Fortune Brands Home & Security, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The filing issuer is Fortune Brands Home & Security, Inc. (the company identified in the request as Fortune Brands Innovations). Unaudited interim results may not indicate full-year performance. The company makes branded kitchen and bath cabinetry, plumbing products, windows and doors, and security and storage products.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $1,040.4 million | $935.3 million | $1,930.4 million | $1,734.1 million |
| Operating income | $106.5 million | $72.3 million | $163.1 million | $93.6 million |
| Net income attributable to company | $64.0 million | $47.8 million | $101.3 million | $60.3 million |
| Diluted EPS | $0.37 | $0.29 | $0.59 | $0.37 |
| Operating margin | 10.2% | 7.7% | 8.4% | 5.4% |
- Six-month sales rose 11.3%; operating income increased 74.3% and attributable net income increased $41.0 million. Q2 sales grew 11.2%, operating income 47.3%, and attributable net income $16.2 million.
- Growth was driven mainly by higher sales volume amid improving U.S. housing and new-construction conditions, plus price increases. Productivity and lower benefit costs also helped; higher advertising, compensation, acquisition expenses, and input costs partly offset gains.
- By segment, first-half sales increased in Kitchen & Bath Cabinetry (12.2%), Plumbing & Accessories (20.1%), and Advanced Material Windows & Door Systems (10.1%). Security & Storage sales declined 6.2%. Plumbing had the largest reported first-half segment operating income, at $110.3 million.
- Interest expense for the first half declined to $3.4 million from $4.6 million. Other expense rose to $5.9 million from $0.2 million, primarily due to a $6.2 million impairment of a cost-method investment. The investment was written down to zero, with no further impairment or funding obligation.
Cash flow, balance sheet and capital
- For the first six months, operating cash flow was $45.9 million, down from $52.5 million; capital expenditures were $31.2 million. Investing cash outflow was $330.3 million, largely reflecting the WoodCrafters acquisition. Financing cash inflow was $71.9 million, including $60 million net long-term borrowing. Cash decreased $212.4 million to $123.6 million.
- At June 30, cash was $123.6 million, current assets $1,203.6 million, and current liabilities $671.7 million. Reported debt comprised $6.1 million of bank notes, $22.5 million current long-term debt, and $357.5 million long-term debt. Cash was down from $336.0 million at year-end 2012; total reported debt was up from $325.5 million.
- In June the company acquired WoodCrafters, a bathroom vanity and top manufacturer, for approximately $300 million, funded with cash and credit-facility borrowings. Preliminary purchase-price allocation included $143.1 million goodwill and $91.4 million identifiable intangibles. WoodCrafters’ operating results were to be included beginning in Q3 2013.
- The $650 million revolving facility and $350 million term loan were renewed in July 2013, extending maturity to July 2018. At June 30, facility borrowings were $320 million on the term loan and $60 million on the revolver; the company reported covenant compliance. It subsequently increased term-loan borrowings by $30 million, reducing revolver borrowings.
- The board initiated a quarterly dividend of $0.10 per share; $16.5 million was paid in the first half. The company repurchased $13.1 million of shares during the first half and had approximately $127.7 million remaining under its $150 million authorization.
Outlook, risks and unusual items
- No quantified earnings or sales guidance is provided. Management expected U.S. home-products recovery to be gradual and uneven, depending on consumer confidence, employment, home prices, and credit availability. Management cited long-term support from housing demand and aging homes.
- Near-term risks cited include cautious consumers, especially for big-ticket purchases; continued promotional activity; raw-material and transportation cost fluctuations; and a preference for lower-priced products. The company said it sought to offset cost pressures through productivity and pricing.
- Other stated risks include dependence on North American housing activity and the broader economy; acquisition integration; key customers and suppliers; raw-material and supply-chain availability; postretirement benefit costs and funding; and changes in tax, environmental, and regulatory requirements.
- Benefit-plan changes reduced accrued retiree benefits, while a pension-plan freeze and liability remeasurement also affected reported costs and comprehensive income. The company cautioned that future actuarial remeasurements could create material income or expense. It expected approximately $35 million in pension contributions for 2013.
- Pending ordinary-course litigation and environmental remediation matters were disclosed. The company said it did not expect litigation or current environmental compliance to have a material adverse effect, while noting remediation estimates are uncertain. It reported no material changes to previously disclosed risk factors.
- The company’s goodwill and intangible-asset valuations depend significantly on projected recovery in U.S. home-products markets; a weaker outlook or other adverse events could trigger impairment. No interim impairment test was required in the first half.
Key facts for investors to verify
- How much of reported sales and earnings growth reflects underlying volume, pricing, and market recovery versus acquisition-related effects, and how WoodCrafters performs after consolidation begins in Q3.
- Whether operating cash generation improves as receivables and inventories rise and accrued expenses decline; first-half operating cash flow was below net income.
- Debt, borrowing costs, covenant headroom, and liquidity after the July facility renewal and borrowing changes, including the location and accessibility of the $91.4 million held by non-U.S. subsidiaries.
- Whether promotional intensity, input costs, and continued strategic and advertising spending affect margins, and whether Security & Storage sales stabilize.
- The final WoodCrafters purchase-price allocation and the sensitivity of goodwill and indefinite-lived intangibles to housing-market assumptions.
- Future pension funding needs and actuarial adjustments, as well as resolution of tax proceedings and environmental or litigation contingencies.