10-Q 1 fbhs-20220331.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2022

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

 

Commission file number 1-35166

 

FORTUNE BRANDS HOME & SECURITY, INC.

 

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

62-1411546

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

520 Lake Cook Road, Deerfield, Illinois 60015-5611

 

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (847) 484-4400

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

FBHS

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, at April 15, 2022 was 130,807,324.

 

 

 

1


PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS.

FORTUNE BRANDS HOME & SECURITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three Months Ended March 31, 2022 and 2021

(In millions, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2022

 

 

2021

 

Net sales

 

$

1,917.3

 

 

$

1,771.0

 

Cost of products sold

 

 

1,237.8

 

 

 

1,126.9

 

Selling, general and administrative expenses

 

 

409.5

 

 

 

371.5

 

Amortization of intangible assets

 

 

16.0

 

 

 

16.6

 

Restructuring charges

 

 

0.6

 

 

 

7.6

 

Operating income

 

 

253.4

 

 

 

248.4

 

Interest expense

 

 

21.8

 

 

 

21.4

 

Other (income) expense, net

 

 

(1.3

)

 

 

3.3

 

Income before taxes

 

 

232.9

 

 

 

223.7

 

Income tax

 

 

52.0

 

 

 

45.9

 

Net income

 

$

180.9

 

 

$

177.8

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

1.36

 

 

$

1.28

 

Diluted earnings per common share

 

$

1.34

 

 

$

1.26

 

 

 

 

 

 

 

 

Comprehensive income

 

$

240.8

 

 

$

181.9

 

 

See notes to condensed consolidated financial statements.

 

2


FORTUNE BRANDS HOME & SECURITY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

 

 

March 31,
2022

 

 

December 31,
2021

 

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

378.2

 

 

$

471.5

 

Accounts receivable less allowances for discounts and credit losses

 

 

1,011.6

 

 

 

885.7

 

Inventories

 

 

1,334.7

 

 

 

1,193.8

 

Other current assets

 

 

232.2

 

 

 

193.5

 

Total current assets

 

 

2,956.7

 

 

 

2,744.5

 

Property, plant and equipment, net of accumulated depreciation

 

 

1,064.3

 

 

 

1,009.5

 

Operating lease assets

 

 

184.0

 

 

 

191.7

 

Goodwill

 

 

2,487.5

 

 

 

2,465.1

 

Other intangible assets, net of accumulated amortization

 

 

1,382.5

 

 

 

1,383.8

 

Other assets

 

 

168.0

 

 

 

141.6

 

Total assets

 

$

8,243.0

 

 

$

7,936.2

 

Liabilities and equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Current portion of long-term debt

 

$

 

 

$

400.0

 

Accounts payable

 

 

728.1

 

 

 

764.9

 

Other current liabilities

 

 

626.7

 

 

 

806.2

 

Total current liabilities

 

 

1,354.8

 

 

 

1,971.1

 

Long-term debt

 

 

3,367.9

 

 

 

2,309.8

 

Deferred income taxes

 

 

196.4

 

 

 

176.0

 

Accrued defined benefit plans

 

 

77.2

 

 

 

79.7

 

Operating lease liabilities

 

 

151.1

 

 

 

158.8

 

Other non-current liabilities

 

 

180.8

 

 

 

176.0

 

Total liabilities

 

 

5,328.2

 

 

 

4,871.4

 

Commitments and contingencies (see Note 17)

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

Common stock(a)

 

 

1.9

 

 

 

1.9

 

Paid-in capital

 

 

3,030.8

 

 

 

3,018.3

 

Accumulated other comprehensive income (loss)

 

 

35.3

 

 

 

(24.6

)

Retained earnings

 

 

2,989.4

 

 

 

2,807.9

 

Treasury stock

 

 

(3,142.6

)

 

 

(2,738.7

)

Total stockholders' equity

 

 

2,914.8

 

 

 

3,064.8

 

Total liabilities and equity

 

$

8,243.0

 

 

$

7,936.2

 

 

(a) Common stock, par value $0.01 per share; 186.0 million shares and 185.3 million shares issued at March 31, 2022 and December 31, 2021, respectively.

 

See notes to condensed consolidated financial statements.

 

3


FORTUNE BRANDS HOME & SECURITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2022 and 2021

(In millions)

(Unaudited)

 

 

 

2022

 

 

2021

 

Operating activities

 

 

 

 

 

 

Net income

 

$

180.9

 

 

$

177.8

 

Non-cash adjustments:

 

 

 

 

 

 

Depreciation

 

 

30.9

 

 

 

31.1

 

Amortization of intangibles

 

 

16.0

 

 

 

16.6

 

Non-cash lease expense

 

 

10.9

 

 

 

10.7

 

Stock-based compensation

 

 

12.3

 

 

 

11.6

 

Deferred taxes

 

 

5.7

 

 

 

(0.1

)

Amortization of deferred financing fees

 

 

0.8

 

 

 

1.2

 

Loss on equity investments

 

 

 

 

 

2.9

 

(Gain) loss on sale of property, plant and equipment

 

 

(6.1

)

 

 

0.2

 

Changes in assets and liabilities:

 

 

 

 

 

 

Increase in accounts receivable

 

 

(118.1

)

 

 

(91.6

)

Increase in inventories

 

 

(128.2

)

 

 

(86.4

)

Decrease in accounts payable

 

 

(37.2

)

 

 

(15.9

)

Increase in other assets

 

 

(27.1

)

 

 

(10.9

)

Decrease in accrued expenses and other liabilities

 

 

(151.8

)

 

 

(150.7

)

Increase in accrued taxes

 

 

27.9

 

 

 

34.3

 

Net cash used in operating activities

 

 

(183.1

)

 

 

(69.2

)

Investing activities

 

 

 

 

 

 

Capital expenditures (a)

 

 

(60.8

)

 

 

(25.4

)

Proceeds from the disposition of assets

 

 

8.0

 

 

 

1.7

 

Cost of acquisitions, net of cash acquired

 

 

(61.6

)

 

 

5.2

 

Net cash used in investing activities

 

 

(114.4

)

 

 

(18.5

)

Financing activities

 

 

 

 

 

 

Issuance of short-term debt

 

 

700.0

 

 

 

 

Repayment of short-term debt

 

 

(1,100.0

)

 

 

 

Issuance of long-term debt

 

 

2,874.5

 

 

 

370.0

 

Repayment of long-term debt

 

 

(1,814.0

)

 

 

(260.0

)

Proceeds from the exercise of stock options

 

 

0.2

 

 

 

10.6

 

Treasury stock purchases(b)

 

 

(377.1

)

 

 

(54.1

)

Employee withholding taxes related to stock-based compensation

 

 

(24.3

)

 

 

(7.8

)

Dividends to stockholders

 

 

(37.2

)

 

 

(36.0

)

Other financing, net

 

 

(18.9

)

 

 

0.1

 

Net cash provided by financing activities

 

 

203.2

 

 

 

22.8

 

Effect of foreign exchange rate changes on cash

 

 

0.7

 

 

 

1.7

 

Net decrease in cash and cash equivalents

 

$

(93.6

)

 

$

(63.2

)

Cash, cash equivalents and restricted cash(c) at beginning of period

 

$

476.1

 

 

$

425.0

 

Cash, cash equivalents and restricted cash(c) at end of period

 

$

382.5

 

 

$

361.8

 

 

(a) Capital expenditures of $14.8 million and $7.4 million that had not been paid as of March 31, 2022 and 2021, respectively, were excluded from the Statement of Cash Flows.

(b) Treasury stock purchases for the three months ended March 31, 2022 excludes $2.5 million of purchases made in March 2022 that were not settled until April 2022.

(c) Restricted cash of $1.3 million and $3.0 million is included in Other current assets and Other assets, respectively, as of March 31, 2022 and restricted cash of $1.1 million and $4.7 million is included in Other current assets and Other assets, respectively, as of March 31, 2021. Restricted cash of $1.3 million and $3.3 million is included in Other current assets and Other assets, respectively, as of December 31, 2021.

See notes to condensed consolidated financial statements.

 

4


FORTUNE BRANDS HOME & SECURITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Three Months Ended March 31, 2022 and 2021

(In millions)

(Unaudited)

 

 

 

Common
Stock

 

 

Paid-In
Capital

 

 

Accumulated
Other
Comprehensive
(Loss) Income

 

 

Retained
Earnings

 

 

Treasury
Stock

 

 

Total
Equity

 

Balance at December 31, 2020

 

$

1.8

 

 

$

2,926.3

 

 

$

(55.1

)

 

$

2,180.2

 

 

$

(2,277.7

)

 

$

2,775.5

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

177.8

 

 

 

 

 

 

177.8

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

4.1

 

 

 

 

 

 

 

 

 

4.1

 

Stock options exercised

 

 

0.1

 

 

 

17.2

 

 

 

 

 

 

 

 

 

 

 

 

17.3

 

Stock-based compensation

 

 

 

 

 

11.6

 

 

 

 

 

 

 

 

 

(7.8

)

 

 

3.8

 

Treasury stock purchases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(54.1

)

 

 

(54.1

)

Balance at March 31, 2021

 

$

1.9

 

 

$

2,955.1

 

 

$

(51.0

)

 

$

2,358.0

 

 

$

(2,339.6

)

 

$

2,924.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2021

 

$

1.9

 

 

$

3,018.3

 

 

$

(24.6

)

 

$

2,807.9

 

 

$

(2,738.7

)

 

$

3,064.8

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

180.9

 

 

 

 

 

 

180.9

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

59.9

 

 

 

 

 

 

 

 

 

59.9

 

Stock options exercised

 

 

 

 

 

0.2

 

 

 

 

 

 

 

 

 

 

 

 

0.2

 

Stock-based compensation

 

 

 

 

 

12.3

 

 

 

 

 

 

 

 

 

(24.3

)

 

 

(12.0

)

Treasury stock purchases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(379.6

)

 

 

(379.6

)

Dividends

 

 

 

 

 

 

 

 

 

 

 

0.6

 

 

 

 

 

 

0.6

 

Balance at March 31, 2022

 

$

1.9

 

 

$

3,030.8

 

 

$

35.3

 

 

$

2,989.4

 

 

$

(3,142.6

)

 

$

2,914.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements

 

5


FORTUNE BRANDS HOME & SECURITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 March 31, 2022, the related condensed consolidated statements of comprehensive income and equity for the three months ended March 31, 2022 and 2021, and the related condensed consolidated statements of cash flows for the three months ended March 31, 2022 and 2021 are unaudited. The presentation of these financial statements requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. In the opinion of management, all adjustments necessary for a fair statement of the financial statements have been included. Interim results may not be indicative of results for a full year.

In the first quarter of 2022, our Plumbing segment was renamed “Water Innovations” in order to better align with our key brands and organizational purpose. The Plumbing segment name change is to the name only and had no impact on the Company’s historical financial position, results of operations, cash flow or segment level results previously reported.

In January 2022, we acquired 100% of the outstanding equity of Solar Innovations LLC and an affiliated entity (together, "Solar"), a leading producer of wide-opening exterior door systems and outdoor enclosures, for a purchase price of approximately $63 million. The purchase price is subject to a final post-closing working capital adjustment. We financed the transaction using cash on hand and borrowings under our revolving credit facility. The results of Solar are reported as part of the Outdoors & Security segment. Its complementary product offerings supports the segment’s outdoor living strategy.

The condensed consolidated financial statements and notes are presented pursuant to the rules and regulations of the Securities and Exchange Commission and do not contain certain information included in our annual audited consolidated financial statements and notes. The December 31, 2021 condensed consolidated balance sheet was derived from our audited consolidated financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles (“GAAP”). This Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2021.

2. Recently Issued Accounting Standards

Disclosures by Business Entities About Government Assistance

In November 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-10, Government Assistance (Topic 832). The new guidance, codified in Accounting Standards Codification ("ASC") 832, requires business entities that account for transactions with a government by applying a grant or contribution model by analogy to disclose information about government assistance recorded during the period. ASU 2021-10 is effective for all entities for annual reporting periods beginning after December 15, 2021. The adoption of this guidance did not have a material effect on our financial statements.

 

 

6


FORTUNE BRANDS HOME & SECURITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Balance Sheet Information

Supplemental information on our balance sheets is as follows:

 

(In millions)

 

March 31,
2022

 

 

December 31,
2021

 

Inventories:

 

 

 

 

 

 

Raw materials and supplies

 

$

509.5

 

 

$

455.1

 

Work in process

 

 

105.6

 

 

 

93.0

 

Finished products

 

 

719.6

 

 

 

645.7

 

Total inventories

 

$

1,334.7

 

 

$

1,193.8

 

 

 

 

 

 

 

 

Property, plant and equipment, gross

 

$

2,362.3

 

 

$

2,278.0

 

Less: accumulated depreciation

 

 

1,298.0

 

 

 

1,268.5

 

Property, plant and equipment, net

 

$

1,064.3

 

 

$

1,009.5

 

 

4. Acquisitions and Dispositions

Solar

In January 2022, we acquired 100% of the outstanding equity of Solar Innovations LLC and an affiliated entity (together, "Solar"), a leading producer of wide-opening exterior door systems and outdoor enclosures, for a purchase price of approximately $63 million. The purchase price is subject to a final post-closing working capital adjustment. We financed the transaction using cash on hand and borrowings under our revolving credit facility. The results of Solar are reported as part of the Outdoors & Security segment. Its complementary product offerings supports the segment’s outdoor living strategy. Solar's net sales and operating income for the three months ended March 31, 2022 were not material to the Company. We have not included pro forma financial information as it is immaterial to our condensed consolidated statements of comprehensive income. The fair value allocated to assets acquired and liabilities assumed as of January 31, 2022 was $61.6 million, net of cash acquired of $4.8 million, which includes $20.3 million of goodwill. Goodwill includes expected sales and cost synergies and is expected to be deductible for income tax purposes.

Flo Technologies

In 2018, our Water Innovations segment entered into a strategic partnership with, and acquired non-controlling equity interests in, Flo Technologies, Inc. ("Flo"), a U.S. manufacturer of comprehensive water monitoring and shut-off systems with leak detection technologies. In January 2020, we entered into an agreement to acquire the remaining outstanding shares of Flo in a multi-phase transaction. As part of this agreement, we acquired a majority of Flo’s outstanding shares during 2020 and entered into a forward contract to purchase all remaining shares of Flo during the first quarter of 2022 for a price based on a multiple of Flo’s 2021 sales and adjusted earnings before interest and taxes. During the three months ended March 31, 2022, we made a final cash payment of $16.7 million to the legacy minority shareholders to acquire such shares which is reflected within Other financing, net in our consolidated statements of cash flows.

The minority shareholders’ substantive participating rights expired on January 1, 2021, at which time we obtained control of, and began consolidating, Flo in our results of operations and statements of financial positions and cash flows. Immediately prior to consolidating Flo, we recognized a non-cash loss of $4.5 million within other expense during the three months ended March 31, 2021 related to the remeasurement of our previously existing investment in Flo. The fair value allocated to assets acquired and liabilities assumed as of January 1, 2021 was $87.8 million, net of cash acquired of $9.7 million, which includes $65.3 million of goodwill. Goodwill includes expected sales and cost synergies and is not expected to be deductible for income tax purposes.

 

7


FORTUNE BRANDS HOME & SECURITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5. Goodwill and Identifiable Intangible Assets

We had goodwill of $2,487.5 million and $2,465.1 million as of March 31, 2022 and December 31, 2021, respectively. The change in the net carrying amount of goodwill by segment was as follows:

 

(In millions)

 

Water Innovations

 

 

Outdoors &
Security

 

 

Cabinets

 

 

Total
Goodwill

 

Goodwill at December 31, 2021(a)

 

$

814.1

 

 

$

724.8

 

 

$

926.2

 

 

$

2,465.1

 

Year-to-date translation adjustments

 

 

0.9

 

 

 

0.4

 

 

 

0.8

 

 

 

2.1

 

Acquisition-related adjustments

 

 

 

 

 

20.3

 

 

 

 

 

 

20.3

 

Goodwill at March 31, 2022(a)

 

$

815.0

 

 

$

745.5

 

 

$

927.0

 

 

$

2,487.5

 

(a) Net of accumulated impairment losses of $399.5 million in the Outdoors & Security segment.

The gross carrying value and accumulated amortization by class of identifiable intangible assets as of March 31, 2022 and December 31, 2021 were as follows:

 

(In millions)

 

As of March 31, 2022

 

 

As of December 31, 2021

 

 

 

Gross
Carrying
Amounts

 

 

Accumulated
Amortization

 

 

Net
Book
Value

 

 

Gross
Carrying
Amounts

 

 

Accumulated
Amortization

 

 

Net
Book
Value

 

Indefinite-lived tradenames

 

$

712.4

 

 

$

 

 

$

712.4

 

 

$

711.1

 

 

$

 

 

$

711.1

 

Amortizable intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tradenames

 

 

40.1

 

 

 

(16.1

)

 

 

24.0

 

 

 

36.4

 

 

 

(15.5

)

 

 

20.9

 

Customer and contractual relationships

 

 

983.9

 

 

 

(401.9

)

 

 

582.0

 

 

 

975.7

 

 

 

(388.2

)

 

 

587.5

 

Patents/proprietary technology

 

 

135.7

 

 

 

(71.6

)

 

 

64.1

 

 

 

133.1

 

 

 

(68.8

)

 

 

64.3

 

Total

 

 

1,159.7

 

 

 

(489.6

)

 

 

670.1

 

 

 

1,145.2

 

 

 

(472.5

)

 

 

672.7

 

Total identifiable intangibles

 

$

1,872.1

 

 

$

(489.6

)

 

$

1,382.5

 

 

$

1,856.3

 

 

$

(472.5

)

 

$

1,383.8

 

 

We also had net identifiable intangible assets of $1,382.5 million and $1,383.8 million as of March 31, 2022 and December 31, 2021, respectively. The $15.8 million increase in gross identifiable intangible assets was primarily due to the acquisition of Solar.

 

Amortizable identifiable intangible assets, principally customer relationships, are subject to amortization over their estimated useful life, ranging from 5 to 30 years, based on the assessment of a number of factors that may impact useful life, which includes customer attrition rates and other relevant factors.

6. External Debt and Financing Arrangements

Unsecured Senior Notes

 

In March 2022, the Company issued $900 million in aggregate principal amount of senior unsecured notes in a registered public offering consisting of $450 million of 4.00% senior unsecured notes maturing in 2032 and $450 million of 4.50% senior unsecured notes maturing in 2052 (together, the “2022 Notes”). The Company used the net proceeds from the 2022 Notes offering to pay down a portion of the outstanding balance on the 2021 Term Loan, as described below.

At March 31, 2022, the Company had aggregate principal outstanding notes in the amount of $2.7 billion, with varying maturities (the “Notes”). The Notes are unsecured senior obligations of the Company. The following table provides a summary of the Company’s outstanding Notes, including the net carrying value of the Notes, net of underwriting commissions, price discounts, and debt issuance costs as of March 31, 2022 and December 31, 2021:

 

 

 

 

 

 

 

 

 

Net Carrying Value

 

 (in millions)

Principal Amount

 

 

Issuance Date

 

Maturity Date

 

March 31, 2022

 

 

December 31, 2