Fortune Brands Home & Security, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company sells branded products for home repair, remodeling, new construction and security through Plumbing, Outdoors & Security, and Cabinets segments. Interim financial statements are unaudited.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $1,986.3 million | $1,652.1 million | $5,693.4 million | $4,430.6 million |
| Operating income | $286.6 million | $240.2 million | $829.9 million | $568.2 million |
| Net income attributable to Fortune Brands | $202.1 million | $164.6 million | $597.1 million | $389.5 million |
| Diluted EPS | $1.45 | $1.17 | $4.26 | $2.78 |
| Operating cash flow | Not separately provided | Not separately provided | $430.8 million | $506.8 million |
Q3 sales rose 20.2% and operating income rose 19.3%; nine-month sales rose 28.5% and operating income rose 46.1%. Approximate operating margin was 14.4% in Q3 versus 14.5% a year earlier, and 14.6% for the nine months versus 12.8%. Approximate gross margin was 35.6% in Q3 versus 35.1%, and 36.1% year to date versus 35.1%.
At September 30, cash and cash equivalents were $460.7 million; current assets were $2,726.0 million and current liabilities $1,528.8 million, a current ratio of approximately 1.78. Long-term debt was $2,629.1 million, including $1.8 billion of senior notes and $840.0 million drawn on a $1.25 billion revolving facility. Cash less debt implies net debt of approximately $2,168.4 million. The company reported compliance with credit-facility covenants.
Nine-month operating cash flow declined $76.0 million year over year, principally from higher receivables and planned inventory buildup to address supply-chain uncertainty, partly offset by higher payables and net income. Capital expenditures were $113.0 million; dividends paid were $107.9 million and treasury-stock purchases were $252.9 million in the cash flow statement.
Material changes and drivers
- Growth reflected higher sales volume, pricing, favorable mix and foreign exchange, as well as acquisitions. Larson contributed $316.0 million of nine-month sales and $99.1 million in Q3; the acquisition was completed in December 2020 for approximately $717.5 million.
- Flo began consolidation in January 2021 after minority shareholders’ participating rights expired. Its reported sales and operating income were not material; the company recorded a $4.5 million non-cash remeasurement loss before consolidation.
- Higher commodity, freight, labor and tariff costs, along with transportation and other operating expenses, partially offset pricing and productivity benefits. Cabinets Q3 operating income fell 18.1% to $67.2 million despite 9.4% sales growth, primarily reflecting freight, commodity inflation and restructuring costs.
- Year-to-date restructuring charges were $11.5 million, largely related to severance and manufacturing-facility relocations. There were no 2021 asset impairment charges, compared with $22.5 million in 2020.
Outlook, risks and contingencies
The filing gives no specific quantified earnings or revenue guidance. Management described long-term housing-market opportunities, including repair and remodeling demand, housing supply and aging housing stock. It also said near-term results may be affected by supply-chain, labor and freight constraints, inflation, foreign exchange and tariffs; the company was pursuing productivity initiatives and price increases to mitigate these pressures. Management said cash, operating cash flow and borrowing availability should support operations, investment, debt service and shareholder returns, while noting business seasonality and that cash flow is typically strongest in the third and fourth quarters.
Risks identified include dependence on North American housing activity and key customers and suppliers; commodity and energy availability and price volatility; supply-chain disruption and labor constraints; COVID-19 uncertainty; acquisition integration; potential goodwill or intangible-asset impairment; and access to capital markets. Litigation and environmental remediation exposures were disclosed; management assessed material litigation loss as remote and did not expect current environmental compliance to materially affect results or financial condition. Four Cabinets tradenames had fair values less than 30% above carrying values at year-end 2020, leaving potential for future impairment if estimates weaken.
Important facts for investors to verify
- Whether pricing and productivity continue to offset inflation, freight, labor and tariff costs, particularly in Cabinets.
- Whether working-capital investment—especially the inventory increase—converts into cash as supply conditions and demand evolve.
- Debt levels, variable-rate revolver exposure and the company’s ability to meet obligations while funding capital spending, dividends and repurchases.
- Larson purchase-price allocation remains provisional; verify any finalized valuation changes and acquisition-related amortization effects.
- Future performance of goodwill and tradenames, including the Cabinets assets with comparatively limited valuation headroom.