Fortune Brands Home & Security, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The filing is under the company’s then-legal name, Fortune Brands Home & Security, Inc. (NYSE: FBHS); the supplied company metadata uses Fortune Brands Innovations.
Business context and results
The company sells branded products for home repair and remodeling, new construction, and security through Cabinets, Plumbing, and Doors & Security segments. Results include Fiberon, acquired in September 2018, from its acquisition date; management attributed substantial Doors & Security sales growth to that acquisition.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $1,507.2m | $1,429.0m | $2,835.1m | $2,683.6m |
| Operating income | $202.4m | $188.6m | $338.0m | $308.0m |
| Net income attributable to Fortune Brands | $137.5m | $129.6m | $222.2m | $204.6m |
| Diluted EPS | $0.97 | $0.88 | $1.57 | $1.37 |
| Gross margin | 35.7% | 36.7% | 35.2% | 35.9% |
| Operating margin | 13.4% | 13.2% | 11.9% | 11.5% |
For Q2, sales rose 5.5%, operating income 7.3%, and diluted EPS 10.2% year over year. For the first half, sales increased 5.6%, operating income 9.7%, and diluted EPS 14.6%. Higher sales, productivity gains, and lower restructuring charges supported operating income; higher commodity costs were a partial offset. Interest expense increased to $24.5m for Q2 and $48.2m for the half, reflecting higher average borrowings and rates. Effective tax rates declined to 23.2% for Q2 and 24.0% for the half, versus 25.7% and 27.4%, respectively.
Cash flow, liquidity, and debt
- First-half operating cash flow was $112.0m, down from $137.3m. Capital expenditures were $54.9m, implying cash flow after capital expenditures of $57.1m, versus $70.1m in 2018.
- Cash and cash equivalents were $276.3m at June 30, 2019, including $227.4m held at non-U.S. subsidiaries. Current assets were $1,916.9m and current liabilities $1,695.2m.
- Short-term debt was $749.3m and long-term debt $1,666.0m, totaling $2,415.3m, compared with $2,334.0m at year-end 2018. Cash less total debt was approximately negative $2,139.0m.
- The $1.25bn revolving credit facility had $575m outstanding; the company reported covenant compliance. The $350m variable-rate term loan matures in March 2020. $400m of 3% senior notes mature in June 2020; management expected to repay or refinance them before maturity. The company also expected to repay or refinance facility borrowings before maturity.
- First-half dividends were $61.7m; share repurchases were $50.0m. Approximately $364m remained authorized under the repurchase program. Management said operating cash flows, credit availability, and capital-market access were expected to meet financing needs; operating cash flow is typically strongest in the third and fourth quarters.
Material changes, outlook, and risks
- Doors & Security first-half sales rose 19.3%, including $96m attributed to Fiberon; segment operating income fell 1.5%, partly due to Fiberon inventory fair-value adjustments and a charge related to an idle facility. Q2 segment sales rose 19.0% and operating income rose 10.4%.
- Cabinets first-half sales increased 1.1%, but Q2 sales declined 0.4% and operating income declined 5.3%. Management cited weaker custom and semi-custom cabinetry volumes, plant underutilization, and promotional costs. Continued sales declines could trigger impairment of a Cabinets tradename; management also identified potential impairment sensitivity for other tradenames.
- Plumbing first-half sales and operating income increased 3.4% and 6.6%, respectively. Growth included China; foreign exchange, commodity inflation, mix, and rebates were offsets in various segments.
- No quantified full-year revenue or earnings guidance is provided in the supplied filing text. Management emphasized profitable organic growth, productivity, capacity and long-term growth investment, strategic acquisitions, dividends, and repurchases.
- Key stated exposures include North American housing and remodeling activity, customer and supplier concentration, competition, commodity and transportation costs, foreign exchange, international operations, acquisition integration, labor constraints, pension funding, litigation, and goodwill or intangible-asset impairment. The filing reported no material change to previously disclosed risk factors.
- Routine litigation was not considered likely to result in a material loss; environmental remediation exposures remain subject to estimation uncertainties. Management reported no material adverse effect expected from environmental compliance.
- Operating lease accounting adopted January 1, 2019 added lease assets and liabilities of approximately $177.2m and $182.6m at adoption, respectively, without a material impact on income or cash flows. The June 30 balance sheet reported $173.2m of operating lease assets and $146.3m of non-current lease liabilities, with $33.3m included in other current liabilities.
Investor verification priorities
- Assess whether sales growth excluding Fiberon and the benefit of pricing reflects underlying volume and demand, particularly in Cabinets.
- Track gross-margin pressure from commodities, mix, rebates, promotions, and foreign exchange against productivity and pricing actions.
- Verify refinancing or repayment plans for the 2020 senior notes and term loan, and monitor variable-rate debt, interest expense, and covenant headroom.
- Review working-capital cash use, including the first-half increases in receivables and inventory, and the company’s seasonal cash-flow pattern.
- Monitor Cabinets sales trends and assumptions supporting the carrying values of tradenames and other acquired intangible assets.
- Confirm future cash allocation among capital spending, dividends, repurchases, pension contributions, and potential acquisitions.