Fortune Brands Home & Security, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. The issuer was named Fortune Brands Home & Security, Inc. at the time of filing. It sells branded products for residential repair and remodeling, new construction, and security markets. Results may be affected by seasonality; the company typically uses operating cash in the first half of the year.
Financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $1,254.6 million | $1,186.8 million | +5.7% |
| Operating income | $119.4 million | $111.0 million | +7.6% |
| Income from continuing operations, net of tax | $75.1 million | $77.4 million | Down $2.3 million |
| Net income attributable to Fortune Brands | $75.0 million | $77.4 million | Down $2.4 million |
| Diluted EPS | $0.49 | $0.50 | Down $0.01 |
| Net cash used in operating activities | $51.9 million | $17.9 million | Outflow increased $34.0 million |
- Gross margin was approximately 35.0%, versus 34.9%; operating margin was approximately 9.5%, versus 9.4%. Net margin attributable to the company was approximately 6.0%, versus 6.5%.
- Operating income benefited from higher sales, productivity improvements, and lower severance costs, partly offset by unfavorable mix, higher commodity costs, and increased employee and marketing expenses. Higher interest and income tax expense and lower other income more than offset operating income growth at the continuing-operations net income level.
- Effective tax rate was 30.1%, compared with 25.4%. Q1 2018 included a $5.4 million unfavorable adjustment related to the Tax Act accounting; the company said its accounting for all Tax Act effects was not complete.
Segments and material changes
- Cabinets: Sales fell 2.9% to $557.2 million; operating income fell 48.7% to $24.1 million. The company cited an exited customer relationship, weather, unfavorable mix, and underutilized fixed costs.
- Plumbing: Sales rose 18.8% to $449.7 million; operating income rose 31.5% to $88.4 million. Growth reflected share gains, new products, international sales, and the 2017 Victoria + Albert and Shaws acquisitions. Acquisition-related inventory fair-value amortization was $1.7 million.
- Doors: Sales rose 7.9% to $110.3 million and operating income rose 59.8% to $13.1 million, supported by volume, share gains, and fixed-cost leverage.
- Security: Sales rose 3.6% to $137.4 million and operating income rose 49.5% to $15.1 million. The comparison benefited from lower restructuring and other charges, including the absence of the prior-year Field ID impairment.
- Consolidated sales growth reflected volume, international sales, share gains and new products, favorable foreign exchange of approximately $11 million, acquisitions, and pricing; unfavorable weather and mix partly offset growth.
Cash, debt, and liquidity
- Cash was $244.4 million at March 31, down from $323.0 million at year-end; $234.2 million was held at non-U.S. subsidiaries. The company noted potential tax consequences from repatriating certain foreign cash.
- Operating cash outflow of $51.9 million was driven primarily by working-capital investment, particularly higher receivables. Investing cash outflow was $42.7 million, including $37.6 million of capital expenditures and $5.8 million of acquisition costs. Financing provided $16.2 million.
- Debt totaled approximately $1.888 billion: $350 million short-term term loan, $645 million revolving credit borrowings, and $893 million net carrying value of senior notes. This compares with approximately $1.508 billion at December 31, 2017. The new $350 million term loan matures in March 2019; the $1.25 billion revolver matures in June 2021. The company reported compliance with debt covenants.
- Current assets were $1.645 billion and current liabilities were $1.141 billion, compared with $1.602 billion and $907 million at year-end. The current ratio was approximately 1.44, versus 1.77.
- The company repurchased 5.6 million shares for $350 million in Q1. The cash flow statement reflected $325.2 million paid by quarter-end; $24.8 million was declared but unsettled. The board authorized a further repurchase program of up to $150 million on April 30, 2018, after quarter-end. The quarterly dividend was $0.20 per share.
Outlook, risks, and unusual items
- No specific earnings, sales, or margin guidance was provided in the supplied filing text. Management described expectations for continued housing-market recovery and profitable organic growth, while noting dependence on consumer confidence, employment, home prices, mortgage rates, and credit availability.
- Key stated risks include North American housing activity and global economic conditions; acquisition execution and integration; competition and intellectual property; reliance on key customers and suppliers; supply-chain and raw-material availability and costs; pension costs and funding; legal and regulatory compliance; and international operations. Foreign exchange, transportation costs, and competitive promotions may also affect results.
- Two Cabinets tradenames had fair value less than 10% above carrying value at December 31, 2017, with a combined carrying value of $217.8 million; weaker market assumptions or other valuation factors could trigger impairment. No interim impairment test was required in Q1 2018.
- Litigation and environmental remediation matters were described as not expected to have a material adverse effect, though outcomes and remediation estimates involve uncertainty. No material changes to previously disclosed risk factors or market-risk disclosures were reported.
- The company adopted the new revenue standard on January 1, 2018; it reported no material quarterly or expected ongoing impact. Prior-period pension-cost presentation was revised under ASU 2017-07, including reclassification of $3.9 million from operating income to other income for Q1 2017.
Important facts for investors to verify
- Whether Cabinets performance improves and the customer exit, weather, mix, and capacity-utilization pressures abate.
- How much Plumbing growth and profitability persist excluding acquisition contribution, foreign exchange, and acquisition-related accounting effects.
- Working-capital trends and seasonal cash generation, particularly receivables and inventory, alongside capital spending.
- Debt refinancing and interest-rate exposure, including the March 2019 term-loan maturity and variable-rate borrowings.
- Final Tax Act accounting and effective tax rate, and whether the at-risk Cabinets tradenames require impairment testing or charges.
- Execution of share repurchases and dividends relative to liquidity needs and the company’s stated growth and acquisition priorities.