at December 31, 2013
Amounts classified into accumulated other
comprehensive income
Amounts reclassified from accumulated other
comprehensive income into earnings
Net current period other comprehensive (loss) income
Foreign
Currency
Adjustments
Derivative
Hedging
Gain
Defined
Benefit
Plan
Adjustments
Accumulated
Other
Comprehensive
(Loss) Income
$ 55.1
8.4
63.5
(10.2)
$ 0.5
(0.3)
0.2
2.0
$(45.0)
11.9
(33.1)
87.8
—
(1.3)
(13.5)
(10.2)
53.3
0.7
0.9
74.3
41.2
(20.8)
(1.5)
(69.7)
(1.5)
(22.3)
—
(1.5)
(8.6)
(78.3)
$ 10.6
20.0
30.6
79.6
(14.8)
64.8
95.4
(92.0)
(10.1)
(102.1)
Balance at December 31, 2014
$ 31.0
$(0.6)
$(37.1)
$ (6.7)
13. Stock-Based Compensation
As of December 31, 2014, we had awards outstanding under two Long-Term Incentive Plans, the
Fortune Brands Home & Security, Inc. 2013 Long-Term Incentive Plan (the “Plan”) and the 2011 Long-
Term Incentive Plan (the “2011 Plan”, and together with the Plan the “Plans”). During 2013, our
stockholders approved the Plan, which provides for the granting of stock options, performance share
awards, restricted stock units, and other equity-based awards, to employees, directors and
consultants. As of December 31, 2014, approximately 8 million shares of common stock remained
authorized for issuance under the Plan. In addition, shares of common stock may be automatically
added to the number of shares of common stock that may be issued as awards expire, are
terminated, cancelled or forfeited, or are used to satisfy withholding taxes with respect to existing
awards under the Plans. No new stock-based awards can be made under the 2011 Plan, but there
are outstanding awards under the 2011 Plan that continue to vest and/or be exercisable. Upon the
exercise or payment of stock-based awards, shares of common stock are issued from authorized
common shares.
63
Pre-tax stock-based compensation expense from continuing operations was as follows:
(In millions)
Stock option awards
Restricted stock units
Performance awards
Director awards
Total pre-tax expense
Tax benefit
Total after tax expense
2014
$ 7.8
11.8
7.6
0.9
28.1
10.5
2013
$ 7.9
9.6
6.5
0.9
24.9
9.1
2012
$11.9
9.8
3.3
1.1
26.1
9.4
$17.6
$15.8
$16.7
Compensation costs that were capitalized in inventory were not material.
Restricted Stock Units
Restricted stock units have been granted to officers and certain employees of the Company and
represent the right to receive unrestricted shares of Company common stock subject to continued
employment. Certain restricted stock units granted to certain officers are also subject to attaining
specific performance criteria. Compensation cost is recognized over the service period. We calculate
the fair value of each restricted stock unit granted by using the average of the high and low share
prices on the date of grant. Restricted stock units generally vest ratably over a three-year period.
A summary of activity with respect to restricted stock units outstanding under the Plans related to
Fortune Brands and our Former Parent employees for the year ended December 31, 2014 was as
follows:
Non-vested at December 31, 2013
Granted
Vested
Cancelled
Non-vested at December 31, 2014
Number of Restricted
Stock Units
Weighted-Average
Grant-Date
Fair Value
1,297,296
358,880
(709,525)
(103,714)
842,937
$20.68
43.98
19.32
28.47
$30.79
The remaining unrecognized pre-tax compensation cost related to restricted stock units at
December 31, 2014 was approximately $14.5 million, and the weighted-average period of time over
which this cost will be recognized is 1.8 years. The fair value of restricted stock units that vested
during 2014, 2013 and 2012 was $31.1 million, $26.9 million and $18.5 million, respectively.
Stock Option Awards
Stock options were granted to officers and select employees of the Company and represent the right
to purchase shares of Company common stock subject to continued employment.
All stock-based compensation to employees is required to be measured at fair value and expensed
over the requisite service period. We recognize compensation expense on awards on a straight-line
basis over the requisite service period for the entire award. Stock options granted under the Plans
generally vest over a three-year period and have a maturity of ten years from the grant date.
64
The fair value of Fortune Brands options was estimated at the date of grant using a Black-Scholes
option pricing model with the assumptions shown in the following table:
Current expected dividend yield
Expected volatility
Risk-free interest rate
Expected term
2014
2013
2012
1.5%
32.0%
1.9%
6 years
1.5%
32.0%
1.1%
6 years
1.5%
35.0%
1.2%
6 years
The determination of expected volatility is based on a blended peer group volatility for companies in
similar industries, at a similar stage of life and with similar market capitalization because there is not
sufficient historical volatility data for Fortune Brands common stock over the period commensurate
with the expected term of stock options, as well as other relevant factors. The risk-free interest rate is
based on U.S. government issues with a remaining term equal to the expected life of the stock
options. The expected term is the period over which our employees are expected to hold their
options. It is based on the simplified method from the Securities and Exchange Commission’s safe
harbor guidelines. The dividend yield is based on the Company’s estimated dividend over the
expected term. The weighted-average grant date fair value of stock options granted under the Plans
during the years ended December 31, 2014, 2013 and 2012 was $12.72, $9.02 and $5.80,
respectively.
A summary of Fortune Brands stock option activity related to Fortune Brands and our Former Parent
employees for the year ended December 31, 2014 was as follows:
Outstanding at December 31, 2013
Granted
Exercised
Expired/forfeited
Outstanding at December 31, 2014
Options
9,649,560
595,150
(2,150,255)
(214,677)
7,879,778
Weighted-
Average
Exercise
Price
$14.39
44.52
13.52
25.77
$16.60
Options outstanding and exercisable at December 31, 2014 were as follows:
Range Of
Exercise Prices
$9.00 to $11.99
12.00 to 14.00
14.01 to 44.73
Options
Outstanding
2,079,975
3,776,262
2,023,541
7,879,778
Options Outstanding(a)
Options Exercisable(b)
Weighted-
Average
Remaining
Contractual
Life
2.0
6.2
7.9
5.5
Weighted-
Average
Exercise
Price
$ 9.71
13.05
30.29
$16.60
Options
Exercisable
2,079,975
3,229,631
839,387
6,148,993
Weighted-
Average
Exercise
Price
$ 9.71
13.18
23.31
$13.39
(a) At December 31, 2014, the aggregate intrinsic value of options outstanding was $225.9 million.
(b) At December 31, 2014, the weighted-average remaining contractual life of options exercisable was 4.9 years and the aggregate intrinsic
value of options exercisable was $196.0 million.
The remaining unrecognized compensation cost related to unvested awards at December 31, 2014
was $8.1 million, and the weighted-average period of time over which this cost will be recognized is
1.5 years. The fair value of options that vested during the years ended December 31, 2014, 2013 and
65
2012 was $9.8 million, $12.4 million and $10.8 million, respectively. The intrinsic value of Fortune
Brands stock options exercised in the years ended December 31, 2014, 2013 and 2012 was $63.4
million, $97.1 million and $70.2 million, respectively.
Performance Awards
Performance share awards were granted to officers and select employees of the Company under the
Plans and represent the right to earn shares of Company common stock based on the achievement of
various segment or company-wide performance conditions, including diluted cumulative earnings per
share, average return on invested capital, average return on net tangible assets and cumulative
operating income during the three-year performance period. Compensation cost is amortized into
expense over the performance period, which is generally three years, and is based on the probability
of meeting performance targets. The fair value of each performance share award is based on the
average of the high and low stock price on the date of grant.
The following table summarizes information about performance share awards as of December 31,
2014, as well as activity during the year then ended, based on the target award amounts in the
performance share award agreements:
Non-vested at December 31, 2013
Granted
Vested
Cancelled
Non-vested at December 31, 2014
Number of
Performance Share
Awards
Weighted-Average
Grant-Date
Fair Value
499,500
160,500
(1,155)
(63,145)
595,700
$25.38
45.13
37.76
31.24
$30.06
The remaining unrecognized pre-tax compensation cost related to performance share awards at
December 31, 2014 was approximately $8.4 million, and the weighted-average period of time over
which this cost will be recognized is 1.5 years. The fair value of performance share awards that
vested during 2014 was $0.1 million.
Director Awards
Stock awards compensate outside directors under the Plan. Awards are issued annually in the
second quarter as part of the compensation to outside directors. In addition, outside directors can
elect to have director fees paid in stock or can elect to defer payment of stock. Compensation cost is
expensed at the time of an award based on the fair value of a share at the date of the award. In 2014,
2013 and 2012, we awarded 22,654, 24,672 and 52,208 shares of Company common stock to outside
directors with a weighted average fair value on the date of the award of $40.01, $36.47 and $20.46,
respectively.
14. Defined Benefit Plans
We have a number of pension plans in the United States, covering many of the Company’s
employees, however most have been closed to new hires. The plans provide for payment of
retirement benefits, mainly commencing between the ages of 55 and 65, and also for payment of
certain disability benefits. After meeting certain qualifications, an employee acquires a vested right to
future benefits. The benefits payable under the plans are generally determined on the basis of an
employee’s length of service and/or earnings. Employer contributions to the plans are made, as
necessary, to ensure legal funding requirements are satisfied. Also, from time to time, we may make
contributions in excess of the legal funding requirements.
66
In addition, the Company provides postretirement health care and life insurance benefits to certain
retirees.
(In millions)
Pension Benefits
Postretirement Benefits
Obligations and Funded Status at December 31
2014
2013
2014
2013
Change in the Projected Benefit Obligation (PBO):
Projected benefit obligation at beginning of year
Service cost
Interest cost
Plan amendments
Actuarial loss (gain)
Participants’ contributions
Benefits paid
Medicare Part D reimbursement
Foreign exchange
$ 662.3
10.4
32.9
—
133.1
—
(30.1)
—
—
$722.5
11.4
30.1
—
(73.0)
—
(28.7)
—
—
$ 34.2
0.1
0.8
(15.3)
3.9
0.3
(4.2)
0.4
(0.1)
$ 73.3
0.3
1.7
(34.7)
(0.3)
0.5
(7.0)
0.4
—
Projected benefit obligation at end of year
$ 808.6
$662.3
$ 20.1
$ 34.2
Accumulated benefit obligation at end of year (excludes the
impact of future compensation increases)
$ 793.2
$648.5
Change in Plan Assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Participants’ contributions
Medicare Part D reimbursement
Benefits paid
Fair value of plan assets at end of year
$ 583.8
52.0
2.5
—
—
(30.1)
$536.8
74.6
1.1
—
—
(28.7)
$ — $ —
—
6.1
0.5
0.4
(7.0)
—
3.5
0.3
0.4
(4.2)
$ 608.2
$583.8
$ — $ —
Funded status (Fair value of plan assets less PBO)
$(200.4)
$ (78.5)
$(20.1)
$(34.2)
The accumulated benefit obligation exceeds the fair value of assets for all pension plans. The 2014
actuarial loss includes $0.9 million related to an acquired business.
Amounts recognized in the consolidated balance sheets consist of:
(In millions)
Current benefit payment liability
Accrued benefit liability
Net amount recognized
Pension Benefits
Postretirement Benefits
2014
2013
2014
2013
$ (1.0)
(199.4)
$ (0.8)
(77.7)
$ (2.6)
(17.5)
$ (3.5)
(30.7)
$(200.4)
$(78.5)
$(20.1)
$(34.2)
In the first quarter of 2014, we communicated our decision to amend certain postretirement benefit
plans to reduce health benefits for certain current and retired employees. The reduction in accrued
retiree benefit plan liabilities was $15.3 million and we recorded actuarial losses of $0.6 million and
prior service credits of $3.5 million.
In the fourth quarter of 2012 and first half of 2013, we communicated our decision to amend certain
postretirement benefit plans to reduce health benefits for certain current and retired employees. The
impact of these changes was a reduction in accrued retiree benefit plan liabilities of $29.8 million in
2012 and $34.7 million in 2013, and we recognized actuarial losses of $4.0 million in 2013 due to a
decrease in the discount rate and a resulting lower threshold for loss recognition because of the
reduced postretirement obligation. Liability reductions resulting from these benefit reductions are
67
recorded as amortization of prior service credits in net income in accordance with accounting
requirements. In addition, in the first quarter of 2013, we communicated to certain employees our
decision to freeze an hourly pension plan by December 31, 2016. As a result, we remeasured our
pension liability, updating our pension measurement assumptions, and recorded a $20.0 million
reduction in the liability. The curtailment charge associated with this pension freeze was insignificant.
See Note 12, “Accumulated Other Comprehensive Income,” for information on the impact on
accumulated other comprehensive income. In the third and fourth quarters of 2011, we
communicated to employees our decision to freeze salaried and certain hourly non-union pension
plans by December 31, 2016. As a result, we remeasured our pension liabilities, updated our pension
measurement assumptions, and recorded pension curtailment charges totaling $1.8 million.
As of December 31 2014, we adopted the new Society of Actuaries RP-2014 mortality tables, resulting
in an increase in our postretirement obligations of approximately $48 million, and a corresponding
increase in deferred actuarial losses in accumulated other comprehensive income.
In 2015, we expect to make pension cash contributions of approximately $5 million.
The amounts in accumulated other comprehensive income on the consolidated balance sheets that
have not yet been recognized as components of net periodic benefit cost were as follows:
(In millions)
Pension Benefits
Postretirement Benefits
Net actuarial loss at December 31, 2012
Recognition of actuarial gain
Current year actuarial gain
Net actuarial gain at December 31, 2013
Recognition of actuarial gain
Current year actuarial loss
Net actuarial loss at December 31, 2014
Net prior service cost (credit) at December 31, 2012
Prior service credit recognition due to plan
amendments
Amortization
$ 72.2
(0.9)
(105.6)
$ (34.3)
(12.5)
123.3
$ 76.5
$
0.6
—
(0.1)
Net prior service cost (credit) at December 31, 2013
$
0.5
Prior service credit recognition due to plan
amendments
Amortization
Net prior service cost (credit) at December 31, 2014
Total at December 31, 2014
—
(0.1)
$
0.4
$ 76.9
$ 4.3
(4.5)
(0.3)
$ (0.5)
(1.2)
2.9
$ 1.2
$(26.2)
(34.7)
27.4
$(33.5)
(15.3)
27.6
$(21.2)
$(20.0)
The amounts in accumulated other comprehensive income expected to be recognized as
components of net periodic benefit cost over the next fiscal year are amortization of net prior service
costs (credits) related pension benefits of $0.1 million and postretirement benefits of $(14.0) million.
68
Components of net periodic benefit cost were as follows:
Components of Net Periodic Benefit Cost
Pension Benefits
Postretirement Benefits
(In millions)
2014
2013
2012
2014
2013
2012
Service cost
Interest cost
Expected return on plan assets
Recognition of actuarial losses
Amortization of prior service cost (credits)
Curtailment and settlement losses
$ 10.4
32.9
(42.2)
12.5
0.1
—
$ 11.4
30.1
(41.8)
0.8
0.1
0.1
$ 12.1
30.7
(36.8)
30.6
0.3
—
$ 0.1
0.8
—
1.2
(27.6)
—
$ 0.3
1.7
—
4.4
(27.4)
0.1
$ 0.5
3.9
—
11.6
(2.6)
—
Net periodic benefit cost
$ 13.7
$ 0.7
$ 36.9
$(25.5)
$(20.9)
$13.4
Assumptions
Pension Benefits
Postretirement Benefits
2014
2013
2012
2014
2013
2012
Weighted-Average Assumptions Used to
Determine Benefit Obligations at
December 31:
Discount rate
Rate of compensation increase
Weighted-Average Assumptions Used to
Determine Net Cost for Years Ended
December 31:
Discount rate
Expected long-term rate of return on plan
4.2% 5.0%
4.0% 4.0%
3.5% 4.3%
—
—
5.0% 4.2% 4.9% 4.3% 3.7% 4.6%
assets
Rate of compensation increase
7.4% 7.8% 7.8%
4.0% 4.0% 4.0%
—
—
—
—
—
—
Assumed Health Care Cost Trend Rates Used to Determine
Benefit Obligations and Net Cost at December 31:
Health care cost trend rate assumed for next year
Rate that the cost trend rate is assumed to decline (the ultimate trend
rate)
Year that the rate reaches the ultimate trend rate
(a) The pre-65 initial health care cost trend rate is shown first / followed by the post-65 rate.
Postretirement Benefits
2014
2013
7.6/7.5%(a)
7.1/7.5%(a)
4.5%
2022
4.5%
2022
A one-percentage-point change in assumed health care cost trend rates would have the following
effects:
(In millions)
Effect on total of service and interest cost
Effect on postretirement benefit obligation
1-Percentage-
Point Increase
1-Percentage-
Point Decrease
$0.1
1.4
$(0.1)
(1.6)
69
Plan Assets
Pension assets by major category of plan assets and the type of fair value measurement as of
December 31, 2014 were as follows:
(In millions)
Group annuity/insurance contracts
Commingled funds:
Cash and cash equivalents
Equity
Fixed income
Multi-strategy hedge funds
Real estate
Total
Total as of
balance
sheet date
$ 21.8
9.1
282.6
248.0
21.6
25.1
Level 2 –
Significant
other observable
inputs
$ —
Level 3 –
Significant
unobservable
inputs
$21.8
9.1
282.6
248.0
—
—
—
—
—
21.6
25.1
$68.5
$608.2
$539.7
A reconciliation of Level 3 measurements as of December 31, 2014 was as follows:
(In millions)
January 1, 2014
Actual return on assets related to assets still held
December 31, 2014
Commingled Funds
Group
annuity/
insurance
contracts
$21.2
0.6
$21.8
Multi-strategy
hedge funds
Real estate
Total
$20.5
1.1
$21.6
$22.8
2.3
$25.1
$64.5
4.0
$68.5
Pension assets by major category of plan assets and the type of fair value measurement as of
December 31, 2013 were as follows:
(In millions)
Group annuity/insurance contracts
Commingled funds:
Cash and cash equivalents
Equity
Fixed income
Multi-strategy hedge funds
Real estate
Total
Total as of
balance
sheet date
$ 21.2
8.1
278.6
232.6
20.5
22.8
Level 2 –
Significant
other observable
inputs
$ —
Level 3 –
Significant
unobservable
inputs
$21.2
8.1
278.6
232.6
—
—
—
—
—
20.5
22.8
$64.5
$583.8
$519.3
A reconciliation of Level 3 measurements as of December 31, 2013 was as follows:
(In millions)
January 1, 2013
Actual return on assets related to assets still held
Purchases, sales and settlements
December 31, 2013
70
Group
annuity/
insurance
contracts
$20.6
0.6
—
$21.2
Commingled Funds
Multi-strategy
hedge funds
Real estate
Total
$18.8
1.7
—
$20.5
$24.4
3.4
(5.0)
$22.8
$63.8
5.7
(5.0)
$64.5
Our defined benefit trust owns a variety of assets including equity, fixed income and real estate
securities, as well as group annuity/insurance contracts and fund-of-hedge funds. Equity securities
are traded on national stock exchanges and are valued at daily closing prices. Fixed income
securities are valued at daily closing prices or institutional mid-evaluation prices provided by
independent industry-recognized pricing sources. Real estate securities are valued based on recent
market appraisals of underlying property, as well as standard valuation methodologies to determine
the most probable cash price in a competitive market. Valuations of group annuity/insurance
contracts and fund-of-hedge funds are based on daily closing prices of underlying securities or
institutional evaluation prices consistent with industry practices.
Our investment strategy is to optimize investment returns through a diversified portfolio of
investments, taking into consideration underlying plan liabilities and asset volatility. A Master Trust
was established to hold the assets of our domestic defined benefit plans. The defined benefit asset
allocation policy of the trust allows for an equity allocation of 0% to 75%, a fixed income allocation of
25% to 100%, a cash allocation of up to 25% and other investments up to 20%. Asset allocations are
based on the underlying liability structure. All retirement asset allocations are reviewed periodically to
ensure the allocation meets the needs of the liability structure.
Our 2015 expected blended long-term rate of return on plan assets of 6.8% was determined based
on the nature of the plans’ investments, our current asset allocation and projected long-term rates of
return from pension investment consultants.
Estimated Future Retirement Benefit Payments
The following retirement benefit payments are expected to be paid:
(In millions)
2015
2016
2017
2018
2019
Years 2020-2024
Pension
Benefits
$ 32.7
34.7
36.3
38.0
39.9
221.8
Postretirement
Benefits
$2.5
2.4
1.2
1.2
1.2
5.3
Estimated future retirement benefit payments above are estimates and could change significantly
based on differences between actuarial assumptions and actual events and decisions related to lump
sum distribution options that are available to participants in certain plans.
Defined Contribution Plan Contributions
We sponsor a number of defined contribution plans. Contributions are determined under various
formulas. Cash contributions by the Company related to these plans amounted to $21.5 million, $18.7
million and $16.1 million in 2014, 2013 and 2012, respectively.
15.
Income Taxes
The components of income from continuing operations before income taxes and noncontrolling
interests were as follows:
(In millions)
Domestic operations
Foreign operations
Income before income taxes and noncontrolling interests
2014
2013
2012
$301.4
90.5
$391.9
$243.8 $ 77.0
58.2
66.7
$310.5 $135.2
71
A reconciliation of income taxes at the 35% federal statutory income tax rate to the income tax
provision reported was as follows:
(In millions)
Income tax expense computed at federal statutory income tax rate
Other income taxes, net of federal tax benefit
Foreign taxes at a different rate than U.S. federal statutory income
tax rate
Tax effect on foreign dividends
Tax benefit on income attributable to domestic production activities
Net adjustments for uncertain tax positions
Net effect of rate changes on deferred taxes
Prior period items
Valuation allowance (decrease) increase
Miscellaneous other, net
Income tax expense as reported
Effective income tax rate
2014
2013
2012
$137.2
7.2
$108.7
7.0
$ 47.3
3.0
(13.4)
—
(7.6)
4.7
(0.7)
—
(4.1)
(5.0)
(10.1)
—
(5.2)
3.0
(1.6)
—
2.1
(2.4)
(7.1)
12.4
(2.1)
(11.1)
(0.3)
(3.2)
(8.9)
(3.1)
$118.3
$101.5
$ 26.9
30.2%
32.7% 19.9%
The effective income tax rate for 2014 was favorably impacted by the tax benefit attributable to the
Domestic Production Activity (Internal Revenue Code Section 199) Deduction ($7.6 million), the
release of valuation allowances related to state net operating loss carryforwards ($4.1 million), and a
$1.8 million benefit associated with the extension of the U.S. research and development credit under
the Tax Increase Prevention Act 2014. The effective income tax rate for 2013 was favorably impacted
by the tax benefit attributable to the Domestic Production Activity (Internal Revenue Code
Section 199) Deduction ($5.2 million), $1.6 million of deferred tax benefits associated with the
enacted repeal of the Mexican Business Flat Tax under the 2014 Mexican Tax Reform Package, and a
$1.4 million tax benefit associated with the extension of the U.S. research and development credit
under The American Taxpayer Relief Act of 2012. The effective income tax rate in 2013 was
unfavorably impacted by an increase in the valuation allowance related to an investment impairment
charge for which we could not record an income tax benefit ($2.1 million). The effective income tax
rate for 2012 was favorably impacted by a tax benefit related to the final settlement of a U.S. federal
income tax audit covering the 2008 to 2009 years ($11.1 million), a decrease in valuation allowance
due to certain reorganization actions among our foreign subsidiaries ($8.9 million), and the tax benefit
attributable to the Domestic Production Activity (Internal Revenue Code Section 199) Deduction ($2.1
million). The effective rate in 2012 was unfavorably impacted by an income tax expense on foreign
dividends ($12.4 million).
A reconciliation of the beginning and ending amount of unrecognized tax benefits (UTBs) was as
follows:
(In millions)
Unrecognized tax benefits — beginning of year
Gross additions — current year tax positions
Gross additions — prior year tax positions
Gross (reductions)/additions — purchase accounting adjustments
Gross reductions — prior year tax positions
Gross reductions — settlements with taxing authorities
Impact due to expiration of statutes of limitations
Unrecognized tax benefits — end of year
2014
2013
2012
$23.7
8.7
2.2
(1.1)
(2.5)
—
—
$31.0
$20.8
4.4
0.7
1.6
(3.2)
(0.6)
—
$23.7
$ 35.4
2.8
0.6
—
(13.5)
(4.0)
(0.5)
$ 20.8
72
The amount of UTBs that, if recognized as of December 31, 2014, would affect the Company’s
effective tax rate was $27.0 million. It is reasonably possible that, within the next twelve months, total
UTBs may decrease in the range of $2.0 million to $7.0 million primarily as a result of the conclusion
of U.S. state and foreign income tax proceedings.
We classify interest and penalty accruals related to UTBs as income tax expense. In 2014, we
recognized an interest and penalty expense of approximately $0.5 million. In 2013, we recognized an
interest and penalty benefit of approximately $0.2 million. In 2012, we recognized an interest and
penalty benefit of approximately $1.7 million, primarily driven by audit resolutions. At December 31,
2014 and 2013, we had accruals for the payment of interest and penalties of $10.7 million and $9.9
million, respectively.
We file income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions. The
Company is currently under examination by the U.S. Internal Revenue Service (“IRS”) for the periods
related to 2010 through 2012. We have tax years that remain open and subject to examination by tax
authorities in the following major taxing jurisdictions: Canada for years after 2009, Mexico for years
after 2006 and China for years after 2010.
Income taxes in 2014, 2013 and 2012 were as follows:
(In millions)
Current
Federal
Foreign
State and other
Deferred
Federal, state and other
Foreign
Total income tax expense
2014
2013
2012
$ 86.9
12.3
12.0
$ 96.3 $16.7
12.8
1.8
12.5
11.1
2.7
4.4
(20.2)
1.8
1.5
(5.9)
$118.3
$101.5 $26.9
The components of net deferred tax assets (liabilities) as of December 31, 2014 and 2013 were as
follows:
(In millions)
Deferred tax assets:
Compensation and benefits
Defined benefit plans
Capitalized inventories
Accounts receivable
Other accrued expenses
Net operating loss and other tax carryforwards
Valuation allowance
Miscellaneous
Total deferred tax assets
Deferred tax liabilities:
LIFO inventories
Fixed assets
Identifiable intangible assets
Miscellaneous
Total deferred tax liabilities
Net deferred tax liability
73
2014
2013
$ 32.5
83.9
10.9
7.5
17.2
15.8
(12.0)
3.7
$ 32.8
40.8
10.8
6.3
12.9
24.4
(19.8)
14.3
159.5
122.5
(9.3)
(60.6)
(205.0)
(1.7)
(276.6)
$(117.1)
(9.1)
(55.1)
(208.4)
(7.2)
(279.8)
$(157.3)
In accordance with ASC requirements for Income Taxes, deferred taxes were classified in the
consolidated balance sheets as of December 31, 2014 and 2013 as follows:
(In millions)
Other current assets
Other current liabilities
Other assets
Deferred income taxes
Net deferred tax liability
2014
2013
$ 33.8
(2.4)
2.1
(150.6)
$(117.1)
$ 40.0
(0.5)
0.6
(197.4)
$(157.3)
As of December 31, 2014 and 2013, the Company had deferred tax assets relating to net operating
losses and other tax carryforwards of $15.8 million and $24.4 million, respectively, of which
approximately $0.8 million will expire between 2015 and 2019, and the remainder which will expire in
2020 and thereafter. The Company has provided a valuation allowance to reduce the carrying value
of certain of these deferred tax assets, as management has concluded that, based on the available
evidence, it is more likely than not that the deferred tax assets will not be fully realized.
The undistributed earnings of foreign subsidiaries that are considered indefinitely reinvested were
$224.7 million at December 31, 2014. A quantification of the associated deferred tax liability on these
undistributed earnings has not been made, as the determination of such liability is not practicable.
In October, 2011, we separated from our Former Parent. During 2012, we analyzed the subsidiary
legal and capital structures inherited from our Former Parent to assess their compatibility with our
strategies as a new independent company. Based on this analysis, in the fourth quarter of 2012, we
committed to a plan to reorganize certain foreign subsidiaries and adjust their capital structures to
better align with our business strategy as a new independent company. As part of this plan, we
committed to a non-recurring remittance of certain foreign earnings and recorded an associated tax
liability of $12.4 million. The remaining portion of this liability as of December 31, 2014 is $2.8 million.
We have not provided deferred income taxes on the remaining undistributed earnings of foreign
subsidiaries.
In general, under the Tax Allocation Agreement that we entered into with our Former Parent, Fortune
Brands is responsible for all taxes to the extent such taxes are attributable to the Home & Security
business, and we agreed to indemnify our Former Parent for these taxes. Our Former Parent will be
responsible for all taxes to the extent such taxes are not attributable to the Fortune Brands business
and our Former Parent has agreed to indemnify us for these taxes. Though valid as between the
parties, the Tax Allocation Agreement will not be binding on the IRS or other taxing authorities.
74
16. Restructuring and Other Charges
Pre-tax restructuring and other charges for the year ended December 31, 2014 were:
(In millions)
Cabinets
Plumbing
Security
Corporate
Total
Year Ended December 31, 2014
Restructuring
Charges
$0.4
0.5
4.1
2.0
$7.0
Other Charges(a)
Cost of
Products
Sold
SG&A(b)
$ — $ —
0.6
—
—
0.1
—
—
$0.1
$0.6
Total
Charges
$0.4
1.2
4.1
2.0
$7.7
(a) “Other Charges” represent charges or gains directly related to restructuring initiatives that cannot be reported as
restructuring under GAAP. Such charges or gains may include losses on disposal of inventories, trade receivables
allowances from exiting product lines, accelerated depreciation resulting from the closure of facilities, and gains and losses
on the sale of previously closed facilities.
(b) Selling, general and administrative expenses
Restructuring and other charges in 2014 primarily resulted from severance charges in Security,
Plumbing and Corporate, partially offset by a benefit from release of a foreign currency gain
associated with the dissolution of a foreign entity in Plumbing.
Pre-tax restructuring and other charges for the year ended December 31, 2013 were:
(In millions)
Cabinets
Plumbing
Total
Year Ended December 31, 2013
Restructuring
Charges
$2.2
0.6
$2.8
Other Charges(a)
Cost of
Products
Sold
SG&A(b)
$0.1
0.6
$0.7
$ —
0.2
$0.2
Total
Charges
$2.3
1.4
$3.7
(a) “Other Charges” represent charges or gains directly related to restructuring initiatives that cannot be reported as
restructuring under GAAP. Such charges or gains may include losses on disposal of inventories, trade receivables
allowances from exiting product lines, accelerated depreciation resulting from the closure of facilities, and gains and losses
on the sale of previously closed facilities.
(b) Selling, general and administrative expenses
2013 restructuring and other charges related to supply chain initiatives.
Pre-tax restructuring and other charges for the year ended December 31, 2012 were:
(In millions)
Cabinets
Year Ended December 31, 2012
Restructuring
Charges
Other
Charges(a)
$4.7
$8.9
Total
Charges
$13.6
(a) “Other Charges,” which were recorded in cost of products sold in 2012, represent charges or gains directly related to
restructuring initiatives that cannot be reported as restructuring under GAAP. Such charges or gains may include losses on
disposal of inventories, trade receivables allowances from exiting product lines, accelerated depreciation resulting from the
closure of facilities, and gains and losses on the sale of previously closed facilities.
In 2012, we recorded restructuring and other charges related to supply chain initiatives and
severance.
75
Reconciliation of Restructuring Liability
(In millions)
Workforce reduction costs
Contract termination costs
Other
(In millions)
Workforce reduction costs
Asset write-downs
Contract termination costs
Balance at
12/31/13
2014
Provision
Cash
Expenditures(a)
Non-Cash
Write-offs(b)
Balance at
12/31/14
$1.5
0.4
—
$1.9
$ 8.1
—
(1.0)
$ 7.0
$(3.1)
(0.4)
(0.4)
$(3.9)
$1.4
—
1.5
$2.9
$7.9
—
—
$7.9
Balance at
12/31/12
2013
Provision
Cash
Expenditures(a)
Non-Cash
Write-offs(b)
Balance at
12/31/13
$0.3
—
—
$0.3
$1.5
0.2
1.1
$2.8
$(0.4)
—
(0.6)
$(1.0)
$ —
(0.2)
—
$(0.2)
$1.5
—
0.4
$1.9
(a) Cash expenditures primarily related to severance charges.
(b) Non-cash write-offs include long-lived asset impairment charges attributable to restructuring actions and the 2014 benefit
from release of a foreign currency gain associated with the dissolution of a foreign entity
17. Commitments
Purchase Obligations
Purchase obligations of the Company as of December 31, 2014 were $366.7 million, of which $356.7
million is due within one year. Purchase obligations include contracts for raw materials and finished
goods purchases, selling and administrative services, and capital expenditures.
Lease Commitments
Future minimum rental payments under non-cancelable operating leases as of December 31, 2014
were as follows:
(In millions)
2015
2016
2017
2018
2019
Remainder
Total minimum rental payments
$23.8
16.9
11.8
7.8
5.7
4.3
$70.3
Total rental expense for all operating leases (reduced by minor amounts from subleases) amounted to
$33.4 million, $29.0 million and $27.4 million in 2014, 2013 and 2012, respectively.
76
Product Warranties
We generally record warranty expense at the time of sale. We offer our customers various warranty
terms based on the type of product that is sold. Warranty expense is determined based on historic
claim experience and the nature of the product category. The following table summarizes activity
related to our product warranty liability for the years ended December 31, 2014, 2013 and 2012.
(In millions)
Reserve balance at the beginning of the year
Provision for warranties issued
Settlements made (in cash or in kind)
Acquisition
Reserve balance at end of year
2014
2013
2012
$ 10.3
24.9
(23.6)
1.4
$ 13.0
$ 9.4
18.3
(17.4)
—
$ 9.3
15.4
(15.3)
—
$ 10.3
$ 9.4
18.
Information on Business Segments
We report our operating segments based on how operating results are regularly reviewed by our chief
operating decision maker for making decisions about resource allocations to segments and
assessing performance. The Company’s operating segments and types of products from which each
segment derives revenues are described below.
The Cabinets segment includes custom, semi-custom and stock cabinetry for the kitchen, bath and
other parts of the home under brand names including Aristokraft, Kitchen Craft, Kitchen Classics,
Omega, Homecrest, Diamond, Schrock, Decorá, Kemper and St. Paul. In addition, cabinets are
distributed under the Martha Stewart Living and Thomasville Cabinetry brand names. The Plumbing
segment manufactures or assembles and sells faucets, bath furnishings, accessories and kitchen
sinks predominantly under the Moen brand. The Doors segment includes residential fiberglass and
steel entry door systems under the Therma-Tru brand name and urethane millwork under the Fypon
brand name. The Security segment includes locks, safety and security devices and electronic
security products under the Master Lock brand name and safes under the SentrySafe brand name.
Corporate expenses consist of headquarter administrative expenses and defined benefit plans costs,
primarily interest costs and expected return on plan assets, as well as actuarial gains and losses
arising from periodic remeasurement of our liabilities. Corporate assets primarily consist of cash.
The Company’s subsidiaries operate principally in the United States, Canada, Mexico, China and
Western Europe.
(In millions)
Net sales:
Cabinets
Plumbing
Doors
Security
Net sales
2014
2013
2012
$1,787.5
1,331.0
413.9
481.2
$1,642.2
1,287.0
371.6
402.8
$1,326.6
1,100.7
321.5
386.0
$4,013.6
$3,703.6
$3,134.8
77
Net sales to two of the Company’s customers, The Home Depot, Inc. (“The Home Depot”) and Lowe’s
Companies, Inc. (“Lowe’s”) each accounted for greater than 10% of the Company’s net sales in 2014,
2013 and 2012. All segments sell to both The Home Depot and Lowe’s. Net sales to The Home Depot
were 15%, 14% and 12% of net sales in 2014, 2013 and 2012, respectively. Net sales to Lowe’s were
14%, 14% and 15% of net sales in 2014, 2013 and 2012, respectively.
(In millions)
Operating income (loss):
Cabinets
Plumbing
Doors
Security
Less: Corporate expenses(a)
Operating income
(a) Below is a table detailing Corporate expenses:
General and administrative expense
Defined benefit plan income
Recognition of defined benefit plan actuarial losses
Total Corporate expenses
Total assets:
Cabinets
Plumbing
Doors
Security
Corporate
Continuing operations
Discontinued operations
Total assets
2014
2013
2012
$ 137.9
258.9
29.2
49.4
(71.9)
$
97.1
228.3
15.3
55.4
(73.1)
$
20.5
169.2
(1.3)
54.3
(99.5)
$ 403.5
$ 323.0
$ 143.2
$
$
(67.0)
8.8
(13.7)
(71.9)
$
$
(78.0)
10.1
(5.2)
(73.1)
$
$
(60.8)
3.5
(42.2)
(99.5)
$1,603.6
1,270.2
459.3
528.5
110.7
3,972.3
80.6
$1,588.0
1,176.3
462.0
361.8
185.9
3,774.0
404.1
$1,248.5
1,081.7
473.3
341.7
305.7
3,450.9
423.0
$4,052.9
$4,178.1
$3,873.9
78
(In millions)
Depreciation expense:
Cabinets
Plumbing
Doors
Security
Corporate
Continuing operations
Discontinued operations
Depreciation expense
Amortization of intangible assets:
Cabinets
Doors
Security
Continuing operations
Discontinued operations
Amortization of intangible assets
Capital expenditures:
Cabinets
Plumbing
Doors
Security
Corporate
Continuing operations
Discontinued operations
Capital expenditures, gross
Less: proceeds from disposition of assets
Capital expenditures, net
Net sales by geographic region(a):
United States
Canada
China and other international
Net sales
Property, plant and equipment, net(b):
United States
Mexico
Canada
China and other international
Property, plant and equipment, net
(a) Based on country of destination
2014
2013
2012
$
$
$
$
$
31.0
18.5
11.7
10.0
2.0
73.2
9.7
82.9
8.0
3.8
1.3
13.1
2.8
15.9
64.0
25.8
10.9
16.2
4.8
121.7
5.8
127.5
(0.7)
$
$
$
$
$
29.3
16.7
11.4
8.2
1.3
66.9
10.3
77.2
5.1
3.8
0.5
9.4
3.8
13.2
36.4
25.3
7.3
12.6
2.5
84.1
12.6
$
$
$
$
$
38.8
18.1
12.3
8.2
1.5
78.9
11.3
90.2
3.3
3.8
0.2
7.3
3.8
11.1
27.7
19.1
10.2
10.5
0.2
67.7
7.3
96.7
(2.2)
75.0
(13.5)
$ 126.8
$
94.5
$
61.5
$3,313.1
405.8
294.7
$3,046.5
413.2
243.9
$2,528.7
400.5
205.6
$4,013.6
$3,703.6
$3,134.8
$ 429.1
72.5
28.4
9.8
$ 378.0
50.8
29.4
10.1
$ 369.9
32.3
32.7
10.8
$ 539.8
$ 468.3
$ 445.7
(b) Purchases of property, plant and equipment not yet paid for as of December 31, 2014, 2013 and 2012 were $4.2 million,
$0.2 million and $3.4 million, respectively.
79
19. Quarterly Financial Data
Unaudited
(In millions, except per share amounts)
2014
1st
2nd
3rd
4th
Net sales
Gross profit
Operating income
Net income from continuing operations
Net (loss) income from discontinued operations
Net income (loss)
Net income (loss) attributable to Fortune Brands
Basic earnings (loss) per common share
Continuing operations
Discontinued operations
Net income (loss) attributable to Fortune Brands
Diluted earnings (loss) per common share
Continuing operations
Discontinued operations
$889.1 $1,027.2 $1,057.7 $1,039.6
341.8
79.2
56.5
(11.1)
45.4
45.1
368.0
129.5
84.5
(105.4)
(20.9)
(21.1)
295.3
69.3
46.3
(5.1)
41.2
40.8
361.8
125.5
86.3
7.3
93.6
93.3
0.28
(0.03)
0.25
0.27
(0.03)
0.52
0.05
0.57
0.51
0.04
0.55
0.53
(0.66)
(0.13)
0.52
(0.65)
(0.13)
0.36
(0.07)
0.29
0.35
(0.07)
0.28
Net income (loss) attributable to Fortune Brands
0.24
2013
1st
2nd
3rd
4th
Net sales
Gross profit
Operating income
Net income from continuing operations
Net income from discontinued operations
Net income
Net income attributable to Fortune Brands
Basic earnings per common share
Continuing operations
Discontinued operations
Net income attributable to Fortune Brands
Diluted earnings per common share
Continuing operations
Discontinued operations
Net income attributable to Fortune Brands
$813.3 $922.1 $1,003.6 $964.6
334.2
81.9
54.8
9.8
64.6
64.2
275.1
57.2
38.4
(0.9)
37.5
37.3
337.3
94.6
56.8
7.4
64.2
64.0
348.5
89.3
59.0
5.6
64.6
64.2
0.23
—
0.23
0.22
—
0.22
0.34
0.05
0.39
0.33
0.04
0.37
0.35
0.04
0.39
0.34
0.03
0.37
0.33
0.06
0.39
0.32
0.05
0.37
Full
Year
$4,013.6
1,366.9
403.5
273.6
(114.3)
159.3
158.1
1.68
(0.70)
0.98
1.64
(0.69)
0.95
Full
Year
$3,703.6
1,295.1
323.0
209.0
21.9
230.9
229.7
1.26
0.13
1.39
1.34
0.13
1.34
In 2014, we recorded pre-tax defined benefit plan actuarial losses of $13.7 million — $0.6 million
($0.4 million after tax or zero per diluted share) in the first quarter, $1.1 million ($0.7 million after tax or
$0.01 million per diluted share) in the third quarter, and a $12.0 million ($7.6 million after tax or $0.04
per diluted share) in the fourth quarter.
In 2013, we recorded pre-tax asset impairment charges in our Cabinets segment of $21.2 million
($13.8 million after tax or $0.08 per diluted share) associated with the abandonment of certain internal
use software. We recorded pre-tax defined benefit plan actuarial losses of $5.2 million — $4.6 million
($3.1 million after tax or $0.02 per diluted share) in the first quarter, $0.7 million ($0.4 million after tax
80
or zero per diluted share) in the second quarter, $0.3 million ($0.2 million after tax or zero per diluted
share) in the third quarter and a gain of $0.4 million ($0.4 million after tax or zero per diluted share) in
the fourth quarter.
20. Earnings Per Share
The computations of earnings (loss) per common share were as follows:
(In millions, except per share data)
Income from continuing operations, net of tax
Less: Noncontrolling interests
Income from continuing operations for EPS
(Loss) income from discontinued operations
Net income attributable to Fortune Brands
Earnings (loss) per common share
Basic
Continuing operations
Discontinued operations
2014
2013
2012
$ 273.6
1.2
272.4
(114.3)
$209.0
1.2
207.8
21.9
$108.3
1.0
107.3
11.4
$ 158.1
$229.7
$118.7
$ 1.68
(0.70)
$ 1.26
0.13
$ 0.67
0.07
Net income attributable to Fortune Brands common stockholders
$ 0.98
$ 1.39
$ 0.74
Diluted
Continuing operations
Discontinued operations
Net income attributable to Fortune Brands common stockholders
Basic average shares outstanding
Stock-based awards
Diluted average shares outstanding
Antidilutive stock-based awards excluded from weighted-average
number of shares outstanding for diluted earnings per share
21. Other Expense (Income), Net
$ 1.64
(0.69)
$ 0.95
161.8
4.5
$ 1.21
0.13
$ 1.34
165.5
5.8
$ 0.65
0.06
$ 0.71
160.6
5.5
166.3
171.3
166.1
0.5
0.4
0.7
The components of other expense (income), net for the years ended December 31, 2014, 2013 and
2012 were as follows:
(In millions)
Asset impairment charges
Other items, net
Total other expense (income), net
2014
2013
2012
$ 1.6
(0.4)
$ 1.2
$ 6.2
(0.9)
$ 5.3
$ —
(0.5)
$(0.5)
In 2014 and 2013, we recorded impairment charges of $1.6 million and $6.2 million, respectively,
pertaining to different cost method investments due to an other-than-temporary declines in the fair
value of the investments. As a result of the impairments, the carrying value of the investments was
reduced to zero and the Company is not subject to further impairment or funding obligations with
regard to this investment.
81
22. Contingencies
Litigation
The Company is a defendant in lawsuits associated with the normal conduct of its businesses and
operations. It is not possible to predict the outcome of the pending actions, and, as with any litigation,
it is possible that these actions could be decided unfavorably to the Company. The Company
believes that there are meritorious defenses to these actions and that these actions will not have a
material adverse effect upon the Company’s results of operations, cash flows or financial condition,
and, where appropriate, these actions are being vigorously contested. Accordingly the Company
believes the likelihood of material loss is remote.
Environmental
Compliance with federal, state and local laws regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment, did not have a material effect
on capital expenditures, earnings or the competitive position of Fortune Brands. Several of our
subsidiaries have been designated as potentially responsible parties (“PRP”) under “Superfund” or
similar state laws. As of December 31, 2014, nine such instances have not been dismissed, settled or
otherwise resolved. In calendar year 2014, our subsidiaries were identified as a PRP in three new
instances and we settled two of these new instances in 2014. In most instances where our
subsidiaries are named as a PRP, we enter into cost-sharing arrangements with other PRPs. We give
notice to insurance carriers of potential PRP liability, but very rarely, if ever, receive reimbursement
from insurance for PRP costs. We believe that the cost of complying with the present environmental
protection laws, before considering estimated recoveries either from other PRPs or insurance, will not
have an adverse effect on our results of operations, cash flows or financial condition. At
December 31, 2014 and 2013, we had accruals of $2.8 million and $4.8 million, respectively, relating
to environmental compliance and clean up including, but not limited to, the above mentioned
Superfund sites.
82
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Fortune Brands Home & Security, Inc.
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 Fortune Brands Home & Security, Inc. and
its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2014 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, 2014, based on criteria established in
Internal Control — Integrated Framework (2013) 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 9A. 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.
As described in Management’s Report on Internal Control over Financial Reporting appearing under
Item 9A, management has excluded Sentry Safe, Inc. and Anaheim Manufacturing Company from its
assessment of internal control over financial reporting as of December 31, 2014 because they were
acquired by the Company in purchase business combinations during 2014. We have also excluded
Sentry Safe, Inc. and Anaheim Manufacturing Company from our audit of internal control over
financial reporting. Sentry Safe, Inc. is a wholly-owned subsidiary whose total assets and total
revenues represent 3% and 2%, respectively, of the related consolidated financial statement amounts
as of and for the year ended December 31, 2014. Anaheim Manufacturing Company is a wholly-
owned subsidiary whose total assets and total revenues represent 1% and 0%, respectively, of the
related consolidated financial statement amounts as of and for the year ended December 31, 2014.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 25, 2015
83
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
The Company’s management has evaluated, with the participation of the Company’s Chief Executive
Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of
the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer have concluded that the Company’s disclosure controls and procedures were
effective as of December 31, 2014.
(b) Management’s Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f). Under the
supervision and with the participation of our management, including our principal executive officer
and principal financial officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control — Integrated Framework
(2013) issued by the Committee of Sponsoring Organization of the Treadway Commission (“COSO”).
Based on our evaluation under the framework in Internal Control — Integrated Framework
(2013) issued by the COSO, our management concluded that our internal control over financial
reporting was effective as of December 31, 2014. The Company acquired SentrySafe in July 2014
and Anaheim Manufacturing Company (“Anaheim”) in December 2014, and therefore as permitted by
the Securities and Exchange Commission, we excluded SentrySafe and Anaheim from the scope of
our management’s assessment of the effectiveness of our internal controls over financial reporting as
of December 31, 2014. The total assets and total revenues of SentrySafe represented 3% and 2%,
respectively, of the related consolidated financial statement amounts as of and for the year ended
December 31, 2014. Anaheim Manufacturing Company is a wholly-owned subsidiary whose total
assets represent 1% of the related consolidated financial statement amounts as of December 31,
2014. No revenues were recorded for Anaheim in 2014.
PricewaterhouseCoopers LLP, the Company’s independent public accounting firm, has audited the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2014, as
stated in their report which appears herein.
(c) Changes in Internal Control Over Financial Reporting.
There have not been any changes in the Company’s internal control over financial reporting that
occurred during the Company’s fiscal quarter ended December 31, 2014 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
Item 9B. Other Information.
None.
84
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
See the information under the captions “Election of Directors,” “Board Committees — Audit
Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance” contained in the 2015
Proxy Statement, which information is incorporated herein by reference. See the information under the
caption “Executive Officers of the Registrant” contained in Part I of this Annual Report on Form 10-K.
The Company’s Board of Directors has adopted a Code of Ethics for Senior Financial Officers that
applies to the Company’s principal executive officer, principal financial officer and principal
accounting officer. The Code of Ethics for Senior Financial Officers is available, free of charge, on the
Company’s website, http://ir.fbhs.com/governance.cfm. A copy of the Code of Ethics for Senior
Financial Officers is also available and will be sent to stockholders free of charge upon written request
to the Company’s Secretary. Any amendment to, or waiver from, the provisions of the Code of Ethics
for Senior Financial Officers that applies to any of those officers will be posted to the same location on
the Company’s website.
Item 11. Executive Compensation.
See the information under the captions “Board Committees — Compensation Committee,”
“Compensation Discussion and Analysis,” “2014 Executive Compensation” and “Compensation
Committee Report” contained in the 2015 Proxy Statement, which information is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
See the information under the caption “Certain Information Regarding Security Holdings” contained in
the 2015 Proxy Statement, which information is incorporated herein by reference. See also the “Equity
Compensation Plan Information” table contained in the 2015 Proxy Statement, which information is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director
Independence.
See the information under the captions “Director Independence,” “Board Committees,” “Policies with
Respect to Transactions with Related Persons” and “Certain Relationships and Related Transactions”
contained in the 2015 Proxy Statement, which information is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
See the information under the captions “Fees of Independent Registered Public Accounting Firm” and
“Approval of Audit and Non-Audit Services” in the 2015 Proxy Statement, which information is
incorporated herein by reference.
85
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) Financial Statements (all financial statements listed below are of the Company and its
consolidated subsidiaries):
Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012
contained in Item 8 hereof.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014,
2013 and 2012 contained in Item 8 hereof.
Consolidated Balance Sheets as of December 31, 2014 and 2013 contained in Item 8 hereof.
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012
contained in Item 8 hereof.
Consolidated Statements of Equity for the years ended December 31, 2014, 2013 and 2012
contained in Item 8 hereof.
Notes to Consolidated Financial Statements contained in Item 8 hereof.
Report of Independent Registered Public Accounting Firm contained in Item 8 hereof.
(2) Financial Statement Schedules
See Financial Statement Schedule of the Company and subsidiaries at page 88.
(3) Exhibits
See Exhibit Index that follows the Signature page contained herein.
86
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.
Date: February 25, 2015
By:/s/ CHRISTOPHER J. KLEIN
FORTUNE BRANDS HOME & SECURITY, INC.
(The Company)
Christopher J. Klein
Chief Executive Officer (principal executive
officer)
/S/ E. LEE WYATT, JR.
E. Lee Wyatt, Jr.
Senior Vice President and Chief Financial
Officer (principal 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 dates
indicated.
/s/ CHRISTOPHER J. KLEIN
Christopher J. Klein, Chief Executive Officer
and Director (principal executive officer)
Date: February 25, 2015
/s/ E. LEE WYATT, JR.
E. Lee Wyatt, Jr., Senior Vice President and
Chief Financial Officer (principal financial
officer)
Date: February 25, 2015
/s/ DANNY LUBURIC
Danny Luburic, Vice President — Controller
(principal accounting officer)
Date: February 25, 2015
/s/ RICHARD A. GOLDSTEIN*
Richard A. Goldstein, Director
Date: February 25, 2015
/s/ ANN FRITZ HACKETT*
Ann Fritz Hackett, Director
Date: February 25, 2015
/s/ A.D. DAVID MACKAY*
A.D. David Mackay, Director
Date: February 25, 2015
/s/ JOHN G. MORIKIS*
John G. Morikis, Director
Date: February 25, 2015
/s/ DAVID M. THOMAS*
David M. Thomas, Director
Date: February 25, 2015
/s/ RONALD V. WATERS, III*
Ronald V. Waters, III, Director
Date: February 25, 2015
/s/ NORMAN H. WESLEY*
Norman H. Wesley, Director
Date: February 25, 2015
*By:/s/ ROBERT K. BIGGART
Robert K. Biggart, Attorney-in-Fact
87
Schedule II Valuation and Qualifying Accounts
For the years ended December 31, 2014, 2013 and 2012
(In millions)
2014:
Allowance for cash discounts, returns and sales
allowances
Allowance for doubtful accounts
Allowance for deferred tax assets
2013:
Allowance for cash discounts, returns and sales
allowances
Allowance for doubtful accounts
Allowance for deferred tax assets
2012:
Allowance for cash discounts, returns and sales
allowances
Allowance for doubtful accounts
Allowance for deferred tax assets
Balance at
Beginning of
Period
Charged to
Expense
Write-offs
and
Deductions(a)
Balance at
End of
Period
$ 33.9
5.8
19.8
$ 129.6
1.3
(7.8)
$ 118.4
1.7
—
$ 45.1
5.4
12.0
$ 32.7
7.9
18.8
$ 122.1
0.5
1.0
$ 120.9
2.6
—
$ 33.9
5.8
19.8
$ 37.0
8.6
26.6
$ 128.1
1.2
(7.8)
$ 132.6
1.9
—
$ 32.7
7.9
18.8
(a) Net of recoveries of amounts written off in prior years and immaterial foreign currency impact.
88
Exhibit Index
2.1(i). Separation and Distribution Agreement, dated as of September 27, 2011, between the
Company and Fortune Brands, Inc. (N/K/A Beam Suntory Inc.) is incorporated herein by
reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on September 30,
2011, Commission file number 1-35166.†
2.1(ii) Stock Purchase Agreement dated August 19, 2014 by and among Fortune Brands Home &
Security, Inc. and Ply Gem Industries, Inc. is incorporated herein by reference to Exhibit 2.1 to
the Company’s Quarterly Report on Form 10-Q filed on October 31, 2014, Commission file
number 1-35166.†
3(i).
3(ii).
10.1.
10.2.
10.3.
Restated Certificate of Incorporation of Fortune Brands Home & Security, Inc. is incorporated
herein by reference to Exhibit 3(i) to the Company’s Quarterly Report on Form 10-Q filed on
November 5, 2012, Commission file number 1-35166.
Amended and Restated Bylaws of Fortune Brands Home & Security, Inc., as adopted
September 27, 2011, are incorporated herein by reference to Exhibit 3.2 to the Company’s
Current Report on Form 8-K filed on September 30, 2011, Commission file number 1-35166.
Tax Allocation Agreement, dated as of September 28, 2011, between Fortune Brands Home &
Security, Inc. and Fortune Brands, Inc. (N/K/A Beam Suntory Inc.) is incorporated herein by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September
30, 2011, Commission file number 1-35166.
Employee Matters Agreement, dated as of September 28, 2011, between Fortune Brands
Home & Security, Inc. and Fortune Brands, Inc. (N/K/A Beam Suntory Inc.) is incorporated
herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on
September 30, 2011, Commission file number 1-35166.
Indemnification Agreement, dated as of September 14, 2011, between Fortune Brands Home
& Security, Inc. and Fortune Brands, Inc. (N/K/A Beam Suntory Inc.) is incorporated herein by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
September 15, 2011, Commission file number 1-35166.
10.4. Credit Agreement, dated as of August 22, 2011, Fortune Brands Home & Security, Inc., the
lenders party thereto and JPMorgan Chase Bank, N.A. is incorporated herein by reference to
Exhibit 10.6 to Amendment No. 6 to the Company’s Registration Statement on Form 10 filed
on August 31, 2011, Commission file number 1-35166.
10.5.
10.6
10.7.
10.8.
Amendment no. 1 to Credit Agreement dated July 23, 2013, among Fortune Brands Home &
Security, Inc., JPMorgan Chase Bank, N.A., as administrative agent and the lenders party
thereto, is incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report
on Form 10-Q filed on November 1, 2013, Commission file number 1-35166.
Amendment no. 2 to Credit Agreement dated August 20, 2014, among Fortune Brands
Home & Security, Inc., JPMorgan Chase Bank, N.A., as administrative agent and the lenders
party thereto, is incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q filed on October 31, 2014, Commission file number 1-35166.
Fortune Brands Home & Security, Inc. 2011 Long-Term Incentive Plan is incorporated by
reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 filed on
October 3, 2011, Commission file number 333-177145.*
Fortune Brands Home & Security, Inc. Annual Executive Incentive Compensation Plan is
incorporated herein by reference to Appendix B to the Company’s Definitive Proxy Statement
filed on March 5, 2013, Commission file number 1-35166.*
89
10.9.
Fortune Brands Home & Security, Inc. 2013 Long-Term Incentive Plan is incorporated by
reference to Appendix A to the Company’s Definitive Proxy Statement filed on March 5, 2013,
Commission file number 1-35166.*
10.10. Form of Founders Grant Restricted Stock Unit Agreement for awards under the Fortune
Brands Home & Security, Inc. 2011 Long-Term Incentive Plan is incorporated herein by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 11,
2011, Commission file number 1-35166.*
10.11. Form of Founders Grant Stock Option Award Notice & Agreement for awards under the
Fortune Brands Home & Security, Inc. 2011 Long-Term Incentive Plan is incorporated herein
by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on
October 11, 2011, Commission file number 1-35166.*
10.12. Form of 2012 Performance Share Award Notice and Agreement for awards under the Fortune
Brands Home & Security, Inc. 2011 Long-Term Incentive Plan is incorporated herein by
reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K filed on
February 22, 2012, Commission file number 1-35166.*
10.13. Form of 2012 Stock Option Award Notice and Agreement for awards under the Fortune
Brands Home & Security, Inc. 2011 Long-Term Incentive Plan is incorporated herein by
reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K filed on
February 22, 2012, Commission file number 1-35166.*
10.14. Form of 2012 Restricted Stock Unit Award Notice and Agreement for awards under the
Fortune Brands Home & Security, Inc. 2011 Long-Term Incentive Plan is incorporated herein
by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K filed on
February 22, 2012 Commission file number 1-35166.*
10.15. Form of Performance Share Award Notice and Agreement for awards under the Fortune
Brands Home & Security, Inc. 2011 Long-Term Incentive Plan is incorporated herein by
reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K filed on
February 27, 2013, Commission file number 1-35166.*
10.16. Form of Stock Option Award Notice and Agreement for awards under the Fortune Brands
Home & Security, Inc. 2011 Long-Term Incentive Plan is incorporated herein by reference to
Exhibit 10.14 to the Company’s Annual Report on Form 10-K filed on February 27, 2013,
Commission file number 1-35166.*
10.17. Form of Restricted Stock Unit Award Notice and Agreement for awards under the Fortune
Brands Home & Security, Inc. 2011 Long-Term Incentive Plan is incorporated herein by
reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K filed on
February 27, 2013 Commission file number 1-35166.*
10.18
10.19
10.20
Form of Performance Share Award Notice and Agreement for awards under the Fortune
Brands Home & Security, Inc. 2013 Long-Term Incentive Plan is incorporated herein by
reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K filed February 26,
2014, commission file number 1-35166.*
Form of Stock Option Award Notice and Agreement for awards under the Fortune Brands
Home & Security, Inc. 2013 Long-Term Incentive Plan is incorporated herein by reference to
Exhibit 10.18 to the Company’s Annual Report on Form 10-K filed February 26, 2014,
commission file number 1-35166.*
Form of Restricted Stock Unit Award Notice and Agreement for awards under the Fortune
Brands Home & Security, Inc. 2013 Long-Term Incentive Plan is incorporated herein by
reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K filed February 26,
2014, commission file number 1-35166.*
90
10.21. Form of Agreement for the Payment of Benefits Following Termination of Employment
between the Company and each of Christopher J. Klein, E. Lee Wyatt Jr., Robert K. Biggart,
Chuck Elias, Jr., Elizabeth R. Lane, and Edward A. Wiertel is incorporated herein by
reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K filed February 26,
2014, commission file number 1-35166.*
10.22
Form of Agreement for the Payment of Benefits Following Termination of Employment for each
of Michael P. Bauer, David B. Lingafelter, Terrence P. Horan, David M. Randich and Mark
Savan is incorporated herein by reference to Exhibit 10.21 to the Company’s Annual Report
on Form 10-K filed February 26, 2014, commission file number 1-35166.*
10.23. Form of Agreement for the Payment of Benefits Following Termination of Employment for
Gregory J. Stoner, is incorporated herein by reference to Exhibit 10.14 to the Company’s
Annual Report on Form 10-K filed on February 22, 2012, Commission file number 1-35166.*
10.24. Non-Competition and Release Agreement between MasterBrand Cabinets, Inc. and
Gregory J. Stoner, dated October 10, 2012 is incorporated herein by reference to Exhibit
10.18 to the Company’s Annual Report on Form 10-K filed on February 27, 2013 Commission
file number 1-35166.*
10.25. Fortune Brands Home & Security, Inc. Directors’ Deferred Compensation Plan (as Amended
and Restated Effective January 1, 2013) is incorporated herein by reference to Exhibit 10.19
to the Company’s Annual Report on Form 10-K filed on February 27, 2013, Commission file
number 1-35166.*
10.26. Fortune Brands Home & Security, Inc. 2011 Long-Term Incentive Plan Non-Employee
Director Stock Election Program is incorporated herein by reference to Exhibit 10.17 to the
Company’s Annual Report on Form 10-K filed on February 22, 2012, Commission file
number 1-35166.*
21.
23.
24.
31.1.
31.2.
32.
101.
Subsidiaries of the Company.
Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP.
Powers of Attorney relating to execution of this Annual Report on Form 10-K.
Certificate of Chief Executive Officer Required Under Section 302 of the Sarbanes-Oxley Act
of 2002.
Certificate of Chief Financial Officer Required Under Section 302 of the Sarbanes-Oxley Act
of 2002.
Joint CEO/CFO Certification Required Under Section 906 of the Sarbanes-Oxley Act of 2002.
The following materials from the Fortune Brands Home & Security, Inc. Annual Report on
Form 10-K for the year ended December 31, 2014 formatted in eXtensible Business
Reporting Language (XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated
Statements of Comprehensive Income (iii) the Consolidated Balance Sheets, (iv) the
Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Equity, and (vi)
the Notes to the Consolidated Financial Statements.
* Indicates the exhibit is a management contract or compensatory plan or arrangement.
† The Company agrees to furnish supplementally a copy of any omitted schedule to the Securities and
Exchange Commission upon request.
91
Reconciliation Of Operating Income Before Charges/Gains To GAAP Operating Income (Loss)
(In millions) (Unaudited)
CABINETS
Operating income before charges/gains (a)
Restructuring charges (b)
Other charges (b)
Cost of products sold
Asset impairment charges
Operating income (GAAP)
PLUMBING
Operating income before charges/gains (a)
Restructuring charges (b)
Other charges (b)
December 31,
2014
December 31,
2013
% Change
December 31,
2012
December 31,
2011
% Change
2014 vs 2011
For the twelve months ended
$138.3
(0.4)
$120.6
(2.2)
—
—
$137.9
(0.1)
(21.2)
$ 97.1
15
82
100
100
42
$ 40.0
(4.7)
$ 18.4
(3.7)
652
89
(8.9)
(5.9)
$ 20.5
(9.0)
—
$ 5.7
100
—
2,319
$260.2
(0.5)
$229.7
(0.6)
13
17
$169.2
—
$ 137.9
—
Cost of products sold
Selling, general and administrative expenses
Operating income (GAAP)
(0.2)
(0.6)
$258.9
(0.6)
(0.2)
$228.3
67
(200)
13
—
—
$169.2
0.1
—
$ 138.0
DOORS
Operating income before charges/gains (a)
Restructuring charges (b)
Other charges (b)
Cost of products sold
Asset impairment charges
Operating income (loss) (GAAP)
SECURITY
Operating income before charges/gains (a)
Restructuring charges (b)
Other charges (b)
Cost of products sold
Operating income (GAAP)
CORPORATE
Corporate expense before charges/gains (a)
Restructuring charges (b)
Standalone corporate costs (c)
Business separation costs (d)
Defined benefit plan actuarial losses (e)
Corporate expense (GAAP)
FORTUNE BRANDS HOME & SECURITY
Operating income before charges/gains (a)
Restructuring charges (b)
Other charges (b)
Cost of products sold
Selling, general and administrative expenses
Asset impairment charges
Standalone corporate costs (c)
Business separation costs (d)
Defined benefit plan actuarial losses (e)
Operating income (GAAP)
$ 29.2
—
$ 15.3
—
—
—
$ 29.2
—
—
$ 15.3
$ 59.2
(4.1)
$ 55.4
—
(5.7)
$ 49.4
—
$ 55.4
$ (56.2)
(2.0)
—
—
(13.7)
$ (71.9)
$ (68.0)
—
—
—
(5.1)
$ (73.1)
$430.7
(7.0)
$353.0
(2.8)
(5.9)
(0.6)
—
—
—
(13.7)
$403.5
(0.7)
(0.2)
(21.2)
—
—
(5.1)
$323.0
92
91
—
—
—
91
7
(100)
(100)
(11)
17
(100)
—
—
(169)
2
22
(150)
(743)
(200)
100
—
—
(169)
25
$ 6.0
—
$ 5.1
0.1
—
(7.3)
$ (1.3)
(0.9)
(24.0)
$ (19.7)
$ 54.3
—
$50.7
—
—
$ 54.3
—
$ 50.7
$ (57.3)
—
—
—
(42.2)
$ (99.5)
$ (51.3)
—
13.8
(2.4)
(80.0)
$(119.9)
$212.2
(4.7)
$160.8
(3.6)
(8.9)
—
(13.2)
—
—
(42.2)
$143.2
(9.8)
—
(24.0)
13.8
(2.4)
(80.0)
$ 54.8
89
(100)
(300)
(100)
88
473
(100)
100
100
248
17
(100)
(100)
(3)
(10)
(100)
(100)
100
83
40
168
(94)
40
(100)
100
(100)
100
83
636
(a) Operating income before charges/gains is operating income derived in accordance with U.S. generally accepted accounting principles
(“GAAP”) including estimated incremental stand alone corporate expenses for 2011 periods prior to the spinoff of the Company from Fortune
Brands Inc. (the “Separation”) and excluding restructuring and other charges, asset impairment charges, business separation costs and the
impact of income and expense from actuarial gains or losses associated with our defined benefit plans. Operating income before charges/
gains is a measure not derived in accordance with GAAP. Management uses this measure to evaluate the returns generated by FBHS and its
business segments. Management believes this measure provides investors with helpful supplemental information regarding the underlying
performance of the Company from period to period. This measure may be inconsistent with similar measures presented by other companies.
(b) Restructuring charges are costs incurred to implement significant cost reduction initiatives and include workforce reduction costs. “Other
charges” represent charges or gains directly related to restructuring initiatives that cannot be reported as restructuring under GAAP.
Such charges or gains may include losses on disposal of inventories, trade receivables allowances from exiting product lines, accelerated
depreciation resulting from the closure of facilities, and gains and losses on the sale of previously closed facilities.
(c) The Company estimates that it would have incurred approximately $14 million of incremental corporate expenses if it had functioned as an
independent standalone public company for the twelve months ended December 31, 2011.
(d) Business separation costs are costs related to non-cash non-recurring costs associated with the modification of share-based compensation
awards as a result of the Separation.
(e) Represents actuarial gains or losses associated with our defined benefit plans. Actuarial gains or losses in a period represent the difference
between actual and actuarially assumed experience, principally related to liability discount rates and plan asset returns, as well as other
actuarial assumptions including compensation rates, turnover rates, and health care cost trend rates. The Company recognizes actuarial
gains or losses immediately in operating income to the extent they cumulatively exceed a “corridor.” The corridor is equal to the greater
of 10% of the fair value of plan assets or 10% of a plan’s projected benefit obligation. Actuarial gains or losses are determined at required
remeasurement dates which occur at least annually in the fourth quarter. Remeasurements due to plan amendments and settlements may
also occur in interim periods during the year. Our operating income before charges/gains reflects our expected rate of return on pension
plan assets which in a given period may materially differ from our actual return on plan assets. Our liability discount rates and plan asset
returns are based upon difficult to predict fluctuations in global bond and equity markets that are not directly related to the Company’s
business. We believe that the exclusion of actuarial gains or losses from operating income before charges/gains provides investors with useful
supplemental information regarding the underlying performance of the business from period to period that may be considered in conjunction
with our operating income as measured on a GAAP basis. We present this supplemental information because such actuarial gains or losses
may create volatility in our operating income that does not necessarily have an immediate corresponding impact on operating cash flow or
the actual compensation and benefits provided to our employees. The table below sets forth additional supplemental information on the
Company’s historical actual and expected rate of return on plan assets, as well as discount rates used to value its defined benefit obligations:
($ In millions)
Actual return on plan assets
Expected return on plan assets
Discount rate at December 31:
Pension benefits
Postretirement benefits
Year Ended
December 31, 2014
Year Ended
Year Ended
Year Ended
December 31, 2013
December 31, 2012
December 31, 2011
%
$
%
$
%
$
%
$
9.8% $52.0
7.4% 42.2
15.2% $74.6
7.8% 41.8
14.5% $63.7
7.8% 36.8
(0.6)% ($2.7)
8.5 % 41.3
4.2%
3.5%
5.0%
4.3%
4.2%
3.7%
4.9 %
4.6 %
93
2014, 2013, 2012 and 2011 Diluted EPS Before Charges/Gains Reconciliation
Earnings Per Common Share — Diluted
EPS Before Charges/Gains (a)
Restructuring and other charges
Standalone corporate costs
Capital structure change
Business separation costs
Adjusted pro forma tax rate adjustment
Asset impairment charges
Defined benefit plan actuarial losses
Tax items
Twelve Months Ended December 31,
2014
2013 % Change
2012
2011
$ 1.74
$ 1.37
27
$ 0.83
$ 0.57
(0.05)
—
—
—
—
(0.01)
(0.05)
0.01
(0.02)
—
—
—
—
(0.12)
(0.02)
—
(150)
—
—
—
—
92
(150)
—
(0.05)
—
—
—
—
(0.05)
(0.16)
0.08
(0.05)
0.05
(0.06)
(0.01)
(0.07)
(0.09)
(0.31)
—
Diluted EPS — Continuing Operations
$ 1.64
$ 1.21
36
$ 0.65
$ 0.03
(a) Diluted EPS before charges/gains is income from continuing operations, net of tax, less noncontrolling interests calculated on a diluted
per-share basis excluding restructuring and other charges, asset impairment charges, tax items and the impact of income and expense
from actuarial gains or losses associated with our defined benefit plans. Diluted EPS before charges/gains from continuing operations, net
of tax, less noncontrolling interests calculated on a diluted per-share basis for the twelve months ended December 31, 2011, have also been
adjusted to reflect an adjusted pro forma effective tax rate of 35%, capital structure changes that reflect the borrowing arrangements and
debt level of the Company as of October 4, 2011, the 1:1 share distribution resulting from the spinoff of the Company from Fortune Brands,
Inc. (the “Separation”), estimated incremental standalone corporate expenses for the 2011 periods prior to the Separation, and business
separation costs. Diluted EPS before charges/gains is a measure not derived in accordance with GAAP. Management uses this measure
to evaluate the overall performance of the Company and believes this measure provides investors with helpful supplemental information
regarding the underlying performance of the Company from period to period. This measure may be inconsistent with similar measures
presented by other companies.
For the twelve months ended December 31, 2014, diluted EPS before charges/gains is income from continuing operations, net of tax and including
the impact from noncontrolling interests calculated on a diluted per-share basis excluding $13.5 million ($8.4 million after tax or $0.05 per diluted
share) of restructuring and other charges, a tax benefit resulting from the write off of our investment in an international subsidiary of $1.6 million
($1.6 million after tax or $0.01 per diluted share), an asset impairment charge of $1.6 million ($1.0 million after tax or $0.01 per diluted share) and the
impact of expense from actuarial losses associated with our defined benefit plans of $13.7 million ($8.7 million after tax or $0.05 per diluted share).
For the twelve months ended December 31, 2013, diluted EPS before charges/gains is income from continuing operations, net of tax and including
the impact from noncontrolling interests calculated on a diluted per-share basis excluding $3.7 million ($3.0 million after tax or $0.02 per diluted
share) of restructuring and other charges, asset impairment charges of $27.4 million ($20.0 million after tax or $0.12 per diluted share) and the
impact of expense from actuarial losses associated with our defined benefit plan of $5.1 million ($3.3 million after tax or $0.02 per diluted share).
For the twelve months ended December 31, 2012, diluted EPS before charges/gains is income from continuing operations, net of tax and including
the impact from noncontrolling interests calculated on a diluted per-share basis excluding $13.6 million ($8.9 million after tax or $0.05 per diluted
share) of restructuring and other charges, asset impairment charges of $13.2 million ($8.1 million after tax or $0.05 per diluted share) pertaining to
the impairment of certain indefinite lived trade names, income tax gains pertaining to the favorable resolution of tax audits of $12.7 million ($0.08 per
diluted share) and the impact of expense from actuarial losses associated with our defined benefit plans of $42.2 million ($26.2 million after tax or
$0.16 per diluted share).
For the twelve months ended December 31, 2011, diluted EPS before charges/gains is income from continuing operations, net of tax and including
the impact from noncontrolling interests calculated on a diluted per-share basis adjusted to reflect the actual number of diluted shares of the
Company as of December 31, 2011 of 160.7 million, estimated incremental standalone corporate costs of $13.8 million ($8.6 million after tax or
$0.05 per diluted share), an adjusted pro forma effective tax rate adjustment of $12.0 million ($0.07 per share) to reflect an effective tax rate of 35%,
capital structure changes that reflect the borrowing arrangements and debt level of the Company as of October 4, 2011 of $14.4 million ($8.9 million
after tax or $0.06 per diluted share), and excludes restructuring and other charges of $13.4 million ($8.4 million after tax or $0.05 per diluted share),
business separation costs of $2.4 million ($1.7 million after tax or $0.01 per diluted share), asset impairment charges of $24.0 million ($14.6 million
after tax or $0.09 per diluted share) pertaining to the impairment of certain indefinite lived trade names and the impact of expense from actuarial
losses associated with our defined benefit plans of $80.0 million ($49.9 million after tax or $0.31 per diluted share).
94
Before Charges/Gains Operating Margin To GAAP Operating Margin
(Unaudited)
CABINETS
Before Charges/Gains Operating Margin
Restructuring & Other Charges
Asset Impairment Charge
GAAP Operating Margin
PLUMBING
Before Charges/Gains Operating Margin
Restructuring & Other Charges
GAAP Operating Margin
DOORS
Before Charges/Gains Operating Margin
GAAP Operating Margin
SECURITY
Before Charges/Gains Operating Margin
Restructuring & Other Charges
GAAP Operating Margin
Twelve Months Ended December 31,
2014
7.7%
—
—
7.7%
2014 vs. 2013
Change
2013
40 bps
7.3%
(0.1%)
(1.3%)
5.9% 180 bps
19.5%
—
19.5%
17.8% 170 bps
(0.1%)
17.7% 180 bps
7.1%
7.1%
4.1% 300 bps
4.1% 300 bps
12.3%
(2.0%)
10.3%
13.8% (150) bps
—
13.8% (350) bps
Before charges/gains operating margin is operating margin derived in accordance with GAAP excluding restructuring and other charges and an
asset impairment charge. Before charges/gains operating margin is a measure not derived in accordance with GAAP. Management uses this
measure to evaluate the returns generated by FBHS and its business segments. Management believes this measure provides investors with
helpful supplemental information regarding the underlying performance of the Company from period to period. This measure may be inconsistent
with similar measures presented by other companies.
Before Charges/Gains Operating Margin Excluding SentrySafe To GAAP Operating Margin
(Unaudited)
SECURITY EXCLUDING SENTRYSAFE
Before Charges/Gains Operating Margin excluding SentrySafe
SentrySafe Operating Margin Impact
Before Charges/Gains Operating Margin
Restructuring & Other Charges
GAAP Operating Margin
Twelve Months Ended
December 31,
2014
13.6%
(1.3%)
12.3%
(2.0%)
10.3%
Before charges/gains operating margin excluding SentrySafe is operating margin derived in accordance with GAAP excluding restructuring
and other charges and the impact of SentrySafe. Before charges/gains operating margin is a measure not derived in accordance with GAAP.
Management uses this measure to evaluate the overall performance of the Security segment and believes this measure provides investors with
helpful supplemental information regarding the underlying performance of the segment from period to period. This measure may be inconsistent
with similar measures presented by other companies.
95
Reconciliation Of Income From Continuing Operations To EBITDA Before Charges/Gains
(In millions)
Income from continuing operations, net of tax
Depreciation
Amortization of intangible assets
Restructuring and other charges
Interest expense
Asset impairment charges
Defined benefit plan actuarial losses
Income taxes
EBITDA BEFORE CHARGES/GAINS (b)
Calculation Of Net Debt-To-EBITDA Before Charges/Gains Ratio
(in millions)
As of December 31, 2014
Current portion of long-term debt (a)
Long-term debt (a)
Total debt
Less:
Cash and cash equivalents (a)
Net debt (1)
For the twelve months ended December 31, 2014
EBITDA before charges/gains (2) (b)
Net debt-to-EBITDA before charges/gains ratio (1)/(2)
Twelve Months Ended
December 31,
2014
$273.6
72.8
13.1
13.5
10.4
1.6
13.7
118.3
$517.0
$ 26.3
643.7
670.0
191.9
478.1
517.0
$ 0.9
(a) Amounts are per the unaudited Condensed Consolidated Balance Sheet as of December 31, 2014.
(b) EBITDA before charges/gains is income from continuing operations, net of tax, derived in accordance with GAAP excluding the following
impacts on income from continuing operations, net of tax: restructuring and other charges, asset impairment charges, the impact of income
and expense from actuarial gains or losses associated with our defined benefit plans, depreciation, amortization of intangible assets, interest
expense, and income taxes. EBITDA before charges/gains is a measure not derived in accordance with GAAP. Management uses this
measure to assess returns generated by FBHS. Management believes this measure provides investors with helpful supplemental information
about the Company’s ability to fund internal growth, make acquisitions and repay debt and related interest. This measure may be inconsistent
with similar measures presented by other companies.
96
Cautionary Statement Concerning Forward-Looking Statements
This Annual Report contains certain “forward-looking statements” regarding business strategies, market potential, future financial performance
and other matters, including all statements with words such as “will,” “should,” “could,” “expects” or “potential.” Where, in any forward-looking
statement, we express an expectation or belief as to future results or events, such expectation or belief is based on the current plans and
expectations at the time of this annual report. Although we believe that these statements are based on reasonable assumptions, they are
subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those indicated
in such statements, including the risks described in Item 1A of our Annual Report on Form 10-K as filed with the Securities and Exchange
Commission. Except as required by law, we undertake no obligation to update or revise any forward-looking statements to reflect changed
assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future results over time or otherwise.
Use of Non-GAAP Financial Information
This Annual Report includes financial measures, including EBITDA before charges/gains, operating income before charges/gains, operating
margin before charges/gains, net debt-to-EBITDA before charges/gains, and diluted EPS before charges/gains, that are derived on the basis of
methodologies other than in accordance with U.S. generally accepted accounting principles (GAAP). We offer these measures to assist investors
in assessing our financial performance and liquidity under GAAP, but investors should not rely on these measures as a substitute for any GAAP
measure. In addition, these measures may be inconsistent with similarly titled measures presented by other companies. For more information,
including reconciliations of these non-GAAP financial measures to the most comparable GAAP measures, please see the reconciliation tables in
this Annual Report.
97
— CO R P O R ATE DATA —
Executive Office
520 Lake Cook Road, Suite 400
Deerfield, IL 60015-5611
847-484-4400
Website
www.FBHS.com
Email
Mail@FBHS.com
Registered Office
2711 Centerville Road, Suite 400
Wilmington, DE 19808
Common Stock
Fortune Brands Home &
Security, Inc. common stock is
listed on the New York Stock
Exchange. Our trading symbol
is FBHS.
Annual Meeting
The Annual Meeting of
Stockholders will take place
on Tuesday, April 28, 2015,
at 8:00 a.m. (CDT) at
The Renaissance Hotel
Chicago North Shore
933 Skokie Boulevard
Northbrook, IL 60062
Transfer Agent for
Common Stock
Wells Fargo Shareowner
Services
1110 Centre Pointe Curve
Suite 101
Mendota Heights, MN
55120-4100
800-468-9716
Quarterly Earnings,
News Summaries,
Copies of News
Releases and Corporate
Publications
http://ir.FBHS.com
Duplicate mailings of proxy
materials to the same address
are costly and may be
inconvenient. Stockholders
who wish to eliminate duplicate
mailings must provide their
request in writing. Eliminating
duplicate mailings will not
affect your voting rights.
For Inquiries
Fortune Brands Home &
Security, Inc.
Shareholder Services
520 Lake Cook Road
Suite 400
Deerfield, IL 60015-5611
SEC Filings
Our Annual Report on Form
10-K, as filed with the SEC for
the last fiscal year, and this
2014 Annual Report are being
distributed in connection with
our 2015 Annual Meeting of
Stockholders. You may also
view electronic copies of our
Annual Report on Form 10-K
and other documents we
file with the SEC on our
investor relations website,
http://ir.FBHS.com.
Fortune Brands Home &
Security, Inc. is a holding
company with subsidiaries
engaged in the manufacture
and sale of home and security
products. To make this Annual
Report easier to read, we’ve
used “we,” “our,” “FBHS” and
similar terms to describe the
activities of Fortune Brands
Home & Security, Inc. or its
subsidiary companies or both,
depending on the context.
— K E Y B R AN DS —
CABINETS
PLUMBING
SECURITY
DOORS
Throughout this Annual
Report, we refer to numerous
trademarks, trade names and
brands. MasterBrand Cabinets,
Master Lock, Moen, Therma-Tru,
SentrySafe and WoodCrafters are
among the trademarks or trade
names held by subsidiaries of
Fortune Brands Home & Security,
Inc. and are registered, pending
registration, and/or common law
marks in the U.S. and/or various
countries internationally.
Therma-Tru was awarded the most
used fiberglass residential entry door
brand in the United States among
builders and remodelers based on
the 2014 Builder Magazine Brand
Use Study and the 2013 Remodeling
Magazine Brand Use Study.
Thomasville Cabinetry is a
registered trademark of HHG
Global Designs LLC.
All other trademarks and
service marks not specifically
mentioned are the property
of their respective owners.
© 2015 Fortune Brands Home & Security, Inc. All rights reserved.
98
Products with an FSC® MIX label
support the development of
responsible forest management
worldwide. The material is sourced
from Forest Stewardship Council®
(FSC®)-certified, well-managed
forests, company-controlled
sources and/or recycled material.
This Annual Report is printed on
paper manufactured with energy
generated from renewable sources.
— BOAR D O F D I R EC TO RS —
From left to right: A.D. David Mackay, John G. Morikis, Richard A. Goldstein, Christopher J. Klein,
David M. Thomas, Ann Fritz Hackett, Norman H. Wesley, Ronald V. Waters, III
David M. Thomas
Chairman of the Board,
Former Chairman and
Chief Executive Officer
IMS Health Incorporated
Christopher J. Klein
Chief Executive Officer
Fortune Brands Home &
Security, Inc.
Richard A. Goldstein
Former Chairman and
Chief Executive Officer
International Flavors &
Fragrances Inc.
Ann Fritz Hackett
Founder and President
Horizon Consulting Group, LLC
A.D. David Mackay
Former President and
Chief Executive Officer
Kellogg Company
John G. Morikis
President and
Chief Operating Officer
The Sherwin-Williams Company
Ronald V. Waters, III
Former President and
Chief Executive Officer
LoJack Corporation
Norman H. Wesley
Former Chairman and
Chief Executive Officer
Fortune Brands, Inc.
— LE AD ERS H I P TE AM —
From left to right: Michael P. Bauer, David B. Lingafelter, Sheri R. Grissom, E. Lee Wyatt, Jr.,
Christopher J. Klein, David M. Randich, Mark Savan, Robert K. Biggart
Christopher J. Klein
Chief Executive Officer
E. Lee Wyatt, Jr.
Senior Vice President and
Chief Financial Officer
Michael P. Bauer
President
Master Lock Company LLC
Robert K. Biggart
Senior Vice President —
General Counsel and Secretary
Sheri R. Grissom
Senior Vice President —
Human Resources
David B. Lingafelter
President
Moen Incorporated
David M. Randich
President
MasterBrand Cabinets, Inc.
Mark Savan
President
Therma-Tru Corp.
520 Lake Cook Road
Suite 400
Deerfield, IL 60015-5611
847-484-4400
www.FBHS.com
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