Fortune Brands Home & Security, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; unaudited. The company reported three segments: Water Innovations (formerly Plumbing), Outdoors & Security, and Cabinets. Unless stated otherwise, amounts are in millions of dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $2,111.0 | $1,936.1 | $4,028.3 | $3,707.1 |
| Operating income | $284.1 | $294.9 | $537.5 | $543.3 |
| Net income | $192.0 | $217.2 | $372.9 | $395.0 |
| Diluted EPS | $1.46 | $1.55 | $2.80 | $2.81 |
| Operating margin | 13.5% | 15.2% | 13.3% | 14.7% |
- Q2 sales rose 9.0% year over year, while operating income fell 3.7% and net income fell 11.6%. Six-month sales rose 8.7%, while operating income fell 1.1% and net income fell 5.6%.
- Q2 cost of products sold was $1,347.9; gross margin was approximately 36.1%, versus 36.5% a year earlier. Six-month gross margin was approximately 35.8%, versus 36.4%.
- Interest expense increased to $30.5 in Q2 from $21.2, and to $52.3 for the six months from $42.6. The six-month effective tax rate was 23.4%, versus 20.8%.
- Segment sales in Q2: Water Innovations $650.0, down 6.4%; Outdoors & Security $605.4, up 13.1%; Cabinets $855.6, up 21.2%. Q2 segment operating income declined in Water Innovations and Cabinets, but increased in Outdoors & Security.
Cash flow, balance sheet and capital allocation
- Six-month operating cash flow was $41.9, down from $262.7. Capital expenditures were $115.6, making operating cash flow less capital expenditures negative $73.7, versus positive $196.9 a year earlier. Working-capital use, particularly inventory and receivables, was a major factor.
- Cash and cash equivalents were $360.6 at June 30, 2022, down from $471.5 at December 31, 2021. Inventories increased to $1,446.7 from $1,193.8.
- Total debt was $3,357.9, compared with $2,709.8 at year-end; reported long-term debt was $3,357.9, with no short-term debt. Cash less total debt implies net debt of approximately $2,997.3. The company remained in compliance with revolving-credit covenants.
- In March, the company issued $900 of senior notes: $450 at 4.00% due 2032 and $450 at 4.50% due 2052. At June 30, it had $561.4 of commercial paper and $125.0 outstanding on its $1.25 billion revolving facility. $600 of notes mature in September 2023.
- The company repurchased 6.2 million shares for $505.0 and paid $73.6 in dividends during the first half. Remaining repurchase authorization was approximately $660 at June 30.
Changes, outlook and risks
- Sales growth reflected pricing across segments, higher Cabinets volume, and $11.4 of first-half sales from the Solar Innovations acquisition. Higher raw-material, labor, freight, transportation and headcount costs, inventory-related charges, and the Cabinets impairment weighed on profitability.
- Water Innovations was affected by COVID-related shutdowns in China and foreign exchange. Management cited inflation, rising interest rates, supply-chain, labor and freight constraints, and tariffs; it said pricing and productivity efforts were intended to offset cost pressures.
- Management said inflation and higher mortgage rates had begun slowing single-family and existing-home sales, but viewed underlying housing-market drivers and the long-term outlook for its products as favorable. The filing provides no specific financial guidance.
- The company recorded a $26.0 impairment of an indefinite-lived Cabinets tradename after production changes prompted lower revenue-growth forecasts. Its estimated fair value was $59.0, equal to carrying value; further impairment could result if estimates decline.
- In January, the company acquired Solar Innovations for $61.6 net of cash acquired. On April 28, it announced plans to pursue a tax-free spin-off of MasterBrand Cabinets into a separate public company, targeting completion approximately 12 months after announcement, subject to approvals and other conditions. Separation costs, lost synergies, execution and tax treatment are risks.
- Management described ordinary-course litigation and environmental remediation matters as not expected to have a material adverse effect; it considered material litigation loss remote. Interim results may not indicate full-year results, and operating cash flow is typically weighted toward the third and fourth quarters.
Important facts for investors to verify
- Progress, timing, costs, approvals and expected benefits of the proposed Cabinets spin-off, including tax-free treatment and potential lost synergies.
- Whether inventory and receivables convert to cash and operating cash flow improves in the seasonally stronger second half.
- Debt levels, interest costs, commercial-paper and revolver availability, and the September 2023 note maturity.
- Whether pricing and productivity can offset persistent input, freight and labor costs without further weakening volumes or margins.
- Assumptions underlying the Cabinets tradename valuation and any subsequent impairment indicators.