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 2, 2023 for important background information related to our business. 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. dollar. 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 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. dollar. 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 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 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 During th e 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 $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 $43.0 million under the Plans as of August 31, 2024. The Plans were implemented in the second quarter of fiscal year 2023 and are currently expected to be completed during fiscal year 2026. The restructuring costs will be spread across the next several fiscal quarters as the measures are implemented with the majority of the charges recognized and cash payments occurring in fiscal 2023 and 2024. 27 Table of Contents Results of Operations Net revenue: Three Months Ended Nine Months Ended August 31, September 2, 2024 vs August 31, September 2, 2024 vs ($ in millions) 2024 2023 2023 2024 2023 2023 Net revenue $ 917.9 $ 900.6 1.9 % $ 2,645.5 $ 2,608.1 1.4 % 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 2024 compared to the three and nine months ended September 2, 2023: Three Months Ended Nine Months Ended August 31, 2024 vs. September 2, 2023 August 31, 2024 vs. September 2, 2023 Organic growth 0.4 % (1.2 )% M&A 3.0 % 3.9 % Currency (1.5 )% (1.3 )% Total 1.9 % 1.4 % 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 1.5 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. dollar. 28 Table of Contents 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 1.3 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. dollar . Cost of sales: Three Months Ended Nine Months Ended August 31, September 2, 2024 vs August 31, September 2, 2024 vs ($ in millions) 2024 2023 2023 2024 2023 2023 Cost of sales $ 642.2 $ 637.2 0.8 % $ 1,848.5 $ 1,873.0 (1.3 )% Percent of net revenue 70.1 % 70.8 % 69.9 % 71.8 % 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 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 partially offset by higher sales volume . Gross profit: Three Months Ended Nine Months Ended August 31, September 2, 2024 vs August 31, September 2, 2024 vs ($ in millions) 2024 2023 2023 2024 2023 2023 Gross profit $ 275.7 $ 263.5 4.6 % $ 797.0 $ 735.1 8.4 % Percent of net revenue 30.0 % 29.3 % 30.1 % 28.2 % 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 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 . Selling, general and administrative (SG&A) expenses: Three Months Ended Nine Months Ended August 31, September 2, 2024 vs August 31, September 2, 2024 vs ($ in millions) 2024 2023 2023 2024 2023 2023 SG&A $ 171.4 $ 172.2 (0.5 )% $ 525.2 $ 493.3 6.5 % Percent of net revenue 18.7 % 19.1 % 19.9 % 18.9 % 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. 29 Table of Contents Other income, net: Three Months Ended Nine Months Ended August 31, September 2, 2024 vs August 31, September 2, 2024 vs ($ in millions) 2024 2023 2023 2024 2023 2023 Other income, net $ 2.1 $ 1.6 31.3 % $ 7.3 $ 4.8 52.1 % 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 $10.8 million of currency transaction losses. Interest expense: Three Months Ended Nine Months Ended August 31, September 2, 2024 vs August 31, September 2, 2024 vs ($ in millions) 2024 2023 2023 2024 2023 2023 Interest expense $ 35.3 $ 35.1 0.6 % $ 99.5 $ 101.3 (1.8 )% 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 $101.3 million in the first nine months of2023 and was lower primarily due to lower interest rates, partially offset by higher debt balances. 30 Table of Contents Interest income: Three Months Ended Nine Months Ended August 31, September 2, 2024 vs August 31, September 2, 2024 vs ($ in millions) 2024 2023 2023 2024 2023 2023 Interest income $ 1.1 $ 1.1 (0.0 )% $ 3.6 $ 2.7 33.3 % 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 $2.7 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income. Income taxes: Three Months Ended Nine Months Ended August 31, September 2, 2024 vs August 31, September 2, 2024 vs ($ in millions) 2024 2023 2023 2024 2023 2023 Income taxes $ 18.3 $ 22.2 (17.6 )% $ 48.5 $ 51.3 (5.5 )% Effective tax rate 25.3 % 37.7 % 26.5 % 34.6 % 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 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 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 $9.1 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 28.5 percent. The discrete tax expense related to various U.S. and foreign tax matters offset by an excess tax benefit related to U.S. stock compensation. 31 Table of Contents Income from equity method investments: Three Months Ended Nine Months Ended August 31, September 2, 2024 vs August 31, September 2, 2024 vs ($ in millions) 2024 2023 2023 2024 2023 2023 Income from equity method investments $ 1.3 $ 1.0 30.0 % $ 3.0 $ 3.3 (9.1 )% The income from equity method investments relates to our 50 percent ownership of the Sekisui-Fuller joint venture in Japan. 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. dollar. 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. dollar. Net income attributable to H.B. Fuller: Three Months Ended Nine Months Ended August 31, September 2, 2024 vs August 31, September 2, 2024 vs ($ in millions) 2024 2023 2023 2024 2023 2023 Net income attributable to H.B. Fuller $ 55.4 $ 37.6 47.3 % $ 137.6 $ 99.9 37.7 % Percent of net revenue 6.0 % 4.2 % 5.2 % 3.8 % The net income attributable to H.B. 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 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 $1.79 per share for the first nine months of 2023. Operating Segment Results We have three reportable segments: Hygiene, Health and Consumable Adhesives, Engineering Adhesives and Construction Adhesives. Operating results of each of these segments are regularly reviewed by our chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance. The tables below provide certain information regarding the net revenue and operating income of each of our operating segments. Corporate Unallocated amounts include business acquisition and integration costs, organizational restructuring charges and project costs associated with implementing a global Enterprise Resource Planning (“ERP”) system that we refer to as Project ONE. 32 Table of Contents Net Revenue by Segment: Three Months Ended Nine Months Ended August 31, 2024 September 2, 2023 August 31, 2024 September 2, 2023 Net % of Net % of Net % of Net % of ($ in millions) Revenue Total Revenue Total Revenue Total Revenue Total Hygiene, Health and Consumable Adhesives $ 389.9 42 % $ 402.4 45 % $ 1,150.7 43 % $ 1,190.4 46 % Engineering Adhesives 374.9 41 % 365.8 40 % 1,077.2 41 % 1,063.0 40 % Construction Adhesives 153.1 17 % 132.4 15 % 417.6 16 % 354.7 14 % Segment total $ 917.9 100 % $ 900.6 100 % $ 2,645.5 100 % $ 2,608.1 100 % Corporate Unallocated - - - - - - - - Total $ 917.9 100 % $ 900.6 100 % $ 2,645.5 100 % $ 2,608.1 100 % Segment Operating Income (Loss): Three Months Ended Nine Months Ended August 31, 2024 September 2, 2023 August 31, 2024 September 2, 2023 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 $ 49.8 48 % $ 52.7 58 % $ 147.2 55 % $ 149.5 62 % Engineering Adhesives 52.9 50 % 52.9 58 % 139.5 51 % 129.8 54 % Construction Adhesives 12.5 12 % 5.9 6 % 20.3 7 % 2.2 (0 )% Segment total $ 115.2 110 % $ 111.5 122 % $ 307.0 113 % $ 281.5 116 % Corporate Unallocated (10.9 ) (10 )% (20.2 ) (22 )% (35.2 ) (13 )% (39.8 ) (16 )% Total $ 104.3 100 % $ 91.3 100 % $ 271.8 100 % $ 241.7 100 % Hygiene, Health and Consumable Adhesives Three Months Ended Nine Months Ended August 31, September 2, 2024 vs August 31, September 2, 2024 vs ($ in millions) 2024 2023 2023 2024 2023 2023 Net revenue $ 389.9 $ 402.4 (3.1 )% $ 1,150.7 $ 1,190.4 (3.3 )% Segment operating income $ 49.8 $ 52.7 (5.5 )% $ 147.2 $ 149.5 (1.5 )% Segment operating margin 12.8 % 13.1 % 12.8 % 12.6 % 33 Table of Contents The following table provides details of the Hygiene, Health and Consumable Adhesives net revenue variances: Three Months Ended Nine Months Ended August 31, 2024 vs. September 2, 2023 August 31, 2024 vs. September 2, 2023 Organic growth (0.5 )% (4.8 )% M&A 0.0 % 3.2 % Currency (2.6 )% (1.7 )% Total (3.1 )% (3.3 )% 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. dollar. 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 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, Chinese renminbi and Egyptian pound offset by a stronger Mexican peso and Colombian peso compared to the U.S. dollar. 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. 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 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 . 34 Table of Contents Engineering Adhesives Three Months Ended Nine Months Ended August 31, September 2, 2024 vs August 31, September 2, 2024 vs ($ in millions) 2024 2023 2023 2024 2023 2023 Net revenue $ 374.9 $ 365.8 2.5 % $ 1,077.2 $ 1,063.0 1.3 % Segment operating income $ 52.9 $ 52.9 (0.0 )% $ 139.5 $ 129.8 7.5 % Segment operating margin 14.1 % 14.5 % 13.0 % 12.2 % The following tables provide details of the Engineering Adhesives net revenue variances: Three Months Ended Nine Months Ended August 31, 2024 vs. September 2, 2023 August 31, 2024 vs. September 2, 2023 Organic growth (2.0 )% (0.7 )% M&A 5.3 % 3.2 % Currency (0.8 )% (1.2 )% Total 2.5 % 1.3 % 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 Brazilian real and Turkish lira co mpared to the U.S. dollar. 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 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. dollar. As a percentage of net revenue, raw material costs decreased 340 basis points due to lower raw material costs. 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 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 Three Months Ended Nine Months Ended August 31, September 2, 2024 vs August 31, September 2, 2024 vs ($ in millions) 2024 2023 2023 2024 2023 2023 Net revenue $ 153.1 $ 132.4 15.7 % $ 417.6 $ 354.7 17.7 % Segment operating income $ 12.5 $ 5.9 111.9 % $ 20.3 $ 2.2 822.7 % Segment operating margin 8.2 % 4.5 % 4.9 % 0.6 % 35 Table of Contents The following tables provide details of the Construction Adhesives net revenue variances: Three Months Ended Nine Months Ended August 31, 2024 vs. September 2, 2023 August 31, 2024 vs. September 2, 2023 Organic growth 10.2 % 9.0 % M&A 5.6 % 8.7 % Currency (0.1 )% 0.0 % Total 15.7 % 17.7 % 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 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 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 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 Three Months Ended Nine Months Ended August 31, September 2, 2024 vs August 31, September 2, 2024 vs ($ in millions) 2024 2023 2023 2024 2023 2023 Net revenue $ - $ - 0.0 % $ - $ - 0.0 % Segment operating loss $ (10.9 ) $ (20.2 ) (46.0 )% $ (35.2 ) $ (39.8 ) (11.6 )% 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 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. 36 Table of Contents Financial Condition, Liquidity and Capital Resources 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. 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. 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 August 31, 2024, we were in compliance with all covenants of our contractual obligations as shown in the following table: Covenant Debt Instrument Measurement Result as of August 31, 2024 Secured Total Indebtedness / TTM 1 EBITDA Revolving Facility and Term Loan A Facility Not greater than 4.50 2 2.2 TTM 1 EBITDA / Consolidated Interest Expense Revolving Facility and Term Loan A Facility Not less than 2.0 5.1 1 TTM = Trailing 12 months 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; 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 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. We believe we have the ability to meet all of our contractual obligations and commitments in fiscal 2024. 37 Table of Contents 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, trade accounts payable outstanding ("DPO") free cash flow after dividends and debt capitalization ratio. August 31, September 2, 2024 2023 Net working capital as a percentage of annualized net revenue 1 16.1 % 18.1 % Accounts receivable DSO (in days) 2 57 58 Inventory days on hand (in days) 3 75 70 Trade accounts payable DPO (in days) 4 70 56 Free cash flow 5 $ 104.0 $ 107.2 Total debt to total capital ratio 6 53.0 % 52.2 % 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 (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. 5 Year-to-date net cash provided by operating activities, less purchased property, plant and equipment. See reconciliation of net cash provided by operating activities to free (negative) cash flow. 6 Total debt divided by (total debt plus total stockholders’ equity). Free cash flow, a non-GAAP financial measure, is defined as net cash provided by operating activities less purchased property, plant and equipment. Free cash flow 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 is determined and provides a reconciliation of free cash flow to net cash provided by operating activities, the most directly comparable financial measure calculated and reported in accordance with U.S. GAAP. Reconciliation of "Net cash provided by operating activities" to free cash flow Nine Months Ended ($ in millions) August 31, 2024 September 2, 2023 Net cash provided by operating activities $ 216.8 $ 216.7 Less: Purchased property, plant and equipment 112.8 109.5 Free cash flow $ 104.0 $ 107.2 38 Table of Contents Summary of Cash Flows Cash Flows from Operating Activities: Nine Months Ended August 31, September 2, ($ in millions) 2024 2023 Net cash provided by operating activities $ 216.8 $ 216.7 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 $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 $43.3 million last year. The table below provides the cash flow impact due to changes in the components of net working capital and an assessment of each of the components: Nine Months Ended August 31, September 2, ($ in millions) 2024 2023 Trade receivables, net $ 26.4 $ 79.5 Inventory (62.2 ) 38.2 Trade payables 49.7 (74.4 ) Total cash flow impact $ 13.9 $ 43.3 ● 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 $74.4 million in the first nine months of 2024 and 2023, respectively. The source of cash in 2024 compared to use of cash in 2023 reflects lower payments on trade payables in the current year compared to the prior year. Days payable outstanding were 70 days as of August 31, 2024 and 56 days as of September 2, 2023. 39 Table of Contents Cash Flows from Investing Activities: Nine Months Ended August 31, September 2, ($ in millions) 2024 2023 Net cash used in investing activities $ (385.8 ) $ (299.5 ) 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 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 $194.2 million, net of cash acquired for purchased businesses. Cash Flows from Financing Activities: Nine Months Ended August 31, September 2, ($ in millions) 2024 2023 Net cash (used in) provided by financing activities $ 131.6 $ 96.3 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 $1,333.0 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 . 40 Table of Contents 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.