# Fortune Brands Innovations, Inc.: Form 10-Q for the period ended Sep 30, 2017

- Company: [Fortune Brands Innovations, Inc.](/companies/fbin.md) (CIK 1519751)
- Form: 10-Q
- Filed: 2017-10-31
- Accepted by EDGAR: Oct 31, 2017, 16:07 ET
- Period: 2017-09-30
- Accession: 0001193125-17-327153
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1519751/000119312517327153/d297743d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1519751/000119312517327153/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 9 months, 2017-01-01 to 2017-09-30 | $3.90bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2017-07-01 to 2017-09-30 | $841.6m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2017-01-01 to 2017-09-30 | $2.46bn | us-gaap:CostOfGoodsSold |
| Selling, general and administrative | 3 months, 2017-07-01 to 2017-09-30 | $297.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2017-01-01 to 2017-09-30 | $877.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-07-01 to 2017-09-30 | $201.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2017-01-01 to 2017-09-30 | $529.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-07-01 to 2017-09-30 | $12.3m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2017-01-01 to 2017-09-30 | $36.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-07-01 to 2017-09-30 | $59.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2017-01-01 to 2017-09-30 | $145.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-07-01 to 2017-09-30 | $129.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2017-01-01 to 2017-09-30 | $344.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-07-01 to 2017-09-30 | $0.83 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2017-01-01 to 2017-09-30 | $2.20 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-07-01 to 2017-09-30 | $0.84 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2017-01-01 to 2017-09-30 | $2.24 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-07-01 to 2017-09-30 | 155,900,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2017-01-01 to 2017-09-30 | 156,200,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2017-01-01 to 2017-09-30 | $352.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2017-01-01 to 2017-09-30 | $95.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2017-01-01 to 2017-09-30 | $82.7m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2017-01-01 to 2017-09-30 | $173.7m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2017-09-30 | $277.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-09-30 | $1.60bn | us-gaap:AssetsCurrent |
| Total assets | at 2017-09-30 | $5.35bn | us-gaap:Assets |
| Current liabilities | at 2017-09-30 | $852.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-09-30 | $2.80bn | us-gaap:Liabilities |
| Long-term debt | at 2017-09-30 | $1.46bn | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2017-09-30 | $2.54bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 44,323 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, 2016, which are included in our Annual Report on Form 10-K for the year ended December 31, 2016.

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 and not historical facts. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief based on current 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. 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 defined 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, 2016. 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.

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

### OVERVIEW (Continued)

We 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 flow and balance sheet by pursuing accretive strategic acquisitions and joint ventures, and by 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 an elongated recovery from the U.S. economic recession that ended in mid-2009 and that 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 an 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 improvement initiatives and price increases.

In July 2017, we acquired Shaws Since1897 Limited (“Shaws”), a UK-based luxury plumbing products company that specializes in manufacturing and selling fireclay sinks and selling brassware and accessories in partnership with Perrin & Rowe. We financed the transaction using cash on hand and borrowings under our existing credit facilities. This acquisition broadened our plumbing portfolio and enhanced future growth opportunities. Net sales and operating income in the three months ended September 30, 2017 were not material to the Company. The results of the operations are included in the Plumbing segment.

During the third quarter of 2016, we created the Global Plumbing Group (“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 Limited, 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 our 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. The revolving credit facility will mature in June 2021 and borrowings thereunder will be used for general corporate purposes.

In May 2016, we acquired Riobel Inc. (“Riobel”), a Canadian plumbing company specializing in premium showroom bath and shower fittings, for a total purchase price of $94.6 million in cash. We financed the transaction using cash on hand and borrowings under our existing credit facility.

### Nine Months Ended September 30, 2017 Compared To Nine Months Ended September 30, 2016

*(In millions)*

|  | Net Sales 2017 | 2016 | % Change vs. Prior Year |
| --- | ---: | ---: | ---: |
| Cabinets | $1,841.2 | $1,797.2 | 2.4% |
| Plumbing | 1,251.5 | 1,108.0 | 13.0 |
| Doors | 374.2 | 351.3 | 6.5 |
| Security | 433.9 | 426.8 | 1.7 |
| Net sales | $3,900.8 | $3,683.3 | 5.9% |
|  | **Operating Income** |  |  |
|  | **2017** | **2016** | **% Change vs. Prior Year** |
| Cabinets | $205.4 | $194.0 | 5.9% |
| Plumbing | 270.8 | 242.6 | 11.6 |
| Doors | 55.8 | 46.1 | 21.0 |
| Security | 56.4 | 44.7 | 26.2 |
| Less: Corporate expenses | (59.3) | (61.1) | 2.9 |
| Operating income | $529.1 | $466.3 | 13.5% |

The following discussion of consolidated results of operations and segment results refers to the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Consolidated results of operations should be read in conjunction with segment results of operations.

#### Net sales

Net sales increased $217.5 million, or 5.9%. The increase was due to higher sales volume primarily from the continuing improvement in U.S. market conditions for home products, new product introductions, the benefits from the acquisitions in our Plumbing segment and price increases to help mitigate cumulative raw material cost increases. These benefits were partially offset by unfavorable mix, higher sales promotions, sales rebates and unfavorable foreign exchange of approximately $4 million.

#### Cost of products sold

Cost of products sold increased $108.5 million, or 4.6%, 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 $46.3 million, or 5.6%, 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 $3.2 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 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 Security segment. We recorded a pre-tax loss of $2.4 million as the result of this sale.

#### Asset impairment charges

Asset impairment charges of $3.2 million relate to our decision in the first quarter of 2017 to sell Field ID, our cloud-based inspection and safety compliance software product line included in our Security segment.

#### Restructuring charges

Restructuring charges of $3.5 million in the nine months ended September 30, 2017 primarily relates to severance costs within our Security and Plumbing segments. Restructuring charges in the nine months ended September 30, 2016 were $12.4 million and primarily related to severance costs and charges associated with supply chain initiatives within our Security segment.

#### Operating income

Operating income increased $62.8 million, or 13.5%, primarily due to higher net sales, including the benefits from the acquisitions in our Plumbing segment and productivity improvements. These benefits were partially offset by unfavorable mix, higher employee-related, raw material and advertising costs.

#### Interest expense

Interest expense decreased $1.0 million to $36.5 million primarily due to the absence in 2017 of the write-off of debt issuance costs of approximately $1.3 million incurred during 2016.

#### Other (income) expense, net

Other (income) expense, net, was expense of $0.2 million in the nine months ended September 30, 2017, compared to income of $0.1 million in the nine months ended September 30, 2016.

#### Income taxes

The effective income tax rates for the nine months ended September 30, 2017 and 2016 were 29.5% and 28.2%, respectively. The increase in the effective tax rate reflected a lower tax benefit on share-based compensation, partially offset by a valuation allowance release related to state deferred tax assets. In addition, the effective tax rates in both periods were favorably impacted by a tax benefit attributable to the Domestic Production Activity (Internal Revenue Code Section 199) Deduction, favorable tax rates in foreign jurisdictions, and a benefit associated with the U.S. research and development credit, offset by state and local taxes and increases to uncertain tax positions.

#### Net income from continuing operations

Net income from continuing operations was $347.3 million in the nine months ended September 30, 2017 compared to $308.0 million in the nine months ended September 30, 2016. The increase of $39.3 million was primarily due to higher operating income.

#### Loss from discontinued operations

The loss from discontinued operations of $2.6 million in the nine months ended September 30, 2017 primarily related to the prior sale of the Waterloo tool storage and Simonton window businesses. The income from discontinued operations of $1.5 million in the nine months ended September 30, 2016 included the effect of tax adjustments relating to the Waterloo business.

### Results by Segment

### Cabinets

Net sales increased $44.0 million, or 2.4%, due to higher sales volume driven primarily by continuing improvement in the U.S. home products market and the benefit from new product introductions and price increases to help mitigate cumulative raw material cost increases. These benefits were partially offset by unfavorable mix and higher sales promotions.

Operating income increased $11.4 million, or 5.9%, due to the increase in net sales and productivity improvements. These benefits were partially offset by unfavorable mix and higher employee-related costs.

### Plumbing

Net sales increased $143.5 million, or 13.0%, 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 in 2017. These benefits were partially offset by higher sales rebates and unfavorable foreign exchange of approximately $4 million.

Operating income increased $28.2 million, or 11.6%, due to higher net sales, productivity improvements and favorable mix. These benefits were partially offset by higher employee-related costs, raw material costs and advertising costs.

### Doors

Net sales increased $22.9 million, or 6.5%, due to higher sales volume driven primarily by continuing improvement in the U.S. home products market and the benefit from new product introductions and price increases to help mitigate cumulative raw material cost increases.

Operating income increased $9.7 million, or 21.0%, due to the higher net sales and leveraging sales on our existing fixed cost base.

### Results by Segment (Continued)

### Security

Net sales increased $7.1 million, or 1.7%, due to higher sales volume and price increases to help mitigate cumulative raw material cost increases. These benefits were partially offset by unfavorable foreign exchange of approximately $1 million and by the impact of our exiting of two product lines in our commercial distribution channel.

Operating income increased $11.7 million, or 26.2%, primarily due to productivity improvements, lower restructuring and other charges (approximately $10 million) relating to the completion in 2016 of a manufacturing facility relocation and the related cost savings resulting from the facility relocation, as well as higher net sales. These benefits were partially offset by higher raw material costs.

### Corporate

Corporate expenses decreased by $1.8 million predominantly due to recognition of an actuarial gain versus an actuarial loss in the prior year and higher defined benefit plan income during 2017 in comparison to prior year.

*(In millions)*

|  | Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| General and administrative expense | $(63.8) | $(61.3) |
| Defined benefit plan income | 3.2 | 2.1 |
| Defined benefit plan recognition of actuarial gain/(loss) | 1.3 | (1.9) |
| Total Corporate expenses | $(59.3) | $(61.1) |

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, 2017 Compared To Three Months Ended September 30, 2016

*(In millions)*

|  | Net Sales 2017 | 2016 | % Change vs. Prior Year |
| --- | ---: | ---: | ---: |
| Cabinets | $614.2 | $602.1 | 2.0% |
| Plumbing | 438.3 | 391.1 | 12.1 |
| Doors | 138.5 | 129.2 | 7.2 |
| Security | 157.6 | 156.6 | 0.6 |
| Net sales | $1,348.6 | $1,279.0 | 5.4% |
|  | **Operating Income** |  |  |
|  | **2017** | **2016** | **% Change vs. Prior Year** |
| Cabinets | $69.7 | $74.8 | (6.8)% |
| Plumbing | 97.3 | 84.0 | 15.8 |
| Doors | 25.1 | 22.3 | 12.6 |
| Security | 27.7 | 22.9 | 21.0 |
| Less: Corporate expenses | (18.0) | (20.9) | 13.9 |
| Operating income | $201.8 | $183.1 | 10.2% |

The following discussion of consolidated results of operations and segment results refers to the three months ended September 30, 2017 compared to the three months ended September 30, 2016. Consolidated results of operations should be read in conjunction with segment results of operations.

#### Net sales

Net sales increased $69.6 million, or 5.4%. The increase was due to higher sales volume primarily from the continuing improvement in U.S. market conditions for home products, new product introductions, the benefits from the acquisitions in our Plumbing segment, price increases to help mitigate cumulative raw material cost increases and favorable foreign exchange of approximately $4 million. These benefits were partially offset by unfavorable mix, higher sales rebates and sales promotions.

#### Cost of products sold

Cost of products sold increased $40.6 million, or 5.1%, due to higher net sales, including the impact of acquisitions in our Plumbing segment and higher raw material costs, partially offset by the benefit of productivity improvements.

#### Selling, general and administrative expenses

Selling, general and administrative expenses increased $12.8 million, or 4.5%, due to higher employee-related costs, including higher healthcare costs, as well as the impact of the acquisitions in our Plumbing segment.

#### Amortization of intangible assets

Amortization of intangible assets increased $0.2 million due to the acquisitions in our Plumbing segment, partially offset by a decrease relating to a definite-lived customer relationship intangible in Doors segment that was fully amortized during the second quarter of 2017.

#### Restructuring charges

Restructuring charges in the three months ended September 30, 2017 and 2016 were $0.4 million and $3.1 million, respectively. Restructuring charges in 2017 relate to severance costs within our Security and Doors segments. Restructuring charges in 2016 primarily relate to supply chain initiatives within our Security segment.

#### Operating income

Operating income increased $18.7 million, or 10.2%, primarily due to higher net sales and productivity improvements. These benefits were partially offset by unfavorable mix and higher employee-related costs.

#### Interest expense

Interest expense increased $0.5 million to $12.3 million primarily due to higher average interest rates partially offset by lower average borrowings.

#### Other (income) expense, net

Other (income) expense, net, was expense of $0.1 million in the three months ended September 30, 2017 compared to expense of $0.6 million in the three months ended September 30, 2016.

#### Income taxes

The effective income tax rates for the three months ended September 30, 2017 and 2016 were 31.6% and 28.6%, respectively. The increase in the effective tax rate reflected a lower tax benefit on share-based compensation, partially offset by a valuation allowance release related to state deferred tax assets. In addition, the effective tax rates in both periods were favorably impacted by a tax benefit attributable to the Domestic Production Activity (Internal Revenue Code Section 199) Deduction, favorable tax rates in foreign jurisdictions, and a benefit associated with the U.S. research and development credit, offset by state and local taxes and increases to uncertain tax positions.

#### Net income from continuing operations

Net income from continuing operations was $129.6 million in the three months ended September 30, 2017 compared to $121.9 million in the three months ended September 30, 2016. The increase of $7.7 million was primarily due to a higher operating income.

### Results by Segment

### Cabinets

Net sales increased $12.1 million, or 2.0%, due to higher sales volume driven primarily by continuing improvement in the U.S. home products market and the benefit from new product introductions, price increases to help mitigate cumulative raw material cost increases and favorable foreign exchange of approximately $2 million. These benefits were partly offset by unfavorable mix and higher sales promotions.

Operating income decreased $5.1 million, or 6.8%, due to higher employee-related costs, including higher healthcare costs. These benefits were partially offset by the increase in net sales and productivity improvements.

### Plumbing

Net sales increased $47.2 million, or 12.1%, due to higher sales volume in the U.S. 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 Canada, the benefit from the acquisitions of ROHL and Perrin & Rowe in 2016 as well as Shaws in 2017 and favorable foreign exchange of approximately $2 million. These benefits were partially offset by higher sales rebates.

Operating income increased $13.3 million, or 15.8%, due to higher net sales and productivity improvements partially offset by higher employee-related costs, sales rebates and raw material costs.

### Doors

Net sales increased $9.3 million, or 7.2%, due to favorable mix, higher sales volume driven primarily by improved conditions in the U.S. home products markets and the benefit from new product introductions and price increases to help mitigate cumulative raw material cost increases.

Operating income increased $2.8 million, or 12.6%, due to higher net sales and leveraging sales on our existing fixed cost base.

### Security

Net sales increased $1.0 million, or 0.6%, due to higher sales volume in the U.S. and international markets for our core locks and safes product lines and favorable foreign exchange offset by the impact from our exiting of two product lines in our commercial sales distribution channel.

Operating income increased $4.8 million, or 21.0%, primarily due to productivity improvements, lower restructuring and other charges (approximately $3 million) relating to the completion in 2016 of a manufacturing facility relocation and the related cost savings resulting from the facility relocation.

### Results by Segment (Continued)

### Corporate

Corporate expenses decreased by $2.9 million predominantly due to recognition of an actuarial gain versus an actuarial loss in the prior quarter and higher defined benefit plan income during 2017 in comparison to prior quarter.

*(In millions)*

|  | Three Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| General and administrative expense | $(20.5) | $(20.5) |
| Defined benefit plan income | 1.2 | 0.6 |
| Defined benefit plan recognition of actuarial gains (losses) | 1.3 | (1.0) |
| Total Corporate expenses | $(18.0) | $(20.9) |

37

### 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 and availability under our credit facilities. Our operating income is generated by our subsidiaries. There are no restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Fortune Brands. In December 2016, our Board of Directors increased the quarterly cash dividend by 13% to $0.18 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 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 the first nine months of 2017, we repurchased 2.8 million shares of our outstanding common stock under the Company’s share repurchase programs for $173.7 million. As of September 30, 2017, the Company’s total remaining share repurchase authorization under the repurchase programs was approximately $347 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 and other capital initiatives to increase shareholder value. However, we cannot predict whether or when we may enter into acquisitions, joint ventures or dispositions, make any purchases of shares of our common stock under our share repurchase programs, or pay dividends, or what impact any such transactions could have on our results of operations, cash flows or financial condition, whether as a result of the issuance of debt or equity securities, or otherwise. Our cash flows from operations, borrowing availability and overall liquidity are subject to certain risks and uncertainties, including those described in the section of our Annual Report on Form 10-K for the year-ended December 31, 2016 entitled “Item 1A. Risk Factors.”

Acquisitions in 2017 and 2016 included:

- In October 2017, the Company acquired Victoria + Albert, a UK manufacturer of luxury freestanding tubs and basins. The results of operations of the acquired company will be included in the Plumbing segment from the date of acquisition. This acquisition will not have a material effect on net sales or operating income.
- In July 2017, we acquired Shaws Since1897 Limited, a U.K.-based company that specializes in the design, production and marketing of luxury fire-clay kitchen sinks. We financed the transaction using cash on hand and borrowings under our existing credit facilities. Net sales and operating income in the three months ended September 30, 2017 were not material to the Company.
- In September 2016, we acquired 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.
- In May 2016, we acquired Riobel, a Canadian plumbing company specializing in premium showroom bath and shower fittings, for a total purchase price of $94.6 million in cash. We financed the transaction using cash on hand and borrowings under our existing credit facilities.

On September 30, 2017, we had cash and cash equivalents of $277.1 million, of which $257.9 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 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 most of 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, 2017 and 2016.

*(In millions)*

|  | Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $352.6 | $380.6 |
| Net cash used in investing activities | (113.2) | (334.3) |
| Net cash used in financing activities | (223.5) | (9.5) |
| Effect of foreign exchange rate changes on cash | 9.7 | 3.3 |
| Net increase in cash and cash equivalents | $25.6 | $40.1 |

Net cash provided by operating activities was $352.6 million in the nine months ended September 30, 2017 compared to $380.6 million in the nine months ended September 30, 2016. The decrease in cash provided of $28.0 million was primarily due to a higher build in working capital during 2017 compared to 2016 which included inventory reductions as we completed our manufacturing facility relocations in our Plumbing and Security businesses, partly offset by higher net income.

Net cash used in investing activities was $113.2 million in the nine months ended September 30, 2017 compared to $334.3 million in the nine months ended September 30, 2016. The decrease of $221.1 million was primarily due to the decrease in cost of acquisitions of $211.1 million.

Net cash used by financing activities was $223.5 million in the nine months ended September 30, 2017 compared to net cash used of $9.5 million in the nine months ended September 30, 2016. The increase in cash used of $214 million during 2017 was primarily due to lower net borrowings of $384 million and higher dividends of $9 million, partially offset by lower share repurchases in 2017 compared to 2016 ($189 million decrease). Additionally, during the third quarter 2017, we paid deferred acquisition payments totaling $12.4 million (net of certain working capital and other adjustments) relating to the ROHL and Perrin & Rowe acquisitions.

### 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. As of December 31, 2016, the fair value of our total pension plan assets was $577.7 million, representing 73% of the accumulated benefit obligation liability. In 2017, we expect to make total pension contributions of approximately $25 million of which $22 million has been paid as of September 30, 2017. 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 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

#### Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, which clarifies the accounting for revenue arising from contracts with customers and specifies the disclosures that an entity should include in its financial statements. The standard is effective for annual reporting periods beginning after December 15, 2017 (calendar year 2018 for Fortune Brands). During 2016, the FASB issued certain amendments to the standard relating to the principal versus agent guidance, accounting for licenses of intellectual property and identifying performance obligations as well as the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. The effective date and transition requirements for these amendments are the same as those of the original ASU. We have elected the modified retrospective transition approach and also have identified focus areas for each of our reporting segments and have made substantial progress in our assessment of the accounting and financial reporting implications as of September 30, 2017. Our key considerations pursuant to ASU 2014-09 are the control of goods (i.e., timing of revenue recognition), separate performance obligations, customer rights of return (i.e., the reclassification on the balance sheet of the customer rights of return from accounts receivable to a refund liability as well as the recognition of a corresponding asset) and our accounting for display assets. We do not expect the change in accounting related to these considerations to have a material effect on our financial statements.

#### Leases

In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize almost all leases on their balance sheet as a “right-of-use” asset and lease liability but recognize related expenses in a manner similar to current accounting. The guidance also eliminates current real estate-specific provisions for all entities. The standard is effective for annual periods beginning after December 15, 2018 (calendar year 2019 for Fortune Brands) and earlier application is permitted. We are assessing the impact the adoption of this standard will have on our financial statements.

#### Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued ASU 2017-12, that amends current hedge accounting model. The new standard eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item (consistent with our current practice). The change in fair value for qualifying cash flow and net investment hedges will be included in Other comprehensive income (until they are reclassified into the income statement). The standard also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. The standard is effective as of January 1, 2019 and earlier application is permitted. We are assessing the impact the adoption of this standard will have on our financial statements.

### RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)

#### Clarifying Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

In May 2017, the FASB issued ASC 610-20 that 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 customer vs non-customer. Sales to customers are in scope of the new revenue standard. It also clarifies a derecognition model for nonfinancial assets that do not represent a business. The standard is effective as of January 1, 2018 consistent with the effective date for the new revenue recognition standard. We are assessing the impact the adoption of this standard will have on our financial statements and we will consider the implications of the new standard on case by case basis for all non-recurring transactions where we sell or transfer nonfinancial assets.

#### Stock Compensation Scope of Modification Accounting

In May 2017, the FASB issued ASU 2017-09, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance provides a relief to entities that make non-substantive changes to their share-based payment awards and will result in fewer changes to the terms of an award being accounted for as modifications. The standard is effective January 1, 2018 and early adoption is permitted, however we elected not to early adopt. We do not expect the adoption of this standard to have a material effect on our financial statements.

#### Presentation of Net Periodic Pension and Postretirement Cost

In March 2017, the FASB issued ASU 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. Employers will present the other components (i.e., interest cost, expected return on plan assets and actuarial gains/losses) separately from the line item(s) that includes the service cost and outside of any subtotal of operating income. The standard is effective January 1, 2018 and early adoption is permitted. We are assessing the impact the adoption of this standard will have on our financial statements.

#### Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, which simplifies the accounting for goodwill impairment for all entities. Under the new standard, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The standard eliminates the current requirement to calculate a goodwill impairment charge by comparing the implied fair value of goodwill with its carrying amount (i.e., hypothetical purchase price allocation). The standard is effective for annual and interim impairment tests performed in the periods beginning after January 1, 2020 and early adoption is permitted. We plan to early adopt ASU 2017-04 in conjunction with our annual goodwill impairment test during the fourth quarter of 2017.

### RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)

#### Clarifying the Definition of a Business

In January 2017, the FASB issued ASU 2017-01, 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). The standard is effective January 1, 2018 and early adoption is permitted. We do not expect the adoption of this standard to have a material effect on our financial statements.

#### Restricted Cash

In November 2016, the FASB issued ASU 2016-18, 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 which has resulted in diversity in cash flows presentation. The standard is effective January 1, 2018 and early adoption is permitted; however, we elected not to early adopt. We do not expect the adoption of this standard to have a material effect on our financial statements.

#### Intra-Entity Transfers of Assets Other Than Inventory

In October 2016, the FASB issued ASU 2016-16, which requires companies to account for the income tax effects of intercompany sales and transfers of assets other than inventory (e.g., intangible assets) when the transfer occurs. Under the current guidance companies are required to defer the income tax effects of intercompany transfers of assets until the asset has been sold to an outside party or otherwise recognized (e.g., depreciated, amortized or impaired). The standard is effective January 1, 2018 and early adoption is permitted; however, we elected not to early adopt. The transition method will be a “modified retrospective” (i.e., with a cumulative adjustment to retained earnings at adoption). We are assessing the impact the adoption of this standard will have on our financial statements.

#### Classification of Certain Cash Receipts and Cash Payments

In September 2016 the FASB issued ASU 2016-15, which changes how an entity classifies certain cash receipts and cash payments on its statement of cash flows. The key changes that may potentially impact our financial statements include the following: 1) Cash payments for debt prepayment or extinguishment costs would be classified as financing cash outflows; 2) Contingent consideration payments that are not made within three months after the consummation of a business combination would be classified as financing (if the payment is made up to the acquisition date fair value of liability) or operating outflows (if in excess of acquisition fair value). Cash payments made “soon after” the consummation of a business combination generally would be classified as cash outflows for investing activities; 3) Insurance settlement proceeds would be classified based on the nature of the loss; and 4) Company-owned life insurance settlement proceeds would be presented as investing cash inflows, and premiums would be classified as investing or operating cash outflows, or a combination of both. The new standard is effective January 1, 2018 and should be adopted retrospectively. Early adoption is permitted; however, we elected not to early adopt. We do not expect the adoption of this standard to have a material effect on our financial statements.

### RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)

#### Financial Instruments—Credit Losses

In June 2016, the FASB issued 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 will replace the “incurred loss” approach under the current guidance with an “expected loss” model that requires an entity to estimate its lifetime “expected credit loss.” The standard is effective January 1, 2020 and early application is permitted beginning January 1, 2019. We are assessing the impact the adoption of this standard will have on our financial statements.

#### Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU 2016-01, 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 an available-for-sale classification (with changes in fair value reported in Other Comprehensive Income). In addition, the cost method is eliminated for equity investments without readily determinable fair values. The standard is effective January 1, 2018. Early application is permitted for certain provisions of the standard; however, we elected not to early adopt. We do not expect this standard to have a material effect on our financial statements.

## 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, 2016.

## 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, 2017 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, 2016 in the section entitled “Risk Factors.”

Filed Oct 31, 2017.
Source: SEC EDGAR, the filing index for accession 0001193125-17-327153. Last ingested by Listed: Nov 10, 2026, 02:09 ET. No prices; not investment advice.