PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 See accompanying Notes to Unaudited Consolidated Financial Statements.

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Consolidated Statements of Total Equity

(In thousands)

(Unaudited)

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements. 

 

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except per share amounts)

(Unaudited)

 

Note 1: Basis of Presentation

 

Overview

 

The accompanying unaudited interim Consolidated Financial Statements of H.B. Fuller Company and Subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of results of operations, comprehensive income, financial position and cash flows in conformity with U.S. generally accepted accounting principles. In our opinion, the unaudited interim Consolidated Financial Statements reflect all adjustments of a normal recurring nature considered necessary for the fair presentation of the results for the periods presented. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates. These unaudited interim Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended  December 3, 2022 as filed with the Securities and Exchange Commission.

 

New Accounting Pronouncements

 

In September 2022, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. This ASU requires that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of the financial statements to understand the program's nature, activity during the period, changes from period to period, and potential magnitude. To achieve that objective, the buyer should disclose qualitative and quantitative information about its supplier finance programs.  Our effective date of this ASU is our fiscal year ending December 1, 2024. We are evaluating the effect that this guidance will have on our Consolidated Financial Statements. 

 

Recently issued accounting standards or pronouncements not disclosed above have been excluded as they are not relevant to the company.

 

Note 2: Acquisitions

 

Adhezion Biomedical LLC

 

On June 23, 2023, we acquired Adhezion Biomedical LLC (“Adhezion”) for a base purchase price of approximately $81,201 which was funded through borrowings on our credit facility. This includes a holdback amount of $780 that will be paid on the 12-month anniversary of the closing date. The agreement includes a payment of contingent consideration up to $15,000 following the completion of certain performance goals and conditions. Adhezion, headquartered in Wyomissing, Pennsylvania, is a manufacturer of cyanoacrylate-based medical adhesives and infection prevention products. The acquisition of Adhezion positions us for expansion in the medical adhesives industry and creates a solid, unique platform from which to scale and innovate in the healthcare adhesives industry. The acquisition fair value measurement was preliminary as of September 2, 2023 and includes intangible assets of $40,800, goodwill of $37,063 and other net assets of $3,338. Goodwill represents expected synergies from combining Adhezion with our existing business. We are evaluating how much goodwill is deductible for tax purposes. Adhezion will be included in our Hygiene, Health and Consumable Adhesives operating segment.

 

XChem International LLC

 

On June 12, 2023, we acquired XChem International LLC ("XChem") for a base purchase price of approximately $14,591 which was funded through borrowings on our credit facility. This includes a holdback amount of $1,650 that will be paid on the 18-month anniversary of the closing date. XChem, headquartered in Ras Al-Khaimah, United Arab Emirates, is a manufacturer of adhesives and sealants for construction-related applications. The acquisition of XChem provides our construction adhesives global business with additional manufacturing presence for certain brands outside the U.S. and broadens our construction adhesives portfolio of highly specified applications and diversifies it toward both non-U.S. and infrastructure-oriented markets. The acquisition fair value measurement was preliminary as of September 2, 2023 and includes intangible assets of $8,664 and other net assets of $5,927. Goodwill represents expected synergies from combining XChem with our existing business. Goodwill is not deductible for tax purposes. XChem will be included in our Construction Adhesives operating segment.

 

Beardow Adams Holdings Ltd.

 

On May 1, 2023, we acquired Beardow Adams Holdings Ltd. (“Beardow Adams”) for a total purchase price of 80,738 British pound sterling, or approximately $100,885, which was funded through borrowings on our credit facility. This includes a holdback amount of 8,000 British pound sterling that will be paid on the 18-month anniversary of the closing date. Beardow Adams, based in the United Kingdom, develops and manufactures adhesives, sealants and coatings, principally in the fields of packaging and related applications. The acquisition of Beardow Adams is expected to accelerate profitable growth in many of our core end markets and generate business synergies through better raw material pricing, production optimization, an expanded distribution platform and difference-making innovation. The acquisition fair value measurement was preliminary as of September 2, 2023 and includes intangible assets of $40,485, goodwill of $45,961 and other net assets of $14,439. Goodwill represents expected synergies from combining Beardow Adams with our existing business. We are evaluating how much goodwill is deductible for tax purposes. Beardow Adams is included in our Hygiene, Health and Consumable Adhesives operating segment. 

 

Aspen Research Corporation

 

On January 31, 2023, we acquired the assets of Aspen Research Corporation (“Aspen”) for a total purchase price of $9,761, which was funded through existing cash. This includes a holdback amount of $500 that will be paid on the 18-month anniversary of the closing date. Aspen, located in Maple Grove, Minnesota, is a contract research organization that develops and manufactures innovative solutions for some of the adhesives used in our insulating glass market. Aspen is known for their superior understanding of materials science, engineering and analytical testing and specializes in custom materials manufacturing for chemicals and adhesives products. The acquisition of Aspen is expected to expand our Engineering Adhesives footprint in North America and strengthen our capabilities in the insulating glass market, in addition to bringing additive continuous flow, process manufacturing capabilities that we plan to leverage. The acquisition fair value measurement was preliminary as of September 2, 2023 and includes intangible assets of $4,900, goodwill of $2,788 and other net assets of $2,073. Goodwill represents expected synergies from combining Aspen with our existing business. Goodwill is deductible for tax purposes. Aspen is included in our Engineering Adhesives operating segment. 

 

Lemtapes Oy

 

On December 15, 2022, we acquired Lemtapes Oy (“Lemtapes”) for a total purchase price of 8,048 Euro, or approximately $8,554 which was funded through existing cash. This includes a holdback amount of 850 Euro that will be paid on the 18-month anniversary of the closing date. Lemtapes, located in Valkeakoski, Finland, is a solutions provider of ecological, innovative tapes and adhesives for the packaging and plywood industries. The acquisition of Lemtapes is expected to reinforce our strategic position in Europe, especially for our Adhesives Coated Solutions products. This acquisition will also accelerate our growth strategy of fast-growing, high margin businesses while adding technology capabilities and strong customer relationships. The acquisition fair value measurement was preliminary as of September 2, 2023 and includes intangible assets of $5,526, goodwill of $955 and other net assets of $2,073. Goodwill represents expected synergies from combining Lemtapes with our existing business. Goodwill is not deductible for tax purposes. Lemtapes is included in our Hygiene, Health and Consumable Adhesives operating segment.

 

GSSI Sealants                                                                                                   

 

On October 24, 2022, we acquired GSSI Sealants, Inc. ("GSSI") for a total purchase price of $7,701, which was funded through existing cash. This includes a holdback amount of $1,050 that will be paid on the 12-month anniversary of the closing date. GSSI, headquartered in Houston, Texas, is a manufacturer of premier elastomeric butyl rubber sealant tapes. The acquisition of GSSI is expected to support our strategy to expand our Construction Adhesives business selectively via high margin applications and expand our reach to new regions. The acquisition fair value measurement was final as of September 2, 2023 and includes intangible assets of $3,400, goodwill of $1,123 and other net assets of $3,178. Goodwill represents expected synergies from combining GSSI with our existing business. Goodwill is not deductible for tax purposes. GSSI is included in our Construction Adhesives operating segment. 

 

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ZKLT Polymer Co.

 

On August 16, 2022, we acquired ZKLT Polymer Co., Ltd. ("ZKLT") for a base purchase price of 143,965 Chinese renminbi, or approximately $21,260, which was funded through existing cash. This includes a holdback of 27,000 Chinese renminbi, or approximately $3,987, that will be paid half on each of the 12-month and 18-month anniversaries of the closing date, as well as contingent consideration up to 30,000 Chinese renminbi, or approximately $4,132, following the completion of certain performance goals and conditions. ZKLT, headquartered in Chongquin City, China, is a manufacturer of liquid adhesives primarily for the automotive market. The acquisition of ZKLT is expected to add unique technology, strong customer relationships and a strategic manufacturing location to further strengthen our presence in central China. The acquisition fair value measurement was final as of September 2, 2023 and includes intangible assets of $5,183, goodwill of $5,992 and other net assets of $10,085. Goodwill represents expected synergies from combining ZKLT with our existing business. Goodwill is not deductible for tax purposes. See Note 12 for further discussion of the fair value of the contingent consideration. ZKLT is included in our Engineering Adhesives operating segment. 

 

Apollo

 

On January 26, 2022, we acquired Apollo Chemicals Limited, Apollo Roofing Solutions Limited and Apollo Construction Solutions Limited (collectively, "Apollo") for a total purchase price of 152,714 British pound sterling, or approximately $205,592, which was funded through borrowings on our credit facility.  Apollo, headquartered in Tamworth, UK, is a manufacturer of liquid adhesives, coatings and primers for the roofing, industrial and construction markets. Apollo is expected to enhance our position in key high-value, high-margin markets in the UK and throughout Europe. The acquisition fair value measurement was final as of December 3, 2022 and includes intangible assets of $76,198, goodwill of $119,358 and other net assets of $10,036. Goodwill represents expected synergies from combining Apollo with our existing business. Goodwill is not deductible for tax purposes.  The acquisition is included in our Construction Adhesives operating segment. 

 

Fourny NV

 

On January 11, 2022, we acquired Fourny NV ("Fourny") for a base purchase price of 12,867 Euro, or approximately $14,627, which was funded through existing cash. The agreement required us to pay an additional holdback amount 18 months following the date of acquisition and during the three months ended September 2, 2023 we paid $3,060. Fourny, headquartered in Willebroek, Belgium, is a manufacturer of construction adhesives. Fourny is expected to enhance our position in key high-value, high-margin markets in Europe. The acquisition fair value measurement was final as of December 3, 2022 and includes intangible assets of $10,117, goodwill of $6,455 and other net assets of $1,391. Goodwill represents expected synergies from combining Fourny with our existing business. Goodwill is not deductible for tax purposes. Fourny is included in our Construction Adhesives operating segment. 

 

 

Note 3: Restructuring Actions

 

During fiscal year 2023, the Company approved restructuring plans (the "Plans") related to organizational changes and other actions to optimize operations and integrate acquired businesses. The Plans began to be implemented in the second quarter of fiscal year 2023 and are currently expected to be completed during fiscal year 2026, with the majority of the charges recognized and cash payments occurring in fiscal 2023 and 2024. In implementing the Plans, the Company currently expects to incur pre-tax costs of approximately $39,100 to $44,100 for severance and related employee costs globally, other restructuring costs related to the streamlining of processes and the payment of anticipated income taxes in certain jurisdictions related to the Plans. 

 

The following table summarizes the pre-tax restructuring charges by income statement classification:

 

		Three Months Ended								Nine Months Ended
		September 2, 2023				August 27, 2022				September 2, 2023				August 27, 2022
Cost of sales		$	3,322			$	-			$	8,407			$	(152	)
Selling, general and administrative			5,077				(222	)			8,320				(297	)
		$	8,399			$	(222	)		$	16,727			$	(449	)

 

The restructuring charges are all recorded in Corporate Unallocated for segment reporting purposes.

 

A summary of the restructuring liability is presented below:

 

		Employee-Related				Asset-Related				Total
Balance at November 27, 2021		$	1,095			$	-			$	1,095
Expenses incurred			(449	)			-				(449	)
Cash payments			(529	)			-				(529	)
Foreign currency translation			(60	)			-				(60	)
Balance at December 3, 2022		$	57			$	-			$	57
Expenses incurred			16,394				333				16,727
Non-cash charges			-				(333	)			(333	)
Cash payments			(6,910	)			-				(6,910	)
Foreign currency translation			(1,130	)			-				(1,130	)
Balance at September 2, 2023		$	8,411			$	-			$	8,411

 

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Non-cash charges include accelerated depreciation resulting from the cessation of use of certain long-lived assets. Restructuring liabilities have been classified as a component of other accrued expenses on the Consolidated Balance Sheets.

 

Note 4: Inventories

 

The composition of inventories is as follows:

 

		September 2,				December 3,
		2023				2022
Raw materials		$	221,385			$	237,071
Finished goods			251,256				254,710
Total inventories		$	472,641			$	491,781

 

Note 5: Goodwill and Other Intangible Assets

 

The goodwill activity by reportable segment for the nine months ended September 2, 2023 is presented below:

 

		Hygiene, Health
		and Consumable				Engineering				Construction
		Adhesives				Adhesives				Adhesives				Total
Balance at December 3, 2022		$	328,962			$	637,910			$	425,755			$	1,392,627
Acquisitions		$	84,158			$	2,788			$	-				86,946
Foreign currency translation effect		$	3,416			$	3,516			$	4,030				10,962
Balance at September 2, 2023		$	416,536			$	644,214			$	429,785			$	1,490,535

 

Balances of amortizable identifiable intangible assets, excluding goodwill and other non-amortizable intangible assets, are as follows:

 

		September 2, 2023
		Purchased
		Technology				Customer
Amortizable Intangible Assets		and Patents				Relationships				Trade Names				Other				Total
Original cost		$	144,597			$	1,052,458			$	55,379			$	10,919			$	1,263,353
Accumulated amortization			(56,624	)			(432,044	)			(21,837	)			(6,797	)			(517,302	)
Net identifiable intangibles		$	87,973			$	620,414			$	33,542			$	4,122			$	746,051

 

		December 3, 2022
		Purchased
		Technology				Customer
Amortizable Intangible Assets		and Patents				Relationships				Trade Names				Other				Total
Original cost		$	118,727			$	1,004,008			$	50,324			$	11,053			$	1,184,112
Accumulated amortization			(66,433	)			(388,394	)			(21,401	)			(6,251	)			(482,479	)
Net identifiable intangibles		$	52,294			$	615,614			$	28,923			$	4,802			$	701,633

 

Amortization expense with respect to amortizable intangible assets was $20,820 and $18,676 for the three months ended September 2, 2023 and August 27, 2022, respectively, and $58,633 and $55,088 for the nine months ended  September 2, 2023 and August 27, 2022, respectively.  

 

Estimated aggregate amortization expense based on the current carrying value of amortizable intangible assets for the next five fiscal years is as follows:

 

		Remainder
Fiscal Year		2023				2024				2025				2026				2027				Thereafter
Amortization expense		$	17,238			$	79,499			$	76,732			$	70,072			$	66,754			$	435,756

 

Non-amortizable intangible assets as of  September 2, 2023 and December 3, 2022 were $470 and $459, respectively, and relate to trademarks and trade names. The change in non-amortizable assets as of September 2, 2023 compared to December 3, 2022 was due to changes in foreign currency exchange rates.

 

Note 6: Long-Term Debt

 

On February 15, 2023, we entered into a credit agreement with a consortium of financial institutions (“Second Amended and Restated Credit Agreement”) which replaces our existing revolving credit agreement under the amended and restated revolving credit agreement dated October 20, 2020 and also replaces our secured term loan credit agreement dated October 20, 2017. The Second Amended and Restated Credit Agreement provides for a new senior secured term loan A facility in an aggregate principal amount of $500,000 (“Term Loan A”), a new senior secured term loan B facility in an aggregate principal amount of $800,000 (“Term Loan B”) and amendments to and extension of our existing senior secured revolving credit facility with an aggregate commitment in the amount of $700,000 (“Revolving Credit Facility”). A portion of the proceeds of the combined facilities, (the “Credit Facilities”) was used to pay off the existing term loan and revolver. The Credit Facilities will generally be used to finance working capital needs and acquisitions, and for general corporate purposes. All of our obligations under the Credit Facilities will be secured by a first-lien security interest in substantially all personal property and material real property of the Company and its material U.S. subsidiaries, and will be guaranteed by all of the Company’s material U.S. subsidiaries.

 

Term Loans

 

Interest on Term Loan A is payable at the Secured Overnight Financing Rate ("SOFR") plus an adjustment of 0.10 percent and an interest rate spread of 1.75 percent (7.15 percent at September 2, 2023). The interest rate spread is based on a secured leverage grid. Term Loan A matures on February 15, 2028. On August 16, 2023, we amended the Term Loan B agreement to an interest rate of SOFR plus an interest rate spread of 2.25 percent with a SOFR floor of 0.50 percent (7.55 percent at September 2, 2023). Term Loan B matures on February 15, 2030. 

 

On January 12, 2023, we entered into an interest rate swap agreement to convert $400,000 of our variable rate 1-month LIBOR rate debt to a fixed rate of 3.6895 percent. On February 28, 2023, after entering into the Second Amended and Restated Credit Agreement, we amended the interest rate swap agreement to 1-month SOFR and a fixed rate of 3.7260 in accordance with the practical expedients included in ASC 848, Reference Rate Reform. See Note 11 for further discussion of this interest rate swap.

 

On March 16, 2023, we entered into interest rate swap agreements to convert $300,000 of our 1-month SOFR rate debt to a fixed rate of 3.7210 percent and to convert $100,000 of our 1-month SOFR rate debt to a fixed rate of 3.8990 percent. See Note 11 for further discussion of these interest rate swaps.

 

Revolving Credit Facility

 

Interest on the Revolving Credit Facility is payable at SOFR plus an adjustment of 0.10 percent and an interest rate spread of 1.75 percent (7.15 percent at September 2, 2023). A facility fee of 25 basis points of the unused commitment under the Revolving Credit Facility is payable quarterly. The interest rate spread and the facility fee are based on a secured leverage grid. At September 2, 2023, there was no balance outstanding on the Revolving Credit Facility. The Revolving Credit Facility matures on February 15, 2028.

 

The Revolving Credit Facility can be drawn upon for general corporate purposes up to a maximum of $700,000, less issued letters of credit. At June 3, 2023, letters of credit reduced the available amount under the Revolving Credit Facility by $9,968.

 

Covenants and Other

 

Under the Second Amended and Restated Credit Agreement, the Revolving Credit Facility and Term Loan A are subject to certain covenants and restrictions. For these facilities, we are required to maintain a secured leverage ratio, as defined in the agreement, no greater than 4.75 to 1.00 for our fiscal quarters ending on or prior to June 1, 2024 and then 4.50 to 1.00 thereafter. We are also required to maintain an interest coverage ratio of not less than 2.00 to 1.00.

 

Restrictive covenants include, but are not limited to, limitations on secured and unsecured borrowings, interest coverage, intercompany transfers and investments, third party investments, dispositions of assets, leases, liens, dividends and distributions, and contains a maximum total debt to trailing twelve months EBITDA requirement. Certain covenants become less restrictive after meeting leverage or other financial ratios. In addition, we cannot be a member of any consolidated group as defined for income tax purposes other than with our subsidiaries.

 

We are subject to mandatory prepayments in the first quarter of each fiscal year equal to 50 percent of Excess Cash Flow, as defined in the Second Amended and Restated Credit Agreement, of the prior fiscal year less any voluntary prepayments made during that fiscal year. The Excess Cash Flow Percentage shall be reduced to 25 percent when our Secured Leverage Ratio is below 4.25:1.00 and to 0 percent when our Secured Leverage Ratio is below 3.75:1.00. 

 

The principal balance of the Term Loan B loans will be repayable in equal quarterly installments in an aggregate annual amount equal to 1 percent of the original principal amount thereof, with the balance due at maturity on February 15, 2030. The principal balance of the Term Loan A loans will be repayable in quarterly installments as follows: (i) with respect to the first eight fiscal quarters ended after the effective date of the Second Amended and Restated Credit Agreement, 1.25 percent of the aggregate principal amount of the original principal of the Term Loan A loans, (ii) with respect to the eight fiscal quarters ended after the end of the period set forth in the preceding clause (i), 1.875 percent of the aggregate principal amount of the original principal amount of the Term Loan A loans, and (iii) thereafter, 2.5 percent of the original principal amount of the Term Loan A loans, with the balance due at maturity on February 15, 2028.

 

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Note 7: Components of Net Periodic Benefit related to Pension and Other Postretirement Benefit Plans

 

		Three Months Ended September 2, 2023 and August 27, 2022
																		Other
		Pension Benefits																Postretirement
		U.S. Plans								Non-U.S. Plans								Benefits
Net periodic (benefit) cost:		2023				2022				2023				2022				2023				2022
Service cost		$	-			$	-			$	422			$	666			$	-			$	-
Interest cost			3,475				2,368				1,454				679				301				184
Expected return on assets			(7,205	)			(7,117	)			(1,785	)			(1,525	)			(2,465	)			(2,719	)
Amortization:
Prior service (benefit) cost			-				(1	)			16				15				-				-
Actuarial loss (gain)			635				1,013				506				570				-				(845	)
Settlement charge			-				-				-				-				-				-
Net periodic (benefit) cost		$	(3,095	)		$	(3,737	)		$	613			$	405			$	(2,164	)		$	(3,380	)

 

		Nine Months Ended September 2, 2023 and August 27, 2022
																		Other
		Pension Benefits																Postretirement
		U.S. Plans								Non-U.S. Plans								Benefits
Net periodic (benefit) cost:		2023				2022				2023				2022				2023				2022
Service cost		$	-			$	-			$	1,255			$	2,086			$	-			$	-
Interest cost			10,426				7,103				4,300				2,204				903				551
Expected return on assets			(21,617	)			(21,353	)			(5,277	)			(4,916	)			(7,394	)			(8,156	)
Amortization:
Prior service (benefit) cost			-				(2	)			47				47				-				-
Actuarial loss (gain)			1,906				3,040				1,496				1,830				-				(2,535	)
Settlement charge			-				-				-				3,329				-				-
Net periodic (benefit) cost		$	(9,285	)		$	(11,212	)		$	1,821			$	4,580			$	(6,491	)		$	(10,140	)

 

Service cost is included with employee compensation cost in cost of sales and selling, general and administrative expenses in the Consolidated Statements of Income. The components of our net periodic defined benefit pension and postretirement benefit costs other than service cost are presented in other income, net in the Consolidated Statements of Income.

 

In the nine months ended August 27, 2022, we recognized a non-cash settlement charge of $3,329 related to the termination of our Canadian defined benefit pension plan.  The settlement charge is included in other income, net in the Consolidated Statement of Income.

 

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Note 8: Accumulated Other Comprehensive Income (Loss)

 

The following table provides details of total comprehensive income (loss): 

 

		Three Months Ended September 2, 2023																Three Months Ended August 27, 2022
														Non-																Non-
														controlling																controlling
		H.B. Fuller Stockholders												Interest				H.B. Fuller Stockholders												Interest
		Pre-tax				Tax				Net				Net				Pre-tax				Tax				Net				Net
Net income attributable to H.B. Fuller and non-controlling interest										$	37,627			$	23											$	46,497			$	33
Foreign currency translation¹		$	(8,710	)		$	-				(8,710	)			(7	)		$	(87,743	)		$	-				(87,743	)			(46	)
Defined benefit pension plans adjustment²			1,157				(294	)			863				-				778				(94	)			684				-
Interest rate swaps³			21,086				(5,188	)			15,898				-				1,783				(437	)			1,346				-
Cross-currency swaps³			-				-				-				-				(377	)			6				(371	)			-
Net investment hedges³			(6,156	)			1,515				(4,641	)			-				-				-				-				-
Other comprehensive income (loss)		$	7,377			$	(3,967	)		$	3,410			$	(7	)		$	(85,559	)		$	(525	)		$	(86,084	)		$	(46	)
Comprehensive income (loss)										$	41,037			$	16											$	(39,587	)		$	(13	)

 

		Nine Months Ended September 2, 2023																Nine Months Ended August 27, 2022
														Non-																Non-
														controlling																controlling
		H.B. Fuller Stockholders												Interest				H.B. Fuller Stockholders												Interest
		Pretax				Tax				Net				Net				Pretax				Tax				Net				Net
Net income attributable to H.B. Fuller and non-controlling interest										$	99,916			$	71											$	132,007			$	70
Foreign currency translation adjustment¹		$	14,070			$	-				14,070				(12	)		$	(165,302	)		$	-				(165,302	)			(67	)
Defined benefit pension plans adjustment²			3,449				(877	)			2,572				-				5,483				(1,507	)			3,976				-
Interest rate swap³			19,557				(4,812	)			14,745				-				14,473				(3,549	)			10,924				-
Cross-currency swaps³			-				-				-				-				(3,720	)			56				(3,664	)			-
Net investment hedges³			(13,694	)			3,370				(10,324	)			-				-				-				-				-
Other comprehensive income (loss)		$	23,382			$	(2,319	)		$	21,063				(12	)		$	(149,066	)		$	(5,000	)			(154,066	)			(67	)
Comprehensive income (loss)										$	120,979			$	59											$	(22,059	)		$	3

 

¹ Income taxes are not provided for foreign currency translation relating to permanent investments in international subsidiaries.

² Loss reclassified from accumulated other comprehensive income ("AOCI") into earnings as part of net periodic cost related to pension and other postretirement benefit plans is reported in cost of sales and SG&A expense.

³ Income (loss) reclassified from AOCI into earnings is reported in other income, net.

 

The components of accumulated other comprehensive loss are as follows:

 

		September 2, 2023
										Non-
						H.B. Fuller				controlling
		Total				Stockholders				Interest
Foreign currency translation adjustment		$	(249,973	)		$	(249,943	)		$	(30	)
Interest rate swap, net of taxes of ($4,812)			14,745				14,745				-
Net investment hedges, net of taxes of $16,667			(51,067	)			(51,067	)			-
Defined benefit pension plans adjustment, net of taxes of $66,867			(125,689	)			(125,689	)			-
Reclassification of AOCI tax effects			(18,341	)			(18,341	)			-
Accumulated other comprehensive loss		$	(430,325	)		$	(430,295	)		$	(30	)

 

		December 3, 2022
										Non-
						H.B. Fuller				controlling
		Total				Stockholders				Interest
Foreign currency translation adjustment		$	(264,054	)		$	(264,012	)		$	(42	)
Net investment hedges, net of taxes of $13,297			(40,743	)			(40,743	)			-
Defined benefit pension plans adjustment, net of taxes of $67,744			(128,261	)			(128,261	)			-
Reclassification of AOCI tax effects			(18,341	)			(18,341	)			-
Accumulated other comprehensive loss		$	(451,399	)		$	(451,357	)		$	(42	)

 

Note 9: Income Taxes

 

Income tax expense for the three and nine months ended September 2, 2023 includes $6,243 and $9,130 of discrete tax expense, respectively, relating to various U.S. and foreign tax matters. Excluding the discrete tax expense, the overall effective tax rate was 27.1 percent and 28.5 percent for the three and nine months ended September 2, 2023, respectively.

 

Income tax expense for the three and nine months ended August 27, 2022 includes $6,449 and $7,696 of discrete tax expense, respectively, primarily relating to the revaluation of cross-currency swap agreements due to depreciation of the Euro versus the U.S. Dollar, as well as U.S. and various foreign tax matters offset by the tax effect of legal entity mergers. Excluding the discrete tax expense, the overall effective tax rate was 29.9 percent and 28.7 percent for the three and nine months ended August 27, 2022, respectively.

 

As of  September 2, 2023, we had a liability of $16,010 recorded for gross unrecognized tax benefits (excluding interest) compared to $17,582 as of December 3, 2022. As of September 2, 2023 and December 3, 2022, we had accrued $7,137 and $5,680 of gross interest relating to unrecognized tax benefits, respectively.

 

Note 10: Earnings Per Share

 

A reconciliation of the common share components for the basic and diluted earnings per share calculations is as follows:

 

		Three Months Ended								Nine Months Ended
		September 2,				August 27,				September 2,				August 27,
(Shares in thousands)		2023				2022				2023				2022
Weighted-average common shares - basic			54,394				53,644				54,279				53,498
Equivalent shares from share-based compensations plans			1,639				1,486				1,611				1,703
Weighted-average common and common equivalent shares diluted			56,033				55,130				55,890				55,201

 

Basic earnings per share is calculated by dividing net income attributable to H.B. Fuller by the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is based upon the weighted-average number of common and common equivalent shares outstanding during the applicable period. The difference between basic and diluted earnings per share is attributable to share-based compensation awards. We use the treasury stock method to calculate the effect of outstanding shares, which computes total employee proceeds as the sum of (a) the amount the employee must pay upon exercise of the award and (b) the amount of unearned share-based compensation costs attributed to future services. Share-based compensation awards for which total employee proceeds exceed the average market price over the applicable period have an antidilutive effect on earnings per share, and accordingly, are excluded from the calculation of diluted earnings per share.

 

Share-based compensation awards of 1,025,337 and 573,914 shares for the three months ended September 2, 2023 and August 27, 2022, respectively, and 1,164,870 and 691,856 shares for the nine months ended September 2, 2023 and August 27, 2022, respectively, were excluded from diluted earnings per share calculations because they were antidilutive.

 

Note 11: Financial Instruments

 

Overview

 

As a result of being a global enterprise, foreign currency exchange rates and fluctuations in those rates may affect the Company's net investment in foreign subsidiaries, and our earnings, cash flows and financial position are exposed to foreign currency risk from foreign currency denominated receivables and payables.

 

We use foreign currency forward contracts, cross-currency swaps, interest rate swaps and net investment hedges to manage risks associated with foreign currency exchange rates and interest rates. We do not hold derivative financial instruments of a speculative nature or for trading purposes. We record derivatives as assets and liabilities on the balance sheet at fair value. Changes in fair value are recognized immediately in earnings unless the derivative qualifies and is designated as a hedge. Cash flows from derivatives are classified in the Consolidated Statement of Cash Flows in the same category as the cash flows from the items subject to designated hedge or undesignated (economic) hedge relationships. We evaluate hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is recorded in earnings.

 

We are exposed to credit risk in the event of nonperformance of counterparties for foreign currency forward exchange contracts and interest rate swap agreements. We select investment-grade multinational banks and financial institutions as counterparties for derivative transactions and monitor the credit quality of each of these banks on a periodic basis as warranted. We do not anticipate nonperformance by any of these counterparties, and valuation allowances, if any, are de minimis.

 

Cash Flow Hedges

 

On January 12, 2023, we entered into an interest rate swap agreement to convert $400,000 of our variable rate 1-month LIBOR rate debt to a fixed rate of 3.6895 percent that matures on January 12, 2028. On February 28, 2023, after refinancing our debt, we amended the interest rate swap agreement to our 1-month SOFR rate debt to a fixed rate of 3.7260 in accordance with the practical expedients included in ASC 848, Reference Rate Reform. The combined fair value of the interest rate swap was an asset of $6,652 at September 2, 2023 and was included in other assets in the Consolidated Balance Sheets. The swap was designated for hedge accounting treatment as a cash flow hedge. We are applying the hypothetical derivative method to assess hedge effectiveness for this interest rate swap. Changes in the fair value of a hypothetically perfect swap with terms that match the critical terms of our variable rate debt are compared with the change in the fair value of the swap.

 

On March 16, 2023, we entered into an interest rate swap agreement to convert $300,000 of our 1-month SOFR rate debt to a fixed rate of 3.7210 percent that matures on February 15, 2028. The combined fair value of the interest rate swap was an asset of $4,227 at September 2, 2023 and was included in other liabilities in the Consolidated Balance Sheets. The swap was designated for hedge accounting treatment as a cash flow hedge. We are applying the hypothetical derivative method to assess hedge effectiveness for this interest rate swap. Changes in the fair value of a hypothetically perfect swap with terms that match the critical terms of our variable rate debt are compared with the change in the fair value of the swaps.

 

On March 16, 2023, we entered into an interest rate swap agreement to convert $100,000 of our 1-month SOFR rate debt to a fixed rate of 3.8990 percent that matures on February 15, 2028. The combined fair value of the interest rate swap was an asset of $951 at September 2, 2023 and was included in other liabilities in the Consolidated Balance Sheets. The swap was designated for hedge accounting treatment as a cash flow hedge. We are applying the hypothetical derivative method to assess hedge effectiveness for these interest rate swaps. Changes in the fair value of a hypothetically perfect swap with terms that match the critical terms of our variable rate debt are compared with the change in the fair value of the swaps.

 

The amounts of pretax gains (losses) recognized in Comprehensive Income related to derivative instruments designated as cash flow hedges are as follows:

 

		Three Months Ended								Nine Months Ended
		September 2, 2023				August 27, 2022				September 2, 2023				August 27, 2022
Cross-currency swap contracts		$	-			$	(377	)		$	-			$	(3,720	)
Interest rate swap contracts			21,086				1,783				19,557				14,473

  

Fair Value Hedges

 

On February 12, 2021, we entered into interest rate swap agreements to convert our $300,000 Public Notes that were issued on October 20, 2020 to a variable interest rate of 1-month LIBOR plus 3.28 percent. On June 30, 2023, 1-month LIBOR rates ceased to exist and the IBOR Fallbacks Protocol published by the International Swaps and Derivatives Association ("ISDA") took effect as outlined in the interest rate swap agreement. As a result, the interest rate swap agreement was converted to Overnight SOFR plus 3.28 percent. We applied the practical expedients included in ASC 848, Reference Rate Reform. 

 

These interest rate swap agreements mature on October 15, 2028. The combined fair value of the interest rate swaps was a liability of $46,843 at  September 2, 2023, and was included in other liabilities in the Consolidated Balance Sheets. The swaps were designated for hedge accounting treatment as fair value hedges. We apply the short cut method and assume hedge effectiveness. Changes in the fair value of a hypothetically perfect swap with terms that match the critical terms of our $300,000 fixed rate Public Notes are compared with the change in the fair value of the swaps.

 

Net Investment Hedges

 

On October 17, 2022, we entered into a float-to-float cross-currency interest rate swap agreement with a notional amount of €307,173 maturing in October 2028. On October 20, 2022, we entered into fixed-to-fixed cross-currency interest rate swap agreements for a total notional amount of €300,000 with tranches maturing in August 2025, August 2026 and February 2027. On June 30, 2023, 1-month LIBOR rates ceased to exist and the IBOR Fallbacks Protocol published by the International Swaps and Derivatives Association (ISDA) took effect as outlined in the interest rate swap agreement. As a result, the 1-month LIBOR leg of the float-to-float agreement was converted to Overnight SOFR plus 3.28 percent. On July 17, 2023, we amended the 1-month EURIBOR leg of the float-to-float agreement to Overnight ESTR plus 3.2195 percent. We applied the practical expedients included in ASC 848, Reference Rate Reform. As of September 2, 2023, the combined fair value of the swaps was a liability of $67,740 and was included in other liabilities in the Consolidated Balance Sheets. The cross-currency interest rate swaps hedge a portion of the Company’s investment in Euro denominated foreign subsidiaries.

 

The swaps are designated as net investment hedges for accounting treatment. The net gains or losses attributable to changes in spot exchange rates are recorded in the cumulative translation adjustment within other comprehensive income (loss). The gains or losses are reclassified into earnings upon a liquidation event or deconsolidation of the foreign subsidiary. Any ineffective portions of net investment hedges are reclassified from accumulated other comprehensive income (loss) into earnings during the period of change. The amount in accumulated other comprehensive income (loss) related to net investment hedge cross-currency swaps was a loss of $51,067 of September 2, 2023. The amounts of pretax loss recognized in comprehensive income related to the net investment hedge was $13,694 for the nine months ended September 2, 2023. As of September 2, 2023, we did not reclassify any gains or losses into earnings from net investment hedges and we do not expect to reclassify any such gain or loss into earnings within the next twelve months. No amounts related to net investment hedges have been excluded from the assessment of hedge effectiveness.

 

---

 

Derivatives Not Designated as Hedging Instruments

 

We use foreign currency forward contracts to offset our exposure to the change in value of certain foreign currency denominated assets and liabilities held at foreign subsidiaries that are remeasured at the end of each period. Although the contracts are effective economic hedges, they are not designated as accounting hedges. Foreign currency forward contracts are recorded as assets and liabilities on the balance sheet at fair value. Changes in the value of these derivatives are recognized immediately in earnings, thereby offsetting the current earnings effect of the related foreign currency denominated assets and liabilities. 

 

As of September 2, 2023, we had forward foreign currency contracts maturing between September 6, 2023 and May 13, 2024. The mark-to-market effect associated with these contracts was largely offset by the underlying transaction gains and losses resulting from the foreign currency exposures for which these contracts relate. 

 

The amounts of pretax gains (losses) recognized in other income, net related to derivative instruments not designated as hedging instruments for the nine months ended September 2, 2023 and August 27, 2022 were ($798) and $2,378, respectively.

 

Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of entities in the customer base and their dispersion across many different industries and countries. As of September 2, 2023, there were no significant concentrations of credit risk.

 

Note 12: Fair Value Measurements

 

Overview

 

Estimates of fair value for financial assets and liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value and requires certain disclosures. The framework discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

	●	Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
	●	Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
	●	Level 3: Unobservable inputs that reflect management’s assumptions, and include situations where there is little, if any, market activity for the asset or liability.

 

Balances Measured at Fair Value on a Recurring Basis

 

The following table presents information about our financial assets and liabilities that are measured at fair value on a recurring basis as of September 2, 2023 and December 3, 2022, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

 

		September 2,				Fair Value Measurements Using:
Description		2023				Level 1				Level 2				Level 3
Assets:
Marketable securities		$	1,565			$	1,565			$	-			$	-
Foreign exchange contract assets			6,410				-				6,410				-
Interest rate swaps, cash flow hedge assets			11,830				-				11,830				-
Liabilities:
Foreign exchange contract liabilities		$	7,208			$	-				7,208			$	-
Interest rate swaps, fair value hedge liabilities			46,843				-				46,843				-
Net investment hedge liabilities			67,740				-				67,740				-
Contingent consideration liabilities			4,632				-				-				4,632

 

		December 3,				Fair Value Measurements Using:
Description		2022				Level 1				Level 2				Level 3
Assets:
Marketable securities		$	4,013			$	4,013			$	-			$	-
Foreign exchange contract assets			10,282				-				10,282				-
Liabilities:
Foreign exchange contract liabilities		$	4,570			$	-			$	4,570			$	-
Interest rate swaps, fair value hedge liabilities			42,542				-				42,542
Net investment hedge liabilities			54,046				-				54,046				-
Contingent consideration liabilities			1,977				-				-				1,977

 

---

 

The valuation of our contingent consideration liability related to the acquisitions of ZKLT and TissueSeal was $4,132 and $500, respectively, as of  September 2, 2023. Adjustments to the fair value of contingent consideration are recorded to selling, general and administrative expenses in the Statement of Income. See Note 2 for further discussion regarding our acquisitions. The following table provides details of the contingent consideration liabilities: 

 

		Amounts
Balance at December 3, 2022		$	1,977
Fair value adjustment			2,893
Foreign currency translation adjustment			(238	)
Balance at September 2, 2023		$	4,632

 

Balances Measured at Fair Value on a Nonrecurring Basis

 

We measure certain assets and liabilities at fair value on a nonrecurring basis. These assets include intangible assets acquired in an acquisition. The identified intangible assets of customer relationships, technology and tradenames acquired in connection with our acquisitions were measured using unobservable (Level 3) inputs. The fair value of the intangible assets was calculated using either the income or cost approach. Significant inputs include estimated revenue growth rates, gross margins, operating expenses, attrition rate, royalty rate and discount rate.  

 

See Note 2 for further discussion regarding our acquisitions.

 

Balances Disclosed at Fair Value

 

Long-term debt had an estimated fair value of $1,744,678 and $1,713,257 as of September 2, 2023 and December 3, 2022, respectively. The fair value of long-term debt is based on quoted market prices for the same or similar issues or on the current rates offered for debt of similar maturities. The estimated fair value of these long-term obligations is not necessarily indicative of the amount that would be realized in a current market exchange.

 

Note 13: Commitments and Contingencies

 

Environmental Matters 

 

We are involved in environmental investigations, clean-up activities and administrative proceedings related to environmental compliance matters at former and current operating facilities.   We have also been identified as a potentially responsible party (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and/or similar state laws that impose liability for costs relating to the clean-up of contamination resulting from past spills, disposal or other release of hazardous substances associated with landfills and/or hazardous waste sites. As a PRP, we may be required to pay a share of the costs of investigation and clean-up of these sites. We are subject to similar laws in some of the countries where current and former facilities are located. Our environmental, health and safety department monitors compliance with applicable laws on a global basis. To the extent we can reasonably estimate the amount of our probable liabilities for environmental matters, we establish an undiscounted financial provision. We recorded liabilities of $5,329 and $5,754 as of September 2, 2023 and December 3, 2022, respectively, for probable and reasonably estimable environmental remediation costs. Of the amount reserved, $2,561 and $2,789 as of September 2, 2023 and December 3, 2022, respectively, is attributable to a facility we own in Simpsonville, South Carolina as a result of our Royal Adhesives acquisition that is a designated site under CERCLA.

 

While uncertainties exist with respect to the amounts and timing of the ultimate environmental liabilities, based on currently available information, we have concluded that these matters, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flow.

 

Other Legal Proceedings 

 

From time to time and in the ordinary course of business, we are a party to, or a target of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, contract, patent and intellectual property, environmental, health and safety, tax and employment matters. While we are unable to predict the outcome of these matters, we have concluded, based upon currently available information, that the ultimate resolution of any pending matter, individually or in the aggregate, including the asbestos litigation described in the following paragraphs, will not have a material adverse effect on our results of operations, financial condition or cash flow.

 

We have been named as a defendant in lawsuits in which plaintiffs have alleged injury due to products containing asbestos manufactured more than 35 years ago. The plaintiffs generally bring these lawsuits against multiple defendants and seek damages (both actual and punitive) in very large amounts. In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable injuries or that the injuries suffered were the result of exposure to products manufactured by us. We are typically dismissed as a defendant in such cases without payment. If the plaintiff presents evidence indicating that compensable injury occurred as a result of exposure to our products, the case is generally settled for an amount that reflects the seriousness of the injury, the length, intensity and character of exposure to products containing asbestos, the number and solvency of other defendants in the case, and the jurisdiction in which the case has been brought.

 

---

 

A significant portion of the defense costs and settlements in asbestos-related litigation is paid by third parties, including indemnification pursuant to the provisions of a 1976 agreement under which we acquired a business from a third party. Currently, this third party is defending and paying settlement amounts, under a reservation of rights, in most of the asbestos cases tendered to the third party.

 

In addition to the indemnification arrangements with third parties, we have insurance policies that generally provide coverage for asbestos liabilities, including defense costs. Historically, insurers have paid a significant portion of our defense costs and settlements in asbestos-related litigation. However, certain of our insurers are insolvent. We have entered into cost-sharing agreements with our insurers that provide for the allocation of defense costs and settlements and judgments in asbestos-related lawsuits. These agreements require, among other things, that we fund a share of settlements and judgments allocable to years in which the responsible insurer is insolvent.

 

A summary of the number of and settlement amounts for asbestos-related lawsuits and claims is as follows:

 

		Nine Months Ended								3 Years Ended
		September 2, 2023				August 27, 2022				December 3, 2022
Lawsuits and claims settled			6				3				13
Settlement amounts		$	3,985			$	206			$	511
Insurance payments received or expected to be received		$	2,307			$	139			$	338

 

We do not believe that it would be meaningful to disclose the aggregate number of asbestos-related lawsuits filed against us because relatively few of these lawsuits are known to involve exposure to asbestos-containing products that we manufactured. Rather, we believe it is more meaningful to disclose the number of lawsuits that are settled and result in a payment to the plaintiff. To the extent we can reasonably estimate the amount of our probable liabilities for pending asbestos-related claims, we establish a financial provision and a corresponding receivable for insurance recoveries. 

 

Based on currently available information, we have concluded that the resolution of any pending matter, including asbestos-related litigation, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flow.

 

Note 14: Segments

 

We are required to report segment information in the same way that we internally organize our business for assessing performance and making decisions regarding allocation of resources. Revenue and operating income of each of our 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. Segment operating income is identified as gross profit less SG&A expenses. Corporate expenses, other than those included in Corporate Unallocated, are allocated to each operating segment. Consistent with our internal management reporting, 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.  Corporate assets are not allocated to the operating segments. Inter-segment revenues are recorded at cost plus a markup for administrative costs.

 

We have three reportable segments: Hygiene, Health and Consumable Adhesives, Engineering Adhesives and Construction Adhesives. The business components within each operating segment are managed to maximize the results of the overall operating segment rather than the results of any individual business component of the operating segment. Results of individual components of each operating segment are subject to numerous allocations of segment-wide costs that may or may not have been focused on that particular component for a particular reporting period. The costs for these allocated resources are not tracked on a "where-used" basis as financial performance is assessed at the total operating segment level.

 

The table below provides certain information regarding net revenue and operating income (loss) for each of our operating segments. 

 

		Three Months Ended
		September 2, 2023								August 27, 2022
		Net				Operating				Net				Operating
		Revenue				Income (Loss)				Revenue				Income (Loss)
Hygiene, Health and Consumable Adhesives		$	402,388			$	52,737			$	424,978			$	47,470
Engineering Adhesives			365,862				52,931				378,264				39,776
Construction Adhesives			132,384				5,853				137,988				6,391
Total segment		$	900,634			$	111,521			$	941,230			$	93,637
Corporate Unallocated1			-				(20,202	)			-				(5,683	)
Total		$	900,634			$	91,319			$	941,230			$	87,954

 

		Nine Months Ended
		September 2, 2023								August 27, 2022
		Net				Operating				Net				Operating
		Revenue				Income (Loss)				Revenue				Income (Loss)
Hygiene, Health and Consumable Adhesives		$	1,190,402			$	149,474			$	1,252,405			$	122,950
Engineering Adhesives			1,063,009				129,806				1,137,587				115,266
Construction Adhesives			354,644				2,189				400,977				22,032
Total segment		$	2,608,055			$	281,469			$	2,790,969			$	260,248
Corporate Unallocated			-				(39,734	)			-				(27,780	)
Total		$	2,608,055			$	241,735			$	2,790,969			$	232,468

 

1 Consistent with our internal management reporting, Corporate Unallocated amounts in the tables above include charges that are not allocated to the Company’s reportable segments. 

 

---

 

The table below provides a reconciliation of operating income to income before income taxes and income from equity method investments:

 

		Three Months Ended								Nine Months Ended
		September 2,				August 27,				September 2,				August 27,
		2023				2022				2023				2022
Operating income		$	91,319			$	87,954			$	241,735			$	232,468
Other income, net			1,555				6,559				4,764				12,701
Interest expense			(35,105	)			(23,450	)			(101,305	)			(61,475	)
Interest income			1,128				2,139				2,726				6,170
Income before income taxes and income from equity method investments		$	58,897			$	73,202			$	147,920			$	189,864

 

We view the following disaggregation of net revenue by geographic region as useful to understanding the composition of revenue recognized during the respective reporting periods:

 

		Three Months Ended September 2, 2023
		Hygiene, Health
		and Consumable				Engineering				Construction
		Adhesives				Adhesives				Adhesives				Total
Americas		$	227,947			$	147,115			$	100,510			$	475,572
EIMEA			127,080				109,151				23,443				259,674
Asia Pacific			47,361				109,596				8,431				165,388
Total		$	402,388			$	365,862			$	132,384			$	900,634

 

		Three Months Ended August 27, 2022
		Hygiene, Health
		and Consumable				Engineering				Construction
		Adhesives				Adhesives				Adhesives				Total
Americas		$	261,751			$	165,398			$	106,169			$	533,318
EIMEA			114,186				111,734				23,519				249,439
Asia Pacific			49,041				101,132				8,300				158,473
Total		$	424,978			$	378,264			$	137,988			$	941,230

 

		Nine Months Ended September 2, 2023
		Hygiene, Health
		and Consumable				Engineering				Construction
		Adhesives				Adhesives				Adhesives				Total
Americas		$	688,890			$	429,824			$	273,116			$	1,391,830
EIMEA			348,876				341,710				57,938				748,524
Asia Pacific			152,636				291,475				23,590				467,701
Total		$	1,190,402			$	1,063,009			$	354,644			$	2,608,055

 

		Nine Months Ended August 27, 2022
		Hygiene, Health
		and Consumable				Engineering				Construction
		Adhesives				Adhesives				Adhesives				Total
Americas		$	737,689			$	465,285			$	321,167			$	1,524,141
EIMEA			351,983				361,485				58,450				771,918
Asia Pacific			162,733				310,817				21,360				494,910
Total		$	1,252,405			$	1,137,587			$	400,977			$	2,790,969

 

Note 15: Subsequent Event

 

Acquisition

 

On September 8, 2023, we completed the acquisition of certain assets of the Sanglier Group ("Sanglier") for a purchase price of 14,000 British pound sterling, or approximately $17,500. Sanglier, headquartered in the United Kingdom, is a manufacturer and filler of sprayable industrial adhesives. The acquisition will be included in our Construction Adhesives operating segment.

 

---

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

The Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended December 3, 2022 for important background information related to our business. 

 

Net revenue in the third quarter of 2023 decreased 4.3 percent from the third quarter of 2022. Net revenue decreased 8.0 percent due to sales volume and 1.7 percent due to negative currency effects, partially offset by a 0.6 percent increase in pricing and a 4.8 percent increase due to acquisitions compared to the third quarter of 2022. The negative currency effects were primarily driven by a weaker Chinese renminbi, Egyptian pound and Turkish lira offset by a stronger Euro and Mexican peso compared to the U.S. dollar. Gross profit margin increased 280 basis points due to an increase in product pricing and lower raw material costs.

 

Net revenue in the first nine months of 2023 decreased 6.6 percent from the first nine months of 2022. Net revenue decreased 11.1 percent due to sales volume and 3.2 percent due to negative currency effects, partially offset by a 4.7 percent increase in pricing and a 3.0 percent increase due to acquisitions compared to the first nine months of 2022. The negative currency effects were primarily driven by a weaker Chinese renminbi, Egyptian pound, Turkish lira and Argentinian peso offset by a stronger Mexican peso compared to the U.S. dollar. Gross profit margin increased 260 basis points due to an increase in product pricing and lower raw material costs.

 

Net income attributable to H.B. Fuller in the third quarter of 2023 was $37.6 million compared to $46.5 million in the third quarter of 2022. On a diluted earnings per share basis, the third quarter of 2023 was $0.67 per share compared to $0.84 per share for the third quarter of 2022.

 

Net income attributable to H.B. Fuller in the first nine months of 2023 was $99.9 million compared to $132.0 million in the first nine months of 2022. On a diluted earnings per share basis, the first nine months of 2023 was $1.79 per share compared to $2.39 per share for the first nine months of 2022.

 

Restructuring Plans

 

During the second and third quarters of 2023, the Company approved restructuring plans (the “Plans”) related to organizational changes and other actions to optimize operations and integrate acquired businesses. In implementing the Plans, the Company currently expects to incur costs of approximately $39.1 million to $44.1 million ($30.4 million to $34.4 million after-tax), which include (i) cash expenditures of approximately $28.4 million to $29.6 million ($22.0 million to $23.0 million after tax) for severance and related employee costs globally and (ii) other restructuring costs related to the streamlining of processes and the payment of anticipated income taxes in certain jurisdictions related to the Plans. We have incurred costs of $17.1 million under the Plans as of September 2, 2023. The Plans began to be implemented in the second quarter of fiscal year 2023 and are currently expected to be completed during fiscal year 2026. The restructuring costs will be spread across the next several fiscal quarters as the measures are implemented with the majority of the charges recognized and cash payments occurring in fiscal 2023 and 2024.

 

Results of Operations

 

Net revenue:

 

		Three Months Ended												Nine Months Ended
		September 2,				August 27,				2023 vs				September 2,				August 27,				2023 vs
($ in millions)		2023				2022				2022				2023				2022				2022
Net revenue		$	900.6			$	941.2				(4.3	)%		$	2,608.1			$	2,791.0				(6.6	)%

 

We review variances in net revenue in terms of changes related to sales volume, product pricing, business acquisitions and divestitures (“M&A”) and changes in foreign currency exchange rates. The following table shows the net revenue variance analysis for the third quarter and first nine months of 2023 compared to the third quarter and first nine months of 2022:

 

		Three Months Ended				Nine Months Ended
		September 2, 2023 vs. August 27, 2022				September 2, 2023 vs. August 27, 2022
Organic growth			(7.4	)%			(6.4	)%
M&A			4.8	%			3.0	%
Currency			(1.7	)%			(3.2	)%
Total			(4.3	)%			(6.6	)%

 

Organic growth was a negative 7.4 percent in the third quarter of 2023 compared to the third quarter of 2022 and consisted of a 10.5 percent decrease in Hygiene, Health and Consumable Adhesives, a 9.4 percent decrease in Construction Adhesives and a 3.3 percent decrease in Engineering Adhesives. The decrease is driven by a decrease in volume partially offset by a slight increase in product pricing. The 4.8 percent increase from M&A is due to our acquisitions that occurred in the last twelve months. The negative 1.7 percent foreign currency impact was primarily driven by a weaker Chinese renminbi, Egyptian pound and Turkish lira offset by a stronger Euro and Mexican peso compared to the U.S. dollar.

 

Organic growth was a negative 6.4 percent in the first nine months of 2023 compared to the first nine months of 2022 and consisted of a 16.0 percent decrease in Construction Adhesives, a 5.3 percent decrease in Engineering Adhesives and a 4.2 percent decrease in Hygiene, Health and Consumable Adhesive. The decrease is driven by a decrease in volume partially offset by an increase in product pricing. The 3.0 percent increase from M&A is due to our acquisitions that occurred in the last twelve months. The negative 3.2 percent foreign currency impact was primarily driven by a weaker Chinese renminbi, Egyptian pound, Turkish lira and Argentinian peso offset by a stronger Mexican peso compared to the U.S. dollar.

 

 

Cost of sales:

 

		Three Months Ended												Nine Months Ended
		September 2,				August 27,				2023 vs				September 2,				August 27,				2023 vs
($ in millions)		2023				2022				2022				2023				2022				2022
Cost of sales		$	637.2			$	692.1				(7.9	)%		$	1,873.0			$	2,075.4				(9.8	)%
Percent of net revenue			70.8	%			73.5	%							71.8	%			74.4	%

 

Cost of sales in the third quarter of 2023 compared to the third quarter of 2022 decreased 270 basis points as a percentage of net revenue. Lower raw material costs partially offset by the impact of lower sales volume led to the decrease.

 

Cost of sales in the first nine months of 2023 compared to the first nine months of 2022 decreased 260 basis points as a percentage of net revenue. Lower raw material costs and higher product pricing partially offset by the impact of lower sales volume led to the decrease.

 

Gross profit:

 

 

		Three Months Ended												Nine Months Ended
		September 2,				August 27,				2023 vs				September 2,				August 27,				2023 vs
($ in millions)		2023				2022				2022				2023				2022				2022
Gross profit		$	263.5			$	249.2				5.7	%		$	735.1			$	715.6				2.7	%
Percent of net revenue			29.3	%			26.5	%							28.2	%			25.6	%

 

Gross profit in the third quarter of 2023 increased 5.7 percent and gross profit margin increased 280 basis points compared to the third quarter of 2022. The increase in gross profit margin was primarily due to lower raw material costs partially offset by the impact of lower sales volume.

 

Gross profit in the first nine months of 2023 increased 2.7 percent and gross profit margin increased 260 basis points compared to the first nine months of 2022. The increase in gross profit margin was primarily due to lower raw material costs and higher product pricing partially offset by the impact of lower sales volume.

 

 

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

 

		Three Months Ended												Nine Months Ended
		September 2,				August 27,				2023 vs				September 2,				August 27,				2023 vs
($ in millions)		2023				2022				2022				2023				2022				2022
SG&A		$	172.2			$	161.2				6.8	%		$	493.3			$	483.1				2.1	%
Percent of net revenue			19.1	%			17.1	%							18.9	%			17.3	%

 

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

 

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

 

Other income, net:

 

		Three Months Ended												Nine Months Ended
		September 2,				August 27,				2023 vs				September 2,				August 27,				2023 vs
($ in millions)		2023				2022				2022				2023				2022				2022
Other income, net		$	1.6			$	6.6				(75.8	)%		$	4.8			$	12.7				(62.2	)%

 

Other income, net in the third quarter of 2023 included $5.1 million of net defined benefit pension benefits, partially offset by $3.2 million of currency transaction losses and $0.3 million of other income. Other income, net in the third quarter of 2022 included $7.4 million of net defined benefit pension benefits and $1.8 million of other income, partially offset by $2.6 million of currency transaction losses.

 

Other income, net in the first nine months of 2023 included $15.2 million of net defined benefit pension benefits and $0.4 million of other income, partially offset by $10.8 million of currency transaction losses. Other income, net in the first nine months of 2022 included $18.9 million of net defined benefit pension benefits and $3.4 million of other income, partially offset by $9.6 million of currency transaction losses. The $18.9 million of net defined benefit pension benefits for the first nine months of 2022 included a $3.3 million settlement loss related to the termination of our Canadian defined benefit pension plan.

 

 

Interest expense:

 

		Three Months Ended												Nine Months Ended
		September 2,				August 27,				2023 vs				September 2,				August 27,				2023 vs
($ in millions)		2023				2022				2022				2023				2022				2022
Interest expense		$	35.1			$	23.5				49.4	%		$	101.3			$	61.5				64.7	%

 

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

 

Interest expense in the first nine months of 2023 was $101.3 million compared to $61.5 million in the first nine months of 2022 and was higher primarily due to higher debt balances and higher interest rates.

 

Interest income:

 

		Three Months Ended												Nine Months Ended
		September 2,				August 27,				2023 vs				September 2,				August 27,				2023 vs
($ in millions)		2023				2022				2022				2023				2022				2022
Interest income		$	1.1			$	2.1				(47.6	)%		$	2.7			$	6.2				(56.5	)%

 

Interest income in the third quarter of 2023 and 2022 was $1.1 million and $2.1 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income.

 

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

 

Income taxes: 

 

		Three Months Ended												Nine Months Ended
		September 2,				August 27,				2023 vs				September 2,				August 27,				2023 vs
($ in millions)		2023				2022				2022				2023				2022				2022
Income taxes		$	22.2			$	28.3				(21.6	)%		$	51.3			$	62.0				(17.3	)%
Effective tax rate			37.7	%			38.7	%							34.6	%			32.7	%

 

Income tax expense of $22.2 million in the third quarter of 2023 includes $6.2 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 27.1 percent. The discrete tax expense relates to various U.S. and foreign tax matters. Income tax expense of $28.3 million in the third quarter of 2022 includes $6.4 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 29.9 percent. The discrete tax expense relates to impacts of the revaluation of cross-currency swap agreements due to depreciation of the Euro versus the U.S. dollar and other various U.S. and foreign tax matters.

 

Income tax expense of $51.3 million in the first nine months of 2023 includes $9.1 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 28.5 percent. The discrete tax expense relates to various U.S. and foreign tax matters offset by an excess tax benefit related to U.S. stock compensation. Income tax expense of $62.0 million in the first nine months of 2022 includes $7.7 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 28.7 percent. The discrete tax expense relates to the revaluation of cross-currency swap agreements due to depreciation of the Euro versus the U.S. dollar, as well as various U.S. and foreign tax matters offset by the tax effect of legal entity mergers.

 

Income from equity method investments:

 

		Three Months Ended												Nine Months Ended
		September 2,				August 27,				2023 vs				September 2,				August 27,				2023 vs
($ in millions)		2023				2022				2022				2023				2022				2022
Income from equity method investments		$	1.0			$	1.6				(37.5	)%		$	3.3			$	4.2				(21.4	)%

 

The income from equity method investments relates to our 50 percent ownership of the Sekisui-Fuller joint venture in Japan. The lower income for the third quarter and first nine months of 2023 compared to the same periods of 2022 is due to lower net income in our joint venture.

 

Net income attributable to H.B. Fuller:

 

		Three Months Ended												Nine Months Ended
		September 2,				August 27,				2023 vs				September 2,				August 27,				2023 vs
($ in millions)		2023				2022				2022				2023				2022				2022
Net income attributable to H.B. Fuller		$	37.6			$	46.5				(19.1	)%		$	99.9			$	132.0				(24.3	)%
Percent of net revenue			4.2	%			4.9	%							3.8	%			4.7	%

 

 

The net income attributable to H.B. Fuller for the third quarter of 2023 was $37.6 million compared to $46.5 million for the third quarter of 2022. The diluted earnings per share for the third quarter of 2023 was $0.67 per share as compared to $0.84 per share for the third quarter of 2022.

 

The net income attributable to H.B. Fuller for the first nine months of 2023 was $99.9 million compared to $132.0 million for the first nine months of 2022. The diluted earnings per share for the first nine months of 2023 was $1.79 per share as compared to $2.39 per share for the first nine months of 2022.

 

Operating Segment Results

 

We have three reportable segments: Hygiene, Health and Consumable Adhesives, Engineering Adhesives and Construction Adhesives. Operating results of each of these segments are regularly reviewed by our chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance. 

 

The tables below provide certain information regarding the net revenue and operating income of each of our operating segments. 

 

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

 

Net Revenue by Segment:

 

		Three Months Ended																Nine Months Ended
		September 2, 2023								August 27, 2022								September 2, 2023								August 27, 2022
		Net				% of				Net				% of				Net				% of				Net				% of
($ in millions)		Revenue				Total				Revenue				Total				Revenue				Total				Revenue				Total
Hygiene, Health and Consumable Adhesives		$	402.4				45	%		$	425.0				45	%		$	1,190.4				46	%		$	1,252.4				45	%
Engineering Adhesives			365.8				40	%			378.2				40	%			1,063.0				40	%			1,137.6				41	%
Construction Adhesives			132.4				15	%			138.0				15	%			354.7				14	%			401.0				14	%
Segment total		$	900.6				100	%		$	941.2				100	%		$	2,608.1				100	%		$	2,791.0				100	%
Corporate Unallocated			-				-				-				-				-				-				-				-
Total		$	900.6				100	%		$	941.2				100	%		$	2,608.1				100	%		$	2,791.0				100	%

 

Segment Operating Income (Loss):

 

		Three Months Ended																Nine Months Ended
		September 2, 2023								August 27, 2022								September 2, 2023								August 27, 2022
		Segment								Segment								Segment								Segment
		Operating								Operating								Operating								Operating
		Income				% of				Income				% of				Income				% of				Income				% of
($ in millions)		(Loss)				Total				(Loss)				Total				(Loss)				Total				(Loss)				Total
Hygiene, Health and Consumable Adhesives		$	52.7				58	%		$	47.5				54	%		$	149.5				62	%		$	122.9				53	%
Engineering Adhesives			52.9				58	%			39.8				45	%			129.8				54	%			115.3				50	%
Construction Adhesives			5.9				6	%			6.4				7	%			2.2				(0	)%			22.0				9	%
Segment total		$	111.5				122	%		$	93.7				106	%		$	281.5				116	%		$	260.2				112	%
Corporate Unallocated			(20.2	)			(22	)%			(5.7	)			(6	)%			(39.8	)			(16	)%			(27.7	)			(12	)%
Total		$	91.3				100	%		$	88.0				100	%		$	241.7				100	%		$	232.5				100	%

 

Hygiene, Health and Consumable Adhesives

 

		Three Months Ended												Nine Months Ended
		September 2,				August 27,				2023 vs				September 2,				August 27,				2023 vs
($ in millions)		2023				2022				2022				2023				2022				2022
Net revenue		$	402.4			$	425.0				(5.3	)%		$	1,190.4			$	1,252.4				(5.0	)%
Segment operating income		$	52.7			$	47.5				10.9	%		$	149.5			$	122.9				21.6	%
Segment operating margin			13.1	%			11.2	%							12.6	%			9.8	%

 

 

The following table provides details of the Hygiene, Health and Consumable Adhesives net revenue variances:

 

		Three Months Ended				Nine Months Ended
		September 2, 2023 vs. August 27, 2022				September 2, 2023 vs. August 27, 2022
Organic growth			(10.5	)%			(4.2	)%
M&A			7.6	%			3.6	%
Currency			(2.4	)%			(4.4	)%
Total			(5.3	)%			(5.0	)%

 

Net revenue decreased 5.3 percent in the third quarter of 2023 compared to the third quarter of 2022. The decrease in organic growth was attributable to a decrease in sales volume, partially offset by a slight increase in product pricing. The 7.6 percent increase in net revenue from M&A was due to the acquisitions of Lemtapes in the first quarter of 2023, Beardow Adams in the second quarter of 2023 and Adhezion in the third quarter of 2023. The negative currency effect was due to a weaker Egyptian pound, Chinese renminbi and Turkish lira offset by a stronger Euro and Mexican peso compared to the U.S. dollar. As a percentage of net revenue, gross margin increased due to lower raw material costs partially offset by the impact of lower sales volume. SG&A expenses as a percentage of net revenue increased due to the impact of acquisitions and lower net revenue.  Segment operating income increased 10.9 percent and segment operating margin as a percentage of net revenue increased 190 basis points compared to the third quarter of 2022.

 

Net revenue decreased 5.0 percent in the first nine months of 2023 compared to the first nine months of 2022. The decrease in organic growth was attributable to a decrease in sales volume, partially offset by an increase in product pricing. The 3.6 percent increase in net revenue from M&A was due to the acquisitions of Lemtapes during the first quarter of 2023, Beardow Adams in the second quarter of 2023 and Adhezion in the third quarter of 2023. The negative currency effect was due to a weaker Egyptian pound, Argentinian peso, Turkish lira and Chinese renminbi offset by a stronger Mexican peso compared to the U.S. dollar. As a percentage of net revenue, gross margin increased due to lower raw material costs and higher product pricing partially offset by the impact of lower sales volume. SG&A expenses as a percentage of net revenue increased due to the impact of acquisitions and lower net revenue. Segment operating income increased 21.6 percent and segment operating margin as a percentage of net revenue increased 280 basis points compared to the first nine months of 2022.

 

Engineering Adhesives

 

		Three Months Ended												Nine Months Ended
		September 2,				August 27,				2023 vs				September 2,				August 27,				2023 vs
($ in millions)		2023				2022				2022				2023				2022				2022
Net revenue		$	365.8			$	378.2				(3.3	)%		$	1,063.0			$	1,137.6				(6.6	)%
Segment operating income		$	52.9			$	39.8				32.9	%		$	129.8			$	115.3				12.6	%
Segment operating margin			14.5	%			10.5	%							12.2	%			10.1	%

 

The following tables provide details of the Engineering Adhesives net revenue variances:

 

		Three Months Ended				Nine Months Ended
		September 2, 2023 vs. August 27, 2022				September 2, 2023 vs. August 27, 2022
Organic growth			(3.3	)%			(5.3	)%
M&A			1.4	%			1.5	%
Currency			(1.4	)%			(2.8	)%
Total			(3.3	)%			(6.6	)%

 

Net revenue decreased 3.3 percent in the third quarter of 2023 compared to the third quarter of 2022. The decrease in organic growth was attributable to a decrease in sales volume and product pricing. The 1.4 percent increase in net revenue from M&A was due to the acquisitions of ZKLT in the third quarter of 2022 and Aspen in the first quarter of 2023. The negative currency effect was due to a weaker Chinese renminbi and Turkish lira offset by a stronger Euro compared to the U.S. dollar.  Gross margin as a percentage of net revenue increased due to lower raw material costs partially offset by the impact of lower sales volume. SG&A expenses as a percentage of net revenue decreased due to lower compensation costs. Segment operating income increased 32.9 percent and segment operating margin increased 400 basis points compared to the third quarter of 2022.

 

Net revenue decreased 6.6 percent in the first nine months of 2023 compared to the first nine months of 2022. The decrease in organic growth was attributable to a decrease in sales volume, partially offset by an increase in product pricing. The 1.5 percent increase in net revenue from M&A was due to the acquisitions of ZKLT in the third quarter of 2022 and Aspen in the first quarter of 2023. The negative currency effect was due to a weaker Chinese renminbi and Turkish lira offset by a stronger Mexican peso compared to the U.S. dollar. Gross margin as a percentage of net revenue increased due to lower raw material costs and higher product pricing partially offset by the impact of lower sales volume. SG&A expenses as a percentage of net revenue increased due to lower net revenue. Segment operating income increased 12.6 percent and segment operating margin increased 210 basis points compared to the first nine months of 2022.

 

 

Construction Adhesives

 

		Three Months Ended												Nine Months Ended
		September 2,				August 27,				2023 vs				September 2,				August 27,				2023 vs
($ in millions)		2023				2022				2022				2023				2022				2022
Net revenue		$	132.4			$	138.0				(4.1	)%		$	354.7			$	401.0				(11.6	)%
Segment operating income (loss)		$	5.9			$	6.4				(7.8	)%		$	2.2			$	22.0				(90.0	)%
Segment operating margin			4.5	%			4.6	%							0.6	%			5.5	%

 

The following tables provide details of the Construction Adhesives net revenue variances:

 

		Three Months Ended				Nine Months Ended
		September 2, 2023 vs. August 27, 2022				September 2, 2023 vs. August 27, 2022
Organic growth			(9.4	)%			(16.0	)%
M&A			5.4	%			5.1	%
Currency			(0.1	)%			(0.7	)%
Total			(4.1	)%			(11.6	)%

 

Net revenue decreased 4.1 percent in the third quarter of 2023 compared to the third quarter of 2022. The decrease in organic growth was attributable to a decrease in sales volume, partially offset by an increase in product pricing. The 5.4 percent increase in net revenue from M&A was due to the acquisition of GSSI in the fourth quarter of 2022 and XChem in the third quarter of  2023. Gross margin as a percentage of net revenue increased primarily due to lower raw material costs partially offset by lower sales volume. SG&A expenses as a percentage of net revenue increased due to the impact of acquisitions and lower net revenue. Segment operating income decreased 7.8 percent and segment operating margin decreased 10 basis points compared to the third quarter of 2022.

 

Net revenue decreased 11.6 percent in the first nine months of 2023 compared to the first nine months of 2022. The decrease in organic growth was attributable to a decrease in sales volume, partially offset by an increase in product pricing. The 5.1 percent increase in net revenue from M&A was due to the acquisitions of GSSI in the fourth quarter of 2022 and XChem in the third quarter of 2023. The negative currency effect was due to a weaker Australian dollar compared to the U.S. dollar. Gross margin as a percentage of net revenue decreased primarily due to the impact of lower sales volume partially offset by higher product pricing and lower raw material costs. SG&A expenses as a percentage of net revenue increased due to the impact of acquisitions and lower net revenue. Segment operating income decreased 90.0 percent and segment operating margin decreased 490 basis points compared to the first nine months of 2022.

 

Corporate Unallocated

 

		Three Months Ended												Nine Months Ended
		September 2,				August 27,				2023 vs				September 2,				August 27,				2023 vs
($ in millions)		2023				2022				2022				2023				2022				2022
Net revenue		$	-			$	-				0.0	%		$	-			$	-				0.0	%
Segment operating loss		$	(20.2	)		$	(5.7	)			254.4	%		$	(39.8	)		$	(27.7	)			43.7	%
Segment operating margin		NMP				NMP								NMP				NMP

 

NMP = Non-meaningful percentage

 

Corporate Unallocated includes acquisition and integration-related charges, restructuring-related charges, and costs related to the implementation of Project ONE.

 

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

 

Financial Condition, Liquidity and Capital Resources

 

Total cash and cash equivalents as of September 2, 2023 were $94.9 million compared to $79.9 million as of December 3, 2022 and $60.7 million as of August 27, 2022. The majority of the $94.9 million in cash and cash equivalents as of September 2, 2023 was held outside the United States. Total long and short-term debt was $1,885.0 million as of September 2, 2023, $1,765.1 million as of December 3, 2022 and $1,918.2 million as of August 27, 2022. The total debt to total capital ratio as measured by total debt divided by total debt plus total stockholders’ equity was 52.2 percent as of September 2, 2023 as compared to 52.3 percent as of December 3, 2022 and 54.9 percent as of August 27, 2022.

 

We believe that cash flows from operating activities will be adequate to meet our ongoing liquidity and capital expenditure needs. In addition, we believe we have the ability to obtain both short-term and long-term debt to meet our financing needs for the foreseeable future. Cash available in the United States has historically been sufficient and we expect it will continue to be sufficient to fund U.S. operations, U.S. capital spending and U.S. pension and other postretirement benefit contributions in addition to funding U.S. acquisitions, dividend payments, debt service and share repurchases as needed. For those international earnings considered to be reinvested indefinitely, we currently have no intention to, and plans do not indicate a need to, repatriate these funds for U.S. operations.

 

 

Our credit agreements include restrictive covenants beginning for the quarter ending June 3, 2023 that, if not met, could lead to a renegotiation of our credit lines and a significant increase in our cost of financing. Those covenants are as follows: 

 

Covenant		Debt Instrument		Measurement		Result as of September 2, 2023
Secured Total Indebtedness / TTM1 EBITDA		Revolving Facility and Term Loan A Facility		Not greater than 4.752		2.3
TTM1 EBITDA / Consolidated Interest Expense		Revolving Facility and Term Loan A Facility		Not less than 2.0		4.5

 

	1 TTM = Trailing 12 months
	2 The Maximum Secured Leverage Ratio prior to June 1, 2024, shall be 4.75 to 1.00 and will step down to 4.50 to 1.0 with respect to quarters ending after June 1, 2024

 

EBITDA for covenant purposes is defined as consolidated net income, plus (i) interest expense, (ii) expense for taxes paid or accrued, (iii) depreciation and amortization, (iv) certain non-cash impairment losses, (v) extraordinary non-cash losses incurred other than in the ordinary course of business, (vi) nonrecurring extraordinary non-cash restructuring charges and the non-cash impact of purchase accounting, (vii) any non-cash charge for the excess of rent expense over actual cash rent paid due to the use of straight-line rent, non-cash charge pursuant to any management equity plan, stock option plan or any other management or employee benefit, (viii) any non-cash finance charges in respect of any pension liabilities or other provisions and income (loss) attributable to deferred compensation plans, (ix) any non-recurring or unusual cash restructuring charges and operating improvements, (x) cost savings initiative and cost synergies related to acquisitions within 12 months, (xi) non-capitalized charges relating to the Company’s SAP implementation, (xii) fees, costs, expenses and charges incurred in connection with the financing, (xiii) fees, costs, expenses, make-whole or penalty payments and other similar items arising out of acquisitions, investments and dispositions, the incurrence, issuance, repayment or refinancing of indebtedness and any issuance of equity interests; minus, non-recurring or unusual non-cash gains incurred not in the ordinary course of business. Provided that the aggregate amounts that may be added back for any period pursuant to clauses (ix), (x) and (xi) shall not exceed 15% of EBITDA for such period (calculated prior to giving effect to all addbacks and adjustments). For Secured Total Indebtedness / TTM EBITDA ratio, TTM EBITDA is adjusted for the pro forma results from Material Acquisitions and Material Divestitures, both as defined in the Second Amended and Restated Credit Agreement, as if the acquisition or divestiture occurred at the beginning of the calculation period. The full definition is set forth in the Second Amended and Restated Credit Agreement, the Company filed as an exhibit to its 8-K filing dated February 21, 2023.

 

Consolidated Interest Expense for covenant purposes is defined as the interest expense (including without limitation to the portion of capital lease obligations that constitutes imputed interest in accordance with GAAP) of the Company and its subsidiaries calculated on a consolidated basis for such period with respect to all outstanding indebtedness allocable to such period in accordance with GAAP, including net costs (or benefits) under Interest Rate Swap Agreements and commissions, discounts and other fees and charges with respect to letters of credit and the interest component of all Attributable Receivables Indebtedness.

 

We believe we have the ability to meet all of our contractual obligations and commitments in fiscal 2023.

 

Selected Metrics of Liquidity

 

Key metrics we monitor are net working capital as a percent of annualized net revenue, trade receivable days sales outstanding (“DSO”), inventory days on hand, free cash flow after dividends and debt capitalization ratio.

 

		September 2,				August 27,
		2023				2022
Net working capital as a percentage of annualized net revenue1			18.1	%			18.8	%
Accounts receivable DSO (in days)2			58				63
Inventory days on hand (in days)3			70				75
Free (negative) cash flow after dividends4		$	74.7			$	(78.8	)
Total debt to total capital ratio5			52.2	%			54.9	%

 

1 Current quarter net working capital (trade receivables, net of allowance for doubtful accounts plus inventory minus trade payables) divided by annualized net revenue (current quarter multiplied by four).

 

2 Trade receivables net of the allowance for doubtful accounts at the balance sheet date multiplied by 91 (13 weeks) and divided by the net revenue for the quarter.

 

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

 

4 Year-to-date net cash provided by operating activities, less purchased property, plant and equipment and dividends paid. See reconciliation of net cash provided by operating activities to free cash flow after dividends below.

 

5 Total debt divided by (total debt plus total stockholders’ equity).

 

Free cash flow after dividends, a non-GAAP financial measure, is defined as net cash provided by operations less purchased property, plant and equipment and dividends paid. Free cash flow after dividends is an integral financial measure used by the Company to assess its ability to generate cash in excess of its operating needs, therefore, the Company believes this financial measure provides useful information to investors. The following table reflects the manner in which free cash flow after dividends is determined and provides a reconciliation of free cash flow after dividends to net cash provided by operating activities, the most directly comparable financial measure calculated and reported in accordance with U.S. GAAP.

 

 

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

 

		Nine Months Ended
($ in millions)		September 2, 2023				August 27, 2022
Net cash provided by operating activities		$	216.7			$	48.7
Less: Purchased property, plant and equipment			109.5				98.4
Less: Dividends paid			32.3				29.1
Free (negative) cash flow after dividends		$	74.7			$	(78.8	)

 

Summary of Cash Flows

 

Cash Flows from Operating Activities: 

 

		Nine Months Ended
		September 2,				August 27,
($ in millions)		2023				2022
Net cash provided by (used in) operating activities		$	216.7			$	48.7

 

Net income including non-controlling interest was $100.0 million in the first nine months of 2023 compared to $132.1 million in the first nine months of 2022. Depreciation and amortization expense totaled $119.2 million in the first nine months of 2023 compared to $109.4 million in the first nine months of 2022. Deferred income taxes was a use of cash of $30.1 million in 2023 compared to $5.0 million in the first nine months of 2022. Accrued compensation was a use of cash of $33.8 million in 2023 compared to $17.3 million last year. Other assets was a use of cash of $30.9 million in the first nine months of 2023 compared to $40.3 million in the first nine months of 2022. Other liabilities was a source of cash of $12.4 million in the first nine months of 2023 compared to a use of cash of $35.9 million in the first nine months of 2022.

 

Changes in net working capital (trade receivables, inventory and trade payables) accounted for a source of cash of $43.3 million compared to a use of cash of $146.6 million last year. The table below provides the cash flow impact due to changes in the components of net working capital:

 

		Nine Months Ended
		September 2,				August 27,
($ in millions)		2023				2022
Trade receivables, net		$	79.5			$	(51.6	)
Inventory			38.2				(112.4	)
Trade payables			(74.4	)			17.4
Total cash flow impact		$	43.3			$	(146.6	)

 

●

Trade receivables, net – Trade receivables, net was a source of cash of $79.5 million and a use of cash of $51.6 million in the first nine months of 2023 and 2022, respectively. The source of cash in 2023 compared to the use of cash in 2022 was due to more cash collected on trade receivables in the current year compared to the prior year. The DSO were 58 days at September 2, 2023 and 63 days at August 27, 2022.

 

●

Inventory – Inventory was a source of cash of $38.2 million and use of cash of $112.4 million in the first nine months of 2023 and 2022, respectively. The source of cash in 2023 compared to the use of cash in 2022 is due to lower inventory purchases at lower prices in 2023 compared to 2022. Inventory days on hand were 70 days as of September 2, 2023 and 75 days as of August 27, 2022.

 

●

Trade payables – Trade payables was a use of cash of $74.4 million and a source of cash of $17.4 million in the first nine months of 2023 and 2022, respectively. The use of cash in 2023 compared to the source of cash in 2022 reflects higher payments on trade payables in the current year compared to the prior year.

 

Cash Flows from Investing Activities:

 

		Nine Months Ended
		September 2,				August 27,
($ in millions)		2023				2022
Net cash used in investing activities		$	(299.5	)		$	(336.0	)

 

Purchases of property, plant and equipment were $109.5 million during the first nine months of 2023 compared to $98.4 million for the same period of 2022.  This difference reflects the timing of capital projects and expenditures related to growth initiatives. 

 

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

 

 

Cash Flows from Financing Activities:

 

		Nine Months Ended
		September 2,				August 27,
($ in millions)		2023				2022
Net cash provided by financing activities		$	96.3			$	301.7

 

In the first nine months of 2023, we refinanced our debt and as a result of that and borrowings we have proceeds from the issuance of long-term debt of $1,333.0 million and repayment of long-term debt of $1,184.9 million. These borrowings are to finance acquisitions and for general working capital purposes. Borrowings on our long-term debt were $335.0 and payments on our revolving credit facility were $15.0 million in the first nine months of 2022. Payment of debt issue costs were $10.2 million and $0.6 million in the first nine months of 2023 and 2022, respectively. Net payments of notes payable were $18.0 million in the first nine months of 2023 and net proceeds of notes payable were $6.7 million in the same period of 2022. Cash dividends paid were $32.3 million in the first nine months of 2023 compared to $29.1 million in the same period of 2022. Repurchases of common stock were $2.6 million in the first nine months of 2023 compared to $3.9 million in the same period of 2022.

 

Forward-Looking Statements and Risk Factors

 

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words like "plan," "expect," "aim," "believe," "project," "anticipate," "intend," "estimate," "will," "should," "could" (including the negative or variations thereof) and other expressions that indicate future events and trends. These plans and expectations are based upon certain underlying assumptions, including those mentioned with the specific statements. Such assumptions are in turn based upon internal estimates and analyses of current market conditions and trends, our plans and strategies, economic conditions and other factors. These plans and expectations and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. In addition to the factors described in this report, Item 1A. Risk Factors identifies some of the important factors that could cause our actual results to differ materially from those in any such forward-looking statements. In order to comply with the terms of the safe harbor, we have identified these important factors which could affect our financial performance and could cause our actual results for future periods to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. These factors should be considered, together with any similar risk factors or other cautionary language that may be made elsewhere in this Quarterly Report on Form 10-Q.

 

The list of important factors in Item 1A. Risk Factors does not necessarily present the risk factors in order of importance. This disclosure, including that under Forward-Looking Statements and Risk Factors, and other forward-looking statements and related disclosures made by us in this report and elsewhere from time to time, represents our best judgment as of the date the information is given. We do not undertake responsibility for updating any of such information, whether as a result of new information, future events, or otherwise, except as required by law. Investors are advised, however, to consult any further public company disclosures (such as in filings with the SEC or in our press releases) on related subjects.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to various market risks, including changes in interest rates, foreign currency rates and prices of raw materials. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates.  See Part II, Item 7A in our Annual Report on Form 10-K for the year ended December 3, 2022 for further discussion of these market risks. There have been no material changes in the reported market risk of the Company since December 3, 2022. 

 

Item 4. Controls and Procedures

 

Controls and Procedures

 

We conducted an evaluation, under the supervision and with the participation of our president and chief executive officer and executive vice president, chief financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of September 2, 2023. Based on this evaluation, our president and chief executive officer and executive vice president, chief financial officer concluded that, as of September 2, 2023, our disclosure controls and procedures were effective.

 

For purposes of Rule 13a-15(e), the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its president and chief executive officer and executive vice president, chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Environmental Matters 

 

We are involved in environmental investigations, clean-up activities and administrative proceedings related to environmental compliance matters at former and current operating facilities.   We have also been identified as a potentially responsible party (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and/or similar state laws that impose liability for costs relating to the clean up of contamination resulting from past spills, disposal or other release of hazardous substances associated with landfills and/or hazardous waste sites. As a PRP, we may be required to pay a share of the costs of investigation and clean-up of these sites. We are subject to similar laws in some of the countries where current and former facilities are located. Our environmental, health and safety department monitors compliance with applicable laws on a global basis.

 

To the extent we can reasonably estimate the amount of our probable liabilities for environmental matters, we establish a financial provision. 

 

While uncertainties exist with respect to the amounts and timing of the ultimate environmental liabilities, based on currently available information, we have concluded that these matters, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flow. 

 

Other Legal Proceedings 

 

From time to time and in the ordinary course of business, we are a party to, or a target of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, contract, patent and intellectual property, environmental, health and safety, tax and employment matters. While we are unable to predict the outcome of these matters, we have concluded, based upon currently available information, that the ultimate resolution of any pending matter, individually or in the aggregate, including asbestos-related litigation, will not have a material adverse effect on our results of operations, financial condition or cash flow. However, adverse developments and/or periodic settlements could negatively impact the results of operations or cash flows in one or more future periods.

 

For additional information regarding environmental matters and other legal proceedings, see Note 13 to our Consolidated Financial Statements.

 

Item 1A. Risk Factors

 

This Form 10-Q contains forward-looking statements concerning our future programs, products, expenses, revenue, liquidity and cash needs as well as our plans and strategies. These forward-looking statements are based on current expectations and we assume no obligation to update this information. Numerous factors could cause actual results to differ significantly from the results described in these forward-looking statements, including the risk factors identified under Part I, Item 1A. Risk Factors contained in our Annual Report on Form 10-K for the fiscal year ended December 3, 2022. There have been no material changes in the risk factors disclosed by us under Part I, Item 1A. Risk Factors contained in the Annual Report on Form 10-K for the fiscal year ended December 3, 2022.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

Information on our purchases of equity securities during the third quarter ended September 2, 2023 is as follows:

 

										(d)
										Maximum
										Approximate Dollar
		(a)								Value of Shares that
		Total				(b)				may yet be
		Number of				Average				Purchased Under the
		Shares				Price Paid				Plan or Program
Period		Purchased1				per Share				(millions)
June 4, 2023 - July 8, 2023			77			$	71.51			$	300,000
July 9, 2023 - August 5, 2023			48			$	73.88			$	300,000
August 6, 2023 - September 2, 2023			-			$	-			$	300,000

 

1 The total number of shares purchased are shares withheld to satisfy the employees’ withholding taxes upon vesting of restricted stock.

 

Repurchases of common stock are made to support our stock-based employee compensation plans and for other corporate purposes. Upon vesting of restricted stock awarded to employees, shares are withheld to cover the employees’ minimum withholding taxes.

 

On April 7, 2022, the Board of Directors authorized a new share repurchase program of up to $300.0 million of our outstanding common shares for a period of up to five years. Under the program, we are authorized to repurchase shares for cash on the open market, from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases is dependent on price, market conditions and applicable regulatory requirements. Upon repurchase of the shares, we reduce our common stock for the par value of the shares with the excess being applied against additional paid-in capital. This authorization replaces the April 6, 2017 authorization to repurchase shares.

 

Item 5. Other Information

 

Rule 10b5-1 Plan Adoptions and Modifications

 

None.

 

 

Item 6. Exhibits

 

	10.1	Amendment No. 1, dated as of August 16, 2023, to the Second Amended and Restated Credit Agreement, dated February 15, 2023, among H.B. Fuller Company and JPMorgan Chase Bank, N.A., as administrative agent and the various other parties named thereto.
	31.1	Form of 302 Certification – Celeste B. Mastin
	31.2	Form of 302 Certification – John J. Corkrean
	32.1	Form of 906 Certification – Celeste B. Mastin
	32.2	Form of 906 Certification – John J. Corkrean
	101	The following materials from the H.B. Fuller Company Quarterly Report on Form 10-Q for the quarter ended September 2, 2023 formatted in Inline Extensible Business Reporting Language (Inline XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Total Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.
	104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	H.B. Fuller Company
Dated: September 28, 2023		/s/ John J. Corkrean
		John J. Corkrean
		Executive Vice President,
		Chief Financial Officer

 

 

Exhibit Index

 

Exhibits

 

	10.1	Amendment No. 1, dated as of August 16, 2023, to the Second Amended and Restated Credit Agreement, dated February 15, 2023, among H.B. Fuller Company and JPMorgan Chase Bank, N.A., as administrative agent and the various other parties named thereto.
	31.1	Form of 302 Certification – Celeste B. Mastin
	31.2	Form of 302 Certification – John J. Corkrean
	32.1	Form of 906 Certification – Celeste B. Mastin
	32.2	Form of 906 Certification – John J. Corkrean
	101	The following materials from the H.B. Fuller Company Quarterly Report on Form 10-Q for the quarter ended September 2, 2023 formatted in Inline Extensible Business Reporting Language (Inline XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Total Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.
	104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).