# Fortune Brands Innovations, Inc.: Form 10-Q for the period ended Jun 30, 2022

- Company: [Fortune Brands Innovations, Inc.](/companies/fbin.md) (CIK 1519751)
- Form: 10-Q
- Filed: 2022-07-28
- Accepted by EDGAR: Jul 28, 2022, 16:05 ET
- Period: 2022-06-30
- Accession: 0000950170-22-013367
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1519751/000095017022013367/fbhs-20220630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1519751/000095017022013367/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-04-01 to 2022-06-30 | $2.11bn | us-gaap:Revenues |
| Revenue | 6 months, 2022-01-01 to 2022-06-30 | $4.03bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2022-04-01 to 2022-06-30 | $1.35bn | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2022-01-01 to 2022-06-30 | $2.59bn | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2022-04-01 to 2022-06-30 | $434.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2022-01-01 to 2022-06-30 | $844.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-04-01 to 2022-06-30 | $284.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2022-01-01 to 2022-06-30 | $537.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-04-01 to 2022-06-30 | $30.5m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2022-01-01 to 2022-06-30 | $52.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-04-01 to 2022-06-30 | $61.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2022-01-01 to 2022-06-30 | $113.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-04-01 to 2022-06-30 | $192.0m | us-gaap:ProfitLoss |
| Net income | 6 months, 2022-01-01 to 2022-06-30 | $372.9m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2022-04-01 to 2022-06-30 | $1.46 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2022-01-01 to 2022-06-30 | $2.80 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-04-01 to 2022-06-30 | $1.47 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2022-01-01 to 2022-06-30 | $2.83 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-04-01 to 2022-06-30 | 131,200,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2022-01-01 to 2022-06-30 | 133,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2022-01-01 to 2022-06-30 | $41.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2022-01-01 to 2022-06-30 | $115.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2022-01-01 to 2022-06-30 | $73.6m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2022-01-01 to 2022-06-30 | $505.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-06-30 | $360.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-06-30 | $3.06bn | us-gaap:AssetsCurrent |
| Total assets | at 2022-06-30 | $8.33bn | us-gaap:Assets |
| Current liabilities | at 2022-06-30 | $1.44bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-06-30 | $5.38bn | us-gaap:Liabilities |
| Long-term debt | at 2022-06-30 | $3.36bn | us-gaap:LongTermDebtNoncurrent |
| Short-term borrowings | at 2022-06-30 | $0 | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2022-06-30 | $2.95bn | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 37,830 characters.

### 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 31, 2021, which are included in our Annual Report on Form 10-K for the year ended December 31, 2021.

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”), regarding expectations for our business, operations, financial performance or financial condition in addition to statements regarding our general business strategies, market potential, the potential of our brands and other matters, expected capital spending, expected pension contributions, the anticipated impact of recently issued accounting standards on our financial statements, the anticipated impact of acquisitions, other strategic transactions and other matters that are not historical in nature, including the expected or potential impact of the novel coronavirus (“COVID-19”) pandemic. Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans” 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 about our industry, business and future financial results, available at the time this report is filed with the Securities and Exchange Commission. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, 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 develop new products or processes and improve existing products and processes, (v) our reliance on key customers and suppliers, including wholesale distributors and dealers and retailers, (vi) risks associated with our ability to improve organizational productivity and global supply chain efficiency and flexibility, (vii) risks associated with global commodity and energy availability and price volatility, as well as the possibility of sustained inflation, (viii) delays or outages in our information technology systems or computer networks, (ix) risks associated with doing business globally, including changes in trade-related tariffs and risks with uncertain trade environments, (x) risks associated with the disruption of operations, (xi) our inability to obtain raw materials and finished goods in a timely and cost-effective manner, (xii) risks associated with entering into potential strategic acquisitions and joint ventures and related integration activities, (xiii) impairments in the carrying value of goodwill or other acquired intangible assets, (xiv) risk of increases in our defined benefit-related costs and funding requirements, (xv) the uncertainties relating to the impact of COVID-19 on the Company’s business, financial performance and operating results, (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) changes in government and industry regulatory standards, (xx) future tax law changes or the interpretation of existing tax laws, (xxi) our ability to secure and protect our intellectual property rights, (xxii) potential liabilities and costs from claims and litigation, (xxiii) the potential costs and disruption to our business of implementing the Spin-Off, (xxiv) our ability to consummate the Spin-Off and achieve the expected benefits of the Spin-Off transaction, (xxv) the loss of synergies from operating the businesses that could negatively impact the balance sheet, profit margins or earnings of both businesses, (xxvi) the potential that the combined value of the common stock of the two publicly-traded companies resulting from the Spin-Off does not equal or exceed the value that the Company’s common stock could have had if the Spin-Off had not occurred and (xxvii) the expected timing of the completion of the Spin-Off transaction and the transaction terms. 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 31, 2021 and in Part II, Item 1A of this Report. 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.

### OVERVIEW

References to “Fortune Brands,” “the Company,” “we,” “our” and “us” refer to Fortune Brands Home & Security, Inc. and its consolidated subsidiaries as a whole, unless the context otherwise requires. The Company is a leading home and security products company with a portfolio of leading branded products used for residential home repair, remodeling, new construction and security applications.

On April 28, 2022, the Company announced that its Board of Directors authorized the Company to develop a plan to separate the Company into two independent, publicly-traded companies via a tax-free spin-off of the MasterBrand Cabinets, Inc. business into a separate standalone publicly-traded company (the "Spin-Off"). The Spin-Off is expected to be completed approximately twelve months from the announcement date, subject to a number of conditions including the approval by the Company’s Board of Directors and the effectiveness of a registration statement on Form 10 to be filed with the SEC.

We believe that the Company has certain competitive advantages including market-leading brands, a diversified mix of channels, lean and flexible supply chains, a decentralized business model and 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. The long-term outlook for our products remain favorable, and our strategic advantages, including those set of capabilities we refer to as the Fortune Brands Advantage, helps us to continue to achieve profitable organic growth.

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. Continued growth in the U.S. market for our home products will largely depend on consumer confidence, employment, wage growth, home prices, stable mortgage rates and credit availability. Inflation and rising of mortgage rates have recently started slowing the pace of single-family and existing home sales activity. However, we believe we are well positioned to manage any short-term slow-down in the housing market because 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 global supply chain environment, as well as sustained increased rates of inflation, rising interest rates, unfavorable fluctuations in foreign exchange rates and the ongoing costs of tariffs. We continue to manage these challenges and are diligently working to offset potential unfavorable impacts of these items through continuous productivity improvement initiatives and price increases.

In the first quarter of 2022, our Plumbing segment was renamed “Water Innovations” to better align with our key brands and organizational purpose. The Plumbing segment name change had no impact on the Company’s historical financial position, results of operations, cash flow or segment-level results previously reported.

In January 2022, we acquired 100% of the outstanding equity of Solar Innovations LLC and an affiliated entity (together, "Solar"), a leading producer of wide-opening exterior door systems and outdoor enclosures, for a purchase price of approximately $61.6 million, net of cash acquired. The purchase price is subject to a final post-closing working capital adjustment. We financed the transaction using cash on hand and borrowings under our revolving credit facility. The results of Solar are reported as part of the Outdoors & Security segment. Its complementary product offerings support the segment’s outdoor living strategy.

### RESULTS OF OPERATIONS

### Six Months Ended June 30, 2022 Compared To Six Months Ended June 30, 2021

*(In millions)*

|  | Net Sales 2022 | 2021 | % Change vs. Prior Year |
| --- | ---: | ---: | ---: |
| Water Innovations | $1,293.6 | $1,316.2 | (1.7)% |
| Outdoors & Security | 1,102.0 | 997.0 | 10.5 |
| Cabinets | 1,632.7 | 1,393.9 | 17.1 |
| Net sales | $4,028.3 | $3,707.1 | 8.7% |
|  | **Operating Income (Loss)** |  |  |
|  | **2022** | **2021** | **% Change vs. Prior Year** |
| Water Innovations | $310.0 | $316.8 | (2.1)% |
| Outdoors & Security | 152.7 | 131.3 | 16.3 |
| Cabinets | 142.4 | 147.0 | (3.1) |
| Less: Corporate expenses | (67.6) | (51.8) | (30.5) |
| Operating income | $537.5 | $543.3 | (1.1)% |

The following discussion of consolidated results of operations and segment results refers to the six months ended June 30, 2022 compared to the six months ended June 30, 2021. Consolidated results of operations should be read in conjunction with segment results of operations.

#### Net sales

Net sales increased by $321.2 million, or 8.7%, principally due to price increases to help mitigate the impact of cumulative commodity and transportation cost increases across all our segments, higher sales volume in the Cabinets segment and the benefit from the Solar Innovations acquisition ($11.4 million). These benefits were partially offset by lower sales volume in the Water Innovations segment due to the impact of shutdowns mandated by the Chinese government in response to a COVID-19 resurgence in China and higher sales incentives, as well as unfavorable foreign exchange of approximately $9 million.

#### Cost of products sold

Cost of products sold increased by $228.5 million, or 9.7%, due to the impact of raw material cost increases and labor cost increases and unfavorable inventory-related expense write-offs in our Outdoors & Security and Cabinets segments, partially offset by the benefit from productivity improvements across all segments, a gain on the sale of a previously closed manufacturing facility within our Outdoors & Security segment and the impact of Larson's acquisition related inventory fair value adjustment amortization of $3.3 million in 2021, which did not recur in 2022.

#### Selling, general and administrative expenses

Selling, general and administrative expenses increased by $78.0 million, or 10.2%, due to higher transportation and headcount-related costs.

#### Asset impairment charge

The asset impairment charge of $26.0 million in 2022 relates to an indefinite-lived tradename within our Cabinets segment. During the second quarter of 2022, production was shifted at a historical make-to-order plant to a stock product line, to enable what we expect to be a higher value purpose and growth opportunity, which led to downward revisions to forecasted revenue growth rates associated with the tradename.

#### Restructuring charges

Restructuring charges of $2.9 million in the six months ended June 30, 2022 are largely related to severance costs associated with plant and office closures. Restructuring charges of $7.9 million in the six months ended June 30, 2021 largely related to severance costs associated with the relocation of manufacturing facilities within our Cabinets and Outdoors & Security segments.

### RESULTS OF OPERATIONS (Continued)

#### Operating income

Operating income decreased by $5.8 million, or 1.1%, primarily due to higher commodity, transportation and headcount-related costs, an asset impairment charge of $26.0 million, a continued shift to value-priced products in the Cabinets segment and higher sales rebate costs, as well as unfavorable foreign exchange of approximately $2 million. These factors were partially offset by the benefit from higher net sales, the benefit from productivity improvements and lower restructuring charges.

#### Interest expense

Interest expense increased by $9.7 million to $52.3 million due to higher average borrowings and higher average interest rates.

#### Other (income) expense, net

Other income, net, was $1.5 million in the six months ended June 30, 2022, compared to other expense, net of $2.0 million in the six months ended June 30, 2021. The increase in other income, net is primarily due to a non-cash loss of $4.5 million related to the 2021 remeasurement of our investment in Flo immediately prior to consolidation, partly offset by a decrease in foreign currency transaction gains.

#### Income taxes

The effective income tax rates for the six months ended June 30, 2022 and 2021 were 23.4% and 20.8%, respectively. The effective income tax rate in 2022 was higher than the prior period primarily due to increased foreign tax expense and lower tax benefits from uncertain tax positions, offset by the benefit of a valuation allowance release.

#### Net income

Net income was $372.9 million in the six months ended June 30, 2022 compared to $395.0 million in the six months ended June 30, 2021. The decrease was due to higher income tax expense, higher interest expense and lower operating income, partly offset by higher other income.

### Results By Segment

### Water Innovations

Net sales decreased by $22.6 million, or 1.7%, due to the impact of shutdowns mandated by the Chinese government in response to a COVID-19 resurgence in China and higher sales rebate costs, as well as unfavorable foreign exchange of approximately $5 million. These factors were partially offset by the benefit from price increases to help mitigate the impact of cumulative commodity and transportation cost increases and a sales increase in our U.S. e-commerce channel.

Operating income decreased by $6.8 million, or 2.1%, due to the lower sales volume and the impact of higher commodity and freight costs, as well as unfavorable foreign exchange of approximately $2 million. These factors were partially offset by the benefit from price increases to help mitigate the impact of cumulative commodity and transportation cost increases, lower sales rebate costs and cost reductions, including employee-related costs.

### Outdoors & Security

Net sales increased by $105.0 million, or 10.5%, due to price increases to help mitigate the impact of cumulative commodity and transportation cost increases and the benefit from the Solar Innovations acquisition ($11.4 million). These benefits were partially offset by lower sales volume, as well as unfavorable foreign exchange of approximately $3 million.

Operating income increased by $21.4 million, or 16.3%, due to higher net sales, lower restructuring costs including a gain of $6.2 million on the sale of a previously closed manufacturing facility, the benefit from productivity improvements, an increase in wholesale doors products versus retail doors products and the benefit from the Solar Innovations acquisition ($1.2 million). These benefits were partially offset by higher commodity, headcount-related and freight costs, in addition to labor availability constraints and an unfavorable inventory-related expense write-off, as well as unfavorable foreign exchange of approximately $1 million.

### Cabinets

Net sales increased by $238.8 million, or 17.1%, due to price increases to help mitigate the impact of cumulative commodity and transportation cost increases and higher sales volume. These benefits were partially offset by unfavorable foreign exchange of approximately $1 million.

Operating income decreased by $4.6 million, or 3.1%, due to commodity cost inflation, a continued shift to value-priced products, higher freight costs, an asset impairment charge, higher headcount-related costs and an unfavorable inventory-related expense write-off. These factors were partly offset by the benefit from higher net sales and productivity improvements.

### Corporate

Corporate expenses increased by $15.8 million, or 30.5%, due to higher consulting costs relating to our digital transformation initiatives and costs related to the planned Spin-Off of our Cabinets business.

### Three Months Ended June 30, 2022 Compared To Three Months Ended June 30, 2021

*(In millions)*

|  | Net Sales 2022 | 2021 | % Change vs. Prior Year |
| --- | ---: | ---: | ---: |
| Water Innovations | $650.0 | $694.6 | (6.4)% |
| Outdoors & Security | 605.4 | 535.5 | 13.1 |
| Cabinets | 855.6 | 706.0 | 21.2 |
| Net sales | $2,111.0 | $1,936.1 | 9.0% |
|  | **Operating Income (Loss)** |  |  |
|  | **2022** | **2021** | **% Change vs. Prior Year** |
| Water Innovations | $160.7 | $168.9 | (4.9)% |
| Outdoors & Security | 92.5 | 78.5 | 17.8 |
| Cabinets | 68.8 | 74.4 | (7.5) |
| Less: Corporate expenses | (37.9) | (26.9) | (40.9) |
| Operating income | $284.1 | $294.9 | (3.7)% |

The following discussion of consolidated results of operations and segment results refers to the three months ended June 30, 2022 compared to the three months ended June 30, 2021. Consolidated results of operations should be read in conjunction with segment results of operations.

#### Net sales

Net sales increased by $174.9 million, or 9.0%, due to price increases to help mitigate the impact of cumulative commodity and transportation cost increases across all our segments, higher sales volume in the Cabinets segment, the benefit from the Solar Innovations acquisition ($8.4 million) and lower sales incentive costs. These benefits were partially offset by lower sales volume in the Water Innovations segment due to the impact of shutdowns mandated by the Chinese government in response to a COVID-19 resurgence in China, as well as unfavorable foreign exchange of approximately $10 million.

#### Cost of products sold

Cost of products sold increased by $117.6 million, or 9.6%, due to the impact of raw material and labor cost increases, the impact of the Solar Innovations acquisition ($7.0 million) and unfavorable inventory-related expense write-offs in our Outdoors & Security and Cabinets segments, partially offset by the benefit of productivity improvements across all segments.

#### Selling, general and administrative expenses

Selling, general and administrative expenses increased by $40.0 million, or 10.1%, due to higher transportation and headcount-related costs.

#### Asset impairment charge

The asset impairment charge of $26.0 million in 2022 relates to an indefinite-lived tradename within our Cabinets segment. During the second quarter of 2022, production was shifted at a historical make-to-order plant to a stock product line, to enable what we expect to be a higher value purpose and growth opportunity, which led to downward revisions to forecasted revenue growth rates associated with the tradename.

#### Restructuring charges

Restructuring charges of $2.3 million in the three months ended June 30, 2022 largely related to severance costs associated with plant and office closures within our Cabinets and Water Innovations segments. Restructuring charges of $0.3 million in the three months ended June 30, 2021 largely related to costs associated with plant and office closures within our Cabinets segment.

#### Operating income

Operating income decreased by $10.8 million, or 3.7%, primarily due to higher commodity, headcount-related and transportation costs, an asset impairment charge of $26.0 million, a continued shift to value-priced products in the Cabinets segment and higher restructuring costs, as well as unfavorable foreign exchange of approximately $3 million. These factors were partially offset by the benefit from higher net sales, the benefit from productivity improvements and the benefit from the Solar Innovations acquisition.

#### Interest expense

Interest expense increased by $9.3 million to $30.5 million due to higher average borrowings and higher average interest rates.

#### Other income, net

Other income, net, was $0.2 million in the three months ended June 30, 2022, compared to $1.3 million in the three months ended June 30, 2021. The decrease in other income, net is primarily due to a decrease in foreign currency transaction gains.

#### Income taxes

The effective income tax rates for the three months ended June 30, 2022 and 2021 were 24.3% and 21.0%, respectively. The effective income tax rate in 2022 was higher than the prior period primarily due to increased foreign tax expense, lower tax benefits from share-based compensation and uncertain tax positions, offset by the benefit of a valuation allowance release.

#### Net income

Net income was $192.0 million in the three months ended June 30, 2022 compared to $217.2 million in the three months ended June 30, 2021. The decrease was due to lower operating income, higher interest expense, higher income tax expense and lower other income.

### Results By Segment

### Water Innovations

Net sales decreased by $44.6 million, or 6.4%, due to the impact of shutdowns mandated by the Chinese government in response to a COVID-19 resurgence in China, as well as unfavorable foreign exchange of approximately $6 million. These factors were partially offset by the benefit from price increases to help mitigate the impact of cumulative commodity and transportation cost increases, sales increases in our U.S. e-commerce channel and lower sales rebate costs.

Operating income decreased by $8.2 million, or 4.9%, due to the lower sales volume and the impact of higher commodity and freight costs, as well as unfavorable foreign exchange of approximately $3 million. These factors were partially offset by the benefit from price increases to help mitigate the impact of cumulative commodity and transportation cost increases, lower sales rebate costs, and cost reductions, including employee-related costs.

### Outdoors & Security

Net sales increased by $69.9 million, or 13.1%, due to price increases to help mitigate the impact of cumulative commodity and transportation cost increases and the benefit from the Solar Innovations acquisition ($8 million). These benefits were partially offset by lower sales volume, as well as unfavorable foreign exchange of approximately $2 million.

Operating income increased by $14.0 million, or 17.8%, due to higher net sales, the benefit from productivity improvements, an increase in wholesale doors products versus retail doors products within the quarter and the benefit from the Solar Innovations acquisition. These benefits were partially offset by commodity, headcount-related and freight costs, in addition to labor availability constraints and an unfavorable inventory-related expense write-off, as well as unfavorable foreign exchange of approximately $1 million.

### Cabinets

Net sales increased by $149.6 million, or 21.2%, due to price increases to help mitigate the impact of cumulative commodity and transportation cost increases and higher sales volume. These benefits were partially offset by unfavorable foreign exchange of approximately $1 million.

Operating income decreased by $5.6 million, or 7.5%, due to an asset impairment charge related to a make-to-order indefinite-lived tradename, commodity cost inflation, a continued shift to value-priced products, higher freight and headcount-related costs and an unfavorable inventory-related expense write-off. These factors were partly offset by the benefit from higher net sales and productivity improvements.

### Corporate

Corporate expenses increased by $11.0 million, or 40.9%, due to costs related to the planned spin-off of our Cabinets business, higher consulting costs relating to our digital transformation initiatives, and higher employee-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.

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 31, 2021 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, 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

In March 2022, the Company issued $900 million in aggregate principal amount of senior unsecured notes in a registered public offering consisting of $450 million of 4.00% senior unsecured notes maturing in 2032 and $450 million of 4.50% senior unsecured notes maturing in 2052 (together, the “2022 Notes”). The Company used the net proceeds from the 2022 Notes offering to pay down a portion of the outstanding balance on the 2021 Term Loan (as defined below).

At June 30, 2022, the Company had aggregate outstanding notes in the amount of $2.7 billion, with varying maturities (the “Notes”). The Notes are unsecured senior obligations of the Company. 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 June 30, 2022 and December 31, 2021:

*(in millions)*

|  | Principal Amount | Issuance Date | Maturity Date | Net Carrying Value June 30, 2022 | December 31, 2021 |
| --- | ---: | --- | --- | ---: | ---: |
| 4.000% Senior Notes | $500.0 | June 2015 | June 2025 | $497.7 | $497.4 |
| 4.000% Senior Notes | 600.0 | September 2018 | September 2023 | 598.8 | 598.2 |
| 3.250% Senior Notes | 700.0 | September 2019 | September 2029 | 694.6 | 694.2 |
| 4.000% Senior Notes | 450.0 | March 2022 | March 2032 | 445.4 | - |
| 4.500% Senior Notes | 450.0 | March 2022 | March 2052 | 435.0 | - |
| Total Senior Notes | $2,700.0 |  |  | $2,671.5 | $1,789.8 |

#### Credit Facilities

In November 2021, the Company entered into a 364-day, $400 million term loan credit agreement (the “2021 Term Loan”), for general corporate purposes, to mature in November 2022. On March 1, 2022, the Company entered into a First Amendment and Incremental Agreement to the 2021 Term Loan (the “First Amendment”). The First Amendment provided for an increase in the principal amount from $400 million to $600 million as well as the transition from LIBOR to SOFR interest rates. As a result, interest rates under the 2021 Term Loan were variable based on SOFR at the time of the borrowing and the Company’s long-term credit rating and could range from SOFR + 0.725% to SOFR + 1.350%. On March 18, 2022, the Company entered into a Second Amendment and Incremental Agreement to the 2021 Term Loan (the “Second Amendment”), increasing the principal amount from $600 million to $1.1 billion. All other terms and conditions remained the same under the First Amendment and Second Amendment. Proceeds from the increased 2021 Term Loan were used to repay outstanding balances on the 2019 Revolving Credit Agreement (as defined below). The outstanding $1.1 billion under the 2021 Term Loan was repaid on March 25, 2022 with proceeds from the 2022 Notes and other existing sources of liquidity.

In September 2019, the Company entered into a second amended and restated $1.25 billion revolving credit facility (the “2019 Revolving Credit Agreement”), and borrowings thereunder will be used for general corporate purposes. The maturity date of the facility is September 2024. Interest rates under the 2019 Revolving Credit Agreement are variable based on LIBOR at the time of the borrowing and the Company’s long-term credit rating and can range from LIBOR + 0.91% to LIBOR + 1.4%. Under the 2019 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 June 30, 2022 and December 31, 2021, our outstanding borrowings under this facility were $125.0 million and $520.0 million, respectively. This facility is included in Long-term debt in the condensed consolidated balance sheets. As of June 30, 2022 we were in compliance with all covenants under this facility.

#### Commercial Paper

In November 2021, the Company established a commercial paper program (the "Commercial Paper Program") pursuant to which the Company may issue unsecured commercial paper notes. The Company's 2019 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 2019 Revolving Credit Agreement, not to exceed $1.25 billion. The Company plans to use net proceeds from any issuances under the Commercial Paper Program for general corporate purposes. On June 30, 2022 and December 31, 2021 our outstanding borrowings under the Commercial Paper Program were $561.4 million and zero, respectively.

#### Cash and Seasonality

On June 30, 2022, we had cash and cash equivalents of $360.6 million, of which $296.6 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 quarters of each year. We use operating cash in the first quarter of the year.

We believe that our current cash position, cash flow generated from operations, and amounts available under our revolving credit facility should be sufficient for our operating requirements and enable us to fund our capital expenditures, dividend payments, and any required long-term debt payments. In addition, we believe that we have the ability to obtain alternative sources of financing if required.

#### Share Repurchases and Dividends

In the first six months of 2022, we repurchased 6.2 million shares of our outstanding common stock under the Company’s share repurchase program for $505.0 million. As of June 30, 2022, the Company’s total remaining share repurchase authorization under its share repurchase program was approximately $660 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 first six months of 2022, we paid dividends in the amount of $73.6 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. There are no restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Fortune Brands.

#### 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 six months ended June 30, 2022 and 2021.

*(In millions)*

|  | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $41.9 | $262.7 |
| Net cash used in investing activities | (169.2) | (58.9) |
| Net cash provided by (used in) financing activities | 27.1 | (169.4) |
| Effect of foreign exchange rate changes on cash | (11.3) | 5.9 |
| Net (decrease) increase in cash and cash equivalents | $(111.5) | $40.3 |

29

Net cash provided by operating activities was $41.9 million in the six months ended June 30, 2022, compared to net cash provided by operating activities of $262.7 million in the six months ended June 30, 2021. The decrease in cash provided of $220.8 million was primarily due to higher accounts payable, an increase in our inventory investments to mitigate the impact of an uncertain and volatile global supply chain environment, a decrease in accrued taxes, a partial settlement on our interest rate swap and higher increases in accounts receivable associated with our sales growth in the first half of 2022.

Net cash used in investing activities was $169.2 million in the six months ended June 30, 2022, compared to net cash used in investing activities of $58.9 million in the six months ended June 30, 2021. The increase in cash used of $110.3 million reflects the Solar Innovations acquisition in January 2022 ($61.6 million), and a planned increase in capital expenditures, partly offset by higher proceeds from the sale of previously closed manufacturing facilities.

Net cash provided by financing activities was $27.1 million in the six months ended June 30, 2022, compared to cash used in financing activities of $169.4 million in the six months ended June 30, 2021. The increase in cash provided of $196.5 million was primarily due to higher net borrowings in 2022 compared to 2021 ($615.4 million increase), partly offset by higher share repurchases in 2022 compared to 2021, a decrease in the proceeds from the exercise of stock options and the final payment for the remaining equity interest in Flo ($16.7 million).

### 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 31, 2021, the fair value of our total pension plan assets was $816.0 million, representing 92% of the accumulated benefit obligation liability. In 2022, we expect to make pension contributions of approximately $10 million. 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, France and Japan. Therefore, changes in the value of the related currencies affect our financial statements when translated into U.S. dollars.

### RECENTLY ISSUED ACCOUNTING STANDARDS

The adoption of recent accounting standards, as discussed in Note 2, “Recently Issued Accounting Standards,” to our Condensed Consolidated Financial Statements, has not had and is not expected to have a significant impact on our revenue, earnings or liquidity.

## Market risk

As filed, 220 characters.

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 31, 2021.

## Controls and procedures

As filed, 1,165 characters.

### (a) Evaluation of Disclosure Controls and Procedures.

The Company’s management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report.

### (b) Changes in Internal Control Over Financial Reporting.

There have not been any changes in the Company's internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company is in the process of reviewing the internal control structure of Solar and, if necessary, will make appropriate changes as we incorporate our controls and procedure into this recently acquired business.

## Risk factors

As filed, 1,777 characters.

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021 in the section entitled “Risk Factors,” except as follows:

***The Spin-Off of the Company’s Cabinets business into a standalone publicly-traded company could cause disruptions to our business and could impact financial performance and operating results.***

The Spin-Off is complex in nature and unanticipated developments or changes, including challenges in executing the Spin-Off, could delay or prevent the completion of the proposed Spin-Off. The process of completing the proposed Spin-Off has been and is expected to continue to be time-consuming and involves significant costs and expenses. In addition, the full strategic and financial benefits that are expected to result from the Spin-Off may not be achieved, and there may be a loss of synergies from separating the businesses that could negatively impact the balance sheet, profit margins or earnings of both businesses. Further, there can be no assurance that the combined value of the common stock of each company following the Spin-Off will be equal to or greater than what the value of the Company’s common stock would have been had the proposed Spin-Off not occurred.

The Company intends that the Spin-Off qualify as tax-free under the U.S. Internal Revenue Code of 1986, as amended. If subsequent to the Spin-Off it is determined that the transaction does not qualify for tax-free treatment for U.S. federal income tax purposes, the resulting tax liability to the Company and its stockholders could be substantial. The planned separation may be taxable in other countries around the world, and as a result may trigger substantial tax liability to the Company.

Filed Jul 28, 2022.
Source: SEC EDGAR, the filing index for accession 0000950170-22-013367. Last ingested by Listed: Nov 4, 2026, 17:11 ET. No prices; not investment advice.