```markdown Part I [Business](index=3&type=section&id=Item%201.%20Business) Fortune Brands Home & Security is a leading home and security products company operating in three segments, focusing on brand leverage and innovation 2019 Net Sales by Business Segment | Segment | 2019 Net Sales (in millions) | Percentage of Total 2019 Net Sales | Key Brands | | :--- | :--- | :--- | :--- | | Cabinets | $2,388.5 | 41.4% | Diamond, Aristokraft, Omega, Decora, Mantra | | Plumbing | $2,027.2 | 35.2% | Moen, Riobel, ROHL, Victoria + Albert | | Doors & Security | $1,348.9 | 23.4% | Therma-Tru, Master Lock, Fiberon, SentrySafe | - The company's strategy emphasizes building on **market-leading brands**, developing **innovative products** like the Flo by Moen Smart Water Shut Off and Mantra value-priced cabinets, expanding in international markets (**16%** of 2019 net sales), leveraging **global supply chains**, and deploying cash to **high-return opportunities**[10](index=10&type=chunk)[11](index=11&type=chunk)[13](index=13&type=chunk) - A **substantial majority** of the U.S. home products market and about two-thirds of the company's U.S. home products sales in 2019 were from **repair-and-remodel activity**, providing a balance to new home construction[22](index=22&type=chunk) - Sales to the company's top ten customers represented **less than half** of total sales in 2019 Sales to all U.S. home centers were approximately **29%** of net sales[23](index=23&type=chunk)[26](index=26&type=chunk) [Risk Factors](index=7&type=section&id=Item%201A.%20Risk%20Factors) The company faces risks from housing market reliance, competition, commodity prices, international trade, and asset impairment - The business is **highly reliant** on North American home improvement, repair/remodel, and new construction activity, which are sensitive to economic factors like employment, consumer confidence, and interest rates[41](index=41&type=chunk)[42](index=42&type=chunk) - The company faces risks from **global commodity and energy price volatility** for materials like brass, zinc, steel, and wood **Import tariffs** could also increase raw material and component prices[46](index=46&type=chunk)[48](index=48&type=chunk)[49](index=49&type=chunk) - International operations (U.S., Canada, China, Europe, Mexico) expose the company to risks from political/economic changes, trade regulations, tariffs, and currency fluctuations[50](index=50&type=chunk)[51](index=51&type=chunk) - Future events, such as **lower-than-forecasted revenues** or a **decline in the housing market**, could lead to **impairment charges** on goodwill and other intangible assets **Impairment charges** of **$41.5 million** and **$62.6 million** were recorded in 2019 and 2018, respectively[68](index=68&type=chunk) [Unresolved Staff Comments](index=13&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments - None[79](index=79&type=chunk) [Properties](index=13&type=section&id=Item%202.%20Properties) As of year-end 2019, the company operates 50 manufacturing facilities and 51 distribution centers globally, suitable for current needs Property Overview as of Dec 31, 2019 | Segment | Manufacturing Facilities (Owned/Leased) | Distribution Centers (Owned/Leased) | | :--- | :--- | :--- | | Cabinets | 21 / 3 | 3 / 15 | | Plumbing | 7 / 6 | 7 / 15 | | Doors & Security | 11 / 2 | 1 / 10 | | **Totals** | **39 / 11** | **11 / 40** | [Legal Proceedings](index=14&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in routine litigation, with management believing the likelihood of material loss is remote - The Company is a defendant in ordinary routine litigation matters incidental to its businesses and believes the likelihood of **material loss is remote**[83](index=83&type=chunk) [Information about our Executive Officers](index=14&type=section&id=Information%20about%20our%20Executive%20Officers) This section lists the company's executive officers, highlighting key leadership changes including the new CEO and Executive Chairman - **Effective January 2020**, Nicholas I Fink became **Chief Executive Officer**, succeeding Christopher J Klein, who transitioned to **Executive Chairman of the Board**[87](index=87&type=chunk)[88](index=88&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=15&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on the NYSE, with a dividend increase in 2019 and remaining share repurchase authorization - The quarterly cash dividend was increased by **9%** to **$0.24 per share** in December 2019[101](index=101&type=chunk) - No shares of common stock were repurchased during the three months ended December 31, 2019 The remaining authorization under the program was approximately **$313.7 million**[103](index=103&type=chunk) [Selected Financial Data](index=17&type=section&id=Item%206.%20Selected%20Financial%20Data) This section summarizes key consolidated financial data, reporting 2019 net sales of $5.76 billion and operating income of $698.5 million Selected Financial Data (2019 vs. 2018) | (In millions, except per share amounts) | 2019 | 2018 | | :--- | :--- | :--- | | Net sales | $5,764.6 | $5,485.1 | | Operating income | $698.5 | $595.2 | | Income from continuing operations, net of tax | $431.3 | $390.0 | | Diluted earnings per share – continuing operations | $3.06 | $2.66 | | Total assets (at year end) | $6,291.3 | $5,964.6 | | Total third party debt (at year end) | $2,184.3 | $2,334.0 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses 2019 financial performance, highlighting increased net sales and operating income, liquidity, capital resources, and critical accounting policies [Results of Operations](index=19&type=section&id=Results%20of%20Operations) In 2019, total net sales increased 5.1% and operating income grew 17.4%, reflecting varied segment performance and productivity gains Net Sales & Operating Income by Segment (2019 vs. 2018) | (In millions) | Net Sales 2019 | Net Sales 2018 | % Change | Operating Income 2019 | Operating Income 2018 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Cabinets | $2,388.5 | $2,418.6 | (1.2)% | $178.3 | $143.5 | 24.3% | | Plumbing | $2,027.2 | $1,883.3 | 7.6% | $427.6 | $375.3 | 13.9% | | Doors & Security | $1,348.9 | $1,183.2 | 14.0% | $172.3 | $155.6 | 10.7% | | **Total** | **$5,764.6** | **$5,485.1** | **5.1%** | **$698.5** | **$595.2** | **17.4%** | - 2019 results included asset **impairment charges** of **$41.5 million** in the Cabinets segment and an unfavorable foreign exchange impact of approximately **$29 million** on net sales[132](index=132&type=chunk) - The Doors & Security segment's sales increase was primarily due to the full-year benefit from the 2018 Fiberon acquisition, which contributed **$139 million**[152](index=152&type=chunk) [Liquidity and Capital Resources](index=22&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity through cash, operating cash flow, and an undrawn credit facility, with debt reduction and capital allocation Cash Flow Summary (2019 vs. 2018) | (In millions) | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $637.2 | $604.0 | | Net cash used in investing activities | $(127.6) | $(634.3) | | Net cash used in financing activities | $(389.7) | $(6.8) | - In September 2019, the company issued **$700 million** of **3.25%** senior notes due in 2029 and used the proceeds to repay its **$350 million** term loan and pay down its revolving credit facility[121](index=121&type=chunk)[158](index=158&type=chunk) - In 2019, the company repurchased **2.0 million** shares for **$100.0 million** and paid **$123.0 million** in dividends[168](index=168&type=chunk)[169](index=169&type=chunk) Contractual Obligations as of Dec 31, 2019 | (In millions) | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Short-term and long-term debt | $2,200.0 | $400.0 | $— | $600.0 | $1,200.0 | | Interest payments on long-term debt | $439.5 | $72.8 | $133.5 | $109.5 | $123.7 | | Operating leases | $202.2 | $39.1 | $60.2 | $41.5 | $61.4 | | Purchase obligations | $408.5 | $373.9 | $24.5 | $10.0 | $0.1 | [Critical Accounting Policies and Estimates](index=26&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Management identifies critical accounting policies for goodwill, intangibles, and defined benefit plans, noting 2019 impairment charges and future risks - Goodwill and indefinite-lived intangible assets are tested for **impairment** annually A quantitative test is performed if qualitative factors suggest impairment is more likely than not[193](index=193&type=chunk)[194](index=194&type=chunk) - In 2019, the company recognized **impairment charges** totaling **$41.5 million** on two indefinite-lived tradenames in the Cabinets segment This was driven by a consumer shift from custom/semi-custom to value-priced cabinetry, leading to lower sales forecasts[198](index=198&type=chunk)[199](index=199&type=chunk) - As of December 31, 2019, the estimated fair values of three tradenames in the Cabinets segment exceeded their carrying values by less than **10%**, increasing the **risk of future impairments**[199](index=199&type=chunk)[200](index=200&type=chunk)[317](index=317&type=chunk) - Defined benefit plan accounting is subject to **volatility from actuarial gains and losses**, primarily due to changes in discount rates and asset returns The company recognized pre-tax actuarial losses of **$34.7 million** in 2019[204](index=204&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=32&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company manages market risks from interest rates, foreign currency, and commodity prices through hedging, with a VAR of $0.6 million for currency - The company uses forward foreign exchange contracts to hedge currency fluctuations, principally for the Canadian dollar, British pound, Mexican peso, and Chinese yuan[222](index=222&type=chunk)[184](index=184&type=chunk) - A Value-at-Risk (VAR) analysis estimated the maximum potential one-day loss from adverse changes in foreign exchange rates for its contracts to be **$0.6 million** at December 31, 2019, at a **95%** confidence level[224](index=224&type=chunk) [Financial Statements and Supplementary Data](index=33&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents audited consolidated financial statements and the auditor's unqualified opinion, noting tradename impairment as a critical audit matter Consolidated Statement of Income Highlights (2019 vs. 2018) | (In millions) | 2019 | 2018 | | :--- | :--- | :--- | | NET SALES | $5,764.6 | $5,485.1 | | OPERATING INCOME | $698.5 | $595.2 | | NET INCOME ATTRIBUTABLE TO FORTUNE BRANDS | $431.9 | $389.6 | Consolidated Balance Sheet Highlights (As of Dec 31) | (In millions) | 2019 | 2018 | | :--- | :--- | :--- | | TOTAL CURRENT ASSETS | $1,898.2 | $1,686.1 | | TOTAL ASSETS | $6,291.3 | $5,964.6 | | TOTAL CURRENT LIABILITIES | $1,409.3 | $1,492.1 | | TOTAL LIABILITIES | $3,863.5 | $3,784.6 | | TOTAL EQUITY | $2,427.8 | $2,180.0 | - The Report of Independent Registered Public Accounting Firm issued an **unqualified opinion** and identified the **impairment assessment** for certain tradenames in the Cabinets segment as a **Critical Audit Matter** due to **significant management judgment** involved[439](index=439&type=chunk)[448](index=448&type=chunk)[449](index=449&type=chunk) [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=74&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no disagreements with its accountants on accounting principles or financial disclosure - None[454](index=454&type=chunk) [Controls and Procedures](index=74&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - Based on their evaluation, the **Chief Executive Officer** and **Chief Financial Officer** concluded that the Company's disclosure controls and procedures were **effective** as of December 31, 2019[457](index=457&type=chunk) - Management concluded that the company's internal control over financial reporting was **effective** as of December 31, 2019[459](index=459&type=chunk) [Other Information](index=74&type=section&id=Item%209B.%20Other%20Information) The company reports no other information for this item - None[463](index=463&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=75&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2020 Proxy Statement - Required information for this item is incorporated by reference from the registrant's 2020 Proxy Statement[465](index=465&type=chunk) [Executive Compensation](index=75&type=section&id=Item%2011.%20Executive%20Compensation) Information on director and executive compensation is incorporated by reference from the company's 2020 Proxy Statement - Required information for this item is incorporated by reference from the registrant's 2020 Proxy Statement[467](index=467&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=75&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information on security ownership and equity compensation plans is incorporated by reference from the company's 2020 Proxy Statement - Required information for this item is incorporated by reference from the registrant's 2020 Proxy Statement[468](index=468&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=75&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on certain relationships, related party transactions, and director independence is incorporated by reference from the 2020 Proxy Statement - Required information for this item is incorporated by reference from the registrant's 2020 Proxy Statement[469](index=469&type=chunk) [Principal Accountant Fees and Services](index=75&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information on principal accountant fees and services is incorporated by reference from the company's 2020 Proxy Statement - Required information for this item is incorporated by reference from the registrant's 2020 Proxy Statement[470](index=470&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=76&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and exhibits filed with the annual report, including various material contracts and certifications - This section lists all financial statements, schedules, and exhibits filed with the annual report, including the Consolidated Financial Statements, Report of Independent Registered Public Accounting Firm, and various material contracts and certifications[472](index=472&type=chunk) [Form 10-K Summary](index=78&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company reports no Form 10-K summary - None[476](index=476&type=chunk) ```

Fortune Brands Home and Security, Inc. (FBHS) Q3 2019 Results Conference Call October 23, 2019 4:30 PM ET Company Participants Brian Lantz - Senior Vice President of Communications and Corporate Administration Chris Klein - Chief Executive Officer Nick Fink - President and Chief Operating Officer Pat Hallinan - Chief Financial Officer Conference Call Participants Michael Dahl - RBC Capital Markets Tim Wojs - Baird Phil Non-GAAP - Jefferies Justin Speer - Zelman & Associates Michael Rehaut - JPMorgan Operato ...

A home and security company DELIVERING THE NEXT PHASE OF GROWTH www.fbhs.com April 2019 Fortune Brands (NYSE: FBHS) is a home and security products company built on industry-leading brands and innovative products for kitchens, bathrooms, entryways and outdoor living spaces. Read about our proven track record, market view, growth platforms and business outlook. This presentation contains forward-looking statements and uses Non-GAAP information such as operating margin, EBITDA and EPS. For more, please read o ...

[Part I](index=3&type=section&id=PART%20I) [Business](index=3&type=section&id=Item%201.%20Business.) Fortune Brands Home & Security is a leading home and security products company with three segments, focusing on brand building, innovation, and strategic cash deployment | Segment | 2018 Net Sales (in million) | Percentage of Total 2018 Net Sales | Key Brands | | :--- | :--- | :--- | :--- | | Cabinets | $2,418.6 | 44% | Diamond, Aristokraft, Mid-Continent, Kitchen Craft, Homecrest, Omega, etc. | | Plumbing | 1,883.3 | 34% | Moen, ROHL, Riobel, Perrin & Rowe, Victoria + Albert, Shaws | | Doors & Security | 1,183.2 | 22% | Master Lock, SentrySafe, Therma-Tru, Fypon, Fiberon | | Total | $5,485.1 | 100% | | - The company's strategy includes building on leading brand positions, developing innovative products, expanding in international markets (**16% of 2018 net sales**), leveraging global supply chains, and deploying cash flow to high-return opportunities such as acquisitions (e.g., Fiberon in 2018) and share repurchases[7](index=7&type=chunk)[8](index=8&type=chunk) - Two customers, The Home Depot and Lowe's, each accounted for **more than 10%** of the Company's net sales in 2018 Sales to all U.S. home centers were approximately **26% of net sales**[12](index=12&type=chunk) | (In million) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Cabinets | $2,418.6 | $2,467.1 | $2,397.8 | | Plumbing | 1,883.3 | 1,720.8 | 1,534.4 | | Doors & Security | 1,183.2 | 1,095.4 | 1,052.7 | | Total | $5,485.1 | $5,283.3 | $4,984.9 | - The business experiences seasonality, with lower sales typically in the first quarter due to reduced new home construction and repair-and-remodel activity[17](index=17&type=chunk) [Risk Factors](index=8&type=section&id=Item%201A.%20Risk%20Factors.) The company faces material risks from North American housing market reliance, intense competition, supply chain volatility, and operational disruptions - The business is heavily reliant on North American home improvement, repair/remodel, and new construction activity, which are sensitive to economic conditions like employment levels, consumer confidence, and interest rates[20](index=20&type=chunk) - The company operates in highly competitive markets where it faces pressure from competitors on price, private-label brands, and imported products[21](index=21&type=chunk) - Global commodity price volatility for materials like brass, zinc, steel, and wood, as well as energy costs, could adversely affect financial results Import tariffs could also lead to price increases[21](index=21&type=chunk)[23](index=23&type=chunk) - Strategic acquisitions involve risks such as integration difficulties, failure to achieve expected financial benefits, and loss of key employees[25](index=25&type=chunk)[26](index=26&type=chunk) - The carrying value of goodwill and other intangible assets could be impaired by negative economic events, potentially affecting results of operations[29](index=29&type=chunk)[30](index=30&type=chunk) - The company is exposed to risks from information technology system failures and cyber-attacks, which could damage its reputation and result in financial, legal, and operational consequences[30](index=30&type=chunk)[31](index=31&type=chunk) [Unresolved Staff Comments](index=14&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments.) The company reports no unresolved staff comments - None [Properties](index=14&type=section&id=Item%202.%20Properties.) The company operates 52 manufacturing facilities and 53 distribution centers globally, with a mix of owned and leased properties across its segments | Segment | Manufacturing Facilities (Owned/Leased) | Distribution Centers and Warehouses (Owned/Leased) | | :--- | :--- | :--- | | Cabinets | 22 / 3 | 3 / 17 | | Plumbing | 8 / 6 | 7 / 15 | | Doors & Security | 10 / 3 | 1 / 10 | | **Totals** | **40 / 12** | **11 / 42** | [Legal Proceedings](index=14&type=section&id=Item%203.%20Legal%20Proceedings.) The company is involved in routine litigation, but management believes these actions will not materially affect its financial condition - The Company is involved in ordinary routine litigation but believes these actions will not have a material adverse effect and that the likelihood of material loss is remote[36](index=36&type=chunk)[37](index=37&type=chunk) [Mine Safety Disclosures](index=15&type=section&id=Item%204.%20Mine%20Safety%20Disclosures.) This item is not applicable to the company - Not applicable [Executive Officers of the Registrant](index=15&type=section&id=Executive%20Officers%20of%20the%20Registrant.) This section lists Fortune Brands' executive officers, including Christopher J. Klein (CEO) and Patrick D. Hallinan (SVP & CFO) | Name | Age | Position | | :--- | :--- | :--- | | Christopher J. Klein | 55 | Chief Executive Officer | | Patrick D. Hallinan | 51 | Senior Vice President and Chief Financial Officer | | Nicholas I. Fink | 44 | President, Plumbing Segment | | Brett E. Finley | 48 | President, Doors & Security Segment | | David M. Randich | 57 | President, Cabinets Segment | [Part II](index=17&type=section&id=PART%20II) [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=17&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities.) The company's common stock trades on NYSE (FBHS), with a **10%** dividend increase and **$92.0 million** in Q4 2018 share repurchases - The company's common stock is listed on the New York Stock Exchange (NYSE) under the ticker symbol "FBHS"[44](index=44&type=chunk) - In December 2018, the Board of Directors increased the quarterly cash dividend by **10%** to **$0.22 per share**[44](index=44&type=chunk) | Period | Total Shares Purchased | Average Price Paid per Share | Approximate Dollar Value Remaining Under Program | | :--- | :--- | :--- | :--- | | Oct 1 – Oct 31, 2018 | 1,043,400 | $47.94 | $455,686,267 | | Nov 1 – Nov 30, 2018 | 951,700 | $44.08 | $413,734,259 | | Dec 1 – Dec 31, 2018 | — | — | $413,734,259 | | **Total Q4 2018** | **1,995,100** | **$46.10** | | [Selected Financial Data](index=19&type=section&id=Item%206.%20Selected%20Financial%20Data.) This section summarizes five-year financial data, showing net sales growth from **$4.0 billion** in 2014 to **$5.5 billion** in 2018 | (In million, except per share amounts) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $5,485.1 | $5,283.3 | $4,984.9 | $4,579.4 | $4,013.6 | | Operating income | 595.2 | 682.5 | 618.6 | 480.3 | 390.9 | | Income from continuing operations, net of tax | 390.0 | 475.3 | 412.4 | 306.5 | 273.6 | | Diluted earnings per share — continuing operations | 2.66 | 3.05 | 2.61 | 1.88 | 1.64 | | Cash flow provided by operating activities | 604.0 | 600.3 | 650.5 | 429.2 | 266.2 | | Total assets | $5,964.6 | $5,511.4 | $5,128.5 | $4,875.7 | $4,051.5 | | Third party debt | 2,334.0 | 1,507.6 | 1,431.1 | 1,168.7 | 668.6 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=20&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations.) Management discusses 2018 financial performance, noting **4%** net sales growth to **$5.5 billion** but a **12.8%** operating income decrease due to impairment and costs - In 2018, net sales grew **4%**, but operating income decreased **12.8%** due to unfavorable mix, asset impairment charges, higher employee-related costs, and restructuring charges[54](index=54&type=chunk) - In September 2018, the company acquired Fiberon for approximately **$470.0 million**, expanding its Doors & Security segment into the outdoor living space[54](index=54&type=chunk)[56](index=56&type=chunk) - The company issued **$600 million** of **4%** senior notes due 2023 and increased its term loan to **$525 million** to finance its activities, including acquisitions and share repurchases[54](index=54&type=chunk)[56](index=56&type=chunk) - The U.S. home products market, a key driver for the company, is estimated to have grown in 2018, with new housing construction up approximately **5%** and repair/remodeling spending up approximately **4%**[54](index=54&type=chunk) [Results of Operations](index=23&type=section&id=Results%20of%20Operations) This section details operating results for 2018 vs. 2017 and 2017 vs. 2016, highlighting the Fiberon acquisition and **$62.6 million** impairment charges | (In million) | 2018 | % change | 2017 | % change | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Net Sales** | | | | | | | Cabinets | $2,418.6 | (2.0)% | $2,467.1 | 2.9% | $2,397.8 | | Plumbing | 1,883.3 | 9.4% | 1,720.8 | 12.1% | 1,534.4 | | Doors & Security | 1,183.2 | 8.0% | 1,095.4 | 4.1% | 1,052.7 | | **Total Net Sales** | **$5,485.1** | **3.8%** | **$5,283.3** | **6.0%** | **$4,984.9** | | **Operating Income** | | | | | | | Cabinets | $143.5 | (46.3)% | $267.2 | 3.6% | $257.8 | | Plumbing | 375.3 | 4.7% | 358.5 | 13.8% | 314.9 | | Doors & Security | 155.6 | 5.9% | 146.9 | 16.2% | 126.4 | | Corporate | (79.2) | 12.1% | (90.1) | (11.9)% | (80.5) | | **Total Operating Income** | **$595.2** | **(12.8)%** | **$682.5** | **10.3%** | **$618.6** | - Key financial impacts in 2018 included the Fiberon acquisition, **$62.6 million** in asset impairment charges for Cabinets tradenames, and **$35.4 million** in restructuring charges[61](index=61&type=chunk) [2018 Compared to 2017](index=24&type=section&id=2018%20Compared%20to%202017) In 2018, net sales grew **3.8%** to **$5.5 billion**, but operating income fell **12.8%** to **$595.2 million**, mainly due to **$62.6 million** impairment charges - Net sales increased by **$201.8 million** (**3.8%**) due to price increases, acquisitions, higher sales volume, and favorable foreign exchange (**$9 million**)[62](index=62&type=chunk)[63](index=63&type=chunk) - Operating income decreased by **$87.3 million** (**12.8%**) due to unfavorable mix, asset impairment charges (**$62.6 million**), higher employee-related costs, and restructuring charges (**$24.1 million**)[65](index=65&type=chunk)[66](index=66&type=chunk)[67](index=67&type=chunk) - The effective income tax rate increased to **27.4%** in 2018 from **25.1%** in 2017, partly due to a **$5.5 million** unfavorable adjustment related to the 2017 Tax Act[70](index=70&type=chunk) - By segment: Cabinets operating income fell **46.3%** due to impairment charges Plumbing operating income grew **4.7%** on higher sales Doors & Security operating income grew **5.9%**, aided by the Fiberon acquisition[74](index=74&type=chunk)[75](index=75&type=chunk)[76](index=76&type=chunk) [2017 Compared to 2016](index=28&type=section&id=2017%20Compared%20to%202016) In 2017, net sales increased **6.0%** to **$5.3 billion**, and operating income grew **10.3%** to **$682.5 million**, driven by market improvements and acquisitions - Net sales increased by **$298.4 million** (**6.0%**) due to higher sales volume, acquisitions in the Plumbing segment, and price increases[78](index=78&type=chunk) - Operating income increased by **$63.9 million** (**10.3%**) due to higher net sales and productivity improvements, partially offset by unfavorable mix and higher costs[80](index=80&type=chunk) - The effective income tax rate decreased to **25.1%** in 2017 from **29.2%** in 2016, favorably impacted by the Tax Act (**$25.7 million** benefit) and tax benefits from share-based compensation[83](index=83&type=chunk) - By segment: Cabinets sales grew **2.9%**, Plumbing sales grew **12.1%** (boosted by acquisitions), and Doors & Security sales grew **4.1%**[84](index=84&type=chunk)[85](index=85&type=chunk)[88](index=88&type=chunk) [Liquidity and Capital Resources](index=30&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with **$262.9 million** cash, **$604.0 million** operating cash flow, and a **$1.25 billion** credit facility, while increasing debt for acquisitions and repurchases - In 2018, the company issued **$600 million** of **4%** senior notes due 2023 and increased its term loan to **$525 million**[90](index=90&type=chunk) - In 2018, the company repurchased **12.0 million shares** of its common stock for **$694.6 million** As of Dec 31, 2018, approximately **$413.7 million** remained under its share repurchase authorizations[92](index=92&type=chunk) | (In million) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $604.0 | $600.3 | $650.5 | | Net cash used in investing activities | (634.3) | (287.7) | (385.1) | | Net cash used in financing activities | (6.8) | (250.1) | (250.4) | | (In million) | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Short-term and long-term debt | $2,334.0 | $525.0 | $719.0 | $595.0 | $495.0 | [Critical Accounting Policies and Estimates](index=34&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section details critical accounting policies, including annual impairment testing for goodwill and intangibles, resulting in a **$62.6 million** charge in 2018 - Goodwill and indefinite-lived intangible assets are tested for impairment annually in Q4 An impairment test is also performed if a triggering event occurs[115](index=115&type=chunk) - In 2018, the company recorded pre-tax impairment charges of **$62.6 million** related to two indefinite-lived tradenames in the Cabinets segment due to reduced revenue growth expectations[117](index=117&type=chunk)[119](index=119&type=chunk) - Key assumptions for defined benefit plans in 2018 included a weighted-average discount rate of **4.4%** and an expected long-term rate of return on assets of **6.0%**[120](index=120&type=chunk)[122](index=122&type=chunk) - The company completed its analysis of the 2017 Tax Act, resulting in a provisional net benefit of **$25.7 million** in 2017 and an unfavorable adjustment of **$5.5 million** in 2018[124](index=124&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=40&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk.) The company manages market risks from interest rates, foreign currency, and commodity prices using derivatives, with a **$8.5 million** interest rate sensitivity - A hypothetical **100 basis point** change in interest rates on variable rate borrowings would impact pre-tax earnings by **$8.5 million** as of December 31, 2018[130](index=130&type=chunk) - The company uses forward foreign exchange contracts to hedge transactions, principally in the Canadian dollar, British pound, Chinese yuan, and Mexican peso[131](index=131&type=chunk) - A Value-at-Risk (VAR) sensitivity analysis estimated the maximum potential one-day loss from adverse changes in foreign exchange rates to be **$0.8 million** at December 31, 2018, with a **95% confidence level**[131](index=131&type=chunk) [Financial Statements and Supplementary Data](index=42&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data.) This section presents the company's audited consolidated financial statements for 2018, showing net sales of **$5.49 billion** and net income of **$389.8 million** | (In million) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | **NET SALES** | **$5,485.1** | **$5,283.3** | **$4,984.9** | | OPERATING INCOME | 595.2 | 682.5 | 618.6 | | NET INCOME | 389.8 | 472.7 | 413.2 | | (In million) | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | TOTAL CURRENT ASSETS | $1,686.1 | $1,601.7 | | TOTAL ASSETS | $5,964.6 | $5,511.4 | | TOTAL CURRENT LIABILITIES | $1,492.1 | $906.8 | | TOTAL LIABILITIES | $3,784.6 | $2,910.3 | | TOTAL EQUITY | $2,180.0 | $2,601.1 | [Notes to Consolidated Financial Statements](index=47&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) These notes detail financial disclosures, including the **$470 million** Fiberon acquisition, **$62.6 million** impairment, and **$2.33 billion** total debt - In September 2018, the company acquired Fiberon for a purchase price of approximately **$470.0 million** The acquisition added **$173.4 million** to goodwill and **$195.0 million** to identifiable intangible assets (Note 4)[171](index=171&type=chunk)[172](index=172&type=chunk)[173](index=173&type=chunk) - Goodwill increased by **$168.3 million** in 2018, primarily due to the Fiberon acquisition The company also recorded asset impairment charges of **$62.6 million** for two indefinite-lived tradenames in the Cabinets segment (Note 6)[176](index=176&type=chunk)[177](index=177&type=chunk) - Total debt as of December 31, 2018 was **$2,334.0 million**, consisting primarily of senior notes, a revolving credit facility, and a term loan (Note 8)[184](index=184&type=chunk) - The company's pension plans had a funded status (deficit) of **$(163.6) million** at year-end 2018, compared to **$(175.8) million** at year-end 2017 (Note 15)[208](index=208&type=chunk) - Net sales to The Home Depot and Lowe's were **13%** and **14%** of total net sales in 2018, respectively (Note 19)[234](index=234&type=chunk) [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=88&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure.) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None [Controls and Procedures](index=88&type=section&id=Item%209A.%20Controls%20and%20Procedures.) Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of December 31, 2018[254](index=254&type=chunk) - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018[258](index=258&type=chunk) - The assessment of internal control over financial reporting excluded the recently acquired Fiberon, which represented **2.0%** of total assets and **0.7%** of total revenues for 2018[258](index=258&type=chunk) - No changes in internal control over financial reporting occurred during the fourth quarter of 2018 that materially affected, or are reasonably likely to materially affect, the controls[259](index=259&type=chunk) [Other Information](index=89&type=section&id=Item%209B.%20Other%20Information.) The company reports no other information for this item - None [Part III](index=90&type=section&id=PART%20III) [Directors, Executive Officers and Corporate Governance](index=90&type=section&id=Item%2010.%20Directors,%20Executive%20Officers%20and%20Corporate%20Governance.) This section incorporates information on directors, executive officers, and corporate governance by reference from the 2019 Proxy Statement - Information regarding directors, executive officers, corporate governance, and the audit committee is incorporated by reference from the registrant's 2019 Proxy Statement[261](index=261&type=chunk) [Executive Compensation](index=90&type=section&id=Item%2011.%20Executive%20Compensation.) This section incorporates executive compensation information by reference from the company's 2019 Proxy Statement - Information regarding executive compensation is incorporated by reference from the registrant's 2019 Proxy Statement[262](index=262&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=90&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters.) This section incorporates security ownership and equity compensation plan information by reference from the 2019 Proxy Statement - Information regarding security ownership and equity compensation plans is incorporated by reference from the registrant's 2019 Proxy Statement[263](index=263&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=90&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions,%20and%20Director%20Independence.) This section incorporates information on related person transactions, director independence, and board committees by reference from the 2019 Proxy Statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the registrant's 2019 Proxy Statement[264](index=264&type=chunk) [Principal Accountant Fees and Services](index=90&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services.) This section incorporates information on fees paid to and services provided by the principal independent registered public accounting firm from the 2019 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the registrant's 2019 Proxy Statement[265](index=265&type=chunk) [Part IV](index=91&type=section&id=PART%20IV) [Exhibits and Financial Statement Schedules](index=91&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K, including consolidated financials and various agreements - Lists the financial statements, schedules, and exhibits filed with the Form 10-K[266](index=266&type=chunk) - Includes key exhibits such as credit agreements, indentures for senior notes, and long-term incentive plans[268](index=268&type=chunk)[270](index=270&type=chunk)[271](index=271&type=chunk) [Form 10-K Summary](index=95&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company reports no Form 10-K summary - None

Fortune Brands Home & Security (FBHS) Q4 2018 Earnings Conference Call January 31, 2019 4:30 PM ET Company Participants Brian Lantz - Senior Vice President of Communications & Corporate Administration Chris Klein - Chief Executive Officer Pat Hallinan - Chief Financial Officer Conference Call Participants Susan Maklari - Credit Suisse Phil Ng - Jefferies Justin Speer - Zelman & Associates Steven Kim - Evercore Timothy Weiss - Baird Operator Good afternoon. My name is Kelly and I will be your conference oper ...