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EX-32.2 - EXHIBIT 32.2 - FULLER H B COex32-2.htm
EX-32.1 - EXHIBIT 32.1 - FULLER H B COex32-1.htm
EX-31.2 - EXHIBIT 31.2 - FULLER H B COex31-2.htm
EX-31.1 - EXHIBIT 31.1 - FULLER H B COex31-1.htm

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 May 28, 2016

 

OR

 

[  ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                          to

 

Commission file number: 001-09225

 

H.B. FULLER COMPANY

(Exact name of registrant as specified in its charter)

 

 Minnesota

 41-0268370

 (State or other jurisdiction of incorporation or organization)

 (I.R.S. Employer 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. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [X] 

Accelerated filer [  ]

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

Smaller reporting company [  ]

                                            

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 50,352,227 as of June 17, 2016.

 

 

 
1

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

May 28,

2016

   

May 30,

2015

   

May 28,

2016

   

May 30,

2015

 

Net revenue

  $ 532,514     $ 540,762     $ 1,006,840     $ 1,011,423  

Cost of sales

    (374,258 )     (391,825 )     (710,979 )     (746,280 )

Gross profit

    158,256       148,937       295,861       265,143  

Selling, general and administrative expenses

    (103,684 )     (100,582 )     (203,451 )     (195,415 )

Special charges, net

    (370 )     (934 )     (783 )     (3,295 )

Other income (expense), net

    (1,565 )     (569 )     (6,647 )     (206 )

Interest expense

    (6,597 )     (6,215 )     (12,905 )     (12,317 )

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

    46,040       40,637       72,075       53,910  

Income taxes

    (14,290 )     (15,387 )     (23,050 )     (20,156 )

Income from equity method investments

    1,640       1,366       3,332       2,657  

Income from continuing operations

    33,390       26,616       52,357       36,411  

Loss from discontinued operations, net of tax

    -       (1,300 )     -       (1,300 )

Net income including non-controlling interests

    33,390       25,316       52,357       35,111  

Net income attributable to non-controlling interests

    (59 )     (144 )     (108 )     (229 )

Net income attributable to H.B. Fuller

  $ 33,331     $ 25,172     $ 52,249     $ 34,882  
                                 

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

                 
                                 

Basic

                               

Income from continuing operations

    0.66       0.53       1.04       0.72  

Loss from discontinued operations

    -       (0.03 )     -       (0.03 )

Basic

  $ 0.66     $ 0.50     $ 1.04     $ 0.69  
                                 

Diluted1

                               

Income from continuing operations

    0.65       0.51       1.02       0.70  

Loss from discontinued operations

    -       (0.03 )     -       (0.03 )

Diluted

  $ 0.65     $ 0.49     $ 1.02     $ 0.68  
                                 

Weighted-average common shares outstanding:

                               

Basic

    50,145       50,345       50,052       50,267  

Diluted

    51,253       51,471       51,124       51,425  
                                 

Dividends declared per common share

  $ 0.14     $ 0.13     $ 0.27     $ 0.25  

 

1 Income per share amounts may not add due to rounding. 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 
2

 

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

 

   

Three Months Ended

   

Six Months Ended

 
   

May 28,

2016

   

May 30,

2015

   

May 28,

2016

   

May 30,

2015

 

Net income including non-controlling interests

  $ 33,390     $ 25,316     $ 52,357     $ 35,111  

Other comprehensive income (loss)

                               

Foreign currency translation

    1,442       (4,651 )     492       (37,920 )

Defined benefit pension plans adjustment, net of tax

    690       1,528       3,355       3,055  

Interest rate swaps, net of tax

    10       10       20       20  

Cash-flow hedges, net of tax

    (440 )     -       (191 )     (25 )

Other comprehensive income (loss)

    1,702       (3,113 )     3,676       (34,870 )

Comprehensive income (loss)

    35,092       22,203       56,033       241  

Less: Comprehensive income attributable to non-controlling interests

    64       218       108       313  

Comprehensive income (loss) attributable to H.B. Fuller

  $ 35,028     $ 21,985     $ 55,925     $ (72 )

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 
3

 

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 

   

(Unaudited)

         
   

May 28,

2016

   

November 28,

2015

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 146,022     $ 119,168  

Trade receivables (net of allowances of $12,418 and $11,893, as of May 28, 2016 and November 28, 2015, respectively)

    355,373       364,704  

Inventories

    261,072       248,504  

Other current assets

    62,237       68,675  

Total current assets

    824,704       801,051  
                 

Property, plant and equipment

    1,143,960       1,111,987  

Accumulated depreciation

    (628,311 )     (599,127 )

Property, plant and equipment, net

    515,649       512,860  
                 

Goodwill

    362,522       354,204  

Other intangibles, net

    201,028       212,993  

Other assets

    162,872       161,144  

Total assets

  $ 2,066,775     $ 2,042,252  
                 

Liabilities, redeemable non-controlling interest and total equity

               

Current liabilities:

               

Notes payable

  $ 42,459     $ 30,757  

Current maturities of long-term debt

    76,250       22,500  

Trade payables

    161,724       177,864  

Accrued compensation

    49,974       52,079  

Income taxes payable

    12,752       8,970  

Other accrued expenses

    50,991       57,355  

Total current liabilities

    394,150       349,525  
                 

Long-term debt, excluding current maturities

    603,138       669,606  

Accrued pension liabilities

    71,565       76,324  

Other liabilities

    69,101       69,272  

Total liabilities

    1,137,954       1,164,727  
                 

Commitments and contingencies

               
                 

Redeemable non-controlling interest

    4,518       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 – 50,325,411 and 50,074,310, as of May 28, 2016 and November 28, 2015, respectively

    50,325       50,074  

Additional paid-in capital

    63,986       55,522  

Retained earnings

    1,033,196       994,608  

Accumulated other comprehensive loss

    (223,608 )     (227,284 )

Total H.B. Fuller stockholders' equity

    923,899       872,920  

Non-controlling interests

    404       406  

Total equity

    924,303       873,326  

Total liabilities, redeemable non-controlling interest and total equity

  $ 2,066,775     $ 2,042,252  

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 
4

 

 

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 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

    -       -       52,249       3,676       108       56,033  

Dividends

    -       -       (13,661 )     -       -       (13,661 )

Stock option exercises

    336       6,747       -       -       -       7,083  

Share-based compensation plans other, net

    108       7,498       -       -       -       7,606  

Tax benefit on share-based compensation plans

    -       592       -       -       -       592  

Repurchases of common stock

    (193 )     (6,373 )     -       -       -       (6,566 )

Redeemable non-controlling interest

    -       -       -       -       (110 )     (110 )

Balance at May 28, 2016

  $ 50,325     $ 63,986     $ 1,033,196     $ (223,608 )   $ 404     $ 924,303  

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 
5

 

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   

Six Months Ended

 
   

May 28, 2016

   

May 30, 2015

 

Cash flows from operating activities:

               

Net income including non-controlling interests

  $ 52,357     $ 35,111  

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

    25,067       23,603  

Amortization

    13,486       13,147  

Deferred income taxes

    1,101       1,916  

Income from equity method investments, net of dividends received

    (3,332 )     (2,657 )

Share-based compensation

    6,968       7,319  

Excess tax benefit from share-based compensation

    (592 )     (910 )

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

    103       2,416  

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

         

Trade receivables, net

    13,280       2,542  

Inventories

    (9,059 )     (14,293 )

Other assets

    9,948       5,817  

Trade payables

    (7,521 )     30,326  

Accrued compensation

    (2,925 )     (3,573 )

Other accrued expenses

    (6,434 )     2,401  

Income taxes payable

    4,451       (1,033 )

Accrued / prepaid pensions

    (1,785 )     (4,990 )

Other liabilities

    (8,720 )     (1,882 )

Other

    (3,790 )     19,656  

Net cash provided by operating activities

    82,603       116,216  
                 

Cash flows from investing activities:

               

Purchased property, plant and equipment

    (35,720 )     (38,917 )

Purchased businesses, net of cash acquired

    (9,123 )     (217,572 )

Proceeds from sale of property, plant and equipment

    870       1,073  

Net cash used in investing activities

    (43,973 )     (255,416 )
                 

Cash flows from financing activities:

               

Proceeds from long-term debt

    -       337,000  

Repayment of long-term debt

    (11,250 )     (183,750 )

Net proceeds from notes payable

    11,246       2,485  

Dividends paid

    (13,537 )     (12,605 )

Proceeds from stock options exercised

    7,083       3,951  

Excess tax benefit from share-based compensation

    592       910  

Repurchases of common stock

    (6,566 )     (2,207 )

Net cash provided by (used in) financing activities

    (12,432 )     145,784  
                 

Effect of exchange rate changes

    656       (4,690 )

Net change in cash and cash equivalents

    26,854       1,894  
                 

Cash and cash equivalents at beginning of period

    119,168       77,569  

Cash and cash equivalents at end of period

  $ 146,022     $ 79,463  
                 

Supplemental disclosure of cash flow information:

               

Dividends paid with company stock

  $ 124     $ 98  

Cash paid for interest, net of amount capitalized of $314 and $36 for the periods ended May 28, 2016 and May 30, 2015, respectively

  $ 14,157     $ 13,624  

Cash paid for income taxes, net of refunds

  $ 18,503     $ 12,041  

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 
6

 

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

Note 1: 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, 2015 as filed with the Securities and Exchange Commission.

 

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 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.

 

New Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. 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. 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), Principal 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.

 

 

 
7

 

 

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. 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, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award That a Performance Target Could Be Achieved after the Requisite Service Period, which requires a performance target that affects vesting and that could 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-date fair value of the award and compensation cost should 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) for which the requisite service has already been rendered. Our effective date for adoption of this guidance is our fiscal year beginning December 4, 2016, however we elected to early adopt this guidance as of our first quarter ended February 27, 2016. The adoption of this guidance did not have a material impact on our Consolidated Financial Statements.

 

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 evaluating the effect that this guidance will have on our Consolidated Financial Statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

   

Note 2: Acquisitions

 

Advanced Adhesives

 

On April 29, 2016, we acquired Advanced Adhesives Pty Limited and the business assets of Advanced Adhesives (New Zealand) Limited (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 $9,123 was funded through existing cash and was recorded in our Asia Pacific operating segment. We incurred acquisition related costs of approximately $544, which were recorded as selling, general and administrative expenses in the Condensed Consolidated Statements of Income. 

 

The acquisition fair value measurement was preliminary as of May 28, 2016, subject to the completion of the valuation of Advanced 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 in the third quarter of 2016.

 

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

 

   

May 28, 2016

 

Current assets

  $ 6,191  

Property, plant and equipment

    751  

Goodwill

    4,546  

Other assets

    6  

Current liabilities

    (2,371 )

Total purchase price

  $ 9,123  

 

 

 
8

 

 

We have preliminarily allocated goodwill in the amount of $4,546 for the 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.

  

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

 

   

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 Compensation

 

Overview 

 

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 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 November 28, 2015.

 

 

 
9

 

 

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 May 28, 2016 and May 30, 2015 were calculated using the following weighted average assumptions:

 

   

Three Months Ended

   

Six Months Ended

 
   

May 28, 2016

   

May 30, 2015

   

May 28, 2016

   

May 30, 2015

 

Expected life (in years)

    4.75         4.75       4.75         4.61    

Weighted-average expected volatility

    28.55%         30.23%       29.01%         30.91%    

Expected volatility

   28.00% - 29.20%       30.23%      28.00% - 29.23%     25.50% - 31.67%  

Risk-free interest rate

    1.25%         1.43%       1.43%         1.26%    

Expected dividend yield

    1.27%         1.22%       1.55%         1.17%    

Weighted-average fair value of grants

    $9.81         $10.31     $ 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.

 

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 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 Recognition

 

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.

 

Total share-based compensation expense of $2,701 and $3,058 was included in our Condensed Consolidated Statements of Income for the second quarter ended May 28, 2016 and May 30, 2015, respectively. Total share-based compensation expense of $6,968 and $7,319 was included in our Condensed Consolidated Statements of Income for the first six months ended May 28, 2016 and May 30, 2015, respectively. All share-based compensation expense was recorded as selling, general and administrative expense. For the second quarter ended May 28, 2016 and May 30, 2015, there was $933 and $513 of excess tax benefit recognized, respectively. For the first six months ended May 28, 2016 and May 30, 2015 there was $592 and $910 of excess tax benefit recognized, respectively.

 

As of May 28, 2016, there was $9,697 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 shares was $315 which is expected to be recognized over a weighted-average period of 0.6 years. Unrecognized compensation costs related to unvested restricted stock units was $10,257 which is expected to be recognized over a weighted-average period of 1.5 years.

 

 

 
10

 

 

Share-based Activity

 

A summary of option activity as of May 28, 2016 and changes during the first six months then ended is presented below:

 

   

Options

   

Weighted-

Average

Exercise Price

 

Outstanding at November 28, 2015

    2,912,073     $ 33.37  

Granted

    836,854       33.77  

Exercised

    (409,971 )     25.10  

Forfeited or cancelled

    (120,663 )     39.97  

Outstanding at May 28, 2016

    3,218,293     $ 34.28  

 

The total fair value of options granted during the second quarter ended May 28, 2016 and May 30, 2015 were $324 and $9, respectively. Total intrinsic value of options exercised during the second quarter ended May 28, 2016 and May 30, 2015 were $7,265 and $2,223, 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 first six months ended May 28, 2016 and May 30, 2015 were $6,462 and $7,189, respectively. Total intrinsic value of options exercised during the first six months ended May 28, 2016 and May 30, 2015 were $7,276 and $3,549, respectively. Proceeds received from option exercises during the second quarter ended May 28, 2016 and May 30, 2015 were $7,051 and $2,267, respectively and $7,083 and $3,951, during the first six months ended May 28, 2016 and May 30, 2015, respectively.

 

A summary of nonvested restricted stock as of May 28, 2016 and changes during the first six months then ended is presented below:

 

   

Units

   

Shares

   

Total

   

Weighted-

Average

Grant

Date Fair

Value

   

Weighted-

Average

Remaining

Contractual

Life

(in Years)

 

Nonvested at November 28, 2015

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

Granted

    215,895       -       215,895       34.21       1.8  

Vested

    (101,652 )     (70,428 )     (172,080 )     41.85       -  

Forfeited

    (21,641 )     (179 )     (21,820 )     38.53       2.0  

Nonvested at May 28, 2016

    329,615       39,553       369,168     $ 37.91       1.4  

 

Total fair value of restricted stock vested during the second quarter ended May 28, 2016 and May 30, 2015 were $179 and $64, respectively. Total fair value of restricted stock vested during the first six months ended May 28, 2016 and May 30, 2015 were $6,012 and $6,064, respectively. The total fair value of nonvested restricted stock at May 28, 2016 was $13,994.

 

We repurchased 1,106 and 86 restricted stock shares during the second quarter ended May 28, 2016 and May 30, 2015, respectively and 67,553 and 54,003 during the first six months ended May 28, 2016 and May 30, 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 May 28, 2016, and changes during the quarter then ended is presented below:

 

   

Non-employee

Directors

   

Employees

   

Total

 

Units outstanding November 28, 2015

    380,170       45,906       426,076  

Participant contributions

    14,517       3,214       17,731  

Company match contributions

    1,452       321       1,773  

Payouts

    (319 )     (5,970 )     (6,289 )

Units outstanding May 28, 2016

    395,820       43,471       439,291  

 

 

 
11

 

 

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

 

Note 4: Earnings Per Share

 

A reconciliation of the common share components for the basic and diluted earnings per share calculations is as follows:

 

   

Three Months Ended

   

Six Months Ended

 

(Shares in thousands)

 

May 28,

2016

   

May 30,

2015

   

May 28,

2016

   

May 30,

2015

 

Weighted-average common shares - basic

    50,145       50,345       50,052       50,267  

Equivalent shares from share-based compensations plans

    1,108       1,126       1,072       1,158  

Weighted-average common and common equivalent shares - diluted

    51,253       51,471       51,124       51,425  

 

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 406,028 and 437,798 shares of common stock at a weighted-average exercise price of $48.59 for each of the quarters ended May 28, 2016 and May 30, 2015, respectively, were excluded from the diluted earnings per share calculations because they were antidilutive. Options to purchase 950,516 and 442,616 shares of common stock at a weighted-average exercise price of $44.10 and $48.59 for the first six months ended May 28, 2016 and May 30, 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 May 28, 2016

   

Three Months Ended May 30, 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

    -       -     $ 33,331     $ 59       -       -     $ 25,172     $ 144  

Foreign currency translation adjustment¹

  $ 1,437       -       1,437       5     $ (4,725 )     -       (4,725 )     74  

Reclassification to earnings:

                                                               

Defined benefit pension plans adjustment²

    1,173     $ (483 )     690       -       2,326     $ (798 )     1,528       -  

Interest rate swap³

    16       (6 )     10       -       5       5       10       -  

Cash-flow hedges³

    (711 )     271       (440 )     -       -       -       -       -  

Other comprehensive income (loss)

  $ 1,915     $ (218 )     1,697       5     $ (2,394 )   $ (793 )     (3,187 )     74  

Comprehensive income (loss)

            $ 35,028     $ 64                     $ 21,985     $ 218  

 

 

 
12

 

 

   

Six Months Ended May 28, 2016

   

Six Months Ended May 30, 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

    -       -     $ 52,249     $ 108       -       -     $ 34,882     $ 229  

Foreign currency translation adjustment¹

  $ 492       -       492       -     $ (38,004 )     -       (38,004 )     84  

Reclassification to earnings:

                                                               

Defined benefit pension plans adjustment²

    5,170     $ (1,815 )     3,355       -       4,651     $ (1,596 )     3,055       -  

Interest rate swap³

    29       (9 )     20       -       21       (1 )     20       -  

Cash-flow hedges³

    (308 )     117       (191 )     -       (31 )     6       (25 )     -  

Other comprehensive income (loss)

  $ 5,383     $ (1,707 )     3,676       -     $ (33,363 )   $ (1,591 )     (34,954 )     84  

Comprehensive income (loss)

            $ 55,925     $ 108                     $ (72 )   $ 313  

 

 

 

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 expenses 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:

 

   

May 28, 2016

 
   

Total

   

H.B. Fuller

Stockholders

   

Non-

controlling

Interests

 

Foreign currency translation adjustment

  $ (51,100 )   $ (51,062 )   $ (38 )

Defined benefit pension plans adjustment, net of taxes of $91,197

    (171,045 )     (171,045 )     -  

Interest rate swap, net of taxes of ($4)

    7       7       -  

Cash-flow hedges, net of taxes of $928

    (1,508 )     (1,508 )     -  

Accumulated other comprehensive income (loss)

  $ (223,646 )   $ (223,608 )   $ (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 taxes of $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) income

  $ (227,322 )   $ (227,284 )   $ (38 )

 

 

 
13

 

 

Note 6: 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 second quarter ended May 28, 2016 and May 30, 2015, we incurred special charges, net of $370 and $934, respectively, for costs related to the Business Integration Project. During the first six months ended May 28, 2016 and May 30, 2015, we incurred special charges, net of $783 and $3,295, respectively, for costs related to the Business Integration Project.

 

The following table provides detail of special charges, net:

 

   

Three Months Ended

   

Six Months Ended

 
   

May 28, 2016

   

May 30, 2015

   

May 28, 2016

   

May 30, 2015

 

Acquisition and transformation related costs

  $ 82     $ 75     $ 187     $ 547  

Workforce reduction costs

    -       (270 )     (1 )     (214 )

Facility exit costs

    134       1,111       407       2,640  

Other related costs

    154       18       190       322  

Special charges, net

  $ 370     $ 934     $ 783     $ 3,295  

 

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

 

   

Three Months Ended May 28, 2016 and May 30, 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     $ 26     $ 481     $ 473     $ 84     $ 112  

Interest cost

    3,768       4,080       1,366       1,461       480       511  

Expected return on assets

    (6,077 )     (6,421 )     (2,483 )     (2,573 )     (1,342 )     (1,378 )

Amortization:

                                               

Prior service cost

    7       7       (1 )     (1 )     (10 )     (626 )

Actuarial loss

    1,293       1,407       753       781       532       608  

Net periodic (benefit) cost

  $ (982 )   $ (901 )   $ 116     $ 141     $ (256 )   $ (773 )

 

   

Six Months Ended May 28, 2016 and May 30, 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

  $ 54     $ 53     $ 961     $ 980     $ 168     $ 224  

Interest cost

    7,535       8,161       2,733       2,977       960       1,021  

Expected return on assets

    (12,154 )     (12,841 )     (4,965 )     (5,240 )     (2,684 )     (2,755 )

Amortization:

                                               

Prior service cost

    14       14       (2 )     (2 )     (20 )     (1,252 )

Actuarial loss

    2,586       2,814       1,505       1,612       1,064       1,216  

Net periodic (benefit) cost

  $ (1,965 )   $ (1,799 )   $ 232     $ 327     $ (512 )   $ (1,546 )

 

Note 8: Inventories

 

The composition of inventories is as follows:

 

   

May 28,

2016

   

November 28,

2015

 

Raw materials

  $ 124,351     $ 121,545  

Finished goods

    150,666       142,195  

LIFO reserve

    (13,945 )     (15,236 )

Total inventories

  $ 261,072     $ 248,504  

 

 

 
14

 

 

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, Indonesian rupiah 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 May 28, 2016, the combined fair value of the swaps was a liability of $1,111 and was included in other assets 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 May 28, 2016 resulted in additional pre-tax gain of $37 for the six months ended May 28, 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 $1,508 as of May 28, 2016. The estimated net amount of the existing loss that is reported in accumulated other comprehensive income (loss) as of May 28, 2016 that is expected to be reclassified into earnings within the next twelve months is $783. As of May 28, 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 May 28, 2016:

  

 

 

Fiscal Year of

Expiration

 

Interest Rate

   

Notional

Value

   

Fair Value

 

Pay EUR

2017

    3.05%     $ 44,912     $ (65 )
Receive USD     3.9145%                  
                           

Pay EUR

2018

    3.45%     $ 44,912     $ (370 )
Receive USD     4.5374%                  
                           

Pay EUR

2019

    3.80%     $ 44,912     $ (676 )
Receive USD     5.0530%                  

Total

          $ 134,736     $ (1,111 )

 

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.

 

 

 
15

 

 

As of May 28, 2016, we had forward foreign currency contracts maturing between June 10, 2016 and February 24, 2017. The mark-to-market effect associated with these contracts, on a net basis, was a loss of $5,551 at May 28, 2016. These gains 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 $2,673 at May 28, 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 was an asset of $2,760 at May 28, 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. The calculation as of May 28, 2016 resulted in a pretax gain of $48 for the first six months ended May 28, 2016 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. The calculations as of May 30, 2015 resulted in a pre-tax gain of $59 for the first six months ended May 30, 2015 as the fair value of the interest rate swaps increased by more than the change in the fair value of the senior notes 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 May 28, 2016, there were no significant concentrations of credit risk.

 

Note 10: 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.