Fortune Brands Home & Security, Inc. — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016; filed February 28, 2017. This is an annual report, not a standalone fourth-quarter filing. The registrant named in the filing is Fortune Brands Home & Security, Inc.
Business context
The company sells branded home and security products through four segments: Cabinets, Plumbing, Doors and Security. Its results are substantially tied to North American housing, repair-and-remodel and new-construction activity. The United States generated 85% of 2016 sales; international markets generated approximately 15%. The Home Depot and Lowe’s represented 13% and 14% of consolidated sales, respectively.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $4,984.9 million | $4,579.4 million |
| Operating income | $632.7 million | $496.1 million |
| Operating margin | 12.7% | 10.8% |
| Continuing-operations net income | $412.4 million | $306.5 million |
| Diluted EPS, continuing operations | $2.61 | $1.88 |
| Net income attributable to Fortune Brands | $413.2 million | $315.0 million |
| Cash provided by operating activities | $650.5 million | $429.2 million |
| Capital expenditures | $149.3 million | $128.5 million |
Gross profit was $1,804.6 million, a 36.2% gross margin. Operating cash flow less capital expenditures was $501.2 million. Year-end cash was $251.5 million, total debt $1,431.1 million and net debt $1,179.6 million. The company reported $710.0 million available under credit facilities and was in compliance with facility covenants. Current assets were $1,445.2 million and current liabilities $842.8 million.
2016 segment sales and operating income were: Cabinets $2,397.8 million and $257.8 million; Plumbing $1,534.4 million and $326.3 million; Doors $473.0 million and $61.9 million; Security $579.7 million and $66.6 million.
Material changes versus prior year
- Sales rose 8.9% and operating income rose 27.5%; all four segments reported higher sales and operating income.
- Management attributed growth to improved U.S. housing and remodeling markets, acquisitions, higher volume, pricing and productivity. Foreign exchange reduced sales by about $27 million and operating income by about $6 million.
- Continuing-operations earnings benefited from higher operating income and a lower effective tax rate, 29.2% versus 33.4%. The rate included a $27.8 million benefit from early adoption of share-based payment accounting guidance.
- Interest expense increased to $49.1 million from $31.9 million, reflecting higher average borrowings and rates. Year-end debt increased $262.4 million from 2015.
- The company acquired Riobel for $94.6 million and ROHL/Perrin & Rowe for approximately $166 million, expanding its plumbing portfolio. It also repurchased approximately 8.8 million shares for $424.5 million.
Outlook, risks and unusual items
- No specific 2017 revenue or EPS guidance is provided in the supplied filing text. Management expects continued profitable organic growth if housing markets improve and expects 2017 capital spending of approximately $140 million and pension contributions of approximately $10 million.
- Management described the U.S. housing recovery as ongoing and dependent on consumer confidence, employment, home prices, mortgage rates and credit availability. First-quarter sales are typically seasonally lower; operating cash flow is generally stronger in the second half.
- Key risks include housing-market weakness, intense price competition, commodity and energy cost volatility, foreign exchange, dependence on distributors and major retailers, acquisition integration, supply interruptions, litigation, product liability and cybersecurity. The company also flagged international sourcing and regulatory/tariff uncertainty.
- Defined-benefit pension plans had $577.7 million of assets against a $791.7 million projected benefit obligation, a $214.0 million deficit. Benefits under the defined-benefit plans were frozen effective December 31, 2016.
- There were 11 unresolved environmental PRP matters and $1.0 million of environmental accruals. Management considered material loss from routine litigation remote. Two tradenames, with a combined carrying value of $168 million, had fair values less than 10% above carrying value, creating impairment sensitivity.
- Restructuring and other charges totaled $19.3 million before tax, primarily related to severance and a Security facility relocation. Discontinued operations contributed $0.8 million of income in 2016; 2015 included $9.0 million, including the Waterloo sale-related gain.
Important facts for investors to verify
- Whether housing-market growth, volume and pricing can offset inflation, sales rebates and foreign-exchange headwinds.
- Post-acquisition performance and integration of the 2016 plumbing businesses, and the durability of earnings growth excluding the $27.8 million tax benefit.
- Debt and interest-cost trajectory after acquisitions and substantial share repurchases; confirm availability and terms under the revolving credit facility.
- Progress in pension funding and sensitivity of pension obligations to discount rates and asset returns.
- Customer concentration, especially the combined 27% of sales to The Home Depot and Lowe’s, and the impairment headroom for the two closely valued tradenames.