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EX-21 - EXHIBIT 21 - FULLER H B COex21.htm
Table Of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

(Mark One)

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 3, 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)

Registrant’s telephone number, including area code:  (651) 236-5900

   

Securities registered pursuant to Section 12(b) of the Act:

   

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $1.00 per share

 

New York Stock Exchange

Preferred Stock Purchase Rights

 

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: none

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [X] Yes [   ] No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [   ] Yes [X] No

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. [X] Yes [   ] 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [   ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [   ]

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 the 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 [X] No

The aggregate market value of the Common Stock, par value $1.00 per share, held by non-affiliates of the registrant as of May 28, 2016 was approximately $2,262,596,032 (based on the closing price of such stock as quoted on the New York Stock Exchange of $45.35 on such date).

The number of shares outstanding of the Registrant’s Common Stock, par value $1.00 per share, was 50,232,491 as of January 20, 2017.

 

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference to portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 6, 2017.

 

 

H.B. FULLER COMPANY

 

2016 Annual Report on Form 10-K

 

Table of Contents

 

 

PART I

   

Item 1.

Business

3

Item 1A.

Risk Factors

7

Item 1B.

Unresolved Staff Comments

10

Item 2.

Properties

11

Item 3.

Legal Proceedings

12

Item 4.

Mine Safety Disclosures

13

     

PART II 

   

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

13

Item 6.

Selected Financial Data

15

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 8.

Financial Statements and Supplementary Data

37

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

84

Item 9A.

Controls and Procedures

84

Item 9B.

Other Information

85

     

PART III

   

Item 10.

Directors, Executive Officers and Corporate Governance

85

Item 11.

Executive Compensation

86

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

86

Item 13.

Certain Relationships and Related Transactions and Director Independence

86

Item 14.

Principal Accountant Fees and Services

86

     

PART IV 

   

Item 15.

Exhibits and Financial Statement Schedules

87

 

Signatures

91

 

 

 

PART I

 

Item 1. Business

 

H.B. Fuller Company was founded in 1887 and incorporated as a Minnesota corporation in 1915. Our stock is traded on the New York Stock Exchange (“NYSE”) under the ticker symbol FUL. As used herein, “H.B. Fuller”, “we”, “us”, “our”, “management” or “company” includes H.B. Fuller and its subsidiaries unless otherwise indicated. Where we refer to 2016, 2015 and 2014 herein, the reference is to our fiscal years ended December 3, 2016, November 28, 2015 and November 29, 2014, respectively.

 

We are a leading worldwide formulator, manufacturer and marketer of adhesives, sealants and other specialty chemical products. Sales operations span 38 countries in North America, Europe, Latin America, the Asia Pacific region, India, the Middle East and Africa. Industrial adhesives represent our core product offering. Customers use our adhesives products in manufacturing common consumer and industrial goods, including food and beverage containers, disposable diapers, windows, doors, flooring, appliances, sportswear, footwear, multi-wall bags, water filtration products, insulation, textiles, automotives, solar energy systems and electronics. Our adhesives help improve the performance of our customers’ products or improve their manufacturing processes. We also provide our customers with technical support and unique solutions designed to address their specific needs. In addition, we have established a variety of product offerings for residential construction markets, such as tile-setting adhesives, grout, sealants and related products.

 

Recent Acquisitions

 

On June 8, 2016, we acquired Cyberbond, L.L.C. (“Cyberbond”) headquartered in Batavia, Illinois, with operations in the United States and Europe. Cyberbond is a provider of industrial adhesives for the electronics, medical, audio equipment, automotive and structural markets. The acquisition will help us to broaden our global position and accelerate our growth in the high margin, high growth Engineering Adhesives segment. The purchase price of $42.5 million was funded through existing cash and was recorded in our Engineering Adhesives operating segment.

 

On April 29, 2016, we acquired Advanced Adhesives Pty Limited and the business assets of Advanced Adhesives (New Zealand) Limited (together referred to as “Advanced Adhesives”), providers of industrial adhesives in Australia and New Zealand. The acquisition will help us to strengthen our industrial adhesives market position and leverage a broader technology portfolio in both Australia and New Zealand. The combined purchase price of $10.4 million was funded through existing cash and was recorded in our Asia Pacific operating segment.

 

Operating Segment Information

 

Our business is reported in five operating segments: Americas Adhesives, EIMEA (Europe, India, Middle East and Africa), Asia Pacific, Construction Products and Engineering Adhesives. In 2016, as a percentage of total net revenue by operating segment, Americas Adhesives was 38 percent, EIMEA 26 percent, Asia Pacific 12 percent, Construction Products 12 percent and Engineering Adhesives 12 percent. See Note 14 to the Consolidated Financial Statements for further information on our operating segments.

 

Our Americas Adhesives, EIMEA and Asia Pacific operating segments produce and supply industrial adhesives products for applications in various markets, including durable assembly (appliances and filters), packaging (food and beverage containers, flexible packaging, consumer goods, package integrity and re-enforcement, and durable and non-durable goods), converting (corrugation, folding carton, tape and label, paper converting, envelopes, books, multi-wall bags, sacks, and tissue and towel), nonwoven and hygiene (disposable diapers, feminine care and medical garments), performance wood (windows, doors and wood flooring) and textile (footwear and sportswear).

 

The Americas Adhesives, EIMEA and Asia Pacific operating segments include a full range of specialty adhesives such as thermoplastic, thermoset, reactive, water-based and solvent-based products. Sales are made through both a direct sales force and distributors.

 

The Construction Products operating segment includes products used for tile setting (adhesives, grouts, mortars, sealers and levelers) and heating, ventilation and air conditioning and insulation applications (duct sealants, weather barriers and fungicidal coatings and block fillers). Construction Products sales are made primarily through distributors, wholesalers, big box retailers and a direct sales force. This operating segment also includes caulks and sealants for the consumer market and professional trade, sold through retailers, primarily in Australia.

 

 

 

The Engineering Adhesives operating segment produces and supplies high performance industrial adhesives to the transportation, electronics, medical, clean energy, appliance and heavy machinery markets. Engineering Adhesives sales are made through both a direct sales force and distributors.

 

Financial information with respect to our operating segments and geographic areas is set forth in Note 14 to the Consolidated Financial Statements.

 

Non-U.S. Operations

 

The principal markets, products and methods of distribution outside the United States vary with each of our regional operations generally maintaining integrated business units that contain dedicated supplier networks, manufacturing, logistics and sales organizations. The vast majority of the products sold within any region are produced within the region, and the respective regions do not import significant amounts of product from other regions. At the end of 2016, we had sales offices and manufacturing plants in 19 countries outside the United States and satellite sales offices in another 18 countries.

 

We have detailed Code of Conduct policies that we apply across all of our operations around the world. These policies represent a set of common values that apply to all employees and all of our business dealings. We have adopted policies and processes, and conduct employee training, all of which are intended to ensure compliance with various economic sanctions and export controls, including the regulations of the U.S. Treasury Department’s Office of Foreign Assets Control. We do not conduct any business in countries that are subject to U.S. economic sanctions such as Cuba, Iran, North Korea, Sudan and Syria.

 

Competition

 

Many of our markets are highly competitive. However, we compete effectively due to the quality and breadth of our adhesives, sealants and specialty chemical portfolio and the experience and expertise of our commercial organizations. Within the adhesives and other specialty chemical markets, we believe few suppliers have comparable global reach and corresponding ability to deliver quality and consistency to multinational customers. Our competition is made up generally of two types of companies: (1) similar multinational suppliers and (2) regional or specialty suppliers that typically compete in only one region or within a narrow geographic area within a region. The multinational competitors typically maintain a broad product offering and range of technology, while regional or specialty companies tend to have limited or more focused product ranges and technology.

 

Principal competitive factors in the sale of adhesives and other specialty chemicals are product performance, supply assurance, technical service, quality, price and customer service.

 

Customers

 

We have cultivated strong, integrated relationships with a diverse set of customers worldwide. Our customers are among the technology and market leaders in consumer goods, construction, and industrial markets. We pride ourselves on long-term, collaborative customer relationships and a diverse portfolio of customers in which no single customer accounted for more than 10 percent of consolidated net revenue.

 

Our leading customers include manufacturers of food and beverages, hygiene products, clothing, major appliances, electronics, automobiles, filters, construction materials, wood flooring, furniture, cabinetry, windows, doors, tissue and towel, corrugation, tube winding, packaging, labels and tapes.

 

Our products are delivered directly to customers primarily from our manufacturing plants, with additional deliveries made through distributors and retailers.

 

Backlog

 

No significant backlog of unfilled orders existed at December 3, 2016 or November 28, 2015.

 

 

 

Raw Materials

 

We use several principal raw materials in our manufacturing processes, including tackifying resins, polymers, synthetic rubbers, vinyl acetate monomer and plasticizers. We generally avoid sole source supplier arrangements for raw materials.

 

The majority of our raw materials are petroleum/natural gas based derivatives. Under normal conditions, raw materials are available on the open market. Prices and availability are subject to supply and demand market mechanisms. Raw material costs are primarily determined by the balance of supply against the aggregate demand from the adhesives industry and other industries that use the same raw material streams. The cost of crude oil and natural gas, the primary feedstocks for our raw materials, can also impact the cost of our raw materials.

 

Patents, Trademarks and Licenses

 

Much of the technology we use in our products and manufacturing processes is available in the public domain. For technology not available in the public domain, we rely on trade secrets and patents when appropriate to protect our competitive position. We also license some patented technology from other sources. Our business is not materially dependent upon licenses or similar rights or on any single patent or group of related patents.

 

We enter into agreements with many employees to protect rights to technology and intellectual property. Confidentiality commitments also are routinely obtained from customers, suppliers and others to safeguard proprietary information.

 

We own numerous trademarks and service marks in various countries. Trademarks, such as H.B. Fuller®, Swift®, Advantra®, Clarity®, Sesame®, TEC®, Plasticola®, Foster®, Rakoll®, Rapidex®, Full-CareTM, Liquamelt®, Thermonex® and TONSAN® are important in marketing products. Many of our trademarks and service marks are registered. U.S. trademark registrations are for a term of ten years and are renewable every ten years as long as the trademarks are used in the regular course of trade.

 

Research and Development

 

Our investment in research and development creates new and innovative adhesive technology platforms, enhances product performance, ensures a competitive cost structure and leverages available raw materials. New product development is a key research and development outcome, providing higher-value solutions to existing customers or meeting new customers’ needs. Projects are developed in local laboratories in each region, where we understand our customer base the best. Platform developments are coordinated globally through our network of laboratories.

 

Through designing and developing new polymers and new formulations, we expect to continue to grow in our current markets. We also develop new applications for existing products and technologies, and improve manufacturing processes to enhance productivity and product quality. Research and development efforts are closely aligned to customer needs, but we do not engage in customer sponsored activities. We foster open innovation, seek supplier-driven new technology and use relationships with academic and other institutions to enhance our capabilities.

 

Research and development expenses were $28.6 million, $26.2 million and $21.2 million in 2016, 2015 and 2014, respectively. Research and development costs are included in selling, general and administrative expenses.

 

Environmental, Health and Safety

 

We comply with applicable regulations relating to environmental protection and workers' safety. This includes regular review of and upgrades to environmental, health and safety policies, practices and procedures as well as improved production methods to minimize our facilities’ outgoing waste, based on evolving societal standards and increased environmental understanding.

 

Expenditures to comply with environmental regulations over the next two years are estimated to be approximately $11.5 million, including approximately $1.9 million of capital expenditures. See additional disclosure under Item 3. Legal Proceedings.

 

 

 

Seasonality

 

Our operating segments have historically had lower net revenue in winter months, which is primarily our first fiscal quarter, mainly due to international holidays and the seasonal decline in construction and consumer spending activities.

 

Employees

 

We employed approximately 4,600 individuals on December 3, 2016, of which approximately 1,500 were located in the United States.

 

Executive Officers of the Registrant

 

The following table shows the name, age and business experience for the past five years of the executive officers as of January 20, 2017. Unless otherwise noted, the positions described are positions with the company or its subsidiaries.

 

Name

Age

 

Positions

 

Period Served

           

James J. Owens

52

 

President and Chief Executive Officer

 

November 2010 - Present

           

Zhiwei Cai

54

 

Vice President, Engineering Adhesives

 

February 2016 - Present

     

Vice President, TONSAN and Electronics

 

2014 - 2016

     

Director, Electronics Materials

 

2012 - 2014

     

Vice President, Global Business Development, Henkel Electronics Material, Henkel Corporation (global manufacturer of adhesives, sealants and surface treatments)

 

2008 - 2010

           

Heather A. Campe

43

 

Senior Vice President, Americas Adhesives

 

October 2016 - Present

     

Vice President, Asia Pacific

 

2013 - 2016

     

Director, Hygiene

 

2010 - 2012

           

Paula M. Cooney

48

 

Vice President, Human Resources

 

April 2016 - Present

     

Director, Global Human Resources Strategic Programs

 

2010 - 2016

           

John J. Corkrean

51

 

Executive Vice President & Chief Financial Officer

 

May 2016 - Present

     

Senior Vice President, Finance - Global Energy Services, NALCO Champion, an Ecolab Inc. company (supplier of chemicals and related services to the oil & gas industry)

 

2014 - 2016

     

Senior Vice President and Corporate Controller, Ecolab Inc. (global provider of water, hygiene and energy technologies and services)

 

2008 - 2014

           

Dietrich J. Crail

46

 

Vice President, Asia Pacific

 

October 2016 - Present

     

Vice President, Paper Converting and Construction, Henkel Corporation (global manufacturer of adhesives, sealants and surface treatments)

 

2013 - 2016

     

Vice President & Global Segment Leader, Pressure Sensitive Adhesives, Henkel Corporation

 

2008 - 2014

           

Elin E. Gabriel

53

 

Vice President, Global Operations

Chief Operating Officer, Alvogen (a multinational pharmaceuticals company)

 

June 2014 - Present

2010 - 2013

 

 

James R. Giertz

59

 

Executive Vice President, Strategy

Executive Vice President, Chief Financial Officer

Senior Vice President, Chief Financial Officer

 

May 2016 - Present

2013 - 2016

2008 - 2013

           

Traci L. Jensen

50

 

Senior Vice President, Global Construction Products

Senior Vice President, Americas Adhesives

Vice President, Americas Adhesives

 

July 2016 - Present

2013 - 2016

2011 - 2013

           

Timothy J. Keenan

59

 

Vice President, General Counsel and Corporate Secretary

 

December 2006 - Present

           

Steven Kenny

55

 

Senior Vice President, Emerging Markets

Senior Vice President, Europe, India, Middle East and Africa (EIMEA)

 

June 2015 - Present

2009 - 2015

           

Patrick M. Kivits

49

 

Senior Vice President, EIMEA

 

September 2015 - Present

     

Corporate Vice President and General Manager, Henkel Corporation (global manufacturer of adhesives, sealants and surface treatments)

 

2013 - 2015

     

Vice President, Henkel AG & Co. KGaA

 

2011 - 2013

           

Ebrahim Rezai

65

 

Vice President and Chief Technology and Innovation Officer

 

October 2016 - Present

     

Associate Director, Baby and Feminine Care Global Material Development and Supply Organization, Procter & Gamble (multinational manufacturer of family, personal and household care products)

 

2015 - 2016

     

Associate Director, Baby Care Global Material Development and Supply Organization, Procter & Gamble

 

2005 - 2015

 

The Board of Directors elects the executive officers annually.

 

Available Information

 

For more information about us, visit our website at: www.hbfuller.com.

 

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”) via EDGAR. Our SEC filings are available free of charge to the public at our website as soon as reasonably practicable after they have been filed with or furnished to the SEC.

 

Item 1A. Risk Factors

 

As a global manufacturer of adhesives, sealants and other specialty chemical products, we operate in a business environment that is subject to various risks and uncertainties. Below are the most significant factors that could adversely affect our business, financial condition and results of operations.

 

Macroeconomic and Industry Risks

 

Uncertainties in foreign economic, political, regulatory and social conditions and fluctuations in foreign currency may adversely affect our results. 

 

Approximately 58 percent, or $1.2 billion, of our net revenue was generated outside the United States in 2016. International operations could be adversely affected by changes in economic, political, regulatory, and social conditions, especially in Russia, China, the Middle East, including Turkey and Egypt, and other developing or emerging markets where we do business. An economic downturn in the businesses or geographic areas in which we sell our products could reduce demand for these products and result in a decrease in sales volume that could have a negative impact on our results of operations. Product demand often depends on end-use markets. Economic conditions that reduce consumer confidence or discretionary spending may reduce product demand. Challenging economic conditions may also impair the ability of our customers to pay for products they have purchased, and as a result, our reserves for doubtful accounts and write-offs of accounts receivable may increase. In addition, trade protection measures, anti-bribery and anti-corruption regulations, restrictions on repatriation of earnings, differing intellectual property rights and changes in legal and regulatory requirements that restrict the sales of products or increase costs could adversely affect our results of operations.

 

 

Fluctuations in exchange rates between the U.S. dollar and other currencies could potentially result in increases or decreases in net revenue, cost of raw materials and earnings and may adversely affect the value of our assets outside the United States. In 2016, the change in foreign currencies negatively impacted our net revenue by approximately $38 million. In 2016, we spent approximately $1.1 billion for raw materials worldwide of which approximately $623.3 million was purchased outside the United States. Based on 2016 financial results, a hypothetical one percent change in our cost of sales due to foreign currency rate changes would have resulted in a change in net income of approximately $4.7 million or $0.09 per diluted share. Although we utilize risk management tools, including hedging, as appropriate, to mitigate market fluctuations in foreign currencies, any changes in strategy in regard to risk management tools can also affect revenue, expenses and results of operations and there can be no assurance that such measures will result in cost savings or that all market fluctuation exposure will be eliminated.

 

Distressed financial markets may result in dramatic deflation of asset valuations and a general disruption in capital markets. 

 

Adverse equity market conditions and volatility in the credit markets could have a negative impact on the value of our pension trust assets, our future estimated pension liabilities and other postretirement benefit plans. In addition, we could be required to provide increased pension plan funding. As a result, our financial results could be negatively impacted. Reduced access to capital markets may affect our ability to invest in strategic growth initiatives such as acquisitions. In addition, the reduced credit availability could limit our customers’ ability to invest in their businesses, refinance maturing debt obligations, or meet their ongoing working capital needs. If these customers do not have sufficient access to the financial markets, demand for our products may decline.

 

Operational Risks

 

Increases in prices and declines in the availability of raw materials could negatively impact our financial results. 

 

In 2016, raw material costs made up over 75 percent of our cost of sales. Accordingly, changes in the cost of raw materials can significantly impact our earnings. Raw materials needed to manufacture products are obtained from a number of suppliers and many of the raw materials are petroleum and natural gas based derivatives. Under normal market conditions, these raw materials are generally available on the open market from a variety of producers. While alternate supplies of most key raw materials are available, supplier production outages may lead to strained supply-demand situations for certain raw materials. The substitution of key raw materials requires us to identify new supply sources, reformulate, re-test and may require seeking re-approval from our customers using those products. From time to time, the prices and availability of these raw materials may fluctuate, which could impair our ability to procure necessary materials, or increase the cost of manufacturing products. If the prices of raw materials increase in a short period of time, we may be unable to pass these increases on to our customers in a timely manner and could experience reductions to our profit margins. Based on 2016 financial results, a hypothetical one percent change in our raw material costs would have resulted in a change in net income of approximately $7.7 million or $0.15 per diluted share.

 

We experience substantial competition in each of the operating segments and geographic areas in which we operate.

 

Our wide variety of products are sold in numerous markets, each of which is highly competitive. Our competitive position in markets is, in part, subject to external factors. For example, supply and demand for certain of our products is driven by end-use markets and worldwide capacities which, in turn, impact demand for and pricing of our products. Many of our direct competitors are part of large multinational companies and may have more resources than we do. Any increase in competition may result in lost market share or reduced prices, which could result in reduced profit margins. This may impair the ability to grow or even to maintain current levels of revenues and earnings. While we have an extensive customer base, loss of certain top customers could adversely affect our financial condition and results of operations until such business is replaced, and no assurances can be made that we would be able to regain or replace any lost customers.

 

 

Failure to develop new products and protect our intellectual property could negatively impact our future performance and growth. 

 

Ongoing innovation and product development are important factors in our competitiveness. Failure to create new products and generate new ideas could negatively impact our ability to grow and deliver strong financial results. We continually apply for and obtain U.S. and foreign patents to protect the results of our research for use in our operations and licensing. We are party to a substantial number of patent licenses and other technology agreements. We rely on patents, confidentiality agreements and internal security measures to protect our intellectual property. Failure to protect this intellectual property could negatively affect our future performance and growth.

 

We may be required to record impairment charges on our long-lived assets. 

 

Weak demand may cause underutilization of our manufacturing capacity or elimination of product lines; contract terminations or customer shutdowns may force sale or abandonment of facilities and equipment; or other events associated with weak economic conditions or specific product or customer events may require us to record an impairment on tangible assets, such as facilities and equipment, as well as intangible assets, such as intellectual property or goodwill, which would have a negative impact on our financial results.

 

Catastrophic events could disrupt our operations or the operations of our suppliers or customers, having a negative impact on our financial results. 

 

Unexpected events, including natural disasters and severe weather events, fires or explosions at our facilities or those of our suppliers, acts of war or terrorism, supply disruptions or breaches of security of our information technology systems could increase the cost of doing business or otherwise harm our operations, our customers and our suppliers. Such events could reduce demand for our products or make it difficult or impossible for us to receive raw materials from suppliers and deliver products to our customers.

 

A failure in our information technology systems could negatively impact our business. 

 

We rely on information technology to record and process transactions, manage our business and maintain the financial accuracy of our records. Our computer systems are subject to damage or interruption from various sources, including power outages, computer and telecommunications failures, computer viruses, security breaches, vandalism, catastrophic events and human error. Interruptions of our computer systems could disrupt our business and could result in the loss of business and cause us to incur additional expense.

 

Information technology security threats are increasing in frequency and sophistication. Our information technology systems could be breached by unauthorized outside parties or misused by employees or other insiders intent on extracting sensitive information, corrupting information or disrupting business processes. Such unauthorized access could compromise confidential information, disrupt our business, harm our reputation, result in the loss of assets, customer confidence and business and have a negative impact on our financial results.

 

We are in the process of implementing a global Enterprise Resource Planning (“ERP”) system, which we refer to as Project ONE, which will upgrade and standardize our information system. The implementation is expected to occur in phases over the next several years. The North America adhesives business went live in 2014, and the implementation process proved to be more difficult than we originally anticipated resulting in disruptions in our manufacturing network, lower productivity and deteriorated customer service levels. By the end of 2014, most of the problems associated with the software implementation had been remediated and the business was stable and running at capacity with productivity levels approaching the levels experienced prior to the new software implementation. In late 2014, we suspended any further implementation projects in other geographic regions until we complete the optimization of the current platform in North America. We are preparing a revised implementation plan that leverages the experiences of our first go-live event and reduces the risk of significant business interruption. We expect to start subsequent implementations in the first half of 2017 with completion of the second phase in the Latin America region expected in 2018.

 

Any delays or other failure to achieve our implementation goals may adversely impact our financial results. In addition, the failure to either deliver the application on time or anticipate the necessary readiness and training needs could lead to business disruption and loss of business. Failure or abandonment of any part of the ERP system could result in a write-off of part or all of the costs that have been capitalized on the project.

 

 

 

Risks associated with acquisitions could have an adverse effect on us and the inability to execute organizational restructuring may affect our results.

 

As part of our growth strategy, we have made and intend to pursue additional acquisitions of complementary businesses or products and joint ventures. The ability to grow through acquisitions or joint ventures depends upon our ability to identify, negotiate, complete and integrate suitable acquisitions or joint venture arrangements. If we fail to successfully integrate acquisitions into our existing business, our results of operations and our cash flows could be adversely affected. Our acquisition strategy also involves other risks and uncertainties, including distraction of management from current operations, greater than expected liabilities and expenses, inadequate return on capital, unidentified issues not discovered in our investigations and evaluations of those strategies and acquisitions and difficulties implementing and maintaining consistent standards, controls, procedures, policies and systems. Future acquisitions could result in debt, dilution, liabilities, increased interest expense, restructuring charges and amortization expenses related to intangible assets.

 

In addition, our profitability is dependent on our ability to drive sustainable productivity improvements such as cost savings through organizational restructuring. Delays or unexpected costs may prevent us from realizing the full operational and financial benefits of such restructuring initiatives and may potentially disrupt our operations.

 

Legal and Regulatory Risks

 

We have lawsuits and claims against us with uncertain outcomes.

 

Our operations from time to time are parties to or targets of lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. The results of any future litigation or settlement of such lawsuits and claims are inherently unpredictable, but such outcomes could be adverse and material in amount. See Item 3. Legal Proceedings for a discussion of current litigation.

 

Costs and expenses resulting from compliance with environmental laws and regulations may negatively impact our operations and financial results. 

 

We are subject to numerous environmental laws and regulations that impose various environmental controls on us or otherwise relate to environmental protection, the sale and export of certain chemicals or hazardous materials, and various health and safety matters. The costs of complying with these laws and regulations can be significant and may increase as applicable requirements and their enforcement become more stringent and new rules are implemented. Adverse developments and/or periodic settlements could negatively impact our results of operations and cash flows. See Item 3. Legal Proceedings for a discussion of current environmental matters.

 

Additional income tax expense or exposure to additional income tax liabilities could have a negative impact on our financial results. 

 

We are subject to income tax laws and regulations in the United States and various foreign jurisdictions.  Significant judgment is required in evaluating and estimating our provision and accruals for these taxes.  Our income tax liabilities are dependent upon the location of earnings among these different jurisdictions.  Our income tax provision and income tax liabilities could be adversely affected by the jurisdictional mix of earnings, changes in valuation of deferred tax assets and liabilities and changes in tax laws and regulations.  In the ordinary course of our business, we are also subject to continuous examinations of our income tax returns by tax authorities.  Although we believe our tax estimates are reasonable, the final results of any tax examination or related litigation could be materially different from our related historical income tax provisions and accruals.  Adverse developments in an audit, examination, litigation related to previously filed tax returns, or in the relevant jurisdiction’s tax laws, regulations, administrative practices, principles and interpretations could have a material effect on our results of operations and cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods. 

 

Item 1B. Unresolved Staff Comments

 

None.

 

 

Item 2. Properties

 

Principal executive offices and central research facilities are located in the St. Paul, Minnesota area. These facilities are company-owned and contain 247,630 square feet. Manufacturing operations are carried out at 21 plants located throughout the United States and at 27 plants located in 18 other countries. In addition, numerous sales and service offices are located throughout the world. We believe that the properties owned or leased are suitable and adequate for our business. Operating capacity varies by product line, but additional production capacity is available for most product lines by increasing the number of shifts worked. The following is a list of our manufacturing plants as of December 3, 2016 (each of the listed properties are owned by us, unless otherwise specified):

 

Segment

 

Manufacturing

Sq Ft

 

Segment

 

Manufacturing

Sq Ft

 

Americas Adhesives

       

Asia Pacific

       

California - Roseville

    82,202  

Australia - Dandenong South, VIC

    71,280  

Georgia - Covington

    73,500  

 - Sydney 1

    12,968  

- Tucker

    69,000  

Republic of China - Guangzhou

    36,055  

Illinois - Seneca

    24,621  

- Nanjing

    55,224  

Kentucky - Paducah

    252,500  

Indonesia - Mojokerto

    52,991  

Michigan - Grand Rapids

    65,689  

Malaysia - Selongor

    21,900  

Minnesota - Fridley

    15,850  

New Zealand - Auckland1

    7,330  

- Vadnais Heights

    53,145  

Philippines - Manila

    9,295  

Ohio - Blue Ash

    102,000  

Asia Pacific Total

    267,043  

Texas - Mesquite

    25,000            

Washington - Vancouver

    35,768  

EIMEA

       

Argentina - Buenos Aires

    10,367  

Egypt - 6th of October City

    8,525  

Brazil - Sorocaba, SP2

    7,535  

Finland - Espoo2

    5,575  

- Curitiba1

    9,896  

France - Blois

    48,438  

Chile - Maipu, Santiago

    64,099  

- Surbourg

    21,743  

Colombia - Rionegro

    17,072  

Germany - Lueneburg

    64,249  

Americas Adhesives Total

    908,244  

- Nienburg

    139,248  
         

- Pirmasens2

    48,438  

Construction Products

       

Greece - Lamia

    11,560  

California - La Mirada

    15,206  

India - Pune

    38,782  

Florida - Gainesville

    6,800  

Italy - Borgolavezzaro2

    24,219  

Georgia - Dalton

    72,000  

- Pianezze

    36,500  

Illinois - Aurora

    149,000  

Portugal - Mindelo

    90,193  

- Palatine2

    55,000  

Spain - Vigo2

    19,375  

New Jersey - Edison

    9,780  

United Kingdom - Dukinfield

    17,465  

Pennsylvania - Fairless Hills

    19,229  

EIMEA Total

    574,310  

Texas - Eagle Lake

    26,000            

- Houston

    11,000  

Engineering Adhesives

       

Construction Products Total

    364,015  

Republic of China - Beijing

    78,120  
         

- Beijing1

    42,044  
         

- Suzhou

    73,622  

1 Leased Property

       

- Yantai

    23,890  

2 Idle Property

       

Germany - Wunstorf

    16,146  
         

Georgia - Norcross1

    21,755  
         

Illinois - Batavia1

    19,169  
         

Engineering Adhesives Total

    274,746  

 

 

 

Item 3. Legal Proceedings

 

Environmental Matters  

 

From time to time, we become aware of compliance matters relating to, or receive notices from, federal, state or local entities regarding possible or alleged violations of environmental, health or safety laws and regulations. We review the circumstances of each individual site, considering the number of parties involved, the level of potential liability or our contribution relative to the other parties, the nature and magnitude of the hazardous substances involved, the method and extent of remediation, the estimated legal and consulting expense with respect to each site and the time period over which any costs would likely be incurred. Also, from time to time, we are identified as a potentially responsible party (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act and/or similar state laws that impose liability for costs relating to the clean up of contamination resulting from past spills, disposal or other release of hazardous substances. We are also subject to similar laws in some of the countries where current and former facilities are located. Our environmental, health and safety department monitors compliance with applicable laws on a global basis. To the extent we can reasonably estimate the amount of our probable liabilities for environmental matters, we establish a financial provision. 

 

Currently we are involved in various environmental investigations, clean up activities and administrative proceedings and lawsuits. In particular, we are currently deemed a PRP in conjunction with numerous other parties, in a number of government enforcement actions associated with landfills and/or hazardous waste sites. As a PRP, we may be required to pay a share of the costs of investigation and clean up of these sites. In addition, we are engaged in environmental remediation and monitoring efforts at a number of current and former operating facilities. While uncertainties exist with respect to the amounts and timing of the ultimate environmental liabilities, based on currently available information, we have concluded that these matters, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flow. However, adverse developments and/or periodic settlements could negatively impact the results of operations or cash flows in one or more future periods.

 

Other Legal Proceedings  

 

From time to time and in the ordinary course of business, we are a party to, or a target of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, contract, patent and intellectual property, environmental, health and safety, tax and employment matters. While we are unable to predict the outcome of these matters, we have concluded, based upon currently available information, that the ultimate resolution of any pending matter, individually or in the aggregate, including the asbestos litigation described in the following paragraphs, will not have a material adverse effect on our results of operations, financial condition or cash flow.

 

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

 

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

 

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

 

  

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

 

   

Year Ended

   

Year Ended

   

Year Ended

 
   

December 3,

   

November 28,

   

November 29,

 

($ in millions)

 

2016

   

2015

   

2014

 

Lawsuits and claims settled

    14       10       9  

Settlement amounts

  $ 1.4     $ 0.9     $ 0.8  

Insurance payments received or expected to be received

  $ 0.9     $ 0.7     $ 0.7  

 

We do not believe that it would be meaningful to disclose the aggregate number of asbestos-related lawsuits filed against us because relatively few of these lawsuits are known to involve exposure to asbestos-containing products that we manufactured. Rather, we believe it is more meaningful to disclose the number of lawsuits that are settled and result in a payment to the plaintiff. To the extent we can reasonably estimate the amount of our probable liabilities for pending asbestos-related claims, we establish a financial provision and a corresponding receivable for insurance recoveries. 

 

Based on currently available information, we have concluded that the resolution of any pending matter, including asbestos-related litigation, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flow.  However, adverse developments and/or periodic settlements could negatively impact the results of operations or cash flows in one or more future periods.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Part II.

 

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our common stock is traded on the New York Stock Exchange under the symbol FUL. As of January 20, 2017, there were 1,700 common shareholders of record for our common stock. The following table shows the high and low sales price per share of our stock and the dividends declared for the fiscal quarters.

 

   

High and Low Sales Price

                 
   

2016

   

2015

   

Dividends (Per Share)

 
   

High

   

Low

   

High

   

Low

   

2016

   

2015

 

First quarter

  $ 39.81     $ 32.71     $ 45.99     $ 38.16     $ 0.130     $ 0.120  

Second quarter

    45.59       38.49       45.54       40.53       0.140       0.130  

Third quarter

    48.36       41.89       48.32       34.57       0.140       0.130  

Fourth quarter

    48.82       41.81       40.35       30.72       0.140       0.130  

 

There are no significant contractual restrictions on our ability to declare or pay dividends. We currently expect that comparable dividends on our common stock will continue to be paid in the future.

 

 

 

Issuer Purchases of Equity Securities

 

Information on our purchases of equity securities during the fourth quarter of 2016 follows:

 

Period

 

(a)

Total

Number of

Shares

Purchased1

   

(b)

Average

Price Paid

per Share

   

(c)

Total Number of

Shares

Purchased as

Part of a Publicly

Announced Plan

or Program

   

(d)

Maximum

Approximate Dollar

Value of Shares that

may yet be

Purchased Under the

Plan or Program

(thousands)

 
                                 

August 28, 2016 - October 1, 2016

    164,457     $ 44.95       164,392     $ 27,971  
                                 

October 2, 2016 - October 29, 2016

    85,608     $ 45.96       85,608     $ 24,036  
                                 

October 30, 2016 - December 3, 2016

    -     $ -       -     $ 24,036  

 

1   The number of shares purchased relates to 65 shares withheld to satisfy employees’ withholding taxes upon vesting of restricted stock and 250,000 shares purchased under the 2010 share repurchase plan. See Note 9 to the Consolidated Financial Statements for more information.

 

Total Shareholder Return Graph

 

The line graph below compares the cumulative total shareholder return on our common stock for the last five fiscal years with cumulative total return on the S&P Small Cap 600 Index and Dow Jones U.S. Specialty Chemicals Index. This graph assumes a $100 investment in each of H.B. Fuller, the S&P Small Cap 600 Index and the Dow Jones U.S. Specialty Chemicals Index at the close of trading on December 3, 2011, and also assumes the reinvestment of all dividends.

 

 

Item 6. Selected Financial Data

 

The following selected financial data has been derived from our audited Consolidated Financial Statements and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes included elsewhere in the Form 10-K.

 

(Dollars in thousands, except per share amounts)

 

Fiscal Years3

 
      2016 2       2015       2014       2013       2012  

Net revenue

  $ 2,094,605     $ 2,083,660     $ 2,104,454     $ 2,046,968     $ 1,886,239  
                                         

Income from continuing operations1

  $ 124,382     $ 88,397     $ 50,151     $ 95,975     $ 68,287  

Percent of net revenue

    5.9       4.2       2.4       4.7       3.6  

Total assets

  $ 2,058,254     $ 2,042,252     $ 1,869,006     $ 1,873,028     $ 1,786,320  

Long-term debt, excluding current maturities

  $ 588,145     $ 669,606     $ 547,735     $ 472,315     $ 475,112  

Total H.B. Fuller stockholders' equity

  $ 937,876     $ 872,920     $ 890,047     $ 930,065     $ 778,273  
                                         

Per Common Share:

                                       
                                         

Income from continuing operations:

                                       

Basic

  $ 2.48     $ 1.75     $ 1.00     $ 1.92     $ 1.37  

Diluted

  $ 2.42     $ 1.71     $ 0.97     $ 1.87     $ 1.34  
                                         

Dividends declared and paid

  $ 0.550     $ 0.510     $ 0.460     $ 0.385     $ 0.330  

Book value4

  $ 18.70     $ 17.43     $ 17.69     $ 18.52     $ 15.60  
                                         

Number of employees

    4,587       4,425       3,650       3,676       3,727  

 

1 2016, 2015, 2014, 2013 and 2012 include after-tax charges of $0.1 million, $4.7 million, $45.2 million, $35.3 million and $35.4 million, respectively, related to special charges, net.

 

2 2016 contained 53 weeks

 

3 All amounts have been adjusted for discontinued operations.

 

4 Book value is calculated by dividing total H.B. Fuller stockholders' equity by the number of common stock shares outstanding as of our fiscal year end.

 

 

 

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

H.B. Fuller Company is a global formulator, manufacturer and marketer of adhesives and other specialty chemical products. We manage our business through five operating segments - Americas Adhesives, EIMEA (Europe, India, Middle East and Africa), Asia Pacific, Construction Products and Engineering Adhesives.

 

The Americas Adhesives, EIMEA and Asia Pacific operating segments manufacture and supply adhesives products in the assembly, packaging, converting, nonwoven and hygiene, performance wood, flooring, textile, flexible packaging, graphic arts, and envelope markets. The Construction Products operating segment provides floor preparation, grouts and mortars for tile setting as well as sealants and related products for heating, ventilation and air conditioning installations. The Engineering Adhesives operating segment provides high-performance adhesives to the transportation, electronics, medical, clean energy, appliance and heavy machinery markets.

 

Total Company

 

When reviewing our financial statements, it is important to understand how certain external factors impact us. These factors include:

 

 

Changes in the prices of our raw materials that are primarily derived from refining crude oil and natural gas

 

 

Global supply of and demand for raw materials

 

 

Economic growth rates, and

 

 

Currency exchange rates compared to the U.S. dollar

 

 

We purchase thousands of raw materials, the majority of which are petroleum/natural gas derivatives. The price of these derivatives impacts the cost of our raw materials. However, the supply of and demand for key raw materials has a greater impact on our costs. As demand increases in high-growth areas, the supply of key raw materials may tighten, resulting in certain materials being put on allocation. Natural disasters, such as hurricanes, also can have an impact as key raw material producers are shut down for extended periods of time. We continually monitor capacity utilization figures, market supply and demand conditions, feedstock costs and inventory levels, as well as derivative and intermediate prices, which affect our raw materials. With over 75 percent of our cost of sales accounted for by raw materials, our financial results are extremely sensitive to changing costs in this area.

 

In 2016, we generated 42 percent of our net revenue in the United States and 29 percent in EIMEA. The pace of economic growth in these areas directly impacts certain industries to which we supply products. For example, adhesives-related revenues from durable goods customers in areas such as appliances, furniture and other woodworking applications tend to fluctuate with the overall economic activity. In business components such as construction products and insulating glass, revenues tend to move with more specific economic indicators such as housing starts and other construction-related activity.

 

The movement of foreign currency exchange rates as compared to the U.S. dollar impacts the translation of the foreign entities’ financial statements into U.S. dollars. As foreign currencies weaken against the dollar, our revenues and costs decrease as the foreign currency-denominated financial statements translate into fewer dollars. The fluctuations of the Euro against the U.S. dollar have the largest impact on our financial results as compared to all other currencies. In 2016, the currency fluctuations had a negative impact on net revenue of approximately $38 million as compared to 2015.

 

Key financial results and transactions for 2016 included the following:

 

 

Net revenue increased 0.5 percent from 2015 primarily driven by a 3.9 percent increase in sales volume offset by a 1.8 percent decrease in currency and a 1.6 percent decrease in product pricing.

 

 

Gross profit margin increased to 29.1 percent from 27.3 percent in 2015.

 

 

Every five or six years we have a 53rd week in our fiscal year. 2016 was a 53-week year which increased our revenue and costs by approximately 2 percent.

 

 

Cash flow generated by operating activities from continuing operations was $195.7 million in 2016 as compared to $210.5 million in 2015 and $29.7 million in 2014.

 

 

We acquired Advanced Adhesives on April 29, 2016 for $10.4 million and Cyberbond on June 8, 2016 for $42.5 million.

 

 

 

The global economic conditions showed little to no improvement in 2016. Our total year constant currency sales growth, which we define as the combined variances from product pricing, sales volume and small acquisitions, increased 2.3 percent for 2016 compared to 2015.

 

In 2016, our diluted earnings per share from continuing operations was $2.42 per share compared to $1.71 per share in 2015 and $0.97 per share in 2014. The higher earnings per share from continuing operations in 2016 compared to 2015 resulted from higher sales volume, lower raw material costs and lower special charges.

 

Project ONE

 

In December of 2012 our Board of Directors approved a multi-year project to replace and enhance our existing core information technology platforms. The scope for this project includes most of the basic transaction processing for the company including customer orders, procurement, manufacturing, and financial reporting. The project envisions harmonized business processes for all of our operating segments supported with one standard software configuration. The execution of this project, which we refer to as Project ONE, is being supported by internal resources and consulting services.

 

During 2013 a project team was formed and the global blueprint for the software configuration was designed and built. In the latter half of 2013 and in the early months of 2014, the global blueprint was applied to the specific requirements of our North America adhesives business, the software was tested and the user groups were trained. On April 6, 2014, our North America adhesives business went live. The implementation process proved to be more difficult than we originally anticipated resulting in disruptions in our manufacturing network, lower productivity and deteriorated customer service levels. By the end of 2014, most of the problems associated with the software implementation had been remediated and the business was stable and running at capacity with productivity levels approaching the levels experienced prior to the new software implementation.

 

In late 2014, we suspended any further implementation projects in other geographic regions until we complete the optimization of the current platform in North America. We are preparing a revised implementation plan that leverages the experiences of our first go-live event and reduces the risk of significant business interruption. We expect to start subsequent implementations in 2017.

 

The original capital expenditure plan for Project ONE was approximately $60.0 million. In the fourth quarter of 2015 we received a cash settlement of $12.8 million as a result of an arbitration proceeding related to our initial implementation of Project ONE. Of this amount, $12.0 million was related to capital expenditures, which allowed us to reduce our total project-to-date capital expenditures to $31.3 million. Given the complexity of the initial implementation, we anticipate that the total investment to complete the project will exceed our original estimate. We will have a revised estimate of the total project costs and the expected completion timetable later in 2017 when the revised implementation plan is complete.

 

Our current plan is to proceed with the second phase implementation in our Latin America region with the project commencing in the first half of 2017 and completion expected in 2018. Subsequent phases of the global implementation will be evaluated following the completion of this second implementation.

 

Restructuring Plan

 

On December 7, 2016, the Company approved a restructuring plan (the “Plan”) related to organizational changes and other actions to optimize operations. In implementing the Plan, the Company expects to incur costs of approximately $17.0 million to $20.0 million ($13.0 million to $16.0 million after-tax) which includes (i) cash expenditures of approximately $13.0 million ($11.0 million after-tax) for severance and related employee costs globally and (ii) $4.0 million to $7.0 million ($3.0 million to $5.0 million after-tax) related to the optimization of production facilities, streamlining of processes and accelerated depreciation of long-lived assets. Approximately $15.0 million to $16.0 million ($12.0 million to $13.0 million after-tax) of the costs are expected to be cash costs. The Plan will be implemented beginning in the first quarter of 2017 and is currently expected to be completed by mid-year of fiscal 2018. The restructuring costs will be spread across the next several quarters as the measures are implemented with the majority of the costs occurring in fiscal 2017.

 

 

 

Critical Accounting Policies and Significant Estimates

 

Management’s discussion and analysis of our results of operations and financial condition are based upon the Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We believe the critical accounting policies and areas that require the most significant judgments and estimates to be used in the preparation of the Consolidated Financial Statements are pension and other postretirement plan assumptions; goodwill impairment assessment; long-lived assets recoverability; product, environmental and other litigation liabilities, income tax accounting and acquisition accounting.

 

Pension and Other Postretirement Plan Assumptions

 

We sponsor defined-benefit pension plans in both the U.S. and non-U.S. entities. Also in the U.S., we sponsor other postretirement plans for health care and life insurance benefits. Expenses and liabilities for the pension plans and other postretirement plans are actuarially calculated. These calculations are based on our assumptions related to the discount rate, expected return on assets, projected salary increases and health care cost trend rates. Note 10 to the Consolidated Financial Statements includes disclosure of assumptions employed in these measurements for both the non-U.S. and U.S. plans.

 

The discount rate assumption is determined using an actuarial yield curve approach, which results in a discount rate that reflects the characteristics of the plan. The approach identifies a broad population of corporate bonds that meet the quality and size criteria for the particular plan. We use this approach rather than a specific index that has a certain set of bonds that may or may not be representative of the characteristics of our particular plan. A higher discount rate reduces the present value of the pension obligations. The discount rate for the U.S. pension plan was 4.10 percent at December 3, 2016, as compared to 4.30 percent at November 28, 2015 and 4.10 percent at November 29, 2014. Net periodic pension cost for a given fiscal year is based on assumptions developed at the end of the previous fiscal year. A discount rate reduction of 0.5 percentage points at December 3, 2016 would increase U.S. pension and other postretirement plan expense approximately $0.2 million (pre-tax) in fiscal 2017. Discount rates for non-U.S. plans are determined in a manner consistent with the U.S. plan.

 

The expected long-term rate of return on plan assets assumption for the U.S. pension plan was 7.75 percent in 2016, 2015 and 2014.  Our expected long-term rate of return on U.S. plan assets was based on our target asset allocation assumption of 60 percent equities and 40 percent fixed-income. Management, in conjunction with our external financial advisors, determines the expected long-term rate of return on plan assets by considering the expected future returns and volatility levels for each asset class that are based on historical returns and forward looking observations. For 2016, the expected long-term rate of return on the target equities allocation was 8.75 percent and the expected long-term rate of return on the target fixed-income allocation was 5.0 percent. The total plan rate of return assumption included an estimate of the effect of diversification and the plan expense. For 2017, the expected long-term rate of return on assets will continue to be 7.75 percent with an expected long-term rate of return on the target equities allocation of 8.5 percent and an expected long-term rate of return on target fixed-income allocation of 5.0 percent. A change of 0.5 percentage points for the expected return on assets assumption would impact U.S. net pension and other postretirement plan expense by approximately $2.0 million (pre-tax).

 

Management, in conjunction with our external financial advisors, uses the actual historical rates of return of the asset categories to assess the reasonableness of the expected long-term rate of return on plan assets. The most recent 10-year and 20-year historical equity returns are shown in the table below.  Our expected rate of return on our total portfolio is consistent with the historical patterns observed over longer time frames.

 

 

 

U.S. Pension Plan

Historical actual rates of return

 

Total Portfolio

   

Equities

   

Fixed

Income 

 

10-year period

    5.3 %     4.7 %     7.7 %

20-year period

    8.6 %     8.3 %     (*) 7.7 %

 

(*) Beginning in 2006, our target allocation migrated from 100 percent equities to our current allocation of 60 percent equities and 40 percent fixed-income. The historical actual rate of return for the fixed income of 8.0 percent is since inception (10 years, 11 months).

 

The expected long-term rate of return on plan assets assumption for non-U.S. pension plans was a weighted-average of 6.20 percent in 2016 compared to 6.22 percent in 2015 and 6.17 percent in 2014. The expected long-term rate of return on plan assets assumption used in each non-U.S. plan is determined on a plan-by-plan basis for each local jurisdiction and is based on expected future returns for the investment mix of assets currently in the portfolio for that plan.  Management, in conjunction with our external financial advisors, develops expected rates of return for each plan, considers expected long-term returns for each asset category in the plan, reviews expectations for inflation for each local jurisdiction, and estimates the effect of active management of the plan’s assets. Our largest non-U.S. pension plans are in the United Kingdom and Germany. The expected long-term rate of return on plan assets for the United Kingdom was 6.75 percent and the expected long-term rate of return on plan assets for Germany was 5.75 percent. Management, in conjunction with our external financial advisors, uses actual historical returns of the asset portfolio to assess the reasonableness of the expected rate of return for each plan.

 

The projected salary increase assumption is based on historic trends and comparisons to the external market. Higher rates of increase result in higher pension expenses. As this rate is also a long-term expected rate, it is less likely to change on an annual basis. In the U.S., we have used the rate of 4.50 percent for 2016, 2015 and 2014. Benefits under the U.S. Pension Plan were locked-in as of May 31, 2011 and no longer include compensation increases. The 4.50 percent rate is for the supplemental executive retirement plan only. Projected salary increase assumption for non-U.S. plans are determined in a manner consistent with the U.S. plans.

 

Goodwill

 

Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a purchase business combination. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to a reporting unit, it no longer retains its association with a particular acquisition, and all the activities within a reporting unit are available to support the value of goodwill. Accounting standards require us to test goodwill for impairment annually or more often if circumstances or events indicate a change in the estimated fair value may have occurred.

 

The goodwill impairment analysis is a two-step process. The first step used to identify potential impairment involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. We use a discounted cash flow approach to estimate the fair value of our reporting units. Our judgment is required in developing the assumptions for the discounted cash flow model. These assumptions include revenue growth rates, profit margin percentages, discount rates, perpetuity growth rates, future capital expenditures and working capital requirements. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered to not be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.

 

The second step of the process, if required, involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated impairment. The implied fair value of goodwill is determined in a manner similar to how goodwill is calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted.

 

In the fourth quarter of 2016, we conducted the required annual test of goodwill for impairment. We performed the goodwill impairment analysis by using a discount rate determined by management to result in the most representative fair value of the business as a whole. Based on this analysis, it was determined that the goodwill allocated to the EIMEA Construction reporting unit was impaired. As a result, a goodwill impairment charge of $0.8 million was recorded as of 2016. There were no indications of impairment for any of the remaining reporting units.

 

 

 

Of the goodwill balance of $366.2 million as of December 3, 2016, $98.9 million is allocated to the EIMEA reporting unit. The calculated fair value of this reporting unit exceeded its carrying value by approximately 60 percent. The goodwill balance in the Tonsan reporting unit as of December 3, 2016 is $114.4 million. The calculated fair value of this reporting unit exceeded its carrying value by approximately 30 percent. For both of these reporting units, the Company believes the calculated fair value exceeds the carrying value by a reasonable margin. For the remaining reporting units, the calculated fair value substantially exceeded the carrying value of the net assets.

 

If the economy or business environment falter and we are unable to achieve our assumed revenue growth rates or profit margin percentages, our projections used would need to be remeasured, which could impact the carrying value of our goodwill in one or more of our reporting units. See Note 6 to the Consolidated Financial Statements.

 

Recoverability of Long-Lived Assets

 

The assessment of the recoverability of long-lived assets reflects our assumptions and estimates. Factors that we must estimate when performing impairment tests include sales volume, prices, inflation, currency exchange rates, tax rates and capital spending. Significant judgment is involved in estimating these factors, and they include inherent uncertainties. The measurement of the recoverability of these assets is dependent upon the accuracy of the assumptions used in making these estimates and how the estimates compare to the eventual future operating performance of the specific businesses to which the assets are attributed.

 

Judgments made by us include the expected useful lives of long-lived assets. The ability to realize undiscounted cash flows in excess of the carrying amounts of such assets is affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance.

 

Product, Environmental and Other Litigation Liabilities

 

As disclosed in Item 3. Legal Proceedings and in Note 1 and Note 12 to the Consolidated Financial Statements, we are subject to various claims, lawsuits and other legal proceedings. Reserves for loss contingencies associated with these matters are established when it is determined that a liability is probable and the amount can be reasonably estimated. The assessment of the probable liabilities is based on the facts and circumstances known at the time that the financial statements are being prepared. For cases in which it is determined that a liability is probable but only a range for the potential loss exists, the minimum amount of the range is recorded and subsequently adjusted as better information becomes available.

 

For cases in which insurance coverage is available, the gross amount of the estimated liabilities is accrued, and a receivable is recorded for any probable estimated insurance recoveries. A discussion of environmental, product and other litigation liabilities is disclosed in Item 3. Legal Proceedings and Note 12 to the Consolidated Financial Statements.

 

Based upon currently available facts, we do not believe that the ultimate resolution of any pending legal proceeding, individually or in the aggregate, will have a material adverse effect on our long-term financial condition. However, adverse developments and/or periodic settlements could negatively affect our results of operations or cash flows in one or more future quarters.

 

Contingent Consideration Liability

 

Concurrent with a business acquisition, we entered into an agreement that requires us to pay the sellers a certain amount based upon a formula related to the entity’s gross profit in 2018. We use the income approach in calculating the fair value of this contingent consideration liability using a real option model. The significant judgments and assumptions utilized in the calculation of the contingent consideration liability include revenue growth rates, profit margin percentages, volatility and discount rate, which are sensitive to change. The change in fair value of the contingent consideration liability each reporting period is recorded in SG&A expenses in the Consolidated Statements of Income. See Notes 2 and 13 to the Consolidated Financial Statements for additional information.

 

Income Tax Accounting

 

As part of the process of preparing the Consolidated Financial Statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. The process involves estimating actual current tax expense along with assessing temporary differences resulting from differing treatment of items for book and tax purposes. These temporary differences result in deferred tax assets and liabilities, which are included in the Consolidated Balance Sheets. We record a valuation allowance to reduce our deferred tax assets to the amount that is more-likely-than-not to be realized. We have considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance. Increases in the valuation allowance result in additional expense to be reflected within the tax provision in the Consolidated Statements of Income. As of December 3, 2016, the valuation allowance to reduce deferred tax assets totaled $11.9 million.

 

 

We recognize tax benefits for tax positions for which it is more-likely-than-not that the tax position will be sustained by the applicable tax authority at the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement. We do not recognize a financial statement benefit for a tax position that does not meet the more-likely-than-not threshold. We believe that our liabilities for income taxes reflect the most likely outcome. It is difficult to predict the final outcome or the timing of the resolution of any particular tax position. Future changes in judgment related to the resolution of tax positions will impact earnings in the quarter of such change. We adjust our income tax liabilities related to tax positions in light of changing facts and circumstances. Settlement with respect to a tax position would usually require cash. Based upon our analysis of tax positions taken on prior year returns and expected tax positions to be taken for the current year tax returns, we have identified gross uncertain tax positions of $4.2 million as of December 3, 2016.

 

We have not recorded U.S. deferred income taxes for certain of our non-U.S. subsidiaries undistributed earnings as such amounts are intended to be indefinitely reinvested outside of the U.S. Should we change our business strategies related to these non-U.S. subsidiaries, additional U.S. tax liabilities could be incurred. It is not practical to estimate the amount of these additional tax liabilities. See Note 8 to the Consolidated Financial Statements for further information on income tax accounting.

 

Acquisition Accounting

 

As we enter into business combinations we perform acquisition accounting requirements including the following:

 

 

Identifying the acquirer,

 

Determining the acquisition date,

 

Recognizing and measuring the identifiable assets acquired and the liabilities assumed, and

 

Recognizing and measuring goodwill or a gain from a bargain purchase

 

We complete valuation procedures, and record the resulting fair value of the acquired assets and assumed liabilities based upon the valuation of the business enterprise and the tangible and intangible assets acquired. Enterprise value allocation methodology requires management to make assumptions and apply judgment to estimate the fair value of assets acquired and liabilities assumed. If estimates or assumptions used to complete the enterprise valuation and estimates of the fair value of the acquired assets and assumed liabilities significantly differed from assumptions made, the resulting difference could materially affect the fair value of net assets.

 

The calculation of the fair value of the tangible assets, including property, plant and equipment utilizes the cost approach, which computes the cost to replace the asset, less accrued depreciation resulting from physical deterioration, functional obsolescence and external obsolescence.  The calculation of the fair value of the identified intangible assets are determined using cash flow models following the income approach or a discounted market-based methodology approach. Significant inputs include estimated revenue growth rates, gross margins, operating expenses, estimated attrition rate, and a discount rate.  Goodwill is recorded as the difference in the fair value of the acquired assets and assumed liabilities and the purchase price.

 

Results of Operations

 

Net revenue

 

($ in millions)

 

2016

   

2015

   

2014

   

2016 vs 2015

   

2015 vs 2014

 

Net revenue

  $ 2,094.6     $ 2,083.7     $ 2,104.5       0.5 %     (1.0 )%

 

Net revenue in 2016 increased 0.5 percent from 2015. The 2015 net revenue was 1.0 percent lower than the net revenue in 2014. We review variances in net revenue in terms of changes related to product pricing, sales volume, changes in foreign currency exchange rates and large acquisitions. The pricing/sales volume variance and small acquisitions including Cyberbond, Advanced Adhesives, Tonsan Adhesive, Inc., Continental Products Limited and ProSpec construction products are viewed as constant currency growth. The following table shows the net revenue variance analysis for the past two years:

 

 

   

2016 vs 2015

   

2015 vs 2014

 

Product pricing

    (1.6 )%     0.5 %

Sales volume

    3.9 %     4.5 %

Currency

    (1.8 )%     (6.0 )%
      0.5 %     (1.0 )%

 

Constant currency growth was 2.3 percent in 2016 compared to 2015. The 2.3 percent constant currency growth in 2016 was driven by 27.3 percent growth in Engineering Adhesives, 8.5 percent growth in Asia Pacific and 2.0 percent growth in EIMEA, offset by a 5.8 percent decrease in Construction Products and 2.7 percent decrease in Americas Adhesives. The negative 1.8 percent currency impact was primarily driven by the devaluation of the Chinese renminbi, Euro, Egyptian pound, Turkish lira, Canadian dollar, Indian rupee, Australian dollar and Malaysian ringgit compared to the U.S. dollar.

 

Constant currency growth was 5.0 percent in 2015 compared to 2014. The 5.0 percent constant currency growth in 2015 was driven by 101.6 percent growth in Engineering Adhesives, 17.6 percent growth in Construction Products and 3.8 percent growth in Asia Pacific offset by a 4.3 percent decrease in Americas Adhesives and 2.0 percent decrease in EIMEA. The majority of the negative currency impact was driven by the weakening of the Euro, Turkish lira, Canadian dollar and Australian dollar against the U.S. dollar.

 

 

Cost of sales

 

($ in millions)

 

2016

   

2015

   

2014

   

2016 vs 2015

   

2015 vs 2014

 

Raw materials

  $ 1,121.4     $ 1,161.3     $ 1,213.5       (3.4 )%     (4.3 )%

Other manufacturing costs

    363.4       354.3       357.7       2.6 %     (1.0 )%

Cost of sales

  $ 1,484.8     $ 1,515.6     $ 1,571.2       (2.0 )%     (3.5 )%

Percent of net revenue

    70.9 %     72.7 %     74.7 %                

 

Raw material costs as a percentage of net revenue decreased 220 basis points in 2016 compared to 2015 due to lower raw material costs, sales mix and the 2015 impact of valuing inventories acquired in the Tonsan Adhesive, Inc. acquisition at fair value. Other manufacturing costs as a percentage of revenue increased 40 basis points compared to 2015. As a result, cost of sales as a percentage of net revenue decreased 180 basis points compared to 2015.

 

Raw material costs as a percentage of net revenue decreased 200 basis points in 2015 compared to 2014, reflecting decreases in raw materials costs as well as changes in product pricing and sales mix. Other manufacturing costs as a percentage of revenue remained flat compared to 2014. As a result, cost of sales as a percentage of net revenue decreased 200 basis points compared to 2014.

 

 

Gross profit

 

($ in millions)

 

2016

   

2015

   

2014

   

2016 vs 2015

   

2015 vs 2014

 

Gross profit

  $ 609.8     $ 568.0     $ 533.3       7.4 %     6.5 %

Percent of net revenue

    29.1 %     27.3 %     25.3 %                

 

Gross profit in 2016 increased $41.8 million compared to 2015 and gross profit margin increased 180 basis points. The decrease in the cost of raw materials was the main factor for the increase in gross profit.

 

Gross profit in 2015 increased $34.7 million compared to 2014 and gross profit margin increased 200 basis points. The decrease in the cost of raw materials was the main factor for the increase in gross profit.

 

 

 Selling, general and administrative expenses

 

($ in millions)

 

2016

   

2015

   

2014

   

2016 vs 2015

   

2015 vs 2014

 

SG&A

  $ 407.6     $ 397.6     $ 383.4       2.5 %     3.7 %

Percent of net revenue

    19.5 %     19.1 %     18.2 %                

 

Selling, general and administration (“SG&A”) expenses for 2016 increased $10.0 million or 2.5 percent compared to 2015. The increase is mainly due to higher personnel costs related to increased headcount, a full year of Tonsan operations for 2016 and incremental expenses coming from newly acquired businesses compared to 2015. This increase is partially offset by lower expenses related to general spending reductions, foreign currency exchange rate benefits on spending outside the U.S. and the mark to market adjustment related to the Tonsan contingent consideration liability.

 

SG&A expenses for 2015 increased $14.2 million or 3.7 percent compared to 2014. The added expense from the Tonsan acquisition partially offset by foreign currency exchange rates were the main drivers for the increase.

 

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

 

Special Charges, net

 

($ in millions)

 

2016

   

2015

   

2014

 

Special Charges, net

  $ (0.2 )   $ 4.7     $ 51.5  

 

The following table provides detail of special charges, net:

 

($ in millions)

 

2016

   

2015

   

2014

 

Acquisition and transformation related costs

  $ 0.2     $ 0.7     $ 7.9  

Workforce reduction costs

    -       -       3.2  

Facility exit costs

    (0.6 )     3.7       32.1  

Other related costs

    0.2       0.3       8.3  

Special charges, net

  $ (0.2 )   $ 4.7     $ 51.5  

 

The integration of the industrial adhesives business we acquired in March 2012 involved a significant amount of restructuring and capital investment to optimize the new combined entity. In addition to this acquisition, we announced our intentions to take a series of actions in our existing EIMEA operating segment to improve the profitability and future growth prospects of this operating segment. We combined these two initiatives into a single project which we refer to as the Business Integration Project. During the years ended December 3, 2016, November 28, 2015 and November 29, 2014, we incurred special charges, net of $(0.2) million, $4.7 million and $51.5 million, respectively, for costs related to the Business Integration Project.

 

Acquisition and transformation related costs of $0.2 million for the year ended December 3, 2016, $0.7 million for the year ended November 28, 2015 and $7.9 million for the year ended November 29, 2014 include costs related to organization consulting, financial advisory and legal services necessary to integrate the acquired business into our existing operating segments.

 

During the year ended December 3, 2016, we incurred cash facility exit costs of $1.3 million, non-cash facility exit costs of $1.7 million and other incremental transformation related costs of $0.2 million including the cost of personnel directly working on the integration. Also included in facility exit costs for 2016 is a $3.6 million gain on the sale of our production facility located in Wels, Austria, of which the sale closed during the third quarter of 2016. During the year ended November 28, 2015, we incurred cash facility exit costs of $2.2 million, non-cash facility exit costs of $1.5 million and other incremental transformation related costs of $0.3 million including the cost of personnel directly working on the integration. During the year ended November 29, 2014, we incurred workforce reduction costs of $3.2 million, cash facility exit costs of $25.2 million, non-cash facility exit costs of $6.9 million and other incremental transformation related costs of $8.3 million including the cost of personnel directly working on the integration.

 

 

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

 

($ in millions)

 

2016

   

2015

   

2014

 

Americas Adhesives

  $ -     $ (1.4 )   $ 3.1  

EIMEA

    (0.2 )     5.7       44.2  

Asia Pacific

    -       0.1       2.4  

Company-wide

    -       0.3       1.8  

Special charges, net

  $ (0.2 )   $ 4.7     $ 51.5  

 

 

We expect total project costs will be approximately $164.0 million. The following table provides detail of costs incurred inception-to-date as of December 3, 2016 for the Business Integration Project:

 

   

Costs Incurred

Inception-to-Date

 

($ in millions)

 

As of December 3, 2016

 

Acquisition and transformation related costs

  $ 43.2  

Work force reduction costs

    41.1  

Cash facility exit costs

    37.9  

Non-cash facility exit costs

 

19.4

 

Other related costs

 

19.5

 

Business Integration Project

  $ 161.1  

 

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

 

Other income (expense), net

 

($ in millions)

 

2016

   

2015

   

2014

 

Other income (expense), net

  $ (7.6 )   $ (2.5 )   $ 0.7  

 

Currency transaction and remeasurement losses were $9.5 million, $3.5 million and $2.5 million in 2016, 2015 and 2014, respectively. Interest income was $2.0 million in 2016 compared to $0.5 million in 2015 and $0.4 million in 2014. Gain or (loss) on disposal of fixed assets were ($.8) million, $0.3 million and $2.8 million in 2016, 2015 and 2014, respectively.

 

Interest expense

 

($ in millions)

 

2016

   

2015

   

2014

 

Interest expense

  $ 27.4     $ 25.0     $ 19.7  

 

Interest expense was $27.4 million in 2016 compared to $25.0 million in 2015 and $19.7 million in 2014. The higher interest expense in 2016 compared to 2015 was due to higher LIBOR rates on floating rate debt held in the U.S. and larger local currency balances at higher interest rates. The higher interest expense in 2015 compared to 2014 was due to higher average debt balances resulting from the Tonsan acquisition and lower capitalized interest on capital projects, offset by lower average interest rates. We capitalized interest of $0.8 million, $0.1 million and $2.7 million in 2016, 2015 and 2014, respectively.

 

 

 

Income taxes

 

($ in millions)

 

2016

   

2015

   

2014

 

Income taxes

  $ 50.4     $ 55.9     $ 34.3  

Effective tax rate

    30.1 %     40.4 %     43.3 %

 

Income tax expense in 2016 of $50.4 million includes $2.6 million of discrete tax benefits in both the U.S. and foreign jurisdictions. Income tax expense in 2015 of $55.9 million included $0.2 million of discrete tax expense in both the U.S. and foreign jurisdictions. Income tax expense in 2014 of $34.3 million included $1.4 million of discrete tax benefits in both the U.S. and foreign jurisdictions. Excluding discrete items, the overall effective tax rate decreased by 8.5 percentage points in 2016 as compared to 2015 and 4.9 percentage points in 2015 as compared to 2014. The decrease in the tax rate is principally due to a change in the geographic mix of pre-tax earnings and the reduction in special charges.

 

Income from equity method investments

 

($ in millions)

 

2016

   

2015

   

2014

 

Income from equity method investments

  $ 7.4     $ 5.9     $ 5.2  

 

The income from equity method investments relates to our 50 percent ownership of the Sekisui-Fuller joint venture in Japan. The higher income for 2016 compared to 2015 is related to higher net income in the joint venture and the impact of a stronger Japanese yen. Sekisui-Fuller’s net income measured in Japanese yen was higher in 2015 compared to 2014, but the weakening of the yen in 2015 negatively impacted the net income in U.S. dollars. Income from equity method investments was negatively impacted in 2014 by a correction of an error in the carrying value of our investment in Sekisui-Fuller in the amount of $1.6 million.

 

Income (loss) from discontinued operations, net of tax

 

($ in millions)

 

2016

   

2015

   

2014

 

Income (loss) from discontinued operations, net of tax

  $ -     $ (1.3 )   $ -  

 

The income (loss) from discontinued operations, net of tax, relates to our Central America Paints business, which we sold in 2012. In 2015, in conjunction with the final settlement agreement, we increased our contingent consideration liability by $2.1 million and adjusted the related deferred income tax.

 

Net income attributable to non-controlling interests

 

($ in millions)

 

2016

   

2015

   

2014

 

Net income attributable to non-controlling interests

  $ (0.3 )   $ (0.4 )   $ (0.4 )

 

The net income attributable to non-controlling interests relates to the redeemable non-controlling interest in H.B. Fuller Kimya Sanayi Ticaret A.S. (HBF Kimya).

 

Net income attributable to H.B. Fuller

 

($ in millions)

 

2016

   

2015

   

2014

   

2016 vs 2015

   

2015 vs 2014

 

Net income attributable to H.B. Fuller

  $ 124.1     $ 86.7     $ 49.8       43.2 %     74.2 %

Percent of net revenue

    5.9 %     4.2 %     2.4 %                

 

Net income attributable to H.B. Fuller was $124.1 million in 2016 compared to $86.7 million in 2015 and $49.8 million in 2014. Fiscal year 2016 included $(0.2) million of special charges, net ($0.1 million after-tax) for costs related to the Business Integration Project compared to $4.7 million ($4.7 million after-tax) in 2015 and $51.5 million ($45.2 million after-tax) in 2014. Diluted earnings per share, from continuing operations, was $2.42 per share in 2016, $1.71 per share for 2015 and $0.97 per share for 2014.

 

 

Operating Segment Results

 

We are required to report segment information in the same way that we internally organize our business for assessing performance and making decisions regarding allocation of resources. For segment evaluation by the chief operating decision maker, segment operating income is defined as gross profit less SG&A expenses. Segment operating income excludes special charges, net. Inter-segment revenues are recorded at cost plus a markup for administrative costs. Corporate expenses are fully allocated to each operating segment.

 

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

 

The tables below provide certain information regarding the net revenue and segment operating income of each of our operating segments.

 

Net Revenue by Segment

 

   

2016

   

2015

   

2014

 
   

Net

   

% of

   

Net

   

% of

   

Net

   

% of

 

($ in millions)

 

Revenue

   

Total

   

Revenue

   

Total

   

Revenue

   

Total

 

Americas Adhesives

  $ 806.1       38 %   $ 830.8       40 %   $ 877.7       42 %

EIMEA

    545.1       26 %     549.6       26 %     652.0       31 %

Asia Pacific

    241.8       12 %     230.7       11 %     234.2       11 %

Construction Products

    256.4       12 %     272.7       13 %     237.2       11 %

Engineering Adhesives

    245.2       12 %     199.9       10 %     103.4       5 %

Total

  $ 2,094.6       100 %   $ 2,083.7       100 %   $ 2,104.5       100 %

 

 

Segment Operating Income

 

   

2016

   

2015

   

2014

 
   

Operating

   

% of

   

Operating

   

% of

   

Operating

   

% of

 

($ in millions)

 

Income

   

Total

   

Income

   

Total

   

Income

   

Total

 

Americas Adhesives

  $ 126.0       61 %   $ 127.8       74 %   $ 105.8       71 %

EIMEA

    40.1       20 %     15.1       9 %     33.2       22 %

Asia Pacific

    15.4       8 %     13.0       8 %     8.3       5 %

Construction Products

    3.3       2 %     13.7       8 %     2.8       2 %

Engineering Adhesives

    17.4       9 %     0.9       1 %     (0.3 )     0 %

Total

  $ 202.2       100 %   $ 170.5       100 %   $ 149.8       100 %

 

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

 

($ in millions)

 

2016

   

2015

   

2014

 

Segment operating income

  $ 202.2     $ 170.5     $ 149.8  

Special charges, net

    0.2       (4.7 )     (51.5 )

Other income (expense), net

    (7.6 )     (2.5 )     0.7  

Interest expense

    (27.4 )     (25.0 )     (19.7 )

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

  $ 167.4     $ 138.3     $ 79.3  

 

 

 

Americas Adhesives

 

($ in millions)

 

2016

   

2015

   

2014

   

2016 vs 2015

   

2015 vs 2014

 

Net revenue

  $ 806.1     $ 830.8     $ 877.7       (3.0 )%     (5.3 )%

Segment operating income

  $ 126.0     $ 127.8     $ 105.8       (1.4 )%     20.8 %

Segment profit margin %

    15.6 %     15.4 %     12.1 %                

 

The following tables provide details of Americas Adhesives net revenue variances:

 

   

2016 vs 2015

   

2015 vs 2014

 

Constant currency growth

    (2.7 )%     (4.3 )%

Currency

    (0.3 )%     (1.0 )%

Total

    (3.0 )%     (5.3 )%

 

Net revenue decreased 3.0 percent in 2016 compared to 2015. The 2.7 percent decrease in constant currency growth was attributable to a 0.2 percent increase in sales volume offset by a 2.9 percent decrease in product pricing. The 0.3 percent negative currency effect was due to the weaker Canadian dollar compared to the U.S. dollar. The sales volume increase was driven by modest market share gains partially offset by general end-market weakness in Latin America and unfavorable sales mix. As a percentage of net revenue, raw material costs decreased 150 basis points mainly due to reductions in raw material costs. Other manufacturing costs as a percentage of net revenue increased 40 basis points in 2016 compared to 2015. Segment operating income decreased 1.4 percent and segment operating margin as a percentage of net revenue increased 20 basis points in 2016 compared to 2015.

 

Net revenue decreased 5.3 percent in 2015 compared to 2014. The 4.3 percent decrease in constant currency growth was attributable to a 4.7 percent decrease in sales volume offset by a 0.4 percent increase in pricing. The sales volume decrease was driven by lower volume in several market segments and lost market share related to our ERP system implementation. Raw material costs as a percentage of net revenue decreased 290 basis points as a result of decreases in raw material costs following the drop in the global price of oil and natural gas. Other manufacturing costs as a percentage of net revenue decreased 60 basis points compared to 2014. Segment operating income increased 20.8 percent compared to 2014 and segment profit margin increased 330 basis points.

 

EIMEA

 

($ in millions)

 

2016

   

2015

   

2014

   

2016 vs 2015

   

2015 vs 2014

 

Net revenue

  $ 545.1     $ 549.6     $ 652.0       (0.8 )%     (15.7 )%

Segment operating income

  $ 40.1     $ 15.1     $ 33.2       165.4 %     (54.5 )%

Segment profit margin %

    7.4 %     2.8 %     5.1 %                

 

 

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

 

   

2016 vs 2015

   

2015 vs 2014

 

Constant currency growth

    2.0 %     (2.0 )%

Currency

    (2.8 )%     (13.7 )%

Total

    (0.8 )%     (15.7 )%

 

Net revenue decreased 0.8 percent in 2016 compared to 2015. The 2.0 percent increase in constant currency growth was attributable to a 3.0 percent increase in sales volume offset by a 1.0 percent decrease in product pricing. Sales volume growth was primarily related to the hygiene market, with strong growth in the emerging markets, as well as growth in core Europe. The 2.8 percent negative currency effect was primarily the result of a weaker Euro, Egyptian pound, Turkish lira and Indian rupee compared to the U.S. dollar. Raw material cost as a percentage of net revenue decreased 300 basis points in 2016 compared to 2015 primarily due to lower raw material costs. Other manufacturing costs as a percentage of net revenue were 100 basis points lower than 2015 primarily due to improved production efficiencies, lower freight costs and favorable currency impacts.  Segment operating income increased 165.4 percent and segment operating margin increased 460 basis points compared to 2015.

 

 

 

Net revenue decreased 15.7 percent in 2015 compared to 2014. The 2.0 percent decrease in constant currency growth was attributable to a 1.6 percent decrease in sales volume and a 0.4 percent decrease in product pricing. Sales volume was down in core Europe reflecting the generally soft end market conditions across most of the region and volume losses due to longer lead times caused by production inefficiencies related to the Business Integration Project. Sales volume growth was generated in the emerging markets, mainly in India, Middle East and Turkey. The negative currency effect of 13.7 percent was primarily the result of a weaker Euro, Turkish lira and Egyptian pound compared to the U.S. dollar. Raw material costs as a percentage of net revenue was flat in 2015 compared to 2014. Other manufacturing costs as a percentage of net revenue were 160 basis points higher in 2015 compared to 2014 mainly due to lower sales. In 2015, segment operating income decreased 54.5 percent and segment profit margin decreased 230 basis points compared to 2014.

 

Asia Pacific

 

($ in millions)

 

2016

   

2015

   

2014

   

2016 vs 2015

   

2015 vs 2014

 

Net revenue

  $ 241.8     $ 230.7     $ 234.2       4.8 %     (1.5 )%

Segment operating income

  $ 15.4     $ 13.0     $ 8.3       19.0 %     55.2 %

Segment profit margin %

    6.4 %     5.6 %     3.6 %                

 

 

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

 

   

2016 vs 2015

   

2015 vs 2014

 

Constant currency growth

    8.5 %     3.8 %

Currency

    (3.7 )%     (5.3 )%

Total

    4.8 %     (1.5 )%

 

Net revenue in 2016 increased 4.8 percent compared to 2015. The 8.5 percent increase in constant currency growth was attributable to a 10.8 percent increase in sales volume partially offset by a 2.3 percent decrease in product pricing. Most of the growth compared to 2015 is driven by the acquisition of Advanced Adhesives that occurred during the second quarter of 2016, as well as growth in Southeast Asia and Greater China. Negative currency effects of 3.7 percent compared to 2015 were primarily driven by the weaker Chinese renminbi, Australian dollar and Malaysian ringgit compared to the U.S. dollar. Raw material costs as a percentage of net revenue decreased 140 basis points compared to 2015 due to lower raw material costs and changes in sales mix, partially offset by the impact of valuing inventories related to the Advanced Adhesives acquisition at fair value. Other manufacturing costs as a percentage of net revenue increased 110 basis points compared to 2015, primarily due to the acquisition of Advanced Adhesives and the costs to rationalize certain production capabilities in Southeast Asia. Segment operating income increased 19 percent and segment operating margin increased 80 basis points compared to 2015.

 

Net revenue for 2015 decreased 1.5 percent compared to 2014. Constant currency growth was 3.8 percent driven by 4.0 percent increase in sales volume offset by a decrease in pricing of 0.2 percent. The increase in sales volume occurred in all Asia sub-regions. The negative currency effect of 5.3 percent was primarily the result of a weaker Australian dollar compared to the U.S. dollar. Raw material costs as a percentage of net revenue decreased 300 basis points in 2015 compared to 2014 primarily due to lower raw material costs following the drop in the global price of oil and natural gas and a change in sales mix. Other manufacturing costs as a percentage of net revenue were 80 basis points higher in 2015 compared to 2014. Segment operating income increased 55.2 percent and segment profit margin increased 200 basis points in 2015 compared to 2014.

 

 

Construction Products

 

($ in millions)

 

2016

   

2015

   

2014

   

2016 vs 2015

   

2015 vs 2014

 

Net revenue

  $ 256.4     $ 272.7     $ 237.2       (6.0 )%     14.9 %

Segment operating income

  $ 3.3     $ 13.7     $ 2.8       (76.3 )%     391.5 %

Segment profit margin %

    1.3 %     5.0 %     1.2 %                

 

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

 

   

2016 vs 2015

   

2015 vs 2014

 

Constant currency growth

    (5.8 )%     17.6 %

Currency

    (0.2 )%     (2.7 )%

Total

    (6.0 )%     14.9 %

 

Net revenue decreased 6.0 percent in 2016 compared to 2015. The 5.8 percent decrease in constant currency growth was driven by a 6.7 percent decrease in sales volume offset by a 0.9 percent increase in product pricing.  The decrease in sales volume was primarily attributed to lower export revenue, inventory rebalancing with certain channel partners and a strong fiscal 2015 driven by market share gains with certain retail partners. The increase in pricing is mainly due to price increases related to certain product lines in multiple channels. Negative currency effects of 0.2 percent compared to 2015 were primarily driven by the weaker Australian dollar compared to the U.S. dollar. Raw material cost as a percentage of net revenue was 210 basis points lower in 2016 compared to 2015 primarily due to changes in product mix and lower raw material costs. Other manufacturing costs as a percentage of net revenue were 360 basis points higher in 2016 compared to 2015 mainly due to higher supply chain costs as we complete the facility upgrade and expansion project. Segment operating income decreased 76.3 percent and segment profit margin decreased 370 basis points in 2016 compared to 2015.

 

Net revenue increased 14.9 percent in 2015 compared to 2014. The 17.6 percent increase in constant currency growth was driven by a 14.9 percent increase in sales volume and a 2.7 percent increase in product pricing.  The increase in sales volume was primarily attributed to market share gains with several key retail partners and the ProSpec acquisition in the fourth quarter of 2014. Negative currency effects of 2.7 percent compared to 2015 were primarily driven by the weaker Australian dollar and Euro compared to the U.S. dollar. Raw material costs as a percentage of net revenue decreased 160 basis points in 2015 compared to 2014 primarily due to lower raw material costs and changes in sales mix. Other manufacturing costs as a percentage of net revenue decreased by 10 basis points. Operating expenses as a percentage of net revenue decreased 280 basis points compared to 2014 primarily due to increased sales volume. Segment operating income increased by $11.0 million and segment profit margin increased 380 basis points compared to 2014.

 

Engineering Adhesives

 

($ in millions)

 

2016

   

2015

   

2014

   

2016 vs 2015

   

2015 vs 2014

 

Net revenue

  $ 245.2     $ 199.9     $ 103.4       22.7 %     93.4 %

Segment operating income

  $ 17.4     $ 0.9     $ (0.3 )  

NMP

   

NMP

 

Segment profit margin %

    7.1 %     0.4 %     (0.3 )%                

 

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

 

   

2016 vs 2015

   

2015 vs 2014

 

Constant currency growth

    27.3 %     101.6 %

Currency

    (4.6 )%     (8.2 )%

Total

    22.7 %     93.4 %

 

 

 

Net revenue increased 22.7 percent in 2016 compared to 2015. The 27.3 percent increase in constant currency growth was driven by a 27.9 percent increase in sales volume offset by a 0.6 percent decrease in product pricing. The increase in sales volume was partially attributed to a full year of the Tonsan business, which was acquired late in the first quarter of 2015, as well as the acquisition of Cyberbond that occurred during the third quarter of 2016. Negative currency effects of 4.6 percent compared to 2015 were primarily driven by the weaker Chinese renminbi and Euro compared to the U.S. dollar.  Raw material cost as a percentage of net revenue was 390 basis points lower in 2016 compared to 2015 primarily due to the impact of valuing inventories related to the Tonsan acquisition at fair value, lower raw material costs and changes in product mix associated with the acquisition of Tonsan. Other manufacturing costs as a percentage of net revenue were 40 basis points higher in 2016 compared to 2015 primarily due to the impact of a full year of the Tonsan business and the Cyberbond acquisition. Operating expense as a percentage of net revenue decreased 320 basis points compared to 2015, partially due to the net mark to market adjustment related to the Tonsan contingent consideration liability offest by the Cyberbond acquisition. Segment operating income increased $16.5 million and segment operating margin increased 670 basis points in 2016 compared to 2015.

 

Net revenue increased 93.4 percent in 2015 compared to 2014. The 101.6 percent increase in constant currency growth was driven by a 98.1 percent increase in sales volume and a 3.5 percent increase in product pricing.  The increase in sales volume was primarily attributed to the Tonsan acquisition, which occurred in the first quarter of 2015. Negative currency effects of 8.2 percent compared to 2014 were primarily driven by the weaker Chinese renminbi and Euro compared to the U.S. dollar.  Raw material costs as a percentage of net revenue decreased 400 basis points in 2015 compared to 2014 primarily due to lower raw material costs and changes in sales mix. Other manufacturing costs as a percentage of net revenue decreased by 260 basis points. Operating expenses as a percentage of net revenue increased 590 basis points compared to 2014 primarily due to increased sales volume and the net mark to market adjustment related to the Tonsan contingent consideration liability. Segment operating income increased $1.2 million and segment profit margin increased 70 basis points compared to 2014.

 

Financial Condition, Liquidity and Capital Resources

 

Total cash and cash equivalents as of December 3, 2016 were $142.2 million compared to $119.2 million as of November 28, 2015. Total long and short-term debt was $705.6 million as of December 3, 2016 and $722.9 million as of November 28, 2015.

 

We believe that cash flows from operating activities will be adequate to meet our ongoing liquidity and capital expenditure needs. In addition, we believe we have the ability to obtain both short-term and long-term debt to meet our financing needs for the foreseeable future. Cash available in the United States has historically been sufficient and we expect it will continue to be sufficient to fund U.S. operations and U.S. capital spending and U.S. pension and other postretirement benefit contributions in addition to funding U.S. acquisitions, dividend payments, debt service and share repurchases as needed. For those international earnings considered to be reinvested indefinitely, we currently have no intention to, and plans do not indicate a need to, repatriate these funds for U.S. operations.

 

Our credit agreements and note purchase agreements include restrictive covenants that, if not met, could lead to a renegotiation of our credit lines and a significant increase in our cost of financing. At December 3, 2016, we were in compliance with all covenants of our contractual obligations as shown in the following table:

 

Covenant

Debt Instrument

Measurement

 

Result as of

December 3, 2016

 

TTM EBITDA / TTM Interest Expense

All Debt Instruments

Not less than 2.5

    10.1  
             

Total Indebtedness / TTM EBITDA

All Debt Instruments

Not greater than 3.5

    2.5  

 

 

TTM = trailing 12 months

 

 

EBITDA for covenant purposes is defined as consolidated net income, plus interest expense, taxes, depreciation and amortization, non-cash impairment losses, extraordinary non-cash losses incurred other than in the ordinary course of business, nonrecurring extraordinary non-cash restructuring charges, cash expenses related to the Tonsan acquisition for advisory services and for arranging financing for the acquired business with cash expenses not to exceed $10.0 million, minus extraordinary non-cash gains incurred other than in the ordinary course of business. For the Total Indebtedness / TTM EBITDA ratio, TTM EBITDA is adjusted for the pro forma results from Material Acquisitions and Material Divestitures as if the acquisition or divestiture occurred at the beginning of the calculation period. Additional detail is provided in the Form 8-K dated October 31, 2014.

 

We believe we have the ability to meet all of our contractual obligations and commitments in fiscal 2017.

 

 

Net Financial Assets

 

($ in millions)

 

2016

   

2015

 

Financial Assets:

               

Cash and cash equivalents

  $ 142.2     $ 119.2  
                 

Debt:

               

Notes payable

    37.3       30.8  

Long-term debt

    668.3       692.1  

Total debt

    705.6       722.9  

Net financial debt

  $ 563.4     $ 603.7  

 

Of the $142.2 million in cash and cash equivalents as of December 3, 2016, $114.7 million was held outside the U.S. Of the $114.7 million of cash held outside the U.S., earnings on $103.8 million are indefinitely reinvested outside of the U.S. It is not practical for us to determine the U.S. tax implications of the repatriation of these funds.

 

There are no contractual or regulatory restrictions on the ability of consolidated and unconsolidated subsidiaries to transfer funds in the form of cash dividends, loans or advances to us, except for: 1) a credit facility limitation restricting investments, loans, advances or capital contributions from the U.S. parent corporation, the Irish financing subsidiary, and the Construction Products subsidiary in excess of $100.0 million, 2) a credit facility limitation that provides total investments, loans, advances or guarantees not otherwise permitted in the credit agreement for all subsidiaries shall not exceed $125.0 million in the aggregate and 3) typical statutory restrictions, which prohibit distributions in excess of net capital or similar tests.  The 2012 Forbo acquisition, the 2015 Tonsan acquisition and any investments, loans, and advances established to consummate the Forbo and Tonsan acquisitions are excluded from the credit facility limitations described above.  Additionally, we have taken the income tax position that the majority of our cash in non-U.S. locations is indefinitely reinvested.  

 

We rely on operating cash flow, short-term borrowings and long-term debt to provide for the working capital needs of our operations. We believe that we have the ability to obtain both short-term and long-term debt to meet our financing needs for the foreseeable future.

 

Debt Outstanding and Debt Capacity

 

Notes Payable

  

Notes payable were $37.3 million at December 3, 2016 and $30.8 million at November 28, 2015. These amounts mainly represented various foreign subsidiaries’ short-term borrowings that were not part of committed lines. The weighted-average interest rates on these short-term borrowings were 13.7 percent in 2016 and 8.1 percent in 2015.

 

Long-Term Debt  

 

Long-term debt consisted of senior notes and term loans. The Series A and Series B senior notes bear a fixed interest rate of 5.13 percent and mature in fiscal year 2017. The Series C and Series D senior notes bear a fixed interest rate of 5.61 percent and mature in fiscal year 2020. The Series E senior notes bear a fixed interest rate of 4.12 percent and mature in fiscal year 2022. We are subject to prepayment penalties on our senior notes. As of December 3, 2016, make-whole premiums were estimated to be, if the entire debt were paid off, $33.1 million. We currently have no intention to prepay any senior notes.

 

We executed interest rate swap agreements for the purpose of obtaining a floating rate of interest on $75.0 million of the $150.0 million senior notes. We have designated the $75.0 million of senior note debt as the hedged item in a fair value hedge. As required by applicable accounting standards, we recorded an asset for the fair value of the interest rate swaps (hedging instruments) totaling $1.6 million and recognized a liability of $1.6 million for the change in the fair value of the senior notes attributable to the change in the risk being hedged. This calculation resulted in $101.4 million being recorded in long-term debt and $50.2 million being recorded in current portion of long-term debt related to these senior notes as of December 3, 2016. For further information related to long-term debt see Note 7 to the Consolidated Financial Statements.

 

On October 31, 2014, we entered into a credit agreement with a consortium of financial institutions under which we established a $300.0 million term loan that we can use to repay existing indebtedness, finance working capital needs, finance acquisitions, and for general corporate purposes. At December 3, 2016, there was a balance of $266.3 million drawn on the term loan. The interest rate on the term loan bears a floating interest rate at the London Interbank Offered Rate (LIBOR) plus 125 basis points and matures in 2019. There is no prepayment penalty on the term loan. See the discussion below regarding our lines of credit.

 

 

On October 31, 2014 we amended various provisions of the Note Purchase Agreements Series A through E, including the covenant definition of Consolidated EBITDA. As part of these amendments, the interest rate on the debt may increase based on a ratings grid. Additional details on the Note Purchase Agreement amendments can be found in the 8-K dated October 31, 2014.

 

Lines of Credit

 

We have a revolving credit agreement with a consortium of financial institutions at December 3, 2016. This credit agreement creates an unsecured multi-currency revolving credit facility that we can draw upon for general corporate purposes up to a maximum of $300.0 million. Interest is payable at LIBOR plus 1.075 percent. A facility fee of 0.175 percent is payable quarterly. The interest rate and the facility fee are based on a rating grid. The credit facility expires on October 31, 2019. As of December 3, 2016, our lines of credit were undrawn.

 

Goodwill and Other Intangible Assets

 

As of December 3, 2016, goodwill totaled $366.2 million (18 percent of total assets) and other intangible assets, net of accumulated amortization, totaled $205.4 million (10 percent of total assets).

 

The components of goodwill and other identifiable intangible assets, net of amortization, by segment at December 3, 2016 are as follows:

 

   

Americas

           

Asia

   

Construction

   

Engineering

         

($ in millions)

 

Adhesives

   

EIMEA

   

Pacific

   

Products

   

Adhesives

   

Total

 

Goodwill

  $ 59.8     $ 98.9     $ 17.5     $ 21.9     $ 168.1     $ 366.2  

Purchased technology & patents

    11.1       5.3       1.4       1.8       29.5       49.1  

Customer relationships

    12.0       11.5       10.4       67.0       34.0       134.9  

Other finite-lived intangible assets1

    0.6       11.6       2.0       5.1       1.6       20.9  

Indefinite-lived intangible assets2

    -       0.5       -       -       -       0.5  

 

1 Other finite-lived intangible assets are related to operating segment trademarks.

 

2 Indefinite-lived intangible assets are related to EIMEA operating segment trademarks.

 

Selected Metrics of Liquidity and Capital Resources

 

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

 

   

December 3,

   

November 28,

 
   

2016

   

2015

 

Net working capital as a percentage of annualized net revenue1

    18.9 %     19.9 %

Accounts receivable DSO2 (in days)

    57       60  

Inventory days on hand3 (in days)

    60       60  

Free cash flow4 (in millions)

  $ 104.9     $ 126.2  

Debt capitalization ratio5

    42.9 %     45.3 %

 

1 Current quarter net working capital (trade receivables, net of allowance for doubtful accounts plus inventory minus trade payables) divided by annualized net revenue (current quarter, adjusted for extra week, multiplied by 4).

 

2 Trade receivables net of allowance for doubtful accounts multiplied by 63 (9 weeks) for 2016 and 56 (8 weeks) for 2015 and divided by the net revenue for the last 2 months of the quarter.

 

3 Total inventory multiplied by 63 for 2016 and 56 for 2015 and divided by cost of sales (excluding delivery costs) for the last 2 months of the quarter.

 

4 Net cash provided by operations less purchased property, plant and equipment and dividends paid.

 

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

 

 

Summary of Cash Flows

 

Cash Flows from Operating Activities from Continuing Operations

 

($ in millions)

 

2016

   

2015

   

2014

 

Net cash provided by operating activities

  $ 195.7