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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from         to         

 

Commission file number 1-35166

 

FORTUNE BRANDS HOME & SECURITY, INC.

 

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

62-1411546

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

520 Lake Cook Road, Deerfield, Illinois 60015-5611

 

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (847) 484-4400

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

FBHS

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes         No  

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes        No    

 

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, at April 17, 2020 was 137,946,952.

 

 

 


PART I.  FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS.

FORTUNE BRANDS HOME & SECURITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three Months Ended March 31, 2020 and 2019

(In millions, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Net sales

 

$

1,402.7

 

 

$

1,327.9

 

Cost of products sold

 

 

909.5

 

 

 

869.1

 

Selling, general and administrative expenses

 

 

313.9

 

 

 

312.0

 

Amortization of intangible assets

 

 

10.3

 

 

 

10.0

 

Asset impairment charges

 

 

9.5

 

 

 

 

Restructuring charges

 

 

4.5

 

 

 

1.2

 

Operating income

 

 

155.0

 

 

 

135.6

 

Interest expense

 

 

22.1

 

 

 

23.7

 

Other income, net

 

 

(6.1

)

 

 

(1.2

)

Income before taxes

 

 

139.0

 

 

 

113.1

 

Income tax

 

 

29.9

 

 

 

28.6

 

Income after tax

 

 

109.1

 

 

 

84.5

 

Equity in losses of affiliate

 

 

0.3

 

 

 

 

Net income

 

 

108.8

 

 

 

84.5

 

Less: Noncontrolling interests

 

 

(0.3

)

 

 

(0.2

)

Net income attributable to Fortune Brands

 

$

109.1

 

 

$

84.7

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.78

 

 

$

0.60

 

Diluted earnings per common share

 

$

0.77

 

 

$

0.60

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

58.2

 

 

$

92.8

 

 

See notes to condensed consolidated financial statements.


 

2


FORTUNE BRANDS HOME & SECURITY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

359.7

 

 

$

387.9

 

Accounts receivable less allowances for discounts and doubtful accounts

 

 

678.2

 

 

 

624.8

 

Inventories

 

 

703.1

 

 

 

718.6

 

Other current assets

 

 

173.0

 

 

 

166.9

 

Total current assets

 

 

1,914.0

 

 

 

1,898.2

 

Property, plant and equipment, net of accumulated depreciation

 

 

807.6

 

 

 

824.2

 

Operating lease assets

 

 

159.3

 

 

 

165.6

 

Goodwill

 

 

2,079.3

 

 

 

2,090.2

 

Other intangible assets, net of accumulated amortization

 

 

1,139.9

 

 

 

1,168.9

 

Other assets

 

 

200.0

 

 

 

144.2

 

Total assets

 

$

6,300.1

 

 

$

6,291.3

 

Liabilities and equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Short-term debt

 

$

399.9

 

 

$

399.7

 

Accounts payable

 

 

426.4

 

 

 

460.0

 

Other current liabilities

 

 

419.8

 

 

 

549.6

 

Total current liabilities

 

 

1,246.1

 

 

 

1,409.3

 

Long-term debt

 

 

2,035.2

 

 

 

1,784.6

 

Deferred income taxes

 

 

157.4

 

 

 

157.2

 

Accrued defined benefit plans

 

 

198.8

 

 

 

201.4

 

Operating lease liabilities

 

 

134.1

 

 

 

139.8

 

Other non-current liabilities

 

 

170.6

 

 

 

171.2

 

Total liabilities

 

 

3,942.2

 

 

 

3,863.5

 

Commitments and contingencies (see Note 17)

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Fortune Brands equity

 

 

 

 

 

 

 

 

Common stock(a)

 

 

1.8

 

 

 

1.8

 

Paid-in capital

 

 

2,843.3

 

 

 

2,813.8

 

Accumulated other comprehensive loss

 

 

(123.2

)

 

 

(72.6

)

Retained earnings

 

 

1,872.1

 

 

 

1,763.0

 

Treasury stock

 

 

(2,237.0

)

 

 

(2,079.4

)

Total Fortune Brands equity

 

 

2,357.0

 

 

 

2,426.6

 

Noncontrolling interests

 

 

0.9

 

 

 

1.2

 

Total equity

 

 

2,357.9

 

 

 

2,427.8

 

Total liabilities and equity

 

$

6,300.1

 

 

$

6,291.3

 

 

(a)

Common stock, par value $0.01 per share; 182.9 million shares and 181.9 million shares issued at March 31, 2020 and December 31, 2019, respectively.

 

See notes to condensed consolidated financial statements.


 

3


FORTUNE BRANDS HOME & SECURITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2020 and 2019

(In millions)

(Unaudited)

 

 

 

2020

 

 

2019

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

108.8

 

 

$

84.5

 

Non-cash pre-tax expense:

 

 

 

 

 

 

 

 

Depreciation

 

 

27.2

 

 

 

27.8

 

Amortization of intangibles

 

 

10.3

 

 

 

10.0

 

Non-cash lease expense

 

 

7.4

 

 

 

8.7

 

Stock-based compensation

 

 

11.1

 

 

 

7.1

 

Deferred taxes

 

 

0.5

 

 

 

(2.0

)

Asset impairment charges

 

 

9.5

 

 

 

1.7

 

Amortization of deferred financing fees

 

 

0.9

 

 

 

0.8

 

Equity in losses of affiliate

 

 

0.3

 

 

 

 

Gain on equity investments

 

 

(6.6

)

 

 

 

Gain on sale of property, plant and equipment

 

 

(0.1

)

 

 

(0.9

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Increase in accounts receivable

 

 

(81.3

)

 

 

(76.8

)

Decrease (increase) in inventories

 

 

9.6

 

 

 

(57.2

)

Decrease in accounts payable

 

 

(25.6

)

 

 

(12.2

)

Increase in other assets

 

 

(7.4

)

 

 

(15.6

)

Decrease in accrued expenses and other liabilities

 

 

(92.9

)

 

 

(87.2

)

Increase in accrued taxes

 

 

14.5

 

 

 

21.6

 

Net cash used in operating activities

 

 

(13.8

)

 

 

(89.7

)

Investing activities

 

 

 

 

 

 

 

 

Capital expenditures (a)

 

 

(26.9

)

 

 

(27.2

)

Proceeds from the disposition of assets

 

 

1.5

 

 

 

1.9

 

Cost of investments in equity securities

 

 

(51.6

)

 

 

 

Net cash used in investing activities

 

 

(77.0

)

 

 

(25.3

)

Financing activities

 

 

 

 

 

 

 

 

Decrease in short-term debt

 

 

 

 

 

(175.0

)

Issuance of long-term debt

 

 

380.0

 

 

 

520.0

 

Repayment of long-term debt

 

 

(130.0

)

 

 

(160.0

)

Proceeds from the exercise of stock options

 

 

18.4

 

 

 

2.9

 

Treasury stock purchases(b)

 

 

(150.0

)

 

 

(18.0

)

Employee withholding taxes related to stock-based compensation

 

 

(7.6

)

 

 

(7.7

)

Deferred acquisition payments

 

 

 

 

 

(1.8

)

Dividends to stockholders

 

 

(33.5

)

 

 

(31.0

)

Net cash provided by financing activities

 

 

77.3

 

 

 

129.4

 

Effect of foreign exchange rate changes on cash

 

 

(15.0

)

 

 

3.8

 

Net (decrease) increase in cash and cash equivalents

 

$

(28.5

)

 

$

18.2

 

Cash, cash equivalents and restricted cash(c) at beginning of period

 

$

394.9

 

 

$

270.7

 

Cash, cash equivalents and restricted cash(c) at end of period

 

$

366.4

 

 

$

288.9

 

 

(a)

Capital expenditures of $4.9 million and $10.6 million that had not been paid as of March 31, 2020 and 2019, respectively, were excluded from the Statement of Cash Flows.

(b)

Treasury stock purchases for the three months ended March 31, 2019 excludes $10.0 million of purchases made in March 2019 that were not settled until April 2019.

(c)

Restricted cash of $0.8 million and $5.9 million is included in Other current assets and Other assets, respectively, as of March 31, 2020 and restricted cash of $0.8 million and $6.9 million is included in Other current assets and Other assets, respectively, as of March 31, 2019.  Restricted cash of $0.8 million and $6.1 million is included in Other current assets and Other assets, respectively, as of December 31, 2019.

See notes to condensed consolidated financial statements.


 

4


FORTUNE BRANDS HOME & SECURITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Three Months Ended March 31, 2020 and 2019

(In millions)

(Unaudited)

 

 

 

Common

Stock

 

 

Paid-In

Capital

 

 

Accumulated

Other

Comprehensive

(Loss) Income

 

 

Retained

Earnings

 

 

Treasury

Stock

 

 

Non-

controlling

Interests

 

 

Total

Equity

 

Balance at December 31, 2018

 

$

1.8

 

 

$

2,766.0

 

 

$

(67.0

)

 

$

1,448.1

 

 

$

(1,970.7

)

 

$

1.8

 

 

$

2,180.0

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

84.7

 

 

 

 

 

 

(0.2

)

 

 

84.5

 

Other comprehensive income

 

 

 

 

 

 

 

 

8.3

 

 

 

 

 

 

 

 

 

 

 

 

8.3

 

Stock options exercised

 

 

 

 

 

2.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.9

 

Stock-based compensation

 

 

 

 

 

7.1

 

 

 

 

 

 

 

 

 

(7.7

)

 

 

 

 

 

(0.6

)

Adoption of ASU 2018-02

 

 

 

 

 

 

 

 

(8.6

)

 

 

8.6

 

 

 

 

 

 

 

 

 

-

 

Treasury stock purchase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(28.0

)

 

 

 

 

 

(28.0

)

Balance at March 31, 2019

 

$

1.8

 

 

$

2,776.0

 

 

$

(67.3

)

 

$

1,541.4

 

 

$

(2,006.4

)

 

$

1.6

 

 

$

2,247.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

$

1.8

 

 

$

2,813.8

 

 

$

(72.6

)

 

$

1,763.0

 

 

$

(2,079.4

)

 

$

1.2

 

 

$

2,427.8

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

109.1

 

 

 

 

 

 

(0.3

)

 

 

108.8

 

Other comprehensive income

 

 

 

 

 

 

 

 

(50.6

)

 

 

 

 

 

 

 

 

 

 

 

(50.6

)

Stock options exercised

 

 

 

 

 

18.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18.4

 

Stock-based compensation

 

 

 

 

 

11.1

 

 

 

 

 

 

 

 

 

(7.6

)

 

 

 

 

 

3.5

 

Treasury stock purchase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(150.0

)

 

 

 

 

 

(150.0

)

Balance at March 31, 2020

 

$

1.8

 

 

$

2,843.3

 

 

$

(123.2

)

 

$

1,872.1

 

 

$

(2,237.0

)

 

$

0.9

 

 

$

2,357.9

 

 

See notes to condensed consolidated financial statements

 

 

5


FORTUNE BRANDS HOME & SECURITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.

Basis of Presentation and Principles of Consolidation

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.

The condensed consolidated balance sheet as of March 31, 2020, the related condensed consolidated statements of comprehensive income and equity for the three months ended March 31, 2020 and 2019, and the related condensed consolidated statements of cash flows for the three months ended March 31, 2020 and 2019 are unaudited.  The presentation of these financial statements requires us to make estimates and assumptions that affect reported amounts and related disclosures.  Actual results could differ from those estimates.  In the opinion of management, all adjustments necessary for a fair statement of the financial statements have been included.  Interim results may not be indicative of results for a full year.

The condensed consolidated financial statements and notes are presented pursuant to the rules and regulations of the Securities and Exchange Commission and do not contain certain information included in our annual audited consolidated financial statements and notes.  The December 31, 2019 condensed consolidated balance sheet was derived from our audited consolidated financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles (“GAAP”). This Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2019.

2.

Recently Issued Accounting Standards

Financial Instruments—Credit Losses

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, which changes the impairment model for most financial assets and certain other instruments that are not measured at fair value through net income. The new guidance applies to most financial assets measured at amortized cost, including trade and other receivables and loans as well as off-balance-sheet credit exposures (e.g., loan commitments and standby letters of credit). The standard replaced the “incurred loss” approach under the previous guidance with an “expected loss” model that requires an entity to estimate its lifetime “expected credit loss.”  We adopted this guidance on January 1, 2020.  The adoption of this guidance did not have a material effect on our financial statements.

Changes to the Disclosure Requirements for Fair Value Measurement

In August 2018, the FASB issued ASU 2018-13, which removes the requirement to disclose: 1) amount of and reasons for transfers between Levels 1 and 2 of the fair value hierarchy, 2) policy for timing of transfers between levels, and 3) valuation processes for Level 3 investments. In addition, this guidance modifies and adds other disclosure requirements, which primarily relate to valuation of Level 3 assets and liabilities. We adopted this guidance on January 1, 2020. The adoption of this guidance did not have a material effect on our financial statements.

Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract

In August 2018, the FASB issued ASU 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Costs to obtain software, including configuration and integration with legacy IT systems, coding and testing, including parallel process phases are eligible for capitalization under the new standard.  In addition, activities that would be expensed include costs related to vendor demonstrations, determining performance and technology requirements and training activities. We adopted this guidance on January 1,2020. The adoption of this guidance did not have a material effect on our financial statements.

Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued ASU 2019-12, which is intended to simplify accounting for income taxes and improve consistency in application.  ASU 2019-12 amends certain elements of income tax accounting, including but not limited to intraperiod tax allocations, step-ups in tax basis of goodwill, and calculating taxes on year-to-date losses in interim periods.  The guidance is effective for the Company’s fiscal year beginning January 1, 2021, with early adoption permitted.  We are assessing the impact that the adoption of this guidance will have on our financial statements.

 

6


FORTUNE BRANDS HOME & SECURITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Clarifications in Accounting for Equity Securities

In January 2020, the FASB issued ASU 2020-01, which clarifies the interactions between accounting for equity investments (ASC 321), equity method accounting (ASC 323) and derivatives and hedges (ASC 815).  As a result of the ASU, when entities apply the measurement alternative to non-controlling equity investments under ASC 321, and must transition to the equity method of accounting because of an observable transaction, existing investments should be remeasured immediately before applying the equity method of accounting.  Additionally, it states that if entities hold non-derivative forward contracts or purchased call options to acquire equity securities, such instruments should be measured using the fair value principles of ASC 321 before settlement or exercise.  The Company early adopted this guidance on January 1, 2020, and as a result recognized a gain of $6.6 million within other income during the three months ended March 31, 2020 related to the remeasurement of our investment in Flo Technologies, Inc. immediately prior to applying the equity method of accounting (see note 4).

Effects of Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, which provides relief from accounting analysis and impacts that may otherwise be required for modifications to agreements necessitated by reference rate reform. It also provides optional expedients to enable the continuance of hedge accounting where certain hedging relationships are impacted by reference rate reform. This optional guidance is effective immediately, and available to be used through December 31, 2022. We are assessing the impact that reference rate reform and the related adoption of this guidance will have on our financial statements.

 

3.

Balance Sheet Information

Supplemental information on our balance sheets is as follows:

 

(In millions)

 

March 31,

2020

 

 

December 31,

2019

 

Inventories:

 

 

 

 

 

 

 

 

Raw materials and supplies

 

$

258.0

 

 

$

274.4

 

Work in process

 

 

71.9

 

 

 

72.2

 

Finished products

 

 

373.2

 

 

 

372.0

 

Total inventories

 

$

703.1

 

 

$

718.6

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, gross

 

$

1,971.5

 

 

$

1,982.5

 

Less: accumulated depreciation

 

 

1,163.9

 

 

 

1,158.3

 

Property, plant and equipment, net

 

$

807.6

 

 

$

824.2

 

 

 

4.

Acquisitions and Dispositions

 

In 2018 our Plumbing segment entered into a strategic partnership with, and acquired non-controlling equity interests in, Flo Technologies, Inc. (“Flo”), a U.S. manufacturer of comprehensive water monitoring and shut-off systems with leak detection technologies.  In January 2020, we entered into an agreement to acquire 100% of the outstanding shares of Flo in a multi-phase transaction. As part of this agreement, we acquired additional shares for $44.2 million in cash, including direct transactions costs, and entered into a forward contract to purchase all remaining shares of Flo at a future date in exchange for an additional $7.9 million in cash, which is included in other assets in our condensed consolidated balance sheet.  

 

We utilize the equity method to account for investments when we possess the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when the investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. In applying the equity method, we record our investment at cost and subsequently increase or decrease the carrying amount of the investment by our proportionate share of the net earnings or losses of the investee. We record dividends or other equity distributions as reductions in the carrying value of our investment.

 

 

7


FORTUNE BRANDS HOME & SECURITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

As of March 31, 2020, we owned approximately 75% of Flo’s outstanding shares.  Starting in the first quarter of 2020, we applied the equity method of accounting to our investment in Flo as the minority shareholders have substantive participating rights which preclude consolidation in our results of operations and statements of financial position and cash flows. The substantive participating rights are due to expire in the first quarter of 2021, at which time we will obtain control of, and begin consolidating, Flo in our results.  The second phase, scheduled to occur in the first quarter of 2022, will result in the acquisition of the remaining outstanding shares of Flo for a price based on a multiple of Flo’s 2021 sales and adjusted earnings before interest and taxes.  Immediately prior to applying the equity method of accounting, we recognized a gain of $6.6 million within other income during the three months ended March 31, 2020 related to the remeasurement of our previously existing investment in Flo.

 

The carrying value of our investment in Flo was $75.7 million at March 31, 2020 and $25.7 million at December 31, 2019.

5.

Goodwill and Identifiable Intangible Assets

We had goodwill of $2,079.3 million and $2,090.2 million as of March 31, 2020 and December 31, 2019, respectively. The change in the net carrying amount of goodwill by segment was as follows:

 

(In millions)

 

Cabinets

 

 

Plumbing

 

 

Doors &

Security

 

 

Total

Goodwill

 

Goodwill at December 31, 2019(a)

 

$

925.5

 

 

$

747.3

 

 

$

417.4

 

 

$

2,090.2

 

Year-to-date translation adjustments

 

 

(2.5

)

 

 

(7.4

)

 

 

(1.0

)

 

 

(10.9

)

Goodwill at March 31, 2020(a)

 

$

923.0

 

 

$

739.9

 

 

$

416.4

 

 

$

2,079.3

 

 

 

(a)

Net of accumulated impairment losses of $399.5 million in the Doors & Security segment.

We also had net identifiable intangible assets of $1,139.9 million and $1,168.9 million as of March 31, 2020 and December 31, 2019, respectively. The $22.1 million decrease in gross identifiable intangible assets was due to foreign translation adjustments and tradename impairment charges of $9.5 million in our Cabinets segment.

The gross carrying value and accumulated amortization by class of identifiable intangible assets as of March 31, 2020 and December 31, 2019 were as follows:

 

(In millions)

 

As of March 31, 2020

 

 

As of December 31, 2019

 

 

 

Gross

Carrying

Amounts

 

 

Accumulated

Amortization

 

 

Net

Book

Value

 

 

Gross

Carrying

Amounts

 

 

Accumulated

Amortization

 

 

Net

Book

Value

 

Indefinite-lived tradenames

 

$

620.8

 

 

$

 

 

$

620.8

 

 

$

635.6

 

 

$

 

 

$

635.6

 

Amortizable intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tradenames

 

 

19.8

 

 

 

(12.6

)

 

 

7.2

 

 

 

20.6

 

 

 

(12.9

)

 

 

7.7

 

Customer and contractual relationships

 

 

796.0

 

 

 

(304.6

)

 

 

491.4

 

 

 

803.9

 

 

 

(299.6

)

 

 

504.3

 

Patents/proprietary technology

 

 

74.8

 

 

 

(54.3

)

 

 

20.5

 

 

 

73.4

 

 

 

(52.1

)

 

 

21.3

 

Total

 

 

890.6

 

 

 

(371.5

)

 

 

519.1

 

 

 

897.9

 

 

 

(364.6

)

 

 

533.3

 

Total identifiable intangibles

 

$

1,511.4

 

 

$

(371.5

)

 

$

1,139.9

 

 

$

1,533.5

 

 

$

(364.6

)

 

$

1,168.9

 

 

Amortizable identifiable intangible assets, principally customer relationships, are subject to amortization over their estimated useful life, ranging from 2 to 30 years, based on the assessment of a number of factors that may impact useful life, which includes customer attrition rates and other relevant factors.  

 

In March 2020, the World Health Organization declared a global pandemic related to COVID-19, and governments around the globe enacted significant and wide-ranging measures to slow and limit the transmission of the virus, including stay at home orders in the United States and globally.  The impacts of these measures is expected to negatively impact our net sales in the second quarter and later periods of 2020.  We considered the forecasted impact of COVID-19 combined with the results of our 2019 annual impairment tests to be a triggering event requiring a March 31, 2020 impairment test for three of our indefinite-lived tradenames in our Cabinets segment.

 

 

8


FORTUNE BRANDS HOME & SECURITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

In the first quarter of 2020, we recognized an impairment charge of $9.5 million related to one of these indefinite-lived tradenames.  This charge was primarily the result of lower expected sales of custom cabinetry products related to the impact of COVID-19. In the fourth quarter of 2019, we recognized an impairment charge of $12.0 million related to the same indefinite-lived tradename, which was the result of a strategic shift associated with new segment leadership and acceleration of our capacity rebalancing initiatives from custom cabinetry products to value-based cabinetry products as a result of lower than expected sales of custom cabinetry products compared to prior forecasts.  As of March 31, 2020, the estimated fair value of this tradename equaled its carrying value of $29.1 million.

 

In the third quarter of 2019, we recognized an impairment charge of $29.5 million related to a second indefinite-lived tradename in our Cabinets segment, which was primarily the result of a continuing shift in consumer demand from semi-custom cabinetry products to value-priced cabinetry products, which led to consecutive downward adjustments of internal sales forecasts and future growth rates associated with the tradename.  As of March 31, 2020, the estimated fair value of this tradename exceeded its carrying value of $85.0 million by less than 10%.

 

As of March 31, 2020, the estimated fair value of the third tradename exceeded its carrying value of $36.2 million by less than 10%.

 

The fair values of these tradenames were measured using the relief-from-royalty approach, which estimates the present value of royalty income that could be hypothetically earned by licensing the tradename to a third party over its remaining useful life.  Some of the more significant assumptions inherent in estimating the fair values include forecasted revenue growth rates for the tradename, assumed royalty rate, and a market-participant discount rate that reflects the level of risk associated with the tradenames’ future revenues and profitability.  We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management plans.  These assumptions represent Level 3 inputs of the fair value hierarchy (refer to Note 8).

 

A reduction in the estimated fair value of these three tradenames could trigger additional impairment charges in future periods.  Events or circumstances that could have a potential negative effect on the estimated fair value of our reporting units and indefinite-lived tradenames include: lower than forecasted revenues, more severe impacts of COVID-19 than expected, actual new construction and repair and remodel growth rates that fall below our assumptions, actions of key customers, increases in discount rates, continued economic uncertainty, higher levels of unemployment, weak consumer confidence, lower levels of discretionary consumer spending, a decrease in royalty rates and a decline in the trading price of our common stock. We cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill and indefinite-lived assets.

 

6.

External Debt and Financing Arrangements

Unsecured Senior Notes

At March 31, 2020, the Company had aggregate outstanding notes in the amount of $2.2 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, 2020 and December 31, 2019:

 

(in millions)

 

 

 

 

 

 

 

 

Net Carrying Value

 

Coupon Rate

Principal Amount

 

 

Issuance Date

 

Maturity Date

 

March 31, 2020

 

 

December 31, 2019

 

3.000% Senior Notes

$

400.0

 

 

June 2015

 

June 2020

 

$

399.9

 

 

$

399.7

 

4.000% Senior Notes

 

500.0

 

 

June 2015

 

June 2025

 

 

496.0

 

 

 

495.8

 

4.000% Senior Notes (the “2018 Notes”)

 

600.0

 

 

September 2018

 

September 2023

 

 

596.3

 

 

 

596.1

 

3.250% Senior Notes (the “2019 Notes”)

 

700.0