Fortune Brands Home & Security, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The filing is for Fortune Brands Home & Security, Inc.; “Fortune Brands Innovations” is not the registrant name shown in this 2012 report. The company, spun off from Fortune Brands, Inc. in October 2011, sells branded cabinetry, plumbing, windows and doors, and security and storage products.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $935.3 million | $889.7 million | $1,734.1 million | $1,604.5 million |
| Operating income | $72.3 million | $65.2 million | $93.6 million | $73.0 million |
| Net income attributable to company | $47.8 million | $43.7 million | $60.3 million | $33.2 million |
| Diluted EPS | $0.29 | $0.28 | $0.37 | $0.21 |
| Operating margin | 7.7% | 7.3% | 5.4% | 4.5% |
For the six months, gross margin was approximately 32.5%, up from 31.3% in 2011; Q2 gross margin was approximately 34.0%, versus 32.7%. Revenue rose 8.1% for the half and 5.1% in Q2. Six-month operating income increased 28.2%; Q2 operating income increased 10.9%. Six-month net income growth was also aided by the absence of $23.0 million of net related-party interest expense recorded in 2011 before the spin-off.
Segments and drivers
- Six-month sales: Plumbing & Accessories +15.5%; Advanced Material Windows & Door Systems +8.8%; Security & Storage +9.3%; Kitchen & Bath Cabinetry +2.1% year over year.
- Six-month operating results: Plumbing & Accessories rose to $79.0 million from $60.3 million; Security & Storage rose to $33.4 million from $25.7 million. Windows & Door Systems narrowed its operating loss to $4.8 million from $9.3 million. Cabinetry operating income slipped to $12.6 million from $13.1 million.
- Management attributed growth to improved U.S. housing conditions, higher sales volume, price increases, productivity, and first-quarter inventory rebuilding by some plumbing customers. Higher raw-material and transportation costs, unfavorable product/customer mix, foreign exchange, customer-program costs, and increased strategic spending partly offset gains.
Cash flow, balance sheet and capital
- Six-month operating cash flow was $52.5 million, versus cash used of $9.7 million in 2011. Capital expenditures were $28.2 million; investing cash outflow was $30.0 million. Financing cash inflow was $2.9 million, including $54.8 million from stock-option exercises and $50.0 million of net long-term debt repayment. Cash increased $26.4 million to $147.2 million.
- At June 30, cash was $147.2 million and current assets were $1,068.1 million against current liabilities of $596.4 million (current ratio approximately 1.79). Receivables were $405.2 million and inventories $385.5 million; both had risen since year-end.
- Long-term debt, including current portion, totaled $356.8 million, down $50.0 million from December 31; notes payable to banks were $4.6 million. The company had a $350 million term loan outstanding and no borrowings on its $650 million revolving facility, both due in October 2016. It reported compliance with facility covenants.
- Most cash was held at non-U.S. subsidiaries; repatriation of some balances could result in adverse tax consequences. The board authorized a share repurchase program of up to $150 million through July 25, 2015; the program is discretionary. No material dividend commitment is stated.
Outlook, risks and unusual items
- Management expected the U.S. home-products recovery to be gradual and uneven, with near-term results potentially uneven as consumers remained cautious about big-ticket purchases. It anticipated continued pressure from materials and transportation costs, value-oriented buying, and promotional activity through 2012, and cited productivity and pricing as offsets. No specific earnings or revenue guidance was provided.
- On August 3, 2012, after quarter-end, the company initiated closure of its Martinsville, Virginia cabinet facility. It expected approximately $13 million of pretax charges ($8 million after tax), comprising about $3 million cash costs and $10 million primarily noncash accelerated depreciation; completion was expected in Q4 2012.
- Goodwill was $1,366.4 million and other intangible assets were $696.1 million. The filing notes that the Advanced Material Windows & Door Systems reporting unit had less than 10% estimated fair-value cushion over carrying value at year-end 2011; adverse market or operating changes could trigger impairment. Housing recovery assumptions are a significant input to impairment projections.
- Other exposures include customer credit risk, foreign-exchange and commodity movements, pension funding (approximately $20 million of minimum contributions expected in Q3 2012), and potential tax consequences related to foreign cash. Routine litigation and environmental remediation matters were disclosed; management did not expect them to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors.
- Comparisons with 2011 require care: that period preceded the spin-off and included allocated former-parent corporate costs and related-party financing; management states those historical costs may not represent standalone expenses.
Investor verification points
- Confirm the drivers and sustainability of sales growth, particularly plumbing customer inventory rebuilding and housing-market improvement.
- Track raw-material, transportation, promotional, and strategic-spending impacts on margins, along with the increase in standalone corporate costs.
- Assess operating cash conversion as receivables and inventories rise, and review the location and accessibility of cash balances.
- Monitor the Martinsville closure costs and expected savings, pension contributions, debt terms and covenant headroom.
- Review impairment sensitivity for goodwill and indefinite-lived brands, especially in Advanced Material Windows & Door Systems, against actual housing-market conditions.