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Item 2. Management’s Discussion and Analysis

2023-09-28 compared with 2023-06-29 · 183 added, 165 removed, 203 unchanged (63% 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 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 revenue in the third quarter of 2023 decreased 4.3 percent from the third quarter of 2022.

Net revenue decreased 8.0 percent due to sales volume and 1.7 percent due to negative currency effects, partially offset by a 0.6 percent increase in pricing and a 4.8 percent  increase due to acquisitions compared to the third quarter of 2022.

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

Gross profit margin increased 280  basis points due to an increase in product pricing and lower raw material costs.

Net revenue in the first nine months of 2023 decreased 6.6 percent from the first nine months of 2022.

Net revenue decreased 11.1 percent due to sales volume and 3.2 percent due to negative currency effects, partially offset by a 4.7 percent increase in pricing and a 3.0 percent  increase due to acquisitions compared to the first nine months of 2022.

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

compared to the U.S.

Gross profit margin increased 260  basis points due to an increase in product pricing and lower raw material costs.

Net income attributable to H.B.

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.

Fuller in the third quarter of 2023 was $37.6 million compared to $46.5 million in the third quarter of 2022.

On a diluted earnings per share basis, the third quarter of 2023 was $0.67 per share compared to $0.84 per share for the third 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 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.

Fuller in the first nine months of 2023 was $99.9 million compared to $132.0 million in the first nine months of 2022.

On a diluted earnings per share basis, the first nine months of 2023 was $1.79 per share compared to $2.39 per share for the first nine months of 2022.

Restructuring Plans

During the second and third quarters of 2023, the Company approved restructuring plans (the “Plans”) related to organizational changes and other actions to optimize operations and integrate acquired businesses.

In implementing the Plans, the Company currently expects to incur costs of approximately $39.1 million to $44.1 million ($30.4 million to $34.4 million after-tax), which include (i) cash expenditures of approximately $28.4 million to $29.6 million ($22.0 million to $23.0 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 Plans.

We have incurred costs of $17.1 million under the Plans as of September 2, 2023.

The Plans began to be implemented in the second quarter of fiscal year 2023 and are currently expected to be completed during fiscal year 2026.

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.

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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 second quarter and first six months of 2023 compared to the second quarter and first six months of 2022:

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

Three Months Ended

Six Months Ended

June 3, 2023 vs.

Nine Months Ended

September 2, 2023 vs.

August 27, 2022

September 2, 2023 vs.

August 27, 2022

Organic growth

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 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.

Organic growth was a negative 7.4 percent in the third quarter of 2023 compared to the third quarter of 2022 and consisted of a 10.5 percent decrease in Hygiene, Health and Consumable Adhesives, a 9.4 percent decrease in Construction Adhesives and a 3.3 percent decrease in Engineering Adhesives.

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

The 4.8 percent increase from M&A is due to our acquisitions that occurred in the last twelve months. The negative 1.7 percent foreign currency impact was primarily driven by a weaker Chinese renminbi, Egyptian pound and Turkish lira offset by a stronger Euro and Mexican peso compared to the U.S.

Organic growth was a negative 6.4 percent in the first nine months of 2023 compared to the first nine months of 2022 and consisted of a 16.0 percent decrease in Construction Adhesives, a 5.3 percent decrease in Engineering Adhesives and a 4.2 percent decrease in Hygiene, Health and Consumable Adhesive.

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.

The 3.0 percent increase from M&A is due to our acquisitions that occurred in the last twelve months. The negative 3.2 percent foreign currency impact was primarily driven by a weaker Chinese renminbi, Egyptian pound, Turkish lira and Argentinian peso offset by a stronger Mexican peso compared to the U.S.

Cost of sales:

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($ in millions)

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Percent of 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 

Cost of sales in the third quarter of 

2023 compared to the third quarter of 2022  decreased 270  basis points as a percentage of net revenue. 

Lower raw material costs partially offset by the impact of lower sales volume led to the decrease.

Cost of sales in the first nine months of 

2023 compared to the first nine months of 2022  decreased 

260  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.

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

Gross profit:

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Six Months Ended

Nine Months Ended

($ in millions)

Percent of net revenue

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.

Gross profit in the third quarter of 2023 increased 5.7 percent and gross profit margin increased 280 basis points compared to the third quarter of 2022.

The increase in gross profit margin was primarily due to lower raw material costs  

partially offset by the impact of lower sales volume .

Gross profit in the first nine months of 2023 increased 2.7 percent and gross profit margin increased 260 basis points compared to the first nine months of 2022.

The increase in gross profit margin was primarily due to lower raw material costs and 

higher product pricing  partially offset by the impact of lower sales volume .

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

Three Months Ended

Six Months Ended

Nine Months Ended

($ in millions)

Percent of net revenue

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.

SG&A expenses for the third quarter of 2023 compared to the third quarter of 2022 increased 200 basis points as a percentage of net revenue. The increase is du e to lower net revenue and higher restructuring and acquisition project costs .

SG&A expenses for the first nine months of 2023 compared to the first nine months of 2022 increased 160 basis points as a percentage of net revenue. The increa se is due to lower net revenue and higher restructuring and acquisition project costs .

Other income, net:

Three Months Ended

Six Months Ended

Nine Months Ended

($ in millions)

Other income, net

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.

Other income, net in the third quarter of 2023 included $5.1 million of net defined benefit pension benefits, partially offset by $3.2 million of currency transaction losses and $0.3 million of other income.

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, partially offset by $2.6 million of currency transaction losses.

Other income, net in the first nine months of 2023 included $15.2 million of net defined benefit pension benefits and $0.4 million of other income, partially offset by $10.8 million of currency transaction losses.

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 for the first nine months 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

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($ in millions)

Interest expense

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 third quarter of 

2023 was $35.1  million compared to $23.5  million in the third quarter of 2022  and was higher primarily due to higher debt balances and higher interest rates.

Interest expense in the 

first six months of 

first nine months of 

2023 was $101.3  million compared to $61.5  million in the 

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

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

Interest income:

Three Months Ended

Six Months Ended

Nine Months Ended

($ in millions)

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.

Interest income in the third quarter of 2023 and 2022 was $1.1 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 nine months of 2023 and 2022 was $2.7 million and $6.2 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income.

Income taxes: 

Three Months Ended

Six Months Ended

Nine Months Ended

($ in millions)

Effective tax rate

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.

Income tax expense of $22.2 million in the third quarter of 2023 includes $6.2 million of discrete tax expense.

Excluding the discrete tax expense, the overall effective tax rate was 27.1 percent. The discrete tax expense relates to various U.S.

and foreign tax matters. 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 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.

dollar and other various U.S.

and foreign tax matters.

Income tax expense of $51.3 million in the first nine months of 2023 includes $9.1 million of discrete tax expense.

Excluding the discrete tax expense, the overall effective tax rate was 28.5 percent. The discrete tax expense relates to various U.S.

and foreign tax matters offset by an excess tax benefit related to U.S.

stock compensation. 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 foreign tax matters offset by the tax effect of legal entity mergers.

dollar, as well as various U.S.

and foreign tax matters offset by the tax effect of legal entity mergers.

Income from equity method investments:

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($ in millions)

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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 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.

The lower income for the third quarter and first nine months of 2023 compared to the same periods of 2022 is due to lower net income in our joint venture.

Net income attributable to H.B.

Three Months Ended

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($ in millions)

2 unchanged sentences

The net income attributable to H.B.

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.

Fuller for the third quarter of 2023 was $37.6 million compared to $46.5 million for the third quarter of 2022.

The diluted earnings per share for the third quarter of 2023 was $0.67 per share as compared to $0.84 per share for the third 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.

Fuller for the first nine months of 2023 was $99.9 million compared to $132.0 million for the first nine months of 2022.

The diluted earnings per share for the first nine months of 2023 was $1.79 per share as compared to $2.39 per share for the first nine months of 2022.

Operating Segment Results

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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 Project ONE.

Corporate Unallocated amounts include business acquisition and integration costs, organizational restructuring charges and project costs associated with implementing a global Enterprise Resource Planning (“ERP”) system that we refer to as Project ONE.

Net Revenue by Segment:

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Six Months Ended

Nine Months Ended

September 2, 2023

August 27, 2022

September 2, 2023

August 27, 2022

($ in millions)

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Three Months Ended

Six Months Ended

Nine Months Ended

September 2, 2023

August 27, 2022

September 2, 2023

August 27, 2022

($ in millions)

6 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

($ in millions)

3 unchanged sentences

Three Months Ended

Six Months Ended

June 3, 2023 vs.

Nine Months Ended

September 2, 2023 vs.

August 27, 2022

September 2, 2023 vs.

August 27, 2022

Organic growth

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 .

Net revenue decreased 5.3 percent in the third quarter of 2023 compared to the third quarter of 2022.

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

The 7.6 percent increase in net revenue from M&A was due to the acquisitions o f Lemtapes in the first quarter of 2023, Beardow Adams in the second quart er of 2023 and Adhezion in the third quarter of 2023. The negative currency effect was due to a weaker Egyptian pound, Chinese renminbi and Turkish lira offset by a stronger Euro and Mexican peso compared to the U.S.

As a percentage of net revenue, gross margin increased due to 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 the impact of acquisitions and lower net revenue. 

Segment operating income increased 10.9  percent and segment operating margin as a percentage of net revenue increased 190  basis points compared to the third quarter of 2022 .

Net revenue decreased 5.0  percent in the first nine months of 

2023 compared to the first nine 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.

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

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

SG&A expenses as a percentage of net revenue increased due to the impact of acquisitions and lower net revenue. 

Segment operating income increased 21.6  percent and segme nt operating margin as a percentage of net revenue increased 280 basis points compared to the first nine months of 2022.

Engineering Adhesives

Three Months Ended

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($ in millions)

3 unchanged sentences

Three Months Ended

Six Months Ended

June 3, 2023 vs.

Nine Months Ended

September 2, 2023 vs.

August 27, 2022

September 2, 2023 vs.

August 27, 2022

Organic growth

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.

Net revenue decreased 3.3 percent in the third quarter of 

2023 compared to the third quarter of 2022 .

The decrease in organic growth was attributable to a decrease in sales volume and product pricing. The 

1.4  percent increase in net revenue from M&A was due to the acquisitions of ZKLT in the third quarter of 2022 and Aspen in the first quarter of 2023. The negative currency effect was due to a weaker Chinese renminbi and Turkish lira offset by a stronger Euro 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 .

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

Segment operating income increased 32.9  percent and segment operating margin increased 400  basis points compared to the third 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.

6.6  percent in the first nine months of 

2023 compared to the first nine 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 acquisitions of ZKLT in the third quarter of 2022 and Aspen in the first quarter of 2023. The negative currency effect was due to a weaker Chinese renminbi and Turkish lira offset by a stronger Mexican peso compared to the U.S.

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

12.6 percent and segment operating margin increased 210  basis points compared to the first nine months of 2022 .

Construction Adhesives

Three Months Ended

Six Months Ended

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Three Months Ended

Six Months Ended

June 3, 2023 vs.

Nine Months Ended

September 2, 2023 vs.

August 27, 2022

September 2, 2023 vs.

August 27, 2022

Organic growth

Net revenue decreased 13.6 percent in the second quarter of 2023 compared to the second quarter of 2022.

Net revenue decreased 4.1 percent in the third quarter of 2023 compared to the third 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 .

The 5.4 percent increase in net revenue from M&A was due to the acquisition o f GSSI in the fourth quarter of 2022 and XChem in the third quarter of  

Gross margin as a percentage of net revenue increased primarily due to lower raw material costs partially offset by lower sales volume.

SG&A expenses as a percentage of net revenue increased due to the impact of acquisitions and lower net revenue.

Segment operating income decreased 7.8  percent and segment operating margin decreased 10  basis points compared to the third 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 .

11.6  percent in the first nine months of 

2023 compared to the first nine months of 2022 .

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

5.1 percent increase in net revenue from M&A was due to the acquisitions of GSSI in the fourth quarter of 2022 and XChem in the third quarter of 2023 . The negative currency effect was due to a weaker Australian dollar compared to the U.S.

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

SG&A expenses as a percentage of net revenue increased due to the impact of acquisitions and lower net revenue.

Segment operating income decreased 90.0  percent and segment operating margin decreased 490  basis points compared to the first nine months of 2022 .

Corporate Unallocated

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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 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.

Segment operating loss in the third quarter of 2023 increased 254.4 percent compared to the third quarter of 2022 and increased 43.7 percent compared to the first nine months of 2022 due to higher restructuring and acquisition project costs.

Financial Condition, Liquidity and Capital Resources

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.

Total cash and cash equivalents as of September 2, 2023 were $94.9 million compared to $79.9 million as of December 3, 2022 and $60.7 million as of August 27, 2022.

The majority of the $94.9 million in cash and cash equivalents as of September 2, 2023 was held outside the United States.

Total long and short-term debt was $1,885.0 million as of September 2, 2023, $1,765.1 million as of December 3, 2022 and $1,918.2 million as of August 27, 2022.

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

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.

equity was 52.2 percent as of September 2, 2023 as compared to 52.3 percent as of December 3, 2022 and 54.9 percent as of August 27, 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.

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Debt Instrument

Result as of June 3, 2023

Result as of September 2, 2023

Secured Total Indebtedness / TTM 1 EBITDA

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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

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;

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 Company’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.

For Secured Total Indebtedness / TTM EBITDA ratio, TTM EBITDA is adjusted for the pro forma results from Material Acquisitions and Material Divestitures, both as defined in the Second Amended and Restated Credit Agreement, 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, the Company filed as an exhibit to its 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 Company 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.

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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 (Negative) free cash flow after dividends

Six Months Ended

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

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September 2, 2023

August 27, 2022

Net cash provided by operating activities

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Cash Flows from Operating Activities:

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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.

Net income including non-controlling interest was $100.0 million in the first nine months of 2023 compared to $132.1 million in the first nine months of 2022.

Depreciation and amortization expense totaled $119.2 million in the first nine months of 2023 compared to $109.4 million in the first nine months of 2022.

Deferred income taxes was a use of cash of $30.1 million in 2023 compared to $5.0 million in the first nine months of 2022.

Accrued compensation was a use of cash of $33.8 million in 2023 compared to $17.3 million last year. Other assets was a use of cash of $30.9 million in the first nine months of 2023 compared to $40.3 million in the first nine months of 2022.

Other liabilities was a source of cash of $12.4 million in the first nine months of 2023 compared to a use of cash of $35.9 million in the first nine months of 2022.

Changes in net working capital (trade receivables, inventory and trade payables) accounted for a source of cash of $43.3 million compared to a use of cash of $146.6 million last year.

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

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Trade receivables, net –

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.

Trade receivables, net was a source of cash of $79.5 million and a use of cash of $51.6 million in the first nine 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. 

The DSO were 58 days at September 2, 2023 and 63 days at August 27, 2022. 

Inventory –

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.

Inventory was a source of cash of $38.2 million and use of cash of $112.4 million in the first nine 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 at lower prices in 2023 compared to 2022.

Inventory days on hand were 70 days as of September 2, 2023 and 75 days as of August 27, 2022.

Trade payables –

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.

Trade payables was a use of cash of $74.4 million and a source of cash of $17.4 million in the first nine 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:

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Purchases of property, plant and equipment were $109.5 million during the first 

six months of 

nine months of 

2023  compared to $98.4 million for the same period of 2022 . 

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

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. 

During the first nine months of 2023 and 2022, we paid cash, net of cash acquired of $194.2 million and $242.9 million, respectively.

Cash Flows from Financing Activities:

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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  

In the first nine months of 

2023 , we refinanced our debt and as a result of that and borrowings we have proceeds from the issuance of long-term debt of $1,333.0  

million and repayment of long-term debt of $1,184.9 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 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 

Borrowings on our long-term debt were $335.0 and payments on our revolving credit facility were $15.0 million in the first nine months of 

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

2023  and 2022 , respectively.

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

Net payments of notes payable were $18.0 million in the first nine months of 

2023  and net proceeds of notes payable were $6.7 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 

Cash dividends paid were $32.3 million in the first nine months of 2023 compared to $29.1 million in the same period of 2022 .

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

2023 compared to $3.9 million in the same period of 2022 .

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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