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Table Of 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 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

 

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. 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 50,342,974 as of September 16, 2016.

 

 

H.B. Fuller Company

Quarterly Report on Form 10-Q

Table of Contents

 

 

    Page

PART I.

FINANCIAL INFORMATION

 
     

ITEM 1.

FINANCIAL STATEMENTS (Unaudited)

1

     
 

Condensed Consolidated Statements of Income for the three and nine months ended August 27, 2016 and August 29, 2015

1

     
 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended August 27, 2016 and August 29, 2015

2

     
 

Condensed Consolidated Balance Sheets as of August 27, 2016 and August 29, 2015

3

     
 

Condensed Consolidated Statements of Total Equity as of August 27, 2016 and August 29, 2015

4

     
 

Condensed Consolidated Statements of Cash Flows for the nine months ended August 27, 2016 and August 29, 2015

5

     
 

Notes to Condensed Consolidated Financial Financial Statements

6

     

ITEM 2.

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

23

     

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

36

     

ITEM 4.

CONTROLS AND PROCEDURES

38

     

PART II.

OTHER INFORMATION

38

     

ITEM 1.

LEGAL PROCEEDINGS

38

     

ITEM 1A.

RISK FACTORS

40

     

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

  40
     

ITEM 6.

EXHIBITS

41

     

SIGNATURES

42

 

 

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

   

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.

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

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.

 

 

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.

 

 

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

    -       -       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  

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   

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  

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

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 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.

 

New Accounting Pronouncements

 

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

 

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

 

Cyberbond

 

On June 8, 2016, we acquired Cyberbond, L.L.C., heaquartered in Batavia, Illinois, which 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 was funded through existing cash and was recorded in our Engineering Adhesives operating segment. We incurred acquisition related costs of approximately $558, 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 August 27, 2016, subject to 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 of 2016.

 

  

The following table summarizes the preliminary 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  

 

 

We have preliminarily allocated the entire excess purchase price to goodwill in the amount of $38,152 pending completion of the valuation of other identified intangible assets. Such goodwill is not deductible for tax purposes. 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), 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, which were recorded as selling, general and administrative expenses in the Condensed Consolidated Statements of Income.

 

During 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 of 2016.

 

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

 

   

May 28, 2016

   

Adjustments

   

August 27, 2016

 

Current assets

  $ 6,197     $ (663 )   $ 5,534  

Property, plant and equipment

    751       (167 )     584  

Customer relationships

    -       7,639       7,639  

Trademarks

    -       146       146  

Goodwill

    4,546       (4,546 )     -  

Current liabilities

    (2,371 )     (288 )     (2,659 )

Long-term liabilities

    -       (879 )     (879 )

Total purchase price

  $ 9,123     $ 1,242     $ 10,365  

 

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

 

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 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.

 

  

Grant-Date Fair Value 

 

We use 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 three months ended August 27, 2016 and nine months ended August 27, 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.

 

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 $2,501 and $3,006 was included in our Condensed Consolidated Statements of Income for the third quarter ended August 27, 2016 and August 29, 2015, respectively. Total share-based compensation expense of $9,469 and $10,325 was included in our Condensed Consolidated Statements of Income for the nine months ended August 27, 2016 and August 29, 2015, respectively. All share-based compensation expense was recorded as selling, general and administrative expense. For the third 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.

 

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.

 

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

   

Nine Months Ended

 
   

August 27,

   

August 29,

   

August 27,

   

August 29,

 

(Shares in thousands)

 

2016

   

2015

   

2016

   

2015

 

Weighted-average common shares - basic

    50,261       50,421       50,122       50,318  

Equivalent shares from share-based compensations plans

    1,192       1,109       1,112       1,142  

Weighted-average common and common equivalent shares - diluted

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

 

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 386,496 and 1,533,690 shares of common stock at a weighted-average exercise price of $48.57 and $42.88 for the quarters ended August 27, 2016 and August 29, 2015, respectively, were excluded from the diluted earnings per share calculations because they were antidilutive. Options to purchase 762,509 and 416,544 shares of common stock at a weighted-average exercise price of $44.86 and $48.89 for the nine months ended August 27, 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 pension plans 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 pension plans 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 comprehensive income (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 taxes of $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 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

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

 

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 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: