Fortune Brands Home & Security, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The filing identifies the registrant as Fortune Brands Home & Security, Inc. (ticker FBHS).
Business context and results
The company sells branded products for residential repair and remodeling, new construction, and security. Its segments are Cabinets, Plumbing, and Doors & Security. Year-over-year comparisons include Fiberon, acquired in September 2018; its contribution to nine-month 2019 sales was approximately $139 million.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1,459.0 million | $1,380.8 million | $4,294.1 million | $4,064.4 million |
| Operating income | $168.0 million | $147.1 million | $506.0 million | $455.1 million |
| Income from continuing operations, net of tax | $105.7 million | $99.9 million | $327.3 million | $304.7 million |
| Diluted EPS from continuing operations | $0.75 | $0.69 | $2.32 | $2.06 |
| Operating cash flow | Not stated separately | Not stated separately | $353.8 million | $343.7 million |
Financial position and cash flow
- For the first nine months, capital expenditures were $82.4 million, cash dividends were $92.3 million, and share repurchases were $100.0 million. Cash increased by $72.6 million to $336.2 million on the balance sheet.
- At September 30, cash was $336.2 million; current assets were $1,906.7 million and current liabilities $1,376.6 million. Short-term debt was $399.5 million and long-term debt $1,949.0 million.
- In September, the company issued $700 million of 3.25% senior notes due 2029, using proceeds to repay its $350 million term loan and reduce revolver borrowings. Revolver borrowings were $165 million; the $1.25 billion facility was extended to September 2024. The company reported compliance with facility covenants.
- Operating cash flow rose $10.1 million year over year, while working-capital needs increased, including $68.4 million absorbed by higher receivables and $81.2 million by higher inventories. Investing cash outflow was $78.1 million versus $568.4 million, mainly because 2018 included the Fiberon acquisition.
Material changes and segment performance
- Sales rose 5.7% in both Q3 and the nine-month period. Nine-month operating income increased 11.2%; diluted EPS rose from $2.06 to $2.32.
- For the first nine months, Cabinets sales were nearly flat (+0.2%) and operating income increased 9.7%. Plumbing sales rose 6.0% and operating income 12.7%. Doors & Security sales rose 16.2%, largely reflecting Fiberon, while operating income increased only 0.7%.
- In Q3, Cabinets sales fell 1.6% and operating income fell 12.5%; Plumbing sales and operating income rose 11.4% and 25.3%; Doors & Security sales rose 10.9% and operating income 3.9%.
- Management cited pricing, productivity, Plumbing growth (including China), and Fiberon as contributors. Offsets included commodity and tariff costs, unfavorable mix and foreign exchange, promotional and rebate costs, and lower custom/semi-custom cabinetry and security product volumes.
Margins, unusual items, outlook and risks
- Calculated from reported figures, nine-month operating margin was approximately 11.8% versus 11.2% in 2018; Q3 operating margin was approximately 11.5% versus 10.7%. Nine-month gross margin was approximately 35.5% versus 35.9%.
- The company recorded a $29.5 million Q3 impairment of a Cabinets indefinite-lived tradename, following a continuing shift in demand from semi-custom to value-priced cabinetry and reduced forecasts. Its remaining carrying value was $85 million. Further impairment is possible if forecasts or market conditions weaken.
- Interest expense increased to $71.8 million for the nine months from $51.1 million, reflecting higher average borrowings and rates. The effective tax rate declined to 25.0% from 27.4%, partly due to tax audit settlements.
- Management estimated potential additional Q4 2019 defined-benefit actuarial losses of $0.09–$0.13 per share, subject to year-end discount rates and pension asset returns; a 50-basis-point discount-rate change affects plan liabilities by approximately $60 million.
- The filing provides no specific revenue or earnings guidance. Management said liquidity, operating cash flow, credit availability, and capital-market access were expected to support operating needs, debt service, investment, acquisitions, repurchases, and dividends. It cautioned that interim results may not indicate full-year results and that cash flow is seasonal.
- Risks highlighted include dependence on North American housing and remodeling activity, competition, commodity and tariff volatility, foreign exchange, key customers and suppliers, supply-chain and labor constraints, international operations, pension costs, litigation, and impairment of goodwill or intangible assets. Management said pending litigation and environmental matters were not expected to have a material adverse effect; outcomes and remediation estimates remain uncertain.
Important facts for investors to verify
- Whether Cabinets demand and revenue forecasts stabilize, and whether additional tradename impairment is required.
- How much of Doors & Security growth and future profitability depends on Fiberon, and whether its acquisition-related costs and integration effects persist.
- Whether pricing and productivity continue to offset tariffs, raw-material inflation, unfavorable mix, and promotional costs.
- Debt refinancing and repayment plans, interest-rate exposure, and the company’s liquidity needs as operating cash flow seasonality plays out.
- The actual year-end pension remeasurement and resulting actuarial expense compared with management’s estimate.