UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20182021

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to_______

Commission filenumber 1-35166

Fortune Brands Home & Security, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

62-1411546

Delaware62-1411546

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification No.)

520 Lake Cook Road, Deerfield, IL60015-5611

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code:(847)  (847) 484-4400

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbols(s)

Name of each exchange

on which registered

Common Stock, par value $0.01 per share

FBHS

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 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

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 No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K 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 thisForm 10-K or any amendment to thisForm 10-K.        

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-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 Rule12b-2 of the Exchange Act.

Large accelerated filer            Accelerated filer      Non-accelerated filer            Smaller reporting company            Emerging growth company      

Large accelerated filer

Accelerated filer

Non-accelerated filer

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act). Yes No

The aggregate market value of the registrant’s voting common equity held bynon-affiliates of the registrant at June 30, 20182021 (the last day of the registrant’s most recent second quarter) was $7,606,348,311.$13,699,604,954. The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, at February 1, 2019,11, 2022, was 140,549,295.134,174,304.


DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in the registrant’s proxy statement for its Annual Meeting of Stockholders to be held on May 7, 20193, 2022 (to be filed not later than 120 days after the end of the registrant’s fiscal year) (the “2019“2022 Proxy Statement”) is incorporated by reference into Part III hereof.



Form 10-K
Table of Contents

Page

PART I

Item 1.

Business.

Business.

1

3

Item 1A.

Risk Factors.

6

9

Item 1B.

Unresolved Staff Comments.

12

15

Item 2.

Properties.

Properties.

12

15

Item 3.

Legal Proceedings.

12

16

Item 4.

Mine Safety Disclosures.

13
Executive Officers of the Registrant.13

16

PART II

Information about our Executive Officers.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

15

18

Item 6.

Reserved.

Selected Financial Data.

17

20

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

18

21

Results of Operations.

21

23

2018 Compared to 2017

22

2017 Compared to 2016

26
Liquidity and Capital ResourcesResources.

28
Critical Accounting Policies and Estimates32

26

Critical Accounting Estimates.

31

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk.

38

36

Item 8.

Financial Statements and Supplementary Data.

40

37

Notes to Consolidated Financial Statements.

45

46

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

86

82

Item 9A.

Controls and Procedures.Procedures.

86

82

Item 9B.

Other Information.

87

82

PART IIIItem 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

82

PART III

Item 10.

Directors, Executive Officers and Corporate Governance.Governance.

88

83

Item 11.

Executive Compensation.

Executive Compensation.

88

83

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

88

83

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

88

83

Item 14.

Principal Accountant Fees and Services.

88

83

PART IV

PART IV

Item 15.

Exhibits and Financial Statement Schedules

89

84

Item 16.

Form 10-K Summary

Form10-K Summary

93

87

Signatures

94

88

Schedule II Valuation and Qualifying Accounts

95

89


PART I

Item 1. Business.

Cautionary Statement Concerning Forward-Looking Statements

This Annual Report on Form10-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 our general business strategies, anticipated market potential, the potential impact of costs, including material and labor costs, the potential impact of inflation, the potential of our brands expected capital spending, expected pension contributions, expected impact of acquisitions, the anticipated effects of recently issued accounting standards on our financial statements, planned business strategies, 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 plansexpectations, estimates, assumptions and expectationsprojections about our industry, business and future financial results available 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, and expressly disclaim any such 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.otherwise, except as required by the law.

Unless the context otherwise requires, references in this Annual Report on Form10-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 three business segments: Cabinets, Plumbing, and Doors & 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” “do-it-yourself” remodeling-oriented home centers, e-commerce 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. Despite increased pressures driven in part by tariffs, higher interest rates and inflation, our performance 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 with what we believe to be sustainable competitive advantages in many of our product categories. In 2018,categories, which we expanded intosell primarily in North America and China. We believe that established brands are meaningful to both consumers and trade customers in their respective categories and that we have the outdoor living market by acquiring Fiber Composites LLC (“Fiberon”), a leading U.S. manufacturer of outdoor performance materials usedopportunity to, among other things, gain share in decking, railingthe marketplace and fencing products. The acquisition of Fiberon provides category expansion and product extension opportunities into the outdoor living space for our Doors & Security segment. We continue to invest in targeted advertising and other strategic initiatives aimed at enhancing brand awareness and educating

consumers regarding the breadth, features and benefitsstrengthen many of our product lines. For example, in the third quarter of 2018, Moen launched its new “Who designs for water” advertising and brand campaign showcasing its appreciation for Earth’s most crucial resource, while inspiring consumers to look at water from a renewed viewpoint. We also strive to leverage our brands bythrough cross-branding, expanding into adjacent product categories, and expanding in international and e-commerce markets. We are committed to continuing to invest in our capacity and supply chain to strengthen our business and continue to develop new programs by working closely withmeet demand for our customers.products.

Continue to developDevelop innovative products and processes for customers designers, installers and consumers.    Sustained investments We have a long track record of successful product and process innovations that introduce valued new products to our customers and consumers. We are committed to continuing to invest in consumer-drivennew product innovationdevelopment and enhance customer service along withto strengthen our low cost structures, have contributed to our successleading brands and penetrate adjacent markets, including in the marketplacedigital space and creating consumer demand. In 2018, our Global Plumbing Group developed partnerships and investments in the “whole home” water space, including partnering with Flo Technologies. In 2018, 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. TheTherma-Tru portfolio ofon-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. In 2018, we launched our Vault Enterprise software and suite of Bluetooth® enabled hardware for business, providing a convenient way for companies to control access, manage assets and improve accountability across many users simultaneously. 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.connected products.

Expand in international markets.    We expect to have opportunities to expand sales by further penetrating international markets, which represented approximately 16% of net sales in 2018. 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. Within our Doors & Security segment, Master Lock continued to expand its presence in Europe and Asia, whileTherma-Tru made inroads in Canada as consumers transitioned from traditional entry door materials to more advanced and energy-efficient fiberglass doors.3


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 global supply chains and manufacturing presence 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.opportunities. We continue to believe our most attractive opportunities are to invest in profitable organic growth initiatives, pursue accretive strategic acquisitions,non-controlling equity investments, and joint ventures, and return cash to stockholders through a combination of dividends and repurchases of shares of our common stock understock.

Advance our share repurchase program. In 2018, we repurchased approximately 12 million shares ofdigital strategy to fuel growth. We continue to invest in our outstanding common stock under the Company’s share repurchase programs for $695 million. In September 2018, we acquired Fiberon providing category expansiondigital capabilities to leverage our scale across technology, data and product extension opportunities into the outdoor living space fortalent to further accelerate and sustain growth in e-commerce and connected products.

Invest in appropriate ESG initiatives that positively impact our Doors & Security segment.

Our Competitive Strengths

We believe our competitive strengths include the following:

Leading brands.    We have leading brands in many of our product categories.employees and community and conduct business responsibly. We believe that established brandsadvancing environmental, social and governance (“ESG”) initiatives are meaningfulcritical to both consumers and trade customers in their respective categories

and thatmaking sure 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:

>

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, the curb appeal offered by stylish entry door systems and the expanding outdoor living market offered through our decking products;

>

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.    In 2018, we invested approximately $45 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 allow us to adapt to challenging market conditions. We believe that margin improvement will continue to be driven predominantly by organic volume growth that can be readily accommodated by current production capacity.

Commitment to innovation.    We have a long track record of successful product and process innovations that introduce valued new products and services toserve our customers and consumers.consumers to meet their needs. As a manufacturer, conducting business ethically is a priority for our businesses. We continue to look for ways to improve our environmental, social and governance programs and practices by focusing on ways to improve water conservation, waste reduction and carbon and climate impact, keep our employees safe and create a culture where all employees are committed to continuing to invest in new product developmenttreated with dignity and enhance customer service to strengthen our leading brands and penetrate adjacent markets.respect.

Diverse salesend-use mix.    We sellInvest in a varietycommon set of product categories and sales channels incapabilities across the U.S. home and security products markets. In addition,enterprise, known as the Fortune Brands Advantage.

While our exposure to changing levels of U.S. residential new home construction activity is balanced withrepair-and-remodel activity, which comprised a substantial majority of the overall U.S. home products market and abouttwo-thirds of our U.S. home products sales in 2018. 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 2018, sales to our top ten customers represented less than half of total sales.

Decentralized business model.    Our business segments are focused on distinct product categories and are responsible for their own performance. This structure enablesperformance, the Fortune Brands Advantage is an operating model consisting of a set of unifying capabilities that we believe are critical to our strategic growth across all of our businesses. The Fortune Brands Advantage currently consists of three critical pillars:

Category Management -Partnering with our channel partners to drive optimal performance and best serve our consumers through actionable category insights.

Global Supply Chain Excellence - Leveraging our robust, global supply chain to strategically drive scale efficiencies with cutting edge capabilities.

Complexity Reduction - Simplifying workstreams to be even more efficient.

We continue to grow our competencies in these areas, allowing each of our segmentsbusinesses to independently best position itself within each category in which it competestake advantage of available opportunities for revenue growth 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.

margin improvement, no matter the market environment.

Strong capital structure.    We exited 2018 with a strong balance sheet. In 2018, we repurchased 12.0 million of our shares. As of December 31, 2018, we had $262.9 million of cash and cash equivalents and total debt was $2,334.0 million, resulting in a net debt position of $2,071.1 million. In addition, we had $930.0 million available under our credit facility as of December 31, 2018.

Business Segments

In July 2018, we publicly announced an internal reorganization to combine our Doors and Security segments under common leadership to drive innovation, accelerate product development, and enhance investments and business processes for the combined segment. In conjunction with the reorganization, we changed how our chief operating decision maker evaluates and allocates the resources across our businesses. As a result, beginning in the third quarter of 2018, weWe have three business segments: Cabinets, Plumbing, Outdoors & Security and Doors & Security. The following table shows net sales for each of these segments and key brands within each segment:

    
Segment  2018
Net Sales
(in millions)
   Percentage of
Total 2018
Net Sales
  Key Brands

Cabinets

  $2,418.6    44 Diamond, Aristokraft,Mid-Continent, Kitchen Craft, Homecrest, Omega, Ultracraft, StarMark, Schrock, Decora, Kemper

Plumbing

   1,883.3    34 Moen, ROHL, Riobel, Perrin & Rowe, Victoria + Albert, Shaws

Doors & Security

   1,183.2    22 Master Lock, American Lock, SentrySafe,Therma-Tru, Fypon, Fiberon

Total

  $5,485.1    100  

Cabinets.Our segments compete on the basis of innovation, fashion, quality, price, service and responsiveness to distributor, retailer and installer needs, as well asend-user consumer preferences. Our markets are very competitive. Approximately 16% of 20182021 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%14% of the Company’s net sales in 2018.2021. Sales to all U.S. home centers in the aggregate were approximately 26%35% of net sales in 2018.

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 cabinets and service2021. In 2021, sales to our customers. This segment sells a portfoliotop ten customers representedless than half 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 36% of net sales of the Cabinets segment in 2018. This segment’s competitors include Masco and American Woodmark, as well as a large number of overseas, regional and local suppliers.total sales.

Plumbing. Our Plumbing segment manufactures or assembles and sells faucets, accessories, kitchen sinks and waste disposals, predominantly under the Moen, ROHL, Riobel, Victoria+Albert, Perrin & Rowe Victoria + Albert and Shaws brands. Although this segment sells products principally in the U.S., China and Canada, this segment also sells in Mexico, Southeast Asia, Europe and South America. Approximately 28%32% of 20182021 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. This segment is increasingly investing in digital trends and “smart” home capabilities. In aggregate, sales to The Home Depot and Lowe’s comprised approximately 23% 21%of net sales of the Plumbing segment in 2018.2021 . This segment’s chief competitors include

Masco, Kohler, Spectrum Brands, LIXIL Group, InSinkErator (owned by Emerson Electronic Company), Huida, Hgill, and Jomooand imported private-label brands.

Doors4


Outdoors & Security. Our DoorsOutdoors & Security segment manufactures and sells fiberglass and steel entry door systems under theTherma-Tru brand, name,storm, screen and security doors under the Larson brand, composite decking, railing and fencingcladding under the Fiberon brand, name, and urethane millwork under the Fypon brand name.brand. It also manufactures, sources and distributes locks, safety and security devices, and electronic security products under the Master Lock brandand American Lock brands and fire resistant safes, security containers and commercial cabinets under the SentrySafe brand. Larson, a North American market leading brand of storm, screen and security doors, was acquired in December 2020. This segment sells products principally in the U.S., Canada, Europe, Central America, Japan and Australia. Approximately 14%10% of 20182021 net sales were to international markets. This segment’s principal customers are home centers, hardware and other retailers, 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 addition, it 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 19%30% of net sales of the DoorsOutdoors & Security segment in 2018.2021. Therma-Tru, Larson, Fiberon and Fypon brands compete with Masonite,JELD-WEN, Andersen, Trex, Azek, Plastpro, Pella and various regional and local suppliers. The Master Lock brand competes with Abus, W.H. Brady, Hampton, Spectrum Brands, Allegion, Assa Abloy and various imports. The SentrySafe brands competebrand competes with Magnum, Fortress Interlocks andStack-On. Interlocks.

AnnualCabinets. Our Cabinets segment manufactures high quality stock, semi-custom and custom cabinetry, as well as vanities, for the kitchen, bath and other parts of the home with a regional and international supply chain footprint. This segment sells a portfolio of brands, including AOK, Diamond Brands, KitchenCraft, Homecrest, Omega and EVE, that enable our customers to differentiate themselves against competitors. Substantially all of this segment’s sales are in North America. Approximately 6% of 2021 net sales for eachwere to international markets. This segment sells directly to kitchen and bath dealers, home centers, wholesalers, large builders and through e-commerce. In aggregate, sales to The Home Depot and Lowe’s comprised approximately 39% of net sales of the last three fiscal years for eachCabinets segment in 2021. This segment’s competitors include Cabinetworks Group (formerly ACPI) and American Woodmark, as well as a large number of our business segments were as follows:overseas, regional and local competitors.

    
(In millions) 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 

For additional financial information for each of our business segments, refer to Note 19, “Information on Business Segments,” to the Consolidated Financial Statements in Item 8 of this Annual Report on Form10-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.

Segment

Segment

Raw Materials

CabinetsPlumbing

Brass, zinc, resins, stainless steel and aluminum

Outdoors & Security

Wood, resins, plastics, steel, glass, aluminum, vinyl and insulating foam

Cabinets

Hardwoods (maple, cherrybirch and oak), plywood and particleboard

Plumbing

Brass, zinc, resins, stainless steel, aluminum and copper

Doors & Security

Steel, resins, glass, wood, aluminum, insulating foam, brass and zinc

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.Human Capital Resources. As of December 31, 2018, we2021, Fortune Brands had approximately 25,300more than 28,000 full-time employees.and part-time employees worldwide (excluding contract workers). Approximately 3,20077% of theseour workforce is composed of hourly production and distribution associates and the remaining population is composed of

5


associates in an office role. Approximately 14% of employees are covered byin the U.S. work under collective bargaining agreements. Below is a summary of the number of employees by segment and role:

Segment

 

Production and Distribution

 

 

Office

 

 

Total

 

Plumbing

 

 

2,461

 

 

 

2,167

 

 

 

4,628

 

Outdoors & Security

 

 

5,402

 

 

 

1,911

 

 

 

7,313

 

Cabinets

 

 

13,646

 

 

 

2,330

 

 

 

15,976

 

Corporate

 

 

 

 

 

139

 

 

 

139

 

We believe our associates are the key to our success. We invest in our teams and develop our associates to become the next generation of leaders to fuel innovation and drive Company growth. The Company also endeavors to create an environment that keeps our employees safe, treats them with dignity and respect and fosters a culture of performance. Fortune Brands does this through the programs summarized below, the objectives and related risks of each is overseen by our Board of Directors or its committees.

Health and Safety

Safety is a critical element to Fortune Brands’ growth strategy, integral to Company culture and one of our core values. This is reflected in our goal of zero safety incidents and through our efforts to create an injury-free workplace. Our Employee relationsSafety & Environmental Stewardship Principles set standards for how we maintain a safe work environment and guides our business operations. The Company also has an Environmental, Health & Safety Leadership council comprised of representatives from across the Company’s businesses that share best practices and is responsible for driving environmental, health and safety strategy. This helps drive our best-in-class programs designed to reinforce positive behaviors, to empower our employees to actively take part in maintaining a safe work environment, to heighten awareness and to mitigate risk on critical safety components. Within each of our manufacturing and distribution facilities, we have site-specific safety and environmental plans designed to reduce risk. Through a continued commitment to improve our safety performance, we have historically been successful in reducing the number of injuries sustained by our employees. Two of our primary safety measures are generally good.the Total Recordable Incidence Rate ("TRIR") and Lost Time Rate ("LTR"). For the year ended December 31, 2021, our TRIR was 1.34, compared to 1.20 for the year ended December 31, 2020 and our LTR was 0.48, compared to 0.40 for the year ended December 31, 2020. The year over year increases in in these numbers are reflective of the addition of Larson to our 2021 results.

Our safety focus was demonstrated in our continued response to the COVID-19 pandemic. In 2021, we supplemented our enhanced safety protocols and implemented a mandatory mask mandate in our facilities when a location hits a positivity rate of 1% or more. We continue to offer flexibility to work remotely, with most office locations working on a hybrid schedule, but allowing for flexibility in that schedule where possible to minimize potential exposure of our employees. We also emphasized the importance of vaccines, by offering over 40 onsite vaccine clinics to employees, implementing flexible leave policies to allow people to get vaccinated, and offering educational opportunities on the safety and efficacy of vaccines. The Company also encouraged vaccinations and rewarded employees who were already vaccinated through a vaccine sweepstakes.

Attracting and Retaining Superior Talent

Fortune Brands is committed to investing in the physical, emotional and financial well-being of our employees and we believe that this is a critical component of our business strategy. To attract and retain superior talent at all levels of the Company, our total rewards are designed to be market competitive, align employee incentives with Company performance and support our employees across many aspects of their lives. We have a strong pay-for-performance culture that is supported by incentive programs that take into consideration business results and employee performance. We also offer a range of benefits including retirement savings plans, comprehensive healthcare and mental-health benefits including medical, dental and vision coverage, health savings and spending accounts, and employee assistance services. In 2021, we took steps to enhance our benefit plans starting in 2022 to further enhance

6


inclusivity by providing enhanced parental support benefits for our US associates, including fertility benefits and specialized support from adoption and surrogacy assistance to pregnancy and post-partum. Many of our businesses also offer paid parental leave.

Creating a Culture of Diversity, Equity and Inclusion (“DEI”)

We continue to take measured actions that create an inclusive culture and diverse workforce, increase representation and engagement of underrepresented associates and that are reflective of our consumers and communities. We believe that attracting and retaining talented and diverse employees will enable us to be more innovative, responsive to consumer needs and deliver strong performance and growth.

Fortune Brands is a party to CEO Action for Diversity & Inclusion, a CEO-driven business commitment to advance diversity and inclusion in the workplace. We also continue to partner with Network of Executive Women to help focus on the development and advancement of women. In 2021, Fortune Brands joined the W.K. Kellogg Foundation Expanding Equity program, a program designed for advancing racial equity in the workplace. The program has helped the Company to create a comprehensive diversity, equity and inclusion equity to increase representation of underrepresented associates. The Company is committed to increasing representation of professionals of color and women through new hires and promotions, ensuring an inclusive culture by reducing the barriers to inclusion through our policies, programs, business practices and education and by demonstrating support for racial equality in our communities through outreach and investment. As of December 31, 2021, Fortune Brands’ workforce is composed of 38% women and approximately 44% of hourly production and distribution employees are people of color and 15% of employees in an office role are people of color.

The Company implemented an unconscious bias learning program to increase DEI awareness and break bias in the decision making process for its senior leaders during 2020. In 2021, Fortune Brands continued its unconscious bias learning program to all global people managers and launched an organization-wide employee engagement survey among employees and implemented a system to foster employee engagement and drive continued improvement in DEI awareness. The Company also continued to expand its employee resource groups during 2021. We now have a dedicated employee resource group for our Women, Black, Hispanic and LGBTQ employees that are focused on activating and educating leaders and accelerating an inclusive culture. These actions supplement the Company’s (i) inclusive culture councils which are responsible for setting priorities and initiatives that support an inclusive work environment, and (ii) employee resource groups that support DEI initiatives and provide networking and professional development opportunities.

Talent Development and Succession

We aim to inspire and equip our associates to be successful in their current role within the organization and help them to develop the skills to build on opportunities to grow their career. We understand our most critical roles that serve as points of leverage to deliver value and place our best people in those roles, while attracting new talent and capabilities in support of continuous improvement in all we do. Fortune Brands uses performance management programs to support a high-performance culture, strengthening our employee engagement and helping to retain our top talent. The Company provides associates with relevant skills training and provides leadership training for production and distribution associates in a supervisory role and mid-level office associates. The Company also makes a significant investment in assessing our talent against the jobs both in the near term and the future and ensuring our leaders are prepared for greater levels of responsibility and can successfully transition into new roles.

Succession planning for critical roles is an important part of our talent program. Succession and development plans are created and monitored to ensure progress is made along established timelines.

Seasonality. All of our operating segments traditionally experience lower sales in the first quarter of the year when new home construction,repair-and-remodel 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.

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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, 2018, ten such instances have not been dismissed, settled or otherwise resolved. In 2018, 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 PRPspotentially responsible parties under Superfund or similar state laws or from insurance, will not have a material adverse effect on our competitive position, results of operations, cash flows or financial condition. At December 31, 2018 and 2017, we had accruals of $0.6 and $0.7 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., 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 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 onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 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. 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.

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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.

Industry Risks Relating to Our Business

Our business primarily relies on North American and Chinese 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, unfavorable interest rates 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.America and China. The housing market is sensitive to changes in economic conditions and other factors, such as the level of employment, access to and the cost of labor, consumer confidence, demographic changes, consumer income, government tax programs, availability of financing, inflation 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 or causing them to delay investments, including large kitchen and bath repair and remodel projects; or making it more difficult to secure loans for major renovations.

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 trends, innovation and ease of installation, price is a significant factor for 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. We also face increasing pressure from imported ‘flat pack’ cabinets. 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 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. Import tariffs could potentially lead to increases in prices of raw materials or components which are critical to our business. Failure to achieve the desired level of quality, capacity or cost reductions could impair our results of operations, cash flows and financial condition.

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. 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.

Our businesses rely on the performance of wholesale distributors and dealers, retailers 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.

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The consolidation of distributors or retailers 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. In addition, one or more retailers may stop carrying certain of our products, reduce the volume of purchases of our products and/or replace certain of our products with the products of our competitors. The loss or termination of, or significant reduction in sales to, 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 adversely affect our ability to bring products to market and our results of operations, cash flows and financial condition.

Operational and Sourcing Risks

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.

If we are unable to obtain sufficient components or raw materials on a timely basis or for a cost-effective price or if we experience other manufacturing, supply or distribution difficulties, our business and results of operations may be adversely affected.We acquire our components and raw materials from many suppliers and vendors in various countries. We endeavor to ensure the continuity of our components and materials and make efforts to diversify certain of our sources of components and materials, but we cannot guarantee these efforts will be successful. A reduction or interruption in supply or an issue in the supply chain, including as a result of our inability to quickly develop acceptable alternative sources for such supply, could adversely affect our ability to manufacture, distribute and sell our products in a timely or cost-effective manner.

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 continued 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. Supply chain disruptions could continue to impact our ability to timely source necessary components and inputs. Import tariffs could potentially lead to increases in prices of raw materials or components which are critical to our business. Failure to achieve the desired level of quality, capacity or cost reductions could impair our results of operations, cash flows and financial condition.

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, severe 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.

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We may experience delays or outages in our information technology systems 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 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. We rely upon information technology systems and infrastructure, including support provided by third parties, to support our business, our products and our customers. Our businesses may implement digital systems or technologies, enterprise resource planning systems or add applications to replace outdated systems and to operate more efficiently. We may not be able to successfully implement these projects without experiencing difficulties. Any expected benefits of implementing projects might not be realized or the costs of implementation might outweigh the benefits realized.

We routinely rely on systems for manufacturing, customer orders, shipping, regulatory compliance and various other matters, as well as information technology systems and infrastructure to aid us in the collection, use, storage and transfer and other processing of data including confidential, business, financial, and personal information. Security threats, including cyber and other attacks, are becoming increasingly sophisticated, frequent and adaptive. In addition, a greater number of our employees are working remotely in response to the COVID-19 pandemic, which (among other things) could expose us to greater risks related to cybersecurity and our information technology systems. Third-party systems that we rely upon could also become vulnerable to the same risks and may contain defects in design or manufacture or other problems that could result in system disruption or compromise the information security of our own systems. 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. Breaches and breakdowns affecting our information technology systems or protected data could have an adverse effect on our business, results of operations, cash flows and financial condition.

We manufacture, source and sell products internationally and are exposed to risks associated with doing business globally.globally, including risks associated with uncertain trade environments.

We manufacture, source or sell our products in a number of locations throughout the world, predominantly in the U.S., Mexico, Europe, Africa, Canada China, Europe and Mexico.Asia. Accordingly, we are subject to risks associated with potential disruption caused by changes in political, economic and social environments, including civil and political unrest, illnesses declared as a public health emergency (including viral pandemics such as COVID-19), 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. We could be adversely affected by international trade regulations, including duties, tariffs and antidumping penalties. 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 other anti-bribery laws, mandatory or voluntary shutdowns of our facilities or our suppliers due to changes in political dynamics, economic policies or health emergencies 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 ChinaAsia where we have experienced higher manufacturing costs and longer lead times due to higher tariffs, currency fluctuations, higher wage rates, labor shortages and higher raw material costs.

Changes in government and industry regulatory standards11


Disruption of operations could adversely affect our results of operations, cash flows and financial condition.

Government regulations and policies pertaining to trade agreements, health and safety (including protectionWe manufacture a significant portion 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 ourthe products or processeswe sell. Any prolonged disruption in the future. Compliance with changes in taxes, tariffs and other regulations may require us to alter our manufacturing operations, whether due to technical or labor difficulties, continued labor shortages, transportation-related shortages, supply chain constraints, COVID-19, weather conditions (including due to the impacts of climate change, particularly for those facilities near any shorelines or in any other area traditionally impacted by extreme 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 installation processesexplosions, use and storage of hazardous materials or other events) or other reasons, could negatively impact our sourcing. Such actions could increase our capital expendituresprofitability and competitive position and adversely impactaffect our results of operations, cash flows and financial condition.

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 to produce certain of the finished goods we sell. We often 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.

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 shareholderstockholder 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;customers; 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 and strategic 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.

Our inabilityImpairment charges could have a material adverse effect on the Company’s financial results.

Goodwill and other acquired intangible assets expected 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 importantcontribute indefinitely to our business. Unauthorized usecash 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 these intellectual property rightsgoodwill, 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. No impairments were recorded during the year ended December 31, 2021. During the years ended December 31, 2020 and 2019, we recorded non-cash impairment charges related to indefinite-lived intangible assets of $22.5 million and $41.5 million, respectively. Future events may not only erode salesoccur that would adversely affect the fair value of our products,goodwill or other acquired intangible assets and require impairment charges. Such events may include, but may also cause significant damageare not limited to, lower than forecasted revenues, actual new construction and repair and remodel growth rates that fall below our brand nameassumptions, actions of key customers, increases in discount rates, continued economic uncertainty, higher levels of unemployment, weak consumer confidence, lower levels of discretionary consumer spending, a decrease in royalty rates and reputation, interfere witha decline in the trading price of our abilitycommon stock. We continue to effectively representevaluate the Companyimpact of economic and other developments 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 productsassess whether impairment indicators are orpresent. Accordingly, we may be developed, manufactured or sold may not fully protect our intellectual property from infringement by others. There can be no assurance that our effortsrequired to assess possible third party intellectual property rights will ensure the 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 relyperform impairment tests based 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 conditioneconomic environment and other factors, and these tests could result in impairment charges in the future. Given the

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Company’s recent impairment charges, there is minimal difference between the estimated fair values and the carrying values of these distributors, representatives or retailers could effectsome our ability to bring products to market.indefinite-lived intangible assets, increasing the possibility of future impairment charges.

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.

Legal, Regulatory and People Risks associated with the disruption of operations could adversely affect

COVID-19 has impacted our business and may cause further disruptions to our business, results of operations cash flows and financial condition.

We manufacture a significant portionThe COVID-19 pandemic has had an impact on many aspects of the Company’s business and operations and may continue to impact the Company in the future, including impacting our ability to efficiently operate our facilities across the globe, the ability of our suppliers to supply and manufacture key inputs, availability and cost of transportation and logistics, customer behaviors, our employees, the distributors, dealers and retailers who sell our products, we sell. Anyand the market generally. Our business could be negatively impacted over the longer term if the disruptions related to COVID-19 decrease consumer confidence and housing investments; or precipitate a prolonged disruptioneconomic downturn and/or an extended rise in unemployment or tempering of wage growth, any of which could lower demand for our operations, whether dueproducts. The COVID-19 pandemic may also exacerbate certain of the other risks described in this “Risk Factors” section.

The COVID-19 pandemic has also resulted in and is expected to technicalcontinue to result in operational challenges in the manufacturing of our products and the operation of the related domestic and international supply chains supporting our ability to manufacture our products and distribute them through our channels. Restrictions on or labor difficulties, weather, lackdisruptions of raw materialtransportation or component availability, startup inefficiencies for new operations, destruction ofincreased border controls or damage to any facility (as a result of natural disasters, fires and explosions, use and storage of hazardous materialsclosures, or other events)impacts on domestic and global supply chains or other reasons,distribution channels, could negatively impactincrease our profitability and competitive position and adversely affect our results of operations, cash flows and financial condition.

Our inability to obtain raw materials and finished goods in a timelycommodity costs, increase demand for raw materials and cost-effective mannercommodities from suppliers could adversely affectcompeting purchasers, limit our ability to manufacture and market our products.

We purchase raw materials to be used in manufacturing ourdistribute 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 anor otherwise have a material adverse effect on our business, results of operations cash flows and financial condition.

Our failure to attract and retain qualified personnel and other labor constraints 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. With low

Low unemployment rates in the U.S., rising wages, competition for qualified talent and attracting and retaining personnel in remote locations could result in the failure to attract, motivate and retain personnel. This has resulted in higher employee costs, increased attrition and significant shifts in the labor market and employee expectations and we may continue to face challenges in finding and retaining qualified personnel, particularly at the production level, which could have an adverse effect on our results of operations, cash flows and financial condition.

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Climate change and related legislative and regulatory initiatives could adversely affect our business and results of operations.

Concerns over the long-term effects of climate change have led to, and we expect will continue to lead to governmental efforts around the world to mitigate those effects. The Company will need to respond to any new laws and regulations as well as to consumer, investor and business preferences resulting from climate change concerns, which may increase our operational complexity and result in costs to us in order to comply with any new laws, regulations or preferences. Further, the effects of climate change may negatively impact international, regional and local economic activity, which may lower demand for our products or disrupt our manufacturing or distribution operations. Overall, climate change, its effects and the resulting, unknown impact on government regulation, consumer, investor and business preferences could have a long-term material adverse effect on our business and results of operations.

Environmental, social and governance matters may adversely impact our business and reputation.

In addition to the importance of their financial performance, companies are increasingly being judged by their performance on a variety of environmental, social and governance (“ESG”) matters.

In light of the increased focus on ESG matters, there can be no certainty that we will manage such issues successfully, or that we will successfully meet stakeholder expectations as to our proper role. Any failure or perceived failure by us in this regard could adversely impact our business and reputation.

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 environment (including those specific to climate change and the reduction of air and energy emissions) may continue to emerge in the U.S., as well as internationally. In particular, there may be additional tariffs or taxes related to our imported raw materials, components 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 further alter our manufacturing and installation processes and our sourcing. Such actions may result in customers transitioning to available competitive products, loss of market share, negative publicity, reputational damage loss of customer confidence or other negative consequences (including a decline in stock price) and could increase our capital expenditures and adversely impact 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. Weinternationally, including income tax, value-added tax and property tax. Our total tax expense could be affected by changes in tax rates in the jurisdictions in which our businesses are subject to taxation, changes in the valuation of deferred tax assets and liabilities or changes in tax laws or the interpretation of such laws by tax authorities which may have a material impact on our financial results. In addition, we are routinely audited by income tax authorities in many jurisdictions. Although we believe that the recordedwe record and accrue tax estimates that are reasonable and appropriate, these estimates are based on assumptions and require the exercise of significant judgment, and 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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Our inability to secure and protect our intellectual property rights could negatively impact revenues and brand reputation.

We have many patents, trademarks, brand names, trade names and trade secrets that, in the aggregate, are important to our business. Unauthorized use of these intellectual property rights or other loss of our intellectual property competitive position may not only erode sales of our products, but may also cause us to incur substantial 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, significant judgement is required in determining our provision for income taxes. Our total income tax expense could be affected by changes in taxexisting patent, trade secret and trademark laws rates inoffer only limited protection, and the jurisdictionslaws of some countries in which our businessesproducts are subjector 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 taxation, changesassess possible third party intellectual property rights will ensure the Company’s ability to manufacture, distribute, market or sell in the valuation of deferred tax assets and liabilitiesany given country or changes in tax lawsterritory. Furthermore, others may assert intellectual property infringement claims against us or the interpretation ofour customers which may require us to incur significant expense to defend such laws by tax authorities.litigation or indemnify our customers.

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 anon-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 anon-cash charge to earnings. Events 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 fall below our assumptions, actions of key customers, increases in 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 . 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 systems 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 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 electronicbreak-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.

Item 2. Properties.

Our principal executive office is located at 520 Lake Cook Road,in Deerfield, Illinois 60015.Illinois. We operate 3035 U.S. manufacturing facilities in 1618 states and have 2221 manufacturing facilities in international locations (9(8 in Mexico, 32 in Asia, 4 in Europe, 4 in Africa, and 23 in Canada). In addition, we have 5371 distribution centers and warehouses worldwide, of which 4256 are leased. The following table provides additional information with respect to these properties.

 
Segment  

Manufacturing

Facilities

   

Distribution Centers

and Warehouses

 

 

Manufacturing
 Facilities

 

 

Distribution Centers
and Warehouses

 

  Owned   Leased   Total   Owned   Leased   Total 

 

Owned

 

 

Leased

 

 

Total

 

 

 

Owned

 

 

Leased

 

 

Total

 

Plumbing

 

7

 

5

 

12

 

 

 

7

 

19

 

26

 

Outdoors & Security

 

17

 

3

 

20

 

 

 

5

 

17

 

22

 

Cabinets

   22    3    25    3    17    20 

 

20

 

4

 

24

 

 

 

3

 

20

 

23

 

Plumbing

   8    6    14    7    15    22 

Doors & Security

   10    3    13    1    10    11 

Totals

   40    12    52    11    42    53 

 

44

 

12

 

56

 

 

 

15

 

56

 

71

 

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.

15


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.

Information about our current Executive Officers of the Registrant.Officers.

Our current executive officers are:

Name

Name

Age

Age

Position

Christopher J. KleinNicholas I. Fink

47

55

Chief Executive Officer

Patrick D. Hallinan

54

51

Senior Vice President and& Chief Financial Officer

Nicholas I. FinkCheri M. Phyfer

50

44

President, Plumbing Segment

Brett E. Finley

51

48

President, DoorsOutdoors & Security Segment

R. David M. RandichBanyard, Jr.

53

57

President, Cabinets Segment

Tracey L. BelcourtHiranda S. Donoghue

43

52

Senior Vice President, General Counsel & Corporate Secretary

Sheri R. Grissom

57

Senior Vice President, Chief Human Resources Officer

John D. Lee

49

Senior Vice President, Global Growth and& Development

Robert K. BiggartMay Russell

44

64

Senior Vice President, General Counsel and SecretaryChief Digital Officer

Sheri R. GrissomMarty Thomas

54Senior Vice President, Human Resources

Brian C. Lantz

56Senior Vice President, Communications & Corporate Administration

Marty Thomas63

60

Senior Vice President, Operations & Supply Chain Strategy

Dan Luburic

50

47

Vice President and Corporate Controller

Christopher J. Klein has

Nicholas I. Fink has served as Chief Executive Officer since January 2020. From March 2019 to January 2020, Mr. Fink served as President and Chief Operating Officer of Fortune Brands since January 2010.Brands. From July 2016 to March 2019, Mr. Fink served as President of the Company’s Plumbing business.

Patrick D. Hallinanhas 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.

Nicholas I. FinkCheri M. Phyfer has served as President of the Plumbing segment since August 2016. From June 2015 to August 2016, Mr. FinkMarch 2019. Ms. Phyfer served as Senior Vice President-Global GrowthPresident of Moen’s U.S. business from February 2018 to March 2019. Prior to that, Ms. Phyfer held various positions at the Sherwin-Williams Company, a manufacturer of paint and Developmentcoatings products, including President 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 Presidentthe Consumer Brands Group (2017) and President Asia-Pacific/South America.& General Manager – Diversified Brands from 2013 to 2017.

Brett E. Finleyhas served as President of the DoorsOutdoors & Security segment since July 2018. From February 2016 to July 2018, Mr. Finley served as the President of Fortune Brands Doors, Inc. 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.

R. David M. RandichBanyard, Jr. has served as President of the Cabinets segment since October 2012.

Tracey L. Belcourt hasNovember 2019. Mr. Banyard served as Senior Vice President and Chief Executive Officer of Global GrowthMyer Industries, an international manufacturer of packaging, storage, and Development of Fortune Brands sincesafety products and specialty molding, from December 2016. From 20122015 to 2016, Ms. Belcourt served as Executive Vice President, Strategy of Mondelez International, Inc. a confectionary, food and beverage company.October 2019.

Robert K. BiggartHiranda S. Donoghue has served as Senior Vice President, General Counsel and& Secretary of Fortune Brands since December 2013.2021. Ms. Donoghue served as Vice President & Deputy General Counsel of Baxter International Inc., a healthcare company, from November 2018 to December 2021. Prior to that, Ms. Donoghue held various positions as a legal advisor at Walgreen Co., from October 2007 to

16


November 2018, including most recently as Vice President, Corporate and M&A Legal (from October 2017 to November 2018).

Sheri R. Grissomhas served as Senior Vice President, Chief Human Resources Officer 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.

Brian C. LantzJohn D. Lee has served as Senior Vice President, CommunicationsGlobal Growth & Corporate AdministrationDevelopment of Fortune Brands since January 2017.2020. Mr. Lantz joinedLee served as Senior Vice President, Global Growth & Development of the Plumbing segment from July 2016 to January 2020.

May Russell has served as Senior Vice President & Chief Digital Officer of Fortune Brands since February 2022. Ms. Russell served in June 2011various positions with Ford Motor Company, a manufacturer of vehicles, since 2009, most recently serving as Vice PresidentChief Technology/Product Officer of Investor Relations.Ford Digital Solutions, a division of Ford Motor Company, from November 2018 to January 2022.

Marty Thomashas served as Senior Vice President, Operations and& Supply Chain Strategy of Fortune Brands 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.prior thereto.

Dan Luburichas served as Vice President and Corporate Controller of Fortune Brands since October 2011.

17


PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

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”.

In December 2018,2021, our Board of Directors increased the quarterly cash dividend by 10%8% to $0.22$0.28 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.

As a holding company, we are a legal entity separate and distinct from our subsidiaries. Accordingly, 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.

On February 1, 2019,11, 2022, there were 9,9468,055 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 inRule 10b-18(a)(3) under the Exchange Act) for the three months ended December 31, 2018:2021:

    
Three Months Ended December 31, 2018 

Total number of

shares purchased(a)

  

Average price

paid per share

  Total number of
shares purchased
as part of publicly
announced plans
or programs(a)
  Approximate dollar
value of shares that may
yet be purchased under
the plans or programs
(a)
 

Three Months Ended December 31, 2021

 

Total number of
shares purchased
(a)

 

 

 

Average price
paid per share

 

 

 

Total number of
shares purchased
as part of publicly
announced plans
or programs
(a)

 

 

 

Approximate dollar
value of shares that may
yet be purchased under
the plans or programs
(a)

 

October 1 – October 31

  1,043,400  $47.94   1,043,400  $455,686,267 

 

1,435,721

 

 

 

$

94.53

 

 

 

1,435,721

 

 

 

$

456,660,001

 

November 1 – November 30

  951,700   44.08   951,700   413,734,259 

 

408,200

 

 

 

102.82

 

 

 

408,200

 

 

 

414,689,648

 

December 1 – December 31

           413,734,259 

 

 

 

 

 

 

 

 

 

 

414,689,648

 

Total

  1,995,100  $46.10   1,995,100  

 

1,843,921

 

 

 

$

96.37

 

 

 

1,843,921

 

 

 

 

 

(a)

Information on the Company’s share repurchase program follows:

(a)
Information on the Company’s share repurchase program follows:

Authorization date

Announcement date

Authorization amount of shares


of outstanding common stock

Expiration date

April 30, 2018

April 30, 2018

$150 million

April 30, 2020

July 13, 2018September 21, 2020

July 16, 2018September 21, 2020

$400 million

$500,000,000

September 21, 2022

July 13, 202023, 2021

July 23, 2021

$400,000,000

July 23, 2023

18


Stock Performance

img23432962_0.jpg 

LOGO

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, 20132016 through December 31, 2018.2021. This graph assumes $100 was invested in the stock or the index on December 31, 20132016 and also assumes the reinvestment of dividends. The foregoing performance graph is being furnished as part of this Annual Report on Form10-K solely in accordance with the requirement under Rule14a-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 20182021 peer group is composed of the following publicly traded companies corresponding to the Company’s core businesses:

American Woodmark Corporation, Armstrong World Industries, Inc., Fastenal Company, Leggett & Platt Incorporated, Lennox International Inc., Masco Corporation, Masonite International Corporation, Mohawk Industries, Inc., Newell Brands Inc., The Sherwin-Williams Company, Stanley Black & Decker, Inc. and USG Corporation.Fastenal Company.

19


Calculation of Peer Group Index

The weighted-average total return of the entire peer group, for the period of December 31, 20132016 through December 31, 2018,2021, 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.

Item 6. Reserved.

(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.

Not applicable.

Item 6.

Selected Financial Data.

20


Five-year Consolidated Selected

Item 7. Management’s Discussion and Analysis of Financial DataCondition and Results of Operations.

  
  Years Ended December 31, 
      
(In millions, except per share amounts) 2018  2017  2016  2015  2014 

Income statement data(a)

      

Net sales

 $5,485.1  $5,283.3  $4,984.9  $4,579.4  $4,013.6 

Cost of products sold(b)

  3,525.7   3,358.3   3,188.8   3,001.1   2,653.6 

Selling, general and administrative expenses(b)

  1,241.4   1,196.9   1,135.5   1,059.8   949.0 

Amortization of intangible assets

  36.1   31.7   28.1   21.6   13.1 

Loss on sale of product line (see Note 4)

     2.4          

Asset impairment charges

  62.6   3.2          

Restructuring charges

  24.1   8.3   13.9   16.6   7.0 

Operating income

  595.2   682.5   618.6   480.3   390.9 

Income from continuing operations, net of tax(e)

  390.0   475.3   412.4   306.5   273.6 

Basic earnings per share — continuing operations

  2.69   3.10   2.67   1.92   1.68 

Diluted earnings per share — continuing operations

  2.66   3.05   2.61   1.88   1.64 
 

Other data(a)

      

Depreciation and amortization

 $149.6  $130.3  $122.7  $115.1  $98.8 

Cash flow provided by operating activities(c)

  604.0   600.3   650.5   429.2   266.2 

Capital expenditures

  (150.1  (165.0  (149.3  (128.5  (127.5

Proceeds from the disposition of assets

  6.1   0.4   3.9   2.5   0.7 

Dividends declared per common share

  0.82   0.74   0.66   0.58   0.50 
 

Balance sheet data

      

Total assets(d)

 $5,964.6  $5,511.4  $5,128.5  $4,875.7  $4,051.5 

Third party debt(d)

  2,334.0   1,507.6   1,431.1   1,168.7   668.6 

Total invested capital

  4,513.9   4,108.7   3,794.1   3,623.3   2,931.6 

(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 19, “Information on Business Segments.”

(b)

Reflects adoption of Accounting Standards Update (“ASU”)2017-07 “Presentation of Net Periodic Pension and Postretirement Cost” which resulted in the retrospective reclassification of amortization of prior service cost/credits, interest cost, expected return on plan assets and actuarial gains/losses from operating income to other income, net.

The Company’s defined benefit expense included recognition ofpre-tax actuarial gains (losses) in each of the last five years as follows:

      
   2018  2017  2016  2015  2014 

Pre-tax actuarial gains (losses)

 $(3.8 $0.5  $(1.9 $(8.6 $(13.7

Portion in other (income) expense

  (3.8  0.5   (1.9  (2.5  (13.7

Portion in discontinued operations

           (6.1   

(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 ASU2015-03 “Simplifying the Presentation of Debt Issuance Costs,” which resulted in the retrospective reclassification of debt issuance costs from other current assets and other assets to long-term debt.

(e)

Includes an estimated net tax benefit of $25.7 million in 2017 resulting from the enactment of the U.S. Tax Cuts and Jobs Act of 2017 on December 22, 2017 (the “Tax Act”). During 2018, the Company completed its SAB 118 analysis with respect to income tax effects of the Tax Act. As a result, the Company recorded a tax expense in the amount of $5.5 million in 2018.

Introduction

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 the two years ended December 31, 2021 and 2020. For a discussion of our 2019 results, please refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 24, 2021.
Liquidity and Capital Resources: This section provides a discussion of our financial condition and an analysis of our cash flows for each of the two years ended December 31, 2021 and 2020. This section also provides a discussion of our contractual obligations, other purchase commitments and customer credit risk that existed at December 31, 2021, 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 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

>

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, 2018, 2017 and 2016.

>

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, 2018, 2017 and 2016. This section also provides a discussion of our contractual obligations, other purchase commitments and customer credit risk that existed at December 31, 2018, 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 and storm door systems, security products, and outdoor performance materials used in decking and railing products, and fencing products.kitchen and bath cabinetry.

For the year ended December 31, 2018,2021, net sales based on country of destination were:

 
(In millions)          

 

 

 

 

 

 

United States

  $4,606.6    84

 

$

6,402.8

 

84

%

China

 

510.4

 

7

 

Canada

   433.1    8 

 

542.6

 

7

 

China

   260.6    5 

Other international

   184.8    3 

 

200.3

 

2

 

Total

  $5,485.1    100

 

$

7,656.1

 

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 shareholderstockholder 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, 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.

21


We continue to 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 pursuinginitiatives, pursue accretive strategic acquisitions,non-controlling equity investments, and joint ventures, and by returningreturn cash to shareholdersstockholders through a combination of dividends and repurchases of shares of our common stock 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. Continued growth in the U.S. market for our home products will largely depend on consumer confidence, employment, wage growth, home prices, stable mortgage rates and credit availability.

We may be impacted by fluctuations in raw materials, component costs, labor costs, tariffs, transportation costs, foreign exchange rates, inflation, interest rates and promotional activity among our competitors.competitors, among other things. We strive to offset the potential unfavorable impact of these items with productivity improvements and price increases.

During the threetwo years ended December 31, 2018,2021, our net sales grew at a compounded annual rate of 6.2%15.2% as we benefited from an improvinga growing U.S. home products market, acquisitions, and growth in international markets. Operating income grew at a compounded annual rate of 7.4%24.9% with consolidated operating margins improvingbetween 12% and 14% from 10% in 20152019 to 11% in 2018.2021. Growth in operating income was primarily due to higher sales volume, changes to our portfolio of businesses, control and leverage ofover our operating expenses and the benefits of manufacturing productivity programs.

During 2018,the first half of 2020, in response to the COVID-19 pandemic, a number of countries and U.S. states issued orders requiring nonessential businesses to close (“closure orders”) and persons who were not engaged in essential businesses to stay at home. Generally, states and jurisdictions designated our products, our retail channel partners and residential construction as essential business activities. While our financial results were negatively impacted during the second quarter of 2020 by these closure orders, sales volumes increased as these restrictions were relaxed benefiting our third and fourth quarter 2020 results.

During 2021, the U.S. home products market grew due to increases in repair and remodel and new home construction and repair and remodel activities.activity. We believe new housing construction experienced approximately 5% growth in 2018 compared to 2017 and spending for home repair and remodeling increased approximately 4%.14%and new housing construction experienced approximately 11% growth in 2021 compared to2020. In 2018,2021, net sales grew 4% 25.7%due to higher sales volume including the favorable comparison to 2020 when our volumes were impacted by the COVID-19 pandemic, the benefit from the Larson acquisition ($403.4 million), price increases to help mitigate the impact of cumulative raw materialcommodity and transportation cost increases the acquisitions in our Plumbing and Doors & Security segments, higher sales volume primarily resulting from U.S. home products market growth, and the effect offavorable mix, as well as favorable foreign exchange. exchange of approximately $63 million. These benefits were partially offset by higher promotion and volume-based rebate costs.In 2018,2021, operating income decreased 12.8%increased 36.1% over 2020 primarily due to unfavorable mix,higher net sales, the benefit from the Larson acquisition, manufacturing productivity improvements, the absence of the 2020 asset impairment charges higher employee-related costs and lower restructuring charges.

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 approximately 7% growth in 2017 compared to 2016 and spending for home repair and remodeling increased by approximately 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 ofother charges, as well as favorable foreign exchange of approximately $17 million. These benefits were partially offset by higher commodity, employee-related and productivity improvements.transportation costs, higher amortization of intangible assets principally due to the Larson acquisition, higher advertising costs, higher promotion and volume-based rebate costs and higher tariffs.

DuringIn December 2020, we acquired 100% of the fourth quarteroutstanding equity of 2018,Larson, the North American market leading brand of storm, screen and security doors, for a total purchase price of approximately $717.5 million, net of cash acquired. We financed the transaction with borrowings under our Plumbing segment entered into strategic partnerships with several companies who incorporate emerging technology into plumbing-related products,existing credit facilities. The results of operations are included in the Outdoors & Security segment. The financial results of Larson were included in the Company’s December 31, 2021 and 2020 consolidated balance sheets and the Company's consolidated statements of income and of cash flows beginning January 2021. Larson's net sales, operating income and cash flows from the date of acquisition to December 31, 2020 were not material to the Company.

22


In June 2020, we repaid all amounts outstanding on the 3.000% Senior Notes issued in June 2015 at the same time acquirednon-controlling equity interests in two oftheir maturity date using borrowings under our partners. This includes an investment in Flo Technologies, Inc.

2019 Revolving Credit Agreement (as defined below). In September 2018, we2019, the Company issued $600$700 million of unsecured senior notes3.25% Senior Notes due 2029 (“2018 Senior2019 Notes”) in a registered public offering. The 2018 Senior Notes are due in 2023 with a coupon rate of 4%. All other terms and conditions of the 2018 Senior Notes are substantially consistent with our other senior notes issued in June 2015 (“2015 Senior Notes”, and collectively with the 2018 Senior Notes, the “Senior Notes”). WeCompany used the proceeds from the 2018 Senior2019 Notes offering to repay in full a $350 million term loan and to pay down our revolving credit facility.

In September 2018, we acquired 100% of the membership interests of Fiber Composites LLC (“Fiberon”), a leading U.S. manufacturer of outdoor performance materials used in decking, railing and fencing products

for a total purchase price of approximately $470.0 million, subject to certain post-closing adjustments. The acquisition of Fiberon provides category expansion and product extension opportunities into the outdoor living space for our Doors & Security segment. We financed the transaction using cash on hand and borrowingsoutstanding balances under our revolving credit and term loan facilities. Fiberon’s results of operations are included in the Doors & Security segment from the date of acquisition.2019 Revolving Credit Agreement.

In July 2018, we publicly announced an internal reorganization to combine our historical Doors and Security segments under common leadership to drive innovation, accelerate product development, and enhance investments and business processes. In connection with the reorganization, we changed how our chief operating decision maker evaluates and allocates the resources for the combined business. Reporting for the new Doors & Security segment began in the third quarter of 2018 and historical financial segment information has been restated to conform to the new segment presentation.

In March 2018,November 2021, the Company entered into a $350364-day, $400 million term loan credit agreement (“2021 Term Loan”) for general corporate purposes that matures in March 2019. In August 2018, the Company amended its existing $350 million term loan to increase the borrowings under the term loan from $350 million to $525 million. All terms and conditions on the amended term loan remain the same as the previous $350 million term loan.November 2022. Interest rates under the term loan2021 Term Loan are variable based on LIBOR at the time of the borrowing and the Company’s long-term credit rating and can range from LIBOR + 0.625% to LIBOR + 1.25%. Covenants under the term loan are the same as the existing $1.25 billion revolving credit agreement.

In October 2017, we2018 our Plumbing segment entered into a strategic partnership with, and acquired Domotec Holdings Limitednon-controlling equity interests in, Flo Technologies, Inc. (“Victoria + Albert”), aUK-based premium brand of standalone bathtubs, sinks, tub fillers, faucets and other accessories. In July 2017, we acquired Shaws Since1897 Limited (“Shaws”), aUK-based luxury plumbing products company that specializes in manufacturing and selling fireclay sinks and selling brassware and accessories. The total combined consideration paid was approximately $146 million, subject to certain post-closing adjustments and deferred acquisition payments. We financed both of the acquisitions using cash on hand and borrowings under our revolving credit facility. These transactions broadened our plumbing portfolio.

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 LLC (“ROHL”Flo”), a California-based luxury plumbing companyU.S. manufacturer of comprehensive water monitoring and shut-off systems with leak detection technologies. In January 2020, we entered into an agreement to acquire 100% of the outstanding shares of Flo in a multi-phase transaction, which was completed in January 2022. The minority shareholders' substantive participating rights expired on January 1, 2021, at which time we obtained control of, and began consolidating, Flo in our results of operations and statements of financial positions and cash flows. Immediately prior to consolidating Flo, we recognized a non-cash loss of $4.5 million within other expense for the year-ended December 31, 2021, related transaction,to the remeasurement of our previously existing investment in Flo. During the fourth quarter of 2021 we acquired TCL Manufacturing Ltd, which gave us ownershiprecorded a mark-to-market expense of Perrin & Rowe, a UK manufacturer and designer of luxury kitchen and bathroom plumbing products. The total combined purchase price was approximately $166$2.2 million subjectrelated 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.remaining shares held by the minority shareholders.

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 as our previous credit assesment. 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 Inc (“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.

Basis of Presentation

The consolidated financial statements in this Annual Report on Form10-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, there were certain transactions that resulted in approximately $38 million of net cash outflows relating to payments made to third parties in the normal course of business during the period between theyear-end of our wholly-owned subsidiaries and the Company’syear-end (in 2018, amounts were immaterial).

In September 2018, we acquired Fiber Composites LLC (“Fiberon”). The financial results of Fiberon were included in the Company’s consolidated statements of income and statements of cash flow beginning in September 2018 and the consolidated balance sheet as of December 31, 2018. The results of operations are included in the Doors & Security segment.

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 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.

Results of Operations

The following discussion of both consolidated results of operations and segment results of operations refers to the year ended December 31, 20182021 compared to the year ended December 31, 2017, and the year ended December 31, 2017 compared to the year ended December 31, 2016.2020. 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 Form10-K. Unless otherwise noted, all discussion of results of operations are for continuing operations.

Years Ended December 31, 2018, 20172021 and 20162020

     
(In millions)  2018 % change  2017 % change   2016 

 

2021

 

 

% change

 

 

 

2020

 

 

Net Sales:

         

 

 

 

 

 

 

 

 

 

 

 

Plumbing

 

$

2,761.2

 

25.4

%

 

 

$

2,202.1

 

Outdoors & Security

 

2,039.9

 

43.7

 

 

 

1,419.2

 

Cabinets

  $2,418.6   (2.0)%  $2,467.1   2.9  $2,397.8 

 

 

2,855.0

 

 

15.6

 

 

 

2,469.0

 

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 Fortune Brands

  $5,485.1   3.8 $5,283.3   6.0  $4,984.9 

 

$

7,656.1

 

25.7

%

 

 

$

6,090.3

 

Operating Income:

         

 

 

 

 

 

 

 

 

 

 

 

Plumbing

 

$

629.7

 

34.6

%

 

 

$

467.9

 

Outdoors & Security

 

 

291.9

 

 

45.0

 

 

 

201.3

 

Cabinets

  $143.5   (46.3)%  $267.2   3.6  $257.8 

 

279.3

 

18.5

 

 

 

235.7

 

Plumbing(a)

   375.3   4.7   358.5   13.8    314.9 

Doors & Security(a)

   155.6   5.9   146.9   16.2    126.4 

Corporate(a)

   (79.2  12.1   (90.1  (11.9   (80.5

Corporate

 

 

(110.5

)

 

(6.8

)

 

 

(103.5

)

 

Total Fortune Brands

  $595.2   (12.8)%  $682.5   10.3  $618.6 

 

$

1,090.4

 

36.1

%

 

 

$

801.4

 

(a)

We revised our previously reported results in 2017 and 2016 to reflect our adoption of ASU2017-07, Presentation of Net Periodic Pension and Postretirement Costs, and to reflect our new Doors & Security segment resulting from the reorganization we announced in July 2018.

Certain items had a significant impact on our results in 2018, 20172021 and 2016.2020. These included the acquisitions of Fiberon, Victoria + Albert, Shaws, Riobel, ROHL and Perrin & Rowe, restructuring and other charges, asset impairment charges and the impact of changes in foreign currency exchange rates.

23


In 2018,2021, financial results included:

the impact of foreign exchange primarily due to movement in the Canadian dollar, Mexican peso, British pound and Chinese yuan, which had a favorable impact compared to 2020, of approximately $63 million on net sales and of approximately $17 million both on operating income and net income and
restructuring and other charges of $20.7 million before tax ($15.9 million after tax), largely related to severance costs associated with the relocation of manufacturing facilities within our Outdoor & Security and Cabinets segments.

>

the addition of the Fiberon acquisition in our Doors & Security segment,

>

asset impairment charges of $62.6 related to impairment of two indefinite-lived tradenames within our Cabinets segment which was primarily the result of changes in the mix of revenue across our tradenames finalized during our annual planning process conducted during the fourth quarter, as well as restructuring actions announced during the third quarter,

>

restructuring and other charges of $35.4 million before tax ($26.9 million after tax), primarily related to costs associated with our initiatives to consolidate our manufacturing footprint and product lines in our Cabinets segment and severance costs within all of our segments,

>

the impact of foreign exchange primarily due to movement in the Canadian Dollar, British Pound, Mexican Peso and Chinese Yuan, which had a favorable impact compared to 2017, of approximately $9 million on net sales, approximately $6 million on operating income and approximately $6 million on net income and

>

the favorable impact of changes fromlast-in,first-out (“LIFO”) tofirst-in,first-out (“FIFO”) for product groups in which metals comprise a significant portion of inventory cost, which resulted in income of approximately $7.3 million before tax ($5.5 million after tax).

>

During 2018, the Company completed its SAB 118 analysis with respect to income tax effects resulting from the enactment of the U.S. Tax Cuts and Jobs Act of 2017 on December 22, 2017 (the “Tax Act”) As a result, the Company recorded a tax expense in the amount of $5.5 million in 2018.

In 2017,2020, 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

restructuring and other charges of $25.1 million before tax ($17.5 million after tax), largely related to losses on disposal of inventory associated with exiting a product line in our Doors & Security segment and exiting a customer relationship in our Cabinets segment, as well as severance costs within our Doors & 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,

>

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 of the Tax Act.

In 2016, financial results included:

>

the benefit of the acquisitions in our Cabinets and Plumbing segments,

>

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 Doors & 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.

2018 Compared to 2017

headcount actions associated with COVID-19 across all segments and costs associated with changes in our manufacturing processes within our Plumbing segment,
asset impairment charges of $22.5 million related to the impairment of indefinite-lived tradenames within our Plumbing and Cabinets segments, which were primarily the result of forecasted sales declines resulting from the COVID-19 pandemic,
actuarial losses within our defined benefit plans of $3.4 million primarily related to decreases in discount rates and differences between expected and actual returns on plan assets and
the impact of foreign exchange primarily due to movement in the Canadian dollar, British pound, Mexican peso and Chinese yuan, which had an unfavorable impact compared to 2019, of approximately $4 million on net sales and a favorable impact compared to 2019, of approximately $1 million both on operating income and net income.

Total Fortune Brands

Net sales

Net sales increased $201.8by $1,565.8 million, or 3.8%. The increase was25.7%, due to higher sales volume including the favorable comparison to 2020 when our volumes were impacted by the COVID-19 pandemic, the benefit from the Larson acquisition ($403.4 million), price increases to help mitigate the impact of cumulative raw materialcommodity and transportation cost increases higher international sales, principally in China, our acquisitions

during 2017 and 2018 in our Plumbing and Doors & Security segments, higher sales volume primarily from the growth in the U.S. home products market, the benefit from new product introductions andfavorable mix, as well as favorable foreign exchange of approximately $9$63 million. These benefits were partially offset by more moderate industry growth during the second half of 2018, unfavorable mixhigher promotion and higher promotions and rebates.volume-based rebate costs.

Cost of products sold

Cost of products sold increased $167.4by $983.2 million, or 5.0%25.0%, due to higher net sales, increased commodity costs, higher restructuring and other charges related to costs associated with our initiatives to consolidate and rationalize our manufacturing footprint and discontinue certain product lines in our Cabinets segment, andthe impact of the Larson acquisition including higher amortization of the acquisition-relatedacquisition related inventory fair value adjustment ($3.3 million in our Plumbing2021), commodity cost inflation, product mix, labor inflation, and Doors & Security segments. These factors werehigher tariffs, partially offset by the benefit offrom manufacturing productivity improvements.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $44.5by $296.4 million, or 3.7%23.1%,due to higher transportation and employee-related costs, the impact from our acquisitions during 2017of the Larson acquisition and 2018 in our Plumbing and Doors & Security segments and higher transportation costs partially offset by the benefit from restructuring actions.advertising costs.

24


Amortization of intangible assets

Amortization of intangible assets increased $4.4by $22.1 million primarily due to the Larson acquisition in our acquisitions during 2017Outdoors & Security segment ($18.2 million) and 2018the 2021 consolidation of Flo in our Plumbing and Doors & Security segments offset by a decrease related to a definite-lived customer relationship intangible that was fully amortized during the second quarter of 2017.segment ($2.6 million).

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 Doors & Security segment. We recorded apre-tax loss of $2.4 million as the result of this sale.

Asset impairment charges

Asset impairment charges of $62.6$22.5 million in 20182020 related to two indefinite-lived tradenames within our Plumbing and Cabinets segment. During the third quarter of 2018, we recognized an impairment of $27.1 million related to one tradename, which was primarily the result of reduced revenue growth expectations associated with Cabinets operations in Canada, including the announced closure of Company-owned retail locations during the third quarter of 2018. During the fourth quarter of 2018, we recognized an impairment of $35.5 million related to another tradename, which was primarily the result of lower than forecasted sales during the fourth quarter of 2018 as well as projected changes in the mix of revenue across our tradenames in future periods, including the impact of more moderate industry growth expectations, which were finalized during our annual planning process conducted during the fourth quarter. Asset impairment charges of $3.2 million in the first quarter of 2017 related to our decision to sell Field ID.segments.

Restructuring charges

Restructuring charges of $24.1$13.5 million in 2018 primarily2021 largely related to severance costs associated with the relocation of manufacturing facilities within allour Outdoor & Security and Cabinets segments.Restructuring charges of our$15.9 million in 2020 largely related to headcount actions associated with COVID-19 across all segments and costs associated with our initiatives to consolidatechanges in our manufacturing footprint and product lines in our Cabinets segment. Restructuring charges of $8.3 million in 2017 primarily related to severance costs across all segments and charges associated with the relocation of a manufacturing facilityprocesses within our CabinetsPlumbing segment.

Operating income

Operating income decreased $87.3increased by $289.0 million, or 12.8%. Operating income decreased36.1%, primarily due to unfavorable mix,higher net sales, the benefit from the Larson acquisition, manufacturing productivity improvements, the absence of the 2020 asset impairment charges and lower restructuring and other charges, as well as favorable foreign exchange of approximately $17 million. These benefits were partially offset by higher commodity, employee-related and transportation costs, higher amortization of intangible assets principally due to the Larson acquisition, higher advertising costs, higher promotion and volume-based rebate costs and restructuring charges partially offset by

higher tariffs.

higher net sales, including the benefit from acquisitions in our Plumbing segment and productivity improvements.

Interest expense

Interest expense increased $25.1by $0.5 million to $74.5$84.4 million, due to higher average borrowings to finance share repurchases and acquisitions and higherpartially offset by lower average interest rates.

Other income,expense (income), net

Other income,expense (income), net, was $16.3expense of $0.9 million in the twelve months ended December 31, 2018,2021, compared to $1.7income of $13.3 million in the twelve months ended December 31, 2017.2020. The increase in otherdecrease of $14.2 million of income net, is primarily due to hedgelosses of $5.0 million in 2021 and gains associated withof $11.0 million in 2020 related to our September 2018 debt issuance, favorableinvestment in Flo prior to its consolidation and unfavorable foreign currency adjustments and various tax credits within our Plumbing businesslosses, partially offset by lowerhigher defined benefit plan income in 2018 ($3.07.8 million decrease)increase). In addition, 2017 reflects a $7.0 million impairment charge related to a cost method investment.

Income taxes

The effective income tax rates for 20182021 and 20172020 were 27.4%23.2% and 25.1%23.1%, respectively. The 2018 effective income tax rate was favorably impacted by the corporate tax rate reduction from 35% to 21% under The Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The 20182021 effective income tax rate was unfavorably impacted by the repeal of the Domestic Production Activity (Internal Revenue Code Section 199) Deduction,state and local income taxes, foreign income taxed at higher rates and a valuation allowance increase ($3 million), an adjustment toincrease. This expense was offset by favorable benefits for the provisional net benefit recorded in 2017 under the Tax Act ($5.5 million), state and local taxes, unfavorable tax rates in foreign jurisdictions ($3.5 million), and increases inrelease of uncertain tax positions, ($4.1 million).primarily related to statute of limitation lapses, and share-based compensation.

The 20172020 effective income tax rate was favorablyunfavorably impacted by the Tax Act. The effectivestate and local income tax rate for 2017taxes and foreign income taxed at higher rates. This expense was favorably impactedoffset by a tax benefit related to share-based compensation ($23.9 million), the tax benefitcompensation.

Net income attributable to the Domestic Production Activity (Internal Revenue Code Section 199) Deduction ($10.9 million)Fortune Brands

Net income attributable to Fortune Brands was $772.4 million in 2021 compared to $553.1 million in 2020. The increase of $219.3 million was due to higher operating income, lower equity in losses of affiliate and favorable tax rates in foreign jurisdictions ($8.3 million), partiallylower noncontrolling interests, partly offset by state and local taxes and increases to uncertain tax positions ($11.6 million).

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 federalhigher income tax for dividends received from foreign subsidiaries,expenses, higher other expense and imposing aone-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 U.S. GAAP to situations where a registrant does not have the necessary information available, preparedhigher interest expense.

25


Results By Segment

Plumbing

Net sales increased by $559.1 million, 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 calculated our best estimate of the impact of the Tax Act on our 2017 effective income tax rate. As a result, the Company 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 included 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. During the fourth quarter of 2018, the Company completed its analysis in conjunction with the SAB 118 measurement period ending on December 22, 2018. The total tax provision impact for the year ended December 31, 2018 was an unfavorable adjustment of $5.5 million related primarily to certain deferred tax assets and liabilities.

Income from continuing operations

Net income from continuing operations was $390.0 million in 2018 compared to $475.3 million in 2017. The decrease of $85.3 million was primarily25.4%, due to lower operating income.

Loss from discontinued operations

The loss from discontinued operations was $0.2 millionhigher sales volume across all brands and $2.6 millionmarkets, including showroom customers whose locations were negatively impacted in 2018 and 2017, respectively and is related to the prior sale of the Waterloo tool storage and Simonton window businesses.

Results By Segment

Cabinets

Net sales decreased $48.5 million, or 2.0%, predominantly due to the impact of exiting a customer relationship and unfavorable mix. These factors were partially offset2020 by the benefit from new product introductionsCOVID-19 pandemic, and price increases to help mitigate the impact of cumulative raw materialcommodity and transportation cost increases.increases, as well as favorable foreign exchange of approximately $53 million. These benefits were partially offset by higher volume-based rebate costs.

Operating income decreased $123.7increased by $161.8 million, or 46.3%34.6%, primarily due to lowerhigher net sales, tradenamethe benefit from manufacturing productivity improvements, the absence of the 2020 asset impairment charges of $62.6 million, highercharge ($13.0 million) and favorable restructuring and other charges, incurred to consolidate our manufacturing footprint and discontinue certain product lines and increased employee-related costs due to inflation,as well as favorable foreign exchange of approximately $21 million. These benefits were partially offset by the benefit from productivity improvements.impact of higher employee-related, freight, commodity, advertising and tariff costs, higher amortization of intangible assets related to the Flo acquisition and higher volume-based rebate costs.

PlumbingOutdoors & Security

Net sales increased $162.5by $620.7 million, or 9.4% 43.7%,due to higher sales unit volume in the U.S. China and Canada, new product introductions across our distribution channels, the benefit from the 2017 acquisitions of Victoria + Albert and Shaws andLarson acquisition ($403.4 million), higher sales volume including the favorable comparison to 2020 when our volumes were impacted by the COVID-19 pandemic, price increases to help mitigate the impact of cumulative raw materialcommodity and transportation cost increases and lower rebate costs due to timing of sales in 2021 versus prior year period, as well as favorable foreign exchange of approximately $1 million. These benefits were partially offset by higher rebates. Foreign exchange was favorableunfavorable mix primarily driven by approximately $5 million.materials availability.

Operating income increased $16.8by $90.6 million, or 4.7%45.0%,due to the higher net sales, the benefit from the Larson acquisition and benefits frommanufacturing productivity improvements. These benefits were partially offset by commodity cost inflation, higher freight and employee-related costs and higher restructuring charges, as well as unfavorable mix, amortization of the acquisition-related inventory fair value adjustments ($5.5 million) related to our 2017 acquisitions and increased marketing and advertising costs. In addition, 2017 operating income reflects the impact of adopting ASU2017-07 during 2018 and the reclassificationforeign exchange of approximately $5.1 million from Plumbing operating income to other income, net.$1 million.

Doors & SecurityCabinets

Net sales increased $87.8by $386.0 million, or 8.0%15.6%, due to higher sales volume resulting fromin both our stock and make-to-order products, including the benefit from new product introductions,favorable comparison to 2020 when our volumes were impacted by the acquisition of Fiberon in 2018,COVID-19 pandemic, price increases to help mitigate the impact of cumulative raw materialcommodity and transportation cost increases and the impact of favorable foreign exchange, which were partly offset by increasednon-repeating sales promotions and unfavorable mix.

Operating income increased $8.7 million, or 5.9%, due to higher net sales and an inventory valuation accounting change benefit of $12.8 million, which were partially offset bynon-repeating sales promotions and inventory step up amortization related to the Fiberon acquisition.

Corporate

Corporate expenses decreased by $10.9 million mainly due to lower employee-related costs. In addition, 2017 corporate expense reflects the impact of adopting ASU2017-07 during the first quarter of 2018 and the related reclassification of approximately $4.5 million of 2017 income from Corporate expenses to other income, net.

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 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 increasesmix, as well as the benefit from favorable foreign exchange of approximately $4$8 million. These benefits were partially offset by unfavorable mix, higher sales promotions, and sales rebates.volume-based rebate costs.

Cost of products sold

Cost of products soldOperating income increased $169.5by $43.6 million, or 5.3%18.5%, due to higher net sales, including the impactbenefit from manufacturing productivity improvements, the absence of the acquisitions in our Plumbing segment2020 asset impairment charge ($9.5 million) and raw material cost increases, partiallylower advertising, tariff and restructuring costs. These factors were partly offset by the benefit of productivity improvements.

Selling, generalhigher freight, commodity, and administrative expenses

Selling, general and administrative expenses increased $61.4 million, or 5.4%, due to higher employee-related costs and advertisinghigher volume-based rebate costs, as well as the impactunfavorable foreign exchange of the acquisitions in our Plumbing segment.approximately $3 million.

Amortization of intangible assetsCorporate

Amortization of intangible assetsCorporate expenses increased $3.6by $7.0 million, primarilyor 6.8%, due to the acquisitions in our Plumbing segment, partiallyhigher employee-related and consulting costs. These factors were partly offset by a decrease relating to a definite-lived customer relationship intangible in our Doors & Security segment that was fully amortized during the second quarterabsence 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 Doors & Security segment. We recorded apre-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 severancetransaction costs within all of our 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 Doors & Security segment.

Operating income

Operating income increased $63.9 million or 10.3%. Operating income increased due to higher net sales, including the benefit from acquisitionsLarson acquisition 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. 2017 and 2016 were adjusted to reflect the impact of adopting ASU2017-07 and reclassification of $9.6 million and $14.1 million, respectively from operating income to other income, net.

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 borrowings2020 ($4.5 million) and the absence of thewrite-off of debt issuance costs incurred in 2016.

Other income, net

Other income, net, was of $1.7 million in the twelve months ended December 31, 2017 compared to $12.6 million in the twelve months ended December 31, 2016. The decrease of $10.9 million was primarily due to a $7.0 million impairment charge in 2017 pertaining to a cost method investment and a decrease in defined benefit income of $4.5 million.

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 Act ($25.7 million). The effective income tax rates for 2017 and 2016 were favorably impacted by the tax benefit attributable to share-based compensation (ASU2016-09) deduction ($23.9 million and $27.8 million, respectively), the Domestic Production Activity (Internal Revenue Code Section 199) deduction ($10.9 million and $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).

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 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 $43.6 million, or 13.8%, 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. In addition, 2017 and 2016 operating income reflects the impact of adopting ASU2017-07 and reclassification of approximately $5.1 million and $11.4 million, respectively from operating income to other income, net.

Doors & Security

Net sales increased $42.7 million, or 4.1%, due to higher sales volume, including the benefit from new product introductions, and price increases to help mitigate cumulative raw material cost increases. These benefits were partially offset by the impact of exiting two security product lines in our commercial distribution channels.

Operating income increased $20.5 million, or 16.2%, 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. In addition, 2017 and 2016 operating income reflects the impact of adopting ASU2017-07 and reclassification of zero and $2.1 million, respectively from operating income to other income, net.

Corporate

Corporate expenses increased by $9.6 million mainly due to the impairment of a long lived asset. In addition, 2017 and 2016 operating income reflects the impact of adopting ASU2017-07 and reclassification of $4.5 million and $0.6 million, respectively from operating income to other income, net.long-lived asset in 2020 ($3.6 million).

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, availabilitycash borrowed under our credit facility and cash from debt issuances in the capital markets. Our operating income is generated by our subsidiaries. There are no restrictions onWe believe our operating cash flows, including funds available under the abilitycredit facility and access to capital markets, provide sufficient liquidity to support the Company’s working capital requirements, capital expenditures and service of indebtedness, as well as to finance acquisitions,

26


repurchase shares of our subsidiariescommon stock and pay dividends to stockholders, as the Board of Directors deems appropriate.

Our cash flows from operations, borrowing availability and overall liquidity are subject to certain risks and uncertainties, including those described in the section entitled “Item 1A. Risk Factors.” In addition, 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 programs, or pay dividends, or makewhat 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.

Unsecured Senior Notes

At December 31, 2021, the Company had aggregate outstanding notes in the principal amount of $1.8 billion, with varying maturities (the “Notes”). The Notes are unsecured senior obligations of the Company. The following table provides a summary of the Company’s outstanding Notes, including the carrying value of the Notes, net of underwriting commissions, price discounts and debt issuance costs as of December 31, 2021 and December 31, 2020:

 (in millions)

 

 

 

 

 

 

 

Net Carrying Value

 

Coupon Rate

Principal Amount

 

 

Issuance Date

 

Maturity Date

 

December 31, 2021

 

 

December 31, 2020

 

4.000% Senior Notes

$

500.0

 

 

June 2015

 

June 2025

 

$

497.4

 

 

$

496.6

 

4.000% Senior Notes

 

600.0

 

 

September 2018

 

September 2023

 

 

598.2

 

 

 

597.1

 

3.250% Senior Notes

 

700.0

 

 

September 2019

 

September 2029

 

 

694.2

 

 

 

693.5

 

Total Senior Notes

$

1,800.0

 

 

 

 

 

 

$

1,789.8

 

 

$

1,787.2

 

Credit Facilities

In November 2021, the Company entered into a 364-day, $400 million term loan credit agreement (“2021 Term Loan”) for general corporate purposes that matures in November 2022. Interest rates under the 2021 Term Loan are variable based on LIBOR at the time of the borrowing and the Company’s long-term credit rating and can range from LIBOR + 0.625% to LIBOR + 1.25%. Covenants under the 2021 Term Loan are the same as the existing $1.25 billion revolving credit agreement. As of December 31, 2021, we were in compliance with all covenants under this facility.

In September 2019, the Company entered into a second amended and restated $1.25 billion revolving credit facility (the “2019 Revolving Credit Agreement”), and borrowings thereunder will be used for general corporate purposes. The maturity date of the facility is September 2024. Interest rates under the 2019 Revolving Credit Agreement are variable based on LIBOR at the time of the borrowing and the Company’s long-term credit rating, and can range from LIBOR + 0.91% to LIBOR + 1.4%. Company is required to maintain a minimum ratio of consolidated EBITDA to consolidated interest expense of 3.0 to 1.0. Consolidated EBITDA is defined as consolidated net income before interest expense, income taxes, depreciation, amortization of intangible assets, losses from asset impairments, and certain other distributionsone-time adjustments. In addition, the Company’s ratio of consolidated debt minus certain cash and cash equivalents to Fortune Brands. consolidated EBITDA generally may not exceed 3.5 to 1.0. On December 31, 2021 and December 31, 2020, our outstanding borrowings under this credit facility were $520.0 million and 785.0 million, respectively. As of December 31, 2021, we were in compliance with all covenants under this credit facility.

We currently have uncommitted bank lines of credit in China, which provide for unsecured borrowings for working capital of up to $17.5 million in aggregate as of December 31, 2021 and December 31, 2020, of which there were no outstanding balances as of December 31, 2021 and 2020.The weighted-average interest rates on these borrowings were zero in 2021 and 2020.

Commercial Paper

In November 2021, the Company established a commercial paper program (the "Commercial Paper Program") pursuant to which the Company may issue short-term, unsecured commercial paper notes. Amounts available under the Commercial Paper Program may be borrowed, repaid and re-borrowed, with the aggregate principal amount outstanding at any time not to exceed $1.25 billion. The Company’s 2019

27


Revolving Credit Agreement is the liquidity backstop for the repayment of any notes issued under the Commercial Paper Program. The Company plans to use net proceeds from any issuances under the Commercial Paper Program for general corporate purposes. There was no commercial paper outstanding as of December 2018,31, 2021.

As of December 31, 2021, the components of external long-term debt were as follows:

(In millions)

 

2021

 

 

2020

 

Notes (due 2023 to 2029)

 

$

1,789.8

 

 

$

1,787.2

 

2019 Revolving Credit Agreement

 

 

520.0

 

 

 

785.0

 

2021 Term Loan

 

 

400.0

 

 

 

 

Total debt

 

 

2,709.8

 

 

 

2,572.2

 

Less: current portion

 

 

400.0

 

 

 

 

Total long-term debt

 

$

2,309.8

 

 

$

2,572.2

 

In our Boarddebt agreements, there are normal and customary events of Directors increaseddefault which would permit the quarterlylenders 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, 2021.

Cash and Seasonality

In 2021, we invested approximately $148.1 million in incremental capacity to support long-term growth potential and new products inclusive of cost reduction and productivity initiatives. We expect capital spending in 2022 to be in the range of $375 to $425 million, reflecting incremental capacity investments in our decking product line within Outdoors & Security. On December 31, 2021, we had cash dividend by 10% to $0.22 per shareand cash equivalents of $471.5 million, of which $376.1 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.

Our operating cash flows are significantly impacted by the seasonality of our business. We typically generate most of our operating cash flow in the third and fourth quarters of each year. We use operating cash in the first quarter of the year.

Share Repurchases

In 2021, we repurchased 4.7 million shares of our outstanding common stock.stock under the Company’s share repurchase program for $447.7 million. As of December 31, 2021, the Company’s total remaining share repurchase authorization under the remaining program was approximately $414.7 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.

Dividends

In 2021, we paid dividends in the amount of $143.0 million to the Company’s stockholders. 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.

In September 2018, we issued $600 million There are no restrictions on the ability of unsecured senior notes (“2018 Senior Notes”) in a registered public offering. The 2018 Senior Notes are due in 2023 with a coupon rate of 4%. We used the proceeds from the Senior Notes offeringour subsidiaries to pay down our revolving credit facility. On December 31, 2018, the outstanding amount of the 2018 Senior Notes, net of underwriting commissions, price discounts, and debt issuance costs, was $595.0 million.dividends or make other distributions to Fortune Brands.

In March 2018, the Company entered into a $350 million term loan for general corporate purposes that matures in March 2019. In August 2018, the Company amended its existing $350 million term loan to increase the borrowings under the term loan from $350 million to $525 million. All terms and conditions on the amended term loan remain the same as the previous $350 million term loan. The amended term loan is for general corporate purposes and matures in March 2019. At December 31, 2018 and December 31, 2017, amounts due under the term loan were $525.0 million and zero, respectively, which are included within short term debt in our consolidated balance sheet. Interest rates under the term loan are variable

Acquisitions

based on LIBOR at the time of the borrowing and the Company’s long-term credit rating and can range from LIBOR + 0.625% to LIBOR + 1.25%. Covenants under the term loan are the same as the existing $1.25 billion revolving credit agreement. As of December 31, 2018, we were in compliance with all covenants under this term loan.

We periodically review our portfolio of brands and evaluate potential strategic transactions and other capital initiatives to increase shareholderstockholder value. However,In December 2020, we cannot predict whether or whenacquired 100% of the outstanding equity of Larson for a total purchase price of approximately $717.5 million, net of cash acquired.

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In 2018 our Plumbing segment entered into a strategic partnership with, and acquired non-controlling equity interests in, Flo Technologies, Inc. (“Flo”), a U.S. manufacturer of comprehensive water monitoring and shut-off systems with leak detection technologies. In January 2020, we may enterentered into acquisitions, joint ventures or dispositions, make any purchasesan agreement to acquire 100% of the outstanding shares of our common stock under our share repurchase program, or pay dividends, or what impact any such transactions could haveFlo in a multi-phase transaction, which was completed in January 2022. The minority shareholders' substantive participating rights expired on January 1, 2021, at which time we obtained control of, and began consolidating, Flo in our results of operations and statements of financial positions and cash flows or financial condition, whether asflows. Immediately prior to consolidating Flo, we recognized a resultnon-cash loss 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 2011 credit agreement to combine and rollover the prior 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 anon-cash transaction$4.5 million within other expense 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. Onyear-ended December 31, 2018 and December 31, 2017, our outstanding borrowings under these facilities were $320.0 million and $615.0 million, respectively, all of which is included in long-term debt in our consolidated balance sheet. Interest rates under2021, related to 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, 2018, 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 (“2015 Senior Notes”, and collectively with the 2018 Senior Notes, the “Senior Notes”) in a registered public offering. The 2015 Senior Notes consist of two tranches: $400 million of five-year notes due in 2020 with a coupon rate of 3% and $500 million often-year notes due in 2025 with a coupon rate of 4%. We used the proceeds from the 2015 Senior Notes offering to pay down our revolving credit facility and for general corporate purposes. On December 31, 2018, the outstanding amount of the 2015 Senior Notes, net of underwriting commissions, price discounts, and debt issuance costs, was $894.1 million.

On April 30, 2018, our Board of Directors authorized the repurchase of up to $150 million of sharesremeasurement of our common stock overpreviously existing investment in Flo. During the two years ending April 30, 2020. On July 13, 2018, our Boardfourth quarter of Directors authorized2021 we recorded a mark-to-market expense of $2.2 million related to the repurchase of up to $400 million ofremaining shares of our common stock over the two years ending July 13, 2020. As of December 31, 2018, the Company’s total remaining share repurchase authorization under the repurchase programs was approximately $413.7 million. The share repurchase programs do not obligate the Company to repurchase any specific dollar amount or number of shares and may be suspended or discontinued at any time. In 2018, we repurchased 12.0 million shares of our outstanding common stock under the Company’s share repurchase programs for $694.6 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 in aggregate as of both December 31, 2018 and 2017, of which zero were outstanding, as of December 31, 2018 and 2017. The weighted-average interest rates on these borrowings were 0%, 0% and 1.5% in 2018, 2017 and 2016 respectively.

Acquisitions, divestitures and other strategic partnerships in 2018, 2017 and 2016 include:

>

During the fourth quarter of 2018, our Plumbing segment entered into strategic partnerships with several companies which incorporate emerging technology into plumbing-related products, and at the same time acquirednon-controlling equity interests in two of our partners. This includes an investment in Flo Technologies, Inc. (“Flo”), a U.S. manufacturer of a comprehensive water monitoring andshut-off

system with leak detection and proactive leak detection technologies. Our investments in our strategic partners are recorded at cost, plus or minus any changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.

>

In September 2018, we acquired 100% of membership interests of Fiberon, a leading U.S. manufacturer of outdoor performance materials used in decking, railing and fencing products for a total purchase price of approximately $470.0 million, subject to certain post-closing adjustments. The acquisition of Fiberon provides category expansion and product extension opportunities for our Doors & Security segment into the outdoor living space. The results of operations, subsequent to the closing of the acquisition, are included in the Doors & Security segment.

>

In October 2017, the Company acquired Victoria + Albert, aUK-based premium brand of standalone bathtubs, sinks, tub fillers, faucets and other accessories. In July 2017, we acquired Shaws, aUK-based luxury plumbing products company that specializes in manufacturing and selling fireclay sinks, and selling brassware and accessories. The combined consideration paid was approximately $146 million, including $19.9 million of additional purchase price consideration paid related to post-closing adjustments and deferred acquisition payments during the year ended December 31, 2018. The combined consideration paid is subject to further deferred acquisition payments. The results of operations of the acquired companies are included in the Plumbing segment from the respective dates of acquisition. We financed the transactions using cash on hand and borrowings under our revolving 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 2018, we invested approximately $45 million in incremental capacity to support long-term growth potential. We expect capital spending in 2019 to be in the range of $135 to $145 million.

On December 31, 2018, we had cash and cash equivalents of $262.9 million, of which $260.1 million was held atnon-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 ofnon-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.

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.minority shareholders.

Cash Flows

Below is a summary of cash flows for the years ended December 31, 2018, 20172021 and 2016.2020.

    
(In millions)  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

Effect of foreign exchange rate changes on cash

   (15.2   9.0    (2.0

Net (decrease) increase in cash, cash equivalents and restricted cash

  $(52.3  $71.5   $13.0 

(In millions)

 

2021

 

 

 

2020

 

Net cash provided by operating activities

 

$

688.7

 

 

 

$

825.7

 

Net cash used in investing activities

 

 

(207.1

)

 

 

 

(923.5

)

Net cash provided by (used in) financing activities

 

 

(428.6

)

 

 

 

111.6

 

Effect of foreign exchange rate changes on cash

 

 

(1.9

)

 

 

 

16.3

 

Net increase in cash, cash equivalents and restricted cash

 

$

51.1

 

 

 

$

30.1

 

Net cash provided by operating activities was $604.0$688.7 million in 20182021 compared to $600.3$825.7 million in 2017 and $650.5 million in 2016.2020. The $3.7 million increase in cash provided was due to lower build in working capital, primarily driven by lower accounts receivable balances and increases in accrued taxes. The $50.2$137.0 million decrease in cash provided by operating activities from 20172020 to 20162021 was primarily due to an increase in our inventory investments to mitigate the impact of an uncertain and volatile global supply chain environment and higher buildincreases in working capital, primarily driven by higher inventory purchases in 2017,accounts receivable associated with our sales growth. These factors were partially offset by a higher net income.

Net cash used in investing activities was $634.3$207.1 million in 20182021 compared to $287.7$923.5 million in 20172020. The decrease in cash used of $716.4 million from 2020 to 2021 was primarily due to the acquisition of Larson in December 2020 ($713.0 million decrease), the acquisition of additional shares of Flo in January and $385.1April 2020 ($59.4 million decrease) and the cash acquired during the consolidation of Flo in January 2021, partially offset by higher capital expenditures.

Net cash used in financing activities was $428.6 million in 2016.2021 compared to cash provided by financing activities of $111.6 million in 2020. The increase in cash used of $346.6$540.2 million from 20172020 to 2018 was primarily due to a $341.0 million increase in cost of acquisitions. The decrease of $97.4 million from 2016 to 2017 was primarily due to lower cost of acquisitions of $115.1 million, partially offset by $15.7 million of higher capital expenditures.

Net cash used by financing activities was $6.8 million in 2018 compared to $250.1 million in 2017 and $250.4 million in 2016. The decrease in net cash used of $243.3 million2021 was primarily due to higher share repurchases in 2021 compared to 2020 ($260.1 million increase), lower net borrowings in 20182021 compared to 20172020 ($751.2250.0 million decrease), lower proceeds from the exercise of stock options and higher dividends to shareholders ($9.7 million increase), partly offset by higher share repurchases in 2018 compared to 2017 ($479.8 million increase).

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 2018, 20172021 and 2016,2020, we contributed $10.0 million, $28.4$21.3 million and zero,$47.7 million, respectively, to our qualified pension plans. In 2019,2022, we expect to make pension contributions of approximately $8.0$10.0 million.As of December 31, 2018,2021, the fair value of our total pension plan assets was $599.6$816.0 million, representing funding of 79%92% 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, China, South Africa, France Australia and Japan. Therefore, changes in the value of the related currencies affect our financial statements when translated into U.S. dollars.

29


Contractual Obligations and Other Commercial Commitments

The following table describes othersummarizes our contractual 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, 2018.2021. Purchase obligations were $959.1 million, of which $900.3 million is due within one year. Purchase obligations include contracts for raw materials and finished goods purchases, selling and administrative services, and capital expenditures. Total lease payments under non-cancellable operating leases as of December 31, 2021 were $48.2 million in 2022, $43.3 million in 2023, $34.0 million in 2024, $24.6 million in 2025, $20.4 million in 2026 and $55.2 million thereafter. A final payment of $16.6 million related to our acquisition of Flo was paid in January 2022.

  
(In millions)  Payments Due by Period as of December 31, 2018 
Contractual Obligations  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 

Interest payments on long-term debt(a)

   300.6    71.6    111.0    88.0    30.0 

Operating leases

   182.3    37.8    53.0    32.7    58.8 

Purchase obligations(b)

   369.9    342.4    21.8    4.7    1.0 

Deferred acquisition payments

   19.5    19.5             

Defined benefit plan contributions(c)

   8.0    8.0             

Total

  $3,214.3   $1,004.3   $904.8   $720.4   $584.8 

(a)

Interest payments on long-term debt were calculated using the borrowing rate in effect on December 31, 2018.

(b)

Purchase obligations include contracts for raw material and finished goods purchases; selling and administrative services; and capital expenditures.

(c)

Pension and postretirement contributions cannot be determined beyond 2019.

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, $83.5$83.1 million of unrecognized tax benefits as of December 31, 20182021 have been excluded from the Contractual Obligations tableparagraph above.

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, 2018. 2021.Other corporate commercial commitments include standby letters of credit of $43.6$37.0 million, in the aggregate, all of which expire in less than one year, and surety bonds of $8.0$22.7 million, of which $7.0$17.4 million matures in less than 1one year and $1.0$5.3 million matures in1-3 years. These contingent commitments are not expected to have a significant impact on our liquidity.

Off-Balance Sheet Arrangements

AsDebt payments due during the next five years as of December 31, 2018, we did not have anyoff-balance sheet arrangements that2021 are material$400 million in 2022, $600 million in 2023, $520 million in 2024, $500 million in 2025, zero in 2026 and $700 million in 2027 and beyond. The Company intends to repay or reasonably likely to be material to our financial conditionrefinance the $400 million Term Loan on or resultsbefore the November 2022 maturity date. Interest payments due during the next five years as of operations.December 31, 2021 are $78 million in 2022, $124 million in 2023 through 2024, $56 million in 2025 through 2026 and $68 million in 2027 and beyond.

Foreign Currency Risk

Certain anticipated transactions, assets and liabilities are exposed to foreign currency risk. Principal currencies hedged include the Canadian dollar, British pound, the Mexican peso, the British pound 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 7A7A. “Quantitative and Qualitative Disclosures about Market Risk” in this Annual Report on Form10-K.

Derivative Financial Instruments

In accordance with ASCAccounting Standards Codification ("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 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)gains (loss) of $2.2$0.3 million, $0.4$(3.0) million and $(3.5)$4.1 million (before tax impact) were reclassified into earnings for the yearyears ended December 31, 2018, 20172021, 2020 and 2016,2019, respectively. Based on foreign exchange rates as of December 31, 2018,2021, we estimate that $3.3$1.9 million of net currency derivative gain

30


included in OCIother comprehensive income ("AOCI") as of December 31, 20182021, will be reclassified to earnings within the next twelve months.

Recently Issued Accounting Standards

The adoption of recent accounting standards, as discussed in Note 2, “Recently Issued“Significant Accounting Standards,Policies,” to our Consolidated Financial Statements, has not had and is not expected to have a significant impact on our revenue, earnings or liquidity.

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 Form10-K. The Consolidated

Financial Statements are prepared in conformity with GAAP.U.S. generally accepted accounting principles (“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.

Allowances for Doubtful AccountsInventories

Trade receivables are recorded at the stated amount, less allowances for discounts and doubtful accounts. 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 $3.7 million and $3.3 million as of December 31, 2018 and 2017, respectively.

Inventories

Inventory provisions are recorded to reduce inventory to the net realizable dollar 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 $45.3$50.7 million and $45.0$51.2 million as of December 31, 20182021 and 2017,2020, respectively.

Long-lived AssetsBusiness Combinations

InWe account for business combinations under the acquisition method of accounting in accordance with ASC requirements for Property, PlantTopic 805, Business Combinations, which requires an allocation of the consideration we paid to the identifiable assets, intangible assets and Equipment, a long-lived asset (including amortizableliabilities based on the estimated fair values as of the closing date of the acquisition. The excess of the fair value of the purchase price over the fair values of these identifiable assets, intangible assets and liabilities is recorded as goodwill.

Purchased intangibles other than goodwill are initially recognized at fair value and amortized over their useful lives unless those lives are determined to be indefinite. The valuation of acquired assets will impact future operating results. The fair value of identifiable intangible assets) orassets is determined using an income approach on an individual asset group held forbasis. Specifically, we 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 summulti-period excess earnings method to determine the fair value of customer relationships and the relief-from-royalty approach to determine the fair value of the undiscounted cash flows expectedtradename and proprietary technology. Determining the fair value of acquired intangibles involves significant estimates and assumptions, including forecasted revenue growth rates, EBITDA margins, percentage of revenue attributable to result from the usetradename, contributory asset charges, customer attrition rate, market-participant discount rates and eventual dispositionthe assumed royalty rates.

The determination of the useful life of an intangible asset or asset group to the carrying amount of a long-lived asset or asset group. The cash flows areother than goodwill is 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.factors including historical tradename performance with respect to consumer name recognition, geographic market presence, market share, plans for ongoing tradename support and promotion, customer attrition rate, and other relevant factors.

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.

We31


To evaluate the recoverability of goodwill, we first assess qualitative factors to determine whether it is more likely than not that goodwill is impaired. Qualitative factors include changes in volume, margin, customers and the industry. If it is deemed more likely than not that goodwill for a reporting unit is impaired, we will perform a quantitative impairment test 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 discount rate. 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 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. 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, or one level below operating segments when appropriate. 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.

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, operating income and cash flow forecasts; peer company EBITDA earnings multiples; the market-participant-based discount rate; 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 operating income 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 determinedThe significant assumptions used to be indefinite. The determinationestimate the fair values of the useful lifegoodwill tested quantitatively during the year ended December 31, 2021 were as follows:

 

 

2021

 

Unobservable Input

 

Minimum

 

 

Maximum

 

 

Weighted Average(a)

 

Discount rates

 

 

8.3

%

 

 

10.0

%

 

 

9.2

%

EBITDA multiple

 

 

15.0

 

 

 

18.0

 

 

 

16.8

 

Long-term revenue growth rates(b)

 

 

2.5

%

 

 

3.0

%

 

 

3.0

%

(a)
Weighted by relative fair value of the goodwill that was tested quantitatively.
(b)
Selected long-term revenue growth rate within 10-year projection period for the goodwill that was tested quantitatively.

A 50 basis point change in any of the significant assumptions during the year ended December 31, 2021 would not have resulted in an intangible asset other than goodwill is based on factors including 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. impairment being recognized when estimating the fair value of our reporting unit goodwill.

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 measure the fair value of identifiable intangible assets upon acquisition and we review 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 assets upon acquisition and

32


subsequent impairment testing are forecasted revenue growth rates; the assumed royalty rate;rates; and the market-participant discount 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. The determination of fair value using this technique requires the use of estimates and assumptions related to projected tradename revenue growth, the assumed royalty rate and the discount rate. rates.

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. We measure fair value of our indefinite-lived tradenames using the 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. The determination of fair value using this technique requires the use of estimates and assumptions related to forecasted revenue growth rates, the assumed royalty rates and the market-participant discount rates. During our 2021 annual impairment test, of our $711.1 million indefinite lived tradenames, we tested $355.4 million quantitatively, and the remainder was assessed using qualitative factors. There were no impairments for the year ended December 31, 2021. See Note 5, “Goodwill and Identifiable Intangible Assets,” for additional information.

InDuring the thirdsecond quarter of 2018,2020, extended closures of luxury plumbing showrooms associated with COVID-19 led to lower than expected sales related to an indefinite-lived tradename within the Plumbing segment, which combined with the updated financial outlook compared to previous forecasts and the continued uncertainty of the pandemic on the sales and profitability related to the tradename led us to conclude that it was more likely than not that the indefinite-lived tradename was impaired. Therefore, we recordedperformed an interim impairment test as of June 30, 2020, and as a result we recognized a pre-tax impairment charge of $27.1$13.0 million related to this tradename. We also performed an evaluation of the useful life of this tradename and determined it was no longer indefinite-lived due to changes in long-term management expectations and future operating plans. As a result, the remaining carrying value of this tradename is being amortized over its estimated useful life of 30 years.

In the first quarter of 2020, we recognized an impairment charge of $9.5 million related to an indefinite-lived tradename in our Cabinets segment. This charge was primarily the result of reduced revenue growth expectationslower expected sales of custom cabinetry products related to the impact of COVID-19. In the fourth quarter of 2019, we recognized an impairment charge of $12.0 million related to the same indefinite-lived tradename, which was the result of a strategic shift associated with Cabinets operations in Canada, includingnew segment leadership and acceleration of our capacity rebalancing initiatives from custom cabinetry products to value-based cabinetry products as a result of lower than expected sales of custom cabinetry products compared to prior forecasts. As of December 31, 2021, the announced closurecarrying value of Company-owned retail locations duringthis tradename was $29.1 million.

In the third quarter of 2018. During the fourth quarter of 2018,2019, we recorded apre-taxrecognized an impairment charge of $35.5$29.5 million related to anothera second indefinite-lived

tradename in our Cabinets segment, as part of our annual impairment testing performed in the fourth quarter. This chargewhich was primarily the result of reduced revenuea continuing shift in consumer demand from semi-custom cabinetry products to value-priced cabinetry products, which led to consecutive downward adjustments of internal sales forecasts and future growth expectations identified during our annual planning process conducted duringrates associated with the fourth quarter, which includes more moderate industry growth expectations. tradename. As of December 31, 2021, the carrying value of this tradename was $85.0 million.

The fair values of the impaired tradenames were measured using the 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 theirits remaining useful life. Some of the more significant assumptions inherent in estimating the fair valuevalues include estimated future annual net sales for the tradename,forecasted revenue growth rates, assumed royalty rate, income tax rate,rates, and amarket-participant discount raterates that reflectsreflect the level of risk associated with the tradename’stradenames’ future salesrevenues and profitability. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management plans. These assumptions represent level 3 inputs of the fair value hierarchy (refer to Note 10 “Fair Value Measurements”9).

33


The significant assumptions used to estimate the Consolidated Financial Statements in Item 8fair values of the Annual Report on Form10-K). As oftradenames tested quantitatively during the years ended December 31, 2018,2021 and 2020 were as follows:

 

 

2021

 

 

2020

 

Unobservable Input

 

Minimum

 

 

Maximum

 

 

Weighted Average(a)

 

 

Minimum

 

 

Maximum

 

 

Weighted Average(a)

 

Discount rates

 

 

10.2

%

 

 

12.4

%

 

 

11.4

%

 

 

11.2

%

 

 

13.2

%

 

 

12.7

%

Royalty rates(b)

 

 

1.0

%

 

 

5.0

%

 

 

3.4

%

 

 

1.0

%

 

 

5.0

%

 

 

3.3

%

Long-term revenue growth rates(c)

 

 

1.0

%

 

 

3.0

%

 

 

2.6

%

 

 

1.0

%

 

 

3.0

%

 

 

2.7

%

(a)
Weighted by the carryingrelative fair value of the tradenames that were impaired was $152.0 million. tested quantitatively.
(b)
Represents estimated percentage of sales a market-participant would pay to license the tradenames that were tested quantitatively.
(c)
Selected long-term revenue growth rate within 10-year projection period of the tradenames that were tested quantitatively.

A further reduction50 basis point change in any of the estimatedsignificant assumptions used during the year ended December 31, 2021 would not have resulted in an impairment being recognized when estimating the fair value of these tradenames could trigger future impairments.our indefinite-lived tradenames.

In 2017 and 2016, we did not record any asset impairment charges in operating income associated with goodwill or 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 20182021 relates to benefit accruals infor an hourly Union group within the defined benefit plan infor our DoorsOutdoors & Security segment. BenefitAll other benefit accruals under all otherour defined benefit pension plans were frozen as of, or prior to, December 31, 2016.

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. Thepre-tax recognition of actuarial (gains) losses was $3.8 million, $(0.5)$0.8 million and $1.9$2.8 million in 2018, 20172021 and 2016,2020, respectively. The total net actuarial losses in accumulated other comprehensive income for all defined benefit plans were $71.5$39.6 million as of December 31, 2018,2021, compared to $67.4$87.1 million as of December 31, 2017.2020.

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 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. The weighted-average long-term expected rate of return on pension plan assets for the years ended December 31, 20182021 and 20172020 was 6.0%4.4% and 6.4%4.5%, respectively.respectively. Compensation increases reflect expected future compensation trends. The discount rate used to measure obligations is based on a spot-rate yield curve on aplan-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 onlynon-callable bonds and those that are deemed to be sufficiently marketable with a Moody’s credit rating

34


of Aa or higher. The weighted-average discount rate for defined benefit liabilities as of December 31, 20182021 and 20172020 was 4.4%2.9% and 3.8%2.6%, 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, 2018,2021, for postretirement medical and prescription drugs in the next year, our assumption was an assumed rate of increase of 6.9%6.3% forpre-65 retirees and 8.0%6.7% forpost-65 retirees, declining until reaching an ultimate assumed rate of increase of 4.5% per year in 2027.2028. As of December 31, 2017,2020, for postretirement medical and prescription drugs in the next year, our assumption was an assumed rate of increase of 7.1%6.4% forpre-65 retirees and 8.4%7.4% forpost-65 retirees, declining until reaching an ultimate assumed rate of increase of 4.5% per year in 2026.2027.

Below is a table showingpre-tax pension and postretirement expenses, including the impact of actuarial gains and losses:

  
(In millions)  2018   2017   2016 

 

 

2021

 

 

 

2020

 

Total pension (income) expense

  $(5.9  $(2.5  $6.8 

 

 

$

(9.4

)

 

 

$

(0.8

)

Actuarial loss component of expense above

   3.9    0.9     

 

 

1.1

 

 

 

2.7

 

Total postretirement income

   (0.1   (6.5   (11.3

Total postretirement expense

 

 

0.7

 

 

 

0.7

 

Actuarial (gain) loss component of expense above

   (0.1   (1.4   1.9 

 

 

(0.3

)

 

 

0.1

 

Amortization of prior service credit component of expense above

       (5.1   (13.5

The actuarial losses in 20182021 were principally due to lower asset returns. than expected return on plan assets. The actuarial gainslosses in 20172020 were principally due to our normalre-measurement of prior year defined benefit plan liabilities. The actuarial losseschanges in 2016 were principally due to there-measurement relating to a retiree medical plan. discount rates offset by positive asset returns.Discount rates in 20182021 used to determine benefit obligations increased by an average of 6030 basis points for pension benefits. Discount rates for 20182021 postretirement benefits increaseddecreased an average of 80200 basis points. points mainly due to the acquisition of Larson.Discount rates in 20172020 used to determine benefit obligations decreased by an average of 5070 basis points for pension benefits. Discount rates for 2020 postretirement benefits remained the same in 2017 as in 2016. Discount rates in 2016 used to determine benefit obligations decreased by an average of 3050 basis points for pension benefits and an average of 70 basis points for postretirement benefits.points. Our actual return on plan assets in 20182021 was (3.5)% 6.6%compared to an actuarial assumption of an average 6.0%4.4% expected return. return. Our actual return on plan assets in 20172020 was 16.3%16.5% compared to an actuarial assumption of an average 6.4%4.5% 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 $23$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 $1.5$2.0 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.

In January 2018, we adopted ASU2017-07, which requires entities to present the defined benefit plannon-service related costs outside the operating income subtotal. The new guidance was applied retrospectively in the consolidated statement of income. As a result, we reclassified $9.6 million and

$14.1 million of income from the operating income subtotal to other income, in the twelve months ended December 31, 2017 and 2016, respectively. The retrospective impact of adopting ASU2017-07 is as follows:

   
(In millions)  2017   2016 

Increase to cost of products sold

  $7.5   $8.5 

Increase to selling, general and administrative expenses

   2.1    5.6 

Decrease to operating income

  $(9.6  $(14.1

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 basesbasis and subsequently adjust them to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a

35


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, 2021, we had liabilities for unrecognized tax benefits pertaining to uncertain tax positions totaling $83.1 million. It is reasonably possible that the unrecognized tax benefits may decrease in the range of $4.1 million to $41.9 million in the next 12 months primarily as a result of the conclusion of U.S. federal, state and foreign income tax proceedings.

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. We record estimates to reduce revenue for customer programs and incentives, which are considered variable consideration, and include price discounts, volume-based incentives, promotions and cooperative advertising when revenue is recognized in order to determine the amount of consideration the Company will ultimately be entitled to receive. These estimates are based on historical and projected experience for each type of customer. In addition, for certain customer program incentives, we receive an identifiable benefit (goods or services) in exchange for the consideration given and record the associated expenditure in selling, general and administrative expenses. 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).

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

The Company had $920million of external variable rate borrowings as of December 31, 2021. A hypothetical 100 basis point change in interest rates affecting the Company’s external variable rate borrowings as of December 31, 2021 would be $9.2 million on a pre-tax basis.

36


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 $0.6 million at December 31, 2021. 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.

Item 8. Financial Statements and Supplementary Data.

37


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders 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 (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of income, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2021 appearing after the signature page (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 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, 2021, 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.

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

38


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.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Indefinite-Lived Intangible Asset Impairment Tests for Certain Tradenames Where Management Performed a Quantitative Annual Impairment Test

As described in Notes 2 and 5 to the consolidated financial statements, the Company’s consolidated indefinite-lived tradenames balance was $711.1million as of December 31, 2021. The carrying value of tradenames where management performed a quantitative annual impairment test was $355.4 million. Management reviews indefinite-lived tradename 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. Fair value is measured by management using the relief-from-royalty approach. Significant assumptions inherent in estimating fair values include forecasted revenue growth rates, assumed royalty rates and market-participant discount rates.

The principal considerations for our determination that performing procedures relating to certain tradenames where management performed a quantitative annual impairment test is a critical audit matter are (i) the significant judgment by management when developing the fair value measurement of the tradenames; (ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the forecasted revenue growth rates, the assumed royalty rates, and the market-participant discount rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s indefinite-lived intangible asset impairment tests, including controls over the valuation of the Company’s indefinite-lived tradenames. These procedures also included, among others (i) testing management’s process for developing the fair value measurements of certain tradenames where management performed a quantitative annual impairment test; (ii) evaluating the appropriateness of the relief-from-royalty approach; (iii) testing the completeness and accuracy of underlying data used in the approach; and (iv) evaluating the reasonableness of significant assumptions used by management related to the forecasted revenue growth rates, the assumed royalty rates, and the market-participant discount rates. Evaluating management’s assumptions related to the forecasted revenue growth rates and assumed royalty rates involved evaluating whether the

39


assumptions used by management were reasonable considering, as applicable, (i) the current and past performance of the business associated with the tradenames; (ii) the consistency with external market and industry data; and (iii) whether the assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of (i) the appropriateness of the relief-from-royalty approach and (ii) the reasonableness of the significant assumptions related to the assumed royalty rates and market-participant discount rates.

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

February 28, 2022

We have served as the Company’s auditor since 2011.

40


Consolidated Statements of Income

Fortune Brands Home & Security, Inc. and Subsidiaries

 

 

 

For years ended December 31

 

(In millions, except per share amounts)

 

 

2021

 

 

 

2020

 

 

2019

 

NET SALES

 

 

$

7,656.1

 

 

 

$

6,090.3

 

 

$

5,764.6

 

Cost of products sold

 

 

 

4,909.1

 

 

 

 

3,925.9

 

 

 

3,712.2

 

Selling, general and administrative expenses

 

 

 

1,579.0

 

 

 

 

1,282.6

 

 

 

1,256.3

 

Amortization of intangible assets

 

 

 

64.1

 

 

 

 

42.0

 

 

 

41.4

 

Asset impairment charges

 

 

 

 

 

 

 

22.5

 

 

 

41.5

 

Restructuring charges

 

 

 

13.5

 

 

 

 

15.9

 

 

 

14.7

 

OPERATING INCOME

 

 

 

1,090.4

 

 

 

 

801.4

 

 

 

698.5

 

Interest expense

 

 

 

84.4

 

 

 

 

83.9

 

 

 

94.2

 

Other expense (income), net

 

 

 

0.9

 

 

 

 

(13.3

)

 

 

29.0

 

Income before taxes

 

 

 

1,005.1

 

 

 

 

730.8

 

 

 

575.3

 

Income taxes

 

 

 

232.7

 

 

 

 

168.8

 

 

 

144.0

 

Income after tax

 

 

 

772.4

 

 

 

 

562.0

 

 

 

431.3

 

Equity in losses of affiliate

 

 

 

0

 

 

 

 

7.6

 

 

 

0

 

NET INCOME

 

 

 

772.4

 

 

 

 

554.4

 

 

 

431.3

 

Less: Noncontrolling interests

 

 

 

 

 

 

 

1.3

 

 

 

(0.6

)

NET INCOME ATTRIBUTABLE TO FORTUNE BRANDS

 

 

$

772.4

 

 

 

$

553.1

 

 

$

431.9

 

BASIC EARNINGS PER COMMON SHARE

 

 

$

5.62

 

 

 

$

3.99

 

 

$

3.09

 

DILUTED EARNINGS PER COMMON SHARE

 

 

$

5.54

 

 

 

$

3.94

 

 

$

3.06

 

Basic average number of shares outstanding

 

 

 

137.5

 

 

 

 

138.7

 

 

 

139.9

 

Diluted average number of shares outstanding

 

 

 

139.5

 

 

 

 

140.2

 

 

 

141.3

 

See Notes to Consolidated Financial Statements.

41


Consolidated Statements of Comprehensive Income

Fortune Brands Home & Security, Inc. and Subsidiaries

 

 

 

For years ended December 31

 

(In millions)

 

 

2021

 

 

 

2020

 

 

2019

 

NET INCOME

 

 

$

772.4

 

 

 

$

554.4

 

 

$

431.3

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

(3.9

)

 

 

 

18.7

 

 

 

13.8

 

Unrealized (losses) gains on derivatives:

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during period

 

 

 

1.5

 

 

 

 

(3.2

)

 

 

4.8

 

Less: reclassification adjustment for (gains) losses included in net income

 

 

 

(2.2

)

 

 

 

2.4

 

 

 

(4.4

)

Unrealized (losses) gains on derivatives

 

 

 

(0.7

)

 

 

 

(0.8

)

 

 

0.4

 

Defined benefit plans:

 

 

 

 

 

 

 

 

 

 

 

Net actuarial gains (loss) arising during period

 

 

 

47.5

 

 

 

 

0.3

 

 

 

(15.9

)

Defined benefit plans

 

 

 

47.5

 

 

 

 

0.3

 

 

 

(15.9

)

Other comprehensive income (loss), before tax

 

 

 

42.9

 

 

 

 

18.2

 

 

 

(1.7

)

Income tax (expense) benefit related to items of other comprehensive income (a)

 

 

 

(12.4

)

 

 

 

(0.7

)

 

 

4.7

 

Other comprehensive income, net of tax

 

 

 

30.5

 

 

 

 

17.5

 

 

 

3.0

 

COMPREHENSIVE INCOME

 

 

 

802.9

 

 

 

 

571.9

 

 

 

434.3

 

Less: comprehensive income attributable to noncontrolling interest

 

 

 

 

 

 

 

1.3

 

 

 

(0.6

)

COMPREHENSIVE INCOME ATTRIBUTABLE TO FORTUNE BRANDS

 

 

$

802.9

 

 

 

$

570.6

 

 

$

434.9

 

(a)
Income tax (expense) benefit on unrealized (losses) gains on derivatives of $(0.5) million, $(0.5) million and $0.9 million and on defined benefit plans of $(11.9) million, $(0.2) million and $3.8 million in 2021, 2020 and 2019, respectively.

See Notes to Consolidated Financial Statements.

42


Consolidated Balance Sheets

Fortune Brands Home & Security, Inc. and Subsidiaries

 

 

 

December 31

 

(In millions)

 

 

2021

 

 

 

2020

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

��

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

471.5

 

 

 

$

419.1

 

Accounts receivable less allowances for discounts and credit losses

 

 

 

885.7

 

 

 

 

734.9

 

Inventories

 

 

 

1,193.8

 

 

 

 

867.2

 

Other current assets

 

 

 

193.5

 

 

 

 

187.3

 

TOTAL CURRENT ASSETS

 

 

 

2,744.5

 

 

 

 

2,208.5

 

Property, plant and equipment, net of accumulated depreciation

 

 

 

1,009.5

 

 

 

 

917.4

 

Operating lease assets

 

 

 

191.7

 

 

 

 

170.2

 

Goodwill

 

 

 

2,465.1

 

 

 

 

2,394.8

 

Other intangible assets, net of accumulated amortization

 

 

 

1,383.8

 

 

 

 

1,420.3

 

Other assets

 

 

 

141.6

 

 

 

 

247.5

 

TOTAL ASSETS

 

 

$

7,936.2

 

 

 

$

7,358.7

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Short-term debt

 

 

 

400.0

 

 

 

 

 

Accounts payable

 

 

 

764.9

 

 

 

 

620.5

 

Other current liabilities

 

 

 

806.2

 

 

 

 

724.6

 

TOTAL CURRENT LIABILITIES

 

 

 

1,971.1

 

 

 

 

1,345.1

 

Long-term debt

 

 

 

2,309.8

 

 

 

 

2,572.2

 

Deferred income taxes

 

 

 

176.0

 

 

 

 

160.5

 

Accrued defined benefit plans

 

 

 

79.7

 

 

 

 

159.5

 

Operating lease liabilities

 

 

 

158.8

 

 

 

 

140.5

 

Other non-current liabilities

 

 

 

176.0

 

 

 

 

205.4

 

TOTAL LIABILITIES

 

 

 

4,871.4

 

 

 

 

4,583.2

 

Commitments (Note 17) and Contingencies (Note 21)

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Common stock (a)

 

 

 

1.9

 

 

 

 

1.8

 

Paid-in capital

 

 

 

3,018.3

 

 

 

 

2,926.3

 

Accumulated other comprehensive loss

 

 

 

(24.6

)

 

 

 

(55.1

)

Retained earnings

 

 

 

2,807.9

 

 

 

 

2,180.2

 

Treasury stock

 

 

 

(2,738.7

)

 

 

 

(2,277.7

)

TOTAL EQUITY

 

 

 

3,064.8

 

 

 

 

2,775.5

 

TOTAL LIABILITIES AND EQUITY

 

 

$

7,936.2

 

 

 

$

7,358.7

 

(a)
Common stock, par value $0.01 per share, 185.3 million shares and 184.1 million shares issued at December 31, 2021 and 2020, respectively.

See Notes to Consolidated Financial Statements.

43


Consolidated Statements of Cash Flows

Fortune Brands Home & Security, Inc. and Subsidiaries

 

 

 

For years ended December 31

 

(In millions)

 

 

2021

 

 

 

2020

 

 

2019

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

772.4

 

 

 

$

554.4

 

 

$

431.3

 

Non-cash expense (income):

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

 

125.0

 

 

 

 

121.5

 

 

 

111.3

 

Amortization of intangibles

 

 

 

64.1

 

 

 

 

42.0

 

 

 

41.4

 

Non-cash lease expense

 

 

 

42.5

 

 

 

 

37.4

 

 

 

35.9

 

Stock-based compensation

 

 

 

50.2

 

 

 

 

47.6

 

 

 

30.5

 

Loss (gain) on sale of property, plant and equipment

 

 

 

1.6

 

 

 

 

2.4

 

 

 

(0.4

)

Loss (gain) on equity investments

 

 

 

5.0

 

 

 

 

(6.6

)

 

 

 

Asset impairment charges

 

 

 

 

 

 

 

26.1

 

 

 

43.2

 

Recognition of actuarial losses

 

 

 

0.8

 

 

 

 

3.2

 

 

 

34.1

 

Deferred taxes

 

 

 

1.7

 

 

 

 

(14.6

)

 

 

(7.5

)

Amortization of deferred financing costs

 

 

 

3.6

 

 

 

 

4.5

 

 

 

3.4

 

Changes in assets and liabilities including effects subsequent to acquisitions

 

 

 

 

 

 

 

 

 

 

 

Increase in accounts receivable

 

 

 

(151.5

)

 

 

 

(85.7

)

 

 

(50.7

)

Increase in inventories

 

 

 

(324.3

)

 

 

 

(91.8

)

 

 

(38.3

)

Increase in accounts payable

 

 

 

137.7

 

 

 

 

142.9

 

 

 

8.7

 

Decrease (increase) in other assets

 

 

 

1.0

 

 

 

 

(41.1

)

 

 

(10.5

)

Increase in accrued taxes

 

 

 

8.4

 

 

 

 

12.5

 

 

 

(5.3

)

(Decrease) increase in accrued expenses and other liabilities

 

 

 

(49.5

)

 

 

 

71.0

 

 

 

10.1

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

 

688.7

 

 

 

 

825.7

 

 

 

637.2

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures(a)

 

 

 

(214.2

)

 

 

 

(150.5

)

 

 

(131.8

)

Proceeds from the disposition of assets

 

 

 

1.9

 

 

 

 

1.6

 

 

 

4.2

 

Cost of acquisitions, net of cash acquired

 

 

 

5.2

 

 

 

 

(715.2

)

 

 

 

Cost of investments in equity securities

 

 

 

 

 

 

 

(59.4

)

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

 

 

 

(207.1

)

 

 

 

(923.5

)

 

 

(127.6

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in short-term debt

 

 

 

400.0

 

 

 

 

 

 

 

(525.0

)

Issuance of long-term debt

 

 

 

1,245.0

 

 

 

 

1,850.0

 

 

 

1,719.3

 

Repayment of long-term debt

 

 

 

(1,510.0

)

 

 

 

(1,465.0

)

 

 

(1,345.0

)

Proceeds from the exercise of stock options

 

 

 

41.8

 

 

 

 

64.9

 

 

 

17.3

 

Employee withholding taxes paid related to stock-based compensation

 

 

 

(13.3

)

 

 

 

(10.7

)

 

 

(8.7

)

Deferred acquisition payments

 

 

 

 

 

 

 

 

 

 

(19.0

)

Dividends to stockholders

 

 

 

(143.0

)

 

 

 

(133.3

)

 

 

(123.0

)

Dividends paid to non-controlling interests

 

 

 

 

 

 

 

(2.5

)

 

 

 

Treasury stock purchases

 

 

 

(447.7

)

 

 

 

(187.6

)

 

 

(100.0

)

Other financing activities, net

 

 

 

(1.4

)

 

 

 

(4.2

)

 

 

(5.6

)

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

 

 

 

(428.6

)

 

 

 

111.6

 

 

 

(389.7

)

Effect of foreign exchange rate changes on cash

 

 

 

(1.9

)

 

 

 

16.3

 

 

 

4.3

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

 

$

51.1

 

 

 

$

30.1

 

 

$

124.2

 

Cash, cash equivalents and restricted cash(b) at beginning of year

 

 

$

425.0

 

 

 

$

394.9

 

 

$

270.7

 

Cash, cash equivalents and restricted cash(b) at end of year

 

 

$

476.1

 

 

 

$

425.0

 

 

$

394.9

 

Cash paid during the year for

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

$

76.8

 

 

 

$

76.2

 

 

$

81.0

 

Income taxes paid directly to taxing authorities

 

 

 

228.8

 

 

 

 

175.5

 

 

 

144.5

 

Dividends declared but not paid

 

 

 

37.8

 

 

 

 

36.1

 

 

 

33.5

 

(a)
Capital expenditures of $19.6 million, $13.6 million and $10.0 million that have not been paid as of December 31, 2021, 2020 and 2019, respectively, were excluded from the Consolidated Statement of Cash Flows.
(b)
Restricted cash of $1.3 million and $3.3 million is included in Other current assets and Other assets, respectively, as of December 31, 2021, $1.0 million and $4.9 million is included in Other current assets and Other assets, respectively, as of December 31, 2020 and $0.9 million and $6.1 million is included in Other current assets and Other assets, respectively, as of December 31, 2019 within our Consolidated Balance Sheet.

See Notes to Consolidated Financial Statements.

44


Consolidated Statements of Equity

Fortune Brands Home & Security, Inc. and Subsidiaries

(In millions)

 

Common
Stock

 

 

Paid-In
Capital

 

 

Accumulated
 Other
Comprehensive
(Loss) Income

 

 

Retained
Earnings

 

 

Treasury
Stock

 

 

Non-
controlling
Interests

 

 

Total
Equity

 

Balance at December 31, 2018

 

$

1.8

 

 

$

2,766.0

 

 

$

(67.0

)

 

$

1,448.1

 

 

$

(1,970.7

)

 

$

1.8

 

 

$

2,180.0

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

431.9

 

 

 

 

 

 

(0.6

)

 

 

431.3

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

3.0

 

 

 

 

 

 

 

 

 

 

 

 

3.0

 

Stock options exercised

 

 

 

 

 

17.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17.3

 

Stock-based compensation

 

 

 

 

 

30.5

 

 

 

 

 

 

 

 

 

(8.7

)

 

 

 

 

 

21.8

 

Adoption of ASU 2018-02

 

 

 

 

 

 

 

 

(8.6

)

 

 

8.6

 

 

 

 

 

 

 

 

 

 

Treasury stock purchase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(100.0

)

 

 

 

 

 

(100.0

)

Dividends ($0.90 per Common share)

 

 

 

 

 

 

 

 

 

 

 

(125.6

)

 

 

 

 

 

 

 

 

(125.6

)

Balance at December 31, 2019

 

$

1.8

 

 

$

2,813.8

 

 

$

(72.6

)

 

$

1,763.0

 

 

$

(2,079.4

)

 

$

1.2

 

 

$

2,427.8

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

553.1

 

 

 

 

 

 

1.3

 

 

 

554.4

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

17.5

 

 

 

 

 

 

 

 

 

 

 

 

17.5

 

Stock options exercised

 

 

 

 

 

64.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

64.9

 

Stock-based compensation

 

 

 

 

 

47.6

 

 

 

 

 

 

 

 

 

(10.7

)

 

 

 

 

 

36.9

 

Treasury stock purchase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(187.6

)

 

 

 

 

 

(187.6

)

Dividends to non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2.5

)

 

 

(2.5

)

Dividends ($0.98 per Common share)

 

 

 

 

 

 

 

 

 

 

 

(135.9

)

 

 

 

 

 

 

 

 

(135.9

)

Balance at December 31, 2020

 

$

1.8

 

 

$

2,926.3

 

 

$

(55.1

)

 

$

2,180.2

 

 

$

(2,277.7

)

 

$

 

 

$

2,775.5

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

772.4

 

 

 

 

 

 

 

 

 

772.4

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

30.5

 

 

 

 

 

 

 

 

 

 

 

 

30.5

 

Stock options exercised

 

 

0.1

 

 

 

41.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41.9

 

Stock-based compensation

 

 

 

 

 

50.2

 

 

 

 

 

 

 

 

 

(13.3

)

 

 

 

 

 

36.9

 

Treasury stock purchase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(447.7

)

 

 

 

 

 

(447.7

)

Dividends ($1.06 per Common share)

 

 

 

 

 

 

 

 

 

 

 

(144.7

)

 

 

 

 

 

 

 

 

(144.7

)

Balance at December 31, 2021

 

$

1.9

 

 

$

3,018.3

 

 

$

(24.6

)

 

$

2,807.9

 

 

$

(2,738.7

)

 

$

 

 

$

3,064.8

 

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 “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 PresentationThe 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 2021, there were certain transactions that resulted in approximately $59 million of net cash outflows, 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 2018 our Plumbing segment entered into a strategic partnership with, and acquired non-controlling equity interests in, Flo Technologies, Inc. (“Flo”), a U.S. manufacturer of comprehensive water monitoring and shut-off systems with leak detection technologies. In January 2020, we entered into an agreement to acquire 100% of the outstanding shares of Flo in a multi-phase transaction, which was completed in January 2022. The minority shareholders' substantive participating rights expired on January 1, 2021, at which time we obtained control of, and began consolidating, Flo in our results of operations and statements of financial positions and cash flows. Immediately prior to consolidating Flo, we recognized a non-cash loss of $4.5 million within other expense for the year-ended December 31, 2021, related to the remeasurement of our previously existing investment in Flo. During the fourth quarter of 2021 we recorded a mark-to-market expense of $2.2 million related to the remaining shares held by the minority shareholders. The financial results of Flo are included in the Company’s consolidated statements of comprehensive income for the year-ended December 31, 2021, the consolidated statement of cash flow for the year-ended December 31, 2021 and the consolidated balance sheet as of December 31, 2021. The results of operations are included in the Plumbing segment.

In December 2020, we acquired 100% of the outstanding equity of Larson Manufacturing ("Larson"), the North American market leading brand of storm, screen and security doors. Larson also sells related outdoor living products including retractable screens and porch windows. The acquisition of Larson is aligned with our strategic focus on the fast-growing outdoor living space. See Note 4 "Acquisitions and Dispositions," for additional information.

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.

Allowances for Credit Losses Trade receivables are recorded at the stated amount, less allowances for discounts and credit losses. The allowances 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 for credit losses include provisions for certain customers where a risk of default has been specifically identified. In addition, the allowances include a provision for expected customer defaults on a general formula basis when it cannot yet be associated with specific customers. Expected credit losses are estimated using 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 credit losses was $8.2 million and $6.7 million as of December 31, 2021 and 2020, respectively.

46


Inventories We use first-in, first-out inventory method. Inventory provisions are recorded to reduce inventory to the net realizable dollar 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.

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 less costs to sell 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

15 to 40 years

Machinery and equipment

3 to 15 years

Software

3 to 7 years

Long-lived Assets In accordance with Accounting Standards Codification ("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.

We recorded impairments of $0.2 million and $3.6 million related to a long-lived asset to be disposed of in selling, general and administrative expenses in 2021 and 2020, respectively. During 2019, we recorded an impairment of $1.7 million related to a long-lived asset to be disposed of in cost of products sold.

Leases Operating lease assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at commencement date. As most of our lease contracts do not provide an explicit interest rate, we use our incremental borrowing rate in determining the present value of future lease payments. Our incremental borrowing rates include estimates related to the impact of collateralization and the economic environment where the leased asset is located. The operating lease assets also include any prepaid lease payments and initial direct costs incurred, but exclude lease incentives received at lease commencement. Our lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Our leases have remaining lease terms of 1 to 34 years, some of which may include options to extend or terminate the lease. Operating lease expense is recognized on a straight-line basis over the lease term.

We do not recognize leases with an initial term of twelve months or less on the balance sheet and instead recognize the related lease payments as expense in the consolidated statements of income on a straight-line basis over the lease term. We account for lease and non-lease components as a single lease component for all asset classes. Additionally, for certain equipment leases, we apply a portfolio approach and account for multiple lease components as a single lease component.

Certain lease agreements include variable rental payments, including rental payments adjusted periodically for inflation. Variable rental payments are expensed during the period they are incurred and therefore are excluded from our lease assets and liabilities. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Business CombinationsWe account for business combinations under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations, which requires an allocation of the consideration we paid to the identifiable assets, intangible assets and liabilities based on the estimated fair values as of the closing date of the acquisition. The excess of the fair value of the purchase price over the fair values of these identifiable assets, intangible assets and liabilities is recorded as goodwill.

47


Purchased intangibles other than goodwill are initially recognized at fair value and amortized over their useful lives unless those lives are determined to be indefinite. The valuation of acquired assets will impact future operating results. The fair value of identifiable intangible assets is determined using an income approach on an individual asset basis. Specifically, we use the multi-period excess earnings method to determine the fair value of customer relationships and the relief-from-royalty approach to determine the fair value of the tradename and proprietary technology. Determining the fair value of acquired intangibles involves significant estimates and assumptions, including forecasted revenue growth rates, EBITDA margins, percentage of revenue attributable to the tradename, contributory asset charges, customer attrition rate, market-participant discount rates and the assumed royalty rates.

The determination of the useful life of an intangible asset other than goodwill is based on factors including historical tradename performance with respect to consumer name recognition, geographic market presence, market share, plans for ongoing tradename support and promotion, customer attrition rate, and other relevant factors.

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.

To evaluate the recoverability of goodwill, we first assess qualitative factors to determine whether it is more likely than not that goodwill is impaired. Qualitative factors include changes in volume, margin, customers and the industry. If it is deemed more likely than not that goodwill for a reporting unit is impaired, we will perform a quantitative impairment test using a weighting of the income and market 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 discount rate. 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 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. 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, or one level below operating segments when appropriate. 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.

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, operating income and cash flow forecasts; peer company EBITDA earnings multiples; the market-participant-based discount rate; 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 operating income 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.

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 measure the fair value of identifiable intangible assets upon acquisition and we review 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

48


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 assets upon acquisition and subsequent impairment testing are forecasted revenue growth rates; the assumed royalty rates; and the market-participant discount rates.

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. We measure fair value of our indefinite-lived tradenames using the 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. The determination of fair value using this technique requires the use of estimates and assumptions related to forecasted revenue growth rates, the assumed royalty rates and the market-participant discount rates. During our 2021 annual impairment test, of our $711.1 million indefinite lived tradenames, we tested $355.4 million quantitatively, and the remainder was assessed using qualitative factors. There were 0 impairments for the year ended December 31, 2021. See Note 5, “Goodwill and Identifiable Intangible Assets,” for additional information.

Events or circumstances that could have a potential negative effect on the estimated fair value of our reporting units and indefinite-lived tradenames include: lower than forecasted revenues, actual new construction and repair and remodel growth rates that fall below our assumptions, actions of key customers, increases in 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 assets.

Investments in Equity Securities In accordance with ASC requirements for investments in equity securities, we utilize the equity method to account for investments when we possess the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when the investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. In applying the equity method, we record our investment at cost and subsequently increase or decrease the carrying amount of the investment by our proportionate share of the net earnings or losses of the investee. We record dividends or other equity distributions as reductions in the carrying value of our investment.

When we do not have the ability to exercise significant influence over the operating and financial policies of the investee, we account for non-controlling investments in equity securities at fair value, with any gains or losses recognized through other income and expense. Equity securities without readily determinable fair values are recorded at cost minus impairment, plus or minus any changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.

As of December 31, 2021,all of our investments in our strategic partners where we do not have significant influence over the investee do not have readily determinable fair values. As of December 31, 2021 and 2020, the carrying value of our investments were $3.5 million and $3.5 million, respectively, which is included in other assets within our Consolidated Balance Sheet.There were 0 impairments or other changes resulting from observable prices changes recorded during the years ended December 31, 2021, 2020 or 2019.

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 2021 relates to benefit accruals for an hourly Union group within the defined benefit plan for our Outdoors & Security segment. All other benefit accruals under our defined benefit pension plans were frozen as of, or prior to, 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.

49


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 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 basis 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 atwo-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, 2018,2021, we had liabilities for unrecognized tax benefits pertaining to uncertain tax positions totaling $83.5$83.1 million. It is reasonably possible that the unrecognized tax benefits may decrease in the range of $1.4$4.1 million to $3.5$41.9 million in the next 12 months primarily as a result of the conclusion of U.S. federal, state and foreign income tax proceedings.

50


Revenue RecognitionThe Tax Act made significant changes toCompany recognizes revenue for 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 aone-time transition taxsale of goods based on the deemed repatriationits assessment 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 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 calculated our best estimate of the impact of the Tax Act on our 2017 effective income tax rate. As a result, the Company 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 included 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 increasewhen control transfers to our provisioncustomers. See Note 13, “Revenue,” for taxes on foreign earnings not considered permanently reinvestedadditional information.

Cost of $8.2 million.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 the quarter ended December 31, 2018, the Company completed its analysisaddition, all depreciation expense associated with assets used to manufacture products and make them saleable is included in conjunction with the SAB 118 measurement period ending on December 22, 2018. The total tax provision impact for the year ended December 31, 2018 was an unfavorable adjustmentcost of $5.5 million related primarily to certain deferred tax assets and liabilities.

The Tax Act included a provision for Global IntangibleLow-Taxed Income (GILTI), the Company elected an accounting policy to treat GILTI as a period cost when incurred. The GILTI provision is effective for taxable years of foreign corporations beginning after December 31, 2017.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. We record estimates to reduce revenue for customer programs and incentives, which are considered variable consideration, and include price discounts, volume-based incentives, promotions and cooperative advertising when revenue is recognized in order to determine the amount of consideration the Company will ultimately be entitled to receive. These estimates are based on historical and projected experience for each type of customer. In addition, for certain customer program incentives, we receive an identifiable benefit (goods or services) in exchange for the consideration given and record the associated expenditure in selling, general and administrative expenses. 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, 2018, ten such instances have not been dismissed, settled or otherwise resolved. In 2018, 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, 2018 and 2017, we had accruals of $0.6 million and $0.7 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, 2018, would be $8.5 million on apre-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 avalue-at-risk (“VAR”) sensitivity analysis model to estimate the maximum potential economic loss from adverse changes in foreign exchange rates over aone-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 maximumone-day loss in the fair value of the Company’s foreign currency exchange contracts using the VAR model was $0.8 million at December 31, 2018. 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.

Item 8. Financial Statements and Supplementary Data.

Consolidated Statements of IncomeFortune Brands Home & Security, Inc. and Subsidiaries

  
   For years ended December 31 
    
(In millions, except per share amounts) 2018  2017  2016 

NET SALES

 $5,485.1  $5,283.3  $4,984.9 

Cost of products sold

  3,525.7   3,358.3   3,188.8 

Selling, general and administrative expenses

  1,241.4   1,196.9   1,135.5 

Amortization of intangible assets

  36.1   31.7   28.1 

Loss on sale of product line (see Note 4)

     2.4    

Asset impairment charges

  62.6   3.2    

Restructuring charges

  24.1   8.3   13.9 

OPERATING INCOME

  595.2   682.5   618.6 

Interest expense

  74.5   49.4   49.1 

Other income, net

  (16.3  (1.7  (12.6

Income from continuing operations before income taxes

  537.0   634.8   582.1 

Income taxes

  147.0   159.5   169.7 

Income from continuing operations, net of tax

  390.0   475.3   412.4 

(Loss) income from discontinued operations, net of tax

  (0.2  (2.6  0.8 

NET INCOME

  389.8   472.7   413.2 

Less: Noncontrolling interests

  0.2   0.1    

NET INCOME ATTRIBUTABLE TO FORTUNE BRANDS

 $389.6  $472.6  $413.2 

BASIC EARNINGS (LOSS) PER COMMON SHARE

   

Continuing operations

 $2.69  $3.10  $2.67 

Discontinuing operations

     (0.02  0.01 

Net income attributable to Fortune Brands common shareholders

 $2.69  $3.08  $2.68 

DILUTED EARNINGS (LOSS) PER COMMON SHARE

   

Continuing operations

 $2.66  $3.05  $2.61 

Discontinuing operations

     (0.02  0.01 

Net income attributable to Fortune Brands common shareholders

 $2.66  $3.03  $2.62 
  

Basic average number of shares outstanding

  144.6   153.2   154.3 

Diluted average number of shares outstanding

  146.4   155.8   157.8 

See Notes to Consolidated Financial Statements.

Consolidated Statements of Comprehensive IncomeFortune Brands Home & Security, Inc. and Subsidiaries

  
   For years ended December 31 
    
(In millions) 2018  2017  2016 

NET INCOME

 $389.8  $472.7  $413.2 

Other comprehensive (loss) income, before tax:

   

Foreign currency translation adjustments

  (31.1  33.8   (14.7

Unrealized (losses) gains on derivatives:

   

Unrealized holding gains (losses) arising during period

  10.1   (1.8  (6.7

Less: reclassification adjustment for (gains) losses included in net income

  (2.1  (0.9  3.5 

Unrealized gains (losses) on derivatives

  8.0   (2.7  (3.2

Defined benefit plans:

   

Prior service credit (cost) arising during period

        12.1 

Prior service credit (cost) recognition due to settlement and curtailment

        0.1 

Net actuarial (loss) gains arising during period

  (4.2  6.2   (1.9

Less: amortization of prior service credit included in net periodic pension cost

     (5.1  (13.5

Defined benefit plans

  (4.2  1.1   (3.2

Other comprehensive (loss) income, before tax

  (27.3  32.2   (21.1

Income tax (expense) benefit related to items of other comprehensive income(a)

  (0.5  0.5   1.7 

Other comprehensive (loss) income, net of tax

  (27.8  32.7   (19.4

COMPREHENSIVE INCOME

  362.0   505.4   393.8 

Less: comprehensive income attributable to noncontrolling interest

  0.2       

COMPREHENSIVE INCOME ATTRIBUTABLE TO FORTUNE BRANDS

 $361.8  $505.4  $393.8 

(a)

Income tax (expense) benefit on unrealized (losses) gains on derivatives of $(1.4) million, $0.9 million and $0.5 million and on defined benefit plans of $0.9 million, $(0.4) million and $1.2 million in 2018, 2017 and 2016, respectively.

See Notes to Consolidated Financial Statements.

Consolidated Balance SheetsFortune Brands Home & Security, Inc. and Subsidiaries

  
    December 31 
 
(In millions)  2018   2017 

ASSETS

     

Current assets

     

Cash and cash equivalents

  $262.9   $323.0 

Accounts receivable less allowances for discounts and doubtful accounts

   571.7    555.3 

Inventories

   678.9    580.8 

Other current assets

   172.6    142.6 

TOTAL CURRENT ASSETS

   1,686.1    1,601.7 

Property, plant and equipment, net of accumulated depreciation

   813.4    740.0 

Goodwill

   2,080.3    1,912.0 

Other intangible assets, net of accumulated amortization

   1,246.8    1,162.4 

Other assets

   138.0    95.3 

TOTAL ASSETS

  $5,964.6   $5,511.4 

LIABILITIES AND EQUITY

     

Current liabilities

     

Short-term debt

   525.0     

Accounts payable

   459.0    428.8 

Other current liabilities

   508.1    478.0 

TOTAL CURRENT LIABILITIES

   1,492.1    906.8 

Long-term debt

   1,809.0    1,507.6 

Deferred income taxes

   162.6    166.8 

Accrued defined benefit plans

   163.3    175.9 

Othernon-current liabilities

   157.6    153.2 

TOTAL LIABILITIES

   3,784.6    2,910.3 

Commitments (Note 18) and Contingencies (Note 23)

     

Equity

     

Common stock(a)

   1.8    1.7 

Paid-in capital

   2,766.0    2,724.9 

Accumulated other comprehensive loss

   (67.0   (39.2

Retained earnings

   1,448.1    1,174.2 

Treasury stock

   (1,970.7   (1,262.1

TOTAL FORTUNE BRANDS EQUITY

   2,178.2    2,599.5 

Noncontrolling interests

   1.8    1.6 

TOTAL EQUITY

   2,180.0    2,601.1 

TOTAL LIABILITIES AND EQUITY

  $5,964.6   $5,511.4 

(a)

Common stock, par value $0.01 per share, 180.6 million shares and 179.8 million shares issued at December 31, 2018 and 2017, respectively.

See Notes to Consolidated Financial Statements.

Consolidated Statements of Cash FlowsFortune Brands Home & Security, Inc. and Subsidiaries

  
   For years ended December 31 
 
(In millions) 2018  2017   2016 

OPERATING ACTIVITIES

    ��

Net income

 $389.8  $472.7   $413.2 

Non-cash expense (income):

     

Depreciation

  113.5   98.6    94.6 

Amortization of intangibles

  36.1   31.7    28.1 

Stock-based compensation

  36.1   43.0    32.0 

Restructuring charges

         (0.1

Loss on sale of property, plant and equipment

  1.2   0.9    1.2 

Loss on sale of product line

     2.4     

Asset impairment charges

  62.6   15.3     

Recognition of actuarial losses (gains)

  3.8   (0.5   1.9 

Deferred taxes

  2.8   (18.7   (25.8

Amortization of deferred financing costs

  2.3   2.0    3.6 

Changes in assets and liabilities including effects subsequent to acquisitions

     

Decrease (increase) in accounts receivable

  9.8   1.0    (39.1

(Increase) decrease in inventories

  (55.0  (24.8   52.4 

Increase in accounts payable

  21.0   24.0    57.6 

(Increase) decrease in other assets

  (24.7  (28.3   10.7 

Increase (decrease) in accrued taxes

  9.5   (24.4   0.3 

(Decrease) increase in accrued expenses and other liabilities

  (4.8  5.4    19.9 

NET CASH PROVIDED BY OPERATING ACTIVITIES

  604.0   600.3    650.5 

INVESTING ACTIVITIES

     

Capital expenditures(a)

  (150.1  (165.0   (149.3

Proceeds from the disposition of assets

  6.1   0.4    3.9 

Proceeds from sale of product line

     1.5     

Cost of acquisitions, net of cash acquired

  (465.6  (124.6   (239.7

Cost of investments in equity securities

  (28.7       

Other investing activities, net

  4.0        

NET CASH USED IN INVESTING ACTIVITIES

  (634.3  (287.7   (385.1

FINANCING ACTIVITIES

     

Increase in short-term debt

  525.0       (1.1

Issuance of long-term debt

  2,191.2   640.0    1,065.0 

Repayment of long-term debt

  (1,890.0  (565.0   (805.0

Proceeds from the exercise of stock options

  4.9   28.5    25.5 

Employee withholding taxes paid related to stock-based compensation

  (14.0  (10.6   (10.1

Deferred acquisition payments

  (13.1  (17.9    

Dividends to stockholders

  (115.2  (110.3   (98.2

Treasury stock purchases

  (694.6  (214.8   (424.5

Other financing activities, net

  (1.0      (2.0

NET CASH USED IN FINANCING ACTIVITIES

  (6.8  (250.1   (250.4

Effect of foreign exchange rate changes on cash

  (15.2  9.0    (2.0

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 $(52.3 $71.5   $13.0 

Cash, cash equivalents and restricted cash(b) at beginning of year

 $323.0  $251.5   $238.5 

Cash, cash equivalents and restricted cash(b)at end of year

 $270.7  $323.0   $251.5 

Cash paid during the year for

     

Interest

 $63.4  $44.4   $43.7 

Income taxes paid directly to taxing authorities

  114.2   169.7    172.1 

Income taxes (received from) paid to Fortune Brands, Inc.

         (0.6

Dividends declared but not paid

  30.9   30.4    27.6 

(a)

Capital expenditures of $16.7 million, $17.2 million and $11.9 million that have not been paid as of December 31, 2018, 2017 and 2016, respectively, were excluded from the Statement of Cash Flows.

(b)

Restricted cash of $0.9 and $6.9 million is included in Other current assets and Other assets, respectively, as of December 31, 2018 within our Consolidated Balance Sheet. There was no restricted cash as of December 31, 2017.

See Notes to Consolidated Financial Statements.

Consolidated Statements of Equity

Fortune Brands Home & Security, Inc. and Subsidiaries

        
(In millions) Common
Stock
  Paid-In
Capital
  

Accumulated

Other
Comprehensive
(Loss) Income

  Retained
Earnings
  

Treasury

Stock

  Non-
controlling
Interests
  Total
Equity
 

Balance at December 31, 2015

 $1.7  $2,602.2  $(52.5 $501.6  $(602.1 $2.9  $2,453.8 

Comprehensive income:

       

Net income

           413.2         413.2 

Other comprehensive (loss) income

        (19.4           (19.4

Stock options exercised

     25.5               25.5 

Stock-based compensation

     32.0         (10.1     21.9 

Treasury stock purchase

              (424.5     (424.5

Dividends ($0.66 per Common share)

           (100.2        (100.2

Dividends paid to noncontrolling interests

                 (1.4  (1.4

Other (See Note 10)

     (5.9              (5.9

Balance at December 31, 2016

 $1.7  $2,653.8  $(71.9 $814.6  $(1,036.7 $1.5  $2,363.0 

Comprehensive income:

       

Net income

           472.6      0.1   472.7 

Other comprehensive income (loss)

        32.7            32.7 

Stock options exercised

     28.5               28.5 

Stock-based compensation

     42.6         (10.6     32.0 

Treasury stock purchase

              (214.8     (214.8

Dividends ($0.74 per Common share)

           (113.0        (113.0

Balance at December 31, 2017

 $1.7  $2,724.9  $(39.2 $1,174.2  $(1,262.1 $1.6  $2,601.1 

Comprehensive income:

       

Net income

           389.6      0.2   389.8 

Other comprehensive income (loss)

        (27.8           (27.8

Stock options exercised

  0.1   5.0               5.1 

Stock-based compensation

     36.1         (14.0     22.1 

Treasury stock purchase

              (694.6     (694.6

Dividends ($0.82 per Common share)

           (115.7        (115.7

Balance at December 31, 2018

 $1.8  $2,766.0  $(67.0 $1,448.1  $(1,970.7 $1.8  $2,180.0 

See Notes to Consolidated Financial Statements.

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 “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 Form10-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, there were certain transactions that resulted in approximately $38 million of net cash outflows relating to payments made to third parties in the normal course of business during the period between theyear-end of our wholly-owned subsidiaries and the Company’syear-end (in 2018, amounts were immaterial).

In September 2018, we acquired 100% of membership interests of Fiber Composites LLC (“Fiberon”), a leading U.S. manufacturer of outdoor performance materials used in decking, railing and fencing products for a total purchase price of approximately $470.0 million, subject to certain post-closing adjustments. The acquisition of Fiberon provides category expansion and product extension opportunities into the outdoor living space for our Doors & Security segment. The financial results were included in the Company’s consolidated balance sheet as of December 31, 2018 and in the Company’s consolidated statements of income and statements of cash flow beginning in September 2018.

In July 2018, we publicly announced an internal reorganization to combine our Doors & Security segments under common leadership to drive innovation, accelerate product development, and enhance investments and business processes. In connection with the reorganization, we changed how our chief operating decision maker evaluates and allocates the resources for the combined business. Reporting for the new Doors & Security segment began in the third quarter of 2018 and historical financial segment information has been restated to conform to the new segment presentation.

In October 2017, we acquired Victoria + Albert, aUK-based premium brand of standalone bathtubs, sink, tub fillers, faucets and other accessories. In July 2017, we acquired Shaws Since1897 Limited (“Shaws”), aUK-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 December 31, 2018 and 2017 consolidated balance sheets 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, 2018 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 cash flows from discontinued operations for 2018, 2017 and 2016 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.

Allowances for Doubtful Accounts    Trade receivables are recorded at the stated amount, less allowances for discounts and doubtful accounts. 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 $3.7 million and $3.3 million as of December 31, 2018 and 2017, respectively.

Inventories    The majority of our inventories are accounted for using thefirst-in,first-out (“FIFO”) 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.

During the fourth quarter of 2018, we determined that it was preferable to change our accounting policy fromlast-in,first-out (“LIFO”) to FIFO for product groups in which metals comprise a significant portion of inventory cost. We believe this change is preferable because it results in a uniform method to value our inventory across all our segments, improves comparability with our peers, and is expected to better reflect the current value of inventory on the consolidated balance sheets. The change in costing method, which affected our Plumbing and Doors & Security segments, was recognized during the fourth quarter of 2018, by adjusting the cost of inventories to FIFO, resulting in a pretax benefit of approximately $7.3 million ($5.5 million after tax) to Cost of products sold in the consolidated statements of income. The impact of this change is not material to our 2017 or 2016 results of operations or our financial position as of December 31, 2017, and therefore we did not retrospectively apply the change in accounting policy. LIFO inventories were zero and $245.6 million (with a current cost of $259.3 million) at December 31, 2018 and 2017, 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

15 to 40 years

Machinery and equipment

3 to 15 years

Software

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.

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 discount rate. 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, or one level below operating segments when appropriate. 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.

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 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 measure the fair value of identifiable intangible assets upon acquisition and we review 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. The determination of fair value using this technique requires the use of estimates and assumptions related to the projected tradename revenue growth, the assumed royalty rate and the discount rate. 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 fall below our assumptions, actions of key customers, increases in 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.

Investments in Equity Securities    In accordance with ASC requirements for Investments – equity securities, we account fornon-controlling investments in equity securities at fair value, with any gains or losses recognized through other income and expense. Equity securities without readily determinable fair values are recorded at cost minus impairment, plus or minus any changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.

During the fourth quarter of 2018, our Plumbing segment entered into strategic partnerships with several companies who incorporate emerging technology into plumbing-related products, and at the same time acquirednon-controlling equity interests in some of our partners. This includes an investment in Flo Technologies, Inc. (“Flo”), a U.S. manufacturer of a comprehensive water monitoring andshut-off system with leak detection and proactive leak detection technologies. Flo’s products are being rebranded to “Flo by Moen”, and our Plumbing segment will utilize its existing retail, wholesale and builder networks to expand the reach of Flo’s technology.

As of December 31, 2018, all of our investments in our strategic partners do not have readily determinable fair values. As of December 31, 2018 and 2017, the carrying value of our investments was $28.7 million and zero, respectively, which is included in other assets within our Consolidated Balance Sheet. There were no impairments or other changes resulting from observable prices changes recorded during the year ended December 31, 2018. Impairments of $7.0 million were recorded within Other income, net within the Consolidated Statements of Income during the year ended December 31, 2017 (see Note 22).

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 2018 relates to benefit accruals in an hourly Union defined benefit plan in our Doors & 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 aplan-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 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 15, “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 atwo-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, 2018, we had liabilities for unrecognized tax benefits pertaining to uncertain tax positions totaling $83.5 million. It is reasonably possible that the unrecognized tax benefits may decrease in the range of $1.4 million to $3.5 million in the next 12 months primarily as a result of the conclusion of U.S. federal, state and foreign income tax proceedings.

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 aone-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 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 calculated our best estimate of the impact of the Tax Act on our 2017 effective income tax rate. As a result, the Company 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 included 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. In the quarter ended December 31, 2018, the Company completed its analysis in conjunction with the SAB 118 measurement period ending on December 22, 2018. The total tax provision impact for the year ended December 31, 2018 was an unfavorable adjustment of $5.5 million related primarily to certain deferred tax assets and liabilities.

The Tax Act included a provision for Global IntangibleLow-Taxed Income (GILTI), the Company elected an accounting policy to treat GILTI as a period cost when incurred. The GILTI provision is effective for taxable years of foreign corporations beginning after December 31, 2017.

Revenue Recognition    The Company recognizes revenue for the sale of goods based on its assessment of when control transfers to our customers. Refer to Note 14 for additional information.

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. We record estimates to reduce revenue for customer programs and incentives, which are considered variable consideration, and include price discounts, volume-based incentives, promotions and cooperative advertising when revenue is recognized in order to determine the amount of consideration the Company will ultimately be entitled to receive. These estimates are based on historical and projected experience for each type of customer. In addition, for certain customer program incentives, we receive an identifiable benefit (goods or services) in exchange for the consideration given and record the associated expenditure in selling, general and administrative expenses. 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 $66.5$63.5 million, $62.4$64.7 million and $44.1$66.3 million for the years ended December 31, 2018, 20172021, 2020 and 2016,2019, 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 $215.9$334.1 million, $204.7$232.6 million and $197.0$225.5 million in 2018, 20172021, 2020 and 2016,2019, respectively.

Advertising costs, which amounted to $243.6$297.3 million, $233.2$259.4 million and $199.1$251.7 million in 2018, 20172021, 2020 and 2016,2019, respectively, are principally expensed as incurred. Advertising costs paid to customers as pricing rebates 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 $72.4$65.1 million, $65.6$66.7 million and $52.5$74.0 million in 2018, 20172021, 2020 and 2016,2019, respectively. Advertising costs recorded in selling, general and administrative expenses were $171.2$232.2 million, $167.6$192.7 million and $146.6$177.7 million in 2018, 20172021, 2020 and 2016,2019, respectively.

Research and development expenses include product development, product improvement, product engineering and process improvement costs. Research and development expenses, which were $50.3$65.6 million, $50.7$49.9 million and $53.1$48.2 million in 2018, 20172021, 2020 and 2016,2019, respectively, are expensed as incurred.incurred within selling, general and administrative expenses.

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. Compensation expense is recorded net of forfeitures, which we have elected to record in the period they occur. 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 13,12, “Stock-Based Compensation,” for additional information.

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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 21,19, “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 InstrumentsIn accordance with ASC requirementsfor Derivatives and Hedging, we recognize all derivatives are recognizedderivative contracts as either assets or liabilities on the balance sheet, and the 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,in other comprehensive income (“OCI”) and are recognized in the consolidated statement of income when the hedged item affects earnings. Ineffective portionsIf the derivative is designated as an effective economic hedge of the net investment in a foreign operation, the changes in the fair value of cash flow hedgesthe 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.earnings only when realized upon sale or upon complete or substantially complete liquidation of the investment in the foreign entity.

Deferred currency gains/(losses)gains (loss) of $2.2$0.3 million, $0.4$(3.0) million and $(3.5)$4.1 million (before tax impact) were reclassified into earnings for the yearyears ended December 31, 2018, 20172021, 2020 and 2016,2019, respectively. Based on foreign exchange rates as of December 31, 2018,2021, we estimate that $3.3$1.9 million of net currency derivative gainsgain included in AOCI as of December 31, 20182021, will be reclassified to earnings within the next twelve months.

Recently Issued Accounting Standards

Revenue from Contracts with CustomersSimplifying the Accounting for Income Taxes

In May 2014,December 2019, the Financial Accounting Standards Board (“FASB”("FASB") issued ASU2014-09,Accounting Standards Update ("ASU") 2019-12, which clarifies theis intended to simplify accounting for revenue arising from contracts with customersincome taxes and specifiesimprove consistency in application. ASU 2019-12 amends certain elements of income tax accounting, including but not limited to intraperiod tax allocations, step-ups in tax basis of goodwill, and calculating taxes on year-to-date losses in interim periods. The guidance was effective for the disclosures that an entity should include in its financial statements. We adopted ASU2014-09 as of Company’s fiscal year beginning January 1, 2018 and for periods thereafter using the modified retrospective approach, which we applied to all contracts not completed as of January 1, 2018.2021. The cumulative effect of adopting the new revenue standard was not material and no adjustment was recorded to retained earnings. The comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of this standardguidance did not have a material impact in 2018 and we do not expect it to have a material impact on revenue or net income on an ongoing basis.

A majority of our sales revenue continues to be recognized when products are shipped from our facilities to our customers. Previously, for certain products, we recognized sales revenue at destination as we determined risks and rewards transferred at that point. We now recognize sales revenue for these customers at the shipping point of the products consistent with the respective contractual terms.

See Note 14, “Revenue,” for further information.

Leases

In February 2016, the FASB issued ASU2016-02, 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. In January 2018, the FASB issued ASU2018-01, which clarifies the application of the new leases guidance to land easements. In July 2018, the FASB issued ASU2018-10 and ASU2018-11, which clarify certain guidance included in ASU2016-02 and introduces a new optional transition method. The standard is effective for annual periods beginning after December 15, 2018 (calendar year 2019 for Fortune Brands) and earlier application is permitted.

We plan to adopt the standard in the first quarter of 2019 using the transition method introduced by ASU2018-11, which does not require revisions to comparative periods. We will elect to implement the transition package of practical expedients permitted within the new standard, which among other things, allows us to carryforward the historical lease classification. In addition, we are electing the hindsight practical expedient to determine the lease term. We will make an accounting policy election to not recognize leases with an initial term of less than twelve months on the balance sheet and we will recognize the related lease payments as expense in the statement of comprehensive income on a straight-line basis over the lease term.

While we are continuing to finalize our assessment of the impacts of the standard, we have completed our scoping reviews, identified our significant leases by segment and by asset type, and made progress in developing accounting policies upon adoption of the standard. We have implemented an accounting system to support the future state leasing process and input the data from substantially all of our existing leases into the system. We continue to refine our future process design as part of the overall system implementation. Upon adoption, we expect to recognize a lease liability, with an offsetting increase toright-of-use assets ranging from $170 million to $200 million. Differences between the lease liability andright-of-use asset, recognized are not expected to material. We do not expect the standard to materially affect our consolidated net income.

Presentation of Net Periodic Pension and Postretirement Cost

In March 2017, the FASB issuedASU 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 adopted ASU2014-09 as of January 1, 2018 and for periods thereafter using the retrospective approach. The adoption of this standard did notnot have a material effect on our financial statements. See Note 15 for further information.

Stock Compensation ScopeEffects of Modification AccountingReference Rate Reform

In May 2017,March 2020, the FASB issued ASU2017-09, 2020-04, which provides relief from accounting analysis and impacts that may otherwise be required for modifications to agreements necessitated by reference rate reform. It also provides optional expedients to enable the continuance of hedge accounting where certain hedging relationships are impacted by reference rate reform. In January 2021, the FASB issued ASU 2021-01 which further clarifies when changesthe scope of ASU 2020-04. This optional guidance is effective immediately, and available to the terms or conditions of a share-based payment award must be accounted for as modifications. The guidance provides a relief to entities that makenon-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 adopted the new standard beginning January 1, 2018.used through December 31, 2022. The adoption of this standardguidance did notnot have a material effect on our financial statements.

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Clarifying the Definition of aDisclosures by Business Entities About Government Assistance

In January 2017,November 2021, the FASB issued ASU2017-01, 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) 2021-10, Government Assistance (Topic 832). 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 adopted the new standard beginning January 1, 2018. The adoption of this standard did not have a material effect on our financial statements.

Restricted Cash

In November 2016, the FASB issued ASU2016-18, 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 adopted the new standard beginning January 1, 2018. The adoption of this standard did not have a material effect on our financial statements.

Intra-Entity Transfers of Assets Other Than Inventory

In October 2016, the FASB issued ASU2016-16, 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 previous guidance companies were 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 adopted the new standard beginning January 1, 2018 using a “modified retrospective” approach (i.e., with a cumulative adjustment to retained earnings at adoption). The adoption of this standard did not have a material effect on our financial statements.

Classification of Certain Cash Receipts and Cash Payments

In September 2016, the FASB issued ASU2016-15, 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) and cash payments made “soon after” the consummation of a business combination generally would be classified as cash outflows from 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 retrospectively adopted the new standard beginning January 1, 2018. The adoption of this standard did not have a material effect on our financial statements.

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU2016-01, 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 anavailable-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 adopted the new standard beginning January 1, 2018. The adoption of this standard did not have a material effect on our financial statements.

Clarifying Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

In February 2017, the FASB issued ASU2017-05, which 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 a customer versus anon-customer. Sales to customers are within the scope of the new revenue standard. It also clarifies a derecognition model for nonfinancial assets that do not represent a business. We adopted the new standard beginning January 1, 2018 consistent with the effective date for the new revenue recognition standard. The adoption of this standard did not have a material effect on our financial statements.

Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued ASU2017-12 which amends the 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. We do not expect the adoption of this standard to have a material effect on our financial statements.

Financial Instruments — Credit Losses

In June 2016, the FASB issued ASU2016-13, 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, appliescodified in ASC 832, requires business entities that account for transactions with a government by applying a grant or contribution model by analogy to most financial assets measured at amortized cost, including trade and other receivables and loans as well asoff-balance-sheet credit exposures (e.g., loan commitments and standby letters of credit). The standard will replacedisclose information about government assistance recorded during 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 standardperiod. ASU 2021-10 is effective January 1, 2020 and early application is permittedfor all entities for annual reporting periods beginning January 1, 2019.after December 15, 2021. We are assessing the impact the adoption ofthat this standard willguidance may have on our financial statements.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued ASU2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This guidance permits companies to reclassify to retained earnings the tax effects stranded in accumulated other comprehensive income as a result of U.S. Tax Cuts and Jobs Act of 2017. This guidance is effective for the Company’s fiscal year beginning January 1, 2019. We do not expect the adoption of this guidance to have a material effect on our financial statements.

Improvements to Nonemployee Share-Based Payment Accounting

In June 2018, the FASB issued ASU2018-07 which simplifies the accounting for share-based arrangements with nonemployees. The new guidance generally aligns the accounting for share-based awards to nonemployees with the guidance for share-based awards to employees. The guidance is effective for the Company’s fiscal year beginning January 1, 2019. We do not expect the adoption of this guidance to have a material effect on our financial statements.

Codification Improvements

In July 2018, the FASB issued ASU2018-09 which includes technical corrections, clarifications, and other minor improvements to various areas including business combinations, fair value measurements and hedging. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments in this standard were effective immediately, while others will be effective for the Company’s fiscal year beginning January 1, 2019. Our adoption of the immediately effective pieces of this standard did not have a material effect on our financial statements, nor do we expect the adoption of the other aspects of this standard to be material.

Changes to the Disclosure Requirements for Fair Value Measurement

In August 2018, the FASB issued ASU2018-13 which removes the requirement to disclose: 1) amount of and reasons for transfers between Levels 1 and 2 of the fair value hierarchy, 2) policy for timing of transfers between levels, and 3) valuation processes for Level 3 investments. In addition, this guidance modifies and adds other disclosure requirements, which primarily relate to valuation of Level 3 assets and liabilities. The guidance is effective for the Company’s fiscal year beginning January 1, 2020, with early adoption permitted. We do not expect the adoption of this guidance to have a material effect on our financial statements.

Changes to the Disclosure Requirements for Defined Benefit Plans

In August 2018, the FASB issued ASU2018-14 which removes several disclosure requirements, including the amount in AOCI expected to be recognized in income over the next fiscal year and the effects of a 1% change in assumed health care cost trend rates and adds new disclosure requirements to explain reasons for significant gains and losses related to changes in the benefit obligation for the period, and to disclose weighted-average interest crediting rates for plans with promised interest crediting rates. The guidance is effective for the Company’s fiscal year beginning January 1, 2020, with early adoption permitted. We do not expect the adoption of this guidance to have a material effect on our financial statements.

Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract

In August 2018, the FASB issued ASU2018-15 which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtaininternal-use software. Costs to obtain software, including configuration and integration with legacy IT systems, coding and testing, including parallel process phases are eligible for capitalization under the new standard. In addition, activities that would be expensed include costs related to vendor demonstrations, determining performance and technology requirements and training activities. The standard is effective for the Company’s fiscal year beginning January 1, 2020, with early adoption permitted. We are assessing the impact the adoption of this standard will have on our financial statements.

��

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3. Balance Sheet Information

Supplemental information on ouryear-end consolidated balance sheets is as follows:

  
(In millions)  2018(a)   2017 

 

2021

 

 

 

2020

 

Inventories:

     

 

 

 

 

 

 

 

Raw materials and supplies

  $227.4   $224.9 

 

$

455.1

 

 

 

$

346.6

 

Work in process

   66.4    58.3 

 

93.0

 

 

 

76.7

 

Finished products

   385.1    297.6 

 

645.7

 

 

 

443.9

 

Total inventories

  $678.9   $580.8 

 

$

1,193.8

 

 

 

$

867.2

 

 

Property, plant and equipment:

     

 

 

 

 

 

 

 

Land and improvements

  $66.8   $58.7 

 

$

76.6

 

 

 

$

75.9

 

Buildings and improvements to leaseholds

   500.1    464.1 

 

551.5

 

 

 

552.4

 

Machinery and equipment

   1,249.0    1,167.5 

 

1,461.9

 

 

 

1,411.5

 

Construction in progress

   95.8    90.1 

 

188.0

 

 

 

110.3

 

Property, plant and equipment, gross

   1,911.7    1,780.4 

 

2,278.0

 

 

 

2,150.1

 

Less: accumulated depreciation

   1,098.3    1,040.4 

 

1,268.5

 

 

 

1,232.7

 

Property, plant and equipment, net of accumulated depreciation

  $813.4   $740.0 

 

$

1,009.5

 

 

 

$

917.4

 

 

Other current liabilities:

     

 

 

 

 

 

 

 

Accrued salaries, wages and other compensation

  $85.9   $105.9 

 

$

178.7

 

 

 

$

167.3

 

Accrued customer programs

   167.8    142.8 

 

250.4

 

 

 

196.2

 

Accrued taxes

   57.7    61.4 

 

90.1

 

 

 

70.8

 

Dividends payable

   30.9    30.4 

 

37.8

 

 

 

36.1

 

Other accrued expenses

   165.8    137.5 

 

249.2

 

 

 

254.2

 

Total other current liabilities

  $508.1   $478.0 

 

$

806.2

 

 

 

$

724.6

 

(a)

2018 includes the impact of acquiring Fiberon. See Note 4 for additional information.

4. Acquisitions and Dispositions

Flo Technologies

In September 2018 weour Plumbing segment entered into a strategic partnership with, and acquired 100% of membershipnon-controlling equity interests of Fiber Composites LLCin, Flo Technologies, Inc. (“Fiberon”Flo”), a leading U.S. manufacturer of comprehensive water monitoring and shut-off systems with leak detection technologies. In January 2020, we entered into an agreement to acquire 100% of the outstanding shares of Flo in a multi-phase transaction which was completed in January 2022. As part of this agreement, we acquired additional shares for $44.2 million in cash, including direct transactions costs, and entered into a forward contract to purchase all remaining shares of Flo at a future date in exchange for an additional $7.9 million in cash, which is included in other assets in our consolidated balance sheet. In April 2020, we acquired additional shares of Flo under a separate option agreement which resulted in a non-cash gain of $4.4 million on the forward contract as included within other income for the year-ended December 31, 2020.

As of December 31, 2020, we owned approximately 80% of Flo’s outstanding shares. Starting in the first quarter of 2020, we applied the equity method of accounting to our investment in Flo as the minority stockholders had substantive participating rights which precluded consolidation in our results of operations and statements of financial position and cash flows. Immediately prior to applying the equity method of accounting, we recognized a non-cash gain of $6.6 million within other income during the

53


year-ended December 31, 2020 related to the remeasurement of our previously existing investment in Flo. The carrying value of our investment as of December 31, 2020 was $76.2 million.

The minority shareholders' substantive participating rights expired on January 1, 2021, at which time we obtained control of and began consolidating Flo in our results of operations and statements of financial positions and cash flows. Immediately prior to consolidating Flo, we recognized a non-cash loss of $4.5 million within other expense for the year-ended December 31, 2021, related to the remeasurement of our previously existing investment in Flo. The fair value allocated to assets acquired and liabilities assumed as of January 1, 2021 was $87.8 million, net of cash acquired of $9.7 million, which includes $65.3 million of goodwill. Goodwill includes expected sales and cost synergies and is not expected to be deductible for income tax purposes. During the fourth quarter of 2021, we recorded a mark-to-market expense of $2.2 million related to the remaining shares held by the minority shareholders.Flo's net sales and operating income for the year-ended December 31, 2021 were not material to the Company.

Larson Manufacturing

In December 2020, we acquired 100% of the outstanding equity of Larson, the North American market leading brand of storm, screen and security doors. Larson also sells related outdoor performance materials used in decking, railingliving products including retractable screens and fencing productsporch windows. The acquisition of Larson is aligned with our strategic focus on the fast-growing outdoor living space. The Company completed the acquisition for a total purchase price of approximately $470.0$717.5 million, subject to certain post-closing adjustments.net of cash acquired. We financed the transaction with borrowings under our existing credit facilities. The acquisitionfinancial results of Fiberon provides category expansionLarson were included in the Company’s December 31, 2021 and product extension opportunities into2020 consolidated balance sheets and the outdoor living space for our Doors & Security segment. Fiberon’sCompany's consolidated statements of income and statements of cash flow beginning January 2021. Larson's net sales, and operating income in 2018and cash flows from the date of acquisition to December 31, 2020 were not material to the Company. We have not included pro forma financial information as it is immaterial to our consolidated statements of comprehensive income. We financed the transaction using cash on hand and borrowings under our revolving credit and term loan facilities. The results of operations are included in the DoorsOutdoors & Security segment fromsegment. We incurred $4.5 million of Larson acquisition-related transaction costs in the date of the acquisition. We expectyear ended December 31, 2020. The goodwill related to this acquisition to be deductible for income tax purposes.

purposes is approximately $290 million.

The following table summarizes the preliminaryfinal allocation of the purchase price to the fair value of assets acquired and liabilities assumed as of the date of the acquisition.

  
(In millions)     

Accounts receivable

  $19.2 

Inventories

   49.4 

Property, plant and equipment

   49.0 

Goodwill

   173.4 

Identifiable intangible assets

   195.0 

Other assets

   4.8 

Total assets

   490.8 

Accounts payable

   16.5 

Other liabilities and accruals

   14.5 

Net assets acquired

  $459.8 

The preceding purchase price allocation has been determined provisionally and is subject

(In millions)

 

Accounts receivable

 

$

42.3

 

Inventories

 

 

49.8

 

Property, plant and equipment

 

 

66.6

 

Goodwill

 

 

307.0

 

Identifiable intangible assets

 

 

313.0

 

Operating lease assets

 

 

6.2

 

Other assets

 

 

3.7

 

Total assets

 

 

788.6

 

Accounts payable

 

 

6.6

 

Other current liabilities and accruals

 

 

32.1

 

Other non-current liabilities

 

 

32.4

 

Net assets acquired(a)

 

$

717.5

 

(a)
Net assets exclude $0.4 million of cash transferred to revisionthe Company as additional information about the fair value of individual assets and liabilities becomes available. We apply significant judgement in determining the estimates and assumptions used to determine the fair valueresult of the identifiable intangible assets, including forecasted revenue growth rates, customer attrition rates, discount rates and assumed royalty rates. The Company is in the process of finalizing valuations of certain tangible and intangible assets, including property, plant and equipment and identifiable intangible assets. The provisional measurement of property, plant and equipment, identifiable intangible assets, and goodwill is subject to change. Any change in the acquisition date fair value of the acquired net assets will change the amount of the purchase price allocable to goodwill.Larson acquisition.

Goodwill includes expected sales and cost synergies. The goodwill will be included in our Outdoors & Security segment. Identifiable intangible assets primarily consist of a finite-lived customer relationships asset of $168.0 million, an indefinite-lived tradename of $111.0 million and a finite-lived proprietary technology asset of $34.0 million. The useful life of the customer relationship intangible asset is estimated to be 13 years. The Larson tradename has been assigned an indefinite life as we currently anticipate that this tradename will contribute cash flows to the Company indefinitely. The useful life of the proprietary technology intangible asset is estimated to be 7 years. Customer and contractual relationships and proprietary technology are amortized on a straight-line basis over their useful lives.

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The following unaudited pro forma summary presents consolidated financial information as if Larson had been acquired on January 1, 2019. The unaudited pro forma financial information is based on historical results of operations and financial position of the Company and Larson. The pro forma results include:

estimated amortization of finite-lived intangible asset, including customer relationships and tradenames.

In October 2017, we acquired Victoria + Albert, aUK-based premium brandproprietary technology,

the estimated cost of standalone bathtubs, sinks, tub fillers, faucetsthe inventory adjustment to fair value,
interest expense associated with debt that would have been incurred in connection with the acquisition,
the reclassification of Larson transaction costs from 2020 to the first quarter of 2019, and other accessories. In July 2017, we acquired Shaws, aUK-based luxury plumbing products company that specializes
the removal of certain transactions recorded in manufacturing and selling fireclay sinks and selling brassware and accessories. The total combined consideration paid was approximately $146 million, including $19.9 millionthe historical financial statements of additional purchase price consideration paidLarson related to post-closing assets and activities which were retained by the seller, and
adjustments and deferredto conform accounting policies.

The unaudited pro forma financial information does not necessarily represent the results that would have occurred had the acquisition payments during 2018. The combined consideration paid is subject to further deferred acquisition payments. Net sales and operating income in 2017 from these acquisitions wereoccurred on January 1, 2019. In addition, the unaudited pro forma information should not material to the Company. We financed the transactions using cash on hand and borrowings under our existing revolving and term loan credit facilities. The results of the operations are included in the Plumbing segment from the respective dates of acquisition. We do not expect any portion of goodwillbe deemed to be deductible for income tax purposes.

In April 2017, we completed the saleindicative of Field ID, our cloud-based inspection and safety compliance software product line included in our Doors & Security segment. We recorded apre-tax loss of $2.4 million and apre-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.future results.

(In millions)

 

 

2020

 

 

 

2019

 

Net sales

 

$

6,493.2

 

 

$

6,100.4

 

Net income

 

$

592.5

 

 

$

410.8

 

5.    Discontinued Operations

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.

6.5. Goodwill and Identifiable Intangible Assets

We had goodwill of $2,080.3$2,465.1 million and $1,912.0$2,394.8 million as of December 31, 20182021 and 2017,2020, respectively. The increase of $168.3 million was primarily due to the acquisition of Fiberon in the Doors & Security segment as well as acquisition related adjustments in our Plumbing segment related to the acquisition of Victoria + Albert, partially offset by foreign translation adjustments. The change in the net carrying amount of goodwill by segment was as follows:

     
(In millions)  Cabinets   Plumbing   Doors & Security   

Total

Goodwill

 

Balance at December 31, 2016(a)

  $924.3   $670.2   $239.3   $1,833.8 

2017 translation adjustments

   2.0    3.3    1.2    6.5 

Acquisition-related adjustments

       71.7        71.7 

Balance at December 31, 2017(a)

  $926.3   $745.2   $240.5   $1,912.0 

2018 translation adjustments

   (2.3   (5.9   (1.4   (9.6

Acquisition-related adjustments

       4.4    173.5    177.9 

Balance at December 31, 2018(a)

  $924.0   $743.7   $412.6   $2,080.3 

(In millions)

 

Plumbing

 

 

 

Outdoors & Security

 

 

 

Cabinets

 

 

 

Total
Goodwill

 

Balance at December 31, 2019(a)

 

$

747.3

 

 

 

$

417.4

 

 

 

$

925.5

 

 

 

$

2,090.2

 

2020 translation adjustments

 

 

2.8

 

 

 

 

0.3

 

 

 

 

0.6

 

 

 

 

3.7

 

Acquisition-related adjustments

 

 

 

 

 

 

300.9

 

 

 

 

 

 

 

 

300.9

 

Balance at December 31, 2020(a)

 

$

750.1

 

 

 

$

718.6

 

 

 

$

926.1

 

 

 

$

2,394.8

 

2021 translation adjustments

 

 

(1.3

)

 

 

 

0.1

 

 

 

 

0.1

 

 

 

 

(1.1

)

Acquisition-related adjustments

 

 

65.3

 

 

 

 

6.1

 

 

 

 

 

 

 

 

71.4

 

Balance at December 31, 2021(a)

 

$

814.1

 

 

 

$

724.8

 

 

 

$

926.2

 

 

 

$

2,465.1

 

(a)

(a)
Net of accumulated impairment losses of $399.5 million in the Doors & Security segment.

We also had identifiable intangible assets, principally tradenames and customer relationships, of $1,246.8accumulated impairment losses of $399.5 million and $1,162.4 million as of December 31, 2018 and 2017, respectively. The $117.9 million increase in gross identifiable intangible assets was primarily due to the acquisition of Fiberon in our DoorsOutdoors & Security segment partially offset by a tradename impairment charges of $62.6 million in our Cabinets segment.

55


The gross carrying value and accumulated amortization by class of intangible assets as of December 31, 20182021 and 20172020 were as follows:

  
 As of December 31, 2018  As of December 31, 2017 

 

As of December 31, 2021

 

 

 

As of December 31, 2020

 

(In millions) Gross
Carrying
Amounts
 Accumulated
Amortization
 Net Book
Value
  Gross
Carrying
Amounts
 Accumulated
Amortization
 Net Book
Value
 

 

 

Gross
Carrying
Amounts

 

Accumulated
Amortization

 

Net Book
Value

 

 

 

Gross
Carrying
Amounts

 

Accumulated
Amortization

 

Net Book
Value

 

Indefinite-lived tradenames

 $673.9  $  $673.9  $709.9  $  $709.9 

 

 

$

711.1

 

$

 

$

711.1

 

 

 

$

711.0

 

$

 

$

711.0

 

Amortizable intangible assets

      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tradenames

  19.8   (11.9  7.9   15.7   (9.9  5.8 

 

 

36.4

 

(15.5

)

 

20.9

 

 

 

34.8

 

(14.0

)

 

20.8

 

Customer and contractual relationships

  800.3   (260.2  540.1   663.8   (232.0  431.8 

 

 

975.7

 

(388.2

)

 

587.5

 

 

 

973.2

 

(337.3

)

 

635.9

 

Patents/proprietary technology

  73.5   (48.6  24.9   60.2   (45.3  14.9 

 

 

133.1

 

(68.8

)

 

64.3

 

 

 

109.6

 

(57.0

)

 

52.6

 

Total

  893.6   (320.7  572.9   739.7   (287.2  452.5 

 

 

1,145.2

 

(472.5

)

 

672.7

 

 

 

1,117.6

 

(408.3

)

 

709.3

 

Total identifiable intangibles

 $1,567.5  $(320.7 $1,246.8  $1,449.6  $(287.2 $1,162.4 

 

 

$

1,856.3

 

$

(472.5

)

 

$

1,383.8

 

 

 

$

1,828.6

 

$

(408.3

)

 

$

1,420.3

 

We had identifiable intangible assets, principally tradenames and customer relationships, of $1,383.8 million and $1,420.3 million as of December 31, 2021 and 2020, respectively. The $27.7million increase in gross identifiable intangible assets was primarily due to the consolidation of Flo.

Amortizable intangible assets, principally customer relationships, and patents/proprietary technology, are subject to amortization on a straight-line basis over their estimated useful life, ranging from 25 to 30 years, based on the assessment of a number of factors that may impact useful life. These factorslife which 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 $43 million in 2019, $42 million in 2020, $42 million in 2021, $40$62 million in 2022, and $39$60 million in 2023.2023, $60 million in 2024, $60 million in 2025, and $59 million in 2026.

We review

During the second quarter of 2020, extended closures of luxury plumbing showrooms associated with COVID-19 led to lower than expected sales related to an indefinite-lived tradename intangible assets forwithin the Plumbing segment, which combined with the updated financial outlook compared to previous forecasts and the continued uncertainty of the pandemic on the sales and profitability related to the tradename led us to conclude that it was more likely than not that the indefinite-lived tradename was impaired. Therefore, we performed an interim impairment annuallytest as of June 30, 2020, and as a result we recognized a pre-tax impairment charge of $13.0 million related to this tradename. We also performed an evaluation of the useful life of this tradename and determined it was no longer indefinite-lived due to changes in long-term management expectations and future operating plans. As a result, the remaining carrying value of this tradename is being amortized over its estimated useful life of 30 years.

In the first quarter of 2020, we recognized an impairment charge of $9.5 million related to an indefinite-lived tradename in our Cabinets segment. This charge was primarily the result of lower expected sales of custom cabinetry products related to the impact of COVID-19. 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 recordedof 2019, we recognized an impairment charge of $12.0 million related to the extent thatsame indefinite-lived tradename, which was the result of a strategic shift associated with new segment leadership and acceleration of our capacity rebalancing initiatives from custom cabinetry products to value-based cabinetry products as a result of lower than expected sales of custom cabinetry products compared to prior forecasts. As of December 31, 2021, 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

this tradename was $29.1 million.

tradename to a third party over the remaining useful life. The determination of fair value using this technique requires the use of estimates and assumptions related to projected tradename revenue growth, the assumed royalty rate and the discount rate.

During 2018, we recognized asset impairment charges of $62.6 million related to two indefinite-lived tradenames within our Cabinets segment. DuringIn the third quarter of 2018,2019, we recognized an impairment charge of $27.1$29.5 million related to onea second indefinite-lived tradename in our Cabinets segment, which was primarily the result of reduced revenuea continuing shift in consumer demand from semi-custom cabinetry products to value-priced cabinetry products, which led to consecutive downward adjustments of internal sales forecasts and future growth expectationsrates associated with Cabinets operations in Canada, including the announced closuretradename. As of Company-owned retail locations duringDecember 31, 2021, the third quartercarrying value of 2018. During the fourth quarter of 2018, we recognized an impairment of $35.5 million related to anotherthis tradename which was primarily the result of lower than forecasted sales during the fourth quarter of 2018 as well as projected changes in the mix of revenue across our tradenames in future periods, including the impact of more moderate industry growth expectations, which were finalized during our annual planning process conducted during the fourth quarter. $85.0 million.

56


The fair values of the impaired tradenames were measured using the 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 its remaining useful life. Some of the more significant assumptions inherent in estimating the fair valuevalues include estimated future annual net sales for the tradename,forecasted revenue growth rates, assumed royalty rate, income tax rate,rates, and amarket-participant discount raterates that reflectsreflect the level of risk associated with the tradename’stradenames’ future salesrevenues and profitability. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management plans. These assumptions represent level 3 inputs of the fair value hierarchy (refer to Note 10)9). As of December 31, 2018,

A reduction in the carryingestimated fair value of theany of our tradenames that were impaired was approximately $152.0 million. We did not record any assetcould trigger impairment changes associated with goodwill or indefinite-lived assetscharges in 2017 or 2016.

The events and/future periods. Events or circumstances that could have a potential negative effect on the estimated fair value of our reporting units and indefinite-lived tradenames include: lower than forecasted revenues, more severe impacts of the COVID-19 pandemic than currently expected, actual new construction and repair and remodel growth rates that fall below our assumptions, actions of key customers, increases in discount rates, continued economic uncertainty, higher levels of unemployment, weak consumer confidence, lower levels of discretionary consumer spending, a decrease in royalty rates and a 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 committedThere were 0 impairments for the year ended December 31, 2021. The significant assumptions used to estimate the fair values of the tradenames impaired during the years ended December 31, 2020 and 2019 were as follows:

 

 

2020

 

 

2019

 

Unobservable Input

 

Minimum

 

 

Maximum

 

 

Weighted Average(a)

 

 

Minimum

 

 

Maximum

 

 

Weighted Average(a)

 

Discount rates

 

 

14.8

%

 

 

15.8

%

 

 

15.1

%

 

 

13.0

%

 

 

13.5

%

 

 

13.3

%

Royalty rates(b)

 

 

4.0

%

 

 

5.0

%

 

 

4.3

%

 

 

3.0

%

 

 

4.0

%

 

 

3.3

%

Long-term revenue growth rates(c)

 

 

1.0

%

 

 

3.0

%

 

 

1.6

%

 

 

3.0

%

 

 

3.0

%

 

 

3.0

%

(a)
Weighted by relative fair value of the impaired tradenames.
(b)
Represents estimated percentage of sales a planmarket-participant would pay to sell Field ID, our cloud-based inspectionlicense the impaired tradenames.
(c)
Selected long-term revenue growth rate within 10-year projection period of the impaired tradenames.

6. Leases

We have operating and safety compliance software product linefinance leases for buildings and certain machinery and equipment. Operating leases are included in operating lease assets, other current liabilities, and operating lease liabilities in our Doors & Security segment. In accordance with FASB Accounting Standards Codification (“ASC”) 360,consolidated balance sheets. Amounts recognized for finance leases as a result of our decision to sell, duringand for the first quarteryears ended December 31, 2021 and 2020 were immaterial.

Operating lease expense recognized in the consolidated statement of 2017 we recorded $3.2comprehensive income for the years ended December 31, 2021, 2020 and 2019 and were $60.3 million, $53.9 million and $51.0 million, respectively, including approximately $11.2million, $9.3million and $8.2 million ofpre-tax impairment charges short-term and variable lease costs for the years ended December 31, 2021, 2020 and 2019, respectively.

57


Other information related 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 consistedleases was as follows:

(In millions, except lease term and discount rate)

 

December 31, 2021

 

 

December 31, 2020

 

 

December 31, 2019

 

Cash paid for amounts included in the measurement of
   lease liabilities:

 

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

48.0

 

 

$

43.5

 

 

$

41.3

 

Right-of-use assets obtained in exchange for operating
   lease obligations

 

$

69.7

 

 

$

40.5

 

 

$

24.5

 

Weighted average remaining lease term - operating leases

 

6.1 years

 

 

6.4 years

 

 

7.1 years

 

Weighted average discount rate - operating leases

 

 

3.3

%

 

 

3.8

%

 

 

4.2

%

Total lease payments under non-cancellable operating leases as 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.December 31, 2021 were as follows:

8.

(In millions)

 

 

 

Year Ending December 31,

 

 

 

2022

 

$

48.2

 

2023

 

 

43.3

 

2024

 

 

34.0

 

2025

 

 

24.6

 

2026

 

 

20.4

 

Thereafter

 

 

55.2

 

Total lease payments

 

 

225.7

 

Less imputed interest

 

 

(24.2

)

Total

 

$

201.5

 

Reported as of December 31, 2021

 

 

 

Other current liabilities

 

$

42.7

 

Operating lease liabilities

 

 

158.8

 

Total

 

$

201.5

 

7. External Debt and Financing Arrangements

In September 2018, we issued $600 millionUnsecured Senior Notes

At December 31, 2021, the Company had aggregate outstanding notes in the principal amount of $1.8 billion, with varying maturities (the “Notes”). The Notes are unsecured senior notes (“2018 Senior Notes”) in a registered public offering. The 2018 Senior Notes are due in 2023 with a coupon rate of 4%. All other terms and conditionsobligations of the 2018 SeniorCompany. The following table provides a summary of the Company’s outstanding Notes, are substantially consistent withincluding the 2015 Senior Notes. We used the proceeds from the 2018 Senior Notes offering to pay down our revolving credit facility. On December 31, 2018, the net carrying value of the 2018 Senior Notes, net of underwriting commissions, price discounts, and debt issuance costs was $595.0 million.as of December 31, 2021 and December 31, 2020:

 (in millions)

 

 

 

 

 

 

 

Net Carrying Value

 

Coupon Rate

Principal Amount

 

 

Issuance Date

 

Maturity Date

 

December 31, 2021

 

 

December 31, 2020

 

4.000% Senior Notes

$

500.0

 

 

June 2015

 

June 2025

 

$

497.4

 

 

$

496.6

 

4.000% Senior Notes

 

600.0

 

 

September 2018

 

September 2023

 

 

598.2

 

 

 

597.1

 

3.250% Senior Notes

 

700.0

 

 

September 2019

 

September 2029

 

 

694.2

 

 

 

693.5

 

Total Senior Notes

$

1,800.0

 

 

 

 

 

 

$

1,789.8

 

 

$

1,787.2

 

In During June 2020, we repaid all outstanding 3.000% Senior Notes issued in June 2015 at their maturity date using borrowings under our 2019 Revolving Credit Agreement (as defined below). In September 2019, we issued $900$700 million of 3.25% Senior Notes due 2029 (“2019 Notes”) in a registered public

58


offering. The Company used the proceeds from the 2019 Notes offering to repay in full the Company’s $350 million term loan and to pay down outstanding balances under our revolving credit facility.

In September 2018, we issued $600 million of unsecured senior notes (“2015 Senior Notes”, and collectively with the 2018 Senior Notes, the “Senior Notes”) in a registered public offering. The 2015 Senior2018 Notes consist of two tranches: $400 million of five-year notesare due in 20202023 with a coupon rate of 3% and $500 million often-year notes due in 2025 with a coupon rate of 4%4%. We used the proceeds from the 2015 Senior2018 Notes

offering to pay down our revolving credit facility and for general corporate purposes. On December 31, 2018 and December 31, 2017, the net carrying value of the 2015 Senior Notes, net of underwriting commissions, price discounts, and debt issuance costs, was $894.0 million and $892.6 million, respectively.facility.

Credit Facilities

In March 2018,November 2021, the Company entered into a $350364-day, $400 million term loan credit agreement (“2021 Term Loan”) for general corporate purposes that matures in March 2019. In August 2018, the Company amended its existing $350 million term loan to increase the borrowings under the term loan from $350 million to $525 million. All other terms and conditions on the amended term loan remain the same as the previous $350 million term loan. November 2022. Interest rates under the term loan2021 Term Loan are variable based on LIBOR at the time of the borrowing and the Company’s long-term credit rating and can range from LIBOR + 0.625%0.625% to LIBOR + 1.25%1.25%.Covenants under the term loan2021 Term Loan are the same as the existing $1.25$1.25 billion revolving credit agreement. As of December 31, 2018,2021, we were in compliance with all covenants under this term loan.facility.

In June 2016,September 2019, the Company entered into a second amended and restated its credit agreement to combine and rollover the 2011$1.25 billion revolving credit facility and term loan into a new standalone $1.25 billion revolving credit facility. The amendment and restatement was anon-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(the “2019 Revolving Credit Agreement”), and borrowings thereunder will be used for general corporate purposes. On December 31, 2018 and December 31, 2017, our outstanding borrowings under thisThe maturity date of the facility were $320.0 million and $615.0 million, respectively. At December 31, 2018 and December 31, 2017, the current portion of long-term debt under this facility was zero. is September 2024. Interest rates under the facility2019 Revolving Credit Agreement 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%0.91% to LIBOR + 1.5%1.4%.Under the 2019 Revolving Credit Agreement, the Company is required to maintain a minimum ratio of consolidated EBITDA to consolidated interest expense of 3.0 to 1.0. Consolidated EBITDA is defined as consolidated net income before interest expense, income taxes, depreciation, amortization of intangible assets, losses from asset impairments, and certain other one-time adjustments. In addition, the Company’s ratio of consolidated debt minus certain cash and cash equivalents to consolidated EBITDA generally may not exceed 3.5 to 1.0. On December 31, 2021 and December 31, 2020, our outstanding borrowings under these credit facilities were $520.0 million and $785.0 million, respectively, which is included in Long-term debt in the consolidated balance sheets. As of December 31, 2018,2021, we were in compliance with all covenants under this facility.

We currently have uncommitted bank lines of credit in China, which provide for unsecured borrowings for working capital of up to $23.5$17.5 million in aggregate of which zero were outstanding, as of December 31, 20182021 and 2017. December 31, 2020, of which there were 0 outstanding balances as of December 31, 2021 and 2020.The weighted-average interest rates on these borrowings were zero0 in 2018both 2021 and 2017.2020.

Commercial Paper

In November 2021, the Company established a commercial paper program (the "Commercial Paper Program") pursuant to which the Company may issue short-term, unsecured commercial paper notes. Amounts available under the Commercial Paper Program may be borrowed, repaid and re-borrowed, with the aggregate principal amount outstanding at any time not to exceed $1.25 billion. The Company’s 2019 Revolving Credit Agreement is the liquidity backstop for the repayment of any notes issued under the Commercial Paper Program. The Company plans to use net proceeds from any issuances under the Commercial Paper Program for general corporate purposes. There was 0 commercial paper outstanding as of December 31, 2021.

As of December 31, 2021, the components of external long-term debt were as follows:

(In millions)

 

2021

 

 

2020

 

Notes (due 2023 to 2029)

 

$

1,789.8

 

 

$

1,787.2

 

2019 Revolving Credit Agreement

 

 

520.0

 

 

 

785.0

 

2021 Term Loan

 

 

400.0

 

 

 

 

Total debt

 

 

2,709.8

 

 

 

2,572.2

 

Less: current portion

 

 

400.0

 

 

 

 

Total long-term debt

 

$

2,309.8

 

 

$

2,572.2

 

59

   
(In millions)  2018   2017 

$400 million unsecured senior note due June 2020

  $399.0   $398.3 

$500 million unsecured senior note due June 2025

   495.0    494.3 

$600 million unsecured senior note due September 2023

   595.0     

$1,250 million revolving credit agreement due June 2021

   320.0    615.0 

$525 million term loan due March 2019

   525.0     

Total debt

   2,334.0    1,507.6 

Less: current portion

   525.0     

Total long-term debt

  $1,809.0   $1,507.6 

Senior Notes payments during the next five years as of December 31, 2018 are zero in 2019, $400 million in 2020, zero in 2021 and $600 million in 2022 through 2023.

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, 2018.2021.

9.Debt payments due during the next five years as of December 31, 2021 are $400 million in 2022, $600 million in 2023, $520 million in 2024, $500 million in 2025, 0 in 2026 and $700 million in 2027 and beyond. Interest payments due during the next five years as of December 31, 2021 are $78 million in 2022, $124 million in 2023 through 2024, $56 million in 2025 through 2026 and $68 million in 2027 and beyond.

8. 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 materialThe gross notional amount of all commodity swap contractsderivatives outstanding for the years endedat December 31, 2018 and 2017.2021 was $5.0 million, representing a net settlement asset of 0. The gross notional amount of all commodity derivatives outstanding at December 31, 2020 was $9.8 million, representing a net settlement asset of $1.9 million.

We may enter into foreign currency forward contracts to protect against foreign exchange risks associated with certain existing assets and liabilities, forecasted future cash flows, and net investments in foreign subsidiaries. Foreign exchange contracts primarilyrelated 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 contractsfuture cash flows correspond to the periods of the forecasted transactions,which generally do not exceed 12 to 15 months subsequent to the latest balance sheet date.

We may enter into interest rate swap contracts to protect against interest rate risks associated with certain of our debt obligations. Interest rate swap contracts related to forecasted future interest payments correspond to the periods of the forecasted transactions. We account for these derivatives as cash flow hedges. These contracts were immaterial to the financial statements at December 31, 2021.

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 statementconsolidated statements of income. The effective portionschanges in the fair value of cash flow hedges are reported in other comprehensive income (“OCI”)OCI and are recognized in the statementconsolidated statements of income when the hedged item affects earnings. The changes in fair value for net investment hedges are recognized in the statementconsolidated statements 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, the Chinese yuanMexican peso and the Mexican peso.Chinese yuan. The gross U.S. dollar equivalent notional amount of all foreign currency derivative hedges outstanding at December 31, 20182021 was $345.3$559.0 million, representing a net settlement assetsasset of $3.4$2.7 million. Based on foreign exchange rates as of December 31, 2018,2021, we estimate that $3.3$1.9 million of net foreign currency derivative lossesgains included in OCIaccumulated

60


other comprehensive income as of December 31, 20182021 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, 20182021 and 20172020 were:

 

  
     Fair Value 
   

 

 

 

Fair Value

 

(In millions)  Location              2018   2017 

 

Location

 

 

2021

 

 

 

2020

 

Assets:

       

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

  Other current assets  $5.3   $0.8 

 

Other current assets

 

 

$

4.1

 

 

 

$

3.7

 

Commodity contracts

  Other current assets       0.2 

 

Other current assets

 

 

 

 

 

1.9

 

Net investment hedges

  Other current assets   0.7     
  Total assets  $6.0   $1.0 

 

Total assets

 

 

$

4.1

 

 

 

$

5.6

 

Liabilities:

       

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

  Other current liabilities  $1.9   $5.6 

 

Other current liabilities

 

 

$

1.4

 

 

 

$

6.5

 

Net investment hedges

  Other current liabilities       0.8 

Commodity contracts

 

Other current liabilities

 

 

0.1

 

 

 

 

  Total liabilities  $1.9   $6.4 

 

Total liabilities

 

 

$

1.5

 

 

 

$

6.5

 

61


The effects of derivative financial instruments on the consolidated statements of income in 2018, 20172021, 2020 and 20162019 were:

  
(In millions) Gain (Loss) Recognized in Income 
    
Type of hedge Location 2018  2017  2016 

Cash flow

 Cost of products sold $2.0  $0.9  $(3.5

Fair value

 

Other (income) expense, net

  3.7   (2.0  2.0 

Total

   $5.7  $(1.1 $(1.5

(In millions)

 

Classification and Amount of Gain (Loss)
   Recognized in Income on Fair Value and
   Cash Flow Hedging Relationships

 

 

 

2021

 

 

 

Cost of
products sold

 

 

Interest
expense

 

 

Other expense,
net

 

Total amounts per Consolidated Statements of Income

 

$

4,909.1

 

 

$

84.4

 

 

$

0.9

 

The effects of fair value and cash flow hedging:

 

 

 

 

 

 

 

 

 

Gain (loss) on fair value hedging relationships

 

 

 

 

 

 

 

 

 

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

Hedged items

 

 

 

 

 

 

 

 

(4.7

)

Derivative designated as hedging instruments

 

 

 

 

 

 

 

 

1.6

 

Gain (loss) on cash flow hedging relationships

 

 

 

 

 

 

 

 

 

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income

 

 

0.3

 

 

 

 

 

 

 

Commodity contracts:

 

 

 

 

 

 

 

 

 

Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income

 

 

1.3

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income

 

 

 

 

 

0.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Classification and Amount of Gain (Loss)
   Recognized in Income on Fair Value and
   Cash Flow Hedging Relationships

 

 

 

2020

 

 

 

Cost of
products sold

 

 

Interest
expense

 

 

Other income,
net

 

Total amounts per Consolidated Statements of Income

 

$

3,925.9

 

 

$

83.9

 

 

$

13.3

 

The effects of fair value and cash flow hedging:

 

 

 

 

 

 

 

 

 

Gain (loss) on fair value hedging relationships

 

 

 

 

 

 

 

 

 

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

Hedged items

 

 

 

 

 

 

 

 

2.9

 

Derivative designated as hedging instruments

 

 

 

 

 

 

 

 

(1.8

)

Gain (loss) on cash flow hedging relationships

 

 

 

 

 

 

 

 

 

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income

 

 

(3.0

)

 

 

 

 

 

 

Commodity contracts:

 

 

 

 

 

 

 

 

 

Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income

 

 

 

 

 

0.6

 

 

 

 

62


(In millions)

 

Classification and Amount of Gain (Loss)
   Recognized in Income on Fair Value and
   Cash Flow Hedging Relationships

 

 

 

2019

 

 

 

Cost of
products sold

 

 

Interest
expense

 

 

Other expense,
net

 

Total amounts per Consolidated Statements of Income

 

$

3,712.2

 

 

$

94.2

 

 

$

29.0

 

The effects of fair value and cash flow hedging:

 

 

 

 

 

 

 

 

 

Gain (loss) on fair value hedging relationships

 

 

 

 

 

 

 

 

 

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

Hedged items

 

 

 

 

 

 

 

 

4.0

 

Derivative designated as hedging instruments

 

 

 

 

 

 

 

 

(3.0

)

Gain (loss) on cash flow hedging relationships

 

 

 

 

 

 

 

 

 

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income

 

 

4.1

 

 

 

 

 

 

 

Commodity contracts:

 

 

 

 

 

 

 

 

 

Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income

 

 

(0.1

)

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income

 

 

 

 

 

0.4

 

 

 

 

The effective portion of cash flow hedges recognized in other comprehensive income were net gains (losses) of $10.1$1.5 million, $(3.2) million and $(1.8)$4.8 million in 20182021, 2020 and 2017,2019 respectively. In the year ended December 31, 2018, the ineffective portion of cash flow hedges recognized in other income, net, was $3.8 million and insignificant in the years ended December 31, 2017 and 2016.

10.9. Fair Value Measurements

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 no0 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 3.3, except for pension assets discussed in Note 14.

The carrying value and fair value of debt as of December 31, 20182021 and 20172020 were as follows:

   
(In millions)  December 31, 2018   December 31, 2017 
     
    Carrying
Value
   Fair
Value
   Carrying
Value
   

Fair

Value

 

Revolving credit facility

  $320.0   $320.0   $615.0   $615.0 

Term Loan

   525.0    525.0         

Senior Notes, net of underwriting commissions and price discounts

   1,489.0    1,490.4    892.6    926.3 

(In millions)

 

December 31, 2021

 

 

December 31, 2020

 

 

 

Carrying
Value

 

 

Fair
Value

 

 

Carrying
Value

 

 

Fair
Value

 

Notes, net of underwriting commissions, price
   discounts and debt issuance costs

 

$

1,789.8

 

 

$

1,902.9

 

 

$

1,787.2

 

 

$

1,994.9

 

2019 Revolving Credit Agreement

 

 

520.0

 

 

 

520.0

 

 

 

785.0

 

 

 

785.0

 

2021 Term Loan

 

 

400.0

 

 

 

400.0

 

 

 

 

 

 

 

The estimated fair value of our term loan and revolving credit facility is determined primarily using broker quotes, which are level 2 inputs. The estimated fair value of our Senior Notes is determined by using quoted market prices of our debt securities, which are level 1 inputs.

63


Assets and liabilities measured at fair value on a recurring basis as of December 31, 20182021 and 20172020 were as follows:

 
(In millions)  Fair Value 

 

Fair Value

 

 
  2018   2017 

 

2021

 

 

 

2020

 

Assets:

     

 

 

 

 

 

 

 

Derivative asset financial instruments (level 2)

  $6.0   $1.0 

 

$

4.1

 

 

 

$

5.6

 

Deferred compensation program assets (level 2)

   9.3    7.5 

 

19.8

 

 

 

16.3

 

Total assets

  $15.3   $8.5 

 

$

23.9

 

 

 

$

21.9

 

Liabilities:

     

 

 

 

 

 

 

 

Derivative liability financial instruments (level 2)

  $1.9   $6.4 

 

$

1.5

 

 

 

$

6.5

 

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.

10. Common Stock

11.    Capital Stock

The Company has 750 million authorized shares of common stock, par value $0.01$0.01 per share and 60 million authorized shares of preferred stock, par value $0.01 per share. The number of shares of common stock and treasury stock and the share activity for 20182021 and 20172020 were as follows:

 

 

Common Shares

 

 

 

Treasury Shares

 

 

 

2021

 

 

 

2020

 

 

 

2021

 

 

 

2020

 

Balance at the beginning of the year

 

 

138,660,154

 

 

 

 

139,555,487

 

 

 

 

45,406,158

 

 

 

 

42,335,315

 

Stock plan shares issued

 

 

1,250,550

 

 

 

 

2,175,510

 

 

 

 

 

 

 

 

 

Shares surrendered by optionees

 

 

(144,280

)

 

 

 

(159,089

)

 

 

 

144,280

 

 

 

 

159,089

 

Common stock repurchases

 

 

(4,702,128

)

 

 

 

(2,911,754

)

 

 

 

4,702,128

 

 

 

 

2,911,754

 

Balance at the end of the year

 

 

135,064,296

 

 

 

 

138,660,154

 

 

 

 

50,252,566

 

 

 

 

45,406,158

 

   
   Common Shares   Treasury Shares 
     
    2018   2017   2018   2017 

Balance at the beginning of the year

   151,906,797    153,412,050    27,879,929    24,305,930 

Stock plan shares issued

   822,878    2,068,746         

Shares surrendered by optionees

   (230,550   (180,537   230,550    180,537 

Common stock repurchases

   (12,000,144   (3,393,462   12,000,144    3,393,462 

Balance at the end of the year

   140,498,981    151,906,797    40,110,623    27,879,929 

In December 2018, our Board of Directors increased the quarterly cash dividend by 10% to $0.22 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, 2018, no2021, 0 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 2018,2021, we repurchased approximately 12.04.7 million shares of outstanding common stock under the Company’s share repurchase program at a cost of $694.6for $447.7 million. As of December 31, 2018,2021, the Company’s total remaining share repurchase authorization under the remaining program was approximately $413.7$414.7 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.

64


12.11. Accumulated Other Comprehensive Income (Loss) Income

The reclassifications out of accumulated other comprehensive income (loss) income for the years ended December 31, 20182021 and 20172020 were as follows:

  
(In millions)       

 

 

 

 

 

 

 

  
Details about Accumulated Other Comprehensive
Income Components
       Affected Line Item in the
Consolidated Statements of Income
   

Details about Accumulated Other
Comprehensive Loss Components

 

Affected Line Item in the
Consolidated Statements of Income

  2018   2017   

 

2021

 

 

2020

 

 

Gains (losses) on cash flow hedges

     

 

 

 

 

 

 

 

Foreign exchange contracts

  $2.2   $0.4  Cost of products sold

 

$

0.3

 

$

(3.0

)

 

Cost of products sold

Interest rate contracts

   0.1      Other income, net

 

0.6

 

0.6

 

Interest expense

Commodity contracts

   (0.2   0.5  Cost of products sold

 

1.3

 

 

Cost of products sold

   2.1    0.9  Total before tax

 

2.2

 

(2.4

)

 

Total before tax

   (0.4   (0.1 Tax expense

 

0.2

 

 

Tax expense

  $1.7   $0.8  Net of tax

 

$

2.4

 

$

(2.4

)

 

Net of tax

Defined benefit plan items

     

 

 

 

 

 

 

 

Recognition of prior service cost

  $   $5.1  (a)

Recognition of actuarial (losses) gains

   (3.8   0.5  (a)
   (3.8   5.6  Total before tax

Recognition of actuarial losses

 

$

(0.8

)

 

$

(3.2

)

 

(a)

   0.8    (2.0 Tax expense

 

0.2

 

0.4

 

Tax benefit

  $(3.0  $3.6  Net of tax

 

$

(0.6

)

 

$

(2.8

)

 

Net of tax

Total reclassifications for the period

  $(1.3  $4.4  Net of tax

 

$

1.8

 

$

(5.2

)

 

Net of tax

(a)

(a)
These accumulated other comprehensive (loss) income components are included in the computation of net periodic benefit cost. Refer to Note 15, “Defined Benefit Plans,” for additional information.

Total 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.

Total accumulated other comprehensive income (loss) consists of net income and other changes in business equity from transactions and other events from sources other than shareholders.stockholders. It includes currency translation gains and losses, unrealized gains and losses from derivative instruments designated as cash flow hedges, and defined benefit plan adjustments. Theafter-tax components of and changes in accumulated other comprehensive (loss) income were as follows:

(In millions)

 

Foreign
Currency
Adjustments

 

 

Derivative
Hedging
 Gain (Loss)

 

 

Defined Benefit
Plan
Adjustments

 

 

 

Accumulated
Other
Comprehensive
(Loss) Income

 

Balance at December 31, 2018

 

$

(25.3

)

 

$

4.2

 

 

$

(45.9

)

 

 

$

(67.0

)

Amounts classified into accumulated other
   comprehensive (loss) income

 

 

13.8

 

 

 

5.1

 

 

 

(37.9

)

 

 

 

(19.0

)

Amounts reclassified into earnings

 

 

 

 

 

(3.8

)

 

 

25.8

 

 

 

 

22.0

 

Adoption of ASU 2018-02

 

 

 

 

 

 

 

 

(8.6

)

 

 

 

(8.6

)

Net current period other comprehensive (loss) income

 

 

13.8

 

 

 

1.3

 

 

 

(20.7

)

 

 

 

(5.6

)

Balance at December 31, 2019

 

$

(11.5

)

 

$

5.5

 

 

$

(66.6

)

 

 

$

(72.6

)

Amounts classified into accumulated other
   comprehensive (loss) income

 

 

18.7

 

 

 

(3.7

)

 

 

(2.7

)

 

 

 

12.3

 

Amounts reclassified into earnings

 

 

 

 

 

2.4

 

 

 

2.8

 

 

 

 

5.2

 

Net current period other comprehensive (loss) income

 

 

18.7

 

 

 

(1.3

)

 

 

0.1

 

 

 

 

17.5

 

Balance at December 31, 2020

 

$

7.2

 

 

$

4.2

 

 

$

(66.5

)

 

 

$

(55.1

)

Amounts classified into accumulated other
   comprehensive (loss) income

 

 

(3.9

)

 

 

1.1

 

 

 

35.1

 

 

 

 

32.3

 

Amounts reclassified into earnings

 

 

 

 

 

(2.4

)

 

 

0.6

 

 

 

 

(1.8

)

Net current period other comprehensive (loss) income

 

 

(3.9

)

 

 

(1.3

)

 

 

35.7

 

 

 

 

30.5

 

Balance at December 31, 2021

 

$

3.3

 

 

$

2.9

 

 

$

(30.8

)

 

 

$

(24.6

)

65

     
(In millions)  Foreign
Currency
Adjustments
  

Derivative

Hedging

Gain
(Loss)

  

Defined
Benefit

Plan
Adjustments

   Accumulated
Other
Comprehensive
(Loss) Income
 

Balance at December 31, 2015

  $(13.3 $2.1  $(41.3  $(52.5

Amounts classified into accumulated other comprehensive (loss) income

   (14.7  (6.2  5.3    (15.6

Amounts reclassified from accumulated other comprehensive (loss) income into earnings

      3.5   (7.3   (3.8

Net current period other comprehensive (loss) income

   (14.7  (2.7  (2.0   (19.4

Balance at December 31, 2016

  $(28.0 $(0.6 $(43.3  $(71.9

Amounts classified into accumulated other comprehensive (loss) income

   33.8   (1.0  4.3    37.1 

Amounts reclassified from accumulated other comprehensive (loss) income into earnings

      (0.8  (3.6   (4.4

Net current period other comprehensive (loss) income

   33.8   (1.8  0.7    32.7 

Balance at December 31, 2017

  $5.8  $(2.4 $(42.6  $(39.2

Amounts classified into accumulated other comprehensive (loss) income

   (31.1  8.3   (6.3   (29.1

Amounts reclassified into earnings

      (1.7  3.0    1.3 

Net current period other comprehensive (loss) income

   (31.1  6.6   (3.3   (27.8

Balance at December 31, 2018

  $(25.3 $4.2  $(45.9  $(67.0

13.

12. Stock-Based Compensation

As of December 31, 2018,2021, we had awards outstanding under two2 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—Plan - 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. 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, 2018,2021, approximately 4.62.2 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, arewere granted and subsequently expired, terminated, cancelled or forfeited, or arewere used to satisfy the required withholding taxes with respect to existing awards under the Plans. No new stock-based awards canPlans may be maderecycled back into the total numbers of shares available for issuance under the 2011 Plan, but there are outstanding stock options under the 2011 Plan that continue to be exercisable.Plan. 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 

 

2021

 

 

 

2020

 

 

 

2019

 

Restricted stock units

 

$

24.0

 

 

 

$

21.5

 

 

 

$

19.4

 

Stock option awards

  $8.6   $7.4   $7.2 

 

6.1

 

 

 

5.3

 

 

 

7.0

 

Restricted stock units

   21.3    21.6    17.2 

Performance awards

   6.3    13.6    6.7 

 

23.0

 

 

 

22.6

 

 

 

4.2

 

Director awards

   1.0    1.0    0.9 

 

1.3

 

 

 

0.9

 

 

 

1.2

 

Totalpre-tax expense

   37.2    43.6    32.0 

 

54.4

 

 

 

50.3

 

 

 

31.8

 

Tax benefit

   6.2    15.2    11.4 

 

9.9

 

 

 

8.7

 

 

 

6.0

 

Total after tax expense

  $31.0   $28.4   $20.6 

 

$

44.5

 

 

 

$

41.6

 

 

 

$

25.8

 

Included in compensation costs are cash-settled restricted stock units of $0.9$3.3 million, $2.3 million and $1.4 million that are classified as a liability.liability as of December 31, 2021, 2020 and 2019, respectively. Compensation costs that were capitalized in inventory were not material.

Restricted Stock Units

Restricted stock units (“RSUs”) 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. RSUs generally vest ratably over a three-year period. 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 unitRSU 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 unitsRSUs outstanding under the Plans for the year ended December 31, 20182021 was as follows:

 

 

Number of
Restricted
Stock Units

 

 

Weighted-Average
Grant-Date
Fair Value

 

  Number of Restricted
Stock Units
   

Weighted-Average
Grant-Date

Fair Value

 

Non-vested at December 31, 2017

   728,065   $54.59 

Non-vested at December 31, 2020

 

708,338

 

$

61.48

 

Granted

   356,860    61.07 

 

263,536

 

$

90.02

 

Vested

   (373,593   52.92 

 

(359,290

)

 

$

59.98

 

Forfeited

   (50,957   59.87 

 

(39,982

)

 

$

74.20

 

Non-vested at December 31, 2018

   660,375   $58.63 

Non-vested at December 31, 2021

 

572,602

 

$

74.92

 

The remaining unrecognizedpre-tax compensation cost related to restricted stock unitsRSUs at December 31, 20182021 was approximately $17.1$21.4 million, and the weighted-average period of time over which this cost will be recognized is 1.7 1.8 years. The fair value of restricted stock unitsRSUs that vested during 2018, 20172021, 2020 and 20162019 was $22.2$22.2 million, $20.3$24.0 million and $16.4$15.2 million, respectively.

66


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.Stock options granted under the Plans generally vest over a three-year period and generally have a maturity of ten years from the grant 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 

 

 

2021

 

 

 

2020

 

 

 

2019

 

Current expected dividend yield

  1.3%   1.4%    1.4% 

 

 

1.2

 %

 

 

1.4

%

 

 

1.5

%

Expected volatility

  24.0%   26.0%    30.0% 

 

 

35.1

%

 

 

25.9

%

 

 

27.0

%

Risk-free interest rate

  2.6%   1.9%    1.3% 

 

 

0.6

%

 

 

1.2

%

 

 

2.5

%

Expected term

  5 years   5.5 years    5.5 years 

 

 

5.2 years

 

 

 

5.3 years

 

 

 

5.0 years

 

Beginning in 2020, the determination of expected volatility is based on the volatility of Fortune Brands common stock. The determination of expected volatility in prior years 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, 20172021, 2020 and 20162019 was $14.14, $13.49$24.55, $15.21 and $12.70,$11.36, 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, 20182021 was as follows:

 

 

Options

 

 

Weighted-
Average
Exercise
Price

 

  Options   Weighted-
Average
Exercise
Price
 

Outstanding at December 31, 2017

   3,682,958   $36.28 

Outstanding at December 31, 2020

 

2,539,029

 

$

55.54

 

Granted

   628,614    63.44 

 

277,038

 

$

86.94

 

Exercised

   (214,727   22.86 

 

(848,895

)

 

$

49.27

 

Expired/forfeited

   (73,023   59.07 

 

(20,378

)

 

$

72.54

 

Outstanding at December 31, 2018

   4,023,822   $40.83 

Outstanding at December 31, 2021

 

1,946,794

 

$

62.56

 

Options outstanding and exercisable at December 31, 20182021 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 

 

 

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

 

$13.00 to $20.00

 

 

4,556

 

 

 

0.15

 

 

$

19.46

 

 

 

4,556

 

 

$

19.46

 

$20.01 to $87.54

 

 

1,942,238

 

 

 

6.69

 

 

$

62.67

 

 

 

1,217,180

 

 

$

56.22

 

 

 

 

1,946,794

 

 

 

6.68

 

 

$

62.56

 

 

 

1,221,736

 

 

$

56.07

 

(a)

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

(a)
At December 31, 2021, the aggregate intrinsic value of options outstanding was $86.3 million.
(b)
At December 31, 2021 the weighted-average remaining contractual life of options exercisable was 5.6 years and the aggregate intrinsic value of options exercisable was $62.1 million.

67

(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, 20182021 was $5.1$6.4 million, and the weighted-average period of time over which this cost will be recognized is 1.61.7 years. The fair value of options that vested during the years ended December 31, 2018, 20172021, 2020 and 20162019 was $6.7$5.5 million, $6.8$9.4 million and $6.0$7.1 million, respectively. The intrinsic value of Fortune Brands stock options exercised in the years ended December 31, 2018, 20172021, 2020 and 20162019 was $8.7$42.7 million, $70.6$64.0 million and $88.1$26.0 million, respectively.

Performance Share Awards

Performance share awards were granted to officers and certain employees of the Company and represent the right to earnsharesearnshares of Company common stock based on the achievement of company-widenon-GAAP performance conditions, including cumulative diluted earnings per share, average return on invested capital, average return on net tangible assetsand cumulative EBITDAduring 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 aboutperformanceaboutperformance share awards as of December 31, 2018,2021, 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

 

  Number of
Performance Share
Awards
   

Weighted-Average
Grant-Date

Fair Value

 

Non-vested at December 31, 2017

   428,328   $52.35 

Non-vested at December 31, 2020

 

576,459

 

$

57.54

 

Granted

   140,071    63.44 

 

194,644

 

$

90.57

 

Vested

   (136,822   47.48 

 

(30,295

)

 

$

63.42

 

Forfeited

   (22,486   57.41 

 

(102,072

)

 

$

65.06

 

Non-vested at December 31, 2018

   409,091   $57.50 

Non-vested at December 31, 2021

 

638,736

 

$

66.12

 

The remaining unrecognizedpre-tax compensation cost related to performance share awards at December 31, 20182021 was approximately $2.6$20.3 million, and the weighted-average period of time over which this cost will be recognized is 1.51.6 years. The fair value of performance share awards that vested during 20182021 was $13.8$1.9 million (218,912(30,295 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 feescash compensation 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, 20172021, 2020 and 2016,2019, we awarded 19,109, 15,31112,114, 20,181 and 16,47121,746 shares of Company common stock to outside directors with a weighted averageweighted-average fair value on the date of the award of $54.93, $63.43$107.73, $46.82 and $57.37,$54.48, respectively.

13. Revenue

14.    Revenue

Our principal performance obligations are the sale of kitchen and bath cabinets, faucets and accessories, fiberglass and steel entry-door systems and locks, safes, safety, security devices and decking, and kitchen and bath cabinets (collectively, “goods” or “products”). We recognize revenue for the sale of goods based on our assessment of when control transfers to our customers. For the majority of our sales, we recognize revenue at the point in time when we ship product from our facilities to our customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods to our customers. Payment terms on our product sales normally range from 30 to 90 days. Taxes assessed by a governmental authority that we collect are excluded from revenue. The expected costs associated with our contractual warranties will continue to be recognized as expense when the products are sold. See Note 18,17, “Product Warranties,” for further discussion.

68


We record estimates to reduce revenue for customer programs and incentives, which are considered variable consideration, and include price discounts, volume-based incentives, promotions and cooperative advertising when revenue is recognized in order to determine the amount of consideration the Company

will ultimately be entitled to receive. These estimates are based on historical and projected experience for each type of customer. In addition, for certain customer program incentives, we receive an identifiable benefit (goods or services) in exchange for the consideration given and record the associated expenditure in selling, general and administrative expenses.

We account for shipping and handling costs that occur after the customer has obtained control of a product as a fulfillment activity (i.e., as an expense) rather than as a promised service (i.e., as a revenue element). These costs are classified within selling, general and administrative expenses.

Settlement of our outstanding accounts receivable balances is normally within 30 to 90 days of the original sale transaction date. Obligations arise for us from customer rights to return our goods for any reason, including among others, product obsolescence, stock rotations,trade-in agreements for newer products and upon termination of a customer contract. We estimate future product returns at the time of sale based on historical experience and record a corresponding refund obligation, which amounted to $14.8$25.3 million and $30.5 million as of December 31, 2018.2021 and 2020, respectively. Refund obligations are classified within other current liabilities in our consolidated balance sheet. Return assets related to the refund obligation are measured at the carrying amount of the goods at the time of sale, less any expected costs to recover the goods and any expected reduction in value. Return assets are classified within other current assets and were approximately $2.3$2.2 million and $2.9 million as of December 31, 2018.2021 and 2020, respectively.

The Company disaggregates revenue from contracts with customers into (i) major sales distribution channels in the U.S. and (ii) total sales to customers outside the U.S. market as these categories depict the nature, amount, timing and uncertainty of revenues and cash flows that are affected by economic factors. The following table disaggregates our consolidated revenue by major sales distribution channels for the yearyears ended December 31, 2018.2021, 2020 and 2019.

(In millions)

 

December 31, 2021

 

 

December 31, 2020

 

 

December 31, 2019

 

Wholesalers(a)

 

$

3,517.2

 

 

$

2,720.6

 

 

$

2,682.8

 

Home Center retailers(b)

 

 

2,185.5

 

 

 

1,808.1

 

 

 

1,606.7

 

Other retailers(c)

 

 

440.6

 

 

 

345.6

 

 

 

304.8

 

Builder direct

 

 

259.5

 

 

 

220.0

 

 

 

229.4

 

U.S. net sales

 

 

6,402.8

 

 

 

5,094.3

 

 

 

4,823.7

 

International(d)

 

 

1,253.3

 

 

 

996.0

 

 

 

940.9

 

Net sales

 

$

7,656.1

 

 

$

6,090.3

 

 

$

5,764.6

 

(a)
Represents sales to customers whose business is oriented towards builders, professional trades and home remodelers, inclusive of sales through our customers’ respective internet website portals.
(b)
Represents sales to the three largest “Do-It-Yourself” retailers; The Home Depot, Inc., Lowes Companies, Inc. and Menards, Inc., inclusive of sales through their respective internet website portals.
(c)
Represents sales principally to our mass merchant and standalone independent e-commerce customers.
(d)
Represents sales in markets outside the United States, principally in China, Canada, Europe and Mexico.

  
(In millions)  December 31, 2018 

Wholesalers(1)

  $2,607.3 

Home Center retailers(2)

   1,452.3 

Other retailers(3)

   311.6 

Builder direct

   235.4 

U.S. net sales

   4,606.6 

International(4)

   878.5 

Net sales

  $5,485.1 

(1)

Represents sales to customers whose business is oriented towards builders, professional trades and home remodelers, inclusive of sales through our customers’ respective internet website portals.

(2)

Represents sales to the three largest“Do-It-Yourself” retailers; The Home Depot, Inc., Lowes Companies, Inc. and Menards, Inc., inclusive of sales through their respective internet website portals.

(3)

Represents sales principally to our mass merchant and standalone independente-commerce customers.

(4)

Represents sales in markets outside the United States, principally in Canada, China, Europe and Mexico.

Practical Expedients

Incremental costs of obtaining a contract include only those costs the Company incurs that would not have been incurred if the contract had not been obtained. These costs are required to be recognized as assets and amortized over the period that the related goods or services transfer to the customer. As a practical expedient, we expense as incurred costs to obtain a contract when the expected amortization period is one year or less. These costs are recorded within selling, general and administrative expenses.

15.14. Defined Benefit Plans

We have a number of pension plans in the United States, covering many of the Company’s employees,employees; however, the majority of these plans have been closedfrozen to new hires.participants and benefit accruals were frozen for active participants on December 31, 2016. The plans provide for payment of retirement

69


benefits, mainly commencing between the ages of 55 and 65.65. 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 20182021 relates to benefit accruals infor an hourly Union group within the defined benefit plan infor our DoorsOutdoors & Security segment. BenefitAll other benefit accruals under all otherour defined benefit pension plans were frozen as of, or prior to, December 31, 2016.

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.

In addition, the Company provides postretirement health care and life insurance benefits to certain retirees.

(In millions)

 

 

Pension Benefits

 

 

 

Postretirement Benefits

 

Obligations and Funded Status at December 31

 

 

2021

 

 

 

2020

 

 

 

2021

 

 

 

2020

 

Change in the Projected Benefit Obligation (PBO):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Projected benefit obligation at beginning of year

 

 

$

933.5

 

 

 

$

877.1

 

 

 

$

13.4

 

 

 

$

3.6

 

Projected benefit obligation acquired(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9.6

 

Service cost

 

 

 

0.4

 

 

 

 

0.4

 

 

 

 

0.6

 

 

 

 

0.4

 

Interest cost

 

 

 

24.0

 

 

 

 

28.3

 

 

 

 

0.4

 

 

 

 

0.2

 

Actuarial (loss) gain

 

 

 

(32.4

)

 

 

 

70.6

 

 

 

 

(0.7

)

 

 

 

0.2

 

Benefits paid

 

 

 

(40.2

)

 

 

 

(42.9

)

 

 

 

(0.4

)

 

 

 

(0.6

)

Projected benefit obligation at end of year

 

 

$

885.3

 

 

 

$

933.5

 

 

 

$

13.3

 

 

 

$

13.4

 

Accumulated benefit obligation at end of year
   (excludes the impact of future compensation increases)

 

 

$

885.3

 

 

 

$

933.5

 

 

 

$

 

 

 

$

 

Change in Plan Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of plan assets at beginning of year

 

 

$

784.9

 

 

 

$

677.2

 

 

 

$

 

 

 

$

 

Actual return on plan assets

 

 

 

48.4

 

 

 

 

101.3

 

 

 

 

 

 

 

 

 

Employer contributions

 

 

 

22.9

 

 

 

 

49.3

 

 

 

 

0.4

 

 

 

 

0.6

 

Benefits paid

 

 

 

(40.2

)

 

 

 

(42.9

)

 

 

 

(0.4

)

 

 

 

(0.6

)

Fair value of plan assets at end of year

 

 

$

816.0

 

 

 

$

784.9

 

 

 

$

 

 

 

$

 

Funded status (Fair value of plan assets less PBO)

 

 

$

(69.3

)

 

 

$

(148.6

)

 

 

$

(13.3

)

 

 

$

(13.4

)

(a)
Related to the Larson acquisition discussed in Note 4.

The actuarial loss is primarily a result of changes in discount rates from year to year.

   
(In millions) Pension Benefits  Postretirement Benefits 
    
Obligations and Funded Status at December 31 2018  2017  2018  2017 

Change in the Projected Benefit Obligation (PBO):

       

Projected benefit obligation at beginning of year

 $832.4  $791.7  $1.6  $3.6 

Service cost

  0.5   0.6       

Interest cost

  30.7   33.3       

Plan amendments

            

Actuarial loss (gain)

  (63.1  40.6   (0.2  (1.4

Benefits paid

  (37.3  (33.8     (0.4

Foreign exchange

           (0.2

Projected benefit obligation at end of year

 $763.2  $832.4  $1.4  $1.6 

Accumulated benefit obligation at end of year (excludes the impact of future compensation increases)

 $763.2  $832.4    

Change in Plan Assets:

       

Fair value of plan assets at beginning of year

 $656.6  $577.7  $  $ 

Actual return on plan assets

  (30.7  83.2       

Employer contributions

  11.0   29.5      0.5 

Benefits paid

  (37.3  (33.8     (0.5

Fair value of plan assets at end of year

 $599.6  $656.6  $  $ 

Funded status (Fair value of plan assets less PBO)

 $(163.6 $(175.8 $(1.4 $(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:

 

 

Pension Benefits

 

 

 

Postretirement Benefits

 

(In millions)

 

2021

 

 

 

2020

 

 

 

2021

 

 

 

2020

 

Current benefit payment liability

 

$

(1.4

)

 

 

$

(1.4

)

 

 

$

(1.5

)

 

 

$

(1.1

)

Accrued benefit liability

 

 

(67.9

)

 

 

 

(147.2

)

 

 

 

(11.8

)

 

 

 

(12.3

)

Net amount recognized

 

$

(69.3

)

 

 

$

(148.6

)

 

 

$

(13.3

)

 

 

$

(13.4

)

   
   Pension Benefits  Postretirement Benefits 
    
(In millions) 2018  2017  2018  2017 

Current benefit payment liability

 $(1.5 $(1.1 $(0.2 $(0.2

Accrued benefit liability

  (162.1  (174.7  (1.2  (1.4

Net amount recognized

 $(163.6 $(175.8 $(1.4 $(1.6

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 are-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 January 2018, we adopted ASU2017-07, which requires entities to present the defined benefit plannon-service related costs outside the operating income subtotal. The new guidance was applied retrospectively in the consolidated statement of comprehensive income. As a result, we reclassified

$9.6 million and $14.1 million of income from the operating income subtotal to other income, in the twelve months ended December 31, 2017 and 2016, respectively. The retrospective impact of adopting ASU2017-07 is as follows:

   
(In millions)  2017   2016 

Increase to cost of products sold

  $7.5   $8.5 

Increase to selling, general and administrative expenses

   2.1    5.6 

Decrease to operating income

  $(9.6  $(14.1

As of December 31, 2018,2021, we adopted the new Society of ActuariesMP-2018 MP-2021 mortality tables resulting in an immaterial decrease in plan benefit obligation and ongoing expenses. As of our pensionDecember 31, 2020, we adopted the new Society of Actuaries MP-2020 mortality tables, resulting in an immaterial increase in plan benefit obligation, and deferred actuarial losses in accumulated other comprehensive income. As of December 31, 2017, we adopted the new Society of ActuariesMP-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.

70


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, 2016

  $73.4   $ 

Recognition of actuarial (loss) gain

   (0.9   1.4 

Current year actuarial gain

   (5.3   (1.4

Net actuarial loss at December 31, 2017

  $67.2   $ 

Recognition of actuarial (loss) gain

   (3.9   0.1 

Current year actuarial loss (gain)

   8.5    (0.4

Net actuarial loss at December 31, 2018

  $71.8   $(0.3

Net prior service cost (credit) at December 31, 2016

  $   $(5.1

Amortization

       5.1 

Net prior service cost (credit) at December 31, 2017

  $   $ 

Amortization

        

Net prior service cost (credit) at December 31, 2018

  $   $ 

Total at December 31, 2018

  $71.8   $(0.3

(In millions)

 

Pension Benefits

 

 

 

Postretirement Benefits

 

Net actuarial loss (gain) at December 31, 2019

 

$

87.7

 

 

 

$

(0.3

)

Recognition of actuarial loss

 

 

(2.7

)

 

 

 

(0.1

)

Current year actuarial loss

 

 

2.1

 

 

 

 

1.0

 

Net actuarial loss due to curtailment

 

 

(0.6

)

 

 

 

 

Net actuarial loss (gain) at December 31, 2020

 

$

86.5

 

 

 

$

0.6

 

Recognition of actuarial loss

 

 

(1.1

)

 

 

 

0.3

 

Current year actuarial gain

 

 

(45.8

)

 

 

 

(0.9

)

Net actuarial loss at December 31, 2021

 

$

39.6

 

 

 

$

(0.0

)

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)

 

2021

 

 

 

2020

 

 

2019

 

 

 

2021

 

 

 

2020

 

 

2019

 

Service cost

 

$

0.4

 

 

 

$

0.4

 

 

$

0.4

 

 

 

$

0.6

 

 

 

$

0.4

 

 

$

0.2

 

Interest cost

 

 

24.0

 

 

 

 

28.3

 

 

 

32.9

 

 

 

 

0.4

 

 

 

 

0.2

 

 

 

0.2

 

Expected return on plan assets

 

 

(34.9

)

 

 

 

(32.8

)

 

 

(35.2

)

 

 

 

 

 

 

 

 

 

 

 

Recognition of actuarial losses (gains)

 

 

1.1

 

 

 

 

2.7

 

 

 

34.1

 

 

 

 

(0.3

)

 

 

 

0.1

 

 

 

0.6

 

Settlement/Curtailment losses (gains)

 

 

 

 

 

 

0.6

 

 

 

0.1

 

 

 

 

 

 

 

 

 

 

 

(0.1

)

Amortization of prior service credits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.2

 

Net periodic benefit (income) cost

 

$

(9.4

)

 

 

$

(0.8

)

 

$

32.3

 

 

 

$

0.7

 

 

 

$

0.7

 

 

$

1.1

 

Assumptions

 

Pension Benefits

 

 

 

Postretirement Benefits

 

 

 

2021

 

 

 

2020

 

 

2019

 

 

 

2021

 

 

 

2020

 

 

2019

 

Weighted-Average Assumptions Used to
   Determine Benefit Obligations at
   December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

 

2.9

%

 

 

 

2.6

%

 

 

3.3

%

 

 

 

3.9

%

 

 

 

5.9

%

 

 

6.4

%

Weighted-Average Assumptions Used to
   Determine Net Cost for Years Ended
   December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

 

2.6

%

 

 

 

3.3

%

 

 

4.4

%

 

 

 

5.9

%

 

 

 

6.4

%

 

 

4.2

%

Expected long-term rate of return on plan assets

 

 

4.4

%

 

 

 

4.5

%

 

 

4.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement Benefits

 

 

2021

 

 

 

2020

 

 

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

 

6.3/6.7

%

(a)

 

6.4/7.4

%

(a)

Rate that the cost trend rate is assumed to decline
   (the ultimate trend rate)

 

4.5

%

 

 

4.5

%

 

Year that the rate reaches the ultimate trend rate

 

2028

 

 

 

2027

 

 

   
Components of Net Periodic Benefit (Income) Cost Pension Benefits  Postretirement Benefits 
    
(In millions) 2018  2017  2016  2018  2017  2016 

Service cost

 $0.5  $0.6  $9.6  $  $  $ 

Interest cost

  30.7   33.3   34.4         0.3 

Expected return on plan assets

  (41.0  (37.3  (37.2         

Recognition of actuarial losses (gains)

  3.9   0.9      (0.1  (1.4  1.9 

Amortization of prior service credits

              (5.1  (13.5

Net periodic benefit (income) cost

 $(5.9 $(2.5 $6.8  $(0.1 $(6.5 $(11.3

   
Assumptions Pension Benefits Postretirement Benefits
    
   2018 2017 2016 2018 2017 2016

Weighted-Average Assumptions Used to
Determine Benefit Obligations at December 31:

         

Discount rate

 4.4% 3.8% 4.3% 4.2% 3.4% 3.4%

Rate of compensation increase

   4.0%   

Weighted-Average Assumptions Used to
Determine Net Cost for Years Ended December 31:

         

Discount rate

 3.8% 4.3% 4.6% 3.4% 3.4% 4.1%

Expected long-term rate of return on plan assets

 6.0% 6.4% 6.6%   

Rate of compensation increase

   4.0%   

  
   Postretirement Benefits 
   
    2018  2017 

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

   6.9/8.0%(a)   7.1/8.4%(a) 

Rate that the cost trend rate is assumed to decline (the ultimate trend rate)

   4.5  4.5

Year that the rate reaches the ultimate trend rate

   2027   2026 

(a)

The(a)

The pre-65 initial health care cost trend rate is shown first / followed by thepost-65 rate.

Aone-percentage-point change in assumed health care cost trend rates would have hadrate is shown first / followed by the following effects in 2018:post-65 rate.

71

   
(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, 20182021 and 20172020 were as follows:

 
(In millions)  Total as of
balance sheet date
 

 

Total as of
balance sheet date

 

 
  2018   2017 

 

2021

 

2020

 

Group annuity/insurance contracts (level 3)

  $23.6   $23.3 

 

$

25.5

 

$

24.8

 

Collective trusts:

    

 

 

 

 

 

 

Cash and cash equivalents

   7.7    12.5 

 

10.5

 

16.0

 

Equity

   197.7    285.9 

 

221.1

 

287.6

 

Fixed income

   324.6    277.7 

 

512.1

 

410.0

 

Multi-strategy hedge funds

   22.0    24.6 

 

22.0

 

24.6

 

Real estate

   24.0    32.6 

 

24.8

 

21.9

 

Total

  $599.6   $656.6 

 

$

816.0

 

$

784.9

 

A reconciliation of Level 3 measurements was as follows:

 

 

Group annuity/
insurance contracts

 

(In millions)

 

2021

 

 

 

2020

 

January 1

 

$

24.8

 

 

 

$

24.2

 

Actual return on assets related to assets still held

 

 

0.7

 

 

 

 

0.6

 

December 31

 

$

25.5

 

 

 

$

24.8

 

  
   Group annuity/
insurance contracts
 
  
(In millions) 2018  2017 

January 1

 $23.3  $22.8 

Actual return on assets related to assets still held

  0.3   0.5 

December 31

 $23.6  $23.3 

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 ASU2015-07 (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 $576.0$790.5 million and $633.3$760.1 million as of December 31, 20182021 and 2017,2020, 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 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, 20182021 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%0% to 75%75%, a fixed income allocation of 25%25% to 100%100%, a cash allocation of up to 25%25% and other investments of up to 20%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 20192022 expected blended long-term rate of return on plan assets of 6.0%4.4% 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.

72


Estimated Future Retirement Benefit Payments

The following retirement benefit payments are expected to be paid:

(In millions)

 

Pension
Benefits

 

 

 

Postretirement
Benefits

 

2022

 

$

42.6

 

 

 

$

1.2

 

2023

 

 

43.4

 

 

 

 

1.1

 

2024

 

 

44.3

 

 

 

 

1.1

 

2025

 

 

45.5

 

 

 

 

1.1

 

2026

 

 

46.4

 

 

 

 

1.1

 

Years 2027-2031

 

 

237.3

 

 

 

 

5.9

 

   
(In millions)  

Pension

Benefits

   Postretirement
Benefits
 

2019

  $39.4   $0.1 

2020

   41.0    0.1 

2021

   42.1    0.1 

2022

   43.4    0.1 

2023

   44.4    0.1 

Years 2024-2028

   234.7    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 $29.5$48.4 million, $29.1$36.7 million and $22.7$36.3 million in 2018, 20172021, 2020 and 2016,2019, respectively.

16.15. Income Taxes

The components of income from continuing operations before income taxes and noncontrolling interests were as follows:

  
(In millions)  2018   2017   2016 

 

 

2021

 

 

 

2020

 

 

2019

 

Domestic operations

  $456.7   $554.7   $513.8 

 

 

$

836.0

 

 

 

$

576.8

 

$

438.2

 

Foreign operations

   80.3    80.1    68.3 

 

 

169.1

 

 

 

154.0

 

137.1

 

Income before income taxes and noncontrolling interests

  $537.0   $634.8   $582.1 

 

 

$

1,005.1

 

 

 

$

730.8

 

$

575.3

 

Income tax expense in the consolidated statement of income consisted of the following:

(In millions)

 

 

2021

 

 

 

2020

 

 

2019

 

Current

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

$

153.0

 

 

 

$

100.0

 

 

$

94.9

 

Foreign

 

 

 

49.1

 

 

 

 

55.9

 

 

 

35.1

 

State and other

 

 

 

30.7

 

 

 

 

27.5

 

 

 

21.5

 

Deferred

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

 

2.5

 

 

 

 

(1.8

)

 

 

(6.9

)

Foreign

 

 

 

(2.8

)

 

 

 

(11.5

)

 

 

(3.1

)

State and Local

 

 

 

0.2

 

 

 

 

(1.3

)

 

 

2.5

 

Total income tax expense

 

 

$

232.7

 

 

 

$

168.8

 

 

$

144.0

 

73


A reconciliation of income taxes atbetween the 35% federal statutory income tax rate for 2016 and 2017 and 21% for 2018 to the incomeeffective tax provision reported wasrate is as follows:

  
(In millions)  2018   2017 2016 

 

 

2021

 

 

 

2020

 

 

2019

 

Income tax expense computed at federal statutory income tax rate

  $112.8   $222.2  $203.7 

 

 

$

211.1

 

 

 

$

153.5

 

$

120.8

 

Other income taxes, net of federal tax benefit

   13.7    13.4   12.6 

State and local income taxes, net of federal tax benefit

 

 

33.9

 

 

 

22.3

 

18.0

 

Foreign taxes at a different rate than U.S. federal statutory income tax rate

   3.5    (8.3  (7.6

 

 

9.0

 

 

 

3.0

 

1.4

 

Tax benefit on income attributable to domestic production activities

   0.0    (10.9  (13.0

Provision for foreign earnings repatriation, net

 

 

0.3

 

 

 

3.2

 

0.4

 

Net adjustments for uncertain tax positions

   4.1    11.6   13.2 

 

 

(12.6

)

 

 

(0.2

)

 

7.5

 

Share-based compensation (ASU2016-09)

   (2.1   (23.9  (27.8

 

 

(10.4

)

 

 

(11.5

)

 

(3.7

)

Tax Act impact

   5.5    (25.7   

Deferred tax impact of state tax rate changes

   3.5    (2.0  (1.1

 

 

(0.9

)

 

 

(0.7

)

 

3.1

 

Valuation allowance increase (decrease)

   3.0    (5.2  (2.1

Valuation allowance (decrease) increase

 

 

4.6

 

 

 

(7.1

)

 

3.4

 

Expiration of loss carryforwards

 

 

 

 

 

6.1

 

 

Miscellaneous other, net

   3.0    (11.7  (8.2

 

 

(2.3

)

 

 

0.2

 

(6.9

)

Income tax expense as reported

  $147.0   $159.5  $169.7 

 

 

$

232.7

 

 

 

$

168.8

 

$

144.0

 

Effective income tax rate

   27.4   25.1  29.2

 

 

23.2

%

 

 

23.1

%

 

25.0

%

The 2018 effective income tax rate was favorably impacted by the corporate tax rate reduction from 35% to 21% under The Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The 20182021 effective income tax rate was unfavorably impacted by the repeal of the Domestic Production Activity (Internal Revenue Code Section 199) Deduction,state and local income taxes, foreign income taxed at higher rates and a valuation allowance increase, an adjustmentincrease. This expense was offset by favorable benefits for the release of uncertain tax positions, primarily related to the provisional net benefit recorded in 2017 under the Tax Act,statute of limitations lapses, and share-based compensation.

The 2020 and 2019 effective income tax rates were unfavorably impacted by state and local income taxes unfavorable tax rates inand foreign jurisdictions, and increases in uncertain tax positions.

income taxed at higher rates. The 20172019 effective income tax rate was favorablyalso unfavorably impacted by the Tax Act. The effective incomeincreases in uncertain tax rates for 2017positions and 2016valuation allowances. Both 2020 and 2019 expenses were favorably impactedoffset by a tax benefit related to share-based compensation, 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.compensation.

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 aone-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 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 calculated our best estimate of the impact of the Tax Act on our 2017 effective income tax rate. As a result, the Company 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 included 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. In the quarter ended December 31, 2018, the Company completed its analysis in conjunction with the SAB 118 measurement period ending on December 22, 2018. The total tax provision impact for the year ended December 31, 2018 was an unfavorable adjustment of $5.5 million related primarily to certain deferred tax assets and liabilities.

The Tax Act included a provision for Global IntangibleLow-Taxed Income (GILTI). The Company elected an accounting policy to treat GILTI as a period cost when incurred. The GILTI provision is effective for taxable years of foreign corporations beginning after December 31, 2017.

A reconciliation of the beginning and ending amount of unrecognized tax benefits (“UTBs”) wasis as follows:

    
(In millions) 2018  2017   2016 

Unrecognized tax benefits — beginning of year

 $87.5  $58.2   $38.2 

Gross additions — current year tax positions

  9.1   31.0    10.7 

Gross additions — prior year tax positions

  9.3   10.9    10.4 

Gross additions (reductions) — purchase accounting adjustments

  1.0   4.0    9.7 

Gross reductions — prior year tax positions

  (14.5  (9.4   (9.8

Gross reductions — settlements with taxing authorities

  (8.9  (7.2   (1.0

Unrecognized tax benefits — end of year

 $83.5  $87.5   $58.2 

(In millions)

 

 

2021

 

 

 

2020

 

 

2019

 

Unrecognized tax benefits—beginning of year

 

 

$

96.1

 

 

 

$

88.0

 

 

$

83.5

 

Gross additions—current year tax positions

 

 

 

2.6

 

 

 

 

7.2

 

 

 

9.2

 

Gross additions—prior year tax positions

 

 

 

2.0

 

 

 

 

3.7

 

 

 

2.9

 

Gross additions (reductions)—purchase accounting adjustments

 

 

 

 

 

 

 

12.1

 

 

 

 

Gross reductions—prior year tax positions

 

 

 

(16.6

)

 

 

 

(11.7

)

 

 

(6.9

)

Gross reductions—settlements with taxing authorities

 

 

 

(1.0

)

 

 

 

(3.2

)

 

 

(0.7

)

Unrecognized tax benefits—end of year

 

 

$

83.1

 

 

 

$

96.1

 

 

$

88.0

 

The amount of UTBs that, if recognized as of December 31, 2018,2021, would affect the Company’s effective tax rate was $64.3is $69.2 million. It is reasonably possible that, within the next twelve months, total UTBs may decrease in the range of $1.4$4.1 million to $3.5$41.9 million primarily as a result of the conclusion of U.S. federal, state and foreign income tax proceedings.

We classify

The Company classifies interest and penalty accruals related to UTBs as income tax expense. In 2018, we2021, the Company recognized an interest and penalty expensebenefit of approximately $2.2$1.9 million. In 2017, we2020 and 2019, the Company recognized an interest and penalty expenseexpenses of approximately $2.0 million. In 2016, we recognized an interest$0.7 million and penalty expense$3.0 million, respectively. As of approximately $1.1 million. At December 31, 20182021 and 2017, we2020, the Company had accruals for the payment of interest and penalties of $14.4$15.5 million and $11.8$17.6 million, respectively.

We file

74


The Company files income tax returns in the U.S., various state and foreign jurisdictions. The Company is open and subject tocurrently under examination for tax years 2016 and subsequent by the U.S. Internal Revenue Service (“IRS”).for the periods related to 2017 and 2018. In addition to the U.S., we havethe Company has tax years that remain open and subject to examination by tax authorities in the following major taxing jurisdictions: Canada for years after 2013,2016, Mexico for years after 20122016 and China for years after 2014.

2017.

Income taxes in 2018, 2017 and 2016 were as follows:

    
(In millions)  2018   2017  2016 

Current

      

Federal

  $93.5   $133.1  $150.4 

Foreign

   26.4    22.4   22.3 

State and other

   24.1    22.8   22.9 

Deferred

      

Federal, state and other

   4.8    (27.2  (23.9

Foreign

   (1.8   8.4   (2.0

Total income tax expense

  $147.0   $159.5  $169.7 

The components of net deferred tax assets (liabilities) as of December 31, 20182021 and 20172020 were as follows:

  
(In millions)  2018   2017 

 

 

2021

 

 

 

2020

 

Deferred tax assets:

     

 

 

 

 

 

 

 

 

Compensation and benefits

  $31.5   $22.1 

 

 

$

46.1

 

 

 

$

43.3

 

Defined benefit plans

   39.3    43.7 

 

 

18.7

 

 

 

38.9

 

Capitalized inventories

   16.1    11.1 

 

 

28.4

 

 

 

18.4

 

Accounts receivable

   5.4    7.8 

 

 

20.6

 

 

 

16.0

 

Operating lease liabilities

 

 

50.9

 

 

 

43.3

 

Other accrued expenses

   55.2    45.6 

 

 

85.5

 

 

 

79.7

 

Net operating loss and other tax carryforwards

   21.2    25.6 

 

 

25.3

 

 

 

14.4

 

Valuation allowance

   (13.3   (11.0

 

 

(20.5

)

 

 

(9.7

)

Miscellaneous

   2.5    3.7 

 

 

0.1

 

 

 

1.2

 

Total deferred tax assets

   157.9    148.6 

 

 

255.1

 

 

 

245.5

 

Deferred tax liabilities:

     

 

 

 

 

 

 

 

 

LIFO inventories

   0.0    (4.2

Fixed assets

   (60.2   (44.5

 

 

(98.3

)

 

 

(86.4

)

Intangible assets

   (224.6   (232.0

 

 

(239.0

)

 

 

(220.9

)

Investment in partnership

   (3.8   (9.2

Operating lease assets

 

 

(48.5

)

 

 

(43.3

)

Other investments

 

 

(0.2

)

 

 

(6.8

)

Miscellaneous

   (20.0   (16.1

 

 

(16.3

)

 

 

(17.8

)

Total deferred tax liabilities

   (308.6   (306.0

 

 

(402.3

)

 

 

(375.2

)

Net deferred tax liability

  $(150.7  $(157.4

 

 

$

(147.2

)

 

 

$

(129.7

)

In accordance with ASC requirements for Income Taxes, deferred taxes were classified in the consolidated balance sheets as of December 31, 20182021 and 20172020 as follows:

  
(In millions)  2018   2017 

 

 

2021

 

 

 

2020

 

Other assets

   11.9    9.4 

 

 

28.8

 

 

 

30.8

 

Deferred income taxes

   (162.6   (166.8

 

 

(176.0

)

 

 

(160.5

)

Net deferred tax liability

  $(150.7  $(157.4

 

 

$

(147.2

)

 

 

$

(129.7

)

As of December 31, 20182021, and 2017,2020, the Company had deferred tax assets relatingrelated to net operating losses, capital losses and other tax carryforwards of $21.2$25.3 million and $25.6$14.4 million, respectively, of which approximately $7.1respectively. Approximately $2.9 million will expireexpires between 20192022 and 2023,2026, and the remainder of which will expire in 20242027 and thereafter.

The Company has provided a valuation allowanceevaluated its ability to reduce the carrying value of certain of theserealize tax benefits associated with deferred tax assets as management hasand concluded, that, based on the available evidence, itthat is more likely than not that thecertain of these deferred tax assets will not be fully realized. The valuation allowance at December 31, 2021, includes amounts set up against acquired federal and state net operating losses of Flo, that are limited in utilization. See Note 4, "Acquisitions and Dispositions" for additional information.

Under the Tax Act, the accumulated

Accumulated foreign earnings and profits of the Company’s foreign subsidiaries as of December 31, 2017 arewere subject to a deemed repatriation tax and should not be subject to additional

U.S. federal income tax upon an actual repatriation of thosethese earnings. As a result,of December 31, 2021, the Company has recorded an estimated deferred tax liability of $9.3 $7.3million for foreign and state taxes that wouldwill be payable on aupon distribution of thosethese earnings.

75


Subsequent to December 31, 2017, we consider the unremitted earnings and profits.

of certain foreign subsidiaries that impose local country taxes on dividends to be indefinitely reinvested. We have not provided for deferred taxes on the remaining book over tax outside basis differencesdifference of our foreign$201.1 million related to these subsidiaries. The outside basis differencesamount of foreign subsidiaries considered indefinitely reinvested totaled approximately $128.1million at December 31, 2018. The associatedunrecognized deferred tax liability on this basis differenceliabilities for local country withholding taxes that would be owed related to these earnings is less than $5$13.2 million.

17.

16. Restructuring and Other Charges

Pre-tax restructuring and other charges for the year ended December 31, 20182021 were as follows:

 
  Year Ended December 31, 2018 

 

Year Ended December 31, 2021

 

       Other Charges(a)      

 

 

 

 

 

Other Charges (a)

 

 

 

 

 

(In millions)  Restructuring
Charges
   Cost of
Products
Sold
   SG&A(b)   Total
Charges
 

 

Restructuring
Charges

 

 

 

Cost of
Products
Sold

 

 

SG&A(b)

 

 

 

Total
Charges

 

Plumbing

 

$

(1.1

)

 

 

$

2.0

 

$

2.1

 

 

 

$

3.0

 

Outdoors & Security

 

10.4

 

 

 

 

(0.6

)

 

 

9.8

 

Cabinets

  $16.8   $9.1   $0.3   $26.2 

 

4.2

 

 

 

3.7

 

 

 

 

7.9

 

Plumbing

   2.6    0.6    0.1    3.3 

Doors & Security

   4.7    2.4    (1.2   5.9 

Total

  $24.1   $12.1   $(0.8  $35.4 

 

$

13.5

 

 

 

$

5.7

 

$

1.5

 

 

 

$

20.7

 

(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,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.

(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

(b)

Selling, general and administrative expenses

Restructuring and other charges in 20182021 are largely related to our initiatives to consolidate and rationalize our manufacturing footprint and discontinue certain product lines in our Cabinets segment and severance costs associated with the relocation of manufacturing facilities within all our Outdoor & Security and Cabinets segments.

Pre-tax restructuring and other charges for the year ended December 31, 20172020 were as follows:

 
  Year Ended December 31, 2017 

 

Year Ended December 31, 2020

 

       Other Charges(a)      

 

 

 

 

 

Other Charges (a)

 

 

 

 

 

(In millions)  Restructuring
Charges
   Cost of
Products
Sold
   SG&A(b)   Total
Charges
 

 

Restructuring
Charges

 

 

 

Cost of
Products
Sold

 

 

SG&A(b)

 

 

 

Total
Charges

 

Plumbing

 

$

6.0

 

 

 

$

4.4

 

$

(1.7

)

 

 

$

8.7

 

Outdoors & Security

 

3.0

 

 

 

0.9

 

 

 

 

3.9

 

Cabinets

  $1.4   $1.6   $2.2   $5.2 

 

5.5

 

 

 

5.1

 

0.2

 

 

 

10.8

 

Plumbing

   2.8            2.8 

Doors & Security

   4.1    5.6    0.8    10.5 

Corporate

 

1.4

 

 

 

 

0.3

 

 

 

1.7

 

Total

  $8.3   $7.2   $3.0   $18.5 

 

$

15.9

 

 

 

$

10.4

 

$

(1.2

)

 

 

$

25.1

 

(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.

(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

(b)

Selling, general and administrative expenses

Restructuring and other charges in 2017, primarily2020 are largely related to losses on disposal of inventoryheadcount actions associated with exiting a product lineCOVID-19 across all segments and costs associated with changes in our Doors & Security segment and exiting a customer relationship in our Cabinets segment, as well as severance costsmanufacturing processes within our Doors & Security, Plumbing and Cabinets segments.segment.

76


Pre-tax restructuring and other charges for the year ended December 31, 20162019 were as follows:

 
  Year Ended December 31, 2016 

 

Year Ended December 31, 2019

 

       Other Charges(a)      

 

 

 

 

 

Other Charges (a)

 

 

 

 

 

(In millions)  Restructuring
Charges
   Cost of
Products
Sold
   SG&A(b)   Total
Charges
 

 

Restructuring
Charges

 

 

 

Cost of
Products
Sold

 

SG&A(b)

 

 

 

Total
Charges

 

Plumbing

 

$

2.8

 

 

 

$

2.6

 

$

2.8

 

 

 

$

8.2

 

Outdoors & Security

 

1.7

 

 

 

1.6

 

 

 

 

3.3

 

Cabinets

  $1.8   $   $   $1.8 

 

10.2

 

 

 

(0.1

)

 

0.6

 

 

 

10.7

 

Plumbing

   1.6    0.3    0.2    2.1 

Doors & Security

   10.5    4.2    0.7    15.4 

Total

  $13.9   $4.5   $0.9   $19.3 

 

$

14.7

 

 

 

$

4.1

 

$

3.4

 

 

 

$

22.2

 

(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.

(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

(b)

Selling, general and administrative expenses

Restructuring and other charges in 2016 primarily2019 largely related to severance costs and chargescosts associated with the relocation of a manufacturing facility withinclosing facilities across all our Doors & Security segment.segments.

Reconciliation of Restructuring Liability

 
(In millions)  

Balance at

12/31/17

   

2018

Provision

   

Cash

Expenditures (a)

 

Non-Cash

Write-offs (b)

   

Balance at

12/31/18

 

 

Balance at
12/31/20

 

2021
Provision

 

Cash
Expenditures
(a)

 

Non-Cash
Write-offs

 

Balance at
12/31/21

 

Workforce reduction costs

  $5.0   $21.4   $(16.3 $(0.2  $9.9 

 

$

6.9

 

$

11.4

 

$

(13.6

)

 

$

-

 

$

4.7

 

Other

   0.8    2.7    (2.4  (0.5   0.6 

 

0.7

 

2.1

 

(1.8

)

 

-

 

1.0

 

  $5.8   $24.1   $(18.7 $(0.7  $10.5 

 

$

7.6

 

$

13.5

 

$

(15.4

)

 

$

-

 

$

5.7

 

(a)

Cash expenditures primarily related to severance charges.

(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)

 

Balance at
12/31/19

 

 

2020
Provision

 

 

Cash
Expenditures
(a)

 

 

Non-Cash
Write-offs

 

 

Balance at
12/31/20

 

Workforce reduction costs

 

$

6.7

 

 

$

14.6

 

 

$

(14.4

)

 

$

 

 

$

6.9

 

Other

 

 

0.1

 

 

 

1.3

 

 

 

(0.7

)

 

 

 

 

 

0.7

 

 

 

$

6.8

 

 

$

15.9

 

 

$

(15.1

)

 

$

 

 

$

7.6

 

      
(In millions)  

Balance at

12/31/16

   

2017

Provision

   

Cash

Expenditures (a)

  

Non-Cash

Write-offs (b)

   

Balance at

12/31/17

 

Workforce reduction costs

  $2.4   $6.7   $(3.9 $(0.2  $5.0 

Other

   0.6    1.6    (1.3  (0.1   0.8 
   $3.0   $8.3   $(5.2 $(0.3  $5.8 
(a)
Cash expenditures primarily related to severance charges.

(a)

Cash expenditures primarily related to severance charges.

(b)

Non-cash write-offs include long-lived asset impairment charges attributable to restructuring actions.

18.17. Commitments

Purchase Obligations

Purchase obligations of the Company as of December 31, 20182021 were $369.9$959.1 million, of which $342.4$900.3 million is due within one year. Purchase obligations include contracts for raw materials and finished goods purchases, selling and administrative services, and capital expenditures.

Lease Commitments

Future minimum rental payments undernon-cancelable operating leases as of December 31, 2018 were as follows:

  
(In millions)     

2019

  $37.8 

2020

   29.6 

2021

   23.4 

2022

   18.9 

2023

   13.8 

Remainder

   58.8 

Total minimum rental payments

  $182.3 

Total rental expense for all operating leases (reduced by immaterial amounts from subleases) amounted to $48.4 million, $42.1 million and $43.5 million in 2018, 2017 and 2016, 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, 2018, 20172021, 2020 and 2016.2019.

(In millions)

 

2021

 

 

 

2020

 

 

2019

 

Reserve balance at the beginning of the year

 

$

24.5

 

 

 

$

24.7

 

 

$

24.9

 

Provision for warranties issued

 

 

36.6

 

 

 

 

25.4

 

 

 

25.4

 

Settlements made (in cash or in kind)

 

 

(35.0

)

 

 

 

(27.2

)

 

 

(25.8

)

Acquisition

 

 

0.3

 

 

 

 

1.5

 

 

 

 

Foreign currency

 

 

0.1

 

 

 

 

0.1

 

 

 

0.2

 

Reserve balance at end of year

 

$

26.5

 

 

 

$

24.5

 

 

$

24.7

 

77

    
(In millions)  2018   2017   2016 

Reserve balance at the beginning of the year

  $17.2   $16.2   $16.0 

Provision for warranties issued

   25.1    25.1    25.8 

Settlements made (in cash or in kind)

   (25.7   (24.3   (25.5

Acquisition

   8.9        0.3 

Foreign currency

   (0.6   0.2    (0.4

Reserve balance at end of year

  $24.9   $17.2   $16.2 

19.

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, Victoria+Albert, Perrin & Rowe Victoria + Albert and Shaws brands. The DoorsOutdoors & Security segment includes residential fiberglass and steel entry door systems under theTherma-Tru brand name, storm, screen and security doors under the Larson brand name, composite decking and railing under the Fiberon brand name, urethane millwork product lines under the Fypon brand name, locks, safety and security devices, and electronic security products under the Master Lock and American Lock brand names,brands, and fire resistant safes, security containers and commercial cabinets under the SentrySafe brand. The Cabinets segment includes stock, semi-custom and custom cabinetry, as well as vanities, for the kitchen, bath and other parts of the home under brand namenames including AOK, Diamond Brands, KitchenCraft, Homecrest, Omega and composite decking, railing and fencing under the Fiberon brand name.EVE. 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.expenses. Corporate assets consist primarily of cash.

The Company’s subsidiaries operate principally in the United States, Canada, Mexico, China and Western Europe.

 
(In millions)  2018   2017   2016 

 

2021

 

 

 

2020

 

 

 

2019

 

Net sales:

      

 

 

 

 

 

 

 

 

 

 

 

Plumbing

 

$

2,761.2

 

 

 

$

2,202.1

 

 

 

$

2,027.2

 

Outdoors & Security

 

2,039.9

 

 

 

1,419.2

 

 

 

1,348.9

 

Cabinets

  $2,418.6   $2,467.1   $2,397.8 

 

2,855.0

 

 

 

2,469.0

 

 

 

2,388.5

 

Plumbing

   1,883.3    1,720.8    1,534.4 

Doors & Security

   1,183.2    1,095.4    1,052.7 

Net sales

  $5,485.1   $5,283.3   $4,984.9 

 

$

7,656.1

 

 

 

$

6,090.3

 

 

 

$

5,764.6

 

Net sales to two2 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 2018, 20172021, 2020 and 2016.2019. All segments sell to both The Home Depot and Lowe’s. Net sales to The Home Depot were 13%14%, 13%15% and 13%14% of net sales in 2018, 20172021, 2020 and 2016,2019, respectively. Net sales to Lowe’s were 14%16%, 14%15% and 14%14% of net sales in 2018, 20172021, 2020 and 2016,2019, respectively.

(In millions)

 

2021

 

 

 

2020

 

 

 

2019

 

Operating income:

 

 

 

 

 

 

 

 

 

 

 

Plumbing

 

$

629.7

 

 

 

$

467.9

 

 

 

$

427.6

 

Outdoors & Security

 

 

291.9

 

 

 

 

201.3

 

 

 

 

172.3

 

Cabinets

 

 

279.3

 

 

 

 

235.7

 

 

 

 

178.3

 

Corporate

 

 

(110.5

)

 

 

 

(103.5

)

 

 

 

(79.7

)

Operating income

 

$

1,090.4

 

 

 

$

801.4

 

 

 

$

698.5

 

    
(In millions)  2018   2017   2016 
   

Operating income:

      

Cabinets

  $143.5   $267.2   $257.8 

Plumbing(b)

   375.3    358.5    314.9 

Doors & Security(b)

   155.6    146.9    126.4 

Less: Corporate expenses(a) (b)

   (79.2   (90.1   (80.5

Operating income

 

  $595.2   $682.5   $618.6 

(a)  Below is a table detailing Corporate expenses:

        

General and administrative expense

  $(79.2  $(85.0  $(80.5

Long-lived asset impairment

       (5.1    

Total Corporate expenses

  $(79.2  $(90.1  $(80.5

(b)

We revised our previously reported results in 2017 and 2016 for ASU2017-07, Presentation of Net Periodic and Postretirement Costs and to reflect our new Doors & Security segment resulting from the reorganization we announced in July 2018.

78


    
(In millions)  2018   2017   2016 

Total assets:

        

Cabinets

  $2,318.7   $2,416.3   $2,349.4 

Plumbing

   1,943.1    1,854.1    1,626.8 

Doors & Security

   1,526.0    1,032.2    995.1 

Corporate

   176.8    208.8    157.2 

Total assets

  $5,964.6   $5,511.4   $5,128.5 
  

Depreciation expense:

        

Cabinets

  $50.9   $42.8   $40.1 

Plumbing

   29.1    26.9    24.6 

Doors & Security

   30.2    25.9    26.2 

Corporate

   3.3    3.0    3.7 

Depreciation expense

  $113.5   $98.6   $94.6 
  

Amortization of intangible assets:

        

Cabinets

  $19.6   $19.7   $18.4 

Plumbing

   10.4    7.7    3.6 

Doors & Security

   6.1    4.3    6.1 

Amortization of intangible assets

  $36.1   $31.7   $28.1 
  

Capital expenditures:

        

Cabinets

  $73.8   $63.4   $61.7 

Plumbing

   41.4    43.5    48.3 

Doors & Security

   34.3    40.1    38.8 

Corporate

   0.6    18.0    0.5 

Capital expenditures, gross

   150.1    165.0    149.3 

Less: proceeds from disposition of assets

   (6.1   (0.4   (3.9

Capital expenditures, net

  $144.0   $164.6   $145.4 
  

Net sales by geographic region(a):

        

United States

  $4,606.6   $4,492.2   $4,258.5 

Canada

   433.1    427.6    406.4 

China

   260.6    202.3    175.0 

Other international

   184.8    161.2    145.0 

Net sales

  $5,485.1   $5,283.3   $4,984.9 
  

Property, plant and equipment, net:

        

United States

  $628.9   $562.3   $499.8 

Mexico

   103.4    89.0    90.8 

Canada

   46.0    50.5    45.5 

China

   22.5    24.8    22.7 

Other international

   12.6    13.4    3.7 

Property, plant and equipment, net

  $813.4   $740.0   $662.5 

(a)

Based on country of destination

(In millions)

 

2021

 

 

 

2020

 

 

 

2019

 

Total assets:

 

 

 

 

 

 

 

 

 

 

 

Plumbing

 

$

2,614.7

 

 

 

$

2,262.9

 

 

 

$

2,110.8

 

Outdoors & Security

 

 

2,619.4

 

 

 

 

2,453.8

 

 

 

 

1,596.6

 

Cabinets

 

 

2,489.7

 

 

 

 

2,366.8

 

 

 

 

2,355.7

 

Corporate

 

 

212.4

 

 

 

 

275.2

 

 

 

 

228.2

 

Total assets

 

$

7,936.2

 

 

 

$

7,358.7

 

 

 

$

6,291.3

 

Depreciation expense:

 

 

 

 

 

 

 

 

 

 

 

Plumbing

 

$

37.1

 

 

 

$

37.6

 

 

 

$

32.0

 

Outdoors & Security

 

 

40.7

 

 

 

 

33.3

 

 

 

 

32.3

 

Cabinets

 

 

44.4

 

 

 

 

47.9

 

 

 

 

44.3

 

Corporate

 

 

2.8

 

 

 

 

2.7

 

 

 

 

2.7

 

Depreciation expense

 

$

125.0

 

 

 

$

121.5

 

 

 

$

111.3

 

Amortization of intangible assets:

 

 

 

 

 

 

 

 

 

 

 

Plumbing

 

$

14.9

 

 

 

$

10.8

 

 

 

$

10.3

 

Outdoors & Security

 

 

31.5

 

 

 

 

13.4

 

 

 

 

13.3

 

Cabinets

 

 

17.7

 

 

 

 

17.8

 

 

 

 

17.8

 

Amortization of intangible assets

 

$

64.1

 

 

 

$

42.0

 

 

 

$

41.4

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

 

 

Plumbing

 

$

38.1

 

 

 

$

30.5

 

 

 

$

35.7

 

Outdoors & Security

 

 

124.2

 

 

 

 

76.4

 

 

 

 

63.6

 

Cabinets

 

 

51.6

 

 

 

 

27.3

 

 

 

 

30.9

 

Corporate

 

 

0.3

 

 

 

 

16.3

 

 

 

 

1.6

 

Capital expenditures, gross

 

 

214.2

 

 

 

 

150.5

 

 

 

 

131.8

 

Less: proceeds from disposition of assets

 

 

(1.9

)

 

 

 

(1.6

)

 

 

 

(4.2

)

Capital expenditures, net

 

$

212.3

 

 

 

$

148.9

 

 

 

$

127.6

 

Net sales by geographic region (a):

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

6,402.8

 

 

 

$

5,094.3

 

 

 

$

4,823.7

 

China

 

 

510.4

 

 

 

 

416.7

 

 

 

 

355.4

 

Canada

 

 

542.6

 

 

 

 

414.2

 

 

 

 

401.0

 

Other international

 

 

200.3

 

 

 

 

165.1

 

 

 

 

184.5

 

Net sales

 

$

7,656.1

 

 

 

$

6,090.3

 

 

 

$

5,764.6

 

Property, plant and equipment, net:

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

807.2

 

 

 

$

732.4

 

 

 

$

641.9

 

Mexico

 

 

122.1

 

 

 

 

104.7

 

 

 

 

103.2

 

Canada

 

 

40.4

 

 

 

 

41.2

 

 

 

 

43.9

 

China

 

 

23.7

 

 

 

 

25.0

 

 

 

 

22.5

 

Other international

 

 

16.1

 

 

 

 

14.1

 

 

 

 

12.7

 

Property, plant and equipment, net

 

$

1,009.5

 

 

 

$

917.4

 

 

 

$

824.2

 

(a)
Based on country of destination

79


20.    Quarterly Financial Data

Unaudited

(In millions, except per share amounts)

      
2018 1st  2nd  3rd  4th  

Full

Year

 

Net sales

 $1,254.6  $1,429.0  $1,380.8  $1,420.7  $5,485.1 

Gross profit

  439.6   524.1   493.9   501.8   1,959.4 

Operating income

  119.4   188.6   147.1   140.1   595.2 

Income from continuing operations, net of tax

  75.1   129.7   99.9   85.3   390.0 

Income (loss) from discontinued operations, net of tax

  (0.2           (0.2

Net income

  74.9   129.7   99.9   85.3   389.8 

Net income attributable to Fortune Brands

  75.0   129.6   99.8   85.2   389.6 

Basic earnings (loss) per common share

      

Continuing operations

  0.50   0.89   0.70   0.60   2.69 

Discontinued operations

               

Net income attributable to Fortune Brands

  0.50   0.89   0.70   0.60   2.69 

Diluted earnings (loss) per common share

      

Continuing operations

  0.49   0.88   0.69   0.60   2.66 

Discontinued operations

               

Net income attributable to Fortune Brands

  0.49   0.88   0.69   0.60   2.66 

      
2017  1st   2nd  3rd   4th   

Full

Year

 

Net sales

  $1,186.8   $1,365.4  $1,348.6   $1,382.5   $5,283.3 

Gross profit(a)

   414.1    513.3   505.3    492.3    1,925.0 

Operating income(a)

   111.0    209.2   199.5    162.8    682.5 

Income from continuing operations, net of tax

   77.4    140.3   129.6    128.0    475.3 

Income (loss) from discontinued operations, net of tax

       (2.6          (2.6

Net income

   77.4    137.7   129.6    128.0    472.7 

Net income attributable to Fortune Brands

   77.4    137.7   129.5    128.0    472.6 

Basic earnings (loss) per common share

          

Continuing operations

   0.50    0.91   0.84    0.84    3.10 

Discontinued operations

       (0.02          (0.02

Net income attributable to Fortune Brands

   0.50    0.89   0.84    0.84    3.08 

Diluted earnings (loss) per common share

          

Continuing operations

   0.50    0.90   0.83    0.83    3.05 

Discontinued operations

       (0.02          (0.02

Net income attributable to Fortune Brands

   0.50    0.88   0.83    0.83    3.03 

(a)

Amounts revised to reflect adoption of ASU2017-07 “Presentation of Net Periodic Pension and Postretirement Costs.”

In 2018, we recordedpre-tax defined benefit plan actuarial loss of $3.8 million—$0.3 million of actuarial loss ($0.2 million after tax) in the third quarter and $3.5 million of actuarial losses ($2.8 million after tax) in the fourth quarter.

In 2017, we recordedpre-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.

21.19. Earnings Per Share

The computations of earnings (loss) per common share were as follows:

 

    
(In millions, except per share data)  2018   2017   2016 

Income from continuing operations, net of tax

  $390.0   $475.3   $412.4 

Less: Noncontrolling interests

   0.2    0.1     

Income from continuing operations for EPS

   389.8    475.2    412.4 

Income (loss) from discontinued operations

   (0.2   (2.6   0.8 

Net income attributable to Fortune Brands

  $389.6   $472.6   $413.2 

Earnings (loss) per common share

       

Basic

       

Continuing operations

  $2.69   $3.10   $2.67 

Discontinued operations

       (0.02   0.01 

Net income attributable to Fortune Brands common stockholders

  $2.69   $3.08   $2.68 

Diluted

       

Continuing operations

  $2.66   $3.05   $2.61 

Discontinued operations

       (0.02   0.01 

Net income attributable to Fortune Brands common stockholders

  $2.66   $3.03   $2.62 

Basic average shares outstanding

   144.6    153.2    154.3 

Stock-based awards

   1.8    2.6    3.5 

Diluted average shares outstanding

   146.4    155.8    157.8 

Antidilutive stock-based awards excluded from weighted-average number of shares outstanding for diluted earnings per share

   1.5    0.5    0.5 

(In millions, except per share data)

 

2021

 

 

 

2020

 

 

2019

 

Net income

 

$

772.4

 

 

 

$

554.4

 

 

$

431.3

 

Less: Noncontrolling interests

 

 

 

 

 

 

1.3

 

 

 

(0.6

)

Net income attributable to Fortune Brands

 

$

772.4

 

 

 

$

553.1

 

 

$

431.9

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

5.62

 

 

 

$

3.99

 

 

$

3.09

 

Diluted earnings per common share

 

$

5.54

 

 

 

$

3.94

 

 

$

3.06

 

 

 

 

 

 

 

 

 

 

 

 

Basic average shares outstanding(a)

 

 

137.5

 

 

 

 

138.7

 

 

 

139.9

 

Stock-based awards

 

 

2.0

 

 

 

 

1.5

 

 

 

1.4

 

Diluted average shares outstanding(a)

 

 

139.5

 

 

 

 

140.2

 

 

 

141.3

 

Antidilutive stock-based awards excluded from weighted-average
   number of shares outstanding for diluted earnings per share

 

 

0.3

 

 

 

 

0.8

 

 

 

1.8

 

(a)
Reflects the impact of share repurchases during the years ended December 31, 2021, 2020 and 2019, respectively.

22.20. Other Income,Expense (Income), Net

The components of other income,expense (income), net for the years ended December 31, 2018, 20172021, 2020 and 20162019 were as follows:

    
(In millions)  2018   2017   2016 

Defined benefit plan(a)

  $(6.5  $(9.6  $(14.2

Asset impairment charge

  $   $7.0   $ 

Foreign currency (gains)/losses

  $(2.0  $0.9   $2.8 

Ineffective portion of cash flow hedge

  $(3.8        

Other items, net

  $(4.0       (1.2

Total other income, net

  $(16.3  $(1.7  $(12.6

(In millions)

 

2021

 

 

 

2020

 

 

2019

 

Defined benefit plan

 

$

(9.1

)

 

 

$

(1.3

)

 

$

31.9

 

Foreign currency losses (gains)

 

 

6.0

 

 

 

 

2.8

 

 

 

(0.7

)

Losses (gains) on equity investment

 

 

5.0

 

 

 

 

(11.0

)

 

 

 

Other items, net

 

 

(1.0

)

 

 

 

(3.8

)

 

 

(2.2

)

Total other expense (income), net

 

$

0.9

 

 

 

$

(13.3

)

 

$

29.0

 

(a)

Amounts revised to reflect adoption of ASU2017-07 “Presentation of Net Periodic Pension and Postretirement Costs.”

In the year ended December 31, 2018, the ineffective portion of cash flow hedges recognized in other items, net, was $3.8 million and insignificant in the years ended December 31, 2017 and 2016.

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.80


21. Contingencies

23.    ContingenciesLitigation

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.

Environmental

Compliance withWe 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 local laws regulating the dischargeinformation related to individual sites make it difficult to develop estimates of materials into the environment, or otherwise relating to the protectionfuture environmental remediation exposures. Some of the environment, did not have a material effect on capital expenditures, earningspotential liabilities relate to sites we own, and some relate to sites we no longer own or the competitive position of Fortune Brands.never owned. Several of our subsidiaries have been designated as potentially responsible parties (“PRPs”PRP”) under “Superfund”Superfund or similar state laws. As of December 31, 2018, ten2021, twelve such instances have not been dismissed, settled or otherwise resolved. In 2018,2021, 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, 20182021 and 2017,2020, we had accruals of $0.6$0.4 million and $0.7$0.3 million, respectively, relating to environmental compliance and cleanup including, but not limited to, the above mentioned Superfund sites.

22. Subsequent Events

Report of Independent Registered Public Accounting Firm

To theBoard 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 (the “Company”) as of December 31, 2018 and 2017,and the related consolidated statements of income, comprehensive income, equity and cash flowsfor eachIn January 2022, we acquired 100% of the three years in the period ended December 31, 2018, including the related notesoutstanding equity of Solar Innovations LLC, a leading producer of wide-opening exterior door systems and scheduleoutdoor enclosures, for a total gross purchase price of valuation and qualifying accounts for each of the three years in the period ended December 31, 2018 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, 2018 based on criteria established inInternal 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018in 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, 2018, based on criteria established inInternal Control — Integrated Framework (2013) issued by the COSO.

Basis for Opinions

approximately $63 million. The Company’s managementacquisition cost 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 consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial 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 Fiber Composites LLC (“Fiberon”) from its assessment of internal control over financial reporting

as of December 31, 2018 because it was acquired by the Company in a purchase business combination during 2018. We have also excluded Fiberon from our audit of internal control over financial reporting. Fiberon is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 2% and 0.7%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.

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 arefurther subject to the risk that controls may become inadequate becausefinal post-closing working capital adjustment. We financed the transaction using cash on hand and borrowings under our existing revolving credit facilities. Solar Innovations will be part of changesFortune Brands’ Outdoors & Security business segment. Its complementary product offerings will support the segment’s outdoor living strategy.

81


Item 9. Changes in conditions, or that the degreeand Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

(a)
Evaluation of compliance with the policies or procedures may deteriorate.

Disclosure Controls and Procedures.

/s/ PricewaterhouseCoopers LLP

Chicago, IL

February 25, 2019

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 inRules 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 ofDecember 31, 2018.2021.

(b)
Management’s Report on Internal Control Over Financial Reporting.

(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 ActRule 13a-15(f) and15d-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 reporting based on the framework inInternal Control — Integrated Framework(2013) issued by the

Committee of Sponsoring Organization of the Treadway Commission (“COSO”). Based on our evaluation under the framework inInternal Control — Integrated Framework(2013) issued by the COSO, our management concluded that our internal control over financial reporting was effective as of December 31, 2018. The Company acquired Fiber Composites LLC (“Fiberon”) in September 2018 and therefore, as permitted by the Securities and Exchange Commission, we excluded Fiberon from the scope of our management’s assessment of the effectiveness of our internal controls over financial reporting as of December 31, 2018. The total assets and total revenues of Fiberon represent 2.0% and 0.7%, respectively, of the related consolidated financial statements amounts as of and for the year ended December 31, 2018.2021.

PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm, has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018,2021, as stated in their report which appears herein.

(c)
Changes in Internal Control Over Financial Reporting.

(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, 20182021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information.

None.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Not applicable.

82


PART III

Item 10. Directors, Executive Officers and Corporate Governance.

See the information under the captions “Election“Proposal 1 – Election of Directors,” “Corporate Governance - Board Committees - Audit Committee” and “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” contained in the 20192022 Proxy Statement, which information is incorporated herein by reference. See the information under the caption “Executive Officers of the Registrant”"information about our Executive Officers" contained in Part I of this Annual Report on Form10-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/governing-high-standards. 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.

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“2021 Executive Compensation,” “CEO Pay Ratio” and “Compensation Committee Report” contained in the 20192022 Proxy Statement, which information is incorporated herein by reference.reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

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 20192022 Proxy Statement, which information is incorporated herein by reference. See also the “Equity Compensation Plan Information” table contained in the 20192022 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 20192022 Proxy Statement, which information is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services.

Item 14.

Principal Accountant Fees and Services.

See the information under the captions “Fees of Independent Registered Public Accounting Firm” and “Approval of Audit andNon-Audit Services” in the 20192022 Proxy Statement, which information is incorporated herein by reference.

83


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):

(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, 2018, 20172021, 2020 and 20162019 contained in Item 8 hereof.

Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 20172021, 2020 and 20162019 contained in Item 8 hereof.

Consolidated Balance Sheets as of December 31, 20182021 and 20172020 contained in Item 8 hereof.

Consolidated Statements of Cash Flows for the years ended December 31, 2018, 20172021, 2020 and 20162019 contained in Item 8 hereof.

Consolidated Statements of Equity for the years ended December 31, 2018, 20172021, 2020 and 20162019 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. (PCAOB ID Number: 238)

(2)
Financial Statement Schedules

(2)

Financial Statement Schedules

See Financial Statement Schedule of the Company and subsidiaries at page 95.89.

(3)
Exhibits

(3)

Exhibits

2.1.

2.1.

StockEquity Purchase Agreement dated as of August 19, 2014 by and amongNovember 16, 2020 between Fortune Brands Doors, Inc., Fortune Brands Home & Security, Inc., Fortune Brands Windows  & Doors, Inc. and Ply Gem Industries, Inc.the owners of Larson Manufacturing Company of South Dakota and its affiliated companies, is incorporated herein by reference to Exhibit 2.1 to the Company’s QuarterlyCompany's Annual Report on Form10-Q 10-K filed on October 31, 2014, Commission file number1-35166.†February 24, 2021.

3.1.

2.2.

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 Form8-K filed on March  30, 2015, Commission file number1-35166.

3.1.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 Form10-Q filed on November 5, 2012, Commission file number1-35166.2012.

3.2.

3.2.

Amended and Restated Bylaws of Fortune Brands Home & Security, Inc., as adopted September 27, 2011,effective February 23, 2021, are incorporated herein by reference to Exhibit 3.23.1 to the Company’s Current Report on Form8-K filed on September  30, 2011, Commission file number1-35166.February 23, 2021.

4.1.

Description of Securities are incorporated herein by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10‑K filed on February 26, 2020.

4.1.

4.2.

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 Form8-K filed on June 16, 2015, Commission file number1-35166.2015.

4.3.

4.2.

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 Form8-K 8‑K filed on June 16, 2015, Commission file number1-35166.2015.

4.4.

4.3.

Second Supplemental Indenture, dated as of September 21, 2018, by andamong Fortune Brands Home & Security, Inc. Wilmington Trust National Association as Trustee, and Citibank, N.A., as Securities Agent is incorporated by reference to Exhibit 4.2 to the Company’s current report on Form8-K filed on September 21, 2018, Commission file number1-35166.2018.

84


4.4.

4.5.

FormThird Supplemental Indenture, dated as of global certificate for the Company’s 3.000% Senior Notes due 2020September 13, 2019, 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 4.34.1 to the Company’s Current Reportcurrent report on Form8-K filed on June 16, 2015, Commission file number1-35166.September 13, 2019.

4.6.

4.5.

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 Form8-K on June 16, 2015, Commission file number1-35166.2015.

4.7.

4.6.

Form of global certificate for the Company’s 4.000% Senior Notes due 2023 is incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form8-K filed on September 21, 2018, Commission file number1-35166.2018.

4.8.

Form of global certificate for the Company’s 3.250% Senior Notes due 2029 is incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on September 13, 2019.

10.1.

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 Form8-K filed on September 30, 2011, Commission file number1-35166.2011.

10.2.

10.2.

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 Form8-K filed on September 15, 2011, Commission file number1-35166.2011.

10.3.

10.3.

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 number1-35166.

10.4.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 Form10-Q filed on November 1, 2013, Commission file number1-35166.
10.5.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 Form10-Q filed on October 31, 2014, Commission file number1-35166.
10.6.$1,250,000,000 Second Amended and Restated Credit Agreement dated as of June  30, 2016, by and among the Company, the lenders party thereto and JPMorgan ChasChase Bank, N.A., as Administrative Agent, dated September 30, 2019 is incorporated herein by reference to Exhibit 10.110.2 to the Company’s Quarterly Report on Form10-Q 10‑Q filed on August 4, 2016, Commission file number1-35166.October 31, 2019.

10.4.

10.7.

$350,000,000400,000,000 Credit Agreement dated as of March  29, 2018, by and among Fortune Brands Home & Security, Inc.,the Company, the lenders party thereto and JPMorganJP Morgan Chase Bank, N.A., as Administrative Agent.Agent, dated April 29, 2020, is incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 2, 2018, Commission file number 1-35166.1, 2020.

10.5.

10.8.

First Amendment and Incremental Agreement dated August  31, 2018 to the $350,000,000364-Day Term Loan Credit Agreement dated March  29, 2018, by and amongbetween Fortune Brands Home & Security, Inc., as borrower, the lenders party thereto Barclays Bank Plc, the incremental lender and JPMorgan Chase Bank, N.A., as Administrative Agentadministrative agent, is incorporated herein by reference to Exhibit 10.1 to the Company’s QuarterlyCurrent Report on Form 10-Q8-K filed on November 8, 2018, Commission file number 1-35166.December 2, 2021.

10.6.

10.9.

Form of Commercial Paper Dealer Agreement between Fortune Brands Home & Security, Inc. 2011 Long-Term Incentive Plan, as issuer, and the Dealer parties thereto, is incorporated herein by reference to Exhibit 10.110.2 to the Company’s Registration StatementCompany's Current Report on FormS-8 8-K filed on October 3, 2011, Commission file number333-177145.*December 2, 2021.

10.7.

10.10.

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 number1-35166.2013.*

10.8.

Fortune Brands Home & Security, Inc. 2011 Long-Term Incentive Plan is incorporated hereinby reference to Exhibit 10.1 to the Company’s registration Statement on Form S-8 filed on October 3, 2011.*

10.11.

10.9.

Fortune Brands Home & Security, Inc. 2013 Long-Term Incentive Plan is incorporated herein by reference to Appendix A to the Company’s Definitive Proxy Statement filed on March 5, 2013, Commission file number1-35166.2013.*

10.10.

10.12.

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 Form10-Q filed on November 2, 2016, Commission file number1-35166.2016.*

10.11.

10.13.

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 Form8-K filed on October 11, 2011, Commission file number1-35166.*

10.14.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 Form10-K filed on February 22, 2012, Commission file number1-35166.2012.*

85


10.12.

10.15.

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 Form10-K filed on February 27, 2013, Commission file number1-35166.2013.*

10.13.

10.16.

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 Form10-K filed on February 26, 2014, Commission file number1-35166.2014.*

10.14.

10.17.

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 Form10-Q filed on April 28, 2016, Commission file number1-35166.*

10.18.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 Form10-Q filed on April 28, 2016, Commission file number1-35166.2016.*

10.15.

Form of Stock Option Agreement for awards under the Fortune Brands Home & Security, Inc. 2013 Long-Term Incentive, is incorporated herein by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K filed on February 26, 2020.*

10.19.

10.16.

Form of 2016 Restricted Stock UnitPerformance 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 10.2210.14 to the Company’s Annual reportReport on Form10-K filed on February 28, 2017, Commission file number1-35166.26, 2020.*

10.17.

10.20.

Form of Performance ShareRestricted 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 10.2310.15 to the Company’s Annual Report on Form10-K filed on February 28, 2017, Commission file number1-31566.26, 2020.*

10.18.

10.21.

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 Form10-K filed on February 28, 2017, Commission file number1-31566.*

10.22.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 Form10-K filed on February 28, 2017, Commission file number1-31566.*
10.23.Form of Agreement for the Payment of Benefits Following Termination of Employment between the Company and each of Christopher J. Klein,Nicholas I. Fink, Patrick D. Hallinan, Robert K. Biggart,Hiranda S. Donoghue, Sheri R. Grissom, John D. Lee, May Russell, Marty Thomas and Tracey L. Belcourt, Brain C. Lantz and Marty Thomas, is incorporated herein by reference to Exhibit 10.23 to the Company’s Annual Report on Form10-K filed on February 28, 2018, Commission file number1-31566.2018.*

10.19.

10.24.

Form of Agreement for the Payment of Benefits Following Termination of Employment for each of Michael P. Bauer, Nicholas I. Fink,R. David Banyard, Jr., Brett E. Finley and DavidCheri M. Randich,Phyfer, is incorporated herein by reference to Exhibit 10.24 to the Company’s Annualannual Report on Form10-K filed on February 28, 2018, Commission file number1-31566.2018.*

10.20.

10.25.

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 Form10-K 10‑K filed on February 27, 2013, Commission file number1-35166.2013.*

10.21.

10.26.

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 Form10-K filed on February 22, 2012, Commission file number1-35166.2012.*

10.22.

10.27.

Fortune Brands Home & Security, Inc. Deferred Compensation Plan, amended & restated as of February 27, 2017 is incorporated herein by reference to Exhibit 10.30 to the Company’s Annual Report on Form10-K filed on February 28, 2017, commission file number1-35166.2017.*

21.

21.

Subsidiaries of the Company.**

23.

23.

Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP.**

24.

24.

Powers of Attorney relating to execution of this Annual Report on Form10-K.**

31.1.

31.1.

Certificate of Chief Executive Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002.**

31.2.

31.2.

Certificate of Chief Financial Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002.**

32.

32.

Joint CEO/CFO Certification Required Under Section 906 of the Sarbanes-Oxley Act of 2002.**

86


101.

The following materials from the Fortune Brands Home & Security, Inc. Annual Report on Form10-K 10‑K for the year ended December 31, 20182021 formatted in extensibleInline eXtensible Business Reporting Language (XBRL)(iXBRL): (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)(vi) the Consolidated Statements of Equity, and (vi) the Notes to the Consolidated Financial Statements.**

104.

The cover page of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, formatted in Inline XBRL and contained in Exhibit 101.**

* 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** Indicates the Securities and Exchange Commission upon request.exhibit is being furnished or filed herewith, as applicable.

Item 16. Form10-K Summary

None.

87


Signatures

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.

FORTUNE BRANDS HOME & SECURITY, INC.

(The Company)

Date: February 25, 2019

28, 2022

By:

/s/  CHRISTOPHERJ.KLEIN

Christopher J. Klein

/s/ nicholas i. fink

Nicholas I. Fink

Chief Executive Officer (principal executive officer)

/s/  PATRICKD.HALLINAN

/s/ patrick d. hallinan

Patrick D. Hallinan

Senior Vice President and Chief Financial Officer (principal

(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/ CHRISTOPHERJ.KLEINnicholas i. fink

/s/ A.D.DAVIDMACKAYsusan s. kilsby*

Christopher J. Klein,Nicholas I. Fink, Chief Executive Officer and Director (principal

(principal executive officer)

Date: February 25, 201928, 2022

A.D. David Mackay,Susan S. Kilsby, Director

Date: February 25, 2019

/S/  PATRICKD.HALLINAN

/s/  JOHNG.MORIKIS*28, 2022

/s/ patrick d. hallinan

/s/ a.d. david mackay*

Patrick D. Hallinan, Senior Vice President and Chief Financial Officer (principal financial officer)

Date: February 25, 201928, 2022

John G. Morikis,A.D. David Mackay, Director

Date: February 25, 2019

/s/  DANNYLUBURIC

/s/  DAVIDM.THOMAS*28, 2022

/s/ danny luburic

/s/ john g. morikis *

Danny Luburic, Vice President Controller

(principal accounting officer)

Date: February 25, 201928, 2022

John G. Morikis, Director

Date: February 28, 2022

/s/ amit banati*

/s/ jeffery s. perry*

Amit Banati, Director

Date: February 28, 2022

Jeffery S. Perry, Director

Date: February 28, 2022

/s/ irial finan*

/s/ david m. thomas*

Irial Finan, Director

Date: February 28, 2022

David M. Thomas, Director

Date: February 25, 2019

/s/  ANNFRITZHACKETT*

/s/  RONALDV.WATERS,III*28, 2022

/s/ ann fritz hackett*

/s/ ronald v. waters, iii*

Ann Fritz Hackett, Director

Date: February 25, 201928, 2022

Ronald V. Waters, III, Director

Date: February 25, 201928, 2022

*By:

/s/ SUSANS.KILSBY*

/s/  NORMANH.WESLEY*Hiranda Donaghue

Susan S. Kilsby, Director

Date: February 25, 2019

Norman H. Wesley, Director

Date: February 25, 2019

/s/  IRIALFINAN*

Irial Finan, Director

Date: February 25, 2019

Hiranda Donaghue, Attorney-in-Fact

*By:

 /s/  ROBERT K. BIGGART

Robert K. Biggart,Attorney-in-Fact

88


Schedule II Valuation and Qualifying Accounts

For the years ended December 31, 2018, 20172021, 2020 and 20162019

       
(In millions)  Balance at
Beginning of
Period
   Charged to
Expense
  Reclassifications(c)  Less:
Write-offs
and
Deductions(a)
   Business
Acquisition(b)
   Balance at
End of
Period
 

2018:

          

Allowance for cash discounts and sales allowances

  $84.0   $216.1  $(16.0 $199.5   $   $84.6 

Allowance for doubtful accounts

   3.3    1.5      1.4    0.3    3.7 

Allowance for deferred tax assets

   11.0    2.3              13.3 

2017:

          

Allowance for cash discounts, returns and sales allowances

  $68.2   $205.7  $3.0  $192.9   $   $84.0 

Allowance for doubtful accounts

   7.4    0.2      4.5    0.2    3.3 

Allowance for deferred tax assets

   16.4    (5.4             11.0 

2016:

          

Allowance for cash discounts, returns and sales allowances

  $  50.3   $  148.6     $  130.7   $   $  68.2 

Allowance for doubtful accounts

   5.8    4.3      2.7        7.4 

Allowance for deferred tax assets

   19.7    (3.3             16.4 

(In millions)

 

Balance at
Beginning of
Period

 

 

Charged to
Expense

 

 

Reclassifications
(c)

 

 

Write-offs
and
Deductions (a)

 

 

Business
Acquisition (b)

 

 

Balance at
End of
Period

 

2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for cash discounts and sales
   allowances

 

$

21.0

 

 

$

241.8

 

 

$

(3.5

)

 

$

245.8

 

 

$

 

 

$

13.5

 

Allowance for credit losses

 

 

6.7

 

 

 

5.9

 

 

 

 

 

 

4.4

 

 

 

 

 

 

8.2

 

Customer program allowance

 

 

132.0

 

 

 

278.7

 

 

 

23.4

 

 

 

250.8

 

 

 

 

 

 

183.3

 

Allowance for deferred tax assets

 

 

9.7

 

 

 

4.6

 

 

 

6.2

 

 

 

 

 

 

 

 

 

20.5

 

2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for cash discounts and sales
   allowances

 

$

17.0

 

 

$

258.3

 

 

$

(28.8

)

 

$

228.3

 

 

 

2.8

 

 

$

21.0

 

Allowance for credit losses

 

 

3.0

 

 

 

5.1

 

 

 

2.2

 

 

 

3.6

 

 

 

 

 

 

6.7

 

Customer program allowance

 

 

79.9

 

 

 

 

 

 

52.1

 

 

 

 

 

 

 

 

 

132.0

 

Allowance for deferred tax assets

 

 

16.8

 

 

 

(7.1

)

 

 

 

 

 

 

 

 

 

 

 

9.7

 

2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for cash discounts and sales
   allowances

 

$

16.4

 

 

$

198.6

 

 

$

(11.7

)

 

$

186.3

 

 

$

 

 

$

17.0

 

Allowance for credit losses

 

 

3.7

 

 

 

1.6

 

 

 

 

 

 

2.3

 

 

 

 

 

 

3.0

 

Customer program allowance

 

 

68.2

 

 

 

 

 

 

11.7

 

 

 

 

 

 

 

 

 

79.9

 

Allowance for deferred tax assets

 

 

13.3

 

 

 

3.5

 

 

 

 

 

 

 

 

 

 

 

 

16.8

 

(a)

Net of recoveries of amounts written off in prior years and immaterial foreign currency impact.

(a)
Net of recoveries of amounts written off in prior years and immaterial foreign currency impact.
(b)
Represents purchase accounting adjustment related to the Larson acquisition within our Outdoors & Security segment in 2020.
(c)
Represents the reclassification of certain liabilities to customer program allowance due to the adoption of CECL across all segments for 2021, 2020 and 2019.

89

(b)

Represents purchase accounting adjustment related to the Fiberon acquisition within our Doors and Security segment in 2018. 2017 represents a valuation allowance on an acquired net operating loss carryforward (Norcraft Canada).

(c)

Represents reclassification of reserve for returns to a separate liability account due to our adoption of the revenue recognition standard and a reclassification of sales allowances to certain customer program liabilities across all segments during 2018. 2017 represents a reclassification of certain customer program liabilities to sales allowances (reduction to accounts receivable) in the Doors & Security segment.

95