Fortune Brands Innovations, Inc. 10-Q

Item 2. 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 28, 2024, which are included in our Annual Report on Form 10-K for the year ended December 28, 2024. 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 Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations for our business, operations, financial performance or financial condition in addition to statements regarding our expectations for the markets in which we operate, general business strategies, expected impacts from recently-announced organizational and leadership changes, the market potential of our brands, trends in the housing market, the potential impact of costs, including material and labor costs, the potential impact of inflation, expected capital spending, expected pension contributions or de-risking initiatives, the expected impact of acquisitions, dispositions and other strategic transactions, the anticipated impact of recently issued accounting standards on our financial statements, and other matters that are not historical in nature. Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” “outlook,” “positioned,” “confident,” “opportunity,” “focus” 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. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is based on current expectations, estimates, assumptions and projections of our management about our industry, business and future financial results, available at the time this report is filed with the Securities and Exchange Commission. Although we believe that these statements are based on reasonable assumptions, they are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those indicated in such statements, including but not limited to: (i) our reliance on the North American and Chinese home improvement, repair and remodel and new home construction activity levels, (ii) the housing market, downward changes in the general economy, unfavorable interest rates or other business conditions, (iii) the competitive nature of consumer and trade brand businesses, (iv) our ability to execute on our strategic plans and the effectiveness of our strategies in the face of business competition, (v) our reliance on key customers and suppliers, including wholesale distributors and dealers and retailers, (vi) risks relating to rapidly evolving technological change, (vii) risks associated with our ability to improve organizational productivity and global supply chain efficiency and flexibility, (viii) risks associated with global commodity and energy availability and price volatility, as well as the possibility of sustained inflation, (ix) delays or outages in our information technology systems or computer networks or breaches of our information technology systems or other cybersecurity incidents, (x) risks associated with doing business globally, including changes in trade-related tariffs (including recent U.S. tariffs announced or imposed on China, Canada, Mexico and other countries and any reciprocal actions taken by such countries) and risks with uncertain trade environments, (xi) risks associated with the disruption of operations, including as a result of severe weather events, (xii) our inability to obtain raw materials and finished goods in a timely and cost-effective manner, (xiii) risks associated with strategic acquisitions, divestitures and joint ventures, including difficulties integrating acquired companies and the inability to achieve the expected financial results and benefits of transactions, (xiv) impairments in the carrying value of goodwill or other acquired intangible assets, (xv) risks of increases in our defined benefit-related costs and funding requirements, (xvi) our ability to attract and retain qualified personnel and other labor constraints, (xvii) the effect of climate change and the impact of related changes in government regulations and consumer preferences, (xviii) risks associated with environmental, social and governance matters, (xix) potential liabilities and costs from claims and litigation, (xx) changes in government and industry regulatory standards, (xxi) future tax law changes or the interpretation of existing tax laws, (xxii) our ability to secure and protect our intellectual property rights, (xxiii) our ability to achieve the expected benefits of the separation of MasterBrand, Inc. (“MasterBrand”), the Company’s Cabinets business (the “Separation”) (xxiv) the risk that we may be required to indemnify MasterBrand in connection with the Separation or that MasterBrand’s indemnities to us may not be sufficient to hold us harmless for the full amount of liabilities for which MasterBrand has been allocated responsibility and (xxv) the potential that the Separation fails to qualify as tax-free for U.S. federal income tax purposes. 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 28, 2024. 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. 20 OVERVIEW References to “Fortune Brands,” “the Company,” “we,” “our” and “us” refer to Fortune Brands Innovations, Inc. and its consolidated subsidiaries as a whole, unless the context otherwise requires. The Company is a leading innovation company focused on creating smarter, safer and more beautiful homes and improving lives that competes in attractive long-term growth markets in our product categories. The Company’s driving purpose is to elevate every life by transforming spaces into havens. We believe that the Company has certain competitive advantages including market-leading brands, a diversified mix of channels, lean and flexible supply chains, a strong capital structure, 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 stockholder value. We believe the Company’s track record reflects the long-term attractiveness and potential of the categories we serve and our leading brands. We believe the long-term outlook for our products remain favorable, and our strategic advantages, including the set of capabilities we refer to as the Fortune Brands Advantage, will helps us to continue to achieve profitable organic growth over time. We continue to believe our most attractive opportunities are to invest in profitable organic growth initiatives, pursue accretive strategic acquisitions, non-controlling equity investments, and joint ventures, and return cash to stockholders through a combination of dividends and repurchases of shares of our common stock under our share repurchase program as explained in further detail under “Liquidity and Capital Resources” below. The U.S. market for our products primarily consists of spending on both new home construction and repair and remodel activities within existing homes, with a substantial majority of the markets we serve consisting of repair and remodel spending. Growth in the U.S. market for our home products will largely depend on consumer confidence, employment, wage growth, home prices, equity levels and rates of extraction, stable mortgage rates and credit availability. Increases in inflation and mortgage rates during the preceding years have slowed the pace of single-family and existing home sales activity and new home construction and repair and remodel activities. However, we believe we are well positioned to manage the continued slow-down in the housing market as we believe the fundamental drivers of the housing market remain intact. We have been and may continue to be impacted by near-term supply, labor and freight constraints, a volatile geopolitical environment, as well as increased rates of inflation, increased interest rates, unfavorable fluctuations in foreign exchange rates and the ongoing and worsening costs of tariffs (including recent U.S. tariffs announced or imposed on China, Canada, Mexico and other countries and any reciprocal actions taken by such countries). We anticipate that, absent any mitigation efforts, our costs of goods sold would increase based on the tariffs that have been announced or imposed (either by the United States or by other countries, including China) as of the date of this report. The Company is actively working to mitigate the anticipated impacts of tariffs through a combination of supply chain actions, cost-out activities and strategic pricing actions across all of our channels and brands. However, this is a rapidly evolving landscape, and the Company’s ability to mitigate the anticipated impacts of tariffs could be affected by a number of factors, including additional tariffs or trade-related sanctions imposed by the U.S. or other countries, and if the Company is ultimately not able to substantially mitigate the impacts of tariffs, there would be negative impacts to the Company’s results of operations. We are also unable at this time to determine any future negative impacts from reduced consumer spending as a result of inflationary or other macroeconomic pressures or uncertainty that may result from the imposition of current or future tariffs. We are currently monitoring, and will continue to monitor, potential changes to these tariffs or the imposition of reciprocal or other tariffs or trade restrictions by other countries. 21 RESULTS OF OPERATIONS Thirteen Weeks Ended March 29, 2025 Compared to Thirteen Weeks Ended March 30, 2024 Net Sales (In millions) 2025 2024 % Change vs. Prior Year Water $ 565.4 $ 625.3 (9.6 ) % Outdoors 304.7 315.0 (3.3 ) Security 163.0 169.3 (3.7 ) Net sales $ 1,033.1 $ 1,109.6 (6.9 ) % Operating Income (Loss) 2025 2024 % Change vs. Prior Year Water $ 103.2 $ 141.3 (27.0 ) % Outdoors 22.6 34.3 (34.1 ) Security 16.0 19.1 (16.2 ) Less: Corporate expenses (44.8 ) (39.3 ) 14.0 Operating income $ 97.0 $ 155.4 (37.6 ) % The following discussion of consolidated results of operations and segment results refers to the thirteen weeks ended March 29, 2025 compared to the thirteen weeks ended March 30, 2024. Consolidated results of operations should be read in conjunction with segment results of operations. Net sales Net sales decreased by $76.5 million, or 6.9%, primarily due to lower sales volume in the U.S. as well as in our international markets ($28.9 million) and unfavorable foreign exchange ($6.6 million), partially offset by incremental sales from a prior year acquisition ($6.5 million). Cost of products sold Cost of products sold decreased by $43.6 million, or 7.0%, primarily due to the lower sales volume, lower transportation costs and productivity improvements in all of our segments as a result of strategic sourcing initiatives and manufacturing efficiencies. Selling, general and administrative expenses Selling, general and administrative expenses increased by $3.3 million, or 1.1%, primarily due to higher restructuring-related charges, higher research and development expenses and higher advertising and marketing costs, partially offset by lower headcount-related expenses and lower freight and shipping expenses. Restructuring charges Restructuring charges of $24.8 million are primarily attributable to costs associated with the previously announced decision to consolidate our U.S. regional offices into one campus headquarters and related organizational and personnel changes, product-line rationalizations within our Outdoors segment, and plant closures in both our Water and Security segments. Operating income Operating income decreased by $58.4 million, or 37.6%, primarily due to the lower sales volume and higher restructuring and restructuring-related charges, partially offset by lower transportation costs and productivity improvements in all of our segments as a result of strategic sourcing initiatives and manufacturing efficiencies as well as lower headcount-related costs. 22 RESULTS OF OPERATIONS (Continued) Interest expense Interest expense decreased $1.5 million to $28.6 million primarily due to lower commercial paper borrowings net of repayments during the thirteen weeks ended March 29, 2025, as compared to the thirteen weeks ended March 30, 2024 ($280.0 million in 2025 versus $375.0 million in 2024). Other (income) expense, net Other income, net, was $1.0 million in the thirteen weeks ended March 29, 2025, compared to other expense, net of $0.1 million in the thirteen weeks ended March 30, 2024. The increase in other income, net is primarily due to an increase in interest income partially offset by an increase in foreign currency transaction expense and an increase in net periodic benefit expense. Income taxes The effective income tax rates for the thirteen weeks ended March 29, 2025, and thirteen weeks ended March 30, 2024, were 25.9% and 23.0%, respectively. The difference between the Company’s effective income tax rate for the thirteen weeks ended March 29, 2025, and the U.S. statutory rate of 21% primarily relates to state income taxes and foreign income taxed at higher rates. The difference between the Company’s effective income tax rate for the thirteen weeks ended March 30, 2024, and the U.S. statutory rate of 21% primarily relates to state income taxes and foreign income taxed at higher rates, partially offset by a valuation allowance release and tax credits. Net income Net income was $51.4 million in the thirteen weeks ended March 29, 2025, compared to $96.4 million in the thirteen weeks ended March 30, 2024. The decrease in net income was due to lower operating income ($58.4 million), partly offset by lower income tax expense ($10.8 million), lower interest expense ($1.5 million) and higher other income ($1.1 million). Results By Segment Water Net sales decreased by $59.9 million, or 9.6%, primarily due to lower sales unit volume (including a sales volume decline within our China business of approximately $21.3 million), higher customer sales incentives and unfavorable foreign exchange ($5.4 million), partially offset by the impact of higher product pricing and the incremental sales from a prior year acquisition ($6.5 million). Operating income decreased by $38.1 million, or 27.0%, primarily due to the lower sales volume and higher restructuring and restructuring-related charges ($10.0 million), partially offset by productivity improvements as a result of strategic sourcing initiatives and manufacturing efficiencies and lower transportation costs. Outdoors Net sales decreased by $10.3 million, or 3.3%, primarily due to lower sales unit volume for our exterior doors products and lower product pricing, partially offset by lower customer sales incentives and favorable product mix. Operating income decreased by $11.7 million, or 34.1%, primarily due to the lower sales unit volume and higher restructuring and restructuring-related charges ($5.6 million), partially offset by productivity improvements as a result of strategic sourcing initiatives and manufacturing efficiencies. Security Net sales decreased by $6.3 million, or 3.7%, primarily due to lower sales unit volume and unfavorable foreign exchange ($1.2 million), partially offset by lower customer sales incentives. Operating income decreased by $3.1 million, or 16.2%, primarily due to the lower sales unit volume, partially offset by productivity improvements as a result of strategic sourcing initiatives and manufacturing efficiencies. 23 Corporate expenses Corporate expenses increased by $5.5 million, or 14.0%, primarily due to higher restructuring and restructuring-related charges ($12.2 million), partially offset by lower headcount-related costs. LIQUIDITY AND CAPITAL RESOURCES Our principal sources of liquidity are cash on hand, cash flows from operating activities, cash borrowed under our credit facility and cash from debt issuances in the capital markets. Our operating income is generated by our subsidiaries. We believe our operating cash flows, including funds available under the credit facility and access to capital markets, provide sufficient liquidity to support the Company’s working capital requirements, capital expenditures and service of indebtedness, as well as to finance acquisitions, repurchase shares of our common stock and pay dividends to stockholders, as the Board of Directors deems appropriate both for the 12-month period following March 29, 2025 and in the long-term. Our cash flows from operations, borrowing availability and overall liquidity are subject to certain risks and uncertainties, including those described in the section of our Annual Report on Form 10-K for the year ended December 28, 2024 entitled “Item 1A. Risk Factors”. In addition, we cannot predict whether or when we may enter into acquisitions, joint ventures or dispositions, repurchase shares of our common stock under our share repurchase program or pay dividends, or what impact any such transactions could have on our results of operations, cash flows or financial condition, whether as a result of the issuance of debt or equity securities, or otherwise. Long-Term Debt As of March 29, 2025, the Company had aggregate outstanding notes in the principal amount of $2.7 billion, with varying maturities (the “Notes”). The Notes are unsecured senior obligations of the Company. In addition, we believe that we have the ability to obtain alternative sources of financing if required. The following table provides a summary of the Company’s outstanding Notes, including the net carrying value of the Notes, net of underwriting commissions, price discounts and debt issuance costs as of March 29, 2025 and December 28, 2024: Net Carrying Value (in millions) Principal Amount Issuance Date Maturity Date March 29, 2025 December 28, 2024 4.000% Senior Notes $ 500.0 June 2015 June 2025 $ 499.8 $ 499.6 3.250% Senior Notes $ 700.0 September 2019 September 2029 696.7 696.5 4.000% Senior Notes $ 450.0 March 2022 March 2032 446.8 446.7 4.500% Senior Notes $ 450.0 March 2022 March 2052 436.5 436.4 5.875% Senior Notes $ 600.0 June 2023 June 2033 594.3 594.1 Total Senior Notes $ 2,674.1 $ 2,673.3 Less: current portion 499.8 499.6 Total Senior Notes long-term $ 2,174.3 $ 2,173.7 Credit Facilities In August 2022, the Company entered into a third amended and restated $1.25 billion revolving credit facility (the “Revolving Credit Agreement”), and borrowings thereunder will be used for general corporate purposes. The maturity date of the facility is August 2027. Interest rates under the Revolving Credit Agreement are variable based on the Secured Overnight Financing Rate (“SOFR”) at the time of the borrowing and the Company’s long-term credit rating and can range from SOFR + 1.02% to SOFR + 1.525%. Under the Revolving Credit Agreement, the Company is required to maintain a minimum ratio of consolidated EBITDA to consolidated interest expense of 3.0 to 1.0. Consolidated EBITDA is defined as consolidated net income before interest expense, income taxes, depreciation, amortization of intangible assets, losses from asset impairments, and certain other one-time adjustments. In addition, the Company's ratio of consolidated debt minus certain cash and cash equivalents to consolidated EBITDA generally may not exceed 3.5 to 1.0. On March 29, 2025 and December 28, 2024, there were no outstanding borrowings under this facility. As of March 29, 2025, we were in compliance with all covenants under this facility. We currently have uncommitted bank lines of credit in China, which provide for unsecured borrowings for working capital of up to $30.5 million in aggregate as of March 29, 2025 and December 28, 2024, respectively. There were no outstanding balances as of March 29, 2025 and December 28, 2024. 24 Commercial Paper The Company operates a commercial paper program (the “Commercial Paper Program”) pursuant to which the Company may issue unsecured commercial paper notes. The Company's Revolving Credit Agreement is the liquidity backstop for the repayment of any notes issued under the Commercial Paper Program, and as such, borrowings under the Commercial Paper Program are included in Long-term debt in the condensed consolidated balance sheets. Amounts available under the Commercial Paper Program may be borrowed, repaid and re-borrowed, with the aggregate principal amount outstanding at any time, including borrowings under the Revolving Credit Agreement, not to exceed $1.25 billion. The Company expects to use any issuances under the Commercial Paper Program for general corporate purposes. Outstanding borrowings under the Commercial Paper Program as of March 29, 2025 and December 28, 2024 were $279.4 million and zero, respectively. Cash and Seasonality On March 29, 2025, we had non-restricted cash and cash equivalents of $340.0 million, of which $306.0 million was held at non-U.S. subsidiaries. We manage our global cash requirements considering (i) available funds among the subsidiaries through which we conduct business, (ii) the geographic location of our liquidity needs, and (iii) the cost to access international cash balances. The repatriation of non-U.S. cash balances from certain subsidiaries could have adverse tax consequences as we may be required to pay and record tax expense on those funds that are repatriated. Our operating cash flows are significantly impacted by the seasonality of our business. We typically generate most of our operating cash flow in the third and fourth fiscal quarters of each year. We believe that our current cash position, cash flow generated from operations, amounts available under our revolving credit facility and access to the capital markets should be sufficient for our operating requirements and enable us to fund our capital expenditures, share repurchases, dividend payments, and required long-term debt payments. Share Repurchases and Dividends On February 6, 2025, the Company announced that on February 4, 2025, the Company's Board of Directors authorized the repurchase of up to $1 billion of shares of the Company’s outstanding common stock over the next two years on the open market or in privately negotiated transactions or otherwise (including pursuant to a Rule 10b5-1 trading plan, block trades and accelerated share repurchase transactions), which share repurchase authorization will expire on February 4, 2027, in accordance with applicable securities laws. The $1 billion share repurchase authorization replaced the then existing authorization, effective on February 4, 2025, that otherwise would have expired on January 29, 2026. In the thirteen weeks ended March 29, 2025, we repurchased 2.6 million shares of our outstanding common stock under the Company’s share repurchase program for $175.0 million. As of March 29, 2025, the Company’s total remaining share repurchase authorization under its share repurchase program was approximately $900.0 million. The share repurchase program does not obligate the Company to repurchase any specific dollar amount or number of shares and may be suspended or discontinued at any time. In the thirteen weeks ended March 29, 2025, we paid dividends in the amount of $30.5 million to the Company’s stockholders. Our Board of Directors will continue to evaluate dividend payment opportunities on a quarterly basis. There can be no assurance as to when and if future dividends will be paid, and at what level, because the payment of dividends is dependent on our financial condition, results of operations, cash flows, capital requirements and other factors deemed relevant by our Board of Directors. Our subsidiaries are not limited by long-term debt or other agreements in their abilities to pay cash dividends or to make other distributions with respect to their capital stock or other payments to the Company. Acquisitions On February 29, 2024, we acquired 100% of the outstanding equity interests of Wise Water Solutions, LLC, doing business as Springwell Water Filtration Systems ("SpringWell") for a purchase price of $105.6 million, net of cash acquired of $1.4 million. We financed the transaction using cash on hand and borrowings under our existing credit facility. The results of SpringWell are reported as part of the Water Innovations ("Water") segment. We have not included pro forma financial information as the transaction is immaterial to our condensed consolidated statements of comprehensive income. The fair value allocated to assets acquired and liabilities assumed as of February 29, 2024, was $105.6 million, which includes $85.2 million of goodwill. Goodwill includes expected sales and cost synergies and is expected to be deductible for income tax purposes. 25 We periodically review our portfolio of brands and evaluate potential strategic transactions and other capital initiatives to increase stockholder value. Cash Flows Below is a summary of cash flows for the thirteen weeks ended March 29, 2025 and the thirteen weeks ended March 30, 2024. '(In millions) Thirteen Weeks Ended March 29, 2025 Thirteen Weeks Ended March 30, 2024 Net cash used in operating activities $ (83.4 ) $ (71.3 ) Net cash used in investing activities (29.2 ) (169.8 ) Net cash provided by financing activities 68.0 238.7 Effect of foreign exchange rate changes on cash 3.0 (5.0 ) Net decrease in cash and cash equivalents $ (41.6 ) $ (7.4 ) Net cash used in operating activities was $83.4 million in the thirteen weeks ended March 29, 2025, compared to net cash used in operating activities of $71.3 million in the thirteen weeks ended March 30, 2024. The increase in cash used of $12.1 million was primarily due to lower net income and changes in working capital items (primarily accounts receivable, inventories and accounts payable) as well as changes in accrued expenses and accrued taxes. Net cash used in investing activities was $29.2 million in the thirteen weeks ended March 29, 2025, compared to net cash used in investing activities of $169.8 million in the thirteen weeks ended March 30, 2024. The decrease in cash used of $140.6 million reflects the cash used in the SpringWell acquisition in February 2024 ($105.2 million) as well as a decrease in capital expenditures. Net cash provided by financing activities was $68.0 million in the thirteen weeks ended March 29, 2025, compared to net cash provided by financing activities of $238.7 million in the thirteen weeks ended March 30, 2024. The decrease in cash provided of $170.7 million was primarily due to lower net borrowings under our commercial paper program as well as higher shares repurchases in 2025 as compared to 2024. Pension Plans Subsidiaries of Fortune Brands sponsor their respective defined benefit pension plans that are funded by a portfolio of investments maintained within our benefit plan trust. As of December 28, 2024, the fair value of our total pension plan assets was $177.1 million, representing funding of approximately 95% of the accumulated qualified benefit obligation liability. During the thirteen weeks ended March 29, 2025, we made no pension contributions. For the foreseeable future, we believe that we have sufficient liquidity to meet the minimum funding that may be required by the Pension Protection Act of 2006. Foreign Exchange We have operations in various foreign countries, principally Canada, Mexico, the United Kingdom, China, South Africa, Vietnam and France. Therefore, changes in the value of the related currencies affect our financial statements when translated into U.S. dollars. CRITICAL ACCOUNTING ESTIMATES There have been no material changes in the information provided in the section entitled “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 28, 2024. 26 Item 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK. There have been no material changes in the information provided in the section entitled “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 28, 2024.