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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 3, 2017

 

OR

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to

 

Commission file number: 001-09225

 

H.B. FULLER COMPANY

(Exact name of registrant as specified in its charter)

 

Minnesota 

41-0268370 

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

   
   
1200 Willow Lake Boulevard, St. Paul, Minnesota 55110-5101
(Address of principal executive offices) (Zip Code)

 

(651) 236-5900

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

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

 

Large accelerated filer

[X]

 

Accelerated filer

[  ]

Non-accelerated filer

[  ]

 

(Do not check if a smaller reporting company)

     

Smaller reporting company

[  ]

     

Emerging growth company

[  ]

 

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

 

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

Yes [  ] No [X]

 

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

 

 

H.B. Fuller Company

Quarterly Report on Form 10-Q

Table of Contents

 

 

   

Page

PART 1. FINANCIAL INFORMATION

 
     

ITEM 1.

FINANCIAL STATEMENTS (Unaudited)

3

     
 

Condensed Consolidated Statements of Income for the three and six months ended June 3, 2017 and May 28, 2016

3

     
 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 3, 2017 and May 28, 2016

4

     
 

Condensed Consolidated Balance Sheets as of June 3, 2017 and December 3, 2016

5

     
 

Condensed Consolidated Statements of Total Equity as of June 3, 2017 and December 3, 2016

6

     
 

Condensed Consolidated Statements of Cash Flows for the six months ended June 3, 2017 and May 28, 2016

7

     
 

Notes to Condensed Consolidated Financial Statements

8

     

ITEM 2.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

27

     

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

40

     

ITEM 4.

CONTROLS AND PROCEDURES

41

     

PART II. OTHER INFORMATION

41

     

ITEM 1.

LEGAL PROCEEDINGS

41

     

ITEM 1A.

RISK FACTORS

43

     

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

43

     

ITEM 6.

EXHIBITS

44

     

SIGNATURES

45

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

  

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

June 3,

   

May 28,

 
   

2017

   

2016

   

2017

   

2016

 

Net revenue

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

Cost of sales

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

Gross profit

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

Selling, general and administrative expenses

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

Special charges, net

    -       (370 )     -       (783 )

Other income (expense), net

    (110 )     (1,565 )     511       (6,647 )

Interest expense

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

Income before income taxes and income from equity method investments

    35,010       46,040       53,332       72,075  

Income taxes

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

Income from equity method investments, net of tax

    2,005       1,640       4,279       3,332  

Net income including non-controlling interests

    25,864       33,390       40,695       52,357  

Net income (loss) attributable to non-controlling interests

    3       (59 )     (33 )     (108 )

Net income attributable to H.B. Fuller

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

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

         

Basic

    0.51       0.66       0.81       1.04  

Diluted

    0.50       0.65       0.79       1.02  
                                 

Weighted-average common shares outstanding:

                               

Basic

    50,496       50,145       50,369       50,052  

Diluted

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

Dividends declared per common share

  $ 0.15     $ 0.14     $ 0.29     $ 0.27  

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

June 3,

   

May 28,

 
   

2017

   

2016

   

2017

   

2016

 

Net income including non-controlling interests

  $ 25,864     $ 33,390     $ 40,695     $ 52,357  

Other comprehensive income

                               

Foreign currency translation

    18,513       1,442       7,994       492  

Defined benefit pension plans adjustment, net of tax

    1,593       690       3,183       3,355  

Interest rate swaps, net of tax

    10       10       20       20  

Cash-flow hedges, net of tax

    (23 )     (440 )     106       (191 )

Other comprehensive income

    20,093       1,702       11,303       3,676  

Comprehensive income

    45,957       35,092       51,998       56,033  

Less: Comprehensive income attributable to non-controlling interests

    3       64       34       108  

Comprehensive income attributable to H.B. Fuller

  $ 45,954     $ 35,028     $ 51,964     $ 55,925  

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 

   

(Unaudited)

         
   

June 3,

   

December 3,

 
   

2017

   

2016

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 94,102     $ 142,245  

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

    378,622       351,130  

Inventories

    302,336       247,399  

Other current assets

    75,380       70,479  

Total current assets

    850,440       811,253  
                 

Property, plant and equipment

    1,111,423       1,093,141  

Accumulated depreciation

    (595,540 )     (577,866 )

Property, plant and equipment, net

    515,883       515,275  
                 

Goodwill

    434,210       366,248  

Other intangibles, net

    239,418       205,359  

Other assets

    160,285       157,733  

Total assets

  $ 2,200,236     $ 2,055,868  
                 

Liabilities, redeemable non-controlling interest and total equity

               

Current liabilities:

               

Notes payable

  $ 28,371     $ 37,334  

Current maturities of long-term debt

    10,000       80,178  

Trade payables

    181,979       162,964  

Accrued compensation

    49,193       52,444  

Income taxes payable

    9,482       7,985  

Other accrued expenses

    46,356       50,939  

Total current liabilities

    325,381       391,844  
                 

Long-term debt, excluding current maturities

    747,738       585,759  

Accrued pension liabilities

    69,245       73,545  

Other liabilities

    66,121       62,174  

Total liabilities

    1,208,485       1,113,322  
                 

Commitments and contingencies (Note 16)

               

Redeemable non-controlling interest

    -       4,277  
                 

Equity:

               

H.B. Fuller stockholders' equity:

               

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

    -       -  

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

    50,517       50,141  

Additional paid-in capital

    75,390       59,564  

Retained earnings

    1,116,883       1,090,900  

Accumulated other comprehensive loss

    (251,427 )     (262,729 )

Total H.B. Fuller stockholders' equity

    991,363       937,876  

Non-controlling interests

    388       393  

Total equity

    991,751       938,269  

Total liabilities, redeemable non-controlling interest and total equity

  $ 2,200,236     $ 2,055,868  

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Total Equity

(In thousands)

(Unaudited)

 

    H.B. Fuller Company Shareholders            
   

Common

Stock

   

Additional

Paid-in

Capital

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

Income (Loss)

   

Non-

Controlling

Interests

   

Total

 

Balance at November 28, 2015

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

Comprehensive income (loss)

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

Dividends

    -       -       (27,836 )     -       -       (27,836 )

Stock option exercises

    519       10,750       -       -       -       11,269  

Share-based compensation plans other, net

    116       14,485       -       -       -       14,601  

Tax benefit on share-based compensation plans

    -       1,467       -       -       -       1,467  

Repurchases of common stock

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

Redeemable non-controlling interest

    -       -       -       -       (239 )     (239 )

Balance at December 3, 2016

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

Comprehensive income

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

Dividends

    -       -       (14,679 )     -       -       (14,679 )

Stock option exercises

    407       13,519       -       -       -       13,926  

Share-based compensation plans other, net

    148       9,553       -       -       -       9,701  

Tax benefit on share-based compensation plans

    -       1,353       -       -       -       1,353  

Repurchases of common stock

    (179 )     (8,693 )     -       -       -       (8,872 )

Purchase of redeemable non-controlling interest

    -       94       -       -       -       94  

Redeemable non-controlling interest

    -       -       -       -       (39 )     (39 )

Balance at June 3, 2017

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

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   

Six Months Ended

 
   

June 3, 2017

   

May 28, 2016

 

Cash flows from operating activities:

               

Net income including non-controlling interests

  $ 40,695     $ 52,357  

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

               

Depreciation

    23,971       25,067  

Amortization

    15,229       13,486  

Deferred income taxes

    7       1,101  

Income from equity method investments, net of dividends received

    (4,279 )     (3,332 )

Gain on sale of assets

    (91 )     -  

Share-based compensation

    8,843       6,968  

Excess tax benefit from share-based compensation

    (1,353 )     (592 )

Gain on mark to market adjustment to contingent consideration liability

    (3,603 )     (891 )

Non-cash charge for sale of inventories revalued at acquisition

    193       103  

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

         

Trade receivables, net

    (9,890 )     13,280  

Inventories

    (45,390 )     (9,059 )

Other assets

    12,602       9,948  

Trade payables

    20,443       (7,521 )

Accrued compensation

    (4,666 )     (2,925 )

Other accrued expenses

    (6,259 )     (6,434 )

Income taxes payable

    (5,569 )     4,451  

Accrued / prepaid pensions

    (2,989 )     (1,785 )

Other liabilities

    3,336       (7,829 )

Other

    (8,436 )     (3,790 )

Net cash provided by operating activities

    32,794       82,603  
                 

Cash flows from investing activities:

               

Purchased property, plant and equipment

    (27,104 )     (35,720 )

Purchased businesses, net of cash acquired

    (123,305 )     (9,123 )

Purchased investments

    (1,250 )     -  

Proceeds from sale of property, plant and equipment

    868       870  

Net cash used in investing activities

    (150,791 )     (43,973 )
                 

Cash flows from financing activities:

               

Proceeds from issuance of long-term debt

    598,000       -  

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

    (508,024 )     (11,250 )

Net (payment of) proceeds from notes payable

    (10,287 )     11,246  

Dividends paid

    (14,614 )     (13,537 )

Purchase of redeemable non-controlling interest

    (3,127 )     -  

Proceeds from stock options exercised

    13,926       7,083  

Excess tax benefit from share-based compensation

    1,353       592  

Repurchases of common stock

    (8,872 )     (6,566 )

Net cash provided by (used in) financing activities

    68,355       (12,432 )
                 

Effect of exchange rate changes on cash and cash equivalents

    1,499       656  

Net change in cash and cash equivalents

    (48,143 )     26,854  
                 

Cash and cash equivalents at beginning of period

    142,245       119,168  

Cash and cash equivalents at end of period

  $ 94,102     $ 146,022  
                 

Supplemental disclosure of cash flow information:

               

Dividends paid with company stock

  $ 65     $ 124  

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

  $ 15,393     $ 14,157  

Cash paid for income taxes, net of refunds

  $ 15,739     $ 18,503  

 

 

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

Note 1: Basis of Presentation

 

The accompanying unaudited interim Condensed Consolidated Financial Statements of H.B. Fuller Company and Subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of results of operations, comprehensive income, financial position, and cash flows in conformity with U.S. generally accepted accounting principles. In our opinion, the unaudited interim Condensed Consolidated Financial Statements reflect all adjustments of a normal recurring nature considered necessary for the fair presentation of the results for the periods presented. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates. These unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 3, 2016 as filed with the Securities and Exchange Commission.

 

On December 4, 2016, for our subsidiaries in Latin America, we changed the functional currency from the U.S. dollar to the entity’s local currency based on management’s analysis of the changes of the economic facts and circumstances in which these subsidiaries operate. The change in functional currency is accounted for prospectively from December 4, 2016 and financial statements prior to and including the six months ended May 28, 2016 and the year ended December 3, 2016 have not been restated for the change in functional currency. Monetary assets and liabilities have been remeasured to the U.S. dollar at current exchange rates. Non-monetary assets (property, plant and equipment, net; goodwill; and intangible assets, net) have been remeasured to reflect the difference between the exchange rate when the asset arose and the exchange rate on the date of the change in functional currency. As a result of this change in functional currency, we recorded an $11,317 cumulative translation adjustment included in other comprehensive income for the six months ended June 3, 2017.

 

New Accounting Pronouncements

 

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

 

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

 

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

 

 

 

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

 

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

 

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

 

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

 

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

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). This ASU requires changes in the presentation of certain items including but not limited to debt prepayment or debt extinguishment costs; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investees. Our effective date for adoption of this guidance is our fiscal year beginning December 2, 2018. We are currently evaluating the effect that this guidance will have on our Consolidated Financial Statements.

 

In June 2016, the FASB ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. This ASU requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Our effective date for adoption of this guidance is our fiscal year beginning November 29, 2020. We are currently evaluating the effect that this guidance will have on our Consolidated Financial Statements.

 

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

 

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

 

 

 

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

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires that equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Furthermore, equity investments without readily determinable fair values are to be assessed for impairment using a quantitative approach. Our effective date for adoption of this guidance is our fiscal year beginning December 2, 2018. We have evaluated the effect that this guidance will have on our Consolidated Financial Statements and related disclosures and determined it will not have a material impact.

 

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

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017 (as stated in ASU No. 2015-14 which defers the effective date and was issued in August 2015) and is now effective for our fiscal year beginning December 2, 2018. Early application as of the original effective date is permitted under ASU 2015-14. The standard permits the use of either the retrospective or cumulative effect transition method. We are continuing to evaluate the effect this guidance will have on our Consolidated Financial Statements, including potential impacts on the timing of revenue recognition and additional information that may be necessary for expanded disclosures regarding revenue. We have identified an implementation project team and related oversight processes and have commenced the assessment phase of the project. We have not concluded as to whether the new guidance will be adopted on a full or modified retrospective basis, but will not apply the early adoption provisions of the new guidance.

 

Note 2: Acquisitions

 

Wisdom Adhesives

 

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

 

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

 

 

 

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

 

   

Amount

 

Current assets

  $ 13,741  

Property, plant and equipment

    10,516  

Goodwill

    60,557  

Other intangibles

       

Customer relationships

    33,300  

Trademarks/trade names

    13,600  

Current liabilities

    (8,409 )

Total purchase price

  $ 123,305  

 

 

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

 

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

 

Cyberbond

 

On June 8, 2016, we acquired Cyberbond, L.L.C., (“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 $42,182, net of cash acquired of $332, was funded through existing cash and was recorded in our Engineering Adhesives operating segment. We incurred acquisition related costs of approximately $527, which were recorded as SG&A expenses in the Condensed Consolidated Statement of Income for the year ended December 3, 2016.

 

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

 

 

   

Amount

 

Current assets

  $ 4,425  

Property, plant and equipment

    2,038  

Goodwill

    23,654  

Other intangibles

       

Developed technology

    2,000  

Customer relationships

    14,400  

Trademarks/trade names

    700  

Other assets

    161  

Current liabilities

    (1,889 )

Long-term liabilities

    (3,307 )

Total purchase price

  $ 42,182  

 

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

 

Based on the fair value measurement of the assets acquired and liabilities assumed, we allocated $23,654 to goodwill for the expected synergies from combining Cyberbond with our existing business. The amount of goodwill deductible for tax purposes is $10,658. The goodwill was assigned to our Engineering Adhesives operating segment. The Cyberbond acquisition does not represent a material business combination, therefore pro forma financial information is not provided.

 

 

Advanced Adhesives

 

On April 29, 2016, we acquired Advanced Adhesives Pty Limited and the business assets of Advanced Adhesives (New Zealand) Limited (together referred to as “Advanced Adhesives”), providers of industrial adhesives in Australia and New Zealand. The acquisition will help us to strengthen our industrial adhesives market position and leverage a broader technology portfolio in both Australia and New Zealand. The combined purchase price of $10,365 was funded through existing cash and was recorded in our Asia Pacific operating segment. We incurred acquisition related costs of approximately $646, which were recorded as SG&A expenses in the Condensed Consolidated Statements of Income for the year ended December 3, 2016.

 

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

 

   

Amount

 

Current assets

  $ 5,704  

Property, plant and equipment

    594  

Goodwill

    102  

Other intangibles

       

Customer relationships

    7,575  

Trademarks/trade names

    146  

Current liabilities

    (2,671 )

Long-term liabilities

    (1,085 )

Total purchase price

  $ 10,365  

 

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

 

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

 

Note 3: Restructuring Actions

 

Business Integration Project

 

The integration of the industrial adhesives business we acquired in March 2012 involved a significant amount of restructuring and capital investment to optimize the new combined entity. In addition, we took a series of actions in our existing EIMEA operating segment to improve the profitability and future growth prospects of this operating segment. We combined these two initiatives into a single project which we refer to as the “Business Integration Project.” During the second quarter and six months ended May 28, 2016, we incurred costs of $370 and $783 related to transformation costs, workforce reduction costs, facility exit costs and other related costs for the Business Integration Project, which are included in special charges, net in the Condensed Consolidated Statements of Income. The Business Integration Project was substantially complete at the end of 2016.

 

2017 Restructuring Plan

 

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

 

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

 

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3, 2017

   

June 3, 2017

 

Cost of sales

  $ 5,252     $ 8,899  

Selling, general and administrative

    382       6,903  
    $ 5,634     $ 15,802  

 

 

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3, 2017

   

June 3, 2017

 

Americas Adhesives

  $ 39     $ 1,765  

EIMEA

    1,266       6,055  

Asia Pacific

    35       1,887  

Construction Products

    4,209       5,458  

Engineering Adhesives

    85       637  
    $ 5,634     $ 15,802  

 

 

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

 

 

   

Employee-

Related

   

Asset-Related

   

Other

   

Total

 

Balance at December 3, 2016

  $ -     $ -     $ -     $ -  

Expenses incurred

    9,898       5,094       810       15,802  

Non-cash charges

    -       (4,291 )     -       (4,291 )

Cash payments

    (5,810 )     (803 )     (505 )     (7,118 )

Foreign currency translation

    261       -       -       261  

Balance at June 3, 2017

  $ 4,349     $ -     $ 305     $ 4,654  

 

 

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

 

 

Note 4: Inventories

 

The composition of inventories is as follows:

 

   

June 3,

   

December 3,

 
   

2017

   

2016

 

Raw materials

  $ 149,629     $ 116,200  

Finished goods

    165,028       142,397  

LIFO reserve

    (12,321 )     (11,198 )

Total inventories

  $ 302,336     $ 247,399  

 

 

 

Note 5: Goodwill and Other Intangible Assets

 

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

 

   

Americas

           

Asia

   

Construction

   

Engineering

         
   

Adhesives

   

EIMEA

   

Pacific

   

Products

   

Adhesives

   

Total

 

Balance at December 3, 2016

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

Acquisitions

    60,557 1     -       -       -       -       60,557  

Currency impact

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

Balance at June 3, 2017

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

 

1

Preliminary goodwill balance as of June 3, 2017.

                       

 

 

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

 

   

June 3, 2017

 

Amortizable Intangible Assets

 

Purchased

Technology &

Patents

   

Customer

Relationships

   

All Other

   

Total

 

Original cost

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

Accumulated amortization

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

Net identifiable intangibles

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

 

   

December 3, 2016

 

Amortizable Intangible Assets

 

Purchased

Technology &

Patents

   

Customer

Relationships

   

All Other

   

Total

 

Original cost

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

Accumulated amortization

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

Net identifiable intangibles

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

 

 

Amortization expense with respect to amortizable intangible assets was $7,874 and $6,788 for the second quarter ended June 3, 2017 and May 28, 2016, respectively, and $15,229 and $13,486 for the six months ended June 3, 2017 and May 28, 2016, respectively.

 

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

 

   

Remainder of

                                         

Fiscal Year

 

2017

   

2018

   

2019

   

2020

   

2021

   

Thereafter

 

Amortization Expense

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

 

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

 

 

Note 6: Long-Term Debt

 

On April 12, 2017, we entered into a credit agreement with a consortium of financial institutions under which we established a $400,000 multi-currency revolving credit facility and a $100,000 term loan that we can use to repay existing indebtedness, finance working capital needs, finance acquisitions, and for general corporate purposes. Interest on the revolving credit facility is payable at LIBOR plus 1.10 percent. A facility fee of 0.15 percent is payable quarterly. The interest rate on the term loan is payable at LIBOR plus 1.25 percent. The interest rates and the facility fee are based on a ratings grid. The credit agreement replaced the previous credit agreement entered into on October 31, 2014. The April 12, 2017 credit agreement expires April 12, 2022.

 

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

 

 

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

 

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

 

We adopted ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issue Costs, during the quarter ended March 4, 2017 on a retrospective basis. The impact of adopting ASU No. 2015-03 on our financial statements was the reclassification of deferred debt issuance costs related to our long-term debt, with the exception of our revolving credit line, from an asset to a direct deduction to the corresponding debt.  Reclassifications from an asset to a direct deduction to the corresponding debt of $2,386 was included in our Condensed Consolidated Balance Sheets as of December 3, 2016. 

 

Note 7: Redeemable Non-Controlling Interest

 

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

 

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

 

During the first quarter of 2017, we purchased the remaining shares from the non-controlling shareholder for €4,206. The difference between the non-controlling interest balance and the purchase price was recorded in additional paid-in capital in the first quarter of 2017.

 

   

Redeemable

 
   

Non-Controlling

 
   

Interest

 

Balance at December 3, 2016

  $ 4,277  

Net income attributed to redeemable non-controlling interest

    39  

Purchase of redeemable non-controlling interest

    (4,468 )

Foreign currency translation adjustment

    152  

Balance at June 3, 2017

  $ -  

 

Note 8: Accounting for Share-Based Compensation

 

Overview 

 

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

 

 

 

Grant-Date Fair Value 

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3, 2017

   

May 28, 2016

   

June 3, 2017

   

May 28, 2016

 

Expected life (in years)

      4.75           4.75           4.75           4.75    

Weighted-average expected volatility

      24.32%           28.55%           24.85%           29.01%    

Expected volatility

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

Risk-free interest rate

      1.81%           1.25%           1.89%           1.43%    

Expected dividend yield

      1.11%           1.27%           1.12%           1.55%    

Weighted-average fair value of grants

      $10.90           $9.81           $10.81           $7.72    

 

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

 

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

 

Risk-free interest rate – The rate is based on the U.S. Treasury yield curve in effect at the time of the grant for the same period of time as the expected life.

 

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

 

Expense

 

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

 

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

 

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

 

 

Stock Option Activity

 

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

 

           

Average

 
   

Options

   

Exercise Price

 

Outstanding at December 3, 2016

    2,986,481     $ 34.92  

Granted

    717,596       50.04  

Exercised

    (407,288 )     34.19  

Forfeited or cancelled

    (74,113 )     36.84  

Outstanding at June 3, 2017

    3,222,676     $ 38.34  

 

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

 

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

 

Restricted Stock Activity

 

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

 

                                   

Weighted-

 
                           

Weighted-

   

Average

 
                           

Average

   

Remaining

 
                           

Grant

   

Contractual

 
                           

Date Fair

   

Life

 
   

Units

   

Shares

   

Total

   

Value

   

(in Years)

 

Nonvested at December 3, 2016

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

Granted

    281,507       -       281,507       51.31       1.7  

Vested

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

Forfeited

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

Nonvested at June 3, 2017

    467,756       -       467,756     $ 44.68       1.5  

 

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

 

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

 

 

Deferred Compensation Activity

 

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

 

   

Non-employee

                 
   

Directors

   

Employees

   

Total

 

Units outstanding December 3, 2016

    424,319       41,116       465,435  

Participant contributions

    8,373       4,582       12,955  

Company match contributions

    837        458        1,295   

Payouts

    (14,143 )     (7,712 )     (21,855 )

Units outstanding June 3, 2017

    419,386       38,444       457,830  

 

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

 

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

 

   

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

 
                                   

Other

 
   

Pension Benefits

   

Postretirement

 
   

U.S. Plans

   

Non-U.S. Plans

   

Benefits

 

Net periodic cost (benefit):

 

2017

   

2016

   

2017

   

2016

   

2017

   

2016

 

Service cost

  $ 28     $ 27     $ 512     $ 481     $ 52     $ 84  

Interest cost

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

Expected return on assets

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

Amortization:

                                               

Prior service cost

    7       7       (1 )     (1 )     -       (10 )

Actuarial loss

    1,307       1,293       846       753       253       532  

Net periodic (benefit) cost

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

 

 

   

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

 
                                   

Other

 
   

Pension Benefits

   

Postretirement

 
   

U.S. Plans

   

Non-U.S. Plans

   

Benefits

 

Net periodic cost (benefit):

 

2017

   

2016

   

2017

   

2016

   

2017

   

2016

 

Service cost

  $ 56     $ 54     $ 1,020     $ 961     $ 104     $ 168  

Interest cost

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

Expected return on assets

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

Amortization:

                                               

Prior service cost

    14       14       (2 )     (2 )     -       (20 )

Actuarial loss

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

Net periodic (benefit) cost

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

 

 

 

Note 10: Accumulated Other Comprehensive Income (Loss)

 

 

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

 

 

   

Three Months Ended June 3, 2017

   

Three Months Ended May 28, 2016

 
   

H.B. Fuller Stockholders

   

Non-

controlling

Interests

   

H.B. Fuller Stockholders

   

Non-

controlling

Interests

 
   

Pre-tax

   

Tax

   

Net

   

Net

   

Pre-tax

   

Tax

   

Net

   

Net

 

Net income including non-controlling interests

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

Foreign currency translation adjustment¹

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

Reclassification to earnings:

                                                               

Defined benefit pension plans adjustment²

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

Interest rate swap³

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

Cash-flow hedges³

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

Other comprehensive income (loss)

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

Comprehensive income (loss)

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

 

 

   

Six Months Ended June 3, 2017

    Six Months Ended May 28, 2016  
   

H.B. Fuller Stockholders

   

Non-

controlling

Interests

   

H.B. Fuller Stockholders

   

Non-

controlling

Interests

 
   

Pretax

   

Tax

   

Net

   

Net

   

Pretax

   

Tax

   

Net

   

Net

 

Net income including non-controlling interests

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

Foreign currency translation adjustment¹

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

Reclassification to earnings:

                                                               

Defined benefit pension plans adjustment²

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

Interest rate swap³

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

Cash-flow hedges³

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

Other comprehensive income (loss)

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

Comprehensive income (loss)

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

 

 

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

 

² Loss reclassified from accumulated other comprehensive income ("AOCI") into earnings as part of net periodic cost related to pension and other postretirement benefit plans is reported in cost of sales, SG&A expense and special charges, net.

 

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

 

 

 

The components of accumulated other comprehensive loss is as follows:

 

   

June 3, 2017

 
   

Total

   

H.B. Fuller

Stockholders

   

Non-controlling

Interests

 

Foreign currency translation adjustment

  $ (77,453 )   $ (77,388 )   $ (65 )

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

    (172,918 )     (172,918 )     -  

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

    48       48       -  

Cash-flow hedges, net of taxes of $720

    (1,169 )     (1,169 )     -  

Accumulated other comprehensive loss

  $ (251,492 )   $ (251,427 )   $ (65 )

 

   

December 3, 2016

 
   

Total

   

H.B. Fuller

Stockholders

   

Non-controlling

Interests

 

Foreign currency translation adjustment

  $ (85,447 )   $ (85,381 )   $ (66 )

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

    (176,101 )     (176,101 )     -  

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

    28       28       -  

Cash-flow hedges, net of taxes of $785

    (1,275 )     (1,275 )     -  

Accumulated other comprehensive loss

  $ (262,795 )   $ (262,729 )   $ (66 )

 

Note 11: Income Taxes

 

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

 

Note 12: Earnings Per Share

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

June 3,

   

May 28,

 

(Shares in thousands)

 

2017

   

2016

   

2017

   

2016

 

Weighted-average common shares - basic

    50,496       50,145       50,369       50,052  

Equivalent shares from share-based compensations plans

    1,190       1,108       1,204       1,072  

Weighted-average common and common equivalent shares - diluted

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

 

Basic earnings per share is calculated by dividing net income attributable to H.B. Fuller by the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is based upon the weighted-average number of common and common equivalent shares outstanding during the applicable period. The difference between basic and diluted earnings per share is attributable to share-based compensation awards. We use the treasury stock method to calculate the effect of outstanding shares, which computes total employee proceeds as the sum of (a) the amount the employee must pay upon exercise of the award, (b) the amount of unearned share-based compensation costs attributed to future services and (c) the amount of tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of the award. Share-based compensation awards for which total employee proceeds exceed the average market price over the applicable period have an antidilutive effect on earnings per share, and accordingly, are excluded from the calculation of diluted earnings per share.

 

 

 

Options to purchase 6,857 and 406,028 shares of common stock at a weighted-average exercise price of $52.75 and $48.59 for the quarters ended June 3, 2017 and May 28, 2016, respectively, were excluded from the diluted earnings per share calculations because they were antidilutive. Options to purchase 132,560 and 950,516 shares of common stock at a weighted-average exercise price of $50.17 and $44.10 for the six months ended June 3, 2017 and May 28, 2016, respectively, were excluded from the diluted earnings per share calculations because they were antidilutive.

 

Note 13: Financial Instruments

 

Overview

 

As a result of being a global enterprise, our earnings, cash flows and financial position are exposed to foreign currency risk from foreign currency denominated receivables and payables.

 

We use foreign currency forward contracts, cross-currency swaps, and interest rate swaps to manage risks associated with foreign currency exchange rates and interest rates. We do not hold derivative financial instruments of a speculative nature or for trading purposes. We record derivatives as assets and liabilities on the balance sheet at fair value. Changes in fair value are recognized immediately in earnings unless the derivative qualifies and is designated as a hedge. Cash flows from derivatives are classified in the statement of cash flows in the same category as the cash flows from the items subject to the designated hedge or undesignated (economic) hedge relationship. We evaluate hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is recorded in earnings.

 

We are exposed to credit risk in the event of nonperformance of counterparties for foreign currency forward exchange contracts and interest rate swap agreements. We select investment-grade multinational banks and financial institutions as counterparties for derivative transactions and monitor the credit quality of each of these banks on periodic basis as warranted. We do not anticipate nonperformance by any of these counterparties, and valuation allowances, if any, are de minimis.

 

Cash Flow Hedges

 

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

 

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

 

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

 

 

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

 

 

 

Fiscal Year of Expiration

 

Interest Rate

   

Notional Value

   

Fair Value

 

Pay EUR

2017

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

Pay EUR

2018

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

Pay EUR

2019

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

Pay EUR

2020

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

Total

          $ 177,336     $ (5,054 )

 

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

 

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

 

Fair Value Hedges

 

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

 

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

 

 

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

 

Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of entities in the customer base and their dispersion across many different industries and countries. As of June 3, 2017, there were no significant concentrations of credit risk.

 

 Note 14: Fair Value Measurements

 

Overview

 

Estimates of fair value for financial assets and liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value and requires certain disclosures. The framework discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

 

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.  These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

Level 3: Unobservable inputs that reflect management’s assumptions, and include situations where there is little, if any, market activity for the asset or liability.

 

Balances Measured at Fair Value on a Recurring Basis

 

The following table presents information about our financial assets and liabilities that are measured at fair value on a recurring basis as of June 3, 2017 and December 3, 2016, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

 

   

June 3,

   

Fair Value Measurements Using:

 

Description

 

2017

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Marketable securities

  $ 2,763     $ 2,763     $ -     $ -  

Foreign exchange contract assets

    2,359       -       2,359       -  

Interest rate swaps

    3,224       -       3,224       -  
                                 

Liabilities:

                               

Foreign exchange contract liabilities

  $ 2,031     $ -     $ 2,031     $ -  

Contingent consideration liability

    1,082       -       -       1,082  

Cash-flow hedges

    5,054       -       5,054       -  

 

 

 

   

December 3,

   

Fair Value Measurements Using:

 

Description

 

2016

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Marketable securities

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

Foreign exchange contract assets

    11,697       -       11,697       -  

Interest rate swaps

    1,579       -       1,579       -  

Cash-flow hedges

    4,654       -       4,654       -  
                                 

Liabilities:

                               

Foreign exchange contract liabilities

  $ 6,925     $ -     $ 6,925     $ -  

Contingent consideration liability

    4,720       -       -       4,720  

 

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

 

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

 

   

Amount

 

Balance at December 3, 2016

  $ 4,720  

Mark to market adjustment

    (3,603 )

Foreign currency translation adjustment

    (35 )

Balance at June 3, 2017

  $ 1,082  

 

Subsequent to the second quarter of 2017, we entered into an agreement to modify the terms of the earnout calculation associated with the contingent consideration liability. This modification results in an increase to the contingent consideration liability by approximately $1,100 based on assumptions utilized for the second quarter 2017 valuation.

 

Note 15: Share Repurchase Program

 

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

 

During the six months ended June 3, 2017, we repurchased shares under the September 30, 2010 program with an aggregate value of $6,284. Of this amount, $125 reduced common stock and $6,159 reduced additional paid-in capital. During the six months ended May 28, 2016, we repurchased shares with an aggregate value of $4,210. Of this amount, $125 reduced common stock and $4,085 reduced additional paid-in capital.

 

Note 16: Commitments and Contingencies

 

Environmental Matters 

 

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

 

 

 

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

 

Other Legal Proceedings 

 

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

 

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

 

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

 

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

 

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

 

   

Six Months Ended

   

3 Years Ended

 
   

June 3, 2017

   

May 28, 2016

   

December 3, 2016

 

Lawsuits and claims settled

    7       4       33  

Settlement amounts

  $ 1,423     $ 343     $ 3,061  

Insurance payments received or expected to be received

  $ 1,132     $ 251     $ 2,253  

 

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

 

 

 

Based on currently available information, we have concluded that the resolution of any pending matter, including asbestos-related litigation, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flow.  

 

Note 17: Operating Segments

 

We are required to report segment information in the same way that we internally organize our business for assessing performance and making decisions regarding allocation of resources. For segment evaluation by the chief operating decision maker, segment operating income is identified as gross profit less SG&A expenses. Segment operating income excludes special charges, net. Corporate expenses are fully allocated to each operating segment. Corporate assets are not allocated to the operating segments. Inter-segment revenues are recorded at cost plus a markup for administrative costs. Operating results of each segment are regularly reviewed by our chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance.

 

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

 

   

Three Months Ended

 
   

June 3, 2017

   

May 28, 2016

 
           

Inter-

   

Segment

            Inter-    

Segment

 
   

Trade

   

Segment

   

Operating

   

Trade

   

Segment

   

Operating

 
   

Revenue

   

Revenue

   

Income (Loss)

   

Revenue

   

Revenue

   

Income

 

Americas Adhesives

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

EIMEA

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

Asia Pacific

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

Construction Products

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

Engineering Adhesives

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

Total

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

 

 

   

Six Months Ended

 
   

June 3, 2017

   

May 28, 2016

 
           

Inter-

   

Segment

           

Inter-

   

Segment

 
   

Trade

   

Segment

   

Operating

   

Trade

   

Segment

   

Operating

 
   

Revenue

   

Revenue

   

Income

   

Revenue

   

Revenue

   

Income

 

Americas Adhesives

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

EIMEA

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

Asia Pacific

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

Construction Products

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

Engineering Adhesives

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

Total

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

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

June 3,

   

May 28,

 
   

2017

   

2016

   

2017

   

2016

 

Segment operating income

  $ 43,268     $ 54,572     $ 69,349     $ 92,410  

Special charges, net

    -       (370 )     -       (783 )

Other income (expense), net

    (110 )     (1,565 )     511       (6,647 )

Interest expense

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

Income before income taxes and income from equity method investments

  $ 35,010     $ 46,040     $ 53,332     $ 72,075  

 

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

The Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended December 3, 2016 for important background information related to our business.

 

Net revenue in the second quarter of 2017 increased 5.5 percent from the second quarter of 2016. Revenue increased 9.4 percent due to sales volume, including 5.4 percent from acquisitions, and a 0.2 percent increase due to favorable sales mix compared to the second quarter of 2016. A weaker Egyptian pound, Euro, Chinese renminbi, Turkish lira and Mexican peso compared to the U.S. dollar for the second quarter of 2017 compared to the second quarter of 2016 were the main drivers of a negative 4.1 percent currency effect. Gross profit margin decreased 370 basis points primarily due to higher raw material costs and the implementation of the 2017 Restructuring Plan.

 

Net revenue in the first six months of 2017 increased 5.8 percent from the first six months of 2016. Revenue increased 10.8 percent due to sales volume, including 4.4 percent from acquisitions, but was partially offset by a 1.0 percent decrease due to unfavorable sales mix and a 0.2 percent decrease in product pricing compared to the first six months of 2016. A weaker Egyptian pound, Euro, Chinese renminbi, Turkish lira and Mexican peso compared to the U.S. dollar for the first six months of 2017 compared to the first six months of 2016 were the main drivers of a negative 3.8 percent currency effect. Gross profit margin decreased 260 basis points primarily due to higher raw material costs and the implementation of the 2017 Restructuring Plan.

 

Net income attributable to H.B. Fuller in the second quarter of 2017 was $25.9 million compared to $33.3 million in the second quarter of 2016. On a diluted earnings per share basis, the second quarter of 2017 was $0.50 per share compared to $0.65 per share for the second quarter of 2016.

 

Net income attributable to H.B. Fuller in the first six months of 2017 was $40.7 million compared to $52.2 million in the first six months of 2016. On a diluted earnings per share basis, the first six months of 2017 was $0.79 per share compared to $1.02 per share for the first six months of 2016.

 

Restructuring Plan

 

During the first quarter of 2017, we approved a restructuring plan (the “2017 Restructuring Plan”) related to organizational changes and other actions to optimize operations. In implementing the 2017 Restructuring Plan, we expect to incur costs of approximately $17.0 million to $20.0 million which includes severance and related employee costs, and costs related to the optimization of production facilities, streamlining of processes, rationalization of product offerings and accelerated depreciation of long-lived assets. The 2017 Restructuring Plan was implemented in the first quarter of 2017 and is currently expected to be completed by mid-year of fiscal 2018. During the second quarter and six months ended June 3, 2017, we recorded a pre-tax charge of $5.6 million and $15.8 million, respectively, related to the 2017 Restructuring Plan.  

 

Results of Operations

 

Net revenue:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

2017 vs

   

June 3,

   

May 28,

   

2017 vs

 

($ in millions)

 

2017

   

2016

   

2016

   

2017

   

2016

   

2016

 

Net revenue

  $ 561.7     $ 532.5       5.5 %   $ 1,065.0     $ 1,006.8       5.8 %

 

 

 

We review variances in net revenue in terms of changes related to sales volume, product pricing, sales mix, business acquisitions and changes in foreign currency exchange rates. The impact of sales volume, product pricing, sales mix and acquisitions are viewed as constant currency growth. The following table shows the net revenue variance analysis for the second quarter and first six months of 2017 compared to the same periods in 2016:

 

 

   

Three Months Ended June 3, 2017

   

Six Months Ended June 3, 2017

 
   

vs May 28, 2016

   

vs May 28, 2016

 

Constant currency growth

    9.6 %     9.6 %

Currency

    (4.1 %)     (3.8 %)

Total

    5.5 %     5.8 %

 

Constant currency growth was a positive 9.6 percent in the second quarter of 2017 compared to the second quarter of 2016. The 9.6 percent constant currency growth in the second quarter of 2017 was driven by 21.7 percent growth in Engineering Adhesives, 11.0 percent growth in Asia Pacific, 8.1 percent growth in EIMEA and 11.8 percent growth in Americas Adhesives, offset by a 6.1 percent decrease in Construction Products. The negative 4.1 percent currency impact was primarily driven by the devaluation of the Egyptian pound, Euro, Chinese renminbi, Turkish lira and Mexican peso.

 

Constant currency growth was a positive 9.6 percent in the first six months of 2017 compared to the first six months of 2016. The 9.6 percent constant currency growth in the first six months of 2017 was driven by 25.7 percent growth in Engineering Adhesives, 15.2 percent growth in Asia Pacific, 8.6 percent growth in EIMEA and 9.0 percent growth in Americas Adhesives, offset by a 5.7 percent decrease in Construction Products. The negative 3.8 percent currency impact was primarily driven by the devaluation of the Egyptian pound, Euro, Chinese renminbi, Turkish lira and Mexican peso.

 

 

Cost of sales:                        

 

                                                 
   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

2017 vs

   

June 3,

   

May 28,

   

2017 vs

 

($ in millions)

 

2017

   

2016

   

2016

   

2017

   

2016

   

2016

 

Raw materials

  $ 312.4     $ 285.0       9.6 %   $ 585.8     $ 539.4       8.6 %

Other manufacturing costs

    103.2       89.3       15.6 %     194.1       171.6       13.2 %

Cost of sales

  $ 415.6     $ 374.3       11.0 %   $ 779.9     $ 711.0       9.7 %

Percent of net revenue

    74.0 %     70.3 %             73.2 %     70.6 %        

 

Cost of sales in the second quarter of 2017 compared to the second quarter of 2016 increased 370 basis points as a percentage of net revenue. Raw material cost as a percentage of net revenue increased 210 basis points in the second quarter of 2017 compared to the second quarter of 2016 primarily due to higher raw material costs. Other manufacturing costs as a percentage of revenue increased 160 basis points in the second quarter of 2017 compared to the second quarter of 2016 driven primarily by the impact of acquired businesses and the implementation of the 2017 Restructuring Plan.

 

Cost of sales in the first six months of 2017 compared to the first six months of 2016 increased 260 basis points as a percentage of net revenue. Raw material cost as a percentage of net revenue increased 140 basis points in the first six months of 2017 compared to the first six months of 2016 primarily due to higher raw material costs. Other manufacturing costs as a percentage of revenue increased 120 basis points in the first six months of 2017 compared to the first six months of 2016 driven primarily by the impact of acquired businesses and the implementation of the 2017 Restructuring Plan.

 

Gross profit:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

2017 vs

   

June 3,

   

May 28,

   

2017 vs

 

($ in millions)

 

2017

   

2016

   

2016

   

2017

   

2016

   

2016

 

Gross profit

  $ 146.0     $ 158.3       (7.7% )   $ 285.0     $ 295.9       (3.7% )

Percent of net revenue

    26.0 %     29.7 %             26.8 %     29.4 %        

 

Gross profit in the second quarter of 2017 decreased 7.7 percent and gross profit margin decreased 370 basis points compared to the second quarter of 2016. The decrease in gross profit margin was primarily due to higher raw material costs, the impact of acquired businesses and the implementation of the 2017 Restructuring Plan.

 

Gross profit in the first six months of 2017 decreased 3.7 percent and gross profit margin decreased 260 basis points compared to the first six months of 2016. The decrease in gross profit margin was primarily due to higher raw material costs, the impact of acquired businesses and the implementation of the 2017 Restructuring Plan.

 

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

2017 vs

   

June 3,

   

May 28,

   

2017 vs

 

($ in millions)

 

2017

   

2016

   

2016

   

2017

   

2016

   

2016

 

SG&A

  $ 102.8     $ 103.7       (0.9% )   $ 215.7     $ 203.5       6.0 %

Percent of net revenue

    18.3 %     19.5 %             20.3 %     20.2 %        

 

SG&A expenses for the second quarter of 2017 decreased $0.9 million, or 0.9 percent, compared to the second quarter of 2016. The decrease is mainly due to lower expenses related to general spending reductions and foreign currency exchange rate benefits on spending outside the U.S., partially offset by the impact of acquired businesses.

 

SG&A expenses for the first six months of 2017 increased $12.2 million, or 6.0 percent, compared to the first six months of 2016. The increase is mainly due to the impact of acquired businesses and the implementation of the 2017 Restructuring Plan, partially offset by lower expenses related to general spending reductions and foreign currency exchange rate benefits on spending outside the U.S.

 

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:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

2017 vs

   

June 3,

   

May 28,

   

2017 vs

 

($ in millions)

 

2017

   

2016

   

2016

   

2017

   

2016

   

2016

 

Special charges, net

  $ -     $ 0.4       NMP     $ -     $ 0.8       NMP  

 

NMP = Non-meaningful percentage

 

The following table provides detail of special charges, net:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

June 3,

   

May 28,

 

($ in millions)

 

2017

   

2016

   

2017

   

2016

 

Acquisition and transformation related costs

  $ -     $ 0.1     $ -     $ 0.2  

Facility exit costs

    -       0.1       -       0.4  

Other related costs

    -       0.2       -       0.2  

Special charges, net

  $ -     $ 0.4     $ -     $ 0.8  

 

The integration of the industrial adhesives business we acquired in March 2012 involved a significant amount of restructuring and capital investment to optimize the new combined entity. In addition to this acquisition, we announced our intentions to take a series of actions in our existing EIMEA operating segment to improve the profitability and future growth prospects of this operating segment. We combined these two initiatives into a single project which we refer to as the “Business Integration Project”. During the second quarter and six months ended May 28, 2016, we incurred special charges, net of $0.4 million and $0.8 million respectively, for costs related to the Business Integration Project. The Business Integration Project was substantially complete at the end of 2016.

 

 

 Other income (expense), net:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

2017 vs

   

June 3,

   

May 28,

   

2017 vs

 

($ in millions)

 

2017

   

2016

   

2016

   

2017

   

2016

   

2016

 

Other income (expense), net

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

NMP = Non-meaningful percentage

                         

 

Other income (expense), net in the second quarter of 2017 included $1.0 million of currency transaction losses off set by $0.8 million of interest income. Other income (expense), net in the second quarter of 2016 included $2.4 million of currency transaction losses offset by $0.3 million of net financing income and $0.5 million of interest income.

 

Other income (expense), net in the first six months of 2017 included $1.4 million of interest income offset by $1.0 million of currency transaction losses. Other income (expense), net in the first six months of 2016 included $8.2 million of currency transaction losses offset by $0.6 million of net financing income and $1.0 million of interest income.

 

 

Interest expense:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

2017 vs

   

June 3,

   

May 28,

   

2017 vs

 

($ in millions)

 

2017

   

2016

   

2016

   

2017

   

2016

   

2016

 

Interest expense

  $ 8.1     $ 6.6       23.5 %   $ 16.5     $ 12.9       28.1 %

 

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

 

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

 

 

Income taxes:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

2017 vs

   

June 3,

   

May 28,

   

2017 vs

 

($ in millions)

 

2017

   

2016

   

2016

   

2017

   

2016

   

2016

 

Income taxes

  $ 11.2     $ 14.3       (22.0 %)   $ 16.9     $ 23.1       (26.6 %)

Effective tax rate

    31.9 %     31.0 %             31.7 %     32.0 %        

 

Income tax expense of $11.2 million in the second quarter of 2017 includes $0.8 million of discrete tax expense and $1.9 million of tax benefit from costs primarily related to the restructuring plans and other non-recurring items. Excluding the discrete tax expense and the effects of these items, the overall effective tax rate was 29.2 percent. 

 

Income tax expense of $16.9 million in the first six months of 2017 includes $0.9 million of discrete tax expense and $5.9 million of tax benefit from costs primarily related to the restructuring plans and other non-recurring items. Excluding the discrete tax expense and the effects of these items, the overall effective tax rate was 29.4 percent. 

 

 

Income from equity method investments:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

2017 vs

   

June 3,

   

May 28,

   

2017 vs

 

($ in millions)

 

2017

   

2016

   

2016

   

2017

   

2016

   

2016

 

Income from equity method investments

  $ 2.0     $ 1.6       22.3 %   $ 4.3     $ 3.3       28.4 %

 

The income from equity method investments relates to our 50 percent ownership of the Sekisui-Fuller joint venture in Japan. The higher income for the second quarter and first six months of 2017 compared to the same periods of 2016 is primarily related to higher net income in our joint venture.

 

Net income attributable to non-controlling interests:

 

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

 

 

Net income attributable to H.B. Fuller:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

2017 vs

   

June 3,

   

May 28,

   

2017 vs

 

($ in millions)

 

2017

   

2016

   

2016

   

2017

   

2016

   

2016

 

Net income attributable to H.B. Fuller

  $ 25.9     $ 33.3       (22.4% )   $ 40.7     $ 52.2       (22.2% )

Percent of net revenue

    4.6 %     6.3 %             3.8 %     5.2 %        

 

The net income attributable to H.B. Fuller for the second quarter of 2017 was $25.9 million compared to $33.3 million for the second quarter of 2016. The diluted earnings per share for the second quarter of 2017 was $0.50 per share as compared to $0.65 per share for the second quarter of 2016.

 

The net income attributable to H.B. Fuller for the first six months of 2017 was $40.7 million compared to $52.2 million for the first six months of 2016. The diluted earnings per share for the first six months of 2017 was $0.79 per share as compared to $1.02 per share for the first six months of 2016.

 

Operating Segment Results

 

We have five reportable segments: Americas Adhesives, EIMEA (Europe, India, Middle East and Africa), Asia Pacific, Construction Products and Engineering Adhesives. Operating results of each of these segments are regularly reviewed by our chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance.

 

The tables below provide certain information regarding the net revenue and segment operating income of each of our operating segments. For segment evaluation by the chief operating decision maker, segment operating income is defined as gross profit less SG&A expenses. Segment operating income excludes special charges, net.

 

 

Net Revenue by Segment:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3, 2017

   

May 28, 2016

   

June 3, 2017

   

May 28, 2016

 
   

Net

   

% of

   

Net

   

% of

   

Net

   

% of

   

Net

   

% of

 

($ in millions)

 

Revenue

   

Total

   

Revenue

   

Total

   

Revenue

   

Total

   

Revenue

   

Total

 

Americas Adhesives

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

EIMEA

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

Asia Pacific

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

Construction Products

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

Engineering Adhesives

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

Total

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

 

Segment Operating Income (Loss):

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3, 2017

   

May 28, 2016

   

June 3, 2017

   

May 28, 2016

 

($ in millions)

 

Segment Operating Income (Loss)

   

% of Total

   

Segment Operating Income

   

% of Total

   

Segment Operating Income

   

% of Total

   

Segment Operating Income

   

% of Total

 

Americas Adhesives

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

EIMEA

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

Asia Pacific

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

Construction Products

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

Engineering Adhesives

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

Total

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

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

June 3,

   

May 28,

 

($ in millions)

 

2017

   

2016

   

2017

   

2016

 

Segment operating income

  $ 43.3     $ 54.6     $ 69.3     $ 92.4  

Special charges, net

    -       (0.4 )     -       (0.8 )

Other income (expense), net

    (0.1 )     (1.6 )     0.5       (6.6 )

Interest expense

    (8.2 )     (6.6 )     (16.5 )     (12.9 )

Income before income taxes and income from equity method investments

  $ 35.0     $ 46.0     $ 53.3     $ 72.1  

 

Americas Adhesives

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

2017 vs

   

June 3,

   

May 28,

   

2017 vs

 

($ in millions)

 

2017

   

2016

   

2016

   

2017

   

2016

   

2016

 

Net revenue

  $ 229.6     $ 206.2       11.4 %   $ 422.8     $ 389.5       8.6 %

Segment operating income

  $ 26.5     $ 35.9       (26.3 %)   $ 47.5     $ 62.1       (23.6 %)

Segment operating margin

    11.5 %     17.4 %             11.2 %     16.0 %        

 

 

 

   

Three Months Ended June 3, 2017

   

Six Months Ended June 3, 2017

 
   

vs May 28, 2016

   

vs May 28, 2016

 

Constant currency growth

    11.8 %     9.0 %

Currency

    (0.4 %)     (0.4 %)

Total

    11.4 %     8.6 %

 

Net revenue increased 11.4 percent in the second quarter of 2017 compared to the second quarter of 2016. The 11.8 percent increase in constant currency growth was attributable to a 12.3 percent increase in sales volume, including a 10.7 percent increase due to the Wisdom Adhesives acquisition, and a 0.8 percent increase in sales mix offset by an unfavorable 1.3 percent decrease in product pricing. The negative currency effect was due to the weaker Mexico peso, Canadian dollar and Argentinian peso compared to the U.S. dollar. As a percentage of net revenue, raw material costs increased 450 basis points mainly due to lower sales prices and higher raw material costs. Other manufacturing costs as a percentage of net revenue increased 200 basis points, primarily due to the acquisition and integration of Wisdom Adhesives and higher delivery expense. SG&A expenses as a percentage of net revenue decreased 60 basis points due to the implementation of the 2017 Restructuring Plan. Segment operating income decreased 26.3 percent and segment operating margin as a percentage of net revenue decreased 590 basis points compared to the second quarter of 2016.

 

Net revenue increased 8.6 percent in the first six months of 2017 compared to the first six months of 2016. The 9.0 percent increase in constant currency growth was attributable to a 11.8 percent increase in sales volume, including a 7.7 percent increase due to the Wisdom Adhesives acquisition, offset by a 1.4 percent decrease due to unfavorable sales mix and a 1.4 percent decrease in product pricing. The negative currency effect was due to the weaker Mexico peso and Argentinian peso compared to the U.S. dollar. As a percentage of net revenue, raw material costs increased 310 basis points mainly due to lower sales prices, higher raw material costs, and the impact of valuing inventories related to the Wisdom Adhesives acquisition at fair value. Other manufacturing costs as a percentage of net revenue increased 160 basis points, primarily due to the acquisition and integration of Wisdom Adhesives and higher delivery expense. Segment operating income decreased 23.6 percent and segment operating margin as a percentage of net revenue decreased 480 basis points compared to the first six months of 2016.

 

EIMEA

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

2017 vs

   

June 3,

   

May 28,

   

2017 vs

 

($ in millions)

 

2017

   

2016

   

2016

   

2017

   

2016

   

2016

 

Net revenue

  $ 135.2     $ 139.9       (3.3 %)   $ 259.3     $ 264.2       (1.9 %)

Segment operating income

  $ 8.1     $ 11.0       (26.7 %)   $ 9.8     $ 17.2       (42.5 %)

Segment operating margin

    6.0 %     7.9 %             3.8 %     6.5 %        

 

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

 

   

Three Months Ended June 3, 2017

   

Six Months Ended June 3, 2017

 
   

vs May 28, 2016

   

vs May 28, 2016

 

Constant currency growth

    8.1 %     8.6 %

Currency

    (11.4 %)     (10.5 %)

Total

    (3.3 %)     (1.9 %)

 

Net revenue decreased 3.3 percent in the second quarter of 2017 compared to the second quarter of 2016. The 8.1 percent increase in constant currency growth was attributable to a 4.0 percent increase in sales volume, a 3.7 percent increase in product pricing, and a 0.4 percent increase in favorable sales mix. The negative currency effect of 11.4 percent was primarily the result of a weaker Egyptian pound, Euro and Turkish lira compared to the U.S. dollar. Sales volume growth was primarily related to the hygiene and durable assembly markets, and strong growth in the emerging markets. Raw material cost as a percentage of net revenue increased 140 basis points in the second quarter compared to the second quarter last year primarily due to higher raw material costs. Other manufacturing costs as a percentage of net revenue were 30 basis points higher than the second quarter of 2016. Segment operating income decreased 26.7 percent and segment operating margin decreased 190 basis points compared to the second quarter of 2016.

 

 

 

Net revenue decreased 1.9 percent in the first six months of 2017 compared to the first six months of 2016. The 8.6 percent increase in constant currency growth was attributable to a 5.1 percent increase in sales volume, a 3.4 percent increase in product pricing and a 0.1 percent increase in sales mix. The negative currency effect of 10.5 percent was primarily the result of a weaker Egyptian pound, Euro and Turkish lira compared to the U.S. dollar. Sales volume growth was primarily related to the hygiene and durable assembly markets, and strong growth in the emerging markets. Raw material cost as a percentage of net revenue increased 40 basis points in the six months compared to the six months last year primarily due to higher raw material costs. Other manufacturing costs as a percentage of net revenue were 90 basis points higher than the second quarter of 2016 due to the implementation of the 2017 Restructuring Plan. SG&A expenses as a percentage of net revenue increased 140 basis points due to the implementation of the 2017 Restructuring Plan. Segment operating income decreased 42.5 percent and segment operating margin decreased 270 basis points compared to the first six months of 2016.

 

Asia Pacific

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

2017 vs

   

June 3,

   

May 28,

   

2017 vs

 

($ in millions)

 

2017

   

2016

   

2016

   

2017

   

2016

   

2016

 

Net revenue

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

Segment operating income

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

Segment operating margin

    7.4 %     5.0 %             5.2 %     6.0 %        

 

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

 

   

Three Months Ended June 3, 2017

   

Six Months Ended June 3, 2017

 
   

vs May 28, 2016

   

vs May 28, 2016

 

Constant currency growth

    11.0 %     15.2 %

Currency

    (3.8 %)     (3.7 %)

Total

    7.2 %     11.5 %

 

 

Net revenue in the second quarter of 2017 increased 7.2 percent compared to the second quarter of 2016. The 11.0 percent increase in constant currency growth was attributable to a 12.5 percent increase in sales volume including a 4.8 percent increase due to the Advanced Adhesives acquisition, partially offset by a 0.4 percent decrease due to unfavorable sales mix and a 1.1 percent decrease in product pricing. Organic constant currency growth was primarily driven by volume growth in Greater China. Negative currency effects of 3.8 percent compared to the second quarter of 2016 were primarily driven by the weaker Chinese renminbi and Malaysian ringgit compared to the U.S. dollar partially offset by a stronger Australian dollar. Raw material costs as a percentage of net revenue decreased 20 basis points compared to the second quarter of 2016. Other manufacturing costs as a percentage of net revenue decreased 60 basis points compared to the second quarter of 2016 primarily due to the acquisition of Advanced Adhesives. SG&A expenses as a percentage of net revenue decreased 160 basis points due to lower expenses related to general spending reductions, foreign currency exchange rate benefits on spending outside the U.S and the impact of the acquisition of Advanced Adhesives. Segment operating income increased 56.5 percent and segment operating margin increased 240 basis points compared to the second quarter of 2016.

 

Net revenue in the first six months of 2017 increased 11.5 percent compared to the first six months of 2016. The 15.2 percent increase in constant currency growth was attributable to a 18.3 percent increase in sales volume including a 5.8 percent increase due to the Advanced Adhesives acquisition, partially offset by a 1.5 percent decrease due to unfavorable sales mix and a 1.6 percent decrease in product pricing. Organic constant currency growth was primarily driven by volume growth in Greater China. Negative currency effects of 3.7 percent compared to the first six months of 2016 were primarily driven by the weaker Chinese renminbi and Malaysian ringgit compared to the U.S. dollar partially offset by a stronger Australian dollar. Raw material costs as a percentage of net revenue increased 60 basis points compared to the first six months of 2016 due to unfavorable sales mix and higher raw material costs. Other manufacturing costs as a percentage of net revenue was flat compared to the first six months of 2016. Segment operating income decreased 2.3 percent and segment operating margin decreased 80 basis points compared to the first six months of 2016.

 

 

 

Construction Products

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

2017 vs

   

June 3,

   

May 28,

   

2017 vs

 

($ in millions)

 

2017

   

2016

   

2016

   

2017

   

2016

   

2016

 

Net revenue

  $ 63.8     $ 67.6       (5.7 %)   $ 120.8     $ 127.7       (5.4 %)

Segment operating income

  $ (1.9 )   $ 2.5       (173.1 %)   $ (2.5 )   $ 3.3       (176.4 %)

Segment operating margin

    (2.9 %)     3.7 %             (2.1 %)     2.6 %        

 

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

 

   

Three Months Ended June 3, 2017

   

Six Months Ended June 3, 2017

 
   

vs May 28, 2016

   

vs May 28, 2016

 

Constant currency growth

    (6.1 %)     (5.7 %)

Currency

    0.4 %     0.3 %

Total

    (5.7 %)     (5.4 %)

 

Net revenue decreased 5.7 percent in the second quarter of 2017 compared to the second quarter of 2016. The 6.1 percent decrease in constant currency growth was driven by a 0.8 percent decrease due to unfavorable sales mix, a 5.0 percent decrease in sales volume and a 0.3 percent decrease in product pricing. The positive currency effect was due to the stronger Australian dollar compared to the U.S. dollar. Raw material cost as a percentage of net revenue was 230 basis points lower in the second quarter of 2017 compared to last year primarily due to sales mix and lower raw material costs. Other manufacturing costs as a percentage of net revenue were 920 basis points higher in the second quarter of 2017 compared to the second quarter of 2016 due to the discontinuance of certain retail and wholesale products in connection with the implementation of the 2017 Restructuring Plan and inefficiencies related to the facility upgrade and expansion project. Segment operating income decreased 173.1 percent and segment operating margin decreased 660 basis points compared to the second quarter of 2016.

 

Net revenue decreased 5.4 percent in the first six months of 2017 compared to the first six months of 2016. The 5.7 percent decrease in constant currency growth was driven by a 2.1 percent decrease due to unfavorable sales mix, a 3.4 percent decrease in sales volume and a 0.2 percent decrease in product pricing. The positive currency effect was due to the stronger Australian dollar compared to the U.S. dollar. Raw material cost as a percentage of net revenue was 170 basis points lower in the first six months of 2017 compared to the first six months of 2016 primarily due to sales mix and lower raw material costs. Other manufacturing costs as a percentage of net revenue were 610 basis points higher in the first six months of 2017 compared to the first six months of 2016 due to the discontinuance of certain retail and wholesale products in connection with the implementation of the 2017 Restructuring Plan and inefficiencies related to the facility upgrade and expansion project. Segment operating income decreased 176.4 percent and segment operating margin decreased 470 basis points compared to the first six months of 2016.

 

 

 

 

Engineering Adhesives

 

   

Three Months Ended

   

Six Months Ended

 
   

June 3,

   

May 28,

   

2017 vs

   

June 3,

   

May 28,

   

2017 vs

 

($ in millions)

 

2017

   

2016

   

2016

   

2017

   

2016

   

2016

 

Net revenue

  $ 68.6     $ 58.7       16.8 %   $ 135.0     $ 111.5       21.1 %

Segment operating income

  $ 5.8     $ 2.1       178.9 %   $ 7.9     $ 3.0       (165.7 %)

Segment operating margin

    8.5 %     3.6 %             5.8 %     2.7 %        

 

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

 

   

Three Months Ended June 3, 2017

   

Six Months Ended June 3, 2017

 
   

vs May 28, 2016

   

vs May 28, 2016

 

Constant currency growth

    21.7 %     25.7 %

Currency

    (4.9 %)     (4.6 %)

Total

    16.8 %     21.1 %

 

Net revenue increased 16.8 percent in the second quarter of 2017 compared to the second quarter of 2016. The 21.7 percent increase in constant currency growth was attributable to a 25.3 percent increase in sales volume including a 6.8 percent increase due to the acquisition of Cyberbond, partially offset by a 2.4 percent decrease in product pricing and a 1.2 percent decrease due to unfavorable sales mix. Organic constant currency growth was driven by strong performance in the automotive, electronics and Tonsan markets. Negative currency effects of 4.9 percent compared to the second quarter of last year were primarily driven by the weaker Chinese renminbi compared to the U.S. dollar. Raw material cost as a percentage of net revenue was 100 basis points higher in the second quarter of 2017 compared to the second quarter of 2016 due to lower product prices and higher raw material costs. Other manufacturing costs as a percentage of net revenue were 20 basis points lower in the second quarter of 2017 compared to the second quarter of 2016. SG&A expenses as a percentage of net revenue decreased 570 basis points due to the mark to market adjustment related to the Tonsan contingent consideration liability. Segment operating income increased 178.9 percent and segment operating margin increased 490 basis points compared to the second quarter of 2016.

 

Net revenue increased 21.1 percent in the first six months of 2017 compared to the first six months of 2016. The 25.7 percent increase in constant currency growth was attributable to a 28.6 percent increase in sales volume including a 6.7 percent increase due to the acquisition of Cyberbond, partially offset by a 2.9 percent decrease in product pricing. Organic constant currency growth was driven by strong performance in the automotive, electronics and Tonsan markets. Negative currency effects of 4.6 percent compared to the first six months of last year were primarily driven by the weaker Chinese renminbi compared to the U.S. dollar. Raw material cost as a percentage of net revenue was 150 basis points higher in the first six months of 2017 compared to the first six months of 2016 due to lower product prices and higher raw material costs. Other manufacturing costs as a percentage of net revenue were 100 basis points lower in the first six months of 2017 compared to the first six months of 2016 due to higher sales volume. SG&A expenses as a percentage of net revenue decreased 360 basis points due to the mark to market adjustment related to the Tonsan contingent consideration liability. Segment operating income decreased 165.7 percent and segment operating margin increased 310 basis points compared to the first six months of 2016.

 

Financial Condition, Liquidity and Capital Resources

 

Total cash and cash equivalents as of June 3, 2017 were $94.1 million compared to $142.2 million as of December 3, 2016 and $146.0 million as of May 28, 2016. The majority of the $94.1 million in cash and cash equivalents as of June 3, 2017 was held outside the United States. Total long and short-term debt was $786.1 million as of June 3, 2017, $703.3 million as of December 3, 2016 and $719.1 million as of May 28, 2016. The total debt to total capital ratio as measured by Total Debt divided by (Total Debt plus Total Stockholders’ Equity) was 44.2 percent as of June 3, 2017 as compared to 42.8 percent as of December 3, 2016 and 43.8 percent as of May 28, 2016.

 

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

 

 

 

Our credit agreements and note purchase agreements include restrictive covenants that, if not met, could lead to a renegotiation of our credit lines and a significant increase in our cost of financing. At June 3, 2017, we were in compliance with all covenants of our contractual obligations as shown in the following table:

 

 

Covenant

Debt Instrument

Measurement

Result as of June 3, 2017

TTM EBITDA / TTM Interest Expense

All Debt Instruments

Not less than 2.5

8.4

       

Total Indebtedness / TTM EBITDA

All Debt Instruments

Not greater than 3.5

2.9

       
       

 

 

  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, 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 April 12, 2017.

 

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

 

Selected Metrics of Liquidity

 

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

 

   

June 3,

   

May 28,

 
   

2017

   

2016

 

Net working capital as a percentage of annualized net revenue1

    22.2 %     21.3 %

Accounts receivable DSO2 (Days)

    61       59  

Inventory days on hand3 (Days)

    70       65  

Free cash flow4 (million)

  $ (9.1 )   $ 33.3  

Total debt to total capital ratio5

    44.2 %     43.8 %

 

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 multiplied by four).

 

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

 

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

 

4 Year-to-date net cash provided by operating activities, 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:

 

   

Six Months Ended

 
   

June 3,

   

May 28,

 

($ in millions)

 

2017

   

2016

 

Net cash provided by operating activities

  $ 32.8     $ 82.6  

 

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

 

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

 

   

Six Months Ended

 
   

June 3,

   

May 28,

 

($ in millions)

 

2017

   

2016

 

Trade receivables, net

  $ (9.9 )   $ 13.3  

Inventory

    (45.4 )     (9.1 )

Trade payables

 

20.4

      (7.5 )

Total cash flow impact

  $ (34.9 )   $ (3.3 )

 

 

Trade Receivables, net – Trade Receivables, net was a use of cash of $9.9 million in 2017 compared to a source of cash of $13.3 million in 2016. The use of cash in 2017 compared to source of cash in 2016 was due to an increase in trade receivables in the current year compared to the prior year. The DSO were 61 days at June 3, 2017 and 59 days at May 28, 2016.

 

 

Inventory – Inventory was a use of cash of $45.4 million and $9.1 million in 2017 and 2016, respectively. The higher use of cash in 2017 is due to higher raw material costs and increasing inventory levels to maintain service levels while integrating our Wisdom acquisition. The lower use of cash in 2016 is related to lower seasonal build of inventory in 2016. Inventory days on hand were 70 days as of June 3, 2017 and 65 days as of May 28, 2016.

 

 

Trade Payables – For the first six months of 2017, trade payables was a source of cash of $20.4 million compared to a use of cash of $7.5 million in 2016. The use of cash in 2016 compared to the source of cash in 2017 is primarily related to higher purchases of inventory somewhat offset by lower purchases of property, plant and equipment.

 

Cash Flows from Investing Activities:

 

   

Six Months Ended

 
   

June 3,

   

May 28,

 

($ in millions)

 

2017

   

2016

 

Net cash used in investing activities

  $ (150.8 )   $ (44.0 )

 

In the first quarter of 2017, we acquired Wisdom Adhesives for $123.3 million. Purchases of property, plant and equipment were $27.1 million during the six months ended June 3, 2017 as compared to $35.7 million for the same period of 2016.

 

 

Cash Flows from Financing Activities:

 

   

Six Months Ended

 
   

June 3,

   

May 28,

 

($ in millions)

 

2017

   

2016

 

Net cash provided by (used in) financing activities

  $ 68.4     $ (12.4 )

 

We had $598.0 million of proceeds from the issuance of long-term debt in the six months ended June 3, 2017 which consisted of $300.0 million of proceeds from the issuance of the 4.00% Notes, $100 million of proceeds from our refinanced term loan and $198.0 million of proceeds from our revolving credit facility. Proceeds from our revolving credit facility were drawn in conjunction with the acquisition of Wisdom Adhesives and from borrowing from ongoing operations. Repayments of long-term debt were $504.3 million in the six months ended June 3, 2017 and $11.3 million in the six months ended May 28, 2016. We also paid $3.8 million in debt issuance costs associated with the issuance of the 4.000% Notes in the first six months of 2017. Net payments of notes payable were $10.3 million in 2017 compared to net proceeds of $11.2 million in 2016. Cash dividends paid were $14.6 million in 2017 compared to $13.5 million in 2016. Repurchases of common stock were $8.9 million in the six months ended June 3, 2017 compared to $6.6 million in the same period of 2016.

 

Forward-Looking Statements and Risk Factors

 

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In this Quarterly Report on Form 10-Q, we discuss expectations regarding our future performance which include anticipated financial performance, savings from restructuring and process initiatives, global economic conditions, liquidity requirements, the impact of litigation and environmental matters, the effect of new accounting pronouncements and one-time accounting charges and credits, and similar matters. This Quarterly Report on Form 10-Q contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words like "plan," "expect," "aim," "believe," "project," "anticipate," "intend," "estimate," "will," "should," "could" (including the negative or variations thereof) and other expressions that indicate future events and trends. These plans and expectations are based upon certain underlying assumptions, including those mentioned with the specific statements. Such assumptions are in turn based upon internal estimates and analyses of current market conditions and trends, our plans and strategies, economic conditions and other factors. These plans and expectations and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. In addition to the factors described in this report, Part II, Item 1A. Risk Factors in this report and Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 3, 2016, identify some of the important factors that could cause our actual results to differ materially from those in any such forward-looking statements. This list of important factors does not include all such factors nor necessarily present them in order of importance. In order to comply with the terms of the safe harbor, we have identified these important factors which could affect our financial performance and could cause our actual results for future periods to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Additionally, the variety of products sold by us and the regions where we do business makes it difficult to determine with certainty the increases or decreases in revenues resulting from changes in the volume of products sold, currency impact, changes in geographic and product mix and selling prices. Our best estimates of these changes as well as changes in other factors have been included. References to volume changes include volume, product mix and delivery charges, combined. These factors should be considered, together with any similar risk factors or other cautionary language, which may be made elsewhere in this Quarterly Report on Form 10-Q.

 

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

 

This disclosure, including that under "Forward-Looking Statements and Risk Factors," and other forward-looking statements and related disclosures made by us in this report and elsewhere from time to time, represents our best judgment as of the date the information is given. We do not undertake responsibility for updating any of such information, whether as a result of new information, future events, or otherwise, except as required by law. Investors are advised, however, to consult any further public company disclosures (such as in filings with the Securities and Exchange Commission or in company press releases) on related subjects.

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Market Risk 

 

We are exposed to various market risks, including changes in interest rates, foreign currency rates and prices of raw materials. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates.

 

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

 

Interest Rate Risk 

 

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

 

Foreign Exchange Risk 

 

As a result of being a global enterprise, there is exposure to market risks from changes in foreign currency exchange rates, which may adversely affect operating results and financial condition. Approximately 57 percent of net revenue was generated outside of the United States for the second quarter of 2017. Principal foreign currency exposures relate to the Euro, British pound sterling, Canadian dollar, Chinese renminbi, Japanese yen, Australian dollar, Argentine peso, Brazilian real, Colombian peso, Mexican peso, Turkish lira, Egyptian pound, Indian rupee, Indonesian rupiah and Malaysian ringgit.

 

Our objective is to balance, where possible, non-functional currency denominated assets to non-functional currency denominated liabilities to have a natural hedge and minimize foreign exchange impacts. We enter into cross border transactions through importing and exporting goods to and from different countries and locations. These transactions generate foreign exchange risk as they create assets, liabilities and cash flows in currencies other than their functional currency. This also applies to services provided and other cross border agreements among subsidiaries. Based on financial results for the six months ended June 3, 2017, 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 attributable to H.B. Fuller of approximately $2.9 million or $0.06 per diluted share.

 

We take steps to minimize risks from foreign currency exchange rate fluctuations through normal operating and financing activities and, when deemed appropriate, through the use of derivative instruments. We do not enter into any speculative positions with regard to derivative instruments.

 

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

 

On December 4, 2016, for our subsidiaries in Latin America, we changed the functional currency from the U.S. dollar to the entity’s local currency based on management’s analysis of the changes of the economic facts and circumstances in which these subsidiaries operate. The change in functional currency is accounted for prospectively from December 4, 2016 and financial statements prior to and including the year ended December 3, 2016 have not been restated for the change in functional currency.

 

Raw Materials 

 

The principal raw materials used to manufacture products include resins, polymers, synthetic rubbers, vinyl acetate monomer and plasticizers. We generally avoid sole source supplier arrangements for raw materials. While alternate supplies of most key raw materials are available, unplanned supplier production outages may lead to strained supply-demand situations for several key raw materials such as ethylene and propylene, several polymers and other petroleum derivatives such as waxes.

 

 

 

The purchase of raw materials is our largest expenditure. Our objective is to purchase raw materials that meet both our quality standards and production needs at the lowest total cost. Most raw materials are purchased on the open market or under contracts that limit the frequency but not the magnitude of price increases. In some cases, however, the risk of raw material price changes is managed by strategic sourcing agreements which limit price increases to increases in supplier feedstock costs, while requiring decreases as feedstock costs decline. The leverage of having substitute raw materials approved for use wherever possible is used to minimize the impact of possible price increases. Based on financial results for the six months ended June 3, 2017, a hypothetical one percent change in our raw material costs would have resulted in a change in net income of approximately $4.1 million or $0.08 per diluted share.

 

Item 4. Controls and Procedures

 

Controls and Procedures

 

We conducted an evaluation, under the supervision and with the participation of our president and chief executive officer and executive vice president, chief financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of June 3, 2017.  We acquired Wisdom Adhesives in the first quarter of 2017. They represented approximately six percent of our total assets as of June 3, 2017. As this acquisition occurred in the first quarter of 2017, the scope of our assessment of the effectiveness of internal control over financial reporting does not include this recent acquisition. This exclusion is in accordance with the SEC’s general guidance that an assessment of a recently acquired business may be omitted from our scope in the year of acquisition. Based on this evaluation, our president and chief executive officer and executive vice president, chief financial officer concluded that, as of June 3, 2017, our disclosure controls and procedures were effective.

 

For purposes of Rule 13a-15(e), the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its president and chief executive officer and executive vice president, chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.

 

PART II. OTHER INFORMATION

 

Item 1. 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:

 

   

Six Months Ended

   

3 Years Ended

 

($ in millions)

 

June 3, 2017

   

May 28, 2016

   

December 3, 2016

 

Lawsuits and claims settled

    7       4       33  

Settlement amounts

  $ 1.4     $ 0.3     $ 3.1  

Insurance payments received or expected to be received

  $ 1.1     $ 0.3     $ 2.3  

 

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

 

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

 

 

 

Item 1A. Risk Factors

 

This Form 10-Q contains forward-looking statements concerning our future programs, products, expenses, revenue, liquidity and cash needs as well as our plans and strategies. These forward-looking statements are based on current expectations and we assume no obligation to update this information. Numerous factors could cause actual results to differ significantly from the results described in these forward-looking statements, including the risk factors identified under Part I, Item 1A. Risk Factors contained in our Annual Report on Form 10-K for the fiscal year ended December 3, 2016. There have been no material changes in the risk factors disclosed by us under Part I, Item 1A. Risk Factors contained in the Annual Report on Form 10-K for the fiscal year ended December 3, 2016.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

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

 

 

Period

 

(a)

Total

Number of

Shares

Purchased1

   

(b)

Average

Price Paid

per Share

   

(c)

Total Number of

Shares Purchased as

Part of a Publicly

Announced Plan of

Program2

   

(d)

Maximum

Approximate Dollar

Value of Shares that

may yet be

Purchased Under

the Plan or Program

(millions)

 
                                 

March 5, 2017 - April 8, 2017

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

April 9 2017 - May 6, 2017

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

May 7, 2017 - June 3, 2017

    3,122     $ 50.61        -     $ 17,752  

 

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

 

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

 

Repurchases of common stock are made to support our stock-based employee compensation plans and for other corporate purposes. Upon vesting of restricted stock awarded to employees, shares are withheld to cover the employees’ minimum withholding taxes.

 

On April 6, 2017, the Board of Directors authorized a new share repurchase program of up to $200.0 million of our outstanding common shares. Under the program, we are authorized to repurchase shares for cash on the open market, from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases is dependent on price, market conditions and applicable regulatory requirements. Upon repurchase of the shares, we reduced our common stock for the par value of the shares with the excess being applied against additional paid-in capital. This authorization replaces the September 30, 2010 authorization to repurchase shares.

 

 

Item 6. Exhibits

 

 

10.1

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

 

10.2

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

 

31.1

Form of 302 Certification –James J. Owens

 

31.2

Form of 302 Certification –John J. Corkrean

 

32.1

Form of 906 Certification –James J. Owens

 

32.2

Form of 906 Certification –John J. Corkrean

 

101

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

 

 

 

SIGNATURES

 

 

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

 

 

H.B. Fuller Company

 

 

 

 

 

 

 

 

 

Dated: June 30, 2017

 

/s/ John J. Corkrean

 

 

 

John J. Corkrean

 

 

 

Executive Vice President,

Chief Financial Officer

 

 

 

 

Exhibit Index

 

Exhibits

 

 

10.1

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

 

10.2

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

 

31.1

Form of 302 Certification – James J. Owens

 

31.2

Form of 302 Certification – John J. Corkrean

 

32.1

Form of 906 Certification –James J. Owens

 

32.2

Form of 906 Certification –John J. Corkrean

 

101

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

 

 

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