| FORTUNE BRANDS INC Item 1A Risk Factors |
| We believe that the following risks and uncertainties may be material to our business |
| Additional risks and uncertainties that we currently consider to be immaterial may also adversely affect our business |
| If any of the following risks actually occur, our business, results of operations and financial condition could be materially and adversely affected |
| 9 ______________________________________________________________________ [45]Table of Contents We operate in highly competitive markets |
| We compete with large national, international and regional companies on the basis of product quality, price, service and innovation in response to consumer preferences |
| Our success depends in part on our ability to anticipate and offer products that appeal to the changing needs and preferences of our customers in the various markets we serve |
| If we are not able to anticipate, identify, develop and market products that respond to changes in customer preferences, demand for our products could decline and our operating results would be adversely affected |
| While the competitive importance of product quality, price, service and innovation varies from product to product, price is a factor, and we experience pricing pressures from competitors in our markets |
| Continued consolidation of our trade customers and increased competition in private-label products, particularly in the home & hardware industry, could adversely affect our business |
| There has been consolidation of our trade customers and growth in the sales of private-label products in portions of our markets, particularly in the home and hardware industry |
| Consolidation increases the size and importance of individual customers, and these larger customers can make significant changes in their volume of purchases, require price reductions and even become competitors for some products |
| Further consolidation could adversely affect our margins and profitability, particularly if we were to lose a significant customer |
| Similarly, growth in the sales of private-label products could reduce our margins and profits |
| Our financial results and demand for our products are dependent on the successful development of new products and processes |
| Our success depends on anticipating changes in consumer preferences and on successful new product and process development and product relaunches in response to such changes |
| We aim to introduce products or new or improved production processes on a timely basis in order to counteract obsolescence and decreases in sales of existing products |
| While we devote significant focus to the development of new products and to the research, development and technology process functions of our business, we may not be successful in developing new products or processes or our new products or processes may not be commercially successful |
| Our future results and ability to maintain or improve our competitive position will depend on our ability to gauge the direction of our key markets and successfully identify, develop, manufacture, market and sell new or improved products in these changing markets |
| The inability to secure and maintain rights to intellectual property could adversely affect our business |
| We have many patents, trademarks, brand names and trade names that are important to our business |
| Our business could be adversely affected by the loss of any major brand or by infringement of our intellectual property rights |
| We are also subject to risks in this area because 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 products |
| In addition, others may assert intellectual property infringement claims against us or our customers |
| Risks associated with our strategic acquisitions could adversely affect our business |
| We have completed a number of acquisitions in recent years, including more than 25 spirits and wine brands and distribution assets acquired last year from Pernod Ricard SA We will continue to consider acquisitions as a means of enhancing shareowner value |
| Acquisitions involve risks and uncertainties, including: > difficulties integrating the acquired company, retaining the Acquired Businesses’ customers, and achieving the expected benefits of the acquisition, such as revenue increases, cost savings, and increases in geographic or product presence, in the desired time frames, if at all; > loss of key employees from the acquired company; > implementing and maintaining consistent standards, controls, procedures, policies and information systems; and > diversion of management’s attention from other business concerns |
| Future acquisitions could cause us to incur additional debt, contingent liabilities, increased interest expense and higher amortization expense related to intangible assets, as well as experience dilution in earnings per share |
| Impairment losses on goodwill and intangible assets with an indefinite life, or restructuring charges, could also occur as a result of acquisitions |
| 10 ______________________________________________________________________ [46]Table of Contents Our failure to attract and retain qualified personnel would adversely affect our business |
| Our success depends in part on the efforts and abilities of our senior management team and key employees |
| Their skills, experience and industry contacts significantly benefit our operations and administration |
| The failure to attract and retain members of our senior management team and key employees would have a negative effect on our operating results |
| Various external conditions, including economic, weather and business conditions may result in a decrease in our sales and profitability |
| Demand for our products is sensitive to certain external factors, including economic conditions; weather conditions; with respect to the golf business, destination travel and corporate spending; and with respect to home and hardware, mortgage and other interest rates affecting the housing market, as well as the number of new housing starts and existing home sales |
| The impact of these external factors is difficult to predict, and one or more of these factors could adversely affect our business |
| We sell products internationally and are exposed to currency exchange rate risks |
| We sell products in the United States, Europe and other areas (principally Canada, Mexico and Australia) |
| While we hedge certain foreign currency transactions, a change in the value of the currencies can impact our financial statements when translated into US dollars |
| The exchange rates between some of the foreign currencies in which our subsidiaries operate and the US dollar have fluctuated significantly in recent years and may do so in the future |
| We manufacture and source our products internationally and are exposed to risks associated with doing business globally |
| We manufacture and source our products in the United States, Europe, Canada, Mexico, China, Thailand and other countries |
| Accordingly, we are subject to risks associated with changes in political, economic and social environments, local labor conditions, changes in laws, regulations and policies of foreign governments, as well as US laws affecting activities of US companies abroad, including tax laws and enforcement of contract and intellectual property rights |
| Exchange rate fluctuations may impact the cost of sourced products and our financial results |
| Risks associated with interest rate fluctuations and commodity and energy price volatility could adversely affect our business |
| We are exposed to risks associated with interest rate fluctuations and commodity price volatility arising from weather, supply conditions, geopolitical and economic variables, and other unpredictable external factors |
| We buy commodities, including steel, copper, brass, titanium, glass, plastic, resins, wood, particle board, grains and grapes |
| Volatility in the prices of these commodities, and energy used in making and distributing our products, could increase the costs of our products |
| We may not be able to pass on these increased costs to our customers, and this could have an adverse effect on our results of operation and financial condition |
| Increases in the costs of medical and pension benefits to our business could continue and negatively affect our business as a result of: > continued increases in medical costs related to current and retired employees due to increased usage of medical benefits and medical inflation in the United States; > the effect of any decline 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 in law and accounting standards that may increase the funding of, and the expense reflected for, employee benefits |
| Our Spirits and Wine business relies on the performance of wholesale distributors and other marketing arrangements and could be adversely affected by poor performance of major distributors or other disruptions in our distribution channels |
| Our spirits and wine products are sold principally through wholesale distributors for resale to retail outlets |
| The replacement, poor performance or financial default of a major distributor or one of its major customers could adversely affect our Spirits and Wine business |
| Any unplanned disruption to the existing channel could adversely affect our revenues and profitability |
| A disruption could be caused by 11 ______________________________________________________________________ [47]Table of Contents the sale of a distributor to a competitor, financial instability of the distributor, or other unforeseen events |
| Increased excise taxes on distilled spirits and wine could adversely affect our Spirits and Wine business |
| Distilled spirits and wine are subject to excise tax in many countries where we operate |
| No federal excise tax increase is presently pending in the United States, our largest market |
| However, many states and other jurisdictions are considering possible excise tax increases |
| The effect of any future excise tax increases in any jurisdiction cannot be determined, but increased excise taxes could have an adverse effect on our business |
| Changes in golf equipment regulatory standards could adversely affect our Golf business |
| Our ability to develop and market new golf products may be limited by rules governing equipment standards set by industry associations, such as restrictions on golf club head size and shaft length, and the overall distance standard for golf balls, which could adversely impact our golf business |
| Potential liabilities and costs from litigation could adversely affect our business |
| Our business is subject to risks related to litigation with respect to various matters, including with respect to alcohol-related liability and tobacco products made and sold by former operations |
| It is not possible to predict the outcome of pending litigation, and, as with any litigation, it is possible that some of the actions could be decided unfavorably |
| An impairment in the carrying value of goodwill or other acquired intangibles could negatively affect our operating results and net worth |
| 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 intangibles represents the fair value of trademarks, trade names and other acquired intangibles as of the acquisition date |
| Goodwill and other acquired intangibles expected to contribute indefinitely to our cash flows are not amortized, but must be evaluated by our management at least annually for impairment |
| If carrying value exceeds current fair value as determined based on the discounted future cash flows of the related business, the intangible is considered impaired and is reduced to fair value via a charge to earnings |
| Events and conditions that could result in impairment include changes in the industries in which we operate, as well as competition and advances in technology, a significant product liability or intellectual property claim, or other factors leading to reduction in expected sales or profitability |
| If the value of goodwill or other acquired intangibles is impaired, our earnings and net worth could be adversely affected |
| Historical financial statements may not be reflective of our future financial condition and results of operation due to our recent portfolio realignment or other reasons |
| We made significant changes in our business last year, as discussed in this report, including spinning off our Office products business, buying more than 25 spirits and wine brands and other assets of Allied Domecq PLC and borrowing to finance that acquisition |
| Although we believe that this report contains all material information that is necessary to make an informed assessment of our assets and liabilities, financial position, profit and losses and prospects, historical financial statements do not necessarily provide all the financial information investors may consider relevant in evaluating our business after these changes or represent what our results of operations or financial position will be for any future periods |
| Downgrades of our credit ratings could adversely affect us |
| If Moody’s, S&P or Fitch were to downgrade our credit rating, such a downgrade could result in loss of access to the commercial paper market and increase our cost of capital |
| Downgrades of our credit ratings could also affect the value or marketability of our outstanding notes |