FULLER H B CO 10-Q

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, 2021 for important background information related to our business.    Net revenue in the second quarter of 2022 increased 20.0 percent from the second quarter of 2021. Net revenue increased 18.5 percent due to price, 3.4 percent due to sales volume and 2.0 percent due to the acquisition of Fourny and Apollo. Negative currency effects of 3.9 percent compared to the second quarter of 2021 were primarily driven by a weaker Euro, Turkish lira and Argentinian peso, partially offset by a stronger Brazilian real and Chinese renminbi  compared to the U.S. dollar . Gross profit margin decreased 80  basis points primarily due to higher raw material costs and higher net revenue.   Net revenue in the first six months of 2022 increased 19.1 percent from the first six months of 2021. Net revenue increased 16.8 percent due to price, 4.6 percent due to sales volume and 1.5 percent due to the acquisition of Fourny and Apollo. Negative currency effects of 3.8 percent compared to the first six months of 2021 were primarily driven by a weaker Euro, Turkish lira and Argentinian peso, partially offset by a stronger Chinese renminbi and Brazilian real compared to the U.S. dollar . Gross profit margin decreased 120  basis points primarily due to higher raw material costs and higher net revenue .     Net income attributable to H.B. Fuller in the second quarter of 2022 was $47.2 million compared to $49.1 million in the second quarter of 2021. On a diluted earnings per share basis, the second quarter of 2022 was $0.86 per share compared to $0.90 per share for the second quarter of 2021.   Net income attributable to H.B. Fuller in the first six months of 2022 was $85.5 million compared to $78.9 million in the first six months of 2021. On a diluted earnings per share basis, the first six months of 2022 was $1.55 per share compared to $1.47 per share for the first six months of 2021.   Market Conditions     On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus ("COVID-19") a pandemic. Throughout fiscal year 2021, the COVID-19 pandemic had a significant disruptive 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.   Restructuring Plan   During the fourth quarter of 2019, we approved a restructuring plan related to organizational changes and other actions to optimize operations in connection with the realignment of the Company into three global business units (“2020 Restructuring Plan”). We have incurred costs of $19.7  million under this plan as of May 28, 2022. We expect to incur total costs of approxim ately $20.0 million ($15.8 million after-tax), which includes cash expenditures for severance and related employee costs globally, costs related to streamlining of processes, and other restructuring-related costs. The 2020 Restructuring Plan was implemented in the fourth quarter of 2019 and is currently expected to be completed in fiscal 2022.   23 Table of Contents   Results of Operations   Net revenue:       Three Months Ended     Six Months Ended       May 28,     May 29,     2022 vs     May 28,     May 29,     2022 vs   ($ in millions)   2022     2021     2021     2022     2021     2021   Net revenue   $ 993.3     $ 827.9       20.0 %   $ 1,849.7     $ 1,553.8       19.1 %   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 second quarter and first six months of 2022 compared to the same periods in 2021:       Three Months Ended     Six Months Ended       May 28, 2022 vs. May 29, 2021     May 28, 2022 vs. May 29, 2021   Organic growth     21.9 %     21.4 % M&A     2.0 %   1.5 % Currency     (3.9 )%   (3.8 )% Total     20.0 %   19.1 %   Organic growth was 21.9 percent in the second quarter of 2022 compared to the second quarter of 2021 driven by a 24.5 percent increase in Hygiene, Health and Consumable Adhesives, a 21.8 percent increase in Engineering Adhesives and a 14.3 percent increase in Construction Adhesives . The increase is predominately driven by an increase in product pricing and sales volume. The 2.0 percent increase from M&A is due to the acquisition of Fourny and Apollo. The negative 3.9 percent currency impact was primarily driven by a weaker Euro, Turkish lira and Argentinian peso, partially offset by a stronger Brazilian real and Chinese renminbi compared to the U.S. dollar.   Organic growth was 21.4 percent in the first six months of 2022 compared to the first six months of 2021 driven by a 23.8 percent increase in Construction Adhesives, a 22.7 percent increase in Hygiene, Health and Consumable Adhesives and a 19.3 percent increase in Engineering Adhesives. The increase is predominately driven by an increase in product pricing and sales volume. The  1.5 percent increase from M&A is due to the acquisition of Fourny and Apollo. The negative 3.8 percent currency impact was primarily driven by a weaker Euro, Turkish lira and Argentinian peso, partially offset by a stronger Chinese renminbi and Brazilian real compared to the U.S. dollar.   Cost of sales:       Three Months Ended     Six Months Ended       May 28,     May 29,     2022 vs     May 28,     May 29,     2022 vs   ($ in millions)   2022     2021     2021     2022     2021     2021   Raw materials   $ 575.4     $ 454.9       26.5 %   $ 1,066.4     $ 839.9       27.0 % Other manufacturing costs     164.3       155.4       5.7 %     316.9       304.0       4.2 % Cost of sales   $ 739.7     $ 610.3       21.2 %   $ 1,383.3     $ 1,143.9       20.9 % Percent of net revenue     74.5 %     73.7 %             74.8 %     73.6 %           Cost of sales in the second quarter of 2022 compared to the second quarter of 2021 increased 80 basis points as a percentage of net revenue. Raw material cost as a percentage of net revenue increased 300 basis points in the second quarter of 2022 compared to the second quarter of 2021 due t o higher raw material costs . Other manufacturing costs as a percentage of revenue decreased 220 basis points in the second quarter of 2022 compared to the second quarter of 2021 due to higher net revenue.   Cost of sales in the first six months of 2022 compared to the first six months of 2021 increased 120 basis points as a percentage of net revenue. Raw material cost as a percentage of net revenue increased 360 basis points in the first six months of 2022 compared to the first six months of 2021 due to higher raw material costs. Oth er manufacturing costs as a percentage of revenue decreased 240 basis points in the first six months of 2022 compared to the first six months of 2021 due to higher net revenue.   24 Table of Contents   Gross profit:       Three Months Ended     Six Months Ended       May 28,     May 29,     2022 vs     May 28,     May 29,     2022 vs   ($ in millions)   2022     2021     2021     2022     2021     2021   Gross profit   $ 253.5     $ 217.6       16.5 %   $ 466.4     $ 409.9       13.8 % Percent of net revenue     25.5 %     26.3 %             25.2 %     26.4 %           Gross profit in the second quarter of 2022 increased 16.5 percent and gross profit margin decreased 80 basis points compared to the second quarter of 2021. The decrease in gross profit margin was primarily d ue to higher raw material costs and higher net revenue.   Gross pr ofit in the first six months of  2022  increased 13.8  percent and gross profit margin decreased 120  basis points compared to the first six months of 2021 . The decrease in gross profit margin was primarily due to higher raw material costs and higher net revenue.   Selling, general and administrative (SG&A) expenses:       Three Months Ended     Six Months Ended       May 28,     May 29,     2022 vs     May 28,     May 29,     2022 vs   ($ in millions)   2022     2021     2021     2022     2021     2021   SG&A   $ 166.0     $ 148.4       11.9 %   $ 321.9     $ 292.4       10.1 % Percent of net revenue     16.7 %     17.9 %             17.4 %     18.8 %           SG&A expenses for the second quarter of 2022 increased $17.6 million, or 11.9 percent, compared to the second quarter of 2021. The increase is primarily du e to higher compensation and acquisition project costs and the impact of the Fourny and Apollo acquisitions.   SG&A expenses for the first six months of 2022 increased $29.5 million, or 10.1 percent, compared to the first six months of 2021. The increase is primarily due to higher compensation and acquisition project costs and the impact of the Fourny and Apollo acquisitions.   Other income, net:       Three Months Ended     Six Months Ended       May 28,     May 29,     2022 vs     May 28,     May 29,     2022 vs   ($ in millions)   2022     2021     2021     2022     2021     2021   Other income, net   $ 0.0     $ 11.9       (100.0 )%   $ 6.1     $ 19.7       (69.0 )%   Other income, net in the second quarter of 2022 included $4.1 million of net defined benefit pension benefits and $1.4 million of other income, offset by $5.5 million of currency transaction losses. The $4.1 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 second quarter of 2021 included $8.0 million of net defined benefit pension benefits and $5.2 million of other income, offset by $1.3 million of currency transaction losses. Other income in the second quarter of 2021 includes gains related to a legal entity merger and a transactional tax legal settlement in Brazil.   Other income, net in the first six months of 2022 included $11.5 million of net defined benefit pension benefits and $1.6 million of other income, partially offset by $7.0 million of currency transaction losses. The $11.5 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 six months of 2021 included $15.9 million of net defined benefit pension benefits and $6.9 million of other income, offset by $3.1 million of currency transaction losses.   Interest expense:       Three Months Ended     Six Months Ended       May 28,     May 29,     2022 vs     May 28,     May 29,     2022 vs   ($ in millions)   2022     2021     2021     2022     2021     2021   Interest expense   $ 19.8     $ 19.9       (0.5 )%   $ 38.0     $ 40.3       (5.7 )%   25 Table of Contents   Interest expense in the second quarter of  2022 was $19.8  million compared to $19.9  million in the second quarter of 2021 . Interest expense in the second quarter of  2022 compared to the second quarter of 2021 was lower due to lower interest rates partially offset by higher debt balances.   Interest expense in the first six months of  2022 was $38.0  million compared to $40.3  million in the first six months of 2021 . Interest expense in the first six months of  2022 compared to the first six months of 2021 was lower due to lower interest rates partially offset by higher debt balances.   Interest income:       Three Months Ended     Six Months Ended       May 28,     May 29,     2022 vs     May 28,     May 29,     2022 vs   ($ in millions)   2022     2021     2021     2022     2021     2021   Interest income   $ 2.1     $ 2.5       (16.0 )%   $ 4.0     $ 5.2       (23.1 )%   Interest income in the second 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.   Interest income in the first six months of 2022 and 2021 was $4.0 million and $5.2 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income.   Income taxes:        Three Months Ended     Six Months Ended       May 28,     May 29,     2022 vs     May 28,     May 29,     2022 vs   ($ in millions)   2022     2021     2021     2022     2021     2021   Income taxes   $ 23.6     $ 16.7       41.3 %   $ 33.8     $ 27.3       23.8 % Effective tax rate     33.9 %     26.2 %             29.0 %     26.7 %           Income tax expense of $23.6 million in the second quarter of 2022 includes $4.1 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 27.9 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 foreign tax matters.  Income tax expense of $16.7 million in the second quarter of 2021 includes $0.6 million of discrete tax benefit. Excluding the discrete tax benefit, the overall effective tax rate was 27.1 percent. The discrete tax benefit relates to various U.S. and foreign tax matters.   Income tax expense of $33.8 million in the first six months of 2022 includes $1.2 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 27.9 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 foreign tax matters offset by the tax effect  of legal entity mergers. Income tax expense of $27.3  million in the first six months of  2021  includes  $0.6  million of discrete tax benefit. Excluding the discrete tax benefit, the overall effective tax rate w as 27.2 percent. The discrete tax benefit relates to various U.S. and foreign tax matters.   Income from equity method investments:       Three Months Ended     Six Months Ended       May 28,     May 29,     2022 vs     May 28,     May 29,     2022 vs   ($ in millions)   2022     2021     2021     2022     2021     2021   Income from equity method investments   $ 1.1     $ 2.2       (50.0 )%   $ 2.6     $ 4.1       (36.6 )%   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 second quarter and first six months of 2022 compared to the same period of 2021 relates to lower net income in our joint venture.   Net income attributable to H.B. Fuller:       Three Months Ended     Six Months Ended       May 28,     May 29,     2022 vs     May 28,     May 29,     2022 vs   ($ in millions)   2022     2021     2021     2022     2021     2021   Net income attributable to H.B. Fuller   $ 47.2     $ 49.1       (3.9 )%   $ 85.5     $ 78.9       8.4 % Percent of net revenue     4.8 %     5.9 %             4.6 %     5.1 %           26 Table of Contents   The net income attributable to H.B. Fuller for the second quarter of 2022 was $47.2 million compared to $49.1 million for the second quarter of 2021. The diluted earnings per share for the second quarter of 2022 was $0.86 per share as compared to $0.90 per share for the second quarter of 2021.   The net income attributable to H.B. Fuller for the first six months of 2022 was $85.5 million compared to $78.9 million for the first six months of 2021. The diluted earnings per share for the first six months of 2022 was $1.55 per share as compared to $1.47 per share for the first six months of 2021.     Operating Segment Results   We have three reportable segments: Hygiene, Health and Consumable Adhesives, Engineering Adhesives and Construction Adhesives. Operating results of each of these segments are regularly reviewed by our chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance.    The tables below provide certain information regarding the net revenue and operating income of each of our operating segments.    Corporate Unallocated amounts include business acquisition and integration costs, organizational restructuring charges and project costs associated with our implementation of SAP ONE.   Net Revenue by Segment:       Three Months Ended     Six Months Ended       May 28, 2022     May 29, 2021     May 28, 2022     May 29, 2021       Net     % of     Net     % of     Net     % of     Net     % of   ($ in millions)   Revenue     Total     Revenue     Total     Revenue     Total     Revenue     Total   Hygiene, Health and Consumable Adhesives   $ 437.9       44 %   $ 364.8       44 %   $ 827.4       45 %   $ 700.5       45 % Engineering Adhesives     405.4       41 %     345.4       42 %     759.3       41 %     658.0       42 % Construction Adhesives     150.0       15 %     117.7       14 %     263.0       14 %     195.3       13 % Segment total   $ 993.3       100 %   $ 827.9       100 %   $ 1,849.7       100 %   $ 1,553.8       100 % Corporate Unallocated     -       -       -       -       -       -       -       -   Total   $ 993.3       100 %   $ 827.9       100 %   $ 1,849.7       100 %   $ 1,553.8       100 %   Segment Operating Income (Loss):       Three Months Ended     Six Months Ended       May 28, 2022     May 29, 2021     May 28, 2022     May 29, 2021       Segment             Segment             Segment             Segment               Operating             Operating             Operating             Operating               Income     % of     Income     % of     Income     % of     Income     % of   ($ in millions)   (Loss)     Total     (Loss)     Total     (Loss)     Total     (Loss)     Total   Hygiene, Health and Consumable Adhesives   $ 43.3       49 %   $ 38.9       56 %   $ 75.5       52 %   $ 68.9       59 % Engineering Adhesives     42.9       49 %     32.1       47 %     75.5       52 %     62.5       53 % Construction Adhesives     11.3       13 %     6.3       9 %     15.6       11 %     1.6       1 % Segment total   $ 97.5       111 %   $ 77.3       112 %   $ 166.6       115 %   $ 133.0       113 % Corporate Unallocated     (10.0 )     (11 )%     (8.2 )     (12 )%     (22.1 )     (15 )%     (15.5 )     (13 )% Total   $ 87.5       100 %   $ 69.1       100 %   $ 144.5       100 %   $ 117.5       100 %   27 Table of Contents   Hygiene, Health and Consumable Adhesives       Three Months Ended     Six Months Ended       May 28,     May 29,     2022 vs     May 28,     May 29,     2022 vs   ($ in millions)   2022     2021     2021     2022     2021     2021   Net revenue   $ 437.9     $ 364.8       20.0 %   $ 827.4     $ 700.5       18.1 % Segment operating income   $ 43.3     $ 38.9       11.3 %   $ 75.5     $ 68.9       9.6 % Segment operating margin     9.9 %     10.7 %             9.1 %     9.8 %           The following table provides details of the Hygiene, Health and Consumable Adhesives net revenue variances:       Three Months Ended     Six Months Ended       May 28, 2022 vs. May 29, 2021     May 28, 2022 vs. May 29, 2021   Organic growth     24.5 %     22.7 % Currency     (4.5 )%     (4.6 )% Total     20.0 %     18.1 %   Net revenue increased 20.0 percent in the second quarter of 2022 compared to the second quarter of 2021. The increase in organic growth was attri butable to an increase in product pricing and sales volume. The neg ative currency effect was due to a weaker Euro, Turkish lira and Argentinian peso, partially offset by a stronger Brazilian real and Chinese renminbi compared to the U.S. dollar. As a percentage of net revenue, raw material costs increased 420 basis points du e to higher raw material costs partially offset by higher net revenue. Other manufacturing costs as a percentage of net revenue decreased 230 basis points primarily d ue to higher net revenue. SG&A expenses as a percentage of net revenue decreased 110 basis points due to higher net revenue . Segment operating income increased 11.3 percent and segment operating margin as a percentage of net revenue decreased 80 basis points compared to the second quarter of 2021.   Net revenue increased 18.1 percent in the first six months of 2022 compared to the first six months of 2021. The increase in organic growth was attributable to an increase in product pricing and sales volume. The n egative currency effect was due to a weaker Euro, Turkish lira, Argentinian peso and Colombian peso, partially offset by a stronger Chinese renminbi and Brazilian real compared to the U.S. dollar. As a percentage of net revenue, raw material costs increased 460 basis points due to higher raw material costs partially offset by higher net revenue. O ther manufacturing costs as a percentage of net revenue decreased 240 basis points primarily due to higher net revenue. SG& A expenses as a percentage of net revenue decreased 150 basis points due to higher net revenue. Segment operating income increased 9.6 percent and segment operating margin as a percentage of net revenue decreased 70 basis points compared to the first six months of 2021.   Engineering Adhesives       Three Months Ended     Six Months Ended       May 28,     May 29,     2022 vs     May 28,     May 29,     2022 vs   ($ in millions)   2022     2021     2021     2022     2021     2021   Net revenue   $ 405.4     $ 345.4       17.4 %   $ 759.3     $ 658.0       15.4 % Segment operating income   $ 42.9     $ 32.1       33.6 %   $ 75.5     $ 62.5       20.8 % Segment operating margin     10.6 %     9.3 %             9.9 %     9.5 %           28 Table of Contents   The following tables provide details of the Engineering Adhesives net revenue variances:       Three Months Ended     Six Months Ended       May 28, 2022 vs. May 29, 2021     May 28, 2022 vs. May 29, 2021   Organic growth     21.8 %     19.3 % Currency     (4.4 )%     (3.9 )% Total     17.4 %     15.4 %   Net revenue increased 17.4 percent in the second quarter of 2022 compared to the second quarter of 2021. The increase in organic growth was attributable primaril y due to an increase in product pricing and sales volume. The negative currency effect was due to a weaker Euro and Turkish lira, partially offset by a stronger Chinese renminbi compa red to the U.S. dollar. Raw material costs as a percentage of net revenue increased 240 basis points due to higher raw material costs partially offset by higher net revenue. Oth er manufacturing costs as a percentage of net revenue decreased 210 basis po ints due to higher net revenue. SG& A expenses as a percentage of net revenue decreased 160 basis points du e to higher net revenue. Segm ent operating income increased 33.6 percent and segment operating margin increased 130 basis points compared to the second quarter of 2021.   Net revenue increased 15.4 percent in the first six months of 2022 compared to the first six months of 2021. The increase in organic growth was attributable primarily du e to an increase in product pricing and sales volume. The neg ative currency effect was due to a weaker Euro and Turkish lira, partially offset by a stronger Chinese renminbi c ompared to the U.S. dollar. Raw material costs as a percentage of net revenue increased 330 basis points d ue to higher raw material costs partially offset by higher net revenue. Ot her manufacturing costs as a percentage of net revenue decreased 220 basis points due to higher net revenue. SG& A expenses as a percentage of net revenue decreased 150 basis points due to higher net revenue. S egment operating income increased 20.8 percent and segment operating margin increased 40 basis points compared to the first six months of 2021.   Construction Adhesives       Three Months Ended     Six Months Ended       May 28,     May 29,     2022 vs     May 28,     May 29,     2022 vs   ($ in millions)   2022     2021     2021     2022     2021     2021   Net revenue   $ 150.0     $ 117.7       27.5 %   $ 263.0     $ 195.3       34.7 % Segment operating income   $ 11.3     $ 6.3       79.4 %   $ 15.6     $ 1.6       875.0 % Segment operating margin     7.5 %     5.4 %             5.9 %     0.8 %           The following tables provide details of the Construction Adhesives net revenue variances:       Three Months Ended     Six Months Ended       May 28, 2022 vs. May 29, 2021     May 28, 2022 vs. May 29, 2021   Organic growth     14.3 %     23.8 % M&A     14.0 %     11.7 % Currency     (0.8 )%     (0.8 )% Total     27.5 %     34.7 %   Net revenue increased 27.5 percent in the second quarter of 2022 compared to the second quarter of 2021. The increase in organic growth was attributable primarily t o an increase in product pricing partially offset by a decrease in sales volume. The increase in net revenue from M&A was due to the acquisition of Fourny and Apollo during the first quarter of 2022. The negative currency effect was due to a weaker 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 170  basis points due to higher net revenue and the impact of acquisitions. SG&A expenses as a percentage of net revenue decreased 110  basis points due to higher net revenue. Segment operating income increased 79.4  percent and segment operating margin increased 210  basis points compared to the second quarter of 2021.   Net revenue increased 34.7 percent in the first six months of 2022 compared to the first six 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 acquisition of Fourny and Apollo during the first quarter of 2022. The negative currency effect was due to a weaker Euro and Australian dollar compared to the U.S. dollar. Raw material costs as a percentage of net revenue increased 150 basis points due to higher raw material costs partially offset by higher net revenue. Other manufacturing costs as a percentage of net revenue decreased 290  basis points due to higher net revenue and the impact of acquisitions. SG&A expenses as a percentage of net revenue decreased 370  basis points due to higher net revenue. Segment oper ating income increased 875.0 percent and segment operating margin increased 510 basis points compared to the first six months of 2021.   29 Table of Contents   Corporate Unallocated       Three Months Ended     Six Months Ended       May 28,     May 29,     2022 vs     May 28,     May 29,     2022 vs   ($ in millions)   2022     2021     2021     2022     2021     2021   Net revenue   $ -     $ -       0.0 %   $ -     $ -       0.0 % Segment operating loss   $ (10.0 )   $ (8.2 )     22.0 %   $ (22.1 )   $ (15.5 )     42.6 % Segment operating margin     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 second quarter and first six months of 2022 increased 22.0 percent and 42.6 percent compared to the second quarter and first six months of 2021, respectively, reflecting increased acquisition project costs.   Financial Condition, Liquidity and Capital Resources   Total cash and cash equivalents as of May 28, 2022 were $68.1 million compared to $61.8 million as of November 27, 2021 and $69.6 million as of May 29, 2021. The majority of the $68.1 million in cash and cash equivalents as of May 28, 2022 was held outside the United States. Total long and short-term debt was $1,935.8 million as of May 28, 2022, $1,616.5 million as of November 27, 2021 and $1,712.4 million as of May 29, 2021. The total debt to total capital ratio as measured by Total Debt divided by (Total Debt plus Total Stockholders’ Equity) was 54.5 percent as of May 28, 2022 as compared to 50.2 percent as of November 27, 2021 and 52.2 percent as of May 29, 2021.   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 that, if not met, could lead to a renegotiation of our credit lines and a significant increase in our cost of financing. At May 28, 2022, we were in compliance with all covenants of our contractual obligations as shown in the following table:   Covenant Debt Instrument Measurement   Result as of May 28, 2022   Secured Indebtedness / TTM EBITDA Term Loan B Credit Agreement Not greater than 5.9     2.9   Secured Indebtedness / TTM EBITDA Revolving Credit Agreement Not greater than 5.9     2.9   TTM EBITDA / Consolidated Interest Expense Revolving Credit Agreement Not less than 2.0     6.1       ● TTM = Trailing 12 months   30 Table of Contents     ● EBITDA for Term Loan B covenant purposes is defined as consolidated net income, plus interest expense, expense for taxes paid or accrued, depreciation and amortization, certain non-cash impairment losses, extraordinary non-cash losses incurred other than in the ordinary course of business, nonrecurring extraordinary non-cash restructuring charges and the non-cash impact of purchase accounting, expenses related to the Royal Adhesives acquisition not to exceed $40.0 million, expenses relating to the integration of Royal Adhesives during the fiscal years ending in 2017, 2018 and 2019 not exceeding $30 million in aggregate, restructuring expenses that began prior to the Royal Adhesives acquisition incurred in fiscal years ending in 2017 and 2018 not exceeding $28 million in aggregate, and non-capitalized charges relating to the SAP implementation during fiscal years ending in 2017 through 2021 not exceeding $13 million in any single fiscal year, minus extraordinary non-cash gains. For the Total Indebtedness / TTM EBITDA ratio, TTM EBITDA is adjusted for the pro forma results from Material Acquisitions and Material Divestitures as if the acquisition or divestiture occurred at the beginning of the calculation period. The full definition is set forth in the Term Loan B Credit Agreement and can be found in the Company’s Form 8-K filing dated October 20, 2017.     ● EBITDA for Revolving Credit Facility covenant purposes is defined as consolidated net income, plus interest expense, expense for taxes paid or accrued, depreciation and amortization, non-cash impairment losses related to long-lived assets, intangible assets or goodwill, nonrecurring or unusual non-cash losses  incurred other than in the ordinary course of business, nonrecurring or unusual non-cash restructuring charges and the non-cash impact of purchase accounting, fees, premiums, expenses and other transaction costs incurred or paid by the borrower or any of its Subsidiaries on the effective date in connection with the  transactions, this agreement and the other loan documents, the 2020 supplemental indenture and the transactions contemplated hereby and thereby, one-time, non-capitalized charges and expenses relating to the Company’s SAP implementation during fiscal years ending in 2017 through 2024, in an amount not  exceeding $15.0 million in any single fiscal year of the Company, charges and expenses relating to the ASP Royal Acquisition, including but not limited to advisory and financing costs, during the Company’s fiscal years ending in 2020 and 2021, in an aggregate amount (as to such years combined) not exceeding $40.0 million, charges and expenses related to the reorganization of the Company and its subsidiaries from five business units to three business units to reduce costs during the Company’s fiscal years ending in 2020 and 2021 in an aggregate amount (as to such years combined) not exceeding $24.0 million, and charges and expenses related to the Company’s manufacturing and operations project to improve delivery, implement cost savings and reduce inventory during the Company’s fiscal years ending in 2020, 2021 and 2022 in an aggregate amount (as to such years combined) not exceeding $15.5 million.     ● Consolidated Interest Expense for the Revolving Credit Facility is defined as the interest expense (including without limitation the portion of capital lease obligations that constitutes imputed interest in accordance with GAAP) of the Company and its subsidiaries calculated on a consolidated basis for such period with respect to all outstanding indebtedness of the Company and its subsidiaries allocable to such period in accordance with GAAP.   We believe we have the ability to meet all of our contractual obligations and commitments in fiscal 2022.   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.       May 28,     May 29,       2022     2021   Net working capital as a percentage of annualized net revenue 1     17.1 %     16.7 % Accounts receivable DSO (in days) 2     59       61   Inventory days on hand (in days) 3     70       67   Free cash flow after dividends 4   $ (97.2 )   $ 11.9   Total debt to total capital ratio 5     54.5 %     52.2 %   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.   31 Table of Contents   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 cash flow after dividends       Six Months Ended   ($ in millions)   May 28, 2022     May 29, 2021   Net cash (used in) provided by operating activities   $ (9.1 )   $ 79.8   Less: Purchased property, plant and equipment     69.1       50.7   Less: Dividends paid     19.0       17.2   Free cash flow after dividends   $ (97.2 )   $ 11.9     Summary of Cash Flows   Cash Flows from Operating Activities:         Six Months Ended       May 28,     May 29,   ($ in millions)   2022     2021   Net cash (used in) provided by operating activities   $ (9.1 )   $ 79.8     Net income including non-controlling interest was $85.5 million in the first six months of 2022 compared to $78.9 million in the first six months of 2021. Depreciation and amortization expense totaled $72.7 million in the first six months of 2022 compared to $71.6 million in the first six months of 2021. Deferred income taxes was a use of cash of $5.0 million in 2022 compared to $1.2 million in the first six months of 2021. Accrued compensation was a use of cash of $40.4 million in 2022 compared to $8.8 million last year. Other assets was a use of cash of $21.9 million in the first six months of 2022 compared to $21.7 million in the first six months of 2021. Other liabilities was a use of cash of $23.6 million in the first six months of 2022 compared to $29.0 million in the first six months of 2021.   Changes in net working capital (trade receivables, inventory and trade payables) accounted for a use of cash of $103.7 million compared to a use of cash of $28.1 million last year. The table below provides the cash flow impact due to changes in the components of net working capital:       Six Months Ended       May 28,     May 29,   ($ in millions)   2022     2021   Trade receivables, net   $ (35.5 )   $ (43.2 ) Inventory     (95.4 )     (100.4 ) Trade payables     27.2       115.5   Total cash flow impact   $ (103.7 )   $ (28.1 )     ● Trade receivables, net – Trade receivables, net was a use of cash of $35.5 million and $43.2 million in the first six months of 2022 and 2021, respectively. The lower use of cash in 2022 compared to 2021 was due to more cash collected on trade receivables in the current year compared to the prior year. The DSO were 59 days at May 28, 2022 and 61 days at May 29, 2021.    32 Table of Contents     ● Inventory – Inventory was a use of cash of $95.4 million and $100.4 million in the first six months of 2022 and 2021, respectively. The lower use of cash in 2022 is due to lower inventory purchases in 2022 compared to 2021. Inventory days on hand were 70 days as of May 28, 2022 and 67 days as of May 29, 2021.     ● Trade payables – Trade payables was a source of cash of $27.2 million and $115.5 million in the first six months of 2022 and 2021, respectively. The lower source of cash in 2022 compared to 2021 reflects higher payments on trade payables in the current year compared to the prior year.   Cash Flows from Investing Activities:       Six Months Ended       May 28,     May 29,   ($ in millions)   2022     2021   Net cash used in investing activities   $ (293.2 )   $ (56.5 )   Purchases of property, plant and equipment were $69.1 million during the first  six months of  2022  compared to $50.7 million for the same period of 2021 .  This difference reflects the timing of capital projects and expenditures related to growth initiatives.    During the first six 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 $192.6 million, net of cash acquired.    Cash Flows from Financing Activities:       Six Months Ended       May 28,     May 29,   ($ in millions)   2022     2021   Net cash provided by (used in) financing activities   $ 318.2     $ (57.9 )   Borrowings on our revolving credit facility were $335.0  million in the first six months of  2022  to finance acquisitions and for general working capital purposes. We did not make any payments of long-term debt in t he first six months of  2022  and payments of long-term debt in the first six months of  2021 were $68.0 million. Net proceeds of notes payable were $3.6 million in the first six months of  2022  and $9.3 million in the same period of 2021 . Cash dividends paid were $19.0 million in the first six months of 2022 compared to $17.2 million in the same period of 2021 . Repurchases of common stock were $3.6 million in the first six months of  2022 compared to $2.6 million in the same period of 2021 .   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.   33 Table of Contents