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 28, 1999
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
incorporation or organization) Identification No.)
1200 Willow Lake Boulevard, St. Paul, Minnesota 55110-5101
(Address of principal executive officers) (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 14,036,986 as of September 30, 1999.
-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 28, August 29, August 28, August 29,
1999 1998 1999 1998
---------- ---------- ----------- ----------
Net sales $ 331,916 $ 333,518 $1,007,325 $ 986,144
Cost of sales (223,205) (230,424) (681,550) (676,722)
--------- --------- ---------- ---------
Gross profit 108,711 103,094 325,775 309,422
Selling, administrative and other expenses (78,437) (81,211) (242,193) (247,381)
Nonrecurring items (2,995) (24,003) (11,165) (24,003)
--------- --------- ---------- ---------
Operating earnings 27,279 (2,120) 72,417 38,038
Interest expense (6,541) (7,766) (19,995) (19,548)
Other income (expense), net (158) (739) (2,388) (1,529)
--------- --------- ---------- ---------
Earnings before income taxes and minority interests 20,580 (10,625) 50,034 16,961
Income taxes (8,773) (145) (21,594) (11,399)
Net earnings (losses) of consolidated subsidiaries
applicable to minority interests (51) 119 (396) 133
Earnings from equity investments 312 387 1,649 1,257
--------- --------- ---------- ---------
Net earnings 12,068 (10,264) 29,693 6,952
Dividends on preferred stock (4) (4) (12) (12)
--------- --------- ---------- ---------
Net earnings applicable to common stock $ 12,064 ($10,268) $ 29,681 $ 6,940
========= ========= ========== =========
Weighted average common shares outstanding:
Basic 13,822 13,749 13,797 13,710
========= ========= ========== =========
Diluted 14,015 13,749 13,945 13,848
========= ========= ========== =========
Net earnings (loss) per common share:
Basic $ 0.87 ($0.75) $ 2.15 $ 0.51
========= ========= ========== =========
Diluted $ 0.86 ($0.75) $ 2.13 $ 0.50
========= ========= ========== =========
Cash dividend per common share $ 0.205 $ 0.200 $ 0.610 $ 0.585
========= ========= ========== =========
-2-
H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In thousands)
(Unaudited)
August 28, November 28,
1999 1998
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,560 $ 4,605
Trade receivables 235,618 247,952
Allowance for doubtful accounts (4,781) (5,073)
Inventories 152,518 158,606
Other current assets 52,662 51,810
----------- -----------
Total current assets 441,577 457,900
Property, plant and equipment, net of
accumulated depreciation of $353,213
in 1999 and $343,514 in 1998 415,395 414,467
Deposits and miscellaneous assets 77,286 70,673
Other intangibles 31,623 34,717
Excess cost 66,157 68,412
----------- -----------
Total assets $ 1,032,038 $ 1,046,169
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 54,234 $ 59,282
Current installments of long-term debt 8,218 4,428
Accounts payable 118,185 129,694
Accrued expenses 74,006 71,725
Accrued nonrecurring charges 5,673 13,215
Income taxes payable 5,554 6,816
----------- -----------
Total current liabilities 265,870 285,160
Long-term debt,
excluding current installments 281,485 300,074
Accrued pension cost 81,143 83,500
Deferred income taxes and other liabilities 21,621 19,833
Minority interest 16,884 16,198
Stockholders' equity:
Preferred stock 306 306
Common stock 14,037 13,983
Additional paid-in capital 33,136 31,140
Retained earnings 330,243 309,275
Accumulated other comprehensive income (6,170) (5,306)
Unearned compensation (6,517) (7,994)
----------- -----------
Total stockholders' equity 365,035 341,404
=========== ===========
Total liabilities and stockholders' equity $ 1,032,038 $ 1,046,169
=========== ===========
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 28, August 29,
1999 1998
---------- ----------
Cash flows from operating activities:
Net earnings $ 29,693 $ 6,952
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 37,769 35,246
Pension costs 5,015 4,434
Deferred income tax (331) 3,714
Nonrecurring expenses (1,054) 17,833
Gain on sale of businesses in the restructuring plan (2,449) --
Other items (6,362) (658)
Change in current assets and liabilities:
Accounts receivable 2,078 (360)
Inventory 5,246 (9,775)
Prepaid assets (1,490) (4,684)
Accounts payable (7,742) (19,659)
Accrued expense 11,039 (7,406)
Accrued nonrecurring charges (7,542) 7,179
Income taxes payable 8,895 (2,550)
-------- ---------
Net cash provided by operating activities 72,765 30,266
Cash flows from investing activities:
Purchased property, plant and equipment (43,157) (41,633)
Purchased business, net of cash acquired (4,483) (87,701)
Proceeds from sale of assets -- 9,019
-------- ---------
Net cash used in investing activities (47,640) (120,315)
Cash flows from financing activities:
Increase in long-term debt 51,651 208,309
Current installments and payments of long-term debt (60,703) (108,704)
Notes payable (9,251) 4,038
Dividends paid (8,559) (8,146)
Other 2,669 (3,453)
-------- ---------
Net cash (used)provided by financing activities (24,193) 92,044
Effect of exchange rate changes on cash 23 (411)
-------- ---------
Net change in cash and cash equivalents 955 1,584
Cash and cash equivalents at beginning of year 4,605 2,710
-------- ---------
Cash and cash equivalents at end of period $ 5,560 $ 4,294
======== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense (net of amount capitalized) $ 25,353 $ 21,007
Income taxes $ 7,623 $ 11,458
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. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with 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 generally accepted
accounting principles. In the opinion of management, the consolidated
financial statements reflect all adjustments considered necessary for a
fair presentation of the Company's 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 generally accepted
accounting principles 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. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended November 28, 1998.
2. The composition of inventories is presented below:
August 28, 1999 November 28, 1998
--------------- -----------------
Raw materials $ 64,584 $ 73,126
Finished goods 97,902 95,862
LIFO reserve (9,968) (10,382)
-------- --------
$152,518 $158,606
======== ========
3. The difference between basic and diluted earnings per share data 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-
4. As required, the company adopted Financial Accounting Standard No. 130
"Reporting Comprehensive Income" during the first quarter. Other
comprehensive income:
Quarter YTD
--------- --------
Beginning balance $(11,195) $(5,306)
Foreign currency translation adjustment 4,913 (976)
Translation loss taken through earnings 112 112
-------- -------
Ending balance $ (6,170) $(6,170)
======== =======
5. During the first nine months of 1999, the company recorded the following
amounts in the income statement in connection with the restructuring plan
implemented in 1998 and discussed in the 1998 Form 10-K. The total amount
of the charge is now estimated to be from $39,000 to $43,000 (before tax)
with approximately $12,000 to $16,000 to be incurred in 1999.
North Latin Asia/
America Europe America Pacific Total
------- ------ ------- ------- -----
Severance (net of
pension curtailment) $1,741 $5,791 $ 426 $ 166 $ 8,124
Impairment of property,
plant and equipment -- 780 13 7 800
Contracts/leases -- 143 205 84 432
Consulting 183 381 199 3 766
Other 1,358 1,143 901 90 3,492
------ ------ ------ -------- -------
Subtotal 3,282 8,238 1,744 350 13,614
Less: Gain on the sale
of property and plant -- -- -- (2,449) (2,449)
------ ------ ------ -------- -------
Total $3,282 $8,238 $1,744 ($ 2,099) $11,165
====== ====== ====== ======== =======
Included in the $13,614 restructuring charge for the first nine months are
$14,668 of cash costs, $800 non-cash related costs and a $1,854 pension
curtailment benefit.
North America charges related to a manufacturing plant closing in the first
quarter, manufacturing and sales offices to be closed in the fourth quarter
and reduced layers of management. Latin America charges relate to two
manufacturing plants closed in the first quarter, two manufacturing plants
closed in the second quarter and one plant to be closed in the balance of
1999. The European charges related to plant closures in three countries (in
the second quarter of 1999), severance cost associated with the reduction
in layers in management and relocation of the area office. In Asia/Pacific,
the costs related to a manufacturing plant closure, sales offices and
warehouses closings, the area office relocation and reduced layers of
management. The costs in Asia/Pacific were more than offset by a gain on
the sale of the closed manufacturing plant.
There was a reduction in census of 535 employees in the first nine months
of 1999 as a result of the restructuring plan. An additional 46 employees
have been notified of severance over the balance of 1999 with severance
costs accrued.
The following table is a detailed reconciliation of the restructuring
reserve balance from November 28, 1998 to August 28, 1999. The
reconciliation reflects the accruals recorded and payments applied during
the first nine months.
-6-
Nonrecurring charge reserve:
North Latin Asia/
America Europe America Pacific Total
------- ------ ------- ------- -----
Balance: November 28, 1998 $ 1,992 $ 7,994 $ 3,141 $ 88 $ 13,215
Accruals in first nine months, 1999:
Severance 2,790 6,596 426 166 9,978
Contracts/leases -- 143 205 84 432
Consulting 183 381 199 -- 763
Other 1,358 851 914 100 3,223
Payments in first nine months, 1999:
Severance (2,970) (11,067) (3,168) (240) (17,445)
Contracts/leases -- (211) (39) (84) (334)
Consulting (183) (381) (151) -- (715)
Other (1,049) (880) (1,415) (100) (3,444)
------- -------- ------- ----- --------
Balance: August 28, 1999 $ 2,121 $ 3,426 $ 112 $ 14 $ 5,673
======= ======== ======= ===== ========
Item 2.
Management's Discussion and Analysis Of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
(Dollars in Thousands)
The following discussion includes comments and data relating to the
company's financial condition 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 1999 decreased $1,602 or 0.5 percent
from the third quarter of 1998. The 0.5 percent decrease contained the
following components: 1.2 percent increase in volume, 1.1 percent decrease
in pricing and changes in product mix, 0.4 percent net decrease from
acquisitions/divestitures and 0.2 percent decrease from the stronger U.S.
dollar. Through nine months of 1999, net sales increased $21,181 or 2.1
percent over the same period of 1998. Volume accounted for an increase of
1.9 percent, pricing and mix combined were a negative 0.7 percent,
acquisitions/divestitures had a positive 0.8 percent impact and
fluctuations in foreign currency against the U.S. dollar accounted for a
positive 0.1%.
Following is a comparison of sales variances by operating area:
13 Weeks Ended 39 Weeks Ended
Operating Area 8/28/99 vs 8/29/98 8/28/99 vs 8/29/98
-------------- ------------------ ------------------
North America $ 3,481 1.8% $10,409 1.8%
Latin America (3,855) (8.2%) (5,270) (3.6%)
Europe (4,757) (6.6%) 6,760 3.3%
Asia/Pacific 3,529 18.1% 9,282 15.0%
------ -------
Total ($1,602) (0.5%) $21,181 2.1%
======= =======
Net earnings in the third quarter were $12,068. This compares to a third
quarter, 1998 net loss of $10,264. The 1999 earnings include nonrecurring
charges of $2,995 ($2,339 after tax). The 1998 earnings include
nonrecurring charges of $24,003 ($18,689 after tax).
-7-
Net earnings through nine months of 1999 were $29,693 compared to $6,952
for the first nine months of 1998. The year-to-date impact of the
nonrecurring charges was $11,165 ($8,279 after tax) in 1999 and $24,003
($18,689 after tax) in 1998.
During the first nine months of 1999, the company recorded the following
amounts in the income statement in connection with the restructuring plan
implemented in 1998 and discussed in the 1998 Form 10-K. The total amount
of the charge is now estimated to be from $39,000 to $43,000 (before tax)
with approximately $12,000 to $16,000 to be incurred in 1999.
North Latin Asia/
America Europe America Pacific Total
------- ------ ------- ------- -----
Severance (net of
pension curtailment) $1,741 $5,791 $ 426 $ 166 $ 8,124
Impairment of property,
plant and equipment -- 780 13 7 800
Contracts/leases -- 143 205 84 432
Consulting 183 381 199 3 766
Other 1,358 1,143 901 90 3,492
------ ------ ------ ------- -------
Subtotal 3,282 8,238 1,744 350 13,614
Less: Gain on the sale
of property and plant -- -- -- (2,449) (2,449)
------ ------ ------ ------- -------
Total $3,282 $8,238 $1,744 ($2,099) $11,165
====== ====== ====== ======= =======
Included in the $13,614 restructuring charge for the first nine months are
$14,668 of cash costs, $800 non-cash related costs and a $1,854 pension
curtailment benefit.
North America charges related to a manufacturing plant closing in the first
quarter, manufacturing and sales offices to be closed in the fourth quarter
and reduced layers of management. Latin America charges relate to two
manufacturing plants closed in the first quarter, two manufacturing plants
closed in the second quarter and one plant to be closed in the balance of
1999. The European charges related to plant closures in three countries (in
the second quarter of 1999), severance cost associated with the reduction
in layers in management and relocation of the area office. In Asia/Pacific,
the costs related to a manufacturing plant closure, sales offices and
warehouses closings, the area office relocation and reduced layers of
management. The costs in Asia/Pacific were more than offset by a gain on
the sale of the closed manufacturing plant.
There was a reduction in census of 535 employees in the first nine months
of 1999 as a result of the restructuring plan. An additional 46 employees
have been notified of severance over the balance of 1999 with severance
costs accrued.
The following table is a detailed reconciliation of the restructuring
reserve balance from November 28, 1998 to August 28, 1999. The
reconciliation reflects the accruals recorded and payments applied during
the first nine months.
-8-
Nonrecurring charge reserve:
North Latin Asia/
America Europe America Pacific Total
------- ------ ------- ------- -----
Balance: November 28, 1998 $ 1,992 $ 7,994 $ 3,141 $ 88 $ 13,215
Accruals in first nine months, 1999:
Severance 2,790 6,596 426 166 9,978
Contracts/leases -- 143 205 84 432
Consulting 183 381 199 -- 763
Other 1,358 851 914 100 3,223
Payments in first nine months, 1999:
Severance (2,970) (11,067) (3,168) (240) (17,445)
Contracts/leases -- (211) (39) (84) (334)
Consulting (183) (381) (151) -- (715)
Other (1,049) (880) (1,415) (100) (3,444)
------- -------- ------- ----- --------
Balance: August 28, 1999 $ 2,121 $ 3,426 $ 112 $ 14 $ 5,673
======= ======== ======= ===== ========
The North American net sales increase of 1.8 percent consisted of an
increase in volume of 3.8 percent, a decrease in pricing and mix of 1.7
percent and a 0.3 percent decrease due to the divestiture of the hot melt
stick and gun business in the fourth quarter of 1998. The Adhesives,
Sealants and Coatings Group had a sales decrease of 1.9 percent in the
third quarter. Volume increased 1.1 percent while pricing and changes in
product mix decreased 2.6 percent. The sale of the gun and stick business
had a negative 0.4 percent impact. In the Specialty Group, third quarter
sales increased 6.1 percent over last year. Strong growth from TEC
Specialty Products, Inc. was the primary driver. Foster Products
Corporation and Linear Products, Inc. both experienced moderate growth
while the Global Coatings Division experienced a slight decline in sales
from the third quarter, 1998. The Automotive Group experienced a sales
increase of 14.1 percent in the third quarter. Last year's sales were
depressed due to strikes in the Auto industry.
Through nine months, the North American increase in net sales was 1.8
percent. Volume was up 2.8 percent, while pricing and mix were down 0.5
percent. The sale of the stick and gun business had a 0.3 percent negative
impact on the nine month sales and currency fluctuations (primarily the
Canadian dollar), had a negative 0.2 percent impact. Sales in the
Adhesives, Sealants and Coatings Group approximated last year's sales as
volume increases of 1.4 percent were offset by decreases in pricing and
mix, currency and the business divestiture. The Specialty Group sales
through nine months increased 4.8 percent over last year, driven primarily
by the growth in TEC Specialty Products, Inc. The Automotive Group
experienced a sales increase of 4.2 percent for the first nine months.
Third quarter, 1999 operating earnings, before nonrecurring charges, in
North America were $20,334. This represents an increase of 50.3 percent
over third quarter, 1998. Favorable raw material costs, tight operating
expense control and savings from the restructuring plan all contributed to
the strong third quarter earnings. Through nine months, North American
operating earnings prior to nonrecurring charges, were $50,677. This
compared to $43,004 for the same period in 1998.
Third quarter net sales in Europe decreased 6.6 percent from the third
quarter, 1998 to $68,773. The stronger U.S. dollar, especially against the
deutsch mark, had a negative 3.6 percent impact on third quarter sales.
Sale of the Wax business in the fourth quarter, 1998 resulted in a 3.0
percent decrease in sales for the quarter. The decrease in volume of 2.5
percent was offset by a 2.5 percent gain in pricing and changes in product
mix. Operating earnings, prior to nonrecurring charges, increased 32.2
percent from third quarter, 1998 to $7,654. Savings from the restructuring
plan was the primary driver of the improved earnings.
-9-
Through nine months, European net sales of $209,765 were 3.3 percent above
the same period of 1998. Two acquisitions in the United Kingdom in the
first half of 1998, net of the Wax business divestiture, resulted in a 3.6
percent sales increase. The year-to-date impact of foreign currency
fluctuations had a negative 0.3 percent impact. Similar to the results of
the third quarter, volume decreases through the first nine months of 2.1
percent were offset by increases in pricing and product mix. The operating
earnings, prior to the nonrecurring charge, increased 81.4 percent over the
first nine months of 1998, to $19,026.
In Latin America, third quarter sales declined 8.2 percent from last year
to $42,970. Volume was down 5.5 percent while pricing and mix contributed a
negative 2.7 percent. Weak economies in Argentina and Brazil were key
factors in the sales decrease. Operating earnings, prior to nonrecurring
charges, declined 13.3 percent to $2,235 as savings from the restructuring
plan were not enough to offset the decrease in sales.
Net sales through nine months in Latin America of $139,761 were 3.6 percent
below the same period of 1998. Pricing and product mix accounted for 2.4
percent while volume was down 1.2 percent. The operating earnings of
$10,919 were above last year's level by 11.3 percent.
The Asia/Pacific region showed a net sales increase over the third quarter,
1998 of 18.1 percent to $23,016. The strengthening of foreign currencies,
primarily the Japanese yen, against the U.S. dollar caused a 10.0 percent
increase in the third quarter sales. Two acquisitions, one in the fourth
quarter of 1998 and one in the first quarter of 1999, accounted for a 7.5
percent increase. Volume increased 5.9 percent in the quarter while pricing
and product mix resulted in a 5.3 percent decrease. Operating earnings of
$51 for the quarter was $62 higher than the 1998 operating loss of $9.
Through nine months of 1999, Asia/Pacific net sales of $71,128 were 15
percent above the first nine months of 1998. Increased volume added 13.3
percent to the nine month sales. The acquisitions mentioned above, net of a
divestiture in the second quarter of 1998 accounted for a 4.0 percent
increase. The foreign currency changes against the U.S. dollar had a 3.5
percent positive impact while pricing and changes in product mix decreased
5.8 percent. Operating earnings of $2,960 compares to an operating loss of
$1,131 for the first nine months of 1998.
The third quarter cost of sales for the consolidated company, decreased 3.1
percent. This resulted in a gross margin of 32.8 percent as compared to the
third quarter, 1998 gross margin of 30.9 percent. Lower raw material costs
and manufacturing savings resulting from the restructuring plan were the
major reasons for the margin improvement. Through nine months of 1999, the
gross margin was 32.3 percent, which compared to 31.4 percent for the same
period in 1998. The European operations have shown particularly strong
margins as a result of the restructuring efforts.
Selling, administrative and other expenses in the third quarter of $78,437
were 3.4 percent below last year. As a percentage of sales, the third
quarter, 1999 expenses were 23.6 percent, which compared to 24.3 percent
for the same period of 1998. Through nine months, these expenses were 2.1
percent below last year. The percentage of sales improved from 25.1 percent
in 1998 to 24.0 percent in 1999. Savings from the restructuring effort and
tight spending control were the primary reasons for both the quarter and
year-to-date improvement.
Interest expense of $6,541 in the third quarter was 15.8 percent lower than
the $7,766 posted in the third quarter, 1998. Improved cash flow from
operations resulted in lower debt levels which, in turn, has resulted in
lower interest expense. Through nine months of 1999 interest expense of
$19,995 was 2.3 percent higher than the same period of 1998.
Income tax expense of $8,773 in the third quarter, 1999 compared to expense
of $145 for the same period of 1998. The large variance was due to the
earnings before taxes and minority interest in 1999 were $20,580, and in
1998 were a loss of $10,625. The loss in 1998 was due to the nonrecurring
charges. Excluding the nonrecurring charge, the tax rate for 1999 is
expected to be 40.0 percent, compared to 40.8 percent in 1998.
-10-
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 28, 1999
to November 28, 1998 and at August 29, 1998 to November 29, 1997.
Cash flow provided by operations for the first nine months of 1999 was
$72,765. This compares to $30,266 for the same period in 1998. Improved net
earnings and lower cash requirements to fund working capital were the key
reasons for the cash flow improvement.
Working capital was $175,707 at August 28,1999. This compares to $172,740
at November 28, 1998 and $202,411 at August 29, 1998. The current ratio of
1.7 at the end of the third quarter, 1999 compared to 1.9 at the same time
in 1998. The number of days sales in trade accounts receivable, net of
reserves for doubtful accounts, was 63 at August 28, 1999. At August 29,
1998 the number of days was 57. The average days sales in inventory was 62
at August 28, 1999 compared to 63 at August 29, 1998.
The total debt to total capitalization ratio was 48.5 percent at August 28,
1999. This compares to 51.6 percent at November 28, 1998.
Capital expenditures for property, plant and equipment, through the first
nine months of 1999, were $43,157. The expenditures were primarily for
construction of manufacturing capacity in Europe to support the
restructuring efforts, the investment in Information Technology and general
improvements in manufacturing productivity and operating efficiency.
Environmental capital expenditures were not a material portion of overall
company expenditures.
Impact of the Year 2000 Issue
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 readiness 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
similar circuitry.)
The assessment phase, during which the Year 2000 Project Office attempted
to identify all hardware and software that affect the company's operation,
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 ready. In addition, the company's internal
laboratory, regulatory, financial and enterprise resource planning systems
for North America are Year 2000 ready.
Outside the United States, the company is addressing readiness issues on a
region-by-region basis. 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 currently anticipates these projects
will be completed by fiscal year-end.
The company has also begun assessing Year 2000 readiness issues relating to
companies with which it has third-party outsourcing relationships on a
global basis, such as a financial institution administering employee
benefit plans, telecommunications providers and health care providers. The
company has requested assurance from its significant suppliers that they
will be functioning properly in the Year 2000. The company will continue to
assess supplier readiness issues. In addition, the company is communicating
with its major customers regarding the company's Year 2000 readiness
efforts. However, it is impossible to fully assess the potential
consequences in the event service
-11-
interruptions from suppliers occur or in the event that there are
disruptions in such infrastructure areas as utilities, communication,
transportation, banking and government.
In October of 1998, the company formed 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 the internal and
external Year 2000 Issues.
The company incurred Year 2000 readiness costs of approximately $2,000 over
the two-year period ending November 28, 1998. The current total estimated
costs to complete Year 2000 readiness efforts in 1999 is $1,200 to $1,500.
In recent years, the company has replaced certain of its financial and
operating systems. These systems have not required modification to address
the Year 2000 Issue, and, as a result, the company's Year 2000 costs have
been relatively low. 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 greater than anticipated.
The company's most reasonably likely worst case Year 2000 Issue scenario is
a potential inability to obtain raw materials from suppliers in a timely
manner, due either to a supplier's inability to manufacture the product or
ship it. In such event, the company may experience a delay in its ability
to manufacture and deliver products when ordered by customers. The company
is currently evaluating its alternatives to mitigate the effect of such a
scenario, if it occurs.
The company is developing contingency plans to address other potential
failures or delays due to the Year 2000 Issue. The company is in the
process of developing a plan for the "Y2K transition". This will be a
comprehensive plan for managing the actual transition over that last week
of December, 1999 and the first week of January, 2000.
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
interfacing with major customers, or with processing orders and billing.
However, if certain 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. 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
effects on the company's results of operations or financial condition.
Safe Harbor Statement under the Private Securities Litigation Act of 1995
-------------------------------------------------------------------------
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; change 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 German mark, the Japanese
yen, the Brazilian real and the Ecuadorian sucre); 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.
-12-
PART II. OTHER INFORMATION
Item 6.
Exhibits and reports on Form 8-K
(a) Exhibits to Part I
27 Financial Data Schedule.
Exhibits to Part II
3(b) Bylaws of H.B. Fuller Company, as amended through July 14, 1999.
10(a) Employment Agreement dated May 6, 1999, between H.B. Fuller Company
and Raymond A. Tucker.
(b) Reports on Form 8-K. No reports on Form 8-K were filed for the thirteen
weeks ended August 28, 1999.
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 11, 1999 /s/ Raymond A. Tucker
------------------------------------
Raymond A. Tucker
Chief Financial Officer
and Treasurer
-13-
EXHIBIT INDEX
Exhibit Number
3(b) Bylaws of H.B. Fuller Company, as amended through July 14, 1999.
10(a) Employment Agreement dated May 6, 1999, between H.B. Fuller Company
and Raymond A. Tucker.
27 Financial Data Schedule.