H.B. FULLER COMPANY Overview
The Hygiene, Health and Consumable Adhesives operating segment manufactures and supplies adhesives products in the assembly, packaging, converting, nonwoven and hygiene, health and beauty, flexible packaging, graphic arts and envelope markets. The Engineering Adhesives operating segment provides high-performance adhesives to the transportation, electronics, medical, clean energy, aerospace and defense, performance wood, insulating glass, textile, appliance and heavy machinery markets. The Construction Adhesives operating segment manufactures and provides specialty adhesives, sealants, tapes, mortars, grouts, and application devices for commercial building roofing systems, heavy infrastructure projects, road/highway/airport transportation applications, telecom/5G utilities, industrial LNG plants, building envelope applications, HVAC insulation systems, and for both residential and commercial flooring underlayment solutions.Total Company
When reviewing our financial statements, it is important to understand how certain external factors impact us. These factors include:
? Changes in the prices of our raw materials that are primarily derived from
refining crude oil and natural gas,
? Global supply of and demand for raw materials,
? Economic growth rates, and
? Currency exchange rates compared to the U.S. dollar.
While we encountered inflationary pressures in fiscal year 2022, which factored
into higher raw material and operating costs, these inflationary pressures were
offset by higher net revenue. We expect inflationary pressures to continue into
fiscal year 2023.
We purchase thousands of raw materials, the majority of which are
petroleum/natural gas derivatives. The price of these derivatives impacts the
cost of our raw materials. However, the supply of and demand for key raw
materials has a greater impact on our costs. As demand increases in high-growth
areas, the supply of key raw materials may tighten, resulting in certain
materials being put on allocation. Natural disasters, such as hurricanes, also
can have an impact as key raw material producers are shut down for extended
periods of time. We continually monitor capacity utilization figures, market
supply and demand conditions, feedstock costs and inventory levels, as well as
derivative and intermediate prices, which affect our raw materials. With
approximately 75 percent of our cost of sales accounted for by raw materials,
our financial results are extremely sensitive to changing costs in this area.
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The pace of economic growth directly impacts certain industries to which we supply products. For example, adhesives-related revenues from durable goods customers in areas such as appliances, furniture and other woodworking applications tend to fluctuate with the overall economic activity. In business components such as Construction Adhesives and insulating glass in Engineering Adhesives, revenues tend to move with more specific economic indicators such as housing starts and other construction-related activity. The movement of foreign currency exchange rates as compared to theU.S. dollar impacts the translation of the foreign entities' financial statements intoU.S. dollars. As foreign currencies weaken against theU.S. dollar, our revenues and costs decrease as the foreign currency-denominated financial statements translate into fewerU.S. dollars. The fluctuations of the Euro, the Turkish lira and the Chinese renminbi against theU.S. dollar have the largest impact on our financial results as compared to all other currencies. In 2022, currency fluctuations had a negative impact on net revenue of approximately$191.7 million as compared to 2021.
Key financial results andtransactions for 2022 included the following:
? Net revenue increased 14.4 percent from 2021 primarily driven by a
15.4 percent increase in product pricing, a 1.6 percent increase due toacquisitions and a 1.2 percent increase in sales volume, partially offset by a
5.8 percent decrease due to currency fluctuations. Additionally, every five or
six years, we have a 53rd week in our fiscal year. 2022 was a 53-week year
which increased our revenue by approximately 2.0 percent.
? Gross profit margin was relatively consistent year over year. Gross profit
margins were 25.7 percent in 2022 and 25.8 percent in 2021.
? Cash flow generated by operating activities was
compared to $213.3 million in 2021.
Our total year organic sales growth, which we define as the combined variances
from sales volume and product pricing, increased 16.6 percent for 2022 compared
to 2021.
In 2022, our diluted earnings per share was
Information pertaining to fiscal year 2020 was included in the Company's Annual Report on Form 10-K for the year endedNovember 27, 2021 , under Part II, Item 7 "Management's Discussion and Analysis of Financial Position and Results of Operations," which was filed with theSEC onJanuary 25, 2022 .
Changes in Accounting Principles
In the first quarter of 2021, we adopted new accounting standards related to the measurement of credit losses on financial statements requiring financial assets measured at amortized cost basis be presented at the net amount expected to be collected. Prior periods were not restated for this adoption. See Note 1 to our Consolidated Financial Statements for further information. Project ONE InDecember 2012 , our Board of Directors approved a multi-year project to replace and enhance our existing core information technology platforms. The scope for this project includes most of the basic transaction processing for the company including customer orders, procurement, manufacturing and financial reporting. The project envisions harmonized business processes for all of our operating segments supported with one standard software configuration. The execution of this project, which we refer to as Project ONE, is being supported by internal resources and consulting services. Implementation of Project ONE began in ourNorth America adhesives business in 2014 and, through 2022, we completed implementation of this system in various parts of our business includingLatin America (exceptBrazil ),Australia , and various other businesses inNorth America and EIMEA. During 2023 and beyond, we will continue implementation inNorth America , EIMEA andAsia Pacific . Total expenditures for Project ONE are estimated to be$200 to$210 million , of which 55-60% is expected to be capital expenditures. Our total project-to-date expenditures are approximately$163 million , of which approximately$94 million are capital expenditures. Given the complexity of the implementation, the total investment to complete the project may exceed our estimate. 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$20.3 million under this plan as ofDecember 3, 2022 , which is substantially complete. 15
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Critical Accounting Policies and Significant Estimates
Management's discussion and analysis of our results of operations and financial condition are based upon the Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We believe the critical accounting policies and areas that require the most significant judgments and estimates to be used in the preparation of the Consolidated Financial Statements relate to goodwill impairment; pension and other postretirement assumptions; long-lived assets recoverability; valuation of product, environmental and other litigation liabilities; valuation of deferred tax assets and accuracy of tax contingencies; and valuation of acquired assets and liabilities.Goodwill Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a purchase business combination.Goodwill is allocated to our reporting units, which are our operating segments or one level below our operating segments (the component level). Reporting units are determined by the discrete financial information available for the component and whether it is regularly reviewed by segment management. Components are aggregated into a single reporting unit if they share similar economic characteristics. Our reporting units are as follows: Hygiene, Health and Consumable Adhesives, Engineering Adhesives and Construction Adhesives. We evaluate our goodwill for impairment annually at the beginning of the fourth quarter or earlier upon the occurrence of substantive unfavorable changes in economic conditions, industry trends, costs, cash flows, or ongoing declines in market capitalization. The quantitative impairment test requires judgment, including the identification of reporting units, the assignment of assets, liabilities and goodwill to reporting units, and the determination of fair value of each reporting unit. The impairment test requires the comparison of the fair value of each reporting unit with its carrying amount, including goodwill. In performing the impairment test, we determined the fair value of our reporting units through the income approach by using discounted cash flow ("DCF") analyses. Determining fair value requires the Company to make judgments about appropriate forecasted revenue and related revenue growth rate, the earnings before interest, taxes, depreciation and amortization ("EBITDA") margins rate and the weighted average cost of capital. The cash flows employed in the DCF analysis for each reporting unit are based on the reporting unit's budget, long-term business plan and recent operating performance. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting unit and market conditions. Given the inherent uncertainty in determining the assumptions underlying a DCF analysis, actual results may differ from those used in our valuations. In assessing the reasonableness of the determined fair values, we also reconciled the aggregate determined fair value of the Company to the Company's market capitalization, which, at the date of our 2022 impairment test, included a 6 percent control premium. For the 2022 impairment test, the fair value of the reporting units exceeded the respective carrying values by 10 percent to 84 percent ("headroom"). Significant assumptions used in the DCF analysis included discount rates that ranged from 9.4 percent to 10.9 percent and long-term revenue growth rates. The Construction Adhesives reporting unit, with$425.8 million of goodwill assigned to it as ofDecember 3, 2022 , had headroom of 10 percent. An increase in the discount rate of 70 basis points or a decrease in the long-term growth rates of 25 percent would result in the fair value of the Construction Adhesives reporting unit falling below its carrying value. The Engineering Adhesives and Hygiene, Health and Consumable Adhesives reporting units had significant fair value in excess of carrying value. Management will continue to monitor these reporting units for changes in the business environment that could impact recoverability. The recoverability of goodwill is dependent upon the continued growth of cash flows from our business activities. If the economy or business environment falter and we are unable to achieve our assumed revenue growth rates or profit margin percentages, our projections used would need to be remeasured, which could impact the carrying value of our goodwill in one or more of our reporting units. Most significantly, for our Construction Adhesives reporting unit, a decrease in the planned volume revenue growth would negatively impact the fair value of the reporting unit and the calculation of excess carrying value.
See Note 5 to the Consolidated Financial Statements for further information regarding goodwill.
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Pension and Other Postretirement Plan Assumptions
We sponsor defined-benefit pension plans in both theU.S. and non-U.S. entities. Also in theU.S. , we sponsor other postretirement plans for health care and life insurance benefits. Expenses and liabilities for the pension plans and other postretirement plans are actuarially calculated. These calculations are based on our assumptions related to the discount rate, expected return on assets, projected salary increases and health care cost trend rates. Note 10 to the Consolidated Financial Statements includes disclosure of assumptions employed in these measurements for both the non-U.S. andU.S. plans. The discount rate assumption is determined using an actuarial yield curve approach, which results in a discount rate that reflects the characteristics of the plan. The approach identifies a broad population of corporate bonds that meet the quality and size criteria for the particular plan. We use this approach rather than a specific index that has a certain set of bonds that may or may not be representative of the characteristics of our particular plan. A higher discount rate reduces the present value of the pension obligations. The discount rate for theU.S. pension plan was 5.36 percent atDecember 3, 2022 , 2.76 percent atNovember 27, 2021 and 2.53 percent atNovember 28, 2020 . Net periodic pension cost for a given fiscal year is based on assumptions developed at the end of the previous fiscal year. A discount rate change of 0.5 percentage points atDecember 3, 2022 would impactU.S. pension and other postretirement plan (income) expense by less than$0.1 million (pre-tax) in fiscal 2023. Discount rates for non-U.S. plans are determined in a manner consistent with theU.S. plans. The expected long-term rate of return on plan assets assumption for theU.S. pension plan was 7.00 percent in 2022, 7.25 percent in 2021 and 7.50 percent in 2020. Our expected long-term rate of return onU.S. plan assets was based on our target asset allocation assumption of 55 percent equities and 45 percent fixed-income. Management, in conjunction with our external financial advisors, determines the expected long-term rate of return on plan assets by considering the expected future returns and volatility levels for each asset class that are based on historical returns and forward looking observations. For 2022, the expected long-term rate of return on the target equities allocation was 8.50 percent and the expected long-term rate of return on the target fixed-income allocation was 5.60 percent. The total plan rate of return assumption included an estimate of the effect of diversification and the plan expense. A change of 0.5 percentage points for the expected return on assets assumption would impactU.S. net pension and other postretirement plan expense by approximately$2.2 million (pre-tax). Management, in conjunction with our external financial advisors, uses the actual historical rates of return of the asset categories to assess the reasonableness of the expected long-term rate of return on plan assets. The most recent 10-year and 20-year historical equity returns are shown in the table below. Our expected rate of return on our total portfolio is consistent with the historical patterns observed over longer time frames. Total FixedU.S. Pension Plan Historical Actual Rates of Return Portfolio Equities Income 10-year period 6.3 % 8.4 % 2.6 % 20-year period 7.2 % 7.5 % 5.9 %* * Beginning in 2022, our target allocation migrated from 60 percent equities and 40 percent fixed-income to 55 percent equities and 45 percent fixed income. The historical actual rate of return for the fixed income of 5.9 percent is since inception (16 years, 11 months). The expected long-term rate of return on plan assets assumption for non-U.S. pension plans was a weighted-average of 3.49 percent in 2022 compared to 6.15 percent in 2021 and 6.23 percent in 2020. The expected long-term rate of return on plan assets assumption used in each non-U.S. plan is determined on a plan-by-plan basis for each local jurisdiction and is based on expected future returns for the investment mix of assets currently in the portfolio for that plan. Management, in conjunction with our external financial advisors, develops expected rates of return for each plan, considers expected long-term returns for each asset category in the plan, reviews expectations for inflation for each local jurisdiction, and estimates the effect of active management of the plan's assets. Our largest non-U.S. pension plans are in theUnited Kingdom andGermany . The expected long-term rate of return on plan assets for theUnited Kingdom was 2.50 percent and the expected long-term rate of return on plan assets forGermany was 4.50 percent. Management, in conjunction with our external financial advisors, uses actual historical returns of the asset portfolio to assess the reasonableness of the expected rate of return for each plan. The projected salary increase assumption is based on historic trends and comparisons to the external market. Higher rates of increase result in higher pension expenses. As this rate is also a long-term expected rate, it is less likely to change on an annual basis. Under theU.S. pension plan, the compensation amount was locked-in as ofMay 31, 2011 and thus the benefit no longer includes compensation increases. The 4.50 percent rate for 2020 is for the supplemental executive retirement plan only; for 2022 and 2021, there is no compensation increase as subsequent toNovember 27, 2021 , there were no active employees in the supplemental executive retirement plan. Projected salary increase assumptions for non-U.S. plans are determined in a manner consistent with theU.S. plans. 17
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Recoverability of Long-Lived Assets
The assessment of the recoverability of long-lived assets reflects our assumptions and estimates. Factors that we must estimate when performing impairment tests include sales volume, prices, inflation, currency exchange rates, tax rates and capital spending. Significant judgment is involved in estimating these factors, and they include inherent uncertainties. The measurement of the recoverability of these assets is dependent upon the accuracy of the assumptions used in making these estimates and how the estimates compare to the eventual future operating performance of the specific businesses to which the assets are attributed. Judgments made by us include the expected useful lives of long-lived assets. The ability to realize undiscounted cash flows in excess of the carrying amounts of such assets is affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance.
Product, Environmental and Other Litigation Liabilities
As disclosed in Item 3. Legal Proceedings and in Note 1 and Note 14 to the Consolidated Financial Statements, we are subject to various claims, lawsuits and other legal proceedings. Reserves for loss contingencies associated with these matters are established when it is determined that a liability is probable and the amount can be reasonably estimated. The assessment of the probable liabilities is based on the facts and circumstances known at the time that the financial statements are being prepared. For cases in which it is determined that a liability is probable but only a range for the potential loss exists, the minimum amount of the range is recorded and subsequently adjusted as better information becomes available. For cases in which insurance coverage is available, the gross amount of the estimated liabilities is accrued, and a receivable is recorded for any probable estimated insurance recoveries. A discussion of environmental, product and other litigation liabilities is disclosed in Item 3. Legal Proceedings and Note 14 to the Consolidated Financial Statements.
Based upon currently available facts, we do not believe that the ultimate resolution of any pending legal proceeding, individually or in the aggregate, will have a material adverse effect on our long-term financial condition. However, adverse developments and/or periodic settlements could negatively affect our results of operations or cash flows in one or more future quarters.
Income Tax Accounting As part of the process of preparing the Consolidated Financial Statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. The process involves estimating actual current tax expense along with assessing temporary differences resulting from differing treatment of items for book and tax purposes. These temporary differences result in deferred tax assets and liabilities, which are included in the Consolidated Balance Sheets. We record a valuation allowance to reduce our deferred tax assets to the amount that is more-likely-than-not to be realized. We have considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance. Increases in the valuation allowance result in additional expense to be reflected within the tax provision in the Consolidated Statements of Income. As ofDecember 3, 2022 , the valuation allowance to reduce deferred tax assets totaled$14.4 million . We recognize tax benefits for tax positions for which it is more-likely-than-not that the tax position will be sustained by the applicable tax authority at the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement. We do not recognize a financial statement benefit for a tax position that does not meet the more-likely-than-not threshold. We believe that our liabilities for income taxes reflect the most likely outcome. It is difficult to predict the final outcome or the timing of the resolution of any particular tax position. Future changes in judgment related to the resolution of tax positions will impact earnings in the quarter of such change. We adjust our income tax liabilities related to tax positions in light of changing facts and circumstances. Settlement with respect to a tax position would usually require cash. Based upon our analysis of tax positions taken on prior year returns and expected tax positions to be taken for the current year tax returns, we have identified gross uncertain tax positions of$17.6 million as ofDecember 3, 2022 and$13.3 million as ofNovember 27, 2021 .
We have not recorded
Acquisition Accounting
As we enter into business combinations, we perform acquisition accounting requirements including the following:
? Identifying the acquirer, ? Determining the acquisition date,
? Recognizing and measuring the identifiable assets acquired and the liabilities
assumed, and
? Recognizing and measuring goodwill or a gain from a bargain purchase.
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We complete valuation procedures and record the resulting fair value of the acquired assets and assumed liabilities based upon the valuation of the business enterprise and the tangible and intangible assets acquired. Enterprise value allocation methodology requires management to make assumptions and apply judgment to estimate the fair value of assets acquired and liabilities assumed. If estimates or assumptions used to complete the enterprise valuation and estimates of the fair value of the acquired assets and assumed liabilities significantly differed from assumptions made, the resulting difference could materially affect the fair value of net assets. The calculation of the fair value of the tangible assets, including property, plant and equipment, utilizes the cost approach, which computes the cost to replace the asset, less accrued depreciation resulting from physical deterioration, functional obsolescence and external obsolescence. The calculation of the fair value of the identified intangible assets are determined using cash flow models following the income approach or a discounted market-based methodology approach. Significant inputs include estimated revenue growth rates, gross margins, operating expenses, and estimated attrition, royalty and discount rates.Goodwill is recorded as the difference in the fair value of the acquired assets and assumed liabilities and the purchase price. Results of Operations Net revenue ($ in millions) 2022 2021 2022 vs 2021 Net revenue$ 3,749.2 $ 3,278.0 14.4 % We review variances in net revenue in terms of changes related to sales volume and product pricing (referred to as organic revenue growth), business acquisitions and divestitures (M&A) and changes in foreign currency exchange rates. The following table shows the net revenue variance analysis for fiscal 2022 compared to fiscal 2021: 2022 vs 2021 Organic revenue growth 16.6 % Extra week (53 week year) 2.0 % M&A 1.6 % Currency (5.8 )% Net revenue growth 14.4 % Organic revenue growth was 16.6 percent in 2022 compared to 2021 driven by a 20.0 percent increase in Hygiene, Health and Consumable Adhesives, a 15.9 percent increase in Engineering Adhesives and a 7.0 percent increase in Construction Adhesives. The increase was driven by a 15.4 percent increase in product pricing and a 1.2 percent increase in sales volume. The 1.6 percent from M&A is due to the acquisitions of Fourny and Apollo. The negative 5.8 percent currency impact was primarily driven by a weaker Euro, Turkish lira, Chinese renminbi, British pound and Argentinian peso compared to theU.S. dollar. Additionally, net revenue in 2022 was higher than 2021 by 2.0 percent from an additional week of revenue in 2022 as it was a 53 week fiscal year compared to a 52 week fiscal year in 2021. Cost of sales ($ in millions) 2022 2021 2022 vs 2021 Raw materials$ 2,154.1 $ 1,810.0 19.0 % Other manufacturing costs 631.4 622.7 1.4 % Cost of sales$ 2,785.5 $ 2,432.7 14.5 % Percent of net revenue 74.3 % 74.2 % Cost of sales in 2022 compared to 2021 increased 10 basis points as a percentage of net revenue. Raw material cost as a percentage of net revenue increased 230 basis points in 2022 compared to 2021 due to higher raw material costs. Other manufacturing costs as a percentage of net revenue decreased 220 basis points in 2022 compared to 2021 due to higher net revenue. 19
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Table of Contents Gross profit ($ in millions) 2022 2021 2022 vs 2021 Gross profit$ 963.7 $ 845.3 14.0 % Percent of net revenue 25.7 % 25.8 %
Gross profit in 2022 increased 14.0 percent and gross profit margin decreased 10 basis points compared to 2021.
Selling, general and administrative (SG&A) expenses
($ in millions) 2022 2021 2022 vs 2021 SG&A$ 641.0 $ 592.7 8.1 % Percent of net revenue 17.1 % 18.1 %
SG&A expenses for 2022 increased
Other income, net ($ in millions) 2022 2021 Other income, net$ 12.9 $ 32.9 Other income, net includes foreign transaction losses of$12.9 million and$6.0 million in 2022 and 2021, respectively. There was a$1.4 million gain on disposal of assets in 2022 and a$0.6 million loss in 2021. Defined benefit pension benefit was$26.8 million and$32.1 million in 2022 and 2021, respectively. The$26.8 million of defined benefit pension benefit in 2022 includes a$3.3 million settlement loss related to the termination of our Canadian defined benefit pension plan. Other income, net also includes a$2.4 million loss and$7.4 million of income in 2022 and 2021, respectively. Other income in 2021 includes gains related to legal entity mergers and a transactional tax legal settlement inBrazil . Interest expense ($ in millions) 2022 2021 Interest expense$ 91.5 $ 78.1
Interest expense was
Interest income ($ in millions) 2022 2021 Interest income$ 7.8 $ 9.5
Interest income in 2022 and 2021 was
Income tax expense: ($ in millions) 2022 2021 Income tax expense$ 77.2 $ 63.0 Effective tax rate 30.6 % 29.1 % Income tax expense of$77.2 million in 2022 includes$9.3 million of discrete tax expense, primarily related to the revaluation of cross-currency swap agreements due to depreciation of the Euro versus theU.S. dollar and several foreign discrete items, offset in part byU.S. tax benefit for state deferred tax rate change and excess tax benefit for stock compensation. Excluding the discrete tax expense of$9.3 million , the overall effective tax rate was 26.9 percent. 20
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Income tax expense of$63.0 million in 2021 includes$4.3 million of discrete tax expense, primarily related to the revaluation of cross-currency swap agreements due to depreciation of the Euro versusU.S. dollar, changes in valuation allowances and several foreign discrete items. Excluding the discrete tax expense of$4.3 million , the overall effective tax rate was 27.1 percent.
The decrease in the overall effective tax rate for 2022 compared to 2021, excluding the impact of discrete items, is primarily due to the change in the foreign rate differential resulting from a change in mix of earnings across jurisdictions.
Income from equity method investments
($ in millions) 2022 2021
Income from equity method investments
The income from equity method investments relates to our 50 percent ownership of theSekisui-Fuller joint venture inJapan . The lower income for 2022 compared to 2021 is due to the unfavorable impact of the weakening of the Japanese yen against theU.S. dollar partially offset by higher net income in our joint venture.
Net income attributable to
($ in millions) 2022 2021 2022 vs
2021
Net income attributable to H.B. Fuller$ 180.3 $ 161.4 11.7 % Percent of net revenue 4.8 % 4.9 %
Net income attributable to
Operating Segment Results
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. For segment evaluation by the chief operating decision
maker, segment operating income is defined as gross profit less SG&A expenses.
Inter-segment revenues are recorded at cost plus a markup for administrative
costs. Corporate expenses, other than those included in Corporate Unallocated,
are allocated to each operating segment.
We have three reportable segments: Hygiene, Health and Consumable Adhesives,
Engineering Adhesives and Construction Adhesives. The tables below provide
certain information regarding the net revenue and segment operating income of
each of our operating segments. Corporate Unallocated includes business
acquisition and integration-related charges, organizational
restructuring-related charges, the results of business divestitures and costs
related to the implementation of Project ONE.
Net Revenue by Segment
2022 2021
Net % of Net % of
($ in millions) Revenue Total Revenue Total
Hygiene, Health and Consumable Adhesives $ 1,695.9 45 % $ 1,472.7 45 %
Engineering Adhesives 1,532.7 41 % 1,371.8 42 %
Construction Adhesives 520.6 14 % 433.5 13 %
Total $ 3,749.2 100 % $ 3,278.0 100 %
Segment Operating Income (Loss)
2022 2021
Operating % of Operating % of
($ in millions) Income (Loss) Total Income (Loss) Total
Hygiene, Health and Consumable Adhesives $ 165.8 51 % $ 138.4 55 %
Engineering Adhesives 168.8 52 % 135.9 54 %
Construction Adhesives 23.0 8 % 14.1 5 %
Segment total 357.6 111 % 288.4 114 %
Corporate Unallocated (34.9 ) (11 )% (35.8 ) (14 )%
Total $ 322.7 100 % $ 252.6 100 %
The following table provides a reconciliation of segment operating income to income before income taxes and income from equity method investments, as reported in the Consolidated Statements of Income.
($ in millions) 2022 2021 Segment operating income$ 322.7 $ 252.6 Other income, net 12.9 32.9 Interest expense (91.5 ) (78.1 ) Interest income 7.8 9.5 Income before income taxes and income from equity method investments$ 251.9 $ 216.9 21
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Hygiene, Health and Consumable Adhesives
($ in millions) 2022 2021 2022 vs 2021 Net revenue$ 1,695.9 $ 1,472.7 15.2 % Segment operating income$ 165.8 $ 138.4 19.8 % Segment profit margin % 9.8 % 9.4 % The following tables provide details of Hygiene, Health and Consumable Adhesives net revenue variances: 2022 vs 2021 Organic revenue growth 20.0 % Extra week (53 week year) 2.1 % Currency (6.9 )% Net revenue growth 15.2 % Net revenue increased 15.2 percent in 2022 compared to 2021. The 20.0 percent increase in organic growth was attributable to favorable product pricing. The negative currency effect was due to the weaker Euro, Turkish lira, Argentinian peso and Egyptian pound compared to theU.S. dollar. Additionally, net revenue in 2022 was higher than 2021 by 2.1 percent from an additional week of revenue in 2022 as it was a 53 week fiscal year compared to a 52 week fiscal year in 2021. As a percentage of net revenue, raw material costs increased 300 basis points due to higher raw material costs partially offset by higher net revenue. Other manufacturing costs as a percentage of net revenue decreased 250 basis points due to higher net revenue. SG&A expenses as a percentage of net revenue decreased 90 basis points in 2022 as compared to 2021 due to higher net revenue. Segment operating income increased 19.8 percent and segment operating margin as a percentage of net revenue increased 40 basis points in 2022 as compared to 2021.
Engineering Adhesives
($ in millions) 2022 2021 2022 vs 2021 Net revenue$ 1,532.7 $ 1,371.8 11.7 % Segment operating income$ 168.8 $ 135.9 24.2 % Segment profit margin % 11.0 % 9.9 % The following tables provide details of Engineering Adhesives net revenue variances: 2022 vs 2021 Organic revenue growth 15.9 % Extra week (53 week year) 2.0 % Currency (6.2 )% Net revenue growth 11.7 % Net revenue increased 11.7 percent in 2022 compared to 2021. The 15.9 percent increase in organic growth was attributable to favorable product pricing and increase in sales volume. The negative currency effect was due to a weaker Euro, Turkish lira and Chinese renminbi compared to theU.S. dollar. Additionally, net revenue in 2022 was higher than 2021 by 2.0 percent from an additional week of revenue in 2022 as it was a 53 week fiscal year compared to a 52 week fiscal year in 2021. 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 170 basis points due to higher net revenue. SG&A expense as a percentage of net revenue decreased 90 basis points due to higher net revenue. Segment operating income increased 24.2 percent and segment operating margin increased 110 basis points compared to 2021. Construction Adhesives ($ in millions) 2022 2021 2022 vs 2021 Net revenue$ 520.6 $ 433.5 20.1 % Segment operating income (loss)$ 23.0 $ 14.1 63.1 % Segment profit margin % 4.4 % 3.3 % The following tables provide details of Construction Adhesives net revenue variances: 2022 vs 2021 Organic revenue growth 7.0 % Extra week (53 week year) 1.9 % M&A 12.4 % Currency (1.2 )% Net revenue growth 20.1 % Net revenue increased 20.1 percent in 2022 compared to 2021. The 7.0 percent increase in organic growth was attributable to favorable product pricing, partially offset by lower sales volume. The increase in net revenue from M&A was primarily due to the acquisitions of Fourny and Apollo during the first quarter of 2022. The negative currency effect was due to a weaker British pound, Euro and Australian dollar compared to theU.S. dollar. Additionally, net revenue in 2022 was higher than 2021 by 1.9 percent from an additional week of revenue in 2022 as it was a 53 week fiscal year compared to a 52 week fiscal year in 2021. 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 160 basis points primarily due to higher net revenue and the impact of acquisitions. SG&A expenses as a percentage of net revenue decreased 100 basis points also due to higher net revenue. Segment operating income increased 63.1 percent and segment operating margin increased 110 basis points compared to 2021. 22
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Table of Contents Corporate Unallocated ($ in millions) 2022 2021 2022 vs 2021 Segment operating loss$ (34.9 ) $ (35.8 ) (2.5 )% Segment profit margin % NMP NMP
NMP = Non-meaningful percentage
Corporate Unallocated includes acquisition and integration-related charges, restructuring-related charges, the results of business divestitures and costs related to the implementation of Project ONE.
Segment operating loss increased 2.5 percent in 2022 reflecting increased acquisition project costs compared to 2021.
Financial Condition, Liquidity and Capital Resources
Total cash and cash equivalents as of
We believe that cash flows from operating activities will be adequate to meet our short-term and long-term liquidity and capital expenditure needs. In addition, we believe we have the ability to obtain both short-term and long-term debt to meet our financing needs for the foreseeable future. Cash available inthe United States has historically been sufficient and we expect it will continue to be sufficient to fundU.S. operations,U.S. capital spending andU.S. pension and other postretirement benefit contributions in addition to fundingU.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 forU.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. AtDecember 3, 2022 , we were in compliance with all covenants of our contractual obligations as shown in the following table: Result as of December 3, Covenant Debt Instrument Measurement 2022
Total Indebtedness / TTM Term Loan B Credit Not greater than 5.25
2.3
EBITDA Agreement
Total Indebtedness / TTM Revolving Credit Not greater than 5.25
2.3
EBITDA Agreement
TTM EBITDA / Consolidated Revolving Credit Not less than 2.0
5.4 Interest Expense Agreement ? 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
Adhesives during the fiscal years ending in 2017, 2018 and 2019 not exceeding
Adhesives acquisition incurred in fiscal years ending in 2017 and 2018 not
exceeding
the SAP implementation during fiscal years ending in 2017 through 2021 not
exceeding
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 8-K filing dated
? 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
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
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
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
? 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.
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We believe we have the ability to meet all of our contractual obligations and commitments in fiscal 2022.
Net Financial Assets (Liabilities)
($ in millions) 2022 2021 Financial assets: Cash and cash equivalents$ 79.9 $ 61.8 Foreign exchange contracts 10.3 5.7 Cash flow hedges - 14.5 Financial liabilities: Notes payable (28.9 ) (25.0 ) Long-term debt (1,736.3 ) (1,591.5 ) Foreign exchange contracts (4.6 ) (6.1 )
Interest rate and cross currency swaps (42.5 ) (22.9 )
Net investment hedges (54.0 ) -
Net financial liabilities $ (1,776.1 ) $ (1,563.5 )
Of the $79.9 million in cash and cash equivalents as of December 3, 2022 ,
$75.2 million was held outside the U.S. Of the $75.2 million of cash held
outside the U.S. , earnings on $73.3 million are indefinitely reinvested outside
of the U.S. It is not practical for us to determine the U.S. tax implications of
the repatriation of these funds.
There are no contractual or regulatory restrictions on the ability of
consolidated and unconsolidated subsidiaries to transfer funds in the form of
cash dividends, loans or advances to us, except for: 1) a credit facility
limitation restricting investments, loans, advances or capital contributions
from Loan Parties to non-Loan Parties in excess of $100.0 million , 2) a credit
facility limitation that provides total investments, loans, advances or
guarantees not otherwise permitted in the credit agreement for all subsidiaries
shall not exceed $125.0 million in the aggregate, 3) a credit facility
limitation that provides total investments, dividends, and distributions shall
not exceed the Available Amount defined in these agreements, all three of which
do not apply once our secured leverage ratio drops below 4.0x and 4) typical
statutory restrictions, which prohibit distributions in excess of net capital or
similar tests. The Royal Adhesives acquisition and any investments, loans, and
advances established to consummate the Royal Adhesives acquisition, are excluded
from the credit facility limitations described above. Additionally, we have
taken the income tax position that the majority of our cash in non-U.S.
locations is indefinitely reinvested.
Debt Outstanding and Debt Capacity
Notes Payable Notes payable were$28.9 million atDecember 3, 2022 and$25.0 million atNovember 27, 2021 . These amounts primarily represented various foreign subsidiaries' short-term borrowings that were not part of committed lines. The weighted-average interest rates on these short-term borrowings were 16.2 percent in 2022 and 8.1 percent in 2021. Long-Term Debt Long-term debt consisted of a secured term loan ("Term Loan B") and two unsecured public notes ("Public Notes"). The Term Loan B has a principal amount of$1,001.2 million and bears a floating interest rate at LIBOR plus 2.00 percent (6.19 percent atDecember 3, 2022 ) and matures in fiscal year 2024. The 10-year Public Notes have a principal amount of$300.0 million , bear fixed interest at 4.00 percent and mature in 2027. We are subject to a par call of 1.00 percent except within three months of the maturity date. The 8-year Public Notes have a principal amount of$300.0 million , bear fixed interest at 4.25 percent and mature in 2028. We are subject to a par call plus 50 percent of coupon in year 4, plus 25 percent of coupon in year 5 and at par thereafter. We currently have no intention to prepay the Public Notes. Additional details on the Public Notes and the Term Loan B Credit Agreement can be found in Form 8-K dated February 9, 2017 , Form 8-K dated October 20, 2017 and Form 8-K dated October 20, 2020 , respectively. Interest payable on our long-term debt totaled$7.4 million as ofDecember 3, 2022 . We entered into interest rate swap agreements to convert our$300.0 million Public Notes that were issued onOctober 20, 2020 to a variable interest rate of 1-month LIBOR plus 3.28 percent. We entered into interest rate swap agreements to convert$150.0 million of our$300.0 million Public Notes that were issued onFebruary 14, 2017 to a variable interest rate of 1-month LIBOR plus 1.86 percent. See Note 7 to the Consolidated Financial Statements for further discussion on the issuance of our Public Notes. The swaps were designated for hedge accounting treatment as fair value hedges. We applied the hypothetical derivative method to assess hedge effectiveness for this interest rate swap. Changes in the fair value of a hypothetically perfect swap with terms that match the critical terms of our fixed rate Public Notes are compared with the change in the fair value of the swaps. OnMay 1, 2020 , we terminated the swap agreement. Upon termination, we received$15.8 million in cash. The remaining swap liability will be accounted for as a discount on long-term debt and will be amortized to interest expense over the remaining life of the Public Notes of seven years. 24
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Table of Contents Revolving Credit Facility We have a revolving credit agreement with a consortium of financial institutions atDecember 3, 2022 . This revolving credit agreement creates a secured multi-currency revolving credit facility that we can draw upon to repay existing indebtedness, finance working capital needs, finance acquisitions and for general corporate purposes up to a maximum of$700 million . OnJanuary 24, 2022 , we relied on the accordion feature in our credit agreement to increase the commitment under the existing credit facility from$400 million to$600 million . OnFebruary 28, 2022 , we executed an amendment to amend and restate the revolving credit agreement to move from borrowing under LIBOR to borrowing under SOFR along with further upsizing the revolving credit facility by$100 million to$700 million in total aggregate commitments. Interest on the revolving credit facility is payable at the SOFR plus a credit spread adjustment (0.11448 percent) plus 1.75 percent (5.94 percent atDecember 3, 2022 ). A facility fee of 0.25 percent of the unused commitment under the revolving credit facility is payable quarterly. The interest rate and the facility fee are based on a leverage grid. The revolving credit facility expires onJuly 22, 2024 . As ofDecember 3, 2022 , we had$175.5 million drawn under the revolving credit facility. Additional details on the revolving credit agreement can be found in Form 8-K datedOctober 20, 2020 . For further information related to debt outstanding and debt capacity, see Note 7 to the Consolidated Financial Statements. Uncertainty relating to the LIBOR phase out may adversely impact the value of, and our obligations under, our Term Loan B and Public Notes. See the applicable discussion under Item 1A. Risk Factors.
As ofDecember 3, 2022 , goodwill totaled$1,392.6 million (31.2 percent of total assets) and other intangible assets, net of accumulated amortization, totaled$702.1 million (15.7 percent of total assets).
The components of goodwill and other identifiable intangible assets, net of amortization, by segment are as follows:
2022
Hygiene,
Health
and
Consumable Engineering Construction
($ in millions) Adhesives Adhesives Adhesives Total
Goodwill $ 329.0 $ 637.9 $ 425.7 $ 1,392.6
Purchased technology and patents 5.7 31.5 15.1 52.3
Customer relationships 105.8 228.5 281.3 615.6
Tradenames 4.5 14.6 9.8 28.9
Other finite-lived intangible assets 1.9 0.1 2.8 4.8
Indefinite-lived intangible assets - 0.5 - 0.5
2021
Hygiene,
Health
and
Consumable Engineering Construction
($ in millions) Adhesives Adhesives Adhesives Total
Goodwill $ 325.4 $ 662.0 $ 311.4 $ 1,298.8
Purchased technology and patents 7.0 36.4 10.2 53.6
Customer relationships 108.0 253.9 235.6 597.5
Tradenames 4.6 16.5 8.7 29.8
Other finite-lived intangible assets 2.3 0.2 3.2 5.7
Indefinite-lived intangible assets - 0.5 - 0.5
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Selected Metrics of Liquidity and Capital Resources
Key metrics we monitor are net working capital as a percent of annualized net
revenue, trade receivables days sales outstanding (DSO), inventory days on hand,
free cash flow after dividends and debt capitalization ratio.
December 3, November 27,
2022 2021
Net working capital as a percentage of annualized
net revenue1 16.7 % 15.7 %
Trade receivables DSO (in days)2 62 62
Inventory days on hand (in days)3 71 65
Free cash flow after dividends4 $ 87.3 $ 82.3
Debt capitalization ratio5 52.3 % 50.2 %
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 4).
2 Trade receivables net of allowance for doubtful accounts 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 Net cash provided by operating activities less purchased property, plant and equipment and dividends paid. See reconciliation to 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 operating activities 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 withU.S. GAAP.
Reconciliation of "Net cash provided by operating activities" to "Free cash flow after dividends"
($ in millions) 2022 2021
Net cash provided by operating activities
39.2 34.9
Free cash flow after dividends $ 87.3 $ 82.3
Summary of Cash Flows
Cash Flows from Operating Activities
($ in millions) 2022 2021
Net cash provided by operating activities
Net income including non-controlling interest was$180.4 million in 2022 and$161.5 million in 2021. Depreciation and amortization expense totaled$147.0 million in 2022 compared to$143.2 million in 2021. The higher depreciation and amortization expense in 2022 is related to the assets acquired in our business acquisitions. 26
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Changes in net working capital (trade receivables, inventory and trade payables)
accounted for a use of cash of
? Trade Receivables, net - Changes in trade receivables resulted in a
million use of cash in 2022 compared to a
The lower use of cash in 2022 compared to 2021 was related to higher
collections in the current year compared to the prior year. The DSO was
62 days at December 3, 2022 and November 27, 2021 .
? Inventory - Changes in inventory resulted in a
in 2022 compared to a
levels increased from 2021 as a result of acquisitions and also reflecting
higher raw material costs and efforts to maintain service levels. Inventory
days on hand were 71 days at the end of 2022 compared to 65 days at the end
of 2021.
? Trade Payables - Changes in trade payables resulted in a
cash in 2022 and a
2022 compared to the source of cash in 2021 primarily related to the timing of
payments.
Contributions to our pension and other postretirement benefit plans were
$3.0 million and $3.8 million in 2022 and 2021, respectively. Income taxes
payable resulted in a $12.9 million and a $4.1 million use of cash in 2022 and
2021, respectively. Other assets resulted in a $46.5 million source of cash and
a $79.1 million use of cash in 2022 and 2021, respectively. The source of cash
in 2022 is primarily driven by an decrease in pension and post-retirement assets
related to year-end pension valuation and a decrease in derivative assets.
Accrued compensation was a $1.1 million and a $27.7 million source of cash
in 2022 and 2021, respectively, relating to higher accruals for our employee
incentive plans. Other operating activity was a $6.2 million and a $108.6
million source of cash in 2022 and 2021, respectively. Other operating activity
includes equity adjustments of approximately ($25.0) million and $55.0 million
related to year-end pension valuations in 2022 and 2021, respectively.
Cash Flows Used In Investing Activities
($ in millions) 2022 2021
Net cash used in investing activities
Purchases of property, plant and equipment were$130.0 million in 2022 compared to$96.1 million in 2021. The higher purchases in 2022 reflect the timing of capital projects and expenditures related to growth initiatives. Proceeds from the sale of property, plant and equipment were$1.6 million in 2022 compared to$2.9 million in 2021. Purchased businesses, net of cash acquired, were$250.8 million in 2022 compared to$5.4 million in 2021. In 2022, we acquired Tissue Seal for$22.2 million , Fourny for$14.3 million , Apollo for$194.4 million , ZKLT for$13.5 million and GSSI for$6.4 million . In 2021, we acquired STR Holdings, Inc. for$5.4 million . In 2021, we received payment of a government grant related to the building of a plant inChina of$5.8 million and we expended cash related to the building of this plant of$1.8 million .
Cash Flows Used In Financing Activities
($ in millions) 2022 2021
Net cash used in financing activities
In 2022 and 2021, we repaid$159.5 million and$156.5 million of long-term debt, respectively. See Note 7 to the Consolidated Financial Statements for further discussion of debt borrowings and repayments. Cash paid for dividends were$39.2 million and$34.9 million in 2022 and 2021, respectively. Cash generated from the exercise of stock options was$30.1 million and$32.3 million in 2022 and 2021, respectively. Repurchases of common stock related to statutory minimum tax withholding upon vesting of restricted stock were$4.0 million in 2022 compared to$2.7 million in 2021. There were no repurchases from our share repurchase program in 2022 and 2021. We are subject to mandatory prepayments in the first quarter of each fiscal year equal to 50% of Excess Cash Flow, as defined in the Term Loan B Credit Agreement, of the prior fiscal year less any voluntary prepayments made during that fiscal year. The Excess Cash Flow Percentage shall be reduced to 25% when our Secured Leverage Ratio is below 4.25:1.00 and to 0% when our Secured Leverage Ratio is below 3.75:1.00. The prepayment for the 2022 measurement period was satisfied through amounts prepaid prior to 2022.
We expect 2023 capital expenditures to be approximately
Forward-Looking Statements and Risk Factors
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. This Annual Report on Form 10-K 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 Annual Report on Form 10-K. 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 theSEC or in our press releases) on related subjects. 27
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