Fortune Brands Home & Security, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; compared with Q1 2020 unless otherwise noted. The filing is under Fortune Brands Home & Security, Inc., the issuer name at the time; the request metadata uses Fortune Brands Innovations, Inc.
Business context and results
The company sells branded home and security products for repair and remodeling, new construction, and security applications. Its segments were Plumbing, Outdoors & Security, and Cabinets. Results include Larson, acquired in December 2020, and Flo, consolidated beginning January 2021.
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $1,771.0 million | $1,402.7 million | +26.3% |
| Gross profit | $644.1 million | $493.2 million | +30.6% |
| Gross margin | 36.4% | 35.2% | +1.2 percentage points |
| Operating income | $248.4 million | $155.0 million | +60.3% |
| Operating margin | 14.0% | 11.1% | +2.9 percentage points |
| Net income attributable to Fortune Brands | $177.8 million | $109.1 million | +63.0% |
| Diluted EPS | $1.26 | $0.77 | +63.6% |
| Cash used in operating activities | $69.2 million | $13.8 million | Greater use of $55.4 million |
Segment performance and key changes
- Plumbing: Sales of $621.6 million, up 32.5%; operating income of $147.9 million, up 41.5%.
- Outdoors & Security: Sales of $461.5 million, up 47.1%; operating income of $52.8 million, up 67.6%. Larson contributed $101.2 million of the sales increase.
- Cabinets: Sales of $687.9 million, up 11.0%; operating income of $72.6 million, up 66.1%, including the absence of a $9.5 million prior-year impairment charge.
Management attributed consolidated sales growth to higher volume, Larson, favorable mix, price increases, and about $12 million of favorable foreign exchange, partly offset by higher promotion and rebate costs. Operating income benefited from higher sales, productivity, the Larson acquisition, and the absence of the prior-year impairment; higher employee, freight, advertising, restructuring, and amortization costs partly offset these gains.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $356.1 million at March 31, 2021, down from $419.1 million at December 31, 2020; $302.2 million was held at non-U.S. subsidiaries.
- Total debt was $2,682.8 million, versus $2,572.2 million at year-end, including $1.8 billion of senior notes and $895.0 million drawn on the $1.25 billion revolving facility. The company reported compliance with facility covenants.
- Current assets were $2,345.9 million and current liabilities were $1,197.0 million. Inventories rose to $958.4 million from $867.2 million.
- Q1 investing cash use was $18.5 million, including $25.4 million of capital expenditures; financing provided $22.8 million. Cash declined by $63.2 million.
- Operating cash use reflected working-capital needs, higher inventory associated with sales growth, and payment of prior-year customer-program and employee incentive accruals. Management noted that the business typically uses operating cash in Q1 and generates most operating cash flow in Q3 and Q4.
- The company repurchased 0.6 million shares for $54.1 million and paid $36.0 million in dividends. Remaining repurchase authorization was approximately $408.4 million.
Outlook, risks, and unusual items
- No specific numerical earnings or revenue guidance was provided in the supplied filing text. Management expected the home-products market to remain supported by increased consumer focus on homes, housing underbuilding, and more flexible work arrangements.
- Management cited dependence on North American home improvement, repair-and-remodel, and new-construction activity; commodity and transportation cost volatility, inflation, supply availability, customer and supplier concentration, competition, COVID-19 uncertainty, acquisition integration, and potential goodwill or intangible-asset impairment as risks.
- The Larson acquisition purchase price was approximately $717.5 million, financed with borrowings. Purchase-price allocation remained provisional. Flo’s consolidation followed expiration of minority shareholders’ participating rights; its Q1 sales and operating income were not material. The company recorded a $4.5 million non-cash loss on remeasurement of its Flo investment before consolidation; Q1 2020 included a $6.6 million non-cash gain.
- Q1 2021 restructuring charges were $7.6 million, primarily severance related to manufacturing-facility relocations in Cabinets and Outdoors & Security. The effective tax rate was 20.5%, versus 21.5%, favorably affected by changes in uncertain tax positions and share-based compensation.
- Management said pending litigation and environmental remediation were not expected to have a material adverse effect; litigation outcomes and environmental exposures remain uncertain. Four Cabinets tradenames had year-end fair values less than 30% above carrying values, creating potential impairment sensitivity.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter; integration reviews for Larson and Flo were ongoing.
Investor verification points
- Separate organic growth from the Larson acquisition, Flo consolidation, foreign exchange, pricing, and volume effects.
- Track whether inventory and other working-capital requirements normalize and whether operating cash flow follows the company’s stated seasonal pattern.
- Monitor revolving-facility borrowings, total debt, covenant headroom, and the cost and availability of refinancing.
- Confirm the final Larson purchase-price allocation and assess acquisition integration and expected synergies.
- Assess commodity, freight, labor, inflation, and pricing trends and their effect on segment margins.
- Review Cabinets tradename impairment headroom and developments in litigation and environmental remediation.