Stock-Based Compensation (Updated by Corporate)

12 Months Ended

Dec. 31, 2018

Stock-Based Compensation (Updated by Corporate)

13. Stock-Based Compensation

As of December 31, 2018, 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, 2018, approximately 4.6 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.

Stock-based compensation expense from continuing operations was as follows:



(In millions)	2018		2017		2016
Stock option awards	$	8.6	$	7.4	$	7.2
Restricted stock units		21.3		21.6		17.2
Performance awards		6.3		13.6		6.7
Director awards		1.0		1.0		0.9
Total pre-tax expense		37.2		43.6		32.0
Tax benefit		6.2		15.2		11.4
Total after tax expense	$	31.0	$	28.4	$	20.6

Included in compensation costs are cash-settled restricted stock units of $0.9 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. 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, 2018 was as follows:



	Number of Restricted Stock Units			Weighted-Average Grant-Date Fair Value
Non-vested at December 31, 2017		728,065		$	54.59
Granted		356,860			61.07
Vested		(373,593	)		52.92
Forfeited		(50,957	)		59.87
Non-vested at December 31, 2018		660,375		$	58.63

The remaining unrecognized

pre-tax

compensation cost related to restricted stock units at December 31, 2018 was approximately $17.1 million, and the weighted-average period of time over which this cost will be recognized is 1.7 years. The fair value of restricted stock units that vested during 2018, 2017 and 2016 was $22.2 million, $20.3 million and $16.4 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.

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:



	2018		2017		2016
Current expected dividend yield		1.3%		1.4%		1.4%
Expected volatility		24.0%		26.0%		30.0%
Risk-free interest rate		2.6%		1.9%		1.3%
Expected term		5 years		5.5 years		5.5 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. 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. The expected term was determined based on the historical employee exercise behavior and the contractual term of the options. 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, 2018, 2017 and 2016 was $14.14, $13.49 and $12.70, respectively.

A summary of Fortune Brands stock option activity related to Fortune Brands and former employees of Fortune Brands, Inc., the Company from which we spun off from in 2011, for the year ended December 31, 2018 was as follows:



	Options			Weighted- Average Exercise Price
Outstanding at December 31, 2017		3,682,958		$	36.28
Granted		628,614			63.44
Exercised		(214,727	)		22.86
Expired/forfeited		(73,023	)		59.07
Outstanding at December 31, 2018		4,023,822		$	40.83

Options outstanding and exercisable at December 31, 2018 were as follows:



	Options Outstanding (a)					Options Exercisable (b)

Range Of Exercise Prices	Options Outstanding	Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price		Options Exercisable		Weighted- Average Exercise Price
$9.00 to $12.99	104,500		2.0	$	12.30		104,500	$	12.30
13.00 to 20.00	1,096,463		2.5		16.37		1,096,463		16.37
20.01 to 65.41	2,822,859		6.8		51.38		1,731,059		45.91
	4,023,822		5.5	$	40.83		2,932,022	$	33.67

(a)	At December 31, 2018, the aggregate intrinsic value of options outstanding was $28.1 million.

(b)	At December 31, 2018, the weighted-average remaining contractual life of options exercisable was 4.4 years and the aggregate intrinsic value of options exercisable was $28.1 million.

The remaining unrecognized compensation cost related to unvested awards at December 31, 2018 was $5.1 million, and the weighted-average period of time over which this cost will be recognized is 1.6 years. The fair value of options that vested during the years ended December 31, 2018, 2017 and 2016 was $6.7 million, $6.8 million and $6.0 million, respectively. The intrinsic value of Fortune Brands stock options exercised in the years ended December 31, 2018, 2017 and 2016 was $8.7 million, $70.6 million and $88.1 million, respectively.

Performance Awards

Performance share awards were granted to officers and certain employees of the Company and represent the right to earn

shares of Company common stock based on the achievement of company-wide

non-GAAP

performance conditions, including cumulative diluted earnings per share, average return on invested capital, average return on net tangible assets and cumulative 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, 2018, as well as activity during the year then ended. The number of performance share awards granted are shown below at the target award amounts:



	Number of Performance Share Awards			Weighted-Average Grant-Date Fair Value
Non-vested at December 31, 2017		428,328		$	52.35
Granted		140,071			63.44
Vested		(136,822	)		47.48
Forfeited		(22,486	)		57.41
Non-vested at December 31, 2018		409,091		$	57.50

The remaining unrecognized

pre-tax

compensation cost related to performance share awards at December 31, 2018 was approximately $2.6 million, and the weighted-average period of time over which this cost will be recognized is 1.5 years. The fair value of performance share awards that vested during 2018 was $13.8 million (218,912 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 2018, 2017 and 2016, we awarded 19,109, 15,311 and 16,471 shares of Company common stock to outside directors with a weighted average fair value on the date of the award of $54.93, $63.43 and $57.37, respectively.