Fortune Brands, Inc. reported strong growth in sales and earnings for the third quarter of 2006. Net sales increased 23% and diluted earnings per share from continuing operations increased 88%. Results benefited from sales growth for the company's home, spirits and golf brands, margin expansion for the company's enhanced spirits and wine portfolio, acquisitions, a lower effective tax rate, and lower one-time items. Excluding one-time items, diluted EPS from continuing operations increased 16% to $1.30.
“Fortune Brands once again demonstrated the benefits of our breadth and balance across great consumer categories by delivering our 21st consecutive quarter of double-digit growth in earnings per share before charges/gains,” said Norm Wesley, chairman and chief executive officer of Fortune Brands. “This was a very good quarter that achieved the EPS growth target we announced three months ago, as each of our three businesses performed in line with what we expected. We're continuing to outperform our categories with a sharp focus on organic growth and share-gain initiatives, including: successful new product innovations, high-impact marketing, expanded customer relationships, extending brands into adjacent markets, and growth in new international markets. Importantly, our expansion and organic growth in the high-return premium spirits and wine category is helping us offset the impact of a softening housing market.”
“Strong sales gains for leading brands across our portfolio – including our kitchen and bath cabinetry brands, Moen, Master Lock, Jim Beam, Sauza, Maker's Mark, Titleist and Cobra – fueled our third quarter performance,” Wesley continued. “We said three months ago that we expected to see slower underlying growth for our home products brands in the second half of 2006, and we certainly saw that as the quarter progressed. Even as weakening new-home construction impacted sales of doors and windows, our home products brands generated low-single-digit comparable sales growth, driven by continued share gains in the kitchen and bath segment, our focus on consumer-oriented home products categories, plus our strength in the replace-and-remodel segment of the market.
“At the same time, we drove strong profit growth and higher margins in spirits and wine, benefiting from a strong increase in worldwide case volumes and the synergy benefits of last year's acquisition. And golf sales grew 7% on strong gains for Titleist golf balls plus the timing of new Titleist and Cobra product introductions that drove golf club sales up double digits.”
For the third quarter, on a continuing operations basis net income was $151 million, or 98 cents per diluted share, up 88% from 52 cents in the year-ago quarter. Comparisons benefited from lower one-time items in the current-year quarter (32 cents per diluted share) versus the prior-year period (60 cents per diluted share). After-tax charges in the current-year quarter were: $48 million (non-cash, 31 cents per diluted share) associated with required accounting for an increase in the value of V&S Group's minority interest in the company's spirits and wine business; and $2 million (1 cent per diluted share) related to restructuring initiatives in the home and hardware business. Excluding the net charges in both the current and prior-year periods, EPS before charges/gains was $1.30, up 16% from $1.12 in the year-ago quarter.
These results achieved the company's previously announced third-quarter target of double-digit growth in EPS before charges/gains. Net sales were $2.22 billion, up 23%. 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 in the range of 3-4% in constant currency. Operating income was $379 million, up 29%. Return on equity before charges/gains was 20%. Return on invested capital before charges/gains was 10%.
Establishing Target for Fourth Quarter, Reaffirming Target for Full Year
“Moving forward, our breadth and balance will continue to be a strategic advantage and stabilizing force for Fortune Brands, especially given our expectation of further softening in the market for our home products,” Wesley said. “While we expect the softening housing environment will create challenging comparisons for our home products brands through the first half of 2007, we believe that we will continue to outperform the broader home products market. We're also confident that our enhanced premium position in the spirits and wine category, and our sustained leadership in golf, will help us offset softer home products results.
“We're pleased with the year-to-date performance of all of our businesses and Fortune Brands remains on track to deliver very strong full-year results. For the fourth quarter, including the first-time impact of stock options expense, we're targeting EPS before charges/gains to grow at a high-single-digit to low-double-digit rate. For the full year 2006, we continue to expect that Fortune Brands will comfortably achieve our goal of double-digit growth in EPS before charges/gains.”
The company also announced that it is targeting free cash flow for 2006 in the range of $450-500 million after dividends and capital expenditures. The target continues to include approximately $50 million in net costs resulting from acquisition-related items and one-time credits that won't be repeated.
FORTUNE BRANDS, INC.
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
(Unaudited)
Three Months Ended September 30,
--------------------------------
2006 2005 % Change
---------- ---------- ----------
Net Sales $2,218.5 $1,801.6 23.1
Cost of goods sold 1,198.4 986.3 21.5
Excise taxes on spirits and
wine 111.6 85.9 29.9
Advertising, selling, general
and administrative expenses 513.3 418.7 22.6
Amortization of intangibles 12.4 8.6 44.2
Restructuring and
restructuring-related items 3.3 7.6 (56.6)
---------- ---------- ----------
Operating Income 379.5 294.5 28.9
---------- ---------- ----------
Interest expense 85.6 52.1 64.3
Other (income) expense, net (9.8) 73.5 (113.3)
---------- ---------- ----------
Income from Continuing Operations
before income taxes and minority
interests 303.7 168.9 79.8
---------- ---------- ----------
Income taxes 99.0 86.3 14.7
Minority interests 53.4 3.3 -
---------- ---------- ----------
Income from Continuing Operations 151.3 79.3 90.8
---------- ---------- ----------
Income from Discontinued Operations - 12.9 -
---------- ---------- ----------
Net Income $151.3 $92.2 64.1
---------- ---------- ----------
Earnings Per Common Share, Basic:
Income from continuing operations 1.00 0.54 85.2
Income from discontinued
operations - 0.09 -
---------- ---------- ----------
Net Income 1.00 0.63 58.7
---------- ---------- ----------
Earnings Per Common Share, Diluted:
Income from continuing operations 0.98 0.52 88.5
Income from discontinued
operations - 0.09 -
---------- ---------- ----------
Net Income 0.98 0.61 60.7
---------- ---------- ----------
Avg. Common Shares Outstanding
Basic 150.9 146.0 3.4
Diluted 154.5 151.1 2.3
