Note1:Basis of Presentation

The accompanying unaudited interim Condensed 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 Condensed 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 Condensed 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 28, 2015December 3, 2016 as filed with the Securities and Exchange Commission.

AsOn December 4, 2016, for our subsidiaries in Latin America, we changed the functional currency from the U.S. dollar to the entity’s local currency based on management’s analysis of the beginningchanges of the first quarter ending February 27,economic facts and circumstances in which these subsidiaries operate. The change in functional currency is accounted for prospectively from December 4, 2016 and financial statements prior to and including the six months ended May 28, 2016 and the year ended December 3, 2016 have not been restated for the change in functional currency. Monetary assets and liabilities have been remeasured to the U.S. dollar at current exchange rates. Non-monetary assets (property, plant and equipment, net; goodwill; and intangible assets, net)have been remeasured to reflect the difference between the exchange rate when the asset arose and the exchange rate on the date of the change in functional currency. As a result of this change in functional currency, we created a new global operating segment named Engineering Adhesives, which includesrecorded an $11,317 cumulative translation adjustment included in other comprehensive income for the electronics, automotive and Tonsan and Cyberbond businesses from around the world. We also began reporting our Construction Products business on a global basis by combining our Europe, India, Middle East and Africa (EIMEA) and Asia Pacific construction businesses with our Construction Products operating segment. We now have five reportable segments: Americas Adhesives, EIMEA, Asia Pacific, Construction Products and Engineering Adhesives.six months ended June 3, 2017.

New Accounting Pronouncements

In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09,Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The ASU was issued to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Our effective date for adoption of this guidance is our fiscal year beginning December 2, 2018 with early adoption permitted. We will apply this guidance to applicable transactions after the adoption date.

In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires employers to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses. The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in nonoperating expenses. The ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization.  Our effective date for adoption of this guidance is our fiscal year beginning December 2, 2018 with early adoption permitted.  We are currently evaluating the effect that this guidance will have on our Consolidated Financial Statements.

In February 2017, the FASB issued ASU No. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The ASU was issued to clarify the scope of the previous standard and to add guidance for partial sales of nonfinancial assets. Our effective date for adoption of this guidance is our fiscal year beginning December 2, 2018. We have evaluated the effect that this guidance will have on our Consolidated Financial Statements and related disclosures and determined it will not have a material impact.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,which removes Step 2 of the goodwill impairment test.  A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.  Our effective date for prospective adoption of this guidance is our fiscal year beginning November 29, 2020 with early adoption permitted. We will apply this guidance to applicable impairment tests after the adoption date.

In January 2017, the FASB issued ASU No. 2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  Our effective date for prospective adoption of this guidance is our fiscal year beginning December 2, 2018. We will apply this guidance to applicable transactions after the adoption date.

In November 2016, the FASB issued ASU No. 2016-18,Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).This ASU requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include cash and restricted cash equivalents. Our effective date for adoption of this guidance is our fiscal year beginning December 2, 2018. We have evaluated the effect that this guidance will have on our Consolidated Financial Statements and related disclosures and determined it will not have a material impact.

In October 2016, the FASB issued ASU No. 2016-17,Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control.This ASU changes how a decision maker treats indirect interests in a managed variable interest entity held through an entity under common control in its primary beneficiary (consolidation) analysis. Our effective date for adoption of this guidance is our fiscal year beginning December 3, 2017. We have evaluated the effect that this guidance will have on our Consolidated Financial Statements and related disclosures and determined it will not have a material impact.

In October 2016, the FASB issued ASU No. 2016-16,Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.This ASU changes the timing of income tax recognition for an intercompany sale of assets. The ASU requires the seller’s tax effects and the buyer’s deferred taxes to be recognized immediately upon the sale instead of deferring accounting for the income tax implications until the assets are sold to a third party or recovered through use. Our effective date for adoption of this guidance is our fiscal year beginning December 2, 2018. We are currently evaluating the effect that this guidance will have on our Consolidated Financial Statements.

In August 2016, the Financial Accounting Standards Board (FASB)FASB issued Accounting Standards Update (ASU)ASU No. 2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force).This ASU requires changes in the presentation of certain items including but not limited to debt prepayment or debt extinguishment costs; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investees. Our effective date for adoption of this guidance is our fiscal year beginning December 2, 2018.2018. We are currently evaluating the effect that this guidance will have on our Consolidated Financial Statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements.This ASU requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Our effective date for adoption of this guidance is our fiscal year beginning November 29, 2020.2020. We are currently evaluating the effect that this guidance will have on our Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-09,Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting.This ASU provides simplification in the accounting for share-based payment transactions including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows.Our effective date for adoption of this guidance is our fiscal year beginning December 3, 2017.We2017.We are currently evaluating the effect that this guidance will have on our Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-08,Revenue from Contracts with Customers (Topic 606), Principalversus versus Agent Considerations (Reporting Revenue Gross versus Net).  This ASU provides guidance on recording revenue on a gross basis versus a net basis based on the determination of whether an entity is a principal or an agent when another party is involved in providing goods or services to a customer.  The amendments in this ASU affect the guidance in ASU No. 2014-09 and are effective in the same timeframe as ASU No. 2014-09 as discussed below.

In February 2016, the FASB issued ASU No. 2016-05,Derivatives and Hedging (Topic 815). The amendments in this guidance clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. Our effective date for adoption of this guidance is our fiscal year beginning December 4, 2016.We have evaluated the effect that this guidance will have on our Consolidated Financial Statements and related disclosures and determined it will not have a material impact.

In February 2016, the FASB issued ASU No. 2016-02,Leases (Subtopic 842). This guidance changes accounting for leases and requires lessees to recognize the assets and liabilities arising from all leases, including those classified as operating leases under previous accounting guidance, on the balance sheet and requires disclosure of key information about leasing arrangements to increase transparency and comparability among organizations. Our effective date for adoption of this guidance is our fiscal year beginning December 1, 2019 with early adoption permitted.permitted. The new guidance must be adopted using a modified retrospective transition approach, and provides for certain practical expedients. We are currently evaluating the impact that the new guidance will have on our Consolidated Financial Statements.

In June 2014,January 2016, the FASB issued ASU No. 2014-12,2016-01, CompensationFinancial Instruments - Stock Compensation (Topic 718), Accounting forShare-Based Payments When the TermsOverall (Subtopic 825-10): Recognition and Measurement of an Award That a Performance Target Could Be Achieved after the Requisite Service Period,Financial Assets and Financial Liabilities, which requires a performance target that affects vesting andequity investments (except those accounted for under the equity method of accounting or those that couldresult in consolidation of the investee) are to be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-datemeasured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the award and compensation cost shouldsame issuer. Furthermore, equity investments without readily determinable fair values are to be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s)assessed for which the requisite service has already been rendered. impairment using a quantitative approach.Our effective date for adoption of this guidance is our fiscal year beginning December 4, 2016, however we elected to early adopt2, 2018. We have evaluated the effect that this guidance as ofwill have on our first quarter ended February 27, 2016. The adoption ofthis guidance didConsolidated Financial Statements and related disclosures and determined it will not have a material impactimpact.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement ofInventory, which requires a company to measure inventory within the scope of this guidance (inventory measured using first-in, first-out (FIFO) or average cost) at the lower of cost and net realizable value methods. Subsequent measurement is unchanged for inventory measured using the last-in, first-out (LIFO) or retail inventory method. Our effective date for adoption of this guidance is our fiscal year beginning December 3, 2017. We have evaluated the effect that this guidance will have on our Consolidated Financial Statements.Statements and related disclosures and determined it will not have a material impact.

In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017 (as stated in ASU No. 2015-14 which defers the effective date and was issued in August 2015) and is now effective for our fiscal year beginning December 2, 2018. Early application as of the original effective date is permitted under ASU 2015-14. The standard permits the use of either the retrospective or cumulative effect transition method.We are evaluatingcontinuing to evaluate the effect that this guidance will have on our Consolidated Financial Statements, including potential impacts on the timing of revenue recognition and additional information that may be necessary for expanded disclosures regarding revenue. We have identified an implementation project team and related disclosures.oversight processes and have commenced the assessment phase of the project. We have not yet selectedconcluded as to whether the new guidance will be adopted on a transition method nor have we determinedfull or modified retrospective basis, but will not apply the effectearly adoption provisions of the standard on our ongoing financial reporting.new guidance.

Note 2: Acquisitions

Wisdom Adhesives

On January 27, 2017, we acquired substantially all of the assets of H.E. Wisdom & Sons, Inc. and its affiliate Wisdom Adhesives Southeast, L.L.C., (“Wisdom Adhesives”) headquartered in Elgin, Illinois. Wisdom Adhesives is a provider of adhesives for the packaging, paper converting and assembly markets. The acquisition will help strengthen our position in the North America adhesives market. The purchase price of $123,305 was financed through borrowings on our revolving credit facility and was recorded in our Americas Adhesives operating segment. We incurred acquisition related costs of approximately $548, which were recorded as selling, general and administrative (“SG&A”) expenses in the Condensed Consolidated Statement of Income for the six months ended June 3, 2017.

The acquisition fair value measurement was preliminary as of June 3, 2017, subject to the completion of the valuation of Wisdom Adhesives and further management reviews and assessment of the preliminary fair values of the assets acquired and liabilities assumed. We expect the fair value measurement process to be completed when the final appraisals are available, but no later than twelve months from the acquisition date.

The following table summarizes the preliminary fair value measurement of the assets acquired and liabilities assumed as of the date of acquisition:

The preliminary expected lives of the acquired intangible assets are 15 years for customer relationships and 10 years for trademarks/trade names.

Based on the preliminary fair value measurement of the assets acquired and liabilities assumed, we allocated $60,557 to goodwill for the expected synergies from combining Wisdom Adhesives with our existing business. Such goodwill is deductible for tax purposes. The goodwill was assigned to our Americas Adhesives operating segment. The Wisdom Adhesives acquisition does not represent a material business combination, therefore pro forma financial information is not provided.

Cyberbond

On June 8, 2016, we acquired Cyberbond, L.L.C., heaquartered(“Cyberbond”) headquartered in Batavia, Illinois whichwith operations in the United States and Europe. Cyberbond is a provider of industrial adhesives for the electronics, medical, audio equipment, automotive and structural markets. The acquisition will help us to broaden our global position and accelerate our growth in the high margin, high growth Engineering Adhesives segment. The purchase price of $42,516$42,182, net of cash acquired of $332, was funded through existing cash and was recorded in our Engineering Adhesives operating segment. We incurred acquisition related costs of approximately $558,$527, which were recorded as selling, general and administrativeSG&A expenses in the Condensed Consolidated StatementsStatement of Income.

The acquisition fair value measurement was preliminary as of August 27, 2016, subject toIncome for the completion of the valuation of Cyberbond and further management reviews and assessment of the preliminary fair values of the assets acquired and liabilities assumed. We expect the fair value measurement process to be completed in the fourth quarter ofyear ended December 3, 2016.

The following table summarizes the preliminaryfinal fair value measurement of the assets acquired and liabilities assumed as of the date of acquisition:

The expected lives of the acquired intangible assets are seven years for developed technology, 15 years for customer relationships and 10 years for trademarks/trade names.

We have preliminarilyBased on the fair value measurement of the assets acquired and liabilities assumed, we allocated the entire excess purchase price$23,654 to goodwill infor the expected synergies from combining Cyberbond with our existing business. The amount of $38,152 pending completion of the valuation of other identified intangible assets. Such goodwill is not deductible for tax purposes.purposes is $10,658. The goodwill was assigned to our Engineering Adhesives operating segment. The Cyberbond acquisition does not represent a material business combination, therefore pro forma financial information is not provided.

Advanced Adhesives

On April 29, 2016, we acquired Advanced Adhesives Pty Limited and the business assets of Advanced Adhesives (New Zealand) Limited (Advanced Adhesives)(together referred to as “Advanced Adhesives”), providers of industrial adhesives in Australia and New Zealand. The acquisition will help us to strengthen our industrial adhesives market position and leverage a broader technology portfolio in both Australia and New Zealand. The combined purchase price of $10,365 was funded through existing cash and was recorded in our Asia Pacific operating segment. We incurred acquisition related costs of approximately $670,$646, which were recorded as selling, general and administrativeSG&A expenses in the Condensed Consolidated Statements of Income.

DuringIncome for the third quarter of 2016, the Company substantially completed its procedures related to the working capital accounts and obtained a preliminary valuation of the identified intangible assets in order to allocate the purchase price to the assets acquired and liabilities assumed. The outcome of these procedures are reflected in the adjustments in the table below. The acquisition fair value measurement as of August 27, 2016, is subject to the completion of the final assessment of the fair values of the assets acquired and liabilities assumed, specifically related to the identified intangible assets. We expect the fair value measurement process to be completed in the fourth quarter ofyear ended December 3, 2016.

The following table summarizes the final fair value measurement of the assets acquired and liabilities assumed as of the date of acquisition:

The expected lives of the acquired intangible assets are 15 years for customer relationships and one year for trademarks.trademarks/trade names.

Continental Products Limited

On February 3, 2015, we acquired the equity of Continental Products Limited, a provider of industrial adhesives, based in Nairobi, Kenya. The purchase price of $1,647, net of cash acquired of $371, was funded through existing cash.

Tonsan Adhesive, Inc.

On February 2, 2015, we acquired 95 percent of the equity of Tonsan Adhesive, Inc., an independent engineering adhesives provider based in Beijing, China. The purchase price was 1.4 billion Chinese renminbi, or approximately $215,925, net of cash acquired of $7,754, which was financed with the proceeds from our October 31, 2014 term loan, drawn in conjunction with the acquisition.

Concurrent with the acquisition, we entered into an agreement to acquire the remaining 5 percent of Tonsan’s equity beginning February 1, 2019 for 82 million Chinese renminbi or approximately $13,038. In addition, the agreement requires us to pay up to 418 million Chinese renminbi or approximately $66,848 in contingent consideration based upon a formula related to Tonsan’s gross profit in fiscal 2018. The fair values of the agreement to purchase the remaining equity and the contingent consideration based upon a discounted cash flow model as of the date of acquisition were $11,773 and $7,714, respectively. See Note 14 for further discussion of the fair value of the contingent consideration.

The following table summarizesBased on the fair value measurement of the assets acquired and liabilities assumed, as ofwe allocated $102 to goodwill for the date of acquisition:expected synergies from combining Advanced Adhesives with our existing business. Such goodwill is not deductible for tax purposes. The goodwill was assigned to our Asia Pacific operating segment. The Advanced Adhesives acquisition does not represent a material business combination, therefore pro forma financial information is not provided.

Note 3: Accounting for Share-Based Compensation3:Restructuring Actions

OverviewBusiness Integration Project

We have various share-based compensation programs, which provide for equity awards including stock options, incentive stock options, restricted stock shares, restricted stock units, performance awardsThe integration of the industrial adhesives business we acquired in March 2012 involved a significant amount of restructuring and deferred compensation. These equity awards fall under several plans and are described in detailcapital investment to optimize the new combined entity. In addition, we took a series of actions in our Annual Report on Form 10-Kexisting EIMEA operating segment to improve the profitability and future growth prospects of this operating segment. We combined these two initiatives into a single project which we refer to as the “Business Integration Project.” During the second quarter and six months ended May 28, 2016, weincurred costs of $370 and $783 related to transformation costs, workforce reduction costs, facility exit costs and other related costs for the yearBusiness Integration Project, which are included in special charges, net in the Condensed Consolidated Statements of Income. The Business Integration Project was substantially complete at the end of 2016.

2017 RestructuringPlan

During the first quarter of 2017, we approved a restructuring plan (the “2017 Restructuring Plan”) related to organizational changes and other actions to optimize operations. The 2017 Restructuring Plan was implemented in the first quarter of 2017 and is currently expected to be completed by mid-year of fiscal 2018. During the three and six months ended November 28, 2015.June 3, 2017, we recorded a pre-tax charge of $5,634 and $15,802, respectively, related to the implementation of the 2017 Restructuring Plan.

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

The following table summarizes the pre-tax impact of restructuring charges by segment:

A summary of the restructuring liability during the six months ended June 3, 2017 is presented below:

Non-cash charges include accelerated depreciation resulting from the cessation of use of certain long-lived assets and the recording of a provision related to the discontinuance of certain retail and wholesale products. Restructuring liabilities have been classified as a component of other accrued expenses on the Condensed Consolidated Balance Sheets.

Grant-Date Fair ValueNote 4: Inventories

The composition of inventories is as follows:

Note5: Goodwill and Other Intangible Assets

We useThe goodwill activity for the Black-Scholes option pricing model to calculate the grant-date fair value of an award. There were no options granted during the third quarter of 2015. The fair value of options granted during the threesix months ended August 27,June 3, 2017 is presented below:

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

Amortization expense with respect to amortizable intangible assets was $7,874 and $6,788 for the second quarter ended June 3, 2017 and May 28, 2016, respectively, and nine$15,229 and $13,486 for the six months ended August 27,June 3, 2017 and May 28, 2016, and August 29, 2015 were calculated using the following weighted average assumptions:  

Expected life – We use historical employee exercise and option expiration data to estimate the expected life assumption for the Black-Scholes grant-date valuation. We believe that this historical data is currently the best estimate of the expected term of a new option. We use a weighted-average expected life for all awards.respectively.

Expected volatility – Volatility is calculated using our historical volatility for the same period of time as the expected life. We have no reason to believe that our future volatility will differ materially from historical volatility.

Risk-free interest rate – The rate isEstimated aggregate amortization expense based on the U.S. Treasury yield curve in effect at the timecurrent carrying value of the grantamortizable intangible assets for the same period of timenext five fiscal years are as the expected life.follows: