UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-09225
H.B. FULLER COMPANY
(Exact name of Registrant as specified in its charter)
Minnesota 41-0268370
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1200 Willow Lake Boulevard, Vadnais Heights, Minnesota 55110-5101
(Address of principal executive offices) (Zip Code)
(651) 236-5900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $1.00 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of the Registrant's Common Stock, par value
$1.00 per share, was 28,352,678 as of September 30, 2002.
1
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
- ----------------------------
H.B. FULLER COMPANY AND SUBSIDIARIES
Statement of Consolidated Income
(In thousands, except per share amounts)
(Unaudited)
--------------------------------------------------------------
13 Weeks Ended 39 Weeks Ended
----------------------------- -----------------------------
August 31, September 1, August 31, September 1,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Net revenue $313,936 $315,712 $926,578 $951,153
Cost of sales (229,752) (229,789) (679,779) (694,442)
-------------- -------------- -------------- --------------
Gross profit 84,184 85,923 246,799 256,711
Selling, administrative and other expenses (67,673) (61,173) (207,887) (194,064)
Interest expense (4,353) (5,198) (13,489) (16,364)
Other income (expense), net 1,594 (1,537) 1,139 (2,229)
-------------- -------------- -------------- --------------
Income before income taxes, minority
interests, equity investments and
accounting change 13,752 18,015 26,562 44,054
Income taxes (4,728) (3,676) (9,248) (12,790)
Minority interests in consolidated income (74) (177) (681) (687)
Income from equity investments 249 426 1,167 1,421
-------------- -------------- -------------- --------------
Income before cumulative effect of
accounting change 9,199 14,588 17,800 31,998
Cumulative effect of accounting change - - - (501)
-------------- -------------- -------------- --------------
Net income $9,199 $14,588 $17,800 $31,497
============== ============== ============== ==============
Basic income per common share:
Income before accounting change $0.33 $0.52 $0.63 $1.15
Accounting change - - - (0.02)
-------------- -------------- -------------- --------------
Net income $0.33 $0.52 $0.63 $1.13
============== ============== ============== ==============
Diluted income per common share:
Income before accounting change $0.32 $0.51 $0.62 $1.13
Accounting change - - - (0.02)
-------------- -------------- -------------- --------------
Net income $0.32 $0.51 $0.62 $1.11
============== ============== ============== ==============
Weighted-average common shares
outstanding:
Basic 28,135 27,970 28,071 27,952
Diluted 28,632 28,396 28,571 28,306
Dividends per share $0.110 $0.108 $0.328 $0.320
See accompanying notes to consolidated financial statements.
2
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheet
(Dollars in thousands)
(Unaudited)
August 31, December 1,
2002 2001
--------------- --------------
Assets
Current assets:
Cash and cash equivalents $2,660 $11,454
Trade receivables 218,971 219,711
Allowance for doubtful accounts (8,197) (8,121)
Inventories 148,638 141,210
Other current assets 47,779 39,619
--------------- --------------
Total current assets 409,851 403,873
Net property, plant and equipment 359,064 371,113
Other assets 107,460 107,432
Goodwill 65,985 62,037
Other intangibles, net 19,840 21,718
--------------- --------------
Total assets $962,200 $966,173
=============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $23,773 $27,601
Current installments of long-term debt 281 3,479
Trade payables 112,321 114,155
Accrued payroll and employee benefits 31,462 30,659
Other accrued expenses 38,849 19,714
Income taxes payable 5,350 8,555
--------------- --------------
Total current liabilities 212,036 204,163
Long-term debt, excluding current installments 170,091 203,001
Accrued pensions 64,049 66,012
Other liabilities 41,665 39,413
Minority interests in consolidated subsidiaries 20,241 19,558
--------------- --------------
Total liabilities 508,082 532,147
--------------- --------------
Commitments and contingencies
Stockholders' equity:
Series A preferred stock - 306
Common stock, par value $1.00 per share 28,359 28,281
Shares outstanding August 31, 2002 were 28,358,677
and December 1, 2001 were 28,280,896
Additional paid-in capital 39,555 37,830
Retained earnings 404,560 396,048
Accumulated other comprehensive loss (15,848) (25,150)
Unearned compensation - restricted stock (2,508) (3,289)
--------------- --------------
Total stockholders' equity 454,118 434,026
--------------- --------------
Total liabilities and stockholders' equity $962,200 $966,173
=============== ==============
See accompanying notes to consolidated financial statements.
3
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
39 Weeks Ended
----------------------------
August 31, September 1,
2002 2001
------------- ------------
Cash flows from operating activities:
Net income $17,800 $31,497
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 43,753 39,423
Change in assets and liabilities:
Accounts receivables, net 4,664 10,442
Inventories (4,137) 4,425
Other assets (2,743) (1,305)
Accounts payables (4,244) (17,211)
Accrued payroll and employee benefits and other
accrued expenses 7,306 (4,625)
Restructuring liability 7,550 (544)
Income taxes payable (1,995) 4,069
Accrued pensions (4,570) (9,004)
Other liabilities (1,368) (2,480)
Other 799 378
--------------- --------------
Net cash provided by operating activities 62,815 55,065
Cash flows from investing activities:
Purchased property, plant and equipment (25,270) (24,461)
Purchased investments - (3,517)
Proceeds from sale of property, plant and equipment 3,398 2,798
Proceeds from sale of investment - 1,567
--------------- --------------
Net cash used in investing activities (21,872) (23,613)
Cash flows from financing activities:
Proceeds from long-term debt 21,685 4,298
Repayment of long-term debt (56,004) (29,572)
(Payments) proceeds from notes payable (6,573) 3,479
Dividends paid (9,287) (9,051)
Other 410 (278)
--------------- --------------
Net cash used in financing activities (49,769) (31,124)
Effect of exchange rate changes 32 260
--------------- --------------
Net change in cash and cash equivalents (8,794) 588
Cash and cash equivalents at beginning of period 11,454 10,489
--------------- --------------
Cash and cash equivalents at end of period $2,660 $11,077
=============== ==============
See accompanying notes to consolidated financial statements.
4
H.B. FULLER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands)
1. Accounting Policies: The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim
financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the
information necessary for a fair presentation of results of operations,
financial position, and cash flows in conformity with accounting
principles generally accepted in the United States of America. In the
opinion of management, the interim consolidated financial statements
reflect all adjustments of a normal recurring nature considered
necessary for a fair presentation of the results for the periods
presented. Operating results for interim periods are not necessarily
indicative of results that may be expected for the fiscal year as a
whole. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, expenses,
and related disclosures at the date of the financial statements and
during the reporting period. Actual results could differ from these
estimates. These unaudited interim consolidated financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto included in the reissued financial
statements for the years ended December 1, 2001 and December 3, 2000
and the three years in the period ended December 1, 2001 as filed with
the Securities and Exchange Commission on Form 8-K dated September 24,
2002.
2. Net Income per Common Share: A reconciliation of the net income and
common share components for the basic and diluted net income per common
share calculations is as follows:
13 Weeks Ended 39 Weeks Ended
---------------------------- -----------------------------
August 31, September 1, August 31, September 1,
2002 2001 2002 2001
------------- -------------- -------------- --------------
Net income $9,199 $14,588 $17,800 $31,998
Dividends on preferred shares - (4) (7) (12)
------------- -------------- -------------- --------------
Income attributable to common shares $9,199 $14,584 $17,793 $31,986
============= ============== ============== ==============
Weighted-average common shares - basic 28,135 27,970 28,071 27,952
Equivalent shares - stock-based
compensation plans 497 426 500 354
------------- -------------- -------------- --------------
Weighted-average common shares - diluted 28,632 28,396 28,571 28,306
============= ============== ============== ==============
The computations of diluted income per common share do not include
stock options with exercise prices greater than the average market
price for the respective periods of the common shares of 1 and 2 for
the third quarter of 2002 and 2001, respectively, and of 2 and 28 for
the first nine months of 2002 and 2001, respectively, as the results
would have been anti-dilutive.
3. Comprehensive Income: The components of total comprehensive income
follows:
13 Weeks Ended 39 Weeks Ended
---------------------------- -----------------------------
August 31, September 1, August 31, September 1,
2002 2001 2002 2001
------------- -------------- -------------- --------------
Net income $9,199 $14,588 $17,800 $31,998
Other comprehensive income
Foreign currency translation, net 5,560 3,357 9,302 1,299
------------- -------------- -------------- --------------
Total comprehensive income $14,759 $17,945 $27,102 $33,297
============= ============== ============== ==============
5
4. Inventories: The composition of inventories follows:
August 31, December 1,
2002 2001
--------------- ----------------
Raw materials $59,347 $57,226
Finished goods 99,901 95,149
LIFO reserve (10,610) (11,165)
--------------- ----------------
$148,638 $141,210
=============== ================
5. Restructuring and Other Related Costs: During the third quarter of
2002, the Company recorded pretax charges of $6,326 ($3,931 after tax
and minority interests) in connection with its restructuring plan that
was announced on January 15, 2002. For the first nine months of 2002
pretax charges recorded were $20,623 ($12,925 after tax and minority
interests). The plan, which was contemplated in 2001, but approved and
implemented throughout 2002, calls for the elimination of approximately
20 percent of current manufacturing capacity. Twelve manufacturing
facilities will be closed within the Global Adhesives operating segment
- eight in North America, three in Latin America and one in Europe. In
the Full-Valu/Specialty operating segment one manufacturing facility
will be closed and one production line will be shut down in another
facility. Also included in the plan is the evaluation, upgrading and
realignment of the sales force in the Global Adhesives operating
segment. Implementation of the plan will result in the elimination of
approximately 450 positions of which approximately 350 have been
accounted for in the first nine months of 2002. The reduction of 450
positions will be offset by hiring approximately 175 employees,
primarily in manufacturing facilities that will take on additional
volume transferred from facilities that will be closed as part of the
restructuring plan, and in sales-related positions as part of the
upgrading and realignment of the sales force.
In connection with the 2002 restructuring plan, the Company expects to
record net pretax charges in the range of $30 to $35 million, inclusive
of the $1.6 million of accelerated depreciation charges recorded in the
fourth quarter of 2001, and net of any gains associated with property
sales subject to the restructuring plan. These charges will include
employee separation costs, accelerated depreciation on assets held and
used until disposal, lease/contract termination costs and other costs
directly related to the restructuring plan offset by any gains
resulting from property sales subject to the restructuring plan. The
net charges remaining to be recorded will be incurred primarily in the
fourth quarter of 2002, with certain employee related charges to be
recorded in the first half of 2003. Cash costs of the plan are expected
to be $20 to $25 million, of which $6.3 million have been incurred as
of August 31, 2002. The following table summarizes the restructuring
charges and the related restructuring liabilities:
Employee
(Dollars in thousands) Severance and Accelerated
Benefits Depreciation Other Total
--------------- -------------- ----------- ----------
Balance at December 2, 2001 $ 349 $ - $ 176 $ 525
2002 charges (pretax)
First quarter 4,784 1,637 1,254 7,675
Second quarter 2,831 2,830 961 6,622
Third quarter 1,572 1,501 3,253 6,326
--------------- -------------- ----------- ----------
Total charges 9,187 5,968 5,468 20,623
Non-cash charges (837) (5,968) (6,805)
Currency change effect - 276 276
Cash payments (3,860) (2,421) (6,281)
--------------- ----------- ----------
Total liabilities at August 31, 2002 4,839 3,499 8,338
Long-term portion of liabilities - (2,177) (2,177)
--------------- ----------- ----------
Current liabilities at August 31, 2002 $4,839 $ 1,322 $ 6,161
=============== =========== ==========
The total pretax charges of $6,326 in the third quarter of 2002 were
recorded in the income statement as: $4,525 in cost of sales and $1,801
in selling, administrative and other expenses (SG&A). The $4,525 in
cost of sales consisted of $144 of employee severance and benefits,
$1,471 of accelerated depreciation, $1,713 of adverse lease termination
costs and $1,197 of other costs directly attributed to the
restructuring plan. The other costs are primarily period costs
associated with the closure of manufacturing facilities such as;
equipment tear down and decommissioning, facility maintenance and
cleanup, equipment and inventory relocation and employee relocation.
The $1,801 in SG&A expenses consisted of $1,428 of employee severance
and benefits, $30 of accelerated depreciation and $343 of other costs
directly attributed to the restructuring plan. Of the total pretax
charges of $6,326 incurred in the third quarter of 2002 the Global
Adhesives operating segment recorded $5,471, the Full-Valu/Specialty
operating segment recorded $144 and corporate office cost centers
recorded $711.
6
Through the first nine months of 2002, total pretax charges of $20,623
were recorded in the income statement as: $14,623 in cost of sales and
$6,000 in SG&A expenses. The $14,623 in cost of sales consisted of
$4,153 of employee severance and benefits, $5,834 of accelerated
depreciation, $3,128 of lease termination costs and $1,508 of other
costs directly attributed to the restructuring plan. The other costs
are primarily period costs associated with the closure of manufacturing
facilities such as; equipment tear down and decommissioning, facility
maintenance and cleanup, equipment and inventory relocation and
employee relocation. The $6,000 in SG&A expenses consisted of $5,034 of
employee severance and benefits, $134 of accelerated depreciation, $178
of lease termination costs and $654 of other costs directly attributed
to the restructuring plan. Of the total pretax charges of $20,623
incurred in the first nine months of 2002, the Global Adhesives
operating segment recorded $17,174, the Full-Valu/Specialty operating
segment recorded $1,100 and corporate office cost centers recorded
$2,349.
Non-cash charges attributed to employee severance and benefits are
related to the granting of accelerated vesting rights on existing
restricted stock held by certain employees subject to the
restructuring. The long-term portion of the restructuring liability
relates to adverse lease commitments that are expected to be paid
beyond one year.
The beginning balance of $525 in the restructuring liability relates to
a prior restructuring plan.
6. Derivatives: Derivatives consisted primarily of forward currency
contracts (primarily to receive euros) used to manage foreign currency
denominated liabilities. Because derivatives instruments outstanding
were not designated as hedges, the gains and losses are recognized in
the income statement as mark-to-market adjustments during the periods
the derivative instrument is outstanding.
Notional amounts outstanding at August 31, 2002 were $129,166, however,
notional amounts are not a measure of the Company's exposure. As of
August 31, 2002, the Company had forward contracts maturing between
September 3, 2002 and November 20, 2002. The mark-to-market gains
associated with these contracts were $216 for the three month and
$1,540 for the nine month periods ended August 31, 2002. These gains
were largely offset by the underlying foreign currency exposures for
which these contracts relate.
7. Preferred Stock Redemption: On May 20, 2002 all shares of Series A
preferred stock were redeemed at par value and a pro rata dividend paid
for the second quarter on those shares for a total cost of $309.
8. Operating Segments: In the first quarter of fiscal 2002 and in
connection with the current year restructuring initiatives (See Note 5,
"Restructuring and Other 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 position of 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.
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.
7
Segment data for the three and nine month periods is as follows:
13 Weeks Ended
-----------------------------------------------------------------------
August 31, 2002 September 1, 2001
--------------------------------- ----------------------------------
Inter- Inter-
Trade Segment Operating Trade Segment Operating
Revenue Revenue Income Revenue Revenue Income
---------- ---------- ----------- ----------- ---------- -----------
Global Adhesives $217,032 $1,166 $14,702 $217,921 $ 2,720 $17,180
Full-Valu/Specialty 96,904 94 8,135 97,791 229 7,570
Corporate and Unallocated - (1,260) - - (2,949) -
---------- ---------- ----------- ----------- ---------- -----------
Total $313,936 $ - $22,837 $315,712 $ - $24,750
========== ========== =========== =========== ========== ===========
39 Weeks Ended
-----------------------------------------------------------------------
August 31, 2002 September 1, 2001
--------------------------------- ----------------------------------
Inter- Inter-
Trade Segment Operating Trade Segment Operating
Revenue Revenue Income Revenue Revenue Income
---------- ---------- ----------- ----------- ---------- -----------
Global Adhesives $637,653 $ 3,421 $38,599 $655,261 $ 6,228 $40,811
Full-Valu/Specialty 288,925 566 20,936 295,892 913 21,836
Corporate and Unallocated - (3,987) - - (7,141) -
---------- ---------- ----------- ----------- ---------- -----------
Total $926,578 $ - $59,535 $951,153 $ - $62,647
========== ========== =========== =========== ========== ===========
Consistent with the Company's internal management reporting, the
charges related to the restructuring plan are excluded from the segment
operating income results. In addition, other income/(expense), net is
excluded from the segment operating income because it consists
primarily of items that are not controllable or impacted by management
within the operating segments.
Reconciliation of Operating Income to Income before Income Taxes:
13 Weeks Ended 39 Weeks Ended
---------------------------- ---------------------------
August 31, September 1, August 31, September 1,
2002 2001 2002 2001
------------ --------------- ------------ --------------
Operating income $22,837 $24,750 $59,535 $62,647
Restructuring and other related costs (6,326) - (20,623) -
Interest expense (4,353) (5,198) (13,489) (16,364)
Gains (losses) from sales of assets 582 (145) 518 1,472
Other income/(expense), net 1,012 (1,392) 621 (3,701)
------------ --------------- ------------ --------------
Income before income taxes $13,752 $18,015 $26,562 $44,054
============ =============== ============ ==============
9. Recently Adopted Accounting Standards: In June 2001 the Financial
Accounting Standards Board (FASB) issued Statements of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations", and No.
142, "Goodwill and Other Intangible Assets". These Statements
eliminated 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, for which the Company had no such transactions. Effective
December 2, 2001, the Company early adopted SFAS No. 142. Under the new
standard, purchased goodwill is no longer amortized over its useful
life. Therefore, no goodwill amortization expense was incurred during
the first nine months of 2002. Beginning December 2, 2001, goodwill is
tested for impairment on an annual basis, and will be tested for
impairment on an interim basis if an event occurs or circumstances
change that would indicate the carrying amount may be impaired. An
impairment loss would generally be recognized when the carrying amount
of a reporting unit's net assets exceeds the estimated fair value of
the reporting unit. The estimated fair value of the reporting unit is
determined using a discounted cash flow analysis.
8
Had SFAS No. 142 been effective in fiscal year 2001, net income and
earnings per share would have been reported as the following amounts:
13 Weeks 39 Weeks
Ended Ended
September 1, September 1,
2001 2001
------------ ------------
Reported net income $14,588 $31,497
Add back goodwill amortization, net of tax benefit 916 2,886
------------ ------------
Adjusted net income $15,504 $34,383
============ ============
Basic earnings per share:
Net income as reported $ 0.52 $ 1.13
Add back goodwill amortization, net of tax benefit 0.04 0.10
------------ ------------
Adjusted net income $ 0.56 $ 1.23
============ ============
Diluted earnings per share:
Net income as reported $ 0.51 $ 1.11
Add back goodwill amortization, net of tax benefit 0.04 0.10
------------ ------------
Adjusted net income $ 0.55 $ 1.21
============ ============
The three fiscal years prior to 2002 would have been reported as
follows:
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
December 1, December 2, November 27,
2001 2000 1999
------------- --------------- ---------------
Reported net income $44,439 $49,163 $43,370
Add back goodwill amortization, net of tax benefit 3,857 3,879 3,444
------------- --------------- ---------------
Adjusted net income $48,296 $53,042 $46,814
============= =============== ===============
Basic earnings per share:
Net income as reported $ 1.59 $ 1.77 $ 1.57
Add back goodwill amortization, net of tax benefit 0.14 0.14 0.12
------------- --------------- ---------------
Adjusted net income $ 1.73 $ 1.91 $ 1.69
============= =============== ===============
Diluted earnings per share:
Net income as reported $ 1.57 $ 1.74 $ 1.55
Add back goodwill amortization, net of tax benefit 0.13 0.14 0.12
------------- --------------- ---------------
Adjusted net income $ 1.70 $ 1.88 $ 1.67
============= =============== ===============
Purchased
Balances of acquired intangible Technology &
assets subject to amortization were: Patents All Other Total
--------------- -------------- ------------
As of August 31, 2002:
Amortizable Intangible Assets:
Original cost $34,044 $1,561 $35,605
Accumulated Amortization (18,115) (964) (19,079)
--------------- -------------- ------------
Total intangible assets, net $15,929 $597 $16,526
=============== ============== ============
As of December 1, 2001:
Amortizable Intangible Assets:
Original cost $34,044 $1,561 $35,605
Accumulated Amortization (16,309) (892) (17,201)
--------------- -------------- ------------
Total intangible assets, net $17,735 $ 669 $18,404
=============== ============== ============
9
Amortization expense of acquired intangible assets subject to
amortization was $632 and $737 for the third quarter of 2002 and 2001,
respectively and $1,900 and $2,483 for the first nine months of 2002
and 2001, respectively. Estimated amortization expense for acquired
intangible assets recorded as of December 1, 2001 for the next five
years is as follows:
Year Amortization Expense
---- --------------------
2003 $2,471
2004 $2,082
2005 $2,079
2006 $2,073
2007 $2,068
The Company completed its transitional impairment analysis during the
second quarter of fiscal 2002 and determined that no changes to the
carrying value of goodwill and other intangible assets were required as
a result of the adoption of SFAS No. 142. Subsequent impairment testing
will take place annually, and will be tested on an interim basis if an
event occurs or circumstances change that would indicate the carrying
value may be impaired.
10. Recently Issued Accounting Standard: In August 2001, the FASB issued
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 Company will adopt this standard
for its fiscal year beginning December 1, 2002. The impact of adopting
this accounting standard is not expected to have a material effect on
the financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses financial
accounting and reporting for costs associated with exit or disposal
activities. The Company will adopt this standard for exit and disposal
activities initiated after December 31, 2002. The impact of adopting
this accounting standard will not have a material effect on the
financial position and results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
Results of Operations
- ---------------------
Net sales in the third quarter of 2002 of $313.9 million were $1.8 million or
0.6 percent less than the net sales of $315.7 million in the third quarter of
2001. Sales volume decreased 1.5 percent as the Company continues to be
negatively impacted by the overall weakness in the global economy. Selling
prices decreased 1.4 percent and the effects from foreign currency fluctuations
as compared to the U.S. dollar resulted in a positive 2.3 percent. The relative
strengthening of the euro as compared to the U.S. dollar during the third
quarter of 2002 was the primary reason for the positive currency variance. Also
contributing to the positive currency variance was the strengthening against the
U.S. dollar of the Australian dollar and British pound.
For the first nine months of 2002, net sales of $926.6 million were 2.6 percent
less than the net sales of $951.2 million posted in the same period of 2001.
Unit volume decreased 1.6 percent, selling prices were down 1.1 percent while
the effects of currency were a positive 0.1 percent as compared to the same
period in 2001.
In the Global Adhesives segment, net sales of $217.0 million in the third
quarter of 2002 were $0.9 million or 0.4 percent less than the third quarter of
2001. Selling price decreases of 1.9 percent and volume decreases of 1.4 percent
offset positive currency effects, primarily from the stronger euro, of 2.9
percent. Sales to the footwear and nonwoven markets in the third quarter of 2002
were well ahead of the third quarter of 2001. Increased market share, primarily
in the Asia/Pacific region, was the main reason for the
10
sales growth in footwear in the third quarter of 2002 as compared to the same
period in 2001. The nonwoven market is one that is more recession-proof than
other markets due to the fact that products such as disposable diapers are used
regardless of economic conditions. The sales growth in nonwoven was driven by
additional volume in the Europe region and also the positive currency effects
from the strengthening of the euro against the U.S. dollar, as compared to the
third quarter of 2001.
Positive sales results were also posted in the automotive market in the third
quarter of 2002 as compared to the third quarter of 2001. Auto manufacturers'
retail incentive programs and low interest rates contributed to increases in
vehicle sales as compared to last year. On the negative side, markets impacted
more severely by the sluggish economy were assembly, graphic arts and
converting.
Net sales for the first nine months of 2002 in the Global Adhesives segment of
$637.7 million were $17.6 million or 2.7 percent less than net sales in the
first nine months of 2001. Sales volume decreased 1.5 percent and selling prices
decreased 1.2 percent as compared to last year. There was no net effect of
currency fluctuations on the net sales for the first nine months of 2002 as
compared to the same period last year. The automotive and nonwoven markets
recorded the strongest sales performance in the first nine months of 2002 as
compared to the same period in 2001. Similar to the third quarter results,
assembly, graphic arts and converting reported the largest decreases for the
first nine months of 2002.
In the Full-Valu/Specialty segment, net sales in the third quarter of 2002 of
$96.9 million were $0.9 million or 0.9 percent less than the net sales in the
third quarter of 2001. Sales volume decreased 1.4 percent, selling prices
decreased 0.3 percent and currency fluctuations had a positive 0.8 percent
impact. The window market was the strongest performer in Full-Valu/Specialty in
the third quarter of 2002 as compared to the third quarter of 2001. The relative
strength of the U.S. housing market was one reason for the higher sales to the
window market. The consumer market also reported a sales increase in the third
quarter as compared to last year, however this increase was principally
attributed to positive currency impacts from Australia and New Zealand. The
liquid paints market in Central America had a sales decrease in the third
quarter of 2002 as the slow economies in that region had a negative impact on
paint sales. The powder coatings market, which is primarily in North America
also was impacted by the slow economy as sales in this market decreased in the
third quarter of 2002 as compared to the same period in 2001.
Through the first nine months of 2002, net sales of $288.9 million in the
Full-Valu/Specialty segment were 2.4 percent less than the net sales recorded in
the first nine months of 2001. Sales volume was down 1.7 percent, selling prices
decreased 1.0 percent and currency fluctuations had a positive 0.3 percent
impact. The window market has shown the largest sales increase over last year.
TEC product sales also increased over last year. The largest sales decreases in
the Full-Valu/Specialty segment through the first nine months of 2002 as
compared to the same period in 2001 were from powder coatings and Foster
products.
The consolidated gross profit margin of 26.8 percent in the third quarter of
2002 was 0.4 percentage points less than the 27.2 percent margin in the third
quarter of 2001. The main reason for the lower margin in 2002 as compared to
2001 was $4.5 million of added costs of sales in 2002 due to the restructuring
plan that is discussed further below in this Management Discussion and Analysis
(MD&A). These costs reduced the gross profit margin in the third quarter of 2002
by 1.4 percentage points. As a percentage of sales, raw material costs in the
third quarter of 2002 were less than the raw material costs in the third quarter
of 2001. Through the first nine months of 2002 the gross profit margin was 26.6
percent as compared to 27.0 percent for the same period in 2001. On a
year-to-date basis in 2002 the costs of sales related to the restructuring plan
were $14.6 million, which reduced the 2002 margin by 1.6 percentage points.
Selling, administrative and other (SG&A) expenses of $67.7 million in the third
quarter of 2002 were $6.5 million or 10.6 percent above the SG&A expenses of
$61.2 million in the third quarter of 2001. As a percent of sales SG&A expenses
in the third quarter of 2002 were 21.6 percent as compared to 19.4 percent for
the same period in 2001. SG&A expenses related to the restructuring plan that is
discussed further below in this MD&A were $1.8 million in the third quarter of
2002. These restructuring-related expenses increased the SG&A expense percentage
of sales by 0.6 percentage points. Other reasons for the increase in SG&A
expenses in 2002 as compared to 2001 were reduced income from the U.S. pension
and postretirement benefit plans, increased management bonus accruals and
increases due to the stronger foreign currencies as compared to the U.S. dollar.
These items are discussed in further detail below in this MD&A. For the first
nine months of 2002 SG&A expenses of $207.9 million were $13.8 million or 7.1
percent more than the SG&A expenses for the same period in 2001. The
restructuring-related expenses included in SG&A expenses for the first nine
months of 2002 were $6.0 million.
Interest expense and other income/expense, net, are discussed later in this MD&A
as they are not impacted by the restructuring plan.
Net income in the third quarter of 2002 of $9.2 million was $5.4 million or 36.9
percent below the net income in the third quarter of 2001. The diluted net
income per common share was $0.32 in 2002 as compared to $0.51 in the third
quarter of 2001. The net income in the third quarter of 2001 included a one-time
income tax benefit of $2.6 million or $0.09 per diluted share. The impact on the
third quarter 2002 net income from the costs related to the restructuring plan
was negative $3.9 million or $0.14 per diluted share. For the first nine months
of 2002 net income was $17.8 million as compared to the net income before the
cumulative effect of an accounting change of $32.0 million for the first nine
months of 2001. The income per diluted share for the first nine months of 2002
was $0.62 as compared to $1.13 for the first nine months of 2001. The
restructuring plan impact on net income for the first nine months of 2002 was
negative $12.9 million or $0.45 per diluted share. As reported above, the 2001
net income includes a one-time income tax benefit of $2.6 million or $0.09 per
diluted share.
During the third quarter of 2002, the Company recorded pretax charges of $6,326
($3,931 after tax and minority interests) in connection with its restructuring
plan that was announced on January 15, 2002. For the first nine months of 2002
pretax charges recorded were $20,623 ($12,925 after tax and minority interests).
The plan, which was contemplated in 2001, but approved and implemented
throughout 2002, calls for the elimination of approximately 20 percent of
current manufacturing capacity. Twelve manufacturing facilities will be closed
within the Global Adhesives operating segment - eight in North America, three in
Latin America and one in Europe. In the Full-Valu/Specialty operating segment
one manufacturing facility will be closed and one production line will be shut
down in another facility. Also included in the plan is the evaluation, upgrading
and realignment of the sales force in the Global Adhesives operating segment. By
reducing capacity and eliminating other cost structures management currently
estimates that upon completion of the restructuring plan, costs will be reduced
$10 to $12 million annually. These savings, consisting primarily of reduced
employee-related costs and reduced depreciation expenses were approximately $0.8
million in the third quarter of 2002. There were minimal savings realized in the
first and second quarters of 2002. Implementation of the plan will result in the
elimination of approximately 450 positions of which approximately 350 have been
accounted for in the first nine months of 2002. The reduction of 450 positions
will be offset by hiring approximately 175 employees, primarily in manufacturing
facilities that will take on additional volume transferred from facilities that
will be closed as part of the restructuring plan, and in sales-related positions
as part of the upgrading and realignment of the sales force.
In connection with the 2002 restructuring plan, the Company expects to record
net pretax charges in the range of $30 to $35 million, inclusive of the $1.6
million of accelerated depreciation charges recorded in the fourth quarter of
2001, and net of any gains associated with property sales subject to the
restructuring plan. These charges will include employee separation costs,
accelerated depreciation on assets held and
11
used until disposal, lease/contract termination costs and other costs directly
related to the restructuring plan offset by any gains resulting from property
sales subject to the restructuring plan. The net charges remaining to be
recorded will be incurred primarily in the fourth quarter of 2002, with certain
employee related charges to be recorded in the first half of 2003. Cash costs of
the plan are expected to be $20 to $25 million, of which $6.3 million have been
incurred as of August 31, 2002. The following table summarizes the restructuring
charges and the related restructuring liabilities:
Employee
(Dollars in thousands) Severance Accelerated
and Benefits Depreciation Other Total
------------ ------------ ---------- -----------
Balance at December 2, 2001 $ 349 $ - $ 176 $ 525
2002 charges (pretax)
First quarter 4,784 1,637 1,254 7,675
Second quarter 2,831 2,830 961 6,622
Third quarter 1,572 1,501 3,253 6,326
-------------- -------------- ------------- -----------
Total charges 9,187 5,968 5,468 20,623
Non-cash charges (837) (5,968) (6,805)
Currency change effect - 276 276
Cash payments (3,860) (2,421) (6,281)
-------------- ------------- -----------
Total liabilities at August 31, 2002 4,839 3,499 8,338
Long-term portion of liabilities - (2,177) (2,177)
-------------- ------------- -----------
Current liabilities at August 31, 2002 $ 4,839 $ 1,322 $ 6,161
============== ============= ===========
The total pretax charges of $6,326 in the third quarter of 2002 were included in
the income statement as: $4,525 in cost of sales and $1,801 in SG&A. The $4,525
in cost of sales consisted of $144 of employee severance and benefits, $1,471 of
accelerated depreciation, $1,713 of adverse lease termination costs and $1,197
of other costs directly attributed to the restructuring plan. The other costs
are primarily period costs associated with the closure of manufacturing
facilities such as; equipment tear down and decommissioning, facility
maintenance and cleanup, equipment and inventory relocation and employee
relocation. The $1,801 in SG&A expenses consisted of $1,428 of employee
severance and benefits, $30 of accelerated depreciation and $343 of other costs
directly attributed to the restructuring plan. Of the total pretax charges of
$6,326 incurred in the third quarter of 2002 the Global Adhesives operating
segment recorded $5,471, the Full-Valu/Specialty operating segment recorded $144
and corporate office cost centers recorded $711.
Through the first nine months of 2002, total pretax charges of $20,623 were
included in the income statement as: $14,623 in cost of sales and $6,000 in SG&A
expenses. The $14,623 in cost of sales consisted of $4,153 of employee severance
and benefits, $5,834 of accelerated depreciation, $3,128 of lease termination
costs and $1,508 of other costs directly attributed to the restructuring plan.
The other costs are primarily period costs associated with the closure of
manufacturing facilities such as; equipment tear down and decommissioning,
facility maintenance and cleanup, equipment and inventory relocation and
employee relocation. The $6,000 in SG&A expenses consisted of $5,034 of employee
severance and benefits, $134 of accelerated depreciation, $178 of lease
termination costs and $654 of other costs directly attributed to the
restructuring plan. Of the total pretax charges of $20,623 incurred in the first
nine months of 2002, the Global Adhesives operating segment recorded $17,174,
the Full-Valu/Specialty operating segment recorded $1,100 and corporate office
cost centers recorded $2,349.
Non-cash charges attributed to employee severance and benefits are related to
the granting of accelerated vesting on restricted stock held by certain
employees subject to the restructuring. The long-term portion of the
restructuring liability relates to adverse lease commitments that are expected
to be paid beyond one year.
The beginning balance of $525 in the restructuring liability relates to a prior
restructuring plan.
12
The following is supplemental unaudited consolidated statement of income
information. Financial results for the three- and nine-month periods ended
August 31, 2002 include net charges relating to the Company's restructuring plan
that was announced on January 15, 2002. The information included in the
following table is not intended to be presented in accordance with SEC
guidelines for pro forma financial information and should not be construed as an
alternative to the reported results determined in accordance with accounting
principles generally accepted in the United States of America. It is provided to
assist an investor's understanding of the impact of the aforementioned
restructuring plan on the comparability of the Company's operations. The table
below is an analysis that reflects as reported amounts as well as pro forma
amounts that reflect the impact to ongoing operations of the restructuring plan.
13 Weeks Ended - August 31, 2002
-----------------------------------------
(Dollars in thousands, except per share amounts) Special Excluding 13 Weeks Ended
As Reported Items Special Items September 1, 2001
------------- ------------ -------------- ------------------
Net sales $ 313,936 $ - $ 313,936 $ 315,712
Cost of sales (229,752) (4,525) (225,227) (229,789)
------------- ------------ -------------- ------------------
Gross profit 84,184 (4,525) 88,709 85,923
Selling, administrative and other expenses (67,673) (1,801) (65,872) (61,173)
Interest expense (4,353) - (4,353) (5,198)
Other income/(expense), net 1,594 - 1,594 (1,537)
------------- ------------ -------------- ------------------
Income before tax and minority interests 13,752 (6,326) 20,078 18,015
Income taxes (4,728) 2,302 (7,030) (3,676)
Minority interests (74) 93 (167) (177)
Income from equity investments 249 - 249 426
------------- ------------ -------------- ------------------
Net income $ 9,199 $(3,931) $ 13,130 $ 14,588
============= ============ ============== ==================
Income per diluted share:
Net Income $ 0.32 $ (0.14) $ 0.46 $ 0.51
============= ============ ============== ==================
39 Weeks Ended - August 31, 2002
-----------------------------------------
(Dollars in thousands, except per share amounts) Special Excluding 39 Weeks Ended
As Reported Items Special Items September 1, 2001
------------ ------------ -------------- ------------------
Net sales $ 926,578 $ - $ 926,578 $ 951,153
Cost of sales (679,779) (14,623) (665,156) (694,442)
------------- ------------ -------------- ------------------
Gross profit 246,799 (14,623) 261,422 256,711
Selling, administrative and other expenses (207,887) (6,000) (201,887) (194,064)
Interest expense (13,489) - (13,489) (16,364)
Other income/(expense), net 1,139 - 1,139 (2,229)
------------- ------------ -------------- ------------------
Income before tax and minority interests 26,562 (20,623) 47,185 44,054
Income taxes (9,248) 7,267 (16,515) (12,790)
Minority interests (681) 431 (1,112) (687)
Income from equity investments 1,167 - 1,167 1,421
------------- ------------ -------------- ------------------
Income before cumulative effect of accounting change 17,800 (12,925) 30,725 31,998
Cumulative effect of accounting change - - - (501)
------------- ------------ -------------- ------------------
Net income $ 17,800 $(12,925) $ 30,725 $ 31,497
============= ============ ============== ==================
Income per diluted share:
Before cumulative effect of accounting change $ 0.62 (0.45) $ 1.08 $ 1.13
Cumulative effect of accounting change - - - (0.02)
------------- ------------ -------------- ------------------
Net Income $ 0.62 $ (0.45) $ 1.08 $ 1.11
============= ============ ============== ==================
The following discussion of results excludes the impact of the restructuring
plan for the three- and nine-month periods.
The consolidated gross profit margin in the third quarter of 2002 of 28.3
percent was 1.1 percentage points higher than the 27.2 percent posted in the
third quarter of 2001. Lower raw material costs were the main reason for the
improved margin. The third quarter margin benefited from the successful
negotiation of raw material prices with key suppliers by internal strategic
sourcing teams. These teams focus on key cost areas and negotiate terms on a
global basis utilizing the Company's worldwide purchasing leverage. The impact
on the third quarter gross profit margin from these successful negotiations was
a positive 0.3 percentage points of which approximately 75 percent related to
the effect of retroactive pricing adjustments to December 2001. Through nine
months of 2002 the gross profit margin was 28.2 percent as compared to 27.0
percent for the first nine months of 2001.
13
SG&A expenses of $65.9 million in the third quarter of 2002 were $4.7 million or
7.7 percent more than the SG&A expenses in the third quarter of 2001. Included
in the 2002 expenses as compared to 2001 was a decrease of approximately $2.3
million in U.S. pension and other postretirement income. The $2.3 million
represents 75 percent of the total decrease in U.S. pension and other
postretirement income of nearly $3.0 million. The remaining decrease of $0.7
million was included in cost of sales. Another significant reason for the
increase in SG&A expenses as compared to 2001 was that management bonus accruals
were approximately $2.7 million higher in the third quarter of 2002 as compared
to the third quarter of 2001. In the third quarter of 2001, the Company was not
achieving its financial targets for the year, therefore the management bonus
accruals were reduced accordingly. In 2002, the annual targets are still within
reach, therefore the bonus accruals have not been reduced. One other factor that
resulted in higher expenses in 2002 as compared to 2001 was the stronger foreign
currencies as compared to the U.S. dollar. This impact, which was positive on
the revenue line of the income statement, was negative in terms of higher SG&A
expenses. The expenses in the third quarter of 2002 were approximately $1.3
million higher than in the third quarter of 2001 due to the stronger foreign
currencies.
Through the first nine months of 2002, SG&A expenses of $201.9 million were $7.8
million or 4.0 percent more than the SG&A expenses incurred in the first nine
months of 2001. As a percentage of net sales the expenses in 2002 were 21.8
percent as compared to 20.4 percent in 2001. The reduction in U.S. pension and
other postretirement income was approximately $6.8 million in the first nine
months of 2002 as compared to the same period in 2001. The management bonus
accruals were $4.6 million higher in 2002 as compared to the first nine months
of 2001. Mitigating the effect of these factors on SG&A expenses were spending
controls and reduced employee census. Employee census at August 31, 2002 was
4,704 as compared to 4,926 at September 1, 2001. Of the net reduction of 222
employees, 109 were included in SG&A expenses and 117 were included in cost of
sales.
Interest expense of $4.4 million in the third quarter of 2002 was $0.8 million
less than last year. Lower average debt levels, combined with lower interest
rates, resulted in the lower interest expense. Through nine months of 2002
interest expense of $13.5 million was $2.9 million less than the first nine
months of 2001, also due to the lower average debt levels and interest rates.
Other income/expense, net was income of $1.6 million in the third quarter of
2002 as compared to expense of $1.5 million in the third quarter of 2001. The
2002 results exclude goodwill amortization expense due to the adoption of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets". The standard
eliminated the systematic amortization of goodwill. The third quarter of 2001
included goodwill amortization expense of $1.0 million. Currency effects
resulted in gains of $0.7 million in the third quarter of 2002 as compared to
losses of $0.3 million in the third quarter of 2001. The third quarter of 2002
also included net gains from sales of assets of $0.6 million as compared to net
losses in the third quarter of 2001 of $0.1 million. One property sale in North
America resulted in a gain of approximately $0.9 million in 2002. For the first
nine months of 2002 other income/expense, net was income of $1.1 million as
compared to expense of $2.2 million in the first nine months of 2001. The 2001
results included $3.0 million of goodwill amortization expense. The net gains on
sales of assets were $0.5 million in the first nine months of 2002 as compared
to net gains of $1.5 million in the same period of 2001. The 2001 results
included a gain on the sale of an investment in Japan of $1.6 million. The
currency effects in 2002 resulted in gains of $0.1 million as compared to losses
of $0.6 million in 2001.
The income tax rate in the third quarter and the first nine months of 2002 was
35 percent. The tax rate in the third quarter of 2001 was 20.4 percent. The 2001
rate was reduced by a one-time tax benefit of $2.6 million resulting from
changes in the Company's European legal structure. The changes allowed the
Company to take advantage of tax losses that were not previously recognizable
under accounting principles generally accepted in the United States of America.
Excluding the one-time benefit, the income tax rate in both the third quarter
and first nine months of 2001 was 35 percent.
Net income was $13.1 million or $0.46 per diluted share in the third quarter of
2002. For the same period of 2001 net income was $14.6 million or $0.51 per
diluted share. The $2.6 million one-time tax benefit recorded in the third
quarter of 2001 had a positive $0.09 per diluted share impact on the 2001
results.
14
Through the first nine months of 2002, net income was $30.7 million or $1.08 per
diluted share. For the same period in 2001, net income before the cumulative
effect of an accounting change was $32.0 or $1.13 per diluted share. Excluding
the one-time tax benefit, net income per diluted share for the first nine months
of 2001 would have been $1.04.
Operating Segment Results
- -------------------------
Consistent with the Company's internal management reporting, the charges related
to the restructuring plan are excluded from the segment operating income
results. In addition, other income/(expense), net is excluded from the segment
operating income because it consists primarily of items that are not
controllable or impacted by management within the operating segments.
In the first quarter of fiscal 2002 and in connection with the current year
restructuring initiatives, 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 position of 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.
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.
The Global Adhesives operating segment recorded operating income of $14.7
million in the third quarter of 2002 as compared to $17.2 million in the third
quarter of 2001. The gross profit margin increased from 24.6 percent in the
third quarter of 2001 to 25.7 percent in the third quarter of 2002. Lower raw
material costs were the main reason for the improved margin. SG&A expenses,
primarily due to the reduced U.S. pension and postretirement income and the
higher management bonus accruals, increased $4.5 million or 12.5 percent
compared to the third quarter of 2001. Operating income as a percent of sales
was 6.8 percent in the third quarter of 2002 as compared to 7.9 percent in the
third quarter of 2001. Through the first nine months of 2002 the operating
income in the Global Adhesives segment of $38.6 million was $2.2 million or 5.4
percent less than the operating income for the first nine months of 2001. As a
percent of sales the 2002 operating income was 6.1 percent as compared to 6.2
percent in 2001.
In the Full-Valu/Specialty segment operating income in the third quarter of 2002
was $8.1 million as compared to $7.6 million in the third quarter of 2001. The
gross profit margin increased 1.1 percentage points to 34.1 percent. SG&A
expenses of $24.9 million were $0.2 million higher than last year. As a percent
of sales the operating income in the third quarter of 2002 was 8.4 percent as
compared to 7.7 percent in the third quarter of 2001. Operating income for the
first nine months of 2002 was $20.9 million as compared to $21.8 million in the
first nine months of 2001.
Liquidity and Capital Resources
- -------------------------------
Note: Cash flow and balance sheet discussion includes the impact from the
restructuring and other related costs.
Net cash provided from operating activities for the first nine months of 2002
was $62.8 million as compared to $55.1 million in the first nine months of 2001.
Net income, including the restructuring and other related charges was $17.8
million as compared to $31.5 million for the same period in 2001. The after-tax
effect of the restructuring and other related charges was a loss of $12.9
million. Offsetting this loss from a cash flow standpoint was the accelerated
depreciation related to the plan of $6.0 million and the increase (source of
cash) in the restructuring liability of $7.6 million. The increase in management
bonus accruals of $4.6 million in 2002 as compared to 2001 also was a positive
cash flow item that offset the additional expense in the income statement. The
change in inventories resulted in
15
a use of cash of $4.1 million in 2002 as compared to a source of cash of $4.4
million in 2001. A key factor in the increase in inventories related to the
restructuring plan, especially in North America. As plants prepared for closure,
inventory levels were increased at other facilities to avoid any disruption in
service levels.
Cash used in investing activities was $21.9 million for the first nine months of
2002 as compared to $23.6 for the same period in 2001. Capital expenditures were
$25.3 million in 2002 and $24.5 million in 2001. Proceeds from sales of assets
were $3.4 million in 2002 as compared to $4.4 million in 2001. The 2001 figure
includes $1.6 million related to the sale of an investment in Japan. There were
no purchased investments in the first nine months of 2002. In the first nine
months of 2001 there was a $3.5 million use of cash related to the purchase of
two separate investments.
Net cash used in financing activities was $49.8 million in the first nine months
of 2002 as compared to $31.1 million for the same period in 2001. In the first
nine months of 2002, net cash used to reduce debt was $40.9 million. In the
first nine months of 2001, net cash used to reduce debt was $21.8 million. The
ratio of total debt to total capitalization was 29.9 percent at August 31, 2002
as compared to 35 percent at December 1, 2001 and 38.3 percent at September 1,
2001.
Euro Currency Conversion
- ------------------------
There were no significant developments in the first nine months of 2002 as the
Company changed its functional currency for its European adhesives operations to
the euro effective December 2, 2001.
Safe Harbor for Forward-Looking Statements
- ------------------------------------------
Certain statements in this document 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 3. 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, such as interest rates and foreign currency exchange rates.
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 would not be material.
16
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 net revenue is generated outside of the United States. The 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 risks from foreign currency exchange rate fluctuations
through normal operating and financing activities and, when deemed appropriate,
through the use of derivative instruments. The Company does not enter into any
speculative positions with regard to derivative instruments. See Note 6 to
consolidated financial statements.
Raw Materials: The principal raw materials used to manufacture 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. 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.
Item 4. Controls and Procedures
- -------------------------------
With the participation of management, the Company's chief executive officer and
chief financial officer evaluated the Company's disclosure controls and
procedures within 90 days of the filing date of this quarterly report. Based
upon this evaluation, the chief executive officer and chief financial officer
concluded that the Company's disclosure controls and procedures are effective in
ensuring that material information required to be disclosed is included in the
reports that it files with the Securities and Exchange Commission.
There were no significant changes in the Company's internal controls or, to the
knowledge of the management of the Company, in other factors that could
significantly affect these controls subsequent to the evaluation date.
17
PART II. OTHER INFORMATION
Item 6.
Exhibits and Reports on Form 8-K
- --------------------------------
(a) Exhibits
10.1 Third Declaration of Amendment to the Retirement Plan for
Directors of H.B. Fuller Company dated April 19, 2002
10.2 Letter Agreement with Raymond A. Tucker
12 Computation of Ratios
99.1 Form of 906 Certification - Albert P.L. Stroucken
99.2 Form of 906 Certification - Raymond A. Tucker
(b) Reports on Form 8-K.
Two Form 8-Ks were filed during the quarter ended August 31, 2002 to:
Report the financial results for the second quarter of 2002 on June 26,
2002. Comply with Regulation FD Disclosure, Statements Under Oath, on
August 9, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H.B. Fuller Company
Dated: October 15, 2002 /s/ Raymond A. Tucker
------------------------------------
Raymond A. Tucker
Senior Vice President and
Chief Financial Officer
18
Exhibit List
Exhibits
10.1 Third Declaration of Amendment to the Retirement Plan for Directors of
H.B. Fuller Company dated April 19, 2002
10.2 Letter Agreement with Raymond A. Tucker
12 Computation of Ratios
99.1 Form of 906 Certification - Albert P.L. Stroucken
99.2 Form of 906 Certification - Raymond A. Tucker
19
CERTIFICATIONS
I, Albert P.L. Stroucken, certify that:
1. I have reviewed this quarterly report on Form 10-Q of H.B. Fuller
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
Audit Committee of Registrant's Board of Directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: October 14, 2002
/s/ Albert P.L. Stroucken
- -----------------------------------------------
Albert P.L. Stroucken
Chairman, President and Chief Executive Officer
20
I, Raymond A. Tucker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of H.B. Fuller
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
Audit Committee of Registrant's Board of Directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: October 14, 2002
/s/ Raymond A. Tucker
- -------------------------------------------------
Raymond A. Tucker
Senior Vice President and Chief Financial Officer
21