Fortune Brands Home & Security, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. The filing is under the company’s then-current name, Fortune Brands Home & Security, Inc. (now identified in the request as Fortune Brands Innovations). Amounts are in millions of dollars except per-share data.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change / comment |
|---|---|---|---|
| Net sales | $1,327.9 | $1,254.6 | +5.8% |
| Gross profit / margin | $458.8 / 34.5% | $439.6 / 35.0% | Margin declined about 0.5 percentage point |
| Operating income / margin | $135.6 / 10.2% | $119.4 / 9.5% | Operating income +13.6% |
| Net income attributable to Fortune Brands | $84.7 | $75.0 | +12.9% |
| Diluted EPS | $0.60 | $0.49 | Continuing-operations EPS |
| Cash from operating activities | $(89.7) | $(51.9) | Greater cash use, principally working capital and lower accrued liabilities |
| Capital expenditures | $27.2 | $37.6 | Lower by $10.4 |
Sales growth reflected pricing, higher volume (including China), and $37.0 of Fiberon contribution, partly offset by approximately $10 of unfavorable foreign exchange and unfavorable mix. Operating income benefited from higher sales and productivity, offset in part by commodity costs. Interest expense rose $9.0 to $23.7, reflecting higher average borrowings and rates. The effective tax rate was 25.3%, down from 30.1%.
Segments and material changes
- Cabinets: Sales +2.8% to $573.0; operating income +79.3% to $43.2, aided by productivity and manufacturing-footprint savings.
- Plumbing: Sales +2.0% to $458.6; operating income +0.9% to $89.2. Commodity inflation and channel mix partly offset sales and productivity benefits.
- Doors & Security: Sales +19.6% to $296.3, including $37.0 from Fiberon; operating income fell 20.6% to $22.4. The filing cites capacity investments, Fiberon inventory fair-value amortization, and a $1.7 idle-facility fair-value expense.
- Fiberon was acquired in September 2018 for approximately $470.0. Its preliminary purchase-price allocation included $173.7 of goodwill and $195.0 of identifiable intangible assets.
Balance sheet, debt and liquidity
- At March 31, 2019, cash and cash equivalents were $281.2 (including $265.1 held at non-U.S. subsidiaries); current assets were $1,848.0 and current liabilities $1,238.8. The current ratio was approximately 1.49.
- Short-term debt was $350.0 and long-term debt $2,169.7, totaling approximately $2,519.7, versus $2,334.0 at year-end 2018. The term loan was reduced to $350.0 and extended to March 2020; revolving-credit borrowings were $680.0 under a $1.25 billion facility maturing June 2021.
- The company reported compliance with credit-facility covenants. Cash from operations is typically seasonally negative in the first half, with most operating cash generated in the third and fourth quarters.
- Financing cash flow was $129.4, including $520.0 of long-term debt issuance, $160.0 of repayment, and $31.0 of dividends. The company repurchased 0.6 million shares for $28.0 during the quarter; approximately $386 million remained authorized.
Outlook, risks and unusual items
- No specific quarterly or full-year financial guidance is provided in the supplied filing text. Management emphasized profitable organic growth, productivity, strategic investment and potential acquisitions, joint ventures, dividends and share repurchases, without assuring future actions or returns.
- Management identified reliance on North American housing, repair and remodeling activity; consumer confidence and financing conditions; competition; commodity and transportation costs; foreign exchange; customer and supplier concentration; supply-chain execution; acquisition integration; pension costs; litigation; and impairment of goodwill or intangibles among relevant risks.
- Two Cabinets tradenames impaired in 2018 had an approximately $152 carrying value at year-end; management said further declines in estimated fair value could trigger impairment. No interim impairment test was required in Q1 2019.
- Operating cash use increased as receivables and inventories grew and accrued expenses and other liabilities declined. Management attributed inventory investment partly to new-product initiatives and pre-buying ahead of expected tariffs.
- The company adopted lease accounting on January 1, 2019, recording approximately $177.2 of lease assets and $182.6 of liabilities at adoption; it said the change did not materially affect income or cash flows. Q1 operating lease expense was $13.0.
- Litigation and environmental remediation were disclosed; management considered material adverse effects unlikely, while noting outcomes and remediation estimates involve uncertainty. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether organic growth and pricing can sustain sales and operating-income gains, separating Fiberon’s contribution from underlying growth.
- Whether commodity inflation, mix and Doors & Security costs continue to pressure segment profitability and gross margin.
- Working-capital needs, seasonal cash generation, and the effect of tariff-related inventory purchases on operating cash flow.
- Debt levels, variable-rate exposure, refinancing needs—particularly the March 2020 term-loan maturity—and covenant headroom.
- Fiberon integration and final purchase accounting, and the sensitivity of Cabinets’ impaired tradenames and other goodwill/intangibles to market assumptions.