Fortune Brands Home & Security, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is for Fortune Brands Home & Security, Inc. (NYSE: FBHS); the supplied company name, Fortune Brands Innovations, is not the registrant name shown on this 2019 filing. Figures are in U.S. dollars unless noted.
Business context
The company sells branded home and security products through three segments: Cabinets, Plumbing, and Doors & Security. U.S. sales were about 84% of revenue; international markets accounted for about 16%. Home Depot and Lowe’s each represented 14% of consolidated sales, or 28% combined. Repair and remodeling and new-home construction are key demand drivers.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $5,764.6 million | $5,485.1 million | +5.1% |
| Gross profit / gross margin | $2,052.4 million / 35.6% | $1,959.4 million / 35.7% | Margin down about 0.1 percentage point |
| Operating income / operating margin | $698.5 million / 12.1% | $595.2 million / 10.9% | Income +17.4% |
| Net income attributable to Fortune Brands | $431.9 million | $389.6 million | +10.9% |
| Diluted EPS | $3.06 | $2.66 | +15.0% |
| Cash from operations | $637.2 million | $604.0 million | +$33.2 million |
| Capital expenditures | $131.8 million | $150.1 million | Down $18.3 million |
| Operating cash flow less capital expenditures | $505.4 million | $453.9 million | +$51.5 million |
| Cash and cash equivalents at year-end | $387.9 million | $262.9 million | +$125.0 million |
| Total debt / net debt | $2,184.3 million / $1,796.4 million | $2,334.0 million / $2,071.1 million | Net debt down $274.7 million |
Year-end current assets were $1,898.2 million and current liabilities were $1,409.3 million (current ratio about 1.35). The company had $1.25 billion available under its revolving credit facility and no revolver borrowings at year-end. The 2019 operating margin and net margin were approximately 12.1% and 7.5%, respectively.
Material changes and segment performance
- Cabinets: Sales decreased 1.2% to $2,388.5 million, reflecting weaker make-to-order custom and semi-custom volumes, lower Canadian sales, and promotional costs. Operating income rose 24.3% to $178.3 million, helped by pricing, productivity, and lower impairment and restructuring charges.
- Plumbing: Sales increased 7.6% to $2,027.2 million and operating income increased 13.9% to $427.6 million. Growth included higher volume, China, and pricing; foreign exchange, tariffs, rebates, and mix were offsets.
- Doors & Security: Sales increased 14.0% to $1,348.9 million and operating income increased 10.7% to $172.3 million. The full-year contribution from the 2018 Fiberon acquisition added about $139 million of sales; lower door volumes and cost pressures partly offset growth.
- Fourth-quarter sales were $1,470.5 million versus $1,420.7 million a year earlier; operating income was $192.5 million versus $140.1 million; and continuing-operations net income was $104.0 million versus $85.3 million.
- The company issued $700 million of 3.25% senior notes due 2029, using proceeds to repay its term loan and reduce revolver borrowings. Total debt declined despite the new notes, and the company reported compliance with its credit covenants.
Outlook, commentary, risks, and unusual items
- Management expected 2020 capital spending of $160–$175 million and pension contributions of approximately $23 million. The filing does not provide a specific full-year 2020 revenue or earnings forecast.
- Management cited 2019 U.S. market growth of approximately 3%–4% in repair and remodeling and approximately 2% in new-home construction. It emphasized pricing, productivity, product innovation, and flexible supply chains as responses to tariffs and rising commodity costs.
- Impairment charges on Cabinets segment indefinite-lived tradenames were $41.5 million in 2019, versus $62.6 million in 2018. One impaired tradename’s year-end fair value equaled its $38.6 million carrying value; two others had fair value less than 10% above carrying value. Further impairment is possible if forecasts or market assumptions weaken.
- Defined-benefit plan actuarial losses were a significant unusual item: $34.1 million was recognized in earnings in 2019 versus $3.8 million in 2018. Pension assets were $677.2 million, funding 77% of the accumulated benefit obligation; the balance-sheet defined-benefit liability was $201.4 million.
- Principal risks include housing-market and consumer-demand declines, competition and price pressure, tariffs and commodity inflation, supply-chain disruption, customer and channel concentration, foreign exchange, pension assumptions, litigation, and further intangible-asset impairment. Ten environmental PRP matters remained unresolved; related environmental accruals were $0.2 million. Management considered material loss from routine litigation remote.
- After year-end, the company paid $52.1 million in January 2020 for additional shares of Flo Technologies, resulting in majority ownership; the filing described a later staged acquisition of the remaining shares. This was a subsequent event, not part of 2019 results.
- The auditor issued unqualified opinions on the financial statements and internal controls. The audit identified Cabinets tradename impairment valuation as a critical audit matter because of judgment in growth, royalty-rate, and discount-rate assumptions.
Important facts for investors to verify
- Whether Cabinets demand continues shifting from custom and semi-custom products toward value-priced cabinetry, and whether the challenged tradenames require further impairment.
- How much of sales and earnings growth is organic versus attributable to Fiberon, pricing, foreign exchange, and volume; also track margin effects from tariffs, commodities, rebates, and mix.
- The refinancing or repayment of the $400 million notes due June 2020, debt maturities thereafter, and compliance with revolver covenants.
- Cash conversion, the planned increase in 2020 capital spending, pension funding needs, and the sustainability of dividends and repurchases.
- Progress, costs, and terms of the staged Flo transaction, alongside exposure to the two largest customers and housing-market conditions.