Fortune Brands Home & Security, Inc. reported weaker-than-expected results for the second quarter of 2018. This was the company’s second consecutive quarter, with a negative earnings surprise of 2.9%, the other being 5.08% in the first quarter of 2018.

Earnings before charges/gains in the reported quarter were $1.00 per share, lagging the Zacks Consensus Estimate of $1.03. It’s worth noting that the adjusted result excluded 11 cents per share of restructuring and other charges, and 1 cent of tax impact.

However, the bottom line increased 8.7% from the year-ago tally of 92 cents on the back of sales growth and 6% fall in share count, partially offset by higher costs and expenses.

Solid Segmental Performance Drives Revenues

In the quarter under review, Fortune Brands’ net sales were $1,429 million, increasing 4.7% from the year-ago tally. The improvement was driven by healthy Plumbing, Doors and Security segments, partially offset by the weakness in Cabinets segment.

However, the top line lagged the Zacks Consensus Estimate of $1,441 million by 0.8%.

The company’s segmental results are discussed below:

Cabinets segment’s sales declined 2.4% year over year to $637.6 million. The weakness was caused by 3% sales decline, resulting from the exit from U.S. homecenter businesses, while the exit from Canadian businesses had no impact on sales. This negative was partially offset by 1% sales growth from businesses, excluding U.S. homecenter and Canadian businesses.

Plumbing sales grew 11.2% year over year to $483.7 million on the back of organic sales growth of 9%. This was driven by strengthening Chinese and U.S. wholesale businesses. Global Plumbing Group (GPG) added 2% to sales.

Doors segment’s sales increased 20% year over year to $160.2 million, backed by strength in wholesale and retail networks.

Sales at the Security segment grew 2.6% year over year to $147.5 million. The performance was driven by healthy retail sales in the United States, partially offset by the weakness in the commercial business.

Margins Weak

In the second quarter, Fortune Brands’ cost of sales before charges/gains increased 5.2% year over year to $896.8 million. It represented 62.8% of net sales compared with 62.4% in the year-ago quarter. Selling, administrative, and research and development expenses before charges/gains grew 7.5% year over year to $314.8 million, while came in at 22% of the net sales versus 21.4% in the year-ago quarter.

Operating income before charges/gains decreased 1.5% year over year to $209.2 million. Operating margin before charges/gains slipped 100 basis points to roughly 14.6%.

Balance Sheet & Cash Flow

Exiting the second quarter, Fortune Brands’ cash and cash equivalents were $345.5 million, up 41.4% from $244.4 million at the end of the previous quarter. Its long-term debt grew 16.6%, sequentially, to $1,793.3 million.

In the first half of 2018, the company generated net cash of $137.3 million from its operating activities, reflecting a decline of 19.8% from the year-ago period. Capital expenditure amounted to $67.2 million versus $59.5 million in the year-ago period. Free cash flow decreased 44.2% year over year to $74.6 million.

During the first half, the company used $602.7 million to purchase treasury stocks while paid dividends amounting to $58.6 million.

Outlook

Fortune Brands expects the positive momentum in the U.S. housing market to continue in 2018. It anticipates the U.S. home products market to grow 5-7% in the year while the global market is expected to rise 5-6%. Management predicts sales growth of 6-7%.

The company also anticipates the strengthening business of Global Plumbing Group, expectations for the housing market, share buybacks, favorable pricing and gains from cost actions to drive its performance in 2018. It increased its projection for earnings before charges/gains to $3.62-$3.72 from the earlier projection of $3.58-$3.70 per share. Also, the revised forecast compares favorably with the year-ago earnings of $3.08.

Also, the company communicated its plan to combine its Doors and Security business segments into a single segment. The new segment — Doors & Security — will come into existence in the third quarter of 2018. Annual sales and operating margin of the segment will be $1.2 billion and 16%, respectively.

Cash flow from operations in the year is predicted to be $645-$670 million (down from the previous expectation of $650-$675 million) while capital spending is likely to be $150-$155 million (forecast maintained). Free cash flow is anticipated to be $500-$525 million (versus the earlier projection of $525-$550 million).

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