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Item 2. Management’s Discussion and Analysis

2023-03-30 compared with 2022-09-22 · 126 added, 226 removed, 176 unchanged (67% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

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 third quarter of 2022 increased 13.8 percent from the third quarter of 2021.

Net revenue increased 18.7 percent due to price and 2.0 percent 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 compared to the third quarter of 2021 were primarily driven by a weaker Euro, Turkish lira, Chinese renminbi, British pound and Argentinian peso 

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 December 3, 2022 for important background information related to our business. 

Net revenue in the first quarter of 2023 decreased 5.5 percent from the first quarter of 2022.

Net revenue decreased 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 a 1.9 percent  increase due to acquisitions compared to the first quarter of 2022.

The negative currency effects were primarily driven by a weaker Euro, Egyptian pound, Chinese renminbi, Argentinian peso and Turkish lira 

compared to the U.S.

Gross profit margin increased 300  basis points primarily due to higher product pricing partially offset by higher raw material costs.

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.

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.

Gross profit margin increased 160  basis points due to an increase in product pricing.

Net income attributable to H.B.

Fuller in the first nine months of 2022 was $132.0 million compared to $110.5 million in the first nine months of 2021.

On a diluted earnings per share basis, the first nine months of 2022 was $2.39 per share compared to $2.04 per share for the first nine months 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.

Fuller in the first quarter of 2023 was $21.9 million compared to $38.3 million in the first quarter of 2022.

On a diluted earnings per share basis, the first quarter of 2023 was $0.39 per share compared to $0.69 per share for the first quarter of 2022.

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 $20.1 

million under this plan as of August 27, 2022, which is substantially complete.

On March 27, 2023, the Company approved a restructuring plan (the “Plan”) related to organizational changes and other actions to optimize operations.

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 certain 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 majority of the charges recognized and cash payments occurring in fiscal 2023 and 2024.

Results of Operations

Three Months Ended

Nine Months Ended

($ in millions)

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 third quarter and first nine months of 2022 compared to the same periods in 2021:

The following table shows the net revenue variance analysis for the first quarter of 2023 compared to the first quarter of 2022:

Three Months Ended

Nine Months Ended

August 27, 2022 vs.

August 28, 2021

August 27, 2022 vs.

August 28, 2021

March 4, 2023 vs.

February 26, 2022

Organic growth

Organic growth was 18.4 percent in the third quarter of 2022 compared to the third quarter of 2021 driven by a 22.9 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 increase is predominately driven by an increase in product pricing, partially offset by a slight decrease in volume.

The 2.0 percent increase from M&A is due to the acquisitions of Fourny and Apollo. The negative 6.6 percent currency impact was primarily driven by a weaker Euro, Turkish lira, Chinese Renminbi, British pound and Argentinian peso compared to the U.S.

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 by 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.

Organic growth was a negative 2.5 percent in the first quarter of 2023 compared to the first quarter of 2022 and consisted of a 2.9 percent decrease in Engineering Adhesives and a 25.8 percent decrease in Construction Adhesives, offset by a 4.5 percent increase in Hygiene, Health and Consumable Adhesives.

The decrease is driven by a decrease in volume partially offset by an increase in product pricing.

The 1.9 percent increase from M&A is due to acquisitions. The negative 4.9 percent foreign currency impact was primarily driven by a weaker Euro, Egyptian pound, Chinese renminbi, Argentinian peso and Turkish lira 

compared to the U.S.

Cost of sales:

Three Months Ended

Nine Months Ended

($ in millions)

Raw materials

Other manufacturing costs

Cost of sales

Percent of net revenue

Cost of sales in the third quarter of 2022 compared to the third quarter of 2021 decreased 300 basis points as a percentage of net revenue.

Raw material cost as a percentage of net revenue decreased 40 basis points in the third quarter of 2022 compared to the third quarter of 2021.

Other manufacturing costs as a percentage of revenue decreased 260 basis points in the third quarter of 2022 compared 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 of 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.

Oth er 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.

Cost of sales in the first quarter of 2023 compared to the first quarter of 2022 decreased 160 basis points as a percentage of net revenue.

Raw material cost decreased 220 basis points due to higher product pricing, partially offset by higher raw material costs.

Other manufacturing costs as a percentage of revenue increased 60 basis points due to lower net revenue.

Gross profit:

Three Months Ended

Nine Months Ended

($ in millions)

Percent of net revenue

Gross profit in the third quarter of 2022 increased 28.5 percent and gross profit margin increased 300 basis points compared to the third quarter of 2021.

The increase in gross profit margin was primarily due to 

higher product pricing .

Gross pr ofit 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 . 

Gross profit in the first quarter of 2023 increased 0.9 percent and gross profit margin increased 160 basis points compared to the first quarter of 2022.

The increase in gross profit margin was primarily due to  an increase in product pricing.

Selling, general and administrative (SG&A) expenses:

Three Months Ended

Nine Months Ended

($ in millions)

Percent of net revenue

SG&A expenses for the third quarter of 2022 increased $26.7 million, or 19.9 percent, compared to the third quarter of 2021.

The increase is primarily du e 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 of 2022 increased $56.2 million, or 13.2 percent, compared to the first nine months of 2021.

The increase is primarily due to higher compensation and acquisition project costs and the impact of acquisitions.

SG&A expenses for the first quarter of 2023 compared to the first quarter of 2022 increased 90 basis points as a percentage of net revenue. The increase is du e to higher compensation costs, partially offset by  the favorable impact of foreign currency exchange rates on spending outside the U.S .

Other income, net:

Three Months Ended

Nine Months Ended

($ in millions)

Other income, net

Other income, net in the third 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 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 million of currency transaction losses.

Other income, net in the first 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 $0.2 million of other income, partially offset by $1.5 million of currency transaction losses.

Interest expense:

Three Months Ended

Nine Months Ended

($ in millions)

Interest expense

Interest expense in the third 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 due to higher interest rates 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.

Interest expense in the first 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 higher primarily due to higher debt balances and higher interest rates.

Interest income:

Three Months Ended

Nine Months Ended

($ in millions)

Interest income

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.

Interest income in the first nine months of 2022 and 2021 was $6.2 million and $7.7 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income.

Interest income in the first quarter of 2023 and 2022 was $0.7 million and $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

($ in millions)

Effective tax rate

Income tax expense of $28.3 million in the third quarter of 2022 includes $6.4 million of discrete tax expense.

Excluding the discrete tax expense, the overall effective tax rate was 29.9 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 U.S.

and foreign tax matters. 

Income tax expense of $19.1 million in the third quarter of 2021 includes $5.6 million of discrete tax expense.

Excluding the discrete tax expense, the overall effective tax rate was 27.6 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 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 

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 w as 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.

and foreign tax matters.

Income tax expense of $9.7 million in the first quarter of 2023 includes $0.8 million of discrete tax expense.

Excluding the discrete tax expense, the overall effective tax rate was 29.2 percent. The discrete tax expense relates to various foreign tax matters offset by an excess tax benefit related to U.S.

stock compensation. Income tax expense of $10.1 million in the first quarter of 2022 includes $2.9 million of discrete tax benefit.

Excluding the discrete tax benefit, the overall effective tax rate was 27.8 percent.

The discrete tax benefit relates to impacts of legal entity mergers offset by foreign tax matters.

Income from equity method investments:

Three Months Ended

Nine Months Ended

($ in millions)

1 unchanged sentence

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 third quarter and first nine months of 2022 compared to the same period of 2021 is due to the unfavorable impact of the weakening of the Japanese yen against the U.S.

dollar offset by higher net income in the joint venture.

The lower income for the first quarter of 2023 compared to the same period of 2022 is due to the unfavorable impact of the weakening of the Japanese yen against the U.S.

dollar and lower net income in our joint venture.

Net income attributable to H.B.

Three Months Ended

Nine Months Ended

($ in millions)

2 unchanged sentences

The net income attributable to H.B.

Fuller for the third quarter of 2022 was $46.5 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 million for the first nine months of 2021.

The diluted earnings per share for the first nine months of 2022 was $2.39 per share as compared to $2.04 per share for the first nine months of 2021.

Fuller for the first quarter of 2023 was $21.9 million compared to $38.3 million for the first quarter of 2022.

The diluted earnings per share for the first quarter of 2023 was $0.39 per share as compared to $0.69 per share for the first quarter of 2022.

Operating Segment Results

3 unchanged sentences

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.

Corporate Unallocated amounts include business acquisition and integration costs, organizational restructuring charges and project costs associated with our implementation of Project ONE.

Net Revenue by Segment:

Three Months Ended

Nine Months Ended

August 27, 2022

August 28, 2021

August 27, 2022

August 28, 2021

March 4, 2023

February 26, 2022

($ in millions)

6 unchanged sentences

Three Months Ended

Nine Months Ended

August 27, 2022

August 28, 2021

August 27, 2022

August 28, 2021

March 4, 2023

February 26, 2022

($ in millions)

6 unchanged sentences

Three Months Ended

Nine Months Ended

($ in millions)

3 unchanged sentences

Three Months Ended

Nine Months Ended

August 27, 2022 vs.

August 28, 2021

August 27, 2022 vs.

August 28, 2021

March 4, 2023 vs.

February 26, 2022

Organic growth

Net revenue increased 15.1 percent in the third quarter of 2022 compared to the third quarter of 2021.

The increase in organic growth was attri butable to an increase in product pricing, partially offset by sales volume.

The neg ative currency effect was due to a weaker Euro, Turkish lira, Argentinian peso, Egyptian pound and Chinese renminbi 

compared to the U.S.

As a percentage of net revenue, raw material costs increased 30 basis points .

Other manufacturing costs as a percentage of net revenue decreased 360 basis points due to 

higher net revenue.

SG&A expenses as a percentage of net revenue increased 10 basis points. Segment operating income increased 59.9 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 n egative currency effect was due to a weaker Euro, Turkish lira and Argentinian peso, partially offset by a stronger Brazilian real 

Net revenue decreased 1.5 percent in the first quarter of 2023 compared to the first quarter of 2022.

The increase in organic growth was attri butable 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 o f Lemtapes during the first quarter of 2022. 

The neg ative currency effect was due to a weaker Egyptian pound, Argentinian peso, Euro and Chinese renminbi 

compared to the U.S.

As a percentage of net revenue, raw material costs increased 310 basis points due to higher raw material costs.

O ther 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 60 basis points compared to the first nine months of 2021.

As a percentage of net revenue, raw material costs decreased 360 basis points due to higher product pricing .

Other manufacturing costs as a percentage of net revenue decreased 70 basis points due to higher product pricing .

SG&A expenses as a percentage of net revenue increased 80 basis points due to higher compensation costs. Segment operating income increased 40.1 percent and segment operating margin as a percentage of net revenue increased 350 basis points compared to the first quarter of 2022.

Engineering Adhesives

Three Months Ended

Nine Months Ended

($ in millions)

3 unchanged sentences

Three Months Ended

Nine Months Ended

August 27, 2022 vs.

August 28, 2021

August 27, 2022 vs.

August 28, 2021

March 4, 2023 vs.

February 26, 2022

Organic growth

Net revenue increased 10.5 percent in the third quarter of 2022 compared to the third 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, Chinese renminbi and Turkish lira compa red to the U.S.

Raw material costs as a percentage of net revenue decreased 120 basis points due to higher net revenue.

Oth er manufacturing costs as a percentage of net revenue decreased 150 basis po ints due to higher net revenue. SG& A expenses as a percentage of net revenue increased 220 basis points du e to higher compensation costs.

Segm ent operating income increased 16.7 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 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 c ompared to the U.S.

Raw material costs as a percentage of net revenue increased 180 basis points d ue to higher raw material costs.

Ot her 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 .

S egment operating income increased 19.4 percent and segment operating margin increased 40 basis points compared to the first nine months of 2021.

Net revenue decreased 5.9 percent in the first quarter of 2023 compared to the first quarter of 2022.

The decrease in organic growth was attributable t o a decrease in sales volume, partially offset by an increase in product pricing. 

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 Aspen in the first quarter of 2023. 

The negative currency effect was due to a weaker Chinese renminbi, Euro and Turkish lira compa red to the U.S.

Raw material costs as a percentage of net revenue decreased 240 basis points due to higher product pricing .

Oth er manufacturing costs as a percentage of net revenue increased 90 basis po ints due to lower net revenue. SG& A expenses as a percentage of net revenue increased 90 basis points du e to higher compensation costs.

Segm ent operating income decreased 0.3 percent and segment operating margin increased 60 basis points compared to the first quarter of 2022.

Construction Adhesives

Three Months Ended

Nine Months Ended

($ in millions)

3 unchanged sentences

Three Months Ended

Nine Months Ended

August 27, 2022 vs.

August 28, 2021

August 27, 2022 vs.

August 28, 2021

March 4, 2023 vs.

February 26, 2022

Organic growth

Net revenue increased 19.8 percent in the third quarter of 2022 compared to the third 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 acquisitions 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.

Raw material costs as a percentage of net revenue decreased 50 basis points .

Other manufacturing costs as a percentage of net revenue decreased 130  basis points due to higher net revenue and the impact of acquisitions. SG&A expenses as a percentage of net revenue increased 10  basis points.

Segment operating income increased 93.9  percent and segment operating margin increased 170  basis points compared to the third 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.

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 oper ating income increased 349.0 percent and segment operating margin increased 390 basis points compared to the first nine months of 2021.

Net revenue decreased 18.0 percent in the first quarter of 2023 compared to the first quarter of 2022.

The decrease in organic growth was attributable t o a decrease in sales volume, partially offset by a slight increase in product pricing.

The 9.3 

percent increase in net revenue from M&A was due to the acquisitions o f Fourny and Apollo in t he first quarter of 2022 and GSSI in the fourth quarter of 2022. The negative currency effect was due to a weaker British pound, Canadian dollar, and Australian dollar compared to the U.S.

Raw material costs as a percentage of net revenue increased 240 basis points due to lower net revenue .

Other manufacturing costs as a percentage of net revenue increased 380  basis points due to lower net revenue. SG&A expenses as a percentage of net revenue increased 810  basis points due to higher compensation costs.

Segment operating income decreased 318.2  percent and segment operating margin decreased 1,430  basis points compared to the first quarter of 2022.

Corporate Unallocated

Three Months Ended

Nine Months Ended

($ in millions)

3 unchanged sentences

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 third quarter and first nine months of 2022 increased 25.0 percent and 19.9 percent compared to the third quarter and first nine months of 2021, respectively, reflecting increased acquisition project costs.

Segment operating loss in the first quarter of 2023 decreased 36.9 percent compared to the first quarter of 2022 reflecting lower acquisition project costs compared to the prior year.

Financial Condition, Liquidity and Capital Resources

Total cash and cash equivalents as of August 27, 2022 were $60.7 million compared to $61.8 million as of November 27, 2021 and $68.1 million as of August 28, 2021.

The majority of the $60.7 million in cash and cash equivalents as of August 27, 2022 was held outside the United States.

Total long and short-term debt was $1,918.2 million as of August 27, 2022, $1,616.5 million as of November 27, 2021 and $1,664.0 million as of August 28, 2021.

Total cash and cash equivalents as of March 4, 2023 were $125.5 million compared to $79.9 million as of December 3, 2022 and $63.5 million as of February 26, 2022.

The majority of the $125.5 million in cash and cash equivalents as of March 4, 2023 was held outside the United States.

Total long and short-term debt was $1,873.5 million as of March 4, 2023, $1,765.1 million as of December 3, 2022 and $1,914.1 million as of February 26, 2022.

The total debt to total capital ratio as measured by Total Debt divided by (Total Debt plus Total Stockholders’

Equity) was 54.9 percent as of August 27, 2022 as compared to 50.2 percent as of November 27, 2021 and 51.4 percent as of August 28, 2021.

Equity) was 53.4 percent as of March 4, 2023 as compared to 52.3 percent as of December 3, 2022 and 53.8 percent as of 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.

4 unchanged sentences

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.

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 August 27, 2022, we were in compliance with all covenants of our contractual obligations as shown in the following table:

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.

Those covenants are as follows: 

Debt Instrument

Result as of August 27, 2022

Secured Indebtedness / TTM EBITDA

Term Loan B Credit Agreement

Not greater than 5.9

Secured Indebtedness / TTM EBITDA

Revolving Credit Agreement

Result as of March 4, 2023

Secured Total Indebtedness / TTM 1 EBITDA

Revolving Facility and Term Loan A Facility

Not greater than 4.75 2

TTM 1 EBITDA / Consolidated Interest Expense

Revolving Credit Agreement

Revolving Facility and Term Loan A Facility

Not less than 2.0

1 TTM = Trailing 12 months

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.

2 The 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 covenant purposes is defined as consolidated net income, plus (i) interest expense, (ii) expense for taxes paid or accrued, (iii) depreciation and amortization, (iv) certain non-cash impairment losses, (v) extraordinary non-cash losses incurred other than in the ordinary course of business, (vi) nonrecurring extraordinary non-cash restructuring charges and the non-cash impact of purchase accounting, (vii) any non-cash charge for the excess of rent expense over actual cash rent paid due to the use of straight-line rent, non-cash charge pursuant to any management equity plan, stock option plan or any other management or employee benefit, (viii) any non-cash finance charges in respect of any pension liabilities or other provisions and income (loss) attributable to deferred compensation plans, (ix) any non-recurring or unusual cash restructuring charges and operating improvements, (x) cost savings initiative and cost synergies related to acquisitions within 12 months, (xi) non-capitalized charges relating to the Borrower’s SAP implementation, (xii) fees, costs, expenses and charges incurred in connection with the financing, (xiii) fees, costs, expenses, make-whole or penalty payments and other similar items arising out of acquisitions, investments and dispositions, the incurrence, issuance, repayment or refinancing of indebtedness and any issuance of equity interests;

minus, non-recurring or unusual non-cash gains incurred not in the ordinary course of business. Provided that the aggregate amounts that may be added back for any period pursuant to clauses (ix), (x) and (xi) shall not exceed 15% of EBITDA for such period (calculated prior to giving effect to all addbacks and adjustments).

For Secured 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 Second Amended and Restated Credit Agreement and can be found in the Company’s 8-K filing dated February 21, 2023.

Consolidated Interest Expense for covenant purposes is defined as the interest expense (including without limitation to the portion of capital lease obligations that constitutes imputed interest in accordance with GAAP) of the Borrower and its subsidiaries calculated on a consolidated basis for such period with respect to all outstanding indebtedness allocable to such period in accordance with GAAP, including net costs (or benefits) under Interest Rate Swap Agreements and commissions, discounts and other fees and charges with respect to letters of credit and the interest component of all Attributable Receivables Indebtedness.

We believe we have the ability to meet all of our contractual obligations and commitments in fiscal 2023.

4 unchanged sentences

Inventory days on hand (in days) 3

Free cash flow after dividends 4

(Negative) free cash flow after dividends 4

Total debt to total capital ratio 5

8 unchanged sentences

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.

Reconciliation of "Net cash provided by operating activities" to Free cash flow after dividends

Nine Months Ended

Reconciliation of "Net cash provided by operating activities" to (Negative) free cash flow after dividends

Three Months Ended

($ in millions)

August 27, 2022

August 28, 2021

March 4, 2023

February 26, 2022

Net cash provided by operating activities

4 unchanged sentences

Cash Flows from Operating Activities:

Nine Months Ended

Three Months Ended

($ in millions)

Net cash provided by operating activities

Net income including non-controlling interest was $132.1 million in the first nine months of 2022 compared to $110.6 million in the first nine months of 2021.

Depreciation and amortization expense totaled $109.4 million in the first nine months of 2022 compared to $107.6 million in the first nine months of 2021.

Deferred income taxes was a use of cash of $5.0 million in 2022 compared to $1.5 million in the first nine months of 2021.

Accrued compensation was a use of cash of $17.3 million in 2022 compared to $1.3 million last year. Other assets was a use of cash of $40.3 million in the first nine months of 2022 compared to $26.1 million in the first nine months of 2021.

Other liabilities was a use of cash of $35.9 million in the first nine months of 2022 compared to $53.5 million in the first nine months of 2021.

Changes in net working capital (trade receivables, inventory and trade payables) accounted for a use of cash of $146.6 million compared to a use of cash of $26.8 million last year.

Net income including non-controlling interest was $21.9 million in the first three months of 2023 compared to $38.3 million in the first three months of 2022.

Depreciation and amortization expense totaled $37.9 million in the first three months of 2023 compared to $36.0 million in the first three months of 2022.

Deferred income taxes was a use of cash of $5.7 million in 2023 compared to $6.0 million in the first three months of 2022.

Accrued compensation was a use of cash of $57.0 million in 2023 compared to $44.1 million last year. Other assets was a use of cash of $28.9 million in the first three months of 2023 compared to $3.2 million in the first three months of 2022.

Other liabilities was a use of cash of $3.1 million in the first three months of 2023 compared to $8.8 million in the first three months of 2022.

Changes in net working capital (trade receivables, inventory and trade payables) accounted for a source of cash of $30.6 million compared to a use of cash of $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

($ in millions)

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Trade receivables, net –

Trade receivables, net was a use of cash of $51.6 million and $61.9 million in the first nine 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 63 days at August 27, 2022 and August 28, 2021. 

Trade receivables, net was a source of cash of $55.4 million and $13.3 million in the first three months of 2023 and 2022, respectively.

The higher source of cash in 2023 compared to 2022 was due to more cash collected on trade receivables in the current year compared to the prior year.

The DSO were 64 days at March 4, 2023 and 65 days at February 26, 2022. 

Inventory –

Inventory was a use of cash of $112.4 million and $141.1 million in the first nine months of 2022 and 2021, respectively.

Inventory was a use of cash of $33.8 million and $87.4 million in the first three months of 2023 and 2022, respectively.

The lower use of cash in 2023 is due to lower inventory purchases in 2023 compared to 2022.

Inventory days on hand were 75 days as of August 27, 2022 and 70 days as of August 28, 2021.

Inventory days on hand were 84 days as of March 4, 2023 and 82 days as of February 26, 2022.

Trade payables –

Trade payables was a source of cash of $17.4 million and $176.2 million in the first nine months of 2022 and 2021, respectively.

Trade payables was a source of cash of $9.0 million and $46.5 million in the first three months of 2023 and 2022, respectively.

The lower source of cash in 2023 compared to 2022 reflects higher payments on trade payables in the current year compared to the prior year.

Cash Flows from Investing Activities:

Nine Months Ended

Three Months Ended

($ in millions)

1 unchanged sentence

Purchases of property, plant and equipment were $47.6 million during the first 

nine months of 

2022  compared to $77.2 million for the same period of 2021 . 

three months of 

2023  compared to $48.9 million for the same period of 2022 . 

This difference reflects the timing of capital projects and expenditures related to growth initiatives. 

During the first nine months of 2022, we paid cash to acquire TissueSeal for $22.2 million, Fourny for $14.5 million, net of cash acquired, Apollo for $192.6 million, net of cash acquired and ZKLT for $13.6 million, net of cash acquired. 

During the first three 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. 

Cash Flows from Financing Activities:

Nine Months Ended

Three Months Ended

($ in millions)

Net cash provided by (used in) financing activities

Borrowings on our revolving credit facility were $335.0 

million in the first nine months of 

2022  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 

Payments of 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 nine months of 

In the first three months of 

2023 ,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.

No p ayment was made for long-term debt in the first three months of 

2022  and borrowings 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 2022 .

Cash dividends paid were $29.1 million in the first nine months of 2022 compared to $26.0 million in the same period of 2021 .

Repurchases of common stock were $3.9 million in the first nine months of 

Cash dividends paid were $10.2 million in the first three months of 2023 compared to $8.9 million in the same period of 2022 .

Repurchases of common stock were $2.4 million in the first three months of 

2023 compared to $3.6 million in the same period of 2022 .

15 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis