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EX-10.1 - EXHIBIT 10.1 - FULLER H B COex_124420.htm
 

 

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 September 1, 2018

 

OR

 

[  ]

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

  For the transition period from                           to

 

Commission file number: 001-09225

 

H.B. FULLER COMPANY

(Exact name of registrant as specified in its charter)

 

Minnesota 41-0268370

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

   

1200 Willow Lake Boulevard, St. Paul, Minnesota 

55110-5101
(Address of principal executive offices) (Zip Code)

 

(651) 236-5900

(Registrant’s telephone number, including area code)

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):

 

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 50,695,705 as of September 21, 2018.

 

 

 

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 nine months ended September 1, 2018 and September 2, 2017

3

     
 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 1, 2018 and September 2, 2017

4

     
 

Condensed Consolidated Balance Sheets as of September 1, 2018 and December 2, 2017

5

     
 

Condensed Consolidated Statements of Total Equity as of September 1, 2018 and December 2, 2017

6

     
 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 1, 2018 and September 2, 2017

7

     
 

Notes to Condensed Consolidated Financial Statements

8

     

ITEM 2.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

30

     

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

42

     

ITEM 4.

CONTROLS AND PROCEDURES

44

     

PART II. OTHER INFORMATION

44

     

ITEM 1.

LEGAL PROCEEDINGS

44

     

ITEM 1A.

RISK FACTORS

46

     

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

46

     

ITEM 6.

EXHIBITS

47

     

SIGNATURES

48

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 1,

2018

   

September 2,

2017

   

September 1,

2018

   

September 2,

2017

 

Net revenue

  $ 770,107     $ 562,869     $ 2,272,573     $ 1,627,843  

Cost of sales

    (552,903 )     (412,469 )     (1,645,279 )     (1,192,409 )

Gross profit

    217,204       150,400       627,294       435,434  

Selling, general and administrative expenses

    (146,069 )     (110,219 )     (442,288 )     (325,904 )

Operating income

    71,135       40,181       185,006       109,530  

Other income (expense), net

    (1,375 )     (602 )     3,508       (1,506 )

Interest expense, net

    (24,924 )     (7,348 )     (74,651 )     (22,461 )

Income before income taxes and income from equity method investments

    44,836       32,231       113,863       85,563  

Income taxes

    (9,300 )     (9,262 )     9,844       (26,178 )

Income from equity method investments

    2,200       2,170       6,160       6,449  

Net income including non-controlling interests

    37,736       25,139       129,867       65,834  

Net income attributable to non-controlling interests

    (6 )     (1 )     (4 )     (34 )

Net income attributable to H.B. Fuller

  $ 37,730     $ 25,138     $ 129,863     $ 65,800  
                                 

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

                               

Basic

    0.75       0.50       2.57       1.31  

Diluted

    0.72       0.49       2.50       1.28  
                                 

Weighted-average common shares outstanding:

                               

Basic

    50,632       50,384       50,551       50,374  

Diluted

    52,138       51,605       51,961       51,584  
                                 

Dividends declared per common share

  $ 0.155     $ 0.15     $ 0.460     $ 0.44  

 

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

   

Nine Months Ended

 
   

September 1,

2018

   

September 2,

2017

   

September 1,

2018

   

September 2,

2017

 

Net income including non-controlling interests

  $ 37,736     $ 25,139     $ 129,867     $ 65,834  

Other comprehensive (loss) income

                               

Foreign currency translation

    (36,814 )     29,090       (56,116 )     37,084  

Defined benefit pension plans adjustment, net of tax

    1,638       1,627       4,958       4,810  

Interest rate swaps, net of tax

    (1,441 )     10       19,095       30  

Cash flow hedges, net of tax

    (1,215 )     (99 )     (8,068 )     7  

Other comprehensive (loss) income

    (37,832 )     30,628       (40,131 )     41,931  

Comprehensive (loss) income

    (96 )     55,767       89,736       107,765  

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

    (1 )     (11 )     (21 )     23  

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

  $ (95 )   $ 55,778     $ 89,757     $ 107,742  

 

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)

September 1,

2018

   

December 2,

2017

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 150,084     $ 194,398  

Trade receivables (net of allowances of $14,796 and $11,670, as of September 1, 2018 and December 2, 2017, respectively)

    465,942       473,700  

Inventories

    401,091       359,505  

Other current assets

    150,739       117,389  

Total current assets

    1,167,856       1,144,992  
                 

Property, plant and equipment

    1,295,408       1,288,287  

Accumulated depreciation

    (653,197 )     (618,093 )

Property, plant and equipment, net

    642,211       670,194  
                 

Goodwill

    1,316,917       1,336,684  

Other intangibles, net

    930,210       1,001,792  

Other assets

    232,583       206,984  

Total assets

  $ 4,289,777     $ 4,360,646  
                 

Liabilities, non-controlling interest and total equity

               

Current liabilities:

               

Notes payable

  $ 17,411     $ 31,468  

Current maturities of long-term debt

    56,090       21,515  

Trade payables

    256,042       268,467  

Accrued compensation

    76,554       84,903  

Income taxes payable

    53,969       14,335  

Other accrued expenses

    58,463       84,225  

Total current liabilities

    518,529       504,913  
                 

Long-term debt, excluding current maturities

    2,290,736       2,398,927  

Accrued pension liabilities

    74,819       71,205  

Other liabilities

    277,719       341,581  

Total liabilities

    3,161,803       3,316,626  
                 

Commitments and contingencies (Note 16)

               
                 

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 – 50,687,368 and 50,388,839, as of September 1, 2018 and December 2, 2017, respectively

    50,687       50,389  

Additional paid-in capital

    91,996       74,662  

Retained earnings

    1,244,021       1,119,231  

Accumulated other comprehensive loss

    (259,102 )     (200,655 )

Total H.B. Fuller stockholders' equity

    1,127,602       1,043,627  

Non-controlling interest

    372       393  

Total equity

    1,127,974       1,044,020  

Total liabilities, non-controlling interest and total equity

  $ 4,289,777     $ 4,360,646  

 

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 December 3, 2016

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

Comprehensive income

    -       -       58,242       62,074       39       120,355  

Dividends

    -       -       (29,911 )     -       -       (29,911 )

Stock option exercises

    514       17,191       -       -       -       17,705  

Share-based compensation plans other, net

    165       17,203       -       -       -       17,368  

Tax benefit on share-based compensation plans

    -       2,010       -       -       -       2,010  

Repurchases of common stock

    (431 )     (21,400 )     -       -       -       (21,831 )

Purchase of redeemable non-controlling interest

    -       94       -       -       -       94  

Redeemable non-controlling interest

    -       -       -       -       (39 )     (39 )

Balance at December 2, 2017

    50,389       74,662       1,119,231       (200,655 )     393       1,044,020  

Comprehensive income (loss)

    -       -       129,863       (40,106 )     (21 )     89,736  

Dividends

    -       -       (23,414 )     -       -       (23,414 )

Stock option exercises

    168       5,060       -       -       -       5,228  

Share-based compensation plans other, net

    220       16,737       -       -       -       16,957  

Repurchases of common stock

    (90 )     (4,463 )     -       -       -       (4,553 )

Reclassification of AOCI tax effects

    -       -       18,341       (18,341 )     -       -  

Balance at September 1, 2018

  $ 50,687     $ 91,996     $ 1,244,021     $ (259,102 )   $ 372     $ 1,127,974  

 

 

 

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   

Nine Months Ended

 
   

September 1, 2018

   

September 2, 2017

 

Cash flows from operating activities:

               

Net income including non-controlling interests

  $ 129,867     $ 65,834  

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

               

Depreciation

    51,527       36,375  

Amortization

    57,635       23,128  

Deferred income taxes

    (51,703 )     1,660  

Income from equity method investments, net of dividends received

    (1,182 )     (2,639 )

Gain on sale of assets

    (3,145 )     (149 )

Share-based compensation

    15,439       12,034  

Excess tax benefit from share-based compensation

    -       (1,504 )

Gain on mark to market adjustment related to contingent consideration liability

    (2,323 )     (2,453 )

Non-cash charge for sale of inventories revalued at acquisition

    -       193  

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

               

Trade receivables, net

    (15,087 )     (14,016 )

Inventories

    (60,188 )     (55,339 )

Other assets

    (47,544 )     2,460  

Trade payables

    3,789       23,022  

Accrued compensation

    (6,213 )     3,881  

Other accrued expenses

    (20,944 )     (5,755 )

Income taxes payable

    17,892       (7,252 )

Accrued / prepaid pensions

    (7,209 )     (3,969 )

Other liabilities

    (566 )     12,639  

Other

    46,771       (17,345 )

Net cash provided by operating activities

    106,816       70,805  
                 

Cash flows from investing activities:

               

Purchased property, plant and equipment

    (46,520 )     (35,511 )

Purchased businesses, net of cash acquired

    2,389       (123,305 )

Purchased investments

    -       (1,250 )

Proceeds from sale of property, plant and equipment

    2,178       745  

Net cash used in investing activities

    (41,953 )     (159,321 )
                 

Cash flows from financing activities:

               

Proceeds from issuance of long-term debt

    -       643,000  

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

    (70,750 )     (540,524 )

Net payment of notes payable

    (9,849 )     (10,921 )

Dividends paid

    (23,263 )     (22,058 )

Purchase of redeemable non-controlling interest

    -       (3,127 )

Proceeds from stock options exercised

    5,228       15,033  

Excess tax benefit from share-based compensation

    -       1,504  

Repurchases of common stock

    (4,553 )     (21,717 )

Net cash (used in) provided by financing activities

    (103,187 )     61,190  
                 

Effect of exchange rate changes on cash and cash equivalents

    (5,990 )     4,676  

Net change in cash and cash equivalents

    (44,314 )     (22,650 )
                 

Cash and cash equivalents at beginning of period

    194,398       142,245  

Cash and cash equivalents at end of period

  $ 150,084     $ 119,595  
                 

Supplemental disclosure of cash flow information:

               

Dividends paid with company stock

  $ 151     $ 231  

Cash paid for interest, net of amount capitalized of $227 and $201 for the periods ended September 1, 2018 and September 2, 2017, respectively

  $ 84,189     $ 25,823  

Cash paid for income taxes, net of refunds

  $ 27,492     $ 22,044  

 

 

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 2, 2017 as filed with the Securities and Exchange Commission.

 

New Accounting Pronouncements

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). This ASU requires entities that are customers in cloud computing arrangements to defer implementation costs if they would be capitalized by the entity in software licensing arrangements under the internal-use software guidance. The guidance may be applied retrospectively or prospectively to implementation costs incurred after the date of adoption. Our effective date for adoption of this guidance is our fiscal year beginning November 29, 2020 with early adoption permitted. We will apply this guidance to applicable transactions after the adoption date.

 

In August 2018, the FASB issued ASU No. 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Topic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The ASU removes the requirements to disclose: amounts in accumulated other comprehensive income (loss) expected to be recognized as components of net periodic benefit cost over the next fiscal year; the amount and timing of plan assets expected to be returned to the employer; and the effects of a one-percentage point change in assumed health care cost trend rates. The ASU requires disclosure of an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. Our effective date for adoption of this guidance is our fiscal year beginning November 28, 2021 with early adoption permitted. We are currently evaluating the effect that this guidance will have on our Consolidated Financial Statements.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements. The ASU removes the requirement to disclose: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The ASU requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Our effective date for adoption of this guidance is our fiscal year beginning November 29, 2020 with early adoption permitted. We are currently evaluating the effect that this guidance will have on our Consolidated Financial Statements.

 

In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. This ASU allows entities to not recast comparative periods in transition to ASC 842 and instead report the comparative periods presented in the period of adoption under ASC 840. The ASU also includes a practical expedient for lessors to not separate the lease and nonlease components of a contract. The amendments in this ASU are effective in the same timeframe as ASU No. 2016-02 as discussed below. We are incorporating this ASU into our assessment and adoption of ASU No. 2016-02.

 

 

In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases. This ASU includes certain clarifications to address potential narrow-scope implementation issues which we are incorporating into our assessment and adoption of ASU No. 2016-02. The amendments in this ASU are effective in the same timeframe as ASU No. 2016-02 as discussed below.

 

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU addresses the stranded income tax effects in accumulated other comprehensive income resulting from the “Tax Cuts and Jobs Act”, hereafter referred to as “U.S. Tax Reform”. In accordance with ASC Topic 740, the effect of the reduced corporate income tax rate on deferred tax assets and liabilities is included in income from continuing operations during the nine months ended September 1, 2018. Tax effects on items within accumulated other comprehensive income were left stranded at the historical tax rate. This guidance allows entities to reclassify the stranded income tax effects from accumulated other comprehensive income to retained earnings. Our effective date for adoption of ASU No. 2018-02 is our fiscal year beginning December 1, 2019, with early adoption permitted. We elected to early adopt the guidance during the first quarter of 2018 using the security-by-security approach. The adoption of this ASU resulted in an $18,341 reclassification from accumulated other comprehensive income (loss) to retained earnings due to the change in the federal corporate tax rate.

 

In May 2017, the FASB issued 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 classification requirements of this standard are applied on a retrospective basis. The ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization on a prospective basis. Our effective date for adoption of this guidance is our fiscal year beginning December 2, 2018 with early adoption permitted. The components of our net periodic defined benefit pension and postretirement benefit costs are presented in Note 9. The components other than service cost will be presented as nonoperating expenses upon adoption. Service cost will remain in operating expenses.

 

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 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. 2016-16, 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 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 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. Adoption of this guidance will have a presentation impact only and will result in a retrospective reclassification of debt prepayment and extinguishment costs within the Consolidated Statement of Cash Flows from operating to financing cash outflows.

 

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. We adopted this guidance during the first quarter of 2018. As a result of adoption, excess tax benefits/deficiencies are now recorded as income tax expense and are dependent upon market prices and the volume of stock option exercises and restricted stock vestings during the reporting period. Excess tax benefits of $266 and $1,095 were recorded as a reduction to income tax expense within the Condensed Consolidated Statement of Income during the three and nine months ended September 1, 2018, respectively. Excess tax benefits/deficiencies are now also classified as operating activities within the statement of cash flows and are excluded from the calculation of assumed proceeds available to repurchase shares under the treasury stock method. Cash payments to tax authorities for withheld shares in net-settlement features are classified as financing activities. These changes are applied prospectively, with the exception of the classification of cash payments to tax authorities in the statement of cash flows, which were already classified as financing activities. Therefore, no prior period adjustments were made as a result of the adoption of this guidance. We are continuing our existing practice of estimating the number of awards that will be forfeited in accordance with this ASU.

 

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 in the process of selecting lease accounting software and 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 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. 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. The standard permits the use of either the retrospective or cumulative effect transition method. We intend to adopt this guidance using the modified retrospective 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 substantially completed contract reviews and have determined there are no significant impacts, as these transactions are not accounted for under industry-specific guidance superseded by the ASU and generally consist of a single performance obligation to transfer promised goods or services. In addition to assessing the impact on the Consolidated Financial Statements, we are continuing to analyze the impact of the new standard on our business processes, systems and controls to support recognition and disclosure requirements under this ASU.

 

 

Note 2: Acquisitions

 

Adecol

 

On November 1, 2017, we acquired Adecol Industria Quimica, Limitada (“Adecol”), headquartered in Guarulhos, Brazil. Adecol works with customers to develop innovative, high-quality hot melt, reactive and polymer-based adhesive solutions in the packaging, converting and assembly markets. The acquisition is expected to enhance our business in Brazil by partnering with customers to produce new and better consumer and durable goods products in this region. The purchase price was 145.9 million Brazilian real, or approximately $44,682, and was funded through borrowings on our revolving credit facility and existing cash. Adecol is reported in our Americas Adhesives operating segment.

 

The acquisition fair value measurement was preliminary as of September 1, 2018, subject to the completion of the valuation of Adecol 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:

 

 

   

December 2, 2017

   

Adjustments

   

September 1, 2018

 

Current assets

  $ 17,877     $ (1,504 )   $ 16,373  

Property, plant and equipment

    7,308       302       7,610  

Goodwill

    23,282       1,015       24,297  

Other intangibles

                       

Customer relationships

    17,016       (383 )     16,633  

Trademarks/trade names

    1,363       (65 )     1,298  

Other assets

    4,811       -       4,811  

Current liabilities

    (12,765 )     112       (12,653 )

Other liabilities

    (14,210 )     523       (13,687 )

Total purchase price

  $ 44,682     $ -     $ 44,682  

 

 

The preliminary expected lives of the acquired intangible assets are 13 years for customer relationships and five years for trademarks/trade names.

 

Based on the preliminary fair value measurement of the assets acquired and liabilities assumed, we allocated $24,297 to goodwill for the expected synergies from combining Adecol with our existing business. Such goodwill is not deductible for tax purposes. The goodwill was assigned to our Americas Adhesives operating segment.

 

Royal Adhesives

 

On October 20, 2017, we acquired Royal Adhesives and Sealants (“Royal Adhesives”), a manufacturer of high-value specialty adhesives and sealants. Royal Adhesives is a supplier of industrial adhesives in a diverse set of end markets, including aerospace, transportation, commercial roofing, insulating glass, solar, packaging and flooring applications and operates 19 manufacturing facilities in five countries. The acquisition is expected to expand our presence in North America, Europe and China and add new technology and packaging capabilities. The initial purchase price of $1,622,728 was funded through new debt financing. During the third quarter of 2018, we received $2,389 of cash adjusting the purchase price to a final purchase price of $1,620,339. Royal Adhesives is included in multiple operating segments.

 

The acquisition fair value measurement was preliminary as of September 1, 2018, subject to the completion of the valuation of Royal 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:

 

   

December 2, 2017

   

Adjustments

   

September 1, 2018

 

Accounts receivable

  $ 64,904     $ 1,287     $ 66,191  

Inventory

    93,680       238       93,918  

Other current assets

    58,508       582       59,090  

Property, plant and equipment

    126,192       (6,055 )     120,137  

Goodwill

    866,013       1,603       867,616  

Other intangibles

                       

Developed technology

    59,800       (100 )     59,700  

Customer relationships

    645,300       19,300       664,600  

Trademarks/trade names

    53,600       (22,600 )     31,000  

Other assets

    1,443       (36 )     1,407  

Accounts payable

    (40,211 )     1,821       (38,390 )

Other current liabilities

    (37,261 )     123       (37,138 )

Other liabilities

    (269,240 )     1,448       (267,792 )

Total purchase price

  $ 1,622,728     $ (2,389 )   $ 1,620,339  

 

 

The preliminary expected lives of the acquired intangible assets are 15 years for developed technology, 18 years for customer relationships and 15 years for trademarks/trade names.

 

Based on the preliminary fair value measurement of the assets acquired and liabilities assumed, we allocated $867,616 to goodwill for the expected synergies from combining Royal Adhesives with our existing business. The goodwill was assigned to multiple operating segments. The amount of goodwill that is deductible for tax purposes is $38,275. The remaining goodwill is not deductible for tax purposes.

 

 

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 durable assembly markets. The acquisition is expected to strengthen our position in the North America adhesives market. The purchase price of $123,549 was financed through borrowings on our revolving credit facility and is reported in our Americas Adhesives operating segment. 

 

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

 

   

December 2, 2017

 

Current assets

  $ 13,844  

Property, plant and equipment

    8,641  

Goodwill

    59,826  

Other intangibles

       

Customer relationships

    45,300  

Trademarks/trade names

    4,400  

Current liabilities

    (8,462 )

Total purchase price

  $ 123,549  

 

 

The expected lives of the acquired intangible assets are 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 $59,826 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.

 

 

Note 3: Restructuring Actions

 

The Company has approved restructuring plans consisting of consolidation plans, organizational changes and other actions related to the integration of the operations of Royal Adhesives with the operations of the Company and other actions to optimize operations during the nine months ended September 1, 2018 and September 2, 2017. The following table summarizes the pre-tax distribution of charges under these restructuring plans by income statement classification:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 1, 2018

   

September 2, 2017

   

September 1, 2018

   

September 2, 2017

 

Cost of sales

  $ 1,939     $ 471     $ 3,127     $ 9,370  

Selling, general and administrative

    864       799       2,829       7,702  
    $ 2,803     $ 1,270     $ 5,956     $ 17,072  

 

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 1, 2018

   

September 2, 2017

   

September 1, 2018

   

September 2, 2017

 

Americas Adhesives

  $ 602     $ 283     $ 1,458     $ 2,048  

EIMEA

    478       704       1,003       6,759  

Asia Pacific

    3       45       6       1,932  

Construction Adhesives

    1,748       164       3,102       5,622  

Engineering Adhesives

    (28 )     74       387       711  
    $ 2,803     $ 1,270     $ 5,956     $ 17,072  

 

 

A summary of the restructuring liability is presented below:

 

   

Employee-

Related

   

Asset-Related

   

Other

   

Total

 

Expenses incurred

  $ 10,266     $ 5,394     $ 2,371     $ 18,031  

Non-cash charges

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

Cash payments

    (9,210 )     (1,103 )     (2,351 )     (12,664 )

Foreign currency translation

    430       -       -       430  

Balance at December 2, 2017

  $ 1,486     $ -     $ 20     $ 1,506  

Expenses incurred

    4,151       1,554       251       5,956  

Non-cash charges

    -       (1,027 )     -       (1,027 )

Cash payments

    (2,198 )     (527 )     (271 )     (2,996 )

Foreign currency translation

    (38 )     -       -       (38 )

Balance at September 1, 2018

  $ 3,401     $ -     $ -     $ 3,401  

 

Non-cash charges for the nine months ended September 1, 2018 include accelerated depreciation resulting from the cessation of use of certain long-lived assets. Non-cash charges for the nine months ended September 2, 2017 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:

 

   

September 1,

   

December 2,

 
   

2018

   

2017

 

Raw materials

  $ 192,526     $ 174,325  

Finished goods

    221,658       198,273  

LIFO reserve

    (13,093 )     (13,093 )

Total inventories

  $ 401,091     $ 359,505  

 

 

Note 5: Goodwill and Other Intangible Assets

 

The goodwill activity for the nine months ended September 1, 2018 is presented below:

 

   

Americas

           

Asia

   

Construction

   

Engineering

         
   

Adhesives

   

EIMEA

   

Pacific

   

Adhesives

   

Adhesives

   

Total

 

Balance at December 2, 2017

  $ 373,328     $ 177,464     $ 21,514     $ 324,860     $ 439,518     $ 1,336,684  

Acquisitions 1

    2,550       20,582       (194 )     (14,322 )     (5,998 )     2,618  

Currency impact

    (3,839 )     (7,709 )     67       (332 )     (10,572 )     (22,385 )

Balance at September 1, 2018

  $ 372,039     $ 190,337     $ 21,387     $ 310,206     $ 422,948     $ 1,316,917  

 

1

Adjustments to preliminary goodwill for Royal Adhesives and Adecol as of September 1, 2018.

 

 

As discussed in Note 17, as of the beginning of fiscal 2018, we modified our operating segment structure by allocating the Royal Adhesives segment into each of the five other segments. This resulted in a change in our reporting units. We allocated goodwill to our reporting units using the relative fair value approach.

 

 

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

 

   

September 1, 2018

 

Amortizable Intangible Assets

 

Purchased

Technology and

 Patents

   

Customer

Relationships

   

All Other

   

Total

 

Original cost

  $ 130,971     $ 956,923     $ 109,304     $ 1,197,198  

Accumulated amortization

    (35,024 )     (184,777 )     (47,693 )     (267,494 )

Net identifiable intangibles

  $ 95,947     $ 772,146     $ 61,611     $ 929,704  

 

   

December 2, 2017

 

Amortizable Intangible Assets

 

Purchased

Technology and

Patents

   

Customer

Relationships

   

All Other

   

Total

 

Original cost

  $ 132,495     $ 968,060     $ 110,576     $ 1,211,131  

Accumulated amortization

    (27,478 )     (144,964 )     (37,417 )     (209,859 )

Net identifiable intangibles

  $ 105,017     $ 823,096     $ 73,159     $ 1,001,272  

 

 

Amortization expense with respect to amortizable intangible assets was $19,116 and $7,899 for the three months ended September 1, 2018 and September 2, 2017, respectively, and $57,635 and $23,128 for the nine months ended September 1, 2018 and September 2, 2017, respectively.

 

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

 

Fiscal Year

 

Remainder

2018

   

2019

   

2020

   

2021

   

2022

   

Thereafter

 

Amortization Expense

  $ 19,024     $ 75,846     $ 73,309     $ 71,767     $ 69,193     $ 620,565  

 

Non-amortizable intangible assets as of September 1, 2018 and December 2, 2017 are $506 and $520, respectively and are related to trademarks and trade names.

 

 

Note 6: Long-Term Debt

 

On February 27, 2018, we entered into an interest rate swap agreement to convert $200,000 of our Term Loan B Credit Agreement (“Term Loan B”) issued on October 20, 2017 to a fixed interest rate of 4.589 percent. On March 9, 2018, we entered into interest rate swap agreements to convert $100,000 of our Term Loan B Credit Agreement to a fixed interest rate of 4.490 percent. On March 26, 2018, we entered into interest rate swap agreements to convert $200,000 of our Term Loan B Credit Agreement to a fixed interest rate of 4.176 percent. See Note 13 for further discussion of the issuance of these interest rate swaps.

 

On April 23, 2018, we amended our Term Loan B Credit Agreement to reduce the interest rate from LIBOR plus 2.25 percent to LIBOR plus 2.00 percent. Fixed interest rates related to swap agreements disclosed have been updated to reflect the amendment.

 

 

Note 7: Redeemable Non-Controlling Interest

 

Prior to the end of the first quarter of 2017, we had a non-controlling interest in H.B. Fuller Kimya Sanayi Ticaret A.S. (“HBF Kimya”) which was accounted for 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 were classified as a redeemable non-controlling interest in temporary equity in the 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 were consolidated in our financial statements. Both the non-controlling interest and the accretion adjustment to redemption value were included in net income attributable to non-controlling interests in the Consolidated Statements of Income for the three months ended March 4, 2017.

 

During the three months ended March 4, 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 for the three months ended March 4, 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 2, 2017.

 

During the first quarter of 2018, we adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The adoption is required to be implemented prospectively. See Note 1 for additional information regarding ASU No. 2016-09.

 

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 nine months ended September 1, 2018 and September 2, 2017 was calculated using the following weighted average assumptions:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 1, 2018

   

September 2, 2017

   

September 1, 2018

   

September 2, 2017

 

Expected life (in years)

    4.75       4.75     4.75     4.75  

Weighted-average expected volatility

    23.36%       23.91%     23.30%     24.84%  

Expected volatility

    23.36%       23.91%      23.18% - 23.58%      23.91% - 24.88%  

Risk-free interest rate

    2.72%       1.85%      2.38% - 2.90%     1.89%  

Expected dividend yield

    1.16%       1.15%     1.14%     1.12%  

Weighted-average fair value of grants

    $11.75       $10.58     $11.38     $10.81  

 

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 was $5,005 and $3,191 for the three months ended September 1, 2018 and September 2, 2017, respectively, and $15,439 and $12,034 for the nine months ended September 1, 2018 and September 2, 2017, respectively. All share-based compensation expense was recorded as selling, general and administrative (SG&A) expense. Beginning with the nine months ended September 1, 2018, excess tax benefits are recorded as income tax expense in accordance with ASU No. 2016-09. For the three and nine months ended September 2, 2017, there was $151 and $1,504 of excess tax benefit recognized in additional paid-in capital, respectively.

 

As of September 1, 2018, there was $14,784 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 $11,749, which is expected to be recognized over a weighted-average period of 1.2 years.

 

Stock Option Activity

 

The stock option activity for the nine months ended September 1, 2018 is presented below:

 

           

Average

 
   

Options

   

Exercise Price

 

Outstanding at December 2, 2017

    3,860,764     $ 42.28  

Granted

    810,306       53.07  

Exercised

    (163,190 )     30.86  

Forfeited or cancelled

    (6,281 )     44.00  

Outstanding at September 1, 2018

    4,501,599     $ 44.64  

 

The fair value of options granted during the three months ended September 1, 2018 and September 2, 2017 was $180 and $46, respectively. Total intrinsic value of options exercised during the three months ended September 1, 2018 and September 2, 2017 was $2,066 and $474, 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 fair value of options granted during the nine months ended September 1, 2018 and September 2, 2017 was $9,217 and $7,803, respectively. Total intrinsic value of options exercised during the nine months ended September 1, 2018 and September 2, 2017 was $3,876 and $7,099, respectively.

 

Proceeds received from option exercises during the three months ended September 1, 2018 and September 2, 2017 were $2,841 and $1,107, respectively, and $5,228 and $15,033 during the nine months ended September 1, 2018 and September 2, 2017, respectively.

 

Restricted Stock Activity

 

The nonvested restricted stock activity for the nine months ended September 1, 2018 is presented below:

 

   

Units

   

Weighted-

Average

Grant

Date Fair

Value

   

Weighted-

Average

Remaining

Contractual

Life

(in Years)

 

Nonvested at December 2, 2017

    462,241     $ 44.80       1.0  

Granted

    147,601       51.29       2.4  

Vested

    (190,249 )     43.67       -  

Forfeited

    (2,947 )     47.20       1.3  

Nonvested at September 1, 2018

    416,646     $ 47.60       1.2  

 

 

Total fair value of restricted stock vested during the three months ended September 1, 2018 and September 2, 2017 was $278 and $250, respectively. Total fair value of restricted stock vested during the nine months ended September 1, 2018 and September 2, 2017 was $8,755 and $7,643, respectively. The total fair value of nonvested restricted stock at September 1, 2018 was $19,831.

 

We repurchased 1,945 and 1,837 restricted stock shares during the three months ended September 1, 2018 and September 2, 2017, respectively, and 68,881 and 55,646 restricted stock shares during the nine months ended September 1, 2018 and September 2, 2017, 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 unit activity for the nine months ended September 1, 2018 is presented below:

 

   

Non-employee

Directors

   

Employees

   

Total

 

Units outstanding December 2, 2017

    443,570       31,606       475,176  

Participant contributions

    11,738       6,274       18,012  

Company match contributions

    19,610       627       20,237  

Payouts

    -       (6,090 )     (6,090 )

Units outstanding September 1, 2018

    474,918       32,417       507,335  

 

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 September 1, 2018 and September 2, 2017

 
                                   

Other

 
   

Pension Benefits

   

Postretirement

 
   

U.S. Plans

   

Non-U.S. Plans

   

Benefits

 

Net periodic cost (benefit):

 

2018

   

2017

   

2018

   

2017

   

2018

   

2017

 

Service cost

  $ 14     $ 27     $ 566     $ 546     $ 43     $ 52  

Interest cost

    3,419       3,603       1,141       1,199       371       399  

Expected return on assets

    (6,541 )     (6,365 )     (2,710 )     (2,510 )     (1,724 )     (1,447 )

Amortization:

                                               

Prior service cost

    7       8       (1 )     (1 )     -       -  

Actuarial loss

    1,476       1,308       710       893       15       251  

Net periodic (benefit) cost

  $ (1,625 )   $ (1,419 )   $ (294 )   $ 127     $ (1,295 )   $ (745 )

 

 

   

Nine Months Ended September 1, 2018 and September 2, 2017

 
                                   

Other

 
   

Pension Benefits

   

Postretirement

 
   

U.S. Plans

   

Non-U.S. Plans

   

Benefits

 

Net periodic cost (benefit):

 

2018

   

2017

   

2018

   

2017

   

2018

   

2017

 

Service cost

  $ 42     $ 83     $ 1,746     $ 1,566     $ 129     $ 156  

Interest cost

    10,257       10,809       3,526       3,490       1,113       1,195  

Expected return on assets

    (19,623 )     (19,093 )     (8,385 )     (7,301 )     (5,172 )     (4,341 )

Amortization:

                                               

Prior service cost

    21       22       (3 )     (3 )     -       -  

Actuarial loss

    4,428       3,922       2,191       2,581       45       757  

Net periodic (benefit) cost

  $ (4,875 )   $ (4,257 )   $ (925 )   $ 333     $ (3,885 )   $ (2,233 )

 

 

 

Note 10: Accumulated Other Comprehensive Income (Loss)

 

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

 

   

Three Months Ended September 1, 2018

   

Three Months Ended September 2, 2017

 
   

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

    -       -     $ 37,730     $ 6       -       -     $ 25,138     $ 1  

Foreign currency translation adjustment¹

  $ (36,807 )     -       (36,807 )     (7 )   $ 29,102       -       29,102       (12 )

Reclassification to earnings:

                                                               

Defined benefit pension plans adjustment²

    2,207     $ (569 )     1,638       -       2,459     $ (832 )     1,627       -  

Interest rate swap³

    (1,921 )     480       (1,441 )     -       16       (6 )     10       -  

Cash flow hedges³

    (1,093 )     (122 )     (1,215 )     -       (160 )     61       (99 )     -  

Other comprehensive income (loss)

  $ (37,614 )   $ (211 )     (37,825 )     (7 )   $ 31,417     $ (777 )     30,640       (12 )

Comprehensive income (loss)

                  $ (95 )   $ (1 )                   $ 55,778     $ (11 )

 

 

   

Nine Months Ended September 1, 2018

   

Nine Months Ended September 2, 2017

 
   

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

    -       -     $ 129,863     $ 4       -       -     $ 65,800     $ 34  

Foreign currency translation adjustment¹

  $ (56,091 )     -       (56,091 )     (25 )   $ 37,095       -       37,095       (11 )

Reclassification to earnings:

                                                               

Defined benefit pension plans adjustment²

    6,683     $ (1,725 )     4,958       -       7,279     $ (2,469 )     4,810       -  

Interest rate swap³

    24,918       (5,823 )     19,095       -       48       (18 )     30       -  

Cash flow hedges³

    (5,606 )     (2,462 )     (8,068 )     -       11       (4 )     7       -  

Other comprehensive income (loss)

  $ (30,096 )   $ (10,010 )     (40,106 )     (25 )   $ 44,433     $ (2,491 )     41,942       (11 )

Comprehensive income (loss)

                  $ 89,757     $ (21 )                   $ 107,742     $ 23  

 

¹ Income taxes are not provided for foreign currency translation relating to permanent investments in international subsidiaries. The foreign currency translation adjustment for the nine months ended September 2, 2017 includes $11,317 related to 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 and SG&A expense.

 

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

 

The components of accumulated other comprehensive loss is as follows:

 

   

September 1, 2018

 
   

Total

   

H.B. Fuller

Stockholders

   

Non-

controlling

Interests

 

Foreign currency translation adjustment

  $ (112,225 )   $ (112,175 )   $ (50 )

Defined benefit pension plans adjustment, net of taxes of $72,657

    (136,213 )     (136,213 )     -  

Interest rate swap, net of taxes of ($7,006)

    21,017       21,017       -  

Cash flow hedges, net of taxes of $814

    (13,390 )     (13,390 )     -  

Reclassification of AOCI tax effects

    (18,341 )     (18,341 )     -  

Accumulated other comprehensive loss

  $ (259,152 )   $ (259,102 )   $ (50 )

 

 

   

December 2, 2017

 
   

Total

   

H.B. Fuller

Stockholders

   

Non-

controlling

Interests

 

Foreign currency translation adjustment

  $ (56,159 )   $ (56,084 )   $ (75 )

Defined benefit pension plans adjustment, net of taxes of $74,382

    (141,171 )     (141,171 )     -  

Interest rate swap, net of taxes of ($1,183)

    1,922       1,922       -  

Cash flow hedges, net of taxes of $3,276

    (5,322 )     (5,322 )     -  

Accumulated other comprehensive loss

  $ (200,730 )   $ (200,655 )   $ (75 )

 

 

Note 11: Income Taxes

 

On December 22, 2017, the President of the United States signed into law U.S. Tax Reform. U.S. Tax Reform includes a number of provisions, including the lowering of the U.S. corporate tax rate from 35 percent to 21 percent, effective January 1, 2018, which results in a blended federal tax rate for fiscal year 2018. U.S. Tax Reform also includes international provisions, which generally establish a territorial-style system for taxing foreign-source income of domestic multinational corporations and imposes a one-time transition tax on deemed repatriated accumulated foreign earnings as of December 31, 2017.

 

During the nine months ended September 1, 2018, we recorded a provisional income tax benefit of $35.6 million related to U.S. Tax Reform. This provisional amount includes a $76.4 million benefit for the remeasurement of deferred tax assets and liabilities due to the decreased tax rate net of income tax expense for the transition tax.  The $40.8 million transition tax is based on certain foreign earnings and profits for which earnings had been previously indefinitely reinvested, as well as estimates of assets and liabilities at future dates. The provisional amounts are subject to adjustment during the measurement period of one year following the enactment of U.S. Tax Reform. Our estimates are subject to change as we review the data available and any additional guidance, and will be evaluated throughout the measurement period, as permitted by Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.

 

Excess tax benefits related to employee share-based compensation, which were recorded as a reduction to income tax expense within the Condensed Consolidated Statement of Income, were $266 and $1,095 during the three and nine months ended September 1, 2018, respectively.