Fortune Brands(FBIN) - 2018 Q4 - Annual Report

Part I Business Fortune Brands Home & Security is a leading home and security products company with three segments, focusing on brand building, innovation, and strategic cash deployment | Segment | 2018 Net Sales (in million) | Percentage of Total 2018 Net Sales | Key Brands | | :--- | :--- | :--- | :--- | | Cabinets | $2,418.6 | 44% | Diamond, Aristokraft, Mid-Continent, Kitchen Craft, Homecrest, Omega, etc. | | Plumbing | 1,883.3 | 34% | Moen, ROHL, Riobel, Perrin & Rowe, Victoria + Albert, Shaws | | Doors & Security | 1,183.2 | 22% | Master Lock, SentrySafe, Therma-Tru, Fypon, Fiberon | | Total | $5,485.1 | 100% | | - The company's strategy includes building on leading brand positions, developing innovative products, expanding in international markets (16% of 2018 net sales), leveraging global supply chains, and deploying cash flow to high-return opportunities such as acquisitions (e.g., Fiberon in 2018) and share repurchases[7][8] - Two customers, The Home Depot and Lowe's, each accounted for more than 10% of the Company's net sales in 2018 Sales to all U.S. home centers were approximately 26% of net sales[12] | (In million) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Cabinets | $2,418.6 | $2,467.1 | $2,397.8 | | Plumbing | 1,883.3 | 1,720.8 | 1,534.4 | | Doors & Security | 1,183.2 | 1,095.4 | 1,052.7 | | Total | $5,485.1 | $5,283.3 | $4,984.9 | - The business experiences seasonality, with lower sales typically in the first quarter due to reduced new home construction and repair-and-remodel activity[17] Risk Factors The company faces material risks from North American housing market reliance, intense competition, supply chain volatility, and operational disruptions - The business is heavily reliant on North American home improvement, repair/remodel, and new construction activity, which are sensitive to economic conditions like employment levels, consumer confidence, and interest rates[20] - The company operates in highly competitive markets where it faces pressure from competitors on price, private-label brands, and imported products[21] - Global commodity price volatility for materials like brass, zinc, steel, and wood, as well as energy costs, could adversely affect financial results Import tariffs could also lead to price increases[21][23] - Strategic acquisitions involve risks such as integration difficulties, failure to achieve expected financial benefits, and loss of key employees[25][26] - The carrying value of goodwill and other intangible assets could be impaired by negative economic events, potentially affecting results of operations[29][30] - The company is exposed to risks from information technology system failures and cyber-attacks, which could damage its reputation and result in financial, legal, and operational consequences[30][31] Unresolved Staff Comments The company reports no unresolved staff comments - None Properties The company operates 52 manufacturing facilities and 53 distribution centers globally, with a mix of owned and leased properties across its segments | Segment | Manufacturing Facilities (Owned/Leased) | Distribution Centers and Warehouses (Owned/Leased) | | :--- | :--- | :--- | | Cabinets | 22 / 3 | 3 / 17 | | Plumbing | 8 / 6 | 7 / 15 | | Doors & Security | 10 / 3 | 1 / 10 | | Totals | 40 / 12 | 11 / 42 | Legal Proceedings The company is involved in routine litigation, but management believes these actions will not materially affect its financial condition - The Company is involved in ordinary routine litigation but believes these actions will not have a material adverse effect and that the likelihood of material loss is remote[36][37] Mine Safety Disclosures This item is not applicable to the company - Not applicable Executive Officers of the Registrant This section lists Fortune Brands' executive officers, including Christopher J. Klein (CEO) and Patrick D. Hallinan (SVP & CFO) | Name | Age | Position | | :--- | :--- | :--- | | Christopher J. Klein | 55 | Chief Executive Officer | | Patrick D. Hallinan | 51 | Senior Vice President and Chief Financial Officer | | Nicholas I. Fink | 44 | President, Plumbing Segment | | Brett E. Finley | 48 | President, Doors & Security Segment | | David M. Randich | 57 | President, Cabinets Segment | Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NYSE (FBHS), with a 10% dividend increase and $92.0 million in Q4 2018 share repurchases - The company's common stock is listed on the New York Stock Exchange (NYSE) under the ticker symbol "FBHS"[44] - In December 2018, the Board of Directors increased the quarterly cash dividend by 10% to $0.22 per share[44] | Period | Total Shares Purchased | Average Price Paid per Share | Approximate Dollar Value Remaining Under Program | | :--- | :--- | :--- | :--- | | Oct 1 – Oct 31, 2018 | 1,043,400 | $47.94 | $455,686,267 | | Nov 1 – Nov 30, 2018 | 951,700 | $44.08 | $413,734,259 | | Dec 1 – Dec 31, 2018 | — | — | $413,734,259 | | Total Q4 2018 | 1,995,100 | $46.10 | | Selected Financial Data This section summarizes five-year financial data, showing net sales growth from $4.0 billion in 2014 to $5.5 billion in 2018 | (In million, except per share amounts) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $5,485.1 | $5,283.3 | $4,984.9 | $4,579.4 | $4,013.6 | | Operating income | 595.2 | 682.5 | 618.6 | 480.3 | 390.9 | | Income from continuing operations, net of tax | 390.0 | 475.3 | 412.4 | 306.5 | 273.6 | | Diluted earnings per share — continuing operations | 2.66 | 3.05 | 2.61 | 1.88 | 1.64 | | Cash flow provided by operating activities | 604.0 | 600.3 | 650.5 | 429.2 | 266.2 | | Total assets | $5,964.6 | $5,511.4 | $5,128.5 | $4,875.7 | $4,051.5 | | Third party debt | 2,334.0 | 1,507.6 | 1,431.1 | 1,168.7 | 668.6 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 2018 financial performance, noting 4% net sales growth to $5.5 billion but a 12.8% operating income decrease due to impairment and costs - In 2018, net sales grew 4%, but operating income decreased 12.8% due to unfavorable mix, asset impairment charges, higher employee-related costs, and restructuring charges[54] - In September 2018, the company acquired Fiberon for approximately $470.0 million, expanding its Doors & Security segment into the outdoor living space[54][56] - The company issued $600 million of 4% senior notes due 2023 and increased its term loan to $525 million to finance its activities, including acquisitions and share repurchases[54][56] - The U.S. home products market, a key driver for the company, is estimated to have grown in 2018, with new housing construction up approximately 5% and repair/remodeling spending up approximately 4%[54] Results of Operations This section details operating results for 2018 vs. 2017 and 2017 vs. 2016, highlighting the Fiberon acquisition and $62.6 million impairment charges | (In million) | 2018 | % change | 2017 | % change | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Sales | | | | | | | Cabinets | $2,418.6 | (2.0)% | $2,467.1 | 2.9% | $2,397.8 | | Plumbing | 1,883.3 | 9.4% | 1,720.8 | 12.1% | 1,534.4 | | Doors & Security | 1,183.2 | 8.0% | 1,095.4 | 4.1% | 1,052.7 | | Total Net Sales | $5,485.1 | 3.8% | $5,283.3 | 6.0% | $4,984.9 | | Operating Income | | | | | | | Cabinets | $143.5 | (46.3)% | $267.2 | 3.6% | $257.8 | | Plumbing | 375.3 | 4.7% | 358.5 | 13.8% | 314.9 | | Doors & Security | 155.6 | 5.9% | 146.9 | 16.2% | 126.4 | | Corporate | (79.2) | 12.1% | (90.1) | (11.9)% | (80.5) | | Total Operating Income | $595.2 | (12.8)% | $682.5 | 10.3% | $618.6 | - Key financial impacts in 2018 included the Fiberon acquisition, $62.6 million in asset impairment charges for Cabinets tradenames, and $35.4 million in restructuring charges[61] 2018 Compared to 2017 In 2018, net sales grew 3.8% to $5.5 billion, but operating income fell 12.8% to $595.2 million, mainly due to $62.6 million impairment charges - Net sales increased by $201.8 million (3.8%) due to price increases, acquisitions, higher sales volume, and favorable foreign exchange ($9 million)[62][63] - Operating income decreased by $87.3 million (12.8%) due to unfavorable mix, asset impairment charges ($62.6 million), higher employee-related costs, and restructuring charges ($24.1 million)[65][66][67] - The effective income tax rate increased to 27.4% in 2018 from 25.1% in 2017, partly due to a $5.5 million unfavorable adjustment related to the 2017 Tax Act[70] - By segment: Cabinets operating income fell 46.3% due to impairment charges Plumbing operating income grew 4.7% on higher sales Doors & Security operating income grew 5.9%, aided by the Fiberon acquisition[74][75][76] 2017 Compared to 2016 In 2017, net sales increased 6.0% to $5.3 billion, and operating income grew 10.3% to $682.5 million, driven by market improvements and acquisitions - Net sales increased by $298.4 million (6.0%) due to higher sales volume, acquisitions in the Plumbing segment, and price increases[78] - Operating income increased by $63.9 million (10.3%) due to higher net sales and productivity improvements, partially offset by unfavorable mix and higher costs[80] - The effective income tax rate decreased to 25.1% in 2017 from 29.2% in 2016, favorably impacted by the Tax Act ($25.7 million benefit) and tax benefits from share-based compensation[83] - By segment: Cabinets sales grew 2.9%, Plumbing sales grew 12.1% (boosted by acquisitions), and Doors & Security sales grew 4.1%[84][85][88] Liquidity and Capital Resources The company maintains strong liquidity with $262.9 million cash, $604.0 million operating cash flow, and a $1.25 billion credit facility, while increasing debt for acquisitions and repurchases - In 2018, the company issued $600 million of 4% senior notes due 2023 and increased its term loan to $525 million[90] - In 2018, the company repurchased 12.0 million shares of its common stock for $694.6 million As of Dec 31, 2018, approximately $413.7 million remained under its share repurchase authorizations[92] | (In million) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $604.0 | $600.3 | $650.5 | | Net cash used in investing activities | (634.3) | (287.7) | (385.1) | | Net cash used in financing activities | (6.8) | (250.1) | (250.4) | | (In million) | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Short-term and long-term debt | $2,334.0 | $525.0 | $719.0 | $595.0 | $495.0 | Critical Accounting Policies and Estimates This section details critical accounting policies, including annual impairment testing for goodwill and intangibles, resulting in a $62.6 million charge in 2018 - Goodwill and indefinite-lived intangible assets are tested for impairment annually in Q4 An impairment test is also performed if a triggering event occurs[115] - In 2018, the company recorded pre-tax impairment charges of $62.6 million related to two indefinite-lived tradenames in the Cabinets segment due to reduced revenue growth expectations[117][119] - Key assumptions for defined benefit plans in 2018 included a weighted-average discount rate of 4.4% and an expected long-term rate of return on assets of 6.0%[120][122] - The company completed its analysis of the 2017 Tax Act, resulting in a provisional net benefit of $25.7 million in 2017 and an unfavorable adjustment of $5.5 million in 2018[124] Quantitative and Qualitative Disclosures about Market Risk The company manages market risks from interest rates, foreign currency, and commodity prices using derivatives, with a $8.5 million interest rate sensitivity - A hypothetical 100 basis point change in interest rates on variable rate borrowings would impact pre-tax earnings by $8.5 million as of December 31, 2018[130] - The company uses forward foreign exchange contracts to hedge transactions, principally in the Canadian dollar, British pound, Chinese yuan, and Mexican peso[131] - A Value-at-Risk (VAR) sensitivity analysis estimated the maximum potential one-day loss from adverse changes in foreign exchange rates to be $0.8 million at December 31, 2018, with a 95% confidence level[131] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2018, showing net sales of $5.49 billion and net income of $389.8 million | (In million) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | NET SALES | $5,485.1 | $5,283.3 | $4,984.9 | | OPERATING INCOME | 595.2 | 682.5 | 618.6 | | NET INCOME | 389.8 | 472.7 | 413.2 | | (In million) | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | TOTAL CURRENT ASSETS | $1,686.1 | $1,601.7 | | TOTAL ASSETS | $5,964.6 | $5,511.4 | | TOTAL CURRENT LIABILITIES | $1,492.1 | $906.8 | | TOTAL LIABILITIES | $3,784.6 | $2,910.3 | | TOTAL EQUITY | $2,180.0 | $2,601.1 | Notes to Consolidated Financial Statements These notes detail financial disclosures, including the $470 million Fiberon acquisition, $62.6 million impairment, and $2.33 billion total debt - In September 2018, the company acquired Fiberon for a purchase price of approximately $470.0 million The acquisition added $173.4 million to goodwill and $195.0 million to identifiable intangible assets (Note 4)[171][172][173] - Goodwill increased by $168.3 million in 2018, primarily due to the Fiberon acquisition The company also recorded asset impairment charges of $62.6 million for two indefinite-lived tradenames in the Cabinets segment (Note 6)[176][177] - Total debt as of December 31, 2018 was $2,334.0 million, consisting primarily of senior notes, a revolving credit facility, and a term loan (Note 8)[184] - The company's pension plans had a funded status (deficit) of $(163.6) million at year-end 2018, compared to $(175.8) million at year-end 2017 (Note 15)[208] - Net sales to The Home Depot and Lowe's were 13% and 14% of total net sales in 2018, respectively (Note 19)[234] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of December 31, 2018[254] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018[258] - The assessment of internal control over financial reporting excluded the recently acquired Fiberon, which represented 2.0% of total assets and 0.7% of total revenues for 2018[258] - No changes in internal control over financial reporting occurred during the fourth quarter of 2018 that materially affected, or are reasonably likely to materially affect, the controls[259] Other Information The company reports no other information for this item - None Part III Directors, Executive Officers and Corporate Governance This section incorporates information on directors, executive officers, and corporate governance by reference from the 2019 Proxy Statement - Information regarding directors, executive officers, corporate governance, and the audit committee is incorporated by reference from the registrant's 2019 Proxy Statement[261] Executive Compensation This section incorporates executive compensation information by reference from the company's 2019 Proxy Statement - Information regarding executive compensation is incorporated by reference from the registrant's 2019 Proxy Statement[262] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates security ownership and equity compensation plan information by reference from the 2019 Proxy Statement - Information regarding security ownership and equity compensation plans is incorporated by reference from the registrant's 2019 Proxy Statement[263] Certain Relationships and Related Transactions, and Director Independence This section incorporates information on related person transactions, director independence, and board committees by reference from the 2019 Proxy Statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the registrant's 2019 Proxy Statement[264] Principal Accountant Fees and Services This section incorporates information on fees paid to and services provided by the principal independent registered public accounting firm from the 2019 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the registrant's 2019 Proxy Statement[265] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K, including consolidated financials and various agreements - Lists the financial statements, schedules, and exhibits filed with the Form 10-K[266] - Includes key exhibits such as credit agreements, indentures for senior notes, and long-term incentive plans[268][270][271] Form 10-K Summary The company reports no Form 10-K summary - None