UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2021
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, Illinois 60015-5611
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:(847)484-4400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | 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, 2017April 16, 2021 was 151,800,773.138,598,332.
PART I. FINANCIAL INFORMATION
Item | FINANCIAL STATEMENTS. |
FORTUNE BRANDS HOME & SECURITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Nine and Three Months Ended September 30, 2017March 31, 2021 and 20162020
(In millions, except per share amounts)
(Unaudited)
| Three Months Ended |
| ||||||||||||||||||||||
Nine Months Ended September 30, | Three Months Ended September 30, |
| March 31, |
| ||||||||||||||||||||
2017 | 2016 | 2017 | 2016 |
| 2021 |
|
| 2020 |
| |||||||||||||||
Net sales | $ | 3,900.8 | $ | 3,683.3 | $ | 1,348.6 | $ | 1,279.0 |
| $ | 1,771.0 |
|
| $ | 1,402.7 |
| ||||||||
Cost of products sold | 2,461.3 | 2,352.8 | 841.6 | 801.0 |
|
| 1,126.9 |
|
|
| 909.5 |
| ||||||||||||
Selling, general and administrative expenses | 877.7 | 831.4 | 297.3 | 284.5 |
|
| 371.5 |
|
|
| 313.9 |
| ||||||||||||
Amortization of intangible assets | 23.6 | 20.4 | 7.5 | 7.3 |
|
| 16.6 |
|
|
| 10.3 |
| ||||||||||||
Loss on sale of product line (see Note 4) | 2.4 | — | — | — | ||||||||||||||||||||
Asset impairment charges | 3.2 | — | — | — |
|
| — |
|
|
| 9.5 |
| ||||||||||||
Restructuring charges | 3.5 | 12.4 | 0.4 | 3.1 |
|
| 7.6 |
|
|
| 4.5 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||
Operating income | 529.1 | 466.3 | 201.8 | 183.1 |
|
| 248.4 |
|
|
| 155.0 |
| ||||||||||||
Interest expense | 36.5 | 37.5 | 12.3 | 11.8 |
|
| 21.4 |
|
|
| 22.1 |
| ||||||||||||
Other expense (income), net | 0.2 | (0.1 | ) | 0.1 | 0.6 |
|
| 3.3 |
|
|
| (6.1 | ) | |||||||||||
|
|
|
| |||||||||||||||||||||
Income before income taxes | 492.4 | 428.9 | 189.4 | 170.7 | ||||||||||||||||||||
Income taxes | 145.1 | 120.9 | 59.8 | 48.8 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Income from continuing operations, net of tax | 347.3 | 308.0 | 129.6 | 121.9 | ||||||||||||||||||||
(Loss) income from discontinued operations , net of tax | (2.6 | ) | 1.5 | — | 1.5 | |||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Income before taxes |
|
| 223.7 |
|
|
| 139.0 |
| ||||||||||||||||
Income tax |
|
| 45.9 |
|
|
| 29.9 |
| ||||||||||||||||
Income after tax |
|
| 177.8 |
|
|
| 109.1 |
| ||||||||||||||||
Equity in losses of affiliate |
|
| — |
|
|
| 0.3 |
| ||||||||||||||||
Net income | 344.7 | 309.5 | 129.6 | 123.4 |
|
| 177.8 |
|
|
| 108.8 |
| ||||||||||||
Less: Noncontrolling interests | 0.1 | (0.1 | ) | 0.1 | — |
|
| — |
|
|
| (0.3 | ) | |||||||||||
|
|
|
| |||||||||||||||||||||
Net income attributable to Fortune Brands | $ | 344.6 | $ | 309.6 | $ | 129.5 | $ | 123.4 |
| $ | 177.8 |
|
| $ | 109.1 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Basic earnings per common share |
| $ | 1.28 |
|
| $ | 0.78 |
| ||||||||||||||||
Diluted earnings per common share |
| $ | 1.26 |
|
| $ | 0.77 |
| ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Basic earnings per common share | ||||||||||||||||||||||||
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 shareholders | $ | 2.24 | $ | 2.01 | $ | 0.84 | $ | 0.80 | ||||||||||||||||
Diluted earnings per common share | ||||||||||||||||||||||||
Continuing operations | $ | 2.22 | $ | 1.95 | $ | 0.83 | $ | 0.77 | ||||||||||||||||
Discontinued operations | (0.02 | ) | 0.01 | — | 0.01 | |||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net income attributable to Fortune Brands common shareholders | $ | 2.20 | $ | 1.96 | $ | 0.83 | $ | 0.78 | ||||||||||||||||
Comprehensive income | $ | 391.1 | $ | 309.8 | $ | 158.7 | $ | 110.5 |
| $ | 181.9 |
|
| $ | 58.2 |
|
See notes to condensed consolidated financial statements.
2
FORTUNE BRANDS HOME & SECURITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
September 30, 2017 | December 31, 2016 |
| March 31, 2021 |
|
| December 31, 2020 |
| |||||||||
Assets |
|
|
|
|
|
|
|
| ||||||||
Current assets |
|
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents | $ | 277.1 | $ | 251.5 |
| $ | 356.1 |
|
| $ | 419.1 |
| ||||
Accounts receivable, net | 594.7 | 550.7 | ||||||||||||||
Accounts receivable less allowances for discounts and credit losses |
|
| 828.5 |
|
|
| 734.9 |
| ||||||||
Inventories | 600.1 | 531.1 |
|
| 958.4 |
|
|
| 867.2 |
| ||||||
Other current assets | 126.4 | 111.9 |
|
| 202.9 |
|
|
| 187.3 |
| ||||||
|
| |||||||||||||||
Total current assets | 1,598.3 | 1,445.2 |
|
| 2,345.9 |
|
|
| 2,208.5 |
| ||||||
Property, plant and equipment, net of accumulated depreciation | 690.6 | 662.5 |
|
| 905.1 |
|
|
| 917.4 |
| ||||||
Operating lease assets |
|
| 179.2 |
|
|
| 170.2 |
| ||||||||
Goodwill | 1,852.8 | 1,833.8 |
|
| 2,466.2 |
|
|
| 2,394.8 |
| ||||||
Other intangible assets, net of accumulated amortization | 1,105.4 | 1,107.0 |
|
| 1,434.3 |
|
|
| 1,420.3 |
| ||||||
Other assets | 102.2 | 80.0 |
|
| 151.4 |
|
|
| 247.5 |
| ||||||
|
| |||||||||||||||
Total assets | $ | 5,349.3 | $ | 5,128.5 |
| $ | 7,482.1 |
|
| $ | 7,358.7 |
| ||||
|
| |||||||||||||||
Liabilities and equity |
|
|
|
|
|
|
|
| ||||||||
Current liabilities |
|
|
|
|
|
|
|
| ||||||||
Accounts payable | $ | 392.5 | $ | 393.8 |
|
| 599.2 |
|
|
| 620.5 |
| ||||
Other current liabilities | 460.0 | 449.0 |
|
| 597.8 |
|
|
| 724.6 |
| ||||||
|
| |||||||||||||||
Total current liabilities | 852.5 | 842.8 |
|
| 1,197.0 |
|
|
| 1,345.1 |
| ||||||
Long-term debt | 1,462.2 | 1,431.1 |
|
| 2,682.8 |
|
|
| 2,572.2 |
| ||||||
Deferred income taxes | 176.2 | 163.5 |
|
| 167.1 |
|
|
| 160.5 |
| ||||||
Accrued defined benefit plans | 185.1 | 216.2 |
|
| 156.8 |
|
|
| 159.5 |
| ||||||
Operating lease liabilities |
|
| 149.1 |
|
|
| 140.5 |
| ||||||||
Othernon-current liabilities | 127.4 | 111.9 |
|
| 204.9 |
|
|
| 205.4 |
| ||||||
|
| |||||||||||||||
Total liabilities | 2,803.4 | 2,765.5 |
|
| 4,557.7 |
|
|
| 4,583.2 |
| ||||||
Commitments and contingencies (see Note 17) |
|
|
|
|
|
|
|
| ||||||||
Equity | ||||||||||||||||
Fortune Brands stockholders’ equity | ||||||||||||||||
Stockholders' equity |
|
|
|
|
|
|
|
| ||||||||
Common stock(a) | 1.7 | 1.7 |
|
| 1.9 |
|
|
| 1.8 |
| ||||||
Paid-in capital | 2,712.2 | 2,653.8 |
|
| 2,955.1 |
|
|
| 2,926.3 |
| ||||||
Accumulated other comprehensive loss | (25.5 | ) | (71.9 | ) |
|
| (51.0 | ) |
|
| (55.1 | ) | ||||
Retained earnings | 1,076.5 | 814.6 |
|
| 2,358.0 |
|
|
| 2,180.2 |
| ||||||
Treasury stock | (1,220.6 | ) | (1,036.7 | ) |
|
| (2,339.6 | ) |
|
| (2,277.7 | ) | ||||
|
| |||||||||||||||
Total Fortune Brands stockholders’ equity | 2,544.3 | 2,361.5 | ||||||||||||||
Noncontrolling interests | 1.6 | 1.5 | ||||||||||||||
|
| |||||||||||||||
Total equity | 2,545.9 | 2,363.0 | ||||||||||||||
|
| |||||||||||||||
Total stockholders' equity |
|
| 2,924.4 |
|
|
| 2,775.5 |
| ||||||||
Total liabilities and equity | $ | 5,349.3 | $ | 5,128.5 |
| $ | 7,482.1 |
|
| $ | 7,358.7 |
| ||||
|
|
(a) | Common stock, par value $0.01 per |
See notes to condensed consolidated financial statements.
3
FORTUNE BRANDS HOME & SECURITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the NineThree Months Ended September 30, 2017March 31, 2021 and 20162020
(In millions)
(Unaudited)
2017 | 2016 | |||||||
Operating activities | ||||||||
Net income | $ | 344.7 | $ | 309.5 | ||||
Non-cashpre-tax expense (income): | ||||||||
Depreciation | 72.7 | 69.3 | ||||||
Amortization | 23.6 | 20.4 | ||||||
Stock-based compensation | 32.7 | 24.3 | ||||||
Recognition of actuarial (gains) losses | (1.3 | ) | 1.9 | |||||
Deferred income taxes | 8.2 | (23.0 | ) | |||||
Loss on sale of product line | 2.4 | — | ||||||
Asset impairment charges | 3.2 | — | ||||||
Amortization of deferred financing costs | 1.5 | 3.0 | ||||||
Loss on sale of property, plant and equipment | 0.3 | 1.2 | ||||||
Changes in assets and liabilities: | ||||||||
Increase in accounts receivable | (34.5 | ) | (53.1 | ) | ||||
(Increase) decrease in inventories | (60.7 | ) | 22.6 | |||||
(Decrease) increase in accounts payable | (3.5 | ) | 28.7 | |||||
Increase in other assets | (28.0 | ) | (11.6 | ) | ||||
Decrease in accrued expenses and other liabilities | (23.9 | ) | (12.0 | ) | ||||
Increase (decrease) in accrued taxes | 15.2 | (0.6 | ) | |||||
|
|
|
| |||||
Net cash provided by operating activities | 352.6 | 380.6 | ||||||
|
|
|
| |||||
Investing activities | ||||||||
Capital expenditures(a) | (95.5 | ) | (106.1 | ) | ||||
Proceeds from the sale of assets | 0.2 | 2.3 | ||||||
Proceeds from sale of product line | 1.5 | — | ||||||
Cost of acquisitions, net of cash acquired | (19.4 | ) | (230.5 | ) | ||||
|
|
|
| |||||
Net cash used in investing activities | (113.2) | (334.3) | ||||||
Financing activities | ||||||||
Decrease in short-term debt, net | — | (1.0 | ) | |||||
Issuance of long-term debt | 375.0 | 880.0 | ||||||
Repayment of long-term debt | (345.0 | ) | (465.0 | ) | ||||
Proceeds from the exercise of stock options | 25.8 | 24.8 | ||||||
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 | ) | — | |||||
Dividends to stockholders | (82.7 | ) | (73.7 | ) | ||||
Other financing, net | (0.3 | ) | (2.1 | ) | ||||
|
|
|
| |||||
Net cash used in financing activities | (223.5 | ) | (9.5 | ) | ||||
|
|
|
| |||||
Effect of foreign exchange rate changes on cash | 9.7 | 3.3 | ||||||
|
|
|
| |||||
Net increase in cash and cash equivalents | $ | 25.6 | $ | 40.1 | ||||
|
|
|
| |||||
Cash and cash equivalents at beginning of period | $ | 251.5 | $ | 238.5 | ||||
Cash and cash equivalents at end of period | $ | 277.1 | $ | 278.6 |
|
| 2021 |
|
| 2020 |
| ||
Operating activities |
|
|
|
|
|
|
|
|
Net income |
| $ | 177.8 |
|
| $ | 108.8 |
|
Non-cash adjustments: |
|
|
|
|
|
|
|
|
Depreciation |
|
| 31.1 |
|
|
| 27.2 |
|
Amortization of intangibles |
|
| 16.6 |
|
|
| 10.3 |
|
Non-cash lease expense |
|
| 10.7 |
|
|
| 7.4 |
|
Stock-based compensation |
|
| 11.6 |
|
|
| 11.1 |
|
Deferred taxes |
|
| (0.1 | ) |
|
| 0.5 |
|
Asset impairment charges |
|
| — |
|
|
| 9.5 |
|
Amortization of deferred financing fees |
|
| 1.2 |
|
|
| 0.9 |
|
Equity in losses of affiliate |
|
| — |
|
|
| 0.3 |
|
Loss (gain) on equity investments |
|
| 2.9 |
|
|
| (6.6 | ) |
Loss (gain) on sale of property, plant and equipment |
|
| 0.2 |
|
|
| (0.1 | ) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Increase in accounts receivable |
|
| (91.6 | ) |
|
| (81.3 | ) |
(Increase) decrease in inventories |
|
| (86.4 | ) |
|
| 9.6 |
|
Decrease in accounts payable |
|
| (15.9 | ) |
|
| (25.6 | ) |
Increase in other assets |
|
| (10.9 | ) |
|
| (7.4 | ) |
Decrease in accrued expenses and other liabilities |
|
| (150.7 | ) |
|
| (92.9 | ) |
Increase in accrued taxes |
|
| 34.3 |
|
|
| 14.5 |
|
Net cash used in operating activities |
|
| (69.2 | ) |
|
| (13.8 | ) |
Investing activities |
|
|
|
|
|
|
|
|
Capital expenditures (a) |
|
| (25.4 | ) |
|
| (26.9 | ) |
Proceeds from the disposition of assets |
|
| 1.7 |
|
|
| 1.5 |
|
Cost of acquisitions, net of cash acquired |
|
| 5.2 |
|
|
| — |
|
Cost of investments in equity securities |
|
| — |
|
|
| (51.6 | ) |
Net cash used in investing activities |
|
| (18.5 | ) |
|
| (77.0 | ) |
Financing activities |
|
|
|
|
|
|
|
|
Issuance of long-term debt |
|
| 370.0 |
|
|
| 380.0 |
|
Repayment of long-term debt |
|
| (260.0 | ) |
|
| (130.0 | ) |
Proceeds from the exercise of stock options (b) |
|
| 10.6 |
|
|
| 18.4 |
|
Treasury stock purchases |
|
| (54.1 | ) |
|
| (150.0 | ) |
Employee withholding taxes related to stock-based compensation |
|
| (7.8 | ) |
|
| (7.6 | ) |
Dividends to stockholders |
|
| (36.0 | ) |
|
| (33.5 | ) |
Other financing, net |
|
| 0.1 |
|
|
| — |
|
Net cash provided by financing activities |
|
| 22.8 |
|
|
| 77.3 |
|
Effect of foreign exchange rate changes on cash |
|
| 1.7 |
|
|
| (15.0 | ) |
Net decrease in cash and cash equivalents |
| $ | (63.2 | ) |
| $ | (28.5 | ) |
Cash, cash equivalents and restricted cash(c) at beginning of period |
| $ | 425.0 |
|
| $ | 394.9 |
|
Cash, cash equivalents and restricted cash(c) at end of period |
| $ | 361.8 |
|
| $ | 366.4 |
|
(a) | Capital expenditures of |
(b) | Proceeds from the exercise of stock options for the three months ended March 31, 2021 excludes $6.6 million related to options that were not settled until April 1, 2021. |
(c) | Restricted cash of $1.1 million and $4.7 million is included in Other current assets and Other assets, respectively, as of March 31, 2021 and restricted cash of $0.8 million and $5.9 million is included in Other current assets and Other assets, respectively, as of March 31, 2020. Restricted cash of $1.0 million and $4.9 million is included in Other current assets and Other assets, respectively, as of December 31, 2020. |
See notes to condensed consolidated financial statements.
4
FORTUNE BRANDS HOME & SECURITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the NineThree Months Ended September 30, 2017March 31, 2021 and 20162020
(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 | ||||||||||||
|
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| |||||||||||||||
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 Stock |
|
| Paid-In Capital |
|
| Accumulated Other Comprehensive (Loss) Income |
|
| Retained Earnings |
|
| Treasury Stock |
|
| Non- controlling Interests |
|
| Total Equity |
| |||||||
Balance at December 31, 2019 |
| $ | 1.8 |
|
| $ | 2,813.8 |
|
| $ | (72.6 | ) |
| $ | 1,763.0 |
|
| $ | (2,079.4 | ) |
| $ | 1.2 |
|
| $ | 2,427.8 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 109.1 |
|
|
| — |
|
|
| (0.3 | ) |
|
| 108.8 |
|
Other comprehensive income (loss) |
|
| — |
|
|
| — |
|
|
| (50.6 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (50.6 | ) |
Stock options exercised |
|
| — |
|
|
| 18.4 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18.4 |
|
Stock-based compensation |
|
| — |
|
|
| 11.1 |
|
|
| — |
|
|
| — |
|
|
| (7.6 | ) |
|
| — |
|
|
| 3.5 |
|
Treasury stock purchases |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (150.0 | ) |
|
| — |
|
|
| (150.0 | ) |
Balance at March 31, 2020 |
| $ | 1.8 |
|
| $ | 2,843.3 |
|
| $ | (123.2 | ) |
| $ | 1,872.1 |
|
| $ | (2,237.0 | ) |
| $ | 0.9 |
|
| $ | 2,357.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020 |
| $ | 1.8 |
|
| $ | 2,926.3 |
|
| $ | (55.1 | ) |
| $ | 2,180.2 |
|
| $ | (2,277.7 | ) |
| $ | — |
|
| $ | 2,775.5 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 177.8 |
|
|
| — |
|
|
| — |
|
|
| 177.8 |
|
Other comprehensive income (loss) |
|
| — |
|
|
| — |
|
|
| 4.1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4.1 |
|
Stock options exercised |
|
| 0.1 |
|
|
| 17.2 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 17.3 |
|
Stock-based compensation |
|
| — |
|
|
| 11.6 |
|
|
| — |
|
|
| — |
|
|
| (7.8 | ) |
|
| — |
|
|
| 3.8 |
|
Treasury stock purchases |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (54.1 | ) |
|
| — |
|
|
| (54.1 | ) |
Balance at March 31, 2021 |
| $ | 1.9 |
|
| $ | 2,955.1 |
|
| $ | (51.0 | ) |
| $ | 2,358.0 |
|
| $ | (2,339.6 | ) |
| $ | — |
|
| $ | 2,924.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
5
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. | Basis of Presentation and Principles of Consolidation |
References to “Fortune Brands,” “the Company,” “we,” “our” and “us” refer to Fortune Brands Home & Security, Inc. and its consolidated subsidiaries as a whole, unless the context otherwise requires.
The Company is a leading home and security products company with a portfolio of leading branded products used for residential home repair, remodeling, new construction and security applications.
The condensed consolidated balance sheet as of September 30, 2017,March 31, 2021, the related condensed consolidated statements of comprehensive income and equity for the ninethree months ended March 31, 2021 and three-month periods ended September 30, 2017 and 20162020, and the related condensed consolidated statements of cash flows and equity for the nine-month periodsthree months ended September 30, 2017March 31, 2021 and 20162020 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 2018 our Plumbing segment entered into a strategic partnership with, and acquired non-controlling equity interests in, Flo Technologies, Inc. (“Flo”), a U.S. manufacturer of comprehensive water monitoring and shut-off systems with leak detection technologies. In January 2020, we entered into an agreement to acquire the remaining outstanding shares of Flo in a multi-phase transaction.In January 2021, upon the expiration of the minority shareholders’ substantive participating rights, we began to consolidate the financial results of Flo into the Company’s financial results. The financial results of Flo are included in the Company’s condensed consolidated statement of comprehensive income and statement of cash flow for the three months ended March 31, 2021 and the condensed consolidated balance sheet as of March 31, 2021. The results of operations are included in the Plumbing segment.
Our Doors & Security segment was renamed “Outdoors & Security” to better align with the segment’s strategic focus on the outdoor living space and to better represent the brands within the segment, including the newly acquired Larson Manufacturing (“Larson”). The Outdoors & Security segment name change had no impact on the Company’s previously reported historical financial position, results of operations, cash flow or segment level results.
In December 2020, we acquired 100% of the outstanding equity interests of Larson, the North American market leading brand of storm, screen and security doors. Larson also sells related outdoor living products including retractable screens and porch windows. The Company completed the acquisition for a total purchase price, excluding expected tax benefits, of approximately $717.5 million, net of cash acquired and final working capital adjustments of $2.3 million paid during the three months ended March 31, 2021. We financed the transaction with borrowings under our existing credit facilities. The financial results of Larson were included in the Company’s condensed consolidated statement of comprehensive income and statement of cash flow for the three months ended March 31, 2021 and the condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020. The results of operations are included in the Outdoors & Security segment.
The condensed consolidated financial statements and notes are presented pursuant to the rules and regulations of the Securities and Exchange Commission and do not contain certain information included in our annual audited consolidated financial statements and notes. The December 31, 20162020 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, 2016.2020.
2. | Recently Issued Accounting Standards |
Simplifying the Accounting for Income Taxes
In July 2017, we acquired Shaws Since1897 LimitedDecember 2019, the Financial Accounting Standards Board (“Shaws”FASB”), aUK-based luxury plumbing products company that specializes issued Accounting Standards Update (“ASU”) 2019-12, which is intended to simplify accounting for income taxes and improve consistency in manufacturingapplication. ASU 2019-12 amends certain elements of income tax accounting, including but not limited to intraperiod tax allocations, step-ups in tax basis of goodwill, and selling fireclay sinks and selling brassware and accessoriescalculating taxes on year-to-date losses 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.interim periods. The financial results of Shaws were included inguidance is effective for the Company’s consolidated balance sheets asfiscal year beginning January 1, 2021. The adoption of September 30, 2017, the Company’s consolidated statementsthis guidance did not have a material effect on our financial statements.
Effects 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.Reference Rate Reform
In September 2016, we acquired ROHL LLC (“ROHL”)March 2020, the FASB issued ASU 2020-04, which provides relief from accounting analysis 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 inimpacts that may otherwise be required for modifications to agreements necessitated by reference rate reform. It also provides optional expedients to enable 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, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2014-09, which clarifies thecontinuance of hedge accounting for revenue arising from contracts with customers and specifies the disclosures that an entity should include in its financial statements. The standardwhere certain hedging relationships are impacted by reference rate reform. This optional guidance is effective for annual reporting periods beginning afterimmediately, and available to be used through 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 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 to 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.31, 2022. We are assessing the impact that reference rate reform and the related adoption of this standard willguidance may have on our financial statements.
Improvements to Accounting for Hedging Activities
3. | Balance Sheet Information |
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 haveSupplemental information on our financial statements.balance sheets is as follows:
(In millions) |
| March 31, 2021 |
|
| December 31, 2020 |
| ||
Inventories: |
|
|
|
|
|
|
|
|
Raw materials and supplies |
| $ | 354.2 |
|
| $ | 346.6 |
|
Work in process |
|
| 80.9 |
|
|
| 76.7 |
|
Finished products |
|
| 523.3 |
|
|
| 443.9 |
|
Total inventories |
| $ | 958.4 |
|
| $ | 867.2 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, gross |
| $ | 2,159.2 |
|
| $ | 2,150.1 |
|
Less: accumulated depreciation |
|
| 1,254.1 |
|
|
| 1,232.7 |
|
Property, plant and equipment, net |
| $ | 905.1 |
|
| $ | 917.4 |
|
7
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. | Acquisitions and Dispositions |
Clarifying Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial AssetsFlo Technologies
In May 2017,2018 our Plumbing segment entered into a strategic partnership with, and acquired non-controlling equity interests in, 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 FASB issued ASC610-20 that clarifiesremaining outstanding shares of Flo in a multi-phase transaction. As part of this agreement, we acquired a majority of Flo’s outstanding shares during 2020 and entered into a forward contract to purchase all remaining shares of Flo during the scopefirst quarter of 2022 for a price based on a multiple of Flo’s 2021 sales and applicationadjusted earnings before interest and taxes.
During 2020, we applied the equity method of various standards foraccounting to our investment in Flo as the saleminority shareholders had substantive participating rights which precluded consolidation in our results of nonfinancialoperations and statements of financial position and cash flows. Immediately prior to applying the equity method of accounting, we recognized a non-cash gain of $6.6 million within other income during the three months ended March 31, 2020 related to the remeasurement of our previously existing investment in Flo.
The minority shareholders’ substantive participating rights expired on January 1, 2021, at which time we obtained control of, and began consolidating, Flo in our results of operations and statements of financial positions and cash flows. Immediately prior to consolidating Flo, we recognized a non-cash loss of $4.5 million within other expense during the three months ended March 31, 2021 related to the remeasurement of our previously existing investment in Flo. The fair value allocated to assets (e.g. PP&E including real estate, intangible assets, materialsacquired 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 effectiveliabilities assumed as of January 1, 2018 consistent with the effective date2021 was $87.8 million,net of cash acquired of $9.7 million. Flo’s net sales and operating income for the new revenue recognition standard. We are assessingthree months ended March 31, 2021 were not material to the impact the adoption of this standard will have on our financial statements andCompany.
Larson Manufacturing
In December 2020, we will consider the implicationsacquired 100% of the new standard on case by case basisoutstanding equity of Larson, the North American market leading brand of storm, screen and security doors. Larson also sells related outdoor living products including retractable screens and porch windows. The Company completed the acquisition for allnon-recurring transactions where we sell or transfer nonfinancial assets.
Stock Compensation Scopea total purchase price, excluding expected tax benefits, of Modification Accounting
In May 2017,approximately $717.5 million, net of cash acquired and final working capital adjustments of $2.3 million paid during the FASB issued ASU2017-09, which clarifies when changesthree months ended March 31, 2021. We financed the transaction with borrowings under our existing credit facilities. The financial results of Larson were included in the Company’s consolidated balance sheet as of December 31, 2020. The results of operations are included in the Outdoors & Security segment. We incurred $4.5 million of Larson acquisition-related transaction costs in the year ended December 31, 2020. The goodwill expected to be deductible for income tax purposes is approximately $290 million, subject 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 componentfinalization of the net periodic benefit cost inpurchase price allocation.
The following table summarizes the same income statement line item(s) as other employee compensation costs arising from services rendered duringpreliminary allocation of the period. In addition, onlypurchase price to 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., hypotheticalassets acquired and liabilities assumed as of the date of the acquisition.
(In millions) |
| |||
Accounts receivable |
| $ | 42.3 |
|
Inventories |
|
| 51.8 |
|
Property, plant and equipment |
|
| 66.1 |
|
Goodwill |
|
| 304.1 |
|
Identifiable intangible assets |
|
| 313.0 |
|
Operating lease assets |
|
| 6.2 |
|
Other assets |
|
| 4.5 |
|
Total assets |
|
| 788.0 |
|
Accounts payable |
|
| 6.5 |
|
Other current liabilities and accruals |
|
| 31.1 |
|
Other non-current liabilities |
|
| 32.9 |
|
Net assets acquired(a) |
| $ | 717.5 |
|
(a) Net assets exclude $0.4 million of cash transferred to the Company as the result of the Larson acquisition.
The preceding purchase price allocation).allocation has been determined provisionally and is subject to revision as additional information about the fair value of individual assets and liabilities becomes available. We apply significant judgement in determining the estimates and assumptions used to determine the fair value of the identifiable intangible assets, including forecasted revenue growth rates, EBITDA margins, percentage of revenue attributable to the tradename, contributory asset charges, customer attrition rate, market-participant discount rates and the assumed royalty rates. The new standardCompany is effective for annual and interim impairment tests performed in the periods beginning after January 1, 2020process of finalizing valuations of certain tangible and early adoption is permitted. We plan to early adopt ASU2017-04 in conjunction with our annual goodwill impairment test during the fourth quarterintangible assets, including property, plant and equipment and identifiable intangible assets. The provisional measurement of 2017.property, plant and
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 transferredequipment, identifiable intangible assets, and activitiesgoodwill is a business and therefore business combination guidance would apply. The new standard requires an entitysubject to evaluate if substantially all ofchange. Any change in the acquisition date fair value of the grossacquired assets acquiredand liabilities will change the amount of the purchase price allocable to goodwill.
Goodwill includes expected sales and cost synergies. The goodwill is concentratedincluded in our Outdoors & Security segment. Larson’s identifiable intangible assets consist of a single identifiablefinite-lived customer relationships asset (i.e.,of $168.0 million, an indefinite-lived tradename of $111.0 million and a business) or a groupfinite-lived proprietary technology asset of similar identifiable assets (i.e., not a business).$34.0 million. The guidance also requires a businessuseful life of the customer relationship intangible asset is estimated to include at least one substantive process and narrows the definition of outputs (e.g., revenues with customers).be 13 years. The standard is effective January 1, 2018 and early adoption is permitted. We do not expect the adoption ofLarson tradename has been assigned an indefinite life as we currently anticipate that 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 oftradename will contribute cash flows which has resulted in diversity into the presentationCompany indefinitely. The useful life of cash flows. The standardthe proprietary technology intangible asset is effective January 1, 2018estimated to be 7 years. Customer and early adoption is permitted; however, we elected not to early adopt. We do not expect the adoption of this standard to havecontractual relationships and proprietary technology are amortized on a material effect on our financial statements.straight-line basis over their useful lives.
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)
5. |
Supplemental information on our balance sheets is as follows:
(In millions) | September 30, 2017 | December 31, 2016 | ||||||
Inventories: | ||||||||
Raw materials and supplies | $ | 211.6 | $ | 207.6 | ||||
Work in process | 61.8 | 55.9 | ||||||
Finished products | 326.7 | 267.6 | ||||||
|
|
|
| |||||
Total inventories | $ | 600.1 | $ | 531.1 | ||||
Property, plant and equipment, gross | $ | 1,715.8 | $ | 1,630.7 | ||||
Less: accumulated depreciation | 1,025.2 | 968.2 | ||||||
|
|
|
| |||||
Property, plant and equipment, net | $ | 690.6 | $ | 662.5 |
In July 2017, we acquired Shaws, a UK-based luxury plumbing products company that specializes in manufacturing and selling fireclay sinks and selling brassware and accessories in partnership with Perrin & Rowe. Net sales and operating income in the three months ended September 30, 2017 were not material to the Company. We financed the transaction using cash on hand and borrowings under our existing credit facilities. The results 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 our Security segment. We recorded apre-tax loss of $2.4 million as 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. Net sales and operating income in the first nine months of 2017 were not material to the Company. The results of operations are included in the Plumbing segment. The goodwill expected to be deductible for income tax purposes is approximately $49 million.
In May 2016, we acquired 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 facilities. Net sales and operating income in the first nine months of 2017 were not material to the Company. The results of operations are included in the Plumbing segment. We do not expect any portion of goodwill to be deductible for income tax purposes.
We recognized a loss on discontinued operations primarily related to the prior sale of the Waterloo tool storage and Simonton window businesses for the nine months ended September 30, 2017.
11
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill and Identifiable Intangible Assets |
We had goodwill of $1,852.8$2,466.2 million and $1,833.8$2,394.8 million as of September 30, 2017March 31, 2021 and December 31, 2016,2020, 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 |
| Plumbing |
|
| Outdoors & Security |
|
| Cabinets |
|
| Total Goodwill |
| |||||||||||||||||||
Goodwill at December 31, 2016(a) | $ | 924.3 | $ | 670.2 | $ | 143.0 | $ | 96.3 | $ | 1,833.8 | ||||||||||||||||||||||||||
Goodwill at December 31, 2020(a) |
| $ | 750.1 |
|
| $ | 718.6 |
|
| $ | 926.1 |
|
| $ | 2,394.8 |
| ||||||||||||||||||||
Year-to-date translation adjustments | 3.3 | 4.6 | — | 1.5 | 9.4 |
|
| 1.8 |
|
|
| 0.3 |
|
|
| 0.7 |
|
|
| 2.8 |
| |||||||||||||||
Acquisition-related adjustments | — | 9.6 | — | — | 9.6 |
|
| 65.4 |
|
|
| 3.2 |
|
|
| — |
|
|
| 68.6 |
| |||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||
Goodwill at September 30, 2017(a) | $ | 927.6 | $ | 684.4 | $ | 143.0 | $ | 97.8 | $ | 1,852.8 | ||||||||||||||||||||||||||
Goodwill at March 31, 2021(a) |
| $ | 817.3 |
|
| $ | 722.1 |
|
| $ | 926.8 |
|
| $ | 2,466.2 |
|
We also had net identifiable intangible assets The gross carrying value and accumulated amortization by class of identifiable intangible assets as of
Amortizable identifiable intangible assets, principally
During the second quarter of 2020, extended closures of luxury plumbing showrooms associated with the impact of the novel coronavirus (“COVID-19”) pandemic led to lower than expected sales related to an indefinite-lived tradename within the Plumbing segment, which combined with the updated financial outlook compared to previous forecasts and the continued uncertainty of the COVID-19 pandemic on the sales and profitability related to the tradename led us to conclude that it was more likely than not that the indefinite-lived tradename was impaired. Therefore, we performed an interim impairment test as of June 30, 2020, and as a result we recognized a pre-tax impairment charge of $13.0 million related to this tradename. We also performed an evaluation of the useful life of this tradename and determined it was no longer indefinite-lived due to changes in long-term management expectations and future operating plans. As a result, the remaining carrying value of this tradename is being amortized over its estimated useful life of 30 years. In the first quarter of 2020, we recognized an impairment charge of $9.5 million related to an indefinite-lived tradename in our Cabinets segment. This charge was primarily the result of lower expected sales of custom cabinetry products related to the impact of COVID-19. As of March 31, 2021, the carrying value of this tradename was $29.1 million. The fair values of these tradenames were measured using the relief-from-royalty approach, which estimates the present value of royalty income that could be hypothetically earned by licensing the tradename to a third party over its remaining useful life. Some of 10 FORTUNE BRANDS HOME & SECURITY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the more significant assumptions inherent in estimating the fair values include forecasted revenue growth rates for the tradename, assumed royalty rate, and a market-participant discount rate that reflects the level of risk associated with the tradenames’ future revenues and profitability. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management plans. These assumptions represent Level 3 inputs of the fair value hierarchy (refer to Note 8). The significant assumptions used to estimate the fair values of the tradenames impaired during the year ended December 31, 2020 were as follows:
As of December 31,
At March 31, 2021, the Company
Credit Facilities In April 2020, the In September 2019, the Company entered into a 11 FORTUNE BRANDS HOME & SECURITY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) credit agreement, except that the maturity date was extended to September
We currently have uncommitted bank lines of credit in China, which provide for unsecured borrowings for working capital of up to
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. Our primary foreign currency hedge contracts pertain to the Canadian dollar, the British pound, the Mexican peso and the Chinese The fair values of derivative instruments on the consolidated balance sheets as of
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
The
13 FORTUNE BRANDS HOME & SECURITY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8.Fair Value Measurements FASB Accounting Standards Codification (“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
The carrying value
The estimated fair value of our Assets and liabilities measured at fair value on a recurring basis as of
14 FORTUNE BRANDS HOME & SECURITY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total accumulated other comprehensive
15 FORTUNE BRANDS HOME & SECURITY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
The components of net periodic benefit
Service cost
The effective income tax rates for the three months ended March 31, 2021 and 2020 were 20.5% and 21.5%, respectively. The effective income tax rate in 2021 was favorably impacted by a benefit related to decreases in uncertain tax positions and a benefit related to share-based compensation. 16 FORTUNE BRANDS HOME & SECURITY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
Net sales and operating income for the
Pre-tax restructuring and other charges for the
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