Table Ofof Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 3, 2017

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 27, 2016

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to

 

Commission file number: 001-09225

 

H.B. FULLER COMPANY

(Exact name of registrant as specified in its charter)

 

Minnesota

41-0268370

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

1200 Willow Lake Boulevard, St. Paul, Minnesota

55110-5101

(Address of principal executive offices)

(Zip Code)

(651) 236-5900

(Registrant’s telephone number, including area code)

 

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. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”,filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [X] 

[X]

Accelerated filer

[  ]

Non-accelerated filer

[  ]

 

Non-accelerated filer [  ] (Do(Do not check if a smaller reporting company)

Smaller reporting company

[  ]

 

Emerging growth company

[  ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.[  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes [  ] No [X]

 

The number of shares outstanding of the Registrant’s Common Stock, par value $1.00 per share, was 50,342,97450,533,586 as of September 16, 2016.June 23, 2017.

 

 
1

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H.B. Fuller Company

Quarterly Report on Form 10-Q

Table of Contents

Quarterly Report on Form 10-Q

Table of Contents

 

  

Page

PART I.

1. FINANCIAL INFORMATION

 
   

ITEM 1.

FINANCIAL STATEMENTS (Unaudited)

13

   
 

Condensed Consolidated Statements of Income for the three and ninesix months ended August 27,June 3, 2017 and May 28, 2016 and August 29, 2015

13

   
 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and ninesix months ended August 27,June 3, 2017 and May 28, 2016 and August 29, 2015

24

   
 

Condensed Consolidated Balance Sheets as of August 27,June 3, 2017 and December 3, 2016 and August 29, 2015

35

   
 

Condensed Consolidated Statements of Total Equity as of August 27,June 3, 2017 and December 3, 2016 and August 29, 2015

46

   
 

Condensed Consolidated Statements of Cash Flows for the ninesix months ended August 27,June 3, 2017 and May 28, 2016 and August 29, 2015

57

   
 

Notes to Condensed Consolidated Financial Financial Statements

68

   

ITEM 2.

MANAGEMENT'SMANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

2327

   

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

3640

   

ITEM 4.

CONTROLS AND PROCEDURES

3841

   

PART II.

OTHER INFORMATION

3841

   

ITEM 1.

LEGAL PROCEEDINGS

3841

   

ITEM 1A.

RISK FACTORS

4043

   

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

  40

43

   

ITEM 6.

EXHIBITS

4144

   

SIGNATURES

4245

 

 
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PARTPART I. FINANCIALFINANCIAL INFORMATION

 

Item 11. Financial. Financial Statements

H.B. FULLER COMPANY AND SUBSIDIARIES

CondensedCondensed Consolidated Statementsof Income

(In thousands, except per share amounts)

(Unaudited)

 

  

Three Months Ended

  

Nine Months Ended

 
  

August 27,

  

August 29,

  

August 27,

  

August 29,

 
  

2016

  

2015

  

2016

  

2015

 

Net revenue

 $512,858  $524,133  $1,519,698  $1,535,556 

Cost of sales

  (366,737)  (377,293)  (1,077,716)  (1,123,573)

Gross profit

  146,121   146,840   441,982   411,983 

Selling, general and administrative expenses

  (97,692)  (98,297)  (301,143)  (293,712)

Special charges, net

  2,807   (1,297)  2,024   (4,592)

Other income (expense), net

  (956)  (1,040)  (7,603)  (1,246)

Interest expense

  (6,809)  (6,448)  (19,714)  (18,765)

Income from continuing operations before income taxes and income from equity method investments

  43,471   39,758   115,546   93,668 

Income taxes

  (12,513)  (14,372)  (35,563)  (34,528)

Income from equity method investments

  1,840   1,500   5,172   4,157 

Income from continuing operations

  32,798   26,886   85,155   63,297 

Loss from discontinued operations, net of tax

  -   -   -   (1,300)

Net income including non-controlling interests

  32,798   26,886   85,155   61,997 

Net income attributable to non-controlling interests

  (53)  (79)  (161)  (308)

Net income attributable to H.B. Fuller

 $32,745  $26,807  $84,994  $61,689 
                 

Earnings per share attributable to H.B. Fuller common stockholders:

         
                 

Basic1

                

Income from continuing operations

  0.65   0.53   1.70   1.25 

Loss from discontinued operations

  -   -   -   (0.03)

Basic

 $0.65  $0.53  $1.70  $1.23 
                 

Diluted1

                

Income from continuing operations

  0.64   0.52   1.66   1.22 

Loss from discontinued operations

  -   -   -   (0.03)

Diluted

 $0.64  $0.52  $1.66  $1.20 
                 

Weighted-average common shares outstanding:

                

Basic

  50,261   50,421   50,122   50,318 

Diluted

  51,453   51,530   51,234   51,460 
                 

Dividends declared per common share

 $0.14  $0.13  $0.41  $0.38 

1

Income per share amounts may not add due to rounding.

  

Three Months Ended

  

Six Months Ended

 
  

June 3,

  

May 28,

  

June 3,

  

May 28,

 
  

2017

  

2016

  

2017

  

2016

 

Net revenue

 $561,651  $532,514  $1,064,974  $1,006,840 

Cost of sales

  (415,613)  (374,258)  (779,940)  (710,979)

Gross profit

  146,038   158,256   285,034   295,861 

Selling, general and administrative expenses

  (102,770)  (103,684)  (215,685)  (203,451)

Special charges, net

  -   (370)  -   (783)

Other income (expense), net

  (110)  (1,565)  511   (6,647)

Interest expense

  (8,148)  (6,597)  (16,528)  (12,905)

Income before income taxes and income from equity method investments

  35,010   46,040   53,332   72,075 

Income taxes

  (11,151)  (14,290)  (16,916)  (23,050)

Income from equity method investments, net of tax

  2,005   1,640   4,279   3,332 

Net income including non-controlling interests

  25,864   33,390   40,695   52,357 

Net income (loss) attributable to non-controlling interests

  3   (59)  (33)  (108)

Net income attributable to H.B. Fuller

 $25,867  $33,331  $40,662  $52,249 
                 

Earnings per share attributable to H.B. Fuller common stockholders:

     

Basic

  0.51   0.66   0.81   1.04 

Diluted

  0.50   0.65   0.79   1.02 
                 

Weighted-average common shares outstanding:

                

Basic

  50,496   50,145   50,369   50,052 

Diluted

  51,686   51,253   51,573   51,124 
                 

Dividends declared per common share

 $0.15  $0.14  $0.29  $0.27 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

  

Three Months Ended

  

Nine Months Ended

 
  

August 27,

  

August 29,

  

August 27,

  

August 29,

 
  

2016

  

2015

  

2016

  

2015

 

Net income including non-controlling interests

 $32,798  $26,886  $85,155  $61,997 

Other comprehensive income (loss)

                

Foreign currency translation

  3,368   (10,719)  3,860   (48,639)

Defined benefit pension plans adjustment, net of tax

  1,677   1,527   5,032   4,582 

Interest rate swaps, net of tax

  10   10   30   30 

Cash-flow hedges, net of tax

  35   -   (156)  (25)

Other comprehensive income (loss)

  5,090   (9,182)  8,766   (44,052)

Comprehensive income

  37,888   17,704   93,921   17,945 

Less: Comprehensive income (loss) attributable to non-controlling interests

  53   (19)  161   294 
                 

Comprehensive income attributable to H.B. Fuller

 $37,835  $17,723  $93,760  $17,651 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

  

(Unaudited)

     
  

August 27,

  

November 28,

 
  

2016

  

2015

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $133,102  $119,168 

Trade receivables (net of allowances of $12,814 and $11,893, as of August 27,2016 and November 28, 2015, respectively)

  344,305   364,704 

Inventories

  261,363   248,504 

Other current assets

  64,992   68,675 

Total current assets

  803,762   801,051 
         

Property, plant and equipment

  1,156,171   1,111,987 

Accumulated depreciation

  (638,068)  (599,127)

Property, plant and equipment, net

  518,103   512,860 
         

Goodwill

  393,251   354,204 

Other intangibles, net

  201,164   212,993 

Other assets

  164,113   161,144 

Total assets

 $2,080,393  $2,042,252 
         

Liabilities, redeemable non-controlling interest and total equity

        

Current liabilities:

        

Notes payable

 $36,818  $30,757 

Current maturities of long-term debt

  78,581   22,500 

Trade payables

  160,836   177,864 

Accrued compensation

  46,425   52,079 

Income taxes payable

  7,815   8,970 

Other accrued expenses

  53,250   57,355 

Total current liabilities

  383,725   349,525 
         

Long-term debt, excluding current maturities

  596,171   669,606 

Accrued pension liabilities

  68,067   76,324 

Other liabilities

  71,174   69,272 

Total liabilities

  1,119,137   1,164,727 
         

Commitments and contingencies

        

Redeemable non-controlling interest

  4,412   4,199 
         

Equity:

        

H.B. Fuller stockholders' equity:

        

Preferred stock (no shares outstanding) shares authorized – 10,045,900

  -   - 

Common stock, par value $1.00 per share, shares authorized – 160,000,000, shares outstanding – 50,331,880 and 50,074,310, as of August 27, 2016 and November 28, 2015, respectively

  50,332   50,074 

Additional paid-in capital

  65,777   55,522 

Retained earnings

  1,058,847   994,608 

Accumulated other comprehensive loss

  (218,518)  (227,284)

Total H.B. Fuller stockholders' equity

  956,438   872,920 

Non-controlling interests

  406   406 

Total equity

  956,844   873,326 

Total liabilities, redeemable non-controlling interest and total equity

 $2,080,393  $2,042,252 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 
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H.B. FULLER COMPANYCOMPANY AND SUBSIDIARIES

CondensedCondensed Consolidated Statements of Total EquityComprehensive Income

(In thousands)

(Unaudited)

  

H.B. Fuller Company Shareholders

 
  

Common

Stock

  

Additional

Paid-in

Capital

  

Retained

Earnings

  

 

Accumulated

Other Comprehensive Income (Loss)

  

Non-

Controlling Interests

  

Total

 

Balance at November 29, 2014

 $50,311  $53,269  $933,819  $(147,352) $403  $890,450 

Comprehensive income (loss)

  -   -   86,680   (79,932)  400   7,148 

Dividends

  -   -   (25,891)  -   -   (25,891)

Stock option exercises

  234   4,397   -   -   -   4,631 

Share-based compensation plans other, net

  83   15,159   -   -   -   15,242 

Tax benefit on share-based compensation plans

  -   1,433   -   -   -   1,433 

Repurchases of common stock

  (554)  (18,736)  -   -   -   (19,290)

Non-controlling interest assumed

  -   -   -   -   14,197   14,197 

Recognition of non-controlling interest redemption liability

  -   -   -   -   (11,773)  (11,773)

Purchase of non-controlling interest

  -   -   -   -   (2,424)  (2,424)

Non-controlling interest

  -   -   -   -   (76)  (76)

Redeemable non-controlling interest

  -   -   -   -   (321)  (321)

Balance at November 28, 2015

  50,074   55,522   994,608   (227,284)  406   873,326 

Comprehensive income

  -   -   84,994   8,766   161   93,921 

Dividends

  -   -   (20,755)  -   -   (20,755)

Stock option exercises

  465   9,295   -   -   -   9,760 

Share-based compensation plans other, net

  111   11,081   -   -   -   11,192 

Tax benefit on share-based compensation plans

  -   1,462   -   -   -   1,462 

Repurchases of common stock

  (318)  (11,583)  -   -   -   (11,901)

Redeemable non-controlling interest

  -   -   -   -   (161)  (161)

Balance at August 27, 2016

 $50,332  $65,777  $1,058,847  $(218,518) $406  $956,844 
  

Three Months Ended

  

Six Months Ended

 
  

June 3,

  

May 28,

  

June 3,

  

May 28,

 
  

2017

  

2016

  

2017

  

2016

 

Net income including non-controlling interests

 $25,864  $33,390  $40,695  $52,357 

Other comprehensive income

                

Foreign currency translation

  18,513   1,442   7,994   492 

Defined benefit pension plans adjustment, net of tax

  1,593   690   3,183   3,355 

Interest rate swaps, net of tax

  10   10   20   20 

Cash-flow hedges, net of tax

  (23)  (440)  106   (191)

Other comprehensive income

  20,093   1,702   11,303   3,676 

Comprehensive income

  45,957   35,092   51,998   56,033 

Less: Comprehensive income attributable to non-controlling interests

  3   64   34   108 

Comprehensive income attributable to H.B. Fuller

 $45,954  $35,028  $51,964  $55,925 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 
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H.B. FULLER COMPANY AND SUBSIDIARIES

CondensedCondensed Consolidated Statements of Cash FlowsBalance Sheets

(In thousands)

(Unaudited)thousands, except share and per share amounts)

 

  

Nine Months Ended

 
  

August 27, 2016

  

August 29, 2015

 

Cash flows from operating activities:

        

Net income including non-controlling interests

 $85,155  $61,997 

Loss from discontinued operations, net of tax

  -   1,300 

Adjustments to reconcile net income including non-controlling interests to net cash provided by operating activities:

        

Depreciation

  36,730   35,696 

Amortization

  20,509   20,046 

Deferred income taxes

  3,785   4,775 

Income from equity method investments

  (5,172)  (4,157)
(Gain) loss on sale of assets  (2,794)  327 

Share-based compensation

  9,469   10,325 

Excess tax benefit from share-based compensation

  (1,462)  (1,321)

Non-cash charge for the sale of inventories revalued at the date of acquisition

  528   2,416 
Change in assets and liabilities, net of effects of acquisitions:        

Trade receivables, net

  25,646   15,860 

Inventories

  (6,165)  (19,955)

Other assets

  1,790   2,241 

Trade payables

  (1,365)  10,557 

Accrued compensation

  (6,715)  (4,617)

Other accrued expenses

  (4,858)  4,705 

Income taxes payable

  (1,415)  1,714 

Accrued / prepaid pensions

  (2,072)  (6,565)

Other liabilities

  (9,889)  (3,262)

Other

  4,199   20,962 

Net cash provided by operating activities

  145,904   153,044 
         

Cash flows from investing activities:

        

Purchased property, plant and equipment

  (49,569)  (48,638)

Purchased businesses, net of cash acquired

  (51,298)  (217,572)

Proceeds from sale of property, plant and equipment

  4,403   1,529 

Net cash used in investing activities

  (96,464)  (264,681)
         

Cash flows from financing activities:

        

Proceeds from long-term debt

  -   357,000 

Repayment of long-term debt

  (16,875)  (207,500)

Net proceeds from notes payable

  6,639   (2,114)

Dividends paid

  (20,570)  (19,174)

Proceeds from stock options exercised

  9,760   4,342 

Excess tax benefit from share-based compensation

  1,462   1,321 

Repurchases of common stock

  (11,901)  (2,214)

Net cash provided by (used in) financing activities

  (31,485)  131,661 
         

Effect of exchange rate changes

  (4,021)  (6,478)

Net change in cash and cash equivalents

  13,934   13,546 
         

Cash used in operating activities of discontinued operations

  -   (5,294)
         

Net change in cash and cash equivalents

  13,934   8,252 

Cash and cash equivalents at beginning of period

  119,168   77,569 

Cash and cash equivalents at end of period

 $133,102  $85,821 
         

Supplemental disclosure of cash flow information:

        

Dividends paid with company stock

 $185  $153 

Cash paid for interest, net of amount capitalized of $556 and $91 for the periods ended August 27, 2016 and August 29, 2015, respectively

 $20,436  $19,735 

Cash paid for income taxes, net of refunds

 $33,428  $23,748 
  

(Unaudited)

     
  

June 3,

  

December 3,

 
  

2017

  

2016

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $94,102  $142,245 

Trade receivables (net of allowances of $12,376 and $12,310, as of June 3,2017 and December 3, 2016, respectively)

  378,622   351,130 

Inventories

  302,336   247,399 

Other current assets

  75,380   70,479 

Total current assets

  850,440   811,253 
         

Property, plant and equipment

  1,111,423   1,093,141 

Accumulated depreciation

  (595,540)  (577,866)

Property, plant and equipment, net

  515,883   515,275 
         

Goodwill

  434,210   366,248 

Other intangibles, net

  239,418   205,359 

Other assets

  160,285   157,733 

Total assets

 $2,200,236  $2,055,868 
         

Liabilities, redeemable non-controlling interest and total equity

        

Current liabilities:

        

Notes payable

 $28,371  $37,334 

Current maturities of long-term debt

  10,000   80,178 

Trade payables

  181,979   162,964 

Accrued compensation

  49,193   52,444 

Income taxes payable

  9,482   7,985 

Other accrued expenses

  46,356   50,939 

Total current liabilities

  325,381   391,844 
         

Long-term debt, excluding current maturities

  747,738   585,759 

Accrued pension liabilities

  69,245   73,545 

Other liabilities

  66,121   62,174 

Total liabilities

  1,208,485   1,113,322 
         

Commitments and contingencies (Note 16)

        

Redeemable non-controlling interest

  -   4,277 
         

Equity:

        

H.B. Fuller stockholders' equity:

        

Preferred stock (no shares outstanding) shares authorized – 10,045,900

  -   - 

Common stock, par value $1.00 per share, shares authorized – 160,000,000, shares outstanding – 50,517,212 and 50,141,343, as of June 3, 2017 and December 3, 2016, respectively

  50,517   50,141 

Additional paid-in capital

  75,390   59,564 

Retained earnings

  1,116,883   1,090,900 

Accumulated other comprehensive loss

  (251,427)  (262,729)

Total H.B. Fuller stockholders' equity

  991,363   937,876 

Non-controlling interests

  388   393 

Total equity

  991,751   938,269 

Total liabilities, redeemable non-controlling interest and total equity

 $2,200,236  $2,055,868 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 
5

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H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Total Equity

(In thousands)

(Unaudited)

  H.B. Fuller Company Shareholders      
  

Common

Stock

  

Additional

Paid-in

Capital

  

Retained

Earnings

  

Accumulated

Other

Comprehensive

Income (Loss)

  

Non-

Controlling

Interests

  

Total

 

Balance at November 28, 2015

 $50,074  $55,522  $994,608  $(227,284) $406  $873,326 

Comprehensive income (loss)

  -   -   124,128   (35,445)  226   88,909 

Dividends

  -   -   (27,836)  -   -   (27,836)

Stock option exercises

  519   10,750   -   -   -   11,269 

Share-based compensation plans other, net

  116   14,485   -   -   -   14,601 

Tax benefit on share-based compensation plans

  -   1,467   -   -   -   1,467 

Repurchases of common stock

  (568)  (22,660)  -   -   -   (23,228)

Redeemable non-controlling interest

  -   -   -   -   (239)  (239)

Balance at December 3, 2016

  50,141   59,564   1,090,900   (262,729)  393   938,269 

Comprehensive income

  -   -   40,662   11,302   34   51,998 

Dividends

  -   -   (14,679)  -   -   (14,679)

Stock option exercises

  407   13,519   -   -   -   13,926 

Share-based compensation plans other, net

  148   9,553   -   -   -   9,701 

Tax benefit on share-based compensation plans

  -   1,353   -   -   -   1,353 

Repurchases of common stock

  (179)  (8,693)  -   -   -   (8,872)

Purchase of redeemable non-controlling interest

  -   94   -   -   -   94 

Redeemable non-controlling interest

  -   -   -   -   (39)  (39)

Balance at June 3, 2017

 $50,517  $75,390  $1,116,883  $(251,427) $388  $991,751 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

  

Six Months Ended

 
  

June 3, 2017

  

May 28, 2016

 

Cash flows from operating activities:

        

Net income including non-controlling interests

 $40,695  $52,357 

Adjustments to reconcile net income including non-controlling interests to net cash provided by operating activities:

        

Depreciation

  23,971   25,067 

Amortization

  15,229   13,486 

Deferred income taxes

  7   1,101 

Income from equity method investments, net of dividends received

  (4,279)  (3,332)

Gain on sale of assets

  (91)  - 

Share-based compensation

  8,843   6,968 

Excess tax benefit from share-based compensation

  (1,353)  (592)

Gain on mark to market adjustment to contingent consideration liability

  (3,603)  (891)

Non-cash charge for sale of inventories revalued at acquisition

  193   103 

Change in assets and liabilities, net of effects of acquisitions:

     

Trade receivables, net

  (9,890)  13,280 

Inventories

  (45,390)  (9,059)

Other assets

  12,602   9,948 

Trade payables

  20,443   (7,521)

Accrued compensation

  (4,666)  (2,925)

Other accrued expenses

  (6,259)  (6,434)

Income taxes payable

  (5,569)  4,451 

Accrued / prepaid pensions

  (2,989)  (1,785)

Other liabilities

  3,336   (7,829)

Other

  (8,436)  (3,790)

Net cash provided by operating activities

  32,794   82,603 
         

Cash flows from investing activities:

        

Purchased property, plant and equipment

  (27,104)  (35,720)

Purchased businesses, net of cash acquired

  (123,305)  (9,123)

Purchased investments

  (1,250)  - 

Proceeds from sale of property, plant and equipment

  868   870 

Net cash used in investing activities

  (150,791)  (43,973)
         

Cash flows from financing activities:

        

Proceeds from issuance of long-term debt

  598,000   - 

Repayment of long-term debt and payment of debt issuance costs

  (508,024)  (11,250)

Net (payment of) proceeds from notes payable

  (10,287)  11,246 

Dividends paid

  (14,614)  (13,537)

Purchase of redeemable non-controlling interest

  (3,127)  - 

Proceeds from stock options exercised

  13,926   7,083 

Excess tax benefit from share-based compensation

  1,353   592 

Repurchases of common stock

  (8,872)  (6,566)

Net cash provided by (used in) financing activities

  68,355   (12,432)
         

Effect of exchange rate changes on cash and cash equivalents

  1,499   656 

Net change in cash and cash equivalents

  (48,143)  26,854 
         

Cash and cash equivalents at beginning of period

  142,245   119,168 

Cash and cash equivalents at end of period

 $94,102  $146,022 
         

Supplemental disclosure of cash flow information:

        

Dividends paid with company stock

 $65  $124 

Cash paid for interest, net of amount capitalized of $101 and $314 for the periods ended June 3, 2017 and May 28, 2016, respectively

 $15,393  $14,157 

Cash paid for income taxes, net of refunds

 $15,739  $18,503 

H.B. FULLER COMPANY AND SUBSIDIARIES

Notes toCondensedConsolidatedConsolidated Financial Statements

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

 

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:

  

Amount

 

Current assets

 $13,741 

Property, plant and equipment

  10,516 

Goodwill

  60,557 

Other intangibles

    

Customer relationships

  33,300 

Trademarks/trade names

  13,600 

Current liabilities

  (8,409)

Total purchase price

 $123,305 

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:

 

  

August 27, 2016

 

Current assets

 $4,410 

Property, plant and equipment

  1,460 

Goodwill

  38,152 

Other assets

  673 

Current liabilities

  (1,526)

Long-term liabilities

  (653)

Total purchase price

 $42,516 

 

  

Amount

 

Current assets

 $4,425 

Property, plant and equipment

  2,038 

Goodwill

  23,654 

Other intangibles

    

Developed technology

  2,000 

Customer relationships

  14,400 

Trademarks/trade names

  700 

Other assets

  161 

Current liabilities

  (1,889)

Long-term liabilities

  (3,307)

Total purchase price

 $42,182 

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:

 

 

May 28, 2016

  

Adjustments

  

August 27, 2016

  

Amount

 

Current assets

 $6,197  $(663) $5,534  $5,704 

Property, plant and equipment

  751   (167)  584   594 

Goodwill

  102 

Other intangibles

    

Customer relationships

  -   7,639   7,639   7,575 

Trademarks

  -   146   146 

Goodwill

  4,546   (4,546)  - 

Trademarks/trade names

  146 

Current liabilities

  (2,371)  (288)  (2,659)  (2,671)

Long-term liabilities

  -   (879)  (879)  (1,085)

Total purchase price

 $9,123  $1,242  $10,365  $10,365 

 

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.

 

  

Amount

 

Current assets

 $49,839 

Property, plant and equipment

  59,142 

Goodwill

  125,790 

Other intangibles

    

Developed technology

  18,600 

Customer relationships

  25,700 

Trademarks/trade names

  11,000 

Current liabilities

  (38,068)

Other liabilities

  (24,305)

Redeemable non-controlling interests

  (11,773)

Total purchase price

 $215,925 

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:

  

Three Months Ended

  

Six Months Ended

 
  

June 3, 2017

  

June 3, 2017

 

Cost of sales

 $5,252  $8,899 

Selling, general and administrative

  382   6,903 
  $5,634  $15,802 

 

 

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

  

Three Months Ended

  

Six Months Ended

 
  

June 3, 2017

  

June 3, 2017

 

Americas Adhesives

 $39  $1,765 

EIMEA

  1,266   6,055 

Asia Pacific

  35   1,887 

Construction Products

  4,209   5,458 

Engineering Adhesives

  85   637 
  $5,634  $15,802 

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

  

Employee-

Related

  

Asset-Related

  

Other

  

Total

 

Balance at December 3, 2016

 $-  $-  $-  $- 

Expenses incurred

  9,898   5,094   810   15,802 

Non-cash charges

  -   (4,291)  -   (4,291)

Cash payments

  (5,810)  (803)  (505)  (7,118)

Foreign currency translation

  261   -   -   261 

Balance at June 3, 2017

 $4,349  $-  $305  $4,654 

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:

  

June 3,

  

December 3,

 
  

2017

  

2016

 

Raw materials

 $149,629  $116,200 

Finished goods

  165,028   142,397 

LIFO reserve

  (12,321)  (11,198)

Total inventories

 $302,336  $247,399 

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:

  

Americas

      

Asia

  

Construction

  

Engineering

     
  

Adhesives

  

EIMEA

  

Pacific

  

Products

  

Adhesives

  

Total

 

Balance at December 3, 2016

 $59,821  $98,876  $17,481  $21,901  $168,169  $366,248 

Acquisitions

  60,5571  -   -   -   -   60,557 

Currency impact

  (646)  4,844   339   22   2,846   7,405 

Balance at June 3, 2017

 $119,732  $103,720  $17,820  $21,923  $171,015  $434,210 

1

Preliminary goodwill balance as of June 3, 2017.

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

  

June 3, 2017

 

Amortizable Intangible Assets

 

Purchased

Technology &

Patents

  

Customer

Relationships

  

All Other

  

Total

 

Original cost

 $70,651  $289,181  $65,350  $425,182 

Accumulated amortization

  (29,189)  (123,054)  (34,092)  (186,335)

Net identifiable intangibles

 $41,462  $166,127  $31,258  $238,847 

  

December 3, 2016

 

Amortizable Intangible Assets

 

Purchased

Technology &

Patents

  

Customer

Relationships

  

All Other

  

Total

 

Original cost

 $70,504  $251,329  $51,116  $372,949 

Accumulated amortization

  (21,448)  (116,411)  (30,198)  (168,057)

Net identifiable intangibles

 $49,056  $134,918  $20,918  $204,892 

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:  

  

Three Months Ended

 

Nine Months Ended

  

August 27, 2016

 

August 27, 2016

 

August 29, 2015

Expected life (in years)

  4.75   4.74   4.61 

Weighted-average expected volatility

  26.77%   28.96%   30.91% 

Expected volatility

  25.71%-27.10%  25.71%-29.23%  25.50%-31.67%

Risk-free interest rate

  0.98%   1.43%   1.26% 

Expected dividend yield

  1.26%   1.54%   1.17% 

Weighted-average fair value of grants

  $9.38   $7.72   $10.21 

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:

 

  

Remainder of

                     

Fiscal Year

 

2017

  

2018

  

2019

  

2020

  

2021

  

Thereafter

 

Amortization Expense

 $16,751  $32,398  $30,224  $27,843  $26,372  $105,259 

Expected dividend yield – The calculation is based on the total expected annual dividend payout divided by the average stock price.

Non-amortizable intangible assets as of June 3, 2017 are $571 and are related to trademarks and trade names.

 

Expense RecognitionNote 6: Long-Term Debt

WeOn April 12, 2017, we entered into a credit agreement with a consortium of financial institutions under which we established a $400,000 multi-currency revolving credit facility and a $100,000 term loan that we can use to repay existing indebtedness, finance working capital needs, finance acquisitions, and for general corporate purposes. Interest on the straight-line attribution method to recognize share-based compensation expense for option awards, restricted stock sharesrevolving credit facility is payable at LIBOR plus 1.10 percent. A facility fee of 0.15 percent is payable quarterly. The interest rate on the term loan is payable at LIBOR plus 1.25 percent. The interest rates and restricted stock units with graded and cliff vesting. Incentive stock options and performance awardsthe facility fee are based on certain performance-based metricsa ratings grid. The credit agreement replaced the previous credit agreement entered into on October 31, 2014. The April 12, 2017 credit agreement expires April 12, 2022.

During the second quarter ended June 3, 2017, we entered into an interest rate swap agreement to convert $125,000 of our Series E private placement to a variable interest rate of 1-month LIBOR (in arrears) plus 2.22 percent.

On February 14, 2017, we issued $300,000 aggregate principal of 10-year long-term unsecured public notes (“4.000% Notes”) due February 15, 2027 with a fixed coupon of 4.00 percent. Proceeds from this debt issuance were used to repay $138,000 outstanding under the revolving credit facility and prepay $158,750 of our term loan. We entered into interest rate swap agreements to convert $150,000 of the expense is adjusted quarterly, based$300,000 4.000% Notes to a variable interest rate of 1-month LIBOR (in advance) plus 1.86 percent.

See Note 13 for further discussion of the interest rate swaps.

We adopted ASU No. 2015-03,Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issue Costs, during the quarter ended March 4, 2017 on a retrospective basis. The impact of adopting ASU No. 2015-03 on our projectionsfinancial statements was the reclassification of deferred debt issuance costs related to our long-term debt, with the achievementexception of those metrics. The amountour revolving credit line, from an asset to a direct deduction to the corresponding debt.  Reclassifications from an asset to a direct deduction to the corresponding debt of share-based compensation expense recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest.

Total share-based compensation expense of $2,501 and $3,006$2,386 was included in our Condensed Consolidated StatementsBalance Sheets as of IncomeDecember 3, 2016. 

Note 7: Redeemable Non-Controlling Interest

We account for the third quarter endednon-controlling interest in H.B. Fuller Kimya Sanayi Ticaret A.S. (“HBF Kimya”) as a redeemable non-controlling interest because both the non-controlling shareholder and H.B. Fuller had an option, exercisable beginning August 27, 20161, 2018, to require the redemption of the shares owned by the non-controlling shareholder at a price determined by a formula based on 24 months trailing EBITDA. Since the option made the redemption of the non-controlling ownership shares of HBF Kimya outside of our control, these shares are classified as a redeemable non-controlling interest in temporary equity in the Condensed Consolidated Balance Sheets. The non-controlling shareholder was entitled to increase his ownership by 1 percent per year for 5 years up to a maximum of 13 percent ownership based on the achievement of profitability targets in each year. The option was subject to a minimum price of €3,500.

The results of operations for the HBF Kimya non-controlling interest is consolidated in our financial statements. Both the non-controlling interest and August 29, 2015, respectively. Total share-based compensation expense of $9,469 and $10,325 wasthe accretion adjustment to redemption value are included in ournet income attributable to non-controlling interests in the Condensed Consolidated Statements of Income and in the carrying value of the redeemable non-controlling interest on the Condensed Consolidated Balance Sheets. HBF Kimya’s functional currency is the Turkish lira and changes in exchange rates affect the reported amount of the redeemable non-controlling interest.

During the first quarter of 2017,we purchased the remaining shares from the non-controlling shareholder for €4,206. The difference between the nine months ended August 27, 2016non-controlling interest balance and August 29, 2015, respectively. All share-based compensation expensethe purchase price was recorded as selling, general and administrative expense. Forin additional paid-in capital in the thirdfirst quarter ended August 27, 2016 and August 29, 2015 there was $870 and $411 of excess tax benefit recognized, respectively. For the nine months ended August 27, 2016 and August 29, 2015 there was $1,462 and $1,321 of excess tax benefit recognized, respectively.2017.

 

As of August 27, 2016, there was $8,059 of unrecognized compensation costs related to unvested stock option awards, which is expected to be recognized over a weighted-average period of 1.2 years. Unrecognized compensation costs related to unvested restricted stock shares was $194 which is expected to be recognized over a weighted-average period of 0.4 years. Unrecognized compensation costs related to unvested restricted stock units was $9,120 which is expected to be recognized over a weighted-average period of 1.3 years.

Share-based Activity

A summary of option activity as of August 27, 2016 and changes during the nine months then ended is presented below:

      

Weighted-

 
      

Average

 
  

Options

  

Exercise Price

 

Outstanding at November 28, 2015

  2,912,073  $33.37 

Granted

  844,033   33.86 

Exercised

  (539,165)  24.05 

Forfeited or cancelled

  (164,337)  39.37 

Outstanding at August 27, 2016

  3,052,604  $34.82 

There were no options granted during the third quarter ended August 29, 2015. The total fair value of options granted during the third quarter ended August 27, 2016 was $47. Total intrinsic value of options exercised during the third quarter ended August 27, 2016 and August 29, 2015 was $3,365 and $1,565, respectively. Intrinsic value is the difference between our closing stock price on the respective trading day and the exercise price, multiplied by the number of options exercised. The total fair value of options granted during the nine months ended August 27, 2016 and August 29, 2015 was $6,509 and $7,189, respectively. Total intrinsic value of options exercised during the nine months ended August 27, 2016 and August 29, 2015 was $10,641 and $5,114, respectively. Proceeds received from option exercises during the third quarter ended August 27, 2016 and August 29, 2015 were $2,676 and $391, respectively, and $9,759 and $4,342 during the nine months ended August 27, 2016 and August 29, 2015, respectively.

A summary of nonvested restricted stock as of August 27, 2016 and changes during the nine months then ended is presented below:

                  

Weighted-

 
              

Weighted-

  

Average

 
              

Average

  

Remaining

 
              

Grant

  

Contractual

 
              

Date Fair

  

Life

 
  

Units

  

Shares

  

Total

  

Value

  

(in Years)

 

Nonvested at November 28, 2015

  237,013   110,160   347,173  $42.17   0.8 

Granted

  243,628   -   243,628   35.32   1.6 

Vested

  (104,051)  (70,428)  (174,479)  41.88   - 

Forfeited

  (31,337)  (179)  (31,516)  38.34   1.7 

Nonvested at August 27, 2016

  345,253   39,553   384,806  $38.33   1.2 

Total fair value of restricted stock vested during the third quarter ended August 27, 2016 and August 29, 2015 was $25 and $57, respectively. Total fair value of restricted stock vested during the nine months ended August 27, 2016 and August 29, 2015 was $6,101 and $6,121, respectively. The total fair value of nonvested restricted stock at August 27, 2016 was $14,934.

We repurchased 189 and 193 restricted stock shares during the third quarter ended August 27, 2016 and August 29, 2015, respectively and 67,742 and 54,196 during the nine months ended August 27, 2016 and August 29, 2015, respectively. The repurchases relate to statutory minimum tax withholding.

We have a Directors’ Deferred Compensation plan that allows non-employee directors to defer all or a portion of their directors’ compensation in a number of investment choices, including units representing shares of our common stock. We also have a Key Employee Deferred Compensation Plan that allows key employees to defer a portion of their eligible compensation in a number of investment choices, including units, representing shares of our common stock. We provide a 10 percent match on deferred compensation invested into units, representing shares of our common stock. A summary of deferred compensation units as of August 27, 2016, and changes during the nine months then ended is presented below:

  

Non-employee

         
  

Directors

  

Employees

  

Total

 

Units outstanding November 28, 2015

  380,170   45,906   426,076 

Participant contributions

  35,678   4,379   40,057 

Company match contributions

  3,568   438   4,006 

Payouts

  (301)  (7,834)  (8,135)

Units outstanding August 27, 2016

  419,115   42,889   462,004 

Deferred compensation units are fully vested at the date of contribution.

  

Redeemable

 
  

Non-Controlling

 
  

Interest

 

Balance at December 3, 2016

 $4,277 

Net income attributed to redeemable non-controlling interest

  39 

Purchase of redeemable non-controlling interest

  (4,468)

Foreign currency translation adjustment

  152 

Balance at June 3, 2017

 $- 

Note 4:8: Accounting for Share-Based Compensation

Overview

We have various share-based compensation programs which provide for equity awards including non-qualified stock options, restricted stock shares, restricted stock units, performance awards and deferred compensation. These equity awards fall under several plans and are described in detail in our Annual Report on Form 10-K for the year ended December 3, 2016.

Grant-Date Fair Value

We use the Black-Scholes option pricing model to calculate the grant-date fair value of an award. The fair value of options granted during the quarter ended June 3, 2017 and May 28, 2016 were calculated using the following weighted average assumptions:

  

Three Months Ended

  

Six Months Ended

 
  

June 3, 2017

  

May 28, 2016

  

June 3, 2017

  

May 28, 2016

 

Expected life (in years)

   4.75     4.75     4.75     4.75  

Weighted-average expected volatility

   24.32%     28.55%     24.85%     29.01%  

Expected volatility

  24.31%-24.33%   28.00% -29.20%   24.31% -24.88%   28.00% -29.23% 

Risk-free interest rate

   1.81%     1.25%     1.89%     1.43%  

Expected dividend yield

   1.11%     1.27%     1.12%     1.55%  

Weighted-average fair value of grants

   $10.90     $9.81     $10.81     $7.72  

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.

Expected volatility – Volatility is calculated using our stock’s 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 is based on the U.S. Treasury yield curve in effect at the time of the grant for the same period of time as the expected life.

Expected dividend yield – The calculation is based on the total expected annual dividend payout divided by the average stock price.

Expense

We use the straight-line attribution method to recognize share-based compensation expense for option awards, restricted stock shares and restricted stock units with graded and cliff vesting. Incentive stock options and performance awards are based on certain performance-based metrics and the expense is adjusted quarterly, based on our projections of the achievement of those metrics. The amount of share-based compensation expense recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. The expense is recognized over the requisite service period, which for us is the period between the grant date and the earlier of the award’s stated vesting term or the date the employee is eligible for early vesting based on the terms of the plans.

Total share-based compensation expense of $3,811 and $2,701 was included in our Condensed Consolidated Statements of Income for the second quarter ended June 3, 2017 and May 28, 2016, respectively. Total share-based compensation expense of $8,843 and $6,968 was included in our Condensed Consolidated Statements of Income for the six months ended June 3, 2017 and May 28, 2016, respectively. All share-based compensation expense was recorded as SG&A expense. For the second quarter ended June 3, 2017 and May 28, 2016, there was $300 and $933 of excess tax benefit recognized. For the six months ended June 3, 2017 and May 28, 2016, there was $1,353 and $592 of excess tax benefit recognized.

As of June 3, 2017, there was $10,198 of unrecognized compensation costs related to unvested stock option awards, which is expected to be recognized over a weighted-average period of 1.4 years. Unrecognized compensation costs related to unvested restricted stock units was $16,463, which is expected to be recognized over a weighted-average period of 1.5 years.

Stock Option Activity

The stock option activity for the six months ended June 3, 2017 is presented below:

      

Average

 
  

Options

  

Exercise Price

 

Outstanding at December 3, 2016

  2,986,481  $34.92 

Granted

  717,596   50.04 

Exercised

  (407,288)  34.19 

Forfeited or cancelled

  (74,113)  36.84 

Outstanding at June 3, 2017

  3,222,676  $38.34 

The total fair value of options granted during the quarter ended June 3, 2017 and May 28, 2016 were $373 and $324, respectively. Total intrinsic value of options exercised during the second quarter ended June 3, 2017 and May 28, 2016 were $2,204 and $7,265, respectively. Intrinsic value is the difference between our closing stock price on the respective trading day and the exercise price, multiplied by the number of options exercised. The total fair value of options granted during the six months ended June 3, 2017 and May 28, 2016 were $7,757 and $6,462, respectively. Total intrinsic value of options exercised during the six months ended June 3, 2017 and May 28, 2016 were $6,624 and $7,276, respectively.

Proceeds received from option exercises during the second quarter ended June 3, 2017 and May 28, 2016 was $5,377 and $7,051, respectively, and $13,926 and $7,083 during the six months ended June 3, 2017 and May 28, 2016.

Restricted Stock Activity

The nonvested restricted stock activity for the quarter ended June 3, 2017 is presented below:

                  

Weighted-

 
              

Weighted-

  

Average

 
              

Average

  

Remaining

 
              

Grant

  

Contractual

 
              

Date Fair

  

Life

 
  

Units

  

Shares

  

Total

  

Value

  

(in Years)

 

Nonvested at December 3, 2016

  352,744   36,953   389,697  $38.36   1.0 

Granted

  281,507   -   281,507   51.31   1.7 

Vested

  (149,095)  (36,953)  (186,048)  39.79   - 

Forfeited

  (17,400)  -   (17,400)  37.86   1.5 

Nonvested at June 3, 2017

  467,756   -   467,756  $44.68   1.5 

Total fair value of restricted stock vested during the second quarter ended June 3, 2017 and May 28, 2016 was $432 and $179, respectively. Total fair value of restricted stock vested during the six months ended June 3, 2017 and May 28, 2016 was $7,402 and $6,012, respectively. The total fair value of nonvested restricted stock at June 3, 2017 was $21,214.

We repurchased 3,122 and 1,106 restricted stock shares during the second quarter ended June 3, 2017 and May 28, 2016, respectively. We repurchased 53,809 and 67,533 restricted stock shares during the six month ended June 3, 2017 and May 28, 2016, respectively. The repurchases relate to statutory minimum tax withholding.

Deferred Compensation Activity

We have a Directors’ Deferred Compensation plan that allows non-employee directors to defer all or a portion of their directors’ compensation in a number of investment choices, including units representing shares of our common stock. We also have a Key Employee Deferred Compensation Plan that allows key employees to defer a portion of their eligible compensation in a number of investment choices, including units, representing shares of our common stock. We provide a 10 percent match on deferred compensation invested into units, representing shares of our common stock. The deferred compensation units activity for the six months ended June 3, 2017 is presented below:

  

Non-employee

         
  

Directors

  

Employees

  

Total

 

Units outstanding December 3, 2016

  424,319   41,116   465,435 

Participant contributions

  8,373   4,582   12,955 

Company match contributions

  837    458    1,295  

Payouts

  (14,143)  (7,712)  (21,855)

Units outstanding June 3, 2017

  419,386   38,444   457,830 

Deferred compensation units are fully vested at the date of contribution.

Note 9: Components of Net Periodic Cost (Benefit) related to Pension and Other Postretirement Benefit Plans

  

Three Months Ended June 3, 2017 and May 28, 2016

 
                  

Other

 
  

Pension Benefits

  

Postretirement

 
  

U.S. Plans

  

Non-U.S. Plans

  

Benefits

 

Net periodic cost (benefit):

 

2017

  

2016

  

2017

  

2016

  

2017

  

2016

 

Service cost

 $28  $27  $512  $481  $52  $84 

Interest cost

  3,603   3,768   1,147   1,366   398   480 

Expected return on assets

  (6,364)  (6,077)  (2,400)  (2,483)  (1,447)  (1,342)

Amortization:

                        

Prior service cost

  7   7   (1)  (1)  -   (10)

Actuarial loss

  1,307   1,293   846   753   253   532 

Net periodic (benefit) cost

 $(1,419) $(982) $104  $116  $(744) $(256)

  

Six Months Ended June 3, 2017 and May 28, 2016

 
                  

Other

 
  

Pension Benefits

  

Postretirement

 
  

U.S. Plans

  

Non-U.S. Plans

  

Benefits

 

Net periodic cost (benefit):

 

2017

  

2016

  

2017

  

2016

  

2017

  

2016

 

Service cost

 $56  $54  $1,020  $961  $104  $168 

Interest cost

  7,206   7,535   2,291   2,733   796   960 

Expected return on assets

  (12,728)  (12,154)  (4,791)  (4,965)  (2,894)  (2,684)

Amortization:

                        

Prior service cost

  14   14   (2)  (2)  -   (20)

Actuarial loss

  2,614   2,586   1,688   1,505   506   1,064 

Net periodic (benefit) cost

 $(2,838) $(1,965) $206  $232  $(1,488) $(512)

Note 10: Accumulated Other Comprehensive Income (Loss)

The following table provides details of total comprehensive income (loss):

  

Three Months Ended June 3, 2017

  

Three Months Ended May 28, 2016

 
  

H.B. Fuller Stockholders

  

Non-

controlling

Interests

  

H.B. Fuller Stockholders

  

Non-

controlling

Interests

 
  

Pre-tax

  

Tax

  

Net

  

Net

  

Pre-tax

  

Tax

  

Net

  

Net

 

Net income including non-controlling interests

  -   -  $25,867  $(3)  -   -  $33,331  $59 

Foreign currency translation adjustment¹

 $18,507   -   18,507   6  $1,437   -   1,437   5 

Reclassification to earnings:

                                

Defined benefit pensionplans adjustment²

  2,412  $(819)  1,593   -   1,173  $(483)  690   - 

Interest rate swap³

  16   (6)   10   -   16   (6)  10   - 

Cash-flow hedges³

  (37)  14   (23)  -   (711)  271   (440)  - 

Other comprehensive income (loss)

 $20,898  $(811)  20,087   6  $1,915  $(218)  1,697   5 

Comprehensive income (loss)

      $45,954  $3          $35,028  $64 

  

Six Months Ended June 3, 2017

  Six Months Ended May 28, 2016 
  

H.B. Fuller Stockholders

  

Non-

controlling

Interests

  

H.B. Fuller Stockholders

  

Non-

controlling

Interests

 
  

Pretax

  

Tax

  

Net

  

Net

  

Pretax

  

Tax

  

Net

  

Net

 

Net income including non-controlling interests

  -   -  $40,662  $33   -   -  $52,249  $108 

Foreign currency translation adjustment¹

 $7,993   -   7,993   1  $492   -   492   - 

Reclassification to earnings:

                                

Defined benefit pensionplans adjustment²

  4,820  $(1,637)  3,183   -   5,170  $(1,815)  3,355   - 

Interest rate swap³

  32   (12)  20   -   29   (9)  20   - 

Cash-flow hedges³

  171   (65  106   -   (308)  117   (191)  - 

Other comprehensiveincome (loss)

 $13,016  $(1,714)  11,302   1  $5,383  $(1,707)  3,676   - 

Comprehensive income (loss)

      $51,964  $34          $55,925  $108 

¹ Income taxes are not provided for foreign currency translation relating to permanent investments in international subsidiaries. As discussed in Note 1, the foreign currency translation adjustment for the six months ended June 3, 2017 includes the impact of the change in functional currency for our subsidiaries in Latin America.

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, SG&A expense and special charges, net.

³ Loss reclassified from AOCI into earnings is reported in other income (expense), net.

The components of accumulated other comprehensive loss is as follows:

  

June 3, 2017

 
  

Total

  

H.B. Fuller

Stockholders

  

Non-controlling

Interests

 

Foreign currency translation adjustment

 $(77,453) $(77,388) $(65)

Defined benefit pension plans adjustment, net of taxesof $89,097

  (172,918)  (172,918)  - 

Interest rate swap, net of taxes of ($30)

  48   48   - 

Cash-flow hedges, net of taxes of $720

  (1,169)  (1,169)  - 

Accumulated other comprehensive loss

 $(251,492) $(251,427) $(65)

  

December 3, 2016

 
  

Total

  

H.B. Fuller

Stockholders

  

Non-controlling

Interests

 

Foreign currency translation adjustment

 $(85,447) $(85,381) $(66)

Defined benefit pension plans adjustment, net of taxesof $90,734

  (176,101)  (176,101)  - 

Interest rate swap, net of taxes of ($17)

  28   28   - 

Cash-flow hedges, net of taxes of $785

  (1,275)  (1,275)  - 

Accumulated other comprehensive loss

 $(262,795) $(262,729) $(66)

Note11: Income Taxes

As of June 3, 2017, we had a liability of $4,508 recorded under FASB ASC 740,Income Taxes, for gross unrecognized tax benefits (excluding interest), compared to $4,165 as of December 3, 2016. As of June 3, 2017, we had accrued $717 of gross interest relating to unrecognized tax benefits. For the quarter ended June 3, 2017, our recorded liability for gross unrecognized tax benefits increased by $154.

Note 12: 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

  

Nine Months Ended

  

Three Months Ended

  

Six Months Ended

 
 

August 27,

  

August 29,

  

August 27,

  

August 29,

  

June 3,

  

May 28,

  

June 3,

  

May 28,

 

(Shares in thousands)

 

2016

  

2015

  

2016

  

2015

  

2017

  

2016

  

2017

  

2016

 

Weighted-average common shares - basic

  50,261   50,421   50,122   50,318   50,496   50,145   50,369   50,052 

Equivalent shares from share-based compensations plans

  1,192   1,109   1,112   1,142   1,190   1,108   1,204   1,072 

Weighted-average common and common equivalent shares - diluted

  51,453   51,530   51,234   51,460   51,686   51,253   51,573   51,124 

 

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, (b) the amount of unearned share-based compensation costs attributed to future services and (c) the amount of tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of the award. 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.

 

Options to purchase 386,4966,857 and 1,533,690406,028 shares of common stock at a weighted-average exercise price of $48.57$52.75 and $42.88$48.59 for the quarters ended August 27,June 3, 2017 and May 28, 2016, and August 29, 2015, respectively, were excluded from the diluted earnings per share calculations because they were antidilutive. Options to purchase 762,509132,560 and 416,544950,516 shares of common stock at a weighted-average exercise price of $44.86$50.17 and $48.89$44.10 for the ninesix months ended August 27,June 3, 2017 and May 28, 2016, and August 29, 2015, respectively, were excluded from the diluted earnings per share calculations because they were antidilutive.

Note 5: Accumulated Other Comprehensive Income (Loss)

The following table provides details of total comprehensive income (loss):

  

Three Months Ended August 27, 2016

  

Three Months Ended August 29, 2015

 
  

H.B. Fuller Stockholders

  

Non-

controlling Interests

  

H.B. Fuller Stockholders

  

Non-

controlling Interests

 
  

Pretax

  

Tax

  

Net

  

Net

  

Pretax

  

Tax

  

Net

  

Net

 

Net income including non-controlling interests

  -   -  $32,745  $53   -   -  $26,807  $79 

Foreign currency translation adjustment¹

 $3,368   -   3,368   -  $(10,621)  -   (10,621)  (98)

Reclassification to earnings:

                                

Defined benefit pensionplans adjustment²

  2,585  $(908)  1,677   -   2,325  $(798)  1,527   - 

Interest rate swap³

  16   (6)  10   -   15   (5)  10   - 

Cash-flow hedges³

  56   (21)  35   -   -   -   -   - 

Other comprehensive income (loss)

 $6,025  $(935)  5,090   -  $(8,281) $(803)  (9,084)  (98)

Comprehensive income (loss)

      $37,835  $53          $17,723  $(19)

  

Nine Months Ended August 27, 2016

  

Nine Months Ended August 29, 2015

 
  

H.B. Fuller Stockholders

  

Non-

controlling Interests

  

H.B. Fuller Stockholders

  

Non-

controlling Interests

 
  

Pretax

  

Tax

  

Net

  

Net

  

Pretax

  

Tax

  

Net

  

Net

 

Net income including non-controlling interests

  -   -  $84,994  $161   -   -  $61,689  $308 

Foreign currency translation adjustment¹

 $3,860   -   3,860   -  $(48,625)  -   (48,625)  (14)

Reclassification to earnings:

                                

Defined benefit pensionplans adjustment²

  7,755  $(2,723)  5,032   -   6,976  $(2,394)  4,582   - 

Interest rate swap³

  45   (15)  30   -   37   (7)  30   - 

Cash-flow hedges³

  (252)  96   (156)  -   (31)  6   (25)  - 

Other comprehensiveincome (loss)

 $11,408  $(2,642)  8,766   -  $(41,643) $(2,395)  (44,038)  (14)

Comprehensive income (loss)

      $93,760  $161          $17,651  $294 

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, selling, general and administrative and special charges, net.

³ Loss reclassified from AOCI into earnings is reported in other income (expense), net. 

The components of accumulated other comprehensive loss is as follows:

  

August 27, 2016

 
  

Total

  

H.B. Fuller

Stockholders

  

Non-

controlling

Interests

 

Foreign currency translation adjustment

 $(47,732) $(47,694) $(38)

Defined benefit pension plans adjustment, net of taxesof $90,289

  (169,368)  (169,368)  - 

Interest rate swap, net of taxes of ($10)

  17   17   - 

Cash-flow hedges, net of taxes of $907

  (1,473)  (1,473)  - 

Accumulated other comprehensive loss

 $(218,556) $(218,518) $(38)

  

November 28, 2015

 
  

Total

  

H.B. Fuller

Stockholders

  

Non-

controlling

Interests

 

Foreign currency translation adjustment

 $(51,592) $(51,554) $(38)

Defined benefit pension plans adjustment, net of taxesof $93,012

  (174,400)  (174,400)  - 

Interest rate swap, net of taxes of $5

  (13)  (13)  - 

Cash-flow hedges, net of taxes of $811

  (1,317)  (1,317)  - 

Accumulated other comprehensive loss

 $(227,322) $(227,284) $(38)

Note6:Special Charges, net

The integration of the industrial adhesives business we acquired in March 2012 involved a significant amount of restructuring and capital investment to optimize the new combined entity. In addition, we have taken a series of actions in our existing 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 third quarter ended August 27, 2016 and August 29, 2015, we incurred special charges, net of $(2,807) and $1,297, respectively, for costs related to the Business Integration Project. During the nine months ended August 27, 2016 and August 29, 2015, we incurred special charges, net of $(2,024) and $4,592, respectively, for costs related to the Business Integration Project. Included in facility exit costs for the three and nine months ended August 27, 2016 is a $3.6 million gain on the sale of our production facility located in Wels, Austria, which closed during the third quarter of 2016.

The following table provides detail of special charges, net:

  

Three Months Ended

  

Nine Months Ended

 
  

August 27, 2016

  

August 29, 2015

  

August 27, 2016

  

August 29, 2015

 

Acquisition and transformation related costs

 $55  $48  $242  $595 

Workforce reduction costs

  -   216   (1)  2 

Facility exit costs

  (2,862  1,043   (2,455  3,683 

Other related costs

  -   (10)  190   312 

Special charges, net

 $(2,807) $1,297  $(2,024) $4,592 

Note 7: Components of Net Periodic Cost (Benefit) related to Pension and Other Postretirement Benefit Plans

  

Three Months Ended August 27, 2016 and August 29, 2015

 
                  

Other

 
  

Pension Benefits

  

Postretirement

 
  

U.S. Plans

  

Non-U.S. Plans

  

Benefits

 

Net periodic cost (benefit):

 

2016

  

2015

  

2016

  

2015

  

2016

  

2015

 

Service cost

 $27  $27  $519  $467  $84  $112 

Interest cost

  3,768   4,082   1,343   1,471   479   510 

Expected return on assets

  (6,078)  (6,421)  (2,435)  (2,590)  (1,341)  (1,377)

Amortization:

                        

Prior service cost

  7   7   (1)  (1)  (10)  (626)

Actuarial loss

  1,292   1,407   788   775   532   607 

Net periodic (benefit) cost

 $(984) $(898) $214  $122  $(256) $(774)

  

Nine Months Ended August 27, 2016 and August 29, 2015

 
                  

Other

 
  

Pension Benefits

  

Postretirement

 
  

U.S. Plans

  

Non-U.S. Plans

  

Benefits

 

Net periodic cost (benefit):

 

2016

  

2015

  

2016

  

2015

  

2016

  

2015

 

Service cost

 $81  $80  $1,480  $1,447  $252  $336 

Interest cost

  11,303   12,242   4,076   4,448   1,439   1,531 

Expected return on assets

  (18,232)  (19,262)  (7,400)  (7,830)  (4,025)  (4,132)

Amortization:

                        

Prior service cost

  21   22   (3)  (3)  (30)  (1,878)

Actuarial loss

  3,878   4,221   2,293   2,387   1,596   1,823 

Net periodic (benefit) cost

 $(2,949) $(2,697) $446  $449  $(768) $(2,320)

Note 8: Inventories

The composition of inventories is as follows:

  

August 27,

  

November 28,

 
  

2016

  

2015

 

Raw materials

 $125,421  $121,545 

Finished goods

  148,829   142,195 

LIFO reserve

  (12,887)  (15,236)

Total inventories

 $261,363  $248,504 

Note 9: Financial Instruments

Foreign Currency Derivative Instruments

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. These items are denominated in various foreign currencies, including the Euro, British pound sterling, Canadian dollar, Chinese renminbi, Japanese yen, Australian dollar, Argentine peso, Brazilian real, Colombian peso, Mexican peso, Turkish lira, Egyptian pound, Indian rupee and Malaysian ringgit.

Our objective is to balance, where possible, local currency denominated assets to local currency denominated liabilities to have a natural hedge and minimize foreign exchange impacts. We take steps to minimize risks from foreign currency exchange rate fluctuations through normal operating and financing activities and, when deemed appropriate, through the use of derivative instruments. We do not enter into any speculative positions with regard to derivative instruments.

We enter into derivative contracts with a group of investment grade multinational commercial banks. We evaluate the credit quality of each of these banks on a periodic basis as warranted.

Effective October 7, 2015, we entered into three cross-currency swap agreements to convert a notional amount of $134,736 of foreign currency denominated intercompany loans into US dollars. The first swap matures in 2017, the second swap matures in 2018 and the third swap matures in 2019. As of August 27, 2016, the combined fair value of the swaps was a liability of $2,048 and was included in other liabilities in the Condensed Consolidated Balance Sheets. The swaps were designated as cash-flow hedges for accounting treatment. The lesser amount between the cumulative change in the fair value of the actual swaps and the cumulative change in the fair value of hypothetical swaps is recorded in accumulated other comprehensive income (loss) in the Condensed Consolidated Balance Sheets. The difference between the cumulative change in the fair value of the actual swaps and the cumulative change in the fair value of hypothetical swaps are recorded as other income (expense), net in the Condensed Consolidated Statements of Income. In a perfectly effective hedge relationship, the two fair value calculations would exactly offset each other. Any difference in the calculation represents hedge ineffectiveness. The ineffectiveness calculations as of August 27, 2016 resulted in additional pre-tax gain of $40 for the nine months ended August 27, 2016 as the change in fair value of the cross-currency swaps was less than the change in the fair value of the hypothetical swaps. The amount in accumulated other comprehensive income (loss) related to cross-currency swaps was a loss of $1,473 as of August 27, 2016. The estimated net amount of the existing loss that is reported in accumulated other comprehensive income (loss) as of August 27, 2016 that is expected to be reclassified into earnings within the next twelve months is $827. As of August 27, 2016, we do not believe any gains or losses will be reclassified into earnings as a result of the discontinuance of these cash flow hedges because the original forecasted transaction will not occur.

The following table summarizes the cross-currency swaps outstanding as of August 27, 2016:

 

Fiscal Year of

Expiration

 

Interest Rate

  

Notional

Value

  

Fair Value

 

Pay EUR

2017

  3.05%  $44,912  $(342)
Receive USD   3.9145%         
              

Pay EUR

2018

  

3.45%

  $44,912  $(689)
Receive USD   4.5374%         
              

Pay EUR

2019

  3.80%  $44,912  $(1,017)
Receive USD   5.0530%         

Total

     $134,736  $(2,048)

Except for the cross-currency swap agreements listed above, foreign currency derivative instruments outstanding are not designated as hedges for accounting purposes. The gains and losses related to mark-to-market adjustments are recognized as other income or expense in the Condensed Consolidated Statements of Income during the periods in which the derivative instruments are outstanding. See Note 14 for fair value amounts of these derivative instruments.

As of August 27, 2016, we had forward foreign currency contracts maturing between September 12, 2016 and February 24, 2017. The mark-to-market effect associated with these contracts, on a net basis, was a loss of $4,570 at August 27, 2016. These losses were largely offset by the underlying transaction gains and losses resulting from the foreign currency exposures for which these contracts relate.

Interest Rate Swaps

We have interest rate swap agreements to convert $75,000 of our senior notes to variable interest rates. The change in fair value of the senior notes, attributable to the change in the risk being hedged, was a liability of $2,284 at August 27, 2016 and was included in long-term debt and current maturities of long-term debt in the Condensed Consolidated Balance Sheets. The combined fair value of the swaps were an asset of $2,337 at August 27, 2016 and $3,395 at November 28, 2015 and were included in other assets in the Condensed Consolidated Balance Sheets. The swaps were designated for hedge accounting treatment as fair value hedges.

The changes in the fair value of the swap and the fair value of the senior notes attributable to the change in the risk being hedged are recorded as other income (expense), net in the Condensed Consolidated Statements of Income. In a perfectly effective hedge relationship, the two fair value calculations would exactly offset each other. Any difference in the calculation represents hedge ineffectiveness. For the nine months ended August 27, 2016 and August 29, 2015, a pretax gain of $14 and $62, respectively, was recorded as the fair value of the senior notes decreased by more than the change in the fair value of the interest rate swaps attributable to the change in the risk being hedged.

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 August 27, 2016, there were no significant concentrations of credit risk.

Note10: 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 a financial provision. 

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 30 years ago. The plaintiffs generally bring these lawsuits against multiple defendants and seek damages (both actual and punitive) in very large amounts. In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable injuries or that the injuries suffered were the result of exposure to products manufactured by us. We are typically dismissed as a defendant in such cases without payment. If the plaintiff presents evidence indicating that compensable injury occurred as a result of exposure to our products, the case is generally settled for an amount that reflects the seriousness of the injury, the length, intensity and character of exposure to products containing asbestos, the number and solvency of other defendants in the case, and the jurisdiction in which the case has been brought.

A significant portion of the defense costs and settlements in asbestos-related litigation is paid by third parties, including indemnification pursuant to the provisions of a 1976 agreement under which we acquired a business from a third party. Currently, this third party is defending and paying settlement amounts, under a reservation of rights, in most of the asbestos cases tendered to the third party.

In addition to the indemnification arrangements with third parties, we have insurance policies that generally provide coverage for asbestos liabilities, including defense costs.  Historically, insurers have paid a significant portion of our defense costs and settlements in asbestos-related litigation. However, certain of our insurers are insolvent.  We have entered into cost-sharing agreements with our insurers that provide for the allocation of defense costs and settlements and judgments in asbestos-related lawsuits.  These agreements require, among other things, that we fund a share of settlements and judgments allocable to years in which the responsible insurer is insolvent

A summary of the number of and settlement amounts for asbestos-related lawsuits and claims is as follows:

  

Nine Months Ended

  

3 Years Ended

 

($ in thousands)

 

August 27, 2016

  

August 29, 2015

  

November 28, 2015

 

Lawsuits and claims settled

  9   6   25 

Settlement amounts

 $978  $463  $2,072 

Insurance payments received or expected to be received

 $645  $373  $1,648 

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. 

Note11: Operating 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. We evaluate the performance of each of our operating segments based on segment operating income, which is defined as gross profit less selling, general and administrative expenses. Segment operating income excludes special charges, net. Corporate expenses are fully allocated to each operating segment. Inter-segment revenues are recorded at cost plus a markup for administrative costs. Operating results of each segment are regularly reviewed by our chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance.

Through the fourth quarter of 2015, our business was reported in four operating segments: Americas Adhesives, EIMEA, Asia Pacific and Construction Products. Changes in our management reporting structure during the first quarter of 2016 required us to conduct an operating segment assessment in accordance with ASC Topic 280,Segment Reporting, to determine our reportable segments. As a result of this assessment, we now have five reportable segments: Americas Adhesives, EIMEA, Asia Pacific, Construction Products and Engineering Adhesives. Prior period segment information has been recast retrospectively to reflect our new operating segments.

The table below provides certain information regarding net revenue and segment operating income for each of our operating segments:

  

Three Months Ended

 
  

August 27, 2016

  

August 29, 2015

 
  

Trade

Revenue

  

Inter-

Segment

Revenue

  

Segment

Operating

Income

  

Trade

Revenue

  

Inter-

Segment

Revenue

  

Segment

Operating

Income

 

Americas Adhesives

 $198,957  $4,096  $31,900  $206,623  $4,725  $33,617 

EIMEA

  130,619   4,056   8,430   133,512   4,513   5,325 

Asia Pacific

  57,488   1,540   2,510   54,645   1,137   2,749 

Construction Products

  64,402   185   2,093   72,404   119   3,421 

Engineering Adhesives

  61,392   -   3,496   56,949   -   3,431 

Total

 $512,858      $48,429  $524,133      $48,543 

  

Nine Months Ended

 
  

August 27, 2016

  

August 29, 2015

 
  

Trade

Revenue

  

Inter-

Segment

Revenue

  

Segment

Operating

Income

  

Trade

Revenue

  

Inter-

Segment

Revenue

  

Segment

Operating

Income

 

Americas Adhesives

 $588,422  $11,821  $94,043  $618,172  $16,428  $91,021 

EIMEA

  394,807   13,821   25,620   405,044   12,174   8,303 

Asia Pacific

  171,467   3,801   9,299   167,541   8,570   8,838 

Construction Products

  192,111   340   5,412   206,690   541   10,790 

Engineering Adhesives

  172,891   -   6,465   138,109   -   (681)

Total

 $1,519,698      $140,839  $1,535,556      $118,271 

Reconciliation of segment operating income to income before income taxes and income from equity method investments:

  

Three Months Ended

  

Nine Months Ended

 
  

August 27,

2016

  

August 29,

2015

  

August 27,

2016

  

August 29,

2015

 

Segment operating income

 $48,429  $48,543  $140,839  $118,271 

Special charges, net

  2,807   (1,297)  2,024   (4,592)

Other income (expense), net

  (956)  (1,040)  (7,603)  (1,246)

Interest expense

  (6,809)  (6,448)  (19,714)  (18,765)

Income before income taxes and income from equity method investments

 $43,471  $39,758  $115,546  $93,668 

Note12: Income Taxes

As of August 27, 2016, we had a liability of $4,508 recorded under FASB ASC 740,Income Taxes, for gross unrecognized tax benefits (excluding interest), compared to $5,124 as of November 28, 2015. As of August 27, 2016, we had accrued $639 of gross interest relating to unrecognized tax benefits. For the quarter ended August 27, 2016, our recorded liability for gross unrecognized tax benefits decreased by $652.

Note13: Goodwill and Other Intangible Assets

A summary of goodwill activity as of August 27, 2016 and changes during the nine months then ended is presented below:

  

Americas

Adhesives

  

EIMEA

  

Asia

Pacific

  

Construction

Products

  

Engineering

Adhesives

  

Total

 

Balance at November 28, 2015

 $59,706  $100,638  $17,329  $22,668  $153,863  $354,204 

Acquisitions

  -   -   -   -   38,8521  38,852 

Currency impact

  116   3,885   812   97   (4,715)  195 

Balance at August 27, 2016

 $59,822  $104,523  $18,141  $22,765  $188,000  $393,251 

1

Preliminary goodwill balance as of August 27, 2016.

As discussed in Note 11, during the first quarter of fiscal year 2016, we changed our operating segments as a result of a change in our management reporting structure. This resulted in a change in our reporting units. We allocated goodwill to our new reporting units using the relative fair value approach.

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

  

August 27, 2016

 

Amortizable Intangible Assets

 

Purchased

Technology &

Patents

  

Customer

Relationships

  

All Other

  

Total

 

Original cost

 $70,237  $243,017  $49,776  $363,030 

Accumulated amortization

  (23,727)  (110,258)  (28,343)  (162,328)

Net identifiable intangibles

 $46,510  $132,759  $21,433  $200,702 

  

November 28, 2015

 

Amortizable Intangible Assets

 

Purchased

Technology &

Patents

  

Customer

Relationships

  

All Other

  

Total

 

Original cost

 $69,792  $234,995  $49,563  $354,350 

Accumulated amortization

  (17,613)  (99,405)  (24,801)  (141,819)

Net identifiable intangibles

 $52,179  $135,590  $24,762  $212,531 

Amortization expense with respect to amortizable intangible assets was $20,509 and $20,046 for the nine months ended August 27, 2016 and August 29, 2015, respectively.

Estimated aggregate amortization expense based on the current carrying value of amortizable intangible assets for the next five fiscal years are as follows:

Fiscal Year

 

Remainder

2016

  

2017

  

2018

  

2019

  

2020

  

Thereafter

 

Amortization Expense

 $7,023  $25,901  $25,444  $23,506  $22,527  $96,301 

Non-amortizable intangible assets as of August 27, 2016 are $462 and are related to trademarks and trade names.

Note 13: 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 statement of cash flows in the same category as the cash flows from the items subject to the designated hedge or undesignated (economic) hedge relationship. 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 periodic basis as warranted. We do not anticipate nonperformance by any of these counterparties, and valuation allowances, if any, arede minimis.

Cash Flow Hedges

Effective February 24, 2017, we entered into a cross-currency swap agreement to convert a notional amount of $42,600 of foreign currency denominated intercompany loans into U.S. dollars. The swap matures in 2020.

Effective October 7, 2015, we entered into three cross-currency swap agreements to convert a notional amount of $134,736 of foreign currency denominated intercompany loans into U.S. dollars. The first swap matures in 2017, the second swap matures in 2018 and the third swap matures in 2019.

As of June 3, 2017, the combined fair value of the swaps was a liability of $5,054 and was included in other liabilities in the Condensed Consolidated Balance Sheets. The swaps were designated as cash-flow hedges for accounting treatment. The lesser amount between the cumulative change in the fair value of the actual swaps and the cumulative change in the fair value of hypothetical swaps is recorded in accumulated other comprehensive income (loss) in the Condensed Consolidated Balance Sheets. The difference between the cumulative change in the fair value of the actual swaps and the cumulative change in the fair value of hypothetical swaps are recorded as other income (expense), net in the Condensed Consolidated Statements of Income. In a perfectly effective hedge relationship, the two fair value calculations would exactly offset each other. Any difference in the calculation represents hedge ineffectiveness. The ineffectiveness calculations as of June 3, 2017 resulted in additional pre-tax gain of $7 for the six months ended June 3, 2017 as the change in fair value of the cross-currency swaps was more than the change in the fair value of the hypothetical swaps. The amount in accumulated other comprehensive income (loss) related to cross-currency swaps was a loss of $1,169 as of June 3, 2017. The estimated net amount of the existing loss that is reported in accumulated other comprehensive income (loss) as of June 3, 2017 that is expected to be reclassified into earnings within the next twelve months is $719. As of June 3, 2017, we do not believe any gains or losses will be reclassified into earnings as a result of the discontinuance of these cash flow hedges because the original forecasted transaction will not occur.

 The following table summarizes the cross-currency swaps outstanding as of June 3, 2017:

 

Fiscal Year of Expiration

 

Interest Rate

  

Notional Value

  

Fair Value

 

Pay EUR

2017

  3.05% $44,912  $(378)
Receive USD  3.9145%        
              

Pay EUR

2018

  3.45% $44,912  $(847)
Receive USD  4.5374%        
              

Pay EUR

2019

  3.80% $44,912  $(1,248)
Receive USD  5.0530%        
              

Pay EUR

2020

  1.95% $42,600  $(2,581)
Receive USD  4.30375%        

Total

     $177,336  $(5,054)

Except for the cross-currency swap agreements listed above, foreign currency derivative instruments outstanding are not designated as hedges for accounting purposes. The gains and losses related to mark-to-market adjustments are recognized as other income or expense in the Condensed Consolidated Statements of Income during the periods in which the derivative instruments are outstanding. See Note 14 for the fair value amounts of these derivative instruments.

As of June 3, 2017, we had forward foreign currency contracts maturing between June 15, 2017 and April 13, 2018. The mark-to-market effect associated with these contracts, on a net basis, was a gain of $328 as of June 3, 2017. These gains were largely offset by the underlying transaction gains and losses resulting from the foreign currency exposures for which these contracts relate.

Fair Value Hedges

During the second quarter ended June 3, 2017, we entered into interest rate swap agreements to convert $125,000 of our Series E private placement to variable interest rates of 1-month LIBOR (in arrears) plus 2.22 percent. The combined fair value of the interest rate swaps in total was an asset of $993 at June 3, 2017 and was included in other assets in the Condensed Consolidated Balance Sheets. The swaps were designated for hedge accounting treatment as fair value hedges. We are applying the shortcut method in accounting for these interest rate swaps as we expect that the changes in the fair value of the swap will offset the changes in the fair value of the 5.61% Notes resulting in no ineffectiveness. As a result of applying the shortcut method, the change in the fair value of the interest rate swap and an equivalent amount for the change in the fair value of the debt will be reflected in other income (expense), net and no ineffectiveness will be recognized in our Condensed Consolidated Statements of Income.

We entered into interest rate swap agreements to convert $150,000 of our $300,000 4.000% Notes that were issued on February 14, 2017 to a variable interest rate of 1-month LIBOR (in advance) plus 1.86 percent. See Note 6 for further discussion on the issuance of our 4.000% Notes. The combined fair value of the interest rate swaps in total was an asset of $1,007 at June 3, 2017 and was included in other assets in the Condensed Consolidated Balance Sheets. The swaps were designated for hedge accounting treatment as fair value hedges. We are applying the shortcut method in accounting for these interest rate swaps as we expect that the changes in the fair value of the swap will offset the changes in the fair value of the 4.000% Notes resulting in no ineffectiveness. As a result of applying the shortcut method, the change in the fair value of the interest rate swap and an equivalent amount for the change in the fair value of the debt will be reflected in other income (expense), net and no ineffectiveness will be recognized in our Condensed Consolidated Statements of Income.

We entered into interest rate swap agreements to convert $75,000 of our senior notes that were issued in November 2009 to variable interest rates. At June 3, 2017, one swap remains in place to convert $25,000 of our 5.61% senior notes issued on December 16, 2009 to a variable interest rate of 6-month LIBOR (in arrears) plus 1.78 percent. The change in fair value of the senior notes, attributable to the change in the risk being hedged, was a liability of $1,160 at June 3, 2017 and was included in long-term debt and current maturities of long-term debt in the Condensed Consolidated Balance Sheets. The combined fair value of the swaps in total was an asset of $1,224 at June 3, 2017 and $1,579 at December 3, 2016 and were included in other assets in the Condensed Consolidated Balance Sheets. The swaps were designated for hedge accounting treatment as fair value hedges. The changes in the fair value of the swap and the fair value of the senior notes attributable to the change in the risk being hedged are recorded as other income (expense), net in the Condensed Consolidated Statements of Income. In a perfectly effective hedge relationship, the two fair value calculations would exactly offset each other. Any difference in the calculation represents hedge ineffectiveness. For the six months ended June 3, 2017 and May 28, 2016, a pre-tax loss of $91 and $48, respectively, was recorded as the fair value of the Senior Notes decreased by more than the fair value of the interest rate swap attributable to the change in the risk being hedged.

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 June 3, 2017, there were no significant concentrations of credit risk.

Note 14: 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 August 27,June 3, 2017 and December 3, 2016, and November 28, 2015, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

 

  

June 3,

  

Fair Value Measurements Using:

 

Description

 

2017

  

Level 1

  

Level 2

  

Level 3

 

Assets:

                

Marketable securities

 $2,763  $2,763  $-  $- 

Foreign exchange contract assets

  2,359   -   2,359   - 

Interest rate swaps

  3,224   -   3,224   - 
                 

Liabilities:

                

Foreign exchange contract liabilities

 $2,031  $-  $2,031  $- 

Contingent consideration liability

  1,082   -   -   1,082 

Cash-flow hedges

  5,054   -   5,054   - 

  

August 27,

  

Fair Value Measurements Using:

 

Description

 

2016

  

Level 1

  

Level 2

  

Level 3

 

Assets:

                

Marketable securities

 $1,816  $1,816  $-  $- 

Derivative assets

  2,931   -   2,931   - 

Interest rate swaps

  2,337   -   2,337   - 
                 

Liabilities:

                

Derivative liabilities

 $7,501  $-  $7,501  $- 

Contingent consideration liability

  10,192   -   -   10,192 

Cash-flow hedges

  2,048   -   2,048   - 
23

Table of Contents

 

 

November 28,

  

Fair Value Measurements Using:

  

December 3,

  

Fair Value Measurements Using:

 

Description

 

2015

  

Level 1

  

Level 2

  

Level 3

  

2016

  

Level 1

  

Level 2

  

Level 3

 

Assets:

                                

Marketable securities

 $1,698  $1,698  $-  $-  $1,020  $1,020  $-  $- 

Derivative assets

  15,185   -   15,185   - 

Foreign exchange contract assets

  11,697   -   11,697   - 

Interest rate swaps

  3,395   -   3,395   -   1,579   -   1,579   - 

Cash-flow hedges

  5,384   -   5,384   -   4,654   -   4,654   - 
                                

Liabilities:

                                

Derivative liabilities

 $4,744  $-  $4,744  $- 

Foreign exchange contract liabilities

 $6,925  $-  $6,925  $- 

Contingent consideration liability

  10,854   -   -   10,854   4,720   -   -   4,720 

Long-term debt had an estimated fair value of $791,936 and $693,283 as of June 3, 2017 and December 3, 2016, respectively. The fair value of long-term debt is based on quoted market prices for the same or similar issues or on the current rates offered for debt of similar maturities. The estimated fair value of these long-term obligations is not necessarily indicative of the amount that would be realized in a current market exchange.

 

We use the income approach in calculating the fair value of our contingent consideration liabilitiesliability using a real option model with Level 3 inputs. The expected cash flows are affected by various significant judgments and assumptions, including revenue growth rates, profit margin percentages, volatility and discount rate, which are sensitive to change. Estimates of fair value are inherently uncertain and represent only management’s reasonable expectation regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will, in all likelihood, differ in some respects from actual future results. The valuationcontingent consideration liability activity for the six months ended June 3, 2017 is presented below:

  

Amount

 

Balance at December 3, 2016

 $4,720 

Mark to market adjustment

  (3,603)

Foreign currency translation adjustment

  (35)

Balance at June 3, 2017

 $1,082 

Subsequent to the second quarter of 2017, we entered into an agreement to modify the terms of the earnout calculation associated with the contingent consideration liability. This modification results in an increase to the contingent consideration liability related toby approximately $1,100 based on assumptions utilized for the acquisition of Tonsan Adhesive, Inc. resulted in a fair value of $10,221 as of August 27, 2016 and a $2,018 mark to market adjustment recorded as a credit to selling, general and administrative in the Condensed Consolidated Statement of Income as of August 27, 2016.second quarter 2017 valuation.

 

Contingent consideration liabilities

    

Level 3 balance November 28, 2015

 $10,854 

Opening balance sheet adjustment

  700 

Mark to market adjustment

  (2,055)

Foreign currency translation adjustment

  693 

Level 3 balance August 27, 2016

 $10,192 

Note15: Share Repurchase Program

 

On September 30, 2010,April 6, 2017, the Board of Directors authorized a share repurchase program of up to $100,000$200,000 of our outstanding common shares.shares for a period up to five years. Under the program, we are authorized to repurchase shares for cash on the open market, from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases is dependent on price, market conditions and applicable regulatory requirements. Upon repurchase of the shares, we reducedreduce our common stock for the par value of the shares with the excess being applied against additional paid-in capital. This authorization replaces the September 30, 2010 authorization to repurchase shares. During six months ended June 3, 2017, no shares were repurchased shares under the April 6, 2017 program.

 

UnderDuring the six months ended June 3, 2017, we repurchased shares under the September 30, 2010 program with an aggregate value of $6,284. Of this program,amount, $125 reduced common stock and $6,159 reduced additional paid-in capital. During the six months ended May 28, 2016, we repurchased shares with an aggregate value of $5,326 during the third quarter of 2016. During the nine months ended August 27, 2016, we repurchased shares under this program with an aggregate value of $9,536.$4,210. Of this amount, $250$125 reduced common stock and $9,286$4,085 reduced additional paid-in capital. We did not repurchase any shares during the nine months ended August 29, 2015.

 

Note16:Redeemable Non-Controlling Interest 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 account forreview the non-controlling interest in H.B. Fuller Kimya Sanayi Ticaret A.S. (HBF Kimya)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 redeemable non-controlling interest because bothpotentially responsible party (“PRP”) under the non-controlling shareholderComprehensive Environmental Response, Compensation and H.B. Fuller have an option, exercisable beginning August 1, 2018,Liability Act and/or similar state laws that impose liability for costs relating to require the redemptionclean 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 shares owned bycountries where current and former facilities are located. Our environmental, health and safety department monitors compliance with applicable laws on a global basis. To the non-controlling shareholder at a price determined by a formula based on 24 months trailing EBITDA. Sinceextent we can reasonably estimate the option makes the redemption of the non-controlling ownership shares of HBF Kimya outsideamount of our control, these shares are classified asprobable liabilities for environmental matters, we establish a redeemable non-controlling interest in temporary equity in the Condensed Consolidated Balance Sheets. The non-controlling shareholder is entitled to increase his ownership by 1 percent per year for 5 years up to a maximum of 13 percent ownership based on the achievement of profitability targets in each year. The option is subject to a minimum price of €3,500. The redemption value of the option, if it were currently redeemable, is estimated to be €3,500.financial provision. 

 

The results of operations for the HBF Kimya non-controlling interest is consolidated in our financial statements. Both the non-controlling interest and the accretion adjustment to redemption value are included in net income attributable to non-controlling interests in the Condensed Consolidated Statements of Income and in the carrying value of the redeemable non-controlling interest on the Condensed Consolidated Balance Sheets. HBF Kimya’s functional currency is the Turkish lira and changes in exchange rates will affect the reported amount of the redeemable non-controlling interest.

  

Redeemable

Non-Controlling

Interest

 

Balance at November 28, 2015

 $4,199 

Net income (loss) attributed to redeemable non-controlling interest

  161 

Foreign currency translation adjustment

  52 

Balance at August 27, 2016

 $4,412 

 

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 30 years ago. The plaintiffs generally bring these lawsuits against multiple defendants and seek damages (both actual and punitive) in very large amounts. In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable injuries or that the injuries suffered were the result of exposure to products manufactured by us. We are typically dismissed as a defendant in such cases without payment. If the plaintiff presents evidence indicating that compensable injury occurred as a result of exposure to our products, the case is generally settled for an amount that reflects the seriousness of the injury, the length, intensity and character of exposure to products containing asbestos, the number and solvency of other defendants in the case, and the jurisdiction in which the case has been brought.

A significant portion of the defense costs and settlements in asbestos-related litigation is paid by third parties, including indemnification pursuant to the provisions of a 1976 agreement under which we acquired a business from a third party. Currently, this third party is defending and paying settlement amounts, under a reservation of rights, in most of the asbestos cases tendered to the third party.

In addition to the indemnification arrangements with third parties, we have insurance policies that generally provide coverage for asbestos liabilities, including defense costs. Historically, insurers have paid a significant portion of our defense costs and settlements in asbestos-related litigation. However, certain of our insurers are insolvent. We have entered into cost-sharing agreements with our insurers that provide for the allocation of defense costs and settlements and judgments in asbestos-related lawsuits. These agreements require, among other things, that we fund a share of settlements and judgments allocable to years in which the responsible insurer is insolvent

A summary of the number of and settlement amounts for asbestos-related lawsuits and claims is as follows:

  

Six Months Ended

  

3 Years Ended

 
  

June 3, 2017

  

May 28, 2016

  

December 3, 2016

 

Lawsuits and claims settled

  7   4   33 

Settlement amounts

 $1,423  $343  $3,061 

Insurance payments received or expected to be received

 $1,132  $251  $2,253 

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.  

Note17: Operating 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. For segment evaluation by the chief operating decision maker, segment operating income is identified as gross profit less SG&A expenses. Segment operating income excludes special charges, net. Corporate expenses are fully allocated to each operating segment. Corporate assets are not allocated to the operating segments. Inter-segment revenues are recorded at cost plus a markup for administrative costs. Operating results of each segment 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 table below provides certain information regarding net revenue and segment operating income for each of our operating segments:

  

Three Months Ended

 
  

June 3, 2017

  

May 28, 2016

 
      

Inter-

  

Segment

      Inter-  

Segment

 
  

Trade

  

Segment

  

Operating

  

Trade

  

Segment

  

Operating

 
  

Revenue

  

Revenue

  

Income (Loss)

  

Revenue

  

Revenue

  

Income

 

Americas Adhesives

 $229,622  $4,048  $26,455  $206,147  $4,095  $35,884 

EIMEA

  135,226   4,452   8,083   139,897   4,494   11,027 

Asia Pacific

  64,466   1,416   4,751   60,119   1,309   3,036 

Construction Products

  63,754   -   (1,853)  67,634   51   2,534 

Engineering Adhesives

  68,583   -   5,832   58,717   -   2,091 

Total

 $561,651      $43,268  $532,514      $54,572 

  

Six Months Ended

 
  

June 3, 2017

  

May 28, 2016

 
      

Inter-

  

Segment

      

Inter-

  

Segment

 
  

Trade

  

Segment

  

Operating

  

Trade

  

Segment

  

Operating

 
  

Revenue

  

Revenue

  

Income

  

Revenue

  

Revenue

  

Income

 

Americas Adhesives

 $422,784  $7,857  $47,488  $389,466  $7,725  $62,143 

EIMEA

  259,265   7,899   9,880   264,188   9,765   17,190 

Asia Pacific

  127,112   2,503   6,630   113,979   2,261   6,789 

Construction Products

  120,800   -   (2,536)  127,708   155   3,319 

Engineering Adhesives

  135,013   -   7,887   111,499   -   2,969 

Total

 $1,064,974      $69,349  $1,006,840      $92,410 

The table below provides a reconciliation of segment operating income to income before income taxes and income from equity method investments:

  

Three Months Ended

  

Six Months Ended

 
  

June 3,

  

May 28,

  

June 3,

  

May 28,

 
  

2017

  

2016

  

2017

  

2016

 

Segment operating income

 $43,268  $54,572  $69,349  $92,410 

Special charges, net

  -   (370)  -   (783)

Other income (expense), net

  (110)  (1,565)  511   (6,647)

Interest expense

  (8,148)  (6,597)  (16,528)  (12,905)

Income before income taxes and income from equity method investments

 $35,010  $46,040  $53,332  $72,075 

Item 2. Management'sDiscus Management's Discussionsion 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 28, 2015December 3, 2016 for important background information related to our business.

 

As of the beginning of the first quarter ending February 27, 2016, we created a new global operating segment named Engineering Adhesives, which includes 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 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.

Net revenue in the thirdsecond quarter of 2016 decreased 2.22017 increased 5.5 percent from the thirdsecond quarter of 2015. Sales2016. Revenue increased 9.4 percent due to sales volume, increased 0.9including 5.4 percent from acquisitions, and product pricing decreased 2.1a 0.2 percent increase due to favorable sales mix compared to the thirdsecond quarter of 2015.2016. A weaker Egyptian pound, Euro, Chinese renminbi, Egyptian pound, Turkish lira Indian rupee and Malaysian ringgit, partially offset by a stronger EuroMexican peso compared to the U.S. dollar for the thirdsecond quarter of 20162017 compared to the thirdsecond quarter of 20152016 were the main drivers of a negative 1.04.1 percent currency effect. Gross profit margin increased 50decreased 370 basis points primarily due to lowerhigher raw material costs.costs and the implementation of the 2017 Restructuring Plan.

 

Net revenue in the first ninesix months of 2016 decreased 1.02017 increased 5.8 percent from the first ninesix months of 2015. Sales2016. Revenue increased 10.8 percent due to sales volume, increased 2.5including 4.4 percent from acquisitions, but was partially offset by a 1.0 percent decrease due to unfavorable sales mix and a 0.2 percent decrease in product pricing decreased 1.3 percent compared to the first ninesix months of 2015.2016. A weaker Egyptian pound, Euro, Chinese renminbi, Euro, Turkish lira Canadian dollar, and Egyptian poundMexican peso compared to the U.S. dollar for the first ninesix months of 20162017 compared to the first ninesix months of 20152016 were the main drivers of a negative 2.23.8 percent currency effect. Gross profit margin increased 230decreased 260 basis points primarily due to lowerhigher raw material costs.costs and the implementation of the 2017 Restructuring Plan.

 

Net income attributable to H.B. Fuller in the thirdsecond quarter of 20162017 was $32.7$25.9 million as compared to $26.8$33.3 million in the thirdsecond quarter of 2015.2016. On a diluted earnings per share basis, the thirdsecond quarter of 20162017 was $0.64$0.50 per share as compared to $0.52$0.65 per share for the thirdsecond quarter of 2015.2016.

 

Net income attributable to H.B. Fuller in the first ninesix months of 20162017 was $85.0$40.7 million as compared to $61.7$52.2 million in the first ninesix months of 2015.2016. On a diluted earnings per share basis, the first ninesix months of 20162017 was $1.66$0.79 per share as compared to $1.20$1.02 per share for the same periodfirst six months of 2015.2016.

Restructuring Plan

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. In implementing the 2017 Restructuring Plan, we expect to incur costs of approximately $17.0 million to $20.0 million which includes severance and related employee costs, and costs related to the optimization of production facilities, streamlining of processes, rationalization of product offerings and accelerated depreciation of long-lived assets. 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 second quarter and six months ended June 3, 2017, we recorded a pre-tax charge of $5.6 million and $15.8 million, respectively, related to the 2017 Restructuring Plan. 

 

Results of Operations

 

Net revenue:

 

 

Three Months Ended

  

Six Months Ended

 
 

Three Months Ended

  

Nine Months Ended

  

June 3,

  

May 28,

  

2017 vs

  

June 3,

  

May 28,

  

2017 vs

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

2017

  

2016

  

2016

  

2017

  

2016

  

2016

 

Net revenue

 $512.9  $524.1   (2.2%) $1,519.7  $1,535.6   (1.0%) $561.7  $532.5   5.5% $1,065.0  $1,006.8   5.8%

 

We review variances in net revenue in terms of changes related to sales volume, product pricing, sales volume,mix, business acquisitions and changes in foreign currency exchange rates and large acquisitions.rates. The product pricing/impact of sales volume, varianceproduct pricing, sales mix and small acquisitions such as Cyberbond, Advanced Adhesives, Tonsan Adhesive, Inc. and Continental Products Limited are viewed as constant currency growth. The following table shows the net revenue variance analysis for the thirdsecond quarter and first ninesix months of 20162017 compared to the same periods in 2015:2016:

 

  

Three Months Ended August 27, 2016

  

Nine Months Ended August 27, 2016

 
  

vs August 29, 2015

  

vs August 29, 2015

 

Product pricing

  (2.1%)  (1.3%)

Sales volume

  0.9%  2.5%

Currency

  (1.0%)  (2.2%)

Total

  (2.2%)  (1.0%)

 

  

Three Months Ended June 3, 2017

  

Six Months Ended June 3, 2017

 
  

vs May 28, 2016

  

vs May 28, 2016

 

Constant currency growth

  9.6%  9.6%

Currency

  (4.1%)  (3.8%)

Total

  5.5%  5.8%

 

Constant currency growth was a negative 1.2positive 9.6 percent in the thirdsecond quarter of 20162017 compared to the thirdsecond quarter of 2015. Sales volume increased 0.9 percent and product pricing decreased 2.1 percent compared to 2015.2016. The negative 1.29.6 percent constant currency growth in the thirdsecond quarter of 20162017 was driven by 11.821.7 percent growth in Engineering Adhesives, 9.611.0 percent growth in Asia Pacific, 8.1 percent growth in EIMEA and 11.8 percent growth in Americas Adhesives, offset by a 2.0 percent decrease in EIMEA, 3.6 percent decrease in Americas Adhesives and a 11.06.1 percent decrease in Construction Products. The negative 1.04.1 percent currency impact was primarily driven by the devaluation of the Egyptian pound, Euro, Chinese renminbi, Egyptian pound, Turkish lira Indian rupee, and Malaysian ringgit, partially offset by a stronger Euro compared to the U.S. dollar.Mexican peso.

 

Constant currency growth was 1.2a positive 9.6 percent in the first ninesix months of 20162017 compared to the first ninesix months of 2015. Sales volume increased 2.5 percent and product pricing decreased 1.3 percent compared to 2015.2016. The 1.29.6 percent constant currency growth in the first ninesix months of 20162017 was driven by 30.025.7 percent growth in Engineering Adhesives, 7.715.2 percent growth in Asia Pacific, and 1.18.6 percent growth in EIMEA and 9.0 percent growth in Americas Adhesives, offset by a 4.35.7 percent decrease in Americas Adhesives and a decrease of 6.6 percent in Construction Products. The negative 2.23.8 percent currency impact was primarily driven by the devaluation of the Egyptian pound, Euro, Chinese renminbi, Euro, Turkish lira Canadian dollar, and Egyptian pound compared to the U.S. dollar.Mexican peso.

 

Cost of sales:

 

                        
 

Three Months Ended

  

Six Months Ended

 
 

Three Months Ended

  

Nine Months Ended

  

June 3,

  

May 28,

  

2017 vs

  

June 3,

  

May 28,

  

2017 vs

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

2017

  

2016

  

2016

  

2017

  

2016

  

2016

 

Raw materials

 $273.9  $288.2   (5.0%) $813.4  $862.2   (5.7%) $312.4  $285.0   9.6% $585.8  $539.4   8.6%

Other manufacturing costs

  92.8   89.1   4.2%  264.3   261.4   1.1%  103.2   89.3   15.6%  194.1   171.6   13.2%

Cost of sales

 $366.7  $377.3   (2.8%) $1,077.7  $1,123.6   (4.1%) $415.6  $374.3   11.0% $779.9  $711.0   9.7%

Percent of net revenue

  71.5%  72.0%      70.9%  73.2%      74.0%  70.3%      73.2%  70.6%    

 

Cost of sales in the thirdsecond quarter of 2017 compared to the second quarter of 2016 compared to the third quarter of 2015 decreased 50increased 370 basis points as a percentage of net revenue. Raw material cost as a percentage of net revenue decreased 160increased 210 basis points in the second quarter of 2017 compared to last yearthe second quarter of 2016 primarily due to lowerhigher raw material costs and sales mix, partially offset by the impact of valuing inventory acquired in the Cyberbond acquisition at fair value.costs. Other manufacturing costs as a percentage of revenue increased 110160 basis points in the second quarter of 2017 compared to the thirdsecond quarter of last year.2016 driven primarily by the impact of acquired businesses and the implementation of the 2017 Restructuring Plan.

 

Cost of sales in the first ninesix months of 20162017 compared to the first ninesix months of 2015 decreased 2302016 increased 260 basis points as a percentage of net revenue. Raw material cost as a percentage of net revenue decreased 270increased 140 basis points in the first six months of 2017 compared to last yearthe first six months of 2016 primarily due to lowerhigher raw material costs, sales mix and the 2015 impact of valuing inventories acquired in the Tonsan Adhesive, Inc. acquisition at fair value.costs. Other manufacturing costs as a percentage of revenue increased 40120 basis points in the first six months of 2017 compared to last year.the first six months of 2016 driven primarily by the impact of acquired businesses and the implementation of the 2017 Restructuring Plan.

 

Gross profit:

 

 

Three Months Ended

  

Six Months Ended

 
 

Three Months Ended

  

Nine Months Ended

  

June 3,

  

May 28,

  

2017 vs

  

June 3,

  

May 28,

  

2017 vs

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

2017

  

2016

  

2016

  

2017

  

2016

  

2016

 

Gross profit

 $146.1  $146.8   (0.5%) $442.0  $412.0   7.3% $146.0  $158.3   (7.7%) $285.0  $295.9   (3.7%)

Percent of net revenue

  28.5%  28.0%      29.1%  26.8%      26.0%  29.7%      26.8%  29.4%    

 

Gross profit in the third secondquarter of 20162017 decreased 0.57.7 percent and gross profit margin increased 50decreased 370 basis points compared to the thirdsecond quarter of 2015.2016. The combined impact of lower revenue, lowerdecrease in gross profit margin was primarily due to higher raw material costs, the impact of acquired businesses and higher other manufacturing costs in the third quarterimplementation of 2016 resulted in the decrease in gross profit.2017 Restructuring Plan.

 

Gross profit in the first ninesix months of 2016 increased $30.0 million or 7.32017 decreased 3.7 percent and gross profit margin increased 230decreased 260 basis points compared to the first nine sixmonths of 2015. Reduced2016. The decrease in gross profit margin was primarily due to higher raw material costs, better sales mixthe impact of acquired businesses and a full nine monthsthe implementation of Tonsan in 2016 resulted in the increase in gross profit.2017 Restructuring Plan.

 

 

Selling, general and administrative (SG&A) expenses:

 

 

Three Months Ended

  

Six Months Ended

 
 

Three Months Ended

  

Nine Months Ended

  

June 3,

  

May 28,

  

2017 vs

  

June 3,

  

May 28,

  

2017 vs

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

2017

  

2016

  

2016

  

2017

  

2016

  

2016

 

SG&A

 $97.7  $98.3   (0.6%) $301.1  $293.7   2.5% $102.8  $103.7   (0.9%) $215.7  $203.5   6.0%

Percent of net revenue

  19.0%  18.8%      19.8%  19.1%      18.3%  19.5%      20.3%  20.2%    

 

SG&A expenses for the thirdsecond quarter of 20162017 decreased $0.6$0.9 million, or 0.60.9 percent, compared to the thirdsecond quarter of 2015.2016. The decrease is primarilymainly due to lower variable compensation, offset by incremental expenses related to general spending reductions and foreign currency exchange rate benefits on spending outside the Advanced Adhesives and Cyberbond acquisitions and higher personnel costs related to increased head count.U.S., partially offset by the impact of acquired businesses.

 

SG&A expenses for the first ninesix months of 20162017 increased $7.4$12.2 million, or 2.56.0 percent, compared to the first ninesix months of 2015.2016. The increase is mainly due to a full nine monthsthe impact of Tonsan for 2016 and incremental expenses coming from newly acquired businesses compared toand the first nine monthsimplementation of 2015. This increase isthe 2017 Restructuring Plan, partially offset by lower expenses related to general spending reductions and foreign currency exchange rate benefits on spending outside the U.S. and the net mark to market adjustment related to the Tonsan contingent consideration liability.

 

We make SG&A expense plans at the beginning of each fiscal year and barring significant changes in business conditions or our outlook for the future, we maintain these spending plans for the entire year. Management routinely monitors our SG&A spending relative to these fiscal year plans for each operating segment and for the company overall. We feel it is important to maintain a consistent spending program in this area as many of the activities within the SG&A category such as the sales force, technology development, and customer service are critical elements of our business strategy. For the current year, we planned SG&A expenses to increase relative to last year by an amount higher than our expected growth in net revenue.

 

Special charges, net:

 

 

Three Months Ended

  

Six Months Ended

 
 

Three Months Ended

  

Nine Months Ended

  

June 3,

  

May 28,

  

2017 vs

  

June 3,

  

May 28,

  

2017 vs

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

2017

  

2016

  

2016

  

2017

  

2016

  

2016

 

Special charges, net

 $(2.8) $1.3   (316.4%) $(2.0) $4.6   (144.1%) $-  $0.4   NMP  $-  $0.8   NMP 

NMP = Non-meaningful percentage

 

The following table provides detail of special charges, net:

 

 

Three Months Ended

  

Six Months Ended

 
 

Three Months Ended

  

Nine Months Ended

  

June 3,

  

May 28,

  

June 3,

  

May 28,

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

August 27,

2016

  

August 29,

2015

  

2017

  

2016

  

2017

  

2016

 

Acquisition and transformation related costs

 $0.1  $0.1  $0.2  $0.6  $-  $0.1  $-  $0.2 

Workforce reduction costs

  -   0.2   -   - 

Facility exit costs

  (2.9)  1.0   (2.4  3.7   -   0.1   -   0.4 

Other related costs

  -   -   0.2   0.3   -   0.2   -   0.2 

Special charges, net

 $(2.8) $1.3  $(2.0) $4.6  $-  $0.4  $-  $0.8 

 

The integration of the industrial adhesives business we acquired in March 2012 involved a significant amount of restructuring and capital investment to optimize the new combined entity. In addition to this acquisition, we announced our intentions to take a series of actions in our existing 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 third quarterended August 27,second quarter and six monthsended May 28, 2016, and August 29, 2015, we incurred special charges, net of $(2.8)$0.4 million and $1.3 million respectively, and for the nine months ended August 27, 2016 and August 29, 2015, we incurred special charges, net of $(2.0) million and $4.6$0.8 million respectively, for costs related to the Business Integration Project. Included in facility exit costs forThe Business Integration Project was substantially complete at the three and nine months ended August 27, 2016 is a $3.6 million gain on the saleend of our production facility located in Wels, Austria, which closed during the third quarter of 2016.

We present operating segment information consistent with how we organize our business internally, assess performance and make decisions regarding the allocation of resources. Segment operating income is defined as gross profit less selling, general and administrative expenses. Because this definition excludes special charges, we have not allocated special charges to the operating segments or included them in Management’s Discussion and Analysis of operating segment results. The following table provides the special charges, net attributable to each operating segment for the periods presented:

 

 

  

Three Months Ended

  

Nine Months Ended

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

August 27,

2016

  

August 29,

2015

 

Americas Adhesives

 $-  $-  $-  $(0.9)

EIMEA

  (2.8)  1.3   2.0   5.2 

Company-wide

  -   -   -   0.3 

Special Charges, net

 $(2.8) $1.3  $2.0  $4.6 

 

We expect total project costs will be approximately $164.0 million. The following table provides detail of costs incurred inception-to-date as of August 27, 2016 for the Business Integration Project:

($ in millions)

 

Costs Incurred

Inception-to-Date

as of August 27, 2016

 

Acquisition and transformation related costs

 $43.3 

Work force reduction costs

  41.1 

Cash facility exit costs

  37.7 

Non-cash facility exit costs

  17.7 

Other related costs

 

19.5

 

Business Integration Project

 $159.3 

Non-cash costs are primarily related to accelerated depreciation of long-lived assets.

Other income (expense), net:

 

  

Three Months Ended

 

Nine Months Ended

($ in millions)

 

August 27,

2016

  

August 29,

2015

 

2016 vs

2015

 

August 27,

2016

  

August 29,

2015

 

2016 vs

2015

Other income (expense), net

 $(1.0) $(1.0)

NMP

 $(7.6) $(1.2)

NMP

NMP = Non-meaningful percentage

  

Three Months Ended

  

Six Months Ended

 
  

June 3,

  

May 28,

  

2017 vs

  

June 3,

  

May 28,

  

2017 vs

 

($ in millions)

 

2017

  

2016

  

2016

  

2017

  

2016

  

2016

 

Other income (expense), net

 $(0.1) $(1.6)  NMP  $0.5  $(6.6)  NMP 
                         

NMP = Non-meaningful percentage

             

 

Other income (expense), net in the thirdsecond quarter of 20162017 included $1.0 million of currency translation and re-measurementtransaction losses and $0.2 million of net financing expense, offsetoff set by $0.5$0.8 million of interest income. Other income (expense), net in the thirdsecond quarter of 20152016 included $1.3$2.4 million of currency translationtransaction losses offset by $0.3 million of net financing income and re-measurement losses.$0.5 million of interest income.

 

Other income (expense), net in the first ninesix months of 20162017 included $9.1$1.4 million of interest income offset by $1.0 million of currency translation and re-measurement losses offset by $1.5 million of interest income. The majority of the $9.1 million of currency translation and re-measurement losses is related to the devaluation of the Argentine peso.transaction losses. Other income (expense), net in the first ninesix months of 20152016 included $2.1$8.2 million of currency translation and re-measurementtransaction losses offset by $0.5$0.6 million of net financing income $0.2and $1.0 million of interest income, and $0.2 million of gains on disposal of fixed assets.income.

 

Interest expense:

 

 

Three Months Ended

  

Six Months Ended

 
 

Three Months Ended

  

Nine Months Ended

  

June 3,

  

May 28,

  

2017 vs

  

June 3,

  

May 28,

  

2017 vs

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

2017

  

2016

  

2016

  

2017

  

2016

  

2016

 

Interest expense

 $6.8  $6.4   5.6% $19.7  $18.8   5.1% $8.1  $6.6   23.5% $16.5  $12.9   28.1%

 

Interest expense in the thirdsecond quarter of 2017 compared to the second quarter of 2016 aswas higher due to U.S. debt balances at higher interest rates from the issuance of our 4.00% Notes, and higher LIBOR rates on floating rate debt held in the U.S. We capitalized less than $0.1 million of interest expense in the second quarter of 2017 compared to $0.2 million in the same period last year.

Interest expense in the first six months of 2017 compared to the same period last year was higher due to higher U.S. debt balances at higher interest rates from the issuance of our 4.00% Notes and higher LIBOR rates on floating rate debt held in the U.S. In addition, and larger local currencyas a result of the issuance of our 4.000% Notes during the first six months of 2017, we recorded $0.5 million of accelerated amortization of debt balances at higher interest rates, offset by higher capitalized interest and lower average U.S.issuance costs related to debt balances.facilities that were repaid with proceeds from the 4.000% Notes. We capitalized $0.2$0.1 million of interest expense in the third quarterfirst six months of 20162017 compared to $0.1$0.3 million in the same period last year.

 

Interest expense for the first nine months of 2016 as compared to the same period last year was higher due to higher LIBOR rates on floating rate debt and larger local currency debt balances at higher interest rates, offset by higher capitalized interest. We capitalized $0.6 million of interest expense in the first nine months of 2016 compared to $0.1 million in the same period last year.

 

Income taxes:

 

 

Three Months Ended

  

Six Months Ended

 
 

Three Months Ended

  

Nine Months Ended

  

June 3,

  

May 28,

  

2017 vs

  

June 3,

  

May 28,

  

2017 vs

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

2017

  

2016

  

2016

  

2017

  

2016

  

2016

 

Income taxes

 $12.5  $14.4   (12.9%) $35.6  $34.5   3.0% $11.2  $14.3   (22.0%) $16.9  $23.1   (26.6%)

Effective tax rate

  28.8%  36.1%      30.8%  36.9%      31.9%  31.0%      31.7%  32.0%    

 

Income tax expense of $12.5$11.2 million in the thirdsecond quarter of 20162017 includes $1.1$0.8 million of discrete tax benefitexpense and $0.8$1.9 million of tax expense relating to the special charges forbenefit from costs primarily related to the Business Integration Project.restructuring plans and other non-recurring items. Excluding the discrete tax expense and the effects of these items, included in special charges, the overall effective tax rate was 31.429.2 percent. 

 

Income tax expense of $35.6$16.9 million in the first ninesix months of 20162017 includes $1.7$0.9 million of discrete tax benefitsexpense and $0.7$5.9 million of tax expense relating to special charges forbenefit from costs primarily related to the Business Integration Project.restructuring plans and other non-recurring items. Excluding the discrete tax benefitsexpense and the effects of these items, included in special charges, the overall effective tax rate was 32.229.4 percent.

 

Income from equity method investments:

 

 

Three Months Ended

  

Six Months Ended

 
 

Three Months Ended

  

Nine Months Ended

  

June 3,

  

May 28,

  

2017 vs

  

June 3,

  

May 28,

  

2017 vs

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

2017

  

2016

  

2016

  

2017

  

2016

  

2016

 

Income from equity method investments

 $1.8  $1.5   22.7% $5.2  $4.2   24.4% $2.0  $1.6   22.3% $4.3  $3.3   28.4%

 

The income from equity method investments relates to our 50 percent ownership of the Sekisui-Fuller joint venture in Japan. The higher income for the thirdsecond quarter and first ninesix months of 20162017 compared to the same periods of 20152016 is primarily related to higher net income in our joint venture.

 

Net income attributable to non-controlling interests:

 

  

Three Months Ended

 

Nine Months Ended

($ in millions)

 

August 27,

2016

  

August 29,

2015

 

2016 vs

2015

 

August 27,

2016

  

August 29,

2015

 

2016 vs

2015

Net income attributable to non-controlling interests

 $(0.1) $(0.1)

NMP

 $(0.2) $(0.3)

NMP

NMP = Non-meaningful percentage

Net income attributable to non-controlling interests relates primarily to an 11 percent redeemable non-controlling interest in HBF Turkey.Turkey and was not material for the quarter ended June 3, 2017 and May 28, 2016. During the first quarterof 2017, we purchased the remaining shares from the non-controlling shareholder.

 

 

Net income attributable to H.B. Fuller:

 

 

Three Months Ended

  

Six Months Ended

 
 

Three Months Ended

  

Nine Months Ended

  

June 3,

  

May 28,

  

2017 vs

  

June 3,

  

May 28,

  

2017 vs

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

2017

  

2016

  

2016

  

2017

  

2016

  

2016

 

Net income attributable to H.B. Fuller

 $32.7  $26.8   22.2% $85.0  $61.7   37.8% $25.9  $33.3   (22.4%) $40.7  $52.2   (22.2%)

Percent of net revenue

  6.4%  5.1%      5.6%  4.0%      4.6%  6.3%      3.8%  5.2%    

 

The net income attributable to H.B. Fuller for the thirdsecond quarter of 20162017 was $32.7$25.9 million compared to $26.8$33.3 million for the thirdsecond quarter of 2015.2016. The diluted earnings per share for the thirdsecond quarter of 20162017 was $0.64$0.50 per share as compared to $0.52$0.65 per share for the thirdsecond quarter of 2015.2016.

 

The net income attributable to H.B. Fuller for the first ninesix months of 20162017 was $85.0$40.7 million compared to $61.7$52.2 million for the first ninesix months of 2015.2016. The diluted earnings per share for the first ninesix months of 20162017 was $1.66$0.79 per share as compared to $1.20$1.02 per share for the first ninesix months of 2015.2016.

 

Operating Segment Results

 

Through the fourth quarter of 2015, our business was reported in four operating segments: Americas Adhesives, Europe, India, Middle East and Africa (EIMEA), Asia Pacific and Construction Products. Changes in our management reporting structure during the first quarter of 2016 required us to conduct an operating segment assessment in accordance with ASC Topic 280,Segment Reporting, to determine our reportable segments. As a result of this assessment, we nowWe have five reportable segments: Americas Adhesives, EIMEA (Europe, India, Middle East and Africa), Asia Pacific, Construction Products and Engineering Adhesives. Prior period segment information has been recast retrospectively to reflect our new operating segments.

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 segment operating income of each of our operating segments. For segment evaluation by the chief operating decision maker, segment operating income is defined as gross profit less selling, general and administrativeSG&A expenses. Segment operating income excludes special charges, net. The product pricing/sales volume variance and small acquisitions are viewed as constant currency growth.

 

Net Revenue by Segment:

 

  

Three Months Ended

  

Nine Months Ended

 
  

August 27, 2016

  

August 29, 2015

  

August 27, 2016

  

August 29, 2015

 

($ in millions)

 

Net

Revenue

  

% of

Total

  

Net

Revenue

  

% of

Total

  

Net

Revenue

  

% of

Total

  

Net

Revenue

  

% of

Total

 

Americas Adhesives

 $199.0   39% $206.7   39% $588.4   39% $618.2   40%

EIMEA

  130.6   25%  133.5   25%  394.8   26%  405.1   26%

Asia Pacific

  57.5   11%  54.6   11%  171.5   11%  167.5   11%

Construction Products

  64.4   13%  72.4   14%  192.1   13%  206.7   13%

Engineering Adhesives

  61.4   12%  56.9   11%  172.9   11%  138.1   10%

Total

 $512.9   100% $524.1   100% $1,519.7   100% $1,535.6   100%

  

Three Months Ended

  

Six Months Ended

 
  

June 3, 2017

  

May 28, 2016

  

June 3, 2017

  

May 28, 2016

 
  

Net

  

% of

  

Net

  

% of

  

Net

  

% of

  

Net

  

% of

 

($ in millions)

 

Revenue

  

Total

  

Revenue

  

Total

  

Revenue

  

Total

  

Revenue

  

Total

 

Americas Adhesives

 $229.6   41% $206.2   39% $422.8   40% $389.5   39%

EIMEA

  135.2   24%  139.9   26%  259.3   24%  264.2   26%

Asia Pacific

  64.5   12%  60.1   11%  127.1   12%  113.9   11%

Construction Products

  63.8   11%  67.6   13%  120.8   11%  127.7   13%

Engineering Adhesives

  68.6   12%  58.7   11%  135.0   13%  111.5   11%

Total

 $561.7   100% $532.5   100% $1,065.0   100% $1,006.8   100%

 

Segment Operating Income:Income (Loss):

 

  

Three Months Ended

  

Nine Months Ended

 
  

August 27, 2016

  

August 29, 2015

  

August 27, 2016

  

August 29, 2015

 

($ in millions)

 

Segment Operating Income

  

% of Total

  

Segment Operating Income

  

% of Total

  

Segment Operating Income

  

% of Total

  

Segment Operating Income

  

% of Total

 

Americas Adhesives

 $31.9   67% $33.6   69% $94.0   67% $91.0   77%

EIMEA

  8.4   17%  5.3   11%  25.6   18%  8.3   8%

Asia Pacific

  2.5   5%  2.8   6%  9.3   6%  8.8   7%

Construction Products

  2.1   4%  3.4   7%  5.4   4%  10.8   9%

Engineering Adhesives

  3.5   7%  3.4   7%  6.5   5%  (0.6)  (1%)

Total

 $48.4   100% $48.5   100% $140.8   100% $118.3   100%

  

Three Months Ended

  

Six Months Ended

 
  

June 3, 2017

  

May 28, 2016

  

June 3, 2017

  

May 28, 2016

 

($ in millions)

 

Segment Operating Income (Loss)

  

% of Total

  

Segment Operating Income

  

% of Total

  

Segment Operating Income

  

% of Total

  

Segment Operating Income

  

% of Total

 

Americas Adhesives

 $26.5   61% $35.9   66% $47.5   68% $62.1   67%

EIMEA

  8.1   19%  11.0   20%  9.8   14%  17.2   19%

Asia Pacific

  4.8   11%  3.1   5%  6.6   10%  6.8   7%

Construction Products

  (1.9)  (4%)  2.5   5%  (2.5)  (4%)  3.3   4%

Engineering Adhesives

  5.8   13%  2.1   4%  7.9   12%  3.0   3%

Total

 $43.3   100% $54.6   100% $69.3   100% $92.4   100%

 

The following table provides a reconciliation of segment operating income to income before income taxes and income from equity method investments, as reported on the Condensed Consolidated Statements of Income.Income:

 

  

Three Months Ended

  

Nine Months Ended

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

August 27,

2016

  

August 29,

2015

 

Segment operating income

 $48.4  $48.5  $140.8  $118.3 

Special charges, net

  2.8   (1.3)  2.0   (4.6)

Other income (expense), net

  (1.0)  (1.0)  (7.6)  (1.2)

Interest expense

  (6.8)  (6.4)  (19.7)  (18.8)

Income before income taxes and income from equity method investments

 $43.4  $39.8  $115.5  $93.7 

  

Three Months Ended

  

Six Months Ended

 
  

June 3,

  

May 28,

  

June 3,

  

May 28,

 

($ in millions)

 

2017

  

2016

  

2017

  

2016

 

Segment operating income

 $43.3  $54.6  $69.3  $92.4 

Special charges, net

  -   (0.4)  -   (0.8)

Other income (expense), net

  (0.1)  (1.6)  0.5   (6.6)

Interest expense

  (8.2)  (6.6)  (16.5)  (12.9)

Income before income taxes and income from equity method investments

 $35.0  $46.0  $53.3  $72.1 

 

Americas Adhesives

 

 

Three Months Ended

  

Six Months Ended

 
 

Three Months Ended

  

Nine Months Ended

  

June 3,

  

May 28,

  

2017 vs

  

June 3,

  

May 28,

  

2017 vs

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

2017

  

2016

  

2016

  

2017

  

2016

  

2016

 

Net revenue

 $199.0  $206.7   (3.7%) $588.4  $618.2   (4.8%) $229.6  $206.2   11.4% $422.8  $389.5   8.6%

Segment operating income

 $31.9  $33.6   (5.1%) $94.0  $91.0   3.3% $26.5  $35.9   (26.3%) $47.5  $62.1   (23.6%)

Segment operating margin

  16.0%  16.3%      16.0%  14.7%      11.5%  17.4%      11.2%  16.0%    

 

The following tables provide details

 

 

Three Months Ended June 3, 2017

  

Six Months Ended June 3, 2017

 
 

Three Months Ended August 27, 2016

vs August 29, 2015

  

Nine Months Ended August 27, 2016

vs August 29, 2015

  

vs May 28, 2016

  

vs May 28, 2016

 

Constant currency growth

  (3.6%)  (4.3%)  11.8%  9.0%

Currency

  (0.1%)  (0.5%)  (0.4%)  (0.4%)

Total

  (3.7%)  (4.8%)  11.4%  8.6%

 

Net revenue decreased 3.7increased 11.4 percent in the thirdthesecond quarter of 2016of2017 compared to the thirdthesecond quarter of 2015.of2016. The 3.611.8 percent decreaseincrease in constant currency growth was attributable to a 0.112.3 percent decreaseincrease in sales volume, including a 10.7 percent increase due to the Wisdom Adhesives acquisition, and 3.5a 0.8 percent increase in sales mix offset by an unfavorable 1.3 percent decrease in product pricing. The 0.1 percent negative currency effect was due to the weaker Mexico peso, Canadian dollar and Argentinian peso compared to the U.S. dollar. As a percentage of net revenue, raw material costs decreased 30increased 450 basis points mainly due to reductions indueto lower sales prices and higher raw material costs. Other manufacturing costs as a percentage of net revenue increased 30200 basis points, primarily due to lower revenues.the acquisition and integration of Wisdom Adhesives and higher delivery expense. SG&A expenses as a percentage of net revenue decreased 60 basis points due to the implementation of the 2017 Restructuring Plan. Segment operating income decreased 5.126.3 percent and segment operating margin as a percentage of net revenue decreased 30590 basis points in the thirdcompared to thesecond quarter of 2016 compared to the third quarter of 2015.2016.

 

Net revenue decreased 4.8increased 8.6 percent in the first ninefirstsix months of 2016of2017 compared to the first ninefirstsix months of 2015.of2016. The 4.39.0 percent decreaseincrease in constant currency growth was attributable to a 1.811.8 percent decreaseincrease in sales volume, including a 7.7 percent increase due to the Wisdom Adhesives acquisition, offset by a 1.4 percent decrease due to unfavorable sales mix and a 2.51.4 percent decrease in product pricing. The 0.5 percent negative currency effect was due to the weaker Canadian dollarMexico peso and Argentinian peso compared to the U.S. dollar. The sales volume decrease was driven by general end-market weakness in Latin America and unfavorable sales mix partially offset by modest market share gains. As a percentage of net revenue, raw material costs decreased 260increased 310 basis points mainly due to reductions indueto lower sales prices, higher raw material costs.costs, and the impact of valuing inventories related to the Wisdom Adhesives acquisition at fair value. Other manufacturing costs as a percentage of net revenue increased 50160 basis points.points, primarily due to the acquisition and integration of Wisdom Adhesives and higher delivery expense. Segment operating income increased 3.3decreased 23.6 percent and segment operating margin as a percentage of net revenue increased 130decreased 480 basis points in the first nine months of 2016 compared to the first ninefirstsix months of 2015.2016.

 

EIMEA

 

 

Three Months Ended

  

Six Months Ended

 
 

Three Months Ended

  

Nine Months Ended

  

June 3,

  

May 28,

  

2017 vs

  

June 3,

  

May 28,

  

2017 vs

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

2017

  

2016

  

2016

  

2017

  

2016

  

2016

 

Net revenue

 $130.6  $133.5   (2.2%) $394.8  $405.1   (2.5%) $135.2  $139.9   (3.3%) $259.3  $264.2   (1.9%)

Segment operating income

 $8.4  $5.3   58.3% $25.6  $8.3   208.6% $8.1  $11.0   (26.7%) $9.8  $17.2   (42.5%)

Segment operating margin

  6.5%  4.0%      6.5%  2.0%      6.0%  7.9%      3.8%  6.5%    

 

The following table provides details of the EIMEA net revenue variances:

 

 

Three Months Ended June 3, 2017

  

Six Months Ended June 3, 2017

 
 

Three Months Ended August 27, 2016

vs August 29, 2015

  

Nine Months Ended August 27, 2016

vs August 29, 2015

  

vs May 28, 2016

  

vs May 28, 2016

 

Constant currency growth

  (2.0%)  1.1%  8.1%  8.6%

Currency

  (0.2%)  (3.6%)  (11.4%)  (10.5%)

Total

  (2.2%)  (2.5%)  (3.3%)  (1.9%)

 

Net revenue decreased 2.23.3 percent in the thirdsecond quarter of 20162017 compared to the thirdsecond quarter of 2015. Sales2016. The 8.1 percent increase in constant currency growth was attributable to a 4.0 percent increase in sales volume, increased 0.3a 3.7 percent andincrease in product pricing, decreased 2.3percent.and a 0.4 percent increase in favorable sales mix. The negative currency effect of 0.211.4 percent was primarily the result of a weaker Egyptian pound, Euro and Turkish lira and Indian rupee compared to the U.S. dollar partially offset by a stronger Euro. Sales volume growth was primarily related to the hygiene and packaging markets, with strong growth in the emerging markets.Raw material cost as a percentage of net revenue decreased 260 basis points in the third quarter of 2016 compared to the third quarter of 2015 primarily due to lower raw material costs. Other manufacturing costs as a percentage of net revenue were 100 basis points higher in the third quarter of 2016 compared to the third quarter of 2015. Segment operating income increased 58.3 percent and segment operating margin increased 250 basis points compared to the third quarter of 2015.

Net revenue decreased 2.5 percent in the first nine months of 2016 compared to the first nine months of 2015. Sales volume increased 2.1 percent and product pricing decreased 1.0 percent. The 3.6 percent negative currency effect was primarily the result of a weaker Euro, Turkish lira, and Indian rupee and compared to the U.S. dollar. Sales volume growth was primarily related to the hygiene market, withand durable assembly markets, and strong growth in the emerging markets, as well as growth in core Europe.markets. Raw material cost as a percentage of net revenue decreased 280increased 140 basis points in the first nine months of 2016second quarter compared to the first nine months of 2015second quarter last year primarily due to lowerhigher raw material costs. Other manufacturing costs as a percentage of net revenue were 11030 basis points lowerhigher than 2015 as a resultthe second quarter of the reduction of production inefficiencies incurred in the prior year related to the Business Integration Project.As a result, segment2016. Segment operating income increased 208.6decreased 26.7 percent and segment operating margin decreased 190 basis points compared to the second quarter of 2016.

Net revenue decreased 1.9 percent in the first six months of 2017 compared to the first six months of 2016. The 8.6 percent increase in constant currency growth was attributable to a 5.1 percent increase in sales volume, a 3.4 percent increase in product pricing and a 0.1 percent increase in sales mix. The negative currency effect of 10.5 percent was primarily the result of a weaker Egyptian pound, Euro and Turkish lira compared to the U.S. dollar. Sales volume growth was primarily related to the hygiene and durable assembly markets, and strong growth in the emerging markets. Raw material cost as a percentage of net revenue increased 45040 basis points in the six months compared to the six months last year primarily due to higher raw material costs. Other manufacturing costs as a percentage of net revenue were 90 basis points higher than the second quarter of 2016 due to the implementation of the 2017 Restructuring Plan. SG&A expenses as a percentage of net revenue increased 140 basis points due to the implementation of the 2017 Restructuring Plan. Segment operating income decreased 42.5 percent and segment operating margin decreased 270 basis points compared to the first ninesix months of 2015.2016.

 

Asia Pacific

 

  

Three Months Ended

  

Nine Months Ended

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

 

Net revenue

 $57.5  $54.6   5.2% $171.5  $167.5   2.4%

Segment operating income

 $2.5  $2.8   (8.7%) $9.3  $8.8   5.2%

Segment operating margin

  4.4%  5.0%      5.4%  5.3%    

  

Three Months Ended

  

Six Months Ended

 
  

June 3,

  

May 28,

  

2017 vs

  

June 3,

  

May 28,

  

2017 vs

 

($ in millions)

 

2017

  

2016

  

2016

  

2017

  

2016

  

2016

 

Net revenue

 $64.5  $60.1   7.2% $127.1  $113.9   11.5%

Segment operating income

 $4.8  $3.1   56.5% $6.6  $6.8   (2.3%)

Segment operating margin

  7.4%  5.0%      5.2%  6.0%    

 

The following table provides details of the Asia Pacific net revenue variances:

 

 

Three Months Ended June 3, 2017

  

Six Months Ended June 3, 2017

 
 

Three Months Ended August 27, 2016

vs August 29, 2015

  

Nine Months Ended August 27, 2016

vs August 29, 2015

  

vs May 28, 2016

  

vs May 28, 2016

 

Constant currency growth

  9.6%  7.7%  11.0%  15.2%

Currency

  (4.4%)  (5.3%)  (3.8%)  (3.7%)

Total

  5.2%  2.4%  7.2%  11.5%

 

Net revenue in the thirdsecond quarter of 20162017 increased 5.27.2 percent compared to the thirdsecond quarter of 2015.2016. The 9.611.0 percent increase in constant currency growth was attributable to a 10.612.5 percent increase in sales volume including a 4.8 percent increase due to the Advanced Adhesives acquisition, partially offset by a 1.00.4 percent decrease due to unfavorable sales mix and a 1.1 percent decrease in product pricing. Most of theOrganic constant currency growth compared to the third quarter of 2015 iswas primarily driven by the acquisitionvolume growth in Greater China.Negative currency effects of Advanced Adhesives that occurred during3.8 percent compared to the second quarter of 2016 as well as growth in Southeast Asia and Greater China.Negative currency effects of 4.4 percent compared to the third quarter of 2015 were primarily driven by the weaker Chinese renminbi and Malaysian ringgit compared to the U.S. dollar partially offset by a stronger Australian dollar. Raw material costs as a percentage of net revenue decreased 22020 basis points compared to the thirdsecond quarter of 2015 due to lower raw material costs and changes in sales mix.2016. Other manufacturing costs as a percentage of net revenue increased 230decreased 60 basis points compared to the thirdsecond quarter of 2015,2016 primarily due to the acquisition of Advanced AdhesivesAdhesives. SG&A expenses as a percentage of net revenue decreased 160 basis points due to lower expenses related to general spending reductions, foreign currency exchange rate benefits on spending outside the U.S and the costs to rationalize certain production capabilities in Southeast Asia.impact of the acquisition of Advanced Adhesives. Segment operating income decreased 8.7increased 56.5 percent and segment operating margin decreased 60increased 240 basis points compared to the thirdsecond quarter of 2015.2016.

 

Net revenue in the first ninesix months of 20162017 increased 2.411.5 percent compared to the first ninesix months of 2015.2016. The 7.715.2 percent increase in constant currency growth was attributable to a 9.018.3 percent increase in sales volume including a 5.8 percent increase due to the Advanced Adhesives acquisition, partially offset by a 1.31.5 percent decrease due to unfavorable sales mix and a 1.6 percent decrease in product pricing. Most of theOrganic constant currency growth compared to the first nine months of 2015 iswas primarily driven by the acquisition of Advanced Adhesives that occurred during the second quarter of 2016, as well asvolume growth in Southeast Asia and Greater China. NegativeChina.Negative currency effects of 5.33.7 percent compared to the first ninesix months of 20152016 were primarily driven by the weaker Chinese renminbi Australian dollar and Malaysian ringgit compared to the U.S. dollar partially offset by a stronger Australian dollar. Raw material costs as a percentage of net revenue decreased 120increased 60 basis points compared to the first ninesix months of 2015 due to lower2016 dueto unfavorable sales mix and higher raw material costs and changes in sales mix, partially offset by the impact of valuing inventories related to the Advanced Adhesives acquisition at fair value.costs. Other manufacturing costs as a percentage of net revenue increased 150was flat compared to the first six months of 2016. Segment operating income decreased 2.3 percent and segment operating margin decreased 80 basis points compared to the first ninesix months of 2015, primarily due to the acquisition2016.

 

Construction Products

 

 

Three Months Ended

  

Six Months Ended

 
 

Three Months Ended

  

Nine Months Ended

  

June 3,

  

May 28,

  

2017 vs

  

June 3,

  

May 28,

  

2017 vs

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

2017

  

2016

  

2016

  

2017

  

2016

  

2016

 

Net revenue

 $64.4  $72.4   (11.1%) $192.1  $206.7   (7.1%) $63.8  $67.6   (5.7%) $120.8  $127.7   (5.4%)

Segment operating income

 $2.1  $3.4   (38.8%) $5.4  $10.8   (49.8%) $(1.9) $2.5   (173.1%) $(2.5) $3.3   (176.4%)

Segment operating margin

  3.3%  4.7%      2.8%  5.2%      (2.9%)  3.7%      (2.1%)  2.6%    

 

The following tables provide details of the Construction Products net revenue variances:

 

 

Three Months Ended June 3, 2017

  

Six Months Ended June 3, 2017

 
 

Three Months Ended August 27, 2016

vs August 29, 2015

  

Nine Months Ended August 27, 2016

vs August 29, 2015

  

vs May 28, 2016

  

vs May 28, 2016

 

Constant currency growth

  (11.0%)  (6.6%)  (6.1%)  (5.7%)

Currency

  (0.1%)  (0.5%)  0.4%  0.3%

Total

  (11.1%)  (7.1%)  (5.7%)  (5.4%)

 

Net revenue decreased 11.15.7 percent in the thirdsecond quarter of 20162017 compared to the thirdsecond quarter of 2015.2016. The 6.1 percent decrease in constant currency growth was driven by a 11.20.8 percent decrease due to unfavorable sales mix, a 5.0 percent decrease in sales volume offset byand a 0.20.3 percent increasedecrease in product pricing.Negativepricing. The positive currency effects of 0.1 percent comparedeffect was due to the third quarter of 2015 were primarily driven by the weakerstronger Australian dollar compared to the U.S. dollar. The decrease in sales volume was primarily attributed to a strong third quarter of 2015 driven by market share gains with certain retail partners. The increase in pricing is mainly due to price increases related to certain product lines in multiple channels.RawRaw material cost as a percentage of net revenue was 350230 basis points lower in the thirdsecond quarter of 20162017 compared to last year primarily due to changes in productdueto sales mix and slightly lower raw material costs. Other manufacturing costs as a percentage of net revenue were 330920 basis points higher in the thirdsecond quarter of 2017 compared to the second quarter of 2016 compareddue to the third quarterdiscontinuance of 2015 mainly duecertain retail and wholesale products in connection with the implementation of the 2017 Restructuring Plan and inefficiencies related to higher supply chain costs as we complete the facility upgrade and expansion project. Operating expense as a percentage of net revenue increased 160 basis points compared to the third quarter of 2015 due to lower revenues. Segment operating income decreased 38.8173.1 percent and segment operating margin decreased 140660 basis points in the thirdcompared to thesecond quarter of 2016 compared to the third quarter of 2015.2016.

 

Net revenue decreased 7.15.4 percent in the first ninesix months of 20162017 compared to the first ninesix months of 2015.2016. The 5.7 percent decrease in constant currency growth was driven by a 7.52.1 percent decrease due to unfavorable sales mix, a 3.4 percent decrease in sales volume offset byand a 0.90.2 percent increasedecrease in product pricing.Negativepricing. The positive currency effects of 0.5 percent comparedeffect was due to the first nine months of 2015 were primarily driven by the weakerstronger Australian dollar compared to the U.S. dollar. The decrease in sales volume was primarily attributed to lower export revenue, inventory rebalancing with certain channel partners and a strong third quarter of 2015 driven by market share gains with certain retail partners. The increase in pricing is mainly due to price increases related to certain product lines in multiple channels.RawRaw material cost as a percentage of net revenue was 270170 basis points lower in the first ninesix months of 2017 compared to the first six months of 2016 compared to 2015 primarily due to changes in productdueto sales mix and slightly lower raw material costs. Other manufacturing costs as a percentage of net revenue were 300610 basis points higher in the first ninesix months of 20162017 compared to the first ninesix months of 2015 mainly2016 due to higher supply chain costs as we completethe discontinuance of certain retail and wholesale products in connection with the implementation of the 2017 Restructuring Plan and inefficiencies related to the facility upgrade and expansion project. Operating expense as a percentage of net revenue increased 210Segment operating income decreased 176.4 percent and segment operating margin decreased 470 basis points compared to the first ninefirstsix months of 2015 primarily due to lower revenues. Segment operating income decreased 49.8 percent and segment profit margin decreased 240 basis points in the first nine months compared to the first nine months2016.

 

Engineering Adhesives

 

 

Three Months Ended

  

Six Months Ended

 
 

Three Months Ended

  

Nine Months Ended

  

June 3,

  

May 28,

  

2017 vs

  

June 3,

  

May 28,

  

2017 vs

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

August 27,

2016

  

August 29,

2015

  

2016 vs

2015

  

2017

  

2016

  

2016

  

2017

  

2016

  

2016

 

Net revenue

 $61.4  $56.9   7.8% $172.9  $138.1   25.2% $68.6  $58.7   16.8% $135.0  $111.5   21.1%

Segment operating income

 $3.5  $3.4   1.9% $6.5  $(0.6)  1050.7% $5.8  $2.1   178.9% $7.9  $3.0   (165.7%)

Segment operating margin

  5.7%  6.0%      3.7%  (0.5%)      8.5%  3.6%      5.8%  2.7%    

 

The following tables provide details of the Engineering Adhesives net revenue variances:

 

 

Three Months Ended June 3, 2017

  

Six Months Ended June 3, 2017

 
 

Three Months Ended August 27, 2016

vs August 29, 2015

  

Nine Months Ended August 27, 2016

vs August 29, 2015

  

vs May 28, 2016

  

vs May 28, 2016

 

Constant currency growth

  11.8%  30.0%  21.7%  25.7%

Currency

  (4.0%)  (4.8%)  (4.9%)  (4.6%)

Total

  7.8%  25.2%  16.8%  21.1%

 

Net revenue increased 7.816.8 percent in the thirdsecond quarter of 20162017 compared to the thirdsecond quarter of 2015.2016. The 11.821.7 percent increase in constant currency growth was driven bytheattributable to a 25.3 percent increase in sales volume including a 6.8 percent increase due to the acquisition of Cyberbond, that occurred during the third quarter of 2016,whilepartially offset by a 2.4 percent decrease in product pricing remained flat.Negativeand a 1.2 percent decrease due to unfavorable sales mix. Organic constant currency growth was driven by strong performance in the automotive, electronics and Tonsan markets.Negative currency effects of 4.04.9 percent compared to the thirdsecond quarter of last year were primarily driven by the weaker Chinese renminbi compared to the U.S. dollar. Raw material cost as a percentage of net revenue was 140100 basis points lowerhigher in the thirdsecond quarter of 2017 compared to the second quarter of 2016 compared to the third quarter of 2015.dueto lower product prices and higher raw material costs. Other manufacturing costs as a percentage of net revenue were 19020 basis points higherlower in the thirdsecond quarter of 20162017 compared to the thirdsecond quarter of 2015 primarily due2016. SG&A expenses as a percentage of net revenue decreased 570 basis pointsdue to the Cyberbond acquisition.mark to market adjustment related to the Tonsan contingent consideration liability. Segment operating income increased 1.9178.9 percent and segment operating margin decreased 30increased 490 basis points in the thirdcompared to thesecond quarter of 2016 compared to the third quarter of 2015.2016.

 

Net revenue increased 25.221.1 percent in the first ninesix months of 20162017 compared to the first ninesix months of 2015.2016. The 25.7 percent increase in constant currency growth was driven byattributable to a 30.628.6 percent increase in sales volume including a 6.7 percent increase due to the acquisition of Cyberbond, partially offset by a 0.62.9 percent decrease in product pricing.The increase in sales volumepricing. Organic constant currency growth was partially attributed to a full period of the Tonsan business, which was acquired latedriven by strong performance in the automotive, electronics and Tonsan markets.Negative currency effects of 4.6 percent compared to the first quartersix months of 2015, as well aslast year were primarily driven by the acquisition of Cyberbond that occurred duringweaker Chinese renminbi compared to the third quarter of 2016.RawU.S. dollar. Raw material cost as a percentage of net revenue was 400150 basis points lowerhigher in the first ninesix months of 20162017 compared to the first ninesix months of 2015 primarily due to the impact of valuing inventories related to the Tonsan acquisition at fair value,2016 dueto lower product prices and higher raw material costs and changes in product mix associated with the acquisition of Tonsan.costs. Other manufacturing costs as a percentage of net revenue were 80100 basis points higherlower in the first ninesix months of 20162017 compared to the first ninesix months of 2015 primarily2016 due to the impact of a full nine months of the Tonsan business and the Cyberbond acquisition. Operating expensehigher sales volume. SG&A expenses as a percentage of net revenue decreased 90360 basis points comparedpointsdue to the first nine months of 2015, partially due to the net mark to market adjustment related to the Tonsan contingent consideration liability offest by the Cyberbond acquisition.liability. Segment operating income increased $7.1 milliondecreased 165.7 percent and segment operating margin increased 420310 basis points in the first nine months of 2016 compared to the first ninefirstsix months of 2015.2016.

 

Financial Condition, Liquidity and Capital Resources

 

Total cash and cash equivalents as of August 27, 2016June 3, 2017 were $133.1$94.1 million compared to $119.2$142.2 million as of November 28, 2015December 3, 2016 and $85.8$146.0 million as of August 29, 2015. OfMay 28, 2016. The majority of the $133.1$94.1 million in cash and cash equivalents as of August 27, 2016, $120.3 millionJune 3, 2017 was held outside the United States. Total long and short-term debt was $713.6$786.1 million as of August 27, 2016, $722.9June 3, 2017, $703.3 million as of November 28, 2015December 3, 2016 and $727.6$719.1 million as of August 29, 2015.May 28, 2016. The total debt to total capital ratio as measured by Total Debt divided by (Total Debt plus Total Stockholders’ Equity) was 42.644.2 percent as of August 27, 2016June 3, 2017 as compared to 45.342.8 percent as of November 28, 2015December 3, 2016 and 44.643.8 percent as of August 29, 2015.May 28, 2016.

 

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 and 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 and note purchase 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 August 27, 2016,June 3, 2017, we were in compliance with all covenants of our contractual obligationsasobligations as shown in the following table:

 

Covenant

Debt Instrument

Measurement

Result as of August

27, 2016June 3, 2017

TTM EBITDA / TTM Interest Expense

All Debt Instruments

Not less than 2.5

10.58.4

    

Total Indebtedness / TTM EBITDA

All Debt Instruments

Not greater than 3.5

2.62.9

    
    

 

 

 

TTM = Trailing 12 months

 

EBITDA for covenant purposes is defined as consolidated net income, plus (i) interest expense, (ii) taxes, (iii) depreciation and amortization, (iv) non-cash impairment losses, (v) extraordinary non-cash losses incurred other than in the ordinary course of business, (vi) nonrecurring extraordinary non-cash restructuring charges, (vii) [reserved] , (viii) cash expenses incurred during fiscal years 2013 through 2015 in connection with facilities consolidation, restructuring and integration, discontinuance of operations, work force reduction, sale or abandonment of assets other than inventory, and professional and other fees incurred in connection with the acquired business or the restructuring of the company’s Europe, India, Middle East and Africa operations, not to exceed (x) $39.8 million for the period beginning with the fiscal quarter ending November 30, 2013 through and including the fiscal quarter ending May 31, 2014 and (y) $20.0 million for the period beginning with the fiscal quarter ending August 30, 2014 through and including the fiscal quarter ending November 28, 2015, (ix) cash expenses related to the Tonsan acquisition for advisory services and for arranging financing for the acquired business (including the non-cash write-off of deferred financing costs and any loss or expense on foreign exchange transactions intended to hedge the purchase price for the acquired business) with cash expenses not to exceed $10.0 million, minus extraordinary non-cash gains incurred other than in the ordinary course of business. 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. Additional detail is provided in the Form 8-K dated October 31, 2014.

Pursuant to the Credit Agreement dated October 31, 2014, the company elected to increase the Total Indebtedness / TTM EBITDA ratio to a maximum of 3.75 to 1.00 for four quarters beginning with first fiscal quarter ending February 28, 2015. The maximum ratio returned to 3.50 to 1.00 in the first fiscal quarter 2016.April 12, 2017.

 

We believe we have the ability to meet all of our contractual obligations and commitments in fiscal 2016.2017.

 

Selected Metrics of Liquidity

 

Key metrics we monitor are net working capital as a percent of annualized net revenue, trade accounts receivable days sales outstanding (DSO)(“DSO”), inventory days on hand, free cash flow and debt capitalization ratio.

 

  

August 27,

2016

  

August 29,

2015

 

Net working capital as a percentage of annualized net revenue1

  21.7%  20.9%

Accounts receivable DSO (in days)2

  60   59 

Inventory days on hand3

  67   68 

Free cash flow (in millions)4

 $75.8  $85.2 

Total debt to total capital ratio5

  42.6%  44.6%
  

June 3,

  

May 28,

 
  

2017

  

2016

 

Net working capital as a percentage of annualized net revenue1

  22.2%  21.3%

Accounts receivable DSO2(Days)

  61   59 

Inventory days on hand3(Days)

  70   65 

Free cash flow4(million)

 $(9.1) $33.3 

Total debt to total capital ratio5

  44.2%  43.8%

 

1Current 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).

 

2Trade receivables net of the allowance for doubtful accounts at the balance sheet date multiplied by 56 (8 weeks) and divided by the net revenue for the last 2 months of the quarter.

 

3Total inventory multiplied by 56 and divided by cost of sales (excluding delivery costs) for the last 2 months of the quarter.

 

4 Year-to-date net cash provided by (used in) operations from continuing operations,operating activities, less purchased property, plant and equipment and dividends paid.

 

5 Total debt divided by (total debt plus total stockholders’ equity).

 

Another key metric is the return on invested capital, or ROIC. The calculation is represented by total return divided by total invested capital.

Total return is defined as: gross profit less selling, general and administrative expenses, less taxes at the effective tax rate plus income from equity method investments. Total return is calculated using trailing 12 month information.

Total invested capital is defined as the sum of notes payable, current maturities of long-term debt, long-term debt, redeemable non-controlling interest and total equity.

We believe ROIC provides a true measure

  

Summary of Cash Flows

Cash Flows from Operating Activities:

 

  

Nine Months Ended

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

 

Net cash provided by operating activities

 $145.9  $153.0 

  

Six Months Ended

 
  

June 3,

  

May 28,

 

($ in millions)

 

2017

  

2016

 

Net cash provided by operating activities

 $32.8  $82.6 

 

Net income including non-controlling interests was $85.2$40.7 million in the first ninesix months of 20162017 compared to $62.0$52.4 million in the first ninesix months of 2015.2016. Depreciation and amortization expense totaled $57.2$39.2 million in the first ninesix months of 20162017 compared to $55.7$38.6 million in the first ninesix months of 2015.2016. Accrued compensation was a use of cash of $6.7$4.7 million in 20162017 compared to a use of cash of $4.6$2.9 million in 2015.last year related to higher accruals for our employee incentive plans. Other accrued expenses was a use of cash of $4.9$6.3 million in the first ninesix months of 2016ending June 3, 2017 compared to a source$6.4 million use of cash of $4.7 million in the first nine months of 2015.same period last year. Other liabilities was a use of cash of $9.9 million in the first nine months of 2016 compared to a usesource of cash of $3.3 million in the first ninesix months of 2015.2017 compared to a use of cash of $7.8 million in the first six months of 2016.

 

Changes in net working capital (trade receivables, inventory and trade payables) accounted for a sourceuse of cash of $18.0$34.9 million compared to a source of cash of $6.5$3.3 million in 2015.last year. The table below provides the cash flow impact due to changes in the components of net working capital:

 

 

Six Months Ended

 
 

Nine Months Ended

  

June 3,

  

May 28,

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

2017

  

2016

 

Trade receivables, net

 $25.6  $15.9  $(9.9) $13.3 

Inventory

  (6.2)  (20.0)  (45.4)  (9.1)

Trade payables

  (1.4)  10.6  

20.4

   (7.5)

Total cash flow impact

 $18.0  $6.5  $(34.9) $(3.3)

 

 

Trade Receivables, net – Trade receivables,Receivables, net was a sourceuse of cash of $25.6$9.9 million in 20162017 compared to a source of cash of $15.9$13.3 million in 2015.2016. The higheruse of cash in 2017 compared to source of cash in 2016 compared to 2015 was due to lower revenues.an increase in trade receivables in the current year compared to the prior year. The DSO were 6061 days at August 27, 2016June 3, 2017 and 59 days at August 29, 2015.May 28, 2016.

 

Inventory – Inventory was a use of cash of $6.2$45.4 million and $20.0$9.1 million in 2017 and 2016, respectively. The higher use of cash in 2017 is due to higher raw material costs and 2015, respectively.increasing inventory levels to maintain service levels while integrating our Wisdom acquisition. The lower use of cash in 2016 is related to lower raw material costs and lower seasonal build of inventory in 2016, partially offset by acquisitions.2016. Inventory days on hand were 6770 days as of August 27, 2016June 3, 2017 and 6865 days as of August 29, 2015.May 28, 2016.

 

 

Trade Payables – For the first ninesix months of 20162017, trade payables was a source of cash of $20.4 million compared to a use of cash of $1.4 million compared to a source of cash of $10.6$7.5 million in 2015.2016. The use of cash in 2016 compared to the source of cash in 20152017 is primarily related to lowerhigher purchases of inventory andsomewhat offset by lower purchases of property, plant and equipment.

 

Cash Flows from Investing Activities:

 

 

Six Months Ended

 
 

Nine Months Ended

  

June 3,

  

May 28,

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

  

2017

  

2016

 

Net cash used in investing activities

 $(96.5) $(264.7) $(150.8) $(44.0)

 

In the first quarter of 2017, we acquired Wisdom Adhesives for $123.3 million. Purchases of property, plant and equipment were $49.6$27.1 million induring the first ninesix months of 2016ended June 3, 2017 as compared to $48.6$35.7 million for the same period of 2015. The decrease in 2016 compared to 2015 was primarily related to lower capital expenditures for the Business Integration Project in 2016 offset by the building2016.

 

Cash Flows from Financing Activities:

 

  

Nine Months Ended

 

($ in millions)

 

August 27,

2016

  

August 29,

2015

 

Net cash provided by (used in) financing activities

 $(31.5) $131.7 

  

Six Months Ended

 
  

June 3,

  

May 28,

 

($ in millions)

 

2017

  

2016

 

Net cash provided by (used in) financing activities

 $68.4  $(12.4)

 

We did not have anyhad $598.0 million of proceeds from the issuance of long-term debt in the first ninesix months ended June 3, 2017 which consisted of 2016 compared to $357.0 million in the first nine months of 2015. Included in the 2015 proceeds of $357.0 million is $300.0 million of proceeds from the issuance of the 4.00% Notes, $100 million of proceeds from our October 31, 2014refinanced term loan and $198.0 million of proceeds from our revolving credit facility. Proceeds from our revolving credit facility were drawn in conjunction with the acquisition of Tonsan.Wisdom Adhesives and from borrowing from ongoing operations. Repayments of long-term debt were $16.9$504.3 million in the first ninesix months of 2016ended June 3, 2017 and $207.5$11.3 million in the six months ended May 28, 2016. We also paid $3.8 million in debt issuance costs associated with the issuance of the 4.000% Notes in the first ninesix months of 2015. Included in the $207.5 million2017. Net payments of repayments in 2015 were $70.0 million from our October 31, 2014 term loan used to repay outstanding balances under the revolving credit facility. Net proceeds from notes payable were $6.6$10.3 million in 20162017 compared to net paymentsproceeds of $2.1$11.2 million in 2015.2016. Cash dividends paid were $20.6$14.6 million in 20162017 compared to $19.2$13.5 million in 2015.2016. Repurchases of common stock were $11.9$8.9 million in the first ninesix months of 2016 comparedended June 3, 2017compared to $2.2$6.6 million in the first nine monthssame period of 2015. The $11.9 million common stock repurchases in 2016 includes $4.2 million from our 2010 share repurchase program.2016.

 

Forward-Looking Statements and Risk Factors

 

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In this Quarterly Report on Form 10-Q, we discuss expectations regarding our future performance which include anticipated financial performance, savings from restructuring and process initiatives, global economic conditions, liquidity requirements, the impact of litigation and environmental matters, the effect of new accounting pronouncements and one-time accounting charges and credits, and similar matters. 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, Part II, Item 1A. Risk Factors in this report and Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended November 28, 2015,December 3, 2016, identify some of the important factors that could cause our actual results to differ materially from those in any such forward-looking statements. This list of important factors does not include all such factors nor necessarily present them in order of importance. 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. Additionally, the variety of products sold by us and the regions where we do business makes it difficult to determine with certainty the increases or decreases in revenues resulting from changes in the volume of products sold, currency impact, changes in geographic and product mix and selling prices. Our best estimates of these changes as well as changes in other factors have been included. References to volume changes include volume, product mix and delivery charges, combined. These factors should be considered, together with any similar risk factors or other cautionary language, which may be made elsewhere in this Quarterly Report on Form 10-Q.

 

We may refer to Part II, Item 1A. Risk Factors and this section of the Form 10-Q to identify risk factors related to other forward looking statements made in oral presentations, including investor conferences and/or webcasts open to the public.

 

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 Securities and Exchange Commission or in company press releases) on related subjects.

 

Item 3. Quantitativeand QualitativeDisclosures about Market Risk

 

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 and cost of raw materials.rates.

 

Our financial performance has been, and may continue to be, negatively affected by the unfavorable economic conditions. RecessionaryContinued or further recessionary economic conditions may have an adverse impact on our sales volumes, pricing levels and profitability. As domestic and international economic conditions change, trends in discretionary consumer spending also become unpredictable and subject to reductions due to uncertainties about the future. A general reduction in consumer discretionary spending due to recession in the domestic and international economies, or uncertainties regarding future economic prospects, could have a material adverse effect on our results of operations.

 

Interest Rate Risk 

 

Exposure to changes in interest rates result primarily from borrowing activities used to fund operations. Committed floating rate credit facilities are used to fund a portion of operations. We believe that probable near-term changes in interest rates would not materially affect financial condition, results of operations or cash flows. The annual impact on interest expense of a one-percentage point interest rate change on the outstanding balance of our variable rate debt as of August 27, 2016June 3, 2017 would behave resulted in a change in net income of approximately $2.7$7.9 million or $0.05$0.15 per diluted share.

 

Foreign Exchange Risk 

 

As a result of being a global enterprise, there is exposure to market risks from changes in foreign currency exchange rates, which may adversely affect operating results and financial condition. We enter into cross border transactions through importing and exporting raw materials, our products and other goods to and from different countries and locations. These transactions generate foreign exchange risk as they create assets, liabilities and cash flows in currencies other than the functional currency. This also applies to services provided and other cross border agreements among subsidiaries.

Approximately 5857 percent of net revenue was generated outside of the United States for the first nine monthssecond quarter of 2016.2017. Principal foreign currency exposures relate to the Euro, British pound sterling, Canadian dollar, Chinese renminbi, Japanese yen, Australian dollar, Argentine peso, Brazilian real, Colombian peso, Mexican peso, Turkish lira, Egyptian pound, Indian rupee, Indonesian rupiah and Malaysian ringgit.

 

Our objective is to match ourbalance, where possible, non-functional currency product costs withdenominated assets to non-functional currency revenuesdenominated liabilities to createhave a natural hedge and minimize foreign exchange impacts on our gross margins. In situations where these non-functional costsimpacts. We enter into cross border transactions through importing and revenues cannot be matched or changesexporting goods to and from different countries and locations. These transactions generate foreign exchange risk as they create assets, liabilities and cash flows in ourcurrencies other than their functional currency selling price are unablecurrency. This also applies to offset the impact of the foreign currency rate change, the change will impact our profitability.services provided and other cross border agreements among subsidiaries. Based on the financial results offor the first ninesix months of 2016,ended June 3, 2017, a hypothetical 1one percent change in our cost of sales due to foreign currency rate changes would have resulted in a change in net income attributable to H.B. Fuller of approximately $3.4$2.9 million or $0.07$0.06 per diluted share.

 

In addition, we striveWe take steps to balance, where possible, non-functionalminimize risks from foreign currency denominated assets to non-functional currency denominated liabilitiesexchange rate fluctuations through normal operating and financing activities to have a natural hedge and, minimize foreign exchange impacts. Whenwhen deemed appropriate, we enter intothrough the use of derivative instruments to further mitigate foreign currency exchange risks.instruments. We do not enter into any speculative positions with regard to derivative instruments.

Based on the financial results offor the first ninesix months of 2016,ended June 3, 2017 and foreign currency balance sheet positions as of August 27, 2016,June 3, 2017, a hypothetical overall 10 percent change in the U.S. dollar would have resulted in a change in net income of approximately $5.0$4.0 million or $0.10$0.08 per diluted share.

 

In addition,On December 4, 2016, for our subsidiaries in Latin America, we changed the translation of financial resultsfunctional currency from nonthe U.S. dollar to the entity’s local currency based on management’s analysis of the changes of the economic facts and circumstances in which these subsidiaries operate. The change in functional entities into U.S. dollarscurrency is accounted for purposes of reporting consolidatedprospectively from December 4, 2016 and financial results may be adversely impacted by changesstatements prior to and including the year ended December 3, 2016 have not been restated for the change in foreign currency exchange rates. The Company does not take measures to mitigate these translation effects.functional currency.

 

Raw Materials 

 

The principal raw materials used to manufacture products include tackifying resins, polymers, synthetic rubbers, vinyl acetate monomer and plasticizers. Many of these raw materials are petroleum and natural gas based derivatives that are manufactured on a global basis. As such, the price of these raw materials fluctuate based upon changes in the cost of petroleum and natural gas, supply and demand and changes in foreign currency exchange rates.

We generally avoid singlesole source supplier arrangements for raw materials. While alternate supplies of most key raw materials are available, unplanned supplier production outages may lead to strained supply-demand situations for several key raw materials such as tackifyersethylene and base polymers. propylene, several polymers and other petroleum derivatives such as waxes.

 

For the nine months ended August 27, 2016, our single largest expenditure was the

The purchase of raw materials.materials is our largest expenditure. Our objective is to purchase raw materials that meet both our quality standards and production needs at the lowest total cost. Most raw materials are purchased on the open market or under contracts that limit the frequency but not the magnitude of price increases. In some cases, however, the risk of raw material price changes is managed by strategic sourcing agreements which limit price increases to increases in supplier feedstock costs, while requiring decreases as feedstock costs decline. The leverage of having substitute raw materials approved for use wherever possible is used to minimize the impact of possible price increases.

Based on the financial results offor the first ninesix months of 2016,ended June 3, 2017, a hypothetical 1one percent change in our raw material costs would have resulted in a change in net income of approximately $5.6$4.1 million or $0.11$0.08 per diluted share.

 

Item 4. Control Controlss 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 August 27, 2016.  OurJune 3, 2017.  We acquired Wisdom Adhesives in the first quarter of 2017. They represented approximately six percent of our total assets as of June 3, 2017. As this acquisition occurred in the first quarter of 2017, the scope of our assessment of the effectiveness of internal control over financial reporting does not include this recent acquisition. This exclusion is in accordance with the SEC’s general guidance that an assessment of a recently acquired business may be omitted from our scope in the year of acquisition. Based on this evaluation, our president and chief executive officer and executive vice president, chief financial officer concluded that, as a result of the material weakness in internal control over financial reporting identified and described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended November 28, 2015,June 3, 2017, our disclosure controls and procedures were not effective as of August 27, 2016.effective.

 

For purposes of Rule 13a-15(e), the termdisclosure 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.

 

Remediation Plan for Material Weakness in Internal Control over Financial Reporting

We are in the process of improving our policies and procedures relating to the recognition and measurement of business acquisitions and designing more effective controls to remediate the material weakness described inItem 9A of our Annual Report on Form 10-K for the fiscal year ended November 28, 2015. Management plans to enhance the controls related to business combinations by a) supplementing its resources, b) enhancing the design and documentation of management review controls, and c) improving the documentation of internal control procedures.

We believe these measures will strengthen our internal controls over financial reporting and will prevent a reoccurrence of the material weakness described inItem 9A of our Annual Report on Form 10-K for the fiscal year ended November 28, 2015.

Changes in Internal Control over Financial Reporting

 

Other than the actions taken under Remediation Plan for Material Weakness in Internal Control over Financial Reportingdiscussed above, thereThere 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.

PART II.OTHER INFORMATION

 

PART II. OTHER INFORMATION

Item 1.Legal Legal Proceedings

 

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)(“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 a financial provision. 

 

 

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. 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 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 30 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, (includingincluding defense costs).costs. Historically, insurers have paid a significant portion of our defense costs and settlements in asbestos-related litigation. However, certain of our insurers are insolvent. We have entered into cost-sharing agreements with our insurers that provide for the allocation of defense costs and settlements and judgments in asbestos-related lawsuits. These agreements require, among other things, that we fund a share of settlements and judgments allocable to years in which the responsible insurer is insolvent.

 

A summary of the number of and settlement amounts for asbestos-related lawsuits and claims is as follows:

 

 

Nine Months Ended

  

3 Years Ended

  

Six Months Ended

  

3 Years Ended

 

($ in millions)

 

August 27, 2016

  

August 29, 2015

  

November 28, 2015

  

June 3, 2017

  

May 28, 2016

  

December 3, 2016

 

Lawsuits and claims settled

  9   6   25   7   4   33 

Settlement amounts

 $1.0  $0.5  $2.1  $1.4  $0.3  $3.1 

Insurance payments received or expected to be received

 $0.6  $0.4  $1.6  $1.1  $0.3  $2.3 

 

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. However, adverse developments and/or periodic settlements could negatively impact the results of operations or cash flows in one or more future periods.

 

Item 1A.Risk Risk Factors

 

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 28, 2015.December 3, 2016. 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 28, 2015.December 3, 2016.

 

Item 22. Unregistered. Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

Information on our purchases of equity securities during the thirdsecond quarter ended June 3, 2017 follows:

 

Period

 

(a)

Total

Number of

Shares

Purchased1

  

(b)

Average

Price Paid

per Share

  

(c)

Total Number of

Shares

Purchased as

Part of a Publicly

Announced Plan

or Program

  

(d)

Maximum

Approximate Dollar

Value of Shares that

may yet be

Purchased Under the

Plan or Program

(millions)

 
                 

May 29, 2016 - July 2, 2016

  125,000  $42.61   125,000  $40.6 
                 

July 3, 2016 - July 30, 2016

  189  $44.59   -  $40.6 
                 

July 31, 2016 - August 27, 2016

  -  $-   -  $40.6 

Period

 

(a)

Total

Number of

Shares

Purchased1

  

(b)

Average

Price Paid

per Share

  

(c)

Total Number of

Shares Purchased as

Part of a Publicly

Announced Plan of

Program2

  

(d)

Maximum

Approximate Dollar

Value of Shares that

may yet be

Purchased Under

the Plan or Program

(millions)

 
                 

March 5, 2017 - April 8, 2017

  70,000  $50.23   70,000  $20,520 
                 

April 9 2017 - May 6, 2017

  55,000  $50.32   55,000  $17,752 
                 

May 7, 2017 - June 3, 2017

  3,122  $50.61    -  $17,752 

 

1 The total number of shares purchased includes 1,106include shares withheld to satisfy the employees’ withholding taxes upon vesting of restricted stock.

2 Shares repurchased were under the September 30, 2010 share repurchase program.

 

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.

 

In 2010,On April 6, 2017, the Board of Directors authorized a new share repurchase program of up to $100.0$200.0 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 reduced our common stock for the par value of the shares with the excess being applied against additional paid-in capital. This authorization replaces the September 30, 2010 authorization to repurchase shares.

 

 

ItemItem 6.Exhibits

 

10.1

Credit Agreement dated as of April 12, 2017 among (i) H.B. Fuller Company, a Minnesota corporation, as Borrower, (ii) certain of its subsidiaries party thereto as Foreign Subsidiary Borrowers, (iii) JPMorgan Chase Bank, N.A., as Administrative Agent, (iv) U.S. Bank National Association, Citibank, N.A., and Morgan Stanley MUFG Loan Partners, LLC, as Co-Syndication Agents, (v) Bank of America, N.A., HSBC Bank USA, National Association, and PNC Bank, National Association, as Co-Documentation Agents, and (iv) various other financial institutions party thereto as Lenders (incorporated by reference to Exhibit 10.1 in H.B. Fuller’s Current Report on Form 8-K filed on April 18, 2017)

10.2

Guaranty made as of April 12, 2017 by H.B. Fuller Construction Products, Inc., a Minnesota corporation, as Initial Guarantor, in favor of J.P. Morgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 in H.B. Fuller’s Current Report on Form 8-K filed on April 18, 2017)

 

31.1

Form of 302 Certification –James J. Owens

 

31.2

Form of 302 Certification –John J. Corkrean

 

32.1

Form of 906 Certification –James J. Owens

 

32.2

Form of 906 Certification –John J. Corkrean

 

101

The following materials from the H.B. Fuller Company Quarterly Report on Form 10-Q for the quarter ended August 27, 2016June 3, 2017 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Total Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.

 

 

SISIGNATURESGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

H.B. Fuller Company

 

 

 

 

 

 

 

 

 

Dated: September 23, 2016June 30, 2017

 

/s/ John J. Corkrean

 

 

 

John J. Corkrean

 

 

 

Executive Vice President,

Chief Financial Officer

 

 

 

Exhibit Index

 

Exhibits

 

10.1

Credit Agreement dated as of April 12, 2017 among (i) H.B. Fuller Company, a Minnesota corporation, as Borrower, (ii) certain of its subsidiaries party thereto as Foreign Subsidiary Borrowers, (iii) JPMorgan Chase Bank, N.A., as Administrative Agent, (iv) U.S. Bank National Association, Citibank, N.A., and Morgan Stanley MUFG Loan Partners, LLC, as Co-Syndication Agents, (v) Bank of America, N.A., HSBC Bank USA, National Association, and PNC Bank, National Association, as Co-Documentation Agents, and (iv) various other financial institutions party thereto as Lenders (incorporated by reference to Exhibit 10.1 in H.B. Fuller’s Current Report on Form 8-K filed on April 18, 2017)

10.2

Guaranty made as of April 12, 2017 by H.B. Fuller Construction Products, Inc., a Minnesota corporation, as Initial Guarantor, in favor of J.P. Morgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 in H.B. Fuller’s Current Report on Form 8-K filed on April 18, 2017)

 

31.1

Form of 302 Certification – James J. Owens

 

31.2

Form of 302 Certification – John J. Corkrean

 

32.1

Form of 906 Certification –James J. Owens

 

32.2

Form of 906 Certification –John J. Corkrean

 

101

The following materials from the H.B. Fuller Company Quarterly Report on Form 10-Q for the quarter ended August 27, 2016June 3, 2017 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Total Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.

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