| (1) | the total return of each peer group member is calculated by dividing the change in market value of a share of its common stock during the period, assuming reinvestment of any dividends, by the value of a share of its common stock at the beginning of the period; and |
| (2) | each peer group member’s total return is then weighted within the index based on its market capitalization relative to the market capitalization of the entire index, and the sum of such weighted returns results in a weighted-average total return for the entire Peer Group Index. |
Item 6. Selected Financial Data. Item 6. | Selected Financial Data.
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Five-year Consolidated Selected Financial Data | | | | | | | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | | | | | | | (In millions, except per share amounts) | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | Income statement data(a) | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 5,485.1 | | | $ | 5,283.3 | | | $ | 4,984.9 | | | $ | 4,579.4 | | | $ | 4,013.6 | | Cost of products sold(b) | | | 3,525.7 | | | | 3,358.3 | | | | 3,188.8 | | | | 3,001.1 | | | | 2,653.6 | | Selling, general and administrative expenses(b) | | | 1,241.4 | | | | 1,196.9 | | | | 1,135.5 | | | | 1,059.8 | | | | 949.0 | | Amortization of intangible assets | | | 36.1 | | | | 31.7 | | | | 28.1 | | | | 21.6 | | | | 13.1 | | Loss on sale of product line (see Note 4) | | | — | | | | 2.4 | | | | — | | | | — | | | | — | | Asset impairment charges | | | 62.6 | | | | 3.2 | | | | — | | | | — | | | | — | | Restructuring charges | | | 24.1 | | | | 8.3 | | | | 13.9 | | | | 16.6 | | | | 7.0 | | Operating income | | | 595.2 | | | | 682.5 | | | | 618.6 | | | | 480.3 | | | | 390.9 | | Income from continuing operations, net of tax(e) | | | 390.0 | | | | 475.3 | | | | 412.4 | | | | 306.5 | | | | 273.6 | | Basic earnings per share — continuing operations | | | 2.69 | | | | 3.10 | | | | 2.67 | | | | 1.92 | | | | 1.68 | | Diluted earnings per share — continuing operations | | | 2.66 | | | | 3.05 | | | | 2.61 | | | | 1.88 | | | | 1.64 | | | | | | | | Other data(a) | | | | | | | | | | | | | | | | | | | | | Depreciation and amortization | | $ | 149.6 | | | $ | 130.3 | | | $ | 122.7 | | | $ | 115.1 | | | $ | 98.8 | | Cash flow provided by operating activities(c) | | | 604.0 | | | | 600.3 | | | | 650.5 | | | | 429.2 | | | | 266.2 | | Capital expenditures | | | (150.1 | ) | | | (165.0 | ) | | | (149.3 | ) | | | (128.5 | ) | | | (127.5 | ) | Proceeds from the disposition of assets | | | 6.1 | | | | 0.4 | | | | 3.9 | | | | 2.5 | | | | 0.7 | | Dividends declared per common share | | | 0.82 | | | | 0.74 | | | | 0.66 | | | | 0.58 | | | | 0.50 | | | | | | | | Balance sheet data | | | | | | | | | | | | | | | | | | | | | Total assets(d) | | $ | 5,964.6 | | | $ | 5,511.4 | | | $ | 5,128.5 | | | $ | 4,875.7 | | | $ | 4,051.5 | | Third party debt(d) | | | 2,334.0 | | | | 1,507.6 | | | | 1,431.1 | | | | 1,168.7 | | | | 668.6 | | Total invested capital | | | 4,513.9 | | | | 4,108.7 | | | | 3,794.1 | | | | 3,623.3 | | | | 2,931.6 | |
| | Years Ended December 31, | | (In millions, except per share amounts) | | 2020 | | | | 2019 | | | 2018 | | | 2017 | | | 2016 | | Income statement data(a)(e)(f) | | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 6,090.3 | | | | $ | 5,764.6 | | | $ | 5,485.1 | | | $ | 5,283.3 | | | $ | 4,984.9 | | Cost of products sold | | | 3,925.9 | | | | | 3,712.2 | | | | 3,525.7 | | | | 3,358.3 | | | | 3,188.8 | | Selling, general and administrative expenses | | | 1,282.6 | | | | | 1,256.3 | | | | 1,241.4 | | | | 1,196.9 | | | | 1,135.5 | | Amortization of intangible assets | | | 42.0 | | | | | 41.4 | | | | 36.1 | | | | 31.7 | | | | 28.1 | | Loss on sale of product line | | | — | | | | | — | | | | — | | | | 2.4 | | | | — | | Asset impairment charges | | | 22.5 | | | | | 41.5 | | | | 62.6 | | | | 3.2 | | | | — | | Restructuring charges | | | 15.9 | | | | | 14.7 | | | | 24.1 | | | | 8.3 | | | | 13.9 | | Operating income | | | 801.4 | | | | | 698.5 | | | | 595.2 | | | | 682.5 | | | | 618.6 | | Income from continuing operations, net of tax(b)(c) | | | 562.0 | | | | | 431.3 | | | | 390.0 | | | | 475.3 | | | | 412.4 | | Basic earnings per share – continuing operations | | | 3.99 | | | | | 3.09 | | | | 2.69 | | | | 3.10 | | | | 2.67 | | Diluted earnings per share – continuing operations | | | 3.94 | | | | | 3.06 | | | | 2.66 | | | | 3.05 | | | | 2.61 | | Other data(a)(e)(f) | | | | | | | | | | | | | | | | | | | | | | Depreciation and amortization | | $ | 163.5 | | | | $ | 152.7 | | | $ | 149.6 | | | $ | 130.3 | | | $ | 122.7 | | Cash flow provided by operating activities | | | 825.7 | | | | | 637.2 | | | | 604.0 | | | | 600.3 | | | | 650.5 | | Capital expenditures | | | (150.5 | ) | | | | (131.8 | ) | | | (150.1 | ) | | | (165.0 | ) | | | (149.3 | ) | Proceeds from the disposition of assets | | | 1.6 | | | | | 4.2 | | | | 6.1 | | | | 0.4 | | | | 3.9 | | Dividends declared per common share | | | 0.98 | | | | | 0.90 | | | | 0.82 | | | | 0.74 | | | | 0.66 | | Balance sheet data(e)(f) | | | | | | | | | | | | | | | | | | | | | | Total assets(c)(d) | | $ | 7,358.7 | | | | $ | 6,291.3 | | | $ | 5,964.6 | | | $ | 5,511.4 | | | $ | 5,128.5 | | Total third party debt | | | 2,572.2 | | | | | 2,184.3 | | | | 2,334.0 | | | | 1,507.6 | | | | 1,431.1 | | Total invested capital | | | 5,347.7 | | | | | 4,612.0 | | | | 4,513.9 | | | | 4,108.7 | | | | 3,794.1 | |
(a) | Income statement data excludes discontinued operations. Other data is derived from the Statement of Cash Flows and therefore includes discontinued operations. For additional information, refer to Note 19,18, “Information on Business Segments.” |
(b)( b) | Reflects adoption of Accounting Standards Update (“ASU”)2017-07 “Presentation of Net Periodic Pension and Postretirement Cost” which resulted in the retrospective reclassification of amortization of prior service cost/credits, interest cost, expected return on plan assets and actuarial gains/losses from operating income to other income, net.
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| The Company’s defined benefit expense included recognition ofpre-tax actuarial (losses) gains (losses)within other (expense) income in each of the last five years as follows:follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | Pre-tax actuarial gains (losses) | | $ | (3.8 | ) | | $ | 0.5 | | | $ | (1.9 | ) | | $ | (8.6 | ) | | $ | (13.7 | ) | Portion in other (income) expense | | | (3.8 | ) | | | 0.5 | | | | (1.9 | ) | | | (2.5 | ) | | | (13.7 | ) | Portion in discontinued operations | | | — | | | | — | | | | — | | | | (6.1 | ) | | | — | |
(In millions) | | 2020 | | | | 2019 | | | 2018 | | | 2017 | | | 2016 | | Pre-tax actuarial (losses) gains | | $ | (3.2 | ) | | | $ | (34.1 | ) | | $ | (3.8 | ) | | $ | 0.5 | | | $ | (1.9 | ) | Portion in other (expense) income | | | (3.2 | ) | | | | (34.1 | ) | | | (3.8 | ) | | | 0.5 | | | | (1.9 | ) | Portion in discontinued operations | | | — | | | | | — | | | | — | | | | — | | | | — | |
(c)( c) | Reflects adoption of Accounting Standards Update (“ASU”)2016-09 “Improvements to Employee Share-Based Payment Accounting” which resulted in the retrospective reclassification of employee withholding taxes paid from operating into financing activities.
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(d) | Reflects adoption of ASU2015-03 “Simplifying the Presentation of Debt Issuance Costs,” which resulted in the retrospective reclassification of debt issuance costs from other current assets and other assets to long-term debt.
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(e) | Includes an estimated net tax benefit of $25.7 million in 2017 resulting from the enactment of the U.S. Tax Cuts and Jobs Act of 2017 on December 22, 2017 (the “Tax Act”). During 2018, the Company completed its SAB 118 analysis with respect to income tax effects of the Tax Act. As a result, the Company recorded a tax expense in the amount of $5.5 million in 2018. |
Item 7.(d) | Management’s Discussion and AnalysisIncludes operating lease right-of-use assets of Financial Condition and Results$165.6 million as of Operations.2019 resulting from the adoption of Accounting Standards Update (“ASU”) 2016-02 “Leases.” Prior periods were not retrospectively adjusted to reflect the impact of this standard.
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(e) | Fiberon’s results of operations are included in the income statement data and other data from September 2018 (date of acquisition) and included in the balance sheet data beginning as of 2018. |
(f) | Larson’s financial results are included in the Company’s consolidated balance sheet as of December 31, 2020. Larson’s net sales, operating income and cash flows from the date of acquisition to December 31, 2020 were not material to the Company. |
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Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Introduction This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is a supplement to the accompanying consolidated financial statements and provides additional information on our business, recent developments, financial condition, liquidity and capital resources, cash flows and results of operations. MD&A is organized as follows: > | • | Overview: This section provides a general description of our business and a discussion of management’s general outlook regarding market demand, our competitive position and product innovation, as well as recent developments we believe are important to understanding our results of operations and financial condition or in understanding anticipated future trends. |
> | • | Basis of Presentation: This section provides a discussion of the basis on which our consolidated financial statements were prepared. |
> | • | Results of Operations: This section provides an analysis of our results of operations for each of the threetwo years ended December 31, 2020 and 2019. For a discussion of our 2018 2017results, please refer to Item 7. “Management’s Discussion and 2016.Analysis” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 26, 2020. |
> | • | Liquidity and Capital Resources: This section provides a discussion of our financial condition and an analysis of our cash flows for each of the threetwo years ended December 31, 2018, 20172020 and 2016.2019. This section also provides a discussion of our contractual obligations, other purchase commitments and customer credit risk that existed at December 31, 2018,2020, as well as a discussion of our ability to fund our future commitments and ongoing operating activities through internal and external sources of capital. |
> | • | Critical Accounting Policies and Estimates: This section identifies and summarizes those accounting policies that significantly impact our reported results of operations and financial condition and require significant judgment or estimates on the part of management in their application. |
Overview The Company is a leader in home and security products focused on the design, manufacture and sale of market-leading branded products in the following categories: kitchen and bath cabinetry, plumbing and accessories, entry door and storm door systems, security products, and outdoor performance materials used in decking and railing products, and fencing products.kitchen and bath cabinetry. For the year ended December 31, 2018,2020, net sales based on country of destination were: | | | | (In millions) | | | | | | | | | | | | | | | United States | | $ | 4,606.6 | | | | 84 | % | | $ | 5,094.3 | | | | 84 | % | China | | | | 416.7 | | | 7 | | Canada | | | 433.1 | | | | 8 | | | | 414.2 | | | 7 | | China | | | 260.6 | | | | 5 | | | Other international | | | 184.8 | | | | 3 | | | | 165.1 | | | 2 | | Total | | $ | 5,485.1 | | | | 100 | % | | $ | 6,090.3 | | | | 100 | % |
We believe the Company has certain competitive advantages including market-leading brands, a diversified mix of customer channels, lean and flexible supply chains, a decentralized business model and a strong capital structure, as well as a tradition of strong innovation and customer service. We are focused on outperforming our markets in growth, profitability and returns in order to drive increased shareholderstockholder value. We believe the Company’s track record reflects the long-term attractiveness and potential of our categories and our leading brands. As consumer demand and the housing market continue to grow, we expect the benefits of operating leverage and strategic spending to support increased manufacturing capacity and long-term growth initiatives will help us to continue to achieve profitable organic growth. We continue to believe our most attractive opportunities are to invest in profitable organic growth initiatives. We also believe that as the market grows, we have the potential to generate additional growth from leveraging our cash flows and balance sheet strength by pursuinginitiatives, pursue accretive strategic acquisitions,non-controlling equity investments, and joint ventures, and by returningreturn cash to shareholdersstockholders through a combination of dividends and repurchases of shares of our common stock under our share repurchase program as explained in further detail under “Liquidity and Capital Resources” below. The U.S. market for our home products consists of spending on both new home construction and repair and remodel activities within existing homes, with the substantial majority of the markets we serve consisting of repair and remodel spending. Continued growth in the U.S. market for our home products will largely depend on consumer confidence, employment, wage growth, home prices, stable mortgage rates and credit availability. We may be impacted by fluctuations in raw materials, tariffs, transportation costs, foreign exchange rates, inflation and promotional activity among our competitors. We strive to offset the potential unfavorable impact of these items with productivity improvements and price increases. 16
Table of Contents During the threetwo years ended December 31, 2018,2020, our net sales grew at a compounded annual rate of 6.2%5.4% as we benefited from an improvinga growing U.S. home products market, acquisitions, and growth in international markets. Operating income grew at a compounded annual rate of 7.4%16.0% with consolidated operating margins improvingbetween 11% and 13% from 10% in 20152018 to 11% in 2018.2020. Growth in operating income was primarily due to higher sales volume, changes to our portfolio of businesses, control and leverage ofover our operating expenses and the benefits of productivity programs. During 2018,the first half of 2020, in response to the COVID-19 pandemic, a number of countries and U.S. states issued orders requiring nonessential businesses to close (“closure orders”) and persons who were not engaged in essential businesses to stay at home. Generally, states and jurisdictions designated our products, our retail channel partners and residential construction as essential business activities. While our financial results were negatively impacted during the second quarter of 2020 by these closure orders, sales volumes increased as these restrictions were relaxed benefiting our third and fourth quarter results. Our first priority with regard to COVID-19 continues to be to ensure the safety, health and hygiene of our employees, customers, suppliers and others with whom we partner in our business activities. Because of our comprehensive use of appropriate risk mitigation and safety practices, we have largely been able to continue our business operations in this unprecedented business environment which could differentiate us from some of our competition. We believe that the disruption caused by the pandemic created increased consumer interest in investing in their homes and accelerated trends that we were experiencing prior to the pandemic, such as the shift towards value-priced cabinetry products and a focus on outdoor living. We expect the trend toward focusing on the home to continue. We have also taken proactive steps in our manufacturing supply chain and other areas to drive efficiencies which we expect to allow us to be more competitive both during and after the pandemic. However, due to the continued inherent uncertainty surrounding COVID-19, including governmental directives, public health challenges and market reactions, our results in future periods may be negatively impacted. During 2020, the U.S. home products market grew due to increases in repair and remodel and new home construction and repair and remodel activities.activity. We believe new housing construction experienced approximately 5% growth in 2018 compared to 2017 and spending for home repair and remodeling increased approximately 6% and new housing construction experienced approximately 4%. growth in 2020 compared to 2019. In 2018,2020, net sales grew 4%5.7% due to higher volume and price increases to help mitigate the cumulative impact from tariff related costs. These factors were partially offset by unfavorable mix, higher rebate costs and unfavorable foreign exchange of $4 million. In 2020, operating income increased 14.7% over 2019 primarily due to price increases to help mitigate cumulative raw materialthe impact of higher tariffs, higher sales volume, the benefits from productivity improvements and restructuring actions and lower asset impairment charges. These factors were partially offset by the impact of unfavorable mix, higher employee related costs, higher tariffs, higher transportation costs, higher advertising and marketing costs and higher restructuring and other charges. In December 2020, we acquired 100% of the outstanding equity of Larson, a leading brand of storm, screen and security doors, for a total purchase price of approximately $715.2 million, net of cash acquired and closing date working capital adjustments. The acquisition cost increases,is further subject to the acquisitions infinal post-closing working capital adjustment. We financed the transaction with borrowings under our Plumbing andexisting credit facilities. This acquisition is expected to strengthen our overall product offering. Following the acquisition of Larson, our Doors & Security segments, higher sales volume primarily resulting from U.S. home products market growth,segment was renamed “Outdoors & Security” to better align with the segment’s strategic focus on the fast-growing outdoor living space and to better represent the effectbrands within the segment, including the newly acquired Larson. The Outdoors & Security segment name change is to the name only and had no impact on the Company’s historical financial position, results of favorable foreign exchange. In 2018, operating income decreased 12.8% due to unfavorable mix, asset impairment charges, higher employee-related costs and restructuring charges.operations, cash flow or segment level results previously reported. During 2017,June 2020, we repaid all amounts outstanding on the U.S. home products market grew due to increases3.000% Senior Notes issued in new home construction and repair and remodel activities. We believe new housing construction experienced approximately 7% growth in 2017 compared to 2016 and spending for home repair and remodeling increased by approximately 5%June 2015 at their maturity date using borrowings under our 2019 Revolving Credit Agreement (as defined below). In 2017, net sales grew 6% and operating income increased 9% due to higher sales volume primarily resulting from U.S. home products market growth,September 2019, the acquisitions in our Plumbing segments, price increases to help mitigate cumulative raw material cost increases, the effect of favorable foreign exchange and productivity improvements. During the fourth quarter of 2018, our Plumbing segment entered into strategic partnerships with several companies who incorporate emerging technology into plumbing-related products, and at the same time acquirednon-controlling equity interests in two of our partners. This includes an investment in Flo Technologies, Inc.
In September 2018, weCompany issued $600$700 million of unsecured senior notes3.25% Senior Notes due 2029 (“2018 Senior2019 Notes”) in a registered public offering. The 2018 Senior Notes are due in 2023 with a coupon rate of 4%. All other terms and conditions of the 2018 Senior Notes are substantially consistent with our other senior notes issued in June 2015 (“2015 Senior Notes”, and collectively with the 2018 Senior Notes, the “Senior Notes”). WeCompany used the proceeds from the 2018 Senior2019 Notes offering to repay in full a $350 million term loan and to pay down our revolving credit facility.
In September 2018, we acquired 100% of the membership interests of Fiber Composites LLC (“Fiberon”), a leading U.S. manufacturer of outdoor performance materials used in decking, railing and fencing products
for a total purchase price of approximately $470.0 million, subject to certain post-closing adjustments. The acquisition of Fiberon provides category expansion and product extension opportunities into the outdoor living space for our Doors & Security segment. We financed the transaction using cash on hand and borrowingsoutstanding balances under our revolving credit and term loan facilities. Fiberon’s results of operations are included in the Doors & Security segment from the date of acquisition.2019 Revolving Credit Agreement.
In July 2018, we publicly announced an internal reorganization to combine our historical Doors and Security segments under common leadership to drive innovation, accelerate product development, and enhance investments and business processes. In connection with the reorganization, we changed how our chief operating decision maker evaluates and allocates the resources for the combined business. Reporting for the new Doors & Security segment began in the third quarter of 2018 and historical financial segment information has been restated to conform to the new segment presentation. In March 2018,April 2020, the Company entered into a $350364-day supplemental, $400 million term loan for general corporate purposes that matures 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. All terms and conditions on the amended term loan remain the same as the previous $350 million term loan. 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.
In October 2017, we acquired Domotec Holdings Limited (“Victoria + Albert”), aUK-based premium brand of standalone bathtubs, sinks, tub fillers, faucets and other accessories. In July 2017, we acquired Shaws Since1897 Limited (“Shaws”), aUK-based luxury plumbing products company that specializes in manufacturing and selling fireclay sinks and selling brassware and accessories. The total combined consideration paid was approximately $146 million, subject to certain post-closing adjustments and deferred acquisition payments. We financed both of the acquisitions using cash on hand and borrowings under our revolving credit facility. These transactions broadened our plumbing portfolio.
During the third quarter of 2016, we announced the creation of GPG, which was designed to support the growth of multiple plumbing brands with an enhanced set of products and brands, while leveraging Moen’s existing global supply chain and broad distribution network.
In September 2016, we acquired ROHL LLC (“ROHL”), a California-based luxury plumbing company and in a related transaction, we acquired TCL Manufacturing Ltd, which gave us ownership of Perrin & Rowe, a UK manufacturer and designer of luxury kitchen and bathroom plumbing products. The total combined purchase price was approximately $166 million, subject to certain post-closing adjustments. We financed both acquisitions using cash on hand and borrowings under our existing credit facility. These transactions broadened the plumbing portfolio and enhanced future growth opportunities.
In June 2016, we amended and restated our credit agreement to combine and rollover the existing revolving credit facility and term loan into a new standalone $1.25 billion revolving credit facility. Terms and conditions of the credit agreement, including the total commitment amount, essentially remained the same as our previous credit assesment. The revolving credit facility will mature in June 2021(the “2020 Revolving Credit Agreement”), and borrowings thereunder will be used for general corporate purposes.
In May 2016, we2018 our Plumbing segment entered into a strategic partnership with, and acquired Riobel Incnon-controlling equity interests in, Flo Technologies, Inc. (“Riobel”Flo”), a Canadian plumbing company specializingU.S. manufacturer of comprehensive water monitoring and shut-off systems with leak detection technologies. In January 2020, we entered into an agreement to acquire 100% of the outstanding shares of Flo in premium showroom bath and shower fittings, for a total purchase price of $94.6 million, subject to certain post-closing adjustments. We financed themulti-phase transaction, using cash on hand and borrowings under our existing credit facilities.which will be completed in 2022. Basis of Presentation The consolidated financial statements in this Annual Report on Form10-K have been derived from the accounts of the Company and its wholly-owned subsidiaries. The Company’s consolidated financial statements are based on a fiscal year 17
Table of Contents ending December 31. Certain of the Company’s subsidiaries operate on a 52 or 53 week fiscal year ending during the month of December. In December 2017, there were certain transactions that resulted in2020, the Company acquired 100% of the outstanding equity of Larson for a total purchase price of approximately $38$715.2 million, net of net cash outflows relatingacquired and closing date working capital adjustments. The acquisition cost is further subject to payments made to third parties in the normal course of business duringfinal post-closing working capital adjustment. We financed the period between theyear-end oftransaction with borrowings under our wholly-owned subsidiaries and the Company’syear-end (in 2018, amounts were immaterial). In September 2018, we acquired Fiber Composites LLC (“Fiberon”).existing credit facilities. The financial results of FiberonLarson 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, 2018.2020. Larson's net sales, operating income and cash flows from the date of acquisition to December 31, 2020 were not material to the Company. The results of operations are included in the DoorsOutdoors & Security segment.
In October 2017, we acquired Victoria + Albert. In July 2017, we acquired Shaws. The financial results of both of the acquisitions were included in the Company’s consolidated balance sheets as of December 31, 2017 and in the Company’s consolidated statements of income and statements of cash flow beginning in October 2017 and July 2017, respectively. The results of operations are included in the Plumbing segment.
In September 2016, we acquired ROHL and in a related transaction, we acquired TCL Manufacturing Ltd., which gave us ownership of Perrin & Rowe and in May 2016, we acquired Riobel. The financial results of ROHL and Riobel were included in the Company’s consolidated balance sheets as of December 31, 2016 and in the Company’s consolidated statements of income and statements of cash flow beginning in September 2016 and May 2016, respectively. The results of operations are included in the Plumbing segment.
Results of Operations The following discussion of both consolidated results of operations and segment results of operations refers to the year ended December 31, 20182020 compared to the year ended December 31, 2017, and the year ended December 31, 2017 compared to the year ended December 31, 2016.2019. The discussion of consolidated results of operations should be read in conjunction with the discussion of segment results of operations and our financial statements and notes thereto included in this Annual Report on Form10-K.Unless otherwise noted, all discussion of results of operations are for continuing operations. Years Ended December 31, 2018, 20172020 and 20162019 | | | | | | | | (In millions) | | 2018 | | % change | | | 2017 | | % change | | | 2016 | | | 2020 | | | % change | | | | 2019 | | | Net Sales: | | | | | | | | | | | | | | | | | | | | | | | | | | | Plumbing | | | $ | 2,202.1 | | | | 8.6 | % | | | $ | 2,027.2 | | | Outdoors & Security | | | | 1,419.2 | | | | 5.2 | | | | | 1,348.9 | | | Cabinets | | $ | 2,418.6 | | | | (2.0 | )% | | $ | 2,467.1 | | | | 2.9 | % | | $ | 2,397.8 | | | | 2,469.0 | | | | 3.4 | | | | | 2,388.5 | | | Plumbing | | | 1,883.3 | | | | 9.4 | | | | 1,720.8 | | | | 12.1 | | | | 1,534.4 | | | Doors & Security | | | 1,183.2 | | | | 8.0 | | | | 1,095.4 | | | | 4.1 | | | | 1,052.7 | | | Total Fortune Brands | | $ | 5,485.1 | | | | 3.8 | % | | $ | 5,283.3 | | | | 6.0 | % | | $ | 4,984.9 | | | $ | 6,090.3 | | | | 5.7 | % | | | $ | 5,764.6 | | | Operating Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | Plumbing | | | $ | 467.9 | | | | 9.4 | % | | | $ | 427.6 | | | Outdoors & Security | | | | 201.3 | | | | 16.8 | | | | | 172.3 | | | Cabinets | | $ | 143.5 | | | | (46.3 | )% | | $ | 267.2 | | | | 3.6 | % | | $ | 257.8 | | | | 235.7 | | | | 32.2 | | | | | 178.3 | | | Plumbing(a) | | | 375.3 | | | | 4.7 | | | | 358.5 | | | | 13.8 | | | | 314.9 | | | Doors & Security(a) | | | 155.6 | | | | 5.9 | | | | 146.9 | | | | 16.2 | | | | 126.4 | | | Corporate(a) | | | (79.2 | ) | | | 12.1 | | | | (90.1 | ) | | | (11.9 | ) | | | (80.5 | ) | | Corporate | | | | (103.5 | ) | | | (29.9 | ) | | | | (79.7 | ) | | Total Fortune Brands | | $ | 595.2 | | | | (12.8 | )% | | $ | 682.5 | | | | 10.3 | % | | $ | 618.6 | | | $ | 801.4 | | | | 14.7 | % | | | $ | 698.5 | | |
(a) | We revised our previously reported results in 2017 and 2016 to reflect our adoption of ASU2017-07, Presentation of Net Periodic Pension and Postretirement Costs, and to reflect our new Doors & Security segment resulting from the reorganization we announced in July 2018.
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Certain items had a significant impact on our results in 2018, 20172020 and 2016.2019. These included the acquisitions of Fiberon, Victoria + Albert, Shaws, Riobel, ROHL and Perrin & Rowe, restructuring and other charges, asset impairment charges and the impact of changes in foreign currency exchange rates. In 2018,2020, financial results included: > | • | the addition of the Fiberon acquisition in our Doors & Security segment,
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> | | asset impairment charges of $62.6 related to impairment of two indefinite-lived tradenames within our Cabinets segment which was primarily the result of changes in the mix of revenue across our tradenames finalized during our annual planning process conducted during the fourth quarter, as well as restructuring actions announced during the third quarter,
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> | | restructuring and other charges of $35.4$25.1 million before tax ($26.917.5 million after tax), primarilylargely related to headcount actions associated with COVID-19 across all segments and costs associated with our initiatives to consolidatechanges in our manufacturing footprint and product lines in our Cabinets segment and severance costsprocesses within all of our segments, |
> | | the impact of foreign exchange primarily due to movement in the Canadian Dollar, British Pound, Mexican Peso and Chinese Yuan, which had a favorable impact compared to 2017, of approximately $9 million on net sales, approximately $6 million on operating income and approximately $6 million on net income and
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> | | the favorable impact of changes fromlast-in,first-out (“LIFO”) tofirst-in,first-out (“FIFO”) for product groups in which metals comprise a significant portion of inventory cost, which resulted in income of approximately $7.3 million before tax ($5.5 million after tax).
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> | | During 2018, the Company completed its SAB 118 analysis with respect to income tax effects resulting from the enactment of the U.S. Tax Cuts and Jobs Act of 2017 on December 22, 2017 (the “Tax Act”) As a result, the Company recorded a tax expense in the amount of $5.5 million in 2018.
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In 2017, financial results included:
> | | the benefit of the acquisitions in our Plumbing segment,
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> | • | restructuring and otherasset impairment charges of $18.5 million before tax ($12.3 million after tax), primarily$22.5 related to losses on disposalthe impairment of inventory associated with exiting a product line in our Doors & Security segment and exiting a customer relationship in our Cabinets segment, as well as severance costsindefinite-lived tradenames within our Doors & Security, Plumbing and Cabinets segments, which were primarily the result of forecasted sales declines resulting from the COVID-19 pandemic,
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> | • | impairment chargeactuarial losses within our defined benefit plans of $7.0$3.4 million pertainingprimarily related to a cost method investmentdecreases in a development stage home products company due to other-than-temporary decline in its fair value,discount rates and differences between expected and actual returns on plan assets and
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> | • | the impact of foreign exchange primarily due to movement in the Canadian dollar, British pound, Mexican peso and Chinese yuan, which had a favorablean unfavorable impact compared to 2016,2019, of approximately $4 million on net sales and a favorable impact compared to 2019, of approximately $5$1 million both on operating income and approximately $4 million on net income andincome. |
> | | an estimated net tax benefit of $25.7 million resulting from the of the Tax Act.
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In 2016,2019, financial results included: > | • | the benefitasset impairment charges of the acquisitions in$41.5 related to impairment of two indefinite-lived tradenames within our Cabinets segment, which were primarily the result of a continuing shift in consumer demand from custom and Plumbing segments,semi-custom cabinetry products to value-priced cabinetry products, which led to reductions in future growth rates related to these tradenames,
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>• | actuarial losses within our defined benefit plans of $34.7 million primarily related to decreases in discount rates and differences between expected and actual returns on plan assets, |
• | restructuring and other charges of $19.3$22.2 million before tax ($13.616.8 million after tax), primarily related to severance costs within all of our segments and costs associated with severance costs and charges associated with the relocation of a manufacturing facilityclosing facilities within our DoorsPlumbing and Outdoors & Security segmentsegments and |
> | • | the impact of foreign exchange primarily due to movement in the Canadian dollar, British pound, Mexican peso and Chinese yuan, which had an unfavorable impact compared to 2015,2018, of approximately $27$29 million on net sales, approximately $6$10 million on operating income and approximately $6$8 million on net income. |
18
Table of Contents2018 Compared to 2017 Total Fortune Brands Net sales Net sales increased $201.8by $325.7 million, or 3.8%. The increase was due to5.7%, on higher volume and price increases to help mitigate the cumulative raw material cost increases, higher international sales, principally in China, our acquisitions during 2017 and 2018 in our Plumbing and Doors & Security segments, higher sales volume primarilyimpact from the growth in the U.S. home products market, the benefit from new product introductions and favorable foreign exchange of approximately $9 million.tariff related costs. These benefitsfactors were partially offset by more moderate industry growth during the second half of 2018, unfavorable mix, higher rebate costs and higher promotions and rebates.unfavorable foreign exchange of $4 million.
Cost of products sold Cost of products sold increased $167.4by $213.7 million, or 5.0%5.8%, due to higher net sales, increased commodity costs,unfavorable mix and the impact of higher restructuring and other charges related to costs associated with our initiatives to consolidate and rationalize our manufacturing footprint and discontinue certain product lines in our Cabinets segment, and higher amortization of the acquisition-related inventory fair value adjustment in our Plumbing and Doors & Security segments. These factors weretariffs, partially offset by the benefit offrom productivity improvements. Selling, general and administrative expenses Selling, general and administrative expenses increased $44.5by $26.3 million, or 3.7%2.1%,due to higher employee-relatedemployee related costs, the impact from our acquisitions during 2017higher advertising and 2018 in our Plumbing and Doors & Security segmentsmarketing cost and higher transportation costscosts. These increases were partially offset by the benefitbenefits from organizational restructuring actions.initiatives. Amortization of intangible assets Amortization of intangible assets increased $4.4 million due to our acquisitions during 2017 and 2018 in our Plumbing and Doors & Security segments offset by a decrease related to a definite-lived customer relationship intangible that was fully amortized duringare consistent with the second quarter of 2017.prior year. Loss on sale of product line
In April 2017, we completed the sale of Field ID, our cloud-based inspection and safety compliance software product line included in our Doors & Security segment. We recorded apre-tax loss of $2.4 million as the result of this sale.
Asset impairment charges Asset impairment charges of $62.6$22.5 million in 20182020 related to indefinite-lived tradenames within our Plumbing and Cabinets segments. Asset impairment charges of $41.5 million in 2019 related to two indefinite-lived tradenames within our Cabinets segment. During the third quarter of 2018, we recognized an impairment of $27.1 million related to one tradename, which was primarily the result of reduced revenue growth expectations associated with Cabinets operations in Canada, including the announced closure of Company-owned retail locations during the third quarter of 2018. During the fourth quarter of 2018, we recognized an impairment of $35.5 million related to another tradename, which was primarily the result of lower than forecasted sales during the fourth quarter of 2018 as well as projected changes in the mix of revenue across our tradenames in future periods, including the impact of more moderate industry growth expectations, which were finalized during our annual planning process conducted during the fourth quarter. Asset impairment charges of $3.2 million in the first quarter of 2017 related to our decision to sell Field ID.
Restructuring charges Restructuring charges of $24.1$15.9 million in 2018 primarily2020 largely related to severance costs withinheadcount actions associated with COVID-19 across all of our segments and costs associated with our initiatives to consolidatechanges in our manufacturing footprint and product lines inprocesses within our Cabinets segment.Plumbing segment. Restructuring charges of $8.3$14.7 million in 20172019 primarily related to severance costs across allwithin our Plumbing and Cabinets segments and chargescosts associated with the relocation of a manufacturing facilityclosing facilities within our Cabinets segment.Plumbing and Outdoors & Security segments. Operating income Operating income decreased $87.3increased by $102.9 million, or 12.8%. Operating income decreased14.7%, primarily due to unfavorable mix,price increases to help mitigate the impact of higher tariffs, higher sales volume, the benefits from productivity improvements and restructuring actions and lower asset impairment charges, higher employee-related costs and restructuring chargescharges. These factors were partially offset by unfavorable mix, higher employee related costs, higher tariffs, higher transportation costs, higher advertising and marketing costs and higher restructuring and other charges.higher net sales, including the benefit from acquisitions in our Plumbing segment and productivity improvements.
Interest expense Interest expense increased $25.1decreased $10.3 million to $74.5$83.9 million, due to higherlower average borrowings to finance share repurchases and acquisitions and higherlower average interest rates. Other income,(income) expense, net Other income,(income) expense, net, was $16.3income of $13.3 million in the twelve months ended December 31, 2018,2020, compared to $1.7expense of $29.0 million in the twelve months ended December 31, 2017.2019. The increase in otherof $42.3 million of income net, is primarily due to hedgehigher defined benefit income in 2020 ($33.2 million increase) and gains associated withof $11.0 million related to our September 2018 debt issuance, favorable foreign currency adjustments and various tax credits within our Plumbing businessinvestment in Flo, partially offset by lower defined benefit plan income in 2018 ($3.0 million decrease). In addition, 2017 reflects a $7.0 million impairment charge related to a cost method investment.unfavorable foreign currency losses. Income taxes The effective income tax rates for 20182020 and 20172019 were 27.4%23.1% and 25.1%25.0%, respectively. The 2018 effective income tax rate was favorably impacted by the corporate tax rate reduction from 35% to 21% under The Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The 20182020 effective income tax rate was unfavorably impacted by the repeal of the Domestic Production Activity (Internal Revenue Code Section 199) Deduction,state and local taxes ($22.3 million) and foreign taxes ($6.2 million), and was favorably impacted by a benefit related to share-based compensation ($11.5 million). The 2019 effective income tax rate was unfavorably impacted by state and local taxes ($18.0 million), foreign taxes ($1.8 million), a valuation allowance increase ($3 million), an adjustment to the provisional net benefit recorded in 2017 under the Tax Act ($5.5 million), state and local taxes, unfavorable tax rates in foreign jurisdictions ($3.53.4 million), and increases in uncertain tax positions ($4.1(7.5 million). The 20172019 effective income tax rate was favorably impacted by the Tax Act. The effective income tax rate for 2017 was favorably impacted by a tax benefit related to share-based compensation ($23.9 million), the tax benefit attributable to the Domestic Production Activity (Internal Revenue Code Section 199) Deduction ($10.9 million) and favorable tax rates in foreign jurisdictions ($8.3 million), partially offset by state and local taxes and increases to uncertain tax positions ($11.63.7 million). The Tax Act made significant changes to the U.S. Internal Revenue Code including a reduction in the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, generally providing for an exemption from federal19
Table of Contents Net income tax for dividends received from foreign subsidiaries, and imposing aone-time transition tax on the deemed repatriation of cumulative foreign earnings and profits as of December 31, 2017. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued, which deals with the application of U.S. GAAP to situations where a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, we calculated our best estimate of the impact of the Tax Act on our 2017 effective income tax rate. As a result, the Company recorded a provisional net benefit of $25.7 million in the fourth quarter of 2017, the period in which the Tax Act was enacted. This provisional amount included an estimated reduction in the Company’s net deferred tax liabilities of $62.4 million resulting from the decrease in the federal income tax rate; an estimated deemed repatriation tax liability of $28.5 million; and an estimated net increase to our provision for taxes on foreign earnings not considered permanently reinvested of $8.2 million. During the fourth quarter of 2018, the Company completed its analysis in conjunction with the SAB 118 measurement period ending on December 22, 2018. The total tax provision impact for the year ended December 31, 2018 was an unfavorable adjustment of $5.5 million related primarily to certain deferred tax assets and liabilities. Income from continuing operations
Net income from continuing operations was $390.0$554.4 million in 20182020 compared to $475.3$431.3 million in 2017.2019. The decreaseincrease of $85.3$123.1 million was primarily due to higher operating income, higher other (income) expense, net and lower operating income. interest expense, partly offset by higher income taxes and equity in losses of affiliate.Loss from discontinued operations
The loss from discontinued operations was $0.2 million and $2.6 million in 2018 and 2017, respectively and is related to the prior sale of the Waterloo tool storage and Simonton window businesses.
Results By Segment CabinetsPlumbing
Net sales decreased $48.5increased by $174.9 million, or 2.0%8.6%, predominantly due to higher sales volume from retail and e-commerce customers in the U.S. who benefited from strong consumer demand from higher home investments, higher sales volume in China despite temporary closures for COVID-19 and price increases to help mitigate the cumulative impact of tariffs. These factors were partly offset by higher rebate costs and lower sales from showroom customers whose locations closed or operated at limited capacity as a result of the COVID-19 pandemic as well as unfavorable foreign exchange of approximately $1 million. Operating income increased by $40.3 million, or 9.4%, due to higher sales volume and the benefit from productivity improvements. These benefits were partly offset by unfavorable channel mix, higher advertising and marketing costs, asset impairment charges ($13.0 million in 2020), higher employee related costs and the impact of exiting a customer relationshiphigher tariffs as well as unfavorable foreign exchange of approximately $2 million. Outdoors & Security Net sales increased by $70.3 million, or 5.2%,due to higher volume for decking and unfavorable mix.doors products due to strong consumer demand benefiting from higher home investments, price increases to help mitigate tariffs and the benefit from new customers in decking products. These factors were partially offset by lower volume primarily due to COVID-19 related weakness in the benefit from newcommercial and international security markets, the discontinuance of a doors product introductionsline, higher rebate costs and price increases to help mitigate cumulative raw material cost increases.unfavorable mix. Foreign exchange was unfavorable by approximately $2 million. Operating income decreased $123.7increased by $29.0 million, or 46.3%16.8%, primarily due to lower nethigher sales tradename asset impairment charges of $62.6 million, higher restructuring and other charges incurred to consolidate our manufacturing footprint and discontinue certain product lines and increased employee-related costs due to inflation, partially offset byvolume, the benefit from productivity improvements. Plumbing
Net sales increased $162.5improvements, the absence in 2020 of expenses related to Fiberon’s inventory fair value adjustment ($1.8 million or 9.4% due to higher sales unit volume in the U.S. China2019) and Canada, new product introductions across our distribution channels, the benefit from the 2017 acquisitions of Victoria + Albert and Shaws and price increases to help mitigate cumulative raw material cost increases partially offset by higher rebates.a fair value adjustment associated with an idle manufacturing facility ($1.7 million in 2019). Foreign exchange was favorable by approximately $5 million.
Operating income increased $16.8 million, or 4.7%, due to the higher net sales and benefits from productivity improvements. These benefits were partially offset by commodity cost inflation, higher employee-related costs, unfavorable mix, amortization of the acquisition-related inventory fair value adjustments ($5.5 million) related to our 2017 acquisitions and increased marketing and advertising costs. In addition, 2017 operating income reflects the impact of adopting ASU2017-07 during 2018 and the reclassification of approximately $5.1 million from Plumbing operating income to other income, net.
Doors & Security
Net sales increased $87.8 million, or 8.0%, due to higher sales volume, resulting from the benefit from new product introductions, the acquisition of Fiberon in 2018, price increases to help mitigate cumulative raw material cost increases and the impact of favorable foreign exchange, which were partly offset by increasednon-repeating sales promotions and unfavorable mix.
Operating income increased $8.7 million, or 5.9%, due to higher net sales and an inventory valuation accounting change benefit of $12.8 million, which were partially offset bynon-repeating sales promotions and inventory step up amortization related to the Fiberon acquisition.
Corporate
Corporate expenses decreased by $10.9 million mainly due to lower employee-related costs. In addition, 2017 corporate expense reflects the impact of adopting ASU2017-07 during the first quarter of 2018 and the related reclassification of approximately $4.5 million of 2017 income from Corporate expenses to other income, net.
2017 Compared to 2016
Total Fortune Brands
Net sales
Net sales increased $298.4 million, or 6.0%. The increase was due to higher sales volume primarily from improvement in U.S. market conditions for home products, new product introductions, the benefit from the acquisitions in our Plumbing segment and price increases to help mitigate cumulative raw material cost increases as well as the benefit from favorable foreign exchange of approximately $4$3 million. These benefitsfactors were partially offset by unfavorable mix, higher employee related costs, the impact of higher tariffs and higher restructuring costs.
Cabinets Net sales promotions, and sales rebates. Cost of products sold
Cost of products sold increased $169.5by $80.5 million, or 5.3%3.4%, due to higher volume and price increases to help mitigate the cumulative impact of tariffs. These factors were partly offset by a continued shift to value-priced products from make-to-order products and higher transportation costs, as well as unfavorable foreign exchange of approximately $1 million.
Operating income increased by $57.4 million, or 32.2%, due to higher net sales, including the impact of the acquisitions in our Plumbing segment and raw material cost increases, partially offset by the benefit of productivity improvements. Selling, general and administrative expenses
Selling, general and administrative expenses increased $61.4 million, or 5.4%, due to higher employee-related costs and advertising costs as well as the impact of the acquisitions in our Plumbing segment.
Amortization of intangible assets
Amortization of intangible assets increased $3.6 million primarily due to the acquisitions in our Plumbing segment, partially offset by a decrease relating to a definite-lived customer relationship intangible in our Doors & Security segment that was fully amortized during the second quarter of 2017.
Loss on sale of product line
In April 2017, we completed the sale of Field ID, our cloud-based inspection and safety compliance software product line included in our Doors & Security segment. We recorded apre-tax loss of $2.4 million as the result of this sale.
Asset impairment charges
Assetlower asset impairment charges of $3.2($32.0 million relate to our decision in the first quarter of 2017 to sell Field ID.
Restructuring charges
Restructuring charges of $8.3 million in 2017 primarily related to severance costs within all of our segments as well as charges associated with a plant relocation in our Cabinets segment. Restructuring charges of $13.9 million in 2016 primarily related to the severance costs and charges associated with the relocation of a manufacturing facility within our Doors & Security segment.
Operating income
Operating income increased $63.9 million or 10.3%. Operating income increased due to higher net sales, including the benefit from acquisitions in our Plumbing segment and productivity improvements. These benefits were partially offset by unfavorable mix, higher employee-related costs, raw material, labor inflation and advertising costs. 2017 and 2016 were adjusted to reflect the impact of adopting ASU2017-07 and reclassification of $9.6 million and $14.1 million, respectively from operating income to other income, net.
Interest expense
Interest expense of $49.4 million was $0.3 million higher as compared to last year primarily due to higher average interest rates which was partially offset by lower average borrowings and the absence of thewrite-off of debt issuance costs incurred in 2016.
Other income, net
Other income, net, was of $1.7 million in the twelve months ended December 31, 2017 compared to $12.6 million in the twelve months ended December 31, 2016. The decrease of $10.9 million was primarily due to a $7.0 million impairment charge in 2017 pertaining to a cost method investment and a decrease in defined benefit income of $4.5 million.
Income taxes
The effective income tax rates for 2017 and 2016 were 25.1% and 29.2% respectively. The 2017 effective income tax rate was favorably impacted by the Tax Act ($25.7 million). The effective income tax rates for 2017 and 2016 were favorably impacted by the tax benefit attributable to share-based compensation (ASU2016-09) deduction ($23.9 million and $27.8 million, respectively), the Domestic Production Activity (Internal Revenue Code Section 199) deduction ($10.9 million and $13.0 million, respectively) and favorable tax rates in foreign jurisdictions ($8.3 million and $7.6 million, respectively), offset by state and local taxes and increases to uncertain tax positions ($11.6 million and $13.2 million, respectively).
Income from continuing operations
Net income from continuing operations was $475.3 million in 2017 compared to $412.4 million in 2016. The increase of $62.9 million was primarily due to higher operating income.
(Loss) income from discontinued operations
The loss from discontinued operations of $2.6 million in 2017 primarily related to the prior sale of the Waterloo tool storage and Simonton window businesses. The income from discontinued operations of $0.8 million in 2016 included the effect of tax adjustments relating to the Waterloo business.
Results By Segment
Cabinets
Net sales increased $69.3 million, or 2.9%, due to higher sales volume driven primarily by continuing improvement in the U.S. home products marketdecrease) and the benefit from new product introductions, price increases to help mitigate cumulative raw material cost increases and a $3 million benefit from favorable foreign exchange. These benefits were partially offset by unfavorable mix and higher sales promotions.
Operating income increased $9.4 million, or 3.6%, due to the increase in net sales and productivity improvements. These benefitsfactors were partiallypartly offset by unfavorable mix, higher employee-related costs, higher labor inflationa continued shift to value-priced products from make-to-order products and higher transportation costs.
PlumbingCorporate
Net sales increased $186.4 million, or 12.1%, due to higher sales volume driven by continuing improvement in the U.S. home products market and the benefit from new product introductions, higher sales in international markets, principally China, and the benefit from the acquisitions of Riobel, ROHL and Perrin & Rowe in 2016 as well as Shaws and Victoria + Albert in 2017. These benefits were partially offset by higher sales rebates.
Operating income increased $43.6 million, or 13.8%, due to higher net sales, productivity improvements and favorable mix as well as a $4 million benefit from favorable foreign exchange. These benefits were partially offset by employee-related costs, higher raw materials costs and higher advertising costs. In addition, 2017 and 2016 operating income reflects the impact of adopting ASU2017-07 and reclassification of approximately $5.1 million and $11.4 million, respectively from operating income to other income, net.
Doors & Security
Net sales increased $42.7 million, or 4.1%, due to higher sales volume, including the benefit from new product introductions, and price increases to help mitigate cumulative raw material cost increases. These benefits were partially offset by the impact of exiting two security product lines in our commercial distribution channels.
Operating income increased $20.5 million, or 16.2%, primarily due to the higher net sales, the benefits from productivity improvements, lower restructuring and other charges (approximately $6 million) relating to the completion in 2016 of a manufacturing facility relocation, favorable foreign exchange and the related cost savings resulting from the facility relocation. In addition, 2017 and 2016 operating income reflects the impact of adopting ASU2017-07 and reclassification of zero and $2.1 million, respectively from operating income to other income, net.
Corporate
Corporate expenses increased by $9.6$23.8 million, mainlyor 29.9%, dueto higher employee related costs, $4.5 million of transaction costs associated with the Larson acquisition and the impairment of a long lived asset. In addition, 2017 and 2016 operating income reflects the impact of adopting ASU2017-07 and reclassification of $4.5 million and $0.6 million, respectively from operating income to other income, net.long-lived asset ($3.6 million). Liquidity and Capital Resources Our primaryprincipal sources of liquidity needs are cash on hand, cash flows from operating activities, cash borrowed under our credit facility and cash from debt issuances in the capital markets. Our operating income is generated by our subsidiaries. We believe our operating cash flows, including funds available under the credit facility and access to capital markets, provide sufficient liquidity to support the Company’s working capital requirements, fund capital expenditures and service of indebtedness, as well as to finance acquisitions, repurchase shares of our common stock and pay dividends to stockholders, as deemedthe Board of Directors deems appropriate. Our principal sources of liquidity are cash on hand, cash flows from operating activities,operations, borrowing availability and overall liquidity are subject to certain risks and uncertainties, including those described in the section entitled “Item 1A. Risk Factors.” In addition, 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 credit facility and debt issuances in the capital markets. Our operating income is generated by our subsidiaries. There are no restrictions on the ability of our subsidiaries toshare repurchase programs, or pay dividends, or makewhat impact any such transactions could have on our results of operations, cash flows or financial condition, whether as a result of the issuance of debt or equity securities, or otherwise. 20
Table of Contents Unsecured Senior Notes At December 31, 2020, the Company had aggregate outstanding notes in the principal amount of $1.8 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 carrying value of the Notes, net of underwriting commissions, price discounts and debt issuance costs as of December 31, 2020 and December 31, 2019: (in millions) | | | | | | | | | Net Carrying Value | | Coupon Rate | Principal Amount | | | Issuance Date | | Maturity Date | | December 31, 2020 | | | December 31, 2019 | | 3.000% Senior Notes | $ | 400.0 | | | June 2015 | | June 2020 | | $ | - | | | $ | 399.7 | | 4.000% Senior Notes | | 500.0 | | | June 2015 | | June 2025 | | | 496.6 | | | | 495.8 | | 4.000% Senior Notes (the “2018 Notes”) | | 600.0 | | | September 2018 | | September 2023 | | | 597.1 | | | | 596.1 | | 3.250% Senior Notes (the “2019 Notes”) | | 700.0 | | | September 2019 | | September 2029 | | | 693.5 | | | | 692.7 | | Total Senior Notes | | | | | | | | | $ | 1,787.2 | | | $ | 2,184.3 | |
During June 2020, we repaid all outstanding 3.000% Senior Notes issued in June 2015 at their maturity date using borrowings under our 2019 Revolving Credit Agreement (as defined below). In September 2019, we issued $700 million of the 3.25% Senior Notes due 2029 in a registered public offering. The Company used the proceeds from the 2019 Notes offering to repay in full the Company’s $350 million term loan and to pay down outstanding balances under our revolving credit facility. Notes payments due during the next five years as of December 31, 2020 are zero in 2021 through 2022, $600 million in 2023, zero in 2024 and $500 million in 2025. Credit Facilities In April 2020, the Company entered into a supplemental 364-day, $400 million revolving credit facility (the “2020 Revolving Credit Agreement”), and borrowings thereunder will be used for general corporate purposes. In September 2019, the Company entered into a second amended and restated $1.25 billion revolving credit facility (the “2019 Revolving Credit Agreement”), and borrowings thereunder will be used for general corporate purposes. The terms and conditions of the 2019 Revolving Credit Agreement, including the total commitment amount, essentially remained the same as the previous revolving credit facility, except that the maturity date was extended to September 2024. Interest rates under the 2019 Revolving Credit Agreement are variable based on LIBOR at the time of the borrowing and the Company’s long-term credit rating and can range from LIBOR + 0.91% to LIBOR + 1.4%. Borrowings amounting to $165.0 million were rolled over from the prior revolving credit facility into the 2019 Revolving Credit Agreement. The amendment also includes a covenant under which the Company is required to maintain a minimum ratio of consolidated EBITDA to consolidated interest expense of 3.0 to 1.0. Adjusted EBITDA is defined as consolidated net income before interest expense, income taxes, depreciation, amortization of intangible assets, losses from asset impairments, and certain other distributionsone-time adjustments. In addition, the amendment includes a covenant under which the Company’s ratio of consolidated debt minus certain cash and cash equivalents to Fortune Brands. consolidated EBITDA generally may not exceed 3.5 to 1.0. This amendment and restatement of the credit agreement was a non-cash transaction for the Company. On December 31, 2020 and December 31, 2019, our outstanding borrowings under this credit facility were $785.0 million and zero, respectively. As of December 31, 2020, we were in compliance with all covenants under this credit facility. We currently have uncommitted bank lines of credit in China, which provide for unsecured borrowings for working capital of up to $17.5 million in aggregate as of December 31, 2020 and December 31, 2019, of which there were no outstanding balances as of December 31, 2020 and 2019.The weighted-average interest rates on these borrowings were zero in 2020 and 2019. The components of external long-term debt were as follows: (In millions) | | 2020 | | | 2019 | | Notes | | $ | 1,787.2 | | | $ | 2,184.3 | | $1,250 million revolving credit agreement due September 2024 | | | 785.0 | | | | — | | Total debt | | | 2,572.2 | | | | 2,184.3 | | Less: current portion | | | — | | | | 399.7 | | Total long-term debt | | $ | 2,572.2 | | | $ | 1,784.6 | |
In our debt agreements, there are normal and customary events of default which would permit the lenders to accelerate the debt if not cured within applicable grace periods, such as failure to pay principal or interest when due or a change in control of the Company. There were no events of default as of December 2018,31, 2020. 21
Table of Contents Cash and Seasonality In 2020, we invested approximately $97.8 million in incremental capacity to support long-term growth potential and new products inclusive of cost reduction and productivity initiatives. We expect capital spending in 2021 to be in the range of $210 to $250 million. On December 31, 2020, we had cash and cash equivalents of $419.1 million, of which $342.9 million was held at non-U.S. subsidiaries. We manage our Board of Directors increasedglobal cash requirements considering (i) available funds among the quarterly cash dividend by 10% to $0.22 per sharesubsidiaries through which we conduct business, (ii) the geographic location of our liquidity needs, and (iii) the cost to access international cash balances. The repatriation of non-U.S. cash balances from certain subsidiaries could have adverse tax consequences as we may be required to pay and record tax expense on those funds that are repatriated. Our operating cash flows are significantly impacted by the seasonality of our business. We typically generate most of our operating cash flow in the third and fourth quarters of each year. We use operating cash in the first quarter of the year. Share Repurchases In 2020, we repurchased 2.9 million shares of our outstanding common stock.stock under the Company’s share repurchase program for $187.6 million. As of December 31, 2020, the Company’s total remaining share repurchase authorization under the remaining program was approximately $462.4 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. Dividends In 2020, we paid dividends in the amount of $133.3 million to the Company’s stockholders. Our Board of Directors will continue to evaluate dividend payment opportunities on a quarterly basis. There can be no assurance as to when and if future dividends will be paid, and at what level, because the payment of dividends is dependent on our financial condition, results of operations, cash flows, capital requirements and other factors deemed relevant by our Board of Directors. In September 2018, we issued $600 million There are no restrictions on the ability 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 Senior Notes offeringour subsidiaries to pay down our revolving credit facility. On December 31, 2018, the outstanding amount of the 2018 Senior Notes, net of underwriting commissions, price discounts, and debt issuance costs, was $595.0 million.dividends or make other distributions to Fortune Brands.
In March 2018, the Company entered into a $350 million term loan for general corporate purposes that matures 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. All terms and conditions on the amended term loan remain the same as the previous $350 million term loan. The amended term loan is for general corporate purposes and matures in March 2019. At December 31, 2018 and December 31, 2017, amounts due under the term loan were $525.0 million and zero, 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. As of December 31, 2018, we were in compliance with all covenants under this term loan.Acquisitions
We periodically review our portfolio of brands and evaluate potential strategic transactions and other capital initiatives to increase shareholderstockholder value. However,In December 2020, 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 program, or pay dividends, or what impact any such transactions could have on our results of operations, cash flows or financial condition, whether as a resultacquired 100% of the issuanceoutstanding equity of debt or equity securities, or otherwise. OurLarson, the North American market leading brand of storm, screen and security doors, for a total purchase price of approximately $715.2 million, net of cash flows from operations, borrowing availabilityacquired and overall liquidity areclosing date working capital adjustments. The acquisition cost is further subject to the final post-closing working capital adjustment. Larson also sells related outdoor living products including retractable screens and porch windows. In September 2018, we acquired 100% of the membership interests of Fiberon, a leading U.S. manufacturer of outdoor performance materials used in decking and railing products, for a total purchase price of approximately $470 million, subject to certain riskspost-closing adjustments. The acquisition of Fiberon provided category expansion and uncertainties, including those described inproduct extension opportunities into the section “Item 1A. Risk Factors.” In June 2016,outdoor living space for our Outdoors & Security segment. We financed the Company amendedtransactions using cash on hand and restated its 2011 credit agreement to combine and rollover the priorborrowings under our revolving credit facility and term loan into a new standalone $1.25 billion revolving credit facility. This amendment and restatementfacilities. The results 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 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 December 31, 2018 and December 31, 2017, our outstanding borrowings under these facilities were $320.0 million and $615.0 million, respectively, all of which isboth acquisitions are included in long-term debt in our consolidated balance sheet. 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 December 31, 2018, we were in compliance with all covenants under this facility. As a result of the refinancing, we wrote off prepaid debt issuance costs of approximately $1.3 million as of June 30, 2016.
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 often-year notes due in 2025 with a coupon rate of 4%. We used the proceedsOutdoors & Security segment from the 2015 Senior Notes offering to pay down our revolving credit facility and for general corporate purposes. On December 31, 2018, the outstanding amountdate of the 2015 Senior Notes, net of underwriting commissions, price discounts, and debt issuance costs, was $894.1 million.acquisition.
On April 30, 2018, our Board of Directors authorized the repurchase of up to $150 million of shares of our common stock over the two years ending April 30, 2020. On July 13, 2018, our Board of Directors authorized the repurchase of up to $400 million of shares of our common stock over the two years ending July 13, 2020. As of December 31, 2018, the Company’s total remaining share repurchase authorization under the repurchase programs was approximately $413.7 million. The share repurchase programs do not obligate the Company to repurchase any specific dollar amount or number of shares and may be suspended or discontinued at any time. In 2018, we repurchased 12.0 million shares of our outstanding common stock under the Company’s share repurchase programs for $694.6 million.
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 as of both December 31, 2018 and 2017, of which zero were outstanding, as of December 31, 2018 and 2017. The weighted-average interest rates on these borrowings were 0%, 0% and 1.5% in 2018, 2017 and 2016 respectively.
Acquisitions, divestitures and other strategic partnerships in 2018, 2017 and 2016 include:
> | | During the fourth quarter of 2018, our Plumbing segment entered into strategic partnerships with several companies which incorporate emerging technology into plumbing-related products, and at the same time acquirednon-controlling equity interests in two of our partners. This includes an investment in Flo Technologies, Inc. (“Flo”), a U.S. manufacturer of a comprehensive water monitoring andshut-off
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| system with leak detection and proactive leak detection technologies. Our investments in our strategic partners are recorded at cost, plus or minus any changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.
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> | | In September 2018, we acquired 100% of membership interests of Fiberon, a leading U.S. manufacturer of outdoor performance materials used in decking, railing and fencing products for a total purchase price of approximately $470.0 million, subject to certain post-closing adjustments. The acquisition of Fiberon provides category expansion and product extension opportunities for our Doors & Security segment into the outdoor living space. The results of operations, subsequent to the closing of the acquisition, are included in the Doors & Security segment.
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> | | In October 2017, the Company acquired Victoria + Albert, aUK-based premium brand of standalone bathtubs, sinks, tub fillers, faucets and other accessories. In July 2017, we acquired Shaws, aUK-based luxury plumbing products company that specializes in manufacturing and selling fireclay sinks, and selling brassware and accessories. The combined consideration paid was approximately $146 million, including $19.9 million of additional purchase price consideration paid related to post-closing adjustments and deferred acquisition payments during the year ended December 31, 2018. The combined consideration paid is subject to further deferred acquisition payments. The results of operations of the acquired companies are included in the Plumbing segment from the respective dates of acquisition. We financed the transactions using cash on hand and borrowings under our revolving credit facility.
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> | | In September 2016, we acquired ROHL, a California-based luxury plumbing company. We also acquired Perrin & Rowe, a UK manufacturer and designer of luxury kitchen and bathroom plumbing products. The total combined purchase price was approximately $166 million, subject to certain post-closing adjustments. We financed the transaction using cash on hand and borrowings under our existing credit facility.
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> | | In May 2016, we acquired Riobel, a Canadian plumbing company for a purchase price of $94.6 million in cash, subject to certain post-closing adjustments. We financed the transaction using cash on hand and borrowings under our existing credit facilities.
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In 2018, we invested approximately $45 million in incremental capacity to support long-term growth potential. We expect capital spending in 2019 to be in the range of $135 to $145 million.
On December 31, 2018, we had cash and cash equivalents of $262.9 million, of which $260.1 million was held atnon-U.S. subsidiaries. We manage our global cash requirements considering (i) available funds among the subsidiaries through which we conduct business, (ii) the geographic location of our liquidity needs, and (iii) the cost to access international cash balances. The repatriation ofnon-U.S. cash balances from certain subsidiaries could have adverse tax consequences as we may be required to pay and record tax expense on those funds that are repatriated.
Our operating cash flows are significantly impacted by the seasonality of our businesses. We typically generate most of our operating cash flow in the third and fourth quarters of each year.
Cash Flows Below is a summary of cash flows for the years ended December 31, 2018, 20172020 and 2016.2019. | | | | | (In millions) | | 2018 | | | 2017 | | | 2016 | | | 2020 | | | | 2019 | | Net cash provided by operating activities | | $ | 604.0 | | | $ | 600.3 | | | $ | 650.5 | | | $ | 825.7 | | | | $ | 637.2 | | Net cash used in investing activities | | | (634.3 | ) | | | (287.7 | ) | | | (385.1 | ) | | | (923.5 | ) | | | | (127.6 | ) | Net cash used in financing activities | | | (6.8 | ) | | | (250.1 | ) | | | (250.4 | ) | | Net cash provided by (used in) financing activities | | | | 111.6 | | | | | (389.7 | ) | Effect of foreign exchange rate changes on cash | | | (15.2 | ) | | | 9.0 | | | | (2.0 | ) | | | 16.3 | | | | | 4.3 | | Net (decrease) increase in cash, cash equivalents and restricted cash | | $ | (52.3 | ) | | $ | 71.5 | | | $ | 13.0 | | | Net increase in cash, cash equivalents and restricted cash | | | $ | 30.1 | | | | $ | 124.2 | |
Net cash provided by operating activities was $604.0$825.7 million in 20182020 compared to $600.3$637.2 million in 2017 and $650.5 million in 2016.2019. The $3.7$188.5 million increase in cash provided from 2019 to 2020 was primarily due to higher net income, lower buildincreases in working capital primarily driven by lower accounts receivable balances and increases in accrued taxes. The $50.2 million decrease in cash provided by operating activities from 2017 to 2016 was primarily due to higher build in working capital, primarily driven by higher inventory purchases in 2017, partially offset by a higher net income. Net cash used in investing activities was $634.3$923.5 million in 20182020 compared to $287.7$127.6 million in 2017 and $385.1 million in 2016.2019. The increase in cash used of $346.6$795.9 million from 20172019 to 20182020 was primarily due to a $341.0the acquisition of Larson and additional shares of Flo Technologies during 2020 and increased capital expenditures. Net cash provided by financing activities was $111.6 million in 2020 compared to cash used in financing activities of $389.7 million in 2019. The increase in costnet cash provided of acquisitions. The decrease of $97.4$501.3 million from 20162019 to 20172020 was primarily due to lower cost of acquisitions of $115.1 million, partially offset by $15.7 million of higher capital expenditures. Net cash used by financing activities was $6.8 million in 2018 compared to $250.1 million in 2017 and $250.4 million in 2016. The decrease in net cash used of $243.3 million was primarily due to higher net borrowings in 20182020 compared to 20172019 ($751.2 million increase)535.7 million), higher proceeds from the exercise of stock options and the absence of deferred
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Table of Contents acquisition payments made during 2019 ($19.0 million), partly offset by higher share repurchases in 20182020 compared to 2017 ($479.8 million increase).2019 and higher dividends to stockholders. Pension Plans Subsidiaries of Fortune Brands sponsor their respective defined benefit pension plans that are funded by a portfolio of investments maintained within our benefit plan trust. In 2018, 20172020 and 2016,2019, we contributed $47.7 million and $10.0 million, $28.4 million and zero, respectively, to our qualified pension plans. In 2019,2021, we expect to make pension contributions of approximately $8.0$10.0 million.As of December 31, 2018,2020, the fair value of our total pension plan assets was $599.6$784.9 million, representing funding of 79%84% of the accumulated benefit obligation liability. For the foreseeable future, we believe that we have sufficient liquidity to meet the minimum funding that may be required by the Pension Protection Act of 2006. Foreign Exchange We have operations in various foreign countries, principally Canada, China, Mexico, the United Kingdom, France, Australia and Japan. Therefore, changes in the value of the related currencies affect our financial statements when translated into U.S. dollars. Contractual Obligations and Other Commercial Commitments The following table describes other obligations and commitments to make future payments under contracts, such as debt and lease agreements, and under contingent commitments, such as debt guarantees, as of December 31, 2018.2020. | | | | (In millions) | | Payments Due by Period as of December 31, 2018 | | | Payments Due by Period as of December 31, 2020 | | | Contractual Obligations | | Total | | | Less than 1 year | | | 1-3 years | | | 4-5 years | | | After 5 years | | | Total | | | Less than 1 year | | | 1-3 years | | | 4-5 years | | | After 5 years | | Short-term and long-term debt | | $ | 2,334.0 | | | $ | 525.0 | | | $ | 719.0 | | | $ | 595.0 | | | $ | 495.0 | | | Long-term debt | | | $ | 2,585.0 | | | $ | — | | | $ | 600.0 | | | $ | 1,285.0 | | | $ | 700.0 | | Interest payments on long-term debt(a) | | | 300.6 | | | | 71.6 | | | | 111.0 | | | | 88.0 | | | | 30.0 | | | | 408.0 | | | | 77.8 | | | | 163.7 | | | | 75.5 | | | | 91.0 | | Operating leases | | | 182.3 | | | | 37.8 | | | | 53.0 | | | | 32.7 | | | | 58.8 | | | | 203.5 | | | | 42.8 | | | | 67.5 | | | | 40.5 | | | | 52.7 | | Purchase obligations(b) | | | 369.9 | | | | 342.4 | | | | 21.8 | | | | 4.7 | | | | 1.0 | | | | 731.7 | | | | 689.0 | | | | 32.6 | | | | 10.1 | | | | — | | Deferred acquisition payments | | | 19.5 | | | | 19.5 | | | | — | | | | — | | | | — | | | Defined benefit plan contributions(c) | | | 8.0 | | | | 8.0 | | | | — | | | | — | | | | — | | | | 10.0 | | | | 10.0 | | | | — | | | | — | | | | — | | Total | | $ | 3,214.3 | | | $ | 1,004.3 | | | $ | 904.8 | | | $ | 720.4 | | | $ | 584.8 | | | $ | 3,938.2 | | | $ | 819.6 | | | $ | 863.8 | | | $ | 1,411.1 | | | $ | 843.7 | |
(a) | Interest payments on long-term debt were calculated using the borrowing rate in effect on December 31, 2018.2020. |
(b) | Purchase obligations include contracts for raw material and finished goods purchases; selling and administrative services; and capital expenditures. |
(c) | Pension and postretirement contributions cannot be determined beyond 2019.2021. |
Due to the uncertainty of the timing of settlement with taxing authorities, we are unable to make reasonably reliable estimates of the period of cash settlement of unrecognized tax benefits. Therefore, $83.5$96.1 million of unrecognized tax benefits as of December 31, 20182020 have been excluded from the Contractual Obligations table above. In addition to the contractual obligations and commitments listed and described above, we also had other commercial commitments for which we are contingently liable as of December 31, 2018. 2020.Other corporate commercial commitments include standby letters of credit of $43.6$34.6 million, in the aggregate, all of which expire in less than one year, and surety bonds of $8.0$15.1 million, of which $7.0$15.0 million matures in less than 1one year and $1.0$0.1 million matures in1-3 years.These contingent commitments are not expected to have a significant impact on our liquidity. Off-Balance Sheet Arrangements As of December 31, 2018,2020, we did not have anyoff-balance sheet arrangements that are material or reasonably likely to be material to our financial condition or results of operations. Foreign Currency Risk Certain anticipated transactions, assets and liabilities are exposed to foreign currency risk. Principal currencies hedged include the Canadian dollar, the British pound, the Mexican peso and the Chinese yuan. We regularly monitor our foreign currency exposures in order to maximize the overall effectiveness of our foreign currency hedge positions. For additional information on this risk, see Item 7A7A. “Quantitative and Qualitative Disclosures about Market Risk” in this Annual Report on Form10-K. Derivative Financial Instruments In accordance with ASCAccounting Standards Codification ("ASC") requirements for Derivatives and Hedging, we recognize all derivative contracts as either assets or liabilities on the balance sheet, and the measurement of those instruments is at fair value. If the derivative is designated as a fair value hedge and is effective, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings in the same period. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (“OCI”) and are 23
Table of Contents recognized in the consolidated statement of income when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. If the derivative is designated as an effective economic hedge of the net investment in a foreign operation, the changes in the fair value of the derivative is reported in the cumulative translation adjustment section of OCI. Similar to foreign currency translation adjustments, these changes in fair value are recognized in earnings only when realized upon sale or upon complete or substantially complete liquidation of the investment in the foreign entity. Deferred currency gains/(losses)(loss) gains of $2.2 million, $0.4$(3.0) million and $(3.5)$4.1 million (before tax impact) were reclassified into earnings for the yearyears ended December 31, 2018, 20172020 and 2016,2019, respectively. Based on foreign exchange rates as of December 31, 2018,2020, we estimate that $3.3$2.0 million of net currency derivative gain included in OCIaccumulated other comprehensive income ("AOCI") as of December 31, 20182020 will be reclassified to earnings within the next twelve months. Recently Issued Accounting Standards The adoption of recent accounting standards, as discussed in Note 2, “Recently Issued“Significant Accounting Standards,Policies,” to our Consolidated Financial Statements, has not had and is not expected to have a significant impact on our revenue, earnings or liquidity. Critical Accounting Policies and Estimates Our significant accounting policies are described in Note 2, “Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form10-K. The Consolidated Financial Statements are prepared in conformity with GAAP.U.S. generally accepted accounting principles (“GAAP”). Preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the amounts of assets and liabilities reflected in the financial statements and revenues and expenses reported for the relevant reporting periods. We believe the policies discussed below are the Company’s critical accounting policies as they include the more significant, subjective and complex judgments and estimates made when preparing our consolidated financial statements. Allowances for Doubtful AccountsCredit Losses Trade receivables are recorded at the stated amount, less allowances for discounts and doubtful accounts.credit losses. The allowances for doubtful accounts represent estimated uncollectible receivables associated with potential customer defaults on contractual obligations (usually due to customers’ potential insolvency) or discounts related to early payment of accounts receivables by our customers. The allowances for credit losses include provisions for certain customers where a risk of default has been specifically identified. In addition, the allowances include a provision for expected customer defaults on a general formula basis when it is determined that the risk of some default is probable and estimable, but cannot yet be associated with specific customers. The assessment of the likelihood of customer defaults is based onExpected credit losses are estimated using various factors, including the length of time the receivables are past due, historical collection experience and existing economic conditions. In accordance with this policy, our allowance for doubtful accountscredit losses was $3.7$6.7 million and $3.3$3.0 million as of December 31, 20182020 and 2017,2019, respectively. Inventories Inventory provisions are recorded to reduce inventory to the net realizable dollar value for obsolete or slow moving inventory based on assumptions about future demand and marketability of products, the impact of new product introductions, inventory levels and turns, product spoilage and specific identification of items, such as product discontinuance, engineering/material changes, or regulatory-related changes. In accordance with this policy, our inventory provision was $45.3$51.2 million and $45.0$46.1 million as of December 31, 20182020 and 2017,2019, respectively. Long-lived Assets In accordance with ASC requirements for Property, Plant and Equipment, a long-lived asset (including amortizable identifiable intangible assets) or asset group held for use is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such events occur, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of a long-lived asset or asset group. The cash flows are based on our best estimate of future cash flows derived from the most recent business projections. If this comparison indicates that there is an impairment, the amount of the impairment is calculated based on fair value. Fair value is estimated primarily using discounted expected future cash flows on a market-participant basis. | | During 2020, we recorded an impairment of $3.6 million related to a long-lived asset to be disposed of in selling, general and administrative expenses. During 2019, we recorded an impairment of $1.7 million related to a long-lived asset to be disposed of in cost of products sold. No impairments of long-lived assets were recorded during 2018. |
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Table of Contents In
Business Combinations We account for business combinations under the acquisition method of accounting in accordance with ASC requirements for Property, PlantTopic 805, Business Combinations, which requires an allocation of the consideration we paid to the identifiable assets, intangible assets and Equipment, a long-lived asset (including amortizableliabilities based on the estimated fair values as of the closing date of the acquisition. The excess of the fair value of the purchase price over the fair values of these identifiable assets, intangible assets and liabilities is recorded as goodwill. Purchased intangibles other than goodwill are initially recognized at fair value and amortized over their useful lives unless those lives are determined to be indefinite. The valuation of acquired assets will impact future operating results. The fair value of identifiable intangible assets) orassets is determined using an income approach on an individual asset group held forbasis. Specifically, we use is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such events occur, we compare the summulti-period excess earnings method to determine the fair value of customer relationships and the relief-from-royalty approach to determine the fair value of the undiscounted cash flows expectedtradename and proprietary technology. Determining the fair value of acquired intangibles involves significant estimates and assumptions, including forecasted revenue growth rates, EBITDA margins, percentage of revenue attributable to result from the usetradename, contributory asset charges, customer attrition rate, market-participant discount rates and eventual dispositionthe assumed royalty rates. The determination of the useful life of an intangible asset or asset group to the carrying amount of a long-lived asset or asset group. The cash flows areother than goodwill is based on our best estimate of future cash flows derived from the most recent business projections. If this comparison indicates that there is an impairment, the amount of the impairment is calculated based on fair value. Fair value is estimated primarily using discounted expected future cash flows on a market-participant basis.factors including historical tradename performance with respect to consumer name recognition, geographic market presence, market share, plans for ongoing tradename support and promotion, customer attrition rate, and other relevant factors. Goodwill and Indefinite-lived Intangible Assets In accordance with ASC requirements for Intangibles —- Goodwill and Other, goodwill is tested for impairment at least annually in the fourth quarter and written down when impaired. An interim impairment test is performed if an event occurs or conditions change that would more likely than not reduce the fair value of the reporting unit below the carrying value. WeTo evaluate the recoverability of goodwill, we first assess qualitative factors to determine whether it is more likely than not that goodwill is impaired. Qualitative factors include changes in volume, margin, customers and the industry. If it is deemed more likely than not that goodwill for a reporting unit is impaired, we will perform a quantitative impairment test using a weighting of the income (80%) and market (20%) approaches. For the income approach, we use a discounted cash flow model, estimating the future cash flows of the reporting units to which the goodwill relates and then discounting the future cash flows at a market-participant-derived discount rate. In determining the estimated future cash flows, we consider current and projected future levels of income based on management’s plans for that business; business
trends, prospects and market and economic conditions; and market-participant considerations. Furthermore, our cash flow projections used to assess impairment of our goodwill and other intangible assets are significantly influenced by our projection for the U.S. home products market, our annual operating plans finalized in the fourth quarter of each year, and our ability to execute on various planned cost reduction initiatives supporting operating income improvements. Our projection for the U.S. home products market is inherently uncertain and is subject to a number of factors, such as employment, home prices, credit availability, new home starts and the rate of home foreclosures. For the market approach, we apply market multiples for peer groups to the current operating results of the reporting units to determine each reporting unit’s fair value. The Company’s reporting units are operating segments, or one level below operating segments when appropriate. When the estimated fair value of a reporting unit is less than its carrying value, we measure and recognize the amount of the goodwill impairment loss based on that difference. The significant assumptions that are used to determine the estimated fair value for goodwill impairment testing include the following: third-party market forecasts of U.S. new home starts and home repair and remodel spending; management’s sales, operating income and cash flow forecasts; peer company EBITDA earnings multiples; the market-participant-based discount rate; and the perpetuity growth rate. Our estimates of reporting unit fair values are based on certain assumptions that may differ from our historical and future actual operating performance. Specifically, assumptions related to growth in the new construction and repair and remodel segments of the U.S. home products markets drive our forecasted sales growth. The market forecasts are developed using independent third-party forecasts from multiple sources. In addition, estimated future operating income and cash flow consider our historical performance at similar levels of sales volume and management’s future operating plans as reflected in annual and long-term plans that are reviewed and approved by management. Purchased intangible assets other than goodwill are amortized over their useful lives unless those lives are determined to be indefinite. The determination of the useful life of an intangible asset other than goodwill is based on factors including historical 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. Certain of our tradenames have been assigned an indefinite life as we currently anticipate that these tradenames will contribute cash flows to the Company indefinitely. Indefinite-lived intangible assets are not amortized, but are evaluated at least annually to determine whether the indefinite useful life is appropriate. We measure the fair value of identifiable intangible assets upon acquisition and we review for impairment annually in the fourth quarter and whenever market or business events indicate there may be a potential impairment of that intangible. Impairment losses are recorded to the extent that the carrying value of the indefinite-lived intangible asset exceeds its fair value. The significant assumptions that are used to determine the estimated fair value for indefinite-lived intangible assets upon acquisition and subsequent impairment testing are forecasted revenue growth
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Table of Contents rates; the assumed royalty rate;rates; and the market-participant discount rate. Impairment losses are recorded to the extent that the carrying value of the indefinite-lived intangible asset exceeds its fair value.rates. We measure fair value of our indefinite-lived tradenames using the standard relief-from-royalty approach which estimates the present value of royalty income that could be hypothetically earned by licensing the brand name to a third party over the remaining useful life. The determination of fair value using this technique requires the use of estimates and assumptions related to projected tradenameforecasted revenue growth rates, the assumed royalty raterates and the market-participant discount rate.rates. We first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. Qualitative factors include changes in volume, customers and the industry. If it is deemed more likely than not that an intangible asset is impaired, we will perform a quantitative impairment test. In the third quarter of 2018, we recorded apre-tax impairment charge of $27.1 million related to an indefinite-lived tradename in our Cabinets segment. This charge was primarily the result of reduced revenue growth expectations associated with Cabinets operations in Canada, including the announced closure of Company-owned retail locations during the third quarter of 2018. During the fourth quarter of 2018, we recorded apre-tax impairment charge of $35.5 million related to another indefinite-lived
tradename in our Cabinets segment as part of our annual impairment testing performed in the fourth quarter. This charge was primarily the result of reduced revenue growth expectations identified during our annual planning process conducted during the fourth quarter, which includes more moderate industry growth expectations. The fair values of the impaired tradenames were measured using the relief-from-royalty approach, which estimates the present value of royalty income that could be hypothetically earned by licensing the tradename to a third party over their remaining useful life. Some of the more significant assumptions inherent in estimating the fair value include estimated future annual net sales See Note 5, “Goodwill and Identifiable Intangible Assets,” for the tradename, assumed royalty rate, income tax rate, and a discount rate that reflects the level of risk associated with the tradename’s future sales and profitability. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management plans. These assumptions represent level 3 inputs of the fair value hierarchy (refer to Note 10 “Fair Value Measurements” to the Consolidated Financial Statements in Item 8 of the Annual Report on Form10-K).additional information.
During the second quarter of 2020, extended closures of luxury plumbing showrooms associated with COVID-19 led to lower than expected sales related to an indefinite-lived tradename within the Plumbing segment, which combined with the updated financial outlook compared to previous forecasts and the continued uncertainty of the pandemic on the sales and profitability related to the tradename led us to conclude that it was more likely than not that the indefinite-lived tradename was impaired. Therefore, we performed an interim impairment test as of June 30, 2020, and as a result we recognized a pre-tax impairment charge of $13.0 million related to this tradename. We also performed an evaluation of the useful life of this tradename and determined it was no longer indefinite-lived due to changes in long-term management expectations and future operating plans. As a result, the remaining carrying value of this tradename is being amortized over its estimated useful life of 30 years. | | In the first quarter of 2020, we recognized an impairment charge of $9.5 million related to an indefinite-lived tradename in our Cabinets segment. This charge was primarily the result of lower expected sales of custom cabinetry products related to the impact of COVID-19. In the fourth quarter of 2019, we recognized an impairment charge of $12.0 million related to the same indefinite-lived tradename, which was the result of a strategic shift associated with new segment leadership and acceleration of our capacity rebalancing initiatives from custom cabinetry products to value-based cabinetry products as a result of lower than expected sales of custom cabinetry products compared to prior forecasts. As of December 31, 2020, the carrying value of this tradename was $29.1 million. | | In the third quarter of 2019, we recognized an impairment charge of $29.5 million related to a second indefinite-lived tradename in our Cabinets segment, which was primarily the result of a continuing shift in consumer demand from semi-custom cabinetry products to value-priced cabinetry products, which led to consecutive downward adjustments of internal sales forecasts and future growth rates associated with the tradename. In the fourth quarter of 2018, we recorded an impairment charge of $35.5 million related to the same indefinite-lived tradename, which was primarily the result of lower than forecasted sales during the fourth quarter of 2018 as well as projected changes in the mix of revenue across our tradenames in future periods, including the impact of more moderate industry growth expectations, which were finalized during our annual planning process conducted during the fourth quarter of 2018. As of December 31, 2020, the carrying value of this tradename was $85.0 million. | | During the third quarter of 2018, we recorded a pre-tax impairment charge of $27.1 million related to a third indefinite-lived tradename within the Cabinets segment. This charge was primarily the result of reduced revenue growth expectations associated with Cabinets operations in Canada, including the announced closure of Company-owned retail locations. As of December 31, 2020, the carrying value of this tradename was $39.8 million. | | The fair values of the impaired tradenames were measured using the relief-from-royalty approach, which estimates the present value of royalty income that could be hypothetically earned by licensing the tradename to a third party over its remaining useful life. Some of the more significant assumptions inherent in estimating the fair values include forecasted revenue growth rates, assumed royalty rates, and market-participant discount rates that reflect the level of risk associated with the tradenames’ future revenues and profitability. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management plans. These assumptions represent level 3 inputs of the fair value hierarchy (refer to Note 9). |
As of December 31, 2018,2020, the carryingfair value of thefour Cabinets' tradenames that were impaired was $152.0 million.exceeded their carrying values of $180.6 million by less than 30%. A further reduction in the estimated fair value of thesethe tradenames in our Cabinets segment could trigger future impairments. In 2017 and 2016, we did not record any assetadditional impairment charges in operating income associated withfuture periods. Events or circumstances that could have a potential negative effect on the estimated fair value of our reporting units and indefinite-lived tradenames include: lower than forecasted revenues, more severe impacts of the COVID-19 pandemic than currently expected, actual new construction and repair and remodel growth rates that fall below our assumptions, actions of key customers, increases in discount rates, continued economic uncertainty, higher levels of unemployment, weak consumer confidence, lower levels of discretionary consumer spending, a decrease in royalty rates and a decline in the trading price of our common stock. We cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill orand indefinite-lived intangible assets.
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Table of Contents Defined Benefit Plans We have a number of pension plans in the United States, covering many of the Company’s employees. In addition, the Company provides postretirement health care and life insurance benefits to certain retirees. Service cost for 20182020 relates to benefit accruals infor an hourly Union group within the defined benefit plan infor our DoorsOutdoors & Security segment. BenefitAll other benefit accruals under all otherour defined benefit pension plans were frozen as of, or prior to, December 31, 2016. We recognize changes in the fair value of pension plan assets and net actuarial gains or losses in excess of 10 percent of the greater of the fair value of pension plan assets or each plan’s projected benefit obligation (the “corridor”) in earnings immediately upon remeasurement, which is at least annually in the fourth quarter of each year. Net actuarial gains and losses occur when actual experience differs from any of the assumptions used to value defined benefit plans or when assumptions change as they may each year. The primary factors contributing to actuarial gains and losses are changes in the discount rate used to value obligations as of the measurement date and the differences between expected and actual returns on pension plan assets. This accounting method results in the potential for volatile and difficult to forecast gains and losses. Thepre-tax recognition of actuarial (gains) losses was $3.8 million, $(0.5)$2.8 million and $1.9$34.7 million in 2018, 20172020 and 2016,2019, respectively. The total net actuarial losses in accumulated other comprehensive income for all defined benefit plans were $71.5 $87.1million as of December 31, 2018,2020, compared to $67.4$87.4 million as of December 31, 2017.2019. We record amounts relating to these defined benefit plans based on various actuarial assumptions, including discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current economic conditions and trends. We believe that the assumptions utilized in recording our obligations under our plans are reasonable based on our experience and on advice from our independent actuaries; however, differences in actual experience or changes in the assumptions may materially affect our financial condition or results of operations. The expected rate of return on plan assets is determined based on the nature of the plans’ investments, our current asset allocation and our expectations for long-term rates of return. The weighted-average long-term expected rate of return on pension plan assets for the years ended December 31, 20182020 and 20172019 was 6.0%4.5% and 6.4%4.9%, respectively. Compensation increases reflect expected future compensation trends. The discount rate used to measure obligations is based on a spot-rate yield curve on aplan-by-plan basis that matches projected future benefit payments with the appropriate interest rate applicable to the timing of the projected future benefit payments. The bond portfolio used for the selection of the discount rate is from the top quartile of bonds rated by nationally recognized statistical rating organizations, and includes onlynon-callable bonds and those that are deemed to be sufficiently marketable with a Moody’s credit rating of Aa or higher. The weighted-average discount rate for defined benefit liabilities as of December 31, 20182020 and 20172019 was 4.4%2.6% and 3.8%3.3%, respectively. For postretirement benefits, our health care trend rate assumption is based on historical cost increases and expectations for long-term increases. As of December 31, 2018,2020, for postretirement medical and prescription drugs in the next year, our assumption was an assumed rate of increase of 6.9%6.4% forpre-65 retirees and 8.0%7.4% forpost-65 retirees, declining until reaching an ultimate assumed rate of increase of 4.5% per year in 2027. As of December 31, 2017,2019, for postretirement medical and prescription drugs in the next year, our assumption was an assumed rate of increase of 7.1%6.7% forpre-65 retirees and 8.4%7.8% forpost-65 retirees, declining until reaching an ultimate assumed rate of increase of 4.5% per year in 2026.2027. Below is a table showingpre-tax pension and postretirement expenses, including the impact of actuarial gains and losses: | | | | | (In millions) | | 2018 | | | 2017 | | | 2016 | | | | 2020 | | | | 2019 | | Total pension (income) expense | | $ | (5.9 | ) | | $ | (2.5 | ) | | $ | 6.8 | | | | $ | (0.8 | ) | | | $ | 32.3 | | Actuarial loss component of expense above | | | 3.9 | | | | 0.9 | | | | — | | | | | 2.7 | | | | | 34.1 | | Total postretirement income | | | (0.1 | ) | | | (6.5 | ) | | | (11.3 | ) | | Actuarial (gain) loss component of expense above | | | (0.1 | ) | | | (1.4 | ) | | | 1.9 | | | Total postretirement expense | | | | | 0.7 | | | | | 1.1 | | Actuarial loss component of expense above | | | | | 0.1 | | | | | 0.6 | | Amortization of prior service credit component of expense above | | | — | | | | (5.1 | ) | | | (13.5 | ) | | | | — | | | | | 0.2 | |
The actuarial losses in 20182020 were principally due to lowerchanges in discount rates offset by positive asset returns. The actuarial gainslosses in 20172019 were principally due to our normalre-measurement of prior year defined benefit plan liabilities. The actuarial losseschanges in 2016 were principally due to there-measurement relating to a retiree medical plan.discount rates. Discount rates in 2018 used to determine benefit obligations increased by an average of 60 basis points for pension benefits. Discount rates for 2018 postretirement benefits increased an average of 80 basis points. Discount rates in 20172020 used to determine benefit obligations decreased by an average of 5070 basis points for pension benefits. Discount rates for 2020 postretirement benefits remained the same in 2017 as in 2016.decreased an average of 50 basis points. Discount rates in 20162019 used to determine benefit obligations decreased by an average of 30110 basis points for pension benefits. Discount rates for 2019 postretirement benefits andincreased an average of 70220 basis points for postretirement benefits.points. Our actual return on plan assets in 20182020 was (3.5)%16.5% compared to an actuarial assumption of an average 6.0%4.5% expected return. Our actual return on plan assets in 20172019 was 16.3%19.7% compared to an actuarial assumption of an average 6.4%4.9% expected return. Significant actuarial losses in future periods would be expected if discount rates decline, actual returns on plan assets are lower than our expected return, or a combination of both occurs. A 25 basis point change in our discount rate assumption would lead to an increase or decrease in our pension and postretirement liability of approximately $23$30 million. A 25 basis point change in the long-term rate of return on plan assets used in accounting for our pension plans would have a $1.5$1.9 million impact on pension expense. In addition, if required, actuarial gains 27
Table of Contents and losses will be recorded in accordance with our defined benefit plan accounting method as previously described. It is not possible to forecast or predict whether there will be actuarial gains and losses in future periods, and if required, the magnitude of any such adjustment. These gains and losses are driven by differences in actual experience or changes in the assumptions that are beyond our control, such as changes in interest rates and the actual return on pension plan assets. In January 2018, we adopted ASU2017-07, which requires entities to present the defined benefit plannon-service related costs outside the operating income subtotal. The new guidance was applied retrospectively in the consolidated statement of income. As a result, we reclassified $9.6 million and
$14.1 million of income from the operating income subtotal to other income, in the twelve months ended December 31, 2017 and 2016, respectively. The retrospective impact of adopting ASU2017-07 is as follows:
| | | | | | | | | | | | (In millions) | | 2017 | | | 2016 | | Increase to cost of products sold | | $ | 7.5 | | | $ | 8.5 | | Increase to selling, general and administrative expenses | | | 2.1 | | | | 5.6 | | Decrease to operating income | | $ | (9.6 | ) | | $ | (14.1 | ) |
Income Taxes In accordance with ASC requirements for Income Taxes, we establish deferred tax liabilities or assets for temporary differences between financial and tax reporting basesbasis and subsequently adjust them to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance reducing deferred tax assets when it is more likely than not that such assets will not be realized. We record liabilities for uncertain income tax positions based on atwo-step process. The first step is recognition, where we evaluate whether an individual tax position has a likelihood of greater than 50% of being sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation processes. For tax positions that are currently estimated to have a less than 50% likelihood of being sustained, no tax benefit is recorded. For tax positions that have met the recognition threshold in the first step, we perform the second step of measuring the benefit to be recorded. The actual benefits ultimately realized may differ from our estimates. In future periods, changes in facts, circumstances, and new information may require us to change the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recorded in the consolidated statement of income and consolidated balance sheet in the period in which such changes occur. As of December 31, 2018,2020, we had liabilities for unrecognized tax benefits pertaining to uncertain tax positions totaling $83.5$96.1 million. It is reasonably possible that the unrecognized tax benefits may decrease in the range of $1.4$4.0 million to $3.5$48.1 million in the next 12 months primarily as a result of the conclusion of U.S. federal, state and foreign income tax proceedings. The Tax Act made significant changes to the U.S. Internal Revenue Code including a reduction in the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, generally providing for an exemption from federal income tax for dividends received from foreign subsidiaries, and imposing aone-time transition tax on the deemed repatriation of cumulative foreign earnings and profits as of December 31, 2017. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued, which deals with the application of U.S. GAAP to situations where a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, we calculated our best estimate of the impact of the Tax Act on our 2017 effective income tax rate. As a result, the Company recorded a provisional net benefit of $25.7 million in the fourth quarter of 2017, the period in which the Tax Act was enacted. This provisional amount included an estimated reduction in the Company’s net deferred tax liabilities of $62.4 million resulting from the decrease in the federal income tax rate; an estimated deemed repatriation tax liability of $28.5 million; and an estimated net increase to our provision for taxes on foreign earnings not considered permanently reinvested of $8.2 million. In the quarter ended December 31, 2018, the Company completed its analysis in conjunction with the SAB 118 measurement period ending on December 22, 2018. The total tax provision impact for the year ended December 31, 2018 was an unfavorable adjustment of $5.5 million related primarily to certain deferred tax assets and liabilities.
The Tax Act included a provision for Global IntangibleLow-Taxed Income (GILTI), the Company elected an accounting policy to treat GILTI as a period cost when incurred. The GILTI provision is effective for taxable years of foreign corporations beginning after December 31, 2017.
Customer Program Costs Customer programs and incentives are a common practice in our businesses. Our businesses incur customer program costs to obtain favorable product placement, to promote sales of products and to maintain competitive pricing. 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. Volume allowances are accrued based on management’s estimates of customer volume achievement and other factors incorporated into customer agreements, such as new products, store sell-through, merchandising support, levels of returns and customer training. Management periodically reviews accruals for these rebates and allowances, and adjusts accruals when circumstances indicate (typically as a result of a change in volume expectations). The costs typically recognized in “selling, general and administrative expenses” include product displays, point of sale materials and media production costs. Litigation Contingencies Our businesses are subject to risks related to threatened or pending litigation and are routinely defendants in lawsuits associated with the normal conduct of business. Liabilities and costs associated with litigation-related loss contingencies require estimates and judgments based on our knowledge of the facts and circumstances surrounding each matter and the advice of our legal counsel. We record liabilities for litigation-related losses when a loss is probable and we can reasonably estimate the amount of the loss in accordance with ASC requirements for Contingencies. We evaluate the measurement of recorded liabilities each reporting period based on the then-current facts and circumstances specific to each matter. The ultimate losses incurred upon final resolution of litigation-related loss contingencies may differ materially from the estimated liability recorded at any particular balance sheet date. Changes in estimates are recorded in earnings in the period in which such changes occur. Environmental Matters We are involved in remediation activities to clean up hazardous wastes as required by federal and state laws. Liabilities for remediation costs of each site are based on our best estimate of undiscounted future costs, excluding possible insurance recoveries or recoveries from other third parties. Uncertainties about the status of laws, regulations, technology and information related to individual sites make it difficult to develop estimates of future environmental remediation exposures. Some of the potential liabilities relate to sites we own, and some relate to sites we no longer own or never owned. Several of our subsidiaries have been designated as potentially responsible parties (“PRPs”PRP”) under “Superfund” or similar state laws. As of December 31, 2018,2020, ten such instances have not been dismissed, settled or otherwise resolved. In 2018,2020, none of our subsidiaries were identified as a PRP in a new instance and no instances were settled, dismissed or otherwise resolved. In most instances where our subsidiaries are named as a PRP, we enter into cost-sharing arrangements with other PRPs. We give notice to insurance carriers of potential PRP liability, but very rarely, if ever, receive reimbursement from insurance for PRP costs. We believe that the cost of complying with the present environmental protection laws, before considering estimated recoveries either from other PRPs or insurance, will not have a material adverse effect on our results of operations, cash flows or financial condition. At 28
Table of Contents December 31, 20182020 and 2017,2019, we had accruals of $0.6 million$0.3 and $0.7$0.2 million, respectively, relating to environmental compliance and cleanup including, but not limited to, the above mentioned Superfund sites.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. We are exposed to various market risks, including changes in interest rates, foreign currency exchange rates and commodity prices. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We enter into financial instruments to manage and reduce the impact of changes in foreign currency exchange rates and commodity prices. The counterparties are major financial institutions. Interest Rate Risk The Company had $785 million of external variable rate borrowings as of December 31, 2020. A hypothetical 100 basis point change in interest rates affecting the Company’s external variable rate borrowings as of December 31, 2018,2020 would be $8.5$7.85 million on apre-tax basis. Foreign Exchange Rate Risk We enter into forward foreign exchange contracts principally to hedge currency fluctuations in transactions denominated in certain foreign currencies, thereby limiting our risk that would otherwise result from changes in exchange rates. The periods of the forward foreign exchange contracts correspond to the periods of the hedged transactions. The estimated fair value of foreign currency contracts represents the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices. The estimated potential loss under foreign exchange contracts from movement in foreign exchange rates would not have a material impact on our results of operations, cash flows or financial condition. As part of our risk management procedure, we use avalue-at-risk (“VAR”) sensitivity analysis model to estimate the maximum potential economic loss from adverse changes in foreign exchange rates over aone-day period given a 95% confidence level. The VAR model uses historical foreign exchange rates to estimate the volatility and correlation of these rates in future periods. The estimated maximumone-day loss in the fair value of the Company’s foreign currency exchange contracts using the VAR model was $0.8$0.7 million at December 31, 2018.2020. The 95% confidence interval signifies our degree of confidence that actual losses under foreign exchange contracts would not exceed the estimated losses. The amounts disregard the possibility that foreign currency exchange rates could move in our favor. The VAR model assumes that all movements in the foreign exchange rates will be adverse. These amounts should not be considered projections of future losses, since actual results may differ significantly depending upon activity in the global financial markets. The VAR model is a risk analysis tool and should not be construed as an endorsement of the VAR model or the accuracy of the related assumptions. Commodity Price Risk We are subject to commodity price volatility caused by weather, supply conditions, geopolitical and economic variables, and other unpredictable external factors. From time to time, we use derivative contracts to manage our exposure to commodity price volatility. Item 8. Financial Statements and Supplementary Data. | | | Consolidated Statements of Income | | Fortune Brands Home & Security, Inc. and Subsidiaries |
| | | | | | | | | | | | | | | | | For years ended December 31 | | | | | | (In millions, except per share amounts) | | 2018 | | | 2017 | | | 2016 | | NET SALES | | $ | 5,485.1 | | | $ | 5,283.3 | | | $ | 4,984.9 | | Cost of products sold | | | 3,525.7 | | | | 3,358.3 | | | | 3,188.8 | | Selling, general and administrative expenses | | | 1,241.4 | | | | 1,196.9 | | | | 1,135.5 | | Amortization of intangible assets | | | 36.1 | | | | 31.7 | | | | 28.1 | | Loss on sale of product line (see Note 4) | | | — | | | | 2.4 | | | | — | | Asset impairment charges | | | 62.6 | | | | 3.2 | | | | — | | Restructuring charges | | | 24.1 | | | | 8.3 | | | | 13.9 | | OPERATING INCOME | | | 595.2 | | | | 682.5 | | | | 618.6 | | Interest expense | | | 74.5 | | | | 49.4 | | | | 49.1 | | Other income, net | | | (16.3 | ) | | | (1.7 | ) | | | (12.6 | ) | Income from continuing operations before income taxes | | | 537.0 | | | | 634.8 | | | | 582.1 | | Income taxes | | | 147.0 | | | | 159.5 | | | | 169.7 | | Income from continuing operations, net of tax | | | 390.0 | | | | 475.3 | | | | 412.4 | | (Loss) income from discontinued operations, net of tax | | | (0.2 | ) | | | (2.6 | ) | | | 0.8 | | NET INCOME | | | 389.8 | | | | 472.7 | | | | 413.2 | | Less: Noncontrolling interests | | | 0.2 | | | | 0.1 | | | | — | | NET INCOME ATTRIBUTABLE TO FORTUNE BRANDS | | $ | 389.6 | | | $ | 472.6 | | | $ | 413.2 | | BASIC EARNINGS (LOSS) PER COMMON SHARE | | | | | | | | | | | | | Continuing operations | | $ | 2.69 | | | $ | 3.10 | | | $ | 2.67 | | Discontinuing operations | | | — | | | | (0.02 | ) | | | 0.01 | | Net income attributable to Fortune Brands common shareholders | | $ | 2.69 | | | $ | 3.08 | | | $ | 2.68 | | DILUTED EARNINGS (LOSS) PER COMMON SHARE | | | | | | | | | | | | | Continuing operations | | $ | 2.66 | | | $ | 3.05 | | | $ | 2.61 | | Discontinuing operations | | | — | | | | (0.02 | ) | | | 0.01 | | Net income attributable to Fortune Brands common shareholders | | $ | 2.66 | | | $ | 3.03 | | | $ | 2.62 | | | | | | Basic average number of shares outstanding | | | 144.6 | | | | 153.2 | | | | 154.3 | | Diluted average number of shares outstanding | | | 146.4 | | | | 155.8 | | | | 157.8 | |
See Notes to Consolidated Financial Statements.
| | | Consolidated Statements of Comprehensive Income | | Fortune Brands Home & Security, Inc. and Subsidiaries |
| | | | | | | | | | | | | | | | | For years ended December 31 | | | | | | (In millions) | | 2018 | | | 2017 | | | 2016 | | NET INCOME | | $ | 389.8 | | | $ | 472.7 | | | $ | 413.2 | | Other comprehensive (loss) income, before tax: | | | | | | | | | | | | | Foreign currency translation adjustments | | | (31.1 | ) | | | 33.8 | | | | (14.7 | ) | Unrealized (losses) gains on derivatives: | | | | | | | | | | | | | Unrealized holding gains (losses) arising during period | | | 10.1 | | | | (1.8 | ) | | | (6.7 | ) | Less: reclassification adjustment for (gains) losses included in net income | | | (2.1 | ) | | | (0.9 | ) | | | 3.5 | | Unrealized gains (losses) on derivatives | | | 8.0 | | | | (2.7 | ) | | | (3.2 | ) | Defined benefit plans: | | | | | | | | | | | | | Prior service credit (cost) arising during period | | | — | | | | — | | | | 12.1 | | Prior service credit (cost) recognition due to settlement and curtailment | | | — | | | | — | | | | 0.1 | | Net actuarial (loss) gains arising during period | | | (4.2 | ) | | | 6.2 | | | | (1.9 | ) | Less: amortization of prior service credit included in net periodic pension cost | | | — | | | | (5.1 | ) | | | (13.5 | ) | Defined benefit plans | | | (4.2 | ) | | | 1.1 | | | | (3.2 | ) | Other comprehensive (loss) income, before tax | | | (27.3 | ) | | | 32.2 | | | | (21.1 | ) | Income tax (expense) benefit related to items of other comprehensive income(a) | | | (0.5 | ) | | | 0.5 | | | | 1.7 | | Other comprehensive (loss) income, net of tax | | | (27.8 | ) | | | 32.7 | | | | (19.4 | ) | COMPREHENSIVE INCOME | | | 362.0 | | | | 505.4 | | | | 393.8 | | Less: comprehensive income attributable to noncontrolling interest | | | 0.2 | | | | — | | | | — | | COMPREHENSIVE INCOME ATTRIBUTABLE TO FORTUNE BRANDS | | $ | 361.8 | | | $ | 505.4 | | | $ | 393.8 | |
(a) | Income tax (expense) benefit on unrealized (losses) gains on derivatives of $(1.4) million, $0.9 million and $0.5 million and on defined benefit plans of $0.9 million, $(0.4) million and $1.2 million in 2018, 2017 and 2016, respectively.
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See Notes to Consolidated Financial Statements.
| | | Consolidated Balance Sheets | | Fortune Brands Home & Security, Inc. and Subsidiaries |
| | | | | | | | | | | | | December 31 | | | | | (In millions) | | 2018 | | | 2017 | | ASSETS | | | | | | | | | Current assets | | | | | | | | | Cash and cash equivalents | | $ | 262.9 | | | $ | 323.0 | | Accounts receivable less allowances for discounts and doubtful accounts | | | 571.7 | | | | 555.3 | | Inventories | | | 678.9 | | | | 580.8 | | Other current assets | | | 172.6 | | | | 142.6 | | TOTAL CURRENT ASSETS | | | 1,686.1 | | | | 1,601.7 | | Property, plant and equipment, net of accumulated depreciation | | | 813.4 | | | | 740.0 | | Goodwill | | | 2,080.3 | | | | 1,912.0 | | Other intangible assets, net of accumulated amortization | | | 1,246.8 | | | | 1,162.4 | | Other assets | | | 138.0 | | | | 95.3 | | TOTAL ASSETS | | $ | 5,964.6 | | | $ | 5,511.4 | | LIABILITIES AND EQUITY | | | | | | | | | Current liabilities | | | | | | | | | Short-term debt | | | 525.0 | | | | — | | Accounts payable | | | 459.0 | | | | 428.8 | | Other current liabilities | | | 508.1 | | | | 478.0 | | TOTAL CURRENT LIABILITIES | | | 1,492.1 | | | | 906.8 | | Long-term debt | | | 1,809.0 | | | | 1,507.6 | | Deferred income taxes | | | 162.6 | | | | 166.8 | | Accrued defined benefit plans | | | 163.3 | | | | 175.9 | | Othernon-current liabilities | | | 157.6 | | | | 153.2 | | TOTAL LIABILITIES | | | 3,784.6 | | | | 2,910.3 | | Commitments (Note 18) and Contingencies (Note 23) | | | | | | | | | Equity | | | | | | | | | Common stock(a) | | | 1.8 | | | | 1.7 | | Paid-in capital | | | 2,766.0 | | | | 2,724.9 | | Accumulated other comprehensive loss | | | (67.0 | ) | | | (39.2 | ) | Retained earnings | | | 1,448.1 | | | | 1,174.2 | | Treasury stock | | | (1,970.7 | ) | | | (1,262.1 | ) | TOTAL FORTUNE BRANDS EQUITY | | | 2,178.2 | | | | 2,599.5 | | Noncontrolling interests | | | 1.8 | | | | 1.6 | | TOTAL EQUITY | | | 2,180.0 | | | | 2,601.1 | | TOTAL LIABILITIES AND EQUITY | | $ | 5,964.6 | | | $ | 5,511.4 | |
(a) | Common stock, par value $0.01 per share, 180.6 million shares and 179.8 million shares issued at December 31, 2018 and 2017, respectively.
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See Notes to Consolidated Financial Statements.
| | | Consolidated Statements of Cash Flows | | Fortune Brands Home & Security, Inc. and Subsidiaries |
| | | | | | | | | | | | | | | | | For years ended December 31 | | | | | | (In millions) | | 2018 | | | 2017 | | | 2016 | | OPERATING ACTIVITIES | | | | | | | | | �� | | | | Net income | | $ | 389.8 | | | $ | 472.7 | | | $ | 413.2 | | Non-cash expense (income): | | | | | | | | | | | | | Depreciation | | | 113.5 | | | | 98.6 | | | | 94.6 | | Amortization of intangibles | | | 36.1 | | | | 31.7 | | | | 28.1 | | Stock-based compensation | | | 36.1 | | | | 43.0 | | | | 32.0 | | Restructuring charges | | | — | | | | — | | | | (0.1 | ) | Loss on sale of property, plant and equipment | | | 1.2 | | | | 0.9 | | | | 1.2 | | Loss on sale of product line | | | — | | | | 2.4 | | | | — | | Asset impairment charges | | | 62.6 | | | | 15.3 | | | | — | | Recognition of actuarial losses (gains) | | | 3.8 | | | | (0.5 | ) | | | 1.9 | | Deferred taxes | | | 2.8 | | | | (18.7 | ) | | | (25.8 | ) | Amortization of deferred financing costs | | | 2.3 | | | | 2.0 | | | | 3.6 | | Changes in assets and liabilities including effects subsequent to acquisitions | | | | | | | | | | | | | Decrease (increase) in accounts receivable | | | 9.8 | | | | 1.0 | | | | (39.1 | ) | (Increase) decrease in inventories | | | (55.0 | ) | | | (24.8 | ) | | | 52.4 | | Increase in accounts payable | | | 21.0 | | | | 24.0 | | | | 57.6 | | (Increase) decrease in other assets | | | (24.7 | ) | | | (28.3 | ) | | | 10.7 | | Increase (decrease) in accrued taxes | | | 9.5 | | | | (24.4 | ) | | | 0.3 | | (Decrease) increase in accrued expenses and other liabilities | | | (4.8 | ) | | | 5.4 | | | | 19.9 | | NET CASH PROVIDED BY OPERATING ACTIVITIES | | | 604.0 | | | | 600.3 | | | | 650.5 | | INVESTING ACTIVITIES | | | | | | | | | | | | | Capital expenditures(a) | | | (150.1 | ) | | | (165.0 | ) | | | (149.3 | ) | Proceeds from the disposition of assets | | | 6.1 | | | | 0.4 | | | | 3.9 | | Proceeds from sale of product line | | | — | | | | 1.5 | | | | — | | Cost of acquisitions, net of cash acquired | | | (465.6 | ) | | | (124.6 | ) | | | (239.7 | ) | Cost of investments in equity securities | | | (28.7 | ) | | | — | | | | — | | Other investing activities, net | | | 4.0 | | | | — | | | | — | | NET CASH USED IN INVESTING ACTIVITIES | | | (634.3 | ) | | | (287.7 | ) | | | (385.1 | ) | FINANCING ACTIVITIES | | | | | | | | | | | | | Increase in short-term debt | | | 525.0 | | | | — | | | | (1.1 | ) | Issuance of long-term debt | | | 2,191.2 | | | | 640.0 | | | | 1,065.0 | | Repayment of long-term debt | | | (1,890.0 | ) | | | (565.0 | ) | | | (805.0 | ) | Proceeds from the exercise of stock options | | | 4.9 | | | | 28.5 | | | | 25.5 | | Employee withholding taxes paid related to stock-based compensation | | | (14.0 | ) | | | (10.6 | ) | | | (10.1 | ) | Deferred acquisition payments | | | (13.1 | ) | | | (17.9 | ) | | | — | | Dividends to stockholders | | | (115.2 | ) | | | (110.3 | ) | | | (98.2 | ) | Treasury stock purchases | | | (694.6 | ) | | | (214.8 | ) | | | (424.5 | ) | Other financing activities, net | | | (1.0 | ) | | | — | | | | (2.0 | ) | NET CASH USED IN FINANCING ACTIVITIES | | | (6.8 | ) | | | (250.1 | ) | | | (250.4 | ) | Effect of foreign exchange rate changes on cash | | | (15.2 | ) | | | 9.0 | | | | (2.0 | ) | NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | $ | (52.3 | ) | | $ | 71.5 | | | $ | 13.0 | | Cash, cash equivalents and restricted cash(b) at beginning of year | | $ | 323.0 | | | $ | 251.5 | | | $ | 238.5 | | Cash, cash equivalents and restricted cash(b)at end of year | | $ | 270.7 | | | $ | 323.0 | | | $ | 251.5 | | Cash paid during the year for | | | | | | | | | | | | | Interest | | $ | 63.4 | | | $ | 44.4 | | | $ | 43.7 | | Income taxes paid directly to taxing authorities | | | 114.2 | | | | 169.7 | | | | 172.1 | | Income taxes (received from) paid to Fortune Brands, Inc. | | | — | | | | — | | | | (0.6 | ) | Dividends declared but not paid | | | 30.9 | | | | 30.4 | | | | 27.6 | |
(a) | Capital expenditures of $16.7 million, $17.2 million and $11.9 million that have not been paid as of December 31, 2018, 2017 and 2016, respectively, were excluded from the Statement of Cash Flows.
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(b) | Restricted cash of $0.9 and $6.9 million is included in Other current assets and Other assets, respectively, as of December 31, 2018 within our Consolidated Balance Sheet. There was no restricted cash as of December 31, 2017.
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See Notes to Consolidated Financial Statements.
| | | Consolidated Statements of Equity
| | Fortune Brands Home & Security, Inc. and Subsidiaries |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (In millions) | | Common Stock | | | Paid-In Capital | | | Accumulated Other Comprehensive (Loss) Income | | | Retained Earnings | | | Treasury Stock | | | Non- controlling Interests | | | Total Equity | | Balance at December 31, 2015 | | $ | 1.7 | | | $ | 2,602.2 | | | $ | (52.5 | ) | | $ | 501.6 | | | $ | (602.1 | ) | | $ | 2.9 | | | $ | 2,453.8 | | Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | — | | | | — | | | | — | | | | 413.2 | | | | — | | | | — | | | | 413.2 | | Other comprehensive (loss) income | | | — | | | | — | | | | (19.4 | ) | | | — | | | | — | | | | — | | | | (19.4 | ) | Stock options exercised | | | — | | | | 25.5 | | | | — | | | | — | | | | — | | | | — | | | | 25.5 | | Stock-based compensation | | | — | | | | 32.0 | | | | — | | | | — | | | | (10.1 | ) | | | — | | | | 21.9 | | Treasury stock purchase | | | — | | | | — | | | | — | | | | — | | | | (424.5 | ) | | | — | | | | (424.5 | ) | Dividends ($0.66 per Common share) | | | — | | | | — | | | | — | | | | (100.2 | ) | | | — | | | | — | | | | (100.2 | ) | Dividends paid to noncontrolling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1.4 | ) | | | (1.4 | ) | Other (See Note 10) | | | — | | | | (5.9 | ) | | | — | | | | — | | | | — | | | | — | | | | (5.9 | ) | Balance at December 31, 2016 | | $ | 1.7 | | | $ | 2,653.8 | | | $ | (71.9 | ) | | $ | 814.6 | | | $ | (1,036.7 | ) | | $ | 1.5 | | | $ | 2,363.0 | | Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | — | | | | — | | | | — | | | | 472.6 | | | | — | | | | 0.1 | | | | 472.7 | | Other comprehensive income (loss) | | | — | | | | — | | | | 32.7 | | | | — | | | | — | | | | — | | | | 32.7 | | Stock options exercised | | | — | | | | 28.5 | | | | — | | | | — | | | | — | | | | — | | | | 28.5 | | Stock-based compensation | | | — | | | | 42.6 | | | | — | | | | — | | | | (10.6 | ) | | | — | | | | 32.0 | | Treasury stock purchase | | | — | | | | — | | | | — | | | | — | | | | (214.8 | ) | | | — | | | | (214.8 | ) | Dividends ($0.74 per Common share) | | | — | | | | — | | | | — | | | | (113.0 | ) | | | — | | | | — | | | | (113.0 | ) | 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: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | — | | | | — | | | | — | | | | 389.6 | | | | — | | | | 0.2 | | | | 389.8 | | Other comprehensive income (loss) | | | — | | | | — | | | | (27.8 | ) | | | — | | | | — | | | | — | | | | (27.8 | ) | Stock options exercised | | | 0.1 | | | | 5.0 | | | | — | | | | — | | | | — | | | | — | | | | 5.1 | | Stock-based compensation | | | — | | | | 36.1 | | | | — | | | | — | | | | (14.0 | ) | | | — | | | | 22.1 | | Treasury stock purchase | | | — | | | | — | | | | — | | | | — | | | | (694.6 | ) | | | — | | | | (694.6 | ) | Dividends ($0.82 per Common share) | | | — | | | | — | | | | — | | | | (115.7 | ) | | | — | | | | — | | | | (115.7 | ) | Balance at December 31, 2018 | | $ | 1.8 | | | $ | 2,766.0 | | | $ | (67.0 | ) | | $ | 1,448.1 | | | $ | (1,970.7 | ) | | $ | 1.8 | | | $ | 2,180.0 | |
See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
1. Background and Basis of Presentation
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. 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.
Basis of Presentation The consolidated financial statements in this Annual Report on Form10-K have been derived from the accounts of the Company and its wholly-owned subsidiaries. The Company’s consolidated financial statements are based on a fiscal year ending December 31. Certain of the Company’s subsidiaries operate on a 52 or 53 week fiscal year ending during the month of December. In December 2017, there were certain transactions that resulted in approximately $38 million of net cash outflows relating to payments made to third parties in the normal course of business during the period between theyear-end of our wholly-owned subsidiaries and the Company’syear-end (in 2018, amounts were immaterial).
In September 2018, we acquired 100% of membership interests of Fiber Composites LLC (“Fiberon”), a leading U.S. manufacturer of outdoor performance materials used in decking, railing and fencing products for a total purchase price of approximately $470.0 million, subject to certain post-closing adjustments. The acquisition of Fiberon provides category expansion and product extension opportunities into the outdoor living space for our Doors & Security segment. The financial results were included in the Company’s consolidated balance sheet as of December 31, 2018 and in the Company’s consolidated statements of income and statements of cash flow beginning in September 2018.
In July 2018, we publicly announced an internal reorganization to combine our Doors & Security segments under common leadership to drive innovation, accelerate product development, and enhance investments and business processes. In connection with the reorganization, we changed how our chief operating decision maker evaluates and allocates the resources for the combined business. Reporting for the new Doors & Security segment began in the third quarter of 2018 and historical financial segment information has been restated to conform to the new segment presentation.
In October 2017, we acquired Victoria + Albert, aUK-based premium brand of standalone bathtubs, sink, tub fillers, faucets and other accessories. In July 2017, we acquired Shaws Since1897 Limited (“Shaws”), aUK-based luxury plumbing products company that specializes in manufacturing and selling fireclay sinks and selling brassware and accessories in partnership with Perrin & Rowe. The financial results of both of the acquisitions were included in the Company’s December 31, 2018 and 2017 consolidated balance sheets and in the Company’s consolidated statements of income and statements of cash flow beginning in October 2017 and July 2017, respectively.
In September 2016, we acquired ROHL LLC (“ROHL”) and in a related transaction, we acquired TCL Manufacturing which gave us ownership of Perrin & Rowe Limited (“Perrin & Rowe”), and in May 2016, we acquired Riobel Inc (“Riobel”). The financial results of ROHL, Perrin & Rowe and Riobel were included in the Company’s consolidated balance sheets as of December 31, 2018 and 2017, and in the Company’s consolidated statements of income and statements of cash flow beginning in September 2016 and May 2016, respectively.
The cash flows from discontinued operations for 2018, 2017 and 2016 were not separately classified on the accompanying consolidated statements of cash flows. Information on Business Segments was revised to exclude these discontinued operations.
2. Significant Accounting Policies
Use of Estimates The presentation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results in future periods could differ from those estimates.
Cash and Cash Equivalents Highly liquid investments with an original maturity of three months or less are included in cash and cash equivalents.
Allowances for Doubtful Accounts Trade receivables are recorded at the stated amount, less allowances for discounts and doubtful accounts. The allowances for doubtful accounts represent estimated uncollectible receivables associated with potential customer defaults on contractual obligations (usually due to customers’ potential insolvency), or discounts related to early payment of accounts receivables by our customers. The allowances include provisions for certain customers where a risk of default has been specifically identified. In addition, the allowances include a provision for customer defaults on a general formula basis when it is determined the risk of some default is probable and estimable, but cannot yet be associated with specific customers. The assessment of the likelihood of customer defaults is based on various factors, including the length of time the receivables are past due, historical collection experience and existing economic conditions. In accordance with this policy, our allowance for doubtful accounts was $3.7 million and $3.3 million as of December 31, 2018 and 2017, respectively.
Inventories The majority of our inventories are accounted for using thefirst-in,first-out (“FIFO”) inventory method. Inventory provisions are recorded to reduce inventory to the lower of cost or market value for obsolete or slow moving inventory based on assumptions about future demand and marketability of products, the impact of new product introductions, inventory levels and turns, product spoilage and specific identification of items, such as product discontinuance, engineering/material changes, or regulatory-related changes.
During the fourth quarter of 2018, we determined that it was preferable to change our accounting policy fromlast-in,first-out (“LIFO”) to FIFO for product groups in which metals comprise a significant portion of inventory cost. We believe this change is preferable because it results in a uniform method to value our inventory across all our segments, improves comparability with our peers, and is expected to better reflect the current value of inventory on the consolidated balance sheets. The change in costing method, which affected our Plumbing and Doors & Security segments, was recognized during the fourth quarter of 2018, by adjusting the cost of inventories to FIFO, resulting in a pretax benefit of approximately $7.3 million ($5.5 million after tax) to Cost of products sold in the consolidated statements of income. The impact of this change is not material to our 2017 or 2016 results of operations or our financial position as of December 31, 2017, and therefore we did not retrospectively apply the change in accounting policy. LIFO inventories were zero and $245.6 million (with a current cost of $259.3 million) at December 31, 2018 and 2017, respectively.
Property, Plant and Equipment Property, plant and equipment are carried at cost. Depreciation is provided, principally on a straight-line basis, over the estimated useful lives of the assets. Gains or losses resulting from dispositions are included in operating income. Betterments and renewals, which improve and extend the life of an asset, are capitalized; maintenance and repair costs are expensed as incurred. Assets held for use to be disposed of at a future date are depreciated over the remaining useful life. Assets to be sold are written down to fair value at the time the assets are being actively marketed for sale. Estimated useful lives of the related assets are as follows:
| | | | | | | | | Buildings and leasehold improvements
| | | 15 to 40 years | | | | | | Machinery and equipment
| | | 3 to 15 years | | | | | | Software
| | | 3 to 7 years | | | | | |
Long-lived Assets In accordance with ASC requirements for Property, Plant and Equipment, a long-lived asset (including amortizable identifiable intangible assets) or asset group held for use is tested for
recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such events occur, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of the long-lived asset or asset group. The cash flows are based on our best estimate of future cash flows derived from the most recent business projections. If this comparison indicates that there is an impairment, the amount of the impairment is calculated based on fair value. Fair value is estimated primarily using discounted expected future cash flows on a market-participant basis.
During 2017, we recorded an impairment of $5.1 million related to a long lived asset to be disposed of in selling, general and administrative expenses.
Goodwill and Indefinite-lived Intangible Assets In accordance with ASC requirements for Intangibles — Goodwill and Other, goodwill is tested for impairment at least annually in the fourth quarter, and written down when impaired. An interim impairment test is performed if an event occurs or conditions change that would more likely than not reduce the fair value of the reporting unit below the carrying value.
We evaluate the recoverability of goodwill using a weighting of the income (80%) and market (20%) approaches. For the income approach, we use a discounted cash flow model, estimating the future cash flows of the reporting units to which the goodwill relates, and then discounting the future cash flows at a market-participant-derived discount rate. In determining the estimated future cash flows, we consider current and projected future levels of income based on management’s plans for that business; business trends, prospects and market and economic conditions; and market-participant considerations. Furthermore, our projection for the U.S. home products market is inherently subject to a number of uncertain factors, such as employment, home prices, credit availability, new home starts and the rate of home foreclosures. For the market approach, we apply market multiples for peer groups to the current operating results of the reporting units to determine each reporting unit’s fair value. The Company’s reporting units are operating segments, or one level below operating segments when appropriate. When the estimated fair value of a reporting unit is less than its carrying value, we measure and recognize the amount of the goodwill impairment loss based on that difference.
Purchased intangible assets other than goodwill are amortized over their useful lives unless those lives are determined to be indefinite. The determination of the useful life of an intangible asset other than goodwill is based on factors including historical tradename performance with respect to consumer name recognition, geographic market presence, market share, and plans for ongoing tradename support and promotion. Certain of our tradenames have been assigned an indefinite life as we currently anticipate that these tradenames will contribute cash flows to the Company indefinitely. Indefinite-lived intangible assets are not amortized, but are evaluated at least annually to determine whether the indefinite useful life is appropriate. We measure the fair value of identifiable intangible assets upon acquisition and we review for impairment annually in the fourth quarter, and whenever market or business events indicate there may be a potential impairment of that intangible asset. Impairment losses are recorded to the extent that the carrying value of the indefinite-lived intangible asset exceeds its fair value. We measure fair value using the standard relief-from-royalty approach which estimates the present value of royalty income that could be hypothetically earned by licensing the brand name to a third party over the remaining useful life. The determination of fair value using this technique requires the use of estimates and assumptions related to the projected tradename revenue growth, the assumed royalty rate and the discount rate. We first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. Qualitative factors include changes in volume, customers and the industry. If it is deemed more likely than not that an intangible asset is impaired, we will perform a quantitative impairment test.
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 fall below our assumptions, actions of key customers, increases in discount rates, continued economic uncertainty, higher levels of unemployment, weak consumer confidence, lower levels of discretionary consumer spending and a decrease in royalty rates. 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.
Investments in Equity Securities In accordance with ASC requirements for Investments – equity securities, we account fornon-controlling investments in equity securities at fair value, with any gains or losses recognized through other income and expense. Equity securities without readily determinable fair values are recorded at cost minus impairment, plus or minus any changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.
During the fourth quarter of 2018, our Plumbing segment entered into strategic partnerships with several companies who incorporate emerging technology into plumbing-related products, and at the same time acquirednon-controlling equity interests in some of our partners. This includes an investment in Flo Technologies, Inc. (“Flo”), a U.S. manufacturer of a comprehensive water monitoring andshut-off system with leak detection and proactive leak detection technologies. Flo’s products are being rebranded to “Flo by Moen”, and our Plumbing segment will utilize its existing retail, wholesale and builder networks to expand the reach of Flo’s technology.
As of December 31, 2018, all of our investments in our strategic partners do not have readily determinable fair values. As of December 31, 2018 and 2017, the carrying value of our investments was $28.7 million and zero, respectively, which is included in other assets within our Consolidated Balance Sheet. There were no impairments or other changes resulting from observable prices changes recorded during the year ended December 31, 2018. Impairments of $7.0 million were recorded within Other income, net within the Consolidated Statements of Income during the year ended December 31, 2017 (see Note 22).
Defined Benefit Plans We have a number of pension plans in the United States, covering many of the Company’s employees. In addition, the Company provides postretirement health care and life insurance benefits to certain retirees. Service cost for 2018 relates to benefit accruals in an hourly Union defined benefit plan in our Doors & Security segment. Benefit accruals under all other defined benefit pension plans were frozen as of December 31, 2016.
We record amounts relating to these plans based on calculations in accordance with ASC requirements for Compensation – Retirement Benefits, which include various actuarial assumptions, including discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. We recognize changes in the fair value of pension plan assets and net actuarial gains or losses in excess of 10 percent of the greater of the fair value of pension plan assets or each plan’s projected benefit obligation (the “corridor”) in earnings immediately upon remeasurement, which is at least annually in the fourth quarter of each year. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current economic conditions and trends. The discount rate used to measure obligations is based on a spot-rate yield curve on aplan-by-plan basis that matches projected future benefit payments with the appropriate interest rate applicable to the timing of the projected future benefit payments. The expected rate of return on plan assets is determined based on the nature of the plans’ investments, our current asset allocation and our expectations for long-term rates of return. Compensation increases reflect expected future compensation trends. For postretirement benefits, our health care trend rate assumption is based on historical cost increases and expectations for long-term increases. The cost or benefit of plan changes, such as increasing or decreasing benefits for prior employee service (prior service cost), is deferred and included in expense on a straight-line basis over the average remaining service period of the related employees. We believe that the assumptions utilized in recording obligations under our plans, which are presented in Note 15, “Defined Benefit Plans,” are reasonable based on our experience and on advice from our independent actuaries; however, differences in actual experience or changes in the assumptions may materially affect our financial position and results of operations. We will continue to monitor these assumptions as market conditions warrant.
Insurance Reserves We provide for expenses associated with workers’ compensation and product liability obligations when such amounts are probable and can be reasonably estimated. The accruals are adjusted as new information develops or circumstances change that would affect the estimated liability.
Litigation Contingencies Our businesses are subject to risks related to threatened or pending litigation and are routinely defendants in lawsuits associated with the normal conduct of business. Liabilities and costs associated with litigation-related loss contingencies require estimates and judgments based on our knowledge of the facts and circumstances surrounding each matter and the advice of our legal counsel. We record liabilities for litigation-related losses when a loss is probable and we can reasonably estimate the amount of the loss in accordance with ASC requirements for Contingencies. We evaluate the measurement of recorded liabilities each reporting period based on the then-current facts and circumstances specific to each matter. The ultimate losses incurred upon final resolution of litigation-related loss contingencies may differ materially from the estimated liability recorded at any particular balance sheet date. Changes in estimates are recorded in earnings in the period in which such changes occur.
Income Taxes
In accordance with ASC requirements for Income Taxes, we establish deferred tax liabilities or assets for temporary differences between financial and tax reporting bases and subsequently adjust them to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance reducing deferred tax assets when it is more likely than not that such assets will not be realized.
We record liabilities for uncertain income tax positions based on atwo-step process. The first step is recognition, where we evaluate whether an individual tax position has a likelihood of greater than 50% of being sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation processes. For tax positions that are currently estimated to have a less than 50% likelihood of being sustained, no tax benefit is recorded. For tax positions that have met the recognition threshold in the first step, we perform the second step of measuring the benefit to be recorded. The actual benefits ultimately realized may differ from our estimates. In future periods, changes in facts, circumstances, and new information may require us to change the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recorded in the consolidated statement of income and consolidated balance sheet in the period in which such changes occur. As of December 31, 2018, we had liabilities for unrecognized tax benefits pertaining to uncertain tax positions totaling $83.5 million. It is reasonably possible that the unrecognized tax benefits may decrease in the range of $1.4 million to $3.5 million in the next 12 months primarily as a result of the conclusion of U.S. federal, state and foreign income tax proceedings.
The Tax Act made significant changes to the U.S. Internal Revenue Code including a reduction in the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, generally providing for an exemption from federal income tax for dividends received from foreign subsidiaries, and imposing aone-time transition tax on the deemed repatriation of cumulative foreign earnings and profits as of December 31, 2017. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued, which deals with the application of U.S. GAAP to situations where a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, we calculated our best estimate of the impact of the Tax Act on our 2017 effective income tax rate. As a result, the Company recorded a provisional net benefit of $25.7 million in the fourth quarter of 2017, the period in which the Tax Act was enacted. This provisional amount included an estimated reduction in the Company’s net deferred tax liabilities of $62.4 million resulting from the decrease in the federal income tax rate; an estimated deemed repatriation tax liability of $28.5 million; and an estimated net increase to our provision for taxes on foreign earnings not considered permanently reinvested of $8.2 million. In the quarter ended December 31, 2018, the Company completed its analysis in conjunction with the SAB 118 measurement period ending on December 22, 2018. The total tax provision impact for the year ended December 31, 2018 was an unfavorable adjustment of $5.5 million related primarily to certain deferred tax assets and liabilities.
The Tax Act included a provision for Global IntangibleLow-Taxed Income (GILTI), the Company elected an accounting policy to treat GILTI as a period cost when incurred. The GILTI provision is effective for taxable years of foreign corporations beginning after December 31, 2017.
Revenue Recognition The Company recognizes revenue for the sale of goods based on its assessment of when control transfers to our customers. Refer to Note 14 for additional information.
Cost of Products Sold Cost of products sold includes all costs to make products saleable, such as labor costs, inbound freight, purchasing and receiving costs, inspection costs and internal transfer costs. In addition, all depreciation expense associated with assets used to manufacture products and make them saleable is included in cost of products sold.
Customer Program Costs Customer programs and incentives are a common practice in our businesses. Our businesses incur customer program costs to obtain favorable product placement, to promote sales of products and to maintain competitive pricing. 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. Volume allowances are accrued based on management’s estimates of customer volume achievement and other factors incorporated into customer agreements, such as new product purchases, store sell-through, merchandising support, levels of returns and customer training. Management periodically reviews accruals for these rebates and allowances, and adjusts accruals when circumstances indicate (typically as a result of a change in volume expectations). The costs typically recognized in selling, general and administrative expenses include product displays, point of sale materials and media production costs. The costs included in the selling, general and administrative expenses category were $66.5 million, $62.4 million and $44.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Selling, General and Administrative Expenses Selling, general and administrative expenses include advertising costs; marketing costs; selling costs, including commissions; research and development costs; shipping and handling costs, including warehousing costs; and general and administrative expenses. Shipping and handling costs included in selling, general and administrative expenses were $215.9 million, $204.7 million and $197.0 million in 2018, 2017 and 2016, respectively.
Advertising costs, which amounted to $243.6 million, $233.2 million and $199.1 million in 2018, 2017 and 2016, respectively, are principally expensed as incurred. Advertising costs paid to customers as pricing rebates include product displays, marketing administration costs, media production costs and point of sale materials. Advertising costs recorded as a reduction to net sales, primarily cooperative advertising, were $72.4 million, $65.6 million and $52.5 million in 2018, 2017 and 2016, respectively. Advertising costs recorded in selling, general and administrative expenses were $171.2 million, $167.6 million and $146.6 million in 2018, 2017 and 2016, respectively.
Research and development expenses include product development, product improvement, product engineering and process improvement costs. Research and development expenses, which were $50.3 million, $50.7 million and $53.1 million in 2018, 2017 and 2016, respectively, are expensed as incurred.
Stock-based Compensation Stock-based compensation expense, measured as the fair value of an award on the date of grant, is recognized in the financial statements over the period that an employee is required to provide services in exchange for the award. The fair value of each option award is measured on the date of grant using the Black-Scholes option-pricing model. The fair value of each performance share
award is based on the average of the high and low share prices on the date of grant and the probability of meeting performance targets. The fair value of each restricted stock unit granted is equal to the average of the high and low share prices on the date of grant. See Note 13, “Stock-Based Compensation,” for additional information.
Earnings Per Share Earnings per common share is calculated by dividing net income attributable to Fortune Brands by the weighted-average number of shares of common stock outstanding during the year. Diluted earnings per common share include the impact of all potentially dilutive securities outstanding during the year. See Note 21, “Earnings Per Share,” for further discussion.
Foreign Currency Translation Foreign currency balance sheet accounts are translated into U.S. dollars at the actual rates of exchange at the balance sheet date. Income and expenses are translated at the average rates of exchange in effect during the period for the foreign subsidiaries where the local currency is the functional currency. The related translation adjustments are made directly to a separate component of the “accumulated other comprehensive income” (“AOCI”) caption in equity. Transactions denominated in a currency other than the functional currency of a subsidiary are translated into functional currency with resulting transaction gains or losses recorded in other expense, net.
Derivative Financial Instruments In accordance with ASC requirements for Derivatives and Hedging, all derivatives are recognized as either assets or liabilities on the balance sheet and measurement of those instruments is at fair value. If the derivative is designated as a fair value hedge and is highly effective, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings in the same period. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded directly to a separate component of AOCI, and are recognized in the consolidated statement of income when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.
Deferred currency gains/(losses) of $2.2 million, $0.4 million and $(3.5) million (before tax impact) were reclassified into earnings for the year ended December 31, 2018, 2017 and 2016, respectively. Based on foreign exchange rates as of December 31, 2018, we estimate that $3.3 million of net currency derivative gains included in AOCI as of December 31, 2018 will be reclassified to earnings within the next twelve months.
Recently Issued Accounting Standards
Revenue from Contracts with Customers
In May 2014, 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. 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 in 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 14, “Revenue,” for further information.
Leases
In February 2016, the FASB issued ASU2016-02, which requires lessees to recognize almost all leases on their balance sheet as a“right-of-use” asset and lease liability but recognize related expenses in a manner similar to current accounting. The guidance also eliminates current real estate-specific provisions for all entities. 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 ASU2018-11, 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.
We plan to adopt the standard in the first quarter of 2019 using the transition method introduced by ASU2018-11, which does not require revisions to comparative periods. We will elect 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 are electing the hindsight practical expedient to determine the lease term. We will make an accounting policy election to not recognize leases with an initial term of less than twelve months on the balance sheet and we will recognize the related lease payments as expense in the statement of comprehensive income on a straight-line basis over the lease term.
While we are continuing to finalize our assessment of the impacts of the standard, we have completed our scoping reviews, identified our significant leases by segment and by asset type, and made progress in developing accounting policies upon adoption of the standard. We have implemented an accounting system to support the future state leasing process and input the data from substantially all of our existing leases into the system. We continue to refine our future process design as part of the overall system implementation. Upon adoption, we expect to recognize a lease liability, with an offsetting increase toright-of-use assets ranging from $170 million to $200 million. Differences between the lease liability andright-of-use asset, recognized are not expected to material. We do not expect the standard to materially affect our consolidated net income.
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 ASU2014-09 as of January 1, 2018 and for periods thereafter using the retrospective approach. The adoption of this standard did not have a material effect on our financial statements. See Note 15 for further information.
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 previous guidance companies were 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 from 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.
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 current practice). The change in fair value for qualifying cash flow and net investment hedges will be included in other comprehensive income (until they are reclassified into the income statement). The standard also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. The standard is effective as of January 1, 2019. We do not expect the adoption of this standard to have a material effect on our financial statements.
Financial Instruments — Credit Losses
In June 2016, the FASB issued ASU2016-13, which changes the impairment model for most financial assets and certain other instruments that are not measured at fair value through net income. The new guidance applies to most financial assets measured at amortized cost, including trade and other receivables and loans as well asoff-balance-sheet credit exposures (e.g., loan commitments and standby letters of credit). The standard will replace the “incurred loss” approach under the current guidance with an “expected loss” model that requires an entity to estimate its lifetime “expected credit loss.” The standard is effective January 1, 2020 and early application is permitted beginning January 1, 2019. We are assessing the impact the adoption of this standard will have on our financial statements.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This guidance permits companies to reclassify to retained earnings the tax effects stranded in accumulated other comprehensive income as a result of U.S. Tax Cuts and Jobs Act of 2017. This guidance is effective for the Company’s fiscal year beginning January 1, 2019. We do not expect the adoption of this guidance to have a material effect 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. The guidance is effective for the Company’s fiscal year beginning January 1, 2019. We do not expect the adoption of this guidance to have a material effect on our financial statements.
Codification Improvements
In July 2018, the FASB issued ASU2018-09 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 will be effective for the Company’s fiscal year beginning January 1, 2019. Our adoption of the immediately effective pieces of this standard did not have a material effect on our financial statements, nor do we expect the adoption of the other aspects of this standard to be material.
Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU2018-13 which removes the requirement to disclose: 1) amount of and 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 modifies and adds other disclosure requirements, which primarily relate to valuation of Level 3 assets and liabilities. The guidance is effective for the Company’s fiscal year beginning January 1, 2020, with early adoption permitted. We do not expect the adoption of this guidance to have a material effect on our financial statements.
Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU2018-14 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 and adds new disclosure requirements to explain reasons for significant gains and losses related to changes in the benefit obligation for the period, and to disclose weighted-average interest crediting rates for plans with promised interest crediting rates. The guidance is effective for the Company’s fiscal year beginning January 1, 2020, with early adoption permitted. We do not expect the adoption of this guidance to have a material effect on our financial statements.
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
In August 2018, the FASB issued ASU2018-15 which 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 obtaininternal-use software. Costs to obtain software, including configuration and integration 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 vendor demonstrations, determining performance and technology requirements and training activities. The standard is effective for the Company’s fiscal year beginning January 1, 2020, with early adoption permitted. We are assessing the impact the adoption of this standard will have on our financial statements.
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3. Balance Sheet Information
Supplemental information on ouryear-end consolidated balance sheets is as follows:
| | | | | | | | | | | | (In millions) | | 2018(a) | | | 2017 | | Inventories: | | | | | | | | | Raw materials and supplies | | $ | 227.4 | | | $ | 224.9 | | Work in process | | | 66.4 | | | | 58.3 | | Finished products | | | 385.1 | | | | 297.6 | | Total inventories | | $ | 678.9 | | | $ | 580.8 | | | | | Property, plant and equipment: | | | | | | | | | Land and improvements | | $ | 66.8 | | | $ | 58.7 | | Buildings and improvements to leaseholds | | | 500.1 | | | | 464.1 | | Machinery and equipment | | | 1,249.0 | | | | 1,167.5 | | Construction in progress | | | 95.8 | | | | 90.1 | | Property, plant and equipment, gross | | | 1,911.7 | | | | 1,780.4 | | Less: accumulated depreciation | | | 1,098.3 | | | | 1,040.4 | | Property, plant and equipment, net of accumulated depreciation | | $ | 813.4 | | | $ | 740.0 | | | | | Other current liabilities: | | | | | | | | | Accrued salaries, wages and other compensation | | $ | 85.9 | | | $ | 105.9 | | Accrued customer programs | | | 167.8 | | | | 142.8 | | Accrued taxes | | | 57.7 | | | | 61.4 | | Dividends payable | | | 30.9 | | | | 30.4 | | Other accrued expenses | | | 165.8 | | | | 137.5 | | Total other current liabilities | | $ | 508.1 | | | $ | 478.0 | |
(a) | 2018 includes the impact of acquiring Fiberon. See Note 4 for additional information.
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4. Acquisitions and Dispositions
In September 2018, we acquired 100% of membership interests of Fiber Composites LLC (“Fiberon”), a leading U.S. manufacturer of outdoor performance materials used in decking, railing and fencing products for a total purchase price of approximately $470.0 million, subject to certain post-closing adjustments. The acquisition of Fiberon provides category expansion and product extension opportunities into the outdoor living space for our Doors & Security segment. Fiberon’s net sales and operating income in 2018 were not material to the Company. We have not included pro forma financial information as it is immaterial to our consolidated statements of comprehensive income. We financed the transaction using cash on hand and borrowings under our revolving credit and term loan facilities. The results of operations are included in the Doors & Security segment from the date of the acquisition. We expect goodwill related to this acquisition to be deductible for income tax purposes.
The following table summarizes the preliminary allocation of the purchase price to the fair value of assets acquired and liabilities assumed as of the date of the acquisition.
| | | | | | | (In millions) | | | | Accounts receivable | | $ | 19.2 | | Inventories | | | 49.4 | | Property, plant and equipment | | | 49.0 | | Goodwill | | | 173.4 | | Identifiable intangible assets | | | 195.0 | | Other assets | | | 4.8 | | Total assets | | | 490.8 | | Accounts payable | | | 16.5 | | Other liabilities and accruals | | | 14.5 | | 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. The Company is in the process of finalizing valuations of certain tangible and intangible assets, including property, plant and equipment and identifiable intangible assets. The provisional measurement of property, plant and equipment, identifiable intangible assets, and goodwill is subject to change. 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.
In October 2017, we acquired Victoria + Albert, aUK-based premium brand of standalone bathtubs, sinks, tub fillers, faucets and other accessories. In July 2017, we acquired Shaws, 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 $146 million, including $19.9 million of additional purchase price consideration paid related to post-closing adjustments and deferred acquisition payments during 2018. The combined consideration paid is subject to further deferred acquisition payments. Net sales and operating income in 2017 from these acquisitions were not material to the Company. We financed the transactions using cash on hand and borrowings under our existing revolving and term loan credit facilities. The results of the operations are included in the Plumbing segment from the respective dates of acquisition. We do not expect any portion of goodwill to be deductible for income tax purposes.
In April 2017, we completed the sale of Field ID, our cloud-based inspection and safety compliance software product line included in our Doors & Security segment. We recorded apre-tax loss of $2.4 million and apre-tax impairment charge to write down the long-lived assets included in this disposal group to fair value of $3.2 million as a result of this sale (See Note 7). The estimated tax expense on the sale was insignificant. Field ID did not qualify for presentation as a discontinued operation in our financial statements.
5. Discontinued Operations
In the twelve months ended December 31, 2017, the loss on discontinued operations is primarily related to the prior sale of the Waterloo tool storage and Simonton window businesses.
6. Goodwill and Identifiable Intangible Assets
We had goodwill of $2,080.3 million and $1,912.0 million as of December 31, 2018 and 2017, respectively. The increase of $168.3 million was primarily due to the acquisition of Fiberon in the Doors & Security segment as well as acquisition related adjustments in our Plumbing segment related to the 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 | | Balance at December 31, 2016(a) | | $ | 924.3 | | | $ | 670.2 | | | $ | 239.3 | | | $ | 1,833.8 | | 2017 translation adjustments | | | 2.0 | | | | 3.3 | | | | 1.2 | | | | 6.5 | | Acquisition-related adjustments | | | — | | | | 71.7 | | | | — | | | | 71.7 | | Balance at December 31, 2017(a) | | $ | 926.3 | | | $ | 745.2 | | | $ | 240.5 | | | $ | 1,912.0 | | 2018 translation adjustments | | | (2.3 | ) | | | (5.9 | ) | | | (1.4 | ) | | | (9.6 | ) | Acquisition-related adjustments | | | — | | | | 4.4 | | | | 173.5 | | | | 177.9 | | Balance at December 31, 2018(a) | | $ | 924.0 | | | $ | 743.7 | | | $ | 412.6 | | | $ | 2,080.3 | |
(a) | Net of accumulated impairment losses of $399.5 million in the Doors & Security segment.
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We also had identifiable intangible assets, principally tradenames and customer relationships, of $1,246.8 million and $1,162.4 million as of December 31, 2018 and 2017, respectively. The $117.9 million increase in gross identifiable intangible assets was primarily due to the acquisition of Fiberon in our Doors & Security segment partially offset by a tradename impairment charges of $62.6 million in our Cabinets segment.
The gross carrying value and accumulated amortization by class of intangible assets as of December 31, 2018 and 2017 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2018 | | | As of December 31, 2017 | | (In millions) | | Gross Carrying Amounts | | | Accumulated Amortization | | | Net Book Value | | | Gross Carrying Amounts | | | Accumulated Amortization | | | Net Book Value | | Indefinite-lived tradenames | | $ | 673.9 | | | $ | — | | | $ | 673.9 | | | $ | 709.9 | | | $ | — | | | $ | 709.9 | | Amortizable intangible assets | | | | | | | | | | | | | | | | | | | | | | | | | Tradenames | | | 19.8 | | | | (11.9 | ) | | | 7.9 | | | | 15.7 | | | | (9.9 | ) | | | 5.8 | | Customer and contractual relationships | | | 800.3 | | | | (260.2 | ) | | | 540.1 | | | | 663.8 | | | | (232.0 | ) | | | 431.8 | | Patents/proprietary technology | | | 73.5 | | | | (48.6 | ) | | | 24.9 | | | | 60.2 | | | | (45.3 | ) | | | 14.9 | | Total | | | 893.6 | | | | (320.7 | ) | | | 572.9 | | | | 739.7 | | | | (287.2 | ) | | | 452.5 | | Total identifiable intangibles | | $ | 1,567.5 | | | $ | (320.7 | ) | | $ | 1,246.8 | | | $ | 1,449.6 | | | $ | (287.2 | ) | | $ | 1,162.4 | |
Amortizable intangible assets, principally customer relationships and patents/proprietary technology, are subject to amortization on a straight-line basis over their estimated useful life, ranging from 2 to 30 years, based on the assessment of a number of factors that may impact useful life. These factors include historical 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. We expect to record intangible amortization of approximately $43 million in 2019, $42 million in 2020, $42 million in 2021, $40 million in 2022, and $39 million in 2023.
We review indefinite-lived tradename intangible assets for impairment annually in the fourth quarter, as well as whenever market or business events indicate there may be a potential impact on a specific intangible asset. Impairment losses are recorded to the extent that the carrying value of the indefinite-lived intangible asset exceeds its fair value. We measure fair value using the standard relief-from-royalty approach which estimates the present value of royalty income that could be hypothetically earned by licensing the
tradename to a third party over the remaining useful life. The determination of fair value using this technique requires the use of estimates and assumptions related to projected tradename revenue growth, the assumed royalty rate and the discount rate.
During 2018, we recognized asset impairment charges of $62.6 million related to two indefinite-lived tradenames within our Cabinets segment. During the third quarter of 2018, we recognized an impairment of $27.1 million related to one tradename, which was primarily the result of reduced revenue growth expectations associated with Cabinets operations in Canada, including the announced closure of Company-owned retail locations during the third quarter of 2018. During the fourth quarter of 2018, we recognized an impairment of $35.5 million related to another tradename, which was primarily the result of lower than forecasted sales during the fourth quarter of 2018 as well as projected changes in the mix of revenue across our tradenames in future periods, including the impact of more moderate industry growth expectations, which were finalized during our annual planning process conducted during the fourth quarter. The fair values of the impaired tradenames were measured using the relief-from-royalty approach, which estimates the present value of royalty income that could be hypothetically earned by licensing the tradename to a third party over its remaining useful life. Some of the more significant assumptions inherent in estimating the fair value include estimated future annual net sales for the tradename, assumed royalty rate, income tax rate, and a discount rate that reflects the level of risk associated with the tradename’s future sales and profitability. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management plans. These assumptions represent level 3 inputs of the fair value hierarchy (refer to Note 10). As of December 31, 2018, the carrying value of the tradenames that were impaired was approximately $152.0 million. We did not record any asset impairment changes associated with goodwill or indefinite-lived assets in 2017 or 2016.
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 fall below our assumptions, actions of key customers, increases 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.
7. Asset Impairment Charges
In January 2017, we committed to a plan to sell Field ID, our cloud-based inspection and safety compliance software product line included in our Doors & Security segment. In accordance with FASB Accounting Standards Codification (“ASC”) 360, as a result of our decision to sell, during the first quarter of 2017 we recorded $3.2 million ofpre-tax impairment charges to write down the long-lived assets included in this disposal group to fair value, based upon their estimated fair value less cost to sell. These charges consisted of approximately $3.0 million for definite-lived intangible assets and $0.2 million for fixed assets. We completed the sale of Field ID in April 2017.
8. 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%. All other terms and conditions of the 2018 Senior Notes are substantially consistent with the 2015 Senior Notes. We used the proceeds from the 2018 Senior Notes offering to pay down our revolving credit facility. On December 31, 2018, the net carrying value of the 2018 Senior Notes, net of underwriting commissions, price discounts, and debt issuance costs, was $595.0 million.
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 often-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 December 31, 2018 and December 31, 2017, the net carrying value of the 2015 Senior Notes, net of underwriting commissions, price discounts, and debt issuance costs, was $894.0 million and $892.6 million, respectively.
In March 2018, the Company entered into a $350 million term loan for general corporate purposes that matures 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. All other terms and conditions on the amended term loan remain the same as the previous $350 million term loan. 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. As of December 31, 2018, we were in compliance with all covenants under this term loan.
In June 2016, the Company amended and restated its credit agreement to combine and rollover the 2011 revolving credit facility and term loan into a new standalone $1.25 billion revolving credit facility. The amendment and restatement was anon-cash transaction for the Company. Terms and conditions of the credit agreement, including the total commitment amount, essentially remained the same. The revolving credit facility will mature in June 2021 and borrowings thereunder will be used for general corporate purposes. On December 31, 2018 and December 31, 2017, our outstanding borrowings under this facility were $320.0 million and $615.0 million, respectively. At December 31, 2018 and December 31, 2017, the current portion of long-term debt under this facility was zero. 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 December 31, 2018, we were in compliance with all covenants under this facility.
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 zero were outstanding, as of December 31, 2018 and 2017. The weighted-average interest rates on these borrowings were zero in 2018 and 2017.
The components of external long-term debt were as follows:
| | | | | | | | | | | | (In millions) | | 2018 | | | 2017 | | $400 million unsecured senior note due June 2020 | | $ | 399.0 | | | $ | 398.3 | | $500 million unsecured senior note due June 2025 | | | 495.0 | | | | 494.3 | | $600 million unsecured senior note due September 2023 | | | 595.0 | | | | — | | $1,250 million revolving credit agreement due June 2021 | | | 320.0 | | | | 615.0 | | $525 million term loan due March 2019 | | | 525.0 | | | | — | | Total debt | | | 2,334.0 | | | | 1,507.6 | | Less: current portion | | | 525.0 | | | | — | | Total long-term debt | | $ | 1,809.0 | | | $ | 1,507.6 | |
Senior Notes payments during the next five years as of December 31, 2018 are zero in 2019, $400 million in 2020, zero in 2021 and $600 million in 2022 through 2023.
In our debt agreements, there are normal and customary events of default which would permit the lenders to accelerate the debt if not cured within applicable grace periods, such as failure to pay principal or interest when due or a change in control of the Company. There were no events of default as of December 31, 2018.
9. Financial Instruments
We do not enter into financial instruments for trading or speculative purposes. We principally use financial instruments to reduce the impact of changes in foreign currency exchange rates and commodities used as
raw materials in our products. The principal derivative financial instruments we enter into on a routine basis are foreign exchange contracts. Derivative financial instruments are recorded at fair value. The counterparties to derivative contracts are major financial institutions. We are subject to credit risk on these contracts equal to the fair value of these instruments. Management currently believes that the risk of incurring material losses is unlikely and that the losses, if any, would be immaterial to the Company.
Raw materials used by the Company are subject to price volatility caused by weather, supply conditions, geopolitical and economic variables, and other unpredictable external factors. As a result, from time to time, we enter into commodity swaps to manage the price risk associated with forecasted purchases of materials used in our operations. We account for these commodity derivatives as economic hedges or cash flow hedges. Changes in the fair value of economic hedges are recorded directly into current period earnings. There were no material commodity swap contracts outstanding for the years ended December 31, 2018 and 2017.
We enter into foreign exchange contracts primarily to hedge forecasted sales and purchases denominated in select foreign currencies, thereby limiting currency risk that would otherwise result from changes in exchange rates. The periods of the foreign exchange contracts correspond to the periods of the forecasted transactions, which generally do not exceed 12 to 15 months subsequent to the latest balance sheet date.
For derivative instruments that are designated as fair value hedges, the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item, are recognized on the same line of the statement of income. The effective portions of cash flow hedges are reported in other comprehensive income (“OCI”) and are recognized in the statement of income when the hedged item affects earnings. The changes in fair value for net investment hedges are recognized in the statement of income when realized upon sale or upon complete or substantially complete liquidation of the investment in the foreign entity. The ineffective portion of all hedges is recognized in current period earnings. In addition, changes in the fair value of all economic hedge transactions are immediately recognized in current period earnings. 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 December 31, 2018 was $345.3 million, representing a net settlement assets of $3.4 million. Based on foreign exchange rates as of December 31, 2018, we estimate that $3.3 million of net foreign currency derivative losses included in OCI as of December 31, 2018 will be reclassified to earnings within the next twelve months.
The fair values of foreign exchange and commodity derivative instruments on the consolidated balance sheets as of December 31, 2018 and 2017 were:
| | | | | | | | | | | | | | | | | | Fair Value | | | | | | (In millions) | | Location | | 2018 | | | 2017 | | Assets: | | | | | | | | | | | Foreign exchange contracts | | Other current assets | | $ | 5.3 | | | $ | 0.8 | | Commodity contracts | | Other current assets | | | — | | | | 0.2 | | Net investment hedges | | Other current assets | | | 0.7 | | | | — | | | | Total assets | | $ | 6.0 | | | $ | 1.0 | | Liabilities: | | | | | | | | | | | Foreign exchange contracts | | Other current liabilities | | $ | 1.9 | | | $ | 5.6 | | Net investment hedges | | Other current liabilities | | | — | | | | 0.8 | | | | Total liabilities | | $ | 1.9 | | | $ | 6.4 | |
The effects of derivative financial instruments on the consolidated statements of income in 2018, 2017 and 2016 were:
| | | | | | | | | | | | | | | | | (In millions) | | Gain (Loss) Recognized in Income | | | | | | | Type of hedge | | Location | | 2018 | | | 2017 | | | 2016 | | Cash flow | | Cost of products sold | | $ | 2.0 | | | $ | 0.9 | | | $ | (3.5 | ) | Fair value | | Other (income) expense, net | | | 3.7 | | | | (2.0 | ) | | | 2.0 | | Total | | | | $ | 5.7 | | | $ | (1.1 | ) | | $ | (1.5 | ) |
The effective portion of cash flow hedges recognized in other comprehensive income were net gains (losses) of $10.1 million and $(1.8) million in 2018 and 2017, respectively. In the year ended December 31, 2018, the ineffective portion of cash flow hedges recognized in other income, net, was $3.8 million and insignificant in the years ended December 31, 2017 and 2016.
10. Fair Value Measurements
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 other than quoted prices included in level 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 level 3.
The carrying value and fair value of debt as of December 31, 2018 and 2017 were as follows:
| | | | | | | | | | | | | | | | | | | | (In millions) | | December 31, 2018 | | | December 31, 2017 | | | | | | | | | Carrying Value | | | Fair Value | | | Carrying Value | | | Fair Value | | Revolving credit facility | | $ | 320.0 | | | $ | 320.0 | | | $ | 615.0 | | | $ | 615.0 | | Term Loan | | | 525.0 | | | | 525.0 | | | | — | | | | — | | Senior Notes, net of underwriting commissions and price discounts | | | 1,489.0 | | | | 1,490.4 | | | | 892.6 | | | | 926.3 | |
The estimated fair value of our term loan and revolving credit facility is determined primarily using broker quotes, which are level 2 inputs. The estimated fair value of our Senior Notes is determined by using quoted market prices of our debt securities, which are level 1 inputs.
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 and 2017 were as follows:
| | | | | | | | | | | (In millions) | | Fair Value | | | | | | | 2018 | | | 2017 | | Assets: | | | | | | | | | Derivative asset financial instruments (level 2) | | $ | 6.0 | | | $ | 1.0 | | Deferred compensation program assets (level 2) | | | 9.3 | | | | 7.5 | | Total assets | | $ | 15.3 | | | $ | 8.5 | | Liabilities: | | | | | | | | | Derivative liability financial instruments (level 2) | | $ | 1.9 | | | $ | 6.4 | |
The principal derivative financial instruments we enter into on a routine basis are foreign exchange contracts. In addition, from time to time, we enter into commodity swaps. Derivative financial instruments are recorded at fair value.
11. Capital Stock
The Company has 750 million authorized shares of common stock, par value $0.01 per share. The number of shares of common stock and treasury stock and the share activity for 2018 and 2017 were as follows:
| | | | | | | | | | | | | | | | | | | | | | Common Shares | | | Treasury Shares | | | | | | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | Balance at the beginning of the year | | | 151,906,797 | | | | 153,412,050 | | | | 27,879,929 | | | | 24,305,930 | | Stock plan shares issued | | | 822,878 | | | | 2,068,746 | | | | — | | | | — | | Shares surrendered by optionees | | | (230,550 | ) | | | (180,537 | ) | | | 230,550 | | | | 180,537 | | Common stock repurchases | | | (12,000,144 | ) | | | (3,393,462 | ) | | | 12,000,144 | | | | 3,393,462 | | Balance at the end of the year | | | 140,498,981 | | | | 151,906,797 | | | | 40,110,623 | | | | 27,879,929 | |
In December 2018, our Board of Directors increased the quarterly cash dividend by 10% to $0.22 per share of our common stock.
The Company has 60 million authorized shares of preferred stock, par value $0.01 per share. At December 31, 2018, no shares of our preferred stock were outstanding. Our Board of Directors has the authority, without action by the Company’s stockholders, to designate and issue our preferred stock in one or more series and to designate the rights, preferences, limitations and privileges of each series of preferred stock, which may be greater than the rights of the Company’s common stock.
In 2018, we repurchased approximately 12.0 million shares of outstanding common stock under the Company’s share repurchase program at a cost of $694.6 million. As of December 31, 2018, the Company’s total remaining share repurchase authorization under the remaining program was approximately $413.7 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.
12. Accumulated Other Comprehensive (Loss) Income
The reclassifications out of accumulated other comprehensive (loss) income for the years ended December 31, 2018 and 2017 were as follows:
| | | | | | | | | | | | | | (In millions) | | | | | | | | | | Details about Accumulated Other Comprehensive Income Components | | | | | Affected Line Item in the Consolidated Statements of Income | | | | | | | | | | 2018 | | | 2017 | | | | Gains (losses) on cash flow hedges | | | | | | | | | | | Foreign exchange contracts | | $ | 2.2 | | | $ | 0.4 | | | Cost of products sold | Interest rate contracts | | | 0.1 | | | | — | | | Other income, net | Commodity contracts | | | (0.2 | ) | | | 0.5 | | | Cost of products sold | | | | 2.1 | | | | 0.9 | | | Total before tax | | | | (0.4 | ) | | | (0.1 | ) | | Tax expense | | | $ | 1.7 | | | $ | 0.8 | | | Net of tax | Defined benefit plan items | | | | | | | | | | | Recognition of prior service cost | | $ | — | | | $ | 5.1 | | | (a) | Recognition of actuarial (losses) gains | | | (3.8 | ) | | | 0.5 | | | (a) | | | | (3.8 | ) | | | 5.6 | | | Total before tax | | | | 0.8 | | | | (2.0 | ) | | Tax expense | | | $ | (3.0 | ) | | $ | 3.6 | | | Net of tax | Total reclassifications for the period | | $ | (1.3 | ) | | $ | 4.4 | | | Net of tax |
(a) | These accumulated other comprehensive (loss) income components are included in the computation of net periodic benefit cost. Refer to Note 15, “Defined Benefit Plans,” for additional information.
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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) income were as follows:
| | | | | | | | | | | | | | | | | | | | | | (In millions) | | Foreign Currency Adjustments | | | Derivative Hedging Gain (Loss) | | | Defined Benefit Plan Adjustments | | | Accumulated Other Comprehensive (Loss) Income | | Balance at December 31, 2015 | | $ | (13.3 | ) | | $ | 2.1 | | | $ | (41.3 | ) | | $ | (52.5 | ) | Amounts classified into accumulated other comprehensive (loss) income | | | (14.7 | ) | | | (6.2 | ) | | | 5.3 | | | | (15.6 | ) | Amounts reclassified from accumulated other comprehensive (loss) income into earnings | | | — | | | | 3.5 | | | | (7.3 | ) | | | (3.8 | ) | Net current period other comprehensive (loss) income | | | (14.7 | ) | | | (2.7 | ) | | | (2.0 | ) | | | (19.4 | ) | Balance at December 31, 2016 | | $ | (28.0 | ) | | $ | (0.6 | ) | | $ | (43.3 | ) | | $ | (71.9 | ) | Amounts classified into accumulated other comprehensive (loss) income | | | 33.8 | | | | (1.0 | ) | | | 4.3 | | | | 37.1 | | Amounts reclassified from accumulated other comprehensive (loss) income into earnings | | | — | | | | (0.8 | ) | | | (3.6 | ) | | | (4.4 | ) | Net current period other comprehensive (loss) income | | | 33.8 | | | | (1.8 | ) | | | 0.7 | | | | 32.7 | | Balance at December 31, 2017 | | $ | 5.8 | | | $ | (2.4 | ) | | $ | (42.6 | ) | | $ | (39.2 | ) | Amounts classified into accumulated other comprehensive (loss) income | | | (31.1 | ) | | | 8.3 | | | | (6.3 | ) | | | (29.1 | ) | Amounts reclassified into earnings | | | — | | | | (1.7 | ) | | | 3.0 | | | | 1.3 | | Net current period other comprehensive (loss) income | | | (31.1 | ) | | | 6.6 | | | | (3.3 | ) | | | (27.8 | ) | Balance at December 31, 2018 | | $ | (25.3 | ) | | $ | 4.2 | | | $ | (45.9 | ) | | $ | (67.0 | ) |
13. Stock-Based Compensation
As of December 31, 2018, we had awards outstanding under two Long-Term Incentive Plans, the Fortune Brands Home & Security, Inc. 2013 Long-Term Incentive Plan (the “Plan”) and the 2011 Long-Term Incentive Plan (the “2011 Plan”, and together with the Plan—the “Plans”). Our stockholders approved the Plan in 2013, which provides for the granting of stock options, performance share awards, restricted stock units, and other equity-based awards, to employees, directors and consultants. As of December 31, 2018, approximately 4.6 million shares of common stock remained authorized for issuance under the Plan. In addition, shares of common stock may be automatically added to the number of shares of common stock that may be issued as awards expire, are terminated, cancelled or forfeited, or are used to satisfy the required withholding taxes with respect to existing awards under the Plans. No new stock-based awards can be made under the 2011 Plan, but there are outstanding stock options under the 2011 Plan that continue to be exercisable. Upon the exercise or payment of stock-based awards, shares of common stock are issued from authorized common shares.
Stock-based compensation expense from continuing operations was as follows:
| | | | | | | | | | | | | | | | | (In millions) | | 2018 | | | 2017 | | | 2016 | | Stock option awards | | $ | 8.6 | | | $ | 7.4 | | | $ | 7.2 | | Restricted stock units | | | 21.3 | | | | 21.6 | | | | 17.2 | | Performance awards | | | 6.3 | | | | 13.6 | | | | 6.7 | | Director awards | | | 1.0 | | | | 1.0 | | | | 0.9 | | Totalpre-tax expense | | | 37.2 | | | | 43.6 | | | | 32.0 | | Tax benefit | | | 6.2 | | | | 15.2 | | | | 11.4 | | Total after tax expense | | $ | 31.0 | | | $ | 28.4 | | | $ | 20.6 | |
Included in compensation costs are cash-settled restricted stock units of $0.9 million that are classified as a liability. Compensation costs that were capitalized in inventory were not material.
Restricted Stock Units
Restricted stock units have been granted to officers and certain employees of the Company and represent the right to receive unrestricted shares of Company common stock subject to continued employment through each vesting date. In addition, certain employees can elect to defer receipt of a portion of their RSU awards upon vesting. Compensation cost is recognized over the service period. We calculate the fair value of each restricted stock unit granted by using the average of the high and low share prices on the date of grant. Restricted stock units generally vest ratably over a three-year period.
A summary of activity with respect to restricted stock units outstanding under the Plans for the year ended December 31, 2018 was as follows:
| | | | | | | | | | | | | | Number of Restricted Stock Units | | | Weighted-Average Grant-Date Fair Value | | Non-vested at December 31, 2017 | | | 728,065 | | | $ | 54.59 | | Granted | | | 356,860 | | | | 61.07 | | Vested | | | (373,593 | ) | | | 52.92 | | Forfeited | | | (50,957 | ) | | | 59.87 | | Non-vested at December 31, 2018 | | | 660,375 | | | $ | 58.63 | |
The remaining unrecognizedpre-tax compensation cost related to restricted stock units at December 31, 2018 was approximately $17.1 million, and the weighted-average period of time over which this cost will be recognized is 1.7 years. The fair value of restricted stock units that vested during 2018, 2017 and 2016 was $22.2 million, $20.3 million and $16.4 million, respectively.
Stock Option Awards
Stock options were granted to officers and certain employees of the Company and represent the right to purchase shares of Company common stock subject to continued employment through each vesting date.
All stock-based compensation to employees is required to be measured at fair value and expensed over the requisite service period. We recognize compensation expense on awards on a straight-line basis over the requisite service period for the entire award. Stock options granted under the Plans generally vest over a three-year period and have a maturity of ten years from the grant date.
The fair value of Fortune Brands options was estimated at the date of grant using a Black-Scholes option pricing model with the assumptions shown in the following table:
| | | | | | | | | | | | | | | | | | | 2018 | | | 2017 | | | 2016 | | Current expected dividend yield | | | 1.3% | | | | 1.4% | | | | 1.4% | | Expected volatility | | | 24.0% | | | | 26.0% | | | | 30.0% | | Risk-free interest rate | | | 2.6% | | | | 1.9% | | | | 1.3% | | Expected term | | | 5 years | | | | 5.5 years | | | | 5.5 years | |
The determination of expected volatility is based on a blended peer group volatility for companies in similar industries, at a similar stage of life and with similar market capitalization. The risk-free interest rate is based on U.S. government issues with a remaining term equal to the expected life of the stock options. The expected term is the period over which our employees are expected to hold their options. The expected term was determined based on the historical employee exercise behavior and the contractual term of the options. The dividend yield is based on the Company’s estimated dividend over the expected term. The weighted-average grant date fair value of stock options granted under the Plans during the years ended December 31, 2018, 2017 and 2016 was $14.14, $13.49 and $12.70, respectively.
A summary of Fortune Brands stock option activity related to Fortune Brands and former employees of Fortune Brands, Inc., the Company from which we spun off from in 2011, for the year ended December 31, 2018 was as follows:
| | | | | | | | | | | | | | Options | | | Weighted- Average Exercise Price | | Outstanding at December 31, 2017 | | | 3,682,958 | | | $ | 36.28 | | Granted | | | 628,614 | | | | 63.44 | | Exercised | | | (214,727 | ) | | | 22.86 | | Expired/forfeited | | | (73,023 | ) | | | 59.07 | | Outstanding at December 31, 2018 | | | 4,023,822 | | | $ | 40.83 | |
Options outstanding and exercisable at December 31, 2018 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Options Outstanding(a) | | | | | | Options Exercisable(b) | | | | | | | | | Range Of Exercise Prices | | Options Outstanding | | Weighted- Average Remaining Contractual Life | | | Weighted- Average Exercise Price | | | | | | Options Exercisable | | | Weighted- Average Exercise Price | | $9.00 to $12.99 | | 104,500 | | | 2.0 | | | $ | 12.30 | | | | | | | | 104,500 | | | $ | 12.30 | | 13.00 to 20.00 | | 1,096,463 | | | 2.5 | | | | 16.37 | | | | | | | | 1,096,463 | | | | 16.37 | | 20.01 to 65.41 | | 2,822,859 | | | 6.8 | | | | 51.38 | | | | | | | | 1,731,059 | | | | 45.91 | | | | 4,023,822 | | | 5.5 | | | $ | 40.83 | | | | | | | | 2,932,022 | | | $ | 33.67 | |
(a) | At December 31, 2018, the aggregate intrinsic value of options outstanding was $28.1 million.
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(b) | At December 31, 2018, the weighted-average remaining contractual life of options exercisable was 4.4 years and the aggregate intrinsic value of options exercisable was $28.1 million.
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The remaining unrecognized compensation cost related to unvested awards at December 31, 2018 was $5.1 million, and the weighted-average period of time over which this cost will be recognized is 1.6 years. The fair value of options that vested during the years ended December 31, 2018, 2017 and 2016 was $6.7 million, $6.8 million and $6.0 million, respectively. The intrinsic value of Fortune Brands stock options exercised in the years ended December 31, 2018, 2017 and 2016 was $8.7 million, $70.6 million and $88.1 million, respectively.
Performance Awards
Performance share awards were granted to officers and certain employees of the Company and represent the right to earnshares of Company common stock based on the achievement of company-widenon-GAAP performance conditions, including cumulative diluted earnings per share, average return on invested capital, average return on net tangible assets and cumulative EBITDA during the three-year performance period. Compensation cost is amortized into expense over the performance period, which is generally three years, and is based on the probability of meeting performance targets. The fair value of each performance share award is based on the average of the high and low stock price on the date of grant.
The following table summarizes information aboutperformance share awards as of December 31, 2018, as well as activity during the year then ended. The number of performance share awards granted are shown below at the target award amounts:
| | | | | | | | | | | | | | Number of Performance Share Awards | | | Weighted-Average Grant-Date Fair Value | | Non-vested at December 31, 2017 | | | 428,328 | | | $ | 52.35 | | Granted | | | 140,071 | | | | 63.44 | | Vested | | | (136,822 | ) | | | 47.48 | | Forfeited | | | (22,486 | ) | | | 57.41 | | Non-vested at December 31, 2018 | | | 409,091 | | | $ | 57.50 | |
The remaining unrecognizedpre-tax compensation cost related to performance share awards at December 31, 2018 was approximately $2.6 million, and the weighted-average period of time over which this cost will be recognized is 1.5 years. The fair value of performance share awards that vested during 2018 was $13.8 million (218,912 shares).
Director Awards
Stock awards are used as part of the compensation provided to outside directors under the Plan. Awards are issued annually in the second quarter. In addition, outside directors can elect to have director fees paid in stock or can elect to defer payment of stock. Compensation cost is expensed at the time of an award based on the fair value of a share at the date of the award. In 2018, 2017 and 2016, we awarded 19,109, 15,311 and 16,471 shares of Company common stock to outside directors with a weighted average fair value on the date of the award of $54.93, $63.43 and $57.37, respectively.
14. 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, security devices and decking (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 18, “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 $14.8 million as of December 31, 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 approximately $2.3 million as of December 31, 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 year ended December 31, 2018.
| | | | | | | (In millions) | | December 31, 2018 | | Wholesalers(1) | | $ | 2,607.3 | | Home Center retailers(2) | | | 1,452.3 | | Other retailers(3) | | | 311.6 | | Builder direct | | | 235.4 | | U.S. net sales | | | 4,606.6 | | International(4) | | | 878.5 | | Net sales | | $ | 5,485.1 | |
(1) | Represents sales to customers whose business is oriented towards builders, professional trades and home remodelers, inclusive of sales through our customers’ respective internet website portals.
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(2) | Represents sales to the three largest“Do-It-Yourself” retailers; The Home Depot, Inc., Lowes Companies, Inc. and Menards, Inc., inclusive of sales through their respective internet website portals.
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(3) | Represents sales principally to our mass merchant and standalone independente-commerce customers.
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(4) | Represents sales in markets outside the United States, principally in Canada, China, Europe and Mexico.
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Practical Expedients
Incremental costs of obtaining a contract include only those costs the Company incurs that would not have been incurred if the contract had not been obtained. These costs are required to be recognized as assets and amortized over the period that the related goods or services transfer to the customer. As a practical expedient, we expense as incurred costs to obtain a contract when the expected amortization period is one year or less. These costs are recorded within selling, general and administrative expenses.
15. Defined Benefit Plans
We have a number of pension plans in the United States, covering many of the Company’s employees, however these plans have been closed to new hires. The plans provide for payment of retirement benefits, mainly commencing between the ages of 55 and 65. After meeting certain qualifications, an employee
acquires a vested right to future benefits. The benefits payable under the plans are generally determined on the basis of an employee’s length of service and/or earnings. Employer contributions to the plans are made, as necessary, to ensure legal funding requirements are satisfied. Also, from time to time, we may make contributions in excess of the legal funding requirements. Service cost for 2018 relates to benefit accruals in an hourly Union defined benefit plan in our Doors & Security segment. Benefit accruals under all other defined benefit pension plans were frozen as of December 31, 2016.
In addition, the Company provides postretirement health care and life insurance benefits to certain retirees.
| | | | | | | | | | | | | | | | | | | | (In millions) | | Pension Benefits | | | Postretirement Benefits | | | | | | | Obligations and Funded Status at December 31 | | 2018 | | | 2017 | | | 2018 | | | 2017 | | Change in the Projected Benefit Obligation (PBO): | | | | | | | | | | | | | | | | | Projected benefit obligation at beginning of year | | $ | 832.4 | | | $ | 791.7 | | | $ | 1.6 | | | $ | 3.6 | | Service cost | | | 0.5 | | | | 0.6 | | | | — | | | | — | | Interest cost | | | 30.7 | | | | 33.3 | | | | — | | | | — | | Plan amendments | | | — | | | | — | | | | — | | | | — | | Actuarial loss (gain) | | | (63.1 | ) | | | 40.6 | | | | (0.2 | ) | | | (1.4 | ) | Benefits paid | | | (37.3 | ) | | | (33.8 | ) | | | — | | | | (0.4 | ) | Foreign exchange | | | — | | | | — | | | | — | | | | (0.2 | ) | Projected benefit obligation at end of year | | $ | 763.2 | | | $ | 832.4 | | | $ | 1.4 | | | $ | 1.6 | | Accumulated benefit obligation at end of year (excludes the impact of future compensation increases) | | $ | 763.2 | | | $ | 832.4 | | | | | | | | | | Change in Plan Assets: | | | | | | | | | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 656.6 | | | $ | 577.7 | | | $ | — | | | $ | — | | Actual return on plan assets | | | (30.7 | ) | | | 83.2 | | | | — | | | | — | | Employer contributions | | | 11.0 | | | | 29.5 | | | | — | | | | 0.5 | | Benefits paid | | | (37.3 | ) | | | (33.8 | ) | | | — | | | | (0.5 | ) | Fair value of plan assets at end of year | | $ | 599.6 | | | $ | 656.6 | | | $ | — | | | $ | — | | Funded status (Fair value of plan assets less PBO) | | $ | (163.6 | ) | | $ | (175.8 | ) | | $ | (1.4 | ) | | $ | (1.6 | ) |
The accumulated benefit obligation exceeds the fair value of assets for all pension plans. Amounts recognized in the consolidated balance sheets consist of:
| | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | | Postretirement Benefits | | | | | | | (In millions) | | 2018 | | | 2017 | | | 2018 | | | 2017 | | Current benefit payment liability | | $ | (1.5 | ) | | $ | (1.1 | ) | | $ | (0.2 | ) | | $ | (0.2 | ) | Accrued benefit liability | | | (162.1 | ) | | | (174.7 | ) | | | (1.2 | ) | | | (1.4 | ) | Net amount recognized | | $ | (163.6 | ) | | $ | (175.8 | ) | | $ | (1.4 | ) | | $ | (1.6 | ) |
In the first quarter of 2013, the Company communicated a plan amendment to reduce health benefits to certain retired employees. Due to the risk of litigation at the time of the initial communication, the Company elected to defer the full recognition of the benefit arising from the plan amendment. Following a favorable court decision in the first quarter of 2016, the Company determined that it would realize the benefit from the plan amendment. As a result, the Company performed are-measurement of the affected retiree plan liability as of March 31, 2016. This remeasurement resulted in a $10.7 million reduction of accrued retiree benefit plan liabilities and a corresponding increase in prior service credits. In accordance with accounting requirements, the liability reduction from this remeasurement is recorded as amortization of prior service credits in net income. In addition, we recorded a $0.9 million actuarial loss during the first quarter of 2016.
In January 2018, we adopted ASU2017-07, which requires entities to present the defined benefit plannon-service related costs outside the operating income subtotal. The new guidance was applied retrospectively in the consolidated statement of comprehensive income. As a result, we reclassified
$9.6 million and $14.1 million of income from the operating income subtotal to other income, in the twelve months ended December 31, 2017 and 2016, respectively. The retrospective impact of adopting ASU2017-07 is as follows:
| | | | | | | | | | | | (In millions) | | 2017 | | | 2016 | | Increase to cost of products sold | | $ | 7.5 | | | $ | 8.5 | | Increase to selling, general and administrative expenses | | | 2.1 | | | | 5.6 | | Decrease to operating income | | $ | (9.6 | ) | | $ | (14.1 | ) |
As of December 31, 2018, we adopted the new Society of ActuariesMP-2018 mortality tables, resulting in an immaterial decrease of our pension benefit obligation, and deferred actuarial losses in accumulated other comprehensive income. As of December 31, 2017, we adopted the new Society of ActuariesMP-2017 mortality tables, resulting in a decrease in our pension benefit obligations of approximately $5.0 million, and a corresponding decrease in deferred actuarial losses in accumulated other comprehensive income.
The amounts in accumulated other comprehensive loss on the consolidated balance sheets that have not yet been recognized as components of net periodic benefit cost were as follows:
| | | | | | | | | | | | (In millions) | | Pension Benefits | | | Postretirement Benefits | | Net actuarial loss at December 31, 2016 | | $ | 73.4 | | | $ | — | | Recognition of actuarial (loss) gain | | | (0.9 | ) | | | 1.4 | | Current year actuarial gain | | | (5.3 | ) | | | (1.4 | ) | Net actuarial loss at December 31, 2017 | | $ | 67.2 | | | $ | — | | Recognition of actuarial (loss) gain | | | (3.9 | ) | | | 0.1 | | Current year actuarial loss (gain) | | | 8.5 | | | | (0.4 | ) | Net actuarial loss at December 31, 2018 | | $ | 71.8 | | | $ | (0.3 | ) | Net prior service cost (credit) at December 31, 2016 | | $ | — | | | $ | (5.1 | ) | Amortization | | | — | | | | 5.1 | | Net prior service cost (credit) at December 31, 2017 | | $ | — | | | $ | — | | Amortization | | | — | | | | — | | Net prior service cost (credit) at December 31, 2018 | | $ | — | | | $ | — | | Total at December 31, 2018 | | $ | 71.8 | | | $ | (0.3 | ) |
There are no accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year.
Components of net periodic benefit cost were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Components of Net Periodic Benefit (Income) Cost | | Pension Benefits | | | Postretirement Benefits | | | | | | | | | (In millions) | | 2018 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2016 | | Service cost | | $ | 0.5 | | | $ | 0.6 | | | $ | 9.6 | | | $ | — | | | $ | — | | | $ | — | | Interest cost | | | 30.7 | | | | 33.3 | | | | 34.4 | | | | — | | | | — | | | | 0.3 | | Expected return on plan assets | | | (41.0 | ) | | | (37.3 | ) | | | (37.2 | ) | | | — | | | | — | | | | — | | Recognition of actuarial losses (gains) | | | 3.9 | | | | 0.9 | | | | — | | | | (0.1 | ) | | | (1.4 | ) | | | 1.9 | | Amortization of prior service credits | | | — | | | | — | | | | — | | | | — | | | | (5.1 | ) | | | (13.5 | ) | Net periodic benefit (income) cost | | $ | (5.9 | ) | | $ | (2.5 | ) | | $ | 6.8 | | | $ | (0.1 | ) | | $ | (6.5 | ) | | $ | (11.3 | ) |
| | | | | | | | | | | | | | | | Assumptions | | Pension Benefits | | Postretirement Benefits | | | | | | | | | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | Weighted-Average Assumptions Used to Determine Benefit Obligations at December 31: | | | | | | | | | | | | | Discount rate | | 4.4% | | 3.8% | | 4.3% | | 4.2% | | 3.4% | | 3.4% | Rate of compensation increase | | — | | — | | 4.0% | | — | | — | | — | Weighted-Average Assumptions Used to Determine Net Cost for Years Ended December 31: | | | | | | | | | | | | | Discount rate | | 3.8% | | 4.3% | | 4.6% | | 3.4% | | 3.4% | | 4.1% | Expected long-term rate of return on plan assets | | 6.0% | | 6.4% | | 6.6% | | — | | — | | — | Rate of compensation increase | | — | | — | | 4.0% | | — | | — | | — |
| | | | | | | | | | | | | Postretirement Benefits | | | | | | | 2018 | | | 2017 | | Assumed Health Care Cost Trend Rates Used to Determine Benefit Obligations and Net Cost at December 31: | | | | | | | | | Health care cost trend rate assumed for next year | | | 6.9/8.0 | %(a) | | | 7.1/8.4 | %(a) | Rate that the cost trend rate is assumed to decline (the ultimate trend rate) | | | 4.5 | % | | | 4.5 | % | Year that the rate reaches the ultimate trend rate | | | 2027 | | | | 2026 | |
(a) | Thepre-65 initial health care cost trend rate is shown first / followed by thepost-65 rate.
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Aone-percentage-point change in assumed health care cost trend rates would have had the following effects in 2018:
| | | | | | | | | | | | (In millions) | | 1-Percentage- Point Increase | | | 1-Percentage- Point Decrease | | Effect on postretirement benefit obligation | | | (0.1 | ) | | | 0.1 | |
Plan Assets
The fair value of the pension assets by major category of plan assets as of December 31, 2018 and 2017 were as follows:
| | | | | | | | | | | (In millions) | | Total as of balance sheet date | | | | | | | 2018 | | | 2017 | | Group annuity/insurance contracts (level 3) | | $ | 23.6 | | | $ | 23.3 | | Collective trusts: | | | | | | | | | Cash and cash equivalents | | | 7.7 | | | | 12.5 | | Equity | | | 197.7 | | | | 285.9 | | Fixed income | | | 324.6 | | | | 277.7 | | Multi-strategy hedge funds | | | 22.0 | | | | 24.6 | | Real estate | | | 24.0 | | | | 32.6 | | Total | | $ | 599.6 | | | $ | 656.6 | |
A reconciliation of Level 3 measurements was as follows:
| | | | | | | | | | | | | Group annuity/ insurance contracts | | | | | (In millions) | | 2018 | | | 2017 | | January 1 | | $ | 23.3 | | | $ | 22.8 | | Actual return on assets related to assets still held | | | 0.3 | | | | 0.5 | | December 31 | | $ | 23.6 | | | $ | 23.3 | |
Our defined benefit plans Master Trust own a variety of investment assets. All of these investment assets, except for group annuity/insurance contracts are measured using net asset value per share as a practical expedient per ASC 820. Following the retrospective adoption of ASU2015-07 (Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share) we excluded all investments measured using net asset value per share in the amount of $576.0 million and $633.3 million as of December 31, 2018 and 2017, respectively, from the tabular fair value hierarchy disclosure.
The terms and conditions for redemptions vary for each class of the investment assets valued at net asset value per share as a practical expedient. Real estate assets may be redeemed quarterly with a 45 day redemption notice period. Investment assets in multi-strategy hedge funds may be redeemed semi-annually with a 95 day redemption notice period. Equity, fixed income and cash and cash equivalents have no specified redemption frequency and notice period and may be redeemed daily. As of December 31, 2018 we do not have an intent to sell or otherwise dispose of these investment assets at prices different than the net asset value per share.
Our investment strategy is to optimize investment returns through a diversified portfolio of investments, taking into consideration underlying plan liabilities and asset volatility. The defined benefit asset allocation policy of the plans allow for an equity allocation of 0% to 75%, a fixed income allocation of 25% to 100%, a cash allocation of up to 25% and other investments of up to 20%. Asset allocations are based on the underlying liability structure. All retirement asset allocations are reviewed periodically to ensure the allocation meets the needs of the liability structure.
Our 2019 expected blended long-term rate of return on plan assets of 6.0% was determined based on the nature of the plans’ investments, our current asset allocation and projected long-term rates of return from pension investment consultants.
Estimated Future Retirement Benefit Payments
The following retirement benefit payments are expected to be paid:
| | | | | | | | | | | | (In millions) | | Pension Benefits | | | Postretirement Benefits | | 2019 | | $ | 39.4 | | | $ | 0.1 | | 2020 | | | 41.0 | | | | 0.1 | | 2021 | | | 42.1 | | | | 0.1 | | 2022 | | | 43.4 | | | | 0.1 | | 2023 | | | 44.4 | | | | 0.1 | | Years 2024-2028 | | | 234.7 | | | | 0.3 | |
Estimated future retirement benefit payments above are estimates and could change significantly based on differences between actuarial assumptions and actual events and decisions related to lump sum distribution options that are available to participants in certain plans.
Defined Contribution Plan Contributions
We sponsor a number of defined contribution plans. Contributions are determined under various formulas. Cash contributions by the Company related to these plans amounted to $29.5 million, $29.1 million and $22.7 million in 2018, 2017 and 2016, respectively.
16. Income Taxes
The components of income from continuing operations before income taxes and noncontrolling interests were as follows:
| | | | | | | | | | | | | | | | | (In millions) | | 2018 | | | 2017 | | | 2016 | | Domestic operations | | $ | 456.7 | | | $ | 554.7 | | | $ | 513.8 | | Foreign operations | | | 80.3 | | | | 80.1 | | | | 68.3 | | Income before income taxes and noncontrolling interests | | $ | 537.0 | | | $ | 634.8 | | | $ | 582.1 | |
A reconciliation of income taxes at the 35% federal statutory income tax rate for 2016 and 2017 and 21% for 2018 to the income tax provision reported was as follows:
| | | | | | | | | | | | | | | | | (In millions) | | 2018 | | | 2017 | | | 2016 | | Income tax expense computed at federal statutory income tax rate | | $ | 112.8 | | | $ | 222.2 | | | $ | 203.7 | | Other income taxes, net of federal tax benefit | | | 13.7 | | | | 13.4 | | | | 12.6 | | Foreign taxes at a different rate than U.S. federal statutory income tax rate | | | 3.5 | | | | (8.3 | ) | | | (7.6 | ) | Tax benefit on income attributable to domestic production activities | | | 0.0 | | | | (10.9 | ) | | | (13.0 | ) | Net adjustments for uncertain tax positions | | | 4.1 | | | | 11.6 | | | | 13.2 | | Share-based compensation (ASU2016-09) | | | (2.1 | ) | | | (23.9 | ) | | | (27.8 | ) | Tax Act impact | | | 5.5 | | | | (25.7 | ) | | | — | | Deferred tax impact of state tax rate changes | | | 3.5 | | | | (2.0 | ) | | | (1.1 | ) | Valuation allowance increase (decrease) | | | 3.0 | | | | (5.2 | ) | | | (2.1 | ) | Miscellaneous other, net | | | 3.0 | | | | (11.7 | ) | | | (8.2 | ) | Income tax expense as reported | | $ | 147.0 | | | $ | 159.5 | | | $ | 169.7 | | Effective income tax rate | | | 27.4 | % | | | 25.1 | % | | | 29.2 | % |
The 2018 effective income tax rate was favorably impacted by the corporate tax rate reduction from 35% to 21% under The Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The 2018 effective income tax rate was unfavorably impacted by the repeal of the Domestic Production Activity (Internal Revenue Code Section 199) Deduction, a valuation allowance increase, an adjustment to the provisional net benefit recorded in 2017 under the Tax Act, state and local taxes, unfavorable tax rates in foreign jurisdictions, and increases in uncertain tax positions.
The 2017 effective income tax rate was favorably impacted by the Tax Act. The effective income tax rates for 2017 and 2016 were favorably impacted by a tax benefit related to share-based compensation, the tax benefit attributable to the Domestic Production Activity (Internal Revenue Code Section 199) Deduction and favorable tax rates in foreign jurisdictions, partially offset by state and local taxes and increases to uncertain tax positions.
The Tax Act made significant changes to the U.S. Internal Revenue Code including a reduction in the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, generally providing for an exemption from federal income tax for dividends received from foreign subsidiaries, and imposing aone-time transition tax on the deemed repatriation of cumulative foreign earnings and profits as of December 31, 2017. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued,
which deals with the application of U.S. GAAP to situations where a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, we calculated our best estimate of the impact of the Tax Act on our 2017 effective income tax rate. As a result, the Company recorded a provisional net benefit of $25.7 million in the fourth quarter of 2017, the period in which the Tax Act was enacted. This provisional amount included an estimated reduction in the Company’s net deferred tax liabilities of $62.4 million resulting from the decrease in the federal income tax rate; an estimated deemed repatriation tax liability of $28.5 million; and an estimated net increase to our provision for taxes on foreign earnings not considered permanently reinvested of $8.2 million. In the quarter ended December 31, 2018, the Company completed its analysis in conjunction with the SAB 118 measurement period ending on December 22, 2018. The total tax provision impact for the year ended December 31, 2018 was an unfavorable adjustment of $5.5 million related primarily to certain deferred tax assets and liabilities.
The Tax Act included a provision for Global IntangibleLow-Taxed Income (GILTI). The Company elected an accounting policy to treat GILTI as a period cost when incurred. The GILTI provision is effective for taxable years of foreign corporations beginning after December 31, 2017.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (“UTBs”) was as follows:
| | | | | | | | | | | | | | | | | (In millions) | | 2018 | | | 2017 | | | 2016 | | Unrecognized tax benefits — beginning of year | | $ | 87.5 | | | $ | 58.2 | | | $ | 38.2 | | Gross additions — current year tax positions | | | 9.1 | | | | 31.0 | | | | 10.7 | | Gross additions — prior year tax positions | | | 9.3 | | | | 10.9 | | | | 10.4 | | Gross additions (reductions) — purchase accounting adjustments | | | 1.0 | | | | 4.0 | | | | 9.7 | | Gross reductions — prior year tax positions | | | (14.5 | ) | | | (9.4 | ) | | | (9.8 | ) | Gross reductions — settlements with taxing authorities | | | (8.9 | ) | | | (7.2 | ) | | | (1.0 | ) | Unrecognized tax benefits — end of year | | $ | 83.5 | | | $ | 87.5 | | | $ | 58.2 | |
The amount of UTBs that, if recognized as of December 31, 2018, would affect the Company’s effective tax rate was $64.3 million. It is reasonably possible that, within the next twelve months, total UTBs may decrease in the range of $1.4 million to $3.5 million primarily as a result of the conclusion of U.S. federal, state and foreign income tax proceedings.
We classify interest and penalty accruals related to UTBs as income tax expense. In 2018, we recognized an interest and penalty expense of approximately $2.2 million. In 2017, we recognized an interest and penalty expense of approximately $2.0 million. In 2016, we recognized an interest and penalty expense of approximately $1.1 million. At December 31, 2018 and 2017, we had accruals for the payment of interest and penalties of $14.4 million and $11.8 million, respectively.
We file income tax returns in the U.S., various state and foreign jurisdictions. The Company is open and subject to examination for tax years 2016 and subsequent by the U.S. Internal Revenue Service (“IRS”). In addition to the U.S., we have tax years that remain open and subject to examination by tax authorities in the following major taxing jurisdictions: Canada for years after 2013, Mexico for years after 2012 and China for years after 2014.
Income taxes in 2018, 2017 and 2016 were as follows:
| | | | | | | | | | | | | | | | | (In millions) | | 2018 | | | 2017 | | | 2016 | | Current | | | | | | | | | | | | | Federal | | $ | 93.5 | | | $ | 133.1 | | | $ | 150.4 | | Foreign | | | 26.4 | | | | 22.4 | | | | 22.3 | | State and other | | | 24.1 | | | | 22.8 | | | | 22.9 | | Deferred | | | | | | | | | | | | | Federal, state and other | | | 4.8 | | | | (27.2 | ) | | | (23.9 | ) | Foreign | | | (1.8 | ) | | | 8.4 | | | | (2.0 | ) | Total income tax expense | | $ | 147.0 | | | $ | 159.5 | | | $ | 169.7 | |
The components of net deferred tax assets (liabilities) as of December 31, 2018 and 2017 were as follows:
| | | | | | | | | | | | (In millions) | | 2018 | | | 2017 | | Deferred tax assets: | | | | | | | | | Compensation and benefits | | $ | 31.5 | | | $ | 22.1 | | Defined benefit plans | | | 39.3 | | | | 43.7 | | Capitalized inventories | | | 16.1 | | | | 11.1 | | Accounts receivable | | | 5.4 | | | | 7.8 | | Other accrued expenses | | | 55.2 | | | | 45.6 | | Net operating loss and other tax carryforwards | | | 21.2 | | | | 25.6 | | Valuation allowance | | | (13.3 | ) | | | (11.0 | ) | Miscellaneous | | | 2.5 | | | | 3.7 | | Total deferred tax assets | | | 157.9 | | | | 148.6 | | Deferred tax liabilities: | | | | | | | | | LIFO inventories | | | 0.0 | | | | (4.2 | ) | Fixed assets | | | (60.2 | ) | | | (44.5 | ) | Intangible assets | | | (224.6 | ) | | | (232.0 | ) | Investment in partnership | | | (3.8 | ) | | | (9.2 | ) | Miscellaneous | | | (20.0 | ) | | | (16.1 | ) | Total deferred tax liabilities | | | (308.6 | ) | | | (306.0 | ) | Net deferred tax liability | | $ | (150.7 | ) | | $ | (157.4 | ) |
In accordance with ASC requirements for Income Taxes, deferred taxes were classified in the consolidated balance sheets as of December 31, 2018 and 2017 as follows:
| | | | | | | | | | | | (In millions) | | 2018 | | | 2017 | | Other assets | | | 11.9 | | | | 9.4 | | Deferred income taxes | | | (162.6 | ) | | | (166.8 | ) | Net deferred tax liability | | $ | (150.7 | ) | | $ | (157.4 | ) |
As of December 31, 2018 and 2017, the Company had deferred tax assets relating to net operating losses, capital losses, and other tax carryforwards of $21.2 million and $25.6 million, respectively, of which approximately $7.1 million will expire between 2019 and 2023, and the remainder of which will expire in 2024 and thereafter.
The Company has provided a valuation allowance to reduce the carrying value of certain of these deferred tax assets, as management has concluded that, based on the available evidence, it is more likely than not that the deferred tax assets will not be fully realized.
Under the Tax Act, the accumulated foreign earnings and profits of the Company’s foreign subsidiaries as of December 31, 2017 are subject to a deemed repatriation tax and should not be subject to additional
U.S. federal income tax upon an actual repatriation of those earnings. As a result, the Company has recorded an estimated tax liability of $9.3 million for foreign and state taxes that would be payable on a distribution of those earnings and profits.
We have not provided for deferred taxes on the remaining book over tax outside basis differences of our foreign subsidiaries. The outside basis differences of foreign subsidiaries considered indefinitely reinvested totaled approximately $128.1million at December 31, 2018. The associated deferred tax liability on this basis difference is less than $5 million.
17. Restructuring and Other Charges
Pre-tax restructuring and other charges for the year ended December 31, 2018 were as follows:
| | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2018 | | | | | | | Other Charges(a) | | | | | (In millions) | | Restructuring Charges | | | Cost of Products Sold | | | SG&A(b) | | | Total Charges | | Cabinets | | $ | 16.8 | | | $ | 9.1 | | | $ | 0.3 | | | $ | 26.2 | | Plumbing | | | 2.6 | | | | 0.6 | | | | 0.1 | | | | 3.3 | | Doors & Security | | | 4.7 | | | | 2.4 | | | | (1.2 | ) | | | 5.9 | | Total | | $ | 24.1 | | | $ | 12.1 | | | $ | (0.8 | ) | | $ | 35.4 | |
(a) | “Other Charges” represent charges or gains directly related to restructuring initiatives that cannot be reported as restructuring under GAAP. Such charges or gains may include losses on disposal of inventories, trade receivables allowances from exiting product lines,write-off of displays from exiting a customer relationship, accelerated depreciation resulting from the closure of facilities, and gains and losses on the sale of previously closed facilities.
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(b) | Selling, general and administrative expenses
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Restructuring and other charges in 2018 are largely related to our initiatives to consolidate and rationalize our manufacturing footprint and discontinue certain product lines in our Cabinets segment and severance costs within all our segments.
Pre-tax restructuring and other charges for the year ended December 31, 2017 were as follows:
| | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2017 | | | | | | | Other Charges(a) | | | | | (In millions) | | Restructuring Charges | | | Cost of Products Sold | | | SG&A(b) | | | Total Charges | | Cabinets | | $ | 1.4 | | | $ | 1.6 | | | $ | 2.2 | | | $ | 5.2 | | Plumbing | | | 2.8 | | | | — | | | | — | | | | 2.8 | | Doors & Security | | | 4.1 | | | | 5.6 | | | | 0.8 | | | | 10.5 | | Total | | $ | 8.3 | | | $ | 7.2 | | | $ | 3.0 | | | $ | 18.5 | |
(a) | “Other Charges” represent charges or gains directly related to restructuring initiatives that cannot be reported as restructuring under GAAP. Such charges or gains may include losses on disposal of inventories, trade receivables allowances from exiting product lines, accelerated depreciation resulting from the closure of facilities, and gains and losses on the sale of previously closed facilities.
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(b) | Selling, general and administrative expenses
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Restructuring and other charges in 2017, primarily related to losses on disposal of inventory associated with exiting a product line in our Doors & Security segment and exiting a customer relationship in our Cabinets segment, as well as severance costs within our Doors & Security, Plumbing and Cabinets segments.
Pre-tax restructuring and other charges for the year ended December 31, 2016 were as follows:
| | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2016 | | | | | | | Other Charges(a) | | | | | (In millions) | | Restructuring Charges | | | Cost of Products Sold | | | SG&A(b) | | | Total Charges | | Cabinets | | $ | 1.8 | | | $ | — | | | $ | — | | | $ | 1.8 | | Plumbing | | | 1.6 | | | | 0.3 | | | | 0.2 | | | | 2.1 | | Doors & Security | | | 10.5 | | | | 4.2 | | | | 0.7 | | | | 15.4 | | Total | | $ | 13.9 | | | $ | 4.5 | | | $ | 0.9 | | | $ | 19.3 | |
(a) | “Other Charges” represent charges or gains directly related to restructuring initiatives that cannot be reported as restructuring under GAAP. Such charges or gains may include losses on disposal of inventories, trade receivables allowances from exiting product lines, accelerated depreciation resulting from the closure of facilities, and gains and losses on the sale of previously closed facilities.
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(b) | Selling, general and administrative expenses
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Restructuring and other charges in 2016 primarily related to severance costs and charges associated with the relocation of a manufacturing facility within our Doors & Security segment.
Reconciliation of Restructuring Liability
| | | | | | | | | | | | | | | | | | | | | | | | | | | (In millions) | | Balance at 12/31/17 | | | 2018 Provision | | | Cash Expenditures (a) | | | Non-Cash Write-offs (b) | | | Balance at 12/31/18 | | Workforce reduction costs | | $ | 5.0 | | | $ | 21.4 | | | $ | (16.3 | ) | | $ | (0.2 | ) | | $ | 9.9 | | Other | | | 0.8 | | | | 2.7 | | | | (2.4 | ) | | | (0.5 | ) | | | 0.6 | | | | $ | 5.8 | | | $ | 24.1 | | | $ | (18.7 | ) | | $ | (0.7 | ) | | $ | 10.5 | |
(a) | Cash expenditures primarily related to severance charges.
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(b) | Non-cash write-offs include long-lived asset impairment charges attributable to restructuring actions.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | (In millions) | | Balance at 12/31/16 | | | 2017 Provision | | | Cash Expenditures (a) | | | Non-Cash Write-offs (b) | | | Balance at 12/31/17 | | Workforce reduction costs | | $ | 2.4 | | | $ | 6.7 | | | $ | (3.9 | ) | | $ | (0.2 | ) | | $ | 5.0 | | Other | | | 0.6 | | | | 1.6 | | | | (1.3 | ) | | | (0.1 | ) | | | 0.8 | | | | $ | 3.0 | | | $ | 8.3 | | | $ | (5.2 | ) | | $ | (0.3 | ) | | $ | 5.8 | |
(a) | Cash expenditures primarily related to severance charges.
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(b) | Non-cash write-offs include long-lived asset impairment charges attributable to restructuring actions.
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18. Commitments
Purchase Obligations
Purchase obligations of the Company as of December 31, 2018 were $369.9 million, of which $342.4 million is due within one year. Purchase obligations include contracts for raw materials and finished goods purchases, selling and administrative services, and capital expenditures.
Lease Commitments
Future minimum rental payments undernon-cancelable operating leases as of December 31, 2018 were as follows:
| | | | | | | (In millions) | | | | 2019 | | $ | 37.8 | | 2020 | | | 29.6 | | 2021 | | | 23.4 | | 2022 | | | 18.9 | | 2023 | | | 13.8 | | Remainder | | | 58.8 | | Total minimum rental payments | | $ | 182.3 | |
Total rental expense for all operating leases (reduced by immaterial amounts from subleases) amounted to $48.4 million, $42.1 million and $43.5 million in 2018, 2017 and 2016, respectively.
Product Warranties
We generally record warranty expense related to contractual warranty terms at the time of sale. We may also provide customer concessions for claims made outside of the contractual warranty terms and those expenses are recorded in the period in which the concession is made. We offer our customers various warranty terms based on the type of product that is sold. Warranty expense is determined based on historic claim experience and the nature of the product category. The following table summarizes activity related to our product warranty liability for the years ended December 31, 2018, 2017 and 2016.
| | | | | | | | | | | | | | | | | (In millions) | | 2018 | | | 2017 | | | 2016 | | Reserve balance at the beginning of the year | | $ | 17.2 | | | $ | 16.2 | | | $ | 16.0 | | Provision for warranties issued | | | 25.1 | | | | 25.1 | | | | 25.8 | | Settlements made (in cash or in kind) | | | (25.7 | ) | | | (24.3 | ) | | | (25.5 | ) | Acquisition | | | 8.9 | | | | — | | | | 0.3 | | Foreign currency | | | (0.6 | ) | | | 0.2 | | | | (0.4 | ) | Reserve balance at end of year | | $ | 24.9 | | | $ | 17.2 | | | $ | 16.2 | |
19. Information on Business Segments
We report our operating segments based on how operating results are regularly reviewed by our chief operating decision maker for making decisions about resource allocations to segments and assessing performance. The Company’s operating segments and types of products from which each segment derives revenues are described below.
The Cabinets segment includes custom, semi-custom and stock cabinetry for the kitchen, bath and other parts of the home under brand names including Aristokraft, Diamond,Mid-Continent, Kitchen Craft, Schrock, Homecrest, Omega, Kemper, StarMark and Ultracraft. In addition, cabinets are distributed under the Thomasville Cabinetry brand names. The Plumbing segment manufactures or assembles and sells faucets, bath furnishings, accessories and kitchen sinks and waste disposals predominantly under the Moen, ROHL, Riobel, Perrin & Rowe, Victoria + Albert and Shaws brands. The Doors & Security segment includes residential fiberglass and steel entry door systems under theTherma-Tru brand name, urethane millwork product lines under the Fypon brand name, locks, safety and security devices and electronic security products under the Master Lock and American Lock brand names, fire resistant safes, security containers and commercial cabinets under the SentrySafe brand name and composite decking, railing and fencing under the Fiberon brand name. Corporate expenses consist of headquarters administrative expenses and defined benefit plans costs, primarily interest costs and expected return on plan assets, as
well as actuarial gains and losses arising from the periodic remeasurement of our liabilities. Corporate assets consist primarily of cash.
The Company’s subsidiaries operate principally in the United States, Canada, Mexico, China and Western Europe.
| | | | | | | | | | | | | | | | | (In millions) | | 2018 | | | 2017 | | | 2016 | | Net sales: | | | | | | | | | | | | | Cabinets | | $ | 2,418.6 | | | $ | 2,467.1 | | | $ | 2,397.8 | | Plumbing | | | 1,883.3 | | | | 1,720.8 | | | | 1,534.4 | | Doors & Security | | | 1,183.2 | | | | 1,095.4 | | | | 1,052.7 | | Net sales | | $ | 5,485.1 | | | $ | 5,283.3 | | | $ | 4,984.9 | |
Net sales to two of the Company’s customers, The Home Depot, Inc. (“The Home Depot”) and Lowe’s Companies, Inc. (“Lowe’s”) each accounted for greater than 10% of the Company’s net sales in 2018, 2017 and 2016. All segments sell to both The Home Depot and Lowe’s. Net sales to The Home Depot were 13%, 13% and 13% of net sales in 2018, 2017 and 2016, respectively. Net sales to Lowe’s were 14%, 14% and 14% of net sales in 2018, 2017 and 2016, respectively.
| | | | | | | | | | | | | | | | | (In millions) | | 2018 | | | 2017 | | | 2016 | | | | | | Operating income: | | | | | | | | | | | | | Cabinets | | $ | 143.5 | | | $ | 267.2 | | | $ | 257.8 | | Plumbing(b) | | | 375.3 | | | | 358.5 | | | | 314.9 | | Doors & Security(b) | | | 155.6 | | | | 146.9 | | | | 126.4 | | Less: Corporate expenses(a) (b) | | | (79.2 | ) | | | (90.1 | ) | | | (80.5 | ) | Operating income | | $ | 595.2 | | | $ | 682.5 | | | $ | 618.6 | | (a) Below is a table detailing Corporate expenses: | | | | | | | | | | | | | General and administrative expense | | $ | (79.2 | ) | | $ | (85.0 | ) | | $ | (80.5 | ) | Long-lived asset impairment | | | — | | | | (5.1 | ) | | | — | | Total Corporate expenses | | $ | (79.2 | ) | | $ | (90.1 | ) | | $ | (80.5 | ) |
(b) | We revised our previously reported results in 2017 and 2016 for ASU2017-07, Presentation of Net Periodic and Postretirement Costs and to reflect our new Doors & Security segment resulting from the reorganization we announced in July 2018.
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| | | | | | | | | | | | | | | | | (In millions) | | 2018 | | | 2017 | | | 2016 | | Total assets: | | | | | | | | | | | | | Cabinets | | $ | 2,318.7 | | | $ | 2,416.3 | | | $ | 2,349.4 | | Plumbing | | | 1,943.1 | | | | 1,854.1 | | | | 1,626.8 | | Doors & Security | | | 1,526.0 | | | | 1,032.2 | | | | 995.1 | | Corporate | | | 176.8 | | | | 208.8 | | | | 157.2 | | Total assets | | $ | 5,964.6 | | | $ | 5,511.4 | | | $ | 5,128.5 | | | | | | Depreciation expense: | | | | | | | | | | | | | Cabinets | | $ | 50.9 | | | $ | 42.8 | | | $ | 40.1 | | Plumbing | | | 29.1 | | | | 26.9 | | | | 24.6 | | Doors & Security | | | 30.2 | | | | 25.9 | | | | 26.2 | | Corporate | | | 3.3 | | | | 3.0 | | | | 3.7 | | Depreciation expense | | $ | 113.5 | | | $ | 98.6 | | | $ | 94.6 | | | | | | Amortization of intangible assets: | | | | | | | | | | | | | Cabinets | | $ | 19.6 | | | $ | 19.7 | | | $ | 18.4 | | Plumbing | | | 10.4 | | | | 7.7 | | | | 3.6 | | Doors & Security | | | 6.1 | | | | 4.3 | | | | 6.1 | | Amortization of intangible assets | | $ | 36.1 | | | $ | 31.7 | | | $ | 28.1 | | | | | | Capital expenditures: | | | | | | | | | | | | | Cabinets | | $ | 73.8 | | | $ | 63.4 | | | $ | 61.7 | | Plumbing | | | 41.4 | | | | 43.5 | | | | 48.3 | | Doors & Security | | | 34.3 | | | | 40.1 | | | | 38.8 | | Corporate | | | 0.6 | | | | 18.0 | | | | 0.5 | | Capital expenditures, gross | | | 150.1 | | | | 165.0 | | | | 149.3 | | Less: proceeds from disposition of assets | | | (6.1 | ) | | | (0.4 | ) | | | (3.9 | ) | Capital expenditures, net | | $ | 144.0 | | | $ | 164.6 | | | $ | 145.4 | | | | | | Net sales by geographic region(a): | | | | | | | | | | | | | United States | | $ | 4,606.6 | | | $ | 4,492.2 | | | $ | 4,258.5 | | Canada | | | 433.1 | | | | 427.6 | | | | 406.4 | | China | | | 260.6 | | | | 202.3 | | | | 175.0 | | Other international | | | 184.8 | | | | 161.2 | | | | 145.0 | | Net sales | | $ | 5,485.1 | | | $ | 5,283.3 | | | $ | 4,984.9 | | | | | | Property, plant and equipment, net: | | | | | | | | | | | | | United States | | $ | 628.9 | | | $ | 562.3 | | | $ | 499.8 | | Mexico | | | 103.4 | | | | 89.0 | | | | 90.8 | | Canada | | | 46.0 | | | | 50.5 | | | | 45.5 | | China | | | 22.5 | | | | 24.8 | | | | 22.7 | | Other international | | | 12.6 | | | | 13.4 | | | | 3.7 | | Property, plant and equipment, net | | $ | 813.4 | | | $ | 740.0 | | | $ | 662.5 | |
(a) | Based on country of destination
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20. Quarterly Financial Data
Unaudited
(In millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | 1st | | | 2nd | | | 3rd | | | 4th | | | Full Year | | Net sales | | $ | 1,254.6 | | | $ | 1,429.0 | | | $ | 1,380.8 | | | $ | 1,420.7 | | | $ | 5,485.1 | | Gross profit | | | 439.6 | | | | 524.1 | | | | 493.9 | | | | 501.8 | | | | 1,959.4 | | Operating income | | | 119.4 | | | | 188.6 | | | | 147.1 | | | | 140.1 | | | | 595.2 | | Income from continuing operations, net of tax | | | 75.1 | | | | 129.7 | | | | 99.9 | | | | 85.3 | | | | 390.0 | | Income (loss) from discontinued operations, net of tax | | | (0.2 | ) | | | — | | | | — | | | | — | | | | (0.2 | ) | Net income | | | 74.9 | | | | 129.7 | | | | 99.9 | | | | 85.3 | | | | 389.8 | | Net income attributable to Fortune Brands | | | 75.0 | | | | 129.6 | | | | 99.8 | | | | 85.2 | | | | 389.6 | | Basic earnings (loss) per common share | | | | | | | | | | | | | | | | | | | | | Continuing operations | | | 0.50 | | | | 0.89 | | | | 0.70 | | | | 0.60 | | | | 2.69 | | Discontinued operations | | | — | | | | — | | | | — | | | | — | | | | — | | Net income attributable to Fortune Brands | | | 0.50 | | | | 0.89 | | | | 0.70 | | | | 0.60 | | | | 2.69 | | Diluted earnings (loss) per common share | | | | | | | | | | | | | | | | | | | | | Continuing operations | | | 0.49 | | | | 0.88 | | | | 0.69 | | | | 0.60 | | | | 2.66 | | Discontinued operations | | | — | | | | — | | | | — | | | | — | | | | — | | Net income attributable to Fortune Brands | | | 0.49 | | | | 0.88 | | | | 0.69 | | | | 0.60 | | | | 2.66 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | 1st | | | 2nd | | | 3rd | | | 4th | | | Full Year | | Net sales | | $ | 1,186.8 | | | $ | 1,365.4 | | | $ | 1,348.6 | | | $ | 1,382.5 | | | $ | 5,283.3 | | Gross profit(a) | | | 414.1 | | | | 513.3 | | | | 505.3 | | | | 492.3 | | | | 1,925.0 | | Operating income(a) | | | 111.0 | | | | 209.2 | | | | 199.5 | | | | 162.8 | | | | 682.5 | | Income from continuing operations, net of tax | | | 77.4 | | | | 140.3 | | | | 129.6 | | | | 128.0 | | | | 475.3 | | Income (loss) from discontinued operations, net of tax | | | — | | | | (2.6 | ) | | | — | | | | — | | | | (2.6 | ) | Net income | | | 77.4 | | | | 137.7 | | | | 129.6 | | | | 128.0 | | | | 472.7 | | Net income attributable to Fortune Brands | | | 77.4 | | | | 137.7 | | | | 129.5 | | | | 128.0 | | | | 472.6 | | Basic earnings (loss) per common share | | | | | | | | | | | | | | | | | | | | | Continuing operations | | | 0.50 | | | | 0.91 | | | | 0.84 | | | | 0.84 | | | | 3.10 | | Discontinued operations | | | — | | | | (0.02 | ) | | | — | | | | — | | | | (0.02 | ) | Net income attributable to Fortune Brands | | | 0.50 | | | | 0.89 | | | | 0.84 | | | | 0.84 | | | | 3.08 | | Diluted earnings (loss) per common share | | | | | | | | | | | | | | | | | | | | | Continuing operations | | | 0.50 | | | | 0.90 | | | | 0.83 | | | | 0.83 | | | | 3.05 | | Discontinued operations | | | — | | | | (0.02 | ) | | | — | | | | — | | | | (0.02 | ) | Net income attributable to Fortune Brands | | | 0.50 | | | | 0.88 | | | | 0.83 | | | | 0.83 | | | | 3.03 | |
(a) | Amounts revised to reflect adoption of ASU2017-07 “Presentation of Net Periodic Pension and Postretirement Costs.”
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In 2018, we recordedpre-tax defined benefit plan actuarial loss of $3.8 million—$0.3 million of actuarial loss ($0.2 million after tax) in the third quarter and $3.5 million of actuarial losses ($2.8 million after tax) in the fourth quarter.
In 2017, we recordedpre-tax defined benefit plan actuarial gains of $0.5 million—$1.3 million of actuarial gains ($0.9 million after tax) in the third quarter and ($0.8) million of actuarial losses (($0.5) million after tax) in the fourth quarter.
21. Earnings Per Share
The computations of earnings (loss) per common share were as follows:
| | | | | | | | | | | | | | | | | (In millions, except per share data) | | 2018 | | | 2017 | | | 2016 | | Income from continuing operations, net of tax | | $ | 390.0 | | | $ | 475.3 | | | $ | 412.4 | | Less: Noncontrolling interests | | | 0.2 | | | | 0.1 | | | | — | | Income from continuing operations for EPS | | | 389.8 | | | | 475.2 | | | | 412.4 | | Income (loss) from discontinued operations | | | (0.2 | ) | | | (2.6 | ) | | | 0.8 | | Net income attributable to Fortune Brands | | $ | 389.6 | | | $ | 472.6 | | | $ | 413.2 | | Earnings (loss) per common share | | | | | | | | | | | | | Basic | | | | | | | | | | | | | Continuing operations | | $ | 2.69 | | | $ | 3.10 | | | $ | 2.67 | | Discontinued operations | | | — | | | | (0.02 | ) | | | 0.01 | | Net income attributable to Fortune Brands common stockholders | | $ | 2.69 | | | $ | 3.08 | | | $ | 2.68 | | Diluted | | | | | | | | | | | | | Continuing operations | | $ | 2.66 | | | $ | 3.05 | | | $ | 2.61 | | Discontinued operations | | | — | | | | (0.02 | ) | | | 0.01 | | Net income attributable to Fortune Brands common stockholders | | $ | 2.66 | | | $ | 3.03 | | | $ | 2.62 | | Basic average shares outstanding | | | 144.6 | | | | 153.2 | | | | 154.3 | | Stock-based awards | | | 1.8 | | | | 2.6 | | | | 3.5 | | Diluted average shares outstanding | | | 146.4 | | | | 155.8 | | | | 157.8 | | Antidilutive stock-based awards excluded from weighted-average number of shares outstanding for diluted earnings per share | | | 1.5 | | | | 0.5 | | | | 0.5 | |
22. Other Income, Net
The components of other income, net for the years ended December 31, 2018, 2017 and 2016 were as follows:
| | | | | | | | | | | | | | | | | (In millions) | | 2018 | | | 2017 | | | 2016 | | Defined benefit plan(a) | | $ | (6.5 | ) | | $ | (9.6 | ) | | $ | (14.2 | ) | Asset impairment charge | | $ | — | | | $ | 7.0 | | | $ | — | | Foreign currency (gains)/losses | | $ | (2.0 | ) | | $ | 0.9 | | | $ | 2.8 | | Ineffective portion of cash flow hedge | | $ | (3.8 | ) | | | — | | | | — | | Other items, net | | $ | (4.0 | ) | | | — | | | | (1.2 | ) | Total other income, net | | $ | (16.3 | ) | | $ | (1.7 | ) | | $ | (12.6 | ) |
(a) | Amounts revised to reflect adoption of ASU2017-07 “Presentation of Net Periodic Pension and Postretirement Costs.”
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In the year ended December 31, 2018, the ineffective portion of cash flow hedges recognized in other items, net, was $3.8 million and insignificant in the years ended December 31, 2017 and 2016.
During 2017, we recorded an impairment charge of $7.0 million pertaining to a cost method investment in a development stage home products company due to an other-than-temporary decline in its fair value. As a result of the impairment, the carrying value of the investment was reduced to zero and the Company is not subject to further impairment or funding obligations with regard to this investment.
23. Contingencies
Litigation
The Company is a defendant in lawsuits that are ordinary routine litigation matters incidental to its businesses. It is not possible to predict the outcome of the pending actions, and, as with any litigation, it is
possible that these actions could be decided unfavorably to the Company. The Company believes that there are meritorious defenses to these actions and that these actions will not have a material adverse effect upon the Company’s 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. Several of our subsidiaries have been designated as potentially responsible parties (“PRPs”) under “Superfund” or similar state laws. As of December 31, 2018, ten such instances have not been dismissed, settled or otherwise resolved. In 2018, none of our subsidiaries were identified as a PRP in a new instance and no instances were settled, dismissed or otherwise resolved. In most instances where our subsidiaries are named as a PRP, we enter into cost-sharing arrangements with other PRPs. We give notice to insurance carriers of potential PRP liability, but very rarely, if ever, receive reimbursement from insurance for PRP costs. We believe that the cost of complying with the present environmental protection laws, before considering estimated recoveries either from other PRPs or insurance, will not have a material adverse effect on our results of operations, cash flows or financial condition. At December 31, 2018 and 2017, we had accruals of $0.6 million and $0.7 million, respectively, relating to environmental compliance and cleanup including, but not limited to, the above mentioned Superfund sites.
Report of Independent Registered Public Accounting Firm To theBoardthe Board of Directors and ShareholdersStockholders of Fortune Brands Home & Security, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Fortune Brands Home & Security, Inc. and its subsidiaries (the “Company”) as of December 31, 20182020 and 2017,2019, and the related consolidated statements of income, of comprehensive income, of equity and of cash flowsforflows for each of the three years in the period ended December 31, 2018,2020, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 20182020 appearing under Item 15(a)(2)after the signature page (collectively referred to as the “consolidated financial statements”). We also have audited the Company’sCompany's internal control over financial reporting as of December 31, 20182020, based on criteria established inInternal Control —- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the 29
Table of Contents three years in the period ended December 31, 2018in2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2020, based on criteria established inInternal Control —- Integrated Framework (2013) issued by the COSO. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019. Basis for Opinions The Company’sCompany's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control OverOver Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’sCompany's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidatedfinancialconsolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancialconsolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Fiber Composites LLCLarson Manufacturing (“Fiberon”Larson”) from its assessment of internal control over financial reporting as of December 31, 20182020 because it was acquired by the Company in a purchase business combination during 2018.2020. We have also excluded FiberonLarson from our audit of internal control over financial reporting. FiberonLarson is a wholly-owned subsidiary whose total assets and total revenuessales excluded from management’s assessment and our audit of internal control over financial reporting represent 2%2.3% and 0.7%0.0%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.2020. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or 30
Table of Contents disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Indefinite-Lived Intangible Asset Impairment Tests for Tradenames in the Cabinets Segment Where Fair Value Exceeds Carrying Value by Less Than 30% As described in Notes 2 and 5 to the consolidated financial statements, the Company’s consolidated indefinite-lived tradenames balance was $711.0million as of December 31, 2020. The carrying value of the four tradenames in the Cabinets segment where fair value exceeds carrying value by less than 30% is $180.6 million as of December 31, 2020. Management reviews indefinite-lived tradename intangible assets for impairment annually in the fourth quarter and whenever market or business events indicate there may be a potential impairment of that intangible. Impairment losses are recorded to the extent that the carrying value of the indefinite-lived intangible asset exceeds its fair value. In the first quarter of 2020, the Company recognized an impairment charge of $9.5 million related to an indefinite-lived tradename in the Cabinets segment. This charge was primarily the result of lower expected sales of custom cabinetry products related to the impact of COVID-19. Fair value is measured by management using the relief-from-royalty approach. Significant assumptions inherent in estimating fair values include forecasted revenue growth rates, assumed royalty rates and market-participant discount rates. The principal considerations for our determination that performing procedures relating to the indefinite-lived intangible asset impairment tests for tradenames in the Cabinets segment where fair value exceeds carrying value by less than 30% is a critical audit matter are (i) the significant judgment by management when developing the fair value measurement of the tradenames; (ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the forecasted revenue growth rates, the assumed royalty rates, and the market-participant discount rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s indefinite-lived intangible asset impairment tests, including controls over the valuation of the Company’s indefinite-lived tradenames. These procedures also included, among others (i) testing management’s process for developing the fair value measurements of tradenames in the Cabinets segment where fair value exceeds carrying value by less than 30%; (ii) evaluating the appropriateness of the relief-from-royalty approach; (iii) testing the completeness and accuracy of underlying data used in the approach; and (iv) evaluating the reasonableness of significant assumptions used by management related to the forecasted revenue growth rates, the assumed royalty rates, and the market-participant discount rates. Evaluating management’s assumptions related to the forecasted revenue growth rates and assumed royalty rates involved evaluating whether the assumptions used by management were reasonable considering, as applicable, (i) the current and past performance of the business associated with the tradenames; (ii) the consistency with external market and industry data; and (iii) whether the assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of (i) the appropriateness of the relief-from-royalty approach and (ii) the reasonableness of the significant assumptions related to the assumed royalty rates and market-participant discount rates. Valuation of Customer Relationships and Tradename Related to the Larson Acquisition As described in Notes 2 and 4 to the consolidated financial statements, the Company acquired Larson Manufacturing in December 2020 for a total purchase price of approximately $715.2 million, net of cash acquired, which resulted in a customer relationships asset of $168.0 million and an indefinite-lived tradename of $111.0 million being recorded. Management uses the multi-period excess earnings method to determine the fair value of customer relationships and the relief-from-royalty approach to determine the fair value of the tradename. Management applied significant judgment in determining the estimates and assumptions used to determine the fair value of identifiable intangible assets, including forecasted revenue growth rates, EBITDA margins, percentage of revenue attributable to the tradename, contributory asset charges, customer attrition rate, market-participant discount rates and the assumed royalty rates. The principal considerations for our determination that performing procedures over the valuation of the customer relationships and tradename related to the Larson acquisition is a critical audit matter are (i) the significant judgment by management when developing the fair value measurements of the customer relationships and tradename; (ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the forecasted revenue growth rates, EBITDA margins, percentage of revenue attributable to the tradename, contributory asset charges, customer attrition rate, market-participant discount rates and the assumed royalty rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. 31
Table of Contents Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the customer relationships and tradename. These procedures also included, among others (i) reading the purchase agreement; (ii) testing management’s process for developing the fair value measurements of the customer relationships and tradename; (iii) evaluating the appropriateness of the multi-period excess earnings method and relief-from-royalty approach; (iv) testing the completeness and accuracy of underlying data used in these valuation techniques; and (v) evaluating the reasonableness of the significant assumptions used by management related to the forecasted revenue growth rates, EBITDA margins, percentage of revenue attributable to the tradename, contributory asset charges, customer attrition rate, market-participant discount rates and the assumed royalty rate. Evaluating management’s assumptions related to the forecasted revenue growth rates, EBITDA margins, percentage of revenue attributable to the tradename, contributory asset charges, customer attrition rate, and the assumed royalty rate involved considering, as applicable, (i) the current and past performance of Larson; (ii) the consistency with external market and industry data; and (iii) whether the assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of (i) the appropriateness of the multi-period excess earnings method and relief-from-royalty approach and (ii) the reasonableness of the significant assumptions related to the contributory asset charges, customer attrition rate, market-participant discount rates and the assumed royalty rate. /s/ PricewaterhouseCoopers LLP Chicago, ILIllinois February 25, 201924, 2021 We have served as the Company’s auditor since 2011. 32
Table of Contents Item 9. | | Consolidated Statements of Income | Changes inFortune Brands Home & Security, Inc. and Disagreements With Accountants on Accounting and Financial Disclosure.Subsidiaries
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| | | For years ended December 31 | | (In millions, except per share amounts) | | | 2020 | | | | 2019 | | | 2018 | | NET SALES | | | $ | 6,090.3 | | | | $ | 5,764.6 | | | $ | 5,485.1 | | Cost of products sold | | | | 3,925.9 | | | | | 3,712.2 | | | | 3,525.7 | | Selling, general and administrative expenses | | | | 1,282.6 | | | | | 1,256.3 | | | | 1,241.4 | | Amortization of intangible assets | | | | 42.0 | | | | | 41.4 | | | | 36.1 | | Asset impairment charges | | | | 22.5 | | | | | 41.5 | | | | 62.6 | | Restructuring charges | | | | 15.9 | | | | | 14.7 | | | | 24.1 | | OPERATING INCOME | | | | 801.4 | | | | | 698.5 | | | | 595.2 | | Interest expense | | | | 83.9 | | | | | 94.2 | | | | 74.5 | | Other (income) expense, net | | | | (13.3 | ) | | | | 29.0 | | | | (16.3 | ) | Income from continuing operations before income taxes | | | | 730.8 | | | | | 575.3 | | | | 537.0 | | Income taxes | | | | 168.8 | | | | | 144.0 | | | | 147.0 | | Income after tax | | | | 562.0 | | | | | 431.3 | | | | 390.0 | | Equity in losses of affiliate | | | | 7.6 | | | | | — | | | | — | | Income from continuing operations, net of tax | | | | 554.4 | | | | | 431.3 | | | | 390.0 | | Loss from discontinued operations, net of tax | | | | — | | | | | — | | | | (0.2 | ) | NET INCOME | | | | 554.4 | | | | | 431.3 | | | | 389.8 | | Less: Noncontrolling interests | | | | 1.3 | | | | | (0.6 | ) | | | 0.2 | | NET INCOME ATTRIBUTABLE TO FORTUNE BRANDS | | | $ | 553.1 | | | | $ | 431.9 | | | $ | 389.6 | | BASIC EARNINGS PER COMMON SHARE | | | | | | | | | | | | | | | Continuing operations | | | $ | 3.99 | | | | $ | 3.09 | | | $ | 2.69 | | Discontinuing operations | | | | — | | | | | — | | | | — | | Net income attributable to Fortune Brands common stockholders | | | $ | 3.99 | | | | $ | 3.09 | | | $ | 2.69 | | DILUTED EARNINGS PER COMMON SHARE | | | | | | | | | | | | | | | Continuing operations | | | $ | 3.94 | | | | $ | 3.06 | | | $ | 2.66 | | Discontinuing operations | | | | — | | | | | — | | | | — | | Net income attributable to Fortune Brands common stockholders | | | $ | 3.94 | | | | $ | 3.06 | | | $ | 2.66 | | Basic average number of shares outstanding | | | | 138.7 | | | | | 139.9 | | | | 144.6 | | Diluted average number of shares outstanding | | | | 140.2 | | | | | 141.3 | | | | 146.4 | |
See Notes to Consolidated Financial Statements. 33
Table of Contents | | Consolidated Statements of Comprehensive Income | Fortune Brands Home & Security, Inc. and Subsidiaries |
| | | For years ended December 31 | | (In millions) | | | 2020 | | | | 2019 | | | 2018 | | NET INCOME | | | $ | 554.4 | | | | $ | 431.3 | | | $ | 389.8 | | Other comprehensive income (loss), before tax: | | | | | | | | | | | | | | | Foreign currency translation adjustments | | | | 18.7 | | | | | 13.8 | | | | (31.1 | ) | Unrealized (losses) gains on derivatives: | | | | | | | | | | | | | | | Unrealized holding (losses) gains arising during period | | | | (3.2 | ) | | | | 4.8 | | | | 10.1 | | Less: reclassification adjustment for losses (gains) included in net income | | | | 2.4 | | | | | (4.4 | ) | | | (2.1 | ) | Unrealized (losses) gains on derivatives | | | | (0.8 | ) | | | | 0.4 | | | | 8.0 | | Defined benefit plans: | | | | | | | | | | | | | | | Net actuarial gains (loss) arising during period | | | | 0.3 | | | | | (15.9 | ) | | | (4.2 | ) | Defined benefit plans | | | | 0.3 | | | | | (15.9 | ) | | | (4.2 | ) | Other comprehensive income (loss), before tax | | | | 18.2 | | | | | (1.7 | ) | | | (27.3 | ) | Income tax (expense) benefit related to items of other comprehensive income (a) | | | | (0.7 | ) | | | | 4.7 | | | | (0.5 | ) | Other comprehensive income (loss), net of tax | | | | 17.5 | | | | | 3.0 | | | | (27.8 | ) | COMPREHENSIVE INCOME | | | | 571.9 | | | | | 434.3 | | | | 362.0 | | Less: comprehensive income attributable to noncontrolling interest | | | | 1.3 | | | | | (0.6 | ) | | | 0.2 | | COMPREHENSIVE INCOME ATTRIBUTABLE TO FORTUNE BRANDS | | | $ | 570.6 | | | | $ | 434.9 | | | $ | 361.8 | |
(a) | Income tax (expense) benefit on unrealized (losses) gains on derivatives of $(0.5) million, $0.9 million and $(1.4) million and on defined benefit plans of $(0.2) million, $3.8 million and $0.9 million in 2020, 2019 and 2018, respectively. |
See Notes to Consolidated Financial Statements. 34
Table of Contents | | Consolidated Balance Sheets | Fortune Brands Home & Security, Inc. and Subsidiaries |
| | | December 31 | | (In millions) | | | 2020 | | | | 2019 | | ASSETS | | | | | | | | | | | Current assets | | | | | | | | | | | Cash and cash equivalents | | | $ | 419.1 | | | | $ | 387.9 | | Accounts receivable less allowances for discounts and credit losses | | | | 734.9 | | | | | 624.8 | | Inventories | | | | 867.2 | | | | | 718.6 | | Other current assets | | | | 187.3 | | | | | 166.9 | | TOTAL CURRENT ASSETS | | | | 2,208.5 | | | | | 1,898.2 | | Property, plant and equipment, net of accumulated depreciation | | | | 917.4 | | | | | 824.2 | | Operating lease assets | | | | 170.2 | | | | | 165.6 | | Goodwill | | | | 2,394.8 | | | | | 2,090.2 | | Other intangible assets, net of accumulated amortization | | | | 1,420.3 | | | | | 1,168.9 | | Other assets | | | | 247.5 | | | | | 144.2 | | TOTAL ASSETS | | | $ | 7,358.7 | | | | $ | 6,291.3 | | LIABILITIES AND EQUITY | | | | | | | | | | | Current liabilities | | | | | | | | | | | Current portion of long-term debt | | | | — | | | | | 399.7 | | Accounts payable | | | | 620.5 | | | | | 460.0 | | Other current liabilities | | | | 724.6 | | | | | 549.6 | | TOTAL CURRENT LIABILITIES | | | | 1,345.1 | | | | | 1,409.3 | | Long-term debt | | | | 2,572.2 | | | | | 1,784.6 | | Deferred income taxes | | | | 160.5 | | | | | 157.2 | | Accrued defined benefit plans | | | | 159.5 | | | | | 201.4 | | Operating lease liabilities | | | | 140.5 | | | | | 139.8 | | Other non-current liabilities | | | | 205.4 | | | | | 171.2 | | TOTAL LIABILITIES | | | | 4,583.2 | | | | | 3,863.5 | | Commitments (Note 17) and Contingencies (Note 22) | | | | | | | | | | | Equity | | | | | | | | | | | Common stock (a) | | | | 1.8 | | | | | 1.8 | | Paid-in capital | | | | 2,926.3 | | | | | 2,813.8 | | Accumulated other comprehensive loss | | | | (55.1 | ) | | | | (72.6 | ) | Retained earnings | | | | 2,180.2 | | | | | 1,763.0 | | Treasury stock | | | | (2,277.7 | ) | | | | (2,079.4 | ) | TOTAL FORTUNE BRANDS EQUITY | | | | 2,775.5 | | | | | 2,426.6 | | Noncontrolling interests | | | | — | | | | | 1.2 | | TOTAL EQUITY | | | | 2,775.5 | | | | | 2,427.8 | | TOTAL LIABILITIES AND EQUITY | | | $ | 7,358.7 | | | | $ | 6,291.3 | |
(a) | Common stock, par value $0.01 per share, 184.1 million shares and 181.9 million shares issued at December 31, 2020 and 2019, respectively. |
See Notes to Consolidated Financial Statements. 35
Table of Contents | | Consolidated Statements of Cash Flows | Fortune Brands Home & Security, Inc. and Subsidiaries |
| | | For years ended December 31 | | (In millions) | | | 2020 | | | | 2019 | | | 2018 | | OPERATING ACTIVITIES | | | | | | | | | | | | | | | Net income | | | $ | 554.4 | | | | $ | 431.3 | | | $ | 389.8 | | Non-cash expense (income): | | | | | | | | | | | | | | | Depreciation | | | | 121.5 | | | | | 111.3 | | | | 113.5 | | Amortization of intangibles | | | | 42.0 | | | | | 41.4 | | | | 36.1 | | Non-cash lease expense | | | | 37.4 | | | | | 35.9 | | | | — | | Stock-based compensation | | | | 47.6 | | | | | 30.5 | | | | 36.1 | | Loss (gain) on sale of property, plant and equipment | | | | 2.4 | | | | | (0.4 | ) | | | 1.2 | | Gain on equity investments | | | | (6.6 | ) | | | | — | | | | — | | Asset impairment charges | | | | 26.1 | | | | | 43.2 | | | | 62.6 | | Recognition of actuarial losses | | | | 3.2 | | | | | 34.1 | | | | 3.8 | | Deferred taxes | | | | (14.6 | ) | | | | (7.5 | ) | | | 2.8 | | Amortization of deferred financing costs | | | | 4.5 | | | | | 3.4 | | | | 2.3 | | Changes in assets and liabilities including effects subsequent to acquisitions | | | | | | | | | | | | | | | (Increase) decrease in accounts receivable | | | | (85.7 | ) | | | | (50.7 | ) | | | 9.8 | | Increase in inventories | | | | (91.8 | ) | | | | (38.3 | ) | | | (55.0 | ) | Increase in accounts payable | | | | 142.9 | | | | | 8.7 | | | | 21.0 | | Increase in other assets | | | | (41.1 | ) | | | | (10.5 | ) | | | (24.7 | ) | Increase (decrease) in accrued taxes | | | | 12.5 | | | | | (5.3 | ) | | | 9.5 | | Increase (decrease) in accrued expenses and other liabilities | | | | 71.0 | | | | | 10.1 | | | | (4.8 | ) | NET CASH PROVIDED BY OPERATING ACTIVITIES | | | | 825.7 | | | | | 637.2 | | | | 604.0 | | INVESTING ACTIVITIES | | | | | | | | | | | | | | | Capital expenditures(a) | | | | (150.5 | ) | | | | (131.8 | ) | | | (150.1 | ) | Proceeds from the disposition of assets | | | | 1.6 | | | | | 4.2 | | | | 6.1 | | Cost of acquisitions, net of cash acquired | | | | (715.2 | ) | | | | — | | | | (465.6 | ) | Cost of investments in equity securities | | | | (59.4 | ) | | | | — | | | | (28.7 | ) | Other investing activities, net | | | | — | | | | | — | | | | 4.0 | | NET CASH USED IN INVESTING ACTIVITIES | | | | (923.5 | ) | | | | (127.6 | ) | | | (634.3 | ) | FINANCING ACTIVITIES | | | | | | | | | | | | | | | (Decrease) increase in short-term debt | �� | | | — | | | | | (525.0 | ) | | | 525.0 | | Issuance of long-term debt | | | | 1,850.0 | | | | | 1,719.3 | | | | 2,191.2 | | Repayment of long-term debt | | | | (1,465.0 | ) | | | | (1,345.0 | ) | | | (1,890.0 | ) | Proceeds from the exercise of stock options | | | | 64.9 | | | | | 17.3 | | | | 4.9 | | Employee withholding taxes paid related to stock-based compensation | | | | (10.7 | ) | | | | (8.7 | ) | | | (14.0 | ) | Deferred acquisition payments | | | | — | | | | | (19.0 | ) | | | (13.1 | ) | Dividends to stockholders | | | | (133.3 | ) | | | | (123.0 | ) | | | (115.2 | ) | Dividends paid to non-controlling interests | | | | (2.5 | ) | | | | — | | | | — | | Treasury stock purchases | | | | (187.6 | ) | | | | (100.0 | ) | | | (694.6 | ) | Other financing activities, net | | | | (4.2 | ) | | | | (5.6 | ) | | | (1.0 | ) | NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | | | | 111.6 | | | | | (389.7 | ) | | | (6.8 | ) | Effect of foreign exchange rate changes on cash | | | | 16.3 | | | | | 4.3 | | | | (15.2 | ) | NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | $ | 30.1 | | | | $ | 124.2 | | | $ | (52.3 | ) | Cash, cash equivalents and restricted cash(b) at beginning of year | | | $ | 394.9 | | | | $ | 270.7 | | | $ | 323.0 | | Cash, cash equivalents and restricted cash(b) at end of year | | | $ | 425.0 | | | | $ | 394.9 | | | $ | 270.7 | | Cash paid during the year for | | | | | | | | | | | | | | | Interest | | | $ | 76.2 | | | | $ | 81.0 | | | $ | 63.4 | | Income taxes paid directly to taxing authorities | | | | 175.5 | | | | | 144.5 | | | | 114.2 | | Dividends declared but not paid | | | | 36.1 | | | | | 33.5 | | | | 30.9 | |
(a) | Capital expenditures of $13.6 million, $10.0 million and $16.7 million that have not been paid as of December 31, 2020, 2019 and 2018, respectively, were excluded from the Consolidated Statement of Cash Flows. |
(b) | Restricted cash of $1.0 million and $4.9million is included in Other current assets and Other assets, respectively, as of December 31, 2020, $0.9 million and $6.1 million is included in Other current assets and Other assets, respectively, as of December 31, 2019 and $0.9 million and $6.9 million is included in Other current assets and Other assets, respectively, as of December 31, 2018 within our Consolidated Balance Sheet. |
See Notes to Consolidated Financial Statements. 36
Table of Contents | | Consolidated Statements of Equity | Fortune Brands Home & Security, Inc. and Subsidiaries |
(In millions) | | Common Stock | | | Paid-In Capital | | | Accumulated Other Comprehensive (Loss) Income | | | Retained Earnings | | | Treasury Stock | | | Non- controlling Interests | | | Total Equity | | 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: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | — | | | | — | | | | — | | | | 389.6 | | | | — | | | | 0.2 | | | | 389.8 | | Other comprehensive income (loss) | | | — | | | | — | | | | (27.8 | ) | | | — | | | | — | | | | — | | | | (27.8 | ) | Stock options exercised | | | 0.1 | | | | 5.0 | | | | — | | | | — | | | | — | | | | — | | | | 5.1 | | Stock-based compensation | | | — | | | | 36.1 | | | | — | | | | — | | | | (14.0 | ) | | | — | | | | 22.1 | | Treasury stock purchase | | | — | | | | — | | | | — | | | | — | | | | (694.6 | ) | | | — | | | | (694.6 | ) | Dividends ($0.82 per Common share) | | | — | | | | — | | | | — | | | | (115.7 | ) | | | — | | | | — | | | | (115.7 | ) | 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 | | | — | | | | — | | | | — | | | | 431.9 | | | | — | | | | (0.6 | ) | | | 431.3 | | Other comprehensive income (loss) | | | — | | | | — | | | | 3.0 | | | | — | | | | — | | | | — | | | | 3.0 | | Stock options exercised | | | — | | | | 17.3 | | | | — | | | | — | | | | — | | | | — | | | | 17.3 | | Stock-based compensation | | | — | | | | 30.5 | | | | — | | | | — | | | | (8.7 | ) | | | — | | | | 21.8 | | Adoption of ASU 2018-02 | | | — | | | | — | | | | (8.6 | ) | | | 8.6 | | | | — | | | | — | | | | — | | Treasury stock purchase | | | — | | | | — | | | | — | | | | — | | | | (100.0 | ) | | | — | | | | (100.0 | ) | Dividends ($0.90 per Common share) | | | — | | | | — | | | | — | | | | (125.6 | ) | | | — | | | | — | | | | (125.6 | ) | Balance at December 31, 2019 | | $ | 1.8 | | | $ | 2,813.8 | | | $ | (72.6 | ) | | $ | 1,763.0 | | | $ | (2,079.4 | ) | | $ | 1.2 | | | $ | 2,427.8 | | Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | — | | | | — | | | | — | | | | 553.1 | | | | — | | | | 1.3 | | | | 554.4 | | Other comprehensive income (loss) | | | — | | | | — | | | | 17.5 | | | | — | | | | — | | | | — | | | | 17.5 | | Stock options exercised | | | — | | | | 64.9 | | | | — | | | | — | | | | — | | | | — | | | | 64.9 | | Stock-based compensation | | | — | | | | 47.6 | | | | — | | | | — | | | | (10.7 | ) | | | — | | | | 36.9 | | Treasury stock purchase | | | — | | | | — | | | | — | | | | — | | | | (187.6 | ) | | | — | | | | (187.6 | ) | Dividends to non-controlling interest | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2.5 | ) | | | (2.5 | ) | Dividends ($0.98 per Common share) | | | — | | | | — | | | | — | | | | (135.9 | ) | | | — | | | | — | | | | (135.9 | ) | Balance at December 31, 2020 | | $ | 1.8 | | | $ | 2,926.3 | | | $ | (55.1 | ) | | $ | 2,180.2 | | | $ | (2,277.7 | ) | | $ | — | | | $ | 2,775.5 | |
See Notes to Consolidated Financial Statements. 37
Table of Contents Notes to Consolidated Financial Statements 1. Background and Basis of Presentation 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. 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. Basis of Presentation The consolidated financial statements in this Annual Report on Form 10-K have been derived from the accounts of the Company and its wholly-owned subsidiaries. The Company’s consolidated financial statements are based on a fiscal year ending December 31. Certain of the Company’s subsidiaries operate on a 52 or 53 week fiscal year ending during the month of December. In the fourth quarter of 2020, our Doors & Security segment was renamed “Outdoors & Security”. The Outdoors & Security 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 December 2020, we acquired 100% of the outstanding equity of Larson Manufacturing ("Larson"), the North American market leading brand of storm, screen and security doors. Larson also sells related outdoor living products including retractable screens and porch windows. The acquisition is aligned with our strategic focus on the fast-growing outdoor living space. The Company completed the acquisition for a total purchase price of approximately $715.2 million, net of cash acquired and closing date working capital adjustments. The acquisition cost is further subject to the final post-closing working capital adjustment. We financed the transaction with borrowings under our existing credit facilities. The financial results of Larson were included in the Company’s consolidated balance sheet as of December 31, 2020. Larson's net sales, operating income and cash flows from the date of acquisition to December 31, 2020 were not material to the Company. The results of operations are included in the Outdoors & Security segment. 2. Significant Accounting Policies Use of Estimates The presentation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results in future periods could differ from those estimates. Cash and Cash Equivalents Highly liquid investments with an original maturity of three months or less are included in cash and cash equivalents. Allowances for Credit Losses Trade receivables are recorded at the stated amount, less allowances for discounts and credit losses. The allowances represent estimated uncollectible receivables associated with potential customer defaults on contractual obligations (usually due to customers’ potential insolvency) or discounts related to early payment of accounts receivables by our customers. The allowances for credit losses include provisions for certain customers where a risk of default has been specifically identified. In addition, the allowances include a provision for expected customer defaults on a general formula basis when it cannot yet be associated with specific customers. Expected credit losses are estimated using various factors, including the length of time the receivables are past due, historical collection experience and existing economic conditions. In accordance with this policy, our allowance for credit losses was $6.7 million and $3.0 million as of December 31, 2020 and 2019, respectively. InventoriesInventory provisions are recorded to reduce inventory to the net realizable dollar value for obsolete or slow moving inventory based on assumptions about future demand and marketability of products, the impact of new product introductions, inventory levels and turns, product spoilage and specific identification of items, such as product discontinuance, engineering/material changes, or regulatory-related changes. During the fourth quarter of 2018, we determined that it was preferable to change our accounting policy from last-in, first-out (“LIFO”) to first-in, first out (“FIFO”) for product groups in which metals comprise a significant portion of inventory cost. We believe this change is preferable because it results in a uniform method to value our inventory across all our segments, improves comparability with our peers, and is expected to better reflect the current value of inventory on the consolidated balance sheets. The change in costing method, which affected our Plumbing and Outdoors & Security segments, was recognized during the fourth quarter of 2018, by adjusting the cost of inventories to FIFO, resulting in a pretax benefit of approximately $7.3 million ($5.5 million after tax) to Cost of products sold in the consolidated statements of income for the year ended December 31, 2018. There were 0 inventories valued using LIFO as of December 31, 2020 or 2019. 38
Table of Contents Property, Plant and Equipment Property, plant and equipment are carried at cost. Depreciation is provided, principally on a straight-line basis, over the estimated useful lives of the assets. Gains or losses resulting from dispositions are included in operating income. Betterments and renewals, which improve and extend the life of an asset, are capitalized; maintenance and repair costs are expensed as incurred. Assets held for use to be disposed of at a future date are depreciated over the remaining useful life. Assets to be sold are written down to fair value less costs to sell at the time the assets are being actively marketed for sale. Estimated useful lives of the related assets are as follows: | | Buildings and leasehold improvements | 15 to 40 years | Machinery and equipment | 3 to 15 years | Software | 3 to 7 years |
Long-lived Assets In accordance with Accounting Standards Codification ("ASC") requirements for Property, Plant and Equipment, a long-lived asset (including amortizable identifiable intangible assets) or asset group held for use is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such events occur, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of a long-lived asset or asset group. The cash flows are based on our best estimate of future cash flows derived from the most recent business projections. If this comparison indicates that there is an impairment, the amount of the impairment is calculated based on fair value. Fair value is estimated primarily using discounted expected future cash flows on a market-participant basis. | | During 2020, we recorded an impairment of $3.6 million related to a long-lived asset to be disposed of in selling, general and administrative expenses. During 2019, we recorded an impairment of $1.7 million related to a long-lived asset to be disposed of in cost of products sold. NaN impairments of long-lived assets were recorded during 2018. |
Leases 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 35 years, some of which may include options to extend or terminate the lease. Operating lease expense is recognized on a straight-line basis over the lease term. We do not recognize leases with 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 single lease component for all asset classes. Additionally, for certain equipment leases, we apply a portfolio approach and account for multiple lease components as a single lease component. Certain 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. Business CombinationsWe account for business combinations under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations, which requires an allocation of the consideration we paid to the identifiable assets, intangible assets and liabilities based on the estimated fair values as of the closing date of the acquisition. The excess of the fair value of the purchase price over the fair values of these identifiable assets, intangible assets and liabilities is recorded as goodwill. Purchased intangibles other than goodwill are initially recognized at fair value and amortized over their useful lives unless those lives are determined to be indefinite. The valuation of acquired assets will impact future operating results. The fair value of identifiable intangible assets is determined using an income approach on an individual asset basis. Specifically, we use the multi-period excess earnings method to determine the fair value of customer relationships and the relief-from-royalty approach to determine the fair value of the tradename and proprietary technology. Determining the fair value of acquired intangibles involves significant estimates and assumptions, including forecasted revenue growth rates, EBITDA margins, percentage of revenue attributable to the tradename, contributory asset charges, customer attrition rate, market-participant discount rates and the assumed royalty rates. The determination of the useful life of an intangible asset other than goodwill is based on factors including historical tradename performance with respect to consumer name recognition, geographic market presence, market share, plans for ongoing tradename support and promotion, customer attrition rate, and other relevant factors. 39
Table of Contents Goodwill and Indefinite-lived Intangible Assets In accordance with ASC requirements for Intangibles - Goodwill and Other, goodwill is tested for impairment at least annually in the fourth quarter and written down when impaired. An interim impairment test is performed if an event occurs or conditions change that would more likely than not reduce the fair value of the reporting unit below the carrying value. To evaluate the recoverability of goodwill, we first assess qualitative factors to determine whether it is more likely than not that goodwill is impaired. Qualitative factors include changes in volume, margin, customers and the industry. If it is deemed more likely than not that goodwill for a reporting unit is impaired, we will perform a quantitative impairment test using a weighting of the income and market approaches. For the income approach, we use a discounted cash flow model, estimating the future cash flows of the reporting units to which the goodwill relates and then discounting the future cash flows at a market-participant-derived discount rate. In determining the estimated future cash flows, we consider current and projected future levels of income based on management’s plans for that business; business trends, prospects and market and economic conditions; and market-participant considerations. Furthermore, our cash flow projections used to assess impairment of our goodwill and other intangible assets are significantly influenced by our projection for the U.S. home products market, our annual operating plans finalized in the fourth quarter of each year, and our ability to execute on various planned cost reduction initiatives supporting operating income improvements. Our projection for the U.S. home products market is inherently uncertain and is subject to a number of factors, such as employment, home prices, credit availability, new home starts and the rate of home foreclosures. For the market approach, we apply market multiples for peer groups to the current operating results of the reporting units to determine each reporting unit’s fair value. The Company’s reporting units are operating segments, or one level below operating segments when appropriate. When the estimated fair value of a reporting unit is less than its carrying value, we measure and recognize the amount of the goodwill impairment loss based on that difference. The significant assumptions that are used to determine the estimated fair value for goodwill impairment testing include the following: third-party market forecasts of U.S. new home starts and home repair and remodel spending; management’s sales, operating income and cash flow forecasts; peer company EBITDA earnings multiples; the market-participant-based discount rate; and the perpetuity growth rate. Our estimates of reporting unit fair values are based on certain assumptions that may differ from our historical and future actual operating performance. Specifically, assumptions related to growth in the new construction and repair and remodel segments of the U.S. home products markets drive our forecasted sales growth. The market forecasts are developed using independent third-party forecasts from multiple sources. In addition, estimated future operating income and cash flow consider our historical performance at similar levels of sales volume and management’s future operating plans as reflected in annual and long-term plans that are reviewed and approved by management. Certain of our tradenames have been assigned an indefinite life as we currently anticipate that these tradenames will contribute cash flows to the Company indefinitely. Indefinite-lived intangible assets are not amortized, but are evaluated at least annually to determine whether the indefinite useful life is appropriate. We measure the fair value of identifiable intangible assets upon acquisition and we review for impairment annually in the fourth quarter and whenever market or business events indicate there may be a potential impairment of that intangible. Impairment losses are recorded to the extent that the carrying value of the indefinite-lived intangible asset exceeds its fair value. The significant assumptions that are used to determine the estimated fair value for indefinite-lived intangible assets upon acquisition and subsequent impairment testing are forecasted revenue growth rates; the assumed royalty rates; and the market-participant discount rates. We measure fair value of our indefinite-lived tradenames using the relief-from-royalty approach which estimates the present value of royalty income that could be hypothetically earned by licensing the brand name to a third party over the remaining useful life. The determination of fair value using this technique requires the use of estimates and assumptions related to forecasted revenue growth rates, the assumed royalty rates and the market-participant discount rates. We first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. Qualitative factors include changes in volume, customers and the industry. If it is deemed more likely than not that an intangible asset is impaired, we will perform a quantitative impairment test. See Note 5, “Goodwill and Identifiable Intangible Assets,” for additional information. Events or circumstances that could have a potential negative effect on the estimated fair value of our reporting units and indefinite-lived tradenames include: lower than forecasted revenues, actual new construction and repair and remodel growth rates that fall below our assumptions, actions of key customers, increases 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 assets. Investments in Equity Securities In accordance with ASC requirements for investments in equity securities, we utilize the equity method to account for investments when we possess the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when the investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. In applying the equity method, we record our investment at cost and subsequently increase or decrease the carrying amount of the investment by our proportionate share of the net earnings or losses of the investee. We record dividends or other equity distributions as reductions in the carrying value of our investment. 40
Table of Contents When we do not have the ability to exercise significant influence over the operating and financial policies of the investee, we account for non-controlling investments in equity securities at fair value, with any gains or losses recognized through other income and expense. Equity securities without readily determinable fair values are recorded at cost minus impairment, plus or minus any changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. As of December 31, 2020,all of our investments in our strategic partners where we do not have significant influence over the investee do not have readily determinable fair values. As of December 31, 2020 and 2019, the carrying value of our investments was $3.5 million and $29.2 million, respectively, which is included in other assets within our Consolidated Balance Sheet.There were 0 impairments or other changes resulting from observable prices changes recorded during the years ended December 31, 2020, 2019 or 2018. Defined Benefit Plans We have a number of pension plans in the United States, covering many of the Company’s employees. In addition, the Company provides postretirement health care and life insurance benefits to certain retirees. Service cost for 2020 relates to benefit accruals for an hourly Union group within the defined benefit plan for our Outdoors & Security segment. All other benefit accruals under our defined benefit pension plans were frozen as of, or prior to, December 31, 2016. We record amounts relating to these plans based on calculations in accordance with ASC requirements for Compensation – Retirement Benefits, which include various actuarial assumptions, including discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. We recognize changes in the fair value of pension plan assets and net actuarial gains or losses in excess of 10 percent of the greater of the fair value of pension plan assets or each plan’s projected benefit obligation (the “corridor”) in earnings immediately upon remeasurement, which is at least annually in the fourth quarter of each year. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current economic conditions and trends. The discount rate used to measure obligations is based on a spot-rate yield curve on a plan-by-plan basis that matches projected future benefit payments with the appropriate interest rate applicable to the timing of the projected future benefit payments. The expected rate of return on plan assets is determined based on the nature of the plans’ investments, our current asset allocation and our expectations for long-term rates of return. Compensation increases reflect expected future compensation trends. For postretirement benefits, our health care trend rate assumption is based on historical cost increases and expectations for long-term increases. The cost or benefit of plan changes, such as increasing or decreasing benefits for prior employee service (prior service cost), is deferred and included in expense on a straight-line basis over the average remaining service period of the related employees. We believe that the assumptions utilized in recording obligations under our plans, which are presented in Note 14, “Defined Benefit Plans,” are reasonable based on our experience and on advice from our independent actuaries; however, differences in actual experience or changes in the assumptions may materially affect our financial position and results of operations. We will continue to monitor these assumptions as market conditions warrant. Insurance Reserves We provide for expenses associated with workers’ compensation and product liability obligations when such amounts are probable and can be reasonably estimated. The accruals are adjusted as new information develops or circumstances change that would affect the estimated liability. Litigation Contingencies Our businesses are subject to risks related to threatened or pending litigation and are routinely defendants in lawsuits associated with the normal conduct of business. Liabilities and costs associated with litigation-related loss contingencies require estimates and judgments based on our knowledge of the facts and circumstances surrounding each matter and the advice of our legal counsel. We record liabilities for litigation-related losses when a loss is probable and we can reasonably estimate the amount of the loss in accordance with ASC requirements for Contingencies. We evaluate the measurement of recorded liabilities each reporting period based on the then-current facts and circumstances specific to each matter. The ultimate losses incurred upon final resolution of litigation-related loss contingencies may differ materially from the estimated liability recorded at any particular balance sheet date. Changes in estimates are recorded in earnings in the period in which such changes occur. Income Taxes In accordance with ASC requirements for Income Taxes, we establish deferred tax liabilities or assets for temporary differences between financial and tax reporting basis and subsequently adjust them to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance reducing deferred tax assets when it is more likely than not that such assets will not be realized. We record liabilities for uncertain income tax positions based on a two-step process. The first step is recognition, where we evaluate whether an individual tax position has a likelihood of greater than 50% of being sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation processes. For tax positions that are currently estimated to have a less than 50% likelihood of being sustained, no tax benefit is recorded. For tax positions that have met the recognition threshold in the first step, we perform the second step of measuring the benefit to be recorded. The actual benefits ultimately realized may differ from our estimates. In future periods, changes in facts, circumstances, and new information may require us to change the recognition and measurement estimates with regard to individual tax positions. 41
Table of Contents Changes in recognition and measurement estimates are recorded in the consolidated statement of income and consolidated balance sheet in the period in which such changes occur. As of December 31, 2020, we had liabilities for unrecognized tax benefits pertaining to uncertain tax positions totaling $96.1 million. It is reasonably possible that the unrecognized tax benefits may decrease in the range of $4.0 million to $48.1 million in the next 12 months primarily as a result of the conclusion of U.S. federal, state and foreign income tax proceedings. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) made significant changes to the U.S. Internal Revenue Code including a reduction in the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, an exemption from federal income tax for dividends received from foreign subsidiaries and an imposition of a one-time transition tax on the deemed repatriation of cumulative foreign earnings and profits as of December 31, 2017. Revenue Recognition The Company recognizes revenue for the sale of goods based on its assessment of when control transfers to our customers. See Note 13, “Revenue,” for additional information. Cost of Products Sold Cost of products sold includes all costs to make products saleable, such as labor costs, inbound freight, purchasing and receiving costs, inspection costs and internal transfer costs. In addition, all depreciation expense associated with assets used to manufacture products and make them saleable is included in cost of products sold. Customer Program Costs Customer programs and incentives are a common practice in our businesses. Our businesses incur customer program costs to obtain favorable product placement, to promote sales of products and to maintain competitive pricing. 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. Volume allowances are accrued based on management’s estimates of customer volume achievement and other factors incorporated into customer agreements, such as new products, store sell-through, merchandising support, levels of returns and customer training. Management periodically reviews accruals for these rebates and allowances, and adjusts accruals when circumstances indicate (typically as a result of a change in volume expectations). The costs typically recognized in selling, general and administrative expenses include product displays, point of sale materials and media production costs. The costs included in the selling, general and administrative expenses category were $64.7 million, $66.3 million and $66.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. Selling, General and Administrative Expenses Selling, general and administrative expenses include advertising costs; marketing costs; selling costs, including commissions; research and development costs; shipping and handling costs, including warehousing costs; and general and administrative expenses. Shipping and handling costs included in selling, general and administrative expenses were $232.6 million, $225.5 million and $215.9 million in 2020, 2019 and 2018, respectively. Advertising costs, which amounted to $259.4 million, $251.7 million and $243.6 million in 2020, 2019 and 2018, respectively, are principally expensed as incurred. Advertising costs paid to customers as pricing rebates include product displays, marketing administration costs, media production costs and point of sale materials. Advertising costs recorded as a reduction to net sales, primarily cooperative advertising, were $66.7 million, $74.0 million and $72.4 million in 2020, 2019 and 2018, respectively. Advertising costs recorded in selling, general and administrative expenses were $192.7 million, $177.7 million and $171.2 million in 2020, 2019 and 2018, respectively. Research and development expenses include product development, product improvement, product engineering and process improvement costs. Research and development expenses, which were $49.9 million, $48.2 million and $50.3 million in 2020, 2019 and 2018, respectively, are expensed as incurred within selling, general and administrative expenses. Stock-based Compensation Stock-based compensation expense, measured as the fair value of an award on the date of grant, is recognized in the financial statements over the period that an employee is required to provide services in exchange for the award. The fair value of each option award is measured on the date of grant using the Black-Scholes option-pricing model. The fair value of each performance share award is based on the average of the high and low share prices on the date of grant and the probability of meeting performance targets. The fair value of each restricted stock unit granted is equal to the average of the high and low share prices on the date of grant. See Note 12, “Stock-Based Compensation,” for additional information. Earnings Per Share Earnings per common share is calculated by dividing net income attributable to Fortune Brands by the weighted-average number of shares of common stock outstanding during the year. Diluted earnings per common share include the impact of all potentially dilutive securities outstanding during the year. See Note 20, “Earnings Per Share,” for further discussion. 42
Table of Contents Foreign Currency Translation Foreign currency balance sheet accounts are translated into U.S. dollars at the actual rates of exchange at the balance sheet date. Income and expenses are translated at the average rates of exchange in effect during the period for the foreign subsidiaries where the local currency is the functional currency. The related translation adjustments are made directly to a separate component of the “accumulated other comprehensive income” (“AOCI”) caption in equity. Transactions denominated in a currency other than the functional currency of a subsidiary are translated into functional currency with resulting transaction gains or losses recorded in other expense, net. Derivative Financial Instruments In accordance with Accounting Standards Codification ("ASC") requirements for Derivatives and Hedging, we recognize all derivative contracts as either assets or liabilities on the balance sheet, and the measurement of those instruments is at fair value. If the derivative is designated as a fair value hedge and is effective, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings in the same period. If the derivative is designated as a cash flow hedge, the changes in the fair value of the derivative are recorded in other comprehensive income (“OCI”) and are recognized in the consolidated statement of income when the hedged item affects earnings. If the derivative is designated as an effective economic hedge of the net investment in a foreign operation, the changes in the fair value of the derivative is reported in the cumulative translation adjustment section of OCI. Similar to foreign currency translation adjustments, these changes in fair value are recognized in earnings only when realized upon sale or upon complete or substantially complete liquidation of the investment in the foreign entity. Deferred currency (loss) gains of $(3.0) million, $4.1 million and $2.2 million (before tax impact) were reclassified into earnings for the years ended December 31, 2020, 2019 and 2018, respectively. Based on foreign exchange rates as of December 31, 2020, we estimate that $2.0 million of net derivative gain included in AOCI as of December 31, 2020 will be reclassified to earnings within the next twelve months. Recently Issued Accounting Standards Leases In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, which requires lessees to recognize almost all leases on their balance sheet as “right-of-use” assets and lease liabilities but recognize related expenses in a manner similar to previous accounting guidance. The guidance also eliminates previous real estate-specific provisions for all entities. In January 2018, the FASB issued ASU 2018-01, which clarifies the application of the new leases guidance to land easements. In July 2018, the FASB issued ASU 2018-10 and ASU 2018-11, which clarify certain guidance included in ASU 2016-02 and introduces a new optional transition method, which does not require revisions to comparative periods. We adopted this standard as of January 1, 2019 using the 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 difference 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 materially impact our consolidated statements of income or cash flows. Financial Instruments—Credit Losses In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, 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 as off-balance-sheet credit exposures (e.g., loan commitments and standby letters of credit). The standard replaced the “incurred loss” approach under the current guidance with an “expected loss” model that requires an entity to estimate its lifetime “expected credit loss.” We adopted this guidance on January 1, 2020. The adoption of this guidance did not have a material effect on our financial statements. Changes to the Disclosure Requirements for Fair Value Measurement In August 2018, the FASB issued ASU 2018-13, which removed the requirement to disclose: 1) amount of and 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 modified and added other disclosure requirements, which primarily relate to valuation of Level 3 assets and liabilities. We adopted this guidance on January 1, 2020. The adoption of this guidance did not have a material effect on our financial statements. 43
Table of Contents Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract In August 2018, the FASB issued ASU 2018-15, which 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 integration 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 vendor demonstrations, determining performance and technology requirements and training activities. We adopted this guidance on January 1, 2020. The adoption of this guidance did not have a material effect on our financial statements. Simplifying the Accounting for Income Taxes In December 2019, the FASB issued ASU 2019-12, which is intended to simplify accounting for income taxes and improve consistency in application. ASU 2019-12 amends certain elements of income tax accounting, including but not limited to intraperiod tax allocations, step-ups in tax basis of goodwill, and calculating taxes on year-to-date losses in interim periods. The guidance is effective for the Company’s fiscal year beginning January 1, 2021, with early adoption permitted. We do not expect the adoption of this guidance to have a material effect on our financial statements. Clarifications in Accounting for Equity Securities In January 2020, the FASB issued ASU 2020-01, which clarifies the interactions between accounting for equity investments (ASC 321), equity method accounting (ASC 323) and derivatives and hedges (ASC 815). As a result of the ASU, when entities apply the measurement alternative to non-controlling equity investments under ASC 321, and must transition to the equity method of accounting because of an observable transaction, existing investments should be remeasured immediately before applying the equity method of accounting. Additionally, it states that if entities hold non-derivative forward contracts or purchased call options to acquire equity securities, such instruments should be measured using the fair value principles of ASC 321 before settlement or exercise. The Company early adopted this guidance on January 1, 2020, and as a result recognized non-cash gains of $11.0 million within other income in 2020 related to our investment in Flo Technologies, Inc. Effects of Reference Rate Reform In March 2020, the FASB issued ASU 2020-04, which provides relief from accounting analysis and impacts that may otherwise be required for modifications to agreements necessitated by reference rate reform. It also provides optional expedients to enable the continuance of hedge accounting where certain hedging relationships are impacted by reference rate reform. In January 2021, the FASB issued ASU 2021-01 which further clarifies the scope of ASU 2020-04. This optional guidance is effective immediately, and available to be used through December 31, 2022. We are assessing the impact that reference rate reform and the related adoption of this guidance may have on our financial statements. 44
Table of Contents 3. Balance Sheet Information Supplemental information on our year-end consolidated balance sheets is as follows: (In millions) | | 2020 | | | | 2019 | | Inventories: | | | | | | | | | | Raw materials and supplies | | $ | 346.6 | | | | $ | 274.4 | | Work in process | | | 76.7 | | | | | 72.2 | | Finished products | | | 443.9 | | | | | 372.0 | | Total inventories | | $ | 867.2 | | | | $ | 718.6 | | Property, plant and equipment: | | | | | | | | | | Land and improvements | | $ | 75.9 | | | | $ | 66.3 | | Buildings and improvements to leaseholds | | | 552.4 | | | | | 510.2 | | Machinery and equipment | | | 1,411.5 | | | | | 1,316.2 | | Construction in progress | | | 110.3 | | | | | 89.8 | | Property, plant and equipment, gross | | | 2,150.1 | | | | | 1,982.5 | | Less: accumulated depreciation | | | 1,232.7 | | | | | 1,158.3 | | Property, plant and equipment, net of accumulated depreciation | | $ | 917.4 | | | | $ | 824.2 | | Other current liabilities: | | | | | | | | | | Accrued salaries, wages and other compensation | | $ | 167.3 | | | | $ | 109.7 | | Accrued customer programs | | | 196.2 | | | | | 179.5 | | Accrued taxes | | | 70.8 | | | | | 39.3 | | Dividends payable | | | 36.1 | | | | | 33.5 | | Other accrued expenses | | | 254.2 | | | | | 187.6 | | Total other current liabilities | | $ | 724.6 | | | | $ | 549.6 | |
4. Acquisitions and Dispositions In December 2020, we acquired 100% of the outstanding equity of Larson Manufacturing ("Larson"), the North American market leading brand of storm, screen and security doors. Larson also sells related outdoor living products including retractable screens and porch windows. The acquisition of Larson is aligned with our strategic focus on the fast-growing outdoor living space. The Company completed the acquisition for a total purchase price of approximately $715.2 million, net of cash acquired and closing date working capital adjustments. The acquisition cost is further subject to the final post-closing working capital adjustment. We financed the transaction with borrowings under our existing credit facilities. The financial results of Larson were included in the Company’s consolidated balance sheet as of December 31, 2020. Larson's net sales, operating income and cash flows from the date of acquisition to December 31, 2020 were not material to the Company. The results of operations are included in the Outdoors & Security segment. We incurred $4.5 million of Larson acquisition-related transaction costs in the year ended December 31, 2020. The goodwill expected to be deductible for income tax purposes is approximately $290 million, subject to the finalization of the purchase price allocation. The following table summarizes the preliminary allocation of the purchase price to the fair value of assets acquired and liabilities assumed as of the date of the acquisition. (In millions) | | Accounts receivable | | $ | 42.3 | | Inventories | | | 51.7 | | Property, plant and equipment | | | 66.4 | | Goodwill | | | 300.9 | | Identifiable intangible assets | | | 313.0 | | Operating lease assets | | | 6.2 | | Other assets | | | 3.7 | | Total assets | | | 784.2 | | Accounts payable | | | 6.5 | | Other current liabilities and accruals | | | 31.1 | | Other non-current liabilities | | | 31.4 | | Net assets acquired(a) | | $ | 715.2 | |
(a) Net assets exclude $0.4 million of cash transferred to the Company as the result of the Larson acquisition. The preceding purchase price allocation 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 45
Table of Contents estimates and assumptions used to determine the fair value of the identifiable intangible assets, including forecasted revenue growth rates, EBITDA margins, percentage of revenue attributable to the tradename,contributory asset charges, customer attrition rate, market-participant discount rates and the assumed royalty rates. The Company is in the process of finalizing valuations of certain tangible and intangible assets, including property, plant and equipment and identifiable intangible assets. The provisional measurement of property, plant and equipment, identifiable intangible assets, and goodwill is subject to change. Any change in the acquisition date fair value of the acquired assets and liabilities will change the amount of the purchase price allocable to goodwill. Goodwill includes expected sales and cost synergies. The goodwill will be included in our Outdoors & Security segment. Identifiable intangible assets consist of a finite-lived customer relationships asset of $168.0 million, an indefinite-lived tradename of $111.0 million and a finite-lived proprietary technology asset of $34.0 million. The useful life of the customer relationship intangible asset is estimated to be 13 years. The Larson tradename has been assigned an indefinite life as we currently anticipate that this tradename will contribute cash flows to the Company indefinitely. The useful life of the proprietary technology intangible asset is estimated to be 7 years. Customer and contractual relationships and proprietary technology are amortized on a straight-line basis over their useful lives. The following unaudited pro forma summary presents consolidated financial information as if Larson had been acquired on January 1, 2019. The unaudited pro forma financial information is based on historical results of operations and financial position of the Company and Larson. The pro forma results include: | • | estimated amortization of finite-lived intangible asset, including customer relationships and proprietary technology, |
| • | the estimated cost of the inventory adjustment to fair value, |
| • | interest expense associated with debt that would have been incurred in connection with the acquisition, |
| • | the reclassification of Larson transaction costs from 2020 to the first quarter of 2019, and |
| • | the removal of certain transactions recorded in the historical financial statements of Larson related to assets and activities which were retained by the seller, and |
| • | adjustments to conform accounting policies. |
The unaudited pro forma financial information does not necessarily represent the results that would have occurred had the acquisition occurred on January 1, 2019. In addition, the unaudited pro forma information should not be deemed to be indicative of future results. (In millions) | | 2020 | | | 2019 | | Net sales | | $ | 6,493.2 | | | $ | 6,100.4 | | Net income | | $ | 592.5 | | | $ | 410.8 | |
In 2018 our Plumbing segment entered into a strategic partnership with, and acquired non-controlling equity interests in, Flo Technologies, Inc. (“Flo”), a U.S. manufacturer of comprehensive water monitoring and shut-off systems with leak detection technologies. In January 2020, we entered into an agreement to acquire 100% of the outstanding shares of Flo in a multi-phase transaction. As part of this agreement, we acquired additional shares for $44.2 million in cash, including direct transactions costs, and entered into a forward contract to purchase all remaining shares of Flo at a future date in exchange for an additional $7.9 million in cash, which is included in other assets in our condensed consolidated balance sheet. In April 2020, we acquired additional shares of Flo under a separate option agreement which resulted in a non-cash gain of $4.4 million on the forward contract as included within other income during the twelve months ended December 31, 2020. As of December 31, 2020, we owned approximately 80% of Flo’s outstanding shares. Starting in the first quarter of 2020, we applied the equity method of accounting to our investment in Flo as the minority stockholders had substantive participating rights which precluded consolidation in our results of operations and statements of financial position and cash flows. The substantive participating rights expired on January 1, 2021, at which time we obtained control of, and began consolidating, Flo in our results. The second phase, scheduled to occur in the first quarter of 2022, will result in the acquisition of the remaining outstanding shares of Flo for a price based on a multiple of Flo’s 2021 sales and adjusted earnings before interest and taxes. Immediately prior to applying the equity method of accounting, we recognized a non-cash gain of $6.6 million within other income during the twelve months ended December 31, 2020 related to the remeasurement of our previously existing investment in Flo. The carrying value of our investment in Flo was $76.2million at December 31, 2020 and $25.7 million at December 31, 2019. In September 2018, we acquired 100% of the membership interests of Fiber Composites LLC (“Fiberon”), a leading U.S. manufacturer of outdoor performance materials used in decking and railing products for a total purchase price of approximately $470.0 million, subject to certain post-closing adjustments. The acquisition of Fiberon provided category expansion and product extension opportunities into the outdoor living space for our Outdoors & Security segment. Fiberon’s net sales and operating income in 2018 were not material to the Company. We financed the transaction using cash on hand and borrowings under our 46
Table of Contents revolving credit and term loan facilities. The results of operations are included in the Outdoors & Security segment from the date of the acquisition. Goodwill related to this acquisition is deductible for income tax purposes. 5. Goodwill and Identifiable Intangible Assets We had goodwill of $2,394.8 million and $2,090.2 million as of December 31, 2020 and 2019, respectively. The change in the net carrying amount of goodwill by segment was as follows: (In millions) | | Plumbing | | | | Outdoors & Security | | | | Cabinets | | | | Total Goodwill | | Balance at December 31, 2018(a) | | $ | 743.7 | | | | $ | 412.6 | | | | $ | 924.0 | | | | $ | 2,080.3 | | 2019 translation adjustments | | | 3.6 | | | | | 0.5 | | | | | 1.5 | | | | | 5.6 | | Acquisition-related adjustments | | | — | | | | | 4.3 | | | | | — | | | | | 4.3 | | Balance at December 31, 2019(a) | | $ | 747.3 | | | | $ | 417.4 | | | | $ | 925.5 | | | | $ | 2,090.2 | | 2020 translation adjustments | | | 2.8 | | | | | 0.3 | | | | | 0.6 | | | | | 3.7 | | Acquisition-related adjustments | | | — | | | | | 300.9 | | | | | — | | | | | 300.9 | | Balance at December 31, 2020(a) | | $ | 750.1 | | | | $ | 718.6 | | | | $ | 926.1 | | | | $ | 2,394.8 | |
(a) | Net of accumulated impairment losses of $399.5 million in the Outdoors & Security segment. |
We also had identifiable intangible assets, principally tradenames and customer relationships, of $1,420.3 million and $1,168.9 million as of December 31, 2020 and 2019, respectively. The $295.1million increase in gross identifiable intangible assets was primarily due to the acquisition of Larson, partially offset by tradename impairment charges of $22.5 million in our Plumbing and Cabinets segments. The gross carrying value and accumulated amortization by class of intangible assets as of December 31, 2020 and 2019 were as follows: | | | As of December 31, 2020 | | | | As of December 31, 2019 | | (In millions) | | | Gross Carrying Amounts | | | Accumulated Amortization | | | Net Book Value | | | | Gross Carrying Amounts | | | Accumulated Amortization | | | Net Book Value | | Indefinite-lived tradenames | | | $ | 711.0 | | | $ | — | | | $ | 711.0 | | | | $ | 635.6 | | | $ | — | | | $ | 635.6 | | Amortizable intangible assets | | | | | | | | | | | | | | | | | | | | | | | | | | | Tradenames | | | | 34.8 | | | | (14.0 | ) | | | 20.8 | | | | | 20.6 | | | | (12.9 | ) | | | 7.7 | | Customer and contractual relationships | | | | 973.2 | | | | (337.3 | ) | | | 635.9 | | | | | 803.9 | | | | (299.6 | ) | | | 504.3 | | Patents/proprietary technology | | | | 109.6 | | | | (57.0 | ) | | | 52.6 | | | | | 73.4 | | | | (52.1 | ) | | | 21.3 | | Total | | | | 1,117.6 | | | | (408.3 | ) | | | 709.3 | | | | | 897.9 | | | | (364.6 | ) | | | 533.3 | | Total identifiable intangibles | | | $ | 1,828.6 | | | $ | (408.3 | ) | | $ | 1,420.3 | | | | $ | 1,533.5 | | | $ | (364.6 | ) | | $ | 1,168.9 | |
Amortizable intangible assets, principally customer relationships, are subject to amortization on a straight-line basis over their estimated useful life, ranging from 2 to 30 years, based on the assessment of a number of factors that may impact useful life which include customer attrition rates and other relevant factors. We expect to record intangible amortization of approximately $60 million in 2021, $59 million in 2022, $58 million in 2023, $57 million in 2024, and $57 million in 2025. During the second quarter of 2020, extended closures of luxury plumbing showrooms associated with COVID-19 led to lower than expected sales related to an indefinite-lived tradename within the Plumbing segment, which combined with the updated financial outlook compared to previous forecasts and the continued uncertainty of the pandemic on the sales and profitability related to the tradename led us to conclude that it was more likely than not that the indefinite-lived tradename was impaired. Therefore, we performed an interim impairment test as of June 30, 2020, and as a result we recognized a pre-tax impairment charge of $13.0 million related to this tradename. We also performed an evaluation of the useful life of this tradename and determined it was no longer indefinite-lived due to changes in long-term management expectations and future operating plans. As a result, the remaining carrying value of this tradename is being amortized over its estimated useful life of 30 years. |
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| In the first quarter of 2020, we recognized an impairment charge of $9.5 million related to an indefinite-lived tradename in our Cabinets segment. This charge was primarily the result of lower expected sales of custom cabinetry products related to the impact of COVID-19. In the fourth quarter of 2019, we recognized an impairment charge of $12.0 million related to the same indefinite-lived tradename, which was the result of a strategic shift associated with new segment leadership and acceleration of our capacity rebalancing initiatives from custom cabinetry products to value-based cabinetry products as a result of lower than expected sales of custom cabinetry products compared to prior forecasts. As of December 31, 2020, the carrying value of this tradename was $29.1 million. | | In the third quarter of 2019, we recognized an impairment charge of $29.5 million related to a second indefinite-lived tradename in our Cabinets segment, which was primarily the result of a continuing shift in consumer demand from semi-custom cabinetry products to value-priced cabinetry products, which led to consecutive downward adjustments of internal sales forecasts and future growth rates associated with the tradename. In the fourth quarter of 2018, we recorded an impairment charge of $35.5 million related to the same indefinite-lived tradename, which was primarily the result of lower than forecasted sales during the fourth quarter of 2018 as well as projected changes in the mix of revenue across our tradenames in future periods, including the impact of more moderate industry growth expectations, which were finalized during our annual planning process conducted during the fourth quarter of 2018. As of December 31, 2020, the carrying value of this tradename was $85.0 million. | | During the third quarter of 2018, we recorded a pre-tax impairment charge of $27.1 million related to a third indefinite-lived tradename within the Cabinets segment. This charge was primarily the result of reduced revenue growth expectations associated with Cabinets operations in Canada, including the announced closure of Company-owned retail locations. As of December 31, 2020, the carrying value of this tradename was $39.8 million. | | The fair values of the impaired tradenames were measured using the relief-from-royalty approach, which estimates the present value of royalty income that could be hypothetically earned by licensing the tradename to a third party over its remaining useful life. Some of the more significant assumptions inherent in estimating the fair values include forecasted revenue growth rates, assumed royalty rates, and market-participant discount rates that reflect the level of risk associated with the tradenames’ future revenues and profitability. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management plans. These assumptions represent level 3 inputs of the fair value hierarchy (refer to Note 9). |
The significant assumptions used to estimate the fair values of the tradenames impaired during the years ended December 31, 2020 and 2019 were as follows: | | 2020 | | | 2019 | | Unobservable Input | | Minimum | | | Maximum | | | Weighted Average(a) | | | Minimum | | | Maximum | | | Weighted Average(a) | | Discount rates | | | 14.8 | % | | | 15.8 | % | | | 15.1 | % | | | 13.0 | % | | | 13.5 | % | | | 13.3 | % | Royalty rates(b) | | | 4.0 | % | | | 5.0 | % | | | 4.3 | % | | | 3.0 | % | | | 4.0 | % | | | 3.3 | % | Long-term revenue growth rates(c) | | | 1.0 | % | | | 3.0 | % | | | 1.6 | % | | | 3.0 | % | | | 3.0 | % | | | 3.0 | % |
(a) Weighted by relative fair value of the impaired tradenames. (b) Represents estimated percentage of sales a market-participant would pay to license the impaired tradenames. (c) Selected long-term revenue growth rate within 10-year projection period of the impaired tradenames. As of December 31, 2020, the fair value of four Cabinets' tradenames exceeded their carrying values of $180.6 million by less than 30%. A reduction in the estimated fair value of the tradenames in our Cabinets segment could trigger additional impairment charges in future periods. Events or circumstances that could have a potential negative effect on the estimated fair value of our reporting units and indefinite-lived tradenames include: lower than forecasted revenues, more severe impacts of the COVID-19 pandemic than currently expected, actual new construction and repair and remodel growth rates that fall below our assumptions, actions of key customers, increases in discount rates, continued economic uncertainty, higher levels of unemployment, weak consumer confidence, lower levels of discretionary consumer spending, a decrease in royalty rates and a decline in the trading price of our common stock. We cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill and indefinite-lived assets. 6. Leases We have operating and finance 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 consolidated balance sheets. Amounts recognized for finance leases as of and for the years ended December 31, 2020 and 2019 were immaterial. Operating lease expense recognized in the consolidated statement of comprehensive income for the years ended December 31, 2020 and 2019 were $53.9 million and $51.0 million, respectively, including approximately $9.3million and $8.2million of short-term and variable lease costs for the years ended December 31, 2020 and 2019, respectively. Operating lease expense (reduced by immaterial amounts from subleases) was $48.4 million for the year ended December 31, 2018. The 2020 and 2019 48
Table of Contents expenses were determined in accordance with ASC 842, whereas 2018 expenses were determined in accordance with the previous leasing guidance (ASC 840). Other information related to leases was as follows: (In millions, except lease term and discount rate) | | December 31, 2020 | | | December 31, 2019 | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | Operating cash flows from operating leases | | $ | 43.5 | | | $ | 41.3 | | Right-of-use assets obtained in exchange for operating lease obligations | | $ | 40.5 | | | $ | 24.5 | | Weighted average remaining lease term - operating leases | | 6.4 years | | | 7.1 years | | Weighted average discount rate - operating leases | | | 3.8 | % | | | 4.2 | % |
Total lease payments under non-cancellable operating leases as of December 31, 2020 were as follows: (In millions) | | | | | Year Ending December 31, | | | | | 2021 | | $ | 42.8 | | 2022 | | | 36.2 | | 2023 | | | 31.3 | | 2024 | | | 23.8 | | 2025 | | | 16.7 | | Thereafter | | | 52.7 | | Total lease payments | | | 203.5 | | Less imputed interest | | | (24.5 | ) | Total | | $ | 179.0 | | Reported as of December 31, 2020 | | | | | Other current liabilities | | $ | 38.5 | | Operating lease liabilities | | | 140.5 | | Total | | $ | 179.0 | |
7. External Debt and Financing Arrangements Unsecured Senior Notes At December 31, 2020, the Company had aggregate outstanding notes in the principal amount of $1.8 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 carrying value of the Notes, net of underwriting commissions, price discounts, and debt issuance costs as of December 31, 2020 and December 31, 2019: (in millions) | | | | | | | | | Net Carrying Value | | Coupon Rate | Principal Amount | | | Issuance Date | | Maturity Date | | December 31, 2020 | | | December 31, 2019 | | 3.000% Senior Notes | $ | 400.0 | | | June 2015 | | June 2020 | | $ | - | | | $ | 399.7 | | 4.000% Senior Notes | | 500.0 | | | June 2015 | | June 2025 | | | 496.6 | | | | 495.8 | | 4.000% Senior Notes (the “2018 Notes”) | | 600.0 | | | September 2018 | | September 2023 | | | 597.1 | | | | 596.1 | | 3.250% Senior Notes (the “2019 Notes”) | | 700.0 | | | September 2019 | | September 2029 | | | 693.5 | | | | 692.7 | | Total Senior Notes | | | | | | | | | $ | 1,787.2 | | | $ | 2,184.3 | |
During June 2020, we repaid all outstanding 3.000% Senior Notes issued in June 2015 at their maturity date using borrowings under our 2019 Revolving Credit Agreement (as defined below). In September 2019, we issued $700 million of 3.25% Senior Notes due 2029 (“2019 Notes”) in a registered public offering. The Company used the proceeds from the 2019 Notes offering to repay in full the Company’s $350 million term loan and to pay down outstanding balances under our revolving credit facility. 49
Table of Contents In September 2018, we issued $600 million of unsecured senior notes (“2018 Notes”) in a registered public offering. The 2018 Notes are due in 2023 with a coupon rate of 4%. We used the proceeds from the 2018 Notes offering to pay down our revolving credit facility. Notes payments due during the next five years as of December 31, 2020 are 0 in 2021 through 2022, $600 million in 2023, 0 in 2024 and $500 million in 2025. Credit Facilities In April 2020, the Company entered into a supplemental 364-day, $400 million revolving credit facility (the “2020 Revolving Credit Agreement”), and borrowings thereunder will be used for general corporate purposes. In September 2019, the Company entered into a second amended and restated $1.25 billion revolving credit facility (the “2019 Revolving Credit Agreement”), and borrowings thereunder will be used for general corporate purposes. The terms and conditions of the 2019 Revolving Credit Agreement, including the total commitment amount, essentially remained the same as under the previous credit agreement, except that the maturity date was extended to September 2024. Borrowings amounting to $165.0 million were rolled-over from the prior revolving credit facility into the 2019 Revolving Credit Agreement. Interest rates under the 2019 Revolving Credit Agreement are variable based on LIBOR at the time of the borrowing and the Company’s long-term credit rating and can range from LIBOR + 0.91% to LIBOR + 1.4%. The amendment also includes a covenant under which the Company is required to maintain a minimum ratio of consolidated EBITDA to consolidated interest expense of 3.0 to 1.0. Adjusted EBITDA is defined as consolidated net income before interest expense, income taxes, depreciation, amortization of intangible assets, losses from asset impairments, and certain other one-time adjustments. In addition, the amendment includes a covenant under which the Company’s ratio of consolidated debt minus certain cash and cash equivalents to consolidated EBITDA generally may not exceed 3.5 to 1.0. This amendment and restatement of the credit agreement was a non-cash transaction for the Company. On December 31, 2020 and December 31, 2019, our outstanding borrowings under these credit facilities were $785.0million and 0, respectively, which is included in Long-term debt in the condensed consolidated balance sheets. As of December 31, 2020, we were in compliance with all covenants under this facility. We currently have uncommitted bank lines of credit in China, which provide for unsecured borrowings for working capital of up to $17.5 million in aggregate as of December 31, 2020 and December 31, 2019, of which there were 0 outstanding balances as of December 31, 2020 and 2019.The weighted-average interest rates on these borrowings were 0 in both 2020 and 2019. The components of long-term debt were as follows: (In millions) | | 2020 | | | 2019 | | Notes | | $ | 1,787.2 | | | $ | 2,184.3 | | $1,250 million revolving credit agreement due September 2024 | | | 785.0 | | | | — | | Total debt | | | 2,572.2 | | | | 2,184.3 | | Less: current portion | | | — | | | | 399.7 | | Total long-term debt | | $ | 2,572.2 | | | $ | 1,784.6 | |
In our debt agreements, there are normal and customary events of default which would permit the lenders to accelerate the debt if not cured within applicable grace periods, such as failure to pay principal or interest when due or a change in control of the Company. There were no events of default as of December 31, 2020. 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. We account for these commodity derivatives as economic hedges or cash flow hedges. Changes in the fair value of economic hedges are recorded directly into current period earnings. The gross notional amount of all commodity derivatives outstanding at December 31, 2020 was $9.8 million, representing a net settlement asset of $1.9 million. There were no material commodity derivative contracts outstanding for the year ended December 31, 2019. 50
Table of Contents We may enter into foreign currency forward contracts to protect against foreign exchange risks associated with certain existing assets and liabilities, forecasted future cash flows, and net investments in foreign subsidiaries. Foreign exchange contracts related to forecasted future cash flows correspond to the periods of the forecasted transactions,which generally do not exceed 12 to 15 months subsequent to the latest balance sheet date. For derivative instruments that are designated as fair value hedges, the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item, are recognized on the same line of the statement of income. The changes in the fair value of cash flow hedges are reported in OCI and are recognized in the statement of income when the hedged item affects earnings. The changes in fair value for net investment hedges are recognized in the statement of income when realized upon sale or upon complete or substantially complete liquidation of the investment in the foreign entity. In addition, changes in the fair value of all economic hedge transactions are immediately recognized in current period earnings. Our primary foreign currency hedge contracts pertain to the Canadian dollar, the British pound, the Mexican peso and the Chinese yuan. The gross U.S. dollar equivalent notional amount of all foreign currency derivative hedges outstanding at December 31, 2020 was $415.2 million, representing a net settlement liability of $2.8 million. Based on foreign exchange rates as of December 31, 2020, we estimate that $2.0 million of net derivative gains included in accumulated other comprehensive income as of December 31, 2020 will be reclassified to earnings within the next twelve months. The fair values of foreign exchange and commodity derivative instruments on the consolidated balance sheets as of December 31, 2020 and 2019 were: | | | | | Fair Value | | (In millions) | | Location | | | 2020 | | | | 2019 | | Assets: | | | | | | | | | | | | | Foreign exchange contracts | | Other current assets | | | $ | 3.7 | | | | $ | 2.9 | | Commodity contracts | | Other current assets | | | | 1.9 | | | | | 0.1 | | | | Total assets | | | $ | 5.6 | | | | $ | 3.0 | | Liabilities: | | | | | | | | | | | | | Foreign exchange contracts | | Other current liabilities | | | $ | 6.5 | | | | $ | 2.2 | | Net investment hedges | | Other current liabilities | | | | — | | | | | 0.3 | | | | Total liabilities | | | $ | 6.5 | | | | $ | 2.5 | |
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Table of Contents The effects of derivative financial instruments on the consolidated statements of income in 2020, 2019 and 2018 were: (In millions) | | Classification and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships | | | | 2020 | | | | Cost of products sold | | | Interest expense | | | Other income, net | | Total amounts per Consolidated Statements of Income | | $ | 3,925.9 | | | $ | 83.9 | | | $ | 13.3 | | The effects of fair value and cash flow hedging: | | | | | | | | | | | | | Gain (loss) on fair value hedging relationships | | | | | | | | | | | | | Foreign exchange contracts: | | | | | | | | | | | | | Hedged items | | | | | | | | | | | 2.9 | | Derivative designated as hedging instruments | | | | | | | | | | | (1.8 | ) | Gain (loss) on cash flow hedging relationships | | | | | | | | | | | | | Foreign exchange contracts: | | | | | | | | | | | | | Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income | | | (3.0 | ) | | | | | | | | | Commodity contracts: | | | | | | | | | | | | | Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income | | | — | | | | | | | | | | Interest rate contracts: | | | | | | | | | | | | | Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income | | | | | | | 0.6 | | | | | | | | | | | | | | | | | | | (In millions) | | Classification and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships | | | | 2019 | | | | Cost of products sold | | | Interest expense | | | Other expense, net | | Total amounts per Consolidated Statements of Income | | $ | 3,712.2 | | | $ | 94.2 | | | $ | 29.0 | | The effects of fair value and cash flow hedging: | | | | | | | | | | | | | Gain (loss) on fair value hedging relationships | | | | | | | | | | | | | Foreign exchange contracts: | | | | | | | | | | | | | Hedged items | | | | | | | | | | | 4.0 | | Derivative designated as hedging instruments | | | | | | | | | | | (3.0 | ) | Gain (loss) on cash flow hedging relationships | | | | | | | | | | | | | Foreign exchange contracts: | | | | | | | | | | | | | Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income | | | 4.1 | | | | | | | | | | 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 | | | | | | | 0.4 | | | | | |
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Table of Contents (In millions) | | Classification and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships | | | | 2018 | | | | Cost of products sold | | | Interest expense | | | Other income, net | | Total amounts per Consolidated Statements of Income | | $ | 3,525.7 | | | $ | 74.5 | | | $ | 16.3 | | The effects of fair value and cash flow hedging: | | | | | | | | | | | | | Gain (loss) on fair value hedging relationships | | | | | | | | | | | | | Foreign exchange contracts: | | | | | | | | | | | | | Hedged items | | | | | | | | | | | (3.4 | ) | Derivative designated as hedging instruments | | | | | | | | | | | 5.0 | | Gain (loss) on cash flow hedging relationships | | | | | | | | | | | | | Foreign exchange contracts: | | | | | | | | | | | | | Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income | | | 2.2 | | | | | | | | | | Commodity contracts: | | | | | | | | | | | | | Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income | | | (0.2 | ) | | | | | | | | | Interest rate contracts: | | | | | | | | | | | | | Amount of gain or (loss) reclassified from accumulated other comprehensive (loss) income into income | | | | | | | 0.1 | | | | | |
The cash flow hedges recognized in other comprehensive income were net (losses) gains of $(3.2) million, $4.8 million and $10.1 million in 2020, 2019 and 2018 respectively. 9. Fair Value Measurements 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 other than quoted prices included in level 1 that are either observable directly or through corroboration with observable market data. Level 3 inputs are unobservable inputs due to little or 0 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 level 3, except for pension assets discussed in Note 14. The carrying value and fair value of debt as of December 31, 2020 and 2019 were as follows: (In millions) | | December 31, 2020 | | | December 31, 2019 | | | | Carrying Value | | | Fair Value | | | Carrying Value | | | Fair Value | | Notes, net of underwriting commissions, price discounts and debt issuance costs | | $ | 1,787.2 | | | $ | 1,994.9 | | | $ | 2,184.3 | | | $ | 2,271.4 | | Revolving credit facility | | | 785.0 | | | | 785.0 | | | | — | | | | — | |
The estimated fair value of our revolving credit facility is determined primarily using broker quotes, which are level 2 inputs. The estimated fair value of our Notes is determined by using quoted market prices of our debt securities, which are level 1 inputs. Assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019 were as follows: (In millions) | | Fair Value | | | | 2020 | | | | 2019 | | Assets: | | | | | | | | | | Derivative asset financial instruments (level 2) | | $ | 5.6 | | | | $ | 3.0 | | Deferred compensation program assets (level 2) | | | 16.3 | | | | | 12.1 | | Total assets | | $ | 21.9 | | | | $ | 15.1 | | Liabilities: | | | | | | | | | | Derivative liability financial instruments (level 2) | | $ | 6.5 | | | | $ | 2.5 | |
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Table of Contents The principal derivative financial instruments we enter into on a routine basis are foreign exchange contracts. In addition, from time to time, we enter into commodity swaps. Derivative financial instruments are recorded at fair value. 10. Capital Stock The Company has 750 million authorized shares of common stock, par value $0.01 per share and 60 million authorized shares of preferred stock, par value $0.01 per share. The number of shares of common stock and treasury stock and the share activity for 2020 and 2019 were as follows: | | Common Shares | | | | Treasury Shares | | | | 2020 | | | | 2019 | | | | 2020 | | | | 2019 | | Balance at the beginning of the year | | | 139,555,487 | | | | | 140,498,981 | | | | | 42,335,315 | | | | | 40,110,623 | | Stock plan shares issued | | | 2,175,510 | | | | | 1,281,198 | | | | | — | | | | | — | | Shares surrendered by optionees | | | (159,089 | ) | | | | (185,141 | ) | | | | 159,089 | | | | | 185,141 | | Common stock repurchases | | | (2,911,754 | ) | | | | (2,039,551 | ) | | | | 2,911,754 | | | | | 2,039,551 | | Balance at the end of the year | | | 138,660,154 | | | | | 139,555,487 | | | | | 45,406,158 | | | | | 42,335,315 | |
At December 31, 2020, 0 shares of our preferred stock were outstanding. Our Board of Directors has the authority, without action by the Company’s stockholders, to designate and issue our preferred stock in one or more series and to designate the rights, preferences, limitations and privileges of each series of preferred stock, which may be greater than the rights of the Company’s common stock. In 2020, we repurchased 2.9 million shares of outstanding common stock under the Company’s share repurchase program for $187.6 million. As of December 31, 2020, the Company’s total remaining share repurchase authorization under the remaining program was approximately $462 million. The share repurchase program does not obligate the Company to repurchase any specific dollar amount or number of shares and may be suspended or discontinued at any time. In December 2020, our Board of Directors declared a cash dividend of $0.26 per share of common stock, which represents an increase of 8% from the previous dividend. 54
Table of Contents 11. Accumulated Other Comprehensive (Loss) Income The reclassifications out of accumulated other comprehensive (loss) income for the years ended December 31, 2020 and 2019 were as follows: (In millions) | | | | | | | | | | | Details about Accumulated Other Comprehensive Loss Components | | Affected Line Item in the Consolidated Statements of Income | | | 2020 | | | 2019 | | | | Gains (losses) on cash flow hedges | | | | | | | | | | | Foreign exchange contracts | | $ | (3.0 | ) | | $ | 4.1 | | | Cost of products sold | Interest rate contracts | | | 0.6 | | | | 0.4 | | | Interest expense | Commodity contracts | | | — | | | | (0.1 | ) | | Cost of products sold | | | | (2.4 | ) | | | 4.4 | | | Total before tax | | | | — | | | | (0.6 | ) | | Tax expense | | | $ | (2.4 | ) | | $ | 3.8 | | | Net of tax | Defined benefit plan items | | | | | | | | | | | Recognition of actuarial losses | | | (3.2 | ) | | | (34.1 | ) | | (a) | | | | 0.4 | | | | 8.3 | | | Tax benefit | | | $ | (2.8 | ) | | $ | (25.8 | ) | | Net of tax | Total reclassifications for the period | | $ | (5.2 | ) | | $ | (22.0 | ) | | Net of tax |
(a) | These accumulated other comprehensive (loss) income components are included in the computation of net periodic benefit cost. Refer to Note 14, “Defined Benefit Plans,” for additional information. |
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 stockholders. It includes currency translation gains and losses, unrealized gains and losses from derivative instruments designated as cash flow hedges, and defined benefit plan adjustments. The after-tax components of and changes in accumulated other comprehensive (loss) income were as follows: (In millions) | | Foreign Currency Adjustments | | | Derivative Hedging Gain (Loss) | | | Defined Benefit Plan Adjustments | | | | Accumulated Other Comprehensive (Loss) Income | | Balance at December 31, 2017 | | $ | 5.8 | | | $ | (2.4 | ) | | $ | (42.6 | ) | | | $ | (39.2 | ) | Amounts classified into accumulated other comprehensive (loss) income | | | (31.1 | ) | | | 8.3 | | | | (6.3 | ) | | | | (29.1 | ) | Amounts reclassified into earnings | | | — | | | | (1.7 | ) | | | 3.0 | | | | | 1.3 | | Net current period other comprehensive (loss) income | | | (31.1 | ) | | | 6.6 | | | | (3.3 | ) | | | | (27.8 | ) | Balance at December 31, 2018 | | $ | (25.3 | ) | | $ | 4.2 | | | $ | (45.9 | ) | | | $ | (67.0 | ) | Amounts classified into accumulated other comprehensive (loss) income | | | 13.8 | | | | 5.1 | | | | (37.9 | ) | | | | (19.0 | ) | Amounts reclassified into earnings | | | — | | | | (3.8 | ) | | | 25.8 | | | | | 22.0 | | Adoption of ASU 2018-02 | | | | | | | | | | | (8.6 | ) | | | | (8.6 | ) | Net current period other comprehensive (loss) income | | | 13.8 | | | | 1.3 | | | | (20.7 | ) | | | | (5.6 | ) | Balance at December 31, 2019 | | $ | (11.5 | ) | | $ | 5.5 | | | $ | (66.6 | ) | | | $ | (72.6 | ) | Amounts classified into accumulated other comprehensive (loss) income | | | 18.7 | | | | (3.7 | ) | | | (2.7 | ) | | | | 12.3 | | Amounts reclassified into earnings | | | — | | | | 2.4 | | | | 2.8 | | | | | 5.2 | | Net current period other comprehensive (loss) income | | | 18.7 | | | | (1.3 | ) | | | 0.1 | | | | | 17.5 | | Balance at December 31, 2020 | | $ | 7.2 | | | $ | 4.2 | | | $ | (66.5 | ) | | | $ | (55.1 | ) |
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Table of Contents 12. Stock-Based Compensation As of December 31, 2020, we had awards outstanding under 2 Long-Term Incentive Plans, the Fortune Brands Home & Security, Inc. 2013 Long-Term Incentive Plan (the “Plan”) and the 2011 Long-Term Incentive Plan (the “2011 Plan”, and together with the Plan - the “Plans”). No new stock-based awards can be made under the 2011 Plan, but there are outstanding stock options under the 2011 Plan that continue to be exercisable.Our stockholders approved the Plan in 2013, which provides for the granting of stock options, performance share awards, restricted stock units, and other equity-based awards, to employees, directors and consultants. As of December 31, 2020, approximately 2.7 million shares of common stock remained authorized for issuance under the Plan. In addition, shares of common stock that were granted and subsequently expired, terminated, cancelled or forfeited, or were used to satisfy the required withholding taxes with respect to existing awards under the Plans may be recycled back into the total numbers of shares available for issuance under the Plan.Upon the exercise or payment of stock-based awards, shares of common stock are issued from authorized common shares. Stock-based compensation expense was as follows: (In millions) | | 2020 | | | | 2019 | | | | 2018 | | Restricted stock units | | $ | 21.5 | | | | $ | 19.4 | | | | $ | 21.3 | | Stock option awards | | | 5.3 | | | | | 7.0 | | | | | 8.6 | | Performance awards | | | 22.6 | | | | | 4.2 | | | | | 6.3 | | Director awards | | | 0.9 | | | | | 1.2 | | | | | 1.0 | | Total pre-tax expense | | | 50.3 | | | | | 31.8 | | | | | 37.2 | | Tax benefit | | | 8.7 | | | | | 6.0 | | | | | 6.2 | | Total after tax expense | | $ | 41.6 | | | | $ | 25.8 | | | | $ | 31.0 | |
Included in compensation costs are cash-settled restricted stock units of $2.3 million, $1.4 million and $0.9 million that are classified as a liability as of December 31, 2020, 2019 and 2018, respectively. Compensation costs that were capitalized in inventory were not material. Restricted Stock Units Restricted stock units (“RSUs”) have been granted to officers and certain employees of the Company and represent the right to receive shares of Company common stock subject to continued employment through each vesting date.RSUs generally vest ratably over a three-year period. In addition, certain employees can elect to defer receipt of a portion of their RSU awards upon vesting. Compensation cost is recognized over the service period. We calculate the fair value of each RSU granted by using the average of the high and low share prices on the date of grant. A summary of activity with respect to RSUs outstanding under the Plans for the year ended December 31, 2020 was as follows: | | Number of Restricted Stock Units | | | Weighted-Average Grant-Date Fair Value | | Non-vested at December 31, 2019 | | | 756,482 | | | $ | 53.89 | | Granted | | | 371,513 | | | | 70.66 | | Vested | | | (363,146 | ) | | | 56.09 | | Forfeited | | | (56,511 | ) | | | 53.89 | | Non-vested at December 31, 2020 | | | 708,338 | | | $ | 61.48 | |
The remaining unrecognized pre-tax compensation cost related to RSUs at December 31, 2020 was approximately $23.1 million, and the weighted-average period of time over which this cost will be recognized is 1.9 years. The fair value of RSUs that vested during 2020, 2019 and 2018 was $24.0 million, $15.2 million and $22.2 million, respectively. Stock Option Awards Stock options were granted to officers and certain employees of the Company and represent the right to purchase shares of Company common stock subject to continued employment through each vesting date. Stock options granted under the Plans generally vest over a three-year period and generally have a maturity of ten years from the grant date. All stock-based compensation to employees is required to be measured at fair value and expensed over the requisite service period. We recognize compensation expense on awards on a straight-line basis over the requisite service period for the entire award. 56
Table of Contents The fair value of Fortune Brands options was estimated at the date of grant using a Black-Scholes option pricing model with the assumptions shown in the following table: | | | 2020 | | | | 2019 | | | | 2018 | Current expected dividend yield | | | | 1.4 | % | | | | 1.5 | % | | | 1.3% | Expected volatility | | | | 25.9 | % | | | | 27.0 | % | | | 24.0% | Risk-free interest rate | | | | 1.2 | % | | | | 2.5 | % | | | 2.6% | Expected term | | | 5.3 years | | | | 5.0 years | | | | 5.0 years |
Beginning in 2020, the determination of expected volatility is based on the volatility of Fortune Brands common stock. The determination of expected volatility in prior years is based on a blended peer group volatility for companies in similar industries, at a similar stage of life and with similarmarket capitalization. The risk-free interest rate is based on U.S. government issues with a remaining term equal to the expected life of the stock options.The expected term is the period over which our employees are expected to hold their options. The expected term was determined based on the historical employee exercise behavior and the contractual term of the options. The dividend yield is based on the Company’s estimated dividend over the expected term. The weighted-average grant date fair value of stock options granted under the Plans during the years ended December 31, 2020, 2019 and 2018 was $15.21, $11.36 and $14.14, respectively. A summary of Fortune Brands stock option activity related to Fortune Brands and former employees of Fortune Brands, Inc., the Company from which we spun off from in 2011, for the year ended December 31, 2020 was as follows: | | Options | | | Weighted- Average Exercise Price | | Outstanding at December 31, 2019 | | | 3,825,216 | | | $ | 45.27 | | Granted | | | 530,932 | | | | 70.56 | | Exercised | | | (1,734,610 | ) | | | 37.44 | | Expired/forfeited | | | (82,509 | ) | | | 56.40 | | Outstanding at December 31, 2020 | | | 2,539,029 | | | $ | 55.54 | |
Options outstanding and exercisable at December 31, 2020 were as follows: | | Options Outstanding (a) | | | Options Exercisable (b) | | Range Of Exercise Prices | | Options Outstanding | | | Weighted- Average Remaining Contractual Life | | | Weighted- Average Exercise Price | | | Options Exercisable | | | Weighted- Average Exercise Price | | 13.00 to 20.00 | | | 64,274 | | | | 0.75 | | | | 17.21 | | | | 64,274 | | | | 17.21 | | 20.01 to 83.07 | | | 2,474,755 | | | | 6.86 | | | | 56.53 | | | | 1,589,176 | | | | 52.94 | | | | | 2,539,029 | | | | 6.71 | | | $ | 55.54 | | | | 1,653,450 | | | $ | 51.56 | |
(a) | At December 31, 2020, the aggregate intrinsic value of options outstanding was $76.6 million. |
(b) | At December 31, 2020 the weighted-average remaining contractual life of options exercisable was 5.7 years and the aggregate intrinsic value of options exercisable was $56.5 million. |
The remaining unrecognized compensation cost related to unvested awards at December 31, 2020 was $6.7 million, and the weighted-average period of time over which this cost will be recognized is 2.0 years. The fair value of options that vested during the years ended December 31, 2020, 2019 and 2018 was $9.4 million, $7.1 million and $6.7 million, respectively. The intrinsic value of Fortune Brands stock options exercised in the years ended December 31, 2020, 2019 and 2018 was $64.0 million, $26.0 million and $8.7 million, respectively. Performance Share Awards Performance share awards were granted to officers and certain employees of the Company and represent the right to earnshares of Company common stock based on the achievement of company-wide non-GAAP performance conditions, including average return on net tangible assetsand cumulative EBITDAduring the three-year performance period. Compensation cost is amortized into expense over the performance period, which is generally three years, and is based on the probability of meeting performance targets. The fair value of each performance share award is based on the average of the high and low stock price on the date of grant. 57
Table of Contents The following table summarizes information aboutperformance share awards as of December 31, 2020, as well as activity during the year then ended. The number of performance share awards granted are shown below at the target award amounts: | | Number of Performance Share Awards | | | Weighted-Average Grant-Date Fair Value | | Non-vested at December 31, 2019 | | | 555,657 | | | $ | 53.71 | | Granted | | | 192,958 | | | | 68.15 | | Vested | | | (60,048 | ) | | | 58.08 | | Forfeited | | | (112,108 | ) | | | 56.32 | | Non-vested at December 31, 2020 | | | 576,459 | | | $ | 57.54 | |
The remaining unrecognized pre-tax compensation cost related to performance share awards at December 31, 2020 was approximately $19.9 million, and the weighted-average period of time over which this cost will be recognized is 1.7 years. The fair value of performance share awards that vested during 2020 was $4.3 million (60,048 shares). Director Awards Stock awards are used as part of the compensation provided to outside directors under the Plan. Awards are issued annually in the second quarter. In addition, outside directors can elect to have director cash compensation paid in stock or can elect to defer payment of stock. Compensation cost is expensed at the time of an award based on the fair value of a share at the date of the award. In 2020, 2019 and 2018, we awarded 20,181, 21,746 and 19,109 shares of Company common stock to outside directors with a weighted-average fair value on the date of the award of $46.82, $54.48 and $54.93, respectively. 13. Revenue Our principal performance obligations are the sale of faucets and accessories, fiberglass and steel entry-door systems and locks, safes, safety, security devices and decking, and kitchen and bath cabinets (collectively, “goods” or “products”). We recognize revenue for the sale of goods based on our assessment of when control transfers 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 17, “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 $30.5million and $16.9 million as of December 31, 2020 and 2019, respectively. 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 approximately $2.9 million and $2.6 million as of December 31, 2020 and 2019, respectively. 58
Table of Contents 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 years ended December 31, 2020, 2019 and 2018. (In millions) | | December 31, 2020 | | | December 31, 2019 | | | December 31, 2018 | | Wholesalers(a) | | $ | 2,720.6 | | | $ | 2,682.8 | | | $ | 2,607.3 | | Home Center retailers(b) | | | 1,808.1 | | | | 1,606.7 | | | | 1,452.3 | | Other retailers(c) | | | 345.6 | | | | 304.8 | | | | 311.6 | | Builder direct | | | 220.0 | | | | 229.4 | | | | 235.4 | | U.S. net sales | | | 5,094.3 | | | | 4,823.7 | | | | 4,606.6 | | International(d) | | | 996.0 | | | | 940.9 | | | | 878.5 | | Net sales | | $ | 6,090.3 | | | $ | 5,764.6 | | | $ | 5,485.1 | |
(a) | Represents sales to customers whose business is oriented towards builders, professional trades and home remodelers, inclusive of sales through our customers’ respective internet website portals. |
(b) | Represents sales to the three largest “Do-It-Yourself” retailers; The Home Depot, Inc., Lowes Companies, Inc. and Menards, Inc., inclusive of sales through their respective internet website portals. |
(c) | Represents sales principally to our mass merchant and standalone independent e-commerce customers. |
(d) | Represents sales in markets outside the United States, principally in China, Canada, Europe and Mexico. |
Practical Expedients Incremental costs of obtaining a contract include only those costs the Company incurs that would not have been incurred if the contract had not been obtained. These costs are required to be recognized as assets and amortized over the period that the related goods or services transfer to the customer. As a practical expedient, we expense as incurred costs to obtain a contract when the expected amortization period is one year or less. These costs are recorded within selling, general and administrative expenses. 14. Defined Benefit Plans We have a number of pension plans in the United States, covering many of the Company’s employees; however, the majority of these plans have been frozen to new participants and benefit accruals were frozen for active participants on December 31, 2016. The plans provide for payment of retirement benefits, mainly commencing between the ages of 55 and 65. After meeting certain qualifications, an employee acquires a vested right to future benefits. The benefits payable under the plans are generally determined on the basis of an employee’s length of service and/or earnings. Employer contributions to the plans are made, as necessary, to ensure legal funding requirements are satisfied. Also, from time to time, we may make contributions in excess of the legal funding requirements. Service cost for 2020 relates to benefit accruals for an hourly Union group within the defined benefit plan for our Outdoors & Security segment. All other benefit accruals under our defined benefit pension plans were frozen as of, or prior to, December 31, 2016. Net actuarial gains and losses occur when actual experience differs from any of the assumptions used to value defined benefit plans or when assumptions change as they may each year. The primary factors contributing to actuarial gains and losses are changes in the discount rate used to value obligations as of the measurement date and the differences between expected and actual returns on pension plan assets. 59
Table of Contents In addition, the Company provides postretirement health care and life insurance benefits to certain retirees. (In millions) | | | Pension Benefits | | | | Postretirement Benefits | | Obligations and Funded Status at December 31 | | | 2020 | | | | 2019 | | | | 2020 | | | | 2019 | | Change in the Projected Benefit Obligation (PBO): | | | | | | | | | | | | | | | | | | | | | Projected benefit obligation at beginning of year | | | $ | 877.1 | | | | $ | 763.2 | | | | $ | 3.6 | | | | $ | 1.4 | | Projected benefit obligation acquired(a) | | | | — | | | | | — | | | | | 9.6 | | | | | — | | Service cost | | | | 0.4 | | | | | 0.4 | | | | | 0.4 | | | | | 0.2 | | Interest cost | | | | 28.3 | | | | | 32.9 | | | | | 0.2 | | | | | 0.2 | | Plan amendments | | | | — | | | | | — | | | | | — | | | | | 1.6 | | Actuarial loss | | | | 70.6 | | | | | 121.6 | | | | | 0.2 | | | | | 1.0 | | Benefits paid | | | | (42.9 | ) | | | | (41.0 | ) | | | | (0.6 | ) | | | | (0.7 | ) | Curtailment gain | | | | — | | | | | — | | | | | — | | | | | (0.1 | ) | Projected benefit obligation at end of year | | | $ | 933.5 | | | | $ | 877.1 | | | | $ | 13.4 | | | | $ | 3.6 | | Accumulated benefit obligation at end of year (excludes the impact of future compensation increases) | | | $ | 933.5 | | | | $ | 877.1 | | | | $ | — | | | | $ | — | | Change in Plan Assets: | | | | | | | | | | | | | | | | | | | | | Fair value of plan assets at beginning of year | | | $ | 677.2 | | | | $ | 599.6 | | | | $ | — | | | | $ | — | | Actual return on plan assets | | | | 101.3 | | | | | 106.8 | | | | | — | | | | | — | | Employer contributions | | | | 49.3 | | | | | 11.8 | | | | | 0.6 | | | | | 0.7 | | Benefits paid | | | | (42.9 | ) | | | | (41.0 | ) | | | | (0.6 | ) | | | | (0.7 | ) | Fair value of plan assets at end of year | | | $ | 784.9 | | | | $ | 677.2 | | | | $ | — | | | | $ | — | | Funded status (Fair value of plan assets less PBO) | | | $ | (148.6 | ) | | | $ | (199.9 | ) | | | $ | (13.4 | ) | | | $ | (3.6 | ) |
| (a) | Related to the Larson acquisition discussed in Note 4. |
The actuarial loss is primarily a result of changes in discount rates from year to year. The accumulated benefit obligation exceeds the fair value of assets for all pension plans. Amounts recognized in the consolidated balance sheets consist of: | | Pension Benefits | | | | Postretirement Benefits | | (In millions) | | 2020 | | | | 2019 | | | | 2020 | | | | 2019 | | Current benefit payment liability | | $ | (1.4 | ) | | | $ | (1.4 | ) | | | $ | (1.1 | ) | | | $ | (0.7 | ) | Accrued benefit liability | | | (147.2 | ) | | | | (198.5 | ) | | | | (12.3 | ) | | | | (2.9 | ) | Net amount recognized | | $ | (148.6 | ) | | | $ | (199.9 | ) | | | $ | (13.4 | ) | | | $ | (3.6 | ) |
As of December 31, 2020, we adopted the new Society of Actuaries MP-2020 mortality tables resulting in an immaterial decrease in plan benefit obligation and ongoing expenses. As of December 31, 2019, we adopted the new Society of Actuaries MP-2019 mortality tables, resulting in an immaterial increase in plan benefit obligation, and deferred actuarial losses in accumulated other comprehensive income. The amounts in accumulated other comprehensive loss on the consolidated balance sheets that have not yet been recognized as components of net periodic benefit cost were as follows: (In millions) | | Pension Benefits | | | | Postretirement Benefits | | Net actuarial loss (gain) at December 31, 2018 | | $ | 71.8 | | | | $ | (0.3 | ) | Recognition of actuarial loss | | | (34.1 | ) | | | | (0.6 | ) | Current year actuarial loss | | | 50.1 | | | | | 0.6 | | Net actuarial loss due to curtailment | | | (0.1 | ) | | | | — | | Net actuarial loss (gain) at December 31, 2019 | | $ | 87.7 | | | | $ | (0.3 | ) | Recognition of actuarial loss | | | (2.7 | ) | | | | (0.1 | ) | Current year actuarial loss | | | 2.1 | | | | | 1.0 | | Net actuarial loss due to curtailment | | | (0.6 | ) | | | | — | | Net actuarial loss at December 31, 2020 | | $ | 86.5 | | | | $ | 0.6 | |
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Table of Contents Components of net periodic benefit cost were as follows: Components of Net Periodic Benefit (Income) Cost | | Pension Benefits | | | | Postretirement Benefits | | (In millions) | | 2020 | | | | 2019 | | | 2018 | | | | 2020 | | | | 2019 | | | 2018 | | Service cost | | $ | 0.4 | | | | $ | 0.4 | | | $ | 0.5 | | | | $ | 0.4 | | | | $ | 0.2 | | | $ | — | | Interest cost | | | 28.3 | | | | | 32.9 | | | | 30.7 | | | | | 0.2 | | | | | 0.2 | | | | — | | Expected return on plan assets | | | (32.8 | ) | | | | (35.2 | ) | | | (41.0 | ) | | | | — | | | | | — | | | | — | | Recognition of actuarial losses (gains) | | | 2.7 | | | | | 34.1 | | | | 3.9 | | | | | 0.1 | | | | | 0.6 | | | | (0.1 | ) | Settlement/Curtailment losses (gains) | | | 0.6 | | | | | 0.1 | | | | — | | | | | — | | | | | (0.1 | ) | | | — | | Amortization of prior service credits | | | — | | | | | — | | | | — | | | | | — | | | | | 0.2 | | | | — | | Net periodic benefit cost (income) | | $ | (0.8 | ) | | | $ | 32.3 | | | $ | (5.9 | ) | | | $ | 0.7 | | | | $ | 1.1 | | | $ | (0.1 | ) |
Assumptions | | Pension Benefits | | | | Postretirement Benefits | | | | 2020 | | | | 2019 | | | 2018 | | | | 2020 | | | | 2019 | | | 2018 | | Weighted-Average Assumptions Used to Determine Benefit Obligations at December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Discount rate | | | 2.6 | % | | | | 3.3 | % | | | 4.4 | % | | | | 5.9 | % | | | | 6.4 | % | | | 4.2 | % | Weighted-Average Assumptions Used to Determine Net Cost for Years Ended December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Discount rate | | | 3.3 | % | | | | 4.4 | % | | | 3.8 | % | | | | 6.4 | % | | | | 4.2 | % | | | 3.4 | % | Expected long-term rate of return on plan assets | | | 4.5 | % | | | | 4.9 | % | | | 6.0 | % | | | | — | | | | | — | | | | — | |
| | Postretirement Benefits | | | 2020 | | | | 2019 | | | Assumed Health Care Cost Trend Rates Used to Determine Benefit Obligations and Net Cost at December 31: | | | | | | | | | Health care cost trend rate assumed for next year | | 6.4/7.4 | % | (a) | | 6.7/7.8 | % | (a) | Rate that the cost trend rate is assumed to decline (the ultimate trend rate) | | 4.5 | % | | | 4.5 | % | | Year that the rate reaches the ultimate trend rate | | 2027 | | | | 2027 | | |
(a) | The pre-65 initial health care cost trend rate is shown first / followed by the post-65 rate. |
Plan Assets The fair value of the pension assets by major category of plan assets as of December 31, 2020 and 2019 were as follows: (In millions) | | Total as of balance sheet date | | | | 2020 | | | 2019 | | Group annuity/insurance contracts (level 3) | | $ | 24.8 | | | $ | 24.2 | | Collective trusts: | | | | | | | | | Cash and cash equivalents | | | 16.0 | | | | 7.8 | | Equity | | | 287.6 | | | | 245.3 | | Fixed income | | | 410.0 | | | | 355.0 | | Multi-strategy hedge funds | | | 24.6 | | | | 23.2 | | Real estate | | | 21.9 | | | | 21.7 | | Total | | $ | 784.9 | | | $ | 677.2 | |
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Table of Contents A reconciliation of Level 3 measurements was as follows: | | Group annuity/ insurance contracts | | (In millions) | | 2020 | | | | 2019 | | January 1 | | $ | 24.2 | | | | $ | 23.6 | | Actual return on assets related to assets still held | | | 0.6 | | | | | 0.6 | | December 31 | | $ | 24.8 | | | | $ | 24.2 | |
Our defined benefit plans Master Trust own a variety of investment assets. All of these investment assets, except for group annuity/insurance contracts are measured using net asset value per share as a practical expedient per ASC 820. Following the retrospective adoption of ASU 2015-07 (Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share) we excluded all investments measured using net asset value per share in the amount of $760.1 million and $653.0 million as of December 31, 2020 and 2019, respectively, from the tabular fair value hierarchy disclosure. The terms and conditions for redemptions vary for each class of the investment assets valued at net asset value per share as a practical expedient. Real estate assets may be redeemed quarterly with a 45 day redemption notice period. Investment assets in multi-strategy hedge funds may be redeemed semi-annually with a 95 day redemption notice period. Equity, fixed income and cash and cash equivalents have no specified redemption frequency and notice period and may be redeemed daily. As of December 31, 2020 we do not have an intent to sell or otherwise dispose of these investment assets at prices different than the net asset value per share. Our investment strategy is to optimize investment returns through a diversified portfolio of investments, taking into consideration underlying plan liabilities and asset volatility. The defined benefit asset allocation policy of the plans allow for an equity allocation of 0% to 75%, a fixed income allocation of 25% to 100%, a cash allocation of up to 25% and other investments of up to 20%. Asset allocations are based on the underlying liability structure. All retirement asset allocations are reviewed periodically to ensure the allocation meets the needs of the liability structure. Our 2021 expected blended long-term rate of return on plan assets of 4.5% was determined based on the nature of the plans’ investments, our current asset allocation and projected long-term rates of return from pension investment consultants. Estimated Future Retirement Benefit Payments The following retirement benefit payments are expected to be paid: (In millions) | | Pension Benefits | | | | Postretirement Benefits | | 2021 | | $ | 42.0 | | | | $ | 1.0 | | 2022 | | | 43.1 | | | | | 0.9 | | 2023 | | | 44.2 | | | | | 0.9 | | 2024 | | | 45.3 | | | | | 1.0 | | 2025 | | | 46.3 | | | | | 1.1 | | Years 2026-2030 | | | 238.7 | | | | | 5.7 | |
Estimated future retirement benefit payments above are estimates and could change significantly based on differences between actuarial assumptions and actual events and decisions related to lump sum distribution options that are available to participants in certain plans. Defined Contribution Plan Contributions We sponsor a number of defined contribution plans. Contributions are determined under various formulas. Cash contributions by the Company related to these plans amounted to $36.7 million, $36.3 million and $29.5 million in 2020, 2019 and 2018, respectively. 15. Income Taxes The components of income from continuing operations before income taxes and noncontrolling interests were as follows: (In millions) | | | 2020 | | | | 2019 | | | 2018 | | Domestic operations | | | $ | 576.8 | | | | $ | 438.2 | | | $ | 456.7 | | Foreign operations | | | | 154.0 | | | | | 137.1 | | | | 80.3 | | Income before income taxes and noncontrolling interests | | | $ | 730.8 | | | | $ | 575.3 | | | $ | 537.0 | |
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Table of Contents Income tax expense in the consolidated statement of income consisted of the following: (In millions) | | | 2020 | | | | 2019 | | | 2018 | | Current | | | | | | | | | | | | | | | Federal | | | $ | 100.0 | | | | $ | 94.9 | | | $ | 93.5 | | Foreign | | | | 55.9 | | | | | 35.1 | | | | 26.4 | | State and other | | | | 27.5 | | | | | 21.5 | | | | 24.1 | | Deferred | | | | | | | | | | | | | | | Federal | | | | (1.8 | ) | | | | (6.9 | ) | | 3.2 | | Foreign | | | | (11.5 | ) | | | | (3.1 | ) | | | (1.8 | ) | State and Local | | | | (1.3 | ) | | | | 2.5 | | | | 1.6 | | Total income tax expense | | | $ | 168.8 | | | | $ | 144.0 | | | $ | 147.0 | |
A reconciliation between the federal statutory tax rate and the effective tax rate is as follows: (In millions) | | | 2020 | | | | 2019 | | | 2018 | | Income tax expense computed at federal statutory income tax rate | | | $ | 153.5 | | | | $ | 120.8 | | | $ | 112.8 | | Other income taxes, net of federal tax benefit | | | | 22.3 | | | | | 18.0 | | | | 13.7 | | Foreign taxes at a different rate than U.S. federal statutory income tax rate | | | | 3.0 | | | | | 1.4 | | | | 3.5 | | Provision for foreign earnings repatriation, net | | | | 3.2 | | | | | 0.4 | | | | 0.6 | | Net adjustments for uncertain tax positions | | | | (0.2 | ) | | | | 7.5 | | | | 4.1 | | Share-based compensation (ASU 2016-09) | | | | (11.5 | ) | | | | (3.7 | ) | | | (2.1 | ) | 2017 Tax Act impact | | | | — | | | | | — | | | | 5.5 | | Deferred tax impact of state tax rate changes | | | | (0.7 | ) | | | | 3.1 | | | | 3.5 | | Valuation allowance (decrease) increase | | | | (7.1 | ) | | | | 3.4 | | | | 3.0 | | Expiration of loss carryforwards | | | | 6.1 | | | | | — | | | | — | | Miscellaneous other, net | | | | 0.2 | | | | | (6.9 | ) | | | 2.4 | | Income tax expense as reported | | | $ | 168.8 | | | | $ | 144.0 | | | $ | 147.0 | | Effective income tax rate | | | | 23.1 | % | | | | 25.0 | % | | | 27.4 | % |
The 2020 effective income tax rate was unfavorably impacted by state, local and foreign taxes, and was favorably impacted by a benefit related to share-based compensation. The 2019 and 2018 effective income tax rates were unfavorably impacted by state, local and foreign taxes, a valuation allowance increase, and increases in uncertain tax positions. The 2018 effective income tax rate was also unfavorably impacted by an adjustment to the provisional net benefit recorded in 2017 under the Tax Act. The 2019 and 2018 effective income tax rates were favorably impacted by a benefit related to share-based compensation. The Tax Act, enacted on December 22, 2017, made significant changes to the U.S. Internal Revenue Code including a reduction in the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, an exemption from federal income tax for dividends received from foreign subsidiaries and an imposition of a one-time transition tax on the deemed repatriation of cumulative foreign earnings as of December 31, 2017. A reconciliation of the beginning and ending amount of unrecognized tax benefits (“UTBs”) is as follows: (In millions) | | | 2020 | | | | 2019 | | | 2018 | | Unrecognized tax benefits—beginning of year | | | $ | 88.0 | | | | $ | 83.5 | | | $ | 87.5 | | Gross additions—current year tax positions | | | | 7.2 | | | | | 9.2 | | | | 9.1 | | Gross additions—prior year tax positions | | | | 3.7 | | | | | 2.9 | | | | 9.3 | | Gross additions (reductions)—purchase accounting adjustments | | | | 12.1 | | | | | — | | | | 1.0 | | Gross reductions—prior year tax positions | | | | (11.7 | ) | | | | (6.9 | ) | | | (14.5 | ) | Gross reductions—settlements with taxing authorities | | | | (3.2 | ) | | | | (0.7 | ) | | | (8.9 | ) | Unrecognized tax benefits—end of year | | | $ | 96.1 | | | | $ | 88.0 | | | $ | 83.5 | |
The amount of UTBs that, if recognized as of December 31, 2020, would affect the Company’s effective tax rate was $80.0 million. It is reasonably possible that, within the next twelve months, total UTBs may decrease in the range of $4.0 million to $48.1 million primarily as a result of the conclusion of U.S. federal, state and foreign income tax proceedings. 63
Table of Contents We classify interest and penalty accruals related to UTBs as income tax expense. In 2020, 2019 and 2018, we recognized interest and penalty expense of approximately $0.7 million, $3.0 million and $2.2 million, respectively. At December 31, 2020 and 2019, we had accruals for the payment of interest and penalties of $17.6 million and $16.1 million, respectively. We file income tax returns in the U.S., various state and foreign jurisdictions. The Company is currently under examination by the U.S. Internal Revenue Service for the periods related to 2017 and 2018. In addition to the U.S., we have tax years that remain open and subject to examination by tax authorities in the following major taxing jurisdictions: Canada for years after 2015, Mexico for years after 2015 and China for years after 2016. The components of net deferred tax assets (liabilities) as of December 31, 2020 and 2019 were as follows: (In millions) | | | 2020 | | | | 2019 | | Deferred tax assets: | | | | | | | | | | | Compensation and benefits | | | $ | 43.3 | | | | $ | 37.6 | | Defined benefit plans | | | | 38.9 | | | | | 50.8 | | Capitalized inventories | | | | 18.4 | | | | | 18.2 | | Accounts receivable | | | | 16.0 | | | | | 5.1 | | Operating lease liabilities | | | | 43.3 | | | | | 42.0 | | Other accrued expenses | | | | 79.7 | | | | | 58.8 | | Net operating loss and other tax carryforwards | | | | 14.4 | | | | | 22.4 | | Valuation allowance | | | | (9.7 | ) | | | | (16.8 | ) | Miscellaneous | | | | 1.2 | | | | | 3.9 | | Total deferred tax assets | | | | 245.5 | | | | | 222.0 | | Deferred tax liabilities: | | | | | | | | | | | Fixed assets | | | | (86.4 | ) | | | | (70.4 | ) | Intangible assets | | | | (220.9 | ) | | | | (222.9 | ) | Operating lease assets | | | | (43.3 | ) | | | | (42.0 | ) | Other investments | | | | (6.8 | ) | | | | (7.4 | ) | Miscellaneous | | | | (17.8 | ) | | | | (19.2 | ) | Total deferred tax liabilities | | | | (375.2 | ) | | | | (361.9 | ) | Net deferred tax liability | | | $ | (129.7 | ) | | | $ | (139.9 | ) |
In accordance with ASC requirements for Income Taxes, deferred taxes were classified in the consolidated balance sheets as of December 31, 2020 and 2019 as follows: (In millions) | | | 2020 | | | | 2019 | | Other assets | | | | 30.8 | | | | | 17.3 | | Deferred income taxes | | | | (160.5 | ) | | | | (157.2 | ) | Net deferred tax liability | | | $ | (129.7 | ) | | | $ | (139.9 | ) |
As of December 31, 2020 and 2019, the Company had deferred tax assets relating to net operating losses, capital losses, and other tax carryforwards of $14.4 million and $22.4 million, respectively, of which approximately $0.6 million will expire between 2021 and 2025, and the remainder of which will expire in 2026 and thereafter. The Company has provided a valuation allowance to reduce the carrying value of certain of these deferred tax assets, as management has concluded that, based on the available evidence, it is more likely than not that the deferred tax assets will not be fully realized.During 2020, certain loss carryforwards expired, and as a result, the valuation allowance associated with these loss carryforwards also decreased. The Company has adjusted the 2019 deferred tax components to include operating lease assets and liabilities on a gross basis for comparative purposes. The impact to 2019 was not material. Accumulated foreign earnings and profits of the Company’s foreign subsidiaries as of December 31, 2017 were subject to a deemed repatriation tax and should not be subject to additional U.S. federal income tax upon an actual repatriation of these earnings. As of December 31, 2020, the Company has recorded an estimated deferred tax liability of $7.2 million for foreign and state taxes that will be payable upon distribution of these earnings. Subsequent to December 31, 2017, we consider the unremitted earnings of certain foreign subsidiaries that impose local country taxes on dividends to be indefinitely reinvested. We have not provided deferred taxes on the remaining book over tax outside basis difference of $126 million related to these subsidiaries. The amount of unrecognized deferred tax liabilities for local country withholding taxes that would be owed related to these earnings is less than $7 million. 64
Table of Contents 16. Restructuring and Other Charges Pre-tax restructuring and other charges for the year ended December 31, 2020 were as follows: | | Year Ended December 31, 2020 | | | | | | | | | Other Charges (a) | | | | | | | (In millions) | | Restructuring Charges | | | | Cost of Products Sold | | | SG&A(b) | | | | Total Charges | | Plumbing | | $ | 6.0 | | | | $ | 4.4 | | | $ | (1.7 | ) | | | $ | 8.7 | | Outdoors & Security | | | 3.0 | | | | | 0.9 | | | | — | | | | | 3.9 | | Cabinets | | | 5.5 | | | | | 5.1 | | | | 0.2 | | | | | 10.8 | | Corporate | | | 1.4 | | | | | — | | | | 0.3 | | | | | 1.7 | | Total | | $ | 15.9 | | | | $ | 10.4 | | | $ | (1.2 | ) | | | $ | 25.1 | |
(a) | “Other Charges” represent charges or gains directly related to restructuring initiatives that cannot be reported as restructuring under GAAP. Such charges or gains may include losses on disposal of inventories, trade receivables allowances from exiting product lines, write-off of displays from exiting a customer relationship, accelerated depreciation resulting from the closure of facilities, and gains and losses on the sale of previously closed facilities. |
(b) | Selling, general and administrative expenses |
Restructuring and other charges in 2020 are largely related to headcount actions associated with COVID-19 across all segments and costs associated with changes in our manufacturing processes within our Plumbing segment. Pre-tax restructuring and other charges for the year ended December 31, 2019 were as follows: | | Year Ended December 31, 2019 | | | | | | | | | Other Charges (a) | | | | | | | (In millions) | | Restructuring Charges | | | | Cost of Products Sold | | | SG&A(b) | | | | Total Charges | | Plumbing | | $ | 2.8 | | | | $ | 2.6 | | | $ | 2.8 | | | | $ | 8.2 | | Outdoors & Security | | | 1.7 | | | | | 1.6 | | | | — | | | | | 3.3 | | Cabinets | | | 10.2 | | | | | (0.1 | ) | | | 0.6 | | | | | 10.7 | | Total | | $ | 14.7 | | | | $ | 4.1 | | | $ | 3.4 | | | | $ | 22.2 | |
(a) | “Other Charges” represent charges or gains directly related to restructuring initiatives that cannot be reported as restructuring under GAAP. Such charges or gains may include losses on disposal of inventories, trade receivables allowances from exiting product lines, write-off of displays from exiting a customer relationship, accelerated depreciation resulting from the closure of facilities, and gains and losses on the sale of previously closed facilities. |
(b) | Selling, general and administrative expenses |
Restructuring and other charges in 2019 arelargely related to severance costs and costs associated with closing facilities across all our segments. Pre-tax restructuring and other charges for the year ended December 31, 2018 were as follows: | | Year Ended December 31, 2018 | | | | | | | | | Other Charges (a) | | | | | | | (In millions) | | Restructuring Charges | | | | Cost of Products Sold | | | SG&A(b) | | | | Total Charges | | Plumbing | | $ | 2.6 | | | | $ | 0.6 | | | $ | 0.1 | | | | $ | 3.3 | | Outdoors & Security | | | 4.7 | | | | | 2.4 | | | | (1.2 | ) | | | | 5.9 | | Cabinets | | | 16.8 | | | | | 9.1 | | | | 0.3 | | | | | 26.2 | | Total | | $ | 24.1 | | | | $ | 12.1 | | | $ | (0.8 | ) | | | $ | 35.4 | |
(a) | “Other Charges” represent charges or gains directly related to restructuring initiatives that cannot be reported as restructuring under GAAP. Such charges or gains may include losses on disposal of inventories, trade receivables allowances from exiting product lines, write-off of displays from exiting a customer relationship, accelerated depreciation resulting from the closure of facilities, and gains and losses on the sale of previously closed facilities. |
(b) | Selling, general and administrative expenses |
Restructuring and other charges in 2018 are primarily related to initiatives to consolidate and rationalize our manufacturing footprint and discontinue certain product lines in our Cabinets segment and severance costs within all our segments. 65
Table of Contents Reconciliation of Restructuring Liability (In millions) | | Balance at 12/31/19 | | | 2020 Provision | | | Cash Expenditures (a) | | | Non-Cash Write-offs | | | Balance at 12/31/20 | | Workforce reduction costs | | $ | 6.7 | | | $ | 14.6 | | | $ | (14.4 | ) | | $ | - | | | $ | 6.9 | | Other | | | 0.1 | | | | 1.3 | | | | (0.7 | ) | | | - | | | | 0.7 | | | | $ | 6.8 | | | $ | 15.9 | | | $ | (15.1 | ) | | $ | - | | | $ | 7.6 | |
(a) | Cash expenditures primarily related to severance charges. |
(In millions) | | Balance at 12/31/18 | | | 2019 Provision | | | Cash Expenditures (a) | | | Non-Cash Write-offs | | | Balance at 12/31/19 | | Workforce reduction costs | | $ | 9.9 | | | $ | 13.5 | | | $ | (16.6 | ) | | $ | (0.1 | ) | | $ | 6.7 | | Other | | | 0.6 | | | | 1.2 | | | | (1.4 | ) | | | (0.3 | ) | | | 0.1 | | | | $ | 10.5 | | | $ | 14.7 | | | $ | (18.0 | ) | | $ | (0.4 | ) | | $ | 6.8 | |
(a) | Cash expenditures primarily related to severance charges. |
17. Commitments Purchase Obligations Purchase obligations of the Company as of December 31, 2020 were $731.7 million, of which $689.0 million is due within one year. Purchase obligations include contracts for raw materials and finished goods purchases, selling and administrative services, and capital expenditures. Product Warranties We generally record warranty expense related to contractual warranty terms at the time of sale. We may also provide customer concessions for claims made outside of the contractual warranty terms and those expenses are recorded in the period in which the concession is made. We offer our customers various warranty terms based on the type of product that is sold. Warranty expense is determined based on historic claim experience and the nature of the product category. The following table summarizes activity related to our product warranty liability for the years ended December 31, 2020, 2019 and 2018. (In millions) | | 2020 | | | | 2019 | | | 2018 | | Reserve balance at the beginning of the year | | $ | 24.7 | | | | $ | 24.9 | | | $ | 17.2 | | Provision for warranties issued | | | 25.4 | | | | | 25.4 | | | | 25.1 | | Settlements made (in cash or in kind) | | | (27.2 | ) | | | | (25.8 | ) | | | (25.7 | ) | Acquisition | | | 1.5 | | | | | — | | | | 8.9 | | Foreign currency | | | 0.1 | | | | | 0.2 | | | | (0.6 | ) | Reserve balance at end of year | | $ | 24.5 | | | | $ | 24.7 | | | $ | 24.9 | |
18. Information on Business Segments We report our operating segments based on how operating results are regularly reviewed by our chief operating decision maker for making decisions about resource allocations to segments and assessing performance. The Company’s operating segments and types of products from which each segment derives revenues are described below. The Plumbing segment manufactures or assembles and sells faucets, accessories, kitchen sinks and waste disposals, predominantly under the Moen, ROHL, Riobel, Victoria+Albert, Perrin & Rowe and Shaws brands. The Outdoors & Security segment includes fiberglass and steel entry door systems under the Therma-Tru brand name, storm, screen and security doors under the Larson brand name, composite decking and railing under the Fiberon brand name, urethane millwork under the Fypon brand name, locks, safety and security devices, and electronic security products under the Master Lock and American Lock brands, and fire resistant safes, security containers and commercial cabinets under the SentrySafe brand. The Cabinets segment includes stock, semi-custom and custom cabinetry, as well as vanities, for the kitchen, bath and other parts of the home under brand names including Aristokraft, Diamond Now, Mid-Continent, Homecrest, Kitchen Craft, Omega, EVE, Diamond Reflections, Diamond, Kemper, Schrock, Starmark, Ultracraft and Mantra. Corporate expenses consist of headquarters administrative expenses. Corporate assets consist primarily of cash. The Company’s subsidiaries operate principally in the United States, Canada, Mexico, China and Western Europe. (In millions) | | 2020 | | | | 2019 | | | | 2018 | | Net sales: | | | | | | | | | | | | | | | Plumbing | | $ | 2,202.1 | | | | $ | 2,027.2 | | | | $ | 1,883.3 | | Outdoors & Security | | | 1,419.2 | | | | | 1,348.9 | | | | | 1,183.2 | | Cabinets | | | 2,469.0 | | | | | 2,388.5 | | | | | 2,418.6 | | Net sales | | $ | 6,090.3 | | | | $ | 5,764.6 | | | | $ | 5,485.1 | |
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Table of Contents Net sales to 2 of the Company’s customers, The Home Depot, Inc. (“The Home Depot”) and Lowe’s Companies, Inc. (“Lowe’s”) each accounted for greater than 10% of the Company’s net sales in 2020, 2019 and 2018. All segments sell to both The Home Depot and Lowe’s. Net sales to The Home Depot were 15%, 14% and 13% of net sales in 2020, 2019 and 2018, respectively. Net sales to Lowe’s were 15%, 14% and 14% of net sales in 2020, 2019 and 2018, respectively. (In millions) | | 2020 | | | | 2019 | | | | 2018 | | Operating income: | | | | | | | | | | | | | | | Plumbing | | $ | 467.9 | | | | $ | 427.6 | | | | $ | 375.3 | | Outdoors & Security | | | 201.3 | | | | | 172.3 | | | | | 155.6 | | Cabinets | | | 235.7 | | | | | 178.3 | | | | | 143.5 | | Less: Corporate expenses | | | (103.5 | ) | | | | (79.7 | ) | | | | (79.2 | ) | Operating income | | $ | 801.4 | | | | $ | 698.5 | | | | $ | 595.2 | |
(In millions) | | 2020 | | | | 2019 | | | | 2018 | | Total assets: | | | | | | | | | | | | | | | Plumbing | | | 2,262.9 | | | | | 2,110.8 | | | | | 1,943.1 | | Outdoors & Security | | | 2,453.8 | | | | | 1,596.6 | | | | | 1,526.0 | | Cabinets | | | 2,366.8 | | | | | 2,355.7 | | | | | 2,318.7 | | Corporate | | | 275.2 | | | | | 228.2 | | | | | 176.8 | | Total assets | | $ | 7,358.7 | | | | $ | 6,291.3 | | | | $ | 5,964.6 | | Depreciation expense: | | | | | | | | | | | | | | | Plumbing | | $ | 37.6 | | | | $ | 32.0 | | | | $ | 29.1 | | Outdoors & Security | | | 33.3 | | | | | 32.3 | | | | | 30.2 | | Cabinets | | | 47.9 | | | | | 44.3 | | | | | 50.9 | | Corporate | | | 2.7 | | | | | 2.7 | | | | | 3.3 | | Depreciation expense | | $ | 121.5 | | | | $ | 111.3 | | | | $ | 113.5 | | Amortization of intangible assets: | | | | | | | | | | | | | | | Plumbing | | $ | 10.8 | | | | $ | 10.3 | | | | $ | 10.4 | | Outdoors & Security | | | 13.4 | | | | | 13.3 | | | | | 6.1 | | Cabinets | | | 17.8 | | | | | 17.8 | | | | | 19.6 | | Amortization of intangible assets | | $ | 42.0 | | | | $ | 41.4 | | | | $ | 36.1 | | Capital expenditures: | | | | | | | | | | | | | | | Plumbing | | $ | 30.5 | | | | $ | 35.7 | | | | $ | 41.4 | | Outdoors & Security | | | 76.4 | | | | | 63.6 | | | | | 34.3 | | Cabinets | | | 27.3 | | | | | 30.9 | | | | | 73.8 | | Corporate | | | 16.3 | | | | | 1.6 | | | | | 0.6 | | Capital expenditures, gross | | | 150.5 | | | | | 131.8 | | | | | 150.1 | | Less: proceeds from disposition of assets | | | (1.6 | ) | | | | (4.2 | ) | | | | (6.1 | ) | Capital expenditures, net | | $ | 148.9 | | | | $ | 127.6 | | | | $ | 144.0 | | Net sales by geographic region (a): | | | | | | | | | | | | | | | United States | | $ | 5,094.3 | | | | $ | 4,823.7 | | | | $ | 4,606.6 | | China | | | 416.7 | | | | | 355.4 | | | | | 260.6 | | Canada | | | 414.2 | | | | | 401.0 | | | | | 433.1 | | Other international | | | 165.1 | | | | | 184.5 | | | | | 184.8 | | Net sales | | $ | 6,090.3 | | | | $ | 5,764.6 | | | | $ | 5,485.1 | | Property, plant and equipment, net: | | | | | | | | | | | | | | | United States | | $ | 732.4 | | | | $ | 641.9 | | | | $ | 628.9 | | Mexico | | | 104.7 | | | | | 103.2 | | | | | 103.4 | | Canada | | | 41.2 | | | | | 43.9 | | | | | 46.0 | | China | | | 25.0 | | | | | 22.5 | | | | | 22.5 | | Other international | | | 14.1 | | | | | 12.7 | | | | | 12.6 | | Property, plant and equipment, net | | $ | 917.4 | | | | $ | 824.2 | | | | $ | 813.4 | |
(a) | Based on country of destination |
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Table of Contents 19. Quarterly Financial Data Unaudited | | | | | | | | | | | | | | | | | | | | | | (In millions, except per share amounts) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 | | 1st | | | 2nd | | | 3rd | | | 4th | | | | Full Year | | Net sales | | $ | 1,402.7 | | | $ | 1,375.8 | | | $ | 1,652.1 | | | $ | 1,659.7 | | | | $ | 6,090.3 | | Gross profit | | | 493.2 | | | | 482.9 | | | | 580.6 | | | | 607.7 | | | | | 2,164.4 | | Operating income | | | 155.0 | | | | 173.0 | | | | 240.2 | | | | 233.2 | | | | | 801.4 | | Income after tax | | | 109.1 | | | | 118.2 | | | | 168.2 | | | | 166.5 | | | | | 562.0 | | Equity in losses of affiliate | | | 0.3 | | | | 2.0 | | | | 2.4 | | | | 2.9 | | | | | 7.6 | | Net income | | | 108.8 | | | | 116.2 | | | | 165.8 | | | | 163.6 | | | | | 554.4 | | Net income attributable to Fortune Brands | | | 109.1 | | | | 115.8 | | | | 164.6 | | | | 163.6 | | | | | 553.1 | | | | | | | | | | | | | | | | | | | | | | | | Basic earnings per common share | | | 0.78 | | | | 0.84 | | | | 1.19 | | | | 1.18 | | | | | 3.99 | | Diluted earnings per common share | | | 0.77 | | | | 0.83 | | | | 1.17 | | | | 1.16 | | | | | 3.94 | |
2019 | | 1st | | | 2nd | | | 3rd | | | 4th | | | | Full Year | | Net sales | | $ | 1,327.9 | | | $ | 1,507.2 | | | $ | 1,459.0 | | | $ | 1,470.5 | | | | $ | 5,764.6 | | Gross profit | | | 458.8 | | | | 537.6 | | | | 524.2 | | | | 531.8 | | | | | 2,052.4 | | Operating income | | | 135.6 | | | | 202.4 | | | | 168.0 | | | | 192.5 | | | | | 698.5 | | Income after tax | | | 84.5 | | | | 137.1 | | | | 105.7 | | | | 104.0 | | | | | 431.3 | | Equity in losses of affiliate | | | — | | | | — | | | | — | | | | — | | | | | — | | Net income | | | 84.5 | | | | 137.1 | | | | 105.7 | | | | 104.0 | | | | | 431.3 | | Net income attributable to Fortune Brands | | | 84.7 | | | | 137.5 | | | | 105.6 | | | | 104.1 | | | | | 431.9 | | | | | | | | | | | | | | | | | | | | | | | | Basic earnings per common share | | | 0.60 | | | | 0.98 | | | | 0.76 | | | | 0.75 | | | | | 3.09 | | Diluted earnings per common share | | | 0.60 | | | | 0.97 | | | | 0.75 | | | | 0.74 | | | | | 3.06 | |
In 2020, we recorded pre-tax defined benefit plan actuarial loss and settlement loss of $3.2 million —$0.6 million of actuarial loss ($0.4 million after tax) in the third quarter and $2.6 million of actuarial loss and settlement loss ($2.4 million after tax) in the fourth quarter. In 2019, we recorded pre-tax defined benefit plan actuarial loss of $34.1 million—$2.1 million of actuarial loss ($1.6 million after tax) in the third quarter and $32.0 million of actuarial loss ($24.2 million after tax) in the fourth quarter. 68
Table of Contents 20. Earnings Per Share The computations of earnings (loss) per common share were as follows: (In millions, except per share data) | | 2020 | | | | 2019 | | | 2018 | | Income from continuing operations, net of tax | | $ | 554.4 | | | | $ | 431.3 | | | $ | 390.0 | | Less: Noncontrolling interests | | | 1.3 | | | | | (0.6 | ) | | | 0.2 | | Income from continuing operations for EPS | | | 553.1 | | | | | 431.9 | | | | 389.8 | | Loss from discontinued operations, net of tax | | | — | | | | | — | | | | (0.2 | ) | Net income attributable to Fortune Brands | | $ | 553.1 | | | | $ | 431.9 | | | $ | 389.6 | | Earnings (loss) per common share | | | | | | | | | | | | | | Basic | | | | | | | | | | | | | | Continuing operations | | $ | 3.99 | | | | $ | 3.09 | | | $ | 2.69 | | Discontinued operations | | | — | | | | | — | | | | — | | Net income attributable to Fortune Brands common stockholders | | $ | 3.99 | | | | $ | 3.09 | | | $ | 2.69 | | Diluted | | | | | | | | | | | | | | Continuing operations | | $ | 3.94 | | | | $ | 3.06 | | | $ | 2.66 | | Discontinued operations | | | — | | | | | — | | | | — | | Net income attributable to Fortune Brands common stockholders | | $ | 3.94 | | | | $ | 3.06 | | | $ | 2.66 | | Basic average shares outstanding(a) | | | 138.7 | | | | | 139.9 | | | | 144.6 | | Stock-based awards | | | 1.5 | | | | | 1.4 | | | | 1.8 | | Diluted average shares outstanding(a) | | | 140.2 | | | | | 141.3 | | | | 146.4 | | Antidilutive stock-based awards excluded from weighted-average number of shares outstanding for diluted earnings per share | | | 0.8 | | | | | 1.8 | | | | 1.5 | |
(a) Reflects the impact of share repurchases during the years ended December 31, 2020, 2019 and 2018, respectively. 21. Other (Income) Expense, Net The components of other (income) expense, net for the years ended December 31, 2020, 2019 and 2018 were as follows: (In millions) | | 2020 | | | | 2019 | | | 2018 | | Defined benefit plan | | $ | (1.3 | ) | | | $ | 31.9 | | | $ | (6.5 | ) | Foreign currency losses (gains) | | | 2.8 | | | | | (0.7 | ) | | | (2.0 | ) | Gain on equity investment | | | (11.0 | ) | | | | — | | | | — | | Ineffective portion of cash flow hedge | | | — | | | | | — | | | | (3.8 | ) | Other items, net | | | (3.8 | ) | | | | (2.2 | ) | | | (4.0 | ) | Total other (income) expense, net | | $ | (13.3 | ) | | | $ | 29.0 | | | $ | (16.3 | ) |
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Table of Contents 22. Contingencies Litigation The Company is a defendant in lawsuits that are ordinary routine litigation matters incidental to its businesses. It is not possible to predict the outcome of the pending actions, and, as with any litigation, it is possible that these actions could be decided unfavorably to the Company. The Company believes that there are meritorious defenses to these actions and that these actions will not have a material adverse effect upon the Company’s 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. We are involved in remediation activities to clean up hazardous wastes as required by federal and state laws. Liabilities for remediation costs of each site are based on our best estimate of undiscounted future costs, excluding possible insurance recoveries or recoveries from other third parties. Uncertainties about the status of laws, regulations, technology and information related to individual sites make it difficult to develop estimates of future environmental remediation exposures. Some of the potential liabilities relate to sites we own, and some relate to sites we no longer own or never owned. Several of our subsidiaries have been designated as potentially responsible parties (“PRP”) under “Superfund” or similar state laws. As of December 31, 2020, ten such instances have not been dismissed, settled or otherwise resolved. In 2020, none of our subsidiaries were identified as a PRP in a new instance and no instances were settled, dismissed or otherwise resolved. In most instances where our subsidiaries are named as a PRP, we enter into cost-sharing arrangements with other PRPs. We give notice to insurance carriers of potential PRP liability, but very rarely, if ever, receive reimbursement from insurance for PRP costs. We believe that the cost of complying with the present environmental protection laws, before considering estimated recoveries either from other PRPs or insurance, will not have a material adverse effect on our results of operations, cash flows or financial condition. At December 31, 2020 and 2019, we had accruals of $0.3 and $0.2 million, respectively, relating to environmental compliance and cleanup including, but not limited to, the above mentioned Superfund sites. 70
Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. Item 9A. | Controls and Procedures.(a)
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(a) | Evaluation of Disclosure Controls and Procedures. |
The Company’s management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined inRules 13a-15(e)and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as ofDecember 31, 2018.2020. (b) | Management’s Report on Internal Control Over Financial Reporting. |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange ActRule 13a-15(f) and15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control — Integrated Framework(2013) issued by the Committee of Sponsoring Organization of the Treadway Commission (“COSO”). Based on our evaluation under the framework inInternal Control — Integrated Framework(2013) issued by the COSO, our management concluded that our internal control over financial reporting was effective as of December 31, 2018. 2020. The Company acquired Fiber Composites LLCLarson Manufacturing (“Fiberon”Larson”) in September 2018December 2020 and therefore, as permitted by the Securities and Exchange Commission, we excluded FiberonLarson from the scope of our management’s assessment of the effectiveness of our internal controls over financial reporting as of December 31, 2018.2020. The total assets and total revenuessales of Fiberon Larson represent 2.0%2.3% and 0.7%0.0%, respectively, of the related consolidated financial statements amounts as of and for the year ended December 31, 2018.2020. PricewaterhouseCoopers LLP, the Company’s independent public accounting firm, has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018,2020, as stated in their report which appears herein. (c) | Changes in Internal Control Over Financial Reporting. |
There have not been any changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended December 31, 20182020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9B. Other Information. None. PART III Item 10. Directors, Executive Officers and Corporate Governance. See the information under the captions “Election“Proposal 1 – Election of Directors,” “Corporate Governance —- Board Committees —- Audit Committee” and “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” contained in the 20192021 Proxy Statement, which information is incorporated herein by reference. See the information under the caption “Executive Officers of the Registrant”“Information about our Executive Officers” contained in Part I of this Annual Report on Form10-K. The Company’s Board of Directors has adopted a Code of Business Conduct & Ethics which sets forth various policies and procedures intended to promote the ethical behavior of all of the Company’s employees. The Company’s Board of Directors has also adopted a Code of Ethics for Senior Financial Officers that applies to the Company’s principal executive officer, principal financial officer and principal accounting officer. The Code of Business Conduct & Ethics and the Code of Ethics for Senior Financial Officers are available, free of charge, on the Company’s website,http://ir.fbhs.com/governing-high-standards. A copy of these documents is also available and will be sent to stockholders free of charge upon written request to the Company’s Secretary. Any amendment to, or waiver from, the provisions of the Code of Business Conduct & Ethics or the Code of Ethics for Senior Financial Officers that applies to any of those officers will be posted to the same location on the Company’s website. 71
Table of Contents Item 11. | Executive Compensation.
Item 11. Executive Compensation. |
See the information under the captions “Director Compensation,” “Corporate Governance —- Board Committees —- Compensation Committee,” “Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” “Executive“2020 Executive Compensation,” “CEO Pay Ratio” and “Compensation Committee Report” contained in the 20192021 Proxy Statement, which information is incorporated herein by reference.reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
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See the information under the caption “Certain Information Regarding Security Holdings” contained in the 20192021 Proxy Statement, which information is incorporated herein by reference. See also the “Equity Compensation Plan Information” table contained in the 20192021 Proxy Statement, which information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. Item 13. | Certain Relationships and Related Transactions, and Director Independence.
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See the information under the captions “Director Independence,” “Board Committees,” “Policies with Respect to Transactions with Related Persons” and “Certain Relationships and Related Transactions” contained in the 20192021 Proxy Statement, which information is incorporated herein by reference. Item 14. Principal Accountant Fees and Services. Item 14. | Principal Accountant Fees and Services.
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See the information under the captions “Fees of Independent Registered Public Accounting Firm” and “Approval of Audit andNon-Audit Services” in the 20192021 Proxy Statement, which information is incorporated herein by reference. PART IV Item 15. Exhibits and Financial Statement Schedules (a) | Financial Statements, Financial Statement Schedules and Exhibits. |
(1) | Financial Statements (all financial statements listed below are of the Company and its consolidated subsidiaries): |
Consolidated Statements of Income for the years ended December 31, 2018, 20172020, 2019 and 20162018 contained in Item 8 hereof. Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 20172020, 2019 and 20162018 contained in Item 8 hereof. Consolidated Balance Sheets as of December 31, 20182020 and 20172019 contained in Item 8 hereof. Consolidated Statements of Cash Flows for the years ended December 31, 2018, 20172020, 2019 and 20162018 contained in Item 8 hereof. Consolidated Statements of Equity for the years ended December 31, 2018, 20172020, 2019 and 20162018 contained in Item 8 hereof. Notes to Consolidated Financial Statements contained in Item 8 hereof. Report of Independent Registered Public Accounting Firm contained in Item 8 hereof. (2) | Financial Statement Schedules |
See Financial Statement Schedule of the Company and subsidiaries at page 95.74. 2.1. | | | | | 2.1. | | StockEquity Purchase Agreement dated as of August 19, 2014 by and amongNovember 16, 20202 between Fortune Brands Doors, Inc., Fortune Brands Home & Security, Inc., Fortune Brands Windows & Doors, Inc. and Ply Gem Industries, Inc. is incorporated herein by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form10-Q filed on October 31, 2014, Commission file number1-35166.†owners of Larson Manufacturing Company of South Dakota and its affiliated companies. ** | 3.1. | | 2.2. | | Agreement and Plan of Merger, dated as of March 30, 2015, by and among Fortune Brands Home & Security, Inc., Tahiti Acquisition Corp. and Norcraft Companies, Inc. is incorporated herein by reference to Exhibit 99.2 to the Company’s Current Report on Form8-K filed on March 30, 2015, Commission file number1-35166.†
| | | 3.1. | | Restated Certificate of Incorporation of Fortune Brands Home & Security, Inc., dated as of September 27, 2011, is incorporated herein by reference to Exhibit 3(i) to the Company’s Quarterly Report on Form10-Q filed on November 5, 2012, Commission file number1-35166.2012. | 3.2. | | 3.2. | | Amended and Restated Bylaws of Fortune Brands Home & Security, Inc., as adopted September 27, 2011,effective February 23, 2021, are incorporated herein by reference to Exhibit 3.23.1 to the Company’s Current Report on Form8-K filed on September 30, 2011, Commission file number1-35166.February 23, 2021. | 4.1. | | Description of Securities are incorporated herein by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10‑K filed on February 26, 2020. | 4.1.4.2. | | Indenture, dated as of June 15, 2015, by and among Fortune Brands Home & Security, Inc., Wilmington Trust, National Association, as Trustee, and Citibank, N.A., as Securities Agent is incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form8-K filed on June 16, 2015, Commission file number1-35166.2015. |
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Table of Contents 4.3. | | 4.2. | | First Supplemental Indenture, dated as of June 15, 2015, by and among Fortune Brands Home & Security, Inc., Wilmington Trust, National Association, as Trustee, and Citibank, N.A., as Securities Agent is incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form8-K 8‑K filed on June 16, 2015, Commission file number1-35166.2015. | 4.4. | | 4.3. | | Second Supplemental Indenture, dated as of September 21, 2018, by andamong Fortune Brands Home & Security, Inc. Wilmington Trust National Association as Trustee, and Citibank, N.A., as Securities Agent is incorporated by reference to Exhibit 4.2 to the Company’s current report on Form8-K filed on September 21, 2018, Commission file number1-35166.2018. | 4.5. | | 4.4. | | FormThird Supplemental Indenture, dated as of global certificate for the Company’s 3.000% Senior Notes due 2020September 13, 2019, by and among Fortune Brands Home & Security, Inc., Wilmington Trust, National Association, as Trustee, and Citibank, N.A., as Securities Agent is incorporated herein by reference to Exhibit 4.34.1 to the Company’s Current Reportcurrent report on Form8-K filed on June 16, 2015, Commission file number1-35166.September 13, 2019.
| 4.6. | | 4.5. | | Form of global certificate for the Company’s 4.000% Senior Notes due 2025 is incorporated herein by reference to Exhibit 4.4 to the Company’s Current Report on Form8-K on June 16, 2015, Commission file number1-35166.2015. | 4.7. | | 4.6. | | Form of global certificate for the Company’s 4.000% Senior Notes due 2023 is incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form8-K filed on September 21, 2018, Commission file number1-35166.2018. | 4.8. | | Form of global certificate for the Company’s 3.250% Senior Notes due 2029 is incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on September 13, 2019. | 10.1. | | Tax Allocation Agreement, dated as of September 28, 2011, by and between Fortune Brands Home & Security, Inc. and Fortune Brands, Inc. (N/K/A Beam Suntory Inc.) is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form8-K filed on September 30, 2011, Commission file number1-35166.2011. | 10.2. | | 10.2. | | Indemnification Agreement, dated as of September 14, 2011, by and between Fortune Brands Home & Security, Inc. and Fortune Brands, Inc. (N/K/A Beam Suntory Inc.) is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form8-K filed on September 15, 2011, Commission file number1-35166.2011. |
| | | 10.3. | | 10.3. | | Credit Agreement, dated as of August 22, 2011, among Fortune Brands Home & Security, Inc., the lenders party thereto and JPMorgan Chase Bank, N.A. is incorporated herein by reference to Exhibit 10.6 to Amendment No. 6 to the Company’s Registration Statement on Form 10 filed on August 31, 2011, Commission file number1-35166.
| | | 10.4. | | Amendment No. 1 to Credit Agreement dated July 23, 2013, among Fortune Brands Home & Security, Inc., JPMorgan Chase Bank, N.A., as administrative agent and the lenders party thereto, is incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form10-Q filed on November 1, 2013, Commission file number1-35166. | | | 10.5. | | Amendment No. 2 to Credit Agreement dated August 20, 2014, among Fortune Brands Home & Security, Inc., JPMorgan Chase Bank, N.A., as administrative agent and the lenders party thereto, is incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form10-Q filed on October 31, 2014, Commission file number1-35166. | | | 10.6. | | $1,250,000,000 Second Amended and Restated Credit Agreement dated as of June 30, 2016, by and among the Company, the lenders party thereto and JPMorgan ChasChase Bank, N.A., as Administrative Agent, dated September 30, 2019 is incorporated herein by reference to Exhibit 10.110.2 to the Company’s Quarterly Report on Form10-Q 10‑Q filed on August 4, 2016, Commission file number1-35166.October 31, 2019. | 10.4. | | 10.7. | | $350,000,000400,000,000 Credit Agreement dated as of March 29, 2018, by and among Fortune Brands Home & Security, Inc.,the Company, the lenders party thereto and JPMorganJP Morgan Chase Bank, N.A., as Administrative Agent.Agent, dated April 29, 2020, is incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 2, 2018, Commission file number 1-35166.1, 2020. | 10.5. | | 10.8. | | First Amendment and Incremental Agreement dated August 31, 2018 to the $350,000,000 Credit Agreement dated March 29, 2018, by and among Fortune Brands Home & Security, Inc., the lenders party thereto, Barclays Bank Plc, the incremental lender and JPMorgan Chase Bank, N.A., as Administrative Agent is incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 8, 2018, Commission file number 1-35166.
| | | 10.9. | | Fortune Brands Home & Security, Inc. 2011 Long-Term Incentive Plan is incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on FormS-8 filed on October 3, 2011, Commission file number333-177145.* | | | 10.10. | | Fortune Brands Home & Security, Inc. Annual Executive Incentive Compensation Plan is incorporated herein by reference to Appendix B to the Company’s Definitive Proxy Statement filed on March 5, 2013, Commission file number1-35166.2013.* | 10.6. | | Fortune Brands Home & Security, Inc. 2011 Long-Term Incentive Plan is incorporated hereinby reference to Exhibit 10.1 to the Company’s registration Statement on Form S-8 filed on October 3, 2011.* | 10.11.10.7. | | Fortune Brands Home & Security, Inc. 2013 Long-Term Incentive Plan is incorporated herein by reference to Appendix A to the Company’s Definitive Proxy Statement filed on March 5, 2013, Commission file number1-35166.2013.* | 10.8. | | 10.12. | | Amendment Number One to the Fortune Brands Home & Security, Inc. 2013 Long-Term Incentive Plan, dated as of August 2, 2016, is incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form10-Q filed on November 2, 2016, Commission file number1-35166.2016.* | 10.9. | | 10.13. | | Form of Founders Grant Stock Option Award Notice & Agreement for awards under the Fortune Brands Home & Security, Inc. 2011 Long-Term Incentive Plan is incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form8-K filed on October 11, 2011, Commission file number1-35166.2011.* | 10.10. | | 10.14. | | Form of 2012 Option Award Notice and Agreement for awards under the Fortune Brands Home & Security, Inc. 2011 Long-Term Incentive Plan is incorporated herein by reference to Exhibit 10.11 to the Company’s Annual Report on Form10-K filed on February 22, 2012, Commission file number1-35166.2012.* |
| | | 10.11. | | 10.15. | | Form of 2013 Stock Option Award Notice and Agreement for awards under the Fortune Brands Home & Security, Inc. 2011 Long-Term Incentive Plan is incorporated herein by reference to Exhibit 10.14 to the Company’s Annual Report on Form10-K filed on February 27, 2013, Commission file number1-35166.2013.* | 10.12. | | 10.16. | | Form of 2014 Stock Option Award Notice and Agreement for awards under the Fortune Brands Home & Security, Inc. 2013 Long-Term Incentive Plan is incorporated herein by reference to Exhibit 10.18 to the Company’s Annual Report on Form10-K filed on February 26, 2014, Commission file number1-35166.2014.* | 10.13. | | 10.17. | | Form of 2016 Performance Share Award Notice and Agreement for awards under the Fortune Brands Home & Security, Inc. 2013 Long-Term Incentive Plan is incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form10-Q filed on April 28, 2016, Commission file number1-35166.*
| | | 10.18. | | Form of 2016 Stock Option Award Notice and Agreement for awards under the Fortune Brands Home & Security, Inc. 2013 Long-Term Incentive Plan is incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form10-Q filed on April 28, 2016, Commission file number1-35166.2016.* |
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Table of Contents 10.14. | | Form of Stock Option Agreement for awards under the Fortune Brands Home & Security, Inc. 2013 Long-Term Incentive, is incorporated herein by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K filed on February 26, 2020.* | 10.15. | | 10.19. | | Form of 2016 Restricted Stock UnitPerformance Share Award Notice and Agreement for awards under the Fortune Brands Home & Security, Inc. 2013 Long-Term Incentive Plan, is incorporated herein by reference to Exhibit 10.2210.14 to the Company’s Annual reportReport on Form10-K filed on February 28, 2017, Commission file number1-35166.26, 2020.* | 10.16. | | 10.20. | | Form of Performance ShareRestricted Stock Unit Award Notice and Agreement for awards under the Fortune Brands Home & Security, Inc. 2013 Long-Term Incentive Plan, is incorporated herein by reference to Exhibit 10.2310.15 to the Company’s Annual Report on Form10-K filed on February 28, 2017, Commission file number1-31566.26, 2020.* | 10.17. | | 10.21. | | Form of Stock Option Award Notice and Agreement for awards under the Fortune Brands Home & Security, Inc. 2013 Long-Term Incentive Plan is incorporated by reference to Exhibit 10.24 to the Company’s annual Report on Form10-K filed on February 28, 2017, Commission file number1-31566.*
| | | 10.22. | | Form of Restricted Stock Unit Award Notice and Agreement for awards under the Fortune Brands Home & Security, Inc. 2013 Long-Term Incentive Plan is incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form10-K filed on February 28, 2017, Commission file number1-31566.* | | | 10.23. | | Form of Agreement for the Payment of Benefits Following Termination of Employment between the Company and each of Christopher J. Klein,Nicholas I. Fink, Patrick D. Hallinan, Robert K. Biggart, Sheri R. Grissom, Brian C. Lantz, John D. Lee, Marty Thomas and Tracey L. Belcourt, Brain C. Lantz and Marty Thomas, is incorporated herein by reference to Exhibit 10.23 to the Company’s Annual Report on Form10-K filed on February 28, 2018, Commission file number1-31566.2018.* | 10.18. | | 10.24. | | Form of Agreement for the Payment of Benefits Following Termination of Employment for each of Michael P. Bauer, Nicholas I. Fink,R. David Banyard, Jr., Brett E. Finley and DavidCheri M. Randich,Phyfer, is incorporated herein by reference to Exhibit 10.24 to the Company’s Annualannual Report on Form10-K filed on February 28, 2018, Commission file number1-31566.2018.* | 10.19. | | 10.25. | | Fortune Brands Home & Security, Inc. Directors’ Deferred Compensation Plan (as Amended and Restated Effective January 1, 2013) is incorporated herein by reference to Exhibit 10.19 to the Company’s Annual Report on Form10-K 10‑K filed on February 27, 2013, Commission file number1-35166.2013.* | 10.20. | | 10.26. | | Fortune Brands Home & Security, Inc.Non-Employee Director Stock Election Program is incorporated herein by reference to Exhibit 10.17 to the Company’s Annual Report on Form10-K filed on February 22, 2012, Commission file number1-35166.2012.* |
| | | 10.21. | | 10.27. | | Fortune Brands Home & Security, Inc. Deferred Compensation Plan, amended & restated as of February 27, 2017 is incorporated herein by reference to Exhibit 10.30 to the Company’s Annual Report on Form10-K filed on February 28, 2017, commission file number1-35166.2017.* | 21. | | 21. | | Subsidiaries of the Company.** | 23. | | 23. | | Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP.** | 24. | | 24. | | Powers of Attorney relating to execution of this Annual Report on Form10-K.** | 31.1. | | 31.1. | | Certificate of Chief Executive Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002.** | 31.2. | | 31.2. | | Certificate of Chief Financial Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002.** | 32. | | 32. | | Joint CEO/CFO Certification Required Under Section 906 of the Sarbanes-Oxley Act of 2002.** | 101. | | 101. | | The following materials from the Fortune Brands Home & Security, Inc. Annual Report on Form10-K 10‑K for the year ended December 31, 20182020 formatted in extensibleInline eXtensible Business Reporting Language (XBRL)(iXBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v)(vi) the Consolidated Statements of Equity, and (vi) the Notes to the Consolidated Financial Statements. ** | 104. | | The cover page of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in Inline XBRL and contained in Exhibit 101.** |
*
| | * | Indicates the exhibit is a management contract or compensatory plan or arrangement. | ** | Indicates the exhibit is being furnished or filed herewith, as applicable. |
† The Company agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request.
Item 16. Form10-K Summary None. 74
Table of Contents
Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | | | FORTUNE BRANDS HOME & SECURITY, INC. (The Company) | | | | Date: February 25, 201924, 2021 | | By: | By:
| | | | /s/ CHRISTOPHERJ.KLEINnicholas i. fink | | | | | Christopher J. Klein
| | Nicholas I. Fink | | | | Chief Executive Officer (principal executive officer) | | | | | | | | /s/ PATRICKD.HALLINAN
| | | | | | /s/ patrick d. hallinan | | | | Patrick D. Hallinan Senior Vice President and Chief Financial Officer (principal (principal financial officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. | | | | | | | /s/ CHRISTOPHERJ.KLEINnicholas i. fink | | | | | | /s/ A.D.DAVIDMACKAYsusan s. kilsby* | Christopher J. Klein,Nicholas I. Fink, Chief Executive Officer and Director (principal
(principal executive officer) Date: February 25, 201924, 2021 | | | | | | A.D. David Mackay,Susan S. Kilsby, Director
Date: February 25, 201924, 2021 | | | | | /S/ PATRICKD.HALLINANs/ patrick d. hallinan | | | | | | /s/ JOHNG.MORIKISa.d. david mackay* | Patrick D. Hallinan, Senior Vice President and Chief Financial Officer (principal financial officer) Date: February 25, 201924, 2021 | | A.D. David Mackay, Director Date: February 24, 2021 | | | | /s/ danny luburic | | /s/ john g. morikis * | Danny Luburic, Vice President – Controller (principal accounting officer) Date: February 24, 2021 | | John G. Morikis, Director Date: February 25, 2019 | | | | | /s/ DANNYLUBURIC
| | | | | | /s/ DAVIDM.THOMAS*24, 2021
| Danny Luburic, Vice President — Controller
| (principal accounting officer)
| | /s/ amit banati* | | /s/ jeffery s. perry* | Amit Banati, Director Date: February 25, 201924, 2021 | | Jeffery S. Perry, Director Date: February 24, 2021 | | | | /s/ irial finan* | | /s/ david m. thomas* | Irial Finan, Director Date: February 24, 2021 | | David M. Thomas, Director Date: February 25, 201924, 2021 | | | | | /s/ ANNFRITZHACKETTann fritz hackett* | | | | | | /s/ RONALDV.WATERS,IIIronald v. waters, iii* | Ann Fritz Hackett, Director Date: February 25, 201924, 2021 | | | | | | Ronald V. Waters, III, Director Date: February 25, 2019 | | | | | /s/ SUSANS.KILSBY*
| | | | | | /s/ NORMANH.WESLEY*
| Susan S. Kilsby, Director
Date: February 25, 2019
| | | | | | Norman H. Wesley, Director
Date: February 25, 2019
| | | | | /s/ IRIALFINAN*
| | | | | | | Irial Finan, Director
Date: February 25, 2019
| | | | | | 24, 2021 |
| | | *By: | | /s/ ROBERT/s/ Robert K. BIGGARTBiggart
| | Robert K. Biggart,Attorney-in-Fact |
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Table of Contents Schedule II Valuation and Qualifying Accounts For the years ended December 31, 2018, 20172020, 2019 and 20162018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (In millions) | | Balance at Beginning of Period | | | Charged to Expense | | | Reclassifications(c) | | | Less: Write-offs and Deductions(a) | | | Business Acquisition(b) | | | Balance at End of Period | | 2018: | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for cash discounts and sales allowances | | $ | 84.0 | | | $ | 216.1 | | | $ | (16.0 | ) | | $ | 199.5 | | | $ | — | | | $ | 84.6 | | Allowance for doubtful accounts | | | 3.3 | | | | 1.5 | | | | — | | | | 1.4 | | | | 0.3 | | | | 3.7 | | Allowance for deferred tax assets | | | 11.0 | | | | 2.3 | | | | — | | | | — | | | | — | | | | 13.3 | | | | | | | | | 2017: | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for cash discounts, returns and sales allowances | | $ | 68.2 | | | $ | 205.7 | | | $ | 3.0 | | | $ | 192.9 | | | $ | — | | | $ | 84.0 | | Allowance for doubtful accounts | | | 7.4 | | | | 0.2 | | | | — | | | | 4.5 | | | | 0.2 | | | | 3.3 | | Allowance for deferred tax assets | | | 16.4 | | | | (5.4 | ) | | | — | | | | — | | | | — | | | | 11.0 | | | | | | | | | 2016: | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for cash discounts, returns and sales allowances | | $ | 50.3 | | | $ | 148.6 | | | | — | | | $ | 130.7 | | | $ | — | | | $ | 68.2 | | Allowance for doubtful accounts | | | 5.8 | | | | 4.3 | | | | — | | | | 2.7 | | | | — | | | | 7.4 | | Allowance for deferred tax assets | | | 19.7 | | | | (3.3 | ) | | | — | | | | — | | | | — | | | | 16.4 | |
(In millions) | | Balance at Beginning of Period | | | Charged to Expense | | | Reclassifications (c) | | | Write-offs and Deductions (a) | | | Business Acquisition (b) | | | Balance at End of Period | | 2020: | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for cash discounts and sales allowances | | $ | 96.9 | | | $ | 258.3 | | | $ | 23.3 | | | $ | 228.3 | | | $ | 2.8 | | | $ | 153.0 | | Allowance for credit losses | | | 3.0 | | | | 5.1 | | | | 2.2 | | | | 3.6 | | | | — | | | | 6.7 | | Allowance for deferred tax assets | | | 16.8 | | | | (7.1 | ) | | | — | | | | — | | | | — | | | | 9.7 | | 2019: | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for cash discounts and sales allowances | | $ | 84.6 | | | $ | 198.6 | | | $ | — | | | $ | 186.3 | | | $ | — | | | $ | 96.9 | | Allowance for credit losses | | | 3.7 | | | | 1.6 | | | | — | | | | 2.3 | | | | — | | | | 3.0 | | Allowance for deferred tax assets | | | 13.3 | | | | 3.5 | | | | — | | | | — | | | | — | | | | 16.8 | | 2018: | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for cash discounts and sales allowances | | $ | 84.0 | | | $ | 216.1 | | | $ | (16.0 | ) | | $ | 199.5 | | | $ | — | | | $ | 84.6 | | Allowance for credit losses | | | 3.3 | | | | 1.5 | | | | — | | | | 1.4 | | | | 0.3 | | | | 3.7 | | Allowance for deferred tax assets | | | 11.0 | | | | 2.3 | | | | — | | | | — | | | | — | | | | 13.3 | |
(a) | Net of recoveries of amounts written off in prior years and immaterial foreign currency impact. |
(b) | Represents purchase accounting adjustment related to the Larson acquisition within our Outdoors & Security segment in 2020 and Fiberon acquisition within our Doors andOutdoors & Security segment in 2018. 2017 represents a valuation allowance on an acquired net operating loss carryforward (Norcraft Canada). |
(c) | Represents the reclassification of certain customer program liabilities to sales allowances for our Cabinets segment and accrued credits due to the adoption of CECL across all segments during 2020. Represents reclassification of reserve for returns to a separate liability account due to our adoption of the revenue recognition standard and a reclassification of sales allowances to certain customer program liabilities across all segments during 2018. 2017 represents a reclassification of certain customer program liabilities to sales allowances (reduction to accounts receivable) in the Doors & Security segment. |
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