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 September 1, 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> <S> <C> Minnesota 41-0268370 (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 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 The number of shares outstanding of the Registrant's Common Stock, par value $1.00 per share, was 14,142,632 as of September 30, 2001. -1-
PART I ------ 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> Quarter Ended Three Quarters Ended --------------------------------- ------------------------------- September 1, August 26, September 1, August 26, 2001 2000 2001 2000 ---------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Net sales $ 315,712 $ 325,977 $ 951,153 $ 999,780 Cost of sales (229,789) (239,930) (694,442) (720,886) --------------- ------------- ------------- ------------- Gross profit 85,923 86,047 256,711 278,894 Selling, administrative and other expenses (61,173) (67,034) (194,064) (204,459) Nonrecurring credits - - - 300 Interest expense (5,198) (5,802) (16,364) (17,999) Other expense, net (1,537) (1,591) (2,229) (2,219) --------------- ------------- ------------- ------------- Income before income taxes, minority interests, and equity investments 18,015 11,620 44,054 54,517 Income taxes (3,676) (4,293) (12,790) (20,171) Minority interests in consolidated income (177) (285) (687) (1,262) Income from equity investments 426 352 1,421 1,812 --------------- ------------- ------------- ------------- Net income $ 14,588 $ 7,394 $ 31,998 $ 34,896 =============== ============= ============= ============= Weighted-average common shares outstanding: Basic 13,985 13,938 13,976 13,903 =============== ============= ============= ============= Diluted 14,198 14,102 14,153 14,096 =============== ============= ============= ============= Net income per common share: Basic $ 1.04 $ 0.53 $ 2.29 $ 2.51 =============== ============= ============= ============= Diluted $ 1.03 $ 0.52 $ 2.26 $ 2.47 =============== ============= ============= ============= Cash dividend per common share $ 0.215 $ 0.210 $ 0.640 $ 0.625 =============== ============= ============= ============= </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) September 1, December 2, 2001 2000 ----------------- ----------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 11,077 $ 10,489 Trade receivables 221,770 227,709 Allowance for doubtful accounts (8,004) (6,913) Inventories 147,315 153,785 Other current assets 46,929 49,994 ----------------- ----------------- Total current assets 419,087 435,064 Property, plant and equipment, net of accumulated depreciation of $383,592 in 2001 and $362,553 in 2000 380,830 394,689 Other long-term assets 104,253 88,903 Other intangibles, net 22,738 25,202 Goodwill, net 63,959 66,503 ----------------- ----------------- Total assets $ 990,867 $ 1,010,361 ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 34,915 $ 34,543 Current installments of long-term debt 1,665 5,718 Accounts payable 111,130 126,713 Accrued expenses 49,007 53,515 Accrued nonrecurring charges 544 1,210 Income taxes payable 7,309 5,026 ----------------- ----------------- Total current liabilities 204,570 226,725 Long-term debt, excluding current installments 230,824 250,464 Accrued pension cost 62,686 71,927 Deferred income taxes and other liabilities 42,339 37,452 Minority interests 19,755 19,083 Stockholders' equity: Preferred stock 306 306 Common stock 14,136 14,116 Additional paid-in capital 37,678 36,707 Retained earnings 400,793 377,846 Accumulated other comprehensive loss (18,789) (20,088) Unearned compensation (3,431) (4,177) ----------------- ----------------- Total stockholders' equity 430,693 404,710 ----------------- ----------------- Total liabilities and stockholders' equity $ 990,867 $ 1,010,361 ================= ================= </TABLE> 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) <TABLE> <CAPTION> Three Quarters Ended -------------------------------------- September 1, August 26, 2001 2000 ----------------- ------------------ <S> <C> <C> Cash flows from operating activities: Net income $ 31,998 $ 34,896 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 39,423 38,205 Other items 648 (1,707) Change in assets and liabilities (net of effects of acquisitions/divestitures): Accounts receivable 7,377 7,257 Inventories 6,719 (12,761) Prepaid assets 799 (3,158) Other assets, net of amortization (2,104) (1,652) Accounts payable (17,211) (6,237) Accrued expense (4,625) (6,677) Accrued nonrecurring charges (544) (6,260) Income taxes payable 4,069 6,177 Accrued pension costs (9,004) (3,307) Other liabilities (2,480) (3,153) ----------------- ------------------ Net cash provided by operating activities 55,065 41,623 Cash flows from investing activities: Purchased property, plant and equipment (24,461) (34,109) Purchased business, net of cash acquired (2,022) (5,498) Purchased investments (1,495) - Proceeds from sale of investments 1,567 - Proceeds from sale of business - 3,852 Proceeds from sale of assets 2,798 6,908 ----------------- ------------------ Net cash used in investing activities (23,613) (28,847) Cash flows from financing activities: Proceeds from long-term debt 4,298 53,110 Payments on long-term debt (29,572) (60,255) Proceeds from notes payable 3,479 2,777 Dividends paid (9,051) (8,817) Other financial activities (278) 350 ----------------- ------------------ Net cash used in financing activities (31,124) (12,835) Effect of exchange rate changes 260 (241) ----------------- ------------------ Net change in cash and cash equivalents 588 (300) Cash and cash equivalents at beginning of year 10,489 5,821 ----------------- ------------------ Cash and cash equivalents at end of period $ 11,077 $ 5,521 ================= ================== </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> Quarter Ended ----------------------------------- September 1, 2001 August 26, 2000 ------------------ --------------- <S> <C> <C> Net income $14,588 $ 7,394 Dividends on preferred shares (4) (4) ------- ------- Income attributable to common shares $14,584 $ 7,390 ======= ======= Weighted-average common shares - basic 13,985 13,938 Dilutive effect of stock compensation plans 213 164 ------- ------- Weighted-average common shares - diluted 14,198 14,102 ======= ======= <CAPTION> Three Quarters Ended ----------------------------------- September 1, 2001 August 26, 2000 ----------------- --------------- <S> <C> <C> Net income $31,998 $34,896 Dividends on preferred shares (12) (12) ------- ------- Income attributable to common shares $31,986 $34,884 ======= ======= Weighted-average common shares - basic 13,976 13,903 Dilutive effect of stock compensation plans 177 193 ------- ------- Weighted-average common shares - diluted 14,153 14,096 ======= ======= </TABLE> The computations of diluted income per common share do not include options exercisable for 7 and 43 common shares with exercise prices greater than the average market price of the common shares for third quarter 2001 and 2000, respectively, and of 28 and 25 for the three quarters 2001 and 2000, respectively, as the results would have been anti-dilutive. 3. Comprehensive Income: The components of total comprehensive income are: <TABLE> <CAPTION> Quarter Ended ----------------------------------- September 1, 2001 August 26, 2000 ------------------ --------------- <S> <C> <C> Net income $ 14,588 $ 7,394 Other comprehensive income (loss) Foreign currency translation, net 3,357 (879) -------- -------- Total comprehensive income $ 17,945 $ 6,515 ======== ======== </TABLE> -5-
<TABLE> <CAPTION> Three Quarters Ended ----------------------------------- September 1, 2001 August 26, 2000 ----------------------------------- <S> <C> <C> Net income $ 31,998 $ 34,896 Other comprehensive income (loss) Foreign currency translation, net 1,299 (7,941) -------- -------- Total comprehensive income $ 33,297 $ 26,955 ======== ======== </TABLE> 4. Inventories: The composition of inventories is: September 1, 2001 December 2, 2000 ----------------- ---------------- Raw materials $ 60,220 $ 59,986 Finished goods 98,138 104,836 LIFO reserve (11,043) (11,037) ------- ------- $147,315 $153,785 ======= ======= 5. Restructuring Reserve: The restructuring reserve related to the Company's 1998 restructuring plan has a remaining balance of $544. The balance consists of redundant lease payments and severance costs in Europe. Payments in the three quarters of 2001 were $666. 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 denominated liabilities. Because contracts outstanding were not designated as hedges, the gains and losses are recognized in the income statement of the same period as the remeasurement of the related foreign currency denominated liabilities. Notional amounts of forward contracts outstanding were $3,183, however, notional amounts are not a measure of the Company's exposure. As of September 1, 2001, the Company had forward contracts maturing between September 28, 2001 and August 15, 2002. In the opinion of the Company, changes in market value were not material during the quarter ended September 1, 2001. 7. Operating Segments: The following table presents information about the Company's operating segments for all periods presented. Inter- For the Quarter Ended Trade Segment Operating September 1, 2001 Revenue Revenue Income ----------------- ---------- -------- ---------- North America Adhesives $142,518 $ 6,217 $17,800 Europe Adhesives 50,832 1,198 369 Latin America Adhesives 18,125 262 (778) Asia/Pacific Adhesives 23,700 -- 643 Specialty Group 80,537 187 6,716 Corporate and Unallocated -- (7,864) -- -------- ------- ------- Total $315,712 -- $24,750 ======== ======= ======= -6-
<TABLE> <CAPTION> Inter- For the Quarter Ended Trade Segment Operating August 26, 2000 Revenue Revenue Income --------------- ------- ------- ------ <S> <C> <C> <C> North America Adhesives $145,585 $ 3,682 $11,645 Europe Adhesives 53,610 796 (529) Latin America Adhesives 18,768 250 (849) Asia/Pacific Adhesives 24,115 12 252 Specialty Group 83,899 348 8,494 Corporate and Unallocated -- (5,088) -- -------- -------- ------- Total $325,977 -- $19,013 ======== ======== ======= <CAPTION> Inter- For the Three Quarters Trade Segment Operating Ended September 1, 2001 Revenue Revenue Income ----------------------- ------- ------- ------- <S> <C> <C> <C> North America Adhesives $418,345 $ 15,881 $43,789 Europe Adhesives 158,748 3,966 992 Latin America Adhesives 56,096 925 (2,443) Asia/Pacific Adhesives 71,100 -- 619 Specialty Group 246,864 1,166 19,690 Corporate and Unallocated -- (21,938) -- -------- -------- ------- Total $951,153 -- $62,647 ======== ======== ======= <CAPTION> Inter- For the Three Quarters Trade Segment Operating Ended August 26, 2000 Revenue Revenue Income --------------------- ------- ------- ------ <S> <C> <C> <C> North America Adhesives $436,943 $ 12,254 $35,645 Europe Adhesives 170,648 2,583 7,376 Latin America Adhesives 57,737 1,012 (25) Asia/Pacific Adhesives 74,049 12 1,334 Specialty Group 260,403 1,384 30,105 Corporate and Unallocated -- (17,245) -- -------- -------- ------- Total $999,780 -- $74,435 ======== ======== ======= <CAPTION> Reconciliation of Operating Income to Pretax Income: For the Quarter Ended September 1, 2001 August 26, 2000 --------------------- ----------------- --------------- <S> <C> <C> Operating income $ 24,750 $19,013 Interest expense (5,198) (5,802) Gains (losses) from sales of assets (145) 36 All other (1,392) (1,627) -------- -------- Pretax income $ 18,015 $ 11,620 ======== ======== <CAPTION> For the Three Quarters Ended September 1, 2001 August 26, 2000 ---------------------------- ----------------- --------------- <S> <C> <C> Operating income $ 62,647 $ 74,435 Nonrecurring items -- 300 Interest expense (16,364) (17,999) Gains from sales of assets 1,472 2,071 All other (3,701) (4,290) -------- -------- Pretax income $ 44,054 $ 54,517 ======== ======== </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 Bulletin No. 101, which summarizes certain of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company 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. 10. New Accounting Standards: In June 2001, the FASB issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets". These Statements eliminate the pooling-of-interests method of accounting for business combinations and the systematic amortization of goodwill. The Company adopted SFAS No. 141 on July 1, 2001 and plans to adopt SFAS No. 142 during the first quarter of fiscal 2002. The adoption of SFAS No. 142 will reduce fiscal 2002 goodwill amortization expense, on a pre-tax basis, by approximately $4,000. Item 2. Management's Discussion and Analysis of Results of Operations and ----------------------------------------------------------------- Financial Condition ------------------- Results of Operations --------------------- Net sales in the third quarter of 2001 of $315.7 million were $10.3 million or 3.1 percent less than net sales in the third quarter of 2000. The continued strength of the U.S. dollar and reduced demand due to the slowing global economy were the primary reasons for the reduction in sales. Sales volume decreased 3.1 percent as compared to the third quarter of 2000 and the negative impact from the strong U.S. dollar was 2.3 percent. Partially offsetting these negative variances was a 2.3 percent increase in selling prices. For the nine months ended September 1, 2001, net sales of $951.2 million were 4.9 percent less than the net sales for the first nine months of 2000. Sales volume decreased 5.0 percent, currency had a negative impact of 2.2 percent and selling prices increased 2.3 percent. The following table shows the net sales changes from 2000 to 2001 for the third quarter and nine months year-to-date by operating segment: <TABLE> <CAPTION> Increase/(Decrease) ($ Millions) Third Quarter Nine Months ------------------- --------------------- --------------------- <S> <C> <C> <C> <C> North America Adhesives $ (3.1) (2.1%) $(18.6) (4.3%) Europe Adhesives (2.8) (5.2%) (11.9) (7.0%) Latin America Adhesives (0.6) (3.4%) (1.6) (2.8%) Asia/Pacific Adhesives (0.4) (1.7%) (3.0) (4.0%) Specialty Group (3.4) (4.0%) (13.5) (5.2%) ------ ------ Total HBF $(10.3) (3.1%) $(48.6) (4.9%) ====== ====== </TABLE> The net sales decrease in the third quarter for North America Adhesives was primarily caused by reduced volume of 4.4 percent, as compared to the third quarter of 2000. Sales to the automotive market continued to fall well below last year's levels as the North American auto manufacturers continued to scale back production. Selling prices increased in North America Adhesives during the third quarter by 2.6 percent. Excluding the automotive market, in which prices declined, selling prices increased 3.1 percent as compared to the third quarter of 2000. Through the first nine months of 2001, net sales in North America Adhesives decreased 4.3 percent from the same period in 2000. Sales volume decreased 6.9 percent primarily as a result of the slowdown in the U.S. economy. Selling prices increased 2.9 percent and the weakness in the Canadian dollar had a negative 0.3 percent impact on the nine-month sales results as compared to last year. The relative strength of the U.S. dollar as compared to the euro and the British pound had a negative 7.5 percent impact on net sales in Europe Adhesives during the third quarter as compared to the same period in 2000. Sales volume in Europe decreased 2.0 percent and selling prices increased 4.3 percent as compared to the third quarter of 2000. The year-to-date net sales in Europe Adhesives were 7.0 percent below last year. The foreign currency weakness had a negative 6.5 percent effect while sales volume decreased 4.6 percent. The volume decrease was caused significantly by the weakness in the European economies. Selling prices increased 4.1 percent in the first nine months of 2001 as compared to the same period of 2000. -8-
The decrease in net sales for the Latin America Adhesives segment during the third quarter of 2001 was mainly caused by depressed economic conditions in South America - primarily Argentina. This is the third consecutive year of economic weakness in Argentina, which also impacts our businesses in Brazil and Chile. Sales volume decreased over 4.0 percent in Latin America Adhesives as compared to the third quarter of 2000. The nine-month sales shortfall in Latin America Adhesives of 2.8 percent was caused mainly by the same issues that affected the third quarter results namely, depressed economies in South America. Asia/Pacific Adhesives was the only operating segment to show a volume increase during the third quarter as compared to the same period of 2000. Volume increased in Asia/Pacific by 6.1 percent as compared to the third quarter of 2000. This volume increase however, was more than offset by negative currency effects of 11.2 percent. Weakness in the Australian dollar and Japanese yen as compared to the U.S. dollar was the main reason for the negative currency impact. The currency impact through nine months of 2001 was 10.8 percent as compared to 2000. The negative year-to-date currency variance was partially offset by a 4.9 percent volume increase and a 1.9 percent increase in selling prices. The Specialty Group net sales decrease in the third quarter was driven by a 4.2 percent decrease in volume as compared to the third quarter of 2000. The Global Coatings division, which was significantly impacted by the slowdown of the U.S. economy, accounted for over half of the volume decrease incurred by the Specialty Group. Similar to the third quarter results, the nine-month net sales decrease of 5.2 percent in the Specialty Group as compared to the first nine months of 2000 was caused primarily by volume decreases of nearly 6.0 percent. The consolidated gross profit margin was 27.2 percent in the third quarter of 2001, as compared to 26.4 percent in the third quarter of 2000. Higher raw material costs in this year's third quarter as compared to last year were offset by higher selling prices and improvements in manufacturing efficiencies. Through the first nine months of 2001 the gross profit margin of 27.0 percent was 0.9 percentage points less than the gross profit margin through the first nine months of 2000. The increase in raw material costs was the primary reason for the reduced margin in 2001 as compared to 2000. Selling, administrative and other expenses (SG&A) were 19.4 percent of net sales in the third quarter of 2001 as compared to 20.6 percent in the third quarter of 2000. Lower payroll costs due to a reduction in the number of employees were the primary reason for the lower SG&A percentage. The number of employees at September 1, 2001 was 4,926 as compared to 5,156 at August 26, 2000. Of this reduction of 230 employees, 180 were included in the SG&A expenses. Another contributing factor to the lower expenses in 2001 was that U.S. pension expenses were $1.8 million less than the third quarter of 2000. Through the first nine months of 2001, U.S. pension expenses were $5.4 million less than the same period of 2000. SG&A expenses for the first nine months of 2001 were 20.4 percent of net sales as compared to 20.5 percent for the first nine months of 2000. Interest expense of $5.2 million in the third quarter of 2001 was $0.6 million or 10.4 percent less than the third quarter of 2000. Lower average outstanding debt levels resulting from improved cash flows, was the primary reason for the reduced interest expense as compared to last year. Interest expense through the first nine months of 2001 of $16.4 million was $1.6 million or 9.1 percent less than the same period in 2000. The income tax rate for the third quarter of 2001 was 20.4 percent. This included a one-time tax benefit of $2.6 million resulting from changes in the Company's legal structure. The change in legal structure allowed the Company to take advantage of tax losses that were not previously recognizable under generally accepted accounting principles in the United States of America. Excluding the one-time benefit, the income tax rate in both the third quarter and the first nine months of 2001 was 35 percent. In both the third quarter and first nine months of 2000 the rate was 37 percent. Net income in the third quarter of 2001 of $14.6 million was $7.2 million or 97.3 percent more than the net income in the third quarter of 2000. Excluding the one-time tax benefit of $2.6 million the net income increased over last year by $4.6 million or 61.7 percent. The net income per diluted share was $1.03 in the third quarter of 2001, as compared to $0.52 per diluted share in the third quarter of 2000. The one-time tax benefit had a positive impact on the third quarter of 2001 of $0.19 per diluted share. -9-
Operating Segment Results ------------------------- The Company evaluates the performance of its operating segments based on operating income, which is defined as gross profit minus selling, administrative and other expenses. Corporate expenses are fully allocated to the operating segments. Operating income in North America Adhesives of $17.8 million in the third quarter of 2001 was 52.9 percent higher than the operating income in the third quarter of 2000. Reduced expenses primarily related to employee payroll and benefits costs, were the main reason for the improved operating income. Through the first nine months of 2001, operating income in North America Adhesives was $8.1 million or 22.9 percent better than the first nine months of 2000. Europe Adhesives reported operating income of $0.4 million in the third quarter of 2001 as compared to an operating loss of $0.5 million in the third quarter of 2000. The gross profit margin increased from last year as a result of higher selling prices and improved manufacturing efficiencies. The year-to-date operating income in Europe Adhesives was $1.0 million in 2001 as compared to $7.4 million for the same period of 2000. Lower gross profit margin due to increases in raw material costs was the primary reason for the decrease in the year-to-date operating income. Latin America Adhesives incurred an operating loss of $0.8 million in both the third quarter of 2001 and the third quarter of 2000. This year's operating loss resulted primarily from the lower sales volume in 2001 as compared to 2000. Through nine months of 2001, Latin America Adhesives reported an operating loss of $2.4 million as compared to an approximate breakeven level for the same period in 2000. The 2000 result included a positive $1.5 million settlement against a raw material supplier. In Asia/Pacific Adhesives, operating income of $0.6 million in the third quarter of 2001 was $0.4 million higher than the third quarter of 2000. Higher sales volume combined with a higher gross profit margin more than offset the negative effects of the weakness in currencies as compared to the U.S. dollar. Lower selling, administrative and other expenses also contributed to the improved operating income. The Asia/Pacific Adhesives operating income through the first nine months of 2001 was over 50 percent less than the operating income in the first nine months of 2000. Lower gross profit margin caused primarily by higher raw material costs was the main reason for the operating income decrease. The Specialty Group had operating income of $6.7 million in the third quarter of 2001 as compared to $8.5 million in the third quarter of 2000. Through nine months of 2001, operating income was $19.7 million as compared to $30.1 million through the first nine months of 2000. The main cause of the lower operating income was lower sales volume due to the slowdown of the U.S. economy. Sales volume in 2001 was 4.2 percent less than 2000 in the third quarter and 5.9 percent less than 2000 in the first nine months. Liquidity and Capital Resources ------------------------------- Cash flows provided by operating activities in the first nine months of 2001 were $55.1 million as compared to $41.6 million in the same period of 2000. Cash flows related to changes in inventory levels were positive $6.7 million in the first nine months of 2001 as compared to negative $12.8 million for the same period in 2000. Partially offsetting the positive cash flow impact from lower inventory levels was a decrease in accounts payable. The cash flows related to changes in accounts payable were negative $17.2 million in the first nine months of 2001, as compared to negative $6.2 million in the first nine months of 2000. Trade accounts receivable days sales outstanding were at 61 days as of September 1, 2001 - the same as at August 26, 2000. The current ratio was 2.0 at the end of the third quarter of 2001 as compared to 1.8 at the end of the third quarter of 2000. The current ratio was 1.9 at the end of the fourth quarter of 2000. The Company's ratio of long-term debt to long-term debt plus equity was 34.9 percent as of September 1, 2001. As of August 26, 2000 and December 2, 2000 the ratio was 38.7 percent and 38.2 percent, respectively. Long-term debt decreased from $250.5 million as of December 2, 2000 to $230.8 million as of September 1, 2001. Capital expenditures for property, plant and equipment were $8.9 million and $24.5 million for the third quarter of 2001 and first nine months of 2001, respectively. For the same periods of 2000 the expenditures were $11.4 million and $34.1 million, respectively. -10-
Cash and cash equivalents were $11.1 million as of September 1, 2001. Current cash levels, combined with the Company's unused lines of credit are considered adequate to fund the Company's normal operations over the next year. Euro Currency Conversion ------------------------ There have not been any significant new developments relating to the euro conversion since year-end 2000. Refer to the 2000 Form 10-K for a complete discussion of the euro conversion. 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. The Company specifically disclaims any intention or obligation to update any such information. 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. -11-
PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K. One report on Form 8-K was filed during the quarter ended September 1, 2001 reporting the Company's financial results for the second 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: October 16, 2001 /s/ Raymond A. Tucker --------------------- Raymond A. Tucker Senior Vice President and Chief Financial Officer -12-