Fortune Brands Home & Security, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; compared with Q1 2013. The filing registrant was named Fortune Brands Home & Security, Inc. (not Fortune Brands Innovations, Inc.). Figures are in millions of dollars unless otherwise stated.
Business context and results
The company sells branded kitchen and bath cabinetry, plumbing and accessories, windows and doors, and security and storage products. Management described U.S. home products markets as being in the early stages of a multi-year recovery, with demand dependent on housing construction and repair and remodeling activity.
- Net sales were $966.2, up 8.6% from $890.0. Management attributed growth to the WoodCrafters acquisition, higher volume and price increases; severe weather reduced sales by an estimated $40.
- Gross profit was $314.7 versus $300.2; gross margin was approximately 32.6% versus 33.7%. Higher volume, weather-related inefficiencies and capacity investments pressured costs, partly offset by productivity improvements.
- Operating income was $62.1, up 9.7%; operating margin was approximately 6.4%, roughly unchanged. Management estimated weather-related lower volume and inefficiencies reduced results by about $20. WoodCrafters contributed approximately $50 of sales and $5 of operating income.
- Net income attributable to the company was $40.8, versus $37.3; diluted EPS was $0.24 versus $0.22. Net margin was approximately 4.2% in both periods.
- Interest expense was $1.9, compared with $1.7. The effective tax rate was 32.1%, versus 31.9%.
Segments and material changes
- Kitchen & Bath Cabinetry sales rose 19.0% to $410.9 and operating income rose 39.2% to $19.9, with WoodCrafters a significant contributor.
- Plumbing & Accessories sales were nearly flat at $309.9; operating income was $55.3, also nearly flat.
- Advanced Material Windows & Door Systems sales increased 4.7% to $130.0; the operating loss narrowed to $7.7 from $8.5.
- Security & Storage sales increased 3.4% to $115.4, while operating income fell 20.3% to $9.8, including $2.2 of restructuring and other charges related primarily to storage product-line rationalization.
- Q1 2014 included $2.3 of restructuring charges, compared with $0.9 in Q1 2013. The company also recorded $0.6 of actuarial losses related to benefit plans, versus $4.6 in Q1 2013.
Cash flow, liquidity and debt
- Operating cash flow was negative $156.6, compared with negative $72.5. Management cited higher incentive compensation and customer program payments (about $35 combined) and increased working capital; the company said cash use in the first half is seasonal.
- Investing cash outflow was $20.9, including $21.0 of capital expenditures. Financing cash inflow was $62.0. Cash declined $117.2 to $124.2; $113.8 was held at non-U.S. subsidiaries.
- At March 31, cash was $124.2 and current assets and liabilities were $1,264.7 and $566.9, respectively. Long-term debt was $475.0, up from $350.0 at year-end 2013; short-term bank notes were $9.7. The company had a $650 revolving facility and a $350 term loan, both due in July 2018, and reported compliance with covenants.
- Q1 financing included $185.0 of long-term debt issuance and $60.0 of repayment. The company repurchased 1.56 million shares for $68.7 and paid $19.9 in dividends. Remaining repurchase authorization was approximately $170.5.
Outlook, risks and contingencies
No formal quantitative earnings or revenue guidance is provided in the supplied filing text. Management expected profitable organic growth as housing markets recover, supported by operating leverage and strategic investment, and identified acquisitions and shareholder returns as possible uses of capital. These expectations are forward-looking, not guarantees.
- Key risks include dependence on North American housing and repair-and-remodel activity, economic and consumer conditions, raw-material and transportation costs, competition, key customers and suppliers, acquisition integration, pension costs, regulation and international operations.
- Management stated that one Advanced Material Windows & Door Systems reporting unit and a related tradename had less than 10% fair-value headroom at year-end 2013; adverse market or operating assumptions could lead to impairment. No interim impairment test was required in Q1.
- The company disclosed ordinary-course litigation and environmental remediation matters, but said these were not expected to materially affect results, cash flows or financial condition. Outcomes and environmental exposures remain uncertain.
- Cash repatriation from certain foreign subsidiaries could create tax expense. The company expected approximately $10 of pension contributions in 2014 and said it had sufficient liquidity for minimum required funding.
- Disclosure controls were assessed as effective; no material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- How much reported growth reflects WoodCrafters versus organic volume and pricing, and whether weather-related disruption reverses.
- Whether working-capital use and seasonal operating cash outflows normalize, given the quarter’s negative $156.6 operating cash flow.
- Debt, variable-rate exposure and covenant headroom after borrowings increased to $475.0.
- Progress on margins and capacity investments, particularly the Windows & Door Systems segment’s operating loss and Security & Storage profitability.
- Developments affecting impairment headroom, foreign cash access, pension obligations, litigation and environmental remediation.