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:
Recent Developments: This section provides a summary of noteworthy recent developments in the most recently completed fiscal year in the operation of the business.
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 additional recent developments we believe are important to understanding our results of operations and financial condition or in understanding anticipated future trends.
Basis of Presentation: This section provides a discussion of the basis on which our consolidated financial statements were prepared.
Results of Operations: This section provides an analysis of our results of operations for the fiscal years ended December 27, 2025, December 28, 2024 and December 30, 2023.
Liquidity and Capital Resources: This section provides a discussion of our financial condition as of December 27, 2025 and an analysis of our cash flows for each of the three years ended December 27, 2025, December 28, 2024 and December 30, 2023. This section also provides a discussion of our contractual obligations, other purchase commitments and customer credit risk that existed at December 27, 2025, as well as a discussion of our ability to fund our future commitments and ongoing operating activities through internal and external sources of capital.
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.
Recent Developments
In January 2025, we announced plans to consolidate our U.S. regional offices into one campus headquarters in Deerfield, Illinois to best position the Company and its brands for long-term growth. The decision is expected to deliver a world-class, collaborative office environment to fuel innovation, accelerate its digital solutions, and grow its core products. This significant investment was supported by annual tax credits offered through Illinois' Economic Development for a Growing Economy ("EDGE") program. We expect to qualify for these credits in 2025. In connection with these consolidation activities and related organizational and personnel changes, we will incur cash and non-cash charges related to employee relocation, severance, retention, non-cash asset related costs, lease exit costs, and other transition costs. The majority of charges have been incurred in 2025 with the remaining charges expected to be incurred in 2026.
Overview
We are an industry leading home, security and digital products company whose purpose is to elevate every life by transforming spaces into havens that is focused on the design, manufacture and sale of market-leading branded products in the following categories: plumbing and accessories, including digital water products, entry door and storm door systems, security and safety products, and outdoor performance materials used in decking and railing products.
For the year ended December 27, 2025, net sales based on country of destination were:
(In millions)
United States
Canada
China
Other international
Total
We believe that we have 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 our track record reflects the long-term attractiveness and potential of the categories we serve and our leading brands. We believe the long-term outlook for our products remains favorable, and we have a number of strategic advantages, including the set of capabilities we refer to as the Fortune Brands Advantage, that has helped us to continue to achieve profitable organic growth over time.
We continue to believe our most attractive opportunities are to invest in profitable organic growth initiatives, pursue accretive strategic acquisitions, non-controlling equity investments, and joint ventures, and return cash to stockholders through a combination of dividends and repurchases of shares of our common stock under our share repurchase program as explained in further detail under “Liquidity and Capital Resources” below.
The U.S. market for our products primarily consists of spending on both new home construction and repair and remodel activities within existing homes, with a substantial majority of the markets we serve consisting of repair and remodel spending. Growth in the U.S. market for our home products will largely depend on consumer confidence, employment, wage growth, home prices, equity levels and rates of extraction, stable mortgage rates and credit availability. Increases in inflation and mortgage rates during the preceding years 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 the continued 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 geopolitical environment, as well as sustained elevated rates of inflation, fluctuating interest rates, unfavorable fluctuations in foreign exchange rates and the ongoing and potentially worsening costs of tariffs (including existing and potential U.S. tariffs imposed or threatened to be imposed on China, Canada and Mexico and other countries and any retaliatory actions taken by such countries). 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.
We anticipate that, absent any mitigation efforts, our costs of goods sold will increase based on the tariffs that have been announced or imposed as of the date of this report. We are actively working to mitigate the anticipated impacts of tariffs through a combination of supply chain actions, cost-out activities and strategic pricing actions across all of our channels and brands. However, this is a rapidly evolving landscape, and our ability to mitigate the anticipated impacts of tariffs could be affected by a number of factors, including additional tariffs or trade-related sanctions imposed by the U.S. or other countries, and if we are ultimately not able to substantially mitigate the impacts of tariffs, there would be negative impacts to our results of operations. We are also unable at this time to determine any future negative impacts from reduced consumer spending as a result of inflationary or other macroeconomic pressures or uncertainty that may result from the imposition of current or future tariffs. We are currently monitoring, and will continue to monitor, potential changes to these tariffs or the imposition of reciprocal or other tariffs or trade restrictions by other countries.
During the three fiscal years ended December 27, 2025, our net sales declined at a compounded annual rate of 1.9% reflecting the contraction of the U.S. home products market and a decline in demand in our
international markets, partially offset by an increase in sales resulting from acquisitions. Operating income declined at a compounded annual rate of 12.6% with consolidated operating margins ranging between 12% and 16% from 2023 to 2025. The decline in operating income over this period was primarily due to the decline in net sales as well as asset impairment charges and higher restructuring and restructuring-related charges, partially offset by control over our operating expenses and the benefits of manufacturing productivity programs.
During 2025, the U.S. home products market contracted due to a decline in both new housing construction and repair and remodel activity. We believe new housing construction activity decreased approximately 6% and spending for home repair and remodeling decreased approximately 1% in 2025 compared to 2024. In 2025, our net sales declined 3.2% due to lower sales in our international markets ($80.8 million) and unfavorable foreign exchange ($2.3 million), partially offset by disciplined pricing actions, including strategic adjustments to mitigate tariff-related costs and lower customer sales incentives. In 2025, operating income decreased 30.1% over 2024 primarily due to higher restructuring and restructuring-related charges, asset impairment charges, raw material cost inflation and higher distribution costs. These factors were partially offset by continued productivity gains across the segments supported by strategic sourcing initiatives and manufacturing efficiencies as well as reductions to incentive compensation.
Basis of Presentation
The consolidated financial statements in this Annual Report on Form 10-K have been derived from our accounts and those of our wholly-owned subsidiaries. The following discussion contains references to years 2025, 2024 and 2023, which represent fiscal years ended December 27, 2025, December 28, 2024 and December 30, 2023.
Results of Operations
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. All amounts, percentages and disclosures for all periods presented reflect only our continuing operations unless otherwise noted.
(In millions)
% change
% change
Net sales:
Water
Outdoors
Security
Total net sales
Operating income:
Water
Outdoors
Security
Corporate
Total operating income
Certain items had a significant impact on our results in 2025, 2024 and 2023. These included restructuring and restructuring-related charges, asset impairment charges, transaction expenses and the impact of changes in foreign currency exchange rates.
In 2025, financial results included:
restructuring and restructuring-related charges of $109.1 million are primarily attributable to costs associated with the decision to consolidate our U.S. regional offices into one campus headquarters and our related organizational and personnel changes, a product-line rationalization within our Outdoors segment, and plant closures in all our segments;
asset impairment charges of $53.6 million related to the impairment of certain assets held-for-sale within our Outdoors and Water segments;
charges of $21.1 million related to a fire in a portion of a manufacturing facility within the Outdoors segment; and
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 2024 of approximately $2.3 million on net sales and approximately $0.2 million on both operating income and net income.
In 2024, financial results included:
restructuring and restructuring-related other charges of $41.3 million largely related to costs associated with a product line rationalization within our Outdoors segment, the closure of a manufacturing facility within our Security segment and headcount actions across all segments; and
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 2024 of approximately $7 million on net sales and approximately $2 million on both operating income and net income.
In 2023, financial results included:
restructuring and restructuring-related charges of $54.2 million largely related to costs associated with the closure of a manufacturing facility within our Security segment and headcount actions across all segments;
asset impairment charges of $33.5 million related to the impairment of two indefinite-lived tradenames within our Outdoors segment, which were primarily the result of a decline in forecasted sales;
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 2022 of approximately $24 million on net sales and approximately $7.9 million on both operating income and net income; and
transaction expenses of $19.7 million related to the acquisition of 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").
2025 Compared to 2024
Total Fortune Brands
Net sales
Net sales decreased by $145.8 million, or 3.2%, primarily due to sales volume decreases in China of $87.8 million. The remaining decrease was due to lower overall sales volume in non-China markets, partially offset by disciplined pricing actions, including strategic adjustments to mitigate tariff-related costs and lower customer sales incentives. Net sales were unfavorably impacted by foreign exchange of $2.3 million.
Cost of products sold
Cost of products sold decreased by $68.9 million, or 2.7%, primarily due to the lower sales volume, lower restructuring-related charges of $13.5 million and continued productivity gains across the segments, supported by strategic sourcing initiatives and manufacturing efficiencies, partially offset by tariff and cost inflation. Cost of products sold also includes losses, net of insurance recovery, of $21.1 million relating to a fire in a portion of a manufacturing facility within the Outdoors segment.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $53.0 million, or 4.3%, primarily due to higher restructuring-related charges of $41.6 million, distribution costs, and higher professional fees, partially offset by reductions to incentive compensation.
Asset impairment charges
In 2025, we determined that certain assets within the Outdoors and Water segments met the criteria to be classified as held-for-sale. Impairment charges of $53.6 million were recorded to reduce the carrying value of the assets to equal their fair value, less estimated costs to sell.
Restructuring charges
Restructuring charges of $52.4 million in 2025 are primarily due to $47.6 million of costs incurred in connection with our headquarters consolidation and our related organizational changes as well as plant closures in our Water and Outdoors segments. Restructuring charges of $16.2 million in 2024 are largely related to a product-line rationalization within our Outdoors segment, the closure of a manufacturing facility within our Security segment and headcount-reduction actions across all segments.
Operating income
Operating income decreased by $221.8 million, or 30.1%, primarily due to lower sales volume, material cost inflation, asset impairment charges of $53.6 million, higher distribution costs, and higher restructuring and restructuring-related charges of $67.8 million, partially offset by continued productivity gains across the segments supported by strategic sourcing initiatives and manufacturing efficiencies as well as reductions to incentive compensation.
Interest expense
Interest expense decreased by $5.3 million, or 4.4%, primarily due to lower interest rates on current-period commercial paper borrowings and lower senior unsecured notes outstanding, partially offset by higher commercial paper borrowings net of repayments of $368.8 million during the fifty-two weeks ended December 27, 2025, as compared to zero during the the fifty-two weeks ended December 28, 2024.
Other (income) expense, net
Other (income) expense, net, was income of $4.1 million in 2025, compared to expense of $11.9 million in 2024. The increase in other (income) expense, net is primarily due to a decrease in net periodic benefit expense of $11.0 million primarily due to the absence of a settlement loss in 2025, an increase in interest and investment income of $3.7 million, and a decrease in foreign currency transaction expense of $1.4 million.
Income taxes
The 2025 effective income tax rate was unfavorably impacted by state and local income taxes and dividend withholding tax, partially offset by decreases in uncertain tax positions.
The 2024 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, partially offset by favorable benefits related to a valuation allowance release and decreases in uncertain tax positions and tax credits.
Net income
Net income was $298.8 million in the fifty-two weeks ended December 27, 2025, compared to $471.9 million in the fifty-two weeks ended December 28, 2024.
Results By Segment
Water
Net sales decreased by $117.0 million, or 4.6%, primarily due to sales volume decreases in China of $87.8 million. The remaining decrease was due to lower sales unit volume in non-China markets, partially offset by disciplined pricing actions across our portfolio, including strategic adjustments to mitigate tariff-related costs and lower customer sales incentives. Net sales was unfavorably impacted by foreign exchange of $3.9 million.
Operating income decreased by $52.9 million, or 8.9%, primarily due to lower sales volume, material cost inflation, including tariff costs, higher restructuring and restructuring-related charges of $19.8 million, partially offset by manufacturing efficiencies and lower selling, general and administrative expenses, including reductions to incentive compensation.
Outdoors
Net sales decreased by $27.1 million, or 2.0%, primarily due to lower sales unit volume, partially offset by disciplined pricing actions, including strategic adjustments to mitigate tariff-related costs, and lower customer sales incentives.
Operating income decreased by $114.5 million, or 57.8%,due to lower sales unit volume, material cost inflation, including tariff costs, partially offset by manufacturing efficiencies. Operating income was also unfavorably impacted by asset impairment charges of $50.1 million and by charges, net of insurance recovery, of $21.1 million relating to a fire in a portion of a manufacturing facility.
Security
Net sales decreased by $1.7 million, or 0.2%, primarily due to lower sales unit volume, partially offset by disciplined pricing actions, including strategic adjustments to mitigate tariff-related costs, and lower customer sales incentives.
Operating income decreased by $20.5 million, or 20.4%, primarily due to lower sales unit volume, material cost inflation, including tariff costs, higher transportation costs as well as higher restructuring and restructuring-related charges of $13.5 million, partially offset by manufacturing efficiencies.
Corporate
Corporate expenses increased by $33.9 million, or 21.8%, primarily due to higher restructuring and restructuring-related charges of $33.4 million, higher professional fees and higher lease expense, partially offset by reductions to incentive compensation
2024 Compared to 2023
Total Fortune Brands
Net sales
Net sales decreased by $17.2 million, or 0.4%, primarily due to lower sales in our international markets ($136.7 million), higher customer sales incentives and unfavorable foreign exchange ($6.9 million), partially offset by the benefit from the acquisitions of Wise Water Solutions, LLC, doing business as Springwell Water Filtration Systems (“SpringWell”) and the Acquired Businesses ($176.5 million).
Cost of products sold
Cost of products sold decreased by $172.1 million, or 6.3%, primarily due to raw material deflation, lower transportation costs and productivity improvements in all of our segments as a result of strategic sourcing initiatives and manufacturing efficiencies. These factors were partially offset by the impact of the acquisitions of SpringWell and the Acquired Businesses.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $70.7 million, or 6.1%, primarily due to the acquisitions of SpringWell and the Acquired Businesses, higher advertising and marketing costs, higher headcount-related costs and higher distribution expenses.
Amortization of intangible assets
Amortization of intangible assets increased by $11.0 million, primarily due to the acquisitions of SpringWell and the Acquired Businesses.
Restructuring charges
Restructuring charges of $16.2 million in 2024 are largely related to a product-line rationalization within our Outdoors segment, the closure of a manufacturing facility within our Security segment, and headcount actions across all segments. Restructuring charges of $32.5 million in 2023 are largely related to costs associated with the closure of the same manufacturing facility within our Security segment and headcount actions across all segments.
Operating income
Operating income increased by $123.0 million, or 20.0%, primarily due to the impacts of the acquisitions of SpringWell and the Acquired Businesses, raw material cost deflation, lower transportation costs, lower restructuring charges and productivity improvements in all of our segments as a result of strategic sourcing initiatives and manufacturing efficiencies as well as the absence of the 2023 asset impairment charges of $33.5 million. These factors were partially offset by increased intangible amortization expense as a result of the acquisitions of SpringWell and the Acquired Businesses ($11.4 million), higher customer sales incentives, higher advertising and marketing costs, higher headcount related costs and higher distribution expenses.
Interest expense
Interest expense increased by $4.0 million, or 3.4%, primarily due to higher floating rate debt borrowings in 2024 and higher fixed rate debt interest rates with the issuance of the $600 million outstanding principal amount of 5.875% Senior Notes due in June 2033 relative to the maturity and settlement of the $600 million outstanding principal amount of 4.000% Senior Notes due in September 2023.
Other (income) expense, net
Other (income) expense, net, was expense of $11.9 million in 2024, compared to income of $19.5 million in 2023. The decrease in other (income) expense, net is primarily due to higher net periodic benefit expense, a decrease in foreign currency transaction income and lower interest income.
Income taxes
The 2024 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, partially offset by favorable benefits related to a valuation allowance release and decreases in uncertain tax positions and tax credits.
The 2023 effective income tax rate was unfavorably impacted by state and local income taxes and foreign income taxed at higher rates. This expense was offset by favorable benefits for the release of uncertain tax positions due to statute of limitations lapses and federal tax credits.
Income from continuing operations, net of tax
Income from continuing operations, net of income taxes, increased by $66.4 million, or 16.4%, due to higher operating income, partly offset by higher interest expense, higher income tax expense and lower other income, net.
Results By Segment
Water
Net sales increased by $2.4 million, or 0.1%, primarily due to the benefit from the acquisitions of SpringWell and the Emtek and Schaub Business ($152.5 million), partially offset by lower organic sales volume (including sales volume declines within our China business of approximately $100.5 million), higher customer sales incentives and unfavorable foreign exchange ($6.0 million).
Operating income increased by $20.8 million, or 3.6%, primarily due to the benefit from the acquisitions of SpringWell and the Emtek and Schaub Business, productivity improvements as a result of strategic sourcing initiatives and manufacturing efficiencies, lower transportation costs and raw material cost deflation. These factors were partially offset by increased asset intangible amortization expense due to the impact of the acquisitions of SpringWell and the Emtek and Schaub Business ($11.1 million) and higher headcount related costs.
Outdoors
Net sales increased by $9.0 million, or 0.7%, primarily due to higher sales unit volume, partially offset by higher customer sales incentives and unfavorable channel mix.
Operating income increased by $64.5 million, or 48.3%, primarily due to the higher sales unit volume, raw material cost deflation and productivity improvements as a result of strategic sourcing initiatives and manufacturing efficiencies, partially offset by higher headcount related costs.
Security
Net sales decreased by $28.6 million, or 4.0%, primarily due to lower sales unit volume and higher customer sales incentives, partially offset by the benefit from the acquisition of the Yale and August Business (approximately $24.0 million).
Operating income increased by $38.0 million, or 60.9%, primarily due to lower restructuring charges, the benefit from the acquisition of the Yale and August Business, and productivity improvements as a result of strategic sourcing initiatives and manufacturing efficiencies, partially offset by the lower sales unit volume.
Corporate
Corporate expenses increased by $0.3 million, or 0.2%, primarily due higher headcount related costs and costs related to our digital transformation efforts being mostly offset by a gain on the sale of Corporate fixed assets and the absence in the current period of nonrecurring costs related to the acquisition of the Acquired Businesses.
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. We believe our cash on hand, operating cash flows, funds available under the credit facility and access to capital markets, provide sufficient liquidity to support the our working capital requirements, capital expenditures, other contractual commitments 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, both for the 12-month period following the 2025 fiscal year, and in the long-term.
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 June 2025, we repaid all $500 million in aggregate principal of our 4.000% senior unsecured notes issued in June 2015 at their maturity date using a combination of cash on hand and commercial paper borrowings.
In September 2023, we repaid all $600 million in aggregate principal of our 2023 4.000% senior unsecured notes at their maturity date in September 2023 using cash on hand.
In June 2023, we issued $600 million in aggregate principal 5.875% senior unsecured notes maturing in 2033 in a registered public offering. We used the net proceeds from the notes offering to redeem our 2023 4.000% senior unsecured notes that matured in September 2023 and for general corporate purposes.
At December 27, 2025, we had aggregate outstanding notes in the principal amount of $2.2 billion, with varying maturities (the “Notes”). The Notes are unsecured senior obligations of the Company. The following table provides a summary of our outstanding Notes, including the carrying value of the Notes, net of underwriting commissions, price discounts and debt issuance costs as of December 27, 2025 and December 28, 2024:
(in millions)
Net Carrying Value
Coupon Rate
Principal Amount
Issuance Date
Maturity Date
December 27, 2025
December 28, 2024
4.000% Senior Notes
June 2015
June 2025
3.250% Senior Notes
September 2019
September 2029
4.000% Senior Notes
March 2022
March 2032
4.500% Senior Notes
March 2022
March 2052
5.875% Senior Notes
June 2023
June 2033
Total Senior Notes
Commercial Paper
Total Debt
Less: current portion
Total long-term debt
Credit Facilities
In August 2022, we 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 the Secured Overnight Financing Rate (“SOFR”) at the time of the borrowing and our long-term credit rating and can range from SOFR + 1.02% to SOFR + 1.525%. Under the 2022 Revolving Credit Agreement, we are 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, our ratio of consolidated debt minus certain cash and cash equivalents to consolidated EBITDA generally may not exceed 3.5 to 1.0. There were no outstanding borrowings under this facility as of December 27, 2025 or December 28, 2024. As of December 27, 2025, we were in compliance with all covenants under this facility.
In January 2026, we entered into a fourth amended and restated $1.25 billion revolving credit facility (the “2026 Revolving Credit Agreement”). The 2026 Revolving Credit Agreement extends the 2022 Revolving Credit Agreement for a five-year term maturing in January 2031. Borrowings under the 2026 Revolving Credit Agreement will bear interest at variable rates equal to, at the Company’s election, the term SOFR rate applicable for an interest period selected by us. The applicable term SOFR rate margin will be determined based on the ratings of our senior unsecured long-term debt securities. The daily simple SOFR rate margins range from 0.80% to 1.30%. The required ratio of consolidated EBITDA to consolidated interest expense and
the ratio of consolidated debt minus certain cash and cash equivalents to consolidated EBITDA under the 2026 Revolving Credit Agreement remained unchanged from the 2022 Revolving Credit Agreement.
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 December 27, 2025 and December 28, 2024, of which there were no outstanding balances as of December 27, 2025 and December 28, 2024. The weighted-average interest rates on these borrowings were zero in 2025 and 2024.
Commercial Paper
We operate a commercial paper program (the “Commercial Paper Program”) pursuant to which we may issue unsecured commercial paper notes. Our 2022 Revolving Credit Agreement is the liquidity backstop for the repayment of any notes issued under the Commercial Paper Program, as amended, 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 2022 Revolving Credit Agreement, as amended, not to exceed $1.25 billion. We expect to use any issuances under the Commercial Paper Program for general corporate purposes. Outstanding borrowings under the Commercial Paper Program as of December 27, 2025 and December 28, 2024 were $368.8 million and zero, respectively.
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 27, 2025.
Cash and Seasonality
In 2025, we invested approximately $57 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 2026 to be in the range of $110 million to $140 million. As of December 27, 2025, we had cash and cash equivalents of $264.0 million, of which $234.9 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 and we typically use operating cash in the first quarter of the year. We believe that our current cash position, cash flow generated from operations, amounts available under our revolving credit facility and access to the capital markets should be sufficient for our operating requirements and enable us to fund our capital expenditures, share repurchases dividend payments, and required long-term debt payments.
Share Repurchases
In 2025, we repurchased 4.0 million shares of our outstanding common stock under our share repurchase programs for $247.8 million. As of December 27, 2025, our total remaining share repurchase authorization under the program was approximately $827.2 million. The share repurchase program does not obligate us to repurchase any specific dollar amount or number of shares and may be suspended or discontinued at any time. Shares may be repurchased on the open market, in privately negotiated transactions or otherwise (including pursuant to a Rule 10b5-1 trading plan, block trades and accelerated share repurchase transactions), in accordance with applicable securities laws.
Dividends
In 2025, we paid dividends in the amount of $120.6 million to our 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. Our subsidiaries are not limited by long-term debt or other agreements in
their abilities to pay cash dividends or to make other distributions with respect to their capital stock or other payments to us.
Acquisitions
We periodically review our portfolio of brands and evaluate potential strategic transactions and other capital initiatives to increase stockholder value.
On February 29, 2024, we acquired SpringWell for a purchase price of $105.6 million, 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 $85.2 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 Acquired Businesses from ASSA. We 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.
Cash Flows
Below is a summary of cash flows for years ended 2025, 2024, and 2023.
(In millions)
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Effect of foreign exchange rate changes on cash
Net decrease in cash, cash equivalents and restricted cash
Net cash provided by operating activities was $478.6 million in 2025, compared to $667.8 million in 2024. The $189.2 million decrease in net cash provided by operating activities from 2024 to 2025 was primarily due to lower net income in 2025, an increase in inventory balances and a decrease in accrued expenses and other liabilities compared to the prior period, partially offset by an increase in accounts payable.
The $388.0 million decrease in net cash provided by operating activities from 2023 to 2024 was primarily due to a decrease in the rate of reduction in inventory balances compared to the prior period as result of our 2023 initiative to decrease inventory balances to align with the U.S. home product market activity, as well as a decrease in accounts payable. The absence of the $84.2 million settlement of our interest rate swaps in 2023 and a decrease in accrued expenses and other liabilities also contributed to the decrease in cash provided by operating activities. The decrease in cash provided by operating activities was partially offset by higher net income in 2024.
Net cash used in investing activities was $104.9 million in 2025 compared to $302.9 million in 2024. The decrease in net cash used in investing activities of $198.0 million from 2024 to 2025 reflects the absence of acquisition-related outflows in 2025 and lower capital expenditures in 2025 as compared to 2024.The decrease in net cash used in investing activities of $734.9 million from 2023 to 2024 reflects the net cash paid for the acquisition of SpringWell for $105.6 million in 2024, as compared to the acquisition of the Acquired Businesses of $784.1 million in 2023, as well as a decrease in capital expenditures of $63.2 million.
Net cash used in financing activities was $503.3 million in 2025 compared to $363.4 million in 2024. The increase in net cash used in financing activities of $139.9 million was primarily due to higher net debt repayments in 2025 as compared to 2024 of $130.0 million and higher share repurchases in 2025 compared to 2024 of $7.4 million. The increase in net cash used in financing activities of $92.1 million from 2023 to 2024 was primarily due to higher share repurchases in 2024 as compared to 2023 of $90.4 million.
Pension Plans
During the fourth quarter of 2025, the Company entered into a buy-in annuity agreement with an insurance provider. The agreement features a buy-in of the plan assets with an option to elect a future buy-out conversion. As part of the buy-in, a majority of the assets of the Pension Plans were transferred to the insurance company in exchange for an annuity contract to further reduce the risk of plan asset value volatility. The Company retains the primary benefit obligation until the buy-out conversion is completed. Upon election of the buy-out conversion, we will transfer full responsibility of the obligations of the Pension Plans to the insurance company, at which time we will derecognize the assets and liabilities of the Pension Plans and realize a settlement loss as a component of net periodic pension cost.
During the fourth quarter of 2024, we entered into two agreements with an insurance company to purchase group annuity contracts and transferred $266.6 million of pension plan obligations and related assets of two of our defined benefit pension plans, the MasterLock Pension Plan and Moen Incorporated Pension Plan (collectively, the "Pension Plans" ). The partial plan settlements resulted in a loss of $19.0 million, which is included in Other (expense) income, net on the Consolidated Statements of Income. The agreements cover approximately 4,100 retirees and other beneficiaries (the "Transferred Participants"). All Transferred Participants continued to receive their benefits from the Pension Plans until January 1, 2025, at which time the insurance company began paying and administering the retirement benefits of the Transferred Participants. The transactions resulted in no changes to the amount of the benefits payable to the Transferred Participants.
Our subsidiaries 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. We made no pension contributions to our qualified pension plans in 2025 or 2024 and made a voluntary contribution of $4.0 million in 2023. We expect to make discretionary pension contributions of approximately $5 million to $12 million in 2026. As of December 27, 2025, the fair value of our total pension plan assets was $188.3 million, representing funding of about 95% of the accumulated qualified 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, Vietnam and France. 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 27, 2025. Purchase obligations were $456.1 million, of which $429.9 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 27, 2025 were $37.3 million in 2026, $41.2 million in 2027, $37.5 million in 2028, $31.8 million in 2029, $28.8 million in 2030 and $195.3 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, $21.1 million of unrecognized tax benefits as of December 27, 2025 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 27, 2025. Other corporate commercial
commitments include standby letters of credit of $18.6 million, in the aggregate, all of which expire in less than one year, and surety bonds of $42.3 million, the majority of which matures in less than two 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 27, 2025 are zero in 2026, $370 million in 2027, zero in 2028, $700 million in 2029, zero in 2030, and $1,500 million in 2031 and beyond. Interest payments due during the next five years as of December 27, 2025 are $96.3 million in 2026, $192.5 million in 2027 through 2028, $169.8 million in 2029 through 2030 and $550.5 million in 2031 and beyond.
Foreign Currency Risk
Certain anticipated transactions, assets and liabilities are exposed to foreign currency risk. Principal currencies that are usually hedged include the Canadian dollar, the Mexican peso, the British pound, Chinese yuan and the South African rand. 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 (losses) of $1.3 million, $(0.4) million and $5.2 million (before tax impact) were reclassified into earnings for 2025, 2024 and 2023, respectively. Based on foreign exchange rates as of December 27, 2025, we estimate that $11.3 million of net derivative gains included in accumulated other comprehensive income ("AOCI") as of December 27, 2025, will be reclassified to earnings within the next twelve months.
Recently Issued Accounting Standards
Refer to Note 2, “Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for discussion of recently issued accounting standards.
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 our 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 $89.9 million and $69.3 million as of December 27, 2025 and December 28, 2024, respectively.
Long-lived Assets
In accordance with ASC requirements for Property, plant and equipment, a long-lived asset (including amortizable identifiable intangible assets) or asset group held for use is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such events occur, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of a long-lived asset or asset group. The cash flows are based on our best estimate of future cash flows derived from the most recent business projections. If this comparison indicates that there is an impairment, the amount of the impairment is calculated based on fair value. Fair value is estimated primarily using discounted expected future cash flows on a market-participant basis.
In the third quarter of 2025, we determined that certain assets, with a carrying value of $166.7 million as of December 28, 2024, met the criteria to be classified as held-for-sale and ceased recording depreciation. Management's decision to dispose of the assets was made as a result of refocusing the business on areas with better growth and profitability potential, while utilizing additional capacity at existing manufacturing facilities. In the fourth quarter of 2025, we determined that assets, with a carrying value of $12.9 million as of December 28, 2024, met the criteria to be classified as held-for-sale and ceased recording depreciation. Management’s decision to dispose of the assets was made as a result of the decision to consolidate its U.S. regional offices into one campus headquarters. We concluded the carrying value of these assets exceeded their fair value, less estimated costs to sell, and recorded an impairment charge of $50.1 million within the Outdoors segment and $3.5 million within the Water segment. The estimated fair values were determined using a combination of market and income approaches, which were based on valuation assumptions including certain Level 3 inputs. These assumptions included estimated sublease rental income, discount rates, market sales data and other market participant assumptions. The assets were reclassified from Property, plant and equipment, net to Assets held for sale in our Consolidated Balance Sheets.
No material impairments related to long-lived assets were recorded in 2024 or 2023.
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 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, earnings before interest and taxes (EBIT) margins, percentage of revenue attributable to the tradename, contributory asset charges, customer attrition rate, market-participant discount rates, the assumed royalty rates and income tax 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. Our 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 . 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 . 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 and EBITDA multiples.
The assumptions used to estimate the fair values of the goodwill related to continuing operations tested quantitatively during the year ended December 27, 2025 were as follows:
Unobservable Input
Discount rate
Long-term revenue growth rates (a)
EBITDA multiple
Selected long-term revenue growth rate 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 1.0 in the EBITDA multiple assumption, during the year ended December 27, 2025 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 us 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. 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. See Note 5, "Goodwill and Intangible Assets," of the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information.
During the fourth quarter of 2023, a reduction in revenue growth expectations, which were finalized during our annual planning process, led us to conclude that it was more likely than not that two indefinite-lived tradenames within our Outdoors segment were impaired. As a result of the impairment tests performed, we recorded pre-tax impairment charges of $28.0 million and $5.5 million, respectively, related to the two indefinite-lived tradenames.
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, "Fair Value Measurements," of the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K ).
The assumptions used to estimate the fair values of the tradenames tested quantitatively during the year ended December 27, 2025 were as follows:
Unobservable Input
Minimum
Maximum
Weighted Average (a)
Discount rates
Royalty rates (b)
Long-term revenue growth rates (c)
Weighted by the relative fair value of the tradenames that were tested quantitatively.
Represents estimated percentage of sales a market-participant would pay to license the tradenames that were tested quantitatively.
Selected long-term revenue growth rate of the tradenames that were tested quantitatively.
For the indefinite-lived tradenames tested quantitatively in 2025, a 50 basis point change in the royalty rate assumption would result in an impairment of those tradenames of approximately $3.5 million; a 50 basis point change in the discount rate assumption would result in an impairment of approximately $2.1 million; and a 50 basis point change in the long-term revenue growth rate assumption would result in an impairment of approximately $1.8 million.
Defined Benefit Plans
We have a number of pension plans in the United States, covering certain employees. In addition, we provide postretirement health care and life insurance benefits to certain retirees. Service cost for 2025 relates to benefit accruals for an hourly Union group within the defined benefit plan for our 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 net actuarial gains or losses in other income, net to the extent they exceed 10 percent of the greater of the fair value of pension plan assets or projected benefit obligation for each plan (the “corridor”) in earnings immediately upon remeasurement, which is at least annually in the fourth quarter of each fiscal 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 . The pre-tax recognition of actuarial was $0.3 million and $18.2 million in 2025 and 2024, respectively. The total unrecognized net actuarial in accumulated other comprehensive income for all defined plans were $11.6 million as of December 27, 2025, compared to $12.3 million as of December 28, 2024.
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 27, 2025 and December 28, 2024 was 6.2% and 7.3%, respectively.
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 of Aa or higher. The weighted-average discount rate for defined benefit liabilities as of December 27, 2025 and December 28, 2024 was 4.9% and 5.7%, respectively.
For the postretirement benefits obligation, our health care trend rate assumption is based on historical cost increases and expectations for long-term increases. As of December 27, 2025, for postretirement medical and prescription drugs in the next year, our assumption was an assumed rate of increase of 6.9% for pre-65 retirees and 7.4% for post-65 retirees, declining until reaching an ultimate assumed rate of increase of 4.5% per year in 2035. As of December 28, 2024, for postretirement medical and prescription drugs in the next year, our assumption was an assumed rate of increase of 7.1% for pre-65 retirees and 7.5% for post-65 retirees, declining until reaching an ultimate assumed rate of increase of 4.5% per year in 2035.
Below is a table showing pre-tax pension and postretirement expenses, including the impact of actuarial gains and losses (which includes settlement losses):
(In millions)
Total pension cost
Actuarial loss component of cost above
Total postretirement cost (income)
Actuarial (gain) component of cost (income) above
Discount rates in 2025 used to determine benefit obligations decreased by an average of 80 basis points for pension benefits. Discount rates for 2025 postretirement benefits decreased by an average of 60 basis points . Discount rates in 2024 used to determine benefit obligations increased by an average of 70 basis points for pension benefits. Discount rates for 2024 postretirement benefits increased an average of 110 basis points. Our actual gain on plan assets in 2025 was 0.4% compared to an actuarial assumption of an average 6.2% expected return. Our actual gain on plan assets in 2024 was 0.3% compared to an actuarial assumption of an average 7.3% 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 $4 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 $0.1 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 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 Statements of Income and Consolidated Balance Sheets in the period in which such changes occur. As of December 27, 2025, we had liabilities for unrecognized tax benefits pertaining to uncertain tax positions totaling $21.1 million.
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 we 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).
Item 7A. Quantitative and Qualita tive Disclosures about Market Risk.
We are exposed to various market risks, including changes in interest rates, foreign currency exchange rates and commodity prices. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We enter into financial instruments to manage and reduce the impact of changes in foreign currency exchange rates and commodity prices. The counterparties are major financial institutions.
Interest Rate Risk
We had $368.8 million of external variable rate borrowings as of December 27, 2025. A hypothetical 100 basis point change in interest rates affecting our external variable rate borrowings as of December 27, 2025 would increase annual pre-tax interest expense by $3.7 million.
Foreign Exchange Rate Risk
We enter into forward foreign exchange contracts principally to hedge currency fluctuations in transactions denominated in certain foreign currencies, thereby limiting our risk that would otherwise result from changes in exchange rates. The periods of the forward foreign exchange contracts correspond to the periods of the hedged transactions.
The estimated fair value of foreign currency contracts represents the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices.
The estimated potential loss under foreign exchange contracts from movement in foreign exchange rates would not have a material impact on our results of operations, cash flows or financial condition. As part of our risk management procedure, we use a value-at-risk (“VAR”) sensitivity analysis model to estimate the maximum potential economic loss from adverse changes in foreign exchange rates over a one-day period given a 95% confidence level. The VAR model uses historical foreign exchange rates to estimate the volatility and correlation of these rates in future periods. The estimated maximum one-day loss in the fair value of our foreign currency exchange contracts using the VAR model was $1.7 million at December 27, 2025. The 95% confidence interval signifies our degree of confidence that actual losses under foreign exchange contracts would not exceed the estimated losses. The amounts disregard the possibility that foreign currency exchange rates could move in our favor. The VAR model assumes that all movements in the foreign exchange rates will be adverse. These amounts should not be considered projections of future , since actual results may differ significantly depending upon activity in the global financial markets. The VAR model is a risk analysis tool and should not be construed as an endorsement of the VAR model or the accuracy of the related assumptions.
Commodity Price Risk
We are subject to commodity price volatility caused by weather, supply conditions, geopolitical and economic variables, and other unpredictable external factors. From time to time, we use derivative contracts to manage our exposure to commodity price volatility.
