Fortune Brands, Inc. posted record results for the fourth quarter and full year 2006 with management attributing the growth to strong performance for the company's premium and super-premium spirits and wine brands plus continued share gains in key home products and golf categories. Results also reflected a net gain due to a one-time deferred tax benefit related to reduced international tax rates.
“The advantage of Fortune Brands' unique breadth and balance continued to deliver powerful benefits, as we comfortably achieved the fourth-quarter EPS target we announced three months ago as well as the full-year target we established a year ago,” said Fortune Brands chairman and chief executive officer Norm Wesley. “Fortune Brands recorded its 22nd consecutive quarter of double-digit growth in EPS before charges/gains as each of our three businesses performed in line with our expectations. The strong fourth-quarter performance of brands like Jim Beam, Maker's Mark, Courvoisier, Clos du Bois, Titleist and FootJoy helped offset the increasing impact of the U.S. housing market on our home products brands.
“We're building brands and outperforming our markets with share-gain initiatives that include developing successful new products, extending brands into new markets and expanding customer relationships,” Wesley continued. “As expected, the benefits of our spirits and wine acquisition accelerated as the year unfolded. Notably, this was the first full year in our history in which spirits and wine was our largest profit contributor, reflecting the success of our major acquisition.
“Even though comparable sales for our home and hardware brands were down at a mid-single-digit rate in the quarter, our faucet, cabinetry and security brands performed well and continued to gain share. We faced challenging marketplace conditions for our home products brands, but our proactive cost controls helped limit the adverse impact on margins in Home & Hardware to about one-half percent on an underlying basis,” Wesley added.
For the fourth quarter:
-- Net income was $252 million, or $1.62 per diluted share, up 38%
from $1.17 in the year-ago quarter.
-- Comparisons benefited from a net gain (23 cents per share)
from a deferred tax benefit (31 cents per share) related to
reduced international tax rates, partly offset by
restructuring-related charges (8 cents per share) principally
for supply-chain initiatives in the home products business.
-- Excluding one-time items in both the current and prior-year
periods, EPS before charges/gains was $1.39, up 14% from $1.22 in the
year-ago quarter.
-- These results comfortably achieved the company's previously
announced fourth quarter target of high-single-digit to low-
double-digit growth and were four cents above the mean
estimate of Wall Street securities analysts (source: Thomson
First Call).
-- Net sales were $2.28 billion, up 16%.
-- On a comparable basis - assuming the company had owned
acquired brands in the year-ago quarter, and excluding excise
taxes - the company estimates total net sales for Fortune
Brands would have risen modestly in constant currency.
-- Operating income was $381 million, up 25%.
For the full year, on a continuing operations basis:
-- Net income was $824 million, or $5.39 per diluted share, up 39%
from $3.87 in 2005.
-- Excluding one-time items in both years, EPS before charges/gains
was $5.30, up 15% from $4.62 in 2005.
-- Net sales were $8.77 billion, up 24%.
-- On a comparable basis, the company estimates total net sales
for Fortune Brands would have risen in the range of 4-5% in
constant currency.
-- Operating income was $1.50 billion, an increase of 29%.
-- Free cash flow reached $584 million after dividends and capital
expenditures, above the top of the company's previously announced
target range of $450-500 million and well above the $385 million in
free cash flow generated in 2005.
-- Return on equity before charges/gains was 18%.
-- Return on invested capital before charges/gains was 10%.
-- The dividend increased 8% to an annual rate of $1.56 per share.
Breadth & Balance to Benefit 2007 Results
“Looking to 2007, our breadth and balance will continue to be an important advantage, especially as we confront the strong headwinds of lower housing activity in the U.S.,” Wesley continued. “Our continued global growth in the premium spirits and wine market, our technological and brand leadership in golf, and our share-gain and new-market initiatives across attractive home products categories position us well to navigate the challenges 2007 will bring.
“As we've previously announced, our Home & Hardware business will face very challenging market conditions, as well as very tough comparisons, especially in the first half of 2007. Importantly – while our current assumption is that the overall home products market could decline at a double-digit rate in 2007 – we believe our brands will continue to outperform the market. We also expect second-half results in our home products business – while potentially down – will be better than the first half as market conditions begin to improve and our comparisons ease. In this environment, we're aggressively managing costs, aligning supply chains with expected demand and partly offsetting higher commodities costs with select price increases.
“In 2007 we expect continued strong performance in Spirits & Wine and growth in Golf will help offset lower results in our Home & Hardware segment,” Wesley said. “For the full year, we expect earnings per share before charges/gains for Fortune Brands will be in the range of down mid-single digits to up low-single digits. Underlying our goal are these full-year targets for our businesses:
- Spirits & Wine operating income before charges up in the mid-to-high single-digit range.
- Home & Hardware operating income before charges down in the mid-to-high single-digit range.
- Golf operating income before charges up in the low-to-mid single-digit range.
“We expect the first quarter will be the most challenging quarter of the year for our home products brands, especially as compared to last year's very strong first quarter when operating income before charges in Home & Hardware rose 19%. We also expect to be adversely impacted by higher year-over-year costs for certain raw materials. We're implementing price increases to help offset these higher costs, but we do not expect to bridge the gap in the first quarter. For the first quarter, we expect diluted earnings per share before charges/gains for Fortune Brands may be down in the range of 20%, principally as a result of the challenging home products market, difficult comparisons in Home & Hardware and the impact of commodities costs,” Wesley concluded.
FORTUNE BRANDS, INC.
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
(Unaudited)
--------------------------------
Three Months Ended December 31,
--------------------------------
2006 2005 % Change
--------------------------------
--------------------------------
Net Sales $2,276.6 $1,959.0 16.2
--------------------------------
Cost of goods sold 1,147.2 1,060.2 8.2
Excise taxes on spirits and
wine 178.0 104.5 70.3
Advertising, selling, general
and administrative expenses 538.3 468.6 14.9
Amortization of intangibles 12.0 8.4 42.9
Restructuring and
restructuring-related items 19.8 12.0 65.0
--------------------------------
Operating Income 381.3 305.3 24.9
--------------------------------
Interest expense 84.5 67.6 25.0
Other (income) expense, net (16.4) (8.4) (95.2)
Income from Continuing Operations
before income taxes and minority --------------------------------
interests 313.2 246.1 27.3
--------------------------------
Income taxes 55.7 62.5 (10.9)
Minority interests 5.7 7.7 (26.0)
--------------------------------
Income from Continuing Operations 251.8 175.9 43.1
--------------------------------
Income from Discontinued Operations - - -
--------------------------------
Net Income $251.8 $175.9 43.1
--------------------------------
Earnings Per Common Share, Basic:
--------------------------------
Income from continuing operations 1.66 1.20 38.3
Income from discontinued
operations - - -
Net Income 1.66 1.20 38.3
--------------------------------
Earnings Per Common Share, Diluted:
--------------------------------
Income from continuing operations 1.62 1.17 38.5
Income from discontinued
operations - - -
Net Income 1.62 1.17 38.5
--------------------------------
Avg. Common Shares Outstanding
--------------------------------
Basic 151.5 146.2 3.7
Diluted 155.6 150.6 3.3
--------------------------------
--------------------------------
Twelve Months Ended December 31,
--------------------------------
2006 2005 % Change
--------------------------------
--------------------------------
Net Sales $8,769.0 $7,061.2 24.2
--------------------------------
Cost of goods sold 4,609.9 3,843.0 20.0
Excise taxes on spirits and
wine 514.0 326.5 57.4
Advertising, selling, general
and administrative expenses 2,065.0 1,674.8 23.3
Amortization of intangibles 43.5 33.4 30.2
Restructuring
and restructuring-related
items 35.3 19.6 80.1
--------------------------------
Operating Income 1,501.3 1,163.9 29.0
--------------------------------
Interest expense 332.4 158.9 109.2
Other (income) expense, net (46.3) 78.9 (158.7)
Income from Continuing Operations
before income taxes and minority --------------------------------
interests 1,215.2 926.1 31.2
--------------------------------
Income taxes 323.0 324.5 (0.5)
Minority interests 67.9 20.0 239.5
--------------------------------
Income from Continuing Operations 824.3 581.6 41.7
--------------------------------
Income from Discontinued Operations - 39.5 -
--------------------------------
Net Income $824.3 $621.1 32.7
--------------------------------
Earnings Per Common Share, Basic:
--------------------------------
Income from continuing operations 5.52 3.99 38.3
Income from discontinued
operations - 0.27 -
Net Income 5.52 4.26 29.6
--------------------------------
Earnings Per Common Share, Diluted:
--------------------------------
Income from continuing operations 5.39 3.87 39.3
Income from discontinued
operations - 0.26 -
Net Income 5.39 4.13 30.5
--------------------------------
Avg. Common Shares Outstanding
--------------------------------
Basic 149.1 145.6 2.4
Diluted 153.0 150.5 1.7
--------------------------------
Actual Common Shares Outstanding
--------------------------------
Basic 151.9 146.3 3.8
Diluted 156.4 151.0 3.6
--------------------------------
