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 MARCH 1, 1997 Commission File No. 0-3488 H. B. FULLER COMPANY A Minnesota Corporation IRS Employer Identification No. 41-0268370 1200 Willow Lake Boulevard, P.O. Box 64683, St. Paul, Minnesota 55164-0683 Telephone - (612) 415-5900 Common Stock, $1.00 par value 14,094,900 shares outstanding as of March 31, 1997 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 FIRST QUARTER 1997 Form 10-Q Quarterly Report Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Condensed Statements of Earnings - Thirteen weeks ended March 1, 1997 and March 2, 1996 Consolidated Condensed Balance Sheets - March 1, 1997 and November 30, 1996 Consolidated Condensed Statements of Cash Flows - Thirteen weeks ended March 1, 1997 and period ended March 2, 1996 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 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> THIRTEEN WEEKS ENDED -------------------------------- MARCH 1, 1997 MARCH 2, 1996 ------------- ------------- <S> <C> <C> NET SALES $304,091 $303,571 -------- -------- Costs and expenses: Cost of sales 209,363 211,510 Selling, administrative and other expenses 79,395 82,034 Interest expense 4,980 5,256 Other (income) expense, net 480 290 -------- -------- 294,218 299,090 -------- -------- Earnings before income taxes and minority interests 9,873 4,481 Income taxes (4,028) (1,788) Net earnings of consolidated subsidiaries applicable to minority interests (24) (23) -------- -------- Net earnings 5,821 2,670 Dividends on preferred stock (4) (4) -------- -------- NET EARNINGS APPLICABLE TO COMMON STOCK $ 5,817 $ 2,666 ======== ======== Average number of common and common equivalent shares outstanding 14,190 14,088 ======== ======== NET EARNINGS PER COMMON SHARE $0.41 $0.19 ======== ======== Cash dividend per common share $0.17 $0.16 ======== ======== </TABLE> * See accompanying Notes to Consolidated Condensed Financial Statements.
H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES Consolidated Condensed Balance Sheets (Unaudited) (In Thousands) <TABLE> <CAPTION> MARCH 1, 1997 NOVEMBER 30, 1996 ------------- ----------------- <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,847 $ 3,515 Trade receivables 195,986 199,786 Allowance for doubtful accounts (6,723) (7,043) Inventories 150,961 151,212 Other current assets 43,239 40,728 -------- -------- TOTAL CURRENT ASSETS 386,310 388,198 Property, plant and equipment, net of accumulated depreciation of $273,543 in 1997 and $272,991 in 1996 386,873 391,201 Other intangibles 14,768 15,383 Excess cost 34,981 36,036 Other assets 38,234 38,457 -------- -------- TOTAL ASSETS $861,166 $869,275 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable 48,854 47,920 Current installments of long-term debt 10,498 11,141 Accounts payable 108,499 118,181 Accrued expenses 52,225 61,210 Income taxes payable 12,034 8,129 -------- -------- TOTAL CURRENT LIABILITIES 232,110 246,581 Long-term debt, excluding current installments 183,349 172,779 Deferred income taxes, accrued pension cost, postretirement costs, other liabilities and minority interests 111,517 115,175 STOCKHOLDERS' EQUITY: Preferred stock 306 306 Common stock 14,090 14,066 Additional paid-in capital 23,116 22,493 Retained earnings 296,312 292,828 Foreign currency translation adjustment 4,278 9,097 Unearned compensation (3,912) (4,050) -------- -------- TOTAL STOCKHOLDERS' EQUITY 334,190 334,740 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $861,166 $869,275 ======== ======== </TABLE> See accompanying Notes to Consolidated Condensed Financial Statements. -4-
H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES Consolidated Condensed Statement of Cash Flows (Unaudited) (In Thousands) <TABLE> <CAPTION> Thirteen Weeks Ended Period Ended * March 1, 1997 March 2, 1996 --------------- ------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 5,821 $ 2,789 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,203 14,437 Pension costs 2,764 2,998 Deferred income tax (624) 1,248 Other items (1,473) 3,571 Change in current assets and liabilities: Accounts receivable (685) (6,833) Inventory (3,067) 6,091 Prepaid assets (5,101) (2,616) Accounts payable (4,825) (8,126) Accrued expense (4,330) (9,216) Income taxes payable 1,420 (2,606) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,103 1,737 CASH FLOWS FROM INVESTING ACTIVITIES: Purchased property, plant and equipment (12,395) (22,161) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (12,395) (22,161) CASH FLOWS FROM FINANCING ACTIVITIES: Increase in long-term debt 16,977 26,359 Current installments and payments of long-term debt (4,715) (13,544) Notes payable 1,722 12,289 Dividends paid (2,328) (2,245) Other (916) (654) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 10,740 22,205 Effect of exchange rate changes on cash (116) (197) -------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS (668) 1,584 Cash and cash equivalents at beginning of year 3,515 9,061 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,847 $ 10,645 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest expense (net of amount capitalized) $ 7,689 $ 5,748 Income taxes $ 3,182 $ 1,094 Noncash investing and financing activities: Assets acquired by incurring long-term debt $ - $ 3,765 </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 thirteen weeks ended March 1, 1996 for all entities and the two month stub period for Non-U.S. entities. -5-
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 March 1, 1997 and November 30, 1996, the results of its operations for the thirteen weeks ended March 1, 1997 and March 2, 1996 and its cash flows for the thirteen weeks ended March 1, 1997 and March 2, 1996. All adjustments were of a normal recurring nature. 2. The results of operations for the thirteen week period ended March 1, 1997 are not necessarily indicative of the results to be expected for the full year. 3. The composition of inventories is presented below: March 1, 1997 November 30, 1996 ------------- ----------------- Raw materials $ 68,952 $ 67,562 Finished goods 93,130 94,642 LIFO reserve (11,121) (10,992) -------- -------- $150,961 $151,212 ======== ======== 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. At March 1, 1997, the aggregate contract value of instruments used to sell 4,823 pound sterling and $4,569 to buy foreign currency (primarily 22,112 Dutch guilders) was $12,101. The contracts mature between April 28, 1997 and November 20, 2000. -6-
6. The carrying amounts and estimated fair values of the Company's significant other financial instruments at March 1, 1997, are as follows: Carrying Fair Amount Value -------- -------- Cash and short-term investments $ 2,847 $ 2,847 Notes payable 48,854 48,854 Long-term debt 193,847 201,423 Fair values of short-term financial instruments approximate their carrying values due to their short maturity. The fair value of long-term debt is based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of similar maturities. The estimates presented above on long-term financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange. -7-
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 first quarter of 1997 increased $520 or 0.2% when compared to the same quarter in 1996. Adjusting the 1996 sales for the $7,283 sales of Monarch Division, which was divested in third quarter 1996, sales increased $7,803, or 2.6%. A comparison of sales increases by operating area is as follows: Thirteen Weeks Ended March 1, 1997 And Operating Area March 2, 1996 --------------- ------------------- North America $ 5,137 3% Latin America 300 1% Europe (4,926) (7%) Asia/Pacific 9 -- ------- Total $ 520 -- ======= In North America, the 3% first quarter sales increase was composed of 5 percentage points relating to increased volume and changes in product mix, 3 percentage points resulting from a second quarter 1996 acquisition, a negative 4 percentage points from the third quarter 1996 divestiture of Monarch Division, and a negative one percentage point from pricing. The Adhesives, Sealants and Coatings Group had a 7% increase in sales with 4% resulting from a second quarter 1996 acquisition. The growth occurred primarily in the paper/converting and graphic arts markets of the industrial adhesives group and in the engineered systems and window markets of the structural adhesives group. A slow down in car production caused a decrease in automotive sales compared to the prior period and a similar slowdown in key sectors had a negative impact on our polymer sales. In the Specialty Group, sales increased 9%, excluding the impact of the Monarch Division divestiture. The primary growth in sales occurred in Industrial Coatings Division and TEC Incorporated where significant growth occurred. Foster Products sales were down substantially due to delays in export customer projects. North American operating earnings grew at a rate of 44% increasing from $5,547 to $8,001. -8-
Latin American first quarter 1997 sales increased 1% from 1996. The increase in sales is composed of 2 percentage points relating to increased volume and changes in product mix partially offset by a 1 percentage point decrease in pricing. Latin American operating earnings increased 23% when compared to 1996, increasing from $4,164 to $5,120. Stable raw material costs and tight cost controls were the primary causes for the improved earnings. In Europe, the 7% first quarter 1997 sales decrease was composed of 7 percentage points resulting from unfavorable foreign currency translations due to the strengthening of the U.S. dollar, a negative 5 percentage points due to pricing, and a positive 5 percentage points due to increased volume and changes in product mix. Operating earnings increased from $731 in first quarter 1996 to $2,343 in 1997. Increased sales volumes, stable raw materials and tight cost controls produced the increase in earnings. Asia/Pacific sales approximated the sales of the same period last year. The strengthening of the U.S. dollar, compared to local currencies, caused a 4 percentage point decrease. A positive 6 percentage point increase due to increased volume and changes in product mix was partially offset by a negative 2 percentage points in pricing. Operating earnings improved from ($415) in 1996 to ($131) in 1997. Cost of sales for the first quarter decreased 1.0% ($2,147) over the same quarter in 1996. Consolidated gross margins, as a percent of sales, increased from 30.33% in 1996 to 31.15% in 1997. Gross margins, as a percent of sales, increased in all geographic operating areas. Excluding Monarch Division, which was divested in the third quarter of 1996, 1996 gross margin, as a percent of sales, would have been 30.05%. Stable to reduced raw materials costs compared to first quarter 1996, improved volumes, and cost control measures were the reason for the improved gross margins. Some suppliers, early in the second quarter of 1997, have announced price increases of certain raw materials. The Company has already announced price increases in North America effective April 30, 1997, and is planning to increase prices in the rest of the world. Selling, administrative, and other expenses for the quarter were down 3.2% ($2,639) when compared to the prior year. This category of expense, as a percent of sales, improved from 27.0% in 1996 to 26.1% in 1997. This expense, as a percent of sales, decreases from 27.0% to 26.6% for first quarter 1996, when Monarch Division results are excluded. Cost control measures implemented in 1996 and carried into 1997 is the primary reason for the improvement in this category of expense. Income taxes for the first quarter of 1997 increased $2,240 (125.3%) when compared to the first quarter of 1996 primarily as a result of increased earnings. The 1996 effective tax rate increased from 39.9% in the first quarter to 40.8% for the year. The first quarter of 1997 reflects the 40.8% annual effective tax rate of 1996. Net earnings increased from $2,670 in the first quarter of 1996 to $5,821 in the first quarter of 1997. -9-
Liquidity and Capital Resources The cash flows as presented in this section have been calculated by comparison of the Consolidated Condensed Balance Sheets at March 1, 1997 and November 30, 1996 and March 2, 1996 and November 30, 1995. During the first quarter of 1997, the Company generated $1,103 of cash to finance operations as compared to $1,737 in the first quarter of 1996. Working capital was $154,200 at March 1, 1997 compared to $141,617 at November 30, 1996. The current ratio at March 1, 1997 was 1.7 compared to a ratio of 1.6 at November 30, 1996. The number of days sales in trade accounts receivable was 56 days at March 1, 1997 compared to 54 days sales at March 2, 1996. The average days sales in inventory on hand was at 65 days compared to 68 days sales at March 2, 1996. The primary reason for the reduction in accrued expenses is the payment of year-end 1996 salary accruals in the first quarter of 1997. The primary reason for the decrease in accounts payable was the decrease in inventories. The Company's long-term debt to total capitalization ratio was 35.4% at March 1, 1997 compared to 34.0% at November 30, 1996. Capital expenditures for property, plant and equipment of $12,395 in first quarter 1997 were primarily for continued construction of a manufacturing facility in Georgia, the investment in Information Technology, for general improvements in manufacturing productivity and operating efficiency and for environmental projects. Environmental capital expenditures, less than 10% of total expenditures, are not a material portion of overall Company expenditures. -10-
H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES Increases(Decreases) (Dollars in Thousands) A summary of the period changes in the principal items included in the Consolidated Condensed Statements of Earnings is presented below: <TABLE> <CAPTION> Comparison of Thirteen Weeks Ended March 1, 1997 and March 2, 1996 -------------------------- <S> <C> <C> NET SALES $ 520 0.2% Cost of sales 2,147 1.0% Selling, administrative and other expenses 2,639 3.2% Interest expense 276 5.3% Other income (expense), net (190) (65.5%) ------- Earnings before income taxes and minority interests $ 5,392 * Income taxes (2,240) * Net earnings of consolidated subsidiaries applicable to minority interests (1) (4.3%) ------- NET EARNINGS $ 3,531 * ======= </TABLE> * Change of 100% or more. -11-
PART II. OTHER INFORMATION Item 6. Exhibits and reports on Form 8-K (a) Exhibits to Part I 27 Financial Data Schedule 99 Report on Form 11-K of H.B. Fuller Company Thrift Plan (b) Reports on Form 8-K. No reports on Form 8-K were filed for the thirteen weeks ended March 1, 1997. 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: April 14, 1997 /S/ Jorge Walter Bolanos ------------------------ Jorge Walter Bolanos Senior Vice President, Treasurer and Chief Financial Officer Dated: April 14, 1997 /S/ David J. Maki ----------------------- David J. Maki Vice President and Controller -12-