# Fortune Brands Innovations, Inc.: Form 10-Q for the period ended Sep 30, 2015

- Company: [Fortune Brands Innovations, Inc.](/companies/fbin.md) (CIK 1519751)
- Form: 10-Q
- Filed: 2015-10-30
- Accepted by EDGAR: Oct 30, 2015, 16:31 ET
- Period: 2015-09-30
- Accession: 0001193125-15-360384
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1519751/000119312515360384/d21049d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1519751/000119312515360384/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-07-01 to 2015-09-30 | $1.24bn | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2015-01-01 to 2015-09-30 | $3.35bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2015-07-01 to 2015-09-30 | $804.3m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2015-01-01 to 2015-09-30 | $2.19bn | us-gaap:CostOfGoodsSold |
| Selling, general and administrative | 3 months, 2015-07-01 to 2015-09-30 | $265.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2015-01-01 to 2015-09-30 | $778.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2015-07-01 to 2015-09-30 | $160.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2015-01-01 to 2015-09-30 | $355.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2015-07-01 to 2015-09-30 | $11.1m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2015-01-01 to 2015-09-30 | $20.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2015-07-01 to 2015-09-30 | $48.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2015-01-01 to 2015-09-30 | $112.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-07-01 to 2015-09-30 | $107.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2015-01-01 to 2015-09-30 | $227.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-07-01 to 2015-09-30 | $0.66 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2015-01-01 to 2015-09-30 | $1.39 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-07-01 to 2015-09-30 | $0.67 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2015-01-01 to 2015-09-30 | $1.43 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-07-01 to 2015-09-30 | 163,400,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2015-01-01 to 2015-09-30 | 163,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2015-01-01 to 2015-09-30 | $264.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2015-01-01 to 2015-09-30 | $86.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2015-01-01 to 2015-09-30 | $67.1m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2015-01-01 to 2015-09-30 | $15.7m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2015-09-30 | $350.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-09-30 | $1.62bn | us-gaap:AssetsCurrent |
| Total assets | at 2015-09-30 | $5.08bn | us-gaap:Assets |
| Current liabilities | at 2015-09-30 | $777.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2015-09-30 | $2.68bn | us-gaap:Liabilities |
| Long-term debt | at 2015-09-30 | $1.34bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2015-09-30 | $3.8m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2015-09-30 | $2.40bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 39,051 characters.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto, which are included in this report, as well as our audited consolidated financial statements for the year ended December 31, 2014, which are included in our Annual Report on Form 10-K for the year ended December 31, 2014.

This discussion contains forward-looking statements that are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended (the “Exchange Act”), regarding business strategies, market potential, future financial performance, pension contributions, impact of acquisitions and other matters. Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” are generally forward-looking in nature. The forward-looking statements are not historical facts, but rather are based on expectations, estimates, assumptions and projections about our industry, business and future financial results, based on information available at the time this report is filed with the Securities and Exchange Commission, or with respect to any document incorporated by reference, available as of the time such document was prepared. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including but not limited to: (i) our reliance on the North American home improvement, repair and new home construction activity levels, (ii) the North American and global economies, (iii) risk associated with entering into potential strategic acquisitions and integrating acquired property, (iv) our ability to remain competitive, innovative and protect our intellectual property, (v) our reliance on key customers and suppliers, (vi) the cost and availability associated with our supply chains and the availability of raw materials, (vii) risk of increases in our postretirement benefit-related costs and funding requirements, (viii) compliance with tax, environmental and federal, state and international laws and industry regulatory standards and (ix) the risk of doing business internationally. These and other factors are discussed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2014. We undertake no obligation to, and expressly disclaim any such obligation to, update or clarify any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future results over time or otherwise, except as required by law.

### OVERVIEW

References to “Fortune Brands,” “the Company,” “we,” “our” and “us” refer to Fortune Brands Home & Security, Inc. and its consolidated subsidiaries as a whole, unless the context otherwise requires. The Company is a leader 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 systems and security products.

### OVERVIEW (Continued)

We believe the Company has certain competitive advantages including market-leading brands, a diversified mix of channels, and lean and flexible supply chains, as well as a tradition of strong innovation and customer service. We are focused on outperforming our markets in growth, profitability and returns in order to drive increased shareholder value. We believe the Company’s track record reflects the long-term attractiveness and potential of our categories and our leading brands. As consumer demand and the housing market grow, we expect the benefits of operating leverage and strategic spending will help us continue to achieve profitable organic growth.

We believe our most attractive opportunities are to invest in profitable organic growth initiatives. We also believe that as the market recovers, we have the potential to generate additional growth from leveraging our cash flow and balance sheet strength by pursuing accretive strategic acquisitions and joint ventures, and returning cash to shareholders through a combination of dividends and common stock repurchases under our share repurchase programs 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. We believe that the U.S. market for our home products is in the midst of a multi-year recovery. A continued recovery will largely depend on consumer confidence, employment, home prices, stable mortgage rates and credit availability. Over the long term, we believe that the U.S. home products market will benefit from favorable population and immigration trends, which will drive demand for new housing units, and from aging existing housing stock that will continue to need to be repaired and remodeled.

We may be impacted by fluctuations in raw material and transportation costs, changes in foreign exchange, and promotional activity among our competitors. We strive to offset the potential unfavorable impact of these items with productivity initiatives and price increases.

In September 2015, we completed the sale of Waterloo Industries, Inc. (“Waterloo”) for approximately $14 million in cash, subject to certain post-closing adjustments. We recorded a pre-tax loss of $16.9 million as the result of this sale. Transaction and other sale related costs were approximately $2.7 million. The related estimated tax benefit on the sale was $26.5 million with the after-tax gain of $6.9 million recorded within discontinued operations. The estimated tax benefit resulted primarily from a tax loss in excess of the financial reporting loss as a result of prior period nondeductible asset impairments. Prior to classifying Waterloo as a discontinued operation, it was reported in the Security segment.

In June 2015, we issued $900 million of unsecured senior notes (“Senior Notes”) in a registered public offering. The Senior Notes consist of two tranches: $400 million of five-year notes due 2020 with a coupon of 3% and $500 million of ten-year notes due 2025 with a coupon of 4%. We used the proceeds from the Senior Notes offering to pay down our revolving credit facility and for general purposes.

In May 2015, we acquired Norcraft Companies, Inc. (“Norcraft”), a leading publicly-owned manufacturer of kitchen and bathroom cabinetry, for a total purchase price of $648.6 million. Pursuant to the agreement, we acquired all outstanding shares of Norcraft for $25.50 per share of common stock in cash. We financed the transaction using cash on hand and borrowings under our existing credit facilities. This acquisition is expected to strengthen our overall product offering, round out our regional market penetration and enhance our frameless cabinetry capabilities. The financial results of Norcraft were included in the Company’s results of operations and cash flows beginning in May 2015.

### OVERVIEW (Continued)

In March 2015, we acquired a cabinets component company for approximately $6 million in cash. The financial results were included in the Company’s results of operations and cash flows beginning in March of 2015.

In December 2014, we acquired Anaheim Manufacturing Company (“Anaheim”), which markets and sells garbage disposals, for $28.9 million in cash. The financial results of Anaheim were included in the Company’s results of operations and cash flows beginning in January of 2015. In July 2014, we acquired John D. Brush & Co., Inc. (“SentrySafe”), a leading manufacturer of home safes, for a purchase price of $116.7 million in cash. The financial results of SentrySafe were included in the Company’s results of operations and cash flows beginning in August of 2014. The purchase prices were funded from cash on hand and our existing credit facilities.

In September 2014, we sold all the shares of stock of Fortune Brands Windows, Inc., our subsidiary that owned and operated the Simonton windows business (“Simonton”) for $130 million in cash. The results of these operations were classified and separately stated as discontinued operations in the consolidated financial statements.

### RESULTS OF OPERATIONS

### Nine Months Ended September 30, 2015 Compared To Nine Months Ended September 30, 2014

*(In millions)*

|  | Net Sales 2015 | 2014 | % Change vs. Prior Year |
| --- | ---: | ---: | ---: |
| Cabinets | $1,565.3 | $1,331.4 | 17.6% |
| Plumbing | 1,056.0 | 995.9 | 6.0 |
| Doors | 324.6 | 304.5 | 6.6 |
| Security | 408.8 | 342.2 | 19.5 |
| Net sales | $3,354.7 | $2,974.0 | 12.8% |

|  | Operating Income 2015 | 2014 | % Change vs. Prior Year |
| --- | ---: | ---: | ---: |
| Cabinets | $132.1 | $102.5 | 28.9% |
| Plumbing | 214.6 | 202.6 | 5.9 |
| Doors | 30.7 | 21.7 | 41.5 |
| Security | 43.1 | 43.4 | (0.7) |
| Less: Corporate expenses | (64.7) | (45.9) | (41.0) |
| Operating income | $355.8 | $324.3 | 9.7% |

The following discussion of consolidated results of operations and segment results refers to the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. Consolidated results of operations should be read in conjunction with segment results of operations.

#### Net sales

Net sales increased $380.7 million, or 13%. The increase was due to the benefit of the acquisitions of SentrySafe, Norcraft and Anaheim (approximately $254 million in aggregate), higher sales volume primarily from the continuing improvement in U.S. market conditions for home products, price increases to help mitigate cumulative raw material cost increases and favorable mix. The impact of foreign exchange was unfavorable by approximately $47 million.

#### Cost of products sold

Cost of products sold increased $244.0 million, or 12%, due to the impact of the acquisitions of SentrySafe, Norcraft and Anaheim (approximately $167 million in aggregate), higher sales volume and investments to support increased manufacturing capacity and long-term growth initiatives, partially offset by the benefit of productivity improvements.

#### Selling, general and administrative expenses

Selling, general and administrative expenses increased $87.9 million, or 13%, due to the impact of the acquisitions of SentrySafe, Norcraft and Anaheim (approximately $60 million in aggregate), $15.1 million of Norcraft transaction costs, higher employee-related costs, and planned increases in strategic spending to support increased capacity and long-term growth initiatives.

#### Amortization of intangible assets

Amortization of intangible assets increased $5.8 million due to the acquisitions of Norcraft, SentrySafe and Anaheim.

#### Restructuring charges

Restructuring charges of $12.6 million in the nine months ended September 30, 2015 primarily related to severance costs to relocate a plumbing facility in China, restructuring charges to relocate a manufacturing facility, and severance within our Security segment and the Corporate office. Restructuring charges in the nine months ended September 30, 2014 were $1.1 million.

#### Operating income

Operating income increased $31.5 million. Operating income benefited from price increases to help mitigate cumulative raw material cost increases, higher sales volume, productivity improvements and the impact of acquisitions, partially offset by investments to support manufacturing capacity increases for long-term growth, $15.1 million of Norcraft transaction costs and $14.7 million of higher restructuring and other charges.

#### Interest expense

Interest expense increased $13.3 million to $20.5 million due to higher average borrowings and higher average interest rates.

#### Other expense (income), net

Other expense (income), net, was expense of $3.7 million in the nine months ended September 30, 2015, compared to zero in the nine months ended September 30, 2014. The change was due to unfavorable foreign currency adjustments.

#### Income taxes

The effective income tax rates for the nine months ended September 30, 2015 and 2014 were 34.0% and 31.5%, respectively. The effective income tax rate for 2015 was unfavorably impacted by the tax cost related to the final settlement of a federal income tax audit covering the 2010 and nine months ended September 30, 2011 tax years, non-deductible acquisition costs and incremental state taxes associated with the Norcraft acquisition, and restructuring charges for which the Company cannot recognize a tax benefit. The effective income tax rate for 2014 was favorably impacted by the release of valuation allowances related to state net operating loss carryforwards and tax benefits related to stock-based compensation.

#### Noncontrolling interests

Noncontrolling interest was $0.3 million and $0.9 million in the nine months ended September 30, 2015 and 2014, respectively.

#### Net income from continuing operations

Net income from continuing operations was $218.9 million in the nine months ended September 30, 2015 compared to $217.1 million in the nine months ended September 30, 2014.

#### Income (loss) from discontinued operations

The income (loss) from discontinued operations was $8.6 million and $(103.2) million in the nine months ended September 30, 2015 and 2014, respectively. The discontinued operations for the nine months ended September 30, 2015 consist of the results of operations of Waterloo and the gain associated with the sale of the business. The discontinued operations for the nine months ended September 30, 2014 also include the results of operations of Simonton and the loss associated with the sale of Simonton in third quarter of 2014 of $111.8 million.

### Results By Segment

### Cabinets

Net sales increased $233.9 million, or 18%, due to the benefit of the Norcraft acquisition (approximately $151 million), higher sales volume including the impact of new product introductions, favorable mix and the benefit of price increases to help mitigate cumulative raw material cost increases. These benefits were partially offset by approximately $17 million of unfavorable foreign exchange.

Operating income increased $29.6 million, or 29%, due to price increases to help mitigate cumulative raw material cost increases, productivity improvements, higher sales volume and a $15.5 million benefit from the acquisition of Norcraft, net of a $2.0 million charge related to an inventory purchase accounting adjustment to fair value. These benefits were partially offset by investments to support manufacturing capacity increases for long-term growth, higher employee-related costs, higher wood related raw material costs and costs associated with new product introductions.

### Plumbing

Net sales increased $60.1 million, or 6%, due to higher sales volume in the U.S. driven by improving U.S. market conditions, the acquisition of Anaheim (approximately $23 million), price increases to help mitigate cumulative raw material cost increases and approximately $10 million in higher sales in Canada. These benefits were partially offset by unfavorable foreign exchange of approximately $20 million and higher sales rebates.

Operating income increased $12.0 million, or 6%, on higher sales volume, price increases to help mitigate cumulative raw material cost increases. Operating income was unfavorably impacted by higher sales rebates, $8.1 million of higher restructuring and other charges primarily related to severance costs to relocate a facility in China and approximately $8 million of unfavorable foreign exchange.

### Doors

Net sales increased $20.1 million, or 7%, due to higher sales volume driven primarily by improved conditions in the U.S. home products market, price increases to help mitigate cumulative raw material cost increases and favorable mix.

Operating income increased $9.0 million, or 41%, due to price increases to help mitigate cumulative raw material cost increases, higher sales volume and productivity improvements, as well as approximately $2 million of favorable foreign exchange. These factors were partially offset by an unfavorable comparison to the reversal of a bad debt reserve in 2014.

### Results By Segment (Continued)

### Security

Net sales increased $66.6 million, or 19%, due primarily to the impact of the acquisition of SentrySafe (approximately $80 million), partially offset by unfavorable foreign exchange (approximately $10 million) and lower international sales volume.

Operating income decreased $0.3 million, or 1%. Operating income was favorably impacted by the acquisition of SentrySafe and lower employee-related costs, offset by an increase of $7.1 million of restructuring and other charges primarily to relocate a manufacturing facility and unfavorable foreign exchange of approximately $3 million.

### Corporate

Corporate expenses increased $18.8 million predominantly due to $15.1 million of transaction costs associated with the Norcraft acquisition.

*(In millions)*

|  | Nine Months Ended September 30, 2015 | 2014 |
| --- | ---: | ---: |
| General and administrative expense | $(51.7) | $(50.7) |
| Defined benefit plan income | 4.9 | 6.5 |
| Defined benefit plan recognition of actuarial losses | (2.8) | (1.7) |
| Norcraft transaction costs(a) | (15.1) | — |
| Total Corporate expenses | $(64.7) | $(45.9) |

*(a) Represents external costs directly related to the acquisition of Norcraft and primarily includes expenditures for banking, legal, accounting and other similar services.*

In future periods the Company may record, in the Corporate segment, material expense or income associated with actuarial gains and losses arising from periodic remeasurement of our liabilities for defined benefit plans. At a minimum the Company will remeasure its defined benefit plan liabilities in the fourth quarter of each year. Remeasurements due to plan amendments and settlements may also occur in interim periods during the year. Remeasurement of these liabilities attributable to updating our liability discount rates and expected return on assets may, in particular, result in material income or expense recognition.

### Three Months Ended September 30, 2015 Compared To Three Months Ended September 30, 2014

*(In millions)*

|  | Net Sales 2015 | 2014 | % Change vs. Prior Year |
| --- | ---: | ---: | ---: |
| Cabinets | $603.3 | $452.6 | 33.3% |
| Plumbing | 364.4 | 345.9 | 5.3 |
| Doors | 123.8 | 114.4 | 8.2 |
| Security | 147.3 | 144.8 | 1.7 |
| Net sales | $1,238.8 | $1,057.7 | 17.1% |

|  | Operating Income 2015 | 2014 | % Change vs. Prior Year |
| --- | ---: | ---: | ---: |
| Cabinets | $64.2 | $36.5 | 75.9% |
| Plumbing | 80.9 | 75.8 | 6.7 |
| Doors | 16.7 | 12.1 | 38.0 |
| Security | 16.6 | 20.2 | (17.8) |
| Less: Corporate expenses | (18.1) | (15.1) | (19.9) |
| Operating income | $160.3 | $129.5 | 23.8% |

The following discussion of consolidated results of operations and segment results refers to the three months ended September 30, 2015 compared to the three months ended September 30, 2014. Consolidated results of operations should be read in conjunction with segment results of operations.

#### Net sales

Net sales increased $181.1 million, or 17%. The increase was due to the benefit of the acquisitions of Norcraft, SentrySafe and Anaheim (approximately $125 million in aggregate), higher sales volume primarily from the continuing improvement in U.S. market conditions for home products, price increases to help mitigate cumulative raw material cost increases and favorable mix. The impact of foreign exchange was unfavorable by approximately $21 million.

#### Cost of products sold

Cost of products sold increased $114.6 million, or 17%, due to the impact of the acquisitions of Norcraft, SentrySafe and Anaheim (approximately $83 million in aggregate) and higher sales volume.

#### Selling, general and administrative expenses

Selling, general and administrative expenses increased $30.8 million, or 13%, due to the impact of the acquisitions of Norcraft, SentrySafe and Anaheim (approximately $25 million in aggregate) and higher employee-related costs.

#### Amortization of intangible assets

Amortization of intangible assets increased $3.3 million due to the acquisitions of Norcraft and Anaheim.

#### Restructuring charges

Restructuring charges of $1.8 million in the three months ended September 30, 2015 primarily related to severance costs to relocate a manufacturing facility within our Security segment. Restructuring charges in the three months ended September 30, 2014 were $0.2 million.

#### Operating income

Operating income increased $30.8 million, or 24%. Operating income benefited from higher sales volume, price increases to help mitigate cumulative raw material cost increases, productivity improvements and the impact of the acquisitions of Norcraft, SentrySafe and Anaheim (approximately $13 million). These benefits were partially offset by higher employee related costs of $10.3 million, investments to support manufacturing capacity increases for long-term growth, higher sales rebates, unfavorable mix and $3.7 million of higher restructuring and other charges.

#### Interest expense

Interest expense increased $7.9 million to $11.1 million due to higher average borrowings as well as higher average interest rates resulting from our bond issuance in June 2015.

#### Other expense (income), net

Other expense (income), net, was $0.5 million expense in the three months ended September 30, 2015 compared to income of $(0.5) million in the three months ended September 30, 2014. The change was due to unfavorable foreign currency adjustments.

#### Income taxes

The effective income tax rates for the three months ended September 30, 2015 and 2014 were 32.8% and 33.4%, respectively. The effective income tax rate for third quarter of 2015 was favorably impacted by adjustments to prior year income tax estimates upon the filing of the Company’s 2014 federal income tax return.

#### Noncontrolling interests

Noncontrolling interests was $0.3 million and $0.2 million in the three months ended September 30, 2015 and 2014, respectively.

#### Net income from continuing operations

Net income from continuing operations was $100.0 million in the three months ended September 30, 2015 compared to $84.5 million in the three months ended September 30, 2014. The increase of $15.5 million was due to a higher operating income, partially offset by lower effective income tax rate and higher interest expense.

#### Income (loss) from discontinued operations

The income from discontinued operations was $7.8 million in the three months ended September 30, 2015 compared to a loss from discontinued operations of $(105.4) million in the three months ended September 30, 2014. The discontinued operations for the three months ended September 30, 2015 consisted of the results of operations of Waterloo and the gain associated with the sale of the business. The net loss from discontinued operations for the three months ended September 30, 2014 included a $111.8 million loss on the sale of Simonton.

### Results By Segment

### Cabinets

Net sales increased $150.7 million, or 33%, due to the benefit of the Norcraft acquisition (approximately $105 million), higher sales volume including the impact of new product introductions and the benefit of price increases to help mitigate cumulative raw material cost increases, partially offset by approximately $7 million of unfavorable foreign exchange.

Operating income increased $27.7 million, or 76%, due to higher sales volume, the benefit of approximately $12 million from the acquisition of Norcraft, price increases to help mitigate cumulative raw material cost increases and productivity improvements. These benefits were partially offset by higher employee-related costs and costs associated with investments to support manufacturing capacity increases for long-term growth.

### Plumbing

Net sales increased $18.5 million, or 5%, due to higher sales volume in the U.S. driven by improving market conditions including the introduction of new products, the acquisition of Anaheim (approximately $8 million), price increases to help mitigate cumulative raw material cost increases, and higher international sales. These benefits were partially offset by higher sales rebates in 2015 and unfavorable foreign exchange of approximately $9 million.

Operating income increased $5.1 million, or 7%, due to higher sales volume and price increases to help mitigate cumulative raw material cost increases. Operating income was unfavorably impacted by higher sales rebates and approximately $3 million of foreign exchange rate.

### Doors

Net sales increased $9.4 million, or 8%, due to higher sales volume driven primarily by improved conditions in the U.S. home products market, price increases to help mitigate cumulative raw material cost increases and favorable mix.

Operating income increased $4.6 million, or 38%, due to higher sales volume and price increases to help mitigate cumulative raw material cost increases.

### Results By Segment (Continued)

### Security

Net sales increased $2.5 million, or 2%, due primarily to the impact of the acquisition of SentrySafe (approximately $12 million), offset by lower international volume and approximately $4 million of unfavorable foreign exchange.

Operating income decreased $3.6 million, or 18%, primarily due to an increase of $3.9 million of restructuring and other charges mainly to relocate a manufacturing facility and lower sales volume. Operating income was favorably impacted by lower employee-related costs.

### Corporate

Corporate expenses increased $3.0 million predominantly as a result of higher employee related costs due to increases in actuarial losses related to changes in defined benefit plan demographic data.

*(In millions)*

|  | Three Months Ended September 30, 2015 | 2014 |
| --- | ---: | ---: |
| General and administrative expense | $(16.7) | $(15.9) |
| Defined benefit plan income | 1.6 | 1.9 |
| Defined benefit plan recognition of actuarial losses | (2.8) | (1.1) |
| Norcraft transaction costs(a) | (0.2) | — |
| Total Corporate expenses | $(18.1) | $(15.1) |

*(a) Represents external costs directly related to the acquisition of Norcraft and primarily includes expenditures for banking, legal, accounting and other similar services.*

### LIQUIDITY AND CAPITAL RESOURCES

Our primary liquidity needs are to support working capital requirements, fund capital expenditures and service indebtedness, as well as to finance acquisitions, repurchase shares of our common stock and pay dividends to stockholders, as deemed appropriate. Our principal sources of liquidity have been cash on hand, cash flows from operating activities, availability under our credit facilities and debt issuances in capital markets. Our operating income is generated by our subsidiaries. There are no legal restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Fortune Brands. In December 2014, our Board of Directors increased the quarterly cash dividend by 17% to $0.14 per share of our outstanding common stock. Our Board of Directors will continue to evaluate dividend payment opportunities on a quarterly basis. There can be no assurance as to when and it 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 the first nine months of 2015, we repurchased 762,954 shares of our outstanding common stock under the Company’s share repurchase program for $36.0 million. As of September 30, 2015, the Company’s total remaining share repurchase authorization under the Company’s repurchase programs was $263.5 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.

We periodically review our portfolio of brands and evaluate potential strategic transactions to increase shareholder value. However, we cannot predict whether or when we may enter into acquisitions, joint ventures or dispositions, make any purchases of shares of our common stock under our share repurchase programs, or pay dividends, or what impact any such transactions could have on our results of operations, cash flows or financial condition, whether as a result of the issuance of debt or equity securities, or otherwise. Our cash flows from operations, borrowing availability and overall liquidity are subject to certain risks and uncertainties, including those described in the section of our Annual Report on Form 10-K for the year-ended December 31, 2014 entitled “Item 1A. Risk Factors.”

Acquisitions and divestitures in 2015 and 2014 included:

- In September 2015, we completed the sale of the Waterloo tool storage business for approximately $14 million in cash, subject to certain post-closing adjustments.
- In May 2015, we acquired Norcraft, a leading manufacturer of kitchen and bathroom cabinetry, for a purchase price of $648.6 million. We financed this transaction using cash on hand and borrowings under our existing credit facilities.
- In December 2014, we acquired Anaheim, which markets and sells garbage disposals, for $28.9 million in cash. We paid the purchase price using a combination of cash on hand and borrowings under our existing credit facilities.
- In September 2014, we completed the sale of the Simonton windows business for $130 million in cash.
- In July 2014, we acquired SentrySafe for a purchase price of $116.7 million in cash. The purchase price was funded from our existing credit facilities.

In June 2015, we issued $900 million of Senior Notes in a registered public offering. The Senior Notes consist of two tranches: $400 million of five-year notes due 2020 with a coupon of 3% and $500 million of ten-year notes due 2025 with a coupon of 4%. We used the proceeds from the Senior Notes offering to pay down our revolving credit facility and for general purposes. On September 30, 2015, the outstanding amount of the Senior Notes, net of underwriting commissions and price discounts, was $891.4 million.

We also have a $975 million committed revolving credit facility, as well as a term loan in the initial amount of $525 million, both of which expire in July 2018. Both facilities can be used for general corporate purposes. On September 30, 2015 and December 31, 2014, our outstanding borrowings under the revolving credit facility were zero and $145.0 million, respectively; the amounts outstanding under term loan were $450.0 million and $525.0 million, respectively. Issuance of long-term debt in 2015 on the statement of cash flows includes borrowings under the revolving credit facility that were repaid when the Senior Notes were issued. The interest rates under all of these facilities are variable based on LIBOR at the time of the borrowing and the Company’s leverage as measured by a debt to Adjusted EBITDA ratio. Based upon the Company’s debt to Adjusted EBITDA ratio at September 30, 2015, the Company’s borrowing rate could range from LIBOR + 1.0% to LIBOR + 2.0%. At September 30, 2015, we were in compliance with all covenants under these facilities.

On September 30, 2015, we had cash and cash equivalents of $350.6 million, of which $202.4 million was held at non-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 undistributed earnings of foreign subsidiaries are considered indefinitely reinvested. If these funds were needed for our operations in the U.S., 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 income tax expense on those funds to the extent they were previously considered indefinitely reinvested.

Our operating cash flows are significantly impacted by the seasonality of our business. We typically generate our operating cash flow in the third and fourth quarters of each year. We use operating cash in the first half of the year, particularly in the first quarter.

### Cash Flows

Below is a summary of cash flows for the nine months ended September 30, 2015 and 2014.

*(In millions)*

|  | Nine Months Ended September 30, 2015 | 2014 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $264.1 | $110.2 |
| Net cash used in investing activities | (725.0) | (77.6) |
| Net cash provided by (used in) financing activities | 630.5 | (97.3) |
| Effect of foreign exchange rate changes on cash | (10.9) | (1.6) |
| Net increase (decrease) in cash and cash equivalents | $158.7 | $(66.3) |

Net cash provided by operating activities was $264.1 million in the nine months ended September 30, 2015 compared to $110.2 million in the nine months ended September 30, 2014. The increase in cash provided of $153.9 million was primarily due to lower incentive compensation and customer program payments in the first quarter of 2015 compared to 2014.

Net cash used in investing activities was $725.0 million in the nine months ended September 30, 2015 compared to $77.6 million in the nine months ended September 30, 2014. The increase of $647.4 million was primarily due to the impact of Norcraft acquisition.

Net cash provided by financing activities was $630.5 million in the nine months ended September 30, 2015 compared to net cash used in financing activities of $97.3 million in the nine months ended September 30, 2014. The increase in cash provided of $727.8 million was primarily due to higher net borrowings of $341.6 million and lower share repurchases in 2015 compared to 2014 ($395.7 million decrease), partially offset by an increase in dividends in 2015 compared to 2014 ($8.6 million increase).

The cash flows related to discontinued operations are combined with cash flows from continuing operations within each category on the statements of cash flows.

### Pension Plans

In 2015, we expect to make pension contributions of approximately $5 million. For the foreseeable future, we believe that we have sufficient liquidity to meet the minimum funding that may be required by the Pension Protection Act of 2006.

### Foreign Exchange

We have investments in various foreign countries, principally Canada, Mexico, China and France. Therefore, changes in the value of the related currencies affect our financial statements when translated into U.S. dollars.

### RECENTLY ISSUED ACCOUNTING STANDARDS

#### Simplifying Accounting for Measurement-Period Adjustments

In September 2015, the Financial Accounting Standards Board (“FASB”) issued a final standard that eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The new standard is effective for the annual period beginning January 1, 2016 (calendar year 2016 for Fortune Brands). Early application is permitted, however we elected not to early adopt. We do not expect this standard to have a material effect on our financial statements.

#### Simplifying Subsequent Measurement of Inventory

In July 2015, the FASB issued a final standard that simplifies the subsequent measurement of inventory by replacing lower of cost or market test under the current GAAP. Under the current guidance the subsequent measurement of inventory is measured at the lower of cost or market, where “market” may have multiple possible outcomes. The new guidance requires subsequent measurement of inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs to sell (completion, disposal, and transportation). This new standard is effective for the annual period beginning January 1, 2017. Earlier application is permitted, however we elected not to early adopt. We do not expect this standard to have a material effect on our financial statements.

#### Simplifying the Presentation of Debt Issuance Costs

In April 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This ASU requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, instead of as a deferred charge (i.e., as an asset). This new standard is effective for the annual period beginning after December 15, 2015 (calendar year 2016 for Fortune Brands), and for annual periods and interim periods thereafter. Early adoption is permitted. The guidance will be applied on a retrospective basis. The adoption of this ASU will require us to reclassify approximately $3 million of debt issuance costs from a deferred asset to long-term debt as of September 30, 2015.

#### Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern

In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This ASU provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This amendment is effective for the annual period ending after December 15, 2016 (year-end 2016 for Fortune Brands), and for annual periods and interim periods thereafter. Early application is permitted. We do not expect this standard to have a material effect on our financial statements.

#### Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This ASU clarifies the accounting for revenue arising from contracts with customers and specifies the disclosures that an entity should include in its financial statements. Further, in August 2015, the FASB issued a standard, which clarified that the amendment is effective for the annual reporting period beginning after December 15, 2017 (calendar year 2018 for Fortune Brands), and for annual and interim periods thereafter. We are assessing the impact the adoption of this standard will have on our financial statements.

## Market risk

As filed, 220 characters.

There have been no material changes in the information provided in the section entitled “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2014.

## Controls and procedures

As filed, 1,198 characters.

### (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 in Rules 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 of the end of the period covered by this report.

### (b) Changes in Internal Control Over Financial Reporting.

There have not been any changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company is in the process of reviewing the internal control structure of acquired businesses and, if necessary, will make appropriate changes as we incorporate our controls and procedures into those recently acquired businesses.

## Risk factors

As filed, 187 characters.

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014 in the section entitled “Risk Factors.”

Filed Oct 30, 2015.
Source: SEC EDGAR, the filing index for accession 0001193125-15-360384. Last ingested by Listed: Nov 10, 2026, 02:09 ET. No prices; not investment advice.