Exhibit 13
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Critical Accounting Policies and Estimates
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. Management believes 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 are revenue
recognition, allowance for doubtful accounts, inventory valuation, pension and
other postretirement plan assumptions, management bonus accruals and income tax
accounting.
The Company recognizes revenue on product sales at the time title passes to the
customer. Reductions to revenue are recorded for various customer incentive
programs and for sales returns and allowances.
Allowances for doubtful accounts receivable are maintained based on historical
payment patterns, aging of accounts receivable and actual writeoff history.
Allowances are also maintained for future sales returns and allowances based on
an analysis of recent trends of product returns.
8
The Company writes down its inventory for estimated obsolescence equal to the
cost of the inventory. Product obsolescence may be caused by shelf-life
expiration, discontinuance of a product line, replacement products in the
marketplace or other competitive situations.
Pension and other postretirement costs and liabilities are actuarially
calculated. These calculations are based on assumptions related to the discount
rate, projected salary increases and expected return on assets. The discount
rate assumption is tied to long-term high quality bond rates. The projected
salary increase assumption is based on recent trends in wage and salary
increases. The expected return on assets assumptions on the investment
portfolios for the pension and other postretirement benefit plans are based on
the long-term expected returns for the investment mix of assets currently in
the portfolio. The current investment mix in the portfolios is primarily U.S.
equities. The return on asset assumptions are subject to change depending upon
the future asset mix in the portfolios.
Management incentive plans are tied to various financial performance metrics.
Bonus accruals made throughout the year related to the various incentive plans
are based on management's best estimate of the achievement of the specific
financial metrics. Adjustments to the accruals are made on a quarterly basis as
forecasts of financial performance are updated. At year-end, the accruals are
adjusted to reflect the actual results achieved.
As part of the process of preparing the Company's consolidated financial
statements, management is required to estimate income taxes in each of the
jurisdictions in which it operates. 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 timing
differences result in deferred tax assets and liabilities, which are included
in the Company's consolidated balance sheet. Management records a valuation
allowance to reduce its deferred tax assets to the amount that is more likely
than not to be realized. Management has 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 statement of income.
Results of Operations: 2001 Compared to 2000
(Note: Fiscal year 2001 was a 52-week year and fiscal year 2000 was a 53-week
year.)
Net Revenue: Net revenue in 2001 of $1,274.1 million was $89.9 million or 6.6
percent less than the 2000 net revenue of $1,364.0 million. The primary reason
for the sales decrease in 2001 was reduced demand due to the relative weakness
in the global economy. Unit volume decreased 6.9 percent in 2001 as compared to
2000. The strength of the U.S. dollar as compared to major foreign currencies
(euro, Japanese yen, Australian dollar, etc.) also contributed to the sales
decrease in 2001. The 2001 net revenue decrease due to currency was 1.6
percent. Offsetting the negative sales impact from volume and currency were
increases in selling prices of 1.9 percent. There were no significant sales
increases or decreases attributed to acquisitions or divestitures in 2001 as
compared to 2000.
Net Revenue Changes from 2000 to 2001 by Operating
Segment ($ in millions): Increase/(Decrease)
- --------------------------------------------------- --------------------
North America Adhesives.................................. $ (47.1) (8.4)%
Europe Adhesives......................................... (17.5) (7.5)%
Latin America Adhesives.................................. (3.6) (4.5)%
Asia/Pacific Adhesives................................... (1.4) (1.6)%
Full-Valu/Specialty Group................................ (20.3) (4.9)%
---------
Total.................................................... $ (89.9) (6.6)%
=========
Gross Profit Margin: The gross profit margin in 2001 of 27.1 percent was 0.7
percentage points less than the 27.8 percent recorded in 2000. Lower production
volume combined with higher raw material prices resulted in the lower margin in
2001 as compared to 2000. In the first half of 2001, raw material costs as a
percentage of
9
sales were the primary factor contributing to the lower margin. In the second
half of the year, selling price increases reduced the negative impact from raw
material cost increases, however the lower unit volume combined with a high
fixed component of manufacturing costs, caused the margin to remain at levels
that were less than the margin recorded in 2000.
The 2001 cost of sales includes $1.6 million ($0.05 per share) of depreciation
expense for asset impairments related to the restructuring initiative
contemplated during 2001, but approved and implemented in 2002, which is
discussed further in the 2002 Outlook section of this report. (See Note 4 to
the consolidated financial statements.) The impairment charges related to three
manufacturing facilities in Latin America.
Selling, Administrative and Other (SG&A) Expenses: SG&A expenses of $257.4
million in 2001 were $19.4 million or 7.0 percent less than the expenses in
2000. The impact of having one less week in 2001 as compared to 2000 was a
reduction of SG&A expenses of approximately $5.0 million. SG&A expenses
decreased $7.2 million attributable to the Company's pension and other
postretirement benefit plans. The benefit to SG&A expenses was due to income of
$13.8 million for pension and other postretirement plans in 2001 as compared to
income of $6.6 million in 2000. Additionally, lower payroll costs associated
with reduced census contributed to the lower SG&A expenses. The total census at
December 1, 2001 was 4,891 as compared to 5,182 as of December 2, 2000. Of the
total decrease of 291 employees, 182 were included in SG&A expenses. One
initiative which resulted in increased SG&A expenses in 2001 was the
implementation of a new business structure for European operations. SG&A
expenses, primarily outside consultant fees, related to this initiative were
$4.1 million in 2001. The new structure allows for the European operations to
be managed on a true pan-European basis, which is expected to contribute to
lower operating costs in the future. As a percent of net revenue, SG&A expenses
were 20.2 percent in 2001 as compared to 20.3 percent in 2000.
Interest Expense: Interest expense in 2001 of $21.2 million was $2.6 million or
10.8 percent less than the interest expense recorded in 2000. Strong cash flow
in 2001 as compared to 2000, which allowed for lower average debt levels,
combined with lower interest rates in 2001 were the primary reasons for the
lower interest expense.
Gains from Sales of Assets: The Company recorded gains from sales of assets in
2001 of $0.8 million. This compared to gains of $4.1 million in 2000. The most
significant transaction in 2001 was the sale of an equity investment in a
Japanese company, which resulted in a gain of $1.6 million. This gain was
offset by losses from a number of smaller transactions. In 2000, the Company
actively sold non-productive assets. The sale of two facilities in North
America accounted for more than half of the $4.1 million gain in 2000.
Other Income/Expense, net: Other income/expense, net was an expense of $4.1
million in 2001 as compared to an expense of $5.9 million in 2000. The primary
factor in the lower expense in 2001 was currency translation losses of $1.0
million in 2001 as compared to $2.5 million in 2000. These losses resulted
primarily from currency devaluations in Latin American countries.
Income Taxes: The income tax rate for 2001 was 31.2 percent. Included in the
2001 income tax expense was a one-time tax benefit of $2.6 million ($0.09 per
share) resulting from changes in the Company's legal structure in Europe. The
change in legal structure allowed the Company to take advantage of tax losses
that were not previously recognizable under accounting principles generally
accepted in the United States. Another factor that affected the 2001 income tax
rate related to asset impairment charges of $1.6 million discussed in the gross
profit margin discussion. These charges were incurred, for the most part, in
Latin American countries for which tax benefits were not available. Therefore
there was only a $0.1 million tax benefit associated with these charges.
Excluding these two items, the effective income tax rate for 2001 was 34.7
percent. In 2000, the effective income tax rate was 37.0 percent.
Net Income: Net income in 2001 was $44.4 million as compared to $49.2 million
in 2000. Included in the 2001 net income was an after-tax charge of $0.5
million related to the Company's adoption of the Securities
10
and Exchange Commission's Staff Accounting Bulletin (SAB) 101, "Revenue
Recognition". The charge was recorded as a cumulative effect of a change in
accounting principle.
Income per diluted share, as reported, was $1.57 in 2001 as compared to $1.74
in 2000. Excluding the impact from special items in 2001 (one-time tax benefit,
adoption of SAB 101 and asset impairment charges), income per diluted share was
$1.54.
Operating Segment Results (2001 Compared to 2000)
Note:
As more fully described in Note 22 of the consolidated financial statements, at
the beginning of 2002 the Company modified its business and management structure
to manage its adhesives business on a global basis rather than on an autonomous
geographic basis. In connection with this change, certain product lines
previously included in the Company's adhesive geographic businesses have been
repositioned, and are now included as a component of the Full-Valu/ Specialty
operating segment. The following discussion has been modified to reflect the
impact of repositioning certain product lines.
Management evaluates the performance of its operating segments based on
operating income which is defined as gross profit minus operating expenses
(SG&A). Expenses resulting from restructuring initiatives are excluded from the
operating segment results. Corporate expenses are fully allocated to the
operating segments. (See Note 22 to the consolidated financial statements.)
North America Adhesives: Net revenue in 2001 of $513.6 million was 8.4 percent
less than the net revenue in 2000 of $560.7 million. Unit volume decreased
approximately 10.0 percent in 2001, selling prices increased about 2.0 percent
and the negative impact from currency was 0.2 percent. Sales to the North
American automotive market decreased 14.1 percent in 2001 as compared to 2000.
This was a direct result of the reduced number of vehicles the automotive
industry produced in 2001. Also contributing to the sales decrease in 2001 were
the assembly market (woodworking, appliances, etc.), which recorded a decline of
16.0 percent from 2000, and the converting market which decreased 8.0 percent.
The slowdown in the U.S. economy negatively impacted both of these markets in
2001. On the positive side, sales to the nonwoven market increased 6.6 percent.
In spite of the sales decline, operating income in North America Adhesives
increased $10.1 million or 22.1 percent as compared to 2000. Operating expense
reductions of approximately 20 percent offset the negative effects of the lower
sales volume and a lower gross profit margin. Key factors in the expense
reduction were lower payroll costs due to reduced headcount and increased U.S.
pension and other postretirement benefit income as compared to 2000. The benefit
plan income increased by $3.9 million in 2001. Another expense reduction
realized in 2001 was a decrease in bad debt expense of approximately $2.7
million.
Europe Adhesives: Net revenue in 2001 of $215.3 million was 7.5 percent less
than the net revenue in 2000 of $232.8 million. The sales decrease was
substantially all related to volume as selling price increases of approximately
4.0 percent were offset by negative currency effects. The reduced economic
activity drove the unit volume decrease in Europe in 2001 as compared to 2000.
In addition to the sales decrease, raw material costs increased in 2001
resulting in a lower gross profit margin than in 2000. Operating expenses also
increased substantially in 2001 primarily due to the expenses of approximately
$4.1 million associated with the implementation of the new business structure in
Europe. The operating income for Europe Adhesives was $1.5 million in 2001 as
compared to $9.5 million in 2000.
Latin America Adhesives: Net revenue in 2001 of $66.2 million was 4.5 percent
less than the net revenue in 2000 of $69.8 million. Unit volume was the primary
cause of the revenue decrease from last year. Economic weakness in Argentina and
Brazil were key factors in the sales decrease in 2001. Latin America Adhesives
recorded an operating loss of $1.8 million in 2001 as compared to operating
income of $0.4 million in 2000. Included in the 2000 results was a $1.5 million
credit due to a settlement of a claim with a raw material supplier.
Asia/Pacific Adhesives: Net revenue in 2001 of $82.9 million was 1.6 percent
less than the net revenue in 2000 of $84.3 million. Both unit volume and selling
prices increased significantly in 2001 as compared to 2000, however negative
currency effects of nearly 10 percent reduced the revenue increase to 1.6
percent. The negative currency effects resulted primarily from weakness in the
Japanese yen and the Australian dollar. Raw material price increases and higher
operating expenses caused the operating income to decrease approximately $3.6
million in 2001 as compared to 2000.
11
Full-Valu/Specialty Group: Net revenue in 2001 of $396.0 million was 4.9 percent
less than the net revenue in 2000 of $416.4 million. Decreases in unit volume
accounted for the entire sales decrease, as the variances from selling price
changes and currency were insignificant. The powder coatings market in North
America and the liquid paint market in Central America drove the 2001 sales
decrease with declines of 16.8 percent and 9.3 percent, respectively. Slowdowns
in the economy negatively impacted both of these markets. Sales to the window
market increased 5.3 percent as compared to 2000. U.S. pension and other
postretirement plan income had a positive $2.6 million impact on 2001 results as
compared to 2000. Primarily due to the lower sales, the Full-Valu/Specialty
Group recorded an operating income decrease in 2001 of approximately $11.0
million.
Results of Operations: 2000 Compared to 1999
(Note: Fiscal year 2000 was a 53-week year and fiscal year 1999 was a 52-week
year. Charges and credits related to the 1998-1999 restructuring initiative
which were previously reported in the aggregate, on a separate line of the
income statement, have been reclassified for 1999 to: cost of sales; SG&A
expenses; and gains from sales of assets in the amounts of $18.6 million, $4.4
million, and $5.8 million, respectively.)
Net Revenue: Net revenue in 2000 of $1,364.0 million was $11.9 million or 0.9
percent less than net revenue in 1999 of $1,375.9 million. Weakness in foreign
currencies, primarily the euro, versus the U.S. dollar had a negative impact of
$31.9 million or 2.3 percent. The negative currency impact offset the benefit
of having 53 weeks in 2000 compared to 52 weeks in 1999. Volume increased 1.5
percent while selling prices decreased 0.3 percent. Acquisitions, net of
divestitures, contributed 0.2 percent.
Net Revenue Changes from 1999 to 2000 by Operating
Segment ($ in millions) Increase/(Decrease)
- --------------------------------------------------- --------------------
North America Adhesives.................................. $ 6.4 1.2%
Europe Adhesives......................................... (24.5) (9.5%)
Latin America Adhesives.................................. (1.0) (1.5%)
Asia/Pacific Adhesives................................... 5.1 6.4%
Full-Valu/Specialty Group................................ 2.1 0.5%
---------
Total.................................................... $ (11.9) (0.9%)
=========
Gross Profit Margin: Throughout 2000 the Company faced rapidly rising raw
material costs. The major contributors were petroleum-based materials such as
vinyl acetate monomers and vinyl acetate emulsions. The gross profit margin of
27.8 percent was 0.5 percentage points below the 28.3 percent recorded in 1999.
Excluding $18.6 million of cost of sales in 1999 related to the 1998-1999
restructuring initiative, the 1999 gross profit margin was 29.7 percent.
Selling, administrative and Other (SG&A) Expenses: SG&A expenses improved as a
percent of net revenue in 2000 to 20.3 percent from 21.2 percent in 1999.
Excluding $4.4 million of expenses related to the 1998-1999 restructuring plan,
the 1999 SG&A expenses were 20.9 percent. Census control and savings related to
the restructuring plan were the primary factors in the expense reduction. Total
census decreased 226 employees during 2000 with 154 of the decrease related to
SG&A expenses. The reduced census combined with good asset investment
performance and changes to the U.S. postretirement benefit plan resulted in
pension and other postretirement benefit plans income of $6.6 million in 2000
as compared to expense of $0.9 million in 1999. Other factors that contributed
to the reduced expenses in 2000 were lower management bonuses due to the lower
earnings in 2000 as compared to 1999 and the settlement of a claim with a raw
material supplier in Latin America which reduced SG&A expenses by $1.3 million.
Two initiatives, which increased expenses in 2000, included $3.3 million for
the Company's e-commerce investments and $2.0 million related to tax planning.
An additional expense in 2000 as compared to 1999 was bad debt expense,
primarily in North America which recorded an increase of approximately $2.7
million in bad debt expense.
Interest Expense: Interest expense of $23.8 million in 2000 was $3.0 million or
11.2 percent less than 1999. Total debt at December 2, 2000 was $290.7 million
as compared to $315.2 million at November 27, 1999.
12
Gains from Sales of Assets: In 2000, the Company recorded gains from sales of
assets of $4.1 million, as compared to $6.1 million in 1999. The 1999 figure
includes $5.8 million of gains which were associated with the 1998-1999
restructuring initiative.
Other Income/Expense, Net: Other income/expense, net, was an expense of $5.9
million in 2000 as compared to an expense of $2.9 million in 1999. A
significant factor in the expense increase in 2000 related to the portfolio of
assets held for the Supplemental Executive Retirement Plan, or SERP. Until
March of 2000, this portfolio was invested in a mutual fund based on the S&P
500 index. In 1999, the gains realized on this portfolio were $3.1 million. In
March of 2000 the Company converted these assets into fixed income securities
to avoid the unpredictable changes in the stock market. Through the time of
conversion, the Company had realized income of $1.0 million and for the
remainder of the year, realized another $0.6 million of income for a total year
investment income of $1.6 million.
Income Taxes: The effective income tax rate in 2000 was 37 percent as compared
to 42.7 percent in 1999. Excluding the impact of nonrecurring charges related
to the 1998-1999 restructuring initiative, the 1999 rate was 39.6 percent. The
reduced rate in 2000 was a direct result of the Company's tax planning
initiatives. The negative impact to the 1999 rate from the nonrecurring charges
was due to a portion of the charges being incurred in countries for which no
tax benefit was available.
Net Income: Net income in 2000 of $49.2 million was $5.8 million or 13.4
percent more than the 1999 net income of $43.4 million. Excluding the effects
of the 1998-1999 restructuring plan and also a charge related to an accounting
change in 1999, the net income in 2000 was $49.0 million as compared to $56.8
million in 1999. The 2000 net income of $49.2 million included a $0.2 million
after-tax credit adjustment related to the 1998-1999 restructuring plan due to
a change in estimate. The income per share, excluding the nonrecurring items
and the impact of the accounting change, was $1.74 per diluted share in 2000 as
compared to $2.03 per diluted share in 1999.
Operating Segment Results (2000 Compared to 1999)
Note:
As more fully described in Note 22 of the consolidated financial statements, at
the beginning of 2002 the Company modified its business and management structure
to manage its adhesives business on a global basis rather than on an autonomous
geographic basis. In connection with this change, certain product lines
previously included in the Company's adhesive geographic businesses have been
repositioned, and are now included as a component of the Full-Valu/ Specialty
operating segment. The following discussion has been modified to reflect the
impact of repositioning certain product lines.
Management evaluates the performance of its operating segments based on
operating income which is defined as gross profit minus operating expenses
(SG&A). Expenses resulting from restructuring initiatives are excluded from the
operating segment results. Corporate expenses are fully allocated to the
operating segments. (See Note 22 to the consolidated financial statements.)
North America Adhesives: Net revenue of $560.7 million was 1.2 percent better
than 1999. The increase was primarily due to increases in unit volume. Increases
in the nonwoven and graphic arts markets were offset by decreases in the
automotive market. Escalating raw material costs combined with the difficulty in
raising selling prices resulted in a lower gross profit margin in 2000. SG&A
expenses were below the 1999 levels, however not enough to neutralize the gross
profit margin erosion. The reduction in expenses in 2000 was largely due to
lower census and income attributed to the U.S. pension and postretirement
benefit plans. The benefit plan income increased $4.4 million in 2000 as
compared to 1999. One factor that had a negative impact on operating expenses
was a significant increase in bad debt expense of approximately $2.7 million.
Operating income of $45.8 million was 12 percent below 1999.
Europe Adhesives: Net revenue of $232.8 million decreased 9.5 percent in 2000
driven by a negative currency impact of 11.6 percent. Volume increased 1.5
percent and selling prices increased 0.6 percent. The business environment in
Europe was similar to North America in terms of raw material cost increases
combined with the difficulty in raising selling prices. Operating income
decreased $6.5 million or 40.6 percent in 2000. The decrease in operating income
attributed to the weakness of the euro was approximately $3.0 million.
Latin America Adhesives: Net revenue of $69.8 million decreased 1.5 percent in
2000 as compared to 1999. Several factors contributed to the decrease including,
economic recession in Argentina, economic slowdown in Central America and
13
exiting certain product lines in 1999. The raw material increases were not as
dramatic in Latin America as the gross profit margin showed some improvement in
2000. SG&A expenses were reduced by $1.3 million due to a settlement of a claim
with a raw material supplier resulting in operating income of $0.4 million in
2000 as compared to a loss of $1.3 million in 1999.
Asia/Pacific Adhesives: Net revenue of $84.3 million increased 6.4 percent in
2000 primarily due to increases in unit volume. Operating income improved from
$0.9 million in 1999 to $3.5 million in 2000. Reduced SG&A expenses were the key
factor in the improved results.
Full-Valu/Specialty Group: Net revenue of $416.4 million was 0.5 percent higher
than 1999. Volume increased approximately 2.0 percent while the effect of an
acquisition, net of a divestiture, added another 0.9 percent. These positive
variances were partially offset by negative sales variances from selling prices
and currency effects. Linear Products, Inc. and TEC Specialty Products, Inc. had
the strongest growth in 2000. The Full-Valu/Specialty Group was not impacted as
much as the adhesives businesses by fluctuations in petroleum-based raw
materials. Therefore, the Specialty Group did not experience the same magnitude
of raw material cost increases in 2000. The gross margin, however, was still
slightly below last year and operating income decreased 15.3 percent to $45.2
million. U.S. pension and other postretirement benefit plan income had a
positive impact on $2.9 million in 2000 as compared to 1999.
Nonrecurring Charges/Restructuring:
1998-1999 Plan: Over the last two quarters of 1998 and throughout 1999, two
businesses were sold, several manufacturing facilities were closed or
considerably scaled back, sales offices and warehouses were consolidated and
layers of management were reduced. Total costs associated with this plan
totaled $43.7 million (before tax), net of gains recorded on assets disposed as
a result of the plan.
The following tables show details of the nonrecurring charges/(credits) for the
years 2000 and 1999 by geographic area ($ in thousands):
North Latin
Year 2000: America Europe America Asia/Pacific Total
- ----------- ------- ------- ------- ------------ -------
Adjustment for change in
estimate..................... $ (300) -- -- -- $ (300)
------- ------- ------ ------- -------
Total......................... $ (300) -- -- -- $ (300)
======= ======= ====== ======= =======
North Latin
Year 1999: America Europe America Asia/Pacific Total
- - ---------- ------- ------- ------- ------------ -------
Severance, net of pension
curtailment.................. $ 1,943 $ 8,372 $1,114 $ 676 $12,105
Contracts/leases.............. -- 1,660 16 618 2,294
------- ------- ------ ------- -------
Total restructuring........... 1,943 10,032 1,130 1,294 14,399
Impairment of property, plant
and equipment................ 66 2,228 188 32 2,514
Consulting.................... 243 685 192 15 1,135
Integration and relocation
costs (1).................... 2,052 1,104 1,465 292 4,913
------- ------- ------ ------- -------
Subtotal...................... 4,304 14,049 2,975 1,633 22,961
Less: Gains from sales of
assets....................... (1,811) (1,497) -- (2,449) (5,757)
------- ------- ------ ------- -------
Total......................... $ 2,493 $12,552 $2,975 $ (816) $17,204
======= ======= ====== ======= =======
- ---------
1. Integration and relocation costs consisted primarily of costs related to the
shutdown of facilities, relocation of employees and other related one-time
costs to carry out the restructuring/reorganization activities. Such costs
were expensed as incurred.
The 2000 credit of $0.3 million was due to a change in estimate of severance
payments in North America included in SG&A expenses. The 1999 charges, prior to
the gain on sale of assets of $5.8 million, included $22.3 million of costs
requiring cash outlays, $2.5 million of non-cash costs and a pension
curtailment benefit
14
of $1.9 million. Total costs requiring cash outlays, since inception of the
plan, were $42.4 million. The 1999 restructuring amounts are reflected in the
income statement as cost of sales ($18.6 million), SG&A expenses ($4.4 million)
and gains from sales of assets ($5.8 million).
Employee census reductions resulting from the restructuring plan were a total
of 820. Annual cost savings as a result of the plan were expected to exceed $30
million (before tax) upon full realization of the benefits of the enacted plan.
No additional charges related to the original restructuring/reorganization plan
were incurred in 2000.
In 1999, the North American charges related primarily to a plant shutdown, and
severance associated with closing sales offices and warehouses. These costs
were partially offset by the gains from sales of assets.
In Europe, the 1999 charges related primarily to severance and the impairment
of assets associated with the shutdown of three manufacturing facilities, the
reduction in the layers of management and the costs associated with the
relocation of the European area office.
Latin American charges in 1999 were mainly for the integration costs associated
with closing four facilities and for severance related to the closing of three
sales offices.
The Asia/Pacific charges in 1999 were mainly for severance and the buyout of
leases associated with closing warehouses and sales offices, relocation costs
related to moving the area office and severance due to reducing layers of
management. The charges were more than offset by the gain on sale of assets of
the one manufacturing facility that was closed in the region.
The following table is a detailed reconciliation of the restructuring reserve
balance from November 29, 1998 to December 1, 2001:
Nonrecurring Charge Reserve ($ North Latin Asia/
in thousands) America Europe America Pacific Total
- ------------------------------- ------- -------- ------- ------- -------
Balance November 29, 1998....... $ 1,992 $ 7,994 $ 3,141 $ 88 $13,215
Provisions in 1999:
Severance..................... 3,057 8,952 1,022 668 13,699
Contracts/leases.............. -- 1,660 16 618 2,294
------- -------- ------- ------- -------
3,057 10,612 1,038 1,286 15,993
------- -------- ------- ------- -------
Adjustments for change in
estimate....................... (65) 225 92 8 260
Payments in 1999:
Severance..................... (3,060) (13,482) (3,492) (82) (20,116)
Contracts/leases.............. -- (399) (16) (175) (590)
------- -------- ------- ------- -------
(3,060) (13,881) (3,508) (257) (20,706)
------- -------- ------- ------- -------
Balance November 27, 1999....... 1,924 4,950 763 1,125 8,762
Adjustment for change in
estimate....................... (300) -- -- -- (300)
Payments in 2000:
Severance..................... (1,577) (2,651) (763) (682) (5,673)
Contracts/leases.............. -- (1,136) -- (443) (1,579)
------- -------- ------- ------- -------
(1,577) (3,787) (763) (1,125) (7,252)
------- -------- ------- ------- -------
Balance December 2, 2000........ 47 1,163 -- -- 1,210
Payments in 2001:
Severance..................... (47) (152) -- -- (199)
Contracts/leases.............. -- (486) -- -- (486)
------- -------- ------- ------- -------
(47) (638) -- -- (685)
------- -------- ------- ------- -------
Balance December 1, 2001........ $ -- $ 525 $ -- $ -- $ 525
======= ======== ======= ======= =======
15
Liquidity and Capital Resources
Net cash provided from operations was $89.7 million in 2001, which was $22.8
million or 34.1 percent more than the $66.9 million provided in 2000. The cash
provided from operations in 1999 was $105.7. The increase in cash provided from
operations in 2001, as compared to 2000, was largely due to changes in working
capital. In 2001, changes in inventory levels resulted in positive cash flow of
$12.0 million. In 2000, changes in inventory levels accounted for negative cash
flow of $11.1 million. As an offset to the inventory changes, accounts payable
changes resulted in negative cash flow in 2001 of $11.4 million and in 2000 the
cash flow attributed to changes in accounts payable was positive $3.8 million.
Accrued compensation amounts were higher at the end of 2001 as compared to
2000. In 2001, increases in the accrued compensation levels accounted for
positive cash flow of $2.3 million. In 2000, the cash flow related to accrued
compensation was negative $7.8 million, primarily because of payments in 2000
of management bonuses accrued in 1999. Total working capital at December 1,
2001 was $199.7 million as compared to $208.3 million at December 2, 2000.
For management purposes, the Company measures working capital performance in
terms of operating working capital, which is defined as current assets less
cash, minus current liabilities less short-term debt. The operating working
capital at December 1, 2001 was $219.3 million as compared to $238.1 million at
December 2, 2000 and $219.9 million at November 27, 1999. The number of days
sales outstanding (DSO) in trade accounts receivables (net of allowance for
doubtful accounts) was 59 days at December 1, 2001 as compared to 55 at
December 2, 2000 and 62 days at November 27, 1999. The calculation of DSO is
determined by using net revenue for the fourth quarter and the net accounts
receivable balance at year-end. In 2000, the DSO calculation was favorably
impacted from the extra week of sales in the fourth quarter. On a comparable
basis, the DSO at December 2, 2000 approximated the 59 days recorded at
December 1, 2001.
The strong cash flow from operations allowed the Company to reduce its total
debt levels to $234.1 million at December 1, 2001. This compares to $290.7
million at December 2, 2000 and $315.2 million at November 27, 1999. The ratio
of long-term debt to long-term debt plus stockholders' equity improved from
38.2 percent at December 2, 2000 to 31.9 percent at December 1, 2001. At
November 27, 1999 the ratio was 41.2 percent. At December 1, 2001 short-term
and long-term lines of credit were $337.1 million of which $154.3 million was
committed. The unused portion of these lines of credit was $321.2 million.
The following table shows the due dates and amounts of contractual obligations:
Payments Due by Period
-----------------------------------------
Contractual Obligations ($ in 1 year 2-3 4-5 After
thousands) Total or less years years 5 years
- ------------------------------ -------- ------- ------- ------- --------
Long-term debt...................... $206,086 $ 3,181 $ 7,403 $27,330 $168,172
Capital lease obligations........... 394 298 96 -- --
Operating leases.................... 41,560 10,438 15,163 4,971 10,988
At December 1, 2001, the Company was in compliance with all covenants of its
contractual obligations. Also, the Company has no rating triggers that would
accelerate the maturity dates of its debt. Management believes that the Company
has the ability to meet all of its contractual obligations and commitments in
2002.
The Company does not have relationships with any unconsolidated, special-
purpose entities or financial partnerships, which would have been established
for the purpose of facilitating off-balance sheet financial arrangements.
Therefore, the Company is not materially exposed to any financing, liquidity,
market or credit risk that could arise had the Company entered into any such
relationships.
Cash used for capital expenditures was $30.7 million in 2001 as compared to
$49.0 million in 2000 and $56.3 million in 1999. Over 50 percent of the capital
expenditures in 2001 were for information systems projects. Management expects
capital expenditures to approximate $40-50 million in 2002.
16
Recently Issued Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144 (SFAS No. 144), "Accounting
for the Impairment or Disposal of Long-lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-
lived Assets and for Long-lived Assets to be Disposed Of", and the accounting
and reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations for a disposal of a segment of a business". SFAS No. 144 is
effective for years beginning after December 15, 2001, with earlier application
encouraged. The impact of adopting this accounting standard is not expected to
have a material effect on the Company's financial position and results of
operations.
In June 2001 the FASB issued Statements of Financial Accounting Standards
(SFAS) No. 141, "Business Combinations", and No. 142, "Goodwill and Other
Intangible Assets". These Statements eliminate the pooling-of-interests method
of accounting for business combinations and the systematic amortization of
goodwill. SFAS No. 141 applies to all business combinations with a closing date
after June 30, 2001, of which the Company has had no such activity. The Company
will adopt SFAS No. 142 during the first quarter of 2002. Under the new
standard, purchased goodwill is no longer amortized over its useful life.
Therefore, the Company will not incur the amortization of goodwill beginning
with year 2002. Amortization of goodwill recorded in 2001 was $4.1 million,
which had a negative impact on income per diluted share of $0.09 per share. The
Company is in the process of assessing any transitional impact of adopting SFAS
No. 142.
Euro Currency Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union (EU)
established fixed conversion rates through the European Central Bank (ECB)
between existing local currencies and the euro, the EU's new single currency.
During a transition period from January 1, 1999, through June 30, 2002, the
euro will replace the national currencies that exist in the participating
countries.
The Company converted to the euro as of December 2, 2001. Management does not
believe the transition to the euro will have a significant effect on
consolidated results of operations, financial position or liquidity.
2002 Outlook
Certain items will have a material impact on 2002 net income. In a continuing
effort to strengthen the organization and remove excess manufacturing capacity,
the Company announced, on January 15, 2002, a plan to eliminate approximately
20 percent of its current manufacturing capacity. The plan calls for
streamlining its facilities and operations in Latin America, Europe and in
particular, North America. By reducing the installed capacity and removing
other cost structures, management estimates that upon completion, costs will be
reduced approximately $10 to $12 million annually.
In connection with the restructuring initiative, the Company expects to record
special charges in the range of $30 to $35 million before tax, inclusive of the
$1.6 million ($1.5 million after-tax) incurred in the fourth quarter of 2001
for Latin America. Cash costs of the plan are expected to be $20 to $25
million. Proceeds from sales of assets affected by the plan however, are
expected to offset the cash costs by $10 to $15 million. The remaining charges
are expected to be recorded over the next four quarters and will include
severance, accelerated depreciation on assets held and used until disposal and
other plan-related costs.
The amounts associated with the pension and other postretirement benefit plans
are expected to reflect a reduction in income of approximately $12 million in
2002 as compared to 2001. This equates to approximately $.27 per share. These
amounts will be reflected in SG&A expenses. The reason for the reduction in
income is primarily attributed to the poor performance of the benefit plan
asset portfolios during 2001 and the decrease in interest rates recorded in
2001.
Currency devaluations in Argentina will have a negative impact on the Company's
first quarter of 2002 operating results however, the impact is not expected to
exceed $0.03 - $0.04 per share in the first quarter.
17
Management continually monitors the economic situation in Argentina, Brazil and
other Latin American countries and where appropriate, takes action to minimize
the Company's exposure to future currency devaluations.
Safe Harbor for Forward-Looking Statements
Certain statements in this document, including those under 2002 Outlook, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are subject to various risks
and uncertainties, including but not limited to the following: political and
economic conditions; product demand and industry capacity; competitive products
and pricing; manufacturing efficiencies; new product development; product mix;
availability and price of raw materials and critical manufacturing equipment;
new plant startups; accounts receivable collection; the Company's relationships
with its major customers and suppliers; changes in tax laws and tariffs; patent
rights that could provide significant advantage to a competitor; devaluations
and other foreign exchange rate fluctuations (particularly with respect to the
euro, the British pound, the Japanese yen, the Australian dollar, the Argentine
peso and the Brazilian real); the regulatory and trade environment; and other
risks as indicated from time to time in the Company's filings with the
Securities and Exchange Commission. All forward-looking information represents
management's best judgment as of this date based on information currently
available that in the future may prove to have been inaccurate. Additionally,
the variety of products sold by the Company and the regions where the Company
does business makes it difficult to determine with certainty the increases or
decreases in sales resulting from changes in the volume of products sold,
currency impact, changes in product mix and selling prices. However,
management's best estimates of these changes as well as changes in other
factors have been included. References to volume changes include volume and
product mix changes, combined.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk: The Company is exposed to various market risks, including changes
in interest rates, foreign currency rates and prices of raw materials. Market
risk is the potential loss arising from adverse changes in market rates and
prices.
Interest Rate Risk: The Company is exposed to changes in interest rates
primarily as a result of borrowing activities used to fund operations. The
Company uses committed floating rate credit facilities to fund a portion of its
operations.
Management believes that probable near-term changes in interest rates would not
materially affect the Company's consolidated financial position, results of
operations or cash flows. The impact on the results of operations of a one-
percentage point interest rate change on the outstanding balance of the
variable rate debt as of December 1, 2001 would be approximately $0.3 million.
Foreign Exchange Risk: As a result of being a global enterprise, the Company is
exposed to market risks from changes in foreign currency exchange rates, which
may adversely affect operating results and financial position. Approximately 44
percent of the Company's net revenue is generated outside of the United States.
The Company's principal foreign currency exposures relate to the euro, British
pound, Japanese yen, Australian dollar, Canadian dollar, Argentine peso and
Brazilian real.
Management's goal is to balance, where possible, the local currency denominated
assets to the local currency denominated liabilities to have a natural hedge
and minimize foreign exchange impacts. The Company enters into cross border
transactions through importing and exporting goods to and from different
countries and locations. These transactions generate foreign exchange risk as
they create assets, liabilities and cash flows in currencies other than the
local currency. This also applies to services provided and other cross border
agreements among subsidiaries.
Management minimizes the Company's risks from foreign currency exchange rate
fluctuations through normal operating and financing activities and, when deemed
appropriate, through the use of derivative instruments. The
18
Company does not enter into any speculative positions with regard to derivative
instruments. Note 17 to the consolidated financial statements provides
additional details regarding the Company's management of foreign exchange risk.
From a sensitivity analysis viewpoint, based on 2001 financial results a
hypothetical overall 10 percent strengthening of the U.S. dollar would have
resulted in a negative income per share impact of approximately $0.02 per
share.
Raw Materials: The principal raw materials used by the Company to manufacture
its products include resins, polymers and vinyl acetate monomer. Natural raw
materials such as starch, dextrines and natural latex are also used in the
manufacturing processes. Management attempts to find multiple sources for all
of its raw materials. While alternate sources for most key raw materials are
available, if worldwide supplies were disrupted due to unforeseen events, or if
unusual demand causes products to be subject to allocation, shortages could
occur.
In 2001, the Company purchased more than $600 million of raw materials, its
single largest expenditure item. Management acknowledges that in the long-term,
prices of most raw materials will probably increase. Management's objective is
to purchase raw materials that meet both its quality standards and production
needs at the lowest total cost to the Company. Most raw materials are purchased
on the open market or under contracts which limit the frequency but not the
magnitude of price increases. In some cases, however, the risk of raw material
price changes is managed by strategic sourcing agreements which limit price
increases to increases in supplier feedstock costs, while requiring decreases
as feedstock costs decline. The Company also uses the leverage created by
having substitute raw materials approved for use wherever possible to minimize
the impact of possible price increases.
19
Item 8. Financial Statements and Supplementary Data
MANAGEMENT'S REPORT
The management of H.B. Fuller Company is responsible for the integrity,
objectivity and accuracy of the financial statements of the Company and its
subsidiaries. The accompanying financial statements, including the notes, were
prepared in conformity with accounting principles generally accepted in the
United States of America appropriate in the circumstances and include amounts
based on the best judgment of management.
Management is also responsible for maintaining a system of internal accounting
controls to provide reasonable assurance that established policies and
procedures are followed, that the records properly reflect all transactions of
the Company and that assets are safeguarded against material loss from
unauthorized use or disposition. Management believes that the Company's
accounting controls provide reasonable assurance that errors or irregularities
that could be material to the financial statements are prevented or would be
detected within a timely period by employees in the normal course of performing
their assigned duties.
The Audit Committee of the Board of Directors, composed of directors from
outside the Company, meets regularly with management, the Company's internal
auditors, and its independent accountants to discuss audit scope and results,
internal control evaluations, and other accounting, reporting, and financial
matters. The independent accountants and internal auditors have access to the
Audit Committee without management's presence.
/s/ Raymond A. Tucker /s/ Albert P. L. Stroucken
- ------------------------------- ----------------------------------
Raymond A. Tucker Albert P.L. Stroucken
Senior Vice President and Chairman of the Board,
Chief Financial Officer President and
Chief Executive Officer
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of H.B. Fuller Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the consolidated financial position of
H.B. Fuller Company and subsidiaries at December 1, 2001 and December 2, 2000,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 1, 2001, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 15, 2002, except for
Note 22, as to which the date is
April 16, 2002
21
CONSOLIDATED STATEMENTS OF INCOME
H.B. Fuller Company and Subsidiaries
(In thousands, except per share amounts)
Fiscal Year Ended
------------------------------------
December 1, December 2, November 27,
2001 2000 1999
---------- ---------- ------------
Net revenue............................... $1,274,059 $1,363,961 $1,375,855
Cost of sales............................. (928,506) (984,599) (986,380)
---------- ---------- ----------
Gross profit.............................. 345,553 379,362 389,475
Selling, administrative and other
expenses................................. (257,446) (276,861) (291,485)
Interest expense.......................... (21,247) (23,814) (26,823)
Gains from sales of assets................ 752 4,131 6,123
Other income (expense), net............... (4,142) (5,913) (2,864)
---------- ---------- ----------
Income before income taxes, minority
interests, equity investments and
accounting change........................ 63,470 76,905 74,426
Income taxes.............................. (19,833) (28,455) (31,807)
Minority interests in consolidated
income................................... (873) (1,826) (1,033)
Income from equity investments............ 2,176 2,539 2,525
---------- ---------- ----------
Income before cumulative effect of
accounting change........................ 44,940 49,163 44,111
Cumulative effect of accounting change.... (501) -- (741)
---------- ---------- ----------
Net income................................ $ 44,439 $ 49,163 $ 43,370
========== ========== ==========
Basic income (loss) per common share:
Income before accounting change........... $ 1.61 $ 1.77 $ 1.60
Accounting change......................... (0.02) -- (0.03)
---------- ---------- ----------
Net income................................ $ 1.59 $ 1.77 $ 1.57
========== ========== ==========
Diluted income (loss) per common share:
Income before accounting change........... $ 1.59 $ 1.74 $ 1.58
Accounting change......................... (0.02) -- (0.03)
---------- ---------- ----------
Net income................................ $ 1.57 $ 1.74 $ 1.55
========== ========== ==========
Weighted-average common shares outstanding:
Basic..................................... 27,962 27,828 27,616
Diluted................................... 28,330 28,206 27,957
See accompanying notes to consolidated financial statements.
22
CONSOLIDATED BALANCE SHEET
H.B. Fuller Company and Subsidiaries
(In thousands)
December 1, December 2,
2001 2000
----------- -----------
Assets
Current Assets:
Cash and cash equivalents............................ $ 11,454 $ 10,489
Trade receivables, net............................... 211,590 220,796
Inventories.......................................... 141,210 153,785
Other current assets................................. 39,619 49,994
-------- ----------
Total current assets................................... 403,873 435,064
Net property, plant and equipment...................... 371,113 394,689
Other assets........................................... 107,432 88,903
Goodwill, net.......................................... 62,037 66,503
Other intangibles, net................................. 21,718 25,202
-------- ----------
Total assets........................................... $966,173 $1,010,361
======== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable........................................ $ 27,601 $ 34,543
Current installments of long-term debt............... 3,479 5,718
Trade payables....................................... 114,155 126,713
Accrued payroll and employee benefits................ 30,659 28,918
Other accrued expenses............................... 19,714 25,807
Income taxes payable................................. 8,555 5,026
-------- ----------
Total current liabilities.............................. 204,163 226,725
Long-term debt, excluding current installments......... 203,001 250,464
Accrued pensions....................................... 66,012 71,927
Other liabilities...................................... 39,413 37,452
Minority interests in consolidated subsidiaries........ 19,558 19,083
Commitments and contingencies
Stockholders' Equity:
Series A preferred stock, par value $6.67 per share.. 306 306
Common stock, par value $1.00 per share.............. 28,281 14,116
Shares outstanding--2001: 28,280,896
2000: 28,231,328 (see Note 19)
Additional paid-in capital........................... 37,830 36,707
Retained earnings.................................... 396,048 377,846
Accumulated other comprehensive income (loss)........ (25,150) (20,088)
Unearned compensation--restricted stock.............. (3,289) (4,177)
-------- ----------
Total stockholders' equity............................. 434,026 404,710
-------- ----------
Total liabilities and stockholders' equity............. $966,173 $1,010,361
======== ==========
See accompanying notes to consolidated financial statements.
23
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
H.B. Fuller Company and Subsidiaries
(In thousands, except shares)
Fiscal Years
----------------------------------
2001 2000 1999
---------- ---------- ----------
Shares Outstanding
Preferred................................ 45,900 45,900 45,900
Common................................... 28,280,896 28,231,328 28,080,310
Preferred Stock............................ $ 306 $ 306 $ 306
Common Stock
Beginning balance........................ $ 14,116 $ 14,040 $ 13,983
Stock split.............................. 14,142 -- --
Retirement of common stock............... (10) (21) (9)
Stock compensation plans, net............ 33 97 66
---------- ---------- ----------
Ending balance........................... $ 28,281 $ 14,116 $ 14,040
========== ========== ==========
Additional Paid-in Capital
Beginning balance........................ $ 36,707 $ 34,071 $ 31,140
Retirement of common stock............... (371) (53) (22)
Stock compensation plans, net............ 1,494 2,689 2,953
---------- ---------- ----------
Ending balance........................... $ 37,830 $ 36,707 $ 34,071
========== ========== ==========
Retained Earnings
Beginning balance........................ $ 377,846 $ 341,356 $ 309,966
Net income............................... 44,439 49,163 43,370
Stock split.............................. (14,142) -- --
Dividends................................ (12,095) (11,786) (11,440)
Retirement of common stock............... -- (887) (540)
---------- ---------- ----------
Ending balance........................... $ 396,048 $ 377,846 $ 341,356
========== ========== ==========
Accumulated Other Comprehensive Income
(Loss)
Beginning balance........................ $ (20,088) $ (7,522) $ (5,997)
Foreign currency translation adjustment.. (395) (12,034) (1,684)
Foreign currency translation adjustment
included in net income.................. -- -- 136
Minimum pension liability adjustment, net
of tax.................................. (4,667) (532) 23
---------- ---------- ----------
Ending balance........................... $ (25,150) $ (20,088) $ (7,522)
========== ========== ==========
Unearned Compensation--Restricted Stock
Beginning balance........................ $ (4,177) $ (5,871) $ (7,994)
Stock compensation plans, net............ 888 1,694 2,123
---------- ---------- ----------
Ending balance........................... $ (3,289) $ (4,177) $ (5,871)
========== ========== ==========
Total Stockholders' Equity................. $ 434,026 $ 404,710 $ 376,380
========== ========== ==========
See accompanying notes to consolidated financial statements.
24
STATEMENT OF CASH FLOWS
H.B. Fuller Company and Subsidiaries
(In thousands)
Fiscal Year Ended
------------------------------------
December 1, December 2, November 27,
2001 2000 1999
----------- ----------- ------------
Cash flows from operating activities:
Net income................................ $ 44,439 $ 49,163 $ 43,370
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 54,401 52,165 50,776
Gains from sales of assets................ (752) (4,131) (6,123)
Change in assets and liabilities (net of
effects of acquisitions/divestitures):
Trade receivables, net.................. 8,189 2,397 (10,949)
Inventories............................. 11,992 (11,142) 9,426
Other current assets.................... 3,495 (2,679) 1,739
Other assets............................ (3,002) (3,332) (2,376)
Trade payables.......................... (11,356) 3,794 6,145
Accrued payroll and employee benefits
and other accrued expenses............. (4,233) (18,058) (2,010)
Income taxes payable.................... 5,731 3,070 10,570
Accrued pensions........................ (12,548) (3,008) 2,317
Other liabilities....................... (6,313) (8,411) (3,796)
Other items............................... (375) 7,067 6,616
-------- -------- --------
Net cash provided by operating
activities............................. 89,668 66,895 105,705
Cash flows from investing activities:
Purchased property, plant and equipment... (30,725) (49,044) (56,253)
Purchased businesses, net of cash
acquired................................. -- (5,388) (4,483)
Purchased investments..................... (3,517) -- --
Proceeds from sale of property, plant and
equipment................................ 7,309 11,842 10,916
Proceeds from sale of investments......... 1,567 -- --
Proceeds from sale of business............ -- 3,852 --
-------- -------- --------
Net cash used in investing activities... (25,366) (38,738) (49,820)
Cash flows from financing activities:
Proceeds from long-term debt.............. 4,602 69,690 41,207
Repayment of long-term debt............... (43,618) (84,876) (79,949)
Proceeds (payments) from/on notes
payable.................................. (12,143) 3,668 (4,477)
Dividends paid............................ (12,095) (11,786) (11,440)
Other..................................... (258) 179 (21)
-------- -------- --------
Net cash used in financing activities... (63,512) (23,125) (54,680)
-------- -------- --------
Net change in cash and cash
equivalents............................ 790 5,032 1,205
Effect of exchange rate changes............. 175 (364) 11
Cash and cash equivalents at beginning of
year....................................... 10,489 5,821 4,605
-------- -------- --------
Cash and cash equivalents at end of year.... $ 11,454 $ 10,489 $ 5,821
======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid for interest...................... $ 22,008 $ 28,198 $ 28,962
Cash paid for income taxes.................. $ 8,420 $ 16,569 $ 11,194
See accompanying notes to consolidated financial statements.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H.B. Fuller Company and Subsidiaries
(Dollars in thousands, except per share amounts)
Note 1--Summary of Significant Accounting Policies
Nature of Operations: H.B. Fuller Company (the "Company") operates as one of the
world's leading manufacturers and marketers of adhesives, sealants, coatings,
paints and other specialty chemical products. The Company has manufacturing
operations in 21 countries in North America, Europe, Latin America and the
Asia/Pacific region. The Company's products, in thousands of formulations, are
sold to customers in a wide range of industries, including packaging,
woodworking, automotive, aerospace, graphic arts (books/magazines), appliances,
filtration, windows, sporting goods, nonwovens, shoes and ceramic tile. The
Company generally markets its products through a direct sales force, with
independent distributors used in some markets.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and all its subsidiaries. The Company's fiscal year ends
on the Saturday closest to November 30th. All fiscal years represent 52- week
years, except the year 2000, which was a 53-week year. All significant
intercompany amounts have been eliminated in consolidation. Certain prior years'
amounts have been reclassified to conform to the 2001 presentation.
Use of Estimates: The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Revenue Recognition: The Company recognizes revenues from product sales when
title to the product transfers, no remaining performance obligations exist, the
terms of the sale are fixed and collection is probable, as required by the
Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 101 (SAB
101). For certain products, the Company maintains consigned inventory at
customer locations. For these products, revenue is recognized at the time that
the Company is notified the customer has used the inventory. The Company records
estimated discounts and rebates in the same period revenue is recognized based
on historical experience.
Sales to distributors are also recognized in accordance with SAB 101 providing
that there is evidence of the arrangement through a distribution agreement or
purchase order, and the Company has no remaining performance obligations, the
terms of the sale are fixed and collection is probable. As a normal practice,
distributors do not have a right of return.
Foreign Currency Translation: The financial statements of non-U.S. operations
are translated into U.S. dollars for inclusion in the consolidated financial
statements. Translation gains or losses resulting from the process of
translating foreign currency financial statements, where the local currency is
the functional currency, are recorded as a component of accumulated other
comprehensive income in stockholders' equity for businesses not considered to be
operating in highly inflationary economies. Translation effects of subsidiaries
using the U.S. dollar as the functional currency are included in determining net
income.
Cash and Cash Equivalents: Cash and cash equivalents consist of cash and all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
Capitalized Interest Costs: Interest costs associated with major construction of
property and equipment are capitalized. Capitalized interest costs were $431,
$482 and $441 in 2001, 2000 and 1999, respectively.
Environmental Costs: Environmental expenditures that relate to current
operations are expensed or capitalized as appropriate. Expenditures that relate
to an existing condition caused by past operations, and which do not contribute
to current or future revenue generation, are expensed. Liabilities are recorded
when environmental assessments are made or remedial efforts are probable and the
costs can be reasonably estimated. The timing of these accruals is generally no
later than the completion of feasibility studies. The liabilities for
26
environmental costs at December 1, 2001 and December 2, 2000 were $1,055 and
$1,161, respectively. For further information on environmental matters, see Item
3, Legal Proceedings.
Postemployment Benefits: The Company provides postemployment benefits to
inactive and former employees, employees' beneficiaries and covered dependents
after employment, but prior to retirement. The cost of providing these benefits
is accrued during the years the employee renders the necessary service.
Purchase of Company Common Stock: Under the Minnesota Business Corporation Act,
repurchased stock is included in the authorized shares of the Company, but is
not included in shares outstanding. The excess of the repurchase cost over par
value is charged to additional paid-in capital to the extent recorded on the
original issuance of the stock with any excess charged as a reduction of
retained earnings. The Company repurchased 10,289, 21,229 and 9,438 shares of
common stock in 2001, 2000 and 1999, respectively.
Recently Issued Accounting Pronouncements: In August 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-
lived Assets", which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of", and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations for a disposal of a segment
of a business". SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001, with earlier application encouraged. The impact of adopting
this accounting standard is not expected to have a material effect on the
Company's financial position and results of operations.
In June 2001 the FASB issued Statements of Financial Accounting Standards No.
141, "Business Combinations", and No. 142, "Goodwill and Other Intangible
Assets". These Statements eliminate the pooling-of-interests method of
accounting for business combinations and the systematic amortization of
goodwill. SFAS No. 141 applies to all business combinations with a closing date
after June 30, 2001, of which the Company has had no such activity. The Company
will adopt SFAS No. 142 during the first quarter of 2002. Under the new
standard, purchased goodwill is no longer amortized over its useful life.
Therefore, the Company will not incur the amortization of goodwill beginning
with 2002. Amortization of goodwill recorded in 2001 was $4.1 million, which had
a negative impact of $0.09 per share.
Note 2--Income Per Common Share (shares in thousands)
Basic income per share includes no dilution and is computed by dividing net
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted income per share reflects the
potential dilution from the Company's stock-based compensation plans. The
difference between basic and diluted income per share data as presented is due
to the dilutive impact from stock-based compensation plans. Net income used in
the calculations of income per share is reduced by the dividends paid to the
preferred stockholder.
A reconciliation of the net income and share components for the basic and
diluted income per share calculations is as follows:
2001 2000 1999
-------- -------- --------
Net income ............................... $ 44,439 $ 49,163 $ 43,370
Dividends on preferred shares ............ (15) (15) (15)
-------- -------- --------
Income attributable to common shares ..... $ 44,424 $ 49,148 $ 43,355
======== ======== ========
Weighted-average common shares--basic .... 27,962 27,828 27,616
Equivalent shares from stock
compensation plans ..................... 368 378 341
-------- -------- --------
Weighted-average common shares--diluted .. 28,330 28,206 27,957
======== ======== ========
The computations of diluted income per common share do not include 45, 88 and 1
stock options with exercise prices greater than the average market price of the
common shares for 2001, 2000 and 1999, respectively, as the results would have
been anti-dilutive.
27
Note 3--Foreign Currency Gains/(Losses)
Foreign currency gains/(losses), included
in income before income taxes, minority
interests, and cumulative effect of
accounting change 2001 2000 1999
----------------------------------------------- ------- ------- -------
Currency translation gains, net................ $ 1,713 $ 182 $ 4,999
Flow-through effect of inventory valuation,
net........................................... (1,018) (611) (226)
------- ------- -------
695 (429) 4,773
Currency exchange transaction losses, net...... (2,754) (2,660) (7,855)
------- ------- -------
Total.......................................... $(2,059) $(3,089) $(3,082)
======= ======= =======
The net loss from the flow-through effects of inventory valuation results from
differences between translation of cost of sales at historic rates versus
average exchange rates. Latin American operations, whenever possible, raise
local selling prices on their products to offset this loss. The result of these
efforts to keep pace with inflation appears in net revenue for each operation.
The impact from currency translation effects, the flow-through effect of
inventory value attributed to foreign currency differences and currency
transaction gains and losses are included in other income (expense), net in the
consolidated statement of income.
Note 4--Restructuring Related Costs
The 2001 cost of sales includes $1.6 million of depreciation expense for asset
impairments related to the restructuring initiative contemplated during 2001,
but approved and implemented in 2002. The impairment charges were calculated by
comparing the net book value of the assets to the expected cash flows, including
proceeds from sales of assets, to be generated by those assets over their
shortened useful life. These charges related to three manufacturing facilities
in Latin America.
In a continuing effort to strengthen the organization and remove excess
manufacturing capacity, the Company announced, on January 15, 2002, a plan to
eliminate approximately 20 percent of its current manufacturing capacity. The
plan calls for streamlining its facilities and operations in Latin America,
Europe and in particular, North America. By reducing the installed capacity and
removing other cost structures, management estimates that upon completion, costs
will be reduced approximately $10 to $12 million annually.
In connection with the 2002 restructuring initiative, the Company expects to
record special charges in the range of $30 to $35 million before tax, inclusive
of the $1.6 million ($1.5 million after-tax) incurred in the fourth quarter of
2001 for Latin America. Cash costs of the plan are expected to be $20 to $25
million. Proceeds from sales of assets affected by the plan however, are
expected to offset the cash costs by $10 to $15 million. The remaining charges
are expected to be recorded over the next four quarters and will include
severance, accelerated depreciation on assets held and used until disposal and
other plan-related costs.
1998-1999 Plan: Over the last two quarters of 1998 and throughout 1999, two
businesses were sold, several manufacturing facilities were closed or
considerably scaled back, sales offices and warehouses were consolidated and
layers of management were reduced. Total costs associated with this plan totaled
$43.7 million (before tax), net of gains recorded on assets disposed as a result
of the plan.
28
The following tables show details of the nonrecurring charges/(credits) for the
years 2000 and 1999 by geographic area:
North Latin
Year 2000: America Europe America Asia/Pacific Total
---------- ------- ------- ------- ------------ -------
Adjustment for change in
estimate.................. $ (300) -- -- -- $ (300)
------- ------- ------ ------- -------
Total...................... $ (300) -- -- -- $ (300)
======= ======= ====== ======= =======
North Latin
Year 1999: America Europe America Asia/Pacific Total
---------- ------- ------- ------- ------------ -------
Severance, net of pension
curtailment............... $ 1,943 $ 8,372 $1,114 $ 676 $12,105
Contracts/leases........... -- 1,660 16 618 2,294
------- ------- ------ ------- -------
Total restructuring........ 1,943 10,032 1,130 1,294 14,399
Impairment of property,
plant and equipment....... 66 2,228 188 32 2,514
Consulting................. 243 685 192 15 1,135
Integration and relocation
costs (1)................. 2,052 1,104 1,465 292 4,913
------- ------- ------ ------- -------
Subtotal................... 4,304 14,049 2,975 1,633 22,961
Less: Gains from sales of
assets.................... (1,811) (1,497) -- (2,449) (5,757)
------- ------- ------ ------- -------
Total...................... $ 2,493 $12,552 $2,975 $ (816) $17,204
======= ======= ====== ======= =======
- ----------
1. Integration and relocation costs consisted primarily of costs related to the
shutdown of facilities, relocation of employees and other related one-time
costs to carry out the restructuring/reorganization activities. Such costs
were expensed as incurred.
The 2000 credit of $0.3 million was due to a change in estimate of severance
payments in North America included in SG&A expenses. The 1999 charges, prior to
the gains from sales of assets of $5.8 million, included $22.3 million of costs
requiring cash outlays, $2.5 million of non-cash costs and a pension curtailment
benefit of $1.9 million. Total costs requiring cash outlays since inception of
the plan, were $42.4 million. The 1999 restructuring amounts are reflected in
the income statement as cost of sales ($18.6 million), SG&A expenses ($4.4
million) and gains from sales of assets ($5.8 million).
Employee census reductions resulting from the restructuring plan were a total of
820. Annual cost savings as a result of the plan were expected to exceed $30
million (before tax) upon full realization of the benefits of the enacted plan.
No additional charges related to the original restructuring/reorganization plan
were incurred in 2000.
In 1999, the North American charges related primarily to a plant shutdown, and
severance associated with closing sales offices and warehouses. These costs were
partially offset by the gains from sales of assets.
In Europe, the 1999 charges related primarily to severance and the impairment of
assets associated with the shutdown of three manufacturing facilities, the
reduction in the layers of management and the costs associated with the
relocation of the European area office.
Latin American charges in 1999 were mainly for the integration costs associated
with closing four facilities and for severance related to the closing of three
sales offices.
The Asia/Pacific charges in 1999 were mainly for severance and the buyout of
leases associated with closing warehouses and sales offices, relocation costs
related to moving the area office and severance due to reducing layers of
management. The charges were more than offset by the gains from sales of assets
of the one manufacturing facility that was closed in the region.
29
The following table is a detailed reconciliation of the restructuring reserve
balance from November 29, 1998 to December 1, 2001:
Nonrecurring Charge North Latin
Reserve America Europe America Asia/Pacific Total
------------------- ------- -------- ------- ------------ --------
Balance November 29,
1998................... $ 1,992 $ 7,994 $ 3,141 $ 88 $ 13,215
Provisions in 1999:
Severance............. 3,057 8,952 1,022 668 13,699
Contracts/leases...... -- 1,660 16 618 2,294
------- -------- ------- ------- --------
3,057 10,612 1,038 1,286 15,993
------- -------- ------- ------- --------
Adjustments for change
in estimate............ (65) 225 92 8 260
Payments in 1999:
Severance............. (3,060) (13,482) (3,492) (82) (20,116)
Contracts/leases...... -- (399) (16) (175) (590)
------- -------- ------- ------- --------
(3,060) (13,881) (3,508) (257) (20,706)
------- -------- ------- ------- --------
Balance November 27,
1999................... 1,924 4,950 763 1,125 8,762
Adjustment for change in
estimate............... (300) -- -- -- (300)
Payments in 2000:
Severance............. (1,577) (2,651) (763) (682) (5,673)
Contracts/leases...... -- (1,136) -- (443) (1,579)
------- -------- ------- ------- --------
(1,577) (3,787) (763) (1,125) (7,252)
------- -------- ------- ------- --------
Balance December 2,
2000................... 47 1,163 -- -- 1,210
Payments in 2001:
Severance............. (47) (152) -- -- (199)
Contracts/leases...... -- (486) -- -- (486)
------- -------- ------- ------- --------
(47) (638) -- -- (685)
------- -------- ------- ------- --------
Balance December 1,
2001................... $ -- $ 525 $ -- $ -- $ 525
======= ======== ======= ======= ========
Note 5--Acquisitions and Divestitures
In 2000, the Company purchased certain assets of a business in its Specialty
Group operating segment for $5,388. In 1999, the Company purchased a business
for $4,483 in its Asia/Pacific Adhesives operating segment. The acquisitions
were accounted for as purchases and the accompanying consolidated financial
statements include the results of these businesses since the purchase date.
The estimated fair values of assets and liabilities acquired at the dates of
their respective acquisition are shown below as supplemental disclosure for cash
flow purposes.
2000 1999
------ ------
Receivables................................................. $ -- $1,329
Inventories................................................. 1,020 828
Property, plant and equipment............................... 34 780
Goodwill and intangible assets.............................. 5,056 1,629
Current liabilities......................................... (722) (83)
------ ------
Net assets acquired for cash, net of cash acquired........ $5,388 $4,483
====== ======
The Company sold its liquid paint business in Ecuador for $3,465 cash in 2000.
The historical results of operations on a pro forma basis are not presented as
the effects of the acquisitions and divestiture were not material.
30
Note 6--Research and Development
Research and development expenses charged against income were $19.0 million,
$18.4 million and $21.3 million in 2001, 2000 and 1999, respectively. These
costs are included as a component of SG&A expenses.
Note 7--Accounting Changes
In December 1999, the SEC issued SAB 101, which summarizes certain of the SEC
staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company adopted this accounting
standard effective in the first quarter of 2001 which impacted income by a
negative $0.8 million pretax ($0.5 million after-tax) or $0.02 per share. Pro
forma presentation on results of prior years is not presented as the impact in
not considered significant.
Effective in 2001, the Company adopted the FASB Emerging Issues Task Force
(EITF) Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs."
Under its provisions, the EITF requires proceeds from shipping charges billed to
customers to be included as revenue. Beginning in 2001, the Company classified
revenues from shipping charges billed to customers and the costs related thereto
as net revenue and cost of sales, respectively. Shipping revenue and costs have
been reclassified for all periods presented.
In 1999, the Company, adopted early, an accounting principle which impacted
income by $1.2 million pretax ($0.7 million after-tax) or $0.03 per share. The
AICPA Statement of Position No. 98-5, "Reporting on the Costs of Start-up
Activities" issued April 3, 1998, requires the Company to expense as incurred
all costs related to start-up activities and organizational costs.
Note 8--Allowance for Doubtful Receivables
2001 2000 1999
------- ------- -------
Balance at beginning of year...................... $ 6,913 $ 4,871 $ 5,073
Charged to expenses............................. 2,377 6,764 3,034
Write-offs...................................... (1,050) (4,495) (2,984)
Divested businesses............................. -- (68) --
Effect of exchange rates........................ (119) (159) (252)
------- ------- -------
Balance at end of year............................ $ 8,121 $ 6,913 $ 4,871
======= ======= =======
Note 9--Inventories
Inventories in the United States, representing approximately 35% of consolidated
inventories, are recorded at cost (not in excess of market value) as determined
primarily by the last-in, first-out method (LIFO). Inventories of non-U.S.
operations are valued at the lower of cost (mainly average cost) or market.
Inventories at Year-end are Summarized as Follows 2001 2000
------------------------------------------------- -------- --------
Raw materials............................................ $ 57,226 $ 59,986
Finished goods........................................... 95,149 104,836
LIFO reserve............................................. (11,165) (11,037)
-------- --------
Total.................................................... $141,210 $153,785
======== ========
31
Note 10--Property, Plant and Equipment
Depreciable
Major Classes Lives (in years) 2001 2000
------------- --------------- --------- ---------
Land................................. $ 46,463 $ 48,297
Buildings and improvements........... 20-40 214,034 218,053
Machinery and equipment.............. 3-15 477,153 459,142
Construction in progress............. 21,724 31,750
--------- ---------
Total, at cost....................... 759,374 757,242
Accumulated depreciation............. (388,261) (362,553)
--------- ---------
Net property, plant and equipment.... $ 371,113 $ 394,689
========= =========
Depreciation is generally computed on a straight-line basis over the useful
lives of the assets, including assets acquired by capital leases. Depreciation
expense on property, plant and equipment was $47,200, $44,371 and $43,079 in
2001, 2000 and 1999, respectively.
Note 11--Intangibles
Other intangible assets, primarily technology, are amortized over the estimated
lives of 3 to 20 years. Goodwill is charged against income over periods of 15 to
25 years. The recoverability of unamortized intangible assets is assessed on an
ongoing basis by comparing anticipated undiscounted future cash flows from
operations to net book value.
Other
Intangibles Goodwill
---------------- ----------------
2001 2000 2001 2000
------- ------- ------- -------
Gross Cost............................... $42,619 $44,883 $80,209 $82,483
Accumulated Amortization................. (20,901) (19,681) (18,172) (15,980)
------- ------- ------- -------
Net...................................... $21,718 $25,202 $62,037 $66,503
======= ======= ======= =======
Note 12--Income Taxes
The Company uses the liability method of accounting for income taxes. Under this
method, deferred income tax assets and liabilities are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
Income Before Income Taxes, Minority Interests
and Cumulative Effect of Accounting Change 2001 2000 1999
---------------------------------------------- ------- ------- -------
United States (U.S.)............................... $43,903 $48,294 $55,943
Outside U.S........................................ 19,567 28,611 18,483
------- ------- -------
Total.............................................. $63,470 $76,905 $74,426
======= ======= =======
32
Components of the Provision for Income Taxes
(excluding the cumulative effect of an accounting
change) 2001 2000 1999
------------------------------------------------ ------- ------- -------
Current:
U.S. federal................................... $ 5,753 $ 2,524 $12,392
State.......................................... 1,835 1,143 1,269
Outside U.S.................................... 9,745 13,514 12,236
------- ------- -------
17,333 17,181 25,897
------- ------- -------
Deferred:
U.S. federal................................... 6,131 10,720 5,171
State.......................................... (23) 620 --
Outside U.S.................................... (3,608) (66) 739
------- ------- -------
2,500 11,274 5,910
------- ------- -------
Total............................................ $19,833 $28,455 $31,807
======= ======= =======
Difference Between the Statutory U.S. Federal Income Tax
Rate and the Company's Effective Income Tax Rate 2001 2000 1999
-------------------------------------------------------- ---- ---- ----
Statutory U.S. federal income tax rate................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit............... 1.9 2.3 1.0
U.S. federal income taxes on dividends received from non-
U.S. subsidiaries, before foreign tax credits........... 1.4 4.3 6.9
Foreign tax credits...................................... (6.3) (6.6) (3.2)
Non-U.S. taxes........................................... 1.4 3.8 6.3
Other tax credits........................................ (2.6) (2.1) (2.3)
Other.................................................... 0.4 0.3 (1.0)
---- ---- ----
Total.................................................... 31.2% 37.0% 42.7%
==== ==== ====
The effective tax rate in 2001 and 1999 was impacted by costs related to the
restructuring plans. Some of these restructuring costs did not provide a tax
benefit in certain foreign countries resulting in an increase in the effective
tax rate associated with non-U.S. taxes. The effective rate in 2001 was also
impacted by a one-time tax benefit of $2.6 million.
Deferred Income Tax Balances at Each Year-end Related
to 2001 2000
----------------------------------------------------- -------- --------
Depreciation........................................... $(40,227) $(41,183)
Asset valuation reserves............................... 2,003 1,800
Accrued expenses currently not deductible:
Employee benefit costs............................... 17,174 21,261
Product and other claims............................. 1,293 1,512
Tax loss carryforwards................................. 19,316 17,307
Other.................................................. 7,157 7,280
-------- --------
6,716 7,977
Valuation allowance.................................... (8,523) (12,406)
-------- --------
Net deferred tax liabilities........................... $ (1,807) $ (4,429)
======== ========
33
Net Deferred Taxes as Presented on the Consolidated
Balance Sheet 2001 2000
--------------------------------------------------- -------- --------
Deferred tax assets:
Current............................................... $ 14,431 $ 15,945
Non-current........................................... 8,774 2,884
Deferred tax liabilities:
Current............................................... (1,457) (1,548)
Non-current........................................... (23,555) (21,710)
-------- --------
Net deferred tax liabilities............................ $ (1,807) $ (4,429)
======== ========
Valuation allowances relate to foreign tax credit carry overs, tax loss
carryforwards and other net deductible temporary differences in non-U.S.
operations where the future potential benefits do not meet the more likely than
not realization test.
U.S. income taxes have not been provided on approximately $78,292 of
undistributed earnings of non-U.S. subsidiaries. The Company plans to reinvest
these undistributed earnings. If any portion were to be distributed, the
related U.S. tax liability may be reduced by foreign income taxes paid on those
earnings plus any available foreign tax credit carry overs. Determination of
the unrecognized deferred tax liability related to these undistributed earnings
is not practicable.
While non-U.S. operations have been profitable overall, cumulative tax losses of
$56,244 are carried as net operating losses in 19 different countries. These
losses can be carried forward to offset income tax liability on future income in
those countries. Cumulative losses of $44,635 can be carried forward
indefinitely, while the remaining $11,609 must be used during the 2002-2007
period.
Note 13--Notes Payable
The primary component of notes payable relates to short-term lines of credit
with banks. This component totals $27,601. The amount of unused available
borrowings under these lines at December 1, 2001 was $166,851. The weighted-
average interest rates on short-term borrowings were 6.6%, 8.8% and 8.1% in
2001, 2000 and 1999, respectively. Fair values of short-term financial
instruments approximate their carrying values due to their short maturity.
34
Note 14--Long-Term Debt
Long-term Debt, Including
Obligations Under Capital Weighted-Average
Leases Interest Rate Maturity 2001 2000
------------------------- ---------------- --------- -------- --------
U.S. dollar obligations:
Notes (a)................. $ -- $ 6,365
Senior notes.............. 7.27% 2001-2012 190,000 190,000
Industrial and commercial
development bonds........ 5.60% 2004-2016 7,100 7,100
Various other
obligations.............. 7.23% 2004-2006 3,857 4,795
-------- --------
200,957 208,260
-------- --------
Foreign currency
obligations:
Pound sterling notes (a).. -- 31,746
Japanese yen note (a)..... 1,620 7,685
Japanese yen.............. 3.80% 2002-2009 3,509 6,536
Various other
obligations.............. -- 927
-------- --------
5,129 46,894
Capital lease obligations... 2002-2004 394 1,028
-------- --------
Total long-term debt........ 206,480 256,182
Less: current
installments............. (3,479) (5,718)
-------- --------
Total....................... $203,001 $250,464
======== ========
- ----------
(a) The Company has revolving credit agreements with a group of major banks,
which provide committed long-term lines of credit through December 20 of
2007, 2006, 2005 and 2004 in amounts of $85,000, $15,000, $25,000 and
$28,000, respectively. At the Company's option, interest is payable at the
London Interbank Offered Rate plus 0.175%--0.375%, adjusted quarterly based
on the Company's capitalization ratio, or a bid rate. A facility fee of
0.075%--0.175% is payable quarterly.
The most restrictive debt agreements place limitations on secured and unsecured
borrowings, operating leases, and contain minimum interest coverage, current
assets and net worth requirements. In addition, the Company cannot be a member
of any "consolidated group" for income tax purposes other than with its
subsidiaries. At December 1, 2001 the Company exceeded minimum requirements for
all financial covenants.
Aggregate maturities of long-term debt, including obligations under capital
leases, amount to $3,479, $6,276, $1,222, $5,114 and $22,216 during the five
years 2002 through 2006, respectively. Senior notes of $26,000 due on December
15, 2001 are shown as long-term because they will be replaced with long-term
debt.
The estimated fair value of long-term debt was $209,200 and $249,052 for
December 1, 2001 and December 2, 2000, 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 to the Company for debt of similar maturities. The
estimates presented above on long-term financial instruments are not necessarily
indicative of the amounts that would be realized in a current market exchange.
Note 15--Lease Commitments
Assets under capital leases 2001 2000
--------------------------- ------- -------
Land....................................................... $ 1,168 $ 1,146
Buildings and improvements................................. 2,056 4,758
Machinery and equipment.................................... 653 632
------- -------
3,877 6,536
Accumulated depreciation................................... (1,669) (3,729)
------- -------
Net assets under capital leases............................ $ 2,208 $ 2,807
======= =======
35
The minimum lease payments, related to equipment and buildings, that will have
to be made in each of the years indicated based on capital and operating leases
in effect at December 1, 2001 are:
Fiscal year Capital Operating
----------- ------- ---------
2002....................................................... $308 $10,438
2003....................................................... 84 8,776
2004....................................................... 12 6,387
2005....................................................... -- 2,962
2006....................................................... -- 2,009
Later years................................................ -- 10,988
---- -------
Total minimum lease payments............................... 404 $41,560
=======
Amount representing interest............................... (10)
----
Present value of minimum lease payments.................... $394
====
Rental expense for all operating leases charged against income amounted to
$16,578, $15,648 and $13,541 in 2001, 2000 and 1999, respectively.
Note 16--Contingencies
Legal: The Company and its subsidiaries are parties to various lawsuits and
governmental proceedings. For further information on certain legal proceedings,
see Item 3, Legal Proceedings. In particular, the Company is currently deemed a
potentially responsible party (PRP) or defendant, generally in conjunction with
numerous other parties, in a number of government enforcement and private
actions associated with hazardous waste sites. As a PRP or defendant, the
Company may be required to pay a share of the costs of investigation and cleanup
of these sites. In some cases the Company may have rights of indemnification
from other parties. The Company's liability in the future for such claims is
difficult to predict because of the uncertainty as to the cost of the
investigation and clean-up of the sites, the Company's responsibility for such
hazardous waste and the number or financial condition of other PRPs or
defendants. As is the case with other types of litigation and proceedings to
which the Company is a party, based upon currently available information, it is
management's opinion that none of these matters will result in material
liability to the Company.
Other: The Company has guaranteed bank loans to certain executives totaling
$11,081 for the purchase of the Company's common stock.
Note 17--Financial Instruments
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes standards for
recognition and measurement of derivatives and hedging activities. The Company
implemented this statement in the first quarter of 2001 as required. The
cumulative effect of adopting SFAS No. 133 as of December 3, 2000 was not
material to the Company's consolidated financial statements. The Company is
exposed to foreign currency exchange rate risk inherent in forecasted sales,
cost of sales, and assets and liabilities denominated in currencies other than
the U.S. dollar. The Company does not enter into any speculative positions with
regard to derivative instruments.
Derivatives consisted primarily of forward currency contracts (primarily to
receive euros) used to manage foreign currency denominated liabilities. Because
contracts outstanding were not designated as hedges, the gains and losses are
recognized in the income statement of the same period as the remeasurement of
the related foreign currency denominated liabilities.
Notional amounts of forward currency contracts outstanding were $108,737
however, notional amounts are not a measure of the Company's exposure. As of
December 1, 2001, the Company had forward currency contracts
36
maturing between December 3, 2001 and August 15, 2002. In the opinion of
management, changes in market value were not material. Counterparties to the
forward currency contracts are major financial institutions. Credit loss from
counterparty nonperformance is not anticipated.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of entities comprising the Company's customer
base and their dispersion across many different industries and countries. As of
December 1, 2001 and December 2, 2000, the Company had no significant
concentrations of credit risk.
Note 18--Retirement and Postretirement Benefits
The Company has noncontributory defined benefit plans covering all U.S.
employees. Benefits for these plans are based primarily on years of service and
employees' average compensation during their five highest out of the last ten
years of service. The Company's funding policy is consistent with the funding
requirements of federal law and regulations. Plan assets consist principally of
listed equity securities. The Company funds U.S. postretirement benefits through
a Voluntary Employees' Beneficiaries Association Trust.
Certain non-U.S. consolidated subsidiaries provide pension benefits for their
employees consistent with local practices and regulations. These plans are
defined benefit plans covering substantially all employees upon completion of a
specified period of service. Benefits for these plans are generally based on
years of service and annual compensation.
The Company and certain of its consolidated subsidiaries provide health care and
life insurance benefits for eligible retired employees and their eligible
dependents. These benefits are provided through various insurance companies and
health care providers. These costs are accrued during the years the employee
renders the necessary service.
Pension Benefits Other
------------------------------------ Postretirement
U.S. Plans Non-U.S. Plans Benefits
------------------ ---------------- -----------------
2001 2000 2001 2000 2001 2000
-------- -------- ------- ------- -------- -------
Change in benefit
obligation:
Benefit obligation,
September 1 of prior
year................. $180,382 $178,021 $66,759 $72,095 $ 39,734 $28,216
Service cost.......... 4,735 5,613 2,491 2,675 1,360 1,027
Interest cost......... 14,018 13,513 3,575 5,041 3,089 2,119
Participant
contributions........ -- -- 1,494 779 250 124
Plan amendments....... 506 13 -- -- -- --
Actuarial
(gain)/loss.......... 21,057 (8,850) 6,341 (3,176) 8,029 10,935
Benefits paid......... (9,248) (7,928) (2,767) (2,689) (3,045) (2,687)
Currency change
effect............... -- -- 1 (7,966) -- --
-------- -------- ------- ------- -------- -------
Benefit obligation,
August 31............ $211,450 $180,382 $77,894 $66,759 $ 49,417 $39,734
======== ======== ======= ======= ======== =======
Change in plan assets:
Fair value of plan
assets, September 1
of prior year........ $290,329 $247,689 $50,963 $48,211 $ 78,185 $68,142
Actual return on plan
assets............... (72,332) 49,695 (5,921) 6,615 (18,663) 10,852
Employer
contributions........ 1,382 873 651 1,420 257 1,754
Participant
contributions........ -- -- 1,494 779 250 124
Benefits paid......... (9,248) (7,928) (928) (1,024) (3,045) (2,687)
Currency change
effect............... -- -- (156) (5,038) -- --
-------- -------- ------- ------- -------- -------
Fair value of plan
assets, August 31.... $210,131 $290,329 $46,103 $50,963 $ 56,984 $78,185
======== ======== ======= ======= ======== =======
37
Pension Benefits Other
--------------------------------------- Postretirement
U.S. Plans Non-U.S. Plans Benefits
------------------- ------------------ -----------------
2001 2000 2001 2000 2001 2000
-------- --------- -------- -------- ------- --------
Reconciliation of funded
status as of November:
Funded status........... $ (1,319) $ 109,947 $(31,791) $(15,796) $ 7,567 $ 38,451
Unrecognized actuarial
loss (gain)............ (22,422) (145,988) 279 (10,920) 22,156 (12,253)
Unrecognized prior
service cost
(benefit).............. 5,202 5,535 (41) (33) (7,707) (10,017)
Unrecognized net
transition obligation.. (69) (96) 583 628 -- --
Contributions between
measurement date and
fiscal year-end........ 270 190 251 -- 75 --
-------- --------- -------- -------- ------- --------
Recognized amount....... $(18,338) $ (30,412) $(30,719) $(26,121) $22,091 $ 16,181
======== ========= ======== ======== ======= ========
Statement of financial
position as of November:
Prepaid benefit cost.... $ 469 $ 283 $ 1,489 $ 2,291
Accrued benefit
liability.............. (18,807) (30,694) (32,208) (28,412)
Additional minimum
liability.............. (8,578) (5,634) (3,785) --
Intangible asset........ 3,314 3,666 -- --
Accumulated other
comprehensive income -
pretax................. 5,264 1,967 3,785 --
-------- --------- -------- --------
Recognized amount....... $(18,338) $ (30,412) $(30,719) $(26,121)
======== ========= ======== ========
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for pension plans with accumulated benefit obligation in excess
of plan assets were $100,166, $90,582, and $46,660, respectively as of August
31, 2001 and $57,895, $53,552, and $24,397 as of August 31, 2000.
Pension Benefits Other
---------------------------------------------------- Postretirement
U.S. Plans Non-U.S. Plans Benefits
---------------------------- ---------------------- -------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
-------- -------- -------- ------ ------ ------ ------- ------- -------
Net periodic cost
(benefit):
Service cost............ $ 4,735 $ 5,613 $ 5,987 $2,491 $2,675 $2,547 $ 1,360 $ 1,027 $ 2,033
Interest cost........... 14,018 13,513 12,011 3,575 5,041 4,237 3,089 2,119 2,667
Expected return on
assets................. (24,118) (20,582) (16,538) (3,303) (4,490) (2,909) (7,317) (6,387) (5,294)
Prior service cost
amortization........... 839 838 724 8 8 9 (2,310) (2,310) (828)
Actuarial (gain)/loss
amortization........... (6,059) (2,637) (766) (406) (137) 24 (457) (942) (561)
Transition amount
amortization........... (27) (27) (27) 60 62 (281) -- -- --
Curtailment gain........ -- -- (1,780) -- -- (274) -- -- (74)
-------- -------- -------- ------ ------ ------ ------- ------- -------
Net periodic benefit
cost (benefit)......... $(10,612) $ (3,282) $ (389) $2,425 $3,159 $3,353 $(5,635) $(6,493) $(2,057)
======== ======== ======== ====== ====== ====== ======= ======= =======
38
Pension Benefits Other
-------------------------------------- Postretirement
U.S. Plans Non-U.S. Plans Benefits
-------------------- ----------------- -----------------
Weighted-Average
Assumptions, August 2001 2000 1999 2001 2000 1999 2001 2000 1999
- --------------------- ------ ------ ------ ----- ----- ----- ----- ----- -----
Discount rate .......... 7.00% 7.75% 7.50% 6.04% 6.53% 6.18% 7.00% 7.75% 7.50%
Expected return on plan
assets................. 10.50% 10.50% 10.50% 7.93% 7.92% 6.18% 9.50% 9.50% 9.50%
Rate of compensation
increase............... 4.02% 4.02% 3.78% 3.16% 3.14% 3.07%
Rate of increase in
healthcare cost levels:
Employees under age
65................... 4.85% 5.10% 5.68%
Employees age 65 and
older................ 4.85% 5.10% 3.73%
The rate of increase in healthcare cost levels is expected to be 5.10% in the
years 2002 and later. Beginning in 2005, the Company's dollar contribution for
retiree medical coverage will remain fixed at the 2004 level for employees who
retire in the year 2005 or later.
Sensitivity Information: The healthcare trend rate assumption has a significant
effect on the amounts reported. A one percentage point change in the healthcare
cost trend rate would have the following effects on the December 2, 2000 service
and interest cost and the accumulated postretirement benefit obligation at
December 1, 2001:
1-Percent 1-Percent
Increase Decrease
--------- ---------
Effect on service and interest cost components......... $ 408 $ (340)
Effect on accumulated postretirement benefit
obligation............................................ $4,168 $(3,544)
Note 19--Stockholders' Equity
Preferred Stock: The Board of Directors is authorized to issue up to 10,000,000
additional shares of preferred stock that may be issued in one or more series
and with such stated value and terms as the Board of Directors may determine.
Series A Preferred Stock: There were 45,900 Series A preferred shares with a par
value of $6.67 authorized and outstanding at December 1, 2001 and December 2,
2000. The holder of Series A preferred stock is entitled to cumulative dividends
at the rate of $0.33 per share per annum. Common stock cash dividends may not be
paid unless provision has been made for payment of Series A preferred dividends.
The Series A preferred stock has multiple voting rights entitling the Series A
preferred shareholder to 80 votes per share. The terms of the Series A preferred
stock include the right of the Company to purchase the shares at specified times
and the right of the Company to redeem all shares at par value if authorized by
the shareholders.
Series B Preferred Stock: In connection with the adoption of the shareholder
rights plan (see below), the Board of Directors authorized a new series of
preferred stock ("Series B preferred shares") that would be exchanged for the
existing Series A preferred shares, if and at such time as the rights issued
pursuant to the shareholder rights plan become exercisable. The Series B
preferred shares have the same terms as the Series A preferred shares, except
that the voting rights of the Series B preferred shares are increased
proportionately according to the number of shares issued upon the exercise or
exchange of rights. The Company entered into a Stock Exchange Agreement dated
July 18, 1996, with the holder of the Series A preferred shares by which the
Series B preferred shares would be exchanged for all Series A preferred shares
on the date the rights under the shareholder rights plan become exercisable. The
exchange of the Series A preferred shares for the new Series B
39
preferred shares is intended to preserve the holder's voting power, in the event
any rights are exercised. No event has occurred which would cause the exchange
to be effected.
Common Stock: There were 80,000,000 shares of common stock with a par value of
$1.00 authorized and 28,280,896 and 28,231,328 shares issued and outstanding at
December 1, 2001 and December 2, 2000, respectively. On November 16, 2001, the
Company issued a 2-for-1 common stock split to shareholders of record on October
26, 2001 which resulted in a transfer of $14,142,068 from retained earnings to
common stock. Share and per share data (except par value) for all periods
presented have been restated to reflect the stock split.
Shareholder Rights Plan: The shareholder rights plan provides each holder of a
share of the Company's common stock a right to purchase one additional share of
common stock for $90, subject to adjustment. These rights are not currently
exercisable. Upon the occurrence of certain events, such as the public
announcement of a tender offer or the acquisition of 15 percent or more of the
Company's outstanding common stock by a person or group (an "acquiring person"),
each right entitles the holder to purchase $90 worth of common stock (or in some
circumstances common stock of the acquiring person) at one half of its then
market value. Rights held by an acquiring person are void. The Company may
redeem or exchange the rights in certain instances. Unless extended or redeemed
the rights expire on July 30, 2006.
Note 20--Stock-Based Compensation
Directors' Deferred Compensation Plan: The Directors' Deferred Compensation Plan
reserves 150,000 shares of common stock for allocation as payment of retainer
fees to its Board of Directors. Directors, who are not employees, can choose to
receive all or a portion of the payment of their retainer and meeting fees in
shares of Company common stock when they leave the Board rather than cash
payments each year. At December 1, 2001, 32,157 shares remained available for
future allocation.
1998 Directors' Stock Incentive Plan: The 1998 Directors' Stock Incentive Plan
reserves 400,000 shares of common stock to offer nonemployee directors
incentives to put forth maximum efforts for the success of the Company's
business and to afford nonemployee directors an opportunity to acquire a
proprietary interest in the Company. In 2001, 2000 and 1999, respectively,
21,020, 15,400 and 8,000 restricted shares were awarded. The market value of
$556, $304 and $281 has been recorded as unearned compensation--restricted stock
and is shown as a separate component of stockholders' equity. Unearned
compensation is being amortized to expense over the vesting periods of generally
four years and amounted to $137, $207 and $93 in 2001, 2000 and 1999,
respectively. At December 1, 2001, 332,746 shares remained available for future
award.
Year 2000 Stock Incentive Plan: Under the Year 2000 Stock Incentive Plan
3,000,000 shares of the common stock are available for the granting of awards
during a period of up to ten years from October 14, 1999. The Year 2000 Stock
Incentive Plan permits the granting of (a) stock options; (b) stock appreciation
rights; (c) restricted stock and restricted stock units; (d) performance awards;
(e) dividend equivalents; and (f) other awards valued in whole or in part by
reference to or otherwise based upon the Company's common stock.
A total of 607,172 and 56,684 non-qualified stock options were granted in 2001
and 2000, respectively to officers and key employees at prices not less than
fair market value at the date of grant. These non-qualified options are
generally exercisable beginning one year from the date of grant in cumulative
yearly amounts of 25 percent and generally have a contractual term of 10 years.
At December 1, 2001, 2,396,752 shares remained available for future grants or
allocations under the plan.
1992 Stock Incentive Plan: Under the 1992 Stock Incentive Plan 1,800,000 shares
of common stock were available for the granting of awards during a period of up
to ten years from April 16, 1992. The Stock Incentive Plan permitted the
granting of (a) stock options; (b) stock appreciation rights; (c) restricted
stock and restricted stock units; (d) performance awards; (e) dividend
equivalents; and (f) other awards valued in whole or in part by reference to or
otherwise based upon the Company's common stock.
40
A total of 2,062 restricted shares of common stock were granted to certain
employees in 1999. The market value of shares awarded of $44 has been recorded
as unearned compensation--restricted stock in 1999 and is shown as a separate
component of stockholders' equity. Unearned compensation is being amortized to
expense over the vesting periods of generally ten years and amounted to $1,060,
$1,768 and $2,029 in 2001, 2000 and 1999, respectively.
A total of 2,000 restricted share units of common stock were allocated to
certain employees in 1999. The market value of units allocated of $43 in 1999 is
generally being charged to expense over the ten-year vesting period.
A total of 288,150 and 487,898 non-qualified stock options were granted in 2000
and 1999, respectively to officers and key employees at prices no less than fair
market value at the date of grant. These non-qualified options are generally
exercisable beginning one year from the date of grant in cumulative yearly
amounts of 25 percent and generally have a contractual term of 10 years. At
December 1, 2001, no shares remained available for future grants or allocations
from the 1992 plan.
Exercise
Summary of Non-qualified Stock Option Transactions Number Price (1)
-------------------------------------------------- --------- --------
Outstanding at November 29, 1998........................ 221,982 $ 7.17
Cancelled............................................... (20,594) 20.98
Granted................................................. 487,898 22.08
Exercised............................................... (74,388) 7.17
---------
Outstanding at November 27, 1999........................ 614,898 18.54
Cancelled............................................... (81,454) 23.07
Granted................................................. 344,834 26.14
Exercised............................................... (150,248) 7.64
---------
Outstanding at December 2, 2000......................... 728,030 23.88
Cancelled............................................... (150,422) 21.62
Granted................................................. 607,172 18.63
Exercised............................................... (5,732) 21.50
---------
Outstanding at December 1, 2001......................... 1,179,048 $21.48
=========
Exercisable at December 1, 2001......................... 261,232 $23.36
Exercisable at December 2, 2000......................... 257,166 $23.50
- ----------
(1) Weighted-Average
Options
Options Outstanding Exercisable
----------------------------------- ----------------
Remaining Life (1) Exercise Exercise
Range of Exercise Prices Shares (in years) Price (1) Shares Price (1)
------------------------ ------- ----------------- -------- ------- --------
$18.63 - 23.44.......... 929,064 8.3 $19.74 188,678 $21.45
27.38.................. 229,984 8.0 27.38 62,554 27.38
34.31.................. 20,000 7.9 34.31 10,000 34.31
- ----------
(1) Weighted-Average
41
If compensation expense had been determined for the non-qualified stock option
plans based on the fair value at the grant dates consistent with the method of
SFAS No. 123, net income and income per share would have been adjusted to the
pro forma amounts indicated below:
2001 2000 1999
------- ------- -------
Net income:
As reported...................................... $44,439 $49,163 $43,370
Pro forma........................................ $42,952 $48,202 $42,830
Basic income per share:
As reported...................................... $ 1.59 $ 1.77 $ 1.57
Pro forma........................................ $ 1.54 $ 1.73 $ 1.55
Diluted income per share:
As reported...................................... $ 1.57 $ 1.74 $ 1.55
Pro forma........................................ $ 1.52 $ 1.71 $ 1.53
Compensation expense for pro forma purposes is reflected over the options'
vesting period.
The weighted-average fair value per option at the grant date for options granted
in 2001, 2000 and 1999 was $7.66, $10.15 and $7.69, respectively. The fair value
was estimated using the Black-Scholes option pricing model with the following
weighted-average assumptions:
2001 2000 1999
------- ------- -------
Risk-free interest rate.............................. 5.66% 6.31% 4.57%
Expected dividend yield.............................. 1.50% 1.50% 1.50%
Expected volatility factor........................... 35.77% 30.60% 30.24%
Expected option term................................. 7 years 7 years 7 years
Note 21--Comprehensive Income Information
Total Comprehensive Income 2001 2000 1999
-------------------------- ------- ------- -------
Net income...................................... $44,439 $49,163 $43,370
Foreign currency translation adjustment......... (395) (12,034) (1,684)
Foreign currency translation adjustment included
in net income.................................. -- -- 136
Minimum pension liability adjustment, net of
tax............................................ (4,667) (532) 23
------- ------- -------
Total........................................... $39,377 $36,597 $41,845
======= ======= =======
The following table shows ending balances of the components of accumulated other
comprehensive income:
Accumulated Other Comprehensive Income 2001 2000 1999
-------------------------------------- -------- -------- -------
Foreign currency translation adjustment....... $(19,283) $(18,888) $(6,854)
Minimum pension liability adjustment net of
taxes of $3,182, $767 and $(15) in 2001, 2000
and 1999, respectively....................... (5,867) (1,200) (668)
-------- -------- -------
Total accumulated other comprehensive income.. $(25,150) $(20,088) $(7,522)
======== ======== =======
Note 22 - Operating Segment Information
In the first quarter of fiscal 2002 and in connection with the current year
restructuring initiatives (See Note 4, "Restructuring Related Costs"), the
Company fundamentally changed its management structure and philosophy of how its
global adhesives operations were to be managed from an autonomous geographic
regions perspective to a combined global operations perspective, focused on
managing adhesive products and markets on a worldwide basis. These primary
markets include adhesives for: packaging, assembly (woodworking, appliances,
etc.), converting, non-woven, automotive, graphic arts and footwear. In
addition, the Company reorganized its management structure to manage these
adhesives markets on a global basis. In this regard, the adhesives operations
now have a newly created global manager who is responsible for the global
adhesives operations and also have newly created positions responsible for
global procurement and supply chain management, sales and product line
management and manufacturing. The Company's management reporting has also been
modified to report and measure results, as well as reward performance of the
adhesives operations on a global basis.
42
Because of these fundamental changes, effective in 2002, the Company has changed
its segment reporting to present its adhesives operations globally. The Company
will continue to report its specialty chemical product lines in a separate
segment entitled Full-Valu/Specialty. Certain product lines previously included
in the adhesives geographic business have been repositioned and are now included
as a component of the Full-Valu/Specialty operating segment.
As a result of the change in the Company's reportable segments, the following
segment information is provided to restate the segment information for years
2001, 2000 and 1999, included in Note 22 of its 2001 Annual Report on Form 10-K
as filed with the Securities and Exchange Commission. Geographic area segment
information as previously filed remains unchanged. The following information for
years 2001, 2000 and 1999 has been adjusted to report segment information in a
manner consistent with the current management structure, approach and
information used to manage the Company's operations. Inter-segment sales are
recorded at cost plus a minor markup for administrative costs. Additionally, the
allocations resulting from the shared utilization of assets are not necessarily
indicative of the underlying activity for segment assets, depreciation and
amortization, and capital expenditures.
Trade Inter-Segment Operating Depreciation/ Total Capital
Operating Segments Revenue Revenue Income(Loss) Amortization Assets (a) Expenditures
- ------------------ ------- ------- ------------ ------------ ---------- ------------
Global Adhesives 2001 $878,034 $7,624 $55,481 $32,723 $614,308 $16,361
2000 947,599 4,942 56,974 35,087 646,992 24,144
1999 961,602 8,373 67,554 36,245 703,994 42,842
Full-Valu/Specialty 2001 $396,025 $1,460 $34,190 $8,985 $239,922 $5,046
2000 416,362 909 45,227 8,672 243,031 5,649
1999 414,253 1,921 53,397 8,378 232,253 9,505
Corporate and Unallocated 2001 - $(9,084) - $11,129 $111,943 $9,318
2000 - (5,851) - 8,406 120,338 19,251
1999 - (10,294) - 6,153 89,368 3,906
Total Company 2001 $1,274,059 - $89,671 $52,837 $966,173 $30,725
2000 1,363,961 - 102,201 52,165 1,010,361 49,044
1999 1,375,855 - 120,951 50,776 1,025,615 56,253
(a) Segment assets include primarily inventory, accounts receivables, property,
plant and equipment and other miscellaneous assets. Corporate and
unallocated assets include primarily corporate property, plant and
equipment, deferred tax assets, certain investments and other assets.
Reconciliation of Operating Income to
Pretax Income 2001 2000 1999
- ------------------------------------------- --------- --------- ---------
Operating income $ 89,671 $ 102,201 $ 120,951
Restructuring related (charges) credits (1,564) 300 (22,961)
Interest expense (21,247) (23,814) (26,823)
Gain from sale of assets 752 4,131 6,123
Other income (expense), net (4,142) (5,913) (2,864)
--------- --------- ---------
Pretax income $ 63,470 $ 76,905 $ 74,426
========= ========= =========
43
Geographic Areas
Information in the table below is presented on the basis the Company uses to
assess its businesses on a geographic basis. Export sales and certain income and
expense items are reported within the geographic area where the final sales to
customers originate.
Trade Property, Plant
Revenue & Equipment
----------- ----------------
North America ......................... 2001 $762,402 $242,296
2000 817,855 258,230
1999 801,359 258,822
Europe ................................ 2001 $245,271 $64,623
2000 262,128 67,369
1999 287,681 79,732
Latin America ......................... 2001 $169,649 $42,853
2000 182,986 45,242
1999 188,919 46,735
Asia/Pacific .......................... 2001 $96,737 $21,341
2000 100,992 23,848
1999 97,896 27,235
Total Company ......................... 2001 $1,274,059 $371,113
2000 1,363,961 394,689
1999 1,375,855 412,524
----------- ----------------
Note 23--Quarterly Data (unaudited)
Net Revenue Gross Profit Operating Income
---------------------- ------------------ -----------------
2001 2000 2001 2000 2001 2000
---------- ---------- -------- -------- ------- --------
First quarter... $ 306,934 $ 323,630 $ 82,576 $ 93,122 $14,284 $ 23,805
Second quarter.. 328,507 350,174 88,212 99,726 23,612 31,917
Third quarter... 315,712 325,977 85,923 86,047 24,752 19,013
Fourth quarter.. 322,906 364,180 88,842 100,467 25,459 27,766
---------- ---------- -------- -------- ------- --------
Total year...... $1,274,059 $1,363,961 $345,553 $379,362 $88,107 $102,501
========== ========== ======== ======== ======= ========
Diluted Net
Basic Net Income Income
Net Revenue Per Share Per Share
---------------------- ------------------ -----------------
2001 2000 2001 2000 2001 2000
---------- ---------- -------- -------- ------- --------
First quarter... $ 5,049* $ 9,730 $ 0.18* $ 0.35 $ 0.18* $ 0.34
Second quarter.. 11,861 17,772 0.42 0.64 0.42 0.63
Third quarter... 14,587 7,394 0.52 0.27 0.51 0.26
Fourth quarter.. 12,942 14,267 0.46 0.51 0.46 0.51
---------- ----------
Total year...... $ 44,439* $ 49,163 $ 1.59* $ 1.77 $ 1.57* $ 1.74
========== ==========
- ----------
* Includes an accounting change of $501 charge or $0.02 loss per share.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
44