# Fortune Brands Innovations, Inc.: Form 10-Q for the period ended Mar 31, 2021

- Company: [Fortune Brands Innovations, Inc.](/companies/fbin.md) (CIK 1519751)
- Form: 10-Q
- Filed: 2021-05-04
- Accepted by EDGAR: May 4, 2021, 16:01 ET
- Period: 2021-03-31
- Accession: 0001564590-21-023312
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1519751/000156459021023312/fbhs-10q_20210331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1519751/000156459021023312/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-01-01 to 2021-03-31 | $1.77bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2021-01-01 to 2021-03-31 | $1.13bn | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2021-01-01 to 2021-03-31 | $371.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2021-01-01 to 2021-03-31 | $248.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2021-01-01 to 2021-03-31 | $21.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2021-01-01 to 2021-03-31 | $45.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-01-01 to 2021-03-31 | $177.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-01-01 to 2021-03-31 | $1.26 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2021-01-01 to 2021-03-31 | $1.28 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2021-01-01 to 2021-03-31 | 140,600,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2021-01-01 to 2021-03-31 | −$69.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2021-01-01 to 2021-03-31 | $25.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2021-01-01 to 2021-03-31 | $36.0m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2021-01-01 to 2021-03-31 | $54.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2021-03-31 | $356.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2021-03-31 | $2.35bn | us-gaap:AssetsCurrent |
| Total assets | at 2021-03-31 | $7.48bn | us-gaap:Assets |
| Current liabilities | at 2021-03-31 | $1.20bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2021-03-31 | $4.56bn | us-gaap:Liabilities |
| Long-term debt | at 2021-03-31 | $2.68bn | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2021-03-31 | $2.92bn | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 24,109 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, 2020, which are included in our Annual Report on Form 10-K for the year ended December 31, 2020.

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 our business, operations or financial condition in addition to statements 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 including the expected or potential impact of the novel coronavirus (“COVID-19”) pandemic. 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:4 (i) our reliance on the North American home improvement, repair and remodel and new home construction activity levels, and the North American and global economies generally, (ii) the competitive nature of consumer and trade brand businesses, (iii) our ability to develop new products or processes and improve existing products and processes, (iv) our reliance on key customers and suppliers, including wholesale distributors and dealers, (v) risks associated with our ability to improve organizational productivity and global supply chain efficiency and flexibility, (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 globally, including changes in trade-related tariffs and risks with uncertain trade environments, (viii) changes in government and industry regulatory standards, (ix) risks associated with the disruption of operations, (x) our inability to obtain raw materials and finished goods in a timely and cost-effective manner, (xi) impairments in the carrying value of goodwill or other acquired intangible assets, (xii) delays or outages in our information technology system or computer networks, (xiii) risk of increases in our defined benefit-related costs and funding requirements, (xiv) the uncertainties relating to the impact of COVID-19 on the Company’s business, financial performance and operating results, (xv) risks associated with entering into potential strategic acquisitions and integrating acquired property, (xvi) future tax law changes or the interpretation of existing tax laws, (xvii) our ability to secure and protect our intellectual property rights, (xviii) our ability to attract and retain qualified personnel and other labor constraints, (xix) potential liabilities and costs from claims and litigation, and (xx) our ability to access the capital markets on terms acceptable to us. 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, 2020. 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.

We 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, as well as a tradition of strong innovation and customer service. We believe these long-held strengths will enable us to compete effectively and 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 a combination of dividends and share repurchases 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 substantial majority of the markets we serve consisting of repair and remodel spending. We believe that recent increases in consumer focus on the home have accelerated the home products market. We expect this expanding market will continue after the pandemic is over due to an underbuilt housing supply in the U.S. and as more flexible workspaces allow for a greater number of housing options. Growth in the U.S. market for our products will largely depend on consumer confidence, employment, home prices, stable mortgage rates and credit availability.

We may be impacted by fluctuations in the cost and availability of raw materials, tariffs, transportation costs, changes in foreign exchange, inflation 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 January 2021, we obtained control of and began consolidating Flo in our results. Flo, which is included in our Plumbing segment, is a U.S. manufacturer of comprehensive water monitoring and shut-off systems with leak detection technologies. During 2020, we applied the equity method of accounting to our investment in Flo as the minority shareholders had substantive participating rights which precluded consolidation. The fair value allocated to assets acquired and liabilities assumed as of January 1, 2021 was $87.8 million, net of cash acquired of $9.7 million.

In December 2020, we acquired 100% of the outstanding equity of Larson, the North American market leading brand of storm, screen and security doors. Larson also sells related outdoor living products including retractable screens and porch windows. The Company completed the acquisition for a total purchase price, excluding expected tax benefits, of approximately $717.5 million, net of cash acquired and final working capital adjustments of $2.3 million paid during the three months ended March 31, 2021. The results of operations are included in the Outdoors & Security segment.

### RESULTS OF OPERATIONS

### Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

*(In millions)*

|  | Net Sales 2021 | 2020 | % Change vs. Prior Year |
| --- | ---: | ---: | ---: |
| Plumbing | $621.6 | $469.0 | 32.5% |
| Outdoors & Security | 461.5 | 313.7 | 47.1 |
| Cabinets | 687.9 | 620.0 | 11.0 |
| Net sales | $1,771.0 | $1,402.7 | 26.3% |
|  | **Operating Income (Loss)** |  |  |
|  | **2021** | **2020** | **% Change vs. Prior Year** |
| Plumbing | $147.9 | $104.5 | 41.5% |
| Outdoors & Security | 52.8 | 31.5 | 67.6 |
| Cabinets | 72.6 | 43.7 | 66.1 |
| Less: Corporate expenses | (24.9) | (24.7) | (0.8) |
| Operating income | $248.4 | $155.0 | 60.3% |

The following discussion of consolidated results of operations and segment results refers to the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Consolidated results of operations should be read in conjunction with segment results of operations.

#### Net sales

Net sales increased by $368.3 million, or 26.3%, due to higher sales volume, the benefit from the 2020 Larson acquisition ($101.2 million), favorable mix, price increases to help mitigate the impact of cumulative commodity and transportation cost increases as well as favorable foreign exchange of approximately $12 million. These benefits were partially offset by higher promotion and rebate costs.

#### Cost of products sold

Cost of products sold increased by $217.4 million, or 23.9%, due to higher net sales, the impact of the Larson acquisition including higher amortization of the acquisition related inventory fair value adjustment ($3.3 million in 2021) and product mix, partially offset by the benefit from productivity improvements.

#### Selling, general and administrative expenses

Selling, general and administrative expenses increased by $57.6 million, or 18.3%, due to higher employee related, transportation, and advertising costs.

#### Amortization of intangible assets

Amortization of intangible assets increased by $6.3 million primarily due to the 2020 Larson acquisition in our Outdoors & Security segment and the 2021 consolidation of Flo in our Plumbing segment.

#### Asset impairment charges

Asset impairment charges of $9.5 million in 2020 related to an indefinite-lived tradename within our Cabinets segment.

#### Restructuring charges

Restructuring charges of $7.6 million in the three months ended March 31, 2021 primarily related to severance costs associated with the relocation of manufacturing facilities within our Cabinets and Outdoors & Security segments. Restructuring charges of $4.5 million in the three months ended March 31, 2020 primarily related to severance costs across all our segments.

### RESULTS OF OPERATIONS (Continued)

#### Operating income

Operating income increased by $93.4 million, or 60.3%, primarily due to higher net sales, productivity improvements, the absence of the 2020 asset impairment charges and the benefit from the 2020 Larson acquisition. These benefits were partially offset by higher employee related, transportation and advertising costs, higher restructuring charges and higher amortization of intangible assets.

#### Interest expense

Interest expense decreased $0.7 million to $21.4 million due to lower average interest rates, partially offset by higher average borrowings.

#### Other expense (income), net

Other expense, net, of $3.3 million in the three months ended March 31, 2021 includes a non-cash loss of $4.5 million related to the remeasurement of our investment in Flo immediately prior to consolidation and foreign currency adjustments, partially offset by defined benefit plan income. Other income, net of $6.1 million in the three months ended March 31, 2020 includes a non-cash gain of $6.6 million related to the remeasurement of our investment in Flo immediately prior to applying the equity method of accounting, partially offset by unfavorable foreign currency adjustments.

#### Income taxes

The effective income tax rates for the three months ended March 31, 2021 and 2020 were 20.5% and 21.5%, respectively. The effective income tax rate in 2021 was favorably impacted by a benefit related to decreases in uncertain tax positions and a benefit related to share-based compensation.

#### Net income attributable to Fortune Brands

Net income attributable to Fortune Brands was $177.8 million in the three months ended March 31, 2021 compared to $109.1 million in the three months ended March 31, 2020. The increase was due to higher operating income and lower interest expense, partly offset by higher income tax expenses and higher other expense.

### Results By Segment

### Plumbing

Net sales increased by $152.6 million, or 32.5%, due to higher sales volume across most brands and markets and price increases to help mitigate the impact of cumulative commodity and transportation cost increases as well as favorable foreign exchange of approximately $10 million. These benefits were partially offset by higher sales rebate costs.

Operating income increased by $43.4 million, or 41.5%, due to higher net sales and the benefit from productivity improvements as well as favorable foreign exchange of approximately $3 million. These benefits were partially offset by the impact of higher marketing, freight and employee related costs.

### Outdoors & Security

Net sales increased by $147.8 million, or 47.1%, due to the benefit from the 2020 Larson acquisition ($101.2 million) and higher sales volume.

Operating income increased by $21.3 million, or 67.6%, due to higher net sales, the benefit from the 2020 Larson acquisition and productivity improvements. These benefits were partially offset by commodity cost inflation, higher freight costs and restructuring charges.

### Cabinets

Net sales increased by $67.9 million, or 11.0%, due to higher sales volume, in both our make-to-order and value priced points, favorable mix and price increases to help mitigate the impact of cumulative commodity and transportation cost increases as well as favorable foreign exchange of approximately $1 million. These factors were partly offset by increased promotional costs.

Operating income increased by $28.9 million, or 66.1%, due to higher net sales, the absence of asset impairment charges booked during the three months ended March 31, 2020 ($9.5 million), favorable mix and the benefit from productivity improvements. These factors were partly offset by higher freight costs, commodity inflation and higher employee related costs.

### Corporate

Corporate expenses increased by $0.2 million, or 0.8%, due to higher 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, repurchase shares of our common stock 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, 2020 entitled “Item 1A. Risk Factors.” 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 March 31, 2021, 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 March 31, 2021 and December 31, 2020:

*(in millions)*

|  | Principal Amount | Issuance Date | Maturity Date | Net Carrying Value March 31, 2021 | December 31, 2020 |
| --- | ---: | --- | --- | ---: | ---: |
| 4.000% Senior Notes | $500.0 | June 2015 | June 2025 | $496.8 | $496.6 |
| 4.000% Senior Notes (the "2018 Notes") | 600.0 | September 2018 | September 2023 | 597.3 | 597.1 |
| 3.250% Senior Notes (the "2019 Notes") | 700.0 | September 2019 | September 2029 | 693.7 | 693.5 |
| Total Senior Notes | $1,800.0 |  |  | $1,787.8 | $1,787.2 |

#### Credit Facilities

In April 2020, the Company entered into a 364-day, supplemental $400 million revolving credit facility (the “2020 Revolving Credit Agreement”). This supplemental facility was never utilized by the Company prior to its expiration in April 2021.

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. 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%. On March 31, 2021 and December 31, 2020, our outstanding borrowings under this facility were $895.0 million and $785.0 million, respectively. This facility is included in Long-term debt in the condensed consolidated balance sheets. As of March 31, 2021, we were in compliance with all covenants under this facility.

#### Cash and Seasonality

On March 31, 2021, we had cash and cash equivalents of $356.1 million, of which $302.2 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.

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.

#### Share Repurchases and Dividends

In the first quarter of 2021, we repurchased 0.6 million shares of our outstanding common stock under the Company’s share repurchase program for $54.1 million. As of March 31, 2021, the Company’s total remaining share repurchase authorization under its share repurchase program was approximately $408.4 million. The share repurchase program does not obligate the Company to repurchase any specific dollar amount or number of shares and may be suspended or discontinued at any time.

In the first quarter of 2021, we paid dividends in the amount of $36.0 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 three months ended March 31, 2021 and 2020.

*(In millions)*

|  | Three Months Ended March 31, 2021 | 2020 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(69.2) | $(13.8) |
| Net cash used in investing activities | (18.5) | (77.0) |
| Net cash provided by financing activities | 22.8 | 77.3 |
| Effect of foreign exchange rate changes on cash | 1.7 | (15.0) |
| Net decrease in cash and cash equivalents | $(63.2) | $(28.5) |

Net cash used in operating activities was $69.2 million in the three months ended March 31, 2021, compared to net cash used in operating activities of $13.8 million in the three months ended March 31, 2020. The increase in cash used of $55.4 million was primarily due to higher increases in working capital driven by higher inventory associated with our strong sales growth (26.3% versus the three months ended March 31, 2020) and the payment of 2020 customer program and employee incentive accruals, partially offset by higher net income and increases in accrued taxes.

Net cash used in investing activities was $18.5 million in the three months ended March 31, 2021, compared to net cash used in investing activities of $77.0 million in the three months ended March 31, 2020. The decrease in cash used of $58.5 million was primarily due to the acquisition of additional shares of Flo in January 2020.

Net cash provided by financing activities was $22.8 million in the three months ended March 31, 2021, compared to cash provided by financing activities of $77.3 million in the three months ended March 31, 2020. The decrease in cash provided of $54.5 million was primarily due to lower net borrowings in 2021 compared to 2020 ($140.0 million decrease), partly offset by lower share repurchases in 2021 compared to 2020.

### 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, 2020, the fair value of our total pension plan assets was $784.9 million, representing 84% of the accumulated benefit obligation liability. In 2021, we expect to make pension contributions of approximately $10 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, 2020.

## Controls and procedures

As filed, 1,179 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 March 31, 2021 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 Larson and Flo and, if necessary, will make appropriate changes as we incorporate our controls and procedures into these 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, 2020 in the section entitled “Risk Factors.”

Filed May 4, 2021.
Source: SEC EDGAR, the filing index for accession 0001564590-21-023312. Last ingested by Listed: Nov 10, 2026, 02:09 ET. No prices; not investment advice.