# Fortune Brands Innovations, Inc.: Form 10-Q for the period ended Jun 30, 2020

- Company: [Fortune Brands Innovations, Inc.](/companies/fbin.md) (CIK 1519751)
- Form: 10-Q
- Filed: 2020-07-30
- Accepted by EDGAR: Jul 30, 2020, 20:24 ET
- Period: 2020-06-30
- Accession: 0001564590-20-034912
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1519751/000156459020034912/fbhs-10q_20200630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1519751/000156459020034912/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-04-01 to 2020-06-30 | $1.38bn | us-gaap:Revenues |
| Revenue | 6 months, 2020-01-01 to 2020-06-30 | $2.78bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2020-04-01 to 2020-06-30 | $892.9m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2020-01-01 to 2020-06-30 | $1.80bn | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2020-04-01 to 2020-06-30 | $276.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2020-01-01 to 2020-06-30 | $590.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-04-01 to 2020-06-30 | $173.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2020-01-01 to 2020-06-30 | $328.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-04-01 to 2020-06-30 | $22.2m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2020-01-01 to 2020-06-30 | $44.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-04-01 to 2020-06-30 | $37.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2020-01-01 to 2020-06-30 | $67.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-04-01 to 2020-06-30 | $115.8m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2020-01-01 to 2020-06-30 | $224.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.83 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2020-01-01 to 2020-06-30 | $1.61 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.84 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2020-01-01 to 2020-06-30 | $1.62 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-04-01 to 2020-06-30 | 138,800,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2020-01-01 to 2020-06-30 | 139,800,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2020-01-01 to 2020-06-30 | $260.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2020-01-01 to 2020-06-30 | $42.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2020-01-01 to 2020-06-30 | $66.6m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2020-01-01 to 2020-06-30 | $150.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-06-30 | $398.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-06-30 | $1.96bn | us-gaap:AssetsCurrent |
| Total assets | at 2020-06-30 | $6.33bn | us-gaap:Assets |
| Current liabilities | at 2020-06-30 | $952.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-06-30 | $3.87bn | us-gaap:Liabilities |
| Long-term debt | at 2020-06-30 | $2.25bn | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2020-06-30 | $2.46bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 35,301 characters.

### MANAGEMENT’S DISCUSSION AND ANALYSIS OF

### FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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, 2019, which are included in our Annual Report on Form 10-K for the year ended December 31, 2019.

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 the expected or potential impact of the novel coronavirus pandemic (“COVID-19”) on our business, operations or financial condition. In addition, statement regarding our general business strategies, market potential, future financial performance, the potential of our brands and other matters, expected capital spending, expected pension contributions, the anticipated impact of recently issued accounting standards on our financial statements, planned business strategies, anticipated market potential, future financial performance, 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 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) the uncertainties relating to the impact of COVID-19 on the Company’s business, operations and financial results, (ii) our reliance on the North American home improvement, repair and new home construction activity levels, and the North American and global economies generally, (iii) the competitive nature of consumer and trade brand businesses, (iv) risks associated with our ability to improve organizational productivity and global supply chain efficiency and flexibility, (v) our ability to develop new products or processes and improve existing products and processes, (vi) risks associated with global commodity and energy availability and price volatility, as well as the possibility of sustained inflation, (vii) risks associated with doing business internationally, including changes in trade-related tariffs and risks with uncertain trade environments, (viii) changes in government and industry standards, (ix) risks associated with entering into potential strategic acquisitions and integrating acquired property, (x) our ability to secure and protect our intellectual property rights, (xi) our reliance on key customers and suppliers, including wholesale distributors and dealers, (xii) risks associated with the disruption of operations, (xiii) our inability to obtain raw materials and finished goods in a timely and cost-effective manner, (xiv) our ability to attract and retain qualified personnel and other labor constraints, (xv) impairments in the carrying value of goodwill or other acquired intangible assets, (xvi) delays or outages in our information technology system or computer networks, (xvii) risk of increases in our defined benefit-related costs and funding requirements, (xviii) future tax law changes or the interpretation of existing tax laws, (xix) potential liabilities and costs from claims and litigation, (xx) our ability to access the capital markets on terms acceptable to us, and (xix) the impact of COVID-19 on our business, financial performance and operating results. 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, 2019, as updated in Part II, Item 1A “Risk Factors” below. 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 leading home and security products company with a portfolio of leading branded products used for residential home repair, remodeling, new construction and security applications.

During the first half of 2020, in response to the COVID-19 pandemic, a number of countries and U.S. states issued orders requiring nonessential businesses to close and persons who were not engaged in essential businesses to stay at home. Most states and jurisdictions designated our products, our retail channel partners and residential construction as essential business activities. A small number of jurisdictions where we operate did not deem our products as part of an essential business, impacting both our ability to manufacture and the demand for some of our products. While many jurisdictions began to relax restrictions during May and June, the COVID-19 pandemic negatively impacted our financial results in the second quarter, primarily due to pandemic-related reductions in demand, temporary closures of some of our facilities and increased inefficiencies at some of our plants and within parts of our supply chain. The long-term impacts of the COVID-19 pandemic continue to be unclear, and these negative impacts may continue to affect our results in later periods, largely depending on the timing and shape of the recovery as well as any further closures related to COVID-19.

Due to the continued inherent uncertainty surrounding COVID-19, including rapidly changing governmental directives, public health challenges and market reactions, it is challenging to estimate the future performance of our business and the financial impacts of COVID-19 in one or more later periods in 2020 compared to the corresponding prior-year periods and compared to our expectations at the beginning of our 2020 fiscal year.

Our first priority with regard to COVID-19 continues to be to ensure the safety, health and hygiene of our employees, customers, suppliers and others with whom we partner in our business activities. Because of our comprehensive use of appropriate risk mitigation and safety practices, we have largely been able to continue our business operations in this unprecedented business environment which could differentiate us from some of our competition. We believe that the disruption caused by the pandemic created an increased consumer interest in investing in their homes and accelerated trends that we were experiencing prior to the pandemic, such as the shift towards value-priced cabinetry products and a focus on outdoor living. We have also taken proactive steps in our manufacturing supply chain and other areas to drive efficiencies which we expect to allow us to be more competitive both during and after the pandemic. We continue to believe that 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. We believe these long-held strengths will enable us to compete effectively during and after the COVID-19 pandemic. We will continue to focus 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 the categories we serve and our leading brands.

We believe long-term our most attractive opportunities are to invest in profitable organic growth initiatives. We also believe that we have the potential to generate additional growth from leveraging our cash flow and balance sheet strength by pursuing accretive strategic acquisitions, non-controlling equity investments and joint ventures, and by returning cash to shareholders through dividends as explained in further detail under “Liquidity and Capital Resources” below.

The U.S. market for our products primarily consists of spending on both new home construction and repair and remodel activities within existing homes, with a majority of the markets we serve consisting of repair and remodel spending. Growth in the U.S. market for our products will largely depend on consumer confidence, employment, home prices, stable mortgage rates and credit availability, all of which may be further impacted by COVID-19 for an unknown duration.

In addition to the potential COVID-19 impacts noted above, we may be impacted by fluctuations in raw material, tariffs, 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.

### RESULTS OF OPERATIONS

### Six Months Ended June 30, 2020 Compared To Six Months Ended June 30, 2019

*(In millions)*

|  | Net Sales 2020 | 2019 | % Change vs. Prior Year |
| --- | ---: | ---: | ---: |
| Plumbing | $973.8 | $964.7 | 0.9% |
| Doors & Security | 646.0 | 662.4 | (2.5) |
| Cabinets | 1,158.7 | 1,208.0 | (4.1) |
| Net sales | $2,778.5 | $2,835.1 | (2.0)% |
|  | **Operating Income (Loss)** |  |  |
|  | **2020** | **2019** | **% Change vs. Prior Year** |
| Plumbing | $214.0 | $195.9 | 9.2% |
| Doors & Security | 76.7 | 72.4 | 5.9 |
| Cabinets | 81.0 | 108.9 | (25.6) |
| Less: Corporate expenses | (43.7) | (39.2) | (11.5) |
| Operating income | $328.0 | $338.0 | (3.0)% |

The following discussion of consolidated results of operations and segment results refers to the six months ended June 30, 2020 compared to the six months ended June 30, 2019. Consolidated results of operations should be read in conjunction with segment results of operations.

#### Net sales

Net sales decreased by $56.6 million, or 2.0%, on lower volume due to the COVID-19 pandemic, unfavorable mix, higher rebate costs, and unfavorable foreign exchange of $12 million. These factors were partially offset by price increases to help mitigate the cumulative impact from tariff related costs.

#### Cost of products sold

Cost of products sold decreased by $36.3 million, or 2.0%, due to the benefit from productivity improvements and lower net sales, partially offset by the impact of higher tariffs.

#### Selling, general and administrative expenses

Selling, general and administrative expenses decreased by $42.5 million, or 6.7%, due to the benefit from cost reductions including lower employee related costs, benefits from organizational restructuring initiatives and lower advertising costs. These decreases were partially offset by higher transportation costs.

#### Amortization of intangible assets

Amortization of intangible assets increased by $0.5 million.

#### Asset impairment charges

Asset impairment charges of $22.5 million relate to indefinite-lived tradenames in our Plumbing and Cabinets segments.

#### Restructuring charges

Restructuring charges of $14.9 million in the six months ended June 30, 2020 largely related to headcount actions associated with COVID-19 reductions in demand across all of our segments. Restructuring charges of $5.7 million in the six months ended June 30, 2019 primarily related to severance costs within our Plumbing and Cabinets segments and costs associated with closing facilities within our Plumbing and Doors & Security segments.

#### Operating income

Operating income decreased by $10.0 million, or 3.0%, primarily due to lower net sales, the impact of higher tariffs and asset impairment charges. These factors were partially offset by price increases to help mitigate the impact of higher tariffs, the benefit from cost reductions including lower employee related costs and benefits from organizational restructuring initiatives.

### RESULTS OF OPERATIONS (Continued)

#### Interest expense

Interest expense decreased $3.9 million to $44.3 million due to lower average borrowings and lower average interest rates.

#### Other income, net

Other income, net, was $11.3 million in the six months ended June 30, 2020, compared to $1.9 million in the six months ended June 30, 2019. The increase in other income, net is primarily due to gains of $11.0 million related to our January 2020 investment in Flo.

#### Income taxes

The effective income tax rates for the six months ended June 30, 2020 and 2019 were 22.9% and 24.0%, respectively. The effective income tax rate in 2020 was favorably impacted by a benefit related to share-based compensation, and in 2019, was favorably impacted by a benefit related to decreases in uncertain tax positions, as a result of audit settlements with taxing authorities.

#### Net income attributable to Fortune Brands

Net income attributable to Fortune Brands was $224.9 million in the six months ended June 30, 2020 compared to $222.2 million in the six months ended June 30, 2019. The increase was due to higher other income, lower interest expense and lower income tax expenses, partly offset by lower operating income.

### Results By Segment

### Plumbing

Net sales increased by $9.1 million, or 0.9%, due to higher sales volume from retail and e-commerce customers in the U.S. who remained open during the economic shutdowns, higher sales volume in China despite closures for COVID-19 and price increases to help mitigate the cumulative impact of tariffs. These factors were partly offset by lower sales from showroom customers whose locations closed or operated at limited capacity as a result of the COVID-19 pandemic as well as unfavorable foreign exchange of approximately $10 million.

Operating income increased by $18.1 million, or 9.2%, due to higher sales volume, the benefit from productivity improvements, cost reductions including lower employee related costs, and lower restructuring and other charges. These benefits were partly offset by unfavorable mix, asset impairment charges ($13.0 million), the impact of higher tariffs and higher rebate costs as well as unfavorable foreign exchange of approximately $3 million.

### Doors & Security

Net sales decreased by $16.4 million, or 2.5%, on lower volume primarily due to COVID-19 related supply chain challenges for security products, the discontinuance of a doors product line, unfavorable mix and higher rebate costs. These factors were partially offset by price increases to help mitigate tariffs and higher volume from new customers for decking products. Foreign exchange was unfavorable by approximately $2 million.

Operating income increased by $4.3 million, or 5.9%, due to price increases to help mitigate tariffs, the benefit from cost reductions including lower employee related costs, the absence in 2020 of amortization expense related to Fiberon’s inventory fair value adjustment ($1.8 million in 2019) and an expense due to a fair value adjustment associated with an idle manufacturing facility ($1.7 million in 2019). Foreign exchange was favorable by approximately $1 million. These factors were partially offset by the impact of tariffs, lower sales volume, unfavorable mix and higher restructuring costs.

### Cabinets

Net sales decreased by $49.3 million, or 4.1%, due to a continued shift to value-priced point products from make-to-order products, lower volume primarily due to lower demand related to the COVID-19 pandemic and increased promotional costs, as well as unfavorable foreign exchange of approximately $1 million. These factors were partly offset by price increases to help mitigate the cumulative impact of tariffs.

Operating income decreased by $27.9 million, or 25.6%, due to lower net sales, asset impairment charges ($9.5 million), higher restructuring and other charges and higher tariffs. These factors were partly offset by the benefit from cost reductions including lower employee related costs.

### Corporate

Corporate expenses increased by $4.5 million, or 11.5%, due to higher employee-related costs, including higher restructuring and other charges.

### RESULTS OF OPERATIONS (Continued)

### Three Months Ended June 30, 2020 Compared To Three Months Ended June 30, 2019

*(In millions)*

|  | Net Sales 2020 | 2019 | % Change vs. Prior Year |
| --- | ---: | ---: | ---: |
| Plumbing | $504.8 | $506.1 | (0.3)% |
| Doors & Security | 332.3 | 366.1 | (9.2) |
| Cabinets | 538.7 | 635.0 | (15.2) |
| Net sales | $1,375.8 | $1,507.2 | (8.7)% |
|  | **Operating Income (Loss)** |  |  |
|  | **2020** | **2019** | **% Change vs. Prior Year** |
| Plumbing | $109.5 | $106.7 | 2.6% |
| Doors & Security | 45.2 | 50.0 | (9.6) |
| Cabinets | 37.3 | 65.7 | (43.2) |
| Less: Corporate expenses | (19.0) | (20.0) | 5.0 |
| Operating income | $173.0 | $202.4 | (14.5)% |

The following discussion of consolidated results of operations and segment results refers to the three months ended June 30, 2020 compared to the three months ended June 30, 2019. Consolidated results of operations should be read in conjunction with segment results of operations.

#### Net sales

Net sales decreased by $131.4 million, or 8.7%, on lower volume due to the COVID-19 pandemic, unfavorable mix and unfavorable foreign exchange of approximately $9 million. These factors were partially offset by price increases to help mitigate the cumulative impact from tariff related costs.

#### Cost of products sold

Cost of products sold decreased by $76.7 million, or 7.9%, due to lower net sales and the benefit from productivity improvements, partially offset by unfavorable mix and higher tariffs.

#### Selling, general and administrative expenses

Selling, general and administrative expenses decreased by $44.4 million, or 13.8%, due to cost reductions, including lower employee related costs and benefits from organizational restructuring initiatives.

#### Amortization of intangible assets

Amortization of intangible assets increased by $0.2 million.

#### Asset impairment charges

Asset impairment charges of $13.0 million related to an indefinite-lived tradename in our Plumbing segment.

#### Restructuring charges

Restructuring charges of $10.4 million in the three months ended June 30, 2020 largely related to headcount actions associated with COVID-19 reductions in demand across all of our segments. Restructuring charges of $4.5 million in the three months ended June 30, 2019 primarily related to severance costs within our Plumbing and Cabinets segments and costs associated with closing facilities within our Plumbing segment.

### RESULTS OF OPERATIONS (Continued)

#### Operating income

Operating income decreased by $29.4 million, or 14.5%, primarily due to lower net sales, unfavorable mix, an asset impairment charge, the impact of tariffs and higher restructuring charges. These factors were partially offset by cost reductions, including lower employee related costs and benefits from organizational restructuring initiatives.

#### Interest expense

Interest expense decreased $2.3 million to $22.2 million due to lower average borrowings and lower average interest rates.

#### Other income, net

Other income, net, was $5.2 million in the three months ended June 30, 2020, compared to $0.7 million in the three months ended June 30, 2019. The increase in other income, net is primarily due to gains of $4.4 million related to our January 2020 investment in Flo.

#### Income taxes

The effective income tax rates for the three months ended June 30, 2020 and 2019 were 24.2% and 23.2%, respectively. The effective income tax rate in 2019 was favorably impacted by decreases to uncertain tax positions, as a result of audit settlements with taxing authorities.

#### Net income attributable to Fortune Brands

Net income attributable to Fortune Brands was $115.8 million in the three months ended June 30, 2020 compared to $137.5 million in the three months ended June 30, 2019. The decrease was due to lower operating income, partly offset by higher other income, lower interest expense and lower income tax expenses.

### Results By Segment

### Plumbing

Net sales decreased by $1.3 million, or 0.3%, due to lower volume from showroom customers whose locations closed or operated at limited capacity as a result of the COVID-19 pandemic, as well as unfavorable foreign exchange of approximately $7 million. These factors were partly offset by higher sales volume in China despite closures for COVID-19, higher sales volume from retail and e-commerce customers in the U.S. who remained open during the economic shutdowns and price increases to help mitigate the cumulative impact of tariffs.

Operating income increased by $2.8 million, or 2.6%, due to the benefit from cost reductions including lower employee related costs, productivity improvements and lower restructuring and other charges. These benefits were partly offset by unfavorable sales mix, asset impairment charges ($13.0 million) and the impact of higher tariffs as well as unfavorable foreign exchange of approximately $2 million.

### Doors & Security

Net sales decreased by $33.8 million, or 9.2%, on lower volume in security products primarily due to COVID-19 related supply chain challenges, the discontinuance of a doors product line, and unfavorable mix. These factors were partially offset by price increases to help mitigate the cumulative impact from tariff related costs and higher volume from new customers for decking products. Foreign exchange was unfavorable by approximately $1 million.

Operating income decreased by $4.8 million, or 9.6%, due to lower sales volume, unfavorable mix, and higher restructuring charges. These factors were partially offset by the benefit from costs reductions including lower employee related costs. Foreign exchange was favorable by approximately $1 million.

### Cabinets

Net sales decreased by $96.3 million, or 15.2%, on lower volume primarily due to lower demand related to the COVID-19 pandemic and a continued shift to value-priced point products from make-to-order products, as well as unfavorable foreign exchange of approximately $1 million. These factors were partly offset by price increases to help mitigate the cumulative impact of tariffs.

Operating income decreased by $28.4 million, or 43.2%, due to lower net sales and higher restructuring costs. These factors were partly offset by the benefit from costs reductions including lower employee related costs as well as productivity improvements.

### Corporate

Corporate expenses decreased by $1.0 million, or 5.0%, due to lower employee-related costs.

### LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are cash on hand, cash flows from operating activities, cash borrowed under our credit facilities and cash from debt issuances in the capital markets. Our operating income is generated by our subsidiaries. We believe our operating cash flows, including funds available under our credit facilities and access to capital markets, provide sufficient liquidity to support the Company’s liquidity and financing needs, which are to support working capital requirements, fund capital expenditures and service indebtedness, as well as to finance acquisitions, and pay dividends to stockholders, as the Board of Directors deems appropriate.

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, 2019 entitled “Item 1A. Risk Factors,” updated in “Item 1A – Risk Factors” below. In addition, we cannot predict whether or when we may enter into acquisitions, joint ventures or dispositions, 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.

#### Long-Term Debt

At June 30, 2020, the Company had aggregate outstanding notes in the amount of $1.8 billion, with varying maturities (the “Notes”). The Notes are unsecured senior obligations of the Company. The following table provides a summary of the Company’s outstanding Notes, including the net carrying value of the Notes, net of underwriting commissions, price discounts and debt issuance costs as of June 30, 2020 and December 31, 2019:

*(in millions)*

|  | Principal Amount | Issuance Date | Maturity Date | Net Carrying Value June 30, 2020 | December 31, 2019 |
| --- | ---: | --- | --- | ---: | ---: |
| 3.000% Senior Notes | $400.0 | June 2015 | June 2020 | $— | $399.7 |
| 4.000% Senior Notes | 500.0 | June 2015 | June 2025 | 496.2 | 495.8 |
| 4.000% Senior Notes (the "2018 Notes") | 600.0 | September 2018 | September 2023 | 596.6 | 596.1 |
| 3.250% Senior Notes | 700.0 | September 2019 | September 2029 | 693.1 | 692.7 |
| Total Senior Notes |  |  |  | $1,785.9 | $2,184.3 |

28

During June 2020, we repaid all amounts outstanding on the 3.000% Senior Notes issued in June 2015 which were scheduled to mature in June 2020 using borrowings under our 2019 Revolving Credit Agreement (as defined below). In September 2019, the Company issued $700 million of unsecured senior notes (“2019 Notes”) in a registered public offering. The 2019 Notes are due in 2029 with a coupon rate of 3.25%. The Company used the proceeds from the 2019 Notes offering to repay in full a $350 million term loan and to pay down outstanding balances under our 2019 Revolving Credit Agreement

#### Credit Facilities

In April 2020, the Company entered into a 364-day, supplemental $400 million revolving credit facility (the “2020 Revolving Credit Agreement”), and borrowings thereunder will be used for general corporate purposes. Given the uncertain nature and duration of the COVID-19 pandemic, this was a proactive step taken out of an abundance of caution to provide ample liquidity for the business. The terms and conditions of the 2020 Revolving Credit Agreement are essentially the same as the Company’s existing $1.25 billion revolving credit facility except for additional provisions related to cash hoarding and the use of debt issuance proceeds. Interest rates under the 2020 Revolving Credit Agreement are variable based on LIBOR at the time of the borrowing and the Company’s long-term credit rating and can range from LIBOR + 1.4% to LIBOR + 1.8%. The 2020 Revolving Credit Agreement includes a covenant under which the Company is required to maintain a minimum ratio of consolidated EBITDA to consolidated interest expense of 3.0 to 1.0. Consolidated EBITDA is defined as consolidated net income before interest expense, income taxes, depreciation, amortization of intangible assets, losses from asset impairments, and certain other one-time adjustments. In addition, the 2020 Revolving Credit Agreement includes a covenant under which the Company’s ratio of consolidated total indebtedness minus certain cash and cash equivalents to consolidated EBITDA generally may not exceed 3.5 to 1.0. As of June 30, 2020, there were no outstanding borrowings under this facility and we were in compliance with all covenants under this facility.

In September 2019, the Company entered into a second amended and restated $1.25 billion revolving credit facility (the “2019 Revolving Credit Agreement”), and borrowings thereunder will be used for general corporate purposes. The terms and conditions of the 2019 Revolving Credit Agreement, including the total commitment amount, essentially remained the same as under the previous credit agreement, except that the maturity date was extended to September 2024. Borrowings amounting to $165.0 million were rolled-over from the prior revolving credit facility into the 2019 Revolving Credit Agreement. Interest rates under the 2019 Revolving Credit Agreement are variable based on LIBOR at the time of the borrowing and the Company’s long-term credit rating and can range from LIBOR + 0.91% to LIBOR + 1.4%. This amendment and restatement of the credit agreement was a non-cash transaction for the Company. On June 30, 2020 our outstanding borrowings under this facility was $460.0 million. On December 31, 2019 our outstanding borrowings under this facility was zero. This facility is included in Long-term debt in the condensed consolidated balance sheets. As of June 30, 2020, we were in compliance with all covenants under this facility.

In September 2019, the Company used the proceeds from the 2019 Notes to repay the full outstanding balance on the Term Loan entered into in March 2018 and subsequently amended in August 2018 and March 2019 (the “Term Loan”). Following the March 2019 amendment, the Term Loan provided for borrowings of $350 million and matured in March 2020. At December 31, 2019, amounts due under the Term Loan were zero.

#### Cash and Seasonality

On June 30, 2020, we had cash and cash equivalents of $398.4 million, of which $313.5 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.

Our operating cash flows are significantly impacted by the seasonality of our business. We typically generate most of our operating cash flow in the third and fourth quarters of each year. We use operating cash in the first quarter of the year. Additionally, as noted in the overview section above, we are uncertain of the impact of COVID-19 to our net sales, supply chain, manufacturing, and distribution as well as overall new construction, repair and remodel activity, and consumer spending.

We believe that our current cash position, cash flow generated from operations, and amounts available under our revolving credit facilities should be sufficient for our operating requirements and enable us to fund our capital expenditures, dividend payments, and any required long-term debt payments. In addition, we believe that we have the ability to obtain alternative sources of financing if required. We expect capital expenditures during 2020 to be in the range of $110 to $130 million. Given the current uncertainty related to COVID-19, we may adjust our capital expenditures as necessary or appropriate to support the operations of the business.

#### Share Repurchases and Dividends

In the first six months of 2020, we repurchased 2.5 million shares of our outstanding common stock under the Company’s share repurchase programs for $150.0 million. We did not repurchase any shares during the second quarter of 2020, and our share repurchase authorization expired on July 13, 2020. Our Board of Directors will continue to evaluate whether and when to authorize a new share repurchase program.

In the first six months of 2020, we paid dividends in the amount of $66.6 million to the Company’s shareholders. 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. There are no restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Fortune Brands.

#### Acquisitions

We periodically review our portfolio of brands and evaluate potential strategic transactions and other capital initiatives to increase shareholder value.

#### Cash Flows

Below is a summary of cash flows for the six months ended June 30, 2020 and 2019.

*(In millions)*

|  | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $260.5 | $112.0 |
| Net cash used in investing activities | (100.2) | (50.8) |
| Net cash used in financing activities | (142.2) | (53.0) |
| Effect of foreign exchange rate changes on cash | (8.0) | 4.9 |
| Net increase in cash and cash equivalents | $10.1 | $13.1 |

Net cash provided by operating activities was $260.5 million in the six months ended June 30, 2020, compared to net cash provided by operating activities of $112.0 million in the six months ended June 30, 2019. The increase in cash provided of $148.5 million was primarily due to smaller increases in working capital due to disruptions arising from COVID-19 and increases in accrued taxes.

Net cash used in investing activities was $100.2 million in the six months ended June 30, 2020, compared to net cash used in investing activities of $50.8 million in the six months ended June 30, 2019. The increase in cash used of $49.4 million was primarily due to the acquisition of additional shares of Flo Technologies in January 2020 and April 2020, partially offset by a decline in capital expenditures.

Net cash used in financing activities was $142.2 million in the six months ended June 30, 2020, compared to cash used in financing activities of $53.0 million in the six months ended June 30, 2019. The increase in cash used of $89.2 million was primarily due to higher share repurchases in 2020 compared to 2019, partly offset by the absence of deferred acquisition payments made during 2019 ($19 million).

### 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, 2019, the fair value of our total pension plan assets was $677.2 million, representing 77% of the accumulated benefit obligation liability. In 2020, we expect to make pension contributions of approximately $23 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, Japan and South Africa. 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, 2019.

## Controls and procedures

As filed, 950 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, 2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

## Risk factors

As filed, 1,515 characters.

*The current outbreak of the novel coronavirus (“COVID-19”) has impacted our business and is expected to continue to cause further disruptions to our business, financial performance and operating results.*

The COVID-19 pandemic may have far-reaching impacts on many aspects of the Company’s operations in the future including the continued operation of our facilities across the globe, the ability of our suppliers to manufacture key inputs, as well as potential other impacts on customer behaviors, the Company’s employees and the market generally. Our business could be negatively impacted over the longer term if the disruptions related to COVID-19 decrease consumer confidence and housing investments; or precipitate a prolonged economic downturn and/or an extended rise in unemployment or tempering of wage growth, any of which could lower demand for our products. Risks related to negative economic conditions are described in "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019.

The inherent uncertainty surrounding COVID-19, due in part to rapidly changing governmental directives, public health challenges and progress, and market reactions also makes it more challenging for our management to estimate the future performance of our business and the economic impact of the COVID-19 pandemic, including but not limited to, possible impairment, restructuring, and other charges. Accordingly, future developments may materially impact our current estimates of such charges.

Filed Jul 30, 2020.
Source: SEC EDGAR, the filing index for accession 0001564590-20-034912. Last ingested by Listed: Nov 10, 2026, 02:09 ET. No prices; not investment advice.