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Item 2. Management’s Discussion and Analysis

2023-06-29 compared with 2023-03-30 · 181 added, 115 removed, 187 unchanged (61% of the section changed)

1 unchanged sentence

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.

Net revenue in the second quarter of 2023 decreased 9.6 percent from the second quarter of 2022.

Net revenue decreased 14.2 percent due to sales volume and 3.4 percent due to negative currency effects, offset by a 5.9 percent increase in pricing and a 2.1 percent  increase due to acquisitions compared to the second quarter of 2022.

The negative currency effects were primarily driven by a weaker Chinese renminbi, Egyptian pound, Argentinian peso and Turkish lira compared to the U.S.

Gross profit margin increased 310  basis points due to an increase in product pricing.

Net revenue in the first six months of 2023 decreased 7.7 percent from the first six months of 2022.

Net revenue decreased 12.6 percent due to sales volume and 4.1 percent due to negative currency effects, offset by a 7.0 percent increase in pricing and a 2.0 percent  increase due to acquisitions compared to the first six months of 2022.

The negative currency effects were primarily driven by a weaker Chinese renminbi, Egyptian pound, Argentinian peso, Turkish lira and Euro compared to the U.S.

Gross profit margin increased 240  basis points due to an increase in product pricing.

Net income attributable to H.B.

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.

Fuller in the second quarter of 2023 was $40.4 million compared to $47.2 million in the second quarter of 2022.

On a diluted earnings per share basis, the second quarter of 2023 was $0.73 per share compared to $0.86 per share for the second quarter of 2022.

Net income attributable to H.B.

Fuller in the first six months of 2023 was $62.3 million compared to $85.5 million in the first six months of 2022.

On a diluted earnings per share basis, the first six months of 2023 was $1.12 per share compared to $1.55 per share for the first six months of 2022.

Restructuring Plan

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.

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 the streamlining of processes and the payment of anticipated income taxes in certain jurisdictions related to the Plan.

We have incurred costs of $8.5 million under this plan as of June 3, 2023.

The Plan was implemented 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.

1 unchanged sentence

Three Months Ended

Six 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 first quarter of 2023 compared to the first quarter of 2022:

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

Three Months Ended

March 4, 2023 vs.

February 26, 2022

Six Months Ended

June 3, 2023 vs.

Organic growth

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.

Organic growth was a negative 8.3 percent in the second quarter of 2023 compared to the second quarter of 2022 and consisted of a 5.5 percent decrease in Hygiene, Health and Consumable Adhesives, a 9.0 percent decrease in Engineering Adhesives and a 14.2 percent decrease in Construction 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.

The 2.1 percent increase from M&A is due to our acquisitions that occurred in the first six months of 2023. The negative 3.4 percent foreign currency impact was primarily driven by a weaker Chinese renminbi, Egyptian pound, Argentinian peso and Turkish lira compared to the U.S.

Organic growth was a negative 5.6 percent in the first six months of 2023 compared to the first six months of 2022 and consisted of a 0.8 percent decrease in Hygiene, Health and Consumable Adhesives, a 6.1 percent decrease in Engineering Adhesives and a 19.2 percent decrease in Construction Adhesives.

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

The 2.0 percent increase from M&A is due to our acquisitions that occurred in the first six months of 2023. The negative 4.1 percent foreign currency impact was primarily driven by a weaker Chinese renminbi, Egyptian pound, Argentinian peso, Turkish lira and Euro compared to the U.S.

Cost of sales:

Three Months Ended

Six Months Ended

($ in millions)

1 unchanged sentence

Percent of 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.

Cost of sales in the second quarter of 

2023 compared to the second quarter of 2022  decreased 310  basis points as a percentage of net revenue. 

Higher product pricing partially offset by slightly higher raw material costs and the impact of lower sales volume led to the decrease.

Cost of sales in the first six months of 

2023 compared to the first six months of 2022  decreased 

240  basis points as a percentage of net revenue. 

Higher product pricing partially offset by higher raw material costs and the impact of lower sales volume led to the decrease.

Gross profit:

Three Months Ended

Six Months Ended

($ in millions)

Percent of net revenue

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.

Gross profit in the second quarter of 2023 increased 1.3 percent and gross profit margin increased 310 basis points compared to the second quarter of 2022.

The increase in gross profit margin was primarily due to 

higher product pricing partially offset by slightly higher raw material costs and the impact of lower sales volume .

Gross profit in the first six months of 2023 increased 1.1 percent and gross profit margin increased 240 basis points compared to the first six months of 2022.

The increase in gross profit margin was primarily due to 

higher product pricin g partially offset by higher raw material costs and the impact of lower sales volume.

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

Three Months Ended

Six Months Ended

($ in millions)

Percent of net revenue

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 .

SG&A expenses for the second quarter of 2023 compared to the second quarter of 2022 increased 180 basis points as a percentage of net revenue. The increase is du e to lower net revenue and higher compensation costs, partially offset by the favorable impact of foreign currency exchange rates on spending outside the U.S.

SG&A expenses for the first six months of 2023 compared to the first six months of 2022 increased 140 basis points as a percentage of net revenue. The increa se is due to lower net revenue and 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

Six Months Ended

($ in millions)

Other income, net

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.

NMP = Non-meaningful percentage

Other income, net in the second quarter of 2023 included $3.6 million of net defined benefit pension benefits and $0.4 million of other income, partially offset by $3.4 million of currency transaction losses.

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, partially offset by $5.5 million of currency transaction losses.

The $4.1 million of net defined benefit pension benefits in the second quarter of 2022 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 2023 included $10.1 million of net defined benefit pension benefits and $0.7 million of other income, partially offset by $7.6 million of currency transaction losses.

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 in the second quarter of 2022 included a $3.3 million settlement loss related to the termination of our Canadian defined benefit pension plan.

Interest expense:

Three Months Ended

Six Months Ended

($ in millions)

Interest expense

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 expense in the second quarter of 

2023 was $33.1  million compared to $19.8  million in the second quarter of 2022  and was higher primarily due to higher debt balances and higher interest rates.

Interest expense in the 

first six months of 

2023 was $66.2  million compared to $38.0  million in the 

first six months of 2022  and  was higher primarily due to higher debt balances and higher interest rates.

Interest income:

Three Months Ended

Six Months Ended

($ in millions)

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.

Interest income in the second quarter of 2023 and 2022 was $0.9 million and $2.1 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income.

Interest income in the first six months of 2023 and 2022 was $1.6 million and $4.0 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income.

Income taxes: 

Three Months Ended

Six Months Ended

($ in millions)

Effective tax rate

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 tax expense of $19.3 million in the second quarter of 2023 includes $2.0 million of discrete tax expense.

Excluding the discrete tax expense, the overall effective tax rate was 29.5 percent. The discrete tax expense relates to various foreign tax matters. 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 $29.0 million in the first six months of 2023 includes $2.9 million of discrete tax expense.

Excluding the discrete tax expense, the overall effective tax rate was 29.4 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 $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 from equity method investments:

Three Months Ended

Six 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 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.

The lower income for the second quarter and first six months 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.

1 unchanged sentence

Three Months Ended

Six Months Ended

($ in millions)

2 unchanged sentences

The net income attributable to H.B.

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.

Fuller for the second quarter of 2023 was $40.4 million compared to $47.2 million for the second quarter of 2022.

The diluted earnings per share for the second quarter of 2023 was $0.73 per share as compared to $0.86 per share for the second quarter of 2022.

The net income attributable to H.B.

Fuller for the first six months of 2023 was $62.3 million compared to $85.5 million for the first six months of 2022.

The diluted earnings per share for the first six months of 2023 was $1.12 per share as compared to $1.55 per share for the first six months of 2022.

Operating Segment Results

6 unchanged sentences

Three Months Ended

March 4, 2023

February 26, 2022

Six Months Ended

($ in millions)

6 unchanged sentences

Three Months Ended

March 4, 2023

February 26, 2022

Six Months Ended

($ in millions)

6 unchanged sentences

Three Months Ended

Six Months Ended

($ in millions)

3 unchanged sentences

Three Months Ended

March 4, 2023 vs.

February 26, 2022

Six Months Ended

June 3, 2023 vs.

Organic growth

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 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.

Net revenue decreased 7.6 percent in the second quarter of 2023 compared to the second quarter of 2022.

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

The 2.7 percent increase in net revenue from M&A was due to the acquisitions o f Lemtapes in the first quarter of 2023 and Beardow Adams in the second quart er of 2023. The negative currency effect was due to a weaker Egyptian pound, Argentinian peso, Turkish lira, Chinese renminbi, Colombian peso and Brazilian real compared to the U.S.

As a percentage of net revenue, gross margin increased due to higher product pricing partially offset by higher raw material costs and the impact of lower sales volume.

SG&A expenses as a percentage of net revenue increased due to higher compensation costs and lower net revenue. 

Segment operating income increased 19.2  percent and segment operating margin as a percentage of net revenue increased 290  basis points compared to the second quarter of 2022 .

Net revenue decreased 4.8  percent in the first six months of 

2023 compared to the first six months of 2022 .

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

1.5  percent increase in net revenue from M&A was due to the acquisitions of Lemtapes during the first quarter of 2023 and Beardow Adams in the second quarter of 2023. The negative currency effect was due to a weaker Egyptian pound, Argentinian peso, Turkish lira, Chinese renminbi and Colombian peso compared to the U.S.

As a percentage of net revenue, gross margin increased due to higher product pricing partially offset by higher raw material costs and the impact of lower sales volume.

SG&A expenses as a percentage of net revenue increased due to higher compensation costs and lower net revenue. 

Segment operating income increased 28.2  percent and segme nt operating margin as a percentage of net revenue increased 320 basis points compared to the first six months of 2022.

Engineering Adhesives

Three Months Ended

Six Months Ended

($ in millions)

3 unchanged sentences

Three Months Ended

March 4, 2023 vs.

February 26, 2022

Six Months Ended

June 3, 2023 vs.

Organic growth

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.

Net revenue decreased 10.2 percent in the second quarter of 

2023 compared to the second quarter of 2022 .

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

1.6  percent increase in net revenue from M&A was due to the acquisition of Aspen in the first quarter of 2023. The negative currency effect was due to a weaker Chinese renminbi and Turkish lira compared to the U.S.

dollar.  

Gross margin as a percentage of net revenue increased due to higher product pricing and lower raw material costs partially offset by the impact of lower sales volume. SG&A expenses as a percentage of net revenue increased due to higher compensation costs and lower net revenue.

Segment operating income increased 3.5  percent and segment operating margin increased 160  basis points compared to the second quarter of 2022 .

Net revenue decreased 

8.2  percent in the first six months of 

2023 compared to the first six months of 2022 .

The decrease in organic growth was attributable to 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 Aspen in the first quarter of 2023. The negative currency effect was due to a weaker Chinese renminbi, Euro and Turkish lira compared to the U.S.

Gross margin as a percentage of net revenue increased due to higher product pricing partially offset by the impact of lower sales volume. SG&A expenses as a percentage of net revenue increased due to higher compensation costs and lower net revenue.

Segment operating income increased 

1.8 percent and segment operating margin increased 110  basis points compared to the first six months of 2022 .

Construction Adhesives

Three Months Ended

Six Months Ended

($ in millions)

3 unchanged sentences

Three Months Ended

March 4, 2023 vs.

February 26, 2022

Six Months Ended

June 3, 2023 vs.

Organic growth

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.

Net revenue decreased 13.6 percent in the second quarter of 2023 compared to the second 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 1.7 percent increase in net revenue from M&A was due to the acquisition o f GSSI in the fourth quarter of 2022. The negative currency effect was due to a weaker Australian dollar and British pound sterling compared to the U.S.

Gross margin as a percentage of net revenue decreased primarily due to the impact of lower sales volume partially offset by higher product pricing.

SG&A expenses as a percentage of net revenue increased due to lower net revenue.

Segment operating income decreased 47.1  percent and segment operating margin decreased 290  basis points compared to the second quarter of 2022 .

Net revenue decreased 

15.5  percent in the first six months of 

2023 compared to the first six months of 2022 .

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

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

Gross margin as a percentage of net revenue decreased primarily due to the impact of lower sales volume partially offset by higher product pricing and slightly lower raw material costs.

SG&A expenses as a percentage of net revenue increased due to lower net revenue.

Segment operating income decreased 126.4  percent and segment operating margin decreased 760  basis points compared to the first six months of 2022 .

Corporate Unallocated

Three Months Ended

Six 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 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.

Segment operating loss in the second quarter of 2023 increased 18.6 percent compared to the second quarter of 2022 due to higher acquisition and restructuring costs for the second quarter of 2023 and decreased 11.6 percent compared to the first six months of 2022 as acquisition costs on a year-to-date basis were lower in 2023.

Financial Condition, Liquidity and Capital Resources

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.

Total cash and cash equivalents as of June 3, 2023 were $103.2 million compared to $79.9 million as of December 3, 2022 and $68.1 million as of May 28, 2022.

The majority of the $103.2 million in cash and cash equivalents as of June 3, 2023 was held outside the United States.

Total long and short-term debt was $1,882.3 million as of June 3, 2023, $1,765.1 million as of December 3, 2022 and $1,935.8 million as of May 28, 2022.

The total debt to total capital ratio as measured by total debt divided by total debt plus total stockholders’

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.

equity was 52.8 percent as of June 3, 2023 as compared to 52.3 percent as of December 3, 2022 and 54.5 percent as of May 28, 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.

7 unchanged sentences

Debt Instrument

Result as of March 4, 2023

Result as of June 3, 2023

Secured Total Indebtedness / TTM 1 EBITDA

6 unchanged sentences

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;

8 unchanged sentences

Inventory days on hand (in days) 3

(Negative) free cash flow after dividends 4

Free (negative) cash flow after dividends4

Total debt to total capital ratio 5

9 unchanged sentences

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

Three Months Ended

Six Months Ended

($ in millions)

March 4, 2023

February 26, 2022

Net cash provided by operating activities

1 unchanged sentence

Dividends paid

(Negative) free cash flow after dividends

Free (negative) cash flow after dividends

Summary of Cash Flows

Cash Flows from Operating Activities:

Three Months Ended

Six Months Ended

($ in millions)

Net cash provided by operating activities

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.

Net cash provided by (used in) operating activities

Net income including non-controlling interest was $62.3 million in the first six months of 2023 compared to $85.5 million in the first six months of 2022.

Depreciation and amortization expense totaled $77.0 million in the first six months of 2023 compared to $72.7 million in the first six months of 2022.

Deferred income taxes was a use of cash of $16.8 million in 2023 compared to $5.0 million in the first six months of 2022.

Accrued compensation was a use of cash of $42.2 million in 2023 compared to $40.4 million last year. Other assets was a use of cash of $37.0 million in the first six months of 2023 compared to $21.9 million in the first six months of 2022.

Other liabilities was a source of cash of $18.8 million in the first six months of 2023 compared to a use of cash of $23.6 million in the first six months of 2022.

Changes in net working capital (trade receivables, inventory and trade payables) accounted for a source of cash of $54.9 million compared to a use of cash of $103.7 million last year.

The table below provides the cash flow impact due to changes in the components of net working capital:

Three Months Ended

Six Months Ended

($ in millions)

3 unchanged sentences

Trade receivables, net –

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. 

Trade receivables, net was a source of cash of $66.9 million and a use of cash of $35.5 million in the first six months of 2023 and 2022, respectively.

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

The DSO were 59 days at both June 3, 2023 and May 28, 2022. 

Inventory –

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 84 days as of March 4, 2023 and 82 days as of February 26, 2022.

Inventory was a source of cash of $8.3 million and use of cash of $95.4 million in the first six months of 2023 and 2022, respectively.

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

Inventory days on hand were 74 days as of June 3, 2023 and 71 days as of May 28, 2022.

Trade payables –

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.

Trade payables was a use of cash of $20.3 million and a source of cash of $27.2 million in the first six months of 2023 and 2022, respectively.

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

Cash Flows from Investing Activities:

Three Months Ended

Six Months Ended

($ in millions)

Net cash used in investing activities

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

three months of 

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

Purchases of property, plant and equipment were $82.6 million during the first 

six months of 

2023  compared to $69.1 million for the same period of 2022 . 

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

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. 

During the first six months of 2023, we paid cash to acquire Lemtapes for $7.4 million, Aspen for $9.3 million and Beardow Adams for $87.0 million, net of cash acquired.

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:

Three Months Ended

Six Months Ended

($ in millions)

Net cash provided by (used in) financing activities

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.

Net cash provided by financing activities

In the first six 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 $1,176.7 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 

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

2022  and borrowings on our long-term debt were $335.0 million.

Payment of debt issue costs were $10.2 million and $0.6 million in the first six 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 $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 

Net payments of notes payable were $0.2 million in the first six months of 

2023  and net proceeds of notes payable were $3.6 million in the same period of 2022 .

Cash dividends paid were $21.3 million in the first six months of 2023 compared to $19.0 million in the same period of 2022 .

Repurchases of common stock were $2.6 million in the first six months of 

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

15 unchanged sentences

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What changed 10-Q

Item 2. Management’s Discussion and Analysis