Fortune Brands Innovations Inc

CONDENSED CONSOLIDATED STATEM ENTS OF COMPREHENSIVE INCOME

For the Thirty-Nine and Thirteen Weeks Ended September 28, 2024 and September 30, 2023

(In millions, except per share amounts)

CONDENSED CONSOLIDATED BALANCE SHEETS

(a)Common stock, par value $0.01 per share;187.8 million shares and 187.1 million shares issued at September 28, 2024 and December 30, 2023, respectively.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Thirty-Nine Weeks Ended September 28, 2024 and September 30, 2023

(a)

Capital expenditures of $3.9 million as of September 28, 2024 and $33.2 million as of September 30, 2023 that had not been paid, were excluded from the Statement of Cash Flows.

(b)

Restricted cash of $2.4 million and $2.8 million is included in Other current assets and Other assets, respectively, as of September 28, 2024 and restricted cash of $3.0 million and $2.1 million is included in Other current assets and Other assets, respectively, as of September 30, 2023. Restricted cash of $26.9 million and $2.2 million is included in Other current assets and Other assets, respectively, as of December 30, 2023.

(c)

Treasury stock purchased for the thirty-nine weeks ended September 30, 2023 excludes $10.0 million related to purchases that were not settled until after September 30, 2023.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Thirty-Nine and Thirteen Weeks Ended September 28, 2024 and September 30, 2023

NOTES TO CONDENSED CONSOLI DATED FINANCIAL STATEMENTS

1. Basis of Presentation and Principles of Consolidation

The Company is a leading innovation company dedicated to creating smarter, safer and more beautiful homes and improving lives that competes in attractive long-term growth markets in our product categories. The Company's driving purpose is to elevate every life by transforming spaces into havens. References to “Fortune Brands,” “the Company,” “we,” “our” and “us” refer to Fortune Brands Innovations, Inc. and its consolidated subsidiaries as a whole, unless the context otherwise requires.

The condensed consolidated financial statements and notes are presented pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and do not contain certain information included in our annual audited consolidated financial statements and notes. The December 30, 2023 condensed consolidated balance sheet was derived from our audited consolidated financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles (“GAAP”). This Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 30, 2023.

The condensed consolidated balance sheet as of September 28, 2024, the related condensed consolidated statements of comprehensive income and equity for the thirty-nine weeks and thirteen weeks ended September 28, 2024, the related condensed consolidated statements of comprehensive income and equity for the thirty-nine weeks and thirteen weeks ended September 30, 2023, and the related condensed consolidated statements of cash flows for the thirty-nine weeks ended September 28, 2024 and September 30, 2023 are unaudited. Certain previously reported amounts have been presented to conform with the current period presentation. The presentation of these financial statements requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. In the opinion of management, all adjustments necessary for a fair statement of the financial statements have been included. Interim results may not be indicative of results for a full year.

On February 29, 2024, we acquired 100% of the outstanding equity of Wise Water Solutions LLC, doing business as SpringWell Water Filtration Systems ("SpringWell"), for a purchase price of $105.6 million, subject to post-closing adjustments, net of cash acquired of $1.4 million. We financed the transaction using cash on hand and borrowings under our existing credit arrangements. The results of SpringWell are reported as part of the Water Innovations ("Water") segment. We have not included pro forma financial information as the transaction is immaterial to our condensed consolidated statements of comprehensive income. The fair value allocated to assets acquired and liabilities assumed as of February 29, 2024, was $105.6 million, which includes $84.4 million of goodwill. Goodwill includes expected sales and cost synergies and is expected to be deductible for income tax purposes.

In June 2023, we acquired the Emtek and Schaub premium and luxury door and cabinet hardware business (the "Emtek and Schaub Business") and the U.S. and Canadian Yale and August residential smart locks business (the "Yale and August Business", and, collectively with the Emtek and Schaub Business, the "Acquired Businesses") from ASSA ABLOY, Inc. and its affiliates ("ASSA"). The Company completed the acquisition for a total purchase price of approximately $813.9 million, net of cash acquired of $21.9 million. During the second quarter of 2024, legal title to international operations in Vietnam transferred to us, which included a payment of approximately $23.5 million, net of cash of $5.6 million (which amount is already included in the overall purchase price). We financed the transaction with cash on hand. The results of the Emtek and Schaub Business are reported as part of the Water segment, and the results of the Yale and August Business are reported as part of the Security segment.

2. Recently Issued Accounting Standards

In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07, which improves segment disclosure reporting requirements, primarily though enhanced disclosures about significant segment expenses. The standard is effective for the Company for annual periods starting in 2024 and interim periods in 2025. We are currently assessing the impact on our segment disclosures.

In December 2023, the FASB issued ASU 2023-09 which requires expanded disclosure of the effective tax rate reconciliation and income taxes paid. The standard is effective for the Company for annual periods starting in 2025. We are currently assessing the impact on our financial statement disclosures.

3. Balance Sheet Information

Supplemental information on our balance sheets is as follows:

4. Acquisitions

SpringWell

On February 29, 2024, we acquired 100% of the outstanding equity of SpringWell for a purchase price of $105.6 million, subject to post-closing adjustments, net of cash acquired of $1.4 million. We financed the transaction using cash on hand and borrowings under our existing credit arrangements. The results of SpringWell are reported as part of the Water segment. We have not included pro forma financial information as the transaction is immaterial to our condensed consolidated statements of comprehensive income. The fair value allocated to assets acquired and liabilities assumed as of February 29, 2024, was $105.6 million, which includes $84.4 million of goodwill. Goodwill includes expected sales and cost synergies and is expected to be deductible for income tax purposes.

Acquired Businesses

In June 2023, we acquired the Acquired Businesses from ASSA. The Company completed the acquisition for a total purchase price of approximately $813.9 million, net of cash acquired of $21.9 million. During the second quarter of 2024, legal title to international operations in Vietnam transferred to us, which included a payment of approximately $23.5 million, net of cash of $5.6 million (which amount is already included in the overall purchase price). We financed the transaction with cash on hand. The results of the Emtek and Schaub Business are reported as part of the Water segment, and the results of the Yale and August Business are reported as part of the Security segment.

The following unaudited pro forma summary presents consolidated financial information as if the Acquired Businesses had been acquired on January 1, 2022. The unaudited pro forma financial information is based on historical results of operations and financial position of the Company and the Acquired Businesses. The pro forma results include:

•

estimated amortization of finite-lived intangible assets, including customer relationships and proprietary technology,

•

the estimated cost of the inventory adjustment to fair value,

•

the reclassification of Acquired Businesses transaction costs from 2023 to the first quarter of 2022,

•

the removal of certain transactions recorded in the historical financial statements of the Acquired Businesses related to assets and activities which were retained by the seller, and

•

adjustments to conform accounting policies.

The unaudited pro forma financial information does not necessarily represent the results that would have occurred had the acquisition occurred on January 1, 2022. In addition, the unaudited pro forma information should not be deemed to be indicative of future results.

5. Goodwill and Intangible Assets

We had goodwill of $2,004.7 million and $1,906.8 million as of September 28, 2024 and December 30, 2023, respectively. The change in the net carrying amount of goodwill by segment was as follows:

(a)Net of accumulated impairment losses of $399.5 million in the Outdoors segment.

The gross carrying value and accumulated amortization by class of intangible assets as of September 28, 2024 and December 30, 2023 were as follows:

We had net intangible assets of $1,324.3 million and $1,354.7 million as of September 28, 2024 and December 30, 2023, respectively. The $27.0 million increase in gross intangible assets was primarily due to the SpringWell acquisition and foreign currency translation adjustments.

Amortizable intangible assets, principally customer relationships, are subject to amortization over their estimated useful life, ranging from 5 to 30 years, based on the assessment of a number of factors that may impact useful life, which includes customer attrition rates and other relevant factors.

6. External Debt and Financing Arrangements

Senior Notes

At September 28, 2024, the Company had aggregate outstanding senior notes in the principal 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 September 28, 2024 and December 30, 2023:

Credit Facilities

In August 2022, the Company entered into a third amended and restated $1.25 billion revolving credit facility (the “Revolving Credit Agreement”), and borrowings thereunder will be used for general corporate purposes. The maturity date of the facility is August 2027. Interest rates under the Revolving Credit Agreement are variable based on the Secured Overnight Financing Rate (“SOFR”) at the time of the borrowing and the Company’s long-term credit rating and can range from SOFR +1.02% to SOFR +1.525%. Under the Revolving Credit Agreement, the Company is required to maintain a minimum ratio of consolidated EBITDA to consolidated interest expense of 3.0 to 1.0. Consolidated EBITDA is defined as consolidated net income before interest expense, income taxes, depreciation, amortization of intangible assets, losses from asset impairments, and certain other one-time adjustments. In addition, the Company's ratio of consolidated debt minus certain cash and cash equivalents to consolidated EBITDA generally may not exceed 3.5 to 1.0. There wereno outstanding borrowings under this facility as of September 28, 2024 and December 30, 2023. As of September 28, 2024, we were in compliance with all covenants under this facility.

We currently have uncommitted bank lines of credit in China, which provide for unsecured borrowings for working capital of up to $30.5 million in aggregate as of September 28, 2024 and December 30, 2023. There wereno outstanding balances as of September 28, 2024 and December 30, 2023.

Commercial Paper

The Company operates a commercial paper program (the “Commercial Paper Program”) pursuant to which the Company may issue unsecured commercial paper notes. The Company’s Revolving Credit Agreement is the liquidity backstop for the repayment of any notes issued under the Commercial Paper Program, and as such, borrowings under the Commercial Paper Program are included in Long-term debt in the condensed consolidated balance sheets. Amounts available under the Commercial Paper Program may be borrowed, repaid and re-borrowed, with the aggregate principal amount outstanding at any time, including borrowings under the Revolving Credit Agreement, not to exceed $1.25 billion. The Company will use any issuances under the Commercial Paper Program for general corporate purposes. Outstanding borrowings under the Commercial Paper Program as of September 28, 2024 and December 30, 2023 were $104.7 million andzero, respectively.

7. Financial Instruments

We do not enter into financial instruments for trading or speculative purposes. We principally use financial instruments to reduce the impact of changes in foreign currency exchange rates and commodities used as raw materials in our products. The principal derivative financial instruments we enter into on a routine basis are foreign currency exchange contracts. Derivative financial instruments are recorded at fair value in the consolidated balance sheet and are reflected on a gross basis. We have not entered into any master netting arrangements. The counterparties to derivative contracts are major financial institutions. We are subject to credit risk on these contracts equal to the fair value of these instruments. Management currently believes that the risk of incurring material losses is unlikely.



Raw materials used by the Company are subject to price volatility caused by weather, supply conditions, geopolitical and economic variables, and other unpredictable external factors. As a result, from time to time, we enter into commodity swaps to manage the price risk associated with forecasted purchases of materials used in our operations. We account for these commodity derivatives as economic hedges or cash flow hedges. Changes in the fair value of economic hedges are immediately recognized in current period earnings.

We may be exposed to interest rate risk on existing debt or forecasted debt issuance. To mitigate this risk, we may enter into interest rate hedge contracts. As of September 28, 2024, we hadno outstanding interest rate hedges.

We may enter into foreign currency forward contracts to protect against foreign exchange risks associated with certain existing assets and liabilities, forecasted future cash flows, and net investments in foreign subsidiaries. Foreign exchange contracts related to forecasted future cash flows correspond to the periods of the forecasted transactions, which generally do not exceed 12 to 15 months subsequent to the latest balance sheet date. Our primary foreign currency hedge contracts pertain to the British pound, the Canadian dollar, the Mexican peso and the Chinese yuan. The gross U.S. dollar equivalent notional amount of all foreign currency derivative hedges outstanding at September 28, 2024 was $603.5 million. Based on foreign exchange rates as of September 28, 2024, we estimate that $9.5 million ofnet derivative gains included in accumulated other comprehensive income as of September 28, 2024 will be reclassified to earnings within the next twelve months.

During the second quarter of 2024, we entered into an 18 month cross-currency swap contract to hedge Chinese yuan exposures of the Company's net investment in certain foreign subsidiaries. As of September 28, 2024, the notional value of the cross-currency swap contracts was $125.0 million. The cross-currency swaps were designated as net investment hedges, with the amount of gain or loss associated with the change in fair value of these instruments included within accumulated other comprehensive income and recognized upon termination of the respective investment.

For derivative instruments that are designated as fair value hedges, the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item, are recognized on the same line of the consolidated statements of income. The changes in the fair value of cash flow hedges are reported in accumulated other comprehensive income and are recognized in the consolidated statements of income when the hedged item affects earnings.

The fair values of derivative instruments on the consolidated balance sheets as of September 28, 2024 and December 30, 2023 were as follows:

The effects of derivative financial instruments on the statements of comprehensive income for thethirty-nine weeks ended September 28, 2024 and September 30, 2023 were as follows:

The effects of derivative financial instruments on the statements of comprehensive income for the thirteen weeks ended September 28, 2024 were as follows:

8. Fair Value Measurements

FASB Accounting Standards Codification requirements for Fair Value Measurements and Disclosures establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels. Level 1 inputs, the highest priority, are quoted prices in active markets for identical assets or liabilities. Level 2 inputs reflect other than quoted prices included in Level 1 that are either observable directly or through corroboration with observable market data. Level 3 inputs are unobservable inputs, due to little orno market activity for the asset or liability, such as internally-developed valuation models. We do not have any assets or liabilities measured at fair value on a recurring basis that are Level 3.

The carrying value and fair value of debt as of September 28, 2024 and December 30, 2023 were as follows:

The estimated fair value of our Notes is determined by using quoted market prices of our debt securities, which are Level 1 inputs. The estimated fair value of borrowings under our Commercial Paper Program is determined primarily using broker quotes, which are Level 2 inputs.

Assets and liabilities measured at fair value on a recurring basis as of September 28, 2024 and December 30, 2023 were as follows:

9. Accumulated Other Comprehensive Income (Loss)

Total accumulated other comprehensive income (loss) consists of net income and other changes in business equity from transactions and other events from sources other than stockholders. It includes currency translation gains and losses, unrealized gains and losses from derivative instruments designated as cash flow hedges, and defined benefit plan adjustments. The after-tax components of and changes in accumulated other comprehensive (loss) income for thethirty-nine and thirteen weeks ended September 28, 2024 and September 30, 2023 were as follows:

The reclassifications out of accumulated other comprehensive loss for thethirty-nine and thirteen weeks ended September 28, 2024 and September 30, 2023 were as follows:

10. Revenue

The following table disaggregates our consolidated revenue by major sales distribution channels for thethirty-nine and thirteen weeks ended September 28, 2024 and September 30, 2023 :

(a)

Represents sales to customers whose business is oriented towards builders, professional trade people and home remodelers, inclusive of sales through our customers’ respective internet website portals.

(b)

Represents sales to the three largest “Do-It-Yourself” retailers: The Home Depot, Inc., Lowe's Companies, Inc. and Menards, Inc., inclusive of sales through their respective internet website portals.

(c)

Represents sales principally to our mass merchant and standalone independent e-commerce customers.

(d)

Represents sales in markets outside the United States, principally in China, Canada, Europe and Mexico.

As part of our contracts with customers, we recognize contract liabilities, principally deferred revenue. Deferred revenue liabilities represents advanced payments and billings in excess of revenue recognized. Deferred revenue liabilities of $29.6 million and $36.6 million as of September 28, 2024 and September 30, 2023, respectively, were included in Other current liabilities in our Consolidated Balance Sheet, and $12.0 million and $7.1 million as of September 28, 2024 and September 30, 2023, respectively, were included in Other noncurrent liabilities in our Consolidated Balance Sheet.

11. Defined Benefit Plans

The components of net periodic benefit income for pension benefits for the thirty-nine and thirteen weeks ended September 28, 2024 and September 30, 2023 were as follows:

Service cost relates to benefit accruals in an hourly union defined benefit plan in our Security segment. All other defined benefit pension plans were frozen as of December 31, 2016.

12. Income Taxes

The effective income tax rates for the thirty-nine and thirteen weeks ended September 28, 2024 were 22.3% and 22.6%, respectively. The effective income tax rates for the thirty-nine and thirteen weeks ended September 30, 2023 were 21.7% and 20.9%, respectively.

The difference between the Company’s effective income tax rate for the thirty-nine weeks ended September 28, 2024, and the U.S. statutory rate of 21% primarily relates to state income taxes and foreign income taxed at higher rates, partially offset by favorable benefits related to a valuation allowance release, provision to return adjustments, decreases in uncertain tax positions, and tax credits.

The difference between the Company’s effective income tax rate for the thirteen weeks ended September 28, 2024, and the U.S. statutory rate of 21% primarily relates to state income taxes and foreign income taxed at higher rates, partially offset by favorable benefits related to provision to return adjustments and tax credits.

In 2021, the Organization for Economic Cooperation & Development (“OECD”), with the support of over 130 countries, endorsed a framework (“Pillar Two”), which includes establishing a 15 percent global minimum corporate tax rate on a country-by-country basis. Numerous countries have adopted legislation in support of Pillar Two or are in the process of doing so, with certain rules that became effective on January 1, 2024, and the remainder becoming effective on January 1, 2025. The Company is continuing to monitor and evaluate Pillar Two legislation and does not expect it to have a material impact on the Company’s tax liability in 2024.

13. Product Warranties

We generally record warranty expense related to contractual warranty terms at the time of sale. We may also provide customer concessions for claims made outside of the contractual warranty terms and those expenses are recorded in the period in which the concession is made. We offer our customers various warranty terms based on the type of product that is sold. Warranty expense is determined based on historic claim experience and the nature of the product category. The following table summarizes activity related to our product warranty liability for thethirty-nine weeks ended September 28, 2024 and September 30, 2023, respectively.

14. Information on Business Segments

Net sales and operating income for thethirty-nine and thirteen weeks ended September 28, 2024 and September 30, 2023 by segment were as follows:

15. Restructuring and Other Charges

Pre-tax restructuring and other charges (gains) for thethirty-nine and thirteen weeks ended September 28, 2024 and September 30, 2023 are shown below.

Restructuring and other charges (gains) in the thirty-nine weeks ended September 28, 2024 are largely related to a product-line rationalization within our Outdoors segment, costs associated with the previously announced closure of a manufacturing facility within our Security segment and headcount actions across all segments. Restructuring and other charges (gains) in the thirty-nine weeks ended September 30, 2023 largely relate to costs associated with the closure of a manufacturing facility within our Security segment.

Restructuring and other charges (gains) in the thirteen weeks ended September 28, 2024 are largely related to costs associated with headcount actions across all segments, a product line rationalization within our Outdoors segment, and the previously announced closure of a manufacturing facility within our Security segment. Restructuring and other charges (gains) in the thirteen weeks ended September 30, 2023 relate to costs associated with the closure of a manufacturing facility within our Security segment.

Reconciliation of Restructuring Liability

(a) Cash expenditures primarily relate to severance charges.

(a) Cash expenditures primarily relate to severance charges.

16. Earnings Per Share

The computations of earnings per common share for thethirty-nine and thirteen weeks ended September 28, 2024 and September 30, 2023 were as follows:

17. Commitments and Contingencies

Litigation

The Company is a defendant in lawsuits that are ordinary, routine litigation matters incidental to its businesses. It is not possible to predict the outcome of the pending actions, and, as with any litigation, it is possible that these actions could be decided unfavorably to the Company. The Company believes that there are meritorious defenses to these actions and that these actions will not have a material adverse effect upon our results of operations, cash flows or financial condition, and where appropriate, these actions are being vigorously contested. Accordingly, the Company believes the likelihood of material loss is remote.

Environmental

We are involved in remediation activities to clean up hazardous wastes as required by federal and state laws. Liabilities for remediation costs of each site are based on our best estimate of undiscounted future costs, excluding possible insurance recoveries or recoveries from other third parties. Uncertainties about the status of laws, regulations, technology and information related to individual sites make it difficult to develop estimates of environmental remediation exposures. Some of the potential liabilities relate to sites we own, and some relate to sites we no longer own or never owned. Several of our subsidiaries have been designated as potentially responsible parties (“PRP”) under Superfund or similar state laws. In most instances where our subsidiaries are named as a PRP, we enter into cost-sharing arrangements with other PRPs. We give notice to insurance carriers of potential PRP liability, but very rarely, if ever, receive reimbursement from insurance for PRP costs. We believe compliance with current environmental protection laws (before taking into account estimated recoveries from third parties) will not have a material adverse effect upon our results of operations, cash flows or financial condition.

18. Subsequent Events

Defined Benefit Plan Annuitization

In October 2024, the Company entered into two agreements with an insurance company to purchase group annuity contracts and to transfer approximately $272 millionof pension plan obligations and related assets of two of its defined benefit pension plans, the MasterLock Pension Plan and the Moen Incorporated Pension Plan (collectively, the "Plans").

The purchase of the group annuity contracts by the Company closed on October 15, 2024 and November 4, 2024, respectively. The contracts cover approximately 4,100 participants and beneficiaries (the “Transferred Participants”). All Transferred Participants will continue to receive their benefits from the Plans until January 1, 2025, at which time the insurance company will begin paying and administering the retirement benefits of the Transferred Participants. The transactions result in no changes to the amount of benefits payable to the Transferred Participants.

As a result of these transactions, which were funded with existing assets of the Plans and which did not require any additional funding contributions from the Company, the Company expects to recognize a total non-cash, pre-tax pension settlement charge of approximately $20 million in the fourth quarter of 2024. The actual charge will depend on finalization of the actuarial and other assumptions.