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 June 30, 20182019
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)
520 Lake Cook Road, Deerfield, Illinois
60015-5611
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 July 20, 2018 19, 2019 was 142,419,669.140,019,208.
PART I. FINANCIAL INFORMATION
Item | FINANCIAL |
FORTUNE BRANDS HOME & SECURITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Six and Three Months Ended June 30, 20182019 and 20172018
(In millions, except per share amounts)
(Unaudited)
| Six Months Ended |
|
| Three Months Ended |
| |||||||||||||||||||||||||||
Six Months Ended June 30, | Three Months Ended June 30, |
| June 30, |
|
| June 30, |
| |||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| |||||||||||||||||
Net sales | $ | 2,683.6 | $ | 2,552.2 | $ | 1,429.0 | $ | 1,365.4 |
| $ | 2,835.1 |
|
| $ | 2,683.6 |
|
| $ | 1,507.2 |
|
| $ | 1,429.0 |
| ||||||||
Cost of products sold | 1,719.9 | 1,624.8 | 904.9 | 852.1 |
|
| 1,838.7 |
|
|
| 1,719.9 |
|
|
| 969.6 |
|
|
| 904.9 |
| ||||||||||||
Selling, general and administrative expenses | 627.7 | 582.4 | 316.5 | 292.8 |
|
| 632.6 |
|
|
| 627.7 |
|
|
| 320.6 |
|
|
| 316.5 |
| ||||||||||||
Amortization of intangible assets | 16.4 | 16.1 | 8.2 | 8.0 |
|
| 20.1 |
|
|
| 16.4 |
|
|
| 10.1 |
|
|
| 8.2 |
| ||||||||||||
Loss on sale of product line (see Note 4) | — | 2.4 | — | 2.4 | ||||||||||||||||||||||||||||
Asset impairment charges | — | 3.2 | — | — | ||||||||||||||||||||||||||||
Restructuring charges | 11.6 | 3.1 | 10.8 | 0.9 |
|
| 5.7 |
|
|
| 11.6 |
|
|
| 4.5 |
|
|
| 10.8 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Operating income | 308.0 | 320.2 | 188.6 | 209.2 |
|
| 338.0 |
|
|
| 308.0 |
|
|
| 202.4 |
|
|
| 188.6 |
| ||||||||||||
Interest expense | 32.1 | 24.2 | 17.4 | 12.3 |
|
| 48.2 |
|
|
| 32.1 |
|
|
| 24.5 |
|
|
| 17.4 |
| ||||||||||||
Other income, net | (6.2 | ) | (7.0 | ) | (3.4 | ) | (2.3 | ) |
|
| (1.9 | ) |
|
| (6.2 | ) |
|
| (0.7 | ) |
|
| (3.4 | ) | ||||||||
|
|
|
| |||||||||||||||||||||||||||||
Income before income taxes | 282.1 | 303.0 | 174.6 | 199.2 | ||||||||||||||||||||||||||||
Income taxes | 77.3 | 85.3 | 44.9 | 58.9 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Income from continuing operations before income taxes |
|
| 291.7 |
|
|
| 282.1 |
|
|
| 178.6 |
|
|
| 174.6 |
| ||||||||||||||||
Income tax |
|
| 70.1 |
|
|
| 77.3 |
|
|
| 41.5 |
|
|
| 44.9 |
| ||||||||||||||||
Income from continuing operations, net of tax | 204.8 | 217.7 | 129.7 | 140.3 |
|
| 221.6 |
|
|
| 204.8 |
|
|
| 137.1 |
|
|
| 129.7 |
| ||||||||||||
Loss from discontinued operations, net of tax | (0.2 | ) | (2.6 | ) | — | (2.6 | ) |
|
| — |
|
|
| (0.2 | ) |
|
| — |
|
|
| - |
| |||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net income | 204.6 | 215.1 | 129.7 | 137.7 |
|
| 221.6 |
|
|
| 204.6 |
|
|
| 137.1 |
|
|
| 129.7 |
| ||||||||||||
Less: Noncontrolling interests | — | — | 0.1 | — |
|
| (0.6 | ) |
|
| — |
|
|
| (0.4 | ) |
|
| 0.1 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net income attributable to Fortune Brands | $ | 204.6 | $ | 215.1 | $ | 129.6 | $ | 137.7 |
| $ | 222.2 |
|
| $ | 204.6 |
|
| $ | 137.5 |
|
| $ | 129.6 |
| ||||||||
|
|
|
| |||||||||||||||||||||||||||||
Basic earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Continuing operations | $ | 1.39 | $ | 1.42 | $ | 0.89 | $ | 0.91 |
| $ | 1.58 |
|
| $ | 1.39 |
|
| $ | 0.98 |
|
| $ | 0.89 |
| ||||||||
Discontinued operations | — | (0.02 | ) | — | (0.02 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net income attributable to Fortune Brands common shareholders | $ | 1.39 | $ | 1.40 | $ | 0.89 | $ | 0.89 |
| $ | 1.58 |
|
| $ | 1.39 |
|
| $ | 0.98 |
|
| $ | 0.89 |
| ||||||||
Diluted earnings per common share |
|
|
|
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|
|
|
|
|
|
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|
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| ||||||||||||||||
Continuing operations | $ | 1.37 | $ | 1.39 | $ | 0.88 | $ | 0.90 |
| $ | 1.57 |
|
| $ | 1.37 |
|
| $ | 0.97 |
|
| $ | 0.88 |
| ||||||||
Discontinued operations | — | (0.02 | ) | — | (0.02 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net income attributable to Fortune Brands common shareholders | $ | 1.37 | $ | 1.37 | $ | 0.88 | $ | 0.88 |
| $ | 1.57 |
|
| $ | 1.37 |
|
| $ | 0.97 |
|
| $ | 0.88 |
| ||||||||
Comprehensive income | $ | 190.6 | $ | 232.4 | $ | 112.4 | $ | 147.8 |
| $ | 233.1 |
|
| $ | 190.6 |
|
| $ | 140.3 |
|
| $ | 112.4 |
|
See notes to condensed consolidated financial statements.
2
FORTUNE BRANDS HOME & SECURITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
June 30, 2018 | December 31, 2017 |
| June 30, 2019 |
|
| December 31, 2018 |
| |||||||||
Assets |
|
|
|
|
|
|
|
| ||||||||
Current assets |
|
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents | $ | 345.5 | $ | 323.0 |
| $ | 276.3 |
|
| $ | 262.9 |
| ||||
Accounts receivable, net | 657.5 | 555.3 | ||||||||||||||
Accounts receivable less allowances for discounts and doubtful accounts |
|
| 706.2 |
|
|
| 571.7 |
| ||||||||
Inventories | 627.0 | 580.8 |
|
| 741.9 |
|
|
| 678.9 |
| ||||||
Other current assets | 175.5 | 142.6 |
|
| 192.5 |
|
|
| 172.6 |
| ||||||
|
| |||||||||||||||
Total current assets | 1,805.5 | 1,601.7 |
|
| 1,916.9 |
|
|
| 1,686.1 |
| ||||||
Property, plant and equipment, net of accumulated depreciation | 737.6 | 740.0 |
|
| 804.9 |
|
|
| 813.4 |
| ||||||
Operating lease assets |
|
| 173.2 |
|
|
| — |
| ||||||||
Goodwill | 1,916.7 | 1,912.0 |
|
| 2,085.7 |
|
|
| 2,080.3 |
| ||||||
Other intangible assets, net of accumulated amortization | 1,139.0 | 1,162.4 |
|
| 1,229.2 |
|
|
| 1,246.8 |
| ||||||
Other assets | 98.3 | 95.3 |
|
| 133.5 |
|
|
| 138.0 |
| ||||||
|
| |||||||||||||||
Total assets | $ | 5,697.1 | $ | 5,511.4 |
| $ | 6,343.4 |
|
| $ | 5,964.6 |
| ||||
|
| |||||||||||||||
Liabilities and equity |
|
|
|
|
|
|
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| ||||||||
Current liabilities |
|
|
|
|
|
|
|
| ||||||||
Short-term debt | $ | 350.0 | $ | — |
| $ | 749.3 |
|
| $ | 525.0 |
| ||||
Accounts payable | 428.7 | 428.8 |
|
| 476.6 |
|
|
| 459.0 |
| ||||||
Other current liabilities | 451.8 | 478.0 |
|
| 469.3 |
|
|
| 508.1 |
| ||||||
|
| |||||||||||||||
Total current liabilities | 1,230.5 | 906.8 |
|
| 1,695.2 |
|
|
| 1,492.1 |
| ||||||
Long-term debt | 1,793.3 | 1,507.6 |
|
| 1,666.0 |
|
|
| 1,809.0 |
| ||||||
Deferred income taxes | 156.2 | 166.8 |
|
| 167.9 |
|
|
| 162.6 |
| ||||||
Accrued defined benefit plans | 170.6 | 175.9 |
|
| 162.1 |
|
|
| 163.3 |
| ||||||
Operating lease liabilities |
|
| 146.3 |
|
|
| — |
| ||||||||
Othernon-current liabilities | 171.8 | 153.2 |
|
| 161.2 |
|
|
| 157.6 |
| ||||||
|
| |||||||||||||||
Total liabilities | 3,522.4 | 2,910.3 |
|
| 3,998.7 |
|
|
| 3,784.6 |
| ||||||
Commitments and contingencies (see Note 18) |
|
|
|
|
|
|
|
| ||||||||
Equity |
|
|
|
|
|
|
|
| ||||||||
Fortune Brands stockholders’ equity | ||||||||||||||||
Fortune Brands equity |
|
|
|
|
|
|
|
| ||||||||
Common stock(a) | 1.8 | 1.7 |
|
| 1.8 |
|
|
| 1.8 |
| ||||||
Paid-in capital | 2,751.5 | 2,724.9 |
|
| 2,786.6 |
|
|
| 2,766.0 |
| ||||||
Accumulated other comprehensive loss | (53.2 | ) | (39.2 | ) |
|
| (64.1 | ) |
|
| (67.0 | ) | ||||
Retained earnings | 1,350.5 | 1,174.2 |
|
| 1,648.1 |
|
|
| 1,448.1 |
| ||||||
Treasury stock | (1,877.5 | ) | (1,262.1 | ) |
|
| (2,028.9 | ) |
|
| (1,970.7 | ) | ||||
|
| |||||||||||||||
Total Fortune Brands stockholders’ equity | 2,173.1 | 2,599.5 | ||||||||||||||
Total Fortune Brands equity |
|
| 2,343.5 |
|
|
| 2,178.2 |
| ||||||||
Noncontrolling interests | 1.6 | 1.6 |
|
| 1.2 |
|
|
| 1.8 |
| ||||||
|
| |||||||||||||||
Total equity | 2,174.7 | 2,601.1 |
|
| 2,344.7 |
|
|
| 2,180.0 |
| ||||||
|
| |||||||||||||||
Total liabilities and equity | $ | 5,697.1 | $ | 5,511.4 |
| $ | 6,343.4 |
|
| $ | 5,964.6 |
| ||||
|
|
(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 Six Months Ended June 30, 20182019 and 20172018
(In millions)
(Unaudited)
2018 | 2017 |
| 2019 |
|
| 2018 |
| |||||||||
Operating activities |
|
|
|
|
|
|
|
| ||||||||
Net income | $ | 204.6 | $ | 215.1 |
| $ | 221.6 |
|
| $ | 204.6 |
| ||||
Non-cash items affecting net income: | ||||||||||||||||
Non-cash pre-tax expense: |
|
|
|
|
|
|
|
| ||||||||
Depreciation | 55.0 | 47.9 |
|
| 56.0 |
|
|
| 55.0 |
| ||||||
Amortization | 16.4 | 16.1 | ||||||||||||||
Amortization of intangibles |
|
| 20.0 |
|
|
| 16.4 |
| ||||||||
Non-cash lease expense |
|
| 17.9 |
|
|
| — |
| ||||||||
Stock-based compensation | 22.9 | 20.9 |
|
| 14.5 |
|
|
| 22.9 |
| ||||||
Deferred income taxes | (9.9 | ) | 5.6 | |||||||||||||
Loss on sale of product line | — | 2.4 | ||||||||||||||
Deferred taxes |
|
| 5.0 |
|
|
| (9.9 | ) | ||||||||
Asset impairment charges | — | 3.2 |
|
| 1.7 |
|
|
| — |
| ||||||
Amortization of deferred financing fees | 1.0 | 1.0 |
|
| 1.5 |
|
|
| 1.0 |
| ||||||
Loss on sale of property, plant and equipment | 1.8 | — | ||||||||||||||
(Gain) loss on sale of property, plant and equipment |
|
| (1.0 | ) |
|
| 1.8 |
| ||||||||
Changes in assets and liabilities: |
|
|
|
|
|
|
|
| ||||||||
Increase in accounts receivable | (94.5 | ) | (42.3 | ) |
|
| (132.6 | ) |
|
| (94.5 | ) | ||||
Increase in inventories | (49.0 | ) | (47.3 | ) |
|
| (61.1 | ) |
|
| (49.0 | ) | ||||
Increase in accounts payable | 12.3 | 3.4 |
|
| 26.8 |
|
|
| 12.3 |
| ||||||
Increase in other assets | (18.0 | ) | (26.4 | ) |
|
| (13.8 | ) |
|
| (18.0 | ) | ||||
Decrease in accrued expenses and other liabilities | (30.0 | ) | (46.4 | ) |
|
| (41.2 | ) |
|
| (30.0 | ) | ||||
Increase in accrued taxes | 24.7 | 18.0 | ||||||||||||||
|
| |||||||||||||||
(Decrease) Increase in accrued taxes |
|
| (3.3 | ) |
|
| 24.7 |
| ||||||||
Net cash provided by operating activities | 137.3 | 171.2 |
|
| 112.0 |
|
|
| 137.3 |
| ||||||
|
| |||||||||||||||
Investing activities |
|
|
|
|
|
|
|
| ||||||||
Capital expenditures(a) | (67.2 | ) | (59.5 | ) |
|
| (54.9 | ) |
|
| (67.2 | ) | ||||
Proceeds from disposition of assets | 0.7 | — | ||||||||||||||
Proceeds from sale of product line | — | 1.5 | ||||||||||||||
Cost of acquisitions, net of cash acquired | (5.8 | ) | (0.1 | ) | ||||||||||||
|
| |||||||||||||||
Proceeds from the disposition of assets |
|
| 4.1 |
|
|
| 0.7 |
| ||||||||
Cost of acquisition, net of cash acquired |
|
| — |
|
|
| (5.8 | ) | ||||||||
Net cash used in investing activities | (72.3 | ) | (58.1 | ) |
|
| (50.8 | ) |
|
| (72.3 | ) | ||||
|
| |||||||||||||||
Financing activities |
|
|
|
|
|
|
|
| ||||||||
Increase in short-term debt | 350.0 | — | ||||||||||||||
(Decrease) increase in short-term debt |
|
| (175.0 | ) |
|
| 350.0 |
| ||||||||
Issuance of long-term debt | 920.0 | 205.0 |
|
| 665.0 |
|
|
| 920.0 |
| ||||||
Repayment of long-term debt | (635.0 | ) | (245.0 | ) |
|
| (410.0 | ) |
|
| (635.0 | ) | ||||
Proceeds from the exercise of stock options | 3.8 | 22.1 |
|
| 6.1 |
|
|
| 3.8 |
| ||||||
Treasury stock purchases | (602.7 | ) | (32.7 | ) |
|
| (50.0 | ) |
|
| (602.7 | ) | ||||
Employee withholding taxes paid related to stock-based compensation | (12.7 | ) | (9.3 | ) | ||||||||||||
Employee withholding taxes related to stock-based compensation |
|
| (8.2 | ) |
|
| (12.7 | ) | ||||||||
Deferred acquisition payments |
|
| (19.0 | ) |
|
| — |
| ||||||||
Dividends to stockholders | (58.6 | ) | (55.3 | ) |
|
| (61.7 | ) |
|
| (58.6 | ) | ||||
|
| |||||||||||||||
Net cash used by financing activities | (35.2 | ) | (115.2 | ) | ||||||||||||
|
| |||||||||||||||
Other financing, net |
|
| (0.2 | ) |
|
| — |
| ||||||||
Net cash used in financing activities |
|
| (53.0 | ) |
|
| (35.2 | ) | ||||||||
Effect of foreign exchange rate changes on cash | (7.3 | ) | 3.3 |
|
| 4.9 |
|
|
| (7.3 | ) | |||||
|
| |||||||||||||||
Net increase in cash and cash equivalents | $ | 22.5 | $ | 1.2 |
| $ | 13.1 |
|
| $ | 22.5 |
| ||||
|
| |||||||||||||||
Cash and cash equivalents at beginning of period | $ | 323.0 | $ | 251.5 | ||||||||||||
Cash and cash equivalents at end of period | $ | 345.5 | $ | 252.7 | ||||||||||||
Cash, cash equivalents and restricted cash(b) at beginning of period |
| $ | 270.7 |
|
| $ | 323.0 |
| ||||||||
Cash, cash equivalents and restricted cash(b) at end of period |
| $ | 283.8 |
|
| $ | 345.5 |
|
(a) | Capital expenditures of $7.8 million and $8.2 million |
(b) | Restricted cash of $0.7 million and $6.8 million is included in Other current assets and Other assets, respectively, as of June 30, 2019 and restricted cash of $0.9 million and $6.9 million is included in Other current assets and Other assets, respectively, as of December 31, 2018. |
See notes to condensed consolidated financial statements.
4
FORTUNE BRANDS HOME & SECURITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Six and Three Months Ended June 30, 20182019 and 20172018
(In millions)
(Unaudited)
| Common Stock |
|
| Paid-In Capital |
|
| Accumulated Other Comprehensive (Loss) Income |
|
| Retained Earnings |
|
| Treasury Stock |
|
| Non- controlling Interests |
|
| Total Equity |
| ||||||||||||||||||||||||||||||||||||
Common Stock | Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Treasury Stock | Non-controlling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2016 | $ | 1.7 | $ | 2,653.8 | $ | (71.9 | ) | $ | 814.6 | $ | (1,036.7 | ) | $ | 1.5 | $ | 2,363.0 | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2017 |
| $ | 1.7 |
|
| $ | 2,724.9 |
|
| $ | (39.2 | ) |
| $ | 1,174.2 |
|
| $ | (1,262.1 | ) |
| $ | 1.6 |
|
| $ | 2,601.1 |
| ||||||||||||||||||||||||||||
Comprehensive income: |
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|
|
|
|
| ||||||||||||||||||||||||||||
Net income | — | — | — | 215.1 | — | — | 215.1 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 204.6 |
|
|
| — |
|
|
| — |
|
|
| 204.6 |
| |||||||||||||||||||||
Other comprehensive income | — | — | 17.3 | — | — | — | 17.3 |
|
| — |
|
|
| — |
|
|
| (14.0 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (14.0 | ) | |||||||||||||||||||||
Stock options exercised | — | 22.1 | — | — | — | — | 22.1 |
|
| 0.1 |
|
|
| 3.7 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3.8 |
| |||||||||||||||||||||
Stock-based compensation | — | 20.9 | — | — | (9.3 | ) | — | 11.6 |
|
| — |
|
|
| 22.9 |
|
|
| — |
|
|
| — |
|
|
| (12.7 | ) |
|
| — |
|
|
| 10.2 |
| ||||||||||||||||||||
Treasury stock purchase | — | — | — | — | (32.7 | ) | — | (32.7 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (602.7 | ) |
|
| — |
|
|
| (602.7 | ) | |||||||||||||||||||
Dividends ($0.18 per common share) | — | — | — | (27.7 | ) | — | — | (27.7 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Dividends ($0.20 per common share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (28.3 | ) |
|
| — |
|
|
| — |
|
|
| (28.3 | ) | ||||||||||||||||||||||||||||
Balance at June 30, 2018 |
| $ | 1.8 |
|
| $ | 2,751.5 |
|
| $ | (53.2 | ) |
| $ | 1,350.5 |
|
| $ | (1,877.5 | ) |
| $ | 1.6 |
|
| $ | 2,174.7 |
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Balance at June 30, 2017 | $ | 1.7 | $ | 2,696.8 | $ | (54.6 | ) | $ | 1,002.0 | $ | (1,078.7 | ) | $ | 1.5 | $ | 2,568.7 | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2017 | $ | 1.7 | $ | 2,724.9 | $ | (39.2 | ) | $ | 1,174.2 | $ | (1,262.1 | ) | $ | 1.6 | $ | 2,601.1 | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 |
| $ | 1.8 |
|
| $ | 2,766.0 |
|
| $ | (67.0 | ) |
| $ | 1,448.1 |
|
| $ | (1,970.7 | ) |
| $ | 1.8 |
|
| $ | 2,180.0 |
| ||||||||||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Net income | — | — | — | 204.6 | — | — | 204.6 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 222.2 |
|
|
| — |
|
|
| (0.6 | ) |
|
| 221.6 |
| |||||||||||||||||||||
Other comprehensive loss | — | — | (14.0 | ) | — | — | — | (14.0 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| 11.5 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 11.5 |
| ||||||||||||||||||||||||||||
Stock options exercised |
|
| — |
|
|
| 6.1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6.1 |
| ||||||||||||||||||||||||||||
Stock-based compensation |
|
| — |
|
|
| 14.5 |
|
|
| — |
|
|
| — |
|
|
| (8.2 | ) |
|
| — |
|
|
| 6.3 |
| ||||||||||||||||||||||||||||
Adoption of ASU 2018-02 |
|
| — |
|
|
| — |
|
|
| (8.6 | ) |
|
| 8.6 |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||||||
Treasury stock purchase |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (50.0 | ) |
|
| — |
|
|
| (50.0 | ) | ||||||||||||||||||||||||||||
Dividends ($0.22 per common share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (30.8 | ) |
|
| — |
|
|
| — |
|
|
| (30.8 | ) | ||||||||||||||||||||||||||||
Balance at June 30, 2019 |
| $ | 1.8 |
|
| $ | 2,786.6 |
|
| $ | (64.1 | ) |
| $ | 1,648.1 |
|
| $ | (2,028.9 | ) |
| $ | 1.2 |
|
| $ | 2,344.7 |
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
|
| Common Stock |
|
| Paid-In Capital |
|
| Accumulated Other Comprehensive (Loss) Income |
|
| Retained Earnings |
|
| Treasury Stock |
|
| Non- controlling Interests |
|
| Total Equity |
| |||||||||||||||||||||||||||||||||||
Balance at March 31, 2018 |
| $ | 1.8 |
|
| $ | 2,740.6 |
|
| $ | (36.0 | ) |
| $ | 1,249.9 |
|
| $ | (1,599.5 | ) |
| $ | 1.5 |
|
| $ | 2,358.3 |
| ||||||||||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 129.6 |
|
|
| — |
|
|
| 0.1 |
|
|
| 129.7 |
| ||||||||||||||||||||||||||||
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| (17.2 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (17.2 | ) | ||||||||||||||||||||||||||||
Stock options exercised | 0.1 | 3.7 | — | — | — | — | 3.8 |
|
| — |
|
|
| 0.6 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.6 |
| |||||||||||||||||||||
Stock-based compensation | — | 22.9 | — | — | (12.7 | ) | — | 10.2 |
|
| — |
|
|
| 10.3 |
|
|
| — |
|
|
| — |
|
|
| (0.5 | ) |
|
| — |
|
|
| 9.8 |
| ||||||||||||||||||||
Treasury stock purchase | — | — | — | — | (602.7 | ) | — | (602.7 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (277.5 | ) |
|
| — |
|
|
| (277.5 | ) | |||||||||||||||||||
Dividends ($0.20 per common share) | — | — | — | (28.3 | ) | — | — | (28.3 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (29.0 | ) |
|
| — |
|
|
| — |
|
|
| (29.0 | ) | |||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2018 | $ | 1.8 | $ | 2,751.5 | $ | (53.2 | ) | $ | 1,350.5 | $ | (1,877.5 | ) | $ | 1.6 | $ | 2,174.7 |
| $ | 1.8 |
|
| $ | 2,751.5 |
|
| $ | (53.2 | ) |
| $ | 1,350.5 |
|
| $ | (1,877.5 | ) |
| $ | 1.6 |
|
| $ | 2,174.7 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Balance at March 31, 2019 |
| $ | 1.8 |
|
| $ | 2,776.0 |
|
| $ | (67.3 | ) |
| $ | 1,541.4 |
|
| $ | (2,006.4 | ) |
| $ | 1.6 |
|
| $ | 2,247.1 |
| ||||||||||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 137.5 |
|
|
| — |
|
|
| (0.4 | ) |
|
| 137.1 |
| ||||||||||||||||||||||||||||
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| 3.2 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3.2 |
| ||||||||||||||||||||||||||||
Stock options exercised |
|
| — |
|
|
| 3.2 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3.2 |
| ||||||||||||||||||||||||||||
Stock-based compensation |
|
| — |
|
|
| 7.4 |
|
|
| — |
|
|
| — |
|
|
| (0.5 | ) |
|
| — |
|
|
| 6.9 |
| ||||||||||||||||||||||||||||
Treasury stock purchase |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (22.0 | ) |
|
| — |
|
|
| (22.0 | ) | ||||||||||||||||||||||||||||
Dividends ($0.22 per common share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (30.8 | ) |
|
| — |
|
|
| — |
|
|
| (30.8 | ) | ||||||||||||||||||||||||||||
Balance at June 30, 2019 |
| $ | 1.8 |
|
| $ | 2,786.6 |
|
| $ | (64.1 | ) |
| $ | 1,648.1 |
|
| $ | (2,028.9 | ) |
| $ | 1.2 |
|
| $ | 2,344.7 |
|
See notes to condensed consolidated financial statements.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 June 30, 2018,2019, the related condensed consolidated statements of comprehensive income and equity for the six and three months ended June 30, 20182019 and 20172018, and the related condensed consolidated statements of cash flows and equity for the six months ended June 30, 20182019 and 20172018 are unaudited. During the first quarter of 2018, we adopted Accounting Standards Update (“ASU”)2017-07 “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. As a result, we revised our previously reported condensed consolidated financial statements as of the six and three months ended June 30, 2017. See Note 12, “Defined Benefit Plans,” for further discussion. 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.
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, 20172018 condensed consolidated balance sheet was derived from our audited consolidated financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles (“GAAP”). This Quarterly Report on 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, 2017.2018.
In October 2017,September 2018, we acquired Victoria +Albert, aUK-based premium brand100% of standalone bathtubs, sinks, tub fillers, faucets and other accessories. In July 2017, we acquired Shaws Since1897 Limitedthe membership interests of Fiber Composites, LLC (“Shaws”Fiberon”), aUK-based luxury plumbing leading U.S. manufacturer of outdoor performance materials used in decking, railing and fencing products, company that specializes in manufacturingfor a total purchase price of approximately $470 million, subject to certain post-closing adjustments. The acquisition of Fiberon provided category expansion and selling fireclay sinksproduct extension opportunities into the outdoor living space for our Doors & Security segment. We financed the transaction using cash on hand and selling brasswareborrowings under our revolving credit and accessories.term loan facilities. The financial results of both of the acquired companiesFiberon were included in the Company’s consolidated balance sheets as of June 30, 2018 and December 31, 2017 and in the Company’s consolidated statements of income and statements of cash flow forbeginning in September 2018 and the six months ended June 30,consolidated balance sheet as of December 31, 2018.
6
FORTUNE BRANDS HOME The results of operations are included in the Doors & SECURITY, INC.Security segment from the date of acquisition.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. | Recently Issued Accounting Standards |
Revenue from Contracts with CustomersLeases
In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU2014-09, which clarifies the accounting for revenue arising from contracts with customers 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). We adopted ASU2014-09 as of January 1, 2018 and for periods thereafter using the modified retrospective approach, which we applied to all contracts not completed as of January 1, 2018. The cumulative effect of adopting the new revenue standard was not material and no adjustment was recorded to retained earnings. The comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of this standard did not have a material impact on the quarter ended June 30, 2018 and we do not expect it to have a material impact on revenue or net income on an ongoing basis.
A majority of our sales revenue continues to be recognized when products are shipped from our facilities to our customers. Previously, for certain products, we recognized sales revenue at destination as we determined risks and rewards transferred at that point. We now recognize sales revenue for these customers at the shipping point of the products consistent with the respective contractual terms.
See Note 11, “Revenue,” for further information.
Leases
In February 2016, the FASB issued ASUAccounting Standards Update (“ASU”) 2016-02, which requires lessees to recognize almost all leases on their balance sheet as a“right-of-use” asset“right-of-use” assets and lease liabilityliabilities but recognize related expenses in a manner similar to current accounting.previous accounting guidance. The guidance also eliminates currentprevious real estate-specific provisions for all entities. In January 2018, the FASB issued ASU2018-01, which clarifies the application of the new leases guidance to land easements. In July 2018, the FASB issued ASU2018-10 and ASU 2018-11, which clarify certain guidance included in ASU2016-02 and introduces a new optional transition method. The standard is effective for annual periods beginning after December 15, 2018 (calendar year 2019 for Fortune Brands) and earlier application is permitted. The Company is evaluating its lease portfoliomethod, which does not require revisions to assess the impact on its financial statements as well as on its accounting processes, internal controls and disclosures. We have not yet determined the impact of adopting the standard.comparative periods.
Presentation of Net Periodic Pension and Postretirement Cost
In March 2017, the FASB issuedASU 2017-07, which requires entities to present the service cost component of the net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Companies will present the other components (i.e., amortization of prior service cost/credits, interest cost, expected return on plan assets and actuarial gains/losses) separately from the line item(s) that includes the service cost and outside of any subtotal of operating income. We adopted ASU2014-09this standard as of January 1, 2018 and for periods thereafter2019 using the retrospective approach.transition method introduced by ASU 2018-11, which does not require revisions to comparative periods. We elected to implement the transition package of practical expedients permitted within the new standard, which among other things, allows us to carryforward the historical lease classification. In addition, we elected the hindsight practical expedient to determine the lease term for existing leases.
Adoption of the new standard resulted in the recording of lease assets and lease liabilities of approximately $177.2 million and $182.6 million, respectively, as of January 1, 2019. The adoption of thisdifference between the lease assets and lease liabilities primarily relates to accrued rent and unamortized lease incentives recorded in accordance with the previous leasing guidance. The new standard did not have a material effect onmaterially impact our financial statements. See Note 12 for further information.condensed consolidated statements of income or cash flows.
76
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. | Recently Issued Accounting Standards (Continued) |
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 guidance provides a relief to entities that makenon-substantive changes to their share-based payment awards and will result in fewer changes to the terms of an award being accounted for as modifications. We adopted the new standard beginning January 1, 2018. The adoption of this standard did not have a material effect on our financial statements.
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). We adopted the new standard beginning January 1, 2018. The adoption of this standard did not have a material effect on our financial statements.
Restricted Cash
In November 2016, the FASB issued ASU2016-18, according to which entities are no longer required to present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The prior standard did not address the classification of activity related to restricted cash and restricted cash equivalents in the statement of cash flows and this has resulted in diversity in cash flows presentation. We adopted the new standard beginning January 1, 2018. The adoption of this standard did not have a material effect on our financial statements.
Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU2016-16, which requires companies to account for the income tax effects of intercompany sales and transfers of assets other than inventory (e.g., intangible assets) when the transfer occurs. Under the 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). We adopted the new standard beginning January 1, 2018 using a “modified retrospective” approach (i.e., with a cumulative adjustment to retained earnings at adoption). The adoption of this standard did not have a material effect on our financial statements.
Classification of Certain Cash Receipts and Cash Payments
In September 2016, the FASB issued ASU2016-15, which changes how an entity classifies certain cash receipts and cash payments on its statement of cash flows. The key changes that may potentially impact our financial statements include the following: 1) Cash payments for debt prepayment or extinguishment costs would be classified as financing cash outflows; 2) Contingent consideration payments that are not made within three months after the consummation of a business combination would be classified as financing (if the payment is made up to the acquisition date fair value of liability) or operating outflows (if in excess of acquisition fair value) and cash payments made “soon after” the consummation of a business combination generally would be classified as cash outflows 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. We retrospectively adopted the new standard beginning January 1, 2018. The adoption of this standard did not have a material effect on our financial statements.
8
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU2016-01, which requires entities to measure investments in unconsolidated entities (other than those accounted for using the equity method of accounting) at fair value through the income statement. There will no longer be anavailable-for-sale classification (with changes in fair value reported in Other Comprehensive Income). In addition, the cost method is eliminated for equity investments without readily determinable fair values. We adopted the new standard beginning January 1, 2018. The adoption of this standard did not have a material effect on our financial statements.
Clarifying Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
In February 2017, the FASB issued ASU2017-05, which clarifies the scope and application of various standards for the sale of nonfinancial assets (e.g. PP&E including real estate, intangible assets, materials and supplies). The standard distinguishes between a sale to a customer versus anon-customer. Sales to customers are within the scope of the new revenue standard. It also clarifies a derecognition model for nonfinancial assets that do not represent a business. We adopted the new standard beginning January 1, 2018 consistent with the effective date for the new revenue recognition standard. The adoption of this standard did not have a material effect on our financial statements.
Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued ASU2017-12, which amends the current hedge accounting model. The new standard eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item (which is consistent with our currentprior practice). The change in fair value for qualifying cash flow and net investment hedges will beis included in Otherother comprehensive incomeloss (until they are reclassified into the income statement). The standard also easeseased certain documentation and assessment requirements and modifiesmodified the accounting for components excluded from the assessment of hedge effectiveness. TheWe adopted this standard is effective as of January 1, 2019 and earlier application is permitted. We are assessing the impact the2019. The adoption of this standard willdid not have a material effect on our financial statements.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, which permits companies to reclassify to retained earnings the tax effects stranded in accumulated other comprehensive income (“AOCI”) as a result of U.S. Tax Cuts and Jobs Act of 2017. We adopted this standard on January 1, 2019, which resulted in a reclassification of $8.6 million between accumulated other comprehensive loss and retained earnings in our condensed consolidated statement of equity.
Improvements to Nonemployee Share-Based Payment Accounting
In June 2018, the FASB issued ASU 2018-07, which simplifies the accounting for share-based arrangements with nonemployees. The new guidance generally aligns the accounting for share-based awards to nonemployees with the guidance for share-based awards to employees. The guidance was effective for the Company’s fiscal year beginning January 1, 2019. The adoption of this standard did not have a material effect on our financial statements.
Codification Improvements
In July 2018, the FASB issued ASU 2018-09, which includes technical corrections, clarifications, and other minor improvements to various areas including business combinations, fair value measurements and hedging. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments in this standard were effective immediately, while others were effective for the Company’s fiscal year beginning January 1, 2019. The adoption of this standard did not have a material effect on our financial statements.
Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14, which removes several disclosure requirements, including the amount in AOCI expected to be recognized in income over the next fiscal year and the effects of a 1% change in assumed health care cost trend rates. The standard also adds new requirements to disclose reasons for significant gains and losses related to changes in the benefit obligation for the period and weighted-average interest crediting rates for plans with promised interest crediting rates. We adopted this guidance on January 1, 2019. The adoption of this standard did not 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 for the Company’s fiscal year beginning January 1, 2020 andwith early application isadoption permitted beginning January 1, 2019. We are assessing the impact the adoption of this standard will have on our financial statements.
97
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. | Recently Issued Accounting Standards (Continued) |
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive IncomeChanges to the Disclosure Requirements for Fair Value Measurement
In FebruaryAugust 2018, the FASB issued ASU2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification 2018-13, which removes the requirement to disclose: 1) amount of Certain Tax Effects from Accumulated Other Comprehensive Income.” Thisand reasons for transfers between Levels 1 and 2 of the fair value hierarchy, 2) policy for timing of transfers between levels, and 3) valuation processes for Level 3 investments. In addition, this guidance permits companiesmodifies and adds other disclosure requirements, which primarily relate to reclassify to retained earnings the tax effects stranded in accumulated other comprehensive income as a resultvaluation of U.S. tax reform. This guidance is effective for the Company’s fiscal year beginning January 1, 2019, with early adoption permitted. We are assessing the impact the adoption of this standard will have on our financial statements.
Improvements to Nonemployee Share-Based Payment Accounting
In June 2018, the FASB issued ASU2018-07 which simplifies the accounting for share-based arrangements with nonemployees. The new guidance generally aligns the accounting for share-based awards to nonemployees with the guidance for share-based awards to employees.Level 3 assets and liabilities. The guidance is effective for the Company’s fiscal year beginning January 1, 2019,2020, with early adoption permitted. We do not expect the adoption of this guidance to have a material effect on our financial statements.
Codification ImprovementsAccounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
In JulyAugust 2018, the FASB issued ASU2018-09 2018-15 which includes technical corrections, clarifications,aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Costs to obtain software, including configuration and other minor improvementsintegration with legacy IT systems, coding and testing, including parallel process phases are eligible for capitalization under the new standard. In addition, activities that would be expensed include costs related to various areas including business combinations, fair value measurementsvendor demonstrations, determining performance and hedging.technology requirements and training activities. The transition and effective date guidancestandard is based on the fact and circumstances of each amendment. Some of the amendments in this standard were effective immediately, while others will be effective for the Company’s fiscal year beginning January 1, 2019.2020, with early adoption permitted. We do not expectare assessing the impact the adoption of this guidance tostandard will have a material effect on our financial statements.
3. | Balance Sheet Information |
Supplemental information on our balance sheets is as follows:
(In millions) | June 30, 2018 | December 31, 2017 |
| June 30, 2019 |
|
| December 31, 2018 |
| ||||||||
Inventories: |
|
|
|
|
|
|
|
| ||||||||
Raw materials and supplies | $ | 229.6 | $ | 224.9 |
| $ | 267.0 |
|
| $ | 227.4 |
| ||||
Work in process | 61.2 | 58.3 |
|
| 75.5 |
|
|
| 66.4 |
| ||||||
Finished products | 336.2 | 297.6 |
|
| 399.4 |
|
|
| 385.1 |
| ||||||
Total inventories |
| $ | 741.9 |
|
| $ | 678.9 |
| ||||||||
|
|
|
|
|
|
|
|
|
| |||||||
Total inventories | $ | 627.0 | $ | 580.8 | ||||||||||||
Property, plant and equipment, gross | $ | 1,815.9 | $ | 1,780.4 |
| $ | 1,945.5 |
|
| $ | 1,911.7 |
| ||||
Less: accumulated depreciation | 1,078.3 | 1,040.4 |
|
| 1,140.6 |
|
|
| 1,098.3 |
| ||||||
|
| |||||||||||||||
Property, plant and equipment, net | $ | 737.6 | $ | 740.0 |
| $ | 804.9 |
|
| $ | 813.4 |
|
10
8
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. | Acquisitions and Dispositions |
In October 2017,September 2018, we acquired Victoria + Albert,100% of the membership interests of Fiberon, aUK-based premium brand leading U.S. manufacturer of standalone bathtubs, sinks, tub fillers, faucetsoutdoor performance materials used in decking, railing and other accessories. In July 2017, we acquired Shaws,fencing products, for aUK-based luxury plumbing products company that specializes in manufacturing and selling fireclay sinks and selling brassware and accessories. The total combined consideration paid was approximately $132 million, including $5.8 million of additional purchase price consideration paid related to post-closing adjustments during the six months ended June 30, 2018. The combined consideration paid isof approximately $470 million, subject to further certain post-closing adjustmentsadjustments. The acquisition of Fiberon provided category expansion and deferred acquisition payments. Net sales and operating income inproduct extension opportunities into the six and three months ended June 30, 2018 from these acquisitions were not material to the Company.outdoor living space for our Doors & Security segment. We financed the transactionstransaction using cash on hand and borrowings under our existing revolving credit facility.and term loan facilities. The financial results of Fiberon were included in the Company’s consolidated statements of income and statements of cash flow beginning in September 2018 and the consolidated balance sheet as of December 31, 2018. The results of the operations are included in the PlumbingDoors & Security segment from the respective datesdate of acquisition. We do not expect any portion of goodwillGoodwill related to bethis acquisition is deductible for income tax purposes.
In April 2017, we completedThe following table summarizes the salepreliminary allocation of Field ID, our cloud-based inspectionthe purchase price to the fair value of assets acquired and safety compliance software product line formerly included in our Security segment.liabilities assumed as of the date of the acquisition.
11
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions) |
| |||
Accounts receivable |
| $ | 18.8 |
|
Inventories |
|
| 50.9 |
|
Property, plant and equipment |
|
| 48.5 |
|
Goodwill |
|
| 174.9 |
|
Identifiable intangible assets |
|
| 195.0 |
|
Other assets |
|
| 4.8 |
|
Total assets |
|
| 492.9 |
|
Accounts payable |
|
| 16.8 |
|
Other liabilities and accruals |
|
| 16.3 |
|
Net assets acquired |
| $ | 459.8 |
|
The preceding purchase price 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, customer attrition rates, discount rates and assumed royalty rates. Any change in the acquisition date fair value of the acquired net assets will change the amount of the purchase price allocable to goodwill.
Goodwill includes expected sales and cost synergies. Identifiable intangible assets primarily consist of customer relationships and tradenames.
5. | Goodwill and Identifiable Intangible Assets |
We had goodwill of $1,916.7$2,085.7 million and $1,912.0$2,080.3 million as of June 30, 20182019 and December 31, 2017,2018, respectively. The $4.7 million increase was primarily due to acquisition-related adjustments in our Plumbing segment, including $5.8 million of additional purchase price consideration paid during the six months ended June 30, 2018 related to our acquisition of Victoria + Albert, partially offset by foreign translation adjustments. The change in the net carrying amount of goodwill by segment was as follows:
(In millions) | Cabinets | Plumbing | Doors | Security | Total Goodwill |
| Cabinets |
|
| Plumbing |
|
| Doors & Security |
|
| Total Goodwill |
| |||||||||||||||||||
Goodwill at December 31, 2017(a) | $ | 926.3 | $ | 745.2 | $ | 143.0 | $ | 97.5 | $ | 1,912.0 | ||||||||||||||||||||||||||
Goodwill at December 31, 2018⁽ª⁾ |
| $ | 924.0 |
|
| $ | 743.7 |
|
| $ | 412.6 |
|
| $ | 2,080.3 |
| ||||||||||||||||||||
Year-to-date translation adjustments | (1.5 | ) | (1.1 | ) | — | (0.8 | ) | (3.4 | ) |
|
| 1.5 |
|
|
| 1.8 |
|
|
| 0.6 |
|
|
| 3.9 |
| |||||||||||
Acquisition-related adjustments | — | 8.1 | — | — | 8.1 |
|
| — |
|
|
| — |
|
|
| 1.5 |
|
|
| 1.5 |
| |||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||
Goodwill at June 30, 2018(a) | $ | 924.8 | $ | 752.2 | $ | 143.0 | $ | 96.7 | $ | 1,916.7 | ||||||||||||||||||||||||||
Goodwill at June 30, 2019⁽ª⁾ |
| $ | 925.5 |
|
| $ | 745.5 |
|
| $ | 414.7 |
|
| $ | 2,085.7 |
|
(a) | Net of accumulated impairment losses of $399.5 million in the Doors & Security segment. |
We also had net identifiable intangible assets, principally tradenames, of $1,139.0$1,229.2 million and $1,162.4$1,246.8 million as of June 30, 20182019 and December 31, 2017,2018, respectively. The $8.6$5.1 million decreaseincrease in gross identifiable intangible assets was primarily due to foreign translation adjustments and acquisition related adjustments.
9
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. | Goodwill and Identifiable Intangible Assets (Continued) |
The gross carrying value and accumulated amortization by class of identifiable intangible assets as of June 30, 20182019 and December 31, 20172018 were as follows:
(In millions) | As of June 30, 2018 | As of December 31, 2017 |
| As of June 30, 2019 |
|
| As of December 31, 2018 |
| ||||||||||||||||||||||||||||||||||||||||
Gross Carrying Amounts | Accumulated Amortization | Net Book Value | Gross Carrying Amounts | Accumulated Amortization | Net Book Value |
| Gross Carrying Amounts |
|
| Accumulated Amortization |
|
| Net Book Value |
|
| Gross Carrying Amounts |
|
| Accumulated Amortization |
|
| Net Book Value |
| |||||||||||||||||||||||||
Indefinite-lived tradenames | $ | 706.2 | $ | — | $ | 706.2 | $ | 709.9 | $ | — | $ | 709.9 |
| $ | 676.2 |
|
| $ | — |
|
| $ | 676.2 |
|
| $ | 673.9 |
|
| $ | — |
|
| $ | 673.9 |
| ||||||||||||
Amortizable intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Tradenames | 15.5 | (10.8 | ) | 4.7 | 15.7 | (9.9 | ) | 5.8 |
|
| 20.1 |
|
|
| (12.5 | ) |
|
| 7.6 |
|
|
| 19.8 |
|
|
| (11.9 | ) |
|
| 7.9 |
| ||||||||||||||||
Customer and contractual relationships | 658.9 | (244.7 | ) | 414.2 | 663.8 | (232.0 | ) | 431.8 |
|
| 802.8 |
|
|
| (280.6 | ) |
|
| 522.2 |
|
|
| 800.3 |
|
|
| (260.2 | ) |
|
| 540.1 |
| ||||||||||||||||
Patents/proprietary technology | 60.4 | (46.5 | ) | 13.9 | 60.2 | (45.3 | ) | 14.9 |
|
| 73.5 |
|
|
| (50.3 | ) |
|
| 23.2 |
|
|
| 73.5 |
|
|
| (48.6 | ) |
|
| 24.9 |
| ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total | 734.8 | (302.0 | ) | 432.8 | 739.7 | (287.2 | ) | 452.5 |
|
| 896.4 |
|
|
| (343.4 | ) |
|
| 553.0 |
|
|
| 893.6 |
|
|
| (320.7 | ) |
|
| 572.9 |
| ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total identifiable intangibles | $ | 1,441.0 | $ | (302.0 | ) | $ | 1,139.0 | $ | 1,449.6 | $ | (287.2 | ) | $ | 1,162.4 |
| $ | 1,572.6 |
|
| $ | (343.4 | ) |
| $ | 1,229.2 |
|
| $ | 1,567.5 |
|
| $ | (320.7 | ) |
| $ | 1,246.8 |
|
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 2 to 2030 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, customer attrition rates and other relevant factors.
12
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In the first six monthshalf of 2018,2019, no events or circumstances occurred that would have required us to perform interim impairment tests of goodwill or indefinite-lived tradenames. AsDuring the third and fourth quarters of December 31, 2017, the fair value of2018, we recognized impairment charges related to two tradenames in the Cabinets segment exceeded their carrying value by less than 10%.segment. Accordingly, a further reduction in the estimated fair value of these tradenames could trigger an impairment. In addition, due to lower than expected sales in our custom and semi-custom cabinetry product lines during the six months ended June 30, 2019, an impairment could be triggered on a third tradename on continuing sales decreases. As of December 31, 2017,2018, the total carrying value of these tradenames was $217.8approximately $203 million. Factors influencing our fair value estimates of the tradenames are described in the following paragraph.
The events and/or circumstances that could have a potential negative effect on the estimated fair value of our reporting units and indefinite-lived tradenames include: actual new construction and repair and remodel growth rates that 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 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. | Leases |
InAs discussed in Note 2, we adopted ASU 2016-02 as of January 2017, we committed to a plan to sell Field ID, our cloud-based inspection1, 2019. We have operating and safety compliance software product linefinance leases for buildings and certain machinery and equipment. Operating leases are included in operating lease assets, other current liabilities, and operating lease liabilities in our Security segment. In accordancecondensed consolidated balance sheets. Amounts recognized for finance leases as of and for the six months ended June 30, 2019 were immaterial.
Operating lease assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at commencement date. As most of our lease contracts do not provide an explicit interest rate, we use our incremental borrowing rate in determining the present value of future lease payments. Our incremental borrowing rates include estimates related to the impact of collateralization and the economic environment where the leased asset is located. The operating lease assets also include any prepaid lease payments and initial direct costs incurred, but exclude lease incentives received at lease commencement. Our lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Our leases have remaining lease terms of 1 to 36 years, some of which may include options to extend or terminate the lease. Lease expense for lease payments is recognized on a straight-line basis over the lease term in a manner similar to previous accounting guidance.
We do not recognize leases with FASB Accounting Standards Codification (“ASC”) 360,an initial term of twelve months or less on the balance sheet and instead recognize the related lease payments as expense in the statement of comprehensive income on a straight-line basis over the lease term. We account for lease and non-lease components as a result of our decision to sell,single lease component for all asset classes. Additionally, for certain equipment leases, we recorded $3.2 million ofpre-tax impairment charges to write down the long-lived assets included in this disposal group to fair value during the first quarter of 2017, based upon their estimated fair value less cost to sell. These charges consisted of approximately $3.0 millionapply a portfolio approach and account for definite-lived intangible assets and $0.2 million for fixed assets. We completed the sale of Field ID in April 2017.multiple lease components as a single lease component.
1310
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. | Leases (Continued) |
Certain of our lease agreements include variable rental payments, including rental payments adjusted periodically for inflation. Variable rental payments are expensed during the period they are incurred and therefore are excluded from our lease assets and liabilities. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating lease expense recognized in the condensed consolidated statement of comprehensive income during the six and three months ended June 30, 2019 was $25.7 million and $12.7million, respectively, including approximately $4.0 million and $1.9 million of short-term and variable lease costs for the six and three months ended June 30, 2019, respectively.
Other information related to leases was as follows:
(In millions, except lease term and discount rate) |
| Six Months Ended June 30, 2019 |
| |
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
Operating cash flows from operating leases |
| $ | 20.5 |
|
Right-of-use assets obtained in exchange for operating lease obligations |
| $ | 12.8 |
|
Weighted average remaining lease term - operating leases |
| 7.4 years |
| |
Weighted average discount rate - operating leases |
|
| 4.4 | % |
Total lease payments under non-cancellable operating leases as of June 30, 2019 were as follows:
(In millions) |
|
|
|
|
Year Ending December 31, |
|
|
|
|
2019 (excluding six months ended June 30, 2019) |
| $ | 20.3 |
|
2020 |
|
| 36.6 |
|
2021 |
|
| 30.5 |
|
2022 |
|
| 24.4 |
|
2023 |
|
| 20.2 |
|
Thereafter |
|
| 79.8 |
|
Total lease payments |
|
| 211.8 |
|
Less imputed interest |
|
| (32.2 | ) |
Total |
| $ | 179.6 |
|
Reported as of June 30, 2019 |
|
|
|
|
Other current liabilities |
| $ | 33.3 |
|
Operating lease liabilities |
|
| 146.3 |
|
Total |
| $ | 179.6 |
|
7. | External Debt and Financing Arrangements |
In September 2018, we issued $600 million of unsecured senior notes (“2018 Senior Notes”) in a registered public offering. The 2018 Senior Notes are due in 2023 with a coupon rate of 4%. We used the proceeds from the 2018 Senior Notes offering to pay down our revolving credit facility. On June 30, 2019 and December 31, 2018, the net carrying value of the 2018 Senior Notes, net of underwriting commissions, price discounts, and debt issuance costs, was $595.5million and $595.0 million, respectively.
In June 2015, we issued $900 million of unsecured senior notes (“2015 Senior Notes”, and collectively with the 2018 Senior Notes, the “Senior Notes”) in a registered public offering. The 2015 Senior Notes consist of two tranches: $400 million of five-year notes due in 2020 with a coupon rate of 3% and $500 million of ten-year notes due in 2025 with a coupon rate of 4%. We used the proceeds from the 2015 Senior Notes offering to pay down our revolving credit facility and for general corporate purposes. On June 30, 2019 and December 31, 2018, the net carrying value of the 2015 Senior Notes, net of underwriting commissions, price discounts and debt issuance costs, was $894.8 million and $894.0 million, respectively.
11
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. | External Debt and Financing Arrangements (Continued) |
In March 2018, the Company entered into a $350 million term loan for general corporate purposes that maturesscheduled to mature in March 2019. In August 2018, the Company amended its existing $350 million term loan to increase the borrowings under the term loan from $350 million to $525 million. In March 2019, the Company amended the $525 million term loan to decrease the borrowings from $525 million to $350 million and extend the maturity date to March 2020. All other terms and conditions on the amended term loan remain the same as the previous $525 million term loan. At June 30, 2019 and December 31, 2018, amounts due under the term loan were $350.0 million and $525.0 million, respectively, which are included within short term debt in our consolidated balance sheet. Interest rates under the term loan are variable based on LIBOR at the time of the borrowing and the Company’s long-term credit rating and can range from LIBOR + 0.625% to LIBOR + 1.25%. Covenants under the term loan are the same as the existing $1.25 billion revolving credit agreement described below.agreement. As of June 30, 2018,2019, we were in compliance with all covenants under this term loan.facility.
In June 2016, the Company amended and restated its 2011 credit agreement to combine and rollover the existingprior revolving credit facility and term loan into a new standalone $1.25 billion revolving credit facility. TheThis amendment and restatement of the credit agreement was anon-cash transaction for the Company. Terms and conditions of the credit agreement, including the total commitment amount, essentially remained the same.same as under the 2011 credit agreement. The revolving credit facility will mature in June 2021 and borrowings thereunder will be used for general corporate purposes. On June 30, 20182019 and December 31, 2017,2018, our outstanding borrowings under this facility were $900.0$575.0 million and $615.0$320.0 million, respectively. At June 30, 2018 and December 31, 2017,respectively, which is included in Long-term debt in the current portion of long-term debt under this facility was zero.condensed consolidated balance sheets. Interest rates under the facility are variable based on LIBOR at the time of the borrowing and the Company’s long-term credit rating and can range from LIBOR + 0.9% to LIBOR + 1.5%. As of June 30, 2018,2019, we were in compliance with all covenants under this facility.
In June 2015, we issued $900 million of unsecured senior notes (“Senior Notes”) in a registered public offering. The Senior Notes consist of two tranches: $400 million of five-year notes due 2020 with a coupon of 3% and $500 million often-year notes due 2025 with a coupon of 4%. We used the proceeds from the Senior Notes offering to pay down our revolving credit facility and for general corporate purposes. On June 30, 2018 and December 31, 2017, the net carrying value of the Senior Notes, net of underwriting commissions, price discounts and debt issuance costs, was $893.3 million and $892.6 million, respectively.
We currently have uncommitted bank lines of credit in China, which provide for unsecured borrowings for working capital of up to $23.5 million in aggregate, of which there were no outstanding balances as of June 30, 20182019 and December 31, 2017.2018.
14
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. | Financial Instruments |
We do not enter into financial instruments for trading or speculative purposes. We principally use financial instruments to reduce the impact of changes in foreign currency exchange rates and commodities used as raw materials in our products. The principal derivative financial instruments we enter into on a routine basis are foreign exchange contracts. Derivative financial instruments are recorded at fair value. The counterparties to derivative contracts are major financial institutions. We are subject to credit risk on these contracts equal to the fair value of these instruments. Management currently believes that the risk of incurring material losses is unlikely and that the losses, if any, would be immaterial to the Company.
Raw materials used by the Company are subject to price volatility caused by weather, supply conditions, geopolitical and economic variables, and other unpredictable external factors. As a result, from time to time, we enter into commodity swaps to manage the price risk associated with forecasted purchases of materials used in our operations.
Our primary foreign currency hedge contracts pertain to the Canadian dollar, the British pound, the Chinese yuan and the Mexican peso. The gross U.S. dollar equivalent notional amount of all foreign currency derivative hedges outstanding at June 30, 20182019 was $355.7$392.9 million. Based on foreign exchange rates as of June 30, 2018,2019, we estimate that $1.2$0.4 million of net foreign currency derivative gains included in other accumulated comprehensive lossincome as of June 30, 20182019 will be reclassified to earnings within the next twelve months.
The fair values of derivative instruments on the consolidated balance sheets as of June 30, 20182019 and December 31, 20172018 were as follows:
(In millions) | Fair Value | |||||||||
Location | June 30, 2018 | December 31, 2017 | ||||||||
Assets | ||||||||||
Foreign exchange contracts | Other current assets | $ | 8.9 | $ | 0.8 | |||||
Net investment hedges | Other current assets | 0.5 | — | |||||||
Commodity contracts | Other current assets | — | 0.2 | |||||||
|
|
|
| |||||||
Total assets | $ | 9.4 | $ | 1.0 | ||||||
Liabilities | ||||||||||
Foreign exchange contracts | Other current liabilities | $ | 1.9 | $ | 5.6 | |||||
Commodity contracts | Other current liabilities | 0.1 | — | |||||||
Net investment hedges | Other current liabilities | — | 0.8 | |||||||
|
|
|
| |||||||
Total current liabilities | $ | 2.0 | $ | 6.4 |
(In millions) |
|
|
|
|
| Fair Value |
| |||||
Type of hedge |
| Type of contract |
| Location |
| June 30, 2019 |
|
| December 31, 2018 |
| ||
Cash flow |
| Foreign exchange contracts |
| Other current assets |
| $ | 1.3 |
|
| $ | 3.9 |
|
Fair value |
| Foreign exchange contracts |
| Other current assets |
|
| 0.7 |
|
|
| 1.4 |
|
Net investment hedges |
| Net investment hedges |
| Other current assets |
|
| - |
|
|
| 0.7 |
|
|
|
|
| Total assets |
| $ | 2.0 |
|
| $ | 6.0 |
|
Cash flow |
| Foreign exchange contracts |
| Other current liabilities |
| $ | 0.7 |
|
| $ | 0.3 |
|
Fair value |
| Foreign exchange contracts |
| Other current liabilities |
|
| 0.4 |
|
|
| 1.6 |
|
Net investment hedges |
| Net investment hedges |
| Other current liabilities |
|
| 0.5 |
|
|
| 1.6 |
|
|
|
|
| Total liabilities |
| $ | 1.6 |
|
| $ | 1.9 |
|
15
12
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. | Financial Instruments (Continued) |
The effects of derivative financial instruments on the statements of comprehensive income for the six and three months ended June 30, 20182019 and 20172018 were as follows:
Gain (Loss) Recognized in Income Six Months Ended June 30, | ||||||||||
(In millions) Type of hedge | Location | 2018 | 2017 | |||||||
Cash flow | Cost of products sold | $ | — | $ | 1.0 | |||||
Fair value | Other expense (income), net | 1.4 | (0.5 | ) | ||||||
|
|
|
| |||||||
Total | $ | 1.4 | $ | 0.5 | ||||||
Gain (Loss) Recognized in Income Three Months Ended June 30, | ||||||||||
(In millions) Type of hedge | Location | 2018 | 2017 | |||||||
Cash flow | Cost of products sold | $ | 0.5 | $ | 1.6 | |||||
Fair value | Other expense (income), net | 1.5 | 0.6 | |||||||
|
|
|
| |||||||
Total | $ | 2.0 | $ | 2.2 |
(In millions) |
| Classification and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships |
| |||||||||
|
| Six Months Ended June 30, 2019 |
| |||||||||
|
| Cost of products sold |
|
| Interest expense |
|
| Other income, net |
| |||
Total amounts per Consolidated Statements of Earnings |
| $ | 1,838.7 |
|
| $ | 48.2 |
|
| $ | 1.9 |
|
The effects of fair value and cash flow hedging: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on fair value hedging relationships |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items |
|
|
|
|
|
|
|
|
|
| 0.5 |
|
Derivative designated as hedging instruments |
|
|
|
|
|
|
|
|
|
| (0.2 | ) |
Gain (loss) on cash flow hedging relationships |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| 2.8 |
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
| Classification and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships |
| |||||||||
|
| Six Months Ended June 30, 2018 |
| |||||||||
|
| Cost of products sold |
|
| Interest expense |
|
| Other income, net |
| |||
Total amounts per Consolidated Statements of Earnings |
| $ | 1,719.9 |
|
| $ | 32.1 |
|
| $ | 6.2 |
|
The effects of fair value and cash flow hedging: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on fair value hedging relationships |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items |
|
|
|
|
|
|
|
|
|
| (1.6 | ) |
Derivative designated as hedging instruments |
|
|
|
|
|
|
|
|
|
| 1.2 |
|
Gain (loss) on cash flow hedging relationships |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| - |
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
| - |
|
|
|
|
|
The effective portion of cash flow hedges recognized in other comprehensive income were net gains of $4.0 million and $3.7 million in the six months ended June 30, 2018 and 2017, respectively. The effective portion of cash flow hedges recognized in other comprehensive income were net losses of $0.3 million and $1.6 million in the three months ended June 30, 2018 and 2017, respectively. In the six and three months ended June 30, 2018 and 2017, the ineffective portion of cash flow hedges recognized in other (income) expense, net, was insignificant.
1613
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. | Financial Instruments (Continued) |
The effects of derivative financial instruments on the statements of comprehensive income for the three months ended June 30, 2019 and 2018 were as follows:
(In millions) |
| Classification and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships |
| |||||||||
|
| Three Months Ended June 30, 2019 |
| |||||||||
|
| Cost of products sold |
|
| Interest expense |
|
| Other income, net |
| |||
Total amounts per Consolidated Statements of Earnings |
| $ | 969.6 |
|
| $ | 24.5 |
|
| $ | 0.7 |
|
The effects of fair value and cash flow hedging: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on fair value hedging relationships |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items |
|
|
|
|
|
|
|
|
|
| (0.5 | ) |
Derivative designated as hedging instruments |
|
|
|
|
|
|
|
|
|
| 0.7 |
|
Gain (loss) on cash flow hedging relationships |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| 1.6 |
|
|
|
|
|
|
|
|
|
Commodity contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| (0.1 | ) |
|
|
|
|
|
|
|
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
|
|
|
|
| 0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
| Classification and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships |
| |||||||||
|
| Three Months Ended June 30, 2018 |
| |||||||||
|
| Cost of products sold |
|
| Interest expense |
|
| Other income, net |
| |||
Total amounts per Consolidated Statements of Earnings |
| $ | 904.9 |
|
| $ | 17.4 |
|
| $ | 3.4 |
|
The effects of fair value and cash flow hedging: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on fair value hedging relationships |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items |
|
|
|
|
|
|
|
|
|
| (4.2 | ) |
Derivative designated as hedging instruments |
|
|
|
|
|
|
|
|
|
| 3.2 |
|
Gain (loss) on cash flow hedging relationships |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| 0.6 |
|
|
|
|
|
|
|
|
|
Commodity contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
| (0.1 | ) |
|
|
|
|
|
|
|
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income |
|
|
|
|
|
| — |
|
|
|
|
|
ASC
The cash flow hedges recognized in other comprehensive income was a net loss of $0.2 million and a net gain of $4.0 million in the six months ended June 30, 2019 and 2018, respectively. The cash flow hedges recognized in other comprehensive income was a net loss of $0.7 million and $0.3 million in the three months ended June 30, 2019 and 2018, respectively.
14
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.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 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.
The carrying value, net of underwriting commissions, price discounts, and debt issuance costs and fair value of debt as of June 30, 20182019 and December 31, 20172018 were as follows:
(In millions) | June 30, 2018 | December 31, 2017 |
| June 30, 2019 |
|
| December 31, 2018 |
| ||||||||||||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value |
| Carrying Value |
|
| Fair Value |
|
| Carrying Value |
|
| Fair Value |
| |||||||||||||||||
Revolving credit facility | $ | 900.0 | $ | 900.0 | $ | 615.0 | $ | 615.0 |
| $ | 575.0 |
|
| $ | 575.0 |
|
| $ | 320.0 |
|
| $ | 320.0 |
| ||||||||
Term Loan | 350.0 | 350.0 | — | — |
|
| 350.0 |
|
|
| 350.0 |
|
|
| 525.0 |
|
|
| 525.0 |
| ||||||||||||
Senior Notes | 893.3 | 898.5 | 892.6 | 926.3 |
|
| 1,490.3 |
|
|
| 1,552.4 |
|
|
| 1,489.0 |
|
|
| 1,490.4 |
|
The estimated fair value of our term loan and revolving credit facility is determined primarily using broker quotes, which are levelLevel 2 inputs. The estimated fair value of our Senior Notes is determined by using quoted market prices of our debt securities, which are level 2Level 1 inputs.
Assets and liabilities measured at fair value on a recurring basis as of June 30, 20182019 and December 31, 20172018 were as follows:
(In millions) | Fair Value |
| Fair Value |
| ||||||||||||
June 30, 2018 | December 31, 2017 |
| June 30, 2019 |
|
| December 31, 2018 |
| |||||||||
Assets |
|
|
|
|
|
|
|
| ||||||||
Derivative financial instruments (level 2) | $ | 9.4 | $ | 1.0 | ||||||||||||
Deferred compensation program assets (level 2) | 9.0 | 7.5 | ||||||||||||||
|
| |||||||||||||||
Derivative financial instruments (Level 2) |
| $ | 2.0 |
|
| $ | 6.0 |
| ||||||||
Deferred compensation program assets (Level 2) |
|
| 10.1 |
|
|
| 9.3 |
| ||||||||
Total assets | $ | 18.4 | $ | 8.5 |
| $ | 12.1 |
|
| $ | 15.3 |
| ||||
Liabilities |
|
|
|
|
|
|
|
| ||||||||
Derivative financial instruments (level 2) | $ | 2.0 | $ | 6.4 | ||||||||||||
Derivative financial instruments (Level 2) |
| $ | 1.6 |
|
| $ | 1.9 |
|
17
15
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Accumulated Other Comprehensive Loss
10. | Accumulated Other Comprehensive (Loss) Income |
Total accumulated other comprehensive (loss) income consists of net income and other changes in business equity from transactions and other events from sources other than shareholders. It includes currency translation gains and losses, unrealized gains and losses from derivative instruments designated as cash flow hedges, and defined benefit plan adjustments. Theafter-tax components of and changes in accumulated other comprehensive loss(loss) income for the six and three months ended June 30, 2019 and 2018 were as follows:
(In millions) | Foreign Currency Adjustments | Derivative Hedging Gain (Loss) | Defined Benefit Plan Adjustments(a) | Accumulated Other Comprehensive Loss | ||||||||||||
Balance at December 31, 2016 | $ | (28.0 | ) | $ | (0.6 | ) | $ | (43.3 | ) | $ | (71.9 | ) | ||||
Amounts classified into accumulated other comprehensive income (loss) | 17.7 | 3.3 | — | 21.0 | ||||||||||||
Amounts reclassified from accumulated other comprehensive loss | — | (0.5 | ) | (3.2 | ) | (3.7 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Net current-period other comprehensive income (loss) | 17.7 | 2.8 | (3.2 | ) | 17.3 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at June 30, 2017 | $ | (10.3 | ) | $ | 2.2 | $ | (46.5 | ) | $ | (54.6 | ) | |||||
Balance at December 31, 2017 | $ | 5.8 | $ | (2.4 | ) | $ | (42.6 | ) | $ | (39.2 | ) | |||||
Amounts classified into accumulated other comprehensive income (loss) | (17.1 | ) | 2.9 | 0.2 | (14.0 | ) | ||||||||||
Amounts reclassified from accumulated other comprehensive loss | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net current-period other comprehensive (loss) income | (17.1 | ) | 2.9 | 0.2 | (14.0 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at June 30, 2018 | $ | (11.3 | ) | $ | 0.5 | $ | (42.4 | ) | $ | (53.2 | ) |
(In millions) |
| Foreign Currency Adjustments |
|
| Derivative Hedging Gain (Loss) |
|
| Defined Benefit Plan Adjustments(a) |
|
| Accumulated Other Comprehensive Loss |
| ||||
Balance at December 31, 2017 |
| $ | 5.8 |
|
| $ | (2.4 | ) |
| $ | (42.6 | ) |
| $ | (39.2 | ) |
Amounts classified into accumulated other comprehensive (loss) income |
|
| (17.1 | ) |
|
| 2.9 |
|
|
| 0.2 |
|
|
| (14.0 | ) |
Amounts reclassified from accumulated other comprehensive (loss) income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net current-period other comprehensive (loss) income |
|
| (17.1 | ) |
|
| 2.9 |
|
|
| 0.2 |
|
|
| (14.0 | ) |
Balance at June 30, 2018 |
| $ | (11.3 | ) |
| $ | 0.5 |
|
| $ | (42.4 | ) |
| $ | (53.2 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018 |
| $ | (25.3 | ) |
| $ | 4.2 |
|
| $ | (45.9 | ) |
| $ | (67.0 | ) |
Amounts classified into accumulated other comprehensive (loss) income |
|
| 13.7 |
|
|
| 0.3 |
|
|
| — |
|
|
| 14.0 |
|
Adoption of ASU 2018-02(b) |
|
| — |
|
|
| — |
|
|
| (8.6 | ) |
|
| (8.6 | ) |
Amounts reclassified from accumulated other comprehensive (loss) income |
|
| — |
|
|
| (2.5 | ) |
|
| — |
|
|
| (2.5 | ) |
Net current-period other comprehensive (loss) income |
|
| 13.7 |
|
|
| (2.2 | ) |
|
| (8.6 | ) |
|
| 2.9 |
|
Balance at June 30, 2019 |
| $ | (11.6 | ) |
| $ | 2.0 |
|
| $ | (54.5 | ) |
| $ | (64.1 | ) |
(a) | See Note 12, “Defined Benefit Plans,” for further information on the adjustments related to defined benefit plans. |
(b) | See Note 2, “Recently Issued Accounting Standards,” for further information on the impact of adopting ASU 2018-02. |
(In millions) |
| Foreign Currency Adjustments |
|
| Derivative Hedging Gain (Loss) |
|
| Defined Benefit Plan Adjustments(a) |
|
| Accumulated Other Comprehensive Loss |
| ||||
Balance at March 31, 2018 |
| $ | 5.0 |
|
| $ | 1.4 |
|
| $ | (42.4 | ) |
| $ | (36.0 | ) |
Amounts classified into accumulated other comprehensive (loss) income |
|
| (16.3 | ) |
|
| (0.6 | ) |
|
| — |
|
|
| (16.9 | ) |
Amounts reclassified from accumulated other comprehensive (loss) income |
|
| — |
|
|
| (0.3 | ) |
|
| — |
|
|
| (0.3 | ) |
Net current-period other comprehensive (loss) income |
|
| (16.3 | ) |
|
| (0.9 | ) |
|
| — |
|
|
| (17.2 | ) |
Balance at June 30, 2018 |
| $ | (11.3 | ) |
| $ | 0.5 |
|
| $ | (42.4 | ) |
| $ | (53.2 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2019 |
| $ | (16.5 | ) |
| $ | 3.7 |
|
| $ | (54.5 | ) |
| $ | (67.3 | ) |
Amounts classified into accumulated other comprehensive (loss) income |
|
| 4.9 |
|
|
| (0.3 | ) |
|
| — |
|
|
| 4.6 |
|
Amounts reclassified from accumulated other comprehensive (loss) income |
|
| — |
|
|
| (1.4 | ) |
|
| — |
|
|
| (1.4 | ) |
Net current-period other comprehensive (loss) income |
|
| 4.9 |
|
|
| (1.7 | ) |
|
| — |
|
|
| 3.2 |
|
Balance at June 30, 2019 |
| $ | (11.6 | ) |
| $ | 2.0 |
|
| $ | (54.5 | ) |
| $ | (64.1 | ) |
(a) | See Note 12, “Defined Benefit Plans,” for further information on the adjustments related to defined benefit plans. |
1816
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. | Accumulated Other Comprehensive |
The reclassifications out of accumulated other comprehensive loss for the six and three months ended June 30, 20182019 and 20172018 were as follows:
(In millions) | ||||||||||||
Details about Accumulated Other Comprehensive Loss Components | Amount Reclassified from Accumulated Other Comprehensive Loss Six Months Ended June 30, | Affected Line Item in the Statement of Comprehensive Income | ||||||||||
2018 | 2017 | |||||||||||
Gains (losses) on cash flow hedges | ||||||||||||
Foreign exchange contracts | $ | — | $ | 1.0 | Cost of products sold | |||||||
|
|
|
| |||||||||
— | 1.0 | Total before tax | ||||||||||
— | (0.5 | ) | Tax expense | |||||||||
|
|
|
| |||||||||
$ | — | $ | 0.5 | Net of tax | ||||||||
Defined benefit plan items | ||||||||||||
Recognition of prior service credits | $ | — | $ | 5.1 | (a) | |||||||
|
|
|
| |||||||||
— | 5.1 | Total before tax | ||||||||||
— | (1.9 | ) | Tax expense | |||||||||
|
|
|
| |||||||||
$ | — | $ | 3.2 | Net of tax | ||||||||
|
|
|
| |||||||||
Total reclassifications for the period | $ | — | $ | 3.7 | Net of tax |
(In millions) | ||||||||||||
Details about Accumulated Other Comprehensive Loss Components | Amount Reclassified from Accumulated Other Comprehensive Loss Three Months Ended June 30, | Affected Line Item in the Statement of Comprehensive Income | ||||||||||
2018 | 2017 | |||||||||||
Gains (losses) on cash flow hedges | ||||||||||||
Foreign exchange contracts | $ | 0.5 | $ | 1.7 | Cost of products sold | |||||||
Commodity contracts | — | (0.1 | ) | Cost of products sold | ||||||||
|
|
|
| |||||||||
0.5 | 1.6 | Total before tax | ||||||||||
(0.2 | ) | (0.5 | ) | Tax expense | ||||||||
|
|
|
| |||||||||
$ | 0.3 | $ | 1.1 | Net of tax | ||||||||
Defined benefit plan items | ||||||||||||
Recognition of prior service credits | $ | — | $ | 2.1 | (a) | |||||||
|
|
|
| |||||||||
— | 2.1 | Total before tax | ||||||||||
— | (0.7 | ) | Tax expense | |||||||||
|
|
|
| |||||||||
$ | — | $ | 1.4 | Net of tax | ||||||||
|
|
|
| |||||||||
Total reclassifications for the period | $ | 0.3 | $ | 2.5 | Net of tax |
(In millions) | ||||||||||
Details about Accumulated Other Comprehensive Loss Components |
| Amount Reclassified from Accumulated Other Comprehensive Loss Six months ended June 30, |
|
| Affected Line Item in the Statement of Comprehensive Income | |||||
|
| 2019 |
|
| 2018 |
|
|
| ||
Gains (losses) on cash flow hedges |
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
| $ | 2.8 |
|
|
| — |
|
| Cost of products sold |
Interest rate contracts |
|
| 0.2 |
|
|
| — |
|
| Interest expense |
|
|
| 3.0 |
|
|
| — |
|
| Total before tax |
|
|
| (0.5 | ) |
|
| — |
|
| Tax expense |
Total reclassifications for the period |
| $ | 2.5 |
|
|
| — |
|
| Net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) | ||||||||||
Details about Accumulated Other Comprehensive Loss Components |
| Amount Reclassified from Accumulated Other Comprehensive Loss Three Months Ended June 30, |
|
| Affected Line Item in the Statement of Comprehensive Income | |||||
|
| 2019 |
|
| 2018 |
|
|
| ||
Gains (losses) on cash flow hedges |
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
| $ | 1.6 |
|
| $ | 0.6 |
|
| Cost of products sold |
Commodity contracts |
|
| (0.1 | ) |
|
| (0.1 | ) |
| Cost of products sold |
Interest rate contracts |
|
| 0.1 |
|
|
| — |
|
| Interest expense |
|
|
| 1.6 |
|
|
| 0.5 |
|
| Total before tax |
|
|
| (0.2 | ) |
|
| (0.2 | ) |
| Tax expense |
Total reclassifications for the period |
| $ | 1.4 |
|
| $ | 0.3 |
|
| Net of tax |
19
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. | Revenue |
Our principal performance obligations are the sale of kitchen and bath cabinets, faucets and accessories, fiberglass and steel entry-door systems and locks, safes, safety and security devices (collectively, “goods” or “products”). We recognize revenue for the sale of goods based on our assessment of when control transfers to our customers. For the majority of our sales, we recognize revenue at the point in time when we ship product from our facilities to our customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods to our customers. Payment terms on our product sales normally range from 30 to 90 days. Taxes assessed by a governmental authority that we collect are excluded from revenue. The expected costs associated with our contractual warranties will continue to be recognized as expense when the products are sold. See Note 14, “Product Warranties,” for further discussion.
We record estimates to reduce revenue for customer programs and incentives, which are considered variable consideration, and include price discounts, volume-based incentives, promotions and cooperative advertising when revenue is recognized in order to determine the amount of consideration the Company will ultimately be entitled to receive. These estimates are based on historical and projected experience for each type of customer. In addition, for certain customer program incentives, we receive an identifiable benefit (goods or services) in exchange for the consideration given and record the associated expenditure in selling, general and administrative expenses.
We account for shipping and handling costs that occur after the customer has obtained control of a product as a fulfillment activity (i.e., as an expense) rather than as a promised service (i.e., as a revenue element). These costs are classified within selling, general and administrative expenses.
Settlement of our outstanding accounts receivable balances is normally within 30 to 90 days of the original sale transaction date. Obligations arise for us from customer rights to return our goods for any reason, including among others, product obsolescence, stock rotations,trade-in agreements for newer products and upon termination of a customer contract. We estimate future product returns at the time of sale based on historical experience and record a corresponding refund obligation, which amounted to $12.4 million as of June 30, 2018. Refund obligations are classified within other current liabilities in our consolidated balance sheet. Return assets related to the refund obligation are measured at the carrying amount of the goods at the time of sale, less any expected costs to recover the goods and any expected reduction in value. Return assets are classified within other current assets and were immaterial as of June 30, 2018.
The Company disaggregates revenue from contracts with customers into (i) major sales distribution channels in the U.S. and (ii) total sales to customers outside the U.S. market as these categories depict the nature, amount, timing and uncertainty of revenues and cash flows that are affected by economic factors. The following table disaggregates our consolidated revenue by major sales distribution channels for the six and three months ended June 30, 2018.2019 and 2018:
20
FORTUNE BRANDS HOME & SECURITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions) |
| Six Months Ended June 30, |
|
| Three Months Ended June 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Wholesalers(1) |
| $ | 1,317.8 |
|
| $ | 1,268.7 |
|
| $ | 706.0 |
|
| $ | 683.1 |
|
Home Center retailers(2) |
|
| 821.9 |
|
|
| 724.7 |
|
|
| 431.0 |
|
|
| 375.0 |
|
Other retailers(3) |
|
| 142.4 |
|
|
| 157.2 |
|
|
| 75.0 |
|
|
| 81.1 |
|
Builder direct |
|
| 112.4 |
|
|
| 110.1 |
|
|
| 57.3 |
|
|
| 58.6 |
|
U.S. net sales |
|
| 2,394.5 |
|
|
| 2,260.7 |
|
|
| 1,269.3 |
|
|
| 1,197.8 |
|
International(4) |
|
| 440.6 |
|
|
| 422.9 |
|
|
| 237.9 |
|
|
| 231.2 |
|
Net sales |
| $ | 2,835.1 |
|
| $ | 2,683.6 |
|
| $ | 1,507.2 |
|
| $ | 1,429.0 |
|
(In millions) | ||||||||
Six Months Ended June 30, | Three Months Ended June 30, | |||||||
2018 | 2018 | |||||||
Wholesalers(1) | $ | 1,268.7 | $ | 683.1 | ||||
Home Center retailers(2) | 724.7 | 375.0 | ||||||
Other retailers(3) | 157.2 | 81.1 | ||||||
Builder direct | 110.1 | 58.6 | ||||||
|
|
|
| |||||
U.S. net sales | 2,260.7 | 1,197.8 | ||||||
International(4) | 422.9 | 231.2 | ||||||
|
|
|
| |||||
Net sales | $ | 2,683.6 | $ | 1,429.0 | ||||
|
|
|
|
FORTUNE BRANDS HOME & SECURITY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of net periodic benefit cost for pension
Service cost
The effective income tax rates for the six months ended June 30, 2019 and 2018 were 24.0% and
The effective income tax rates for the three months ended June 30, 2019 and 2018 were 23.2% and
It is reasonably possible that, within the next 12 months, total unrecognized tax benefits may decrease in the range of
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 historic claim experience and the nature of the product category. The following table summarizes activity related to our product warranty liability for the six months ended June 30, 2019 and 2018,
Beginning in the third quarter of 2018, we combined our Doors and Security segments and historical financial segment information has been restated to conform to the new segment presentation. Net sales and operating income for the six and three months ended June 30,
19 FORTUNE BRANDS HOME & SECURITY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pre-tax restructuring and other charges for the six and three months ended June 30,
Restructuring and other charges in the first six months of 2019 largely related to severance costs within our Plumbing and Cabinets segments and costs associated with closing facilities within our Plumbing and Doors & Security segments. Restructuring and other charges in the first six months of 2018 largely related to severance costs
Restructuring and other charges in the second quarter of 2019 largely related to severance costs within our Plumbing and Cabinets segments and costs associated with closing facilities within our Plumbing segment. Restructuring and other charges in the second quarter of 2018 primarily resulted from severance costs Reconciliation of Restructuring
FORTUNE BRANDS HOME & SECURITY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The computations of earnings per common share for the six and three months ended June 30, 2019 and 2018 were as follows:
21
FORTUNE BRANDS HOME & SECURITY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 Lease Commitments Future minimum rental payments under non-cancelable operating leases as of December 31, 2018 were as follows:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto, which are included in this report, as well as our audited consolidated financial statements for the year ended December 31, 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 expected capital spending, expected pension contributions, the anticipated impact of recently issued accounting standards on our financial statements, planned business strategies, anticipated market potential, future financial performance, 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 leading home and security products company with a portfolio of leading branded products used for residential home repair, remodeling, new construction and security applications.
We believe 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 shareholder value. We believe the Company’s track record reflects the long-term attractiveness and potential of our categories and our leading brands. We believe our most attractive opportunities are to invest in profitable organic growth initiatives. We also believe that The U.S. market for our We may be impacted by fluctuations in raw material and transportation costs, changes in foreign exchange and promotional activity among our competitors. We strive to offset the potential unfavorable impact of these items with productivity improvement initiatives and price increases. In
RESULTS OF OPERATIONS Six Months Ended June 30,
The following discussion of consolidated results of operations and segment results refers to the six months ended June 30, Net sales Net sales increased Cost of products sold Cost of products sold increased Selling, general and administrative expenses Selling, general and administrative expenses increased
Amortization of intangible assets Amortization of intangible assets increased Restructuring charges Restructuring charges of $5.7 million in the six months ended June 30, 2019 primarily related to
Plumbing and Cabinets segments and costs associated with closing facilities within our Plumbing and Doors & Security segments. Restructuring charges of $11.6 million in the six months ended June 30, 2018 primarily related to severance costs Operating income Operating income RESULTS OF OPERATIONS (Continued) Interest expense Interest expense increased Other income, net Other income, net, was $1.9 million in the six months ended June 30, 2019, compared to $6.2 million in the six months ended June 30, Income taxes The effective income tax rates for the six months ended June 30, 2019 and 2018 were 24.0% and
Net income from continuing operations Net income from continuing operations was $221.6 million in the six months ended June 30, 2019 compared to $204.8 million in the six months ended June 30,
Results By Segment Cabinets Net sales Operating income Plumbing Net sales increased Operating income increased
unfavorable channel mix. Doors & Security Net sales increased Operating income
Corporate Corporate expenses decreased by
RESULTS OF OPERATIONS (Continued) Three Months Ended June 30,
The following discussion of consolidated results of operations and segment results refers to the three months ended June 30, Net sales Net sales increased Cost of products sold Cost of products sold increased Selling, general and administrative expenses Selling, general and administrative expenses increased
Amortization of intangible assets Amortization of intangible assets increased
Restructuring charges Restructuring charges of $4.5 million in the three months ended June 30, Operating income Operating income RESULTS OF OPERATIONS (Continued) Interest expense Interest expense increased Other income, net Other income, net, was $0.7 million in the three months ended June 30, 2019, compared to $3.4 million in the three months ended June 30, Income taxes The effective income tax rates for the three months ended June 30, 2019 and 2018 were 23.2% and
Net income from continuing operations Net income from continuing operations was $137.1 million in the three months ended June 30, 2019 compared to $129.7 million in the three months ended June 30,
Results By Segment Cabinets Net sales decreased Operating income decreased
Net sales increased
These benefits were partially offset by lower sales volume in Canada and luxury-branded products, higher rebates costs as well as unfavorable foreign exchange of approximately $9 million. Operating income increased
Doors & Security Net sales increased by $58.4 million, or 19.0%, principally due to the benefit from the Fiberon acquisition ($59 million) and price increases to help mitigate cumulative raw material cost increases. These benefits were partially offset by unfavorable mix and higher Operating income increased by $4.7 million, or 10.4%, due to the benefit from the Fiberon acquisition, partly offset by unfavorable product mix and Corporate Corporate expenses decreased by
LIQUIDITY AND CAPITAL RESOURCES Our primary liquidity needs are to support working capital requirements, fund capital expenditures and service indebtedness, as well as to finance acquisitions, repurchase shares of our common stock and pay dividends to stockholders, as deemed appropriate. Our principal sources of liquidity are cash on hand, cash flows from operating activities, Our operating income is generated by our subsidiaries. There are no restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Fortune Brands.
In June 2015, we issued $900 million of In March 2018, the Company entered into a $350 million term loan for general corporate purposes In June 2016, we amended and restated our 2011 credit agreement to combine and rollover the existing revolving credit facility and term In the first half of 2019, we repurchased 1.1 million shares of our outstanding common stock under the Company’s share repurchase programs for $50.0 million. As of June 30, 2019, the Company’s total remaining share repurchase authorization under the remaining program was approximately $364 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. We periodically review our portfolio of brands and evaluate potential strategic transactions and other capital initiatives to increase shareholder 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,
In and term loan facilities. The results of operations are included in the Doors & Security segment from the date of acquisition.
On June 30,
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 Cash Flows Below is a summary of cash flows for the six months ended June 30,
Net cash provided by operating activities was $112.0 million in the six months ended June 30, 2019, compared to net cash provided by operating activities of $137.3 million in the six months ended June 30, Net cash used in investing activities was $50.8 million in the six months ended June 30,
Net cash used in financing activities was $53.0 million in the six months ended June 30,
Pension Plans Subsidiaries of Fortune Brands Foreign Exchange We have operations in various foreign countries, principally Canada, China, Mexico, the United Kingdom, France, Australia, Japan and RECENTLY ISSUED ACCOUNTING STANDARDS The adoption of recent accounting standards, as discussed in Note 2, “Recently Issued Accounting Standards,” to our Consolidated Financial Statements, has not had and is not expected to have a significant impact on our revenue, earnings or liquidity.
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,
|