UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form10-Q
Form 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172022
OR
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission file number1-35166
FORTUNE BRANDS HOME & SECURITY, 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, Illinois60015-5611
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:(847)(847) 484-4400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | FBHS | 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-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 Rule12b-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 inRule 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 October 20, 2017July 15, 2022 was 151,800,773.129,316,984.
1
PART I. FINANCIAL INFORMATION
Item 1.FINANCIAL STATEMENTS.
FORTUNE BRANDS HOME & SECURITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the NineSix and Three Months Ended SeptemberJune 30, 20172022 and 20162021
(In millions, except per share amounts)
(Unaudited)
| Six Months Ended |
|
| Three Months Ended |
| |||||||||||||||||||||||||||
Nine Months Ended September 30, | Three Months Ended September 30, |
| June 30, |
|
| June 30, |
| |||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 |
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| |||||||||||||||||
Net sales | $ | 3,900.8 | $ | 3,683.3 | $ | 1,348.6 | $ | 1,279.0 |
| $ | 4,028.3 |
|
| $ | 3,707.1 |
|
| $ | 2,111.0 |
|
| $ | 1,936.1 |
| ||||||||
Cost of products sold | 2,461.3 | 2,352.8 | 841.6 | 801.0 |
|
| 2,585.7 |
|
|
| 2,357.2 |
|
|
| 1,347.9 |
|
|
| 1,230.3 |
| ||||||||||||
Selling, general and administrative expenses | 877.7 | 831.4 | 297.3 | 284.5 |
|
| 844.1 |
|
|
| 766.1 |
|
|
| 434.6 |
|
|
| 394.6 |
| ||||||||||||
Amortization of intangible assets | 23.6 | 20.4 | 7.5 | 7.3 |
|
| 32.1 |
|
|
| 32.6 |
|
|
| 16.1 |
|
|
| 16.0 |
| ||||||||||||
Loss on sale of product line (see Note 4) | 2.4 | — | — | — | ||||||||||||||||||||||||||||
Asset impairment charges | 3.2 | — | — | — |
|
| 26.0 |
|
|
| 0 |
|
|
| 26.0 |
|
|
| 0 |
| ||||||||||||
Restructuring charges | 3.5 | 12.4 | 0.4 | 3.1 |
|
| 2.9 |
|
|
| 7.9 |
|
|
| 2.3 |
|
|
| 0.3 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Operating income | 529.1 | 466.3 | 201.8 | 183.1 |
|
| 537.5 |
|
|
| 543.3 |
|
|
| 284.1 |
|
|
| 294.9 |
| ||||||||||||
Interest expense | 36.5 | 37.5 | 12.3 | 11.8 |
|
| 52.3 |
|
|
| 42.6 |
|
|
| 30.5 |
|
|
| 21.2 |
| ||||||||||||
Other expense (income), net | 0.2 | (0.1 | ) | 0.1 | 0.6 |
|
| (1.5 | ) |
|
| 2.0 |
|
|
| (0.2 | ) |
|
| (1.3 | ) | |||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Income before income taxes | 492.4 | 428.9 | 189.4 | 170.7 | ||||||||||||||||||||||||||||
Income taxes | 145.1 | 120.9 | 59.8 | 48.8 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Income from continuing operations, net of tax | 347.3 | 308.0 | 129.6 | 121.9 | ||||||||||||||||||||||||||||
(Loss) income from discontinued operations , net of tax | (2.6 | ) | 1.5 | — | 1.5 | |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Income before taxes |
|
| 486.7 |
|
|
| 498.7 |
|
|
| 253.8 |
|
|
| 275.0 |
| ||||||||||||||||
Income tax |
|
| 113.8 |
|
|
| 103.7 |
|
|
| 61.8 |
|
|
| 57.8 |
| ||||||||||||||||
Net income | 344.7 | 309.5 | 129.6 | 123.4 |
| $ | 372.9 |
|
| $ | 395.0 |
|
| $ | 192.0 |
|
| $ | 217.2 |
| ||||||||||||
Less: Noncontrolling interests | 0.1 | (0.1 | ) | 0.1 | — | |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net income attributable to Fortune Brands | $ | 344.6 | $ | 309.6 | $ | 129.5 | $ | 123.4 | ||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Basic earnings per common share |
| $ | 2.83 |
|
| $ | 2.85 |
|
| $ | 1.47 |
|
| $ | 1.57 |
| ||||||||||||||||
Continuing operations | $ | 2.26 | $ | 2.00 | $ | 0.84 | $ | 0.79 | ||||||||||||||||||||||||
Discontinued operations | (0.02 | ) | 0.01 | — | 0.01 | |||||||||||||||||||||||||||
Diluted earnings per common share |
| $ | 2.80 |
|
| $ | 2.81 |
|
| $ | 1.46 |
|
| $ | 1.55 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Net income attributable to Fortune Brands common shareholders | $ | 2.24 | $ | 2.01 | $ | 0.84 | $ | 0.80 | ||||||||||||||||||||||||
Diluted earnings per common share | ||||||||||||||||||||||||||||||||
Continuing operations | $ | 2.22 | $ | 1.95 | $ | 0.83 | $ | 0.77 | ||||||||||||||||||||||||
Discontinued operations | (0.02 | ) | 0.01 | — | 0.01 | |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net income attributable to Fortune Brands common shareholders | $ | 2.20 | $ | 1.96 | $ | 0.83 | $ | 0.78 | ||||||||||||||||||||||||
Comprehensive income | $ | 391.1 | $ | 309.8 | $ | 158.7 | $ | 110.5 |
| $ | 425.3 |
|
| $ | 411.7 |
|
| $ | 184.5 |
|
| $ | 229.8 |
|
See notes to condensed consolidated financial statements.
2
FORTUNE BRANDS HOME & SECURITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
September 30, 2017 | December 31, 2016 |
| June 30, |
|
| December 31, |
| |||||||||
Assets |
|
|
|
|
|
| ||||||||||
Current assets |
|
|
|
|
|
| ||||||||||
Cash and cash equivalents | $ | 277.1 | $ | 251.5 |
| $ | 360.6 |
|
| $ | 471.5 |
| ||||
Accounts receivable, net | 594.7 | 550.7 | ||||||||||||||
Accounts receivable less allowances for discounts and credit losses |
|
| 998.5 |
|
|
| 885.7 |
| ||||||||
Inventories | 600.1 | 531.1 |
|
| 1,446.7 |
|
|
| 1,193.8 |
| ||||||
Other current assets | 126.4 | 111.9 |
|
| 258.0 |
|
|
| 193.5 |
| ||||||
|
| |||||||||||||||
Total current assets | 1,598.3 | 1,445.2 |
|
| 3,063.8 |
|
|
| 2,744.5 |
| ||||||
Property, plant and equipment, net of accumulated depreciation | 690.6 | 662.5 |
|
| 1,082.8 |
|
|
| 1,009.5 |
| ||||||
Operating lease assets |
|
| 184.0 |
|
|
| 191.7 |
| ||||||||
Goodwill | 1,852.8 | 1,833.8 |
|
| 2,479.6 |
|
|
| 2,465.1 |
| ||||||
Other intangible assets, net of accumulated amortization | 1,105.4 | 1,107.0 |
|
| 1,334.6 |
|
|
| 1,383.8 |
| ||||||
Other assets | 102.2 | 80.0 |
|
| 189.3 |
|
|
| 141.6 |
| ||||||
|
| |||||||||||||||
Total assets | $ | 5,349.3 | $ | 5,128.5 |
| $ | 8,334.1 |
|
| $ | 7,936.2 |
| ||||
|
| |||||||||||||||
Liabilities and equity |
|
|
|
|
|
| ||||||||||
Current liabilities |
|
|
|
|
|
| ||||||||||
Short-term debt |
| $ | 0 |
|
| $ | 400.0 |
| ||||||||
Accounts payable | $ | 392.5 | $ | 393.8 |
|
| 756.3 |
|
|
| 764.9 |
| ||||
Other current liabilities | 460.0 | 449.0 |
|
| 685.2 |
|
|
| 806.2 |
| ||||||
|
| |||||||||||||||
Total current liabilities | 852.5 | 842.8 |
|
| 1,441.5 |
|
|
| 1,971.1 |
| ||||||
Long-term debt | 1,462.2 | 1,431.1 |
|
| 3,357.9 |
|
|
| 2,309.8 |
| ||||||
Deferred income taxes | 176.2 | 163.5 |
|
| 184.2 |
|
|
| 176.0 |
| ||||||
Accrued defined benefit plans | 185.1 | 216.2 |
|
| 74.3 |
|
|
| 79.7 |
| ||||||
Operating lease liabilities |
|
| 149.8 |
|
|
| 158.8 |
| ||||||||
Othernon-current liabilities | 127.4 | 111.9 |
|
| 174.0 |
|
|
| 176.0 |
| ||||||
|
| |||||||||||||||
Total liabilities | 2,803.4 | 2,765.5 |
|
| 5,381.7 |
|
|
| 4,871.4 |
| ||||||
Commitments and contingencies (see Note 17) |
|
|
|
|
|
| ||||||||||
Equity | ||||||||||||||||
Fortune Brands stockholders’ equity | ||||||||||||||||
Stockholders' equity |
|
|
|
|
|
| ||||||||||
Common stock(a) | 1.7 | 1.7 |
|
| 1.9 |
|
|
| 1.9 |
| ||||||
Paid-in capital | 2,712.2 | 2,653.8 |
|
| 3,046.2 |
|
|
| 3,018.3 |
| ||||||
Accumulated other comprehensive loss | (25.5 | ) | (71.9 | ) |
|
| 27.8 |
|
|
| (24.6 | ) | ||||
Retained earnings | 1,076.5 | 814.6 |
|
| 3,145.0 |
|
|
| 2,807.9 |
| ||||||
Treasury stock | (1,220.6 | ) | (1,036.7 | ) |
|
| (3,268.5 | ) |
|
| (2,738.7 | ) | ||||
|
| |||||||||||||||
Total Fortune Brands stockholders’ equity | 2,544.3 | 2,361.5 | ||||||||||||||
Noncontrolling interests | 1.6 | 1.5 | ||||||||||||||
|
| |||||||||||||||
Total equity | 2,545.9 | 2,363.0 | ||||||||||||||
|
| |||||||||||||||
Total stockholders' equity |
|
| 2,952.4 |
|
|
| 3,064.8 |
| ||||||||
Total liabilities and equity | $ | 5,349.3 | $ | 5,128.5 |
| $ | 8,334.1 |
|
| $ | 7,936.2 |
| ||||
|
|
(a) Common stock, par value $0.01 per share; 186.0 million shares and 185.3 million shares issued at June 30, 2022 and December 31, 2021, respectively.
See notes to condensed consolidated financial statements.
3
FORTUNE BRANDS HOME & SECURITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the NineSix Months Ended SeptemberJune 30, 20172022 and 20162021
(In millions)
(Unaudited)
2017 | 2016 |
| 2022 |
|
| 2021 |
| |||||||||
Operating activities |
|
|
|
|
|
| ||||||||||
Net income | $ | 344.7 | $ | 309.5 |
| $ | 372.9 |
|
| $ | 395.0 |
| ||||
Non-cashpre-tax expense (income): | ||||||||||||||||
Non-cash adjustments: |
|
|
|
|
|
| ||||||||||
Depreciation | 72.7 | 69.3 |
|
| 61.7 |
|
|
| 62.6 |
| ||||||
Amortization | 23.6 | 20.4 | ||||||||||||||
Amortization of intangibles |
|
| 32.1 |
|
|
| 32.6 |
| ||||||||
Non-cash lease expense |
|
| 22.2 |
|
|
| 20.9 |
| ||||||||
Stock-based compensation | 32.7 | 24.3 |
|
| 27.5 |
|
|
| 24.4 |
| ||||||
Recognition of actuarial (gains) losses | (1.3 | ) | 1.9 | |||||||||||||
Deferred income taxes | 8.2 | (23.0 | ) | |||||||||||||
Loss on sale of product line | 2.4 | — | ||||||||||||||
Deferred taxes |
|
| (0.5 | ) |
|
| 7.1 |
| ||||||||
Asset impairment charges | 3.2 | — |
|
| 26.0 |
|
|
| 0 |
| ||||||
Amortization of deferred financing costs | 1.5 | 3.0 | ||||||||||||||
Loss on sale of property, plant and equipment | 0.3 | 1.2 | ||||||||||||||
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 | (34.5 | ) | (53.1 | ) |
|
| (110.8 | ) |
|
| (106.0 | ) | ||||
(Increase) decrease in inventories | (60.7 | ) | 22.6 | |||||||||||||
Increase in inventories |
|
| (247.4 | ) |
|
| (173.1 | ) | ||||||||
(Decrease) increase in accounts payable | (3.5 | ) | 28.7 |
|
| (1.0 | ) |
|
| 78.7 |
| |||||
Increase in other assets | (28.0 | ) | (11.6 | ) | ||||||||||||
(Increase) decrease in other assets |
|
| (17.1 | ) |
|
| 0.5 |
| ||||||||
Decrease in accrued expenses and other liabilities | (23.9 | ) | (12.0 | ) |
|
| (110.2 | ) |
|
| (100.2 | ) | ||||
Increase (decrease) in accrued taxes | 15.2 | (0.6 | ) | |||||||||||||
|
| |||||||||||||||
(Decrease) increase in accrued taxes |
|
| (9.4 | ) |
|
| 14.0 |
| ||||||||
Net cash provided by operating activities | 352.6 | 380.6 |
|
| 41.9 |
|
|
| 262.7 |
| ||||||
|
| |||||||||||||||
Investing activities |
|
|
|
|
|
| ||||||||||
Capital expenditures(a) | (95.5 | ) | (106.1 | ) |
|
| (115.6 | ) |
|
| (65.8 | ) | ||||
Proceeds from the sale of assets | 0.2 | 2.3 | ||||||||||||||
Proceeds from sale of product line | 1.5 | — | ||||||||||||||
Proceeds from the disposition of assets |
|
| 8.0 |
|
|
| 1.7 |
| ||||||||
Cost of acquisitions, net of cash acquired | (19.4 | ) | (230.5 | ) |
|
| (61.6 | ) |
|
| 5.2 |
| ||||
|
| |||||||||||||||
Net cash used in investing activities | (113.2) | (334.3) |
|
| (169.2 | ) |
|
| (58.9 | ) | ||||||
Financing activities |
|
|
|
|
|
| ||||||||||
Decrease in short-term debt, net | — | (1.0 | ) | |||||||||||||
Issuance of short-term debt |
|
| 700.0 |
|
|
| 0 |
| ||||||||
Repayment of short-term debt |
|
| (1,100.0 | ) |
|
| 0 |
| ||||||||
Issuance of long-term debt | 375.0 | 880.0 |
|
| 4,123.7 |
|
|
| 535.0 |
| ||||||
Repayment of long-term debt | (345.0 | ) | (465.0 | ) |
|
| (3,073.3 | ) |
|
| (500.0 | ) | ||||
Proceeds from the exercise of stock options | 25.8 | 24.8 |
|
| 0.4 |
|
|
| 32.1 |
| ||||||
Treasury stock purchases | (173.7 | ) | (362.7 | ) |
|
| (505.0 | ) |
|
| (156.0 | ) | ||||
Employee withholding taxes paid related to stock-based compensation | (10.2 | ) | (9.8 | ) | ||||||||||||
Deferred acquisition payment | (12.4 | ) | — | |||||||||||||
Employee withholding taxes related to stock-based compensation |
|
| (24.8 | ) |
|
| (8.4 | ) | ||||||||
Dividends to stockholders | (82.7 | ) | (73.7 | ) |
|
| (73.6 | ) |
|
| (72.0 | ) | ||||
Other financing, net | (0.3 | ) | (2.1 | ) |
|
| (20.3 | ) |
|
| (0.1 | ) | ||||
|
| |||||||||||||||
Net cash used in financing activities | (223.5 | ) | (9.5 | ) | ||||||||||||
|
| |||||||||||||||
Net cash provided by (used in) financing activities |
|
| 27.1 |
|
|
| (169.4 | ) | ||||||||
Effect of foreign exchange rate changes on cash | 9.7 | 3.3 |
|
| (11.3 | ) |
|
| 5.9 |
| ||||||
|
| |||||||||||||||
Net increase in cash and cash equivalents | $ | 25.6 | $ | 40.1 | ||||||||||||
|
| |||||||||||||||
Cash and cash equivalents at beginning of period | $ | 251.5 | $ | 238.5 | ||||||||||||
Cash and cash equivalents at end of period | $ | 277.1 | $ | 278.6 | ||||||||||||
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 |
|
See notes to condensed consolidated financial statements.
4
FORTUNE BRANDS HOME & SECURITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the NineSix and Three Months Ended SeptemberJune 30, 20172022 and 20162021
(In millions)
(Unaudited)
Common Stock | Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock | Non- controlling Interests | Total Equity | ||||||||||||||||||||||
Balance at December 31, 2015 | $ | 1.7 | $ | 2,602.2 | $ | (52.5 | ) | $ | 501.6 | $ | (602.1 | ) | $ | 2.9 | $ | 2,453.8 | ||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | — | — | — | 309.6 | — | (0.1 | ) | 309.5 | ||||||||||||||||||||
Other comprehensive income | — | — | 0.3 | — | — | — | 0.3 | |||||||||||||||||||||
Stock options exercised | — | 24.8 | — | — | — | — | 24.8 | |||||||||||||||||||||
Stock-based compensation | — | 24.3 | — | — | (9.8 | ) | — | 14.5 | ||||||||||||||||||||
Treasury stock purchase | — | — | — | — | (362.7 | ) | — | (362.7 | ) | |||||||||||||||||||
Dividends ($0.28 per common share) | — | — | — | (72.8 | ) | — | — | (72.8 | ) | |||||||||||||||||||
Dividends paid to noncontrolling interests | — | — | — | — | — | (1.4 | ) | (1.4 | ) | |||||||||||||||||||
Other | — | (5.8 | ) | — | — | — | — | (5.8 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at September 30, 2016 | $ | 1.7 | $ | 2,645.5 | $ | (52.2 | ) | $ | 738.4 | $ | (974.6 | ) | $ | 1.4 | $ | 2,360.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at December 31, 2016 | $ | 1.7 | $ | 2,653.8 | $ | (71.9 | ) | $ | 814.6 | $ | (1,036.7 | ) | $ | 1.5 | $ | 2,363.0 | ||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | — | — | — | 344.6 | — | 0.1 | 344.7 | |||||||||||||||||||||
Other comprehensive income | — | — | 46.4 | — | — | — | 46.4 | |||||||||||||||||||||
Stock options exercised | — | 25.7 | — | — | — | — | 25.7 | |||||||||||||||||||||
Stock-based compensation | — | 32.7 | — | — | (10.2 | ) | — | 22.5 | ||||||||||||||||||||
Treasury stock purchase | — | — | — | — | (173.7 | ) | — | (173.7 | ) | |||||||||||||||||||
Dividends ($0.54 per common share) | — | — | — | (82.7 | ) | — | — | (82.7 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at September 30, 2017 | $ | 1.7 | $ | 2,712.2 | $ | (25.5 | ) | $ | 1,076.5 | $ | (1,220.6 | ) | $ | 1.6 | $ | 2,545.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
|
See notes to condensed consolidated financial statements.
5
FORTUNE BRANDS HOME & SECURITY, 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.
The condensed consolidated balance sheet as of SeptemberJune 30, 2017,2022, the related condensed consolidated statements of comprehensive income and equity for the ninesix and three-month periodsthree months ended SeptemberJune 30, 20172022 and 20162021, and the related condensed consolidated statements of cash flows and equity for the nine-month periodssix months ended SeptemberJune 30, 20172022 and 20162021 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.
In the first quarter of 2022, our Plumbing segment was renamed “Water Innovations” to better align with our key brands and organizational purpose. The Plumbing segment name change is to the name only and 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 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 & Security segment. Its complementary product offerings support the segment’s outdoor living strategy.
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, 20162021 condensed consolidated balance sheet was derived from theour audited consolidated financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles (“GAAP”). This Quarterly Report on Form10-Q should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form10-K for the year ended December 31, 2016.2021.
2. Recently Issued Accounting Standards
Disclosures by Business Entities About Government Assistance
In July 2017, we acquired Shaws Since1897 Limited (“Shaws”), aUK-based luxury plumbing products company that specializes in manufacturing and selling fireclay sinks and selling brassware and accessories in partnership with Perrin & Rowe. This acquisition broadened our plumbing portfolio and enhanced future growth opportunities. Net sales and operating income in the three months ended September 30, 2017 were not material to the Company. The financial results of Shaws were included in the Company’s consolidated balance sheets as of September 30, 2017, the Company’s consolidated statements of income for the nine and three months ended September 30, 2017, and statement of cash flows for the nine months ended September 30, 2017.
In September 2016, we acquired ROHL LLC (“ROHL”) and in a related transaction, we acquired TCL Manufacturing which gave us ownership of Perrin & Rowe Limited (“Perrin & Rowe”). In addition, in May 2016, we acquired Riobel Inc (“Riobel”). The financial results of ROHL, Perrin & Rowe, and Riobel were included in the Company’s consolidated balance sheets as of September 30, 2017 and December 31, 2016, the Company’s consolidated statements of income for the nine and three months ended September 30, 2017, and statement of cash flows for the nine months ended September 30, 2017.
6
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue from Contracts with Customers
In May 2014,November 2021, the Financial Accounting Standards Board (“FASB”("FASB") issued Accounting Standards Update (“ASU”("ASU")2014-09, which clarifies 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 accountingperiod. ASU 2021-10 is effective for revenue arising from contracts with customers and specifies the disclosures that an entity should include in its financial statements. The standard is effectiveall entities for annual reporting periods beginning after December 15, 2017 (calendar year 2018 for Fortune Brands)2021. During 2016, the FASB issued certain amendments to the standard relating to the principal versus agentThe adoption of this guidance accounting for licenses of intellectual property and identifying performance obligations as well as the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. The effective date and transition requirements for these amendments are the same as those of the original ASU. We have elected the modified retrospective transition approach and also have identified focus areas for each of our reporting segments and have made substantial progress in our assessment of the accounting and financial reporting implications as of September 30, 2017. Our key considerations pursuant to ASU 2014-09 are the control of goods (i.e., timing of revenue recognition), separate performance obligations, customer rights of return (i.e., the reclassification on the balance sheet of the customer rights of return from accounts receivable to a refund liability as well as the recognition of a corresponding asset) and our accounting for display assets. We do not expect the change in accounting related to these considerations todid not have a material effect on our financial statements.
Leases
In February 2016, the FASB issued ASU2016-02, which requires lessees to recognize almost all leases on their balance sheet as a“right-of-use” asset and lease liability but recognize related expenses in a manner similar to current accounting. The guidance also eliminates current real estate-specific provisions for all entities. The standard is effective for annual periods beginning after December 15, 2018 (calendar year 2019 for Fortune Brands) and earlier application is permitted. We are assessing the impact the adoption of this standard will have on our financial statements.
Improvements to Accounting for Hedging Activities6
In August 2017, the FASB issued ASU2017-12, that amends current hedge accounting model. The new standard eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item (consistent with our current practice). The change in fair value for qualifying cash flow and net investment hedges will be included in Other comprehensive income (until they are reclassified into the income statement). The standard also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of the hedge effectiveness. Standard is effective as of January 1, 2019 and earlier application is permitted. We are assessing the impact the adoption of this standard will have on our financial statements.
7
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Balance Sheet Information
Clarifying Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
In May 2017, the FASB issued ASC610-20 that clarifies the scope and application of various standards for the sale of nonfinancial assets (e.g. PP&E including real estate, intangible assets, materials and supplies). The standard distinguishes between a sale to customer vsnon-customer. Sales to customers are in scope of the new revenue standard. It also clarifies a derecognition model for nonfinancial assets that do not represent a business. The standard is effective as of January 1, 2018 consistent with the effective date for the new revenue recognition standard. We are assessing the impact the adoption of this standard will have on our financial statements and we will consider the implications of the new standard on case by case basis for allnon-recurring transactions where we sell or transfer nonfinancial assets.
Stock Compensation Scope of Modification Accounting
In May 2017, the FASB issued ASU2017-09, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance provides a relief to entities that makenon-substantive changes to their share-based payment awards and will result in fewer changes to the terms of an award being accounted for as modifications. The standard is effective January 1, 2018 and early adoption is permitted; however we have elected not to early adopt. We do not expect the adoption of this standard to have a material effect on our financial statements.
Presentation of Net Periodic Pension and Postretirement Cost
In March 2017, the FASB issued ASU2017-07, which requires entities to present the service cost component of the net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Employers will present the other components (i.e., interest cost, expected return on plan assets and actuarial gains/losses) separately from the line item(s) that includes the service cost and outside of any subtotal of operating income. The standard is effective January 1, 2018 and early adoption is permitted. We are assessing the impact the adoption of this standard will have on our financial statements.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU2017-04, which simplifies the accounting for goodwill impairment for all entities. Under the new standard, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The standard eliminates the current requirement to calculate a goodwill impairment charge by comparing the implied fair value of goodwill with its carrying amount (i.e., hypothetical purchase price allocation). The new standard is effective for annual and interim impairment tests performed in the periods beginning after January 1, 2020 and early adoption is permitted. We plan to early adopt ASU2017-04 in conjunction with our annual goodwill impairment test during the fourth quarter of 2017.
8
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Clarifying the Definition of a Business
In January 2017, the FASB issued ASU2017-01, which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business and therefore business combination guidance would apply. The new standard requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset (i.e., a business) or a group of similar identifiable assets (i.e., not a business). The guidance also requires a business to include at least one substantive process and narrows the definition of outputs (e.g., revenues with customers). The standard is effective January 1, 2018 and early adoption is permitted. We do not expect the adoption of this standard to have a material effect on our financial statements.
Restricted Cash
In November 2016, the FASB issued ASU2016-18, according to which entities are no longer required to present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The prior standard did not address the classification of activity related to restricted cash and restricted cash equivalents in the statement of cash flows, which has resulted in diversity in the presentation of cash flows. The standard is effective January 1, 2018 and early adoption is permitted; however, we elected not to early adopt. We do not expect the adoption of this standard to have a material effect on our financial statements.
Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU2016-16, which requires companies to account for the income tax effects of intercompany sales and transfers of assets other than inventory (e.g., intangible assets) when the transfer occurs. Under the current guidance, companies are required to defer the income tax effects of intercompany transfers of assets until the asset has been sold to an outside party or otherwise recognized (e.g., depreciated, amortized or impaired). The standard is effective January 1, 2018 and early adoption is permitted; however, we elected not to early adopt. The transition method will be a “modified retrospective” (i.e., with a cumulative adjustment to retained earnings at adoption). We are assessing the impact the adoption of this standard will have on our financial statements.
9
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Classification of Certain Cash Receipts and Cash Payments
In September 2016, the FASB issued ASU2016-15, which changes how an entity classifies certain cash receipts and cash payments on its statement of cash flows. The key changes that may potentially impact our financial statements include the following: 1) Cash payments for debt prepayment or extinguishment costs would be classified as financing cash outflows; 2) Contingent consideration payments that are not made within three months after the consummation of a business combination would be classified as financing (if the payment is made up to the acquisition date fair value of liability) or operating outflows (if in excess of acquisition fair value). Cash payments made “soon after” the consummation of a business combination generally would be classified as cash outflows for investing activities; 3) Insurance settlement proceeds would be classified based on the nature of the loss; and 4) Company-owned life insurance settlement proceeds would be presented as investing cash inflows, and premiums would be classified as investing or operating cash outflows, or a combination of both. The new standard is effective January 1, 2018 and should be adopted retrospectively. Early adoption is permitted; however, we elected not to early adopt. We do not expect the adoption of this standard to have a material effect on our financial statements.
Financial Instruments—Credit Losses
In June 2016, the FASB issued ASU2016-13, which changes the impairment model for most financial assets and certain other instruments that are not measured at fair value through net income. The new guidance applies to most financial assets measured at amortized cost, including trade and other receivables and loans as well asoff-balance-sheet credit exposures (e.g., loan commitments and standby letters of credit). The standard will replace the “incurred loss” approach under the current guidance with an “expected loss” model that requires an entity to estimate its lifetime “expected credit loss.” The standard is effective January 1, 2020 and early application is permitted beginning January 1, 2019. We are assessing the impact the adoption of this standard will have on our financial statements.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU2016-01, which requires entities to measure investments in unconsolidated entities (other than those accounted for using the equity method of accounting) at fair value through the income statement. There will no longer be anavailable-for-sale classification (with changes in fair value reported in Other Comprehensive Income). In addition, the cost method is eliminated for equity investments without readily determinable fair values. The new standard is effective January 1, 2018. Early application is permitted for certain provisions of the standard; however, we elected not to early adopt. We do not expect this standard to have a material effect on our financial statements.
10
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Supplemental information on our balance sheets is as follows:
(In millions) | September 30, 2017 | December 31, 2016 |
| June 30, |
|
| December 31, |
| ||||||||
Inventories: |
|
|
|
|
|
| ||||||||||
Raw materials and supplies | $ | 211.6 | $ | 207.6 |
| $ | 541.4 |
|
| $ | 455.1 |
| ||||
Work in process | 61.8 | 55.9 |
|
| 108.4 |
|
|
| 93.0 |
| ||||||
Finished products | 326.7 | 267.6 |
|
| 796.9 |
|
|
| 645.7 |
| ||||||
Total inventories |
| $ | 1,446.7 |
|
| $ | 1,193.8 |
| ||||||||
|
|
|
|
|
|
|
| |||||||||
Total inventories | $ | 600.1 | $ | 531.1 | ||||||||||||
Property, plant and equipment, gross | $ | 1,715.8 | $ | 1,630.7 |
| $ | 2,403.0 |
|
| $ | 2,278.0 |
| ||||
Less: accumulated depreciation | 1,025.2 | 968.2 |
|
| 1,320.2 |
|
|
| 1,268.5 |
| ||||||
|
| |||||||||||||||
Property, plant and equipment, net | $ | 690.6 | $ | 662.5 |
| $ | 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.
Solar
In July 2017,January 2022, we acquired Shaws,100% of the outstanding equity of Solar Innovations LLC and an affiliated entity (together, "Solar"), a UK-based luxury plumbing products company that specializes in manufacturingleading producer of wide-opening exterior door systems and selling fireclay sinks and selling brassware and accessories in partnership with Perrin & Rowe. Net sales and operating income in the three months ended September 30, 2017 were not materialoutdoor enclosures, for a purchase price of $61.6 million, net of cash acquired of $4.8 million. The purchase price is subject to the Company.a final post-closing working capital adjustment. We financed the transaction using cash on hand and borrowings under our existingrevolving credit facilities.facility. The results of Solar are reported as part of the operations are included in the Plumbing segment from the date of acquisition.
In April 2017, we completed the sale of Field ID, our cloud-based inspection and safety compliance software product line included in ourOutdoors & Security segment. We recorded apre-tax loss of $2.4 million asIts complementary product offerings support the result of this sale. The estimated tax expense on the sale was insignificant. Field ID did not qualify for presentation as a discontinued operation in our financial statements.
In September 2016, we acquired ROHL, a California-based luxury plumbing company. In a related transaction, we also acquired Perrin & Rowe, a UK manufacturer and designer of luxury kitchen and bathroom plumbing products. The total combined purchase price was approximately $166 million (including $3 million of liabilities assumed), subject to certain post-closing adjustments. We financed the transaction using cash on hand and borrowings under our existing credit facility. Netsegment’s outdoor living strategy. Solar's net sales and operating income infor the first ninethree and six months of 2017ended June 30, 2022 were not material to the Company. We have not included pro forma financial information as it is immaterial to our condensed consolidated statements of comprehensive income. The resultsfair value allocated to assets acquired and liabilities assumed as of operations are included in the Plumbing segment. The goodwillJanuary 31, 2022 was $61.6 million, which includes $20.4 million of goodwill. Goodwill includes expected sales and cost synergies and is expected to be deductible for income tax purposes is approximately $49 million.purposes.
Flo Technologies
In May 2016,2018, our Water Innovations segment entered into a strategic partnership with, and acquired non-controlling equity interests in, Flo Technologies, Inc. ("Flo"), a U.S. manufacturer of comprehensive water monitoring and shut-off systems with leak detection technologies. In January 2020, we entered into an agreement to acquire the remaining outstanding shares of Flo in a multi-phase transaction. As part of this agreement, we acquired Riobel, a Canadian plumbing company specializing in premium showroom bathmajority of Flo’s outstanding shares during 2020 and shower fittings,entered into a forward contract to purchase all remaining shares of Flo during the first quarter of 2022 for a total purchase price based on a multiple of $94.6 million in cash. We financed the transaction using cash on hand and borrowings under our existing credit facilities. NetFlo’s 2021 sales and operating income inadjusted earnings before interest and taxes. During the first ninesix months ended June 30, 2022, we made a final cash payment of 2017 were not material$16.7 million to the Company. 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 are includedand 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 the Plumbing segment. We doFlo. 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 expect any portion of goodwillexpected to be deductible for income tax purposes.
We recognized a loss on discontinued operations primarily related to the prior sale of the Waterloo tool storage and Simonton window businesses for the nine months ended September 30, 2017.
7
11
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Goodwill and Identifiable Intangible Assets
We had goodwill of $1,852.8$2,479.6 million and $1,833.8$2,465.1 million as of SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively. The $19.0 million increase was primarily due to the acquisition-related adjustments in our Plumbing segment (See Note 4) and foreign translation adjustments. 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) | Cabinets | Plumbing | Doors | Security | Total Goodwill | |||||||||||||||
Goodwill at December 31, 2016(a) | $ | 924.3 | $ | 670.2 | $ | 143.0 | $ | 96.3 | $ | 1,833.8 | ||||||||||
Year-to-date translation adjustments | 3.3 | 4.6 | — | 1.5 | 9.4 | |||||||||||||||
Acquisition-related adjustments | — | 9.6 | — | — | 9.6 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Goodwill at September 30, 2017(a) | $ | 927.6 | $ | 684.4 | $ | 143.0 | $ | 97.8 | $ | 1,852.8 |
(a) Net |
We also had net identifiable intangible assets, principally tradenames, of $1,105.4accumulated impairment losses of $399.5 million and $1,107.0 million as of September 30, 2017 and December 31, 2016, respectively.in the Outdoors & Security segment.
The gross carrying value and accumulated amortization by class of identifiable intangible assets as of SeptemberJune 30, 20172022 and December 31, 20162021 were as follows:
(In millions) | As of September 30, 2017 | As of December 31, 2016 |
| As of June 30, 2022 |
|
| As of December 31, 2021 |
| ||||||||||||||||||||||||||||||||||||||||
Gross Carrying Amounts | Accumulated Amortization | Net Book Value | Gross Carrying Amounts | Accumulated Amortization | Net Book Value |
| Gross |
|
| Accumulated |
|
| Net |
|
| Gross |
|
| Accumulated |
|
| Net |
| |||||||||||||||||||||||||
Indefinite-lived tradenames | $ | 682.6 | $ | — | $ | 682.6 | $ | 671.8 | $ | — | $ | 671.8 |
| $ | 684.4 |
|
| $ | - |
|
| $ | 684.4 |
|
| $ | 711.1 |
|
| $ | - |
|
| $ | 711.1 |
| ||||||||||||
Amortizable intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
Tradenames | 18.6 | (9.4 | ) | 9.2 | 15.8 | (7.3 | ) | 8.5 |
|
| 38.7 |
|
|
| (16.1 | ) |
|
| 22.6 |
|
|
| 36.4 |
|
|
| (15.5 | ) |
|
| 20.9 |
| ||||||||||||||||
Customer and contractual relationships | 627.1 | (226.0 | ) | 401.1 | 611.9 | (203.1 | ) | 408.8 |
|
| 978.9 |
|
|
| (412.3 | ) |
|
| 566.6 |
|
|
| 975.7 |
|
|
| (388.2 | ) |
|
| 587.5 |
| ||||||||||||||||
Patents/proprietary technology | 57.2 | (44.7 | ) | 12.5 | 61.9 | (44.0 | ) | 17.9 |
|
| 135.5 |
|
|
| (74.5 | ) |
|
| 61.0 |
|
|
| 133.1 |
|
|
| (68.8 | ) |
|
| 64.3 |
| ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total | 702.9 | (280.1 | ) | 422.8 | 689.6 | (254.4 | ) | 435.2 |
|
| 1,153.1 |
|
|
| (502.9 | ) |
|
| 650.2 |
|
|
| 1,145.2 |
|
|
| (472.5 | ) |
|
| 672.7 |
| ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total identifiable intangibles | $ | 1,385.5 | $ | (280.1 | ) | $ | 1,105.4 | $ | 1,361.4 | $ | (254.4 | ) | $ | 1,107.0 |
| $ | 1,837.5 |
|
| $ | (502.9 | ) |
| $ | 1,334.6 |
|
| $ | 1,856.3 |
|
| $ | (472.5 | ) |
| $ | 1,383.8 |
|
We had net identifiable intangible assets of $1,334.6 million and $1,383.8 million as of June 30, 2022 and December 31, 2021, respectively. The $24.1$18.8 million increasedecrease in gross identifiable intangible assets was primarily due to acquisition-related adjustmentsthe tradename impairment charges of $26.0 million in our PlumbingCabinets segment (See Note 4) as well as foreign translation adjustments,(as discussed below), partially offset by impairment charges during the first quarteracquisition of 2017 related to our decision to sell Field ID (See Note 6).Solar.
Amortizable identifiable intangible assets, principally tradenames and customer relationships, are subject to amortization on a straight-line basis over their estimated useful life, ranging from 25 to 30 years, based on the assessment of a number of factors that may impact useful life. These factors include historical and tradename performance with respect to consumer name recognition, geographic market presence, market share, plans for ongoing tradename support and promotion,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.
12The 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:
Unobservable Input | 2022 | |||
Discount rate | 11.6 | % | ||
Royalty rate(a) | 3 | % | ||
Long-term revenue growth rate(b) | 1 | % |
(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 December 31, 2016,June 30, 2022, the estimated fair value of onethis tradename equaled its carrying value of the tradenames$59.0 million. A reduction in the Cabinets segment and one of the tradenames in the Doors segment exceeded their carrying value by less than 10%. In the second quarter of 2017, we performed an interim impairment test on the tradename in the Cabinets segment and concluded the fair value continues to exceed its carrying value. A further reduction inestimated fair value of these tradenames may result in anthis tradename could trigger additional impairment chargecharges in future periods. As of September 30, 2017, the carrying values of these tradenames was $168 million.We did not identify any impairment triggers during the third quarter of 2017. In addition to evaluating the interim events that may require more frequent impairment testing, we will conduct our annual impairment testing in the fourth quarter of 2017.
The Company cannot predict the occurrence of certain events that might adversely affect the carrying value of goodwill and other intangible assets. The events and/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 lagfall below our assumptions, actions of key customers, volatility ofincreases in discount rates, continued economic uncertainty, higher levels of unemployment, weak consumer confidence, lower levels of discretionary consumer spending, a decrease in royalty rates and a decline in the trading price of our common stock. We cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill and indefinite-lived intangible assets.
6. External Debt and Financing Arrangements
Senior Notes
In January 2017, we committedMarch 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 planportion of the outstanding balance on the 2021 Term Loan, as described below.
At June 30, 2022, 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, 2022 and December 31, 2021:
|
|
|
|
|
|
|
| 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 |
|
Credit Facilities
In November 2021, the Company entered into a 364-day, $400 million term loan credit agreement (“2021 Term Loan”), for general corporate purposes, to sell Field ID, our cloud-based inspectionmature in November 2022. On March 1, 2022, the Company entered into a First Amendment and safety compliance software product line includedIncremental Agreement to the 2021 Term Loan (the “First Amendment”). The First Amendment provided for an increase in our Security segment. In accordance with FASB Accounting Standards Codification (“ASC”) 360,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 our decisionthe borrowing and the Company’s long-term credit rating and could range from SOFR + 0.725% to sell, during the first quarter of 2017 we recorded $3.2 million ofpre-tax impairment charges to write down the long-lived assets included in this disposal group to fair value, based upon their estimated fair value less cost to sell. These charges consisted of approximately $3.0 million for definite-lived intangible assets and $0.2 million for fixed assets. We completed the sale of Field ID in April 2017 (See Note 4)SOFR + 1.350%.
In June 2016, 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). 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 its credit agreement to combine and rollover the existing$1.25 billion revolving credit facility and term loan into a new standalone $1.25 billion revolving credit facility. This amendment of the credit agreement was anon-cash transaction for the Company. Terms and conditions of the amended and restated credit agreement, including the total commitment amount, essentially remained the same. As a result of the refinancing, wewrote-off prepaid debt issuance costs of approximately $1.3 million during the three months ended June 30, 2016. The revolving credit facility will mature in June 2021(the “2019 Revolving Credit Agreement”), and borrowings thereunder will be used for general corporate purposes. On The maturity date of the facility is September 30, 2017 and December 31, 2016, our outstanding borrowings under this facility were $570.0 million and $540.0 million, respectively. At September 30, 2017 and December 31, 2016, the current portion of long-term debt was zero. 2024. Interest rates under the facility2019 Revolving Credit Agreement are variable based on LIBOR at the time of the borrowing and the Company’s long-term credit rating and can range from LIBOR + 0.9%0.91% to LIBOR + 1.5%1.4%.Under the 2019 Revolving Credit Agreement, the Company is required to maintain a minimum ratio of consolidated EBITDA to consolidated interest expense of 3.0 to 1.0. Consolidated EBITDA is defined as consolidated net income before interest expense, income taxes, depreciation, amortization of intangible assets, losses from asset impairments, and certain other one-time adjustments. In addition, the Company's ratio of consolidated debt minus certain cash and cash equivalents to consolidated EBITDA generally may not exceed 3.5 to 1.0. On 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 SeptemberJune 30, 2017,2022, we were in compliance with all covenants under this facility.
139
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In June 2015, we issued $900 million of unsecured senior notes (“Senior Notes”) in a registered public offering. The Senior Notes consist of two tranches: $400 million of five-year notes due 2020 with a coupon of 3% and $500 million often-year notes due 2025 with a coupon of 4%. We used the proceeds from the Senior Notes offering to pay down our revolving credit facility and for general corporate purposes. On September 30, 2017 and December 31, 2016, the carrying value of the Senior Notes, net of underwriting commissions, price discounts and debt issuance costs, was $892.2 million and $891.1 million, respectively.
We currently have uncommitted bank lines of credit in China, which provide for unsecured borrowings for working capital of up to $25.7$20.5 million and $17.5 million in aggregate as of which thereJune 30, 2022 and December 31, 2021, respectively. There were no0 outstanding balances as of SeptemberJune 30, 20172022 and December 31, 2016.2021, respectively.
Commercial Paper
In November 2021, the Company established a commercial paper program (the “Commercial Paper Program”) pursuant to which the Company may issue unsecured commercial paper notes. The Company’s 2019 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 2019 Revolving Credit Agreement, not to exceed $1.25 billion. The Company plans to use net proceeds from any issuances under the Commercial Paper Program for general corporate purposes. On June 30, 2022 and December 31, 2021 our outstanding borrowings under the Commercial Paper Program were $561.4million and 0, respectively.
10
FORTUNE BRANDS HOME & SECURITY, 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, 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 Canadian dollar, the British pound, the Mexican peso and the Chinese yuan and the Euro.yuan. The gross U.S. dollar equivalent notional amount of all foreign currency derivative hedges outstanding at SeptemberJune 30, 20172022 was $190.2 million, representing a net settlement payable of $2.3$568.3 million. Based on foreign exchange rates as of SeptemberJune 30, 2017,2022, we estimate that $1.2$2.6 million of net foreign currency derivative losses included in accumulated other comprehensive income as of SeptemberJune 30, 20172022 will be reclassified to earnings within the next twelve months.
The fair values of derivative instruments on the consolidated balance sheets as of SeptemberJune 30, 20172022 and December 31, 20162021 were as follows:
(In millions) | Fair Value | |||||||||
Location | September 30, 2017 | December 31, 2016 | ||||||||
Assets | ||||||||||
Foreign exchange contracts | Other current assets | $ | 3.0 | $ | 2.8 | |||||
Net investment hedges | Other current assets | 0.2 | 0.6 | |||||||
|
|
|
| |||||||
Total assets | $ | 3.2 | $ | 3.4 | ||||||
Liabilities | ||||||||||
Foreign exchange contracts | Other current liabilities | $ | 5.1 | $ | 2.9 | |||||
Net investment hedges | Other current liabilities | 0.4 | 0.2 | |||||||
|
|
|
| |||||||
Total current liabilities | $ | 5.5 | $ | 3.1 |
|
|
|
|
| Fair Value |
| |||||
(In millions) |
| Location |
|
| June 30, |
|
| December 31, |
| ||
Assets: |
|
|
|
|
|
|
|
|
| ||
Foreign exchange contracts |
| Other current assets |
|
| $ | 5.7 |
|
| $ | 4.1 |
|
Interest rate hedges |
| Other non-current assets |
|
|
| 58.9 |
|
|
| 0 |
|
|
| Total assets |
|
| $ | 64.6 |
|
| $ | 4.1 |
|
Liabilities: |
|
|
|
|
|
|
|
|
| ||
Foreign exchange contracts |
| Other current liabilities |
|
| $ | 0.9 |
|
| $ | 1.4 |
|
Commodity contracts |
| Other current liabilities |
|
|
| 9.4 |
|
|
| 0.1 |
|
|
| Total liabilities |
|
| $ | 10.3 |
|
| $ | 1.5 |
|
14
11
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 ninesix months ended June 30, 2022 and 2021 were as follows:
(In millions) |
| Classification and Amount of Gain (Loss) |
| |||||||||
|
| Six Months Ended June 30, 2022 |
| |||||||||
|
| Cost of |
|
| Interest |
|
| Other income, net |
| |||
Total amounts per Consolidated Statements of Comprehensive Income |
| $ | 2,585.7 |
|
| $ | 52.3 |
|
| $ | 1.5 |
|
The effects of fair value and cash flow hedging: |
|
|
|
|
|
|
|
|
| |||
Gain (loss) on fair value hedging relationships |
|
|
|
|
|
|
|
|
| |||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
| |||
Hedged items |
|
| - |
|
|
| - |
|
|
| (8.9 | ) |
Derivative designated as hedging instruments |
|
| - |
|
|
| - |
|
|
| 5.1 |
|
Gain (loss) on cash flow hedging relationships |
|
|
|
|
|
|
|
|
| |||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| 3.0 |
|
|
| - |
|
|
| - |
|
Commodity contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| (0.3 | ) |
|
| - |
|
|
| - |
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| - |
|
|
| 1.4 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
| |||
(In millions) |
| Classification and Amount of Gain (Loss) |
| |||||||||
|
| Six Months Ended June 30, 2021 |
| |||||||||
|
| Cost of |
|
| Interest |
|
| Other expense, net |
| |||
Total amounts per Consolidated Statements of Comprehensive Income |
| $ | 2,357.2 |
|
| $ | 42.6 |
|
| $ | 2.0 |
|
The effects of fair value and cash flow hedging: |
|
|
|
|
|
|
|
|
| |||
Gain (loss) on fair value hedging relationships |
|
|
|
|
|
|
|
|
| |||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
| |||
Hedged items |
|
| - |
|
|
| - |
|
|
| 1.7 |
|
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 |
|
| (0.7 | ) |
|
| - |
|
|
| - |
|
Commodity contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| 0.9 |
|
|
| - |
|
|
| - |
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| - |
|
|
| 0.3 |
|
|
| - |
|
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 SeptemberJune 30, 20172022 and 2016 were:2021 were as follows:
(In millions) | Gain (Loss) Recognized in Income Nine Months Ended September 30, | |||||||||
Type of hedge | Location | 2017 | 2016 | |||||||
Cash flow | Cost of products sold | $ | 0.9 | $ | (2.6 | ) | ||||
Fair value | Other (income) expense, net | (1.4 | ) | 1.3 | ||||||
|
|
|
| |||||||
Total | $ | (0.5 | ) | $ | (1.3 | ) | ||||
(In millions) | Gain (Loss) Recognized in Income Three Months Ended September 30, | |||||||||
Type of hedge | Location | 2017 | 2016 | |||||||
Cash flow | Cost of products sold | $ | (0.1 | ) | $ | (1.2 | ) | |||
Fair value | Other (income) expense, net | (0.9 | ) | 0.3 | ||||||
|
|
|
| |||||||
Total | $ | (1.0 | ) | $ | (0.9 | ) |
(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 effective portion of cash flow hedges recognized in other comprehensive income were a net lossesloss of $(0.1)$0.5 million and $(8.0)a net loss of $0.6 million in the ninesix months ended SeptemberJune 30, 20172022 and 2016,2021, respectively. The effective portion of cash flow hedges recognized in other comprehensive income were a net lossesgain of $(3.8)$0.2 million and zeroa net gain of $1.4 million in the three months ended SeptemberJune 30, 20172022 and 2016,2021, respectively. In the nine and three months ended September 30, 2017 and 2016, the ineffective portion of cash flow hedges recognized in other (income) expense, net, was insignificant.
8. Fair Value Measurements
FASB ASC requirements for Fair Value Measurements and Disclosures establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels. Level 1 inputs, the highest priority, are quoted prices in active
13
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
markets for identical assets or liabilities. Level 2 inputs reflect inputs other than quoted prices included in levelLevel 1 that are either observable directly or through corroboration with observable market data. Level 3 inputs are unobservable inputs, due to little or no0 market activity for the asset or liability, such as internally-developed valuation models. We do not have any assets or liabilities measured at fair value on a recurring basis that are levelLevel 3.
15
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying value net of underwriting commissions, price discounts, and debt issuance costs and fair value of debt as of SeptemberJune 30, 20172022 and December 31, 20162021 were as follows:
(In millions) | September 30, 2017 | December 31, 2016 | ||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Revolving credit facility | $ | 570.0 | $ | 570.0 | $ | 540.0 | $ | 540.0 | ||||||||
Senior Notes | 892.2 | 927.5 | 891.1 | 919.2 |
(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 |
|
The estimated fair value of our revolving credit facility is determined primarily using broker quotes, which are level 2 inputs. The estimated fair value of our Senior Notes is determined by using quoted market prices of our debt securities, which are levelLevel 1 inputs. The estimated fair value of our 2019 Revolving Credit Facility, 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 SeptemberJune 30, 20172022 and December 31, 20162021 were as follows:
(In millions) | Fair Value |
| Fair Value |
| ||||||||||||
September 30, 2017 | December 31, 2016 |
| June 30, |
|
| December 31, |
| |||||||||
Assets |
|
|
|
|
|
| ||||||||||
Derivative financial instruments (level 2) | $ | 3.2 | $ | 3.4 | ||||||||||||
Deferred compensation program assets (level 2) | 7.0 | 4.5 | ||||||||||||||
|
| |||||||||||||||
Derivative financial instruments (Level 2) |
| $ | 64.6 |
|
| $ | 4.1 |
| ||||||||
Deferred compensation program assets (Level 2) |
|
| 19.5 |
|
|
| 19.8 |
| ||||||||
Total assets | $ | 10.2 | $ | 7.9 |
| $ | 84.1 |
|
| $ | 23.9 |
| ||||
Liabilities |
|
|
|
|
|
| ||||||||||
Derivative financial instruments (level 2) | $ | 5.5 | $ | 3.1 | ||||||||||||
Derivative financial instruments (Level 2) |
| $ | 10.3 |
|
| $ | 1.5 |
|
9. Accumulated Other Comprehensive Income (Loss)
16
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total accumulated other comprehensive lossincome (loss) consists of net income and other changes in business equity from transactions and other events from sources other than shareholders.stockholders. It includes currency translation gains and losses, unrealized gains and losses from derivative instruments designated as cash flow hedges, and defined benefit plan adjustments. The after-tax components of and changes in accumulated other comprehensive loss, net of tax,(loss) income for the six and three months ended June 30, 2022 and 2021 were as follows:
(In millions) | Foreign Currency Adjustments | Derivative Hedging Gain (Loss) | Defined Benefit Plan Adjustments(a) | Accumulated Other Comprehensive Loss | ||||||||||||
Balance at December 31, 2015 | $ | (13.3 | ) | $ | 2.1 | $ | (41.3 | ) | $ | (52.5 | ) | |||||
Amounts classified into accumulated other comprehensive loss | 0.9 | (7.3 | ) | 9.0 | 2.6 | |||||||||||
Amounts reclassified from accumulated other comprehensive loss | — | 2.8 | (5.1 | ) | (2.3 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net current-period other comprehensive income (loss) | 0.9 | (4.5 | ) | 3.9 | 0.3 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at September 30, 2016 | $ | (12.4 | ) | $ | (2.4 | ) | $ | (37.4 | ) | $ | (52.2 | ) | ||||
|
|
|
|
|
|
|
| |||||||||
Balance at December 31, 2016 | $ | (28.0 | ) | $ | (0.6 | ) | $ | (43.3 | ) | $ | (71.9 | ) | ||||
Amounts classified into accumulated other comprehensive loss | 47.0 | 0.6 | 3.5 | 51.1 | ||||||||||||
Amounts reclassified from accumulated other comprehensive loss | — | (0.6 | ) | (4.1 | ) | (4.7 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Net current-period other comprehensive income (loss) | 47.0 | — | (0.6 | ) | 46.4 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at September 30, 2017 | $ | 19.0 | $ | (0.6 | ) | $ | (43.9 | ) | $ | (25.5 | ) | |||||
|
|
|
|
|
|
|
|
14
17
FORTUNE BRANDS HOME & SECURITY, 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 ninesix and three months ended SeptemberJune 30, 20172022 and 20162021 were as follows:
(In millions) | ||||||||||||
Details about Accumulated Other Comprehensive Loss Components | Amount Reclassified from Accumulated Other Comprehensive Loss Nine Months Ended September 30, | Affected Line Item in the Statement of Comprehensive Income | ||||||||||
2017 | 2016 | |||||||||||
(Losses) gains on cash flow hedges | ||||||||||||
Foreign exchange contracts | $ | 0.5 | $ | (2.5 | ) | Cost of products sold | ||||||
Commodity contracts | 0.4 | (0.1 | ) | Cost of products sold | ||||||||
|
|
|
| |||||||||
0.9 | (2.6 | ) | Total before tax | |||||||||
(0.3 | ) | (0.2 | ) | Tax expense | ||||||||
|
|
|
| |||||||||
$ | 0.6 | $ | (2.8 | ) | Net of tax | |||||||
Defined benefit plan items | ||||||||||||
Recognition of prior service credits | $ | 5.1 | $ | 10.0 | (a) | |||||||
Recognition of actuarial gains (losses) | 1.3 | (1.9 | ) | (a) | ||||||||
|
|
|
| |||||||||
6.4 | 8.1 | Total before tax | ||||||||||
(2.3 | ) | (3.0 | ) | Tax expense | ||||||||
|
|
|
| |||||||||
$ | 4.1 | $ | 5.1 | Net of tax | ||||||||
|
|
|
| |||||||||
Total reclassifications for the period | $ | 4.7 | $ | 2.3 | 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 |
| $ | 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 |
(In millions) | ||||||||||||
Details about Accumulated Other Comprehensive Loss Components | Amount Reclassified from Accumulated Other Comprehensive Loss Three Months Ended September 30, | Affected Line Item in the Statement of Comprehensive Income | ||||||||||
2017 | 2016 | |||||||||||
Gains (losses) on cash flow hedges | ||||||||||||
Foreign exchange contracts | $ | (0.5 | ) | $ | (1.3 | ) | Cost��of products sold | |||||
Commodity contracts | 0.4 | 0.1 | Cost of products sold | |||||||||
|
|
|
| |||||||||
(0.1 | ) | (1.2 | ) | Total before tax | ||||||||
0.2 | — | Tax expense | ||||||||||
|
|
|
| |||||||||
$ | 0.1 | $ | (1.2 | ) | Net of tax | |||||||
Defined benefit plan items | ||||||||||||
Recognition of prior service credits | $ | — | $ | 3.8 | (a) | |||||||
Recognition of actuarial gains (losses) | 1.3 | (1.0 | ) | (a) | ||||||||
|
|
|
| |||||||||
1.3 | 2.8 | Total before tax | ||||||||||
(0.4 | ) | (1.0 | ) | Tax expense | ||||||||
|
|
|
| |||||||||
$ | 0.9 | $ | 1.8 | Net of tax | ||||||||
|
|
|
| |||||||||
Total reclassifications for the period | $ | 1.0 | $ | 0.6 | Net of tax |
18
10. Revenue
The following table disaggregates our consolidated revenue by major sales distribution channels for the six and three months ended June 30, 2022 and 2021:
(In millions) |
| Six Months Ended |
|
| Three Months Ended |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Wholesalers(a) |
| $ | 1,886.8 |
|
| $ | 1,660.8 |
|
| $ | 1,034.5 |
|
| $ | 862.8 |
|
Home Center retailers(b) |
|
| 1,206.9 |
|
|
| 1,117.1 |
|
|
| 605.9 |
|
|
| 568.2 |
|
Other retailers(c) |
|
| 210.2 |
|
|
| 198.1 |
|
|
| 117.1 |
|
|
| 99.0 |
|
Builder direct |
|
| 160.0 |
|
|
| 129.1 |
|
|
| 87.8 |
|
|
| 67.7 |
|
U.S. net sales |
|
| 3,463.9 |
|
|
| 3,105.1 |
|
|
| 1,845.3 |
|
|
| 1,597.7 |
|
International(d) |
|
| 564.4 |
|
|
| 602.0 |
|
|
| 265.7 |
|
|
| 338.4 |
|
Net sales |
| $ | 4,028.3 |
|
| $ | 3,707.1 |
|
| $ | 2,111.0 |
|
| $ | 1,936.1 |
|
16
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Defined Benefit Plans
The components of net periodic benefit costincome for pension and postretirement benefits for the ninesix and three months ended SeptemberJune 30, 20172022 and 20162021 were as follows:
(In millions) | Nine Months Ended September 30, |
| Six Months Ended June 30, |
|
| Three Months Ended June 30, |
|
| |||||||||||||||||||||||||
Pension Benefits | Postretirement Benefits |
| Pension Benefits |
|
| Pension Benefits |
|
| |||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 |
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| |||||||||||||||||
Service cost | $ | 0.4 | $ | 7.2 | $ | — | $ | — |
| $ | 0.2 |
|
| $ | 0.2 |
|
| $ | 0.1 |
|
| $ | 0.1 |
|
| ||||||||
Interest cost | 25.0 | 25.8 | — | 0.2 |
|
| 12.7 |
|
|
| 12.0 |
|
|
| 6.4 |
|
|
| 6.0 |
|
| ||||||||||||
Expected return on plan assets | (28.0 | ) | (27.9 | ) | — | — |
|
| (17.7 | ) |
|
| (17.5 | ) |
|
| (8.9 | ) |
|
| (8.8 | ) |
| ||||||||||
Recognition of prior service costs (credits) | — | — | (5.1 | ) | (10.0 | ) | |||||||||||||||||||||||||||
Recognition of actuarial losses (gains) | 0.3 | — | (1.6 | ) | 1.9 | ||||||||||||||||||||||||||||
|
|
|
| ||||||||||||||||||||||||||||||
Net periodic benefit (income) cost | $ | (2.3 | ) | $ | 5.1 | $ | (6.7 | ) | $ | (7.9 | ) | ||||||||||||||||||||||
(In millions) | Three Months Ended September 30, | ||||||||||||||||||||||||||||||||
Pension Benefits | Postretirement Benefits | ||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||||||||
Service cost | $0.1 | $1.6 | $— | $— | |||||||||||||||||||||||||||||
Interest cost | 8.3 | 8.4 | — | (0.1) | |||||||||||||||||||||||||||||
Expected return on plan assets | (9.3) | (8.9) | — | — | |||||||||||||||||||||||||||||
Recognition of prior service costs (credits) | — | — | — | (3.8) | |||||||||||||||||||||||||||||
Recognition of actuarial losses (gains) | 0.3 | — | (1.6) | 1.0 | |||||||||||||||||||||||||||||
|
|
|
| ||||||||||||||||||||||||||||||
Net periodic benefit (income) cost | $ | (0.6 | ) | $ | 1.1 | $ | (1.6 | ) | $ | (2.9 | ) | ||||||||||||||||||||||
Net periodic benefit income |
| $ | (4.8 | ) |
| $ | (5.3 | ) |
| $ | (2.4 | ) |
| $ | (2.7 | ) |
|
Service cost for 2017 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
19
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The effective income tax rates for the ninesix and three months ended SeptemberJune 30 2017were 23.4% and 2016 were 29.5%24.3% for 2022 and 28.2%,20.8% and 21.0% for 2021, respectively.
The increase indifference between the Company’s effective tax rate reflected a lowerfor the six months ended June 30, 2022 and the U.S. statutory rate of 21.0% primarily relates to state income taxes (net of federal income tax benefit), tax benefit on share-basedfor stock compensation, partially offset by achanges in valuation allowance release related to state deferred tax assets. In addition, the effective tax rates in both periods were favorably impacted by a tax benefit attributable to the Domestic Production Activity (Internal Revenue Code Section 199) Deduction, favorable tax rates in foreign jurisdictions, and a benefit associated with the U.S. research and development credit, offset by state and local taxes and increases to uncertain tax positions.
The effective income tax rates for the three months ended September 30, 2017 and 2016 were 31.6% and 28.6%, respectively. The increase in the effective tax rate reflected a lower tax benefit on share-based compensation, partially offset by a valuation allowance release related to state deferred tax assets. In addition, the effective tax rates in both periods were favorably impacted by a tax benefit attributable to the Domestic Production Activity (Internal Revenue Code Section 199) Deduction, favorable tax rates in foreign jurisdictions, and a benefit associated with the U.S. research and development credit, offset by state and local taxes and increases to uncertain tax positions.
It is reasonably possible that, within the next 12 months, total unrecognized tax benefits may decrease up to $1.5 million, primarily as a result of the conclusion of pending U.S. federal, stateallowances, and foreign income tax proceedings.expense.
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 historical claimshistoric claim experience and the nature of the product category. The following table summarizes activity related to our product warranty liability for the ninesix months ended SeptemberJune 30, 20172022 and 2016,2021, respectively.
(In millions) |
| Six Months Ended |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Reserve balance at January 1, |
| $ | 26.5 |
|
| $ | 24.5 |
|
Provision for warranties issued |
|
| 22.2 |
|
|
| 16.9 |
|
Settlements made (in cash or in kind) |
|
| (21.3 | ) |
|
| (16.8 | ) |
Acquisition |
|
| 0.4 |
|
|
| 0.3 |
|
Foreign translation adjustments |
|
| (0.2 | ) |
|
| 0 |
|
Reserve balance at June 30, |
| $ | 27.6 |
|
| $ | 24.9 |
|
(In millions) | Nine Months Ended September 30, | |||||||
2017 | 2016 | |||||||
Reserve balance at January 1, | $ | 16.2 | $ | 16.0 | ||||
Provision for warranties issued | 23.3 | 23.8 | ||||||
Settlements made (in cash or in kind) | (17.0 | ) | (22.8 | ) | ||||
Foreign translation adjustments | (1.2 | ) | — | |||||
Acquisitions | 0.7 | 0.4 | ||||||
|
|
|
| |||||
Reserve balance at September 30, | $ | 22.0 | $ | 17.4 |
17
20
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Information on Business Segments
Net sales and operating income for the ninesix and three months ended SeptemberJune 30, 20172022 and 20162021 by segment were as follows:
Nine Months Ended September 30, | ||||||||||||
(In millions) | 2017 | 2016 | % Change vs. Prior Year | |||||||||
Net Sales | ||||||||||||
Cabinets | $ | 1,841.2 | $ | 1,797.2 | 2.4 | % | ||||||
Plumbing | 1,251.5 | 1,108.0 | 13.0 | |||||||||
Doors | 374.2 | 351.3 | 6.5 | |||||||||
Security | 433.9 | 426.8 | 1.7 | |||||||||
|
|
|
| |||||||||
Net sales | $ | 3,900.8 | $ | 3,683.3 | 5.9 | % | ||||||
Operating Income | ||||||||||||
Cabinets | $ | 205.4 | $ | 194.0 | 5.9 | % | ||||||
Plumbing | 270.8 | 242.6 | 11.6 | |||||||||
Doors | 55.8 | 46.1 | 21.0 | |||||||||
Security | 56.4 | 44.7 | 26.2 | |||||||||
Less: Corporate expenses | (59.3 | ) | (61.1 | ) | 2.9 | |||||||
|
|
|
| |||||||||
Operating income | $ | 529.1 | $ | 466.3 | 13.5 | % | ||||||
Corporate expenses | ||||||||||||
General and administrative expense | $ | (63.8 | ) | $ | (61.3 | ) | ||||||
Defined benefit plan income | 3.2 | 2.1 | ||||||||||
Recognition of defined benefit plan actuarial gains (losses) | 1.3 | (1.9 | ) | |||||||||
|
|
|
| |||||||||
Total Corporate expenses | $ | (59.3 | ) | $ | (61.1 | ) | 2.9 | % |
|
| 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 | ) | % |
2115. Restructuring and Other Charges
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended September 30, | ||||||||||||
(In millions) | 2017 | 2016 | % Change vs. Prior Year | |||||||||
Net Sales | ||||||||||||
Cabinets | $ | 614.2 | $ | 602.1 | 2.0 | % | ||||||
Plumbing | 438.3 | 391.1 | 12.1 | |||||||||
Doors | 138.5 | 129.2 | 7.2 | |||||||||
Security | 157.6 | 156.6 | 0.6 | |||||||||
|
|
|
| |||||||||
Net sales | $ | 1,348.6 | $ | 1,279.0 | 5.4 | % | ||||||
Operating Income | ||||||||||||
Cabinets | $ | 69.7 | $ | 74.8 | (6.8 | )% | ||||||
Plumbing | 97.3 | 84.0 | 15.8 | |||||||||
Doors | 25.1 | 22.3 | 12.6 | |||||||||
Security | 27.7 | 22.9 | 21.0 | |||||||||
Less: Corporate expenses | (18.0 | ) | (20.9 | ) | 13.9 | |||||||
|
|
|
| |||||||||
Operating income | $ | 201.8 | $ | 183.1 | 10.2 | % | ||||||
Corporate expenses | ||||||||||||
General and administrative expense | $ | (20.5 | ) | $ | (20.5 | ) | ||||||
Defined benefit plan income | 1.2 | 0.6 | ||||||||||
Recognition of defined benefit plan actuarial gains (losses) | 1.3 | (1.0 | ) | |||||||||
|
|
|
| |||||||||
Total Corporate expenses | $ | (18.0 | ) | $ | (20.9 | ) | 13.9 | % |
22
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pre-tax restructuring and other charges for the ninesix and three months ended SeptemberJune 30, 20172022 and 20162021 are shown below.
(In millions) | Nine Months Ended September 30, 2017 |
| Six Months Ended June 30, 2022 |
|
| Six Months Ended June 30, 2021 |
| |||||||||||||||||||||||||||||
Restructuring Charges | Other Charges (a) | Total Charges |
| Restructuring |
|
| Other |
|
| Total |
|
| Restructuring |
|
| Other |
|
| Total |
| ||||||||||||||||
Plumbing | 1.6 | $ | — | $ | 1.6 | |||||||||||||||||||||||||||||||
Security | 1.9 | 0.9 | 2.8 | |||||||||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||||||
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 | $ | 3.5 | $ | 0.9 | $ | 4.4 |
| $ | 2.9 |
|
| $ | (3.1 | ) |
| $ | (0.2 | ) |
| $ | 7.9 |
|
| $ | 4.2 |
|
| $ | 12.1 |
|
(a) | “Other |
18
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restructuring and other charges (gains) in thefirst six months of 2022 are largely related to severance costs associated with plant and office closures. Restructuring and other charges in the first ninesix months of 20172021 largely related to severance costs associated with the relocation of manufacturing facilities within our Cabinets and Outdoors & Security and Plumbing segments.
(In millions) | Nine Months Ended September 30, 2016 |
| Three Months Ended June 30, 2022 |
|
| Three Months Ended June 30, 2021 |
| |||||||||||||||||||||||||||||
Restructuring Charges | Other Charges (a) | Total Charges |
| Restructuring |
|
| Other |
|
| Total |
|
| Restructuring |
|
| Other |
|
| Total |
| ||||||||||||||||
Water Innovations |
| $ | 0.9 |
|
| $ | - |
|
| $ | 0.9 |
|
| $ | - |
|
| $ | 0.2 |
|
| $ | 0.2 |
| ||||||||||||
Outdoors & Security |
|
| 0.1 |
|
|
| - |
|
|
| 0.1 |
|
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||
Cabinets | $ | 1.8 | $ | — | $ | 1.8 |
|
| 1.3 |
|
|
| 2.3 |
|
|
| 3.6 |
|
|
| 0.3 |
|
|
| 2.1 |
|
|
| 2.4 |
| ||||||
Plumbing | 1.1 | 0.8 | 1.9 | |||||||||||||||||||||||||||||||||
Security | 9.5 | 3.5 | 13.0 | |||||||||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||||||
Total | $ | 12.4 | $ | 4.3 | $ | 16.7 |
| $ | 2.3 |
|
| $ | 2.3 |
|
| $ | 4.6 |
|
| $ | 0.3 |
|
| $ | 2.3 |
|
| $ | 2.6 |
|
(a) | “Other |
Restructuring and other charges (gains) in the second quarter of 2022 largely related to severance costs associated with plant and office closures within our Cabinets and Water Innovations segments. Restructuring and other charges in the first nine monthssecond quarter of 2016 primarily2021 largely related to severance costs and charges associated with the relocation of a manufacturing facilityplant and office closures within our SecurityCabinets segment.
23
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions) | Three Months Ended September 30, 2017 | |||||||||||
Restructuring Charges | Other Charges (a) | Total Charges | ||||||||||
Doors | $ | 0.2 | $ | (0.1 | ) | $ | 0.1 | |||||
Security | 0.2 | 0.3 | 0.5 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 0.4 | $ | 0.2 | $ | 0.6 |
Restructuring and other charges in the third quarter of 2017 primarily resulted from severance costs within our Doors and Plumbing Segments.
(In millions) | Three Months Ended September 30, 2016 | |||||||||||
Restructuring Charges | Other Charges (a) | Total Charges | ||||||||||
Plumbing | $ | 0.4 | $ | 0.5 | $ | 0.9 | ||||||
Security | 2.7 | 1.0 | 3.7 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 3.1 | $ | 1.5 | $ | 4.6 |
Restructuring and other charges in the third quarter of 2016 primarily resulted from severance costs within our Security segment.
24
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reconciliation of Restructuring Liability
(In millions) | Balance at 12/31/16 | 2017 Provision | Cash Expenditures (a) | Non-Cash Write-offs | Balance at 9/30/17 |
| Balance at |
|
| 2022 |
|
| Cash |
|
| Balance at |
| |||||||||||||||||||
Workforce reduction costs | $ | 2.4 | $ | 2.8 | $ | (2.9 | ) | $ | (0.5 | ) | $ | 1.8 |
| $ | 4.7 |
|
| $ | 2.8 |
|
| $ | (4.3 | ) |
| $ | 3.2 |
| ||||||||
Other | 0.6 | 0.7 | (1.3 | ) | — | 0.0 |
|
| 1.0 |
|
|
| 0.1 |
|
|
| (0.2 | ) |
|
| 0.9 |
| ||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||
$ | 3.0 | $ | 3.5 | $ | (4.2 | ) | $ | (0.5 | ) | $ | 1.8 | |||||||||||||||||||||||||
Total |
| $ | 5.7 |
|
| $ | 2.9 |
|
| $ | (4.5 | ) |
| $ | 4.1 |
|
(In millions) | Balance at 12/31/15 | 2016 Provision | Cash Expenditures (a) | Non-Cash Write-offs (b) | Balance at 9/30/16 | |||||||||||||||
Workforce reduction costs | $ | 10.4 | $ | 8.7 | $ | (15.0 | ) | $ | 0.2 | $ | 4.3 | |||||||||
Other | 0.5 | 3.7 | (3.0 | ) | (0.6 | ) | 0.6 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
$ | 10.9 | $ | 12.4 | $ | (18.0 | ) | $ | (0.4 | ) | $ | 4.9 |
(a) Cash expenditures primarily relate to severance charges.
25
(In millions) |
| Balance at |
|
| 2021 |
|
| Cash |
|
| Balance at |
| ||||
Workforce reduction costs |
| $ | 6.9 |
|
| $ | 6.4 |
|
| $ | (7.9 | ) |
| $ | 5.4 |
|
Other |
|
| 0.7 |
|
|
| 1.5 |
|
|
| (0.9 | ) |
|
| 1.3 |
|
Total |
| $ | 7.6 |
|
| $ | 7.9 |
|
| $ | (8.8 | ) |
| $ | 6.7 |
|
FORTUNE BRANDS HOME & SECURITY, INC.16. Earnings Per Share
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The computations of earnings per common share for the six and three months ended June 30, 2022 and 2021 were as follows:
(In millions, except per share data) | Nine Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Income from continuing operations, net of tax | $ | 347.3 | $ | 308.0 | $ | 129.6 | $ | 121.9 | ||||||||
Less: Noncontrolling interest | 0.1 | (0.1 | ) | 0.1 | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Income from continuing operations for EPS | 347.2 | 308.1 | 129.5 | 121.9 | ||||||||||||
Income from discontinued operations | (2.6 | ) | 1.5 | — | 1.5 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income attributable to Fortune Brands | $ | 344.6 | $ | 309.6 | $ | 129.5 | $ | 123.4 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Earnings per common share | ||||||||||||||||
Basic | ||||||||||||||||
Continuing operations | $ | 2.26 | $ | 2.00 | $ | 0.84 | $ | 0.79 | ||||||||
Discontinued operations | (0.02 | ) | 0.01 | — | 0.01 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income attributable to Fortune Brands common stockholders | $ | 2.24 | $ | 2.01 | $ | 0.84 | $ | 0.80 | ||||||||
Diluted | ||||||||||||||||
Continuing operations | $ | 2.22 | $ | 1.95 | $ | 0.83 | $ | 0.77 | ||||||||
Discontinued operations | (0.02 | ) | 0.01 | — | 0.01 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income attributable to Fortune Brands common stockholders | $ | 2.20 | $ | 1.96 | $ | 0.83 | $ | 0.78 | ||||||||
Basic average shares outstanding | 153.7 | 154.4 | 153.5 | 154.2 | ||||||||||||
Stock-based awards | 2.5 | 3.6 | 2.4 | 3.4 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Diluted average shares outstanding | 156.2 | 158.1 | 155.9 | 157.6 | ||||||||||||
Antidilutive stock-based awards excluded from weighted-average number of shares outstanding for diluted earnings per share | 0.6 | 0.5 | 0.6 | — |
(In millions, except per share data) |
| Six Months Ended |
|
| Three Months Ended |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Net income |
| $ | 372.9 |
|
| $ | 395.0 |
|
| $ | 192.0 |
|
| $ | 217.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic average shares outstanding |
|
| 131.9 |
|
|
| 138.5 |
|
|
| 130.3 |
|
|
| 138.4 |
|
Stock-based awards |
|
| 1.1 |
|
|
| 2.0 |
|
|
| 0.9 |
|
|
| 2.0 |
|
Diluted average shares outstanding |
|
| 133.0 |
|
|
| 140.5 |
|
|
| 131.2 |
|
|
| 140.4 |
|
Antidilutive stock-based awards excluded from weighted- |
|
| 1.0 |
|
|
| 0.3 |
|
|
| 1.6 |
|
|
| 0.4 |
|
26
19
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
Litigation17. Commitments and Contingencies
Litigation
We are defendants in lawsuits associated with the normal conduct of our businesses and operations. 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.
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 ninesix and three months ended SeptemberJune 30, 20172022 and 2016.2021. 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.costs. Uncertainties about the status of laws, regulations, technology and information related to individual sites make it difficult to develop estimates of environmental remediation exposures. 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.
20
In October 2017, the Company acquired Victoria + Albert, a UK manufacturer of luxury freestanding tubs and basins. Victoria + Albert represent a strong strategic fit, adding a preeminent luxury tub brand to our plumbing portfolio. The results of operations of the acquired company will be included in the Plumbing segment from the date of acquisition. This acquisition will not have a material effect on net sales or operating income.
Item 2. FORTUNE BRANDS HOME & SECURITY, INC.
27MANAGEMENT’S DISCUSSION AND ANALYSIS OF
|
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, 2016,2021, which are included in our Annual Report on Form10-K for the year ended December 31, 2016.2021.
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”), regarding expectations for our business, operations, financial performance or financial condition in addition to statements regarding our general business strategies, market potential, futurethe potential of our brands and other matters, expected capital spending, expected pension contributions, the anticipated impact of recently issued accounting standards on our financial performance, pension contributions,statements, the anticipated impact of acquisitions, other strategic transactions and other matters.matters that are not historical in nature, including the expected or potential impact of the novel coronavirus (“COVID-19”) pandemic. Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” are generally forward-looking in nature and not historical facts. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is based on current expectations, estimates, assumptions and projections about our industry, business and future financial results, based on information available at the time this report is filed with the Securities and Exchange Commission. Our actual results could differ materially from the results contemplated by these forward-looking 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 North Americanhousing 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 processes and improve existing products and processes, (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 economies, (iii) risksupply 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 integratingjoint ventures and related integration activities, (xiii) impairments in the carrying value of goodwill or other acquired property, (iv) our ability to remain competitive, innovative and protect our intellectual property, (v) our reliance on key customers and suppliers, (vi) the cost and availability associated with our supply chains and the availability of raw materials, (vii)intangible assets, (xiv) risk of increases in our defined benefit-related costs and funding requirements, (viii) compliance(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 tax, environmental, social and federal, state and international lawsgovernance 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 (ix)protect our intellectual property rights, (xxii) potential liabilities and costs from claims and litigation, (xxiii) the riskpotential costs and disruption to our business of doing business internationally.implementing the Spin-Off, (xxiv) our ability to consummate the Spin-Off and achieve the expected benefits of the Spin-Off transaction, (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. These and other factors are discussed in Part I, Item 1A “Risk Factors” of our Annual Report on Form10-K for the year ended December 31, 2016.2021 and in Part II, Item 1A of this Report. 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.
OVERVIEW
21
OVERVIEW
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 leader inleading home and security products focused on the design, manufacture and salecompany with a portfolio of market-leadingleading branded products in the following categories: kitchen and bath cabinetry, plumbing and accessories, entry door systemsused for residential home repair, remodeling, new construction and security products.applications.
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.
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 shareholderstockholder value. We believe the Company’s track record reflects the long-term attractiveness and potential of ourthe categories we serve and our leading brands. As consumer demandThe long-term outlook for our products remain favorable, and our strategic advantages, including those set of capabilities we refer to as the housing market grow, we expect the benefits of operating leverage and strategic spendingFortune Brands Advantage, helps us to support increased manufacturing capacity and long-term growth initiatives will help us continue to achieve profitable organic growth.
28
OVERVIEW (Continued)
We continue to believe our most attractive opportunities are to invest in profitable organic growth initiatives. We also believe that as the market grows, we have the potential to generate additional growth from leveraging our cash flow and balance sheet by pursuinginitiatives, pursue accretive strategic acquisitions, non-controlling equity investments, and joint ventures, and by returningreturn cash to shareholdersstockholders through a combination of dividends and repurchases of shares of our common stock repurchases under our share repurchase programsprogram as explained in further detail under “Liquidity and Capital Resources” below.
The U.S. market for our home products primarily consists of spending on both new home construction and repair and remodel activities within existing homes, with thea substantial majority of the markets we serve consisting of repair and remodel spending. We believe thatContinued growth in the U.S. market for our home products is in the midst of an elongated recovery from the U.S. economic recession that ended inmid-2009 and that a continued recovery will largely depend on consumer confidence, employment, wage growth, home prices, stable mortgage rates and credit availability. OverInflation and rising of mortgage rates have recently started slowing the long term,pace of single-family and existing home sales activity. However, we believe thatwe are well positioned to manage any short-term slow-down in the U.S. home productshousing market will benefit from favorable populationbecause the fundamental drivers of the housing market remain intact.
We have been and immigration trends, which will drive demand for new housing units, and from an aging existing housing stock that willmay continue to need to be repaired and remodeled.
We may be impacted by fluctuations in raw materialnear-term supply, labor and transportation costs, changesfreight 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 promotional activity among our competitors.the ongoing costs of tariffs. We strivecontinue to manage these challenges and are diligently working to offset the potential unfavorable impactimpacts of these items withthrough continuous productivity improvement initiatives and price increases.
In July 2017,the first quarter of 2022, our Plumbing segment was renamed “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 Shaws Since1897 Limited (“Shaws”100% of the outstanding equity of Solar Innovations LLC and an affiliated entity (together, "Solar"), aUK-based luxury plumbing products company that specializes in manufacturing leading producer of wide-opening exterior door systems and selling fireclay sinks and selling brassware and accessories in partnership with Perrin & Rowe.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 existingrevolving credit facilities. This acquisition broadened our plumbing portfolio and enhanced future growth opportunities. Net sales and operating income in the three months ended September 30, 2017 were not material to the Company.facility. The results of Solar are reported as part of the operations are included in the PlumbingOutdoors & Security segment.
During the third quarter of 2016, we created the Global Plumbing Group (“GPG”), which was designed to Its complementary product offerings support the growth of multiple plumbing brands with an enhanced set of products and brands, while leveraging Moen’s existing global supply chain and broad distribution network.segment’s outdoor living strategy.
In September 2016, we acquired ROHL LLC (“ROHL”), a California-based luxury plumbing company and in a related transaction, we acquired TCL Manufacturing Ltd, which gave us ownership of Perrin & Rowe Limited, a UK manufacturer and designer of luxury kitchen and bathroom plumbing products. The total combined purchase price was approximately $166 million, subject to certain post-closing adjustments. We financed both acquisitions using cash on hand and borrowings under our existing credit facility. These transactions broadened the plumbing portfolio and enhanced future growth opportunities.
In June 2016, we amended and restated our credit agreement to combine and rollover our existing revolving credit facility and term loan into a new standalone $1.25 billion revolving credit facility. Terms and conditions of the credit agreement, including the total commitment amount, essentially remained the same. The revolving credit facility will mature in June 2021 and borrowings thereunder will be used for general corporate purposes.
In May 2016, we acquired Riobel Inc. (“Riobel”), a Canadian plumbing company specializing in premium showroom bath and shower fittings, for a total purchase price of $94.6 million in cash. We financed the transaction using cash on hand and borrowings under our existing credit facility.22
RESULTS OF OPERATIONS
29
NineSix Months Ended SeptemberJune 30, 20172022 Compared To NineSix Months Ended SeptemberJune 30, 20162021
|
| 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) | 2017 | 2016 | % Change vs. Prior Year | |||||||||
Cabinets | $ | 1,841.2 | $ | 1,797.2 | 2.4 | % | ||||||
Plumbing | 1,251.5 | 1,108.0 | 13.0 | |||||||||
Doors | 374.2 | 351.3 | 6.5 | |||||||||
Security | 433.9 | 426.8 | 1.7 | |||||||||
|
|
|
|
|
| |||||||
Net sales | $ | 3,900.8 | $ | 3,683.3 | 5.9 | % | ||||||
Operating Income | ||||||||||||
2017 | 2016 | % Change vs. Prior Year | ||||||||||
Cabinets | $ | 205.4 | $ | 194.0 | 5.9 | % | ||||||
Plumbing | 270.8 | 242.6 | 11.6 | |||||||||
Doors | 55.8 | 46.1 | 21.0 | |||||||||
Security | 56.4 | 44.7 | 26.2 | |||||||||
Less: Corporate expenses | (59.3 | ) | (61.1 | ) | 2.9 | |||||||
Operating income | $ | 529.1 | $ | 466.3 | 13.5 | % |
The following discussion of consolidated results of operations and segment results refers to the ninesix months ended SeptemberJune 30, 20172022 compared to the ninesix months ended SeptemberJune 30, 2016.2021. Consolidated results of operations should be read in conjunction with segment results of operations.
Net sales
Net sales increased $217.5by $321.2 million, or 5.9%. The increase was8.7%, principally due to higher sales volume primarily from the continuing improvement in U.S. market conditions for home products, new product introductions, the benefits from the acquisitions in our Plumbing segment and price increases to help mitigate the impact of cumulative raw materialcommodity and transportation cost increases.increases across all our segments, higher sales volume in the Cabinets segment and the benefit from the Solar Innovations acquisition ($11.4 million). These benefits were partially offset by unfavorable mix,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 and higher sales promotions, sales rebates andincentives, as well as unfavorable foreign exchange of approximately $4$9 million.
Cost of products sold
Cost of products sold increased $108.5by $228.5 million, or 4.6%9.7%, due to higher net sales, including the impact of the acquisitions in our Plumbing segment and raw material cost increases 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 productivity improvements.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.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $46.3by $78.0 million, or 5.6%10.2%, due to higher employee-related coststransportation and advertising costs as well as the impactheadcount-related costs.
Asset impairment charge
The asset impairment charge of the acquisitions$26.0 million in 2022 relates to an indefinite-lived tradename within our PlumbingCabinets segment.
30
RESULTS OF OPERATIONS (Continued)
Amortization of intangible assets
Amortization of intangible assets increased $3.2 million primarily due to the acquisitions in our Plumbing segment, partially offset by a decrease relating to a definite-lived customer relationship intangible in our Doors segment that was fully amortized during During the second quarter of 2017.
Loss on sale of2022, 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.
In April 2017, we completed the sale of Field ID, our cloud-based inspection and safety compliance software product line included in our Security segment. We recorded apre-tax loss of $2.4 million as the result of this sale.
Asset impairment charges
Asset impairment charges of $3.2 million relate to our decision in the first quarter of 2017 to sell Field ID, our cloud-based inspection and safety compliance software product line included in our Security segment.
Restructuring charges
Restructuring charges of $3.5$2.9 million in the ninesix months ended SeptemberJune 30, 2017 primarily relates to severance costs within our Security and Plumbing segments. Restructuring charges in the nine months ended September 30, 2016 were $12.4 million and primarily2022 are largely related to severance costs and charges associated with supply chain initiativesplant and office closures. Restructuring charges of $7.9 million in the six months ended June 30, 2021 largely related to severance costs associated with the relocation of manufacturing facilities within our Cabinets and Outdoors & Security segment.segments.
23
RESULTS OF OPERATIONS (Continued)
Operating income
Operating income increased $62.8decreased by $5.8 million, or 13.5%1.1%, primarily due to higher net sales, includingcommodity, transportation and headcount-related costs, an asset impairment charge of $26.0 million, a continued shift to value-priced products in the benefits from the acquisitions in our PlumbingCabinets segment and productivity improvements.higher sales rebate costs, as well as unfavorable foreign exchange of approximately $2 million. These benefitsfactors were partially offset by unfavorable mix,the benefit from higher employee-related, raw materialnet sales, the benefit from productivity improvements and advertising costs.lower restructuring charges.
Interest expense
Interest expense decreased $1.0increased by $9.7 million to $36.5$52.3 million due to higher average borrowings and higher average interest rates.
Other (income) expense, net
Other income, net, was $1.5 million in the six months ended June 30, 2022, compared to other expense, net of $2.0 million in the six months ended June 30, 2021. The increase in other income, net is primarily due to a non-cash loss of $4.5 million related to the absence2021 remeasurement of our investment in 2017 of thewrite-off of debt issuance costs of approximately $1.3 million incurred during 2016.Flo immediately prior to consolidation, partly offset by a decrease in foreign currency transaction gains.
Other (income) expense, net
Other (income) expense, net, was expense of $0.2 million in the nine months ended September 30, 2017, compared to income of $0.1 million in the nine months ended September 30, 2016.
Income taxes
The effective income tax rates for the ninesix months ended SeptemberJune 30, 20172022 and 20162021 were 29.5%23.4% and 28.2%20.8%, respectively. The increaseeffective income tax rate in 2022 was higher than the prior period primarily due to increased foreign tax expense and lower tax benefits from uncertain tax positions, offset by the benefit of a valuation allowance release.
Net income
Net income was $372.9 million in the effectivesix months ended June 30, 2022 compared to $395.0 million in the six months ended June 30, 2021. The decrease was due to higher income tax rate reflectedexpense, higher interest expense and lower operating income, partly offset by higher other income.
Results By Segment
Water Innovations
Net sales decreased by $22.6 million, or 1.7%, due to the impact of shutdowns mandated by the Chinese government in response to a lower tax benefit on share-based compensation,COVID-19 resurgence in China and higher sales rebate costs, as well as unfavorable foreign exchange of approximately $5 million. These factors were partially offset by a valuation allowance release related to state deferred tax assets. In addition, the effective tax rates in both periods were favorably impacted by a tax benefit attributable to the Domestic Production Activity (Internal Revenue Code Section 199) Deduction, favorable tax rates in foreign jurisdictions, and a benefit associated with the U.S. research and development credit, offset by state and local taxes and increases to uncertain tax positions.
Net income from continuing operations
Net income from continuing operations was $347.3 million in the nine months ended September 30, 2017 compared to $308.0 million in the nine months ended September 30, 2016. The increase of $39.3 million was primarily due to higher operating income.
31
RESULTS OF OPERATIONS (Continued)
Loss from discontinued operations
The loss from discontinued operations of $2.6 million in the nine months ended September 30, 2017 primarily related to the prior sale of the Waterloo tool storage and Simonton window businesses. The income from discontinued operations of $1.5 million in the nine months ended September 30, 2016 included the effect of tax adjustments relating to the Waterloo business.
Results by Segment
Cabinets
Net sales increased $44.0 million, or 2.4%, due to higher sales volume driven primarily by continuing improvement in the U.S. home products market and the benefit from new product introductions and price increases to help mitigate the impact of cumulative raw materialcommodity and transportation cost increases.increases and a sales increase in our U.S. e-commerce channel.
Operating income decreased by $6.8 million, or 2.1%, due to the lower sales volume and the impact of higher commodity and freight costs, as well as unfavorable foreign exchange of approximately $2 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 $105.0 million, or 10.5%, due to price increases to help mitigate the impact of cumulative commodity and transportation cost increases and the benefit from the Solar Innovations acquisition ($11.4 million). These benefits were partially offset by lower sales volume, as well as unfavorable mix and higher sales promotions.foreign exchange of approximately $3 million.
24
Operating income increased $11.4by $21.4 million, or 5.9%, due to the increase in net sales and productivity improvements. These benefits were partially offset by unfavorable mix and higher employee-related costs.
Plumbing
Net sales increased $143.5 million, or 13.0%16.3%, due to higher net sales, volume driven by continuing improvement inlower restructuring costs including a gain of $6.2 million on the U.S. home products market andsale of a previously closed manufacturing facility, the benefit from new product introductions, higher salesproductivity improvements, an increase in international markets, principally China,wholesale doors products versus retail doors products and the benefit from the acquisitions of Riobel, ROHL and Perrin & Rowe in 2016 as well as Shaws in 2017.Solar Innovations acquisition ($1.2 million). These benefits were partially offset by higher sales rebatescommodity, 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 $4$1 million.
Operating income increased $28.2 million, or 11.6%, due to higher net sales, productivity improvements and favorable mix. These benefits were partially offset by higher employee-related costs, raw material costs and advertising costs.Cabinets
Doors
Net sales increased $22.9by $238.8 million, or 6.5%17.1%, due to higher sales volume driven primarily by continuing improvement in the U.S. home products market and the benefit from new product introductions and price increases to help mitigate the impact of cumulative raw materialcommodity and transportation cost increases.
Operating income increased $9.7 million, or 21.0%, due to the higher net salesincreases and leveraging sales on our existing fixed cost base.
32
RESULTS OF OPERATIONS (Continued)
Results by Segment (Continued)
Security
Net sales increased $7.1 million, or 1.7%, due to higher sales volume and price increases to help mitigate cumulative raw material cost increases.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 impactbenefit 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 exiting of two product lines in our commercial distribution channel.Cabinets business.
Operating income increased $11.7 million, or 26.2%, primarily due to productivity improvements, lower restructuring and other charges (approximately $10 million) relating to the completion in 2016 of a manufacturing facility relocation and the related cost savings resulting from the facility relocation, as well as higher net sales. These benefits were partially offset by higher raw material costs.
Corporate
Corporate expenses decreased by $1.8 million predominantly due to recognition of an actuarial gain versus an actuarial loss in the prior year and higher defined benefit plan income during 2017 in comparison to prior year.
25
(In millions) | Nine Months Ended September 30, | |||||||
2017 | 2016 | |||||||
General and administrative expense | $ | (63.8 | ) | $ | (61.3 | ) | ||
Defined benefit plan income | 3.2 | 2.1 | ||||||
Defined benefit plan recognition of actuarial gain/(loss) | 1.3 | (1.9 | ) | |||||
|
|
|
| |||||
Total Corporate expenses | $ | (59.3 | ) | $ | (61.1 | ) |
In future periods the Company may record, in the Corporate segment, material expense or income associated with actuarial gains and losses arising from periodic remeasurement of our liabilities for defined benefit plans. At a minimum, the Company will remeasure its defined benefit plan liabilities in the fourth quarter of each year. Remeasurements due to plan amendments and settlements may also occur in interim periods during the year. Remeasurement of these liabilities attributable to updating our liability discount rates and expected return on assets may, in particular, result in material income or expense recognition.
33
RESULTS OF OPERATIONS (Continued)
Three Months Ended SeptemberJune 30, 20172022 Compared To Three Months Ended SeptemberJune 30, 20162021
|
| 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 | ) | % |
Net Sales | ||||||||||||
(In millions) | 2017 | 2016 | % Change vs. Prior Year | |||||||||
Cabinets | $ | 614.2 | $ | 602.1 | 2.0 | % | ||||||
Plumbing | 438.3 | 391.1 | 12.1 | |||||||||
Doors | 138.5 | 129.2 | 7.2 | |||||||||
Security | 157.6 | 156.6 | 0.6 | |||||||||
|
|
|
| |||||||||
Net sales | $ | 1,348.6 | $ | 1,279.0 | 5.4 | % | ||||||
Operating Income | ||||||||||||
2017 | 2016 | % Change vs. Prior Year | ||||||||||
Cabinets | $ | 69.7 | $ | 74.8 | (6.8 | )% | ||||||
Plumbing | 97.3 | 84.0 | 15.8 | |||||||||
Doors | 25.1 | 22.3 | 12.6 | |||||||||
Security | 27.7 | 22.9 | 21.0 | |||||||||
Less: Corporate expenses | (18.0 | ) | (20.9 | ) | 13.9 | |||||||
|
|
|
| |||||||||
Operating income | $ | 201.8 | $ | 183.1 | 10.2 | % |
The following discussion of consolidated results of operations and segment results refers to the three months ended SeptemberJune 30, 20172022 compared to the three months ended SeptemberJune 30, 2016.2021. Consolidated results of operations should be read in conjunction with segment results of operations.
Net sales
Net sales increased $69.6by $174.9 million, or 5.4%. The increase was9.0%, due to higher sales volume primarily from the continuing improvement in U.S. market conditions for home products, new product introductions, the benefits from the acquisitions in our Plumbing segment, price increases to help mitigate the impact of cumulative raw materialcommodity 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 favorable foreign exchange of approximately $4 million.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 mix, higher sales rebates and sales promotions.foreign exchange of approximately $10 million.
Cost of products sold
Cost of products sold increased $40.6by $117.6 million, or 5.1%9.6%, due to higher net sales, including the impact of acquisitionsraw material and labor cost increases, the impact of the Solar Innovations acquisition ($7.0 million) and unfavorable inventory-related expense write-offs in our Plumbing segmentOutdoors & Security and higher raw material costs,Cabinets segments, partially offset by the benefit of productivity improvements.improvements across all segments.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $12.8by $40.0 million, or 4.5%10.1%, due to higher employee-related costs, including higher healthcare costs, as well as the impacttransportation and headcount-related costs.
Asset impairment charge
The asset impairment charge of the acquisitions$26.0 million in 2022 relates to an indefinite-lived tradename within our PlumbingCabinets segment.
34
RESULTS OF OPERATIONS (Continued)
Amortization of intangible assets
Amortization of intangible assets increased $0.2 million due to the acquisitions in our Plumbing segment, partially offset by a decrease relating to a definite-lived customer relationship intangible in Doors segment that was fully amortized during During the second quarter of 2017.2022, 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 in the three months ended September 30, 2017 and 2016 were $0.4 million and $3.1 million, respectively. Restructuring charges in 2017 relate to severance costs within our Security and Doors segments. Restructuring charges in 2016 primarily relate to supply chain initiatives within our Security segment.
Operating income
Operating income increased $18.7 million, or 10.2%, primarily due to higher net sales and productivity improvements. These benefits were partially offset by unfavorable mix and higher employee-related costs.
Interest expense
Interest expense increased $0.5 million to $12.3 million primarily due to higher average interest rates partially offset by lower average borrowings.
Other (income) expense, net
Other (income) expense, net, was expense of $0.1$2.3 million in the three months ended SeptemberJune 30, 2017 compared2022 largely related to expenseseverance costs associated with plant and office closures within our Cabinets and Water Innovations segments. Restructuring charges of $0.6$0.3 million in the three months ended SeptemberJune 30, 2016.2021 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 SeptemberJune 30, 20172022 and 20162021 were 31.6%24.3% and 28.6%21.0%, respectively. The increase in the effective income tax rate reflected ain 2022 was higher than the prior period primarily due to increased foreign tax expense, lower tax benefit onbenefits from share-based compensation partiallyand uncertain tax positions, offset by the benefit of a valuation allowance release related to state deferred tax assets. In addition, the effective tax rates in both periods were favorably impacted by a tax benefit attributable to the Domestic Production Activity (Internal Revenue Code Section 199) Deduction, favorable tax rates in foreign jurisdictions, and a benefit associated with the U.S. research and development credit, offset by state and local taxes and increases to uncertain tax positions.release.
Net income
Net income from continuing operations
Net income from continuing operations was $129.6$192.0 million in the three months ended SeptemberJune 30, 20172022 compared to $121.9$217.2 million in the three months ended SeptemberJune 30, 2016.2021. The increase of $7.7 milliondecrease was primarily due to alower operating income, higher operatinginterest expense, higher income tax expense and lower other income.
Results By Segment
35Water Innovations
RESULTS OF OPERATIONS (Continued)
Results by Segment
Cabinets
Net sales increased $12.1decreased by $44.6 million, or 2.0%6.4%, due to higher sales volume driven primarilythe impact of shutdowns mandated by continuing improvementthe Chinese government in the U.S. home products market andresponse 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 new product introductions, price increases to help mitigate the impact of cumulative raw materialcommodity and transportation cost increases, sales increases in our U.S. e-commerce channel and favorablelower 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 $2$3 million. These benefitsfactors were partlypartially offset by unfavorable mixthe benefit from price increases to help mitigate the impact of cumulative commodity and highertransportation cost increases, lower sales promotions.rebate costs, and cost reductions, including employee-related costs.
Operating income decreased $5.1Outdoors & Security
Net sales increased by $69.9 million, or 6.8%13.1%, due to higher employee-related costs, including higher healthcare costs.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 the increase in netlower sales and productivity improvements.
Plumbing
Net sales increased $47.2 million, or 12.1%, due to higher sales volume, in the U.S. driven by continuing improvement in the U.S. home products market and the benefit from new product introductions, higher sales in international markets, principally China and Canada, the benefit from the acquisitions of ROHL and Perrin & Rowe in 2016 as well as Shaws in 2017 and favorableunfavorable 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 highercommodity, 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 rebates.
Operating income increased $13.3by $149.6 million, or 15.8%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 partially offsetimprovements.
Corporate
Corporate expenses increased by higher employee-related costs, sales rebates and raw material costs.
Doors
Net sales increased $9.3$11.0 million, or 7.2%40.9%, due to favorable mix,costs related to the planned spin-off of our Cabinets business, higher sales volume driven primarily by improved conditions in the U.S. home products markets and the benefit from new product introductions and price increases to help mitigate cumulative raw material cost increases.
Operating income increased $2.8 million, or 12.6%, due to higher net sales and leveraging sales on our existing fixed cost base.
Security
Net sales increased $1.0 million, or 0.6%, due to higher sales volume in the U.S. and international markets for our core locks and safes product lines and favorable foreign exchange offset by the impact from our exiting of two product lines in our commercial sales distribution channel.
Operating income increased $4.8 million, or 21.0%, primarily due to productivity improvements, lower restructuring and other charges (approximately $3 million)consulting costs relating to the completion in 2016 of a manufacturing facility relocation and the related cost savings resulting from the facility relocation.
36
RESULTS OF OPERATIONS (Continued)
Results by Segment (Continued)
Corporate
Corporate expenses decreased by $2.9 million predominantly due to recognition of an actuarial gain versus an actuarial loss in the prior quarterour digital transformation initiatives, and higher defined benefit plan income during 2017 in comparison to prior quarter.employee-related costs.
(In millions) | Three Months Ended September 30, | |||||||
2017 | 2016 | |||||||
General and administrative expense | $ | (20.5 | ) | $ | (20.5 | ) | ||
Defined benefit plan income | 1.2 | 0.6 | ||||||
Defined benefit plan recognition of actuarial gains (losses) | 1.3 | (1.0 | ) | |||||
|
|
|
| |||||
Total Corporate expenses | $ | (18.0 | ) | $ | (20.9 | ) |
27
37
LIQUIDITY AND CAPITAL RESOURCES
Our primaryprincipal sources of liquidity needs 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, fund capital expenditures and service of indebtedness, as well as to finance acquisitions, repurchase shares of our common stock and pay dividends to stockholders, as deemedthe Board of Directors deems appropriate.
Our principal sources of liquidity have been cash on hand, cash flows from operating activitiesoperations, borrowing availability and availabilityoverall 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-ended December 31, 2021 entitled “Item 1A. Risk 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 credit facilities. Our operating income is generated by our subsidiaries. There are no restrictions on the ability of our subsidiaries toshare repurchase program, pay dividends, or makewhat impact any such transactions could have on our results of operations, cash flows or financial condition, whether as a result of the issuance of debt or equity securities, or otherwise.
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, 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 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, 2022 and December 31, 2021:
|
|
|
|
|
|
|
| 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 |
|
|
| - |
|
4.500% Senior Notes |
| 450.0 |
|
| March 2022 |
| March 2052 |
|
| 435.0 |
|
|
| - |
|
Total Senior Notes | $ | 2,700.0 |
|
|
|
|
|
| $ | 2,671.5 |
|
| $ | 1,789.8 |
|
Credit Facilities
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 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 distributionsterms and conditions remained the same under the First Amendment and Second Amendment. Proceeds from the increased 2021 Term Loan were used to Fortune Brands. repay outstanding balances on the 2019 Revolving Credit Agreement (as defined below). 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 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 2016,31, 2021, our Boardoutstanding borrowings under this facility were $125.0 million and $520.0
28
million, respectively. This facility is included in Long-term debt in the condensed consolidated balance sheets. As of Directors increasedJune 30, 2022 we were in compliance with all covenants under this facility.
Commercial Paper
In November 2021, the quarterlyCompany established a commercial paper program (the "Commercial Paper Program") pursuant to which the Company may issue unsecured commercial paper notes. The Company's 2019 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 2019 Revolving Credit Agreement, not to exceed $1.25 billion. The Company plans to use net proceeds from any issuances under the Commercial Paper Program for general corporate purposes. On June 30, 2022 and December 31, 2021 our outstanding borrowings under the Commercial Paper Program were $561.4 million and zero, respectively.
Cash and Seasonality
On June 30, 2022, we had cash and cash equivalents of $360.6 million, of which$296.6 million was held at non-U.S. subsidiaries. We manage our global cash requirements considering (i) available funds among the subsidiaries through which we conduct business, (ii) the geographic location of our liquidity needs, and (iii) the cost to access international cash balances. The repatriation of non-U.S. cash balances from certain subsidiaries could have adverse tax consequences as we may be required to pay and record tax expense on those funds that are repatriated.
Our operating cash flows are significantly impacted by the seasonality of our business. We typically generate most of our operating cash flow in the third and fourth quarters of each year. We use operating cash in the first quarter of the year.
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, dividend by 13%payments, and any required long-term debt payments. In addition, we believe that we have the ability to $0.18 per shareobtain alternative sources of financing if required.
Share Repurchases and Dividends
In the first six months of 2022, we repurchased 6.2 million shares of our outstanding common stock.stock under the Company’s share repurchase program for $505.0 million. As of June 30, 2022, the Company’s total remaining share repurchase authorization under its share repurchase program was approximately $660 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 months of 2022, we paid dividends in the amount of $73.6 million to the Company’s stockholders. Our Board of Directors will continue to evaluate dividend payment opportunities on a quarterly basis. There can be no assurance as to when and if future dividends will be paid, and at what level, because the payment of dividends is dependent on our financial condition, results of operations, cash flows, capital requirements and other factors deemed relevant by our Board of Directors.
In There are no restrictions on the first nine months of 2017, we repurchased 2.8 million sharesability of our outstanding common stock under the Company’s share repurchase programs for $173.7 million. As of September 30, 2017, the Company’s total remaining share repurchase authorization under the repurchase programs was approximately $347 million. The share repurchase programs do not obligate the Companysubsidiaries to repurchase any specific dollar amountpay dividends or number of shares and may be suspended or discontinued at any time.make other distributions to Fortune Brands.
Acquisitions
We periodically review our portfolio of brands and evaluate potential strategic transactions and other capital initiatives to increase shareholderstockholder value. However, we cannot predict whether or when we may enter into acquisitions, joint ventures or dispositions, make any purchases of shares of our common stock under our share repurchase programs, or pay dividends, or 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. 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 Form10-K for the year-ended December 31, 2016 entitled “Item 1A. Risk Factors.”
Acquisitions in 2017 and 2016 included:
On September 30, 2017, we had cash and cash equivalents of $277.1 million, of which $257.9 million was held atnon-U.S. subsidiaries. We manage our global cash requirements considering (i) available funds among the subsidiaries through which we conduct business, (ii) the geographic location of our liquidity needs, and (iii) the cost to access international cash balances. The repatriation ofnon-U.S. cash balances from certain subsidiaries could have adverse tax consequences as we may be required to pay and record income tax expense on those funds to the extent they were previously considered indefinitely reinvested.
38
Our operating cash flows are significantly impacted by the seasonality of our business. We typically generate most of our operating cash flow in the third and fourth quarters of each year. We use operating cash in the first half of the year, particularly in the first quarter.
Cash Flows
Below is a summary of cash flows for the ninesix months ended SeptemberJune 30, 20172022 and 2016.2021.
(In millions) | Nine Months Ended September 30, |
| Six Months Ended |
| ||||||||||||
2017 | 2016 |
| 2022 |
|
| 2021 |
| |||||||||
Net cash provided by operating activities | $ | 352.6 | $ | 380.6 |
| $ | 41.9 |
|
| $ | 262.7 |
| ||||
Net cash used in investing activities | (113.2 | ) | (334.3 | ) |
|
| (169.2 | ) |
|
| (58.9 | ) | ||||
Net cash used in financing activities | (223.5 | ) | (9.5 | ) | ||||||||||||
Net cash provided by (used in) financing activities |
|
| 27.1 |
|
|
| (169.4 | ) | ||||||||
Effect of foreign exchange rate changes on cash | 9.7 | 3.3 |
|
| (11.3 | ) |
|
| 5.9 |
| ||||||
|
| |||||||||||||||
Net increase in cash and cash equivalents | $ | 25.6 | $ | 40.1 | ||||||||||||
Net (decrease) increase in cash and cash equivalents |
| $ | (111.5 | ) |
| $ | 40.3 |
|
29
Net cash provided by operating activities was $352.6$41.9 million in the ninesix months ended SeptemberJune 30, 20172022, compared to $380.6net cash provided by operating activities of $262.7 million in the ninesix months ended SeptemberJune 30, 2016.2021. The decrease in cash provided of $28.0$220.8 million was primarily due to a higher build in working capital during 2017 compared to 2016 which included inventory reductions as we completed our manufacturing facility relocationsaccounts payable, an increase in our Plumbinginventory investments to mitigate the impact of an uncertain and Security businesses, partly offset byvolatile global supply chain environment, a decrease in accrued taxes, a partial settlement on our interest rate swap and higher net income.increases in accounts receivable associated with our sales growth in the first half of 2022.
Net cash used in investing activities was $113.2$169.2 million in the ninesix months ended SeptemberJune 30, 2017 compared to $334.3 million in the nine months ended September 30, 2016. The decrease of $221.1 million was primarily due to the decrease in cost of acquisitions of $211.1 million.
Net cash used by financing activities was $223.5 million in the nine months ended September 30, 20172022, compared to net cash used in investing activities of $9.5$58.9 million in the ninesix months ended SeptemberJune 30, 2016.2021. The increase in cash used of $214$110.3 million during 2017reflects the Solar Innovations acquisition in January 2022 ($61.6 million), and a planned increase in capital expenditures, partly offset by higher proceeds from the sale of previously closed manufacturing facilities.
Net cash provided by financing activities was $27.1 million in the six months ended June 30, 2022, compared to cash used in financing activities of $169.4 million in the six months ended June 30, 2021. The increase in cash provided of $196.5 million was primarily due to lowerhigher net borrowings of $384in 2022 compared to 2021 ($615.4 million and higher dividends of $9 million, partiallyincrease), partly offset by lowerhigher share repurchases in 20172022 compared to 20162021, a decrease in the proceeds from the exercise of stock options and the final payment for the remaining equity interest in Flo ($189 million decrease)16.7 million). Additionally, during the third quarter 2017, we paid deferred acquisition payments totaling $12.4 million (net of certain working capital and other adjustments) relating to the ROHL and Perrin & Rowe acquisitions.
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, 2016,2021, the fair value of our total pension plan assets was $577.7$816.0 million, representing 73%92% of the accumulated benefit obligation liability. In 2017,2022, we expect to make total pension contributions of approximately $25 million of which $22 million has been paid as of September 30, 2017.$10 million. For the foreseeable future, we believe that we have sufficient liquidity to meet the minimum funding that may be required by the Pension Protection Act of 2006.
Foreign Exchange
We have operations in various foreign countries, principally Canada, China, Mexico, the United Kingdom, China, South Africa, France and France.Japan. Therefore, changes in the value of the related currencies affect our financial statements when translated into U.S. dollars.
39
RECENTLY ISSUED ACCOUNTING STANDARDS
Revenue from Contracts with Customers
In May 2014, the FinancialThe adoption of recent accounting standards, as discussed in Note 2, “Recently Issued Accounting Standards, Board (“FASB”) issued Accounting Standards Update (“ASU”)2014-09, which clarifies the accounting for revenue arising from contracts with customers” to our Condensed Consolidated Financial Statements, has not had and specifies the disclosures that an entity should include in its financial statements. The standard is effective for annual reporting periods beginning after December 15, 2017 (calendar year 2018 for Fortune Brands). During 2016, the FASB issued certain amendments to the standard relating to the principal versus agent guidance, accounting for licenses of intellectual property and identifying performance obligations as well as the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. The effective date and transition requirements for these amendments are the same as those of the original ASU. We have elected the modified retrospective transition approach and also have identified focus areas for each of our reporting segments and have made substantial progress in our assessment of the accounting and financial reporting implications as of September 30, 2017. Our key considerations pursuant toASU 2014-09 are the control of goods (i.e., timing of revenue recognition), separate performance obligations, customer rights of return (i.e., the reclassification on the balance sheet of the customer rights of return from accounts receivable to a refund liability as well as the recognition of a corresponding asset) and our accounting for display assets. We do not expect the change in accounting related to these considerationsexpected to have a material effectsignificant impact on our financial statements.revenue, earnings or liquidity.
LeasesItem 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In February 2016, the FASB issued ASU2016-02, which requires lessees to recognize almost all leases on their balance sheet as a“right-of-use” asset and lease liability but recognize related expenses in a manner similar to current accounting. The guidance also eliminates current real estate-specific provisions for all entities. The standard is effective for annual periods beginning after December 15, 2018 (calendar year 2019 for Fortune Brands) and earlier application is permitted. We are assessing the impact the adoption of this standard will have on our financial statements.
Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued ASU2017-12, that amends current hedge accounting model. The new standard eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item (consistent with our current practice). The change in fair value for qualifying cash flow and net investment hedges will be included in Other comprehensive income (until they are reclassified into the income statement). The standard also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. The standard is effective as of January 1, 2019 and earlier application is permitted. We are assessing the impact the adoption of this standard will have on our financial statements.
40
RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)
Clarifying Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
In May 2017, the FASB issued ASC610-20 that clarifies the scope and application of various standards for the sale of nonfinancial assets (e.g. PP&E including real estate, intangible assets, materials and supplies). The standard distinguishes between a sale to customer vsnon-customer. Sales to customers are in scope of the new revenue standard. It also clarifies a derecognition model for nonfinancial assets that do not represent a business. The standard is effective as of January 1, 2018 consistent with the effective date for the new revenue recognition standard. We are assessing the impact the adoption of this standard will have on our financial statements and we will consider the implications of the new standard on case by case basis for allnon-recurring transactions where we sell or transfer nonfinancial assets.
Stock Compensation Scope of Modification Accounting
In May 2017, the FASB issued ASU2017-09, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance provides a relief to entities that makenon-substantive changes to their share-based payment awards and will result in fewer changes to the terms of an award being accounted for as modifications. The standard is effective January 1, 2018 and early adoption is permitted, however we elected not to early adopt. We do not expect the adoption of this standard to have a material effect on our financial statements.
Presentation of Net Periodic Pension and Postretirement Cost
In March 2017, the FASB issued ASU2017-07, which requires entities to present the service cost component of the net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Employers will present the other components (i.e., interest cost, expected return on plan assets and actuarial gains/losses) separately from the line item(s) that includes the service cost and outside of any subtotal of operating income. The standard is effective January 1, 2018 and early adoption is permitted. We are assessing the impact the adoption of this standard will have on our financial statements.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU2017-04, which simplifies the accounting for goodwill impairment for all entities. Under the new standard, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The standard eliminates the current requirement to calculate a goodwill impairment charge by comparing the implied fair value of goodwill with its carrying amount (i.e., hypothetical purchase price allocation). The standard is effective for annual and interim impairment tests performed in the periods beginning after January 1, 2020 and early adoption is permitted. We plan to early adopt ASU2017-04 in conjunction with our annual goodwill impairment test during the fourth quarter of 2017.
41
RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)
Clarifying the Definition of a Business
In January 2017, the FASB issued ASU2017-01, which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business and therefore business combination guidance would apply. The new standard requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset (i.e., a business) or a group of similar identifiable assets (i.e., not a business). The guidance also requires a business to include at least one substantive process and narrows the definition of outputs (e.g., revenues with customers). The standard is effective January 1, 2018 and early adoption is permitted. We do not expect the adoption of this standard to have a material effect on our financial statements.
Restricted Cash
In November 2016, the FASB issued ASU2016-18, according to which entities are no longer required to present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The prior standard did not address the classification of activity related to restricted cash and restricted cash equivalents in the statement of cash flows which has resulted in diversity in cash flows presentation. The standard is effective January 1, 2018 and early adoption is permitted; however, we elected not to early adopt. We do not expect the adoption of this standard to have a material effect on our financial statements.
Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU2016-16, which requires companies to account for the income tax effects of intercompany sales and transfers of assets other than inventory (e.g., intangible assets) when the transfer occurs. Under the current guidance companies are required to defer the income tax effects of intercompany transfers of assets until the asset has been sold to an outside party or otherwise recognized (e.g., depreciated, amortized or impaired). The standard is effective January 1, 2018 and early adoption is permitted; however, we elected not to early adopt. The transition method will be a “modified retrospective” (i.e., with a cumulative adjustment to retained earnings at adoption). We are assessing the impact the adoption of this standard will have on our financial statements.
Classification of Certain Cash Receipts and Cash Payments
In September 2016 the FASB issued ASU2016-15, which changes how an entity classifies certain cash receipts and cash payments on its statement of cash flows. The key changes that may potentially impact our financial statements include the following: 1) Cash payments for debt prepayment or extinguishment costs would be classified as financing cash outflows; 2) Contingent consideration payments that are not made within three months after the consummation of a business combination would be classified as financing (if the payment is made up to the acquisition date fair value of liability) or operating outflows (if in excess of acquisition fair value). Cash payments made “soon after” the consummation of a business combination generally would be classified as cash outflows for investing activities; 3) Insurance settlement proceeds would be classified based on the nature of the loss; and 4) Company-owned life insurance settlement proceeds would be presented as investing cash inflows, and premiums would be classified as investing or operating cash outflows, or a combination of both. The new standard is effective January 1, 2018 and should be adopted retrospectively. Early adoption is permitted; however, we elected not to early adopt. We do not expect the adoption of this standard to have a material effect on our financial statements.
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RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)
Financial Instruments—Credit Losses
In June 2016, the FASB issued ASU2016-13, which changes the impairment model for most financial assets and certain other instruments that are not measured at fair value through net income. The new guidance applies to most financial assets measured at amortized cost, including trade and other receivables and loans as well asoff-balance-sheet credit exposures (e.g., loan commitments and standby letters of credit). The standard will replace the “incurred loss” approach under the current guidance with an “expected loss” model that requires an entity to estimate its lifetime “expected credit loss.” The standard is effective January 1, 2020 and early application is permitted beginning January 1, 2019. We are assessing the impact the adoption of this standard will have on our financial statements.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU2016-01, which requires entities to measure investments in unconsolidated entities (other than those accounted for using the equity method of accounting) at fair value through the income statement. There will no longer be anavailable-for-sale classification (with changes in fair value reported in Other Comprehensive Income). In addition, the cost method is eliminated for equity investments without readily determinable fair values. The standard is effective January 1, 2018. Early application is permitted for certain provisions of the standard; however, we elected not to early adopt. We do not expect this standard to have a material effect on our financial statements.
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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 Form10-K for the year ended December 31, 2016.2021.
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’sCompany's disclosure controls and procedures (as defined in Rules13a-15(e) and15d-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’sCompany'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’sCompany's internal control over financial reporting that occurred during the Company’s fiscal quarter ended SeptemberJune 30, 20172022 that have materially affected, or are reasonably likely to materially affect, the Company’sCompany's internal control over financial reporting. The Company is in the process of reviewing the internal control structure of acquired businessesSolar and, if necessary, will make appropriate changes as we incorporate our controls and proceduresprocedure into thosethis recently acquired businesses.
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PART II. OTHER INFORMATION
Item 1.LEGAL PROCEEDINGS.
The Company is a defendantWe are defendants in lawsuits associated with the normal conduct of itsour businesses and operations. It is not possible to predict the outcome of the pending actions, and, as with any litigation, it is possible that these actions could be decided unfavorably to the Company. The Company believes that there are meritorious defenses to these actions and that these actions will not have a material adverse effect upon the Company’sour 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 ninesix and three months ended SeptemberJune 30, 20172022 and 2016.2021. 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.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.
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There have been no material changes to the risk factors previously disclosed in our Annual Report on Form10-K for the year ended December 31, 20162021 in the section entitled “Risk Factors.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.
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 Rule10b-18(a)(3) under the Exchange Act) for the three months ended SeptemberJune 30, 2017:2022:
Issuer Purchases of Equity Securities
Period | Total number of shares purchased(a) | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs(a) | Maximum dollar amount that may yet be purchased under the plans or programs(a) | ||||||||||||
July 1 – July 31 | 603,750 | $ | 66.18 | 603,750 | $ | 450,381,443 | ||||||||||
August 1 – August 31 | 881,646 | 63.53 | 881,646 | 394,375,046 | ||||||||||||
September 1 – September 30 | 729,023 | 64.51 | 729,023 | 347,346,977 | ||||||||||||
|
|
|
|
|
| |||||||||||
Total | 2,214,419 | $ | 64.57 | 2,214,419 |
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 |
|
|
|
|
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Authorization date | Announcement date | Authorization amount of shares | Expiration date | |||
September 21, 2020 | September 21, 2020 | $500,000,000 | September 21, 2022 | |||
July 23, 2021 | July 23, 2021 | $400,000,000 | July 23, 2023 | |||
March 2, 2022 | March 2, 2022 | $750,000,000 | March 2, 2024 |
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Item 6.EXHIBITS
| ||||||||||||
| ||||||||||||
|
46
Restated Certificate of Incorporation of Fortune Brands Home & Security, Inc. | ||
3(ii) | ||
10.1 | ||
10.2* | ||
10.3* | ||
10.4* | ||
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 Form10-Q for the quarter ended | |
104.* | Cover Page Interactive Data File (embedded within the iXBRL document). |
** Indicates the exhibit is a management contract or compensatory plan or arrangement.
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SIGNATURE
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 HOME & SECURITY, INC.
| ||||||
(Registrant) | ||||||
Date: | /s/ Patrick D. Hallinan | |||||
Patrick D. Hallinan | ||||||
Senior Vice President and Chief Financial Officer | ||||||
(Duly authorized officer and principal financial officer of the Registrant) |
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