Fortune Brands Home & Security, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. The filing’s registrant name is Fortune Brands Home & Security, Inc. (not Fortune Brands Innovations, Inc.). Comparisons are with Q1 2012 unless otherwise noted. Interim results may not indicate full-year performance.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $890.0 million | $798.8 million |
| Operating income | $56.6 million | $21.3 million |
| Net income attributable to the company | $37.3 million | $12.5 million |
| Diluted EPS | $0.22 | $0.08 |
| Cash from operations | $(72.5) million | $(43.9) million |
| Capital expenditures | $14.4 million | $11.2 million |
- Sales rose 11.4%; operating income increased 165.7%. Calculated gross margin was approximately 33.7%, versus 30.9%; operating margin was approximately 6.4%, versus 2.7%.
- Cash and cash equivalents were $258.9 million at March 31, down from $336.0 million at year-end 2012. Current assets were $1,199.2 million and current liabilities $559.7 million.
- Long-term borrowings under the revolving facility and term loan totaled $320.0 million, unchanged from year-end; bank notes payable were $6.4 million. The company reported compliance with facility covenants. The $650 million revolving facility and $350 million term loan expire in October 2016, with variable rates of LIBOR plus 1.0% to 2.0%.
Material changes and operating drivers
- Management attributed higher sales primarily to improved U.S. home-products conditions, especially new construction, and growth initiatives. Cost of products sold rose 7%, slower than sales, partly reflecting productivity gains; SG&A increased 9% with volume and planned strategic spending.
- Plumbing & Accessories sales increased 26.3% and operating income 51.9%; Kitchen & Bath Cabinetry sales increased 10.9% and returned to operating profit of $14.3 million from a $5.3 million loss.
- Advanced Material Windows & Door Systems sales rose 9.5%, but the segment retained an $8.5 million operating loss. Security & Storage sales fell 13.8%, primarily due to lower storage sales; operating income increased 4.2%.
- Operating cash use worsened by $28.6 million year over year, primarily due to higher incentive compensation and customer-program payments, despite higher net income. Receivables and inventory increases also used cash.
Outlook, risks and unusual items
- No quantified earnings or sales guidance is provided. Management expected a gradual, uneven U.S. home-products recovery, dependent on consumer confidence, employment, home prices and credit availability. It cited cautious consumers, possible continued heavy cabinet promotion, raw-material and transportation cost fluctuations, and value-oriented purchasing as near-term challenges; productivity and pricing were intended offsets.
- On May 2, 2013, the company announced an agreement to acquire WoodCrafters Home Products for approximately $300 million, subject to adjustments, regulatory approval and customary closing conditions. Closing was expected before year-end 2013; funding was expected from cash and existing credit facilities.
- The board approved a $0.10-per-share quarterly dividend on April 30, payable June 19, 2013. The company repurchased 398,600 shares for $13.1 million in Q1 under its $150 million authorization; $127.8 million remained.
- Postretirement plan amendments reduced accrued retiree-benefit liabilities by $31.6 million in Q1, while $4.6 million of actuarial losses were recognized. A planned freeze of an hourly pension plan by December 31, 2016 resulted in a $19.9 million pension-liability reduction; the curtailment charge was insignificant. Management cautioned that future benefit-plan remeasurements could materially affect income.
- Goodwill and other intangible assets were significant ($1.38 billion and $677.9 million, respectively). Management noted impairment sensitivity to the home-products recovery and other economic and customer factors; no interim impairment test was triggered in Q1.
- Pending ordinary-course litigation was not expected by management to have a material adverse effect, though outcomes are uncertain. Environmental remediation estimates are also uncertain. The filing reported no material changes to previously disclosed risk factors or market-risk disclosures.
Important facts for investors to verify
- Whether sales and margin improvement persist across segments, especially given Security & Storage’s sales decline and the continued Windows & Door Systems loss.
- Cash conversion and working-capital trends, including the timing of incentive compensation and customer-program payments.
- Funding, closing conditions and integration implications of the proposed WoodCrafters acquisition, including resulting debt and liquidity.
- Exposure to U.S. housing conditions, promotional activity, raw-material and freight costs, customer credit risk, and pension funding or remeasurement changes.
- Potential impairment sensitivity of goodwill and indefinite-lived tradenames if market-recovery assumptions weaken.