# Fortune Brands Innovations, Inc.: Form 10-Q for the period ended Jun 30, 2018

- Company: [Fortune Brands Innovations, Inc.](/companies/fbin.md) (CIK 1519751)
- Form: 10-Q
- Filed: 2018-07-31
- Accepted by EDGAR: Jul 31, 2018, 16:07 ET
- Period: 2018-06-30
- Accession: 0001193125-18-233151
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1519751/000119312518233151/d622152d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1519751/000119312518233151/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Selling, general and administrative | 3 months, 2018-04-01 to 2018-06-30 | $316.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2018-01-01 to 2018-06-30 | $627.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-04-01 to 2018-06-30 | $188.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2018-01-01 to 2018-06-30 | $308.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-04-01 to 2018-06-30 | $17.4m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2018-01-01 to 2018-06-30 | $32.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-04-01 to 2018-06-30 | $44.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2018-01-01 to 2018-06-30 | $77.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-04-01 to 2018-06-30 | $129.6m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2018-01-01 to 2018-06-30 | $204.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-04-01 to 2018-06-30 | $0.88 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2018-01-01 to 2018-06-30 | $1.37 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-04-01 to 2018-06-30 | $0.89 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2018-01-01 to 2018-06-30 | $1.39 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-04-01 to 2018-06-30 | 146,700,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2018-01-01 to 2018-06-30 | 149,400,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2018-01-01 to 2018-06-30 | $137.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2018-01-01 to 2018-06-30 | $67.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2018-01-01 to 2018-06-30 | $58.6m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2018-01-01 to 2018-06-30 | $602.7m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Current assets | at 2018-06-30 | $1.81bn | us-gaap:AssetsCurrent |
| Total assets | at 2018-06-30 | $5.70bn | us-gaap:Assets |
| Current liabilities | at 2018-06-30 | $1.23bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-06-30 | $3.52bn | us-gaap:Liabilities |
| Long-term debt | at 2018-06-30 | $1.79bn | us-gaap:LongTermDebtNoncurrent |
| Short-term borrowings | at 2018-06-30 | $350.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2018-06-30 | $2.17bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 33,930 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, 2017, which are included in our Annual Report on Form 10-K for the year ended December 31, 2017.

This discussion contains forward-looking statements that are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding planned business strategies, anticipated market potential, future financial performance, pension contributions, the anticipated effects of the combination of our Doors and Security businesses 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 is based on current expectations, estimates, assumptions and projections about our industry, business and future financial results, 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 businesses, (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, 2017. We undertake no obligation to, and expressly disclaim any such obligation to, update, amend or clarify any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances 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 leading home and security products company with a portfolio of leading branded products used for residential home repair, remodeling, new construction and security applications.

### OVERVIEW (Continued)

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.

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 strength 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 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 2018, we publicly announced an internal reorganization to combine our Doors and Security segments under common leadership to drive innovation, accelerate product development, and enhance investments and business processes. In conjunction with the reorganization, we changed how our chief operating decision maker evaluates and allocates the resources for the combined business. As a result, starting in the third quarter of 2018, we will have a new reportable segment – Doors and Security. Reporting for the new Doors and Security segment will begin in the third quarter of 2018 with historical financial segment information restated prospectively to conform to the new segment presentation.

In October 2017, we acquired Victoria +Albert, a UK-based premium brand of standalone bathtubs, sinks, tub fillers, faucets and other accessories. 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. The total combined consideration paid was approximately $132 million, subject to certain post-closing adjustments and deferred acquisition payments. We financed both of the acquisitions using cash on hand and borrowings under our revolving credit facility. These transactions broadened our plumbing portfolio and enhanced future growth opportunities.

### RESULTS OF OPERATIONS

### Six Months Ended June 30, 2018 Compared To Six Months Ended June 30, 2017

*(In millions)*

|  | Net Sales 2018 | 2017 | % Change vs. Prior Year |
| --- | ---: | ---: | ---: |
| Cabinets | $1,194.8 | $1,227.0 | (2.6)% |
| Plumbing | 933.4 | 813.2 | 14.8 |
| Doors | 270.5 | 235.7 | 14.8 |
| Security | 284.9 | 276.3 | 3.1 |
| Net sales | $2,683.6 | $2,552.2 | 5.1% |
|  | **Operating Income** |  |  |
|  | **2018** | **2017** | **% Change vs. Prior Year** |
| Cabinets | $93.5 | $135.7 | (31.1)% |
| Plumbing (a) | 183.7 | 168.4 | 9.1 |
| Doors | 41.0 | 30.7 | 33.6 |
| Security | 32.5 | 28.7 | 13.2 |
| Less: Corporate expenses (a) | (42.7) | (43.3) | 1.4 |
| Operating income | $308.0 | $320.2 | (3.8)% |

*(a) We revised our previously reported results for the six months ended June 30, 2017 for ASU 2017-07, Presentation of Net Periodic Pension and Postretirement Costs.*

The following discussion of consolidated results of operations and segment results refers to the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Consolidated results of operations should be read in conjunction with segment results of operations.

#### Net sales

Net sales increased $131.4 million, or 5.1%. The increase was due to higher sales volume primarily from the continuing improvement in U.S. market conditions for home products as well as higher international sales principally in China and Canada, price increases to help mitigate cumulative raw material cost increases, the benefit from new product introductions, favorable foreign exchange of approximately $21 million and the benefit from the 2017 acquisitions in our Plumbing segment. These benefits were partially offset by unfavorable mix as well as unfavorable weather conditions affecting our U.S. market performance.

#### Cost of products sold

Cost of products sold increased $95.1 million, or 5.9%, due to higher net sales, including the impact of the acquisitions in our Plumbing segment and increased commodity costs partially offset by the benefit of productivity improvements.

#### Selling, general and administrative expenses

Selling, general and administrative expenses increased $45.3 million, or 7.8%, due to higher employee-related costs as well as the impact of the acquisitions in our Plumbing segment.

#### 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 during the second quarter of 2017.

#### Amortization of intangible assets

Amortization of intangible assets increased $0.3 million due to the 2017 acquisitions in our Plumbing segment offset by a decrease related to a definite-lived customer relationship intangible that was fully amortized during the second quarter of 2017.

#### Asset impairment charges

Asset impairment charges of $3.2 million during the first quarter of 2017 related to our decision to sell Field ID.

#### Restructuring charges

Restructuring charges of $11.6 million in the six months ended June 30, 2018 primarily related to costs associated with our initiatives to consolidate our manufacturing footprint in our Cabinets segment, in addition to severance costs within our Security, Plumbing and Doors segments. Restructuring charges of $3.1 million in the six months ended June 30, 2017 primarily related to severance costs within our Security and Plumbing segments.

#### Operating income

Operating income decreased $12.2 million, or 3.8%, primarily due to increased restructuring and other charges, commodity cost inflation, unfavorable mix, and higher employee-related costs. These benefits were partially offset by higher net sales and productivity improvements.

#### Interest expense

Interest expense increased $7.9 million to $32.1 million due to higher average borrowings and higher average interest rates.

#### Other income, net

Other income, net, was $6.2 million in the six months ended June 30, 2018, compared to income of $7.0 million in the six months ended June 30, 2017. The decrease in other income, net is primarily due to lower defined benefit plan income in 2018 ($1.9 million decrease).

#### Income taxes

The effective income tax rates for the six months ended June 30, 2018 and 2017 were 27.4% and 28.2%, respectively. The effective income tax rate in 2018 was favorably impacted by the corporate tax rate reduction from 35% to 21% under the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), and a benefit associated with the U.S. research and development credit. The effective income tax rate in 2018 was unfavorably impacted by an adjustment to the deemed repatriation tax liability recorded in 2017 under the Tax Act, the repeal of the Domestic Production Activity (Internal Revenue Code Section 199) Deduction, state and local taxes, and increases to uncertain tax positions.

The effective income tax rate in 2017 was favorably impacted by a tax benefit attributable to the share-based compensation (ASU 2016-09) deduction, 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 $204.8 million in the six months ended June 30, 2018 compared to $217.7 million in the six months ended June 30, 2017. The decrease of $12.9 million was primarily due to lower operating income and higher interest expense partially offset by lower income tax.

#### Loss from discontinued operations

The loss from discontinued operations was $0.2 and $2.6 million in the six months ended June 30, 2018 and 2017, respectively. The loss on discontinued operations in the six months ended June 30, 2018 and 2017 is primarily related to the prior sale of the Waterloo tool storage and Simonton window businesses.

### Results By Segment

### Cabinets

Net sales decreased $32.2 million, or 2.6%, predominantly due to the impact of exiting a customer relationship, unfavorable weather conditions affecting our U.S. market performance and unfavorable mix. These factors were partly offset by the benefit from new product introductions and price increases to help mitigate cumulative raw material cost increases.

Operating income decreased $42.2 million, or 31.1%, due to lower net sales, including the impact of underutilization of our fixed cost base and unfavorable mix, higher restructuring and other charges of $11.9 million to consolidate our manufacturing footprint and increased headcount-related costs partially offset by the benefit from productivity improvements.

### Plumbing

Net sales increased $120.2 million, or 14.8% due to higher sales unit volume, new product introductions across our distribution channels, the benefit from the 2017 acquisitions of Victoria & Albert and Shaws and higher sales in international markets, principally in China and Canada. Foreign exchange was favorable by approximately $14 million. These benefits were slightly offset by higher sales rebates tied to higher sales volumes.

Operating income increased $15.3 million, or 9.1%, due to the higher net sales and benefit from productivity improvements. These benefits were partially offset by commodity cost inflation, higher employee-related, advertising and marketing costs, and higher amortization of the acquisition-related inventory fair value adjustment related to our acquisitions. In addition, 2017 operating income reflects the impact of adopting ASU 2017-07 during the first six months of 2018 and the reclassification of approximately $5.1 million from Plumbing operating income to other income, net.

### Results By Segment (Continued)

### Doors

Net sales increased $34.8 million, or 14.8%, due to share gains, including the benefit from new product introductions, higher sales volume driven primarily by continuing improvement in the U.S. home products market, price increases to help mitigate cumulative raw material cost increases and favorable product mix.

Operating income increased $10.3 million, or 33.6%, due to the higher net sales, and leveraging the sales on our existing fixed cost base.

### Security

Net sales increased $8.6 million, or 3.1%, due to higher sales volume, the impact from favorable foreign exchange and price increases to help mitigate cumulative raw material cost increases partly offset by the impact of our exiting of two product lines in our commercial distribution channel.

Operating income increased $3.8 million, or 13.2%, due to higher net sales, the absence in 2018 of charges related to the sale of Field ID and productivity improvements. These benefits were partly offset by higher commodity costs and employee-related costs.

### Corporate

Corporate expenses decreased by $0.6 million. In addition, 2017 operating income reflects the impact of adopting ASU 2017-07 during the first quarter of 2018 and the related reclassification of approximately $2.0 million from Corporate expenses to other income, net.

### Three Months Ended June 30, 2018 Compared To Three Months Ended June 30, 2017

*(In millions)*

|  | Net Sales 2018 | 2017 | % Change vs. Prior Year |
| --- | ---: | ---: | ---: |
| Cabinets | $637.6 | $653.4 | (2.4)% |
| Plumbing | 483.7 | 434.8 | 11.2 |
| Doors | 160.2 | 133.5 | 20.0 |
| Security | 147.5 | 143.7 | 2.6 |
| Net sales | $1,429.0 | $1,365.4 | 4.7% |
|  | **Operating Income** |  |  |
|  | **2018** | **2017** | **% Change vs. Prior Year** |
| Cabinets | $69.4 | $88.7 | (21.8)% |
| Plumbing (a) | 95.3 | 101.2 | (5.8) |
| Doors | 27.9 | 22.5 | 24.0 |
| Security | 17.4 | 18.6 | (6.5) |
| Less: Corporate expenses (a) | (21.4) | (21.8) | 1.8 |
| Operating income | $188.6 | $209.2 | (9.8)% |

*(a) We revised our previously reported results for the three months ended June 30, 2017 for ASU 2017-07, Presentation of Net Periodic Pension and Postretirement Costs.*

The following discussion of consolidated results of operations and segment results refers to the three months ended June 30, 2018 compared to the three months ended June 30, 2017. Consolidated results of operations should be read in conjunction with segment results of operations.

#### Net sales

Net sales increased $63.6 million, or 4.7%. The increase was due to higher sales volume primarily from the continuing improvement in U.S. market conditions for home products as well as higher international sales principally in China and Canada, the benefit from new product introductions, price increases to help mitigate cumulative raw material cost increases, the benefit from the 2017 acquisitions in our Plumbing segment and favorable foreign exchange of approximately $11 million. These benefits were partially offset by unfavorable mix.

#### Cost of products sold

Cost of products sold increased $52.8 million, or 6.2%, due to higher net sales, including the impact of the acquisitions in our Plumbing segment and increased commodity costs partially offset by the benefit of productivity improvements.

#### Selling, general and administrative expenses

Selling, general and administrative expenses increased $23.7 million, or 8.1%, due to higher employee-related costs as well as the impact of the acquisitions in our Plumbing segment.

#### 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 during the second quarter of 2017.

#### Amortization of intangible assets

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

#### Restructuring charges

Restructuring charges in the three months ended June 30, 2018 and 2017 were $10.8 million and $0.9 million, respectively. Restructuring charges in the three months ended June 30, 2018 primarily related to costs associated with our initiatives to consolidate our manufacturing footprint in our Cabinets segment, in addition to severance costs within our Plumbing and Security segments. Restructuring charges in the three months ended June 30, 2017 primarily related to severance costs and charges associated with supply chain initiatives within our Security segment.

#### Operating income

Operating income decreased $20.6 million, or 9.8%, primarily due to increased restructuring and other charges, commodity cost inflation, unfavorable mix, and higher employee-related costs. These benefits were partially offset by higher net sales and productivity improvements.

#### Interest expense

Interest expense increased $5.1 million to $17.4 million due to higher average borrowings and higher average interest rates.

#### Other income, net

Other income, net, was $3.4 million in the three months ended June 30, 2018, compared to income of $2.3 million in the three months ended June 30, 2017. The decrease in other income, net is primarily due to lower defined benefit plan income in 2018 ($0.6 million decrease).

#### Income taxes

The effective income tax rates for the three months ended June 30, 2018 and 2017 were 25.7% and 29.6%, respectively. The effective income tax rate for the three months ended June 30, 2018 was favorably impacted by the corporate tax rate reduction from 35% to 21% under the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), and a benefit associated with the U.S. research and development credit. The effective income tax rate for the three months ended June 30, 2018 was unfavorably impacted by the repeal of the Domestic Production Activity (Internal Revenue Code Section 199) Deduction, state and local taxes, and increases to uncertain tax positions.

The effective income tax rate for the three months ended June 30, 2017 was favorably impacted by a tax benefit attributable to the share-based compensation deduction, 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 $129.7 million in the three months ended June 30, 2018 compared to $140.3 million in the three months ended June 30, 2017. The decrease of $10.6 million was primarily due to lower operating income, and higher interest expense partially offset by lower income tax.

#### Loss from discontinued operations

The loss from discontinued operations of $2.6 million in the three months ended June 30, 2017 is primarily related to the prior sale of the Waterloo tool storage and Simonton window businesses.

### Results By Segment

### Cabinets

Net sales decreased $15.8 million, or 2.4%, predominantly due to the impact of exiting a customer relationship and unfavorable mix. These factors were partly offset by the benefit from new product introductions and price increases to help mitigate cumulative raw material cost increases.

Operating income decreased $19.3 million, or 21.8%, due to the lower net sales, including the impact of underutilization of our fixed cost base and unfavorable mix, higher restructuring and other charges of $11.8 million to consolidate our manufacturing footprint and increased headcount-related costs partially offset by the benefit from productivity improvements.

### Plumbing

Net sales increased $48.9 million, or 11.2% due to higher sales unit volume, new product introductions across our distribution channels, the benefit from the 2017 acquisitions of Victoria & Albert and Shaws and higher sales in international markets, principally in China and Canada. Foreign exchange was favorable by approximately $7 million. These benefits were slightly offset by higher sales rebates tied to higher sales volumes.

Operating income decreased $5.9 million, or 5.8%, due to commodity cost inflation, higher employee-related costs, amortization of the acquisition-related inventory fair value adjustment ($1.7 million) related to our 2017 acquisitions and higher restructuring and other charges ($1.6 million). These factors were partly offset by higher net sales and benefit from productivity improvements. In addition, 2017 operating income reflects the impact of adopting ASU 2017-07 during the second quarter of 2018 and the reclassification of approximately $2.1 million from Plumbing operating income to other income, net.

### Doors

Net sales increased $26.7 million, or 20.0%, due to share gains, including new product introductions, higher sales volume driven primarily by continuing improvement in the U.S. home products market and price increases to help mitigate cumulative raw material cost increases.

### Results By Segment (Continued)

Operating income increased $5.4 million, or 24.0%, due to the higher net sales, and leveraging the sales on our existing fixed cost base.

### Security

Net sales increased $3.8 million, or 2.6%, due to higher sales volume and favorable foreign exchange partly offset by the impact of exiting two product lines in our commercial distribution channel.

Operating income decreased $1.2 million, or 6.5%, due to higher commodity costs, higher restructuring and other charges ($2.0 million), unfavorable mix and employee-related costs. These factors were partially offset by benefits from the higher sales volume and productivity improvements.

### Corporate

Corporate expenses decreased by $0.4 million. In addition, 2017 operating income reflects the impact of adopting ASU 2017-07 during the first quarter of 2018 and the related reclassification of approximately $1.1 million from Corporate expenses to other income, net.

### LIQUIDITY AND CAPITAL RESOURCES

Our primary liquidity needs are to support working capital requirements, fund capital expenditures and service indebtedness, as well as to finance acquisitions, repurchase shares of our common stock and pay dividends to stockholders, as deemed appropriate. Our principal sources of liquidity are cash on hand, cash flows from operating activities and availability under our credit facility. 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 2017, our Board of Directors increased the quarterly cash dividend by 11% to $0.20 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.

On April 30, 2018, our Board of Directors authorized the repurchase of up to $150 million of shares of our common stock over the two years ending April 30, 2020. During the six months ended on June 30, 2018, we repurchased 10.0 million shares of our common stock under the Company’s share repurchase programs for $602.7 million. As of June 30, 2018, the Company’s total remaining share repurchase authorization under the repurchase programs was approximately $105.7 million. On July 13, 2018, our Board of Directors authorized the repurchase of up to $400 million of shares of our common stock over the two years ending July 13, 2020. The share repurchase programs do not obligate the Company to repurchase any specific dollar amount or number of shares and may be suspended or discontinued at any time.

In March 2018, the Company entered into a $350 million term loan for general corporate purposes that matures in March 2019. Interest rates under the term loan are variable based on LIBOR at the time of the borrowing and the Company’s long-term credit rating and can range from LIBOR + 0.625% to LIBOR + 1.25%. Covenants under the term loan are the same as the existing $1.25 billion revolving credit agreement. As of June 30, 2018, we were in compliance with all covenants under this term loan.

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, 2017 entitled “Item 1A. Risk Factors.”

Acquisitions in 2017 included:

- In October 2017, the Company acquired Victoria + Albert, a UK-based premium brand of standalone bathtubs, sinks, tub fillers, faucets and other accessories. In July 2017, we acquired Shaws, a UK-based luxury plumbing products company that specializes in manufacturing and selling fireclay sinks and selling brassware and accessories. The combined consideration paid was approximately $132 million, including $5.8 million of additional purchase price consideration paid related to post-closing adjustments during the six months ended June 30, 2018. The combined consideration paid is subject to further certain post-closing adjustments and deferred acquisition payments. The results of operations of the acquired companies are included in the Plumbing segment from the respective dates of acquisition. We financed the transactions using cash on hand and borrowings under our revolving credit facility.

On June 30, 2018, we had cash and cash equivalents of $345.5 million, of which $276.1 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 tax expense on those funds that are repatriated.

In June 2016, we amended and restated our credit agreement to combine and rollover the existing revolving credit facility and term loan into a new standalone $1.25 billion revolving credit facility. Terms and conditions of the credit agreement, including the total commitment amount, essentially remained the same as under the 2011 credit agreement. The revolving credit facility will mature in June 2021 and borrowings thereunder will be used for general corporate purposes. Interest rates under the facility are variable based on LIBOR at the time of the borrowing and the Company’s long-term credit rating and can range from LIBOR + 0.9% to LIBOR + 1.5%. At June 30, 2018, we were in compliance with all covenants under this facility.

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 six months ended June 30, 2018 and 2017.

*(In millions)*

|  | Six Months Ended June 30, 2018 | 2017 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $137.3 | $171.2 |
| Net cash used in investing activities | (72.3) | (58.1) |
| Net cash (used) provided by financing activities | (35.2) | (115.2) |
| Effect of foreign exchange rate changes on cash | (7.3) | 3.3 |
| Net increase in cash and cash equivalents | $22.5 | $1.2 |

Net cash provided by operating activities was $137.3 million in the six months ended June 30, 2018 compared to $171.2 million in the six months ended June 30, 2017. The decrease in cash provided of $33.9 million was primarily due to lower net income and higher build in working capital mainly driven by higher accounts receivable in 2018 compared to 2017.

Net cash used in investing activities was $72.3 million in the six months ended June 30, 2018 compared to $58.1 million in the six months ended June 30, 2017. The increase in cash used of $14.2 million was primarily due to $7.7 million of higher capital spending and a $5.7 million increase in cost of acquisitions.

Net cash used by financing activities was $35.2 million in the six months ended June 30, 2018 compared to $115.2 million in the six months ended June 30, 2017. The decrease in cash used of $80.0 million was primarily due to higher net borrowings in 2018 compared to 2017 ($675.0 million increase), partly offset by higher share repurchases in 2018 compared to 2017 ($570.0 million increase).

### Pension Plans

Subsidiaries of Fortune Brands Home & Security, Inc. 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, 2017, the fair value of our total pension plan assets was $656.6 million, representing 79% of the accumulated benefit obligation liability. During 2017, we contributed our 2018 minimum required contribution of approximately $6.4 million. During 2018, we may make an additional voluntary contribution of up to approximately $25 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 operations in various foreign countries, principally Canada, China, Mexico, the United Kingdom, France, Australia and Japan. Therefore, changes in the value of the related currencies affect our financial statements when translated into U.S. dollars.

### RECENTLY ISSUED ACCOUNTING STANDARDS

The adoption of recent accounting standards, as discussed in Note 2, “Recently Issued Accounting Standards,” to our Consolidated Financial Statements, has not had and is not expected to have a significant impact on our revenue, earnings or liquidity.

## 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, 2017.

## Controls and procedures

As filed, 1,183 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 fiscal quarter ended June 30, 2018 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, 2017 in the section entitled “Risk Factors.”

Filed Jul 31, 2018.
Source: SEC EDGAR, the filing index for accession 0001193125-18-233151. Last ingested by Listed: Nov 10, 2026, 02:09 ET. No prices; not investment advice.