ANNUAL 2017 REPORT
MAXIMIZING LONG-TERM VALUE
A GROWTH
STORY
Fortune Brands is a
home and security
products company
built on industry-
leading brands and
innovative plumbing,
cabinetry, door and
security products.
To learn more, visit
www.FBHS.com.
A STORY OF
STRONG RESULTS
Our strategy has focused on driving profitable organic and
incremental growth. In doing so, we have strengthened our
business and delivered exceptional value to shareholders.
The momentum we’ve built sets us up for continued success.
— 5-YEAR GROWTH HIGHLIGHTS —
Total Net Sales
IN BILLIONS
Operating Margin
OM%
Earnings Per Share
$/SHARE
$5.3
$3.1
13.7%
$3.08
6.8%
$0.83
2012
2017
2012
2017
2012
2017
Sales increased
more than 70%
Operating
margin more
than doubled
Earnings per
share grew more
than 270%
In this Annual Report, all data presented is from continuing operations, and all references to earnings per share, operating income
and operating margin are on a before charges/gains basis, unless noted otherwise. Reconciliations of non‑GAAP measures are
presented on pages 90 – 95.
1
STRUCTURAL
COMPETITIVE
ADVANTAGES
Our industry-leading
brands in attractive
categories, consumer-
driven innovation and
operational excellence are
just a few of the sustainable
competitive advantages that
set Fortune Brands apart
from our competitors.
INDUSTRY-LEADING
BRANDS
#1
Kitchen and bath residential
cabinet manufacturer
in North America
#1
Faucet brand in
North America
#1
Entry door brand in the
United States among
building professionals
#1
Padlock and protective
security container brands
in North America
OUR STORY IS GROUNDED IN
CORE GROWTH
The strong foundation to drive
profitable future growth
Our business is built on a strong
foundation that enables us to
deliver profitable growth. The
scale we have in our categories
generates operating efficiency;
our channel leadership gets our
innovation to market quickly;
and we continue to refine and
strengthen our sustainable
competitive advantages. Our
unique capabilities, coupled
with a healthy housing market,
position us extremely well
for continued growth.
● Stronger operating
capabilities and platforms:
We are accelerating organic
growth through the Global
Plumbing Group platform by
leveraging our global supply
chain and strong distribution
channels.
● Capacity and productivity
investments: We’ve
strategically allocated capital
to areas of our business that
can produce the best long-
term returns.
OUR CONTINUED FOCUS
● Strong management team
● New products and programs
in the most attractive
channels: We continue to
focus on consumer-driven
innovation within the most
attractive areas of the market.
and incentives: We have highly
experienced leaders with
incentives aligned to focus on
driving shareholder value.
Business Mix by End Market*
48%
25%
15% 8% 4%
Repair & Remodel New Construction
Commercial
International
U.S. Security
Business Mix by Channel*
28%
25%
23% 5% 4%
15%
Home Center
Wholesale
Dealer
International
Other Retail
Builder Direct
* Company data for the year ended December 31, 2017.
3
ATTRACTIVE
CATEGORIES AND
MARKETS
With attractive, consumer-
focused product categories
and 75 percent of sales
impacted by the U.S.
home products market,
we continue to benefit
from an elongated
housing recovery.
EIGHT STRATEGIC
ACQUISITIONS
SINCE 2012
PROVING OUR GLOBAL
PLUMBING GROUP
(GPG) STRATEGY
The GPG has demonstrated
early success in accelerating
growth. Its portfolio of
products and brands has
expanded due to the 2016
additions of Riobel, ROHL
and Perrin & Rowe, and the
2017 acquisitions of Shaws
and Victoria + Albert.
SHAWS
Shaws joined the
GPG in 2017, adding a
premium sink brand to
the platform’s product
portfolio.
OPPORTUNITIES TO DRIVE
INCREMENTAL
GROWTH
The flexibility and commitment to create
additional shareholder value
Our strong cash flow and balance
sheet provide maximum flexibility
to continue to drive incremental
growth. We remain focused on
maximizing long-term shareholder
value by using our cash flow and
leveraging our strong balance
sheet for strategic acquisitions,
share repurchases and dividends.
OUR CONTINUED FOCUS
● Strategic acquisitions: Since
2012, we have deployed
approximately $1.5 billion on
eight strategic acquisitions. We
continue to look for long-term,
value-creating strategic
opportunities.
● Global Plumbing Group:
The Global Plumbing Group
structure paves the way
for further acquisitions,
joint ventures and supply
agreements, which promote
seamless integration and
continued growth.
● Share repurchases: We
continue our strategy of
opportunistically repurchasing
our shares.
● Increased dividend: We
increased our quarterly
dividend for the fifth
consecutive year. Now at
$0.20, our dividend reflects
the Board’s confidence in our
operating performance and
long term cash flow.
Capital Allocation for Incremental Growth
2012 – 2017
More than $3 billion deployed through strategic
acquisitions, share repurchases and dividends
Strategic Acquisitions
48%
+$3 B
Share Repurchases
38%
Dividends
14%
5
VICTORIA + ALBERT
Victoria + Albert
joined the GPG in 2017,
adding a premium
free-standing tub
brand to the platform’s
product portfolio.
LETTER TO SHAREHOLDERS
Dear Shareholders:
I’m incredibly pleased that our teams once again
delivered strong results in 2017. We continued to execute
on our strategy of disciplined, profitable growth as we
increased earnings per share by double digits, and grew
sales and operating margin simultaneously. We continued
to see healthy consumer demand for our products. The
results we achieved in 2017 position us well to continue
to increase shareholder value — as we’ve consistently
done since becoming a stand‑alone company.
Christopher J. Klein
CHIEF EXECUTIVE OFFICER
Our teams are executing at a high level against our
strategy and performing well in a housing market
that continues to recover. Our product and brand
positioning remains strong, and the momentum we
have built sets us up for continued success in 2018.
2017 Financial Highlights:
● Sales increased 12 percent to $1.7 billion.
● Operating income grew 12 percent to
$371 million.
● Operating margin was 21.6 percent.
2017 FINANCIAL HIGHLIGHTS
Full‑year 2017 sales were $5.3 billion, an increase of
6 percent, and our operating margin increased to
13.7 percent. Importantly, we increased earnings per
share by 12 percent to $3.08.
Additionally, we spent approximately $140 million
on two plumbing acquisitions: Shaws and
Victoria + Albert. We also repurchased $215 million
of our shares and increased our quarterly dividend
for the fifth consecutive year, demonstrating once
again our commitment to delivering shareholder
value through incremental growth.
Overall, we are driving profitable growth across a
great portfolio of businesses.
Plumbing
We proved the strength of our Global Plumbing
Group (GPG) strategy to drive accelerated organic
and incremental growth, while maintaining strong
operating margins. The GPG now offers a broader
product and brand portfolio combined with expanded
channel penetration and a well‑established distribution
network. Looking ahead, we will continue to enhance
our capabilities, products and talent while seeking
incremental acquisition and partnership opportunities.
Cabinets
We grew sales and profit while remaining committed
to leveraging our industry leadership. Looking ahead,
margins should continue to expand and we will actively
allocate our resources and product innovations
toward our most attractive opportunities.
2017 Financial Highlights:
● Sales increased 3 percent to $2.5 billion.
● Operating income grew 5 percent to
$272 million.
● Operating margin increased to 11.0 percent.
Doors
We saw strong share‑gain performance for our
Doors segment. The Therma‑Tru brand continues to
resonate with large homebuilders and distributors,
and benefited from retail placements and new
product and display investments. Looking ahead,
we plan to continue to build on this strong
momentum and to invest even more in the business.
2017 Financial Highlights:
● Sales increased 6 percent to $503 million.
● Operating income grew 20 percent to
$75 million.
● Operating margin increased to 14.8 percent.
6
FINANCIAL HIGHLIGHTS
IN MILLIONS, EXCEPT PER‑SHARE AMOUNTS
YEARS ENDED DECEMBER 31
2017
2016
2015
2014
2013
2012
Total Net Sales
Operating Income
Earnings Per Share
$5,283
$725
$3.08
$4,985
$658
$2.75
$4,579
$538
$2.07
$4,014
$431
$1.74
$3,704
$353
$1.37
$3,135
$212
$0.83
CAPITAL PERFORMANCE
12/31/2017
12/31/2012
Cash
Debt
Debt‑to‑Capital
Market Capitalization (in billions)
$323
$1,508
37%
$10.4
$336
$326
12%
$4.8
Learn more
about our
company
portfolio on
the following
pages.
Security
Our core business grew from new product
innovation and strong international sales. Looking
ahead, we see additional growth opportunities
to increase sales with new products across
retail, international and commercial markets.
2017 Financial Highlights:
● Sales increased 2 percent to $593 million.
● Operating income grew 8 percent to
$88 million.
● Operating margin increased to 14.9 percent.
DRIVING INCREMENTAL GROWTH
Since 2012, we have deployed more than $3 billion
on strategic acquisitions, share repurchases and
dividends. Incremental growth through these
methods remains a priority going forward. We
remain encouraged by the number of strategic
acquisition opportunities we see, and have
substantial flexibility to continue to create
incremental shareholder value. In fact, over the
next three years, we believe we have the potential
to deploy another $3+ billion for acquisitions,
share repurchases and dividends to further drive
incremental growth and shareholder value.
LOOKING AHEAD
We are excited about the new U.S. tax legislation
that delivers a lower effective tax rate and will
increase our cash flow. I believe that tax reform
was designed to benefit companies like ours,
with a large base of U.S. manufacturing and sales.
Consumers should create a favorable environment
for growth due to the strength in underlying
demand. We now have a greater ability to continue
to invest capital in our business and people, which
should help drive growth while generating even
more free cash flow.
Looking ahead, we are focused on creating long‑
term growth opportunities, deploying additional
capital to drive shareholder value and leveraging
our improved position to sell even more products. I
remain incredibly proud of our consistent and strong
results as we continue with our mission to “fulfill the
dreams of homeowners and help people feel more
secure.” Thank you for your support as we continue
to build a great company.
Regards,
Christopher J. Klein
Chief Executive Officer
Fortune Brands Home & Security, Inc.
February 28, 2018
7
COMPANY PORTFOLIO
PLUMBING
KEY BRANDS
Moen
Perrin & Rowe
Riobel
ROHL
Shaws
Victoria + Albert
The GPG was designed to accelerate high‑margin growth. This
multi‑brand, multi‑channel, and multi‑geography business was
expanded in 2017 by two acquisitions, further elevating the
segment’s product and price‑point offering to reach a broader
group of consumers. The GPG manufactures, assembles and
distributes a multitude of plumbing consumer products, including
faucets, showers, sinks and tubs.
STRUCTURAL ADVANTAGES
● The GPG’s expanded product and brand portfolio is driving growth in new
and existing sales channels, including showrooms, hospitality and online
● Exclusive, national, multi‑year contracts with a significant share of the
largest builders help secure Moen’s leading brand position in North America
● Consumer‑focused innovation drives higher sales and profitability
● The GPG enables acquisitions, supply agreements, and distribution
agreements by leveraging our channel strength
Segment Net Sales
% OF TOTAL FBHS
Net Sales
IN BILLIONS
Operating Income
IN MILLIONS
Operating Margin
OM%
33%
8
$1.7
$1.1
$371
$169
21.6%
15.4%
2012
2017
2012
2017
2012
2017
COMPANY PORTFOLIO
CABINETS
KEY BRANDS
Aristokraft
Decorá
Diamond
Homecrest
Kemper
Kitchen Craft
Mid Continent
Omega
Schrock
StarMark
UltraCraft
WoodCrafters
MasterBrand Cabinets leverages its industry leadership and
strong network to meet consumers’ needs. Our Cabinets segment
manufactures custom, semi‑custom and stock cabinetry under
more than a dozen brands. The segment offers the full range of
styles and price points that appeal to consumers undergoing major
kitchen remodels or simpler DIY projects.
STRUCTURAL ADVANTAGES
● Focus on channels with the most attractive opportunities for profitable
growth: kitchen & bath dealers and in‑stock cabinets & vanities
● Superior service to our 5,000+ dealer customers supported by our
responsive, regional supply chain and innovative, diverse offerings
● In‑stock cabinets & vanities backed by a separate supply chain, driving
profitable growth in home centers
Segment Net Sales
% OF TOTAL FBHS
Net Sales
IN BILLIONS
Operating Income
IN MILLIONS
Operating Margin
OM%
47%
$2.5
$1.3
$272
11.0%
2012
2017
2012
2017
2012
2017
$40
3.0%
9
COMPANY PORTFOLIO
DOORS
KEY BRANDS
Therma‑Tru
Fypon
The Therma‑Tru brand continues to resonate with large
homebuilders and industry‑leading door distributors. Our Doors
segment manufactures fiberglass entry door systems in a range
of styles and sizes to add beauty and functionality to a variety
of home architectures. Therma‑Tru also makes steel entry door
systems and patio doors, as well as urethane millwork products
under the Fypon brand.
STRUCTURAL ADVANTAGES
● Therma‑Tru is a leader in fiberglass entry doors, the fastest‑growing
segment of the entry door market
● Our strong door fabrication network adds value through assembly and
installation of integrated, whole entry door systems
● Decorative glass designs, door styles and finishes promote product
differentiation and higher margins
Segment Net Sales
% OF TOTAL FBHS
Net Sales
IN BILLIONS
Operating Income
IN MILLIONS
Operating Margin
OM%
9%
10
$0.5
$0.3
$75
$6
14.8%
1.9%
2012
2017
2012
2017
2012
2017
COMPANY PORTFOLIO
SECURITY
KEY BRANDS
Master Lock
SentrySafe
American Lock
Our Security segment is best‑known for its locks, but its product
portfolio is broader and includes safety and security devices,
electronic security products and safes. Our security products are
sold across retail, international and commercial markets. They
are manufactured, sourced and distributed primarily under the
Master Lock, SentrySafe and American Lock brands.
STRUCTURAL ADVANTAGES
● Iconic, growth‑oriented Master Lock and SentrySafe brands have leading
market share positions and global brand recognition
● Consistent flow of consumer‑focused innovation and increased emphasis
on electronic locking solutions
● Integrated, flexible global supply chain
Segment Net Sales
% OF TOTAL FBHS
Net Sales
IN BILLIONS
Operating Income
IN MILLIONS
Operating Margin
OM%
11%
$0.6
$0.4
$88
$54
14.9%
14.1%
2012
2017
2012
2017
2012
2017
11
“ I believe we have only begun to test
our full value-creation potential in
this housing market. Our story of
growth continues.”
Christopher J. Klein
CHIEF EXECUTIVE OFFICER
2017
Fortune Brands Home & Security, Inc.
FORM 10-K
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, 2017
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 (§229.405) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. È
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer È Accelerated filer ‘ Non-accelerated filer (Do not check if a smaller reporting company) ‘
Smaller reporting company ‘ Emerging growth company ‘
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ‘
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, 2017 (the
last day of the registrant’s most recent second quarter) was $10,015,217,282. The number of shares outstanding of the registrant’s
common stock, par value $0.01 per share, at February 2, 2018, was 151,950,428.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the registrant’s proxy statement for its Annual Meeting of
Stockholders to be held on May 1, 2018 (to be filed not later than 120 days after the end of the
registrant’s fiscal year) (the “2018 Proxy Statement”) is incorporated by reference into Part III hereof.
Form 10-K Table of Contents
PART I
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.
Item 1A. Risk Factors.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
Mine Safety Disclosures.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Officers of the Registrant.
PART II
Item 5.
Item 6.
Item 7.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 Compared to 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 Compared to 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Critical Accounting Policies and Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 7A. Quantitative and Qualitative Disclosures about Market Risk.
Item 8.
Item 9.
PART III
Item 10. Directors, Executive Officers and Corporate Governance. . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related
Item 12.
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . .
Principal Accountant Fees and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14.
PART IV
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15.
Item 16.
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule II Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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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
expected capital spending, expected pension contributions, the anticipated effects of recently issued
accounting standards on our financial statements, planned business strategies, estimated impact and
effects of the U.S. Tax Cuts and Jobs Act of 2017, 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 “Fortune Brands,”
the “Company,” “we,” “our” or “us” refer to Fortune Brands Home & Security, Inc. and its consolidated
subsidiaries.
Our Company
We are a leading home and security products company that competes in attractive long-term growth
markets in our product 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 have four business segments: Cabinets, Plumbing, Doors and Security.
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
impressive track record reflects the long-term attractiveness and potential of our categories and our
leading brands. Our performance in the six years since becoming an independent publicly traded
company 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. For example, in the third quarter of 2017, Moen launched its new “Innovated By…” advertising
campaign which brings Moen innovation to life through compelling narratives designed to evoke emotion
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and provoke thought. We also strive to leverage our brands by expanding into adjacent product categories
and continue to develop new programs by working closely with our customers.
Continue to develop innovative products for customers, designers, installers and
consumers. Sustained investments in consumer-driven product innovation and customer service, along
with our low cost structures, have contributed to our success in the marketplace and creating consumer
demand. In 2017, MasterBrand Cabinets, which provides a wide range of cabinets for the home, launched
innovative new cabinet door designs, lighting systems, color palettes and features in a range of styles that
allows consumers to create a custom kitchen look at an affordable price and introduced new, exclusive
laminate door and finish options across multiple price segments. We continue to provide channel support
with responsive websites featuring our cabinet brands that drives consumers to our partner dealers. In
2016, we created the Global Plumbing Group (“GPG”), a strategic platform within our Plumbing segment
that spans across brands and geographic areas in order to accelerate growth opportunities and transform
our existing plumbing business. During 2017 and 2016, we expanded our brand presence in plumbing
through acquisitions. In 2017, we acquired Victoria + Albert, a U.K. manufacturer of luxury freestanding
tubs and basins and Shaws Since1987 Limited (“Shaws”), a U.K.-based company that specializes in the
design, production and marketing of luxury fire-clay kitchen sinks. In 2016, we acquired Riobel Inc.
(“Riobel”), a Canadian premium showroom brand and ROHL LLC (“ROHL”), a California-based luxury
brand and in a related transaction and TCL Manufacturing Ltd, which gave us ownership of Perrin & Rowe
Limited (“Perrin & Rowe”), a UK manufacturer and designer of luxury kitchen and bathroom plumbing
products. In addition, GPG’s legacy brand, Moen had a number of innovative product launches in 2017,
including a customizable shower technology with personal device integration. The Therma-Tru portfolio of
on-trend door and glass collections continued to evolve to meet current and emerging architectural design
trends including wider and taller door styles, expanding panel configurations, as well as additional
decorative, privacy and textured glass designs. Master Lock continued to be an innovation leader in
security and safety products and services, driven by consumer and end user focused insights with
continued emphasis on electronic enabled solutions for enhanced capability and convenience. SentrySafe
continued to provide a full line portfolio of quality security, fire and water resistant safes to help consumers
and small business owners protect documents and valuables.
Expand in international markets. We expect to have opportunities to expand sales by further
penetrating international markets, which represented approximately 15% of net sales in 2017. We continue
to develop our relationship with dealers and distributors and their Moen branded stores throughout China.
In our Cabinets segment, Kitchen Craft remained a leading cabinetry brand in Canada, while WoodCrafters
provided a company presence in Mexico. Master Lock continued to expand its presence in Europe and
Asia (primarily Japan), while Therma-Tru made inroads in Canada as consumers transitioned 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 continue to
believe our most attractive opportunities are to invest in profitable organic growth initiatives, pursue accretive
strategic acquisitions and joint ventures, and return cash to stockholders through a combination of dividends
and repurchases of shares of our common stock under our share repurchase program. Both add-on
acquisitions and share repurchase opportunities may be particularly attractive in the next few years. In 2017,
we repurchased 3.4 million shares of our outstanding common stock under the Company’s share repurchase
programs for $214.8 million. In July 2017, we acquired Shaws, a UK-based luxury plumbing products
company that specializes in manufacturing and selling fireclay sinks. In October 2017, we acquired Victoria
+Albert, a UK-based premium brand of standalone bathtubs, sink, tub fillers, faucets and other accessories.
These acquisitions broadened our plumbing portfolio and enhanced future growth opportunities.
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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, continue to expand many of our brands into
adjacent product categories and international markets.
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 or reduce capacity
in order to match demand levels. In 2017, we invested approximately $40 million to support long-term
growth potential both in the U.S. and international markets. In addition, our supply chains and low cost
manufacturing structures have created favorable operating leverage allowing volumes to 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 comprised a substantial majority of the overall
U.S. home products market and about two-thirds of our U.S. home products sales in 2017. 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 these existing sales
channels to expand into adjacent product categories. In 2017, sales to our top ten customers represented
less than half of total sales.
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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 focuses on its unique set of
consumers, customers, competitors and suppliers, while also sharing best practices.
Strong capital structure. We exited 2017 with a strong balance sheet. In 2017, we repurchased
3.4 million of our shares. As of December 31, 2017, we had $323.0 million of cash and cash equivalents
and total debt was $1,507.6 million, resulting in a net debt position of $1,184.6 million. In addition, we had
$635.0 million available under our credit facility as of December 31, 2017.
Business Segments
We have four business segments: Cabinets, Plumbing, Doors and Security. The following table shows net
sales for each of these segments and key brands within each segment:
Segment
Cabinets
Plumbing
Doors
Security
Total
2017
Net Sales
(in millions)
Percentage of
Total 2017
Net Sales
Key Brands
$2,467.1
1,720.8
502.9
592.5
47% Aristokraft, Diamond, Mid-Continent,
Kitchen Craft, Schrock, Homecrest,
Omega, Thomasville(a), Kemper,
StarMark, Ultracraft
33% Moen, ROHL, Riobel, Perrin & Rowe,
Victoria + Albert, Shaws, Waste King
9% Therma-Tru, Fypon
11% Master Lock, American Lock,
SentrySafe
$5,283.3
100%
(a) Thomasville is a registered trademark of Hhg Global Designs LLC.
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 15% of 2017 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 2017. Sales to all U.S. home centers in
the aggregate were approximately 27% of net sales in 2017.
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, Diamond, Mid-Continent, Kitchen Craft, Schrock, Homecrest, Omega, Thomasville, Kemper,
StarMark and Ultracraft. 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. In aggregate, sales to
The Home Depot and Lowe’s comprised approximately 34% of net sales of the Cabinets segment in 2017.
This segment’s competitors include Masco, American Woodmark and RSI (owned by American
Woodmark), as well as a large number of regional and local suppliers.
Plumbing. Our Plumbing segment manufactures or assembles and sells faucets, accessories, kitchen
sinks and waste disposals in North America and China, predominantly under the Moen, ROHL, Riobel,
Perrin & Rowe, Victoria + Albert, Shaws and Waste King brands. Although this segment sells products
principally in the U.S., Canada and China, this segment also sells in Mexico, Southeast Asia, Europe and
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South America. Approximately 26% of 2017 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. In aggregate, sales
to The Home Depot and Lowe’s comprised approximately 23% of net sales of the Plumbing segment in
2017. This segment’s chief competitors include Delta (owned by Masco), Kohler, Pfister (owned by
Spectrum Brands), American Standard (owned by LIXIL Group), InSinkErator (owned by Emerson
Electronic Company) 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. In aggregate, sales to The Home Depot and Lowe’s comprised approximately 14% of
net sales of the Doors segment in 2017. 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 primarily 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, Japan and Australia. Approximately 25% of 2017 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 and fire resistant safes to locksmiths,
industrial and institutional users, and original equipment manufacturers. In aggregate, sales to The Home
Depot and Lowe’s comprised approximately 18% of the net sales of the Security segment in 2017. 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
2017
2016
2015
$2,467.1
1,720.8
502.9
592.5
$2,397.8
1,534.4
473.0
579.7
$2,173.4
1,414.5
439.1
552.4
$5,283.3
$4,984.9
$4,579.4
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.
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.
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Segment
Cabinets
Plumbing
Doors
Security
Raw Materials
Hardwoods (maple, cherry and oak), plywood and
particleboard
Brass, zinc, resins, stainless steel, aluminum and
copper
Resins, wood, glass, foam, aluminum and steel
Rolled steel, zinc, brass and resins
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, 2017, we had approximately 23,800 full-time employees. Of these
employees, approximately 2,000 of these employees are covered by collective bargaining agreements.
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 at their 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, 2017, eleven such instances have not been
dismissed, settled or otherwise resolved. In 2017, none of our subsidiaries were identified as a PRP in a
new instance and no instances were settled, dismissed or otherwise resolved. 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, 2017 and 2016, we
had accruals of $0.7 and $1.0 million, respectively, relating to environmental compliance and cleanup
including, but not limited to, the above mentioned Superfund sites.
Legal structure. Fortune Brands Home & Security, Inc. is a holding company that was initially
organized as a Delaware corporation in 1988. Wholly-owned subsidiaries of the Company include
MasterBrand Cabinets, Inc., Moen Incorporated, Fortune Brands Global Plumbing Group LLC, Fortune
Brands Doors, Inc. and Fortune Brands Storage & Security LLC. As a holding company, we are 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
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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.
Item 1A. Risk Factors.
There are inherent risks and uncertainties associated with our business that could adversely affect our
business, financial condition or operating results. Set forth below are descriptions of those risks and
uncertainties that we currently believe to be material, but the risks and uncertainties described below are
not the only risks and uncertainties that could adversely affect our business, financial condition or
operating results. If any of these 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, access to labor, consumer confidence,
consumer income, government tax programs, 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 by: causing consumers to delay or decrease
homeownership; making consumers more price conscious resulting in a shift in demand to smaller, less
expensive homes; making consumers more reluctant to make investments in their existing homes,
including large kitchen and bath repair and remodel projects; or making it more difficult to secure loans for
major renovations. Although the U.S. new home construction market continues to improve, demand for new
homes is still recovering after the 2007-2009 U.S. economic recession and continues to remain 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
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consumers as well as our trade customers. Some of our competitors may resort to price competition to
sustain or grow 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 and joint ventures 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 additional shares, resulting in dilution in
earnings per share and return on capital.
We may not successfully develop new products or processes or improve existing products or processes.
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 or updated products and
processes, 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 or
processes 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 may be unable 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.
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.
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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 brass, zinc, steel, wood, and glass 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 commodity
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 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,
unfavorable changes or uncertainty relating to trade agreements or importation duties, 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 and policies pertaining to trade agreements, health and safety (including
protection of employees as well as consumers), taxes and environmental concerns continue to emerge
domestically, as well as internationally. In particular, there may be additional tariffs or taxes related to our
imported inputs and finished goods. 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 changes in taxes, tariffs and other
regulations 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.
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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, 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, representatives or retailers to effectively promote our products, or changes
in the financial or business condition of these distributors, representatives or retailers 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,
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, 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.
10
Our inability to obtain raw materials and finished goods in a timely and cost-effective manner from
suppliers could 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.
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 an adverse effect on
our results of operations, cash flows and financial condition.
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 customer relationships, 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 management at least annually. If the carrying
value exceeds the implied fair value of goodwill, the goodwill is 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 or circumstances that could have a potential negative effect on the
11
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
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.
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. 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. In addition, 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. We believe 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.
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 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: our financial performance, our credit ratings, the liquidity of the overall capital markets and 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.
12
Item 2. Properties.
Our principal executive office is located at 520 Lake Cook Road, Deerfield, Illinois 60015. We operate 29
U.S. manufacturing facilities in 16 states and have 19 manufacturing facilities in international locations (8 in
Mexico, 3 in Asia, 4 in Europe, 2 in Africa, and 2 in Canada). In addition, we have 50 distribution centers
and warehouses worldwide, of which 41 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
23
8
4
3
38
4
4
2
—
10
27
12
6
3
48
3
5
—
1
9
20
12
2
7
41
23
17
2
8
50
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.
The Company is a defendant in lawsuits that are ordinary routine litigation matters incidental to its
businesses. 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.
Item 4. Mine Safety Disclosures.
Not applicable.
Executive Officers of the Registrant.
Name
Age
Position
Christopher J. Klein 54 Chief Executive Officer
Patrick D. Hallinan
Michael P. Bauer
Nicholas I. Fink
Brett E. Finley
David M. Randich
Tracey L. Belcourt
Robert K. Biggart
Sheri R. Grissom
Dan Luburic
Brian C. Lantz
Marty Thomas
50 Senior Vice President and Chief Financial Officer
53 President, The Master Lock Company
43 President, Fortune Brands Global Plumbing Group LLC
47 President, Fortune Brands Doors, Inc.
56 President, MasterBrand Cabinets, Inc.
51 Senior Vice President, Global Growth and Development
63 Senior Vice President, General Counsel and Secretary
53 Senior Vice President, Human Resources
46 Vice President and Corporate Controller
55 Senior Vice President, Communications & Corporate Administration
59 Senior Vice President, Operations & Supply Chain Strategy
Christopher J. Klein has served as Chief Executive Officer of Fortune Brands since January 2010.
Patrick D. Hallinan has served as Senior Vice President and Chief Financial Officer of Fortune Brands
since July 2017. From January 2017 to July 2017, Mr. Hallinan served as Senior Vice President of Finance
of Fortune Brands. Prior to joining Fortune Brands’ executive team, Mr. Hallinan served as chief financial
officer of Moen Incorporated, a subsidiary of Fortune Brands, from November 2013 to January 2017.
13
Michael P. Bauer has served as President of The Master Lock Company 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.
Nicholas I. Fink has served as President of Fortune Brands Global Plumbing Group LLC since August
2016. From June 2015 to August 2016, Mr. Fink served as Senior Vice President-Global Growth and
Development of Fortune Brands. From June 2006 to May 2015, Mr. Fink worked at Beam Suntory, Inc., a
global spirits company, and its predecessor entities in various senior positions including as Senior Vice
President and President, Asia-Pacific/South America.
Brett E. Finley has served as President of Fortune Brands Doors, Inc. since February 2016. From
February 2008 to February 2016, Mr. Finley held various leadership positions at IDEX Corporation, a global
manufacturer of fluidics systems and specialty engineered products, including Senior Vice President,
Group Executive, Fluid & Metering Technologies Segment and President- IDEX-Asia.
David M. Randich has served as President of MasterBrand Cabinets, Inc., a subsidiary of Fortune
Brands, since October 2012.
Tracey L. Belcourt has served as Senior Vice President of Global Growth and Development of Fortune
Brands since December 2016. From 2012 to 2016, Ms. Belcourt served as Executive Vice President,
Strategy of Mondelez International, Inc. a confectionary, food and beverage company.
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. Ms. Grissom served as Executive Vice President — Global Human Resources of Actuant
Corporation, a diversified industrial company, from October 2010 to February 2015.
Dan Luburic has served as Vice President and Corporate Controller of Fortune Brands since October
2011.
Brian C. Lantz has served as Senior Vice President, Communications & Corporate Administration since
January 2017. Mr. Lantz joined Fortune Brands in June 2011 as Vice President of Investor Relations.
Marty Thomas has served as Senior Vice President, Operations and Supply Chain Strategy since
September 2017. Mr. Thomas served as Senior Vice President of Global Operations and Engineering
Services at Rockwell Automation, Inc., a provider of industrial automation and information products, from
2006 to 2016.
14
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 and
the dividends declared for each of the periods indicated.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2017
High
Low
$61.67
66.35
67.77
69.76
$53.15
60.22
61.34
63.41
Dividends
Declared
High
— $56.36
59.98
64.47
58.39
0.18
0.36(a)
0.20
2016
Low
$44.19
54.51
56.09
52.05
Dividends
Declared
—
0.16
0.32(a)
0.18
(a) Reflects a $0.18 and $0.16 per share dividend declared and paid in the third quarter of 2017 and 2016, respectively, and a $0.18
and $0.16 per share dividend declared in third quarter and paid in fourth quarter of 2017 and 2016, respectively.
In December 2017, our Board of Directors increased the quarterly cash dividend by 11% to $0.20 per
share of our common stock. Our Board of Directors will continue to evaluate dividend payment
opportunities on a quarterly basis. There can be no assurance as to when and if future dividends will be
paid, or at what level, because the payment of dividends is dependent upon our financial condition, results
of operations, capital requirements and other factors deemed relevant by our Board of Directors.
On February 2, 2018, there were 10,615 record holders of the Company’s common stock, par value
$0.01 per share. A substantially greater number of holders of the Company’s common stock are “street
name” or beneficial holders, whose shares of record are held by banks, brokers or other financial
institutions.
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, 2017:
Period
October 1 – October 31
November 1 – November 30
December 1 – December 31
Total
Total number of
shares purchased(a)
Average price
paid per share
589,000
—
—
589,000
$66.18
—
—
$66.18
Total number of
shares purchased
as part of publicly
announced plans
or programs(a)
589,000
—
—
589,000
Approximate dollar
value of shares that may
yet be purchased under
the plans or programs(a)
$308,366,151
308,366,151
558,366,151
(a)
Information on the Company’s share repurchase program follows:
Authorization date
February 16, 2016
February 28, 2017
December 8, 2017
Announcement date
February 22, 2016
March 1, 2017
December 11, 2017
Authorization amount of shares
of outstanding common stock
$400 million
$300 million
$250 million
Expiration date
February 16, 2018
February 28, 2019
December 8, 2019
15
Stock Performance
FORTUNE BRANDS HOME & SECURITY, INC.
STOCK PRICE PERFORMANCE
(With Dividend Reinvestment)
$300
$250
$200
$150
$100
$50
$0
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
Peer Index
FBHS
S&P 500
The above graph compares the relative performance of our common stock, the S&P 500 Index and a Peer
Group Index. This graph covers the period from December 31, 2012 through December 31, 2017. This graph
assumes $100 was invested in the stock or the index on December 31, 2012 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 or the Exchange Act.
Peer Group Index The 2017 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 Brands Inc., The Sherwin-Williams Company,
Stanley Black & Decker, Inc. and USG Corporation.
Calculation of Peer Group Index
The weighted-average total return of the entire peer group, for the period of December 31, 2012 through
December 31, 2017, 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.
16
Item 6. Selected Financial Data.
Five-year Consolidated Selected Financial Data
(In millions, except per share amounts)
2017
2016
2015
2014
2013
Years Ended December 31,
Income statement data(a)
Net sales
Cost of products sold(b)
Selling, general and administrative expenses(b)
Amortization of intangible assets
Loss on sale of product line (see Note 4)
Asset impairment charges
Restructuring charges
Operating income
Income from continuing operations, net of tax(e)
Basic earnings per share — continuing operations
Diluted earnings per share — continuing
$5,283.3
3,350.8
1,194.8
31.7
2.4
3.2
8.3
692.1
475.3
3.10
$4,984.9
3,180.3
1,129.9
28.1
—
—
13.9
632.7
412.4
2.67
$4,579.4
2,997.5
1,047.6
21.6
—
—
16.6
496.1
306.5
1.92
$4,013.6
2,646.7
943.3
13.1
—
—
7.0
403.5
273.6
1.68
$3,703.6
2,408.5
938.7
9.4
—
21.2
2.8
323.0
209.0
1.26
operations
3.05
2.61
1.88
1.64
1.21
Other data(a)
Depreciation and amortization
Cash flow provided by operating activities(c)
Capital expenditures
Proceeds from the disposition of assets
Dividends declared per common share
$ 130.3
600.3
(165.0)
0.4
0.74
$ 122.7
650.5
(149.3)
3.9
0.66
$ 115.1
429.2
(128.5)
2.5
0.58
$
98.8
266.2
(127.5)
0.7
0.50
$
90.4
308.8
(96.7)
2.2
0.42
Balance sheet data
Total assets(d)
Third party long-term debt(d)
Total invested capital
$5,511.4
1,507.6
4,108.7
$5,128.5
1,431.1
3,794.1
$4,875.7
1,168.7
3,623.3
$4,051.5
642.3
2,931.6
$4,176.8
348.7
3,007.9
(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 recognition of pre-tax actuarial gains (losses) in each of the last five years as follows:
Pre-tax actuarial gains (losses)
Portion in cost of products sold
Portion in selling, general and administrative expenses
Portion in discontinued operations
2017
$0.5
0.4
0.1
—
2016
$(1.9)
(1.3)
(0.6)
—
2015
$(8.6)
(0.2)
(2.3)
(6.1)
2014
$(13.7)
(3.0)
(10.7)
—
2013
$(5.2)
(2.7)
(2.5)
—
(c) Reflects adoption of Accounting Standards Update (“ASU”) 2016-09 “Improvements to Employee Share-Based Payment Accounting” which resulted
in the retrospective reclassification of employee withholding taxes paid from operating into financing activities.
(d) Reflects adoption of ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs,” resulting in the retrospective reclassification of debt
(e)
issuance costs from other current assets and other assets to long-term debt.
Includes an estimated net tax benefit of $25.7 million resulting from the enactment of the U.S. Tax Cuts and Jobs Act of 2017 on December 22, 2017
(the “Tax Act”).
17
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, 2017, 2016 and 2015.
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, 2017, 2016 and 2015. This
section also provides a discussion of our contractual obligations, other purchase commitments and
customer credit risk that existed at December 31, 2017, 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, 2017, net sales based on country of destination were:
(In millions)
United States
Canada
China
Other international
Total
$4,492.2
427.6
202.3
161.2
85%
8
4
3
$5,283.3
100%
We believe the Company has certain competitive advantages including market-leading brands, a
diversified mix of customer channels, lean and flexible supply chains, a decentralized business model and
a strong capital structure 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 continue to grow after
the 2007-2009 recession, we expect the benefits of operating leverage and strategic spending to support
increased manufacturing capacity and long-term growth initiatives will help us to continue to achieve
profitable organic growth.
18
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
by returning cash to shareholders through a combination of dividends and repurchases under our share
repurchase program 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 an elongated 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.
We may be impacted by fluctuations in raw material, transportation costs, foreign exchange rates and
promotional activity among our competitors. We strive to offset the potential unfavorable impact of these
items with productivity improvements initiatives and price increases.
During the three years ended December 31, 2017, our net sales grew at a compounded annual rate of 7%
as we benefited from an improving U.S. home products market, acquisitions, and growth in international
markets. Operating income grew at a compounded annual rate of 18% with consolidated operating
margins improving from 10% in 2014 to 13% in 2017. Growth in operating income was primarily due to
higher sales volume, changes to our portfolio of businesses, control and leverage of our operating
expenses and the benefits of productivity programs.
During 2017, the U.S. home products market grew due to increases in new home construction and repair
and remodel activities. We believe new housing construction experienced 7.4% growth in 2017 compared
to 2016 and spending for home repair and remodeling increased about 5%. In 2017, net sales grew 6%
and operating income increased 9% due to higher sales volume primarily resulting from U.S. home
products market growth, the acquisitions in our Plumbing segments, price increases to help mitigate
cumulative raw material cost increases, the effect of favorable foreign exchange and productivity
improvements.
During 2016, the U.S. home products market grew due to increases in new home construction and repair
and remodel activities. We believe new housing construction experienced low double-digit growth in 2016
compared to 2015 and spending for home repair and remodeling increased about of 5%. In 2016, net
sales grew 9% and operating income increased 28% due to higher sales volume primarily resulting from
U.S. home products market growth, the acquisitions in our Cabinets and Plumbing segments, price
increases to help mitigate cumulative raw material cost increases and the effect of unfavorable foreign
exchange and productivity improvements.
In October 2017, we acquired Victoria +Albert, a UK-based premium brand of standalone bathtubs, sink,
tub fillers, faucets and other accessories. In July 2017, we acquired Shaws, a UK-based luxury plumbing
products company that specializes in manufacturing. The combined purchase price was approximately
$125 million, net of cash acquired and deferred acquisition payments and subject to certain post-closing
adjustments. We financed both of the acquisitions using cash on hand and borrowings under our existing
credit facility. These transactions broadened our plumbing portfolio and enhanced future growth
opportunities.
During the third quarter of 2016, we announced the creation of GPG, which was designed to support the
growth of multiple plumbing brands with an enhanced set of products and brands, while leveraging Moen’s
existing global supply chain and broad distribution network.
In September 2016, we acquired ROHL, a California-based luxury plumbing company and in a related
transaction, we acquired TCL Manufacturing Ltd, which gave us ownership of Perrin & Rowe, a UK
19
manufacturer and designer of luxury kitchen and bathroom plumbing products. The total combined
purchase price was approximately $166 million, subject to certain post-closing adjustments. We financed
both acquisitions using cash on hand and borrowings under our existing credit facility. These transactions
broadened the plumbing portfolio and enhanced future growth opportunities.
In June 2016, we amended and restated our credit agreement to combine and rollover the existing
revolving credit facility and term loan into a new standalone $1.25 billion revolving credit facility. Terms and
conditions of the credit agreement, including the total commitment amount, essentially remained the same.
The revolving credit facility will mature in June 2021 and borrowings thereunder will be used for general
corporate purposes.
In May 2016, we acquired Riobel, a Canadian plumbing company specializing in premium showroom bath
and shower fittings, for a total purchase price of $94.6 million, subject to certain post-closing adjustments.
We financed the transaction using cash on hand and borrowings under our existing credit facilities.
In September 2015, we completed the sale of Waterloo Industries, Inc. (“Waterloo”), our tool storage
business which was included in our security segment for approximately $14 million in cash, subject to
certain post-closing adjustments.
In June 2015, we issued $900 million of unsecured senior notes (“Senior Notes”) in a registered public
offering. We used the proceeds from the Senior Notes offering to pay down our revolving credit facility and
for general purposes.
In May 2015, we acquired Norcraft Companies, Inc. (“Norcraft”), a leading publicly-owned manufacturer of
kitchen and bathroom cabinetry, for a total purchase price of $648.6 million. We financed the transaction
using cash on hand and borrowings under our existing credit facilities.
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 wholly-owned subsidiaries. The Company’s consolidated financial
statements are based on a fiscal year ending December 31. Certain of the Company’s subsidiaries operate
on a 52 or 53 week fiscal year ending during the month of December. There were certain transactions that
resulted in net cash outflows of $38 million and $49 million as of December 31, 2017 and 2016,
respectively, relating to payments made to third parties in the normal course of business during the period
between the year-end of our wholly-owned subsidiaries and the Company’s year-end.
In October 2017, we acquired Victoria +Albert. In July 2017, we acquired Shaws. The financial results of
both of the acquisitions were included in the Company’s consolidated balance sheets as of December 31,
2017 and in the Company’s consolidated statements of income and statements of cash flow beginning in
October 2017 and July 2017, respectively. The results of operations are included in the Plumbing segment.
In September 2016, we acquired ROHL and in a related transaction, we acquired TCL Manufacturing Ltd.,
which gave us ownership of Perrin & Rowe and in May 2016, we acquired Riobel. The financial results of
ROHL and Riobel were included in the Company’s consolidated balance sheets as of December 31, 2016
and 2017 and in the Company’s consolidated statements of income and statements of cash flow beginning
in September 2016 and May 2016, respectively. The results of operations are included in the Plumbing
segment.
In September 2015, we completed the sale of Waterloo. In accordance with Accounting Standards
Codification (“ASC”) requirements, the results of operations of Waterloo through the date of sale, were
classified and separately stated as discontinued operations in the accompanying consolidated statements
of income for 2015 and 2014. The assets and liabilities of Waterloo were classified as discontinued
operations in the accompanying consolidated balance sheet as of December 31, 2014.
20
In May 2015, we acquired Norcraft. The financial results of Norcraft were included in the Company’s
consolidated statements of income and statements of cash flow beginning in May 2015 and the
consolidated balance sheets as of December 31, 2015 and 2016.
The cash flows from discontinued operations for 2015 were not separately classified on the accompanying
consolidated statements of cash flows. Information on Business Segments was revised to exclude these
discontinued operations.
Results of Operations
The following discussion of both consolidated results of operations and segment results of operations
refers to the year ended December 31, 2017 compared to the year ended December 31, 2016, and the
year ended December 31, 2016 compared to the year ended December 31, 2015. 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, 2017, 2016 and 2015
(In millions)
Net Sales:
Cabinets
Plumbing
Doors
Security
Total Fortune Brands
Operating Income:
Cabinets
Plumbing
Doors
Security
Corporate(a)
Total Fortune Brands
2017 % change
2016 % change
2015
$2,467.1
1,720.8
502.9
592.5
$5,283.3
$ 267.2
363.6
74.5
72.4
(85.6)
$ 692.1
2.9%
12.1
6.3
2.2
$2,397.8
1,534.4
473.0
579.7
10.3% $2,173.4
1,414.5
439.1
552.4
8.5
7.7
4.9
6.0%
$4,984.9
8.9% $4,579.4
3.6%
11.4
20.4
8.7
7.1
$ 257.8
326.3
61.9
66.6
(79.9)
34.0% $ 192.4
285.4
14.3
44.0
40.7
55.9
19.1
(81.6)
2.1
9.4%
$ 632.7
27.5% $ 496.1
(a) Corporate expenses include the components of defined benefit plan expense (income) other than service cost which totaled
(income) expense of $(4.7) million, $(0.6) million, and $(3.6) million for the years ended December 31, 2017, 2016 and 2015,
respectively. In addition, Corporate expenses for the year ended December 31, 2015 includes $15.1 million of Norcraft transaction
costs. There are no amounts that represent the elimination or reversal of transactions between reportable segments.
Certain items had a significant impact on our results in 2017, 2016 and 2015. These included the
acquisitions of Victoria +Albert, Shaws, Riobel, ROHL, Perrin & Rowe and Norcraft, the disposition of
Waterloo, defined benefit plan recognition of actuarial losses, restructuring and other charges, asset
impairment charges and the impact of changes in foreign currency exchange rates.
In 2017, financial results included:
>
>
>
the benefit of the acquisitions in our Plumbing segment,
restructuring and other charges of $18.5 million before tax ($12.3 million after tax), primarily related to
losses on disposal of inventory associated with exiting a product line in our Security segment and
exiting a customer relationship in our Cabinets segment, as well as severance costs within our
Security, Plumbing and Cabinets segments,
impairment charge of $7.0 million pertaining to a cost method investment in a development stage
home products company due to other-than-temporary decline in its fair value,
21
>
>
the impact of foreign exchange primarily due to movement in the Canadian dollar, which had a
favorable impact compared to 2016, of approximately $4 million on net sales, approximately $5 million
on operating income and approximately $4 million on net income and
an estimated net tax benefit of $25.7 million resulting from the enactment of the U.S. Tax Cuts and
Jobs Act of 2017 on December 22, 2017 (the “Tax Act”).
In 2016, financial results included:
>
>
>
>
the benefit of the acquisitions in our Cabinets and Plumbing segments,
defined benefit plan recognition of actuarial losses, recorded in the Corporate segment, of $1.9 million
($1.3 million after tax) compared to $2.5 million ($1.6 million after tax) in 2015. The actuarial losses in
2016 were primarily due to the re-measurement relating to a retiree medical plan,
restructuring and other charges of $19.3 million before tax ($13.6 million after tax), primarily associated
with severance costs and charges associated with the relocation of a manufacturing facility within our
Security segment and
the impact of foreign exchange primarily due to movement in the Canadian dollar, which had an
unfavorable impact compared to 2015, of approximately $27 million on net sales, approximately
$6 million on operating income and approximately $6 million on net income.
In 2015, financial results included:
>
>
>
>
>
the benefit of the Norcraft, SentrySafe and Anaheim acquisitions,
defined benefit plan recognition of actuarial losses, recorded in the Corporate segment, of $2.5 million
($1.6 million after tax) compared to $13.7 million ($8.7 million after tax) in 2014. The actuarial losses in
2015 were primarily due to the impact of a lower than expected increase in pension plan assets,
partially offset by higher discount rates,
restructuring and other charges of $22.7 million before tax ($15.8 million after tax), primarily associated
with employee related costs,
the impact of foreign exchange primarily due to movement in the Canadian dollar, which had an
unfavorable impact compared to 2014, of approximately $66 million on net sales, approximately
$16 million on operating income and approximately $10 million on net income and
income from discontinued operations of $9.0 million, net of tax, which includes the after-tax gain
associated with the sale of the Waterloo business.
2017 Compared to 2016
Total Fortune Brands
Net sales
Net sales increased $298.4 million, or 6.0%. The increase was due to higher sales volume primarily from
the continuing improvement in U.S. market conditions for home products, new product introductions, the
benefit from the acquisitions in our Plumbing segment and price increases to help mitigate cumulative raw
material cost increases as well as the benefit from favorable foreign exchange of approximately $4 million.
These benefits were partially offset by unfavorable mix, higher sales promotions, and sales rebates.
Cost of products sold
Cost of products sold increased $170.5 million, or 5.4%, due to higher net sales, including the impact of
the acquisitions in our Plumbing segment and raw material cost increases, partially offset by the benefit of
productivity improvements.
22
Selling, general and administrative expenses
Selling, general and administrative expenses increased $64.9 million, or 5.7%, due to higher employee-
related costs and advertising costs as well as the impact of the acquisitions in our Plumbing segment.
Amortization of intangible assets
Amortization of intangible assets increased $3.6 million primarily due to the acquisitions in our Plumbing
segment, partially offset by a decrease relating to a definite-lived customer relationship intangible in our
Doors segment that was fully amortized during the second quarter of 2017.
Loss on sale of product line
In April 2017, we completed the sale of Field ID, our cloud-based inspection and safety compliance
software product line included in our Security segment. We recorded a pre-tax loss of $2.4 million as the
result of this sale.
Asset impairment charges
Asset impairment charges of $3.2 million relate to our decision in the first quarter of 2017 to sell Field ID.
Restructuring charges
Restructuring charges of $8.3 million in 2017 primarily related to severance costs within our Security,
Plumbing and Cabinets segments as well as charges associated with a plant relocation in our Cabinets
segment. Restructuring charges of $13.9 million in 2016 primarily related to the severance costs and
charges associated with the relocation of a manufacturing facility within our Security segment.
Operating income
Operating income increased $59.4 million or 9.4%. Operating income increased due to higher net sales,
including the benefit from acquisitions in our Plumbing segment and productivity improvements. These
benefits were partially offset by unfavorable mix, higher employee-related costs, raw material, labor
inflation and advertising costs.
Interest expense
Interest expense of $49.4 million was $0.3 million higher as compared to last year primarily due to higher
average interest rates which was partially offset by lower average borrowings and the absence of the
write-off of debt issuance costs incurred in 2016.
Other (income) expense, net
Other (income) expense, net, was expense of $7.9 million in the twelve months ended December 31, 2017
compared to expense of $1.5 million in the twelve months ended December 31, 2016. The increase of
$6.4 million was due to a $7.0 million impairment charge in 2017 pertaining to a cost method investment.
Income taxes
The effective income tax rates for 2017 and 2016 were 25.1% and 29.2% respectively. The 2017 effective
income tax rate was favorably impacted by The Tax Cuts and Jobs Act of 2017, (the “Tax Act”).The
effective income tax rates for 2017 and 2016 were favorably impacted by the tax benefit attributable to
share-based compensation (ASU 2016-09) deduction ($23.9 million and $27.8 million, respectively), the
Domestic Production Activity (Internal Revenue Code Section 199) deduction ($10.9 million and
23
$13.0 million, respectively) and favorable tax rates in foreign jurisdictions ($8.3 million and $7.6 million,
respectively), offset by state and local taxes and increases to uncertain tax positions ($11.6 million and
$13.2 million, respectively).
The Tax Act made significant changes to the U.S. Internal Revenue Code including a reduction in the
corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, generally providing
for an exemption from federal income tax for dividends received from foreign subsidiaries, and imposing a
one-time transition tax on the deemed repatriation of cumulative foreign earnings and profits as of
December 31, 2017. We have calculated our best estimate of the impact of the Tax Act on our 2017
effective income tax rate based upon available information, limited timing and our understanding of the Tax
Act, as well as the facts and guidance available at our assessment date of January 22, 2018. The
Company has recorded a provisional net benefit of $25.7 million related to the Tax Act in the fourth quarter
of 2017, the period in which it was enacted. This provisional amount includes an estimated reduction in the
Company’s net deferred tax liabilities of $62.4 million resulting from the decrease in the federal income tax
rate; an estimated deemed repatriation tax liability of $28.5 million; and an estimated net increase to our
provision for taxes on foreign earnings not considered permanently reinvested of $8.2 million. The impact
of the Tax Act may differ from these estimates, possibly materially, due to, among other things, refinement
of calculations due to additional analysis, changes in interpretations, assumptions made and additional
guidance that may be issued. Any subsequent adjustment, related to the aforementioned, will be recorded
in current tax expense when such analysis is completed or such guidance is issued.
Income from continuing operations
Net income from continuing operations was $475.3 million in 2017 compared to $412.4 million in 2016. The
increase of $62.9 million was primarily due to higher operating income.
(Loss) income from discontinued operations
The loss from discontinued operations of $2.6 million in 2017 primarily related to the prior sale of the
Waterloo tool storage business and Simonton window businesses. The income from discontinued
operations of $0.8 million in 2016 included the effect of tax adjustments relating to the Waterloo business.
Results By Segment
Cabinets
Net sales increased $69.3 million, or 2.9%, due to higher sales volume driven primarily by continuing
improvement in the U.S. home products market and the benefit from new product introductions, price
increases to help mitigate cumulative raw material cost increases and a $3 million benefit from favorable
foreign exchange. These benefits were partially offset by unfavorable mix and higher sales promotions.
Operating income increased $9.4 million, or 3.6%, due to the increase in net sales and productivity
improvements. These benefits were partially offset by unfavorable mix, higher employee-related costs,
higher labor inflation and higher transportation costs.
Plumbing
Net sales increased $186.4 million, or 12.1%, due to higher sales volume driven by continuing improvement
in the U.S. home products market and the benefit from new product introductions, higher sales in
international markets, principally China, and the benefit from the acquisitions of Riobel, ROHL and Perrin &
Rowe in 2016 as well as Shaws and Victoria +Albert in 2017. These benefits were partially offset by higher
sales rebates.
Operating income increased $37.3 million, or 11.4%, due to higher net sales, productivity improvements
and favorable mix as well as a $4 million benefit from favorable foreign exchange. These benefits were
partially offset by employee-related costs, higher raw materials costs and higher advertising costs.
24
Doors
Net sales increased $29.9 million, or 6.3%, due to higher sales volume driven primarily by continuing
improvement in the U.S. home products market and the benefit from new product introductions and price
increases to help mitigate cumulative raw material cost increases.
Operating income increased $12.6 million, or 20.4%, due to higher net sales, the benefits from productivity
improvements and leveraging sales on our existing fixed cost base.
Security
Net sales increased $12.8 million, or 2.2%, due to higher sales volume and price increases to help mitigate
cumulative raw material cost increases. These benefits were partially offset by the impact of our exiting of
two product lines in our commercial distribution channel.
Operating income increased $5.8 million, or 8.7%, primarily due to the higher net sales, the benefits from
productivity improvements, lower restructuring and other charges (approximately $6 million) relating to the
completion in 2016 of a manufacturing facility relocation, favorable foreign exchange and the related cost
savings resulting from the facility relocation.
Corporate
Corporate expenses increased by $5.7 million mainly due to the impairment of a long lived asset and
recognition of an actuarial gain versus an actuarial loss in 2016 and higher defined benefit plan income
during 2017 compared to 2016.
(In millions)
General and administrative expense
Defined benefit plan income
Defined benefit plan recognition of actuarial gains (losses)
Total Corporate expenses
2017
2016
$(90.3)
4.2
0.5
$(85.6)
$(80.9)
2.9
(1.9)
$(79.9)
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.
2016 Compared to 2015
Total Fortune Brands
Net sales
Net sales increased $405.5 million, or 9%. The increase was due to higher sales volume primarily from the
continuing improvement in U.S. market conditions for home products, the benefit from the acquisitions in
our Cabinets and Plumbing segments and price increases to help mitigate cumulative raw material cost
increases and the effect of unfavorable foreign exchange. These benefits were partially offset by
unfavorable foreign exchange of approximately $27 million and higher sales rebates.
Cost of products sold
Cost of products sold increased $182.8 million, or 6%, due to higher net sales, including the impact of the
acquisitions in our Cabinets and Plumbing segments, partially offset by the benefit of productivity
improvements.
25
Selling, general and administrative expenses
Selling, general and administrative expenses increased $82.3 million, or 8%, due to the impact of the
acquisitions in our Cabinets and Plumbing segments and higher employee-related costs, partially offset by
the absence of Norcraft transaction costs in 2016 ($15.1 million in 2015).
Amortization of intangible assets
Amortization of intangible assets increased $6.5 million due to the recognition of certain intangible assets
from the acquisitions in our Cabinets and Plumbing segment.
Restructuring charges
Restructuring charges of $13.9 million in 2016 primarily related to severance costs and charges associated
with the relocation of a manufacturing facility within our Security segment. Restructuring charges of
$16.6 million in 2015 primarily related to the same relocation of a manufacturing facility, including
severance costs within our Security segment as well as severance costs to relocate a Plumbing
manufacturing facility in China.
Operating income
Operating income increased $136.6 million or 28%. Operating income increased due to higher net sales,
including the benefit from acquisitions and productivity improvements. These benefits were partially offset
by higher employee-related costs, higher advertising costs and higher sales rebates and approximately
$6 million of unfavorable foreign exchange. Operating income in 2015 was also impacted by $15.1 million
of Norcraft transaction costs, which did not recur in 2016.
Interest expense
Interest expense increased $17.2 million to $49.1 million due to higher average borrowings and higher
average interest rates.
Other expense, net
Other expense, net, was expense of $1.5 million in 2016 compared to expense of $4.3 million in 2015. The
change was principally due to favorable foreign currency adjustments.
Income taxes
The effective income tax rates for 2016 and 2015 were 29.2% and 33.4%, respectively. The effective
income tax rates for 2016 and 2015 were favorably impacted by the tax benefit attributable to the Domestic
Production Activity (Internal Revenue Code Section 199) Deduction ($13.0 million and $12.5 million,
respectively) and favorable tax rates in foreign jurisdictions ($7.6 million and $8.7 million, respectively),
offset by state and local taxes and increases to uncertain tax positions ($13.2 million and $4.7 million,
respectively). The 2016 effective income tax rate was favorably impacted by a tax benefit related to the
adoption of ASU 2016-09, the new accounting guidance relating to share-based compensation ($27.8
million). The 2015 effective income tax rate was unfavorably impacted by $2.4 million related to
nondeductible acquisition costs.
Income from continuing operations
Net income from continuing operations was $412.4 million in 2016 compared to $306.5 million in 2015 due
to higher operating income.
26
Income (loss) from discontinued operations
Income from discontinued operations was $0.8 million and $9.0 million in 2016 and 2015, respectively. The
discontinued operations in 2016 includes the effect of tax adjustments relating to the Waterloo business.
The discontinued operations in 2015 consist of the results of operations of Waterloo and the after-tax gain
associated with the sale of the business.
Results By Segment
Cabinets
Net sales increased $224.4 million, or 10%, due to the benefit of the Norcraft acquisition, the benefit of
price increases to help mitigate cumulative raw material cost increases and higher sales volume including
the impact of new product introductions. These benefits were partially offset by approximately $6 million of
unfavorable foreign exchange.
Operating income increased $65.4 million, or 34%, due to higher net sales including the benefit of the
Norcraft acquisition and productivity improvements. These benefits were partially offset by higher
employee-related costs.
Plumbing
Net sales increased $119.9 million, or 8%, due to higher sales volume in the U.S. driven by improving U.S.
market conditions and new product introductions, the benefit from the acquisitions of Riobel, ROHL and
Perrin & Rowe and price increases to help mitigate cumulative raw material cost increases and the effect of
unfavorable foreign exchange. These benefits were partially offset by higher sales rebates and
approximately $18 million of unfavorable foreign exchange.
Operating income increased $40.9 million, or 14%, due to higher net sales including the benefits of the
acquisitions of Riobel, ROHL and Perrin & Rowe, as well as productivity improvements. These benefits
were partially offset by higher employee-related costs, higher advertising costs and approximately
$7 million of unfavorable foreign exchange. Operating income in 2016 was also favorably impacted by
lower restructuring and other charges ($4.0 million impact) primarily related to severance costs to relocate
a facility in China.
Doors
Net sales increased $33.9 million, or 8%, due to higher sales volume driven primarily by improved
conditions in the U.S. home products market, new product introductions, price increases to help mitigate
cumulative raw material cost increases and favorable mix.
Operating income increased $17.9 million, or 41%, due to higher net sales, the benefits of productivity
improvements and approximately $2 million of favorable foreign exchange. These benefits were partially
offset by higher employee related costs.
Security
Net sales increased $27.3 million, or 5%, due primarily to higher sales volume in the U.S. and Europe and
price increases to help mitigate cumulative raw material cost increases. These benefits were partially offset
by the impact of exiting certain product lines and approximately $3 million of unfavorable foreign
exchange.
Operating income increased $10.7 million, or 19% due to higher net sales and the benefits of productivity
improvements. These benefits were partially offset by the impact of approximately $3 million of unfavorable
foreign exchange.
27
Corporate
Corporate expenses in 2016 benefited from the absence of transaction costs associated with the Norcraft
acquisition ($15.1 million in 2015). This benefit was offset by higher employee-related costs and lower
defined benefit plan income.
(In millions)
General and administrative expense
Defined benefit plan income
Defined benefit plan recognition of actuarial losses
Norcraft transaction costs(a)
Total Corporate expenses
2016
2015
$(80.9)
2.9
(1.9)
—
$(79.9)
$(70.1)
6.1
(2.5)
(15.1)
$(81.6)
(a) Represents external costs directly related to the acquisition of Norcraft and primarily includes expenditures for banking, legal,
accounting and other similar services.
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.
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 are cash on hand,
cash flows from operating activities, availability under our credit facility and debt issuances in the capital
markets. 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 2017, our
Board of Directors increased the quarterly cash dividend by 11% to $0.20 per share of our common stock.
Our Board of Directors will continue to evaluate dividend payment opportunities on a quarterly basis. There
can be no assurance as to when and if future dividends will be paid, and at what level, because the
payment of dividends is dependent on our financial condition, results of operations, cash flows, capital
requirements and other factors deemed relevant by 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
program, 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 June 2016, the Company amended and restated its credit agreement to combine and rollover the
existing revolving credit facility and term loan into a new standalone $1.25 billion revolving credit facility.
This amendment and restatement of the credit agreement was a non-cash transaction for the Company.
Terms and conditions of the credit agreement, including the total commitment amount, essentially
remained the same as under the 2011 credit agreement. The revolving credit facility will mature in June
2021 and borrowings thereunder will be used for general corporate purposes. On December 31, 2017 and
December 31, 2016, our outstanding borrowings under these facilities were $615.0 million and
$540.0 million, respectively. At December 31, 2017 and December 31, 2016, the current portion of long-
term debt was zero. Interest rates under the facility are variable based on LIBOR at the time of the
28
borrowing and the Company’s long-term credit rating and can range from LIBOR + 0.9% to LIBOR + 1.5%.
As of December 31, 2017, we were in compliance with all covenants under this facility. As a result of the
refinancing, we wrote off prepaid debt issuance costs of approximately $1.3 million as of June 30, 2016.
We retrospectively adopted ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” on
January 1, 2016, resulting in the reclassification of approximately $3 million of debt issuance costs from
other current assets and other assets to long-term debt as of December 31, 2015. Adoption of this
guidance did not impact the Company’s equity, results of operations or cash flows.
On December 8, 2017, our Board of Directors authorized the repurchase of up to $250 million of shares of
our common stock over the two years ending December 8, 2019. As of December 31, 2017, total remaining
available share repurchase authorization was $558.4 million which included amounts pursuant to the Board
of Directors authorization on February 16, 2016 for the repurchase of up to $400.0 million of our common
stock over the two years ended February 16, 2018. The share repurchase programs do not obligate us to
repurchase any specific dollar amount or number of shares and may be suspended or discontinued at any
time. In 2017, we repurchased 3.4 million shares of our outstanding common stock under the Company’s
share repurchase programs for $214.8 million.
We currently have uncommitted bank lines of credit in China, which provide for unsecured borrowings for
working capital of up to $23.5 million and $25.7 million in aggregate as of December 31, 2017 and 2016,
respectively, of which zero were outstanding, as of December 31, 2017 and 2016. The weighted-average
interest rates on these borrowings were zero, 1.5% and 1.0% in 2017, 2016 and 2015 respectively.
Acquisitions and divestitures in 2017, 2016 and 2015 include:
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>
>
>
>
In October 2017, the Company acquired Victoria + Albert, a UK manufacturer of luxury freestanding
tubs and basins. In July 2017, we acquired Shaws, a UK-based luxury plumbing products company
that specializes in manufacturing and selling fireclay sinks. The combined purchase price was
approximately $125 million, net of cash acquired and deferred acquisition payments and subject to
certain post-closing adjustments. The results of operations of the acquired companies are included in
the Plumbing segment from the date of acquisitions. We financed the transactions using cash on hand
and borrowings under our existing credit facility.
In September 2016, we acquired ROHL, a California-based luxury plumbing company. We also
acquired Perrin & Rowe, a UK manufacturer and designer of luxury kitchen and bathroom plumbing
products. The total combined purchase price was approximately $166 million, subject to certain post-
closing adjustments. We financed the transaction using cash on hand and borrowings under our
existing credit facility.
In May 2016, we acquired Riobel, a Canadian plumbing company for a purchase price of $94.6 million
in cash, subject to certain post-closing adjustments. We financed the transaction using cash on hand
and borrowings under our existing credit facilities.
In September 2015, we completed the sale of the Waterloo tool storage business for approximately
$14 million in cash, subject to certain post-closing adjustments.
In May 2015, we acquired Norcraft, a leading manufacturer of kitchen and bathroom cabinetry, for a
purchase price of $648.6 million. We financed this transaction using cash on hand and borrowings
under our existing credit facility.
In 2017, we invested approximately $40 million in incremental capacity to support long-term growth
potential. We expect capital spending in 2018 to be in the range of $150 to $160 million.
On December 31, 2017, we had cash and cash equivalents of $323.0 million, of which $260.5 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
tax expense on those funds that are repatriated.
29
Our operating cash flows are significantly impacted by the seasonality of our businesses. We typically
generate most of our operating cash flow in the third and fourth quarters of each year.
In June 2015, we issued $900 million of Senior Notes in a registered public offering. The Senior Notes
consist of two tranches: $400 million of five-year notes due 2020 with a coupon of 3% and $500 million of
ten-year notes due 2025 with a coupon of 4%. We used the proceeds from the Senior Notes offering to pay
down our revolving credit facility and for general corporate purposes. On December 31, 2017, the
outstanding amount of the Senior Notes, net of underwriting commissions and price discounts, was
$892.6 million.
Cash Flows
Below is a summary of cash flows for the years ended December 31, 2017, 2016 and 2015.
(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
Net increase in cash and cash equivalents
2017
2016
2015
$ 600.3
(287.7)
(250.1)
9.0
$ 650.5
(385.1)
(250.4)
(2.0)
$ 429.2
(766.6)
398.8
(14.8)
$ 71.5
$ 13.0
$ 46.6
Net cash provided by operating activities was $600.3 million in 2017 compared to $650.5 million in 2016
and $429.2 million in 2015. The $50.2 million decrease in cash provided by operating activities from 2017
to 2016 was primarily due to higher build in working capital, primarily driven by higher inventory purchases
in 2017, partially offset by a higher net income. The $221.3 million increase in cash provided by operating
activities from 2015 to 2016 was primarily due to a reduction in working capital in 2016 compared to 2015
and higher net income.
Net cash used in investing activities was $287.7 million in 2017 compared to $385.1 million in 2016 and
$766.6 million in 2015. The decrease of $97.4 million from 2016 to 2017 was primarily due lower cost of
acquisitions of $115.1 million, partially offset by $15.7 million of higher capital expenditures. The decrease
of $381.5 million from 2015 to 2016 was primarily due the decrease in cost of acquisitions of $413.1 million,
partially offset by $20.8 million of higher capital spending.
Net cash used in financing activities was $250.1 million in 2017 compared to net cash used in financing
activities of $250.4 million in 2016 and net cash provided by in financing activities of $398.8 million in 2015.
The change of $649.2 million in 2016 compared to 2015 was primarily due to $372.8 million of higher share
repurchases and lower net borrowings of $240.8 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 2017, 2016 and 2015, we contributed
$28.4 million, zero and $2.3 million, respectively, to qualified pension plans. In 2018, we expect to make
pension contributions of approximately $12.8 million. As of December 31, 2017, the fair value of our total
pension plan assets was $656.6 million, representing funding of 79% 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 Canada, China, Mexico, the United Kingdom,
France, Australia and Japan. Therefore, changes in the value of the related currencies affect our financial
statements when translated into U.S. dollars.
30
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, 2017.
(In millions)
Contractual Obligations
Long-term debt
Interest payments on long-term debt(a)
Operating leases
Purchase obligations(b)
Deferred acquisition payments(c)
Defined benefit plan contributions(d)
Total
Payments Due by Period as of December 31, 2017
Total
Less than
1 year
1-3 years
4-5 years
$1,507.6 $ — $398.3 $615.0
48.0
28.9
2.9
—
—
238.0
158.2
397.3
33.0
12.9
49.0
31.0
371.3
13.7
12.9
91.0
47.6
21.1
19.3
—
$2,347.0 $477.9 $577.3 $694.8
After
5 years
$494.3
50.0
50.7
2.0
—
—
$597.0
(a)
Interest payments on long-term debt were calculated using the borrowing rate in effect on December 31, 2017.
(b) Purchase obligations include contracts for raw material and finished goods purchases; selling and administrative services; and capital expenditures.
(c)
In addition to deferred acquisition payments relating to Victoria + Albert and Shaws, the acquisition of Victoria + Albert includes certain payments up
to $9.6 million that are contingent on continued employment for one year after the acquisition date.
(d) Pension and postretirement contributions cannot be determined beyond 2018.
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, $87.5 million of
unrecognized tax benefits as of December 31, 2017 have been excluded from the Contractual Obligations
table above. In addition, we are still evaluating our options regarding the timing of the payment of the
deemed repatriation tax liability resulting from the Tax Act. Therefore we have excluded the provisional
$28.5 million deemed repatriation tax liability 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, 2017. Other corporate
commercial commitments include standby letters of credit of $42.9 million, in the aggregate, all of which
expire in less than one year, and surety bonds of $5.1 million, of which $5.0 million matures in less than 1
year and $0.1 million matures in 1-3 years. These contingent commitments are not expected to have a
significant impact on our liquidity.
Off-Balance Sheet Arrangements
As of December 31, 2017, 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. For additional information on this risk, see Item 7A “Quantitative and Qualitative
Disclosures about Market Risk” in this Annual Report on Form 10-K.
Derivative Financial Instruments
In accordance with 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
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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 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. If the derivative is designated as an
effective economic hedge of the net investment in a foreign operation, the changes in the fair value of the
derivative is reported in the cumulative translation adjustment section of OCI. Similar to foreign currency
translation adjustments, these changes in fair value are recognized in earnings only when realized upon
sale or upon complete or substantially complete liquidation of the investment in the foreign entity.
Deferred currency gains/(losses) of $0.4 million, (3.5) million and $3.6 million (before tax impact) were
reclassified into earnings for the year ended December 31, 2017, 2016 and 2015, respectively. Based on
foreign exchange rates as of December 31, 2017, we estimate that $3.0 million of net currency derivative
losses included in OCI as of December 31, 2017 will be reclassified to earnings within the next twelve
months.
Recently Issued Accounting Standards
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2014-09, which clarifies the accounting for revenue arising from contracts with customers and
specifies the disclosures that an entity should include in its financial statements. The standard is effective
for annual reporting periods beginning after December 15, 2017 (calendar year 2018 for Fortune Brands).
During 2016, the FASB issued certain amendments to the standard relating to the principal versus agent
guidance, accounting for licenses of intellectual property and identifying performance obligations as well
as the guidance on transition, collectability, noncash consideration and the presentation of sales and other
similar taxes. The effective date and transition requirements for these amendments are the same as those
of the original ASU. Our key considerations pursuant to ASU 2014-09 during the assessment period were
the control of goods (i.e., timing of revenue recognition), separate performance obligations and customer
rights of return (i.e., the reclassification on the balance sheet of the customer rights of return from accounts
receivable to a refund liability as well as the recognition of a corresponding asset). We will adopt the new
standard using the modified retrospective method beginning January 1, 2018. The adoption of this
standard will not have a material effect on our financial statements.
Leases
In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize almost all leases on
their balance sheet as a “right-of-use” asset and lease liability but recognize related expenses in a manner
similar to current accounting. The guidance also eliminates current real estate-specific provisions for all
entities. The standard is effective for annual periods beginning after December 15, 2018 (calendar year
2019 for Fortune Brands) and earlier application is permitted. We are assessing the impact the adoption of
this standard will have on our financial statements.
Clarifying Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
In May 2017, the FASB issued ASU 2017-05 that clarifies the scope and application of various standards
for the sale of nonfinancial assets (e.g. PP&E including real estate, intangible assets, materials and
supplies). The standard distinguishes between a sale to customer vs non-customer. Sales to customers are
in scope of the new revenue standard. It also clarifies a derecognition model for nonfinancial assets that do
not represent a business. We will adopt the new standard beginning January 1, 2018 consistent with the
effective date for the new revenue recognition standard. The adoption of this standard will not have a
material effect on our financial statements.
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Stock Compensation Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017-09, which clarifies when changes to the terms or conditions of a
share-based payment award must be accounted for as modifications. The new guidance provides a relief
to entities that make non-substantive changes to their share-based payment awards and will result in fewer
changes to the terms of an award being accounted for as modifications. We will adopt the new standard
beginning January 1, 2018. The adoption of this standard will not have a material effect on our financial
statements.
Presentation of Net Periodic Pension and Postretirement Cost
In March 2017, the FASB issued ASU 2017-07, which requires entities to present the service cost
component of the net periodic benefit cost in the same income statement line item(s) as other employee
compensation costs arising from services rendered during the period. In addition, only the service cost
component will be eligible for capitalization in assets. Companies will present the other components (i.e.,
amortization of prior service cost/credits, interest cost, expected return on plan assets and actuarial gains/
losses) separately from the line item(s) that includes the service cost and outside of any subtotal of
operating income. We will retrospectively adopt the new standard beginning January 1, 2018. The adoption
of this standard will not have a material effect on our financial statements.
Clarifying the Definition of a Business
In January 2017, the FASB issued ASU 2017-01, which changes the definition of a business to assist
entities with evaluating when a set of transferred assets and activities is a business and therefore business
combination guidance would apply. The new standard requires an entity to evaluate if substantially all of
the fair value of the gross assets acquired is concentrated in a single identifiable asset (i.e., a business) or
a group of similar identifiable assets (i.e., not a business). The guidance also requires a business to
include at least one substantive process and narrows the definition of outputs (e.g., revenues with
customers). We will adopt the new standard beginning January 1, 2018. The adoption of this standard will
not have a material effect on our financial statements.
Restricted Cash
In November 2016, the FASB issued ASU 2016-18, according to which entities are no longer required to
present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents
in the statement of cash flows. The prior standard did not address the classification of activity related to
restricted cash and restricted cash equivalents in the statement of cash flows and this has resulted in
diversity in cash flows presentation. We will adopt the new standard beginning January 1, 2018. The
adoption of this standard will not have a material effect on our financial statements.
Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU 2016-16, which requires companies to account for the income tax
effects of intercompany sales and transfers of assets other than inventory (e.g., intangible assets) when the
transfer occurs. Under the current guidance companies are required to defer the income tax effects of
intercompany transfers of assets until the asset has been sold to an outside party or otherwise recognized
(e.g., depreciated, amortized or impaired). We will adopt the new standard beginning January 1, 2018
using a “modified retrospective” (i.e., with a cumulative adjustment to retained earnings at adoption). The
adoption of this standard will not have a material effect on our financial statements.
Classification of Certain Cash Receipts and Cash Payments
In September 2016 the FASB issued ASU 2016-15, which changes how an entity classifies certain cash
receipts and cash payments on its statement of cash flows. The key changes that may potentially impact
33
our financial statements include the following: 1) Cash payments for debt prepayment or extinguishment
costs would be classified as financing cash outflows; 2) Contingent consideration payments that are not
made within three months after the consummation of a business combination would be classified as
financing (if the payment is made up to the acquisition date fair value of liability) or operating outflows (if in
excess of acquisition fair value). Cash payments made “soon after” the consummation of a business
combination generally would be classified as cash outflows for investing activities; 3) Insurance settlement
proceeds would be classified based on the nature of the loss; and 4) Company-owned life insurance
settlement proceeds would be presented as investing cash inflows, and premiums would be classified as
investing or operating cash outflows, or a combination of both. We will retrospectively adopt the new
standard beginning January 1, 2018. The adoption of this standard will not have a material effect on our
financial statements.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01, which requires entities to measure investments in
unconsolidated entities (other than those accounted for using the equity method of accounting) at fair value
through the income statement. There will no longer be an available-for-sale classification (with changes in
fair value reported in Other Comprehensive Income). In addition, the cost method is eliminated for equity
investments without readily determinable fair values. We will adopt the new standard beginning January 1,
2018. The adoption of this standard will not have a material effect on our financial statements.
Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued ASU 2017-12 that amends current hedge accounting model. The new
standard eliminates the requirement to separately measure and report hedge ineffectiveness and generally
requires the entire change in the fair value of a hedging instrument to be presented in the same income
statement line as the hedged item (which is consistent with our current practice). The change in fair value
for qualifying cash flow and net investment hedges will be included in Other comprehensive income (until
they are reclassified into the income statement). The standard also eases certain documentation and
assessment requirements and modifies the accounting for components excluded from the assessment of
hedge effectiveness. The standard is effective as of January 1, 2019 and earlier application is permitted.
We are assessing the impact the adoption of this standard will have on our financial statements.
Financial Instruments — Credit Losses
In June 2016, the FASB issued ASU 2016-13, which changes the impairment model for most financial
assets and certain other instruments that are not measured at fair value through net income. The new
guidance applies to most financial assets measured at amortized cost, including trade and other
receivables and loans as well as off-balance-sheet credit exposures (e.g., loan commitments and standby
letters of credit). The standard will replace the “incurred loss” approach under the current guidance with an
“expected loss” model that requires an entity to estimate its lifetime “expected credit loss.” The standard is
effective January 1, 2020 and early application is permitted beginning January 1, 2019. We are assessing
the impact the adoption of this standard will have 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 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 $3.3 million and $7.4 million as of
December 31, 2017 and 2016, 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. In
accordance with this policy, our inventory provision was $45.0 million and $36.4 million as of December 31,
2017 and 2016, respectively.
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.
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 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 uncertain and is subject to a number of factors,
such as employment, home prices, credit availability, new home starts and the rate of home foreclosures.
35
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 based on that difference, if any.
The significant assumptions that are used to determine the estimated fair value for goodwill impairment
testing include 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, plans for ongoing tradename support and
promotion, customer attrition rates, and other relevant factors. 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 of our indefinite-lived tradenames 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. We 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.
In 2017, 2016 and 2015, we did not record any asset impairment charges in operating income associated
with goodwill or indefinite-lived intangible assets. As of December 31, 2017, the fair value of two
tradenames in the Cabinets segment exceeded their carrying values by less than 10%. Accordingly, a
reduction in the estimated fair value of these tradenames could trigger an impairment. As of December 31,
2017, the total carrying value of these tradenames was $217.8 million.
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.
Service cost for 2017 relates to benefit accruals in an hourly Union defined benefit plan in our Security
segment. Benefit accruals under all other defined benefit pension plans were frozen as of December 31,
2016.
36
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 (gains) losses was $(0.5) million, $1.9 million and
$2.5 million in 2017, 2016 and 2015, respectively. The total net actuarial losses in accumulated other
comprehensive income for all defined benefit plans were $67.4 million as of December 31, 2017,
compared to $73.4 million as of December 31, 2016.
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, 2017 and 2016 was 6.4% and 6.6%, 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, 2017 and 2016 was 3.8% and 4.3%, respectively.
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, 2017, 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 8.4% for post-65 retirees, declining until reaching an ultimate assumed rate of increase of
4.5% per year in 2026. As of December 31, 2016, for postretirement medical and prescription drugs in the
next year, our assumption was an assumed rate of increase of 7.3% for pre-65 retirees and 8.2% for
post-65 retirees, declining until reaching an ultimate assumed rate of increase of 4.5% per year in 2026.
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
Actuarial (gain) loss component of expense above
Amortization of prior service credit component of
2017
$(2.5)
0.9
(6.5)
(1.4)
2016
2015
$ 6.8
—
(11.3)
1.9
$ 8.0
2.9
(13.2)
(0.4)
expense above
(5.1)
(13.5)
(13.5)
The actuarial gains in 2017 were principally due to normal re-measurement of prior year defined benefit
plan liabilities. The actuarial losses in 2016 were principally due to the re-measurement relating to a retiree
medical plan. The actuarial losses in 2015 were due to lower asset returns, partially offset by higher
37
discount rates. Discount rates in 2017 used to determine benefit obligations decreased by an average of
50 basis points for pension benefits. Discount rates for postretirement benefits remained the same in 2017.
Discount rates in 2016 used to determine benefit obligations decreased by an average of 30 basis points
for pension benefits and an average of 70 basis points for postretirement benefits. Discount rates in 2015
used to determine benefit obligations increased by an average of 40 basis points for pension benefits and
an average of 50 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 2017 was 16.3%
compared to an actuarial assumption of an average 6.4% expected return. Our actual return on plan assets
in 2016 was 10.0% compared to an actuarial assumption of an average 6.6% 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 $27 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 $1.6 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 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, 2017, we had
liabilities for unrecognized tax benefits pertaining to uncertain tax positions totaling $87.5 million. It is
reasonably possible that the unrecognized tax benefits may decrease in the range of $1.5 million to
$21.5 million in the next 12 months primarily as a result of the conclusion of U.S. federal, state and foreign
income tax proceedings.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued regarding the
application of U.S. GAAP to situations where a registrant does not have the necessary information
available, prepared or analyzed (including computations) in reasonable detail to complete the accounting
for certain income tax effects of the Tax Act. In accordance with SAB 118, we have calculated and
included our best estimate of the impact of the Tax Act in our year end income tax provision. In
accordance with our understanding of the Tax Act and guidance available, a provisional net tax benefit of
$25.7 million was recorded in the fourth quarter of 2017. This provisional amount includes a tax benefit of
$62.4 million due to the remeasurement of the Company’s net deferred tax liabilities, tax expense on
38
deemed repatriation of foreign earnings of $28.5 million and tax expense of $8.2 million on foreign earnings
not considered permanently reinvested. The impact of the Tax Act may differ from these estimates,
possibly materially, due to, among other things, refinement of calculations due to additional analysis,
changes in interpretations, assumptions made and additional guidance that may be issued. Any
subsequent adjustment, related to the aforementioned, will be recorded in current tax expense when such
analysis is completed or such guidance is issued.
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 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.
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, 2017, eleven such instances have not been dismissed, settled or otherwise resolved. In
2017, none of our subsidiaries were identified as a PRP in a new instance and no instances were settled,
dismissed or otherwise resolved. 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,
39
cash flows or financial condition. At December 31, 2017 and 2016, we had accruals of $0.7 million and
$1.0 million, respectively, relating to environmental compliance and cleanup 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, 2017, would be $6.2 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 certain 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 the VAR model was $1.0 million at
December 31, 2017. 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.
40
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
Loss on sale of product line (see Note 4)
Asset impairment charges
Restructuring charges
OPERATING INCOME
Interest expense
Other expense, 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
2017
2016
2015
$5,283.3
3,350.8
1,194.8
31.7
2.4
3.2
8.3
$4,984.9
3,180.3
1,129.9
28.1
—
—
13.9
$4,579.4
2,997.5
1,047.6
21.6
—
—
16.6
692.1
49.4
7.9
634.8
159.5
475.3
(2.6)
472.7
0.1
632.7
49.1
1.5
582.1
169.7
412.4
0.8
413.2
—
496.1
31.9
4.3
459.9
153.4
306.5
9.0
315.5
0.5
NET INCOME ATTRIBUTABLE TO FORTUNE BRANDS
$ 472.6
$ 413.2
$ 315.0
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
$
$
$
$
$
3.10
(0.02)
3.08
3.05
(0.02)
3.03
153.2
155.8
0.74
$
$
$
$
$
2.67
0.01
2.68
2.61
0.01
2.62
154.3
157.8
0.66
$
$
$
$
$
1.92
0.05
1.97
1.88
0.05
1.93
159.5
163.0
0.58
See Notes to Consolidated Financial Statements.
41
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 losses (gains) included in
net income
Unrealized (losses) gains on derivatives
Defined benefit plans:
Prior service credit (cost) arising during period
Prior service credit (cost) recognition due to settlement and curtailment
Net actuarial gain (loss) arising during period
Less: amortization of prior service credit included in net periodic
pension cost
Defined benefit plans
Other comprehensive income (loss), before tax
Income tax benefit (expense) related to items of other
comprehensive income(a)
Other comprehensive income (loss), net of tax
COMPREHENSIVE INCOME
Less: comprehensive income attributable to noncontrolling interest
COMPREHENSIVE INCOME ATTRIBUTABLE TO
FORTUNE BRANDS
For years ended December 31
2017
2016
2015
$472.7
$413.2
$315.5
33.8
(14.7)
(44.3)
(1.8)
(6.7)
6.8
(0.9)
(2.7)
—
—
6.2
(5.1)
1.1
32.2
3.5
(3.2)
12.1
0.1
(1.9)
(13.5)
(3.2)
(21.1)
(3.6)
3.2
(0.1)
(1.0)
6.3
(13.4)
(8.2)
(49.3)
0.5
32.7
505.4
—
1.7
3.5
(19.4)
(45.8)
393.8
—
269.7
0.5
$505.4
$393.8
$269.2
(a)
Income tax benefit (expense) on unrealized (losses) gains on derivatives of $0.9 million, $0.5 million and $(0.5) million and on
defined benefit plans of $(0.4) million, $1.2 million and $4.0 million in 2017, 2016 and 2015, respectively.
See Notes to Consolidated Financial Statements.
42
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
TOTAL CURRENT ASSETS
Property, plant and equipment, net of accumulated depreciation
Goodwill
Other intangible assets, net of accumulated amortization
Other assets
TOTAL ASSETS
LIABILITIES AND EQUITY
Current liabilities
Accounts payable
Other current liabilities
TOTAL CURRENT LIABILITIES
Long-term debt
Deferred income taxes
Accrued defined benefit plans
Other non-current liabilities
TOTAL LIABILITIES
Commitments (Note 17) and Contingencies (Note 22)
Equity
Common stock(a)
Paid-in capital
Accumulated other comprehensive loss
Retained earnings
Treasury stock
TOTAL FORTUNE BRANDS EQUITY
Noncontrolling interests
TOTAL EQUITY
December 31
2017
2016
$
323.0
$
251.5
555.3
580.8
142.6
1,601.7
740.0
1,912.0
1,162.4
95.3
550.7
531.1
111.9
1,445.2
662.5
1,833.8
1,107.0
80.0
$ 5,511.4
$ 5,128.5
428.8
478.0
906.8
1,507.6
166.8
175.9
153.2
2,910.3
1.7
2,724.9
(39.2)
1,174.2
(1,262.1)
2,599.5
1.6
2,601.1
393.8
449.0
842.8
1,431.1
163.5
216.2
111.9
2,765.5
1.7
2,653.8
(71.9)
814.6
(1,036.7)
2,361.5
1.5
2,363.0
TOTAL LIABILITIES AND EQUITY
$ 5,511.4
$ 5,128.5
(a) Common stock, par value $0.01 per share, 179.8 million shares and 177.7 million shares issued at December 31, 2017 and 2016,
respectively.
See Notes to Consolidated Financial Statements.
43
Consolidated Statements of Cash Flows
Fortune Brands Home & Security, Inc. and Subsidiaries
(In millions)
OPERATING ACTIVITIES
Net income
Non-cash expense (income):
Depreciation
Amortization of intangibles
Stock-based compensation
Restructuring charges
Loss (gain) on sale of property, plant and equipment
Loss on sale of product line
Loss on sale of discontinued operation
Asset impairment charges
Recognition of actuarial (gains) losses
Deferred taxes
Amortization of deferred financing costs
Changes in assets and liabilities including effects subsequent to acquisitions:
Decrease (increase) in accounts receivable
(Increase) decrease in inventories
Increase (decrease) in accounts payable
(Increase) decrease in other assets
(Decrease) increase in accrued taxes
Increase in accrued expenses and other liabilities
NET CASH PROVIDED BY OPERATING ACTIVITIES
INVESTING ACTIVITIES
Capital expenditures(a)
Proceeds from the disposition of assets
Proceeds from sale of product line
Proceeds from sale of discontinued operation
Cost of acquisitions, net of cash acquired
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
Employee withholding taxes paid related to stock-based compensation
Deferred acquisition payments
Dividends to stockholders
Treasury stock purchases
Other financing activities, net
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
Effect of foreign exchange rate changes on cash
NET INCREASE (DECREASE) 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:
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
2017
2016
2015
$ 472.7
$ 413.2
$
315.5
98.6
31.7
43.0
—
0.9
2.4
—
15.3
(0.5)
(18.7)
2.0
1.0
(24.8)
24.0
(28.3)
(24.4)
5.4
600.3
(165.0)
0.4
1.5
—
(124.6)
(287.7)
—
640.0
(565.0)
28.5
—
(10.6)
(17.9)
(110.3)
(214.8)
—
(250.1)
9.0
$ 71.5
$ 251.5
$ 323.0
$ 44.4
169.7
—
30.4
94.6
28.1
32.0
(0.1)
1.2
—
—
—
1.9
(25.8)
3.6
(39.1)
52.4
57.6
10.7
0.3
19.9
650.5
(149.3)
3.9
—
—
(239.7)
(385.1)
(1.1)
1,065.0
(805.0)
25.5
—
(10.1)
—
(98.2)
(424.5)
(2.0)
(250.4)
(2.0)
$
13.0
$ 238.5
$ 251.5
$
43.7
172.1
(0.6)
27.6
93.5
21.6
27.6
1.0
(0.5)
—
16.7
—
8.6
(13.6)
0.6
(6.9)
(69.8)
(16.0)
(24.4)
6.7
68.6
429.2
(128.5)
2.5
—
12.2
(652.8)
(766.6)
0.8
1,748.9
(1,250.0)
28.9
30.7
(18.1)
—
(89.5)
(51.7)
(1.2)
398.8
(14.8)
46.6
191.9
238.5
$
$
$
$
26.0
102.2
2.0
25.6
(a) Capital expenditures of $17.2 million, $11.9 million and $20.0 million that have not been paid as of December 31, 2017, 2016 and
2015, respectively, were excluded from the Statement of Cash Flows.
See Notes to Consolidated Financial Statements.
44
Consolidated Statements of Equity
Fortune Brands Home & Security, Inc. and Subsidiaries
(In millions)
Balance at December 31, 2014
Comprehensive income:
Net income
Other comprehensive (loss) income
Stock options exercised
Stock-based compensation
Tax benefit on exercise of stock options
Treasury stock purchase
Dividends ($0.58 per Common share)
Dividends paid to noncontrolling interests
Balance at December 31, 2015
Comprehensive income:
Net income
Other comprehensive (loss) income
Stock options exercised
Stock-based compensation
Treasury stock purchase
Dividends ($0.66 per Common share)
Dividends paid to noncontrolling interests
Other (See Note 10)
Balance at December 31, 2016
Comprehensive income:
Net income
Other comprehensive income (loss)
Stock options exercised
Stock-based compensation
Treasury stock purchase
Dividends ($0.74 per Common share)
Balance at December 31, 2017
Common
Paid-In
Stock
Capital
$1.7 $2,517.3
—
—
—
—
—
—
—
—
—
—
28.9
27.6
28.4
—
—
—
$1.7 $2,602.2
—
—
—
—
—
—
—
—
—
—
25.5
32.0
—
—
—
(5.9)
$1.7 $2,653.8
—
—
—
—
—
—
—
—
28.5
42.6
—
—
$1.7 $2,724.9
Accumulated
Other
Comprehensive
(Loss) Income
Retained
Earnings
Treasury
Stock
$ (6.7) $ 279.5 $ (532.3)
—
(45.8)
—
—
—
—
—
—
—
—
—
(18.1)
—
(51.7)
—
—
$(52.5) $ 501.6 $ (602.1)
315.0
—
—
—
—
—
(92.9)
—
413.2
—
—
(19.4)
—
—
—
—
—
—
— (100.2)
—
—
—
—
—
—
—
(10.1)
(424.5)
—
—
—
$(71.9) $ 814.6 $(1,036.7)
472.6
—
—
32.7
—
—
—
—
—
—
— (113.0)
—
—
—
(10.6)
(214.8)
—
$(39.2) $1,174.2 $(1,262.1)
Non-
controlling
Interests
Total
Equity
$3.6 $2,263.1
315.5
0.5
(45.8)
—
28.9
—
9.5
—
28.4
—
(51.7)
—
(92.9)
—
(1.2)
(1.2)
$2.9 $2,453.8
413.2
—
(19.4)
—
25.5
—
—
21.9
— (424.5)
— (100.2)
(1.4)
(5.9)
$1.5 $2,363.0
(1.4)
—
472.7
0.1
32.7
—
28.5
—
—
32.0
— (214.8)
— (113.0)
$1.6 $2,601.1
See Notes to Consolidated Financial Statements.
45
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 and security applications.
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.
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 wholly-owned subsidiaries. The Company’s
consolidated financial statements are based on a fiscal year ending December 31. Certain of the
Company’s subsidiaries operate on a 52 or 53 week fiscal year ending during the month of December. In
December 2017 and 2016, there were certain transactions that resulted in approximately $38 million and
$49 million of net cash outflows, respectively, relating to payments made to third parties in the normal
course of business during the period between the year-end of our wholly-owned subsidiaries and the
Company’s year-end.
In October 2017, we acquired Victoria +Albert, a UK-based premium brand of standalone bathtubs, sink,
tub fillers, faucets and other accessories. In July 2017, we acquired Shaws Since1897 Limited (“Shaws”), a
UK-based luxury plumbing products company that specializes in manufacturing and selling fireclay sinks
and selling brassware and accessories in partnership with Perrin & Rowe. The financial results of both of
the acquisitions were included in the Company’s consolidated balance sheets as of December 31, 2017
and in the Company’s consolidated statements of income and statements of cash flow beginning in
October 2017 and July 2017, respectively.
In September 2016, we acquired ROHL LLC (“ROHL”) and in a related transaction, we acquired TCL
Manufacturing which gave us ownership of Perrin & Rowe Limited (“Perrin & Rowe”), and in May 2016, we
acquired Riobel Inc (“Riobel”). The financial results of ROHL, Perrin & Rowe and Riobel were included in
the Company’s consolidated balance sheets as of December 31, 2017 and 2016, and in the Company’s
consolidated statements of income and statements of cash flow beginning in September 2016 and May
2016, respectively.
In September 2015, we completed the sale of Waterloo Industries, Inc. (“Waterloo”). In accordance with
Accounting Standards Codification (“ASC”) requirements, the results of operations of Waterloo through the
date of sale, were classified and separately stated as discontinued operations in the accompanying
consolidated statements of income for 2015.
In May 2015, we acquired Norcraft Companies, Inc. (“Norcraft”). The financial results of Norcraft were
included in the Company’s consolidated statements of income and statements of cash flow beginning in
May 2015 and the consolidated balance sheets as of December 31, 2017 and 2016.
The cash flows from discontinued operations for 2017, 2016 and 2015 were not separately classified on the
accompanying consolidated statements of cash flows. Information on Business Segments was revised to
exclude these discontinued operations.
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.
46
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 $3.3 million and $7.4 million as of December 31, 2017 and 2016,
respectively.
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, 2017 and
2016 were $245.6 million (with a current cost of $259.3 million) and $235.5 million (with a current cost of
$244.4 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 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.
During 2017, we recorded an impairment of $5.1 million related to a long lived asset to be disposed of in
selling, general and administrative expenses.
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.
47
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 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 based on that
difference, if any.
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
asset. 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. We 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 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. Service cost for 2017 relates to benefit accruals in an hourly Union defined
benefit plan in our Security segment. Benefit accruals under all other defined benefit pension plans were
frozen as of December 31, 2016.
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
48
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 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.
Insurance Reserves We provide for expenses associated with workers’ compensation and product
liability obligations when such amounts are probable and can be reasonably estimated. The accruals are
adjusted as new information develops or circumstances change that would affect the estimated liability.
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, 2017, we had liabilities for unrecognized tax benefits pertaining to uncertain tax
positions totaling $87.5 million. It is reasonably possible that the unrecognized tax benefits may decrease
in the range of $1.5 million to $21.5 million in the next 12 months primarily as a result of the conclusion of
U.S. federal, state and foreign income tax proceedings.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued regarding the
application of U.S. GAAP to situations where a registrant does not have the necessary information
49
available, prepared or analyzed (including computations) in reasonable detail to complete the accounting
for certain income tax effects of the U.S. Tax Cuts and Jobs Act of 2017 on December 22, 2017 (the “Tax
Act”). In accordance with SAB 118, we have calculated and included our best estimate of the impact of the
Tax Act in our year end income tax provision. In accordance with our understanding of the Tax Act and
guidance available, a provisional net tax benefit of $25.7 million was recorded in the fourth quarter of 2017.
This provisional amount includes a tax benefit of $62.4 million due to the remeasurement of the Company’s
net deferred tax liabilities, tax expense on deemed repatriation of foreign earnings of $28.5 million and tax
expense of $8.2 million on foreign earnings not considered permanently reinvested. The impact of the Tax
Act may differ from these estimates, possibly materially, due to, among other things, refinement of
calculations due to additional analysis, changes in interpretations, assumptions made and additional
guidance that may be issued. Any subsequent adjustment, related to the aforementioned, will be recorded
in current tax expense when such analysis is completed or such guidance is issued.
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.
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 $62.4 million, $44.1 million and $43.2 million for the years ended December 31,
2017, 2016 and 2015, 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 $204.7 million, $197.0 million and $184.6 million in 2017, 2016 and 2015, respectively.
Advertising costs, which amounted to $233.2 million, $199.1 million and $195.4 million in 2017, 2016 and
2015, respectively, are principally expensed as incurred. Advertising costs include product displays,
marketing administration costs, media production costs and point of sale materials. Advertising costs
recorded as a reduction to net sales, primarily cooperative advertising, were $65.6 million, $52.5 million
50
and $63.2 million in 2017, 2016 and 2015, respectively. Advertising costs recorded in selling, general and
administrative expenses were $167.6 million, $146.6 million and $132.2 million in 2017, 2016 and 2015,
respectively.
Research and development expenses include product development, product improvement, product
engineering and process improvement costs. Research and development expenses, which were
$50.7 million, $53.1 million and $48.7 million in 2017, 2016 and 2015, 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 share
award is based on the average of the high and low share prices on the date of grant and the probability of
meeting performance targets. The fair value of each restricted stock unit granted is equal to the average of
the high and low share prices on 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.
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, 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.
Deferred currency gains/(losses) of $0.4 million, $(3.5) million and $3.6 million (before tax impact) were
reclassified into earnings for the year ended December 31, 2017, 2016 and 2015, respectively. Based on
foreign exchange rates as of December 31, 2017, we estimate that $3.0 million of net currency derivative
losses included in AOCI as of December 31, 2017 will be reclassified to earnings within the next
twelve months.
Recently Issued Accounting Standards
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2014-09, which clarifies the accounting for revenue arising from contracts with customers and
specifies the disclosures that an entity should include in its financial statements. The standard is effective
for annual reporting periods beginning after December 15, 2017 (calendar year 2018 for Fortune Brands).
51
During 2016, the FASB issued certain amendments to the standard relating to the principal versus agent
guidance, accounting for licenses of intellectual property and identifying performance obligations as well
as the guidance on transition, collectability, noncash consideration and the presentation of sales and other
similar taxes. The effective date and transition requirements for these amendments are the same as those
of the original ASU. Our key considerations pursuant to ASU 2014-09 during the assessment period were
the control of goods (i.e., timing of revenue recognition), separate performance obligations and customer
rights of return (i.e., the reclassification on the balance sheet of the customer rights of return from accounts
receivable to a refund liability as well as the recognition of a corresponding asset). We will adopt the new
standard using the modified retrospective method beginning January 1, 2018. The adoption of this
standard will not have a material effect on our financial statements.
Leases
In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize almost all leases on
their balance sheet as a “right-of-use” asset and lease liability but recognize related expenses in a manner
similar to current accounting. The guidance also eliminates current real estate-specific provisions for all
entities. The standard is effective for annual periods beginning after December 15, 2018 (calendar year
2019 for Fortune Brands) and earlier application is permitted. We are assessing the impact the adoption of
this standard will have on our financial statements.
Clarifying Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
In May 2017, the FASB issued ASU 2017-05 that clarifies the scope and application of various standards
for the sale of nonfinancial assets (e.g. PP&E including real estate, intangible assets, materials and
supplies). The standard distinguishes between a sale to customer vs non-customer. Sales to customers are
in scope of the new revenue standard. It also clarifies a derecognition model for nonfinancial assets that do
not represent a business. We will adopt the new standard beginning January 1, 2018 consistent with the
effective date for the new revenue recognition standard. The adoption of the standard will not have a
material effect on our financial statements.
Stock Compensation Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017-09, which clarifies when changes to the terms or conditions of a
share-based payment award must be accounted for as modifications. The new guidance provides a relief
to entities that make non-substantive changes to their share-based payment awards and will result in fewer
changes to the terms of an award being accounted for as modifications. We will adopt the new standard
beginning January 1, 2018. The adoption of this standard will not have a material effect on our financial
statements.
Presentation of Net Periodic Pension and Postretirement Cost
In March 2017, the FASB issued ASU 2017-07, which requires entities to present the service cost
component of the net periodic benefit cost in the same income statement line item(s) as other employee
compensation costs arising from services rendered during the period. In addition, only the service cost
component will be eligible for capitalization in assets. Companies will present the other components (i.e.,
amortization of prior service cost/credits, interest cost, expected return on plan assets and actuarial gains/
losses) separately from the line item(s) that includes the service cost and outside of any subtotal of
operating income. We will retrospectively adopt the new standard beginning January 1, 2018. The adoption
of this standard will not have a material effect on our financial statements.
Clarifying the Definition of a Business
In January 2017, the FASB issued ASU 2017-01, which changes the definition of a business to assist
entities with evaluating when a set of transferred assets and activities is a business and therefore business
52
combination guidance would apply. The new standard requires an entity to evaluate if substantially all of
the fair value of the gross assets acquired is concentrated in a single identifiable asset (i.e., a business) or
a group of similar identifiable assets (i.e., not a business). The guidance also requires a business to
include at least one substantive process and narrows the definition of outputs (e.g., revenues with
customers). We will adopt the new standard beginning January 1, 2018. The adoption of this standard will
not have a material effect on our financial statements.
Restricted Cash
In November 2016, the FASB issued ASU 2016-18, according to which entities are no longer required to
present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents
in the statement of cash flows. The prior standard did not address the classification of activity related to
restricted cash and restricted cash equivalents in the statement of cash flows and this has resulted in
diversity in cash flows presentation. We will adopt the new standard beginning January 1, 2018. The
adoption of this standard will not have a material effect on our financial statements.
Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU 2016-16, which requires companies to account for the income tax
effects of intercompany sales and transfers of assets other than inventory (e.g., intangible assets) when the
transfer occurs. Under the current guidance companies are required to defer the income tax effects of
intercompany transfers of assets until the asset has been sold to an outside party or otherwise recognized
(e.g., depreciated, amortized or impaired). We will adopt the new standard beginning January 1, 2018
using a “modified retrospective” (i.e., with a cumulative adjustment to retained earnings at adoption). The
adoption of this standard will not have a material effect on our financial statements.
Classification of Certain Cash Receipts and Cash Payments
In September 2016 the FASB issued ASU 2016-15, which changes how an entity classifies certain cash
receipts and cash payments on its statement of cash flows. The key changes that may potentially impact
our financial statements include the following: 1) Cash payments for debt prepayment or extinguishment
costs would be classified as financing cash outflows; 2) Contingent consideration payments that are not
made within three months after the consummation of a business combination would be classified as
financing (if the payment is made up to the acquisition date fair value of liability) or operating outflows (if in
excess of acquisition fair value). Cash payments made “soon after” the consummation of a business
combination generally would be classified as cash outflows for investing activities; 3) Insurance settlement
proceeds would be classified based on the nature of the loss; and 4) Company-owned life insurance
settlement proceeds would be presented as investing cash inflows, and premiums would be classified as
investing or operating cash outflows, or a combination of both. We will retrospectively adopt the new
standard beginning January 1, 2018. The adoption of this standard will not have a material effect on our
financial statements.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01, which requires entities to measure investments in
unconsolidated entities (other than those accounted for using the equity method of accounting) at fair value
through the income statement. There will no longer be an available-for-sale classification (with changes in
fair value reported in Other Comprehensive Income). In addition, the cost method is eliminated for equity
investments without readily determinable fair values. We will adopt the new standard beginning January 1,
2018. The adoption of this standard will not have a material effect on our financial statements.
Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued ASU 2017-12 that amends current hedge accounting model. The new
standard eliminates the requirement to separately measure and report hedge ineffectiveness and generally
53
requires the entire change in the fair value of a hedging instrument to be presented in the same income
statement line as the hedged item (which is consistent with our current practice). The change in fair value
for qualifying cash flow and net investment hedges will be included in Other comprehensive income (until
they are reclassified into the income statement). The standard also eases certain documentation and
assessment requirements and modifies the accounting for components excluded from the assessment of
hedge effectiveness. The standard is effective as of January 1, 2019 and earlier application is permitted.
We are assessing the impact the adoption of this standard will have on our financial statements.
Financial Instruments — Credit Losses
In June 2016, the FASB issued ASU 2016-13, which changes the impairment model for most financial
assets and certain other instruments that are not measured at fair value through net income. The new
guidance applies to most financial assets measured at amortized cost, including trade and other
receivables and loans as well as off-balance-sheet credit exposures (e.g., loan commitments and standby
letters of credit). The standard will replace the “incurred loss” approach under the current guidance with an
“expected loss” model that requires an entity to estimate its lifetime “expected credit loss.” The standard is
effective January 1, 2020 and early application is permitted beginning January 1, 2019. We are assessing
the impact the adoption of this standard will have on our financial statements.
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
Accrued taxes
Dividends payable
Other accrued expenses
Total other current liabilities
2017
2016
$ 224.9
58.3
297.6
$ 580.8
$
58.7
464.1
1,167.5
90.1
1,780.4
1,040.4
$ 207.6
55.9
267.6
$ 531.1
$
57.0
429.4
1,079.8
64.5
1,630.7
968.2
$ 740.0
$ 662.5
$ 105.9
142.8
61.4
30.4
137.5
$ 478.0
$ 112.6
129.3
46.3
27.6
133.2
$ 449.0
4. Acquisitions and Dispositions
In October 2017, we acquired Victoria + Albert, a UK manufacturer of luxury freestanding tubs and basins.
In July 2017, we acquired Shaws, a UK-based luxury plumbing products company that specializes in
manufacturing and selling fireclay sinks and selling brassware and accessories in partnership with Perrin &
54
Rowe. The total combined purchase price was approximately $125 million, net of cash acquired and
deferred acquisition payments and subject to certain post-closing adjustments. Net sales and operating
income in the twelve months ended December 31, 2017 from these acquisitions were not material to the
Company. We financed the transactions using cash on hand and borrowings under our existing credit
facility. The results of the operations are included in the Plumbing segment from the date of acquisition. We
do not expect any portion of goodwill to be deductible for income tax purposes.
In April 2017, we completed the sale of Field ID, our cloud-based inspection and safety compliance
software product line included in our Security segment. We recorded a pre-tax loss of $2.4 million and a
pre-tax impairment charge to write down the long-lived assets included in this disposal group to fair value
of $3.2 million as a result of this sale (See Note 7). The estimated tax expense on the sale was insignificant.
Field ID did not qualify for presentation as a discontinued operation in our financial statements.
In September 2016, we acquired ROHL, a California-based luxury plumbing company. In a related
transaction, we also acquired Perrin & Rowe, a UK manufacturer and designer of luxury kitchen and
bathroom plumbing products. The total combined purchase price was approximately $166 million
(including $3 million of liabilities assumed), subject to certain post-closing adjustments. We financed the
transaction using cash on hand and borrowings under our existing credit facility. Net sales and operating
income in the twelve months ended December 31, 2016 were not material to the Company. The results of
operations are included in the Plumbing segment. The goodwill expected to be deductible for income tax
purposes is approximately $49 million.
In May 2016, we acquired Riobel, a Canadian plumbing company specializing in premium showroom bath
and shower fittings, for a total purchase price of $94.6 million in cash, subject to certain post-closing
adjustments. We financed the transaction using cash on hand and borrowings under our existing credit
facility. Net sales and operating income in the twelve months ended December 31, 2016 were not material
to the Company. The results of operations are included in the Plumbing segment. We do not expect any
portion of goodwill to be deductible for income tax purposes.
5. Discontinued Operations
In 2015, we completed the sale of Waterloo for approximately $14 million in cash, subject to certain post-
closing adjustments. We recorded a pre-tax loss of $16.9 million as the result of this sale. Transaction and
other sale-related costs were approximately $2.8 million. The estimated tax benefit on the sale was
$26.5 million with the after-tax gain of $7.0 million recorded within discontinued operations. The estimated
tax benefit resulted primarily from a tax loss in excess of the financial reporting loss as a result of prior
period nondeductible asset impairments. Waterloo is presented as a discontinued operation in our financial
statements beginning January 1, 2014 and through the date of sale in accordance with ASC 205
requirements. Prior to classifying Waterloo as a discontinued operation, it was reported in the Security
segment.
In the twelve months ended December 31, 2017, the loss on discontinued operations is primarily related to
the prior sale of the Waterloo tool storage and Simonton window businesses.
55
6. Goodwill and Identifiable Intangible Assets
We had goodwill of $1,912.0 million and $1,833.8 million as of December 31, 2017 and 2016, respectively.
The increase of $78.2 million was primarily due to the acquisitions of Shaws and Victoria + Albert . The
change in the net carrying amount of goodwill by segment was as follows:
(In millions)
Cabinets
Plumbing
Doors
Security
Balance at December 31, 2015(a)
2016 translation adjustments
Acquisition-related adjustments
Balance at December 31, 2016(a)
2017 translation adjustments
Acquisition-related adjustments
Balance at December 31, 2017(a)
$937.7
0.8
(14.2)
$924.3
2.0
—
$926.3
$578.6
(2.3)
93.9
$670.2
3.3
71.7
$745.2
$143.0
—
—
$143.0
—
—
$143.0
$96.0
0.3
—
$96.3
1.2
—
$97.5
Total
Goodwill
$1,755.3
(1.2)
79.7
$1,833.8
6.5
71.7
$1,912.0
(a) Net of accumulated impairment losses of $399.5 million in the Doors segment.
We also had identifiable intangible assets, principally tradenames, of $1,162.4 million and $1,107.0 million
as of December 31, 2017 and 2016, respectively. The $88.2 million increase in gross identifiable intangible
assets was primarily due to acquisition-related adjustments in our Plumbing segment (See Note 4) as well
as foreign translation adjustments, partially offset by impairment charges during the first quarter of 2017
related to our decision to sell Field ID (See Note 4 and 7).
The gross carrying value and accumulated amortization by class of intangible assets as of December 31,
2017 and 2016 were as follows:
(In millions)
Indefinite-lived tradenames
Amortizable intangible assets
Tradenames
Customer and contractual
relationships
Patents/proprietary technology
Total
As of December 31, 2017
As of December 31, 2016
Gross
Carrying
Amounts
Accumulated
Amortization
Net Book
Value
Gross
Carrying
Amounts
Accumulated
Amortization
Net Book
Value
$ 709.9
$ — $ 709.9
$ 671.8
$ — $ 671.8
15.7
(9.9)
5.8
15.8
(7.3)
8.5
663.8
60.2
739.7
(232.0)
(45.3)
(287.2)
431.8
14.9
452.5
611.9
61.9
689.6
(203.1)
(44.0)
(254.4)
408.8
17.9
435.2
Total identifiable intangibles
$1,449.6
$(287.2)
$1,162.4
$1,361.4
$(254.4)
$1,107.0
Amortizable intangible assets, principally tradenames and customer relationships, are subject to
amortization on a straight-line basis over their estimated useful life, ranging from 2 to 20 years, based on
the assessment of a number of factors that may impact useful life. These factors include historical
tradename performance with respect to consumer name recognition, geographic market presence, market
share, plans for ongoing tradename support and promotion, customer attrition rates, and other relevant
factors. We expect to record intangible amortization of approximately $33 million in 2018, $30 million in
2019, $30 million in 2020, $30 million in 2021, and $29 million in 2022.
We review indefinite-lived tradename 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 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
tradename to a third party over the remaining useful life.
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In 2017, 2016 and 2015, we did not record any asset impairment charges associated with goodwill or
indefinite-lived intangible assets. As of December 31, 2017, the fair value of two tradenames in the
Cabinets segment exceeded their carrying value by less than 10%. Accordingly, a reduction in the
estimated fair value of these tradenames could trigger an impairment. As of December 31, 2017, the total
carrying value of these tradenames was $217.8 million. Factors influencing our fair value estimates of the
tradenames are described in the following paragraph.
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, a decrease in royalty rates and decline in the trading price of our
common stock. 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.
7. Asset Impairment Charges
In January 2017, we committed to a plan to sell Field ID, our cloud-based inspection and safety
compliance software product line included in our Security segment. In accordance with FASB Accounting
Standards Codification (“ASC”) 360, as a result of our decision to sell, during the first quarter of 2017 we
recorded $3.2 million of pre-tax impairment charges to write down the long-lived assets included in this
disposal group to fair value, based upon their estimated fair value less cost to sell. These charges
consisted of approximately $3.0 million for definite-lived intangible assets and $0.2 million for fixed assets.
We completed the sale of Field ID in April 2017.
8. External Debt and Financing Arrangements
In June 2016, the Company amended and restated its credit agreement to combine and rollover the
existing revolving credit facility and term loan into a new standalone $1.25 billion revolving credit facility.
This amendment and restatement of the credit agreement was a non-cash transaction for the Company.
Terms and conditions of the credit agreement, including the total commitment amount, essentially
remained the same. The revolving credit facility will mature in June 2021 and borrowings thereunder will be
used for general corporate purposes. On December 31, 2017 and 2016, our outstanding borrowings under
these facilities were $615.0 million and $540.0 million, respectively. At December 31, 2017 and 2016, the
current portion of long-term debt was zero. Interest rates under the facility are variable based on LIBOR at
the time of the borrowing and the Company’s long-term credit rating and can range from LIBOR + 0.9% to
LIBOR + 1.5%. As of December 31, 2017, we were in compliance with all covenants under this facility. As a
result of the refinancing, we wrote-off prepaid debt issuance costs of approximately $1.3 million as of
June 30, 2016.
In June 2015, we issued $900 million of unsecured senior notes (“Senior Notes”) in a registered public
offering. The Senior Notes consist of two tranches: $400 million of five-year notes due 2020 with a coupon of
3% and $500 million of ten-year notes due 2025 with a coupon of 4%. We used the proceeds from the Senior
Notes offering to pay down our revolving credit facility and for general corporate purposes. On December 31,
2017 and 2016, the outstanding amount of the Senior Notes, net of underwriting commissions and price
discounts, was $892.6 million and $891.1 million, respectively.
We currently have uncommitted bank lines of credit in China, which provide for unsecured borrowings for
working capital of up to $23.5 million in aggregate, of which zero were outstanding, as of December 31,
2017 and 2016. The weighted-average interest rates on these borrowings were zero, 1.5% and 1.0% in
2017, 2016 and 2015 respectively.
57
The components of external long-term debt were as follows:
(In millions)
$400 million unsecured senior note due June 2020
$500 million unsecured senior note due June 2025
$1,250 million revolving credit agreement due June 2021
Total debt
Less: current portion
Total long-term debt
2017
2016
$ 398.3
494.3
615.0
1,507.6
—
$ 397.6
493.5
540.0
1,431.1
—
$1,507.6
$1,431.1
Senior Notes payments during the next five years as of December 31, 2017 are zero in 2018 through 2019,
$400 million in 2020 and zero in 2021 through 2022.
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, 2017.
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. As a result, 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, 2017 and 2016.
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 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
changes in fair value for net investment hedges are recognized in the statement of income when realized
upon sale or upon complete or substantially complete liquidation of the investment in the foreign entity. 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 British pound, and the Mexican
peso. The gross U.S. dollar equivalent notional amount of all foreign currency derivative hedges outstanding
at December 31, 2017 was $282.8 million, representing a net settlement liability of $4.8 million. Based on
foreign exchange rates as of December 31, 2017, we estimate that $3.0 million of net foreign currency
58
derivative losses included in OCI as of December 31, 2017 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, 2017 and 2016 were:
(In millions)
Location
Assets:
Foreign exchange contracts
Commodity contracts
Net investment hedges
Liabilities:
Foreign exchange contracts
Net investment hedges
Other current assets
Other current assets
Other current assets
Total assets
Other current liabilities
Other current liabilities
Total liabilities
Fair Value
2017
2016
$0.8
0.2
—
$1.0
$5.6
0.8
$6.4
$2.8
—
0.6
$3.4
$2.9
0.2
$3.1
The effects of derivative financial instruments on the consolidated statements of income in 2017, 2016 and
2015 were:
(In millions)
Type of hedge
Cash flow
Fair value
Total
Gain (Loss) Recognized in Income
Location
Cost of products sold
Other (income) expense, net
2017
2016
2015
$ 0.9
(2.0)
$(3.5) $ 3.6
8.2
2.0
$(1.1) $(1.5) $11.8
The effective portion of cash flow hedges recognized in other comprehensive income were net losses of
$(1.8) million and $(6.7) million in 2017 and 2016, respectively. In the years ended December 31, 2017,
2016 and 2015, the ineffective portion of cash flow hedges recognized in other (income) expense, net, was
insignificant.
10. Fair Value Measurements
The carrying value and fair value of debt as of December 31, 2017 and 2016 were as follows:
(In millions)
Revolving credit facility
Senior Notes, net of underwriting commissions
December 31, 2017
December 31, 2016
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
$615.0
$615.0
$540.0
$540.0
and price discounts
892.6
926.3
891.1
919.2
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.
59
The estimated fair value of our Senior Notes is determined primarily using broker quotes, which are level 2
inputs.
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and 2016 were
as follows:
(In millions)
Assets:
Derivative asset financial instruments (level 2)
Deferred compensation program assets (level 2)
Total assets
Liabilities:
Derivative liability financial instruments (level 2)
Fair Value
2017
2016
$1.0
7.5
$8.5
$3.4
4.5
$7.9
$6.4
$3.1
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.
During the second quarter of 2016, we entered into a joint venture arrangement with a partner to operate a
manufacturing facility in China. Under the arrangement, we are required to make certain fixed payments to
our partner each year starting in June 2017 and through June 2024 (final year of the agreement) and also
purchase the outstanding preferred shares of our partner in 2024. During the second quarter of 2016, we
recognized the fair value of $8.2 million of these contractual payments, including a redemption of the
preferred shares ($7.2 million within other non-current liabilities and $1.0 million due within one year in other
current liabilities). We have also recognized the excess of $5.2 million of this liability fair value over the
$3.0 million cash contributed by our partner within paid-in capital.
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 2017 and 2016 were as follows:
Common Shares
Treasury Shares
2017
2016
2017
2016
Balance at the beginning of the
year
Stock plan shares issued
Shares surrendered by optionees
Common stock repurchases
153,412,050
2,068,746
(180,537)
(3,393,462)
159,906,032
2,518,071
(204,538)
(8,807,515)
24,305,930
—
180,537
3,393,462
15,293,877
—
204,538
8,807,515
Balance at the end of the year
151,906,797
153,412,050
27,879,929
24,305,930
In December 2017, our Board of Directors increased the quarterly cash dividend by 11% to $0.20 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, 2017, 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 2017, we repurchased approximately 3.4 million shares of outstanding common stock under the
Company’s share repurchase program at a cost of $214.8 million. As of December 31, 2017, the
60
Company’s total remaining share repurchase authorization under the remaining program was
approximately $558.4 million. The share repurchase program does not obligate the Company to
repurchase any specific dollar amount or number of shares and may be suspended or discontinued at any
time.
12. Accumulated Other Comprehensive (Loss) Income
The reclassifications out of accumulated other comprehensive (loss) income for the year ended
December 31, 2017 and 2016 were as follows:
(In millions)
Details about Accumulated Other Comprehensive
Income Components
Affected Line Item in the
Consolidated Statements of Income
2017
2016
Gains (losses) on cash flow hedges
Foreign exchange contracts
Commodity contracts
Defined benefit plan items
Amortization of prior service cost
Recognition of actuarial gains
(losses)
Total reclassifications for the period
$ 0.4
0.5
0.9
(0.1)
$ 0.8
$ 5.1
0.5
5.6
(2.0)
$ 3.6
$ 4.4
$ (3.5)
—
(3.5)
—
$ (3.5)
$13.5
(1.9)
11.6
(4.3)
$ 7.3
$ 3.8
Cost of products sold
Cost of products sold
Total before tax
Tax expense
Net of tax
(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.
61
Total accumulated other comprehensive (loss) income consists of net income 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 after-tax components of and changes in
accumulated other comprehensive (loss) income were as follows:
(In millions)
Balance at December 31, 2014
Foreign
Currency
Adjustments
Derivative
Hedging
Gain
(Loss)
Defined
Benefit
Plan
Adjustments
Accumulated
Other
Comprehensive
(Loss) Income
$ 31.0
$(0.6)
$(37.1)
$ (6.7)
Amounts classified into accumulated other comprehensive
(loss) income
Amounts reclassified from accumulated other
comprehensive (loss) income into earnings
Net current period other comprehensive (loss) income
(44.3)
4.5
—
(44.3)
(1.8)
2.7
(1.4)
(2.8)
(4.2)
Balance at December 31, 2015
$(13.3)
$ 2.1
$(41.3)
Amounts classified into accumulated other comprehensive
(loss) income
Amounts reclassified from accumulated other
comprehensive (loss) income into earnings
Net current period other comprehensive (loss) income
(14.7)
(6.2)
—
(14.7)
3.5
(2.7)
5.3
(7.3)
(2.0)
Balance at December 31, 2016
$(28.0)
$(0.6)
$(43.3)
Amounts classified into accumulated other comprehensive
(loss) income
Amounts reclassified from accumulated other
comprehensive (loss) income into earnings
Net current period other comprehensive (loss) income
33.8
(1.0)
—
33.8
(0.8)
(1.8)
4.3
(3.6)
0.7
(41.2)
(4.6)
(45.8)
$(52.5)
(15.6)
(3.8)
(19.4)
$(71.9)
37.1
(4.4)
32.7
Balance at December 31, 2017
$ 5.8
$(2.4)
$(42.6)
$(39.2)
13. Stock-Based Compensation
As of December 31, 2017, 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”). Our stockholders approved the
Plan in 2013, 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, 2017,
approximately six 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 the
required 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 stock options under the 2011 Plan that
continue to be exercisable. Upon the exercise or payment of stock-based awards, shares of common stock
are issued from authorized common shares.
62
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
2017
$ 7.4
21.6
13.6
1.0
43.6
15.2
2016
$ 7.2
17.2
6.7
0.9
32.0
11.4
2015
$ 7.4
13.4
5.9
0.9
27.6
9.9
$28.4
$20.6
$17.7
Included in compensation costs are cash-settled restricted stock units of $0.6 million that are classified as
a liability. 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
through each vesting date. Restricted stock units granted to certain officers are also subject to attaining
specific performance criteria. In addition, certain employees can elect to defer receipt of a portion of their
RSU awards upon vesting. 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 for the year ended
December 31, 2017 was as follows:
Non-vested at December 31, 2016
Granted
Vested
Forfeited
Non-vested at December 31, 2017
Number of Restricted
Stock Units
Weighted-Average
Grant-Date
Fair Value
723,398
408,608
(338,988)
(64,953)
728,065
$49.22
58.59
48.13
53.56
$54.59
The remaining unrecognized pre-tax compensation cost related to restricted stock units at December 31,
2017 was approximately $18.9 million, and the weighted-average period of time over which this cost will be
recognized is 1.5 years. The fair value of restricted stock units that vested during 2017, 2016 and 2015 was
$20.3 million, $16.4 million and $24.9 million, respectively.
Stock Option Awards
Stock options were granted to officers and certain employees of the Company and represent the right to
purchase shares of Company common stock subject to continued employment through each vesting date.
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.
63
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
2017
2016
2015
1.4%
26.0%
1.9%
5.5 years
1.4%
30.0%
1.3%
5.5 years
1.5%
27.0%
1.8%
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. In 2017 and 2016, the
expected term was determined based on the historical employee exercise behavior and the contractual
term of the options. In 2015, the expected term was determined 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, 2017, 2016 and 2015 was
$13.49, $12.70 and $11.58, respectively.
A summary of Fortune Brands stock option activity related to Fortune Brands and employees of Fortune
Brands, Inc., the Company from which we spun off from in 2011, for the year ended December 31, 2017
was as follows:
Outstanding at December 31, 2016
Granted
Exercised
Expired/forfeited
Outstanding at December 31, 2017
Options
4,815,291
603,230
(1,605,999)
(129,564)
3,682,958
Weighted-
Average
Exercise
Price
$27.34
58.43
17.73
37.02
$36.28
Options outstanding and exercisable at December 31, 2017 were as follows:
Range Of
Exercise Prices
$9.00 to $12.99
13.00 to 20.00
20.01 to 65.41
Options Outstanding(a)
Options Exercisable(b)
Options
Outstanding
104,500
1,250,011
2,328,447
3,682,958
Weighted-
Average
Remaining
Contractual
Life
3.8
3.6
7.4
6.0
Weighted-
Average
Exercise
Price
$12.30
16.17
48.16
Options
Exercisable
104,500
1,250,011
1,220,692
$36.28
2,575,203
Weighted-
Average
Exercise
Price
$12.30
16.17
42.82
$28.64
(a) At December 31, 2017, the aggregate intrinsic value of options outstanding was $118.4 million.
(b) At December 31, 2017, the weighted-average remaining contractual life of options exercisable was 4.9 years and the aggregate intrinsic value of
options exercisable was $102.5 million.
The remaining unrecognized compensation cost related to unvested awards at December 31, 2017 was
$6.0 million, and the weighted-average period of time over which this cost will be recognized is 1.4 years.
64
The fair value of options that vested during the years ended December 31, 2017, 2016 and 2015 was
$6.8 million, $6.0 million and $7.8 million, respectively. The intrinsic value of Fortune Brands stock options
exercised in the years ended December 31, 2017, 2016 and 2015 was $70.6 million, $88.1 million and
$78.0 million, respectively.
Performance Awards
Performance share awards were granted to officers and certain employees of the Company under the
Plans and represent the right to earn shares of Company common stock based on the achievement of or
company-wide performance conditions, including cumulative diluted earnings per share, average return on
invested capital, average return on net tangible assets and EBITDA 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, 2017, as
well as activity during the year then ended. The number of Performance share awards granted are shown
below at the target award amounts:
Non-vested at December 31, 2016
Granted
Vested
Forfeited
Non-vested at December 31, 2017
Number of
Performance Share
Awards
Weighted-Average
Grant-Date
Fair Value
421,600
160,196
(95,183)
(58,285)
428,328
$48.00
58.02
45.13
48.22
$52.35
The remaining unrecognized pre-tax compensation cost related to performance share awards at
December 31, 2017 was approximately $6.8 million, and the weighted-average period of time over which
this cost will be recognized is 1.3 years. The fair value of performance share awards that vested during
2017 was $5.6 million (100,580 shares).
Director Awards
Stock awards are used as part of the compensation provided to outside directors under the Plan. Awards
are issued annually in the second quarter. 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 2017, 2016 and 2015, we awarded 15,311,
16,471 and 19,695 shares of Company common stock to outside directors with a weighted average fair
value on the date of the award of $63.43, $57.37 and $46.21, respectively.
14. Defined Benefit Plans
We have a number of pension plans in the United States, covering many of the Company’s employees,
however these plans have been closed to new hires. The plans provide for payment of retirement benefits,
mainly commencing between the ages of 55 and 65. 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. Service cost for 2017 relates to benefit
accruals in an hourly Union defined benefit plan in our Security segment. Benefit accruals under all other
defined benefit pension plans were frozen as of December 31, 2016.
65
In addition, the Company provides postretirement health care and life insurance benefits to certain retirees.
(In millions)
Obligations and Funded Status at December 31
Change in the Projected Benefit Obligation (PBO):
Projected benefit obligation at beginning of year
Service cost
Interest cost
Plan amendments
Actuarial loss (gain)
Benefits paid
Foreign exchange
Projected benefit obligation at end of year
Accumulated benefit obligation at end of year (excludes
the impact of future compensation increases)
Change in Plan Assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Funded status (Fair value of plan assets less PBO)
Pension Benefits
Postretirement Benefits
2017
2016
2017
2016
$ 791.7
0.6
33.3
—
40.6
(33.8)
—
$ 832.4
$ 767.7
9.6
34.4
0.1
11.7
(31.8)
—
$ 791.7
$15.6
$ 3.6
—
—
—
0.3
— (12.3)
1.6
(1.6)
—
$ 3.6
(1.4)
(0.4)
(0.2)
$ 1.6
$ 832.4
$ 791.7
$ 577.7
83.2
29.5
(33.8)
$ 656.6
$(175.8)
$ 561.9
46.6
1.0
(31.8)
$ 577.7
$(214.0)
—
0.5
(0.5)
$ — $ —
—
1.5
(1.5)
$ — $ —
$ (3.6)
$(1.6)
The accumulated benefit obligation exceeds the fair value of assets for all pension plans. 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
2017
2016
2017
2016
$ (1.1)
(174.7)
$ (1.0)
(213.0)
$(0.2)
(1.4)
$(0.4)
(3.2)
$(175.8)
$(214.0)
$(1.6)
$(3.6)
In the first quarter of 2013, the Company communicated a plan amendment to reduce health benefits to
certain retired employees. Due to the risk of litigation at the time of the initial communication, the Company
elected to defer the full recognition of the benefit arising from the plan amendment. Following a favorable
court decision in the first quarter of 2016, the Company determined that it would realize the benefit from the
plan amendment. As a result, the Company performed a re-measurement of the affected retiree plan
liability as of March 31, 2016. This remeasurement resulted in a $10.7 million reduction of accrued retiree
benefit plan liabilities and a corresponding increase in prior service credits. In accordance with accounting
requirements, the liability reduction from this remeasurement is recorded as amortization of prior service
credits in net income. In addition, we recorded a $0.9 million actuarial loss during the first quarter of 2016.
In the third quarter of 2015, we recognized actuarial losses of $6.1 million in discontinued operations
related to curtailment accounting due to the sale of the Waterloo tool storage business in addition to the
$2.5 million of actuarial losses reflected below in net periodic benefit cost.
As of December 31, 2017, we adopted the new Society of Actuaries MP-2017 mortality tables, resulting in a
decrease in our pension benefit obligations of approximately $5.0 million, and a corresponding decrease in
deferred actuarial losses in accumulated other comprehensive income. As of December 31, 2016, we
adopted the new Society of Actuaries MP-2016 mortality tables, resulting in a decrease in our
postretirement obligations of approximately $0.1 million, and a corresponding decrease in deferred
actuarial losses in accumulated other comprehensive income.
66
The amounts in accumulated other comprehensive loss 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, 2015
Recognition of actuarial loss
Current year actuarial loss
Net actuarial loss at December 31, 2016
Recognition of actuarial (loss) gain
Current year actuarial gain
Net actuarial loss at December 31, 2017
Net prior service cost (credit) at December 31, 2015
Prior service cost recognition due to plan amendments
Amortization
Prior service cost recognition due to curtailment
Net prior service cost (credit) at December 31, 2016
Amortization
Net prior service cost (credit) at December 31, 2017
Total at December 31, 2017
$71.1
—
2.3
$73.4
(0.9)
(5.3)
$67.2
$ 0.1
—
—
(0.1)
$ —
—
$ —
$67.2
$ 0.3
(1.9)
1.6
$ —
1.4
(1.4)
$ —
$ (6.4)
(12.2)
13.5
—
$ (5.1)
5.1
$ —
$ —
There are no accumulated other comprehensive income expected to be recognized as components of net
periodic benefit cost over the next fiscal year.
Components of net periodic benefit cost were as follows:
Components of Net Periodic Benefit (Income) Cost
Pension Benefits
Postretirement Benefits
(In millions)
2017
2016
2015
2017
2016
2015
Service cost
Interest cost
Expected return on plan assets
Recognition of actuarial losses (gains)
Amortization of prior service cost (credits)
$ 0.6
33.3
(37.3)
0.9
—
$ 9.6
34.4
(37.2)
—
—
$ 11.5
33.7
(40.2)
2.9
0.1
$ — $ — $ 0.1
0.6
0.3
—
—
(0.4)
1.9
(13.5)
(13.5)
—
—
(1.4)
(5.1)
Net periodic benefit (income) cost
$ (2.5)
$ 6.8
$ 8.0
$(6.5)
$(11.3)
$(13.2)
Assumptions
Pension Benefits
Postretirement Benefits
2017
2016
2015
2017
2016
2015
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 assets
Rate of compensation increase
67
3.8% 4.3% 4.6% 3.4% 3.4% 4.1%
—
— 4.0% 4.0%
—
—
4.3% 4.6% 4.2% 3.4% 4.1% 3.5%
—
6.4% 6.6% 6.8%
—
— 4.0% 4.0%
—
—
—
—
Postretirement Benefits
2017
2016
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
7.1/8.4%(a) 7.3/8.2%(a)
4.5%
2026
4.5%
2025
(a) The pre-65 initial health care cost trend rate is shown first / followed by the post-65 rate.
A one-percentage-point change in assumed health care cost trend rates would have had the following
effects in 2017:
(In millions)
1-Percentage-
Point Increase
1-Percentage-
Point Decrease
Effect on postretirement benefit obligation
(0.1)
0.1
Plan Assets
The fair value of the pension assets by major category of plan assets as of December 31, 2017 and 2016
were as follows:
(In millions)
Group annuity/insurance contracts (level 3)
Collective trusts:
Cash and cash equivalents
Equity
Fixed income
Multi-strategy hedge funds
Real estate
Total
A reconciliation of Level 3 measurements was as follows:
(In millions)
January 1
Actual return on assets related to assets still held
December 31
Total as of
balance sheet
date
2017
2016
$ 23.3
$ 22.8
12.5
285.9
277.7
24.6
32.6
6.9
258.8
235.4
23.1
30.7
$656.6
$577.7
Group annuity/
insurance contracts
2017
2016
$22.8
0.5
$23.3
$22.3
0.5
$22.8
Our defined benefit plans Master Trust own a variety of investment assets. All of these investment assets,
except for group annuity/insurance contracts are measured using net asset value per share as a practical
expedient per ASC 820. Following the retrospective adoption of ASU 2015-07 (Fair Value Measurement
(Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share) we
excluded all investments measured using net asset value per share in the amount of $633.3 million and
$554.9 million as of December 31, 2017 and 2016, respectively, from the tabular fair value hierarchy
disclosure.
The terms and conditions for redemptions vary for each class of the investment assets valued at net asset
value per share as a practical expedient. Real estate assets may be redeemed quarterly with a 45 day
68
redemption notice period. Investment assets in multi-strategy hedge funds may be redeemed semi-
annually with a 95 day redemption notice period. Equity, fixed income and cash and cash equivalents have
no specified redemption frequency and notice period and may be redeemed daily. As of December 31,
2017 we do not have an intent to sell or otherwise dispose of these investment assets at prices different
than the net asset value per share.
Our investment strategy is to optimize investment returns through a diversified portfolio of investments,
taking into consideration underlying plan liabilities and asset volatility. The defined benefit asset allocation
policy of the plans allow 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 of 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 2018 expected blended long-term rate of return on plan assets of 6.4% 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)
2018
2019
2020
2021
2022
Years 2023-2027
Pension
Benefits
$ 37.4
39.1
40.4
41.6
43.1
229.9
Postretirement
Benefits
$0.1
0.1
0.1
0.1
0.1
0.3
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 $29.1 million, $22.7 million and
$18.3 million in 2017, 2016 and 2015, 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
2017
2016
2015
$554.7
80.1
$634.8
$513.8 $387.7
72.2
68.3
$582.1 $459.9
69
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 benefit on income attributable to domestic production activities
Net adjustments for uncertain tax positions
Share-based compensation (ASU 2016-09)
Tax Act impact
Deferred tax impact of state tax rate changes
Valuation allowance increase (decrease)
Miscellaneous other, net
Income tax expense as reported
Effective income tax rate
2017
2016
2015
$222.2
13.4
$203.7
12.6
$161.0
9.4
(8.3)
(10.9)
11.6
(23.9)
(25.7)
(2.0)
(5.2)
(11.7)
(7.6)
(13.0)
13.2
(27.8)
—
(1.1)
(2.1)
(8.2)
(8.7)
(12.5)
4.7
—
—
0.2
0.8
(1.5)
$159.5
$169.7
$153.4
25.1%
29.2%
33.4%
The 2017 effective income tax rate was favorably impacted by The Tax Cuts and Jobs Act of 2017, (the
“Tax Act”). The effective income tax rates for 2017, 2016 and 2015 were favorably impacted by the tax
benefit attributable to the Domestic Production Activity (Internal Revenue Code Section 199) Deduction and
favorable tax rates in foreign jurisdictions, partially offset by state and local taxes and increases to
uncertain tax positions. In addition, the 2017 and 2016 effective income tax rates were favorably impacted
by a tax benefit related to share-based compensation. The benefit associated with the favorable tax rates
in foreign jurisdictions is affected by overall allocation of income, rate changes and impact of foreign
exchange rates. The 2015 effective income tax rate was unfavorably impacted by $2.4 million related to
nondeductible acquisition costs.
The Tax Act made significant changes to the U.S. Internal Revenue Code including a reduction in the
corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, generally providing
for an exemption from federal income tax for dividends received from foreign subsidiaries, and imposing a
one-time transition tax on the deemed repatriation of cumulative foreign earnings and profits as of
December 31, 2017. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued
which deals with the application of US GAAP to situations where a registrant does not have the necessary
information available, prepared or analyzed (including computations) in reasonable detail to complete the
accounting for certain income tax effects of the Tax Act. In accordance with SAB 118 we have calculated
our best estimate of the impact of the Tax Act on our 2017 effective income tax rate, based upon available
information, limited timing and our understanding of the Tax Act as well as the facts and guidance available
at our assessment date of January 22, 2018. As a result, the Company has recorded a provisional net
benefit of $25.7 million in the fourth quarter of 2017, the period in which the Tax Act was enacted. This
provisional amount includes an estimated reduction in the Company’s net deferred tax liabilities of
$62.4 million resulting from the decrease in the federal income tax rate; an estimated deemed repatriation
tax liability of $28.5 million; and an estimated net increase to our provision for taxes on foreign earnings not
considered permanently reinvested of $8.2 million. The impact of the Tax Act may differ from these
estimates, possibly materially, due to, among other things, refinement of calculations due to additional
analysis, changes in interpretations, assumptions made and additional guidance that may be issued. Any
subsequent adjustment, related to the aforementioned, will be recorded in current tax expense when such
analysis is completed or such guidance is issued.
70
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 additions (reductions) — purchase accounting adjustments
Gross reductions — prior year tax positions
Gross reductions — settlements with taxing authorities
Impact of change in foreign exchange rates
Unrecognized tax benefits — end of year
2017
2016
2015
$58.2
31.0
10.9
4.0
(9.4)
(7.2)
(0.0)
$38.2
10.7
10.4
9.7
(9.8)
(1.0)
(0.0)
$87.5
$58.2
$31.0
4.6
8.3
0.1
(2.1)
(3.6)
(0.1)
$38.2
The amount of UTBs that, if recognized as of December 31, 2017, would affect the Company’s effective tax
rate was $53.0 million. It is reasonably possible that, within the next twelve months, total UTBs may
decrease in the range of $1.5 million to $21.5 million primarily as a result of the conclusion of U.S. federal,
state and foreign income tax proceedings.
We classify interest and penalty accruals related to UTBs as income tax expense. In 2017, we recognized
an interest and penalty expense of approximately $2.0 million. In 2016, we recognized an interest and
penalty expense of approximately $1.1 million. In 2015, we recognized an interest and penalty expense of
approximately $1.0 million. At December 31, 2017 and 2016, we had accruals for the payment of interest
and penalties of $11.8 million and $11.0 million, respectively.
We file income tax returns in the U.S., various state and foreign jurisdictions. The Company is currently
under examination by the U.S. Internal Revenue Service (“IRS”) for the periods related to 2013 through
2015, and is open and subject to examination for subsequent tax years. In addition to the U.S., we have tax
years that remain open and subject to examination by tax authorities in the following major taxing
jurisdictions: Canada for years after 2012, Mexico for years after 2011 and China for years after 2013.
Income taxes in 2017, 2016 and 2015 were as follows:
(In millions)
Current
Federal
Foreign
State and other
Deferred
Federal, state and other
Foreign
Total income tax expense
2017
2016
2015
$133.1
22.4
22.8
$150.4
22.3
22.9
$130.6
19.7
16.1
(27.2)
8.4
$159.5
(23.9)
(2.0)
$169.7
(11.3)
(1.7)
$153.4
71
The components of net deferred tax assets (liabilities) as of December 31, 2017 and 2016 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
Intangible assets
Investment in partnership
Miscellaneous
Total deferred tax liabilities
Net deferred tax liability
2017
2016
$ 22.1
43.7
11.1
7.8
45.6
25.6
(11.0)
3.7
148.6
(4.2)
(44.5)
(232.0)
(9.2)
(16.1)
(306.0)
$(157.4)
$ 56.1
82.5
13.6
10.3
41.4
39.7
(16.4)
2.5
229.7
(6.7)
(57.1)
(210.4)
(109.3)
(0.2)
(383.7)
$(154.0)
In accordance with ASC requirements for Income Taxes, deferred taxes were classified in the consolidated
balance sheets as of December 31, 2017 and 2016 as follows:
(In millions)
Other assets
Deferred income taxes
Net deferred tax liability
2017
2016
$
9.4
(166.8)
$(157.4)
$
9.5
(163.5)
$(154.0)
As of December 31, 2017 and 2016, the Company had deferred tax assets relating to net operating losses,
capital losses, and other tax carryforwards of $25.6 million and $39.7 million, respectively, of which
approximately $8.3 million will expire between 2018 and 2022, and the remainder of which will expire in
2023 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.
Under the Tax Act, the accumulated foreign earnings and profits of the Company’s foreign subsidiaries are
subject to a deemed repatriation tax and should not be subject to additional U.S. federal income tax upon
an actual repatriation of those earnings. As a result, the Company has recorded an estimated tax liability of
$9.6 million for foreign and state taxes that would be payable on a distribution of those earnings and
profits.
We have not provided for deferred taxes on the remaining book over tax outside basis differences of our
foreign subsidiaries. The outside basis differences of foreign subsidiaries considered indefinitely reinvested
totaled approximately $50 million at December 31, 2017. The associated deferred tax liability on this basis
difference would not be material.
72
16. Restructuring and Other Charges
Pre-tax restructuring and other charges for the year ended December 31, 2017 were as follows:
(In millions)
Cabinets
Plumbing
Doors
Security
Total
Year Ended December 31, 2017
Restructuring
Charges
$ 1.4
2.8
(0.1)
4.2
$ 8.3
Other Charges (a)
Cost of
Products
Sold
SG&A(b)
$1.6
—
—
5.6
$7.2
$2.2
—
0.1
0.7
$3.0
Total
Charges
$ 5.2
2.8
—
10.5
$18.5
(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, write-off of displays from exiting a customer relationship, 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 of $18.5 million before tax ($12.3 million after tax) in 2017, primarily
related to losses on disposal of inventory associated with exiting a product line in our Security segment and
exiting a customer relationship in our Cabinets segment, as well as severance costs within our Security,
Plumbing and Cabinets segments.
Pre-tax restructuring and other charges for the year ended December 31, 2016 were as follows:
(In millions)
Cabinets
Plumbing
Doors
Security
Total
Year Ended December 31, 2016
Restructuring
Charges
$ 1.8
1.6
0.4
10.1
$13.9
Other Charges (a)
Cost of
Products
Sold
SG&A(b)
$ — $ —
0.2
—
0.7
0.3
—
4.2
$4.5
$0.9
Total
Charges
$ 1.8
2.1
0.4
15.0
$19.3
(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 2016 primarily related to severance costs and charges associated with
the relocation of a manufacturing facility within our Security segment.
73
Pre-tax restructuring and other charges for the year ended December 31, 2015 were as follows:
(In millions)
Cabinets
Plumbing
Security
Corporate
Total
Year Ended December 31, 2015
Restructuring
Charges
$ 1.2
6.4
8.1
0.9
$16.6
Other Charges (a)
Cost of
Products
Sold
SG&A(b)
$0.1
0.1
5.3
—
$5.5
$ —
0.6
—
—
$0.6
Total
Charges
$ 1.3
7.1
13.4
0.9
$22.7
(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 2015 related to severance costs to relocate a Plumbing manufacturing
facility in China and severance costs and accelerated depreciation to relocate a manufacturing facility
within our Security segment, as well as severance costs in the Security, Cabinets and Corporate segments.
Reconciliation of Restructuring Liability
(In millions)
Workforce reduction costs
Other
Balance at
12/31/16
2017
Provision
Cash
Expenditures (a)
Non-Cash
Write-offs (b)
Balance at
12/31/17
$2.4
0.6
$3.0
$6.7
1.6
$8.3
$(3.9)
(1.3)
$(5.2)
$(0.2)
(0.1)
$(0.3)
$5.0
0.8
$5.8
(a) Cash expenditures primarily related to severance charges.
(b) Non-cash write-offs include long-lived asset impairment charges attributable to restructuring actions.
(In millions)
Workforce reduction costs
Asset disposals
Other
Balance at
12/31/15
2016
Provision
Cash
Expenditures (c)
Non-Cash
Write-offs (d)
Balance at
12/31/16
$10.4
—
0.5
$10.9
$ 9.3
0.1
4.5
$13.9
$(17.5)
—
(4.1)
$(21.6)
$ 0.2
(0.1)
(0.3)
$(0.2)
$2.4
—
0.6
$3.0
(c) Cash expenditures primarily related to severance charges.
(d) Non-cash write-offs include long-lived asset impairment charges attributable to restructuring actions.
17. Commitments
Purchase Obligations
Purchase obligations of the Company as of December 31, 2017 were $397.3 million, of which $371.3 million
is due within one year. Purchase obligations include contracts for raw materials and finished goods
purchases, selling and administrative services, and capital expenditures.
74
Lease Commitments
Future minimum rental payments under non-cancelable operating leases as of December 31, 2017 were
as follows:
(In millions)
2018
2019
2020
2021
2022
Remainder
Total minimum rental payments
$ 31.0
26.9
20.7
15.9
13.0
50.7
$158.2
Total rental expense for all operating leases (reduced by minor amounts from subleases) amounted to
$42.1 million, $43.5 million and $34.9 million in 2017, 2016 and 2015, respectively.
Product Warranties
We generally record warranty expense related to contractual warranty terms at the time of sale. We may
also provide customer concessions for claims made outside of the contractual warranty terms and those
expenses are recorded in the period in which the concession is made. 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, 2017, 2016 and 2015.
(In millions)
Reserve balance at the beginning of the year
Provision for warranties issued
Settlements made (in cash or in kind)
Acquisition
Foreign currency
Reserve balance at end of year
2017
2016
2015
$ 16.2
25.1
(24.3)
—
0.2
$ 17.2
$ 16.0
25.8
(25.5)
0.3
(0.4)
$ 13.0
29.9
(28.3)
1.6
(0.2)
$ 16.2
$ 16.0
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, Diamond, Mid-Continent, Kitchen Craft,
Schrock, Homecrest, Omega, Kemper, StarMark and Ultracraft. In addition, cabinets are distributed under
the Thomasville Cabinetry brand names. The Plumbing segment manufactures or assembles and sells
faucets, bath furnishings, accessories and kitchen sinks and waste disposals predominantly under the
Moen, ROHL, Riobel, Perrin & Rowe, Victoria + Albert, Shaws and Waste King brands. The Doors segment
includes residential fiberglass and steel entry door systems under the Therma-Tru brand name and
urethane millwork product lines under the Fypon brand name. The Security segment includes locks, safety
and security devices and electronic security products under the Master Lock and American Lock brand
names and fire resistant safes, security containers and commercial cabinets under the SentrySafe brand
name. Corporate expenses consist of headquarters 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 the periodic remeasurement of our liabilities. Corporate assets consist primarily of cash.
75
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
2017
2016
2015
$2,467.1
1,720.8
502.9
592.5
$2,397.8
1,534.4
473.0
579.7
$2,173.4
1,414.5
439.1
552.4
$5,283.3
$4,984.9
$4,579.4
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 2017, 2016
and 2015. All segments sell to both The Home Depot and Lowe’s. Net sales to The Home Depot were 13%,
13% and 14% of net sales in 2017, 2016 and 2015, respectively. Net sales to Lowe’s were 14%, 14% and
14% of net sales in 2017, 2016 and 2015, respectively.
(In millions)
Operating income:
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 gains (losses)
Long-lived asset impairment
Norcraft transaction costs(b)
Total Corporate expenses
2017
2016
2015
$267.2
363.6
74.5
72.4
(85.6)
$257.8
326.3
61.9
66.6
(79.9)
$192.4
285.4
44.0
55.9
(81.6)
$692.1
$632.7
$496.1
$
(85.2)
4.2
0.5
(5.1)
—
$
(80.9)
2.9
(1.9)
—
—
$
(70.1)
6.1
(2.5)
—
(15.1)
$
(85.6)
$
(79.9)
$
(81.6)
(b) Representing external costs directly related to the acquisition of Norcraft and primarily includes expenditures for banking, legal, accounting and other
similar services.
76
(In millions)
Total assets:
Cabinets
Plumbing
Doors
Security
Corporate
Total assets
Depreciation expense:
Cabinets
Plumbing
Doors
Security
Corporate
Depreciation expense
Amortization of intangible assets:
Cabinets
Plumbing
Doors
Security
Amortization of intangible assets
Capital expenditures:
Cabinets
Plumbing
Doors
Security
Corporate
Capital expenditures, gross
Less: proceeds from disposition of assets
Capital expenditures, net
Net sales by geographic region(a):
United States
Canada
China
Other international
Net sales
Property, plant and equipment, net:
United States
Mexico
Canada
China
Other international
Property, plant and equipment, net
(a) Based on country of destination
77
2017
2016
2015
$2,416.3
1,854.1
494.8
537.4
208.8
$2,349.4
1,626.8
480.6
514.5
157.2
$2,364.0
1,341.4
483.9
520.7
165.7
$5,511.4
$5,128.5
$4,875.7
$
$
$
$
$
42.8
26.9
9.1
16.8
3.0
98.6
19.7
7.7
2.3
2.0
31.7
63.4
43.5
20.8
19.3
18.0
$
$
$
$
$
40.1
24.6
9.0
17.2
3.7
94.6
18.4
3.6
3.8
2.3
28.1
61.7
48.3
12.9
25.9
0.5
$
$
$
$
$
38.1
21.3
11.2
19.5
3.4
93.5
14.3
1.2
3.8
2.3
21.6
61.3
27.2
13.3
17.3
9.4
165.0
(0.4)
149.3
(3.9)
128.5
(2.5)
$ 164.6
$ 145.4
$ 126.0
$4,492.2
427.6
202.3
161.2
$4,258.5
406.4
175.0
145.0
$3,892.9
385.1
163.2
138.2
$5,283.3
$4,984.9
$4,579.4
$ 562.3
89.0
50.5
24.8
13.4
$ 499.8
90.8
45.5
22.7
3.7
$ 498.9
74.2
39.4
14.4
1.0
$ 740.0
$ 662.5
$ 627.9
19. Quarterly Financial Data
Unaudited
(In millions, except per share amounts)
2017
1st
2nd
3rd
4th
Net sales
Gross profit
Operating income
Income from continuing operations, net of tax
Income (loss) from discontinued operations, net of
tax
Net income
Net income attributable to Fortune Brands
Basic earnings (loss) per common share
Continuing operations
Discontinued operations
Net income attributable to Fortune Brands
Diluted earnings (loss) per common share
Continuing operations
Discontinued operations
Net income attributable to Fortune Brands
$1,186.8 $1,365.4 $1,348.6 $1,382.5
493.0
163.0
128.0
515.5
212.4
140.3
507.0
201.8
129.6
417.0
114.9
77.4
—
77.4
77.4
0.50
—
0.50
0.50
—
0.50
(2.6)
137.7
137.7
0.91
(0.02)
0.89
0.90
(0.02)
0.88
—
129.6
129.5
—
128.0
128.0
0.84
—
0.84
0.83
—
0.83
0.84
—
0.84
0.83
—
0.83
2016
1st(a)
2nd
3rd
4th
Net sales
Gross profit
Operating income
Income from continuing operations, net of tax
Income (loss) from discontinued operations, net of
tax
Net income
Net income attributable to Fortune Brands
Basic earnings (loss) per common share
Continuing operations
Discontinued operations
Net income attributable to Fortune Brands
Diluted earnings (loss) per common share
Continuing operations
Discontinued operations
Net income attributable to Fortune Brands
$1,106.5 $1,297.8 $1,279.0 $1,301.6
474.1
166.4
104.4
474.7
187.7
125.1
478.0
183.1
121.9
377.8
95.5
61.0
—
61.0
61.0
0.39
—
0.39
0.38
—
0.38
—
125.1
125.2
1.5
123.4
123.4
0.82
—
0.82
0.80
—
0.80
0.79
0.01
0.80
0.77
0.01
0.78
(0.7)
103.7
103.6
0.68
(0.01)
0.67
0.67
(0.01)
0.66
Full
Year
$5,283.3
1,932.5
692.1
475.3
(2.6)
472.7
472.6
3.10
(0.02)
3.08
3.05
(0.02)
3.03
Full
Year
$4,984.9
1,804.6
632.7
412.4
0.8
413.2
413.2
2.67
0.01
2.68
2.61
0.01
2.62
(a) Amounts revised to reflect adoption of ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting.”
In 2017, we recorded pre-tax defined benefit plan actuarial gains of $0.5 million — $1.3 million of actuarial
gains ($0.9 million after tax) in the third quarter and ($0.8) million of actuarial losses (($0.5) million after tax)
in the fourth quarter.
In 2016, we recorded pre-tax defined benefit plan actuarial losses of $1.9 million — $0.9 million
($0.6 million after tax) in the first quarter and $1.0 million ($0.7 million after tax) in the third quarter.
78
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
Income (loss) from discontinued operations
Net income attributable to Fortune Brands
Earnings (loss) per common share
Basic
Continuing operations
Discontinued operations
2017
2016
2015
$475.3
0.1
475.2
(2.6)
$412.4
—
412.4
0.8
$306.5
0.5
306.0
9.0
$472.6
$413.2
$315.0
$ 3.10
(0.02)
$ 2.67
0.01
$ 1.92
0.05
Net income attributable to Fortune Brands common stockholders
$ 3.08
$ 2.68
$ 1.97
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
$ 3.05
(0.02)
$ 3.03
153.2
2.6
$ 2.61
0.01
$ 2.62
154.3
3.5
$ 1.88
0.05
$ 1.93
159.5
3.5
155.8
157.8
163.0
shares outstanding for diluted earnings per share
0.5
0.5
0.7
21. Other Expense, Net
The components of other expense, net for the years ended December 31, 2017, 2016 and 2015 were as
follows:
(In millions)
Asset impairment charge
Other items, net
Total other expense, net
2017
$7.0
0.9
$7.9
2016
$ —
1.5
$1.5
2015
$ —
4.3
$4.3
During 2017, we recorded an impairment charge of $7.0 million pertaining to a cost method investment in a
development stage home products company due to an other-than-temporary decline in its fair value. As a
result of the impairment, the carrying value of the investment was reduced to zero and the Company is not
subject to further impairment or funding obligations with regard to this investment.
22. Contingencies
Litigation
The Company is a defendant in lawsuits that are ordinary routine litigation matters incidental to its
businesses. 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.
79
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 (“PRPs”) under “Superfund” or similar state laws. As of
December 31, 2016, eleven such instances have not been dismissed, settled or otherwise resolved. In
calendar year 2017, none of our subsidiaries were identified as a PRP in a new instance and no instances
were settled, dismissed or otherwise resolved. 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, 2017 and 2016, we had accruals of
$0.7 million and $1.0 million, respectively, relating to environmental compliance and cleanup including, but
not limited to, the above mentioned Superfund sites.
80
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Fortune Brands Home & Security, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Fortune Brands Home & Security Inc.
and its subsidiaries as of December 31, 2017 and December 31, 2016, and the related consolidated
statements of income, comprehensive income, cash flows and equity for each of the three years in the
period ended December 31, 2017, including the related notes and financial statement schedule listed in
the index appearing under Item 15(a)(2). (collectively referred to as the “consolidated financial
statements”). We also have audited the Company’s internal control over financial reporting as of
December 31, 2017 based on criteria established in Internal Control — Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2017 and December 31, 2016, and the
results of their operations and their cash flows for each of the three years in the period ended
December 31, 2017 in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2017, based on criteria established in Internal Control —
Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, 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 the Company’s
consolidated financial statements and on the Company’s internal control over financial reporting based on
our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of
material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. 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.
As described in Management’s Report on Internal Control Over Financial Reporting, management has
excluded Victoria + Albert and Shaws from its assessment of internal control over financial reporting as of
81
December 31, 2017, because they were acquired by the Company in purchase business combinations
during 2017. We have also excluded Victoria + Albert and Shaws from our audit of internal control over
financial reporting. Victoria & Albert and Shaws are wholly-owned subsidiaries whose total assets and total
revenues excluded from management’s assessment and our audit of internal control over financial
reporting represent 0.7% and 0.2%, respectively, of the related consolidated financial statement amounts
as of and for the year ended December 31, 2017.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Chicago, IL
February 28, 2018
We have served as the Company’s auditor since 2011.
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,
2017.
(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
82
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,
2017. The Company acquired Victoria + Albert in October 2017 and Shaws Since 1897 Limited (“Shaws”)
in July 2017, and therefore as permitted by the Securities and Exchange Commission, we excluded Victoria
+ Albert and Shaws from the scope of our management’s assessment of the effectiveness of our internal
controls over financial reporting as of December 31, 2017. The total assets and total revenues of Victoria +
Albert and Shaws represented 0.7% and 0.2%, respectively, of the related consolidated financial statement
amounts as of and for the year ended December 31, 2017.
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, 2017, 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, 2017 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
See the information under the captions “Election of Directors,” “Corporate Governance — Board
Committees — Audit Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance”
contained in the 2018 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 Business Conduct & Ethics which sets forth
various policies and procedures intended to promote the ethical behavior of all of the Company’s
employees. The Company’s Board of Directors has also 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 Business Conduct & Ethics and the Code of Ethics for Senior Financial
Officers are available, free of charge, on the Company’s website, http://ir.fbhs.com/corporate-
governance.cfm. A copy of these documents 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 Business Conduct & Ethics or 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 “Director Compensation,” “Corporate Governance — Board
Committees — Compensation Committee,” “Compensation Committee Interlocks and Insider Participation,”
“Compensation Discussion and Analysis,” “Executive Compensation,” “CEO Pay Ratio” and “Compensation
Committee Report” contained in the 2018 Proxy Statement, which information is incorporated herein
by reference.
83
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
2018 Proxy Statement, which information is incorporated herein by reference. See also the “Equity
Compensation Plan Information” table contained in the 2018 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 2018 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 2018 Proxy Statement, which information is incorporated
herein by reference.
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, 2017, 2016 and 2015
contained in Item 8 hereof.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016
and 2015 contained in Item 8 hereof.
Consolidated Balance Sheets as of December 31, 2017 and 2016 contained in Item 8 hereof.
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
contained in Item 8 hereof.
Consolidated Statements of Equity for the years ended December 31, 2017, 2016 and 2015 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 89.
(3) Exhibits
2.1.
2.2.
Stock Purchase Agreement dated as of August 19, 2014 by and among Fortune Brands Home &
Security, Inc., Fortune Brands Windows & Doors, 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.†
Agreement and Plan of Merger, dated as of March 30, 2015, by and among Fortune Brands
Home & Security, Inc., Tahiti Acquisition Corp. and Norcraft Companies, Inc. is incorporated herein
by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on March 30, 2015,
Commission file number 1-35166.†
84
3.1.
3.2.
4.1.
4.2.
4.3.
4.4.
10.1.
10.2.
10.3.
10.4.
10.5.
10.6.
10.7.
Restated Certificate of Incorporation of Fortune Brands Home & Security, Inc., dated as of
September 27, 2011, 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.
Indenture, dated as of June 15, 2015, by and among Fortune Brands Home & Security, Inc.,
Wilmington Trust, National Association, as Trustee, and Citibank, N.A., as Securities Agent is
incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed
on June 16, 2015, Commission file number 1-35166.
First Supplemental Indenture, dated as of June 15, 2015, by and among Fortune Brands Home &
Security, Inc., Wilmington Trust, National Association, as Trustee, and Citibank, N.A., as Securities
Agent is incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form
8-K filed on June 16, 2015, Commission file number 1-35166.
Form of global certificate for the Company’s 3.000% Senior Notes due 2020 is incorporated
herein by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on June 16,
2015, Commission file number 1-35166.
Form of global certificate for the Company’s 4.000% Senior Notes due 2025 is incorporated
herein by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K on June 16,
2015, Commission file number 1-35166.
Tax Allocation Agreement, dated as of September 28, 2011, by and 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.
Indemnification Agreement, dated as of September 14, 2011, by and 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.
Credit Agreement, dated as of August 22, 2011, among 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.
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.
$1,250,000,000 Amended and Restated Credit Agreement, dated as of June 30, 2016, by and
among the Company, the lenders party thereto and JPMorgan Chas Bank, N.A., as Administrative
Agent, is incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on
Form 10-Q filed on August 4, 2016, 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.*
85
10.8.
10.9.
10.10.
10.11.
10.12.
10.13.
10.14.
10.15.
10.16.
10.17.
10.18.
10.19.
10.20.
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.*
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.*
Amendment Number One to the Fortune Brands Home & Security, Inc. 2013 Long-Term
Incentive Plan, dated as of August 2, 2016, is incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q filed on November 2, 2016, Commission file number
1-35166.*
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.*
Form of 2012 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.*
Form of 2013 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.*
Form of 2014 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 on February 26,
2014, Commission file number 1-35166.*
Form of 2014 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 on February 26, 2014,
Commission file number 1-35166.*
Form of 2014 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 on February 26,
2014, Commission file number 1-35166.*
Form of 2016 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 10.3 to the Company’s Quarterly Report on Form 10-Q filed on April 28,
2016, Commission file number 1-35166.*
Form of 2016 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 10.1 to the Company’s Quarterly Report on Form 10-Q filed on April 28, 2016,
Commission file number 1-35166.*
Form of 2016 Restricted Stock Unit Award Notice and Agreement for awards under the Fortune
Brands Home & Security, Inc. 2013 Long-Term Incentive Plan is incorporated by reference to
Exhibit 10.22 to the Company’s Annual Report on Form 10-K filed on February 28, 2017,
Commission file number 1-35166.*
Form of Performance Share Award Notice and Agreement for awards under the Fortune Brands
Home & Security, Inc. 2013 Long-Term Incentive Plan is incorporated by reference to Exhibit
10.23 to the Company’s Annual Report on Form 10-K filed on February 28, 2017, Commission
file number 1-35166.*
86
10.21.
10.22.
10.23.
10.24.
10.25.
10.26.
10.27.
21.
23.
24.
31.1.
31.2.
32.
101.
Form of Stock Option Award Notice and Agreement for awards under the Fortune Brands
Home & Security, Inc. 2013 Long-Term Incentive Plan is incorporated by reference to Exhibit
10.24 to the Company’s Annual Report on Form 10-K filed on February 28, 2017, 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 by reference to
Exhibit 10.25 to the Company’s Annual Report on Form 10-K filed on February 28, 2017,
Commission file number 1-35166.*
Form of Agreement for the Payment of Benefits Following Termination of Employment between
the Company and each of Christopher J. Klein, Patrick D. Hallinan, Robert K. Biggart, Sheri R.
Grissom, Tracey L. Belcourt, Brian C. Lantz and Marty Thomas.*
Form of Agreement for the Payment of Benefits Following Termination of Employment for each of
Michael P. Bauer, Nicholas I. Fink, Brett E. Finley, David M. Randich and David B. Lingafelter.*
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.*
Fortune Brands Home & Security, Inc. 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.*
Fortune Brands Home & Security, Inc. Deferred Compensation Plan, amended & restated as of
February 27, 2017 is incorporated by reference to Exhibit 10.30 to the Company’s Annual Report
on Form 10-K filed on February 28, 2017, Commission file number 1-35166.*
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, 2017 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.
Item 16. Form 10-K Summary
None.
87
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 28, 2018
By:/s/ CHRISTOPHER J. KLEIN
FORTUNE BRANDS HOME & SECURITY, INC.
(The Company)
Christopher J. Klein
Chief Executive Officer (principal executive officer)
/s/ PATRICK D. HALLINAN
Patrick D. Hallinan
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 28, 2018
/S/ PATRICK D. HALLINAN
Patrick D. Hallinan., Senior Vice President
and Chief Financial Officer (principal
financial officer)
Date: February 28, 2018
/s/ DANNY LUBURIC
Danny Luburic, Vice President — Controller
(principal accounting officer)
Date: February 28, 2018
/s/ ANN FRITZ HACKETT*
Ann Fritz Hackett, Director
Date: February 28, 2018
/s/ SUSAN S. KILSBY*
Susan S. Kilsby, Director
Date: February 28, 2018
/s/ A.D. DAVID MACKAY*
A.D. David Mackay, Director
Date: February 28, 2018
/s/ JOHN G. MORIKIS*
John G. Morikis, Director
Date: February 28, 2018
/s/ DAVID M. THOMAS*
David M. Thomas, Director
Date: February 28, 2018
/s/ RONALD V. WATERS, III*
Ronald V. Waters, III, Director
Date: February 28, 2018
/s/ NORMAN H. WESLEY*
Norman H. Wesley, Director
Date: February 28, 2018
*By:/s/ ROBERT K. BIGGART
Robert K. Biggart, Attorney-in-Fact
88
Schedule II Valuation and Qualifying Accounts
For the years ended December 31, 2017, 2016 and 2015
(In millions)
2017:
Allowance for cash discounts,
returns and sales allowances
Allowance for doubtful accounts
Allowance for deferred tax assets
2016:
Allowance for cash discounts,
returns and sales allowances
Allowance for doubtful accounts
Allowance for deferred tax assets
2015:
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
Reclassifications(c)
Write-offs
and
Deductions(a)
Business
Acquisition(b)
Balance at
End of
Period
$ 68.2
7.4
16.4
$ 205.7
0.2
(5.4)
$ 50.3
5.8
19.7
$ 148.6
4.3
(3.3)
$ 45.1
5.4
12.0
$ 150.7
2.8
6.4
$3.0
—
—
$ —
—
—
$ —
—
—
$ 192.9
4.5
—
$ 130.7
2.7
—
$ 145.5
2.4
—
$—
0.2
—
$—
—
—
$—
—
1.3
$ 84.0
3.3
11.0
$ 68.2
7.4
16.4
$ 50.3
5.8
19.7
(a) Net of recoveries of amounts written off in prior years and immaterial foreign currency impact.
(b) Represents a valuation allowance on an acquired net operating loss carryforward (Norcraft Canada).
(c) Represents a reclassification of certain customer program liabilities to sales allowances (reduction to accounts receivable) in
Security segment during 2017.
89
Reconciliation Of Operating Income Before Charges/Gains To GAAP Operating Income
(In millions) (Unaudited)
CABINETS
Operating income before charges/gains
Restructuring charges (a)
Other charges (a)
Cost of products sold
Selling, general and administrative expenses
Asset impairment charges
Operating income (GAAP)
PLUMBING
Operating income before charges/gains
Restructuring charges (a)
Other charges (a)
Cost of products sold
Selling, general and administrative expenses
Operating income (GAAP)
DOORS
Operating income before charges/gains
Restructuring charges (a)
Other charges (a)
Cost of products sold
Selling, general and administrative expenses
Asset impairment charges
Operating income (GAAP)
SECURITY
Operating income before charges/gains
Restructuring charges (a)
Other charges (a)
Cost of products sold
Selling, general and administrative expenses
Asset impairment charges
Loss on sale of product line
Operating income (GAAP)
CORPORATE
Operating income before charges/gains
Restructuring charges (a)
Other charges (a)
December 31,
December 31,
For the Twelve Months Ended
2017
2016
% Change
2015
2014
2013
2012
$272.4
(1.4)
$259.6
(1.8)
(1.6)
(2.2)
—
$267.2
—
—
—
$257.8
5
22
(100)
(100)
—
4
$195.7
(1.2)
$138.3
(0.4)
$120.6
(2.2)
$ 40.0
(4.7)
(2.1)
—
—
$192.4
—
—
—
$137.9
(0.1)
—
(21.2)
$ 97.1
(8.9)
—
(5.9)
$ 20.5
$370.9
(2.8)
$332.2
(1.6)
12
(75)
$292.5
(6.4)
$260.2
(0.5)
$229.7
(0.6)
$169.2
—
(2.1)
(2.4)
$363.6
(4.1)
(0.2)
$326.3
49
(1,100)
11
(0.1)
(0.6)
$285.4
(0.2)
(0.6)
$258.9
(0.6)
(0.2)
$228.3
—
—
$169.2
$ 74.5
0.1
$ 62.3
(0.4)
—
(0.1)
—
—
—
—
$ 74.5
$ 61.9
$ 88.5
(4.2)
$ 81.6
(10.1)
(5.6)
(0.7)
(3.2)
(2.4)
$ 72.4
(4.2)
(0.7)
—
—
$ 66.6
20
125
—
(100)
—
20
8
58
(33)
—
(100)
(100)
9
$ 44.0
—
$ 29.2
—
$ 15.3
—
$ 6.0
—
—
—
—
—
—
—
—
—
—
—
—
(7.3)
$ 44.0
$ 29.2
$ 15.3
$ (1.3)
$ 69.3
(8.1)
$ 59.2
(4.1)
$ 55.4
—
$ 54.3
—
(5.3)
—
—
—
$ 55.9
(5.7)
—
—
—
$ 49.4
—
—
—
—
$ 55.4
—
—
—
—
$ 54.3
$ (85.2)
—
$ (80.8)
—
(5)
—
$ (69.2)
(0.9)
$ (65.0)
(2.0)
$ (78.2)
—
$ (60.8)
—
Selling, general and administrative expenses
General and administrative expense (GAAP)
(5.1)
(90.3)
(0.1)
(80.9)
(5,000)
(12)
(15.1)
(85.2)
—
(67.0)
—
(78.2)
—
(60.8)
Defined benefit plan income before actuarial
gains/(losses)
Defined benefit plan actuarial gains/(losses) (b)
Defined benefit plan income/(expense) (GAAP)
Corporate expense (GAAP)
$ 4.2
0.5
4.7
$ (85.6)
$ 2.9
(1.9)
1.0
$ (79.9)
45
126
370
(7)
$ 6.1
(2.5)
3.6
$ (81.6)
$ 8.8
(13.7)
(4.9)
$ (71.9)
$ 10.2
(5.1)
5.1
$ (73.1)
$ 3.5
(42.2)
(38.7)
$ (99.5)
90
Reconciliation Of Operating Income Before Charges/Gains To GAAP Operating Income
(continued) (In millions) (Unaudited)
FORTUNE BRANDS HOME & SECURITY
Operating income before charges/gains
Restructuring charges (a)
Other charges (a)
Cost of products sold
Selling, general and administrative expenses
Asset impairment charges
Loss on sale of product line
Defined benefit plan actuarial gains/(losses) (b)
Operating income (GAAP)
December 31,
December 31,
For the Twelve Months Ended
2017
2016
% Change
2015
2014
2013
2012
$725.3
(8.3)
$657.8
(13.9)
(9.3)
(10.5)
(3.2)
(2.4)
0.5
$692.1
(8.3)
(1.0)
—
—
(1.9)
$632.7
10
40
(12)
(950)
(100)
(100)
126
9
$538.4
(16.6)
$430.7
(7.0)
$353.0
(2.8)
$212.2
(4.7)
(7.5)
(15.7)
—
—
(2.5)
$496.1
(5.9)
(0.6)
—
—
(13.7)
$403.5
(0.7)
(0.2)
(21.2)
—
(5.1)
$323.0
(8.9)
—
(13.2)
—
(42.2)
$143.2
Operating income before charges/gains is operating income derived in accordance with U.S. generally accepted accounting principles (“GAAP”)
excluding restructuring and other charges, asset impairment charges, loss on the sale of a product line 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.
(a) (b) For definitions of Non-GAAP measures, see Definitions of Terms on page 94.
91
Before Charges/Gains Operating Margin To Operating Margin
(Unaudited)
CABINETS
Before charges/gains operating margin
Restructuring & other charges
Asset impairment charges
Operating margin
PLUMBING
Before charges/gains operating margin
Restructuring & other charges
Operating margin
DOORS
Before charges/gains operating margin
Restructuring & other charges
Asset impairment charges
Operating margin
SECURITY
Before charges/gains operating margin
Restructuring & other charges
Asset impairment charges
Loss on sale of product line
Operating margin
FORTUNE BRANDS HOME & SECURITY
Before charges/gains operating margin
Restructuring & other chargess
Asset impairment charges
Loss on sale of product line
Defined benefit plan actuarial gains/(losses)
Operating margin
For the Twelve Months Ended
December 31,
2017
2012
11.0%
(0.2%)
—
10.8%
21.6%
(0.5%)
21.1%
14.8%
—
—
14.8%
14.9%
(1.8%)
(0.5%)
(0.4%)
12.2%
13.7%
(0.4%)
(0.2%)
—
—
13.1%
3.0%
(1.0%)
(0.5%)
1.5%
15.4%
—
15.4%
1.9%
—
(2.3%)
(0.4%)
14.1%
—
—
—
14.1%
6.8%
(0.4%)
(0.5%)
—
(1.3%)
4.6%
Operating margin is calculated as operating income derived in accordance with GAAP, divided by GAAP Net Sales. Before charges/gains
operating margin is operating income derived in accordance with GAAP excluding restructuring and other charges, loss on the sale of product
line and asset impairment charges, and for FBHS, the impact of income and expense from actuarial gains or losses associated with our defined
benefit plans recorded in the Corporate segment, divided by GAAP net sales. 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.
92
2017, 2016, 2015, 2014, 2013 & 2012 Diluted EPS Before Charges/Gains Reconciliation
(Unaudited)
Twelve Months Ended December 31,
2017
2016
%
Change
vs 2017
2015
2014
2013
2012
%
Change
vs 2017
Earnings per common share — diluted
EPS before charges/gains (d)
$3.08
$2.75
12
$2.07
$1.74
$1.37
$0.83
271
Restructuring and other charges
Asset impairment charges (e)
Income tax gains/(losses)
Loss on sale of product line
Defined benefit plan actuarial gains/(losses)
Write-off of prepaid debt issuance costs
Norcraft transaction costs (c)
(0.10)
(0.07)
0.16
(0.02)
—
—
—
(0.10)
—
(0.02)
—
(0.01)
(0.01)
—
—
—
900
—
100
100
—
(0.10)
—
—
—
(0.01)
—
(0.08)
(0.05)
(0.01)
0.01
—
(0.05)
—
—
(0.02)
(0.12)
—
—
(0.02)
—
—
(0.05)
(0.05)
0.08
—
(0.16)
—
—
(100)
(40)
100
—
100
—
—
Diluted EPS — continuing operations
$3.05
$2.61
17
$1.88
$1.64
$1.21
$0.65
369
For the twelve months ended December 31, 2017, diluted EPS before charges/gains is income from continuing operations, net of tax including
the impact from noncontrolling interests calculated on a diluted per-share basis excluding $23.0 million ($16.3 million after tax or $0.10 per
diluted share) of restructuring and other charges, asset impairments of $15.3 million ($11.1 million after tax or $0.07 per diluted share), the loss on
sale of product line of $2.4 million ($2.5 million after tax or $0.02 per diluted share), the impact of income from actuarial gains associated with our
defined benefit plans of $0.5 million ($0.4 million after tax) and an income tax gain arising from a net benefit related to the Tax Cuts and Jobs Act
of 2017 of $25.7 million ($0.16 per diluted share).
For the twelve months ended December 31, 2016, 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 $23.2 million ($16.5 million after tax or $0.10
per diluted share) of restructuring and other charges, the impact of the write-off of prepaid debt issuance cost of $1.3 million ($0.8 million after
tax or $0.01 per diluted share), expense related to an income tax loss of $3.1 million ($0.02 per diluted share), and actuarial losses of $1.9 million
($1.3 million after tax or $0.01 per diluted share).
For the twelve months ended December 31, 2015, 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 $22.7 million ($16.3 million after tax or $0.10
per diluted share) of restructuring and other charges, transaction costs related to the acquisition of Norcraft of $17.1 million ($13.4 million after
tax or $0.08 per diluted share), the impact of expense from actuarial losses associated with our defined benefit plans of $2.5 million ($1.6 million
after tax or $0.01 per diluted share) and a charge related to an income tax loss of $0.2 million.
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, an income tax gain 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).
(c) (d) (e) For definitions of Non-GAAP measures, see Definitions of Terms on page 94.
93
Definitions of Terms: Non-GAAP Measures
(a) 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
costs may include inventory obsolescence provisions and trade receivables allowances from exiting product lines, accelerated depreciation
resulting from the closure of facilities, and gains or losses on the sale of previously closed facilities. At Corporate, other charges incurred
represent external costs directly related to the acquisition of Norcraft and primarily include expenditures from banking, legal, accounting
and other similar services for the twelve months ended December 31, 2015. In addition, other charges include estimated acquisition
related inventory step-up expense of $2.0 million for the twelve months ended December 31, 2017, and $3.8 million for the twelve months
ended December 31, 2016, in our Plumbing segment and $2.1 million for the twelve months ended December 31, 2015, in our Cabinets
segment; these charges are classified in cost of products sold. Other charges also included in our Plumbing segment include $1.6 million of
compensation expense related to deferred purchase price consideration payable to certain former Victoria + Albert shareholders contingent
on their employment through October 2018 and $0.7 million of transaction related U.K. stamp duty resulting from our acquisition of
Victoria + Albert.
(b) 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)
For Years Ending December 31,
2017
2016
2015
2014
2013
2012
%
$
%
$
%
$
%
$
%
$
%
$
Actual return on plan assets
Expected return on plan assets
16.3% $83.2
37.3
6.4%
10.0% $46.6
37.2
6.6%
(2.1)% ($18.2)
40.2
6.8%
9.8% $52.0
42.2
7.4%
15.2% $74.6
41.8
7.8%
14.5% $63.7
36.8
7.8%
Discount rate at December 31:
Pension benefits
Postretirement benefits
3.8%
3.4%
4.3%
3.4%
4.6%
4.1%
4.2%
3.5%
5.0%
4.3%
4.2%
3.7%
(c) Represents external costs directly related to the acquisition of Norcraft and primarily includes expenditures for banking, legal, accounting and
other similar services. In addition, it includes the impact of expense related to our estimated purchase accounting inventory step-up.
(d) 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, Norcraft transaction related expenses, income tax gains
and losses, the impact of income and expense from actuarial gains or losses associated with our defined benefit plans, the loss on the sale of
product line and the write-off of prepaid debt issuance 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.
(e) Asset impairment charges for the twelve months ended December 31, 2017, represent an impairment of a cost investment in a developmental
stage home security company classified in other expense and an impairment of a long-lived Corporate asset classified in selling, general and
administrative expenses and include impairments related to our decision during the first quarter of 2017 to sell the Field ID product line.
94
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,” “look to” 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 operating income before charges/gains, operating margin
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.
95
CORPORATE DATA
EXECUTIVE OFFICE
520 Lake Cook Road
Suite 300
Deerfield, IL 60015-5611
847-484-4400
WEBSITE
www.FBHS.com
EMAIL
Mail@FBHS.com
REGISTERED OFFICE
251 Little Falls Drive
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, May 1, 2018,
at 8:00 a.m. (CDT) at
The Renaissance Chicago
North Shore Hotel
933 Skokie Boulevard
Northbrook, IL 60062
TRANSFER AGENT FOR
COMMON STOCK
EQ 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
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 300
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
2017 Annual Report are being
distributed in connection with
our 2018 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, 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,” “Fortune Brands” and
similar terms to describe the
activities of Fortune Brands
Home & Security, Inc., or its
subsidiary companies or both,
depending on the context.
KEY BRANDS
CABINETS
PLUMBING
DOORS
SECURITY
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.
Throughout this Annual Report, we
refer to numerous trademarks, trade
names and brands. MasterBrand
Cabinets, WoodCrafters, Norcraft,
Moen, Riobel, ROHL, Perrin & Rowe,
Shaws, Victoria + Albert, Therma-Tru,
Master Lock and SentrySafe 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.
Therma-Tru was awarded the No. 1
in quality and most-used entry door
brand in the United States among
building professionals, based on
the 2017 Builder magazine Brand
Use Study.
Occasionally, in conveying
information, we refer to trademarks of
third parties. Such trademarks are the
property of their respective owners.
© 2018 Fortune Brands Home &
Security, Inc. All rights reserved.
96
BOARD OF DIRECTORS
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.
ANN FRITZ HACKETT
Partner and Co‑Founder
Personal Pathways LLC
SUSAN SALTZBART KILSBY
Former Senior Advisor
Credit Suisse Group AG
A.D. DAVID MACKAY
Former President and
Chief Executive Officer
Kellogg Company
JOHN G. MORIKIS
Chairman, President and
Chief Executive 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.
LEADERSHIP TEAM
CHRISTOPHER J. KLEIN
Chief Executive Officer
PATRICK D. HALLINAN
Senior Vice President and
Chief Financial Officer
MICHAEL P. BAUER
President
Master Lock Company
TRACEY L. BELCOURT
Senior Vice President
Global Growth and Development
ROBERT K. BIGGART
Senior Vice President
General Counsel and Secretary
NICHOLAS I. FINK
President
Global Plumbing Group
BRETT E. FINLEY
President
Therma‑Tru
SHERI R. GRISSOM
Senior Vice President
Human Resources
BRIAN C. LANTZ
Senior Vice President
Communications and
Corporate Administration
DAVID M. RANDICH
President
MasterBrand Cabinets
MARTY THOMAS
Senior Vice President
Operations and Supply Chain
Strategy
520 Lake Cook Road
Suite 300
Deerfield, IL 60015-5611
www.FBHS.com
ABOUT THE COVER
New acquisitions into
Fortune Brands’ Global
Plumbing Group (GPG)
continue to elevate our
product, brand and price-
point offering, and further
fuel the platform’s ability to
drive accelerated organic
and incremental growth.