UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30,April 1, 20222023
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-35166
FORTUNE BRANDS HOME & SECURITY, INC.Fortune Brands Innovations, Inc.
(Exact name of Registrant as specified in its charter)
Delaware | 62-1411546 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
520 Lake Cook Road, Deerfield, Illinois 60015-5611
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (847) 484-4400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock |
| New York Stock Exchange |
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 Regulation S-T (§232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, at July 15, 2022April 14, 2023 was 129,316,984126,709,841.
1
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
FORTUNE BRANDS HOME & SECURITY,INNOVATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the SixThirteen Weeks Ended April 1, 2023 and
Three Months Ended June 30,March 31, 2022 and 2021
(In millions, except per share amounts)
(Unaudited)
|
| Six Months Ended |
|
| Three Months Ended |
| ||||||||||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| Thirteen Weeks Ended April 1, 2023 |
|
| Three Months Ended March 31, 2022 |
| ||||||
Net sales |
| $ | 4,028.3 |
|
| $ | 3,707.1 |
|
| $ | 2,111.0 |
|
| $ | 1,936.1 |
|
| $ | 1,040.0 |
|
| $ | 1,140.2 |
|
Cost of products sold |
|
| 2,585.7 |
|
|
| 2,357.2 |
|
|
| 1,347.9 |
|
|
| 1,230.3 |
|
|
| 631.7 |
|
|
| 671.8 |
|
Selling, general and administrative expenses |
|
| 844.1 |
|
|
| 766.1 |
|
|
| 434.6 |
|
|
| 394.6 |
|
|
| 260.8 |
|
|
| 276.4 |
|
Amortization of intangible assets |
|
| 32.1 |
|
|
| 32.6 |
|
|
| 16.1 |
|
|
| 16.0 |
|
|
| 12.6 |
|
|
| 11.6 |
|
Asset impairment charges |
|
| 26.0 |
|
|
| 0 |
|
|
| 26.0 |
|
|
| 0 |
| ||||||||
Restructuring charges |
|
| 2.9 |
|
|
| 7.9 |
|
|
| 2.3 |
|
|
| 0.3 |
|
|
| 3.1 |
|
|
| 0.6 |
|
Operating income |
|
| 537.5 |
|
|
| 543.3 |
|
|
| 284.1 |
|
|
| 294.9 |
|
|
| 131.8 |
|
|
| 179.8 |
|
Interest expense |
|
| 52.3 |
|
|
| 42.6 |
|
|
| 30.5 |
|
|
| 21.2 |
|
|
| 26.8 |
|
|
| 21.7 |
|
Other expense (income), net |
|
| (1.5 | ) |
|
| 2.0 |
|
|
| (0.2 | ) |
|
| (1.3 | ) | ||||||||
Income before taxes |
|
| 486.7 |
|
|
| 498.7 |
|
|
| 253.8 |
|
|
| 275.0 |
| ||||||||
Other income, net |
|
| (6.3 | ) |
|
| (2.1 | ) | ||||||||||||||||
Income from continuing operations before income taxes |
|
| 111.3 |
|
|
| 160.2 |
| ||||||||||||||||
Income tax |
|
| 113.8 |
|
|
| 103.7 |
|
|
| 61.8 |
|
|
| 57.8 |
|
|
| 25.7 |
|
|
| 34.0 |
|
Net income |
| $ | 372.9 |
|
| $ | 395.0 |
|
| $ | 192.0 |
|
| $ | 217.2 |
| ||||||||
Income from continuing operations, net of tax |
|
| 85.6 |
|
|
| 126.2 |
| ||||||||||||||||
(Loss) income from discontinued operations, net of tax |
|
| (1.0 | ) |
|
| 54.7 |
| ||||||||||||||||
Net Income |
| $ | 84.6 |
|
| $ | 180.9 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Basic earnings per common share |
| $ | 2.83 |
|
| $ | 2.85 |
|
| $ | 1.47 |
|
| $ | 1.57 |
|
|
|
|
|
|
| ||
Continuing operations |
| $ | 0.67 |
|
| $ | 0.95 |
| ||||||||||||||||
Discontinued operations |
|
| (0.01 | ) |
|
| 0.41 |
| ||||||||||||||||
Basic earnings per share |
| $ | 0.66 |
|
| $ | 1.36 |
| ||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||
Diluted earnings per common share |
| $ | 2.80 |
|
| $ | 2.81 |
|
| $ | 1.46 |
|
| $ | 1.55 |
|
|
|
|
|
|
| ||
Continuing operations |
| $ | 0.67 |
|
| $ | 0.94 |
| ||||||||||||||||
Discontinued operations |
|
| (0.01 | ) |
|
| 0.40 |
| ||||||||||||||||
Diluted earnings per share |
| $ | 0.66 |
|
| $ | 1.34 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Comprehensive income |
| $ | 425.3 |
|
| $ | 411.7 |
|
| $ | 184.5 |
|
| $ | 229.8 |
|
| $ | 83.9 |
|
| $ | 240.8 |
|
See notes to condensed consolidated financial statements.
2
FORTUNE BRANDS HOME & SECURITY,INNOVATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
|
| June 30, |
|
| December 31, |
| ||
Assets |
|
|
|
|
|
| ||
Current assets |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 360.6 |
|
| $ | 471.5 |
|
Accounts receivable less allowances for discounts and credit losses |
|
| 998.5 |
|
|
| 885.7 |
|
Inventories |
|
| 1,446.7 |
|
|
| 1,193.8 |
|
Other current assets |
|
| 258.0 |
|
|
| 193.5 |
|
Total current assets |
|
| 3,063.8 |
|
|
| 2,744.5 |
|
Property, plant and equipment, net of accumulated depreciation |
|
| 1,082.8 |
|
|
| 1,009.5 |
|
Operating lease assets |
|
| 184.0 |
|
|
| 191.7 |
|
Goodwill |
|
| 2,479.6 |
|
|
| 2,465.1 |
|
Other intangible assets, net of accumulated amortization |
|
| 1,334.6 |
|
|
| 1,383.8 |
|
Other assets |
|
| 189.3 |
|
|
| 141.6 |
|
Total assets |
| $ | 8,334.1 |
|
| $ | 7,936.2 |
|
Liabilities and equity |
|
|
|
|
|
| ||
Current liabilities |
|
|
|
|
|
| ||
Short-term debt |
| $ | 0 |
|
| $ | 400.0 |
|
Accounts payable |
|
| 756.3 |
|
|
| 764.9 |
|
Other current liabilities |
|
| 685.2 |
|
|
| 806.2 |
|
Total current liabilities |
|
| 1,441.5 |
|
|
| 1,971.1 |
|
Long-term debt |
|
| 3,357.9 |
|
|
| 2,309.8 |
|
Deferred income taxes |
|
| 184.2 |
|
|
| 176.0 |
|
Accrued defined benefit plans |
|
| 74.3 |
|
|
| 79.7 |
|
Operating lease liabilities |
|
| 149.8 |
|
|
| 158.8 |
|
Other non-current liabilities |
|
| 174.0 |
|
|
| 176.0 |
|
Total liabilities |
|
| 5,381.7 |
|
|
| 4,871.4 |
|
Commitments and contingencies (see Note 17) |
|
|
|
|
|
| ||
Stockholders' equity |
|
|
|
|
|
| ||
Common stock(a) |
|
| 1.9 |
|
|
| 1.9 |
|
Paid-in capital |
|
| 3,046.2 |
|
|
| 3,018.3 |
|
Accumulated other comprehensive loss |
|
| 27.8 |
|
|
| (24.6 | ) |
Retained earnings |
|
| 3,145.0 |
|
|
| 2,807.9 |
|
Treasury stock |
|
| (3,268.5 | ) |
|
| (2,738.7 | ) |
Total stockholders' equity |
|
| 2,952.4 |
|
|
| 3,064.8 |
|
Total liabilities and equity |
| $ | 8,334.1 |
|
| $ | 7,936.2 |
|
|
| April 1, |
|
| December 31, |
| ||
Assets |
|
|
|
|
|
| ||
Current assets |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 539.1 |
|
| $ | 642.5 |
|
Accounts receivable less allowances for discounts and credit losses |
|
| 559.0 |
|
|
| 521.8 |
|
Inventories |
|
| 931.1 |
|
|
| 1,021.3 |
|
Other current assets |
|
| 272.0 |
|
|
| 274.8 |
|
Total current assets |
|
| 2,301.2 |
|
|
| 2,460.4 |
|
Property, plant and equipment, net of accumulated depreciation |
|
| 805.8 |
|
|
| 783.7 |
|
Operating lease assets |
|
| 111.9 |
|
|
| 118.9 |
|
Goodwill |
|
| 1,643.6 |
|
|
| 1,640.7 |
|
Other intangible assets, net of accumulated amortization |
|
| 990.7 |
|
|
| 1,000.8 |
|
Other assets |
|
| 119.5 |
|
|
| 116.4 |
|
Total assets |
| $ | 5,972.7 |
|
| $ | 6,120.9 |
|
Liabilities and equity |
|
|
|
|
|
| ||
Current liabilities |
|
|
|
|
|
| ||
Short-term debt |
| $ | 599.5 |
|
| $ | 599.2 |
|
Accounts payable |
|
| 423.7 |
|
|
| 421.6 |
|
Other current liabilities |
|
| 390.0 |
|
|
| 523.9 |
|
Total current liabilities |
|
| 1,413.2 |
|
|
| 1,544.7 |
|
Long-term debt |
|
| 2,074.9 |
|
|
| 2,074.3 |
|
Deferred income taxes |
|
| 143.0 |
|
|
| 136.9 |
|
Accrued defined benefit plans |
|
| 66.7 |
|
|
| 79.9 |
|
Operating lease liabilities |
|
| 90.0 |
|
|
| 95.4 |
|
Other non-current liabilities |
|
| 102.4 |
|
|
| 102.8 |
|
Total liabilities |
|
| 3,890.2 |
|
|
| 4,034.0 |
|
Commitments and contingencies (see Note 17) |
|
|
|
|
|
| ||
Stockholders' equity |
|
|
|
|
|
| ||
Common stock(a) |
|
| 1.9 |
|
|
| 1.9 |
|
Paid-in capital |
|
| 3,094.1 |
|
|
| 3,069.6 |
|
Accumulated other comprehensive income (loss) |
|
| 42.9 |
|
|
| 37.4 |
|
Retained earnings |
|
| 2,402.4 |
|
|
| 2,323.8 |
|
Treasury stock |
|
| (3,458.8 | ) |
|
| (3,345.8 | ) |
Total stockholders' equity |
|
| 2,082.5 |
|
|
| 2,086.9 |
|
Total liabilities and equity |
| $ | 5,972.7 |
|
| $ | 6,120.9 |
|
(a) Common stock, par value $0.01 per share; 186.0186.7 million shares and 185.3186.2 million shares issued at June 30, 2022April 1, 2023 and December 31, 2021,2022, respectively.
See notes to condensed consolidated financial statements.
3
FORTUNE BRANDS HOME & SECURITY,INNOVATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the SixThirteen Weeks Ended April 1, 2023 and
Three Months Ended June 30,March 31, 2022 and 2021
(In millions)
(Unaudited)
|
| 2022 |
|
| 2021 |
| ||
Operating activities |
|
|
|
|
|
| ||
Net income |
| $ | 372.9 |
|
| $ | 395.0 |
|
Non-cash adjustments: |
|
|
|
|
|
| ||
Depreciation |
|
| 61.7 |
|
|
| 62.6 |
|
Amortization of intangibles |
|
| 32.1 |
|
|
| 32.6 |
|
Non-cash lease expense |
|
| 22.2 |
|
|
| 20.9 |
|
Stock-based compensation |
|
| 27.5 |
|
|
| 24.4 |
|
Deferred taxes |
|
| (0.5 | ) |
|
| 7.1 |
|
Asset impairment charges |
|
| 26.0 |
|
|
| 0 |
|
Amortization of deferred financing fees |
|
| 1.8 |
|
|
| 2.1 |
|
Loss on equity investments |
|
| 0 |
|
|
| 2.9 |
|
(Gain) loss on sale of property, plant and equipment |
|
| (5.9 | ) |
|
| 1.2 |
|
Changes in assets and liabilities: |
|
|
|
|
|
| ||
Increase in accounts receivable |
|
| (110.8 | ) |
|
| (106.0 | ) |
Increase in inventories |
|
| (247.4 | ) |
|
| (173.1 | ) |
(Decrease) increase in accounts payable |
|
| (1.0 | ) |
|
| 78.7 |
|
(Increase) decrease in other assets |
|
| (17.1 | ) |
|
| 0.5 |
|
Decrease in accrued expenses and other liabilities |
|
| (110.2 | ) |
|
| (100.2 | ) |
(Decrease) increase in accrued taxes |
|
| (9.4 | ) |
|
| 14.0 |
|
Net cash provided by operating activities |
|
| 41.9 |
|
|
| 262.7 |
|
Investing activities |
|
|
|
|
|
| ||
Capital expenditures (a) |
|
| (115.6 | ) |
|
| (65.8 | ) |
Proceeds from the disposition of assets |
|
| 8.0 |
|
|
| 1.7 |
|
Cost of acquisitions, net of cash acquired |
|
| (61.6 | ) |
|
| 5.2 |
|
Net cash used in investing activities |
|
| (169.2 | ) |
|
| (58.9 | ) |
Financing activities |
|
|
|
|
|
| ||
Issuance of short-term debt |
|
| 700.0 |
|
|
| 0 |
|
Repayment of short-term debt |
|
| (1,100.0 | ) |
|
| 0 |
|
Issuance of long-term debt |
|
| 4,123.7 |
|
|
| 535.0 |
|
Repayment of long-term debt |
|
| (3,073.3 | ) |
|
| (500.0 | ) |
Proceeds from the exercise of stock options |
|
| 0.4 |
|
|
| 32.1 |
|
Treasury stock purchases |
|
| (505.0 | ) |
|
| (156.0 | ) |
Employee withholding taxes related to stock-based compensation |
|
| (24.8 | ) |
|
| (8.4 | ) |
Dividends to stockholders |
|
| (73.6 | ) |
|
| (72.0 | ) |
Other financing, net |
|
| (20.3 | ) |
|
| (0.1 | ) |
Net cash provided by (used in) financing activities |
|
| 27.1 |
|
|
| (169.4 | ) |
Effect of foreign exchange rate changes on cash |
|
| (11.3 | ) |
|
| 5.9 |
|
Net (decrease) increase in cash and cash equivalents |
| $ | (111.5 | ) |
| $ | 40.3 |
|
Cash, cash equivalents and restricted cash(b) at beginning of period |
| $ | 476.1 |
|
| $ | 425.0 |
|
Cash, cash equivalents and restricted cash(b) at end of period |
| $ | 364.6 |
|
| $ | 465.3 |
|
|
| Thirteen Weeks Ended April 1, 2023 |
|
| Three Months Ended March 31, 2022 |
| ||
Operating activities |
|
|
|
|
|
| ||
Net income |
| $ | 84.6 |
|
| $ | 180.9 |
|
Non-cash adjustments: |
|
|
|
|
|
| ||
Depreciation |
|
| 19.3 |
|
|
| 30.9 |
|
Amortization of intangibles |
|
| 12.6 |
|
|
| 16.0 |
|
Non-cash lease expense |
|
| 8.1 |
|
|
| 10.9 |
|
Stock-based compensation |
|
| 9.5 |
|
|
| 12.3 |
|
Deferred taxes |
|
| 7.4 |
|
|
| 5.7 |
|
Amortization of deferred financing fees |
|
| 1.0 |
|
|
| 0.8 |
|
Gain on sales of property, plant and equipment |
|
| — |
|
|
| (6.1 | ) |
Changes in assets and liabilities: |
|
|
|
|
|
| ||
Increase in accounts receivable |
|
| (35.7 | ) |
|
| (118.1 | ) |
Decrease (increase) in inventories |
|
| 91.6 |
|
|
| (128.2 | ) |
Increase (decrease) in accounts payable |
|
| 2.7 |
|
|
| (37.2 | ) |
Decrease (increase) in other assets |
|
| 7.7 |
|
|
| (27.1 | ) |
Decrease in accrued expenses and other liabilities |
|
| (116.9 | ) |
|
| (151.8 | ) |
(Decrease) increase in accrued taxes |
|
| (15.8 | ) |
|
| 27.9 |
|
Net cash provided by (used in) operating activities |
|
| 76.1 |
|
|
| (183.1 | ) |
Investing activities |
|
|
|
|
|
| ||
Capital expenditures (a) |
|
| (42.6 | ) |
|
| (60.8 | ) |
Proceeds from the disposition of assets |
|
| — |
|
|
| 8.0 |
|
Cost of acquisitions, net of cash acquired |
|
| — |
|
|
| (61.6 | ) |
Net cash used in investing activities |
|
| (42.6 | ) |
|
| (114.4 | ) |
Financing activities |
|
|
|
|
|
| ||
Issuance of short-term debt |
|
| — |
|
|
| 700.0 |
|
Repayment of short-term debt |
|
| — |
|
|
| (1,100.0 | ) |
Issuance of long-term debt |
|
| — |
|
|
| 2,874.5 |
|
Repayment of long-term debt |
|
| — |
|
|
| (1,814.0 | ) |
Proceeds from the exercise of stock options |
|
| 2.3 |
|
|
| 0.2 |
|
Treasury stock purchases(b) |
|
| (100.0 | ) |
|
| (377.1 | ) |
Employee withholding taxes related to stock-based compensation |
|
| (12.1 | ) |
|
| (24.3 | ) |
Dividends to stockholders |
|
| (29.5 | ) |
|
| (37.2 | ) |
Other financing, net |
|
| — |
|
|
| (18.9 | ) |
Net cash (used in) provided by financing activities |
|
| (139.3 | ) |
|
| 203.2 |
|
Effect of foreign exchange rate changes on cash |
|
| 2.2 |
|
|
| 0.7 |
|
Net decrease in cash and cash equivalents |
| $ | (103.6 | ) |
| $ | (93.6 | ) |
Cash, cash equivalents and restricted cash(c) at beginning of period |
| $ | 648.3 |
|
| $ | 476.1 |
|
Cash, cash equivalents and restricted cash(c) at end of period |
| $ | 544.7 |
|
| $ | 382.5 |
|
The Condensed Consolidated Statements of Cash Flows presented above include cash flows from continuing and discontinued operations. Refer to Note 4, Acquisitions and Dispositions, for additional details.
See notes to condensed consolidated financial statements.
4
FORTUNE BRANDS HOME & SECURITY,INNOVATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the SixThirteen Weeks Ended April 1, 2023 and
Three Months Ended June 30,March 31, 2022 and 2021
(In millions)
(Unaudited)
|
| Common |
|
| Paid-In |
|
| Accumulated |
|
| Retained |
|
| Treasury |
|
| Total |
| ||||||
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 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 395.0 |
|
|
| - |
|
|
| 395.0 |
|
Other comprehensive income (loss) |
|
| - |
|
|
| - |
|
|
| 16.7 |
|
|
| - |
|
|
| - |
|
|
| 16.7 |
|
Stock options exercised |
|
| 0.1 |
|
|
| 32.1 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 32.2 |
|
Stock-based compensation |
|
| - |
|
|
| 24.4 |
|
|
| - |
|
|
| - |
|
|
| (8.4 | ) |
|
| 16.0 |
|
Treasury stock purchases |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (156.0 | ) |
|
| (156.0 | ) |
Dividends ($0.26 per common share) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (35.9 | ) |
|
| - |
|
|
| (35.9 | ) |
Balance at June 30, 2021 |
| $ | 1.9 |
|
| $ | 2,982.8 |
|
| $ | (38.4 | ) |
| $ | 2,539.3 |
|
| $ | (2,442.1 | ) |
| $ | 3,043.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at December 31, 2021 |
| $ | 1.9 |
|
| $ | 3,018.3 |
|
| $ | (24.6 | ) |
| $ | 2,807.9 |
|
| $ | (2,738.7 | ) |
| $ | 3,064.8 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 372.9 |
|
|
| - |
|
|
| 372.9 |
|
Other comprehensive income (loss) |
|
| - |
|
|
| - |
|
|
| 52.4 |
|
|
| - |
|
|
| - |
|
|
| 52.4 |
|
Stock options exercised |
|
| - |
|
|
| 0.4 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 0.4 |
|
Stock-based compensation |
|
| - |
|
|
| 27.5 |
|
|
| - |
|
|
| - |
|
|
| (24.8 | ) |
|
| 2.7 |
|
Treasury stock purchases |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (505.0 | ) |
|
| (505.0 | ) |
Dividends ($0.28 per common share) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (35.8 | ) |
|
| - |
|
|
| (35.8 | ) |
Balance at June 30, 2022 |
| $ | 1.9 |
|
| $ | 3,046.2 |
|
| $ | 27.8 |
|
| $ | 3,145.0 |
|
| $ | (3,268.5 | ) |
| $ | 2,952.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| Common |
|
| Paid-In |
|
| Accumulated |
|
| Retained |
|
| Treasury |
|
| Total |
| ||||||
Balance at March 31, 2021 |
| $ | 1.9 |
|
| $ | 2,955.1 |
|
| $ | (51.0 | ) |
| $ | 2,358.0 |
|
| $ | (2,339.6 | ) |
| $ | 2,924.4 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 217.2 |
|
|
| - |
|
|
| 217.2 |
|
Other comprehensive income (loss) |
|
| - |
|
|
| - |
|
|
| 12.6 |
|
|
| - |
|
|
| - |
|
|
| 12.6 |
|
Stock options exercised |
|
| - |
|
|
| 14.9 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 14.9 |
|
Stock-based compensation |
|
| - |
|
|
| 12.8 |
|
|
| - |
|
|
| - |
|
|
| (0.6 | ) |
|
| 12.2 |
|
Treasury stock purchases |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (101.9 | ) |
|
| (101.9 | ) |
Dividends ($0.26 per common share) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (35.9 | ) |
|
| - |
|
|
| (35.9 | ) |
Balance at June 30, 2021 |
| $ | 1.9 |
|
| $ | 2,982.8 |
|
| $ | (38.4 | ) |
| $ | 2,539.3 |
|
| $ | (2,442.1 | ) |
| $ | 3,043.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at March 31, 2022 |
| $ | 1.9 |
|
| $ | 3,030.8 |
|
| $ | 35.3 |
|
| $ | 2,989.4 |
|
| $ | (3,142.6 | ) |
| $ | 2,914.8 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 192.0 |
|
|
| - |
|
|
| 192.0 |
|
Other comprehensive income (loss) |
|
| - |
|
|
| - |
|
|
| (7.5 | ) |
|
| - |
|
|
| - |
|
|
| (7.5 | ) |
Stock options exercised |
|
| - |
|
|
| 0.2 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 0.2 |
|
Stock-based compensation |
|
| - |
|
|
| 15.2 |
|
|
| - |
|
|
| - |
|
|
| (0.5 | ) |
|
| 14.7 |
|
Treasury stock purchases |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (125.4 | ) |
|
| (125.4 | ) |
Dividends ($0.28 per common share) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (36.4 | ) |
|
| - |
|
|
| (36.4 | ) |
Balance at June 30, 2022 |
| $ | 1.9 |
|
| $ | 3,046.2 |
|
| $ | 27.8 |
|
| $ | 3,145.0 |
|
| $ | (3,268.5 | ) |
| $ | 2,952.4 |
|
|
| Common |
|
| Paid-In |
|
| Accumulated |
|
| Retained |
|
| Treasury |
|
| Total |
| ||||||
Balance at December 31, 2021 |
| $ | 1.9 |
|
| $ | 3,018.3 |
|
| $ | (24.6 | ) |
| $ | 2,807.9 |
|
| $ | (2,738.7 | ) |
| $ | 3,064.8 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 180.9 |
|
|
| — |
|
|
| 180.9 |
|
Other comprehensive income (loss) |
|
| — |
|
|
| — |
|
|
| 59.9 |
|
|
| — |
|
|
| — |
|
|
| 59.9 |
|
Stock options exercised |
|
| — |
|
|
| 0.2 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.2 |
|
Stock-based compensation |
|
| — |
|
|
| 12.3 |
|
|
| — |
|
|
| — |
|
|
| (24.3 | ) |
|
| (12.0 | ) |
Treasury stock purchases |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (379.6 | ) |
|
| (379.6 | ) |
Dividends |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.6 |
|
|
| — |
|
|
| 0.6 |
|
Balance at March 31, 2022 |
| $ | 1.9 |
|
| $ | 3,030.8 |
|
| $ | 35.3 |
|
| $ | 2,989.4 |
|
| $ | (3,142.6 | ) |
| $ | 2,914.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at December 31, 2022 |
| $ | 1.9 |
|
| $ | 3,069.6 |
|
| $ | 37.4 |
|
| $ | 2,323.8 |
|
| $ | (3,345.8 | ) |
| $ | 2,086.9 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 84.6 |
|
|
| — |
|
|
| 84.6 |
|
Other comprehensive income (loss) |
|
| — |
|
|
| — |
|
|
| (0.7 | ) |
|
| — |
|
|
| — |
|
|
| (0.7 | ) |
Other |
|
|
|
|
| 12.7 |
|
|
| 6.2 |
|
|
| (6.0 | ) |
|
| — |
|
|
| 12.9 |
| |
Stock options exercised |
|
| — |
|
|
| 2.3 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2.3 |
|
Stock-based compensation |
|
| — |
|
|
| 9.5 |
|
|
| — |
|
|
| — |
|
|
| (12.2 | ) |
|
| (2.7 | ) |
Treasury stock purchases |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (100.8 | ) |
|
| (100.8 | ) |
Balance at April 1, 2023 |
| $ | 1.9 |
|
| $ | 3,094.1 |
|
| $ | 42.9 |
|
| $ | 2,402.4 |
|
| $ | (3,458.8 | ) |
| $ | 2,082.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
5
FORTUNE BRANDS HOME & SECURITY,INNOVATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Principles of Consolidation
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.
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 Innovations, Inc. and its consolidated subsidiaries as a whole, unless the context otherwise requires.
On December 14, 2022, the Company completed the separation of its Cabinets business, MasterBrand, Inc. (“MasterBrand”), via a tax-free spin-off transaction (the “Separation”) to create an independent, publicly-traded company. Immediately following completion of the Separation, the Company changed its name from “Fortune Brands Home & Security, Inc.” to “Fortune Brands Innovations, Inc.” and its stock ticker changed from “FBHS” to “FBIN” to better reflect its focus on activities related to core brands and innovation. As a result of the Separation, our former Cabinets segment was disposed of and the operating results of the Cabinets business are reported as discontinued operations for all periods presented within this Quarterly Report on Form 10-Q. All amounts, percentages and disclosures for all periods presented reflect only the continuing operations of the Company unless otherwise noted. See Note 4, Acquisitions and Dispositions, in the condensed consolidated financial statements, and Note 5, Discontinued Operations, in the consolidated financial statements in Item 8 of our 2022 Annual Report on Form 10-K for additional information.
The condensed consolidated financial statements and notes are presented pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and do not contain certain information included in our annual audited consolidated financial statements and notes. The December 31, 2022 condensed consolidated balance sheet was derived from our audited consolidated financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles (“GAAP”). This Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2022.
On January 19, 2023, the Board of Directors of the Company approved a change to the Company’s fiscal year end from December 31 to a 52- or 53-week fiscal year ending on the Saturday closest but not subsequent to December 31, effective as of the commencement of the Company’s fiscal year on January 1, 2023. This change was made in order to align the Company’s fiscal year with that of its operating businesses and to align the Company’s reporting calendar with how the Company evaluates its businesses. As a result, the Company’s fiscal quarters for the 2023 fiscal year end on April 1, 2023, July 1, 2023, September 30, 2023, and December 30, 2023,
The condensed consolidated balance sheetsheets as of June 30, 2022,April 1, 2023, the related condensed consolidated statements of comprehensive income, equity and equitycash flows for the sixthirteen weeks ended April 1, 2023 and three months ended June 30, 2022 and 2021, and the related condensed consolidated statements of comprehensive income, equity and cash flows for the sixthree months ended June 30,March 31, 2022 and 2021 are unaudited. The presentation of these financial statements requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. In the opinion of management, all adjustments necessary for a fair statement of the financial statements have been included. Interim results may not be indicative of results for a full year.
InEffective in the first quarter of 2022, our Plumbing2023, the Company revised its segment reporting from two reportable segments, Water Innovations and Outdoors & Security, to three reportable segments, Water Innovations (which we refer to as “Water”), Outdoors and Security. The change in segment reporting was renamed “Water Innovations”made to better align with changes made in the manner our key brandschief operating decision maker reviews the Company’s operating results in assessing performance and organizational purpose. The Plumbing segment name change isallocating resources. Comparative prior periods amounts have been recast to conform to the name only and had no impact on the Company’s historical financial position, results of operations, cash flow ornew segment level results previously reported.presentation.
In JanuaryOn July 29, 2022, we acquired 100% of the outstanding equity of Solar Innovations LLC and an affiliated entity (together, "Solar"),Aqualisa Holdings (International) Ltd. (“Aqualisa” ), a leading producerU.K. manufacturer of wide-opening exterior doorshower products known for premium, innovative and smart digital shower systems, and outdoor enclosures, for a purchase price of approximately $61.6156.0 million, net of cash acquired of $4.8 million. The purchase price is subject to a final post-closing working capital adjustment. We financed the transaction using cash on hand andwith borrowings under our revolvingexisting credit facility. The results of SolarAqualisa are reported as part of the Outdoors & SecurityWater segment. Its complementary product offerings support the segment’s outdoor living strategy.
TheWe have not included pro forma financial information as it is immaterial to our condensed consolidated financial statements of comprehensive income. The fair value allocated to assets acquired and notes are presented pursuant to the rules and regulationsliabilities assumed as of the Securities and Exchange Commission ("SEC") and do not contain certain information included in our annual audited consolidated financial statements and notes. The December 31, 2021 condensed consolidated balance sheetJuly 29, 2022 was derived from our audited consolidated financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles (“GAAP”). This Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2021.$
2. Recently Issued Accounting Standards
Disclosures by Business Entities About Government Assistance
In November 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-10, Government Assistance (Topic 832). The new guidance, codified in Accounting Standards Codification ("ASC") 832, requires business entities that account for transactions with a government by applying a grant or contribution model by analogy to disclose information about government assistance recorded during the period. ASU 2021-10 is effective for all entities for annual reporting periods beginning after December 15, 2021. The adoption156.0 of this guidance did not have a material effect on our financial statements.
6
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Balance Sheet Information
Supplemental information on our balance sheets is as follows:
(In millions) |
| June 30, |
|
| December 31, |
| ||
Inventories: |
|
|
|
|
|
| ||
Raw materials and supplies |
| $ | 541.4 |
|
| $ | 455.1 |
|
Work in process |
|
| 108.4 |
|
|
| 93.0 |
|
Finished products |
|
| 796.9 |
|
|
| 645.7 |
|
Total inventories |
| $ | 1,446.7 |
|
| $ | 1,193.8 |
|
|
|
|
|
|
|
| ||
Property, plant and equipment, gross |
| $ | 2,403.0 |
|
| $ | 2,278.0 |
|
Less: accumulated depreciation |
|
| 1,320.2 |
|
|
| 1,268.5 |
|
Property, plant and equipment, net |
| $ | 1,082.8 |
|
| $ | 1,009.5 |
|
4. Acquisitions and Dispositions
Cabinets
On April 28, 2022, the Company announced that its Board of Directors authorized the Company to develop a plan to separate the Company into two independent, publicly-traded companies via a tax-free spin-off of the MasterBrand Cabinets, Inc. business into a separate standalone publicly-traded company (the "Spin-Off"). The Spin-Off is expected to be completed approximately twelve months from the announcement date, subject to a number of conditions including the approval by the Company’s Board of Directors and the effectiveness of a registration statement on Form 10 to be filed with the SEC.
Solarmillion.
In January 2022, we acquired 100% of the outstanding equity of Solar Innovations LLC and an affiliated entity (together, "Solar"“Solar”), a leading producer of wide-opening exterior door systems and outdoor enclosures, for a purchase price of $61.6 million, net of cash acquired of $4.8 million. The purchase price is subject to a final post-closing working capital adjustment. We financed the transaction using cash on hand and borrowings under our revolving credit facility. The results of Solar are reported as part of the Outdoors segment.
6
FORTUNE BRANDS INNOVATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Recently Issued Accounting Standards
No material impacts noted from recently issued accounting standards.
3. Balance Sheet Information
Supplemental information on our balance sheets is as follows:
(In millions) |
| April 1, |
|
| December 31, |
| ||
Inventories: |
|
|
|
|
|
| ||
Raw materials and supplies |
| $ | 285.0 |
|
| $ | 309.4 |
|
Work in process |
|
| 80.2 |
|
|
| 83.5 |
|
Finished products |
|
| 565.9 |
|
|
| 628.4 |
|
Total inventories |
| $ | 931.1 |
|
| $ | 1,021.3 |
|
|
|
|
|
|
|
| ||
Property, plant and equipment, gross |
| $ | 1,653.4 |
|
| $ | 1,614.3 |
|
Less: accumulated depreciation |
|
| 847.6 |
|
|
| 830.6 |
|
Property, plant and equipment, net |
| $ | 805.8 |
|
| $ | 783.7 |
|
7
FORTUNE BRANDS INNOVATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Acquisitions and Dispositions
Cabinets
On December 14, 2022, the Company completed the separation of its Cabinets business, MasterBrand, Inc. (“MasterBrand”), via a tax-free spin-off transaction (the “Separation”) to create an independent, publicly-traded company. Immediately following completion of the Separation, the Company changed its name from “Fortune Brands Home & Security, segment. Its complementary product offerings supportInc.” to “Fortune Brands Innovations, Inc.” and its stock ticker changed from “FBHS” to “FBIN” to better reflect its focus on activities related to core brands and innovation.
The condensed consolidated statements of income and consolidated balance sheets for all prior periods have been adjusted to reflect the segment’s outdoor living strategy. Solar'spresentation of MasterBrand as discontinued operations. For the three months ended March 31, 2022, the condensed consolidated statement of cash flows includes net salescash provided from operations related to discontinued operations of $19.0 million and operating incomenet cash in investing activities of $11.0 million. Depreciation, amortization and capital expenditures attributable to discontinued operations for the three and six months ended June 30,March 31, 2022, were not material to$11.0 million, $4.4 million and $11.0 million, respectively.
Aqualisa
In July 2022, we acquired 100% of the Company.outstanding equity of Aqualisa Holdings (International) Ltd. (“Aqualisa”), a leading U.K. manufacturer of shower products known for premium, innovative and smart digital shower systems, for a purchase price of $156.0 million, net of cash acquired of $4.8 million. We financed the transaction with borrowings under our existing credit facility. The results of Aqualisa are reported as part of the Water segment. We have not included pro forma financial information as itthe transaction is immaterial to our condensed consolidated statements of comprehensive income. The fair value allocated to assets acquired and liabilities assumed as of July 29, 2022, was $156.0 million, which includes $88.7 million of goodwill. Goodwill includes expected sales and cost synergies and is not expected to be deductible for income tax purposes.
Solar
In January 2022, we acquired 100% of the outstanding equity of Solar for a purchase price of $61.6 million, net of cash acquired of $4.8 million. We financed the transaction using cash on hand and borrowings under our revolving credit facility. The results of Solar are reported as part of the Outdoors segment. We have not included pro forma financial information as the transaction is immaterial to our condensed consolidated statements of comprehensive income. The fair value allocated to assets acquired and liabilities assumed as of January 31, 2022, was $61.6 million, which includes $20.423.3 million of goodwill. Goodwill includes expected sales and cost synergies and is expected to be deductible for income tax purposes.
Flo Technologies
In 2018, our Water Innovations segment entered into a strategic partnership with, and acquired non-controlling equity interests in, Flo Technologies, Inc. ("Flo"(“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 the remaining outstanding shares of Flo in a multi-phase transaction. As part of this agreement, we acquired a majority of Flo’s outstanding shares during 2020 and entered into a forward contract to purchase all remaining shares of Flo during the first quarter of 2022 for a price based on a multiple of Flo’s 2021 sales and adjusted earnings before interest and taxes. During the six months ended June2022. On January 30, 2022, we made a final cash payment of $16.7 million to the legacy minority shareholders to acquire such shares which is reflected within Other financing, net in our consolidated statements of cash flows.
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 during the three months ended March 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.
78
FORTUNE BRANDS HOME & SECURITY,INNOVATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Goodwill and Identifiable Intangible Assets
We had goodwill of $2,479.61,643.6 million and $2,465.11,640.7 million as of June 30, 2022April 1, 2023 and December 31, 2021,2022, respectively.The change in the net carrying amount of goodwill by segment was as follows:
(In millions) |
| Water Innovations |
|
| Outdoors & |
|
| Cabinets |
|
| Total |
| ||||
Goodwill at December 31, 2021(a) |
| $ | 814.1 |
|
| $ | 724.8 |
|
| $ | 926.2 |
|
| $ | 2,465.1 |
|
Year-to-date translation adjustments |
|
| (5.5 | ) |
|
| (0.1 | ) |
|
| (0.3 | ) |
|
| (5.9 | ) |
Acquisition-related adjustments |
|
| 0 |
|
|
| 20.4 |
|
|
| 0 |
|
|
| 20.4 |
|
Goodwill at June 30, 2022(a) |
| $ | 808.6 |
|
| $ | 745.1 |
|
| $ | 925.9 |
|
| $ | 2,479.6 |
|
(In millions) |
| Water |
|
| Outdoors |
|
| Security |
|
| Total |
| ||||
Goodwill at December 31, 2022(a) |
| $ | 893.4 |
|
| $ | 651.0 |
|
| $ | 96.3 |
|
| $ | 1,640.7 |
|
Year-to-date foreign currency translation adjustments |
|
| 2.8 |
|
|
| — |
|
|
| 0.1 |
|
|
| 2.9 |
|
Goodwill at April 1, 2023(a) |
| $ | 896.2 |
|
| $ | 651.0 |
|
| $ | 96.4 |
|
| $ | 1,643.6 |
|
(a) Net of accumulated impairment losses of $399.5 million in the Outdoors & Security segment.
The gross carrying value and accumulated amortization by class of identifiable intangible assets as of June 30, 2022April 1, 2023 and December 31, 20212022 were as follows:
(In millions) |
| As of June 30, 2022 |
|
| As of December 31, 2021 |
|
| As of April 1, 2023 |
|
| As of December 31, 2022 |
| ||||||||||||||||||||||||||||||||||||
|
| Gross |
|
| Accumulated |
|
| Net |
|
| Gross |
|
| Accumulated |
|
| Net |
|
| Gross |
|
| Accumulated |
|
| Net |
|
| Gross |
|
| Accumulated |
|
| Net |
| ||||||||||||
Indefinite-lived tradenames |
| $ | 684.4 |
|
| $ | - |
|
| $ | 684.4 |
|
| $ | 711.1 |
|
| $ | - |
|
| $ | 711.1 |
|
| $ | 478.2 |
|
| $ | — |
|
| $ | 478.2 |
|
| $ | 478.1 |
|
| $ | — |
|
| $ | 478.1 |
|
Amortizable intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Tradenames |
|
| 38.7 |
|
|
| (16.1 | ) |
|
| 22.6 |
|
|
| 36.4 |
|
|
| (15.5 | ) |
|
| 20.9 |
|
|
| 48.2 |
|
|
| (7.4 | ) |
|
| 40.8 |
|
|
| 47.5 |
|
|
| (6.8 | ) |
|
| 40.7 |
|
Customer and contractual relationships |
|
| 978.9 |
|
|
| (412.3 | ) |
|
| 566.6 |
|
|
| 975.7 |
|
|
| (388.2 | ) |
|
| 587.5 |
|
|
| 664.4 |
|
|
| (249.3 | ) |
|
| 415.1 |
|
|
| 662.6 |
|
|
| (239.6 | ) |
|
| 423.0 |
|
Patents/proprietary technology |
|
| 135.5 |
|
|
| (74.5 | ) |
|
| 61.0 |
|
|
| 133.1 |
|
|
| (68.8 | ) |
|
| 64.3 |
|
|
| 128.8 |
|
|
| (72.2 | ) |
|
| 56.6 |
|
|
| 128.5 |
|
|
| (69.5 | ) |
|
| 59.0 |
|
Total |
|
| 1,153.1 |
|
|
| (502.9 | ) |
|
| 650.2 |
|
|
| 1,145.2 |
|
|
| (472.5 | ) |
|
| 672.7 |
|
|
| 841.4 |
|
|
| (328.9 | ) |
|
| 512.5 |
|
|
| 838.6 |
|
|
| (315.9 | ) |
|
| 522.7 |
|
Total identifiable intangibles |
| $ | 1,837.5 |
|
| $ | (502.9 | ) |
| $ | 1,334.6 |
|
| $ | 1,856.3 |
|
| $ | (472.5 | ) |
| $ | 1,383.8 |
|
| $ | 1,319.6 |
|
| $ | (328.9 | ) |
| $ | 990.7 |
|
| $ | 1,316.7 |
|
| $ | (315.9 | ) |
| $ | 1,000.8 |
|
We had net identifiable intangible assets of $1,334.6990.7 million and $1,383.81,000.8 million as of June 30, 2022April 1, 2023 and December 31, 2021,2022, respectively. The $18.82.9 million decreaseincrease in gross identifiable intangible assets was primarily due to the tradename impairment charges of $26.0 million in our Cabinets segment (as discussed below), partially offset by the acquisition of Solar.foreign translation adjustments.
Amortizable identifiable intangible assets, principally customer relationships, are subject to amortization over their estimated useful life, ranging from 5 to 30 years, based on the assessment of a number of factors that may impact useful life, which includes customer attrition rates and other relevant factors.
In the second quarter of 2022, we recognized an impairment charge of $26.0 million related to an indefinite-lived tradename. During the second quarter of 2022, production was shifted at a historical make-to-order plant to a stock product line, to enable what we expect to be a higher value purpose and growth opportunity, which led to downward revisions to forecasted revenue growth rates associated with the tradename.
The fair value of this tradename was 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 values include forecasted revenue growth rates for the tradename, assumed royalty rate, and a market-participant discount rate that reflects the level of risk associated with the tradenames’ future revenues 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 8).
The significant assumptions used to estimate the fair value of the tradename impaired in the second quarter of 2022 were as follows:
|
| |||
|
|
| ||
|
|
| ||
|
|
|
(a) Represents estimated percentage of sales a market-participant would pay to license the impaired tradename.
(b)Selected long-term revenue growth rate within 10-year projection period of the impaired tradename
8
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
.As of June 30, 2022, the estimated fair value of this tradename equaled its carrying value of $59.0 million. A reduction in the estimated fair value of this tradename could trigger additional impairment charges in 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, including due to resurgences of the virus, 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 assets.
6. External Debt and Financing Arrangements
Senior Notes
In March 2022, the Company issued $900 million in aggregate principal amount of senior unsecured notes in a registered public offering consisting of $450 million of 4.00% senior unsecured notes maturing in 2032 and $450 million of 4.50% senior unsecured notes maturing in 2052 (together, the “2022 Notes”). The Company used the net proceeds from the 2022 Notes offering to pay down a portion of the outstanding balance on the 2021 Term Loan, as described below.
At June 30, 2022,April 1, 2023, the Company had aggregate outstanding senior notes in the amount of $2.7 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 net carrying value of the Notes, net of underwriting commissions, price discounts, and debt issuance costs as of June 30, 2022April 1, 2023 and December 31, 2021:2022:
|
|
|
|
|
|
|
| Net Carrying Value |
| ||||||
(in millions) | Principal Amount |
|
| Issuance Date |
| Maturity Date |
| April 1, 2023 |
|
| December 31, 2022 |
| |||
4.000% Senior Notes | $ | 500.0 |
|
| June 2015 |
| June 2025 |
| $ | 498.3 |
|
| $ | 498.1 |
|
4.000% Senior Notes |
| 600.0 |
|
| September 2018 |
| September 2023 |
|
| 599.5 |
|
|
| 599.2 |
|
3.250% Senior Notes |
| 700.0 |
|
| September 2019 |
| September 2029 |
|
| 695.2 |
|
|
| 695.0 |
|
4.000% Senior Notes |
| 450.0 |
|
| March 2022 |
| March 2032 |
|
| 445.9 |
|
|
| 445.8 |
|
4.500% Senior Notes |
| 450.0 |
|
| March 2022 |
| March 2052 |
|
| 435.5 |
|
|
| 435.4 |
|
Total Senior Notes | $ | 2,700.0 |
|
|
|
|
|
| $ | 2,674.4 |
|
| $ | 2,673.5 |
|
|
|
|
|
|
|
|
| Net Carrying Value |
| ||||||
(in millions) | Principal Amount |
|
| Issuance Date |
| Maturity Date |
| June 30, 2022 |
|
| December 31, 2021 |
| |||
4.000% Senior Notes | $ | 500.0 |
|
| June 2015 |
| June 2025 |
| $ | 497.7 |
|
| $ | 497.4 |
|
4.000% Senior Notes |
| 600.0 |
|
| September 2018 |
| September 2023 |
|
| 598.8 |
|
|
| 598.2 |
|
3.250% Senior Notes |
| 700.0 |
|
| September 2019 |
| September 2029 |
|
| 694.6 |
|
|
| 694.2 |
|
4.000% Senior Notes |
| 450.0 |
|
| March 2022 |
| March 2032 |
|
| 445.4 |
|
|
| 0 |
|
4.500% Senior Notes |
| 450.0 |
|
| March 2022 |
| March 2052 |
|
| 435.0 |
|
|
| - |
|
Total Senior Notes | $ | 2,700.0 |
|
|
|
|
|
| $ | 2,671.5 |
|
| $ | 1,789.8 |
|
9
FORTUNE BRANDS INNOVATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Credit Facilities
In August 2022, the Company entered into a third amended and restated $1.25 billion revolving credit facility (the “2022 Revolving Credit Agreement”), and borrowings thereunder will be used for general corporate purposes. The maturity date of the facility is August 2027. Interest rates under the 2022 Revolving Credit Agreement are variable based on the Secured Overnight Financing Rate (“SOFR”) at the time of the borrowing and the Company’s long-term credit rating and can range from SOFR + 1.02% to SOFR + 1.525%.Under the 2022 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. There were no outstanding borrowings under this facility as of April 1, 2023, and December 31, 2022. As of April 1, 2023, we were in compliance with all covenants under this facility.
In November 2021, the Company entered into a 364-day, $400 million term loan credit agreement (“2021(the “2021 Term Loan”), for general corporate purposes, to mature in November 2022.2022. On March 1, 2022, the Company entered into a First Amendment and Incremental Agreement to the 2021 Term Loan (the “First Amendment”). The First Amendment provided for an increase in the principal amount from $400 million to $600 million as well as the transition from LIBOR to SOFR interest rates. As a result, interest rates under the 2021 Term Loan were variable based on SOFR at the time of the borrowing and the Company’s long-term credit rating and could range from SOFR + 0.725% to SOFR + 1.350%.On March 18, 2022, the Company entered into a Second Amendment and Incremental Agreement to the 2021 Term Loan (the “Second Amendment”), increasing the principal amount from $600 million to $1.1 billion. All other terms and conditions remained the same under the First Amendment and Second Amendment. Proceeds from the increased 2021 Term Loan were used to repay outstanding balances under the 2019 Revolving Credit Agreement (as described below).our previous revolving credit facility. The outstanding $1.1 billion under the 2021 Term Loan was repaid on March 25, 2022 with proceeds from the senior notes offering in March 2022 (as described above) and other existing sources of liquidity.
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%. 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 June 30, 2022 and December 31, 2021, our outstanding borrowings under this facility were $125.0 million and $520.0 million, respectively. This facility is included in Long-term debt in the condensed consolidated balance sheets. As of June 30, 2022, we were in compliance with all covenants under this facility.
9
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We currently have uncommitted bank lines of credit in China, which provide for unsecured borrowings for working capital of up to $20.5 million and $17.5 million in aggregate as of June 30, 2022April 1, 2023 and December 31, 2021, respectively.2022. There were 0no outstanding balances as of June 30, 2022April 1, 2023 and December 31, 2021, respectively.2022.
Commercial Paper
In November 2021, theThe Company establishedoperates a commercial paper program (the “Commercial Paper Program”) pursuant to which the Company may issue unsecured commercial paper notes. The Company’s 20192022 Revolving Credit Agreement is the liquidity backstop for the repayment of any notes issued under the Commercial Paper Program, and as such, borrowings under the Commercial Paper Program are included in Long-term debt in the condensed consolidated balance sheets. Amounts available under the Commercial Paper Program may be borrowed, repaid and re-borrowed, with the aggregate principal amount outstanding at any time, including borrowings under the 20192022 Revolving Credit Agreement, not to exceed $1.25 billion. The Company plans towill use net proceeds from any issuances under the Commercial Paper Program for general corporate purposes. On June 30, 2022 and December 31, 2021 ourThere were no outstanding borrowings under the Commercial Paper Program were $561.4millionas of April 1, 2023 and 0, respectively.December 31, 2022.
10
FORTUNE BRANDS HOME & SECURITY,INNOVATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. 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 may be exposed to interest rate risk on existing debt or forecasted debt issuance. To mitigate this risk, we may enter into interest rate hedge contracts. As of June 30, 2022,April 1, 2023, we had outstanding interest rate hedges with a notional value of $600 million which have been accounted for as cash flow hedges.
We terminated $600 million of interest rate hedges during the first quarter of 2022, concurrent with the issuance of new long-term debt. Total realized pre-tax gains of $39.0 million related to these interest rate hedges have been recorded in accumulated other comprehensive income and will be reclassified to earnings over the related maturity of the related interest rate hedging instrument.
Our primary foreign currency hedge contracts pertain to the British pound, the Canadian dollar, the British pound, the Mexican peso and the Chinese yuan. The gross U.S. dollar equivalent notional amount of all foreign currency derivative hedges outstanding at June 30, 2022April 1, 2023 was $568.3293.6 million. Based on foreign exchange rates as of June 30, 2022,April 1, 2023, we estimate that $2.63.8 million of net derivative lossesgains included in accumulated other comprehensive income as of June 30, 2022April 1, 2023 will be reclassified to earnings within the next twelve months.
The fair values of derivative instruments on the consolidated balance sheets as of June 30, 2022April 1, 2023 and December 31, 20212022 were as follows:
|
|
|
| Fair Value |
|
|
|
| Fair Value |
| |||||||||||
(In millions) |
| Location |
|
| June 30, |
|
| December 31, |
|
| Location |
| April 1, |
|
| December 31, |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Foreign exchange contracts |
| Other current assets |
| $ | 5.7 |
|
| $ | 4.1 |
|
| Other current assets |
| $ | 3.7 |
|
| $ | 5.0 |
| |
Interest rate hedges |
| Other non-current assets |
|
| 58.9 |
|
|
| 0 |
|
| Other current assets |
|
| 73.0 |
|
|
| 84.6 |
| |
|
| Total assets |
| $ | 64.6 |
|
| $ | 4.1 |
|
| Total assets |
| $ | 76.7 |
|
| $ | 89.6 |
| |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Foreign exchange contracts |
| Other current liabilities |
| $ | 0.9 |
|
| $ | 1.4 |
|
| Other current liabilities |
| $ | 1.3 |
|
| $ | 0.7 |
| |
Commodity contracts |
| Other current liabilities |
|
| 9.4 |
|
|
| 0.1 |
|
| Other current liabilities |
|
| 1.2 |
|
|
| 3.6 |
| |
|
| Total liabilities |
| $ | 10.3 |
|
| $ | 1.5 |
|
| Total liabilities |
| $ | 2.5 |
|
| $ | 4.3 |
|
11
FORTUNE BRANDS HOME & SECURITY,INNOVATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The effects of derivative financial instruments on the statements of comprehensive income for the sixthirteen weeks ended April 1, 2023 and the three months ended June 30,March 31, 2022 and 2021 were as follows:
(In millions) |
| Classification and Amount of Gain (Loss) |
|
| Classification and Amount of Gain (Loss) |
| ||||||||||||||||||
|
| Six Months Ended June 30, 2022 |
|
| Thirteen Weeks Ended April 1, 2023 |
| ||||||||||||||||||
|
| Cost of |
|
| Interest |
|
| Other income, net |
|
| Cost of |
|
| Interest |
|
| Other income, net |
| ||||||
Total amounts per Consolidated Statements of Comprehensive Income |
| $ | 2,585.7 |
|
| $ | 52.3 |
|
| $ | 1.5 |
|
| $ | 631.7 |
|
| $ | 26.8 |
|
| $ | 6.3 |
|
The effects of fair value and cash flow hedging: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Gain (loss) on fair value hedging relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Hedged items |
|
| - |
|
|
| - |
|
|
| (8.9 | ) |
|
| — |
|
|
| — |
|
|
| 1.3 |
|
Derivative designated as hedging instruments |
|
| - |
|
|
| - |
|
|
| 5.1 |
|
|
| — |
|
|
| — |
|
|
| (0.8 | ) |
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 |
|
|
| - |
|
|
| - |
|
|
| 2.0 |
|
|
| — |
|
|
| — |
|
Commodity contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| (0.3 | ) |
|
| - |
|
|
| - |
|
|
| 0.2 |
|
|
| — |
|
|
| — |
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| - |
|
|
| 1.4 |
|
|
| - |
|
|
| — |
|
|
| 1.1 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
(In millions) |
| Classification and Amount of Gain (Loss) |
|
| Classification and Amount of Gain (Loss) |
| ||||||||||||||||||
|
| Six Months Ended June 30, 2021 |
|
| Three Months Ended March 31, 2022 |
| ||||||||||||||||||
|
| Cost of |
|
| Interest |
|
| Other expense, net |
|
| Cost of |
|
| Interest |
|
| Other income, net |
| ||||||
Total amounts per Consolidated Statements of Comprehensive Income |
| $ | 2,357.2 |
|
| $ | 42.6 |
|
| $ | 2.0 |
|
| $ | 671.8 |
|
| $ | 21.7 |
|
| $ | 2.1 |
|
The effects of fair value and cash flow hedging: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Gain (loss) on fair value hedging relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Hedged items |
|
| - |
|
|
| - |
|
|
| 1.7 |
|
|
| — |
|
|
| — |
|
|
| (2.0 | ) |
Derivative designated as hedging instruments |
|
| - |
|
|
| - |
|
|
| (3.7 | ) |
|
| — |
|
|
| — |
|
|
| 0.5 |
|
Gain (loss) on cash flow hedging relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| (0.7 | ) |
|
| - |
|
|
| - |
|
|
| 0.4 |
|
|
| — |
|
|
| — |
|
Commodity contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| 0.9 |
|
|
| - |
|
|
| - |
| ||||||||||||
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 |
|
| - |
|
|
| 0.3 |
|
|
| - |
|
|
| — |
|
|
| 0.2 |
|
|
| — |
|
12
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The effects of derivative financial instruments on the statements of comprehensive income for the three months ended June 30, 2022 and 2021 were as follows:
(In millions) |
| Classification and Amount of Gain (Loss) |
| |||||||||
|
| Three Months Ended June 30, 2022 |
| |||||||||
|
| Cost of |
|
| Interest |
|
| Other income, net |
| |||
Total amounts per Consolidated Statements of Comprehensive Income |
| $ | 1,347.9 |
|
| $ | 30.5 |
|
| $ | 0.2 |
|
The effects of fair value and cash flow hedging: |
|
|
|
|
|
|
|
|
| |||
Gain (loss) on fair value hedging relationships |
|
|
|
|
|
|
|
|
| |||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
| |||
Hedged items |
|
| - |
|
|
| - |
|
|
| (7.8 | ) |
Derivative designated as hedging instruments |
|
| - |
|
|
| - |
|
|
| 6.2 |
|
Gain (loss) on cash flow hedging relationships |
|
|
|
|
|
|
|
|
| |||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| 2.1 |
|
|
| - |
|
|
| - |
|
Commodity contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| (0.4 | ) |
|
| - |
|
|
| - |
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| - |
|
|
| 1.2 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
| |||
(In millions) |
| Classification and Amount of Gain (Loss) |
| |||||||||
|
| Three Months Ended June 30, 2021 |
| |||||||||
|
| Cost of |
|
| Interest |
|
| Other income, net |
| |||
Total amounts per Consolidated Statements of Comprehensive Income |
| $ | 1,230.3 |
|
| $ | 21.2 |
|
| $ | 1.3 |
|
The effects of fair value and cash flow hedging: |
|
|
|
|
|
|
|
|
| |||
Gain (loss) on fair value hedging relationships |
|
|
|
|
|
|
|
|
| |||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
| |||
Hedged items |
|
| - |
|
|
| - |
|
|
| 2.5 |
|
Derivative designated as hedging instruments |
|
| - |
|
|
| - |
|
|
| (3.7 | ) |
Gain (loss) on cash flow hedging relationships |
|
|
|
|
|
|
|
|
| |||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| 0.1 |
|
|
| - |
|
|
| - |
|
Commodity contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| 0.8 |
|
|
| - |
|
|
| - |
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| - |
|
|
| 0.1 |
|
|
| - |
|
The cash flow hedges recognized in other comprehensive income were a net loss of $0.57.8 million for the thirteen weeks ended April 1, 2023 and a net loss of $0.6 million in the six months ended June 30, 2022 and 2021, respectively. The cash flow hedges recognized in other comprehensive income were a net gain of $0.2 million and a net gain of $1.42.9 million in the three months ended June 30, 2022 and 2021, respectively.March 31, 2022.
12
FORTUNE BRANDS INNOVATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Fair Value Measurements
FASB ASCFinancial Accounting Standards Board Accounting Standards Codification 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
13
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 0no 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 11.
The carrying value and fair value of debt as of June 30, 2022April 1, 2023 and December 31, 20212022 were as follows:
(In millions) |
| June 30, 2022 |
|
| December 31, 2021 |
| ||||||||||
|
| Carrying |
|
| Fair |
|
| Carrying |
|
| Fair |
| ||||
Notes, net of underwriting commissions, price discounts and debt issuance costs |
| $ | 2,671.5 |
|
| $ | 2,445.6 |
|
| $ | 1,789.8 |
|
| $ | 1,902.9 |
|
2019 Revolving Credit Agreement |
|
| 125.0 |
|
|
| 125.0 |
|
|
| 520.0 |
|
|
| 520.0 |
|
Commercial paper borrowings |
|
| 561.4 |
|
|
| 561.4 |
|
|
| 0 |
|
|
| 0 |
|
2021 Term Loan |
|
| 0 |
|
|
| 0 |
|
|
| 400.0 |
|
|
| 400.0 |
|
Total debt |
| $ | 3,357.9 |
|
| $ | 3,132.0 |
|
| $ | 2,709.8 |
|
| $ | 2,822.9 |
|
(In millions) |
| April 1, 2023 |
|
| December 31, 2022 |
| ||||||||||
|
| Carrying |
|
| Fair |
|
| Carrying |
|
| Fair |
| ||||
Notes, net of underwriting commissions, price discounts and debt issuance costs |
| $ | 2,674.4 |
|
| $ | 2,455.1 |
|
| $ | 2,673.5 |
|
| $ | 2,412.6 |
|
The estimated fair value of our Notes is determined by using quoted market prices of our debt securities, which are Level 1 inputs. The estimated fair value of our 20192022 Revolving Credit Facility,Agreement, Commercial paper borrowings and 2021 Term Loan is determined primarily using broker quotes, which are Level 2 inputs.
Assets and liabilities measured at fair value on a recurring basis as of June 30, 2022April 1, 2023 and December 31, 20212022 were as follows:
(In millions) |
| Fair Value |
|
| Fair Value |
| ||||||||||
|
| June 30, |
|
| December 31, |
|
| April 1, |
|
| December 31, |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Derivative financial instruments (Level 2) |
| $ | 64.6 |
|
| $ | 4.1 |
|
| $ | 76.7 |
|
| $ | 89.6 |
|
Deferred compensation program assets (Level 2) |
|
| 19.5 |
|
|
| 19.8 |
|
|
| 15.5 |
|
|
| 14.9 |
|
Total assets |
| $ | 84.1 |
|
| $ | 23.9 |
|
| $ | 92.2 |
|
| $ | 104.5 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Derivative financial instruments (Level 2) |
| $ | 10.3 |
|
| $ | 1.5 |
|
| $ | 2.5 |
|
| $ | 4.3 |
|
13
FORTUNE BRANDS INNOVATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Accumulated Other Comprehensive Income (Loss)
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 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. The after-tax components of and changes in accumulated other comprehensive (loss) income for the sixthirteen weeks ended April 1, 2023 and three months ended June 30,March 31, 2022 and 2021 were as follows:
(In millions) |
| Foreign |
|
| Derivative |
|
| Defined |
|
| Accumulated |
| ||||
Balance at December 31, 2021 |
| $ | 3.3 |
|
| $ | 2.9 |
|
| $ | (30.8 | ) |
| $ | (24.6 | ) |
Amounts classified into accumulated other |
|
| 11.6 |
|
|
| 49.2 |
|
|
| 0.2 |
|
|
| 61.0 |
|
Amounts reclassified from accumulated other |
|
| — |
|
|
| (1.1 | ) |
|
| — |
|
|
| (1.1 | ) |
Net current-period other comprehensive (loss) income |
|
| 11.6 |
|
|
| 48.1 |
|
|
| 0.2 |
|
|
| 59.9 |
|
Balance at March 31, 2022 |
| $ | 14.9 |
|
| $ | 51.0 |
|
| $ | (30.6 | ) |
| $ | 35.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance at December 31, 2022 |
| $ | (12.1 | ) |
| $ | 93.5 |
|
| $ | (44.0 | ) |
| $ | 37.4 |
|
Amounts classified into accumulated other |
|
| 8.0 |
|
|
| (5.8 | ) |
|
| (0.2 | ) |
|
| 2.0 |
|
Other |
|
| — |
|
|
| — |
|
|
| 6.2 |
|
|
| 6.2 |
|
Amounts reclassified from accumulated other |
|
| — |
|
|
| (2.7 | ) |
|
| — |
|
|
| (2.7 | ) |
Net current-period other comprehensive (loss) income |
|
| 8.0 |
|
|
| (8.5 | ) |
|
| 6.0 |
|
|
| 5.5 |
|
Balance at April 1, 2023 |
| $ | (4.1 | ) |
| $ | 85.0 |
|
| $ | (38.0 | ) |
| $ | 42.9 |
|
The reclassifications out of accumulated other comprehensive loss for the thirteen weeks ended April 1, 2023 and three months ended March 31, 2022 were as follows:
(In millions) | ||||||||||
Details about Accumulated Other |
| Amount Reclassified from |
|
| Affected Line Item in | |||||
|
| Thirteen Weeks Ended April 1, 2023 |
|
| Three Months Ended March 31, 2022 |
|
|
| ||
Gains (losses) on cash flow hedges |
|
|
|
|
|
|
|
| ||
Foreign exchange contracts |
| $ | 2.0 |
|
| $ | 0.4 |
|
| Cost of products sold |
Commodity contracts |
|
| 0.2 |
|
|
| 0.1 |
|
| Cost of products sold |
Interest rate contracts |
|
| 1.1 |
|
|
| 0.2 |
|
| Interest expense |
|
| 3.3 |
|
|
| 0.7 |
|
| Total before tax | |
|
| (0.6 | ) |
|
| (0.1 | ) |
| Tax expense | |
|
| $ | 2.7 |
|
| $ | 0.6 |
|
| Net of tax |
The amounts in the table above reflect continuing operations, and exclude income amounts, net of tax, related to discontinued operations of $0.5 million in 2022.
14
FORTUNE BRANDS HOME & SECURITY,INNOVATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions) |
| Foreign |
|
| Derivative |
|
| Defined |
| �� | Accumulated |
| ||||
Balance at December 31, 2020 |
| $ | 7.2 |
|
| $ | 4.2 |
|
| $ | (66.5 | ) |
| $ | (55.1 | ) |
Amounts classified into accumulated other |
|
| 17.8 |
|
|
| (0.3 | ) |
|
| (0.2 | ) |
|
| 17.3 |
|
Amounts reclassified from accumulated other |
|
| - |
|
|
| (0.6 | ) |
|
| - |
|
|
| (0.6 | ) |
Net current-period other comprehensive (loss) income |
|
| 17.8 |
|
|
| (0.9 | ) |
|
| (0.2 | ) |
|
| 16.7 |
|
Balance at June 30, 2021 |
| $ | 25.0 |
|
| $ | 3.3 |
|
| $ | (66.7 | ) |
| $ | (38.4 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance at December 31, 2021 |
| $ | 3.3 |
|
| $ | 2.9 |
|
| $ | (30.8 | ) |
| $ | (24.6 | ) |
Amounts classified into accumulated other |
|
| (16.1 | ) |
|
| 72.4 |
|
|
| (0.1 | ) |
|
| 56.2 |
|
Amounts reclassified from accumulated other |
|
| - |
|
|
| (3.8 | ) |
|
| - |
|
|
| (3.8 | ) |
Net current-period other comprehensive (loss) income |
|
| (16.1 | ) |
|
| 68.6 |
|
|
| (0.1 | ) |
|
| 52.4 |
|
Balance at June 30, 2022 |
| $ | (12.8 | ) |
| $ | 71.5 |
|
| $ | (30.9 | ) |
| $ | 27.8 |
|
(In millions) |
| Foreign |
|
| Derivative |
|
| Defined |
|
| Accumulated |
| ||||
Balance at March 31, 2021 |
| $ | 13.0 |
|
| $ | 2.7 |
|
| $ | (66.7 | ) |
| $ | (51.0 | ) |
Amounts classified into accumulated other |
|
| 12.0 |
|
|
| 1.5 |
|
|
| - |
|
|
| 13.5 |
|
Amounts reclassified from accumulated other |
|
| - |
|
|
| (0.9 | ) |
|
| - |
|
|
| (0.9 | ) |
Net current-period other comprehensive (loss) income |
|
| 12.0 |
|
|
| 0.6 |
|
|
| - |
|
|
| 12.6 |
|
Balance at June 30, 2021 |
| $ | 25.0 |
|
| $ | 3.3 |
|
| $ | (66.7 | ) |
| $ | (38.4 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance at March 31, 2022 |
| $ | 14.9 |
|
| $ | 51.0 |
|
| $ | (30.6 | ) |
| $ | 35.3 |
|
Amounts classified into accumulated other |
|
| (27.7 | ) |
|
| 23.2 |
|
|
| (0.3 | ) |
|
| (4.8 | ) |
Amounts reclassified from accumulated other |
|
| - |
|
|
| (2.7 | ) |
|
| - |
|
|
| (2.7 | ) |
Net current-period other comprehensive (loss) income |
|
| (27.7 | ) |
|
| 20.5 |
|
|
| (0.3 | ) |
|
| (7.5 | ) |
Balance at June 30, 2022 |
| $ | (12.8 | ) |
| $ | 71.5 |
|
| $ | (30.9 | ) |
| $ | 27.8 |
|
15
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The reclassifications out of accumulated other comprehensive loss for the six and three months ended June 30, 2022 and 2021 were as follows:
(In millions) | ||||||||||
Details about Accumulated Other |
| Amount Reclassified from |
|
| Affected Line Item in | |||||
|
| 2022 |
|
| 2021 |
|
|
| ||
Gains (losses) on cash flow hedges |
|
|
|
|
|
|
|
| ||
Foreign exchange contracts |
| $ | 3.0 |
|
| $ | (0.7 | ) |
| Cost of products sold |
Commodity contracts |
|
| (0.3 | ) |
|
| 0.9 |
|
| Cost of products sold |
Interest rate contracts |
|
| 1.4 |
|
|
| 0.3 |
|
| Interest expense |
|
|
| 4.1 |
|
|
| 0.5 |
|
| Total before tax |
|
|
| (0.3 | ) |
|
| 0.1 |
|
| Tax expense |
Total reclassifications for the period |
| $ | 3.8 |
|
| $ | 0.6 |
|
| Net of tax |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
| ||
(In millions) | ||||||||||
Details about Accumulated Other |
| Amount Reclassified from |
|
| Affected Line Item in | |||||
|
| 2022 |
|
| 2021 |
|
|
| ||
Gains (losses) on cash flow hedges |
|
|
|
|
|
|
|
| ||
Foreign exchange contracts |
| $ | 2.1 |
|
| $ | 0.1 |
|
| Cost of products sold |
Commodity contracts |
|
| (0.4 | ) |
|
| 0.8 |
|
| Cost of products sold |
Interest rate contracts |
|
| 1.2 |
|
|
| 0.1 |
|
| Interest expense |
|
|
| 2.9 |
|
|
| 1.0 |
|
| Total before tax |
|
|
| (0.2 | ) |
|
| (0.1 | ) |
| Tax expense |
Total reclassifications for the period |
| $ | 2.7 |
|
| $ | 0.9 |
|
| Net of tax |
10. Revenue
The following table disaggregates our consolidated revenue by major sales distribution channels for the sixthirteen weeks ended April 1, 2023 and three months ended June 30, 2022 and 2021:March 31, 2022:
(In millions) |
| Six Months Ended |
|
| Three Months Ended |
|
| Thirteen Weeks Ended April 1, 2023 |
|
| Three Months Ended March 31, 2022 |
| ||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||||||||||
Wholesalers(a) |
| $ | 1,886.8 |
|
| $ | 1,660.8 |
|
| $ | 1,034.5 |
|
| $ | 862.8 |
|
| $ | 460.5 |
|
| $ | 487.9 |
|
Home Center retailers(b) |
|
| 1,206.9 |
|
|
| 1,117.1 |
|
|
| 605.9 |
|
|
| 568.2 |
|
|
| 295.4 |
|
|
| 319.5 |
|
Other retailers(c) |
|
| 210.2 |
|
|
| 198.1 |
|
|
| 117.1 |
|
|
| 99.0 |
|
|
| 95.5 |
|
|
| 93.2 |
|
Builder direct |
|
| 160.0 |
|
|
| 129.1 |
|
|
| 87.8 |
|
|
| 67.7 |
|
|
| 0.5 |
|
|
| — |
|
U.S. net sales |
|
| 3,463.9 |
|
|
| 3,105.1 |
|
|
| 1,845.3 |
|
|
| 1,597.7 |
|
|
| 851.9 |
|
|
| 900.6 |
|
International(d) |
|
| 564.4 |
|
|
| 602.0 |
|
|
| 265.7 |
|
|
| 338.4 |
|
|
| 188.1 |
|
|
| 239.6 |
|
Net sales |
| $ | 4,028.3 |
|
| $ | 3,707.1 |
|
| $ | 2,111.0 |
|
| $ | 1,936.1 |
|
| $ | 1,040.0 |
|
| $ | 1,140.2 |
|
16
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Defined Benefit Plans
The components of net periodic benefit income for pension benefits for the sixthirteen weeks ended April 1, 2023 and three months ended June 30,March 31, 2022 and 2021 were as follows:
(In millions) |
| Six Months Ended June 30, |
|
| Three Months Ended June 30, |
|
|
| Pension Benefits |
| |||||||||||||||
|
| Pension Benefits |
|
| Pension Benefits |
|
| ||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
|
| Thirteen Weeks Ended April 1, 2023 |
|
| Three Months Ended March 31, 2022 |
| ||||||
Service cost |
| $ | 0.2 |
|
| $ | 0.2 |
|
| $ | 0.1 |
|
| $ | 0.1 |
|
|
| $ | — |
|
| $ | 0.1 |
|
Interest cost |
|
| 12.7 |
|
|
| 12.0 |
|
|
| 6.4 |
|
|
| 6.0 |
|
|
|
| 6.9 |
|
|
| 5.1 |
|
Expected return on plan assets |
|
| (17.7 | ) |
|
| (17.5 | ) |
|
| (8.9 | ) |
|
| (8.8 | ) |
|
|
| (7.2 | ) |
|
| (7.0 | ) |
Net periodic benefit income |
| $ | (4.8 | ) |
| $ | (5.3 | ) |
| $ | (2.4 | ) |
| $ | (2.7 | ) |
|
| $ | (0.3 | ) |
| $ | (1.8 | ) |
Service cost relates to benefit accruals in an hourly Union defined benefit plan in our Outdoors & Security segment. All other defined benefit pension plans were frozen as of December 31, 2016.
12. Income Taxes
The effective income tax rates for sixthe thirteen weeks ended April 1, 2023, and three months ended June 30March 31, 2022, were 23.423.1% and 24.321.3% for 2022 and 20.8% and 21.0% for 2021,, respectively.
The difference between the Company’s effective income tax rate for the six monthsthirteen weeks ended June 30, 2022April 1, 2023, and the U.S. statutory rate of 21.021% primarily relates to state income taxes (net of federal income tax benefit)benefits), foreign income taxed at higher rates, partially offset by a favorable benefit related to decreases in uncertain tax benefit for stock compensation, changes inpositions and a valuation allowances, and foreign tax expense.allowance release.
15
FORTUNE BRANDS INNOVATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. 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 sixthirteen weeks ended April 1, 2023 and three months ended June 30, 2022 and 2021, respectively.March 31, 2022.
(In millions) |
| Six Months Ended |
|
| Thirteen Weeks Ended April 1, 2023 |
|
| Three Months Ended March 31, 2022 |
| |||||||
|
| 2022 |
|
| 2021 |
| ||||||||||
Reserve balance at January 1, |
| $ | 26.5 |
|
| $ | 24.5 |
|
| $ | 20.1 |
|
| $ | 19.5 |
|
Provision for warranties issued |
|
| 22.2 |
|
|
| 16.9 |
|
|
| 2.1 |
|
|
| 1.6 |
|
Settlements made (in cash or in kind) |
|
| (21.3 | ) |
|
| (16.8 | ) |
|
| (2.6 | ) |
|
| (1.8 | ) |
Acquisition |
|
| 0.4 |
|
|
| 0.3 |
|
|
| — |
|
|
| 0.4 |
|
Foreign translation adjustments |
|
| (0.2 | ) |
|
| 0 |
| ||||||||
Reserve balance at June 30, |
| $ | 27.6 |
|
| $ | 24.9 |
| ||||||||
Reserve balance at end of period |
| $ | 19.6 |
|
| $ | 19.7 |
|
17
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Information on Business Segments
Net sales and operating income for the sixthirteen weeks ended April 1, 2023 and three months ended June 30,March 31, 2022 and 2021 by segment were as follows:
|
| Six Months Ended June 30, | |||||||||||
(In millions) |
| 2022 |
|
| 2021 |
|
| % Change | |||||
Net Sales |
|
|
|
|
|
|
|
|
|
| |||
Water Innovations |
| $ | 1,293.6 |
|
| $ | 1,316.2 |
|
|
| (1.7 | ) | % |
Outdoors & Security |
|
| 1,102.0 |
|
|
| 997.0 |
|
|
| 10.5 |
|
|
Cabinets |
|
| 1,632.7 |
|
|
| 1,393.9 |
|
|
| 17.1 |
|
|
Net sales |
| $ | 4,028.3 |
|
| $ | 3,707.1 |
|
|
| 8.7 |
| % |
Operating Income (Loss) |
|
|
|
|
|
|
|
|
|
| |||
Water Innovations |
| $ | 310.0 |
|
| $ | 316.8 |
|
|
| (2.1 | ) | % |
Outdoors & Security |
|
| 152.7 |
|
|
| 131.3 |
|
|
| 16.3 |
|
|
Cabinets |
|
| 142.4 |
|
|
| 147.0 |
|
|
| (3.1 | ) |
|
Less: Corporate expenses |
|
| (67.6 | ) |
|
| (51.8 | ) |
|
| (30.5 | ) |
|
Operating income |
| $ | 537.5 |
|
| $ | 543.3 |
|
|
| (1.1 | ) | % |
|
|
|
|
|
|
|
|
|
|
| |||
|
| Three Months Ended June 30, | |||||||||||
(In millions) |
| 2022 |
|
| 2021 |
|
| % Change | |||||
Net Sales |
|
|
|
|
|
|
|
|
|
| |||
Water Innovations |
| $ | 650.0 |
|
| $ | 694.6 |
|
|
| (6.4 | ) | % |
Outdoors & Security |
|
| 605.4 |
|
|
| 535.5 |
|
|
| 13.1 |
|
|
Cabinets |
|
| 855.6 |
|
|
| 706.0 |
|
|
| 21.2 |
|
|
Net sales |
| $ | 2,111.0 |
|
| $ | 1,936.1 |
|
|
| 9.0 |
| % |
Operating Income (Loss) |
|
|
|
|
|
|
|
|
|
| |||
Water Innovations |
| $ | 160.7 |
|
| $ | 168.9 |
|
|
| (4.9 | ) | % |
Outdoors & Security |
|
| 92.5 |
|
|
| 78.5 |
|
|
| 17.8 |
|
|
Cabinets |
|
| 68.8 |
|
|
| 74.4 |
|
|
| (7.5 | ) |
|
Less: Corporate expenses |
|
| (37.9 | ) |
|
| (26.9 | ) |
|
| (40.9 | ) |
|
Operating income |
| $ | 284.1 |
|
| $ | 294.9 |
|
|
| (3.7 | ) | % |
(In millions) |
| Thirteen Weeks Ended April 1, 2023 |
|
| Three Months Ended March 31, 2022 |
|
| % Change | |||||
Net Sales |
|
|
|
|
|
|
|
|
|
| |||
Water |
| $ | 594.2 |
|
| $ | 643.6 |
|
|
| (7.7 | ) | % |
Outdoors |
|
| 289.9 |
|
|
| 343.6 |
|
|
| (15.6 | ) |
|
Security |
|
| 155.9 |
|
|
| 153.0 |
|
|
| 1.9 |
|
|
Net sales |
| $ | 1,040.0 |
|
| $ | 1,140.2 |
|
|
| (8.8 | ) | % |
Operating Income |
|
|
|
|
|
|
|
|
|
| |||
Water |
| $ | 128.4 |
|
| $ | 149.3 |
|
|
| (14.0 | ) | % |
Outdoors |
|
| 13.0 |
|
|
| 39.8 |
|
|
| (67.3 | ) |
|
Security |
|
| 21.1 |
|
|
| 20.4 |
|
|
| 3.4 |
|
|
Less: Corporate expenses |
|
| (30.7 | ) |
|
| (29.7 | ) |
|
| (3.4 | ) |
|
Operating income |
| $ | 131.8 |
|
| $ | 179.8 |
|
|
| (26.7 | ) | % |
15. Restructuring and Other Charges
Pre-tax restructuring and other charges (gains) for the sixthirteen weeks ended April 1, 2023 and three months ended June 30,March 31, 2022 and 2021 are shown below.
(In millions) |
| Six Months Ended June 30, 2022 |
|
| Six Months Ended June 30, 2021 |
| ||||||||||||||||||
|
| Restructuring |
|
| Other |
|
| Total |
|
| Restructuring |
|
| Other |
|
| Total |
| ||||||
Water Innovations |
| $ | 0.9 |
|
| $ | 0.8 |
|
| $ | 1.7 |
|
| $ | - |
|
| $ | 1.6 |
|
| $ | 1.6 |
|
Outdoors & Security |
|
| 0.7 |
|
|
| (6.3 | ) |
|
| (5.6 | ) |
|
| 6.1 |
|
|
| - |
|
|
| 6.1 |
|
Cabinets |
|
| 1.3 |
|
|
| 2.4 |
|
|
| 3.7 |
|
|
| 1.8 |
|
|
| 2.6 |
|
|
| 4.4 |
|
Total |
| $ | 2.9 |
|
| $ | (3.1 | ) |
| $ | (0.2 | ) |
| $ | 7.9 |
|
| $ | 4.2 |
|
| $ | 12.1 |
|
(In millions) |
| Thirteen Weeks Ended April 1, 2023 |
|
| Three Months Ended March 31, 2022 |
| ||||||||||||||||||
|
| Restructuring |
|
| Other |
|
| Total |
|
| Restructuring |
|
| Other |
|
| Total |
| ||||||
Water |
| $ | 0.2 |
|
| $ | 0.1 |
|
| $ | 0.3 |
|
| $ | — |
|
| $ | 0.8 |
|
| $ | 0.8 |
|
Outdoors |
|
| 1.5 |
|
|
| — |
|
|
| 1.5 |
|
|
| 0.6 |
|
|
| (6.2 | ) |
|
| (5.6 | ) |
Security |
|
| 0.7 |
|
|
| — |
|
|
| 0.7 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Corporate |
|
| 0.7 |
|
|
| — |
|
|
| 0.7 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total |
| $ | 3.1 |
|
| $ | 0.1 |
|
| $ | 3.2 |
|
| $ | 0.6 |
|
| $ | (5.4 | ) |
| $ | (4.8 | ) |
(a) | “Other Charges (Gains)” represent charges directly related to restructuring initiatives that cannot be reported as restructuring under GAAP. Such costs may include losses on disposal of inventories, trade receivables allowances from exiting product lines, accelerated depreciation resulting from the closure of facilities and gains or losses on the sale of previously closed facilities. |
1816
FORTUNE BRANDS HOME & SECURITY,INNOVATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restructuring and other charges (gains) in the
first six months of 2022 are largely related to severance costs associated with plant and office closures. Restructuring and other charges in the first six monthsquarter of 20212023 are largely related to severance costs associated with the relocation of manufacturing facilities within our Cabinets and Outdoors & Securityheadcount actions across all segments.
(In millions) |
| Three Months Ended June 30, 2022 |
|
| Three Months Ended June 30, 2021 |
| ||||||||||||||||||
|
| Restructuring |
|
| Other |
|
| Total |
|
| Restructuring |
|
| Other |
|
| Total |
| ||||||
Water Innovations |
| $ | 0.9 |
|
| $ | - |
|
| $ | 0.9 |
|
| $ | - |
|
| $ | 0.2 |
|
| $ | 0.2 |
|
Outdoors & Security |
|
| 0.1 |
|
|
| - |
|
|
| 0.1 |
|
|
| - |
|
|
| - |
|
|
| - |
|
Cabinets |
|
| 1.3 |
|
|
| 2.3 |
|
|
| 3.6 |
|
|
| 0.3 |
|
|
| 2.1 |
|
|
| 2.4 |
|
Total |
| $ | 2.3 |
|
| $ | 2.3 |
|
| $ | 4.6 |
|
| $ | 0.3 |
|
| $ | 2.3 |
|
| $ | 2.6 |
|
|
|
Restructuring and other charges (gains) in the secondfirst quarter of 2022 were largely related to severance costs associated with plant and office closuresa gain on the sale of previously closed manufacturing facility within our Cabinets and Water Innovations segments. Restructuring and other charges in the second quarter of 2021 largely related to costs associated with plant and office closuresOutdoors segment, partially offset by severance actions within our CabinetsOutdoors segment.
Reconciliation of Restructuring Liability
(In millions) |
| Balance at |
|
| 2022 |
|
| Cash |
|
| Balance at |
|
| Balance at |
|
| 2023 |
|
| Cash |
|
| Non-Cash |
|
| Balance at |
| |||||||||
Workforce reduction costs |
| $ | 4.7 |
|
| $ | 2.8 |
|
| $ | (4.3 | ) |
| $ | 3.2 |
|
| $ | 16.2 |
|
| $ | 2.3 |
|
| $ | (11.1 | ) |
| $ | 0.7 |
|
| $ | 8.1 |
|
Other |
|
| 1.0 |
|
|
| 0.1 |
|
|
| (0.2 | ) |
|
| 0.9 |
|
|
| 13.5 |
|
|
| 0.8 |
|
|
| (0.7 | ) |
|
| (13.6 | ) |
|
| — |
|
Total |
| $ | 5.7 |
|
| $ | 2.9 |
|
| $ | (4.5 | ) |
| $ | 4.1 |
| ||||||||||||||||||||
| $ | 29.7 |
|
| $ | 3.1 |
|
| $ | (11.8 | ) |
| $ | (12.9 | ) |
| $ | 8.1 |
|
(a) Cash expenditures primarily relate to severance charges.
(In millions) |
| Balance at |
|
| 2021 |
|
| Cash |
|
| Balance at |
|
| Balance at |
|
| 2022 |
|
| Cash |
|
| Non-Cash |
|
| Balance at |
| |||||||||
Workforce reduction costs |
| $ | 6.9 |
|
| $ | 6.4 |
|
| $ | (7.9 | ) |
| $ | 5.4 |
|
| $ | 3.2 |
|
| $ | 0.6 |
|
| $ | (3.3 | ) |
| $ | — |
|
| $ | 0.5 |
|
Other |
|
| 0.7 |
|
|
| 1.5 |
|
|
| (0.9 | ) |
|
| 1.3 |
|
|
| 0.8 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.8 |
|
Total |
| $ | 7.6 |
|
| $ | 7.9 |
|
| $ | (8.8 | ) |
| $ | 6.7 |
| ||||||||||||||||||||
| $ | 4.0 |
|
| $ | 0.6 |
|
| $ | (3.3 | ) |
| $ | — |
|
| $ | 1.3 |
|
(a) Cash expenditures primarily relate to severance charges.
16. Earnings Per Share
The computations of earnings per common share for the sixthirteen weeks ended April 1, 2023 and three months ended June 30,March 31, 2022 and 2021 were as follows:
(In millions, except per share data) |
| Six Months Ended |
|
| Three Months Ended |
|
| Thirteen Weeks Ended April 1, 2023 |
|
| Three Months Ended March 31, 2022 |
| ||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||||||||||
Income from continuing operations, net of tax |
| $ | 85.6 |
|
| $ | 126.2 |
| ||||||||||||||||
Income from discontinued operations, net of tax |
|
| (1.0 | ) |
|
| 54.7 |
| ||||||||||||||||
Net income |
| $ | 372.9 |
|
| $ | 395.0 |
|
| $ | 192.0 |
|
| $ | 217.2 |
|
| $ | 84.6 |
|
| $ | 180.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Basic earnings per common share |
| $ | 2.83 |
|
| $ | 2.85 |
|
| $ | 1.47 |
|
| $ | 1.57 |
| ||||||||
Diluted earnings per common share |
| $ | 2.80 |
|
| $ | 2.81 |
|
| $ | 1.46 |
|
| $ | 1.55 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Earnings per common share |
|
|
|
|
|
| ||||||||||||||||||
Basic |
|
|
|
|
|
| ||||||||||||||||||
Continuing operations |
| $ | 0.67 |
|
| $ | 0.95 |
| ||||||||||||||||
Discontinued operations |
|
| (0.01 | ) |
|
| 0.41 |
| ||||||||||||||||
Basic earnings per share |
| $ | 0.66 |
|
| $ | 1.36 |
| ||||||||||||||||
Diluted |
|
|
|
|
|
| ||||||||||||||||||
Continuing operations |
| $ | 0.67 |
|
| $ | 0.94 |
| ||||||||||||||||
Discontinued operations |
|
| (0.01 | ) |
|
| 0.40 |
| ||||||||||||||||
Diluted earnings per share |
| $ | 0.66 |
|
| $ | 1.34 |
| ||||||||||||||||
Basic average shares outstanding |
|
| 131.9 |
|
|
| 138.5 |
|
|
| 130.3 |
|
|
| 138.4 |
|
|
| 127.8 |
|
|
| 133.4 |
|
Stock-based awards |
|
| 1.1 |
|
|
| 2.0 |
|
|
| 0.9 |
|
|
| 2.0 |
|
|
| 0.7 |
|
|
| 1.3 |
|
Diluted average shares outstanding |
|
| 133.0 |
|
|
| 140.5 |
|
|
| 131.2 |
|
|
| 140.4 |
|
|
| 128.5 |
|
|
| 134.7 |
|
Antidilutive stock-based awards excluded from weighted- |
|
| 1.0 |
|
|
| 0.3 |
|
|
| 1.6 |
|
|
| 0.4 |
|
|
| 1.0 |
|
|
| 0.4 |
|
19
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Commitments and Contingencies
Litigation
We are defendantsThe Company is a defendant in lawsuits associated with the normal conduct of our businesses and operations.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 our 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.
17
FORTUNE BRANDS INNOVATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Environmental
Compliance with federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, did not have a material effect on capital expenditures, earnings or the competitive position of Fortune Brands during the six and three months ended June 30, 2022 and 2021. 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.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. 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 compliance with current environmental protection laws (before taking into account estimated recoveries from third parties) will not have a material adverse effect upon our results of operations, cash flows or financial condition.
2018
Item 2. FORTUNE BRANDS HOME & SECURITY,INNOVATIONS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto, which are included in this report, as well as our audited consolidated financial statements for the year ended December 31, 2021,2022, which are included in our Annual Report on Form 10-K for the year ended December 31, 2021.2022.
This discussion contains forward-looking statements that are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),. Forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations for our business, operations, financial performance or financial condition in addition to statements regarding our general business strategies, the market potential, the potential of our brands, trends in the housing market, the potential impact of costs, including material and other matters,labor costs, the potential impact of inflation, expected capital spending, expected pension contributions, the expected impact of acquisitions, dispositions and other strategic transactions including the expected benefits of the Separation of MasterBrand and the tax-free nature of the Separation, the anticipated impact of recently issued accounting standards on our financial statements, the anticipated impact of acquisitions, other strategic transactions and other matters that are not historical in nature, including the expected or potential impact of the novel coronavirus (“COVID-19”) pandemic.nature. Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans”“plans,” “outlook,” “positioned” 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 current expectations, estimates, assumptions and projections of our management about our industry, business and future financial results, available at the time this report is filed with the Securities and Exchange Commission. OurAlthough 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 could differto be materially different from the results contemplated by these forward-lookingthose indicated in such statements, due to a number of factors, including but not limited to: (i) our reliance on the North American and Chinese home improvement, repair and remodel and new home construction activity levels, (ii) the housing market, downward changes in the general economy, unfavorable interest rates or other business conditions, (iii) the competitive nature of consumer and trade brand businesses, (iv) our ability to develop new products or processesexecute on our strategic plans and improve existing products and processes,the effectiveness of our strategies in the face of business competition, (v) our reliance on key customers and suppliers, including wholesale distributors and dealers and retailers, (vi) risks associated with our ability to improve organizational productivity and global supply chain efficiency and flexibility, (vii) risks associated with global commodity and energy availability and price volatility, as well as the possibility of sustained inflation, (viii) delays or outages in our information technology systems or computer networks, (ix) risks associated with doing business globally, including changes in trade-related tariffs and risks with uncertain trade environments, (x) risks associated with the disruption of operations, (xi) our inability to obtain raw materials and finished goods in a timely and cost-effective manner, (xii) risks associated with entering into potential strategic acquisitions and joint ventures and related integration activities, (xiii) impairments in the carrying value of goodwill or other acquired intangible assets, (xiv) risk of increases in our defined benefit-related costs and funding requirements, (xv) the uncertainties relating to the impact of COVID-19 on the Company’s business, financial performance and operating results, (xvi) our ability to attract and retain qualified personnel and other labor constraints, (xvii) the effect of climate change and the impact of related changes in government regulations and consumer preferences, (xviii) risks associated with environmental, social and governance matters, (xix) changes in government and industry regulatory standards, (xx) future tax law changes or the interpretation of existing tax laws, (xxi) our ability to secure and protect our intellectual property rights, (xxii) potential liabilities and costs from claims and litigation, (xxiii) the potential costs and disruption to our business of implementing the Spin-Off, (xxiv) our ability to consummate the Spin-Off and achieve the expected benefits of the Spin-Off transaction,Separation of MasterBrand, (xxiv) the risk that we may be required to indemnify MasterBrand in connection with the Separation or that MasterBrand’s indemnities to us may not be sufficient to hold us harmless for the full amount of liabilities for which MasterBrand has been allocated responsibility and (xxv) the loss of synergies from operating the businesses that could negatively impact the balance sheet, profit margins or earnings of both businesses, (xxvi) the potential that the combined value of the common stock of the two publicly-traded companies resulting from the Spin-Off does not equal or exceed the value that the Company’s common stock could have had if the Spin-Off had not occurred and (xxvii) the expected timing of the completion of the Spin-Off transaction and the transaction terms.Separation fails to qualify as tax-free for U.S. federal income tax purposes. These and other factors are discussed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021 and in Part II, Item 1A of this Report.2022. We undertake no obligation to, and expressly disclaim any such obligation to, update or clarify 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, except as required by law.
2119
OVERVIEW
References to “Fortune Brands,” “the Company,” “we,” “our” and “us” refer to Fortune Brands Home & Security,Innovations, Inc. and its consolidated subsidiaries as a whole, unless the context otherwise requires. The Company is a leading home, security and securitycommercial building products company with a portfolio of leading branded products used for residential home repair, remodeling, new construction and security applications.that competes in attractive long-term growth markets in our product categories.
On April 28,December 14, 2022, the Company announced thatcompleted the separation of its Board of Directors authorized the Company to develop a plan to separate the Company into two independent, publicly-traded companiesCabinets business, MasterBrand, Inc. (“MasterBrand”), via a tax-free spin-off transaction (the “Separation”) to create an independent, publicly-traded company. Immediately following completion of the MasterBrandSeparation, the Company changed its name from “Fortune Brands Home & Security, Inc.” to “Fortune Brands Innovations, Inc.” and its stock ticker changed from “FBHS” to “FBIN” to better reflect its focus on activities related to core brands and innovation. As a result of the Separation, our former Cabinets Inc. business into a separate standalone publicly-traded company (the "Spin-Off"). The Spin-Off is expected to be completed approximately twelve months from the announcement date, subject to a numbersegment was disposed of conditions including the approval by the Company’s Board of Directors and the effectivenessoperating results of a registration statementthe Cabinets business are reported as discontinued operations for all periods presented within this Quarterly Report on Form 10 to be filed with10-Q. All amounts, percentages and disclosures for all periods presented reflect only the SEC.continuing operations of the Company unless otherwise noted. See Note 4, Acquisitions and Dispositions, in the condensed consolidated financial statements, and Note 5, Discontinued Operations, in the consolidated financial statements in Item 8 of our 2022 Annual Report on Form 10-K for additional information.
We believe that the Company has certain competitive advantages including market-leading brands, a diversified mix of 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 stockholder value. We believe the Company’s track record reflects the long-term attractiveness and potential of the categories we serve and our leading brands. The long-term outlook for our products remain favorable, and our strategic advantages, including thosethe set of capabilities we refer to as the Fortune Brands Advantage, helps us to continue to achieve profitable organic growth.
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 under our share repurchase program as explained in further detail under “Liquidity and Capital Resources” below.
The U.S. market for our products primarily consists of spending on both new home construction and repair and remodel activities within existing homes, with a 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. InflationRecent increases in inflation and rising of mortgage rates have recently started slowingslowed the pace of single-family and existing home sales activity.activity and new home construction and repair and remodel activities. However, we believe we are well positioned to manage anywhat we expect to be a short-term slow-down in the housing market becauseas we believe the fundamental drivers of the housing market remain intact.
We have been and may continue to be impacted by near-term supply, labor and freight constraints, a volatile global supply chain environment, as well as sustained increased rates of inflation, rising interest rates, unfavorable fluctuations in foreign exchange rates and the ongoing costs of tariffs. We continue to manage these challenges and are diligently working to offset potential unfavorable impacts of these items through continuous productivity improvement initiatives and price increases.
On January 19, 2023, the Board of Directors of the Company approved a change to the Company’s fiscal year end from December 31 to a 52-or 53-week fiscal year ending on the Saturday closest but not subsequent to December 31, effective as of the commencement of the Company’s fiscal year on January 1, 2023. This change was made in order to align the Company’s fiscal year with that of its operating businesses and to align the Company’s reporting calendar with how the Company evaluates its businesses. There was no material impact to any of our previously disclosed financial information. As a result, the Company’s fiscal quarters for the 2023 fiscal year end on April 1, 2023, July 1, 2023, September 30, 2023, and December 30, 2023.
In February 2023, we publicly announced an internal reorganization to separate our Outdoors & Security segment under separate leadership to drive innovation, accelerate product development, and enhance investments and business processes. In conjunction with the reorganization, we changed how our chief operating decision maker evaluates and allocates the resources for the two businesses. Separate reporting for the new Outdoors and Security segments began in the first quarter of 2023 and comparative prior period amounts have been recast to conform to the new segment presentation. There was no impact to our Water Innovations segment (which we refer to as “Water”).
In December 2022, we entered into a definitive agreement to acquire the Emtek and Schaub premium and luxury door and cabinet hardware business and the United States and Canada Yale and August residential smart home locks business (collectively, the “ASSA Businesses”) from ASSA ABLOY, Inc. (“ASSA”), for a purchase price of $800 million in cash on a cash-free, debt-free basis, subject to customary adjustments. The transaction is conditioned on the successful closing of the acquisition by ASSA of Spectrum Brands, Inc.'s hardware and home improvement business division following a favorable resolution of the court proceedings with the U.S. Department of Justice. The Company intends to finance the transaction with cash on hand and borrowings under our existing credit facility.
20
In July 2022, we acquired 100% of the outstanding equity of Aqualisa Holdings (International) Ltd. (“Aqualisa”), a leading U.K. manufacturer of shower products known for premium, innovative and smart digital shower systems, for a purchase price of $156.0 million, net of cash acquired of $4.8 million. We financed the transaction using cash on hand and borrowings under our revolving credit facility. The results of Aqualisa are reported as part of the Water segment.
In January 2022, we acquired 100% of the outstanding equity of Solar Innovations LLC and an affiliated entity (together, “Solar”), a leading producer of wide-opening exterior door systems and outdoor enclosures, for a purchase price of $61.6 million, net of cash acquired. We financed the transaction using cash on hand and borrowings under our revolving credit facility. The results of Solar are reported as part of the Outdoors segment.
In the first quarter of 2022, our Plumbing segment was renamed “Water Innovations”Water Innovations to better align with our key brands and organizational purpose. The Plumbing segment name change had no impact on the Company’s historical financial position, results of operations, cash flow or segment-level results previously reported.
In January 2022, we acquired 100% of the outstanding equity of Solar Innovations LLC and an affiliated entity (together, "Solar"), a leading producer of wide-opening exterior door systems and outdoor enclosures, for a purchase price of approximately $61.6 million, net of cash acquired. The purchase price is subject to a final post-closing working capital adjustment. We financed the transaction using cash on hand and borrowings under our revolving credit facility. The results of Solar are reported as part of the Outdoors & Security segment. Its complementary product offerings support the segment’s outdoor living strategy.
2221
RESULTS OF OPERATIONS
SixThirteen Weeks Ended April 1, 2023 Compared to Three Months Ended June 30,March 31, 2022 Compared To Six Months Ended June 30, 2021
|
| Net Sales | |||||||||||
(In millions) |
| 2022 |
|
| 2021 |
|
| % Change | |||||
Water Innovations |
| $ | 1,293.6 |
|
| $ | 1,316.2 |
|
|
| (1.7 | ) | % |
Outdoors & Security |
|
| 1,102.0 |
|
|
| 997.0 |
|
|
| 10.5 |
|
|
Cabinets |
|
| 1,632.7 |
|
|
| 1,393.9 |
|
|
| 17.1 |
|
|
Net sales |
| $ | 4,028.3 |
|
| $ | 3,707.1 |
|
|
| 8.7 |
| % |
|
|
|
|
|
|
|
|
|
|
| |||
|
| Operating Income (Loss) | |||||||||||
|
| 2022 |
|
| 2021 |
|
| % Change |
|
| |||
Water Innovations |
| $ | 310.0 |
|
| $ | 316.8 |
|
|
| (2.1 | ) | % |
Outdoors & Security |
|
| 152.7 |
|
|
| 131.3 |
|
|
| 16.3 |
|
|
Cabinets |
|
| 142.4 |
|
|
| 147.0 |
|
|
| (3.1 | ) |
|
Less: Corporate expenses |
|
| (67.6 | ) |
|
| (51.8 | ) |
|
| (30.5 | ) |
|
Operating income |
| $ | 537.5 |
|
| $ | 543.3 |
|
|
| (1.1 | ) | % |
|
| Net Sales | |||||||||||
(In millions) |
| 2023 |
|
| 2022 |
|
| % Change | |||||
Water |
| $ | 594.2 |
|
| $ | 643.6 |
|
|
| (7.7 | ) | % |
Outdoors |
|
| 289.9 |
|
|
| 343.6 |
|
|
| (15.6 | ) |
|
Security |
|
| 155.9 |
|
|
| 153.0 |
|
|
| 1.9 |
|
|
Net sales |
| $ | 1,040.0 |
|
| $ | 1,140.2 |
|
|
| (8.8 | ) | % |
|
|
|
|
|
|
|
|
|
|
| |||
|
| Operating Income (Loss) | |||||||||||
|
| 2023 |
|
| 2022 |
|
| % Change |
|
| |||
Water |
| $ | 128.4 |
|
| $ | 149.3 |
|
|
| (14.0 | ) | % |
Outdoors |
|
| 13.0 |
|
|
| 39.8 |
|
|
| (67.3 | ) |
|
Security |
|
| 21.1 |
|
|
| 20.4 |
|
|
| 3.4 |
|
|
Less: Corporate expenses |
|
| (30.7 | ) |
|
| (29.7 | ) |
|
| (3.4 | ) |
|
Operating income |
| $ | 131.8 |
|
| $ | 179.8 |
|
|
| (26.7 | ) | % |
The following discussion of consolidated results of operations and segment results refers to the six monthsthirteen weeks ended June 30, 2022April 1, 2023 compared to the sixthree months ended June 30, 2021.March 31, 2022. Consolidated results of operations should be read in conjunction with segment results of operations.
Net sales
Net sales increaseddecreased by $321.2$100.2 million, or 8.7%8.8%, principally due to lower sales unit volume in the U.S. and Canada and slowing housing market activity in China, as well as unfavorable foreign exchange of approximately $11 million. These factors were partially offset by price increases to help mitigate the impact of cumulative commodity and transportation cost increases acrossin all of our segments, higher sales volume in the Cabinets segment and the benefit from the Solar InnovationsAqualisa acquisition ($11.414.7 million). These benefits were partially offset by and lower customer sales volumeincentives in the Water Innovations segment due to the impactas a result of shutdowns mandated by the Chinese government in response to a COVID-19 resurgence in China and higher sales incentives, as well as unfavorable foreign exchange of approximately $9 million.lower sales.
Cost of products sold
Cost of products sold increaseddecreased by $228.5$40.1 million, or 9.7%6.0%, due to lower sales volumes, the benefit from favorable geographic channel mix in the Water segment and productivity improvements in the Water segment. These factors were partially offset by manufacturing inefficiencies related to the lower sales unit volume in the Water and Outdoors segments, the impact of the Aqualisa acquisition, raw material cost increasesinflation and labor cost increases and unfavorable inventory-related expense write-offs in our Outdoors & Security and Cabinets segments, partially offset by the benefit from productivity improvements across all segments, a gain on the sale of a previously closed manufacturing facility within our Outdoors & Security segment and the impact of Larson's acquisition related inventory fair value adjustment amortization of $3.3 million in 2021, which did not recur in 2022.higher transportation costs.
Selling, general and administrative expenses
Selling, general and administrative expenses increaseddecreased by $78.0$15.6 million, or 10.2%5.6%, due to higherlower transportation, advertising, marketing and headcount-related costs.
Asset impairment charge
The asset impairment charge of $26.0 million in 2022 relates to an indefinite-lived tradename within our Cabinets segment. During the second quarter of 2022, production was shifted at a historical make-to-order plant to a stock product line, to enable what we expect to be a higher value purpose and growth opportunity, which led to downward revisions to forecasted revenue growth ratesheadcount related costs, as well as savings associated with our 2022 corporate reorganization and restructuring activities. These factors were partially offset by the tradename.benefit related to the Aqualisa acquisition in 2022.
Restructuring charges
Restructuring charges of $2.9$3.1 million in the six monthsthirteen weeks ended June 30, 2022April 1, 2023 are largely related to severance costs associated with plant and office closures.headcount actions across all segments. Restructuring charges of $7.9 million in the sixfor three months ended June 30, 2021 largely related to severance costs associated with the relocation of manufacturing facilities within our Cabinets and Outdoors & Security segments.
23
RESULTS OF OPERATIONS (Continued)March 31, 2022 were $0.6 million.
Operating income
Operating income decreased by $5.8$48.0 million, or 1.1%26.7%, primarily due to manufacturing inefficiencies related to the lower sales unit volume, higher commodity costs, higher transportation and headcount-related costs, an asset impairment charge of $26.0 million, a continued shift to value-priced products in the Cabinets segmentlower net sales and higher sales rebateheadcount related costs, as well as unfavorable foreign exchange of approximately $2 million. These factors were partially offset by the benefit from higher net sales, the benefit fromfavorable geographic channel mix in Water, productivity improvements and lower restructuring charges.customer sales incentives in the Water segment and lower advertising and marketing costs.
22
RESULTS OF OPERATIONS (Continued)
Interest expense
Interest expense increased by $9.7$5.1 million to $52.3$26.8 million due to higher average borrowingsfixed rate debt balances with the issuance of the $450 million of 4.000% Senior Notes due 2032 and higher average interest rates.$450 million of 4.500% Senior Notes due 2052. This amount was partially offset with a reduction of balances under floating rate facilities. As of April 1, 2023, there were no floating rate balances outstanding.
Other (income) expense, net
Other income, net, was $1.5$6.3 million in the six monthsthirteen weeks ended June 30, 2022,April 1, 2023, compared to other expense, net of $2.0$2.1 million in the sixthree months ended June 30, 2021.March 31, 2022. The increase in other income, net is primarily due to a non-cash loss of $4.5 million related to the 2021 remeasurement of our investment in Flo immediately prior to consolidation, partly offset by a decreasean increase in foreign currency transaction gains.income and an increase in interest income.
Income taxes
The effective income tax rates for the sixthirteen weeks ended, April 1, 2023, and three months ended June 30,March 31, 2022, were 23.1% and 2021 were 23.4% and 20.8%21.3%, respectively. The difference between the Company’s effective income tax rate in 2022 wasfor the thirteen weeks ended April 1, 2023, and the U.S. statutory rate of 21% primarily relates to state income taxes (net of federal income tax benefits), foreign income taxed at higher than the prior period primarily duerates, partially offset by a favorable benefit related to increased foreign tax expense and lower tax benefits fromdecreases in uncertain tax positions offset by the benefit ofand a valuation allowance release.
Net incomeIncome from Continuing Operations, net of tax
Net incomeIncome from continuing operations, net of tax, was $372.9$85.6 million in the six monthsthirteen weeks ended June 30, 2022April 1, 2023, compared to $395.0$126.2 million in the sixthree months ended June 30, 2021.March 31, 2022. The decrease was due to lower operating income and higher interest expense, partly offset by lower income tax expense higher interest expense and lower operating income, partly offset by higher other income.
Income from Discontinued Operations, net of tax
Income from discontinued operations, net of income taxes, was $54.7 million for the quarter ending March 31, 2022 and includes the results from operations of our former Cabinets segment.
Results By Segment
Water Innovations
Net sales decreased by $22.6$49.4 million, or 1.7%7.7%, due to the impact of shutdowns mandated by the Chinese government in response to a COVID-19 resurgence in Chinalower sales unit volume, and higher sales rebate costs, as well as unfavorable foreign exchange of approximately $5$11 million. These factors were partially offset by the benefit from price increases to help mitigate the impact of cumulative commodity and transportation cost increases and the benefit from the Aqualisa acquisition ($14.7 million) and lower customer sales incentives as a sales increaseresult of the decrease in our U.S. e-commerce channel.sales.
Operating income decreased by $6.8$20.9 million, or 2.1%14.0%, due to lower net sales and manufacturing inefficiencies related to the lower sales volume and the impact of higher commodity and freight costs, as well as unfavorable foreign exchange of approximately $2 million.unit volume. These factors were partially offset by the benefit fromfavorable geographic channel mix, productivity improvements, lower customer sales incentives and lower advertising and marketing costs.
Outdoors
Net sales decreased by $53.7 million, or 15.6%, due to lower sales unit volume for our exterior doors and decking products. These were partially offset by price increases to help mitigate the impact of cumulative commodity and transportation cost increases, lower sales rebate costs and cost reductions, including employee-related costs.increases.
Outdoors & Operating income decreased by $26.8 million, or 67.3%, due to the impact of costs associated with manufacturing inefficiencies related to the lower sales unit volume, the absence of the 2022 gain of $6.2 million on the sale of a previously closed manufacturing facility and higher commodity and employee-related costs. These factors were partially offset by savings resulting from the rationalization of certain of our production facilities and lower transportation costs.
Security
Net sales increased by $105.0$2.9 million, or 10.5%1.9%, due to price increases to help mitigate the impact of cumulative commodity and transportation cost increases and continued growth in the benefit from the Solar Innovations acquisition ($11.4 million).commercial business. These benefits were partially offset by lower sales unit volume as well as unfavorable foreign exchange of approximately $3 million.in our retail safe business.
24
Operating income increased by $21.4$0.7 million, or 16.3%3.4%, due to higher net sales, lower restructuring costs including a gain of $6.2 million on the sale of a previously closed manufacturing facility, the benefit from productivity improvements, an increase in wholesale doors products versus retail doors products and the benefit from the Solar Innovations acquisition ($1.2 million). These benefits were partially offset by higher commodity, headcount-related and freight costs, in addition to labor availability constraints and an unfavorable inventory-related expense write-off, as well as unfavorable foreign exchange of approximately $1 million.
Cabinets
Net sales increased by $238.8 million, or 17.1%, due to price increases to help mitigate the impact of cumulative commodity and transportation cost increases and higher sales volume. These benefits were partially offset by unfavorable foreign exchange of approximately $1 million.
Operating income decreased by $4.6 million, or 3.1%, due to commodity cost inflation, a continued shift to value-priced products, higher freight costs, an asset impairment charge, higher headcount-related costs and an unfavorable inventory-related expense write-off. These factors were partly offset by the benefit from higher net sales and productivity improvements.
Corporate
Corporate expenses increased by $15.8 million, or 30.5%, due to higher consulting costs relating to our digital transformation initiatives and costs related to the planned Spin-Off of our Cabinets business.
2523
Three Months Ended June 30, 2022 Compared To Three Months Ended June 30, 2021
|
| Net Sales | |||||||||||
(In millions) |
| 2022 |
|
| 2021 |
|
| % Change | |||||
Water Innovations |
| $ | 650.0 |
|
| $ | 694.6 |
|
|
| (6.4 | ) | % |
Outdoors & Security |
|
| 605.4 |
|
|
| 535.5 |
|
|
| 13.1 |
|
|
Cabinets |
|
| 855.6 |
|
|
| 706.0 |
|
|
| 21.2 |
|
|
Net sales |
| $ | 2,111.0 |
|
| $ | 1,936.1 |
|
|
| 9.0 |
| % |
|
|
|
|
|
|
|
|
|
|
| |||
|
| Operating Income (Loss) | |||||||||||
|
| 2022 |
|
| 2021 |
|
| % Change | |||||
Water Innovations |
| $ | 160.7 |
|
| $ | 168.9 |
|
|
| (4.9 | ) | % |
Outdoors & Security |
|
| 92.5 |
|
|
| 78.5 |
|
|
| 17.8 |
|
|
Cabinets |
|
| 68.8 |
|
|
| 74.4 |
|
|
| (7.5 | ) |
|
Less: Corporate expenses |
|
| (37.9 | ) |
|
| (26.9 | ) |
|
| (40.9 | ) |
|
Operating income |
| $ | 284.1 |
|
| $ | 294.9 |
|
|
| (3.7 | ) | % |
The following discussion of consolidated results of operations and segment results refers to the three months ended June 30, 2022 compared to the three months ended June 30, 2021. Consolidated results of operations should be read in conjunction with segment results of operations.
Net sales
Net sales increased by $174.9 million, or 9.0%, due to price increases to help mitigate the impact of cumulative commodity and transportation cost increases across all our segments, higher sales volume in the Cabinets segment, the benefit from the Solar Innovations acquisition ($8.4 million) and lower sales incentive costs. These benefits were partially offset by lower sales volume in the Water Innovations segment due to the impact of shutdowns mandated by the Chinese government in response to a COVID-19 resurgence in China, as well as unfavorable foreign exchange of approximately $10 million.
Cost of products sold
Cost of products sold increased by $117.6 million, or 9.6%, due to the impact of raw material and labor cost increases, the impact of the Solar Innovations acquisition ($7.0 million) and unfavorable inventory-related expense write-offs in our Outdoors & Security and Cabinets segments, partially offset by the benefit of productivity improvements across all segments.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $40.0 million, or 10.1%, due to higher transportation and headcount-related costs.
Asset impairment charge
The asset impairment charge of $26.0 million in 2022 relates to an indefinite-lived tradename within our Cabinets segment. During the second quarter of 2022, production was shifted at a historical make-to-order plant to a stock product line, to enable what we expect to be a higher value purpose and growth opportunity, which led to downward revisions to forecasted revenue growth rates associated with the tradename.
Restructuring charges
Restructuring charges of $2.3 million in the three months ended June 30, 2022 largely related to severance costs associated with plant and office closures within our Cabinets and Water Innovations segments. Restructuring charges of $0.3 million in the three months ended June 30, 2021 largely related to costs associated with plant and office closures within our Cabinets segment.
Operating income
Operating income decreased by $10.8 million, or 3.7%, primarily due to higher commodity, headcount-related and transportation costs, an asset impairment charge of $26.0 million, a continued shift to value-priced products in the Cabinets segment and higher restructuring costs, as well as unfavorable foreign exchange of approximately $3 million. These factors were partially offset by the benefit from higher net sales, the benefit from productivity improvements and the benefit from the Solar Innovations acquisition.
26
Interest expense
Interest expense increased by $9.3 million to $30.5 million due to higher average borrowings and higher average interest rates.
Other income, net
Other income, net, was $0.2 million in the three months ended June 30, 2022, compared to $1.3 million in the three months ended June 30, 2021. The decrease in other income, net is primarily due to a decrease in foreign currency transaction gains.
Income taxes
The effective income tax rates for the three months ended June 30, 2022 and 2021 were 24.3% and 21.0%, respectively. The effective income tax rate in 2022 was higher than the prior period primarily due to increased foreign tax expense, lower tax benefits from share-based compensation and uncertain tax positions, offset by the benefit of a valuation allowance release.
Net income
Net income was $192.0 million in the three months ended June 30, 2022 compared to $217.2 million in the three months ended June 30, 2021. The decrease was due to lower operating income, higher interest expense, higher income tax expense and lower other income.
Results By Segment
Water Innovations
Net sales decreased by $44.6 million, or 6.4%, due to the impact of shutdowns mandated by the Chinese government in response to a COVID-19 resurgence in China, as well as unfavorable foreign exchange of approximately $6 million. These factors were partially offset by the benefit from price increases to help mitigate the impact of cumulative commodity and transportation cost increases, sales increases in our U.S. e-commerce channel and lower sales rebate costs.
Operating income decreased by $8.2 million, or 4.9%, due to the lower sales volume and the impact of higher commodity and freight costs, as well as unfavorable foreign exchange of approximately $3 million. These factors were partially offset by the benefit from price increases to help mitigate the impact of cumulative commodity and transportation cost increases, lower sales rebate costs, and cost reductions, including employee-related costs.
Outdoors & Security
Net sales increased by $69.9 million, or 13.1%, due to price increases to help mitigate the impact of cumulative commodity and transportation cost increases and the benefit from the Solar Innovations acquisition ($8 million). These benefits were partially offset by lower sales volume, as well as unfavorable foreign exchange of approximately $2 million.
Operating income increased by $14.0 million, or 17.8%, due to higher net sales, the benefit from productivity improvements, an increase in wholesale doors products versus retail doors products within the quarter and the benefit from the Solar Innovations acquisition. These benefits were partially offset by commodity, headcount-related and freight costs, in addition to labor availability constraints and an unfavorable inventory-related expense write-off, as well as unfavorable foreign exchange of approximately $1 million.
Cabinets
Net sales increased by $149.6 million, or 21.2%, due to price increases to help mitigate the impact of cumulative commodity and transportation cost increases and higher sales volume. These benefits were partially offset by unfavorable foreign exchange of approximately $1 million.
Operating income decreased by $5.6 million, or 7.5%, due to an asset impairment charge related to a make-to-order indefinite-lived tradename, commodity cost inflation, a continued shift to value-priced products, higher freight and headcount-related costs and an unfavorable inventory-related expense write-off. These factors were partly offset by the benefit from higher net sales and productivity improvements.
Corporate
Corporate expenses increased by $11.0$1.0 million, or 40.9%3.4%, due to costs related to the planned spin-offacquisition of our Cabinets business, higher consulting costs relating to our digital transformation initiatives, and higher employee-related costs.the ASSA Businesses.
27
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash on hand, cash flows from operating activities, cash borrowed under our credit facility and cash from debt issuances in the capital markets. Our operating income is generated by our subsidiaries. We believe our operating cash flows, including funds available under the credit 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, repurchase shares of our common 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 of our Annual Report on Form 10-K for the year-endedyear ended December 31, 20212022 entitled “Item 1A. Risk Factors.”Factors”. In addition, we cannot predict whether or when we may enter into acquisitions, joint ventures or dispositions, repurchase shares of our common stock under our share repurchase program or pay dividends, or what 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.
Long-Term Debt
In March 2022, the Company issued $900 million in aggregate principal amount of senior unsecured notes in a registered public offering consisting of $450 million of 4.00% senior unsecured notes maturing in 2032 and $450 million of 4.50% senior unsecured notes maturing in 2052 (together, the “2022 Notes”). The Company used the net proceeds from the 2022 Notes offering to pay down a portion of the outstanding balance on the 2021 Term Loan (as defined below).
At June 30, 2022,April 1, 2023, the Company had aggregate outstanding notes in the amount of $2.7 billion, with varying maturities (the “Notes”). The Notes are unsecured senior obligations of the Company. The Company intends to repay or refinance the $600 million outstanding principal amount of 4.00% Senior Notes due September 2023 on or before the maturity date. In addition, we believe that we have the ability to obtain alternative sources of financing if required. The following table provides a summary of the Company’s outstanding Notes, including the net carrying value of the Notes, net of underwriting commissions, price discounts and debt issuance costs as of June 30, 2022April 1, 2023 and December 31, 2021:2022:
|
|
| Net Carrying Value |
|
|
| Net Carrying Value |
| ||||||||||||||||||||||
(in millions) | Principal Amount |
|
| Issuance Date |
| Maturity Date |
| June 30, 2022 |
|
| December 31, 2021 |
| Principal Amount |
|
| Issuance Date |
| Maturity Date |
| April 1, 2023 |
|
| December 31, 2022 |
| ||||||
4.000% Senior Notes | $ | 500.0 |
|
| June 2015 |
| June 2025 |
| $ | 497.7 |
|
| $ | 497.4 |
| $ | 500.0 |
|
| June 2015 |
| June 2025 |
| $ | 498.3 |
|
| $ | 498.1 |
|
4.000% Senior Notes |
| 600.0 |
|
| September 2018 |
| September 2023 |
|
| 598.8 |
|
|
| 598.2 |
|
| 600.0 |
|
| September 2018 |
| September 2023 |
|
| 599.5 |
|
|
| 599.2 |
|
3.250% Senior Notes |
| 700.0 |
|
| September 2019 |
| September 2029 |
|
| 694.6 |
|
|
| 694.2 |
|
| 700.0 |
|
| September 2019 |
| September 2029 |
|
| 695.2 |
|
|
| 695.0 |
|
4.000% Senior Notes |
| 450.0 |
|
| March 2022 |
| March 2032 |
|
| 445.4 |
|
|
| - |
|
| 450.0 |
|
| March 2022 |
| March 2032 |
|
| 445.9 |
|
|
| 445.8 |
|
4.500% Senior Notes |
| 450.0 |
|
| March 2022 |
| March 2052 |
|
| 435.0 |
|
|
| - |
|
| 450.0 |
|
| March 2022 |
| March 2052 |
|
| 435.5 |
|
|
| 435.4 |
|
Total Senior Notes | $ | 2,700.0 |
|
| $ | 2,671.5 |
|
| $ | 1,789.8 |
| $ | 2,700.0 |
|
| $ | 2,674.4 |
|
| $ | 2,673.5 |
|
Credit Facilities
In August 2022, the Company entered into a third amended and restated $1.25 billion revolving credit facility (the “2022 Revolving Credit Agreement”), and borrowings thereunder will be used for general corporate purposes. The maturity date of the facility is August 2027. Interest rates under the 2022 Revolving Credit Agreement are variable based on SOFR at the time of the borrowing and the Company’s long-term credit rating and can range from SOFR + 1.02% to SOFR + 1.525%. Under the 2022 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 April 1, 2023, and December 31, 2022, there were no outstanding borrowings under this facility. As of April 1, 2023, we were in compliance with all covenants under this facility.
In November 2021, the Company entered into a 364-day, $400 million term loan credit agreement (the “2021 Term Loan”), for general corporate purposes, to mature in November 2022. On March 1, 2022, the Company entered into a First Amendment and Incremental Agreement to the 2021 Term Loan (the “First Amendment”). The First Amendment provided for an increase in the principal amount from $400 million to $600 million as well as the transition from LIBOR to SOFR interest rates. As a result, interest
24
rates under the 2021 Term Loan were variable based on SOFR at the time of the borrowing and the Company’s long-term credit rating and could range from SOFR + 0.725% to SOFR + 1.350%. On March 18, 2022, the Company entered into a Second Amendment and Incremental Agreement to the 2021 Term Loan (the “Second Amendment”), increasing the principal amount from $600 million to $1.1 billion. All other terms and conditions remained the same under the First Amendment and Second Amendment. Proceeds from the increased 2021 Term Loan were used to repay outstanding balances on the 2019 Revolving Credit Agreement (as defined below).under our previous revolving credit facility. The outstanding $1.1 billion under the 2021 Term Loan was repaid on March 25, 2022 with proceeds from the 2022 Notes and other existing sources of liquidity.
In September 2019, the Company entered into a second amended and restated $1.25 billion revolvingWe currently have uncommitted bank lines of credit facility (the “2019 Revolving Credit Agreement”), andin China, which provide for unsecured borrowings thereunder will be used for general corporate purposes. The maturity dateworking capital of the facility is September 2024. Interest rates under the 2019 Revolving Credit Agreement are variable based on LIBOR at the timeup to $20.5 million in aggregate as of the borrowing and the Company’s long-term credit rating and can range from LIBOR + 0.91% to LIBOR + 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 June 30, 2022April 1, 2023 and December 31, 2021, our2022, respectively. There were no outstanding borrowings under this facility were $125.0 millionbalances as of April 1, 2023 and $520.0December 31, 2022.
28
million, respectively. This facility is included in Long-term debt in the condensed consolidated balance sheets. As of June 30, 2022 we were in compliance with all covenants under this facility.
Commercial Paper
In November 2021, theThe Company establishedoperates a commercial paper program (the "Commercial“Commercial Paper Program"Program”) pursuant to which the Company may issue unsecured commercial paper notes. The Company's 20192022 Revolving Credit Agreement is the liquidity backstop for the repayment of any notes issued under the Commercial Paper Program, and as such borrowings under the Commercial Paper Program are included in Long-term debt in the condensed consolidated balance sheets. Amounts available under the Commercial Paper Program may be borrowed, repaid and re-borrowed, with the aggregate principal amount outstanding at any time, including borrowings under the 20192022 Revolving Credit Agreement, not to exceed $1.25 billion. The Company plans towill use net proceeds from any issuances under the Commercial Paper Program for general corporate purposes. On June 30, 2022April 1, 2023 and December 31, 2021 our2022 there were no outstanding borrowings under the Commercial Paper Program were $561.4 million and zero, respectively.Program.
Cash and Seasonality
On June 30, 2022,April 1, 2023, we had cash and cash equivalents of $360.6$539.1 million, of which$296.6 $316.2 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 fiscal quarters of each year. We use operating cash in the first quarter of the year.
We believe that our current cash position, cash flow generated from operations, and amounts available under our revolving credit facility should be sufficient for our operating requirements and enable us to fund our capital expenditures, share repurchases, dividend payments, and any required long-term debt payments. In addition, we believe that we have the ability to obtain alternative sources of financing if required.
Share Repurchases and Dividends
In the first six monthsquarter of 2022,2023, we repurchased 6.21.7 million shares of our outstanding common stock under the Company’s share repurchase program for $505.0$100.0 million. As of June 30, 2022,April 1, 2023, the Company’s total remaining share repurchase authorization under its share repurchase program was approximately $660$485 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.
In the first six monthsquarter of 2022,2023, we paid dividends in the amount of $73.6$29.5 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. There are no restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Fortune Brands.
25
Acquisitions
In December 2022, we entered into a definitive agreement to acquire the Emtek and Schaub premium and luxury door and cabinet hardware business and the United States and Canada Yale and August residential smart home locks business from ASSA ABLOY, Inc. (“ASSA”), for a purchase price of $800 million in cash on a cash-free, debt-free basis, subject to customary adjustments. The transaction is conditioned on the successful closing of the acquisition of such businesses by ASSA from Spectrum Brands, Inc. following a favorable resolution of the court proceedings with the U.S. Department of Justice. The Company intends to finance the transaction with cash on hand and borrowings under our existing credit facility.
We periodically review our portfolio of brands and evaluate potential strategic transactions and other capital initiatives to increase stockholder value.
Cash Flows
Below is a summary of cash flows for the sixthirteen weeks ended April 1, 2023 and three months ended June 30,March 31, 2022, and 2021.including
continuing and discontinued operations. See Note 4, Acquisitions and Dispositions, in the condensed consolidated financial statements for additional information.
(In millions) |
| Six Months Ended |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Net cash provided by operating activities |
| $ | 41.9 |
|
| $ | 262.7 |
|
Net cash used in investing activities |
|
| (169.2 | ) |
|
| (58.9 | ) |
Net cash provided by (used in) financing activities |
|
| 27.1 |
|
|
| (169.4 | ) |
Effect of foreign exchange rate changes on cash |
|
| (11.3 | ) |
|
| 5.9 |
|
Net (decrease) increase in cash and cash equivalents |
| $ | (111.5 | ) |
| $ | 40.3 |
|
(In millions) |
|
|
| |||||
|
| Thirteen Weeks Ended April 1, 2023 |
|
| Three Months Ended March 31, 2022 |
| ||
Net cash provided by (used in) operating activities |
| $ | 76.1 |
|
| $ | (183.1 | ) |
Net cash used in investing activities |
|
| (42.6 | ) |
|
| (114.4 | ) |
Net cash (used in) provided by financing activities |
|
| (139.3 | ) |
|
| 203.2 |
|
Effect of foreign exchange rate changes on cash |
|
| 2.2 |
|
|
| 0.7 |
|
Net decrease in cash and cash equivalents |
| $ | (103.6 | ) |
| $ | (93.6 | ) |
29
Net cash provided by operating activities was $41.9$76.1 million in the six monthsthirteen weeks ended June 30, 2022,April 1, 2023, compared to net cash provided byused in operating activities of $262.7$183.1 million in the sixthree months ended June 30, 2021.March 31, 2022. The decreaseincrease in cash provided of $220.8$259.2 million was primarily due to an initiative to decrease inventory balances to align with current U.S. home product market activity and sales volumes, lower increases in accounts receivables, higher accounts payable an increasepayments in our inventory investments to mitigate the impact of an uncertaincomparative prior year period and volatile global supply chain environment,lower customer and employee incentive payments, partially offset by a decrease in net income and a decrease in accrued taxes, a partial settlement on our interest rate swap and higher increases in accounts receivable associated with our sales growth in the first half of 2022.taxes.
Net cash used in investing activities was $169.2$42.6 million in the six monthsthirteen weeks ended June 30, 2022,April 1, 2023, compared to net cash used in investing activities of $58.9$114.4 million in the sixthree months ended June 30, 2021.March 31, 2022. The increasedecrease in cash used of $110.3$71.8 million reflects the cash used in the Solar Innovations acquisition in January 2022 ($61.6 million), and a plannedlower increase in capital expenditures, partly offset by higherthe proceeds from the sale of previously closed manufacturing facilities.facilities in 2022.
Net cash used in financing activities was $139.3 million in the thirteen weeks ended April 1, 2023, compared to cash provided by financing activities was $27.1of $203.2 million in the sixthree months ended June 30, 2022, compared to cash used in financing activities of $169.4 million in the six months ended June 30, 2021.March 31, 2022. The increase in cash providedused of $196.5$342.5 million was primarily due to higheran absence of net borrowingsdebt issuances in 20222023 compared to 20212022 ($615.4660.5 million increase), partly offset by higherlower share repurchases in 20222023 compared to 2021,2022, a decrease in the proceeds from the exercise of stock options in 2022 and the final payment for the remaining equity interest in Flo ($16.7 million). in 2022.
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. As of December 31, 2021,2022, the fair value of our total pension plan assets was $816.0 million, representing 92% of the accumulated benefit obligation liability. In 2022,During the thirteen weeks ended April 1, 2023, we expect to makemade no pension contributions of approximately $10 million.contributions. 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, Mexico, the United Kingdom, China, South Africa, France and Japan. Therefore, changes in the value of the related currencies affect our financial statements when translated into U.S. dollars.
26
RECENTLY ISSUED ACCOUNTING STANDARDS
The adoption of recent accounting standards, as discussed in Note 2, “Recently Issued Accounting Standards,” to our Condensed Consolidated Financial Statements, has not had and is not expected to have a significant impact on our revenue, earnings or liquidity.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in the information provided in the section entitled “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2021.2022.
Item 4. 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 in Rules 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 of the end of the period covered by this report.
(b) 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 fiscal quarter ended June 30, 2022April 1, 2023 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company is in the process of reviewing the internal control structure of Solar and, if necessary, will make appropriate changes as we incorporate our controls and procedure into this recently acquired business.
3027
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
We are defendantsThe Company is a defendant in lawsuits associated with the normal conduct of our businesses and operations.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 our 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.
Compliance with federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, did not have a material effect on capital expenditures, earnings or the competitive position of Fortune Brands during the six and three months ended June 30, 2022 and 2021. 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. 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 compliance with current environmental protection laws (before taking into account estimated recoveries from third parties) will not have a material adverse effect upon our results of operations, cash flows or financial condition. Uncertainties about the status of laws, regulations, technology and information related to individual sites make it difficult to develop estimates of environmental remediation exposures.
Item 1A. RISK FACTORS.
There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021 in the section entitled “Risk Factors,” except as follows:
The Spin-Off of the Company’s Cabinets business into a standalone publicly-traded company could cause disruptions to our business and could impact financial performance and operating results.
The Spin-Off is complex in nature and unanticipated developments or changes, including challenges in executing the Spin-Off, could delay or prevent the completion of the proposed Spin-Off. The process of completing the proposed Spin-Off has been and is expected to continue to be time-consuming and involves significant costs and expenses. In addition, the full strategic and financial benefits that are expected to result from the Spin-Off may not be achieved, and there may be a loss of synergies from separating the businesses that could negatively impact the balance sheet, profit margins or earnings of both businesses. Further, there can be no assurance that the combined value of the common stock of each company following the Spin-Off will be equal to or greater than what the value of the Company’s common stock would have been had the proposed Spin-Off not occurred.2022.
The Company intends that the Spin-Off qualify as tax-free under the U.S. Internal Revenue Code of 1986, as amended. If subsequent to the Spin-Off it is determined that the transaction does not qualify for tax-free treatment for U.S. federal income tax purposes, the resulting tax liability to the Company and its stockholders could be substantial. The planned separation may be taxable in other countries around the world, and as a result may trigger substantial tax liability to the Company.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Below are the repurchases of common stock by the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) for the three monthsthirteen weeks ended June 30, 2022:April 1, 2023:
Issuer Purchases of Equity Securities
Three Months Ended June 30, 2022 |
| Total |
|
| Average |
|
| Total number of |
|
| Maximum dollar |
| ||||
April 1 – April 30 |
|
| 355,164 |
|
| $ | 72.2 |
|
|
| 355,164 |
|
| $ | 759,515,175 |
|
May 1 – May 31 |
|
| 775,400 |
|
|
| 67.7 |
|
|
| 775,400 |
|
|
| 707,014,763 |
|
June 1 – June 30 |
|
| 763,568 |
|
|
| 62.0 |
|
|
| 763,568 |
|
|
| 659,669,166 |
|
Total |
|
| 1,894,132 |
|
| $ | 66.3 |
|
|
| 1,894,132 |
|
|
|
|
Thirteen Weeks Ended April 1, 2023 |
| Total |
|
| Average |
|
| Total number of |
|
| Maximum dollar |
| ||||
January 1 – January 28 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 584,610,782 |
|
January 29 – February 25 |
|
| 242,600 |
|
|
| 61.8 |
|
|
| 242,600 |
|
|
| 569,616,305 |
|
February 26 – April 1 |
|
| 1,433,186 |
|
|
| 59.3 |
|
|
| 1,433,186 |
|
|
| 484,850,514 |
|
Total |
|
| 1,675,786 |
|
| $ | 59.7 |
|
|
| 1,675,786 |
|
|
|
|
31
Authorization date | Announcement date | Authorization amount of shares | Expiration date | |||
|
|
|
| |||
|
|
|
| |||
March 2, 2022 | March 2, 2022 | $750,000,000 | March 2, 2024 |
3228
Item 6. EXHIBITS
| |
| |
3.3 | |
| |
| |
| |
| |
31.1* | Certificate of Chief Executive Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2* | Certificate of Chief Financial Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. |
32.* | Joint CEO/CFO Certificate Required Under Section 906 of the Sarbanes-Oxley Act of 2002. |
101.* | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended |
104.* | Cover Page Interactive Data File (embedded within the iXBRL document). |
* Filed or furnished herewith.
** Indicates the exhibit is a management contract or compensatory plan or arrangement.
3329
SIGNATURE
Pursuant to the requirements 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 | |
(Registrant) | |
Date: | /s/ |
| |
| |
(Duly authorized officer and principal financial officer of the Registrant) |
3430