Fortune Brands Home & Security, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; filed May 4, 2012. The filing is for Fortune Brands Home & Security, Inc., the company’s name at that time, not the later Fortune Brands Innovations name. The company was spun off from Fortune Brands, Inc. on October 3, 2011, so Q1 2011 results reflect its former-parent period and are not fully comparable to stand-alone operations.
Financial results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $798.8 million | $714.8 million |
| Operating income | $21.3 million | $7.8 million |
| Net income (loss) attributable to company | $12.5 million | $(10.5) million |
| Basic and diluted EPS | $0.08 | $(0.07) |
| Cash used in operating activities | $43.9 million | $67.9 million |
- Sales increased 11.8%. Operating margin was approximately 2.7%, versus 1.1% a year earlier; gross margin was approximately 30.9%, versus 29.4%.
- Operating income rose $13.5 million. Higher sales, productivity and pricing helped offset unfavorable mix, increased strategic spending, and higher raw-material and transportation costs.
- Net income improved by $23.0 million, primarily reflecting higher operating income and the absence of $22.7 million in net related-party interest expense recorded in Q1 2011.
- Cash and cash equivalents were $120.6 million at March 31, 2012, little changed from $120.8 million at year-end. Investing activities used $13.4 million, including $11.2 million of capital expenditures; financing activities provided $56.7 million.
- Current assets were $973.9 million and current liabilities $516.9 million (current ratio approximately 1.9). Long-term debt was $409.3 million and current maturities $17.5 million; notes payable to banks were $4.3 million. Separately, the company reported $420 million outstanding under its revolving credit and term-loan facilities, plus $6.8 million of industrial revenue bonds.
Segments and material changes
- Sales increased in all four segments: Kitchen & Bath Cabinetry 3.9%; Plumbing & Accessories 20.0%; Advanced Material Windows & Door Systems 11.2%; and Security & Storage 18.5%.
- Plumbing & Accessories operating income rose to $36.2 million from $25.7 million; Security & Storage rose to $11.8 million from $6.2 million. Advanced Material Windows & Door Systems narrowed its operating loss to $8.5 million from $13.9 million, including a $2.0 million benefit from reducing a contingent consideration liability. Kitchen & Bath Cabinetry’s operating loss widened to $5.3 million from $2.0 million.
- Corporate expenses increased to $12.9 million from $8.2 million. The prior-year period included $7.9 million of former-parent corporate expense allocations; management also cited higher stand-alone-company costs in 2012.
- Q1 2012 restructuring charges were $1.0 million, primarily related to supply-chain initiatives; other related charges in cost of products sold were $0.6 million.
Liquidity, outlook and risks
- The company had a $650 million committed revolver and a $350 million term loan, both expiring in October 2016. It reported covenant compliance at quarter-end; facility pricing varies with LIBOR and leverage.
- Management said a U.S. home-products recovery could be uneven and near-term conditions challenging, while expecting operating leverage and strategic spending to support profitability as demand improves. No numerical earnings or revenue guidance was provided.
- Management highlighted investment in innovation, new products, brand advertising, international selling infrastructure and manufacturing capacity. It also cited organic growth as a priority and said acquisitions, repurchases or dividends could be considered, without committing to them.
- Risks include housing-market weakness and uncertainty in employment, home prices, credit availability and foreclosures; customer defaults; raw-material and transportation costs; currency exposure; and possible goodwill or intangible-asset impairment. The Advanced Material Windows & Door Systems reporting unit had less than 10% estimated fair-value headroom over carrying value at year-end 2011, according to the filing.
- Cash was mostly held at non-U.S. subsidiaries; repatriation could trigger tax expense. The company expected approximately $20 million of minimum pension contributions in 2012.
- Routine litigation and environmental remediation matters were disclosed; management did not expect them to have a material adverse effect, while noting outcomes and remediation estimates involve uncertainty.
Important facts for investors to verify
- How much of sales growth reflected underlying demand versus customer inventory rebuilding, promotions, price increases and new products.
- Whether margin improvement can continue as raw-material, transportation and stand-alone corporate costs evolve.
- The quality and sustainability of operating cash flow, given the $43.9 million quarterly cash use and higher receivables and inventory.
- Debt-facility balances and covenant headroom, and the distinction between the $420 million facility borrowing disclosure and balance-sheet debt that also includes industrial revenue bonds.
- Impairment sensitivity of goodwill and indefinite-lived brands, particularly in the Advanced Material Windows & Door Systems segment, and potential tax, pension and litigation exposures.