FULLER H B CO - FORM 10-Q - September 28, 2018

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - FULLER H B CO	ex_124419.htm
EX-32.1 - EXHIBIT 32.1 - FULLER H B CO	ex_124418.htm
EX-31.2 - EXHIBIT 31.2 - FULLER H B CO	ex_124417.htm
EX-31.1 - EXHIBIT 31.1 - FULLER H B CO	ex_124416.htm
EX-10.1 - EXHIBIT 10.1 - FULLER H B CO	ex_124420.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 1, 2018

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

Commission file number: 001-09225

H.B. FULLER COMPANY

(Exact name of registrant as specified in its charter)

Minnesota	41-0268370
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

(651) 236-5900

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer [X]	Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)	Smaller reporting company [ ]
	Emerging growth company [ ]

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

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

Yes [ ] No [X]

The number of shares outstanding of the Registrant’s Common Stock, par value $1.00 per share, was 50,695,705 as of September 21, 2018.

Table of Contents

H.B. Fuller Company

Quarterly Report on Form 10-Q

Table of Contents

		Page
PART 1. FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS (Unaudited)	3

	Condensed Consolidated Statements of Income for the three and nine months ended September 1, 2018 and September 2, 2017	3

	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 1, 2018 and September 2, 2017	4

	Condensed Consolidated Balance Sheets as of September 1, 2018 and December 2, 2017	5

	Condensed Consolidated Statements of Total Equity as of September 1, 2018 and December 2, 2017	6

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 1, 2018 and September 2, 2017	7

	Notes to Condensed Consolidated Financial Statements	8

ITEM 2.	MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	30

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	42

ITEM 4.	CONTROLS AND PROCEDURES	44

PART II. OTHER INFORMATION		44

ITEM 1.	LEGAL PROCEEDINGS	44

ITEM 1A.	RISK FACTORS	46

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	46

ITEM 6.	EXHIBITS	47

SIGNATURES		48

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

Three Months Ended

Nine Months Ended

September 1,

2018

September 2,

2017

September 1,

2018

September 2,

2017

Net revenue

770,107

562,869

2,272,573

1,627,843

Cost of sales

(552,903

)

(412,469

)

(1,645,279

)

(1,192,409

)

Gross profit

217,204

150,400

627,294

435,434

Selling, general and administrative expenses

(146,069

)

(110,219

)

(442,288

)

(325,904

)

Operating income

71,135

40,181

185,006

109,530

Other income (expense), net

(1,375

)

(602

)

3,508

(1,506

)

Interest expense, net

(24,924

)

(7,348

)

(74,651

)

(22,461

)

Income before income taxes and income from equity method investments

44,836

32,231

113,863

85,563

Income taxes

(9,300

)

(9,262

)

9,844

(26,178

)

Income from equity method investments

2,200

2,170

6,160

6,449

Net income including non-controlling interests

37,736

25,139

129,867

65,834

Net income attributable to non-controlling interests

)

(34

)

Net income attributable to H.B. Fuller

37,730

25,138

129,863

65,800

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

Basic

0.75

0.50

2.57

1.31

Diluted

0.72

0.49

2.50

1.28

Weighted-average common shares outstanding:

Basic

50,632

50,384

50,551

50,374

Diluted

52,138

51,605

51,961

51,584

Dividends declared per common share

0.155

0.15

0.460

0.44

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

Three Months Ended

Nine Months Ended

September 1,

2018

September 2,

2017

September 1,

2018

September 2,

2017

Net income including non-controlling interests

37,736

25,139

129,867

65,834

Other comprehensive (loss) income

Foreign currency translation

(36,814

)

29,090

(56,116

)

37,084

Defined benefit pension plans adjustment, net of tax

1,638

1,627

4,958

4,810

Interest rate swaps, net of tax

(1,441

)

19,095

Cash flow hedges, net of tax

(1,215

)

(99

)

(8,068

)

Other comprehensive (loss) income

(37,832

)

30,628

(40,131

)

41,931

Comprehensive (loss) income

(96

)

55,767

89,736

107,765

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

)

(11

)

(21

)

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

(95

)

55,778

89,757

107,742

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	(Unaudited) September 1, 2018			December 2, 2017
Assets
Current assets:
Cash and cash equivalents	$	150,084		$	194,398
Trade receivables (net of allowances of $14,796 and $11,670, as of September 1, 2018 and December 2, 2017, respectively)		465,942			473,700
Inventories		401,091			359,505
Other current assets		150,739			117,389
Total current assets		1,167,856			1,144,992

Property, plant and equipment		1,295,408			1,288,287
Accumulated depreciation		(653,197	)		(618,093	)
Property, plant and equipment, net		642,211			670,194

Goodwill		1,316,917			1,336,684
Other intangibles, net		930,210			1,001,792
Other assets		232,583			206,984
Total assets	$	4,289,777		$	4,360,646

Liabilities, non-controlling interest and total equity
Current liabilities:
Notes payable	$	17,411		$	31,468
Current maturities of long-term debt		56,090			21,515
Trade payables		256,042			268,467
Accrued compensation		76,554			84,903
Income taxes payable		53,969			14,335
Other accrued expenses		58,463			84,225
Total current liabilities		518,529			504,913

Long-term debt, excluding current maturities		2,290,736			2,398,927
Accrued pension liabilities		74,819			71,205
Other liabilities		277,719			341,581
Total liabilities		3,161,803			3,316,626

Commitments and contingencies (Note 16)

Equity:
H.B. Fuller stockholders' equity:
Preferred stock (no shares outstanding) shares authorized – 10,045,900		-			-
Common stock, par value $1.00 per share, shares authorized – 160,000,000, shares outstanding – 50,687,368 and 50,388,839, as of September 1, 2018 and December 2, 2017, respectively		50,687			50,389
Additional paid-in capital		91,996			74,662
Retained earnings		1,244,021			1,119,231
Accumulated other comprehensive loss		(259,102	)		(200,655	)
Total H.B. Fuller stockholders' equity		1,127,602			1,043,627
Non-controlling interest		372			393
Total equity		1,127,974			1,044,020
Total liabilities, non-controlling interest and total equity	$	4,289,777		$	4,360,646

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Total Equity

(In thousands)

(Unaudited)

	H.B. Fuller Company Shareholders
	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non-Controlling Interests			Total
Balance at December 3, 2016	$	50,141		$	59,564		$	1,090,900		$	(262,729	)	$	393		$	938,269
Comprehensive income		-			-			58,242			62,074			39			120,355
Dividends		-			-			(29,911	)		-			-			(29,911	)
Stock option exercises		514			17,191			-			-			-			17,705
Share-based compensation plans other, net		165			17,203			-			-			-			17,368
Tax benefit on share-based compensation plans		-			2,010			-			-			-			2,010
Repurchases of common stock		(431	)		(21,400	)		-			-			-			(21,831	)
Purchase of redeemable non-controlling interest		-			94			-			-			-			94
Redeemable non-controlling interest		-			-			-			-			(39	)		(39	)
Balance at December 2, 2017		50,389			74,662			1,119,231			(200,655	)		393			1,044,020
Comprehensive income (loss)		-			-			129,863			(40,106	)		(21	)		89,736
Dividends		-			-			(23,414	)		-			-			(23,414	)
Stock option exercises		168			5,060			-			-			-			5,228
Share-based compensation plans other, net		220			16,737			-			-			-			16,957
Repurchases of common stock		(90	)		(4,463	)		-			-			-			(4,553	)
Reclassification of AOCI tax effects		-			-			18,341			(18,341	)		-			-
Balance at September 1, 2018	$	50,687		$	91,996		$	1,244,021		$	(259,102	)	$	372		$	1,127,974

Table of Contents

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended
	September 1, 2018			September 2, 2017
Cash flows from operating activities:
Net income including non-controlling interests	$	129,867		$	65,834
Adjustments to reconcile net income including non-controlling interests to net cash provided by operating activities:
Depreciation		51,527			36,375
Amortization		57,635			23,128
Deferred income taxes		(51,703	)		1,660
Income from equity method investments, net of dividends received		(1,182	)		(2,639	)
Gain on sale of assets		(3,145	)		(149	)
Share-based compensation		15,439			12,034
Excess tax benefit from share-based compensation		-			(1,504	)
Gain on mark to market adjustment related to contingent consideration liability		(2,323	)		(2,453	)
Non-cash charge for sale of inventories revalued at acquisition		-			193
Change in assets and liabilities, net of effects of acquisitions:
Trade receivables, net		(15,087	)		(14,016	)
Inventories		(60,188	)		(55,339	)
Other assets		(47,544	)		2,460
Trade payables		3,789			23,022
Accrued compensation		(6,213	)		3,881
Other accrued expenses		(20,944	)		(5,755	)
Income taxes payable		17,892			(7,252	)
Accrued / prepaid pensions		(7,209	)		(3,969	)
Other liabilities		(566	)		12,639
Other		46,771			(17,345	)
Net cash provided by operating activities		106,816			70,805

Cash flows from investing activities:
Purchased property, plant and equipment		(46,520	)		(35,511	)
Purchased businesses, net of cash acquired		2,389			(123,305	)
Purchased investments		-			(1,250	)
Proceeds from sale of property, plant and equipment		2,178			745
Net cash used in investing activities		(41,953	)		(159,321	)

Cash flows from financing activities:
Proceeds from issuance of long-term debt		-			643,000
Repayment of long-term debt and payment of debt issuance costs		(70,750	)		(540,524	)
Net payment of notes payable		(9,849	)		(10,921	)
Dividends paid		(23,263	)		(22,058	)
Purchase of redeemable non-controlling interest		-			(3,127	)
Proceeds from stock options exercised		5,228			15,033
Excess tax benefit from share-based compensation		-			1,504
Repurchases of common stock		(4,553	)		(21,717	)
Net cash (used in) provided by financing activities		(103,187	)		61,190

Effect of exchange rate changes on cash and cash equivalents		(5,990	)		4,676
Net change in cash and cash equivalents		(44,314	)		(22,650	)

Cash and cash equivalents at beginning of period		194,398			142,245
Cash and cash equivalents at end of period	$	150,084		$	119,595

Supplemental disclosure of cash flow information:
Dividends paid with company stock	$	151		$	231
Cash paid for interest, net of amount capitalized of $227 and $201 for the periods ended September 1, 2018 and September 2, 2017, respectively	$	84,189		$	25,823
Cash paid for income taxes, net of refunds	$	27,492		$	22,044

Table of Contents

H.B. FULLER COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

Note 1: Basis of Presentation

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

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates. These unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 2, 2017 as filed with the Securities and Exchange Commission.

New Accounting Pronouncements

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

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

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

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

Table of Contents

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

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

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

In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires employers to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses. The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in nonoperating expenses. The classification requirements of this standard are applied on a retrospective basis. The ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization on a prospective basis. Our effective date for adoption of this guidance is our fiscal year beginning December 2, 2018 with early adoption permitted. The components of our net periodic defined benefit pension and postretirement benefit costs are presented in Note 9. The components other than service cost will be presented as nonoperating expenses upon adoption. Service cost will remain in operating expenses.

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

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

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

Table of Contents

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU changes the timing of income tax recognition for an intercompany sale of assets. The ASU requires the seller’s tax effects and the buyer’s deferred taxes to be recognized immediately upon the sale instead of deferring accounting for the income tax implications until the assets are sold to a third party or recovered through use. Our effective date for adoption of this guidance is our fiscal year beginning December 2, 2018. We have evaluated the effect that this guidance will have on our Consolidated Financial Statements and related disclosures and determined it will not have a material impact.

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

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

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. This ASU provides simplification in the accounting for share-based payment transactions including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. We adopted this guidance during the first quarter of 2018. As a result of adoption, excess tax benefits/deficiencies are now recorded as income tax expense and are dependent upon market prices and the volume of stock option exercises and restricted stock vestings during the reporting period. Excess tax benefits of $266 and $1,095 were recorded as a reduction to income tax expense within the Condensed Consolidated Statement of Income during the three and nine months ended September 1, 2018, respectively. Excess tax benefits/deficiencies are now also classified as operating activities within the statement of cash flows and are excluded from the calculation of assumed proceeds available to repurchase shares under the treasury stock method. Cash payments to tax authorities for withheld shares in net-settlement features are classified as financing activities. These changes are applied prospectively, with the exception of the classification of cash payments to tax authorities in the statement of cash flows, which were already classified as financing activities. Therefore, no prior period adjustments were made as a result of the adoption of this guidance. We are continuing our existing practice of estimating the number of awards that will be forfeited in accordance with this ASU.

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

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

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

Table of Contents

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017 (as stated in ASU No. 2015-14 which defers the effective date and was issued in August 2015) and is now effective for our fiscal year beginning December 2, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. We intend to adopt this guidance using the modified retrospective method. We are continuing to evaluate the effect this guidance will have on our Consolidated Financial Statements, including potential impacts on the timing of revenue recognition and additional information that may be necessary for expanded disclosures regarding revenue. We have substantially completed contract reviews and have determined there are no significant impacts, as these transactions are not accounted for under industry-specific guidance superseded by the ASU and generally consist of a single performance obligation to transfer promised goods or services. In addition to assessing the impact on the Consolidated Financial Statements, we are continuing to analyze the impact of the new standard on our business processes, systems and controls to support recognition and disclosure requirements under this ASU.

Note 2: Acquisitions

Adecol

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

The acquisition fair value measurement was preliminary as of September 1, 2018, subject to the completion of the valuation of Adecol and further management reviews and assessment of the preliminary fair values of the assets acquired and liabilities assumed. We expect the fair value measurement process to be completed when the final appraisals are available, but no later than twelve months from the acquisition date.

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

December 2, 2017

Adjustments

September 1, 2018

Current assets

17,877

(1,504

)

16,373

Property, plant and equipment

7,308

302

7,610

Goodwill

23,282

1,015

24,297

Other intangibles

Customer relationships

17,016

(383

)

16,633

Trademarks/trade names

1,363

(65

)

1,298

Other assets

4,811

Current liabilities

(12,765

)

112

(12,653

)

Other liabilities

(14,210

)

523

(13,687

)

Total purchase price

44,682

Table of Contents

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

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

Royal Adhesives

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

The acquisition fair value measurement was preliminary as of September 1, 2018, subject to the completion of the valuation of Royal Adhesives and further management reviews and assessment of the preliminary fair values of the assets acquired and liabilities assumed. We expect the fair value measurement process to be completed when the final appraisals are available, but no later than twelve months from the acquisition date.

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

December 2, 2017

Adjustments

September 1, 2018

Accounts receivable

64,904

1,287

66,191

Inventory

93,680

238

93,918

Other current assets

58,508

582

59,090

Property, plant and equipment

126,192

(6,055

)

120,137

Goodwill

866,013

1,603

867,616

Other intangibles

Developed technology

59,800

(100

)

59,700

Customer relationships

645,300

19,300

664,600

Trademarks/trade names

53,600

(22,600

)

31,000

Other assets

1,443

(36

)

1,407

Accounts payable

(40,211

)

1,821

(38,390

)

Other current liabilities

(37,261

)

123

(37,138

)

Other liabilities

(269,240

)

1,448

(267,792

)

Total purchase price

1,622,728

(2,389

)

1,620,339

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

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

Table of Contents

Wisdom Adhesives

On January 27, 2017, we acquired substantially all of the assets of H.E. Wisdom & Sons, Inc. and its affiliate Wisdom Adhesives Southeast, L.L.C., (“Wisdom Adhesives”) headquartered in Elgin, Illinois. Wisdom Adhesives is a provider of adhesives for the packaging, paper converting and durable assembly markets. The acquisition is expected to strengthen our position in the North America adhesives market. The purchase price of $123,549 was financed through borrowings on our revolving credit facility and is reported in our Americas Adhesives operating segment.

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

	December 2, 2017
Current assets	$	13,844
Property, plant and equipment		8,641
Goodwill		59,826
Other intangibles
Customer relationships		45,300
Trademarks/trade names		4,400
Current liabilities		(8,462	)
Total purchase price	$	123,549

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

Based on the fair value measurement of the assets acquired and liabilities assumed, we allocated $59,826 to goodwill for the expected synergies from combining Wisdom Adhesives with our existing business. Such goodwill is deductible for tax purposes. The goodwill was assigned to our Americas Adhesives operating segment.

Note 3: Restructuring Actions

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

Three Months Ended

Nine Months Ended

September 1, 2018

September 2, 2017

September 1, 2018

September 2, 2017

Cost of sales

1,939

471

3,127

9,370

Selling, general and administrative

864

799

2,829

7,702

2,803

1,270

5,956

17,072

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

Three Months Ended

Nine Months Ended

September 1, 2018

September 2, 2017

September 1, 2018

September 2, 2017

Americas Adhesives

602

283

1,458

2,048

EIMEA

478

704

1,003

6,759

Asia Pacific

1,932

Construction Adhesives

1,748

164

3,102

5,622

Engineering Adhesives

(28

)

387

711

2,803

1,270

5,956

17,072

Table of Contents

A summary of the restructuring liability is presented below:

	Employee- Related			Asset-Related			Other			Total
Expenses incurred	$	10,266		$	5,394		$	2,371		$	18,031
Non-cash charges		-			(4,291	)		-			(4,291	)
Cash payments		(9,210	)		(1,103	)		(2,351	)		(12,664	)
Foreign currency translation		430			-			-			430
Balance at December 2, 2017	$	1,486		$	-		$	20		$	1,506
Expenses incurred		4,151			1,554			251			5,956
Non-cash charges		-			(1,027	)		-			(1,027	)
Cash payments		(2,198	)		(527	)		(271	)		(2,996	)
Foreign currency translation		(38	)		-			-			(38	)
Balance at September 1, 2018	$	3,401		$	-		$	-		$	3,401

Non-cash charges for the nine months ended September 1, 2018 include accelerated depreciation resulting from the cessation of use of certain long-lived assets. Non-cash charges for the nine months ended September 2, 2017 include accelerated depreciation resulting from the cessation of use of certain long-lived assets and the recording of a provision related to the discontinuance of certain retail and wholesale products. Restructuring liabilities have been classified as a component of other accrued expenses on the Condensed Consolidated Balance Sheets.

Note 4: Inventories

The composition of inventories is as follows:

	September 1,			December 2,
	2018			2017
Raw materials	$	192,526		$	174,325
Finished goods		221,658			198,273
LIFO reserve		(13,093	)		(13,093	)
Total inventories	$	401,091		$	359,505

Note 5: Goodwill and Other Intangible Assets

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

Americas

Asia

Construction

Engineering

Adhesives

EIMEA

Pacific

Adhesives

Total

Balance at December 2, 2017

373,328

177,464

21,514

324,860

439,518

1,336,684

Acquisitions ¹

2,550

20,582

(194

)

(14,322

)

(5,998

)

2,618

Currency impact

(3,839

)

(7,709

)

(332

)

(10,572

)

(22,385

)

Balance at September 1, 2018

372,039

190,337

21,387

310,206

422,948

1,316,917

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

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

Table of Contents

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

September 1, 2018

Amortizable Intangible Assets

Purchased

Technology and

Patents

Customer

Relationships

All Other

Total

Original cost

130,971

956,923

109,304

1,197,198

Accumulated amortization

(35,024

)

(184,777

)

(47,693

)

(267,494

)

Net identifiable intangibles

95,947

772,146

61,611

929,704

December 2, 2017

Amortizable Intangible Assets

Purchased

Technology and

Patents

Customer

Relationships

All Other

Total

Original cost

132,495

968,060

110,576

1,211,131

Accumulated amortization

(27,478

)

(144,964

)

(37,417

)

(209,859

)

Net identifiable intangibles

105,017

823,096

73,159

1,001,272

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

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

Fiscal Year

Remainder

2018

2019

2020

2021

2022

Thereafter

Amortization Expense

19,024

75,846

73,309

71,767

69,193

620,565

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

Note 6: Long-Term Debt

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

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

Note 7: Redeemable Non-Controlling Interest

Prior to the end of the first quarter of 2017, we had a non-controlling interest in H.B. Fuller Kimya Sanayi Ticaret A.S. (“HBF Kimya”) which was accounted for as a redeemable non-controlling interest because both the non-controlling shareholder and H.B. Fuller had an option, exercisable beginning August 1, 2018, to require the redemption of the shares owned by the non-controlling shareholder at a price determined by a formula based on 24 months trailing EBITDA. Since the option made the redemption of the non-controlling ownership shares of HBF Kimya outside of our control, these shares were classified as a redeemable non-controlling interest in temporary equity in the Consolidated Balance Sheets. The non-controlling shareholder was entitled to increase his ownership by 1 percent per year for 5 years up to a maximum of 13 percent ownership based on the achievement of profitability targets in each year. The option was subject to a minimum price of €3,500.

Table of Contents

The results of operations for the HBF Kimya non-controlling interest were consolidated in our financial statements. Both the non-controlling interest and the accretion adjustment to redemption value were included in net income attributable to non-controlling interests in the Consolidated Statements of Income for the three months ended March 4, 2017.

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

Note 8: Accounting for Share-Based Compensation

Overview

We have various share-based compensation programs, which provide for equity awards including non-qualified stock options, restricted stock shares, restricted stock units, performance awards and deferred compensation. These equity awards fall under several plans and are described in detail in our Annual Report on Form 10-K for the year ended December 2, 2017.

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

Grant-Date Fair Value

We use the Black-Scholes option pricing model to calculate the grant-date fair value of an award. The fair value of options granted during the nine months ended September 1, 2018 and September 2, 2017 was calculated using the following weighted average assumptions:

Three Months Ended

Nine Months Ended

September 1, 2018

September 2, 2017

September 1, 2018

September 2, 2017

Expected life (in years)

4.75

Weighted-average expected volatility

23.36%

23.91%

23.30%

24.84%

Expected volatility

23.36%

23.91%

23.18%

23.58%

23.91%

24.88%

Risk-free interest rate

2.72%

1.85%

2.38%

2.90%

1.89%

Expected dividend yield

1.16%

1.15%

1.14%

1.12%

Weighted-average fair value of grants

$11.75

$10.58

$11.38

$10.81

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

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

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

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

Table of Contents

Expense

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

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

As of September 1, 2018, there was $14,784 of unrecognized compensation costs related to unvested stock option awards, which is expected to be recognized over a weighted-average period of 1.4 years. Unrecognized compensation costs related to unvested restricted stock units was $11,749, which is expected to be recognized over a weighted-average period of 1.2 years.

Stock Option Activity

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

				Average
	Options			Exercise Price
Outstanding at December 2, 2017		3,860,764		$	42.28
Granted		810,306			53.07
Exercised		(163,190	)		30.86
Forfeited or cancelled		(6,281	)		44.00
Outstanding at September 1, 2018		4,501,599		$	44.64

The fair value of options granted during the three months ended September 1, 2018 and September 2, 2017 was $180 and $46, respectively. Total intrinsic value of options exercised during the three months ended September 1, 2018 and September 2, 2017 was $2,066 and $474, respectively. Intrinsic value is the difference between our closing stock price on the respective trading day and the exercise price, multiplied by the number of options exercised. The fair value of options granted during the nine months ended September 1, 2018 and September 2, 2017 was $9,217 and $7,803, respectively. Total intrinsic value of options exercised during the nine months ended September 1, 2018 and September 2, 2017 was $3,876 and $7,099, respectively.

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

Restricted Stock Activity

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

Units

Weighted-

Average

Grant

Date Fair

Value

Weighted-

Average

Remaining

Contractual

Life

(in Years)

Nonvested at December 2, 2017

462,241

44.80

1.0

Granted

147,601

51.29

2.4

Vested

(190,249

)

43.67

Forfeited

(2,947

)

47.20

1.3

Nonvested at September 1, 2018

416,646

47.60

1.2

Table of Contents

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

We repurchased 1,945 and 1,837 restricted stock shares during the three months ended September 1, 2018 and September 2, 2017, respectively, and 68,881 and 55,646 restricted stock shares during the nine months ended September 1, 2018 and September 2, 2017, respectively. The repurchases relate to statutory minimum tax withholding.

Deferred Compensation Activity

We have a Directors’ Deferred Compensation plan that allows non-employee directors to defer all or a portion of their directors’ compensation in a number of investment choices, including units representing shares of our common stock. We also have a Key Employee Deferred Compensation Plan that allows key employees to defer a portion of their eligible compensation in a number of investment choices, including units, representing shares of our common stock. We provide a 10 percent match on deferred compensation invested into units, representing shares of our common stock. The deferred compensation unit activity for the nine months ended September 1, 2018 is presented below:

Non-employee

Directors

Employees

Total

Units outstanding December 2, 2017

443,570

31,606

475,176

Participant contributions

11,738

6,274

18,012

Company match contributions

19,610

627

20,237

Payouts

(6,090

)

(6,090

)

Units outstanding September 1, 2018

474,918

32,417

507,335

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

Table of Contents

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

	Three Months Ended September 1, 2018 and September 2, 2017
													Other
	Pension Benefits												Postretirement
	U.S. Plans						Non-U.S. Plans						Benefits
Net periodic cost (benefit):	2018			2017			2018			2017			2018			2017
Service cost	$	14		$	27		$	566		$	546		$	43		$	52
Interest cost		3,419			3,603			1,141			1,199			371			399
Expected return on assets		(6,541	)		(6,365	)		(2,710	)		(2,510	)		(1,724	)		(1,447	)
Amortization:
Prior service cost		7			8			(1	)		(1	)		-			-
Actuarial loss		1,476			1,308			710			893			15			251
Net periodic (benefit) cost	$	(1,625	)	$	(1,419	)	$	(294	)	$	127		$	(1,295	)	$	(745	)

	Nine Months Ended September 1, 2018 and September 2, 2017
													Other
	Pension Benefits												Postretirement
	U.S. Plans						Non-U.S. Plans						Benefits
Net periodic cost (benefit):	2018			2017			2018			2017			2018			2017
Service cost	$	42		$	83		$	1,746		$	1,566		$	129		$	156
Interest cost		10,257			10,809			3,526			3,490			1,113			1,195
Expected return on assets		(19,623	)		(19,093	)		(8,385	)		(7,301	)		(5,172	)		(4,341	)
Amortization:
Prior service cost		21			22			(3	)		(3	)		-			-
Actuarial loss		4,428			3,922			2,191			2,581			45			757
Net periodic (benefit) cost	$	(4,875	)	$	(4,257	)	$	(925	)	$	333		$	(3,885	)	$	(2,233	)

Note 10: Accumulated Other Comprehensive Income (Loss)

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

	Three Months Ended September 1, 2018												Three Months Ended September 2, 2017
	H.B. Fuller Stockholders									Non- controlling Interests			H.B. Fuller Stockholders									Non- controlling Interests
	Pre-tax			Tax			Net			Net			Pre-tax			Tax			Net			Net
Net income including non-controlling interests		-			-		$	37,730		$	6			-			-		$	25,138		$	1
Foreign currency translation adjustment¹	$	(36,807	)		-			(36,807	)		(7	)	$	29,102			-			29,102			(12	)
Reclassification to earnings:
Defined benefit pension plans adjustment²		2,207		$	(569	)		1,638			-			2,459		$	(832	)		1,627			-
Interest rate swap³		(1,921	)		480			(1,441	)		-			16			(6	)		10			-
Cash flow hedges³		(1,093	)		(122	)		(1,215	)		-			(160	)		61			(99	)		-
Other comprehensive income (loss)	$	(37,614	)	$	(211	)		(37,825	)		(7	)	$	31,417		$	(777	)		30,640			(12	)
Comprehensive income (loss)							$	(95	)	$	(1	)							$	55,778		$	(11	)

Table of Contents

	Nine Months Ended September 1, 2018												Nine Months Ended September 2, 2017
	H.B. Fuller Stockholders									Non- controlling Interests			H.B. Fuller Stockholders							Non- controlling Interests
	Pretax			Tax			Net			Net			Pretax		Tax			Net		Net
Net income including non-controlling interests		-			-		$	129,863		$	4			-		-		$	65,800	$	34
Foreign currency translation adjustment¹	$	(56,091	)		-			(56,091	)		(25	)	$	37,095		-			37,095		(11	)
Reclassification to earnings:
Defined benefit pension plans adjustment²		6,683		$	(1,725	)		4,958			-			7,279	$	(2,469	)		4,810		-
Interest rate swap³		24,918			(5,823	)		19,095			-			48		(18	)		30		-
Cash flow hedges³		(5,606	)		(2,462	)		(8,068	)		-			11		(4	)		7		-
Other comprehensive income (loss)	$	(30,096	)	$	(10,010	)		(40,106	)		(25	)	$	44,433	$	(2,491	)		41,942		(11	)
Comprehensive income (loss)							$	89,757		$	(21	)						$	107,742	$	23

¹ Income taxes are not provided for foreign currency translation relating to permanent investments in international subsidiaries. The foreign currency translation adjustment for the nine months ended September 2, 2017 includes $11,317 related to the impact of the change in functional currency for our subsidiaries in Latin America.

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

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

The components of accumulated other comprehensive loss is as follows:

September 1, 2018

Total

H.B. Fuller

Stockholders

Non-

controlling

Interests

Foreign currency translation adjustment

(112,225

)

(112,175

)

(50

)

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

(136,213

)

(136,213

)

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

21,017

Cash flow hedges, net of taxes of $814

(13,390

)

(13,390

)

Reclassification of AOCI tax effects

(18,341

)

(18,341

)

Accumulated other comprehensive loss

(259,152

)

(259,102

)

(50

)

Table of Contents

December 2, 2017

Total

H.B. Fuller

Stockholders

Non-

controlling

Interests

Foreign currency translation adjustment

(56,159

)

(56,084

)

(75

)

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

(141,171

)

(141,171

)

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

1,922

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

(5,322

)

(5,322

)

Accumulated other comprehensive loss

(200,730

)

(200,655

)

(75

)

Note 11: Income Taxes

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

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

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

As of September 1, 2018, we had a liability of $8,524 recorded under ASC 740, Income Taxes, for gross unrecognized tax benefits (excluding interest), compared to $8,887 as of December 2, 2017. As of September 1, 2018, we had accrued $795 of gross interest relating to unrecognized tax benefits. For the nine months ended September 1, 2018, our recorded liability for gross unrecognized tax benefits decreased by $363.

Note 12: Earnings Per Share

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

Three Months Ended

Nine Months Ended

September 1,

September 2,

September 1,

September 2,

(Shares in thousands)

2018

2017

2018

2017

Weighted-average common shares - basic

50,632

50,384

50,551

50,374

Equivalent shares from share-based compensations plans

1,506

1,221

1,410

1,210

Weighted-average common and common equivalent shares - diluted

52,138

51,605

51,961

51,584

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

Share-based compensation awards for 1,558,690 and 27,942 shares for the three months ended September 1, 2018 and September 2, 2017, respectively, and 2,423,367 and 97,687 shares for the nine months ended September 1, 2018 and September 2, 2017, respectively, were excluded from the diluted earnings per share calculations because they were antidilutive.

Table of Contents

Note 13: Financial Instruments

Overview

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

We use foreign currency forward contracts, cross-currency swaps, and interest rate swaps to manage risks associated with foreign currency exchange rates and interest rates. We do not hold derivative financial instruments of a speculative nature or for trading purposes. We record derivatives as assets and liabilities on the balance sheet at fair value. Changes in fair value are recognized immediately in earnings unless the derivative qualifies and is designated as a hedge. Cash flows from derivatives are classified in the statement of cash flows in the same category as the cash flows from the items subject to 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

Effective October 20, 2017, we entered into six cross-currency swap agreements to convert a notional amount of $401,200 of foreign currency denominated intercompany loans into U.S. dollars. The swaps mature in 2021 and 2022.

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

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

As of September 1, 2018, the combined fair value of the swaps was a liability of $14,288 and was included in other liabilities in the Consolidated Balance Sheets. The swaps were designated as cash flow hedges for accounting treatment. The lesser amount between the cumulative change in the fair value of the actual swaps and the cumulative change in the fair value of hypothetical swaps is recorded in accumulated other comprehensive income (loss) in the Consolidated Balance Sheets. The difference between the cumulative change in the fair value of the actual swaps and the cumulative change in the fair value of hypothetical swaps are recorded as other income (expense), net in the Condensed Consolidated Statements of Income. In a perfectly effective hedge relationship, the two fair value calculations would exactly offset each other. Any difference in the calculation represents hedge ineffectiveness. The amount in accumulated other comprehensive income (loss) related to cross-currency swaps was a loss of $13,390 as of September 1, 2018. The estimated net amount of the existing loss that is reported in accumulated other comprehensive income (loss) as of September 1, 2018 that is expected to be reclassified into earnings within the next twelve months is $2,741. As of September 1, 2018, we do not believe any gains or losses will be reclassified into earnings as a result of the discontinuance of these cash flow hedges because the original forecasted transaction will not occur.

Table of Contents

The following table summarizes the cross-currency swaps outstanding as of September 1, 2018:

Fiscal Year of

Expiration

Interest Rate

Notional

Value

Fair Value

Pay EUR

2018

3.45%

44,912

(1,574

)

Receive USD

4.5374%

Pay EUR

2019

3.80%

44,912

(2,510

)

Receive USD

5.0530%

Pay EUR

2020

1.95%

42,600

(4,769

)

Receive USD

4.3038%

Pay EUR

2021

2.75%

133,340

(1,415

)

Receive USD

4.9330%

Pay EUR

2022

3.00%

267,860

(4,020

)

Receive USD

5.1803%

Total

533,624

(14,288

)

On March 26, 2018, we entered into interest rate swap agreements to convert $200,000 of our $2,150,000 Term Loan B to a fixed interest rate of 4.176 percent. On March 9, 2018, we entered into an interest rate swap agreement to convert $100,000 of our $2,150,000 Term Loan B to a fixed interest rate of 4.490 percent. On February 27, 2018, we entered into an interest rate swap agreement to convert $200,000 of our $2,150,000 Term Loan B to a fixed interest rate of 4.589 percent. On October 20, 2017, we entered into interest rate swap agreements to convert $1,050,000 of our $2,150,000 Term Loan B issued on October 20, 2017 to a fixed interest rate of 4.0275 percent. The combined fair value of the interest rate swaps in total was an asset of $28,012 at September 1, 2018 and was included in other assets in the Consolidated Balance Sheets. The swaps were designated for hedge accounting treatment as cash flow hedges. We are applying the shortcut method in accounting for these interest rate swaps as we expect changes in the cash flows of the interest rate swap to offset the changes in cash flows (i.e. changes in interest rate payments) attributable to fluctuations in LIBOR rates on the interest payments associated with the first $1,550,000 tranche of the variable rate Term Loan B, resulting in no ineffectiveness.

The amounts of pretax gains (losses) recognized in Comprehensive Income related to derivative instruments designated as cash flow hedges are as follows:

	Nine Months Ended
	September 1, 2018			September 2, 2017
	Amount			Amount
Cross-currency swap contracts	$	(5,606	)	$	11
Interest rate swap contracts		24,918			48

Table of Contents

Fair Value Hedges

On February 14, 2017, we entered into interest rate swap agreements to convert $150,000 of our $300,000 Public Notes that were issued on February 14, 2017 to a variable interest rate of 1-month LIBOR plus 1.86 percent. The combined fair value of the interest rate swaps in total was a liability of $8,295 at September 1, 2018, and was included in other liabilities in the Consolidated Balance Sheets. The swaps were designated for hedge accounting treatment as fair value hedges. We are applying the shortcut method in accounting for these interest rate swaps as we expect that the changes in the fair value of the swap will offset the changes in the fair value of the Public Notes resulting in no ineffectiveness. As a result of applying the shortcut method, the change in the fair value of the interest rate swap and an equivalent amount for the change in the fair value of the debt will be reflected in other income (expense), net and no ineffectiveness will be recognized in our Consolidated Statements of Income.

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 14 for fair value amounts of these derivative instruments.

As of September 1, 2018, we had forward foreign currency contracts maturing between September 4, 2018 and April 15, 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 (expense) income, net related to derivative instruments not designated as hedging instruments are as follows:

Nine Months Ended

September 1, 2018

September 2, 2017

Foreign currency forward contracts

10,520

(1,606

)

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 September 1, 2018, there were no significant concentrations of credit risk.

Note 14: Fair Value Measurements

Overview

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

	●	Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
	●	Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
	●	Level 3: Unobservable inputs that reflect management’s assumptions, and include situations where there is little, if any, market activity for the asset or liability.

Table of Contents

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 September 1, 2018 and December 2, 2017, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

September 1,

Fair Value Measurements Using:

Description

2018

Level 1

Level 2

Level 3

Assets:

Marketable securities

8,246

Foreign exchange contract assets

11,356

Interest rate swaps, cash flow hedges

28,012

Liabilities:

Foreign exchange contract liabilities

836

Interest rate swaps, fair value hedges

8,295

Cross currency cash flow hedges

14,288

Contingent consideration liability

199

December 2,

Fair Value Measurements Using:

Description

2017

Level 1

Level 2

Level 3

Assets:

Marketable securities

7,528

Foreign exchange contract assets

600

Interest rate swaps, cash flow hedges

3,104

Liabilities:

Foreign exchange contract liabilities

4,397

Interest rate swaps, fair value hedges

2,121

Cross-currency cash flow hedges

20,136

Contingent consideration liability

496

Long-term debt had an estimated fair value of $2,292,073 and $2,452,034 as of September 1, 2018 and December 2, 2017, respectively. The fair value of long-term debt is based on quoted market prices for the same or similar issues or on the current rates offered for debt of similar maturities. The estimated fair value of these long-term obligations is not necessarily indicative of the amount that would be realized in a current market exchange.

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

Table of Contents

The contingent consideration liability activity for the nine months ended September 1, 2018 is presented below:

	Amount
Balance at December 2, 2017	$	496
Mark to market adjustment		51
Foreign currency translation adjustment		(348	)
Balance at September 1, 2018	$	199

Balances Measured at Fair Value on a Nonrecurring Basis

We measure certain assets and liabilities at fair value on a nonrecurring basis. These assets include tangible and intangible assets acquired and liabilities assumed in an acquisition, and cost basis investments that are written down to fair value when they are determined to be impaired.

Property, plant and equipment related to acquisitions – Property, plant and equipment acquired in connection with our acquisitions were measured using unobservable (Level 3) inputs, using the cost approach. The cost approach computes the cost to replace the asset, less accrued depreciation resulting from physical deterioration, functional obsolescence and external obsolescence.

Intangible assets related to acquisitions – The identified intangible assets acquired in connection with our acquisitions during were measured using unobservable (Level 3) inputs. The fair value of the intangible assets was calculated using either the income approach or a discounted market-based methodology approach. Significant inputs include estimated revenue growth rates, gross margins, operating expenses, attrition rate, royalty rate and discount rate.

See Note 2 for further discussion regarding our acquisitions.

Note 15: Share Repurchase Program

On April 6, 2017, the Board of Directors authorized a share repurchase program of up to $200,000 of our outstanding common shares. Under the program, we are authorized to repurchase shares for cash on the open market, from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases is dependent on price, market conditions and applicable regulatory requirements. Upon repurchase of the shares, we reduce our common stock for the par value of the shares with the excess being applied against additional paid-in capital. This authorization replaces the September 30, 2010 authorization to repurchase shares.

We did not repurchase any shares during the nine months ended September 1, 2018. During the nine months ended September 2, 2017, we repurchased shares under the April 6, 2017 program with an aggregate value of $12,830. Of this amount, $250 reduced common stock and $12,580 reduced additional paid-in capital.

During the nine months ended September 2, 2017, we repurchased shares under the September 30, 2010 program with an aggregate value of $6,284. Of this amount, $125 reduced common stock and $6,159 reduced additional paid-in capital.

Note 16: Commitments and Contingencies

Environmental Matters

From time to time, we become aware of compliance matters relating to, or receive notices from, federal, state or local entities regarding possible or alleged violations of environmental, health or safety laws and regulations. We review the circumstances of each individual site, considering the number of parties involved, the level of potential liability or our contribution relative to the other parties, the nature and magnitude of the hazardous substances involved, the method and extent of remediation, the estimated legal and consulting expense with respect to each site and the time period over which any costs would likely be incurred. Also, from time to time, we are identified as a potentially responsible party (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act (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 $11,425 and $11,380 as of September 1, 2018 and December 2, 2017, respectively, for probable and reasonably estimable environmental remediation costs. Of the amount reserved, $4,756 and $5,000 as of September 1, 2018 and December 2, 2017, respectively, 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.

Table of Contents

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

September 1, 2018

September 2, 2017

December 2, 2017

Lawsuits and claims settled

Settlement amounts

334

1,605

3,891

Insurance payments received or expected to be received

281

1,312

2,931

Table of Contents

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.

We have retained legal counsel to conduct an internal investigation of possible resale of our products by certain customers to Iran contrary to U.S. law and regulations and our compliance policy. The sales to those particular customers being investigated represented less than one percent of our net revenue in each of our last three fiscal years. The investigation also includes a review of sales by our subsidiaries in Turkey (beginning in 2011) and India (beginning in 2014) in possible violation of the sanctions regulations of the Office of Foreign Assets Control (“OFAC”) and other applicable laws and regulations. In January 2018, we voluntarily contacted OFAC to advise it of this internal investigation and our intention to cooperate fully with 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 $10,000.

Note 17: Operating Segments

We are required to report segment information in the same way that we internally organize our business for assessing performance and making decisions regarding allocation of resources. 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.

As of December 2, 2017, we had six reportable segments: Americas Adhesives, EIMEA (Europe, India, Middle East and Africa), Asia Pacific, Construction Adhesives, Engineering Adhesives and Royal Adhesives. As of the beginning of fiscal 2018, we modified our operating segment structure by allocating the Royal Adhesives segment into each of the five other segments. We now have five reportable segments: Americas Adhesives, EIMEA, Asia Pacific, Construction Adhesives and Engineering Adhesives.

Table of Contents

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

Three Months Ended

September 1, 2018

September 2, 2017

Trade

Revenue

Inter-

Segment

Revenue

Segment

Operating

Income

Trade

Revenue

Inter-

Segment

Revenue

Segment

Operating

Income (Loss)

Americas Adhesives

282,490

4,595

34,816

230,881

3,998

25,434

EIMEA

182,020

5,255

8,758

137,408

5,347

8,873

Asia Pacific

65,944

1,435

3,694

62,972

1,882

2,793

Construction Adhesives

121,140

)

12,767

59,080

(698

)

Engineering Adhesives

118,513

11,100

72,528

3,779

Total

770,107

71,135

562,869

40,181

Nine Months Ended

September 1, 2018

September 2, 2017

Trade

Revenue

Inter-

Segment

Revenue

Segment

Operating

Income

Trade

Revenue

Inter-

Segment

Revenue

Segment

Operating

Income (Loss)

Americas Adhesives

821,813

15,491

84,934

653,665

11,855

72,921

EIMEA

554,031

14,702

30,636

396,674

13,246

18,753

Asia Pacific

206,944

5,032

11,056

190,083

4,385

9,423

Construction Adhesives

340,179

)

25,705

179,880

(3,234

)

Engineering Adhesives

349,606

32,675

207,541

11,667

Total

2,272,573

185,006

1,627,843

109,530

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

September 1,

September 2,

September 1,

September 2,

2018

2017

2018

2017

Segment operating income

71,135

40,181

185,006

109,530

Other income (expense), net

(1,375

)

(602

)

3,508

(1,506

)

Interest expense

(24,924

)

(7,348

)

(74,651

)

(22,461

)

Income before income taxes and income from equity method investments

44,836

32,231

113,863

85,563

Table of Contents

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 2, 2017 for important background information related to our business.

For the year ended December 2, 2017, we had six reportable segments: Americas Adhesives, EIMEA (Europe, India, Middle East and Africa), Asia Pacific, Construction Adhesives, Engineering Adhesives and Royal Adhesives. As of the beginning of fiscal 2018, we modified our operating segment structure by allocating the Royal Adhesives segment into each of the five other segments. We now have five reportable segments: Americas Adhesives, EIMEA, Asia Pacific, Construction Adhesives and Engineering Adhesives.

Net revenue in the third quarter of 2018 increased 36.8 percent from the third quarter of 2017. Revenue increased 33.7 percent due to sales volume, including 34.2 percent from acquisitions, 4.6 percent due to favorable product pricing, and 0.7 percent due to favorable sales mix compared to the third quarter of 2017. Negative currency effects of 2.2 percent compared to the third quarter of 2017 were primarily driven by the weaker Brazilian real, Turkish lira, Argentinian peso and Indian rupee offset by a stronger Chinese renminbi, Mexican peso and Euro compared to the U.S. dollar. Gross profit margin increased 150 basis points primarily due to favorable product pricing and the impact of the Royal Adhesives acquisition partially offset by higher restructuring plan costs.

Net revenue in the first nine months of 2018 increased 39.6 percent from the first nine months of 2017. Revenue increased 33.8 percent due to sales volume, including 34.0 percent from acquisitions, 3.3 percent due to favorable product pricing, and 0.6 percent due to favorable sales mix compared to the third quarter of 2017. Positive currency effects of 1.9 percent compared to the first nine months of 2017 were primarily driven by the stronger Euro, Chinese renminbi, Mexican peso and British pound offset by a weaker Brazilian real, Turkish lira and Argentinian peso compared to the U.S. dollar. Gross profit margin increased 90 basis points primarily due to favorable product pricing, the impact of the Royal Adhesives acquisition and lower restructuring plan costs.

Net income attributable to H.B. Fuller in the third quarter of 2018 was $37.7 million compared to $25.1 million in the third quarter of 2017. On a diluted earnings per share basis, the third quarter of 2018 was $0.72 per share compared to $0.49 per share for the third quarter of 2017.

Net income attributable to H.B. Fuller in the first nine months of 2018 was $129.9 million compared to $65.8 million in the first nine months of 2017. On a diluted earnings per share basis, the third quarter of 2018 was $2.50 per share compared to $1.28 per share for the third quarter of 2017.

Restructuring Plans

Royal Adhesives 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. 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.

2017 Restructuring Plan

During the first quarter of 2017, we approved a restructuring plan (the “2017 Restructuring Plan”) related to organizational changes and other actions to optimize operations. In implementing the 2017 Restructuring Plan, we expect to incur costs of approximately $17.0 million to $20.0 million which includes (i) cash expenditures of approximately $13.0 million for severance and related employee costs globally and (ii) $4.0 million to $7.0 million related to the optimization of production facilities, streamlining of processes and accelerated depreciation of long-lived assets. Approximately $15.0 million to $16.0 million of the costs are expected to be cash costs. As of September 1, 2018, we have incurred $19.9 million under the 2017 Restructuring Plan. The 2017 Restructuring Plan is currently expected to be completed by the end of fiscal 2018.

Table of Contents

Collectively, we expect to incur costs of approximately $40.0 million related to the restructuring plans. During the quarters ended September 1, 2018 and September 2, 2017, we recorded pre-tax charges of $2.8 million and $1.3 million, respectively, and during the nine months ended September 1, 2018 and September 2, 2017, we recorded pre-tax charges of $6.0 million and $17.1 million, respectively, related to the restructuring plans.

Results of Operations

Net revenue:

	Three Months Ended							Nine Months Ended
	September 1,		September 2,		2018 vs			September 1,		September 2,		2018 vs
($ in millions)	2018		2017		2017			2018		2017		2017
Net revenue	$	770.1	$	562.9		36.8	%	$	2,272.6	$	1,627.8		39.6	%

We review variances in net revenue in terms of changes related to sales volume, product pricing, sales mix, business acquisitions and changes in foreign currency exchange rates. The impact of sales volume, product pricing, sales mix and acquisitions are viewed as constant currency growth. The following table shows the net revenue variance analysis for the third quarter and first nine months of 2018 compared to the same periods in 2017:

	Three Months Ended September 1, 2018 vs September 2, 2017			Nine Months Ended September 1, 2018 vs September 2, 2017
Constant currency		39.0	%		37.7	%
Currency		(2.2	%)		1.9	%
Total		36.8	%		39.6	%

Constant currency growth was 39.0 percent in the third quarter of 2018 compared to the third quarter of 2017. The 39.0 percent constant currency growth in the third quarter of 2018 was driven by 105.2 percent growth in Construction Adhesives, 62.8 percent growth in Engineering Adhesives, 35.5 percent growth in EIMEA, 26.1 percent growth in Americas Adhesives, and 4.6 percent growth in Asia Pacific. The growth is predominately driven by acquisitions. The negative 2.2 percent currency impact was primarily driven by a weaker Brazilian real, Argentinian peso, Australian dollar, Canadian dollar and Turkish lira offset by a stronger Mexican peso, Chinese renminbi and Euro compared to the U.S. dollar.

Constant currency growth was 37.7 percent in the first nine months of 2018 compared to the first nine months of 2017. The 37.7 percent constant currency growth in the first nine months of 2018 was driven by 88.6 percent growth in Construction Adhesives, 63.4 percent growth in Engineering Adhesives, 34.2 percent growth in EIMEA, 27.3 percent growth in Americas Adhesives, and 4.8 percent growth in Asia Pacific. The growth is predominantly driven by acquisitions. The positive 1.9 percent currency impact was primarily driven by a stronger Euro, Chinese renminbi, Mexican peso and British pound offset by a weaker Brazilian real, Turkish lira and Argentinian peso compared to the U.S. dollar.

Cost of sales:

	Three Months Ended									Nine Months Ended
	September 1,			September 2,			2018 vs			September 1,			September 2,			2018 vs
($ in millions)	2018			2017			2017			2018			2017			2017
Raw materials	$	416.4		$	316.5			31.6	%	$	1,242.3		$	902.3			37.7	%
Other manufacturing costs		136.5			96.0			42.2	%		403.0			290.1			38.9	%
Cost of sales	$	552.9		$	412.5			34.0	%	$	1,645.3		$	1,192.4			38.0	%
Percent of net revenue		71.8	%		73.3	%					72.4	%		73.3	%

Cost of sales in the third quarter of 2018 compared to the third quarter of 2017 decreased 150 basis points as a percentage of net revenue. Raw material cost as a percentage of net revenue decreased 210 basis points in the third quarter of 2018 compared to the third quarter of 2017 primarily due to an increase in product pricing and the impact of the Royal Adhesives acquisition. Other manufacturing costs as a percentage of revenue increased 60 basis points in the third quarter of 2018 compared to the third quarter of 2017 primarily due to higher restructuring plan costs.

Table of Contents

Cost of sales in the first nine months of 2018 compared to the first nine months of 2017 decreased 90 basis points as a percentage of net revenue. Raw material cost as a percentage of net revenue decreased 70 basis points in the first nine months of 2018 compared to the first nine months of 2017 primarily due to an increase in product pricing and the impact of the Royal Adhesives acquisition. Other manufacturing costs as a percentage of revenue decreased 20 basis points in the first nine months of 2018 compared to the first nine months of 2017.

Gross profit:

	Three Months Ended									Nine Months Ended
	September 1,			September 2,			2018 vs			September 1,			September 2,			2018 vs
($ in millions)	2018			2017			2017			2018			2017			2017
Gross profit	$	217.2		$	150.4			44.4	%	$	627.3		$	435.4			44.1	%
Percent of net revenue		28.2	%		26.7	%					27.6	%		26.7	%

Gross profit in the third quarter of 2018 increased 44.4 percent and gross profit margin increased 150 basis points compared to the third quarter of 2017. The increase in gross profit margin was primarily due to favorable product pricing and the impact of the Royal Adhesives acquisition partially offset by higher restructuring plan costs.

Gross profit in the first nine months of 2018 increased 44.1 percent and gross profit margin increased 90 basis points compared to the first nine months of 2017. The increase in gross profit margin was primarily due to favorable product pricing, the impact of the Royal Adhesives acquisition and lower restructuring plan costs.

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

	Three Months Ended									Nine Months Ended
	September 1,			September 2,			2018 vs			September 1,			September 2,			2018 vs
($ in millions)	2018			2017			2017			2018			2017			2017
SG&A	$	146.1		$	110.2			32.6	%	$	442.3		$	325.9			35.7	%
Percent of net revenue		19.0	%		19.6	%					19.5	%		20.0	%

SG&A expenses for the third quarter of 2018 increased $35.9 million, or 32.6 percent, compared to the third quarter of 2017. The increase is mainly due to the impact of acquired businesses.

SG&A expenses for the first nine months of 2018 increased $116.4 million, or 35.7 percent, compared to the first nine months of 2017. The increase is mainly due to the impact of acquired businesses and 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 (expense), net:

	Three Months Ended									Nine Months Ended
	September 1,			September 2,			2018 vs			September 1,		September 2,			2018 vs
($ in millions)	2018			2017			2017			2018		2017			2017
Other income (expense), net	$	(1.4	)	$	(0.6	)		133.3	%	$	3.5	$	(1.5	)		NMP

NMP = Non-meaningful percentage

Table of Contents

Other income (expense), net in the third quarter of 2018 included $1.3 million of currency transaction losses and $0.1 million of other expenses. Other income (expense), net in the third quarter of 2017 included $0.8 million of currency transaction losses, offset by $0.2 million of other income.

Other income (expense), net in the first nine months of 2018 included a $3.1 million gain on sale of assets and $2.8 million of other income, offset by $2.4 million of foreign currency transaction losses. Other income (expense), net in the first nine months of 2017 included $1.8 million of currency transaction losses, offset by $0.3 million of other income.

Interest expense, net:

	Three Months Ended							Nine Months Ended
	September 1,		September 2,		2018 vs			September 1,		September 2,		2018 vs
($ in millions)	2018		2017		2017			2018		2017		2017
Interest expense, net	$	24.9	$	7.3		241.1	%	$	74.7	$	22.5		232.0	%

Interest expense, net in the third quarter of 2018 included $27.8 of interest expense and $2.9 million of interest income. Interest expense, net in the third quarter of 2017 included $8.1 of interest expense and $0.8 million of interest income. Interest expense, net in the third quarter of 2018 compared to the third quarter of 2017 was higher due to higher U.S. debt balances from the issuance of our Term Loan B Credit Agreement and Public Notes. We capitalized $0.1 million of interest expense in both the third quarter of 2018 and the same period last year.

Interest expense, net in the first nine months of 2018 included $83.5 of interest expense and $8.8 million of interest income. Interest expense, net in the first nine months of 2017 included $24.7 of interest expense and $2.2 million of interest income. Interest expense, net in the first nine months of 2018 compared to the same period last year was higher due to higher U.S. debt balances from the issuance of our Term Loan B Credit Agreement and Public Notes. We capitalized $0.2 million of interest expense in both the first nine months of 2018 and the same period last year.

Income taxes:

	Three Months Ended									Nine Months Ended
	September 1,			September 2,			2018 vs			September 1,			September 2,			2018 vs
($ in millions)	2018			2017			2017			2018			2017			2017
Income taxes	$	9.3		$	9.3			0.0	%	$	(9.8	)	$	26.2			NMP
Effective tax rate		20.7	%		28.7	%					(8.6	%)		30.6	%

NMP = Non-meaningful percentage

Income tax expense of $9.3 million in the third quarter of 2018 includes $1.0 million of other discrete tax benefit. Excluding the discrete tax benefit of $1.0 million, the overall effective tax rate was 22.9 percent. Income tax expense of $9.3 million in the third quarter of 2017 includes $0.2 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 28.2 percent. The 530 basis point decrease in the overall effective tax rate, excluding the impact of discrete and other items, is primarily due to the reduction in the U.S. federal income tax rate as a result of U.S. Tax Reform and a favorable mix of earnings in the various countries in which we conduct business.

The income tax benefit of $9.8 million in the first nine months of 2018 includes $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. Income tax expense of $26.2 million in the first nine months of 2017 includes $1.1 million of discrete tax expense. Excluding the discrete tax expense and the effects of these items, the overall effective tax rate was 29.3 percent. The 520 basis point decrease in the overall effective tax rate, excluding the impact of discrete and other items, is primarily due to the reduction in the U.S. federal income tax rate as a result of U.S. Tax Reform and a favorable mix of earnings in the various countries in which we conduct business.

Table of Contents

Income from equity method investments:

	Three Months Ended							Nine Months Ended
	September 1,		September 2,		2018 vs			September 1,		September 2,		2018 vs
($ in millions)	2018		2017		2017			2018		2017		2017
Income from equity method investments	$	2.2	$	2.2		0.0	%	$	6.2	$	6.4		(3.1%	)

The income from equity method investments relates to our 50 percent ownership of the Sekisui-Fuller joint venture in Japan. Net income in our joint venture was flat for the third quarter of 2018 compared to the same period of 2017. The lower income for the first nine months of 2018 compared to the same period of 2017 relates to lower net income in our joint venture.

Net income attributable to H.B. Fuller:

	Three Months Ended									Nine Months Ended
	September 1,			September 2,			2018 vs			September 1,			September 2,			2018 vs
($ in millions)	2018			2017			2017			2018			2017			2017
Net income attributable to H.B. Fuller	$	37.7		$	25.1			50.2	%	$	129.9		$	65.8			97.4	%
Percent of net revenue		4.9	%		4.5	%					5.7	%		4.0	%

The net income attributable to H.B. Fuller for the third quarter of 2018 was $37.7 million compared to $25.1 million for the third quarter of 2017. The diluted earnings per share for the third quarter of 2018 was $0.72 per share as compared to $0.49 per share for the third quarter of 2017.

The net income attributable to H.B. Fuller for the first nine months of 2018 was $129.9 million compared to $65.8 million for the first nine months of 2017. The diluted earnings per share for the first nine months of 2018 was $2.50 per share as compared to $1.28 per share for the first nine months of 2017.

Operating Segment Results

For the year ended December 2, 2017, we had six reportable segments: Americas Adhesives, EIMEA, Asia Pacific, Construction Adhesives, Engineering Adhesives and Royal Adhesives. As of the beginning of fiscal 2018, we modified our operating segment structure by allocating the Royal Adhesives segment into each of the five other segments. We now 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.

Table of Contents

The tables below provide certain information regarding the net revenue and segment operating income of each of our operating segments. 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
	September 1, 2018					September 2, 2017					September 1, 2018					September 2, 2017
	Net		% of			Net		% of			Net		% of			Net		% of
($ in millions)	Revenue		Total			Revenue		Total			Revenue		Total			Revenue		Total
Americas Adhesives	$	282.5		37	%	$	230.9		41	%	$	821.8		36	%	$	653.6		40	%
EIMEA		182.0		24	%		137.4		24	%		554.0		24	%		396.7		24	%
Asia Pacific		65.9		8	%		63.0		11	%		206.9		9	%		190.1		12	%
Construction Adhesives		121.2		16	%		59.1		11	%		340.3		15	%		179.9		11	%
Engineering Adhesives		118.5		15	%		72.5		13	%		349.6		16	%		207.5		13	%
Total	$	770.1		100	%	$	562.9		100	%		2,272.6		100	%	$	1,627.8		100	%

Segment Operating Income (Loss):

	Three Months Ended											Nine Months Ended
	September 1, 2018					September 2, 2017						September 1, 2018					September 2, 2017
($ in millions)	Segment Operating Income		% of Total			Segment Operating Income (Loss)			% of Total			Segment Operating Income		% of Total			Segment Operating Income (Loss)			% of Total
Americas Adhesives	$	34.8		49	%	$	25.4			63	%	$	84.9		46	%	$	72.9			67	%
EIMEA		8.7		12	%		8.9			22	%		30.6		16	%		18.7			17	%
Asia Pacific		3.7		5	%		2.8			7	%		11.1		6	%		9.4			8	%
Construction Adhesives		12.8		18	%		(0.7	)		(2	%)		25.7		14	%		(3.2	)		(3	%)
Engineering Adhesives		11.1		16	%		3.8			10	%		32.7		18	%		11.7			11	%
Total	$	71.1		100	%	$	40.2			100	%	$	185.0		100	%	$	109.5			100	%

Americas Adhesives

	Three Months Ended									Nine Months Ended
	September 1,			September 2,			2018 vs			September 1,			September 2,			2018 vs
($ in millions)	2018			2017			2017			2018			2017			2017
Net revenue	$	282.5		$	230.9			22.3	%	$	821.8		$	653.6			25.7	%
Segment operating income	$	34.8		$	25.4			37.0	%	$	84.9		$	72.9			16.5	%
Segment operating margin		12.3	%		11.0	%					10.3	%		11.2	%

The following table provides details of the Americas Adhesives net revenue variances:

	Three Months Ended September 1, 2018			Nine Months Ended September 1, 2018
	vs September 2, 2017			vs September 2, 2017
Constant currency growth		26.1	%		27.3	%
Currency		(3.8	%)		(1.6	%)
Total		22.3	%		25.7	%

Net revenue increased 22.3 percent in the third quarter of 2018 compared to the third quarter of 2017. The 26.1 percent increase in constant currency growth was attributable to a 19.4 percent increase in sales volume, including a 24.4 percent increase due to the Royal Adhesives and Adecol acquisitions, a 5.5 percent increase in product pricing and a 1.2 percent increase due to favorable sales mix. The 3.8 percent negative currency effect was due to the weaker Brazilian real, Argentinian peso and Canadian dollar offset by the stronger Mexican peso and Colombian peso compared to the U.S. dollar. As a percentage of net revenue, raw material costs decreased 260 basis points mainly due to an increase in product pricing and the impact of acquired businesses. Other manufacturing costs as a percentage of net revenue increased 30 basis points. SG&A expenses as a percentage of net revenue increased 100 basis points due to the impact of acquired businesses. Segment operating income increased 37.0 percent and segment operating margin as a percentage of net revenue increased 130 basis points compared third quarter of 2017.

Table of Contents

Net revenue increased 25.7 percent in the first nine months of 2018 compared to the first nine months of 2017. The 27.3 percent increase in constant currency growth was attributable to a 23.0 percent increase in sales volume, including a 26.1 percent increase due to the Royal Adhesives and Adecol acquisitions, a 3.3 percent increase in product pricing and a 1.0 percent increase due to favorable sales mix. The 1.6 percent negative currency effect was due to the weaker Brazilian real and Argentinian peso offset by the stronger Mexican peso, Canadian dollar and Colombian peso compared to the U.S. dollar. As a percentage of net revenue, raw material costs decreased 70 basis points mainly due to increased product pricing and the impact of acquired businesses. Other manufacturing costs as a percentage of net revenue increased 90 basis points due to the impact of acquired businesses. SG&A expenses as a percentage of net revenue increased 70 basis points primarily due to the impact of acquired businesses. Segment operating income increased 16.5 percent and segment operating margin as a percentage of net revenue decreased 90 basis points compared to the first nine months of 2017.

EIMEA

	Three Months Ended									Nine Months Ended
	September 1,			September 2,			2018 vs			September 1,			September 2,			2018 vs
($ in millions)	2018			2017			2017			2018			2017			2017
Net revenue	$	182.0		$	137.4			32.5	%	$	554.0		$	396.7			39.7	%
Segment operating income	$	8.7		$	8.9			(2.2	%)	$	30.6		$	18.7			63.6	%
Segment operating margin		4.8	%		6.5	%					5.5	%		4.7	%

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

	Three Months Ended September 1, 2018			Nine Months Ended September 1, 2018
	vs September 2, 2017			vs September 2, 2017
Constant currency growth		35.5	%		34.2	%
Currency		(3.0	%)		5.5	%
Total		32.5	%		39.7	%

Net revenue increased 32.5 percent in the third quarter of 2018 compared to the third quarter of 2017. The 35.5 percent increase in constant currency growth was attributable to a 29.7 percent increase in sales volume, including a 29.3 percent increase due to the Royal Adhesives acquisition, a 5.1 percent increase in product pricing and a 0.7 percent increase due to favorable sales mix. The negative currency effect of 3.0 percent was primarily the result of a weaker Turkish lira and Indian rupee offset by a stronger Euro compared to the U.S. dollar. Raw material cost as a percentage of net revenue was flat in the third quarter of 2018 compared to the third quarter of 2017. Other manufacturing costs as a percentage of net revenue were 170 basis points higher than the third quarter of 2017 primarily due to the impact of the Royal Adhesives acquisition. SG&A expenses as a percentage of net revenue in the third quarter of 2018 were flat compared to the third quarter of 2017. Segment operating income decreased 2.2 percent and segment operating margin decreased 170 basis points compared to the third quarter of 2017.

Net revenue increased 39.7 percent in the first nine months of 2018 compared to the first nine months of 2017. The 34.2 percent increase in constant currency growth was attributable to a 29.4 percent increase in sales volume, including a 29.5 percent increase due to the Royal Adhesives acquisition, a 4.4 percent increase in product pricing and a 0.4 percent increase due to favorable sales mix. The positive currency effect of 5.5 percent was primarily the result of a stronger Euro and British pound offset by a weaker Turkish lira and Indian rupee compared to the U.S. dollar. Raw material cost as a percentage of net revenue increased 110 basis points in the first nine months of 2018 compared to the first nine months of 2017 primarily due to higher raw material costs offset by increased product pricing. Other manufacturing costs as a percentage of net revenue were 90 basis points lower than the first nine months of 2017 primarily due to lower restructuring plan costs and the impact of the Royal Adhesives acquisition. SG&A expenses as a percentage of net revenue decreased 100 basis points due to lower restructuring plan costs. Segment operating income increased 63.6 percent and segment operating margin increased 80 basis points compared to the first nine months of 2017.

Table of Contents

Asia Pacific
	Three Months Ended									Nine Months Ended
	September 1,			September 2,			2018 vs			September 1,			September 2,			2018 vs
($ in millions)	2018			2017			2017			2018			2017			2017
Net revenue	$	65.9		$	63.0			4.6	%	$	206.9		$	190.1			8.8	%
Segment operating income	$	3.7		$	2.8			32.1	%	$	11.1		$	9.4			18.1	%
Segment operating margin		5.6	%		4.4	%					5.4	%		4.9	%

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

	Three Months Ended September 1, 2018			Nine Months Ended September 1, 2018
	vs September 2, 2017			vs September 2, 2017
Constant currency growth		4.6	%		4.8	%
Currency		0.0	%		4.0	%
Total		4.6	%		8.8	%

Net revenue in the third quarter of 2018 increased 4.6 percent compared to the third quarter of 2017. The 4.6 percent increase in constant currency growth was attributable to a 3.0 percent increase in sales volume, including a 1.9 percent increase due to the Royal Adhesives acquisition, a 1.7 percent increase in product pricing, offset by a 0.1 percent decrease due to unfavorable sales mix. Currency effects were neutral compared to the first nine months of 2017 due to the stronger Chinese renminbi and Malaysian ringgit which were offset by the weaker Australian dollar compared to the U.S. dollar. Raw material costs as a percentage of net revenue decreased 190 basis points compared to the third quarter of 2017 primarily due to increased product pricing and lower raw material costs. Other manufacturing costs as a percentage of net revenue decreased 30 basis points compared to the third quarter of 2017. SG&A expenses as a percentage of net revenue increased 100 basis points primarily due to the Royal Adhesives acquisition. Segment operating income increased 32.1 percent and segment operating margin increased 120 basis points compared to the third quarter of 2017.

Net revenue in the first nine months of 2018 increased 8.8 percent compared to the first nine months of 2017. The 4.8 percent increase in constant currency growth was attributable to a 4.1 percent increase in sales volume, including a 1.7 percent increase due to the Royal Adhesives acquisition, and a 1.1 percent increase in product pricing, offset by a 0.4 percent decrease due to unfavorable sales mix. Positive currency effects of 4.0 percent compared to the first nine months of 2017 were primarily driven by the stronger Chinese renminbi and Malaysian ringgit offset by the weaker Indonesian rupiah and Philippine peso compared to the U.S. dollar. Raw material costs as a percentage of net revenue decreased 60 basis points compared to the first nine months of 2017. Other manufacturing costs as a percentage of net revenue decreased 50 basis points compared to the first nine months of 2017. SG&A expenses as a percentage of net revenue increased 60 basis points primarily due to the Royal Adhesives acquisition. Segment operating income increased 18.1 percent and segment operating margin increased 50 basis points compared to the first nine months of 2017.

Construction Adhesives

	Three Months Ended									Nine Months Ended
	September 1,			September 2,			2018 vs			September 1,			September 2,			2018 vs
($ in millions)	2018			2017			2017			2018			2017			2017
Net revenue	$	121.2		$	59.1			105.1	%	$	340.3		$	179.9			89.2	%
Segment operating income	$	12.8		$	(0.7	)		NMP		$	25.7		$	(3.2	)		NMP
Segment operating margin		10.6	%		(1.2	%)					7.6	%		(1.8	%)

Table of Contents

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

	Three Months Ended September 1, 2018			Nine Months Ended September 1, 2018
	vs September 2, 2017			vs September 2, 2017
Constant currency growth		105.2	%		88.6	%
Currency		(0.1	%)		0.6	%
Total		105.1	%		89.2	%

Net revenue increased 105.1 percent in the third quarter of 2018 compared to the third quarter of 2017. The 105.2 percent increase in constant currency growth was driven by a 105.7 percent increase in sales volume, including a 100.5 percent increase due to the Royal Adhesives acquisition, and a 0.5 percent increase in product pricing, offset by a 1.0 decrease due to unfavorable sales mix. The negative currency effect of 0.1 percent was due to the weaker Australian dollar offset by the stronger Euro compared to the U.S. dollar. Raw material cost as a percentage of net revenue was 10 basis points higher in the third quarter of 2018 compared to the third quarter of 2017. Other manufacturing costs as a percentage of net revenue were 540 basis points lower in the third quarter of 2018 compared to the third quarter of 2017 primarily due to higher sales volume and the impact of the Royal Adhesives acquisition. SG&A expenses as a percentage of net revenue decreased 650 basis points due to higher sales volume. Segment operating income increased $13.5 million and segment operating margin increased 1,180 basis points compared to the third quarter of 2017.

Net revenue increased 89.2 percent in the first nine months of 2018 compared to the first nine months of 2017. The 88.6 percent increase in constant currency growth was driven by an 89.1 percent increase in sales volume, including an 88.8 percent increase due to the Royal Adhesives acquisition, offset by a 0.4 percent decrease due to an unfavorable sales mix and a 0.1 percent decrease in product pricing. The positive currency effect of 0.6 percent was due to the stronger Euro and Australian dollar compared to the U.S. dollar. Raw material cost as a percentage of net revenue was 140 basis points higher in the first nine months of 2018 compared to last year primarily due to higher raw material costs and the impact of the Royal Adhesives acquisition. Other manufacturing costs as a percentage of net revenue were 820 basis points lower in the first nine months of 2018 compared to the first nine months of 2017 primarily due to lower restructuring plan costs. SG&A expenses as a percentage of net revenue decreased 260 basis points due to higher sales volume . Segment operating income increased $28.9 million and segment operating margin increased 940 basis points compared to the first nine months of 2017.

Engineering Adhesives

	Three Months Ended									Nine Months Ended
	September 1,			September 2,			2018 vs			September 1,			September 2,			2018 vs
($ in millions)	2018			2017			2017			2018			2017			2017
Net revenue	$	118.5		$	72.5			63.4	%	$	349.6		$	207.5			68.5	%
Segment operating income	$	11.1		$	3.8			192.1	%	$	32.7		$	11.7			179.5	%
Segment operating margin		9.4	%		5.2	%					9.4	%		5.6	%

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

	Three Months Ended September 1, 2018			Nine Months Ended September 1, 2018
	vs September 2, 2017			vs September 2, 2017
Constant currency growth		62.8	%		63.4	%
Currency		0.6	%		5.1	%
Total		63.4	%		68.5	%

Table of Contents

Net revenue increased 63.4 percent in the third quarter of 2018 compared to the third quarter of 2017. The 62.8 percent increase in constant currency growth was attributable to a 54.5 percent increase in sales volume, including a 48.4 percent increase due to the acquisition of Royal Adhesives, a 7.0 percent increase in product pricing and a 1.3 percent increase due to favorable sales mix. Sales volume growth was primarily driven by strong performance in the Tonsan and automotive markets. Positive currency effects of 0.6 percent compared to the third quarter of 2017 were primarily driven by the stronger Chinese renminbi and Euro offset by the weaker Turkish lira and Brazilian real compared to the U.S. dollar. Raw material cost as a percentage of net revenue was 210 basis points lower in the third quarter of 2018 compared to the third quarter of 2017 due to increased product pricing and the impact of the Royal Adhesives acquisition. Other manufacturing costs as a percentage of net revenue were 390 basis points higher in the third quarter of 2018 compared to the third quarter of 2017 due to the impact of the Royal Adhesives acquisition. SG&A expenses as a percentage of net revenue decreased 600 basis points due to higher sales volume and the impact of the Royal Adhesives acquisition. Segment operating income increased 192.1 percent and segment operating margin increased 420 basis points compared to the third quarter of 2017.

Net revenue increased 68.5 percent in the first nine months of 2018 compared to the first nine months of 2017. The 63.4 percent increase in constant currency growth was attributable to a 55.8 percent increase in sales volume, including a 49.3 percent increase due to the acquisition of Royal Adhesives, a 6.1 percent increase in product pricing and a 1.5 percent increase due to favorable sales mix. Sales volume growth was primarily driven by strong performance in the Tonsan and automotive markets. Positive currency effects of 5.1 percent compared to the first nine months of 2017 were primarily driven by the stronger Chinese renminbi, Euro and British pound offset by the weaker Turkish lira and Brazilian real compared to the U.S. dollar. Raw material cost as a percentage of net revenue was 220 basis points lower in the first nine months of 2018 compared to the first nine months of 2017 due to increased product pricing and the impact of the Royal Adhesives acquisition partially offset by higher raw material costs. Other manufacturing costs as a percentage of net revenue were 350 basis points higher in the first nine months of 2018 compared to the first nine months of 2017 due to the impact of the Royal Adhesives acquisition. SG&A expenses as a percentage of net revenue decreased 510 basis points due to higher sales volume and the impact of the Royal Adhesives acquisition. Segment operating income increased 179.5 percent and segment operating margin increased 380 basis points compared to the first nine months of 2017.

Financial Condition, Liquidity and Capital Resources

Total cash and cash equivalents as of September 1, 2018 were $150.1 million compared to $194.4 million as of December 2, 2017 and $119.6 million as of September 2, 2017. The majority of the $150.1 million in cash and cash equivalents as of September 1, 2018 was held outside the United States. Total long and short-term debt was $2,364.2 million as of September 1, 2018, $2,451.9 million as of December 2, 2017 and $799.0 million as of September 2, 2017. The total debt to total capital ratio as measured by Total Debt divided by (Total Debt plus Total Stockholders’ Equity) was 67.6 percent as of September 1, 2018 as compared to 60.3 percent as of December 2, 2017 and 43.6 percent as of September 2, 2017.

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 September 1, 2018, we were in compliance with all covenants of our contractual obligations as shown in the following table:

Covenant

Debt Instrument

Measurement

Result as of September 1, 2018

Total Indebtedness / TTM EBITDA

Revolving Credit

Agreement and Term

Loan B Credit

Agreement

Not greater than 5.9

4.8

●

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, one-time costs incurred in connection with prepayment premiums and make-whole amounts under certain agreements, certain “run rate” cost savings and synergies in connection with the Royal Adhesives acquisition not to exceed 15% of Consolidated EBITDA, 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.

Table of Contents

We believe we have the ability to meet all of our contractual obligations and commitments in fiscal 2018.

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.

	September 1,		September 2,
	2018		2017
Net working capital as a percentage of annualized net revenue¹		19.7%		23.0%
Accounts receivable DSO²(in days)		54		62
Inventory days on hand³(in days)		69		73
Free cash flow after dividends⁴		$37.0		$13.2
Total debt to total capital ratio⁵		67.6%		43.6%

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).

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.

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 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 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 from continuing operations" to Free cash flow after dividends

	Nine Months Ended
($ in millions)	September 1, 2018		September 2, 2017
Net cash provided by operating activities from continuing operations	$	106.8	$	70.8
Less: Purchased property, plant and equipment		46.5		35.5
Less: Dividends paid		23.3		22.1
Free cash flow after dividends		37.0		13.2

Table of Contents

Summary of Cash Flows

Cash Flows from Operating Activities:

	Nine Months Ended
	September 1,		September 2,
($ in millions)	2018		2017
Net cash provided by operating activities	$	106.8	$	70.8

Net income including non-controlling interests was $129.9 million in the first nine months of 2018 compared to $65.8 million in the first nine months of 2017. Depreciation and amortization expense totaled $109.2 million in the first nine months of 2018 compared to $59.5 million in the first nine months of 2017. Accrued compensation was a use of cash of $6.2 million in 2018 compared to a source of cash of $3.9 million last year related to higher payouts for our employee incentive plans in the current year. Other assets was a use of cash of $47.5 million in the nine months ending September 1, 2018 compared to a source of cash $2.5 million in the same period last year. Other liabilities was a use of cash of $0.6 million in the first nine months of 2018 compared to $12.6 million in the first nine months of 2017.

Changes in net working capital (trade receivables, inventory and trade payables) accounted for a use of cash of $71.5 million compared $46.3 million last year. The table below provides the cash flow impact due to changes in the components of net working capital:

	Nine Months Ended
	September 1,			September 2,
($ in millions)	2018			2017
Trade receivables, net	$	(15.1	)	$	(14.0	)
Inventory		(60.2	)		(55.3	)
Trade payables		3.8			23.0
Total cash flow impact	$	(71.5	)	$	(46.3	)

●

Trade Receivables, net – Trade Receivables, net was a use of cash of $15.1 million and $14.0 million in 2018 and 2017, respectively. The higher use of cash in 2018 compared 2017 was due to an increase in trade receivables in the current year compared to the prior year. The DSO were 54 days at September 1, 2018 and 62 days at September 2, 2017.

●

Inventory – Inventory was a use of cash of $60.2 million and $55.3 million in 2018 and 2017, respectively. The higher use of cash in 2018 is due to higher raw material costs and increasing inventory levels to maintain service levels while integrating our acquisitions. Inventory days on hand were 69 days as of September 1, 2018 and 73 days as of September 2, 2017.

●

Trade Payables – For the first nine months of 2018, trade payables was a source of cash of $3.8 million compared to $23.0 million in 2017. The lower source of cash in 2017 compared to 2018 reflects higher payments on trade payables compared to the prior year.

Cash Flows from Investing Activities:

	Nine Months Ended
	September 1,			September 2,
($ in millions)	2018			2017
Net cash used in investing activities	$	(42.0	)	$	(159.3	)

Purchases of property, plant and equipment were $46.5 million during the nine months ended September 1, 2018 as compared to $35.5 million for the same period of 2017. During the nine months ended September 1, 2018 we received $2.4 million of cash resulting in an adjustment to the purchase price of Royal Adhesives acquired during the fourth quarter of 2017. During the nine months ended September 2, 2017, we acquired Wisdom Adhesives for $123.3 million.

Table of Contents

Cash Flows from Financing Activities:

	Nine Months Ended
	September 1,			September 2,
($ in millions)	2018			2017
Net cash provided by (used in) financing activities	$	(103.2	)	$	61.2

We did not have any issuance of long-term debt in the first nine months ended September 1, 2018. We had $643.0 million of proceeds from the issuance of long-term debt in the same period of 2017, which consisted of $300.0 million of proceeds from the issuance of the 4.000% Notes and $100.0 million of proceeds from our refinanced Term Loan B Credit Agreement and $243.0 million of proceeds from our revolving credit facility. Proceeds from our revolving credit facility were drawn in conjunction with the acquisition of Wisdom Adhesives. Repayments of long-term debt were $70.8 million in the first nine months ended September 1, 2018 and $536.7 million in the first nine months ended September 2, 2017. We also paid $3.8 million in debt issuance costs associated with the issuance of the 4.000% Notes in the first nine months of 2017. Net payment of notes payable were $9.8 million in 2018 compared to $10.9 million in 2017. Cash dividends paid were $23.3 million in 2018 compared to $22.1 million in 2017. Repurchases of common stock were $4.6 million in the nine months ended September 1, 2018 compared to $21.7 million in the same period of 2017.

Forward-Looking Statements and Risk Factors

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. This Annual Report on Form 10-K 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

Market Risk

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

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

Table of Contents

Interest Rate Risk

Exposure to changes in interest rates results primarily from borrowing activities used to fund operations. Committed floating rate credit facilities are used to fund a portion of operations. We believe that probable near-term changes in interest rates would not materially affect financial condition, results of operations or cash flows. The annual impact on interest expense of a one-percentage point interest rate change on the outstanding balance of our variable rate debt as of September 1, 2018 would have resulted in a change in net income of approximately $5.0 million or $0.10 per diluted share.

Foreign Exchange Risk

As a result of being a global enterprise, there is exposure to market risks from changes in foreign currency exchange rates. Our operating results and financial condition are subject to both currency transaction and currency translation risk. Approximately 54 percent of net revenue was generated outside of the United States for the third quarter of 2018. Principal foreign currency exposures relate to the Euro, British pound sterling, Canadian dollar, Chinese renminbi, Japanese yen, Australian dollar, Argentine peso, Brazilian real, Colombian peso, Mexican peso, Turkish lira, Egyptian pound, Indian rupee, Indonesian rupiah and Malaysian ringgit.

We enter into cross border transactions through importing and exporting goods to and from different countries and locations. These transactions generate foreign exchange risk as they create assets, liabilities and cash flows in currencies other than their functional currency. This also applies to services provided and other cross border agreements among subsidiaries. Our objective is to balance, where possible, non-functional currency denominated assets to non-functional currency denominated liabilities to have a natural hedge and minimize foreign exchange impacts.

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

Based on financial results for the third quarter of 2018, a hypothetical one percent change in our cost of sales due to foreign currency rate changes would have resulted in a change in net income attributable to H.B. Fuller of approximately $6.4 million or $0.12 per diluted share. Based on financial results and foreign currency balance sheet positions as of September 1, 2018, a hypothetical overall 10 percent change in the U.S. dollar would have resulted in a change in net income of approximately $10.0 million or $0.19 per diluted share.

Raw Materials

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

The purchase of raw materials is our largest expenditure. Our objective is to purchase raw materials that meet both our quality standards and production needs at the lowest total cost. Most raw materials are purchased on the open market or under contracts that limit the frequency but not the magnitude of price increases. In some cases, however, the risk of raw material price changes is managed by strategic sourcing agreements which limit price increases to increases in supplier feedstock costs, while requiring decreases as feedstock costs decline. The leverage of having substitute raw materials approved for use wherever possible is used to minimize the impact of possible price increases. Based on financial results for the first nine months of 2018, a hypothetical one percent change in our raw material costs would have resulted in a change in net income of approximately $9.4 million or $0.18 per diluted share.

Recently Issued Accounting Pronouncements

See Note 1 to the Consolidated Financial Statements for information concerning new accounting standards and the impact of the implementation of these standards on our financial statements.

Table of Contents

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 September 1, 2018. Based on this evaluation, our president and chief executive officer and executive vice president, chief financial officer concluded that, as of September 1, 2018, our disclosure controls and procedures were effective. We acquired Adecol on November 1, 2017 and Royal Adhesives on October 20, 2017 and have not yet included Adecol and Royal Adhesives in our assessment of the effectiveness of our internal control over financial reporting. Accordingly, pursuant to the Securities and Exchange Commission's general guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment in the year of acquisition, the scope of our assessment of the effectiveness of disclosure controls and procedures does not include internal control over financial reporting related to Adecol and Royal Adhesives. For the three months ended September 1, 2018, Adecol and Royal Adhesives accounted for $195.2 million of our total net revenue. For the nine months ended September 1, 2018, Adecol and Royal Adhesives accounted for $544.6 million of our total net revenue, and as of September 1, 2018 had total assets of $2,454.6 million.

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

Changes in Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Environmental Matters

Table of Contents

We are engaged in environmental remediation and monitoring efforts at a number of current and former operating facilities. As of September 1, 2018, we had reserved $11.4 million, which represents our best estimate of probable liabilities with respect to environmental matters. Of the amount reserved, $4.8 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.

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)	September 1, 2018		September 2, 2017		December 2, 2017
Lawsuits and claims settled		7		7		33
Settlement amounts	$	0.3	$	1.6	$	3.9
Insurance payments received or expected to be received	$	0.3	$	1.3	$	2.9

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.

Table of Contents

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.

We have retained legal counsel to conduct an internal investigation of possible resale of our products by certain customers to Iran contrary to U.S. law and regulations and our compliance policy. The sales to those particular customers being investigated represented less than one percent of our net revenue in each of our last three fiscal years. The investigation also includes a review of sales by our subsidiaries in Turkey (beginning in 2011) and India (beginning in 2014) in possible violation of the sanctions regulations of the Office of Foreign Assets Control (“OFAC”) and other applicable laws and regulations. In January 2018, we voluntarily contacted OFAC to advise it of this internal investigation and our intention to cooperate fully with 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.

Item 1A. Risk Factors

This Form 10-Q contains forward-looking statements concerning our future programs, products, expenses, revenue, liquidity and cash needs as well as our plans and strategies. These forward-looking statements are based on current expectations and we assume no obligation to update this information. Numerous factors could cause actual results to differ significantly from the results described in these forward-looking statements, including the risk factors identified under Part I, Item 1A. Risk Factors contained in our Annual Report on Form 10-K for the fiscal year ended December 2, 2017. 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 2, 2017.

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 September 1, 2018 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 3, 2018 - July 7, 2018		154	$	47.94	$	187,170

July 8, 2018 - August 4, 2018		292	$	56.23	$	187,170

August 5, 2018 - September 1, 2018		-	$	-	$	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.

Table of Contents

Item 6. Exhibits

	10.1	Amendment No. 1 to the Term Loan Credit Agreement, dated as of April 23, 2018, by and among H.B. Fuller Company, certain of H.B. Fuller Company’s subsidiaries, Morgan Stanley Senior Funding, Inc., as administrative agent, and the various other lenders party thereto
	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 September 1, 2018 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Total Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.

Table of Contents

SIGNATURES

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

H.B. Fuller Company

Dated: September 28, 2018	/s/ John J. Corkrean
	John J. Corkrean
	Executive Vice President,
	Chief Financial Officer

Table of Contents

Exhibit Index

Exhibits

	10.1	Amendment No. 1 to the Term Loan Credit Agreement, dated as of April 23, 2018, by and among H.B. Fuller Company, certain of H.B. Fuller Company’s subsidiaries, Morgan Stanley Senior Funding, Inc., as administrative agent, and the various other lenders party thereto
	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

FULLER H B CO - FORM 10-Q - September 28, 2018

Attached files

FULLER H B CO Reports