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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

For the fiscal year ended December 31, 2021

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)

 

(IRS Employer

Identification No.)

520 Lake Cook Road, Deerfield, IL 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 Symbols(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

FBHS

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No

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 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, a smaller reporting company or 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

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

The aggregate market value of the registrant’s voting common equity held by non-affiliates of the registrant at June 30, 2021 (the last day of the registrant’s most recent second quarter) was $13,699,604,954. The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, at February 11, 2022, was 134,174,304.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in the registrant’s proxy statement for its Annual Meeting of Stockholders to be held on May 3, 2022 (to be filed not later than 120 days after the end of the registrant’s fiscal year) (the “2022 Proxy Statement”) is incorporated by reference into Part III hereof.

 


 


Form 10-K Table of Contents

 

 

 

 

Page

PART I

 

 

 

Item 1.

Business.

 

3

Item 1A.

Risk Factors.

 

9

Item 1B.

Unresolved Staff Comments.

 

15

Item 2.

Properties.

 

15

Item 3.

Legal Proceedings.

 

16

Item 4.

Mine Safety Disclosures.

 

16

 

Information about our Executive Officers.

 

 

 

 

 

PART II

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

18

Item 6.

Reserved.

 

20

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

21

 

Results of Operations.

 

23

 

Liquidity and Capital Resources.

 

26

 

Critical Accounting Estimates.

 

31

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk.

 

36

Item 8.

Financial Statements and Supplementary Data.

 

37

 

Notes to Consolidated Financial Statements.

 

46

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

82

Item 9A.

Controls and Procedures.

 

82

Item 9B.

Other Information.

 

82

Item 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

 

82

 

 

 

 

PART III

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance.

 

83

Item 11.

Executive Compensation.

 

83

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

83

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

 

83

Item 14.

Principal Accountant Fees and Services.

 

83

 

 

 

 

PART IV

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

 

84

Item 16.

Form 10-K Summary

 

87

Signatures

 

88

Schedule II Valuation and Qualifying Accounts

 

89

 

 


 

PART I

Item 1. Business.

Cautionary Statement Concerning Forward-Looking Statements

This Annual Report on Form 10-K contains certain “forward-looking statements” made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding our general business strategies, anticipated market potential, the potential impact of costs, including material and labor costs, the potential impact of inflation, the potential of our brands expected capital spending, expected pension contributions, expected impact of acquisitions, the anticipated effects of recently issued accounting standards on our financial statements, planned business strategies, future financial performance and other matters. Statements that 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 the 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 (the “SEC”). Although we believe that these statements are based on reasonable assumptions, they are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those indicated in such statements. These factors include those listed in the section below entitled “Risk Factors.” Except as required by law, we undertake no obligation to, and expressly disclaim any such obligation to, update or revise 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 the law.

Unless the context otherwise requires, references in this Annual Report on Form 10-K to “Fortune Brands,” the “Company,” “we,” “our” or “us” refer to Fortune Brands Home & Security, Inc. and its consolidated subsidiaries.

Our Company

We are a leading home and security products company that competes in attractive long-term growth markets in our product categories. We sell our products through a wide array of sales channels, including kitchen and bath dealers, wholesalers oriented toward builders or professional remodelers, industrial and locksmith distributors, “do-it-yourself” remodeling-oriented home centers, e-commerce and other retail outlets.

Our Strategy

 

Build on leading business and brand positions in attractive growth and return categories. We have leading brands with what we believe to be sustainable competitive advantages in many of our product categories, which we sell primarily in North America and China. We believe that established brands are meaningful to both consumers and trade customers in their respective categories and that we have the opportunity to, among other things, gain share in the marketplace and continue to strengthen many of our brands through cross-branding, expanding into adjacent product categories, and expanding in international and e-commerce markets. We are committed to continuing to invest in our capacity and supply chain to strengthen our business and continue to meet demand for our products.

Develop innovative products and processes for customers and consumers. We have a long track record of successful product and process innovations that introduce valued new products to our customers and consumers. We are committed to continuing to invest in new product development and enhance customer service to strengthen our leading brands and penetrate adjacent markets, including in the digital space and connected products.

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Enhance returns and deploy our cash flow to high-return opportunities. We continue to believe our most attractive opportunities are to invest in profitable organic growth initiatives, pursue accretive strategic acquisitions, non-controlling equity investments, and joint ventures, and return cash to stockholders through a combination of dividends and repurchases of our common stock.

Advance our digital strategy to fuel growth. We continue to invest in our digital capabilities to leverage our scale across technology, data and talent to further accelerate and sustain growth in e-commerce and connected products.

Invest in appropriate ESG initiatives that positively impact our employees and community and conduct business responsibly. We believe that advancing environmental, social and governance (“ESG”) initiatives are critical to making sure we continue to serve our customers and consumers to meet their needs. As a manufacturer, conducting business ethically is a priority for our businesses. We continue to look for ways to improve our environmental, social and governance programs and practices by focusing on ways to improve water conservation, waste reduction and carbon and climate impact, keep our employees safe and create a culture where all employees are treated with dignity and respect.

Invest in a common set of capabilities across the enterprise, known as the Fortune Brands Advantage.

While our business segments are focused on distinct product categories and are responsible for their own performance, the Fortune Brands Advantage is an operating model consisting of a set of unifying capabilities that we believe are critical to our strategic growth across all of our businesses. The Fortune Brands Advantage currently consists of three critical pillars:

Category Management - Partnering with our channel partners to drive optimal performance and best serve our consumers through actionable category insights.

Global Supply Chain Excellence - Leveraging our robust, global supply chain to strategically drive scale efficiencies with cutting edge capabilities.

Complexity Reduction - Simplifying workstreams to be even more efficient.

We continue to grow our competencies in these areas, allowing each of our businesses to take advantage of available opportunities for revenue growth and margin improvement, no matter the market environment.

Business Segments

We have three business segments: Plumbing, Outdoors & Security and Cabinets. Our segments compete on the basis of innovation, fashion, quality, price, service and responsiveness to distributor, retailer and installer needs, as well as end-user consumer preferences. Our markets are very competitive. Approximately 16% of 2021 net sales were to international markets, and sales to two of the Company’s customers, The Home Depot, Inc. (“The Home Depot”) and Lowe’s Companies, Inc. (“Lowe’s”), each accounted for more than 14% of the Company’s net sales in 2021. Sales to all U.S. home centers in the aggregate were approximately 35% of net sales in 2021. In 2021, sales to our top ten customers represented less than half of total sales.

Plumbing. Our Plumbing segment manufactures or assembles and sells faucets, accessories, kitchen sinks and waste disposals, predominantly under the Moen, ROHL, Riobel, Victoria+Albert, Perrin & Rowe and Shaws brands. Although this segment sells products principally in the U.S., China and Canada, this segment also sells in Mexico, Southeast Asia, Europe and South America. Approximately 32% of 2021 net sales were to international markets. This segment sells directly through its own sales force and indirectly through independent manufacturers’ representatives, primarily to wholesalers, home centers, mass merchandisers and industrial distributors. This segment is increasingly investing in digital trends and “smart” home capabilities. In aggregate, sales to The Home Depot and Lowe’s comprised approximately 21% of net sales of the Plumbing segment in 2021 . This segment’s chief competitors include Masco, Kohler, LIXIL Group, InSinkErator (owned by Emerson Electronic Company), Huida, Hgill, and Jomoo and imported private-label brands.

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Outdoors & Security. Our Outdoors & Security segment manufactures and sells fiberglass and steel entry door systems under the Therma-Tru brand, storm, screen and security doors under the Larson brand, composite decking, railing and cladding under the Fiberon brand, and urethane millwork under the Fypon brand. It also manufactures, sources and distributes locks, safety and security devices, and electronic security products under the Master Lock and American Lock brands and fire resistant safes, security containers and commercial cabinets under the SentrySafe brand. Larson, a North American market leading brand of storm, screen and security doors, was acquired in December 2020. This segment sells products principally in the U.S., Canada, Europe, Central America, Japan and Australia. Approximately 10% of 2021 net sales were to international markets. This segment’s principal customers are home centers, hardware and other retailers, millwork building products and wholesale distributors, and specialty dealers that provide products to the residential new construction market, as well as to the remodeling and renovation markets. In addition, it sells lock systems and fire resistant safes to locksmiths, industrial and institutional users, and original equipment manufacturers. In aggregate, sales to The Home Depot and Lowe’s comprised approximately 30% of net sales of the Outdoors & Security segment in 2021. Therma-Tru, Larson, Fiberon and Fypon brands compete with Masonite, JELD-WEN, Andersen, Trex, Azek, Plastpro, Pella and various regional and local suppliers. The Master Lock brand competes with Abus, W.H. Brady, Hampton, Allegion, Assa Abloy and various imports. The SentrySafe brand competes with Magnum, Fortress and Interlocks.

Cabinets. Our Cabinets segment manufactures high quality stock, semi-custom and custom cabinetry, as well as vanities, for the kitchen, bath and other parts of the home with a regional and international supply chain footprint. This segment sells a portfolio of brands, including AOK, Diamond Brands, KitchenCraft, Homecrest, Omega and EVE, that enable our customers to differentiate themselves against competitors. Substantially all of this segment’s sales are in North America. Approximately 6% of 2021 net sales were to international markets. This segment sells directly to kitchen and bath dealers, home centers, wholesalers, large builders and through e-commerce. In aggregate, sales to The Home Depot and Lowe’s comprised approximately 39% of net sales of the Cabinets segment in 2021. This segment’s competitors include Cabinetworks Group (formerly ACPI) and American Woodmark, as well as a large number of overseas, regional and local competitors.

Other Information

Raw materials. The table below indicates the principal raw materials used by each of our segments. These materials are available from a number of sources. Volatility in the prices of commodities and energy used in making and distributing our products impacts the cost of manufacturing our products.

 

Segment

Raw Materials

Plumbing

Brass, zinc, resins, stainless steel and aluminum

Outdoors & Security

Wood, resins, plastics, steel, glass, aluminum, vinyl and insulating foam

Cabinets

Hardwoods (maple, birch and oak), plywood and particleboard

 

Intellectual property. Product innovation and branding are important to the success of our business. In addition to the brand protection offered by our trademarks, patent protection helps distinguish our unique product features in the market by preventing copying and making it more difficult for competitors to benefit unfairly from our design innovation. We hold U.S. and foreign patents covering various features used in products sold within all of our business segments. Although each of our segments relies on a number of patents and patent groups that, in the aggregate, provide important protections to the Company, no single patent or patent group is material to any of the Company’s segments.

Human Capital Resources. As of December 31, 2021, Fortune Brands had more than 28,000 full-time and part-time employees worldwide (excluding contract workers). Approximately 77% of our workforce is composed of hourly production and distribution associates and the remaining population is composed of

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associates in an office role. Approximately 14% of employees in the U.S. work under collective bargaining agreements. Below is a summary of the number of employees by segment and role:

Segment

 

Production and Distribution

 

 

Office

 

 

Total

 

Plumbing

 

 

2,461

 

 

 

2,167

 

 

 

4,628

 

Outdoors & Security

 

 

5,402

 

 

 

1,911

 

 

 

7,313

 

Cabinets

 

 

13,646

 

 

 

2,330

 

 

 

15,976

 

Corporate

 

 

 

 

 

139

 

 

 

139

 

We believe our associates are the key to our success. We invest in our teams and develop our associates to become the next generation of leaders to fuel innovation and drive Company growth. The Company also endeavors to create an environment that keeps our employees safe, treats them with dignity and respect and fosters a culture of performance. Fortune Brands does this through the programs summarized below, the objectives and related risks of each is overseen by our Board of Directors or its committees.

Health and Safety

Safety is a critical element to Fortune Brands’ growth strategy, integral to Company culture and one of our core values. This is reflected in our goal of zero safety incidents and through our efforts to create an injury-free workplace. Our Employee Safety & Environmental Stewardship Principles set standards for how we maintain a safe work environment and guides our business operations. The Company also has an Environmental, Health & Safety Leadership council comprised of representatives from across the Company’s businesses that share best practices and is responsible for driving environmental, health and safety strategy. This helps drive our best-in-class programs designed to reinforce positive behaviors, to empower our employees to actively take part in maintaining a safe work environment, to heighten awareness and to mitigate risk on critical safety components. Within each of our manufacturing and distribution facilities, we have site-specific safety and environmental plans designed to reduce risk. Through a continued commitment to improve our safety performance, we have historically been successful in reducing the number of injuries sustained by our employees. Two of our primary safety measures are the Total Recordable Incidence Rate ("TRIR") and Lost Time Rate ("LTR"). For the year ended December 31, 2021, our TRIR was 1.34, compared to 1.20 for the year ended December 31, 2020 and our LTR was 0.48, compared to 0.40 for the year ended December 31, 2020. The year over year increases in in these numbers are reflective of the addition of Larson to our 2021 results.

 

Our safety focus was demonstrated in our continued response to the COVID-19 pandemic. In 2021, we supplemented our enhanced safety protocols and implemented a mandatory mask mandate in our facilities when a location hits a positivity rate of 1% or more. We continue to offer flexibility to work remotely, with most office locations working on a hybrid schedule, but allowing for flexibility in that schedule where possible to minimize potential exposure of our employees. We also emphasized the importance of vaccines, by offering over 40 onsite vaccine clinics to employees, implementing flexible leave policies to allow people to get vaccinated, and offering educational opportunities on the safety and efficacy of vaccines. The Company also encouraged vaccinations and rewarded employees who were already vaccinated through a vaccine sweepstakes.

Attracting and Retaining Superior Talent

 

Fortune Brands is committed to investing in the physical, emotional and financial well-being of our employees and we believe that this is a critical component of our business strategy. To attract and retain superior talent at all levels of the Company, our total rewards are designed to be market competitive, align employee incentives with Company performance and support our employees across many aspects of their lives. We have a strong pay-for-performance culture that is supported by incentive programs that take into consideration business results and employee performance. We also offer a range of benefits including retirement savings plans, comprehensive healthcare and mental-health benefits including medical, dental and vision coverage, health savings and spending accounts, and employee assistance services. In 2021, we took steps to enhance our benefit plans starting in 2022 to further enhance

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inclusivity by providing enhanced parental support benefits for our US associates, including fertility benefits and specialized support from adoption and surrogacy assistance to pregnancy and post-partum. Many of our businesses also offer paid parental leave.

 

Creating a Culture of Diversity, Equity and Inclusion (“DEI”)

We continue to take measured actions that create an inclusive culture and diverse workforce, increase representation and engagement of underrepresented associates and that are reflective of our consumers and communities. We believe that attracting and retaining talented and diverse employees will enable us to be more innovative, responsive to consumer needs and deliver strong performance and growth.

Fortune Brands is a party to CEO Action for Diversity & Inclusion, a CEO-driven business commitment to advance diversity and inclusion in the workplace. We also continue to partner with Network of Executive Women to help focus on the development and advancement of women. In 2021, Fortune Brands joined the W.K. Kellogg Foundation Expanding Equity program, a program designed for advancing racial equity in the workplace. The program has helped the Company to create a comprehensive diversity, equity and inclusion equity to increase representation of underrepresented associates. The Company is committed to increasing representation of professionals of color and women through new hires and promotions, ensuring an inclusive culture by reducing the barriers to inclusion through our policies, programs, business practices and education and by demonstrating support for racial equality in our communities through outreach and investment. As of December 31, 2021, Fortune Brands’ workforce is composed of 38% women and approximately 44% of hourly production and distribution employees are people of color and 15% of employees in an office role are people of color.

The Company implemented an unconscious bias learning program to increase DEI awareness and break bias in the decision making process for its senior leaders during 2020. In 2021, Fortune Brands continued its unconscious bias learning program to all global people managers and launched an organization-wide employee engagement survey among employees and implemented a system to foster employee engagement and drive continued improvement in DEI awareness. The Company also continued to expand its employee resource groups during 2021. We now have a dedicated employee resource group for our Women, Black, Hispanic and LGBTQ employees that are focused on activating and educating leaders and accelerating an inclusive culture. These actions supplement the Company’s (i) inclusive culture councils which are responsible for setting priorities and initiatives that support an inclusive work environment, and (ii) employee resource groups that support DEI initiatives and provide networking and professional development opportunities.

Talent Development and Succession

We aim to inspire and equip our associates to be successful in their current role within the organization and help them to develop the skills to build on opportunities to grow their career. We understand our most critical roles that serve as points of leverage to deliver value and place our best people in those roles, while attracting new talent and capabilities in support of continuous improvement in all we do. Fortune Brands uses performance management programs to support a high-performance culture, strengthening our employee engagement and helping to retain our top talent. The Company provides associates with relevant skills training and provides leadership training for production and distribution associates in a supervisory role and mid-level office associates. The Company also makes a significant investment in assessing our talent against the jobs both in the near term and the future and ensuring our leaders are prepared for greater levels of responsibility and can successfully transition into new roles.

Succession planning for critical roles is an important part of our talent program. Succession and development plans are created and monitored to ensure progress is made along established timelines.

Seasonality. All of our operating segments traditionally experience lower sales in the first quarter of the year when new home construction, repair and remodel activity and security buying are at their lowest. As a result of sales seasonality and associated timing of working capital fluctuations, our cash flow from operating activities is typically higher in the second half of the year.

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Environmental matters. We believe that the cost of complying with the present environmental protection laws, before considering estimated recoveries either from other potentially responsible parties under Superfund or similar state laws or from insurance, will not have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

Available Information. The Company’s website address is www.FBHS.com. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports are available free of charge on the Company’s website as soon as reasonably practicable after the reports are filed or furnished electronically with the SEC. Reports filed with the SEC are also made available on its website at www.sec.gov.

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Item 1A. Risk Factors.

There are inherent risks and uncertainties associated with our business that could adversely affect our business, financial condition or operating results. Set forth below are descriptions of those risks and uncertainties that we currently believe to be material, but the risks and uncertainties described below are not the only risks and uncertainties that could adversely affect our business, financial condition or operating results. If any of these risks materialize, our business, financial condition or operating results could suffer. In this case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Industry Risks

Our business primarily relies on North American and Chinese home improvement, repair and remodel and new home construction activity levels, all of which are impacted by risks associated with fluctuations in the housing market. Downward changes in the general economy, the housing market, unfavorable interest rates or other business conditions could adversely affect our results of operations, cash flows and financial condition.

Our business primarily relies on home improvement, repair and remodel, and new home construction activity levels, principally in North America and China. The housing market is sensitive to changes in economic conditions and other factors, such as the level of employment, access to and the cost of labor, consumer confidence, demographic changes, consumer income, government tax programs, availability of financing, inflation and interest rate levels. Adverse changes in any of these conditions generally, or in any of the markets where we operate, could decrease demand and could adversely impact our businesses by: causing consumers to delay or decrease homeownership; making consumers more price conscious resulting in a shift in demand to smaller, less expensive homes; making consumers more reluctant to make investments in their existing homes or causing them to delay investments, including large kitchen and bath repair and remodel projects; or making it more difficult to secure loans for major renovations.

We operate in very competitive consumer and trade brand categories.

The markets in which we operate are very competitive. Although we believe that competition in our businesses is based largely on product quality, consumer and trade brand reputation, customer service and product features, as well as fashion trends, innovation and ease of installation, price is a significant factor for consumers as well as our trade customers. Some of our competitors may resort to price competition to sustain or grow market share and manufacturing capacity utilization. Also, certain large customers continue to offer private-label brands that compete with some of our product offerings as a lower-cost alternative. The strong competition that we face in all of our businesses may adversely affect our profitability and revenue levels, as well as our results of operations, cash flows and financial condition.

We may not successfully develop new products or processes or improve existing products or processes.

Our success depends on meeting consumer needs and anticipating changes in consumer preferences with successful new products and product improvements. We aim to introduce products and new or improved production processes proactively to offset obsolescence and decreases in sales of existing products. We may not be successful in product development and our new products may not be commercially successful. In addition, it is possible that competitors may improve their products or processes more rapidly or effectively, which could adversely affect our sales. Furthermore, market demand may decline as a result of consumer preferences trending away from our categories or trending down within our brands or product categories, which could adversely impact our results of operations, cash flows and financial condition.

Our businesses rely on the performance of wholesale distributors and dealers, retailers and other marketing arrangements and could be adversely affected by poor performance or other disruptions in our distribution channels and customers.

We rely on a distribution network comprised of consolidating customers. Any disruption to the existing distribution channels could adversely affect our results of operations, cash flows and financial condition.

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The consolidation of distributors or retailers or the financial instability or default of a distributor or one of its major customers could potentially cause such a disruption. In addition to our own sales force, we offer our products through a variety of third-party distributors, representatives and retailers. Certain of our distributors, representatives or retailers may also market other products that compete with our products. In addition, one or more retailers may stop carrying certain of our products, reduce the volume of purchases of our products and/or replace certain of our products with the products of our competitors. The loss or termination of, or significant reduction in sales to, one or more of our major distributors, representatives or retailers, the failure of one or more of our distributors, representatives or retailers to effectively promote our products, or changes in the financial or business condition of these distributors, representatives or retailers could adversely affect our ability to bring products to market and our results of operations, cash flows and financial condition.

Operational and Sourcing Risks

Risks associated with our ability to improve organizational productivity and global supply chain efficiency and flexibility could adversely affect our results of operations, cash flows and financial condition.

If we are unable to obtain sufficient components or raw materials on a timely basis or for a cost-effective price or if we experience other manufacturing, supply or distribution difficulties, our business and results of operations may be adversely affected. We acquire our components and raw materials from many suppliers and vendors in various countries. We endeavor to ensure the continuity of our components and materials and make efforts to diversify certain of our sources of components and materials, but we cannot guarantee these efforts will be successful. A reduction or interruption in supply or an issue in the supply chain, including as a result of our inability to quickly develop acceptable alternative sources for such supply, could adversely affect our ability to manufacture, distribute and sell our products in a timely or cost-effective manner.

We regularly evaluate our organizational productivity and global supply chains and assess opportunities to increase capacity, reduce costs and enhance quality. We may be unable to enhance quality, speed and flexibility to meet changing and uncertain market conditions, as well as manage continued cost inflation, including wages, pension and medical costs. Our success depends in part on refining our cost structure and supply chains to promote consistently flexible and low cost supply chains that can respond to market changes to protect profitability and cash flow or ramp up quickly and effectively to meet demand. Supply chain disruptions could continue to impact our ability to timely source necessary components and inputs. Import tariffs could potentially lead to increases in prices of raw materials or components which are critical to our business. Failure to achieve the desired level of quality, capacity or cost reductions could impair our results of operations, cash flows and financial condition.

Risks associated with global commodity and energy availability and price volatility, as well as the possibility of sustained inflation, could adversely affect our results of operations, cash flows and financial condition.

We are exposed to risks associated with global commodity price volatility arising from restricted or uneven supply conditions, the sustained expansion and volatility of demand from emerging markets, potentially unstable geopolitical and economic variables, severe weather and other unpredictable external factors. We buy raw materials that contain commodities such as brass, zinc, steel, wood, glass and petroleum-based products such as resins. In addition, our distribution costs are significantly impacted by the price of oil and diesel fuel. Decreased availability and increased or volatile prices for these commodities, as well as energy used in making, distributing and transporting our products, could increase the costs of our products. While in the past we have been able to mitigate the impact of these cost increases through productivity improvements and passing on increasing costs to our customers over time, there is no assurance that we will be able to offset such cost increases in the future, and the risk of potentially sustained high levels of inflation could adversely impact our results of operations, cash flows and financial condition. While we may use derivative contracts to limit our short-term exposure to commodity price volatility, the commodity exposures under these contracts could still be material to our results of operations, cash flows and financial condition. In addition, in periods of declining commodity prices, these derivative contracts may have the short-term effect of increasing our expenditures for these raw materials.

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We may experience delays or outages in our information technology systems and computer networks. We may be subject to breaches of our information technology systems, which could damage our reputation and consumer relationships. Such breaches could subject us to significant financial, legal and operational consequences.

We, like most companies, may be subject to information technology system failures and network disruptions caused by delays or disruptions due to system updates, natural disasters, malicious attacks, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, or similar events or disruptions. We rely upon information technology systems and infrastructure, including support provided by third parties, to support our business, our products and our customers. Our businesses may implement digital systems or technologies, enterprise resource planning systems or add applications to replace outdated systems and to operate more efficiently. We may not be able to successfully implement these projects without experiencing difficulties. Any expected benefits of implementing projects might not be realized or the costs of implementation might outweigh the benefits realized.

We routinely rely on systems for manufacturing, customer orders, shipping, regulatory compliance and various other matters, as well as information technology systems and infrastructure to aid us in the collection, use, storage and transfer and other processing of data including confidential, business, financial, and personal information. Security threats, including cyber and other attacks, are becoming increasingly sophisticated, frequent and adaptive. In addition, a greater number of our employees are working remotely in response to the COVID-19 pandemic, which (among other things) could expose us to greater risks related to cybersecurity and our information technology systems. Third-party systems that we rely upon could also become vulnerable to the same risks and may contain defects in design or manufacture or other problems that could result in system disruption or compromise the information security of our own systems. We believe we devote appropriate resources to network security, data encryption, and other security measures to protect our systems and data, but these security measures cannot provide absolute security. Breaches and breakdowns affecting our information technology systems or protected data could have an adverse effect on our business, results of operations, cash flows and financial condition.

We manufacture, source and sell products internationally and are exposed to risks associated with doing business globally, including risks associated with uncertain trade environments.

We manufacture, source or sell our products in a number of locations throughout the world, predominantly in the U.S., Mexico, Europe, Africa, Canada and Asia. Accordingly, we are subject to risks associated with potential disruption caused by changes in political, economic and social environments, including civil and political unrest, illnesses declared as a public health emergency (including viral pandemics such as COVID-19), terrorism, expropriation, local labor conditions, changes in laws, regulations and policies of foreign governments and trade disputes with the U.S., and U.S. laws affecting activities of U.S. companies abroad. We could be adversely affected by international trade regulations, including duties, tariffs and antidumping penalties. Risks inherent to international operations include: potentially adverse tax laws, unfavorable changes or uncertainty relating to trade agreements or importation duties, uncertainty regarding clearance and enforcement of intellectual property rights, risks associated with the Foreign Corrupt Practices Act and other anti-bribery laws, mandatory or voluntary shutdowns of our facilities or our suppliers due to changes in political dynamics, economic policies or health emergencies and difficulty enforcing contracts. While we hedge certain foreign currency transactions, a change in the value of the currencies will impact our financial statements when translated into U.S. dollars. In addition, fluctuations in currency can adversely impact the cost position of our products in local currency, making it more difficult for us to compete. Our success will depend, in part, on our ability to effectively manage our businesses through the impact of these potential changes. In addition, we source certain raw materials, components and finished goods from Asia where we have experienced higher manufacturing costs and longer lead times due to higher tariffs, currency fluctuations, higher wage rates, labor shortages and higher raw material costs.

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Disruption of operations could adversely affect our results of operations, cash flows and financial condition.

We manufacture a significant portion of the products we sell. Any prolonged disruption in our manufacturing operations, whether due to technical or labor difficulties, continued labor shortages, transportation-related shortages, supply chain constraints, COVID-19, weather conditions (including due to the impacts of climate change, particularly for those facilities near any shorelines or in any other area traditionally impacted by extreme weather), lack of raw material or component availability, startup inefficiencies for new operations, destruction of or damage to any facility (as a result of natural disasters, fires and explosions, use and storage of hazardous materials or other events) or other reasons, could negatively impact our profitability and competitive position and adversely affect our results of operations, cash flows and financial condition.

Our inability to obtain raw materials and finished goods in a timely and cost-effective manner from suppliers could adversely affect our ability to manufacture and market our products.

We purchase raw materials to be used in manufacturing our products and also rely on third-party manufacturers to produce certain of the finished goods we sell. We often do not enter into long-term contracts with our suppliers or sourcing partners. Instead, most raw materials and sourced goods are obtained on a “purchase order” basis. In addition, in some instances we maintain single-source or limited-source sourcing relationships, either because multiple sources are not available or the relationship is advantageous due to performance, quality, support, delivery, capacity or price considerations. Financial, operating or other difficulties encountered by our suppliers or sourcing partners or changes in our relationships with them could result in manufacturing or sourcing interruptions, delays and inefficiencies, and prevent us from manufacturing or obtaining the finished goods necessary to meet customer demand. If we are unable to meet customer demand, there could be an adverse effect on our results of operations, cash flows and financial condition.

Risks associated with strategic acquisitions and joint ventures could adversely affect our results of operations, cash flows and financial condition.

We consider acquisitions and joint ventures as a means of enhancing stockholder value. Acquisitions and joint ventures involve risks and uncertainties, including difficulties integrating acquired companies and operating joint ventures; difficulties retaining the acquired businesses’ customers; the inability to achieve the expected financial results and benefits of transactions; the loss of key employees from acquired companies; implementing and maintaining consistent standards, controls, policies and information systems; and diversion of management’s attention from other business and strategic matters. Future acquisitions could cause us to incur additional debt or issue additional shares, resulting in dilution in earnings per share and return on capital.

Impairment charges could have a material adverse effect on the Company’s financial results.

Goodwill and other acquired intangible assets expected to contribute indefinitely to our cash flows are not amortized, but must be evaluated for impairment by management at least annually. If the carrying value exceeds the implied fair value of goodwill, the goodwill is considered impaired and is reduced to fair value via a non-cash charge to earnings. If the carrying value of an indefinite-lived intangible asset is greater than its fair value, the intangible asset is considered impaired and is reduced to fair value via a non-cash charge to earnings. No impairments were recorded during the year ended December 31, 2021. During the years ended December 31, 2020 and 2019, we recorded non-cash impairment charges related to indefinite-lived intangible assets of $22.5 million and $41.5 million, respectively. Future events may occur that would adversely affect the fair value of our goodwill or other acquired intangible assets and require impairment charges. Such events may include, but are not limited to, lower than forecasted revenues, 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 continue to evaluate the impact of economic and other developments to assess whether impairment indicators are present. Accordingly, we may be required to perform impairment tests based on changes in the economic environment and other factors, and these tests could result in impairment charges in the future. Given the

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Company’s recent impairment charges, there is minimal difference between the estimated fair values and the carrying values of some our indefinite-lived intangible assets, increasing the possibility of future impairment charges.

Our pension costs and funding requirements could increase as a result of volatility in the financial markets and changes in interest rates and actuarial assumptions.

Increases in the costs of pension benefits may continue and negatively affect our business as a result of: the effect of potential declines in the stock and bond markets on the performance of our pension plan assets; potential reductions in the discount rate used to determine the present value of our benefit obligations; and changes to our investment strategy that may impact our expected return on pension plan assets assumptions. U.S. generally accepted accounting principles require that we calculate income or expense for the plans using actuarial valuations. These valuations reflect assumptions about financial markets and interest rates, which may change based on economic conditions. Our accounting policy for defined benefit plans may subject earnings to volatility due to the recognition of actuarial gains and losses, particularly due to the change in the fair value of pension assets and interest rates. Funding requirements for our U.S. pension plans may become more significant. However, the ultimate amounts to be contributed are dependent upon, among other things, interest rates, underlying asset returns and the impact of legislative or regulatory changes related to pension funding obligations.

Legal, Regulatory and People Risks

COVID-19 has impacted our business and may cause further disruptions to our business, results of operations and financial condition.

The COVID-19 pandemic has had an impact on many aspects of the Company’s business and operations and may continue to impact the Company in the future, including impacting our ability to efficiently operate our facilities across the globe, the ability of our suppliers to supply and manufacture key inputs, availability and cost of transportation and logistics, customer behaviors, our employees, the distributors, dealers and retailers who sell our products, 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. The COVID-19 pandemic may also exacerbate certain of the other risks described in this “Risk Factors” section.

The COVID-19 pandemic has also resulted in and is expected to continue to result in operational challenges in the manufacturing of our products and the operation of the related domestic and international supply chains supporting our ability to manufacture our products and distribute them through our channels. Restrictions on or disruptions of transportation or increased border controls or closures, or other impacts on domestic and global supply chains or distribution channels, could increase our raw materials and commodity costs, increase demand for raw materials and commodities from competing purchasers, limit our ability to manufacture and distribute products to meet customer demand or otherwise have a material adverse effect on our business, results of operations and financial condition.

Our failure to attract and retain qualified personnel and other labor constraints could adversely affect our results of operations, cash flows and financial condition.

Our success depends in part on the efforts and abilities of qualified personnel at all levels, including our senior management team and other key employees. Their motivation, skills, experience, contacts and industry knowledge significantly benefit our operations and administration.

Low unemployment rates in the U.S., rising wages, competition for qualified talent and attracting and retaining personnel in remote locations could result in the failure to attract, motivate and retain personnel. This has resulted in higher employee costs, increased attrition and significant shifts in the labor market and employee expectations and we may continue to face challenges in finding and retaining qualified personnel, particularly at the production level, which could have an adverse effect on our results of operations, cash flows and financial condition.

13


 

Climate change and related legislative and regulatory initiatives could adversely affect our business and results of operations.

Concerns over the long-term effects of climate change have led to, and we expect will continue to lead to governmental efforts around the world to mitigate those effects. The Company will need to respond to any new laws and regulations as well as to consumer, investor and business preferences resulting from climate change concerns, which may increase our operational complexity and result in costs to us in order to comply with any new laws, regulations or preferences. Further, the effects of climate change may negatively impact international, regional and local economic activity, which may lower demand for our products or disrupt our manufacturing or distribution operations. Overall, climate change, its effects and the resulting, unknown impact on government regulation, consumer, investor and business preferences could have a long-term material adverse effect on our business and results of operations.

 

Environmental, social and governance matters may adversely impact our business and reputation.

In addition to the importance of their financial performance, companies are increasingly being judged by their performance on a variety of environmental, social and governance (“ESG”) matters.

In light of the increased focus on ESG matters, there can be no certainty that we will manage such issues successfully, or that we will successfully meet stakeholder expectations as to our proper role. Any failure or perceived failure by us in this regard could adversely impact our business and reputation.

Changes in government and industry regulatory standards could adversely affect our results of operations, cash flows and financial condition.

Government regulations and policies pertaining to trade agreements, health and safety (including protection of employees as well as consumers), taxes and environment (including those specific to climate change and the reduction of air and energy emissions) may continue to emerge in the U.S., as well as internationally. In particular, there may be additional tariffs or taxes related to our imported raw materials, components and finished goods. It is necessary for us to comply with current requirements (including requirements that do not become effective until a future date), and even more stringent requirements could be imposed on our products or processes in the future. Compliance with changes in taxes, tariffs and other regulations may require us to further alter our manufacturing and installation processes and our sourcing. Such actions may result in customers transitioning to available competitive products, loss of market share, negative publicity, reputational damage loss of customer confidence or other negative consequences (including a decline in stock price) and could increase our capital expenditures and adversely impact our results of operations, cash flows and financial condition.

Future tax law changes or the interpretation of existing tax laws may materially impact our effective income tax rate, the resolution of unrecognized tax benefits and cash tax payments.

Our businesses are subject to taxation in the U.S., as well as internationally, including income tax, value-added tax and property tax. Our total tax expense could be affected by changes in tax rates in the jurisdictions in which our businesses are subject to taxation, changes in the valuation of deferred tax assets and liabilities or changes in tax laws or the interpretation of such laws by tax authorities which may have a material impact on our financial results. In addition, we are routinely audited by tax authorities in many jurisdictions. Although we believe we record and accrue tax estimates that are reasonable and appropriate, these estimates are based on assumptions and require the exercise of significant judgment, and there are significant uncertainties in these estimates. As a result, the ultimate outcome from any audit could be materially different from amounts reflected in our income tax provisions and accruals. Future settlements of income tax audits may have a material adverse effect on earnings between the period of initial recognition of tax estimates in our financial statements and the point of ultimate tax audit settlement.

14


 

Our inability to secure and protect our intellectual property rights could negatively impact revenues and brand reputation.

We have many patents, trademarks, brand names, trade names and trade secrets that, in the aggregate, are important to our business. Unauthorized use of these intellectual property rights or other loss of our intellectual property competitive position may not only erode sales of our products, but may also cause us to incur substantial significant damage to our brand name and reputation, interfere with our ability to effectively represent the Company to our customers, contractors and suppliers, and increase litigation costs. There can be no assurance that our efforts to protect our brands and trademark rights will prevent violations. In addition, existing patent, trade secret and trademark laws offer only limited protection, and the laws of some countries in which our products are or may be developed, manufactured or sold may not fully protect our intellectual property from infringement by others. There can be no assurance that our efforts to assess possible third party intellectual property rights will ensure the Company’s ability to manufacture, distribute, market or sell in any given country or territory. Furthermore, others may assert intellectual property infringement claims against us or our customers which may require us to incur significant expense to defend such litigation or indemnify our customers.

Potential liabilities and costs from claims and litigation could adversely affect our results of operations, cash flows and financial condition.

We are, from time to time, involved in various claims, litigation matters and regulatory proceedings that arise in the ordinary course of our business and that could have an adverse effect on us. These matters may include contract disputes, intellectual property disputes, product recalls, personal injury claims, construction defects and home warranty claims, warranty disputes, environmental claims or proceedings, other tort claims, employment and tax matters and other proceedings and litigation, including class actions. It is not possible to predict the outcome of pending or future litigation, and, as with any litigation, it is possible that some of the actions could be decided unfavorably and could have an adverse effect on our results of operations, cash flows and financial condition.

We are subject to product safety regulations, recalls and direct claims for product liability that can result in significant liability and, regardless of the ultimate outcome, can be costly to defend. As a result of the difficulty of controlling the quality of products or components sourced from other manufacturers, we are exposed to risks relating to the quality of such products and to limitations on our recourse against such suppliers.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our principal executive office is located in Deerfield, Illinois. We operate 35 U.S. manufacturing facilities in 18 states and have 21 manufacturing facilities in international locations (8 in Mexico, 2 in Asia, 4 in Europe, 4 in Africa, and 3 in Canada). In addition, we have 71 distribution centers and warehouses worldwide, of which 56 are leased. The following table provides additional information with respect to these properties.

 

Segment

 

Manufacturing
 Facilities

 

 

 

Distribution Centers
and Warehouses

 

 

 

Owned

 

 

Leased

 

 

Total

 

 

 

Owned

 

 

Leased

 

 

Total

 

Plumbing

 

 

7

 

 

 

5

 

 

 

12

 

 

 

 

7

 

 

 

19

 

 

 

26

 

Outdoors & Security

 

 

17

 

 

 

3

 

 

 

20

 

 

 

 

5

 

 

 

17

 

 

 

22

 

Cabinets

 

 

20

 

 

 

4

 

 

 

24

 

 

 

 

3

 

 

 

20

 

 

 

23

 

Totals

 

 

44

 

 

 

12

 

 

 

56

 

 

 

 

15

 

 

 

56

 

 

 

71

 

 

We are of the opinion that the properties are suitable to our respective businesses and have production capacities adequate to meet the current needs of our businesses.

15


 

The Company is a defendant in lawsuits that are ordinary routine litigation matters incidental to its businesses. It is not possible to predict the outcome of the pending actions, and, as with any litigation, it is possible that these actions could be decided unfavorably to the Company. The Company believes that there are meritorious defenses to these actions and that these actions will not have a material adverse effect upon the Company’s results of operations, cash flows or financial condition, and, where appropriate, these actions are being vigorously contested. Accordingly, the Company believes the likelihood of material loss is remote.

 

Item 4. Mine Safety Disclosures.

Not applicable.

Information about our current Executive Officers.

Our current executive officers are:

 

Name

 

Age

 

Position

Nicholas I. Fink

 

47

 

Chief Executive Officer

Patrick D. Hallinan

 

54

 

Senior Vice President & Chief Financial Officer

Cheri M. Phyfer

 

50

 

President, Plumbing

Brett E. Finley

 

51

 

President, Outdoors & Security

R. David Banyard, Jr.

 

53

 

President, Cabinets

Hiranda S. Donoghue

 

43

 

Senior Vice President, General Counsel & Corporate Secretary

Sheri R. Grissom

 

57

 

Senior Vice President, Chief Human Resources Officer

John D. Lee

 

49

 

Senior Vice President, Global Growth & Development

May Russell

 

44

 

Senior Vice President, Chief Digital Officer

Marty Thomas

 

63

 

Senior Vice President, Operations & Supply Chain Strategy

Dan Luburic

 

50

 

Vice President and Corporate Controller

 

 

Nicholas I. Fink has served as Chief Executive Officer since January 2020. From March 2019 to January 2020, Mr. Fink served as President and Chief Operating Officer of Fortune Brands. From July 2016 to March 2019, Mr. Fink served as President of the Company’s Plumbing business.

Patrick D. Hallinan has served as Senior Vice President & Chief Financial Officer of Fortune Brands since July 2017. From January 2017 to July 2017, Mr. Hallinan served as Senior Vice President of Finance of Fortune Brands.

Cheri M. Phyfer has served as President of the Plumbing segment since March 2019. Ms. Phyfer served as President of Moen’s U.S. business from February 2018 to March 2019. Prior to that, Ms. Phyfer held various positions at the Sherwin-Williams Company, a manufacturer of paint and coatings products, including President of the Consumer Brands Group (2017) and President & General Manager – Diversified Brands from 2013 to 2017.

Brett E. Finley has served as President of the Outdoors & Security segment since July 2018. From February 2016 to July 2018, Mr. Finley served as the President of Fortune Brands Doors, Inc.

R. David Banyard, Jr. has served as President of the Cabinets segment since November 2019. Mr. Banyard served as President and Chief Executive Officer of Myer Industries, an international manufacturer of packaging, storage, and safety products and specialty molding, from December 2015 to October 2019.

Hiranda S. Donoghue has served as Senior Vice President, General Counsel & Secretary of Fortune Brands since December 2021. Ms. Donoghue served as Vice President & Deputy General Counsel of Baxter International Inc., a healthcare company, from November 2018 to December 2021. Prior to that, Ms. Donoghue held various positions as a legal advisor at Walgreen Co., from October 2007 to

16


 

November 2018, including most recently as Vice President, Corporate and M&A Legal (from October 2017 to November 2018).

Sheri R. Grissom has served as Senior Vice President, Chief Human Resources Officer of Fortune Brands since February 2015.

John D. Lee has served as Senior Vice President, Global Growth & Development of Fortune Brands since January 2020. Mr. Lee served as Senior Vice President, Global Growth & Development of the Plumbing segment from July 2016 to January 2020.

May Russell has served as Senior Vice President & Chief Digital Officer of Fortune Brands since February 2022. Ms. Russell served in various positions with Ford Motor Company, a manufacturer of vehicles, since 2009, most recently serving as Chief Technology/Product Officer of Ford Digital Solutions, a division of Ford Motor Company, from November 2018 to January 2022.

Marty Thomas has served as Senior Vice President, Operations & Supply Chain Strategy of Fortune Brands since September 2017. Mr. Thomas served as Senior Vice President of Global Operations and Engineering Services at Rockwell Automation, Inc., a provider of industrial automation and information products, prior thereto.

Dan Luburic has served as Vice President and Corporate Controller of Fortune Brands since October 2011.

17


 

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information, Dividends and Holders of Record

Our common stock is listed on the New York Stock Exchange under the ticker symbol “FBHS”.

In December 2021, our Board of Directors increased the quarterly cash dividend by 8% to $0.28 per share of our common stock. Our Board of Directors will continue to evaluate dividend payment opportunities on a quarterly basis. There can be no assurance as to when and if future dividends will be paid, or at what level, because the payment of dividends is dependent upon our financial condition, results of operations, capital requirements and other factors deemed relevant by our Board of Directors.

As a holding company, we are a legal entity separate and distinct from our subsidiaries. Accordingly, the source of our unconsolidated revenues and funds is dividends and other payments from subsidiaries. Our subsidiaries are not limited by long-term debt or other agreements in their abilities to pay cash dividends or to make other distributions with respect to their capital stock or other payments to the Company.

On February 11, 2022, there were 8,055 record holders of the Company’s common stock, par value $0.01 per share. A substantially greater number of holders of the Company’s common stock are “street name” or beneficial holders, whose shares of record are held by banks, brokers or other financial institutions.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Below are the repurchases of common stock by the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) for the three months ended December 31, 2021:

 

Three Months Ended December 31, 2021

 

Total number of
shares purchased
(a)

 

 

 

Average price
paid per share

 

 

 

Total number of
shares purchased
as part of publicly
announced plans
or programs
(a)

 

 

 

Approximate dollar
value of shares that may
yet be purchased under
the plans or programs
(a)

 

October 1 – October 31

 

 

1,435,721

 

 

 

$

94.53

 

 

 

 

1,435,721

 

 

 

$

456,660,001

 

November 1 – November 30

 

 

408,200

 

 

 

 

102.82

 

 

 

 

408,200

 

 

 

 

414,689,648

 

December 1 – December 31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

414,689,648

 

Total

 

 

1,843,921

 

 

 

$

96.37

 

 

 

 

1,843,921

 

 

 

 

 

 

(a)
Information on the Company’s share repurchase program follows:

 

Authorization date

 

Announcement date

 

Authorization amount of shares
of outstanding common stock

 

Expiration date

September 21, 2020

 

September 21, 2020

 

$500,000,000

 

September 21, 2022

July 23, 2021

 

July 23, 2021

 

$400,000,000

 

July 23, 2023

 

 

 

 

 

 

 

 

18


 

 

Stock Performance

img23432962_0.jpg 

 

The above graph compares the relative performance of our common stock, the S&P 500 Index and a Peer Group Index. This graph covers the period from December 31, 2016 through December 31, 2021. This graph assumes $100 was invested in the stock or the index on December 31, 2016 and also assumes the reinvestment of dividends. The foregoing performance graph is being furnished as part of this Annual Report on Form 10-K solely in accordance with the requirement under Rule 14a-3(b)(9) to furnish our stockholders with such information, and therefore, shall not be deemed to be filed or incorporated by reference into any filings by the Company under the Securities Act or the Exchange Act.

Peer Group Index. The 2021 peer group is composed of the following publicly traded companies corresponding to the Company’s core businesses:

American Woodmark Corporation, Armstrong World Industries, Inc., Leggett & Platt Incorporated, Lennox International Inc., Masco Corporation, Masonite International Corporation, Mohawk Industries, Inc., Newell Brands Inc., The Sherwin-Williams Company, Stanley Black & Decker, Inc. and Fastenal Company.

19


 

Calculation of Peer Group Index

The weighted-average total return of the entire peer group, for the period of December 31, 2016 through December 31, 2021, is calculated in the following manner:

(1)
the total return of each peer group member is calculated by dividing the change in market value of a share of its common stock during the period, assuming reinvestment of any dividends, by the value of a share of its common stock at the beginning of the period; and
(2)
each peer group member’s total return is then weighted within the index based on its market capitalization relative to the market capitalization of the entire index, and the sum of such weighted returns results in a weighted-average total return for the entire Peer Group Index.

Item 6. Reserved.

Not applicable.

20


 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is a supplement to the accompanying consolidated financial statements and provides additional information on our business, recent developments, financial condition, liquidity and capital resources, cash flows and results of operations. MD&A is organized as follows:

Overview: This section provides a general description of our business and a discussion of management’s general outlook regarding market demand, our competitive position and product innovation, as well as recent developments we believe are important to understanding our results of operations and financial condition or in understanding anticipated future trends.
Basis of Presentation: This section provides a discussion of the basis on which our consolidated financial statements were prepared.
Results of Operations: This section provides an analysis of our results of operations for the two years ended December 31, 2021 and 2020. For a discussion of our 2019 results, please refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 24, 2021.
Liquidity and Capital Resources: This section provides a discussion of our financial condition and an analysis of our cash flows for each of the two years ended December 31, 2021 and 2020. This section also provides a discussion of our contractual obligations, other purchase commitments and customer credit risk that existed at December 31, 2021, as well as a discussion of our ability to fund our future commitments and ongoing operating activities through internal and external sources of capital.
Critical Accounting Estimates: This section identifies and summarizes those accounting policies that significantly impact our reported results of operations and financial condition and require significant judgment or estimates on the part of management in their application.

Overview

The Company is a leader in home and security products focused on the design, manufacture and sale of market-leading branded products in the following categories: plumbing and accessories, entry door and storm door systems, security products, outdoor performance materials used in decking and railing products, and kitchen and bath cabinetry.

For the year ended December 31, 2021, net sales based on country of destination were:

 

(In millions)

 

 

 

 

 

 

United States

 

$

6,402.8

 

 

 

84

%

China

 

 

510.4

 

 

7

 

Canada

 

 

542.6

 

 

7

 

Other international

 

 

200.3

 

 

2

 

Total

 

$

7,656.1

 

 

 

100

%

 

 

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

21


 

 

We continue to believe our most attractive opportunities are to invest in profitable organic growth initiatives, pursue accretive strategic acquisitions, non-controlling equity investments, and joint ventures, and return cash to stockholders through a combination of dividends and repurchases of shares of our common stock under our share repurchase program as explained in further detail under “Liquidity and Capital Resources” below.

The U.S. market for our home products consists of spending on both new home construction and repair and remodel activities within existing homes, with the substantial majority of the markets we serve consisting of repair and remodel spending. Continued growth in the U.S. market for our home products will largely depend on consumer confidence, employment, wage growth, home prices, stable mortgage rates and credit availability.

We may be impacted by fluctuations in raw materials, component costs, labor costs, tariffs, transportation costs, foreign exchange rates, inflation, interest rates and promotional activity among our competitors, among other things. We strive to offset the potential unfavorable impact of these items with productivity improvements and price increases.

During the two years ended December 31, 2021, our net sales grew at a compounded annual rate of 15.2% as we benefited from a growing U.S. home products market, acquisitions, and growth in international markets. Operating income grew at a compounded annual rate of 24.9% with consolidated operating margins between 12% and 14% from 2019 to 2021. Growth in operating income was primarily due to higher sales volume, changes to our portfolio of businesses, control over our operating expenses and the benefits of manufacturing productivity programs.

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 (“closure orders”) and persons who were not engaged in essential businesses to stay at home. Generally, states and jurisdictions designated our products, our retail channel partners and residential construction as essential business activities. While our financial results were negatively impacted during the second quarter of 2020 by these closure orders, sales volumes increased as these restrictions were relaxed benefiting our third and fourth quarter 2020 results.

During 2021, the U.S. home products market grew due to increases in repair and remodel and new home construction activity. We believe spending for home repair and remodeling increased approximately 14% and new housing construction experienced approximately 11% growth in 2021 compared to 2020. In 2021, net sales grew 25.7% due to higher sales volume including the favorable comparison to 2020 when our volumes were impacted by the COVID-19 pandemic, the benefit from the Larson acquisition ($403.4 million), price increases to help mitigate the impact of cumulative commodity and transportation cost increases and favorable mix, as well as favorable foreign exchange of approximately $63 million. These benefits were partially offset by higher promotion and volume-based rebate costs. In 2021, operating income increased 36.1% over 2020 primarily due to higher net sales, the benefit from the Larson acquisition, manufacturing productivity improvements, the absence of the 2020 asset impairment charges and lower restructuring and other charges, as well as favorable foreign exchange of approximately $17 million. These benefits were partially offset by higher commodity, employee-related and transportation costs, higher amortization of intangible assets principally due to the Larson acquisition, higher advertising costs, higher promotion and volume-based rebate costs and higher tariffs.

In December 2020, we acquired 100% of the outstanding equity of Larson, the North American market leading brand of storm, screen and security doors, for a total purchase price of approximately $717.5 million, net of cash acquired. We financed the transaction with borrowings under our existing credit facilities. The results of operations are included in the Outdoors & Security segment. The financial results of Larson were included in the Company’s December 31, 2021 and 2020 consolidated balance sheets and the Company's consolidated statements of income and of cash flows beginning January 2021. Larson's net sales, operating income and cash flows from the date of acquisition to December 31, 2020 were not material to the Company.

22


 

In June 2020, we repaid all amounts outstanding on the 3.000% Senior Notes issued in June 2015 at their maturity date using borrowings under our 2019 Revolving Credit Agreement (as defined below). In September 2019, the Company issued $700 million of 3.25% Senior Notes due 2029 (“2019 Notes”) in a registered public offering. 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.

In November 2021, the Company entered into a 364-day, $400 million term loan credit agreement (“2021 Term Loan”) for general corporate purposes that matures in November 2022. Interest rates under the 2021 Term Loan are variable based on LIBOR at the time of the borrowing and the Company’s long-term credit rating and can range from LIBOR + 0.625% to LIBOR + 1.25%.

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, which was completed in January 2022. The minority shareholders' substantive participating rights expired on January 1, 2021, at which time we obtained control of, and began consolidating, Flo in our results of operations and statements of financial positions and cash flows. Immediately prior to consolidating Flo, we recognized a non-cash loss of $4.5 million within other expense for the year-ended December 31, 2021, related to the remeasurement of our previously existing investment in Flo. During the fourth quarter of 2021 we recorded a mark-to-market expense of $2.2 million related to the remaining shares held by the minority shareholders.

Basis of Presentation

The consolidated financial statements in this Annual Report on Form 10-K have been derived from the accounts of the Company and its wholly-owned subsidiaries. The Company’s consolidated financial statements are based on a fiscal year ending December 31. Certain of the Company’s subsidiaries operate on a 52 or 53 week fiscal year ending during the month of December.

Results of Operations

The following discussion of both consolidated results of operations and segment results of operations refers to the year ended December 31, 2021 compared to the year ended December 31, 2020. The discussion of consolidated results of operations should be read in conjunction with the discussion of segment results of operations and our financial statements and notes thereto included in this Annual Report on Form 10-K. Unless otherwise noted, all discussion of results of operations are for continuing operations.

Years Ended December 31, 2021 and 2020

 

(In millions)

 

2021

 

 

% change

 

 

 

2020

 

 

Net Sales:

 

 

 

 

 

 

 

 

 

 

 

Plumbing

 

$

2,761.2

 

 

 

25.4

%

 

 

$

2,202.1

 

 

Outdoors & Security

 

 

2,039.9

 

 

 

43.7

 

 

 

 

1,419.2

 

 

Cabinets

 

 

2,855.0

 

 

 

15.6

 

 

 

 

2,469.0

 

 

Total Fortune Brands

 

$

7,656.1

 

 

 

25.7

%

 

 

$

6,090.3

 

 

Operating Income:

 

 

 

 

 

 

 

 

 

 

 

Plumbing

 

$

629.7

 

 

 

34.6

%

 

 

$

467.9

 

 

Outdoors & Security

 

 

291.9

 

 

 

45.0

 

 

 

 

201.3

 

 

Cabinets

 

 

279.3

 

 

 

18.5

 

 

 

 

235.7

 

 

Corporate

 

 

(110.5

)

 

 

(6.8

)

 

 

 

(103.5

)

 

Total Fortune Brands

 

$

1,090.4

 

 

 

36.1

%

 

 

$

801.4

 

 

 

Certain items had a significant impact on our results in 2021 and 2020. These included restructuring and other charges, asset impairment charges and the impact of changes in foreign currency exchange rates.

23


 

In 2021, financial results included:

the impact of foreign exchange primarily due to movement in the Canadian dollar, Mexican peso, British pound and Chinese yuan, which had a favorable impact compared to 2020, of approximately $63 million on net sales and of approximately $17 million both on operating income and net income and
restructuring and other charges of $20.7 million before tax ($15.9 million after tax), largely related to severance costs associated with the relocation of manufacturing facilities within our Outdoor & Security and Cabinets segments.

In 2020, financial results included:

restructuring and other charges of $25.1 million before tax ($17.5 million after tax), largely related to headcount actions associated with COVID-19 across all segments and costs associated with changes in our manufacturing processes within our Plumbing segment,
asset impairment charges of $22.5 million related to the impairment of indefinite-lived tradenames within our Plumbing and Cabinets segments, which were primarily the result of forecasted sales declines resulting from the COVID-19 pandemic,
actuarial losses within our defined benefit plans of $3.4 million primarily related to decreases in discount rates and differences between expected and actual returns on plan assets and
the impact of foreign exchange primarily due to movement in the Canadian dollar, British pound, Mexican peso and Chinese yuan, which had an unfavorable impact compared to 2019, of approximately $4 million on net sales and a favorable impact compared to 2019, of approximately $1 million both on operating income and net income.

Total Fortune Brands

Net sales

Net sales increased by $1,565.8 million, or 25.7%, due to higher sales volume including the favorable comparison to 2020 when our volumes were impacted by the COVID-19 pandemic, the benefit from the Larson acquisition ($403.4 million), price increases to help mitigate the impact of cumulative commodity and transportation cost increases and favorable mix, as well as favorable foreign exchange of approximately $63 million. These benefits were partially offset by higher promotion and volume-based rebate costs.

Cost of products sold

Cost of products sold increased by $983.2 million, or 25.0%, 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), commodity cost inflation, product mix, labor inflation, and higher tariffs, partially offset by the benefit from manufacturing productivity improvements.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $296.4 million, or 23.1%, due to higher transportation and employee-related costs, the impact of the Larson acquisition and advertising costs.

24


 

Amortization of intangible assets

Amortization of intangible assets increased by $22.1 million primarily due to the Larson acquisition in our Outdoors & Security segment ($18.2 million) and the 2021 consolidation of Flo in our Plumbing segment ($2.6 million).

Asset impairment charges

Asset impairment charges of $22.5 million in 2020 related to indefinite-lived tradenames within our Plumbing and Cabinets segments.

 

Restructuring charges

Restructuring charges of $13.5 million in 2021 largely related to severance costs associated with the relocation of manufacturing facilities within our Outdoor & Security and Cabinets segments. Restructuring charges of $15.9 million in 2020 largely related to headcount actions associated with COVID-19 across all segments and costs associated with changes in our manufacturing processes within our Plumbing segment.

Operating income

Operating income increased by $289.0 million, or 36.1%, primarily due to higher net sales, the benefit from the Larson acquisition, manufacturing productivity improvements, the absence of the 2020 asset impairment charges and lower restructuring and other charges, as well as favorable foreign exchange of approximately $17 million. These benefits were partially offset by higher commodity, employee-related and transportation costs, higher amortization of intangible assets principally due to the Larson acquisition, higher advertising costs, higher promotion and volume-based rebate costs and higher tariffs.

Interest expense

Interest expense increased by $0.5 million to $84.4 million, due to higher average borrowings partially offset by lower average interest rates.

Other expense (income), net

Other expense (income), net, was expense of $0.9 million in 2021, compared to income of $13.3 million in 2020. The decrease of $14.2 million of income is primarily due to losses of $5.0 million in 2021 and gains of $11.0 million in 2020 related to our investment in Flo prior to its consolidation and unfavorable foreign currency losses, partially offset by higher defined benefit income ($7.8 million increase).

Income taxes

 

The effective income tax rates for 2021 and 2020 were 23.2% and 23.1%, respectively. The 2021 effective income tax rate was unfavorably impacted by state and local income taxes, foreign income taxed at higher rates and a valuation allowance increase. This expense was offset by favorable benefits for the release of uncertain tax positions, primarily related to statute of limitation lapses, and share-based compensation.

 

The 2020 effective income tax rate was unfavorably impacted by state and local income taxes and foreign income taxed at higher rates. This expense was offset by a tax benefit related to share-based compensation.

Net income attributable to Fortune Brands

Net income attributable to Fortune Brands was $772.4 million in 2021 compared to $553.1 million in 2020. The increase of $219.3 million was due to higher operating income, lower equity in losses of affiliate and lower noncontrolling interests, partly offset by higher income tax expenses, higher other expense and higher interest expense.

25


 

Results By Segment

Plumbing

Net sales increased by $559.1 million, or 25.4%, due to higher sales volume across all brands and markets, including showroom customers whose locations were negatively impacted in 2020 by the COVID-19 pandemic, and price increases to help mitigate the impact of cumulative commodity and transportation cost increases, as well as favorable foreign exchange of approximately $53 million. These benefits were partially offset by higher volume-based rebate costs.

Operating income increased by $161.8 million, or 34.6%, due to higher net sales, the benefit from manufacturing productivity improvements, the absence of the 2020 asset impairment charge ($13.0 million) and favorable restructuring and other charges, as well as favorable foreign exchange of approximately $21 million. These benefits were partially offset by the impact of higher employee-related, freight, commodity, advertising and tariff costs, higher amortization of intangible assets related to the Flo acquisition and higher volume-based rebate costs.

Outdoors & Security

Net sales increased by $620.7 million, or 43.7%, due to the benefit from the Larson acquisition ($403.4 million), higher sales volume including the favorable comparison to 2020 when our volumes were impacted by the COVID-19 pandemic, price increases to help mitigate the impact of cumulative commodity and transportation cost increases and lower rebate costs due to timing of sales in 2021 versus prior year period, as well as favorable foreign exchange of approximately $1 million. These benefits were partially offset by unfavorable mix primarily driven by materials availability.

Operating income increased by $90.6 million, or 45.0%, due to higher net sales, the benefit from the Larson acquisition and manufacturing productivity improvements. These benefits were partially offset by commodity cost inflation, higher freight and employee-related costs and higher restructuring charges, as well as unfavorable foreign exchange of approximately $1 million.

Cabinets

Net sales increased by $386.0 million, or 15.6%, due to higher sales volume in both our stock and make-to-order products, including the favorable comparison to 2020 when our volumes were impacted by the COVID-19 pandemic, price increases to help mitigate the impact of cumulative commodity and transportation cost increases and favorable mix, as well as favorable foreign exchange of approximately $8 million. These benefits were partially offset by higher volume-based rebate costs.

Operating income increased by $43.6 million, or 18.5%, due to higher net sales, the benefit from manufacturing productivity improvements, the absence of the 2020 asset impairment charge ($9.5 million) and lower advertising, tariff and restructuring costs. These factors were partly offset by higher freight, commodity, and employee-related costs and higher volume-based rebate costs, as well as unfavorable foreign exchange of approximately $3 million.

Corporate

Corporate expenses increased by $7.0 million, or 6.8%, due to higher employee-related and consulting costs. These factors were partly offset by the absence of transaction costs associated with the Larson acquisition in 2020 ($4.5 million) and the absence of the impairment of a long-lived asset in 2020 ($3.6 million).

 

Liquidity and Capital Resources

Our principal sources of liquidity are cash on hand, cash flows from operating activities, cash borrowed under our credit facility 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 the credit facility and access to capital markets, provide sufficient liquidity to support the Company’s working capital requirements, capital expenditures and service of indebtedness, as well as to finance acquisitions,

26


 

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 entitled “Item 1A. Risk Factors.” In addition, we cannot predict whether or when we may enter into acquisitions, joint ventures or dispositions, make any purchases of shares of our common stock under our share repurchase programs, or pay dividends, or what impact any such transactions could have on our results of operations, cash flows or financial condition, whether as a result of the issuance of debt or equity securities, or otherwise.

Unsecured Senior Notes

At December 31, 2021, the Company had aggregate outstanding notes in the principal 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 carrying value of the Notes, net of underwriting commissions, price discounts and debt issuance costs as of December 31, 2021 and December 31, 2020:

 (in millions)

 

 

 

 

 

 

 

Net Carrying Value

 

Coupon Rate

Principal Amount

 

 

Issuance Date

 

Maturity Date

 

December 31, 2021

 

 

December 31, 2020

 

4.000% Senior Notes

$

500.0

 

 

June 2015

 

June 2025

 

$

497.4

 

 

$

496.6

 

4.000% Senior Notes

 

600.0

 

 

September 2018

 

September 2023

 

 

598.2

 

 

 

597.1

 

3.250% Senior Notes

 

700.0

 

 

September 2019

 

September 2029

 

 

694.2

 

 

 

693.5

 

Total Senior Notes

$

1,800.0

 

 

 

 

 

 

$

1,789.8

 

 

$

1,787.2

 

Credit Facilities

In November 2021, the Company entered into a 364-day, $400 million term loan credit agreement (“2021 Term Loan”) for general corporate purposes that matures in November 2022. Interest rates under the 2021 Term Loan are variable based on LIBOR at the time of the borrowing and the Company’s long-term credit rating and can range from LIBOR + 0.625% to LIBOR + 1.25%. Covenants under the 2021 Term Loan are the same as the existing $1.25 billion revolving credit agreement. As of December 31, 2021, 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 maturity date of the facility is 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%. 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 Company’s ratio of consolidated debt minus certain cash and cash equivalents to consolidated EBITDA generally may not exceed 3.5 to 1.0. On December 31, 2021 and December 31, 2020, our outstanding borrowings under this credit facility were $520.0 million and 785.0 million, respectively. As of December 31, 2021, we were in compliance with all covenants under this credit facility.

We currently have uncommitted bank lines of credit in China, which provide for unsecured borrowings for working capital of up to $17.5 million in aggregate as of December 31, 2021 and December 31, 2020, of which there were no outstanding balances as of December 31, 2021 and 2020. The weighted-average interest rates on these borrowings were zero in 2021 and 2020.

Commercial Paper

In November 2021, the Company established a commercial paper program (the "Commercial Paper Program") pursuant to which the Company may issue short-term, unsecured commercial paper notes. Amounts available under the Commercial Paper Program may be borrowed, repaid and re-borrowed, with the aggregate principal amount outstanding at any time not to exceed $1.25 billion. The Company’s 2019

27


 

Revolving Credit Agreement is the liquidity backstop for the repayment of any notes issued under the Commercial Paper Program. The Company plans to use net proceeds from any issuances under the Commercial Paper Program for general corporate purposes. There was no commercial paper outstanding as of December 31, 2021.

As of December 31, 2021, the components of external long-term debt were as follows:

(In millions)

 

2021

 

 

2020

 

Notes (due 2023 to 2029)

 

$

1,789.8

 

 

$

1,787.2

 

2019 Revolving Credit Agreement

 

 

520.0

 

 

 

785.0

 

2021 Term Loan

 

 

400.0

 

 

 

 

Total debt

 

 

2,709.8

 

 

 

2,572.2

 

Less: current portion

 

 

400.0

 

 

 

 

Total long-term debt

 

$

2,309.8

 

 

$

2,572.2

 

In our debt agreements, there are normal and customary events of default which would permit the lenders to accelerate the debt if not cured within applicable grace periods, such as failure to pay principal or interest when due or a change in control of the Company. There were no events of default as of December 31, 2021.

Cash and Seasonality

In 2021, we invested approximately $148.1 million in incremental capacity to support long-term growth potential and new products inclusive of cost reduction and productivity initiatives. We expect capital spending in 2022 to be in the range of $375 to $425 million, reflecting incremental capacity investments in our decking product line within Outdoors & Security. On December 31, 2021, we had cash and cash equivalents of $471.5 million, of which $376.1 million was held at non-U.S. subsidiaries. We manage our global cash requirements considering (i) available funds among the subsidiaries through which we conduct business, (ii) the geographic location of our liquidity needs, and (iii) the cost to access international cash balances. The repatriation of non-U.S. cash balances from certain subsidiaries could have adverse tax consequences as we may be required to pay and record tax expense on those funds that are repatriated.

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.

Share Repurchases

In 2021, we repurchased 4.7 million shares of our outstanding common stock under the Company’s share repurchase program for $447.7 million. As of December 31, 2021, the Company’s total remaining share repurchase authorization under the remaining program was approximately $414.7 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.

Dividends

In 2021, we paid dividends in the amount of $143.0 million to the Company’s stockholders. 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 stockholder value. In December 2020, we acquired 100% of the outstanding equity of Larson for a total purchase price of approximately $717.5 million, net of cash acquired.

28


 

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, which was completed in January 2022. The minority shareholders' substantive participating rights expired on January 1, 2021, at which time we obtained control of, and began consolidating, Flo in our results of operations and statements of financial positions and cash flows. Immediately prior to consolidating Flo, we recognized a non-cash loss of $4.5 million within other expense for the year-ended December 31, 2021, related to the remeasurement of our previously existing investment in Flo. During the fourth quarter of 2021 we recorded a mark-to-market expense of $2.2 million related to the remaining shares held by the minority shareholders.

Cash Flows

Below is a summary of cash flows for the years ended December 31, 2021 and 2020.

 

(In millions)

 

2021

 

 

 

2020

 

Net cash provided by operating activities

 

$

688.7

 

 

 

$

825.7

 

Net cash used in investing activities

 

 

(207.1

)

 

 

 

(923.5

)

Net cash provided by (used in) financing activities

 

 

(428.6

)

 

 

 

111.6

 

Effect of foreign exchange rate changes on cash

 

 

(1.9

)

 

 

 

16.3

 

Net increase in cash, cash equivalents and restricted cash

 

$

51.1

 

 

 

$

30.1

 

 

Net cash provided by operating activities was $688.7 million in 2021 compared to $825.7 million in 2020. The $137.0 million decrease in cash provided from 2020 to 2021 was primarily due to an increase in our inventory investments to mitigate the impact of an uncertain and volatile global supply chain environment and higher increases in accounts receivable associated with our sales growth. These factors were partially offset by higher net income.

Net cash used in investing activities was $207.1 million in 2021 compared to $923.5 million in 2020. The decrease in cash used of $716.4 million from 2020 to 2021 was primarily due to the acquisition of Larson in December 2020 ($713.0 million decrease), the acquisition of additional shares of Flo in January and April 2020 ($59.4 million decrease) and the cash acquired during the consolidation of Flo in January 2021, partially offset by higher capital expenditures.

 

Net cash used in financing activities was $428.6 million in 2021 compared to cash provided by financing activities of $111.6 million in 2020. The increase in cash used of $540.2 million from 2020 to 2021 was primarily due to higher share repurchases in 2021 compared to 2020 ($260.1 million increase), lower net borrowings in 2021 compared to 2020 ($250.0 million decrease), lower proceeds from the exercise of stock options and higher dividends to shareholders ($9.7 million increase).

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. In 2021 and 2020, we contributed $21.3 million and $47.7 million, respectively, to our qualified pension plans. In 2022, we expect to make pension contributions of approximately $10.0 million. As of December 31, 2021, the fair value of our total pension plan assets was $816.0 million, representing funding of 92% of the accumulated benefit obligation liability. 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, Mexico, the United Kingdom, China, South Africa, France and Japan. Therefore, changes in the value of the related currencies affect our financial statements when translated into U.S. dollars.

29


 

Contractual Obligations and Other Commercial Commitments

The following summarizes our contractual obligations and commitments as of December 31, 2021. Purchase obligations were $959.1 million, of which $900.3 million is due within one year. Purchase obligations include contracts for raw materials and finished goods purchases, selling and administrative services, and capital expenditures. Total lease payments under non-cancellable operating leases as of December 31, 2021 were $48.2 million in 2022, $43.3 million in 2023, $34.0 million in 2024, $24.6 million in 2025, $20.4 million in 2026 and $55.2 million thereafter. A final payment of $16.6 million related to our acquisition of Flo was paid in January 2022.

Due to the uncertainty of the timing of settlement with taxing authorities, we are unable to make reasonably reliable estimates of the period of cash settlement of unrecognized tax benefits. Therefore, $83.1 million of unrecognized tax benefits as of December 31, 2021 have been excluded from the paragraph above.

In addition to the contractual obligations and commitments described above, we also had other commercial commitments for which we are contingently liable as of December 31, 2021. Other corporate commercial commitments include standby letters of credit of $37.0 million, in the aggregate, all of which expire in less than one year, and surety bonds of $22.7 million, of which $17.4 million matures in less than one year and $5.3 million matures in 1-3 years. These contingent commitments are not expected to have a significant impact on our liquidity.

Debt payments due during the next five years as of December 31, 2021 are $400 million in 2022, $600 million in 2023, $520 million in 2024, $500 million in 2025, zero in 2026 and $700 million in 2027 and beyond. The Company intends to repay or refinance the $400 million Term Loan on or before the November 2022 maturity date. Interest payments due during the next five years as of December 31, 2021 are $78 million in 2022, $124 million in 2023 through 2024, $56 million in 2025 through 2026 and $68 million in 2027 and beyond.

Foreign Currency Risk

Certain anticipated transactions, assets and liabilities are exposed to foreign currency risk. Principal currencies hedged include the Canadian dollar, the Mexican peso, the British pound and the Chinese yuan. We regularly monitor our foreign currency exposures in order to maximize the overall effectiveness of our foreign currency hedge positions. For additional information on this risk, see Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in this Annual Report on Form 10-K.

Derivative Financial Instruments

In accordance with Accounting Standards Codification ("ASC") requirements for Derivatives and Hedging, we recognize all derivative contracts as either assets or liabilities on the balance sheet, and the measurement of those instruments is at fair value. If the derivative is designated as a fair value hedge and is effective, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings in the same period. If the derivative is designated as a cash flow hedge, the changes in the fair value of the derivative are recorded in other comprehensive income (“OCI”) and are recognized in the consolidated statement of income when the hedged item affects earnings. If the derivative is designated as an effective economic hedge of the net investment in a foreign operation, the changes in the fair value of the derivative is reported in the cumulative translation adjustment section of OCI. Similar to foreign currency translation adjustments, these changes in fair value are recognized in earnings only when realized upon sale or upon complete or substantially complete liquidation of the investment in the foreign entity.

Deferred currency gains (loss) of $0.3 million, $(3.0) million and $4.1 million (before tax impact) were reclassified into earnings for the years ended December 31, 2021, 2020 and 2019, respectively. Based on foreign exchange rates as of December 31, 2021, we estimate that $1.9 million of net derivative gain

30


 

included in other comprehensive income ("AOCI") as of December 31, 2021, will be reclassified to earnings within the next twelve months.

Recently Issued Accounting Standards

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

Critical Accounting Estimates

Our significant accounting policies are described in Note 2, “Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. The Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). Preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the amounts of assets and liabilities reflected in the financial statements and revenues and expenses reported for the relevant reporting periods. We believe the policies discussed below are the Company’s critical accounting policies as they include the more significant, subjective and complex judgments and estimates made when preparing our consolidated financial statements.

Inventories

 

Inventory provisions are recorded to reduce inventory to the net realizable dollar value for obsolete or slow moving inventory based on assumptions about future demand and marketability of products, the impact of new product introductions, inventory levels and turns, product spoilage and specific identification of items, such as product discontinuance, engineering/material changes, or regulatory-related changes. In accordance with this policy, our inventory provision was $50.7 million and $51.2 million as of December 31, 2021 and 2020, respectively.

Business Combinations

We account for business combinations under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations, which requires an allocation of the consideration we paid to the identifiable assets, intangible assets and liabilities based on the estimated fair values as of the closing date of the acquisition. The excess of the fair value of the purchase price over the fair values of these identifiable assets, intangible assets and liabilities is recorded as goodwill.

Purchased intangibles other than goodwill are initially recognized at fair value and amortized over their useful lives unless those lives are determined to be indefinite. The valuation of acquired assets will impact future operating results. The fair value of identifiable intangible assets is determined using an income approach on an individual asset basis. Specifically, we use the multi-period excess earnings method to determine the fair value of customer relationships and the relief-from-royalty approach to determine the fair value of the tradename and proprietary technology. Determining the fair value of acquired intangibles involves significant estimates and assumptions, including forecasted revenue growth rates, EBITDA margins, percentage of revenue attributable to the tradename, contributory asset charges, customer attrition rate, market-participant discount rates and the assumed royalty rates.

The determination of the useful life of an intangible asset other than goodwill is based on factors including historical tradename performance with respect to consumer name recognition, geographic market presence, market share, plans for ongoing tradename support and promotion, customer attrition rate, and other relevant factors.

Goodwill and Indefinite-lived Intangible Assets

In accordance with ASC requirements for Intangibles - Goodwill and Other, goodwill is tested for impairment at least annually in the fourth quarter and written down when impaired. An interim impairment test is performed if an event occurs or conditions change that would more likely than not reduce the fair value of the reporting unit below the carrying value.

31


 

To evaluate the recoverability of goodwill, we first assess qualitative factors to determine whether it is more likely than not that goodwill is impaired. Qualitative factors include changes in volume, margin, customers and the industry. If it is deemed more likely than not that goodwill for a reporting unit is impaired, we will perform a quantitative impairment test using a weighting of the income and market approaches. For the income approach, we use a discounted cash flow model, estimating the future cash flows of the reporting units to which the goodwill relates and then discounting the future cash flows at a market-participant-derived discount rate. In determining the estimated future cash flows, we consider current and projected future levels of income based on management’s plans for that business; business trends, prospects and market and economic conditions; and market-participant considerations. Furthermore, our cash flow projections used to assess impairment of our goodwill and other intangible assets are significantly influenced by our projection for the U.S. home products market, our annual operating plans finalized in the fourth quarter of each year, and our ability to execute on various planned cost reduction initiatives supporting operating income improvements. Our projection for the U.S. home products market is inherently uncertain and is subject to a number of factors, such as employment, home prices, credit availability, new home starts and the rate of home foreclosures. For the market approach, we apply market multiples for peer groups to the current operating results of the reporting units to determine each reporting unit’s fair value. The Company’s reporting units are operating segments, or one level below operating segments when appropriate. When the estimated fair value of a reporting unit is less than its carrying value, we measure and recognize the amount of the goodwill impairment loss based on that difference.

The significant assumptions that are used to determine the estimated fair value for goodwill impairment testing include the following: third-party market forecasts of U.S. new home starts and home repair and remodel spending; management’s sales, operating income and cash flow forecasts; peer company EBITDA earnings multiples; the market-participant-based discount rate; and the perpetuity growth rate. Our estimates of reporting unit fair values are based on certain assumptions that may differ from our historical and future actual operating performance. Specifically, assumptions related to growth in the new construction and repair and remodel segments of the U.S. home products markets drive our forecasted sales growth. The market forecasts are developed using independent third-party forecasts from multiple sources. In addition, estimated future operating income and cash flow consider our historical performance at similar levels of sales volume and management’s future operating plans as reflected in annual and long-term plans that are reviewed and approved by management.

The significant assumptions used to estimate the fair values of the goodwill tested quantitatively during the year ended December 31, 2021 were as follows:

 

 

 

2021

 

Unobservable Input

 

Minimum

 

 

Maximum

 

 

Weighted Average(a)

 

Discount rates

 

 

8.3

%

 

 

10.0

%

 

 

9.2

%

EBITDA multiple

 

 

15.0

 

 

 

18.0

 

 

 

16.8

 

Long-term revenue growth rates(b)

 

 

2.5

%

 

 

3.0

%

 

 

3.0

%

(a)
Weighted by relative fair value of the goodwill that was tested quantitatively.
(b)
Selected long-term revenue growth rate within 10-year projection period for the goodwill that was tested quantitatively.

A 50 basis point change in any of the significant assumptions during the year ended December 31, 2021 would not have resulted in an impairment being recognized when estimating the fair value of our reporting unit goodwill.

Certain of our tradenames have been assigned an indefinite life as we currently anticipate that these tradenames will contribute cash flows to the Company indefinitely. Indefinite-lived intangible assets are not amortized, but are evaluated at least annually to determine whether the indefinite useful life is appropriate. We measure the fair value of identifiable intangible assets upon acquisition and we review for impairment annually in the fourth quarter and whenever market or business events indicate there may be a potential impairment of that intangible. Impairment losses are recorded to the extent that the carrying value of the indefinite-lived intangible asset exceeds its fair value. The significant assumptions that are used to determine the estimated fair value for indefinite-lived intangible assets upon acquisition and

32


 

subsequent impairment testing are forecasted revenue growth rates; the assumed royalty rates; and the market-participant discount rates.

We first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. Qualitative factors include changes in volume, customers and the industry. If it is deemed more likely than not that an intangible asset is impaired, we will perform a quantitative impairment test. We measure fair value of our indefinite-lived tradenames using the relief-from-royalty approach which estimates the present value of royalty income that could be hypothetically earned by licensing the brand name to a third party over the remaining useful life. The determination of fair value using this technique requires the use of estimates and assumptions related to forecasted revenue growth rates, the assumed royalty rates and the market-participant discount rates. During our 2021 annual impairment test, of our $711.1 million indefinite lived tradenames, we tested $355.4 million quantitatively, and the remainder was assessed using qualitative factors. There were no impairments for the year ended December 31, 2021. See Note 5, “Goodwill and Identifiable Intangible Assets,” for additional information.

During the second quarter of 2020, extended closures of luxury plumbing showrooms associated with COVID-19 led to lower than expected sales related to an indefinite-lived tradename within the Plumbing segment, which combined with the updated financial outlook compared to previous forecasts and the continued uncertainty of the pandemic on the sales and profitability related to the tradename led us to conclude that it was more likely than not that the indefinite-lived tradename was impaired. Therefore, we performed an interim impairment test as of June 30, 2020, and as a result we recognized a pre-tax impairment charge of $13.0 million related to this tradename. We also performed an evaluation of the useful life of this tradename and determined it was no longer indefinite-lived due to changes in long-term management expectations and future operating plans. As a result, the remaining carrying value of this tradename is being amortized over its estimated useful life of 30 years.

In the first quarter of 2020, we recognized an impairment charge of $9.5 million related to an indefinite-lived tradename in our Cabinets segment. 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 December 31, 2021, the carrying value of this tradename was $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 December 31, 2021, the carrying value of this tradename was $85.0 million.

The fair values of the impaired 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, assumed royalty rates, and market-participant discount rates that reflect 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 9).

33


 

The significant assumptions used to estimate the fair values of the tradenames tested quantitatively during the years ended December 31, 2021 and 2020 were as follows:

 

 

 

2021

 

 

2020

 

Unobservable Input

 

Minimum

 

 

Maximum

 

 

Weighted Average(a)

 

 

Minimum

 

 

Maximum

 

 

Weighted Average(a)

 

Discount rates

 

 

10.2

%

 

 

12.4

%

 

 

11.4

%

 

 

11.2

%

 

 

13.2

%

 

 

12.7

%

Royalty rates(b)

 

 

1.0

%

 

 

5.0

%

 

 

3.4

%

 

 

1.0

%

 

 

5.0

%

 

 

3.3

%

Long-term revenue growth rates(c)

 

 

1.0

%

 

 

3.0

%

 

 

2.6

%

 

 

1.0

%

 

 

3.0

%

 

 

2.7

%

(a)
Weighted by the relative fair value of the tradenames that were tested quantitatively.
(b)
Represents estimated percentage of sales a market-participant would pay to license the tradenames that were tested quantitatively.
(c)
Selected long-term revenue growth rate within 10-year projection period of the tradenames that were tested quantitatively.

A 50 basis point change in any of the significant assumptions used during the year ended December 31, 2021 would not have resulted in an impairment being recognized when estimating the fair value of our indefinite-lived tradenames.

Defined Benefit Plans

We have a number of pension plans in the United States, covering many of the Company’s employees. In addition, the Company provides postretirement health care and life insurance benefits to certain retirees. Service cost for 2021 relates to benefit accruals for an hourly Union group within the defined benefit plan for our Outdoors & Security segment. All other benefit accruals under our defined benefit pension plans were frozen as of, or prior to, December 31, 2016.

We recognize changes in the fair value of pension plan assets and net actuarial gains or losses in excess of 10 percent of the greater of the fair value of pension plan assets or each plan’s projected benefit obligation (the “corridor”) in earnings immediately upon remeasurement, which is at least annually in the fourth quarter of each year. Net actuarial gains and losses occur when actual experience differs from any of the assumptions used to value defined benefit plans or when assumptions change as they may each year. The primary factors contributing to actuarial gains and losses are changes in the discount rate used to value obligations as of the measurement date and the differences between expected and actual returns on pension plan assets. This accounting method results in the potential for volatile and difficult to forecast gains and losses. The pre-tax recognition of actuarial losses was $0.8 million and $2.8 million in 2021 and 2020, respectively. The total net actuarial losses in accumulated other comprehensive income for all defined benefit plans were $39.6 million as of December 31, 2021, compared to $87.1 million as of December 31, 2020.

We record amounts relating to these defined benefit plans based on various actuarial assumptions, including discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current economic conditions and trends. We believe that the assumptions utilized in recording our obligations under our plans are reasonable based on our experience and on advice from our independent actuaries; however, differences in actual experience or changes in the assumptions may materially affect our financial condition or results of operations. The expected rate of return on plan assets is determined based on the nature of the plans’ investments, our current asset allocation and our expectations for long-term rates of return. The weighted-average long-term expected rate of return on pension plan assets for the years ended December 31, 2021 and 2020 was 4.4% and 4.5%, respectively. Compensation increases reflect expected future compensation trends. The discount rate used to measure obligations is based on a spot-rate yield curve on a plan-by-plan basis that matches projected future benefit payments with the appropriate interest rate applicable to the timing of the projected future benefit payments. The bond portfolio used for the selection of the discount rate is from the top quartile of bonds rated by nationally recognized statistical rating organizations, and includes only non-callable bonds and those that are deemed to be sufficiently marketable with a Moody’s credit rating

34


 

of Aa or higher. The weighted-average discount rate for defined benefit liabilities as of December 31, 2021 and 2020 was 2.9% and 2.6%, respectively.

For postretirement benefits, our health care trend rate assumption is based on historical cost increases and expectations for long-term increases. As of December 31, 2021, for postretirement medical and prescription drugs in the next year, our assumption was an assumed rate of increase of 6.3% for pre-65 retirees and 6.7% for post-65 retirees, declining until reaching an ultimate assumed rate of increase of 4.5% per year in 2028. As of December 31, 2020, for postretirement medical and prescription drugs in the next year, our assumption was an assumed rate of increase of 6.4% for pre-65 retirees and 7.4% for post-65 retirees, declining until reaching an ultimate assumed rate of increase of 4.5% per year in 2027.

Below is a table showing pre-tax pension and postretirement expenses, including the impact of actuarial gains and losses:

 

(In millions)

 

 

2021

 

 

 

2020

 

Total pension (income) expense

 

 

$

(9.4

)

 

 

$

(0.8

)

Actuarial loss component of expense above

 

 

 

1.1

 

 

 

 

2.7

 

Total postretirement expense

 

 

 

0.7

 

 

 

 

0.7

 

Actuarial (gain) loss component of expense above

 

 

 

(0.3

)

 

 

 

0.1

 

 

The actuarial losses in 2021 were principally due to lower than expected return on plan assets. The actuarial losses in 2020 were principally due to changes in discount rates offset by positive asset returns. Discount rates in 2021 used to determine benefit obligations increased by an average of 30 basis points for pension benefits. Discount rates for 2021 postretirement benefits decreased an average of 200 basis points mainly due to the acquisition of Larson. Discount rates in 2020 used to determine benefit obligations decreased by an average of 70 basis points for pension benefits. Discount rates for 2020 postretirement benefits decreased an average of 50 basis points. Our actual return on plan assets in 2021 was 6.6% compared to an actuarial assumption of an average 4.4% expected return. Our actual return on plan assets in 2020 was 16.5% compared to an actuarial assumption of an average 4.5% expected return. Significant actuarial losses in future periods would be expected if discount rates decline, actual returns on plan assets are lower than our expected return, or a combination of both occurs.

 

A 25 basis point change in our discount rate assumption would lead to an increase or decrease in our pension and postretirement liability of approximately $27 million.