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 September 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, 201714, 2022 was 151,800,773.128,242,529.
1
PART I. FINANCIAL INFORMATION
Item 1.FINANCIAL STATEMENTS.
FORTUNE BRANDS HOME & SECURITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Nine and Three Months Ended September 30, 20172022 and 20162021
(In millions, except per share amounts)
(Unaudited)
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net sales | $ | 3,900.8 | $ | 3,683.3 | $ | 1,348.6 | $ | 1,279.0 | ||||||||
Cost of products sold | 2,461.3 | 2,352.8 | 841.6 | 801.0 | ||||||||||||
Selling, general and administrative expenses | 877.7 | 831.4 | 297.3 | 284.5 | ||||||||||||
Amortization of intangible assets | 23.6 | 20.4 | 7.5 | 7.3 | ||||||||||||
Loss on sale of product line (see Note 4) | 2.4 | — | — | — | ||||||||||||
Asset impairment charges | 3.2 | — | — | — | ||||||||||||
Restructuring charges | 3.5 | 12.4 | 0.4 | 3.1 | ||||||||||||
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Operating income | 529.1 | 466.3 | 201.8 | 183.1 | ||||||||||||
Interest expense | 36.5 | 37.5 | 12.3 | 11.8 | ||||||||||||
Other expense (income), net | 0.2 | (0.1 | ) | 0.1 | 0.6 | |||||||||||
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Income before income taxes | 492.4 | 428.9 | 189.4 | 170.7 | ||||||||||||
Income taxes | 145.1 | 120.9 | 59.8 | 48.8 | ||||||||||||
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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 | |||||||||||
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Net income | 344.7 | 309.5 | 129.6 | 123.4 | ||||||||||||
Less: Noncontrolling interests | 0.1 | (0.1 | ) | 0.1 | — | |||||||||||
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Net income attributable to Fortune Brands | $ | 344.6 | $ | 309.6 | $ | 129.5 | $ | 123.4 | ||||||||
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Basic earnings per common share | ||||||||||||||||
Continuing operations | $ | 2.26 | $ | 2.00 | $ | 0.84 | $ | 0.79 | ||||||||
Discontinued operations | (0.02 | ) | 0.01 | — | 0.01 | |||||||||||
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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 | |||||||||||
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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 |
|
| Nine Months Ended |
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| Three Months Ended |
| ||||||||||
|
| September 30, |
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| September 30, |
| ||||||||||
|
| 2022 |
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| 2021 |
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| 2022 |
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| 2021 |
| ||||
Net sales |
| $ | 6,082.0 |
|
| $ | 5,693.4 |
|
| $ | 2,053.7 |
|
| $ | 1,986.3 |
|
Cost of products sold |
|
| 3,895.9 |
|
|
| 3,637.2 |
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|
| 1,310.2 |
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|
| 1,280.0 |
|
Selling, general and administrative expenses |
|
| 1,259.4 |
|
|
| 1,166.3 |
|
|
| 415.3 |
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|
| 400.2 |
|
Amortization of intangible assets |
|
| 48.9 |
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|
| 48.5 |
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|
| 16.8 |
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|
| 15.9 |
|
Asset impairment charges |
|
| 26.0 |
|
|
| - |
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|
| - |
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|
| - |
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Restructuring charges |
|
| 33.1 |
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|
| 11.5 |
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|
| 30.2 |
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|
| 3.6 |
|
Operating income |
|
| 818.7 |
|
|
| 829.9 |
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|
| 281.2 |
|
|
| 286.6 |
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Interest expense |
|
| 85.4 |
|
|
| 63.2 |
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|
| 33.1 |
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|
| 20.6 |
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Other (income) expense, net |
|
| (3.6 | ) |
|
| 0.7 |
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|
| (2.1 | ) |
|
| (1.3 | ) |
Income before taxes |
|
| 736.9 |
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|
| 766.0 |
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|
| 250.2 |
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|
| 267.3 |
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Income tax |
|
| 159.8 |
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|
| 168.9 |
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|
| 46.0 |
|
|
| 65.2 |
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Net income |
| $ | 577.1 |
|
| $ | 597.1 |
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| $ | 204.2 |
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| $ | 202.1 |
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Basic earnings per common share |
| $ | 4.40 |
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| $ | 4.32 |
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| $ | 1.58 |
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| $ | 1.47 |
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Diluted earnings per common share |
| $ | 4.37 |
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| $ | 4.26 |
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| $ | 1.57 |
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| $ | 1.45 |
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Comprehensive income |
| $ | 599.5 |
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| $ | 598.4 |
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| $ | 174.2 |
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| $ | 186.7 |
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See notes to condensed consolidated financial statements.
2
FORTUNE BRANDS HOME & SECURITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
|
| September 30, |
|
| December 31, |
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Assets |
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Current assets |
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Cash and cash equivalents |
| $ | 345.3 |
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| $ | 471.5 |
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Accounts receivable less allowances for discounts and credit losses |
|
| 936.1 |
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| 885.7 |
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Inventories |
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| 1,502.3 |
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|
| 1,193.8 |
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Other current assets |
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| 223.9 |
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|
| 193.5 |
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Total current assets |
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| 3,007.6 |
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|
| 2,744.5 |
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Property, plant and equipment, net of accumulated depreciation |
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| 1,097.7 |
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| 1,009.5 |
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Operating lease assets |
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| 177.0 |
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| 191.7 |
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Goodwill |
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| 2,546.2 |
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| 2,465.1 |
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Other intangible assets, net of accumulated amortization |
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| 1,375.9 |
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| 1,383.8 |
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Other assets |
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| 211.2 |
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| 141.6 |
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Total assets |
| $ | 8,415.6 |
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| $ | 7,936.2 |
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Liabilities and equity |
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Current liabilities |
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Short-term debt |
| $ | 600.3 |
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| $ | 400.0 |
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Accounts payable |
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| 672.6 |
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|
| 764.9 |
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Other current liabilities |
|
| 775.0 |
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|
| 806.2 |
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Total current liabilities |
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| 2,047.9 |
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| 1,971.1 |
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Long-term debt |
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| 2,786.9 |
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|
| 2,309.8 |
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Deferred income taxes |
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| 222.7 |
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| 176.0 |
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Accrued defined benefit plans |
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| 62.3 |
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| 79.7 |
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Operating lease liabilities |
|
| 142.4 |
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| 158.8 |
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Other non-current liabilities |
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| 123.3 |
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|
| 176.0 |
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Total liabilities |
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| 5,385.5 |
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|
| 4,871.4 |
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Commitments and contingencies (see Note 17) |
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Stockholders' equity |
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Common stock(a) |
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| 1.9 |
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| 1.9 |
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Paid-in capital |
|
| 3,058.9 |
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| 3,018.3 |
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Accumulated other comprehensive loss |
|
| (2.2 | ) |
|
| (24.6 | ) |
Retained earnings |
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| 3,277.0 |
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| 2,807.9 |
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Treasury stock |
|
| (3,305.5 | ) |
|
| (2,738.7 | ) |
Total stockholders' equity |
|
| 3,030.1 |
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|
| 3,064.8 |
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Total liabilities and equity |
| $ | 8,415.6 |
|
| $ | 7,936.2 |
|
(a) Common stock, par value $0.01 per share; 186.1 million shares and 185.3 million shares issued at September 30, 2022 and December 31, 2021, respectively.
September 30, 2017 | December 31, 2016 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 277.1 | $ | 251.5 | ||||
Accounts receivable, net | 594.7 | 550.7 | ||||||
Inventories | 600.1 | 531.1 | ||||||
Other current assets | 126.4 | 111.9 | ||||||
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Total current assets | 1,598.3 | 1,445.2 | ||||||
Property, plant and equipment, net of accumulated depreciation | 690.6 | 662.5 | ||||||
Goodwill | 1,852.8 | 1,833.8 | ||||||
Other intangible assets, net of accumulated amortization | 1,105.4 | 1,107.0 | ||||||
Other assets | 102.2 | 80.0 | ||||||
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Total assets | $ | 5,349.3 | $ | 5,128.5 | ||||
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Liabilities and equity | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 392.5 | $ | 393.8 | ||||
Other current liabilities | 460.0 | 449.0 | ||||||
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Total current liabilities | 852.5 | 842.8 | ||||||
Long-term debt | 1,462.2 | 1,431.1 | ||||||
Deferred income taxes | 176.2 | 163.5 | ||||||
Accrued defined benefit plans | 185.1 | 216.2 | ||||||
Othernon-current liabilities | 127.4 | 111.9 | ||||||
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Total liabilities | 2,803.4 | 2,765.5 | ||||||
Commitments and contingencies (see Note 17) | ||||||||
Equity | ||||||||
Fortune Brands stockholders’ equity | ||||||||
Common stock(a) | 1.7 | 1.7 | ||||||
Paid-in capital | 2,712.2 | 2,653.8 | ||||||
Accumulated other comprehensive loss | (25.5 | ) | (71.9 | ) | ||||
Retained earnings | 1,076.5 | 814.6 | ||||||
Treasury stock | (1,220.6 | ) | (1,036.7 | ) | ||||
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Total Fortune Brands stockholders’ equity | 2,544.3 | 2,361.5 | ||||||
Noncontrolling interests | 1.6 | 1.5 | ||||||
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Total equity | 2,545.9 | 2,363.0 | ||||||
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Total liabilities and equity | $ | 5,349.3 | $ | 5,128.5 | ||||
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See notes to condensed consolidated financial statements.
3
FORTUNE BRANDS HOME & SECURITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 20172022 and 20162021
(In millions)
(Unaudited)
2017 | 2016 |
| 2022 |
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| 2021 |
| |||||||||
Operating activities |
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Net income | $ | 344.7 | $ | 309.5 |
| $ | 577.1 |
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| $ | 597.1 |
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Non-cashpre-tax expense (income): | ||||||||||||||||
Non-cash adjustments: |
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Depreciation | 72.7 | 69.3 |
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| 93.5 |
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| 92.9 |
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Amortization | 23.6 | 20.4 | ||||||||||||||
Amortization of intangibles |
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| 48.9 |
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| 48.5 |
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Non-cash lease expense |
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| 33.8 |
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| 31.8 |
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Stock-based compensation | 32.7 | 24.3 |
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| 40.0 |
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| 36.0 |
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Recognition of actuarial (gains) losses | (1.3 | ) | 1.9 | |||||||||||||
Deferred income taxes | 8.2 | (23.0 | ) | |||||||||||||
Loss on sale of product line | 2.4 | — | ||||||||||||||
Recognition of actuarial losses |
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| 0.4 |
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| 1.1 |
| ||||||||
Deferred taxes |
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| 34.9 |
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| 9.6 |
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Restructuring charges |
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| 7.5 |
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|
| - |
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Asset impairment charges | 3.2 | — |
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| 26.0 |
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| - |
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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 |
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| 2.8 |
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| 2.8 |
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Loss on equity investments |
|
| - |
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| 2.9 |
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(Gain) loss on sale of property, plant and equipment |
|
| (5.6 | ) |
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| 1.5 |
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Changes in assets and liabilities: |
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Increase in accounts receivable | (34.5 | ) | (53.1 | ) |
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| (51.0 | ) |
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| (186.2 | ) | ||||
(Increase) decrease in inventories | (60.7 | ) | 22.6 | |||||||||||||
Increase in inventories |
|
| (302.7 | ) |
|
| (258.0 | ) | ||||||||
(Decrease) increase in accounts payable | (3.5 | ) | 28.7 |
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| (79.3 | ) |
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| 116.5 |
| |||||
Increase in other assets | (28.0 | ) | (11.6 | ) | ||||||||||||
Decrease (increase) in other assets |
|
| 6.2 |
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|
| (0.6 | ) | ||||||||
Decrease in accrued expenses and other liabilities | (23.9 | ) | (12.0 | ) |
|
| (117.6 | ) |
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| (65.0 | ) | ||||
Increase (decrease) in accrued taxes | 15.2 | (0.6 | ) | |||||||||||||
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Decrease in accrued taxes |
|
| (26.1 | ) |
|
| (0.1 | ) | ||||||||
Net cash provided by operating activities | 352.6 | 380.6 |
|
| 288.8 |
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| 430.8 |
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Investing activities |
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Capital expenditures(a) | (95.5 | ) | (106.1 | ) |
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| (175.1 | ) |
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| (113.0 | ) | ||||
Proceeds from the sale of assets | 0.2 | 2.3 | ||||||||||||||
Proceeds from sale of product line | 1.5 | — | ||||||||||||||
Proceeds from the disposition of assets |
|
| 8.1 |
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| 1.7 |
| ||||||||
Cost of acquisitions, net of cash acquired | (19.4 | ) | (230.5 | ) |
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| (214.0 | ) |
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| 5.2 |
| ||||
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Net cash used in investing activities | (113.2) | (334.3) |
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| (381.0 | ) |
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| (106.1 | ) | ||||||
Financing activities |
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Decrease in short-term debt, net | — | (1.0 | ) | |||||||||||||
Issuance of short-term debt |
|
| 701.4 |
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|
| - |
| ||||||||
Repayment of short-term debt |
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| (1,100.0 | ) |
|
| - |
| ||||||||
Issuance of long-term debt | 375.0 | 880.0 |
|
| 4,973.9 |
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| 825.0 |
| ||||||
Repayment of long-term debt | (345.0 | ) | (465.0 | ) |
|
| (3,895.9 | ) |
|
| (770.0 | ) | ||||
Proceeds from the exercise of stock options | 25.8 | 24.8 |
|
| 0.6 |
|
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| 32.6 |
| ||||||
Treasury stock purchases | (173.7 | ) | (362.7 | ) | ||||||||||||
Employee withholding taxes paid related to stock-based compensation | (10.2 | ) | (9.8 | ) | ||||||||||||
Deferred acquisition payment | (12.4 | ) | — | |||||||||||||
Treasury stock purchases(b) |
|
| (531.1 | ) |
|
| (252.9 | ) | ||||||||
Employee withholding taxes related to stock-based compensation |
|
| (25.7 | ) |
|
| (10.5 | ) | ||||||||
Dividends to stockholders | (82.7 | ) | (73.7 | ) |
|
| (109.8 | ) |
|
| (107.9 | ) | ||||
Other financing, net | (0.3 | ) | (2.1 | ) |
|
| (22.3 | ) |
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| (1.4 | ) | ||||
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Net cash used in financing activities | (223.5 | ) | (9.5 | ) |
|
| (8.9 | ) |
|
| (285.1 | ) | ||||
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Effect of foreign exchange rate changes on cash | 9.7 | 3.3 |
|
| (26.0 | ) |
|
| 1.0 |
| ||||||
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Net increase in cash and cash equivalents | $ | 25.6 | $ | 40.1 | ||||||||||||
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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 |
| $ | (127.1 | ) |
| $ | 40.6 |
| ||||||||
Cash, cash equivalents and restricted cash(c) at beginning of period |
| $ | 476.1 |
|
| $ | 425.0 |
| ||||||||
Cash, cash equivalents and restricted cash(c) at end of period |
| $ | 349.0 |
|
| $ | 465.6 |
|
See notes to condensed consolidated financial statements.
4
FORTUNE BRANDS HOME & SECURITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Nine and Three Months Ended September 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 | ) | |||||||||||||||||||
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|
|
|
|
|
| |||||||||||||||
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 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 597.1 |
|
|
| - |
|
|
| 597.1 |
|
Other comprehensive income (loss) |
|
| - |
|
|
| - |
|
|
| 1.3 |
|
|
| - |
|
|
| - |
|
|
| 1.3 |
|
Stock options exercised |
|
| 0.1 |
|
|
| 32.5 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 32.6 |
|
Stock-based compensation |
|
| - |
|
|
| 36.0 |
|
|
| - |
|
|
| - |
|
|
| (10.5 | ) |
|
| 25.5 |
|
Treasury stock purchases |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (270.1 | ) |
|
| (270.1 | ) |
Dividends ($0.78 per common share) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (107.3 | ) |
|
| - |
|
|
| (107.3 | ) |
Balance at September 30, 2021 |
| $ | 1.9 |
|
| $ | 2,994.8 |
|
| $ | (53.8 | ) |
| $ | 2,670.0 |
|
| $ | (2,558.3 | ) |
| $ | 3,054.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
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 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 577.1 |
|
|
| - |
|
|
| 577.1 |
|
Other comprehensive income (loss) |
|
| - |
|
|
| - |
|
|
| 22.4 |
|
|
| - |
|
|
| - |
|
|
| 22.4 |
|
Stock options exercised |
|
| - |
|
|
| 0.6 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 0.6 |
|
Stock-based compensation |
|
| - |
|
|
| 40.0 |
|
|
| - |
|
|
| - |
|
|
| (25.7 | ) |
|
| 14.3 |
|
Treasury stock purchases |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (541.1 | ) |
|
| (541.1 | ) |
Dividends ($0.84 per common share) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (108.0 | ) |
|
| - |
|
|
| (108.0 | ) |
Balance at September 30, 2022 |
| $ | 1.9 |
|
| $ | 3,058.9 |
|
| $ | (2.2 | ) |
| $ | 3,277.0 |
|
| $ | (3,305.5 | ) |
| $ | 3,030.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| Common |
|
| Paid-In |
|
| Accumulated |
|
| Retained |
|
| Treasury |
|
| Total |
| ||||||
Balance at June 30, 2021 |
| $ | 1.9 |
|
| $ | 2,982.8 |
|
| $ | (38.4 | ) |
| $ | 2,539.3 |
|
| $ | (2,442.1 | ) |
| $ | 3,043.5 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 202.1 |
|
|
| - |
|
|
| 202.1 |
|
Other comprehensive income (loss) |
|
| - |
|
|
| - |
|
|
| (15.4 | ) |
|
| - |
|
|
| - |
|
|
| (15.4 | ) |
Stock options exercised |
|
| - |
|
|
| 0.4 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 0.4 |
|
Stock-based compensation |
|
| - |
|
|
| 11.6 |
|
|
| - |
|
|
| - |
|
|
| (2.1 | ) |
|
| 9.5 |
|
Treasury stock purchases |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (114.1 | ) |
|
| (114.1 | ) |
Dividends ($0.52 per common share) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (71.4 | ) |
|
| - |
|
|
| (71.4 | ) |
Balance at September 30, 2021 |
| $ | 1.9 |
|
| $ | 2,994.8 |
|
| $ | (53.8 | ) |
| $ | 2,670.0 |
|
| $ | (2,558.3 | ) |
| $ | 3,054.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at June 30, 2022 |
| $ | 1.9 |
|
| $ | 3,046.2 |
|
| $ | 27.8 |
|
| $ | 3,145.0 |
|
| $ | (3,268.5 | ) |
| $ | 2,952.4 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 204.2 |
|
|
| - |
|
|
| 204.2 |
|
Other comprehensive income (loss) |
|
| - |
|
|
| - |
|
|
| (30.0 | ) |
|
| - |
|
|
| - |
|
|
| (30.0 | ) |
Stock options exercised |
|
| - |
|
|
| 0.2 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 0.2 |
|
Stock-based compensation |
|
| - |
|
|
| 12.5 |
|
|
| - |
|
|
| - |
|
|
| (0.9 | ) |
|
| 11.6 |
|
Treasury stock purchases |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (36.1 | ) |
|
| (36.1 | ) |
Dividends ($0.56 per common share) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (72.2 | ) |
|
| - |
|
|
| (72.2 | ) |
Balance at September 30, 2022 |
| $ | 1.9 |
|
| $ | 3,058.9 |
|
| $ | (2.2 | ) |
| $ | 3,277.0 |
|
| $ | (3,305.5 | ) |
| $ | 3,030.1 |
|
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 September 30, 2017,2022, the related condensed consolidated statements of comprehensive income and equity for the nine and three-month periodsthree months ended September 30, 20172022 and 20162021, and the related condensed consolidated statements of cash flows and equity for the nine-month periodsnine months ended September 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 July 2022, we acquired 100% of the outstanding equity of Aqualisa Holdings (International) Ltd. (“Aqualisa” ), a leading U.K. manufacturer of shower products known for premium, innovative and smart digital shower systems, for a purchase price of $156.0 million, net of cash acquired of $4.8 million. The results of Aqualisa are reported as part of the Water Innovations segment. We believe its product offerings will enable us to continue to leverage growing trends in water management and connected products. We financed the transaction with borrowings under our existing credit facility. We have not included pro forma financial information as it is immaterial to our condensed consolidated statements of comprehensive income. The fair value allocated to assets acquired and liabilities assumed as of July 29, 2022 was $156.0 million.
In January 2022, we acquired 100% of the outstanding equity of Solar Innovations LLC and an affiliated entity (together, “Solar” ), a leading producer of wide-opening exterior door systems and outdoor enclosures, for a purchase price of $61.6 million, net of cash acquired 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”) issued Accounting Standards Update (“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 |
| September 30, |
|
| December 31, |
| ||||||||
Inventories: |
|
|
|
|
|
| ||||||||||
Raw materials and supplies | $ | 211.6 | $ | 207.6 |
| $ | 619.9 |
|
| $ | 455.1 |
| ||||
Work in process | 61.8 | 55.9 |
|
| 110.6 |
|
|
| 93.0 |
| ||||||
Finished products | 326.7 | 267.6 |
|
| 771.8 |
|
|
| 645.7 |
| ||||||
Total inventories |
| $ | 1,502.3 |
|
| $ | 1,193.8 |
| ||||||||
|
|
|
|
|
|
|
| |||||||||
Total inventories | $ | 600.1 | $ | 531.1 | ||||||||||||
Property, plant and equipment, gross | $ | 1,715.8 | $ | 1,630.7 |
| $ | 2,438.8 |
|
| $ | 2,278.0 |
| ||||
Less: accumulated depreciation | 1,025.2 | 968.2 |
|
| 1,341.1 |
|
|
| 1,268.5 |
| ||||||
|
| |||||||||||||||
Property, plant and equipment, net | $ | 690.6 | $ | 662.5 |
| $ | 1,097.7 |
|
| $ | 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 within 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.
Aqualisa
In July 2017,2022, we acquired Shaws,100% of the outstanding equity of Aqualisa Holdings (International) Ltd. (“Aqualisa”), a UK-based luxury plumbingleading U.K. manufacturer of shower products company that specializesknown for premium, innovative and smart digital shower systems, for a purchase price of $156.0 million, net of cash acquired of $4.8 million. The results of Aqualisa are reported as part of the Water Innovations segment. We believe its product offerings will enable us to continue to leverage growing trends in manufacturingwater management and selling fireclay sinksconnected products. We financed the transaction with borrowings under our existing credit facility. We have not included pro forma financial information as the transaction is immaterial to our condensed consolidated statements of comprehensive income. The fair value allocated to assets acquired and selling brassware and accessories in partnership with Perrin & Rowe. Netliabilities assumed as of July 29, 2022 was $156.0 million, which includes $87.3 million of goodwill. Goodwill includes expected sales and operatingcost synergies and is not expected to be deductible for income intax purposes.
Solar
In January 2022, we acquired 100% of the three months ended September 30, 2017 were not materialoutstanding equity of Solar 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 firstthree and nine months of 2017ended September 30, 2022 were not material to the Company. We have not included pro forma financial information as the transaction 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 $21.0 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 in the first nine monthsadjusted earnings before interest and taxes. On January 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.
7
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
5. Goodwill and Identifiable Intangible Assets
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.
11
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We had goodwill of $1,852.8$2,546.2 million and $1,833.8$2,465.1 million as of September 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) | Cabinets | Plumbing | Doors | Security | Total Goodwill |
| Water Innovations |
|
| Outdoors & |
|
| Cabinets |
|
| Total |
| |||||||||||||||||||
Goodwill at December 31, 2016(a) | $ | 924.3 | $ | 670.2 | $ | 143.0 | $ | 96.3 | $ | 1,833.8 | ||||||||||||||||||||||||||
Goodwill at December 31, 2021(a) |
| $ | 814.1 |
|
| $ | 724.8 |
|
| $ | 926.2 |
|
| $ | 2,465.1 |
| ||||||||||||||||||||
Year-to-date translation adjustments | 3.3 | 4.6 | — | 1.5 | 9.4 |
|
| (24.5 | ) |
|
| (0.8 | ) |
|
| (1.9 | ) |
|
| (27.2 | ) | |||||||||||||||
Acquisition-related adjustments | — | 9.6 | — | — | 9.6 |
|
| 87.3 |
|
|
| 21.0 |
|
|
| - |
|
|
| 108.3 |
| |||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||
Goodwill at September 30, 2017(a) | $ | 927.6 | $ | 684.4 | $ | 143.0 | $ | 97.8 | $ | 1,852.8 | ||||||||||||||||||||||||||
Goodwill at September 30, 2022(a) |
| $ | 876.9 |
|
| $ | 745.0 |
|
| $ | 924.3 |
|
| $ | 2,546.2 |
|
(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 September 30, 20172022 and December 31, 20162021 were as follows:
(In millions) |
| As of September 30, 2022 |
|
| As of December 31, 2021 |
| ||||||||||||||||||
|
| Gross |
|
| Accumulated |
|
| Net |
|
| Gross |
|
| Accumulated |
|
| Net |
| ||||||
Indefinite-lived tradenames |
| $ | 681.5 |
|
| $ | - |
|
| $ | 681.5 |
|
| $ | 711.1 |
|
| $ | - |
|
| $ | 711.1 |
|
Amortizable intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Tradenames |
|
| 54.3 |
|
|
| (16.4 | ) |
|
| 37.9 |
|
|
| 36.4 |
|
|
| (15.5 | ) |
|
| 20.9 |
|
Customer and contractual relationships |
|
| 1,016.5 |
|
|
| (422.0 | ) |
|
| 594.5 |
|
|
| 975.7 |
|
|
| (388.2 | ) |
|
| 587.5 |
|
Patents/proprietary technology |
|
| 139.0 |
|
|
| (77.0 | ) |
|
| 62.0 |
|
|
| 133.1 |
|
|
| (68.8 | ) |
|
| 64.3 |
|
Total |
|
| 1,209.8 |
|
|
| (515.4 | ) |
|
| 694.4 |
|
|
| 1,145.2 |
|
|
| (472.5 | ) |
|
| 672.7 |
|
Total identifiable intangibles |
| $ | 1,891.3 |
|
| $ | (515.4 | ) |
| $ | 1,375.9 |
|
| $ | 1,856.3 |
|
| $ | (472.5 | ) |
| $ | 1,383.8 |
|
(In millions) | As of September 30, 2017 | As of December 31, 2016 | ||||||||||||||||||||||
Gross Carrying Amounts | Accumulated Amortization | Net Book Value | Gross Carrying Amounts | Accumulated Amortization | Net Book Value | |||||||||||||||||||
Indefinite-lived tradenames | $ | 682.6 | $ | — | $ | 682.6 | $ | 671.8 | $ | — | $ | 671.8 | ||||||||||||
Amortizable intangible assets | ||||||||||||||||||||||||
Tradenames | 18.6 | (9.4 | ) | 9.2 | 15.8 | (7.3 | ) | 8.5 | ||||||||||||||||
Customer and contractual relationships | 627.1 | (226.0 | ) | 401.1 | 611.9 | (203.1 | ) | 408.8 | ||||||||||||||||
Patents/proprietary technology | 57.2 | (44.7 | ) | 12.5 | 61.9 | (44.0 | ) | 17.9 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | 702.9 | (280.1 | ) | 422.8 | 689.6 | (254.4 | ) | 435.2 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total identifiable intangibles | $ | 1,385.5 | $ | (280.1 | ) | $ | 1,105.4 | $ | 1,361.4 | $ | (254.4 | ) | $ | 1,107.0 |
We had net identifiable intangible assets of $1,375.9 million and $1,383.8 million as of September 30, 2022 and December 31, 2021, respectively. The $24.1$35.0 million increase in gross identifiable intangible assets was primarily due to acquisition-related adjustments in our Plumbing segment (See Note 4) as well as foreign translation adjustments,the acquisition of Aqualisa and Solar partially offset by the tradename impairment charges during the first quarter of 2017 related to$26.0 million in our decision to sell Field ID (See Note 6).Cabinets segment (as discussed below) and translation adjustments.
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.
The asset impairment charge of $26.0 million in 2022 relates to an indefinite-lived tradename within our Cabinets segment. During the second quarter of 2022, production was shifted at a historical make-to-order plant to a stock product line, to enable what we expect to be a higher value purpose and growth opportunity. This production shift 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).
8
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2016,The significant assumptions used to estimate the fair value of one of the tradenamestradename impaired 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 on2022 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 tradename inimpaired tradename.
(b)Selected long-term revenue growth rate within 10-year projection period of the Cabinets segment and concluded the fair value continues to exceed its carrying value. A further reduction in fair value of these tradenames may result in an impairment charge in future periods. impaired tradename.
As of September 30, 2017,2022, the carrying valuesestimated fair value 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 thethis tradename equaled its carrying value of goodwill and other intangible assets. The events and/$59.0 million. A reduction in the estimated fair value of this tradename could trigger additional impairment charges in future periods. Events or circumstances that could have a potential negative effect on the estimated fair value of our reporting units and indefinite-lived tradenames include: lower than forecasted revenues, more severe impacts of the COVID-19 pandemic than currently expected, including due to resurgences of the virus, actual new construction and repair and remodel growth rates that 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 committed toMarch 2022, the Company issued $900 million in aggregate principal amount of senior unsecured notes in a plan to sell Field ID, our cloud-based inspection and safety compliance software product line included in our Security segment. In accordance with FASB Accounting Standards Codification (“ASC”) 360, as a resultregistered public offering consisting of our decision to sell, during the first quarter of 2017 we recorded $3.2$450 million ofpre-tax impairment charges4.00% 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 writepay down a portion of 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 completedoutstanding balance on the sale of Field ID in April 2017 (See Note 4).2021 Term Loan, as described below.
In June 2016,At September 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 September 30, 2022 and December 31, 2021:
|
|
|
|
|
|
|
| Net Carrying Value |
| ||||||
(in millions) | Principal Amount |
|
| Issuance Date |
| Maturity Date |
| September 30, 2022 |
|
| December 31, 2021 |
| |||
4.000% Senior Notes | $ | 500.0 |
|
| June 2015 |
| June 2025 |
| $ | 497.9 |
|
| $ | 497.4 |
|
4.000% Senior Notes |
| 600.0 |
|
| September 2018 |
| September 2023 |
|
| 599.0 |
|
|
| 598.2 |
|
3.250% Senior Notes |
| 700.0 |
|
| September 2019 |
| September 2029 |
|
| 694.8 |
|
|
| 694.2 |
|
4.000% Senior Notes |
| 450.0 |
|
| March 2022 |
| March 2032 |
|
| 445.6 |
|
|
| - |
|
4.500% Senior Notes |
| 450.0 |
|
| March 2022 |
| March 2052 |
|
| 435.3 |
|
|
| - |
|
Total Senior Notes | $ | 2,700.0 |
|
|
|
|
|
| $ | 2,672.6 |
|
| $ | 1,789.8 |
|
Credit Facilities
In August 2022, the Company entered into a third 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 “2022 Revolving Credit Agreement”), and borrowings thereunder will be used for general corporate purposes. On September 30, 2017 and December 31, 2016, our outstanding borrowings under thisThe maturity date of the 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.is August 2027. Interest rates under the facility2022 Revolving Credit Agreement are variable based on LIBORthe Secured Overnight Financing Rate (“SOFR”) at the time of the borrowing and the Company’s long-term credit rating and can range from LIBORSOFR + 0.9%1.02% to LIBORSOFR + 1.5%1.525%.Under the 2022 Revolving Credit Agreement, the Company is required to maintain a minimum ratio of consolidated EBITDA to consolidated interest expense of 3.0 to 1.0. Consolidated EBITDA is defined as consolidated net income before interest expense, income taxes, depreciation, amortization of intangible assets, losses from asset impairments, and certain other one-time adjustments. In addition, the Company's ratio of consolidated debt minus certain cash and cash equivalents to consolidated EBITDA generally may not exceed 3.5 to 1.0. On September 30, 2022 and December 31, 2021, our outstanding borrowings under this facility and our previous revolving credit facility were $100.0 million and $520.0 million, respectively. This facility is included in Long-term debt in the condensed consolidated balance sheets. As of September 30, 2017,2022, we were in compliance with all covenants under this facility.
13
9
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In June 2015, we issued $900November 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 unsecured senior notes (“Senior Notes”) inthe 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 registered public offering.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 our previous revolving credit facility. The Senior Notes consist of two tranches: $400 million of five-year notes due 2020outstanding $1.1 billion under the 2021 Term Loan was repaid on March 25, 2022 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 Notessenior notes offering to pay down our revolving credit facilityin March 2022 (as described above) and for general corporate purposes. On September 30, 2017 and December 31, 2016, the carrying valueother existing sources of the Senior Notes, net of underwriting commissions, price discounts and debt issuance costs, was $892.2 million and $891.1 million, respectively.liquidity.
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 of which there were no outstanding balances as of September 30, 20172022 and December 31, 2016.2021, respectively. There were outstanding balances of $1.4 million as of September 30, 2022 and no outstanding balance as of December 31, 2021.
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 2022 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 2022 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 September 30, 2022 and December 31, 2021 our outstanding borrowings under the Commercial Paper Program were $613.3million and zero, 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 September 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 September 30, 20172022 was $190.2 million, representing a net settlement payable of $2.3$553.7 million. Based on foreign exchange rates as of September 30, 2017,2022, we estimate that $1.2$2.5 million of net foreign currency derivative losses included in accumulated other comprehensive income as of September 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 September 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 |
|
| September 30, |
|
| December 31, |
| ||
Assets: |
|
|
|
|
|
|
|
|
| ||
Foreign exchange contracts |
| Other current assets |
|
| $ | 9.5 |
|
| $ | 4.1 |
|
Interest rate hedges |
| Other non-current assets |
|
|
| 88.8 |
|
|
| - |
|
|
| Total assets |
|
| $ | 98.3 |
|
| $ | 4.1 |
|
Liabilities: |
|
|
|
|
|
|
|
|
| ||
Foreign exchange contracts |
| Other current liabilities |
|
| $ | 10.9 |
|
| $ | 1.4 |
|
Commodity contracts |
| Other current liabilities |
|
|
| 7.6 |
|
|
| 0.1 |
|
|
| Total liabilities |
|
| $ | 18.5 |
|
| $ | 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 nine months ended September 30, 2022 and 2021 were as follows:
(In millions) |
| Classification and Amount of Gain (Loss) |
| |||||||||
|
| Nine Months Ended September 30, 2022 |
| |||||||||
|
| Cost of |
|
| Interest |
|
| Other income, net |
| |||
Total amounts per Consolidated Statements of Comprehensive Income |
| $ | 3,895.9 |
|
| $ | 85.4 |
|
| $ | 3.6 |
|
The effects of fair value and cash flow hedging: |
|
|
|
|
|
|
|
|
| |||
Gain (loss) on fair value hedging relationships |
|
|
|
|
|
|
|
|
| |||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
| |||
Hedged items |
|
| - |
|
|
| - |
|
|
| (26.1 | ) |
Derivative designated as hedging instruments |
|
| - |
|
|
| - |
|
|
| 21.6 |
|
Gain (loss) on cash flow hedging relationships |
|
|
|
|
|
|
|
|
| |||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| 4.3 |
|
|
| - |
|
|
| - |
|
Commodity contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| (4.2 | ) |
|
| - |
|
|
| - |
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| - |
|
|
| 2.5 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
| |||
(In millions) |
| Classification and Amount of Gain (Loss) |
| |||||||||
|
| Nine Months Ended September 30, 2021 |
| |||||||||
|
| Cost of |
|
| Interest |
|
| Other expense, net |
| |||
Total amounts per Consolidated Statements of Comprehensive Income |
| $ | 3,637.2 |
|
| $ | 63.2 |
|
| $ | 0.7 |
|
The effects of fair value and cash flow hedging: |
|
|
|
|
|
|
|
|
| |||
Gain (loss) on fair value hedging relationships |
|
|
|
|
|
|
|
|
| |||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
| |||
Hedged items |
|
| - |
|
|
| - |
|
|
| (2.1 | ) |
Derivative designated as hedging instruments |
|
| - |
|
|
| - |
|
|
| (0.6 | ) |
Gain (loss) on cash flow hedging relationships |
|
|
|
|
|
|
|
|
| |||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| 0.2 |
|
|
| - |
|
|
| - |
|
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 |
|
| - |
|
|
| 0.5 |
|
|
| - |
|
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 September 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 September 30, 2022 |
| |||||||||
|
| Cost of |
|
| Interest |
|
| Other income, net |
| |||
Total amounts per Consolidated Statements of Comprehensive Income |
| $ | 1,310.2 |
|
| $ | 33.1 |
|
| $ | 2.1 |
|
The effects of fair value and cash flow hedging: |
|
|
|
|
|
|
|
|
| |||
Gain (loss) on fair value hedging relationships |
|
|
|
|
|
|
|
|
| |||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
| |||
Hedged items |
|
| - |
|
|
| - |
|
|
| (17.2 | ) |
Derivative designated as hedging instruments |
|
| - |
|
|
| - |
|
|
| 16.5 |
|
Gain (loss) on cash flow hedging relationships |
|
|
|
|
|
|
|
|
| |||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| 1.3 |
|
|
| - |
|
|
| - |
|
Commodity contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| (3.9 | ) |
|
| - |
|
|
| - |
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| - |
|
|
| 1.1 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
| |||
(In millions) |
| Classification and Amount of Gain (Loss) |
| |||||||||
|
| Three Months Ended September 30, 2021 |
| |||||||||
|
| Cost of |
|
| Interest |
|
| Other income, net |
| |||
Total amounts per Consolidated Statements of Comprehensive Income |
| $ | 1,280.0 |
|
| $ | 20.6 |
|
| $ | 1.3 |
|
The effects of fair value and cash flow hedging: |
|
|
|
|
|
|
|
|
| |||
Gain (loss) on fair value hedging relationships |
|
|
|
|
|
|
|
|
| |||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
| |||
Hedged items |
|
| - |
|
|
| - |
|
|
| (3.8 | ) |
Derivative designated as hedging instruments |
|
| - |
|
|
| - |
|
|
| 3.1 |
|
Gain (loss) on cash flow hedging relationships |
|
|
|
|
|
|
|
|
| |||
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| 0.9 |
|
|
| - |
|
|
| - |
|
Commodity contracts: |
|
|
|
|
|
|
|
|
| |||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
|
|
|
| - |
|
|
| - |
| |
Interest rate contracts: |
|
| - |
|
|
|
|
|
|
| ||
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| - |
|
|
| 0.2 |
|
|
| - |
|
The effective portion of cash flow hedges recognized in other comprehensive income were a net lossesgain of $(0.1)$125.9 million and $(8.0)a net gain of $1.8 million in the nine months ended September 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)$126.4 million and zeroa net gain of $2.4 million in the three months ended September 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.
13
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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 no 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 September 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) |
| September 30, 2022 |
|
| December 31, 2021 |
| ||||||||||
|
| Carrying |
|
| Fair |
|
| Carrying |
|
| Fair |
| ||||
Notes, net of underwriting commissions, price discounts and debt issuance costs |
| $ | 2,672.6 |
|
| $ | 2,338.9 |
|
| $ | 1,789.8 |
|
| $ | 1,902.9 |
|
2022 Revolving Credit Agreement |
|
| 100.0 |
|
|
| 100.0 |
|
|
| 520.0 |
|
|
| 520.0 |
|
Commercial paper borrowings |
|
| 613.3 |
|
|
| 615.2 |
|
|
| - |
|
|
| - |
|
2021 Term Loan |
|
| - |
|
|
| - |
|
|
| 400.0 |
|
|
| 400.0 |
|
Total debt |
| $ | 3,385.9 |
|
| $ | 3,054.1 |
|
| $ | 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 2022 Revolving Credit Agreement, Commercial paper borrowings and 2021 Term Loan is determined primarily using broker quotes, which are Level 2 inputs.
Assets and liabilities measured at fair value on a recurring basis as of September 30, 20172022 and December 31, 20162021 were as follows:
(In millions) | Fair Value |
| Fair Value |
| ||||||||||||
September 30, 2017 | December 31, 2016 |
| September 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) |
| $ | 98.3 |
|
| $ | 4.1 |
| ||||||||
Deferred compensation program assets (Level 2) |
|
| 18.8 |
|
|
| 19.8 |
| ||||||||
Total assets | $ | 10.2 | $ | 7.9 |
| $ | 117.1 |
|
| $ | 23.9 |
| ||||
Liabilities |
|
|
|
|
|
| ||||||||||
Derivative financial instruments (level 2) | $ | 5.5 | $ | 3.1 | ||||||||||||
Derivative financial instruments (Level 2) |
| $ | 18.5 |
|
| $ | 1.5 |
|
16
14
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Accumulated Other Comprehensive Income (Loss)
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 nine and three months ended September 30, 2022 and 2021 were as follows:
(In millions) |
| Foreign |
|
| Derivative |
|
| Defined |
|
| Accumulated |
| ||||
Balance at December 31, 2020 |
| $ | 7.2 |
|
| $ | 4.2 |
|
| $ | (66.5 | ) |
| $ | (55.1 | ) |
Amounts classified into accumulated other |
|
| 2.9 |
|
|
| 1.4 |
|
|
| (2.6 | ) |
|
| 1.7 |
|
Amounts reclassified from accumulated other |
|
| - |
|
|
| (1.8 | ) |
|
| 1.4 |
|
|
| (0.4 | ) |
Net current-period other comprehensive (loss) income |
|
| 2.9 |
|
|
| (0.4 | ) |
|
| (1.2 | ) |
|
| 1.3 |
|
Balance at September 30, 2021 |
| $ | 10.1 |
|
| $ | 3.8 |
|
| $ | (67.7 | ) |
| $ | (53.8 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance at December 31, 2021 |
| $ | 3.3 |
|
| $ | 2.9 |
|
| $ | (30.8 | ) |
| $ | (24.6 | ) |
Amounts classified into accumulated other |
|
| (70.5 | ) |
|
| 97.3 |
|
|
| (1.6 | ) |
|
| 25.2 |
|
Amounts reclassified from accumulated other |
|
| - |
|
|
| (3.1 | ) |
|
| 0.3 |
|
|
| (2.8 | ) |
Net current-period other comprehensive (loss) income |
|
| (70.5 | ) |
|
| 94.2 |
|
|
| (1.3 | ) |
|
| 22.4 |
|
Balance at September 30, 2022 |
| $ | (67.2 | ) |
| $ | 97.1 |
|
| $ | (32.1 | ) |
| $ | (2.2 | ) |
(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 | ) | |||||
|
|
|
|
|
|
|
|
(In millions) |
| Foreign |
|
| Derivative |
|
| Defined |
|
| Accumulated |
| ||||
Balance at June 30, 2021 |
| $ | 25.0 |
|
| $ | 3.3 |
|
| $ | (66.7 | ) |
| $ | (38.4 | ) |
Amounts classified into accumulated other |
|
| (14.9 | ) |
|
| 1.7 |
|
|
| (2.4 | ) |
|
| (15.6 | ) |
Amounts reclassified from accumulated other |
|
| - |
|
|
| (1.2 | ) |
|
| 1.4 |
|
|
| 0.2 |
|
Net current-period other comprehensive (loss) income |
|
| (14.9 | ) |
|
| 0.5 |
|
|
| (1.0 | ) |
|
| (15.4 | ) |
Balance at September 30, 2021 |
| $ | 10.1 |
|
| $ | 3.8 |
|
| $ | (67.7 | ) |
| $ | (53.8 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance at June 30, 2022 |
| $ | (12.8 | ) |
| $ | 71.5 |
|
| $ | (30.9 | ) |
| $ | 27.8 |
|
Amounts classified into accumulated other |
|
| (54.4 | ) |
|
| 24.9 |
|
|
| (1.5 | ) |
|
| (31.0 | ) |
Amounts reclassified from accumulated other |
|
| - |
|
|
| 0.7 |
|
|
| 0.3 |
|
|
| 1.0 |
|
Net current-period other comprehensive (loss) income |
|
| (54.4 | ) |
|
| 25.6 |
|
|
| (1.2 | ) |
|
| (30.0 | ) |
Balance at September 30, 2022 |
| $ | (67.2 | ) |
| $ | 97.1 |
|
| $ | (32.1 | ) |
| $ | (2.2 | ) |
17
15
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The reclassifications out of accumulated other comprehensive loss for the nine and three months ended September 30, 20172022 and 20162021 were as follows:
(In millions) | (In millions) | (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 |
| Amount Reclassified from |
|
| Affected Line Item in | |||||||||||||||
2017 | 2016 |
| 2022 |
|
| 2021 |
|
|
| |||||||||||||
(Losses) gains on cash flow hedges | ||||||||||||||||||||||
Gains (losses) on cash flow hedges |
|
|
|
|
|
|
|
| ||||||||||||||
Foreign exchange contracts | $ | 0.5 | $ | (2.5 | ) | Cost of products sold |
| $ | 4.3 |
|
| $ | 0.2 |
|
| Cost of products sold | ||||||
Commodity contracts | 0.4 | (0.1 | ) | Cost of products sold |
|
| (4.2 | ) |
|
| 0.9 |
|
| Cost of products sold | ||||||||
|
| |||||||||||||||||||||
0.9 | (2.6 | ) | Total before tax | |||||||||||||||||||
Interest rate contracts |
|
| 2.5 |
|
|
| 0.5 |
|
| Interest expense | ||||||||||||
(0.3 | ) | (0.2 | ) | Tax expense |
|
| 2.6 |
|
|
| 1.6 |
|
| Total before tax | ||||||||
|
|
|
| 0.5 |
|
|
| 0.2 |
|
| Tax expense | |||||||||||
$ | 0.6 | $ | (2.8 | ) | Net of tax |
| $ | 3.1 |
|
| $ | 1.8 |
|
| 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 | ||||||||||||||||||
Recognition of actuarial losses |
| $ | (0.4 | ) |
| $ | (1.1 | ) |
| Other (income) expense, net | ||||||||||||
|
|
|
| (0.4 | ) |
|
| (1.1 | ) |
| Total before tax | |||||||||||
$ | 4.1 | $ | 5.1 | Net of tax |
|
| 0.1 |
|
|
| (0.3 | ) |
| Tax expense | ||||||||
|
|
| $ | (0.3 | ) |
| $ | (1.4 | ) |
| Net of tax | |||||||||||
Total reclassifications for the period | $ | 4.7 | $ | 2.3 | Net of tax |
| $ | 2.8 |
|
| $ | 0.4 |
|
| Net of tax | |||||||
|
|
|
|
|
| |||||||||||||||||
|
|
|
|
|
| |||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||
Details about Accumulated Other |
| Amount Reclassified from |
|
| Affected Line Item in | |||||||||||||||||
|
| 2022 |
|
| 2021 |
|
|
| ||||||||||||||
Gains (losses) on cash flow hedges |
|
|
|
|
|
|
|
| ||||||||||||||
Foreign exchange contracts |
| $ | 1.3 |
|
| $ | 0.9 |
|
| Cost of products sold | ||||||||||||
Commodity contracts |
|
| (3.9 | ) |
|
| - |
|
| Cost of products sold | ||||||||||||
Interest rate contracts |
|
| 1.1 |
|
|
| 0.2 |
|
| Interest expense | ||||||||||||
|
|
| (1.5 | ) |
|
| 1.1 |
|
| Total before tax | ||||||||||||
|
|
| 0.8 |
|
|
| 0.1 |
|
| Tax expense | ||||||||||||
Total reclassifications for the period |
| $ | (0.7 | ) |
| $ | 1.2 |
|
| Net of tax | ||||||||||||
Defined benefit plan items |
|
|
|
|
|
|
|
| ||||||||||||||
Recognition of actuarial losses |
| $ | (0.4 | ) |
| $ | (1.1 | ) |
| Other (income) expense, net | ||||||||||||
|
|
| (0.4 | ) |
|
| (1.1 | ) |
| Total before tax | ||||||||||||
|
|
| 0.1 |
|
|
| (0.3 | ) |
| Tax expense | ||||||||||||
|
| $ | (0.3 | ) |
| $ | (1.4 | ) |
| Net of tax | ||||||||||||
Total reclassifications for the period |
| $ | (1.0 | ) |
| $ | (0.2 | ) |
| 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
16
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Revenue
The following table disaggregates our consolidated revenue by major sales distribution channels for the nine and three months ended September 30, 2022 and 2021:
(In millions) |
| Nine Months Ended |
|
| Three Months Ended |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Wholesalers(a) |
| $ | 2,874.4 |
|
| $ | 2,594.4 |
|
| $ | 987.6 |
|
| $ | 933.6 |
|
Home Center retailers(b) |
|
| 1,787.5 |
|
|
| 1,642.0 |
|
|
| 580.6 |
|
|
| 524.9 |
|
Other retailers(c) |
|
| 309.9 |
|
|
| 326.6 |
|
|
| 99.7 |
|
|
| 128.5 |
|
Builder direct |
|
| 248.1 |
|
|
| 194.8 |
|
|
| 88.1 |
|
|
| 65.7 |
|
U.S. net sales |
|
| 5,219.9 |
|
|
| 4,757.8 |
|
|
| 1,756.0 |
|
|
| 1,652.7 |
|
International(d) |
|
| 862.1 |
|
|
| 935.6 |
|
|
| 297.7 |
|
|
| 333.6 |
|
Net sales |
| $ | 6,082.0 |
|
| $ | 5,693.4 |
|
| $ | 2,053.7 |
|
| $ | 1,986.3 |
|
11. Defined Benefit Plans
The components of net periodic benefit costincome for pension and postretirement benefits for the nine and three months ended September 30, 20172022 and 20162021 were as follows:
(In millions) | Nine Months Ended September 30, |
| Nine Months Ended September 30, |
|
| Three Months Ended September 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 |
|
| $ | 0.3 |
|
| $ | - |
|
| $ | 0.1 |
|
| ||||||||
Interest cost | 25.0 | 25.8 | — | 0.2 |
|
| 19.1 |
|
|
| 18.0 |
|
|
| 6.4 |
|
|
| 6.0 |
|
| ||||||||||||
Expected return on plan assets | (28.0 | ) | (27.9 | ) | — | — |
|
| (26.6 | ) |
|
| (26.2 | ) |
|
| (8.9 | ) |
|
| (8.7 | ) |
| ||||||||||
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 | ) | ||||||||||||||||||||||
Recognition of actuarial losses |
|
| 0.4 |
|
|
| 1.1 |
|
|
| 0.4 |
|
|
| 1.1 |
|
| ||||||||||||||||
Net periodic benefit income |
| $ | (6.9 | ) |
| $ | (6.8 | ) |
| $ | (2.1 | ) |
| $ | (1.5 | ) |
|
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 nine months ended September 30, 2017 and 2016 were 29.5% and 28.2%, 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.
The effective income tax rates for the three months ended September 30 2017were 21.7% and 2016 were 31.6%18.4% for 2022 and 28.6%,22.0% and 24.4% for 2021, respectively.
The increase indifference between the Company’s effective tax rate reflectedfor the nine and three months ended September 30, 2022, and the U.S. statutory rate of 21.0% primarily relates to state income taxes (net of federal income tax benefit), the benefit for decreases in uncertain tax positions and tax expense related to the tax audit settlement.
In the third quarter of 2022, the Internal Revenue Service (“IRS”) completed its examination of the Company’s tax filings for 2017 and 2018. As a lowerresult of closing the IRS examination, the Company realized a net 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 torelease of uncertain tax positions.
It is reasonably possible that, within the next 12 months, total unrecognizedpositions reduced by tax benefits may decrease upexpenses to $1.5 million, primarily asadjust accrued current and deferred income tax liabilities. As a result of the conclusion of pending U.S. federal, state and foreign incomeIRS audit, the Company is now recognizing deferred tax proceedings.liability for full inclusion entities where the Company cannot assert permanent reinvestment.
17
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Product Warranties
We generally record warranty expense related to contractual warranty terms at the time of sale. We may also provide customer concessions for claims made outside of the contractual warranty terms and those expenses are recorded in the period in which the concession is made. We offer our customers various warranty terms based on the type of product that is sold. Warranty expense is determined based on historical claimshistoric claim experience and the nature of the product category. The following table summarizes activity related to our product warranty liability for the nine months ended September 30, 20172022 and 2016,2021, respectively.
(In millions) | Nine Months Ended September 30, |
| Nine Months Ended |
| ||||||||||||
2017 | 2016 |
| 2022 |
|
| 2021 |
| |||||||||
Reserve balance at January 1, | $ | 16.2 | $ | 16.0 |
| $ | 26.5 |
|
| $ | 24.5 |
| ||||
Provision for warranties issued | 23.3 | 23.8 |
|
| 35.1 |
|
|
| 26.5 |
| ||||||
Settlements made (in cash or in kind) | (17.0 | ) | (22.8 | ) |
|
| (32.1 | ) |
|
| (25.5 | ) | ||||
Acquisitions |
|
| 1.1 |
|
|
| 0.3 |
| ||||||||
Foreign translation adjustments | (1.2 | ) | — |
|
| (0.5 | ) |
|
| 0.1 |
| |||||
Acquisitions | 0.7 | 0.4 | ||||||||||||||
|
| |||||||||||||||
Reserve balance at September 30, | $ | 22.0 | $ | 17.4 |
| $ | 30.1 |
|
| $ | 25.9 |
|
2014. Information on Business Segments
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net sales and operating income for the nine and three months ended September 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 | % |
|
| Nine Months Ended September 30, | |||||||||||
(In millions) |
| 2022 |
|
| 2021 |
|
| % Change | |||||
Net Sales |
|
|
|
|
|
|
|
|
|
| |||
Water Innovations |
| $ | 1,928.6 |
|
| $ | 2,057.6 |
|
|
| (6.3 | ) | % |
Outdoors & Security |
|
| 1,662.4 |
|
|
| 1,525.4 |
|
|
| 9.0 |
|
|
Cabinets |
|
| 2,491.0 |
|
|
| 2,110.4 |
|
|
| 18.0 |
|
|
Net sales |
| $ | 6,082.0 |
|
| $ | 5,693.4 |
|
|
| 6.8 |
| % |
Operating Income (Loss) |
|
|
|
|
|
|
|
|
|
| |||
Water Innovations |
| $ | 462.7 |
|
| $ | 483.3 |
|
|
| (4.3 | ) | % |
Outdoors & Security |
|
| 223.3 |
|
|
| 211.7 |
|
|
| 5.5 |
|
|
Cabinets |
|
| 243.3 |
|
|
| 214.2 |
|
|
| 13.6 |
|
|
Less: Corporate expenses |
|
| (110.6 | ) |
|
| (79.3 | ) |
|
| (39.5 | ) |
|
Operating income |
| $ | 818.7 |
|
| $ | 829.9 |
|
|
| (1.3 | ) | % |
|
|
|
|
|
|
|
|
|
|
| |||
|
| Three Months Ended September 30, | |||||||||||
(In millions) |
| 2022 |
|
| 2021 |
|
| % Change | |||||
Net Sales |
|
|
|
|
|
|
|
|
|
| |||
Water Innovations |
| $ | 635.1 |
|
| $ | 741.4 |
|
|
| (14.3 | ) | % |
Outdoors & Security |
|
| 560.4 |
|
|
| 528.4 |
|
|
| 6.1 |
|
|
Cabinets |
|
| 858.2 |
|
|
| 716.5 |
|
|
| 19.8 |
|
|
Net sales |
| $ | 2,053.7 |
|
| $ | 1,986.3 |
|
|
| 3.4 |
| % |
Operating Income (Loss) |
|
|
|
|
|
|
|
|
|
| |||
Water Innovations |
| $ | 152.7 |
|
| $ | 166.5 |
|
|
| (8.3 | ) | % |
Outdoors & Security |
|
| 70.6 |
|
|
| 80.4 |
|
|
| (12.2 | ) |
|
Cabinets |
|
| 100.9 |
|
|
| 67.2 |
|
|
| 50.1 |
|
|
Less: Corporate expenses |
|
| (43.0 | ) |
|
| (27.5 | ) |
|
| (56.4 | ) |
|
Operating income |
| $ | 281.2 |
|
| $ | 286.6 |
|
|
| (1.9 | ) | % |
|
|
|
|
|
|
|
|
|
|
|
21
18
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Restructuring and Other Charges
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 (gains) for the nine and three months ended September 30, 20172022 and 20162021 are shown below.
(In millions) | Nine Months Ended September 30, 2017 |
| Nine Months Ended September 30, 2022 |
|
| Nine Months Ended September 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 |
| $ | 3.8 |
|
| $ | 0.7 |
|
| $ | 4.5 |
|
| $ | - |
|
| $ | 2.8 |
|
| $ | 2.8 |
| ||||||||||||
Outdoors & Security |
|
| 18.9 |
|
|
| (6.1 | ) |
|
| 12.8 |
|
|
| 8.5 |
|
|
| (0.4 | ) |
|
| 8.1 |
| ||||||||||||
Cabinets |
|
| 10.9 |
|
|
| 6.3 |
|
|
| 17.2 |
|
|
| 3.0 |
|
|
| 3.5 |
|
|
| 6.5 |
| ||||||||||||
Corporate |
|
| (0.5 | ) |
|
| - |
|
|
| (0.5 | ) |
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||
Total | $ | 3.5 | $ | 0.9 | $ | 4.4 |
| $ | 33.1 |
|
| $ | 0.9 |
|
| $ | 34.0 |
|
| $ | 11.5 |
|
| $ | 5.9 |
|
| $ | 17.4 |
|
(a) | “Other |
Restructuring and other charges (gains) in the first nine months of 20172022 are largely related to severance, asset impairment and other costs associated with plant closures and headcount actions across all segments. Restructuring and other charges (gains) in the first nine months of 2021 were 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 September 30, 2022 |
|
| Three Months Ended September 30, 2021 |
| |||||||||||||||||||||||||||||
Restructuring Charges | Other Charges (a) | Total Charges |
| Restructuring |
|
| Other |
|
| Total |
|
| Restructuring |
|
| Other |
|
| Total |
| ||||||||||||||||
Water Innovations |
| $ | 2.9 |
|
| $ | - |
|
| $ | 2.9 |
|
| $ | - |
|
| $ | 1.2 |
|
| $ | 1.2 |
| ||||||||||||
Outdoors & Security |
|
| 18.2 |
|
|
| 0.2 |
|
|
| 18.4 |
|
|
| 2.4 |
|
|
| (0.4 | ) |
|
| 2.0 |
| ||||||||||||
Cabinets | $ | 1.8 | $ | — | $ | 1.8 |
|
| 9.6 |
|
|
| 3.9 |
|
|
| 13.5 |
|
|
| 1.2 |
|
|
| 0.9 |
|
|
| 2.1 |
| ||||||
Plumbing | 1.1 | 0.8 | 1.9 | |||||||||||||||||||||||||||||||||
Security | 9.5 | 3.5 | 13.0 | |||||||||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||||||
Corporate |
|
| (0.5 | ) |
|
| - |
|
|
| (0.5 | ) |
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||
Total | $ | 12.4 | $ | 4.3 | $ | 16.7 |
| $ | 30.2 |
|
| $ | 4.1 |
|
| $ | 34.3 |
|
| $ | 3.6 |
|
| $ | 1.7 |
|
| $ | 5.3 |
|
(a) | “Other |
Restructuring and other charges (gains) in the first nine monthsthird quarter of 2016 primarily2022 are largely related to severance, asset impairment and other costs associated with plant closures and headcount actions across all segments. Restructuring and other charges (gains) in the third quarter of 2021 were largely related to severance costs and charges associated with the relocation of a manufacturing facilityheadcount actions within our Outdoor & Security segment.and Cabinets segments.
Reconciliation of Restructuring Liability
(In millions) |
| Balance at |
|
| 2022 |
|
| Cash |
|
| Balance at |
| ||||
Workforce reduction costs |
| $ | 4.7 |
|
| $ | 24.5 |
|
| $ | (7.1 | ) |
| $ | 22.1 |
|
Other |
|
| 1.0 |
|
|
| 8.6 |
|
|
| (0.4 | ) |
|
| 9.2 |
|
Total |
| $ | 5.7 |
|
| $ | 33.1 |
|
| $ | (7.5 | ) |
| $ | 31.3 |
|
(a) Cash expenditures primarily relate to severance charges.
(In millions) |
| Balance at |
|
| 2021 |
|
| Cash |
|
| Balance at |
| ||||
Workforce reduction costs |
| $ | 6.9 |
|
| $ | 9.6 |
|
| $ | (11.2 | ) |
| $ | 5.3 |
|
Other |
|
| 0.7 |
|
|
| 1.9 |
|
|
| (1.5 | ) |
|
| 1.1 |
|
Total |
| $ | 7.6 |
|
| $ | 11.5 |
|
| $ | (12.7 | ) |
| $ | 6.4 |
|
23(a) Cash expenditures primarily relate to severance charges.
19
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Earnings Per Share
(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 | |||||||||||||||
Workforce reduction costs | $ | 2.4 | $ | 2.8 | $ | (2.9 | ) | $ | (0.5 | ) | $ | 1.8 | ||||||||
Other | 0.6 | 0.7 | (1.3 | ) | — | 0.0 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
$ | 3.0 | $ | 3.5 | $ | (4.2 | ) | $ | (0.5 | ) | $ | 1.8 |
(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 |
25
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The computations of earnings per common share werefor the nine and three months ended September 30, 2022 and 2021were 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) |
| Nine Months Ended |
|
| Three Months Ended |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Net income |
| $ | 577.1 |
|
| $ | 597.1 |
|
| $ | 204.2 |
|
| $ | 202.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic earnings per common share |
| $ | 4.40 |
|
| $ | 4.32 |
|
| $ | 1.58 |
|
| $ | 1.47 |
|
Diluted earnings per common share |
| $ | 4.37 |
|
| $ | 4.26 |
|
| $ | 1.57 |
|
| $ | 1.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic average shares outstanding |
|
| 131.0 |
|
|
| 138.3 |
|
|
| 129.3 |
|
|
| 137.8 |
|
Stock-based awards |
|
| 1.0 |
|
|
| 1.9 |
|
|
| 0.8 |
|
|
| 1.9 |
|
Diluted average shares outstanding |
|
| 132.0 |
|
|
| 140.2 |
|
|
| 130.1 |
|
|
| 139.7 |
|
Antidilutive stock-based awards excluded from weighted- |
|
| 1.2 |
|
|
| 0.3 |
|
|
| 1.6 |
|
|
| 0.4 |
|
17. Commitments and Contingencies
26Litigation
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
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 nine and three months ended September 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 timing for completion of the Spin-Off, expected pension contributions, the anticipated impact of recently issued accounting standards on our financial performance, pension contributions,statements, the anticipated impact of acquisitions, expectations for 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 and (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. 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 our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022. We undertake no obligation to, and expressly disclaim any such obligation to, update or clarify any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future results over time or otherwise, except as required by law.
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 within 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 the housing market grow,set of capabilities we expectrefer to as 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. OverRecent increases in inflation and mortgage rates have slowed the long term,pace of single-family and existing home sales activity and new home construction and repair and remodel activities. However, we believe that the U.S. home products market will benefit from favorable population and immigration trends, which will drive demand for new housing units, and from an aging existing housing stock that will continuewe are well positioned to needmanage what we expect to be repaireda short-term slow-down in the housing market as we believe the fundamental drivers of the housing market remain intact.
We have been and remodeled.
We may continue to 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 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 July 2017,2022, we acquired Shaws Since1897 Limited100% of the outstanding equity of Aqualisa Holdings (International) Ltd. (“Shaws”Aqualisa”), aUK-based luxury plumbing leading U.K. manufacturer of shower products company that specializesknown for premium, innovative and smart digital shower systems, for a purchase price of $156.0 million, net of cash acquired of $4.8 million. We believe the acquisition of Aqualisa will enable us to continue to leverage growing trends in manufacturingwater management and selling fireclay sinksconnected products. We financed the transaction with borrowings under our existing credit facility. The assets and selling brasswareliabilities of Aqualisa were included in the Company’s consolidated balance sheet as of September 30, 2022. Aqualisa's net sales, operating income and accessoriescash flows from the date of acquisition to September 30, 2022 were not material to the Company and are included in partnership with Perrin & Rowe.the Water Innovations segment.
In January 2022, we acquired 100% of the outstanding equity of Solar Innovations LLC and an affiliated entity (together, “Solar”), a leading producer of wide-opening exterior door systems and outdoor enclosures, for a purchase price of $61.6 million, net of cash acquired. 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.
2922
Nine Months Ended September 30, 20172022 Compared To Nine Months Ended September 30, 20162021
Net Sales |
| Net Sales | |||||||||||||||||||||||
(In millions) | 2017 | 2016 | % Change vs. Prior Year |
| 2022 |
|
| 2021 |
|
| % Change | ||||||||||||||
Water Innovations |
| $ | 1,928.6 |
|
| $ | 2,057.6 |
|
|
| (6.3 | ) | % | ||||||||||||
Outdoors & Security |
|
| 1,662.4 |
|
|
| 1,525.4 |
|
|
| 9.0 |
|
| ||||||||||||
Cabinets | $ | 1,841.2 | $ | 1,797.2 | 2.4 | % |
|
| 2,491.0 |
|
|
| 2,110.4 |
|
|
| 18.0 |
|
| ||||||
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 | % |
| $ | 6,082.0 |
|
| $ | 5,693.4 |
|
|
| 6.8 |
| % | ||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
Operating Income |
| Operating Income (Loss) | |||||||||||||||||||||||
2017 | 2016 | % Change vs. Prior Year |
| 2022 |
|
| 2021 |
|
| % Change |
|
| |||||||||||||
Water Innovations |
| $ | 462.7 |
|
| $ | 483.3 |
|
|
| (4.3 | ) | % | ||||||||||||
Outdoors & Security |
|
| 223.3 |
|
|
| 211.7 |
|
|
| 5.5 |
|
| ||||||||||||
Cabinets | $ | 205.4 | $ | 194.0 | 5.9 | % |
|
| 243.3 |
|
|
| 214.2 |
|
|
| 13.6 |
|
| ||||||
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 |
|
| (110.6 | ) |
|
| (79.3 | ) |
|
| (39.5 | ) |
| |||||||
Operating income | $ | 529.1 | $ | 466.3 | 13.5 | % |
| $ | 818.7 |
|
| $ | 829.9 |
|
|
| (1.3 | ) | % |
The following discussion of consolidated results of operations and segment results refers to the nine months ended September 30, 20172022 compared to the nine months ended September 30, 2016.2021. Consolidated results of operations should be read in conjunction with segment results of operations.
Net sales
Net sales increased $217.5by $388.6 million, or 5.9%. The increase was6.8% 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, the benefit from the Solar and Aqualisa acquisitions ($15.5 million combined). These benefits were partially offset by unfavorable mix,lower sales unit volume in our Water Innovations and Outdoors & Security segments due to the impact of inventory reductions by our distribution channelpartners, lower sales demand in the US and Canada and slowing housing market activity in China and higher sales promotions, sales rebates andincentives, as well as unfavorable foreign exchange of approximately $4$24 million.
Cost of products sold
Cost of products sold increased $108.5by $258.7 million, or 4.6%7.1%, due to higher net sales, including the impact of the acquisitions in our Plumbing segment and raw material cost increases and labor cost increases across all segments, the impact of acquisitions, as well as 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 $93.1 million, or 5.6%,8.0% due to higher employee-relatedtransportation, headcount-related costs and advertising costs as well as the impact of the acquisitions in our Plumbing segment.
30
RESULTS OF OPERATIONS (Continued)
Amortization of intangible assets
Amortization of intangible assets increased $3.2 million primarily duerelated to the acquisitions in our Plumbing segment,planned Spin-Off. These factors were partially offset by a decrease relatinglower advertising and marketing costs.
Asset impairment charge
The asset impairment charge of $26.0 million in 2022 relates to a definite-lived customer relationship intangible inan indefinite-lived tradename within our Doors segment that was fully amortized duringCabinets segment. 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. This production shift 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$33.1 million in the nine months ended September 30, 2017 primarily relates2022 are largely related to severance, asset impairment and other costs within our Securityassociated with plant closures and Plumbingheadcount actions across all segments. Restructuring charges in the nine months ended September 30, 2016 were $12.4 million and primarily related to severance costs and charges associated with supply chain initiatives within our Security segment.
Operating income
Operating income increased $62.8 million, or 13.5%, primarily due to higher net sales, including the benefits from the acquisitions in our Plumbing segment and productivity improvements. These benefits were partially offset by unfavorable mix, higher employee-related, raw material and advertising costs.
Interest expense
Interest expense decreased $1.0 million to $36.5 million primarily due to the absence in 2017 of thewrite-off of debt issuance costs of approximately $1.3 million incurred during 2016.
Other (income) expense, net
Other (income) expense, net, was expense of $0.2$11.5 million in the nine months ended September 30, 2017, compared2021 were largely related to severance costs associated with the relocation of manufacturing facilities within our Cabinets and Outdoors & Security segments.
23
RESULTS OF OPERATIONS (Continued)
Operating income
Operating income decreased by $11.2 million, or 1.3% primarily due to higher commodity, transportation and headcount-related costs, an asset impairment charge of $0.1$26.0 million, costs related to the planned Spin-Off, a continued shift to value-priced products in our Cabinets segment, and higher restructuring and sales rebate costs, as well as unfavorable foreign exchange of approximately $8 million. These factors were partially offset by the benefit from higher net sales, productivity improvements and lower advertising and marketing costs.
Interest expense
Interest expense increased by $22.2 million to $85.4 million due to higher average borrowings and higher average interest rates.
Other (income) expense, net
Other income, net, was $3.6 million in the nine months ended September 30, 2016.2022, compared to other expense, net of $0.7 million in the nine months ended September 30, 2021. The increase in other income, net is primarily due to the absence of a non-cash loss of $4.5 million related to the 2021 remeasurement of our investment in Flo immediately prior to consolidation and an increase in interest income, partly offset by an increase foreign currency transaction losses.
Income taxes
The effective income tax rates for the nine months ended September 30, 20172022 and 20162021 were 29.5%21.7% and 28.2%22.0%, respectively. The increase in the effective income tax rate reflected ain 2022 was lower due primarily to tax benefit on share-based compensation, partially offsetbenefits from uncertain tax positions reduced by a valuation allowance releasetax expenses related to state deferredthe 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.audit settlement.
Net income
Net income from continuing operations
Net income from continuing operations was $347.3$577.1 million in the nine months ended September 30, 20172022 compared to $308.0$597.1 million in the nine months ended September 30, 2016.2021. The increase of $39.3 milliondecrease was primarily due to higher interest expense and lower operating income, partly offset by lower income tax expense and higher other income.
Results By Segment
31Water Innovations
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 $44.0decreased by $129.0 million, or 2.4%6.3%, due to higherlower sales unit volume driven primarily by continuing improvementinventory reductions by our distribution channelpartners, lower sales demand in the U.S. home productsUS and Canada, slowing housing market activity in China and higher promotion and sales rebate costs, as well as unfavorable foreign exchange of approximately $14 million. These factors were partially offset by the benefit from new product introductions and price increases to help mitigate the impact of cumulative raw materialcommodity and transportation cost increases.increases, a sales increase in our U.S. e-commerce channel and the benefit from the Aqualisa acquisition ($7 million).
Operating income decreased by $20.6 million, or 4.3%, due to lower net sales, the impact of higher commodity and freight costs as well as unfavorable foreign exchange of approximately $7 million. These factors were partially offset by cost reductions, including employee-related and advertising and marketing costs.
Outdoors & Security
Net sales increased by $137.0 million, or 9.0%, due to price increases to help mitigate the impact of cumulative commodity and transportation cost increases and the benefit from the Solar acquisition ($8 million). These benefits were partially offset by lower sales unit volume due to the impact of inventory reductions by our distribution channelpartners and lower sales demand in the US and Canada in our exterior doors, as well as unfavorable mix and higher sales promotions.foreign exchange of approximately $7 million.
Operating income increased $11.4by $11.6 million, or 5.9%5.5%, due to the benefit from higher net sales, productivity improvements, an increase in net saleswholesale doors products versus retail doors products and productivity improvements. These benefits were partially offset by unfavorable mix and higher employee-related costs.
Plumbing
Net sales increased $143.5a gain of $6.2 million or 13.0%, due to higher sales volume driven by continuing improvement inon the U.S. home products market and the benefit from new product introductions, higher sales in international markets, principally China, and the benefit from the acquisitionssale of Riobel, ROHL and Perrin & Rowe in 2016 as well as Shaws in 2017.a previously closed manufacturing facility. These benefits were partially offset by higher sales rebatescommodity, headcount-related and freight costs, higher restructuring costs 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 $380.6 million, or 6.5%,18.0% 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 material cost increases.
Operating income increased $9.7 million, or 21.0%, due to the higher net salescommodity 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 materialtransportation cost increases. These benefits were partially offset by unfavorable foreign exchange of approximately $1 million and by the impact of our exiting of two product lines in our commercial distribution channel.$3 million.
24
Operating income increased $11.7by $29.1 million, or 26.2%13.6%, 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 resultingbenefit from the facility relocation, as well as higher net sales.sales and productivity improvements. These benefits were partially offset by increased commodity and freight costs, higher raw material costs.headcount-related costs, an asset impairment charge, higher restructuring costs, costs related to the planned Spin-Off and an unfavorable inventory-related expense write-off.
Corporate
Corporate expenses decreasedincreased by $1.8$31.3 million, predominantlyor 39.5% , due to recognition of an actuarial gain versus an actuarial loss incosts related to the prior yearplanned Spin-Off and higher defined benefit plan income during 2017 in comparisonconsulting costs relating to prior year.our digital transformation initiatives.
(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 September 30, 20172022 Compared To Three Months Ended September 30, 20162021
Net Sales |
| Net Sales | |||||||||||||||||||||||
(In millions) | 2017 | 2016 | % Change vs. Prior Year |
| 2022 |
|
| 2021 |
|
| % Change | ||||||||||||||
Water Innovations |
| $ | 635.1 |
|
| $ | 741.4 |
|
|
| (14.3 | ) | % | ||||||||||||
Outdoors & Security |
|
| 560.4 |
|
|
| 528.4 |
|
|
| 6.1 |
|
| ||||||||||||
Cabinets | $ | 614.2 | $ | 602.1 | 2.0 | % |
|
| 858.2 |
|
|
| 716.5 |
|
|
| 19.8 |
|
| ||||||
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 | % |
| $ | 2,053.7 |
|
| $ | 1,986.3 |
|
|
| 3.4 |
| % | ||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| Operating Income (Loss) | ||||||||||||||||||||||||
Operating Income |
| 2022 |
|
| 2021 |
|
| % Change | |||||||||||||||||
2017 | 2016 | % Change vs. Prior Year | |||||||||||||||||||||||
Water Innovations |
| $ | 152.7 |
|
| $ | 166.5 |
|
|
| (8.3 | ) | % | ||||||||||||
Outdoors & Security |
|
| 70.6 |
|
|
| 80.4 |
|
|
| (12.2 | ) |
| ||||||||||||
Cabinets | $ | 69.7 | $ | 74.8 | (6.8 | )% |
|
| 100.9 |
|
|
| 67.2 |
|
|
| 50.1 |
|
| ||||||
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 |
|
| (43.0 | ) |
|
| (27.5 | ) |
|
| (56.4 | ) |
| |||||||
|
| ||||||||||||||||||||||||
Operating income | $ | 201.8 | $ | 183.1 | 10.2 | % |
| $ | 281.2 |
|
| $ | 286.6 |
|
|
| (1.9 | ) | % |
The following discussion of consolidated results of operations and segment results refers to the three months ended September 30, 20172022 compared to the three months ended September 30, 2016.2021. Consolidated results of operations should be read in conjunction with segment results of operations.
Net sales
Net sales increased $69.6by $67.4 million, or 5.4%. The increase was3.4% 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, the benefit from the Solar and favorable foreign exchange of approximately $4 million.Aqualisa acquisitions ($15.6 million combined). These benefits were partially offset by unfavorable mix,lower sales unit volume across all our segments due to inventory reductions by our distribution channelpartners, lower sales demand in the US and Canada, slowing housing market activity in China and higher sales rebates and sales promotions.incentive costs, as well as unfavorable foreign exchange of approximately $14 million.
Cost of products sold
Cost of products sold increased $40.6by $30.2 million, or 5.1%,2.4% due to higher net sales, includingthe impact of raw material and labor cost increases, the impact of acquisitions and an unfavorable inventory-related expense write-off in our PlumbingOutdoors & Security segment, partially offset by the benefit of productivity improvements across all segments.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $15.1 million, or 3.8%, due to costs related to the planned Spin-Off, higher raw materialtransportation and headcount-related costs, partially offset by the benefit of productivity improvements.lower advertising and marketing costs.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $12.8 million, or 4.5%, due to higher employee-related costs, including higher healthcare costs, as well as the impact of the acquisitions in our Plumbing 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 the second quarter of 2017.
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$30.2 million in the three months ended September 30, 2017 compared2022 are largely related to expenseseverance, asset impairment and other costs associated with plant closures and headcount actions across all segments. Restructuring charges of $0.6$3.6 million in the three months ended September 30, 2016.2021 were largely related to severance costs associated with headcount actions within our Outdoor & Security and Cabinets segments.
Operating income
25
Operating income decreased by $5.4 million, or 1.9% primarily due to higher commodity costs, lower sales unit volume across all our segments due to inventory reductions by our distribution channelpartners, lower sales demand in the US and Canada, slowing housing market activity in China, higher headcount-related, restructuring and transportation costs, costs related to the planned Spin-Off and an unfavorable inventory-related expense write-off in our Outdoors & Security segment, as well as unfavorable foreign exchange of approximately $5 million. These factors were partially offset by the benefit from price increases to help mitigate the impact of cumulative commodity and transportation cost increases, the benefit from productivity improvements and lower advertising and marketing costs.
Interest expense
Interest expense increased by $12.5 million to $33.1 million due to higher average borrowings and higher average interest rates.
Other income, net
Other income, net, was $2.1 million in the three months ended September 30, 2022 , compared to $1.3 million in the three months ended September 30, 2021. The increase in other income, net is primarily due to an increase in interest income.
Income taxes
The effective income tax rates for the three months ended September 30, 20172022 and 20162021 were 31.6%18.4% and 28.6%24.4%, respectively. The increase in the effective income tax rate reflected ain 2022 was lower due primarily to tax benefit on share-based compensation, partially offsetbenefits from uncertain tax positions reduced by a valuation allowance releasetax expenses related to state deferredthe 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.audit settlement.
Net income
Net income from continuing operations
Net income from continuing operations was $129.6$204.2 million in the three months ended September 30, 20172022 compared to $121.9$202.1 million in the three months ended September 30, 2016.2021. The increase of $7.7 million was primarily due to alower income tax expense and higher other income, these factors were partially offset by higher interest expense and lower operating income.
Results By Segment
35Water Innovations
RESULTS OF OPERATIONS (Continued)
Results by Segment
Cabinets
Net sales increased $12.1decreased by $106.3 million, or 2.0%14.3%, due to higherlower sales unit volume driven primarilydue to inventory reductions by continuing improvementour distribution channelpartners, lower sales demand in the U.S. home productsUS and Canada, slowing housing market activity in China and higher promotion and sales rebate costs, as well as unfavorable foreign exchange of approximately $9 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 and favorablethe benefit from the Aqualisa acquisition ($7 million).
Operating income decreased by $13.8 million, or 8.3%, due to lower net sales and the impact of higher commodity, freight and restructuring costs, as well as unfavorable foreign exchange of approximately $2$5 million. These benefitsfactors were partlypartially offset by unfavorablethe benefit from favorable sales mix, productivity improvements and higherlower employee-related and advertising and marketing costs.
Outdoors & Security
Net sales promotions.
Operating income decreased $5.1increased by $32.0 million, or 6.8%6.1%, 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 acquisition ($8 million). These benefits were partially offset by lower exterior door sales unit volume due to inventory reductions by our distribution channelpartners and lower sales demand in the increase in net salesUS and productivity improvements.Canada, as well as unfavorable foreign exchange of approximately $4 million.
Plumbing
Net sales increased $47.2Operating income decreased by $9.8 million, or 12.1%12.2%, due to higher commodity costs, higher restructuring costs, an unfavorable inventory-related expense write-off and higher sales volumeincentive, headcount-related and freight costs, as well as unfavorable foreign exchange of approximately $1 million. These factors were partially offset by the benefit from higher net sales, productivity improvements, an increase in the U.S. driven by continuing improvement in the U.S. homewholesale doors products marketversus retail doors products and the benefit from new product introductions, higherthe Solar acquisition ($1 million).
Cabinets
Net sales in international markets, principally Chinaincreased by $141.7 million, or 19.8%, due to price increases to help mitigate the impact of cumulative commodity and Canada, the benefit from the acquisitions of ROHL and Perrin & Rowe in 2016 as well as Shaws in 2017 and favorable foreign exchange of approximately $2 million.transportation cost increases. These benefits were partially offset by higherlower sales rebates.unit volume due to inventory reductions by our distribution channelpartners and lower sales demand in the US and Canada, as well as foreign exchange of approximately $1 million.
26
Operating income increased $13.3by $33.7 million, or 15.8%50.1%, due to higher net sales and productivity improvements partiallyimprovements. These benefits were partly offset by commodity cost inflation, higher employee-relatedheadcount-related, freight and restructuring costs sales rebates and raw material costs.costs related to the planned Spin-Off .
DoorsCorporate
Net salesCorporate expenses increased $9.3by $15.5 million, or 7.2%56.4%, due to favorable mix,costs related to the planned Spin-Off and 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.our digital transformation initiatives.
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 quarter and higher defined benefit plan income during 2017 in comparison to prior quarter.
(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 | ) |
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” and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022. 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 or pay dividends, or makewhat impact any such transactions could have on our results of operations, cash flows or financial condition, whether as a result of the issuance of debt or equity securities, or otherwise.
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 September 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 September 30, 2022 and December 31, 2021:
|
|
|
|
|
|
|
| Net Carrying Value |
| ||||||
(in millions) | Principal Amount |
|
| Issuance Date |
| Maturity Date |
| September 30, 2022 |
|
| December 31, 2021 |
| |||
4.000% Senior Notes | $ | 500.0 |
|
| June 2015 |
| June 2025 |
| $ | 497.9 |
|
| $ | 497.4 |
|
4.000% Senior Notes |
| 600.0 |
|
| September 2018 |
| September 2023 |
|
| 599.0 |
|
|
| 598.2 |
|
3.250% Senior Notes |
| 700.0 |
|
| September 2019 |
| September 2029 |
|
| 694.8 |
|
|
| 694.2 |
|
4.000% Senior Notes |
| 450.0 |
|
| March 2022 |
| March 2032 |
|
| 445.6 |
|
|
| - |
|
4.500% Senior Notes |
| 450.0 |
|
| March 2022 |
| March 2052 |
|
| 435.3 |
|
|
| - |
|
Total Senior Notes | $ | 2,700.0 |
|
|
|
|
|
| $ | 2,672.6 |
|
| $ | 1,789.8 |
|
Credit Facilities
In August 2022, the Company entered into a third amended and restated $1.25 billion revolving credit facility (the “2022 Revolving Credit Agreement”), and borrowings thereunder will be used for general corporate purposes. The maturity date of the facility is August 2027. Interest rates under the 2022 Revolving Credit Agreement are variable based on SOFR at the time of the borrowing and the Company’s long-term credit rating and can range from SOFR + 1.02% to SOFR + 1.525%. Under the 2022 Revolving Credit Agreement, the Company is required to maintain a minimum ratio of consolidated EBITDA to consolidated interest expense of 3.0 to 1.0. Consolidated EBITDA is defined as consolidated net income before interest expense, income taxes, depreciation, amortization of intangible assets, losses from asset impairments, and certain other distributionsone-time adjustments. In addition, the Company's ratio of consolidated debt minus certain cash and cash equivalents to Fortune Brands. consolidated EBITDA generally may not exceed 3.5 to 1.0. On September 30, 2022 and December 31, 2021, our outstanding borrowings under this facility and our previous revolving credit facility were $100.0 million and $520.0 million, respectively. This facility is included in Long-term debt in the condensed consolidated balance sheets. As of September 30, 2022 we were in compliance with all covenants under this facility.
27
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 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 our previous revolving credit facility. The outstanding $1.1 billion under the 2021 Term Loan was repaid on March 25, 2022 with proceeds from the 2022 Notes and other existing sources of liquidity.
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 2022 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 2022 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 September 30, 2022 and December 2016,31, 2021 our Boardoutstanding borrowings under the Commercial Paper Program were $613.3 million and zero, respectively.
Cash and Seasonality
On September 30, 2022, we had cash and cash equivalents of Directors increased$345.3 million, of which$298.9 million was held at non-U.S. subsidiaries. We manage our global cash requirements considering (i) available funds among the quarterlysubsidiaries 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, share repurchases, dividend by 13%payments, and any required long-term debt payments. The Company intends to $0.18 per sharerepay or refinance the $600 million outstanding principal amount of 4.00% Senior Notes due September 2023 on or before the maturity date. In addition, we believe that we have the ability to obtain alternative sources of financing if required.
Share Repurchases and Dividends
In the first nine months of 2022, we repurchased 6.9 million shares of our outstanding common stock.stock under the Company’s share repurchase program for $541.1 million. As of September 30, 2022, the Company’s total remaining share repurchase authorization under its share repurchase program was approximately $624 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 nine months of 2022, we paid dividends in the amount of $109.8 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.
28
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 nine months ended September 30, 20172022 and 2016.2021.
(In millions) | Nine Months Ended September 30, |
| Nine Months Ended |
| ||||||||||||
2017 | 2016 |
| 2022 |
|
| 2021 |
| |||||||||
Net cash provided by operating activities | $ | 352.6 | $ | 380.6 |
| $ | 288.8 |
|
| $ | 430.8 |
| ||||
Net cash used in investing activities | (113.2 | ) | (334.3 | ) |
|
| (381.0 | ) |
|
| (106.1 | ) | ||||
Net cash used in financing activities | (223.5 | ) | (9.5 | ) |
|
| (8.9 | ) |
|
| (285.1 | ) | ||||
Effect of foreign exchange rate changes on cash | 9.7 | 3.3 |
|
| (26.0 | ) |
|
| 1.0 |
| ||||||
|
| |||||||||||||||
Net increase in cash and cash equivalents | $ | 25.6 | $ | 40.1 | ||||||||||||
Net (decrease) increase in cash and cash equivalents |
| $ | (127.1 | ) |
| $ | 40.6 |
|
Net cash provided by operating activities was $352.6$288.8 million in the nine months ended September 30, 20172022, compared to $380.6net cash provided by operating activities of $430.8 million in the nine months ended September 30, 2016.2021. The decrease in cash provided of $28.0 million$142 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 relocationsan increase in our Plumbinginventory investments to mitigate the impact of an uncertain and Security businesses, partlyvolatile global supply chain environment, a decrease in accounts payable driven by reduced net sales growth in the third quarter of 2022, a decrease in accrued taxes, partially offset by higher net income.lower increases in accounts receivable in the third quarter of 2022.
Net cash used in investing activities was $113.2$381.0 million in the nine months ended September 30, 20172022, compared to $334.3net cash used in investing activities of $106.1 million in the nine months ended September 30, 2016.2021. The decreaseincrease in cash used of $221.1$274.9 million was primarily due toreflects our acquisitions ($214.0 million), and a planned increase in capital expenditures, partly offset by proceeds from the decrease in costsale of acquisitions of $211.1 million.previously closed manufacturing facilities.
Net cash used byin financing activities was $223.5$8.9 million in the nine months ended September 30, 20172022, compared to net cash used in financing activities of $9.5$285.1 million in the nine months ended September 30, 2016.2021. The increasedecrease in cash used of $214$276.2 million during 2017 was primarily due to lowerhigher net borrowings of $384in 2022 compared to 2021 ($624.4 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,During the nine months ended September 30, 2022, we expect to make totalmade pension contributions of approximately $25 million of which $22 million has been paid as of September 30, 2017.$10.0 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.
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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.
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.29
Improvements to Accounting for Hedging ActivitiesItem 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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.
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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.
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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 September 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 structurestructures of acquired businessesAqualisa and Solar 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 nine and three months ended September 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” and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022.
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 September 30, 2017:2022:
Issuer Purchases of Equity Securities
Three Months Ended September 30, 2022 |
| Total |
|
| Average |
|
| Total number of |
|
| Maximum dollar |
| ||||
July 1 – July 31 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 659,669,166 |
|
August 1 – August 31 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 659,669,166 |
|
September 1 – September 30 |
|
| 647,720 |
|
|
| 55.7 |
|
|
| 647,720 |
|
|
| 623,568,876 |
|
Total |
|
| 647,720 |
|
| $ | 55.7 |
|
|
| 647,720 |
|
|
|
|
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 |
Authorization date | Announcement date | Authorization amount of shares | Expiration date | |||
March 2, 2022 | March 2, 2022 | $750,000,000 | March 2, 2024 |
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Item 6.EXHIBITS
| ||||||||||||
| ||||||||||||
|
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Restated Certificate of Incorporation of Fortune Brands Home & Security, Inc. | ||
3(ii) | ||
10.1 | ||
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 September 30, | |
104.* | Cover Page Interactive Data File (embedded within the iXBRL document). |
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32
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: October | /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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