Fortune Brands Home & Security, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. The filing’s registrant name is Fortune Brands Home & Security, Inc. (the metadata identifies the company as Fortune Brands Innovations, Inc.). The company sells branded cabinetry, plumbing, door and security products. Simonton and Waterloo are presented as discontinued operations.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $950.8 million | $889.1 million |
| Gross profit / margin | $316.9 million / 33.3% | $295.3 million / 33.2% |
| Operating income / margin | $67.3 million / 7.1% | $69.3 million / 7.8% |
| Continuing-operations income, net of tax | $40.9 million | $46.3 million |
| Net income attributable to Fortune Brands | $40.0 million | $40.8 million |
| Diluted EPS | $0.25 | $0.24 |
| Operating cash flow | $(66.7) million | $(156.6) million |
Cash and cash equivalents were $179.4 million at March 31, 2015, down from $191.9 million at year-end 2014; $154.4 million was held outside the U.S. Total debt was $760.0 million, versus $670.0 million at year-end. The company reported compliance with its debt covenants. Capital expenditures were $24.6 million, and dividends paid were $22.3 million. The quarterly dividend was $0.14 per share.
Changes versus prior year
- Sales grew 6.9%, reflecting about $44 million from the SentrySafe and Anaheim acquisitions, higher volume, pricing and favorable mix; foreign exchange reduced sales by about $12 million.
- Operating income declined 2.9%. Higher restructuring charges and Cabinets capacity-expansion inefficiencies offset sales growth and productivity improvements. SG&A rose 8% amid acquisitions, employee costs and strategic spending.
- Continuing-operations income fell to $40.9 million from $46.3 million, affected by lower operating income, higher interest expense and unfavorable foreign-currency adjustments. The discontinued-operations loss narrowed to $0.6 million from $5.1 million.
- Operating cash use improved by $89.9 million year over year, largely because incentive compensation and customer-program payments were about $75 million lower. First-quarter operating cash use is typical due to seasonality.
- By segment, Plumbing sales and operating income increased 7.6% and 15.4%; Security sales rose 38.6%, mainly from SentrySafe, while operating income fell 13.0%. Cabinets sales were essentially flat and operating income declined 34.7%; Doors reported a $1.2 million operating loss.
Outlook, transactions and risks
- No specific financial guidance was provided. Management said it viewed the U.S. home-products market as being in a multi-year recovery and cited consumer confidence, employment, home prices, mortgage rates and credit availability as important factors.
- The company agreed to acquire Norcraft for an enterprise valuation of approximately $600 million, payable at $25.50 per share in cash. Closing was expected in Q2 2015, subject to customary conditions; funding was expected from cash and existing credit facilities. A new $200 million, 364-day revolving facility was available for general corporate purposes following closing.
- Management identified exposure to housing and remodeling activity, economic conditions, acquisition integration, competition, key customers and suppliers, raw-material and supply-chain costs, postretirement costs, regulation and international operations. Goodwill and intangible-asset valuations depend in part on housing-market recovery and planned cost reductions.
- Q1 restructuring charges were $4.7 million, primarily for severance and supply-chain initiatives. Waterloo was classified as discontinued operations, with a sale expected by the end of 2015. Ordinary-course litigation and environmental remediation were disclosed; management did not expect them to materially affect results, cash flows or financial condition.
Important facts for investors to verify
- Whether the Norcraft acquisition closed on expected terms and how its financing affected debt, interest expense and liquidity.
- Whether sales growth translates into improved segment operating margins, particularly in Cabinets and Security.
- Working-capital and seasonal cash-flow trends, including inventory growth and the company’s ability to maintain liquidity while funding acquisitions, capital spending and dividends.
- Progress and proceeds from the planned Waterloo sale, and any associated costs or changes to discontinued-operations results.
- Developments in tax examinations, environmental matters, litigation and the housing-market factors that could affect impairment assumptions.