Fortune Brands Home & Security, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; compared with the corresponding 2017 periods. The filing is under the name Fortune Brands Home & Security, Inc. (the company identified in the request as Fortune Brands Innovations). Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $1,429.0 | $1,365.4 | $2,683.6 | $2,552.2 |
| Operating income | $188.6 | $209.2 | $308.0 | $320.2 |
| Net income attributable to Fortune Brands | $129.6 | $137.7 | $204.6 | $215.1 |
| Diluted EPS | $0.88 | $0.88 | $1.37 | $1.37 |
| Cash from operating activities | Not separately provided | Not separately provided | $137.3 | $171.2 |
- Q2 sales rose 4.7%; first-half sales rose 5.1%. First-half operating income fell 3.8%, while continuing-operations net income fell $12.9 million to $204.8 million. Q2 operating income declined 9.8%, and continuing-operations net income declined $10.6 million to $129.7 million.
- Approximate operating margin was 13.2% in Q2 versus 15.3% a year earlier, and 11.5% for the first half versus 12.5%. Approximate gross margin was 36.7% in Q2 versus 37.6%, and 35.9% for the first half versus 36.3%.
- First-half operating cash flow decreased $33.9 million, primarily from lower net income and higher working capital, notably accounts receivable. Capital expenditures were $67.2 million; investing cash outflow was $72.3 million. Cash increased $22.5 million to $345.5 million.
- At June 30, cash was $345.5 million and total debt was $2,143.3 million, versus $1,507.6 million at December 31, 2017; approximate net debt increased to $1,797.8 million from $1,184.6 million. Debt included $900 million drawn on the revolving facility, a $350 million term loan due March 2019, and $893.3 million carrying value of senior notes. The company reported compliance with debt covenants.
- Current assets were $1,805.5 million and current liabilities $1,230.5 million. Cash and $276.1 million of cash at non-U.S. subsidiaries are disclosed; repatriation of some foreign cash could have adverse tax consequences.
Material changes and operating drivers
- Plumbing led first-half growth: sales increased 14.8% to $933.4 million, including contributions from the 2017 Victoria + Albert and Shaws acquisitions and higher international sales. Operating income rose 9.1% to $183.7 million.
- Doors sales increased 14.8% and operating income 33.6% for the first half, reflecting share gains, new products, volume and fixed-cost leverage. Security sales rose 3.1% and operating income 13.2%.
- Cabinets sales fell 2.6% and operating income fell 31.1%, reflecting an exited customer relationship, unfavorable weather and mix, fixed-cost underutilization, restructuring and higher employee costs.
- Management attributed consolidated sales growth to volume, price increases, new products, international demand, favorable foreign exchange and Plumbing acquisitions. Higher commodity costs, unfavorable mix, employee costs and restructuring weighed on profitability; productivity gains partly offset these pressures.
- Interest expense rose to $17.4 million in Q2 and $32.1 million for the first half, driven by higher average borrowings and rates. The effective tax rate was 25.7% in Q2 and 27.4% for the first half, versus 29.6% and 28.2%, respectively, in 2017.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management described expectations for continued housing-market recovery and sees opportunities in organic investment, acquisitions and shareholder returns, while noting dependence on consumer confidence, employment, home prices, mortgage rates and credit availability.
- Key risks discussed include North American housing and repair/remodel activity, economic conditions, raw-material and transportation costs and availability, key customers and suppliers, competition, acquisitions and integration, pensions, regulation, taxes and international operations. Management noted seasonality: operating cash flow is typically strongest in the third and fourth quarters.
- First-half restructuring charges were $11.6 million; restructuring and related other charges together were $17.0 million, primarily associated with Cabinets manufacturing-footprint consolidation and severance. Q2 restructuring and related other charges totaled $16.3 million.
- A $5.4 million unfavorable adjustment to the 2017 Tax Act deemed-repatriation tax estimate was recorded in Q1; the company had not completed its Tax Act accounting at June 30. It said unrecognized tax benefits could decrease by $2 million to $11 million over the next 12 months.
- In July, the board authorized an additional $400 million share-repurchase program. During the first half, the company repurchased 10.0 million shares for $602.7 million and paid $58.6 million in dividends. A July reorganization combined Doors and Security under common leadership, with a new reportable segment beginning in Q3 2018.
- Pending ordinary-course litigation and environmental remediation were disclosed; management did not expect them to have a material adverse effect, while acknowledging uncertainty in outcomes and remediation estimates.
- Revenue-standard adoption had no material impact. Prior-year comparisons were revised retrospectively for pension-cost presentation; the filing also notes adoption of the new revenue standard using a modified retrospective approach.
Key facts for investors to verify
- Whether Cabinets performance and manufacturing consolidation improve, and how much of Plumbing growth reflects acquisitions, foreign exchange and underlying demand.
- Whether commodity inflation, pricing, mix and productivity affect margins in subsequent quarters.
- Working-capital trends and seasonal cash generation, alongside the enlarged debt balance, variable-rate exposure and March 2019 term-loan maturity.
- Cash available for capital needs and shareholder returns, considering the large first-half repurchases and foreign-cash repatriation considerations.
- Final Tax Act accounting and resolution of uncertain tax positions; also the effect of the Doors and Security reporting change on comparable segment analysis.