H.B. FULLER COMPANY Overview
H.B. Fuller Company is a global formulator, manufacturer and marketer of adhesives and other specialty chemical products. As ofNovember 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 Hygiene, Health and Consumable Adhesives operating segment manufactures and supplies adhesives products in the assembly, packaging, converting, nonwoven and hygiene, health and beauty, flexible packaging, graphic arts and envelope markets. The Engineering Adhesives operating segment provides high-performance adhesives to the transportation, electronics, medical, clean energy, aerospace and defense, performance wood, insulating glass, textile, appliance and heavy machinery markets. The Construction Adhesives operating segment provides floor preparation, grouts and mortars for tile setting, and adhesives for soft flooring, and pressure-sensitive adhesives, tapes and sealants for the commercial roofing industry as well as sealants and related products for heating, ventilation and air conditioning installations.Total Company
When reviewing our financial statements, it is important to understand how certain external factors impact us. These factors include:
? Changes in the prices of our raw materials that are primarily derived from
refining crude oil and natural gas,
? Global supply of and demand for raw materials,
? Economic growth rates, and
? Currency exchange rates compared to the U.S. dollar
We purchase thousands of raw materials, the majority of which are
petroleum/natural gas derivatives. The price of these derivatives impacts the
cost of our raw materials. However, the supply of and demand for key raw
materials has a greater impact on our costs. As demand increases in high-growth
areas, the supply of key raw materials may tighten, resulting in certain
materials being put on allocation. Natural disasters, such as hurricanes, also
can have an impact as key raw material producers are shut down for extended
periods of time. We continually monitor capacity utilization figures, market
supply and demand conditions, feedstock costs and inventory levels, as well as
derivative and intermediate prices, which affect our raw materials. With
approximately 73 percent of our cost of sales accounted for by raw materials,
our financial results are extremely sensitive to changing costs in this area.
The pace of economic growth directly impacts certain industries to which we
supply products. For example, adhesives-related revenues from durable goods
customers in areas such as appliances, furniture and other woodworking
applications tend to fluctuate with the overall economic activity. In business
components such as Construction Adhesives and insulating glass in Engineering
Adhesives, revenues tend to move with more specific economic indicators such as
housing starts and other construction-related activity.
The movement of foreign currency exchange rates as compared to the U.S. dollar
impacts the translation of the foreign entities' financial statements into U.S.
dollars. As foreign currencies weaken against the U.S. dollar, our revenues and
costs decrease as the foreign currency-denominated financial statements
translate into fewer U.S. dollars. The fluctuations of the Euro and the Chinese
renminbi against the U.S. dollar have the largest impact on our financial
results as compared to all other currencies. In 2020, currency fluctuations had
a negative impact on net revenue of approximately $46.0 million as compared to
2019.
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Key financial results and transactions for 2020 included the following:
? Net revenue decreased 3.7 percent from 2019 primarily driven by a 1.6 percent
decrease due to currency fluctuations, a 1.0 percent decrease in sales volume,
a 0.6 percent in product pricing and a 0.5 percent decrease due to the
divestiture of our surfactants and thickeners business.
? Gross profit margin decreased to 27.1 percent from 27.9 percent in 2019
primarily due to lower net revenue and higher manufacturing costs.
? Cash flow generated by operating activities was
compared to $269.2 million in 2019 and $253.3 million in 2018.
Our total year organic sales growth, which we define as the combined variances
from sales volume and product pricing, decreased 1.6 percent for 2020 compared
to 2019.
In 2020, our diluted earnings per share was $ 2.36 compared to $2.52 in 2019 and
$3.29 in 2018. The lower earnings per share in 2020 compared to 2019 was due to
lower net revenue partially offset by lower operating costs, lower income tax
expense and lower interest expense. Also, the gain on the sale of our
surfactants and thickeners business was recorded in 2019. The lower earnings per
share in 2019 compared to 2018 was due to lower net revenue and higher income
tax expense, which were partially offset by lower operating costs and the gain
on the sale of our surfactants and thickeners business.
Changes in Accounting Principles
In the first quarter of 2020, we adopted new accounting standards related to the accounting for leases which requires us 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. Prior periods were not restated for this adoption. In the first quarter of 2019, we adopted a new accounting standard related to revenue recognition which requires us to recognize the amount of revenue to which we expect to be entitled for the transfer of promised goods or services to customers. Prior periods were not restated for this adoption. In the first quarter of 2019, we also adopted a new accounting standard related to the classification of pension expense which requires us to include only the service component of pension expense in operating expenses with the other components included in non-operating expenses. We have retrospectively adjusted the Consolidated Statements of Income for the year endedDecember 1, 2018 to reflect this change. Project ONE InDecember 2012 , our Board of Directors approved a multi-year project to replace and enhance our existing core information technology platforms. The scope for this project includes most of the basic transaction processing for the company including customer orders, procurement, manufacturing, and financial reporting. The project envisions harmonized business processes for all of our operating segments supported with one standard software configuration. The execution of this project, which we refer to as Project ONE, is being supported by internal resources and consulting services. Implementation of Project ONE began in ourNorth America adhesives business in 2014 and, through 2020, we completed implementation of this system in various parts of our business includingLatin America (exceptBrazil ),Australia and various other business inNorth America . During 2021 and beyond, we will continue implementation inNorth America , EIMEA andAsia Pacific . Total expenditures for Project ONE are estimated to be$170 to$185 million , of which 50-55% is expected to be capital expenditures. Our total project-to-date expenditures are approximately$97 million , of which approximately$48 million are capital expenditures. Given the complexity of the implementation, the total investment to complete the project may exceed our estimate. 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 global business units ("2020 Restructuring Plan"). We have incurred costs of$13.8 million under this plan as ofNovember 28, 2020 . We expect to incur total costs of approximately$20.0 million ($15.8 million after-tax), which includes cash expenditures for severance and related employee costs globally, costs related to streamlining of processes, and other restructuring-related costs. The 2020 Restructuring Plan was implemented in the fourth quarter of 2019 and is currently expected to be completed in 2022. 18
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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$11.4 million , which includes cash expenditures, severance and related employee costs globally and other costs related to the optimization of production facilities, streamlining of processes and accelerated depreciation of long-lived assets. Approximately$8.7 million of the costs were cash costs. The Royal Adhesives Restructuring Plan was implemented in the first quarter of 2018 and is substantially complete.
Critical Accounting Policies and Significant Estimates
Management's discussion and analysis of our results of operations and financial condition are based upon the Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We believe the critical accounting policies and areas that require the most significant judgments and estimates to be used in the preparation of the Consolidated Financial Statements relate to pension and other postretirement plans; goodwill impairment; long-lived assets recoverability; valuation of product, environmental and other litigation liabilities; valuation of deferred tax assets and accuracy of tax contingencies; and valuation of acquired assets and liabilities.Goodwill Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a purchase business combination.Goodwill is allocated to our reporting units, which are our operating segments or one level below our operating segments (the component level). Reporting units are determined by the discrete financial information available for the component and whether it is regularly reviewed by segment management. Components are aggregated into a single reporting unit if they share similar economic characteristics. Our reporting units are as follows: Hygiene, Health and Consumable Adhesives, Engineering Adhesives and Construction Adhesives. We evaluate our goodwill for impairment annually at the beginning of the fourth quarter or earlier upon the occurrence of substantive unfavorable changes in economic conditions, industry trends, costs, cash flows, or ongoing declines in market capitalization. The quantitative impairment test requires judgment, including the identification of reporting units, the assignment of assets, liabilities and goodwill to reporting units, and the determination of fair value of each reporting unit. The impairment test requires the comparison of the fair value of each reporting unit with its carrying amount, including goodwill. In performing the impairment test, we determined the fair value of our reporting units through the income approach by using discounted cash flow ("DCF") analyses. Determining fair value requires the Company to make judgments about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows. The cash flows employed in the DCF analysis for each reporting unit are based on the reporting unit's budget, long-term business plan, and recent operating performance. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting unit and market conditions. Given the inherent uncertainty in determining the assumptions underlying a DCF analysis, actual results may differ from those used in our valuations. In assessing the reasonableness of the determined fair values, we also reconciled the aggregate determined fair value of the Company to the Company's market capitalization, which, at the date of our 2020 impairment test, included a 21 percent control premium. For the 2020 impairment test, the fair value of the reporting units exceeded the respective carrying values by 9 percent to 85 percent ("headroom"). Significant assumptions used in the DCF analysis included discount rates that ranged from 7.5 percent to 9.3 percent and long-term revenue growth rates. The Construction Adhesives reporting unit had headroom of 9 percent. An increase in the discount rate of 55 basis points or a decrease in the long-term revenue growth rates of 45 percent would result in the fair value of the Construction Adhesives reporting unit falling below its carrying value. The Engineering Adhesives and Hygiene, Health and Consumable Adhesives reporting units had significant fair value in excess of carrying value. 19
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As ofNovember 28, 2020 , the carrying value of goodwill assigned to the Construction Adhesives reporting unit was$311.0 million . Management will continue to monitor these reporting units for changes in the business environment that could impact recoverability. The recoverability of goodwill is dependent upon the continued growth of cash flows from our business activities. If the economy or business environment falter and we are unable to achieve our assumed revenue growth rates or profit margin percentages, our projections used would need to be remeasured, which could impact the carrying value of our goodwill in one or more of our reporting units. Most significantly, for our Construction Adhesives reporting unit, a decrease in the planned volume revenue growth would negatively impact the fair value of the reporting unit and the calculation of excess carrying value.
See Note 5 to the Consolidated Financial Statements for further information regarding goodwill.
Pension and Other Postretirement Plan Assumptions
We sponsor defined-benefit pension plans in both theU.S. and non-U.S. entities. Also in theU.S. , we sponsor other postretirement plans for health care and life insurance benefits. Expenses and liabilities for the pension plans and other postretirement plans are actuarially calculated. These calculations are based on our assumptions related to the discount rate, expected return on assets, projected salary increases and health care cost trend rates. Note 10 to the Consolidated Financial Statements includes disclosure of assumptions employed in these measurements for both the non-U.S. andU.S. plans. The discount rate assumption is determined using an actuarial yield curve approach, which results in a discount rate that reflects the characteristics of the plan. The approach identifies a broad population of corporate bonds that meet the quality and size criteria for the particular plan. We use this approach rather than a specific index that has a certain set of bonds that may or may not be representative of the characteristics of our particular plan. A higher discount rate reduces the present value of the pension obligations. The discount rate for theU.S. pension plan was 2.53 percent atNovember 28, 2020 , as compared to 3.19 percent atNovember 30, 2019 and 4.51 percent atDecember 1, 2018 . Net periodic pension cost for a given fiscal year is based on assumptions developed at the end of the previous fiscal year. A discount rate change of 0.5 percentage points atNovember 28, 2020 would impactU.S. pension and other postretirement plan (income) expense by approximately$0.2 million (pre-tax) in fiscal 2021. Discount rates for non-U.S. plans are determined in a manner consistent with theU.S. plans. The expected long-term rate of return on plan assets assumption for theU.S. pension plan was 7.50 percent in 2020 and 7.50 in 2019 and 7.75 in 2018. Our expected long-term rate of return onU.S. plan assets was based on our target asset allocation assumption of 60 percent equities and 40 percent fixed-income. Management, in conjunction with our external financial advisors, determines the expected long-term rate of return on plan assets by considering the expected future returns and volatility levels for each asset class that are based on historical returns and forward looking observations. For 2020, the expected long-term rate of return on the target equities allocation was 8.00 percent and the expected long-term rate of return on the target fixed-income allocation was 3.60 percent. The total plan rate of return assumption included an estimate of the effect of diversification and the plan expense. A change of 0.5 percentage points for the expected return on assets assumption would impactU.S. net pension and other postretirement plan expense by approximately$2.5 million (pre-tax). Management, in conjunction with our external financial advisors, uses the actual historical rates of return of the asset categories to assess the reasonableness of the expected long-term rate of return on plan assets. The most recent 10-year and 20-year historical equity returns are shown in the table below. Our expected rate of return on our total portfolio is consistent with the historical patterns observed over longer time frames. U.S. Pension Plan Historical Actual Total Fixed Rates of Return Portfolio Equities Income 10-year period 9.1 % 9.0 % 8.6 % 20-year period 9.5 % 9.3 % 8.7 %* * Beginning in 2006, our target allocation migrated from 100 percent equities to our current allocation of 60 percent equities and 40 percent fixed-income. The historical actual rate of return for the fixed income of 8.2 percent is since inception (14 years, 11 months). 20
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The expected long-term rate of return on plan assets assumption for non-U.S. pension plans was a weighted-average of 6.23 percent in 2020 compared to 6.21 percent in 2019 and 6.20 percent in 2018. The expected long-term rate of return on plan assets assumption used in each non-U.S. plan is determined on a plan-by-plan basis for each local jurisdiction and is based on expected future returns for the investment mix of assets currently in the portfolio for that plan. Management, in conjunction with our external financial advisors, develops expected rates of return for each plan, considers expected long-term returns for each asset category in the plan, reviews expectations for inflation for each local jurisdiction, and estimates the effect of active management of the plan's assets. Our largest non-U.S. pension plans are in theUnited Kingdom andGermany . The expected long-term rate of return on plan assets for theUnited Kingdom was 6.75 percent and the expected long-term rate of return on plan assets forGermany was 5.75 percent. Management, in conjunction with our external financial advisors, uses actual historical returns of the asset portfolio to assess the reasonableness of the expected rate of return for each plan. The projected salary increase assumption is based on historic trends and comparisons to the external market. Higher rates of increase result in higher pension expenses. As this rate is also a long-term expected rate, it is less likely to change on an annual basis. In theU.S. , we have used the rate of 4.50 percent for 2020, 2019 and 2018. Benefits under theU.S. Pension Plan were locked-in as ofMay 31, 2011 and no longer include compensation increases. The 4.50 percent rate is for the supplemental executive retirement plan only. Projected salary increase assumptions for non-U.S. plans are determined in a manner consistent with theU.S. plans.
Recoverability of Long-Lived Assets
The assessment of the recoverability of long-lived assets reflects our assumptions and estimates. Factors that we must estimate when performing impairment tests include sales volume, prices, inflation, currency exchange rates, tax rates and capital spending. Significant judgment is involved in estimating these factors, and they include inherent uncertainties. The measurement of the recoverability of these assets is dependent upon the accuracy of the assumptions used in making these estimates and how the estimates compare to the eventual future operating performance of the specific businesses to which the assets are attributed. Judgments made by us include the expected useful lives of long-lived assets. The ability to realize undiscounted cash flows in excess of the carrying amounts of such assets is affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance.
Product, Environmental and Other Litigation Liabilities
As disclosed in Item 3. Legal Proceedings and in Note 1 and Note 14 to the Consolidated Financial Statements, we are subject to various claims, lawsuits and other legal proceedings. Reserves for loss contingencies associated with these matters are established when it is determined that a liability is probable and the amount can be reasonably estimated. The assessment of the probable liabilities is based on the facts and circumstances known at the time that the financial statements are being prepared. For cases in which it is determined that a liability is probable but only a range for the potential loss exists, the minimum amount of the range is recorded and subsequently adjusted as better information becomes available. For cases in which insurance coverage is available, the gross amount of the estimated liabilities is accrued, and a receivable is recorded for any probable estimated insurance recoveries. A discussion of environmental, product and other litigation liabilities is disclosed in Item 3. Legal Proceedings and Note 14 to the Consolidated Financial Statements.
Based upon currently available facts, we do not believe that the ultimate resolution of any pending legal proceeding, individually or in the aggregate, will have a material adverse effect on our long-term financial condition. However, adverse developments and/or periodic settlements could negatively affect our results of operations or cash flows in one or more future quarters.
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Table of Contents Income Tax Accounting As part of the process of preparing the Consolidated Financial Statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. The process involves estimating actual current tax expense along with assessing temporary differences resulting from differing treatment of items for book and tax purposes. These temporary differences result in deferred tax assets and liabilities, which are included in the Consolidated Balance Sheets. We record a valuation allowance to reduce our deferred tax assets to the amount that is more-likely-than-not to be realized. We have considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance. Increases in the valuation allowance result in additional expense to be reflected within the tax provision in the Consolidated Statements of Income. As ofNovember 28, 2020 , the valuation allowance to reduce deferred tax assets totaled$21.8 million . We recognize tax benefits for tax positions for which it is more-likely-than-not that the tax position will be sustained by the applicable tax authority at the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement. We do not recognize a financial statement benefit for a tax position that does not meet the more-likely-than-not threshold. We believe that our liabilities for income taxes reflect the most likely outcome. It is difficult to predict the final outcome or the timing of the resolution of any particular tax position. Future changes in judgment related to the resolution of tax positions will impact earnings in the quarter of such change. We adjust our income tax liabilities related to tax positions in light of changing facts and circumstances. Settlement with respect to a tax position would usually require cash. Based upon our analysis of tax positions taken on prior year returns and expected tax positions to be taken for the current year tax returns, we have identified gross uncertain tax positions of$14.6 million as ofNovember 28, 2020 .
We have not recorded
Acquisition Accounting
As we enter into business combinations, we perform acquisition accounting requirements including the following:
? Identifying the acquirer, ? Determining the acquisition date,
? Recognizing and measuring the identifiable assets acquired and the liabilities
assumed, and
? Recognizing and measuring goodwill or a gain from a bargain purchase
We complete valuation procedures and record the resulting fair value of the
acquired assets and assumed liabilities based upon the valuation of the business
enterprise and the tangible and intangible assets acquired. Enterprise value
allocation methodology requires management to make assumptions and apply
judgment to estimate the fair value of assets acquired and liabilities assumed.
If estimates or assumptions used to complete the enterprise valuation and
estimates of the fair value of the acquired assets and assumed liabilities
significantly differed from assumptions made, the resulting difference could
materially affect the fair value of net assets.
The calculation of the fair value of the tangible assets, including property,
plant and equipment, utilizes the cost approach, which computes the cost to
replace the asset, less accrued depreciation resulting from physical
deterioration, functional obsolescence and external obsolescence. The
calculation of the fair value of the identified intangible assets are determined
using cash flow models following the income approach or a discounted
market-based methodology approach. Significant inputs include estimated revenue
growth rates, gross margins, operating expenses, and estimated attrition,
royalty and discount rates. Goodwill is recorded as the difference in the fair
value of the acquired assets and assumed liabilities and the purchase price.
Results of Operations
Net revenue
($ in millions) 2020 2019 2018 2020 vs 2019 2019 vs 2018
Net revenue $ 2,790.3 $ 2,897.0 $ 3,041.0 (3.7 %) (4.7 )%
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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 the past two years:
2020 vs 2019 2019 vs 2018
Organic growth (1.6 )% (1.1 )%
M&A (0.5 )% (0.3 )%
Currency (1.6 )% (3.3 )%
Total (3.7 )% (4.7 )%
Organic growth was a negative 1.6 percent in 2020 compared to 2019 driven by a
6.7 percent decrease in Construction Adhesives and a 5.5 percent decrease in
Engineering Adhesives, partially offset by 3.3 percent growth in Hygiene, Health
and Consumable Adhesives. The decrease was driven by a decrease in sales volume
and product pricing. There was a 0.5 percent decrease due to the divestiture of
our surfactants and thickeners business during 2019. The negative 1.6 percent
currency impact was primarily driven by a weaker Brazilian real, Turkish lira,
Argentinian peso, Mexican peso and Colombian peso partially offset by a stronger
Euro and Egyptian pound compared to the U.S. dollar.
Organic growth was a negative 1.1 percent in 2019 compared to 2018 driven by a
12.0 percent decrease in Construction Adhesives, partially offset by 1.2 percent
growth in Engineering Adhesives and 0.6 percent growth in Hygiene, Health and
Consumable Adhesives. The decrease was predominately driven by a decrease in
sales volume. There was a 0.3 percent decrease due to the divestiture of our
surfactants and thickeners business during 2019. The negative 3.3 percent
currency impact was primarily driven by a weaker Euro, Chinese renminbi,
Argentinian peso, Brazilian real and Turkish lira compared to the U.S. dollar.
Cost of sales
($ in millions) 2020 2019 2018 2020 vs 2019 2019 vs 2018
Raw materials $ 1,476.4 $ 1,535.7 $ 1,660.1 (3.9 )% (7.5 )%
Other manufacturing costs 557.2 554.4 552.7 0.5 % 0.3 %
Cost of sales $ 2,033.6 $ 2,090.1 $ 2,212.8 (2.7 )% (5.5 )%
Percent of net revenue 72.9 % 72.1 % 72.8 %
Cost of sales in 2020 compared to 2019 increased 80 basis points as a percentage
of net revenue. Raw material cost as a percentage of net revenue decreased 10
basis points in 2020 compared to 2019. Other manufacturing costs as a percentage
of net revenue increased 90 basis points in 2020 compared to 2019 primarily due
to the impact of lower net revenue and higher manufacturing costs.
Cost of sales in 2019 compared to 2018 decreased 70 basis points as a percentage
of net revenue. Raw material cost as a percentage of net revenue decreased 160
basis points in 2019 compared to 2018 primarily due to an increase in product
pricing and lower raw material costs. Other manufacturing costs as a percentage
of net revenue increased 90 basis points in 2019 compared to 2018 primarily due
to the impact of lower sales volume and higher manufacturing waste and scrap
costs.
Gross profit
($ in millions) 2020 2019 2018 2020 vs 2019 2019 vs 2018
Gross profit $ 756.7 $ 806.9 $ 828.2 (6.2 )% (2.6 )%
Percent of net revenue 27.1 % 27.9 % 27.2 %
Gross profit in 2020 decreased 6.2 percent and gross profit margin decreased 80
basis points compared to 2019. The decrease in gross profit margin was primarily
due to lower net revenue and higher manufacturing costs.
Gross profit in 2019 decreased 2.6 percent and gross profit margin increased 70
basis points compared to 2018. The increase in gross profit margin was primarily
due to increased product pricing and lower raw material costs partially offset
by lower sales volume and higher manufacturing waste and scrap costs.
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Selling, general and administrative expenses
($ in millions) 2020 2019 2018 2020 vs 2019 2019 vs 2018 SG&A$ 538.3 $ 580.9 $ 590.3 (7.3 )% (1.6 )% Percent of net revenue 19.3 % 20.1 % 19.4 %
SG&A expenses for 2020 decreased
SG&A expenses for 2019 decreased$9.4 million , or 1.6 percent, compared to 2018. The decrease is primarily due to general spending reductions and the favorable impact of foreign currency exchange rates on spending outside theU.S. Other income, net ($ in millions) 2020 2019 2018 Other income, net$ 15.4 $ 37.9 $ 18.1 Other income, net includes foreign transaction losses of$3.1 million ,$1.2 million and$4.5 million in 2020, 2019 and 2018, respectively. Loss on disposal of assets was$0.1 million in 2020 and gains on disposal of assets were$24.1 million and$3.1 in 2019 and 2018, respectively. Defined benefit pension benefit was$17.9 million ,$13.7 million and$16.9 million in 2020, 2019 and 2018, respectively. Other income of$0.7 million ,$1.3 million and$2.6 million was also included in 2020, 2019 and 2018, respectively. Interest expense ($ in millions) 2020 2019 2018 Interest expense$ 86.8 $ 103.3 $ 111.0 Interest expense was$86.8 million ,$103.3 million and$111.0 million of interest expense in 2020, 2019 and 2018, respectively. The decrease in interest expense is due to lowerU.S. debt balances. We capitalized$0.6 million ,$0.4 million and$0.3 million of interest expense in 2020, 2019 and 2018 respectively. Interest income ($ in millions) 2020 2019 2018 Interest income$ 11.4 $ 12.2 $ 11.7
Interest income in 2020, 2019 and 2018 was
Income taxes: ($ in millions) 2020 2019 2018
Income tax benefit (expense)
26.5 % 28.6 % (4.1 )%
Income tax expense of $41.9 million in 2020 includes $1.1 million of discrete
tax expense, primarily related to tax expense for uncertain tax positions and
several foreign discrete items, offset by U.S. benefits for state deferred rate
changes and a benefit related to the revaluation of cross-currency swap
agreements due to appreciation of the Euro versus US dollar. Excluding the
discrete tax expense of $1.1 million , the overall effective tax rate was 25.8
percent. The increase in the overall effective tax rate for 2020 compared to
2019, excluding the impact of discrete items, is primarily due to the ongoing
effects of U.S. Tax Reform.
Income tax expense of $49.4 million in 2019 includes $12.4 million of discrete
tax expense related to the sale of the surfactants and thickeners business and
return to accrual adjustments. Excluding the discrete tax expense of $12.4
million , the overall effective tax rate was 24.9 percent. The decrease in the
overall effective tax rate for 2019 compared to 2018, excluding the impact of
discrete items, is primarily due to the geographic mix of earnings.
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The income tax benefit in 2018 of
Income from equity method investments
($ in millions) 2020 2019 2018
Income from equity method investments
The income from equity method investments relates to our 50 percent ownership of theSekisui-Fuller joint venture inJapan . The lower income for 2020 and 2019 compared to 2018 relates to lower net income in our joint venture.
Net income attributable to
($ in millions) 2020 2019 2018 2020 vs 2019 2019 vs 2018 Net income attributable to H.B. Fuller$ 123.7 $ 130.8 $ 171.2 (5.4 )% (23.6 )% Percent of net revenue 4.4 % 4.5 % 5.6 % Net income attributable toH.B. Fuller was$123.7 million in 2020 compared to$130.8 million in 2019 and$171.2 million in 2018. Diluted earnings per share were$2.36 per share in 2020,$2.52 per share for 2019 and$3.29 per share for 2018. Operating Segment Results We are required to report segment information in the same way that we internally organize our business for assessing performance and making decisions regarding allocation of resources. For segment evaluation by the chief operating decision maker, segment operating income is defined as gross profit less SG&A expenses. Inter-segment revenues are recorded at cost plus a markup for administrative costs. Corporate expenses are fully allocated to each operating segment. As ofNovember 30, 2019 , we had five reportable segments: Americas Adhesives, EIMEA,Asia Pacific , Construction Adhesives and Engineering Adhesives. As of the beginning of fiscal 2020, we realigned our operating segment structure and now have three reportable segments: Hygiene, Health and Consumable Adhesives, Engineering Adhesives and Construction Adhesives. The change in operating segments is based on how we have organized the Company to make operating decisions and assess business performance. Prior period segment information has been recast retrospectively to reflect the realignment.
The tables below provide certain information regarding the net revenue and segment operating income of each of our operating segments.
Beginning in 2020, certain amounts are included within Corporate Unallocated
instead of within the operating segments to better align with our internal
management view of financial information. Corporate Unallocated includes
acquisition and integration-related charges, restructuring-related charges, the
results of business divestitures and costs related to the implementation of
Project ONE.
Net Revenue by Segment
2020 2019 2018
Net % of Net % of Net % of
($ in millions) Revenue Total Revenue Total
Revenue Total
Hygiene, Health and
Consumable Adhesives $ 1,332.8 48 % $ 1,328.3 46 % $ 1,375.6 46 %
Engineering Adhesives 1,088.3 39 % 1,158.4 40 % 1,186.5 39 %
Construction
Adhesives 369.2 13 % 396.6 14 % 454.2 15 %
Segment total 2,790.3 100 % 2,883.3 100 % 3,016.3 100 %
Corporate Unallocated - 0 % 13.7 0 % 24.7 0 %
Total $ 2,790.3 100 % $ 2,897.0 100 % $ 3,041.0 100 %
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Segment Operating Income (Loss)
2020 2019 2018
Operating % of Operating % of Operating % of
($ in millions) Income (Loss) Total Income (Loss) Total Income (Loss) Total
Hygiene, Health and
Consumable Adhesives $ 130.8 60 % $ 116.0 51 % $ 120.5 51 %
Engineering Adhesives 104.0 48 % 136.3 60 % 119.4 50 %
Construction
Adhesives 11.1 5 % 16.6 7 % 39.1 16 %
Segment total 245.9 113 % 268.9 118 % 279.0 117 %
Corporate Unallocated (27.6 ) (13 )% (42.9 ) (18 )% (41.1 ) (17 )%
Total $ 218.3 100 % $ 226.0 100 % $ 237.9 100 %
The following table provides a reconciliation of segment operating income to income before income taxes and income from equity method investments, as reported in the Consolidated Statements of Income.
($ in millions) 2020 2019 2018 Segment operating income$ 218.3 $ 226.0 $ 237.9 Other income, net 15.4 37.9 18.1 Interest expense (86.8 ) (103.3 ) (111.0 ) Interest income 11.4 12.2 11.7 Income before income taxes and income from equity method investments$ 158.3 $ 172.8 $ 156.7
Hygiene, Health and Consumable Adhesives
($ in millions) 2020 2019 2018 2020 vs 2019 2019 vs 2018 Net revenue$ 1,332.8 $ 1,328.3 $ 1,375.6 0.3 % (3.4 )% Segment operating income$ 130.8 $ 116.0 $ 120.5 12.8 % (3.7 )% Segment profit margin % 9.8 % 8.7 % 8.8 %
The following tables provide details of Hygiene, Health and Consumable Adhesives net revenue variances:
2020 vs 2019 2019 vs 2018
Organic growth 3.3 % 0.6 %
Currency (3.0 )% (4.0 )%
Total 0.3 % (3.4 )%
Net revenue increased 0.3 percent in 2020 compared to 2019. The 3.3 percent
increase in organic growth was attributable to an increase in sales volume,
partially offset by a decrease in product pricing. The negative currency effect
was due to the weaker Brazilian real, Argentinian peso, Turkish lira, Mexican
peso and Colombian peso partially offset by a stronger Egyptian pound and Euro
compared to the U.S. dollar. As a percentage of net revenue, raw material costs
decreased 50 basis points. Other manufacturing costs as a percentage of net
revenue increased 40 basis points. SG&A expenses as a percentage of net revenue
decreased 100 basis points in 2020 as compared to 2019 primarily due to costs
savings realized from our business realignment to three segments and lower
discretionary spending. Segment operating income increased 12.8 percent and
segment operating margin as a percentage of net revenue increased 110 basis
points in 2020 as compared to 2019.
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Net revenue decreased 3.4 percent in 2019 compared to 2018. The 0.6 percent increase in organic growth was attributable to increased product pricing, partially offset by a decrease in sales volume. The negative currency effect was due to the weaker Argentinian peso, Euro, Turkish lira, Brazilian real and Chinese renminbi compared to theU.S. dollar. As a percentage of net revenue, raw material costs decreased 120 basis points primarily due to increased product pricing and lower raw material costs. Other manufacturing costs as a percentage of net revenue increased 80 basis points primarily due to lower sales volume. SG&A expenses as a percentage of net revenue increased 30 basis points in 2019 as compared to 2018. Segment operating income decreased 3.7 percent and segment operating margin as a percentage of net revenue decreased 10 basis points in 2019 as compared to 2018. Engineering Adhesives ($ in millions) 2020 2019 2018 2020 vs 2019 2019 vs 2018 Net revenue$ 1,088.3 $ 1,158.4 $ 1,186.5 (6.1 )% (2.4 )% Segment operating income$ 104.0 $ 136.3 $ 119.4 (23.7 )% 14.2 % Segment profit margin % 9.6 % 11.8 % 10.1 % The following tables provide details of Engineering Adhesives net revenue variances: 2020 vs 2019 2019 vs 2018 Organic growth (5.5 )% 1.2 % Currency (0.6 )% (3.6 )% Total (6.1 )% (2.4 )% Net revenue decreased 6.1 percent in 2020 compared to 2019. The 5.5 percent decrease in organic growth was attributable to lower sales volume and product pricing. The negative currency effect was due to a weaker Brazilian real, Turkish lira and Argentinian peso partially offset by a stronger Euro compared to theU.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 130 basis points due to lower net revenue. SG&A expense as a percentage of net revenue increased 60 basis points due to lower net revenue. Segment operating income decreased 23.7 percent and segment operating margin decreased 220 basis points compared to 2019. Net revenue decreased 2.4 percent in 2019 compared to 2018. The 1.2 percent increase in organic growth was attributable to an increase in sales volume, partially offset by decreased product pricing. Sales volume growth was primarily driven by strong performance in the electronics and new energy markets. The negative currency effect was due to a weaker Chinese renminbi and Euro compared to theU.S. dollar. Raw material costs as a percentage of net revenue decreased 260 basis points due to favorable product mix and lower raw material costs. Other manufacturing costs as a percentage of net revenue increased 90 basis points due to higher production and integration costs. SG&A expense as a percentage of net revenue was flat. Segment operating income increased 14.2 percent and segment operating margin increased 170 basis points compared to 2018. Construction Adhesives ($ in millions) 2020 2019 2018 2020 vs 2019 2019 vs 2018 Net revenue$ 369.2 $ 396.6 $ 454.2 (6.9 )% (12.7 )%
Segment operating income (loss)
(33.1 )% (57.5 )%
Segment profit margin % 3.0 % 4.2 % 8.6 %
The following tables provide details of Construction Adhesives net revenue
variances:
2020 vs 2019 2019 vs 2018
Organic growth (6.7 )% (12.0 )%
Currency (0.2 )% (0.7 )%
Total (6.9 )% (12.7 )%
Net revenue decreased 6.9 percent in 2020 compared to 2019. The 6.7 percent
decrease in organic growth was attributable to lower sales volume and product
pricing. The negative currency effect was due to the weaker Australian dollar
compared to the U.S. dollar. Raw material costs as a percentage of net revenue
decreased 60 basis points primarily due to lower raw material costs. Other
manufacturing costs as a percentage of net revenue increased 160 basis points
primarily due to lower net revenue. SG&A expenses as a percentage of net revenue
increased 20 basis points. Segment operating income decreased 33.1 percent and
segment operating margin decreased 120 basis points compared to 2019.
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Net revenue decreased 12.7 percent in 2019 compared to 2018. The 12.0 percent decrease in organic growth was attributable to lower sales volume partially offset by increased product pricing. The negative currency effect was due to the weaker Australian dollar and Canadian dollar compared to theU.S. dollar. Raw material costs as a percentage of net revenue decreased 80 basis points primarily due to increased product pricing and lower raw material costs. Other manufacturing costs as a percentage of net revenue increased 300 basis points primarily due to higher production costs, the impact of lower sales volume and higher manufacturing waste and scrap costs. SG&A expenses as a percentage of net revenue increased 220 basis points due to lower sales volume. Segment operating income decreased 57.5 percent and segment operating margin decreased 440 basis points compared to 2018. Corporate Unallocated ($ in millions) 2020 2019 2018 2020 vs 2019 2019 vs 2018 Net revenue $ -$ 13.7 $ 24.7 (100.0 )% (44.5 )% Segment operating loss$ (27.6 ) $ (42.9 ) $ (41.1 ) (35.7 )% 4.4 % Segment profit margin % NMP (313.1 )% (166.4 )%
NMP = Non-meaningful percentage
Corporate Unallocated includes acquisition and integration-related charges, restructuring-related charges, the results of business divestitures and costs related to the implementation of Project ONE.
Net revenue in Corporate Unallocated for 2019 and 2018 included revenue from our surfactants and thickeners business that was divested during the third quarter of 2019. Segment operating loss decreased 35.7 percent in 2020 reflecting decreased organizational realignment costs compared to 2019. Segment operating loss increased 4.4 percent in 2019 reflecting increased organizational realignment costs compared to 2018.
Financial Condition, Liquidity and Capital Resources
Total cash and cash equivalents as ofNovember 28, 2020 were$100.5 million compared to$112.2 million as ofNovember 30, 2019 . Total long and short-term debt was$1,773.9 million as ofNovember 28, 2020 and$1,979.1 million as ofNovember 30, 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 inthe United States has historically been sufficient and we expect it will continue to be sufficient to fundU.S. operations,U.S. capital spending andU.S. pension and other postretirement benefit contributions in addition to fundingU.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 forU.S. operations. Our credit agreements include restrictive covenants that, if not met, could lead to a renegotiation of our credit lines and a significant increase in our cost of financing. AtNovember 28, 2020 , we were in compliance with all covenants of our contractual obligations as shown in the following table: Result as of November 28, Covenant Debt Instrument Measurement 2020
Total Indebtedness / TTM Term Loan B Credit Not greater than 5.9 2.9 EBITDA
Agreement
Total Indebtedness / TTM Revolving Credit Not greater than 5.9 2.8 EBITDA
Agreement
TTM EBITDA / Consolidated Revolving Credit Not less than 2.0 4.7 Interest Expense
Agreement
? TTM = trailing 12 months
? EBITDA for Term Loan B covenant purposes is defined as consolidated netincome, 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
Adhesives during the fiscal years ending in 2017, 2018 and 2019 not exceeding
Adhesives acquisition incurred in fiscal years ending in 2017 and 2018 not
exceeding
the SAP implementation during fiscal years ending in 2017 through 2021 not
exceeding
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 can be found in the Company's 8-K filing dated
? EBITDA for Revolving Credit Facility covenant purposes is defined as
consolidated net income, plus interest expense, expense for taxes paid or
accrued, depreciation and amortization, non-cash impairment losses related to
long-lived assets, intangible assets or goodwill, nonrecurring or unusual
non-cash losses incurred other than in the ordinary course of business,
nonrecurring or unusual non-cash restructuring charges and the non-cash impact
of purchase accounting, fees, premiums, expenses and other transaction costs
incurred or paid by the borrower or any of its Subsidiaries on the effective
date in connection with the transactions, this agreement and the other loan
documents, the 2020 supplemental indenture and the transactions contemplated
hereby and thereby, one-time, non-capitalized charges and expenses relating to
the Company's SAP implementation during fiscal years ending in 2017 through
2024, in an amount not exceeding
the Company, charges and expenses relating to the ASP Royal Acquisition,
including but not limited to advisory and financing costs, during the
Company's fiscal years ending in 2020 and 2021, in an aggregate amount (as to
such years combined) not exceeding
to the reorganization of the Company and its subsidiaries from five business
units to three business units to reduce costs during the Company's fiscal
years ending in 2020 and 2021 in an aggregate amount (as to such years
combined) not exceeding
Company's manufacturing and operations project to improve delivery, implement
cost savings and reduce inventory during the Company's fiscal years ending in
2020, 2021 and 2022 in an aggregate amount (as to such years combined) not
exceeding
? Consolidated Interest Expense for the Revolving Credit Facility is defined as
the interest expense (including without limitation the portion of capital
lease obligations that constitutes imputed interest in accordance with GAAP)
of the Company and its subsidiaries calculated on a consolidated basis for
such period with respect to all outstanding indebtedness of the Company and
its subsidiaries allocable to such period in accordance with GAAP.
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We believe we have the ability to meet all of our contractual obligations and commitments in fiscal 2021.
Net Financial Assets (Liabilities)
($ in millions) 2020 2019 Financial assets: Cash and cash equivalents$ 100.5 $ 112.2 Foreign exchange contracts 2.3 1.2 Cash flow hedges 2.5 26.9 Fair value hedges - 5.7 Financial liabilities: Notes payable (16.9 ) (15.7 ) Long-term debt (1,757.0 ) (1,963.4 ) Foreign exchange contracts (5.3 ) (1.8 ) Interest rate swaps (33.3 ) (17.6 ) Net financial liabilities$ (1,706.9 ) $ (1,852.5 ) Of the$100.5 million in cash and cash equivalents as ofNovember 28, 2020 ,$82.6 million was held outside theU.S. Of the$82.6 million of cash held outside theU.S. , earnings on$77.3 million are indefinitely reinvested outside of theU.S. It is not practical for us to determine theU.S. tax implications of the repatriation of these funds. There are no contractual or regulatory restrictions on the ability of consolidated and unconsolidated subsidiaries to transfer funds in the form of cash dividends, loans or advances to us, except for: 1) a credit facility limitation restricting investments, loans, advances or capital contributions from Loan Parties to non-Loan Parties in excess of$100.0 million , 2) a credit facility limitation that provides total investments, loans, advances or guarantees not otherwise permitted in the credit agreement for all subsidiaries shall not exceed$125.0 million in the aggregate, 3) a credit facility limitation that provides total investments, dividends, and distributions shall not exceed the Available Amount defined in these agreements, all three of which do not apply once our secured leverage ratio drops below 4.0x and 4) typical statutory restrictions, which prohibit distributions in excess of net capital or similar tests. The Royal Adhesives acquisition and any investments, loans, and advances established to consummate the Royal Adhesives acquisition, are excluded from the credit facility limitations described above. Additionally, we have taken the income tax position that the majority of our cash in non-U.S. locations is indefinitely reinvested.
Debt Outstanding and Debt Capacity
Notes Payable Notes payable were$16.9 million atNovember 28, 2020 and$15.7 million atNovember 30, 2019 . These amounts primarily represented various foreign subsidiaries' short-term borrowings that were not part of committed lines. The weighted-average interest rates on these short-term borrowings were 8.1 percent in 2020 and 8.9 percent in 2019. 29
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Long-Term Debt
Long-term debt consisted of a secured term loan ("Term Loan B") and two
unsecured public notes ("Public Notes"). The Term Loan B has a principal amount
of $1,157.7 million and bears a floating interest rate at LIBOR plus 2.00
percent (2.15 percent at November 28, 2020 ) and matures in fiscal year 2024. The
10-year Public Notes have a principal amount of $300.0 million , bear fixed
interest at 4.00 percent and mature in 2027. We are subject to a par call of
1.00 percent except within three months of the maturity date. The 8-year Public
Notes have a principal amount of $300.0 million , bear fixed interest at 4.25
percent and mature in 2028. We are subject to a par call plus 50 percent of
coupon in year 4, plus 25 percent of coupon in year 5 and at par thereafter. We
currently have no intention to prepay the Public Notes. Additional details on
the Public Notes and the Term Loan B Credit Agreement can be found in Form 8-K
dated February 9, 2017 , Form 8-K dated October 20, 2017 and Form 8-K
dated October 20, 2020 , respectively.
We executed interest rate swap agreements for the purpose of obtaining a fixed
interest rate on $1,125.0 million of the $2,150.0 million Term Loan B. We have
designated forecasted interest payments resulting from the variability of
1-month LIBOR in relation to $1,125.0 million of the Term Loan B as the hedged
item in cash flow hedges. The combined fair value of the interest rate swaps in
total was a liability of $33.3 million at November 28, 2020 and was included in
other liabilities in the Consolidated Balance Sheets. We are applying the
hypothetical derivative method to assess hedge effectiveness for these interest
rate swaps. Changes in the fair value of a hypothetically perfect swap with
terms that match the critical terms of our $1,125.0 million variable rate Term
Loan B are compared with the change in the fair value of the swaps.
We entered into interest rate swap agreements to convert $150.0 million of our
$300.0 million Public Notes that were issued on February 14, 2017 to a variable
interest rate of 1-month LIBOR plus 1.86 percent. See Note 7 to the Consolidated
Financial Statements for further discussion on the issuance of our Public Notes.
The swaps were designated for hedge accounting treatment as fair value hedges.
We applied the hypothetical derivative method to assess hedge effectiveness for
this interest rate swap. Changes in the fair value of a hypothetically perfect
swap with terms that match the critical terms of our $150.0 million fixed rate
Public Notes are compared with the change in the fair value of the swaps. On May
1, 2020 , we terminated the swap agreement. Upon termination, we received $15.8
million 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.
Lines of Credit
We have a revolving credit agreement with a consortium of financial institutions
at November 28, 2020 . This credit agreement creates a secured multi-currency
revolving credit facility that we can draw upon to repay existing indebtedness,
finance working capital needs, finance acquisitions, and for general corporate
purposes up to a maximum of $400.0 million . Interest on the revolving credit
facility is payable at LIBOR plus 2.00 percent (2.15 percent at November 28,
2020 ). A facility fee of 0.25 percent of the unused commitment under the
revolving credit facility is payable quarterly. The interest rate and the
facility fee are based on a leverage grid. The credit facility expires on July
22, 2024 . As of November 28, 2020 , our lines of credit were undrawn. Additional
details on the revolving credit agreement can be found in Form 8-K dated
Uncertainty relating to the LIBOR phase out at the end of 2021 may adversely impact the value of, and our obligations under, our Term Loan B, Public Notes and revolving credit facility. See the applicable discussion under Item 1A. Risk Factors.
As ofNovember 28, 2020 , goodwill totaled$1,312.0 million (33 percent of total assets) and other intangible assets, net of accumulated amortization, totaled$756.0 million (19 percent of total assets).
The components of goodwill and other identifiable intangible assets, net of
amortization, by segment at
2020
Hygiene,
Health
and
Consumable Engineering Construction
($ in millions) Adhesives Adhesives Adhesives Total
Goodwill $ 332.9 $ 667.9 $ 311.2 $ 1,312.0
Purchased technology and patents 9.1 40.2 11.2 60.5
Customer relationships 120.0 276.7 257.7 654.4
Tradenames 5.3 18.7 9.9 33.9
Other finite-lived intangible assets 2.8 0.3 3.5 6.6
Indefinite-lived intangible assets - 0.5 - 0.5
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2019
Hygiene,
Health
and
Consumable Engineering Construction
($ in millions) Adhesives Adhesives Adhesives Total
Goodwill $ 321.3 $ 649.5 $ 311.0 $ 1,281.8
Purchased technology and patents 11.1 43.2 12.3 66.6
Customer relationships 120.5 290.5 279.4 690.4
Tradenames 6.1 20.1 11.5 37.7
Other finite-lived intangible assets 3.5 0.6 0.1 4.2
Indefinite-lived intangible assets - 0.5 - 0.5
Selected Metrics of Liquidity and Capital Resources
Key metrics we monitor are net working capital as a percent of annualized net
revenue, trade receivables days sales outstanding (DSO), inventory days on hand,
free cash flow after dividends and debt capitalization ratio.
November 28, November 30,
2020 2019
Net working capital as a percentage of annualized
net revenue1 16.8 % 18.0 %
Trade receivables DSO (in days)2 59 59
Inventory days on hand (in days)3 53
58
Free cash flow after dividends4$ 210.8 $ 174.8 Debt capitalization ratio5 56.1 % 61.8 % 1 Current quarter net working capital (trade receivables, net of allowance for doubtful accounts plus inventory minus trade payables) divided by annualized net revenue (current quarter, multiplied by 4).
2 Trade receivables net of allowance for doubtful accounts multiplied by 56 (8 weeks) and divided by the net revenue for the last 2 months of the quarter.
3 Total inventory multiplied by 56 and divided by cost of sales (excluding delivery costs) for the last 2 months of the quarter.
4 Net cash provided by operations less purchased property, plant and equipment and dividends paid. See reconciliation to Net cash provided by operating activities below.
5 Total debt divided by (total debt plus total stockholders' equity).
Free cash flow after dividends, a non-GAAP financial measure, is defined as net cash provided by operating activities less purchased property, plant and equipment and dividends paid. Free cash flow after dividends is an integral financial measure used by the Company to assess its ability to generate cash in excess of its operating needs, therefore, the Company believes this financial measure provides useful information to investors. The following table reflects the manner in which free cash flow after dividends is determined and provides a reconciliation of free cash flow after dividends to net cash provided by operating activities, the most directly comparable financial measure calculated and reported in accordance withU.S. GAAP. 31
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Reconciliation of "Net cash provided by operating activities" to "Free cash flow after dividends"
($ in millions) 2020 2019
2018
Net cash provided by operating activities$ 331.6 $ 269.2 $ 253.3 Less: Purchased property, plant and equipment 87.3 62.0 68.3 Less: Dividends paid 33.5 32.4
31.1
Free cash flow after dividends$ 210.8 $ 174.8 $ 153.9 Summary of Cash Flows
Cash Flows from Operating Activities
($ in millions) 2020 2019 2018
Net cash provided by operating activities
Net income including non-controlling interest was$123.8 million in 2020,$130.8 million in 2019 and$171.2 million in 2018. Depreciation and amortization expense totaled$138.8 million in 2020 compared to$141.2 million in 2019 and$145.1 million in 2018. Depreciation and amortization expense in 2020, 2019 and 2018 reflect assets acquired in our business acquisitions. Changes in net working capital (trade receivables, inventory and trade payables) accounted for a source of cash of$24.0 million , a source of cash of$5.5 million and a use of cash of$31.1 million in 2020, 2019 and 2018, respectively. Following is an assessment of each of the net working capital components:
? Trade Receivables, net - Changes in trade receivables resulted in a
million use of cash in 2020 compared to a
of cash in 2019 and 2018, respectively. The lower use of cash in 2020 compared
to 2019 was related to lower net revenue compared to the prior year. The lower
use of cash in 2019 was related to lower net revenue and lower trade
receivables compared to 2018. The DSO was 59 days at
November 30, 2019 and 56 days atDecember 1, 2018 .
? Inventory - Changes in inventory resulted in a
2020 compared to a
cash in 2019 and 2018, respectively. The lower source of cash in 2020 compared
to 2019 was due to higher decreasing inventory levels in 2019 compared to
2020. Inventory days on hand were 53 days at the end of 2020 compared to 58
days at the end of 2019 and 60 days at the end of 2018.
? Trade Payables - Changes in trade payables resulted in a
million and
Changes between all years were primarily related to the timing of payments,
and extension of payment terms globally.
Contributions to our pension and other postretirement benefit plans were $5.5
million , $8.1 million and $6.6 million in 2020, 2019 and 2018, respectively.
Income taxes payable resulted in a $5.5 million , $21.0 million and $4.0 million
source of cash in 2020, 2019 and 2018, respectively. Other assets resulted in a
$38.4 million source of cash and an $18.3 million and $35.2 million use of cash
in 2020, 2019 and 2018, respectively. Accrued compensation was a $2.5 million
and $1.3 million source of cash in 2020 and 2019, respectively, and a $0.3
million use of cash in 2018. The source of cash in 2020 and 2019 relates to
higher accruals for our employee incentive plans while the use of cash in 2018
relates to lower accruals. Other operating activity was a $0.9 million use of
cash in 2020 and a $37.5 million and an $81.5 million source of cash in 2019 and
2018, respectively. This reflects the impact of a stronger U.S. dollar on
certain foreign transactions in 2019 and 2018.
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Cash Flows from Investing Activities
($ in millions) 2020 2019
2018
Net cash (used in) provided by investing activities
$ (61.8 ) Purchases of property, plant and equipment were$87.3 million in 2020 compared to$62.0 million in 2019 and$68.3 million in 2018. The higher purchases in 2020 reflect the timing of capital projects and expenditures related to growth initiatives. Proceeds from the sale of property, plant and equipment were$1.5 million in 2020 compared to$11.1 million in 2019 and$2.9 million in 2018. The higher proceeds in 2019 were due to the sale of certain properties. In 2020, we acquiredD.H.M Adhesives, Inc. for$9.5 million and also purchased other business assets for$5.6 million . In 2019, we acquiredRamapo Sales andMarketing, Inc. for$8.3 million and paid a$9.9 million contingent consideration payment for our 2015 acquisition ofTonsan Adhesive, Inc. In 2019, we also received$70.3 million of cash related to the sale of our surfactants and thickeners business. In addition, we received payment of a government grant and expended cash related to the building of a plant inChina of$8.9 million and$2.8 million , respectively. In 2018, we received$3.5 million of cash resulting in an adjustment to the purchase price of Royal Adhesives and Adecol. See Note 2 to the Consolidated Financial Statements for further information on acquisitions.
Cash Flows from Financing Activities
($ in millions) 2020 2019 2018
Net cash used in financing activities
In 2020, 2019, and 2018 we repaid
Cash paid for dividends were$33.5 million ,$32.4 million and$31.1 million in 2020, 2019 and 2018, respectively. Cash generated from the exercise of stock options was$12.3 million ,$10.9 million and$6.2 million in 2020, 2019 and 2018, respectively. Repurchases of common stock related to statutory minimum tax withholding upon vesting of restricted stock were$3.4 million in 2020 compared to$3.0 million in 2019 and$4.7 million in 2018. There were no repurchases from our share repurchase program in 2020, 2019 and 2018. Contractual Obligations
Due dates and amounts of contractual obligations are as follows:
Payments Due by Period
Less than More than
($ in millions) Total 1 year 1-3 years 3-5 years 5 years
Long-term debt $ 1,757.7 $ - $ - $ 1,157.7 $ 600.0
Interest payable on long-term debt1 322.8 73.2 118.1 75.3 56.3
Notes payable 16.9 16.9 - - -
Operating leases 37.9 11.5 13.5 9.0 3.9
Pension contributions2 1.9 1.9 - - -
Financial instrument liabilities3 5.3 5.3 - - -
Total contractual obligations $ 2,142.5 $ 108.8 $ 131.6 $ 1,242.0 $ 660.2 1 Some of our interest obligations on long-term debt are variable based on LIBOR. Interest payable for the variable portion is estimated based on a forward LIBOR curve.
2 Pension contributions are only included for fiscal 2021. We have not determined our pension funding obligations beyond 2021 and thus, any potential future contributions have been excluded from the table.
3 Represents the fair value of our foreign exchange contracts with a payable position to the counterparty as ofNovember 28, 2020 , based on fair market values as of that date. Future changes in market values will impact the amount of cash ultimately paid or received to settle those instruments in the future. 33
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We are subject to mandatory prepayments in the first quarter of each fiscal year equal to 50% of Excess Cash Flow, as defined in the Term Loan B Credit Agreement, of the prior fiscal year less any voluntary prepayments made during that fiscal year. The Excess Cash Flow Percentage (ECF Percentage) shall be reduced to 25% when our Secured Leverage Ratio is below 4.25:1.00 and to 0% when our Secured Leverage Ratio is below 3.75:1.00. The prepayment for the 2020 measurement period was satisfied through amounts prepaid during 2020. We have estimated the 2021 prepayment to be zero. We expect to make cash outlays in the future related to uncertain tax positions. However, due to the uncertainty of the timing of future cash flows, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. Accordingly, gross unrecognized tax benefits of$14.6 million as ofNovember 28, 2020 have been excluded from the contractual obligations table above. For further information related to unrecognized tax benefits see Note 11 to the Consolidated Financial Statements.
We expect 2021 capital expenditures to be approximately
Off-Balance Sheet Arrangements
There are no relationships with any unconsolidated, special-purpose entities or financial partnerships established for the purpose of facilitating off-balance sheet financial arrangements.
Forward-Looking Statements and Risk Factors
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words like "plan," "expect," "aim," "believe," "project," "anticipate," "intend," "estimate," "will," "should," "could" (including the negative or variations thereof) and other expressions that indicate future events and trends. These plans and expectations are based upon certain underlying assumptions, including those mentioned with the specific statements. Such assumptions are in turn based upon internal estimates and analyses of current market conditions and trends, our plans and strategies, economic conditions and other factors. These plans and expectations and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. In addition to the factors described in this report, Item 1A. Risk Factors identifies some of the important factors that could cause our actual results to differ materially from those in any such forward-looking statements. In order to comply with the terms of the safe harbor, we have identified these important factors which could affect our financial performance and could cause our actual results for future periods to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. These factors should be considered, together with any similar risk factors or other cautionary language that may be made elsewhere in this Annual Report on Form 10-K. 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 theSEC or in our press releases) on related subjects.
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