UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 27, 2022March 4, 2023
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 001-09225
H.B. FULLER COMPANY
(Exact name of registrant as specified in its charter)
Minnesota | 41-0268370 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
1200 Willow Lake Boulevard, St. Paul, Minnesota | 55110-5101 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (651) 236-5900
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, par value $1.00 per share | FUL | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☒ | Accelerated filer ☐ |
Non-accelerated filer ☐ | Smaller reporting company ☐ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b) of the Exchange Act. Yes ☐ No ☒
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PROCEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the Registrant’s Common Stock, par value $1.00 per share, was 53,312,94353,828,652 as of September 16, 2022.March 24, 2023.
Quarterly Report on Form 10-Q
Table of Contents
Page | ||
ITEM 1. | ||
Consolidated Balance Sheets as of | ||
ITEM 2. | MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
ITEM 3. | ||
ITEM 4. | ||
ITEM 1. | ||
ITEM 1A. | ||
ITEM 2. | ||
ITEM 6. | ||
Item 1. Financial Statements
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
August 27, | August 28, | August 27, | August 28, | March 4, | February 26, | |||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
Net revenue | $ | 941,230 | $ | 826,830 | $ | 2,790,969 | $ | 2,380,607 | $ | 809,183 | $ | 856,482 | ||||||||||||
Cost of sales | (692,066 | ) | (632,880 | ) | (2,075,392 | ) | (1,776,744 | ) | (594,374 | ) | (643,589 | ) | ||||||||||||
Gross profit | 249,164 | 193,950 | 715,577 | 603,863 | 214,809 | 212,893 | ||||||||||||||||||
Selling, general and administrative expenses | (161,210 | ) | (134,497 | ) | (483,109 | ) | (426,921 | ) | (154,542 | ) | (155,894 | ) | ||||||||||||
Other income, net | 6,559 | 6,150 | 12,701 | 25,899 | 2,604 | 6,142 | ||||||||||||||||||
Interest expense | (23,450 | ) | (19,396 | ) | (61,475 | ) | (59,699 | ) | (33,069 | ) | (18,196 | ) | ||||||||||||
Interest income | 2,139 | 2,520 | 6,170 | 7,709 | 667 | 1,940 | ||||||||||||||||||
Income before income taxes and income from equity method investments | 73,202 | 48,727 | 189,864 | 150,851 | 30,469 | 46,885 | ||||||||||||||||||
Income taxes | (28,259 | ) | (19,095 | ) | (62,023 | ) | (46,362 | ) | (9,733 | ) | (10,148 | ) | ||||||||||||
Income from equity method investments | 1,587 | 1,998 | 4,236 | 6,071 | 1,180 | 1,583 | ||||||||||||||||||
Net income including non-controlling interest | 46,530 | 31,630 | 132,077 | 110,560 | 21,916 | 38,320 | ||||||||||||||||||
Net income attributable to non-controlling interest | (33 | ) | (14 | ) | (70 | ) | (51 | ) | (27 | ) | (14 | ) | ||||||||||||
Net income attributable to H.B. Fuller | $ | 46,497 | $ | 31,616 | $ | 132,007 | $ | 110,509 | $ | 21,889 | $ | 38,306 | ||||||||||||
Earnings per share attributable to H.B. Fuller common stockholders: | ||||||||||||||||||||||||
Basic | $ | 0.87 | $ | 0.60 | $ | 2.47 | $ | 2.09 | $ | 0.40 | $ | 0.72 | ||||||||||||
Diluted | $ | 0.84 | $ | 0.58 | $ | 2.39 | $ | 2.04 | $ | 0.39 | $ | 0.69 | ||||||||||||
Weighted-average common shares outstanding: | ||||||||||||||||||||||||
Basic | 53,644 | 53,049 | 53,498 | 52,794 | 54,174 | 53,353 | ||||||||||||||||||
Diluted | 55,130 | 54,646 | 55,201 | 54,093 | 55,919 | 55,395 | ||||||||||||||||||
Dividends declared per common share | $ | 0.190 | $ | 0.168 | $ | 0.548 | $ | 0.498 | $ | 0.190 | $ | 0.168 |
See accompanying Notes to Unaudited Consolidated Financial Statements.
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
August 27, | August 28, | August 27, | August 28, | March 4, | February 26, | |||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
Net income including non-controlling interest | $ | 46,530 | $ | 31,630 | $ | 132,077 | $ | 110,560 | $ | 21,916 | $ | 38,320 | ||||||||||||
Other comprehensive (loss) income | ||||||||||||||||||||||||
Other comprehensive income | ||||||||||||||||||||||||
Foreign currency translation | (87,789 | ) | (32,006 | ) | (165,369 | ) | 46,655 | (3,636 | ) | 6,530 | ||||||||||||||
Defined benefit pension plans adjustment, net of tax | 684 | 1,375 | 3,976 | 4,121 | 851 | 489 | ||||||||||||||||||
Interest rate swaps, net of tax | 1,346 | 3,830 | 10,924 | 11,574 | 8,335 | 6,231 | ||||||||||||||||||
Cross-currency swaps, net of tax | (371 | ) | (1,289 | ) | (3,664 | ) | (3,576 | ) | - | (2,083 | ) | |||||||||||||
Other comprehensive (loss) income | (86,130 | ) | (28,090 | ) | (154,133 | ) | 58,774 | |||||||||||||||||
Comprehensive (loss) income | (39,600 | ) | 3,540 | (22,056 | ) | 169,334 | ||||||||||||||||||
Less: Comprehensive income (loss) attributable to non-controlling interest | (13 | ) | (13 | ) | 3 | 26 | ||||||||||||||||||
Comprehensive (loss) income attributable to H.B. Fuller | $ | (39,587 | ) | $ | 3,553 | $ | (22,059 | ) | $ | 169,308 | ||||||||||||||
Net investment hedges, net of tax | (299 | ) | - | |||||||||||||||||||||
Other comprehensive income | 5,251 | 11,167 | ||||||||||||||||||||||
Comprehensive income | 27,167 | 49,487 | ||||||||||||||||||||||
Less: Comprehensive income attributable to non-controlling interest | 37 | 4 | ||||||||||||||||||||||
Comprehensive income attributable to H.B. Fuller | $ | 27,130 | $ | 49,483 |
See accompanying Notes to Unaudited Consolidated Financial Statements.
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
August 27, | November 27, | March 4, | December 3, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 60,708 | $ | 61,786 | $ | 125,482 | $ | 79,910 | ||||||||
Trade receivables (net of allowances of $12,662 and $9,935, as of August 27, 2022 and November 27, 2021, respectively) | 649,727 | 614,645 | ||||||||||||||
Trade receivables (net of allowances of $11,121 and $10,939, as of March 4, 2023 and December 3, 2022, respectively) | 566,358 | 607,365 | ||||||||||||||
Inventories | 547,278 | 448,404 | 526,041 | 491,781 | ||||||||||||
Other current assets | 163,213 | 96,335 | 123,034 | 120,319 | ||||||||||||
Total current assets | 1,420,926 | 1,221,170 | 1,340,915 | 1,299,375 | ||||||||||||
Property, plant and equipment | 1,526,602 | 1,500,989 | 1,623,489 | 1,579,738 | ||||||||||||
Accumulated depreciation | (820,132 | ) | (805,622 | ) | (866,468 | ) | (846,071 | ) | ||||||||
Property, plant and equipment, net | 706,470 | 695,367 | 757,021 | 733,667 | ||||||||||||
Goodwill | 1,375,964 | 1,298,845 | 1,391,057 | 1,392,627 | ||||||||||||
Other intangibles, net | 707,690 | 687,075 | 697,104 | 702,092 | ||||||||||||
Other assets | 360,588 | 372,073 | 349,639 | 335,868 | ||||||||||||
Total assets | $ | 4,571,638 | $ | 4,274,530 | $ | 4,535,736 | $ | 4,463,629 | ||||||||
Liabilities, non-controlling interest and total equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Current liabilities | ||||||||||||||||
Notes payable | $ | 33,116 | $ | 24,983 | $ | 28,208 | $ | 28,860 | ||||||||
Trade payables | 485,479 | 500,321 | 450,203 | 460,669 | ||||||||||||
Accrued compensation | 88,744 | 109,542 | 51,920 | 108,328 | ||||||||||||
Income taxes payable | 42,792 | 15,943 | 16,348 | 18,530 | ||||||||||||
Other accrued expenses | 87,260 | 86,061 | 96,497 | 89,345 | ||||||||||||
Total current liabilities | 737,391 | 736,850 | 643,176 | 705,732 | ||||||||||||
Long-term debt | 1,885,041 | 1,591,479 | 1,845,281 | 1,736,256 | ||||||||||||
Accrued pension liabilities | 66,704 | 71,651 | 53,742 | 52,561 | ||||||||||||
Other liabilities | 303,817 | 277,190 | 359,410 | 358,286 | ||||||||||||
Total liabilities | 2,992,953 | 2,677,170 | $ | 2,901,609 | $ | 2,852,835 | ||||||||||
Commitments and contingencies (Note 12) | ||||||||||||||||
Commitments and contingencies (Note 13) | ||||||||||||||||
Equity: | ||||||||||||||||
Equity | ||||||||||||||||
H.B. Fuller stockholders' equity: | ||||||||||||||||
Preferred stock (no shares outstanding) shares authorized – 10,045,900 | - | - | - | - | ||||||||||||
Common stock, par value $1.00 per share, shares authorized – 160,000,000, shares outstanding – 53,298,831 and 52,777,753 as of August 27, 2022 and November 27, 2021, respectively | 53,299 | 52,778 | ||||||||||||||
Common stock, par value $1.00 per share, shares authorized – 160,000,000, shares outstanding – 53,818,698 and 53,676,576 as of March 4, 2023 and December 3, 2022, respectively | $ | 53,819 | $ | 53,677 | ||||||||||||
Additional paid-in capital | 245,826 | 213,637 | 272,820 | 266,491 | ||||||||||||
Retained earnings | 1,703,278 | 1,600,601 | 1,752,943 | 1,741,359 | ||||||||||||
Accumulated other comprehensive loss | (424,312 | ) | (270,247 | ) | (446,116 | ) | (451,357 | ) | ||||||||
Total H.B. Fuller stockholders' equity | 1,578,091 | 1,596,769 | 1,633,466 | 1,610,170 | ||||||||||||
Non-controlling interest | 594 | 591 | 661 | 624 | ||||||||||||
Total equity | 1,578,685 | 1,597,360 | 1,634,127 | 1,610,794 | ||||||||||||
Total liabilities, non-controlling interest and total equity | $ | 4,571,638 | $ | 4,274,530 | $ | 4,535,736 | $ | 4,463,629 |
See accompanying Notes to Unaudited Consolidated Financial Statements.
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Statements of Total Equity
(In thousands)
(Unaudited)
H.B. Fuller Company Shareholders | H.B. Fuller Company Shareholders | |||||||||||||||||||||||||||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Additional | Other | |||||||||||||||||||||||||||||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | Non-Controlling | Common | Paid-in | Retained | Comprehensive | Non-Controlling | |||||||||||||||||||||||||||||||||||||||
Stock | Capital | Earnings | Income (Loss) | Interest | Total | Stock | Capital | Earnings | Income (Loss) | Interest | Total | |||||||||||||||||||||||||||||||||||||
Balance at November 27, 2021 | $ | 52,778 | $ | 213,637 | $ | 1,600,601 | $ | (270,247 | ) | $ | 591 | $ | 1,597,360 | |||||||||||||||||||||||||||||||||||
Balance at December 3, 2022 | $ | 53,677 | $ | 266,491 | $ | 1,741,359 | $ | (451,357 | ) | $ | 624 | $ | 1,610,794 | |||||||||||||||||||||||||||||||||||
Comprehensive income | - | - | 38,306 | 11,177 | 4 | 49,487 | - | - | 21,889 | 5,241 | 37 | 27,167 | ||||||||||||||||||||||||||||||||||||
Dividends | - | - | (8,964 | ) | - | - | (8,964 | ) | - | - | (10,305 | ) | - | - | (10,305 | ) | ||||||||||||||||||||||||||||||||
Stock option exercises | 126 | 5,628 | - | - | - | 5,754 | 76 | 3,520 | - | - | - | 3,596 | ||||||||||||||||||||||||||||||||||||
Share-based compensation plans and other, net | 187 | 5,601 | - | - | - | 5,788 | 102 | 5,221 | - | - | - | 5,323 | ||||||||||||||||||||||||||||||||||||
Repurchases of common stock | (49 | ) | (3,528 | ) | - | - | - | (3,577 | ) | (36 | ) | (2,412 | ) | - | - | - | (2,448 | ) | ||||||||||||||||||||||||||||||
Balance at February 26, 2022 | $ | 53,042 | $ | 221,338 | $ | 1,629,943 | $ | (259,070 | ) | $ | 595 | $ | 1,645,848 | |||||||||||||||||||||||||||||||||||
Comprehensive income (loss) | - | - | 47,203 | (79,158 | ) | 12 | (31,943 | ) | ||||||||||||||||||||||||||||||||||||||||
Dividends | - | - | (10,177 | ) | - | - | (10,177 | ) | ||||||||||||||||||||||||||||||||||||||||
Stock option exercises | 47 | 2,036 | - | - | - | 2,083 | ||||||||||||||||||||||||||||||||||||||||||
Share-based compensation plans other, net | 65 | 8,910 | - | - | - | 8,975 | ||||||||||||||||||||||||||||||||||||||||||
Repurchases of common stock | (1 | ) | (31 | ) | - | - | - | (32 | ) | |||||||||||||||||||||||||||||||||||||||
Balance at May 28, 2022 | $ | 53,153 | $ | 232,253 | $ | 1,666,969 | $ | (338,228 | ) | $ | 607 | 1,614,754 | ||||||||||||||||||||||||||||||||||||
Comprehensive income (loss) | - | - | 46,497 | (86,084 | ) | (13 | ) | (39,600 | ) | |||||||||||||||||||||||||||||||||||||||
Dividends | - | - | (10,188 | ) | - | - | (10,188 | ) | ||||||||||||||||||||||||||||||||||||||||
Stock option exercises | 135 | 5,549 | - | - | - | 5,684 | ||||||||||||||||||||||||||||||||||||||||||
Share-based compensation plans other, net | 15 | 8,295 | - | - | - | 8,310 | ||||||||||||||||||||||||||||||||||||||||||
Repurchases of common stock | (4 | ) | (271 | ) | - | - | - | (275 | ) | |||||||||||||||||||||||||||||||||||||||
Balance at August 27, 2022 | $ | 53,299 | $ | 245,826 | $ | 1,703,278 | $ | (424,312 | ) | $ | 594 | 1,578,685 | ||||||||||||||||||||||||||||||||||||
Balance at March 4, 2023 | $ | 53,819 | $ | 272,820 | $ | 1,752,943 | $ | (446,116 | ) | $ | 661 | $ | 1,634,127 |
H.B. Fuller Company Shareholders | H.B. Fuller Company Shareholders | |||||||||||||||||||||||||||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Additional | Other | |||||||||||||||||||||||||||||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | Non-Controlling | Common | Paid-in | Retained | Comprehensive | Non-Controlling | |||||||||||||||||||||||||||||||||||||||
Stock | Capital | Earnings | Income (Loss) | Interest | Total | Stock | Capital | Earnings | Income (Loss) | Interest | Total | |||||||||||||||||||||||||||||||||||||
Balance at November 28, 2020 | $ | 51,907 | $ | 157,867 | $ | 1,474,406 | $ | (302,859 | ) | $ | 541 | $ | 1,381,862 | |||||||||||||||||||||||||||||||||||
Balance at November 27, 2021 | $ | 52,778 | $ | 213,637 | $ | 1,600,601 | $ | (270,247 | ) | $ | 591 | $ | 1,597,360 | |||||||||||||||||||||||||||||||||||
Comprehensive income | - | - | 29,791 | 27,656 | 5 | 57,452 | - | - | 38,306 | 11,177 | 4 | 49,487 | ||||||||||||||||||||||||||||||||||||
Dividends | - | - | (8,542 | ) | - | - | (8,542 | ) | - | - | (8,964 | ) | - | - | (8,964 | ) | ||||||||||||||||||||||||||||||||
Stock option exercises | 147 | 6,251 | - | - | - | 6,398 | 126 | 5,628 | - | - | - | 5,754 | ||||||||||||||||||||||||||||||||||||
Share-based compensation plans and other, net | 150 | 7,423 | - | - | - | 7,573 | 187 | 5,601 | - | - | - | 5,788 | ||||||||||||||||||||||||||||||||||||
Repurchases of common stock | (49 | ) | (2,531 | ) | - | - | - | (2,580 | ) | (49 | ) | (3,528 | ) | - | - | - | (3,577 | ) | ||||||||||||||||||||||||||||||
Balance at February 27, 2021 | $ | 52,155 | $ | 169,010 | $ | 1,495,655 | $ | (275,203 | ) | $ | 546 | $ | 1,442,163 | |||||||||||||||||||||||||||||||||||
Comprehensive income | - | - | 49,102 | 59,206 | 34 | 108,342 | ||||||||||||||||||||||||||||||||||||||||||
Dividends | - | - | (8,870 | ) | - | - | (8,870 | ) | ||||||||||||||||||||||||||||||||||||||||
Stock option exercises | 318 | 13,887 | - | - | - | 14,205 | ||||||||||||||||||||||||||||||||||||||||||
Share-based compensation plans other, net | 27 | 7,393 | - | - | - | 7,420 | ||||||||||||||||||||||||||||||||||||||||||
Repurchases of common stock | (1 | ) | (47 | ) | - | - | - | (48 | ) | |||||||||||||||||||||||||||||||||||||||
Balance at May 29, 2021 | $ | 52,499 | $ | 190,243 | $ | 1,535,887 | $ | (215,997 | ) | $ | 580 | $ | 1,563,212 | |||||||||||||||||||||||||||||||||||
Comprehensive income | - | - | 31,616 | (28,063 | ) | (13 | ) | 3,540 | ||||||||||||||||||||||||||||||||||||||||
Dividends | - | - | (8,884 | ) | - | - | (8,884 | ) | ||||||||||||||||||||||||||||||||||||||||
Stock option exercises | 49 | 1,401 | - | - | - | 1,450 | ||||||||||||||||||||||||||||||||||||||||||
Share-based compensation plans other, net | 3 | 8,575 | - | - | - | 8,578 | ||||||||||||||||||||||||||||||||||||||||||
Repurchases of common stock | (1 | ) | (39 | ) | - | - | - | (40 | ) | |||||||||||||||||||||||||||||||||||||||
Balance at August 28, 2021 | $ | 52,550 | $ | 200,180 | $ | 1,558,619 | $ | (244,060 | ) | $ | 567 | $ | 1,567,856 | |||||||||||||||||||||||||||||||||||
Balance at February 26, 2022 | $ | 53,042 | $ | 221,338 | $ | 1,629,943 | $ | (259,070 | ) | $ | 595 | $ | 1,645,848 |
See accompanying Notes to Unaudited Consolidated Financial Statements.
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended | Three Months Ended | |||||||||||||||
August 27, 2022 | August 28, 2021 | March 4, 2023 | February 26, 2022 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income including non-controlling interest | $ | 132,077 | $ | 110,560 | $ | 21,916 | $ | 38,320 | ||||||||
Adjustments to reconcile net income including non-controlling interest to net cash (used in) provided by operating activities: | ||||||||||||||||
Depreciation | 54,297 | 54,158 | 19,248 | 18,163 | ||||||||||||
Amortization | 55,088 | 53,464 | 18,683 | 17,792 | ||||||||||||
Deferred income taxes | (4,968 | ) | (1,547 | ) | (5,746 | ) | (6,020 | ) | ||||||||
Income from equity method investments, net of dividends received | 1,420 | 4,363 | (1,180 | ) | (1,583 | ) | ||||||||||
Loss (gain) on sale or disposal of assets | (1,130 | ) | 641 | |||||||||||||
Debt issuance costs write-off | 2,689 | - | ||||||||||||||
Loss on mark to market adjustment on contingent consideration liability | 139 | - | ||||||||||||||
Gain on sale or disposal of assets | (4 | ) | (13 | ) | ||||||||||||
Share-based compensation | 20,358 | 19,400 | 4,527 | 5,091 | ||||||||||||
Pension and other post-retirement benefit plan activity | (15,324 | ) | (23,192 | ) | (3,476 | ) | (5,361 | ) | ||||||||
Change in assets and liabilities, net of effects of acquisitions: | ||||||||||||||||
Trade receivables, net | (51,629 | ) | (61,900 | ) | 55,407 | 13,283 | ||||||||||
Inventories | (112,390 | ) | (141,112 | ) | (33,800 | ) | (87,419 | ) | ||||||||
Other assets | (40,329 | ) | (26,060 | ) | (28,947 | ) | (3,195 | ) | ||||||||
Trade payables | 17,381 | 176,210 | 8,996 | 46,464 | ||||||||||||
Accrued compensation | (17,275 | ) | (1,283 | ) | (57,000 | ) | (44,066 | ) | ||||||||
Other accrued expenses | 1,614 | (2,292 | ) | (6,414 | ) | (6,839 | ) | |||||||||
Income taxes payable | 10,201 | 1,001 | (2,235 | ) | 6,698 | |||||||||||
Other liabilities | (35,940 | ) | (53,498 | ) | (3,085 | ) | (8,810 | ) | ||||||||
Other | 35,246 | 52,221 | 15,827 | (178 | ) | |||||||||||
Net cash provided by operating activities | 48,697 | 161,134 | ||||||||||||||
Net cash provided by (used in) operating activities | 5,545 | (17,673 | ) | |||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchased property, plant and equipment | (98,352 | ) | (77,237 | ) | (47,604 | ) | (48,883 | ) | ||||||||
Purchased businesses, net of cash acquired | (242,870 | ) | (5,445 | ) | (16,723 | ) | (229,314 | ) | ||||||||
Proceeds from sale of property, plant and equipment | 1,281 | 2,751 | 611 | 22 | ||||||||||||
Cash received from government grant | 3,928 | 5,800 | - | 3,928 | ||||||||||||
Cash payments related to government grant | - | (1,526 | ) | |||||||||||||
Net cash used in investing activities | (336,013 | ) | (75,657 | ) | (63,716 | ) | (274,247 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from debt | 335,000 | - | ||||||||||||||
Proceeds from issuance of long-term debt | 1,300,000 | 307,500 | ||||||||||||||
Repayment of long-term debt | (15,000 | ) | (118,000 | ) | (1,176,650 | ) | - | |||||||||
Payment of debt issuance costs | (600 | ) | - | (10,214 | ) | (400 | ) | |||||||||
Net proceeds of notes payable | 6,707 | 9,846 | ||||||||||||||
Net payment of notes payable | (881 | ) | (7,604 | ) | ||||||||||||
Dividends paid | (29,067 | ) | (26,045 | ) | (10,222 | ) | (8,881 | ) | ||||||||
Contingent consideration payment | (5,000 | ) | - | - | (5,000 | ) | ||||||||||
Proceeds from stock options exercised | 13,522 | 22,053 | 3,595 | 5,754 | ||||||||||||
Repurchases of common stock | (3,885 | ) | (2,668 | ) | (2,448 | ) | (3,577 | ) | ||||||||
Net cash provided by (used in) financing activities | 301,677 | (114,814 | ) | |||||||||||||
Net cash provided by financing activities | 103,180 | 287,792 | ||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (15,439 | ) | (3,063 | ) | 563 | 5,853 | ||||||||||
Net change in cash and cash equivalents | (1,078 | ) | (32,400 | ) | 45,572 | 1,725 | ||||||||||
Cash and cash equivalents at beginning of period | 61,786 | 100,534 | 79,910 | 61,786 | ||||||||||||
Cash and cash equivalents at end of period | $ | 60,708 | $ | 68,134 | $ | 125,482 | $ | 63,511 |
See accompanying Notes to Unaudited Consolidated Financial Statements.
H.B. FULLER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
(Unaudited)
Note 1: Basis of Presentation
Overview
The accompanying unaudited interim Consolidated Financial Statements of H.B. Fuller Company and Subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of results of operations, comprehensive income, financial position and cash flows in conformity with U.S. generally accepted accounting principles. In our opinion, the unaudited interim Consolidated Financial Statements reflect all adjustments of a normal recurring nature considered necessary for the fair presentation of the results for the periods presented. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates. These unaudited interim Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended November 27, 2021December 3, 2022 as filed with the Securities and Exchange Commission.
New Accounting Pronouncements
In November 2021,September 2022, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU No. 20212022-10,04, Government Assistance (TopicLiabilities - Supplier Finance Programs (Subtopic 832405-50): Disclosures by Business Entities about Government AssistanceDisclosure of Supplier Finance Program Obligations.. This ASU requires business entitiesthat a buyer in a supplier finance program disclose sufficient information about the program to make annual disclosuresallow a user of the financial statements to understand the program's nature, activity during the period, changes from period to period, and potential magnitude. To achieve that objective, the buyer should disclose qualitative and quantitative information about transactions with a government they account for by analogizing to a grant or contribution accounting model under ASC 958-605.its supplier finance programs. Our effective date for adoption of this ASU is our fiscal year beginningending December 4, 20221, 2024. with early adoption permitted. We have evaluatedare evaluating the effect that this guidance will have on our Consolidated Financial Statements and determined it willStatements.
Recently issued accounting standards or pronouncements not disclosed above have been excluded as they are not have a material impact.relevant to the company.
Note 2: Acquisitions
Aspen Research Corporation
On January 31, 2023, we acquired the assets of Aspen Research Corporation (“Aspen”) for a total purchase price of $9,850, which was funded through existing cash. This includes a holdback amount of $500 that will be paid on the 18-month anniversary of the closing date. Aspen, located in Maple Grove, Minnesota, is a contract research organization that develops and manufactures innovative solutions for some of the adhesives used in our insulating glass market. Aspen is known for their superior understanding of materials science, engineering and analytical testing and specializes in custom materials manufacturing for chemicals and adhesives products. The acquisition of Aspen is expected to expand our Engineering Adhesives footprint in North America and strengthen our capabilities in the insulating glass market, in addition to bringing additive continuous flow, process manufacturing capabilities that we plan to leverage. The acquisition fair value measurement was preliminary as of March 4, 2023 and includes intangible assets of $7,902 and other net assets of $1,948. Aspen is included in our Engineering Adhesives operating segment.
Lemtapes Oy
On December 15, 2022, we acquired Lemtapes Oy (“Lemtapes”) for a total purchase price of 7,997 Euro, or approximately $8,498, which was funded through existing cash. This includes a holdback amount of 850 Euro that will be paid on the 18-month anniversary of the closing date. Lemtapes, located in Valkeakoski, Finland, is a solutions provider of ecological, innovative tapes and adhesives for the packaging and plywood industries. The acquisition of Lemtapes is expected to reinforce our strategic position in Europe, especially for our Adhesives Coated Solutions products. This acquisition will also accelerate our growth strategy of fast-growing, high margin businesses while adding technology capabilities and strong customer relationships. The acquisition fair value measurement was preliminary as of March 4, 2023 and includes intangible assets of $6,834 and other net assets of $1,664. Lemtapes is included in our Hygiene, Health and Consumable Adhesives operating segment.
GSSI Sealants
On October 24, 2022, we acquired GSSI Sealants, Inc. ("GSSI") for a total purchase price of $7,483, which was funded through existing cash. This includes a holdback amount of $1,050 that will be paid on the 12-month anniversary of the closing date. GSSI, headquartered in Houston, Texas, is a manufacturer of premier elastomeric butyl rubber sealant tapes. The acquisition of GSSI is expected to support our strategy to expand our Construction Adhesives business selectively via high margin applications and expand our reach to new regions. The acquisition fair value measurement was preliminary as of March 4, 2023 and includes intangible assets of $4,305 and other net assets of $3,178. GSSI is included in our Construction Adhesives operating segment.
ZKLT Polymer Co.
On August 16, 2022, we acquired ZKLT Polymer Co., Ltd. ("ZKLT") for a base purchase price of 102,812 Chinese renminbi, or approximately $15,183, which was funded through existing cash. We are also required to pay 27,000 Chinese renminbi, or approximately $3,987, with half to be paid on each of the 12 month-month and 18 month-month anniversaries of the closing date, as well as contingent consideration up to 30,000 Chinese renminbi, or approximately $4,430, following the completion of certain performance goals and conditions. ZKLT, headquartered in Chongquin City, China, is a manufacturer of liquid adhesives primarily for the automotive market. The acquisition of ZKLT is expected to add market knowledge,unique technology, strong customer relationships and a strategic manufacturing location to further strengthen our presence in Southwest China. The acquisition fair value measurement was preliminary as of August 27, March 4,2022 and includes intangible assets of $3,042,$5,316, goodwill of $8,175 $3,786 and other net assetsassets of $7,953. $10,068. Goodwill is not deductible for tax purposes. See Note 1112 for further discussion of the fair value of the contingent consideration. ZKLT will beis included in our EngineeringEngineering Adhesives operating segment. The ZKLT acquisition does not represent a material business combination, and therefore pro forma financial information is not provided.
Apollo
On January 26, 2022, we acquired Apollo Chemicals Limited, Apollo Roofing Solutions Limited and Apollo Construction Solutions Limited (collectively, "Apollo") for a basetotal purchase price of 151,214152,714 British pound sterling, or approximately $203,573,$205,592, which was funded through borrowings on our credit facility. The agreement requires us to pay an additional 1,500 British pound sterling, or approximately $2,019, following the completion of certain environmental studies. As of August 27, 2022, the environmental studies were complete and the $2,019 was paid. Apollo, headquartered in Tamworth, UK, is a manufacturer of liquid adhesives, coatings and primers for the roofing, industrial and construction markets. Apollo is expected to enhance our position in key high-value, high-margin markets in the UK and throughout Europe. The acquisition fair value measurement was preliminaryfinal as of August 27, 2022.December 3, 2022 and includes intangible assets of $76,198, goodwill of $119,358 and other net assets of $10,036. Goodwill is not deductible for tax purposes. The acquisition will beis included in our Construction Adhesives operating segment.
The following table summarizes the preliminary fair value measurement of the assets acquired and liabilities assumed as of the date of acquisition:
February 26, 2022 | Adjustments | August 27, 2022 | ||||||||||
Cash | $ | 12,165 | - | $ | 12,165 | |||||||
Current assets | 17,283 | (51 | ) | 17,232 | ||||||||
Property, plant and equipment | 7,877 | - | 7,877 | |||||||||
Goodwill | 104,885 | 13,410 | 118,295 | |||||||||
Other intangibles | ||||||||||||
Customer relationships | 82,256 | (14,809 | ) | 67,447 | ||||||||
Trademarks/trade names | 2,154 | 135 | 2,289 | |||||||||
Technology | 9,558 | (3,096 | ) | 6,462 | ||||||||
Other assets | 1,590 | - | 1,590 | |||||||||
Current liabilities | (8,293 | ) | (41 | ) | (8,334 | ) | ||||||
Other liabilities | (23,883 | ) | 4,452 | (19,431 | ) | |||||||
Total | $ | 205,592 | $ | - | $ | 205,592 |
The expected useful lives of the acquired intangible assets are 15 years for technology, 10 years for customer relationships and five years for trademarks/trade names.
Based on the fair value measurement of the assets acquired and liabilities assumed, we allocated $118,295 to goodwill for the expected synergies from combining Apollo with our existing business. Such goodwill is not deductible for tax purposes. The goodwill was assigned to our Construction Adhesives operating segment. The Apollo acquisition does not represent a material business combination, and therefore pro forma financial information is not provided.
Fourny NV
On January 11, 2022, we acquired Fourny NV ("Fourny") for a base purchase price of 12,867 Euro, or approximately $14,627, which was funded through existing cash. The agreement requires us to pay an additional 3,100 Euro, or approximately $3,524, 18 months following the date of acquisition. Fourny, headquartered in Willebroek, Belgium, is a manufacturer of construction and automotive adhesives.adhesives. Fourny is expected to enhance our position in key high-value, high-margin markets in Europe. The acquisition fair value measurement was preliminaryfinal as of August 27,December 3, 2022 and includes intangible assets of $10,117, goodwill of $6,617, cash of $75$6,455 and other net assets of $1,342.$1,391. Goodwill is not deductibledeductible for tax purposes. Fourny is recordedincluded in our Construction Adhesives operating segment. The Fourny acquisition does
Tissue Seal, LLC
On November 30, 2021, we acquired certain assets of Tissue Seal, LLC ("TissueSeal") for a base purchase price of $22,167, which was funded through existing cash. The agreement requires us to pay an additional $2,475 on the first anniversary of the acquisition and contingent consideration of up to $500 on November 30, 2024 based on certain agreement provisions. TissueSeal, headquartered in Ann Arbor, Michigan, is a distributor of topical tissue adhesives and sutures. With this acquisition, we add TissueSeal's regulatory clearances, customer and distribution relationships, regulatory approvals and trademarks into our portfolio of products. The acquisition fair value measurement was preliminary as of August 27, 2022 and includes intangible assets of $11,160, goodwill of $13,765 and other net assets of $217. Goodwill is deductible for tax purposes. See Note 11 for further discussion of the fair value of the contingent consideration liability. TissueSeal is recorded in our Hygiene, Health and Consumable Adhesives operating segment. The TissueSeal acquisition does not represent a material business combination, and therefore pro forma financial information is not provided.
STR Holdings, Inc.
On January 13, 2021, we acquired certain assets of STR Holding, Inc. ("STR") for a base purchase price of $5,445 which was funded through existing cash. The agreement required us to pay an additional $800 on the first anniversary of the acquisition and contingent consideration of up to $1,700 based on certain agreement provisions. STR, headquartered in Enfield, Connecticut, is a manufacturer of encapsulant products used in the solar industry. The acquisition fair value measurement, which includes intangible assets of $6,700 and other net assets of $1,245, was final as of November 27, 2021. The agreement provisions for the contingent consideration were met, and as a result, $1,700 was paid as of November 27, 2021. No goodwill was recorded for this acquisition. STR is reported in our Engineering Adhesives operating segment. The STR acquisition does not represent a material business combination, and therefore pro forma financial information is not provided.
D.H.M. Adhesives, Inc.
On February 3, 2020, we acquired certain assets of D.H.M. Adhesives, Inc. (“D.H.M.”) for approximately $9,500 which was funded through existing cash. In addition, the agreement required us to pay contingent consideration of up to approximately $8,100 based upon a formula related to revenue during the fiscal years ended November 27, 2021 and December 3, 2022. D.H.M., headquartered in Calhoun, Georgia, is a provider of hotmelt adhesives. The acquisition fair value measurement was final as of May 30, 2020 and includes goodwill of $1,063 and customer relationship intangible of $11,900. The fair value of the contingent consideration as of the date of acquisition was $5,000 resulting in a final purchase price of $14,500. As of November 27, 2021, the agreement provisions for the contingent consideration were met, and as a result, $8,100 was paid during the period ended February 26, 2022. Goodwill is deductible for tax purposes. D.H.M. and the related goodwill are reported in our Hygiene, Health and Consumable Adhesives operating segment. The D.H.M acquisition does not represent a material business combination, and therefore pro forma financial information is not provided.
Note 3: Restructuring Actions
The Company has approved restructuring plans consisting of consolidation plans, organizational changes and other actions related to the reorganization of our business into three segments, the integration of the operations of Royal Adhesives with the operations of the Company and other actions to optimize operations. The following table summarizes the pre-tax distribution of charges under these restructuring plans by income statement classification:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
August 27, 2022 | August 28, 2021 | August 27, 2022 | August 28, 2021 | March 4, 2023 | February 26, 2022 | |||||||||||||||||||
Cost of sales | $ | - | $ | (5 | ) | $ | (152 | ) | $ | 288 | $ | 2,301 | $ | (152 | ) | |||||||||
Selling, general and administrative | (222 | ) | (187 | ) | (297 | ) | 1,159 | 625 | (89 | ) | ||||||||||||||
$ | (222 | ) | $ | (192 | ) | $ | (449 | ) | $ | 1,447 | $ | 2,926 | $ | (241 | ) |
The restructuring charges are all recorded in Corporate Unallocated for segment reporting.reporting purposes.
A summary of the restructuring liability is presented below:
Employee-Related | Other | Total | Employee-Related | |||||||||||||
Balance at November 28, 2020 | $ | 5,834 | $ | 248 | $ | 6,082 | ||||||||||
Expenses incurred | (807 | ) | 1,594 | 787 | ||||||||||||
Non-cash charges | - | (135 | ) | (135 | ) | |||||||||||
Cash payments | (3,917 | ) | (1,707 | ) | (5,624 | ) | ||||||||||
Foreign currency translation | (15 | ) | - | (15 | ) | |||||||||||
Balance at November 27, 2021 | 1,095 | - | 1,095 | $ | 1,095 | |||||||||||
Expenses incurred | (449 | ) | - | (449 | ) | (449 | ) | |||||||||
Cash payments | (529 | ) | - | (529 | ) | (529 | ) | |||||||||
Foreign currency translation | (47 | ) | - | (47 | ) | (60 | ) | |||||||||
Balance at August 27, 2022 | $ | 70 | $ | - | $ | 70 | ||||||||||
Balance at December 3, 2022 | $ | 57 | ||||||||||||||
Expenses incurred | 2,926 | |||||||||||||||
Cash payments | (110 | ) | ||||||||||||||
Foreign currency translation | (8 | ) | ||||||||||||||
Balance at March 4, 2023 | $ | 2,865 |
Non-cash charges include accelerated depreciation resulting from the cessation of use of certain long-lived assets. Restructuring liabilities have been classified as a component of other accrued expenses inon the Consolidated Balance Sheets.
Note 4: Inventories
The composition of inventories is as follows:
August 27, | November 27, | March 4, | December 3, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Raw materials | $ | 264,779 | $ | 226,723 | $ | 251,027 | $ | 237,071 | ||||||||
Finished goods | 282,499 | 221,681 | 275,014 | 254,710 | ||||||||||||
Total inventories | $ | 547,278 | $ | 448,404 | $ | 526,041 | $ | 491,781 |
Note 5: Goodwill and Other Intangible Assets
The goodwill activity by reportable segment for the ninethree months ended August 27, 2022March 4, 2023 is presented below:
Hygiene, Health | ||||||||||||||||
and Consumable | Engineering | Construction | ||||||||||||||
Adhesives | Adhesives | Adhesives | Total | |||||||||||||
Balance at November 27, 2021 | $ | 325,470 | $ | 662,021 | $ | 311,354 | $ | 1,298,845 | ||||||||
TissueSeal acquisition | 13,765 | - | - | 13,765 | ||||||||||||
Fourny acquisition | - | - | 6,617 | 6,617 | ||||||||||||
Apollo acquisition | - | - | 118,295 | 118,295 | ||||||||||||
ZKLT acquisition | - | 8,175 | - | 8,175 | ||||||||||||
Foreign currency translation effect | (17,100 | ) | (36,536 | ) | (16,097 | ) | (69,733 | ) | ||||||||
Balance at August 27, 2022 | $ | 322,135 | $ | 633,660 | $ | 420,169 | $ | 1,375,964 |
Hygiene, Health | ||||||||||||||||
and Consumable | Engineering | Construction | ||||||||||||||
Adhesives | Adhesives | Adhesives | Total | |||||||||||||
Balance at December 3, 2022 | $ | 328,962 | $ | 637,910 | $ | 425,755 | $ | 1,392,627 | ||||||||
Foreign currency translation effect | (104 | ) | 789 | (2,255 | ) | (1,570 | ) | |||||||||
Balance at March 4, 2023 | $ | 328,858 | $ | 638,699 | $ | 423,500 | $ | 1,391,057 |
Balances of amortizable identifiable intangible assets, excluding goodwill and other non-amortizable intangible assets, are as follows:
August 27, 2022 | March 4, 2023 | |||||||||||||||||||||||||||||||||||||||
Purchased | Purchased | |||||||||||||||||||||||||||||||||||||||
Technology | Customer | Technology | Customer | |||||||||||||||||||||||||||||||||||||
Amortizable Intangible Assets | and Patents | Relationships | Trade Names | Other | Total | and Patents | Relationships | Trade Names | Other | Total | ||||||||||||||||||||||||||||||
Original cost | $ | 117,440 | $ | 991,789 | $ | 49,379 | $ | 11,004 | $ | 1,169,612 | $ | 102,261 | $ | 1,012,402 | $ | 47,964 | $ | 11,000 | $ | 1,173,627 | ||||||||||||||||||||
Accumulated amortization | (63,926 | ) | (372,198 | ) | (20,252 | ) | (5,980 | ) | (462,356 | ) | (51,875 | ) | (398,847 | ) | (19,834 | ) | (6,429 | ) | (476,985 | ) | ||||||||||||||||||||
Net identifiable intangibles | $ | 53,514 | $ | 619,591 | $ | 29,127 | $ | 5,024 | $ | 707,256 | $ | 50,386 | $ | 613,555 | $ | 28,130 | $ | 4,571 | $ | 696,642 |
November 27, 2021 | December 3, 2022 | |||||||||||||||||||||||||||||||||||||||
Purchased | Purchased | |||||||||||||||||||||||||||||||||||||||
Technology | Customer | �� | Technology | Customer | ||||||||||||||||||||||||||||||||||||
Amortizable Intangible Assets | and Patents | Relationships | Trade Names | Other | Total | and Patents | Relationships | Trade Names | Other | Total | ||||||||||||||||||||||||||||||
Original cost | $ | 115,980 | $ | 932,644 | $ | 63,543 | $ | 11,343 | $ | 1,123,510 | $ | 118,727 | $ | 1,004,008 | $ | 50,324 | $ | 11,053 | $ | 1,184,112 | ||||||||||||||||||||
Accumulated amortization | (62,364 | ) | (335,143 | ) | (33,786 | ) | (5,635 | ) | (436,928 | ) | (66,433 | ) | (388,394 | ) | (21,401 | ) | (6,251 | ) | (482,479 | ) | ||||||||||||||||||||
Net identifiable intangibles | $ | 53,616 | $ | 597,501 | $ | 29,757 | $ | 5,708 | $ | 686,582 | $ | 52,294 | $ | 615,614 | $ | 28,923 | $ | 4,802 | $ | 701,633 |
Amortization expense with respect to amortizable intangible assets was $18,676$18,683 and $17,815$17,792 for the three months ended August 27, 2022March 4, 2023 and August 28, 2021, respectively, and $55,088 and $53,464 for the nine months ended August 27,February 26, 2022and August 28, 2021, respectively.
Estimated aggregate amortization expense based on the current carrying value of amortizable intangible assets for the next five fiscal years is as follows:
Remainder | Remainder | |||||||||||||||||||||||||||||||||||||||||||||||
Fiscal Year | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | ||||||||||||||||||||||||||||||||||||
Amortization expense | $ | 31,804 | $ | 67,995 | $ | 64,095 | $ | 61,948 | $ | 55,709 | $ | 425,705 | $ | 68,839 | $ | 68,621 | $ | 66,519 | $ | 60,323 | $ | 57,355 | $ | 374,985 |
Non-amortizable intangible assets as of August 27, 2022March 4, 2023 and November 27, 2021December 3, 2022 are $434were $462 and $493,$459, respectively, and are relatedrelate to trademarks and trade names. The change in non-amortizable assets as of August 27, 2022March 4, 2023 compared to November 27, 2021December 3, 2022 was due to changes in foreign currency exchange rates.
Note 6: Long-Term Debt
On February 15, 2023, we entered into a credit agreement with a consortium of financial institutions (“Second Amended and Restated Credit Agreement”) which replaces our existing revolving credit agreement under the amended and restated revolving credit agreement dated October 20, 2020 and also replaces our secured term loan credit agreement dated October 20, 2017. The Second Amended and Restated Credit Agreement provides for a new senior secured term loan A facility in an aggregate principal amount of $500,000 (“Term Loan A”), a new senior secured term loan B facility in an aggregate principal amount of $800,000 (“Term Loan B”) and amendments to and extension of our existing senior secured revolving credit facility with an aggregate commitment in the amount of $700,000 (“Revolving Credit Facility”). A portion of the proceeds of the combined facilities, (the “Credit Facilities”) was used to pay off the existing term loan and revolver. The Credit Facilities will generally be used to finance working capital needs and acquisitions, and for general corporate purposes. All of our obligations under the Credit Facilities will be secured by a first-lien security interest in substantially all personal property and material real property of the Company and its material U.S. subsidiaries, and will be guaranteed by all of the Company’s material U.S. subsidiaries.
Term Loans
Interest on Term Loan A is payable at the Secured Overnight Financing Rate ("SOFR") plus an adjustment of 0.10 percent and an interest rate spread of 1.75 percent (6.47 percent at March 4, 2023). The interest rate spread is based on a secured leverage grid. Term Loan A matures on February 15, 2028. Interest on Term Loan B is payable at SOFR plus an interest rate spread of 2.50 percent with a SOFR floor of 0.50 percent (7.12 percent at March 4, 2023). Term Loan B matures on February 15, 2030.
On January 12, 2023, we entered into an interest rate swap agreement to convert $400,000 of our variable rate 1-month LIBOR rate debt to a fixed rate of 3.6895 percent. On February 28, 2023, after entering into the Second Amended and Restated Credit Agreement, we amended the interest rate swap agreement to 1-month SOFR and a fixed rate of 3.7260 in accordance with the practical expedients included in ASC 848,Reference Rate Reform. See Note 12 for further discussion of this interest rate swap.
Revolving Credit Facility
Interest on the Revolving Credit Facility is payable at SOFR plus an adjustment of 0.10 percent and an interest rate spread of 1.75 percent (6.47 percent at March 4, 2023). A facility fee of 25 basis points of the unused commitment under the Revolving Credit Facility is payable quarterly. The interest rate spread and the facility fee are based on a secured leverage grid. At March 4, 2023, there was no balance outstanding on the Revolving Credit Facility. The Revolving Credit Facility matures on February 15, 2028.
The Revolving Credit Facility can be drawn upon for general corporate purposes up to a maximum of $700,000, less issued letters of credit. At March 4, 2023, letters of credit reduced the available amount under the Revolving Credit Facility by $9,864.
Covenants and Other
Under the Second Amended and Restated Credit Agreement, the Revolving Credit Facility and Term Loan A are subject to certain covenants and restrictions. For these facilities, we are required to maintain a secured leverage ratio, as defined in the agreement, no greater than 4.75 to 1.00 for our fiscal quarters ending on or prior to June 1, 2024 and then 4.50 to 1.00 thereafter. We are also required to maintain an interest coverage ratio of not less than 2.00 to 1.00.
Restrictive covenants include, but are not limited to, limitations on secured and unsecured borrowings, interest coverage, intercompany transfers and investments, third party investments, dispositions of assets, leases, liens, dividends and distributions, and contains a maximum total debt to trailing twelve months EBITDA requirement. Certain covenants become less restrictive after meeting leverage or other financial ratios. In addition, we cannot be a member of any consolidated group as defined for income tax purposes other than with our subsidiaries. The terms of the Second Amended and Restated Credit Agreement do not require the financial covenants to be measured until the fiscal quarter ending June 3, 2023.
We are subject to mandatory prepayments in the first quarter of each fiscal year equal to 50% of Excess Cash Flow, as defined in the Second Amended and Restated Credit Agreement, of the prior fiscal year less any voluntary prepayments made during that fiscal year. The Excess Cash Flow Percentage shall be reduced to 25 percent when our Secured Leverage Ratio is below 4.25:1.00 and to 0 percent when our Secured Leverage Ratio is below 3.75:1.00.
Note 7: Components of Net Periodic Benefit related to Pension and Other Postretirement Benefit Plans
Three Months Ended August 27, 2022 and August 28, 2021 | ||||||||||||||||||||||||
Other | ||||||||||||||||||||||||
Pension Benefits | Postretirement | |||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | Benefits | ||||||||||||||||||||||
Net periodic cost (benefit): | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||
Service cost | $ | - | $ | - | $ | 666 | $ | 824 | $ | - | $ | 5 | ||||||||||||
Interest cost | 2,368 | 2,325 | 679 | 743 | 184 | 206 | ||||||||||||||||||
Expected return on assets | (7,117 | ) | (7,781 | ) | (1,525 | ) | (3,120 | ) | (2,719 | ) | (2,236 | ) | ||||||||||||
Amortization: | ||||||||||||||||||||||||
Prior service cost (benefit) | (1 | ) | (1 | ) | 15 | 17 | - | - | ||||||||||||||||
Actuarial loss (gain) | 1,013 | 799 | 570 | 1,020 | (845 | ) | 18 | |||||||||||||||||
Settlement charge | - | - | - | - | - | - | ||||||||||||||||||
Net periodic benefit | $ | (3,737 | ) | $ | (4,658 | ) | $ | 405 | $ | (516 | ) | $ | (3,380 | ) | $ | (2,007 | ) |
Nine Months Ended August 27, 2022 and August 28, 2021 | Three Months Ended March 4, 2023 and February 26, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
Other | Other | |||||||||||||||||||||||||||||||||||||||||||||||
Pension Benefits | Postretirement | Pension Benefits | Postretirement | |||||||||||||||||||||||||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | Benefits | U.S. Plans | Non-U.S. Plans | Benefits | |||||||||||||||||||||||||||||||||||||||||||
Net periodic cost (benefit): | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||
Net periodic (benefit) cost: | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||
Service cost | $ | - | $ | - | $ | 2,086 | $ | 2,478 | $ | - | $ | 16 | $ | - | $ | - | $ | 413 | $ | 720 | $ | - | $ | - | ||||||||||||||||||||||||
Interest cost | 7,103 | 6,974 | 2,204 | 2,215 | 551 | 616 | 3,475 | 2,368 | 1,410 | 789 | 301 | 184 | ||||||||||||||||||||||||||||||||||||
Expected return on assets | (21,353 | ) | (23,342 | ) | (4,916 | ) | (9,301 | ) | (8,156 | ) | (6,708 | ) | (7,206 | ) | (7,117 | ) | (1,730 | ) | (1,747 | ) | (2,465 | ) | (2,719 | ) | ||||||||||||||||||||||||
Amortization: | ||||||||||||||||||||||||||||||||||||||||||||||||
Prior service cost (benefit) | (2 | ) | (2 | ) | 47 | 51 | - | - | ||||||||||||||||||||||||||||||||||||||||
Prior service (benefit) cost | - | (1 | ) | 15 | 16 | - | - | |||||||||||||||||||||||||||||||||||||||||
Actuarial loss (gain) | 3,040 | 2,398 | 1,830 | 3,059 | (2,535 | ) | 55 | 635 | 1,013 | 491 | 649 | - | (845 | ) | ||||||||||||||||||||||||||||||||||
Settlement charge | - | - | 3,329 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
Net periodic benefit | $ | (11,212 | ) | $ | (13,972 | ) | $ | 4,580 | $ | (1,498 | ) | $ | (10,140 | ) | $ | (6,021 | ) | |||||||||||||||||||||||||||||||
Net periodic (benefit) cost | $ | (3,096 | ) | $ | (3,737 | ) | $ | 599 | $ | 427 | $ | (2,164 | ) | $ | (3,380 | ) |
Service cost is included with employee compensation cost in cost of sales and selling, general and administrative expenses in the Consolidated Statements of Income. The components of our net periodic defined benefit pension and postretirement benefit costs other than service cost are presented in other income, net in the Consolidated Statements of Income.
In the second quarter of 2022, we recognized a non-cash settlement charge of $3,329 related to the termination of our Canadian defined benefit pension plan. The settlement charge is included in other income, net in the Consolidated Statements of Income.
Note 7:8: Accumulated Other Comprehensive Income (Loss)
The following table provides details of total comprehensive income (loss):
Three Months Ended August 27, 2022 | Three Months Ended August 28, 2021 | |||||||||||||||||||||||||||||||
Non- | Non- | |||||||||||||||||||||||||||||||
controlling | controlling | |||||||||||||||||||||||||||||||
H.B. Fuller Stockholders | Interest | H.B. Fuller Stockholders | Interest | |||||||||||||||||||||||||||||
Pre-tax | Tax | Net | Net | Pre-tax | Tax | Net | Net | |||||||||||||||||||||||||
Net income attributable to H.B. Fuller and non-controlling interest | $ | 46,497 | $ | 33 | $ | 31,616 | $ | 14 | ||||||||||||||||||||||||
Foreign currency translation adjustment¹ | $ | (87,743 | ) | $ | - | (87,743 | ) | (46 | ) | $ | (31,979 | ) | $ | - | (31,979 | ) | (27 | ) | ||||||||||||||
Defined benefit pension plans adjustment² | 778 | (94 | ) | 684 | - | 1,855 | (480 | ) | 1,375 | - | ||||||||||||||||||||||
Interest rate swap³ | 1,783 | (437 | ) | 1,346 | - | 5,074 | (1,244 | ) | 3,830 | - | ||||||||||||||||||||||
Cross currency swaps³ | (377 | ) | 6 | (371 | ) | - | (1,309 | ) | 20 | (1,289 | ) | - | ||||||||||||||||||||
Other comprehensive loss | $ | (85,559 | ) | $ | (525 | ) | $ | (86,084 | ) | $ | (46 | ) | $ | (26,359 | ) | $ | (1,704 | ) | $ | (28,063 | ) | $ | (27 | ) | ||||||||
Comprehensive income (loss) | $ | (39,587 | ) | $ | (13 | ) | $ | 3,553 | $ | (13 | ) |
Nine Months Ended August 27, 2022 | Nine Months Ended August 28, 2021 | |||||||||||||||||||||||||||||||
Non- | Non- | |||||||||||||||||||||||||||||||
controlling | controlling | |||||||||||||||||||||||||||||||
H.B. Fuller Stockholders | Interest | H.B. Fuller Stockholders | Interest | |||||||||||||||||||||||||||||
Pretax | Tax | Net | Net | Pretax | Tax | Net | Net | |||||||||||||||||||||||||
Net income attributable to H.B. Fuller and non-controlling interest | $ | 132,007 | $ | 70 | $ | 110,509 | $ | 51 | ||||||||||||||||||||||||
Foreign currency translation adjustment¹ | $ | (165,302 | ) | $ | - | (165,302 | ) | (67 | ) | $ | 46,680 | $ | - | 46,680 | (25 | ) | ||||||||||||||||
Defined benefit pension plans adjustment² | 5,483 | (1,507 | ) | 3,976 | - | 5,561 | (1,440 | ) | 4,121 | - | ||||||||||||||||||||||
Interest rate swap³ | 14,473 | (3,549 | ) | 10,924 | - | 15,332 | (3,758 | ) | 11,574 | - | ||||||||||||||||||||||
Cross currency swaps³ | (3,720 | ) | 56 | (3,664 | ) | - | (3,629 | ) | 53 | (3,576 | ) | - | ||||||||||||||||||||
Other comprehensive income (loss) | $ | (149,066 | ) | $ | (5,000 | ) | $ | (154,066 | ) | (67 | ) | $ | 63,944 | $ | (5,145 | ) | 58,799 | (25 | ) | |||||||||||||
Comprehensive income | $ | (22,059 | ) | $ | 3 | $ | 169,308 | $ | 26 |
Three Months Ended March 4, 2023 | Three Months Ended February 26, 2022 | |||||||||||||||||||||||||||||||
Non- | Non- | |||||||||||||||||||||||||||||||
controlling | controlling | |||||||||||||||||||||||||||||||
H.B. Fuller Stockholders | Interest | H.B. Fuller Stockholders | Interest | |||||||||||||||||||||||||||||
Pre-tax | Tax | Net | Net | Pre-tax | Tax | Net | Net | |||||||||||||||||||||||||
Net income attributable to H.B. Fuller and non-controlling interest | $ | 21,889 | $ | 27 | $ | 38,306 | $ | 14 | ||||||||||||||||||||||||
Foreign currency translation¹ | $ | (3,646 | ) | $ | - | (3,646 | ) | 10 | $ | 6,540 | $ | - | 6,540 | (10 | ) | |||||||||||||||||
Defined benefit pension plans adjustment² | 1,141 | (290 | ) | 851 | - | 833 | (344 | ) | 489 | - | ||||||||||||||||||||||
Interest rate swaps³ | 11,055 | (2,720 | ) | 8,335 | - | 8,255 | (2,024 | ) | 6,231 | - | ||||||||||||||||||||||
Cross-currency swaps³ | - | - | - | - | (2,115 | ) | 32 | (2,083 | ) | - | ||||||||||||||||||||||
Net investment hedges³ | (397 | ) | 98 | (299 | ) | - | - | - | - | - | ||||||||||||||||||||||
Other comprehensive income | $ | 8,153 | $ | (2,912 | ) | $ | 5,241 | $ | 10 | $ | 13,513 | $ | (2,336 | ) | $ | 11,177 | $ | (10 | ) | |||||||||||||
Comprehensive income | $ | 27,130 | $ | 37 | $ | 49,483 | $ | 4 |
¹ Income taxes are not provided for foreign currency translation relating to permanent investments in international subsidiaries. |
² Loss reclassified from accumulated other comprehensive income ("AOCI") into earnings as part of net periodic cost related to pension and other postretirement benefit plans is reported in cost of sales and SG&A expense. |
³ Income (loss) reclassified from AOCI into earnings is reported in other income, net. |
The components of accumulated other comprehensive loss are as follows:
August 27, 2022 | March 4, 2023 | |||||||||||||||||||||||
Non- | Non- | |||||||||||||||||||||||
H.B. Fuller | controlling | H.B. Fuller | controlling | |||||||||||||||||||||
Total | Stockholders | Interest | Total | Stockholders | Interest | |||||||||||||||||||
Foreign currency translation adjustment | $ | (297,604 | ) | $ | (297,568 | ) | $ | (36 | ) | $ | (267,710 | ) | $ | (267,658 | ) | $ | (52 | ) | ||||||
Interest rate swap, net of taxes of ($325) | 1,000 | 1,000 | - | |||||||||||||||||||||
Cash flow hedges, net of taxes of $3 | (181 | ) | (181 | ) | - | |||||||||||||||||||
Defined benefit pension plans adjustment, net of taxes of $62,418 | (109,222 | ) | (109,222 | ) | - | |||||||||||||||||||
Interest rate swap, net of taxes of ($2,720) | 8,335 | 8,335 | - | |||||||||||||||||||||
Net investment hedges, net of taxes of $13,395 | (41,042 | ) | (41,042 | ) | - | |||||||||||||||||||
Defined benefit pension plans adjustment, net of taxes of $67,454 | (127,410 | ) | (127,410 | ) | - | |||||||||||||||||||
Reclassification of AOCI tax effects | (18,341 | ) | (18,341 | ) | - | (18,341 | ) | (18,341 | ) | - | ||||||||||||||
Accumulated other comprehensive loss | $ | (424,348 | ) | $ | (424,312 | ) | $ | (36 | ) | $ | (446,168 | ) | $ | (446,116 | ) | $ | (52 | ) |
November 27, 2021 | December 3, 2022 | |||||||||||||||||||||||
Non- | Non- | |||||||||||||||||||||||
H.B. Fuller | controlling | H.B. Fuller | controlling | |||||||||||||||||||||
Total | Stockholders | Interest | Total | Stockholders | Interest | |||||||||||||||||||
Foreign currency translation adjustment | $ | (132,370 | ) | $ | (132,267 | ) | $ | (103 | ) | $ | (264,054 | ) | $ | (264,012 | ) | $ | (42 | ) | ||||||
Interest rate swap, net of taxes of $3,224 | (9,924 | ) | (9,924 | ) | - | |||||||||||||||||||
Cash flow hedges, net of taxes of ($53) | 3,483 | 3,483 | - | |||||||||||||||||||||
Defined benefit pension plans adjustment, net of taxes of $63,925 | (113,198 | ) | (113,198 | ) | - | |||||||||||||||||||
Net investment hedges, net of taxes of $13,297 | (40,743 | ) | (40,743 | ) | - | |||||||||||||||||||
Defined benefit pension plans adjustment, net of taxes of $67,744 | (128,261 | ) | (128,261 | ) | - | |||||||||||||||||||
Reclassification of AOCI tax effects | (18,341 | ) | (18,341 | ) | - | (18,341 | ) | (18,341 | ) | - | ||||||||||||||
Accumulated other comprehensive loss | $ | (270,350 | ) | $ | (270,247 | ) | $ | (103 | ) | $ | (451,399 | ) | $ | (451,357 | ) | $ | (42 | ) |
Note 8:9: Income Taxes
Income tax expense for the three and ninemonths ended August 27, 2022March 4, 2023 includes $6,449 and $7,696$846 of discrete tax expense, respectively, primarily relating to the revaluation of cross-currency swap agreements due to depreciation of the Euro versus the U.S. Dollar, as well as various foreign tax matters offset by thean excess tax effect of legal entity mergers.benefit related to U.S. stock compensation. Excluding the discrete tax expense, the overall effective tax rate was 29.9 percent and 28.729.2 percent for the three and ninemonths ended August 27, 2022March 4, 2023 respectively..
Income tax expense for the three and ninemonths ended August 28, 2021February 26, 2022 includes $5,626 and $5,068$2,901 of discrete tax expense, respectively,benefit, relating to the revaluation of cross-currency swap agreements due to depreciation of the Euro versus the U.S. Dollar, as well aslegal entity mergers offset by various foreign tax matters. Excluding the discrete tax expense,benefit, the overall effective tax rate was 27.6 percent and 27.427.8 percent for the three and ninemonths ended August 28, 2021February 26, 2022 respectively..
As of August 27, 2022March 4, 2023, we had a liability of $14,541$17,973 recorded for gross unrecognized tax benefits (excluding interest) compared to $13,281$17,582 as of November 27, 2021December 3, 2022. As of August 27, 2022March 4, 2023 and November 27, 2021December 3, 2022, we had accrued $4,555$6,086 and $2,448$5,680 of gross interest relating to unrecognized tax benefits, respectively.
Note 9:10: Earnings Per Share
A reconciliation of the common share components for the basic and diluted earnings per share calculations is as follows:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
August 27, | August 28, | August 27, | August 28, | March 4, | February 26, | |||||||||||||||||||
(Shares in thousands) | 2022 | 2021 | 2022 | 2021 | 2023 | 2022 | ||||||||||||||||||
Weighted-average common shares - basic | 53,644 | 53,049 | 53,498 | 52,794 | 54,174 | 53,353 | ||||||||||||||||||
Equivalent shares from share-based compensations plans | 1,486 | 1,597 | 1,703 | 1,299 | 1,745 | 2,042 | ||||||||||||||||||
Weighted-average common and common equivalent shares diluted | 55,130 | 54,646 | 55,201 | 54,093 | 55,919 | 55,395 |
Basic earnings per share is calculated by dividing net income attributable to H.B. Fuller by the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is based upon the weighted-average number of common and common equivalent shares outstanding during the applicable period. The difference between basic and diluted earnings per share is attributable to share-based compensation awards. We use the treasury stock method to calculate the effect of outstanding shares, which computes total employee proceeds as the sum of (a) the amount the employee must pay upon exercise of the award and (b) the amount of unearned share-based compensation costs attributed to future services. Share-based compensation awards for which total employee proceeds exceed the average market price over the applicable period have an antidilutive effect on earnings per share, and accordingly, are excluded from the calculation of diluted earnings per share.
Share-based compensation awards of 573,9141,172,987 and 93,876700,250 shares for the three months ended August 27, 2022March 4, 2023 and August 28, 2021, respectively, and 691,856 and 1,655,852 shares for the nine months ended August 27,February 26, 2022and August 28, 2021, respectively, were excluded from diluted earnings per share calculations because they were antidilutive.
Note 10:11: Financial Instruments
Overview
As a result of being a global enterprise, foreign currency exchange rates and fluctuations in those rates may affect the Company's net investment in foreign subsidiaries, and our earnings, cash flows and financial position are exposed to foreign currency risk from foreign currency denominated receivables and payables.
We use foreign currency forward contracts, cross-currency swaps, and interest rate swaps and net investment hedges to manage risks associated with foreign currency exchange rates and interest rates. We do not hold derivative financial instruments of a speculative nature or for trading purposes. We record derivatives as assets and liabilities on the balance sheet at fair value. Changes in fair value are recognized immediately in earnings unless the derivative qualifies and is designated as a hedge. Cash flows from derivatives are classified in the Consolidated Statement of Cash Flows in the same category as the cash flows from the items subject to designated hedge or undesignated (economic) hedge relationships. We evaluate hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is recorded in earnings.
We are exposed to credit risk in the event of nonperformance of counterparties for foreign currency forward exchange contracts and interest rate swap agreements. We select investment-grade multinational banks and financial institutions as counterparties for derivative transactions and monitor the credit quality of each of these banks on a periodic basis as warranted. We do not anticipate nonperformance by any of these counterparties, and valuation allowances, if any, are de minimis.
Cash Flow Hedges
As of August 27, 2022, we had cash flow hedges of four cross-currency swap agreements effective October 20, 2017 to convert a notional amount of $267,860 of foreign currency denominated intercompany loans into U.S. dollars, which mature in 2022. As of August 27, 2022, the combined fair value of the swaps was an asset of $42,329 and was included in other current assets in the Consolidated Balance Sheets. The swaps were designated as cash flow hedges for accounting treatment. The lesser amount between the cumulative change in the fair value of the actual swaps and the cumulative change in the fair value of hypothetical swaps is recorded in accumulated other comprehensive income (loss) in the Consolidated Balance Sheets and in other net cash provided by operating activities in the Consolidated Statement of Cash Flows. The differences between the cumulative change in the fair value of the actual swaps and the cumulative change in the fair value of hypothetical swaps are recorded as other income, net in the Consolidated Statements of Income. In a perfectly effective hedge relationship, the two fair value calculations would exactly offset each other. Any difference in the calculation represents hedge ineffectiveness. The amount in accumulated other comprehensive income (loss) related to cross-currency swaps was a loss of$181 as of August 27, 2022. The estimated net amount of the existing loss that is reported in accumulated other comprehensive income (loss) as of August 27, 2022 that is expected to be reclassified into earnings within the next twelve months is $181. As of August 27, 2022, we do not believe any gains or losses will be reclassified into earnings as a result of the discontinuance of these cash flow hedges because the original forecasted transaction will not occur.
The following table summarizes the cross-currency swaps outstanding as of August 27, 2022:
Fiscal Year of | Notional | |||||||||||
Expiration | Interest Rate | Value | Fair Value | |||||||||
Pay EUR | 2022 | 3.00% | $ | 267,860 | $ | 42,329 | ||||||
Receive USD | 5.1803% |
On February 27, 2018,January 12, 2023, we entered into an interest rate swap agreement to convert $200,000$400,000 of our $2,150,000 Term Loan Bvariable rate 1-month LIBOR rate debt to a fixed interest rate of 4.5893.6895 percent. During theOn secondFebruary 28, 2023, quarter of 2021,after refinancing our debt, we settled a portion of this interest rate swap as the debt underlying this swap was less than the swap value due to debt paydown. We settled the ineffective portion ofamended the interest rate swap by making a cash payment of $378 and recorded that paymentagreement to interest expense in our Consolidated Statements of Income during the second1 quarter of 2021. On October 20, 2017, we entered into interest-month SOFR rate swap agreements to convert $1,050,000, which was amortized down to $800,000 on October 20, 2021, of our $2,150,000 Term Loan Bdebt to a fixed interest rate of 4.0275 percent. These interest rate swap agreements mature on3.7260 in accordance with the practical expedients included in ASC October 20, 2022. 848,Reference Rate Reform. The combined fair value of the interest rate swaps was an asset of $802 $6,688 at August 27, 2022March 4, 2023 and was included in other liabilities inassets in the Consolidated Balance Sheets. The swaps were designated for hedge accounting treatment as cash flow hedges. We are applying the hypothetical derivative method to assess hedge effectiveness for these interest rate swaps. Changes in the fair value of a hypothetically perfect swap with terms that match the critical terms of our $1,125,000 variable rate Term Loan Bdebt are compared with the change in the fair value of the swaps.
On April 23, 2018, we amended our Term Loan B Credit Agreement to reduce the interest rate from LIBOR plus 2.25 percent to LIBOR plus 2.00 percent. Fixed interest rates related to swap agreements disclosed have been updated to reflect the amendment.
The amounts of pretax gains (losses) recognized in Comprehensive Income related to derivative instruments designated as cash flow hedges are as follows:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
August 27, 2022 | August 28, 2021 | August 27, 2022 | August 28, 2021 | March 4, 2023 | February 26, 2022 | |||||||||||||||||||
Cross-currency swap contracts | $ | (377 | ) | $ | (1,309 | ) | $ | (3,720 | ) | $ | (3,629 | ) | $ | - | $ | (2,115 | ) | |||||||
Interest rate swap contracts | 1,783 | 5,074 | 14,473 | 15,332 | 11,055 | 8,255 |
Fair Value Hedges
On February 12, 2021, we entered into interest rate swap agreements to convert our $300,000 Public Notes that were issued on October 20, 2020 to a variable interest rate of 1-month LIBOR plus 3.28 percent. These interest rate swap agreements mature on October 15, 2028. 2028.TheThe combined fair value of the interest rate swaps was a liabilityliability of $38,069 $49,529 aatt August 27, 2022March 4, 2023, and was included in other liabilities in the Consolidated Balance Sheets. The swaps were designated for hedge accounting treatment as fair value hedges. We apply the short cut method and assume hedge effectiveness. Changes in the fair value of a hypothetically perfect swap with terms that match the critical terms of our $300,000 fixed rate Public Notes are compared with the change in the fair value of the swaps.
Net Investment Hedges
On October 17, 2022, we entered into a float-to-float cross-currency interest rate swap agreement with a notional amount of €307,173 maturing in October 2028. On October 20, 2022, we entered into fixed-to-fixed cross-currency interest rate swap agreements for a total notional amount of €300,000 with tranches maturing in August 2025, August 2026 and February 2027. As of March 4, 2023, the combined fair value of the swaps was a liability of $54,442 and was included in other liabilities in the Consolidated Balance Sheets. The cross-currency interest rate swaps hedge a portion of the Company’s investment in Euro denominated foreign subsidiaries.
The swaps are designated as net investment hedges for accounting treatment. The net gains or losses attributable to changes in spot exchange rates are recorded in the cumulative translation adjustment within other comprehensive income (loss). The gains or losses are reclassified into earnings upon a liquidation event or deconsolidation of the foreign subsidiary. Any ineffective portions of net investment hedges are reclassified from accumulated other comprehensive income (loss) into earnings during the period of change. The amount in accumulated other comprehensive income (loss) related to net investment hedge cross-currency swaps was a loss of $41,042 as of March 4, 2023. The amounts of pretax loss recognized in comprehensive income related to the net investment hedge was $397 for the three months ended March 4, 2023. As of March 4, 2023, we did not reclassify any gains or losses into earnings from net investment hedges and we do not expect to reclassify any such gain or loss into earnings within the next twelve months. No amounts related to net investment hedges have been excluded from the assessment of hedge effectiveness.
Derivatives Not Designated As Hedging Instruments
We use foreign currency forward contracts to offset our exposure to the change in value of certain foreign currency denominated assets and liabilities held at foreign subsidiaries that are remeasured at the end of each period. Although the contracts are effective economic hedges, they are not designated as accounting hedges. Foreign currency forward contracts are recorded as assets and liabilities on the balance sheet at fair value. Changes in the value of these derivatives are recognized immediately in earnings, thereby offsetting the current earnings effect of the related foreign currency denominated assets and liabilities. See Note 11 for fair value amounts of these derivative instruments.
As of August 27, 2022March 4, 2023, we had forward foreign currency contracts maturing between August 29, 2022 March 6, 2023and December 13, 2022.November 21, 2023. The mark-to-market effect associated with these contracts was largely offset by the underlying transaction gains and losses resulting from the foreign currency exposures for which these contracts relate.
The amounts of pretax gains (losses) recognized in other income, net related to derivative instruments not designated as hedging instruments for the ninethree months ended August 27, 2022March 4, 2023 and August 28, 2021February 26, 2022 were $2,378$7,154 and $1,428,$4,237, respectively.
Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of entities in the customer base and their dispersion across many different industries and countries. As of August 27, 2022March 4, 2023, there were no significant concentrations of credit risk.
Note 11:12: Fair Value Measurements
Overview
Estimates of fair value for financial assets and liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value and requires certain disclosures. The framework discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
● | Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. | |
● | Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. | |
● | Level 3: Unobservable inputs that reflect management’s assumptions, and include situations where there is little, if any, market activity for the asset or liability. |
Balances Measured at Fair Value on a Recurring Basis
The following table presents information about our financial assets and liabilities that are measured at fair value on a recurring basis as of August 27, 2022March 4, 2023 and November 27, 2021December 3, 2022, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
August 27, | Fair Value Measurements Using: | March 4, | Fair Value Measurements Using: | |||||||||||||||||||||||||||||
Description | 2022 | Level 1 | Level 2 | Level 3 | 2023 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Marketable securities | $ | 3,388 | $ | 3,388 | $ | - | $ | - | $ | 26,594 | $ | 26,594 | $ | - | $ | - | ||||||||||||||||
Foreign exchange contract assets | 6,381 | - | 6,381 | - | 9,768 | - | 9,768 | - | ||||||||||||||||||||||||
Cross-currency cash flow hedge assets | 42,329 | - | 42,329 | - | ||||||||||||||||||||||||||||
Interest rate swaps, cash flow hedge liabilities | 802 | - | 802 | - | ||||||||||||||||||||||||||||
Interest rate swaps, cash flow hedge assets | 6,688 | - | 6,688 | - | ||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Foreign exchange contract liabilities | $ | 4,003 | $ | - | $ | 4,003 | $ | - | $ | 2,614 | $ | - | $ | 2,614 | $ | - | ||||||||||||||||
Interest rate swaps, fair value hedge liabilities | 38,069 | - | 38,069 | - | 49,549 | 49,549 | ||||||||||||||||||||||||||
Net investment hedge liabilities | 54,442 | - | 54,442 | - | ||||||||||||||||||||||||||||
Contingent consideration liabilities | 4,930 | - | - | 4,930 | 1,983 | - | - | 1,983 |
November 27, | Fair Value Measurements Using: | December 3, | Fair Value Measurements Using: | |||||||||||||||||||||||||||||
Description | 2021 | Level 1 | Level 2 | Level 3 | 2022 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Marketable securities | $ | 2,079 | $ | 2,079 | $ | - | $ | - | $ | 4,013 | $ | 4,013 | $ | - | $ | - | ||||||||||||||||
Foreign exchange contract assets | 5,725 | - | 5,725 | - | 10,282 | - | 10,282 | - | ||||||||||||||||||||||||
Cross-currency cash flow hedge assets | 14,496 | - | 14,496 | - | ||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Foreign exchange contract liabilities | $ | 6,082 | $ | - | $ | 6,082 | $ | - | $ | 4,570 | $ | - | $ | 4,570 | $ | - | ||||||||||||||||
Interest rate swaps, cash flow hedge liabilities | 12,366 | - | 12,366 | |||||||||||||||||||||||||||||
Interest rate swaps, fair value hedge liabilities | 10,539 | - | 10,539 | - | 42,542 | - | 42,542 | |||||||||||||||||||||||||
Contingent consideration liability | 8,100 | - | - | 8,100 | ||||||||||||||||||||||||||||
Net investment hedge liabilities | 54,046 | - | 54,046 | - | ||||||||||||||||||||||||||||
Contingent consideration liabilities | 1,977 | - | - | 1,977 |
The valuation of our contingent consideration liability related to the acquisitions of ZKLT and TissueSeal with a fair value of $1,483 and $500, respectively as of March 4, 2023. Adjustments to the fair value of contingent consideration are recorded to selling, general and administrative expenses in the Statement of Income.
The valuation of our contingent consideration liability related to the acquisition of ZKLT with a fair value of $4,430 and TissueSeal with a fair value of $500 as of August 27, 2022. As of November 27, 2021, the agreement provisions for the D.H.M contingent consideration were met, and as a result, $8,122 was paid during the period ended February 26, 2022. See Note 2 for further discussion regarding our acquisitions. The following table provides details of the contingent consideration liabilities:
Amounts | ||||
Balance at November 27, 2021 | $ | 8,100 | ||
Acquisitions | 4,930 | |||
Payment of contingent consideration | (8,122 | ) | ||
Mark to market adjustment | 22 | |||
Balance at August 27, 2022 | $ | 4,930 |
Amounts | ||||
Balance at December 3, 2022 | $ | 1,977 | ||
Mark to market adjustment | 139 | |||
Foreign currency translation adjustment | (133 | ) | ||
Balance at March 4, 2023 | $ | 1,983 |
Balances Measured at Fair Value on a Nonrecurring Basis
We measure certain assets and liabilities at fair value on a nonrecurring basis. These assets include intangible assets acquired in an acquisition. The identified intangible assets of customer relationships, technology and tradenames acquired in connection with our acquisitions were measured using unobservable (Level 3) inputs. The fair value of the intangible assets was calculated using either the income or cost approach. Significant inputs include estimated revenue growth rates, gross margins, operating expenses, attrition rate, royalty rate and discount rate.
See Note 2 for further discussion regarding our acquisitions.
Balances Disclosed at Fair Value
Long-term debt had an estimated fair value of $1,508,239$1,714,383 and $1,618,291$1,713,257 as of August 27, 2022March 4, 2023 and November 27, 2021December 3, 2022, respectively. The fair value of long-term debt is based on quoted market prices for the same or similar issues or on the current rates offered for debt of similar maturities. The estimated fair value of these long-term obligations is not necessarily indicative of the amount that would be realized in a current market exchange.
Note 12:13: Commitments and Contingencies
Environmental Matters
From timeWe are involved in environmental investigations, clean-up activities and administrative proceedings related to time, we become aware ofenvironmental compliance matters relating to, or receive notices from, federal, state or local entities regarding possible or alleged violations of environmental, health or safety lawsat former and regulations.current operating facilities. We review the circumstances of each individual site, considering the number of parties involved, the level of potential liability or our contribution relative to the other parties, the nature and magnitude of the hazardous substances involved, the method and extent of remediation, the estimated legal and consulting expense with respect to each site and the time period over which any costs would likely be incurred. Also, from time to time, we arehave also been identified as a potentially responsible party (“PRP��PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and/or similar state laws that impose liability for costs relating to the clean upclean-up of contamination resulting from past spills, disposal or other release of hazardous substances.substances associated with landfills and/or hazardous waste sites. As a PRP, we may be required to pay a share of the costs of investigation and clean-up of these sites. We are also subject to similar laws in some of the countries where current and former facilities are located. Our environmental, health and safety department monitors compliance with applicable laws on a global basis. To the extent we can reasonably estimate the amount of our probable liabilities for environmental matters, we establish an undiscounted financial provision. We recorded liabilities of $6,127$5,541 and $6,603$5,754 as of August 27, 2022March 4, 2023 and November 27, 2021December 3, 2022, respectively, for probable and reasonably estimable environmental remediation costs. Of the amount reserved, $2,962$2,640 and $3,333$2,789 as of August 27, 2022March 4, 2023 and November 27, 2021December 3, 2022, respectively, is attributable to a facility we own in Simpsonville, South Carolina as a result of our Royal Adhesives acquisition that is a designated site under CERCLA.
Currently, we are involved in various environmental investigations, clean up activities and administrative proceedings and lawsuits. In particular, we are currently deemed a PRP in conjunction with numerous other parties, in a number of government enforcement actions associated with landfills and/or hazardous waste sites. As a PRP, we may be required to pay a share of the costs of investigation and clean up of these sites. In addition, we are engaged in environmental remediation and monitoring efforts at a number of current and former operating facilities. While uncertainties exist with respect to the amounts and timing of the ultimate environmental liabilities, based on currently available information, we have concluded that these matters, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flow.
Other Legal Proceedings
From time to time and in the ordinary course of business, we are a party to, or a target of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, contract, patent and intellectual property, environmental, health and safety, tax and employment matters. While we are unable to predict the outcome of these matters, we have concluded, based upon currently available information, that the ultimate resolution of any pending matter, individually or in the aggregate, including the asbestos litigation described in the following paragraphs, will not have a material adverse effect on our results of operations, financial condition or cash flow.
We have been named as a defendant in lawsuits in which plaintiffs have alleged injury due to products containing asbestos manufactured more than 35 years ago. The plaintiffs generally bring these lawsuits against multiple defendants and seek damages (both actual and punitive) in very large amounts. In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable injuries or that the injuries suffered were the result of exposure to products manufactured by us. We are typically dismissed as a defendant in such cases without payment. If the plaintiff presents evidence indicating that compensable injury occurred as a result of exposure to our products, the case is generally settled for an amount that reflects the seriousness of the injury, the length, intensity and character of exposure to products containing asbestos, the number and solvency of other defendants in the case, and the jurisdiction in which the case has been brought.
A significant portion of the defense costs and settlements in asbestos-related litigation is paid by third parties, including indemnification pursuant to the provisions of a 1976 agreement under which we acquired a business from a third party. Currently, this third party is defending and paying settlement amounts, under a reservation of rights, in most of the asbestos cases tendered to the third party.
In addition to the indemnification arrangements with third parties, we have insurance policies that generally provide coverage for asbestos liabilities, including defense costs. Historically, insurers have paid a significant portion of our defense costs and settlements in asbestos-related litigation. However, certain of our insurers are insolvent. We have entered into cost-sharing agreements with our insurers that provide for the allocation of defense costs and settlements and judgments in asbestos-related lawsuits. These agreements require, among other things, that we fund a share of defense costs, settlements and judgments allocable to years in which the responsible insurer is insolvent.
A summary of the number of and settlement amounts for asbestos-related lawsuits and claims is as follows:
Nine Months Ended | 3 Years Ended | Three Months Ended | 3 Years Ended | |||||||||||||||||||||
August 27, 2022 | August 28, 2021 | November 27, 2021 | March 4, 2023 | February 26, 2022 | December 3, 2022 | |||||||||||||||||||
Lawsuits and claims settled | 3 | 2 | 14 | 2 | - | 13 | ||||||||||||||||||
Settlement amounts | $ | 206 | $ | 85 | $ | 639 | $ | 30 | $ | - | $ | 511 | ||||||||||||
Insurance payments received or expected to be received | $ | 139 | $ | 55 | $ | 434 | $ | 39 | $ | - | $ | 338 |
We do not believe that it would be meaningful to disclose the aggregate number of asbestos-related lawsuits filed against us because relatively few of these lawsuits are known to involve exposure to asbestos-containing products that we manufactured. Rather, we believe it is more meaningful to disclose the number of lawsuits that are settled and result in a payment to the plaintiff. To the extent we can reasonably estimate the amount of our probable liabilities for pending asbestos-related claims, we establish a financial provision and a corresponding receivable for insurance recoveries.
Based on currently available information, we have concluded that the resolution of any pending matter, including asbestos-related litigation, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flow.
Note 13:14: Segments
We are required to report segment information in the same way that we internally organize our business for assessing performance and making decisions regarding allocation of resources. Revenue and operating income of each of our segments are regularly reviewed by our chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance. Segment operating income is identified as gross profit less SG&A expenses. Corporate expenses, other than those included in Corporate Unallocated, are allocated to each operating segment. Consistent with our internal management reporting, Corporate Unallocated amounts include business acquisition and integration costs, organizational restructuring charges and project costs associated with our implementation of Project ONE. Corporate assets are not allocated to the operating segments. Inter-segment revenues are recorded at cost plus a markup for administrative costs.
We have three reportable segments: Hygiene, Health and Consumable Adhesives, Engineering Adhesives and Construction Adhesives. The business components within each operating segment are managed to maximize the results of the overall operating segment rather than the results of any individual business component of the operating segment. Results of individual components of each operating segment are subject to numerous allocations of segment-wide costs that may or may not have been focused on that particular component for a particular reporting period. The costs for these allocated resources are not tracked on a "where-used" basis as financial performance is assessed at the total operating segment level.
The table below provides certain information regarding net revenue and operating income (loss) for each of our operating segments.
Three Months Ended | ||||||||||||||||
August 27, 2022 | August 28, 2021 | |||||||||||||||
Net | Operating | Net | Operating | |||||||||||||
Revenue | Income (Loss) | Revenue | Income (Loss) | |||||||||||||
Hygiene, Health and Consumable Adhesives | $ | 424,978 | $ | 47,470 | $ | 369,439 | $ | 29,652 | ||||||||
Engineering Adhesives | 378,264 | 39,776 | 342,300 | 34,087 | ||||||||||||
Construction Adhesives | 137,988 | 6,391 | 115,091 | 3,339 | ||||||||||||
Total segment | $ | 941,230 | $ | 93,637 | $ | 826,830 | $ | 67,078 | ||||||||
Corporate Unallocated1 | - | (5,683 | ) | - | (7,625 | ) | ||||||||||
Total | $ | 941,230 | $ | 87,954 | $ | 826,830 | $ | 59,453 |
Nine Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||
August 27, 2022 | August 28, 2021 | March 4, 2023 | February 26, 2022 | |||||||||||||||||||||||||||||
Net | Operating | Net | Operating | Net | Operating | Net | Operating | |||||||||||||||||||||||||
Revenue | Income (Loss) | Revenue | Income (Loss) | Revenue | Income (Loss) | Revenue | Income (Loss) | |||||||||||||||||||||||||
Hygiene, Health and Consumable Adhesives | $ | 1,252,405 | $ | 122,950 | $ | 1,069,922 | $ | 98,493 | $ | 383,528 | $ | 45,146 | $ | 389,538 | $ | 32,213 | ||||||||||||||||
Engineering Adhesives | 1,137,587 | 115,266 | 1,000,337 | 96,580 | 333,067 | 32,475 | 353,977 | 32,572 | ||||||||||||||||||||||||
Construction Adhesives | 400,977 | 22,032 | 310,348 | 4,974 | 92,588 | (9,634 | ) | 112,967 | 4,356 | |||||||||||||||||||||||
Total segment | $ | 2,790,969 | $ | 260,248 | $ | 2,380,607 | $ | 200,047 | $ | 809,183 | $ | 67,987 | $ | 856,482 | $ | 69,141 | ||||||||||||||||
Corporate Unallocated | - | (27,780 | ) | - | (23,105 | ) | ||||||||||||||||||||||||||
Corporate Unallocated1 | - | (7,720 | ) | - | (12,142 | ) | ||||||||||||||||||||||||||
Total | $ | 2,790,969 | $ | 232,468 | $ | 2,380,607 | $ | 176,942 | $ | 809,183 | $ | 60,267 | $ | 856,482 | $ | 56,999 |
1 Consistent with our internal management reporting, Corporate Unallocated amounts in the tables above include charges that are not allocated to the Company’s reportable segments.
The table below provides a reconciliation of operating income to income before income taxes and income from equity method investments:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
August 27, | August 28, | August 27, | August 28, | March 4, | February 26, | |||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
Operating income | $ | 87,954 | $ | 59,453 | $ | 232,468 | $ | 176,942 | $ | 60,267 | $ | 56,999 | ||||||||||||
Other income, net | 6,559 | 6,150 | 12,701 | 25,899 | 2,604 | 6,142 | ||||||||||||||||||
Interest expense | (23,450 | ) | (19,396 | ) | (61,475 | ) | (59,699 | ) | (33,069 | ) | (18,196 | ) | ||||||||||||
Interest income | 2,139 | 2,520 | 6,170 | 7,709 | 667 | 1,940 | ||||||||||||||||||
Income before income taxes and income from equity method investments | $ | 73,202 | $ | 48,727 | $ | 189,864 | $ | 150,851 | $ | 30,469 | $ | 46,885 |
We view the following disaggregation of net revenue by geographic region as useful to understanding the composition of revenue recognized during the respective reporting periods:
Three Months Ended August 27, 2022 | Three Months Ended March 4, 2023 | |||||||||||||||||||||||||||||||
Hygiene, Health | Hygiene, Health | |||||||||||||||||||||||||||||||
and Consumable | Engineering | Construction | and Consumable | Engineering | Construction | |||||||||||||||||||||||||||
Adhesives | Adhesives | Adhesives | Total | Adhesives | Adhesives | Adhesives | Total | |||||||||||||||||||||||||
Americas | $ | 261,751 | $ | 165,398 | $ | 106,169 | $ | 533,318 | $ | 223,618 | $ | 133,470 | $ | 70,964 | $ | 428,052 | ||||||||||||||||
EIMEA | 114,186 | 111,734 | 23,519 | 249,439 | 107,072 | 113,360 | 14,578 | 235,010 | ||||||||||||||||||||||||
Asia Pacific | 49,041 | 101,132 | 8,300 | 158,473 | 52,838 | 86,237 | 7,046 | 146,121 | ||||||||||||||||||||||||
Total | $ | 424,978 | $ | 378,264 | $ | 137,988 | $ | 941,230 | $ | 383,528 | $ | 333,067 | $ | 92,588 | $ | 809,183 |
Three Months Ended August 28, 2021 | ||||||||||||||||
Hygiene, Health | ||||||||||||||||
and Consumable | Engineering | Construction | ||||||||||||||
Adhesives | Adhesives | Adhesives | Total | |||||||||||||
Americas | $ | 210,589 | $ | 127,683 | $ | 103,475 | $ | 441,747 | ||||||||
EIMEA | 108,626 | 121,905 | 4,958 | 235,489 | ||||||||||||
Asia Pacific | 50,224 | 92,712 | 6,658 | 149,594 | ||||||||||||
Total | $ | 369,439 | $ | 342,300 | $ | 115,091 | $ | 826,830 |
Nine Months Ended August 27, 2022 | ||||||||||||||||
Hygiene, Health | ||||||||||||||||
and Consumable | Engineering | Construction | ||||||||||||||
Adhesives | Adhesives | Adhesives | Total | |||||||||||||
Americas | $ | 737,689 | $ | 465,285 | $ | 321,167 | $ | 1,524,141 | ||||||||
EIMEA | 351,983 | 361,485 | 58,450 | 771,918 | ||||||||||||
Asia Pacific | 162,733 | 310,817 | 21,360 | 494,910 | ||||||||||||
Total | $ | 1,252,405 | $ | 1,137,587 | $ | 400,977 | $ | 2,790,969 |
Three Months Ended February 26, 2022 | ||||||||||||||||||||||||||||||||
Nine Months Ended August 28, 2021 | ||||||||||||||||||||||||||||||||
Hygiene, Health | Hygiene, Health | |||||||||||||||||||||||||||||||
and Consumable | Engineering | Construction | and Consumable | Engineering | Construction | |||||||||||||||||||||||||||
Adhesives | Adhesives | Adhesives | Total | Adhesives | Adhesives | Adhesives | Total | |||||||||||||||||||||||||
Americas | $ | 594,071 | $ | 367,260 | $ | 274,502 | $ | 1,235,833 | $ | 220,694 | $ | 133,328 | $ | 95,578 | $ | 449,600 | ||||||||||||||||
EIMEA | 312,908 | 345,249 | 16,191 | 674,348 | 114,653 | 115,820 | 11,217 | 241,690 | ||||||||||||||||||||||||
Asia Pacific | 162,943 | 287,828 | 19,655 | 470,426 | 54,191 | 104,829 | 6,172 | 165,192 | ||||||||||||||||||||||||
Total | $ | 1,069,922 | $ | 1,000,337 | $ | 310,348 | $ | 2,380,607 | $ | 389,538 | $ | 353,977 | $ | 112,967 | $ | 856,482 |
Note 2215:
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended November 27, 2021December 3, 2022 for important background information related to our business.
Net revenue in the thirdfirst quarter of 2022 increased 13.82023 decreased 5.5 percent from the thirdfirst quarter of 2021.2022. Net revenue increased 18.7decreased 10.8 percent due to sales volume and 4.9 percent due to negative currency effects, offset by an 8.3 percent increase due to price and 2.0a 1.9 percent increase due to the acquisition of Fourny and Apollo, partially offset by a 0.3 percent decrease in sales volume. Negative currency effects of 6.6 percent acquisitions compared to the thirdfirst quarter of 20212022. The negative currency effects were primarily driven by a weaker Euro, Turkish lira,Egyptian pound, Chinese renminbi, British poundArgentinian peso and Argentinian pesoTurkish lira compared to the U.S. dollar. Gross profit margin increased 300160 basis points primarily due to higheran increase in product pricing partially offset by higher raw material costs.pricing.
Net revenue in the first nine months of 2022 increased 17.2 percent from the first nine months of 2021. Net revenue increased 17.6 percent due to price, 2.8 percent due to sales volume and 1.6 percent due to the acquisitions of Fourny and Apollo. Negative currency effects of 4.8 percent compared to the first nine months of 2021 were primarily driven by a weaker Euro, Turkish lira, British pound and Argentinian peso, partially offset by a stronger Brazilian real compared to the U.S. dollar. Gross profit margin increased 20 basis points.
Net income attributable to H.B. Fuller in the third quarter of 2022 was $46.5 million compared to $31.6 million in the third quarter of 2021. On a diluted earnings per share basis, the third quarter of 2022 was $0.84 per share compared to $0.58 per share for the third quarter of 2021.
Net income attributable to H.B. Fuller in the first nine monthsquarter of 20222023 was $132.0$21.9 million compared to $110.5$38.3 million in the first nine monthsquarter of 2021.2022. On a diluted earnings per share basis, the first nine monthsquarter of 20222023 was $2.39$0.39 per share compared to $2.04$0.69 per share for the first nine monthsquarter of 2021.
Market Conditions
On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus ("COVID-19") a pandemic. The COVID-19 pandemic continues to have an impact on global economies, supply chains and industrial production. Although government restrictions have been relaxed, it is currently not possible to estimate additional impacts this outbreak may have on our business. We continue to effectively manage our global operations focusing on the health and safety of our employees and ensuring business continuity across our supplier, manufacturing and distribution networks.
See "Risk Factors" in Item 1A in our Annual Report on Form 10-K for the year ended November 27, 2021 as filed with the Securities and Exchange Commission for further information of the effects of the COVID-19 pandemic on our business including raw material cost and availability.2022.
Restructuring Plan
DuringOn March 27, 2023, the fourth quarter of 2019, weCompany approved a restructuring plan (the “Plan”) related to organizational changes and other actions to optimize operationsoperations. In implementing the Plan, the Company currently expects to incur costs of approximately $15.0 million to $20.0 million ($12.4 million to $16.4 million after-tax), which includes (i) cash expenditures of approximately $13.8 million to $15.0 million ($11.1 million to $12.1 million after tax) for severance and related employee costs globally and (ii) other restructuring costs related to streamlining of processes and the payment of anticipated income taxes in connectioncertain jurisdictions related to the Plan. The Plan will be implemented beginning in the second quarter of fiscal year 2023 and is currently expected to be completed during fiscal year 2025. The restructuring costs will be spread across the next several fiscal quarters as the measures are implemented with the realignmentmajority of the Company into three global business units (“2020 Restructuring Plan”). We have incurred costs of $20.1 million under this plan as of August 27, 2022, which is substantially complete.charges recognized and cash payments occurring in fiscal 2023 and 2024.
Results of Operations
Net revenue:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
August 27, | August 28, | 2022 vs | August 27, | August 28, | 2022 vs | March 4, | February 26, | 2023 vs | ||||||||||||||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | 2022 | 2021 | 2021 | 2023 | 2022 | 2022 | |||||||||||||||||||||||||||
Net revenue | $ | 941.2 | $ | 826.8 | 13.8 | % | $ | 2,791.0 | $ | 2,380.6 | 17.2 | % | $ | 809.2 | $ | 856.5 | (5.5 | )% |
We review variances in net revenue in terms of changes related to sales volume, product pricing, business acquisitions and divestitures (“M&A”) and changes in foreign currency exchange rates. The following table shows the net revenue variance analysis for the thirdfirst quarter and first nine months of 20222023 compared to the same periods in 2021:first quarter of 2022:
Three Months Ended | Nine Months Ended | |||||||
August 27, 2022 vs. August 28, 2021 | August 27, 2022 vs. August 28, 2021 | |||||||
Organic growth | 18.4 | % | 20.4 | % | ||||
M&A | 2.0 | % | 1.6 | % | ||||
Currency | (6.6 | )% | (4.8 | )% | ||||
Total | 13.8 | % | 17.2 | % |
Three Months Ended | ||||
March 4, 2023 vs. February 26, 2022 | ||||
Organic growth | (2.5 | )% | ||
M&A | 1.9 | % | ||
Currency | (4.9 | )% | ||
Total | (5.5 | )% |
Organic growth was 18.4a negative 2.5 percent in the thirdfirst quarter of 2023 compared to the first quarter of 2022 compared to the third quarterand consisted of 2021 drivena 2.9 percent decrease in Engineering Adhesives and a 25.8 percent decrease in Construction Adhesives, offset by a 22.94.5 percent increase in Hygiene, Health and Consumable Adhesives, a 17.5 percent increase in Engineering Adhesives and a 6.9 percent increase in Construction Adhesives. The increasedecrease is predominately driven by a decrease in volume partially offset by an increase in product pricing, partially offset by a slight decrease in volume.pricing. The 2.01.9 percent increase from M&A is due to the acquisitions of Fourny and Apollo.acquisitions. The negative 6.64.9 percent foreign currency impact was primarily driven by a weaker Euro, Egyptian pound, Chinese renminbi, Argentinian peso and Turkish lira Chinese Renminbi, British pound and Argentinian peso compared to the U.S. dollar.
Organic growth was 20.4 percent in the first nine months of 2022 compared to the first nine months of 2021 driven by a 22.7 percent increase in Hygiene, Health and Consumable Adhesives, a 18.7 percent increase in Engineering Adhesives and a 17.6 percent increase in Construction Adhesives. The increase is driven dollarby an increase in product pricing and sales volume. The 1.6 percent increase from M&A is due to the acquisitions of Fourny and Apollo. The negative 4.8 percent currency impact was primarily driven by a weaker Euro, Turkish lira, British pound and Argentinian peso, partially offset by a stronger Brazilian real compared to the U.S. dollar..
Cost of sales:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
August 27, | August 28, | 2022 vs | August 27, | August 28, | 2022 vs | March 4, | February 26, | 2023 vs | ||||||||||||||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | 2022 | 2021 | 2021 | 2023 | 2022 | 2022 | |||||||||||||||||||||||||||
Raw materials | $ | 540.3 | $ | 477.9 | 13.1 | % | $ | 1,606.7 | $ | 1,317.7 | 21.9 | % | ||||||||||||||||||||||||
Other manufacturing costs | 151.8 | 155.0 | (2.1 | )% | 468.7 | 459.0 | 2.1 | % | ||||||||||||||||||||||||||||
Cost of sales | $ | 692.1 | $ | 632.9 | 9.4 | % | $ | 2,075.4 | $ | 1,776.7 | 16.8 | % | $ | 594.4 | $ | 643.6 | (7.6 | )% | ||||||||||||||||||
Percent of net revenue | 73.5 | % | 76.5 | % | 74.4 | % | 74.6 | % | 73.5 | % | 75.1 | % |
Cost of sales in the thirdfirst quarter of 2023 compared to the first quarter of 2022 compared to the third quarter of 2021 decreased 300160 basis points as a percentage of net revenue. Raw material cost as a percentage of net revenue decreased 40220 basis points in the third quarter of 2022 compareddue to the third quarter of 2021.higher product pricing, partially offset by higher raw material costs. Other manufacturing costs as a percentage of revenue decreased 260increased 60 basis points in the third quarter of 2022 compareddue to the third quarter of 2021 due to higher product pricing.
Cost of sales in the first nine months of 2022 compared to the first nine months of 2021 decreased 20 basis points as a percentage oflower net revenue. Raw material cost as a percentage of net revenue increased 220 basis points in the first nine months of 2022 compared to the first nine months of 2021 due to higher raw material costs. Other manufacturing costs as a percentage of revenue decreased 240 basis points in the first nine months of 2022 compared to the first nine months of 2021 due to higher net revenue.
Gross profit:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
August 27, | August 28, | 2022 vs | August 27, | August 28, | 2022 vs | March 4, | February 26, | 2023 vs | ||||||||||||||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | 2022 | 2021 | 2021 | 2023 | 2022 | 2022 | |||||||||||||||||||||||||||
Gross profit | $ | 249.2 | $ | 194.0 | 28.5 | % | $ | 715.6 | $ | 603.9 | 18.5 | % | $ | 214.8 | $ | 212.9 | 0.9 | % | ||||||||||||||||||
Percent of net revenue | 26.5 | % | 23.5 | % | 25.6 | % | 25.4 | % | 26.5 | % | 24.9 | % |
Gross profit in the thirdfirst quarter of 20222023 increased 28.50.9 percent and gross profit margin increased 300160 basis points compared to the thirdfirst quarter of 2021.2022. The increase in gross profit margin was primarily due tohigher an increase in product pricing.
Gross profit in the first nine months of 2022 increased 18.5 percent and gross profit margin increased 20 basis points compared to the first nine months of 2021.
Selling, general and administrative (SG&A) expenses:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
August 27, | August 28, | 2022 vs | August 27, | August 28, | 2022 vs | March 4, | February 26, | 2023 vs | ||||||||||||||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | 2022 | 2021 | 2021 | 2023 | 2022 | 2022 | |||||||||||||||||||||||||||
SG&A | $ | 161.2 | $ | 134.5 | 19.9 | % | $ | 483.1 | $ | 426.9 | 13.2 | % | $ | 154.5 | $ | 155.9 | (0.9 | )% | ||||||||||||||||||
Percent of net revenue | 17.1 | % | 16.3 | % | 17.3 | % | 17.9 | % | 19.1 | % | 18.2 | % |
SG&A expenses for the thirdfirst quarter of 2023 compared to the first quarter of 2022 increased $26.7 million, or 19.9 percent, compared to the third quarter90 basis points as a percentage of 2021.net revenue. The increase is primarily due to higher compensation and acquisition project costs, partially offset by the favorable impact of foreign currency exchange rates on spending outside the U.S.
SG&A expenses for the first nine months
Other income, net:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
August 27, | August 28, | 2022 vs | August 27, | August 28, | 2022 vs | March 4, | February 26, | 2023 vs | ||||||||||||||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | 2022 | 2021 | 2021 | 2023 | 2022 | 2022 | |||||||||||||||||||||||||||
Other income, net | $ | 6.6 | $ | 6.2 | 6.5 | % | $ | 12.7 | $ | 25.9 | (51.0 | )% | $ | 2.6 | $ | 6.1 | (57.4 | )% |
Other income, net in the thirdfirst quarter of 2023 included $6.5 million of net defined benefit pension benefits and $0.2 million of other income, partially offset by $4.1 million of currency transaction losses. Other income, net in the first quarter of 2022 included $7.4 million of net defined benefit pension benefits and $1.8 million of other income, offset by $2.6 million of currency transaction losses. Other income, net in the third quarter of 2021 included $8.0 million of net defined benefit pension benefits, partially offset by $1.4 million of currency transaction losses and $0.4 million of other income.
Other income, net in the first nine months of 2022 included $18.9 million of net defined benefit pension benefits and $3.4$0.2 million of other income, partially offset by $9.6 million of currency transaction losses. The $18.9 million of net defined benefit pension benefits included a $3.3 million settlement loss related to the termination of our Canadian defined benefit pension plan. Other income, net in the first nine months of 2021 included $23.9 million of net defined benefit pension benefits and $6.5 million of other income, partially offset by $4.5$1.5 million of currency transaction losses.
Interest expense:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
August 27, | August 28, | 2022 vs | August 27, | August 28, | 2022 vs | |||||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | 2022 | 2021 | 2021 | ||||||||||||||||||
Interest expense | $ | 23.5 | $ | 19.4 | 21.1 | % | $ | 61.5 | $ | 59.7 | 3.0 | % |
Three Months Ended | ||||||||||||
March 4, | February 26, | 2023 vs | ||||||||||
($ in millions) | 2023 | 2022 | 2022 | |||||||||
Interest expense | $ | 33.1 | $ | 18.2 | 81.9 | % |
Interest expense in the thirdfirst quarter of 2023 was $33.1 million compared to $18.2 million in the first quarter of 2022. Interest expense in the first quarter of 2023 compared to the first quarter of 2022 was $23.5 million compared to $19.4 million in the third quarter of 2021. Interest expense in the third quarter of 2022 compared to the third quarter of 2021 was higher primarily due to higher interest ratesdebt balances and higher debt balances.
Interest expense in the first nine months of 2022 was $61.5 million compared to $59.7 million in the first nine months of 2021. Interest expense in the first nine months of 2022 compared to the first nine months of 2021 was higher due to higher interest rates and higher debt balances.rates.
Interest income:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
August 27, | August 28, | 2022 vs | August 27, | August 28, | 2022 vs | |||||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | 2022 | 2021 | 2021 | ||||||||||||||||||
Interest income | $ | 2.1 | $ | 2.5 | (16.0 | )% | $ | 6.2 | $ | 7.7 | (19.5 | )% |
Interest income in the third quarter of 2022 and 2021 was $2.1 million and $2.5 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income.
Three Months Ended | ||||||||||||
March 4, | February 26, | 2023 vs | ||||||||||
($ in millions) | 2023 | 2022 | 2022 | |||||||||
Interest income | $ | 0.7 | $ | 1.9 | (63.2 | )% |
Interest income in the first nine monthsquarter of 2023 and 2022 and 2021 was $6.2$0.7 million and $7.7$1.9 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income.
Income taxes:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
August 27, | August 28, | 2022 vs | August 27, | August 28, | 2022 vs | March 4, | February 26, | 2023 vs | ||||||||||||||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | 2022 | 2021 | 2021 | 2023 | 2022 | 2022 | |||||||||||||||||||||||||||
Income taxes | $ | 28.3 | $ | 19.1 | 48.2 | % | $ | 62.0 | $ | 46.4 | 33.6 | % | $ | 9.7 | $ | 10.1 | (4.0 | )% | ||||||||||||||||||
Effective tax rate | 38.7 | % | 39.2 | % | 32.7 | % | 30.7 | % | 31.9 | % | 21.6 | % |
Income tax expense of $28.3$9.7 million in the thirdfirst quarter of 20222023 includes $6.4$0.8 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 29.929.2 percent. The discrete tax expense relates to impacts of the revaluation of cross-currency swap agreements due to depreciation of the Euro versus the U.S. dollar and other various U.S. and foreign tax matters. matters offset by an excess tax benefit related to U.S. stock compensation. Income tax expense of $19.1$10.1 million in the thirdfirst quarter of 20212022 includes $5.6$2.9 million of discrete tax expense.benefit. Excluding the discrete tax expense,benefit, the overall effective tax rate was 27.627.8 percent. The discrete tax expensebenefit relates to the revaluation of cross-currency swap agreements due to depreciation of the Euro versus the U.S. dollar and other various U.S. and foreign tax matters.
Income tax expense of $62.0 million in the first nine months of 2022 includes $7.7 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 28.7 percent. The discrete tax expense relates to the revaluation of cross-currency swap agreements due to depreciation of the Euro versus the U.S. dollar, as well as various U.S. and foreign tax matters offset by the tax effect impacts of legal entity mergers. Income tax expense of $46.4 million in the first nine months of 2021 includes $5.1 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 27.4 percent. The discrete tax expense relates to the revaluation of cross-currency swap agreements due to depreciation of the Euro versus the U.S. dollar and various U.S. andmergers offset by foreign tax matters.
Income from equity method investments:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
August 27, | August 28, | 2022 vs | August 27, | August 28, | 2022 vs | March 4, | February 26, | 2023 vs | ||||||||||||||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | 2022 | 2021 | 2021 | 2023 | 2022 | 2022 | |||||||||||||||||||||||||||
Income from equity method investments | $ | 1.6 | $ | 2.0 | (20.0 | )% | $ | 4.2 | $ | 6.1 | (31.1 | )% | $ | 1.2 | $ | 1.6 | (25.0 | )% |
The income from equity method investments relates to our 50 percent ownership of the Sekisui-Fuller joint venture in Japan. The lower income for the thirdfirst quarter and first nine months of 20222023 compared to the same period of 20212022 is due to the unfavorable impact of the weakening of the Japanese yen against the U.S. dollar offset by higherand lower net income in theour joint venture.
Net income attributable to H.B. Fuller:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
August 27, | August 28, | 2022 vs | August 27, | August 28, | 2022 vs | March 4, | February 26, | 2023 vs | ||||||||||||||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | 2022 | 2021 | 2021 | 2023 | 2022 | 2022 | |||||||||||||||||||||||||||
Net income attributable to H.B. Fuller | $ | 46.5 | $ | 31.6 | 47.2 | % | $ | 132.0 | $ | 110.5 | 19.5 | % | $ | 21.9 | $ | 38.3 | (42.8 | )% | ||||||||||||||||||
Percent of net revenue | 4.9 | % | 3.8 | % | 4.7 | % | 4.6 | % | 2.7 | % | 4.5 | % |
The net income attributable to H.B. Fuller for the thirdfirst quarter of 20222023 was $46.5$21.9 million compared to $31.6 million for the third quarter of 2021. The diluted earnings per share for the third quarter of 2022 was $0.84 per share as compared to $0.58 per share for the third quarter of 2021.
The net income attributable to H.B. Fuller for the first nine months of 2022 was $132.0 million compared to $110.5$38.3 million for the first nine monthsquarter of 2021.2022. The diluted earnings per share for the first nine monthsquarter of 20222023 was $2.39$0.39 per share as compared to $2.04$0.69 per share for the first nine monthsquarter of 2021.
2022.
Operating Segment Results
We have three reportable segments: Hygiene, Health and Consumable Adhesives, Engineering Adhesives and Construction Adhesives. Operating results of each of these segments are regularly reviewed by our chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance.
The tables below provide certain information regarding the net revenue and operating income of each of our operating segments.
Corporate Unallocated amounts include business acquisition and integration costs, organizational restructuring charges and project costs associated with our implementation of SAPProject ONE.
Net Revenue by Segment:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
August 27, 2022 | August 28, 2021 | August 27, 2022 | August 28, 2021 | March 4, 2023 | February 26, 2022 | |||||||||||||||||||||||||||||||||||||||||||
Net | % of | Net | % of | Net | % of | Net | % of | Net | % of | Net | % of | |||||||||||||||||||||||||||||||||||||
($ in millions) | Revenue | Total | Revenue | Total | Revenue | Total | Revenue | Total | Revenue | Total | Revenue | Total | ||||||||||||||||||||||||||||||||||||
Hygiene, Health and Consumable Adhesives | $ | 425.0 | 45 | % | $ | 369.4 | 45 | % | $ | 1,252.4 | 45 | % | $ | 1,069.9 | 45 | % | $ | 383.5 | 47 | % | $ | 389.5 | 46 | % | ||||||||||||||||||||||||
Engineering Adhesives | 378.2 | 40 | % | 342.3 | 41 | % | 1,137.6 | 41 | % | 1,000.3 | 42 | % | 333.1 | 41 | % | 354.0 | 41 | % | ||||||||||||||||||||||||||||||
Construction Adhesives | 138.0 | 15 | % | 115.1 | 14 | % | 401.0 | 14 | % | 310.4 | 13 | % | 92.6 | 12 | % | 113.0 | 13 | % | ||||||||||||||||||||||||||||||
Segment total | $ | 941.2 | 100 | % | $ | 826.8 | 100 | % | $ | 2,791.0 | 100 | % | $ | 2,380.6 | 100 | % | $ | 809.2 | 100 | % | $ | 856.5 | 100 | % | ||||||||||||||||||||||||
Corporate Unallocated | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Total | $ | 941.2 | 100 | % | $ | 826.8 | 100 | % | $ | 2,791.0 | 100 | % | $ | 2,380.6 | 100 | % | $ | 809.2 | 100 | % | $ | 856.5 | 100 | % |
Segment Operating Income (Loss):
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
August 27, 2022 | August 28, 2021 | August 27, 2022 | August 28, 2021 | March 4, 2023 | February 26, 2022 | |||||||||||||||||||||||||||||||||||||||||||
Segment | Segment | Segment | Segment | Segment | Segment | |||||||||||||||||||||||||||||||||||||||||||
Operating | Operating | Operating | Operating | Operating | Operating | |||||||||||||||||||||||||||||||||||||||||||
Income | % of | Income | % of | Income | % of | Income | % of | Income | % of | Income | % of | |||||||||||||||||||||||||||||||||||||
($ in millions) | (Loss) | Total | (Loss) | Total | (Loss) | Total | (Loss) | Total | (Loss) | Total | (Loss) | Total | ||||||||||||||||||||||||||||||||||||
Hygiene, Health and Consumable Adhesives | $ | 47.5 | 54 | % | $ | 29.7 | 50 | % | $ | 122.9 | 53 | % | $ | 98.5 | 56 | % | $ | 45.1 | 75 | % | $ | 32.2 | 56 | % | ||||||||||||||||||||||||
Engineering Adhesives | 39.8 | 45 | % | 34.1 | 57 | % | 115.3 | 50 | % | 96.6 | 54 | % | 32.5 | 54 | % | 32.6 | 57 | % | ||||||||||||||||||||||||||||||
Construction Adhesives | 6.4 | 7 | % | 3.3 | 6 | % | 22.0 | 9 | % | 4.9 | 3 | % | (9.6 | ) | (16 | )% | 4.4 | 8 | % | |||||||||||||||||||||||||||||
Segment total | $ | 93.7 | 106 | % | $ | 67.1 | 113 | % | $ | 260.2 | 112 | % | $ | 200.0 | 113 | % | $ | 68.0 | 113 | % | $ | 69.2 | 121 | % | ||||||||||||||||||||||||
Corporate Unallocated | (5.7 | ) | (6 | )% | (7.6 | ) | (13 | )% | (27.7 | ) | (12 | )% | (23.1 | ) | (13 | )% | (7.7 | ) | (13 | )% | (12.2 | ) | (21 | )% | ||||||||||||||||||||||||
Total | $ | 88.0 | 100 | % | $ | 59.5 | 100 | % | $ | 232.5 | 100 | % | $ | 176.9 | 100 | % | $ | 60.3 | 100 | % | $ | 57.0 | 100 | % |
Hygiene, Health and Consumable Adhesives
Three Months Ended | ||||||||||||
March 4, | February 26, | 2023 vs | ||||||||||
($ in millions) | 2023 | 2022 | 2022 | |||||||||
Net revenue | $ | 383.5 | $ | 389.5 | (1.5 | )% | ||||||
Segment operating income | $ | 45.1 | $ | 32.2 | 40.1 | % | ||||||
Segment operating margin | 11.8 | % | 8.3 | % |
Hygiene, Health and Consumable Adhesives
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
August 27, | August 28, | 2022 vs | August 27, | August 28, | 2022 vs | |||||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | 2022 | 2021 | 2021 | ||||||||||||||||||
Net revenue | $ | 425.0 | $ | 369.4 | 15.1 | % | $ | 1,252.4 | $ | 1,069.9 | 17.0 | % | ||||||||||||
Segment operating income | $ | 47.5 | $ | 29.7 | 59.9 | % | $ | 122.9 | $ | 98.5 | 24.8 | % | ||||||||||||
Segment operating margin | 11.2 | % | 8.0 | % | 9.8 | % | 9.2 | % |
The following table provides details of the Hygiene, Health and Consumable Adhesives net revenue variances:
Three Months Ended | Nine Months Ended | |||||||
August 27, 2022 vs. August 28, 2021 | August 27, 2022 vs. August 28, 2021 | |||||||
Organic growth | 22.9 | % | 22.7 | % | ||||
Currency | (7.8 | )% | (5.7 | )% | ||||
Total | 15.1 | % | 17.0 | % |
Three Months Ended | ||||
March 4, 2023 vs. February 26, 2022 | ||||
Organic growth | 4.5 | % | ||
M&A | 0.2 | % | ||
Currency | (6.2 | )% | ||
Total | (1.5 | )% |
Net revenue increased 15.1decreased 1.5 percent in the thirdfirst quarter of 20222023 compared to the thirdfirst quarter of 2021.2022. The increase in organic growth was attributable to an increase in product pricing, partially offset by a decrease in sales volume. The 0.2 percent increase in net revenue from M&A was due to the acquisition of Lemtapes during the first quarter of 2022. The negative currency effect was due to a weaker Euro, Turkish lira,Egyptian pound, Argentinian peso, Egyptian poundEuro and Chinese renminbi compared to the U.S. dollar. As a percentage of net revenue, raw material costs increased 30decreased 360 basis points due to higher product pricing. Other manufacturing costs as a percentage of net revenue decreased 36070 basis points due to higher net revenue.product pricing. SG&A expenses as a percentage of net revenue increased 1080 basis points.points due to higher compensation costs. Segment operating income increased 59.940.1 percent and segment operating margin as a percentage of net revenue increased 320 basis points compared to the third quarter of 2021.
Net revenue increased 17.0 percent in the first nine months of 2022 compared to the first nine months of 2021. The increase in organic growth was attributable to an increase in product pricing and sales volume. The negative currency effect was due to a weaker Euro, Turkish lira and Argentinian peso, partially offset by a stronger Brazilian real compared to the U.S. dollar. As a percentage of net revenue, raw material costs increased 310 basis points due to higher raw material costs. Other manufacturing costs as a percentage of net revenue decreased 280 basis points due to higher net revenue. SG&A expenses as a percentage of net revenue decreased 90 basis points due to higher net revenue. Segment operating income increased 24.8 percent and segment operating margin as a percentage of net revenue increased 60350 basis points compared to the first nine monthsquarter of 2021.2022.
Engineering Adhesives
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
August 27, | August 28, | 2022 vs | August 27, | August 28, | 2022 vs | |||||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | 2022 | 2021 | 2021 | ||||||||||||||||||
Net revenue | $ | 378.2 | $ | 342.3 | 10.5 | % | $ | 1,137.6 | $ | 1,000.3 | 13.7 | % | ||||||||||||
Segment operating income | $ | 39.8 | $ | 34.1 | 16.7 | % | $ | 115.3 | $ | 96.6 | 19.4 | % | ||||||||||||
Segment operating margin | 10.5 | % | 10.0 | % | 10.1 | % | 9.7 | % |
Three Months Ended | ||||||||||||
March 4, | February 26, | 2023 vs | ||||||||||
($ in millions) | 2023 | 2022 | 2022 | |||||||||
Net revenue | $ | 333.1 | $ | 354.0 | (5.9 | )% | ||||||
Segment operating income | $ | 32.5 | $ | 32.6 | (0.3 | )% | ||||||
Segment operating margin | 9.8 | % | 9.2 | % |
The following tables provide details of the Engineering Adhesives net revenue variances:
Three Months Ended | Nine Months Ended | |||||||
August 27, 2022 vs. August 28, 2021 | August 27, 2022 vs. August 28, 2021 | |||||||
Organic growth | 17.5 | % | 18.7 | % | ||||
Currency | (7.0 | )% | (5.0 | )% | ||||
Total | 10.5 | % | 13.7 | % |
Three Months Ended | ||||
March 4, 2023 vs. February 26, 2022 | ||||
Organic growth | (2.9 | )% | ||
M&A | 1.5 | % | ||
Currency | (4.5 | )% | ||
Total | (5.9 | )% |
Net revenue increased 10.5decreased 5.9 percent in the thirdfirst quarter of 20222023 compared to the thirdfirst quarter of 2021.2022. The increasedecrease in organic growth was attributable primarilty due too a decrease in sales volume, partially offset by an increase in product pricingpricing. The 1.5 percent increase in net revenue from M&A was due to the acquisition of ZKLT in the fourth quarter of 2022 and sales volume. Aspen in the first quarter of 2023. The negative currency effect was due to a weaker Euro, Chinese renminbi, Euro and Turkish lira compared to the U.S. dollar. Raw material costs as a percentage of net revenue decreased 120240 basis points due to higher net revenue.product pricing. Other manufacturing costs as a percentage of net revenue decreased 150increased 90 basis points due to higherlower net revenue. SG&A expenses as a percentage of net revenue increased 22090 basis points due to higher compensation costs. Segment operating income increased 16.7decreased 0.3 percent and segment operating margin increased 50 basis points compared to the third quarter of 2021.
Net revenue increased 13.7 percent in the first nine months of 2022 compared to the first nine months of 2021. The increase in organic growth was attributable primarily due to an increase in product pricing and sales volume. The negative currency effect was due to a weaker Euro and Turkish lira compared to the U.S. dollar. Raw material costs as a percentage of net revenue increased 180 basis points due to higher raw material costs. Other manufacturing costs as a percentage of net revenue decreased 200 basis points due to higher net revenue. SG&A expenses as a percentage of net revenue decreased 20 basis points. Segment operating income increased 19.4 percent and segment operating margin increased 4060 basis points compared to the first nine monthsquarter of 2021.2022.
Construction Adhesives
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
August 27, | August 28, | 2022 vs | August 27, | August 28, | 2022 vs | March 4, | February 26, | 2023 vs | ||||||||||||||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | 2022 | 2021 | 2021 | 2023 | 2022 | 2022 | |||||||||||||||||||||||||||
Net revenue | $ | 138.0 | $ | 115.1 | 19.8 | % | $ | 401.0 | $ | 310.4 | 29.2 | % | $ | 92.6 | $ | 113.0 | (18.0 | )% | ||||||||||||||||||
Segment operating income (loss) | $ | 6.4 | $ | 3.3 | 93.9 | % | $ | 22.0 | $ | 4.9 | 349.0 | % | $ | (9.6 | ) | $ | 4.4 | (318.2 | )% | |||||||||||||||||
Segment operating margin | 4.6 | % | 2.9 | % | 5.5 | % | 1.6 | % | (10.4 | )% | 3.9 | % |
The following tables provide details of the Construction Adhesives net revenue variances:
Three Months Ended | Nine Months Ended | |||||||
August 27, 2022 vs. August 28, 2021 | August 27, 2022 vs. August 28, 2021 | |||||||
Organic growth | 6.9 | % | 17.6 | % | ||||
M&A | 14.2 | % | 12.6 | % | ||||
Currency | (1.3 | )% | (1.0 | )% | ||||
Total | 19.8 | % | 29.2 | % |
Three Months Ended | ||||
March 4, 2023 vs. February 26, 2022 | ||||
Organic growth | (25.8 | )% | ||
M&A | 9.3 | % | ||
Currency | (1.5 | )% | ||
Total | (18.0 | )% |
Net revenue increased 19.8decreased 18.0 percent in the thirdfirst quarter of 20222023 compared to the thirdfirst quarter of 2021.2022. The increasedecrease in organic growth was attributable primarily to an increasea decrease in product pricingsales volume, partially offset by a decreaseslight increase in sales volume.product pricing. The 9.3 percent increase in net revenue from M&A was due to the acquisitions ofof Fourny and Apollo duringin the first quarter of 2022 and GSSI in the firstfourth quarter of 2022. The negative currency effect was due to a weaker EuroBritish pound, Canadian dollar, and Australian dollar compared to the U.S. dollar. Raw material costs as a percentage of net revenue decreased 50increased 240 basis points due to lower net revenue. Other manufacturing costs as a percentage of net revenue decreasedincreased 130380 basis points due to higherlower net revenue and the impact of acquisitions.revenue. SG&A expenses as a percentage of net revenue increased 10810 basis points.points due to higher compensation costs. Segment operating income increaseddecreased 93.9318.2 percent and segment operating margin increaseddecreased 1701,430 basis points compared to the thirdfirst quarter of 2021.
Net revenue increased 29.2 percent in the first nine months of 2022 compared to the first nine months of 2021. The increase in organic growth was attributable primarily to an increase in product pricing and sales volume. The increase in net revenue from M&A was due to the acquisitions of Fourny and Apollo during the first quarter of 2022. The negative currency effect was due to a weaker British pound, Euro and Australian dollar compared to the U.S. dollar. Raw material costs as a percentage of net revenue increased 70 basis points due to higher raw material costs partially offset by higher net revenue. Other manufacturing costs as a percentage of net revenue decreased 240 basis points due to higher net revenue and the impact of acquisitions. SG&A expenses as a percentage of net revenue decreased 220 basis points due to higher net revenue. Segment operating income increased 349.0 percent and segment operating margin increased 390 basis points compared to the first nine months of 2021.
Corporate Unallocated
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
August 27, | August 28, | 2022 vs | August 27, | August 28, | 2022 vs | March 4, | February 26, | 2023 vs | ||||||||||||||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | 2022 | 2021 | 2021 | 2023 | 2022 | 2022 | |||||||||||||||||||||||||||
Net revenue | $ | - | $ | - | 0.0 | % | $ | - | $ | - | 0.0 | % | $ | - | $ | - | 0.0 | % | ||||||||||||||||||
Segment operating loss | $ | (5.7 | ) | $ | (7.6 | ) | (25.0 | )% | $ | (27.7 | ) | $ | (23.1 | ) | 19.9 | % | $ | (7.7 | ) | $ | (12.2 | ) | (36.9 | )% | ||||||||||||
Segment operating margin | NMP | NMP | NMP | NMP | NMP | NMP |
NMP = Non-meaningful percentage
Corporate Unallocated includes acquisition and integration-related charges, restructuring-related charges, and costs related to the implementation of Project ONE.
Segment operating loss in the thirdfirst quarter and first nine months of 2022 increased 25.0 percent and 19.92023 decreased 36.9 percent compared to the thirdfirst quarter and first nine months of 2021, respectively,2022 reflecting increasedlower acquisition project costs.costs compared to the prior year.
Financial Condition, Liquidity and Capital Resources
Total cash and cash equivalents as of August 27, 2022March 4, 2023 were $60.7$125.5 million compared to $61.8$79.9 million as of November 27, 2021December 3, 2022 and $68.1$63.5 million as of August 28, 2021.February 26, 2022. The majority of the $60.7$125.5 million in cash and cash equivalents as of August 27, 2022March 4, 2023 was held outside the United States. Total long and short-term debt was $1,918.2$1,873.5 million as of August 27, 2022, $1,616.5March 4, 2023, $1,765.1 million as of November 27, 2021December 3, 2022 and $1,664.0$1,914.1 million as of August 28, 2021.February 26, 2022. The total debt to total capital ratio as measured by Total Debt divided by (Total Debt plus Total Stockholders’ Equity) was 54.953.4 percent as of August 27, 2022March 4, 2023 as compared to 50.252.3 percent as of November 27, 2021December 3, 2022 and 51.453.8 percent as of August 28, 2021.February 26, 2022.
We believe that cash flows from operating activities will be adequate to meet our ongoing liquidity and capital expenditure needs. In addition, we believe we have the ability to obtain both short-term and long-term debt to meet our financing needs for the foreseeable future. Cash available in the United States has historically been sufficient and we expect it will continue to be sufficient to fund U.S. operations, U.S. capital spending and U.S. pension and other postretirement benefit contributions in addition to funding U.S. acquisitions, dividend payments, debt service and share repurchases as needed. For those international earnings considered to be reinvested indefinitely, we currently have no intention to, and plans do not indicate a need to, repatriate these funds for U.S. operations.
Our credit agreements include restrictive covenants beginning for the quarter ending June 3, 2023 that, if not met, could lead to a renegotiation of our credit lines and a significant increase in our cost of financing. At August 27, 2022, we were in compliance with allThose covenants of our contractual obligationsare as shown in the following table:follows:
Covenant | Debt Instrument | Measurement | Result as of | |||
Secured Total Indebtedness / TTM1 EBITDA | Revolving Facility and Term Loan | Not greater than | ||||
|
|
| ||||
TTM1 EBITDA / Consolidated Interest Expense | Revolving | Not less than 2.0 |
| 1TTM = Trailing 12 months | |
2The Maximum Secured Leverage Ratio prior to June 1, 2024, shall be 4.75 to 1.00 and will step down to 4.50 to 1.0 with respect to quarters ending after June 1, 2024 | ||
*The terms of the Second Amended and Restated Credit Agreement do not require the financial covenants to be measured until the fiscal quarter ending June 3, 2023 |
| EBITDA for |
|
| Consolidated Interest Expense for |
We believe we have the ability to meet all of our contractual obligations and commitments in fiscal 2022.2023.
Selected Metrics of Liquidity
Key metrics we monitor are net working capital as a percent of annualized net revenue, trade receivable days sales outstanding (“DSO”), inventory days on hand, free cash flow after dividends and debt capitalization ratio.
August 27, | August 28, | March 4, | February 26, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Net working capital as a percentage of annualized net revenue1 | 18.9 | % | 16.6 | % | 19.8 | % | 18.5 | % | ||||||||
Accounts receivable DSO (in days)2 | 63 | 63 | 64 | 65 | ||||||||||||
Inventory days on hand (in days)3 | 75 | 70 | 84 | 82 | ||||||||||||
Free cash flow after dividends4 | $ | (78.8 | ) | $ | 57.9 | |||||||||||
(Negative) free cash flow after dividends4 | $ | (52.3 | ) | $ | (75.5 | ) | ||||||||||
Total debt to total capital ratio5 | 54.9 | % | 51.4 | % | 53.4 | % | 53.8 | % |
1 Current quarter net working capital (trade receivables, net of allowance for doubtful accounts plus inventory minus trade payables) divided by annualized net revenue (current quarter multiplied by four).
2 Trade receivables net of the allowance for doubtful accounts at the balance sheet date multiplied by 91 (13 weeks) and divided by the net revenue for the quarter.
3 Total inventory multiplied by 91 and divided by cost of sales (excluding delivery costs) for the quarter.
4 Year-to-date net cash provided by operating activities, less purchased property, plant and equipment and dividends paid. See reconciliation of net cash provided by operating activities to free cash flow after dividends below.
5 Total debt divided by (total debt plus total stockholders’ equity).
Free cash flow after dividends, a non-GAAP financial measure, is defined as net cash provided by operations less purchased property, plant and equipment and dividends paid. Free cash flow after dividends is an integral financial measure used by the Company to assess its ability to generate cash in excess of its operating needs, therefore, the Company believes this financial measure provides useful information to investors. The following table reflects the manner in which free cash flow after dividends is determined and provides a reconciliation of free cash flow after dividends to net cash provided by operating activities, the most directly comparable financial measure calculated and reported in accordance with U.S. GAAP.
Reconciliation of "Net cash provided by operating activities" to Free(Negative) free cash flow after dividends
Nine Months Ended | Three Months Ended | |||||||||||||||
($ in millions) | August 27, 2022 | August 28, 2021 | March 4, 2023 | February 26, 2022 | ||||||||||||
Net cash provided by operating activities | $ | 48.7 | $ | 161.1 | $ | 5.5 | $ | (17.7 | ) | |||||||
Less: Purchased property, plant and equipment | 98.4 | 77.2 | 47.6 | 48.9 | ||||||||||||
Less: Dividends paid | 29.1 | 26.0 | 10.2 | 8.9 | ||||||||||||
(Negative) free cash flow after dividends | $ | (78.8 | ) | $ | 57.9 | $ | (52.3 | ) | $ | (75.5 | ) |
Summary of Cash Flows
Cash Flows from Operating Activities:
Nine Months Ended | Three Months Ended | |||||||||||||||
August 27, | August 28, | March 4, | February 26, | |||||||||||||
($ in millions) | 2022 | 2021 | 2023 | 2022 | ||||||||||||
Net cash provided by operating activities | $ | 48.7 | $ | 161.1 | $ | 5.5 | $ | (17.7 | ) |
Net income including non-controlling interest was $132.1$21.9 million in the first ninethree months of 20222023 compared to $110.6$38.3 million in the first ninethree months of 2021.2022. Depreciation and amortization expense totaled $109.4$37.9 million in the first ninethree months of 20222023 compared to $107.6$36.0 million in the first ninethree months of 2021.2022. Deferred income taxes was a use of cash of $5.0$5.7 million in 20222023 compared to $1.5$6.0 million in the first ninethree months of 2021.2022. Accrued compensation was a use of cash of $17.3$57.0 million in 20222023 compared to $1.3$44.1 million last year. Other assets was a use of cash of $40.3$28.9 million in the first ninethree months of 20222023 compared to $26.1$3.2 million in the first ninethree months of 2021.2022. Other liabilities was a use of cash of $35.9$3.1 million in the first ninethree months of 20222023 compared to $53.5$8.8 million in the first ninethree months of 2021.2022.
Changes in net working capital (trade receivables, inventory and trade payables) accounted for a usesource of cash of $146.6$30.6 million compared to a use of cash of $26.8$27.6 million last year. The table below provides the cash flow impact due to changes in the components of net working capital:
Nine Months Ended | Three Months Ended | |||||||||||||||
August 27, | August 28, | March 4, | February 26, | |||||||||||||
($ in millions) | 2022 | 2021 | 2023 | 2022 | ||||||||||||
Trade receivables, net | $ | (51.6 | ) | $ | (61.9 | ) | $ | 55.4 | $ | 13.3 | ||||||
Inventory | (112.4 | ) | (141.1 | ) | (33.8 | ) | (87.4 | ) | ||||||||
Trade payables | 17.4 | 176.2 | 9.0 | 46.5 | ||||||||||||
Total cash flow impact | $ | (146.6 | ) | $ | (26.8 | ) | $ | 30.6 | $ | (27.6 | ) |
● | Trade receivables, net – Trade receivables, net was a |
| ● | Inventory – Inventory was a use of cash of |
● | Trade payables – Trade payables was a source of cash of |
Cash Flows from Investing Activities:
Nine Months Ended | Three Months Ended | |||||||||||||||
August 27, | August 28, | March 4, | February 26, | |||||||||||||
($ in millions) | 2022 | 2021 | 2023 | 2022 | ||||||||||||
Net cash used in investing activities | $ | (336.0 | ) | $ | (75.7 | ) | $ | (63.7 | ) | $ | (274.2 | ) |
Purchases of property, plant and equipment were $98.4$47.6 million during the first ninethree months of 20222023 compared to $77.2$48.9 million for the same period of 20212022. This difference reflects the timing of capital projects and expenditures related to growth initiatives.
During the first ninethree months of 2023, we paid cash to acquire Lemtapes for $7.4 million and Aspen for $9.3 million, net of cash acquired. During the first three months of 2022, we paid cash to acquire TissueSeal for $22.2 million, Fourny for $14.5 million, net of cash acquired and Apollo for $192.6 million, net of cash acquired and ZKLT for $13.6 million, net of cash acquired.
Cash Flows from Financing Activities:
Nine Months Ended | Three Months Ended | |||||||||||||||
August 27, | August 28, | March 4, | February 26, | |||||||||||||
($ in millions) | 2022 | 2021 | 2023 | 2022 | ||||||||||||
Net cash provided by (used in) financing activities | $ | 301.7 | $ | (114.8 | ) | $ | 103.2 | $ | 287.8 |
Borrowings on our revolving credit facility were $335.0 million inIn the first ninethree months of 20222023,we refinanced our debt and as a result have proceeds from the issuance of long-term debt of $1,300.0 million and repayment of long-term debt of $1,177 million. These borrowings are to finance acquisitions and for general working capital purposes. Payments on our revolving credit facility were $15.0 million in the first nine months of 2022. No pPayments ofayment was made for long-term debt in the first nine months of 2021 were $118.0 million. Net proceeds of notes payable were $6.7 million in the first ninethree months of 2022 and $9.8borrowings on our long-term debt were $307.5 million. Payment of debt issue costs were $10.2 million and $0.4 million in the first three months of 2023 and 2022, respectively. Net payments of notes payable were $0.9 million in the first three months of 2023 and $7.6 million in the same period of 20212022. Cash dividends paid were $29.1$10.2 million in the first ninethree months of 20222023 compared to $26.0$8.9 million in the same period of 20212022. Repurchases of common stock were $3.9$2.4 million in the first ninethree months of 20222023 compared to $2.7$3.6 million in the same period of 20212022.
Forward-Looking Statements and Risk Factors
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words like "plan," "expect," "aim," "believe," "project," "anticipate," "intend," "estimate," "will," "should," "could" (including the negative or variations thereof) and other expressions that indicate future events and trends. These plans and expectations are based upon certain underlying assumptions, including those mentioned with the specific statements. Such assumptions are in turn based upon internal estimates and analyses of current market conditions and trends, our plans and strategies, economic conditions and other factors. These plans and expectations and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. In addition to the factors described in this report, Item 1A. Risk Factors identifies some of the important factors that could cause our actual results to differ materially from those in any such forward-looking statements. In order to comply with the terms of the safe harbor, we have identified these important factors which could affect our financial performance and could cause our actual results for future periods to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. These factors should be considered, together with any similar risk factors or other cautionary language that may be made elsewhere in this Quarterly Report on Form 10-Q.
The list of important factors in Item 1A. Risk Factors does not necessarily present the risk factors in order of importance. This disclosure, including that under Forward-Looking Statements and Risk Factors, and other forward-looking statements and related disclosures made by us in this report and elsewhere from time to time, represents our best judgment as of the date the information is given. We do not undertake responsibility for updating any of such information, whether as a result of new information, future events, or otherwise, except as required by law. Investors are advised, however, to consult any further public company disclosures (such as in filings with the SEC or in our press releases) on related subjects.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various market risks, including changes in interest rates, foreign currency rates and prices of raw materials. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates. See Part II, Item 7A in our Annual Report on Form 10-K for the year ended November 27, 2021December 3, 2022 for further discussion of these market risks. There have been no material changes in the reported market risk of the Company since November 27, 2021.December 3, 2022.
Item 4. Controls and Procedures
Controls and Procedures
We conducted an evaluation, under the supervision and with the participation of our president and chief executive officer and executive vice president, chief financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of August 27, 2022.March 4, 2023. Based on this evaluation, our president and chief executive officer and executive vice president, chief financial officer concluded that, as of August 27, 2022,March 4, 2023, our disclosure controls and procedures were effective.
For purposes of Rule 13a-15(e), the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its president and chief executive officer and executive vice president, chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.
Environmental Matters
From timeWe are involved in environmental investigations, clean-up activities and administrative proceedings related to time, we become aware ofenvironmental compliance matters relating to, or receive notices from, federal, state or local entities regarding possible or alleged violations of environmental, health or safety lawsat former and regulations. Also, from time to time, we arecurrent operating facilities. We have also been identified as a potentially responsible party (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and/or similar state laws that impose liability for costs relating to the clean up of contamination resulting from past spills, disposal or other release of hazardous substances.substances associated with landfills and/or hazardous waste sites. As a PRP, we may be required to pay a share of the costs of investigation and clean-up of these sites. We are also subject to similar laws in some of the countries where current and former facilities are located. Our environmental, health and safety department monitors compliance with applicable laws on a global basis.
Currently, we are involved in various environmental investigations, clean up activities and administrative proceedings and lawsuits. In particular, we are currently deemed a PRP in conjunction with numerous other parties, in a number of government enforcement actions associated with landfills and/or hazardous waste sites. As a PRP, we may be required to pay a share of the costs of investigation and clean up of these sites.
We are also engaged in environmental remediation and monitoring efforts at a number of current and former operating facilities. To the extent we can reasonably estimate the amount of our probable liabilities for environmental matters, we establish a financial provision. It is reasonably possible that we may have additional liabilities related to these known environmental matters. However, the full extent of our future liability for environmental matters is difficult to predict because of uncertainty as to the cost of investigation and clean up of the sites, our responsibility for such hazardous substances and the number of and financial condition of other potentially responsible parties.
While uncertainties exist with respect to the amounts and timing of the ultimate environmental liabilities, based on currently available information, we have concluded that these matters, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flow. However, adverse developments and/or periodic settlements could negatively impact the results of operations or cash flows in one or more future periods.
Other Legal Proceedings
From time to time and in the ordinary course of business, we are a party to, or a target of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, contract, patent and intellectual property, environmental, health and safety, tax and employment matters. While we are unable to predict the outcome of these matters, we have concluded, based upon currently available information, that the ultimate resolution of any pending matter, individually or in the aggregate, including asbestos-related litigation, will not have a material adverse effect on our results of operations, financial condition or cash flow. However, adverse developments and/or periodic settlements could negatively impact the results of operations or cash flows in one or more future periods.
For additional information regarding environmental matters and other legal proceedings, see Note 1213 to our Consolidated Financial Statements.
This Form 10-Q contains forward-looking statements concerning our future programs, products, expenses, revenue, liquidity and cash needs as well as our plans and strategies. These forward-looking statements are based on current expectations and we assume no obligation to update this information. Numerous factors could cause actual results to differ significantly from the results described in these forward-looking statements, including the risk factors identified under Part I, Item 1A. Risk Factors contained in our Annual Report on Form 10-K for the fiscal year ended November 27, 2021.December 3, 2022. There have been no material changes in the risk factors disclosed by us under Part I, Item 1A. Risk Factors contained in the Annual Report on Form 10-K for the fiscal year ended November 27, 2021, except for the addition of the following risk factor:
The military conflict betweenRussiaand Ukraine, and the global response to it, could adversely impact our revenues, gross margins and financial results.
The U.S. government and other nations have imposed significant restrictions on most companies’ ability to do business in Russia as a result of the military conflict between Russia and Ukraine. It is not possible to predict the broader or longer-term consequences of this conflict, which could include further sanctions, embargoes, regional instability, energy shortages, geopolitical shifts and adverse effects on macroeconomic conditions, security conditions, currency exchange rates and financial markets. Such geo-political instability and uncertainty could have a negative impact on our ability to sell to, ship products to, collect payments from, and support customers in certain regions based on trade restrictions, embargoes and export control law restrictions, and logistics restrictions including closures of air space, and could increase the costs, risks and adverse impacts from these new challenges. We may also be the subject of increased cyber-attacks. While Russia does not constitute a material portion of our business, a significant escalation or expansion of economic disruption or the conflict's current scope could have a material adverse effect on our results of operations.December 3, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Information on our purchases of equity securities during the thirdfirst quarter ended August 27, 2022March 4, 2023 is as follows:
(d) | ||||||||||||
Maximum | ||||||||||||
Approximate Dollar | ||||||||||||
(a) | Value of Shares that | |||||||||||
Total | (b) | may yet be | ||||||||||
Number of | Average | Purchased Under the | ||||||||||
Shares | Price Paid | Plan or Program | ||||||||||
Period | Purchased1 | per Share | (millions) | |||||||||
May 29, 2022 - July 2, 2022 | 765 | $ | 60.53 | $ | 300,000 | |||||||
July 3, 2022 - July 30, 2022 | - | $ | - | $ | 300,000 | |||||||
July 31, 2022 - August 27, 2022 | 3,563 | $ | 64.26 | $ | 300,000 |
(d) | ||||||||||||
Maximum | ||||||||||||
Approximate Dollar | ||||||||||||
(a) | Value of Shares that | |||||||||||
Total | (b) | may yet be | ||||||||||
Number of | Average | Purchased Under the | ||||||||||
Shares | Price Paid | Plan or Program | ||||||||||
Period | Purchased1 | per Share | (millions) | |||||||||
December 4, 2022 - January 6, 2023 | - | $ | - | $ | 300,000 | |||||||
January 7, 2023 - February 4, 2022 | 35,990 | $ | 69.57 | $ | 300,000 | |||||||
February 5, 2023 - March 4, 2023 | - | $ | - | $ | 300,000 |
1 The total number of shares purchased are shares withheld to satisfy the employees’ withholding taxes upon vesting of restricted stock.
Repurchases of common stock are made to support our stock-based employee compensation plans and for other corporate purposes. Upon vesting of restricted stock awarded to employees, shares are withheld to cover the employees’ minimum withholding taxes.
On April 7, 2022, the Board of Directors authorized a new share repurchase program of up to $300.0 million of our outstanding common shares.shares for a period of up to five years. Under the program, we are authorized to repurchase shares for cash on the open market, from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases is dependent on price, market conditions and applicable regulatory requirements. Upon repurchase of the shares, we reduce our common stock for the par value of the shares with the excess being applied against additional paid-in capital. This authorization replaces the April 6, 2017 authorization to repurchase shares.
4.1 | Form of Certificate for common stock, par value $1.00 per share | |
10.1 | Amended and Restated Credit Agreement, dated February 15, 2023, among H.B. Fuller Company and JPMorgan Chase Bank, N.A., as administrative agent and the various other parties named thereto(1) | |
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101 | The following materials from the H.B. Fuller Company Quarterly Report on Form 10-Q for the quarter ended | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |
(1) | Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K dated February 21, 2023 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
H.B. Fuller Company | |||
Dated: | /s/ John J. Corkrean | ||
John J. Corkrean | |||
Executive Vice President, | |||
Chief Financial Officer |
Exhibit Index
Exhibits
4.1 | Form of Certificate for common stock, par value $1.00 per share | |
10.1 | Amended and Restated Credit Agreement, dated February 15, 2023, among H.B. Fuller Company and JPMorgan Chase Bank, N.A., as administrative agent and the various other parties named thereto(1) | |
31.1 | Form of 302 Certification – | |
31.2 | Form of 302 Certification – John J. Corkrean | |
32.1 | Form of 906 Certification – | |
32.2 | Form of 906 Certification – John J. Corkrean | |
101 | The following materials from the H.B. Fuller Company Quarterly Report on Form 10-Q for the quarter ended | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |
(1) | Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K dated February 21, 2023 |