FORTUNE BRANDS INNOVATIONS, INC. 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 endedDecember 31, 2021 , which are included in our Annual Report on Form 10-K for the year endedDecember 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 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 theSecurities 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 endedDecember 31, 2021 . 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 toFortune 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. OnApril 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 theMasterBrand Cabinets, Inc. business into a separate standalone publicly-traded company (the "Spin-Off"). The separation is expected to be completed in approximately twelve 18 -------------------------------------------------------------------------------- months, subject to the approval of the Company's Board of Directors and customary closing conditions, including the effectiveness of a registration statement on Form 10 to be filed with theSEC to register the shares to be issued in the Spin-Off. Upon completion, stockholders would hold interests in two separate companies, which at present, will be publicly referred to as "New Fortune Brands" and "Cabinets" or "Cabinet Company ". 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. As consumer demand and the housing market continue to grow, we expect the benefits of operational leverage and strategic spending to support increased manufacturing capacity and long-term growth initiatives will help 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. 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, 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" in order 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. InJanuary 2022 , we acquired 100% of the outstanding equity ofSolar 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$63 million . The purchase price is subject to a final post-closing working capital adjustment. We financed the transaction using cash on hand and borrowings under our revolving credit facility. The results of Solar are reported as part of the Outdoors & Security segment. Its complementary product offerings supports the segment's outdoor living strategy. 19 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Three Months EndedMarch 31, 2022 Compared to Three Months EndedMarch 31, 2021 Net Sales % Change vs. Prior (In millions) 2022 2021 Year Water Innovations$ 643.6 $ 621.6 3.5 % Outdoors & Security 496.6 461.5 7.6 Cabinets 777.1 687.9 13.0 Net sales$ 1,917.3 $ 1,771.0 8.3 % Operating Income (Loss) % Change vs. Prior 2022 2021 Year Water Innovations$ 149.3 $ 147.9 0.9 % Outdoors & Security 60.2 52.8 14.0 Cabinets 73.6 72.6 1.4 Less: Corporate expenses (29.7 ) (24.9 ) (19.3 ) Operating income$ 253.4 $ 248.4 2.0 % The following discussion of consolidated results of operations and segment results refers to the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . Consolidated results of operations should be read in conjunction with segment results of operations.
Net sales
Net sales increased by$146.3 million , or 8.3%, principally due to price increases to help mitigate the impact of cumulative commodity and transportation cost increases. These benefits were partially offset by higher sales incentives in Water Innovations resulting from the increase in sales.
Cost of products sold
Cost of products sold increased by$110.9 million , or 9.8%, due to the impact of raw material cost increases and a continued shift to value-priced products in Cabinets, partially offset by the benefit from productivity improvements, a gain on the sale of 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
Amortization of intangible assets
Amortization of intangible assets decreased by
Restructuring charges
Restructuring charges decreased by
Operating income
Operating income increased by$5.0 million , or 2.0%, primarily due to higher net sales, the benefit from productivity improvements and lower restructuring charges, as well as favorable foreign exchange of approximately$1 million . These benefits were partially offset by higher commodity, transportation and headcount-related costs, a shift to value-priced products this quarter in Cabinets and higher sales rebate costs. 20 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
Interest expense
Interest expense increased by
Other (income) expense, net
Other income, net, increased by
Income taxes
The effective income tax rates for the three months endedMarch 31, 2022 and 2021 were 22.3% and 20.5%, respectively. The difference between the Company's Q1 2022 effective income tax rate and theU.S. statutory rate of 21.0% primarily relates to state income taxes (net of federal income tax benefit), foreign income taxed at higher rates, partially offset by a favorable benefit related to share-based compensation.
Net income attributable to Fortune Brands
Net income attributable to Fortune Brands was$180.9 million in the three months endedMarch 31, 2022 compared to$177.8 million in the three months endedMarch 31, 2021 . The increase was due to higher operating income and higher other income, partly offset by higher income tax expense.
Results By Segment
Water Innovations
Net sales increased by$22.0 million , or 3.5%, due to price increases to help mitigate the impact of cumulative commodity and transportation cost increases, as well as favorable foreign exchange of approximately$2 million . These benefits were partially offset by higher sales rebate costs. Operating income increased by$1.4 million , or 0.9%, due to higher net sales, the benefit from productivity improvements, as well as favorable foreign exchange of approximately$1 million . These benefits were partially offset by the impact of higher commodity, freight and tariff costs.
Outdoors & Security
Net sales increased by$35.1 million , or 7.6%, due to price increases to help mitigate the impact of cumulative commodity and transportation cost increases. These benefits were partially offset by unfavorable foreign exchange of approximately$1 million .
Operating income increased by
Cabinets
Net sales increased by$89.2 million , or 13.0%, due to price increases to help mitigate the impact of cumulative commodity and transportation cost increases and higher sales volume, in both our make-to-order and value-priced product lines. Operating income increased by$1.0 million , or 1.4%, due to higher net sales and the benefit from productivity improvements. These factors were partly offset by commodity cost inflation, a shift to value-priced products in the quarter and higher freight and headcount-related costs.
Corporate
Corporate expenses increased by
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--------------------------------------------------------------------------------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-endedDecember 31, 2021 entitled "Item 1A. Risk Factors." In addition, we cannot predict whether or when we may enter into acquisitions, joint ventures or dispositions, make any purchases of shares of our common stock under our share repurchase programs, 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
InMarch 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). AtMarch 31, 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 ofMarch 31, 2022 andDecember 31, 2021 :
Net Carrying Value
Principal Issuance Date Maturity Date (in millions) Amount 2021
4.000% Senior Notes
497.5 $ 497.4
4.000% Senior Notes 600.0 September 2018 September 2023 598.4 598.2
3.250% Senior Notes 700.0 September 2019 September 2029 694.4 694.2
4.000% Senior Notes 450.0 March 2022 March 2032 445.3 -
4.500% Senior Notes 450.0 March 2022 March 2052 435.0 -
Total Senior Notes $ 2,700.0 $
2,670.6
Credit Facilities
InNovember 2021 , the Company entered into a 364-day,$400 million term loan credit agreement (the "2021 Term Loan"), for general corporate purposes, to mature inNovember 2022 . OnMarch 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%. OnMarch 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 onMarch 25, 2022 with proceeds from the 2022 Notes and other existing sources of liquidity. InSeptember 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 isSeptember 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. OnMarch 31, 2022 andDecember 31, 2021 , our outstanding borrowings under this facility were$150.0 million and$520.0 22 --------------------------------------------------------------------------------
million, respectively. This facility is included in Long-term debt in the
condensed consolidated balance sheets. As of
Commercial Paper
InNovember 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. OnMarch 31, 2022 andDecember 31, 2021 our outstanding borrowings under the Commercial Paper Program were$547.3 million and zero, respectively.
Cash and Seasonality
OnMarch 31, 2022 , we had cash and cash equivalents of$378.2 million , of which$305.5 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, share repurchases, 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 OnMarch 2, 2022 , our Board of Directors authorized the repurchase of up to an additional$750 million shares of our common stock over the two years endingMarch 2, 2024 . In the first quarter of 2022, we repurchased 4.3 million shares of our outstanding common stock under the Company's share repurchase program for$379.5 million . As ofMarch 31, 2022 , the Company's total remaining share repurchase authorization under its share repurchase program was approximately$785.2 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.
Dividends
In the first quarter of 2022, we paid dividends in the amount of$37.2 million to the Company's stockholders. Our Board of Directors will continue to evaluate dividend payment opportunities on a quarterly basis. There can be no assurance as to when and if future dividends will be paid, and at what level, because the payment of dividends is dependent on our financial condition, results of operations, cash flows, capital requirements and other factors deemed relevant by our Board of Directors. There are no restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Fortune Brands. 23 --------------------------------------------------------------------------------
Acquisitions
We periodically review our portfolio of brands and evaluate potential strategic transactions and other capital initiatives to increase stockholder value.
Cash Flows
Below is a summary of cash flows for the three months endedMarch 31, 2022 and 2021. Three Months Ended (In millions) March 31, 2022 2021 Net cash used in operating activities$ (183.1 ) $ (69.2 ) Net cash used in investing activities (114.4 ) (18.5 ) Net cash provided by financing activities 203.2 22.8 Effect of foreign exchange rate changes on cash 0.7 1.7
Net decrease in cash and cash equivalents
Net cash used in operating activities was$183.1 million in the three months endedMarch 31, 2022 , compared to net cash used in operating activities of$69.2 million in the three months endedMarch 31, 2021 . The increase in cash used of$113.9 million was primarily due to an increase in our inventory investments to mitigate the impact of an uncertain and volatile global supply chain environment, a gain on our interest rate swap, higher increases in accounts receivable associated with our sales growth in the first quarter of 2022 and higher accounts payable payments. Net cash used in investing activities was$114.4 million in the three months endedMarch 31, 2022 , compared to net cash used in investing activities of$18.5 million in the three months endedMarch 31, 2021 . The increase in cash used of$95.9 million reflects the Solar Innovations acquisition inJanuary 2022 ($61.6 million ), and a planned increase in capital expenditures, partly offset by the proceeds from the sale of a previously closed manufacturing facility. Net cash provided by financing activities was$203.2 million in the three months endedMarch 31, 2022 , compared to cash provided by financing activities of$22.8 million in the three months endedMarch 31, 2021 . The increase in cash provided of$180.4 million was primarily due to higher net borrowings in 2022 compared to 2021 ($550.5 million increase), partly offset by higher share repurchases in 2022 compared to 2021. Pension Plans Certain subsidiaries of Fortune Brands sponsor defined benefit pension plans. These subsidiaries fund their respective defined benefit pension plans with a portfolio of investments maintained within our benefit plan trust. As ofDecember 31, 2021 , the aggregate fair value of our 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, principallyCanada ,Mexico , theUnited Kingdom ,China ,South Africa ,France andJapan . Therefore, changes in the value of the related currencies affect our financial statements when translated intoU.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.
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