Business context and reporting period
Fortune Brands Home & Security, Inc. (the registrant named in this filing; not “Fortune Brands Innovations, Inc.”) filed this Form 10-K for the fiscal year ended December 31, 2015. The filing includes fourth-quarter results, but reports primarily on the full fiscal year. Its four segments are Cabinets, Plumbing, Doors and Security; products include cabinetry, faucets, entry doors, locks and safes. About 85% of 2015 sales were in the U.S.; two home-center customers each represented 14% of sales.
Financial results and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net sales | $4,579.4 million | $4,013.6 million |
| Operating income | $496.1 million; 10.8% margin | $403.5 million; 10.1% margin |
| Continuing-operations net income | $306.5 million | $273.6 million |
| Diluted EPS, continuing operations | $1.88 | $1.64 |
| Operating cash flow | $411.1 million | $253.7 million |
| Capital expenditures | $128.5 million | $127.5 million |
Gross profit was $1,581.9 million, or about 34.5% of sales. Operating cash flow less capital expenditures was approximately $282.6 million. Net income attributable to Fortune Brands was $315.0 million, including $9.0 million of after-tax income from discontinued operations; in 2014, a $114.3 million discontinued-operations loss depressed reported net income.
At year-end, cash and equivalents were $238.5 million, total debt was approximately $1,172.4 million (including bank notes), and reported net debt was $933.9 million. The current ratio was approximately 1.9. The company had $975 million available under its revolving facility; no revolver borrowings were outstanding. It reported compliance with debt covenants. The $900 million senior-note issuance comprised $400 million due 2020 at 3% and $500 million due 2025 at 4%.
Fourth-quarter snapshot
Q4 2015 sales were $1,224.7 million, operating income $140.3 million, continuing-operations net income $87.6 million and diluted continuing-operations EPS $0.54. Comparable Q4 2014 amounts were $1,039.6 million, $79.2 million, $56.5 million and $0.35, respectively.
Material changes versus the prior comparable period
- Full-year sales rose 14.1% and operating income rose 22.9%; diluted continuing-operations EPS increased from $1.64 to $1.88.
- Growth reflected improving U.S. housing and repair-and-remodel activity, pricing, productivity and acquisitions. Acquisitions contributed approximately $369 million of 2015 sales, including Norcraft, SentrySafe and Anaheim. Foreign exchange reduced sales by about $66 million and operating income by about $16 million.
- All segments increased sales. Cabinets grew 21.6% to $2,173.4 million, largely reflecting Norcraft; Plumbing grew 6.3%, Doors 6.1% and Security 14.8%. Segment operating income rose in each segment.
- Operating cash flow improved by $157.4 million. Investing cash outflow rose to $766.6 million, primarily due to the $648.6 million Norcraft acquisition. Debt increased following the acquisition and 2015 financing activity.
- Interest expense rose to $31.9 million from $10.4 million, primarily due to higher average borrowings and rates. The effective tax rate increased to 33.4% from 30.2%.
Outlook, commentary, risks and unusual items
Management described continued recovery in U.S. housing markets and cited 2015 double-digit growth in new-home construction and approximately 5% growth in repair-and-remodel spending. It expects capital spending of approximately $145 million in 2016 and pension contributions of approximately $1 million. The filing provides no specific 2016 sales or earnings guidance. Management’s strategy emphasizes organic growth, capacity and productivity investment, acquisitions, dividends and share repurchases.
- In May 2015, the company acquired Norcraft for $648.6 million. Reported 2015 results included $15.1 million of Norcraft transaction costs.
- Waterloo was sold in September 2015 for approximately $14 million cash. The sale produced a $16.7 million pretax loss, offset by an estimated $26.5 million tax benefit; discontinued operations recorded a $9.0 million after-tax gain.
- Restructuring and other charges totaled $22.7 million pretax, mainly facility relocations and severance. There were no 2015 goodwill or indefinite-lived intangible impairment charges.
- The board raised the quarterly dividend 14% to $0.16 per share in December 2015. A subsequent February 2016 authorization permits up to $400 million of additional repurchases through February 2018.
- Principal risks include housing-market weakness, competitive pricing and private labels, commodity and energy costs, currency movements, acquisition integration, dependence on suppliers and distribution channels, customer concentration, pensions, regulation, litigation, environmental obligations and cybersecurity. Ten environmental PRP matters remained unresolved; related accruals were $2.8 million. Management considered material litigation loss remote.
- Management and the auditor concluded internal control over financial reporting was effective, but Norcraft—representing 17% of assets and 6% of revenue—was excluded from their 2015 control assessment and audit because it was acquired during the year.
Important facts for investors to verify
- Separate organic growth and pricing from acquired sales, and assess the durability of housing-market recovery and segment margin improvement.
- Review Norcraft integration, realization of expected benefits and the final purchase-price allocation, which was provisional.
- Track leverage, interest costs, covenant headroom, debt maturities and the use of cash for acquisitions, dividends and repurchases.
- Assess foreign-exchange and commodity exposure, along with the effect of customer concentration and sales rebates.
- Monitor pension funding and actuarial assumptions, uncertain tax positions, environmental matters, and the planned integration of Norcraft into financial controls.