See accompanying Notes to Unaudited Consolidated Financial Statements.
See accompanying Notes to Unaudited Consolidated Financial Statements.
See accompanying Notes to Unaudited Consolidated Financial Statements.
See accompanying Notes to Unaudited Consolidated Financial Statements.
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 $9,850, 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 March 4, 2023 and includes intangible assets of $7,902 and other net assets of $1,948. 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 7,997 Euro, or approximately $8,498, 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 March 4, 2023 and includes intangible assets of $6,834 and other net assets of $1,664. 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 $7,483, 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 preliminary as of March 4, 2023 and includes intangible assets of $4,305 and other net assets of $3,178. GSSI is included in our Construction Adhesives operating segment.
ZKLT Polymer Co.
On August 16, 2022, we acquired ZKLT Polymer Co., Ltd. ("ZKLT") for a base purchase price of 102,812 Chinese renminbi, or approximately $15,183, which was funded through existing cash. We are also required to pay 27,000 Chinese renminbi, or approximately $3,987, with half to be paid 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 $4,430, 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 Southwest China. The acquisition fair value measurement was preliminary as of March 4, 2022 and includes intangible assets of $5,316, goodwill of $3,786 and other net assets of $10,068. 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 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 requires us to pay an additional 3,100 Euro, or approximately $3,524, 18 months following the date of acquisition. 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 is not deductible for tax purposes. Fourny is included in our Construction Adhesives operating segment.
All acquisitions, individually and in the aggregate, are
not material and therefore pro forma financial information is
not provided.
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 |
|
$ |
2,301 |
|
|
$ |
(152 |
) |
Selling, general and administrative |
|
|
625 |
|
|
|
(89 |
) |
|
|
$ |
2,926 |
|
|
$ |
(241 |
) |
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 |
|
$ |
1,095 |
|
Expenses incurred |
|
|
(449 |
) |
Cash payments |
|
|
(529 |
) |
Foreign currency translation |
|
|
(60 |
) |
Balance at December 3, 2022 |
|
$ |
57 |
|
Expenses incurred |
|
|
2,926 |
|
Cash payments |
|
|
(110 |
) |
Foreign currency translation |
|
|
(8 |
) |
Balance at March 4, 2023 |
|
$ |
2,865 |
|
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 |
|
$ |
251,027 |
|
|
$ |
237,071 |
|
Finished goods |
|
|
275,014 |
|
|
|
254,710 |
|
Total inventories |
|
$ |
526,041 |
|
|
$ |
491,781 |
|
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 |
|
$ |
328,962 |
|
|
$ |
637,910 |
|
|
$ |
425,755 |
|
|
$ |
1,392,627 |
|
Foreign currency translation effect |
|
|
(104 |
) |
|
|
789 |
|
|
|
(2,255 |
) |
|
|
(1,570 |
) |
Balance at March 4, 2023 |
|
$ |
328,858 |
|
|
$ |
638,699 |
|
|
$ |
423,500 |
|
|
$ |
1,391,057 |
|
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 |
|
$ |
102,261 |
|
|
$ |
1,012,402 |
|
|
$ |
47,964 |
|
|
$ |
11,000 |
|
|
$ |
1,173,627 |
|
Accumulated amortization |
|
|
(51,875 |
) |
|
|
(398,847 |
) |
|
|
(19,834 |
) |
|
|
(6,429 |
) |
|
|
(476,985 |
) |
Net identifiable intangibles |
|
$ |
50,386 |
|
|
$ |
613,555 |
|
|
$ |
28,130 |
|
|
$ |
4,571 |
|
|
$ |
696,642 |
|
|
|
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 $18,683 and $17,792 for the three months ended March 4, 2023 and February 26, 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 |
|
$ |
68,839 |
|
|
$ |
68,621 |
|
|
$ |
66,519 |
|
|
$ |
60,323 |
|
|
$ |
57,355 |
|
|
$ |
374,985 |
|
Non-amortizable intangible assets as of March 4, 2023 and December 3, 2022 were $462 and $459, respectively, and relate to trademarks and trade names. The change in non-amortizable assets as of March 4, 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 (6.47 percent at March 4, 2023). The interest rate spread is based on a secured leverage grid. Term Loan A matures on February 15, 2028. Interest on Term Loan B is payable at SOFR plus an interest rate spread of 2.50 percent with a SOFR floor of 0.50 percent (7.12 percent at March 4, 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 12 for further discussion of this interest rate swap.
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 (6.47 percent at March 4, 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 March 4, 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 March 4, 2023, letters of credit reduced the available amount under the Revolving Credit Facility by $9,864.
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. 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 50% 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.
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 |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
413 |
|
|
$ |
720 |
|
|
$ |
- |
|
|
$ |
- |
|
Interest cost |
|
|
3,475 |
|
|
|
2,368 |
|
|
|
1,410 |
|
|
|
789 |
|
|
|
301 |
|
|
|
184 |
|
Expected return on assets |
|
|
(7,206 |
) |
|
|
(7,117 |
) |
|
|
(1,730 |
) |
|
|
(1,747 |
) |
|
|
(2,465 |
) |
|
|
(2,719 |
) |
Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service (benefit) cost |
|
|
- |
|
|
|
(1 |
) |
|
|
15 |
|
|
|
16 |
|
|
|
- |
|
|
|
- |
|
Actuarial loss (gain) |
|
|
635 |
|
|
|
1,013 |
|
|
|
491 |
|
|
|
649 |
|
|
|
- |
|
|
|
(845 |
) |
Net periodic (benefit) cost |
|
$ |
(3,096 |
) |
|
$ |
(3,737 |
) |
|
$ |
599 |
|
|
$ |
427 |
|
|
$ |
(2,164 |
) |
|
$ |
(3,380 |
) |
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 |
|
|
|
|
|
|
|
|
|
$ |
21,889 |
|
|
$ |
27 |
|
|
|
|
|
|
|
|
|
|
$ |
38,306 |
|
|
$ |
14 |
|
Foreign currency translation¹ |
|
$ |
(3,646 |
) |
|
$ |
- |
|
|
|
(3,646 |
) |
|
|
10 |
|
|
$ |
6,540 |
|
|
$ |
- |
|
|
|
6,540 |
|
|
|
(10 |
) |
Defined benefit pension plans adjustment² |
|
|
1,141 |
|
|
|
(290 |
) |
|
|
851 |
|
|
|
- |
|
|
|
833 |
|
|
|
(344 |
) |
|
|
489 |
|
|
|
- |
|
Interest rate swaps³ |
|
|
11,055 |
|
|
|
(2,720 |
) |
|
|
8,335 |
|
|
|
- |
|
|
|
8,255 |
|
|
|
(2,024 |
) |
|
|
6,231 |
|
|
|
- |
|
Cross-currency swaps³ |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,115 |
) |
|
|
32 |
|
|
|
(2,083 |
) |
|
|
- |
|
Net investment hedges³ |
|
|
(397 |
) |
|
|
98 |
|
|
|
(299 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other comprehensive income |
|
$ |
8,153 |
|
|
$ |
(2,912 |
) |
|
$ |
5,241 |
|
|
$ |
10 |
|
|
$ |
13,513 |
|
|
$ |
(2,336 |
) |
|
$ |
11,177 |
|
|
$ |
(10 |
) |
Comprehensive income |
|
|
|
|
|
|
|
|
|
$ |
27,130 |
|
|
$ |
37 |
|
|
|
|
|
|
|
|
|
|
$ |
49,483 |
|
|
$ |
4 |
|
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 |
|
$ |
(267,710 |
) |
|
$ |
(267,658 |
) |
|
$ |
(52 |
) |
Interest rate swap, net of taxes of ($2,720) |
|
|
8,335 |
|
|
|
8,335 |
|
|
|
- |
|
Net investment hedges, net of taxes of $13,395 |
|
|
(41,042 |
) |
|
|
(41,042 |
) |
|
|
- |
|
Defined benefit pension plans adjustment, net of taxes of $67,454 |
|
|
(127,410 |
) |
|
|
(127,410 |
) |
|
|
- |
|
Reclassification of AOCI tax effects |
|
|
(18,341 |
) |
|
|
(18,341 |
) |
|
|
- |
|
Accumulated other comprehensive loss |
|
$ |
(446,168 |
) |
|
$ |
(446,116 |
) |
|
$ |
(52 |
) |
|
|
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 months ended March 4, 2023 includes $846 of discrete tax expense, relating to various foreign tax matters offset by an excess tax benefit related to U.S. stock compensation. Excluding the discrete tax expense, the overall effective tax rate was 29.2 percent for the three months ended March 4, 2023.
Income tax expense for the three months ended February 26, 2022 includes $2,901 of discrete tax benefit, relating to legal entity mergers offset by various foreign tax matters. Excluding the discrete tax benefit, the overall effective tax rate was 27.8 percent for the three months ended February 26, 2022.
As of March 4, 2023, we had a liability of $17,973 recorded for gross unrecognized tax benefits (excluding interest) compared to $17,582 as of December 3, 2022. As of March 4, 2023 and December 3, 2022, we had accrued $6,086 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 |
|
|
|
March 4, |
|
|
February 26, |
|
(Shares in thousands) |
|
2023 |
|
|
2022 |
|
Weighted-average common shares - basic |
|
|
54,174 |
|
|
|
53,353 |
|
Equivalent shares from share-based compensations plans |
|
|
1,745 |
|
|
|
2,042 |
|
Weighted-average common and common equivalent shares diluted |
|
|
55,919 |
|
|
|
55,395 |
|
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 1,172,987 and 700,250 shares for the three months ended March 4, 2023 and February 26, 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. 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 swaps was an asset of $6,688 at March 4, 2023 and was included in other assets in the Consolidated Balance Sheets. The swaps were designated for hedge accounting treatment as cash flow hedges. 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 |
|
|
|
March 4, 2023 |
|
|
February 26, 2022 |
|
Cross-currency swap contracts |
|
$ |
- |
|
|
$ |
(2,115 |
) |
Interest rate swap contracts |
|
|
11,055 |
|
|
|
8,255 |
|
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. These interest rate swap agreements mature on October 15, 2028. The combined fair value of the interest rate swaps was a liability of $49,529 at March 4, 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. As of March 4, 2023, the combined fair value of the swaps was a liability of $54,442 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 $41,042 as of March 4, 2023. The amounts of pretax loss recognized in comprehensive income related to the net investment hedge was $397 for the three months ended March 4, 2023. As of March 4, 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 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 $7,154 and $4,237, 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 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 |
|
$ |
26,594 |
|
|
$ |
26,594 |
|
|
$ |
- |
|
|
$ |
- |
|
Foreign exchange contract assets |
|
|
9,768 |
|
|
|
- |
|
|
|
9,768 |
|
|
|
- |
|
Interest rate swaps, cash flow hedge assets |
|
|
6,688 |
|
|
|
- |
|
|
|
6,688 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contract liabilities |
|
$ |
2,614 |
|
|
$ |
- |
|
|
$ |
2,614 |
|
|
$ |
- |
|
Interest rate swaps, fair value hedge liabilities |
|
|
49,549 |
|
|
|
|
|
|
|
49,549 |
|
|
|
|
|
Net investment hedge liabilities |
|
|
54,442 |
|
|
|
- |
|
|
|
54,442 |
|
|
|
- |
|
Contingent consideration liabilities |
|
|
1,983 |
|
|
|
- |
|
|
|
- |
|
|
|
1,983 |
|
|
|
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 with a fair value of $1,483 and $500, respectively as of March 4, 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 |
|
Mark to market adjustment |
|
|
139 |
|
Foreign currency translation adjustment |
|
|
(133 |
) |
Balance at March 4, 2023 |
|
$ |
1,983 |
|
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 $1,714,383 and $1,713,257 as of March 4, 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 $5,541 and $5,754 as of March 4, 2023 and December 3, 2022, respectively, for probable and reasonably estimable environmental remediation costs. Of the amount reserved, $2,640 and $2,789 as of March 4, 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:
|
|
Three Months Ended |
|
|
3 Years Ended |
|
|
|
March 4, 2023 |
|
|
February 26, 2022 |
|
|
December 3, 2022 |
|
Lawsuits and claims settled |
|
|
2 |
|
|
|
- |
|
|
|
13 |
|
Settlement amounts |
|
$ |
30 |
|
|
$ |
- |
|
|
$ |
511 |
|
Insurance payments received or expected to be received |
|
$ |
39 |
|
|
$ |
- |
|
|
$ |
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 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 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 |
|
|
|
March 4, 2023 |
|
|
February 26, 2022 |
|
|
|
Net |
|
|
Operating |
|
|
Net |
|
|
Operating |
|
|
|
Revenue |
|
|
Income (Loss) |
|
|
Revenue |
|
|
Income (Loss) |
|
Hygiene, Health and Consumable Adhesives |
|
$ |
383,528 |
|
|
$ |
45,146 |
|
|
$ |
389,538 |
|
|
$ |
32,213 |
|
Engineering Adhesives |
|
|
333,067 |
|
|
|
32,475 |
|
|
|
353,977 |
|
|
|
32,572 |
|
Construction Adhesives |
|
|
92,588 |
|
|
|
(9,634 |
) |
|
|
112,967 |
|
|
|
4,356 |
|
Total segment |
|
$ |
809,183 |
|
|
$ |
67,987 |
|
|
$ |
856,482 |
|
|
$ |
69,141 |
|
Corporate Unallocated1 |
|
|
- |
|
|
|
(7,720 |
) |
|
|
- |
|
|
|
(12,142 |
) |
Total |
|
$ |
809,183 |
|
|
$ |
60,267 |
|
|
$ |
856,482 |
|
|
$ |
56,999 |
|
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 |
|
$ |
60,267 |
|
|
$ |
56,999 |
|
Other income, net |
|
|
2,604 |
|
|
|
6,142 |
|
Interest expense |
|
|
(33,069 |
) |
|
|
(18,196 |
) |
Interest income |
|
|
667 |
|
|
|
1,940 |
|
Income before income taxes and income from equity method investments |
|
$ |
30,469 |
|
|
$ |
46,885 |
|
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 |
|
$ |
223,618 |
|
|
$ |
133,470 |
|
|
$ |
70,964 |
|
|
$ |
428,052 |
|
EIMEA |
|
|
107,072 |
|
|
|
113,360 |
|
|
|
14,578 |
|
|
|
235,010 |
|
Asia Pacific |
|
|
52,838 |
|
|
|
86,237 |
|
|
|
7,046 |
|
|
|
146,121 |
|
Total |
|
$ |
383,528 |
|
|
$ |
333,067 |
|
|
$ |
92,588 |
|
|
$ |
809,183 |
|
|
|
Three Months Ended February 26, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hygiene, Health |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Consumable |
|
|
Engineering |
|
|
Construction |
|
|
|
|
|
|
|
Adhesives |
|
|
Adhesives |
|
|
Adhesives |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
220,694 |
|
|
$ |
133,328 |
|
|
$ |
95,578 |
|
|
$ |
449,600 |
|
EIMEA |
|
|
114,653 |
|
|
|
115,820 |
|
|
|
11,217 |
|
|
|
241,690 |
|
Asia Pacific |
|
|
54,191 |
|
|
|
104,829 |
|
|
|
6,172 |
|
|
|
165,192 |
|
Total |
|
$ |
389,538 |
|
|
$ |
353,977 |
|
|
$ |
112,967 |
|
|
$ |
856,482 |
|
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 $15,000 to $20,000 ($12,400 to $16,400 after-tax), which includes (i) cash expenditures of approximately $13,800 to $15,000 ($11,100 to $12,100 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.