- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT Under Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTER ENDED AUGUST 31, 1996 Commission File No. 0-3488 H. B. FULLER COMPANY A Minnesota Corporation IRS Employer Identification No. 41-0268370 2400 Energy Park Drive, St. Paul, Minnesota 55108 Telephone - (612) 645-3401 Common Stock, $1.00 par value 14,057,563 shares outstanding as of September 30, 1996 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No____ ---- - -------------------------------------------------------------------------------- -1-
H. B. FULLER COMPANY THIRD QUARTER 1996 Form 10-Q Quarterly Report Table of Contents PART I. FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements: Consolidated Condensed Statements of Earnings - Thirty-nine weeks ended August 31, 1996 and nine months ended August 31, 1995 Consolidated Condensed Balance Sheets - August 31, 1996 and November 30, 1995 Consolidated Condensed Statements of Cash Flows - Thirty-nine weeks ended August 31, 1996 and nine months ended August 31, 1995 Notes to Consolidated Condensed Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION --------------------------- Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K Signatures -2-
H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES Consolidated Condensed Statements of Earnings (Unaudited) (In Thousands Except Per Share Amounts) <TABLE> <CAPTION> Thirty-Nine Nine Proforma Nine * Weeks Ended Months Ended Months Ended August 31, 1996 August 31, 1995 August 31, 1995 --------------- --------------- --------------- <S> <C> <C> <C> NET SALES $941,894 $930,674 $922,023 -------- -------- -------- Costs and expenses: Cost of sales 646,109 634,198 631,224 Selling, administrative and other expenses 241,694 239,773 241,456 Interest expense 14,521 13,693 13,693 (Gain) from sale of assets (17,803) - - Other (income) expense, net 2,010 1,399 1,996 -------- -------- -------- 886,531 889,063 888,369 -------- -------- -------- Earnings before income taxes and minority interests 55,363 41,611 33,654 Income taxes (22,367) (16,561) (13,791) Net earnings of consolidated subsidiaries applicable to minority interests 104 (186) 106 -------- -------- -------- Earnings before accounting changes 33,100 24,864 19,969 Accounting changes - (2,532) (2,532) -------- -------- -------- Net earnings 33,100 22,332 17,437 Dividends on preferred stock (12) (12) (12) -------- -------- -------- NET EARNINGS APPLICABLE TO COMMON STOCK $ 33,088 $ 22,320 $ 17,425 ======== ======== ======== Average number of common and common equivalent shares outstanding 14,100 14,049 14,049 ======== ======== ======== Per share earnings before accounting changes $ 2.35 $ 1.77 $ 1.42 Per share accounting changes - (0.18) (0.18) -------- -------- -------- NET EARNINGS PER COMMON SHARE $ 2.35 $ 1.59 $ 1.24 ======== ======== ======== Cash dividend per common share $ 0.49 $ 0.47 $ 0.47 ======== ======== ======== </TABLE> * See accompanying Footnote 9 in Notes to Consolidated Condensed Financial Statements. -3-
H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES Consolidated Condensed Statements of Earnings (Unaudited) (In Thousands Except Per Share Amounts) <TABLE> <CAPTION> Thirteen Three Proforma Three * Weeks Ended Months Ended Months Ended August 31, 1996 August 31, 1995 August 31, 1995 --------------- --------------- --------------- <S> <C> <C> <C> NET SALES $318,100 $312,590 $309,063 -------- -------- -------- Costs and expenses: Cost of sales 215,642 213,261 211,143 Selling, administrative and other expenses 75,469 79,700 79,924 Interest expense 4,306 5,118 5,118 (Gain) from sale of assets (16,568) - - Other (income) expense, net 2,410 160 295 -------- -------- -------- 281,259 298,239 296,480 -------- -------- -------- Earnings before income taxes and minority interests 36,841 14,351 12,583 Income taxes (14,887) (5,711) (5,452) Net earnings of consolidated subsidiaries applicable to minority interests 61 122 201 -------- -------- -------- Net earnings 22,015 8,762 7,332 Dividends on preferred stock (4) (4) (4) -------- -------- -------- NET EARNINGS APPLICABLE TO COMMON STOCK $ 22,011 $ 8,758 $ 7,328 ======== ======== ======== Average number of common and common equivalent shares outstanding 14,110 14,064 14,064 ======== ======== ======== NET EARNINGS PER COMMON SHARE $ 1.56 $ 0.62 $ 0.52 ======== ======== ======== Cash dividend per common share $ 0.16 $ 0.16 $ 0.16 ======== ======== ======== </TABLE> * See accompanying Footnote 9 in Notes to Consolidated Condensed Financial Statements. -4-
H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES Consolidated Condensed Balance Sheets (Unaudited) (In Thousands) <TABLE> <CAPTION> August 31, 1996 November 30, 1995 --------------- ----------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 8,857 $ 9,061 Trade receivables 188,025 184,821 Allowance for doubtful accounts (6,710) (6,256) Inventories 150,724 159,024 Other current assets 43,243 40,991 --------------- ----------------- Total current assets 384,139 387,641 Property, plant and equipment, net of accumulated depreciation of $267,521 in 1996 and $253,138 in 1995 374,802 355,123 Other intangibles 18,383 16,761 Excess cost 36,364 38,310 Other assets 33,956 31,094 --------------- ----------------- Total assets $847,644 $828,929 =============== ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 44,987 $ 53,749 Current installments of long-term debt 9,761 5,722 Accounts payable 109,667 117,446 Accrued expenses 57,260 59,504 Income taxes payable 17,501 9,164 --------------- ----------------- Total current liabilities 239,176 245,585 Long-term debt, excluding current installments 163,873 166,459 Deferred income taxes, accrued pension cost, postretirement costs, other liabilities and minority interests 119,925 117,471 Stockholders' equity: Preferred stock 306 306 Common stock 14,054 14,007 Additional paid-in capital 22,180 20,771 Retained earnings 282,823 256,489 Foreign currency translation adjustment 9,501 11,319 Unearned compensation (4,194) (3,478) --------------- ----------------- Total stockholders' equity 324,670 299,414 Total liabilities and --------------- ----------------- stockholders' equity $847,644 $828,929 =============== ================= </TABLE> See accompanying Notes to Consolidated Condensed Financial Statements. -5-
H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES Consolidated Condensed Statement of Cash Flows (Unaudited) (In Thousands) <TABLE> <CAPTION> Thirty-Nine Nine Months Weeks Ended * Ended August 31, 1996 August 31, 1995 ------------------- ------------------- <S> <C> <C> Cash flows from operating activities: Net earnings $33,219 $22,332 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 34,781 30,776 Pension costs 10,071 7,681 Gain from sale of assets (10,833) - Deferred income tax 1,638 (1,226) Accounting changes - 2,532 Other items 3,879 3,476 Change in current assets and liabilities: Increase in accounts receivable (12,249) (5,569) Decrease (increase) in inventory 8,074 (8,242) Increase in prepaid assets (3,930) (5,060) (Decrease) in accounts payable (4,373) (725) Increase (decrease) in accrued expense 1,309 (2,675) Increase in income taxes payable 1,074 359 ------------------- ------------------- Net cash provided by operating activities $62,660 $43,659 Cash flows from investing activities: Purchased property, plant and equipment (60,475) (57,247) Proceeds from sale of assets 29,551 - Purchased business, net of cash acquired (7,625) - ------------------- ------------------- Net cash used in investing activities (38,549) (57,247) Cash flows from financing activities: Increase in long-term debt 52,848 70,045 Current installments and payments of long-term debt (56,470) (48,845) (Decrease) increase in notes payable (7,093) 3,360 Dividends paid (6,885) (6,501) Other (6,527) (10,436) ------------------- ------------------- Net cash (used) provided by financing activities (24,127) 7,623 Effect of exchange rate changes on cash (188) 482 ------------------- ------------------- Net change in cash and cash equivalents ($204) ($5,483) Cash and cash equivalents at beginning of year 9,061 9,830 ------------------- ------------------- Cash and cash equivalents at end of period $8,857 $4,347 =================== =================== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest expense (net of amount capitalized) $19,399 $12,242 Income taxes $7,598 $19,355 Noncash investing and financing activities: Assets acquired by incurring notes payable/long-term debt $3,748 $750 </TABLE> 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. * Includes the thirty-nine weeks ended August 31, 1996 for all entities and the two month stub period for Non-U.S. entities. See footnote 9. -6-
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 31, 1996 and November 30, 1995, the results of its operations for the thirteen and thirty-nine week periods ended August 31, 1996 and the three and nine month periods ended August 31, 1995 and its cash flows for the thirty-nine week period ended August 31, 1996 and nine month period ended August 31, 1995. All adjustments were of a normal recurring nature. 2. The results of operations for the thirteen and thirty-nine week periods ended August 31, 1996 are not necessarily indicative of the results to be expected for the full year. 3. The composition of inventories is presented below: <TABLE> <CAPTION> August 31, 1996 November 30, 1995 --------------- ----------------- <S> <C> <C> Raw materials $ 67,601 $ 78,180 Finished goods 94,396 92,629 LIFO reserve (11,273) (11,785) -------- ------- $150,724 $159,024 ======== ======== </TABLE> 4. Net earnings per common share is determined by dividing the net earnings applicable to common stock by the weighted average number of common and common equivalent shares outstanding (stock options). 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. The aggregate contract value of instruments used to sell pound sterling in exchange for Dutch guilders was approximately $5,250. The contracts mature between October 20, 2000 and November 20, 2000. 6. The carrying amounts and estimated fair values of the Company's significant other financial instruments at August 31, 1996, are as follows: <TABLE> <CAPTION> Carrying Fair Amount Value -------- -------- <S> <C> <C> Cash and short-term investments $ 8,857 $ 8,857 Notes payable 44,987 44,987 Long-term debt 173,634 181,573 </TABLE> Fair values of short-term financial instruments approximate their carrying values due to their short maturity. -7-
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 second quarter, the Company acquired a hot melt adhesives product line for industrial applications for $7,625. The acquisition includes product formulas, customer lists, technology and inventory. The Company has signed a long-term agreement to have these products toll produced. 8. During the second quarter, the Company sold assets for $1,726. During the third quarter, the Company sold two product lines for $27,825, including epoxy tooling slabs and the previously announced sale of Monarch's sanitation chemicals. 9. Effective December 1, 1995, in the first quarter of the Company's 1996 fiscal year, the Company's international subsidiaries that previously reported on a fiscal year ending September 30 changed their reporting period to a Company wide fiscal year ending on the Saturday closest to November 30. This change was made to reflect the results of operations and financial position of these subsidiaries on a more timely basis and to increase operating and planning efficiency. The results of operations of these subsidiaries for the period October 1 through November 30, 1995, net earnings of $118 or $0.01 per share, have been reflected as an adjustment to retained earnings. Sales for the period were $104,811 and cost of sales was $73,341. The Company also changed to thirteen-week quarters. 1995 Proforma (International subsidiaries results restated to November 30 fiscal year end) <TABLE> <CAPTION> 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. ---------- --------- --------- --------- <S> <C> <C> <C> <C> Net sales $291,579 $321,381 $309,063 $326,789 Gross profit 91,068 101,811 97,920 100,072 Operating earnings 13,149 18,198 17,996 16,366 Earnings before cumulative effect of accounting changes 4,617 8,020 7,332 8,226 Cumulative effect of accounting changes (2,532) -- -- -- ------------------------------------------------------------------------------------------ Net earnings $ 2,085 $ 8,020 $ 7,332 $ 8,226 ------------------------------------------------------------------------------------------ Earnings (loss) per common share: Earnings before cumulative effects of accounting changes $ 0.33 $ 0.57 $ 0.52 $ 0.59 Cumulative effect of accounting changes $ (0.18) -- -- -- - ------------------------------------------------------------------------------------------- Net earnings $ 0.15 $ 0.57 $ 0.52 $ 0.59 </TABLE> -8-
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 1996 increased $5,510, or 1.8%, when compared to the same quarter in 1995. Net sales for the third quarter of 1996, on a proforma basis (See Note 9 to Consolidated Condensed Financial Statements), increased $9,037, or 2.9%, when compared to 1995. Net sales for the first nine months of 1996 increased $11,220, or 1.2%, when compared to the first nine months of 1995. Net sales for the first nine months of 1996, on a proforma basis (See Note 9 to Consolidated Condensed Financial Statements), increased $19,871, or 2.2%, when compared to 1995. A comparison of sales increases by operating area is as follows: <TABLE> <CAPTION> Quarter Ended Quarter Ended August 31, 1996 August 31, Proforma Quarter (Note 9) Operating Area 1996 and 1995 Ended August 31, 1995 -------------- -------------- ------------------------- <S> <C> <C> <C> <C> North America $ 13,974 8% $ 13,865 8% Latin America 1,521 4% 1,577 4% Europe (8,897) (12%) (5,190) (7%) Asia/Pacific (1,088) (5%) (1,215) (6%) ------- ------- Total $ 5,510 2% $ 9,037 3% ======= ======= Nine Months Ended Nine Months Ended August 31, 1996 August 31, Proforma Nine Months (Note 9) Operating Area 1996 and 1995 Ended August 31, 1995 -------------- ------------------ ----------------------------- <S> <C> <C> <C> <C> North America $ 31,299 6% $ 30,727 6% Latin America (2,389) (2%) 2,491 2% Europe (16,878) (8%) (13,214) (6%) Asia/Pacific (812) (1%) (133) -- ------- ------- Total $ 11,220 1% $ 19,871 2% ======= ======= </TABLE> -9-
In North America, the 8% third quarter sales increase was composed of 7 percentage points relating to increased volume and changes in product mix, 2 percentage points related to fourth quarter 1995 and second quarter 1996 acquisitions and a negative one percentage point impact from pricing. The Adhesives, Sealants and Coatings Group had a 9% increase in sales with 5 percentage points resulting from a late fourth quarter 1995 acquisition and a second quarter 1996 acquisition and the other 4 percentage points of growth occurring primarily in the packaging/converting market of the industrial adhesives group and in the woodworking, window and engineered systems markets of the structural adhesives group. Automotive sales were up slightly in the quarter compared to last year and nonwoven sales were down moderately. The Specialty Group produced a 10% increase in North American sales for the quarter adjusted for the sale of the Monarch Division. TEC Incorporated experienced a strong increase in sales with Linear Products Inc., Industrial Coatings Division and Foster Products Corporation showing a moderate increase. North American operating earnings grew at a rate of 43% increasing from $13,813 to $19,804. On a proforma basis (See Note 9 to Consolidated Condensed Financial Statements), North American sales increased 8% and operating earnings grew at a rate of 46% increasing from $13,539 to $19,804. For the first nine months of 1996, North American sales increased 6% and was composed of 4 percentage points resulting from increased volume and changes in product mix, 2 percentage points resulting from sales of businesses acquired late in the fourth quarter of 1995 and second quarter of 1996, net of the decreased sales resulting from the sale of the Monarch Division. The Adhesives, Sealants and Coatings Group had a 7% increase in 1996 sales, with 4 percentage points resulting from late fourth quarter 1995 and second quarter 1996 acquisitions and the other 3 percentage points of growth occurring primarily in the packaging/converting and polymer units of the industrial adhesives group and in engineered systems and window markets of the structural adhesives group. The Specialty Group had a 6% sales growth adjusted for the sale of the Monarch Division. Foster Corporation experienced a significant increase in sales compared to 1995. Industrial Coatings Division, Linear Products Incorporated, and TEC Incorporated all had moderate increases in sales. North American operating earnings grew at a rate of 34% from $30,434 in 1995 to $40,636 for the first nine months of 1996. On a proforma basis (See Note 9 to Consolidated Condensed Financial Statements), North American sales increased 6% and operating earnings grew at a rate of 33% increasing from $30,514 to $40,636. Latin American third quarter 1996 sales increased 4% from 1995. The increase in sales is composed of 2 percentage points relating to increased volume and changes in product mix and a 2 percentage point increase in pricing. Latin American operating earnings were up significantly when compared to 1995, from $2,606 in 1995 to $3,112 in 1996. On a proforma basis (See Note 9 to Consolidated Condensed Financial Statements), Latin American third quarter 1996 sales were also up 4% compared to sales of 1995 and operating earnings increased substantially from $1,912 to $3,112. This improved operating earnings in 1996 was the result of cost reduction efforts in Latin America. In Europe, the 12% third quarter 1996 sales decrease was composed of 5 percentage points resulting from unfavorable foreign currency translations due to the strengthening of the U.S. dollar, one percentage point due to a decrease in pricing and a negative 6 percentage points due to a decrease in volume and changes in product mix. Operating earnings increased 26% from $3,581 in 1995 to $4,502 in 1996 as a result of cost reduction efforts and improved gross margins. On a proforma basis (See Note 9 to Consolidated Condensed Financial Statements), European sales decreased 7% in 1996 compared to 1995 and operating earnings increased from $3,105 in 1995 to $4,502 in 1996. -10-
Asia/Pacific sales were down 5% compared to the third quarter last year. The strengthening of the U.S. dollar, compared to local currencies, caused a 9 percentage point decrease which was partially offset by a 3 percentage point increase resulting from increases in volume and change in product mix and one percentage point increase due to pricing. Operating earnings decreased slightly from ($371) in 1995 to ($429) in 1996. On a proforma basis (See Note 9 to Consolidated Condensed Financial Statements), Asia/Pacific sales were down 6% in 1996 compared to 1995 and operating earnings improved from ($560) in 1995 to ($429) in 1996. For the first nine months of 1996, Latin American sales decreased 2% from the same period in 1995 with 6 percentage points accounted for by decreased volume and changes in product mix, with a partial offset of 4 percentage points resulting from increased pricing. Operating earnings decreased substantially from $14,278 in 1995 to $9,922 in 1996 as a result of reduced volumes and a change in paint sales mix. European sales were down 8% from first nine months 1995 sales with the strengthening of the U.S. dollar causing a one percentage point decrease. The 7 percentage point decrease in local currency sales was comprised of 9 percentage points resulting from decreased volume and changes in product mix, primarily in Germany, and 2 percentage points in increased pricing. Operating earnings decreased from $12,529 in 1995 to $4,696 in 1996. Asia/Pacific sales decreased 1% with a 4 percentage point decrease resulting from a strengthened U.S. dollar. A 6 percentage point increase resulting from volume and changes in product mix was partially offset by a 3 percentage point decrease in pricing. Continued expansion activities in Asia/Pacific and the economic slowdown in Japan caused operating earnings to decrease from ($538) in 1995 to ($1,163) in 1996. On a proforma basis (See Note 9 to Consolidated Condensed Financial Statements), Latin American first nine months 1996 sales were up 2% from 1995 and operating earnings decreased from $10,548 to $9,922. In Europe sales were down 6% compared to 1995 and operating earnings decreased from $9,695 in 1995 to $4,696 in 1996. In Asia/Pacific sales approximated 1995 sales and operating income improved from ($1,414) in 1995 to ($1,163) in 1996. Cost of sales for the third quarter increased 1.1% ($2,381) over the same quarter in 1995. Consolidated gross margins, as a percent of sales, increased from 31.8% in 1995 to 32.2% in 1996. In the third quarters of 1995 and 1996, respectively, cost of goods sold was favorably impacted by reversals of $1,470 and $1,540 of first and second quarter profit-sharing accruals due to lower projected annual earnings. Excluding the impact of these reversals, consolidated gross margins as a percent of sales, would have improved from 31.3% in 1995 to 31.7% in 1996. On a proforma basis (See Note 9 to Consolidated Condensed Financial Statements), cost of sales for the third quarter increased 2.1% ($4,499) from the same period in 1995. Proforma consolidated gross margins in 1995, as a percent of sales, were 31.7% and 31.2% excluding the impact of profit-sharing reversals. The consolidated improvement in gross margins occurred as a result of improved gross margins, as a percent of sales, in North America and Europe. Year-to-date, cost of sales increased 1.9% ($11,911) when compared to the same period in 1995. Consolidated gross margins, as a percent of sales, decreased from 31.9% in 1995 to 31.4% in 1996 with lower volume and product mix in Europe and Latin America in the first six months of 1996 being the primary reasons for this decrease in gross margin percent. On a proforma basis (See Note 9 to Consolidated Condensed Financial Statements), cost of sales for the first nine months increased 2.4% ($14,885) over the same period in 1995. Proforma consolidated gross margins, as a percent of sales, decreased from 31.5% in 1995 to 31.4% in 1996. -11-
Selling, administrative, and other expenses for the quarter decreased 5.3% ($4,231) when compared to the prior year. This category of expense, as a percent of sales, decreased from 25.5% in 1995 to 23.7% in 1996. In the third quarters of 1995 and 1996, respectively, this category of expense was favorably impacted by $1,796 and $3,172 reversals of first and second quarter profit-sharing accruals due to lower annual projected earnings. Excluding these reversals, the expense, as a percent of sales, would have been 26.1% in 1995 and 24.7% in 1996. On a proforma basis (See Note 9 to Consolidated Condensed Financial Statements), selling, administrative, and other expenses for the quarter decreased 5.6% ($4,455) from the same period in 1995 and as a percent of sales decreased from 25.9% in 1995 to 23.7% in 1996. Selling, administrative, and other expenses for the first nine months were up 0.8% ($1,921) when compared to the prior year. This category of expense, as a percent of sales, decreased from 25.8% in 1995 to 25.7% in 1996. Adjusting for a $2,790 restructuring charge in the second quarter, the expense was down 0.4% ($869) and the percent of sales for 1996 would be 25.4%. The overall low sales volumes for the first six months of 1996 impacted the ability of the Company to further leverage operating expenses. On a proforma basis (See Note 9 to Consolidated Condensed Financial Statements), selling, administrative, and other expenses for the first nine months were up 0.1% ($238) over the same period in 1995 and, as a percent of sales, decreased from 26.2% in 1995 to 25.7% in 1996. Adjusting for the restructuring charge in the second quarter, the expense decreased 1.1% ($2,552) and, as a percent of sales, improved from 26.2% in 1995 to 25.4% in 1996. Year-to-date interest expense increased 6.0% ($828) primarily as a result of increased borrowing to finance the increased capital spending. In 1996 the Company had year-to-date (pre-tax) income of $17,803 from the sale of assets. This income resulted from gains on the sale of property in Munich, Germany in the second quarter of 1996 and gains from the sale of two product lines in the third quarter of 1996. Net earnings increased from $22,332 in the first nine months of 1995 to $33,100 in the first nine months of 1996. Earnings before the cumulative effect of the accounting change in 1995 were $24,864. On a proforma basis (See Note 9 to Consolidated Condensed Financial Statements), 1995 earnings before the cumulative effect of the accounting change were $19,969. 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 31, 1996 and November 30, 1995 (September 30, 1995 for international subsidiaries) and August 31, 1995 and November 30, 1994. During the first nine months of 1996, the Company generated $62,660 of cash from operations as compared to $43,659 in the first nine months of 1995. The increased generation of cash was primarily the result of a $11,817 decrease in cash required to fund working capital in 1996 and a $4,005 increase in depreciation and amortization compared to 1995. -12-
Working capital was $144,963 at August 31, 1996 compared to $142,056 at November 30, 1995. The current ratio at August 31, 1996 was 1.6 equaling the ratio at November 30, 1995. The number of days sales in trade accounts receivable was 51 days at August 31, 1996 compared to 52 days sales at August 31, 1995. The average days sales in inventory on hand was at 62 days at August 31, 1996 compared to 69 days sales at August 31, 1995. The Company's long-term debt to total capitalization ratio was 33.5% at August 31, 1996 compared to 35.7% at November 30, 1995. Long-term debt decreased primarily due to sale of assets which generated $29,551 in cash in the nine months of 1996. Capital expenditures for property, plant and equipment of $60,475 in first nine months of 1996 were primarily for continued construction of the research and development facility in Minnesota, construction of an adhesives plant in the Philippines, 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. -13-
H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES Increases(Decreases) (Dollars in Thousands) A summary of the period to period changes in the principal items included in the Consolidated Condensed Statements of Earnings is presented below: <TABLE> <CAPTION> Comparison of Thirty-Nine Comparison of Thirty-Nine Weeks Ended August 31, Weeks Ended August 31, 1996 1996 and Three Months and Proforma Three Months Ended August 31, 1995 Ended August 31, 1995 ** --------------------------- ------------------------------ <S> <C> <C> <C> <C> Net sales $11,220 1.2% $19,871 2.2% Cost of sales 11,911 1.9% 14,885 2.4% Selling, administrative and other expenses 1,921 0.8% 238 0.1% Interest expense 828 6.0% 828 6.0% Gain from sale of assets 17,803 * 17,803 * Other income (expense), net (611) -43.7% (14) -0.7% Earnings before income taxes and ------------ ----------- minority interests $13,752 33.0% $21,709 64.5% Income taxes (5,806) -35.1% (8,576) -62.2% Net earnings of consolidated subsidiaries applicable to minority interests 290 * (2) -1.9% ------------ ----------- Earnings before accounting changes $8,236 33.1% $13,131 65.8% Accounting changes 2,532 * 2,532 * ------------ ----------- Net earnings $10,768 * $15,663 89.8% ============ =========== </TABLE> <TABLE> <CAPTION> Comparison of Thirteen Comparison of Thirteen Weeks Ended August 31, Weeks Ended August 31, 1996 1996 and Three Months and Proforma Three Months Ended August 31, 1995 Ended August 31, 1995 ** --------------------------- ------------------------------ <S> <C> <C> <C> <C> Net sales $5,510 1.8% $9,037 2.9% Cost of sales 2,381 1.1% 4,499 2.1% Selling, administrative and other expenses (4,231) -5.3% (4,455) -5.6% Interest expense (812) -15.9% (812) -15.9% Gain from sale of assets 16,568 * 16,568 * Other income (expense), net (2,250) * (2,115) * Earnings before income taxes and ------------ ----------- minority interests $22,490 * $24,258 * Income taxes (9,176) * (9,435) * Net earnings of consolidated subsidiaries applicable to minority interests (61) -50.0% (140) -69.7% ------------ ----------- Net earnings $13,253 * $14,683 * ============ =========== </TABLE> * Change of 100% or more. ** See footnote 9. -14-
PART II OTHER INFORMATION Item 1. Legal Proceedings. - ----------------- ENVIRONMENTAL REMEDIATION The Company is currently deemed a potentially responsible party ("PRP"), in conjunction with numerous other parties, in a number of government enforcement and private actions associated with hazardous waste sites ("Sites"). As a PRP, the Company may be required to pay a share of the cost of investigation and cleanup of these Sites. In some cases the Company may have rights of indemnification from other parties. The Company's future liability for such claims is difficult to predict because of uncertainty as to the cost of investigation and cleanup of the Sites, the Company's responsibility for such hazardous wastes and the number or financial condition of other PRPs or defendants. Reserves for future liabilities are established as soon as an estimate of potential cleanup costs and allocation can be determined. The reserves are reviewed and revised quarterly in light of currently available technical and legal information. Based upon such available information, it is the Company's opinion that these environmental claims will not result in material liability to the Company. Following is an update on one previously reported Site. Gloucester Environmental Management Services, Inc., Gloucester Township, - ------------------------------------------------------------------------ New Jersey. - ----------- The Company had previously received notice from the EPA that it may be a PRP at this Site, and the New Jersey EPA served the Company with a complaint that named Paisley Products, Inc., from which the Company acquired certain assets, as a PRP. In addition, the Company may have liability at this Site as the result of a class action filed by residents near the Site. The Company recently contributed $82,079.42 as its portion of the allocation for the time period that the Company operated the acquired Paisley Products facility for past obligations to the EPA and the New Jersey EPA, as well as any expected cost of future remediation. Accordingly, the Company has no further liability to any regulatory agencies as a result of remedial activities at this Site. The Company believes that any potential liability associated with the action brought by residents near the landfill will be minimal, and will not materially affect its business or financial condition. Other Legal Proceeding - ---------------------- As previously reported, on January 4, 1996, Ruth Linares Polanco filed a wrongful death action against the Company and two Central American subsidiaries in Federal District Court for the District of Minnesota. The plaintiff subsequently amended the complaint, dropping the two subsidiaries as defendants. The plaintiff alleged that her brother abused a solvent-based adhesive manufactured by the Company by inhaling fumes from the adhesive, and that the Company was substantially responsible for his death. The Company filed a motion to dismiss the lawsuit on a number of legal grounds, including forum nonconveniens. The Company also filed an answer to the plaintiff's complaint denying all liability. On September 23, 1996, a United States District Court judge dismissed the lawsuit against the Company on the basis of lack of diversity and forum nonconveniens. -15-
Item 6. Exhibits and Reports on Form 8-K - -------------------------------- (a) Exhibits to Part I 27 Financial Data (b) Reports on Form 8-K During the fiscal quarter ended August 31, 1996, the Company filed one report on Form 8-K, which report was dated July 18, 1996. This Form 8-K (reporting on Item 5 "Other Events") disclosed (i) the adoption of the Shareholder Rights Plan ("Rights Plan") by the Board of Directors of the Company on July 18, 1996, (ii) the execution of an exchange agreement between the Company and the holder of the outstanding Series A preferred stock of the Company, and (iii) the authorization of a new Series B preferred stock which would be exchanged for the Series A stock on the "Distribution Date" as defined in the Rights Plan. 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 14, 1996 /s/ Jorge Walter Bolanos ------------------------ Jorge Walter Bolanos Senior Vice President, Treasurer and Chief Financial Officer Dated: October 14, 1996 /s/ David J. Maki ----------------------- David J. Maki Vice President and Controller -16-