Business context and reporting period
This summary covers Fortune Brands Home & Security, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The filing describes a branded home and security products business, reported in Cabinets, Plumbing, and Doors & Security segments. The company combined its Doors & Security businesses under common leadership in 2018 and recast prior-period segment information. The filing’s issuer name is Fortune Brands Home & Security, Inc.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $1,380.8 million | $1,348.6 million | $4,064.4 million | $3,900.8 million |
| Operating income | $147.1 million | $199.5 million | $455.1 million | $519.7 million |
| Net income attributable to Fortune Brands | $99.8 million | $129.5 million | $304.4 million | $344.6 million |
| Diluted EPS | $0.69 | $0.83 | $2.06 | $2.20 |
| Operating margin | 10.6% | 14.8% | 11.2% | 13.3% |
Gross margin was approximately 35.8% in Q3 2018 versus 37.5% a year earlier, and 35.9% for the first nine months versus 36.7%. Operating cash flow was $343.7 million for the nine months, compared with $352.6 million; capital expenditures were $106.5 million, implying operating cash flow less capital expenditures of $237.2 million. Investing used $568.4 million, principally reflecting $466.0 million of acquisition spending. Financing provided $307.4 million.
At September 30, cash and cash equivalents were $389.9 million, including $311.6 million held at non-U.S. subsidiaries. Total debt was approximately $2.51 billion: $525.0 million of short-term debt and $1,988.4 million of long-term debt. Current assets were $1.89 billion and current liabilities $1.45 billion. The company reported covenant compliance on its term loan and revolving credit facility. The $1.25 billion revolver had $500 million outstanding. A $525 million term loan matures in March 2019; senior notes include $600 million due in 2023 at 4%, in addition to notes due in 2020 and 2025.
Material changes versus the prior comparable period
- Q3 sales rose 2.4%, but operating income fell 26.3%; nine-month sales rose 4.2%, while operating income fell 12.4%.
- Cabinets was the principal weakness: nine-month sales declined 2.6% and operating income fell 40.5%. Q3 segment operating income fell 58.8%.
- Plumbing nine-month sales increased 11.5% and operating income 2.8%; Doors & Security sales increased 8.4% and operating income 8.5%. Both segments’ Q3 operating income declined year over year.
- Results included a $27.1 million Cabinets tradename impairment and $17.3 million of restructuring charges for the first nine months, versus $3.2 million and $3.5 million, respectively, in 2017. Q3 restructuring and other charges totaled $11.3 million.
- The effective tax rate declined to 27.4% for the nine months from 29.5%, and to 27.5% in Q3 from 31.6%. Higher interest expense partly offset the tax benefit.
- Debt and treasury stock purchases rose materially. The company spent $602.7 million repurchasing 10.0 million shares in the first nine months and paid $87.1 million in dividends.
Outlook, management commentary, risks and unusual items
The filing provides no specific financial guidance. Management described long-term opportunities in organic growth, new products, productivity, strategic acquisitions, and shareholder returns. It said home-products demand depends on housing, repair-and-remodel activity, consumer confidence, employment, home prices, mortgage rates, and credit availability. It cited raw-material, tariff, transportation, foreign-exchange, promotional, and weather-related pressures, which it seeks to offset through productivity and pricing.
In September, the company acquired Fiberon for approximately $470 million, expanding into outdoor living products; its contribution to reported-period sales and operating income was not material. The preliminary purchase-price allocation included $146.8 million of goodwill and $229.0 million of identifiable intangible assets and remains subject to revision. The Cabinets impairment followed weaker Canadian revenue growth expectations and announced retail-location closures; further impairment could result if fair-value assumptions deteriorate. Management also identified acquisition integration, customer and supplier reliance, raw-material availability, pension costs, international operations, and regulatory and tax matters as risks. It said pending litigation and environmental remediation were not expected to have a material adverse effect, while noting outcomes and remediation estimates involve uncertainty. The company had not completed all accounting for the Tax Act and recorded a $2.3 million unfavorable tax adjustment in 2018.
Important facts for investors to verify
- Whether Cabinets performance, Canadian demand, and the assumptions supporting its remaining indefinite-lived tradenames stabilize.
- The final Fiberon purchase-price allocation, integration progress, and contribution to Doors & Security results.
- Debt maturities, refinancing or repayment plans for the March 2019 term loan, and the effect of borrowing costs and leverage.
- Whether cash held outside the U.S. is accessible for domestic needs without material tax consequences, and the availability of revolver capacity.
- How much of the decline in operating income reflects impairment, restructuring, weather, mix, inflation, and other recurring versus unusual factors.
- Future cash generation and capital allocation, including share repurchases, dividends, and acquisition spending.