MasterBrand, Inc. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This Quarterly Report on Form 10-Q contains “forward-looking statements” regarding business strategies, market potential, future financial performance, and other matters. Statements preceded by, followed by or that otherwise include the word “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” “may increase,” “may fluctuate,” 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 the current plans and expectations of our management. 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. These factors include those listed under “Risk Factors” in our Annual Report on Form 10-K within Part I, Item 1A. The forward-looking statements included in this document are made as of the date of this Quarterly Report on Form 10-Q and, except pursuant to any obligations to disclose material information under the federal securities laws, we undertake no obligation to update, amend or clarify any forward-looking statements to reflect events, new information or circumstances occurring after the date of this Quarterly Report on Form 10-Q. Some of the important factors that could cause our actual results to differ materially from those projected in any such forward-looking statements include: ◦ Our ability to develop and expand our business; ◦ Our anticipated financial resources and capital spending; ◦ Our ability to manage costs; ◦ The impact of our dependence on third parties with respect to sourcing our raw materials; ◦ Our ability to accurately price our products; ◦ Our anticipated future revenues and expectations of operational performance; ◦ The effects of competition and consolidation of competitors in our industry; ◦ Costs of complying with evolving regulatory requirements and the effect of actual or alleged violations of environmental laws; ◦ The effect of climate change and unpredictable seasonal and weather factors; ◦ Failure to realize the anticipated benefits of the Separation; ◦ Conditions in the housing market in the United States and Canada; ◦ The expected strength of our existing customers and consumers; ◦ Worldwide economic, geopolitical and business conditions and risks associated with doing business on a global basis; ◦ Unfavorable or unexpected effects of the Distribution and Separation; ◦ The effects of the COVID-19 pandemic or another public health crisis or other unexpected event; and ◦ Other statements contained in this Quarterly Report on Form 10-Q regarding items that are not historical facts or that involve predictions. Introduction Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is a supplement to the accompanying condensed consolidated financial statements of MasterBrand and its consolidated subsidiaries and provides additional information on our business, recent developments, financial condition, liquidity and capital resources, cash flows and results of operations. MD&A is organized as follows: • Overview: This section provides a general description of our business, as well as recent developments we believe are important in understanding our results of operations and financial condition or in understanding anticipated future trends. • Separation from Fortune Brands: This section provides a general discussion of our Separation from Fortune Brands. 22 Table of Contents • Basis of Presentation: This section provides a discussion of the basis on which our condensed consolidated financial statements were prepared, including our historical results of operations and adjustments thereto, primarily allocations of general corporate expenses from Fortune Brands. • Results of Operations: Our consolidated financial statements are based on a 52- or 53-week fiscal year ending on the last Sunday in December in each calendar year. This section provides an analysis of our results of operations for the 13-week period that ended on March 26, 2023 as compared to March 27, 2022. Unless the context otherwise requires, references to years and quarters contained in this Quarterly Report on Form 10-Q pertain to our fiscal years and fiscal quarters. Additionally, unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to: (1) “2023,” or “fiscal 2023” refers to our 2023 fiscal year that is a 53-week period that will end on December 31, 2023; and (2) “2022,” or “fiscal 2022” refers to our 2022 fiscal year that was a 52-week period that ended on December 25, 2022. Furthermore, unless the context otherwise requires, reference in this Quarterly Report on Form 10-Q to: (1) “the first quarter of 2023” refers to the thirteen week period that ended on March 26, 2023; and (2) “the first quarter of 2022” refers to the thirteen week period that ended on March 27, 2022. • Liquidity and Capital Resources: This section provides a discussion of our financial condition and an analysis of our cash flows for our 2023 fiscal first quarter as compared to our 2022 fiscal first quarter. This section also provides a discussion of our ability to fund our future commitments and ongoing operating activities through internal and external sources of capital. • Recently Issued Accounting Standards: This section identifies our adoption of recently issued accounting standards. • Critical Accounting Estimates: This section identifies and summarizes those accounting policies that significantly impact our reported results of operations and financial condition and require significant judgment or estimates on the part of management in their application. Overview Founded nearly 70 years ago, we are the largest manufacturer of residential cabinets in North America. Our superior product quality, innovative design and service excellence drive a compelling value proposition. We have insight into the fashion and features consumers desire, which we use to tailor our product lines across price points. Our volume leadership allows us to achieve an advantaged cost structure and service platform by standardizing product platforms and components to the greatest extent possible—resulting in an improved facility footprint and an efficient supply chain. Further, our decades of experience have informed how we use global geographies to optimize procurement and manufacturing costs. Finally, with the most extensive dealer network throughout the United States and Canada, we have an advantaged distribution model that cannot be easily replicated. We expect to further extend our competitive advantages by using technology and data to enhance the consumer’s experience from visualization to ordering to delivery and installation. Separation from Fortune Brands On April 28, 2022, Fortune Brands Home & Security, Inc. (“Fortune Brands” or the “Parent”) announced that its Board of Directors approved in principle a separation of its Cabinets segment into a standalone publicly-traded company (the “Separation”). The Cabinets segment of Fortune Brands had historically been operated by MasterBrand Cabinets, Inc. (“MBCI”). In July 2022, Fortune Brands incorporated MasterBrand, Inc. in the State of Delaware and subscribed to all of the shares of MasterBrand, Inc.’s common stock upon its incorporation. Following the incorporation of MasterBrand, Inc., the following occurred: (1) Fortune Brands contributed all of the issued and outstanding shares of capital stock of MBCI to MasterBrand, Inc., resulting in MBCI becoming a wholly-owned subsidiary of MasterBrand, Inc. through a transaction between entities under common control; and (2) MBCI was converted into a Delaware limited liability company, MasterBrand Cabinets LLC (collectively, the “Reorganization”). On December 14, 2022, the Separation was completed by way of a pro rata dividend of our common stock to stockholders of Fortune Brands common stock (the “Distribution”). On December 14, 2022, the date of Separation, 128.0 million shares of MasterBrand, Inc. common stock were issued. Fortune Brand shareholders received one share of MasterBrand, Inc. common stock for each share of Fortune Brands common stock held on the record date. Following the Distribution, Fortune Brands stockholders owned 100 percent of the shares of MasterBrand, Inc. common stock, and MasterBrand, Inc. became an independent, publicly-traded company, listed under the symbol “MBC” on the New York Stock Exchange beginning December 15, 2022. All share and per share amounts for all prior periods presented in the condensed consolidated financial statements, including Note 4, “Earnings Per Share,” have been retroactively recast to reflect the effects of the changes in equity structure resulting from the Reorganization, Separation and Distribution. The historical activity of the Company is that of MBCI prior to the Reorganization. 23 Table of Contents The Company’s equity structure prior to the Separation and Distribution included 5,000 shares of MasterBrand, Inc. common stock authorized and 100 shares issued. Prior to the incorporation of MasterBrand, Inc. in July 2022, the equity structure of MBCI included 1,000 authorized and issued shares of common stock. MasterBrand, Inc. is the registrant and the financial reporting entity following the consummation of the Separation and Distribution. In order to govern the ongoing relationships between MasterBrand, Inc. and Fortune Brands after the Separation and to facilitate an orderly transition, the parties entered into a series of agreements, including the following: • Separation and Distribution Agreement – sets forth the principal actions to be taken in connection with the Separation, including the transfer of assets and assumption of liabilities, among others, and sets forth other agreements governing aspects of the relationship between MasterBrand and Fortune Brands. • Transition Services Agreement – allows for Fortune Brands and MasterBrand to provide certain transition services to each other for a limited time, up to 24 months following the Separation. • Tax Allocation Agreement – governs the respective rights, responsibilities and obligations of MasterBrand and Fortune Brands with respect to tax liabilities and benefits, tax attributes, tax contests and other matters regarding income taxes, non-income taxes and related tax returns. • Employee Matters Agreement – addresses certain employment, compensation and benefits matters, including the allocation and treatment of certain assets and liabilities relating to MasterBrand employees. Separating the Cabinets segment into a standalone publicly-traded company significantly enhances the long-term growth and return prospects of our Company and offers substantially greater long-term value to stockholders, customers and employees. Moreover, separating the Cabinets segment into an independent, standalone company with publicly-traded stock provides our Company with a number of benefits, including: • Strategic and Management Focus : The Separation enables our management team to better focus on strengthening our market-leading business and pursue targeted opportunities for long-term growth, profitability, and value creation. Like many of its competitors and peers, our Company believes that it will be more effective in managing its capital structure with credit tied more specifically to its industry and business performance and achieving greater margin expansion by focusing on its operational effectiveness specific to its products. A dedicated management team and board of directors streamlines operational and strategic decision-making, and ensures management incentives are optimized and aligned with our strategic priorities and financial objectives are in line with our industry. • Resource Allocation and Capital Deployment : The Separation provides us an opportunity to implement a tailored capital structure that ties specifically to our industry and business that provides greater financial and operational flexibility and increased agility. We are better positioned to more effectively allocate resources to address unique operating needs relating to our manufacturing and marketing requirements within our specific markets, invest in strategic priorities that will maximize long-term potential, and manage capital return strategies. Our unique operating needs are tailored towards enhancing the standardization of our processes, including with respect to our supply chain, and the specific manufacturing needs of our products, and strengthening our lean manufacturing capabilities. The Separation provides an opportunity for us to more effectively focus on these unique operating needs and markets. • Distinct Investment Opportunities and Investor Choice : The Separation creates a compelling investment opportunity for investors based on our unique operating model and financial profile. It also provides investors with enhanced insight into our distinct value drivers and allows for more targeted investment decisions. 24 Table of Contents Basis of Presentation Our consolidated financial statements are based on a 52- or 53-week fiscal year ending on the last Sunday in December in each calendar year and have been principally derived from the consolidated financial statements of our Company and its consolidated subsidiaries using the historical results of operations, and historical basis of assets and liabilities. Our condensed consolidated financial statements have been prepared in accordance with GAAP. Our historical financial statements through the date of Separation include allocations of expenses related to certain Fortune Brands corporate functions, including information technology, finance, executive, human resources, supply chain, internal audit, governance and legal services. These expenses have been allocated based on direct usage or benefit where specifically identifiable, with the remainder allocated on a proportional cost allocation method based primarily on net sales, employee headcount or number of facilities, as applicable. Prior to the Separation, total expenses allocated for the thirteen weeks ended March 27, 2022 were $20.1 million, of which $12.1 million was not previously allocated to us. Such amounts are primarily included within selling, general and administrative expenses in our condensed consolidated statements of income and comprehensive income. We consider the expense methodology and resulting allocation to be reasonable for all periods presented; however, the allocations may not be indicative of actual expenses that would have been incurred had we operated as an independent, publicly-traded company for the periods presented. Actual costs that we may have incurred had we been a standalone company would depend on a number of factors, including the chosen organizational structure, whether functions were outsourced or performed by our employees and strategic decisions made in areas such as manufacturing, selling and marketing, research and development, information technology and infrastructure. Accordingly, historical allocations may not be indicative of future costs we incur operating as an independent, publicly-traded company. The income tax amounts in our condensed consolidated financial statements have been calculated on a separate return method and presented as if our operations were separate taxpayers in the respective jurisdictions. For the period prior to the Separation in 2022, including the Separation, federal and state income tax payments and refunds were paid and received by Fortune Brands on our behalf. The net taxes paid on our behalf are payable to Fortune Brands, as provided in the indemnification provisions of the Tax Allocation Agreement. Accordingly, the net tax payable of $32.6 million to Fortune Brands as of March 26, 2023, is recorded in accounts payable on the condensed consolidated balance sheets. Following the Separation, a limited number of services that Fortune Brands provided to us, or we provided to them, prior to the Separation are continuing to be provided for a period of time under a Transition Services Agreement. We are now incurring certain costs as a standalone public company, including services provided by our own resources or through third-party service providers relating to corporate functions, including information technology, finance, executive, human resources, supply chain, internal audit, governance and legal services, as well as ongoing additional costs associated with operating as an independent, publicly-traded company. All transactions between us and Fortune Brands previously resulting in related party balances were settled in our consolidated financial statements immediately prior to the Distribution, or were settled shortly thereafter, including by making a distribution of capital by us to Fortune Brands of any remaining related party receivable owed by Fortune Brands to us. For more information regarding related party transactions with Fortune Brands, see Note 15, “Related Party Transactions” within this Quarterly Report on Form 10-Q. Fortune Brands utilized a central approach to treasury management, and we historically participated in related cash pooling arrangements prior to the Separation. Our cash and cash equivalents on our condensed consolidated balance sheets represent cash balances held in bank accounts owned by us and our consolidated subsidiaries. Prior to Separation, we had no third-party borrowings. All borrowings attributable to our business and due to Fortune Brands were recorded as “related party payable” in our condensed consolidated balance sheets and classified as current or noncurrent based on loan maturity dates. Fortune Brands’ third-party debt and related interest expense have not historically been attributed to us as we were not the legal obligor of the debt, and the borrowings are not specifically identifiable to us. However, we incurred indebtedness in connection with the Separation and Distribution, which resulted in additional interest expense beginning in the fourth quarter of 2022. 25 Table of Contents Results of Operations The following discussion of condensed consolidated results of operations refers to the thirteen weeks ended March 26, 2023 compared to the thirteen weeks ended March 27, 2022. Thirteen Weeks Ended March 26, 2023 Compared to the Thirteen Weeks Ended March 27, 2022 Thirteen Weeks Ended (In millions) March 26, 2023 $ change % change March 27, 2022 Net sales $ 676.7 $ (100.4) (12.9) % $ 777.1 Cost of products sold 472.1 (94.0) (16.6) % 566.1 Gross Profit 204.6 (6.4) (3.0) % 211.0 Selling, general and administrative expenses 135.3 (9.8) (6.8) % 145.1 Amortization of intangible assets 4.0 (0.4) (9.1) % 4.4 Restructuring adjustments (0.4) (0.4) n/m (1) — Operating income 65.7 4.2 6.8 % 61.5 Related party interest income, net — 1.1 n/m (1) (1.1) Interest expense 17.4 17.4 n/m (1) — Other expense, net 0.4 (0.5) (55.6) % 0.9 Income before taxes 47.9 (13.8) (22.4) % 61.7 Income tax expense 12.9 (1.9) (12.8) % 14.8 Net income $ 35.0 $ (11.9) (25.4) % $ 46.9 ___________ (1) Not meaningful. Net sales Net sales were $676.7 million for the thirteen weeks ended March 26, 2023 compared to $777.1 million for the thirteen weeks ended March 27, 2022, a decrease of $100.4 million, or 12.9 percent. The lower net sales compared to the first quarter of 2022 was driven by a decrease in sales unit volume, partially offset by favorable price, including the carryover of price increases implemented in 2022 which helped to mitigate the impact of cumulative commodity and transportation cost increases. Foreign currency impact was $1.5 million unfavorable during the first quarter of 2023 as compared to the first quarter of 2022. Cost of products sold Cost of products sold decreased by $94.0 million, or 16.6 percent, to $472.1 million (69.8 percent of net sales) in the first quarter of 2023 as compared to $566.1 million (72.8 percent of net sales) in the first quarter of 2022. Aside from the impact of decreased sales unit volume, the lower cost of products sold as a percentage of net sales in the first quarter of 2023 is due to the favorable carryover of price increases implemented in 2022, as well as realized savings from various cost reduction actions taken in the fourth quarter of 2022 and first quarter of 2023. These factors were partially offset by commodity cost inflation, labor inflation and higher inbound transportation costs. Additionally, the first quarter of 2023 included $9.4 million of incremental costs related to the tornado at our Jackson, GA facility. Selling, general and administrative expenses Selling, general and administrative expenses decreased by $9.8 million, or 6.8 percent, to $135.3 million (20.1 percent of net sales) in the thirteen weeks ended March 26, 2023 compared to $145.1 million (18.8 percent of net sales) in the thirteen weeks ended March 27, 2022. The decrease in the first quarter of 2023 is primarily due to lower distribution costs ($10.4 million) and commission costs ($3.4 million) as a result of lower unit volume, partially offset by increased employee-related costs and professional support fees ($12.2 million) as the first quarter of 2023 includes additional costs for newly established MasterBrand corporate functions, including information technology, finance, executive, human resources, supply chain, internal audit, governance and legal services, previously provided by Fortune Brands. The first quarter of 2022 included $12.1 million of allocated costs from Fortune Brands which did not recur in the first quarter of 2023. In the first quarter of 2023, we also incurred $1.6 million of additional costs directly related to the Separation from Fortune Brands. 26 Table of Contents Restructuring adjustments Restructuring adjustments to our restructuring liability were $0.4 million in the thirteen weeks ended March 26, 2023. There were no restructuring charges or adjustments during the thirteen week period ended March 27, 2022. Operating income We recorded operating income of $65.7 million in the thirteen weeks ended March 26, 2023, compared to operating income of $61.5 million for the thirteen weeks ended March 27, 2022. The $4.2 million, or 6.8 percent, in crease in operating income was driven mainly by the favorable carryover of price increases implemented in 2022, as well as realized savings from various cost reduction actions taken in the fourth quarter of 2022 and first quarter of 2023 and decreased selling, general and administrative expenses. These items were partially offset by $9.4 million of incremental costs related to the tornado at our Jackson, GA facility and $1.6 million of costs additional costs directly related to the Separation from Fortune Brands. Related party interest income, net Related party interest income, net, was $1.1 million in the first quarter of 2022 based upon the related party loan receivable from Fortune Brands. Prior to the Separation, excess cash generated by our operations was remitted to Fortune Brands on a regular basis through the cash pooling arrangements. At the date of the Separation, such arrangements ceased. Interest expense Upon Separation, we incurred indebtedness in connection with the Separation and Distribution, which resulted in $17.4 million of interest expense in the first quarter of 2023. Prior to the Separation, we had no third-party borrowings. Other expense Other expense, net was $0.4 million in the first quarter of 2023, which was comparable to other expense, net of $0.9 million in the first quarter of 2022. Income taxes Our condensed consolidated income tax expense, income before taxes, and effective tax rate for the thirteen week periods ended March 26, 2023 and March 27, 2022 were as follows: Thirteen Weeks Ended (In millions) March 26, 2023 March 27, 2022 Income before taxes $ 47.9 $ 61.7 Income tax expense 12.9 14.8 Effective tax rate 26.9 % 24.0 % The effective income tax rates for the thirteen weeks ended March 26, 2023, and March 27, 2022, were 26.9 percent and 24.0 percent, respectively. The change in the effective tax rate between the periods resulted primarily due to the change in projected earnings mix by geography and tax jurisdiction as compared to the prior period, changes in state and local income taxes, nondeductible compensation, and recognition of deferred tax liability for foreign earnings in 2023. The difference between the Company’s effective income tax rate for the thirteen weeks ended March 26, 2023, and the U.S. statutory rate of 21.0 percent primarily relates to changes in state and local income taxes, nondeductible compensation, foreign income inclusions with offsetting foreign tax credits, changes due to foreign tax return filings, recognition of a deferred tax liability for foreign earnings and the mix of earnings in jurisdictions with differing tax rates. The difference between the Company’s effective income tax rate for the thirteen weeks ended March 27, 2022, and the U.S. statutory rate of 21.0 percent primarily relates to changes in state and local income taxes, nondeductible compensation, and tax benefits from general business credits. 27 Table of Contents Net income Net income was $35.0 million for the thirteen weeks ended March 26, 2023 compared to $46.9 million for the thirteen weeks ended March 27, 2022. While operating income increased $4.2 million, or 6.8 percent, it was more than offset by the $17.4 million of interest expense in the first quarter of 2023 resulting from the indebtedness we incurred upon Separation from Fortune Brands. LIQUIDITY AND CAPITAL RESOURCES Our primary liquidity needs have historically been to support working capital requirements and fund capital expenditures. Prospectively, we may have liquidity needs to finance acquisitions and return cash to stockholders, if and when appropriate. Historically, our principal sources of liquidity have been cash on hand, cash flows from operating activities and financial support from Fortune Brands via participation in Fortune Brands’ centralized approach to treasury, including financing and cash management activities. Subsequent to the Separation, we implemented our own centralized approach to treasury, including cash management performed through cash pooling arrangements. Certain of our entities have standalone cash accounts that are not included in the centralized cash pooling arrangements. All cash balances specifically identifiable to us are included in our condensed consolidated balance sheets and statement of cash flows. The cash flows presented in our condensed consolidated statement of cash flows may not be indicative of the cash flows we would have recognized had we operated as a standalone publicly-traded company for the periods presented prior to the Separation. After the Separation, we no longer have financial support from Fortune Brands. Our operating income is generated by our subsidiaries. There are no restrictions on the ability of our subsidiaries to pay dividends or make other distributions to MasterBrand. We periodically review our portfolio of brands, manufacturing and supply chain footprint, and evaluate potential strategic transactions to increase stockholder value. However, we cannot predict whether or when we may enter into acquisitions, joint ventures or dispositions, or what impact any such transactions could have on our results of operations, cash flows or financial condition. Our cash flows from operations, borrowing availability and overall liquidity are subject to certain risks and uncertainties, including those described in the section entitled “Risk Factors” within Part I, Item 1A of our Annual Report on Form 10-K. On November 18, 2022, we entered into a 5-year, $1.25 billion credit agreement, consisting of a $750.0 million term loan and a $500.0 million revolving credit facility (the “2022 Credit Agreement”). Initial proceeds of $955.0 million from the credit agreement were received at the time of Separation from Fortune Brands. The proceeds were primarily used to make a cash dividend payment of $940.0 million to Fortune Brands and to pay related fees and expenses at the Separation. The credit agreement is secured by certain assets as well as the guarantee of certain of our subsidiaries. Interest rates under these facilities are variable based on the SOFR at the time of the borrowing, and our net leverage ratio as measured by our Net Leverage to our Consolidated EBITDA. Net Leverage is defined as consolidated total indebtedness minus certain cash and cash equivalents. 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. The Net Leverage Ratio may not exceed 3.875 to 1.0 at the initial borrowing through the second fiscal quarter of 2023, adjusting downward in various future quarters before settling at 3.25 to 1.0 in January 2025. Interest rates can range from SOFR plus 1.85 percent to SOFR plus 2.60 percent. We also are required to maintain a minimum Interest Coverage Ratio of 3.0 to 1.0. The Interest Coverage Ratio is defined as Consolidated EBITDA to consolidated interest expense. Our 2022 Credit Agreement contains additional covenants which limit or preclude certain corporate actions based upon the measurement of certain financial covenant metrics. The $750.0 million Term Loan has quarterly required amortization payments beginning in March 2023. As of March 26, 2023, the Company was in compliance with all financial covenants set forth in the 2022 Credit Agreement, and expects to remain in compliance for the foreseeable future. As of March 26, 2023, we had $939.6 million outstanding in third-party borrowings, net of deferred financing fees. We may also incur additional indebtedness in the future. 28 Table of Contents Cash Flows Below is a summary of cash flows for the thirteen weeks ended March 26, 2023 and March 27, 2022. For the thirteen weeks ended (In millions) March 26, 2023 March 27, 2022 Net cash provided by (used in) operating activities $ 62.1 $ (2.9) Net cash used in investing activities (2.7) (11.0) Net cash (used in) provided by financing activities (42.7) 11.0 Effect of foreign exchange rate changes on cash and cash equivalents (1.5) 0.4 Net increase (decrease) in cash and cash equivalents $ 15.2 $ (2.5) Net cash provided by operating activities included net income of $35.0 million in the first quarter of 2023, as compared to net income of $46.9 million in the first quarter of 2022. First quarter 2023 net income included interest expense of $17.4 million on external debt that was entered into at the Separation, which equaled cash outflows of $17.4 million for interest in the quarter. In the first quarter of 2023, accounts receivable generated $14.1 million of cash, as a result of improvements in our collection processes. In the first quarter of 2022, our accounts receivable used $18.3 million, due in part to increased first quarter 2022 sales. In the first quarter of 2023, the movement in inventory was $23.3 million favorable, as compared to the first quarter of 2022, which had an unfavorable movement in inventory of $32.8 million. In 2022, we executed an intentional build in inventory in the first half of the year in order to mitigate the impact of an uncertain and volatile global supply chain environment. The favorable inventory movement in the first quarter of 2023 reflects our efforts to more efficiently manage our inventory levels in the current supply chain environment. Accounts payable was $16.9 million unfavorable in the first quarter of 2023 as a result of decreased purchasing levels aligned with our lower inventory levels. This compares to the favorable accounts payable movement of $14.9 million in the first quarter of 2022 in conjunction with our increasing inventory levels. The first quarter of 2023 was also unfavorably impacted by $10.4 million of payments related to restructuring reserves established in fiscal 2022 and $17.4 million of interest payments on external debt. In conjunction with the Separation in the fourth quarter of 2022, we borrowed $985.0 million of external debt. Net cash used in investing activities was $2.7 million in the thirteen weeks ended March 26, 2023 compared to net cash used in investing activities of $11.0 million in the thirteen weeks ended March 27, 2022. The year-over-year decrease is due to fewer capital expenditures scheduled in the first quarter of 2023 as compared to the prior year, which included spending related to the completion of a large expansion at our production facility in Reynosa, Mexico. Net cash used in financing activities was $42.7 million in the thirteen weeks ended March 26, 2023 as compared to cash provided of $11.0 million in the thirteen weeks ended March 27, 2022. The first quarter of 2023 included net payments on external debt of $39.6 million, as the Company used excess cash to pay down our revolving credit facility. The first quarter of 2023 also includes $2.8 million of payments of taxes associated with share-based compensation that vested during the quarter. Prior to the Separation, there were no stock-based awards of MasterBrand, Inc. outstanding. Prior to the Separation, our employees participated in Fortune Brands’ stock-based compensation plans, the costs of which were allocated to us. The activity in the first quarter of 2022 primarily reflects our cash remittances to Fortune Brands, net of cash lending from Fortune Brands, to finance our operations prior to the Separation. The financing relationship with Fortune Brands ceased as of the date of Separation. We believe that our cash and cash equivalent balances, along with available cash from operating cash flows and credit facilities, will be adequate to fund our typical needs, including working capital requirements and projected capital expenditures. We also believe we have access to additional funds from capital markets to fund strategic initiatives. RECENTLY ISSUED ACCOUNTING STANDARDS As discussed in Note 2, “Recently Issued Accounting Standards,” of our unaudited condensed consolidated financial statements, there are no recently issued accounting pronouncements that we have adopted and which have had a material effect on our results of operations, cash flows or financial condition. 29 Table of Contents CRITICAL ACCOUNTING ESTIMATES We prepare our condensed consolidated financial statements in conformity with GAAP. This requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Our critical accounting estimates requiring significant judgement that could materially impact our results of operations, financial position and cash flows are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2022. Since the date of the Company’s most recent Annual Report, there have been no material changes in our critical accounting estimates or assumptions. Item 3. QUANTITATIVE AND QUALITATIVE 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 Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 25, 2022.