Business context and reporting period
Fortune Brands Home & Security, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The filing describes a branded home and security products company with Cabinets, Plumbing, Doors and Security segments. The company’s business name in this filing differs from the “Fortune Brands Innovations, Inc.” name in the request metadata.
Financial performance
Amounts are in millions, except per-share data. Comparisons are with the corresponding 2015 period.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $1,279.0 | $1,238.8 | $3,683.3 | $3,354.7 |
| Operating income | $183.1 | $160.3 | $466.3 | $355.8 |
| Income from continuing operations, net of tax | $121.9 | $100.0 | $308.0 | $218.9 |
| Net income attributable to Fortune Brands | $123.4 | $107.5 | $309.6 | $227.2 |
| Diluted EPS, continuing operations | $0.77 | $0.61 | $1.95 | $1.34 |
| Diluted EPS, total | $0.78 | $0.66 | $1.96 | $1.39 |
- Q3 sales rose 3.2%; operating income rose 14.2%. Nine-month sales rose 9.8%; operating income rose 31.1%. Calculated operating margins were approximately 14.3% versus 12.9% in Q3 and 12.7% versus 10.6% for nine months.
- For nine months, cost of products sold was $2,352.8 million and SG&A was $831.4 million. Gross margin, calculated from reported sales and product costs, was approximately 36.1%, compared with 34.6% in 2015.
- Nine-month operating cash flow was $380.6 million, up from $277.8 million. Capital expenditures were $106.1 million, implying approximate operating cash flow less capital expenditures of $274.5 million. Investing cash outflow was $334.3 million; financing cash outflow was $9.5 million. Cash increased $40.1 million to $278.6 million.
- At September 30, cash was $278.6 million and long-term debt was $1,585.8 million; net debt was approximately $1,307.2 million. Current assets were $1,539.7 million and current liabilities $776.7 million, a current ratio of approximately 1.98. The company reported compliance with credit-facility covenants.
Material changes versus prior comparable periods
- Growth reflected acquisitions, higher sales volume as U.S. home-product markets improved, price increases and favorable mix; productivity also supported operating income. Foreign exchange was a headwind, including approximately $23 million to nine-month sales and $5 million to Q3 sales.
- Nine-month Cabinets sales increased 14.8%, partly reflecting Norcraft; Plumbing sales increased 4.9%, with Riobel, ROHL and TCL/Perrin & Rowe contributing. Q3 Cabinets sales were essentially flat, while Plumbing, Doors and Security sales increased.
- Interest expense rose to $37.5 million for nine months from $20.5 million, primarily due to higher average borrowings and interest rates. The nine-month effective tax rate declined to 28.2% from 34.0%; 2016 benefited in part from adoption of share-based-payment accounting, while 2015 had specified tax and acquisition-related costs.
- Waterloo is presented as discontinued operations. Its contribution was $1.5 million after tax in the first nine months of 2016 versus $8.6 million in 2015; the prior period included Waterloo operating results and the sale-related tax effect.
Outlook, management commentary and risks
- No specific company-wide revenue or earnings guidance is provided. Management described a continuing, multi-year U.S. housing-market recovery and expects operating leverage and strategic investment to support profitable organic growth, while also citing acquisitions, joint ventures, dividends and repurchases as capital-allocation options.
- Management estimated possible Q4 2016 defined-benefit actuarial losses of $0.15–$0.25 per share, depending on year-end discount rates and pension-asset returns. A 25-basis-point discount-rate change affects plan liabilities by approximately $25 million.
- In 2016 the company acquired Riobel for $88.4 million and ROHL/TCL for approximately $166 million, funded with cash and credit-facility borrowings. It also established a Global Plumbing Group. These transactions increased Plumbing exposure and contributed to higher goodwill and intangible assets.
- The company repurchased 7.6 million shares for $362.7 million during the first nine months; approximately $285 million remained authorized at September 30. The quarterly dividend was $0.16 per share, and future dividends are subject to board review.
- Other risks include dependence on North American housing and remodeling activity, raw-material and transportation costs, competition, customer and supplier concentration, acquisition integration, foreign exchange, pension costs, and international, tax and environmental matters. The company stated pending litigation and environmental matters were not expected to have a material adverse effect, while noting outcomes and remediation estimates are uncertain.
Important facts for investors to verify
- Separate acquisition-driven growth from organic growth, particularly in Cabinets and Plumbing, and assess whether Q3 Cabinets’ flat sales persist.
- Check the sustainability of margin improvement and the effects of pricing, productivity, advertising, rebates, employee costs and foreign exchange.
- Review debt growth, variable-rate exposure, covenant headroom and cash availability, including the fact that $251.3 million of cash was held at non-U.S. subsidiaries whose repatriation could have tax consequences.
- Assess the Q4 pension remeasurement against management’s estimated per-share loss range and the sensitivity to discount rates and asset returns.
- Confirm the acquired businesses’ integration, purchase accounting and performance, and monitor goodwill and intangible-asset balances.
- Consider the impact of discontinued operations, the share repurchase program and tax-related benefits when evaluating recurring earnings and per-share growth.