Fortune Brands Home & Security, Inc. — Q1 2017 10-Q
Reporting period: Three months ended March 31, 2017. The filing describes a branded home and security products business spanning Cabinets, Plumbing, Doors and Security. Dollar amounts below are in millions unless stated otherwise.
Financial performance
- Sales: $1,186.8, up 7.3% from $1,106.5. Growth reflected higher volume, improving U.S. home-products markets, 2016 Plumbing acquisitions and price increases; higher rebates and unfavorable foreign exchange partly offset these factors.
- Profit: Operating income was $114.9, up 20.3%; net income was $77.4, up 26.9%. Diluted EPS was $0.50 versus $0.38.
- Margins: Gross margin was approximately 35.1% versus 34.1%; operating margin was approximately 9.7% versus 8.6%. The filing does not present these percentages directly.
- Segment results: Cabinets sales rose 4.3% and operating income 31.7%; Plumbing sales rose 11.8% but operating income fell 1.8%; Doors sales rose 8.4% and operating income 95.2%; Security sales rose 7.3% and operating income 80.4%.
- Cash flow: Operating cash flow was negative $17.9 versus negative $6.1, primarily due to a larger working-capital build. Capital expenditures were $29.5; investing cash flow was negative $29.6. Financing cash flow was positive $6.0, and cash declined $40.7 to $210.8. The company says cash generation is seasonal, with most operating cash flow typically generated in the third and fourth quarters.
- Liquidity and debt: Cash was $210.8, including $168.7 held by non-U.S. subsidiaries. Long-term debt was $1,491.5, comprising $600.0 drawn on the revolving facility and $891.5 carrying value of senior notes. The $1.25 billion revolver matures in June 2021; the company reported covenant compliance. Current assets were $1,456.1 and current liabilities $707.8.
- Capital returns: The company repurchased 0.5 million shares for $27.3 and paid $27.6 in dividends. The quarterly dividend had been raised 13% to $0.18 per share in December 2016. Remaining repurchase authorization was approximately $496 million.
Changes and unusual items
- Operating income growth was driven by sales and productivity, partly offset by rebates, employee costs and advertising. Plumbing profitability faced higher advertising and severance costs and $1.0 of acquisition-related inventory step-up amortization.
- In January 2017, the company committed to sell a cloud-based inspection and safety compliance software asset group in Security and recorded a $3.2 impairment charge.
- Restructuring charges were $2.2, primarily severance in Plumbing and Security, compared with $5.6 in Q1 2016. Security’s year-over-year operating-income improvement also reflected lower costs following completion of a 2016 facility relocation.
- Plumbing sales benefited from the 2016 acquisitions of Riobel, ROHL and Perrin & Rowe. Their Q1 2017 sales and operating income were described as not material to the company.
- The 2016 comparative statements reflect early adoption of ASU 2016-09, including a $5.3 excess share-based compensation tax benefit reclassified into income taxes; the adoption increased previously reported Q1 2016 EPS by $0.03. The 2016 cash-flow statement also reflects an immaterial debt cash-flow classification correction with no effect on total financing cash flow.
Outlook, risks and contingencies
- No specific full-year revenue or earnings guidance is provided. Management expects continued housing-market recovery and believes operating leverage, strategic investment and capacity initiatives can support profitable organic growth. It also cites potential acquisitions, joint ventures, dividends and repurchases as capital-allocation options.
- Management identifies dependence on North American repair/remodel and new-construction activity, economic conditions, customer and supplier concentration, raw-material and transportation costs, competition, acquisitions and integration, foreign exchange, pension costs, and legal, tax and regulatory matters as risks. The company says it seeks to offset cost pressures through productivity and pricing.
- Two tradenames in Cabinets and Doors had fair values less than 10% above carrying value at year-end 2016, with a combined carrying value of $168; weaker markets, customer actions or valuation assumptions could lead to impairment. No interim goodwill or indefinite-lived tradename impairment test was required in Q1.
- Pending ordinary-course litigation and environmental remediation are disclosed; management does not expect them to materially affect results, cash flows or financial condition, while noting outcomes and remediation estimates involve uncertainty. Expected 2017 pension contributions were approximately $10.
- The company was assessing the impact of the forthcoming revenue-recognition standard, with control of goods, separate performance obligations and rights of return identified as focus areas. It planned to complete its impact assessment in Q3 2017 and finalize adoption planning by year-end.
Important facts for investors to verify
- How much of Plumbing’s sales growth and future profitability depends on the acquired brands, and whether acquisition-related costs continue.
- Whether working capital reverses as the year progresses, given negative Q1 operating cash flow and stated seasonality.
- Revolver utilization, variable-rate exposure and liquidity available after considering any facility restrictions or other commitments.
- Progress and economics of the planned software-asset sale, and the valuation cushion for the identified tradenames.
- Whether housing-market demand, pricing, rebates, foreign exchange and raw-material costs support the company’s stated growth and margin expectations.