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 QUARTER ENDED AUGUST 29, 1998
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. 0-3488
H.B. FULLER COMPANY
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0268370
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1200 WILLOW LAKE BOULEVARD, VADNAIS HEIGHTS, MINNESOTA 55110
(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 of 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 13,980,837 as of September 30, 1998.
-1-
H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
(In Thousands Except Per Share Amounts)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
----------------------- -----------------------
AUGUST 29, AUGUST 30, % AUGUST 29, AUGUST 30, %
1998 1997 CHANGE 1998 1997 CHANGE
---------- ---------- ------ ---------- ---------- ------
NET SALES $333,518 $323,460 3.1% $986,144 $956,423 3.1%
Cost of sales (230,423) (220,700) 4.4% (676,723) (653,462) 3.6%
---------- ---------- ---------- ----------
Gross profit 103,095 102,760 0.3% 309,421 302,961 2.1%
Selling, administrative and other expenses (81,211) (80,814) 0.5% (247,380) (243,419) 1.6%
Non-recurring items (24,003) - * (24,003) - *
---------- ---------- ---------- ----------
Operating earnings (2,119) 21,946 * 38,038 59,542 -36.1%
Interest expense (7,766) (4,856) 59.9% (19,548) (14,755) 32.5%
Other income (expense), net (739) 244 * (1,529) 585 *
---------- ---------- ---------- ----------
Earnings before income taxes and minority interests (10,624) 17,334 * 16,961 45,372 -62.6%
Income taxes (145) (7,072) -97.9% (11,400) (18,511) -38.4%
Net earnings of consolidated subsidiaries
applicable to minority interests 119 407 -70.8% 134 485 -72.4%
Earnings from equity investments 387 94 * 1,257 349 *
---------- ---------- ---------- ----------
Net earnings (10,263) 10,763 * 6,952 27,695 -74.9%
Dividends on preferred stock (4) (4) (12) (12)
---------- ---------- ---------- ----------
NET EARNINGS APPLICABLE TO COMMON STOCK ($10,267) $10,759 * $6,940 $27,683 -74.9%
========== ========== ========== ==========
Average number of common and common
equivalent shares outstanding:
Basic 13,749 13,798 -0.4% 13,710 13,900 -1.4%
========== ========== ========== ==========
Diluted 13,877 13,947 -0.5% 13,848 14,046 -1.4%
========== ========== ========== ==========
NET EARNINGS PER COMMON SHARE:
Basic ($0.75) $0.78 * $0.51 $1.99 -74.4%
========== ========== ========== ==========
Diluted ($0.74) $0.77 * $0.50 $1.97 -74.6%
========== ========== ========== ==========
Cash dividend per common share $0.200 $0.185 8.1% $0.585 $0.535 9.3%
========== ========== ========== ==========
* Change of 100% or more.
-2-
H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
AUGUST 29, NOVEMBER 29,
1998 1997
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,294 $ 2,710
Trade receivables 217,572 211,469
Allowance for doubtful accounts (4,869) (5,879)
Inventories 162,846 150,685
Other current assets 59,768 50,171
----------- -----------
TOTAL CURRENT ASSETS 439,611 409,156
Property, plant and equipment, net of
accumulated depreciation of $327,691
in 1998 and $299,356 in 1997 404,550 398,561
Deposits and miscellaneous assets 66,979 62,196
Other intangibles 34,392 13,830
Excess cost 68,614 33,903
----------- -----------
TOTAL ASSETS $ 1,014,146 $ 917,646
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 40,640 $ 39,675
Current installments of long-term debt 7,198 2,551
Accounts payable 107,637 121,883
Accrued expenses 76,277 68,952
Income taxes payable 5,448 4,488
----------- -----------
TOTAL CURRENT LIABILITIES 237,200 237,549
Long-term debt,
excluding current installments 324,463 229,996
Accrued pension cost 80,107 76,694
Deferred income taxes and other liabilities 20,026 18,477
Minority interest 15,727 15,816
STOCKHOLDERS' EQUITY:
Preferred stock 306 306
Common stock 13,980 13,841
Additional paid-in capital 31,085 25,035
Retained earnings 303,780 304,974
Foreign currency translation adjustment (4,045) 341
Unearned compensation (8,483) (5,383)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 336,623 339,114
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,014,146 $ 917,646
=========== ===========
See accompanying Notes to Consolidated Condensed Financial Statements.
-3-
H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands)
THIRTY-NINE WEEKS ENDED
-----------------------
AUGUST 29, AUGUST 30,
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 6,952 $ 27,695
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 35,246 34,112
Pension costs 4,434 7,994
Deferred income tax 3,714 (9,373)
Non-recurring expenses 17,833 --
Other items (658) (1,824)
Change in current assets and liabilities:
Accounts receivable (360) (7,397)
Inventory (9,775) (8,129)
Prepaid assets (4,684) (6,680)
Accounts payable (19,659) (29)
Accrued expense (227) 7,319
Income taxes payable (2,550) (505)
--------- ---------
NET CASH (USED)PROVIDED BY OPERATING ACTIVITIES 30,266 43,183
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchased property, plant and equipment (41,633) (41,292)
Purchased business, net of cash acquired (87,701) (7,618)
Proceeds from sale of assets 9,019 6,411
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (120,315) (42,499)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in long-term debt 208,309 40,748
Current installments and payments of long-term debt (108,704) (8,746)
Notes payable 4,038 7,811
Dividends paid (8,146) (7,504)
Repurchase common stock -- (15,524)
Other (3,453) (16,424)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 92,044 361
Effect of exchange rate changes on cash (411) (277)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,584 768
Cash and cash equivalents at beginning of year 2,710 3,515
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,294 $ 4,283
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense (net of amount capitalized) $21,007 $17,708
Income taxes $11,458 $21,127
For purposes of this statement, the Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
-4-
H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts in Thousands)
(Unaudited)
1. In the opinion of the Company, the accompanying unaudited Consolidated
Condensed Financial Statements include all adjustments necessary to
present fairly the financial position as of August 29, 1998 and
November 29, 1997, the results of its operations for the thirty-nine
weeks ended August 29, 1998 and August 30, 1997 and its cash flows for
the thirty-nine weeks ended August 29, 1998 and August 30, 1997.
2. The results of operations for the thirteen week period ended August
29, 1998 are not necessarily indicative of the results to be expected
for the full year.
3. The composition of inventories is presented below:
AUGUST 29, 1998 NOVEMBER 29, 1997
--------------- -----------------
Raw materials $ 71,854 $ 71,234
Finished goods 102,243 90,634
LIFO reserve (11,251) (11,183)
--------- ---------
$ 162,846 $ 150,685
========= =========
4. In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128
is effective for financial statements for periods ending after
December 15, 1997. Under SFAS No. 128, the previous presentation of
earnings per share is replaced with dual presentation of basic
earnings per share and diluted earnings per share. Basic earnings per
share includes no dilution and is computed by dividing net earnings
available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of stock options and restricted stock
grants that could share in the earnings. The Company adopted SFAS No.
128 for the quarter ended February 28, 1998 and has restated last year
net earnings per share data presented to conform to the provisions of
this statement. The difference between basic and diluted earnings per
share data as presented is due to the dilutive impact of stock options
and restricted stock grants whose exercise price or grant price was
below the average common stock price for the respective period
presented.
5. The Company enters into foreign exchange forward contracts as a hedge
against firm commitment foreign currency intercompany accounts
receivable/payable/debt. Market value gains and losses are recognized,
and the resulting credit or debit offsets foreign exchange gains or
losses on those receivables/payables/debt. At August 29, 1998, the
aggregate contract value of instruments used to sell 5,358 pound
sterling, 4,766 deutsche marks, 4,422 French francs, and $4,362 to buy
foreign currency (primarily 28,210 Dutch guilders and 2,379 deutsche
marks) was $15,587. The contracts mature between September 15, 1998
and November 20, 2000.
-5-
6. The carrying amounts and estimated fair values of the Company's
significant other financial instruments at August 29, 1998, are as
follows:
CARRYING FAIR
AMOUNT VALUE
------ -----
Cash and short-term investments $ 4,294 $ 4,294
Notes payable 40,640 40,640
Long-term debt 331,661 340,883
Fair values of short-term financial instruments approximate their
carrying values due to their short maturity.
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.
7. During the first and second quarters, the Company acquired two
adhesive companies in the United Kingdom for $87,701 in cash. Assets
acquired include other intangibles of $21,207 and excess of cost over
net assets acquired of $37,490. The acquisitions were accounted for as
purchases and the accompanying Consolidated Financial Statements
include the results of these businesses since the purchase date. The
historical results of operations on a pro forma basis are not
presented as the effects of the acquisitions were not material.
8. On June 2, 1998 the Company completed agreements for the private
placement of senior notes which will partially replace existing
borrowing under the revolving lines of credit. A group of investors,
primarily insurance companies, provided borrowings of $125,000 in
eight to twelve-year senior notes due June 2, 2010 at 6.60% with
interest payable semi-annually. The senior notes contain covenants
which are generally no more restrictive than current debt agreements.
9. The earnings in 1998 were impacted by a $24,003 ($18,689 after tax or
$1.36 basic earnings per share) non-recurring charge.
In the quarter, the Company's Board approved and the Company announced
a restructuring plan that will streamline the organizational structure
worldwide. Over the next six quarters, twelve adhesive manufacturing
facilities will be closed, primarily in Europe, Latin America and
Asia/Pacific, sales offices and warehouses will be consolidated and
layers of management reduced. This plan anticipates a non-recurring
charge of $40 to $45 million (before tax) over the next six quarters,
reduction of employee census by approximately 600 and reduction of
costs in excess of $30 million (before tax) annually, when completed.
Cash requirements of this plan are estimated to be $29 to $30 million
and will primarily be expended in fiscal 1999. The Company has
adequate lines of credit to fund these payments.
During the third quarter of 1998, the Company took non-recurring
charges of $14,245 related to the restructuring plan and a $9,758
charge related to the write-down of previously capitalized computer
software due to the reassessment of system benefits as a result of the
restructuring. The restructuring charges for the quarter were $6,516
for severance (243 employees, $187 cash and $6,329 accrued), $6,281
write-down of assets due to the restructuring plan, $850 accrued for
contract and lease charges impacted by the restructuring and $598 cash
in other restructuring expense.
-6-
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
(Dollars in Thousands)
The following discussion includes comments and data related to the Company's
financial conditions and results of operations during the periods included in
the accompanying Consolidated Condensed Financial Statements.
Results of Operations
- ---------------------
Net sales for the third quarter of 1998 increased $10,058 or 3.1 percent, when
compared to the same quarter in 1997. The sales increase was the result of 1.1
percentage points from increased volume and product mix, a net increase of 4.3
percentage points from acquisitions and divestitures, a negative 0.6 percentage
points from reduced pricing and a negative 1.7 percentage points due to the
strengthening of the U.S. dollar.
A comparison of sales increases by operating area is as follows:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
August 29, 1998 August 29, 1998
August 30, 1997 August 30, 1997
--------------- ---------------
Operating Area
North America ($3,476) (2%) $10,534 2%
Latin America 1,227 3% 4,889 3%
Europe 16,634 29% 21,732 12%
Asia/Pacific (4,327) (18%) (7,434) (11%)
------- -------
Total $10,058 3% $29,721 3%
======= =======
Net earnings for the quarter decreased from $10,763 in 1997 to a loss of $10,263
in 1998. The earnings in 1998 were impacted by a $24,003 ($18,689 after tax)
non-recurring charge.
In the quarter, the Company's Board approved and the Company announced a
restructuring plan that will streamline the organizational structure worldwide.
Over the next six quarters, twelve adhesive manufacturing facilities will be
closed, primarily in Europe, Latin America and Asia/Pacific, sales offices and
warehouses will be consolidated and layers of management reduced. This plan
anticipates a non-recurring charge of $40 to $45 million (before tax) over the
next six quarters, reduction of employee census by approximately 600 and
reduction of costs in excess of $30 million (before tax) annually, when
completed. Cash requirements of this plan are estimated to be $29 to $30 million
and will primarily be expended in fiscal 1999. The Company has adequate lines of
credit to fund these payments.
During the third quarter of 1998, the Company took non-recurring charges of
$14,245 related to the restructuring plan and a $9,758 charge related to the
write-down of previously capitalized computer software due to the reassessment
of system benefits as a result of the restructuring. The restructuring charges
for the quarter were $6,516 for severance (243 employees, $187 cash and $6,329
accrued), $6,281 write-down of assets due to the restructuring plan, $850
accrued for contract and lease charges impacted by the restructuring and $598
cash in other restructuring expense.
-7-
In North America, the 2 percent third quarter sales decrease was composed of one
percentage point related to decreased volume and changes in product mix and a
negative one percentage point impact from pricing and currency. The Adhesives,
Sealants and Coatings Group had a 2 percent decrease in sales compared to third
quarter 1997 primarily due to a reduction in paper converting sales. The EFTEC
(Automotive) Group had a 12 percent decrease in sales compared to the prior year
with the General Motors strike having a negative 18 percentage point impact. In
the Specialty Group, sales increased 2 percent. In the quarter, strong increases
in TEC Specialty Products, Inc. sales were offset by reduced Linear Products
Corporation sales. North American operating earnings decreased from $17,702 to
$15,312. The primary reasons for this decrease were the impact of the General
Motors strike and the impact of reduced paper converting sales.
For nine months of 1998, North American sales increased 2 percent over the same
period in 1997. The increase was composed of 2 percentage points resulting from
increased volume and changes in product mix, one percentage point resulting from
added sales from a second quarter 1997 joint venture, and a negative one
percentage point from negative pricing and the impact of currency. The
Adhesives, Sealants and Coatings Group had a one percent decrease in 1998 sales,
primarily due to the reduction in paper converting sales. The EFTEC (Automotive)
Group had an 8 percent increase in sales, with a 7 percentage point increase
resulting from adding the sales of our joint venture partner (second quarter
1997 joint venture). The third quarter 1998 General Motors strike had a negative
6 percentage point impact on 1998 sales. The Specialty Group had a 7 percent
increase in sales with the primary growth occurring in TEC Specialty Products,
Inc. and the Foster Products Corporation. North American operating earnings
increased from $42,088 in 1997 to $43,007 for nine months of 1998.
Latin American third quarter 1998 sales increased 3 percent from 1997. The
increase in sales was composed of 4 percentage points relating to increased
volume and changes in product mix partially offset by one percentage point
decrease in pricing. Latin American operating earnings decreased 20 percent when
compared to 1997, decreasing from $2,716 to $2,183. Low volumes and economic
pressures within the region were the primary reason for the reduction in
operating income.
In Europe, the 29 percent third quarter 1998 sales increase was composed of 4
percentage points due to increased volume and changes in product mix, 27
percentage points related to two 1998 UK acquisitions and a negative 2
percentage points from pricing and a strengthening of the U.S. dollar. Operating
earnings increased from $1,633 in third quarter 1997 to $4,774 in 1998 with
operating income from the UK acquisitions being the primary reason for the
increase.
Asia/Pacific sales decreased 18 percent from sales in the third quarter of 1997.
The strengthening of the U.S. dollar, compared to local currencies, caused an 18
percentage point decrease. A positive 8 percentage point increase due to
increased volume and changes in product mix was offset by a negative 8
percentage points resulting from a divestiture in New Zealand. Operating
earnings decreased from ($105) in 1997 to ($385) in 1998 with all of the change
resulting from the New Zealand divestiture.
For nine months of 1998, Latin American sales increased 3% over the same period
in 1997 with 5 percentage points accounted for by increased volume and changes
in product mix, and a negative 2 percentage points resulting from decreased
pricing. Operating earnings decreased from $10,696 in 1997 to $9,681 in 1998.
European sales increased 12 percent from nine month sales in 1997. The net
impact of acquisitions and divestitures was a positive 14 percentage points,
increased volume and changes in product mix 5 percentage points, negative
pricing 2 percentage points and a strengthening of the U.S. dollar a negative 5
percentage points. Operating earnings increased from $6,981 in 1997 to $10,484
in 1998. Nine month Asia/Pacific sales decreased 11 percent with a 16 percentage
point decrease resulting from a strengthened U.S. dollar. A 7 percentage point
increase resulting from volume and changes in product mix was partially offset
by a 2 percentage point decrease resulting from the net impact of an acquisition
and divestiture. Nine month operating earnings decreased from ($223) in 1997 to
($1,131) in 1998.
-8-
Cost of sales for the third quarter increased 4.4 percent ($9,723) over the same
quarter in 1997. Consolidated gross margins, as a percent of sales, decreased
from 31.8% in 1997 to 30.9% in 1998. The decreased margin, as a percent of
sales, in 1998 was primarily the result of low sales volumes and the impact of
the General Motors strike.
Year-to-date cost of sales was up 3.6 percent ($23,261) when compared to the
same period in 1997. Consolidated gross margins, as a percent of sales,
decreased from 31.7% in 1997 to 31.4% in 1998. The decreased margin in 1998 was
primarily the result of low sales volumes and the impact of the General Motors
strike.
Selling, administrative, and other expenses for the quarter, excluding
non-recurring items, were up 0.5 percent ($397) when compared to prior year.
This category of expense, as a percent of sales, decreased from 25.0 percent in
1997 to 24.3 percent in 1998. A previously described 1998 non-recurring charge
of $24,003 was 7.2 percent of sales.
Selling, administrative, and other expenses for nine months of 1998, excluding
non-recurring items, increased 1.6 percent ($3,961) when compared to prior year.
This category of expense, as a percent of sales, decreased from 25.5% in 1997 to
25.1% in 1998. A previously described 1998 non-recurring charge of $24,003 was
2.4% of sales.
Year-to-date other (expense)/income, net decreased from an income of $585 in
1997 to expense of $1,529 in 1998. The income in 1997 was primarily the result
of gains from the sale of the construction business in Germany and the
Automotive joint venture in North America. These gains were partially offset by
expenses incurred in the pursuit of a major acquisition opportunity which was
not successful, currency losses in Asia/Pacific and outside consulting expense.
Other expense in 1998 was generated by the sale of properties in New Zealand,
Honduras and Munich and reduced currency losses, primarily Asia/Pacific, which
was more than offset by costs associated with the change in CEO, write-down of
impaired assets, added goodwill expense and reduced investment income.
Income taxes for the first nine months of 1998 decreased $7,111 (38.4%) when
compared to the first nine months of 1997, primarily as a result of decreased
earnings. The tax rate for the first nine months 1998 excluding the impact of
the non-recurring charge reflects a 40.8% annual effective tax rate equal to
1997. The tax benefit on the non-recurring charge was only $5,314, raising the
year-to-date effective tax rate including the charge to 67.2%.
Net earnings decreased from $27,695 in the first nine months of 1997 to $6,952
in the first nine months of 1998. The impact on net earnings of the
non-recurring charge was $18,689.
Liquidity and Capital Resources
- -------------------------------
The cash flows as presented in this section have been calculated by comparison
of the Consolidated Condensed Balance Sheets at August 29, 1998 and November 29,
1997 and August 30, 1997 and November 30, 1996.
During the first nine months of 1998, the Company generated $30,266 of cash to
finance operations as compared to $43,183 in the first nine months of 1997. The
decreased generation of cash was primarily the result of $21,834 increase in
cash required to fund working capital in the first nine months of 1998 compared
to the same period in 1997.
-9-
Working capital was $202,411 at August 29, 1998 compared to $171,607 at November
29, 1997. The current ratio at August 29, 1998 was 1.9 compared to a ratio of
1.7 at November 29, 1997. The number of days sales in trade accounts receivable
was 57 days at August 29, 1998 compared to 53 days sales at August 30, 1997. The
average days sales in inventory on hand was 63 days compared to 63 days at
August 30, 1997. Trade accounts payable decreased from 46 days at year-end 1997
to 42 days at August 29, 1998.
The Company's long-term debt to total capitalization ratio was 49.1% at August
29, 1998 compared to 40.4% at November 29, 1997. The primary reason for the
increase in this ratio is increased debt required to purchase businesses,
$87,701 in 1998.
Capital expenditures for property, plant and equipment of $41,633 in the first
nine months of 1998 were primarily for the completion of construction of a
manufacturing facility in Georgia, the investment in Information Technology, for
general improvements in manufacturing productivity and operating efficiency and
for environmental projects. Environmental capital expenditures, less than 10% of
total expenditures, are not a material portion of overall Company expenditures.
Impact of the Year 2000 Issue
- -----------------------------
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. As a result of this
issue, computer programs that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. The Year 2000 issue could
result in system failures or miscalculations causing disruption of operations,
including, among other things, a temporary inability to process transactions
involving the recording of sales, manufacture of products, management of
inventory and distribution, preparation of invoices and collection of accounts
receivable.
The Company's Year 2000 Project Office (consisting of information technology
("IT") personnel) has established a three-phase program to address the Year 2000
issue. The three phases consist of (a) an assessment phase, (b) an analysis and
resolution strategy phase and (c) a remediation and testing phase. The
compliance program focuses on the Company's IT as well as non-IT systems (which
systems contain embedded technology in manufacturing or process control
equipment containing microprocessors or other similar circuitry).
The assessment phase, during which the Year 2000 Project Office attempted to
identify all hardware and software that affect the Company's operations, has
been completed with respect to most of the Company's operations. Based on the
results of the assessment phase, the Company has determined that its primary
hardware and operating system software used in North American operations is Year
2000 compliant. In addition, the Company's internal laboratory and regulatory
systems, as well as the Company's financial and enterprise resource planning
systems for most division locations in North America, England, Australia,
Brazil, Argentina, and Chile are compliant. The Company's Year 2000 Project
Office has determined that the Company will need to update or replace certain
other hardware and software so that its computer systems will properly utilize
dates after December 31, 1999.
The Company is currently in the remediation and testing phase of the program for
most of its North American operations. Outside the United States, the Company is
addressing compliance issues on a region-by-region basis; and the Company is in
the analysis and resolution strategy phase in certain locations and in the
remediation and testing phase in other locations. The Company has a timeline for
completing all internal Year 2000 remediation projects. The Company currently
anticipates these projects will be completed prior to June 30, 1999.
-10-
The Company has also begun assessing Year 2000 compliance issues relating to
companies with which it has third-party outsourcing relationships in North
America, such as a financial institution administering employee benefit plans,
telecommunications providers and health care providers. The Company has
requested assurances from its significant suppliers that they are addressing the
Year 2000 issue and that products purchased by the Company from such suppliers
will function properly in the Year 2000. The Company will continue to assess
supplier compliance issues. In addition, the Company is communicating with its
major customers regarding the Company's Year 2000 compliance efforts. However,
it is impossible to fully assess the potential consequences in the event service
interruptions from suppliers occur or in the event that there are disruptions in
such infrastructure areas as utilities, communications, transportation, banking
and government.
During October 1998, the Company intends to form a Year 2000 Task Force
(consisting of representatives from its financial, IT, legal and risk management
departments and from its key business units) to address internal and external
Year 2000 issues.
The Company expects to incur Year 2000 compliance costs of approximately
$2.0 million over a two-year period ending late 1998. The current total
estimated cost to complete Year 2000 compliance efforts over the next year is
$1.2 to $1.5 million (will be $2.0 million). Estimates of Year 2000 costs are
based on numerous assumptions, and there can be no assurance that the estimates
are correct or that the actual costs will not be materially greater than
anticipated.
Based on its assessments and current knowledge, the Company believes it will
not, as a result of the Year 2000 issue, experience any material disruptions in
internal manufacturing processes, information processing or interfaces with
major customers, or with processing orders and billing. However, if certain
critical third-party providers, such as providers of electricity, water or
telephone service, experience difficulties resulting in disruption of service to
the Company, a shutdown of the Company's operations at individual facilities
could occur for the duration of the disruption. The Company's Year 2000 Task
Force will establish a contingency plan to provide for continuity of processing
if the Company's Year 2000 compliance efforts fail. Assuming no major disruption
in service from utility companies or other critical third-party providers, the
Company believes that it will be able to manage its total Year 2000 transition
without any material effect on the Company's results of operations or financial
condition.
Safe Harbor Statement under the Private Securities Litigation Act of 1995
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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: The Asian economic crisis and other political 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 receivables collection; the Company's relationships
with it major customers and suppliers; changes in tax laws and tariffs; patent
rights that could provide significant advantage to a competitor; foreign
exchange rate fluctuations (particularly with respect to the German mark and the
Japanese yen); the regulatory and trade environment; the year 2000 computer
issue; 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.
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PART II. OTHER INFORMATION
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits to Part I
27(a) Financial Data Schedule
27(b) Restated Financial Data Schedule for August 30, 1997
Exhibits to Part II
4(a) Agreement dated as of June 2, 1998 between H.B. Fuller Company
and a group of investors, primarily insurance companies,
including the form of Notes.
10(a) Directors' Stock Plan as Amended and Restated July 16, 1998.
10(b) Separation Agreement dated August 28, 1998 between H.B. Fuller
Company and Jerald L. Scott.
10(c) Separation Agreement dated August 28, 1998 between H.B. Fuller
Company and Rolf Schubert.
(b) Reports on Form 8-K. No reports on Form 8-K were filed for the thirteen
weeks ended August 29, 1998.
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 12, 1998 /S/ Jorge Walter Bolanos
------------------------
Jorge Walter Bolanos
Senior Vice President,
Treasurer and
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT NUMBER
4(a) Agreement dated as of June 2, 1998 between H.B. Fuller Company and
a group of investors, primarily insurance companies, including
the form of Notes.
10(a) Directors' Stock Plan as Amended and Restated July 16, 1998.
10(b) Separation Agreement dated August 28, 1998 between H.B. Fuller
Company and Jerald L. Scott.
10(c) Separation Agreement dated August 28, 1998 between H.B. Fuller
Company and Rolf Schubert.
27(a) Financial Data Schedule
27(b) Restated Financial Data Schedule for August 30, 1997