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FBHS > SEC Filings for FBHS > Form 10-Q on 31-Jul-2014All Recent SEC Filings

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

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


31-Jul-2014

Quarterly Report


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, 2013, which are included in our Annual Report on Form 10-K for the year ended December 31, 2013.

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 (the "Exchange Act"), as amended, regarding business strategies, market potential, future financial performance, our raw material costs, the activities of our competitors 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) by our reliance on the North American home improvement, repair and new home construction activity levels, (ii) the North American and global economies, (iii) risk associated with entering into potential strategic acquisitions and integrating acquired property, (iv) our ability to remain competitive, 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, (viii) compliance with tax, environmental and federal, state and international laws and industry regulatory standards and
(ix) the risk of doing business internationally. 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, 2013. We undertake no obligation to, and expressly disclaim any such obligation to, update or clarify 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 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)

We believe the Company has certain competitive advantages including market-leading brands, 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 growth, profitability and returns in order to drive 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 continue to achieve profitable organic growth.

We believe our most attractive opportunities are to invest in profitable organic growth initiatives. We also believe that as the market continues to improve, we have the potential to generate additional growth from leveraging our cash flow and balance sheet strength by pursuing accretive strategic acquisitions and returning cash to shareholders through a combination of dividends and repurchases under our share repurchase programs as explained in further detail under "Liquidity and Capital Resources" below.

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. We believe that the U.S. market for our home products is in the early stages of a multi-year recovery and that continued improvement will largely depend 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 may be impacted by fluctuations in raw material and transportation costs and promotional activity among our competitors. We strive to offset the potential unfavorable impact of these items with productivity initiatives and price increases.

On July 29, 2014, the Company acquired Sentry Safe, a leading manufacturer of personal safes with estimated annual sales of $150 million, for a purchase price of $117.5 million in cash, subject to certain post-closing adjustments. The purchase price was funded from our existing credit facilities. This acquisition broadens our product offering within our Master Lock business. An allocation of the purchase price will be completed after asset and liability valuations are finalized. Final adjustments will reflect the fair value assigned to the assets, including intangible assets, and assumed liabilities.

In June 2013, our Kitchen & Bath Cabinetry business acquired WoodCrafters Home Products Holding, LLC ("WoodCrafters"), a manufacturer of bathroom vanities and tops. The financial results of WoodCrafters are included in the Company's results of operations and cash flows beginning in the third quarter of 2013.


RESULTS OF OPERATIONS

Six Months Ended June 30, 2014 Compared To Six Months Ended June 30, 2013



(In millions)                                                      Net Sales
                                                                                     % Change
                                                 2014             2013            vs. Prior Year
Kitchen & Bath Cabinetry                       $   878.8        $   737.7                    19.1 %
Plumbing & Accessories                             650.0            631.5                     2.9
Advanced Material Windows & Door Systems           322.9            300.7                     7.4
Security & Storage                                 256.7            260.5                    (1.5 )

Net sales                                      $ 2,108.4        $ 1,930.4                     9.2 %

                                                                Operating Income
                                                                                     % Change
                                                 2014             2013            vs. Prior Year
Kitchen & Bath Cabinetry                       $    66.0        $    49.7                    32.8 %
Plumbing & Accessories                             126.8            110.3                    15.0
Advanced Material Windows & Door Systems             7.4              1.3                   469.2
Security & Storage                                  29.6             38.6                   (23.3 )
Less: Corporate expenses                           (31.1 )          (36.8 )                  15.5

Operating income                               $   198.7        $   163.1                    21.8 %

The following discussion of consolidated results of operations and segment results refers to the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Consolidated results of operations should be read in conjunction with segment results of operations.

Net Sales

Net sales increased $178.0 million, or 9%. The increase was due to the benefit of the acquisition of WoodCrafters (approximately $100 million), higher sales volume primarily from the continuing improvement in U.S. market conditions for home products and price increases to help mitigate material cost increases. These increases were partially offset by the impact of extreme weather in certain regions of the U.S. during the first quarter of 2014 and approximately $10 million of unfavorable foreign exchange.

Cost of products sold

Cost of products sold increased $140.1 million, or 11%, due to higher sales volume, higher costs associated with manufacturing capacity increases to support long-term growth and inefficiencies related to extreme weather in the first quarter of 2014. These cost increases were partially offset by the benefit of productivity improvements.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased $2.5 million due to the timing of spending and lower employee-related costs, partially offset by higher volume-related costs.


RESULTS OF OPERATIONS (Continued)

Amortization of intangible assets

Amortization of intangible assets increased $2.9 million due to amortization of identifiable intangible assets associated with the WoodCrafters acquisition.

Restructuring charges

Restructuring charges of $3.1 million in the six months ended June 30, 2014 related to product line rationalization in the storage product line within our Security & Storage segment in the first quarter of 2014 and Corporate severance charges in the second quarter, partially offset by a benefit from a foreign currency gain associated with dissolution of a foreign entity in the Plumbing & Accessories segment. Restructuring charges of $1.2 million in the six months ended June 30, 2013 related to supply chain initiatives.

Operating income

Operating income increased $35.6 million, or 22%, primarily due to higher sales volume from our growth initiatives and improving U.S. home products market conditions, benefit from the WoodCrafters acquisition (approximately $12 million) and lower selling, general and administrative expenses. Operating income was unfavorably impacted by planned costs associated with manufacturing capacity increases to support long-term growth, as well as inefficiencies resulting from extreme weather in the first quarter of 2014.

Interest expense

Interest expense increased $0.6 million due to higher average borrowings, partially offset by lower average interest rates.

Other expense, net

Other expense, net, was $0.3 million in the six months ended June 30, 2014, compared to $5.9 million in the six months ended June 30, 2013. The decrease of $5.6 million was due to a $6.2 million impairment charge pertaining to a cost method investment in 2013.

Income taxes

The effective income tax rates for the six months ended June 30, 2014 and 2013 were 30.7% and 33.9%, respectively. The effective income tax rate for 2014 was favorably impacted by the release of valuation allowances related to state net operating loss carryforwards and by the tax benefit associated with the anticipated year-over-year increase of the Domestic Production Activity (Internal Revenue Code Section 199) deduction. The effective income tax rate in 2013 was unfavorably impacted by an increase in the valuation allowance related to an investment impairment charge for which we could not record an income tax benefit and favorably impacted by the tax benefits associated with the extension of the U.S. research and development credit under The American Taxpayer Relief Act of 2012.

Noncontrolling interests

Noncontrolling interest was $0.7 million and $0.4 million in the six months ended June 30, 2014 and 2013, respectively.


RESULTS OF OPERATIONS (Continued)

Net income attributable to Home & Security

Net income attributable to Home & Security was $134.1 million in the six months ended June 30, 2014 compared to $101.3 million in the six months ended June 30, 2013. The increase of $32.8 million was primarily due to higher operating income, a decrease in other expense, net, and the impact of the lower effective income tax rate.

Results By Segment

Kitchen & Bath Cabinetry

Net sales increased $141.1 million, or 19%, due primarily to the benefit of the acquisition of WoodCrafters and strength in repair and remodel market volume. Net sales also benefited from price increases to help mitigate raw material cost increases and favorable product mix. Net sales were unfavorably affected by extreme weather in certain regions of the U.S. during the first quarter of 2014 and approximately $5 million of unfavorable foreign exchange.

Operating income increased $16.3 million, or 33%, due to the acquisition of WoodCrafters. Operating income also benefited from price increases to help mitigate raw material cost increases (wood-related), productivity improvements and improved product mix. Operating income was unfavorably impacted by higher costs associated with manufacturing capacity increases to support long-term growth and operating inefficiencies caused by extreme weather in certain regions of the U.S. in the first quarter of 2014.

Plumbing & Accessories

Net sales increased $18.5 million, or 3%, due to higher sales volume in the U.S. driven primarily by improving U.S. market conditions, price increases to help mitigate raw material cost increases and approximately $10 million in higher international sales including China and Canada. These benefits were partially offset by the adverse impact of weather in certain regions of the U.S. in the first quarter of 2014 and approximately $5 million of unfavorable foreign exchange.

Operating income increased $16.5 million, or 15%, due to higher sales volume, cost saving initiatives, and lower selling, general and administrative expenses due to the timing of spending. These benefits were partially offset by planned strategic and supply chain initiatives to increase capacity for long-term growth and the impact of extreme weather in certain regions of the U.S. in the first quarter of 2014.


RESULTS OF OPERATIONS (Continued)

Results By Segment

Advanced Material Windows & Door Systems

Net sales increased $22.2 million, or 7%, due to higher sales volume driven primarily by improved conditions in the U.S. home products market and price increases to help mitigate raw material cost increases, partially offset by the adverse impact of extreme weather in certain regions of the U.S in the first quarter of 2014. Net sales of door systems grew $17.0 million, or 10%, and net sales of window products increased $5.2 million, or 4%.

Operating income increased $6.1 million in the first half of 2014 to $7.4 million, compared to $1.3 million in the same period of 2013, due to higher sales volume. Operating income also benefited from price increases to help mitigate raw material cost increases and cost savings initiatives. These benefits were partially offset by higher costs related to planned capacity investments and inefficiencies from extreme weather in the first quarter of 2014.

Security & Storage

Net sales decreased $3.8 million, or 1%. Net sales of storage products were down $8.3 million, or 12%, due to the timing of new product introductions, lower overall demand for tool storage and the exit from some lower margin storage product lines. Net sales of security products increased $4.5 million, or 2%, due to higher sales volume.

Operating income decreased $9.0 million, or 23%, due to higher raw material costs, $2.2 million in restructuring and other charges primarily related to product line rationalization in the storage product line, lower sales of storage products, and higher selling and administrative expenses to support long-term growth in security products. Operating income benefited from higher sales volume of security products.

Corporate

Corporate expenses decreased $5.7 million due to lower actuarial losses ($4.8 million) recognized in the first six months of 2014 compared to 2013. These losses related to defined benefit plan amendments that required a remeasurement of certain postretirement benefit liabilities. General and administrative expenses decreased $1.2 million primarily due to lower consulting expense, employee-related costs and transaction expenses associated with acquisition-related activities.

    (In millions)                                            Six Months Ended
                                                                 June 30,
                                                             2014         2013
    General and administrative expense                     $  (35.1 )    $ (36.3 )
    Defined benefit plan costs                                  4.6          4.9
    Defined benefit plan recognition of actuarial losses       (0.6 )       (5.4 )

    Total Corporate expenses                               $  (31.1 )    $ (36.8 )

In future periods the Company 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 the Company will remeasure its 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 attributable to updating our liability discount rates and expected return on assets may, in particular, result in material income or expense recognition.


Three Months Ended June 30, 2014 Compared To Three Months Ended June 30, 2013



(In millions)                                                      Net Sales
                                                                                     % Change
                                                 2014             2013            vs. Prior Year
Kitchen & Bath Cabinetry                       $   467.9        $   392.4                    19.2 %
Plumbing & Accessories                             340.1            322.6                     5.4
Advanced Material Windows & Door Systems           192.9            176.5                     9.3
Security & Storage                                 141.3            148.9                    (5.1 )

Net sales                                      $ 1,142.2        $ 1,040.4                     9.8 %

                                                                Operating Income
                                                                                     % Change
                                                 2014             2013            vs. Prior Year
Kitchen & Bath Cabinetry                       $    46.1        $    35.4                    30.2 %
Plumbing & Accessories                              71.5             55.3                    29.3
Advanced Material Windows & Door Systems            15.1              9.8                    54.1
Security & Storage                                  19.8             26.3                   (24.7 )
Less: Corporate expenses                           (15.9 )          (20.3 )                  21.7

Operating income                               $   136.6        $   106.5                    28.3 %

The following discussion of consolidated results of operations and segment results refers to the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Consolidated results of operations should be read in conjunction with segment results of operations.

Net sales

Net sales increased $101.8 million, or 10%. The increase was due to higher sales volume primarily from the continuing improvement in U.S. market conditions for home products, the benefit of the acquisition of WoodCrafters (approximately $50 million) and price increases to help mitigate material cost increases, partially offset by unfavorable foreign exchange of approximately $5 million.

Cost of products sold

Cost of products sold increased $78.4 million, or 12%, due to higher sales volume and higher costs associated with manufacturing capacity increases to support long-term growth, partially offset by the benefit of productivity improvements.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased $8.7 million, or 3%, primarily due to the timing of spending and lower employee-related costs.


RESULTS OF OPERATIONS (Continued)

Amortization of intangible assets

Amortization of intangible assets increased $1.5 million due to the amortization of identifiable intangible assets associated with the WoodCrafters acquisition.

Restructuring charges

Restructuring charges of $0.8 million in the three months ended June 30, 2014 primarily related to Corporate severance costs, partially offset by a benefit from a foreign currency gain associated with dissolution of a foreign entity in the Plumbing & Accessories segment. Restructuring charges of $0.3 million in the three months ended June 30, 2013, related to supply chain initiatives.

Operating income

Operating income increased $30.1 million, or 28%, primarily due to higher sales volume from our growth initiatives and improving U.S. home products market conditions, as well as benefit from the WoodCrafters acquisition (approximately $7 million) and lower selling, general and administrative expenses. These benefits were partially offset by higher costs associated with manufacturing capacity increases to support long-term growth.

Interest expense

Interest expense increased $0.4 million to $2.1 million due to higher average borrowings, partially offset by lower average interest rates.

Other expense, net

Other expense, net, was $0.8 million in the three months ended June 30, 2014, compared to $6.1 million in the three months ended June 30, 2013. The decrease of $5.3 million was primarily due to a $6.2 million impairment charge pertaining to a cost method investment in 2013.

Income taxes

The effective income tax rates for the three months ended June 30, 2014 and 2013 were 30.0% and 35.0%, respectively. The effective income tax rate for 2014 was favorably impacted by the release of valuation allowances related to state net operating loss carryforwards and by the tax benefit associated with the anticipated year-over-year increase of the Domestic Production Activity (Internal Revenue Code Section 199) deduction. The effective income tax rate in 2013 was unfavorably impacted by an increase in the valuation allowance related to an investment impairment charge for which we could not record an income tax benefit.

Noncontrolling interests

Noncontrolling interest was $0.3 million and $0.2 million in the three months ended June 30, 2014 and 2013.

Net income attributable to Home & Security

Net income attributable to Home & Security was $93.3 million in the three months ended June 30, 2014 compared to $64.0 million in the three months ended June 30, 2013. The increase of $29.3 million was primarily due to higher operating income, a decrease in other expense, net and the lower effective income tax rate.


RESULTS OF OPERATIONS (Continued)

Results By Segment

Kitchen & Bath Cabinetry

Net sales increased $75.5 million, or 19%, due primarily to the benefit of the acquisition of WoodCrafters and from strength in repair and remodel market volume. Net sales also benefited from price increases to help mitigate raw material cost increases and favorable product mix.

Operating income increased $10.7 million, or 30%, due to the acquisition of WoodCrafters, the benefit from price increases to help mitigate raw material increases (wood-related), improved product mix and productivity improvements. Operating income was unfavorably impacted by higher costs associated with manufacturing capacity increases to support long-term growth.

Plumbing & Accessories

Net sales increased $17.5 million, or 5%, due to higher sales volume in the U.S. driven primarily by improving U.S. market conditions and higher sales volume in Canada. Net sales also benefited from price increases to help mitigate raw material cost increases. These benefits were partially offset by $5 million of unfavorable foreign exchange.

Operating income increased $16.2 million, or 29%, due to higher sales volume and lower selling, general and administrative expenses due to the timing of spending. Operating income also benefited from price increases to help mitigate raw material cost increases, cost saving initiatives, and a restructuring and other charges benefit of $1.6 million. These benefits were partially offset by approximately $3 million of unfavorable foreign exchange.

Advanced Material Windows & Door Systems

Net sales increased $16.4 million, or 9%, due to higher sales volume driven primarily by improved conditions in the U.S. home products market and the benefit of price increases to help mitigate cost increases. Net sales of door systems grew $11.1 million, or 11%, while net sales of window products were up $5.3 million, or 7%.

Operating income increased $5.3 million, or 54%, due to higher sales volume. Operating income also benefited from price increases to help mitigate raw material cost increases, cost savings initiatives, and the absence of 2013 restructuring charges of $0.7 million. These benefits were partially offset by higher costs related to planned capacity investments.

Security & Storage

Net sales decreased $7.6 million, or 5%. Net sales of security products increased $1.3 million, or 1%. Net sales of storage products decreased $8.9 million, or 21%, due to the timing of new product introductions, lower overall demand for tool storage and the exit from some lower margin storage product lines.

Operating income decreased $6.5 million, or 25%, due to lower sales volume in storage products, raw material cost increases and higher selling and administrative expenses to support long-term growth in security products.


RESULTS OF OPERATIONS (Continued)



Corporate
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