Fortune Brands Home & Security, Inc. has reported weaker-than-expected results for the fourth quarter of 2018, delivering negative earnings surprise of 8.5%. This was the company’s fourth consecutive quarter of recording lower-than-expected results, the average for the four quarters being 6.98%.

Earnings before charges/gains in the reported quarter were 86 cents per share, lagging the Zacks Consensus Estimate of 94 cents. On a year-over-year basis, the bottom line improved 7.5% on the back of sales growth, margin improvement and 7.6% fall in share count.

For 2018, the company’s earnings before charges/gains were $2.66 per share, lagging the Zacks Consensus Estimate of $3.42 and declining 13% from the year-ago tally of $3.05.

Growth in Plumbing and Doors & Security Drive Revenues

In the quarter under review, Fortune Brands’ net sales were $1,420.7 million, increasing 2.8% from the year-ago tally. The improvement was driven by healthy growth in Plumbing, and Doors & Security segments.

However, the top line lagged the Zacks Consensus Estimate of $1.46 billion.

The company’s segmental results are discussed below:

The Cabinets segment’s sales declined 0.2% year over year to $624.8 million. As noted, growth in builder direct and dealer business were offset by the decrease in order from Canada and homecenter.

Plumbing sales grew 4.1% year over year to $488.4 million on the back of organic sales growth of 3%. This was driven by strengthening wholesale businesses in China and the United States, partially offset by forex woes and reduction in channel inventory.

The Doors & Security segment’s sales increased 7% year over year to $307.5 million, backed by gains from buyouts of Fiberon and Therma-Tru doors. However, it was partially offset by decrease in sales from security products.

For 2018, the company’s net sales were $5,485.1 million, increasing 3.8% year over year and lagging the Zacks Consensus Estimate of $5.53 billion.

Margins Weak Y/Y

In the fourth quarter, Fortune Brands’ cost of sales before charges/gains increased 4.5% year over year to $921.6 million. It represented 64.9% of net sales compared with 63.8% in the year-ago quarter. Selling, administrative, and research and development expenses before charges/gains grew 0.3% year over year to $30.7.7 million while came in at 21.7% of the net sales versus 22.2% in the year-ago quarter.

Notably, inflation and tariffs heightened costs by $90 million in 2018.

Operating income before charges/gains decreased 2.7% year over year to $180.6 million. Operating margin before charges/gains slipped 70 basis points to roughly 12.7%. Interest expenses in the reported quarter surged 81.4% year over year to $23.4 million.

Balance Sheet & Cash Flow

Exiting the fourth quarter, Fortune Brands’ cash and cash equivalents were $262.9 million, down 32.6% from $389.9 million at the end of the previous quarter. Its long-term debt declined 9% sequentially to $1,809 million. It is worth mentioning here that the company raised $826.2 million funds from debts during 2018.

In 2018, the company generated net cash of $604 million from operating activities, reflecting 0.6% increase from the previous year. Capital expenditure amounted to $150.1 million versus $165 million in 2017. Free cash flow inched up 0.2% year over year to $464.9 million.

During the year, the company used $694.6 million to purchase treasury stocks while paid dividends amounting to $115.2 million.

Outlook

For 2019, Fortune Brands anticipates moderate growth in markets while predicts continued focus on operational improvements. The company predicts the U.S. home products market to grow 2-4% in the year and the global market to grow 2-4% as well.

Sales in the year are expected to increase by 6-7.5% over the previous year, including organic sales growth of 3-5%. Earnings before charges/gains are estimated to be $3.53-$3.77 per share, reflecting year-over-year growth of 9% at the mid-point.

Fortune Brands Home & Security, Inc. Price, Consensus and EPS Surprise