Fortune Brands Home & Security, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; unaudited. The filing issuer’s name at the time was Fortune Brands Home & Security, Inc. (the company identified in the request as Fortune Brands Innovations).
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2016 period.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1,348.6 (+5.4%) | $1,279.0 | $3,900.8 (+5.9%) | $3,683.3 |
| Operating income | $201.8 (+10.2%) | $183.1 | $529.1 (+13.5%) | $466.3 |
| Operating margin | 15.0% | 14.3% | 13.6% | 12.7% |
| Net income attributable to Fortune Brands | $129.5 | $123.4 | $344.6 | $309.6 |
| Diluted EPS | $0.83 | $0.78 | $2.20 | $1.96 |
| Operating cash flow | Not provided separately | Not provided separately | $352.6 | $380.6 |
- Nine-month gross margin was approximately 36.9%, versus 36.1% in 2016; Q3 gross margin was approximately 37.6%, versus 37.4%.
- Nine-month capital expenditures were $95.5; operating cash flow less capital expenditures was approximately $257.1. This is a simple calculation, not a company-reported non-GAAP measure.
- At September 30, cash was $277.1, current assets $1,598.3 and current liabilities $852.5 (current ratio approximately 1.88). Long-term debt was $1,462.2, comprising $570.0 outstanding under the revolving facility and $892.2 in senior notes. Net debt after cash was approximately $1,185.1.
Changes and operating drivers
- Plumbing was the largest growth contributor: nine-month sales rose 13.0% and operating income 11.6%; Q3 sales rose 12.1% and operating income 15.8%. Acquisitions, market demand and international sales contributed.
- For the first nine months, operating income increased in all segments. In Q3, Cabinets operating income fell 6.8% despite 2.0% sales growth; the company cited higher employee and healthcare costs. Doors and Security Q3 operating income increased 12.6% and 21.0%, respectively.
- Management attributed consolidated sales growth to higher volume, product introductions, pricing and Plumbing acquisitions, partly offset by unfavorable mix and promotions or rebates. Productivity supported operating income, while raw-material, employee-related and advertising costs were offsets.
- Operating cash flow declined $28.0 year over year, primarily due to a higher working-capital build, including inventory. Investing cash use fell to $113.2 from $334.3, largely because 2016 acquisition spending was higher. Financing cash use was $223.5, including $173.7 of share repurchases and $82.7 of dividends.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided in the supplied filing text. Management described the U.S. home-products market as continuing its recovery and cited consumer confidence, employment, home prices, mortgage rates and credit availability as relevant factors. It expects organic growth investment and operating leverage to support growth over time.
- Management identified exposure to housing and repair-and-remodel demand, economic conditions, acquisitions and integration, competition, key customers and suppliers, raw-material and supply-chain costs, defined-benefit costs, regulation and international business. The filing reports no material changes to the risk factors in the 2016 Form 10-K.
- 2017 unusual items included a $3.2 asset impairment and $2.4 pretax loss associated with the Field ID product-line sale, plus $3.5 of restructuring charges. Nine-month discontinued-operations loss was $2.6, primarily related to earlier business sales. Restructuring charges were lower than the prior-year nine-month amount of $12.4.
- Shaws was acquired in July 2017; its Q3 sales and operating income were not material. In October 2017, after quarter-end, the company acquired Victoria + Albert; management said it would not materially affect sales or operating income. The company also disclosed ordinary-course litigation and environmental remediation, which it did not expect to have a material adverse effect, while noting estimation uncertainties.
- The revolving credit facility matures in June 2021; the company said it was in covenant compliance at quarter-end. It expected approximately $25 of 2017 pension contributions, of which $22 had been paid by September 30. Cash held at non-U.S. subsidiaries was $257.9, and repatriation could have tax consequences.
Most important facts for investors to verify
- Whether sales and margin growth—particularly in Plumbing—persist without relying on acquisition contributions, and whether Q3 Cabinets cost pressure continues.
- Working-capital and inventory trends and the seasonal pattern of cash generation; nine-month operating cash flow was below the prior-year level.
- Debt, interest-rate exposure, acquisition funding and returns, and the pace of share repurchases and dividends.
- Potential sensitivity of goodwill and intangible asset values to housing demand and other assumptions; management noted certain tradenames had limited fair-value headroom and planned annual impairment testing in Q4.
- Future tax, pension, litigation and environmental developments, and the effect of adopting new accounting standards. Management expected no material effect from the revenue standard’s identified considerations.