UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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)
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| (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:
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Title of each class |
Trading Symbol |
Name of each exchange on which registered |
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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):
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Accelerated filer ☐ |
| Non-accelerated filer ☐ |
Smaller reporting company
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Emerging growth company
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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)
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Three Months Ended |
Six Months Ended |
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May 28, |
May 29, |
May 28, |
May 29, |
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2022 |
2021 |
2022 |
2021 |
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Net revenue |
$ |
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$ |
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$ |
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$ |
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Cost of sales |
(
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(
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(
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Gross profit |
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Selling, general and administrative expenses |
(
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(
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(
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Other income, net |
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Interest expense |
(
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(
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Interest income |
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Income before income taxes and income from equity method investments |
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Income taxes |
(
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(
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(
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(
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Income from equity method investments |
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Net income including non-controlling interest |
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Net income attributable to non-controlling interest |
(
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(
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(
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Net income attributable to H.B. Fuller |
$ |
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$ |
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$ |
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$ |
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Earnings per share attributable to H.B. Fuller common stockholders: |
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Basic |
$ |
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$ |
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$ |
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$ |
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Diluted |
$ |
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$ |
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$ |
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$ |
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Weighted-average common shares outstanding: |
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Basic |
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Diluted |
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Dividends declared per common share |
$ |
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$ |
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$ |
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$ |
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See accompanying Notes to Unaudited Consolidated Financial Statements.
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
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Three Months Ended |
Six Months Ended |
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May 28, |
May 29, |
May 28, |
May 29, |
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2022 |
2021 |
2022 |
2021 |
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Net income including non-controlling interest |
$ |
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$ |
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$ |
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$ |
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Other comprehensive (loss) income |
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Foreign currency translation |
(
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(
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Defined benefit pension plans adjustment, net of tax |
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Interest rate swaps, net of tax |
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Cross-currency swaps, net of tax |
(
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(
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(
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(
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Other comprehensive (loss) income |
(
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(
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Comprehensive (loss) income |
(
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Less: Comprehensive income attributable to non-controlling interest |
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Comprehensive (loss) income attributable to H.B. Fuller |
$ |
(
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) | $ |
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$ |
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$ |
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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)
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May 28, |
November 27, |
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2022 |
2021 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
$ |
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$ |
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Trade receivables (net of allowances of $ and $ , as of May 28, 2022 and November 27, 2021, respectively) |
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Inventories |
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Other current assets |
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Total current assets |
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Property, plant and equipment |
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Accumulated depreciation |
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Property, plant and equipment, net |
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Goodwill |
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Other intangibles, net |
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Other assets |
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Total assets |
$ |
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$ |
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Liabilities, non-controlling interest and total equity |
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Current liabilities: |
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Notes payable |
$ |
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$ |
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Trade payables |
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Accrued compensation |
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Income taxes payable |
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Other accrued expenses |
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Total current liabilities |
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Long-term debt |
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Accrued pension liabilities |
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Other liabilities |
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Total liabilities |
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Commitments and contingencies (Note 12) |
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Equity: |
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H.B. Fuller stockholders' equity: |
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Preferred stock ( shares outstanding) shares authorized – |
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Common stock, par value $ per share, shares authorized – , shares outstanding – and as of May 28, 2022 and November 27, 2021, respectively |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
(
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Total H.B. Fuller stockholders' equity |
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Non-controlling interest |
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Total equity |
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Total liabilities, non-controlling interest and total equity |
$ |
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$ |
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See accompanying Notes to Unaudited Consolidated Financial Statements.
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Statements of Total Equity
(In thousands)
(Unaudited)
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H.B. Fuller Company Shareholders |
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Accumulated |
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Additional |
Other |
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Common |
Paid-in |
Retained |
Comprehensive |
Non-Controlling |
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Stock |
Capital |
Earnings |
Income (Loss) |
Interest |
Total |
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Balance at November 27, 2021 |
$ |
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$ |
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$ |
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$ |
(
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) | $ |
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$ |
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Comprehensive income |
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Dividends |
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(
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(
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Stock option exercises |
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Share-based compensation plans and other, net |
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Repurchases of common stock |
(
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(
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(
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Balance at February 26, 2022 |
$ |
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$ |
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$ |
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$ |
(
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) | $ |
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$ |
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Comprehensive income (loss) |
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(
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(
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Dividends |
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(
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Stock option exercises |
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Share-based compensation plans other, net |
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Repurchases of common stock |
(
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(
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(
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Balance at May 28, 2022 |
$ |
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$ |
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$ |
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$ |
(
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) | $ |
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H.B. Fuller Company Shareholders |
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Accumulated |
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Additional |
Other |
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Common |
Paid-in |
Retained |
Comprehensive |
Non-Controlling |
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Stock |
Capital |
Earnings |
Income (Loss) |
Interest |
Total |
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Balance at November 28, 2020 |
$ |
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$ |
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$ |
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$ |
(
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) | $ |
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$ |
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Comprehensive income |
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Dividends |
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(
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(
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Stock option exercises |
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Share-based compensation plans and other, net |
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Repurchases of common stock |
(
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(
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(
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Balance at February 27, 2021 |
$ |
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$ |
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$ |
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$ |
(
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) | $ |
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$ |
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Comprehensive income |
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Dividends |
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(
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(
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Stock option exercises |
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Share-based compensation plans other, net |
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Repurchases of common stock |
(
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(
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(
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Balance at May 29, 2021 |
$ |
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$ |
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$ |
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$ |
(
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) | $ |
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$ |
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See accompanying Notes to Unaudited Consolidated Financial Statements.
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Six Months Ended |
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May 28, 2022 |
May 29, 2021 |
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Cash flows from operating activities: |
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Net income including non-controlling interest |
$ |
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$ |
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Adjustments to reconcile net income including non-controlling interest to net cash (used in) provided by operating activities: |
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Depreciation |
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Amortization |
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Deferred income taxes |
(
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(
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Income from equity method investments, net of dividends received |
(
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(
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Loss on sale or disposal of assets |
(
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Share-based compensation |
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Pension and other post-retirement benefit plan activity |
(
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(
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Change in assets and liabilities, net of effects of acquisitions: |
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Trade receivables, net |
(
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(
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Inventories |
(
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(
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Other assets |
(
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(
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Trade payables |
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Accrued compensation |
(
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(
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Other accrued expenses |
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Income taxes payable |
(
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(
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Other liabilities |
(
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(
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Other |
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Net cash (used in) provided by operating activities |
(
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Cash flows from investing activities: |
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Purchased property, plant and equipment |
(
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(
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Purchased businesses, net of cash acquired |
(
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(
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Proceeds from sale of property, plant and equipment |
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Cash received from government grant |
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Cash payments related to government grant |
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(
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Net cash used in investing activities |
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(
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Cash flows from financing activities: |
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Proceeds from debt |
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Repayment of long-term debt |
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(
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Payment of debt issuance costs |
(
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Net proceeds of notes payable |
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Dividends paid |
(
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(
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Contingent consideration payment |
(
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Proceeds from stock options exercised |
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Repurchases of common stock |
(
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(
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Net cash provided by (used in) financing activities |
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(
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Effect of exchange rate changes on cash and cash equivalents |
(
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Net change in cash and cash equivalents |
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(
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ |
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$ |
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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 November 27, 2021 as filed with the Securities and Exchange Commission.
New Accounting Pronouncements
In November 2021, the FASB issued ASU No. 2021 - 10, Government Assistance (Topic 832 ): Disclosures by Business Entities about Government Assistance . This ASU requires business entities to make annual disclosures about transactions with a government they account for by analogizing to a grant or contribution accounting model under ASC 958 - 605. Our effective date for adoption of this ASU is our fiscal year beginning December 4, 2022 with early adoption permitted. We have evaluated the effect that this guidance will have on our Consolidated Financial Statements and determined it will not have a material impact.
Note 2: Acquisitions
Apollo
On
January 26, 2022,
we acquired Apollo Chemicals Limited, Apollo Roofing Solutions Limited and Apollo Construction Solutions Limited (collectively, "Apollo") for a base purchase price of GBP
The following table summarizes the preliminary fair value measurement of the assets acquired and liabilities assumed as of the date of acquisition:
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February 26, 2022 |
Adjustments |
May 28, 2022 |
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Cash |
$ |
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- | $ |
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Current assets |
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- |
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Property, plant and equipment |
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- |
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Goodwill |
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Other intangibles |
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Customer relationships |
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(
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Trademarks/trade names |
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Technology |
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(
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Current liabilities |
(
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(
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(
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Other liabilities |
(
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(
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Total |
$ |
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$ | - | $ |
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The expected useful lives of the acquired intangible assets are
Based on the fair value measurement of the assets acquired and liabilities assumed, we allocated $
Fourny NV
On
January 11, 2022,
we acquired Fourny NV ("Fourny") for a base purchase price of EUR
Tissue Seal, LLC
On
November 30, 2021,
we acquired certain assets of Tissue Seal, LLC ("TissueSeal") for a base purchase price of $
STR Holdings, Inc.
On
January 13, 2021,
we acquired certain assets of STR Holding, Inc. ("STR") for a base purchase price of $
D.H.M. Adhesives, Inc .
On
February 3, 2020,
we acquired certain assets of D.H.M. Adhesives, Inc. (“D.H.M.”) for approximately $
Note 3: Restructuring Actions
The Company has approved restructuring plans consisting of consolidation plans, organizational changes and other actions related to the reorganization of our business into
|
Three Months Ended |
Six Months Ended |
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May 28, 2022 |
May 29, 2021 |
May 28, 2022 |
May 29, 2021 |
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Cost of sales |
$ |
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$ |
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$ |
(
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) | $ |
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Selling, general and administrative |
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(
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(
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) |
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| $ |
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$ |
(
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) | $ |
(
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) | $ |
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The restructuring charges are all recorded in Corporate Unallocated for segment reporting.
A summary of the restructuring liability is presented below:
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Employee-Related |
Other |
Total |
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Balance at November 28, 2020 |
$ |
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$ |
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$ |
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Expenses incurred |
(
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) |
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Non-cash charges |
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(
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) |
(
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) | |||||||
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Cash payments |
(
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) |
(
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) |
(
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) | ||||||
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Foreign currency translation |
(
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) |
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(
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) | |||||||
|
Balance at November 27, 2021 |
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Expenses incurred |
(
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) |
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(
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) | |||||||
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Cash payments |
(
|
) |
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(
|
) | |||||||
|
Foreign currency translation |
(
|
) |
|
(
|
) | |||||||
|
Balance at May 28, 2022 |
$ |
|
$ |
|
$ |
|
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Non-cash charges include accelerated depreciation resulting from the cessation of use of certain long-lived assets. Restructuring liabilities have been classified as a component of other accrued expenses in the Consolidated Balance Sheets.
Note 4: Inventories
The composition of inventories is as follows:
|
May 28, |
November 27, |
|||||||
|
2022 |
2021 |
|||||||
|
Raw materials |
$ |
|
$ |
|
||||
|
Finished goods |
|
|
||||||
|
Total inventories |
$ |
|
$ |
|
||||
Note 5: Goodwill and Other Intangible Assets
The goodwill activity by reportable segment for the six months ended May 28, 2022 is presented below:
|
Hygiene, Health |
||||||||||||||||
|
and Consumable |
Engineering |
Construction |
||||||||||||||
|
Adhesives |
Adhesives |
Adhesives |
Total |
|||||||||||||
|
Balance at November 27, 2021 |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
TissueSeal acquisition |
|
|
|
|
||||||||||||
|
Fourny acquisition |
|
|
|
|
||||||||||||
|
Apollo acquisition |
|
|
|
|
||||||||||||
|
Foreign currency translation effect |
(
|
) |
(
|
) |
|
(
|
) | |||||||||
|
Balance at May 28, 2022 |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
Balances of amortizable identifiable intangible assets, excluding goodwill and other non-amortizable intangible assets, are as follows:
|
May 28, 2022 |
||||||||||||||||||||
|
Purchased |
||||||||||||||||||||
|
Technology |
Customer |
|||||||||||||||||||
|
Amortizable Intangible Assets |
and Patents |
Relationships |
Trade Names |
Other |
Total |
|||||||||||||||
|
Original cost |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
|
Accumulated amortization |
(
|
) |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||||
|
Net identifiable intangibles |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
|
November 27, 2021 |
||||||||||||||||||||
|
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 |
2022 |
2023 |
2024 |
2025 |
2026 |
Thereafter |
||||||||||||||||||
|
Amortization expense |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
Non-amortizable intangible assets as of
May 28, 2022
and
November 27, 2021
are $
Note 6: Components of Net Periodic Benefit related to Pension and Other Postretirement Benefit Plans
|
Three Months Ended May 28, 2022 and May 29, 2021 |
||||||||||||||||||||||||
|
Other |
||||||||||||||||||||||||
|
Pension Benefits |
Postretirement |
|||||||||||||||||||||||
|
U.S. Plans |
Non-U.S. Plans |
Benefits |
||||||||||||||||||||||
|
Net periodic cost (benefit): |
2022 |
2021 |
2022 |
2021 |
2022 |
2021 |
||||||||||||||||||
|
Service cost |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
|
Interest cost |
|
|
|
|
|
|
||||||||||||||||||
|
Expected return on assets |
(
|
) |
(
|
) |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||||||
|
Amortization: |
||||||||||||||||||||||||
|
Prior service cost (benefit) |
(
|
) |
(
|
) |
|
|
|
|
||||||||||||||||
|
Actuarial loss |
|
|
|
|
(
|
) |
|
|||||||||||||||||
|
Settlement charge |
|
|
|
|
|
|
||||||||||||||||||
|
Net periodic benefit |
$ |
(
|
) | $ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | |||||||
|
Six Months Ended May 28, 2022 and May 29, 2021 |
||||||||||||||||||||||||
|
Other |
||||||||||||||||||||||||
|
Pension Benefits |
Postretirement |
|||||||||||||||||||||||
|
U.S. Plans |
Non-U.S. Plans |
Benefits |
||||||||||||||||||||||
|
Net periodic cost (benefit): |
2022 |
2021 |
2022 |
2021 |
2022 |
2021 |
||||||||||||||||||
|
Service cost |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
|
Interest cost |
|
|
|
|
|
|
||||||||||||||||||
|
Expected return on assets |
(
|
) |
(
|
) |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||||||
|
Amortization: |
||||||||||||||||||||||||
|
Prior service cost (benefit) |
(
|
) |
(
|
) |
|
|
|
|
||||||||||||||||
|
Actuarial loss |
|
|
|
|
(
|
) |
|
|||||||||||||||||
|
Settlement charge |
|
|
|
|
|
|
||||||||||||||||||
|
Net periodic benefit |
$ |
(
|
) | $ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | |||||||
Service cost is included with employee compensation cost in cost of sales and selling, general and administrative expenses in the Consolidated Statements of Income. The components of our net periodic defined benefit pension and postretirement benefit costs other than service cost are presented in other income, net in the Consolidated Statements of Income.
In the
second
quarter of
2022,
we recognized a non-cash settlement charge of $
Note 7: Accumulated Other Comprehensive Income (Loss)
The following table provides details of total comprehensive income (loss):
|
Three Months Ended May 28, 2022 |
Three Months Ended May 29, 2021 |
|||||||||||||||||||||||||||||||
|
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 translation adjustment¹ |
$ |
(
|
) | $ |
|
(
|
) |
(
|
) | $ |
|
$ |
|
|
|
|||||||||||||||||
|
Defined benefit pension plans adjustment² |
|
(
|
) |
|
- |
|
(
|
) |
|
- | ||||||||||||||||||||||
|
Interest rate swap³ |
|
(
|
) |
|
- |
|
(
|
) |
|
- | ||||||||||||||||||||||
|
Cross currency swaps³ |
(
|
) |
|
(
|
) | - |
(
|
) |
|
(
|
) | - | ||||||||||||||||||||
|
Other comprehensive income (loss) |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
|
$ |
(
|
) | $ |
|
$ |
|
|||||||||||
|
Comprehensive income (loss) |
$ |
(
|
) | $ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
|
Six Months Ended May 28, 2022 |
Six Months Ended May 29, 2021 |
|||||||||||||||||||||||||||||||
|
Non- |
Non- |
|||||||||||||||||||||||||||||||
|
controlling |
controlling |
|||||||||||||||||||||||||||||||
|
H.B. Fuller Stockholders |
Interest |
H.B. Fuller Stockholders |
Interest |
|||||||||||||||||||||||||||||
|
Pretax |
Tax |
Net |
Net |
Pretax |
Tax |
Net |
Net |
|||||||||||||||||||||||||
|
Net income attributable to H.B. Fuller and non-controlling interest |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||
|
Foreign currency translation adjustment¹ |
$ |
(
|
) | $ |
|
(
|
) |
(
|
) | $ |
|
$ |
|
|
|
|||||||||||||||||
|
Defined benefit pension plans adjustment² |
|
(
|
) |
|
- |
|
(
|
) |
|
- | ||||||||||||||||||||||
|
Interest rate swap³ |
|
(
|
) |
|
- |
|
(
|
) |
|
- | ||||||||||||||||||||||
|
Cross currency swaps³ |
(
|
) |
|
(
|
) | - |
(
|
) |
|
(
|
) | - | ||||||||||||||||||||
|
Other comprehensive income (loss) |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) |
(
|
) | $ |
|
$ |
(
|
) |
|
|
||||||||||||||
|
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:
|
May 28, 2022 |
||||||||||||
|
Non- |
||||||||||||
|
H.B. Fuller |
controlling |
|||||||||||
|
Total |
Stockholders |
Interest |
||||||||||
|
Foreign currency translation adjustment |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | |||
|
Interest rate swap, net of taxes of $112 |
(
|
) |
(
|
) |
|
|||||||
|
Cash flow hedges, net of taxes of ($3) |
|
|
|
|||||||||
|
Defined benefit pension plans adjustment, net of taxes of $42,292 |
(
|
) |
(
|
) |
|
|||||||
|
Reclassification of AOCI tax effects |
(
|
) |
(
|
) |
|
|||||||
|
Accumulated other comprehensive loss |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | |||
|
November 27, 2021 |
||||||||||||
|
Non- |
||||||||||||
|
H.B. Fuller |
controlling |
|||||||||||
|
Total |
Stockholders |
Interest |
||||||||||
|
Foreign currency translation adjustment |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | |||
|
Interest rate swap, net of taxes of $3,224 |
(
|
) |
(
|
) |
|
|||||||
|
Cash flow hedges, net of taxes of ($53) |
|
|
|
|||||||||
|
Defined benefit pension plans adjustment, net of taxes of $63,925 |
(
|
) |
(
|
) |
|
|||||||
|
Reclassification of AOCI tax effects |
(
|
) |
(
|
) |
|
|||||||
|
Accumulated other comprehensive loss |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | |||
Note 8: Income Taxes
Income tax expense for the
three
and
six
months ended
May 28, 2022
includes $
Income tax expense for the
three
and
six
months ended
May 29, 2021
includes $
As of
May 28, 2022
, we had a liability of $
Note 9: 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 |
Six Months Ended |
|||||||||||||||
|
May 28, |
May 29, |
May 28, |
May 29, |
|||||||||||||
|
(Shares in thousands) |
2022 |
2021 |
2022 |
2021 |
||||||||||||
|
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 10: Financial Instruments
Overview
As a result of being a global enterprise, 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 and interest rate swaps 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
As of
May 28, 2022
, we had cash flow hedges of
cross-currency swap agreements effective
October 20, 2017
to convert a notional amount of $
The following table summarizes the cross-currency swaps outstanding as of May 28, 2022 :
|
Fiscal Year of |
Notional |
|||||||||||
|
Expiration |
Interest Rate |
Value |
Fair Value |
|||||||||
|
Pay EUR |
|
|
$ |
|
$ |
|
||||||
|
Receive USD |
|
|||||||||||
On
February 27, 2018,
we entered into an interest rate swap agreement to convert $
On
April 23, 2018,
we amended our Term Loan B Credit Agreement to reduce the interest rate from LIBOR plus
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 |
Six Months Ended |
|||||||||||||||
|
May 28, 2022 |
May 29, 2021 |
May 28, 2022 |
May 29, 2021 |
|||||||||||||
|
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 $
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. See Note 11 for fair value amounts of these derivative instruments.
As of May 28, 2022 , we had forward foreign currency contracts maturing between May 31, 2022 and December 13, 2022. The ma rk-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 recognized in other income, net related to derivative instruments
not
designated as hedging instruments for the
six
months ended
May 28, 2022
and
May 29, 2021
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 May 28, 2022 , there were no significant concentrations of credit risk.
Note 11: 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 May 28, 2022 and November 27, 2021 , and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
|
May 28, |
Fair Value Measurements Using: |
|||||||||||||||
|
Description |
2022 |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
|
Assets: |
||||||||||||||||
|
Marketable securities |
$ |
|
$ |
|
$ | - | $ | - | ||||||||
|
Foreign exchange contract assets |
|
- |
|
- | ||||||||||||
|
Cross-currency cash flow hedge assets |
|
- |
|
- | ||||||||||||
|
Liabilities: |
||||||||||||||||
|
Foreign exchange contract liabilities |
$ |
|
$ | - | $ |
|
$ | - | ||||||||
|
Interest rate swaps, cash flow hedge liabilities |
|
- |
|
- | ||||||||||||
|
Interest rate swaps, fair value hedge liabilities |
|
- |
|
- | ||||||||||||
|
Contingent consideration liability |
|
- | - |
|
||||||||||||
|
November 27, |
Fair Value Measurements Using: |
|||||||||||||||
|
Description |
2021 |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
|
Assets: |
||||||||||||||||
|
Marketable securities |
$ |
|
$ |
|
$ | - | $ | - | ||||||||
|
Foreign exchange contract assets |
|
- |
|
- | ||||||||||||
|
Cross-currency cash flow hedge assets |
|
- |
|
- | ||||||||||||
|
Liabilities: |
||||||||||||||||
|
Foreign exchange contract liabilities |
$ |
|
$ | - | $ |
|
$ | - | ||||||||
|
Interest rate swaps, cash flow hedge liabilities |
|
- |
|
|||||||||||||
|
Interest rate swaps, fair value hedge liabilities |
|
- |
|
- | ||||||||||||
|
Contingent consideration liability |
|
- | - |
|
||||||||||||
Adjustments to the fair value of contingent consideration are recorded to selling, general and administrative expenses in the Statement of Income.
The valuation of our contingent consideration liability related to the acquisition of TissueSeal resulted in a fair value of $
|
Amounts |
||||
|
Balance at November 27, 2021 |
$ |
|
||
|
Acquisition |
|
|||
|
Payment of contingent consideration |
(
|
) | ||
|
Mark to market adjustment |
|
|||
|
Balance at May 28, 2022 |
$ |
|
||
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 12: Commitments and Contingencies
Environmental Matters
From time to time, we become aware of compliance matters relating to, or receive notices from, federal, state or local entities regarding possible or alleged violations of environmental, health or safety laws and regulations. We review the circumstances of each individual site, considering the number of parties involved, the level of potential liability or our contribution relative to the other parties, the nature and magnitude of the hazardous substances involved, the method and extent of remediation, the estimated legal and consulting expense with respect to each site and the time period over which any costs would likely be incurred. Also, from time to time, we are 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. We are also 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 $
Currently, we are involved in various environmental investigations, clean up activities and administrative proceedings and lawsuits. In particular, we are currently deemed a PRP in conjunction with numerous other parties, in a number of government enforcement actions 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. In addition, we are engaged in environmental remediation and monitoring efforts at a number of current and former operating facilities. 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 defense costs, 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:
|
Six Months Ended |
3 Years Ended |
|||||||||||
|
May 28, 2022 |
May 29, 2021 |
November 27, 2021 |
||||||||||
|
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 13: 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 |
||||||||||||||||
|
May 28, 2022 |
May 29, 2021 |
|||||||||||||||
|
Net |
Operating |
Net |
Operating |
|||||||||||||
|
Revenue |
Income (Loss) |
Revenue |
Income (Loss) |
|||||||||||||
|
Hygiene, Health and Consumable Adhesives |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Engineering Adhesives |
|
|
|
|
||||||||||||
|
Construction Adhesives |
|
|
|
|
||||||||||||
|
Total segment |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Corporate Unallocated 1 |
|
(
|
) |
|
(
|
) | ||||||||||
|
Total |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Six Months Ended |
||||||||||||||||
|
May 28, 2022 |
May 29, 2021 |
|||||||||||||||
|
Net |
Operating |
Net |
Operating |
|||||||||||||
|
Revenue |
Income (Loss) |
Revenue |
Income (Loss) |
|||||||||||||
|
Hygiene, Health and Consumable Adhesives |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Engineering Adhesives |
|
|
|
|
||||||||||||
|
Construction Adhesives |
|
|
|
|
||||||||||||
|
Total segment |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Corporate Unallocated |
|
(
|
) |
|
(
|
) | ||||||||||
|
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 |
Six Months Ended |
|||||||||||||||
|
May 28, |
May 29, |
May 28, |
May 29, |
|||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
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 May 28, 2022 |
||||||||||||||||
|
Hygiene, Health |
||||||||||||||||
|
and Consumable |
Engineering |
Construction |
||||||||||||||
|
Adhesives |
Adhesives |
Adhesives |
Total |
|||||||||||||
|
Americas |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
EIMEA |
|
|
|
|
||||||||||||
|
Asia Pacific |
|
|
|
|
||||||||||||
|
Total |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Three Months Ended May 29, 2021 |
||||||||||||||||
|
Hygiene, Health |
||||||||||||||||
|
and Consumable |
Engineering |
Construction |
||||||||||||||
|
Adhesives |
Adhesives |
Adhesives |
Total |
|||||||||||||
|
Americas |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
EIMEA |
|
|
|
|
||||||||||||
|
Asia Pacific |
|
|
|
|
||||||||||||
|
Total |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Six Months Ended May 28, 2022 |
||||||||||||||||
|
Hygiene, Health |
||||||||||||||||
|
and Consumable |
Engineering |
Construction |
||||||||||||||
|
Adhesives |
Adhesives |
Adhesives |
Total |
|||||||||||||
|
Americas |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
EIMEA |
|
|
|
|
||||||||||||
|
Asia Pacific |
|
|
|
|
||||||||||||
|
Total |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Six Months Ended May 29, 2021 |
||||||||||||||||
|
Hygiene, Health |
||||||||||||||||
|
and Consumable |
Engineering |
Construction |
||||||||||||||
|
Adhesives |
Adhesives |
Adhesives |
Total |
|||||||||||||
|
Americas |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
EIMEA |
|
|
|
|
||||||||||||
|
Asia Pacific |
|
|
|
|
||||||||||||
|
Total |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended November 27, 2021 for important background information related to our business.
Net revenue in the second quarter of 2022 increased 20.0 percent from the second quarter of 2021. Net revenue increased 18.5 percent due to price, 3.4 percent due to sales volume and 2.0 percent due to the acquisition of Fourny and Apollo. Negative currency effects of 3.9 percent compared to the second quarter of 2021 were primarily driven by a weaker Euro, Turkish lira and Argentinian peso, partially offset by a stronger Brazilian real and Chinese renminbi compared to the U.S. dollar . Gross profit margin decreased 80 basis points primarily due to higher raw material costs and higher net revenue.
Net revenue in the first six months of 2022 increased 19.1 percent from the first six months of 2021. Net revenue increased 16.8 percent due to price, 4.6 percent due to sales volume and 1.5 percent due to the acquisition of Fourny and Apollo. Negative currency effects of 3.8 percent compared to the first six months of 2021 were primarily driven by a weaker Euro, Turkish lira and Argentinian peso, partially offset by a stronger Chinese renminbi and Brazilian real compared to the U.S. dollar . Gross profit margin decreased 120 basis points primarily due to higher raw material costs and higher net revenue .
Net income attributable to H.B. Fuller in the second quarter of 2022 was $47.2 million compared to $49.1 million in the second quarter of 2021. On a diluted earnings per share basis, the second quarter of 2022 was $0.86 per share compared to $0.90 per share for the second quarter of 2021.
Net income attributable to H.B. Fuller in the first six months of 2022 was $85.5 million compared to $78.9 million in the first six months of 2021. On a diluted earnings per share basis, the first six months of 2022 was $1.55 per share compared to $1.47 per share for the first six months of 2021.
Market Conditions
On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus ("COVID-19") a pandemic. Throughout fiscal year 2021, the COVID-19 pandemic had a significant disruptive impact on global economies, supply chains and industrial production. Although government restrictions have been relaxed, it is currently not possible to estimate additional impacts this outbreak may have on our business. We continue to effectively manage our global operations focusing on the health and safety of our employees and ensuring business continuity across our supplier, manufacturing and distribution networks.
See "Risk Factors" in Item 1A in our Annual Report on Form 10-K for the year ended November 27, 2021 as filed with the Securities and Exchange Commission for further information of the effects of the COVID-19 pandemic on our business including raw material cost and availability.
Restructuring Plan
During the fourth quarter of 2019, we approved a restructuring plan related to organizational changes and other actions to optimize operations in connection with the realignment of the Company into three global business units (“2020 Restructuring Plan”). We have incurred costs of $19.7 million under this plan as of May 28, 2022. We expect to incur total costs of approxim ately $20.0 million ($15.8 million after-tax), which includes cash expenditures for severance and related employee costs globally, costs related to streamlining of processes, and other restructuring-related costs. The 2020 Restructuring Plan was implemented in the fourth quarter of 2019 and is currently expected to be completed in fiscal 2022.
Results of Operations
Net revenue:
|
Three Months Ended |
Six Months Ended |
|||||||||||||||||||||||
|
May 28, |
May 29, |
2022 vs |
May 28, |
May 29, |
2022 vs |
|||||||||||||||||||
|
($ in millions) |
2022 |
2021 |
2021 |
2022 |
2021 |
2021 |
||||||||||||||||||
|
Net revenue |
$ | 993.3 | $ | 827.9 | 20.0 | % | $ | 1,849.7 | $ | 1,553.8 | 19.1 | % | ||||||||||||
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 second quarter and first six months of 2022 compared to the same periods in 2021:
|
Three Months Ended |
Six Months Ended |
|||||||
|
May 28, 2022 vs. May 29, 2021 |
May 28, 2022 vs. May 29, 2021 |
|||||||
|
Organic growth |
21.9 | % | 21.4 | % | ||||
|
M&A |
2.0 | % | 1.5 | % | ||||
|
Currency |
(3.9 | )% |
(3.8 |
)% | ||||
|
Total |
20.0 | % |
19.1 |
% | ||||
Organic growth was 21.9 percent in the second quarter of 2022 compared to the second quarter of 2021 driven by a 24.5 percent increase in Hygiene, Health and Consumable Adhesives, a 21.8 percent increase in Engineering Adhesives and a 14.3 percent increase in Construction Adhesives . The increase is predominately driven by an increase in product pricing and sales volume. The 2.0 percent increase from M&A is due to the acquisition of Fourny and Apollo. The negative 3.9 percent currency impact was primarily driven by a weaker Euro, Turkish lira and Argentinian peso, partially offset by a stronger Brazilian real and Chinese renminbi compared to the U.S. dollar.
Organic growth was 21.4 percent in the first six months of 2022 compared to the first six months of 2021 driven by a 23.8 percent increase in Construction Adhesives, a 22.7 percent increase in Hygiene, Health and Consumable Adhesives and a 19.3 percent increase in Engineering Adhesives. The increase is predominately driven by an increase in product pricing and sales volume. The 1.5 percent increase from M&A is due to the acquisition of Fourny and Apollo. The negative 3.8 percent currency impact was primarily driven by a weaker Euro, Turkish lira and Argentinian peso, partially offset by a stronger Chinese renminbi and Brazilian real compared to the U.S. dollar.
Cost of sales:
|
Three Months Ended |
Six Months Ended |
|||||||||||||||||||||||
|
May 28, |
May 29, |
2022 vs |
May 28, |
May 29, |
2022 vs |
|||||||||||||||||||
|
($ in millions) |
2022 |
2021 |
2021 |
2022 |
2021 |
2021 |
||||||||||||||||||
|
Raw materials |
$ | 575.4 | $ | 454.9 | 26.5 | % | $ | 1,066.4 | $ | 839.9 | 27.0 | % | ||||||||||||
|
Other manufacturing costs |
164.3 | 155.4 | 5.7 | % | 316.9 | 304.0 | 4.2 | % | ||||||||||||||||
|
Cost of sales |
$ | 739.7 | $ | 610.3 | 21.2 | % | $ | 1,383.3 | $ | 1,143.9 | 20.9 | % | ||||||||||||
|
Percent of net revenue |
74.5 | % | 73.7 | % | 74.8 | % | 73.6 | % | ||||||||||||||||
Cost of sales in the second quarter of 2022 compared to the second quarter of 2021 increased 80 basis points as a percentage of net revenue. Raw material cost as a percentage of net revenue increased 300 basis points in the second quarter of 2022 compared to the second quarter of 2021 due t o higher raw material costs . Other manufacturing costs as a percentage of revenue decreased 220 basis points in the second quarter of 2022 compared to the second quarter of 2021 due to higher net revenue.
Cost of sales in the first six months of 2022 compared to the first six months of 2021 increased 120 basis points as a percentage of net revenue. Raw material cost as a percentage of net revenue increased 360 basis points in the first six months of 2022 compared to the first six months of 2021 due to higher raw material costs. Oth er manufacturing costs as a percentage of revenue decreased 240 basis points in the first six months of 2022 compared to the first six months of 2021 due to higher net revenue.
Gross profit:
|
Three Months Ended |
Six Months Ended |
|||||||||||||||||||||||
|
May 28, |
May 29, |
2022 vs |
May 28, |
May 29, |
2022 vs |
|||||||||||||||||||
|
($ in millions) |
2022 |
2021 |
2021 |
2022 |
2021 |
2021 |
||||||||||||||||||
|
Gross profit |
$ | 253.5 | $ | 217.6 | 16.5 | % | $ | 466.4 | $ | 409.9 | 13.8 | % | ||||||||||||
|
Percent of net revenue |
25.5 | % | 26.3 | % | 25.2 | % | 26.4 | % | ||||||||||||||||
Gross profit in the second quarter of 2022 increased 16.5 percent and gross profit margin decreased 80 basis points compared to the second quarter of 2021. The decrease in gross profit margin was primarily d ue to higher raw material costs and higher net revenue.
Gross pr ofit in the first six months of 2022 increased 13.8 percent and gross profit margin decreased 120 basis points compared to the first six months of 2021 . The decrease in gross profit margin was primarily due to higher raw material costs and higher net revenue.
Selling, general and administrative (SG&A) expenses:
|
Three Months Ended |
Six Months Ended |
|||||||||||||||||||||||
|
May 28, |
May 29, |
2022 vs |
May 28, |
May 29, |
2022 vs |
|||||||||||||||||||
|
($ in millions) |
2022 |
2021 |
2021 |
2022 |
2021 |
2021 |
||||||||||||||||||
|
SG&A |
$ | 166.0 | $ | 148.4 | 11.9 | % | $ | 321.9 | $ | 292.4 | 10.1 | % | ||||||||||||
|
Percent of net revenue |
16.7 | % | 17.9 | % | 17.4 | % | 18.8 | % | ||||||||||||||||
SG&A expenses for the second quarter of 2022 increased $17.6 million, or 11.9 percent, compared to the second quarter of 2021. The increase is primarily du e to higher compensation and acquisition project costs and the impact of the Fourny and Apollo acquisitions.
SG&A expenses for the first six months of 2022 increased $29.5 million, or 10.1 percent, compared to the first six months of 2021. The increase is primarily due to higher compensation and acquisition project costs and the impact of the Fourny and Apollo acquisitions.
Other income, net:
|
Three Months Ended |
Six Months Ended |
|||||||||||||||||||||||
|
May 28, |
May 29, |
2022 vs |
May 28, |
May 29, |
2022 vs |
|||||||||||||||||||
|
($ in millions) |
2022 |
2021 |
2021 |
2022 |
2021 |
2021 |
||||||||||||||||||
|
Other income, net |
$ | 0.0 | $ | 11.9 | (100.0 | )% | $ | 6.1 | $ | 19.7 | (69.0 | )% | ||||||||||||
Other income, net in the second quarter of 2022 included $4.1 million of net defined benefit pension benefits and $1.4 million of other income, offset by $5.5 million of currency transaction losses. The $4.1 million of net defined benefit pension benefits included a $3.3 million settlement loss related to the termination of our Canadian defined benefit pension plan. Other income, net in the second quarter of 2021 included $8.0 million of net defined benefit pension benefits and $5.2 million of other income, offset by $1.3 million of currency transaction losses. Other income in the second quarter of 2021 includes gains related to a legal entity merger and a transactional tax legal settlement in Brazil.
Other income, net in the first six months of 2022 included $11.5 million of net defined benefit pension benefits and $1.6 million of other income, partially offset by $7.0 million of currency transaction losses. The $11.5 million of net defined benefit pension benefits included a $3.3 million settlement loss related to the termination of our Canadian defined benefit pension plan. Other income, net in the first six months of 2021 included $15.9 million of net defined benefit pension benefits and $6.9 million of other income, offset by $3.1 million of currency transaction losses.
Interest expense:
|
Three Months Ended |
Six Months Ended |
|||||||||||||||||||||||
|
May 28, |
May 29, |
2022 vs |
May 28, |
May 29, |
2022 vs |
|||||||||||||||||||
|
($ in millions) |
2022 |
2021 |
2021 |
2022 |
2021 |
2021 |
||||||||||||||||||
|
Interest expense |
$ | 19.8 | $ | 19.9 | (0.5 | )% | $ | 38.0 | $ | 40.3 | (5.7 | )% | ||||||||||||
Interest expense in the second quarter of 2022 was $19.8 million compared to $19.9 million in the second quarter of 2021 . Interest expense in the second quarter of 2022 compared to the second quarter of 2021 was lower due to lower interest rates partially offset by higher debt balances.
Interest expense in the first six months of 2022 was $38.0 million compared to $40.3 million in the first six months of 2021 . Interest expense in the first six months of 2022 compared to the first six months of 2021 was lower due to lower interest rates partially offset by higher debt balances.
Interest income:
|
Three Months Ended |
Six Months Ended |
|||||||||||||||||||||||
|
May 28, |
May 29, |
2022 vs |
May 28, |
May 29, |
2022 vs |
|||||||||||||||||||
|
($ in millions) |
2022 |
2021 |
2021 |
2022 |
2021 |
2021 |
||||||||||||||||||
|
Interest income |
$ | 2.1 | $ | 2.5 | (16.0 | )% | $ | 4.0 | $ | 5.2 | (23.1 | )% | ||||||||||||
Interest income in the second quarter of 2022 and 2021 was $2.1 million and $2.5 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income.
Interest income in the first six months of 2022 and 2021 was $4.0 million and $5.2 million, respectively, consisting primarily of interest on cross-currency swap activity and other miscellaneous interest income.
Income taxes:
|
Three Months Ended |
Six Months Ended |
|||||||||||||||||||||||
|
May 28, |
May 29, |
2022 vs |
May 28, |
May 29, |
2022 vs |
|||||||||||||||||||
|
($ in millions) |
2022 |
2021 |
2021 |
2022 |
2021 |
2021 |
||||||||||||||||||
|
Income taxes |
$ | 23.6 | $ | 16.7 | 41.3 | % | $ | 33.8 | $ | 27.3 | 23.8 | % | ||||||||||||
|
Effective tax rate |
33.9 | % | 26.2 | % | 29.0 | % | 26.7 | % | ||||||||||||||||
Income tax expense of $23.6 million in the second quarter of 2022 includes $4.1 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 27.9 percent. The discrete tax expense relates to impacts of the revaluation of cross-currency swap agreements due to depreciation of the Euro versus the U.S. Dollar and other various foreign tax matters. Income tax expense of $16.7 million in the second quarter of 2021 includes $0.6 million of discrete tax benefit. Excluding the discrete tax benefit, the overall effective tax rate was 27.1 percent. The discrete tax benefit relates to various U.S. and foreign tax matters.
Income tax expense of $33.8 million in the first six months of 2022 includes $1.2 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 27.9 percent. The discrete tax expense relates to the revaluation of cross-currency swap agreements due to depreciation of the Euro versus the U.S. Dollar, as well as various foreign tax matters offset by the tax effect of legal entity mergers. Income tax expense of $27.3 million in the first six months of 2021 includes $0.6 million of discrete tax benefit. Excluding the discrete tax benefit, the overall effective tax rate w as 27.2 percent. The discrete tax benefit relates to various U.S. and foreign tax matters.
Income from equity method investments:
|
Three Months Ended |
Six Months Ended |
|||||||||||||||||||||||
|
May 28, |
May 29, |
2022 vs |
May 28, |
May 29, |
2022 vs |
|||||||||||||||||||
|
($ in millions) |
2022 |
2021 |
2021 |
2022 |
2021 |
2021 |
||||||||||||||||||
|
Income from equity method investments |
$ | 1.1 | $ | 2.2 | (50.0 | )% | $ | 2.6 | $ | 4.1 | (36.6 | )% | ||||||||||||
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 second quarter and first six months of 2022 compared to the same period of 2021 relates to lower net income in our joint venture.
Net income attributable to H.B. Fuller:
|
Three Months Ended |
Six Months Ended |
|||||||||||||||||||||||
|
May 28, |
May 29, |
2022 vs |
May 28, |
May 29, |
2022 vs |
|||||||||||||||||||
|
($ in millions) |
2022 |
2021 |
2021 |
2022 |
2021 |
2021 |
||||||||||||||||||
|
Net income attributable to H.B. Fuller |
$ | 47.2 | $ | 49.1 | (3.9 | )% | $ | 85.5 | $ | 78.9 | 8.4 | % | ||||||||||||
|
Percent of net revenue |
4.8 | % | 5.9 | % | 4.6 | % | 5.1 | % | ||||||||||||||||
The net income attributable to H.B. Fuller for the second quarter of 2022 was $47.2 million compared to $49.1 million for the second quarter of 2021. The diluted earnings per share for the second quarter of 2022 was $0.86 per share as compared to $0.90 per share for the second quarter of 2021.
The net income attributable to H.B. Fuller for the first six months of 2022 was $85.5 million compared to $78.9 million for the first six months of 2021. The diluted earnings per share for the first six months of 2022 was $1.55 per share as compared to $1.47 per share for the first six months of 2021.
Operating Segment Results
We have three reportable segments: Hygiene, Health and Consumable Adhesives, Engineering Adhesives and Construction Adhesives. Operating results of each of these segments are regularly reviewed by our chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance.
The tables below provide certain information regarding the net revenue and operating income of each of our operating segments.
Corporate Unallocated amounts include business acquisition and integration costs, organizational restructuring charges and project costs associated with our implementation of SAP ONE.
Net Revenue by Segment:
|
Three Months Ended |
Six Months Ended |
|||||||||||||||||||||||||||||||
|
May 28, 2022 |
May 29, 2021 |
May 28, 2022 |
May 29, 2021 |
|||||||||||||||||||||||||||||
|
Net |
% of |
Net |
% of |
Net |
% of |
Net |
% of |
|||||||||||||||||||||||||
|
($ in millions) |
Revenue |
Total |
Revenue |
Total |
Revenue |
Total |
Revenue |
Total |
||||||||||||||||||||||||
|
Hygiene, Health and Consumable Adhesives |
$ | 437.9 | 44 | % | $ | 364.8 | 44 | % | $ | 827.4 | 45 | % | $ | 700.5 | 45 | % | ||||||||||||||||
|
Engineering Adhesives |
405.4 | 41 | % | 345.4 | 42 | % | 759.3 | 41 | % | 658.0 | 42 | % | ||||||||||||||||||||
|
Construction Adhesives |
150.0 | 15 | % | 117.7 | 14 | % | 263.0 | 14 | % | 195.3 | 13 | % | ||||||||||||||||||||
|
Segment total |
$ | 993.3 | 100 | % | $ | 827.9 | 100 | % | $ | 1,849.7 | 100 | % | $ | 1,553.8 | 100 | % | ||||||||||||||||
|
Corporate Unallocated |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Total |
$ | 993.3 | 100 | % | $ | 827.9 | 100 | % | $ | 1,849.7 | 100 | % | $ | 1,553.8 | 100 | % | ||||||||||||||||
Segment Operating Income (Loss):
|
Three Months Ended |
Six Months Ended |
|||||||||||||||||||||||||||||||
|
May 28, 2022 |
May 29, 2021 |
May 28, 2022 |
May 29, 2021 |
|||||||||||||||||||||||||||||
|
Segment |
Segment |
Segment |
Segment |
|||||||||||||||||||||||||||||
|
Operating |
Operating |
Operating |
Operating |
|||||||||||||||||||||||||||||
|
Income |
% of |
Income |
% of |
Income |
% of |
Income |
% of |
|||||||||||||||||||||||||
|
($ in millions) |
(Loss) |
Total |
(Loss) |
Total |
(Loss) |
Total |
(Loss) |
Total |
||||||||||||||||||||||||
|
Hygiene, Health and Consumable Adhesives |
$ | 43.3 | 49 | % | $ | 38.9 | 56 | % | $ | 75.5 | 52 | % | $ | 68.9 | 59 | % | ||||||||||||||||
|
Engineering Adhesives |
42.9 | 49 | % | 32.1 | 47 | % | 75.5 | 52 | % | 62.5 | 53 | % | ||||||||||||||||||||
|
Construction Adhesives |
11.3 | 13 | % | 6.3 | 9 | % | 15.6 | 11 | % | 1.6 | 1 | % | ||||||||||||||||||||
|
Segment total |
$ | 97.5 | 111 | % | $ | 77.3 | 112 | % | $ | 166.6 | 115 | % | $ | 133.0 | 113 | % | ||||||||||||||||
|
Corporate Unallocated |
(10.0 | ) | (11 | )% | (8.2 | ) | (12 | )% | (22.1 | ) | (15 | )% | (15.5 | ) | (13 | )% | ||||||||||||||||
|
Total |
$ | 87.5 | 100 | % | $ | 69.1 | 100 | % | $ | 144.5 | 100 | % | $ | 117.5 | 100 | % | ||||||||||||||||
Hygiene, Health and Consumable Adhesives
|
Three Months Ended |
Six Months Ended |
|||||||||||||||||||||||
|
May 28, |
May 29, |
2022 vs |
May 28, |
May 29, |
2022 vs |
|||||||||||||||||||
|
($ in millions) |
2022 |
2021 |
2021 |
2022 |
2021 |
2021 |
||||||||||||||||||
|
Net revenue |
$ | 437.9 | $ | 364.8 | 20.0 | % | $ | 827.4 | $ | 700.5 | 18.1 | % | ||||||||||||
|
Segment operating income |
$ | 43.3 | $ | 38.9 | 11.3 | % | $ | 75.5 | $ | 68.9 | 9.6 | % | ||||||||||||
|
Segment operating margin |
9.9 | % | 10.7 | % | 9.1 | % | 9.8 | % | ||||||||||||||||
The following table provides details of the Hygiene, Health and Consumable Adhesives net revenue variances:
|
Three Months Ended |
Six Months Ended |
|||||||
|
May 28, 2022 vs. May 29, 2021 |
May 28, 2022 vs. May 29, 2021 |
|||||||
|
Organic growth |
24.5 | % | 22.7 | % | ||||
|
Currency |
(4.5 | )% | (4.6 | )% | ||||
|
Total |
20.0 | % | 18.1 | % | ||||
Net revenue increased 20.0 percent in the second quarter of 2022 compared to the second quarter of 2021. The increase in organic growth was attri butable to an increase in product pricing and sales volume. The neg ative currency effect was due to a weaker Euro, Turkish lira and Argentinian peso, partially offset by a stronger Brazilian real and Chinese renminbi compared to the U.S. dollar. As a percentage of net revenue, raw material costs increased 420 basis points du e to higher raw material costs partially offset by higher net revenue. Other manufacturing costs as a percentage of net revenue decreased 230 basis points primarily d ue to higher net revenue. SG&A expenses as a percentage of net revenue decreased 110 basis points due to higher net revenue . Segment operating income increased 11.3 percent and segment operating margin as a percentage of net revenue decreased 80 basis points compared to the second quarter of 2021.
Net revenue increased 18.1 percent in the first six months of 2022 compared to the first six months of 2021. The increase in organic growth was attributable to an increase in product pricing and sales volume. The n egative currency effect was due to a weaker Euro, Turkish lira, Argentinian peso and Colombian peso, partially offset by a stronger Chinese renminbi and Brazilian real compared to the U.S. dollar. As a percentage of net revenue, raw material costs increased 460 basis points due to higher raw material costs partially offset by higher net revenue. O ther manufacturing costs as a percentage of net revenue decreased 240 basis points primarily due to higher net revenue. SG& A expenses as a percentage of net revenue decreased 150 basis points due to higher net revenue. Segment operating income increased 9.6 percent and segment operating margin as a percentage of net revenue decreased 70 basis points compared to the first six months of 2021.
Engineering Adhesives
|
Three Months Ended |
Six Months Ended |
|||||||||||||||||||||||
|
May 28, |
May 29, |
2022 vs |
May 28, |
May 29, |
2022 vs |
|||||||||||||||||||
|
($ in millions) |
2022 |
2021 |
2021 |
2022 |
2021 |
2021 |
||||||||||||||||||
|
Net revenue |
$ | 405.4 | $ | 345.4 | 17.4 | % | $ | 759.3 | $ | 658.0 | 15.4 | % | ||||||||||||
|
Segment operating income |
$ | 42.9 | $ | 32.1 | 33.6 | % | $ | 75.5 | $ | 62.5 | 20.8 | % | ||||||||||||
|
Segment operating margin |
10.6 | % | 9.3 | % | 9.9 | % | 9.5 | % | ||||||||||||||||
The following tables provide details of the Engineering Adhesives net revenue variances:
|
Three Months Ended |
Six Months Ended |
|||||||
|
May 28, 2022 vs. May 29, 2021 |
May 28, 2022 vs. May 29, 2021 |
|||||||
|
Organic growth |
21.8 | % | 19.3 | % | ||||
|
Currency |
(4.4 | )% | (3.9 | )% | ||||
|
Total |
17.4 | % | 15.4 | % | ||||
Net revenue increased 17.4 percent in the second quarter of 2022 compared to the second quarter of 2021. The increase in organic growth was attributable primaril y due to an increase in product pricing and sales volume. The negative currency effect was due to a weaker Euro and Turkish lira, partially offset by a stronger Chinese renminbi compa red to the U.S. dollar. Raw material costs as a percentage of net revenue increased 240 basis points due to higher raw material costs partially offset by higher net revenue. Oth er manufacturing costs as a percentage of net revenue decreased 210 basis po ints due to higher net revenue. SG& A expenses as a percentage of net revenue decreased 160 basis points du e to higher net revenue. Segm ent operating income increased 33.6 percent and segment operating margin increased 130 basis points compared to the second quarter of 2021.
Net revenue increased 15.4 percent in the first six months of 2022 compared to the first six months of 2021. The increase in organic growth was attributable primarily du e to an increase in product pricing and sales volume. The neg ative currency effect was due to a weaker Euro and Turkish lira, partially offset by a stronger Chinese renminbi c ompared to the U.S. dollar. Raw material costs as a percentage of net revenue increased 330 basis points d ue to higher raw material costs partially offset by higher net revenue. Ot her manufacturing costs as a percentage of net revenue decreased 220 basis points due to higher net revenue. SG& A expenses as a percentage of net revenue decreased 150 basis points due to higher net revenue. S egment operating income increased 20.8 percent and segment operating margin increased 40 basis points compared to the first six months of 2021.
Construction Adhesives
|
Three Months Ended |
Six Months Ended |
|||||||||||||||||||||||
|
May 28, |
May 29, |
2022 vs |
May 28, |
May 29, |
2022 vs |
|||||||||||||||||||
|
($ in millions) |
2022 |
2021 |
2021 |
2022 |
2021 |
2021 |
||||||||||||||||||
|
Net revenue |
$ | 150.0 | $ | 117.7 | 27.5 | % | $ | 263.0 | $ | 195.3 | 34.7 | % | ||||||||||||
|
Segment operating income |
$ | 11.3 | $ | 6.3 | 79.4 | % | $ | 15.6 | $ | 1.6 | 875.0 | % | ||||||||||||
|
Segment operating margin |
7.5 | % | 5.4 | % | 5.9 | % | 0.8 | % | ||||||||||||||||
The following tables provide details of the Construction Adhesives net revenue variances:
|
Three Months Ended |
Six Months Ended |
|||||||
|
May 28, 2022 vs. May 29, 2021 |
May 28, 2022 vs. May 29, 2021 |
|||||||
|
Organic growth |
14.3 | % | 23.8 | % | ||||
|
M&A |
14.0 | % | 11.7 | % | ||||
|
Currency |
(0.8 | )% | (0.8 | )% | ||||
|
Total |
27.5 | % | 34.7 | % | ||||
Net revenue increased 27.5 percent in the second quarter of 2022 compared to the second quarter of 2021. The increase in organic growth was attributable primarily t o an increase in product pricing partially offset by a decrease in sales volume. The increase in net revenue from M&A was due to the acquisition of Fourny and Apollo during the first quarter of 2022. The negative currency effect was due to a weaker Euro and Australian dollar compared to the U.S. dollar . Raw material costs as a percentage of net revenue increased 70 basis points due to higher raw material costs partially offset by higher net revenue. Other manufacturing costs as a percentage of net revenue decreased 170 basis points due to higher net revenue and the impact of acquisitions. SG&A expenses as a percentage of net revenue decreased 110 basis points due to higher net revenue. Segment operating income increased 79.4 percent and segment operating margin increased 210 basis points compared to the second quarter of 2021.
Net revenue increased 34.7 percent in the first six months of 2022 compared to the first six months of 2021. The increase in organic growth was attributable primarily to an increase in product pricing and sales volume. The increase in net revenue from M&A was due to the acquisition of Fourny and Apollo during the first quarter of 2022. The negative currency effect was due to a weaker Euro and Australian dollar compared to the U.S. dollar. Raw material costs as a percentage of net revenue increased 150 basis points due to higher raw material costs partially offset by higher net revenue. Other manufacturing costs as a percentage of net revenue decreased 290 basis points due to higher net revenue and the impact of acquisitions. SG&A expenses as a percentage of net revenue decreased 370 basis points due to higher net revenue. Segment oper ating income increased 875.0 percent and segment operating margin increased 510 basis points compared to the first six months of 2021.
Corporate Unallocated
|
Three Months Ended |
Six Months Ended |
|||||||||||||||||||||||
|
May 28, |
May 29, |
2022 vs |
May 28, |
May 29, |
2022 vs |
|||||||||||||||||||
|
($ in millions) |
2022 |
2021 |
2021 |
2022 |
2021 |
2021 |
||||||||||||||||||
|
Net revenue |
$ | - | $ | - | 0.0 | % | $ | - | $ | - | 0.0 | % | ||||||||||||
|
Segment operating loss |
$ | (10.0 | ) | $ | (8.2 | ) | 22.0 | % | $ | (22.1 | ) | $ | (15.5 | ) | 42.6 | % | ||||||||
|
Segment operating margin |
NMP | NMP | NMP | NMP | ||||||||||||||||||||
NMP = Non-meaningful percentage
Corporate Unallocated includes acquisition and integration-related charges, restructuring-related charges, and costs related to the implementation of Project ONE.
Segment operating loss in the second quarter and first six months of 2022 increased 22.0 percent and 42.6 percent compared to the second quarter and first six months of 2021, respectively, reflecting increased acquisition project costs.
Financial Condition, Liquidity and Capital Resources
Total cash and cash equivalents as of May 28, 2022 were $68.1 million compared to $61.8 million as of November 27, 2021 and $69.6 million as of May 29, 2021. The majority of the $68.1 million in cash and cash equivalents as of May 28, 2022 was held outside the United States. Total long and short-term debt was $1,935.8 million as of May 28, 2022, $1,616.5 million as of November 27, 2021 and $1,712.4 million as of May 29, 2021. The total debt to total capital ratio as measured by Total Debt divided by (Total Debt plus Total Stockholders’ Equity) was 54.5 percent as of May 28, 2022 as compared to 50.2 percent as of November 27, 2021 and 52.2 percent as of May 29, 2021.
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 that, if not met, could lead to a renegotiation of our credit lines and a significant increase in our cost of financing. At May 28, 2022, we were in compliance with all covenants of our contractual obligations as shown in the following table:
|
Covenant |
Debt Instrument |
Measurement |
Result as of May 28, 2022 |
|||
|
Secured Indebtedness / TTM EBITDA |
Term Loan B Credit Agreement |
Not greater than 5.9 |
2.9 | |||
|
Secured Indebtedness / TTM EBITDA |
Revolving Credit Agreement |
Not greater than 5.9 |
2.9 | |||
|
TTM EBITDA / Consolidated Interest Expense |
Revolving Credit Agreement |
Not less than 2.0 |
6.1 | |||
|
● |
TTM = Trailing 12 months |
|
● |
EBITDA for Term Loan B covenant purposes is defined as consolidated net income, plus interest expense, expense for taxes paid or accrued, depreciation and amortization, certain non-cash impairment losses, extraordinary non-cash losses incurred other than in the ordinary course of business, nonrecurring extraordinary non-cash restructuring charges and the non-cash impact of purchase accounting, expenses related to the Royal Adhesives acquisition not to exceed $40.0 million, expenses relating to the integration of Royal Adhesives during the fiscal years ending in 2017, 2018 and 2019 not exceeding $30 million in aggregate, restructuring expenses that began prior to the Royal Adhesives acquisition incurred in fiscal years ending in 2017 and 2018 not exceeding $28 million in aggregate, and non-capitalized charges relating to the SAP implementation during fiscal years ending in 2017 through 2021 not exceeding $13 million in any single fiscal year, minus extraordinary non-cash gains. For the 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 Term Loan B Credit Agreement and can be found in the Company’s Form 8-K filing dated October 20, 2017. |
|
● |
EBITDA for Revolving Credit Facility covenant purposes is defined as consolidated net income, plus interest expense, expense for taxes paid or accrued, depreciation and amortization, non-cash impairment losses related to long-lived assets, intangible assets or goodwill, nonrecurring or unusual non-cash losses incurred other than in the ordinary course of business, nonrecurring or unusual non-cash restructuring charges and the non-cash impact of purchase accounting, fees, premiums, expenses and other transaction costs incurred or paid by the borrower or any of its Subsidiaries on the effective date in connection with the transactions, this agreement and the other loan documents, the 2020 supplemental indenture and the transactions contemplated hereby and thereby, one-time, non-capitalized charges and expenses relating to the Company’s SAP implementation during fiscal years ending in 2017 through 2024, in an amount not exceeding $15.0 million in any single fiscal year of the Company, charges and expenses relating to the ASP Royal Acquisition, including but not limited to advisory and financing costs, during the Company’s fiscal years ending in 2020 and 2021, in an aggregate amount (as to such years combined) not exceeding $40.0 million, charges and expenses related to the reorganization of the Company and its subsidiaries from five business units to three business units to reduce costs during the Company’s fiscal years ending in 2020 and 2021 in an aggregate amount (as to such years combined) not exceeding $24.0 million, and charges and expenses related to the Company’s manufacturing and operations project to improve delivery, implement cost savings and reduce inventory during the Company’s fiscal years ending in 2020, 2021 and 2022 in an aggregate amount (as to such years combined) not exceeding $15.5 million. |
|
● |
Consolidated Interest Expense for the Revolving Credit Facility is defined as the interest expense (including without limitation the portion of capital lease obligations that constitutes imputed interest in accordance with GAAP) of the Company and its subsidiaries calculated on a consolidated basis for such period with respect to all outstanding indebtedness of the Company and its subsidiaries allocable to such period in accordance with GAAP. |
We believe we have the ability to meet all of our contractual obligations and commitments in fiscal 2022.
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.
|
May 28, |
May 29, |
|||||||
|
2022 |
2021 |
|||||||
|
Net working capital as a percentage of annualized net revenue 1 |
17.1 | % | 16.7 | % | ||||
|
Accounts receivable DSO (in days) 2 |
59 | 61 | ||||||
|
Inventory days on hand (in days) 3 |
70 | 67 | ||||||
|
Free cash flow after dividends 4 |
$ | (97.2 | ) | $ | 11.9 | |||
|
Total debt to total capital ratio 5 |
54.5 | % | 52.2 | % | ||||
1 Current quarter net working capital (trade receivables, net of allowance for doubtful accounts plus inventory minus trade payables) divided by annualized net revenue (current quarter multiplied by four).
2 Trade receivables net of the allowance for doubtful accounts at the balance sheet date multiplied by 91 (13 weeks) and divided by the net revenue for the quarter.
3 Total inventory multiplied by 91 and divided by cost of sales (excluding delivery costs) for the quarter.
4 Year-to-date net cash provided by operating activities, less purchased property, plant and equipment and dividends paid. See reconciliation of net cash provided by operating activities to free cash flow after dividends below.
5 Total debt divided by (total debt plus total stockholders’ equity).
Free cash flow after dividends, a non-GAAP financial measure, is defined as net cash provided by operations less purchased property, plant and equipment and dividends paid. Free cash flow after dividends is an integral financial measure used by the Company to assess its ability to generate cash in excess of its operating needs, therefore, the Company believes this financial measure provides useful information to investors. The following table reflects the manner in which free cash flow after dividends is determined and provides a reconciliation of free cash flow after dividends to net cash provided by operating activities, the most directly comparable financial measure calculated and reported in accordance with U.S. GAAP.
Reconciliation of "Net cash provided by operating activities" to Free cash flow after dividends
|
Six Months Ended |
||||||||
|
($ in millions) |
May 28, 2022 |
May 29, 2021 |
||||||
|
Net cash (used in) provided by operating activities |
$ | (9.1 | ) | $ | 79.8 | |||
|
Less: Purchased property, plant and equipment |
69.1 | 50.7 | ||||||
|
Less: Dividends paid |
19.0 | 17.2 | ||||||
|
Free cash flow after dividends |
$ | (97.2 | ) | $ | 11.9 | |||
Summary of Cash Flows
Cash Flows from Operating Activities:
|
Six Months Ended |
||||||||
|
May 28, |
May 29, |
|||||||
|
($ in millions) |
2022 |
2021 |
||||||
|
Net cash (used in) provided by operating activities |
$ | (9.1 | ) | $ | 79.8 | |||
Net income including non-controlling interest was $85.5 million in the first six months of 2022 compared to $78.9 million in the first six months of 2021. Depreciation and amortization expense totaled $72.7 million in the first six months of 2022 compared to $71.6 million in the first six months of 2021. Deferred income taxes was a use of cash of $5.0 million in 2022 compared to $1.2 million in the first six months of 2021. Accrued compensation was a use of cash of $40.4 million in 2022 compared to $8.8 million last year. Other assets was a use of cash of $21.9 million in the first six months of 2022 compared to $21.7 million in the first six months of 2021. Other liabilities was a use of cash of $23.6 million in the first six months of 2022 compared to $29.0 million in the first six months of 2021.
Changes in net working capital (trade receivables, inventory and trade payables) accounted for a use of cash of $103.7 million compared to a use of cash of $28.1 million last year. The table below provides the cash flow impact due to changes in the components of net working capital:
|
Six Months Ended |
||||||||
|
May 28, |
May 29, |
|||||||
|
($ in millions) |
2022 |
2021 |
||||||
|
Trade receivables, net |
$ | (35.5 | ) | $ | (43.2 | ) | ||
|
Inventory |
(95.4 | ) | (100.4 | ) | ||||
|
Trade payables |
27.2 | 115.5 | ||||||
|
Total cash flow impact |
$ | (103.7 | ) | $ | (28.1 | ) | ||
|
● |
Trade receivables, net – Trade receivables, net was a use of cash of $35.5 million and $43.2 million in the first six months of 2022 and 2021, respectively. The lower use of cash in 2022 compared to 2021 was due to more cash collected on trade receivables in the current year compared to the prior year. The DSO were 59 days at May 28, 2022 and 61 days at May 29, 2021. |
|
|
● |
Inventory – Inventory was a use of cash of $95.4 million and $100.4 million in the first six months of 2022 and 2021, respectively. The lower use of cash in 2022 is due to lower inventory purchases in 2022 compared to 2021. Inventory days on hand were 70 days as of May 28, 2022 and 67 days as of May 29, 2021. |
|
● |
Trade payables – Trade payables was a source of cash of $27.2 million and $115.5 million in the first six months of 2022 and 2021, respectively. The lower source of cash in 2022 compared to 2021 reflects higher payments on trade payables in the current year compared to the prior year. |
Cash Flows from Investing Activities:
|
Six Months Ended |
||||||||
|
May 28, |
May 29, |
|||||||
|
($ in millions) |
2022 |
2021 |
||||||
|
Net cash used in investing activities |
$ | (293.2 | ) | $ | (56.5 | ) | ||
Purchases of property, plant and equipment were $69.1 million during the first six months of 2022 compared to $50.7 million for the same period of 2021 . This difference reflects the timing of capital projects and expenditures related to growth initiatives.
During the first six 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 $192.6 million, net of cash acquired.
Cash Flows from Financing Activities:
|
Six Months Ended |
||||||||
|
May 28, |
May 29, |
|||||||
|
($ in millions) |
2022 |
2021 |
||||||
|
Net cash provided by (used in) financing activities |
$ | 318.2 | $ | (57.9 | ) | |||
Borrowings on our revolving credit facility were $335.0 million in the first six months of 2022 to finance acquisitions and for general working capital purposes. We did not make any payments of long-term debt in t he first six months of 2022 and payments of long-term debt in the first six months of 2021 were $68.0 million. Net proceeds of notes payable were $3.6 million in the first six months of 2022 and $9.3 million in the same period of 2021 . Cash dividends paid were $19.0 million in the first six months of 2022 compared to $17.2 million in the same period of 2021 . Repurchases of common stock were $3.6 million in the first six months of 2022 compared to $2.6 million in the same period of 2021 .
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 November 27, 2021 for further discussion of these market risks. There have been no material changes in the reported market risk of the Company since November 27, 2021.
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 May 28, 2022. Based on this evaluation, our president and chief executive officer and executive vice president, chief financial officer concluded that, as of May 28, 2022, 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
From time to time, we become aware of compliance matters relating to, or receive notices from, federal, state or local entities regarding possible or alleged violations of environmental, health or safety laws and regulations. Also, from time to time, we are 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. We are also 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.
Currently, we are involved in various environmental investigations, clean up activities and administrative proceedings and lawsuits. In particular, we are currently deemed a PRP in conjunction with numerous other parties, in a number of government enforcement actions 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 also engaged in environmental remediation and monitoring efforts at a number of current and former operating facilities. To the extent we can reasonably estimate the amount of our probable liabilities for environmental matters, we establish a financial provision. It is reasonably possible that we may have additional liabilities related to these known environmental matters. However, the full extent of our future liability for environmental matters is difficult to predict because of uncertainty as to the cost of investigation and clean up of the sites, our responsibility for such hazardous substances and the number of and financial condition of other potentially responsible parties.
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. However, adverse developments and/or periodic settlements could negatively impact the results of operations or cash flows in one or more future periods.
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 12 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 November 27, 2021. 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 November 27, 2021, except for the addition of the following risk factor:
The military conflict between Russia and Ukraine, and the global response to it, could adversely impact our revenues, gross margins and financial results.
The U.S. government and other nations have imposed significant restrictions on most companies’ ability to do business in Russia as a result of the military conflict between Russia and Ukraine. It is not possible to predict the broader or longer-term consequences of this conflict, which could include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effec ts on macroeconomic conditions, security conditions, currency exchange rates and financial markets. Such geo-political instability and uncertainty could have a negative impact on our ability to sell to, ship products to, collect payments from, and support customers in certain regions based on trade restrictions, embargoes and export control law restrictions, and logistics restrictions including closures of air space, and could increase the costs, risks and adverse impacts from these new challenges. We may also be the subject of increased cyber-attacks. While Russia does not constitute a material portion of our business, a significant escalation or expansion of economic disruption or the conflict's current scope could have a material adverse effect on our results of operations.
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 second quarter ended May 28, 2022 is as follows:
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Maximum |
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Approximate Dollar |
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(a) |
Value of Shares that |
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Total |
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may yet be |
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Average |
Purchased Under the |
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Shares |
Price Paid |
Plan or Program |
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Purchased 1 |
per Share |
(millions) |
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February 27, 2022 - April 2, 2022 |
361 | $ | 68.07 | $ | 300,000 | |||||||
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April 3, 2022 - April 30, 2022 |
- | $ | - | $ | 300,000 | |||||||
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May 1, 2022 - May 28, 2022 |
165 | $ | 66.36 | $ | 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. 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.
| 10.1 | Form of Restricted Stock Unit Award Agreement for Non-Employee Directors under the Amended and Restated H.B. Fuller Company 2020 Master Incentive Plan for awards made on or after April 7, 2022 | |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101 |
The following materials from the H.B. Fuller Company Quarterly Report on Form 10-Q for the quarter ended May 28, 2022 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. |
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104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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 | |||
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Dated: June 23, 2022 |
/s/ John J. Corkrean |
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John J. Corkrean |
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Executive Vice President, |
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Chief Financial Officer |
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Exhibit Index
Exhibits
| 10.1 | Form of Restricted Stock Unit Award Agreement for Non-Employee Directors under the Amended and Restated H.B. Fuller Company 2020 Master Incentive Plan for awards made on or after April 7, 2022 | |
| 31.1 |
Form of 302 Certification – James J. Owens |
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31.2 |
Form of 302 Certification – John J. Corkrean |
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32.1 |
Form of 906 Certification – James J. Owens |
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32.2 |
Form of 906 Certification – John J. Corkrean |
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101 |
The following materials from the H.B. Fuller Company Quarterly Report on Form 10-Q for the quarter ended May 28, 2022 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. |
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104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |