Attached files
| file | filename |
|---|---|
| 8-K/A - FORM 8-K/A - Fortune Brands Home & Security, Inc. | d305389d8ka.htm |
| EX-99.1 - UPDATED FINANCIAL TABLES - Fortune Brands Home & Security, Inc. | d305389dex991.htm |
 1
Fortune Brands Home & Security, Inc.
Defined Benefit Plan Accounting Change
February 22, 2012
Exhibit 99.2
This document contains certain “forward-looking statements” regarding the rate of
return on plan assets and other matters. Statements preceded by, followed by or that otherwise
include the words “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” and similar expressions or
future or conditional verbs such as “will,” “should,” “would,”
“may” and “could” are generally forward-looking in nature and not historical facts. Where, in any
forward-looking statement, we express an expectation or belief as to future results or events,
such expectation or belief is based on the current plans and expectations of our management.
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 under “Risk
Factors” in the “Risk Factors” section contained in our Annual Report on Form 10-K filed with the Securities and Exchange
Commission. The forward-looking statements included in this release are made as of the date
hereof, and except as required by law, we undertake no obligation to update, amend or clarify
any forward-looking statements to reflect events, new information
or circumstances occurring after the date hereof. |
 2
Defined Benefit Plan Accounting Change
On December 31, 2011, the Company changed its method of accounting for the
Plans. The changes in accounting method are summarized below.
The
Company’s
U.S.
subsidiaries
maintain
a
number
of
defined
benefit
pension
and
other
post
retirement
benefit
plans
(collectively, “the Plans”). This document summarizes key aspects of the
Company’s change in accounting for the Plans. Additional
disclosures and information will be included in the Company’s annual report on Form 10-K that will be filed with
the SEC. Terms in bold are defined in a glossary at the end of this
document. Old
accounting
method:
Actuarial
gains/losses
in
excess
of
10
percent
of
the
greater
of
the
market-related
value
of
plan
assets
or
the
Plans’
projected
benefit
obligation
(defined
as
the
“corridor”)
were
generally
recognized
in
earnings over the remaining service life of plan participants.
The Company believes its new accounting method is preferable because it eliminates
any delay in recognition within earnings of actuarial gains and losses that
are outside the corridor. The Company’s independent auditors concur
with the preferability of the new accounting method.
The accounting change is applied by retroactively restating the Company’s
financial statements for all prior periods by applying the new accounting
method. As a result, previously reported GAAP net income and EPS
change.
New
accounting
method:
Actuarial
gains/losses
in
excess
of
10
percent
of
the
greater
of
the
fair
value
of
plan
assets
or the Plans’
projected benefit obligation are recognized in earnings immediately upon
remeasurement (which is at least annually in the fourth quarter of
each year). Refer to Appendix for more detailed explanation.
–
– |
 3
Defined Benefit Plan Accounting Change (Continued)
This accounting change has no impact on:
–
Cash flow
–
Pension and postretirement liabilities
–
Pension funding requirements
–
Financial covenant compliance in the Company’s lending arrangements
Under the new method, the Company will refer to actuarial gains/losses in excess of
10 percent of the greater of the fair value
of
plan
assets
or
the
Plans’
projected
benefit
obligation
as
Future
AGL
Adjustments
may
occur at least annually in the fourth quarter and the extent of any AGL Adjustments
will be influenced principally by changes
in
the
required
discount
rate
and
variances
between
the
expected
rate
of
return
on
plan
assets
and
actual
returns on plan assets.
Segment reporting considerations
–
Impacts of the pension accounting change are entirely reflected in Corporate as
other segments only record the service cost component of expense. The
amount of service cost is not impacted by the accounting change. In
addition
to
the
change
in
accounting
for
the
Plans,
beginning
in
2012
the
Company
changed
its
estimated
expected
rate of return on plan assets to reflect changes in the long-term investment
strategy of the pension Plans. The Company expects that over the
long-term its pension Plans may invest a greater portion of their assets in fixed income securities
whose maturities more closely match the timing of expected future benefit
payments. As a result, effective December 31, 2011 the Company reduced
its expected rate of return on plan assets to approximately 7.8% from 8.5% in 2011.
“AGL Adjustments.” |
 4
Financial Reporting Impact
1)
Represents service cost, interest cost and expected rate of return on plan assets
associated with the Plans. The discount rate for on-going expense
in 2010 and 2011 was approximately 6.0% and 5.8%, respectively. The expected rate of return on plan assets in
2010 and 2011 was 8.5%.
2)
Assumes a tax rate of 38%.
3)
Approximately $65 million of 2011 AGL Adjustments is attributable to a 90 bps
decline in discount rate during 2011 and approximately $15 million of 2011
AGL Adjustments is attributable to the change in fair value of plan assets. Under the new
accounting method, unrecognized net losses within the corridor totaled $69.5
million as of December 31, 2011. $ millions
2010
2011
2010
2011
On-going Expense
(1)
7.2
$
5.8
$
12.1
$
8.2
$
Loss Amortization
11.5
16.7
-
-
Curtailments/Settlements
1.3
1.8
0.9
1.8
AGL Adjustments
-
-
(3.5)
80.0
(3)
Total Defined Benefit Plan Expense
20.0
$
24.3
$
9.5
$
90.0
$
Diluted EPS Impact
(2)
0.08
$
0.10
$
0.04
$
0.36
$
Diluted EPS Impact of AGL Adjustments
(0.01)
$
0.32
$
Old Method
New Method
For the Year Ended December 31, |
 5
Pension Funding Status
The change in accounting method has no
impact
on
the
funded
status
of
the
pension Plans.
The Company estimates approximately
$20 million of minimum required pension
contributions in 2012.
The Company also has liabilities of $93.9
million for other postretirement benefit
plans. These plans have no minimum
funding requirements. Contributions to
these plans totaled $6.5 million in 2011.
The Company believes it has sufficient
liquidity to make required contributions to
the Plans as they become due in future
periods.
$ millions
2010
2011
Projected Benefit Obligation
557.3
$
639.5
$
Fair Value of Plan Assets
(503.9)
(477.9)
Funded Status
(53.4)
$
(161.6)
$
% Funded
90%
75%
Pension Contributions
61.2
$
1.1
$
Discount Rate
(1)
5.8%
4.9%
Sensitivity:
Impact of 25 bps Movement in Discount
21.5
$
Rate on Projected Benefit Obligation
(1) Weighted-average across all Plans
As of December 31, |
 6
Appendix |
 7
Explanation of Changes in Accounting
Cost
Component
Old Method
New Method
Service Cost
Record present value of future pension benefits
earned in the current period
No change
Interest Cost
Record interest on the projected benefit
obligation based on rate on a current AA
corporate bond yield curve specific to future
estimated pension payments
No change
Expected Rate
of Return on
Plan Assets
Record income based on a “market-related
value”
of pension plan assets smoothed over 5
years multiplied by an expected long term rate
of return on pension plan assets.
Record income based on current market value of
pension plan assets multiplied by expected long
term rate of return; no smoothing of market value
changes.
Actuarial
Gains/Losses
Record gains/losses outside 10% corridor by
amortizing over the remaining service life of
plan participants. For other retiree plans, we
use a dual corridor whereby actuarial gains or
losses in excess of 20% of the projected benefit
obligation were amortized faster.
Record
all
gains/losses
outside
10%
corridor
immediately in earnings. |
 8
Glossary of Terms
Term
Definition
Actuarial gains/losses
A
change
in
the
value
of
either
the
projected
benefit
obligation
or
the
plan
assets
resulting
from
experience
different from that assumed or from a change in an actuarial assumption.
AGL adjustments
Under the Company’s new accounting method, actuarial gain/loss adjustments
that are outside of the corridor and recorded in earnings.
Corridor
Under the Company’s new accounting method, the greater of 10% of the
projected benefit obligation or fair value of plan assets. Under the old
accounting method, the greater of 10% of the projected benefit obligation
or the market-related value of plan assets was amortized into earnings over
the remaining service period of the plan participants.
Expected rate of return on
plan assets
Under the Company’s new accounting method, calculated based on the current
fair value of plan assets, multiplied by the expected long-term rate of
return. Under the Company’s old accounting method, calculated
based
on
the
market-related
value
of
plan
assets,
multiplied
by
the
expected
long-term
rate
of
return.
Fair value of plan assets
Actual fair value of pension plan assets at a particular date.
Funded status
The projected benefit obligation less the fair value of assets.
Market-related value of plan
assets
Under the Company’s old accounting method, it used a market-related value
of plan assets method to calculate pension costs, recognizing each
year’s asset gains or losses over a five-year period. On-going
expense Expense before recognition of AGL adjustments and curtailment and
settlement costs. Consists of service cost, interest cost and expected rate
of return on plan assets. Projected benefit obligation
The actuarial present value as of a date of all benefits attributed by the pension
benefit formula to employee service rendered before that date. The
projected benefit obligation is measured using assumptions as to future
compensation levels if the pension benefit formula is based on those future compensation levels. |