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 27, 2025, which are included in our Annual Report on Form 10-K for the year ended December 27, 2025. 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 (the “Securities Act”), 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, the expected effects of acquisitions, dispositions and other strategic transactions including the expected benefits and costs of the spin-off of MasterBrand, Inc. and the tax-free nature of the spin-off transaction, the anticipated effects of recently issued accounting standards on our financial statements, and other matters that are not historical in nature. Statements that 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, plans, 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 SEC. 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 associated with our recent leadership changes and our search process to identify our next CEO and CFO, (vii) risks relating to rapidly evolving technological change, (viii) risks associated with our ability to improve organizational productivity and global supply chain efficiency and flexibility, (ix) risks associated with global commodity and energy availability and price volatility, as well as the possibility of sustained inflation, (x) delays or outages in our information technology systems or computer networks or breaches of our information technology systems or other cybersecurity incidents, (xi) 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, (xii) risks associated with the disruption of operations, including as a result of severe weather events, (xiii) our inability to obtain raw materials and finished goods in a timely and cost-effective manner, (xiv) 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, (xv) impairments in the carrying value of goodwill or other acquired intangible assets, (xvi) risks of increases in our defined benefit-related costs and funding requirements, (xvii) our ability to attract and retain qualified personnel and other labor constraints, (xviii) the effect of climate change and the impact of related changes in government regulations and consumer preferences, (xix) risks associated with environmental, social and governance matters, (xx) potential liabilities and costs from claims and litigation, (xxi) changes in government and industry regulatory standards, (xxii) future tax law changes or the interpretation of existing tax laws, and (xxiii) our ability to secure and protect our intellectual property rights, as well as those described in the section of our Annual Report on Form 10-K for the year ended December 27, 2025 entitled Item 1A. “Risk Factors”. We undertake no obligation to, and expressly disclaim any such obligation to, update, amend, clarify or revise 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 home, security and digital products company whose purpose is to elevate every life by transforming spaces into havens. We sell our products through a wide array of sales channels, including kitchen and bath dealers, wholesalers oriented toward builders or professional remodelers, industrial and locksmith distributors, “do-it-yourself” remodeling-oriented home centers, showrooms, direct to consumer, e-commerce and other retail outlets. 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 remains favorable, and our strategic advantages, including the set of capabilities we refer to as the Fortune Brands Advantage, will help us 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 and unfavorable fluctuations in foreign exchange rates. In addition, we have been adversely impacted and may in the future be impacted by tariff-related costs. On February 20, 2026, the U.S. Supreme court invalidated the U.S. tariffs imposed under the International Emergency Economic Powers Act ("IEEPA") on goods imported into the U.S. The ultimate availability, timing, and amount of any potential refunds remain highly uncertain and are subject to further legal, regulatory, and administrative developments. In addition, the U.S. Administration imposed new tariffs and may impose additional tariffs. We will continue to monitor changes to import and export policies of the U.S. and other countries that could impact our financial position, results of operations and cash flows. As of March 28, 2026, the Company has not recognized any amounts associated with potential refunds related to these tariffs. The Company continues to actively work 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 remains 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. 21 RESULTS OF OPERATIONS Thirteen Weeks Ended March 28, 2026 Compared to Thirteen Weeks Ended March 29, 2025 Fortune Brands delivered net income of $24.2 million, or $0.20 per diluted common share for the thirteen weeks ended March 28, 2026 compared to net income of $51.4 million, or $0.42 per diluted common share in the prior year. Net income for the thirteen weeks ended March 28, 2026 was negatively impacted by lower sales unit volume and $42.4 million due to costs associated with governance advisory services and leadership changes. We delivered cash used in operating activities of $(119.2) million of the thirteen weeks ended March 28, 2026, compared to $(83.4) million in the same prior year period. Net Sales (In millions) 2026 2025 % Change vs. Prior Year Water $ 563.7 $ 565.4 (0.3 ) % Outdoors 294.4 304.7 (3.4 ) Security 153.2 163.0 (6.0 ) Net sales $ 1,011.3 $ 1,033.1 (2.1 ) % Operating Income (Loss) 2026 2025 % Change vs. Prior Year Water $ 103.7 $ 103.2 0.5 % Outdoors 17.4 22.6 (23.0 ) Security 21.7 16.0 35.6 Less: Corporate expenses (82.6 ) (44.8 ) 84.4 Operating income $ 60.2 $ 97.0 (37.9 ) % The following discussion of consolidated results of operations and segment results refers to the thirteen weeks ended March 28, 2026 compared to the thirteen weeks ended March 29, 2025. Consolidated results of operations should be read in conjunction with segment results of operations. Net sales Net sales decreased by $21.8 million, or 2.1%, primarily due to lower sales volume across all operating segments, primarily driven by demand softness. Volume declines were offset by year over price increases, including tariff and commodity mitigating actions. Net sales within our China business decreased by $9.1 million, or 25%, due to volume declines. These declines were partially offset by the favorable impact of foreign exchange of $10.1 million. Cost of products sold Cost of products sold decreased by $2.8 million, or 0.5%, primarily due to lower sales volume, partially offset by material cost inflation and tariffs. Cost of products sold was also impacted by lower restructuring-related charges of $8.4 million. Selling, general and administrative expenses Selling, general and administrative expenses increased by $37.8 million, or 12.0%, primarily due to costs associated with governance advisory services and leadership changes of $42.4 million. Restructuring charges Restructuring charges of $4.3 million are primarily due to costs incurred in connection with the Company's headquarters consolidation and its related organizational changes. 22 RESULTS OF OPERATIONS (Continued) Operating income Operating income decreased by $36.8 million, or 37.9%, primarily due to lower sales volume, costs associated with governance advisory services and leadership changes of $42.4 million, higher commodity and tariff costs, higher freight costs, partially offset by lower restructuring and restructuring-related charges of $32.8 million. Interest expense Interest expense decreased by $2.1 million, or 7.3% to $26.5 million primarily due to lower commercial paper borrowings net of repayments during the thirteen weeks ended March 28, 2026 of $168.3 million, as compared to the thirteen weeks ended March 29, 2025 of $280.0 million. Other (income) expense, net Other income, net, was $(0.1) million in the thirteen weeks ended March 28, 2026, compared to other income, net of $(1.0) million in the thirteen weeks ended March 29, 2025. The decrease in other income, net is primarily due to a decrease in interest income, and increases in foreign currency transaction expense. Income taxes The effective income tax rates for the thirteen weeks ended March 28, 2026 and thirteen weeks ended March 29, 2025 were 28.4% and 25.9%, respectively. The difference between the Company’s effective income tax rate for the thirteen weeks ended March 28, 2026 and the U.S. statutory rate of 21% primarily relates to state income taxes and equity compensation. 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. Net income Net income was $24.2 million in the thirteen weeks ended March 28, 2026, compared to $51.4 million in the thirteen weeks ended March 29, 2025. The decrease in net income was due to lower operating income of $36.8 million and lower other income of $0.9 million, partly offset by lower income tax expense and interest expense of $8.4 million and $2.1 million, respectively. Results By Segment Water Net sales decreased by $1.7 million, or 0.3%, primarily due to lower sales unit volume due to market softness. Volume declines were offset by year over price increases, including tariff-mitigating actions. Net sales within our China business decreased by $9.1 million, or 25%, due to volume decline. These declines were partially offset by the favorable impact of foreign exchange of $7.5 million. Operating income increased by $0.5 million, or 0.5%, primarily due to lower restructuring and restructuring-related charges of $7.6 million, partially offset by the impact of lower sales volume, higher tariff costs net of price mitigating actions and higher freight costs of $6.3 million. Outdoors Net sales decreased by $10.3 million, or 3.4%, primarily due to lower sales unit volume due to market softness, channel inventory decreases, partially offset by strategic price actions primarily to mitigate commodity and tariff-related cost inflation. Operating income decreased by $5.2 million, or 23.0%, primarily due to higher commodity and tariff costs, lower sales unit volume and $3.5 million net costs incurred related to the fire that occurred at a manufacturing facility, partially offset by lower restructuring and restructuring-related charges of $8.2 million and by the impact of price mitigating actions. Security Net sales decreased by $9.8 million, or 6.0%, primarily due to lower sales unit volume, partially offset by pricing actions to mitigate commodity and tariff-related cost inflation and the favorable impact of foreign exchange of $2.6 million. 23 Operating income increased by $5.7 million, or 35.6%, primarily due to lower restructuring and restructuring-related charges of $7.2 million, partially offset by lower sales unit volume and higher tariff costs net of price mitigating actions. Corporate expenses Corporate expenses increased by $37.8 million, or 84.4% primarily due to costs associated with governance advisory services and leadership changes of $42.4 million, partially offset by lower restructuring and restructuring-related charges of $9.8 million. 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 28, 2026 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 27, 2025 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 28, 2026, the Company had aggregate outstanding notes in the principal amount of $2.2 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 28, 2026 and December 27, 2025: Net Carrying Value (in millions) Principal Amount Issuance Date Maturity Date March 28, 2026 December 27, 2025 3.250% Senior Notes $ 700.0 September 2019 September 2029 697.4 697.2 4.000% Senior Notes $ 450.0 March 2022 March 2032 447.3 447.2 4.500% Senior Notes $ 450.0 March 2022 March 2052 437.0 436.9 5.875% Senior Notes $ 600.0 June 2023 June 2033 595.0 594.8 Total Senior Notes long-term $ 2,176.7 $ 2,176.1 Credit Facilities In January 2026, the Company entered into a fourth 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 January 2031. Borrowings under the Revolving Credit Agreement will bear interest at variable rates equal to, at the Company’s election, the term Secured Overnight Financing Rate ("SOFR") plus an applicable term SOFR margin for an interest period selected by the Company. The applicable term SOFR rate margin will be determined based on the ratings of the Company’s senior unsecured long-term debt securities. The daily simple SOFR rate margins range from 0.80% to 1.30%. 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 28, 2026 and December 27, 2025, there were no outstanding borrowings under this facility. As of March 28, 2026, 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 28, 2026 and December 27, 2025, respectively. There were no outstanding balances as of March 28, 2026 and December 27, 2025. 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 28, 2026 and December 27, 2025 were $537.0 million and $368.8 million, respectively. Cash and Seasonality On March 28, 2026, we had non-restricted cash and cash equivalents of $223.1 million, of which $206.4 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 In the thirteen weeks ended March 28, 2026, we repurchased 0.9 million shares of our outstanding common stock under the Company’s share repurchase program for $43.5 million. As of March 28, 2026, the Company’s total remaining share repurchase authorization under its share repurchase program was approximately $783.8 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 28, 2026, we paid dividends in the amount of $31.2 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 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 28, 2026 and the thirteen weeks ended March 29, 2025. '(In millions) Thirteen Weeks Period March 28, 2026 Thirteen Weeks Ended March 29, 2025 Net cash used in operating activities $ (119.2 ) $ (83.4 ) Net cash used in investing activities (10.5 ) (29.2 ) Net cash provided by financing activities 90.4 68.0 Effect of foreign exchange rate changes on cash (1.7 ) 3.0 Net decrease in cash and cash equivalents $ (41.0 ) $ (41.6 ) Net cash used in operating activities was $119.2 million in the thirteen weeks ended March 28, 2026, compared to net cash used in operating activities of $83.4 million in the thirteen weeks ended March 29, 2025. The increase in cash used of $35.8 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. 25 Net cash used in investing activities was $10.5 million in the thirteen weeks ended March 28, 2026, compared to net cash used in investing activities of $29.2 million in the thirteen weeks ended March 29, 2025. The decrease in cash used of $18.7 million is primarily due to a decrease in capital expenditures, partially offset by proceeds from the disposition of assets. Net cash provided by financing activities was $90.4 million in the thirteen weeks ended March 28, 2026, compared to net cash provided by financing activities of $68.0 million in the thirteen weeks ended March 29, 2025. The increase in cash provided of $22.4 million was primarily due to lower treasury stock purchases offset by lower net borrowings under our commercial paper program. 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 27, 2025, the fair value of our total pension plan assets was $188.3 million, representing funding of approximately 95% of the accumulated qualified benefit obligation liability. During the thirteen weeks ended March 28, 2026, 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 27, 2025. 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 27, 2025.