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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number:
H.B. FULLER COMPANY
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered |
| | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Accelerated filer ☐ | |
| Non-accelerated filer ☐ | Smaller reporting company |
|
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b) of the Exchange Act. Yes
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PROCEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the Registrant’s Common Stock, par value $1.00 per share, was
Quarterly Report on Form 10-Q
Table of Contents
Item 1. Financial Statements
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended |
||||||||
| March 4, |
February 26, |
|||||||
| 2023 |
2022 |
|||||||
| Net revenue |
$ | $ | ||||||
| Cost of sales |
( |
) | ( |
) | ||||
| Gross profit |
||||||||
| Selling, general and administrative expenses |
( |
) | ( |
) | ||||
| Other income, net |
||||||||
| Interest expense |
( |
) | ( |
) | ||||
| Interest income |
||||||||
| Income before income taxes and income from equity method investments |
||||||||
| Income taxes |
( |
) | ( |
) | ||||
| Income from equity method investments |
||||||||
| Net income including non-controlling interest |
||||||||
| Net income attributable to non-controlling interest |
( |
) | ( |
) | ||||
| Net income attributable to H.B. Fuller |
$ | $ | ||||||
| Earnings per share attributable to H.B. Fuller common stockholders: |
||||||||
| Basic |
$ | $ | ||||||
| Diluted |
$ | $ | ||||||
| Weighted-average common shares outstanding: |
||||||||
| Basic |
||||||||
| Diluted |
||||||||
| Dividends declared per common share |
$ | $ | ||||||
See accompanying Notes to Unaudited Consolidated Financial Statements.
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
| Three Months Ended |
||||||||
| March 4, |
February 26, |
|||||||
| 2023 |
2022 |
|||||||
| Net income including non-controlling interest |
$ | $ | ||||||
| Other comprehensive income |
||||||||
| Foreign currency translation |
( |
) | ||||||
| Defined benefit pension plans adjustment, net of tax |
||||||||
| Interest rate swaps, net of tax |
||||||||
| Cross-currency swaps, net of tax |
( |
) | ||||||
| Net investment hedges, net of tax |
( |
) | ||||||
| Other comprehensive income |
||||||||
| Comprehensive income |
||||||||
| Less: Comprehensive income attributable to non-controlling interest |
||||||||
| Comprehensive income attributable to H.B. Fuller |
$ | $ | ||||||
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)
| March 4, | December 3, | |||||||
| 2023 | 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Trade receivables (net of allowances of $ and $, as of March 4, 2023 and December 3, 2022, respectively) | ||||||||
| Inventories | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | ||||||||
| Goodwill | ||||||||
| Other intangibles, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities, non-controlling interest and total equity | ||||||||
| Current liabilities | ||||||||
| Notes payable | $ | $ | ||||||
| Trade payables | ||||||||
| Accrued compensation | ||||||||
| Income taxes payable | ||||||||
| Other accrued expenses | ||||||||
| Total current liabilities | ||||||||
| Long-term debt | ||||||||
| Accrued pension liabilities | ||||||||
| Other liabilities | ||||||||
| Total liabilities | $ | $ | ||||||
| Commitments and contingencies (Note 13) | ||||||||
| Equity | ||||||||
| H.B. Fuller stockholders' equity: | ||||||||
| Preferred stock ( shares outstanding) shares authorized – | ||||||||
| Common stock, par value $ per share, shares authorized – , shares outstanding – and as of March 4, 2023 and December 3, 2022, respectively | $ | $ | ||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total H.B. Fuller stockholders' equity | ||||||||
| Non-controlling interest | ||||||||
| Total equity | ||||||||
| Total liabilities, non-controlling interest and total equity | $ | $ | ||||||
See accompanying Notes to Unaudited Consolidated Financial Statements.
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Statements of Total Equity
(In thousands)
(Unaudited)
| H.B. Fuller Company Shareholders |
||||||||||||||||||||||||
| Accumulated |
||||||||||||||||||||||||
| Additional |
Other |
|||||||||||||||||||||||
| Common |
Paid-in |
Retained |
Comprehensive |
Non-Controlling |
||||||||||||||||||||
| Stock |
Capital |
Earnings |
Income (Loss) |
Interest |
Total |
|||||||||||||||||||
| Balance at December 3, 2022 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
| Comprehensive income |
||||||||||||||||||||||||
| Dividends |
( |
) | ( |
) | ||||||||||||||||||||
| Stock option exercises |
||||||||||||||||||||||||
| Share-based compensation plans and other, net |
||||||||||||||||||||||||
| Repurchases of common stock |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Balance at March 4, 2023 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
| H.B. Fuller Company Shareholders |
||||||||||||||||||||||||
| Accumulated |
||||||||||||||||||||||||
| Additional |
Other |
|||||||||||||||||||||||
| Common |
Paid-in |
Retained |
Comprehensive |
Non-Controlling |
||||||||||||||||||||
| Stock |
Capital |
Earnings |
Income (Loss) |
Interest |
Total |
|||||||||||||||||||
| Balance at November 27, 2021 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
| Comprehensive income |
||||||||||||||||||||||||
| Dividends |
( |
) | ( |
) | ||||||||||||||||||||
| Stock option exercises |
||||||||||||||||||||||||
| Share-based compensation plans and other, net |
||||||||||||||||||||||||
| Repurchases of common stock |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Balance at February 26, 2022 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
See accompanying Notes to Unaudited Consolidated Financial Statements.
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Three Months Ended | ||||||||
| March 4, 2023 | February 26, 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income including non-controlling interest | $ | $ | ||||||
| Adjustments to reconcile net income including non-controlling interest to net cash (used in) provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization | ||||||||
| Deferred income taxes | ( | ) | ( | ) | ||||
| Income from equity method investments, net of dividends received | ( | ) | ( | ) | ||||
| Debt issuance costs write-off | ||||||||
| Loss on mark to market adjustment on contingent consideration liability | ||||||||
| Gain on sale or disposal of assets | ( | ) | ( | ) | ||||
| Share-based compensation | ||||||||
| Pension and other post-retirement benefit plan activity | ( | ) | ( | ) | ||||
| Change in assets and liabilities, net of effects of acquisitions: | ||||||||
| Trade receivables, net | ||||||||
| Inventories | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ( | ) | ||||
| Trade payables | ||||||||
| Accrued compensation | ( | ) | ( | ) | ||||
| Other accrued expenses | ( | ) | ( | ) | ||||
| Income taxes payable | ( | ) | ||||||
| Other liabilities | ( | ) | ( | ) | ||||
| Other | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchased property, plant and equipment | ( | ) | ( | ) | ||||
| Purchased businesses, net of cash acquired | ( | ) | ( | ) | ||||
| Proceeds from sale of property, plant and equipment | ||||||||
| Cash received from government grant | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of long-term debt | ||||||||
| Repayment of long-term debt | ( | ) | ||||||
| Payment of debt issuance costs | ( | ) | ( | ) | ||||
| Net payment of notes payable | ( | ) | ( | ) | ||||
| Dividends paid | ( | ) | ( | ) | ||||
| Contingent consideration payment | ( | ) | ||||||
| Proceeds from stock options exercised | ||||||||
| Repurchases of common stock | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | ||||||||
| Net change in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
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
Aspen Research Corporation
On January 31, 2023, we acquired the assets of Aspen Research Corporation (“Aspen”) for a total purchase price of $
Lemtapes Oy
On December 15, 2022, we acquired Lemtapes Oy (“Lemtapes”) for a total purchase price of
GSSI Sealants
On October 24, 2022, we acquired GSSI Sealants, Inc. ("GSSI") for a total purchase price of $
ZKLT Polymer Co.
On August 16, 2022, we acquired ZKLT Polymer Co., Ltd. ("ZKLT") for a base purchase price of
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
Fourny NV
On January 11, 2022, we acquired Fourny NV ("Fourny") for a base purchase price of
Note 3: Restructuring Actions
The Company has approved restructuring plans consisting of consolidation plans, organizational changes and other actions to optimize operations. The following table summarizes the pre-tax distribution of charges under these restructuring plans by income statement classification:
| Three Months Ended |
||||||||
| March 4, 2023 |
February 26, 2022 |
|||||||
| Cost of sales |
$ | $ | ( |
) | ||||
| Selling, general and administrative |
( |
) | ||||||
| $ | $ | ( |
) | |||||
The restructuring charges are all recorded in Corporate Unallocated for segment reporting purposes.
A summary of the restructuring liability is presented below:
| Employee-Related |
||||
| Balance at November 27, 2021 |
$ | |||
| Expenses incurred |
( |
) | ||
| Cash payments |
( |
) | ||
| Foreign currency translation |
( |
) | ||
| Balance at December 3, 2022 |
$ | |||
| Expenses incurred |
||||
| Cash payments |
( |
) | ||
| Foreign currency translation |
( |
) | ||
| Balance at March 4, 2023 |
$ | |||
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:
| March 4, |
December 3, |
|||||||
| 2023 |
2022 |
|||||||
| Raw materials |
$ | $ | ||||||
| Finished goods |
||||||||
| Total inventories |
$ | $ | ||||||
Note 5: Goodwill and Other Intangible Assets
The goodwill activity by reportable segment for the three months ended March 4, 2023 is presented below:
| Hygiene, Health |
||||||||||||||||
| and Consumable |
Engineering |
Construction |
||||||||||||||
| Adhesives |
Adhesives |
Adhesives |
Total |
|||||||||||||
| Balance at December 3, 2022 |
$ | $ | $ | $ | ||||||||||||
| Foreign currency translation effect |
( |
) | ( |
) | ( |
) | ||||||||||
| Balance at March 4, 2023 |
$ | $ | $ | $ | ||||||||||||
Balances of amortizable identifiable intangible assets, excluding goodwill and other non-amortizable intangible assets, are as follows:
| March 4, 2023 |
||||||||||||||||||||
| Purchased |
||||||||||||||||||||
| Technology |
Customer |
|||||||||||||||||||
| Amortizable Intangible Assets |
and Patents |
Relationships |
Trade Names |
Other |
Total |
|||||||||||||||
| Original cost |
$ | $ | $ | $ | $ | |||||||||||||||
| Accumulated amortization |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| Net identifiable intangibles |
$ | $ | $ | $ | $ | |||||||||||||||
| December 3, 2022 |
||||||||||||||||||||
| Purchased |
||||||||||||||||||||
| Technology |
Customer |
|||||||||||||||||||
| Amortizable Intangible Assets |
and Patents |
Relationships |
Trade Names |
Other |
Total |
|||||||||||||||
| Original cost |
$ | $ | $ | $ | $ | |||||||||||||||
| Accumulated amortization |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| Net identifiable intangibles |
$ | $ | $ | $ | $ | |||||||||||||||
Amortization expense with respect to amortizable intangible assets was $
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 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Non-amortizable intangible assets as of March 4, 2023 and December 3, 2022 were $
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 $
Term Loans
Interest on Term Loan A is payable at the Secured Overnight Financing Rate ("SOFR") plus an adjustment of
On January 12, 2023, we entered into an interest rate swap agreement to convert $
Revolving Credit Facility
Interest on the Revolving Credit Facility is payable at SOFR plus an adjustment of
The Revolving Credit Facility can be drawn upon for general corporate purposes up to a maximum of $
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
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. The terms of the Second Amended and Restated Credit Agreement do not require the financial covenants to be measured until the fiscal quarter ending June 3, 2023.
We are subject to mandatory prepayments in the first quarter of each fiscal year equal to
Note 7: Components of Net Periodic Benefit related to Pension and Other Postretirement Benefit Plans
| Three Months Ended March 4, 2023 and February 26, 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 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Interest cost |
||||||||||||||||||||||||
| Expected return on assets |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||
| Amortization: |
||||||||||||||||||||||||
| Prior service (benefit) cost |
( |
) | ||||||||||||||||||||||
| Actuarial loss (gain) |
( |
) | ||||||||||||||||||||||
| Net periodic (benefit) cost |
$ | ( |
) | $ | ( |
) | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||||
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.
Note 8: Accumulated Other Comprehensive Income (Loss)
The following table provides details of total comprehensive income (loss):
| Three Months Ended March 4, 2023 |
Three Months Ended February 26, 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 |
$ | $ | $ | $ | ||||||||||||||||||||||||||||
| Foreign currency translation¹ |
$ | ( |
) | $ | - | ( |
) | $ | $ | - | ( |
) | ||||||||||||||||||||
| Defined benefit pension plans adjustment² |
( |
) | - | ( |
) | - | ||||||||||||||||||||||||||
| Interest rate swaps³ |
( |
) | - | ( |
) | - | ||||||||||||||||||||||||||
| Cross-currency swaps³ |
- | ( |
) | ( |
) | - | ||||||||||||||||||||||||||
| Net investment hedges³ |
( |
) | ( |
) | - | - | ||||||||||||||||||||||||||
| Other comprehensive income |
$ | $ | ( |
) | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||||||||||||
| Comprehensive income |
$ | $ | $ | $ | ||||||||||||||||||||||||||||
| 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:
| March 4, 2023 |
||||||||||||
| Non- |
||||||||||||
| H.B. Fuller |
controlling |
|||||||||||
| Total |
Stockholders |
Interest |
||||||||||
| Foreign currency translation adjustment |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Interest rate swap, net of taxes of ($2,720) |
||||||||||||
| Net investment hedges, net of taxes of $13,395 |
( |
) | ( |
) | ||||||||
| Defined benefit pension plans adjustment, net of taxes of $67,454 |
( |
) | ( |
) | ||||||||
| Reclassification of AOCI tax effects |
( |
) | ( |
) | ||||||||
| Accumulated other comprehensive loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| December 3, 2022 |
||||||||||||
| Non- |
||||||||||||
| H.B. Fuller |
controlling |
|||||||||||
| Total |
Stockholders |
Interest |
||||||||||
| Foreign currency translation adjustment |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Net investment hedges, net of taxes of $13,297 |
( |
) | ( |
) | ||||||||
| Defined benefit pension plans adjustment, net of taxes of $67,744 |
( |
) | ( |
) | ||||||||
| Reclassification of AOCI tax effects |
( |
) | ( |
) | ||||||||
| Accumulated other comprehensive loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
Note 9: Income Taxes
Income tax expense for the three months ended March 4, 2023 includes $
Income tax expense for the three months ended February 26, 2022 includes $
As of March 4, 2023, we had a liability of $
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 |
||||||||
| March 4, |
February 26, |
|||||||
| (Shares in thousands) |
2023 |
2022 |
||||||
| Weighted-average common shares - basic |
||||||||
| Equivalent shares from share-based compensations plans |
||||||||
| Weighted-average common and common equivalent shares diluted |
||||||||
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
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 $
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 |
||||||||
| March 4, 2023 |
February 26, 2022 |
|||||||
| Cross-currency swap contracts |
$ | $ | ( |
) | ||||
| Interest rate swap contracts |
||||||||
Fair Value Hedges
On February 12, 2021, we entered into interest rate swap agreements to convert our $
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 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 with tranches maturing in August 2025, August 2026 and February 2027. As of March 4, 2023, the combined fair value of the swaps was a liability of $
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 $
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 March 4, 2023, we had forward foreign currency contracts maturing between March 6, 2023 and November 21, 2023. 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 three months ended March 4, 2023 and February 26, 2022 were $
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 March 4, 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 March 4, 2023 and December 3, 2022, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
| March 4, |
Fair Value Measurements Using: |
|||||||||||||||
| Description |
2023 |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
| Assets: |
||||||||||||||||
| Marketable securities |
$ | $ | $ | - | $ | - | ||||||||||
| Foreign exchange contract assets |
- | - | ||||||||||||||
| Interest rate swaps, cash flow hedge assets |
||||||||||||||||
| Liabilities: |
||||||||||||||||
| Foreign exchange contract liabilities |
$ | $ | - | $ | $ | - | ||||||||||
| Interest rate swaps, fair value hedge liabilities |
||||||||||||||||
| Net investment hedge liabilities |
||||||||||||||||
| Contingent consideration liabilities |
||||||||||||||||
| December 3, |
Fair Value Measurements Using: |
|||||||||||||||
| Description |
2022 |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
| Assets: |
||||||||||||||||
| Marketable securities |
$ | $ | $ | - | $ | - | ||||||||||
| Foreign exchange contract assets |
- | - | ||||||||||||||
| Liabilities: |
||||||||||||||||
| Foreign exchange contract liabilities |
$ | $ | - | $ | $ | - | ||||||||||
| Interest rate swaps, fair value hedge liabilities |
- | |||||||||||||||
| Net investment hedge liabilities |
||||||||||||||||
| Contingent consideration liabilities |
||||||||||||||||
The valuation of our contingent consideration liability related to the acquisitions of ZKLT and TissueSeal with a fair value of $
| Amounts |
||||
| Balance at December 3, 2022 |
$ | |||
| Mark to market adjustment |
||||
| Foreign currency translation adjustment |
( |
) | ||
| Balance at March 4, 2023 |
$ | |||
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 $
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 $
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:
| Three Months Ended |
3 Years Ended |
|||||||||||
| March 4, 2023 |
February 26, 2022 |
December 3, 2022 |
||||||||||
| Lawsuits and claims settled |
||||||||||||
| Settlement amounts |
$ | $ | $ | |||||||||
| Insurance payments received or expected to be received |
$ | $ | $ | |||||||||
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 our implementation of 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
The table below provides certain information regarding net revenue and operating income (loss) for each of our operating segments.
| Three Months Ended |
||||||||||||||||
| March 4, 2023 |
February 26, 2022 |
|||||||||||||||
| Net |
Operating |
Net |
Operating |
|||||||||||||
| Revenue |
Income (Loss) |
Revenue |
Income (Loss) |
|||||||||||||
| Hygiene, Health and Consumable Adhesives |
$ | $ | $ | $ | ||||||||||||
| Engineering Adhesives |
||||||||||||||||
| Construction Adhesives |
( |
) | ||||||||||||||
| Total segment |
$ | $ | $ | $ | ||||||||||||
| Corporate Unallocated1 |
( |
) | ( |
) | ||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
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 |
||||||||
| March 4, |
February 26, |
|||||||
| 2023 |
2022 |
|||||||
| Operating income |
$ | $ | ||||||
| Other income, net |
||||||||
| Interest expense |
( |
) | ( |
) | ||||
| Interest income |
||||||||
| Income before income taxes and income from equity method investments |
$ | $ | ||||||
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 March 4, 2023 |
||||||||||||||||
| Hygiene, Health |
||||||||||||||||
| and Consumable |
Engineering |
Construction |
||||||||||||||
| Adhesives |
Adhesives |
Adhesives |
Total |
|||||||||||||
| Americas |
$ | $ | $ | $ | ||||||||||||
| EIMEA |
||||||||||||||||
| Asia Pacific |
||||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
| Three Months Ended February 26, 2022 |
||||||||||||||||
| Hygiene, Health |
||||||||||||||||
| and Consumable |
Engineering |
Construction |
||||||||||||||
| Adhesives |
Adhesives |
Adhesives |
Total |
|||||||||||||
| Americas |
$ | $ | $ | $ | ||||||||||||
| EIMEA |
||||||||||||||||
| Asia Pacific |
||||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
Note 15: Subsequent Event
On March 27, 2023, the Company approved a restructuring plan (the “Plan”) related to organizational changes and other actions to optimize operations. In implementing the Plan, we currently expect to incur costs of approximately $
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 first quarter of 2023 decreased 5.5 percent from the first quarter of 2022. Net revenue decreased 10.8 percent due to sales volume and 4.9 percent due to negative currency effects, offset by an 8.3 percent increase due to price and a 1.9 percent increase due to acquisitions compared to the first quarter of 2022. The negative currency effects were primarily driven by a weaker Euro, Egyptian pound, Chinese renminbi, Argentinian peso and Turkish lira compared to the U.S. dollar. Gross profit margin increased 160 basis points due to an increase in product pricing.
Net income attributable to H.B. Fuller in the first quarter of 2023 was $21.9 million compared to $38.3 million in the first quarter of 2022. On a diluted earnings per share basis, the first quarter of 2023 was $0.39 per share compared to $0.69 per share for the first quarter of 2022.
Restructuring Plan
On March 27, 2023, the Company approved a restructuring plan (the “Plan”) related to organizational changes and other actions to optimize operations. In implementing the Plan, the Company currently expects to incur costs of approximately $15.0 million to $20.0 million ($12.4 million to $16.4 million after-tax), which includes (i) cash expenditures of approximately $13.8 million to $15.0 million ($11.1 million to $12.1 million after tax) for severance and related employee costs globally and (ii) other restructuring costs related to streamlining of processes and the payment of anticipated income taxes in certain jurisdictions related to the Plan. The Plan will be implemented beginning in the second quarter of fiscal year 2023 and is currently expected to be completed during fiscal year 2025. The restructuring costs will be spread across the next several fiscal quarters as the measures are implemented with the majority of the charges recognized and cash payments occurring in fiscal 2023 and 2024.
Results of Operations
Net revenue:
| Three Months Ended |
||||||||||||
| March 4, |
February 26, |
2023 vs |
||||||||||
| ($ in millions) |
2023 |
2022 |
2022 |
|||||||||
| Net revenue |
$ | 809.2 | $ | 856.5 | (5.5 | )% | ||||||
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 first quarter of 2023 compared to the first quarter of 2022:
| Three Months Ended |
||||
| March 4, 2023 vs. February 26, 2022 |
||||
| Organic growth |
(2.5 | )% | ||
| M&A |
1.9 | % | ||
| Currency |
(4.9 | )% | ||
| Total |
(5.5 | )% | ||
Organic growth was a negative 2.5 percent in the first quarter of 2023 compared to the first quarter of 2022 and consisted of a 2.9 percent decrease in Engineering Adhesives and a 25.8 percent decrease in Construction Adhesives, offset by a 4.5 percent increase in Hygiene, Health and Consumable Adhesives. The decrease is driven by a decrease in volume partially offset by an increase in product pricing. The 1.9 percent increase from M&A is due to acquisitions. The negative 4.9 percent foreign currency impact was primarily driven by a weaker Euro, Egyptian pound, Chinese renminbi, Argentinian peso and Turkish lira compared to the U.S. dollar.
Cost of sales:
| Three Months Ended |
||||||||||||
| March 4, |
February 26, |
2023 vs |
||||||||||
| ($ in millions) |
2023 |
2022 |
2022 |
|||||||||
| Cost of sales |
$ | 594.4 | $ | 643.6 | (7.6 | )% | ||||||
| Percent of net revenue |
73.5 | % | 75.1 | % | ||||||||
Cost of sales in the first quarter of 2023 compared to the first quarter of 2022 decreased 160 basis points as a percentage of net revenue. Raw material cost decreased 220 basis points due to higher product pricing, partially offset by higher raw material costs. Other manufacturing costs as a percentage of revenue increased 60 basis points due to lower net revenue.
Gross profit:
| Three Months Ended |
||||||||||||
| March 4, |
February 26, |
2023 vs |
||||||||||
| ($ in millions) |
2023 |
2022 |
2022 |
|||||||||
| Gross profit |
$ | 214.8 | $ | 212.9 | 0.9 | % | ||||||
| Percent of net revenue |
26.5 | % | 24.9 | % | ||||||||
Gross profit in the first quarter of 2023 increased 0.9 percent and gross profit margin increased 160 basis points compared to the first quarter of 2022. The increase in gross profit margin was primarily due to an increase in product pricing.
Selling, general and administrative (SG&A) expenses:
| Three Months Ended |
||||||||||||
| March 4, |
February 26, |
2023 vs |
||||||||||
| ($ in millions) |
2023 |
2022 |
2022 |
|||||||||
| SG&A |
$ | 154.5 | $ | 155.9 | (0.9 | )% | ||||||
| Percent of net revenue |
19.1 | % | 18.2 | % | ||||||||
SG&A expenses for the first quarter of 2023 compared to the first quarter of 2022 increased 90 basis points as a percentage of net revenue. The increase is due to higher compensation costs, partially offset by the favorable impact of foreign currency exchange rates on spending outside the U.S.
Other income, net:
| Three Months Ended |
||||||||||||
| March 4, |
February 26, |
2023 vs |
||||||||||
| ($ in millions) |
2023 |
2022 |
2022 |
|||||||||
| Other income, net |
$ | 2.6 | $ | 6.1 | (57.4 | )% | ||||||
Other income, net in the first quarter of 2023 included $6.5 million of net defined benefit pension benefits and $0.2 million of other income, partially offset by $4.1 million of currency transaction losses. Other income, net in the first quarter of 2022 included $7.4 million of net defined benefit pension benefits and $0.2 million of other income, partially offset by $1.5 million of currency transaction losses.
Interest expense:
| Three Months Ended |
||||||||||||
| March 4, |
February 26, |
2023 vs |
||||||||||
| ($ in millions) |
2023 |
2022 |
2022 |
|||||||||
| Interest expense |
$ | 33.1 | $ | 18.2 | 81.9 | % | ||||||
Interest expense in the first quarter of 2023 was $33.1 million compared to $18.2 million in the first quarter of 2022. Interest expense in the first quarter of 2023 compared to the first quarter of 2022 was higher primarily due to higher debt balances and higher interest rates.
Interest income:
| Three Months Ended |
||||||||||||
| March 4, |
February 26, |
2023 vs |
||||||||||
| ($ in millions) |
2023 |
2022 |
2022 |
|||||||||
| Interest income |
$ | 0.7 | $ | 1.9 | (63.2 | )% | ||||||
Interest income in the first quarter of 2023 and 2022 was $0.7 million and $1.9 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income.
Income taxes:
| Three Months Ended |
||||||||||||
| March 4, |
February 26, |
2023 vs |
||||||||||
| ($ in millions) |
2023 |
2022 |
2022 |
|||||||||
| Income taxes |
$ | 9.7 | $ | 10.1 | (4.0 | )% | ||||||
| Effective tax rate |
31.9 | % | 21.6 | % | ||||||||
Income tax expense of $9.7 million in the first quarter of 2023 includes $0.8 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 29.2 percent. The discrete tax expense relates to various foreign tax matters offset by an excess tax benefit related to U.S. stock compensation. Income tax expense of $10.1 million in the first quarter of 2022 includes $2.9 million of discrete tax benefit. Excluding the discrete tax benefit, the overall effective tax rate was 27.8 percent. The discrete tax benefit relates to impacts of legal entity mergers offset by foreign tax matters.
Income from equity method investments:
| Three Months Ended |
||||||||||||
| March 4, |
February 26, |
2023 vs |
||||||||||
| ($ in millions) |
2023 |
2022 |
2022 |
|||||||||
| Income from equity method investments |
$ | 1.2 | $ | 1.6 | (25.0 | )% | ||||||
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 first quarter of 2023 compared to the same period of 2022 is due to the unfavorable impact of the weakening of the Japanese yen against the U.S. dollar and lower net income in our joint venture.
Net income attributable to H.B. Fuller:
| Three Months Ended |
||||||||||||
| March 4, |
February 26, |
2023 vs |
||||||||||
| ($ in millions) |
2023 |
2022 |
2022 |
|||||||||
| Net income attributable to H.B. Fuller |
$ | 21.9 | $ | 38.3 | (42.8 | )% | ||||||
| Percent of net revenue |
2.7 | % | 4.5 | % | ||||||||
The net income attributable to H.B. Fuller for the first quarter of 2023 was $21.9 million compared to $38.3 million for the first quarter of 2022. The diluted earnings per share for the first quarter of 2023 was $0.39 per share as compared to $0.69 per share for the first quarter of 2022.
Operating Segment Results
We have three reportable segments: Hygiene, Health and Consumable Adhesives, Engineering Adhesives and Construction Adhesives. Operating results of each of these segments are regularly reviewed by our chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance.
The tables below provide certain information regarding the net revenue and operating income of each of our operating segments.
Corporate Unallocated amounts include business acquisition and integration costs, organizational restructuring charges and project costs associated with our implementation of Project ONE.
Net Revenue by Segment:
| Three Months Ended |
||||||||||||||||
| March 4, 2023 |
February 26, 2022 |
|||||||||||||||
| Net |
% of |
Net |
% of |
|||||||||||||
| ($ in millions) |
Revenue |
Total |
Revenue |
Total |
||||||||||||
| Hygiene, Health and Consumable Adhesives |
$ | 383.5 | 47 | % | $ | 389.5 | 46 | % | ||||||||
| Engineering Adhesives |
333.1 | 41 | % | 354.0 | 41 | % | ||||||||||
| Construction Adhesives |
92.6 | 12 | % | 113.0 | 13 | % | ||||||||||
| Segment total |
$ | 809.2 | 100 | % | $ | 856.5 | 100 | % | ||||||||
| Corporate Unallocated |
- | - | - | - | ||||||||||||
| Total |
$ | 809.2 | 100 | % | $ | 856.5 | 100 | % | ||||||||
Segment Operating Income (Loss):
| Three Months Ended |
||||||||||||||||
| March 4, 2023 |
February 26, 2022 |
|||||||||||||||
| Segment |
Segment |
|||||||||||||||
| Operating |
Operating |
|||||||||||||||
| Income |
% of |
Income |
% of |
|||||||||||||
| ($ in millions) |
(Loss) |
Total |
(Loss) |
Total |
||||||||||||
| Hygiene, Health and Consumable Adhesives |
$ | 45.1 | 75 | % | $ | 32.2 | 56 | % | ||||||||
| Engineering Adhesives |
32.5 | 54 | % | 32.6 | 57 | % | ||||||||||
| Construction Adhesives |
(9.6 | ) | (16 | )% | 4.4 | 8 | % | |||||||||
| Segment total |
$ | 68.0 | 113 | % | $ | 69.2 | 121 | % | ||||||||
| Corporate Unallocated |
(7.7 | ) | (13 | )% | (12.2 | ) | (21 | )% | ||||||||
| Total |
$ | 60.3 | 100 | % | $ | 57.0 | 100 | % | ||||||||
Hygiene, Health and Consumable Adhesives
| Three Months Ended |
||||||||||||
| March 4, |
February 26, |
2023 vs |
||||||||||
| ($ in millions) |
2023 |
2022 |
2022 |
|||||||||
| Net revenue |
$ | 383.5 | $ | 389.5 | (1.5 | )% | ||||||
| Segment operating income |
$ | 45.1 | $ | 32.2 | 40.1 | % | ||||||
| Segment operating margin |
11.8 | % | 8.3 | % | ||||||||
The following table provides details of the Hygiene, Health and Consumable Adhesives net revenue variances:
| Three Months Ended |
||||
| March 4, 2023 vs. February 26, 2022 |
||||
| Organic growth |
4.5 | % | ||
| M&A |
0.2 | % | ||
| Currency |
(6.2 | )% | ||
| Total |
(1.5 | )% | ||
Net revenue decreased 1.5 percent in the first quarter of 2023 compared to the first quarter of 2022. The increase in organic growth was attributable to an increase in product pricing, partially offset by a decrease in sales volume. The 0.2 percent increase in net revenue from M&A was due to the acquisition of Lemtapes during the first quarter of 2022. The negative currency effect was due to a weaker Egyptian pound, Argentinian peso, Euro and Chinese renminbi compared to the U.S. dollar. As a percentage of net revenue, raw material costs decreased 360 basis points due to higher product pricing. Other manufacturing costs as a percentage of net revenue decreased 70 basis points due to higher product pricing. SG&A expenses as a percentage of net revenue increased 80 basis points due to higher compensation costs. Segment operating income increased 40.1 percent and segment operating margin as a percentage of net revenue increased 350 basis points compared to the first quarter of 2022.
Engineering Adhesives
| Three Months Ended |
||||||||||||
| March 4, |
February 26, |
2023 vs |
||||||||||
| ($ in millions) |
2023 |
2022 |
2022 |
|||||||||
| Net revenue |
$ | 333.1 | $ | 354.0 | (5.9 | )% | ||||||
| Segment operating income |
$ | 32.5 | $ | 32.6 | (0.3 | )% | ||||||
| Segment operating margin |
9.8 | % | 9.2 | % | ||||||||
The following tables provide details of the Engineering Adhesives net revenue variances:
| Three Months Ended |
||||
| March 4, 2023 vs. February 26, 2022 |
||||
| Organic growth |
(2.9 | )% | ||
| M&A |
1.5 | % | ||
| Currency |
(4.5 | )% | ||
| Total |
(5.9 | )% | ||
Net revenue decreased 5.9 percent in the first quarter of 2023 compared to the first 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 1.5 percent increase in net revenue from M&A was due to the acquisition of ZKLT in the fourth quarter of 2022 and Aspen in the first quarter of 2023. The negative currency effect was due to a weaker Chinese renminbi, Euro and Turkish lira compared to the U.S. dollar. Raw material costs as a percentage of net revenue decreased 240 basis points due to higher product pricing. Other manufacturing costs as a percentage of net revenue increased 90 basis points due to lower net revenue. SG&A expenses as a percentage of net revenue increased 90 basis points due to higher compensation costs. Segment operating income decreased 0.3 percent and segment operating margin increased 60 basis points compared to the first quarter of 2022.
Construction Adhesives
| Three Months Ended |
||||||||||||
| March 4, |
February 26, |
2023 vs |
||||||||||
| ($ in millions) |
2023 |
2022 |
2022 |
|||||||||
| Net revenue |
$ | 92.6 | $ | 113.0 | (18.0 | )% | ||||||
| Segment operating income (loss) |
$ | (9.6 | ) | $ | 4.4 | (318.2 | )% | |||||
| Segment operating margin |
(10.4 | )% | 3.9 | % | ||||||||
The following tables provide details of the Construction Adhesives net revenue variances:
| Three Months Ended |
||||
| March 4, 2023 vs. February 26, 2022 |
||||
| Organic growth |
(25.8 | )% | ||
| M&A |
9.3 | % | ||
| Currency |
(1.5 | )% | ||
| Total |
(18.0 | )% | ||
Net revenue decreased 18.0 percent in the first quarter of 2023 compared to the first 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 9.3 percent increase in net revenue from M&A was due to the acquisitions of Fourny and Apollo in the first quarter of 2022 and GSSI in the fourth quarter of 2022. The negative currency effect was due to a weaker British pound, Canadian dollar, and Australian dollar compared to the U.S. dollar. Raw material costs as a percentage of net revenue increased 240 basis points due to lower net revenue. Other manufacturing costs as a percentage of net revenue increased 380 basis points due to lower net revenue. SG&A expenses as a percentage of net revenue increased 810 basis points due to higher compensation costs. Segment operating income decreased 318.2 percent and segment operating margin decreased 1,430 basis points compared to the first quarter of 2022.
Corporate Unallocated
| Three Months Ended |
||||||||||||
| March 4, |
February 26, |
2023 vs |
||||||||||
| ($ in millions) |
2023 |
2022 |
2022 |
|||||||||
| Net revenue |
$ | - | $ | - | 0.0 | % | ||||||
| Segment operating loss |
$ | (7.7 | ) | $ | (12.2 | ) | (36.9 | )% | ||||
| Segment operating margin |
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 first quarter of 2023 decreased 36.9 percent compared to the first quarter of 2022 reflecting lower acquisition project costs compared to the prior year.
Financial Condition, Liquidity and Capital Resources
Total cash and cash equivalents as of March 4, 2023 were $125.5 million compared to $79.9 million as of December 3, 2022 and $63.5 million as of February 26, 2022. The majority of the $125.5 million in cash and cash equivalents as of March 4, 2023 was held outside the United States. Total long and short-term debt was $1,873.5 million as of March 4, 2023, $1,765.1 million as of December 3, 2022 and $1,914.1 million as of February 26, 2022. The total debt to total capital ratio as measured by Total Debt divided by (Total Debt plus Total Stockholders’ Equity) was 53.4 percent as of March 4, 2023 as compared to 52.3 percent as of December 3, 2022 and 53.8 percent as of February 26, 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 March 4, 2023 |
|||
| Secured Total Indebtedness / TTM1 EBITDA |
Revolving Facility and Term Loan A Facility |
Not greater than 4.752 |
* | |||
| TTM1 EBITDA / Consolidated Interest Expense |
Revolving Facility and Term Loan A Facility |
Not less than 2.0 |
* | |||
| 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 | |
| * The terms of the Second Amended and Restated Credit Agreement do not require the financial covenants to be measured until the fiscal quarter ending June 3, 2023 |
| 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 Borrower’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 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 and can be found in the Company’s 8-K filing dated February 21, 2023. |
| Consolidated Interest Expense for covenant purposes is defined as the interest expense (including without limitation to the portion of capital lease obligations that constitutes imputed interest in accordance with GAAP) of the Borrower 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.
| March 4, |
February 26, |
|||||||
| 2023 |
2022 |
|||||||
| Net working capital as a percentage of annualized net revenue1 |
19.8 | % | 18.5 | % | ||||
| Accounts receivable DSO (in days)2 |
64 | 65 | ||||||
| Inventory days on hand (in days)3 |
84 | 82 | ||||||
| (Negative) free cash flow after dividends4 |
$ | (52.3 | ) | $ | (75.5 | ) | ||
| Total debt to total capital ratio5 |
53.4 | % | 53.8 | % | ||||
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 (Negative) free cash flow after dividends
| Three Months Ended |
||||||||
| ($ in millions) |
March 4, 2023 |
February 26, 2022 |
||||||
| Net cash provided by operating activities |
$ | 5.5 | $ | (17.7 | ) | |||
| Less: Purchased property, plant and equipment |
47.6 | 48.9 | ||||||
| Less: Dividends paid |
10.2 | 8.9 | ||||||
| (Negative) free cash flow after dividends |
$ | (52.3 | ) | $ | (75.5 | ) | ||
Summary of Cash Flows
Cash Flows from Operating Activities:
| Three Months Ended |
||||||||
| March 4, |
February 26, |
|||||||
| ($ in millions) |
2023 |
2022 |
||||||
| Net cash provided by operating activities |
$ | 5.5 | $ | (17.7 | ) | |||
Net income including non-controlling interest was $21.9 million in the first three months of 2023 compared to $38.3 million in the first three months of 2022. Depreciation and amortization expense totaled $37.9 million in the first three months of 2023 compared to $36.0 million in the first three months of 2022. Deferred income taxes was a use of cash of $5.7 million in 2023 compared to $6.0 million in the first three months of 2022. Accrued compensation was a use of cash of $57.0 million in 2023 compared to $44.1 million last year. Other assets was a use of cash of $28.9 million in the first three months of 2023 compared to $3.2 million in the first three months of 2022. Other liabilities was a use of cash of $3.1 million in the first three months of 2023 compared to $8.8 million in the first three months of 2022.
Changes in net working capital (trade receivables, inventory and trade payables) accounted for a source of cash of $30.6 million compared to a use of cash of $27.6 million last year. The table below provides the cash flow impact due to changes in the components of net working capital:
| Three Months Ended |
||||||||
| March 4, |
February 26, |
|||||||
| ($ in millions) |
2023 |
2022 |
||||||
| Trade receivables, net |
$ | 55.4 | $ | 13.3 | ||||
| Inventory |
(33.8 | ) | (87.4 | ) | ||||
| Trade payables |
9.0 | 46.5 | ||||||
| Total cash flow impact |
$ | 30.6 | $ | (27.6 | ) | |||
| ● |
Trade receivables, net – Trade receivables, net was a source of cash of $55.4 million and $13.3 million in the first three months of 2023 and 2022, respectively. The higher source of cash in 2023 compared to 2022 was due to more cash collected on trade receivables in the current year compared to the prior year. The DSO were 64 days at March 4, 2023 and 65 days at February 26, 2022. |
|
|
● |
Inventory – Inventory was a use of cash of $33.8 million and $87.4 million in the first three months of 2023 and 2022, respectively. The lower use of cash in 2023 is due to lower inventory purchases in 2023 compared to 2022. Inventory days on hand were 84 days as of March 4, 2023 and 82 days as of February 26, 2022. |
| ● |
Trade payables – Trade payables was a source of cash of $9.0 million and $46.5 million in the first three months of 2023 and 2022, respectively. The lower source of cash in 2023 compared to 2022 reflects higher payments on trade payables in the current year compared to the prior year. |
Cash Flows from Investing Activities:
| Three Months Ended |
||||||||
| March 4, |
February 26, |
|||||||
| ($ in millions) |
2023 |
2022 |
||||||
| Net cash used in investing activities |
$ | (63.7 | ) | $ | (274.2 | ) | ||
Purchases of property, plant and equipment were $47.6 million during the first three months of 2023 compared to $48.9 million for the same period of 2022. This difference reflects the timing of capital projects and expenditures related to growth initiatives.
During the first three months of 2023, we paid cash to acquire Lemtapes for $7.4 million and Aspen for $9.3 million, net of cash acquired. During the first three months of 2022, we paid cash to acquire TissueSeal for $22.2 million, Fourny for $14.5 million, net of cash acquired and Apollo for $192.6 million, net of cash acquired.
Cash Flows from Financing Activities:
| Three Months Ended |
||||||||
| March 4, |
February 26, |
|||||||
| ($ in millions) |
2023 |
2022 |
||||||
| Net cash provided by (used in) financing activities |
$ | 103.2 | $ | 287.8 | ||||
In the first three months of 2023,we refinanced our debt and as a result have proceeds from the issuance of long-term debt of $1,300.0 million and repayment of long-term debt of $1,177 million. These borrowings are to finance acquisitions and for general working capital purposes. No payment was made for long-term debt in the first three months of 2022 and borrowings on our long-term debt were $307.5 million. Payment of debt issue costs were $10.2 million and $0.4 million in the first three months of 2023 and 2022, respectively. Net payments of notes payable were $0.9 million in the first three months of 2023 and $7.6 million in the same period of 2022. Cash dividends paid were $10.2 million in the first three months of 2023 compared to $8.9 million in the same period of 2022. Repurchases of common stock were $2.4 million in the first three months of 2023 compared to $3.6 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 March 4, 2023. Based on this evaluation, our president and chief executive officer and executive vice president, chief financial officer concluded that, as of March 4, 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.
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.
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 first quarter ended March 4, 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) |
|||||||||
| December 4, 2022 - January 6, 2023 |
- | $ | - | $ | 300,000 | |||||||
| January 7, 2023 - February 4, 2022 |
35,990 | $ | 69.57 | $ | 300,000 | |||||||
| February 5, 2023 - March 4, 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.
| 4.1 | Form of Certificate for common stock, par value $1.00 per share | |
| 10.1 | 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(1) | |
| 31.1 |
||
| 31.2 |
||
| 32.1 |
||
| 32.2 |
||
| 101 |
The following materials from the H.B. Fuller Company Quarterly Report on Form 10-Q for the quarter ended March 4, 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). |
|
| (1) | Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K dated February 21, 2023 |
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: March 30, 2023 |
/s/ John J. Corkrean |
||
| John J. Corkrean |
|||
| Executive Vice President, |
|||
| Chief Financial Officer |
|||
Exhibit Index
Exhibits
| 4.1 | Form of Certificate for common stock, par value $1.00 per share | |
| 10.1 | 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(1) | |
| 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 March 4, 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). |
|
| (1) | Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K dated February 21, 2023 |
