Fortune Brands Home & Security, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The filing is unaudited and reports the company under its then-current name, Fortune Brands Home & Security, Inc. It sells branded products for home repair, remodeling, new construction and security.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,375.8 million | $1,507.2 million | $2,778.5 million | $2,835.1 million |
| Operating income | $173.0 million | $202.4 million | $328.0 million | $338.0 million |
| Net income attributable to Fortune Brands | $115.8 million | $137.5 million | $224.9 million | $222.2 million |
| Diluted earnings per share | $0.83 | $0.97 | $1.61 | $1.57 |
| Operating margin (calculated) | 12.6% | 13.4% | 11.8% | 11.9% |
Q2 sales fell 8.7% year over year; first-half sales fell 2.0%. Q2 operating income declined 14.5%, while first-half operating income declined 3.0%. First-half attributable net income increased slightly, supported by higher other income, lower interest expense and lower income taxes; Q2 attributable net income declined 15.8%.
First-half gross margin was approximately 35.1%, broadly unchanged from 2019; Q2 gross margin was approximately 35.1%, versus 35.7%. SG&A declined 13.8% in Q2 and 6.7% in the first half, reflecting cost reductions, lower employee-related costs and lower advertising. Tariffs, unfavorable product mix and lower sales weighed on results.
Segments and material changes
- Cabinets: Q2 sales declined 15.2% and operating income declined 43.2%. First-half sales declined 4.1% and operating income declined 25.6%, reflecting COVID-related demand weakness, a shift toward value-priced products, tariffs and impairment charges.
- Plumbing: Q2 sales were down 0.3%, while operating income rose 2.6%. First-half sales increased 0.9% and operating income rose 9.2%. U.S. retail and e-commerce strength and China sales partly offset closed or constrained showrooms and foreign exchange headwinds.
- Doors & Security: Q2 sales fell 9.2% and operating income fell 9.6%; first-half sales fell 2.5%, while operating income increased 5.9%. COVID-related security-product supply-chain challenges, product-line discontinuation and mix affected sales.
Cash flow, debt and liquidity
- First-half operating cash flow was $260.5 million, versus $112.0 million in 2019. The company attributed the improvement mainly to smaller working-capital increases amid COVID-related disruption and higher accrued taxes.
- Investing cash outflow was $100.2 million, including investment in Flo Technologies; financing cash outflow was $142.2 million, including $150.0 million of share repurchases and $66.6 million of dividends. Cash and cash equivalents rose to $398.4 million from $387.9 million at year-end.
- Total debt was $2,245.9 million at June 30, 2020, versus $2,184.3 million at December 31, 2019. The company repaid $400 million of notes due in June using its existing revolver; $460 million was outstanding under the $1.25 billion 2019 revolver. No borrowings were outstanding under the supplemental $400 million 364-day facility.
- Current assets were $1,957.3 million and current liabilities were $952.8 million (calculated current ratio approximately 2.1). Management said cash, operating cash flow and available revolving credit should support operating needs, capital spending, dividends and debt service. Of cash on hand, $313.5 million was held at non-U.S. subsidiaries.
Outlook, commentary and risks
Management did not provide a specific earnings or sales forecast. It said COVID-19’s duration and effects remained uncertain, citing facility closures, supply-chain inefficiencies and demand reductions, while noting that many jurisdictions classified the company and related channels as essential businesses. Management also observed increased consumer interest in home investment and accelerated pre-existing trends, including demand for value-priced cabinetry and outdoor living.
Expected 2020 capital expenditures were $110–$130 million, subject to adjustment for COVID-19 conditions. Expected 2020 pension contributions were approximately $23 million. The company noted that cash flow is seasonal, typically strongest in the third and fourth quarters. Its share-repurchase authorization expired July 13, 2020; the board would evaluate whether to authorize a new program. Future dividends remain subject to board review.
- Recorded $22.5 million of first-half tradename impairment charges: $13.0 million in Plumbing and $9.5 million in Cabinets. The Plumbing impairment followed showroom closures and a revised outlook; management warned that further impairment could result if forecasts weaken.
- Recorded $14.9 million of first-half restructuring charges, largely tied to COVID-related demand reductions; additional restructuring may occur.
- Acquired additional Flo Technologies shares, reaching approximately 80% ownership, but continued equity-method accounting because minority shareholders had substantive participating rights. The company expects to obtain control and begin consolidation in Q1 2021; the remaining shares are scheduled for acquisition in Q1 2022 under a price formula. First-half other income included $11.0 million of gains related to Flo.
- Risks include prolonged pandemic effects on demand, housing activity, consumers and suppliers; tariffs and commodity costs; customer and supplier concentration; foreign-exchange exposure; and possible future goodwill or intangible-asset impairments. The company reported ordinary-course litigation and environmental remediation matters, and assessed the likelihood of material litigation loss as remote.
Most important facts for investors to verify
- Whether sales and margins recover from the Q2 declines, especially in Cabinets and Doors & Security, and whether pandemic-related demand or supply-chain disruptions persist.
- Whether the reported cash-flow improvement is sustainable, given the disclosed working-capital and accrued-tax effects.
- Debt, revolver utilization and compliance with credit-facility covenants; the filing reports compliance at June 30, 2020.
- Flo’s control and consolidation timing, remaining purchase-price terms and the treatment of related gains.
- Further impairment or restructuring charges, and actual capital spending, pension contributions, dividends and any renewed share-repurchase authorization.