Fortune Brands Innovations, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and 26 weeks ended July 1, 2023; comparisons are with the three and six months ended June 30, 2022. Dollar amounts are in millions unless otherwise stated. The company changed its fiscal calendar in 2023. Results reflect continuing operations after the December 2022 spin-off of MasterBrand, except where discontinued operations are noted.
Financial performance
| Metric | Q2 2023 | Comparable 2022 | 26 weeks 2023 | Comparable 2022 |
|---|---|---|---|---|
| Net sales | $1,163.7 | $1,255.4 | $2,203.7 | $2,395.6 |
| Operating income | $152.6 | $219.5 | $284.4 | $399.3 |
| Income from continuing operations, net of tax | $102.1 | $144.3 | $187.7 | $270.5 |
| Net income, including discontinued operations | $102.1 | $192.0 | $186.7 | $372.9 |
| Diluted EPS | $0.80 | $1.46 | $1.46 | $2.80 |
| Operating cash flow | Not separately provided | Not separately provided | $503.6 | $41.9 |
- Q2 sales declined 7.3% and operating income declined 30.5%; first-half sales fell 8.0% and operating income fell 28.8% year over year.
- Approximate Q2 gross margin was 40.2% versus 40.9%; operating margin was 13.1% versus 17.5%. First-half operating margin was 12.9% versus 16.7%.
- Q2 diluted EPS from continuing operations was $0.80, versus $1.10 in 2022. The prior-year total EPS comparisons also included MasterBrand discontinued-operations earnings: $0.36 for Q2 and $0.77 for the first half.
- Q2 segment sales and operating income: Water $617.1 and $142.1; Outdoors $375.6 and $61.2; Security $171.0 and a loss of $0.4. Security’s results included substantial restructuring costs.
- First-half segment sales: Water $1,211.3 (down 6.4%), Outdoors $665.5 (down 14.8%), and Security $326.9 (up 1.8%).
Cash, debt and liquidity
- Cash and cash equivalents were $681.7 at July 1, 2023, including $321.3 held outside the U.S. Current assets were $2,443.6 and current liabilities $1,640.7; the implied current ratio was approximately 1.49.
- Short-term debt was $599.8 and long-term debt $2,668.5, or $3,268.3 total; less cash, implied net debt was approximately $2,586.6. Debt carrying value increased from $2,673.5 at year-end 2022.
- The company issued $600 million of 5.875% senior notes due 2033. It said proceeds were intended to repay $600 million of 4.000% notes due September 2023 and for general corporate purposes. The $1.25 billion revolving facility and commercial paper program had no borrowings at period-end; the company reported covenant compliance.
- First-half operating cash flow was $503.6; investing cash outflow was $891.3, primarily reflecting the approximately $800 million ASSA Businesses acquisition. Financing cash inflow was $427.8. Cash increased $38.0, to $681.7 (cash, cash equivalents and restricted cash totaled $686.3).
- Management attributed the operating cash flow increase versus 2022 mainly to working-capital movements, including lower inventory, and an $84.2 million settlement of interest-rate hedges. Capital expenditures were $112.2; dividends paid were $58.6; share repurchases were $100.0.
Material changes and notable items
- On June 20, 2023, the company acquired Emtek and Schaub hardware businesses and U.S. and Canadian Yale and August residential smart-lock businesses from ASSA ABLOY for approximately $800 million, subject to adjustments. The acquisition was funded with cash on hand; acquired results through July 1 were not material. The purchase-price allocation remains preliminary, including $261.8 of goodwill and $439.4 of identifiable intangible assets. A deferred Vietnam closing, requiring an approximately $24 million payment already included in the purchase price, awaited regulatory approval.
- Q2 restructuring charges were $22.2; related other charges brought total restructuring and other charges to $28.1. First-half restructuring charges were $25.2 and total related charges were $31.2, largely tied to a planned Security manufacturing-facility closure and headcount actions.
- The company separated Outdoors and Security into distinct reportable segments in 2023; comparative segment data was recast. It also changed its fiscal year-end convention to the Saturday closest to, but not after, December 31.
- Interest-rate hedges were terminated alongside the new debt issuance, generating an $84.2 pretax gain recorded in accumulated other comprehensive income and to be reclassified to earnings over the new debt’s 10-year maturity.
Outlook, commentary and risks
- No quantified earnings, sales or cash-flow guidance is provided in the supplied filing text. Management described the housing slowdown as expected to be short term and maintained that the long-term outlook for its products remained favorable.
- Management said higher inflation and mortgage rates had slowed home sales, new construction, and repair-and-remodel activity. It cited lower U.S. sales volumes, manufacturing inefficiencies, unfavorable Water channel mix, higher commodity, transportation and labor costs, and foreign-exchange effects as pressures on results; productivity, pricing and lower advertising costs partly offset them.
- Risks highlighted include housing and economic conditions, interest rates, competitive pressures, key customers and suppliers, supply-chain and labor constraints, commodity and energy volatility, tariffs, foreign exchange, acquisition integration, goodwill and intangible-asset impairment, environmental matters, litigation, and risks related to the MasterBrand separation.
- The company said ordinary-course litigation and environmental remediation were not expected to have a material adverse effect; it considered the likelihood of material litigation loss remote. It reported no material changes to previously disclosed risk factors and no material market-risk changes.
Most important facts for investors to verify
- Whether sales and margins stabilize as housing and repair-and-remodel demand evolve, and how much of the downturn reflects volume versus pricing and mix.
- Progress, integration costs and realized benefits from the ASSA Businesses acquisition; final purchase-price allocation and completion of the Vietnam closing.
- Execution and cash costs of the Security facility closure and other restructuring actions.
- Repayment or refinancing of the September 2023 notes, debt levels after acquisition funding, and continued compliance with credit-facility covenants.
- How much of the reported operating cash flow improvement is sustainable versus working-capital changes and the hedge settlement.