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FBHS > SEC Filings for FBHS > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for FORTUNE BRANDS HOME & SECURITY, INC.

Form 10-Q for FORTUNE BRANDS HOME & SECURITY, INC.


1-Nov-2013

Quarterly Report


Item 2. FORTUNE BRANDS HOME & SECURITY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto, which are included in this report, as well as our audited consolidated financial statements for the year ended December 31, 2012, which are included in our Annual Report on Form 10-K for the year ended December 31, 2012.

This discussion contains forward-looking statements that are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended (the "Exchange Act"), regarding business strategies, market potential, future financial performance and other matters. Statements preceded by, followed by or that otherwise include the words "believes," "expects," "anticipates," "intends," "projects," "estimates," "plans" and similar expressions or future or conditional verbs such as "will," "should," "would," "may" and "could" are generally forward-looking in nature and not historical facts. The forward-looking statements are not historical facts, but rather are based on expectations, estimates, assumptions and projections about our industry, business and future financial results, based on information available at the time this report is filed with the Securities and Exchange Commission, or with respect to any document incorporated by reference, available as of the time such document was prepared. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including but not limited to: (i) our reliance on the North American home improvement, repair and new home construction activity levels, (ii) the North American and larger global economies, (iii) risk associated with entering into potential strategic acquisitions and integrating and operating acquired businesses, (iv) our ability to remain innovative and protect our intellectual property, (v) our reliance on key customers and suppliers, (vi) the cost and availability associated with our supply chains and the availability of raw materials, (vii) risk of increases in our postretirement benefit-related costs and funding requirements and (viii) changes in tax, environmental and federal and state laws and industry regulatory standards. These and other factors are discussed in Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2012, which is hereby incorporated herein by reference. We undertake no obligation to, and expressly disclaim any such obligation to, update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future results over time or otherwise, except as required by law.

OVERVIEW

References to "Home & Security," "the Company," "we," "our" and "us" refer to Fortune Brands Home & Security, Inc. and its consolidated subsidiaries as a whole, unless the context otherwise requires. The Company is a leader in home and security products with companies focused on the design, manufacture and sale of market leading branded products in the following categories: kitchen and bath cabinetry, plumbing and accessories, advanced material windows products and entry door systems, and security and storage products.


OVERVIEW (Continued)

With a foundation of market-leading brands across a diversified mix of channels, and lean and flexible supply chains, as well as a tradition of strong innovation and customer service, we are focused on outperforming our markets in both growth and returns and driving increased shareholder value. We believe the Company's track record reflects the long-term attractiveness and potential of our categories and our leading brands. As consumer demand and the housing market improve from current levels, we expect the benefits of operating leverage and strategic spending will help us to substantially improve profitability.

We believe our most attractive opportunities are to invest in profitable organic growth initiatives. In addition, we may invest in add-on acquisitions that leverage our existing brands and infrastructure, and we may undertake share repurchases under our share repurchase program as explained in further detail under "Liquidity and Capital Resources" below. In the second quarter of 2013, our Board of Directors declared our first dividend since becoming a publicly-traded company in October 2011, declaring a regular quarterly dividend of $0.10 per share of common stock.

In June 2013, our Kitchen & Bath Cabinetry business acquired Woodcrafters Home Products Holding, LLC ("WoodCrafters"), a manufacturer of bathroom vanities and tops, for a purchase price of approximately $302 million, subject to certain post-closing adjustments. We paid the purchase price using a combination of cash on hand and borrowings under our existing credit facilities. The financial results of WoodCrafters are included in the Company's results of operations and cash flows beginning in the third quarter of 2013. This acquisition greatly expands our offering of bathroom cabinetry products.

The U.S. market for our home products consists of spending on both new home construction and repair and remodel activities within existing homes, with the substantial majority of the markets we serve consisting of repair and remodel spending. During the first nine months of 2013, the U.S. home products market continued to grow with the expansion of both new home construction and repair and remodel activities. In the second and third quarters, we experienced strengthening in larger ticket repair and remodel activities which had been lagging the overall market. Larger ticket repair and remodel activities are particularly impactful to our cabinet and window products. We expect that the recovery in the U.S. market for our home products from the current low levels may be gradual and uneven. The recovery largely depends on consumer confidence, employment, home prices and credit availability. Over the long term, we believe that the U.S. home products market will benefit from favorable population and immigration trends, which will drive demand for new housing units, and from aging existing housing stock that will continue to need to be repaired and remodeled.

We remain focused on our initiatives designed to outperform our markets. We believe our strong brand positions across a diversified mix of channels, consumer-focused innovation, flexible and efficient supply chains, and excellent customer service position our business to perform well in the marketplace. We may be impacted by fluctuations in raw material and transportation costs and promotional activity among our competitors for big-ticket discretionary purchases such as kitchen cabinets may continue. We strive to offset the potential unfavorable impact of these items with productivity initiatives and price increases.


RESULTS OF OPERATIONS

Nine Months Ended September 30, 2013 Compared To Nine Months Ended September 30,
2012



                                                                   Net Sales
                                                                                     % Change
(In millions)                                    2013             2012            vs. Prior Year
Kitchen & Bath Cabinetry                       $ 1,186.3        $   987.1                    20.2 %
Plumbing & Accessories                             969.6            804.2                    20.6
Advanced Material Windows & Door Systems           481.7            431.4                    11.7
Security & Storage                                 417.9            420.5                    (0.6 )

Net sales                                      $ 3,055.5        $ 2,643.2                    15.6 %

                                                                Operating Income
                                                                                     % Change
                                                 2013             2012            vs. Prior Year
Kitchen & Bath Cabinetry                       $    63.8        $    14.1                      -  %
Plumbing & Accessories                             176.2            127.5                    38.2
Advanced Material Windows & Door Systems             9.8              4.4                      -
Security & Storage                                  68.1             54.2                    25.6
Less: Corporate expenses                           (56.2 )          (46.0 )                 (22.2 )

Operating income                               $   261.7        $   154.2                    69.7 %

The following discussion of consolidated results of operations and segment results refers to the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. Consolidated results of operations should be read in conjunction with segment results of operations.

Net sales

Net sales increased $412.3 million, or 16%. The increase was due to higher sales volume, primarily from improved U.S. market conditions for home products, as well as a benefit of approximately $60 million from the acquisition of WoodCrafters. Net sales also benefited from price increases that helped mitigate raw material and transportation cost increases.

Cost of products sold

Cost of products sold increased $216.7 million, or 12%, due to higher sales volume and the impact of the WoodCrafters acquisition, partially offset by the benefit of productivity improvements and $17.6 million of amortization of prior service credits related to defined benefit plan amendments that reduced health benefits for certain current and retired employees. Cost of products sold also benefited from the absence in 2013 of $9.7 million in charges for the 2012 restructuring action to close our Martinsville, Virginia cabinet manufacturing facility.


RESULTS OF OPERATIONS (Continued)

Selling, general and administrative expenses

Selling, general and administrative expenses increased $67.8 million, or 10%, due to higher volume-related expenses and planned increases in strategic spending to support growth initiatives that included approximately $15 million of higher advertising spending. Administrative expenses also increased approximately $4 million due to higher acquisition-related expenses associated with the acquisition of WoodCrafters and a non-recurring benefit in 2012 from the reduction of a contingent consideration liability.

Amortization of intangible assets

Amortization of intangible assets increased $0.5 million due to $1.5 million of amortization of identifiable intangible assets associated with the WoodCrafters acquisition, partially offset by an identifiable intangible asset that was fully amortized in the second quarter of 2012.

Restructuring charges

Restructuring charges of $2.7 million and $4.1 million in the nine months ended September 30, 2013 and 2012, respectively, related to supply chain initiatives.

Asset impairment charge

At the end of the third quarter, our Kitchen and Bath Cabinetry segment completed an evaluation of its information technology strategy. The evaluation considered opportunities arising from the improving U.S. home market conditions. As a result of this evaluation, the segment abandoned certain software developed for internal use in order to redirect financial resources toward developing more flexible systems that provide industry leading content for consumers and more advanced tools for designers to deliver a superior purchasing experience for our customers. The abandonment of this internal use software resulted in a pre-tax impairment charge of $21.2 million, which was recorded in operating income and reduced property, plant and equipment, and will not materially impact current or future cash flow or future operating income.

Operating income

Operating income increased $107.5 million, or 70%, primarily due to higher sales volume from our growth initiatives and improving U.S. home products market conditions, as well as the acquisition of WoodCrafters. In addition, the following items had a significant impact on operating income:

                                                               Increase/(decrease)
      (In millions)                      2013       2012       In operating income
      Asset impairment charge           $ 21.2     $   -      $               (21.2 )
      Restructuring and other charges      2.8       10.6                       7.8


RESULTS OF OPERATIONS (Continued)

Interest expense

Interest expense decreased $1.1 million due to lower average external borrowings.

Other expense (income), net

Other expense (income), net, was expense of $5.4 million in the nine months ended September 30, 2013, compared to income of $0.6 million in the nine months ended September 30, 2012. The change of $6.0 million was primarily due to a second quarter 2013 impairment charge of $6.2 million pertaining to a cost method investment.

Income taxes

The effective income tax rates for the nine months ended September 30, 2013 and 2012 were 33.7% and 31.8%, respectively. The effective income tax rate in 2013 was unfavorably impacted by an impairment charge of a cost method investment for which we could not presently record an income tax benefit and favorably impacted by the tax benefits associated with the extension of the research and development credit under The American Taxpayer Relief Act of 2012, including the full-year credit attributable to 2012. The effective income tax rate in 2012 was favorably impacted by a discrete foreign income tax benefit and a decrease in the valuation allowance related to certain restructuring actions.

On September 13, 2013, the Treasury Department and Internal Revenue Service issued the final tangible property repair regulations that are effective for years beginning on or after January 1, 2014. While we are still analyzing the final impact of these regulations on our 2013 financial statements, we do not expect the impact to be significant.

Noncontrolling interests

Noncontrolling interest was $0.8 million in the nine months ended September 30, 2013 and 2012.

Net income attributable to Home & Security

Net income attributable to Home & Security was $165.5 million in the nine months ended September 30, 2013 compared to $100.3 million in the nine months ended September 30, 2012. The increase of $65.2 million was primarily due to higher operating income, partially offset by an increase in other expense (income), net, and the impact of the higher effective income tax rate.


RESULTS OF OPERATIONS (Continued)

Results By Segment

Kitchen & Bath Cabinetry

Net sales increased $199.2 million, or 20%, due to higher sales volume, primarily from improved U.S. market conditions in both new construction and repair and remodel activity. Net sales also benefited from the acquisition of WoodCrafters (approximately $60 million) and price increases that helped mitigate raw material and transportation cost increases.

Operating income increased $49.7 million to $63.8 million due to higher sales volume. Operating income also benefited from price increases and productivity improvements, including cost savings from previously announced restructuring actions, as well as the impact of the acquisition of WoodCrafters. Restructuring and other charges decreased by $11.6 million due to the absence in 2013 of the 2012 restructuring action to close our Martinsville, Virginia cabinet manufacturing facility. Operating income was unfavorably impacted by an asset impairment charge of $21.2 million, as well as increased costs for raw materials (wood-related) and higher compensation expense.

At the end of the third quarter, the Kitchen and Bath Cabinetry segment completed an evaluation of its information technology strategy. The evaluation considered opportunities arising from improving U.S. home market conditions. As a result of this evaluation, the segment abandoned certain software developed for internal use in order to redirect financial resources toward developing more flexible systems that provide industry leading content for consumers and more advanced tools for designers to deliver a superior purchasing experience for our customers. The abandonment of this internal use software resulted in a pre-tax impairment charge of $21.2 million, which was recorded in operating income and reduced property, plant and equipment, and will not materially impact current or future cash flow or future operating income.

Plumbing & Accessories

Net sales increased $165.4 million, or 21%, due to higher sales volume in the U.S. driven primarily by higher new construction housing starts and improving repair and remodel market conditions, as well as approximately $33 million of higher international sales, primarily in China. Net sales also benefited from price increases that helped mitigate raw material cost increases.

Operating income increased $48.7 million, or 38%, due to higher sales volume. The impact of productivity improvements was offset by planned strategic investments to support long-term growth initiatives that included approximately $13 million of higher spending on advertising.

Advanced Material Windows & Door Systems

Net sales increased $50.3 million, or 12%, due to higher sales volume driven primarily by improved conditions in the U.S. home products market. Net sales of door systems grew $34.7 million, or 14%. Net sales of window products increased $15.6 million, or 8%, due to improving conditions in the repair and remodel portion of the U.S. home products market.

Operating income increased $5.4 million to $9.8 million due to the benefit of higher sales, partially offset by the absence in 2013 of a 2012 $3.5 million gain on the disposition of property and $2.0 million of income attributable to a reduction of a contingent consideration liability related to an acquisition.


RESULTS OF OPERATIONS (Continued)

Security & Storage

Net sales decreased $2.6 million, or 1%. Net sales of security products increased $9.6 million, or 3%, due to new product introductions and higher U.S. retail and international sales. Net sales of storage products were down $12.2 million, or 10%, due to increased retailer-driven promotions in the first quarter of 2012 that did not recur in 2013.

Operating income increased $13.9 million, or 26%. Operating income increased approximately $11 million in aggregate due to lower employee benefit costs as a result of reductions in certain postretirement benefits in our storage product line, partially offset by an environmental charge and higher planned spending on security growth initiatives. Operating income was favorably impacted by higher net sales of security products. Operating income was unfavorably impacted by lower storage product sales volume.

Corporate

Corporate expenses increased $10.2 million primarily due to increased
compensation-related costs, higher transaction expenses associated with the
acquisition of WoodCrafters, and other administrative cost increases. Corporate
expenses benefited from lower defined benefit costs ($5.0 million) primarily
resulting from increased pension plan assets.



                                                             Nine Months Ended
                                                               September 30,
    (In millions)                                            2013          2012
    General and administrative expense                     $   (58.2 )    $ (44.9 )
    Defined benefit plan costs                                   7.6          2.6
    Defined benefit plan recognition of actuarial losses        (5.6 )       (3.7 )

    Total Corporate expenses                               $   (56.2 )    $ (46.0 )

In future periods, we may record in the Corporate segment material expense or income associated with actuarial gains and losses arising from periodic remeasurement of our liabilities for defined benefit plans. At a minimum, we remeasure our defined benefit plan liabilities in the fourth quarter of each year. Remeasurements due to plan amendments and settlements may also occur in interim periods during the year. Remeasurement of these liabilities results from changes to discount rates and expected return on assets and may result in material income or expense recognition.


      Three Months Ended September 30, 2013 Compared to Three Months Ended
                               September 30, 2012



                                                             Net Sales
                                                                            % Change
 (In millions)                                2013          2012         vs. Prior Year
 Kitchen & Bath Cabinetry                   $   448.6      $ 329.7                  36.1 %
 Plumbing & Accessories                         338.1        278.2                  21.5
 Advanced Material Windows & Door Systems       181.0        158.4                  14.3
 Security & Storage                             157.4        142.8                  10.2

 Net sales                                  $ 1,125.1      $ 909.1                  23.8 %

                                                          Operating Income
                                                                            % Change
                                              2013          2012         vs. Prior Year
 Kitchen & Bath Cabinetry                   $    14.1      $   1.5                    -  %
 Plumbing & Accessories                          65.9         48.5                  35.9
 Advanced Material Windows & Door Systems         8.5          9.2                  (7.6 )
 Security & Storage                              29.5         20.8                  41.8
 Less: Corporate expenses                       (19.4 )      (19.4 )                  -

 Operating income                           $    98.6      $  60.6                  62.7 %

The following discussion of consolidated results of operations and segment results refers to the three months ended September 30, 2013 compared to the three months ended September 30, 2012. Consolidated results of operations should be read in conjunction with segment results of operations.

Net sales

Net sales increased $216.0 million, or 24%. The increase was due to higher sales volume, primarily from improved U.S. market conditions for home products, which experienced strengthening in both new construction and repair and remodel activity. Net sales increased approximately $60 million due to the acquisition of WoodCrafters. Net sales also benefited from price increases that helped mitigate raw material and transportation cost increases.

Cost of products sold

Cost of products sold increased $133.4 million, or 22%, due to higher sales volume and the impact of the WoodCrafters acquisition, partially offset by the benefit of productivity improvements and $4.0 million of amortization of prior service credits related to defined benefit plan amendments that reduced health benefits for certain current and retired employees. Cost of products sold also benefited from the absence in 2013 of $9.7 million in charges for the 2012 restructuring action to close our Martinsville, Virginia cabinet manufacturing facility.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $23.4 million, or 10%, due to higher volume-related expenses and planned increases in strategic spending to support growth initiatives that included approximately $3 million of higher advertising spending. Administrative expenses also increased due to higher compensation-related costs.

Amortization of intangible assets

Amortization of intangible assets increased $1.6 million due to the acquisition of WoodCrafters.


RESULTS OF OPERATIONS (Continued)

Restructuring charges

Restructuring charges of $1.5 million and $3.1 million in the three months ended September 30, 2013 and 2012, respectively, related to supply chain initiatives.

Asset impairment charge

At the end of the third quarter, our Kitchen and Bath Cabinetry segment completed an evaluation of its information technology strategy. The evaluation considered opportunities arising from improving U.S. home market conditions. As a result of this evaluation, the segment abandoned certain software developed for internal use in order to redirect financial resources toward developing more flexible systems that provide industry leading content for consumers and more advanced tools for designers to deliver a superior purchasing experience for our customers. The abandonment of this internal use software resulted in a pre-tax impairment charge of $21.2 million, which was recorded in operating income and reduced property, plant and equipment, and will not materially impact current or future cash flow or future operating income.

Operating income

Operating income increased $38.0 million, or 63%, primarily due to higher sales volume from our growth initiatives and improving U.S. home products market conditions, as well as the acquisition of WoodCrafters. In addition, the following items had a significant impact on operating income:

                                                              Increase/(decrease)
      (In millions)                      2013      2012       In operating income
      Asset impairment charge           $ 21.2     $  -      $               (21.2 )
      Restructuring and other charges      1.6       8.6                       7.0

Interest expense

Interest expense increased $0.1 million primarily due to the write-off of unamortized deferred loan costs.

Other expense (income), net

Other expense (income), net, was income of $0.5 million in the three months ended September 30, 2013, compared to $0.8 million in the three months ended September 30, 2012.

Income taxes

The effective income tax rates for the three months ended September 30, 2013 and 2012 were 33.4% and 32.3%, respectively. The effective income tax rate in 2012 was favorably impacted by a decrease in the valuation allowance related to certain restructuring actions.

Noncontrolling interests

Noncontrolling interest was $0.4 million and $0.2 million in the three months ended September 30, 2013 and 2012, respectively.

Net income attributable to Home & Security

Net income attributable to Home & Security was $64.2 million in the three months ended September 30, 2013 compared to $40.0 million in the three months ended September 30, 2012. The increase of $24.2 million was primarily due to higher operating income, partially offset by the impact of the higher effective income tax rate.

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