Published: 2021-06-29 13:36:01 ET

 

Table of Contents

 

Explanatory Note		3
Part II
Item 8.	Financial Statements and Supplementary Data	4
Part IV
Item 15.	Exhibits and Financial Statement Schedules	56
Signatures		57

 

 

Explanatory Note

 

This Amendment No. 1 on Form 10-K/A (the “Amendment”) amends the Annual Report on Form 10-K of H.B. Fuller Company (the “Company”) for the fiscal year ended November 28, 2020, as originally filed with the Securities and Exchange Commission on January 26, 2021 (the “Original Form 10-K”). The Company is filing this Amendment to include a reissued audit report on the 2019 and 2018 financial statements of its predecessor independent auditor, KPMG LLP. The reissued audit report was dual dated to indicate that KPMG LLP has audited and reported on the adjustments made to the 2019 and 2018 segment financial information that was recast to retrospectively reflect the realignment of the Company's operating segment structure as further described in Note 15 to the consolidated financial statements.

 

No other changes were made to the Original Form 10-K except for removing the paragraph and table containing adjusted EBITDA information by segment in Note 15. Except as stated herein, this Amendment does not reflect events occurring after the date of the Original Form 10-K, nor does it modify or update any of the financial or other disclosures as presented in the Original Form 10-K. Information not affected by this Amendment remains unchanged and reflects the disclosures made at the time the Original Form 10-K was filed.

 

As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by the Company’s principal executive officer and principal financial officer are filed as exhibits to this Amendment under Item 15 of Part IV. In addition, new consents of Ernst & Young LLP and KPMG LLP have been included in Item 15 of Part IV, Exhibits 23.1 and 23.2.

 

 

 

 

Item 8. Financial Statements and Supplementary Data

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and the Board of Directors of H.B. Fuller Company

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of H.B. Fuller Company and subsidiaries (the Company) as of November 28, 2020, the related consolidated statements of income, comprehensive income, total equity and cash flows for the year ended November 28, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at November 28, 2020, and the results of its operations and its cash flows for the year ended November 28, 2020, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of November 28, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated January 26, 2021 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

Critical Audit Matter 

 

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

 

Valuation of Goodwill for the Construction Adhesives reporting unit

 

Description of the Matter

 

At November 28, 2020, the Company had goodwill of approximately $311 million related to the Construction Adhesive reporting unit. As discussed in Notes 1 and 5 of the consolidated financial statements, the Company performs goodwill impairment testing on an annual basis as of the beginning of the fourth quarter, and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

 

Auditing management’s goodwill impairment test for the Construction Adhesives reporting unit was complex and judgmental due to the significant estimation required in determining the fair value of the reporting unit. In particular, the Company estimates fair value using the income approach which is sensitive to certain assumptions, such as forecasted revenue and related revenue growth rate, the earnings before interest, taxes, depreciation and amortization (EBITDA) margins rate, the weighted average cost of capital and the tax rate which are affected by management’s business plans and expectations about future market or economic conditions.

 

 

How We Addressed the Matter in Our Audit

 

We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company's goodwill impairment review process, including controls over management’s review of the significant assumptions described above.

 

To test the estimated fair value of the Construction Adhesive reporting unit, we performed audit procedures that included, among others, assessing the valuation methodology used by management and testing the significant assumptions discussed above, as well as the underlying data used by the Company in its analysis. For example, we compared the significant assumptions used by management in the prospective financial information to current industry, market and economic trends as well as other relevant factors. We assessed the reasonableness of the forecasted future revenue growth rate and EBITDA margins rate by comparing the forecasts to historical results. We involved our valuation specialists to assist in our evaluation of the valuation models, methodologies and significant assumptions used by the Company, specifically the weighted average cost of capital. We compared the projected tax rates with current enacted rates and assessed the reasonableness of the forecasted profits and losses by jurisdiction by comparing to historical results.

 

/s/ Ernst & Young LLP

 

We have served as the Company’s auditor since 2019.

 

Minneapolis, Minnesota

January 26, 2021

 

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and the Board of Directors of H.B. Fuller Company

 

Opinion on Internal Control Over Financial Reporting

 

We have audited H.B. Fuller Company and subsidiaries’ internal control over financial reporting as of November 28, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, H.B. Fuller Company and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of November 28, 2020, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of November 28, 2020, the related consolidated statements of income, comprehensive income, total equity and cash flows for the year ended November 28, 2020, and the related notes and our report dated January 26, 2021 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

 

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ Ernst & Young LLP

 

Minneapolis, Minnesota

January 26, 2021

 

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and Board of Directors

H.B. Fuller Company

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheet of H.B. Fuller Company and subsidiaries (the Company) as of November 30, 2019, the related consolidated statements of income, comprehensive income, total equity, and cash flows for each of the fiscal years in the two-year period ended November 30, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of November 30, 2019, and the results of its operations and its cash flows for each of the fiscal years in the two-year period ended November 30, 2019, in conformity with U.S. generally accepted accounting principles

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ KPMG LLP

 

We served as the Company’s auditor from 2003 to 2020.

 

Minneapolis, Minnesota

January 24, 2020, except for Note 15, as to which the date is June 29, 2021

 

 

CONSOLIDATED STATEMENTS OF INCOME

H.B. Fuller Company and Subsidiaries

(In thousands, except per share amounts)

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

H.B. Fuller Company and Subsidiaries

(In thousands)

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

CONSOLIDATED BALANCE SHEETS

H.B. Fuller Company and Subsidiaries

(In thousands, except share and per share amounts)

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

CONSOLIDATED STATEMENTS OF TOTAL EQUITY

H.B. Fuller Company and Subsidiaries

(In thousands)

 

 

 

CONSOLIDATED STATEMENTS of CASH FLOWS

H.B. Fuller Company and Subsidiaries

(In thousands)

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

H.B. Fuller Company and Subsidiaries

(In thousands, except share and per share amounts)

 

Note 1: Nature of Business and Summary of Significant Accounting Policies

 

Nature of Business

 

H.B. Fuller Company and our subsidiaries formulate, manufacture and market specialty adhesives, sealants, coatings, polymers, tapes, encapsulants, additives and other specialty chemical products globally, with sales operations in 35 countries in North America, Europe, Latin America, the Asia Pacific region, India, the Middle East and Africa.

 

As of November 30, 2019, we had five reportable segments: Americas Adhesives, EIMEA (Europe, India, Middle East and Africa), Asia Pacific, Construction Adhesives and Engineering Adhesives. As of the beginning of fiscal 2020, we realigned our operating segment structure and now have three reportable segments: Hygiene, Health and Consumable Adhesives, Engineering Adhesives and Construction Adhesives. The change in operating segments is based on how we have organized the company to make operating decisions and assess business performance. Prior period segment information has been recast retrospectively to reflect the realignment. In 2020, as a percentage of total net revenue by operating segment, Hygiene, Health and Consumable Adhesives accounted for 48 percent, Engineering Adhesives 39 percent and Construction Adhesives 13 percent.

 

Our Hygiene, Health and Consumable Adhesives operating segment produces and supplies a full range of specialty industrial adhesives such as thermoplastic, thermoset, reactive, water-based and solvent-based products for applications in various markets, including packaging (food and beverage containers, flexible packaging, consumer goods, package integrity and re-enforcement, and non-durable goods), converting (corrugation, folding carton, tape and label, paper converting, envelopes, books, multi-wall bags, sacks, and tissue and towel), nonwoven and hygiene (disposable diapers, feminine care and medical garments) and health and beauty.

 

The Engineering Adhesives operating segment produces and supplies high performance industrial adhesives such as reactive, light cure, two-part liquids, polyurethane, silicone, film and fast cure products to the durable assembly (appliances and filters), performance wood (windows, doors and wood flooring) and textile (footwear and sportswear), transportation, electronics, medical, clean energy, aerospace and defense, appliance, heavy machinery and insulating glass markets.

 

The Construction Adhesives operating segment includes products used for tile setting (adhesives, grouts, mortars, sealers and levelers), the commercial roofing industry (pressure-sensitive adhesives, tapes and sealants) and heating, ventilation and air conditioning and insulation applications (duct sealants, weather barriers and fungicidal coatings and block fillers). This operating segment also includes caulks and sealants for the consumer market and professional trade, sold through retailers, primarily in Australia.

 

Principles of Consolidation

 

The Consolidated Financial Statements include the accounts of H.B. Fuller Company and its wholly-owned and majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. Investments in affiliated companies in which we exercise significant influence, but which we do not control, are accounted for in the Consolidated Financial Statements under the equity method of accounting. As such, consolidated net income includes our equity portion in current earnings of such companies, after elimination of intercompany profits. Investments in which we do not exercise significant influence (generally less than a 20 percent ownership interest) are accounted for using the measurement alternative.

 

Our 50 percent ownership in Sekisui-Fuller Company, Ltd., our Japan joint venture, is accounted for under the equity method of accounting as we do not exercise control over the investee. In fiscal years 2020, 2019 and 2018, this equity method investment was not significant as defined in Regulation S-X under the Securities Exchange Act of 1934. As such, financial information as of November 28, 2020, November 30, 2019 and December 1, 2018 for Sekisui-Fuller Company, Ltd. is not required.

 

Our fiscal year ends on the Saturday closest to November 30. Fiscal year-end dates were November 28, 2020, November 30, 2019 and December 1, 2018 for 2020, 2019 and 2018, respectively.

 

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Use of Estimates

 

Preparation of the Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Revenue Recognition

 

We sell a variety of adhesives, sealants and other specialty chemical products to a diverse customer base. The vast majority of our arrangements contain a single performance obligation to transfer manufactured goods to the customer as governed by an individual purchase order.

 

We recognize revenue at the amount of consideration to which we expect to be entitled in exchange for transferring the promised goods to the customer. The transaction price includes an estimation of any variable amounts of consideration to which we will be entitled. The most common forms of variable consideration within our arrangements are customer rebates, which are recorded as a reduction to revenue at the time of the initial sale using the expected value method. The expected value method is the sum of probability-weighted amounts in a range of possible consideration amounts and is based on a consideration of historical, current and forecast information. Changes in estimates are updated each reporting period. There are no material instances where variable consideration is constrained and not recorded at the initial time of sale. Product returns are recorded as a reduction to revenue based on historical experience and anticipated sales returns that occur in the normal course of business. We primarily have assurance-type warranties that do not result in separate performance obligations. We have elected to present revenue net of sales and other similar taxes.

 

We recognize revenue when control of goods is transferred to the customer. For the vast majority of our arrangements, control transfers at a point in time either upon shipment or upon delivery of the goods to the customer. The timing of transfer of control is determined considering the timing of the transfer of legal title, physical possession, and risks and rewards of goods to the customer.

 

We record shipping and handling revenue in net revenue and outbound shipping and handling costs in cost of goods sold. The majority of our shipping and handling activities are performed prior to transfer of control of the goods to the customer. For those arrangements where we provide shipping and handling services after control of the goods has transferred to the customer, we have elected the practical expedient allowed under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 606 to account for these activities as a fulfillment cost rather than as a separate performance obligation.

 

Provisions for sales returns are estimated based on historical experience, and are adjusted for known returns, if material. Customer incentive programs (primarily volume purchase rebates) and arrangements such as cooperative advertising, slotting fees and buy-downs are recorded as a reduction of net revenue in accordance with ASC 606. Customer incentives recorded in the Consolidated Statements of Income as a reduction of net revenue, were $34,860, $22,795 and $21,265 in 2020, 2019 and 2018, respectively.

 

For certain products, consigned inventory is maintained at customer locations. For this inventory, revenue is recognized in the period that the inventory is consumed. Sales to distributors require a distribution agreement or purchase order. As a normal practice, distributors do not have a right of return.

 

Cost of Sales

 

Cost of sales includes raw materials, container costs, direct labor, manufacturing overhead, freight costs, and other less significant indirect costs related to the production of our products.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative (“SG&A”) expenses include sales and marketing, research and development, technical and customer service, finance, legal, human resources, general management and similar expenses.

 

Income Taxes

 

The income tax provision is computed based on income before income from equity method investments included in the Consolidated Statement of Income. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Enacted statutory tax rates applicable to future years are applied to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances reduce deferred tax assets when it is not more-likely-than-not that a tax benefit will be realized. See Note 11 for further information.

 

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Acquisition Accounting

 

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

 

	●	Identifying the acquirer,
	●	Determining the acquisition date,

	●	Recognizing and measuring the identifiable assets acquired and the liabilities assumed, and
	●	Recognizing and measuring goodwill or a gain from a bargain purchase

 

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

 

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

 

Cash Equivalents

 

Cash equivalents are highly liquid instruments with an original maturity of three months or less. We review cash and cash equivalent balances on a bank by bank basis to identify book overdrafts. Book overdrafts occur when the amount of outstanding checks exceed the cash deposited at a given bank. Book overdrafts, if any, are included in trade payables in our Consolidated Balance Sheets and in operating activities in our Consolidated Statements of Cash Flows.

 

Restrictions on Cash

 

There were no restrictions on cash as of November 28, 2020. There are no contractual or regulatory restrictions on the ability of consolidated and unconsolidated subsidiaries to transfer funds to us, except for typical statutory restrictions which prohibit distributions in excess of net capital or similar tests. The majority of our cash in non-U.S. locations is considered indefinitely reinvested.

 

Trade Receivables and Allowances

 

Trade receivables are recorded at the invoiced amount and do not bear interest. Allowances are maintained for doubtful accounts, credits related to pricing or quantities shipped and early payment discounts. The allowance for doubtful accounts includes an estimate of future uncollectible receivables based on the aging of the receivable balance and our collection experience. The allowance also includes specific customer accounts when it is probable that the full amount of the receivable will not be collected. See Note 4 for further information.

 

Inventories

 

Inventories are recorded at cost (not in excess of net realizable value) as determined by the weighted-average cost method and are valued at the lower of cost or net realizable value.

 

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Investments

 

Investments with a value of $9,006 and $5,062 represent the cash surrender value of life insurance contracts as of November 28, 2020 and November 30, 2019, respectively. These assets are held to primarily support supplemental pension plans and are recorded in other assets in the Consolidated Balance Sheets. The corresponding gain or loss associated with these contracts is reported in earnings each period as a component of other income, net.

 

Equity Investments

 

Investments in an entity where we own less than 20% of the voting stock of the entity and do not exercise significant influence over operating and financial policies of the entity are accounted for using the measurement alternative at cost less impairment plus or minus observable price changes in orderly transactions. We have a policy in place to review our investments at least annually, to evaluate the accounting method and identify observable price changes that could indicate impairment. If we believe that an impairment exists, it is our policy to calculate the fair value of the investment and recognize as impairment any amount by which the carrying value exceeds the fair value of the investment. We did not have any impairment of our equity investments for the years ended November 28, 2020, November 30, 2019 and December 1, 2018. The book value of the equity investments was $1,669 as of November 28, 2020 and $1,667 as of November 30, 2019.

 

Property, Plant and Equipment

 

Property, plant and equipment are carried at cost and depreciated over the useful lives of the assets using the straight-line method. Estimated useful lives range from 20 to 40 years for buildings and improvements, 3 to 20 years for machinery and equipment, and the shorter of the lease or expected life for leasehold improvements. Fully depreciated assets are retained in property and accumulated depreciation accounts until removed from service. Upon disposal, assets and related accumulated depreciation are removed. Upon sale of an asset, the difference between the proceeds and remaining net book value is charged or credited to other income, net on the Consolidated Statements of Income. Expenditures that add value or extend the life of the respective assets are capitalized, while expenditures that are typical recurring repairs and maintenance are expensed as incurred. Interest costs associated with construction and implementation of property, plant and equipment of $565, $416 and $285 were capitalized in 2020, 2019 and 2018, respectively.

 

Goodwill

 

We evaluate our goodwill for impairment annually at the beginning of the fourth quarter or earlier upon the occurrence of substantive unfavorable changes in economic conditions, industry trends, costs, cash flows or ongoing declines in market capitalization. The quantitative impairment test requires judgment, including the identification of reporting units, the assignment of assets, liabilities and goodwill to reporting units, and the determination of fair value of each reporting unit. The impairment test requires the comparison of the fair value of each reporting unit with its carrying amount, including goodwill. In performing the impairment test, we determined the fair value of our reporting units through the income approach by using discounted cash flow (“DCF”) analyses. Determining fair value requires the company to make judgments about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows. The cash flows employed in the DCF analysis for each reporting unit are based on the reporting unit's budget, long-term business plan and recent operating performance. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting unit and market conditions. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered to not be impaired. If the carrying value exceeds estimated fair value, an impairment charge is recorded for any excess of the carrying value over the estimated fair value. Based on the analysis performed for our fiscal 2020 annual impairment test, there were no indications of impairment for any of our reporting units. See Note 5 for further information.

 

Intangible Assets

 

Intangible assets include patents, customer lists, technology, trademarks and other intangible assets acquired from independent parties and are amortized on a straight-line basis with estimated useful lives ranging from 3 to 20 years. The straight-line method of amortization of these assets reflects an appropriate allocation of the costs of the intangible assets to earnings in proportion to the amount of economic benefits obtained in each reporting period.

 

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Impairment of Long-Lived Assets

 

Our long-lived assets are tested for impairment whenever events or circumstances indicate that a carrying amount of an asset (asset group) may not be recoverable. An impairment loss would be measured and recognized when the carrying amount of an asset (asset group) exceeds the estimated undiscounted future cash flows expected to result from the use of the asset (asset group) and its eventual disposition. The impairment loss to be recorded would be the excess of the asset's carrying value over its fair value. Fair value is generally determined using a DCF analysis or other valuation technique. Costs related to internally developed intangible assets are expensed as incurred.

 

Foreign Currency Translation

 

Assets and liabilities of non-U.S. functional currency entities are translated to U.S. dollars at period-end exchange rates, and the resulting gains and losses arising from the translation of those net assets are recorded as a cumulative translation adjustment, a component of accumulated other comprehensive income (loss) in stockholders' equity. Revenues and expenses are translated using average exchange rates during the year. Foreign currency transaction gains and losses are included in other income, net in the Consolidated Statements of Income.

 

We consider a subsidiary’s sales price drivers, currency denomination of sales transactions and inventory purchases to be the primary indicators in determining a foreign subsidiary’s functional currency. Our subsidiaries in certain European countries have a functional currency different than their local currency. All other foreign subsidiaries, which are located in North America, Latin America, Europe and the Asia Pacific region, have the same local and functional currency.

 

Pension and Other Postretirement Benefits

 

We sponsor defined-benefit pension plans in both the U.S. and non-U.S. entities. Also in the U.S., we sponsor other postretirement plans for health care and life insurance benefits. Expenses and liabilities for the pension plans and other postretirement plans are actuarially calculated. These calculations are based on our assumptions related to the discount rate, expected return on assets, projected salary increases, health care cost trend rates and mortality rates. The discount rate assumption is determined using an actuarial yield curve approach, which results in a discount rate that reflects the characteristics of the plan. The approach identifies a broad population of corporate bonds that meet the quality and size criteria for the particular plan. We use this approach rather than a specific index that has a certain set of bonds that may or may not be representative of the characteristics of our particular plan. Our expected long-term rate of return on U.S. plan assets was based on our target asset allocation assumption of 60 percent equities and 40 percent fixed income. Management, in conjunction with our external financial advisors, determines the expected long-term rate of return on plan assets by considering the expected future returns and volatility levels for each asset class that are based on historical returns and forward-looking observations. The expected long-term rate of return on plan assets assumption used in each non-U.S. plan is determined on a plan-by-plan basis for each local jurisdiction and is based on expected future returns for the investment mix of assets currently in the portfolio for that plan. Management, in conjunction with our external financial advisors, develops expected rates of return for each plan, considers expected long-term returns for each asset category in the plan, reviews expectations for inflation for each local jurisdiction, and estimates the impact of active management of the plan’s assets. Note 10 includes disclosure of assumptions employed in these measurements for both the non-U.S. and U.S. plans.

 

Asset Retirement Obligations

 

We recognize asset retirement obligations ("ARO") in the period in which we have an existing legal obligation associated with the retirement of a tangible long-lived asset, and the amount can be reasonably estimated. The ARO is recognized at fair value when the liability is incurred. Upon initial recognition of a liability, that cost is capitalized as part of the related long-lived asset and depreciated on a straight-line basis over the remaining estimated useful life of the related asset. We have recognized a liability related to special handling of asbestos related materials in certain facilities for which we have plans or expectation of plans to undertake a major renovation or demolition project that would require the removal of asbestos or have plans or expectation of plans to exit a facility. In addition, we have determined that we have facilities with some level of asbestos that will require abatement action in the future. Once the probability and timeframe of an action are determined, we apply certain assumptions to determine the related liability and asset. These assumptions include the use of inflation rates, the use of credit adjusted risk-free discount rates and the estimation of costs to handle asbestos related materials. The recorded liability is required to be adjusted for changes resulting from the passage of time and/or revisions to the timing or the amount of the original estimate. The asset retirement obligation liability was $2,948 and $2,952 at November 28, 2020 and November 30, 2019, respectively

.

 

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Environmental Costs

 

Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments are made, or remedial efforts are probable, and the costs can be reasonably estimated. The timing of these accruals is generally no later than the completion of feasibility studies.

 

Contingent Consideration Liability

 

Concurrent with business acquisitions, we enter into agreements that require us to pay the sellers a certain amount based upon a formula related to the entity’s financial results. The change in fair value of the contingent consideration liability is recorded in SG&A expenses in the Consolidated Statements of Income.

 

Share-based Compensation

 

We have various share-based compensation programs which provide for equity awards, including non-qualified stock options, incentive stock options, restricted stock units, performance awards and deferred compensation. We use the straight-line attribution method to recognize compensation expense associated with share-based awards based on the fair value on the date of grant, net of the estimated forfeiture rate. Expense is recognized over the requisite service period related to each award, which 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 retirement based on the terms of the plan. The fair value of stock options is estimated using the Black-Scholes option pricing model. All of our stock compensation expense is recorded in SG&A expenses in the Consolidated Statements of Income. See Note 9 for additional information.

 

Earnings per Share

 

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 awards, which computes total employee proceeds as the sum of (a) the amount the employee must pay upon exercise of the award and (b) the amount of unearned share-based compensation costs attributed to future services. Share-based compensation awards for which total employee proceeds exceed the average market price over the applicable period have an antidilutive effect on earnings per share, and accordingly, are excluded from the calculation of diluted earnings per share. The computations for basic and diluted earnings per share are as follows:

 

(in thousands, except per share data)		2020				2019				2018
Net income attributable to H.B. Fuller		$	123,719			$	130,817			$	171,208
Weighted-average common shares – basic			52,039				50,920				50,591
Equivalent shares from share-based compensation plans			481				1,063				1,384
Weighted-average common and common equivalent shares – diluted			52,520				51,983				51,975
Basic earnings per share		$	2.38			$	2.57			$	3.38
Diluted earnings per share		$	2.36			$	2.52			$	3.29

 

Share-based compensation awards for 3,982,275, 2,951,697 and 1,905,411 shares for 2020, 2019 and 2018, respectively, were excluded from the diluted earnings per share calculation because they were antidilutive.

 

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Financial Instruments and Derivatives

 

As a part of our ongoing operations, we are exposed to market risks such as changes in foreign currency exchange rates and interest rates. To manage these risks, we may enter into derivative transactions pursuant to our established policies.

 

Our objective is to balance, where possible, non-functional currency denominated assets to non-functional currency denominated liabilities to have a natural hedge and minimize foreign exchange impacts. We minimize risks from foreign currency exchange rate fluctuations through normal operating and financing activities and, when deemed appropriate, through the use of derivative instruments. Derivatives consisted primarily of forward currency contracts used to manage foreign currency denominated assets and liabilities. For derivative instruments outstanding that were not designated as hedges for accounting purposes, the gains and losses related to mark-to-market adjustments were recognized as other income or expense in the income statement during the periods the derivative instruments were outstanding. To manage exposure to currency rate movements on expected cash flows, the company may enter into cross-currency swap agreements. 

 

The company manages interest expense using a mix of fixed and floating rate debt.  To manage exposure to interest rate movements and to reduce borrowing costs, the company may enter into interest rate swap agreements.

 

Changes in the fair values of derivatives are recorded in net earnings or other comprehensive income, based on the type of derivative, and whether the instrument is designated and effective as a hedge transaction. Gains or losses on derivative instruments reported in accumulated other comprehensive income (loss) are reclassified to earnings in the period the hedged item affects earnings. Any ineffectiveness is recognized in earnings in the current period. We maintain master netting arrangements that allow us to net settle contracts with the same counterparties; we do not elect to offset amounts in our Consolidated Balance Sheet.  These arrangements generally do not call for collateral. We do not enter into any speculative positions with regard to derivative instruments. See Note 12 for further information regarding our financial instruments.

 

Purchase of Company Common Stock

 

Under the Minnesota Business Corporation Act, repurchased stock is included in authorized shares, but is not included in shares outstanding. The excess of the repurchase cost over par value is charged to additional paid-in capital. When additional paid-in capital is exhausted, the excess reduces retained earnings. We repurchased 72,000, 73,043 and 71,181 shares of common stock in 2020, 2019 and 2018, respectively, in connection with the statutory minimum tax withholding related to vesting of restricted stock.

 

Change in Accounting Principle – Leases

 

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Subtopic 842). This ASU changes accounting for leases and requires lessees to recognize the assets and liabilities arising from all leases, including those classified as operating leases under previous accounting guidance, on the balance sheet and requires disclosure of key information about leasing arrangements to increase transparency and comparability among organizations. In December 2018, the FASB also issued ASU No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, which clarifies the accounting for lessors for variable payments that relate to both a lease component and a nonlease component and is effective in the same timeframe as ASU 2016-02, and ASU No. 2019-01, Leases (Topic 842): Codification Improvements, which clarifies the transition disclosure requirements. 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. 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 have incorporated into our assessment and adoption of ASU No. 2016-02.

 

We adopted these ASUs and related standards during the first quarter ended February 29, 2020 using the modified retrospective method of adoption. As a result of the adoption of these ASUs, as of December 1, 2019 we recorded $28,254 of right-of-use assets and liabilities on the balance sheet. Adoption of these ASUs did not have a significant impact on the Consolidated Statements of Income. We have included the disclosures required by these ASUs in Note 6.

 

Change in Accounting Principle – Revenue Recognition

 

In May 2014, 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. We adopted this ASU during the quarter ended March 2, 2019 using the modified retrospective method of adoption. As a result of the adoption of this ASU, we recorded an increase to opening retained earnings of $1,776 as of December 1, 2018 related to accelerated recognition for arrangements where we provide shipping and handling services after control of the goods has transferred to the customer. Prior periods were not restated. We have included the disclosures required by this ASU in Note 15.

 

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In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This ASU provides guidance on recording revenue on a gross basis versus a net basis based on the determination of whether an entity is a principal or an agent when another party is involved in providing goods or services to a customer. The amendments in this ASU affect the guidance in ASU No. 2014-09 and were adopted during the quarter ended March 2, 2019 with ASU No. 2014-09 as discussed above.

 

Change in Accounting Principle – Income Tax Impact of Intra-Entity Transfers of Assets Other Than Inventory

 

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU changes the timing of income tax recognition for an intercompany sale of assets. The ASU requires the seller’s tax effects and the buyer’s deferred taxes to be recognized immediately upon the sale instead of deferring accounting for the income tax implications until the assets are sold to a third party or recovered through use. We adopted this ASU during the quarter ended March 2, 2019. We recorded a decrease to opening retained earnings of $733 as of December 1, 2018 as a result of the adoption of this ASU.

 

New Accounting Pronouncements

 

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides practical expedients and exception for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. This ASU is applicable to our contracts and hedging relationships that reference LIBOR. The guidance is effective immediately and may be applied through December 31, 2022. The FASB also issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope in January 2021. It clarifies that certain optional expedients and exceptions in Topic 848 apply to derivatives that are affected by the discounting transition. The amendments in this ASU affect the guidance in ASU No. 2020-04 and are effective in the same timeframe as ASU No. 2020-04. We are evaluating whether to apply any of the expedients and/or exceptions included in these ASUs.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. This ASU requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The FASB also issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses in November 2018, ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments in April 2019 and ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments in November 2019. ASU No. 2018-19 clarifies that receivables arising from operating leases are within the scope of Topic 842, Leases. ASU No. 2019-04 and ASU No. 2019-11 clarify various scoping and other issues arising from ASU No. 2016-13. The amendments in this ASU affect the guidance in ASU No. 2016-13 and are effective in the same timeframe as ASU No. 2016-13. Our effective date for adoption of these ASUs is our fiscal year beginning November 29, 2020. Based on the conducted analyses and due to the nature and extent of our assets in scope of this ASU (accounts receivable) and the historical, current and expected credit quality of our customers, we have determined that this ASU will not have a material impact on our Consolidated Statements of Income or the Balance Sheet.

 

Recently issued accounting standards or pronouncements not disclosed above have been excluded as they are not relevant to the company.

 

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Note 2: Acquisitions and Divestiture

 

D.H.M. Adhesives, Inc.

 

On February 3, 2020, we acquired certain assets of D.H.M. Adhesives, Inc. (“D.H.M.”) for approximately $9,500 which was funded through existing cash. In addition, the agreement requires us to pay contingent consideration of up to approximately $8,100 based upon a formula related to revenue during the fiscal years ended November 27, 2021 and December 3, 2022. D.H.M., headquartered in Calhoun, Georgia, is a provider of hotmelt adhesives. The acquisition fair value measurement was final as of May 30, 2020 and includes goodwill of $1,063 and customer relationship intangible of $11,900. The fair value of the contingent consideration liability as of the date of acquisition was $5,000 resulting in a final purchase price of $14,500. See Note 13 for further discussion of the fair value of the contingent consideration liability. Goodwill is deductible for tax purposes. D.H.M. and the related goodwill are reported in our Hygiene, Heath and Consumable Adhesives operation segment. The D.H.M. acquisition does not represent a material business combination and therefore pro forma financial information is not provided.

 

Ramapo Sales and Marketing, Inc.

 

On May 17, 2019, we acquired certain assets from a window and insulating glass sealants sales and distribution company, Ramapo Sales and Marketing, Inc. (“Ramapo”), headquartered in Charleston, South Carolina. This acquisition supports the integration of the insulating glass business that we acquired as part of the Royal Adhesives acquisition. The purchase price of $8,292 was funded through existing cash. In addition, we were required to pay up to $3,400 in contingent consideration based upon financial results for the twelve months ended December 31, 2019. Existing receivables of $2,166 from Ramapo were effectively settled as a result of the acquisition. The acquisition fair value measurement was final as of May 30, 2020 and includes goodwill of $165, customer relationship intangible of $8,800, and additional acquired assets of $4,148. The fair value of the contingent consideration liability as of the date of the acquisition was $2,654, resulting in a final purchase price of $10,947. During the second quarter of 2020, the contingent consideration liability was finalized and adjusted to a final balance of $767. Ramapo and the related goodwill are reported in our Engineering Adhesives operating segment.

 

Dalton Holdings, LLC

 

On July 1, 2019, we completed the sale of Dalton Holdings, LLC (“Dalton Holdings”), which primarily manufactures surfactants and thickeners, within the Americas Adhesives segment. The sale resulted in a pre-tax gain on sale of $18,764, which is recorded in other income, net in the Consolidated Statements of Income for the year ended November 30, 2019.

 

Note 3: Restructuring Actions

 

The company has approved restructuring plans consisting of consolidation plans, organizational changes and other actions related to the reorganization of our business into three segments, the integration of the operations of Royal Adhesives with the operations of the company and other actions to optimize operations during the years ended November 28, 2020 and November 30, 2019. The following table summarizes the pre-tax distribution of charges under these restructuring plans by income statement classification:

 

		November 28, 2020				November 30, 2019
Cost of sales		$	1,013			$	2,082
Selling, general and administrative			3,567				12,453
		$	4,580			$	14,535

 

A summary of the restructuring liability is presented below:

 

		Employee-
		Related				Asset-Related				Other				Total
Balance at end December 1, 2018		$	4,256			$	-			$	-			$	4,256
Expense incurred			9,140				1,929				3,466				14,535
Non-cash charges			-				(968	)			-				(968	)
Cash payments			(3,494	)			(961	)			(2,542	)			(6,997	)
Foreign currency translation			(72	)			-				-				(72	)
Balance at end November 30, 2019		$	9,830			$	-			$	924			$	10,754
Expense incurred			2,898				-				1,681				4,579
Cash payments			(7,051	)			-				(2,357	)			(9,408	)
Foreign currency translation			157				-				-				157
Balance at end November 28, 2020		$	5,834			$	-			$	248			$	6,082

 

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Non-cash charges include accelerated depreciation resulting from the cessation of use of certain long-lived assets. Restructuring liabilities have been classified as a component of other accrued expenses on the Consolidated Balance Sheets.

 

Note 4: Supplemental Financial Statement Information

 

Statement of Income Information

 

Additional details of income statement amounts for 2020, 2019 and 2018 are as follows:

 

		2020				2019				2018
Foreign currency transaction losses, net		$	(3,078	)		$	(1,156	)		$	(4,450	)
(Loss) gain on disposal of assets			(86	)			24,304				2,177
Net periodic pension benefit			17,902				13,661				16,870
Other, net			660				1,134				3,458
Total other income, net		$	15,398			$	37,943			$	18,055
Research and development expenses (included in SG&A expenses)		$	36,969			$	36,624			$	35,534

 

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Balance Sheet Information

 

Additional details of balance sheet amounts as of November 28, 2020 and November 30, 2019 are as follows:

 

		2020				2019
Inventories
Raw materials		$	151,026			$	150,338
Finished goods			172,187				186,929
Total inventories		$	323,213			$	337,267
Other current assets
Other receivables		$	18,666			$	26,258
Prepaid income taxes			22,137				23,112
Prepaid taxes other than income taxes			20,270				16,836
Prepaid expenses			19,212				20,862
Assets held for sale			828				3,655
Total other current assets		$	81,113			$	90,723
Property, plant and equipment
Land		$	87,403			$	79,631
Buildings and improvements			393,175				362,114
Machinery and equipment			876,858				808,154
Construction in progress			70,747				54,332
Total, at cost			1,428,183				1,304,231
Accumulated depreciation			(757,439	)			(674,418	)
Net property, plant and equipment		$	670,744			$	629,813
Other assets
Investments and company owned life insurance		$	9,006			$	8,870
Equity method investments			53,863				53,696
Equity investments			1,669				1,667
Long-term deferred income taxes			37,376				29,037
Prepaid pension costs			43,206				28,759
Prepaid postretirement other than pension			73,137				58,307
Operating lease right-of-use assets			28,445				-
Other long-term receivables			16,760				46,887
Other long-term assets			14,751				14,129
Total other assets		$	278,213			$	241,352
Other accrued expenses
Taxes other than income taxes		$	16,893			$	15,031
Miscellaneous services			5,691				5,541
Customer rebates			15,008				11,293
Interest			4,901				4,572
Insurance			184				178
Product liability			501				978
Contingent consideration liability			-				3,400
Current operating lease liabilities			8,706				-
Accrued expenses			32,092				19,752
Total other accrued expenses		$	83,976			$	60,745
Other liabilities
Asset retirement obligations		$	2,948			$	2,952
Long-term deferred income taxes			165,877				177,530
Long-term income tax liability			18,089				10,088
Long-term deferred compensation			8,510				6,929
Postretirement other than pension			2,930				2,879
Noncurrent operating lease liabilities			19,498				-
Long-term accrued payroll tax			7,216				-
Environmental liabilities			3,639				4,657
Other long-term liabilities			50,212				37,155
Total other liabilities		$	278,919			$	242,190

 

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Additional details on the trade receivables allowance for doubtful accounts, credits related to pricing or quantities shipped and early payment discounts for 2020, 2019 and 2018 are as follows:

 

		2020				2019				2018
Balance at beginning of year		$	10,682			$	14,017			$	11,670
Charged to expenses and other adjustments			8,313				2,678				6,445
Write-offs			(6,158	)			(5,947	)			(2,187	)
Foreign currency translation effect			68				(66	)			(1,911	)
Balance at end of year		$	12,905			$	10,682			$	14,017

 

Statement of Comprehensive Income Information

 

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

 

		November 28, 2020
		H.B. Fuller Stockholders												Non-controlling Interest
		Pretax				Tax				Net				Net
Net income attributable to H.B. Fuller and non-controlling interests			-				-			$	123,719			$	69
Other comprehensive income (loss)
Foreign currency translation adjustment¹		$	41,712				-				41,712				30
Defined benefit pension plans adjustment²			5,823				(1,235	)			4,588				-
Interest rate swap³			(15,618	)			3,853				(11,765	)			-
Other cash flow hedges³			6,307				(101	)			6,206				-
Other comprehensive income		$	38,224			$	2,517				40,741				30
Comprehensive income										$	164,460			$	99

 

		November 30, 2019
		H.B. Fuller Stockholders												Non-controlling Interest
		Pretax				Tax				Net				Net
Net income attributable to H.B. Fuller and non-controlling interests			-				-			$	130,817			$	27
Other comprehensive income (loss)
Foreign currency translation adjustment¹		$	(20,409	)			-				(20,409	)			14
Defined benefit pension plans adjustment²			(28,635	)			6,807				(21,828	)			-
Interest rate swap³			(46,254	)			11,223				(35,031	)			-
Other cash flow hedges³			14,429				(609	)			13,820				-
Other comprehensive loss		$	(80,869	)		$	17,421				(63,448	)			14
Comprehensive income										$	67,369			$	41

 

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		December 1, 2018
		H.B. Fuller Stockholders												Non-controlling Interest
		Pretax				Tax				Net				Net
Net income attributable to H.B. Fuller and non-controlling interests			-				-			$	171,208			$	24
Other comprehensive income (loss)
Foreign currency translation adjustment¹		$	(71,222	)			-				(71,222	)			(16	)
Defined benefit pension plans adjustment²			(3,671	)			701				(2,970	)			-
Interest rate swap³			25,819				(6,048	)			19,771				-
Other cash flow hedges³			(4,047	)			(2,688	)			(6,735	)			-
Other comprehensive loss		$	(53,121	)		$	(8,035	)			(61,156	)			(16	)
Comprehensive income										$	110,052			$	8

 

¹ Income taxes are not provided for foreign currency translation relating to indefinite investments in international subsidiaries.

 

² Loss reclassified from accumulated other comprehensive income (loss) 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 expenses.

 

³ Loss reclassified from accumulated other comprehensive income (loss) into earnings is reported in other income, net.

 

Statement of Total Equity Information

 

Components of accumulated other comprehensive income (loss) are as follows:

 

		November 28, 2020
		Total				H.B. Fuller Stockholders				Non- controlling Interests
Foreign currency translation adjustment		$	(106,140	)		$	(106,005	)		$	(135	)
Interest rate swap, net of taxes of $8,153			(25,103	)			(25,103	)			-
Cash flow hedges, net of taxes of ($121)			7,969				7,969				-
Defined benefit pension plans adjustment, net of taxes of $80,656			(161,379	)			(161,379	)			-
Reclassification of AOCI tax effects			(18,341	)			(18,341	)			-
Total accumulated other comprehensive loss		$	(302,994	)		$	(302,859	)		$	(135	)

 

		November 30, 2019
		Total				H.B. Fuller Stockholders				Non- controlling Interests
Foreign currency translation adjustment		$	(147,821	)		$	(147,716	)		$	(105	)
Interest rate swap, net of taxes of ($4,300)			(13,338	)			(13,338	)			-
Cash flow hedges, net of taxes of $21			1,763				1,763				-
Defined benefit pension plans adjustment, net of taxes of $81,891			(165,968	)			(165,968	)			-
Reclassification of AOCI tax effects			(18,341	)			(18,341	)			-
Total accumulated other comprehensive loss		$	(343,705	)		$	(343,600	)		$	(105	)

 

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		December 1, 2018
		Total				H.B. Fuller Stockholders				Non- controlling Interests
Foreign currency translation adjustment		$	(127,398	)		$	(127,307	)		$	(91	)
Interest rate swap, net of taxes of ($7,231)			21,693				21,693				-
Cash flow hedges, net of taxes of $588			(12,057	)			(12,057	)			-
Defined benefit pension plans adjustment, net of taxes of $75,083			(144,140	)			(144,140	)			-
Reclassification of AOCI tax effects			(18,341	)			(18,341	)			-
Total accumulated other comprehensive loss		$	(280,243	)		$	(280,152	)		$	(91	)

 

Note 5: Goodwill and Other Intangible Assets

 

Goodwill balances by reportable segment as of November 28, 2020 and November 30, 2019 consisted of the following:

 

		2020				2019
Hygiene, Health and Consumable Adhesives		$	332,909			$	321,274
Engineering Adhesives			667,863				649,555
Construction Adhesives			311,231				310,979
Total		$	1,312,003			$	1,281,808

 

Additional details related to goodwill for 2020 and 2019 are as follows:

 

		2020				2019
Balance at beginning of year		$	1,281,808			$	1,305,171
Ramapo acquisition			(746	)			910
D.H.M acquisition			1,063				-
Dalton Holdings divestiture			-				(15,757	)
Foreign currency translation effect			29,878				(8,516	)
Balance at end of year		$	1,312,003			$	1,281,808

 

We evaluate our goodwill for impairment annually at the beginning of the fourth quarter or earlier upon the occurrence of substantive unfavorable changes in economic conditions, industry trends, costs, cash flows, or ongoing declines in market capitalization. The quantitative impairment test requires judgment, including the identification of reporting units, the assignment of assets, liabilities and goodwill to reporting units, and the determination of fair value of each reporting unit. The impairment test requires the comparison of the fair value of each reporting unit with its carrying amount, including goodwill. In performing the impairment test, we determined the fair value of our reporting units through the income approach by using DCF analyses. Determining fair value requires the company to make judgments about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows. The cash flows employed in the DCF analysis for each reporting unit are based on the reporting unit's budget, long-term business plan, and recent operating performance. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting unit and market conditions. Based on the analysis performed during the fourth quarter of 2020, there were no indications of impairment for any of our reporting units.

 

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

 

Amortizable Intangible Assets		Purchased Technology and Patents				Customer Relationships				Tradename				All Other				Total
As of November 28, 2020
Original cost		$	113,775			$	933,943			$	63,266			$	11,410			$	1,122,394
Accumulated amortization			(53,216	)			(279,586	)			(29,368	)			(4,775	)			(366,945	)
Net identifiable intangibles		$	60,559			$	654,357			$	33,898			$	6,635			$	755,449
Weighted-average useful lives (in years)			13				17				14				12				17
As of November 30, 2019
Original cost		$	109,967			$	913,968			$	62,537			$	27,453			$	1,113,925
Accumulated amortization			(43,351	)			(223,563	)			(24,819	)			(23,273	)			(315,006	)
Net identifiable intangibles		$	66,616			$	690,405			$	37,718			$	4,180			$	798,919
Weighted-average useful lives (in years)			13				17				14				10				17

 

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Amortization expense with respect to amortizable intangible assets was $70,591, $74,091 and $76,490 in 2020, 2019 and 2018, respectively.

 

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

 

Fiscal Year		2021				2022				2023				2024				2025				Thereafter
Amortization Expense		$	70,673			$	68,783			$	65,854			$	60,825			$	58,199			$	431,115

 

The above amortization expense forecast is an estimate. Actual amounts may change from such estimated amounts due to fluctuations in foreign currency exchange rates, additional intangible asset acquisitions, potential impairment, accelerated amortization, or other events.

 

Non-amortizable intangible assets as of November 28, 2020 and November 30, 2019 were $519 and $480, respectively, and relate to trademarks and trade names. The change in non-amortizable assets in 2020 compared to 2019 was due to changes in foreign currency exchange rates.

 

Note 6: Leases

 

We adopted ASU No. 2016-02 and related standards (collectively, “ASC 842”), which replaced previous lease accounting guidance, during the first quarter ended February 29, 2020 using the modified retrospective method of adoption. As a result of electing this transition method, prior periods have not been restated. The adoption of ASC 842 resulted in the recording of right-of-use assets and associated lease liabilities of approximately $28,254 each as of the first day of the quarter ended February 29, 2020. ASC 842 did not have a material impact on our Consolidated Statement of Income. We elected the package of practical expedients permitted under the transition guidance within ASC 842, which includes not reassessing lease classification of existing leases. We did not elect the hindsight practical expedient.

 

As a lessee, the company leases office, manufacturing and warehouse space and equipment. Certain lease agreements include rental payments adjusted annually based on changes in an inflation index. Our leases do not contain material residual value guarantees or material restrictive covenants. Lease expense is recognized on a straight-line basis over the lease term. We determine if an arrangement is a lease upon inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an asset includes the right to obtain substantially all of the economic benefits of the underlying asset and the right to direct how and for what purpose the asset is used.

 

Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The discount rate used to calculate present value is the company’s incremental borrowing rate. We determine the incremental borrowing rate for each lease based primarily on its lease term and the economic environment of the applicable country or region.

 

Certain leases include one or more options to renew, with terms that can extend the lease term up to five years. We include options to renew the lease as part of the right-of-use lease asset and liability when it is reasonably certain we will exercise the option. In addition, certain leases contain termination options with an associated penalty. In general, the company is not reasonably certain to exercise such options.

 

For the measurement and classification of lease agreements, we group lease and non-lease components into a single lease component for all underlying asset classes. Variable lease payments primarily include payments for non-lease components, such as maintenance costs, payments for leased assets used beyond their non-cancelable lease term as adjusted for contractual options to terminate or renew, and payments for non-components such as sales tax. Certain leases contain immaterial variable lease payments based on usage.

 

We also enter into insignificant finance leases.

 

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The components of lease expense are as follows:

 

		November 28, 2020
Operating lease cost		$	12,581
Variable lease cost			4,024
Total net lease cost		$	16,605

 

Supplemental balance sheet information related to leases is as follows:

 

	Location on
	Balance Sheet		November 28, 2020
Operating leases:
Operating lease right-of-use assets	Other assets		$	28,445
Current operating lease liabilities	Other accrued expenses			8,706
Noncurrent operating lease liabilities	Other liabilities			19,498
Total operating lease liabilities			$	28,204

 

The weighted average remaining lease term is 5.6 years and the weighted average discount rate is 3.6% for the company's lease agreements as of November 28, 2020.

 

Supplemental information related to leases is as follows:

		November 28, 2020
Cash paid amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	13,216
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases		$	13,166

 

Maturities of lease liabilities are as follows:

 

Fiscal Year		Amount
2021		$	9,492
2022			6,517
2023			4,945
2024			3,200
2025			1,917
2026 and beyond			4,523
Total			30,594
Less: amounts representing interest			(2,390	)
Present value of future minimum payments			28,204
Less: current obligations			(8,706	)
Noncurrent operating lease liabilities		$	19,498

 

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Disclosures related to periods prior to adoption of new lease standard

 

The minimum lease payments, related to buildings, equipment and vehicles, that are expected to be made in each of the years indicated based on operating leases in effect at November 28, 2020 were:

 

Fiscal Year		2021				2022				2023				2024				2025 and Beyond				Total Minimum Lease Payments
Operating leases		$	11,492			$	7,984			$	5,497			$	4,686			$	8,217			$	37,876

 

Rent expense for all operating leases, which includes minimum lease payments and other charges such as common area maintenance fees, was $19,618 and $20,620 in 2019 and 2018, respectively.

 

Note 7: Notes Payable, Long-Term Debt and Lines of Credit

 

Notes Payable

 

Notes payable were $16,925 and $15,732 at November 28, 2020 and November 30, 2019, respectively. This amount primarily represents various foreign subsidiaries’ other short-term borrowings that were not part of committed lines. The weighted-average interest rates on short-term borrowings were 8.1 percent, 8.9 percent and 9.6 percent in 2020, 2019 and 2018, respectively. Fair values of these short-term obligations approximate their carrying values due to their short maturity. There were no funds drawn from the short-term committed lines at November 28, 2020.

 

Long-Term Debt

 

		Weighted-Average				Fiscal Year				Balance at				Balance at
		Interest Rate at				Maturity				November 28,				November 30,
Long-Term Debt		November 28, 2020				Date				2020				2019
Revolving credit facility			2.15	%			2024			$	-			$	-
Term Loan B1			4.07	%			2024				1,157,650				1,675,650
Public Notes2			4.00	%			2027				300,000				300,000
Public Notes3			4.25	%			2028				300,000				-
Other, including debt issuance cost and discount											(665	)			(12,266	)
Total debt										$	1,756,985			$	1,963,384
Less: current maturities											-				(65,000	)
Total long-term debt, excluding current maturities										$	1,756,985			$	1,898,384

 

¹ Term Loan B, due on October 20, 2024, $2,150,000 variable rate at the London Interbank Offered Rate (LIBOR) plus 2.00 percent (2.15 percent at November 28, 2020); $1,350,000 swapped to various fixed rates as detailed below.

 

² Public Notes, due February 15, 2027, $300,000 4.00 percent fixed.

 

³ Public Notes, due October 15, 2028, $300,000 4.25 percent fixed.

 

Term Loans

 

On October 20, 2017, we entered into a secured term loan credit agreement (“Term Loan B Credit Agreement”) with a consortium of financial institutions under which we established a $2,150,000 term loan (“Term Loan B”) that we used to repay existing indebtedness, finance working capital needs, finance acquisitions, and for general corporate purposes. The Term Loan B Credit Agreement is secured by a security interest in substantially all of the personal property assets of the company and each Guarantor, including 100% of the equity interests in certain domestic subsidiaries and 65% of the equity interests of first-tier foreign subsidiaries together with certain domestic material real property. At November 28, 2020, a balance of $1,157,650 was drawn on the Term Loan B. The interest rate on the Term Loan B is payable at the LIBOR rate plus 2.00 percent (2.15 percent at November 28, 2020). The interest rate is based on a leverage grid. The Term Loan B Credit Agreement expires on October 20, 2024. 

 

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On February 27, 2018, we entered into an interest rate swap agreement to convert $200,000 of our Term Loan B to a fixed rate of 4.589 percent. On October 20, 2017, we entered into interest rate swap agreements to convert $1,050,000 of our Term Loan B to a fixed interest rate of 4.0275%, which amortized down to $925,000 on October 20, 2020. See Note 12 for further discussion of these interest rate swaps.

 

We are subject to mandatory prepayments in the first quarter of each fiscal year equal to 50% of Excess Cash Flow, as defined in the Term Loan B Credit Agreement, of the prior fiscal year less any voluntary prepayments made during that fiscal year. The Excess Cash Flow Percentage (ECF Percentage) shall be reduced to 25% when our Secured Leverage Ratio is below 4.25:1.00 and to 0% when our Secured Leverage Ratio is below 3.75:1.00. The prepayment for the 2020 measurement period was satisfied through amounts prepaid during 2020. We have estimated the 2021 prepayment to be zero.

 

Public Notes

 

On October 20, 2020, we issued $300,000 aggregate principal of 8-year unsecured public notes (“8-year Public Notes”) due October 15, 2028 with a fixed coupon of 4.25 percent. Proceeds from this debt issuance were used to prepay $300,000 of our Term Loan B.

 

On February 14, 2017, we issued $300,000 aggregate principal of 10-year unsecured public notes (“10-year Public Notes”) due February 15, 2027 with a fixed coupon of 4.00 percent. Proceeds from this debt issuance were used to repay $138,000 outstanding under the revolving credit facility at that time and prepay $158,750 of our Term Loan A. On February 14, 2017, we entered into an interest rate swap agreement to convert $150,000 of the $300,000 Public Notes to a variable interest rate of 1-month LIBOR plus 1.86 percent and on May 1, 2020, we terminated the swap. See Note 12 for further discussion of this interest rate swap.

 

The Public Notes are senior unsecured obligations of the company and will rank equally with the company’s other unsecured and unsubordinated debt from time to time outstanding.

 

Fair Value of Long-Term Debt

 

Long-term debt had an estimated fair value of $1,811,562 and $2,016,516 as of November 28, 2020 and November 30, 2019, 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.

 

Long-term Debt Maturities

 

Maturities of long-term debt for the next five fiscal years are as follows:

 

Fiscal Year		2021				2022				2023				2024				2025				Thereafter
Long-term debt obligations		$	-			$	-			$	-			$	1,157,650			$	-			$	600,000

 

Revolving Credit Facility

 

On October 20, 2020, we amended and restated our revolving credit facility. The revolving credit facility is secured along with the Term Loan B Credit Agreement, by a first-priority security interest in substantially all of the personal property assets of the company and each Guarantor, including 100% of the equity interests in certain domestic subsidiaries and 65% of the equity interests of first-tier foreign subsidiaries. Interest on the revolving credit facility is payable at the LIBOR plus 2.00 percent (2.15 percent at November 28, 2020). A facility fee of 0.25 percent of the unused commitment under the revolving credit facility is payable quarterly. The interest rates and the facility fee are based on a leverage grid. The revolving credit facility matures July 22, 2024.

 

As of November 28, 2020, amounts related to our revolving credit facility was as follows:

 

		Committed				Drawn				Unused
Revolving credit facility		$	400,000			$	-			$	391,009

 

The secured, multi-currency revolving credit facility can be drawn upon for general corporate purposes up to a maximum of $400,000, less issued letters of credit. At November 28, 2020, letters of credit reduced the available amount under the revolving credit facility by $8,991.

 

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Covenants

 

The secured Term Loan B Credit Agreement and secured revolving credit facility are subject to certain covenants and restrictions. Restrictive covenants include, but are not limited to, limitations on secured and unsecured borrowings, interest coverage, intercompany transfers and investments, third party investments, dispositions of assets, leases, liens, dividends and distributions, and contains a maximum secured debt to trailing twelve months EBITDA requirement.  Certain covenants become less restrictive after meeting leverage or other financial ratios. In addition, we cannot be a member of any consolidated group as defined for income tax purposes other than with our subsidiaries. At November 28, 2020 and November 30, 2019, all financial covenants were met.

 

The Indenture under which the Public Notes have been issued contains covenants imposing certain limitations on the ability of the company to incur liens or enter into sales and leaseback transactions. It also provides for customary events of default (subject in certain cases to customary grace and cure periods), which include among other things nonpayment, breach of covenants in the Indenture and certain events of bankruptcy and insolvency. If an event of default occurs and is continuing with respect to the Public Notes, the Trustee or holders of at least 25% in principal amount outstanding of the Public Notes may declare the principal and the accrued and unpaid interest, if any, on all of the outstanding Public Notes to be due and payable. These covenants and events of default are subject to a number of important qualifications, limitations and exceptions that are described in the Indenture.

 

Note 8: Stockholders' Equity

 

Preferred Stock

 

The Board of Directors is authorized to issue up to 10,045,900 shares of preferred stock that may be issued in one or more series and with such stated value and terms as the Board of Directors may determine.

 

Common Stock

 

There were 160,000,000 shares of common stock with a par value of $1.00 authorized and 51,906,663 and 51,241,190 shares issued and outstanding at November 28, 2020 and November 30, 2019, respectively.

 

On April 6, 2017, the Board of Directors authorized a share repurchase program of up to $200,000 of our outstanding common shares for a period of up to five years. Under the program, we are authorized to repurchase shares for cash on the open market, from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases is dependent on price, market conditions and applicable regulatory requirements. Upon repurchase of the shares, we reduce our common stock for the par value of the shares with the excess being applied against additional paid-in capital. This authorization replaces the September 30, 2010 authorization to repurchase shares. We did not repurchase any shares during 2020, 2019 and 2018 under our share repurchase program. Up to $187,170 of our outstanding common shares may still be repurchased under the current share repurchase program.

 

Common Shares Outstanding		2020				2019				2018
Beginning balance			51,241,190				50,732,796				50,388,839
Stock options exercised			397,456				378,734				198,849
Deferred compensation paid			118,742				5,354				7,152
Restricted units vested			221,275				197,349				209,137
Shares withheld for taxes			(72,000	)			(73,043	)			(71,181	)
Ending balance			51,906,663				51,241,190				50,732,796

 

Note 9: Accounting for Share-Based Compensation

 

Overview

 

We have various share-based compensation programs, which provide for equity awards including non-qualified stock options, incentive stock options, restricted stock units, performance awards and deferred compensation. These equity awards fall under several plans and are described below.

 

Share-based Compensation Plans

 

We currently grant stock options and restricted stock units under equity compensation and deferred compensation plans.

 

Stock options are granted to officers and key employees at prices not less than the fair market value at the date of grant. Non-qualified stock options are generally exercisable beginning one year from the date of grant in cumulative yearly amounts of 33.3 percent. Incentive stock options are based on certain performance-based criteria and are generally exercisable at a stated date when the performance criteria is measured. Stock options generally have a contractual term of 10 years. Options exercised represent newly issued shares.

 

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Restricted stock awards are nonvested stock-based awards that include grants of restricted stock units. Restricted stock awards are independent of option grants and are subject to forfeiture if employment terminates prior to the release of the restrictions. Such awards generally vest beginning one year from the date of grant or 33.3 percent per year for three years, depending on the grant. During the vesting period, ownership of the shares cannot be transferred.

 

Restricted stock units have dividend equivalent rights equal to the cash dividend paid on restricted stock shares. However, restricted stock units do not have voting rights of common stock and are not considered issued and outstanding upon grant. Restricted stock units become newly issued shares when vested. The dividend equivalent rights for restricted stock units are forfeitable.

 

We expense the cost, which is the grant date fair market value, of the restricted stock units ratably over the period during which the restrictions lapse. The grant date fair value is our closing stock price on the date of grant.

 

We are required to recognize compensation expense when an employee is eligible to retire. We consider employees eligible to retire at age 55 and after 10 years of service. Awards granted to retirement-eligible employees are forfeited if the retirement-eligible employees retire prior to 180 days after the grant. Accordingly, the related compensation expense is recognized during the 180 day period for awards granted to retirement-eligible employees or over the period from the grant date to the date retirement eligibility is achieved, if less than the stated vesting period.

 

2020 Master Incentive Plan

 

This plan allows for granting of awards to employees. The plan permits granting of (a) stock options; (b) stock appreciation rights; (c) restricted stock and restricted stock units; (d) performance awards; (e) dividend equivalents; (f) other awards based on our common stock, including shares for amounts employees deferred under the Key Employee Deferred Compensation Plan. There were 1,679,579 common shares available for grant as of November 28, 2020.

 

2018 Master Incentive Plan

 

This plan allows for granting of awards to employees. The plan permits granting of (a) stock options; (b) stock appreciation rights; (c) restricted stock and restricted stock units; (d) performance awards; (e) dividend equivalents; (f) other awards based on our common stock, including shares for amounts employees deferred under the Key Employee Deferred Compensation Plan.

 

Year 2016 Master Incentive Plan

 

This plan allows for granting of awards to employees. The plan permits granting of (a) stock options; (b) stock appreciation rights; (c) restricted stock awards; (d) performance awards; (e) dividend equivalents; and (f) other awards based on our common stock, including shares for amounts employees deferred under the Key Employee Deferred Compensation Plan.

 

2009 Directors’ Stock Incentive Plan

 

This plan permits granting of (a) shares for amounts non-employee directors defer under the Directors’ Deferred Compensation Plan and (b) discretionary grants of restricted stock, stock options, stock appreciation rights, performance awards and other stock awards.      

 

Directors' Deferred Compensation Plan

 

This plan allows non-employee directors to defer all or a portion of their retainer and meeting fees in a number of investment choices, including units representing shares of our common stock. We provide a 10 percent match on deferred compensation invested in these units. These units are required to be paid out in our common stock.

 

Key Employee Deferred Compensation Plan

 

This plan allows key employees to defer a portion of their eligible compensation in a number of investment choices, including units representing shares of company common stock. We provide a 10 percent match on deferred compensation invested in these units.

 

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Grant-Date Fair Valu

 

We use the Black-Scholes option-pricing model to calculate the grant-date fair value of stock option awards. The fair value of options granted during 2020, 2019 and 2018 were calculated using the following assumptions:

 

 

		2020					2019						2018
Expected life (in years)				5.00						4.75						4.75
Weighted-average expected volatility				24.32	%					24.26	%					23.31	%
Expected volatility range		24.18%	-	30.99	%			23.88%	-	24.76	%			23.18%	-	23.58	%
Risk-free interest rate		0.21%	-	1.51	%			1.34%	-	2.55	%			2.38%	-	2.95	%
Weighted-average expected dividend				1.38	%					1.40	%					1.14	%
Expected dividend yield range		1.35%	-	2.53	%			1.25%	-	1.45	%			1.12%	-	1.24	%
Weighted-average fair value of grants	$			9.63			$			9.76			$			11.38

 

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 its future volatility will differ from the past.

 

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

 

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

 

Expense

 

We use the straight-line attribution method to recognize share-based compensation expense for option awards 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 $16,914, $24,003 and $17,113 for 2020, 2019 and 2018, respectively. All share-based compensation was recorded as SG&A expense.

 

As of November 28, 2020, $6,044 of unrecognized compensation costs related to unvested stock option awards is expected to be recognized over a weighted-average period of 0.7 years. Unrecognized compensation costs related to unvested restricted stock units was $5,304 which is expected to be recognized over a weighted-average period of 0.9 years.

 

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Stock Option Activity

 

The stock option activity for the years ended November 28, 2020, November 30, 2019 and December 1, 2018 is summarized below:

 

						Weighted-
						Average
		Options				Exercise Price
Outstanding at December 2, 2017			3,860,764			$	42.28
Granted			818,537				53.06
Exercised			(198,849	)			31.37
Forfeited or cancelled			(14,346	)			48.62
Outstanding at December 1, 2018			4,466,106			$	44.72
Granted			1,020,246				45.53
Exercised			(378,734	)			28.74
Forfeited or cancelled			(47,308	)			48.90
Outstanding at November 30, 2019			5,060,310			$	46.04
Granted			1,052,968				47.70
Exercised			(397,456	)			31.00
Forfeited or cancelled			(169,907	)			49.11
Outstanding at November 28, 2020			5,545,915			$	47.34

 

The fair value of options granted during 2020, 2019 and 2018 was $10,132, $9,956 and $9,217, respectively. Total intrinsic value of options exercised during 2020, 2019 and 2018 was $6,563, $7,590 and $4,534, respectively. For options outstanding at November 28, 2020, the weighted-average remaining contractual life was 6.7 years and the aggregate intrinsic value was $38,430. There were 2,983,960 options exercisable at November 28, 2020, with a weighted-average remaining contractual life of 5.4 years and an aggregate intrinsic value of $27,098. 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. Proceeds received from option exercises during the year ended November 28, 2020, November 30, 2019 and December 1, 2018 were $12,321, $10,885 and $6,237, respectively. The company’s actual tax benefits realized for the tax deductions related to the exercise of stock options for 2020, 2019 and 2018 was $1,278, $1,298 and $868, respectively.

 

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Restricted Stock Activity

 

The nonvested restricted stock activity for the years ended November 28, 2020, November 30, 2019 and December 1, 2018 is summarized below:

 

										Weighted-
						Weighted-				Average
						Average				Remaining
						Grant				Contractual
						Date Fair				Life
		Units				Value				(in Years)
Nonvested at December 2, 2017			462,241			$	44.80				1.0
Granted			165,909				45.92				2.2
Vested			(209,137	)			40.38				-
Forfeited			(4,660	)			47.27				1.1
Nonvested at December 1, 2018			414,353			$	47.45				1.0
Granted			302,132				44.29				2.2
Vested			(197,349	)			45.45				-
Forfeited			(31,139	)			43.37				0.4
Nonvested at November 30, 2019			487,997			$	46.56				0.8
Granted			216,293				46.39				3.4
Vested			(221,275	)			46.83				-
Forfeited			(50,666	)			47.55				0.1
Nonvested at November 28, 2020			432,349			$	46.22				0.8

 

Total fair value of restricted stock vested during 2020, 2019, and 2018 was $10,362, $8,970 and $8,892, respectively. The total fair value of nonvested restricted stock at November 28, 2020 was $19,984.

 

We repurchased 70,380, 73,043 and 71,181 shares during 2020, 2019 and 2018, respectively, in connection with the statutory minimum tax withholding related to vesting of restricted stock. The company’s actual tax benefits realized for the tax deductions related to the restricted stock vested for 2020, 2019 and 2018 was $2,136, $1,574 and $2,649 respectively.

 

Deferred Compensation Activity

 

Deferred compensation units are fully vested at the date of contribution. The deferred compensation units outstanding for the years ended November 28, 2020, November 30, 2019 and December 1, 2018 is summarized below:

 

		Non-employee
		Directors				Employees				Total
Units outstanding December 2, 2017			443,570				31,606				475,176
Participant contributions			16,164				7,589				23,753
Company match contributions1			20,053				759				20,812
Payouts			-				(10,219	)			(10,219	)
Units outstanding December 1, 2018			479,787				29,735				509,522
Participant contributions			22,153				11,166				33,319
Company match contributions1			23,720				1,117				24,837
Payouts			-				(5,354	)			(5,354	)
Units outstanding November 30, 2019			525,660				36,664				562,324
Participant contributions			18,008				13,814				31,822
Company match contributions1			23,033				1,381				24,414
Payouts			(111,436	)			(7,306	)			(118,742	)
Units outstanding November 28, 2020			455,265				44,553				499,818

 

¹ The non-employee directors’ company match includes 21,323, 21,504 and 18,436 deferred compensation units paid as discretionary awards to all non-employee directors in 2020, 2019 and 2018, respectively.

 

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The fair value of non-employee directors’ company matches for 2020, 2019 and 2018 was $128, $167 and $152, respectively. The fair value of the non-employee directors’ discretionary award was $920 for 2020 and $1,035 for each of 2019 and 2018. The fair value of employee company matches was $56, $41 and $27 for 2020, 2019 and 2018, respectively.

 

Note 10: Pension and Postretirement Benefits

 

Defined Contribution Plan

 

All U.S. employees have the option of contributing up to 75 percent of their pre-tax earnings to a 401(k) plan, subject to IRS limitations. We match up to the first 4 percent of each employee's pre-tax earnings, based on the employee’s contributions. All U.S. employees are eligible for a separate annual non-discretionary retirement contribution to the 401(k) plan of 1 percent of pay, that is invested based on the election of the individual participant. The 1 percent contribution is in addition to our 4 percent matching contribution described above and is in lieu of participation in our defined benefit pension plan. The total contribution to the 401(k) plan for 2020 was $10,764 which included the cost of the 4 percent company match of $7,468 and the additional 1 percent contribution of $3,296. The total contributions to the 401(k) plan were $10,784 and $11,034 in 2019 and 2018, respectively.

 

All U.S. employees are eligible to receive an annual discretionary non-elective contribution to the 401(k) plan of up to 3 percent based on achieving the company’s earnings per share target. This discretionary contribution is in addition to the contributions described above. No such contribution was made during 2020 and 2019.

 

The defined contribution plan liability recorded in the Consolidated Balance Sheets was $9,819 and $8,494 in 2020 and 2019, respectively, for the U.S. Plan and several statutorily required non-U.S. Plans.

 

Defined Benefit Plans

 

Noncontributory defined benefit pension plans cover all U.S. employees employed prior to January 1, 2007. Benefits for these plans are based primarily on each employee’s years of service and average compensation. During 2011, we made significant changes to our U.S. Pension Plan. The changes included: benefits under the plan were locked-in using service and salary as of May 31, 2011, participants no longer earn benefits for future service and salary as they had in the past, affected participants receive a three percent increase to the locked-in benefit for every year they continue to work for us and we are making a retirement contribution of three percent of eligible compensation to the 401(k) Plan for those participants.  The funding policy is consistent with the funding requirements of federal law and regulations. Plan assets consist principally of listed equity securities and bonds. During 2020, we amended the U.S. Pension Plan to add a program for eligible employees to take a lump sum distribution. A total of $10,939 was paid during 2020 as distributions under this program. Other U.S. postretirement benefits are funded through a Voluntary Employees' Beneficiaries Association Trust.

 

Health care and life insurance benefits are provided for eligible retired employees and their eligible dependents. These benefits are provided through various insurance companies and health care providers. Costs are accrued during the years the employee renders the necessary service.

 

Certain non-U.S. subsidiaries provide pension benefits for their employees consistent with local practices and regulations. These plans are primarily defined benefit plans covering substantially all employees upon completion of a specified period of service. Benefits for these plans are generally based on years of service and annual compensation.

 

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Following is a reconciliation of the beginning and ending balances of the benefit obligation and fair value of plan assets as of November 28, 2020 and November 30, 2019:

 

		Pension Benefits																Other Postretirement
		U.S. Plans								Non-U.S. Plans								Benefits
		2020				2019				2020				2019				2020				2019
Change in projected benefit obligation
Benefit obligation at beginning of year		$	380,388			$	336,889			$	234,542			$	208,075			$	39,256			$	36,842
Service cost			-				4				2,950				2,237				73				98
Interest cost			11,738				14,691				3,158				4,678				1,135				1,550
Participant contributions			-				-				-				-				226				240
Actuarial (gain)/loss1			27,377				49,211				4,350				30,517				1,327				3,749
Other			-				-				-				(103	)			-				-
Curtailments			-				-				14				-				-				-
Settlement payments			(10,939	)			-				(273	)			(307	)			-				-
Benefits paid			(20,034	)			(20,407	)			(8,628	)			(8,356	)			(2,942	)			(3,223	)
Foreign currency translation effect			-				-				14,448				(2,199	)			-				-
Benefit obligation at end of year			388,530				380,388				250,561				234,542				39,075				39,256
Change in plan assets
Fair value of plan assets at beginning of year			383,527				346,460				185,331				169,455				94,474				82,910
Actual return on plan assets			44,365				54,527				13,155				22,945				15,673				12,046
Employer contributions			1,677				3,124				2,177				2,437				1,625				2,501
Participant contributions			-				-				-				-				226				240
Other			-				-				-				(103	)			-				-
Settlement payments			(10,939	)			-				-				-				-				-
Benefits paid2			(20,227	)			(20,584	)			(8,628	)			(8,356	)			(2,942	)			(3,223	)
Foreign currency translation effect			-				-				10,207				(1,047	)			-				-
Fair value of plan assets at end of year			398,403				383,527				202,242				185,331				109,056				94,474
Plan assets in excess of (less than) benefit obligation as of year end		$	9,873			$	3,139			$	(48,688	)		$	(49,211	)		$	69,981			$	55,218

 

¹ Actuarial loss in 2020 and actuarial loss in 2019 for the U.S. Plans is primarily due to assumption changes. Actuarial loss in 2020 and actuarial loss in 2019 for the Non-U.S. Plans are due to both assumption changes and plan experience.

² Amount excludes benefit payments made from sources other than plan assets.

 

Amounts in accumulated other comprehensive income (loss) that have not been recognized as components of net periodic benefit cost		Pension Benefits																Other Postretirement
		U.S. Plans								Non-U.S. Plans								Benefits
		2020				2019				2020				2019				2020				2019
Unrecognized actuarial loss		$	147,917			$	146,149			$	87,368			$	83,457			$	(4,318	)		$	2,114
Unrecognized prior service (benefit) cost			(6	)			(9	)			1,453				1,476				-				-
Ending balance		$	147,911			$	146,140			$	88,821			$	84,933			$	(4,318	)		$	2,114

 

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		Pension Benefits																Other Postretirement
		U.S. Plans								Non-U.S. Plans								Benefits
		2020				2019				2020				2019				2020				2019
Statement of financial position as of fiscal year-end
Non-current assets		$	30,672			$	22,480			$	12,534			$	6,263			$	73,137			$	58,307
Accrued benefit cost
Current liabilities			(1,467	)			(1,418	)			(1,701	)			(1,723	)			(226	)			(210	)
Non-current liabilities			(19,332	)			(17,922	)			(59,521	)			(53,750	)			(2,930	)			(2,879	)
Ending balance		$	9,873			$	3,140			$	(48,688	)		$	(49,210	)		$	69,981			$	55,218

 

The accumulated benefit obligation of the U.S. pension and other postretirement plans was $418,019 at November 28, 2020 and $409,800 at November 30, 2019. The accumulated benefit obligation of the non-U.S. pension plans was $239,572 at November 28, 2020 and $224,619 at November 30, 2019.

 

The following amounts relate to pension plans with accumulated benefit obligations in excess of plan assets as of November 28, 2020 and November 30, 2019:

 

		Pension Benefits and Other Postretirement Benefits
		U.S. Plans								Non-U.S. Plans
		2020				2019				2020				2019
Accumulated benefit obligation		$	26,241			$	24,344			$	134,472			$	125,073
Fair value of plan assets			5,441				5,004				84,239				79,437

 

The following amounts relate to pension plans with projected benefit obligations in excess of plan assets as of November 28, 2020 and November 30, 2019:

 

		Pension Benefits and Other Postretirement Benefits
		U.S. Plans								Non-U.S. Plans
		2020				2019				2020				2019
Projected benefit obligation		$	26,241			$	24,344			$	145,461			$	134,910
Fair value of plan assets			5,441				5,004				84,239				79,437

 

Information about the expected cash flows is as follows:

 

			Pension Benefits								Other
			U.S. Plans				Non-U.S. Plans				Postretirement Benefits
Employer contributions
2021			$	312			$	54			$	1,500
Expected benefit payments
2021				21,084				16,196				2,999
2022				21,521				8,689				2,938
2023				21,127				8,710				2,872
2024				21,444				8,943				2,772
2025-2030				105,296				47,195				12,092

 

The components of our net period defined benefit pension and postretirement benefit costs other than service cost are presented as non-operating expenses and service cost is presented in operating expenses.

 

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Components of net periodic benefit cost and other supplemental information for the years ended November 28, 2020, November 30, 2019 and December 1, 2018 are as follows:

 

		Pension Benefits																								Other
		U.S. Plans												Non-U.S. Plans												Postretirement Benefits
Net periodic cost (benefit)		2020				2019				2018				2020				2019				2018				2020				2019				2018
Service cost		$	-			$	4			$	56			$	2,950			$	2,237			$	2,311			$	73			$	98			$	173
Interest cost			11,738				14,691				12,251				3,158				4,678				4,671				1,135				1,550				1,484
Expected return on assets			(25,758	)			(25,305	)			(26,167	)			(11,312	)			(10,224	)			(11,105	)			(7,976	)			(7,013	)			(6,896	)
Amortization:
Prior service cost (benefit)			(3	)			13				29				64				64				(4	)			-				-				-
Actuarial loss			7,195				4,677				5,904				3,829				3,114				2,901				62				33				60
Curtailment loss			-				-				-				14				83				-				-				-				-
Settlement charge			-				-				-				67				-				-				-				-				-
Net periodic (benefit) cost		$	(6,828	)		$	(5,920	)		$	(7,927	)		$	(1,230	)		$	(48	)		$	(1,226	)		$	(6,706	)		$	(5,332	)		$	(5,179	)

 

		Pension Benefits																								Other
		U.S. Plans												Non-U.S. Plans												Postretirement Benefits
Weighted-average assumptions used to determine benefit obligations		2020				2019				2018				2020				2019				2018				2020				2019				2018
Discount rate			2.50	%			3.17	%			4.50	%			1.16	%			1.35	%			2.29	%			2.19	%			3.00	%			4.37	%
Rate of compensation increase1			4.50	%			4.50	%			4.50	%			1.74	%			1.71	%			1.75	%			N/A				N/A				N/A

 

Weighted-average assumptions used to determine net costs for years ended		2020				2019				2018				2020				2019				2018				2020				2019				2018
Discount rate			3.17	%			4.50	%			3.72	%			1.34	%			2.30	%			2.10	%			3.00	%			4.37	%			3.54	%
Expected return on plan assets			7.49	%			7.49	%			7.75	%			6.23	%			6.21	%			6.20	%			8.50	%			8.50	%			8.75	%
Rate of compensation increase1			4.50	%			4.50	%			4.50	%			1.74	%			1.71	%			1.75	%			N/A				N/A				N/A

 

¹ Benefits under the U.S. Pension Plan were locked-in as of May 31, 2011 and no longer include compensation increases. The 4.50 percent rate for 2020, 2019 and 2018 is for the supplemental executive retirement plan only.

 

The discount rate assumption is determined using an actuarial yield curve approach, which results in a discount rate that reflects the characteristics of the plan. The approach identifies a broad population of corporate bonds that meet the quality and size criteria for the particular plan. We use this approach rather than a specific index that has a certain set of bonds that may or may not be representative of the characteristics of our particular plan. A higher discount rate decreases the present value of the pension obligations. The discount rate for the U.S. pension plan was 2.53 percent at November 28, 2020, compared to 3.19 percent at November 30. 2019 and 4.51 percent at December 1, 2018. Net periodic pension cost for a given fiscal year is based on assumptions developed at the end of the previous fiscal year. A discount rate change of 0.5 percentage points at November 28, 2020 would impact U.S. pension and other postretirement plan (income) expense by approximately $223 (pre-tax) in fiscal 2021. Discount rates for non-U.S. plans are determined in a manner consistent with the U.S. plan.

 

For the U.S. Pension Plan, we adopted the Adjusted Pri-2012 base mortality table projected generationally using scale MP-2020.

 

The expected long-term rate of return on plan assets assumption for the U.S. pension plan was 7.50 percent in 2020, 7.50 percent in 2019 and 7.75 percent in 2018. Our expected long-term rate of return on U.S. plan assets was based on our target asset allocation assumption of 60 percent equities and 40 percent fixed-income. Management, in conjunction with our external financial advisors, determines the expected long-term rate of return on plan assets by considering the expected future returns and volatility levels for each asset class that are based on historical returns and forward-looking observations. For 2020, the expected long-term rate of return on the target equities allocation was 8.00 percent and the expected long-term rate of return on the target fixed-income allocation was 3.60 percent. The total plan rate of return assumption included an estimate of the effect of diversification and the plan expense. A change of 0.5 percentage points for the expected return on assets assumption would impact U.S. net pension and other postretirement plan expense by approximately $2,538 (pre-tax).

 

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Management, in conjunction with our external financial advisors, uses the actual historical rates of return of the asset categories to assess the reasonableness of the expected long-term rate of return on plan assets.

 

The expected long-term rate of return on plan assets assumption for non-U.S. pension plans was a weighted-average of 6.23 percent in 2020 compared to 6.21 percent in 2019 and 6.20 percent in 2018. The expected long-term rate of return on plan assets assumption used in each non-U.S. plan is determined on a plan-by-plan basis for each local jurisdiction and is based on expected future returns for the investment mix of assets currently in the portfolio for that plan. Management, in conjunction with our external financial advisors, develops expected rates of return for each plan, considers expected long-term returns for each asset category in the plan, reviews expectations for inflation for each local jurisdiction, and estimates the effect of active management of the plan’s assets. Our largest non-U.S. pension plans are in the United Kingdom and Germany. The expected long-term rate of return on plan assets for the United Kingdom was 6.75 percent and the expected long-term rate of return on plan assets for Germany was 5.75 percent. Management, in conjunction with our external financial advisors, uses actual historical returns of the asset portfolio to assess the reasonableness of the expected rate of return for each plan.

 

Assumed health care trend rates		2020				2019				2018
Health care cost trend rate assumed for next year			6.75	%			7.00	%			6.25	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)			5.00	%			0.25	%			0.25	%
Fiscal year that the rate reaches the ultimate trend rate		2028				2028				2024

 

The asset allocation for the company’s U.S. and non-U.S. pension plans at the end of 2020 and 2019 follows.

 

		U.S. Pension Plans												Non-U.S. Pension Plans												Other Postretirement Plans
		Target				Percentage of Plan Assets at Year-End								Target				Percentage of Plan Assets at Year-End								Target				Percentage of Plan Assets at Year-End
Asset Category		2020				2020				2019				2020				2020				2019				2020				2020				2019
Equities			60.0	%			55.4	%			57.7	%			49.6	%			48.8	%			49.6	%			0.0	%			0.0	%			0.0	%
Fixed income			40.0	%			36.2	%			63.8	%			50.4	%			51.0	%			50.1	%			0.0	%			0.0	%			0.0	%
Insurance			0.0	%			0.0	%			0.0	%			0.0	%			0.0	%			0.0	%			100.0	%			99.4	%			99.6	%
Cash 1			0.0	%			8.4	%			-21.5	%			0.0	%			0.2	%			0.3	%			0.0	%			0.6	%			0.4	%
Total			100	%			100	%			100	%			100	%			100	%			100	%			100	%			100	%			100	%

 

¹ Negative cash for 2019 represents unsettled pending trades within an investment that are classified in cash and cash equivalents until settled.

 

Plan Asset Management

 

Plan assets are held in trust and invested in mutual funds, separately managed accounts and other commingled investment vehicles holding U.S. and non-U.S. equity securities, fixed income securities and other investment classes. We employ a total return approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Futures and options may also be used to enhance risk-adjusted long-term returns while improving portfolio diversification and duration. Risk management is accomplished through diversification across asset classes, utilization of multiple investment managers and general plan-specific investment policies. Risk tolerance is established through careful consideration of the plan liabilities, plan funded status and our assessment of our overall liquidity position. This asset allocation policy mix is reviewed annually and actual versus target allocations are monitored regularly and rebalanced on an as-needed basis. Plan assets are invested using a combination of active and passive investment strategies. Passive, or “indexed” strategies, attempt to mimic rather than exceed the investment performance of a market benchmark. The plans’ active investment strategies employ multiple investment management firms which in aggregate cover a range of investment styles and approaches. Performance is monitored and compared to relevant benchmarks on a regular basis.

 

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The U.S. pension plans consist of two plans: a pension plan and a supplemental executive retirement plan (“SERP”). There were no assets in the SERP in 2020 and 2019. Consequently, all of the data disclosed in the asset allocation table for the U.S. pension plans pertain to our U.S. pension plan.

 

During 2020, we maintained our assets within the allowed ranges of the target asset allocation mix of 60 percent equities and 40 percent fixed income plus or minus 5 percent and continued our focus to reduce volatility of plan assets in future periods and to more closely match the duration of the assets with the duration of the liabilities of the plan.

 

The non-U.S. pension plans consist of all the pension plans administered by us outside the U.S., principally consisting of plans in Germany, the United Kingdom, France and Canada. During 2020 we maintained our assets for the non-U.S. pension plans at the specific target asset allocation mix determined for each plan plus or minus the allowed rate and continued our focus to reduce volatility of plan assets in future periods and to more closely match the duration of the assets with the duration of the liabilities of the individual plans. We plan to maintain the portfolios at their respective target asset allocations in 2021.

 

Other postretirement benefits plans consist of two U.S. plans: a retiree medical health care plan and a group term life insurance plan. There were no assets in the group term life insurance plan for 2020 and 2019. Consequently, all of the data disclosed in the asset allocation table for other postretirement plans pertain to our retiree medical health care plan. Our investment strategy for other postretirement benefit plans is to own insurance policies that maintain an asset allocation nearly completely in equities. These equities are invested in a passive portfolio indexed to the S&P 500.

 

Fair Value of Plan Assets

 

The following table presents plan assets categorized within a three-level fair value hierarchy as described in Note 13.

 

		November 28, 2020
U.S. Pension Plans		Level 1				Level 2				Level 3				Total Assets
Equities		$	3,421			$	217,151			$	-			$	220,572
Fixed income			1,524				142,317				205				144,046
Cash 2			33,391				-				-				33,392
Total categorized in the fair value hierarchy			38,336				359,468				205				398,009
Other investments measured at NAV 1															394
Total		$	38,336			$	359,468			$	205			$	398,403

 

Non-U.S. Pension Plans		Level 1				Level 2				Level 3				Total Assets
Equities		$	33,478			$	1,368			$	-			$	34,846
Fixed income			49,813				7,182				770				57,765
Cash			352				-				-				352
Total categorized in the fair value hierarchy			83,643				8,550				770				92,963
Other investments measured at NAV 1															109,279
Total		$	83,643			$	8,550			$	770			$	202,242

 

Other Postretirement Benefits		Level 1				Level 2				Level 3				Total Assets
Insurance		$	-			$	-			$	108,406			$	108,406
Cash			650				-				-				650
Total		$	650			$	-			$	108,406			$	109,056

 

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		November 30, 2019
U.S. Pension Plans		Level 1				Level 2				Level 3				Total Assets
Equities		$	126,178			$	95,271			$	-			$	221,449
Fixed income			119,103				125,329				219				244,651
Cash			(83,099	)			140				-				(82,959	)
Total categorized in the fair value hierarchy			162,182				220,740				219				383,141
Other investments measured at NAV 1															386
Total		$	162,182			$	220,740			$	219			$	383,527

 

Non-U.S. Pension Plans		Level 1				Level 2				Level 3				Total Assets
Equities		$	32,045			$	1,247			$	-			$	33,292
Fixed income			46,262				6,819				675				53,756
Cash			506				-				-				506
Total categorized in the fair value hierarchy			78,813				8,066				675				87,554
Other investments measured at NAV 1															97,777
Total		$	78,813			$	8,066			$	675			$	185,331

 

Other Postretirement Benefits		Level 1				Level 2				Level 3				Total Assets
Insurance		$	-			$	-			$	94,082			$	94,082
Cash			392				-				-				392
Total		$	392			$	-			$	94,082			$	94,474

 

¹ In accordance with ASC Topic 820-10, Fair Value Measurement, certain investments that are measured at NAV (Net Asset Value per share) (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts represented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.

 

² Negative cash for 2019 represents unsettled pending trades within an investment that are classified in cash and cash equivalents until settled.

 

The definitions of fair values of our pension and other postretirement benefit plan assets at November 28, 2020 and November 30, 2019 by asset category are as follows:

 

Equities—Primarily publicly traded common stock for purposes of total return and to maintain equity exposure consistent with policy allocations. Investments include: (i) U.S. and non-U.S. equity securities and mutual funds valued at closing prices from national exchanges; and (ii) commingled funds valued at unit values or net asset values provided by the investment managers, which are based on the fair value of the underlying investments. Funds valued at net asset value have various investment strategies including seeking maximum total returns consistent with prudent investment management, seeking current income consistent with preservation of capital and daily liquidity and seeking to approximate the risk and return characterized by a specific index fund. There are no restrictions for redeeming holdings out of these funds and the funds have no unfunded commitments.

 

Fixed income—Primarily corporate and government debt securities for purposes of total return and managing fixed income exposure to policy allocations. Investments include (i) mutual funds valued at closing prices from national exchanges, (ii) corporate and government debt securities valued at closing prices from national exchanges, (iii) commingled funds valued at unit values or net asset value provided by the investment managers, which are based on the fair value of the underlying investments, and (iv) an annuity contract, the value of which is determined by the provider and represents the amount the plan would receive if the contract were cashed out at year-end.

 

Insurance—Insurance contracts for purposes of funding postretirement medical benefits. Fair values are the cash surrender values as determined by the providers which are the amounts the plans would receive if the contracts were cashed out at year end.

 

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Cash–Cash balances on hand, accrued income and pending settlements of transactions for purposes of handling plan payments. Fair values are the cash balances as reported by the Trustees of the plans.

 

The following is a roll forward of the Level 3 investments of our pension and postretirement benefit plan assets during the year ended November 28, 2020 and November 30, 2019:

 

		Fixed Income
U.S. Pension Plans		2020				2019
Level 3 balance at beginning of year		$	219			$	266
Purchases, sales, issuances and settlements, net			(14	)			(47	)
Level 3 balance at end of year		$	205			$	219

 

		Fixed Income
Non-U.S. Pension Plans		2020				2019
Level 3 balance at beginning of year		$	675			$	662
Net transfers into / (out of) level 3			43				28
Net gains			(8	)			5
Currency change effect			60				(20	)
Level 3 balance at end of year		$	770			$	675

 

		Insurance
Other Postretirement Benefits		2020				2019
Level 3 balance at beginning of year		$	94,082			$	82,446
Net transfers into / (out of) level 3			(831	)			(403	)
Purchases, sales, issuances and settlements, net			(822	)			(720	)
Net gains			15,977				12,759
Level 3 balance at end of year		$	108,406			$	94,082

 

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.

 

The company recorded a discrete tax charge of $42.0 million during the year ended December 1, 2018 for the one-time transition tax on deemed repatriation of its non-U.S. subsidiaries earnings. The transition tax was partially offset by a tax benefit of approximately $8.5 million related to a dividends received deduction for certain foreign tax credits related to the transition tax. This charge includes U.S. state income tax on the portion of the earnings deemed to be repatriated. The one-time transition tax is based on the company’s post-1986 earnings and profits not previously subject to U.S. taxation. The company also recorded a $79.5 million benefit for the remeasurement of deferred tax assets and liabilities due to the decreased tax rate.

 

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Income before income taxes and income from equity method investments		2020				2019				2018
United States		$	20,328			$	31,796			$	19,388
Non-U.S.			138,028				141,032				137,338
Total		$	158,356			$	172,828			$	156,726

 

Components of the provision for income tax expense (benefit)		2020				2019				2018
Current:
U.S. federal		$	5,243			$	9,122			$	9,652
State			1,320				3,294				1,597
Non-U.S.			56,542				47,848				37,980
			63,105				60,264				49,229
Deferred:
U.S. federal			(4,709	)			(432	)			(50,115	)
State			(4,111	)			125				(197	)
Non-U.S.			(12,364	)			(10,549	)			(5,273	)
			(21,184	)			(10,856	)			(55,585	)
Total		$	41,921			$	49,408			$	(6,356	)

 

Reconciliation of effective income tax		2020				2019				2018
Statutory U.S. federal income tax rate		$	33,255			$	36,294			$	34,605
State income taxes, net of federal benefit			(2,104	)			2,785				1,148
Foreign dividend repatriation			900				825				1,258
Foreign operations			(563	)			8,712				(3,253	)
Impact of option valuation			-				-				330
Executive compensation over $1.0 million			1,420				1,661				611
Change in valuation allowance			5,925				1,097				5,213
Research and development tax credit			(906	)			(802	)			(982	)
Section 199 manufacturing deduction			-				-				(319	)
Foreign-derived intangible income			(1,396	)			(2,240	)			-
Global intangible low-taxed income			1,932				2,029				-
Provision to return			1,704				(3,271	)			(1,921	)
Cross currency swap			(6,748	)			2,677				-
Contingency reserve			8,287				(957	)			1,943
Transition tax			-				-				42,007
Dividends received deduction			-				-				(8,484	)
Deferred tax rate change			-				-				(79,488	)
Other			215				598				976
Total income tax expense (benefit)		$	41,921			$	49,408			$	(6,356	)

 

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Deferred income tax balances at each year-end related to:		2020				2019
Deferred tax assets:
Pension and other post-retirement benefit plans		$	1,417			$	6,847
Employee benefit costs			24,538				21,468
Foreign tax credit carryforward			6,905				2,175
Tax loss carryforwards			31,495				26,427
Leases			7,133				-
Hedging activity			12,906				1,198
Other			36,521				32,626
Gross deferred tax assets			120,915				90,741
Less: valuation allowance			(21,843	)			(14,986	)
Total net deferred tax assets			99,072				75,755
Deferred tax liability:
Depreciation and amortization			(220,379	)			(224,248	)
Leases			(7,194	)			-
Total deferred tax liability			(227,573	)			(224,248	)
Net deferred tax liability		$	(128,501	)		$	(148,493	)

 

The difference between the change in the deferred tax assets in the balance sheet and the deferred tax provision is primarily due to the defined benefit pension plan adjustment and floating-to-fixed hedges recorded in accumulated other comprehensive income (loss).

 

Valuation allowances principally relate to foreign net operating loss carryforwards where the future potential benefits do not meet the more-likely-than-not realization test. The increase in the valuation allowance relates primarily to current year net operating losses for which the company does not expect to receive a tax benefit.

 

Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more-likely-than-not to be realized. We believe it is more-likely-than-not that reversal of deferred tax liabilities and forecasted income will be sufficient to fully recover the net deferred tax assets not already offset by a valuation allowance. In the event that all or part of the gross deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made.

 

U.S. income taxes have not been provided on approximately $936,607 of undistributed earnings of non-U.S. subsidiaries. We intend to indefinitely reinvest these undistributed earnings. Cash available in the United States has historically been sufficient and we expect it will continue to be sufficient to fund U.S. cash flow requirements. In the event these earnings are later distributed to the U.S., such distributions would likely result in additional U.S. tax.

 

While non-U.S. operations have been profitable overall, there are cumulative tax losses of $115,550 in various countries. These tax losses can be carried forward to offset the income tax liabilities on future income in these countries. Cumulative tax losses of $78,438 can be carried forward indefinitely, while the remaining $37,112 of tax losses must be utilized during 2021 to 2038.

 

The U.S. has a branch foreign tax credit carryforward of $4,357. A valuation allowance has been recorded against this foreign tax credit carryforward to reflect that this amount is not more-likely-than-not to be realized.

 

The table below sets forth the changes to our gross unrecognized tax benefit as a result of uncertain tax positions, excluding accrued interest.  We do not anticipate that the total unrecognized tax benefits will change significantly within the next twelve months.

 

		2020				2019
Balance at beginning of year		$	8,946			$	8,420
Tax positions related to the current year:
Additions			579				684
Tax positions related to prior years:
Additions			7,400				3,077
Reductions			(283	)			(1,484	)
Settlements			(747	)			(105	)
Lapses in applicable statutes of limitation			(1,326	)			(1,646	)
Balance at end of year		$	14,569			$	8,946

 

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Included in the balance of unrecognized tax benefits as of November 28, 2020 and November 30, 2019 are potential benefits of $9,125 and $6,755, respectively, that, if recognized, would affect the effective tax rate.

 

We report accrued interest and penalties related to unrecognized tax benefits in income tax expense. For the year ended November 28, 2020, we recognized a net benefit for interest and penalties of $2,378 relating to unrecognized tax benefits and had net accumulated accrued interest and penalties of $3,520 as of November 28, 2020. For the year ended November 30, 2019, we recognized a net benefit for interest and penalties of $59 relating to unrecognized tax benefits and had net accumulated accrued interest and penalties of $1,142 as of November 30, 2019.

 

We are subject to U.S. federal income tax as well as income tax in numerous state and foreign jurisdictions. Apart from the 2012 and 2013 U.S. federal audits discussed below, we are no longer subject to U.S. federal tax examination for years prior to 2017, or Swiss income tax examination for years prior to 2015. During 2015, the U.S. tax authorities opened an audit for the years ended December 1, 2012 and November 30, 2013. These audits have been principally settled but remain open only for matters to be addressed by the U.S. and Mexican authorities in competent authority. During the second quarter of 2016, H.B. Fuller (China) Adhesives, Ltd. was notified of a transfer pricing audit covering the calendar years 2005 through 2014. We are in various stages of examination and appeal in other foreign jurisdictions. Although the final outcomes of these examinations cannot currently be determined, we believe that we have recorded adequate liabilities with respect to these examinations.

 

Note 12: Financial Instruments

 

Overview

 

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

 

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

 

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

 

Cash Flow Hedges

 

As of November 28, 2020, we had cash flow hedges of six cross-currency swap agreements effective October 20, 2017 to convert a notional amount of $401,200 of foreign currency denominated intercompany loans into U.S. dollars and maturing in 2021 and 2022.

 

As of November 28, 2020, the combined fair value of the swaps was an asset of $2,543 and was included in other assets 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 and in other net cash provided by operating activities in the Consolidated Statement of Cash Flows. The differences 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, net in the 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 gain of $7,969 as of November 28, 2020. The estimated net amount of the existing gain that is reported in accumulated other comprehensive income (loss) as of November 28, 2020 that is expected to be reclassified into earnings within the next twelve months is $7,969. As of November 28, 2020, 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.

 

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The following table summarizes the cross-currency swaps outstanding as of November 28, 2020:

 

	Fiscal Year of Expiration		Interest Rate				Notional Value				Fair Value
Pay EUR	2021			2.75	%			133,340				(280	)
Receive USD				4.9330	%
Pay EUR	2022			3.00	%			267,860				2,823
Receive USD				5.1803	%
Total							$	401,200			$	2,543

 

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, which amortized down to $925,000 on October 20, 2020, of our $2,150,000 Term Loan B to a fixed interest rate of 4.0275 percent. See Note 7 for further discussion on the issuance of our Term Loan B. The combined fair value of the interest rate swaps was a liability of $33,256 at November 28, 2020 and was included in other liabilities in the Consolidated Balance Sheets. The swaps were designated for hedge accounting treatment as cash flow hedges. We are applying the hypothetical derivative method to assess hedge effectiveness for these interest rate swaps. Changes in the fair value of a hypothetically perfect swap with terms that match the critical terms of our $1,125,000 variable rate Term Loan B are compared with the change in the fair value of the 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.

 

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

 

		November 28, 2020				November 30, 2019				December 1, 2018
Cross-currency swap contracts		$	6,307			$	14,429			$	(4,047	)
Interest rate swap contracts		$	(15,618	)		$	(46,254	)		$	25,819

 

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. See Note 7 for further discussion on the issuance of our Public Notes. The swap was designated for hedge accounting treatment as fair value hedges. We applied the hypothetical derivative method to assess hedge effectiveness for this interest rate swap. Changes in the fair value of a hypothetically perfect swap with terms that match the critical terms of our $150,000 fixed rate Public Notes are compared with the change in the fair value of the swaps. On May 1, 2020, we terminated the swap agreement. Upon termination, we received $15,808 in cash. The remaining swap liability will be accounted for as a discount on long-term debt and will be amortized to interest expense over the remaining life of the Public Notes of seven years.

 

Derivatives Not Designated As Hedging Instruments

 

The company uses foreign currency forward contracts to offset its exposure to the change in value of certain foreign currency denominated assets and liabilities held at foreign subsidiaries that are remeasured at the end of each period. Although the contracts are effective economic hedges, they are not designated as accounting hedges. Foreign currency forward contracts are recorded as assets and liabilities on the balance sheet at fair value. Changes in the value of these derivatives are recognized immediately in earnings, thereby offsetting the current earnings effect of the related foreign currency denominated assets and liabilities. See Note 13 for fair value amounts of these derivative instruments.

 

As of November 28, 2020, we had forward foreign currency contracts maturing between November 30, 2020 and October 19, 2021. 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.

 

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The amounts of pretax gains (losses) recognized in other income, net related to derivative instruments not designated as hedging instruments are as follows:

 

		November 28, 2020				November 30, 2019				December 1, 2018
Foreign currency forward contracts		$	(2,908	)		$	(573	)		$	2,776

 

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 November 28, 2020, there were no significant concentrations of credit risk.

 

Note 13: Fair Value Measurements

 

Overview

 

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

 

●

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

●

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

●

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

 

Balances Measured at Fair Value on a Recurring Basis

 

The following table presents information about our financial assets and liabilities that are measured at fair value on a recurring basis as of November 28, 2020 and November 30, 2019, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

 

						Fair Value Measurements Using:
		November 28,
Description		2020				Level 1				Level 2				Level 3
Assets:
Marketable securities		$	22,560			$	22,560			$	-			$	-
Foreign exchange contract assets			2,320				-				2,320				-
Cross-currency cash flow hedge assets			2,823				-				2,823				-
Liabilities:
Foreign exchange contract liabilities		$	5,251			$	-			$	5,251			$	-
Cross-currency cash flow hedge liabilities			280				-				280				-
Interest rate swaps, cash flow hedge liabilities			33,256				-				33,256				-
Contingent consideration liability			5,800				-				-				5,800

 

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						Fair Value Measurements Using:
		November 30,
Description		2019				Level 1				Level 2				Level 3
Assets:
Marketable securities		$	19,430			$	19,430			$	-			$	-
Foreign exchange contract assets			1,227				-				1,227				-
Interest rate swaps, cash flow hedges			5,741				-				5,741				-
Cross-currency cash flow hedges			26,896				-				26,896				-
Liabilities:
Foreign exchange contract liabilities		$	1,800			$	-			$	1,800			$	-
Interest rate swaps, fair value hedges			17,637				-				17,637				-

 

See Note 7 for discussion regarding the fair value of debt.

 

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, volatility and discount rate, which are sensitive to change. Estimates of fair value are inherently uncertain and represent only management’s reasonable expectation regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will, in all likelihood, differ in some respects from actual future results. The valuation of our contingent consideration liability related to the acquisition of D.H.M. resulted in a fair value of $5,800 with an adjustment recorded to selling, general and administrative expenses in the Statement of Income as of November 28, 2020.

 

Contingent consideration liability		2020
Level 3 balance at beginning of year		$	-
Acquisition			5,000
Mark to market adjustment			800
Level 3 balance at end of year		$	5,800

 

See Note 2 for further discussion regarding our acquisitions.

 

Note 14: 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 $8,099 and $8,535 as of November 28, 2020 and November 30, 2019, respectively, for probable and reasonably estimable environmental remediation costs. Of the amount reserved, $3,703 and $4,117 as of November 28, 2020 and November 30, 2019, 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.

 

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.

 

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

 

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

 

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

 

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

 

		Year Ended				Year Ended				Year Ended
		November 28,				November 30,				December 1,
		2020				2019				2018
Lawsuits and claims settled			4				8				7
Settlement amounts		$	130			$	424			$	390
Insurance payments received or expected to be received		$	88			$	291			$	281

 

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

 

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

 

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During 2018, we retained legal counsel to conduct an internal investigation of the possible resale of our hygiene products into Iran by certain customers of our subsidiaries in Turkey (beginning in 2011) and India (beginning in 2014), in possible violation of the economic sanctions against Iran administered by the U.S. Department of the Treasury’s Office of Foreign Assets (“OFAC”) and our compliance policy. The sales to these customers represented less than one percent of our net revenue in the 2018 fiscal year. The sales to the customers who were reselling our products into Iran ceased during fiscal year 2018 and we do not currently conduct any business in Iran. In January 2018, we voluntarily contacted OFAC to advise it of this internal investigation and our intention to cooperate fully with OFAC and, in September 2018, we submitted the results and findings of our investigation to OFAC. In December 2020, we received formal notification from OFAC that it had completed its review of the company’s investigation and voluntary disclosure and that OFAC has decided to issue a Cautionary Letter instead of pursuing a civil monetary penalty or taking other enforcement action. While OFAC has indicated that future enforcement action is not precluded if additional information warrants renewed attention, the Cautionary Letter represents OFAC’s final enforcement response to our investigation and voluntary disclosure, so we now consider this matter closed.

 

Note 15: Segments

 

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

 

As of November 30, 2019, we had five reportable segments: Americas Adhesives, EIMEA, Asia Pacific, Construction Adhesives and Engineering Adhesives. As of the beginning of fiscal 2020, we realigned our operating segment structure and now have three reportable segments: Hygiene, Health and Consumable Adhesives, Engineering Adhesives and Construction Adhesives. The change in operating segments is based on how we have organized the company to make operating decisions and assess business performance. Prior period segment information has been recast retrospectively to reflect the realignment.

 

The business components within each operating segment are managed to maximize the results of the overall operating segment rather than the results of any individual business component of the operating segment. Results of individual components of each operating segment are subject to numerous allocations of segment-wide costs that may or may not have been focused on that particular component for a particular reporting period. The costs for these allocated resources are not tracked on a “where-used” basis as financial performance is assessed at the total operating segment level.

 

Reportable operating segment financial information for all periods presented is as follows:

 

		2020				2019				2018
Net revenue
Hygiene, Health and Consumable Adhesives		$	1,332,786			$	1,328,286			$	1,375,562
Engineering Adhesives			1,088,313				1,158,403				1,186,533
Construction Adhesives			369,170				396,580				454,149
Corporate Unallocated			-				13,731				24,758
Total		$	2,790,269			$	2,897,000			$	3,041,002
Segment operating income
Hygiene, Health and Consumable Adhesives		$	130,789			$	115,961			$	120,513
Engineering Adhesives			103,974				136,299				119,391
Construction Adhesives			11,148				16,657				39,111
Corporate Unallocated			(27,594	)			(42,923	)			(41,124	)
Total		$	218,317			$	225,994			$	237,891
Depreciation and amortization
Hygiene, Health and Consumable Adhesives		$	44,329			$	45,448			$	46,171
Engineering Adhesives			58,102				57,175				59,773
Construction Adhesives			35,811				35,851				35,625
Corporate Unallocated			575				2,732				3,557
Total		$	138,817			$	141,206			$	145,126
Total assets1
Hygiene, Health and Consumable Adhesives		$	1,268,236			$	1,253,864
Engineering Adhesives			1,515,302				1,610,748
Construction Adhesives			934,397				799,995
Corporate			318,769				321,127
Total		$	4,036,704			$	3,985,734
Capital expenditures
Hygiene, Health and Consumable Adhesives		$	57,416			$	44,583
Engineering Adhesives			18,212				5,896
Construction Adhesives			7,635				6,421
Corporate			12,580				6,654
Total		$	95,843			$	63,554

 

¹ Segment assets include primarily inventory, accounts receivable, property, plant and equipment, goodwill, intangible assets and other miscellaneous assets. Corporate assets include primarily corporate property, plant and equipment, deferred tax assets, certain investments and other assets.

 

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Reconciliation of segment operating income to income before income taxes and income from equity method investments:

 

		2020				2019				2018
Segment operating income		$	218,317			$	225,994			$	237,891
Other income, net			15,398				37,943				18,055
Interest expense			(86,776	)			(103,287	)			(110,994	)
Interest income			11,417				12,178				11,774
Income before income taxes and income from equity method investments		$	158,356			$	172,828			$	156,726

 

Financial information about geographic areas

 

		Net Revenue
		2020				2019				2018
United States		$	1,248,495			$	1,309,056			$	1,374,147
China			351,204				347,304				343,960
Germany			330,755				-				-
Countries with more than 10 percent of total			1,930,454				1,656,360				1,718,107
All other countries with less than 10 percent of total			859,815				1,240,640				1,322,895
Total		$	2,790,269			$	2,897,000			$	3,041,002

 

		Property, Plant and Equipment, net
		2020				2019				2018
United States		$	297,046			$	287,372			$	286,639
Germany			131,879				127,497				137,677
China			99,513				80,606				77,861
All other countries with less than 10 percent of total			142,306				134,338				134,372
Total		$	670,744			$	629,813			$	636,549

 

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We view the following disaggregation of net revenue by geographic region as useful to understanding the composition of revenue recognized during the respective reporting periods:

 

		November 28, 2020
		Hygiene, Health
		and Consumable				Engineering				Construction				Corporate
		Adhesives				Adhesives				Adhesives				Unallocated				Total
Americas		$	736,681			$	430,866			$	325,622			$	-			$	1,493,169
EIMEA			388,271				347,417				20,506				-				756,194
Asia Pacific			207,834				310,030				23,042				-				540,906
		$	1,332,786			$	1,088,313			$	369,170			$	-			$	2,790,269

 

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		November 30, 2019
		Hygiene, Health
		and Consumable				Engineering				Construction				Corporate
		Adhesives				Adhesives				Adhesives				Unallocated				Total
Americas		$	733,125			$	469,764			$	351,924			$	13,731			$	1,568,544
EIMEA			392,497				380,673				20,767				-				793,937
Asia Pacific			202,664				307,966				23,889				-				534,519
		$	1,328,286			$	1,158,403			$	396,580			$	13,731			$	2,897,000

 

		December 1, 2018
		Hygiene, Health
		and Consumable				Engineering				Construction				Corporate
		Adhesives				Adhesives				Adhesives				Unallocated				Total
Americas		$	744,096			$	476,322			$	403,765			$	24,758			$	1,648,941
EIMEA			424,521				416,906				24,630				-				866,057
Asia Pacific			206,945				293,305				25,754				-				526,004
		$	1,375,562			$	1,186,533			$	454,149			$	24,758			$	3,041,002

 

Note 16: Quarterly Data (unaudited)

 

		2020
(In thousands, except per share amounts)		Q1				Q2				Q3				Q4
Net revenue		$	646,564			$	674,602			$	691,463			$	777,640
Gross profit			170,262				184,901				187,844				213,642
Selling, general and administrative expenses			(141,509	)			(127,998	)			(129,113	)			(139,712	)
Net income attributable to H.B. Fuller		$	9,895			$	31,613			$	41,607			$	40,604
Basic earnings per share1		$	0.19			$	0.61			$	0.80			$	0.78
Diluted earnings per share1		$	0.19			$	0.61			$	0.79			$	0.77
Weighted-average common shares outstanding
Basic			51,295				51,420				52,130				52,276
Diluted			52,580				52,029				52,591				52,879

 

		2019
(In thousands, except per share amounts)		Q1				Q2				Q3				Q4
Net revenue		$	672,935			$	759,583			$	725,376			$	739,106
Gross profit			179,925				218,459				207,321				201,217
Selling, general and administrative expenses			(145,713	)			(146,079	)			(140,615	)			(148,521	)
Net income attributable to H.B. Fuller		$	12,244			$	36,641			$	49,718			$	32,214
Basic earnings per share1		$	0.24			$	0.72			$	0.98			$	0.63
Diluted earnings per share1		$	0.24			$	0.70			$	0.97			$	0.61
Weighted-average common shares outstanding
Basic			50,752				50,902				50,939				51,089
Diluted			51,901				52,105				51,502				52,423

 

¹ Quarterly earnings per share amounts may not equal full year amounts due to rounding.

 

 

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Note 17: Subsequent Event

 

Acquisition

 

On January 15, 2021, we completed the acquisition of certain assets of STR Holdings, Inc. for a base purchase price of $6,300. STR Holdings, Inc., headquartered in Enfield, Connecticut, is a manufacturer of encapsulant products used in the solar industry. The acquisition will be included in our Engineering Adhesives operating segment.

 

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PART IV

 

Item 15. Exhibits and Financial Statement Schedules

 

(a)	Documents filed as part of this report:

 

1.	Consolidated Financial Statements
	Consolidated Statements of Income for the fiscal years ended November 28, 2020, November 30, 2019 and December 1, 2018.
	Consolidated Statements of Comprehensive Income for the fiscal years ended November 28, 2020, November 30, 2019 and December 1, 2018.
	Consolidated Balance Sheets as of November 28, 2020 and November 30, 2019.
	Consolidated Statements of Total Equity for the fiscal years ended November 28, 2020, November 30, 2019 and December 1, 2018.
	Consolidated Statements of Cash Flows for the fiscal years ended November 28, 2020, November 30, 2019 and December 1, 2018.
	Notes to Consolidated Financial Statements
	Report of Independent Registered Public Accounting Firm

 

2.	Financial Statement Schedules

 

All financial statement schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.

 

3.

Exhibits

 

23.1	Consent of Ernst & Young LLP
23.2	Consent of KPMG LLP
31.1	302 Certification – James J. Owens
31.2	302 Certification – John J. Corkrean
32.1	906 Certification – James J. Owens
32.2	906 Certification – John J. Corkrean
101	The following materials from Amendment No. 1 to the H.B. Fuller Company Annual Report on Form 10-K/A for the fiscal year ended November 28, 2020 formatted in Inline Extensible Business Reporting Language (Inline XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Total Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.
104	Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)
(b)	See Exhibits attached to this Form 10-K/A.

 

 

Signatures

 

Pursuant to the requirements of Section 13 or 15(d) 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
	By:	/s/ James J. Owens
Dated: June 29, 2021		JAMES J. OWENS
		President and Chief Executive Officer