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 June 2, 2001 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) <TABLE> <CAPTION> Minnesota 41-0268370 <S> <C> (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 1200 Willow Lake Boulevard, Vadnais Heights, Minnesota 55110-5101 (Address of principal executive offices) (Zip Code) </TABLE> (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 14,125,556 as of June 30, 2001. 1
PART 1 FINANCIAL INFORMATION ---------------------------- Item 1. Financial Statements - ---------------------------- H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES Consolidated Condensed Statement of Income (Unaudited) (In thousands except per share amounts) <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-six Weeks Ended ------------------------------------- ----------------------------------- June 2, 2001 May 27, 2000 June 2, 2001 May 27, 2000 --------------- ---------------- -------------- ---------------- <S> <C> <C> <C> <C> Net sales $ 328,507 $ 350,173 $ 635,441 $ 673,803 Cost of sales (240,294) (250,447) (464,653) (480,956) --------------- ---------------- -------------- ---------------- Gross profit 88,213 99,726 170,788 192,847 Selling, administrative and other expenses (64,600) (67,809) (132,891) (137,425) Nonrecurring items - - - 300 Interest expense (5,503) (6,068) (11,166) (12,110) Other income (expense), net (171) 1,749 (692) (714) --------------- ---------------- -------------- ---------------- Income before income taxes and minority interests 17,939 27,598 26,039 42,898 Income taxes (6,117) (9,911) (9,114) (15,878) Minority interests in consolidated income (495) (650) (510) (978) Income from equity investments 533 735 995 1,460 --------------- ---------------- -------------- ---------------- Net income $ 11,860 $ 17,772 $ 17,410 $ 27,502 =============== ================ ============== ================ Weighted-average common shares outstanding: Basic 13,977 13,909 13,972 13,885 =============== ================ ============== ================ Diluted 14,135 14,086 14,130 14,093 =============== ================ ============== ================ Net income per common share: Basic $ 0.85 $ 1.28 $ 1.25 $ 1.98 =============== ================ ============== ================ Diluted $ 0.84 $ 1.26 $ 1.23 $ 1.95 =============== ================ ============== ================ Cash dividend per common share $ 0.215 $ 0.210 $ 0.425 $ 0.415 =============== ================ ============== ================ </TABLE> See accompanying notes to consolidated condensed financial statements. 2
H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES Consolidated Condensed Balance Sheet (In thousands) <TABLE> <CAPTION> (Unaudited) June 2, 2001 December 2, 2000 ------------------ ------------------ <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 8,477 $ 10,489 Trade receivables 220,856 227,709 Allowance for doubtful accounts (7,435) (6,913) Inventories 148,943 153,785 Other current assets 47,839 49,994 ------------------ ------------------ Total current assets 418,680 435,064 Property, plant and equipment, net of accumulated depreciation of $375,630 in 2001 and $362,553 in 2000 382,500 394,689 Deposits and miscellaneous assets 97,285 88,903 Other intangibles, net 23,470 25,202 Excess of cost over net assets acquired 64,005 66,503 ------------------ ------------------ Total assets $ 985,940 $ 1,010,361 ================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 34,911 $ 34,543 Current installments of long-term debt 1,940 5,718 Accounts payable 112,480 126,713 Accrued expenses 46,157 53,515 Accrued nonrecurring charges 666 1,210 Income taxes payable 9,255 5,026 ------------------ ------------------ Total current liabilities 205,409 226,725 Long-term debt, excluding current installments 242,654 250,464 Accrued pension cost 64,151 71,927 Deferred income taxes and other liabilities 38,649 37,452 Minority interests 19,537 19,083 Stockholders' equity: Preferred stock 306 306 Common stock 14,126 14,116 Additional paid-in capital 37,192 36,707 Retained earnings 389,247 377,846 Accumulated other comprehensive income (loss) (22,146) (20,088) Unearned compensation (3,185) (4,177) ------------------ ------------------ Total stockholders' equity 415,540 404,710 ------------------ ------------------ Total liabilities and stockholders' equity $ 985,940 $ 1,010,361 ================== ================== </TABLE> See accompanying notes to consolidated condensed financial statements. 3
<TABLE> <CAPTION> H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES Consolidated Condensed Statement of Cash Flows (Unaudited) (In thousands) Twenty-six Weeks Ended ------------------------------------------- June 2, May 27, 2001 2000 ------------------ ------------------- <S> <C> <C> Cash flows from operating activities: Net income $ 17,410 $ 27,502 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 26,344 25,916 Nonrecurring items - (300) Other items (7,590) 4,414 Change in current assets and liabilities (net of effects of acquisitions/divestitures): Accounts receivable 3,304 (419) Inventories 3,386 (13,195) Prepaid assets (404) (4,134) Accounts payable (11,590) (9,308) Accrued expense (5,665) (8,660) Accrued nonrecurring charges (544) (5,232) Income taxes payable 4,901 6,579 ------------------ ------------------- Net cash provided by operating activities 29,552 23,163 Cash flows from investing activities: Purchased property, plant and equipment (15,600) (22,727) Purchased business, net of cash acquired - (5,498) Proceeds from sale of assets 3,849 10,270 ------------------ ------------------- Net cash used in investing activities (11,751) (17,955) Cash flows from financing activities: Proceeds from long-term debt 7,724 36,121 Payments on long-term debt (16,798) (33,008) Proceeds (payments) from/on notes payable 564 4,614 Dividends paid (6,010) (5,849) Other financing activities (5,282) (9,158) ------------------ ------------------- Net cash used in financing activities (19,802) (7,280) Effect of exchange rate changes on cash (11) (229) ------------------ ------------------- Net change in cash and cash equivalents (2,012) (2,301) Cash and cash equivalents at beginning of year 10,489 5,821 ------------------ ------------------- Cash and cash equivalents at end of period $ 8,477 $ 3,520 ================== =================== </TABLE> See accompanying notes to consolidated condensed financial statements. 4
H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Condensed Financial Statements (Amounts in Thousands) 1. Accounting Policies: The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Quarterly Reports on 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 condensed financial statements reflect all adjustments of a normal recurring nature 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 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 interim consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 2, 2000 as filed with the Securities and Exchange Commission. 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: <TABLE> <CAPTION> Thirteen Weeks Ended -------------------------------- June 2, 2001 May 27, 2000 --------------- --------------- <S> <C> <C> Net income $11,860 $17,772 Dividends on preferred shares (4) (4) ------- ------- Income attributable to common shares $11,856 $17,768 ======= ======= Weighted-average common shares - basic 13,977 13,909 Equivalent shares from stock compensation plans 158 177 ------- ------- Weighted-average common shares - diluted 14,135 14,086 ======= ======= Twenty-six Weeks Ended -------------------------------- June 2, 2001 May 27, 2000 --------------- --------------- Net income $17,410 $27,502 Dividends on preferred shares (8) (8) ------- ------- Income attributable to common shares $17,402 $27,494 ======= ======= Weighted-average common shares - basic 13,972 13,885 Equivalent shares from stock compensation plans 158 208 ------- ------- Weighted-average common shares - diluted 14,130 14,093 ======= ======= </TABLE> The computations of diluted income per common share do not include 28 and 32 stock options with exercise prices greater than the average market price of the common shares for second quarter 2001 and 2000, respectively, and of 38 and 16 for the twenty-six weeks 2001 and 2000, respectively, as the results would have been anti-dilutive. 3. Comprehensive Income: The components of total comprehensive income are: <TABLE> <CAPTION> Thirteen Weeks Ended -------------------------------- June 2, 2001 May 27, 2000 --------------- --------------- <S> <C> <C> Net income $ 11,860 $ 17,772 Other comprehensive income Foreign currency translation, net (5,068) (3,575) -------- -------- Total comprehensive income $ 6,792 $ 14,197 ======== ======== </TABLE> 5
Twenty-six Weeks Ended ----------------------------- June 2, 2001 May 27, 2000 ------------ ------------ Net income $ 17,410 $ 27,502 Other comprehensive income Foreign currency translation, net (2,058) (7,062) -------- -------- Total comprehensive income $ 15,352 $ 20,440 ======== ======== 4. Inventories: The composition of inventories is: June 2, 2001 December 2, 2000 ------------ ---------------- Raw materials $ 59,615 $ 59,986 Finished goods 100,404 104,836 LIFO reserve (11,076) (11,037) -------- -------- $148,943 $153,785 ======== ======== 5. Restructuring Reserve: The restructuring reserve related to the Company's 1998 restructuring plan has a remaining balance of $666. The balance consists of redundant lease payments and severance costs in Europe. Payments in the twenty-six weeks of 2001 were $544. 6. Derivatives: On December 3, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." The standard requires that all derivatives be recorded on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The cumulative effect of adopting SFAS 133 as of December 3, 2000 was not material to the Company's consolidated condensed financial statements. The Company is exposed to foreign currency exchange rate risk inherent in forecasted sales, cost of sales, and assets and liabilities denominated in currencies other than the U.S. dollar. The Company does not enter into any speculative positions with regard to derivative instruments. Derivatives consisted primarily of forward contracts used to manage foreign currency balance sheet liabilities. Because contracts used for balance sheet liabilities outstanding are not designated as hedges, the gains and losses on forward contracts used to manage balance sheet exposures are recognized in other income and expense in the same period as the remeasurement of the related foreign currency denominated liabilities. Notional amounts outstanding were $1,912, however, notional amounts are not a measure of the Company's exposure. As of June 2, 2001, the Company had forward contracts maturing between June 15, 2001 and November 30, 2001. In the opinion of the Company, changes in market value were not material during the quarter ended June 2, 2001. 7. Operating Segments: The following table presents information about the Company's operating segments for all periods presented. <TABLE> <CAPTION> Inter- For the Thirteen Weeks Trade Segment Operating Ended June 2, 2001 Revenue Revenue Income ------------------ ------- ------- ------ <S> <C> <C> <C> North America Adhesives $146,450 $ 4,861 $15,907 Europe Adhesives 55,974 1,458 824 Latin America Adhesives 18,522 323 (844) Asia/Pacific Adhesives 23,668 -- 196 Specialty Group 83,893 432 7,530 Corporate and Unallocated -- (7,074) -- -------- ------- ------- Total $328,507 -- $23,613 ======== ======= ======= </TABLE> 6
<TABLE> <CAPTION> Inter- For the Thirteen Weeks Trade Segment Operating Ended May 27, 2000 Revenue Revenue Income ------------------ ------- -------- ------ <S> <C> <C> <C> North America Adhesives $153,414 $ 2,743 $13,697 Europe Adhesives 60,328 1,180 4,171 Latin America Adhesives 20,051 333 1,313 Asia/Pacific Adhesives 25,200 -- 584 Specialty Group 91,180 607 12,152 Corporate and Unallocated -- (4,863) -- -------- --------- ------- Total $350,173 -- $31,917 ======== ========= ======= <CAPTION> Inter- For the Twenty-six Weeks Trade Segment Operating Ended June 2, 2001 Revenue Revenue Income ------------------ ------- -------- ------ <S> <C> <C> <C> North America Adhesives $275,827 $ 9,664 $25,989 Europe Adhesives 107,916 2,768 623 Latin America Adhesives 37,971 663 (1,665) Asia/Pacific Adhesives 47,400 -- (24) Specialty Group 166,327 979 12,974 Corporate and Unallocated -- (14,074) -- -------- -------- ------- Total $635,441 -- $37,897 ======== ======== ======= <CAPTION> Inter- For the Twenty-six Weeks Trade Segment Operating Ended May 27, 2000 Revenue Revenue Income ------------------ ------- ------- ------ <S> <C> <C> <C> North America Adhesives $291,358 $ 8,572 $24,000 Europe Adhesives 117,038 1,787 7,905 Latin America Adhesives 38,969 762 824 Asia/Pacific Adhesives 49,934 -- 1,082 Specialty Group 176,504 1,036 21,611 Corporate and Unallocated -- (12,157) -- -------- -------- ------- Total $673,803 -- $55,422 ======== ======== ======= </TABLE> Reconciliation of Operating Income to Pretax Income: <TABLE> <CAPTION> For the Thirteen Weeks Ended June 2, 2001 May 27, 2000 ----------------------------- ------------ ------------ <S> <C> <C> Operating income $ 23,613 $ 31,917 Interest expense (5,503) (6,068) Gains from sales of assets 1,623 1,777 All other (1,794) (28) -------- -------- Pretax income $ 17,939 $ 27,598 ======== ======== <CAPTION> For the Twenty-six Weeks Ended June 2, 2001 May 27, 2000 ------------------------------ ------------ ------------ <S> <C> <C> Operating income $ 37,897 $ 55,422 Nonrecurring items -- 300 Interest expense (11,166) (12,110) Gains from sales of assets 1,623 2,035 All other (2,315) (2,749) -------- -------- Pretax income $ 26,039 $ 42,898 ======== ======== </TABLE> 8. Reclassification: Effective December 3, 2000, the Company adopted the Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Under its provisions, the EITF requires proceeds from shipping charges billed to customers to be included as revenue. The Company previously included shipping charges billed to customers as a reduction of the costs related thereto as a component of selling, administrative and other expenses. Beginning December 3, 2000, the Company classified revenues from shipping charges billed to customers and the costs related thereto as net sales and cost of sales, respectively. The 2000 reported results are presented on a consistent basis. 7
9. Accounting Standard: In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulleting No. 101 (SAB 101), which summarizes certain of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company is in the process of analyzing the requirements of SAB 101, as amended, and is required to comply by no later than the fourth quarter of fiscal year 2001. The impact of adopting this accounting standard is not expected to have a material effect on the Company's financial position or results of operations. Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- 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 unaudited consolidated condensed financial statements. Results of Operations - --------------------- Net sales in the second quarter of 2001 of $328.5 million were $21.7 million or 6.2 percent below the net sales in the second quarter of 2000. The lower sales were primarily the result of reduced demand due to the slowing global economy as well as the weakness in foreign currencies as compared to the U.S. dollar. As compared to the second quarter of 2000, sales volume decreased 6.2 percent, the foreign currency weakness caused a 2.0 percent decline and selling prices increased 2.1 percent. Through the first six months of 2001, net sales of $635.4 million were $38.4 million or 5.7 percent below the first six months of 2000. Reduced volume accounted for a decline of 5.6 percent, foreign currency weakness caused a 2.2 percent decline and selling prices were 2.1 percent above the first six months of 2000. The following table shows the net sales changes from 2000 to 2001 for the second quarter and six months year-to-date by operating segment: ($ Millions) Increase / (Decrease) Second Quarter Six Months - ------------------------------------------------------------------ North America Adhesives $ (7.0) (4.5%) $(15.6) (5.3%) Europe Adhesives (4.4) (7.2%) (9.1) (8.0%) Latin America Adhesives (1.5) (7.6%) (1.0) (2.6%) Asia/Pacific Adhesives (1.5) (6.1%) (2.5) (5.1%) Specialty Group (7.3) (8.0%) (10.2) (5.8%) ------ ------ Total $(21.7) (6.2%) $(38.4) (5.7%) ====== ====== The net sales decrease in North America Adhesives for the second quarter was driven by a 6.9 percent decrease in volume. Sales to the automotive market were down over 12 percent in the second quarter of 2001. This was a direct result of production cutbacks within the North American automotive industry. Selling prices in North America Adhesives increased in the second quarter of 2001 by 2.7 percent as compared to the second quarter of 2000. Excluding the automotive market where prices declined, selling prices increased 3.4 percent over the second quarter of 2000. The relative weakness of the euro as compared to the U.S. dollar continued to hinder sales performance in Europe Adhesives. In the second quarter of 2001, the currency weakness resulted in a 4.9 percent sales decline as compared to last year. A slowdown in the European economy also had a negative impact, as sales volume in the second quarter of 2001 was 6.6 percent below the second quarter of 2000. Offsetting the negative volume and currency variances was an increase in selling prices of 4.3 percent as compared to the second quarter of 2000. The net sales decrease for the second quarter of 2001 in Latin America Adhesives was due primarily to the weak economic conditions in South America, especially Argentina. Brazil's acceleration of the currency devaluation process also had a negative impact on the second quarter net sales. 8
Asia/Pacific Adhesives showed a volume increase in net sales of 4.5 percent in the second quarter of 2001 as compared to the second quarter of 2000. The volume increase was offset however, by a decrease of over 11 percent due to negative currency effects. The weakness of the Australian dollar and Japanese yen, as compared to the U.S. dollar, caused the sales decrease. The Specialty Group net sales were also hard hit by volume decreases in the second quarter. The volume decrease compared to the second quarter of 2000 was 8.2 percent. Global Coatings, TEC Specialty Products and Liquid Paints each had significant net sales shortfalls in the second quarter of 2001 as compared to the second quarter of 2000, primarily due to lower volume. The volume reductions in Global Coatings and TEC Specialty Products were largely due to the general slowdown of the U.S. economy. The consolidated gross profit margin was 26.9 percent for both the second quarter and the first six months of 2001. This compares to 28.5 percent in the second quarter of 2000 and 28.6 percent in the first six months of 2000. The lower gross profit margin in 2001 was due primarily to higher raw material costs as compared to the same periods in 2000. Higher energy costs also contributed to the lower margin along with reduced plant utilization related to the lower sales volume. Selling, administrative and other expenses were $64.6 million or 19.7 percent of net sales in the second quarter of 2001. This compares to $67.8 million or 19.4 percent of net sales in the second quarter of 2000. Last year's expenses included a credit of $1.3 million from the settlement of a claim against a raw material vendor in Latin America. Payroll costs were lower in the second quarter of 2001 as compared to 2000 due to lower census. The total number of employees at June 2, 2001 was 4,966 as compared to 5,142 at May 27, 2000. The number of employees included in operating expenses was 2,418 at June 2, 2001 as compared to 2,571 at May 27, 2000 - a reduction of approximately 6 percent. Another factor that contributed to the lower expenses in the second quarter of 2001 was reduced U.S. pension costs of $1.8 million as compared to the second quarter of 2000. The second quarter of both 2001 and 2000 included reversal of management bonuses accrued in the first quarter. In 2001 the reversal amount was approximately $0.9 million as compared to $1.5 million in the second quarter of 2000. Through the first six months of 2001, selling, administrative and other expenses were $132.9 million or 20.9 percent of net sales. For the same period of 2000, the expenses were $137.4 million or 20.4 percent of net sales. Interest expense was $5.5 million in the second quarter of 2001 as compared to $6.1 million in the second quarter of 2000. In the first six months of 2001 interest expense was $11.2 million as compared to $12.1 million for the same period in 2000. Lower average debt levels during 2001 resulting from improved cash flows as compared to last year was the reason for the lower interest expense. Other income/expense, net was expense of $0.2 million in the second quarter of 2001 as compared to income of $1.7 million in the second quarter of 2000. The second quarter of 2001 included a gain of $1.6 million from the sale of an investment in a Japanese company. The second quarter of 2000 included gains totaling $1.6 million from the sales of unproductive assets. Also included in the second quarter of 2000 was $2.4 million of income from the Company's SERP portfolio, when the portfolio was invested 100 percent in equities. The income from the SERP portfolio, which has been converted to fixed income securities, in the second quarter of 2001 was $0.2 million. The income tax rate for the first six months of 2001 was adjusted to 35 percent from 37 percent in the first quarter of 2001, which resulted in a second quarter rate of 34.1 percent. The 35 percent rate reflects the expected rate for the year, taking into consideration the current mix of worldwide income and the tax planning initiatives, both of which are subject to change. In the second quarter of 2000 the effective tax rate was lowered to 37 percent from 39 percent in the first quarter of 2000. Therefore, the effective rate for the second quarter of 2000 was 35.9 percent. Net income in the second quarter of 2001 was $11.9 million as compared to $17.8 million in the second quarter of 2000 - a reduction of 33 percent. The net income per diluted share was $0.84 in the second quarter of 2001, as compared to $1.26 per diluted share in the second quarter of 2000. Through the first six months of 2001 the net income of $17.4 million was 37 percent below the net income of $27.5 million in the first six months of 2000. 9
The net income per diluted share of $1.23 for the first six months of 2001 was 37 percent below the income per diluted share of $1.95 earned in the first six months of 2000. Last year's net income per diluted share for the first six months included a nonrecurring credit of $.01 per share. Operating Segment Results - ------------------------- Operating income in North America Adhesives of $15.9 million in the second quarter of 2001 was $2.2 million or 16.1 percent above the operating income in the second quarter of 2000. Reduced expenses, primarily related to employee payroll and benefits costs, more than offset the negative effects of lower sales volume and higher raw material costs. Through the first six months of 2001, operating income in North America Adhesives was $2.0 million or 8.2 percent above the operating income for the first six months of 2000. Europe Adhesives reported operating income of $0.8 million in the second quarter of 2001 as compared to $4.2 million in the second quarter of 2000, a reduction of over 80 percent. Lower sales volume, higher raw material costs and negative currency effects all contributed to the reduced operating income. The gross profit margin for Europe Adhesives in the second quarter of 2001 was 3.5 percentage points below the second quarter of last year. For the first six months of 2001 Europe Adhesives operating income was below the first six months of 2000 by $7.3 million or 92 percent. In Latin America Adhesives, the operating income reduction of $2.2 million in the second quarter of 2001 as compared to the second quarter of 2000 was caused primarily by the settlement against a raw material supplier in the second quarter of 2000. As discussed above, the impact on selling, administrative and other expenses was a credit of $1.3 million. The total settlement was for a credit of $1.5 million as an additional $0.2 million was credited to cost of sales. Excluding this settlement, operating income for the second quarter of 2001 in Latin America Adhesives was $0.6 million below the second quarter of 2000. In Asia/Pacific Adhesives, the lower operating income in the second quarter of 2001 as compared to the second quarter of 2000 was primarily due to the sales decrease discussed above. Lower sales volume was the main reason operating income in the Specialty Group dropped from $12.2 million in the second quarter of 2000 to $7.5 in the second quarter of 2001. The operating income through six months of 2001 was $13.0 million as compared to $21.6 million for the same period in 2000, a 40 percent reduction. Liquidity and Capital Resources - ------------------------------- Cash flows provided by operating activities in the first six months of 2001 were $29.6 million as compared to $23.2 million in the first six months of 2000. Improved cash flows due to changes in working capital more than offset the lower net income in 2001 as compared to 2000. In 2001, negative cash flows due to increased working capital were $6.6 million as compared to a negative $34.4 million in the first six months of 2000. Positive cash flows related to decreases in inventories were $3.4 million in the first six months of 2001 while in the first six months of 2000, negative cash flows related to increases in inventories were $13.2 million. Cash flows related to accounts receivable were a positive $3.3 million in the first six months of 2001 as compared to a negative $0.4 million in the first six months of 2000. Trade accounts receivable DSO (Days Sales Outstanding) was 59 days at June 2, 2001 compared to 61 days at May 27, 2000. The DSO at December 2, 2000 was 55 days. Total working capital of $213.3 million at June 2, 2001 was $13.1 million or 6.5 percent higher than at the end of the first six months of 2000. The current ratio was 2.0 at June 2, 2001 as compared to 1.8 at May 27, 2000. Total working capital at December 2, 2000 was $208.3 million and the current ratio was 1.9. The Company's ratio of long-term debt to long-term debt plus equity was 36.9 percent at June 2, 2001 as compared to 40.3 percent at May 27, 2000 and 38.2 percent at December 2, 2000. Long-term debt of $242.7 million at June 2, 2001 was $23.3 million or 8.8 percent lower than at May 27, 2000. The long-term debt at December 2, 2000 was $250.5 million. Capital expenditures for property, plant and equipment were $15.6 million during the first six months of 2001 as compared to $22.7 million in the first six months of 2000. These expenditures were primarily for information technology projects and general improvements intended to increase manufacturing efficiency. Cash and cash equivalents were $8.5 million at June 2, 2001. Current cash levels, combined with the Company's unused lines of credit are considered adequate to meet Company obligations over the next year. 10
Euro Currency Conversion - ------------------------ On January 1, 1999, 11 of the 15 member countries of the European Union (EU) established fixed conversion rates through the European Central Bank (ECB) between existing local currencies and the euro, the EU's new single currency. During a transition period from January 1, 1999 through June 30, 2002, the euro will replace the national currencies that exist in the participating countries. The transition to the euro creates a number of finance, accounting and information systems issues for the Company. These issues are being evaluated and addressed by the management of the Company. While the Company will continue to evaluate the impact of the euro introduction over time, based on currently available information and the nature of the exposures, the Company does not, at this time, believe that the transition to the euro will have a significant effect on the Company's consolidated results of operations, financial position or liquidity. 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; 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 Japanese yen, the Australian dollar 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, the impact of exchange rates, 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 - ------------------------------------------------------------------- See Note 6 to unaudited consolidated condensed financial statements. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders: (a) The Registrant's annual meeting of security holders was held on April 19, 2001. (b) The following matters were submitted to a vote of security holders during the second quarter: Proposal 1 - Election of Directors - Class II (term ending in 2004): Nominees Votes For Votes Withheld -------- --------- -------------- Norbert R. Berg 11,451,278 4,280,524 Freeman A. Ford 11,458,553 4,273,249 John J. Muriel, Jr. 11,406,158 4,325,644 Robert J. Carlson, Gail D. Fosler, Reatha Clark King, Albert P.L. Stroucken; Edward L. Bronstien, Jr., Walter Kissling, Lee R. Mitau and R. William Van Sant continued to serve as directors following the meeting. 11
Proposal 2 - Proposal to Ratify the Appointment of Independent Auditors: Votes for: 15,379,948 Votes against: 253,400 Votes to abstain: 98,454 Proposal 3 - To consider and vote on a security holder proposal regarding tobacco-related business of the Registrant: Votes for: 823,952 Votes against: 12,403,983 Votes to abstain: 684,729 Broker non-vote: 1,819,138 Item 6. Exhibits and Reports on Form 8-K - -------------------------------- (a) Exhibits 10(a) International Service Agreement with Peter Koxholt dated May 1, 2001 10(b) Letter to Peter Koxholt dated May 1, 2001 (b) Reports on Form 8-K. One report on Form 8-K was filed during the thirteen weeks ended June 2, 2001 reporting the Company's financial results for the first quarter of 2001. 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: July 17, 2001 /s/ Raymond A. Tucker --------------------- Raymond A. Tucker Senior Vice President and Chief Financial Officer 12
EXHIBIT INDEX Exhibit Number 10(a) International Service Agreement with Peter Koxholt dated May 1, 2001 10(b) Letter to Peter Koxholt dated May 1, 2001 13