Item 1. Financial Statements
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
 
 
 
September 2,
 
 
August 27,
 
 
September 2,
 
 
August 27,
 
 
 
2023
 
 
2022
 
 
2023
 
 
2022
 
Net revenue
 
$
900,634
 
 
$
941,230
 
 
$
2,608,055
 
 
$
2,790,969
 
Cost of sales
 
 
( 637,162
)
 
 
( 692,066
)
 
 
( 1,873,000
)
 
 
( 2,075,392
)
Gross profit
 
 
263,472
 
 
 
249,164
 
 
 
735,055
 
 
 
715,577
 
Selling, general and administrative expenses
 
 
( 172,153
)
 
 
( 161,210
)
 
 
( 493,320
)
 
 
( 483,109
)
Other income, net
 
 
1,555
 
 
 
6,559
 
 
 
4,764
 
 
 
12,701
 
Interest expense
 
 
( 35,105
)
 
 
( 23,450
)
 
 
( 101,305
)
 
 
( 61,475
)
Interest income
 
 
1,128
 
 
 
2,139
 
 
 
2,726
 
 
 
6,170
 
Income before income taxes and income from equity method investments
 
 
58,897
 
 
 
73,202
 
 
 
147,920
 
 
 
189,864
 
Income taxes
 
 
( 22,231
)
 
 
( 28,259
)
 
 
( 51,255
)
 
 
( 62,023
)
Income from equity method investments
 
 
984
 
 
 
1,587
 
 
 
3,322
 
 
 
4,236
 
Net income including non-controlling interest
 
 
37,650
 
 
 
46,530
 
 
 
99,987
 
 
 
132,077
 
Net income attributable to non-controlling interest
 
 
( 23
)
 
 
( 33
)
 
 
( 71
)
 
 
( 70
)
Net income attributable to H.B. Fuller
 
$
37,627
 
 
$
46,497
 
 
$
99,916
 
 
$
132,007
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share attributable to H.B. Fuller common stockholders:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.69
 
 
$
0.87
 
 
$
1.84
 
 
$
2.47
 
Diluted
 
$
0.67
 
 
$
0.84
 
 
$
1.79
 
 
$
2.39
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
54,394
 
 
 
53,644
 
 
 
54,279
 
 
 
53,498
 
Diluted
 
 
56,033
 
 
 
55,130
 
 
 
55,890
 
 
 
55,201
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.205
 
 
$
0.190
 
 
$
0.600
 
 
$
0.548
 
 
See accompanying Notes to Unaudited Consolidated Financial Statements.
 
4
Table of Contents
 
 
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
September 2,
 
 
August 27,
 
 
September 2,
 
 
August 27,
 
 
 
2023
 
 
2022
 
 
2023
 
 
2022
 
Net income including non-controlling interest
 
$
37,650
 
 
$
46,530
 
 
$
99,987
 
 
$
132,077
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation
 
 
( 8,717
)
 
 
( 87,789
)
 
 
14,058
 
 
 
( 165,369
)
Defined benefit pension plans adjustment, net of tax
 
 
863
 
 
 
684
 
 
 
2,572
 
 
 
3,976
 
Interest rate swaps, net of tax
 
 
15,898
 
 
 
1,346
 
 
 
14,745
 
 
 
10,924
 
Cross-currency swaps, net of tax
 
 
-
 
 
 
( 371
)
 
 
-
 
 
 
( 3,664
)
Net investment hedges, net of tax
 
 
( 4,641
)
 
 
-
 
 
 
( 10,324
)
 
 
-
 
Other comprehensive income (loss)
 
 
3,403
 
 
 
( 86,130
)
 
 
21,051
 
 
 
( 154,133
)
Comprehensive income (loss)
 
 
41,053
 
 
 
( 39,600
)
 
 
121,038
 
 
 
( 22,056
)
Less: Comprehensive income (loss) attributable to non-controlling interest
 
 
16
 
 
 
( 13
)
 
 
59
 
 
 
3
 
Comprehensive income (loss) attributable to H.B. Fuller
 
$
41,037
 
 
$
( 39,587
)
 
$
120,979
 
 
$
( 22,059
)
 
See accompanying Notes to Unaudited Consolidated Financial Statements.
 
5
Table of Contents
 
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
 
    September 2,
    December 3,
 
    2023
    2022
 
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 94,934     $ 79,910  
Trade receivables (net of allowances of $ 12,458 and $ 10,939 , as of September 2, 2023 and December 3, 2022, respectively)
    576,060       607,365  
Inventories
    472,641       491,781  
Other current assets
    97,756       120,319  
Total current assets
    1,241,391       1,299,375  
                 
Property, plant and equipment
    1,709,191       1,579,738  
Accumulated depreciation
    ( 907,895 )     ( 846,071 )
Property, plant and equipment, net
    801,296       733,667  
                 
Goodwill
    1,490,535       1,392,627  
Other intangibles, net
    746,521       702,092  
Other assets
    380,165       335,868  
Total assets
  $ 4,659,908     $ 4,463,629  
                 
Liabilities, non-controlling interest and total equity
               
Current liabilities
               
Notes payable
  $ 12,553     $ 28,860  
Trade payables
    394,914       460,669  
Accrued compensation
    75,035       108,328  
Income taxes payable
    33,007       18,530  
Other accrued expenses
    102,837       89,345  
Total current liabilities
    618,346       705,732  
                 
Long-term debt
    1,872,468       1,736,256  
Accrued pension liabilities
    54,661       52,561  
Other liabilities
    387,307       358,286  
Total liabilities
  $ 2,932,782     $ 2,852,835  
                 
Commitments and contingencies (Note 13)
                   
                 
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 – 54,016,374 and 53,676,576 as of September 2, 2023 and December 3, 2022, respectively
  $ 54,016     $ 53,677  
Additional paid-in capital
    294,035       266,491  
Retained earnings
    1,808,687       1,741,359  
Accumulated other comprehensive loss
    ( 430,295 )     ( 451,357 )
Total H.B. Fuller stockholders' equity
    1,726,443       1,610,170  
Non-controlling interest
    683       624  
Total equity
    1,727,126       1,610,794  
Total liabilities, non-controlling interest and total equity
  $ 4,659,908     $ 4,463,629  
 
 See accompanying Notes to Unaudited Consolidated Financial Statements.
 
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Table of Contents
 
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Statements of Total Equity
(In thousands)
(Unaudited)
 
 
 
H.B. Fuller Company Shareholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
 
 
 
Common
 
 
Paid-in
 
 
Retained
 
 
Comprehensive
 
 
Non-Controlling
 
 
 
 
 
 
 
Stock
 
 
Capital
 
 
Earnings
 
 
Income (Loss)
 
 
Interest
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 3, 2022
 
$
53,677
 
 
$
266,491
 
 
$
1,741,359
 
 
$
( 451,357
)
 
$
624
 
 
$
1,610,794
 
Comprehensive income
 
 
-
 
 
 
-
 
 
 
21,889
 
 
 
5,241
 
 
 
37
 
 
 
27,167
 
Dividends
 
 
-
 
 
 
-
 
 
 
( 10,305
)
 
 
-
 
 
 
-
 
 
 
( 10,305
)
Stock option exercises
 
 
76
 
 
 
3,520
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
3,596
 
Share-based compensation plans and other, net
 
 
102
 
 
 
5,221
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
5,323
 
Repurchases of common stock
 
 
( 36
)
 
 
( 2,412
)
 
 
-
 
 
 
-
 
 
 
-
 
 
 
( 2,448
)
Balance at March 4, 2023
 
$
53,819
 
 
$
272,820
 
 
$
1,752,943
 
 
$
( 446,116
)
 
$
661
 
 
$
1,634,127
 
Comprehensive income
 
 
-
 
 
 
-
 
 
 
40,401
 
 
 
12,411
 
 
 
6
 
 
 
52,818
 
Dividends
 
 
-
 
 
 
-
 
 
 
( 11,129
)
 
 
-
 
 
 
-
 
 
 
( 11,129
)
Stock option exercises
 
 
13
 
 
 
584
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
597
 
Share-based compensation plans and other, net
 
 
30
 
 
 
6,818
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
6,848
 
Repurchases of common stock
 
 
( 2
)
 
 
( 102
)
 
 
-
 
 
 
-
 
 
 
-
 
 
 
( 104
)
Balance at June 3, 2023
 
$
53,860
 
 
$
280,120
 
 
$
1,782,215
 
 
$
( 433,705
)
 
$
667
 
 
$
1,683,157
 
Comprehensive income (loss)
 
 
-
 
 
 
-
 
 
 
37,627
 
 
 
3,410
 
 
 
16
 
 
 
41,053
 
Dividends
 
 
-
 
 
 
-
 
 
 
( 11,155
)
 
 
-
 
 
 
-
 
 
 
( 11,155
)
Stock option exercises
 
 
153
 
 
 
6,906
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
7,059
 
Share-based compensation plans and other, net
 
 
3
 
 
 
7,018
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
7,021
 
Repurchases of common stock
 
 
-
 
 
 
( 9
)
 
 
-
 
 
 
-
 
 
 
-
 
 
 
( 9
)
Balance at September 2, 2023
 
$
54,016
 
 
$
294,035
 
 
$
1,808,687
 
 
$
( 430,295
)
 
$
683
 
 
 
1,727,126
 
 
 
 
H.B. Fuller Company Shareholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
 
 
 
Common
 
 
Paid-in
 
 
Retained
 
 
Comprehensive
 
 
Non-Controlling
 
 
 
 
 
 
 
Stock
 
 
Capital
 
 
Earnings
 
 
Income (Loss)
 
 
Interest
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at November 27, 2021
 
$
52,778
 
 
$
213,637
 
 
$
1,600,601
 
 
$
( 270,247
)
 
$
591
 
 
$
1,597,360
 
Comprehensive income
 
 
-
 
 
 
-
 
 
 
38,306
 
 
 
11,177
 
 
 
4
 
 
 
49,487
 
Dividends
 
 
-
 
 
 
-
 
 
 
( 8,964
)
 
 
-
 
 
 
-
 
 
 
( 8,964
)
Stock option exercises
 
 
126
 
 
 
5,628
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
5,754
 
Share-based compensation plans and other, net
 
 
187
 
 
 
5,601
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
5,788
 
Repurchases of common stock
 
 
( 49
)
 
 
( 3,528
)
 
 
-
 
 
 
-
 
 
 
-
 
 
 
( 3,577
)
Balance at February 26, 2022
 
$
53,042
 
 
$
221,338
 
 
$
1,629,943
 
 
$
( 259,070
)
 
$
595
 
 
$
1,645,848
 
Comprehensive income (loss)
 
 
-
 
 
 
-
 
 
 
47,203
 
 
 
( 79,158
)
 
 
12
 
 
 
( 31,943
)
Dividends
 
 
-
 
 
 
-
 
 
 
( 10,177
)
 
 
-
 
 
 
-
 
 
 
( 10,177
)
Stock option exercises
 
 
47
 
 
 
2,036
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
2,083
 
Share-based compensation plans other, net
 
 
65
 
 
 
8,910
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
8,975
 
Repurchases of common stock
 
 
( 1
)
 
 
( 31
)
 
 
-
 
 
 
-
 
 
 
-
 
 
 
( 32
)
Balance at May 28, 2022
 
$
53,153
 
 
$
232,253
 
 
$
1,666,969
 
 
$
( 338,228
)
 
$
607
 
 
$
1,614,754
 
Comprehensive income
 
 
-
 
 
 
-
 
 
 
46,497
 
 
 
( 86,084
)
 
 
( 13
)
 
 
( 39,600
)
Dividends
 
 
-
 
 
 
-
 
 
 
( 10,188
)
 
 
-
 
 
 
-
 
 
 
( 10,188
)
Stock option exercises
 
 
135
 
 
 
5,549
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
5,684
 
Share-based compensation plans other, net
 
 
15
 
 
 
8,295
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
8,310
 
Repurchases of common stock
 
 
( 4
)
 
 
( 271
)
 
 
-
 
 
 
-
 
 
 
-
 
 
 
( 275
)
Balance at August 27, 2022
 
$
53,299
 
 
$
245,826
 
 
$
1,703,278
 
 
$
( 424,312
)
 
$
594
 
 
$
1,578,685
 
 
See accompanying Notes to Unaudited Consolidated Financial Statements. 
 
7
Table of Contents
 
 
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
Nine Months Ended
 
 
 
September 2, 2023
 
 
August 27, 2022
 
Cash flows from operating activities:
 
 
 
 
 
 
 
 
Net income including non-controlling interest
 
$
99,987
 
 
$
132,077
 
Adjustments to reconcile net income including non-controlling interest to net cash provided by operating activities:
 
 
 
 
 
 
 
 
Depreciation
 
 
60,518
 
 
 
54,297
 
Amortization
 
 
58,633
 
 
 
55,088
 
Deferred income taxes
 
 
( 30,064
)
 
 
( 4,968
)
Income from equity method investments, net of dividends received
 
 
260
 
 
 
1,420
 
Debt issuance costs write-off
 
 
2,689
 
 
 
-
 
Loss on fair value adjustment on contingent consideration liability
 
 
2,893
 
 
 
-
 
Gain on sale or disposal of assets
 
 
( 78
)
 
 
( 1,130
)
Share-based compensation
 
 
16,279
 
 
 
20,358
 
Pension and other post-retirement benefit plan activity
 
 
( 8,890
)
 
 
( 15,324
)
Change in assets and liabilities, net of effects of acquisitions:
 
 
 
 
 
 
 
 
Trade receivables, net
 
 
79,495
 
 
 
( 51,629
)
Inventories
 
 
38,212
 
 
 
( 112,390
)
Other assets
 
 
( 30,901
)
 
 
( 40,329
)
Trade payables
 
 
( 74,443
)
 
 
17,381
 
Accrued compensation
 
 
( 33,796
)
 
 
( 17,275
)
Other accrued expenses
 
 
( 6,992
)
 
 
1,614
 
Income taxes payable
 
 
24,461
 
 
 
10,201
 
Other liabilities
 
 
12,408
 
 
 
( 35,940
)
Other
 
 
6,023
 
 
 
35,246
 
Net cash provided by operating activities
 
 
216,694
 
 
 
48,697
 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
Purchased property, plant and equipment
 
 
( 109,545
)
 
 
( 98,352
)
Purchased businesses, net of cash acquired
 
 
( 194,248
)
 
 
( 242,870
)
Proceeds from sale of property, plant and equipment
 
 
4,257
 
 
 
1,281
 
Cash received from government grant
 
 
-
 
 
 
3,928
 
Net cash used in investing activities
 
 
( 299,536
)
 
 
( 336,013
)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
Proceeds from issuance of long-term debt
 
 
1,333,000
 
 
 
335,000
 
Repayment of long-term debt
 
 
( 1,184,900
)
 
 
( 15,000
)
Payment of debt issuance costs
 
 
( 10,214
)
 
 
( 600
)
Net payment of notes payable
 
 
( 18,000
)
 
 
6,707
 
Dividends paid
 
 
( 32,319
)
 
 
( 29,067
)
Contingent consideration payment
 
 
-
 
 
 
( 5,000
)
Proceeds from stock options exercised
 
 
11,251
 
 
 
13,522
 
Repurchases of common stock
 
 
( 2,560
)
 
 
( 3,885
)
Net cash provided by financing activities
 
 
96,258
 
 
 
301,677
 
 
 
 
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
 
1,608
 
 
 
( 15,439
)
Net change in cash and cash equivalents
 
 
15,024
 
 
 
( 1,078
)
Cash and cash equivalents at beginning of period
 
 
79,910
 
 
 
61,786
 
Cash and cash equivalents at end of period
 
$
94,934
 
 
$
60,708
 
 
See accompanying Notes to Unaudited Consolidated Financial Statements.
 
8
Table of Contents
 
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  December 3, 2022 as filed with the Securities and Exchange Commission.
 
New Accounting Pronouncements
 
In September 2022, the Financial Accounting Standards Board (“FASB”) issued ASU  No. 2022 - 04, Liabilities - Supplier Finance Programs (Subtopic 405 - 50 ): Disclosure of Supplier Finance Program Obligations. This ASU requires that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of the financial statements to understand the program's nature, activity during the period, changes from period to period, and potential magnitude. To achieve that objective, the buyer should disclose qualitative and quantitative information about its supplier finance programs.  Our effective date of this ASU is our fiscal year ending December 1, 2024. We are evaluating the effect that this guidance will have on our Consolidated Financial Statements. 
 
Recently issued accounting standards or pronouncements not disclosed above have been excluded as they are not relevant to the company.
 
 
Note 2: Acquisitions
 
Adhezion Biomedical LLC
 
On June 23,  2023, we acquired Adhezion Biomedical LLC (“Adhezion”) for a base purchase price of approximately $ 81,201 which was funded through borrowings on our credit facility. This includes a holdback amount of $ 780 that will be paid on the 12 -month anniversary of the closing date. The agreement includes a payment of contingent consideration up to $ 15,000 following the completion of certain performance goals and conditions. Adhezion, headquartered in Wyomissing, Pennsylvania, is a manufacturer of cyanoacrylate-based medical adhesives and infection prevention products. The acquisition of Adhezion positions us for expansion in the medical adhesives industry and creates a solid, unique platform from which to scale and innovate in the healthcare adhesives industry.  The acquisition fair value measurement was preliminary as of September 2, 2023 and includes intangible asse ts of $ 40,800 , goodwill of $ 37,063  and other net asse ts of $ 3,338 . Goodwill represents expected synergies from combining Adhezion with our existing business. We are evaluating how much goodwill is deductible for tax purposes . Adhezion will be included in our Hygiene, Health and Consumable Adhesives operating segment.
 
XChem International LLC
 
On June 12, 2023, we acquired XChem International LLC ("XChem") for a base purchase price of approximately $ 14,591  which was funded through borrowings on our credit facility. This includes a holdback amount of $ 1,650 that will be paid on the 18 -month anniversary of the closing date. XChem, headquartered in Ras Al-Khaimah, United Arab Emirates, is a manufacturer of adhesives and sealants for construction-related applications. The acquisition of XChem provides our construction adhesives global business with additional manufacturing presence for certain brands outside the U.S. and broadens our construction adhesives portfolio of highly specified applications and diversifies it toward both non-U.S. and infrastructure-oriented markets.  The acquisition fair value measurement was preliminary as of September 2, 2023 and includes intangible asse ts of $ 8,664   and other net asse ts of $ 5,927 . Goodwill represents expected synergies from combining XChem with our existing business. Goodwill is not deductible for tax purposes. XChem will be included in our Construction Adhesives operating segment.
 
Beardow Adams Holdings Ltd.
 
On May 1, 2023, we acquired Beardow Adams Holdings Ltd. (“Beardow Adams”) for a total purchase price of 80,738 British pound sterling, or approximately $ 100,885 , which was funded through borrowings on our credit facility. This includes a holdback amount of 8,000 British pound sterling that will be paid on the 18 -month anniversary of the closing date. Beardow Adams, based in the  United Kingdom, develops and manufactures adhesives, sealants and coatings, principally in the fields of packaging and related applications. The acquisition of Beardow Adams is expected to accelerate profitable growth in many of our core end markets and generate business synergies through better raw material pricing, production optimization, an expanded distribution platform and difference-making innovation. The acquisition fair value measurement was preliminary as of September 2, 2023 and includes intangible asse ts of $ 40,485 , goodwill of $ 45,961  and other net asse ts of $ 14,439 . Goodwill represents expected synergies from combining Beardow Adams with our existing business. We are evaluating how much goodwill is deductible for tax purposes. Beardow Adams  is included in our Hygiene, Health and Consumable Adhesives operating segment. 
 
Aspen Research Corporation
 
On January 31, 2023, we acquired the assets of Aspen Research Corporation (“Aspen”) for a total purchase price of $ 9,761 , which was funded through existing cash. This includes a holdback amount of $ 500 that will be paid on the 18 -month anniversary of the closing date. Aspen, located in Maple Grove, Minnesota, is a contract research organization that develops and manufactures innovative solutions for some of the adhesives used in our insulating glass market. Aspen is known for their superior understanding of materials science, engineering and analytical testing and specializes in custom materials manufacturing for chemicals and adhesives products. The acquisition of Aspen is expected to expand our Engineering Adhesives footprint in North America and strengthen our capabilities in the insulating glass market, in addition to bringing additive continuous flow, process manufacturing capabilities that we plan to leverage. The acquisition fair value measurement was preliminary as of September 2, 2023 and includes intangible asse ts of $ 4,900 , goodwill of $ 2,788   and other net assets of $ 2,073 . Goodwill represents expected synergies from combining Aspen with our existing business. Goodwill is deductible for tax purposes. A spen is included in our Engineering Adhesives operating segment. 
 
Lemtapes Oy
 
On December 15, 2022, we acquired Lemtapes Oy (“Lemtapes”) for a total purchase price of 8,048 Euro, or approximately $ 8,554  which was funded through existing cash. This includes a holdback amount of 850 Euro that will be paid on the 18 -month anniversary of the closing date. Lemtapes, located in Valkeakoski, Finland, is a solutions provider of ecological, innovative tapes and adhesives for the packaging and plywood industries. The acquisition of Lemtapes is expected to reinforce our strategic position in Europe, especially for our Adhesives Coated Solutions products. This acquisition will also accelerate our growth strategy of fast-growing, high margin businesses while adding technology capabilities and strong customer relationships. The acquisition fair value measurement was preliminary as of September 2, 2023 and includes intangible ass ets of $ 5,526 , goodwill of $ 955 and other net assets of $ 2,073 . Goodwill represents expected synergies from combining Lemtapes with our existing business. Goodwill is not deductible for tax purposes.  Lemta pes is included in our Hygiene, Health and Consumable Adhesives operating segment.
 
GSSI Sealants                                                                                                    
 
On October 24, 2022, we acquired GSSI Sealants, Inc. ("GSSI") for a total purchase price of $ 7,701 , which was funded through existing cash. This includes a holdback amount of $ 1,050 that will be paid on the 12 -month anniversary of the closing date. GSSI, headquartered in Houston, Texas, is a manufacturer of premier elastomeric butyl rubber sealant tapes. The acquisition of GSSI is expected to support our strategy to expand our Construction Adhesives business selectively via high margin applications and expand our reach to new regions. The acquisition fair value measurement was final as of September 2, 2023 and includes intangible a ssets of $ 3,400 , goodwill of $ 1,123  and other net assets of $ 3,178 . Goodwill represents expected synergies from combining GSSI with our existing business. Goodwill is not deductible for tax purposes. GSSI is included in our Construction Adhesives operating segment. 
 
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ZKLT Polymer Co.
 
On August 16, 2022, we acquired ZKLT Polymer Co., Ltd. ("ZKLT") for a base purchase price of 143,965 Chinese renminbi, or approximately $ 21,260 , which was funded through existing cash. This includes a holdback of 27,000 Chinese renminbi, or approximately $ 3,987 , that will be paid half on each of the 12 -month and 18 -month anniversaries of the closing date, as well as contingent consideration up to 30,000 Chinese renminbi, or approximately $ 4,132 , following the completion of certain performance goals and conditions. ZKLT, headquartered in Chongquin City, China, is a manufacturer of liquid adhesives primarily for the automotive market. The acquisition of ZKLT is expected to add unique technology, strong customer relationships and a strategic manufacturing location to further strengthen our presence in central China. The acquisition fair value measurement was final as of September 2, 2023  and includes intangible assets of $ 5,183 , goodwill of $ 5,992   and other net as sets of $ 10,085 . Goodwill represents expected synergies from combining ZKLT with our existing business. Goodwill is not deductible for tax purposes. See Note 12  for further discussion of the fair value of the contingent consideration. ZKLT is included in our Engineering Adhesives operating segment. 
 
Apollo
 
On January 26, 2022, we acquired Apollo Chemicals Limited, Apollo Roofing Solutions Limited and Apollo Construction Solutions Limited (collectively, "Apollo") for a total purchase price of 152,714 British pound sterling, or approximately $ 205,592 , which was funded through borrowings on our credit facility.  Apollo, headquartered in Tamworth, UK, is a manufacturer of liquid adhesives, coatings and primers for the roofing, industrial and construction markets. Apollo is expected to enhance our position in key high-value, high-margin markets in the UK and throughout Europe. The acquisition fair value measurement was final as of December 3, 2022 and includes intangible assets of $ 76,198 , goodwill of $ 119,358  and other net assets of $ 10,036 . Goodwill represents expected synergies from combining Apollo with our existing business. Goodwill is not deductible for tax purposes.  The acquisition is included in our Construction Adhesives operating segment. 
 
Fourny NV
 
On January 11, 2022, we acquired Fourny NV ("Fourny") for a base purchase price of 12,867 Euro, or approximately $ 14,627 , which was funded through existing cash. The agreement required us to pay an additional holdback amount 18 months following the date of acquisition and during the three months ended September 2, 2023 we paid $ 3,060 . Fourny, headquartered in Willebroek, Belgium, is a manufacturer of construction adhesives. Fourny is expected to enhance our position in key high-value, high-margin markets in Europe. The acquisition fair value measurement was final as of December 3, 2022 and includes intangible assets of $ 10,117 , goodwill of $ 6,455 and other net assets of $ 1,391 . Goodwill represents expected synergies from combining Fourny with our existing business. Goodwill is not deductible for tax purposes. Fourny is included in our Construction Adhesives operating segment. 
 
All acquisitions, individually and in the aggregate, are
not material and therefore pro forma financial information is
not provided.
 
 
Note 3: Restructuring Actions
 
During fiscal year 2023, the Company approved restructuring plans (the "Plans") related to organizational changes and other actions to optimize operations and integrate acquired businesses. The Plans began to be implemented in the second quarter of fiscal year 2023 and are currently expected to be completed during fiscal year 2026, with the majority of the charges recognized and cash payments occurring in fiscal 2023 and 2024. In implementing the Plans, the Company currently expects to incur pre-tax costs of approximately $ 39,100  to $ 44,100  for severance and related employee costs globally, other restructuring costs related to the streamlining of processes and the payment of anticipated income taxes in certain jurisdictions related to the Plans. 
 
The following table summarizes the pre-tax restructuring charges by income statement classification:
 
    Three Months Ended
    Nine Months Ended
 
    September 2, 2023
    August 27, 2022
    September 2, 2023
    August 27, 2022
 
Cost of sales
  $ 3,322     $ -     $ 8,407     $ ( 152 )
Selling, general and administrative
    5,077       ( 222 )     8,320       ( 297 )
    $ 8,399     $ ( 222 )   $ 16,727     $ ( 449 )
 
The restructuring charges are all recorded in Corporate Unallocated for segment reporting purposes.
 
A summary of the restructuring liability is presented below:
 
    Employee-Related
    Asset-Related
    Total
 
Balance at November 27, 2021
  $ 1,095     $ -     $ 1,095  
Expenses incurred
    ( 449 )     -       ( 449 )
Cash payments
    ( 529 )     -       ( 529 )
Foreign currency translation
    ( 60 )     -       ( 60 )
Balance at December 3, 2022
  $ 57     $ -     $ 57  
Expenses incurred
    16,394       333       16,727  
Non-cash charges
    -       ( 333 )     ( 333 )
Cash payments
    ( 6,910 )     -       ( 6,910 )
Foreign currency translation
    ( 1,130 )     -       ( 1,130 )
Balance at September 2, 2023
  $ 8,411     $ -     $ 8,411  
 
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Non-cash charges include accelerated depreciation resulting from the cessation of use of certain long-lived assets. Restructuring liabilities have been classified as a component of other accrued expenses on the Consolidated Balance Sheets.
 
 
Note 4: Inventories
 
The composition of inventories is as follows:
 
    September 2,
    December 3,
 
    2023
    2022
 
Raw materials
  $ 221,385     $ 237,071  
Finished goods
    251,256       254,710  
Total inventories
  $ 472,641     $ 491,781  
 
 
Note 5: Goodwill and Other Intangible Assets
 
The goodwill activity by reportable segment for the  nine months ended September 2, 2023 is presented below:
 
    Hygiene, Health
                         
    and Consumable
    Engineering
    Construction
         
    Adhesives
    Adhesives
    Adhesives
    Total
 
Balance at December 3, 2022
  $ 328,962     $ 637,910     $ 425,755     $ 1,392,627  
Acquisitions
  $ 84,158     $ 2,788     $ -       86,946  
Foreign currency translation effect
  $ 3,416     $ 3,516     $ 4,030       10,962  
Balance at September 2, 2023
  $ 416,536     $ 644,214     $ 429,785     $ 1,490,535  
 
Balances of amortizable identifiable intangible assets, excluding goodwill and other non-amortizable intangible assets, are as follows:
 
    September 2, 2023
 
    Purchased
                                 
    Technology
    Customer
                         
Amortizable Intangible Assets
  and Patents
    Relationships
    Trade Names
    Other
    Total
 
Original cost
  $ 144,597     $ 1,052,458     $ 55,379     $ 10,919     $ 1,263,353  
Accumulated amortization
    ( 56,624 )     ( 432,044 )     ( 21,837 )     ( 6,797 )     ( 517,302 )
Net identifiable intangibles
  $ 87,973     $ 620,414     $ 33,542     $ 4,122     $ 746,051  
 
    December 3, 2022
 
    Purchased
                                 
    Technology
    Customer
                         
Amortizable Intangible Assets
  and Patents
    Relationships
    Trade Names
    Other
    Total
 
Original cost
  $ 118,727     $ 1,004,008     $ 50,324     $ 11,053     $ 1,184,112  
Accumulated amortization
    ( 66,433 )     ( 388,394 )     ( 21,401 )     ( 6,251 )     ( 482,479 )
Net identifiable intangibles
  $ 52,294     $ 615,614     $ 28,923     $ 4,802     $ 701,633  
 
Amortization expense with respect to amortizable intangible assets was $ 20,820 and $ 18,676  for the three months ended September 2, 2023 and August 27, 2022 , respectively, and $ 58,633  and $ 55,088 for the  nine months ended  September 2, 2023 and August 27, 2022 , respectively.  
 
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
  2023
    2024
    2025
    2026
    2027
    Thereafter
 
Amortization expense
  $ 17,238     $ 79,499     $ 76,732     $ 70,072     $ 66,754     $ 435,756  
 
Non-amortizable intangible assets as of  September 2, 2023 and December 3, 2022 were $ 470  and $ 459 , respectively, and relate to trademarks and trade names. The change in non-amortizable assets as of September 2, 2023 compared to December 3, 2022 was due to changes in foreign currency exchange rates.
 
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Note 6: Long-Term Debt
 
On February 15, 2023, we entered into a credit agreement with a consortium of financial institutions (“Second Amended and Restated Credit Agreement”) which replaces our existing revolving credit agreement under the amended and restated revolving credit agreement dated October 20, 2020 and also replaces our secured term loan credit agreement dated October 20, 2017. The Second Amended and Restated Credit Agreement provides for a new senior secured term loan A facility in an aggregate principal amount of $ 500,000 (“Term Loan A”), a new senior secured term loan B facility in an aggregate principal amount of $ 800,000 (“Term Loan B”) and amendments to and extension of our existing senior secured revolving credit facility with an aggregate commitment in the amount of $ 700,000 (“Revolving Credit Facility”). A portion of the proceeds of the combined facilities, (the “Credit Facilities”) was used to pay off the existing term loan and revolver. The Credit Facilities will generally be used to finance working capital needs and acquisitions, and for general corporate purposes. All of our obligations under the Credit Facilities will be secured by a first -lien security interest in substantially all personal property and material real property of the Company and its material U.S. subsidiaries, and will be guaranteed by all of the Company’s material U.S. subsidiaries.
 
Term Loans
 
Interest on Term Loan A is payable at the Secured Overnight Financing Rate ("SOFR") plus an adjustment of  0.10 percent and an interest rate spread of 1.75 percent ( 7.15  percent at September 2, 2023 ). The interest rate spread is based on a secured leverage grid. Term Loan A matures on February 15, 2028. On August 16, 2023, we amended the Term Loan B agreement to an interest rate of SOFR plus an interest rate spread of 2.25 percent with a SOFR floor of 0.50 percent ( 7.55  percent at September 2, 2023 ). Term Loan B matures on February 15, 2030. 
 
On January 12, 2023, we entered into an interest rate swap agreement to convert $ 400,000 of our variable rate 1 -month LIBOR rate debt to a fixed rate of 3.6895 percent. On February 28, 2023, after entering into the Second Amended and Restated Credit Agreement, we amended the interest rate swap agreement to 1 -month SOFR and a fixed rate of 3.7260 in accordance with the practical expedients included in ASC 848, Reference Rate Reform . See Note 11 for further discussion of this interest rate swap.
 
On March 16, 2023, we entered into interest rate swap agreements to convert $ 300,000 of our 1 -month SOFR rate debt to a fixed rate of 3.7210 percent and to convert $ 100,000 of our 1 -month SOFR rate debt to a fixed rate of 3.8990 percent. See Note 11 for further discussion of these interest rate swaps.
 
Revolving Credit Facility
 
Interest on the Revolving Credit Facility is payable at SOFR plus an adjustment of 0.10 percent and an interest rate spread of 1.75 percent ( 7.15  percent at September 2, 2023 ). A facility fee of 25 basis points of the unused commitment under the Revolving Credit Facility is payable quarterly. The interest rate spread and the facility fee are based on a secured leverage grid. At September 2, 2023 , there was no balance outstanding on the Revolving Credit Facility. The Revolving Credit Facility matures on February 15, 2028.
 
The Revolving Credit Facility can be drawn upon for general corporate purposes up to a maximum of $ 700,000 , less issued letters of credit. At June 3, 2023, letters of credit reduced the available amount under the Revolving Credit Facil ity by $ 9,968 .
 
Covenants and Other
 
Under the Second Amended and Restated Credit Agreement, the Revolving Credit Facility and Term Loan A are subject to certain covenants and restrictions. For these facilities, we are required to maintain a secured leverage ratio, as defined in the agreement, no greater than 4.75 to 1.00 for our fiscal quarters ending on or prior to June 1, 2024 and then 4.50 to 1.00 thereafter. We are also required to maintain an interest coverage ratio of not less than 2.00 to 1.00.
 
Restrictive covenants include, but are not limited to, limitations on secured and unsecured borrowings, interest coverage, intercompany transfers and investments, third party investments, dispositions of assets, leases, liens, dividends and distributions, and contains a maximum total debt to trailing twelve months EBITDA requirement. Certain covenants become less restrictive after meeting leverage or other financial ratios. In addition, we cannot be a member of any consolidated group as defined for income tax purposes other than with our subsidiaries.
 
We are subject to mandatory prepayments in the first quarter of each fiscal year equal to 50 percent of Excess Cash Flow, as defined in the Second Amended and Restated Credit Agreement, of the prior fiscal year less any voluntary prepayments made during that fiscal year. The Excess Cash Flow Percentage shall be reduced to 25 percent when our Secured Leverage Ratio is below 4.25:1.00 and to 0 percent when our Secured Leverage Ratio is below 3.75:1.00.  
 
The principal balance of the Term Loan B loans will be repayable in equal quarterly installments in an aggregate annual amount equal to 1 percent of the original principal amount thereof, with the balance due at maturity on February 15, 2030.  The principal balance of the Term Loan A loans will be repayable in quarterly installments as follows: (i) with respect to the first eight fiscal quarters ended after the effective date of the Second Amended and Restated Credit Agreement, 1.25 percent of the aggregate principal amount of the original principal of the Term Loan A loans, (ii) with respect to the eight fiscal quarters ended after the end of the period set forth in the preceding clause (i), 1.875 percent of the aggregate principal amount of the original principal amount of the Term Loan A loans, and (iii) thereafter, 2.5 percent of the original principal amount of the Term Loan A loans, with the balance due at maturity on February 15, 2028.
 
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Note 7: Components of Net Periodic Benefit related to Pension and Other Postretirement Benefit Plans
 
    Three Months Ended September 2, 2023 and August 27, 2022
 
                                    Other
 
    Pension Benefits
    Postretirement
 
    U.S. Plans
    Non-U.S. Plans
    Benefits
 
Net periodic (benefit) cost:
  2023
    2022
    2023
    2022
    2023
    2022
 
Service cost
  $ -     $ -     $ 422     $ 666     $ -     $ -  
Interest cost
    3,475       2,368       1,454       679       301       184  
Expected return on assets
    ( 7,205 )     ( 7,117 )     ( 1,785 )     ( 1,525 )     ( 2,465 )     ( 2,719 )
Amortization:
                                               
Prior service (benefit) cost
    -       ( 1 )     16       15       -       -  
Actuarial loss (gain)
    635       1,013       506       570       -       ( 845 )
Settlement charge
    -       -       -       -       -       -  
Net periodic (benefit) cost
  $ ( 3,095 )   $ ( 3,737 )   $ 613     $ 405     $ ( 2,164 )   $ ( 3,380 )
 
    Nine Months Ended September 2, 2023 and August 27, 2022
 
                                    Other
 
    Pension Benefits
    Postretirement
 
    U.S. Plans
    Non-U.S. Plans
    Benefits
 
Net periodic (benefit) cost:
  2023
    2022
    2023
    2022
    2023
    2022
 
Service cost
  $ -     $ -     $ 1,255     $ 2,086     $ -     $ -  
Interest cost
    10,426       7,103       4,300       2,204       903       551  
Expected return on assets
    ( 21,617 )     ( 21,353 )     ( 5,277 )     ( 4,916 )     ( 7,394 )     ( 8,156 )
Amortization:
                                               
Prior service (benefit) cost
    -       ( 2 )     47       47       -       -  
Actuarial loss (gain)
    1,906       3,040       1,496       1,830       -       ( 2,535 )
Settlement charge
    -       -       -       3,329       -       -  
Net periodic (benefit) cost
  $ ( 9,285 )   $ ( 11,212 )   $ 1,821     $ 4,580     $ ( 6,491 )   $ ( 10,140 )
 
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, net in the Consolidated Statements of Income.
 
In the nine months ended August 27, 2022, we recognized a non-cash settlement charge of $ 3,329 related to the termination of our Canadian defined benefit pension plan.  The settlement charge is included in other income, net in the Consolidated Statement of Income.
 
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Note 8: Accumulated Other Comprehensive Income (Loss)
 
The following table provides details of total comprehensive income (loss): 
 
    Three Months Ended September 2, 2023
    Three Months Ended August 27, 2022
 
                            Non-
                            Non-
 
                            controlling
                            controlling
 
    H.B. Fuller Stockholders
    Interest
    H.B. Fuller Stockholders
    Interest
 
    Pre-tax
    Tax
    Net
    Net
    Pre-tax
    Tax
    Net
    Net
 
Net income attributable to H.B. Fuller and non-controlling interest
                  $ 37,627     $ 23                     $ 46,497     $ 33  
Foreign currency translation¹
  $ ( 8,710 )   $ -       ( 8,710 )     ( 7 )   $ ( 87,743 )   $ -       ( 87,743 )     ( 46 )
Defined benefit pension plans adjustment²
    1,157       ( 294 )     863       -       778       ( 94 )     684       -  
Interest rate swaps³
    21,086       ( 5,188 )     15,898       -       1,783       ( 437 )     1,346       -  
Cross-currency swaps³
    -       -       -       -       ( 377 )     6       ( 371 )     -  
Net investment hedges³
    ( 6,156 )     1,515       ( 4,641 )     -       -       -       -       -  
Other comprehensive income (loss)
  $ 7,377     $ ( 3,967 )   $ 3,410     $ ( 7 )   $ ( 85,559 )   $ ( 525 )   $ ( 86,084 )   $ ( 46 )
Comprehensive income (loss)
                  $ 41,037     $ 16                     $ ( 39,587 )   $ ( 13 )
 
    Nine Months Ended September 2, 2023
    Nine Months Ended August 27, 2022
 
                            Non-
                            Non-
 
                            controlling
                            controlling
 
    H.B. Fuller Stockholders
    Interest
    H.B. Fuller Stockholders
    Interest
 
    Pretax
    Tax
    Net
    Net
    Pretax
    Tax
    Net
    Net
 
Net income attributable to H.B. Fuller and non-controlling interest
                  $ 99,916     $ 71                     $ 132,007     $ 70  
Foreign currency translation adjustment¹
  $ 14,070     $ -       14,070       ( 12 )   $ ( 165,302 )   $ -       ( 165,302 )     ( 67 )
Defined benefit pension plans adjustment²
    3,449       ( 877 )     2,572       -       5,483       ( 1,507 )     3,976       -  
Interest rate swap³
    19,557       ( 4,812 )     14,745       -       14,473       ( 3,549 )     10,924       -  
Cross-currency swaps³
    -       -       -       -       ( 3,720 )     56       ( 3,664 )     -  
Net investment hedges³
    ( 13,694 )     3,370       ( 10,324 )     -       -       -       -       -  
Other comprehensive income (loss)
  $ 23,382     $ ( 2,319 )   $ 21,063       ( 12 )   $ ( 149,066 )   $ ( 5,000 )     ( 154,066 )     ( 67 )
Comprehensive income (loss)
                  $ 120,979     $ 59                     $ ( 22,059 )   $ 3  
 
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, net.
 
The components of accumulated other comprehensive loss are as follows:
 
    September 2, 2023
 
                    Non-
 
            H.B. Fuller
    controlling
 
    Total
    Stockholders
    Interest
 
Foreign currency translation adjustment
  $ ( 249,973 )   $ ( 249,943 )   $ ( 30 )
Interest rate swap, net of taxes of ($4,812)
    14,745       14,745       -  
Net investment hedges, net of taxes of $ 16,667
    ( 51,067 )     ( 51,067 )     -  
Defined benefit pension plans adjustment, net of taxes of $ 66,867
    ( 125,689 )     ( 125,689 )     -  
Reclassification of AOCI tax effects
    ( 18,341 )     ( 18,341 )     -  
Accumulated other comprehensive loss
  $ ( 430,325 )   $ ( 430,295 )   $ ( 30 )
 
    December 3, 2022
 
                    Non-
 
            H.B. Fuller
    controlling
 
    Total
    Stockholders
    Interest
 
Foreign currency translation adjustment
  $ ( 264,054 )   $ ( 264,012 )   $ ( 42 )
Net investment hedges, net of taxes of $ 13,297
    ( 40,743 )     ( 40,743 )     -  
Defined benefit pension plans adjustment, net of taxes of $ 67,744
    ( 128,261 )     ( 128,261 )     -  
Reclassification of AOCI tax effects
    ( 18,341 )     ( 18,341 )     -  
Accumulated other comprehensive loss
  $ ( 451,399 )   $ ( 451,357 )   $ ( 42 )
 
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Note 9: Income Taxes
 
Income tax expense for the  three and nine months ended September 2, 2023  includes $ 6,243  and $ 9,130 of discrete tax expense, respectively, relating to various U.S. and foreign tax matters. Excluding the discrete tax expense, the overall effective tax rate was  27.1 percent and  28.5 percent for the three and nine months ended September 2, 2023 , respectively.
 
Income tax expense for the three and nine months ended August 27, 2022 includes $ 6,449  and $ 7,696 of discrete tax expense, respectively, primarily relating to the revaluation of cross-currency swap agreements due to depreciation of the Euro versus the U.S. Dollar, as well as U.S. and various foreign tax matters offset by the tax effect of legal entity mergers. Excluding the discrete tax expense, the overall effective tax rate was  29.9  percent and  28.7  percent for the  three and nine months ended August 27, 2022 , respectively.
 
As of  September 2, 2023 , we had a liability of $ 16,010  recorded for gross unrecognized tax benefits (excluding interest) compared to $ 17,582  as of December 3, 2022 . As of September 2, 2023 and December 3, 2022 , we had accrued $ 7,137 and $ 5,680 of gross interest relating to unrecognized tax benefits, respectively.
 
 
Note 10: Earnings Per Share
 
A reconciliation of the common share components for the basic and diluted earnings per share calculations is as follows:
 
    Three Months Ended
    Nine Months Ended
 
    September 2,
    August 27,
    September 2,
    August 27,
 
(Shares in thousands)
  2023
    2022
    2023
    2022
 
Weighted-average common shares - basic
    54,394       53,644       54,279       53,498  
Equivalent shares from share-based compensations plans
    1,639       1,486       1,611       1,703  
Weighted-average common and common equivalent shares diluted
    56,033       55,130       55,890       55,201  
 
Basic earnings per share is calculated by dividing net income attributable to H.B. Fuller by the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is based upon the weighted-average number of common and common equivalent shares outstanding during the applicable period. The difference between basic and diluted earnings per share is attributable to share-based compensation awards. We use the treasury stock method to calculate the effect of outstanding shares, which computes total employee proceeds as the sum of (a) the amount the employee must pay upon exercise of the award and (b) the amount of unearned share-based compensation costs attributed to future services. Share-based compensation awards for which total employee proceeds exceed the average market price over the applicable period have an antidilutive effect on earnings per share, and accordingly, are excluded from the calculation of diluted earnings per share.
 
Share-based compensation awards of  1,025,337 and 573,914  shares for the three months ended September 2, 2023 and August 27, 2022 , respectively, and  1,164,870  and  691,856  shares for the  nine months ended September 2, 2023 and August 27, 2022 , respectively, were excluded from diluted earnings per share calculations because they were antidilutive.
 
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Note 11: Financial Instruments
 
Overview
 
As a result of being a global enterprise, foreign currency exchange rates and fluctuations in those rates may affect the Company's net investment in foreign subsidiaries, and 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, interest rate swaps and net investment hedges 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. We evaluate 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
 
On January 12, 2023, we entered into an interest rate swap agreement to convert $ 400,000 of our variable rate 1 -month LIBOR rate debt to a fixed rate of 3.6895 percent that matures on January 12, 2028.  On February 28, 2023, after refinancing our debt, we amended the interest rate swap agreement to our 1 -month SOFR rate debt to a fixed rate of 3.7260 in accordance with the practical expedients included in ASC 848, Reference Rate Reform . The combined fair value of the interest rate swap was an asset of $ 6,652  at September 2, 2023 and was included in other assets i n the Consolidated Balance Sheets. The swap was designated for hedge accounting treatment as a cash flow hedge. We are applying 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 variable rate debt are compared with the change in the fair value of the swap.
 
On March 16, 2023, we entered into an interest rate swap agreement to convert $ 300,000 of our 1 -month SOFR rate debt to a fixed rate of 3.7210 percent that matures on February 15, 2028. The combined fair value of the interest rate swap wa s an asset of $ 4,227  a t September 2, 2023 and was included in other liabilities  in the Consolidated Balance Sheets. The swap was designated for hedge accounting treatment as a cash flow hedge. We are applying 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 variable rate debt are compared with the change in the fair value of the swaps.
 
On March 16, 2023, we entered into an interest rate swap agreement to convert $ 100,000 of our 1 -month SOFR rate debt to a fixed rate of 3.8990 percent that matures on February 15, 2028. The combined fair value of the interest rate swap was an  asset of $ 951   at September 2, 2023 and was included i n other liabilities in the Consolidated Balance Sheets. The swap was designated for hedge accounting treatment as a cash flow hedge. 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 variable rate debt are compared with the change in the fair value of the swaps.
 
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
 
    September 2, 2023
    August 27, 2022
    September 2, 2023
    August 27, 2022
 
Cross-currency swap contracts
  $ -     $ ( 377 )   $ -     $ ( 3,720 )
Interest rate swap contracts
    21,086       1,783       19,557       14,473  
  
Fair Value Hedges
 
On February 12, 2021, we entered into interest rate swap agreements to convert our $ 300,000  Public Notes that were issued on October  20, 2020 to a variable interest rate of 1 -month LIBOR plus 3.28 percent. On June 30, 2023, 1 -month LIBOR rates ceased to exist and the IBOR Fallbacks Protocol published by the International Swaps and Derivatives Association ("ISDA") took effect as outlined in the interest rate swap agreement. As a result, the interest rate swap agreement was converted to Overnight SOFR plus 3.28  percent. We applied the practical expedients included in ASC 848, Reference Rate Reform . 
 
These interest rate swap agreements mature on October 15, 2028. The combined fair value of the interest rate swaps was a liabili ty of $ 46,843 a t  September 2, 2023 , and was included in other liabilities in the Consolidated Balance Sheets. The swaps were designated for hedge accounting treatment as fair value hedges. We apply the short cut method and assume hedge effectiveness. Changes in the fair value of a hypothetically perfect swap with terms that match the critical terms of our $ 300,000 fixed rate Public Notes are compared with the change in the fair value of the swaps.
 
Net Investment Hedges
 
On October 17, 2022, we entered into a float-to-float cross-currency interest rate swap agreement with a notional amount of €307,173 maturing in October 2028. On October 20, 2022, we entered into fixed-to-fixed cross-currency interest rate swap agreements for a total notional amount of €300,000 with tranches maturing in August 2025, August 2026 and February 2027.  On June 30, 2023, 1 -month LIBOR rates ceased to exist and the IBOR Fallbacks Protocol published by the International Swaps and Derivatives Association (ISDA) took effect as outlined in the interest rate swap agreemen t. As a result, the 1 -month LIBOR leg of the float-to-float agreement was converted to Overnight SOFR plus 3.28  percent. On July 17, 2023, we amended the 1 -month EURIBOR leg of the float-to-float agreement to Overnight ESTR plus 3.2195  percent. We applied the practical expedients included in ASC 848, Reference Rate Reform . As of September 2, 2023 , the combined fair value of the swaps w as a liability of $ 67,740  a nd was included in other liabilities in the Consolidated Balance Sheets. The cross-currency interest rate swaps hedge a portion of the Company’s investment in Euro denominated foreign subsidiaries.
 
The swaps are designated as net investment hedges for accounting treatment. The net gains or losses attributable to changes in spot exchange rates are recorded in the cumulative translation adjustment within other comprehensive income (loss). The gains or losses are reclassified into earnings upon a liquidation event or deconsolidation of the foreign subsidiary. Any ineffective portions of net investment hedges are reclassified from accumulated other comprehensive income (loss) into earnings during the period of change. The amount in accumulated other comprehensive income (loss) related to net investment hedge cross-currency swaps was a loss of $ 51,067  of September 2, 2023 . The amounts of pretax loss recognized in comprehensive income related to the net investment he dge was $ 13,694   for the nine  months ended September 2, 2023 . As of September 2, 2023 , we did not reclassify any gains or losses into earnings from net investment hedges and we do not expect to reclassify any such gain or loss into earnings within the next twelve months. No amounts related to net investment hedges have been excluded from the assessment of hedge effectiveness.
 
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Derivatives Not Designated as Hedging Instruments
 
We use foreign currency forward contracts to offset our 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. 
 
As of September 2, 2023 , we had forward foreign currency contracts maturing between September 6, 2023  and May 13, 2024 . The ma rk-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 September 2, 2023 and August 27, 2022 were ($ 798 )  a nd $ 2,378 , 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 September 2, 2023 , there were no significant concentrations of credit risk.
 
 
Note 12: 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 September 2, 2023 and December 3, 2022 , and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
 
    September 2,
    Fair Value Measurements Using:
 
Description
  2023
    Level 1
    Level 2
    Level 3
 
Assets:
                               
Marketable securities
  $ 1,565     $ 1,565     $ -     $ -  
Foreign exchange contract assets
    6,410       -       6,410       -  
Interest rate swaps, cash flow hedge assets
    11,830       -       11,830       -  
                                 
Liabilities:
                               
Foreign exchange contract liabilities
  $ 7,208     $ -       7,208     $ -  
Interest rate swaps, fair value hedge liabilities
    46,843       -       46,843       -  
Net investment hedge liabilities
    67,740       -       67,740       -  
Contingent consideration liabilities
    4,632       -       -       4,632  
 
    December 3,
    Fair Value Measurements Using:
 
Description
  2022
    Level 1
    Level 2
    Level 3
 
Assets:
                               
Marketable securities
  $ 4,013     $ 4,013     $ -     $ -  
Foreign exchange contract assets
    10,282       -       10,282       -  
                                 
Liabilities:
                               
Foreign exchange contract liabilities
  $ 4,570     $ -     $ 4,570     $ -  
Interest rate swaps, fair value hedge liabilities
    42,542       -       42,542          
Net investment hedge liabilities
    54,046       -       54,046       -  
Contingent consideration liabilities
    1,977       -       -       1,977  
 
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The valuation of our contingent consideration liability related to the acquisitions of ZKLT and TissueSeal was $ 4,132 and $ 500 , respectively, as of  September 2, 2023 . Adjustments to the fair value of contingent consideration are recorded to selling, general and administrative expenses in the Statement of Income. See Note 2 for further discussion regarding our acquisitions. The following table provides details of the contingent consideration liabilities: 
 
    Amounts
 
Balance at December 3, 2022
  $ 1,977  
Fair value adjustment
    2,893  
Foreign currency translation adjustment
    ( 238 )
Balance at September 2, 2023
  $ 4,632  
 
Balances Measured at Fair Value on a Nonrecurring Basis
 
We measure certain assets and liabilities at fair value on a nonrecurring basis. These assets include intangible assets acquired in an acquisition. The identified intangible assets of customer relationships, technology and tradenames acquired in connection with our acquisitions were measured using unobservable (Level  3 ) inputs. The fair value of the intangible assets was calculated using either the income or cost approach. Significant inputs include estimated revenue growth rates, gross margins, operating expenses, attrition rate, royalty rate and discount rate.  
 
See Note  2  for further discussion regarding our acquisitions.
 
Balances Disclosed at Fair Value
 
Long-term debt had an estimated fair value of $ 1,744,678  and $ 1,713,257 as of September 2, 2023 and December 3, 2022 , 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 13: Commitments and Contingencies
 
Environmental Matters  
 
We are involved in environmental investigations, clean-up activities and administrative proceedings related to environmental compliance matters at former and current operating facilities.   We have also been 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 associated with landfills and/or hazardous waste sites. As a PRP, we may be required to pay a share of the costs of investigation and clean-up of these sites. We are 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 $ 5,329 and $ 5,754  as of September 2, 2023 and December 3, 2022 , respectively, for probable and reasonably estimable environmental remediation costs. Of the amount reserved, $ 2,561 and $ 2,789  as of September 2, 2023 and December 3, 2022 , 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.
 
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 35 years ago. The plaintiffs generally bring these lawsuits against multiple defendants and seek damages (both actual and punitive) in very large amounts. In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable injuries or that the injuries suffered were the result of exposure to products manufactured by us. We are typically dismissed as a defendant in such cases without payment. If the plaintiff presents evidence indicating that compensable injury occurred as a result of exposure to our products, the case is generally settled for an amount that reflects the seriousness of the injury, the length, intensity and character of exposure to products containing asbestos, the number and solvency of other defendants in the case, and the jurisdiction in which the case has been brought.
 
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A significant portion of the defense costs and settlements in asbestos-related litigation is paid by third parties, including indemnification pursuant to the provisions of a 1976 agreement under which we acquired a business from a third party. Currently, this third party is defending and paying settlement amounts, under a reservation of rights, in most of the asbestos cases tendered to the third party.
 
In addition to the indemnification arrangements with third parties, we have insurance policies that generally provide coverage for asbestos liabilities, including defense costs. Historically, insurers have paid a significant portion of our defense costs and settlements in asbestos-related litigation. However, certain of our insurers are insolvent. We have entered into cost-sharing agreements with our insurers that provide for the allocation of defense costs and settlements and judgments in asbestos-related lawsuits. These agreements require, among other things, that we fund a share of settlements and judgments allocable to years in which the responsible insurer is insolvent.
 
A summary of the number of and settlement amounts for asbestos-related lawsuits and claims is as follows:
 
    Nine Months Ended
    3 Years Ended
 
    September 2, 2023
    August 27, 2022
    December 3, 2022
 
Lawsuits and claims settled
    6       3       13  
Settlement amounts
  $ 3,985     $ 206     $ 511  
Insurance payments received or expected to be received
  $ 2,307     $ 139     $ 338  
 
We do not believe that it would be meaningful to disclose the aggregate number of asbestos-related lawsuits filed against us because relatively few of these lawsuits are known to involve exposure to asbestos-containing products that we manufactured. Rather, we believe it is more meaningful to disclose the number of lawsuits that are settled and result in a payment to the plaintiff. To the extent we can reasonably estimate the amount of our probable liabilities for pending asbestos-related claims, we establish a financial provision and a corresponding receivable for insurance recoveries. 
 
Based on currently available information, we have concluded that the resolution of any pending matter, including asbestos-related litigation, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flow.
 
 
Note 14: 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. Revenue and operating income 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. Segment operating income is identified as gross profit less SG&A expenses. Corporate expenses, other than those included in Corporate Unallocated, are allocated to each operating segment. Consistent with our internal management reporting, Corporate Unallocated amounts include business acquisition and integration costs, organizational restructuring charges and project costs associated with implementing a global Enterprise Resource Planning (“ERP”) system that we refer to as Project ONE.  Corporate assets are not allocated to the operating segments. Inter-segment revenues are recorded at cost plus a markup for administrative costs.
 
We have  three reportable segments: Hygiene, Health and Consumable Adhesives, Engineering Adhesives and Construction Adhesives. The business components within each operating segment are managed to maximize the results of the overall operating segment rather than the results of any individual business component of the operating segment. Results of individual components of each operating segment are subject to numerous allocations of segment-wide costs that may or may not have been focused on that particular component for a particular reporting period. The costs for these allocated resources are not tracked on a "where-used" basis as financial performance is assessed at the total operating segment level.
 
The table below provides certain information regarding net revenue and operating income (loss) for each of our operating segments. 
 
    Three Months Ended
 
    September 2, 2023
    August 27, 2022
 
    Net
    Operating
    Net
    Operating
 
    Revenue
    Income (Loss)
    Revenue
    Income (Loss)
 
Hygiene, Health and Consumable Adhesives
  $ 402,388     $ 52,737     $ 424,978     $ 47,470  
Engineering Adhesives
    365,862       52,931       378,264       39,776  
Construction Adhesives
    132,384       5,853       137,988       6,391  
Total segment
  $ 900,634     $ 111,521     $ 941,230     $ 93,637  
Corporate Unallocated 1
    -       ( 20,202 )     -       ( 5,683 )
Total
  $ 900,634     $ 91,319     $ 941,230     $ 87,954  
 
    Nine Months Ended
 
    September 2, 2023
    August 27, 2022
 
    Net
    Operating
    Net
    Operating
 
    Revenue
    Income (Loss)
    Revenue
    Income (Loss)
 
Hygiene, Health and Consumable Adhesives
  $ 1,190,402     $ 149,474     $ 1,252,405     $ 122,950  
Engineering Adhesives
    1,063,009       129,806       1,137,587       115,266  
Construction Adhesives
    354,644       2,189       400,977       22,032  
Total segment
  $ 2,608,055     $ 281,469     $ 2,790,969     $ 260,248  
Corporate Unallocated
    -       ( 39,734 )     -       ( 27,780 )
Total
  $ 2,608,055     $ 241,735     $ 2,790,969     $ 232,468  
 
1 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. 
 
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The table below provides a reconciliation of operating income to income before income taxes and income from equity method investments:
 
    Three Months Ended
    Nine Months Ended
 
    September 2,
    August 27,
    September 2,
    August 27,
 
    2023
    2022
    2023
    2022
 
Operating income
  $ 91,319     $ 87,954     $ 241,735     $ 232,468  
Other income, net
    1,555       6,559       4,764       12,701  
Interest expense
    ( 35,105 )     ( 23,450 )     ( 101,305 )     ( 61,475 )
Interest income
    1,128       2,139       2,726       6,170  
Income before income taxes and income from equity method investments
  $ 58,897     $ 73,202     $ 147,920     $ 189,864  
 
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 September 2, 2023
 
                                 
    Hygiene, Health
                         
    and Consumable
    Engineering
    Construction
         
    Adhesives
    Adhesives
    Adhesives
    Total
 
                                 
Americas
  $ 227,947     $ 147,115     $ 100,510     $ 475,572  
EIMEA
    127,080       109,151       23,443       259,674  
Asia Pacific
    47,361       109,596       8,431       165,388  
Total
  $ 402,388     $ 365,862     $ 132,384     $ 900,634  
 
    Three Months Ended August 27, 2022
 
                                 
    Hygiene, Health
                         
    and Consumable
    Engineering
    Construction
         
    Adhesives
    Adhesives
    Adhesives
    Total
 
                                 
Americas
  $ 261,751     $ 165,398     $ 106,169     $ 533,318  
EIMEA
    114,186       111,734       23,519       249,439  
Asia Pacific
    49,041       101,132       8,300       158,473  
Total
  $ 424,978     $ 378,264     $ 137,988     $ 941,230  
 
    Nine Months Ended September 2, 2023
 
    Hygiene, Health
                         
    and Consumable
    Engineering
    Construction
         
    Adhesives
    Adhesives
    Adhesives
    Total
 
                                 
Americas
  $ 688,890     $ 429,824     $ 273,116     $ 1,391,830  
EIMEA
    348,876       341,710       57,938       748,524  
Asia Pacific
    152,636       291,475       23,590       467,701  
Total
  $ 1,190,402     $ 1,063,009     $ 354,644     $ 2,608,055  
 
    Nine Months Ended August 27, 2022
 
    Hygiene, Health
                         
    and Consumable
    Engineering
    Construction
         
    Adhesives
    Adhesives
    Adhesives
    Total
 
                                 
Americas
  $ 737,689     $ 465,285     $ 321,167     $ 1,524,141  
EIMEA
    351,983       361,485       58,450       771,918  
Asia Pacific
    162,733       310,817       21,360       494,910  
Total
  $ 1,252,405     $ 1,137,587     $ 400,977     $ 2,790,969  
 
 
Note 15: Subsequent Event
 
Acquisition
 
On September 8, 2023, we completed the acquisition of certain assets of the Sanglier Group ("Sanglier") for a purchase price of 14,000 British pound sterling, or approximately $ 17,500 . Sanglier, headquartered in the United Kingdom, is a manufacturer and filler of sprayable industrial adhesives. The acquisition will be included in our Construction Adhesives operating segment.
 
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.