Fortune Brands Innovations, Inc. (FBIN) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is a supplement to the accompanying consolidated financial statements and provides additional information on our business, recent developments, financial condition, liquidity and capital resources, cash flows and results of operations. MD&A is organized as follows:

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Overview: This section provides a general description of our business and a discussion of management’s general outlook regarding market demand, our competitive position and product innovation, as well as recent developments we believe are important to understanding our results of operations and financial condition or in understanding anticipated future trends.

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Basis of Presentation: This section provides a discussion of the basis on which our consolidated financial statements were prepared.

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Results of Operations: This section provides an analysis of our results of operations for the years ended December 31, 2022, 2021 and 2020.

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Liquidity and Capital Resources: This section provides a discussion of our financial condition and an analysis of our cash flows for each of the three years ended December 31, 2022, 2021 and 2020. This section also provides a discussion of our contractual obligations, other purchase commitments and customer credit risk that existed at December 31, 2022, as well as a discussion of our ability to fund our future commitments and ongoing operating activities through internal and external sources of capital.

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Critical Accounting Estimates: This section identifies and summarizes those accounting policies that significantly impact our reported results of operations and financial condition and require significant judgment or estimates on the part of management in their application.

Overview

The Company is a leader in home, security and commercial building products focused on the design, manufacture and sale of market-leading branded products in the following categories: plumbing and accessories, entry door and storm door systems, security products, and outdoor performance materials used in decking and railing products.

For the year ended December 31, 2022, net sales based on country of destination were:

We believe that the Company has certain competitive advantages including market-leading brands, a diversified mix of channels, lean and flexible supply chains 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 the set of capabilities we refer to as the Fortune Brands Advantage, has helped 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

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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. Recent increases in inflation and mortgage rates have slowed the pace of single-family and existing home sales activity and new home construction and repair and remodel activities. However, we believe we are well positioned to manage what we expect to be a short-term slow-down in the housing market as we believe the fundamental drivers of the housing market remain intact.

We have been and may continue to be impacted by near-term supply, labor and freight constraints, a volatile 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.

During the three years ended December 31, 2022, our net sales grew at a compounded annual rate of 11.8% as we benefited from a growing U.S. home products market, acquisitions and growth in international markets. Operating income grew at a compounded annual rate of 14.2% with consolidated operating margins between 15% and 17% from 2020 to 2022. Growth in operating income was primarily due to higher sales volume, changes to our portfolio of businesses, control over our operating expenses and the benefits of manufacturing productivity programs.

During 2022, the U.S. home products market grew due to increases in repair and remodel and new home construction activity. We believe spending for home repair and remodeling increased approximately 4% and new housing construction experienced approximately 3% growth in 2022 compared to 2021. In 2022, net sales declined 1.6% due to slowing housing market activity in China, lower sales unit volume in both of our segments due to the impact of inventory reductions by our distribution channel partners, lower sales demand in the U.S. and Canada and higher sales incentives, as well as unfavorable foreign exchange of approximately $41 million. These factors were partially offset by price increases to help mitigate the impact of cumulative commodity and transportation cost increases in both of our segments and the benefit from the Solar and Aqualisa acquisitions ($50.2 million combined). In 2022, operating income decreased 4.5% over 2021 primarily due to lower net sales, higher commodity costs, separation and other transaction costs related to the Separation ($83 million in 2022, of which $73 million is presented within discontinued operations), and higher transportation, restructuring, sales rebate and headcount related costs, as well as unfavorable foreign exchange of approximately $12 million. These factors were partially offset by the benefit from productivity improvements, favorable geographic channel mix in the Water Innovations segment and lower advertising and marketing costs.

Recent Developments

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.

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In December 2022, we entered into a definitive agreement to acquire the Emtek and Schaub premium and luxury door and cabinet hardware business and the United States and Canada Yale and August residential smart home locks business from ASSA ABLOY, Inc. (“ASSA”), for a purchase price of $800 million in cash on a cash-free, debt-free basis, subject to customary adjustments. The transaction is conditioned on the successful closing of the acquisition of such businesses by ASSA from Spectrum Brands, Inc. following a favorable resolution of the court proceedings with the U.S. Department of Justice

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and is expected to close in the second quarter of 2023. The Company intends to finance the transaction with cash on hand and borrowings under our existing credit facility.

In July 2022, we acquired 100% of the outstanding equity of Aqualisa Holdings (International) Ltd. (“Aqualisa”), a leading U.K. manufacturer of shower products known for premium, innovative and smart digital shower systems, for a purchase price of $156.0 million, net of cash acquired of $4.8 million. We believe the acquisition of Aqualisa will enable us to continue to leverage growing trends in water management and connected products. We financed the transaction with borrowings under our existing credit facility. The assets and liabilities of Aqualisa were included in the Company’s consolidated balance sheet as of December 31, 2022. Aqualisa's net sales, operating income and cash flows from the date of acquisition to December 31, 2022 were not material to the Company and are included in the Water Innovations segment.

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 $61.6 million, net of cash acquired. Its complementary product offerings support the segment’s outdoor living strategy. 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 assets and liabilities of Solar were included in the Company’s consolidated balance sheet as of December 31, 2022. Solar's net sales, operating income and cash flows from the date of acquisition to December 31, 2022 were not material to the Company and are included in the Outdoors & Security segment.

On December 14, 2022, the Company completed the spin-off of its Cabinets business, MasterBrand, Inc. ("MasterBrand"), via a tax-free spin-off transaction (the "Separation"). The Separation created two independent, publicly traded companies. Immediately following completion of the Separation, the Company changed its name from "Fortune Brands Home & Security, Inc." to "Fortune Brands Innovations, Inc." and its stock ticker changed from "FBHS" to "FBIN" to better reflect its focus on activities related to core brands and innovation. As a result of the Separation, our former Cabinets segment was disposed of and the operating results of the Cabinets business are reported as discontinued operations for all periods presented within this Annual Report on Form 10-K. All amounts, percentages and disclosures for all periods presented reflect only the continuing operations of the Company unless otherwise noted. See Note 5, Discontinued Operations, in the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional information.

Basis of Presentation

The consolidated financial statements in this Annual Report on Form 10-K have been derived from the accounts of the Company and its wholly-owned subsidiaries. The Company’s consolidated financial statements are based on a fiscal year ending December 31. Certain of the Company’s subsidiaries operate on a 52- or 53-week fiscal year ending during the month of December.

Results of Operations

The following discussion of both consolidated results of operations and segment results of operations refers to the year ended December 31, 2022 compared to the year ended December 31, 2021, and the year ended December 31, 2021 compared to the year ended December 31, 2020. The discussion of consolidated results of operations should be read in conjunction with the discussion of segment results of operations and our financial statements and notes thereto included in this Annual Report on Form 10-K. Unless otherwise noted, all discussion of results of operations are for continuing operations.

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Years Ended December 31, 2022, 2021 and 2020

Certain items had a significant impact on our results in 2022, 2021 and 2020. These included restructuring and other charges, asset impairment charges and the impact of changes in foreign currency exchange rates.

In 2022, financial results included:

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the impact of foreign exchange primarily due to movement in the Canadian dollar, Mexican peso, British pound and Chinese yuan, which had an unfavorable impact compared to 2021, of approximately $41 million on net sales and of approximately $12 million both on operating income and net income; and

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restructuring and other charges of $26.8 million before tax ($19.6 million after tax), largely related to severance, asset impairment and other costs associated with plant closures and headcount actions across both segments, net of a gain on the sale of a previously closed manufacturing facility within our Outdoors & Security segment of approximately $6 million.

In 2021, financial results included:

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the impact of foreign exchange primarily due to movement in the Canadian dollar, Mexican peso, British pound and Chinese yuan, which had a favorable impact compared to 2021, of approximately $55 million on net sales and of approximately $21 million on operating income; and

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restructuring and other charges of $12.8 million before tax ($10.0 million after tax), largely related to severance costs associated with the relocation of manufacturing facilities within the Outdoors & Security segment.

In 2020, financial results included:

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restructuring and other charges of $14.3 million before tax ($9.4 million after tax), largely related to headcount actions associated with COVID-19 across both segments and costs associated with changes in our manufacturing processes within our Water Innovations segment; and

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asset impairment charges of $13.0 million related to the impairment of an indefinite-lived tradename within our Water Innovations segment, which was primarily the result of forecasted sales declines resulting from the COVID-19 pandemic.

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2022 Compared to 2021

Total Fortune Brands

Net sales

Net sales decreased by $78.1 million, or 1.6%, due to slowing housing market activity in China, lower sales unit volume in both of our segments due to the impact of inventory reductions by our distribution channel partners, lower sales demand in the U.S. and Canada and higher sales incentives, as well as unfavorable foreign exchange of approximately $41 million. These factors were partially offset by price increases to help mitigate the impact of cumulative commodity and transportation cost increases in both of our segments and the benefit from the Solar and Aqualisa acquisitions ($50.2 million combined).

Cost of products sold

Cost of products sold decreased by $50.5 million, or 1.8%, due to lower sales volume, productivity improvements, a gain on the sale of a previously closed manufacturing facility within our Outdoors & Security segment and the absence of Larson's 2021 acquisition-related inventory fair value adjustment amortization of $3.3 million, which did not recur in 2022. These benefits are partially offset by the impact of raw material cost increases, the impact of acquisitions and labor cost increases, as well as an unfavorable inventory-related expense write-off in our Outdoors & Security segment.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased by $15.8 million, or 1.4%, due to lower net sales and lower advertising, marketing and headcount related costs. These factors were partially offset by higher transportation costs and the impact of acquisitions.

Restructuring charges

Restructuring charges of $32.4 million in 2022 are largely related to severance, asset impairment and other costs associated with plant closures and headcount actions across both segments. Restructuring charges of $9.3 million in 2021 were largely related to severance costs associated with the relocation of manufacturing facilities within our Outdoors & Security segment.

Operating income

Operating income decreased by $36.8 million, or 4.5%, primarily due to lower net sales, higher commodity costs, separation and other transaction costs related to the Separation ($83 million in 2022, of which $73 million is presented within discontinued operations), and higher transportation, restructuring, sales rebate and headcount related costs, as well as unfavorable foreign exchange of approximately $12 million. These factors were partially offset by the benefit from productivity improvements, favorable geographic channel mix in the Water Innovations segment and lower advertising and marketing costs.

Interest expense

Interest expense increased by $34.9 million, or 41.4%, due to higher average interest rates and higher average borrowings.

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Other (income) expense, net

Other (income) expense, net, was income of $12 million in 2022, compared to expense of $0.4 million in 2021. The increase in other income, net is primarily due to the absence of a non-cash loss of $4.5 million related to the 2021 remeasurement of our investment in Flo immediately prior to consolidation, higher defined benefit income ($3.7 million increase), higher interest income and favorable foreign currency adjustments.

Income taxes

The 2022 effective income tax rate was unfavorably impacted by state and local income taxes, foreign income taxed at higher rates, as well as non-deductible executive compensation. This expense was offset by favorable benefits for the release of uncertain tax positions, primarily related to audit closures and statute of limitations lapses, share-based compensation and a valuation allowance decrease.

The 2021 effective income tax rate was unfavorably impacted by state and local income taxes, foreign income taxed at higher rates, as well as non-deductible executive compensation. The 2021 expense was offset by favorable benefits for the release of uncertain tax positions, primarily related to statute of limitations lapses, and share-based compensation.

Income from Continuing Operations, net of tax

Income from continuing operations, net of income taxes, decreased by $19.8 million, or 3.5%, due to lower net sales, lower operating income and higher interest expense, partly offset by higher other income and lower tax expense.

Income from discontinued operations, net of tax

Income from discontinued operations, net of income taxes, for the year ended December 31, 2022 included eleven and a half months of results of our former Cabinets segment. Income decreased by $65.9 million, or 31.0%, due to lower operating income including transaction costs related to the Separation ($73.1 million) and impairments related to two indefinite-lived tradenames ($46.4 million), higher income tax expense and higher defined benefit costs. Refer to Note 5, Discontinued Operations, in the consolidated financial statements in Item 8 in this Annual Report on Form 10k for additional details.

Results By Segment

Water Innovations

Net sales decreased by $191.0 million, or 6.9%, due to slowing housing market activity in China, lower sales unit volume driven by inventory reductions by our distribution channel partners, lower sales demand in the U.S. and Canada, and higher promotion and sales rebate costs, as well as unfavorable foreign exchange of approximately $30 million. These factors were partially offset by the benefit from price increases to help mitigate the impact of cumulative commodity and transportation cost increases, the benefit from the Aqualisa acquisition ($22 million) and sales increases in our U.S. e-commerce channel.

Operating income decreased by $15.1 million, or 2.4%, due to lower net sales, the impact of higher commodity, freight and restructuring costs and unfavorable foreign exchange of approximately $11 million. These factors were partially offset by lower employee-related costs, lower advertising and marketing costs, and favorable geographic channel mix.

Outdoors & Security

Net sales increased by $112.9 million, or 5.5%, due to price increases to help mitigate the impact of cumulative commodity and transportation cost increases and the benefit from the Solar acquisition ($28.5 million). These benefits were partially offset by lower sales demand for our exterior doors and decking

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products and lower sales unit volume due to the impact of inventory reductions by our distribution channel partners, as well as unfavorable foreign exchange of approximately $11 million.

Operating income decreased by $2.3 million, or 0.8%, due to commodity cost inflation, higher employee-related and freight costs, and higher restructuring charges, as well as unfavorable foreign exchange of approximately $1 million. These factors were partially offset by higher net sales and manufacturing productivity improvements.

Corporate

Corporate expenses increased by $19.4 million, or 17.3%, due to higher consulting costs relating to our digital transformation initiatives.

2021 Compared to 2020

Total Fortune Brands

Net sales

Net sales increased by $1,179.8 million, or 32.6%, due to higher sales volume including the favorable comparison to 2020, when our volumes were impacted by the COVID-19 pandemic, the benefit from the Larson acquisition ($403.4 million) and price increases to help mitigate the impact of cumulative commodity and transportation cost increases, as well as favorable foreign exchange of approximately $55 million, partially offset by unfavorable mix.

Cost of products sold

Cost of products sold increased by $683.2 million, or 31.7%, due to higher net sales, the impact of the Larson acquisition including higher amortization of the acquisition related inventory fair value adjustment ($3.3 million in 2021), commodity cost inflation, higher tariffs and labor inflation, partially offset by the benefit from manufacturing productivity improvements and product mix.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $245.1 million, or 28.9%, due to higher employee-related costs, the impact of the Larson acquisition and higher transportation and advertising costs.

Amortization of intangible assets

Amortization of intangible assets increased by $22.2 million, or 91.7% primarily due to the Larson acquisition in our Outdoors & Security segment ($18.2 million) and the 2021 consolidation of Flo in our Water Innovations segment ($2.6 million).

Asset impairment charges

Asset impairment charges of $13.0 million in 2020 related to indefinite-lived tradenames within our Water Innovations segment.

Restructuring charges

Restructuring charges of $9.3 million in 2021 largely related to severance costs associated with the relocation of manufacturing facilities within our Outdoor & Security segment. Restructuring charges of $10.4 million in 2020 largely related to headcount actions associated with COVID-19 across both segments and costs associated with changes in our manufacturing processes within our Water Innovations segment.

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Operating income

Operating income increased by $243.4 million, or 42.9%, primarily due to higher net sales, the benefit from the Larson acquisition, manufacturing productivity improvements, the absence of the 2020 asset impairment charges, and lower restructuring and other charges, as well as favorable foreign exchange of approximately $21 million. These benefits were partially offset by higher commodity, employee-related transportation and advertising costs, higher amortization of intangible assets principally due to the Larson acquisition, and higher tariffs.

Interest expense

Interest expense increased by $0.5 million to $84.3 million, due to higher average borrowings partially offset by lower average interest rates.

Other expense (income), net

Other expense (income), net, was expense of $0.4 million in 2021, compared to income of $15.3 million in 2020. The decrease of $15.7 million of income is primarily due to losses of $5.0 million in 2021 and gains of $11.0 million in 2020 related to our investment in Flo prior to its consolidation and unfavorable foreign currency losses, partially offset by higher defined benefit income ($1.9 million increase).

Income taxes

The 2021 and 2020 effective income tax rates were unfavorably impacted by state and local income taxes, foreign income taxed at higher rates and non-deductible executive compensation. Both 2021 and 2020 expenses were offset by favorable benefits for the release of uncertain tax positions, primarily related to statute of limitations lapses, and share-based compensation.

Income from Continuing Operations, Net of Income Taxes

Income from discontinued operations, net of income taxes, increased by $178.9 million, or 47.0%, due to higher operating income and lower equity in losses of affiliate, partly offset by higher income tax expenses, higher other expense and higher interest expense.

Income from Discontinued Operations, Net of Income Taxes

Income from discontinued operations, net of income taxes, for the year ended December 31, 2021 included twelve months of results of our former Cabinets segment. Income increased by $39.1 million, or 22.6%, due to higher operating income and higher defined benefit income, partially offset by higher income tax expense. Refer to Note 5, Discontinued Operations, in the consolidated financial statements in Item 8 in this Annual Report on Form 10K for additional details.

Results By Segment

Water Innovations

Net sales increased by $559.1 million, or 25.4%, due to higher sales volume across all brands and markets, including showroom customers whose locations were negatively impacted in 2020 by the COVID-19 pandemic, and price increases to help mitigate the impact of cumulative commodity and transportation cost increases, as well as favorable foreign exchange of approximately $53 million. These benefits were partially offset by higher volume-based rebate costs.

Operating income increased by $161.8 million, or 34.6%, due to higher net sales, the benefit from manufacturing productivity improvements, the absence of the 2020 asset impairment charge ($13.0 million) and favorable restructuring and other charges, as well as favorable foreign exchange of approximately $21 million. These benefits were partially offset by the impact of higher employee-related,

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freight, commodity, advertising and tariff costs, higher amortization of intangible assets related to the Flo acquisition and higher volume-based rebate costs.

Outdoors & Security

Net sales increased by $620.7 million, or 43.7%, due to the benefit from the Larson acquisition ($403.4 million), higher sales volume including the favorable comparison to 2020, when our volumes were impacted by the COVID-19 pandemic, price increases to help mitigate the impact of cumulative commodity and transportation cost increases, and lower rebate costs due to timing of sales in 2021 versus prior year period, as well as favorable foreign exchange of approximately $1 million. These benefits were partially offset by unfavorable mix primarily driven by materials availability.

Operating income increased by $90.6 million, or 45.0%, due to higher net sales, the benefit from the Larson acquisition and manufacturing productivity improvements. These benefits were partially offset by commodity cost inflation, higher freight and employee-related costs, and higher restructuring charges, as well as unfavorable foreign exchange of approximately $1 million.

Corporate

Corporate expenses increased by $7.0 million, or 6.8%, due to higher employee-related and consulting costs. These factors were partly offset by the absence of transaction costs associated with the Larson acquisition in 2020 ($4.5 million) and the absence of the impairment of a long-lived asset in 2020 ($3.6 million).

Liquidity and Capital Resources

Our principal sources of liquidity are cash on hand, cash flows from operating activities, cash borrowed under our credit facility and cash from debt issuances in the capital markets. On December 14, 2022, in connection with the completion of the Separation, we also received a one-time cash payment, in the form of a dividend, from MasterBrand in the amount of $940.0 million. Our operating income is generated by our subsidiary businesses. 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 entitled “Item 1A. Risk Factors.” In addition, we cannot predict whether or when we may enter into acquisitions, joint ventures or dispositions, repurchase shares of our common stock under our share repurchase program or pay dividends, or what impact any such transactions could have on our results of operations, cash flows or financial condition, whether as a result of the issuance of debt or equity securities or otherwise.

Long-Term Debt

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).

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At December 31, 2022, the Company had aggregate outstanding 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 carrying value of the Notes, net of underwriting commissions, price discounts and debt issuance costs as of December 31, 2022 and December 31, 2021:

Credit Facilities

In August 2022, the Company entered into a third amended and restated $1.25 billion revolving credit facility (the “2022 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 2022 Revolving Credit Agreement are variable based on 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 2022 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 December 31, 2022 and December 31, 2021, our outstanding borrowings under this credit facility and our previous revolving credit facility were zero and $520.0 million, respectively. As of December 31, 2022, we believe we are in compliance with all covenants under this credit facility.

In November 2021, the Company entered into a 364-day, $400 million term loan credit agreement (“2021 Term Loan”) for general corporate purposes that matured 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 under our previous revolving credit facility. 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.

We currently have uncommitted bank lines of credit in China, which provide for unsecured borrowings for working capital of up to $20.5 million in aggregate as of December 31, 2022 and December 31, 2021, of which there were no outstanding balances as of December 31, 2022 and 2021. The weighted-average interest rates on these borrowings were zero in 2022 and 2021.

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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 2022 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 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 2022 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 December 31, 2022 and December 31, 2021, there were no outstanding borrowings under the Commercial Paper Program.

As of December 31, 2022, the components of our long-term debt were as follows:

In our debt agreements, there are normal and customary events of default which would permit the lenders to accelerate the debt if not cured, in certain cases within applicable grace periods, such as failure to pay principal or interest when due or a change in control of the Company. There were no events of default as of December 31, 2022.

Cash and Seasonality

In 2022, we invested approximately $172.8 million in incremental capacity to support long-term growth potential and new products inclusive of cost reduction and productivity initiatives. We expect capital spending in 2023 to be in the range of $250 million to $300 million, reflecting incremental capacity investments in our decking product line within Outdoors & Security. On December 31, 2022, we had cash and cash equivalents of $642.5 million, of which $403.9 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. The Company intends to repay or refinance the $600 million outstanding principal amount of 4.00% Senior Notes due September 2023 and to fund the approximately $800 million purchase price of the pending acquisition discussed below with cash on hand and borrowings under our existing credit facility. In addition, we believe that we have the ability to obtain alternative sources of financing if required.

Share Repurchases

In 2022, we repurchased 7.6 million shares of our outstanding common stock under the Company’s share repurchase program for $580.1 million. As of December 31, 2022, the Company’s total remaining share repurchase authorization under the remaining program was approximately $584.6 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.

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Dividends

In 2022, we paid dividends in the amount of $145.6 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.

In December 2022, we entered into a definitive agreement to acquire the Emtek and Schaub premium and luxury door and cabinet hardware business and the United States and Canada Yale and August residential smart home locks business from ASSA ABLOY, Inc. (”ASSA”), for a purchase price of $800 million in cash on a cash-free, debt-free basis, subject to customary adjustments. The transaction is conditioned on the successful closing of the acquisition of such businesses by ASSA from Spectrum Brands, Inc. following a favorable resolution of the court proceedings with the U.S. Department of Justice and is expected to close in the second quarter of 2023. The Company intends to finance the transaction with cash on hand and borrowings under our existing credit facility.

In July 2022, we acquired 100% of the outstanding equity of Aqualisa for a purchase price of $156.0 million, net of cash acquired of $4.8 million. The results of Aqualisa are reported as part of the Water Innovations segment. We believe its product offerings will enable us to continue to leverage growing trends in water management and connected products. We financed the transaction with borrowings under our existing credit facility. 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 July 29, 2022 was $156.0 million, which includes $88.7 million of goodwill. Goodwill includes expected sales and cost synergies and is not expected to be deductible for income tax purposes.

In January 2022, we acquired 100% of the outstanding equity of Solar for a purchase price of $61.6 million, net of cash acquired of $4.8 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 support the segment’s outdoor living strategy. Solar's net sales and operating income for the three and nine months ended September 30, 2022 were not material to the Company. 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 January 31, 2022 was $61.6 million, which includes $23.3 million of goodwill. Goodwill includes expected sales and cost synergies and is expected to be deductible for income tax purposes.

In December 2020, we acquired 100% of the outstanding equity of Larson for a total purchase price of approximately $717.5 million, net of cash acquired.

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Cash Flows

Below is a summary of cash flows for the years ended December 31, 2022, 2021 and 2020, including continuing and discontinued operations. See Note 5, Discontinued Operations, in the consolidated financial statements in Item 8 for additional information on the cash flow for discontinued operations.

Net cash provided by operating activities was $566.3 million in 2022, compared to $688.7 million in 2021. The $122.4 million decrease in cash provided from 2021 to 2022 included a $47.5 million increase in cash provided related to discontinued operations. The $169.9 million decrease in cash provided related to continuing operations was primarily due to a decrease in accounts payable driven by lower sales growth, lower employee incentive accruals, as the 2021 payout was greater than the 2022 accruals, and lower advertising expense accruals, lower net income and a decrease in accrued taxes due to lower income before taxes, partially offset by an reduction in the growth of our inventory investments and a decrease in accounts receivable driven by decreased sales in the fourth quarter of 2022. The $137.0 million decrease in cash provided from 2020 to 2021 included a $66.6 million decrease in cash provided related to discontinued operations. The $70.4 million decrease in cash provided related to continuing operations was primarily due to an increase in our inventory investments to mitigate the impact of an uncertain and volatile global supply chain environment, a decrease in accrued expenses and increases in accounts receivable associated with our sales growth. These factors were partially offset by higher net income.

Net cash used in investing activities was $455.5 million in 2022 compared to $207.1 million in 2021. The increase in cash used of $248.4 million from 2021 to 2022 included an increase of $4.3 million in cash used related to discontinued operations. The $244.1 million increase in cash used related to continuing operations reflects our cost of acquisitions ($217.6 million in 2022) and an increase in capital expenditures, partly offset by proceeds from the sale of previously closed manufacturing facilities. The increase in cash used of $716.4 million from 2020 to 2021 included a $24.8 million decrease in cash used related to discontinued operations. The $741.2 million decrease in cash used related to continuing operations was primarily due to the acquisition of Larson in December 2020 ($713.0 million decrease), the acquisition of additional shares of Flo in January and April 2020 ($59.4 million decrease) and the cash acquired during the consolidation of Flo in January 2021, partially offset by higher capital expenditures.

Net cash provided by financing activities was $72.5 million in 2022 compared to cash used in financing activities of $428.6 million in 2021. The increase in cash provided of $501.1 million from 2021 to 2022 was primarily due to dividends received from MasterBrand as a result of the Separation ($940.0 million), partly offset by lower net borrowings in 2022 compared to 2021 ($172.1 million), higher share repurchases in 2022 compared to 2021 ($132.4 million increase), cash retained by MasterBrand after the Separation ($56.3 million), 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). The increase in cash used of $540.2 million from 2020 to 2021 was primarily due to higher share repurchases in 2021 compared to 2020 ($260.1 million increase), lower net borrowings in 2021 compared to 2020 ($250.0 million decrease), lower proceeds from the exercise of stock options and higher dividends to shareholders ($9.7 million increase).

Pension Plans

Subsidiaries of Fortune Brands sponsor their respective defined benefit pension plans, related to our continuing operations, that are funded by a portfolio of investments maintained within our benefit plan trust. In 2022, 2021 and 2020 we contributed $9.0 million, $18.5 million and $34.6 million, respectively, to our qualified pension plans. In 2023, we expect to make pension contributions of approximately $4.0 million. As of December 31, 2022, the fair value of our total pension plan assets was $482.5 million,

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representing funding of 89% of the accumulated benefit obligation liability. 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.

Contractual Obligations and Other Commercial Commitments

The following summarizes our contractual obligations and commitments as of December 31, 2022. Purchase obligations were $561.3 million, of which $534.0 million is due within one year. Purchase obligations include contracts for raw materials and finished goods purchases, selling and administrative services, and capital expenditures. Total lease payments under non-cancellable operating leases as of December 31, 2022 were $34.1 million in 2023, $26.4 million in 2024, $19.8 million in 2025, $17.0 million in 2026, $14.2 million in 2027 and $28.6 million thereafter.

Due to the uncertainty of the timing of settlement with taxing authorities, we are unable to make reasonably reliable estimates of the period of cash settlement of unrecognized tax benefits. Therefore, $33.4 million of unrecognized tax benefits as of December 31, 2022 have been excluded from the paragraph above.

In addition to the contractual obligations and commitments described above, we also had other commercial commitments for which we are contingently liable as of December 31, 2022. Other corporate commercial commitments include standby letters of credit of $31.6 million, in the aggregate, all of which expire in less than one year, and surety bonds of $24.0 million, of which $16.2 million matures in less than one year and $7.8 million matures in 1-3 years. These contingent commitments are not expected to have a significant impact on our liquidity.

Debt payments due during the next five years as of December 31, 2022 are $600 million in 2023, zero in 2024, $500 million in 2025, zero in 2026, zero in 2027 and $1,600 million in 2028 and beyond. Interest payments due during the next five years as of December 31, 2022 are $105 million in 2023, $152 million in 2024 through 2025, $122 million in 2026 through 2027 and $642 million in 2028 and beyond.

Foreign Currency Risk

Certain anticipated transactions, assets and liabilities are exposed to foreign currency risk. Principal currencies hedged include the Canadian dollar, the Mexican peso, the British pound and the Chinese yuan. We regularly monitor our foreign currency exposures in order to maximize the overall effectiveness of our foreign currency hedge positions. For additional information on this risk, see Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in this Annual Report on Form 10-K.

Derivative Financial Instruments

In accordance with Accounting Standards Codification ("ASC") requirements for Derivatives and Hedging, we recognize all derivative contracts as either assets or liabilities on the balance sheet, and the measurement of those instruments is at fair value. If the derivative is designated as a fair value hedge and is effective, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings in the same period. If the derivative is designated as a cash flow hedge, the changes in the fair value of the derivative are recorded in other comprehensive income (“OCI”) and are recognized in the consolidated statement of income when the hedged item affects earnings. If the derivative is designated as an effective economic hedge of the net investment in a foreign operation, the changes in the fair value of the derivative is reported in the cumulative translation adjustment section of OCI. Similar to foreign currency translation adjustments, these changes in fair value are recognized in earnings only when realized upon sale or upon complete or substantially complete liquidation of the investment in the foreign entity.

Deferred currency gains (loss) of $4.7 million, $(2.6) million and $(0.7) million (before tax impact) were reclassified into earnings for the years ended December 31, 2022, 2021 and 2020, respectively. Based

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on foreign exchange rates as of December 31, 2022, we estimate that $2.3 million of net derivative gain included in accumulated other comprehensive income ("AOCI") as of December 31, 2022, will be reclassified to earnings within the next twelve months.

Recently Issued Accounting Standards

The adoption of recent accounting standards, as discussed in Note 2, “Significant Accounting Policies,” to our consolidated financial statements, has not had and is not expected to have a significant impact on our revenue, earnings or liquidity.

Critical Accounting Estimates

Our significant accounting policies are described in Note 2, “Significant Accounting Policies,” of the Notes to consolidated financial statements in Item 8 of this Annual Report on Form 10-K. The consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). Preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the amounts of assets and liabilities reflected in the financial statements and revenues and expenses reported for the relevant reporting periods. We believe the policies discussed below are the Company’s critical accounting policies as they include the more significant, subjective and complex judgments and estimates made when preparing our consolidated financial statements.

Inventories

Inventory provisions are recorded to reduce inventory to the net realizable dollar value for obsolete or slow-moving inventory based on assumptions about future demand and marketability of products, the impact of new product introductions, inventory levels and turns, product spoilage and specific identification of items, such as product discontinuance, engineering/material changes, or regulatory-related changes. In accordance with this policy, our inventory provision was $49.2 million and $37.1 million as of December 31, 2022 and 2021 respectively.

Long-lived Assets

Business Combinations

We account for business combinations under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations, which requires an allocation of the consideration we paid to the identifiable assets, intangible assets and liabilities based on the estimated fair values as of the closing

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date of the acquisition. The excess of the fair value of the purchase price over the fair values of these identifiable assets, intangible assets and liabilities is recorded as goodwill.

Purchased intangibles other than goodwill are initially recognized at fair value and amortized over their useful lives unless those lives are determined to be indefinite. The valuation of acquired assets will impact future operating results. The fair value of identifiable intangible assets is determined using an income approach on an individual asset basis. Specifically, we use the multi-period excess earnings method to determine the fair value of customer relationships and the relief-from-royalty approach to determine the fair value of the tradename and proprietary technology. Determining the fair value of acquired intangibles involves significant estimates and assumptions, including forecasted revenue growth rates, EBITDA margins, percentage of revenue attributable to the tradename, contributory asset charges, customer attrition rate, market-participant discount rates and the assumed royalty rates.

The determination of the useful life of an intangible asset other than goodwill is based on factors including historical tradename performance with respect to consumer name recognition, geographic market presence, market share, plans for ongoing tradename support and promotion, customer attrition rate and other relevant factors.

Goodwill and Indefinite-lived Intangible Assets

In accordance with ASC requirements for Intangibles - Goodwill and Other, management reviews goodwill for impairment annually in the fourth quarter and whenever market or business events indicate there may be a potential impairment of the reporting unit. Impairment losses are recorded to the extent that the carrying value of the reporting unit exceeds its fair value. The Company’s reporting units are operating segments, or one level below operating segments when appropriate.

To evaluate the recoverability of goodwill, we first assess qualitative factors to determine whether it is more likely than not that goodwill is impaired. Qualitative factors include changes in volume, margin, customers and the industry. If it is deemed more likely than not that goodwill for a reporting unit is impaired, we will perform a quantitative impairment test where fair value of each reporting unit is estimated using the income approach using a discounted cash flow model based on estimates of future cash flows combined with the market approach using comparable trading and transaction multiples based on guideline public companies. We may also elect to bypass the qualitative testing and proceed directly to the quantitative testing. For the income approach, using a discounted cash flow model, we estimate the future cash flows of the reporting units to which the goodwill relates and then discount the future cash flows at a market-participant-derived discount rate. In determining the estimated future cash flows, we consider current and projected future levels of income based on management’s plans for that business; business trends, prospects and market and economic conditions; and market-participant considerations. Furthermore, our cash flow projections used to assess impairment of our goodwill and other intangible assets are significantly influenced by our projection for the U.S. new home starts and home repair remodel spending, our annual operating plans finalized in the fourth quarter of each year, and our ability to execute on various planned cost reduction initiatives supporting operating income improvements. Our projection for the U.S. home products market is inherently uncertain and is subject to a number of factors, such as employment, home prices, credit availability, new home starts and the rate of home foreclosures. For the market approach, we apply comparable trading and transaction multiples based on guideline public companies to the current operating results of the reporting units to determine each reporting unit’s fair value.

The significant assumptions that are used to determine the estimated fair value of reporting units for impairment testing are forecasted revenue growth rates, operating income margins, market-participant discount rates, EBITDA multiples and revenue multiples.

The assumptions used to estimate the fair values of the goodwill related to continuing operations tested quantitatively during the year ended December 31, 2022 were as follows:

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(a)
Weighted by relative fair value of the goodwill that was tested quantitatively.

(b)
Selected long-term revenue growth rate within 10-year projection period for the goodwill that was tested quantitatively.

A 50 basis point change in the discount rate or long-term revenue growth rate assumptions, or a decrease in multiple of 0.2 in the EBITDA multiple or revenue multiple assumptions, during the year ended December 31, 2022 would not have resulted in an impairment being recognized when estimating the fair value of our reporting unit goodwill.

Certain of our tradenames have been assigned an indefinite life as we currently anticipate that these tradenames will contribute cash flows to the Company indefinitely. Indefinite-lived intangible assets are not amortized, but are evaluated at least annually to determine whether the indefinite useful life is appropriate. We measure the fair value of identifiable intangible assets upon acquisition and we review for impairment annually in the fourth quarter and whenever market or business events indicate there may be a potential impairment of that intangible. Impairment losses are recorded to the extent that the carrying value of the indefinite-lived intangible asset exceeds its fair value.

We first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. Qualitative factors include changes in volume, customers and the industry. If it is deemed more likely than not that an intangible asset is impaired, we will perform a quantitative impairment test. We measure fair value of our indefinite-lived tradenames using the relief-from-royalty approach which estimates the present value of royalty income that could be hypothetically earned by licensing the brand name to a third party over the remaining useful life. The significant assumptions that are used to determine the estimated fair value for indefinite-lived intangible assets upon acquisition and subsequent impairment testing are forecasted revenue growth rates, the assumed royalty rates and the market-participant discount rates. Of our $478.1 million indefinite-lived tradenames, $141.5 million relate to our Water Innovations segment and $336.6 million relate to our Outdoors & Security segment as of December 31, 2022. There were no impairments related to our continuing operations for the year ended December 31, 2022. See Note 6, “Goodwill and Identifiable Intangible Assets,” for additional information.

During the second quarter of 2020, extended closures of luxury plumbing showrooms associated with COVID-19 led to lower than expected sales related to an indefinite-lived tradename within the Water Innovations segment, which combined with the updated financial outlook compared to previous forecasts and the continued uncertainty of the pandemic on the sales and profitability related to the tradename, led us to conclude that it was more likely than not that the indefinite-lived tradename was impaired. Therefore, we performed an interim impairment test as of June 30, 2020, and as a result we recognized a pre-tax impairment charge of $13.0 million related to this tradename. We also performed an evaluation of the useful life of this tradename and determined it was no longer indefinite-lived due to changes in long-term management expectations and future operating plans. As a result, the remaining carrying value of this tradename is being amortized over its estimated useful life of 30 years.

The fair values of the impaired tradenames were measured using the relief-from-royalty approach, which estimates the present value of royalty income that could be hypothetically earned by licensing the tradename to a third party over its remaining useful life. Some of the more significant assumptions inherent in estimating the fair values include forecasted revenue growth rates, assumed royalty rates, and market-participant discount rates that reflect the level of risk associated with the tradenames’ future revenues and profitability. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated growth rates and management plans. These assumptions represent level 3 inputs of the fair value hierarchy (refer to Note 9).

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The assumptions used to estimate the fair values of the tradenames tested quantitatively during the year ended December 31, 2022 were as follows:

(a)
Weighted by the relative fair value of the tradenames that were tested quantitatively.

(b)
Represents estimated percentage of sales a market-participant would pay to license the tradenames that were tested quantitatively.

(c)
Selected long-term revenue growth rate within 10-year projection period of the tradenames that were tested quantitatively.

A 50 basis point change in the discount rate assumption, a 25 basis point change in the royalty rate assumption, or a 25 basis point change in the long-term revenue growth rate assumption used during the year ended December 31, 2022 would not have resulted in an impairment being recognized when estimating the fair value of our indefinite-lived tradenames.

Included within income from discontinued operations, we recognized impairment charges of $46.4 million and zero in 2022 and 2021, respectively, related to impairments of indefinite lived tradenames within our legacy Cabinets segment.

Defined Benefit Plans

We have a number of pension plans in the United States, covering many of the Company’s employees. In addition, the Company provides postretirement health care and life insurance benefits to certain retirees. Service cost for 2022 relates to benefit accruals for an hourly Union group within the defined benefit plan for our Outdoors & Security segment. All other benefit accruals under our defined benefit pension plans were frozen as of, or prior to, December 31, 2016.

We recognize changes in the fair value of pension plan assets and net actuarial gains or losses in excess of 10 percent of the greater of the fair value of pension plan assets or each plan’s projected benefit obligation (the “corridor”) in earnings immediately upon remeasurement, which is at least annually in the fourth quarter of each year. Net actuarial gains and losses occur when actual experience differs from any of the assumptions used to value defined benefit plans or when assumptions change as they may each year. The primary factors contributing to actuarial gains and losses are changes in the discount rate used to value obligations as of the measurement date and the differences between expected and actual returns on pension plan assets. This accounting method results in the potential for volatile and difficult to forecast gains and losses. The pre-tax recognition of actuarial losses (gains) was $1.3 million and $(0.6) million in 2022 and 2021, respectively. The total net actuarial losses in accumulated other comprehensive income for all defined benefit plans were $49.2 million as of December 31, 2022, compared to $32.0 million as of December 31, 2021.

We record amounts relating to these defined benefit plans based on various actuarial assumptions, including discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current economic conditions and trends. We believe that the assumptions utilized in recording our obligations under our plans are reasonable based on our experience and on advice from our independent actuaries; however, differences in actual experience or changes in the assumptions may materially affect our financial condition or results of operations. The expected rate of return on plan assets is determined based on the nature of the plans’ investments, our current asset allocation and our expectations for long-term rates of return. The weighted-average long-term expected rate of return on pension plan assets for the years ended December 31, 2022 and 2021 was 4.4% and 4.4%, respectively. Compensation increases reflect expected future compensation trends. The discount rate used to measure obligations is based on a spot-rate yield curve on a plan-by-plan basis that matches projected future benefit payments with the appropriate interest rate applicable to the timing of the projected future benefit payments. The bond portfolio used for the selection of the discount rate is from the top quartile of bonds rated by nationally recognized statistical rating organizations, and includes only non-callable bonds and those that are deemed to be sufficiently marketable with a Moody’s credit rating

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of Aa or higher. The weighted-average discount rate for defined benefit liabilities as of December 31, 2022 and 2021 was 5.2% and 2.9%, respectively.

For postretirement benefits, our health care trend rate assumption is based on historical cost increases and expectations for long-term increases. As of December 31, 2022, for postretirement medical and prescription drugs in the next year, our assumption was an assumed rate of increase of 5.8% for pre-65 retirees and 6.3% for post-65 retirees, declining until reaching an ultimate assumed rate of increase of 4.5% per year in 2028. As of December 31, 2021, for postretirement medical and prescription drugs in the next year, our assumption was an assumed rate of increase of 6.3% for pre-65 retirees and 6.7% for post-65 retirees, declining until reaching an ultimate assumed rate of increase of 4.5% per year in 2028.

Below is a table showing pre-tax pension and postretirement expenses, including the impact of actuarial gains and losses:

The actuarial losses in 2022 and 2021 were principally due to lower than expected return on plan assets. Discount rates in 2022 used to determine benefit obligations increased by an average of 230 basis points for pension benefits. Discount rates for 2022 postretirement benefits increased by an average of 190 basis points. Discount rates in 2021 used to determine benefit obligations increased by an average of 30 basis points for pension benefits. Discount rates for 2021 postretirement benefits decreased an average of 200 basis points. Our actual loss on plan assets in 2022 was 22.6% compared to an actuarial assumption of an average 4.4% expected return. Our actual return on plan assets in 2021 was 6.6% compared to an actuarial assumption of an average 4.4% expected return. Significant actuarial losses in future periods would be expected if discount rates decline, actual returns on plan assets are lower than our expected return, or a combination of both occurs.

A 25 basis point change in our discount rate assumption would lead to an increase or decrease in our pension and postretirement liability of approximately $14 million. A 25 basis point change in the long-term rate of return on plan assets used in accounting for our pension plans would have a $1.2 million impact on pension expense. In addition, if required, actuarial gains and losses will be recorded in accordance with our defined benefit plan accounting method as previously described. It is not possible to forecast or predict whether there will be actuarial gains and losses in future periods, and if required, the magnitude of any such adjustment. These gains and losses are driven by differences in actual experience or changes in the assumptions that are beyond our control, such as changes in interest rates and the actual return on pension plan assets.

Income Taxes

In accordance with ASC requirements for Income Taxes, we establish deferred tax liabilities or assets for temporary differences between financial and tax reporting basis and subsequently adjust them to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance reducing deferred tax assets when it is more likely than not that such assets will not be realized.

We record liabilities for uncertain income tax positions based on a two-step process. The first step is recognition, where we evaluate whether an individual tax position has a likelihood of greater than 50% of being sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation processes. For tax positions that are currently estimated to have a less than 50% likelihood of being sustained, no tax benefit is recorded. For tax positions that have met the recognition threshold in the first step, we perform the second step of measuring the benefit to be recorded. The actual benefits ultimately realized may differ from our estimates. In future periods, changes

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in facts, circumstances, and new information may require us to change the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recorded in the consolidated statement of income and consolidated balance sheet in the period in which such changes occur. As of December 31, 2022, we had liabilities for unrecognized tax benefits pertaining to uncertain tax positions totaling $33.4 million. It is reasonably possible that the unrecognized tax benefits may decrease by $9.8 million in the next 12 months primarily as a result of the lapse of statutes of U.S. federal, state and foreign income taxes.

Customer Program Costs

Customer programs and incentives are a common practice in our businesses. Our businesses incur customer program costs to obtain favorable product placement, to promote sales of products and to maintain competitive pricing. We record estimates to reduce revenue for customer programs and incentives, which are considered variable consideration, and include price discounts, volume-based incentives, promotions and cooperative advertising when revenue is recognized in order to determine the amount of consideration the Company will ultimately be entitled to receive. These estimates are based on historical and projected experience for each type of customer. In addition, for certain customer program incentives, we receive an identifiable benefit (goods or services) in exchange for the consideration given and record the associated expenditure in selling, general and administrative expenses. Volume allowances are accrued based on management’s estimates of customer volume achievement and other factors incorporated into customer agreements, such as new products, store sell-through, merchandising support, levels of returns and customer training. Management periodically reviews accruals for these rebates and allowances, and adjusts accruals when circumstances indicate (typically as a result of a change in volume expectations).