UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
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:
H.B. FULLER COMPANY
(Exact name of registrant as specified in its charter)
| State or other jurisdiction of | I.R.S. Employer |
| Incorporation or Organization | Identification No. |
| Address of principal executive offices | Zip Code |
(
Registrant’s telephone number, including area code
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to section 12(b) of the Act
| Title of each class: |
Trading Symbol(s) |
Name of each exchange on which registered |
| |
|
|
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Accelerated filer [ ] | ||
| Non-accelerated filer [ ] | 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. [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PROCEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the Registrant’s Common Stock, par value $1.00 per share, was
Quarterly Report on Form 10-Q
Table of Contents
| Page |
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| ITEM 1. |
3 |
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| 3 |
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| 4 |
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| Condensed Consolidated Balance Sheets as of August 31, 2019 and December 1, 2018 |
5 |
|
| 6 |
||
| 7 |
||
| 8 |
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| ITEM 2. |
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
27 |
| ITEM 3. |
39 |
|
| ITEM 4. |
39 |
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| 39 |
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| ITEM 1. |
39 |
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| ITEM 1A. |
41 |
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| ITEM 2. |
41 |
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| ITEM 6. |
43 |
|
| 44 |
||
| Item 1. Financial Statements |
| H.B. FULLER COMPANY AND SUBSIDIARIES |
| Condensed Consolidated Statements of Income |
| (In thousands, except per share amounts) |
| (Unaudited) |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| August 31, |
September 1, |
August 31, |
September 1, |
|||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| Net revenue |
$ | $ | $ | $ | ||||||||||||
| Cost of sales |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Gross profit |
||||||||||||||||
| Selling, general and administrative expenses |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other income, net |
||||||||||||||||
| Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Interest income |
||||||||||||||||
| Income before income taxes and income from equity method investments |
||||||||||||||||
| Income taxes |
( |
) | ( |
) | ( |
) | ||||||||||
| Income from equity method investments |
||||||||||||||||
| Net income including non-controlling interest |
||||||||||||||||
| Net income attributable to non-controlling interest |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net income attributable to H.B. Fuller |
$ | $ | $ | $ | ||||||||||||
| Earnings per share attributable to H.B. Fuller common stockholders: |
||||||||||||||||
| Basic |
||||||||||||||||
| Diluted |
||||||||||||||||
| Weighted-average common shares outstanding: |
||||||||||||||||
| Basic |
||||||||||||||||
| Diluted |
||||||||||||||||
| Dividends declared per common share |
$ | $ | $ | $ | ||||||||||||
| See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. |
| Condensed Consolidated Statements of Comprehensive Income |
|||||||||||||||||
| (In thousands) |
|||||||||||||||||
| (Unaudited) |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| August 31, |
September 1, |
August 31, |
September 1, |
|||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| Net income including non-controlling interest |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive loss |
||||||||||||||||
| Foreign currency translation |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Defined benefit pension plans adjustment, net of tax |
||||||||||||||||
| Interest rate swaps, net of tax |
( |
) | ( |
) | ( |
) | ||||||||||
| Cash flow hedges, net of tax |
( |
) | ( |
) | ||||||||||||
| Other comprehensive loss |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Comprehensive income (loss) |
( |
) | ||||||||||||||
| Less: Comprehensive income (loss) attributable to non-controlling interest |
( |
) | ( |
) | ||||||||||||
| Comprehensive income (loss) attributable to H.B. Fuller |
$ | $ | ( |
) | $ | $ | ||||||||||
| See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. |
| Condensed Consolidated Balance Sheets |
| (In thousands, except share and per share amounts) |
| (Unaudited) |
| August 31, |
December 1, |
|||||||
| 2019 |
2018 |
|||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | $ | ||||||
| Trade receivables (net of allowances of $12,918 and $14,017, as of August 31, 2019 and December 1, 2018, respectively) |
||||||||
| Inventories |
||||||||
| Other current assets |
||||||||
| Total current assets |
||||||||
| Property, plant and equipment |
||||||||
| Accumulated depreciation |
( |
) | ( |
) | ||||
| Property, plant and equipment, net |
||||||||
| Goodwill |
||||||||
| Other intangibles, net |
||||||||
| Other assets |
||||||||
| Total assets |
$ | $ | ||||||
| Liabilities, non-controlling interest and total equity |
||||||||
| Current liabilities: |
||||||||
| Notes payable |
$ | $ | ||||||
| Current maturities of long-term debt |
||||||||
| Trade payables |
||||||||
| Accrued compensation |
||||||||
| Income taxes payable |
||||||||
| Other accrued expenses |
||||||||
| Total current liabilities |
||||||||
| Long-term debt, excluding current maturities |
||||||||
| Accrued pension liabilities |
||||||||
| Other liabilities |
||||||||
| Total liabilities |
||||||||
| Commitments and contingencies (Note 15) |
||||||||
| 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 – 50,953,845 and 50,732,796, as of August 31, 2019 and December 1, 2018, respectively |
||||||||
| Additional paid-in capital |
||||||||
| Retained earnings |
||||||||
| Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
| Total H.B. Fuller stockholders' equity |
||||||||
| Non-controlling interest |
||||||||
| Total equity |
||||||||
| Total liabilities, non-controlling interest and total equity |
$ | $ | ||||||
| See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. |
| 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 Interest |
Total |
|||||||||||||||||||
| Balance at December 1, 2018, as previously reported |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
| Change in accounting principles |
||||||||||||||||||||||||
| Balance at December 1, 2018, as adjusted |
( |
) | ||||||||||||||||||||||
| Comprehensive income |
||||||||||||||||||||||||
| Dividends |
( |
) | ( |
) | ||||||||||||||||||||
| Stock option exercises |
||||||||||||||||||||||||
| Share-based compensation plans other, net |
||||||||||||||||||||||||
| Repurchases of common stock |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Balance at March 2, 2019 |
( |
) | ||||||||||||||||||||||
| Comprehensive income |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Dividends |
( |
) | ( |
) | ||||||||||||||||||||
| Stock option exercises |
||||||||||||||||||||||||
| Share-based compensation plans other, net |
||||||||||||||||||||||||
| Repurchases of common stock |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Balance at June 1, 2019 |
( |
) | ||||||||||||||||||||||
| Comprehensive income |
( |
) | ||||||||||||||||||||||
| Dividends |
( |
) | ( |
) | ||||||||||||||||||||
| Stock option exercises |
||||||||||||||||||||||||
| Share-based compensation plans other, net |
||||||||||||||||||||||||
| Repurchases of common stock |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Balance at August 31, 2019 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
|
|
H.B. Fuller Company Shareholders | ||||||||||||||||||||||||||||||||||||||||||
| Common Stock |
Additional Paid-in Capital |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Non- Controlling Interest |
Total |
|||||||||||||||||||
| Balance at December 2, 2017 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
| Comprehensive income (loss) |
( |
) | ||||||||||||||||||||||
| Dividends |
( |
) | ( |
) | ||||||||||||||||||||
| Stock option exercises |
||||||||||||||||||||||||
| Share-based compensation plans other, net |
||||||||||||||||||||||||
| Repurchases of common stock |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Reclassification of AOCI tax effects |
( |
) | ||||||||||||||||||||||
| Balance at March 3, 2018 |
( |
) | ||||||||||||||||||||||
| Comprehensive income |
( |
) | ||||||||||||||||||||||
| Dividends |
( |
) | ( |
) | ||||||||||||||||||||
| Stock option exercises |
||||||||||||||||||||||||
| Share-based compensation plans other, net |
||||||||||||||||||||||||
| Repurchases of common stock |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Balance at June 2, 2018 |
( |
) | ||||||||||||||||||||||
| Comprehensive income |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Dividends |
( |
) | ( |
) | ||||||||||||||||||||
| Stock option exercises |
||||||||||||||||||||||||
| Share-based compensation plans other, net |
||||||||||||||||||||||||
| Repurchases of common stock |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Balance at September 1, 2018 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
| See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. |
| Condensed Consolidated Statements of Cash Flows |
| (In thousands) |
| (Unaudited) |
| Nine Months Ended |
||||||||
| August 31, 2019 |
September 1, 2018 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income including non-controlling interest |
$ | $ | ||||||
| Adjustments to reconcile net income including non-controlling interest to net cash provided by operating activities: |
||||||||
| Depreciation |
||||||||
| Amortization |
||||||||
| Deferred income taxes |
( |
) | ( |
) | ||||
| Income from equity method investments, net of dividends received |
( |
) | ||||||
| Gain on sale of assets |
( |
) | ( |
) | ||||
| Share-based compensation |
||||||||
| Gain on mark to market adjustment related to contingent consideration liability |
( |
) | ||||||
| Change in assets and liabilities, net of effects of acquisitions: |
||||||||
| Trade receivables, net |
( |
) | ( |
) | ||||
| Inventories |
( |
) | ( |
) | ||||
| Other assets |
( |
) | ( |
) | ||||
| Trade payables |
||||||||
| Accrued compensation |
( |
) | ( |
) | ||||
| Other accrued expenses |
( |
) | ||||||
| Income taxes payable |
||||||||
| Accrued / prepaid pensions |
( |
) | ( |
) | ||||
| Other liabilities |
( |
) | ||||||
| Other |
||||||||
| Net cash provided by operating activities |
||||||||
| Cash flows from investing activities: |
||||||||
| Purchased property, plant and equipment |
( |
) | ( |
) | ||||
| Purchased businesses, net of cash acquired |
( |
) | ||||||
| Purchased business remaining equity |
( |
) | ||||||
| Proceeds from sale of property, plant and equipment |
||||||||
| Proceeds from sale of business |
||||||||
| Cash received from government grant |
||||||||
| Cash payments related to government grant |
( |
) | ||||||
| Net cash provided by (used in) investing activities |
( |
) | ||||||
| Cash flows from financing activities: |
||||||||
| Repayment of long-term debt |
( |
) | ( |
) | ||||
| Net payment of notes payable |
( |
) | ||||||
| Dividends paid |
( |
) | ( |
) | ||||
| Contingent consideration payment |
( |
) | ||||||
| Proceeds from stock options exercised |
||||||||
| Repurchases of common stock |
( |
) | ( |
) | ||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| Effect of exchange rate changes on cash and cash equivalents |
( |
) | ( |
) | ||||
| Net change in cash and cash equivalents |
( |
) | ( |
) | ||||
| Cash and cash equivalents at beginning of period |
||||||||
| Cash and cash equivalents at end of period |
$ | $ | ||||||
| Supplemental disclosure of cash flow information: |
||||||||
| Dividends paid with company stock |
$ | $ | ||||||
| Cash paid for interest, net of amount capitalized of $328 and $227 for the periods ended August 31, 2019 and September 1, 2018, respectively |
$ | $ | ||||||
| Cash paid for income taxes, net of refunds |
$ | $ | ||||||
| See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. |
H.B. FULLER COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(Unaudited)
Note 1: Basis of Presentation
Overview
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 1, 2018 as filed with the Securities and Exchange Commission.
Change in Accounting Principle – Accounting for Inventory
During the year ended December 1, 2018, we elected to change our method of accounting for certain inventories in the United States within the Company’s Americas Adhesives and Construction Adhesives segments from the last-in, first-out method (“LIFO”) to weighted-average cost. We retrospectively adjusted the Consolidated Financial Statements for all periods presented to reflect this change.
Change in Accounting Principle – Revenue Recognition
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. We adopted this ASU during the quarter ended March 2, 2019 using the modified retrospective method of adoption. As a result of the adoption of this ASU, we recorded an increase to opening retained earnings of $
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 were adopted during the quarter ended March 2, 2019 with ASU No. 2014-09 as discussed above.
Change in Accounting Principle – Income Tax Impact of Intra-Entity Transfers of Assets Other Than Inventory
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. We adopted this ASU during the quarter ended March 2, 2019. We recorded a decrease to opening retained earnings of $
Change in Accounting Principle – Net Periodic Defined Benefit Pension and Postretirement Benefit Costs
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 non-operating expenses. The classification requirements of this ASU 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. We adopted this ASU during the quarter ended March 2, 2019. As a result of adoption, the components of our net periodic defined benefit pension and postretirement benefit costs other than service cost are now presented as non-operating expenses for all periods presented. Service cost remains in operating expenses. As a result of the retrospective adjustment for the change in accounting principle, certain amounts in our Condensed Consolidated Statement of Income for the three and nine months ended September 1, 2018 were adjusted as follows:
| Three Months Ended September 1, 2018 |
||||||||||||
| As Reported |
Impact of Adoption of ASU 2017-07 |
As Adjusted |
||||||||||
| Cost of sales |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Gross profit |
( |
) | ||||||||||
| Selling, general and administrative expenses |
( |
) | ( |
) | ( |
) | ||||||
| Other income (expense), net |
( |
) | ||||||||||
| Net income including non-controlling interests |
||||||||||||
| Net income attributable to H.B. Fuller |
||||||||||||
| Basic |
$ | $ | $ | |||||||||
| Diluted |
||||||||||||
| Nine Months Ended September 1, 2018 |
||||||||||||
| As Reported |
Impact of Adoption of ASU 2017-07 |
As Adjusted |
||||||||||
| Cost of sales |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Gross profit |
( |
) | ||||||||||
| Selling, general and administrative expenses |
( |
) | ( |
) | ( |
) | ||||||
| Other income, net |
||||||||||||
| Net income including non-controlling interests |
||||||||||||
| Net income attributable to H.B. Fuller |
||||||||||||
| Basic |
$ | $ | $ | |||||||||
| Diluted |
||||||||||||
New Accounting Pronouncements
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 ASU is our fiscal year beginning November 29, 2020 with early adoption permitted. The adoption of this guidance requires a change in disclosures only and is not expected to impact 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 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. We adopted this ASU during the quarter ended March 2, 2019. Adoption of this ASU will result in a retrospective reclassification of debt prepayment and extinguishment costs of $
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. This ASU requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The FASB also issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses in November 2018 and ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments in April 2019. ASU No. 2018-19 clarifies that receivables arising from operating leases are within the scope of Topic 842, Leases. ASU No. 2019-04 clarifies various scoping and other issues arising from ASU No. 2016-13. The amendments in this ASU affect the guidance in ASU No. 2016-13 and are effective in the same timeframe as ASU No. 2016-13. Our effective date for adoption of this ASU is our fiscal year beginning November 29, 2020. We are currently evaluating the effect that this ASU will have on our Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Subtopic 842). This ASU 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. In December 2018, the FASB also issued ASU No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, which clarifies the accounting for lessors for variable payments that relate to both a lease component and a nonlease component and is effective in the same timeframe as ASU 2016-02, and ASU No. 2019-01, Leases (Topic 842): Codification Improvements, which clarifies the transition disclosure requirements. Our effective date for adoption of this ASU is our fiscal year beginning December 1, 2019 with early adoption permitted. The new ASU must be adopted using a modified retrospective transition approach, and provides for certain practical expedients. We have begun implementing lease accounting software and are currently evaluating the impact that the new ASU will have on our Consolidated Financial Statements.
Note 2: Acquisition and Divestiture
Ramapo Sales and Marketing, Inc.
On May 17, 2019, we acquired certain assets from a window and insulating glass sealants sales and distribution company, Ramapo Sales and Marketing, Inc. (“Ramapo”), headquartered in Charleston, South Carolina. This acquisition supports the integration of the insulating glass business that we acquired as part of the Royal Adhesives acquisition. The initial purchase price of $
Dalton Holdings, LLC
In June 2019, the Company entered into a definitive agreement for the sale of Dalton Holdings, LLC (“Dalton Holdings”), which primarily manufactures surfactants and thickeners, within the Americas Adhesives segment. The sale was completed on July 1, 2019 resulting in a pre-tax gain on sale of $
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. The following table summarizes the pre-tax distribution of charges under these restructuring plans by income statement classification:
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| August 31, 2019 |
September 1, 2018 |
August 31, 2019 |
September 1, 2018 |
|||||||||||||
| Cost of sales |
$ | $ | $ | $ | ||||||||||||
| Selling, general and administrative |
||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| The following table summarizes the pre-tax impact of restructuring charges by segment: |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| August 31, 2019 |
September 1, 2018 |
August 31, 2019 |
September 1, 2018 |
|||||||||||||
| Americas Adhesives |
$ | $ | $ | $ | ||||||||||||
| EIMEA |
||||||||||||||||
| Asia Pacific |
||||||||||||||||
| Construction Adhesives |
||||||||||||||||
| Engineering Adhesives |
( |
) | ||||||||||||||
| $ | $ | $ | $ | |||||||||||||
A summary of the restructuring liability is presented below:
| Employee-Related |
Asset-Related |
Other |
Total |
|||||||||||||
| Balance at December 2, 2017 |
$ | $ | $ | $ | ||||||||||||
| Expenses incurred |
||||||||||||||||
| Non-cash charges |
( |
) | ( |
) | ||||||||||||
| Cash payments |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Foreign currency translation |
( |
) | ( |
) | ||||||||||||
| Balance at December 1, 2018 |
$ | $ | $ | $ | ||||||||||||
| Expenses incurred |
||||||||||||||||
| Cash payments |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Foreign currency translation |
( |
) | ( |
) | ||||||||||||
| Balance at August 31, 2019 |
$ | $ | $ | $ | ||||||||||||
Restructuring liabilities have been classified as a component of other accrued expenses in the Condensed Consolidated Balance Sheets.
| Note 4: Inventories |
| The composition of inventories is as follows: |
| August 31, |
December 1, |
|||||||
| 2019 |
2018 |
|||||||
| Raw materials |
$ | $ | ||||||
| Finished goods |
||||||||
| Total inventories |
$ | $ | ||||||
Note 5: Goodwill and Other Intangible Assets
The goodwill activity for the nine months ended August 31, 2019 is presented below:
| Americas |
Asia |
Construction |
Engineering |
|||||||||||||||||||||
| Adhesives |
EIMEA |
Pacific |
Adhesives |
Adhesives |
Total |
|||||||||||||||||||
| Balance at December 1, 2018 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Acquisition |
||||||||||||||||||||||||
| Divestiture |
( |
) | ( |
) | ||||||||||||||||||||
| Currency impact |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||
| Balance at August 31, 2019 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
As discussed in Note 16, as of the beginning of fiscal 2019, we realigned certain customers across operating segments. We allocated goodwill within our reporting units to reflect this realignment using the relative fair value approach.
| Balances of amortizable identifiable intangible assets, excluding goodwill and other non-amortizable intangible assets, are as follows: |
| August 31, 2019 |
||||||||||||||||||||
| Amortizable Intangible Assets |
Purchased Technology and Patents |
Customer Relationships |
Trade Names |
Other |
Total |
|||||||||||||||
| Original cost |
$ | $ | $ | $ | $ | |||||||||||||||
| Accumulated amortization |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| Net identifiable intangibles |
$ | $ | $ | $ | $ | |||||||||||||||
| December 1, 2018 |
||||||||||||||||||||
| Amortizable Intangible Assets |
Purchased Technology and Patents |
Customer Relationships |
Trade Names |
Other |
Total |
|||||||||||||||
| Original cost |
$ | $ | $ | $ | $ | |||||||||||||||
| Accumulated amortization |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| Net identifiable intangibles |
$ | $ | $ | $ | $ | |||||||||||||||
Amortization expense with respect to amortizable intangible assets was $
Estimated aggregate amortization expense based on the current carrying value of amortizable intangible assets for the next five fiscal years is as follows:
| Remainder |
||||||||||||||||||||||||
| Fiscal Year |
2019 |
2020 |
2021 |
2022 |
2023 |
Thereafter |
||||||||||||||||||
| Amortization Expense |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Non-amortizable intangible assets as of August 31, 2019 and December 1, 2018 are $ |
Note 6: 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 1, 2018.
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 three and nine months ended August 31, 2019 and September 1, 2018 was calculated using the following weighted average assumptions:
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| August 31, 2019 |
September 1, 2018 |
August 31, 2019 |
September 1, 2018 |
|||||||||||||
| Expected life (in years) |
||||||||||||||||
| Weighted-average expected volatility |
||||||||||||||||
| Expected volatility |
- | - | ||||||||||||||
| Risk-free interest rate |
- | - | ||||||||||||||
| Weighted-average expected dividend yield |
||||||||||||||||
| Expected dividend yield range |
- | - | ||||||||||||||
| Weighted-average fair value of grants |
$ |
$ |
$ |
$ |
||||||||||||
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 $
As of August 31, 2019, there was $
Stock Option Activity
The stock option activity for the nine months ended August 31, 2019 is presented below:
| Average |
||||||||
| Options |
Exercise Price |
|||||||
| Outstanding at December 1, 2018 |
$ | |||||||
| Granted |
||||||||
| Exercised |
( |
) | ||||||
| Forfeited or cancelled |
( |
) | ||||||
| Outstanding at August 31, 2019 |
$ | |||||||
The fair value of options granted during the three months ended August 31, 2019 and September 1, 2018 was $
Proceeds received from option exercises during the three months ended August 31, 2019 and September 1, 2018 were $
Restricted Stock Activity
The nonvested restricted stock activity for the nine months ended August 31, 2019 is presented below:
| Weighted- |
||||||||||
| Weighted- |
Average |
|||||||||
| Average |
Remaining |
|||||||||
| Grant |
Contractual |
|||||||||
| Date Fair |
Life |
|||||||||
| Units |
Value |
(in Years) |
||||||||
| Nonvested at December 1, 2018 |
$ | |||||||||
| Granted |
||||||||||
| Vested |
( |
- | ||||||||
| Forfeited |
( |
|||||||||
| Nonvested at August 31, 2019 |
$ | |||||||||
Total fair value of restricted stock vested during the three months ended August 31, 2019 and September 1, 2018 was $
We repurchased
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
| Non-employee |
|||||||||
| Directors |
Employees |
Total |
|||||||
| Units outstanding December 1, 2018 |
|||||||||
| Participant contributions |
|||||||||
| Company match contributions |
|||||||||
| Payouts |
( |
( |
|||||||
| Units outstanding August 31, 2019 |
Deferred compensation units are fully vested at the date of contribution.
| Note 7: Components of Net Periodic Benefit related to Pension and Other Postretirement Benefit Plans |
| Three Months Ended August 31, 2019 and September 1, 2018 |
||||||||||||||||||||||||
| Other |
||||||||||||||||||||||||
| Pension Benefits |
Postretirement |
|||||||||||||||||||||||
| U.S. Plans |
Non-U.S. Plans |
Benefits |
||||||||||||||||||||||
| Net periodic cost (benefit): |
2019 |
2018 |
2019 |
2018 |
2019 |
2018 |
||||||||||||||||||
| Service cost |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Interest cost |
||||||||||||||||||||||||
| Expected return on assets |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||
| Amortization: |
||||||||||||||||||||||||
| Prior service cost (benefit) |
( |
) | ||||||||||||||||||||||
| Actuarial loss |
||||||||||||||||||||||||
| Net periodic benefit |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
| Nine Months Ended August 31, 2019 and September 1, 2018 |
||||||||||||||||||||||||
| Other |
||||||||||||||||||||||||
| Pension Benefits |
Postretirement |
|||||||||||||||||||||||
| U.S. Plans |
Non-U.S. Plans |
Benefits |
||||||||||||||||||||||
| Net periodic cost (benefit): |
2019 |
2018 |
2019 |
2018 |
2019 |
2018 |
||||||||||||||||||
| Service cost |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Interest cost |
||||||||||||||||||||||||
| Expected return on assets |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||
| Amortization: |
||||||||||||||||||||||||
| Prior service cost (benefit) |
( |
) | ||||||||||||||||||||||
| Actuarial loss |
||||||||||||||||||||||||
| Net periodic benefit |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
Note 8: Revenue
Revenue Recognition
We sell a variety of adhesives, sealants and other specialty chemical products to a diverse customer base. The vast majority of our arrangements contain a single performance obligation to transfer manufactured goods to the customer as governed by an individual purchase order.
We recognize revenue at the amount of consideration to which we expect to be entitled in exchange for transferring the promised goods to the customer. The transaction price includes an estimation of any variable amounts of consideration to which we will be entitled. The most common forms of variable consideration within our arrangements are customer rebates, which are recorded as a reduction to revenue at the time of the initial sale using the expected value method. The expected value method is the sum of probability-weighted amounts in a range of possible consideration amounts and is based on a consideration of historical, current and forecast information. Changes in estimates are updated each reporting period. There are no material instances where variable consideration is constrained and not recorded at the initial time of sale. Product returns are recorded as a reduction to revenue based on historical experience and anticipated sales returns that occur in the normal course of business. We primarily have assurance-type warranties that do not result in separate performance obligations. We have elected to present revenue net of sales taxes and other similar taxes.
We recognize revenue when control of goods is transferred to the customer. For the vast majority of our arrangements, control transfers at a point in time either upon shipment or upon delivery of the goods to the customer. The timing of transfer of control is determined considering the timing of the transfer of legal title, physical possession, and risks and rewards of goods to the customer.
We record shipping and handling revenue in net revenues and outbound shipping and handling costs in cost of goods sold. The majority of our shipping and handling activities are performed prior to transfer of control of the goods to the customer. For those arrangements where we provide shipping and handling services after control of the goods has transferred to the customer, we have elected the practical expedient allowed under ASC 606 to account for these activities as a fulfillment cost rather than as a separate performance obligation. Election of this practical expedient resulted in an increase in the balance of retained earnings of $
Practical Expedients Elected
We have elected the following practical expedients allowable under ASC 606:
| - |
Election to present revenue net of sales taxes and other similar taxes |
| - |
Election to account for shipping and handling services performed after control has transferred to the customer as fulfillment activities |
Disaggregated Revenue Information
We view the following disaggregation of revenue by product type as useful to understanding the composition of revenue recognized during the respective reporting periods:
| Three Months Ended August 31, 2019 |
||||||||||||||||||||||||
| Americas |
Asia |
Construction |
Engineering |
|||||||||||||||||||||
| Adhesives |
EIMEA |
Pacific |
Adhesives |
Adhesives |
Total |
|||||||||||||||||||
| Durable assembly |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Hygiene |
||||||||||||||||||||||||
| Packaging |
||||||||||||||||||||||||
| Paper and other |
||||||||||||||||||||||||
| Construction |
||||||||||||||||||||||||
| Engineering |
||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Three Months Ended September 1, 2018 |
||||||||||||||||||||||||
| Americas |
Asia |
Construction |
Engineering |
|||||||||||||||||||||
| Adhesives |
EIMEA |
Pacific |
Adhesives |
Adhesives |
Total |
|||||||||||||||||||
| Durable assembly |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Hygiene |
||||||||||||||||||||||||
| Packaging |
||||||||||||||||||||||||
| Paper and other |
||||||||||||||||||||||||
| Construction |
||||||||||||||||||||||||
| Engineering |
||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Nine Months Ended August 31, 2019 |
||||||||||||||||||||||||
| Americas |
Asia |
Construction |
Engineering |
|||||||||||||||||||||
| Adhesives |
EIMEA |
Pacific |
Adhesives |
Adhesives |
Total |
|||||||||||||||||||
| Durable assembly |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Hygiene |
||||||||||||||||||||||||
| Packaging |
||||||||||||||||||||||||
| Paper and other |
||||||||||||||||||||||||
| Construction |
||||||||||||||||||||||||
| Engineering |
||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Nine Months Ended September 1, 2018 |
||||||||||||||||||||||||
| Americas |
Asia |
Construction |
Engineering |
|||||||||||||||||||||
| Adhesives |
EIMEA |
Pacific |
Adhesives |
Adhesives |
Total |
|||||||||||||||||||
| Durable assembly |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Hygiene |
||||||||||||||||||||||||
| Packaging |
||||||||||||||||||||||||
| Paper and other |
||||||||||||||||||||||||
| Construction |
||||||||||||||||||||||||
| Engineering |
||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Note 9: Accumulated Other Comprehensive Income (Loss) |
| The following table provides details of total comprehensive income (loss): |
| Three Months Ended August 31, 2019 |
Three Months Ended September 1, 2018 |
|||||||||||||||||||||||||||||||
| 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 |
- | - | $ | $ | - | - | $ | $ | ||||||||||||||||||||||||
| Foreign currency translation adjustment¹ |
$ | ( |
) | ( |
) | $ | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
| Defined benefit pension plans adjustment² |
$ | ( |
) | - | $ | ( |
) | - | ||||||||||||||||||||||||
| Interest rate swap³ |
( |
) | ( |
) | - | ( |
) | ( |
) | - | ||||||||||||||||||||||
| Cash flow hedges³ |
( |
) | - | ( |
) | ( |
) | ( |
) | - | ||||||||||||||||||||||
| Other comprehensive income (loss) |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Comprehensive income (loss) |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||||||||||||||
| Nine Months Ended August 31, 2019 |
Nine Months Ended September 1, 2018 |
|||||||||||||||||||||||||||||||
| 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 |
- | - | $ | $ | - | - | $ | $ | ||||||||||||||||||||||||
| Foreign currency translation adjustment¹ |
$ | ( |
) | ( |
) | $ | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
| Reclassification to earnings: |
||||||||||||||||||||||||||||||||
| Defined benefit pension plans adjustment² |
$ | ( |
) | - | $ | ( |
) | - | ||||||||||||||||||||||||
| Interest rate swap³ |
( |
) | ( |
) | - | ( |
) | - | ||||||||||||||||||||||||
| Cash flow hedges³ |
( |
) | - | ( |
) | ( |
) | ( |
) | - | ||||||||||||||||||||||
| Other comprehensive income (loss) |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Comprehensive income (loss) |
$ | $ | $ | $ | ( |
) | ||||||||||||||||||||||||||
| ¹ Income taxes are not provided for foreign currency translation relating to permanent investments in international subsidiaries. |
| ² Loss reclassified from accumulated other comprehensive income ("AOCI") into earnings as part of net periodic cost related to pension and other postretirement benefit plans is reported in cost of sales 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: |
| August 31, 2019 |
||||||||||||
| Total |
H.B. Fuller Stockholders |
Non- controlling Interests |
||||||||||
| Foreign currency translation adjustment |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Defined benefit pension plans adjustment, net of taxes of $74,077 |
( |
) | ( |
) | ||||||||
| Interest rate swap, net of taxes of $6,028 |
( |
) | ( |
) | ||||||||
| Cash flow hedges, net of taxes of $50 |
||||||||||||
| Reclassification of AOCI tax effects |
( |
) | ( |
) | ||||||||
| Accumulated other comprehensive loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| December 1, 2018 |
||||||||||||
| Total |
H.B. Fuller Stockholders |
Non- controlling Interests |
||||||||||
| Foreign currency translation adjustment |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Defined benefit pension plans adjustment, net of taxes of $75,083 |
( |
) | ( |
) | ||||||||
| Interest rate swap, net of taxes of $(7,231) |
||||||||||||
| Cash flow hedges, net of taxes of $588 |
( |
) | ( |
) | ||||||||
| Reclassification of AOCI tax effects |
( |
) | ( |
) | ||||||||
| Accumulated other comprehensive loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
Note 10: Income Taxes
As of August 31, 2019, we had a liability of $
On September 28, 2018, the Swiss Parliament approved the Federal Act on Tax Reform and AHV Financing (TRAF). On May 19, 2019, a public referendum was held in Switzerland that approved the federal reform proposals and subsequently announced the TRAF will become effective on January 1, 2020. As TRAF was not enacted as of August 31, 2019, we have not reflected the financial impacts in our Consolidated Financial Statements during the nine months ended August 31, 2019. The Canton of Zurich, where we operate, voted and passed their legislation on September 1, 2019. Accordingly, we will record the combined financial impact of both the federal and cantonal components of Swiss Tax Reform during the fourth quarter of 2019.
| Note 11: Earnings Per Share |
| A reconciliation of the common share components for the basic and diluted earnings per share calculations is as follows: |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| August 31, |
September 1, |
August 31, |
September 1, |
|||||||||||||
| (Shares in thousands) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
| Weighted-average common shares - basic |
||||||||||||||||
| Equivalent shares from share-based compensations plans |
||||||||||||||||
| Weighted-average common and common equivalent shares - diluted |
||||||||||||||||
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 and (b) the amount of unearned share-based compensation costs attributed to future services. 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.
Share-based compensation awards for
Note 12: 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 designated hedge or undesignated (economic) hedge relationships. The company evaluates 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 a 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
As of August 31, 2019, we had the following cash flow hedges: 1) six cross-currency swap agreements effective October 20, 2017 to convert a notional amount of $
As of August 31, 2019, the combined fair value of the swaps was an asset of $
The following table summarizes the cross-currency swaps outstanding as of August 31, 2019:
| Fiscal Year of Expiration |
Interest Rate |
Notional Value |
Fair Value |
|||||||||
| Pay EUR |
|
$ | $ | |||||||||
| Receive USD | ||||||||||||
| Pay EUR |
|
$ | $ | ( |
) | |||||||
| Receive USD | ||||||||||||
| Pay EUR |
|
$ | $ | |||||||||
| Receive USD | ||||||||||||
| Pay EUR |
|
$ | $ | |||||||||
| Receive USD | ||||||||||||
| Total |
$ | $ | ||||||||||
On March 26, 2018, we entered into interest rate swap agreements to convert $
On April 23, 2018, we amended our Term Loan B Credit Agreement to reduce the interest rate from LIBOR plus
The amounts of pretax gains (losses) recognized in Comprehensive Income related to derivative instruments designated as cash flow hedges are as follows:
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| August 31, 2019 |
September 1, 2018 |
August 31, 2019 |
September 1, 2018 |
|||||||||||||
| Cross-currency swap contracts |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Interest rate swap contracts |
( |
) | ( |
) | ( |
) | ||||||||||
Fair Value Hedges
On February 14, 2017, we entered into interest rate swap agreements to convert $
Derivatives Not Designated As Hedging Instruments
The company uses foreign currency forward contracts to offset its exposure to the change in value of certain foreign currency denominated assets and liabilities held at foreign subsidiaries that are remeasured at the end of each period. Although the contracts are effective economic hedges, they are not designated as accounting hedges. Foreign currency forward contracts are recorded as assets and liabilities on the balance sheet at fair value. Changes in the value of these derivatives are recognized immediately in earnings, thereby offsetting the current earnings effect of the related foreign currency denominated assets and liabilities. See Note 13 for fair value amounts of these derivative instruments.
As of August 31, 2019, we had forward foreign currency contracts maturing between September 3, 2019 and November 20, 2019. The mark-to-market effect associated with these contracts was largely offset by the underlying transaction gains and losses resulting from the foreign currency exposures for which these contracts relate. The amounts of pretax gains (losses) recognized in other income, net related to derivative instruments not designated as hedging instruments for the nine months ended August 31, 2019 and September 1, 2018 were $
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 August 31, 2019, there were no significant concentrations of credit risk.
Note 13: 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 August 31, 2019 and December 1, 2018, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
| August 31, |
Fair Value Measurements Using: |
|||||||||||||||
| Description |
2019 |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
| Assets: |
||||||||||||||||
| Marketable securities |
$ | $ | $ | $ | ||||||||||||
| Foreign exchange contract assets |
||||||||||||||||
| Interest rate swaps, fair value hedges |
||||||||||||||||
| Cross-currency cash flow hedges |
||||||||||||||||
| Liabilities: |
||||||||||||||||
| Foreign exchange contract liabilities |
$ | $ | $ | $ | ||||||||||||
| Interest rate swaps, cash flow hedges |
||||||||||||||||
| December 1, |
Fair Value Measurements Using: |
|||||||||||||||
| Description |
2018 |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
| Assets: |
||||||||||||||||
| Marketable securities |
$ | $ | $ | $ | ||||||||||||
| Foreign exchange contract assets |
||||||||||||||||
| Interest rate swaps, cash flow hedges |
||||||||||||||||
| Cross-currency cash flow hedges |
||||||||||||||||
| Liabilities: |
||||||||||||||||
| Foreign exchange contract liabilities |
$ | $ | $ | $ | ||||||||||||
| Interest rate swaps, fair value hedges |
||||||||||||||||
Long-term debt had an estimated fair value of $
Note 14: Share Repurchase Program
On April 6, 2017, the Board of Directors authorized a share repurchase program of up to $
We did not repurchase any shares during the nine months ended August 31, 2019 and September 1, 2018.
Note 15: Commitments and Contingencies
Environmental Matters
From time to time, we become aware of compliance matters relating to, or receive notices from, federal, state or local entities regarding possible or alleged violations of environmental, health or safety laws and regulations. We review the circumstances of each individual site, considering the number of parties involved, the level of potential liability or our contribution relative to the other parties, the nature and magnitude of the hazardous substances involved, the method and extent of remediation, the estimated legal and consulting expense with respect to each site and the time period over which any costs would likely be incurred. Also, from time to time, we are identified as a potentially responsible party (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and/or similar state laws that impose liability for costs relating to the clean up of contamination resulting from past spills, disposal or other release of hazardous substances. We are also subject to similar laws in some of the countries where current and former facilities are located. Our environmental, health and safety department monitors compliance with applicable laws on a global basis. To the extent we can reasonably estimate the amount of our probable liabilities for environmental matters, we establish an undiscounted financial provision. We recorded liabilities of $
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:
| Nine Months Ended |
3 Years Ended |
|||||||||||
| August 31, 2019 |
September 1, 2018 |
December 1, 2018 |
||||||||||
| Lawsuits and claims settled |
||||||||||||
| Settlement amounts |
$ | $ | $ | |||||||||
| Insurance payments received or expected to be received |
$ | $ | $ | |||||||||
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.
During 2018, we retained legal counsel to conduct an internal investigation of the possible resale of our hygiene products into Iran by certain customers of our subsidiaries in Turkey (beginning in 2011) and India (beginning in 2014), in possible violation of the economic sanctions against Iran administered by the U.S. Department of the Treasury’s Office of Foreign Assets (“OFAC”) and our compliance policy. The sales to these customers represented less than one percent of our net revenue in each of our last three fiscal years. The sales to the customers who were reselling our products into Iran ceased during fiscal year 2018 and we do not currently conduct any business in Iran. In January 2018, we voluntarily contacted OFAC to advise it of this internal investigation and our intention to cooperate fully with OFAC and, in September 2018, we submitted the results and findings of our investigation to OFAC. We have not yet received a response from OFAC. At this time, we cannot predict the outcome or effect of the investigation, however, based on the results of our investigation to date, we believe we could incur penalties ranging from
Note 16: 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. 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. 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.
We have
| Three Months Ended |
||||||||||||||||||||||||
| August 31, 2019 |
September 1, 2018 |
|||||||||||||||||||||||
| Inter- |
Segment |
Inter- |
Segment |
|||||||||||||||||||||
| Trade |
Segment |
Operating |
Trade |
Segment |
Operating |
|||||||||||||||||||
| Revenue |
Revenue |
Income |
Revenue |
Revenue |
Income |
|||||||||||||||||||
| Americas Adhesives |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| EIMEA |
||||||||||||||||||||||||
| Asia Pacific |
||||||||||||||||||||||||
| Construction Adhesives |
( |
) | ||||||||||||||||||||||
| Engineering Adhesives |
||||||||||||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||||||||||
| Nine Months Ended |
||||||||||||||||||||||||
| August 31, 2019 |
September 1, 2018 |
|||||||||||||||||||||||
| Inter- |
Segment |
Inter- |
Segment |
|||||||||||||||||||||
| Trade |
Segment |
Operating |
Trade |
Segment |
Operating |
|||||||||||||||||||
| Revenue |
Revenue |
Income |
Revenue |
Revenue |
Income |
|||||||||||||||||||
| Americas Adhesives |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| EIMEA |
||||||||||||||||||||||||
| Asia Pacific |
||||||||||||||||||||||||
| Construction Adhesives |
( |
) | ||||||||||||||||||||||
| Engineering Adhesives |
||||||||||||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||||||||||
The table below provides a reconciliation of segment operating income to income before income taxes and income from equity method investments:
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| August 31, |
September 1, |
August 31, |
September 1, |
|||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| Segment operating income |
$ | $ | $ | $ | ||||||||||||
| Other income, net |
||||||||||||||||
| Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Interest income |
||||||||||||||||
| Income before income taxes and income from equity method investments |
$ | $ | $ | $ | ||||||||||||
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 1, 2018 for important background information related to our business.
Net revenue in the third quarter of 2019 decreased 5.8 percent from the third quarter of 2018. Net revenue decreased 2.7 percent due to sales volume, 0.6 percent due to unfavorable product pricing and 0.6 percent due to the divestiture of our surfactants and thickeners business. Negative currency effects of 1.9 percent compared to the third quarter of 2018 were primarily driven by the weaker Euro, Chinese renminbi, Argentinian peso, Brazilian real and Turkish lira compared to the U.S. dollar. Gross profit margin increased 70 basis points primarily due to lower material costs partially offset by lower sales volume.
Net revenue in the first nine months of 2019 decreased 5.1 percent from the first nine months of 2018. Net revenue decreased 2.7 percent due to sales volume and 0.2 percent due to the divestiture of our surfactants and thickeners business, partially offset by a 1.5 percent increase due to favorable product pricing. Negative currency effects of 3.7 percent compared to the first nine months of 2018 were primarily driven by the weaker Chinese renminbi, Argentinian peso, Turkish lira, Euro, Brazilian real and Australian dollar compared to the U.S. dollar. Gross profit margin increased 80 basis points primarily due to favorable product pricing and lower material costs partially offset by lower sales volume.
Net income attributable to H.B. Fuller in the third quarter of 2019 was $49.7 million compared to $37.7 million in the third quarter of 2018. On a diluted earnings per share basis, the third quarter of 2019 was $0.97 per share compared to $0.72 per share for the third quarter of 2018.
Net income attributable to H.B. Fuller in the first nine months of 2019 was $98.6 million compared to $129.9 million in the first nine months of 2018. On a diluted earnings per share basis, the first nine months of 2019 was $1.90 per share compared to $2.50 per share for the first nine months of 2018.
Restructuring Plan
During the first quarter of 2018, we approved a restructuring plan 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 (the “Royal Adhesives Restructuring Plan”). In implementing the Royal Adhesives Restructuring Plan, we expect to incur costs of approximately $20.0 million, which includes (i) cash expenditures of approximately $12.0 million for severance and related employee costs globally and (ii) other costs of approximately $8.0 million related to the optimization of production facilities, streamlining of processes and accelerated depreciation of long-lived assets. Approximately $14.0 million of the costs are expected to be cash costs. We incurred costs of $0.3 million and $2.7 million under this plan during the third quarter ended August 31, 2019 and during the nine months ended August 31, 2019, respectively. The Royal Adhesives Restructuring Plan was implemented in the first quarter of 2018 and is currently expected to be completed by the end of fiscal year 2020.
| Results of Operations |
| Net revenue: |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| August 31, |
September 1, |
2019 vs |
August 31, |
September 1, |
2019 vs |
|||||||||||||||||||
| ($ in millions) |
2019 |
2018 |
2018 |
2019 |
2018 |
2018 |
||||||||||||||||||
| Net revenue |
$ | 725.4 | $ | 770.1 | (5.8% | ) | $ | 2,157.9 | $ | 2,272.6 | (5.1% | ) | ||||||||||||
We review variances in net revenue in terms of changes related to sales volume, product pricing, business acquisitions and divestitures (M&A) and changes in foreign currency exchange rates. The following table shows the net revenue variance analysis for the third quarter and first nine months of 2019 compared to the same period in 2018:
| Three Months Ended August 31, 2019 |
Nine Months Ended August 31, 2019 |
|||||||
| vs September 1, 2018 |
vs September 1, 2018 |
|||||||
| Organic growth |
(3.3% | ) | (1.2% | ) | ||||
| M&A |
(0.6% | ) | (0.2% | ) | ||||
| Currency |
(1.9% | ) | (3.7% | ) | ||||
| Total |
(5.8% | ) | (5.1% | ) | ||||
Organic growth was a negative 3.3 percent in the third quarter of 2019 compared to the third quarter of 2018. The 3.3 percent negative organic growth in the third quarter of 2019 was driven by a 12.4 percent decrease in Construction Adhesives and a 7.3 percent decrease in EIMEA, offset by 1.0 percent growth in Asia Pacific, 0.9 percent growth in Engineering Adhesives and 0.1 percent growth in Americas Adhesives. The decrease is predominately driven by a decrease in sales volume. There was a 0.6 percent decrease due to the divestiture of our surfactants and thickeners business during the three months ended August 31, 2019. The negative 1.9 percent currency impact was primarily driven by a weaker Euro, Chinese renminbi, Argentinian peso, Brazilian real and Turkish lira compared to the U.S. dollar.
Organic growth was a negative 1.2 percent in the first nine months of 2019 compared to the first nine months of 2018. The 1.2 percent negative organic growth in the first nine months of 2019 was driven by an 11.8 percent decrease in Construction Adhesives and a 2.4 percent decrease in EIMEA, offset by 5.3 percent growth in Engineering Adhesives, 0.6 percent growth in Asia Pacific and 0.5 percent growth in Americas Adhesives. The decrease is predominately driven by a decrease in sales volume. There was a 0.2 percent decrease due to the divestiture of our surfactants and thickeners business during the nine months ended August 31, 2019. The negative 3.7 percent currency impact was primarily driven by a weaker Chinese renminbi, Argentinian peso, Turkish lira, Euro, Brazilian real and Australian dollar compared to the U.S. dollar.
| Cost of sales: |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| August 31, |
September 1, |
2019 vs |
August 31, |
September 1, |
2019 vs |
|||||||||||||||||||
| ($ in millions) |
2019 |
2018 |
2018 |
2019 |
2018 |
2018 |
||||||||||||||||||
| Raw materials |
$ | 382.5 | $ | 416.4 | (8.1% | ) | $ | 1,144.4 | $ | 1,242.3 | (7.9% | ) | ||||||||||||
| Other manufacturing costs |
135.6 | 138.7 | (2.2% | ) | 407.8 | 409.5 | (0.4% | ) | ||||||||||||||||
| Cost of sales |
$ | 518.1 | $ | 555.1 | (6.7% | ) | $ | 1,552.2 | $ | 1,651.8 | (6.0% | ) | ||||||||||||
| Percent of net revenue |
71.4 | % | 72.1 | % | 71.9 | % | 72.7 | % | ||||||||||||||||
Cost of sales in the third quarter of 2019 compared to the third quarter of 2018 decreased 70 basis points as a percentage of net revenue. Raw material cost as a percentage of net revenue decreased 140 basis points in the third quarter of 2019 compared to the third quarter of 2018 primarily due to decreased raw material costs. Other manufacturing costs as a percentage of revenue increased 70 basis points in the third quarter of 2019 compared to the third quarter of 2018 primarily due to the impact of lower sales volume.
Cost of sales in the first nine months of 2019 compared to the first nine months of 2018 decreased 80 basis points as a percentage of net revenue. Raw material cost as a percentage of net revenue decreased 170 basis points in the first nine months of 2019 compared to the first nine months of 2018 primarily due to an increase in product pricing and decreased raw material costs. Other manufacturing costs as a percentage of revenue increased 90 basis points in the first nine months of 2019 compared to the first nine months of 2018 primarily due to the impact of lower sales volume.
| Gross profit: |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| August 31, |
September 1, |
2019 vs |
August 31, |
September 1, |
2019 vs |
|||||||||||||||||||
| ($ in millions) |
2019 |
2018 |
2018 |
2019 |
2018 |
2018 |
||||||||||||||||||
| Gross profit |
$ | 207.3 | $ | 215.0 | (3.6% | ) | $ | 605.7 | $ | 620.7 | (2.4% | ) | ||||||||||||
| Percent of net revenue |
28.6 | % | 27.9 | % | 28.1 | % | 27.3 | % | ||||||||||||||||
Gross profit in the third quarter of 2019 decreased 3.6 percent and gross profit margin increased 70 basis points compared to the third quarter of 2018. The increase in gross profit margin was primarily due to lower raw material costs partially offset by lower sales volume.
Gross profit in the first nine months of 2019 decreased 2.4 percent and gross profit margin increased 80 basis points compared to the first nine months of 2018. The increase in gross profit margin was primarily due to favorable product pricing and lower raw material costs partially offset by lower sales volume.
| Selling, general and administrative (SG&A) expenses: |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| August 31, |
September 1, |
2019 vs |
August 31, |
September 1, |
2019 vs |
|||||||||||||||||||
| ($ in millions) |
2019 |
2018 |
2018 |
2019 |
2018 |
2018 |
||||||||||||||||||
| SG&A |
$ | 140.6 | $ | 147.7 | (4.8% | ) | $ | 432.4 | $ | 447.3 | (3.3% | ) | ||||||||||||
| Percent of net revenue |
19.4 | % | 19.2 | % | 20.0 | % | 19.7 | % | ||||||||||||||||
SG&A expenses for the third quarter of 2019 decreased $7.1 million, or 4.8 percent, compared to the third quarter of 2018. The decrease is primarily due to general spending reductions and the favorable impact of foreign currency exchange rates on spending outside the U.S.
SG&A expenses for the first nine months of 2019 decreased $14.9 million, or 3.3 percent, compared to the first nine months of 2018. The decrease is primarily due to general spending reductions and the favorable impact of foreign currency exchange rates on spending outside the U.S.
We make SG&A expense plans at the beginning of each fiscal year and barring significant changes in business conditions or our outlook for the future, we maintain these spending plans for the entire year. Management routinely monitors our SG&A spending relative to these fiscal year plans for each operating segment and for the company overall. We feel it is important to maintain a consistent spending program in this area as many of the activities within the SG&A category such as the sales force, technology development, and customer service are critical elements of our business strategy.
| Other income, net: |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| August 31, |
September 1, |
2019 vs |
August 31, |
September 1, |
2019 vs |
|||||||||||||||||||
| ($ in millions) |
2019 |
2018 |
2018 |
2019 |
2018 |
2018 |
||||||||||||||||||
| Other income, net |
$ | 22.8 | $ | 2.5 | 812.0 | % | $ | 29.1 | $ | 15.1 | 92.7 | % | ||||||||||||
Other income, net in the third quarter of 2019 included a $20.3 million gain on sale of assets, $3.4 million of net defined benefit pension benefits and $0.7 of other income, offset by $1.6 million currency transaction losses. Other income, net in the third quarter of 2018 included $3.8 million of net defined benefit pension benefits, offset by $1.3 million currency transaction losses.
Other income, net in the first nine months of 2019 included a $20.0 million gain on sale of assets, $10.3 million of net defined benefit pension benefits and $1.0 million of other income, offset by $2.2 million of currency transaction losses. Other income, net in the first nine months of 2018 included $11.6 million of net defined benefit pension benefits, $3.1 million gain on sale of assets and $2.8 million of other income, offset by $2.4 million of currency transaction losses.
| Interest expense: |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| August 31, |
September 1, |
2019 vs |
August 31, |
September 1, |
2019 vs |
|||||||||||||||||||
| ($ in millions) |
2019 |
2018 |
2018 |
2019 |
2018 |
2018 |
||||||||||||||||||
| Interest expense |
$ | 25.6 | $ | 27.9 | (8.2% | ) | $ | 79.4 | $ | 83.4 | (4.9% | ) | ||||||||||||
Interest expense in the third quarter of 2019 was $25.6 million compared to $27.9 million in the third quarter of 2018. Interest expense in the third quarter of 2019 compared to the third quarter of 2018 was lower due to lower U.S. debt balances. We capitalized $0.1 million of interest expense in both the third quarter of 2019 and in the same period last year.
Interest expense in the first nine months of 2019 was $79.4 million compared to $83.4 million in the first nine months of 2018. Interest expense in the first nine months of 2019 compared to the first nine months of 2018 was lower due to lower U.S. debt balances. We capitalized $0.3 million and $0.2 million of interest expense in the first nine months of 2019 and 2018, respectively.
| Interest income: |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| August 31, |
September 1, |
2019 vs |
August 31, |
September 1, |
2019 vs |
|||||||||||||||||||
| ($ in millions) |
2019 |
2018 |
2018 |
2019 |
2018 |
2018 |
||||||||||||||||||
| Interest income |
$ | 3.1 | $ | 2.9 | 6.9 | % | $ | 9.2 | $ | 8.8 | 4.4 | % | ||||||||||||
Interest income in the third quarter of 2019 was $3.1 million. Interest income in the third quarter of 2018 was $2.9 million.
Interest income in the first nine months of 2019 was $9.2 million. Interest income in the first nine months of 2018 was $8.8 million.
| Income taxes: |
| Three Months Ended |
Nine Months Ended |
||||||||||||||||||||||
| August 31, |
September 1, |
2019 vs |
August 31, |
September 1, |
2019 vs |
||||||||||||||||||
| ($ in millions) |
2019 |
2018 |
2018 |
2019 |
2018 |
2018 |
|||||||||||||||||
| Income taxes |
$ | 19.3 | $ | 9.3 | 107.5% | $ | 38.9 | $ | (9.8 | ) | NMP |
||||||||||||
| Effective tax rate |
28.8 | % | 20.7 | % | 29.4 | % | (8.6% | ) | |||||||||||||||
| NMP = Non-meaningful percentage |
Income tax expense of $19.3 million in the third quarter of 2019 includes $6.3 million of discrete tax expense. Excluding the discrete tax expense of $6.3 million, the overall effective tax rate was 27.7 percent. Income tax expense of $9.3 million in the third quarter of 2018 included $1.0 million of discrete tax benefit. Excluding the discrete tax benefit of $1.0 million, the overall effective tax rate was 22.9 percent. The increase in the overall effective tax rate, excluding the impact of discrete items, is primarily due to the impact of certain items of U.S. Tax Reform which were not effective in 2018, but are applicable to 2019.
Income tax expense of $38.9 million in the first nine months of 2019 includes $7.2 million of discrete tax expense. Excluding the discrete tax expense of $7.2 million, the overall effective tax rate was 28.3 percent. Income tax benefit of $9.8 million in the first nine months of 2018 included $35.6 million of tax benefit related to the accounting for the tax effects of U.S. Tax Reform and $1.7 million of other discrete tax benefit. Excluding the discrete tax benefits of $37.3 million, the overall effective tax rate was 24.1 percent. The increase in the overall effective tax rate, excluding the impact of discrete and other items, is primarily due to the impact of certain items of U.S. Tax Reform which were not effective in 2018, but are applicable to 2019.
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| August 31, |
September 1, |
2019 vs |
August 31, |
September 1, |
2019 vs |
|||||||||||||||||||
| ($ in millions) |
2019 |
2018 |
2018 |
2019 |
2018 |
2018 |
||||||||||||||||||
| Income from equity method investments |
$ | 2.1 | $ | 2.2 | (4.5% | ) | $ | 5.3 | $ | 6.2 | (15.0% | ) | ||||||||||||
The income from equity method investments relates to our 50 percent ownership of the Sekisui-Fuller joint venture in Japan. The lower income for the third quarter of 2019 and for the first nine months of 2019 compared to the same period of 2018 relates to lower net income in our joint venture.
| Net income attributable to H.B. Fuller: |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| August 31, |
September 1, |
2019 vs |
August 31, |
September 1, |
2019 vs |
|||||||||||||||||||
| ($ in millions) |
2019 |
2018 |
2018 |
2019 |
2018 |
2018 |
||||||||||||||||||
| Net income attributable to H.B. Fuller |
$ | 49.7 | $ | 37.7 | 31.8 | % | $ | 98.6 | $ | 129.9 | (24.1% | ) | ||||||||||||
| Percent of net revenue |
6.9 | % | 4.9 | % | 4.6 | % | 5.7 | % | ||||||||||||||||
The net income attributable to H.B. Fuller for the third quarter of 2019 was $49.7 million compared to $37.7 million for the third quarter of 2018. The diluted earnings per share for the third quarter of 2019 was $0.97 per share as compared to $0.72 per share for the third quarter of 2018.
The net income attributable to H.B. Fuller for the first nine months of 2019 was $98.6 million compared to $129.9 million for the first nine months of 2018. The diluted earnings per share for the first nine months of 2019 was $1.90 per share as compared to $2.50 per share for the first nine months of 2018.
Operating Segment Results
We have five reportable segments: Americas Adhesives, EIMEA, Asia Pacific, Construction Adhesives and Engineering Adhesives. Operating results of each of these segments are regularly reviewed by our chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance.
As of the beginning of the fiscal 2019, we realigned certain customers across operating segments. The tables below provide certain information regarding the net revenue and segment operating income of each of our operating segments. Prior period segment information has been recast retrospectively to reflect the realignment. Inter-segment revenues are recorded at cost plus a markup for administrative costs. Corporate expenses are fully allocated to each operating segment.
| Net Revenue by Segment: |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||||||||||
| August 31, 2019 |
September 1, 2018 |
August 31, 2019 |
September 1, 2018 |
|||||||||||||||||||||||||||||
| Net |
% of |
Net |
% of |
Net |
% of |
Net |
% of |
|||||||||||||||||||||||||
| ($ in millions) |
Revenue |
Total |
Revenue |
Total |
Revenue |
Total |
Revenue |
Total |
||||||||||||||||||||||||
| Americas Adhesives |
$ | 259.8 | 36 | % | $ | 268.7 | 35 | % | $ | 761.4 | 35 | % | $ | 785.9 | 35 | % | ||||||||||||||||
| EIMEA |
154.3 | 21 | % | 171.5 | 22 | % | 476.2 | 22 | % | 522.7 | 23 | % | ||||||||||||||||||||
| Asia Pacific |
65.6 | 9 | % | 66.0 | 9 | % | 200.1 | 9 | % | 207.0 | 9 | % | ||||||||||||||||||||
| Construction Adhesives |
107.9 | 15 | % | 124.0 | 16 | % | 301.6 | 14 | % | 345.1 | 15 | % | ||||||||||||||||||||
| Engineering Adhesives |
137.8 | 19 | % | 139.9 | 18 | % | 418.6 | 20 | % | 411.9 | 18 | % | ||||||||||||||||||||
| Total |
$ | 725.4 | 100 | % | $ | 770.1 | 100 | % | 2,157.9 | 100 | % | $ | 2,272.6 | 100 | % | |||||||||||||||||
| Segment Operating Income: |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||||||||||
| August 31, 2019 |
September 1, 2018 |
August 31, 2019 |
September 1, 2018 |
|||||||||||||||||||||||||||||
| ($ in millions) |
Segment Operating Income |
% of Total |
Segment Operating Income |
% of Total |
Segment Operating Income |
% of Total |
Segment Operating Income |
% of Total |
||||||||||||||||||||||||
| Americas Adhesives |
$ | 28.3 | 42 | % | $ | 31.5 | 47 | % | $ | 70.5 | 41 | % | $ | 72.8 | 42 | % | ||||||||||||||||
| EIMEA |
6.4 | 10 | % | 6.2 | 9 | % | 18.5 | 11 | % | 22.7 | 13 | % | ||||||||||||||||||||
| Asia Pacific |
6.1 | 9 | % | 3.7 | 5 | % | 15.6 | 9 | % | 11.0 | 6 | % | ||||||||||||||||||||
| Construction Adhesives |
7.4 | 11 | % | 11.9 | 18 | % | 11.1 | 6 | % | 24.4 | 14 | % | ||||||||||||||||||||
| Engineering Adhesives |
18.5 | 28 | % | 14.0 | 21 | % | 57.6 | 33 | % | 42.5 | 25 | % | ||||||||||||||||||||
| Total |
$ | 66.7 | 100 | % | $ | 67.3 | 100 | % | $ | 173.3 | 100 | % | $ | 173.4 | 100 | % | ||||||||||||||||
| Americas Adhesives |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| August 31, |
September 1, |
2019 vs |
August 31, |
September 1, |
2019 vs |
|||||||||||||||||||
| ($ in millions) |
2019 |
2018 |
2018 |
2019 |
2018 |
2018 |
||||||||||||||||||
| Net revenue |
$ | 259.8 | $ | 268.7 | (3.3 | %) | $ | 761.4 | $ | 785.9 | (3.1 | %) | ||||||||||||
| Segment operating income |
$ | 28.3 | $ | 31.5 | (10.2 | %) | $ | 70.5 | $ | 72.8 | (3.2 | %) | ||||||||||||
| Segment operating margin |
10.9 | % | 11.7 | % | 9.3 | % | 9.3 | % | ||||||||||||||||
| The following table provides details of the Americas Adhesives net revenue variances: |
| Three Months Ended August 31, 2019 |
Nine Months Ended August 31, 2019 |
|||||||
| vs September 1, 2018 |
vs September 1, 2018 |
|||||||
| Organic growth |
0.1 | % | 0.5 | % | ||||
| M&A |
(1.7% | ) | (0.6% | ) | ||||
| Currency |
(1.7% | ) | (3.0% | ) | ||||
| Total |
(3.3% | ) | (3.1% | ) | ||||
Net revenue decreased 3.3 percent in the third quarter of 2019 compared to the third quarter of 2018. The increase in organic growth was attributable to an increase in sales volume offset by unfavorable product pricing. There was a 1.7 percent decrease due to the divestiture of our surfactants and thickeners business during the three months ended August 31, 2019. The negative currency effect was due to the weaker Argentinian peso, Brazilian real, Colombian peso and Canadian dollar compared to the U.S. dollar. As a percentage of net revenue, raw material costs increased 30 basis points. Other manufacturing costs as a percentage of net revenue increased 30 basis points. SG&A expenses as a percentage of net revenue increased 20 basis points. Segment operating income decreased 10.2 percent and segment operating margin as a percentage of net revenue decreased 80 basis points compared to the third quarter of 2018.
Net revenue decreased 3.1 percent in the first nine months of 2019 compared to the first nine months of 2018. The increase in organic growth was attributable to favorable product pricing, partially offset by decrease in sales volume. There was a 0.6 percent decrease due to the divestiture of our surfactants and thickeners business during the nine months ended August 31, 2019. The negative currency effect was due to the weaker Argentinian peso, Brazilian real, Colombian peso and Canadian dollar compared to the U.S. dollar. As a percentage of net revenue, raw material costs decreased 50 basis points due to lower raw material costs. Other manufacturing costs as a percentage of net revenue increased 50 basis points due to higher production costs and lower sales volume. SG&A expenses as a percentage of net revenue was flat. Segment operating income decreased 3.2 percent and segment operating margin as a percentage of net revenue was flat compared to the first nine months of 2018.
| EIMEA |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| August 31, |
September 1, |
2019 vs |
August 31, |
September 1, |
2019 vs |
|||||||||||||||||||
| ($ in millions) |
2019 |
2018 |
2018 |
2019 |
2018 |
2018 |
||||||||||||||||||
| Net revenue |
$ | 154.3 | $ | 171.5 | (10.0% | ) | $ | 476.2 | $ | 522.7 | (8.9% | ) | ||||||||||||
| Segment operating income |
$ | 6.4 | $ | 6.2 | 3.2 | % | $ | 18.5 | $ | 22.7 | (18.5% | ) | ||||||||||||
| Segment operating margin |
4.1 | % | 3.6 | % | 3.9 | % | 4.3 | % | ||||||||||||||||
| The following table provides details of the EIMEA net revenue variances: |
| Three Months Ended August 31, 2019 |
Nine Months Ended August 31, 2019 |
|||||||
| vs September 1, 2018 |
vs September 1, 2018 |
|||||||
| Organic growth |
(7.3% | ) | (2.4% | ) | ||||
| Currency |
(2.7% | ) | (6.5% | ) | ||||
| Total |
(10.0% | ) | (8.9% | ) | ||||
Net revenue decreased 10.0 percent in the third quarter of 2019 compared to the third quarter of 2018. The decrease in organic growth was attributable to a decrease in sales volume and unfavorable product pricing. The negative currency effect was primarily the result of a weaker Euro and Turkish lira compared to the U.S. dollar. Raw material costs as a percentage of net revenue decreased 260 basis points due to lower raw material costs and favorable product mix. Other manufacturing costs as a percentage of net revenue increased 120 basis points due to lower sales volume and higher restructuring plan costs. SG&A expenses as a percentage of net revenue increased 90 basis points primarily due to higher restructuring plan and lower net revenue. Segment operating income increased 3.2 percent and segment operating margin increased 50 basis points compared to the third quarter of 2018.
Net revenue decreased 8.9 percent in the first nine months of 2019 compared to the first nine months of 2018. The decrease in organic growth was attributable to a decrease in sales volume, partially offset by favorable product pricing. The negative currency effect was primarily the result of a weaker Turkish lira, Euro, and Indian rupee compared to the U.S. dollar. Raw material costs as a percentage of net revenue decreased 120 basis points due to lower raw material costs and favorable product mix. Other manufacturing costs as a percentage of net revenue increased 70 basis points primarily due to higher production and freight costs combined with lower sales volume. SG&A expenses as a percentage of net revenue increased 90 basis points due to higher restructuring plan and lower net revenue. Segment operating income decreased 18.5 percent and segment operating margin decreased 40 basis points compared to the first nine months of 2018.
| Asia Pacific |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| August 31, |
September 1, |
2019 vs |
August 31, |
September 1, |
2019 vs |
|||||||||||||||||||
| ($ in millions) |
2019 |
2018 |
2018 |
2019 |
2018 |
2018 |
||||||||||||||||||
| Net revenue |
$ | 65.6 | $ | 66.0 | (0.6% | ) | $ | 200.1 | $ | 207.0 | (3.3% | ) | ||||||||||||
| Segment operating income |
$ | 6.1 | $ | 3.7 | 64.9 | % | $ | 15.6 | $ | 11.0 | 41.8 | % | ||||||||||||
| Segment operating margin |
9.3 | % | 5.6 | % | 7.8 | % | 5.3 | % | ||||||||||||||||
| The following table provides details of the Asia Pacific net revenue variances: |
| Three Months Ended August 31, 2019 |
Nine Months Ended August 31, 2019 |
|||||||
| vs September 1, 2018 |
vs September 1, 2018 |
|||||||
| Organic growth |
1.0 | % | 0.6 | % | ||||
| Currency |
(1.6% | ) | (3.9% | ) | ||||
| Total |
(0.6% | ) | (3.3% | ) | ||||
Net revenue in the third quarter of 2019 decreased 0.6 percent compared to the third quarter of 2018. The increase in organic growth was attributable to increased sales volume, partially offset by unfavorable product pricing. The negative currency effect was primarily the result of a weaker Chinese renminbi and Australian dollar compared to the U.S. dollar. Raw material costs as a percentage of net revenue decreased 320 basis points primarily due to lower raw material costs. Other manufacturing costs as a percentage of net revenue decreased 20 basis points. SG&A expenses as a percentage of net revenue decreased 30 basis points. Segment operating income increased 64.9 percent and segment operating margin increased 370 basis points compared to the third quarter of 2018.
Net revenue in the first nine months of 2019 decreased 3.3 percent compared to the first nine months of 2018. The increase in organic growth was attributable to favorable product pricing and an increase in sales volume. The negative currency effect was primarily the result of a weaker Chinese renminbi and Australian dollar compared to the U.S. dollar. Raw material costs as a percentage of net revenue decreased 260 basis points primarily due to increased product pricing and lower raw material costs. Other manufacturing costs as a percentage of net revenue was flat. SG&A expenses as a percentage of net revenue increased 10 basis points. Segment operating income increased 41.8 percent and segment operating margin increased 250 basis points compared to the first nine months of 2018.
| Construction Adhesives |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| August 31, |
September 1, |
2019 vs |
August 31, |
September 1, |
2019 vs |
|||||||||||||||||||
| ($ in millions) |
2019 |
2018 |
2018 |
2019 |
2018 |
2018 |
||||||||||||||||||
| Net revenue |
$ | 107.9 | $ | 124.0 | (13.0% | ) | $ | 301.6 | $ | 345.1 | (12.6% | ) | ||||||||||||
| Segment operating (loss) income |
$ | 7.4 | $ | 11.9 | (37.8% | ) | $ | 11.1 | $ | 24.4 | (54.5% | ) | ||||||||||||
| Segment operating margin |
6.9 | % | 9.6 | % | 3.7 | % | 7.1 | % | ||||||||||||||||
| The following tables provide details of the Construction Adhesives net revenue variances: |
| Three Months Ended August 31, 2019 |
Nine Months Ended August 31, 2019 |
|||||||
| vs September 1, 2018 |
vs September 1, 2018 |
|||||||
| Organic growth |
(12.4% | ) | (11.8% | ) | ||||
| Currency |
(0.6% | ) | (0.8% | ) | ||||
| Total |
(13.0% | ) | (12.6% | ) | ||||
Net revenue decreased 13.0 percent in the third quarter of 2019 compared to the third quarter of 2018. The decrease in organic growth was driven by lower sales volume primarily related to the elimination of under-performing products, partially offset by favorable product pricing. The negative currency effect was due to the weaker Australian dollar compared to the U.S. dollar. Raw material costs as a percentage of net revenue decreased 30 basis points. Other manufacturing costs as a percentage of net revenue increased 80 basis points due to lower sales volume. SG&A expenses as a percentage of net revenue increased 220 basis points due to lower sales volume and higher restructuring plan expenses. Segment operating income decreased $4.5 million and segment operating margin decreased 270 basis points compared to the third quarter of 2018.
Net revenue decreased 12.6 percent in the first nine months of 2019 compared to the first nine months of 2018. The decrease in organic growth was driven by lower sales volume primarily related to the elimination of under-performing products, partially offset by favorable product pricing. The negative currency effect was due to the weaker Australian dollar compared to the U.S. dollar. Raw material costs as a percentage of net revenue decreased 70 basis points due to favorable product pricing and lower raw material costs. Other manufacturing costs as a percentage of net revenue increased 220 basis points primarily due to higher integration and restructuring costs combined with lower sales volume. SG&A expenses as a percentage of net revenue increased 190 basis points due to lower sales volume partially offset by lower restructuring plan expenses. Segment operating income decreased $13.3 million and segment operating margin decreased 340 basis points compared to first nine months of 2018.
| Engineering Adhesives |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| August 31, |
September 1, |
2019 vs |
August 31, |
September 1, |
2019 vs |
|||||||||||||||||||
| ($ in millions) |
2019 |
2018 |
2018 |
2019 |
2018 |
2018 |
||||||||||||||||||
| Net revenue |
$ | 137.8 | $ | 139.9 | (1.5% | ) | $ | 418.6 | $ | 411.9 | 1.6 | % | ||||||||||||
| Segment operating income |
$ | 18.5 | $ | 14.0 | 32.1 | % | $ | 57.6 | $ | 42.5 | 35.5 | % | ||||||||||||
| Segment operating margin |
13.4 | % | 10.0 | % | 13.8 | % | 10.3 | % | ||||||||||||||||
| The following tables provide details of the Engineering Adhesives net revenue variances: |
| Three Months Ended August 31, 2019 |
Nine Months Ended August 31, 2019 |
|||||||
| vs September 1, 2018 |
vs September 1, 2018 |
|||||||
| Organic growth |
0.9 | % | 5.3 | % | ||||
| Currency |
(2.4% | ) | (3.7% | ) | ||||
| Total |
(1.5% | ) | 1.6 | % | ||||
Net revenue decreased 1.5 percent in the third quarter of 2019 compared to the third quarter of 2018. The increase in organic growth was attributable to an increase in sales volume, partially offset by unfavorable product pricing. Sales volume growth was primarily driven by strong performance in the electronics and new energy markets. The negative currency effect was due to a weaker Chinese renminbi, Euro and South Korean won compared to the U.S. dollar. Raw material costs as a percentage of net revenue decreased 310 basis points due to favorable product mix and lower raw material costs. Other manufacturing costs as a percentage of net revenue increased 180 basis points due to higher production and integration costs. SG&A expenses as a percentage of net revenue decreased 210 basis points due to lower compensation costs. Segment operating income increased 32.1 percent and segment operating margin increased 340 basis points compared to the third quarter of 2018.
Net revenue increased 1.6 percent in the first nine months of 2019 compared to the first nine months of 2018. The increase in organic growth was attributable to an increase in sales volume, partially offset by unfavorable product pricing. Sales volume growth was primarily driven by strong performance in the electronics and new energy markets. The negative currency effect was due to a weaker Chinese renminbi, Euro and South Korean won compared to the U.S. dollar. Raw material costs as a percentage of net revenue decreased 420 basis points due to favorable product mix and lower raw material costs. Other manufacturing costs as a percentage of net revenue increased 150 basis points due to higher production and integration costs. SG&A expenses as a percentage of net revenue decreased 80 basis points due to lower compensation costs. Segment operating income increased 35.5 percent and segment operating margin increased 350 basis points compared to the first nine months of 2018.
Financial Condition, Liquidity and Capital Resources
Total cash and cash equivalents as of August 31, 2019 were $119.8 million compared to $150.8 million as of December 1, 2018 and $150.1 million as of September 1, 2018. The majority of the $119.8 million in cash and cash equivalents as of August 31, 2019 was held outside the United States. Total long and short-term debt was $2,097.1 million as of August 31, 2019, $2,247.5 million as of December 1, 2018 and $2,364.2 million as of September 1, 2018. The total debt to total capital ratio as measured by Total Debt divided by (Total Debt plus Total Stockholders’ Equity) was 64.1 percent as of August 31, 2019 as compared to 66.1 percent as of December 1, 2018 and 67.6 percent as of September 1, 2018.
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 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 August 31, 2019, we were in compliance with all covenants of our contractual obligations as shown in the following table:
| Covenant |
Debt Instrument |
Measurement |
Result as of August 31, 2019 |
| Secured Indebtedness / TTM EBITDA |
Revolving Credit Agreement and Term Loan B Credit Agreement |
Not greater than 5.9 |
3.9 |
| ● |
TTM = Trailing 12 months |
| ● |
EBITDA for covenant purposes is defined as consolidated net income, plus interest expense, expense for taxes paid or accrued, depreciation and amortization, certain non-cash impairment losses, extraordinary non-cash losses incurred other than in the ordinary course of business, nonrecurring extraordinary non-cash restructuring charges and the non-cash impact of purchase accounting, expenses related to the Royal Adhesives acquisition not to exceed $40.0 million, expenses relating to the integration of Royal Adhesives during the fiscal years ending in 2017, 2018 and 2019 not exceeding $30 million in aggregate, restructuring expenses that began prior to the Royal Adhesives acquisition incurred in fiscal years ending in 2017 and 2018 not exceeding $28 million in aggregate, and non-capitalized charges relating to the SAP implementation during fiscal years ending in 2017 through 2021 not exceeding $13 million in any single fiscal year, minus extraordinary non-cash gains. 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. The full definition is set forth in the Term Loan B Credit Agreement and the Amended Revolving Credit Agreement, and can be found in the Company’s 8-K filings dated October 20, 2017 and 8-K dated November 17, 2017, respectively. |
We believe we have the ability to meet all of our contractual obligations and commitments in fiscal 2019.
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 after dividends and debt capitalization ratio.
| August 31, |
September 1, |
|||||
| 2019 |
2018 |
|||||
| Net working capital as a percentage of annualized net revenue1 |
20.2% | 19.7% | ||||
| Accounts receivable DSO (in days)2 |
59 | 54 | ||||
| Inventory days on hand (in days)3 |
67 | 69 | ||||
| Free cash flow after dividends4 |
$89.0 | $37.0 | ||||
| Total debt to total capital ratio5 |
64.1% | 67.6% |
1 Current quarter net working capital (trade receivables, net of allowance for doubtful accounts plus inventory minus trade payables) divided by annualized net revenue (current quarter multiplied by four).
2 Trade receivables net of the allowance for doubtful accounts at the balance sheet date multiplied by 56 (8 weeks) and divided by the net revenue for the last 2 months of the quarter.
3 Total inventory multiplied by 56 and divided by cost of sales (excluding delivery costs) for the last 2 months of the quarter.
4 Year-to-date net cash provided by operating activities, less purchased property, plant and equipment and dividends paid. See reconciliation to Net cash provided by operating activities from continuing operations below.
5 Total debt divided by (total debt plus total stockholders’ equity).
| Free cash flow after dividends, a non-GAAP financial measure, is defined as net cash provided by (used in) operations less purchased property, plant and equipment and dividends paid. Free cash flow after dividends is an integral financial measure used by the Company to assess its ability to generate cash in excess of its operating needs, therefore, the Company believes this financial measure provides useful information to investors. The following table reflects the manner in which free cash flow after dividends is determined and provides a reconciliation of free cash flow after dividends to net cash provided by (used in) operating activities from continuing operations, the most directly comparable financial measure calculated and reported in accordance with U.S. GAAP. |
| Reconciliation of "Net cash provided by operating activities" to Free cash flow after dividends |
| Nine Months Ended |
||||||||
| ($ in millions) |
August 31, 2019 |
September 1, 2018 |
||||||
| Net cash provided by operating activities |
$ | 160.2 | $ | 106.8 | ||||
| Less: Purchased property, plant and equipment |
47.0 | 46.5 | ||||||
| Less: Dividends paid |
24.2 | 23.3 | ||||||
| Free cash flow after dividends |
89.0 | 37.0 | ||||||
| Summary of Cash Flows |
| Cash Flows from Operating Activities: |
| Nine Months Ended |
||||||||
| August 31, |
September 1, |
|||||||
| ($ in millions) |
2019 |
2018 |
||||||
| Net cash provided by operating activities |
$ | 160.2 | $ | 106.8 | ||||
Net income including non-controlling interest was $98.6 million in the first nine months of 2019 compared to $129.9 million in the first nine months of 2018. Depreciation and amortization expense totaled $106.5 million in the first nine months of 2019 compared to $109.2 million in the first nine months of 2018. Deferred income taxes was a use of cash of $36.8 million in 2019 compared to $51.7 million in the first nine months of 2018. The higher use of cash in the first nine months of 2018 was due to the impact of U.S. Tax Reform. Accrued compensation was a use of cash of $10.2 million in 2019 compared to $6.2 million last year related to lower accruals for our employee incentive plans in the current year. Other assets was a use of cash of $31.9 million in the nine months ending August 31, 2019 compared to $47.5 million in the same period last year. Other liabilities was a source of cash of $10.6 million in the first nine months of 2019 compared to a use of cash of $0.6 million in the first nine months of 2018.
Changes in net working capital (trade receivables, inventory and trade payables) accounted for a use of cash of $31.2 million compared to $71.5 million last year. The table below provides the cash flow impact due to changes in the components of net working capital:
| Nine Months Ended |
||||||||
| August 31, |
September 1, |
|||||||
| ($ in millions) |
2019 |
2018 |
||||||
| Trade receivables, net |
$ | (15.7 | ) | $ | (15.1 | ) | ||
| Inventory |
(17.7 | ) | (60.2 | ) | ||||
| Trade payables |
2.2 | 3.8 | ||||||
| Total cash flow impact |
$ | (31.2 | ) | $ | (71.5 | ) | ||
| ● |
Trade Receivables, net – Trade receivables, net was a use of cash of $15.7 million and $15.1 million in 2019 and 2018, respectively. The higher use of cash in 2019 compared to 2018 was due to more cash collected on trade receivables in the prior year compared to the current year. The DSO were 59 days at August 31, 2019 and 54 days at September 1, 2018. |
| ● |
Inventory – Inventory was a use of cash of $17.7 million and $60.2 million in 2019 and 2018, respectively. The lower use of cash in 2019 is due to higher raw material costs and increasing inventory levels in 2018 to maintain service levels while integrating our acquisitions in 2018. Inventory days on hand were 67 days as of August 31, 2019 and 69 days as of September 1, 2018. |
| ● |
Trade Payables – For the first nine months of 2019, trade payables was a source of cash of $2.2 million and $3.8 million in 2018. The higher source of cash in 2018 compared to 2019 reflects higher payments on trade payables in the prior year. |
| Cash Flows from Investing Activities: |
| Nine Months Ended |
||||||||
| August 31, |
September 1, |
|||||||
| ($ in millions) |
2019 |
2018 |
||||||
| Net cash provided by (used in) investing activities |
$ | 18.6 | $ | (42.0 | ) | |||
Purchases of property, plant and equipment were $47.0 million during the nine months ended August 31, 2019 as compared to $46.5 million for the same period of 2018. In 2019, we received $70.3 million of cash related to the sale of our surfactants and thickeners business.
| Cash Flows from Financing Activities: |
| Nine Months Ended |
||||||||
| August 31, |
September 1, |
|||||||
| ($ in millions) |
2019 |
2018 |
||||||
| Net cash used in financing activities |
$ | (199.1 | ) | $ | (103.2 | ) | ||
Repayments of long-term debt were $173.5 million in the first nine months ended August 31, 2019 and $70.8 million in the first nine months ended September 1, 2018. Net proceeds of notes payable were $2.7 million in 2019 compared to net payments of $9.8 million in 2018. Cash dividends paid were $24.2 million in 2019 compared to $23.3 million in 2018. Repurchases of common stock were $2.9 million in the nine months ended August 31, 2019 compared to $4.6 million in the same period of 2018.
Forward-Looking Statements and Risk Factors
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. 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, Item 1A. Risk Factors identifies some of the important factors that could cause our actual results to differ materially from those in any such forward-looking statements. 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. These factors should be considered, together with any similar risk factors or other cautionary language that may be made elsewhere in this Quarterly Report on Form 10-Q.
The list of important factors in Item 1A. Risk Factors does not necessarily present the risk factors in order of importance. 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 SEC or in our press releases) on related subjects.
Item 3. Quantitative and Qualitative Disclosures about 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. See Part II, Item 7A in our Annual Report on Form 10-K for the year ended December 1, 2018 for further discussion of these market risks. There have been no material changes in the reported market risk of the Company since December 1, 2018.
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 August 31, 2019. Based on this evaluation, our president and chief executive officer and executive vice president, chief financial officer concluded that, as of August 31, 2019, 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.
Environmental Matters
From time to time, we become aware of compliance matters relating to, or receive notices from, federal, state or local entities regarding possible or alleged violations of environmental, health or safety laws and regulations. We review the circumstances of each individual site, considering the number of parties involved, the level of potential liability or our contribution relative to the other parties, the nature and magnitude of the hazardous substances involved, the method and extent of remediation, the estimated legal and consulting expense with respect to each site and the time period over which any costs would likely be incurred. Also, from time to time, we are identified as a potentially responsible party (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and/or similar state laws that impose liability for costs relating to the clean up of contamination resulting from past spills, disposal or other release of hazardous substances. We are also subject to similar laws in some of the countries where current and former facilities are located. Our environmental, health and safety department monitors compliance with applicable laws on a global basis. To the extent we can reasonably estimate the amount of our probable liabilities for environmental matters, we establish a financial provision.
Currently, we are involved in various environmental investigations, clean up activities and administrative proceedings and lawsuits. In particular, we are currently deemed a PRP in conjunction with numerous other parties, in a number of government enforcement actions associated with landfills and/or hazardous waste sites. As a PRP, we may be required to pay a share of the costs of investigation and clean up of these sites.
We are engaged in environmental remediation and monitoring efforts at a number of current and former operating facilities. As of August 31, 2019, we had reserved $8.7 million, which represents our best estimate of probable liabilities with respect to environmental matters. Of the amount reserved, $4.3 million is attributable to a facility we own in Simpsonville, South Carolina as a result of our Royal Adhesives acquisition that is a designated site under CERCLA. It is reasonably possible that we may have additional liabilities related to these known environmental matters. However, the full extent of our future liability for environmental matters is difficult to predict because of uncertainty as to the cost of investigation and clean up of the sites, our responsibility for such hazardous substances and the number of and financial condition of other potentially responsible parties.
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:
| Nine Months Ended |
3 Years Ended |
|||||||||||
| ($ in millions) |
August 31, 2019 |
September 1, 2018 |
December 1, 2018 |
|||||||||
| Lawsuits and claims settled |
5 | 7 | 30 | |||||||||
| Settlement amounts |
$ | 0.2 | $ | 0.3 | $ | 3.4 | ||||||
| Insurance payments received or expected to be received |
$ | 0.2 | $ | 0.3 | $ | 2.5 | ||||||
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.
During 2018, we retained legal counsel to conduct an internal investigation of the possible resale of our hygiene products into Iran by certain customers of our subsidiaries in Turkey (beginning in 2011) and India (beginning in 2014), in possible violation of the economic sanctions against Iran administered by OFAC and our compliance policy. The sales to these customers represented less than one percent of our net revenue in each of our last three fiscal years. The sales to the customers who were reselling our products into Iran ceased during fiscal year 2018 and we do not currently conduct any business in Iran. In January 2018, we voluntarily contacted OFAC to advise it of this internal investigation and our intention to cooperate fully with OFAC and, in September 2018, we submitted the results and findings of our investigation to OFAC. We have not yet received a response from OFAC. At this time, we cannot predict the outcome or effect of the investigation, however, based on the results of our investigation to date, we believe we could incur penalties ranging from zero to $10.0 million.
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 1, 2018. 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 1, 2018.
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 third quarter ended August 31, 2019 is as follows:
| Period |
(a) Total Number of Shares Purchased1 |
(b) Average Price Paid per Share |
(d) Maximum Approximate Dollar Value of Shares that may yet be Purchased Under the Plan or Program (millions) |
|||||||||
| June 2, 2019 - July 6, 2019 |
2,182 | $ | 46.47 | $ | 187,170 | |||||||
| July 7, 2019 - August 3, 2019 |
296 | $ | 46.14 | $ | 187,170 | |||||||
| August 4, 2019 - August 31, 2019 |
- | $ | - | $ | 187,170 | |||||||
1 The total number of shares purchased include shares withheld to satisfy the employees’ withholding taxes upon vesting of restricted stock.
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.
| 31.1 |
||
| 31.2 |
||
| 32.1 |
||
| 32.2 |
||
| 101 |
The following materials from the H.B. Fuller Company Quarterly Report on Form 10-Q for the quarter ended August 31, 2019 formatted in Inline Extensible Business Reporting Language (iXBRL): (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. |
|
| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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: September 27, 2019 |
/s/ John J. Corkrean |
|
| John J. Corkrean |
||
| Executive Vice President, |
||
| Chief Financial Officer |
||
Exhibit Index
Exhibits
| 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 August 31, 2019 formatted in Inline Extensible Business Reporting Language (iXBRL): (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. |
|
| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
45
Exhibit 31.1
CERTIFICATION
I, James J. Owens, certify that:
| 1. | I have reviewed this report on Form 10-Q of H.B. Fuller Company; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-115(e) and 15d-115(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d–15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
|
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and | |
|
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
|
Date: September 27, 2019
/s/ James J. Owens |
|
|
James J. Owens |
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, John J. Corkrean, certify that:
| 1. | I have reviewed this report on Form 10-Q of H.B. Fuller Company; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
6. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
7. |
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-115(e) and 15d-115(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d–15(f)) for the registrant and have: |
| e) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
|
f) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
g) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
h) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
8. |
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
| b) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and | |
|
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
|
Date: September 27, 2019
/s/ John J. Corkrean |
|
|
John J. Corkrean |
Executive Vice President, Chief Financial Officer
Exhibit 32.1
CERTIFICATION
I, James J. Owens, in connection with the Quarterly Report of H.B. Fuller Company on Form 10-Q for the quarter ended August 31, 2019 (the “Report”), hereby certify that:
|
(a) |
the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), and |
|
(b) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of H.B. Fuller Company. |
Date: September 27, 2019
|
/s/ James J. Owens |
|
|
James J. Owens |
President and Chief Executive Officer
Exhibit 32.2
CERTIFICATION
I, John J. Corkrean, in connection with the Quarterly Report of H.B. Fuller Company on Form 10-Q for the quarter ended August 31, 2019 (the “Report”), hereby certify that:
|
(a) |
the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), and |
|
(b) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of H.B. Fuller Company. |
Date: September 27, 2019
|
/s/ John J. Corkrean |
|
|
John J. Corkrean |
Executive Vice President, Chief Financial Officer
Note 5 - Goodwill and Other Intangible Assets - Estimated Aggregate Amortization Expense (Details) $ in Thousands |
Aug. 31, 2019
USD ($)
|
|---|---|
| 2019 | $ 18,151 |
| 2020 | 68,078 |
| 2021 | 66,530 |
| 2022 | 65,251 |
| 2023 | 62,492 |
| Thereafter | $ 532,004 |
Note 2 - Acquisition and Divestiture (Details Textual) - USD ($) $ in Thousands |
3 Months Ended | |||
|---|---|---|---|---|
Aug. 31, 2019 |
May 17, 2019 |
Aug. 31, 2019 |
Dec. 01, 2018 |
|
| Goodwill, Ending Balance | $ 1,272,165 | $ 1,272,165 | $ 1,305,171 | |
| Dalton Holdings [Member] | Other Income [Member] | ||||
| Gain (Loss) on Disposition of Business | 16,551 | |||
| Ramapo [Member] | ||||
| Payments to Acquire Businesses, Gross | $ 7,914 | |||
| Business Combination, Contingent Consideration Arrangements, Range of Outcomes, Value, High | 3,400 | |||
| Business Combination, Consideration Transferred, Receivables Settled | $ 2,166 | |||
| Payments for Previous Acquisition | 128 | |||
| Business Combination, Consideration Transferred, Total | 13,608 | |||
| Goodwill, Ending Balance | 507 | 507 | ||
| Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Intangible Assets, Other than Goodwill, Total | 8,800 | 8,800 | ||
| Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Assets, Excluding Intangible Assets | $ 4,301 | $ 4,301 |
Note 4 - Inventories - Inventories (Details) - USD ($) $ in Thousands |
Aug. 31, 2019 |
Dec. 01, 2018 |
|---|---|---|
| Raw materials | $ 171,786 | $ 169,228 |
| Finished goods | 201,823 | 179,233 |
| Total inventories | $ 373,609 | $ 348,461 |
Note 1 - Basis of Presentation (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Schedule of New Accounting Pronouncements and Changes in Accounting Principles [Table Text Block] |
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Note 13 - Fair Value Measurements |
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| Fair Value Disclosures [Text Block] |
Note 13: 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:
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 August 31, 2019 and December 1, 2018, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
Long-term debt had an estimated fair value of $2,091,560 and $2,123,447 as of August 31, 2019 and December 1, 2018, respectively. The fair value of long-term debt is based on quoted market prices for the same or similar issues or on the current rates offered for debt of similar maturities. The estimated fair value of these long-term obligations is not necessarily indicative of the amount that would be realized in a current market exchange. |
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Note 6 - Accounting for Share-based Compensation (Tables) |
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| Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Weighted Average Grant Date Fair Value [Table Text Block] |
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| Share-based Payment Arrangement, Option, Activity [Table Text Block] |
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| Schedule of Nonvested Restricted Stock Units Activity [Table Text Block] |
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| Schedule of Deferred Compensation Arrangement with Individual, Share-based Payments [Table Text Block] |
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Condensed Consolidated Statements of Cash Flows (Unaudited) (Parentheticals) - USD ($) $ in Thousands |
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Aug. 31, 2019 |
Sep. 01, 2018 |
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| Capitalized interest cost | $ 328 | $ 227 |
Note 1 - Basis of Presentation (Details Textual) - USD ($) $ in Thousands |
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Dec. 02, 2017 |
Aug. 31, 2019 |
Dec. 01, 2018 |
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| Retained Earnings (Accumulated Deficit), Ending Balance | $ 1,360,463 | $ 1,286,289 | |
| Accounting Standards Update 2014-09 [Member] | |||
| Retained Earnings (Accumulated Deficit), Ending Balance | 1,776 | ||
| Accounting Standards Update 2016-16 [Member] | |||
| Retained Earnings (Accumulated Deficit), Ending Balance | $ 733 | ||
| Accounting Standards Update 2016-15 [Member] | reclassification of Debt Prepayment and Extinguishment Costs From Operating to Financing Cash Outflows [Member] | |||
| Current Period Reclassification Adjustment | $ 16,598 |
Note 7 - Components of Net Periodic Benefit Related to Pension and Other Postretirement Benefit Plans (Tables) |
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| Schedule of Net Benefit Costs [Table Text Block] |
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Note 12 - Financial Instruments (Tables) |
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| Schedule of Derivative Instruments in Statement of Financial Position, Fair Value [Table Text Block] |
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| Derivative Instruments, Gain (Loss) [Table Text Block] |
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Note 9 - Accumulated Other Comprehensive Income (Loss) |
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Aug. 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes to Financial Statements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated Other Comprehensive Income (Loss) Disclosure [Text Block] |
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