Fortune Brands Innovations, Inc. — FY2023 Form 10-K
Reporting period: 52 weeks ended December 30, 2023. The company changed to a 52- or 53-week fiscal year in 2023; prior-year comparisons are for the year ended December 31, 2022. The Cabinets business was spun off as MasterBrand in December 2022 and is reported as discontinued operations.
Business context and reporting period
Fortune Brands sells branded products for water, outdoor living and security, including faucets, doors, decking, locks and safes. It reports three segments: Water, Outdoors and Security. Approximately 80% of 2023 sales were in the U.S.; Home Depot and Lowe’s represented 10.2% and 10.9% of consolidated sales, respectively.
In June 2023, the company acquired Emtek and Schaub hardware and the U.S. and Canadian Yale and August smart-lock businesses from ASSA ABLOY for approximately $809.3 million, funded with cash on hand. Their results are included in Water and Security, respectively.
Financial performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net sales | $4,626.2 million | $4,723.0 million | Down 2.0% |
| Operating income | $614.9 million | $774.3 million | Down 20.6% |
| Operating margin | 13.3% | 16.4% | Down 3.1 percentage points |
| Income from continuing operations | $405.5 million | $539.9 million | Down 24.9% |
| Diluted EPS from continuing operations | $3.17 | $4.11 | Down 22.9% |
| Net income | $404.5 million | $686.7 million | Down 41.1% |
| Net cash provided by operating activities* | $1,055.8 million | $566.3 million | Up $489.5 million |
| Capital expenditures | $256.5 million | $246.1 million | Up $10.4 million |
*Cash-flow statements include continuing and discontinued operations. Net income comparisons also reflect discontinued operations: 2022 included $146.8 million of after-tax Cabinets income, while 2023 included a $1.0 million discontinued-operations loss.
At year-end, cash and cash equivalents were $366.4 million, including $306.1 million at non-U.S. subsidiaries. Senior notes had a net carrying value of $2.67 billion; there were no borrowings under the $1.25 billion revolving facility or commercial-paper program. The company reported compliance with debt covenants. Current assets were $2.05 billion and current liabilities $1.20 billion.
Gross margin was approximately 41.3%, versus 40.9% in 2022. Segment sales and operating income were: Water $2,562.2 million and $574.3 million; Outdoors $1,341.1 million and $133.5 million; Security $722.9 million and $62.4 million. Outdoors sales fell 11.6%, while Security sales rose 13.8%, largely reflecting the acquired Yale and August business.
Material changes versus the prior comparable period
- Lower U.S. sales volumes and lower international sales weighed on revenue; unfavorable foreign exchange reduced sales by approximately $24 million.
- Acquisitions contributed approximately $247 million of combined 2023 sales, partly offsetting the market decline.
- Operating income was pressured by lower volume and related manufacturing inefficiencies, higher headcount costs, acquisition-related inventory fair-value amortization of $12.4 million, and restructuring costs. Productivity savings and lower advertising costs partially offset these impacts.
- The company recorded $33.5 million of impairment charges for two Outdoors indefinite-lived tradenames and $54.2 million of restructuring and other charges before tax.
- Operating cash flow improved substantially, principally due to working-capital changes, including inventory reduction and other working-capital initiatives. Investing cash outflow increased to $1,037.8 million, mainly due to the ASSA acquisition.
Outlook, risks and unusual items
- Management described the housing slowdown as potentially short-term, citing lower repair-and-remodel spending and new construction in 2023, while stating that underlying housing-market drivers remain intact. The filing does not provide specific 2024 revenue or earnings guidance.
- Management expects 2024 capital spending of $175 million to $225 million. It expects no pension contribution in 2024.
- The company paid $116.8 million in dividends and repurchased 2.5 million shares for $150.0 million during 2023. In January 2024, the Board authorized an additional $650 million repurchase program; this authorization does not require purchases.
- Key risks include housing-market weakness, interest rates and consumer demand; competition and customer concentration; commodity, labor, freight and tariff costs; supply-chain disruption; foreign exchange; cybersecurity; and the execution and integration of acquisitions. Lowe’s and Home Depot together accounted for about 21% of 2023 sales.
- The company has uncapped mutual indemnification obligations with MasterBrand related to the separation and identifies potential tax exposure if the spin-off fails to qualify as tax-free. Management considers ordinary-course litigation losses remote and does not expect current environmental matters to be material.
- Auditors issued an unqualified opinion and found internal control over financial reporting effective. The acquired ASSA businesses were excluded from the 2023 internal-control assessment and audit; they represented 2.9% of assets and 4.7% of sales.
Important facts for investors to verify
- Whether housing demand and volumes stabilize, particularly in Outdoors, and whether lower sales continue to affect factory utilization and margins.
- The acquired businesses’ contribution to sales, earnings and cash generation, and the final purchase-price allocation and deferred Vietnam closing.
- Whether the Outdoors tradename impairments indicate further impairment risk; two affected tradenames had year-end carrying values of $83.0 million and $12.5 million.
- The sustainability of the 2023 operating-cash-flow increase, given its significant contribution from working-capital movements and the cash-flow statement’s inclusion of discontinued operations.
- Debt-service capacity and refinancing plans ahead of the $500 million note maturity in 2025, alongside planned capital spending, dividends and share repurchases.