Business context and reporting period
Fortune Brands Home & Security, Inc. (the name used in this filing; now identified in the request as Fortune Brands Innovations) filed this unaudited Form 10-Q for the quarter ended March 31, 2020. The company sells branded products for home repair, remodeling, new construction and security through its Cabinets, Plumbing, and Doors & Security segments. Interim results may not indicate full-year performance.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $1,402.7 million | $1,327.9 million; +5.6% |
| Operating income | $155.0 million | $135.6 million; +14.3% |
| Net income attributable to Fortune Brands | $109.1 million | $84.7 million |
| Diluted EPS | $0.77 | $0.60 |
| Gross margin | 35.2% (calculated) | 34.6% (calculated) |
| Operating margin | 11.1% (calculated) | 10.2% (calculated) |
| Operating cash flow | $(13.8) million | $(89.7) million |
| Cash and cash equivalents at March 31 | $359.7 million | $387.9 million at Dec. 31, 2019 |
| Total debt at March 31 | $2,435.1 million | $2,184.3 million at Dec. 31, 2019 |
Net sales grew across all three segments: Cabinets +8.2%, Plumbing +2.3%, and Doors & Security +5.9%. Plumbing and Doors & Security operating income rose 17.2% and 40.6%, respectively; Cabinets operating income increased 1.2%. The effective tax rate declined to 21.5% from 25.3%, helped by a share-based compensation benefit. Comprehensive income was $58.2 million versus $92.8 million, largely reflecting current-period other comprehensive losses, including currency translation.
Operating cash use improved year over year, principally because inventory declined rather than increased as in the prior-year quarter, alongside stronger-than-planned sales. Investing cash use was $77.0 million, including the Flo investment; financing provided $77.3 million. The company paid $33.5 million in dividends and repurchased 2.45 million shares for $150.0 million. Current assets were $1,914.0 million and current liabilities $1,246.1 million at quarter-end.
Material changes and unusual items
- Operating income increased despite a $9.5 million Cabinets tradename impairment, higher tariffs and rebates, and COVID-related production interruptions. Productivity improvements and sales growth supported results.
- Other income included a $6.6 million gain from remeasuring the company’s Flo Technologies investment before applying equity-method accounting. Fortune Brands owned approximately 75% of Flo at quarter-end, but did not consolidate it because minority shareholders held substantive participating rights. Those rights were expected to expire in Q1 2021; the remaining shares were scheduled for purchase in Q1 2022 at a price based on Flo’s 2021 sales and adjusted EBIT.
- Long-term debt included $250 million borrowed under the $1.25 billion revolving facility, versus no borrowings at year-end. The company had $400 million of 3.0% senior notes maturing in June 2020 and expected to repay or refinance them.
- In April 2020, after quarter-end, the company entered a 364-day, $400 million revolving credit facility as a precautionary liquidity measure amid COVID-19 uncertainty.
Outlook, risks and contingencies
Management said COVID-19 had not significantly affected first-quarter results overall, but expected it to negatively affect sales and financial results in Q2 and later 2020 periods. The company reported China factory closures affecting Plumbing during Q1, and April order declines and plant inefficiencies. Further closures, supply constraints, labor shortages, weaker housing activity or reduced consumer spending could disrupt production and demand. Management could not reliably estimate the pandemic’s ultimate financial impact and warned that further impairment, restructuring and other charges might occur.
2020 capital expenditures were expected to be $110–$130 million, subject to adjustment; expected pension contributions were approximately $23 million. Management believed cash, operating cash flow and available credit facilities would support operating needs, capital expenditures, dividends and debt service. The company reported compliance with covenants under its existing revolving facility at March 31. Litigation and environmental remediation matters were disclosed; management considered material loss from pending litigation remote and did not expect environmental matters to have a material adverse effect, while noting estimation uncertainty.
Most important facts for investors to verify
- How COVID-19 affected subsequent-quarter sales, factory operations, supply availability, restructuring needs and asset valuations.
- Whether the June 2020 notes were repaid or refinanced, and subsequent borrowings, liquidity and covenant headroom under both revolving facilities.
- Flo’s operating performance, the timing and accounting consequences of gaining control, and the formula and funding for the remaining-share purchase.
- Whether the Cabinets tradename’s fair value assumptions changed or triggered additional impairment charges.
- Actual capital spending, pension contributions, dividend decisions and share repurchases relative to the stated plans and available liquidity.