FULLER H B CO 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations   Overview   The Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended December 3, 2022 for important background information related to our business.    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. dollar. 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. dollar . 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 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 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 $17.1 million under the Plans as of September 2, 2023. The Plans began to be implemented in the second quarter of fiscal year 2023 and are currently expected to be completed during fiscal year 2026. The restructuring costs will be spread across the next several fiscal quarters as the measures are implemented with the majority of the charges recognized and cash payments occurring in fiscal 2023 and 2024.   Results of Operations   Net revenue:       Three Months Ended     Nine Months Ended       September 2,     August 27,     2023 vs     September 2,     August 27,     2023 vs   ($ in millions)   2023     2022     2022     2023     2022     2022   Net revenue   $ 900.6     $ 941.2       (4.3 )%   $ 2,608.1     $ 2,791.0       (6.6 )%   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 2023 compared to the third quarter and first nine months of 2022:       Three Months Ended     Nine Months Ended       September 2, 2023 vs. August 27, 2022     September 2, 2023 vs. August 27, 2022   Organic growth     (7.4 )%     (6.4 )% M&A     4.8 %     3.0 % Currency     (1.7 )%     (3.2 )% Total     (4.3 )%     (6.6 )%   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. dollar .   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 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. dollar .   21 Table of Contents   Cost of sales:       Three Months Ended     Nine Months Ended       September 2,     August 27,     2023 vs     September 2,     August 27,     2023 vs   ($ in millions)   2023     2022     2022     2023     2022     2022   Cost of sales   $ 637.2     $ 692.1       (7.9 )%   $ 1,873.0     $ 2,075.4       (9.8 )% Percent of net revenue     70.8 %     73.5 %             71.8 %     74.4 %           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.  Lower raw material costs and higher product pricing partially offset by the impact of lower sales volume led to the decrease.   Gross profit:         Three Months Ended     Nine Months Ended       September 2,     August 27,     2023 vs     September 2,     August 27,     2023 vs   ($ in millions)   2023     2022     2022     2023     2022     2022   Gross profit   $ 263.5     $ 249.2       5.7 %   $ 735.1     $ 715.6       2.7 % Percent of net revenue     29.3 %     26.5 %             28.2 %     25.6 %           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     Nine Months Ended       September 2,     August 27,     2023 vs     September 2,     August 27,     2023 vs   ($ in millions)   2023     2022     2022     2023     2022     2022   SG&A   $ 172.2     $ 161.2       6.8 %   $ 493.3     $ 483.1       2.1 % Percent of net revenue     19.1 %     17.1 %             18.9 %     17.3 %           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     Nine Months Ended       September 2,     August 27,     2023 vs     September 2,     August 27,     2023 vs   ($ in millions)   2023     2022     2022     2023     2022     2022   Other income, net   $ 1.6     $ 6.6       (75.8 )%   $ 4.8     $ 12.7       (62.2 )%   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 $3.3 million settlement loss related to the termination of our Canadian defined benefit pension plan.   22 Table of Contents   Interest expense:       Three Months Ended     Nine Months Ended       September 2,     August 27,     2023 vs     September 2,     August 27,     2023 vs   ($ in millions)   2023     2022     2022     2023     2022     2022   Interest expense   $ 35.1     $ 23.5       49.4 %   $ 101.3     $ 61.5       64.7 %   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 nine months of  2023 was $101.3  million compared to $61.5  million in the  first nine months of 2022  and  was higher primarily due to higher debt balances and higher interest rates.   Interest income:       Three Months Ended     Nine Months Ended       September 2,     August 27,     2023 vs     September 2,     August 27,     2023 vs   ($ in millions)   2023     2022     2022     2023     2022     2022   Interest income   $ 1.1     $ 2.1       (47.6 )%   $ 2.7     $ 6.2       (56.5 )%   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 $6.2 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income.   Income taxes:        Three Months Ended     Nine Months Ended       September 2,     August 27,     2023 vs     September 2,     August 27,     2023 vs   ($ in millions)   2023     2022     2022     2023     2022     2022   Income taxes   $ 22.2     $ 28.3       (21.6 )%   $ 51.3     $ 62.0       (17.3 )% Effective tax rate     37.7 %     38.7 %             34.6 %     32.7 %           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 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 $7.7 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 28.7 percent. The discrete tax expense relates to the revaluation of cross-currency swap agreements due to depreciation of the Euro versus the U.S. dollar, as well as various U.S. and foreign tax matters offset by the tax effect of legal entity mergers.   Income from equity method investments:       Three Months Ended     Nine Months Ended       September 2,     August 27,     2023 vs     September 2,     August 27,     2023 vs   ($ in millions)   2023     2022     2022     2023     2022     2022   Income from equity method investments   $ 1.0     $ 1.6       (37.5 )%   $ 3.3     $ 4.2       (21.4 )%   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 2023 compared to the same periods of 2022 is due to lower net income in our joint venture.   Net income attributable to H.B. Fuller:       Three Months Ended     Nine Months Ended       September 2,     August 27,     2023 vs     September 2,     August 27,     2023 vs   ($ in millions)   2023     2022     2022     2023     2022     2022   Net income attributable to H.B. Fuller   $ 37.6     $ 46.5       (19.1 )%   $ 99.9     $ 132.0       (24.3 )% Percent of net revenue     4.2 %     4.9 %             3.8 %     4.7 %           23 Table of Contents   The net income attributable to H.B. 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 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 $2.39 per share for the first nine months of 2022.   Operating Segment Results   We have three reportable segments: Hygiene, Health and Consumable Adhesives, Engineering Adhesives and Construction Adhesives. Operating results of each of these segments are regularly reviewed by our chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance.    The tables below provide certain information regarding the net revenue and operating income of each of our operating segments.    Corporate Unallocated amounts include business acquisition and integration costs, organizational restructuring charges and project costs associated with implementing a global Enterprise Resource Planning (“ERP”) system that we refer to as Project ONE.   Net Revenue by Segment:       Three Months Ended     Nine Months Ended       September 2, 2023     August 27, 2022     September 2, 2023     August 27, 2022       Net     % of     Net     % of     Net     % of     Net     % of   ($ in millions)   Revenue     Total     Revenue     Total     Revenue     Total     Revenue     Total   Hygiene, Health and Consumable Adhesives   $ 402.4       45 %   $ 425.0       45 %   $ 1,190.4       46 %   $ 1,252.4       45 % Engineering Adhesives     365.8       40 %     378.2       40 %     1,063.0       40 %     1,137.6       41 % Construction Adhesives     132.4       15 %     138.0       15 %     354.7       14 %     401.0       14 % Segment total   $ 900.6       100 %   $ 941.2       100 %   $ 2,608.1       100 %   $ 2,791.0       100 % Corporate Unallocated     -       -       -       -       -       -       -       -   Total   $ 900.6       100 %   $ 941.2       100 %   $ 2,608.1       100 %   $ 2,791.0       100 %   Segment Operating Income (Loss):       Three Months Ended     Nine Months Ended       September 2, 2023     August 27, 2022     September 2, 2023     August 27, 2022       Segment             Segment             Segment             Segment               Operating             Operating             Operating             Operating               Income     % of     Income     % of     Income     % of     Income     % of   ($ in millions)   (Loss)     Total     (Loss)     Total     (Loss)     Total     (Loss)     Total   Hygiene, Health and Consumable Adhesives   $ 52.7       58 %   $ 47.5       54 %   $ 149.5       62 %   $ 122.9       53 % Engineering Adhesives     52.9       58 %     39.8       45 %     129.8       54 %     115.3       50 % Construction Adhesives     5.9       6 %     6.4       7 %     2.2       (0 )%     22.0       9 % Segment total   $ 111.5       122 %   $ 93.7       106 %   $ 281.5       116 %   $ 260.2       112 % Corporate Unallocated     (20.2 )     (22 )%     (5.7 )     (6 )%     (39.8 )     (16 )%     (27.7 )     (12 )% Total   $ 91.3       100 %   $ 88.0       100 %   $ 241.7       100 %   $ 232.5       100 %   Hygiene, Health and Consumable Adhesives       Three Months Ended     Nine Months Ended       September 2,     August 27,     2023 vs     September 2,     August 27,     2023 vs   ($ in millions)   2023     2022     2022     2023     2022     2022   Net revenue   $ 402.4     $ 425.0       (5.3 )%   $ 1,190.4     $ 1,252.4       (5.0 )% Segment operating income   $ 52.7     $ 47.5       10.9 %   $ 149.5     $ 122.9       21.6 % Segment operating margin     13.1 %     11.2 %             12.6 %     9.8 %           24 Table of Contents   The following table provides details of the Hygiene, Health and Consumable Adhesives net revenue variances:       Three Months Ended     Nine Months Ended       September 2, 2023 vs. August 27, 2022     September 2, 2023 vs. August 27, 2022   Organic growth     (10.5 )%     (4.2 )% M&A     7.6 %     3.6 % Currency     (2.4 )%     (4.4 )% Total     (5.3 )%     (5.0 )%   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. dollar. 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. The  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. dollar. 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     Nine Months Ended       September 2,     August 27,     2023 vs     September 2,     August 27,     2023 vs   ($ in millions)   2023     2022     2022     2023     2022     2022   Net revenue   $ 365.8     $ 378.2       (3.3 )%   $ 1,063.0     $ 1,137.6       (6.6 )% Segment operating income   $ 52.9     $ 39.8       32.9 %   $ 129.8     $ 115.3       12.6 % Segment operating margin     14.5 %     10.5 %             12.2 %     10.1 %           The following tables provide details of the Engineering Adhesives net revenue variances:       Three Months Ended     Nine Months Ended       September 2, 2023 vs. August 27, 2022     September 2, 2023 vs. August 27, 2022   Organic growth     (3.3 )%     (5.3 )% M&A     1.4 %     1.5 % Currency     (1.4 )%     (2.8 )% Total     (3.3 )%     (6.6 )%   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 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  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. dollar. 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  12.6 percent and segment operating margin increased 210  basis points compared to the first nine months of 2022 .   25 Table of Contents   Construction Adhesives       Three Months Ended     Nine Months Ended       September 2,     August 27,     2023 vs     September 2,     August 27,     2023 vs   ($ in millions)   2023     2022     2022     2023     2022     2022   Net revenue   $ 132.4     $ 138.0       (4.1 )%   $ 354.7     $ 401.0       (11.6 )% Segment operating income (loss)   $ 5.9     $ 6.4       (7.8 )%   $ 2.2     $ 22.0       (90.0 )% Segment operating margin     4.5 %     4.6 %             0.6 %     5.5 %           The following tables provide details of the Construction Adhesives net revenue variances:       Three Months Ended     Nine Months Ended       September 2, 2023 vs. August 27, 2022     September 2, 2023 vs. August 27, 2022   Organic growth     (9.4 )%     (16.0 )% M&A     5.4 %     5.1 % Currency     (0.1 )%     (0.7 )% Total     (4.1 )%     (11.6 )%   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 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   2023 .  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  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. The  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. dollar. 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       Three Months Ended     Nine Months Ended       September 2,     August 27,     2023 vs     September 2,     August 27,     2023 vs   ($ in millions)   2023     2022     2022     2023     2022     2022   Net revenue   $ -     $ -       0.0 %   $ -     $ -       0.0 % Segment operating loss   $ (20.2 )   $ (5.7 )     254.4 %   $ (39.8 )   $ (27.7 )     43.7 % Segment operating margin   NMP     NMP             NMP     NMP             NMP = Non-meaningful percentage   Corporate Unallocated includes acquisition and integration-related charges, restructuring-related charges, and costs related to the implementation of Project ONE.   Segment operating loss in the 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 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 52.2 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. operations, U.S. capital spending and U.S. pension and other postretirement benefit contributions in addition to funding U.S. acquisitions, dividend payments, debt service and share repurchases as needed. For those international earnings considered to be reinvested indefinitely, we currently have no intention to, and plans do not indicate a need to, repatriate these funds for U.S. operations.   26 Table of Contents   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:    Covenant   Debt Instrument   Measurement   Result as of September 2, 2023 Secured Total Indebtedness / TTM 1 EBITDA   Revolving Facility and Term Loan A Facility   Not greater than 4.75 2   2.3 TTM 1 EBITDA / Consolidated Interest Expense   Revolving Facility and Term Loan A Facility   Not less than 2.0   4.5     1 TTM = Trailing 12 months   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 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, 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.   Selected Metrics of Liquidity   Key metrics we monitor are net working capital as a percent of annualized net revenue, trade receivable days sales outstanding (“DSO”), inventory days on hand, free cash flow after dividends and debt capitalization ratio.       September 2,     August 27,       2023     2022   Net working capital as a percentage of annualized net revenue 1     18.1 %     18.8 % Accounts receivable DSO (in days) 2     58       63   Inventory days on hand (in days) 3     70       75   Free (negative) cash flow after dividends 4   $ 74.7     $ (78.8 ) Total debt to total capital ratio 5     52.2 %     54.9 %   1 Current quarter net working capital (trade receivables, net of allowance for doubtful accounts plus inventory minus trade payables) divided by annualized net revenue (current quarter multiplied by four).   2 Trade receivables net of the allowance for doubtful accounts at the balance sheet date multiplied by 91 (13 weeks) and divided by the net revenue for the quarter.   3 Total inventory multiplied by 91 and divided by cost of sales (excluding delivery costs) for the quarter.   4 Year-to-date net cash provided by operating activities, less purchased property, plant and equipment and dividends paid. See reconciliation of net cash provided by operating activities to free cash flow after dividends below.   5 Total debt divided by (total debt plus total stockholders’ equity).   Free cash flow after dividends, a non-GAAP financial measure, is defined as net cash provided by operations less purchased property, plant and equipment and dividends paid. Free cash flow after dividends is an integral financial measure used by the Company to assess its ability to generate cash in excess of its operating needs, therefore, the Company believes this financial measure provides useful information to investors. The following table reflects the manner in which free cash flow after dividends is determined and provides a reconciliation of free cash flow after dividends to net cash provided by operating activities, the most directly comparable financial measure calculated and reported in accordance with U.S. GAAP.   27 Table of Contents   Reconciliation of "Net cash provided by operating activities" to free (negative) cash flow after dividends       Nine Months Ended   ($ in millions)   September 2, 2023     August 27, 2022   Net cash provided by operating activities   $ 216.7     $ 48.7   Less: Purchased property, plant and equipment     109.5       98.4   Less: Dividends paid     32.3       29.1   Free (negative) cash flow after dividends   $ 74.7     $ (78.8 )   Summary of Cash Flows   Cash Flows from Operating Activities:         Nine Months Ended       September 2,     August 27,   ($ in millions)   2023     2022   Net cash provided by (used in) operating activities   $ 216.7     $ 48.7     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 $146.6 million last year. The table below provides the cash flow impact due to changes in the components of net working capital:       Nine Months Ended       September 2,     August 27,   ($ in millions)   2023     2022   Trade receivables, net   $ 79.5     $ (51.6 ) Inventory     38.2       (112.4 ) Trade payables     (74.4 )     17.4   Total cash flow impact   $ 43.3     $ (146.6 )     ● Trade receivables, net – 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 58 days at September 2, 2023 and 63 days at August 27, 2022.      ● Inventory – 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 $74.4 million and a source of cash of $17.4 million in the first nine months of 2023 and 2022, respectively. The use of cash in 2023 compared to the source of cash in 2022 reflects higher payments on trade payables in the current year compared to the prior year.   Cash Flows from Investing Activities:       Nine Months Ended       September 2,     August 27,   ($ in millions)   2023     2022   Net cash used in investing activities   $ (299.5 )   $ (336.0 )   Purchases of property, plant and equipment were $109.5 million during the first  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 nine months of 2023 and 2022, we paid cash, net of cash acquired of $194.2 million and $242.9 million, respectively.        28 Table of Contents   Cash Flows from Financing Activities:       Nine Months Ended       September 2,     August 27,   ($ in millions)   2023     2022   Net cash provided by financing activities   $ 96.3     $ 301.7     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. 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  2022 . 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 $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 $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 .   Forward-Looking Statements and Risk Factors   The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words like "plan," "expect," "aim," "believe," "project," "anticipate," "intend," "estimate," "will," "should," "could" (including the negative or variations thereof) and other expressions that indicate future events and trends. These plans and expectations are based upon certain underlying assumptions, including those mentioned with the specific statements. Such assumptions are in turn based upon internal estimates and analyses of current market conditions and trends, our plans and strategies, economic conditions and other factors. These plans and expectations and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. In addition to the factors described in this report, Item 1A. Risk Factors identifies some of the important factors that could cause our actual results to differ materially from those in any such forward-looking statements. In order to comply with the terms of the safe harbor, we have identified these important factors which could affect our financial performance and could cause our actual results for future periods to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. These factors should be considered, together with any similar risk factors or other cautionary language that may be made elsewhere in this Quarterly Report on Form 10-Q.   The list of important factors in Item 1A. Risk Factors does not necessarily present the risk factors in order of importance. This disclosure, including that under Forward-Looking Statements and Risk Factors, and other forward-looking statements and related disclosures made by us in this report and elsewhere from time to time, represents our best judgment as of the date the information is given. We do not undertake responsibility for updating any of such information, whether as a result of new information, future events, or otherwise, except as required by law. Investors are advised, however, to consult any further public company disclosures (such as in filings with the SEC or in our press releases) on related subjects.