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 November 30, 2024, for important background information related to our business. Net revenue in the second quarter of 2025 decreased 2.1 percent from the second quarter of 2024. The decrease was due to a 1.3 percent decrease in acquisitions/divestitures, a 1.2 percent decrease due to negative currency effects compared to the second quarter of 2024 and a 0.3 percent decrease due to sales volume, partially offset by a 0.7 percent increase due to pricing. The negative currency effect was primarily driven by a weaker Brazilian real, Mexican peso, Egyptian pound, and Turkish Lira c ompared to the U.S. dollar. Gross profit margin increased 110 basis points due to the impact of acquisitions/divestitures. Net revenue in the first six months of 2025 decreased 2.4 percent from the first six months of 2024 . The decrease was due to a 2.2 percent decrease due to negative currency effects compared to the first six months of 2024 and a 1.2 percent decrease in acquisitions/divestitures, partially offset by a 0.5 percent increase due to sales volume and a 0.5 increase due to pricing. The negative currency effect was primarily driven by a weaker Egyptian pound, Brazilian real, Euro, Mexican peso, Turkish lira, and Chinese renminbi compared to the U.S. dollar. Gross profit margin increased 20 basis points due to the impact of acquisitions/divestitures. Net income attributable to H.B. Fuller in the second quarter of 2025 was $41.8 million compared to $51.3 million in the second quarter of 2024 . Diluted earnings per share for the second quarter of 2025 was $0.76 per share compared to $0.91 per share for the second quarter of 2024 . Net income attributable to H.B. Fuller in the first six months of 2025 was $55.1 million compared to $82.3 million in the first six months of 2024 . Diluted earnings per share for the first six months of 2025 was $0.99 per share compared to $1.45 per share for the first six months of 2024 . 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 $70.0 million to $75.0 million ($47.8 million to $51.2 million after-tax), which include (i) cash expenditures of approximately $41.0 million to $42.0 million ($28.0 million to $28.7 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 $66.3 million under the Plans as of May 31, 2025. The Plans were implemented in the second quarter of fiscal year 2023 and are currently expected to be completed during fiscal year 2026. The remaining restructuring costs will be spread across the next several fiscal quarters as the measures are implemented. 25 Table of Contents Results of Operations Net revenue: Three Months Ended Six Months Ended May 31, June 1, 2025 vs May 31, June 1, 2025 vs ($ in millions) 2025 2024 2024 2025 2024 2024 Net revenue $ 898.1 $ 917.1 (2.1 )% $ 1,686.8 $ 1,727.5 (2.4 )% We review variances in net revenue in terms of changes related to sales volume and product pricing (referred to as organic revenue growth), 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 2025 compared to the second quarter and first six months of 2024: Three Months Ended Six Months Ended May 31, 2025 vs. June 1, 2024 May 31, 2025 vs. June 1, 2024 Organic growth 0.4 % 1.0 % M&A (1.3 )% (1.2 )% Currency (1.2 )% (2.2 )% Total (2.1 )% (2.4 )% Organic revenue increased 0.4 percent in the second quarter of 2025 compared to the second quarter of 2024 driven by a 0.7 percent increase in product pricing, partially offset by a 0.3 percent decrease in sales volume. The 1.3 percent decrease from M&A was due to the sale of our North American Flooring business ( “ NA Flooring ” ), discussed further in Operating Segment Results below, net of acquisitions that occurred in the last twelve months. The negative 1.2 percent foreign currency impact was primarily driven by a weaker Brazilian real, Mexican peso, Egyptian pound, and Turkish lira compared to the U.S. dollar. Organic revenue increased 1.0 percent in the first six months of 2025 compared to the first six months of 2024 driven by a 0.5 percent increase in sales volume and a 0.5 percent increase in product pricing. The 1.2 percent decrease from M&A was due to the sale of NA Flooring, net of acquisitions that occurred in the last twelve months. The negative 2.2 percent foreign currency impact was primarily driven by a weaker Egyptian pound, Brazilian real, Euro, and Mexican peso, Turkish lira, and Chinese renminbi compared to the U.S. dollar. 26 Table of Contents Cost of sales: Three Months Ended Six Months Ended May 31, June 1, 2025 vs May 31, June 1, 2025 vs ($ in millions) 2025 2024 2024 2025 2024 2024 Cost of sales $ 611.7 $ 635.1 (3.7 )% $ 1,173.3 $ 1,206.2 (2.7 )% Percent of net revenue 68.1 % 69.3 % 69.6 % 69.8 % Cost of sales as a percentage of net revenue in the second quarter of 2025 compared to the second quarter of 2024 decreased 120 basis points. Raw material cost as a percentage of net revenue decreased 70 basis points in 2025 compared to 2024 due to the impact of acquisitions/divestitures and other manufacturing costs as a percentage of net revenue decreased 50 basis points in 2025 compared to 2024 . Cost of sales as a percentage of net revenue in the first six months of 2025 compared to the first six months of 2024 decreased 20 basis points. Raw material cost as a percentage of net revenue decre ased 10 basis points in 2025 compared to 2024 and other manufacturing costs as a percentage of net revenue decreased 10 basis points in 2025 compared to 2024 . Gross profit: Three Months Ended Six Months Ended May 31, June 1, 2025 vs May 31, June 1, 2025 vs ($ in millions) 2025 2024 2024 2025 2024 2024 Gross profit $ 286.4 $ 282.1 1.5 % $ 513.5 $ 521.3 (1.5 )% Percent of net revenue 31.9 % 30.8 % 30.4 % 30.2 % Gross profit in the second quarter of 2025 increased 1.5 percent and gross profit margin increased 110 basis points compared to the second quarter of 2024 . The increase in gross profit margin was due to the impact of acquisitions/divestitures. Gross profit in the first six months of 2025 decreased 1.5 percent and gross profit margin increased 20 basis points compared to the first six months of 2024 . Selling, general and administrative (SG&A) expenses: Three Months Ended Six Months Ended May 31, June 1, 2025 vs May 31, June 1, 2025 vs ($ in millions) 2025 2024 2024 2025 2024 2024 SG&A $ 186.3 $ 181.5 2.6 % $ 367.0 $ 353.8 3.7 % Percent of net revenue 20.7 % 19.8 % 21.8 % 20.5 % SG&A expenses for the second quarter of 2025 compared to the second quarter of 2024 increased 90 basis points as a percentage of net reve nue. The increase was due to the impact of acquisitions/divestitures. SG&A expenses for the first six months of 2025 compared to the first six months of 2024 increased 130 basis points as a percentage of net reve nue. The increase was due to the impact of acquisitions/divestitures and higher compensation costs. 27 Table of Contents Other income, net: Three Months Ended Six Months Ended May 31, June 1, 2025 vs May 31, June 1, 2025 vs ($ in millions) 2025 2024 2024 2025 2024 2024 Other income, net $ 7.1 $ 3.6 97.2 % $ 10.3 $ 5.1 102.0 % Other income, net in the second quarter of 2025 included $5.7 million of net defined benefit pension benefits and $1.4 million of currency transaction gains. 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 $0.1 million of other expense. Other income, net in the first six months of 2025 included $11.4 million of net defined benefit pension benefits and $2.0 million of currency transaction gains, partially offset by a $1.5 million loss on the sale of our NA Flooring business and $1.6 million of other expense. 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 $0.1 million of other expense. Interest expense: Three Months Ended Six Months Ended May 31, June 1, 2025 vs May 31, June 1, 2025 vs ($ in millions) 2025 2024 2024 2025 2024 2024 Interest expense $ 34.9 $ 32.3 8.0 % $ 66.9 $ 64.2 4.2 % Interest expense in the second quarter of 2025 was $34.9 million compared to $32.3 million in the second quarter of 2024 due to higher debt levels. Interest expense in the first six months of 2025 was $66.9 million compared to $64.2 million in the first six months of 2024 due to higher debt levels. 28 Table of Contents Interest income: Three Months Ended Six Months Ended May 31, June 1, 2025 vs May 31, June 1, 2025 vs ($ in millions) 2025 2024 2024 2025 2024 2024 Interest income $ 0.9 $ 1.2 (25.0 )% $ 2.0 $ 2.5 (20.0 )% Interest income in the second quarter of 2025 and 2024 was $0.9 million and $1.2 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income. Interest income in the first six months of 2025 and 2024 was $2.0 million and $2.5 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income. Income taxes: Three Months Ended Six Months Ended May 31, June 1, 2025 vs May 31, June 1, 2025 vs ($ in millions) 2025 2024 2024 2025 2024 2024 Income taxes $ 32.7 $ 22.4 46.0 % $ 38.7 $ 30.2 28.1 % Effective tax rate 44.7 % 30.7 % 42.1 % 27.3 % Income tax expense of $32.7 million in the second quarter of 2025 includes $14.0 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 25.7 percent. The discrete tax expense relates to the impact of withholding tax recorded on earnings that are no longer permanently reinvested as well as other various U.S. and foreign tax matters. 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 related to various foreign tax matters, offset by an excess tax benefit related to U.S. stock compensation. Income tax expense of $38.7 million in the first six months of 2025 includes $15.0 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 25.8 percent. The discrete tax expense relates to the impact of withholding tax recorded on earnings that are no longer permanently reinvested as well as other various U.S. and foreign tax matters. Income tax expense of $30.2 million in the first six months of 2024 includes $1.2 million of discrete tax benefit. Excluding the discrete tax benefit, the overall effective tax rate was 28.4 percent. The discrete tax benefit related to an excess tax benefit related to U.S. stock compensation offset by various foreign tax matters. 29 Table of Contents Income from equity method investments: Three Months Ended Six Months Ended May 31, June 1, 2025 vs May 31, June 1, 2025 vs ($ in millions) 2025 2024 2024 2025 2024 2024 Income from equity method investments $ 1.4 $ 0.6 133.3 % $ 1.9 $ 1.6 18.8 % 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 second quarter of 2025 compared to the second quarter of 2024 is due to higher net income in our joint venture during the quarter compared to the prior year and the impact of the strengthening of the Japanese yen compared to the U.S. dollar . 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 first six months of 2025 compared to the first six months of 2024 is due to higher net income in our joint venture compared to the prior year and the impact of the strengthening of the Japanese yen compared to the U.S. dollar . Net income attributable to H.B. Fuller: Three Months Ended Six Months Ended May 31, June 1, 2025 vs May 31, June 1, 2025 vs ($ in millions) 2025 2024 2024 2025 2024 2024 Net income attributable to H.B. Fuller $ 41.8 $ 51.3 (18.5 )% $ 55.1 $ 82.3 (33.0 )% Percent of net revenue 4.7 % 5.6 % 3.3 % 4.8 % The net income attributable to H.B. Fuller in the second quarter of 2025 was $41.8 million compared to $51.3 million in the second quarter of 2024 . The diluted earnings per share in the second quarter of 2025 was $0.76 per share as compared to $0.91 per share in the second quarter of 2024 . The net income attributable to H.B. Fuller in the first six months of 2025 was $55.1 million compared to $82.3 million in the first six months of 2024 . The diluted earnings per share in the first six months of 2025 was $0.99 per share as compared to $1.45 per share in the first six months of 2024 . Operating Segment Results As of November 30, 2024, our three operating segments consisted of Hygiene, Health and Consumable Adhesives, Engineering Adhesives and Construction Adhesives. As of the beginning of fiscal 2025, we reorganized our operating segments by selling our NA Flooring business, previously part of the Construction Adhesives operating segment, and combining our Insulated Glass, Woodworking and Composite businesses, previously part of the Engineering Adhesives operating segment, with Construction Adhesives Roofing and Building Envelope and Infrastructure businesses to form the newly named Building Adhesive Solutions operating segment. All financial results related to NA Flooring have been moved to our Corporate Unallocated segment. Prior period segment information has been recast retrospectively to reflect the realignment. The tables below provide certain information regarding the net revenue and operating income of each of our operating segments. Corporate Unallocated amounts include business acquisition and integration costs, organizational restructuring charges and project costs associated with implementing a global Enterprise Resource Planning (“ERP”) system that we refer to as Project ONE. As a result of the change in operating segments and the sale of our NA Flooring business, we have retrospectively moved the results of our Flooring business to Corporate Unallocated for prior periods. 30 Table of Contents Net Revenue by Segment: Three Months Ended Six Months Ended May 31, 2025 June 1, 2024 May 31, 2025 June 1, 2024 Net % of Net % of Net % of Net % of ($ in millions) Revenue Total Revenue Total Revenue Total Revenue Total Hygiene, Health and Consumable Adhesives $ 397.5 44 % $ 393.3 43 % $ 765.7 46 % $ 761.4 44 % Engineering Adhesives 276.4 31 % 257.6 28 % 513.2 30 % 483.7 28 % Building Adhesive Solutions 224.2 25 % 222.5 24 % 407.9 24 % 402.1 23 % Segment total $ 898.1 100 % $ 873.4 95 % $ 1,686.8 100 % $ 1,647.2 95 % Corporate Unallocated - - 43.7 5 % - - 80.3 5 % Total $ 898.1 100 % $ 917.1 100 % $ 1,686.8 100 % $ 1,727.5 100 % Segment Operating Income (Loss): Three Months Ended Six Months Ended May 31, 2025 June 1, 2024 May 31, 2025 June 1, 2024 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 $ 43.4 43 % $ 49.8 49 % $ 73.4 50 % $ 97.2 58 % Engineering Adhesives 46.9 47 % 39.0 39 % 75.0 51 % 64.8 39 % Building Adhesive Solutions 22.1 22 % 22.0 22 % 28.7 20 % 29.1 17 % Segment total $ 112.4 112 % $ 110.8 110 % $ 177.1 121 % $ 191.1 114 % Corporate Unallocated (12.4 ) (12 )% (10.2 ) (10 )% (30.6 ) (21 )% (23.6 ) (14 )% Total $ 100.0 100 % $ 100.6 100 % $ 146.5 100 % $ 167.5 100 % Hygiene, Health and Consumable Adhesives Three Months Ended Six Months Ended May 31, June 1, 2025 vs May 31, June 1, 2025 vs ($ in millions) 2025 2024 2024 2025 2024 2024 Net revenue $ 397.5 $ 393.3 1.1 % $ 765.7 $ 761.4 0.6 % Segment operating income $ 43.4 $ 49.8 (12.9 )% $ 73.4 $ 97.2 (24.5 )% Segment operating margin 10.9 % 12.7 % 9.6 % 12.8 % 31 Table of Contents The following table provides details of the Hygiene, Health and Consumable Adhesives net revenue variances: Three Months Ended Six Months Ended May 31, 2025 vs. June 1, 2024 May 31, 2025 vs. June 1, 2024 Organic growth 1.8 % 2.9 % M&A 1.4 % 1.2 % Currency (2.1 )% (3.5 )% Total 1.1 % 0.6 % Net revenue increased 1.1 percent in the second quarter of 2025 compared to the second quarter of 2024 . Organic growth increased due to an increase in both product pricing and sales volume. The 1.4 percent increase in net revenue from M&A was due to the acquisitions of GEM and Medifill in the first quarter of 2025. The negative currency effect was due to a weaker Brazilian real, Mexican peso, and Egyptian pound compared to the U.S. dollar. As a percentage of net revenue, raw material costs increased 100 basis points due to higher raw material costs, partially offset by the impact of acquisitions. Other manufacturing costs as a percentage of net revenue was flat compared to the prior year. SG&A expenses as a percentage of net revenue increased 80 basis points due to higher compensation costs. Segment operating income decreased 12.9 percent and segment operating margin as a percentage of net revenue decreased 180 basis points compared to the second quarter of 2024 . Net revenue increased 0.6 percent in the first six months of 2025 compared to the first six months of 2024 . Organic growth increased due to an increase in product pricing and sales volume. The 1.2 percent increase in net revenue from M&A was due to the acquisitions of GEM and Medifill in the first quarter of 2025. The negative currency effect was due to a weaker Egyptian pound, Brazilian real, Mexican peso, and Euro compared to the U.S. dollar. As a percentage of net revenue, raw material costs increased 210 basis points due to higher raw material costs, partially offset by the impact of acquisitions. Other manufacturing costs as a percentage of net revenue increased 30 basis points due to higher compensation and delivery costs. SG&A expenses as a percentage of net revenue increased 80 basis points due to higher compensation costs. Segment operating income decreased 24.5 percent and segment operating margin as a percentage of net revenue decreased 320 basis points compared to the first six months of 2024 . 32 Table of Contents Engineering Adhesives Three Months Ended Six Months Ended May 31, June 1, 2025 vs May 31, June 1, 2025 vs ($ in millions) 2025 2024 2024 2025 2024 2024 Net revenue $ 276.4 $ 257.6 7.3 % $ 513.2 $ 483.7 6.1 % Segment operating income $ 46.9 $ 39.0 20.3 % $ 75.0 $ 64.8 15.7 % Segment operating margin 17.0 % 15.1 % 14.6 % 13.4 % The following tables provide details of the Engineering Adhesives net revenue variances: Three Months Ended Six Months Ended May 31, 2025 vs. June 1, 2024 May 31, 2025 vs. June 1, 2024 Organic growth (0.4 )% (1.0 )% M&A 8.4 % 8.5 % Currency (0.7 )% (1.4 )% Total 7.3 % 6.1 % Net revenue increased 7.3 percent in the second quarter of 2025 compared to the second quarter of 2024 . Organic growth decreased due to a decrease in sales volume. The 8.4 percent increase in net revenue from M&A was due to the acquisition of ND Industries. The negative currency effect was due to a weaker Mexican peso and Chinese renminbi co mpared to the U.S. dollar. A s a percentage of net revenue, raw material costs decreased 330 basis points primarily due to the impact of acquisitions. Other manufacturing costs as a percentage of net revenue increased 70 basis points due to the impact of lower sales volume offset by the impact of acquisitions. SG&A expenses as a percentage of net revenue increased 70 basis points primarily due to higher compensation. Segment operating income increased 20.3 percent and segment operating margin increased 190 basis points compared to the second quarter of 2024 . Net revenue increased 6.1 percent in the first six months of 2025 compared to the first six months of 2024 . Organic growth decreased due to a decrease in sales volume. The 8.5 percent increase in net revenue from M&A was due to the acquisition of ND Industries. The negative currency effect was due to a weaker Chinese renminbi and Euro 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 and the impact of acquisitions. Other manufacturing costs as a percentage of net revenue increased 90 basis points due to the impact of lower sales volume offset by acquisitions. SG&A expenses as a percentage of net revenue increased 140 basis points primarily due to higher compensation. Segment operating income increased 15.7 percent and segment operating margin increased 120 basis points compared to the first six months of 2024 . Building Adhesive Solutions Three Months Ended Six Months Ended May 31, June 1, 2025 vs May 31, June 1, 2025 vs ($ in millions) 2025 2024 2024 2025 2024 2024 Net revenue $ 224.2 $ 222.5 0.8 % $ 407.9 $ 402.1 1.4 % Segment operating income $ 22.1 $ 22.0 0.5 % $ 28.7 $ 29.1 (1.4 )% Segment operating margin 9.9 % 9.9 % 7.0 % 7.2 % 33 Table of Contents The following tables provide details of the Building Adhesive Solutions net revenue variances: Three Months Ended Six Months Ended May 31, 2025 vs. June 1, 2024 May 31, 2025 vs. June 1, 2024 Organic growth (0.9 )% 0.5 % M&A 2.2 % 2.3 % Currency (0.5 )% (1.4 )% Total 0.8 % 1.4 % Net revenue increased 0.8 percent in the second quarter of 2025 compared to the second quarter of 2024 . Organic growth decreased due to a decrease in sales volume, partially offset by an increase in product pricing. The 2.2 percent increase in net revenue from M&A was due to the acquisition of HS Butyl in the third quarter of 2024. The negative currency effect was due to a weaker Turkish lira and Australian dollar, partially offset by a stronger British Pound sterling co mpared to the U.S. dollar. As a percentage of net revenue, raw material costs decreased 60 basis points due to lower raw materials costs. O ther manufacturing costs as a percentage of net revenue were flat. SG&A expenses as a percentage of net revenue increased 60 basis points due to higher compensation. S egment operating income increased 0.5 percent and segment operating margin was flat. Net revenue increased 1.4 percent in the first six months of 2025 compared to the first six months of 2024 . Organic growth increased due to an increase in sales volume. T he 2.3 percent increase in net revenue from M&A was due to the acquisition of HS Butyl in the third quarter of 2024. The negative currency effect was due to a weaker Euro co mpared to the U.S. dollar. As a percentage of net revenue, raw material costs decreased 50 basis points due to lower raw material costs. O ther manufacturing costs as a percentage of net revenue was flat. SG&A expenses as a percentage of net revenue increased 70 basis points due to higher compensation. S egment operating income decreased 1.4 percent and segment operating margin decreased 20 basis points compared to the first six months of 2024 . Corporate Unallocated Three Months Ended Six Months Ended May 31, June 1, 2025 vs May 31, June 1, 2025 vs ($ in millions) 2025 2024 2024 2025 2024 2024 Net revenue $ - $ 43.7 (100.0 )% $ - $ 80.3 (100.0 )% Segment operating loss $ (12.4 ) $ (10.2 ) 21.6 % $ (30.6 ) $ (23.6 ) 29.7 % Segment operating margin NMP -23.4 % NMP -29.4 % NMP = Non-meaningful percentage 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. As a result of the change in operating segments and the sale of our NA Flooring business, we have retrospectively moved the results of our Flooring business to Corporate Unallocated for prior periods. Segment operating loss in the second quarter of 2025 increased 21.6 percent compared to the second quarter of 2024 due to the inclusion of the NA Flooring business results in 2024. Segment operating loss in the first six months of 2025 increased 29.7 percent compared to the first six months of 2024 due to the inclusion of the NA Flooring business results in 2024. 34 Table of Contents Financial Condition, Liquidity and Capital Resources Total cash and cash equivalents as of May 31, 2025 were $96.8 million compared to $169.4 million as of November 30, 2024 and $114.8 million as of June 1, 2024. The majority of the $96.8 million in cash and cash equivalents as of May 31, 2025 was held outside the United States. Total long and short-term debt was $2,112.4 million as of May 31, 2025, $2,010.6 million as of November 30, 2024 and $2,024.9 million as of June 1, 2024. 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 May 31, 2025 as compared to 50.8 percent as of November 30, 2024 and 53.0 percent as of June 1, 2024. 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 May 31, 2025, we were in compliance with all covenants of our contractual obligations as shown in the following table: Covenant Debt Instrument Measurement Result as of May 31, 2025 Secured Total Indebtedness / TTM 1 EBITDA Revolving Facility and Term Loan A Facility Not greater than 4.50 2 2.5 TTM 1 EBITDA / Consolidated Interest Expense Revolving Facility and Term Loan A Facility Not less than 2.0 4.8 1 TTM = Trailing 12 months 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 for the next twelve months. 35 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. May 31, June 1, 2025 2024 Net working capital as a percentage of annualized net revenue 1 16.6 % 16.2 % Accounts receivable DSO (in days) 2 59 57 Inventory days on hand (in days) 3 77 74 Trade accounts payable DPO (in days) 4 72 68 Free cash flow 5 $ (6.7 ) $ 38.8 Total debt to total capital ratio 6 53.0 % 53.0 % 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 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 Six Months Ended ($ in millions) May 31, 2025 June 1, 2024 Net cash provided by operating activities $ 57.8 $ 129.0 Less: Purchased property, plant and equipment 64.5 90.2 Free cash flow $ (6.7 ) $ 38.8 36 Table of Contents Summary of Cash Flows Cash Flows from Operating Activities: Six Months Ended May 31, June 1, ($ in millions) 2025 2024 Net cash provided by operating activities $ 57.8 $ 129.0 Net income including non-controlling interest was $55.1 million in the first six months of 2025 compared to $82.3 million in the first six months of 2024. Depreciation and amortization expense totaled $87.3 million in the first six months of 2025 compared to $84.7 million in the first six months of 2024. Deferred income taxes was a use of cash of $14.1 million in the first six months of 2025 compared to $24.1 million in the first six months of 2024. Accrued compensation was a use of cash of $23.5 million in 2025 compared to $16.4 million in 2024. Other assets was a use of cash of $4.1 million in the first six months of 2025 compared to $22.3 million in the first six months of 2024. Other liabilities was a source of cash of $24.8 million in the first six months of 2025 compared to a use of cash of $1.8 million in the first six months of 2024. Changes in net working capital (trade receivables, inventory and trade payables) accounted for a use of cash of $57.5 million compared to a source of cash of $4.9 million last year. The table below provides the cash flow impact due to changes in the components of net working capital and an assessment of each of the components: Six Months Ended May 31, June 1, ($ in millions) 2025 2024 Trade receivables, net $ (28.9 ) $ 22.6 Inventory (40.2 ) (56.5 ) Trade payables 11.6 38.8 Total cash flow impact $ (57.5 ) $ 4.9 ● Trade receivables, net – Trade receivables, net was a use of cash of $28.9 million and a source of cash of $22.6 million in the first six months of 2025 and 2024, respectively. The use of cash in 2025 compared to source of cash in 2024 was due to less cash collected on trade receivables in the current year compared to the prior year. The DSO were 59 days at May 31, 2025 and 57 days at June 1, 2024. ● Inventory – Inventory was a use of cash of $40.2 million and $56.5 million in the first six months of 2025 and 2024, respectively. The lower use of cash in 2025 compared to 2024 was due to lower inventory purchases in 2025 compared to 2024. Inventory days on hand were 77 days as of May 31, 2025 and 74 days as of June 1, 2024. ● Trade payables – Trade payables was a source of cash of $11.6 million and $38.8 million in the first six months of 2025 and 2024, respectively. The lower source of cash in 2025 compared to 2024 reflects higher payments on trade payables in the current year compared to the prior year. Days payable outstanding were 72 days as of May 31, 2025 and 68 days as of June 1, 2024. 37 Table of Contents Cash Flows from Investing Activities: Six Months Ended May 31, June 1, ($ in millions) 2025 2024 Net cash used in investing activities $ (152.0 ) $ (343.8 ) Purchases of property, plant and equipment were $64.5 million during the first six months of 2025 compared to $90.2 million for the same period of 2024 . This difference reflects the timing of capital projects and expenditures related to growth initiatives. During the first six months of 2025, we paid $162.0 million of cash for business acquisitions. Additionally, we received $75.8 million in cash related to the sale of our NA Flooring business. During the first six months of 2024, we paid $254.3 million of cash for business acquisitions. Cash Flows from Financing Activities: Six Months Ended May 31, June 1, ($ in millions) 2025 2024 Net cash provided by financing activities $ 12.5 $ 160.8 In the first six months of 2025 , borrowings on our revolving credit facility were $784.9 million and repayments on our revolving credit facility and our long-term debt totaled $687.8 million. These borrowings are for general working capital purposes and permitted acquisitions. Borrowings on our revolving credit facility were $1,497.0 and repayments on our revolving credit facility and our long-term debt totaled $1,305.5 million in the first six months of 2024 . Net payments of notes payable were a use of cash of $0.6 million in the first six months of 2025 compared to $0.4 million in the same period of 2024 . Cash dividends paid were $24.9 million in the first six months of 2025 compared to $23.3 million in the same period of 2024 . Repurchases of common stock were $60.7 million in the first six months of 2025 compared to $21.8 million in the same period of 2024 . 38 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.