Fortune Brands Innovations, Inc. quarterly report, Q2 FY2014

Fortune Brands Home & Security, Inc. — Q2 2014 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2014. The filing identifies the registrant as Fortune Brands Home & Security, Inc.; it describes a home and security products business spanning cabinetry, plumbing, windows and doors, and security and storage.

Financial performance

MetricQ2 2014Q2 2013Six months 2014Six months 2013
Net sales$1,142.2 million$1,040.4 million$2,108.4 million$1,930.4 million
Operating income$136.6 million$106.5 million$198.7 million$163.1 million
Net income attributable to company$93.3 million$64.0 million$134.1 million$101.3 million
Diluted EPS$0.55$0.37$0.79$0.59
  • Q2 sales rose 9.8%; operating income increased 28.3%. Approximate operating margin improved to 12.0% from 10.2%; gross margin was about 35.1% versus 36.2%.
  • For the first half, sales rose 9.2% and operating income 21.8%. Approximate operating margin was 9.4% versus 8.4%; gross margin was about 33.9% versus 35.1%.
  • Cash from operations was negative $30.7 million in the first half, versus positive $45.9 million a year earlier. Capital expenditures were $47.6 million.
  • June 30 cash was $145.0 million, down from $241.4 million at year-end 2013; $121.3 million was held at non-U.S. subsidiaries. Current assets were $1,337.1 million and current liabilities $644.9 million. Long-term debt was $595.0 million, with another $10.1 million of short-term bank notes.

Changes and drivers

  • Growth reflected improving U.S. home-products demand, pricing and WoodCrafters, acquired in June 2013. WoodCrafters contributed about $50 million of Q2 sales and $100 million in the first half.
  • Kitchen & Bath Cabinetry led segment growth: first-half sales rose 19.1% and operating income 32.8%. Plumbing & Accessories and Advanced Material Windows & Door Systems also grew sales and operating income.
  • Security & Storage weakened: first-half sales fell 1.5% and operating income fell 23.3%, with lower storage-product demand and product-line exits among the factors.
  • Management cited manufacturing capacity investment costs and first-quarter extreme-weather inefficiencies as offsets to volume growth and productivity gains. SG&A declined; 2013 other expense included a $6.2 million investment impairment that did not recur.

Outlook, risks and notable items

  • Management characterized the U.S. home-products market as being in the early stages of a multi-year recovery, while noting dependence on consumer confidence, employment, home prices and credit availability. No quantified earnings or revenue guidance was provided.
  • On July 29, 2014, after quarter-end, the company acquired Sentry Safe for $117.5 million in cash, funded through credit facilities. Sentry reported estimated annual sales of $150 million; purchase accounting was not final.
  • The company repurchased approximately 6.5 million shares for $264.8 million in the first half and paid $39.5 million in dividends. It reported $224.5 million of remaining repurchase authorization at June 30; it also repurchased 2.9 million shares for $112.4 million in July.
  • Cash use reflected incentive compensation and customer-program payments, higher working capital, capital spending, repurchases and dividends. Management says operating cash flow is seasonal, typically stronger in the third and fourth quarters.
  • The $650 million revolving facility and $350 million term loan mature in July 2018; facility borrowings were $595.0 million at June 30. Rates are variable, and the company reported covenant compliance. Risks include housing-market exposure, raw-material and transportation costs, customer and supplier concentration, acquisition integration, foreign exchange, pensions, and environmental or legal matters.
  • Goodwill and indefinite-lived intangible impairment risk remains sensitive to housing-market assumptions and other valuation inputs. One reporting unit and one tradename had less than 10% estimated fair-value headroom at year-end 2013. Routine litigation and environmental remediation were disclosed; management did not expect a material adverse effect.

Important facts for investors to verify

  • Whether sales and margin improvement continued, especially after weather-related disruption and planned capacity investments.
  • Whether Security & Storage stabilized and whether the storage-product declines persisted.
  • Working-capital trends, seasonal cash generation, and funding needs after repurchases and the Sentry Safe acquisition.
  • Debt levels, variable-rate exposure, covenant headroom, and the availability and use of remaining share-repurchase authorization.
  • Housing-market and impairment assumptions, plus final purchase-price allocation and integration performance for Sentry Safe.