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Item 2. Management’s Discussion and Analysis

2024-09-26 compared with 2024-06-27 · 173 added, 149 removed, 218 unchanged (60% 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 2, 2023 for important background information related to our business.

Net revenue in the second quarter of 2024 increased 2.1 percent from the second quarter of 2023.

Net revenue increased 3.9 percent due to acquisitions and 3.3 percent due to sales volume, partially offset by a 3.4 percent decrease in pricing and a 1.7 percent decrease due to negative currency effect compared to the second quarter of 2023.

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

Net revenue in the third quarter of 2024 increased 1.9 percent from the third quarter of 2023.

Net revenue increased 3.0 percent due to acquisitions and 3.0 percent due to sales volume, partially offset by a 2.6 percent decrease in pricing and a 1.5 percent decrease due to negative currency effect compared to the third quarter of 2023.

The negative currency effects were primarily driven by aweaker Egyptian pound, Turkish lira and Brazilian real compared to the U.S.

Gross profit margin increased 70 basis points primarily due to lower raw material costs and higher sales volume partially offset by lower product pricing.

Net revenue in the first six months of 2024 increased 1.2 percent from the first six months of 2023.

Net revenue increased 4.4 percent due to acquisitions and 1.4 percent due to sales volume, partially offset by a 3.4 percent decrease in pricing and a 1.2 percent decrease due to negative currency effect compared to the first six months of 2023.

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

Gross profit margin increased 260 basis points primarily due to lower raw material costs partially offset by lower product pricing.

Net revenue in the first nine months of 2024 increased 1.4 percent from the first nine months of 2023.

Net revenue increased 3.9 percent due to acquisitions and 1.9 percent due to sales volume, partially offset by a 3.1 percent decrease in pricing and a 1.3 percent decrease due to negative currency effect compared to the first nine months of 2023.

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

Gross profit margin increased 190 basis points primarily due to lower raw material costs and higher sales volume partially offset by lower product pricing.

Net income attributable to H.B.

Fuller in the second quarter of 2024 was $51.3 million compared to $40.4 million in the second quarter of 2023.

Diluted earnings per share for the second quarter of 2024 was $0.91 per share compared to $0.73 per share for the second quarter of 2023.

Fuller in the third quarter of 2024 was $55.4 million compared to $37.6 million in the third quarter of 2023.

Diluted earnings per share for the third quarter of 2024 was $0.98 per share compared to $0.67 per share for the third quarter of 2023.

Net income attributable to H.B.

Fuller in the first six months of 2024 was $82.3 million compared to $62.3 million in the first six months of 2023.

Diluted earnings per share for the first six months of 2024 was $1.45 per share compared to $1.12 per share for the first six months of 2023.

Fuller in the first nine months of 2024 was $137.6 million compared to $99.9 million in the first nine months of 2023.

Diluted earnings per share for the first nine months of 2024 was $2.43 per share compared to $1.79 per share for the first nine months of 2023.

Restructuring Plans

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In implementing the Plans, the Company currently expects to incur costs of approximately $39.1 million to $50.1 million ($30.4 million to $39.0 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 $37.1 million under the Plans as of June 1, 2024.

We have incurred costs of $43.0 million under the Plans as of August 31, 2024.

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

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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 2024 compared to the second quarter and first six months of 2023:

The following table shows the net revenue variance analysis for the third quarter and first nine months of 2024 compared to the three and nine months ended September 2, 2023:

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June 1, 2024 vs.

Nine Months Ended

August 31, 2024 vs.

September 2, 2023

August 31, 2024 vs.

September 2, 2023

Organic growth

Organic revenue decreased 0.1 percent in the second quarter of 2024 compared to the second quarter of 2023 and consisted of a 7.2 percent increase in Construction Adhesives and a 2.5 percent increase in Engineering Adhesives, offset by a 4.7 percent decrease in Hygiene, Health and Consumable Adhesives.

The decrease was driven by a 3.4 percent decrease in product pricing, partially offset by a 3.3 percent increase in sales volume.

Organic revenue increased 0.4 percent in the third quarter of 2024 compared to the third quarter of 2023 and consisted of a 10.2 percent increase in Construction Adhesives, partially offset by a 2.0 percent decrease in Engineering Adhesives and a 0.5 percent decrease in Hygiene, Health and Consumable Adhesives.

The increase was driven by a 3.0 percent increase in sales volume, partially offset by a 2.6 percent decrease in product pricing.

The 3.0 percent increase from M&A was 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 Turkish lira, Chinese renminbi and Egyptian pound offset by a stronger Brazilian real and Mexican peso compared to the U.S.

Organic revenue decreased 2.0 percent in the first six months of 2024 compared to the first six months of 2023 and consisted of an 8.5 percent increase in Construction Adhesives and a 0.2 percent increase in Engineering Adhesives, offset by a 7.1 percent decrease in Hygiene, Health and Consumable Adhesives.

The negative 1.5 percent foreign currency impact was primarily driven by a weaker Egyptian pound, Turkish lira and Brazilian real compared to the U.S.

dollar compared to the U.S.

Organic revenue decreased 1.2 percent in the first nine months of 2024 compared to the first nine months of 2023 and consisted of an 9.0 percent increase in Construction Adhesives, offset by a 4.8 percent decrease in Hygiene, Health and Consumable Adhesives and a 0.7 percent decrease in Engineering Adhesives.

The decrease was driven by a 3.1 percent decrease in product pricing, partially offset by a 1.9 percent increase in sales volume.

The 3.9 percent increase from M&A was due to our acquisitions that occurred in the last twelve months.

The negative 1.2 percent foreign currency impact was primarily driven by a weaker Turkish lira, Chinese renminbi and Egyptian pound offset by a stronger Euro, Brazilian real, Mexican peso and Colombian peso compared to the U.S.

The negative 1.3 percent foreign currency impact was primarily driven by a weaker Turkish lira, Chinese renminbi and Egyptian pound offset by a stronger British pound sterling and Mexican peso compared to the U.S.

Cost of sales:

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Percent of net revenue

Cost of sales in the second quarter of 2024 compared to the second quarter of 2023 decreased 210 basis points as a percentage of net revenue.

Cost of sales in the third quarter of 2024 compared to the third quarter of 2023 decreased 70 basis points as a percentage of net revenue.

Raw material cost as a percentage of net revenue decreased 170 basis points in 2024 compared to 2023 due to lower raw material costs.

Other manufacturing costs as a percentage of net revenue increased 70 basis points in 2024 compared to 2023 due to a decrease in product pricing partially offset by higher sales volum e.

Cost of sales in the first six months of2024 compared to the first six months of2023 decreased 260 basis points as a percentage of net revenue.

Other manufacturing costs as a percentage of net revenue increased 100 basis points in 2024 compared to 2023 due to a decrease in product pricing partially offset by higher sales volume .

Cost of sales in the first nine months of2024 compared to the first nine months of2023 decreased 190 basis points as a percentage of net revenue.

Raw material cost as a percentage of net revenue decreased 300 basis points in 2024 compared to 2023 due to lower raw material costs.

Other manufacturing costs as a percentage of net revenue increased 110 basis points in 2024 compared to 2023 primarily due to a decrease in product pricing .

Other manufacturing costs as a percentage of net revenue increased 110 basis points in 2024 compared to 2023 primarily due to a decrease in product pricing partially offset by higher sales volume .

Gross profit:

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Percent of net revenue

Gross profit in the second quarter of 2024 increased 9.9 percent and gross profit margin increased 220 basis points compared to the second quarter of 2023.

Gross profit in the third quarter of 2024 increased 4.6 percent and gross profit margin increased 70 basis points compared to the third quarter of 2023.

The increase in gross profit margin was due to a 170 basis point decrease in raw materials offset by a 100 basis point increase in other manufacturing costs .

Gross profit in the first six months of 2024 increased 10.5 percent and gross profit margin increased 260 basis points compared to the first six months of 2023.

Gross profit in the first nine months of 2024 increased 8.4 percent and gross profit margin increased 190 basis points compared to the first nine months of 2023.

The increase in gross profit margin was due to a 300 basis point decrease in raw materials offset by a 110 basis point increase in other manufacturing costs .

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Percent of net revenue

SG&A expenses for the second quarter of 2024 compared to the second quarter of 2023 increased 130 basis points as a percentage of net revenue.

The increase was du e to the impact of acquisitions and higher compensation costs .

SG&A expenses for the first six months of 2024 compared to the first six months of 2023 increased 170 basis points as a percentage of net revenue.

The increase was du e to the impact of acquisitions and higher compensation costs .

SG&A expenses for the third quarter of 2024 compared to the third quarter of 2023 decreased 40 basis points as a percentage of net revenue.

The decrease was due to a gain on insurance claims, partially offset by the impact of acquisitions.

SG&A expenses for the first nine months of 2024 compared to the first nine months of 2023 increased 100 basis points as a percentage of net revenue.

The increase was du e to the impact of acquisitions and higher compensation costs, partially offset by a gain on insurance claims.

Other income, net:

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Other income, net

Other income, net in the second quarter of 2024 included $4.0 million of net defined benefit pension benefits, partially offset by $0.3 million of currency transaction losses and a $0.1 million of other expense.

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 first six months of 2024 included $7.9 million of net defined benefit pension benefits, partially offset by $2.3 million of currency transaction losses, a $0.4 million loss from the write-off of a cost method investment and $0.1 million of other expense.

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 third quarter of 2024 included $4.0 million of net defined benefit pension benefits, and $0.3 million of currency transaction gains, partially offset by a $2.0 million loss on equity investment and $0.2 million of other expense.

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

Other income, net in the first nine months of 2024 included $11.9 million of net defined benefit pension benefits, partially offset by $2.0 million of currency transaction losses, a $2.0 million loss on equity investment and $0.6 million of other expense.

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.

Interest expense:

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Interest expense

Interest expense in the second quarter of 2024 was $32.3 million compared to $33.1 million in the second quarter of 2023 and was lower primarily due to lower interest rates and lower debt balances.

Interest expense in the first six months of2024 was $64.2 million compared to $66.2 million in the first six months of2023 and was lower primarily due to lower interest rates and lower debt balances.

Interest expense in the third quarter of 2024 was $35.3 million compared to $35.1 million in the third quarter of 2023 and was higher primarily due to higher debt balances, partially offset by lower interest rates.

Interest expense in the first nine months of2024 was $99.5 million compared to $101.3 million in the first nine months of2023 and was lower primarily due to lower interest rates, partially offset by higher debt balances.

Interest income:

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Interest income

Interest income in the second quarter of 2024 and 2023 was $1.2 million and $0.9 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income.

Interest income in the first six months of 2024 and 2023 was $2.5 million and $1.6 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income.

Interest income in the third quarter of 2024 and 2023 was $1.1 million and $1.1 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income.

Interest income in the first nine months of 2024 and 2023 was $3.6 million and $2.7 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income.

Income taxes:

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Effective tax rate

Income tax expense of $22.4 million in the second quarter of 2024 includes $1.3 million of discrete tax expense.

Excluding the discrete tax expense, the overall effective tax rate was 28.9 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 $19.3 million in the second quarter of 2023 includes $2.0 million of discrete tax expense.

Income tax expense of $18.3 million in the third quarter of 2024 includes $2.9 million of discrete tax benefit.

Excluding the discrete tax benefit, the overall effective tax rate was 29.3 percent.

The discrete tax benefit relates to an excess tax benefit on U.S.

stock compensation, as well as other various U.S.

and foreign tax matters.

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 related to various foreign tax matters.

Income tax expense of $30.2 million in the first six months of 2024 includes $1.2 million of discrete tax benefit.

The discrete tax expense related to various U.S.

and foreign tax matters.

Income tax expense of $48.5 million in the first nine months of 2024 includes $4.1 million of discrete tax benefit.

Excluding the discrete tax benefit, the overall effective tax rate was 28.7 percent.

The discrete tax benefit relates to an excess tax benefit related to U.S.

stock compensation offset by 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.

The discrete tax benefit relates to an excess tax benefit on U.S.

stock compensation, as well as 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 related to various foreign tax matters offset by an excess tax benefit related to U.S.

The discrete tax expense related to various U.S.

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

stock compensation.

1 unchanged sentence

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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 2024 compared to the second quarter and first six months of 2023 is due to lower net income in our joint venture and the unfavorable impact of the weakening of the Japanese yen against the U.S.

The higher income for the third quarter of 2024 compared to the third quarter of 2023 is due to higher net income in our joint venture during the quarter compared to the prior year, partially offset by the impact of the weakening of the Japanese yen compared to the U.S.

The lower income for the first nine months of 2024compared to the first nine months of 2023 is due to the impact of the weakening of the Japanese yen compared to the U.S.

Net income attributable to H.B.

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The net income attributable to H.B.

Fuller for the second quarter of 2024 was $51.3 million compared to $40.4 million for the second quarter of 2023.

The diluted earnings per share for the second quarter of 2024 was $0.91 per share as compared to $0.73 per share for the second quarter of 2023.

Fuller for the third quarter of 2024 was $55.4 million compared to $37.6 million for the third quarter of 2023.

The diluted earnings per share for the third quarter of 2024 was $0.98 per share as compared to $0.67 per share for the third quarter of 2023.

The net income attributable to H.B.

Fuller for the first six months of 2024 was $82.3 million compared to $62.3 million for the first six months of 2023.

The diluted earnings per share for the first six months of 2024 was $1.45 per share as compared to $1.12 per share for the first six months of 2023.

Fuller for the first nine months of 2024 was $137.6 million compared to $99.9 million for the first nine months of 2023.

The diluted earnings per share for the first nine months of 2024 was $2.43 per share as compared to $1.79 per share for the first nine months of 2023.

Operating Segment Results

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September 2, 2023

August 31, 2024

September 2, 2023

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August 31, 2024

September 2, 2023

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August 31, 2024 vs.

September 2, 2023

August 31, 2024 vs.

September 2, 2023

Organic growth

Net revenue decreased 2.8 percent in the second quarter of 2024 compared to the second quarter of 2023.

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

The 4.0 percent increase in net revenue from M&A was due to the acquisitions o f 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 Turkish lira, Egyptian pound and Chinese renminbi offset by a stronger Brazilian real and Mexican peso compared to the U.S.

Net revenue decreased 3.1 percent in the third quarter of 2024 compared to the third quarter of 2023.

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

The negative currency effect was due to a weaker primarily driven by a weaker Egyptian pound, Turkish lira and Brazilian real compared to the U.S.

As a percentage of net revenue, raw material costs decreased 20 basis points due to lower raw material costs.

Other manufacturing costs as a percentage of net revenue increased 60 basis points due to lower product pricing, partially offset by a slight increase in sales volume.

SG&A expenses as a percentage of net revenue increased 200 basis points due to the impact of acquisitions and lower net revenue.

Segment operating income decreased 2.1 percent and segment operating margin as a percentage of net revenue was flat compared to the second quarter of 2023 .

Net revenue decreased 3.5 percent in the first six months of 2024 compared to the first six months of 2023.

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

Other manufacturing costs as a percentage of net revenue increased 70 basis points due to lower product pricing, partially offset by an increase in sales volume.

SG&A expenses as a percentage of net revenue decreased 20 basis points due to lower SG&A expense, partially offset by lower net revenue.

Segment operating income decreased 5.5 percent and segment operating margin as a percentage of net revenue decreased 30 basis points compared to the third quarter of 2023 .

Net revenue decr eased 3.3 percent in the first nine months of 2024 compared to the first nine months of 2023.

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

The 3.2 percent increase in net revenue from M&A was due to the acquisitions o f 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 Turkish lira, Egyptian pound, and Chinese renminbi offset by a stronger Brazilian real, Mexican peso and Colombian peso compared to the U.S.

The negative currency effect was due to a weaker Turkish lira, Chinese renminbi and Egyptian pound offset by a stronger Mexican peso and Colombian peso compared to the U.S.

As a percentage of net revenue, raw material costs decreased 270 basis points due to lower raw material costs.

Other manufacturing costs as a percentage of net revenue increased 100 basis points due to lower product pricing and lower sales volume.

Other manufacturing costs as a percentage of net revenue increased 100 basis points due to lower product pricing.

SG&A expenses as a percentage of net revenue increased 150 basis points due to the impact of acquisitions, lower net revenue and higher compensation costs.

Segment operating income increased 0.6 percent and segment operating margin as a percentage of net revenue increased 50 basis points compared to the first six months of2023 .

Segment operating income decreased 1.5 percent and segment operating margin as a percentage of net revenue increased 20 basis points compared to the first nine months of2023 .

Engineering Adhesives

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September 2, 2023

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September 2, 2023

Organic growth

Net revenue increased 2.6 percent in the second quarter of 2024 compared to the second quarter of 2023 .

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

Net revenue increased 2.5 percent in the third quarter of 2024 compared to the third quarter of 2023 .

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

The 5.3 percent increase in net revenue from M&A was due to the acquisition of ND Industries in the second quarter of 2024.

The negative currency effect was due to a weaker Chinese renminbi and Turkish lira offset by a stronger British pound sterlin g co mpared to the U.S.

The negative currency effect was due to a weaker Brazilian real and Turkish lira co mpared to the U.S.

A s a percentage of net revenue, raw material costs decreased 350 basis points due to lower raw material costs.

Other manufacturing costs as a percentage of net revenue increased 230 basis points.

SG&A expenses as a percentage of net revenue increased 70 basis points primarily due to higher compensation costs.

Segment operating income increased 16.7 percent and segment operating margin increased 170 basis points compared to the second quarter of 2023 .

Net revenue increased 0.7 percent in the first six months of2024 compared to the first six months of2023 .

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

The 1.9 percent increase in net revenue from M&A was due to the acquisition of Aspen in the first quarter of 2023 and ND Industries in the second quarter of 2024.

SG&A expenses as a percentage of net revenue increased 160 basis points primarily due to the acquisition of ND Industries and higher compensation costs.

Segment operating income was flat and segment operating margin decreased 40 basis points compared to the third quarter of 2023 .

Net revenue increased 1.3 percent in the first nine months of2024 compared to the first nine months of2023 .

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

The 3.2 percent increase in net revenue from M&A was due to the acquisition of ND Industries in the second quarter of 2024.

The negative currency effect was due to a weaker Chinese renminbi and Turkish lira compared to the U.S.

1 unchanged sentence

Other manufacturing costs as a percentage of net revenue increased 130 basis points due to the impact of lower product pricing, partially offset by increased sales volume.

SG&A expenses as a percentage of net revenue increased by 130 basis points due to higher compensation costs.

Segment operating income increased 12.7 percent and segment operating margin increased 130 basis points compared to the first six months of2023 .

SG&A expenses as a percentage of net revenue increased by 130 basis points primarily due to the acquisition of ND Industries and higher compensation costs.

Segment operating income increased 7.5 percent and segment operating margin increased 80 basis points compared to the first nine months of2023 .

Construction Adhesives

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September 2, 2023

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September 2, 2023

Organic growth

Net revenue increased 16.0 percent in the second quarter of 2024 compared to the second quarter of 2023.

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

The 8.9 percent increase in net revenue from M&A was due to the acquisitions o f XChem in the third quarter of 2023 and Sanglier in the fourth quarter of 2023.

Net revenue increased 15.7 percent in the third quarter of 2024 compared to the third quarter of 2023.

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

The 5.6 percent increase in net revenue from M&A was due to the acquisitions of XChem in the third quarter of 2023, Sanglier in the fourth quarter of 2023 and HS Butyl in the third quarter of 2024.

As a percentage of net revenue, raw material costs decreased 30 basis points due to lower raw material costs.

O ther manufacturing costs as a percentage of net revenue decreased 90 basis points due to higher sales volume, partially offset by lower product pricing.

SG&A expenses as a percentage of net revenue decreased 40 basis points.

Segment operating income increased 74.5 percent and segment operating margin increased 230 basis points compared to the second quarter of 2023 .

Net revenue increased 19.0 percent in the first six months of 2024 compared to the first six months of 2023.

SG&A expenses as a percentage of net revenue decreased 250 basis points due to increased net revenue and the impact of acquisitions.

S egment operating income increased 111.9 percent and segment operating margin increased 370 basis points compared to the third quarter of 2023 .

Net revenue increased 17.7 percent in the first nine months of 2024 compared to the first nine months of 2023.

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

The 10.5 percent increase in net revenue from M&A was due to the acquisitions o f XChem in the third quarter of 2023 and Sanglier in the fourth quarter of 2023.

The 8.7 percent increase in net revenue from M&A was due to the acquisitions of XChem in the third quarter of 2023, Sanglier in the fourth quarter of 2023 and HS Butyl in the third quarter of 2024.

As a percentage of net revenue, raw material costs decreased 130 basis points due to lower raw material costs.

Other manufacturing costs as a percentage of net revenue decreased 90 basis points due to higher sales volume, partially offset by lower product pricing.

SG&A expenses as a percentage of net revenue decreased by 190 basis points due increased net revenue, partially offset by the impact of acquisitions and higher compensation costs.

Segment operating loss decreased 312.9 percent to operating income and segment operating margin increased 470 basis points compared to the first six months of2023 .

SG&A expenses as a percentage of net revenue decreased by 210 basis points due increased net revenue and the impact of acquisitions, partially offset by higher compensation costs.

Segment operating income increased 822.7 percent and segment operating margin increased 430 basis points compared to the first nine months of2023 .

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 2024 increased 2.7 percent compared to the second quarter of 2023 due to higher restructuring and acquisition project costs.

Segment operating loss in the first six months of 2024 increased 24.7 percent compared to the first six months of 2023 due to higher restructuring and acquisition project costs.

Segment operating loss in the third quarter of 2024 decreased 46.0 percent compared to the third quarter of 2023 due to a gain on insurance claims and lower acquisition project costs.

Segment operating loss in the first nine months of 2024 decreased 11.6 percent compared to the first nine months of 2023 due to a gain on insurance claims and lower acquisition project costs.

Financial Condition, Liquidity and Capital Resources

Total cash and cash equivalents as of June 1, 2024 were $114.8 million compared to $179.5 million as of December 2, 2023 and $103.2 million as of June 3, 2023.

The majority of the $114.8 million in cash and cash equivalents as of June 1, 2024 was held outside the United States.

Total long and short-term debt was $2,024.9 million as of June 1, 2024, $1,838.4 million as of December 2, 2023 and $1,882.3 million as of June 3, 2023.

The total debt to total capital ratio as measured by total debt divided by total debt plus total stockholders’ equity was 53.0 percent as of June 1, 2024 as compared to 51.1 percent as of December 2, 2023 and 52.8 percent as of June 3, 2023.

Total cash and cash equivalents as of August 31, 2024 were $131.4 million compared to $179.5 million as of December 2, 2023 and $94.9 million as of September 2, 2023.

The majority of the $131.4 million in cash and cash equivalents as of August 31, 2024 was held outside the United States.

Total long and short-term debt was $2,021.1 million as of August 31, 2024, $1,838.4 million as of December 2, 2023 and $1,885.0 million as of September 2, 2023.

The total debt to total capital ratio as measured by total debt divided by total debt plus total stockholders’ equity was 52.3 percent as of August 31, 2024 as compared to 51.1 percent as of December 2, 2023 and 52.2 percent as of September 2, 2023.

We believe that cash flows from operating activities will be adequate to meet our short-term and long-term liquidity and capital expenditure needs.

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Our credit agreements include restrictive covenants that, if not met, could lead to a renegotiation of our credit lines and a significant increase in our cost of financing.

As of June 3, 2023, we were in compliance with all covenants of our contractual obligations as shown in the following table:

As of August 31, 2024, we were in compliance with all covenants of our contractual obligations as shown in the following table:

Debt Instrument

Result as of June 1, 2024

Result as of August 31, 2024

Secured Total Indebtedness / TTM 1 EBITDA

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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

2 The Maximum Secured Leverage Ratio prior to June 1, 2024, was 4.75 to 1.00 and stepped 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;

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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.

The full definition is set forth in the Second Amended and Restated Credit Agreement filed as an exhibit to 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 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.

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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.

3 Total inventory multiplied by 91 (13 weeks) and divided by cost of sales (excluding delivery costs) for the quarter.

4 Trade accounts payable multiplied by 91 (13 weeks) and divided by the net revenue for the quarter.

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Reconciliation of "Net cash provided by operating activities" to free cash flow

Six Months Ended

Nine Months Ended

($ in millions)

August 31, 2024

September 2, 2023

Net cash provided by operating activities

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Cash Flows from Operating Activities:

Six Months Ended

Nine Months Ended

($ in millions)

Net cash provided by operating activities

Net income including non-controlling interest was $82.3 million in the first six months of 2024 compared to $62.3 million in the first six months of 2023.

Depreciation and amortization expense totaled $84.7 million in the first six months of 2024 compared to $77.0 million in the first six months of 2023.

Deferred income taxes was a use of cash of $24.1 million in the first six months of 2024 compared to $16.8 million in the first six months of 2023.

Net income including non-controlling interest was $137.6 million in the first nine months of 2024 compared to $100.0 million in the first nine months of 2023.

Depreciation and amortization expense totaled $128.7 million in the first nine months of 2024 compared to $119.2 million in the first nine months of 2023.

Deferred income taxes was a use of cash of $46.0 million in the first nine months of 2024 compared to $30.1 million in the first nine months of 2023.

Accrued compensation was a use of cash of $11.6 million in 2024 compared to $33.8 million in 2023.

Other assets was a use of cash of $22.3 million in the first six months of 2024 compared to $37.0 million in the first six months of 2023.

Other liabilities was a use of cash of $1.8 million in the first six months of 2024 compared to a source of cash of $18.8 million in the first six months of 2023.

Other assets was a use of cash of $39.0 million in the first nine months of 2024 compared to $30.9 million in the first nine months of 2023.

Other liabilities was a source of cash of $0.9 million in the first nine months of 2024 compared to $12.4 million in the first nine months of 2023.

Changes in net working capital (trade receivables, inventory and trade payables) accounted for a source of cash of $13.9 million compared to a source of cash of $43.3 million last year.

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

Six Months Ended

Nine Months Ended

($ in millions)

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Total cash flow impact

Trade receivables, net – Trade receivables, net was a source of cash of $22.6 million and $66.9 million in the first six months of 2024 and 2023, respectively.

The slightly higher source of cash in 2024 compared to 2023 was due to more cash collected on trade receivables in the current year compared to the prior year.

The DSO were 57 days at June 1, 2024 and 59 days at June 3, 2023.

Inventory – Inventory was a use of cash of $56.5 million and a source of cash of $8.3 million in the first six months of 2024 and 2023, respectively.

The higher use of cash in 2024 compared to 2023 is due to higher inventory purchases in 2024 compared to 2023.

Inventory days on hand were 74 days as of June 1, 2024 and 74 days as of June 3, 2023.

Trade payables – Trade payables was a source of cash of $38.8 million and a use of cash of $20.3 million in the first six months of 2024 and 2023, respectively.

The higher source of cash in 2024 compared to 2023 reflects lower payments on trade payables in the current year compared to the prior year.

Trade receivables, net – Trade receivables, net was a source of cash of $26.4 million and $79.5 million in the first nine months of 2024 and 2023, respectively.

The lower source of cash in 2024 compared to 2023 was due to less cash collected on trade receivables in the current year compared to the prior year.

The DSO were 57 days at August 31, 2024 and 58 days at September 2, 2023.

Inventory – Inventory was a use of cash of $62.2 million and a source of cash of $38.2 million in the first nine months of 2024 and 2023, respectively.

The use of cash in 2024 compared to source of cash in 2023 was due to higher inventory purchases in 2024 compared to 2023.

Inventory days on hand were 75 days as of August 31, 2024 and 70 days as of September 2, 2023.

Trade payables – Trade payables was a source of cash of $49.7 million and a use of cash of $74.4 million in the first nine months of 2024 and 2023, respectively.

The source of cash in 2024 compared to use of cash in 2023 reflects lower payments on trade payables in the current year compared to the prior year.

Days payable outstanding were 70 days as of August 31, 2024 and 56 days as of September 2, 2023.

Cash Flows from Investing Activities:

Six Months Ended

Nine Months Ended

($ in millions)

Net cash used in investing activities

Purchases of property, plant and equipment were $90.2 million during the first six months of 2024 compared to $82.6 million for the same period of 2023 .

Purchases of property, plant and equipment were $112.8 million during the first nine months of 2024 compared to $109.5 million for the same period of 2023 .

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

During the first six months of 2024, we paid $254.3 million of cash, net of cash acquired for purchased businesses.

During the first six months of 2023, we paid $103.7 million, net of cash acquired for purchased businesses.

During the first nine months of 2024, we paid $274.1 million of cash, net of cash acquired for purchased businesses.

During the first nine months of 2023, we paid $194.2 million, net of cash acquired for purchased businesses.

Cash Flows from Financing Activities:

Six Months Ended

Nine Months Ended

($ in millions)

Net cash (used in) provided by financing activities

In the first six months of 2024 , borrowings on our revolving credit facility were $1,497.0 million and repayments on our revolving credit facility and our long-term debt totaled $1,305.5 million.

In the first nine months of 2024 , borrowings on our revolving credit facility were $1,732.9 million and repayments on our revolving credit facility and our long-term debt totaled $1,556.1 million.

These borrowings are for general working capital purposes and permitted acquisitions.

Borrowings on our long-term debt were $1,300.0 and payments on our revolving credit facility were $1,176.7 million in the first six months of 2023 .

Payment of debt issue costs were $3.5 million in the first six months of 2024 and $10.2 million in the first six months of 2023 .

Net payments of notes payable were a use of cash of $0.4 million in the first six months of 2024 compared to $0.2 million in the same period of 2023 .

Cash dividends paid were $23.3 million in the first six months of 2024 compared to $21.3 million in the same period of 2023 .

Repurchases of common stock were $21.8 million in the first six months of 2024 compared to $2.6 million in the same period of 2023 .

Borrowings on our long-term debt were $1,333.0 and payments on our revolving credit facility were $1,184.9 million in the first nine months of 2023 .

Payment of debt issue costs were $3.5 million in the first nine months of 2024 and $10.2 million in the first nine months of 2023 .

Net payments of notes payable were a use of cash of $1.0 million in the first nine months of 2024 compared to $18.0 million in the same period of 2023 .

Cash dividends paid were $35.4 million in the first nine months of 2024 compared to $32.3 million in the same period of 2023 .

Repurchases of common stock were $39.4 million in the first nine months of 2024 compared to $2.6 million in the same period of 2023 .

Forward-Looking Statements and Risk Factors

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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