Fortune Brands Home & Security, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial statements are unaudited. The filing uses the company’s then-current name, Fortune Brands Home & Security, Inc.
Business context and financial performance
The company sells branded products for home repair and remodeling, new construction, and security. Its segments are Water Innovations, Outdoors & Security, and Cabinets. Nine-month revenue rose 6.8%, principally from price increases; management also cited lower unit volume in Water Innovations and Outdoors & Security, channel inventory reductions, softer demand, and unfavorable foreign exchange.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $2,053.7m | $1,986.3m | $6,082.0m | $5,693.4m |
| Operating income | $281.2m | $286.6m | $818.7m | $829.9m |
| Net income | $204.2m | $202.1m | $577.1m | $597.1m |
| Diluted EPS | $1.57 | $1.45 | $4.37 | $4.26 |
| Operating margin | 13.7% | 14.4% | 13.5% | 14.6% |
Q3 sales increased 3.4%, but operating income declined 1.9%; lower taxes and higher other income helped lift net income 1.0%. For the nine months, sales increased 6.8%, while operating income fell 1.3% and net income fell 3.3%. Nine-month cost of products sold was $3,895.9m, implying gross margin of approximately 35.9% versus 36.1% in 2021. Q3 gross margin was approximately 36.2% versus 35.6%.
Segments and material changes
- Water Innovations: Nine-month sales decreased 6.3% to $1,928.6m and operating income decreased 4.3% to $462.7m. Q3 sales fell 14.3% to $635.1m and operating income fell 8.3% to $152.7m.
- Outdoors & Security: Nine-month sales increased 9.0% to $1,662.4m and operating income increased 5.5% to $223.3m. Q3 sales rose 6.1%, but operating income declined 12.2% to $70.6m.
- Cabinets: Nine-month sales increased 18.0% to $2,491.0m and operating income increased 13.6% to $243.3m. Q3 sales rose 19.8% and operating income rose 50.1% to $100.9m.
Growth across segments reflected price increases, while management cited inflation in materials, freight and labor, and lower volumes in some product lines. Corporate expenses increased 39.5% for the nine months, primarily due to planned separation costs and digital transformation consulting.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $288.8m, down from $430.8m. Management attributed the decline mainly to inventory investment, lower accounts payable, and lower accrued taxes.
- Investing cash outflow was $381.0m, including $214.0m for acquisitions and $175.1m of capital expenditures. Financing cash outflow was $8.9m. Cash and cash equivalents decreased by $127.1m to $345.3m; $298.9m was held at non-U.S. subsidiaries.
- At September 30, current assets were $3,007.6m and current liabilities were $2,047.9m. Inventory was $1,502.3m, up from $1,193.8m at year-end 2021.
- Debt totaled $3,385.9m in the debt note, versus $2,709.8m at December 31, 2021. The company had $2.7bn of senior notes, $613.3m of commercial paper, and $100.0m outstanding under its revolving facility. The $1.25bn revolver matures in August 2027; the company reported covenant compliance. It intends to repay or refinance $600m of 4.00% notes due September 2023.
- In the first nine months, the company repurchased 6.9m shares for $541.1m and paid $109.8m in dividends. Remaining repurchase authorization was approximately $624m at September 30.
Outlook, risks, and unusual items
- Management said rising inflation and mortgage rates had slowed home sales, new construction, and repair-and-remodel activity, and expected a short-term housing-market slowdown. It cited continuing supply, labor, freight, commodity, tariff, and foreign-exchange pressures, with pricing and productivity initiatives intended to offset costs. No numerical earnings or revenue guidance is provided in the filing text.
- The company announced plans to separate MasterBrand Cabinets into a standalone public company through a tax-free spin-off, expected within 12 months of the April 28, 2022 announcement, subject to approvals and other conditions. The filing does not establish that completion is assured.
- Acquisitions included Aqualisa, acquired in July for $156.0m net of cash acquired, and Solar, acquired in January for $61.6m net of cash acquired. Their reported-period contributions were described as immaterial or not material.
- Reported nine-month results include a $26.0m Cabinets tradename impairment and $33.1m of restructuring charges, largely related to severance, plant closures, and headcount actions. The impaired tradename’s estimated fair value equaled its $59.0m carrying value at quarter-end; further impairment could occur if estimates deteriorate.
- Q3 effective tax rate was 18.4%, versus 24.4% a year earlier, reflecting tax benefits from uncertain tax positions, partly offset by tax audit settlement expenses. Litigation and environmental remediation are disclosed; management did not expect them to have a material adverse effect.
- Key stated risks include housing and economic conditions, customer and supplier concentration, inflation and supply constraints, interest rates, foreign exchange, acquisitions, goodwill or intangible impairment, and costs or disruption from the proposed spin-off.
Important facts for investors to verify
- Whether the planned Cabinets spin-off proceeds, on what timetable, and with what separation costs and capital structure.
- Whether declining Water Innovations sales and Q3 Outdoors & Security profitability stabilize as channel inventories and housing activity change.
- How elevated inventory converts to sales and cash, and whether operating cash flow improves from the nine-month level.
- How the company will refinance or repay the $600m September 2023 notes and manage variable-rate commercial paper and other debt.
- Whether pricing and productivity can offset inflation, restructuring costs, and any further tradename or goodwill impairment.