OVERVIEW

Fortune Brands, Inc. (Fortune Brands) is a holding company with subsidiaries that make and sell leading consumer branded products worldwide in the following markets: distilled spirits, home and hardware, and golf products. We strive to enhance shareholder value in a variety of ways, including:

• profitably building leading consumer brands to drive sales and earnings growth and enhance returns on a long-term basis,

• positioning our brands and businesses to outperform their respective markets. We do this by:

- developing innovative new products and effective marketing programs,

- expanding customer relationships,

- extending brands into adjacent categories, and

- developing international growth opportunities,

• pursuing business improvements by operating lean and flexible supply chains and business processes,

• promoting organizational excellence by developing winning cultures and associates, and

• leveraging our breadth and balance and financial resources to drive shareholder value.

While our first priority is internal growth, we also strive to create shareholder value through add-on acquisitions, dispositions and joint ventures. In addition, over time, we enhance shareholder value through other initiatives, such as using our financial resources to pay down debt, repurchase shares and pay dividends.

For a description of certain factors that may have had, or may in the future have, a significant impact on our business, financial condition or results of operations, see "-Forward-Looking Statements."

RESULTS OF OPERATIONS

Nine Months Ended September 30, 2009 Compared To Nine Months Ended September 30,
2008



                                                 Net Sales
                                                                 % Change
           (in millions)          2009           2008         vs. Prior Year
           Spirits              $ 1,723.2      $ 1,759.5                (2.1 )%
           Home and Hardware      2,183.0        2,907.1               (24.9 )
           Golf                     991.4        1,156.7               (14.3 )

           Net Sales            $ 4,897.6      $ 5,823.3               (15.9 )%

                                              Operating Income
                                                                 % Change
                                  2009           2008         vs. Prior Year
           Spirits              $   414.3      $   417.6                (0.8 )%
           Home and Hardware         51.9          (45.9 )                -
           Golf                      62.3          143.6               (56.6 )
           Corporate expenses       (70.6 )        (49.3 )             (43.2 )

           Operating Income     $   457.9      $   466.0                (1.7 )%

Net Sales

Net sales decreased $925.7 million, or 16%, to $4.9 billion primarily due to:

• the impact of the global economy and reduced consumer discretionary spending on all of our businesses,

• the downturn in the U.S. home products markets and its impact on our Home and Hardware business, and

• unfavorable foreign exchange (approximately $194 million).

Sales benefited from:

• newly introduced products and line extensions in all segments,

• selected price increases in the Home and Hardware and Spirits businesses, and

• the impact of acquisitions (approximately $81 million, including Cruzan rum and sales of third party brands within distribution businesses acquired from Maxxium Worldwide B.V. (Maxxium), which was our international spirits sales and distribution joint venture).

Cost of products sold

Cost of products sold decreased $488.8 million, or 16%, primarily due to lower sales across all segments and cost reduction programs in the Home and Hardware and Golf businesses.

Excise taxes on spirits

Excise taxes on spirits were up approximately 120 basis points as a percentage of sales compared to the prior year due to higher Spirits segment sales as a percentage of total Company sales, as well as the impact of foreign exchange on sales. Excise taxes are generally levied based on the alcohol content of spirits products and vary significantly by country. Consistent with industry practice, excise taxes collected from customers are reflected in net sales and the corresponding payments to governments in expenses.

RESULTS OF OPERATIONS (Continued)

Advertising, selling, general and administrative expenses

Advertising, selling, general and administrative expenses decreased $102.2 million, or 7%, primarily as a result of lower variable sales-related expenses and a decrease in advertising and promotion spending, partly offset by increased operating costs associated with our U.S. and international route-to-market initiatives in our Spirits business.

Amortization of intangible assets

Amortization of intangible assets decreased $12.1 million to $25.2 million due to the impact of intangible asset impairment charges for definite-lived intangible assets in 2008.

Intangible asset impairment charges

Through the first nine months of 2009, no events or circumstances have arisen requiring an interim impairment test with regard to our goodwill or indefinite-lived tradenames. During the fourth quarter of 2009, we will be performing our regular annual impairment testing of goodwill and indefinite-lived tradenames. These tests are performed in conjunction with finalizing 2009 results and preparing our annual revenue and profit plan for 2010 - 2012. While we are confident in the long-term growth and return prospects of our reporting units and brands, generally accepted accounting principles require us to assess the impairment of goodwill and indefinite-lived tradenames based upon current fair value. We generally estimate fair value based on an estimate of discounted future cash flows to be derived from reporting units and use of our brands, in accordance with our critical accounting policies. We are in the process of preparing our 2010 - 2012 operating plans, which will be completed in the fourth quarter of 2009. To the extent these operating plans change from prior year estimates, it is possible we may incur impairment charges for certain intangible assets during the fourth quarter of 2009. Factors that could cause us to change our prior estimates of reporting unit and brand performance include the combined effect of the economic downturn in certain key geographic markets, consumers trading down to lower price points in certain product categories, competitor activity within those categories, and our potential responses to the current and longer term market conditions.

In the second quarter of 2008, due to the severity of the decline in the U.S. home products market, we recorded pre-tax intangible asset impairment charges in the Home and Hardware business of $324.3 million, primarily for our Therma-Tru door and Simonton window brands.

RESULTS OF OPERATIONS (Continued)

Restructuring charges

For the nine months ended September 30, 2009, we recorded restructuring charges of $47.2 million. These charges related to workforce reductions primarily in the Golf and Home and Hardware businesses ($29.5 million), including closure of a shoe manufacturing facility and the announced closure of seven Home and Hardware manufacturing facilities in the U.S. ($5.7 million in fixed asset write-downs), and $3.4 million for lease contract termination and other costs, as well as reductions in general and administrative costs, and charges associated with strategic route-to-market initiatives in our international spirits markets ($4.9 million). Corporate charges of $3.7 million related to the disposal of fixed assets.

For the nine months ended September 30, 2008, we recorded restructuring charges of $41.1 million, primarily in the Spirits business ($22.1 million in total) to restructure our U.S. and international routes to market, including charges for workforce reduction and lease terminations. Restructuring charges also included costs for supply chain realignment. In addition, we recorded charges in the Home and Hardware business ($19.0 million) to align costs and capacities with marketplace conditions, including the announced closing of six manufacturing facilities.

Operating income

Operating income decreased $8.1 million, or 2%, primarily due to the impact of lower sales and related adverse operating leverage in the Home and Hardware and Golf businesses. Operating income was favorably impacted by the absence of 2008 intangible asset impairment charges ($324.3 million), as well as reduced cost structures and lower advertising and promotion spending.

Interest expense

Interest expense decreased $18.2 million, or 10%, to $161.0 million, primarily due to lower average interest rates.

Other expense (income), net

Other expense (income), net, decreased $278.2 million, predominantly due to the absence of the following items recognized in 2008:

• income of $230.0 million from Pernod Ricard S.A. for the early termination of Future Brands LLC (Future Brands) U.S. spirits distribution agreement,

• $72.0 million of remaining unamortized deferred income from the initial establishment of the Future Brands, and

• deferred income of $20.3 million related to Future Brands as a result of the purchase of the remaining balance of the minority interest in September 2008.

Other expense (income), net, benefited from a $12.5 million gain on a Maxxium dividend distribution and the absence of a 2008 $50.5 million write-down of our investment in Maxxium which was recorded to reflect our share of a goodwill write-down recorded in the financial statements of Maxxium. Other expense (income), net, also includes non-operating income and expense, such as interest income and transaction gains/losses related to foreign currency-denominated transactions.

RESULTS OF OPERATIONS (Continued)

Income taxes

The effective income tax rate for the nine months ended September 30, 2009 and 2008 was 19.0% and 33.2%, respectively. The 2009 effective tax rate was favorably impacted by higher tax benefits from restructuring and restructuring-related charges relative to lower taxed income before these charges. In addition, the effective tax rate was favorably impacted by a higher proportion of foreign income in 2009, which is taxed at a lower rate relative to U.S. income. The 2009 income tax rate was also favorably impacted by annual true-up adjustments related to tax returns filed in the current period. The 2009 income tax rate was unfavorably impacted by net tax expense of $8.5 million related to prior period items.

The 2008 effective income tax rate was favorably impacted by a $98.4 million tax benefit related to final settlement of the federal income tax audit related to our 2001 - 2002 federal tax returns and tax credits associated with the conclusion of our 2004 - 2005 federal tax audit. The 2008 effective income tax rate was unfavorably impacted by the absence of a tax benefit on goodwill impairment charges of $288.9 million and a $50.5 million write-down in our Maxxium joint venture.

Noncontrolling interests

Noncontrolling interest expense was $3.4 million compared to income of $67.5 million last year, primarily due to the $87.9 million gain recorded in 2008 from a reduction in the fair value of the noncontrolling interest in the Spirits business repurchased in July 2008, partially offset by absence of $9.8 million of preferred dividends paid to the noncontrolling interest and expenses associated with the repurchase of the noncontrolling interest.

Income from continuing operations attributable to Fortune Brands common stockholders

Income from continuing operations was $231.3 million, or $1.54 per basic share and $1.53 per diluted share, for the nine months ended September 30, 2009. These results compared to $439.9 million, or $2.89 per basic share and $2.85 per diluted share, for the nine months ended September 30, 2008. The $208.6 million decrease in income from continuing operations was primarily due to lower operating income and the absence of the following items recognized in 2008:

• income from the termination of the Spirits U.S. distribution agreement and the related deferred gain recognition ($187.3 million after tax in aggregate),

• a gain due to a reduction in the fair value of the noncontrolling interest in the Spirits business ($81.5 million), and

• tax-related credits ($98.2 million).

Income from continuing operations benefited from the absence of the 2008 intangible asset impairment charges ($324.3 million) in the Home and Hardware business and 2008 write-downs of the Spirits business's investment in Maxxium ($50.5 million), as well as the 2009 gain on a Maxxium dividend distribution ($12.5 million).

Income from discontinued operations

There was no income from discontinued operations for the nine months ended September 30, 2009. Income from discontinued operations for the nine months ended September 30, 2008 of $152.5 million, or $1.00 per basic share and $0.98 per diluted share, was due to one-time tax benefits from a capital loss carry forward position associated with the sale of the U.S. Wine business, as well as a revision to the calculation of the state tax benefit on the gain on the sale of the U.S. Wine business.

Results of Operations By Segment

Spirits

Net sales decreased $36.3 million, or 2%, to $1,723.2 million, primarily due to unfavorable foreign exchange ($90 million), lower sales internationally on a constant currency basis, including the adverse impact of a 2008 Australian excise tax increase on ready-to-drink products and a change in distributors in Mexico, and lower U.S. shipments. These decreases were partly offset by the benefit of acquisitions (approximately $81 million, including Cruzan rum and sales of third party brands within distribution businesses acquired from Maxxium), higher pricing, our U.S. distributor program that has resulted in more stable wholesale inventory levels, and the introduction of new products.

Operating income decreased $3.3 million, or 1%, to $414.3 million. Increased operating costs associated with our new U.S. and international route-to-market structures were partially offset by price increases, a shift in the timing of advertising and promotional spending to the fourth quarter holiday season, and lower restructuring and restructuring-related charges. In 2009, we continue to expect that full year operating income will be adversely affected by a net impact of approximately $30 million due to costs associated with our U.S. and international route-to-market structures.

We expect to incur additional restructuring and restructuring-related charges of approximately $35 million over the next nine months related to our previously approved U.S. and international route-to-market initiatives, as well as organizational changes announced in the fourth quarter of 2009. These changes are being undertaken to align the business closer to customers and consumers and to support brand building and long-term profitable growth.

The U.S. dollar strengthened in the fourth quarter of 2008 against major foreign currencies associated with our Spirits business's international operations and moderated during the first nine months of 2009. Based on spot exchange rates at September 30, 2009 and our outlook for full year, we anticipate the full year 2009 impact of adverse foreign exchange on operating income to be approximately $10 to $15 million.

In September 2008, Beam Global Spirits & Wine, Inc. (BGSW) and The Edrington Group Ltd. (TEG) entered into an agreement establishing an international distribution alliance that is a combination of jointly-owned and Company-owned sales forces in 24 markets. Operations under the new alliance began on April 1, 2009. This alliance simplifies our international routes to market and gives us greater control over our distribution. The alliance provides that BGSW and TEG have joint 50-50 ownership of sales and distribution companies in certain markets and that BGSW wholly-owned or TEG wholly-owned distribution companies distribute both companies' products and third party products in certain other markets. Prior to March 30, 2009, BGSW was a 25% partner in the Maxxium international sales and distribution joint venture. The other equal partners in Maxxium were Rémy Cointreau S.A. (Rémy), V&S Group (V&S) and TEG. In accordance with a Settlement Agreement executed in September 2008, on March 30, 2009, Rémy and V&S exited the Maxxium joint venture and BGSW became a 50% owner of Maxxium with TEG. BGSW and TEG are facilitating an orderly transition or winding down of Maxxium operations, which is now substantially complete.

Results of Operations By Segment (Continued)

Spirits (Continued)

Factors that could adversely affect results include consumers trading down to lower price points, competitive pricing activities, potential changes to commercial and operational risk in the transition from the Maxxium joint venture to the alliance with TEG, changes to third party distribution, changes in customer inventory levels in international markets, impairment charges, and the possibility of excise and other tax increases, including internationally.

In April 2008, the Australian government increased excise taxes on ready-to-drink products by 70%, equating to a 25% price increase to consumers, which adversely impacted demand for Beam's pre-mixed products including Jim Beam and Cola. Operating income comparisons were negatively affected by the excise tax increase until its impact was annualized at the end of April 2009. In addition, there have been excise tax increases in several U.S. states in 2009.

In October of 2009, we entered into a long-term agreement with the U.S. Virgin Islands to continue to produce rum on St. Croix. The mutually beneficial agreement is structured to promote increased tax revenue for the U.S. Virgin Islands and to provide cost effective production of rum for our Spirits business.

Home and Hardware

Net sales decreased $724.1 million, or 25%, to $2,183.0 million. The decrease was primarily attributable to the downturn in the U.S. home products market and the U.S. economic recession. These factors resulted in a substantial decrease in new home construction compared to the first nine months of 2008, a mix shift to lower-priced products, and lower repair and remodeling spending, particularly on big-ticket items such as cabinetry and entry doors. Sales benefited modestly from new products and line extensions, as well as the impact of select price increases and share gains with key customers.

Operating income increased $97.8 million to income of $51.9 million, primarily due to intangible asset impairment charges recorded in 2008 ($324.3 million) and lower cost structures in all areas of the business in 2009. These benefits were partially offset by continuing adverse operating leverage from substantially lower sales. In addition, restructuring and restructuring-related charges were $15.2 million higher than the same period in 2008 due to continuing efforts to reduce manufacturing capacity, and general and administrative costs. In the first nine months of 2009, we announced the closure of seven additional plants.

We anticipate that the restructuring initiatives will generate savings that pay back the cash costs in three years or less. Restructuring and restructuring-related charges for currently approved projects are expected to be approximately $50 million for all of 2009 and approximately $5 million in 2010.

Results of Operations By Segment (Continued)

Home and Hardware (Continued)

We anticipate that the categories of the U.S. home products market in which we compete will decline in 2009 in the range of 20-25%. As a result, we continue to believe our full year 2009 sales will be significantly lower than 2008. Our business will continue to face pressures resulting from adverse operating leverage, potential increased price competition, and a shift to lower-priced product. In addition, we may see increases in bad debt expenses as our customers continue to face financial pressures. We may also incur additional restructuring charges to further rationalize our supply chains. We will continue to strive to mitigate the impact of the downturn through ongoing cost reductions as well as through market share gain initiatives, successful extension of brands into new markets, expanding existing customer relationships, and building on our substantial presence in the repair-and-remodel segment of the U.S. home products market. As we continue to respond to the downturn in the U.S. home products market, our restructuring initiatives to reduce manufacturing capacity and administrative costs, and exit lower return product lines, may result in further impairments of assets.

Golf

Net sales decreased $165.3 million, or 14%, to $991.4 million, primarily due to the impact of significantly decreased demand in the U.S. and Western Europe across all product categories, including lower consumer demand for discretionary purchases such as golf clubs and lower sales of corporate custom golf balls, as well as unfavorable foreign exchange ($62 million). Net sales benefited from higher constant currency sales in Asian markets.

Operating income decreased $81.3 million, or 57%, to $62.3 million primarily due to restructuring and restructuring-related charges of $24.6 million, mainly related to workplace reductions and the closure of a footwear manufacturing facility, and unfavorable foreign currency ($16 million), as well as lower sales and the related unfavorable operating leverage. Operating income benefited from cost recovery actions and lower operating expenses, including reduced advertising and promotion and lower discretionary expenses.

In the near term, participation levels and consumer spending on golf products are expected to be adversely impacted by general economic conditions and declines in golf-related travel and corporate spending. We expect the golf industry to benefit from favorable long-term demographic trends, including an aging U.S. population (rounds of play increase with age and retirement), and the increasing popularity of golf internationally.

The U.S. dollar strengthened in the fourth quarter of 2008 against major foreign currencies associated with our Golf business's international operations. We expect the continued impact of adverse foreign exchange on operating income for the full year 2009 to be approximately $20-25 million.

Results of Operations By Segment (Continued)

Golf (Continued)

The United States Golf Association (USGA) and the Royal and Ancient Golf Club (R&A) establish standards for golf equipment used in the United States and outside the United States, respectively. In recent years, each of the USGA and the R&A has enacted new rules further restricting the dimensions or performance of golf clubs and golf balls. In March 2005, the USGA and R&A requested that manufacturers participate in a golf ball research project by manufacturing and submitting balls that would conform to an overall distance standard that is 15 to 25 yards shorter than the current standard of 317 yards. More recently, they adopted a rule change to allow greater adjustability in golf clubs, which went into effect January 1, 2008. In August 2008, the USGA and R&A adopted a rule change, effective January 1, 2010, further restricting golf club grooves by reducing the groove volume and limiting the groove edge angle allowable on irons and wedges. This rules change will not apply to most golfers until January 1, 2024. It will be implemented on professional tours beginning in 2010 and then in other elite amateur competitions beginning 2014. All products shipped into the marketplace after December 31, 2010 must comply with the new groove specification. Existing rules and any new rules could change the golf products industry's ability to innovate and deploy new technologies and the competitive dynamic among industry participants, potentially impacting our Golf business.

Corporate

Corporate expenses of $70.6 million, which include salaries, benefits and expenses related to corporate office employees, increased $21.3 million primarily due to pension settlement costs, timing of share-based compensation, and expenses associated with the disposition of fixed assets.

RESULTS OF OPERATIONS (Continued)

Three Months Ended September 30, 2009 Compared To Three Months Ended
September 30, 2008



                                                 Net Sales
                                                                 % Change
           (in millions)          2009           2008         vs. Prior Year
           Spirits              $   636.9      $   636.3                 0.1 %
. . .