FULLER H B CO - Quarter Report: 2020 August (Form 10-Q)

ful20200829_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended August 29, 2020

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

For the transition period from to .

Commission file number: 001-09225

H.B. FULLER COMPANY

(Exact name of registrant as specified in its charter)

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

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

Registrant’s telephone number, including area code: (651) 236-5900

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $1.00 per share	FUL	New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer ☒	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☐
	Emerging growth company ☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b) of the Exchange Act. Yes ☐ No ☒

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PROCEEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐

APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares outstanding of the Registrant’s Common Stock, par value $1.00 per share, was 51,735,560 as of September 18, 2020.

Table of Contents

H.B. Fuller Company

Quarterly Report on Form 10-Q

Table of Contents

		Page
PART 1. FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS (Unaudited)	3

	Consolidated Statements of Income for the three and nine months ended August 29, 2020 and August 31, 2019	3

	Consolidated Statements of Comprehensive Income for the three and nine months ended August 29, 2020 and August 31, 2019	4

	Consolidated Balance Sheets as of August 29, 2020 and November 30, 2019	5

	Consolidated Statements of Total Equity for the three and nine months ended August 29, 2020 and August 31, 2019	6

	Consolidated Statements of Cash Flows for the nine months ended August 29, 2020 and August 31, 2019	7

	Notes to Consolidated Financial Statements	8

ITEM 2.	MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	28

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	39

ITEM 4.	CONTROLS AND PROCEDURES	39

PART II. OTHER INFORMATION		39

ITEM 1.	LEGAL PROCEEDINGS	39

ITEM 1A.	RISK FACTORS	41

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	42

ITEM 6.	EXHIBITS	43

SIGNATURES		44

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

H.B. FULLER COMPANY AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	August 29,			August 31,			August 29,			August 31,
	2020			2019			2020			2019
Net revenue	$	691,463		$	725,376		$	2,012,629		$	2,157,894
Cost of sales		(503,619	)		(518,055	)		(1,469,622	)		(1,552,189	)
Gross profit		187,844			207,321			543,007			605,705
Selling, general and administrative expenses		(129,113	)		(140,615	)		(398,620	)		(432,407	)
Other income, net		3,722			22,762			11,740			29,113
Interest expense		(20,196	)		(25,607	)		(64,597	)		(79,354	)
Interest income		2,945			3,115			8,761			9,191
Income before income taxes and income from equity method investments		45,202			66,976			100,291			132,248
Income taxes		(5,112	)		(19,321	)		(22,194	)		(38,902	)
Income from equity method investments		1,541			2,075			5,068			5,273
Net income including non-controlling interest		41,631			49,730			83,165			98,619
Net income attributable to non-controlling interest		(24	)		(12	)		(50	)		(16	)
Net income attributable to H.B. Fuller	$	41,607		$	49,718		$	83,115		$	98,603

*Earnings per share attributable to H.B. Fuller common stockholders:*
Basic	$	0.80		$	0.98		$	1.60		$	1.94
Diluted	$	0.79		$	0.97		$	1.59		$	1.90

*Weighted-average common shares outstanding:*
Basic		52,130			50,939			51,959			50,864
Diluted		52,591			51,502			52,400			51,836

Dividends declared per common share	$	0.163		$	0.160		$	0.485		$	0.475

See accompanying Notes to Unaudited Consolidated Financial Statements.

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H.B. FULLER COMPANY AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	August 29,			August 31,			August 29,			August 31,
	2020			2019			2020			2019
Net income including non-controlling interest	$	41,631		$	49,730		$	83,165		$	98,619
Other comprehensive income (loss)
Foreign currency translation		46,711			(30,612	)		14,008			(52,230	)
Defined benefit pension plans adjustment, net of tax		2,078			1,470			6,234			4,432
Interest rate swaps, net of tax		4,125			(11,254	)		(14,757	)		(39,776	)
Cross-currency swaps, net of tax		(2,314	)		2,417			8,208			12,605
Other comprehensive income (loss)		50,600			(37,979	)		13,693			(74,969	)
Comprehensive income		92,231			11,751			96,858			23,650
Less: Comprehensive income attributable to non-controlling interest		46			13			75			19
Comprehensive income attributable to H.B. Fuller	$	92,185		$	11,738		$	96,783		$	23,631

See accompanying Notes to Unaudited Consolidated Financial Statements.

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H.B. FULLER COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

	August 29,			November 30,
	2020			2019
Assets
Current assets:
Cash and cash equivalents	$	74,922		$	112,191
Trade receivables (net of allowances of $13,637 and $10,682, as of August 29, 2020 and November 30, 2019, respectively)		476,099			493,181
Inventories		354,221			337,267
Other current assets		84,187			90,723
Total current assets		989,429			1,033,362

Property, plant and equipment		1,392,017			1,304,231
Accumulated depreciation		(737,299	)		(674,418	)
Property, plant and equipment, net		654,718			629,813

Goodwill		1,306,398			1,281,808
Other intangibles, net		771,942			799,399
Other assets		259,238			241,352
Total assets	$	3,981,725		$	3,985,734

Liabilities, non-controlling interest and total equity
Current liabilities:
Notes payable	$	21,082		$	15,732
Current maturities of long-term debt		-			65,000
Trade payables		272,232			298,869
Accrued compensation		68,031			78,582
Income taxes payable		18,352			23,229
Other accrued expenses		75,739			60,745
Total current liabilities		455,436			542,157

Long-term debt, excluding current maturities		1,847,844			1,898,384
Accrued pension liabilities		84,336			80,214
Other liabilities		280,201			242,190
Total liabilities		2,667,817			2,762,945

Commitments and contingencies (Note 15)

Equity:
H.B. Fuller stockholders' equity:
Preferred stock (no shares outstanding) shares authorized – 10,045,900		-			-
Common stock, par value $1.00 per share, shares authorized – 160,000,000, shares outstanding – 51,725,732 and 51,241,190, as of August 29, 2020 and November 30, 2019, respectively		51,726			51,241
Additional paid-in capital		149,305			130,295
Retained earnings		1,442,292			1,384,411
Accumulated other comprehensive loss		(329,932	)		(343,600	)
Total H.B. Fuller stockholders' equity		1,313,391			1,222,347
Non-controlling interest		517			442
Total equity		1,313,908			1,222,789
Total liabilities, non-controlling interest and total equity	$	3,981,725		$	3,985,734

See accompanying Notes to Unaudited Consolidated Financial Statements.

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H.B. FULLER COMPANY AND SUBSIDIARIES

Consolidated Statements of Total Equity

(In thousands)

(Unaudited)

	H.B. Fuller Company Shareholders
	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non-Controlling Interest		Total

Balance at November 30, 2019	$	51,241		$	130,295		$	1,384,411		$	(343,600	)	$	442	$	1,222,789
Comprehensive income		-			-			9,895			(5,049	)		10		4,856
Dividends		-			-			(8,313	)		-			-		(8,313	)
Stock option exercises		26			881			-			-			-		907
Share-based compensation plans other, net		206			4,821			-			-			-		5,027
Repurchases of common stock		(66	)		(3,146	)		-			-			-		(3,212	)
Balance at February 29, 2020	$	51,407		$	132,851		$	1,385,993		$	(348,649	)	$	452	$	1,222,054
Comprehensive income		-			-			31,613			(31,861	)		19		(229	)
Dividends		-			-			(8,448	)		-			-		(8,448	)
Stock option exercises		24			626			-			-			-		650
Share-based compensation plans other, net		121			4,730			-			-			-		4,851
Repurchases of common stock		(1	)		(32	)		-			-			-		(33	)
Balance at May 30, 2020	$	51,551		$	138,175		$	1,409,158		$	(380,510	)	$	471	$	1,218,845
Comprehensive income		-			-			41,607			50,578			46		92,231
Dividends		-			-			(8,473	)		-			-		(8,473	)
Stock option exercises		174			4,832			-			-			-		5,006
Share-based compensation plans other, net		3			6,391			-			-			-		6,394
Repurchases of common stock		(2	)		(93	)		-			-			-		(95	)
Balance at August 29, 2020	$	51,726		$	149,305		$	1,442,292		$	(329,932	)	$	517	$	1,313,908

	H.B. Fuller Company Shareholders
	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non-Controlling Interest			Total

Balance at December 1, 2018, as previously reported	$	50,733		$	95,940		$	1,285,246		$	(280,152	)	$	401		$	1,152,168
Change in accounting principles		-			-			1,043			-			-			1,043
Balance at December 1, 2018, as adjusted		50,733			95,940			1,286,289			(280,152	)		401			1,153,211
Comprehensive income		-			-			12,244			11,817			10			24,071
Dividends		-			-			(7,962	)		-			-			(7,962	)
Stock option exercises		41			1,025			-			-			-			1,066
Share-based compensation plans other, net		168			6,233			-			-			-			6,401
Repurchases of common stock		(58	)		(2,625	)		-			-			-			(2,683	)
Balance at March 2, 2019	$	50,884		$	100,573		$	1,290,571		$	(268,335	)	$	411		$	1,174,104
Comprehensive income		-			-			36,641			(48,809	)		(4	)		(12,172	)
Dividends		-			-			(8,228	)		-			-			(8,228	)
Stock option exercises		25			746			-			-			-			771
Share-based compensation plans other, net		11			8,627			-			-			-			8,638
Repurchases of common stock		(3	)		(121	)		-			-			-			(124	)
Balance at June 1, 2019	$	50,917		$	109,825		$	1,318,984		$	(317,144	)	$	407		$	1,162,989
Comprehensive income		-			-			49,718			(37,980	)		13			11,751
Dividends		-			-			(8,239	)		-			-			(8,239	)
Stock option exercises		26			627			-			-			-			653
Share-based compensation plans other, net		13			8,967			-			-			-			8,980
Repurchases of common stock		(2	)		(113	)		-			-			-			(115	)
Balance at August 31, 2019	$	50,954		$	119,306		$	1,360,463		$	(355,124	)	$	420		$	1,176,019

See accompanying Notes to Unaudited Consolidated Financial Statements.

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H.B. FULLER COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended
	August 29, 2020			August 31, 2019
Cash flows from operating activities:
Net income including non-controlling interest	$	83,165		$	98,619
Adjustments to reconcile net income including non-controlling interest to net cash provided by operating activities:
Depreciation		50,558			50,269
Amortization		52,943			56,269
Deferred income taxes		(10,952	)		(36,831	)
Income from equity method investments, net of dividends received		2,660			1,743
Loss (gain) on sale of assets		118			(19,964	)
Share-based compensation		14,087			20,170
Change in assets and liabilities, net of effects of acquisitions:
Trade receivables, net		17,307			(15,674	)
Inventories		(17,195	)		(17,704	)
Other assets		31,372			(31,853	)
Trade payables		(9,449	)		2,246
Accrued compensation		(12,345	)		(10,173	)
Other accrued expenses		8,776			7,936
Income taxes payable		330			23,587
Accrued / prepaid pensions		(5,954	)		(7,548	)
Other liabilities		20,481			10,636
Other		(32,872	)		28,520
Net cash provided by operating activities		193,030			160,248

Cash flows from investing activities:
Purchased property, plant and equipment		(71,939	)		(47,023	)
Purchased businesses, net of cash acquired		(9,500	)		(8,042	)
Purchase of assets		(5,623	)		-
Purchased business remaining equity		-			(9,870	)
Proceeds from sale of property, plant and equipment		1,407			5,314
Proceeds from sale of business		-			70,293
Cash received from government grant		-			9,045
Cash payments related to government grant		(5,326	)		(1,120	)
Net cash provided by (used in) investing activities		(90,981	)		18,597

Cash flows from financing activities:
Repayment of long-term debt		(128,000	)		(173,500	)
Net proceeds of notes payable		8,422			2,667
Dividends paid		(24,970	)		(24,181	)
Contingent consideration payment		(767	)		(3,610	)
Proceeds from stock options exercised		6,567			2,495
Repurchases of common stock		(3,342	)		(2,922	)
Net cash used in financing activities		(142,090	)		(199,051	)

Effect of exchange rate changes on cash and cash equivalents		2,772			(10,811	)
Net change in cash and cash equivalents		(37,269	)		(31,017	)
Cash and cash equivalents at beginning of period		112,191			150,793
Cash and cash equivalents at end of period	$	74,922		$	119,776

See accompanying Notes to Unaudited Consolidated Financial Statements.

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H.B. FULLER COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except per share amounts)

(Unaudited)

Note 1: Basis of Presentation

Overview

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

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates. These unaudited interim Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended November 30, 2019 as filed with the Securities and Exchange Commission.

Change in Operating Segments

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.

Change in Accounting Principle – Leases

In February 2016, the Financial Accounting Standards Board (“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.

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Change in Accounting Principle – Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. 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 16.

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 exceptions 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. We are evaluating whether to apply any of the expedients and/or exceptions.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies the accounting for income taxes by clarifying and amending existing guidance related to the recognition of franchise tax, the evaluation of a step up in the tax basis of goodwill, and the effects of enacted changes in tax laws or rates in the effective tax rate computation, among other clarifications. Our effective date for adoption of this ASU is our fiscal year beginning November 28, 2021 with early adoption permitted. We have evaluated the effect that this guidance will have on our Consolidated Financial Statements and determined it will not have a material impact.

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 these ASUs 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. We are currently evaluating the effect that these ASUs will have on our Consolidated Financial Statements.

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Note 2: Acquisitions

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 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. Goodwill is deductible for tax purposes. D.H.M. and the related goodwill are reported in our Hygiene, Health and Consumable Adhesives operating 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 as of the date of 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.

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

	Three Months Ended				Nine Months Ended
	August 29, 2020		August 31, 2019		August 29, 2020		August 31, 2019
Cost of sales	$	371	$	287	$	438	$	1,281
Selling, general and administrative		618		2,615		984		4,358
	$	989	$	2,902	$	1,422	$	5,639

The restructuring charges are all recorded in Corporate Unallocated for segment reporting.

A summary of the restructuring liability is presented below:

	Employee-Related			Asset-Related			Other			Total
Balance at December 1, 2018	$	4,256		$	-		$	-		$	4,256
Expenses 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 November 30, 2019	$	9,830		$	-		$	924		$	10,754
Expenses incurred		206			-			1,216			1,422
Cash payments		(5,361	)		-			(2,051	)		(7,412	)
Foreign currency translation		253			-			-			253
Balance at August 29, 2020	$	4,928		$	-		$	89		$	5,017

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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 in the Consolidated Balance Sheets.

Note 4: Inventories

The composition of inventories is as follows:

	August 29,		November 30,
	2020		2019
Raw materials	$	173,951	$	150,338
Finished goods		180,270		186,929
Total inventories	$	354,221	$	337,267

Note 5: Goodwill and Other Intangible Assets

The goodwill activity for the nine months ended August 29, 2020 is presented below:

	Hygiene, Health
	and Consumable		Engineering			Construction
	Adhesives		Adhesives			Adhesives		Total
Balance at November 30, 2019	$	321,274	$	649,555		$	310,979	$	1,281,808
Acquisition		1,063		(746	)		-		317
Currency impact		10,155		13,954			164		24,273
Balance at August 29, 2020	$	332,492	$	662,763		$	311,143	$	1,306,398

As discussed in Note 16, 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. We allocated goodwill within our reporting units to reflect this realignment using the relative fair value approach.

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

August 29, 2020

Amortizable Intangible Assets

Purchased
Technology
and Patents

Customer
Relationships

Trade Names

Other

Total

Original cost

113,820

933,982

63,266

11,410

1,122,478

Accumulated amortization

(51,381

)

(266,737

)

(28,384

)

(4,553

)

(351,055

)

Net identifiable intangibles

62,439

667,245

34,882

6,857

771,423

	November 30, 2019
Amortizable Intangible Assets	Purchased Technology and Patents			Customer Relationships			Trade Names			Other			Total
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

Amortization expense with respect to amortizable intangible assets was $17,485 and $18,079 for the three months ended August 29, 2020 and August 31, 2019, respectively, and $52,943 and $56,269 for the nine months ended August 29, 2020 and August 31, 2019, respectively.

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

	Remainder
Fiscal Year	2020		2021		2022		2023		2024		Thereafter
Amortization Expense	$	17,845	$	70,031	$	68,507	$	65,657	$	60,669	$	488,714

Non-amortizable intangible assets as of August 29, 2020 and November 30, 2019 are $519 and $480, respectively and are related to trademarks and trade names.

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 its 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.

The components of lease expense are as follows:

	Three Months Ended		Nine Months Ended
	August 29, 2020		August 29, 2020
Operating lease cost	$	2,811	$	9,290
Variable lease cost		1,631		3,224
Total net lease cost	$	4,442	$	12,514

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Supplemental balance sheet information related to leases is as follows:

	Location on	Nine Months Ended
	Balance Sheet	August 29, 2020
Operating leases:
Operating lease right-of-use assets	Other assets	$	26,817

Current operating lease liabilities	Other accrued expenses		8,832
Noncurrent operating lease liabilities	Other liabilities		17,860
Total operating lease liabilities		$	26,692

The weighted average remaining lease term is 5.2 years and the weighted average discount rate is 3.8% for the Company's lease agreements as of August 29, 2020.

Supplemental information related to leases is as follows:

	Nine Months Ended
	August 29, 2020
Cash paid amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		3,184

Right-of-use assets obtained in exchange for lease liabilities:
Operating leases		1,622

Maturities of lease liabilities are as follows:

Fiscal Year	Amount
Remainder of 2020	$	2,919
2021		8,578
2022		5,897
2023		4,539
2024		2,916
2025 and beyond		4,075
Total		28,924
Less: amounts representing interest		(2,232	)
Present value of future minimum payments		26,692
Less: current obligations		(8,832	)
Noncurrent operating lease liabilities	$	17,860

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 30, 2019 were:

Fiscal Year		2020				2021				2022				2023				2024 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.

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Note 7: 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 shares, restricted stock units, performance awards and deferred compensation. These equity awards fall under several plans and are described in detail in our Annual Report on Form 10-K for the year ended November 30, 2019.

Grant-Date Fair Value

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 the nine months ended August 29, 2020 and August 31, 2019 was calculated using the following weighted average assumptions:

	Three Months Ended				Nine Months Ended
	August 29, 2020			August 31, 2019	August 29, 2020			August 31, 2019
Expected life (in years)		5.00		4.75		5.00			4.75
Weighted-average expected volatility		29.91%		23.88%		24.32%			24.26%
Expected volatility	29.35%	-	30.99%	23.88%	24.18%	-	30.99%	23.88%	-	24.76%
Risk-free interest rate		0.28%		1.68%	0.21%	-	1.51%	1.68%	-	2.55%
Weighted-average expected dividend yield		1.46%		1.38%		1.38%			1.40%
Expected dividend yield range	1.43%	-	1.48%	1.38%	1.35%	-	2.53%	1.26%	-	1.45%
Weighted-average fair value of grants		$9.92		$9.12		$9.63			$9.80

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

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

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

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

Expense

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

Total share-based compensation expense was $4,851 and $5,998 for the three months ended August 29, 2020 and August 31, 2019, respectively and $14,087 and $21,657 for the nine months ended August 29, 2020 and August 31, 2019, respectively. All share-based compensation expense was recorded as selling, general and administrative (SG&A) expense.

As of August 29, 2020, there was $7,414 of unrecognized compensation costs related to unvested stock option awards, which is expected to be recognized over a weighted-average period of 0.8 years. Unrecognized compensation costs related to unvested restricted stock units was $6,699, which is expected to be recognized over a weighted-average period of 1.0 year.

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Stock Option Activity

The stock option activity for the nine months ended August 29, 2020 is presented below:

				Average
	Options			Exercise Price
Outstanding at November 30, 2019		5,060,310		$	46.04
Granted		1,052,968			47.70
Exercised		(227,421	)		28.95
Forfeited or cancelled		(164,697	)		49.10
Outstanding at August 29, 2020		5,721,160		$	46.94

The fair value of options granted during the three months ended August 29, 2020 and August 31, 2019 was $55 and $12, respectively. Total intrinsic value of options exercised during the three months ended August 29, 2020 and August 31, 2019 was $3,016 and $806, respectively. Intrinsic value is the difference between our closing stock price on the respective trading day and the exercise price, multiplied by the number of options exercised. The fair value of options granted during the nine months ended August 29, 2020 and August 31, 2019 was $10,132 and $9,426, respectively. Total intrinsic value of options exercised during the nine months ended August 29, 2020 and August 31, 2019 was $3,533 and $2,187, respectively.

Proceeds received from option exercises during the three months ended August 29, 2020 and August 31, 2019 were $5,010 and $658, respectively, and $6,567 and $2,495 during the nine months ended August 29, 2020 and August 31, 2019.

Restricted Stock Activity

The nonvested restricted stock activity for the nine months ended August 29, 2020 is presented below:

						Weighted-
				*Weighted-*		*Average*
				*Average*		*Remaining*
				*Grant*		*Contractual*
				*Date Fair*		*Life*
	*Units*			*Value*		*(in Years)*
Nonvested at November 30, 2019		487,997		$	46.56		0.8
Granted		210,294			47.71		2.7
Vested		(208,116	)		47.85		-
Forfeited		(49,483	)		47.60		0.4
Nonvested at August 29, 2020		440,692		$	46.39		1.0

Total fair value of restricted stock vested during the three months ended August 29, 2020 and August 31, 2019 was $116 and $360, respectively. Total fair value of restricted stock vested during the nine months ended August 29, 2020 and August 31, 2019 was $9,958 and $8,641, respectively. The total fair value of nonvested restricted stock at August 29, 2020 was $20,443.

We repurchased 772 and 2,479 restricted stock shares during the three months ended August 29, 2020 and August 31, 2019, respectively, and repurchased 66,436 and 63,152 restricted stock shares during the nine months ended August 29, 2020 and August 31, 2019, respectively, related to statutory minimum tax withholding.

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Deferred Compensation Activity

We have a Directors’ Deferred Compensation plan that allows non-employee directors to defer all or a portion of their directors’ compensation in a number of investment choices, including units representing shares of our common stock. We also have a Key Employee Deferred Compensation Plan that allows key employees to defer a portion of their eligible compensation in a number of investment choices, including units, representing shares of our common stock. We provide a 10 percent match on deferred compensation invested into units, representing shares of our common stock. The deferred compensation unit activity for the nine months ended August 29, 2020 is presented below:

	Non-employee
	Directors			Employees			Total
Units outstanding November 30, 2019		525,660			36,664			562,324
Participant contributions		35,851			15,786			51,637
Company match contributions		3,585			1,579			5,164
Payouts		(111,436	)		(12,536	)		(123,972	)
Units outstanding August 29, 2020		453,660			41,493			495,153

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

Note 8: Components of Net Periodic Benefit related to Pension and Other Postretirement Benefit Plans

	Three Months Ended August 29, 2020 and August 31, 2019
													Other
	Pension Benefits												Postretirement
	U.S. Plans						Non-U.S. Plans						Benefits
Net periodic cost (benefit):	2020			2019			2020			2019			2020			2019
Service cost	$	-		$	1		$	743		$	557		$	18		$	24
Interest cost		2,935			3,673			785			1,154			284			387
Expected return on assets		(6,439	)		(6,326	)		(2,812	)		(2,517	)		(1,994	)		(1,752	)
Amortization:
Prior service cost (benefit)		(1	)		3			16			16			-			-
Actuarial loss		1,799			1,169			959			772			15			8
Net periodic benefit	$	(1,706	)	$	(1,480	)	$	(309	)	$	(18	)	$	(1,677	)	$	(1,333	)

	Nine Months Ended August 29, 2020 and August 31, 2019
													Other
	Pension Benefits												Postretirement
	U.S. Plans						Non-U.S. Plans						Benefits
Net periodic cost (benefit):	2020			2019			2020			2019			2020			2019
Service cost	$	-		$	3		$	2,184		$	1,687		$	55		$	73
Interest cost		8,803			7,346			2,348			3,527			851			1,162
Expected return on assets		(19,318	)		(12,652	)		(8,408	)		(7,710	)		(5,982	)		(5,259	)
Amortization:
Prior service cost (benefit)		(2	)		10			48			48			-			-
Actuarial loss		5,397			3,507			2,839			2,347			46			25
Net periodic benefit	$	(5,120	)	$	(1,786	)	$	(989	)	$	(101	)	$	(5,030	)	$	(3,999	)

Service cost is included with employee compensation cost in cost of sales and selling, general and administrative expenses in the Consolidated Statements of Income. The components of our net periodic defined benefit pension and postretirement benefit costs other than service cost are presented in other income (expense), net in the Consolidated Statements of Income.

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Note 9: Accumulated Other Comprehensive Income (Loss)

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

	Three Months Ended August 29, 2020											Three Months Ended August 31, 2019
	H.B. Fuller Stockholders									Non- controlling Interest		H.B. Fuller Stockholders									Non- controlling Interest
	Pre-tax			Tax			Net			Net		Pre-tax			Tax			Net			Net
Net income including non-controlling interest		-			-		$	41,607		$	24		-			-		$	49,718		$	12
Foreign currency translation adjustment¹	$	46,689			-			46,689			22	$	(30,613	)		-			(30,613	)		1
Defined benefit pension plans adjustment²		2,769		$	(691	)		2,078			-		1,970		$	(500	)		1,470			-
Interest rate swap³		5,455			(1,330	)		4,125			-		(15,006	)		3,752			(11,254	)		-
Cross currency swaps³		(2,387	)		73			(2,314	)		-		2,532			(115	)		2,417			-
Other comprehensive income (loss)	$	52,526		$	(1,948	)		50,578			22	$	(41,117	)	$	3,137			(37,980	)		1
Comprehensive income							$	92,185		$	46							$	11,738		$	13

	Nine Months Ended August 29, 2020											Nine Months Ended August 31, 2019
	H.B. Fuller Stockholders									Non- controlling Interest		H.B. Fuller Stockholders									Non- controlling Interest
	Pretax			Tax			Net			Net		Pretax			Tax			Net			Net
Net income including non-controlling interest		-			-		$	83,115		$	50		-			-		$	98,603		$	16
Foreign currency translation adjustment¹	$	13,983			-			13,983			25	$	(52,233	)		-			(52,233	)		3
Reclassification to earnings:
Defined benefit pension plans adjustment²		8,306		$	(2,072	)		6,234			-		5,938		$	(1,506	)		4,432			-
Interest rate swap³		(19,515	)		4,758			(14,757	)		-		(53,035	)		13,259			(39,776	)		-
Cross currency swaps³		8,353			(145	)		8,208			-		13,143			(538	)		12,605			-
Other comprehensive income (loss)	$	11,127		$	2,541			13,668			25	$	(86,187	)	$	11,215			(74,972	)		3
Comprehensive income							$	96,783		$	75							$	23,631		$	19

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

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

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

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The components of accumulated other comprehensive loss is as follows:

August 29, 2020

Total

H.B. Fuller

Stockholders

Non-
controlling

Interest

Foreign currency translation adjustment

(133,863

)

(133,733

)

(130

)

Interest rate swap, net of taxes of ($9,058)

(28,095

)

(28,095

)

Cash flow hedges, net of taxes of $168

9,971

Defined benefit pension plans adjustment, net of taxes of $79,819

(159,734

)

(159,734

)

Reclassification of AOCI tax effects

(18,341

)

(18,341

)

Accumulated other comprehensive loss

(330,062

)

(329,932

)

(130

)

	November 30, 2019
	Total			H.B. Fuller Stockholders			Non- controlling Interest
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	)		-
Accumulated other comprehensive loss	$	(343,705	)	$	(343,600	)	$	(105	)

Note 10: Income Taxes

As of August 29, 2020, we had a liability of $9,740 recorded for gross unrecognized tax benefits (excluding interest) compared to $8,946 as of November 30, 2019. As of August 29, 2020 and November 30, 2019, we had accrued $1,026 and $834 of gross interest relating to unrecognized tax benefits, respectively.

Income tax expense for the three and nine months ended August 29, 2020 includes $7.2 million and $5.2 million, respectively, of discrete tax benefit relating to the revaluation of cross-currency swap agreements due to appreciation of the Euro versus the U.S. Dollar and various foreign tax matters. Excluding the discrete tax benefit, the overall effective tax rate was 27.1 percent and 27.3 percent for the three and nine months ended August 29, 2020, respectively.

Income tax expense for the three and nine months ended August 31, 2019 includes $6.3 million and $7.2 million, respectively, of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 27.7 percent and 28.3 percent for the three and nine months ended August 31, 2019.

Note 11: Earnings Per Share

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

Three Months Ended

Nine Months Ended

August 29,

August 31,

August 29,

August 31,

(Shares in thousands)

2020

2019

2020

2019

Weighted-average common shares - basic

52,130

50,939

51,959

50,864

Equivalent shares from share-based compensations plans

461

563

441

972

Weighted-average common and common equivalent shares diluted

52,591

51,502

52,400

51,836

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

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Share-based compensation awards for 3,672,150 and 13,429 shares for the three months ended August 29, 2020 and August 31, 2019, respectively, and 4,034,001 and 152,999 shares for the nine months ended August 29, 2020 and August 31, 2019, respectively, were excluded from diluted earnings per share calculations because they were antidilutive.

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 August 29, 2020, we had the following cash flow hedges: 1) 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 and 2) one cross-currency swap agreement effective February 24, 2017 to convert a notional amount of $42,600 of foreign currency denominated intercompany loans into U.S. dollars and maturing on October 7, 2020.

As of August 29, 2020, the combined fair value of the swaps was an asset of $1,612 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 (expense), 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 $9,971 as of August 29, 2020. The estimated net amount of the existing gain that is reported in accumulated other comprehensive income (loss) as of August 29, 2020 that is expected to be reclassified into earnings within the next twelve months is $5,064. As of August 29, 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 August 29, 2020:

	Fiscal Year of Expiration	Interest Rate		Notional Value		Fair Value
Pay EUR	2020		1.95%	$	42,600	$	(4,951	)
Receive USD			4.3038%

Pay EUR	2021		2.75%	$	133,340	$	969
Receive USD			4.9330%

Pay EUR	2022		3.00%	$	267,860	$	5,594
Receive USD			5.1803%

Total				$	443,800	$	1,612

On March 9, 2018, we entered into an interest rate swap agreement to convert $100,000 of our $2,150,000 Term Loan B issued on October 20, 2017 to a fixed interest rate of 4.490 percent. On February 27, 2018, we entered into an interest rate swap agreement to convert $200,000 of our $2,150,000 Term Loan B to a fixed interest rate of 4.589 percent. On October 20, 2017, we entered into interest rate swap agreements to convert $1,050,000 of our $2,150,000 Term Loan B to a fixed interest rate of 4.0275 percent. The combined fair value of the interest rate swaps was a liability of $37,151 at August 29, 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 $1,350,000 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:

	Three Months Ended						Nine Months Ended
	August 29, 2020			August 31, 2019			August 29, 2020			August 31, 2019
Cross-currency swap contracts	$	(2,387	)	$	2,532		$	8,353		$	13,143
Interest rate swap contracts		5,455			(15,006	)		(19,515	)		(53,035	)

Fair Value Hedges

On February 14, 2017, we entered into an interest rate swap agreement to convert $150,000 of our $300,000 Public Notes that were issued on February 14, 2017 to a variable interest rate of 1-month LIBOR plus 1.86 percent. The swap was designated for hedge accounting treatment as a fair value hedge. 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. 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.

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Derivatives Not Designated As Hedging Instruments

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

As of August 29, 2020, we had forward foreign currency contracts maturing between August 31, 2020 and May 18, 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.

The amounts of pretax gains (losses) recognized in other income, net related to derivative instruments not designated as hedging instruments for the nine months ended August 29, 2020 and August 31, 2019 were ($4,859) and $3,996, respectively.

Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of entities in the customer base and their dispersion across many different industries and countries. As of August 29, 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 August 29, 2020 and November 30, 2019, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

August 29,

Fair Value Measurements Using:

Description

2020

Level 1

Level 2

Level 3

Assets:

Marketable securities

11,846

Foreign exchange contract assets

3,004

Cross-currency cash flow hedges

1,612

Liabilities:

Foreign exchange contract liabilities

7,865

Interest rate swaps, cash flow hedges

37,151

Contingent consideration liability

5,000

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	November 30,		Fair Value Measurements Using:
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, fair value 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, cash flow hedges		17,637		-		17,637		-

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 related to the acquisition of D.H.M. resulted in a fair value of $5,000.

	Amounts
Balance at November 30, 2019	$	-
Acquisition		5,000
Balance at August 29, 2020	$	5,000

Long-term debt had an estimated fair value of $1,846,462 and $2,016,516 as of August 29, 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.

Note 14: Share Repurchase Program

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

We did not repurchase any shares under this authorization during the nine months ended August 29, 2020 and August 31, 2019.

Note 15: Commitments and Contingencies

Environmental Matters

From time to time, we become aware of compliance matters relating to, or receive notices from, federal, state or local entities regarding possible or alleged violations of environmental, health or safety laws and regulations. We review the circumstances of each individual site, considering the number of parties involved, the level of potential liability or our contribution relative to the other parties, the nature and magnitude of the hazardous substances involved, the method and extent of remediation, the estimated legal and consulting expense with respect to each site and the time period over which any costs would likely be incurred. Also, from time to time, we are identified as a potentially responsible party (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and/or similar state laws that impose liability for costs relating to the clean up of contamination resulting from past spills, disposal or other release of hazardous substances. We are also subject to similar laws in some of the countries where current and former facilities are located. Our environmental, health and safety department monitors compliance with applicable laws on a global basis. To the extent we can reasonably estimate the amount of our probable liabilities for environmental matters, we establish an undiscounted financial provision. We recorded liabilities of $6,989 and $8,535 as of August 29, 2020 and November 30, 2019, respectively, for probable and reasonably estimable environmental remediation costs. Of the amount reserved, $3,851 and $4,117 as of August 29, 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.

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

Other Legal Proceedings

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

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

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

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

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

	Nine Months Ended				3 Years Ended
	August 29, 2020		August 31, 2019		November 30, 2019
Lawsuits and claims settled		3		5		24
Settlement amounts	$	80	$	232	$	2,487
Insurance payments received or expected to be received	$	54	$	177	$	1,937

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.

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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 each of our 2017 and 2018 fiscal years. The sales to the customers who were reselling our products into Iran ceased during fiscal year 2018 and we do not currently conduct any business in Iran. In January 2018, we voluntarily contacted OFAC to advise it of this internal investigation and our intention to cooperate fully with OFAC and, in September 2018, we submitted the results and findings of our investigation to OFAC. We have not yet received a response from OFAC. At this time, we cannot predict the outcome or effect of the investigation, however, based on the results of our investigation to date, we believe we could incur penalties ranging from zero to $10,000.

Note 16: Operating Segments

We are required to report segment information in the same way that we internally organize our business for assessing performance and making decisions regarding allocation of resources. For segment evaluation by the chief operating decision maker, segment operating income is identified as gross profit less SG&A expenses. Beginning in the third quarter of 2020, we are also presenting earnings before interest, taxes, depreciation and amortization (EBITDA) adjusted for certain non-recurring items, as this measure is also being used for assessing performance. Corporate assets are not allocated to the operating segments. Operating results of each of our segments are regularly reviewed by our chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance.

The table below provides certain information regarding net revenue and segment operating income (loss) for each of our operating segments.

	Three Months Ended
	August 29, 2020					August 31, 2019
			Segment					Segment
	*Net*		*Operating*			*Net*		*Operating*
	*Revenue*		*Income (Loss)*			*Revenue*		*Income (Loss)*
Hygiene, Health and Consumable Adhesives	$	320,187	$	31,883		$	328,420	$	32,638
Engineering Adhesives		276,083		29,873			286,716		36,847
Construction Adhesives		95,193		4,284			108,406		7,650
Total segment		691,463		66,040			723,542		77,135
Corporate Unallocated		-		(7,309	)		1,834		(10,429	)
Total	$	691,463	$	58,731		$	725,376	$	66,706

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	Nine Months Ended
	August 29, 2020					August 31, 2019
			Segment					Segment
	*Net*		*Operating*			*Net*		*Operating*
	*Revenue*		*Income (Loss)*			*Revenue*		*Income (Loss)*
Hygiene, Health and Consumable Adhesives	$	977,373	$	89,556		$	986,166	$	85,576
Engineering Adhesives		761,040		65,386			855,010		98,146
Construction Adhesives		274,216		9,436			302,987		14,246
Total segment		2,012,629		164,378			2,144,163		197,968
Corporate Unallocated		-		(19,991	)		13,731		(24,670	)
Total	$	2,012,629	$	144,387		$	2,157,894	$	173,298

Consistent with our internal management reporting, Corporate Unallocated amounts in the tables above include charges that are not allocated to the Company’s reportable segments. For the three and nine months ended August 31, 2019, Corporate Unallocated also includes operating results related to our surfactants and thickeners business, which we divested during the third quarter of 2019.

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

	Three Months Ended						Nine Months Ended
	August 29,			August 31,			August 29,			August 31,
	2020			2019			2020			2019
Operating income	$	58,731		$	66,706		$	144,387		$	173,298
Other income, net		3,722			22,762			11,740			29,113
Interest expense		(20,196	)		(25,607	)		(64,597	)		(79,354	)
Interest income		2,945			3,115			8,761			9,191
Income before income taxes and income from equity method investments	$	45,202		$	66,976		$	100,291		$	132,248

The adjusted EBITDA information presented below does not conform to U.S. GAAP and should not be construed as an alternative to the reported results determined in accordance with U.S. GAAP. Adjusted EBITDA is defined as net income before interest, income taxes, depreciation, amortization and certain adjustments. Management has included this non-GAAP information to assist in understanding the operating performance of the company and its operating segments. Adjusted EBITDA is reconciled to net income attributable to H.B. Fuller, the most directly comparable financial measure determined and reported in accordance with U.S. GAAP.

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	Three Months Ended						Nine Months Ended
	August 29, 2020			August 31, 2019			August 29, 2020			August 31, 2019

Adjusted EBITDA
Health, Hygiene and Consumable Adhesives	$	43,697			45,146		$	127,914		$	123,700
Engineering Adhesives		46,831			52,152			112,918			144,521
Construction Adhesives		14,394			17,486			39,893			44,185
Corporate Unallocated		785			1,339			3,377			7,761
Total		105,707			116,123			284,102			320,167

Adjusted items:
Adjustments		(1,657	)		(5,491	)		9,771			8,779
Interest expense		20,220			25,607			64,650			79,354
Interest income		(2,945	)		(3,115	)		(8,761	)		(9,191	)
Income taxes		14,050			14,798			32,335			37,219
Depreciation and amortization expense		34,432			34,606			102,992			105,403
Total		64,100			66,405			200,987			221,564

Net income attributable to H.B. Fuller	$	41,607		$	49,718		$	83,115		$	98,603

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:

	Three Months Ended August 29, 2020

		*Hygiene, Health*
		*and Consumable*		*Engineering*		*Construction*		*Corporate*
		*Adhesives*		*Adhesives*		*Adhesives*		*Unallocated*		*Total*

Americas	$	179,209	$	114,358	$	84,379	$	-	$	377,946
EIMEA		91,813		81,783		4,418		-		178,014
Asia Pacific		49,165		79,942		6,396		-		135,503
	$	320,187	$	276,083	$	95,193	$	-	$	691,463

	Three Months Ended August 31, 2019

		*Hygiene, Health*
		*and Consumable*		*Engineering*		*Construction*		*Corporate*
		*Adhesives*		*Adhesives*		*Adhesives*		*Unallocated*		*Total*

Americas	$	185,356	$	120,519	$	96,463	$	1,834	$	404,172
EIMEA		95,719		90,113		5,940		-		191,772
Asia Pacific		47,345		76,084		6,003		-		129,432
	$	328,420	$	286,716	$	108,406	$	1,834	$	725,376

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	Nine Months Ended August 29, 2020
		Hygiene, Health
		and Consumable		Engineering		Construction		Corporate
		Adhesives		Adhesives		Adhesives		Unallocated		Total

Americas	$	543,066	$	309,742	$	242,685	$	-	$	1,095,493
EIMEA		282,418		237,102		15,049		-		534,569
Asia Pacific		151,889		214,196		16,482		-		382,567
	$	977,373	$	761,040	$	274,216	$	-	$	2,012,629

	Nine Months Ended August 31, 2019
		Hygiene, Health
		and Consumable		Engineering		Construction		Corporate
		Adhesives		Adhesives		Adhesives		Unallocated		Total

Americas	$	545,903	$	345,175	$	268,697	$	13,731	$	1,173,506
EIMEA		291,372		284,101		16,627		-		592,100
Asia Pacific		148,891		225,734		17,663		-		392,288
	$	986,166	$	855,010	$	302,987	$	13,731	$	2,157,894

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

Overview

The Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended November 30, 2019 for important background information related to our business.

Net revenue in the third quarter of 2020 decreased 4.7 percent from the third quarter of 2019. Net revenue decreased 2.1 percent due to sales volume, 0.4 percent due to unfavorable product pricing and 0.2 percent due to the divestiture of our surfactants and thickeners business. Negative currency effects of 2.0 percent compared to the third quarter of 2019 were primarily driven by the weaker Brazilian real, Turkish lira, Argentinian peso, Mexican peso and Chinese renminbi, partially offset by a stronger Euro compared to the U.S. dollar. Gross profit margin decreased 140 basis points primarily due to lower sales volume and unfavorable mix partially offset by lower raw material costs.

Net revenue in the first nine months of 2020 decreased 6.7 percent from the third quarter of 2019. Net revenue decreased 3.1 percent due to sales volume, 0.7 percent due to unfavorable product pricing and 0.6 percent due to the divestiture of our surfactants and thickeners business. Negative currency effects of 2.3 percent compared to the first nine months of 2019 were primarily driven by the weaker Brazilian real, Argentinian peso, Chinese renminbi, Turkish lira and Euro compared to the U.S. dollar. Gross profit margin decreased 110 basis points primarily due to lower sales volume and unfavorable mix partially offset by lower raw material costs.

Net income attributable to H.B. Fuller in the third quarter of 2020 was $41.6 million compared to $49.7 million in the third quarter of 2019. On a diluted earnings per share basis, the third quarter of 2020 was $0.79 per share compared to $0.97 per share for the third quarter of 2019.

Net income attributable to H.B. Fuller in the first nine months of 2020 was $83.1 million compared to $98.6 million in the first nine months of 2019. On a diluted earnings per share basis, the first nine months of 2020 was $1.59 per share compared to $1.90 per share for the first nine months of 2019.

Market Conditions

On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a pandemic. Its full financial impact is unknown at this time and will depend on the duration of government restrictions, including travel restrictions, quarantines, shelter in place orders and shutdowns and duration of the economic slowdown and nature and timing of a recovery. The Company has been deemed an essential business and all of our global manufacturing operations have remained open. We are closely monitoring the situation to help ensure the well-being of our employees, customers and suppliers to minimize disruptions and provide for the safe and reliable supply of products to our customers. In accordance with the guidance provided by both the World Health Organization and the U.S. Centers for Disease Control and Prevention, we have implemented safe work practices, including social distancing and work from home guidelines.

See "Risk Factors" in Item 1A of this Quarterly Report on Form 10-Q for further information of the possible impact of the COVID-19 pandemic on our business.

Restructuring Plans

2020 Restructuring Plan

During the fourth quarter of 2019, we approved a restructuring plan related to organizational changes and other actions to optimize operations in connection with the realignment of the Company into three segments (“2020 Restructuring Plan”). In implementing the 2020 Restructuring Plan, we expect to incur costs of approximately $9.0 million to $11.0 million ($7.1 million to $8.7 million after-tax), which includes (i) cash expenditures of approximately $6.0 million to $8.0 million ($4.8 million to $6.4 million after tax) for severance and related employee costs globally and (ii) $3.0 million ($2.3 million after-tax) related to streamlining of processes and other restructuring-related costs. All restructuring costs are expected to be cash costs. We have incurred costs of $10.9 million under this plan as of August 29, 2020. The 2020 Restructuring Plan was implemented in the fourth quarter of 2019 and is currently expected to be completed by mid-year of fiscal year 2021.

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Royal Adhesives Restructuring Plan

During the first quarter of 2018, we approved a restructuring plan consisting of consolidation plans, organizational changes and other actions related to the integration of the operations of Royal Adhesives with the operations of the Company (the “Royal Adhesives Restructuring Plan”). In implementing the Royal Adhesives Restructuring Plan, we have incurred costs of approximately $11.2 million, which includes (i) cash expenditures of approximately $6.3 million for severance and related employee costs globally and (ii) other costs of approximately $4.9 million related to the optimization of production facilities, streamlining of processes and accelerated depreciation of long-lived assets. Approximately $8.5 million of the costs were cash costs. The Royal Adhesives Restructuring Plan was implemented in the first quarter of 2018 and is substantially complete.

Results of Operations

Net revenue:

	Three Months Ended							Nine Months Ended
	August 29,		August 31,		2020 vs			August 29,		August 31,		2020 vs
($ in millions)	2020		2019		2019			2020		2019		2019
Net revenue	$	691.5	$	725.4		(4.7	%)	$	2,012.6	$	2,157.9		(6.7	%)

We review variances in net revenue in terms of changes related to sales volume, product pricing, business acquisitions and divestitures (“M&A”) and changes in foreign currency exchange rates. The following table shows the net revenue variance analysis for the third quarter and first nine months of 2020 compared to the same periods in 2019:

	Three Months Ended			Nine Months Ended
	August 29, 2020 vs. August 31, 2019			August 29, 2020 vs. August 31, 2019
Organic growth		(2.5	%)		(3.8	%)
M&A		(0.2	%)		(0.6	%)
Currency		(2.0	%)		(2.3	%)
Total		(4.7	%)		(6.7	%)

Organic growth was a negative 2.5 percent in the third quarter of 2020 compared to the third quarter of 2019 driven by a 12.2 percent decrease in Construction Adhesives and a 2.9 percent decrease in Engineering Adhesives, partially offset by 1.1 percent growth in the Hygiene, Health and Consumable Adhesives segment. The decrease is predominately driven by a decrease in sales volume. The 0.2 percent decrease related to M&A is due to the sale of our surfactants and thickeners business in 2019. The negative 2.0 percent currency impact was primarily driven by a weaker Brazilian real, Turkish lira, Argentinian peso, Mexican peso and Chinese renminbi partially offset by a stronger Euro compared to the U.S. dollar.

Organic growth was a negative 3.8 percent in the first nine months of 2020 compared to the first nine months of 2019 driven by a 9.5 percent decrease in Engineering Adhesives and a 9.2 percent decrease in Construction Adhesives, partially offset by 2.7 percent growth in the Hygiene, Health and Consumable Adhesives segment. The decrease is predominately driven by a decrease in sales volume. The 0.6 percent decrease related to M&A is due to the sale of our surfactants and thickeners business in 2019. The negative 2.3 percent currency impact was primarily driven by a weaker Brazilian real, Argentinian peso, Chinese renminbi, Turkish lira and Euro compared to the U.S. dollar.

Cost of sales:

	Three Months Ended									Nine Months Ended
	August 29,			August 31,			2020 vs			August 29,			August 31,			2020 vs
($ in millions)	2020			2019			2019			2020			2019			2019
Raw materials	$	366.7		$	382.5			(4.1	%)	$	1,069.7		$	1,144.4			(6.5	%)
Other manufacturing costs		136.9			135.6			1.0	%		399.9			407.8			(1.9	%)
Cost of sales	$	503.6		$	518.1			(2.8	%)	$	1,469.6		$	1,552.2			(5.3	%)
Percent of net revenue		72.8	%		71.4	%					73.0	%		71.9	%

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Cost of sales in the third quarter of 2020 compared to the third quarter of 2019 increased 140 basis points as a percentage of net revenue. Raw material cost as a percentage of net revenue increased 30 basis points in the third quarter of 2020 compared to the third quarter of 2019. Other manufacturing costs as a percentage of revenue increased 110 basis points in the third quarter of 2020 compared to the third quarter of 2019 primarily due to the impact of lower sales volume and unfavorable mix.

Cost of sales in the first nine months of 2020 compared to the first nine months of 2019 increased 110 basis points as a percentage of net revenue. Raw material cost as a percentage of net revenue increased 10 basis points as a percentage of net revenue in the first nine months of 2020 compared to the first nine months of 2019. Other manufacturing costs as a percentage of revenue increased 100 basis points in the first nine months of 2020 compared to the first nine months of 2019 primarily due to the impact of lower sales volume and unfavorable mix.

Gross profit:

	Three Months Ended									Nine Months Ended
	August 29,			August 31,			2020 vs			August 29,			August 31,			2020 vs
($ in millions)	2020			2019			2019			2020			2019			2019
Gross profit	$	187.8		$	207.3			(9.4	%)	$	543.0		$	605.7			(10.4	%)
Percent of net revenue		27.2	%		28.6	%					27.0	%		28.1	%

Gross profit in the third quarter of 2020 decreased 9.4 percent and gross profit margin decreased 140 basis points compared to the third quarter of 2019. The decrease in gross profit margin was primarily due to lower sales volume and unfavorable mix partially offset by lower raw material costs.

Gross profit in the first nine months of 2020 decreased 10.4 percent and gross profit margin decreased 110 basis points compared to the first nine months of 2019. The decrease in gross profit margin was primarily due to lower sales volume and unfavorable mix partially offset by lower raw material costs.

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

	Three Months Ended									Nine Months Ended
	August 29,			August 31,			2020 vs			August 29,			August 31,			2020 vs
($ in millions)	2020			2019			2019			2020			2019			2019
SG&A	$	129.1		$	140.6			(8.2	%)	$	398.6		$	432.4			(7.8	%)
Percent of net revenue		18.7	%		19.4	%					19.8	%		20.0	%

SG&A expenses for the third quarter of 2020 decreased $11.5 million, or 8.2 percent, compared to the third quarter of 2019. The decrease is primarily due to cost savings realized from our business realignment to three segments and lower discretionary spending.

SG&A expenses for the first nine months of 2020 decreased $33.8 million, or 7.8 percent, compared to the first nine months of 2019. The decrease is primarily due to cost savings realized from our business realignment to three segments and lower discretionary spending.

Other income, net:

	Three Months Ended							Nine Months Ended
	August 29,		August 31,		2020 vs			August 29,		August 31,		2020 vs
($ in millions)	2020		2019		2019			2020		2019		2019
Other income, net	$	3.7	$	22.8		(83.8	%)	$	11.7	$	29.1		(59.8	%)

Other income, net in the third quarter of 2020 included $4.5 million of net defined benefit pension benefits, offset by $0.6 of other expense and $0.2 million of currency transaction losses. Other income, net in the third quarter of 2019 included a $20.3 million on gain on sale of assets, $3.4 million of net defined benefit pension benefits and $0.7 million of other income, offset by $1.6 million of currency transaction losses.

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Other income, net in the first nine months of 2020 included $13.4 million of net defined benefit pension benefits, offset by $1.7 million of currency transaction losses. Other income, net in the first nine months of 2019 included a $20.0 million gain on sale of assets, $10.3 million of net defined benefit pension benefits and $1.0 million of other income, offset by $2.2 million of currency transaction losses.

Interest expense:

	Three Months Ended							Nine Months Ended
	August 29,		August 31,		2020 vs			August 29,		August 31,		2020 vs
($ in millions)	2020		2019		2019			2020		2019		2019
Interest expense	$	20.2	$	25.6		(21.1	%)	$	64.6	$	79.4		(18.6	%)

Interest expense in the third quarter of 2020 was $20.2 million compared to $25.6 million in the third quarter of 2019. Interest expense in the third quarter of 2020 compared to the third quarter of 2019 was lower due to lower U.S. debt balances and lower interest rates.

Interest expense in the first nine months of 2020 was $64.6 million compared to $79.4 million in the first nine months of 2019. Interest expense in the first nine months of 2020 compared to the first nine months of 2019 was lower due to lower U.S. debt balances.

Interest income:

	Three Months Ended							Nine Months Ended
	August 29,		August 31,		2020 vs			August 29,		August 31,		2020 vs
($ in millions)	2020		2019		2019			2020		2019		2019
Interest income	$	2.9	$	3.1		(6.5	%)	$	8.8	$	9.2		(4.3	%)

Interest income in the third quarter of 2020 was $2.9 million. Interest income in the third quarter of 2019 was $3.1 million.

Interest income in the first nine months of 2020 was $8.8 million. Interest income in the nine months of 2019 was $9.2 million.

Income taxes:

	Three Months Ended									Nine Months Ended
	August 29,			August 31,			2020 vs			August 29,			August 31,			2020 vs
($ in millions)	2020			2019			2019			2020			2019			2019
Income taxes	$	5.1		$	19.3			(73.6	%)	$	22.2		$	38.9			(42.9	%)
Effective tax rate		11.3	%		28.8	%					22.1	%		29.4	%

Income tax expense of $5.1 million in the third quarter of 2020 includes $7.2 million of discrete tax benefit relating to the revaluation of cross-currency swap agreements due to appreciation of the Euro versus the U.S. Dollar and various foreign tax matters. Excluding the discrete tax benefit, the overall effective tax rate was 27.1 percent. Income tax expense of $19.3 million in the third quarter of 2019 included $6.3 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 27.7 percent. The reduction in rate excluding discrete taxes relates to changes in the geographic mix of earnings.

Income tax expense of $22.2 million in the first nine months of 2020 includes $5.2 million of discrete tax benefit relating to the revaluation of cross-currency swap agreements due to appreciation of the Euro versus the U.S. Dollar and various foreign tax matters. Excluding the discrete tax benefit, the overall effective tax rate was 27.3 percent. Income tax expense of $38.9 million in the first nine months of 2019 included $7.2 million of discrete tax expense. Excluding the discrete tax expense, the overall effective tax rate was 28.3 percent. The reduction in rate excluding discrete taxes relates to changes in the geographic mix of earnings.

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Income from equity method investments:

	Three Months Ended							Nine Months Ended
	August 29,		August 31,		2020 vs			August 29,		August 31,		2020 vs
($ in millions)	2020		2019		2019			2020		2019		2019
Income from equity method investments	$	1.5	$	2.1		(28.6	%)	$	5.1	$	5.3		(3.8	%)

The income from equity method investments relates to our 50 percent ownership of the Sekisui-Fuller joint venture in Japan. The lower income for the third quarter of 2020 and for the first nine months of 2020 compared to the same periods of 2019 relates to lower net income in our joint venture.

Net income attributable to H.B. Fuller:

	Three Months Ended									Nine Months Ended
	August 29,			August 31,			2020 vs			August 29,			August 31,			2020 vs
($ in millions)	2020			2019			2019			2020			2019			2019
Net income attributable to H.B. Fuller	$	41.6		$	49.7			(16.3	%)	$	83.1		$	98.6			(15.7	%)
Percent of net revenue		6.0	%		6.9	%					4.1	%		4.6	%

The net income attributable to H.B. Fuller for the third quarter of 2020 was $41.6 million compared to $49.7 million for the third quarter of 2019. The diluted earnings per share for the third quarter of 2020 was $0.79 per share as compared to $0.97 per share for the third quarter of 2019.

The net income attributable to H.B. Fuller for the first nine months of 2020 was $83.1 million compared to $98.6 million for the first nine months of 2019. The diluted earnings per share for the first nine months of 2020 was $1.59 per share as compared to $1.90 per share for the first nine months of 2019.

Operating Segment Results

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 tables below provide certain information regarding the net revenue and segment operating income of each of our operating segments.

Corporate Unallocated includes acquisition and integration-related charges, restructuring-related charges and the results of business divestitures.

Net Revenue by Segment:

	Three Months Ended										Nine Months Ended
	August 29, 2020					August 31, 2019					August 29, 2020					August 31, 2019
	Net		% of			Net		% of			Net		% of			Net		% of
($ in millions)	Revenue		Total			Revenue		Total			Revenue		Total			Revenue		Total
Hygiene, Health and Consumable Adhesives	$	320.2		46	%	$	328.5		45	%	$	977.4		48	%	$	986.2		46	%
Engineering Adhesives		276.1		40	%		286.7		40	%		761.0		38	%		855.0		40	%
Construction Adhesives		95.2		14	%		108.4		15	%		274.2		14	%		303.0		14	%
Segment total	$	691.5		100	%	$	723.6		100	%	$	2,012.6		100	%	$	2,144.2		100	%
Corporate Unallocated		-		-			1.8		0	%		-		-			13.7		0	%
Total	$	691.5		100	%	$	725.4		100	%	$	2,012.6		100	%	$	2,157.9		100	%

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Segment Operating Income (Loss):

	Three Months Ended												Nine Months Ended
	August 29, 2020						August 31, 2019						August 29, 2020						August 31, 2019
($ in millions)	Segment Operating Income (Loss)			% of Total			Segment Operating Income (Loss)			% of Total			Segment Operating Income (Loss)			% of Total			Segment Operating Income (Loss)			% of Total
Hygiene, Health and Consumable Adhesives	$	31.9			54	%	$	32.6			49	%	$	89.6			62	%	$	85.6			49	%
Engineering Adhesives		29.8			51	%		36.8			55	%		65.4			45	%		98.2			57	%
Construction Adhesives		4.3			7	%		7.7			12	%		9.4			7	%		14.2			8	%
Segment total	$	66.0			112	%	$	77.1			116	%	$	164.4			114	%	$	198.0			114	%
Corporate Unallocated		(7.3	)		(12	%)		(10.4	)		(16	%)		(20.0	)		(14	%)		(24.7	)		(14	%)
Total	$	58.7			100	%	$	66.7			100	%	$	144.4			100	%	$	173.3			100	%

Hygiene, Health and Consumable Adhesives

	Three Months Ended									Nine Months Ended
	August 29,			August 31,			2020 vs			August 29,			August 31,			2020 vs
($ in millions)	2020			2019			2019			2020			2019			2019
Net revenue	$	320.2		$	328.5			(2.5	%)	$	977.4		$	986.2			(0.9	%)
Segment operating income	$	31.9		$	32.6			(2.1	%)	$	89.6		$	85.6			4.7	%
Segment operating margin		10.0	%		9.9	%					9.2	%		8.7	%

The following table provides details of the Hygiene, Health and Consumable Adhesives net revenue variances:

	Three Months Ended			Nine Months Ended
	August 29, 2020 vs. August 31, 2019			August 29, 2020 vs. August 31, 2019
Organic growth		1.1	%		2.7	%
Currency		(3.6	%)		(3.6	%)
Total		(2.5	%)		(0.9	%)

Net revenue decreased 2.5 percent in the third quarter of 2020 compared to the third quarter of 2019. The increase in organic growth was attributable to an increase in product price as well as a slight increase in sales volume. The negative currency effect was due to the weaker Brazilian real, Argentinian peso, Turkish lira and Mexican peso partially offset by a stronger Euro compared to the U.S. dollar. As a percentage of net revenue, raw material costs increased 60 basis points due to unfavorable product mix partially offset by lower raw material costs. Other manufacturing costs as a percentage of net revenue increased 20 basis points. SG&A expenses as a percentage of net revenue decreased 90 basis points primarily due to costs savings realized from our business realignment to three segments and lower discretionary spending. Segment operating income decreased 2.1 percent and segment operating margin as a percentage of net revenue increased 10 basis points compared to the third quarter of 2019.

Net revenue decreased 0.9 percent in the first nine months of 2020 compared to the first nine months of 2019. The increase in organic growth was attributable to an increase in sales volume. The negative currency effect was due to the weaker Brazilian real, Argentinian peso, Turkish lira, Mexican peso and Chinese renminbi compared to the U.S. dollar. As a percentage of net revenue, raw material costs were flat. Other manufacturing costs as a percentage of net revenue increased 30 basis points. SG&A expenses as a percentage of net revenue decreased 80 basis points primarily due to costs savings realized from our business realignment to three segments and lower discretionary spending. Segment operating income increased 4.7 percent and segment operating margin as a percentage of net revenue increased 50 basis points compared to the first nine months of 2019.

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Engineering Adhesives

	Three Months Ended									Nine Months Ended
	August 29,			August 31,			2020 vs			August 29,			August 31,			2020 vs
($ in millions)	2020			2019			2019			2020			2019			2019
Net revenue	$	276.1		$	286.7			(3.7	%)	$	761.0		$	855.0			(11.0	%)
Segment operating income	$	29.8		$	36.8			(19.0	%)	$	65.4		$	98.2			(33.4	%)
Segment operating margin		10.8	%		12.8	%					8.6	%		11.5	%

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

	Three Months Ended			Nine Months Ended
	August 29, 2020 vs. August 31, 2019			August 29, 2020 vs. August 31, 2019
Organic growth		(2.9	%)		(9.5	%)
Currency		(0.8	%)		(1.5	%)
Total		(3.7	%)		(11.0	%)

Net revenue decreased 3.7 percent in the third quarter of 2020 compared to the third quarter of 2019. The decrease in organic growth was attributable to a decrease in sales volume and product pricing. The negative currency effect was due to a weaker Chinese renminbi, Turkish lira, Brazilian real and Argentinian peso partially offset by a stronger Euro compared to the U.S. dollar. Raw material costs as a percentage of net revenue increased 20 basis points. Other manufacturing costs as a percentage of net revenue increased 180 basis points due to lower net revenue. SG&A expenses as a percentage of net revenue was flat. Segment operating income decreased 19.0 percent and segment operating margin decreased 200 basis points compared to the third quarter of 2019.

Net revenue decreased 11.0 percent in the first nine months of 2020 compared to the first nine months of 2019. The decrease in organic growth was attributable to a decrease in sales volume and product pricing. The negative currency effect was due to a weaker Chinese renminbi, Brazilian real, Euro and Turkish lira compared to the U.S. dollar. Raw material costs as a percentage of net revenue increased 30 basis points. Other manufacturing costs as a percentage of net revenue increased 140 basis points due to lower net revenue. SG&A expenses as a percentage of net revenue increased 120 basis points due to lower net revenue. Segment operating income decreased 33.4 percent and segment operating margin decreased 290 basis points compared to the first nine months of 2019.

Construction Adhesives

	Three Months Ended									Nine Months Ended
	August 29,			August 31,			2020 vs			August 29,			August 31,			2020 vs
($ in millions)	2020			2019			2019			2020			2019			2019
Net revenue	$	95.2		$	108.4			(12.2	%)	$	274.2		$	303.0			(9.5	%)
Segment operating income	$	4.3		$	7.7			(44.2	%)	$	9.4		$	14.2			(33.8	%)
Segment operating margin		4.5	%		7.1	%					3.4	%		4.7	%

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

	Three Months Ended			Nine Months Ended
	August 29, 2020 vs. August 31, 2019			August 29, 2020 vs. August 31, 2019
Organic growth		(12.2	%)		(9.2	%)
Currency		0.0	%		(0.3	%)
Total		(12.2	%)		(9.5	%)

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Net revenue decreased 12.2 percent in the third quarter of 2020 compared to the third quarter of 2019. The decrease in organic growth was attributable to a decrease in sales volume and unfavorable product pricing. The currency effect was flat. Raw material costs as a percentage of net revenue decreased 130 basis points due to lower raw material costs compared to the third quarter of 2019. Other manufacturing costs as a percentage of net revenue increased 260 basis points due lower net revenue. SG&A expenses as a percentage of net revenue increased 130 basis points due to lower net revenue. Segment operating income decreased 44.2 percent and segment operating margin decreased 260 basis points compared to the third quarter of 2019.

Net revenue decreased 9.5 percent in the first nine months of 2020 compared to the first nine months of 2019. The decrease in organic growth was attributable to a decrease in sales volume and unfavorable product pricing. The negative currency effect was due to the weaker Australian dollar and Canadian dollar compared to the U.S. dollar. Raw material costs as a percentage of net revenue decreased 110 basis points due to lower raw material costs. Other manufacturing costs as a percentage of net revenue increased 170 basis points due to lower net revenue. SG&A expenses as a percentage of net revenue increased 70 basis points due to lower net revenue. Segment operating income decreased 33.8 percent and segment operating margin decreased 130 basis points compared to the first nine months of 2019.

Corporate Unallocated

	Three Months Ended									Nine Months Ended
	August 29,			August 31,			2020 vs			August 29,			August 31,			2020 vs
($ in millions)	2020			2019			2019			2020			2019			2019
Net revenue	$	-		$	1.8			(100.0	%)	$	-		$	13.7			(100.0	%)
Segment operating loss	$	(7.3	)	$	(10.4	)		(29.8	%)	$	(20.0	)	$	(24.7	)		(19.0	%)
Segment operating margin		NMP			NMP						NMP			NMP

NMP = Non-meaningful percentage

Corporate Unallocated includes acquisition and integration-related charges, restructuring-related charges and the results of business divestitures.

Net revenue in Corporate Unallocated in the third quarter of 2019 included revenue from our surfactants and thickeners business that was divested during the third quarter of 2019. Segment operating loss decreased 29.8 percent compared to the third quarter of 2019 reflecting increased organizational realignment costs.

Net revenue in Corporate Unallocated in the first nine months of 2019 included revenue from our surfactants and thickeners business that was divested during the third quarter of 2019. Segment operating loss decreased 19.0 percent compared to the first nine months of 2019 reflecting increased organizational realignment costs.

Financial Condition, Liquidity and Capital Resources

Total cash and cash equivalents as of August 29, 2020 were $74.9 million compared to $112.2 million as of November 30, 2019 and $119.8 million as of August 31, 2019. The majority of the $74.9 million in cash and cash equivalents as of August 29, 2020 was held outside the United States. Total long and short-term debt was $1,868.9 million as of August 29, 2020, $1,979.1 million as of November 30, 2019 and $2,097.1 million as of August 31, 2019. The total debt to total capital ratio as measured by Total Debt divided by (Total Debt plus Total Stockholders’ Equity) was 58.7 percent as of August 29, 2020 as compared to 61.8 percent as of November 30, 2019 and 64.1 percent as of August 31, 2019.

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

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Our credit agreements include restrictive covenants that, if not met, could lead to a renegotiation of our credit lines and a significant increase in our cost of financing. At August 29, 2020, we were in compliance with all covenants of our contractual obligations as shown in the following table:

Covenant	Debt Instrument	Measurement		Result as of August 29, 2020
Secured Indebtedness / TTM EBITDA	Revolving Credit Agreement and Term Loan B Credit Agreement	Not greater than 5.9			4.1

●

TTM = Trailing 12 months

●

EBITDA for covenant purposes is defined as consolidated net income, plus interest expense, expense for taxes paid or accrued, depreciation and amortization, certain non-cash impairment losses, extraordinary non-cash losses incurred other than in the ordinary course of business, nonrecurring extraordinary non-cash restructuring charges and the non-cash impact of purchase accounting, expenses related to the Royal Adhesives acquisition not to exceed $40.0 million, expenses relating to the integration of Royal Adhesives during the fiscal years ending in 2017, 2018 and 2019 not exceeding $30 million in aggregate, restructuring expenses that began prior to the Royal Adhesives acquisition incurred in fiscal years ending in 2017 and 2018 not exceeding $28 million in aggregate, and non-capitalized charges relating to the SAP implementation during fiscal years ending in 2017 through 2021 not exceeding $13 million in any single fiscal year, minus extraordinary non-cash gains. For the Total Indebtedness / TTM EBITDA ratio, TTM EBITDA is adjusted for the pro forma results from Material Acquisitions and Material Divestitures as if the acquisition or divestiture occurred at the beginning of the calculation period. The full definition is set forth in the Term Loan B Credit Agreement and the Amended Revolving Credit Agreement, and can be found in the Company’s 8-K filings dated October 20, 2017 and 8-K dated November 17, 2017, respectively.

We believe we have the ability to meet all of our contractual obligations and commitments in fiscal 2020.

Selected Metrics of Liquidity

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

	August 29,			August 31,
	2020			2019
Net working capital as a percentage of annualized net revenue¹		20.2	%		20.2	%
Accounts receivable DSO (in days)²		60			59
Inventory days on hand (in days)³		64			67
Free cash flow after dividends⁴	$	96.1		$	89.0
Total debt to total capital ratio⁵		58.7	%		64.1	%

¹Current quarter net working capital (trade receivables, net of allowance for doubtful accounts plus inventory minus trade payables) divided by annualized net revenue (current quarter multiplied by four).

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

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

⁴ Year-to-date net cash provided by operating activities, less purchased property, plant and equipment and dividends paid. See reconciliation to Net cash provided by operating activities from continuing operations below.

⁵ Total debt divided by (total debt plus total stockholders’ equity).

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Free cash flow after dividends, a non-GAAP financial measure, is defined as net cash provided by (used in) operations less purchased property, plant and equipment and dividends paid. Free cash flow after dividends is an integral financial measure used by the Company to assess its ability to generate cash in excess of its operating needs, therefore, the Company believes this financial measure provides useful information to investors. The following table reflects the manner in which free cash flow after dividends is determined and provides a reconciliation of free cash flow after dividends to net cash provided by (used in) operating activities from continuing operations, the most directly comparable financial measure calculated and reported in accordance with U.S. GAAP.

Reconciliation of "Net cash provided by operating activities" to Free cash flow after dividends

	Nine Months Ended
($ in millions)	August 29, 2020		August 31, 2019
Net cash provided by operating activities	$	193.0	$	160.2
Less: Purchased property, plant and equipment		71.9		47.0
Less: Dividends paid		25.0		24.2
Free cash flow after dividends	$	96.1	$	89.0

Summary of Cash Flows

Cash Flows from Operating Activities:

	Nine Months Ended
	August 29,		August 31,
($ in millions)	2020		2019
Net cash provided by operating activities	$	193.0	$	160.2

Net income including non-controlling interest was $83.2 million in the first nine months of 2020 compared to $98.6 million in the first nine months of 2019. Depreciation and amortization expense totaled $103.5 million in the first nine months of 2020 compared to $106.5 million in the first nine months of 2019. Deferred income taxes was a use of cash of $11.0 million in 2020 compared to $36.8 million in the first nine months of 2019. Accrued compensation was a use of cash of $12.3 million in 2020 compared to $10.2 million last year. The higher use of cash in 2020 was related to lower accruals for our employee incentive plans in the current year. Other assets was a source of cash of $31.4 million in the nine months ending August 29, 2020 compared to a use of cash of $31.9 million in the same period last year. Other liabilities was a source of cash of $20.5 million in the first nine months of 2020 compared to $10.6 million in the first nine months of 2019.

Changes in net working capital (trade receivables, inventory and trade payables) accounted for a use of cash of $9.3 million compared to $31.2 million last year. The table below provides the cash flow impact due to changes in the components of net working capital:

	Nine Months Ended
	August 29,			August 31,
($ in millions)	2020			2019
Trade receivables, net	$	17.3		$	(15.7	)
Inventory		(17.2	)		(17.7	)
Trade payables		(9.4	)		2.2
Total cash flow impact	$	(9.3	)	$	(31.2	)

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Trade Receivables, net – Trade receivables, net was a source of cash of $17.3 million and a use of cash of $15.7 million in the first nine months of 2020 and 2019, respectively. The source of cash in 2020 compared to the use of cash in 2019 was due to more cash collected on trade receivables in the current year compared to the prior year. The DSO were 60 days at August 29, 2020 and 59 days at August 31, 2019.

●

Inventory – Inventory was a use of cash of $17.2 million and $17.7 million in the first nine months of 2020 and 2019, respectively. The lower use of cash in 2020 is due to decreasing inventory levels in 2020 compared to 2019. Inventory days on hand were 64 days as of August 29, 2020 and 67 days as of August 31, 2019.

●

Trade Payables – Trade payables was a use of cash of $9.4 million and a source of cash of $2.2 million in the first nine months of 2020 and 2019, respectively. The use of cash in 2020 compared to source of cash in 2019 reflects higher payments on trade payables in the current year.

Cash Flows from Investing Activities:

	Nine Months Ended
	August 29,			August 31,
($ in millions)	2020			2019
Net cash used in investing activities	$	(91.0	)	$	18.6

Purchases of property, plant and equipment were $71.9 million during the first nine months 2020 as compared to $47.0 million for the same period of 2019, reflecting the timing of capital projects and expenditures related to growth initiatives.

Cash Flows from Financing Activities:

	Nine Months Ended
	August 29,			August 31,
($ in millions)	2020			2019
Net cash used in financing activities	$	(142.1	)	$	(199.1	)

Repayments of long-term debt were $128.0 million in the nine months ended August 29, 2020 and $173.5 million in the nine months ended August 31, 2019. Net proceeds of notes payable were $8.4 million in the nine months ended August 29, 2020 and $2.7 million in the same period of 2019. Cash dividends paid were $25.0 million in the nine months ended August 29, 2020 compared to $24.2 million in the same period of 2019. Repurchases of common stock were $3.3 million in the nine months ended August 29, 2020 compared to $2.9 million in the same period of 2019.

Forward-Looking Statements and Risk Factors

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words like "plan," "expect," "aim," "believe," "project," "anticipate," "intend," "estimate," "will," "should," "could" (including the negative or variations thereof) and other expressions that indicate future events and trends. These plans and expectations are based upon certain underlying assumptions, including those mentioned with the specific statements. Such assumptions are in turn based upon internal estimates and analyses of current market conditions and trends, our plans and strategies, economic conditions and other factors. These plans and expectations and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. In addition to the factors described in this report, Item 1A. Risk Factors identifies some of the important factors that could cause our actual results to differ materially from those in any such forward-looking statements. In order to comply with the terms of the safe harbor, we have identified these important factors which could affect our financial performance and could cause our actual results for future periods to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. These factors should be considered, together with any similar risk factors or other cautionary language that may be made elsewhere in this Quarterly Report on Form 10-Q.

The list of important factors in Item 1A. Risk Factors does not necessarily present the risk factors in order of importance. This disclosure, including that under Forward-Looking Statements and Risk Factors, and other forward-looking statements and related disclosures made by us in this report and elsewhere from time to time, represents our best judgment as of the date the information is given. We do not undertake responsibility for updating any of such information, whether as a result of new information, future events, or otherwise, except as required by law. Investors are advised, however, to consult any further public company disclosures (such as in filings with the SEC or in our press releases) on related subjects.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to various market risks, including changes in interest rates, foreign currency rates and prices of raw materials. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates. See Part II, Item 7A in our Annual Report on Form 10-K for the year ended November 30, 2019 for further discussion of these market risks. There have been no material changes in the reported market risk of the Company since November 30, 2019.

Item 4. Controls and Procedures

Controls and Procedures

We conducted an evaluation, under the supervision and with the participation of our president and chief executive officer and executive vice president, chief financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of August 29, 2020. Based on this evaluation, our president and chief executive officer and executive vice president, chief financial officer concluded that, as of August 29, 2020, our disclosure controls and procedures were effective.

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

Changes in Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Environmental Matters

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

Currently, we are involved in various environmental investigations, clean up activities and administrative proceedings and lawsuits. In particular, we are currently deemed a PRP in conjunction with numerous other parties, in a number of government enforcement actions associated with landfills and/or hazardous waste sites. As a PRP, we may be required to pay a share of the costs of investigation and clean up of these sites.

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We are engaged in environmental remediation and monitoring efforts at a number of current and former operating facilities. As of August 29, 2020, we had reserved $7.0 million, which represents our best estimate of probable liabilities with respect to environmental matters. Of the amount reserved, $3.9 million is attributable to a facility we own in Simpsonville, South Carolina as a result of our Royal Adhesives acquisition that is a designated site under CERCLA. It is reasonably possible that we may have additional liabilities related to these known environmental matters. However, the full extent of our future liability for environmental matters is difficult to predict because of uncertainty as to the cost of investigation and clean up of the sites, our responsibility for such hazardous substances and the number of and financial condition of other potentially responsible parties.

While uncertainties exist with respect to the amounts and timing of the ultimate environmental liabilities, based on currently available information, we have concluded that these matters, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flow. However, adverse developments and/or periodic settlements could negatively impact the results of operations or cash flows in one or more future periods.

Other Legal Proceedings

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

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

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

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

	Nine Months Ended				3 Years Ended
($ in millions)	August 29, 2020		August 31, 2019		November 30, 2019
Lawsuits and claims settled		3		5		24
Settlement amounts	$	0.08	$	0.2	$	2.5
Insurance payments received or expected to be received	$	0.05	$	0.2	$	1.9

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

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

During 2018, we retained legal counsel to conduct an internal investigation of the possible resale of our hygiene products into Iran by certain customers of our subsidiaries in Turkey (beginning in 2011) and India (beginning in 2014), in possible violation of the economic sanctions against Iran administered by OFAC and our compliance policy. The sales to these customers represented less than one percent of our net revenue in each of our 2017 and 2018 fiscal years. The sales to the customers who were reselling our products into Iran ceased during fiscal year 2018 and we do not currently conduct any business in Iran. In January 2018, we voluntarily contacted OFAC to advise it of this internal investigation and our intention to cooperate fully with OFAC and, in September 2018, we submitted the results and findings of our investigation to OFAC. We have not yet received a response from OFAC. At this time, we cannot predict the outcome or effect of the investigation, however, based on the results of our investigation to date, we believe we could incur penalties ranging from zero to $10.0 million.

Item 1A. Risk Factors

This Form 10-Q contains forward-looking statements concerning our future programs, products, expenses, revenue, liquidity and cash needs as well as our plans and strategies. These forward-looking statements are based on current expectations and we assume no obligation to update this information. Numerous factors could cause actual results to differ significantly from the results described in these forward-looking statements, including the risk factors identified under Part I, Item 1A. Risk Factors contained in our Annual Report on Form 10-K for the fiscal year ended November 30, 2019. There have been no material changes in the risk factors disclosed by us under Part I, Item 1A. Risk Factors contained in the Annual Report on Form 10-K for the fiscal year ended November 30, 2019, except for the addition of the following risk factor:

The COVID-19 pandemic could affect our operations and financial results.

In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China, which has become a global pandemic. We operate facilities around the world which could be adversely affected by the pandemic, including disruption of our supply of raw materials, production, transportation and delivery of our products. Demand for our products could be adversely affected. Due to the evolving and highly uncertain nature of this event, it is currently not possible to estimate the direct or indirect impacts this outbreak may have on our business, however, the disruption of the manufacturing of our product, commerce and related activity caused by the COVID-19 pandemic could materially and adversely affect our results of operations and financial condition.

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

Issuer Purchases of Equity Securities

Information on our purchases of equity securities during the third quarter ended August 29, 2020 is as follows:

Period	(a) Total Number of Shares Purchased¹		(b) Average Price Paid per Share		(d) Maximum Approximate Dollar Value of Shares that may yet be Purchased Under the Plan or Program (millions)

May 31, 2020 - June 4, 2020		-	$	-	$	187,170

June 5, 2020 - August 1, 2020		2,309	$	40.85	$	187,170

August 2, 2020 - August 29, 2020		32	$	45.34	$	187,170

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

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

On April 6, 2017, the Board of Directors authorized a new share repurchase program of up to $200.0 million of our outstanding common shares. Under the program, we are authorized to repurchase shares for cash on the open market, from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases is dependent on price, market conditions and applicable regulatory requirements. Upon repurchase of the shares, we 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.

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Item 6. Exhibits

31.1

Form of 302 Certification –James J. Owens

31.2

Form of 302 Certification –John J. Corkrean

32.1

Form of 906 Certification –James J. Owens

32.2

Form of 906 Certification –John J. Corkrean

101

The following materials from the H.B. Fuller Company Quarterly Report on Form 10-Q for the quarter ended August 29, 2020 formatted in Extensible Business Reporting Language (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 as Inline XBRL and contained in Exhibit 101).

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SIGNATURES

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

	H.B. Fuller Company


Dated: September 24, 2020		/s/ John J. Corkrean
		John J. Corkrean
		Executive Vice President,
		Chief Financial Officer

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Exhibit Index

Exhibits

	31.1	Form of 302 Certification – James J. Owens
	31.2	Form of 302 Certification – John J. Corkrean
	32.1	Form of 906 Certification –James J. Owens
	32.2	Form of 906 Certification –John J. Corkrean
	101	The following materials from the H.B. Fuller Company Quarterly Report on Form 10-Q for the quarter ended August 29, 2020 formatted in Extensible Business Reporting Language (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 as Inline XBRL and contained in Exhibit 101).