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 1, 2002 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. 001-09225 H.B. FULLER COMPANY (Exact name of registrant as specified in its charter) Minnesota 41-0268370 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1200 Willow Lake Boulevard, Vadnais Heights, Minnesota 55110-5101 (Address of principal executive offices) (Zip Code) (651) 236-5900 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the Registrant's Common Stock, par value $1.00 per share, was 28,353,413 as of June 28, 2002. -1-
PART I. FINANCIAL INFORMATION Item 1. Financial Statements H.B. FULLER COMPANY AND SUBSIDIARIES Statement of Consolidated Income (In thousands, except per share amounts) <TABLE> <CAPTION> (Unaudited) ---------------------------------------------------------- Thirteen Weeks Twenty-six Weeks Ended Ended --------------------------- -------------------------- June 1, June 2, June 1, June 2, 2002 2001 2002 2001 ------------- ------------- ------------ ------------- <S> <C> <C> <C> <C> Net revenue $ 319,402 $ 328,507 $ 612,642 $ 635,441 Cost of sales (231,965) (240,294) (450,027) (464,653) --------- --------- --------- --------- Gross profit 87,437 88,213 162,615 170,788 Selling, administrative and other expenses (71,382) (64,600) (140,214) (132,891) Interest expense (4,420) (5,503) (9,136) (11,166) Other income (expense), net 171 (171) (455) (692) --------- --------- --------- --------- Income before income taxes, minority interests, equity investments and accounting change 11,806 17,939 12,810 26,039 Income taxes (4,078) (6,117) (4,520) (9,114) Minority interests in consolidated income (328) (495) (607) (510) Income from equity investments 535 533 918 995 --------- --------- --------- --------- Income before cumulative effect of accounting change 7,935 11,860 8,601 17,410 Cumulative effect of accounting change - - - (501) --------- --------- --------- --------- Net income $ 7,935 $ 11,860 $ 8,601 $ 16,909 ========= ========= ========= ========= Basic income per common share: Income before accounting change $ 0.28 $ 0.42 $ 0.31 $ 0.62 Accounting change - - - (0.02) --------- --------- --------- --------- Net income $ 0.28 $ 0.42 $ 0.31 $ 0.60 ========= ========= ========= ========= Diluted income per common share: Income before accounting change $ 0.28 $ 0.42 $ 0.30 $ 0.62 Accounting change - - - (0.02) --------- --------- --------- --------- Net income $ 0.28 $ 0.42 $ 0.30 $ 0.60 ========= ========= ========= ========= Weighted-average common shares outstanding: Basic 28,071 27,954 28,038 27,943 Diluted 28,643 28,270 28,540 28,261 Dividends per share $ 0.110 $ 0.108 $ 0.218 $ 0.212 </TABLE> See accompanying notes to consolidated financial statements. -2-
H.B. FULLER COMPANY AND SUBSIDIARIES Consolidated Balance Sheet (Dollars in thousands) <TABLE> <CAPTION> (Unaudited) June 1, December 1, 2002 2001 ------------------------------- <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 2,184 $ 11,454 Trade receivables 226,833 219,711 Allowance for doubtful accounts (8,308) (8,121) Inventories 149,243 141,210 Other current assets 45,363 39,619 ---------------------------- Total current assets 415,315 403,873 Net property, plant and equipment 357,755 371,113 Other assets 112,312 107,432 Goodwill 63,916 62,037 Other intangibles, net 20,468 21,718 ---------------------------- Total assets $969,766 $966,173 ============================ Liabilities and Stockholders' Equity Current liabilities: Notes payable $ 34,924 $ 27,601 Current installments of long-term debt 2,325 3,479 Trade payables 112,286 114,155 Accrued payroll and employee benefits 31,763 30,659 Other accrued expenses 38,705 19,714 Income taxes payable 11,179 8,555 ---------------------------- Total current liabilities 231,182 204,163 Long-term debt, excluding current installments 173,298 203,001 Accrued pensions 63,664 66,012 Other liabilities 39,536 39,413 Minority interests in consolidated subsidiaries 20,122 19,558 ---------------------------- Total liabilities 527,802 532,147 ---------------------------- Commitments and contingencies Stockholders' equity: Series A preferred stock - 306 Common stock, par value $1.00 per share 28,334 28,281 Shares outstanding June 1, 2002 were 28,333,734 and December 1, 2001 were 28,280,896 Additional paid-in capital 38,999 37,830 Retained earnings 398,480 396,048 Accumulated other comprehensive loss (21,408) (25,150) Unearned compensation - restricted stock (2,441) (3,289) ---------------------------- Total stockholders' equity 441,964 434,026 ---------------------------- Total liabilities and stockholders' equity $969,766 $966,173 ============================ </TABLE> See accompanying notes to consolidated financial statements. -3-
H.B. FULLER COMPANY AND SUBSIDIARIES Consolidated Statement of Cash Flows (In thousands) <TABLE> <CAPTION> (Unaudited) Twenty-six Weeks Ended ------------------------------- June 1, 2002 June 2, 2001 ------------------------------- <S> <C> <C> Cash flows from operating activities: Net income $ 8,601 $ 16,909 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 29,631 26,344 Change in assets and liabilities: Accounts receivables, net (5,133) 6,369 Inventories (6,177) 1,092 Other assets (5,622) (2,191) Accounts payables (2,949) (11,590) Accrued payroll and employee benefits and other accrued expenses 1,764 (5,665) Restructuring liability 5,949 (544) Income taxes payable 3,518 4,901 Accrued pensions (3,150) (5,571) Other liabilities 1,739 (4,606) Other 3,437 (954) ------------------------------ Net cash provided by operating activities 31,608 24,494 Cash flows from investing activities: Purchased property, plant and equipment (12,448) (15,600) Proceeds from sale of property, plant and equipment 975 2,282 Proceeds from sale of investment - 1,567 ------------------------------ Net cash used in investing activities (11,473) (11,751) Cash flows from financing activities: Proceeds from long-term debt 21,635 7,724 Repayment of long-term debt (50,748) (16,798) Proceeds from notes payable 5,114 564 Dividends paid (6,169) (6,010) Other 592 (224) ------------------------------ Net cash (used in) provided by financing activities (29,576) (14,744) Effect of exchange rate changes 171 (11) ------------------------------ Net change in cash and cash equivalents (9,270) (2,012) Cash and cash equivalents at beginning of period 11,454 10,489 ------------------------------ Cash and cash equivalents at end of period $ 2,184 $ 8,477 ============================== See accompanying notes to consolidated financial statements. </TABLE> -4-
H.B. FULLER COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands) 1. Accounting Policies: The accompanying unaudited consolidated 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 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 financial statements reflect all adjustments of a normal recurring nature considered necessary for a fair presentation of the 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 unaudited interim consolidated 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 1, 2001 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> 13 Weeks Ended 26 Weeks Ended ------------------- ------------------- June 1, June 2, June 1, June 2, 2002 2001 2002 2001 ------------------- ------------------- <S> <C> <C> <C> <C> Net income $ 7,935 $ 11,860 $ 8,601 $ 16,909 Dividends on preferred shares (3) (4) (7) (8) -------- -------- -------- -------- Income attributable to common shares $ 7,932 $ 11,856 $ 8,594 $ 16,901 =========================================== Weighted-average common shares - basic 28,071 27,954 28,038 27,943 Equivalent shares - stock-based compensation plans 572 316 502 318 -------- -------- -------- -------- Weighted-average common shares - diluted 28,643 28,270 28,540 28,261 =========================================== </TABLE> The computations of diluted income per common share do not include stock options with exercise prices greater than the average market price of the common shares of 1 and 28 for the second quarter of 2002 and 2001, respectively, and of 3 and 48 for the first half of 2002 and 2001, respectively, as the results would have been anti-dilutive. 3. Comprehensive Income: The components of total comprehensive income follows: <TABLE> <CAPTION> 13 Weeks Ended 26 Weeks Ended -------------------------- -------------------------- June 1, 2002 June 2, 2001 June 1, 2002 June 2, 2001 -------------------------- -------------------------- <S> <C> <C> <C> <C> Net income $ 7,935 $ 11,860 $ 8,601 $ 16,909 Other comprehensive income (loss) Foreign currency translation, net 4,604 (5,068) 3,742 (2,058) -------------------------- -------------------------- Total comprehensive income $ 12,539 $ 6,792 $ 12,343 $ 14,851 ======================================================= </TABLE> 4. Inventories: The composition of inventories follows: June 1, 2002 December 1, 2001 --------------------------------- Raw materials $ 59,152 $ 57,226 Finished goods 100,791 95,149 LIFO reserve (10,700) (11,165) --------------------------------- $ 149,243 $ 141,210 ================================= -5-
5. Restructuring and Other Related Costs: During the second quarter of 2002, the Company recorded pretax charges of $6,622 ($4,063 after tax and minority interests) in the income statement in connection with its restructuring plan that was announced on January 15, 2002. For the first six months of 2002 pretax charges recorded were $14,297 ($8,992 after tax and minority interests). The plan calls for the elimination of approximately 20 percent of the Company's current manufacturing capacity. The Company is streamlining facilities and operations in Latin America, Europe and North America by reducing capacity and eliminating other cost structures. In connection with the 2002 restructuring plan, the Company expects to record pretax charges in the range of $30 to $35 million, inclusive of the $1.6 million of accelerated depreciation charges recorded in the fourth quarter of 2001. These charges will include employee separation costs, accelerated depreciation on assets held and used until disposal, lease/contract termination costs and other costs directly related to the restructuring plan. The charges will be incurred throughout 2002. Cash costs of the plan are expected to be $20 to $25 million, of which $2.8 million have been paid as of June 1, 2002. The following table summarizes the restructuring charges and the related restructuring liabilities: <TABLE> <CAPTION> Employee Severance and Accelerated (Dollars in thousands) Benefits Depreciation Other Total ------------------------------------------------------- <S> <C> <C> <C> <C> Balance at December 2, 2001 $ 349 $ -- $ 176 $ 525 2002 charges (pretax) First quarter 4,784 1,637 1,254 7,675 Second quarter 2,831 2,830 961 6,622 ------------------------------------------------------- Total charges 7,615 4,467 2,215 14,297 Non-cash charges (669) (4,467) (5,136) Currency change effect 135 19 154 Cash payments (2,063) (711) (2,774) ---------- ---------------------- Total liabilities at June 1, 2002 5,367 1,699 7,066 Long-term portion of liabilities -- (492) (492) ---------- ---------------------- Current liabilities at June 1, 2002 $ 5,367 $ 1,207 $ 6,574 ========== ====================== </TABLE> The total pretax charges of $6,622 in the second quarter of 2002 were recorded in the income statement as: $3,844 in cost of sales and $2,778 in selling, administrative and other expenses (SG&A). The $3,844 in cost of sales consisted of $565 of employee severance and benefits, $2,735 of accelerated depreciation, $237 of adverse lease termination costs and $307 of other costs directly attributed to the restructuring plan. The $2,778 in SG&A expenses consisted of $2,266 of employee severance and benefits, $95 of accelerated depreciation, $177 of adverse lease termination costs and $240 of other costs directly attributed to the restructuring plan. Through the first six months of 2002, total pretax charges of $14,297 were recorded in the income statement as: $10,098 in cost of sales and $4,199 in SG&A expenses. The $10,098 in cost of sales consisted of $4,009 of employee severance and benefits, $4,363 of accelerated depreciation, $1,415 of lease termination costs and $311 of other costs directly attributed to the restructuring plan. The $4,199 in SG&A expenses consisted of $3,608 of employee severance and benefits, $104 of accelerated depreciation, $177 of lease termination costs and $310 of other costs directly attributed to the restructuring plan. Non-cash charges attributed to employee severance and benefits are related to the granting of accelerated vesting on restricted stock held by certain employees subject to the restructuring. The long-term portion of the restructuring liability relates to adverse lease commitments that are expected to be paid beyond one year. The beginning balance of $525 in the restructuring liability relates to a prior restructuring plan. -6-
6. Derivatives: Derivatives consisted primarily of forward currency contracts (primarily to receive euros) 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 outstanding at June 1, 2002 were $136,193, however, notional amounts are not a measure of the Company's exposure. As of June 1, 2002, the Company had forward contracts maturing between June 3, 2002 and November 20, 2002. In the opinion of management, the amounts recorded for changes in market value during the quarter and the first half of 2002 were not material. 7. Preferred Stock Redemption: On May 20, 2002 the Company redeemed all Series A preferred stock at par value and paid a pro rata dividend for the second quarter on those shares for a total cost of $309. 8. Operating Segments: Effective for the first quarter of 2002, the new internal management structure has caused a change in segment reporting. The change has resulted in the reporting of two operating segments: Global Adhesives and Full-Valu/Specialty. The global adhesives operating segment is comprised of industrial adhesives and automotive adhesives product lines. Markets served in the global adhesives operating segment include packaging, graphic arts, nonwoven, assembly (woodworking, appliances, etc.), converting, automotive and footwear. These product lines and markets were previously reported on a geographic segment basis. The Full-Valu/Specialty operating segment represents the specialty product lines including TEC, Foster, Global Coatings, liquid paints and other product lines that constitute "Full-Valu". <TABLE> <CAPTION> 13 Weeks Ended -------------------------------------------------------------------------------------- June 1, 2002 June 2, 2001 ---------------------------------------- ---------------------------------------- Inter- Inter- Trade Segment Operating Trade Segment Operating Revenue Revenue Income Revenue Revenue Income ---------------------------------------- ---------------------------------------- <S> <C> <C> <C> <C> <C> <C> Global Adhesives $ 219,807 $ 757 $ 14,574 $ 226,925 $ 1,533 $ 15,292 Full-Valu/Specialty 99,595 284 8,103 101,582 12 8,321 Corporate and Unallocated - (1,041) - - (1,545) - ---------------------------------------- ---------------------------------------- Total $ 319,402 $ - $ 22,677 $ 328,507 $ - $ 23,613 ======================================== ======================================== <CAPTION> 26 Weeks Ended -------------------------------------------------------------------------------------- June 1, 2002 June 2, 2001 ---------------------------------------- ---------------------------------------- Inter- Inter- Trade Segment Operating Trade Segment Operating Revenue Revenue Income Revenue Revenue Income ---------------------------------------- ---------------------------------------- <S> <C> <C> <C> <C> <C> <C> Global Adhesives $ 420,622 $ 2,255 $ 23,897 $ 437,341 $ 3,508 $ 23,631 Full-Valu/Specialty 192,020 472 12,801 198,100 684 14,266 Corporate and Unallocated - (2,727) - - (4,192) - ---------------------------------------- ---------------------------------------- Total $ 612,642 $ - $ 36,698 $ 635,441 $ - $ 37,897 ======================================== ======================================== </TABLE> Reconciliation of Operating Income to Income before Income Taxes: <TABLE> <CAPTION> 13 Weeks Ended 26 Weeks Ended ------------------------------ ------------------------------ June 1, 2002 June 2, 2001 June 1, 2002 June 2, 2001 ------------------------------ ------------------------------ <S> <C> <C> <C> <C> Operating income $ 22,677 $ 23,613 $ 36,698 $ 37,897 Restructuring and other related costs (6,622) - (14,297) - Interest expense (4,420) (5,503) (9,136) (11,166) Other income/(expense), net 171 (171) (455) (692) ------------------------------ ------------------------------ Income before income taxes $ 11,806 $ 17,939 $ 12,810 $ 26,039 ============================== ============================== </TABLE> -7-
9. Adopted Accounting Standards: In June 2001 the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets". These Statements eliminated the pooling-of-interests method of accounting for business combinations and the systematic amortization of goodwill. SFAS No. 141 applies to all business combinations with a closing date after June 30, 2001, of which the Company had no such activity. Effective December 2, 2001, the Company early adopted SFAS No. 142. Under the new standard, purchased goodwill is no longer amortized over its useful life. Therefore, no goodwill amortization expense was incurred during the first half of 2002. Beginning December 2, 2001 goodwill will be tested for impairment on an annual basis, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. An impairment loss would generally be recognized when the carrying amount of reporting unit's net assets exceeds the estimated fair value of the reporting unit. The estimated fair value of the reporting unit is determined using a discounted cash flow analysis of projected cash flows over the next five years. Had SFAS No. 142 been effective in fiscal year 2001, net income and earnings per share would have been reported as the following amounts: <TABLE> <CAPTION> 13 Weeks Ended 26 Weeks Ended 52 Weeks Ended June 2, 2001 June 2, 2001 December 1, 2001 ---------------------- -------------------- ---------------------- <S> <C> <C> <C> Reported net income $ 11,860 $ 16,909 $ 44,439 Add back goodwill amortization, net 994 1,969 3,857 ---------------------- -------------------- ---------------------- Adjusted net income $ 12,854 $ 18,878 $ 48,296 ====================== ==================== ====================== Basic earnings per share: Net income as reported $ 0.42 $ 0.60 $ 1.59 Add back goodwill amortization, net 0.04 0.07 0.14 ---------------------- -------------------- ---------------------- Adjusted net income $ 0.46 $ 0.67 $ 1.73 ====================== ==================== ====================== Diluted earnings per share: Net income as reported $ 0.42 $ 0.60 $ 1.57 Add back goodwill amortization, net 0.03 0.07 0.13 ---------------------- -------------------- ---------------------- Adjusted net income $ 0.45 $ 0.67 $ 1.70 ====================== ==================== ====================== </TABLE> The two fiscal years prior to 2001 would have been reported as follows: <TABLE> <CAPTION> 53 Weeks Ended 52 Weeks Ended December 2, 2000 November 27, 1999 ---------------------- ------------------------- <S> <C> <C> Reported net income $ 49,163 $ 43,370 Add back goodwill amortization, net 3,879 3,444 ---------------------- ------------------------- Adjusted net income $ 53,042 $ 46,814 ====================== ========================= Basic earnings per share: Net income as reported $ 1.77 $ 1.57 Add back goodwill amortization, net 0.14 0.12 ---------------------- ------------------------- Adjusted net income $ 1.91 $ 1.69 ====================== ========================= Diluted earnings per share: Net income as reported $ 1.74 $ 1.55 Add back goodwill amortization, net 0.14 0.12 ---------------------- ------------------------- Adjusted net income $ 1.88 $ 1.67 ====================== ========================= </TABLE> - 8 -
<TABLE> <CAPTION> Purchased Balances of acquired intangible Technology & assets subject to amortization were: Patents All Other Total ------------------------------------ ------------------- ---------------- -------------- <S> <C> <C> <C> As of June 1, 2002: Amortizable Intangible Assets: Original cost $ 34,044 $ 1,561 $ 35,605 Accumulated Amortization (17,581) (940) (18,521) -------------------- ----------------- -------------- Total intangible assets, net $ 16,463 $ 621 $ 17,084 ==================== ================= ============== As of December 1, 2001: Amortizable Intangible Assets: Original cost $ 34,044 $ 1,561 $ 35,605 Accumulated Amortization (16,309) (892) (17,201) -------------------- ----------------- -------------- Total intangible assets, net $ 17,735 $ 669 $ 18,404 ==================== ================= ============== </TABLE> Estimated amortization expense for acquired intangible assets recorded as of December 1, 2001 for the next five years is as follows: Year Amortization Expense ---- -------------------- 2003 $2,471 2004 $2,082 2005 $2,079 2006 $2,073 2007 $2,068 The Company has completed its transitional impairment testing and no changes to the carrying value of goodwill and other intangible assets were made as a result of the adoption of SFAS No. 142. Subsequent impairment testing will take place annually as well as when a triggering event indicating impairment may have occurred. 10. Recently Issued Accounting Standard: In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations for a disposal of a segment of a business". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company will adopt this standard for its fiscal year beginning December 1, 2002. The impact of adopting this accounting standard is not expected to have a material effect on the financial position and results of operations of the Company. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net sales in the second quarter of 2002 of $319.4 million were $9.1 million or 2.8 percent less than the net sales of $328.5 million reported in the second quarter of 2001. The sales performance continued to be affected by the overall weakness in the global economy as evidenced by the sales volume decrease of 1.1 percent as compared to the second quarter of 2001. Selling prices also accounted for a 1.1 percent decrease in the quarterly sales as compared to last year. Fluctuations in foreign currencies as compared to the U.S. dollar accounted for the remaining 0.6 percent decrease as compared to last year. -9-
Through the first half of 2002 net sales of $612.6 million were $22.8 million or 3.6 percent less than the net sales in the first half of 2001. Sales volume decreased 1.7 percent, selling prices decreased 0.9 percent and currency fluctuations caused a 1.0 percent decrease as compared to last year. Second quarter net sales in the Global Adhesives operating segment of $219.8 million decreased 3.1 percent from the $226.9 million reported in the second quarter of 2001. Sales volume decreased 1.5 percent from a year ago while selling prices and currency effects both had a negative 0.8 percent impact as compared to last year. Sales to the automotive market increased 6.7 percent, primarily due to an increase in vehicle production in North America of approximately 4.5 percent. The nonwoven market was another area of strength in the second quarter with a 4.7 percent sales increase compared to last year. Markets that continued to be impacted by the overall slowdown in economic activity were assembly (appliances, woodworking, etc.) and graphic arts. Second quarter sales to the assembly market decreased 8.3 percent and sales to the graphic arts market decreased 9.7 percent as compared to last year. Six months net sales in the Global Adhesives operating segment of $420.6 million decreased 3.8 percent from the first half of 2001. Sales volume decreased 2.2 percent, currency fluctuations caused a 1.3 percent decrease and selling prices decreased 0.3 percent. Similar to the second quarter results, sales to the automotive and nonwoven markets increased over the first half of 2001 by 10 percent and 5.1 percent, respectively. These increases were offset by sales declines in the graphic arts, assembly and paper converting markets of 8.3 percent, 9.3 percent and 7.3 percent, respectively. Net sales in the Full-Valu/Specialty operating segment of $99.6 million in the second quarter of 2002 were $2.0 million or 2.0 percent less than the second quarter of 2001. Selling prices decreased 1.7 percent, currency effects were a negative 0.2 percent and sales volume decreased 0.1 percent. The decrease in selling prices was attributed primarily to the liquid paints market in Central America and the powder coatings market in North America. Both markets have seen a high level of price competition as a reaction to the slowdown in overall economic activity. TEC product sales increased 6.6 percent in the second quarter of 2002 as compared to last year. The year-to-date net sales in Full-Valu/Specialty of $192.0 million were $6.1 million or 3.1 percent less than the net sales of $198.1 million recorded in the first half of 2001. Selling prices, primarily due to competition in the powder coatings and liquid paints markets, decreased 2.3 percent compared to the first half of 2001. Sales volume and currency fluctuations both had a negative impact of 0.4 percent. Sales to the window market increased 4.9 percent over last year and TEC product sales increased 3.3 percent over the first six months of 2001. Both of these businesses have benefited from the strength of the U.S. housing market. During the second quarter of 2002, the Company recorded pretax charges of $6,622 ($4,063 after tax and minority interests) in connection with its restructuring plan that was announced on January 15, 2002. For the first six months of 2002 pretax charges recorded were $14,297 ($8,992 after tax and minority interests). The plan, which was contemplated in 2001, but approved and implemented throughout 2002, calls for the elimination of approximately 20 percent of the Company's current manufacturing capacity. The Company is streamlining facilities and operations in Latin America, Europe and North America. By reducing capacity and eliminating other cost structures management estimates that upon completion, costs will be reduced $10 to $12 million annually. Implementation of the plan will result in the elimination of approximately 350 positions, primarily in manufacturing, of which approximately 240 have occurred during the first six months of 2002. The reduction of 350 positions will be offset by the hiring of approximately 100 employees in facilities that will take on additional volume as a result of the restructuring plan. In connection with the 2002 restructuring plan, the Company expects to record pretax charges in the range of $30 to $35 million, inclusive of the $1.6 million of accelerated depreciation charges recorded in the fourth quarter of 2001. These charges will include employee separation costs, accelerated depreciation on assets held and used until disposal, lease/contract termination costs and other costs directly related to the restructuring plan. The charges will be incurred throughout 2002. Cash costs of the plan are expected to be $20 to $25 million, of which $2.8 million have been incurred as of June 1, 2002. The following table summarizes the restructuring charges and the related restructuring liabilities: -10-
<TABLE> <CAPTION> Employee (Dollars in thousands) Severance and Accelerated Benefits Depreciation Other Total ------------------------------------------------------------ <S> <C> <C> <C> <C> Balance at December 2, 2001 $ 349 $ -- $ 176 $ 525 2002 charges (pretax) First quarter 4,784 1,637 1,254 7,675 Second quarter 2,831 2,830 961 6,622 ------------------------------------------------------------ Total charges 7,615 4,467 2,215 14,297 Non-cash charges (669) (4,467) (5,136) Currency change effect 135 19 154 Cash payments (2,063) (711) (2,774) ----------- ---------------------- Total liabilities at June 1, 2002 5,367 1,699 7,066 Long-term portion of liabilities -- (492) (492) ----------- ---------------------- Current liabilities at June 1, 2002 $ 5,367 $ 1,207 $ 6,574 =========== ====================== </TABLE> The total pretax charges of $6,622 in the second quarter of 2002 were recorded in the income statement as: $3,844 in cost of sales and $2,778 in selling, administrative and other expenses (SG&A). The $3,844 in cost of sales consisted of $565 of employee severance and benefits, $2,735 of accelerated depreciation, $237 of adverse lease termination costs and $307 of other related costs. The $2,778 in SG&A expenses consisted of $2,266 of employee severance and benefits, $95 of accelerated depreciation, $177 of adverse lease termination costs and $240 of other related costs. Through the first six months of 2002, total pretax charges of $14,297 were recorded in the income statement as: $10,098 in cost of sales and $4,199 in SG&A expenses. The $10,098 in cost of sales consisted of $4,009 of employee severance and benefits, $4,363 of accelerated depreciation, $1,415 of lease termination costs and $311 of other related costs. The $4,199 in SG&A expenses consisted of $3,608 of employee severance and benefits, $104 of accelerated depreciation, $177 of lease termination costs and $310 of other related costs. Non-cash charges attributed to employee severance and benefits are related to the granting of accelerated vesting on restricted stock held by certain employees subject to the restructuring. The long-term portion of the restructuring liability relates to adverse lease commitments that are expected to be paid beyond one year. The beginning balance of $525 in the restructuring liability relates to a prior restructuring plan. Following is Supplemental Unaudited Consolidated Statement of Income information. The Company considers this information to be useful in assessing operating results excluding the effects of the restructuring plan. <TABLE> <CAPTION> 13 Weeks Ended - June 1, 2002 ------------------------------------------------ (Dollars in thousands, except per share amounts) Excluding 13 Weeks Ended As Reported Special Items Special Items June 2, 2001 ----------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales $ 319,402 $ - $ 319,402 $ 328,507 Cost of sales (231,965) (3,844) (228,121) (240,294) --------------------------------------------------------------- Gross profit 87,437 (3,844) 91,281 88,213 Selling, administrative and other expenses (71,382) (2,778) (68,604) (64,600) Interest expense (4,420) - (4,420) (5,503) Other income/(expense), net 171 - 171 (171) --------------------------------------------------------------- Income before tax and minority interests 11,806 (6,622) 18,428 17,939 Income taxes (4,078) 2,371 (6,449) (6,117) Minority interests (328) 188 (516) (495) Income from equity investments 535 - 535 533 --------------------------------------------------------------- Net income $ 7,935 $ (4,063) $ 11,998 $ 11,860 =============================================================== Income per diluted share: Net Income $ 0.28 $ (0.14) $ 0.42 $ 0.42 =============================================================== </TABLE> -11-
<TABLE> <CAPTION> 26 Weeks Ended - June 1, 2002 --------------------------------------------------- (Dollars in thousands, except per share amounts) Excluding 26 Weeks Ended As Reported Special Items Special Items June 2, 2001 ---------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales $ 612,642 $ - $ 612,642 $ 635,441 Cost of sales (450,027) (10,098) (439,929) (464,653) ---------------------------------------------------------------------- Gross profit 162,615 (10,098) 172,713 170,788 Selling, administrative and other expenses (140,214) (4,199) (136,015) (132,891) Interest expense (9,136) - (9,136) (11,166) Other income/(expense), net (455) - (455) (692) ---------------------------------------------------------------------- Income before tax and minority interests 12,810 (14,297) 27,107 26,039 Income taxes (4,520) 4,967 (9,487) (9,114) Minority interests (607) 338 (945) (510) Income from equity investments 918 - 918 995 ---------------------------------------------------------------------- Income before cumulative effect of accounting change 8,601 (8,992) 17,593 17,410 Cumulative effect of accounting change - - - (501) ---------------------------------------------------------------------- Net income $ 8,601 $ (8,992) $ 17,593 $ 16,909 ====================================================================== Income per diluted share: Before cumulative effect of accounting change $ 0.30 $ ( 0.32) $ 0.62 $ 0.62 Cumulative effect of accounting change - - - (0.02) ---------------------------------------------------------------------- Net Income $ 0.30 $ (0.32) $ 0.62 $ 0.60 ====================================================================== </TABLE> The following discussion excludes the impact of the restructuring plan on the first half results. The consolidated gross profit margin in the second quarter of 2002 of 28.6 percent was 1.7 percentage points higher than the second quarter of 2001. Favorable raw material prices were the main reason for the margin improvement. Through six months of 2002 the gross profit margin was 28.2 percent, a 1.3 percentage point increase over the first half of 2001. Selling, administrative and other expenses (SG&A) of $68.6 million in the second quarter of 2002 were $4.0 million or 6.2 percent more than the $64.6 million of SG&A expenses recorded in the second quarter of 2001. Included in the 2002 expenses as compared to 2001 is a decrease of approximately $2.3 million in U.S. pension and other postretirement income. The $2.3 million represents 75 percent of the total decrease in U.S. pension and other postretirement income of nearly $3.0 million. The remaining decrease of $0.7 million was included in cost of sales. Another reason for the increase in SG&A expenses from last year was that management bonus accruals were approximately $1.8 million higher in the second quarter of 2002 as compared to the second quarter of 2001. In the second quarter of 2001 the Company was not reaching its financial targets, therefore the management bonus accruals were reduced accordingly. In 2002, the Company is still within reach of its annual targets, therefore the bonus accruals have not been reduced. As a percentage of sales, the SG&A expenses in the second quarter of 2002 were 21.5 percent as compared to 19.7 percent in the second quarter of 2001. Through six months of 2002, SG&A expenses were 22.2 percent of sales as compared to 20.9 percent through the first half of 2001. In dollars, SG&A expenses of $136.0 million in the first half of 2002 were $3.1 million or 2.4 percent higher than the same period in 2001. The decrease in U.S. pension and other post-retirement income was approximately $4.5 million in the first half of 2002 as compared to the first half of 2001. Spending controls and reduced employee census have partially offset the SG&A expense increase due to the changes in the U.S. pension and post-retirement income. Employee census at June 1, 2002 was 4,747 as compared to 4,966 at June 2, 2001. Of the net reduction of 219 employees, 147 were included in cost of sales and 72 were included in SG&A expenses. Interest expense in the second quarter of 2002 of $4.4 million was $1.1 million less than last year. Lower average debt levels, combined with lower interest rates, resulted in the lower interest expense. Through six months of 2002 interest expense of $9.1 million was $2.0 million below the first half of 2001, also due to the lower average debt levels and interest rates. -12-
Other income/expense, net was income of $0.2 million as compared to an expense of $0.2 million in the second quarter of 2001. Last year's results included a gain on the sale of an investment in Japan of $1.6 million offset by $1.0 million of goodwill amortization expense. The 2002 results exclude goodwill amortization expense due to the adoption of the Financial Accounting Standards Board's Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets". The standard eliminated the systematic amortization of goodwill. Currency effects resulted in a gain of $0.4 million in the second quarter of 2002 as compared to a loss of $0.3 million in the second quarter of 2001. The second quarter gain in 2002 was primarily due to changes in the euro and Brazilian real. For the first half of 2002 other income/expense, net was an expense of $0.5 million as compared to an expense of $0.7 million in the first half of 2001. Currency effects reflected an expense of $0.6 million in the first half of 2002 and an expense of $0.3 million last year. The $0.6 million currency loss in the first half of 2002 includes a first quarter loss from the Argentine peso of $0.7 million and a second quarter gain of $0.2 million from the Argentine peso. Last year's first half included the $1.6 million gain on the sale of an investment in Japan as well as $2.0 million of goodwill amortization expense. The income tax rate in the second quarter of 2002 was 35 percent. In the second quarter of 2001 the Company lowered its effective tax rate from 37 percent to 35 percent due to the mix of worldwide income and tax planning initiatives. This resulted in an effective rate for the second quarter of 2001 of 34.1 percent. The rate for the total year 2001 was 35 percent. Net income was $12.0 million or $0.42 per diluted share in the second quarter of 2002. For the same period in 2001 net income was $11.9 million or $.42 per diluted share. Through six months of 2002 the net income was $17.6 million or $.62 per diluted share as compared to $17.4 million of net income before the cumulative effect of an accounting change or $.62 per diluted share in 2001. Operating Segment Results Effective for the first quarter of 2002, the new internal management structure has caused a change in segment reporting. The change has resulted in the reporting of two operating segments: Global Adhesives and Full-Valu/Specialty. The global adhesives operating segment is comprised of the industrial adhesives and automotive adhesives product lines. Markets served in the global adhesives operating segment include packaging, graphic arts, nonwoven, assembly (woodworking, appliances, etc.), converting, automotive and footwear. These product lines and markets were previously reported on a geographic segment basis. The Full-Valu/Specialty operating segment represents the specialty product lines including TEC, Foster, Global Coatings, liquid paints and other product lines that constitute "Full-Valu". Management evaluates the performance of its operating segments based on operating income, which is defined as gross profit minus SG&A expenses. Corporate expenses are fully allocated to the operating segments. Charges related to the restructuring initiative are excluded from the operating segment analysis. Operating income of $14.6 million for the Global Adhesives operating segment in the second quarter of 2002 was $0.7 million or 4.7 percent less than the second quarter of 2001. The lower sales levels and higher SG&A expenses caused the operating income to fall from last year's level. The gross profit margin increased 2.2 percentage points from the second quarter of 2001 to 26.2 percent primarily as a result of lower raw material costs. SG&A expenses remain tightly controlled through reduced headcount and lower discretionary spending, however the reduced pension and other postretirement income as well as the higher management bonus expenses in 2002 caused the total SG&A expense to exceed last year's level by nearly $4.0 million. Operating income as a percent of sales was 6.6 percent in the second quarter of 2002, as compared to 6.7 percent in the second quarter of 2001. Through six months of 2002 the operating income in Global Adhesives was $23.9 million as compared to $23.6 million for the same period of 2001. Reduced raw material costs were the primary reason for the first half operating income of 2002 to exceed the operating income in the same period last year. Operating income of $8.1 million for the Full-Valu/Specialty operating segment in the second quarter of 2002 was $0.2 million or 2.6 percent less than the second quarter of 2001. The gross profit margin increased 0.5 percentage points to 33.8 percent as margin increases in Foster products, TEC products and the window -13-
product line offset decreases in liquid paints and Global Coatings. SG&A expenses in Full-Valu/Specialty were $25.6 million in the second quarter of 2002 compared to $25.5 million in the second quarter of 2001. Operating income as a percent of sales in the second quarter of 2002 was 8.1 percent as compared to 8.2 percent in the second quarter of 2001. Operating income for the first half of 2002 was $12.8 million as compared to $14.3 million in the first half of 2001. The lower first half operating income in 2002 as compared to last year was primarily due to the 3.8 percent decline in net sales. Liquidity and Capital Resources Note: Cash flow and balance sheet discussion includes the impact from the restructuring and other related costs. Net cash provided from operating activities in the first half of 2002 of $31.6 million was $7.1 million more than in the same period last year. Operating working capital, defined as current assets excluding cash less current liabilities excluding short-term debt of $219 million was equal to operating working capital at December 1, 2001. As a percent of annualized trade sales the operating working capital was 17.2 percent as of June 1, 2002 as compared to 18.4 percent at June 2, 2001 and 17.0 percent at December 1, 2001. Trade accounts receivable days sales outstanding (DSO) were 62 days at June 1, 2002 as compared to 59 days at both December 1, 2001 and June 2, 2001. One factor contributing to the higher DSO number was the change in currency exchange rates. For example, the quarter-end euro exchange rate used to translate the balance sheet to U.S. dollars was approximately 1.07 euro/dollar while the average rate for the quarter used to translate the income statement was approximately 1.13 euro/dollar. This resulted in a relatively higher trade accounts receivable balance in U.S. dollars as compared to the trade sales, which lead to the higher DSO result. Similar impacts were realized from the Japanese yen, Australian dollar and other foreign currencies as the U.S. dollar weakened during the second quarter. Average inventory days on hand of 61 days was equal to the days on hand at both December 1, 2001 and June 2, 2001. Other accrued expenses increased from $19.7 million at December 1, 2001 to $38.7 million at June 2, 2002. This increase of $19.0 million includes the increase in restructuring liabilities of $6.5 million. Another significant increase resulted from the reclassification of $4.5 million to short-term liability from long-term liability as a result of a change in company policy in the U.S. regarding compensated absences. The remaining increase of $8.0 million in other accrued expenses was spread over several entities. Total debt of $210.5 million at June 1, 2002 was $23.6 million or 10.1 percent less than total debt at December 1, 2001 and $69 million or 24.7 percent less than the total debt level at June 2, 2001. Strong operating cash flow combined with relatively low investment activity allowed the Company to reduce its overall debt levels during the first half of 2002. The Company's capitalization ratio (defined as total debt divided by total debt plus stockholders' equity) was 32.3 percent at June 1, 2002 as compared to 35.0 percent at December 1, 2001 and 40.2 percent at June 2, 2001. Capital expenditures for property, plant and equipment in the first half of 2002 were $12.4 million as compared to $15.6 million in the first half of 2001. Euro Currency Conversion There were no significant developments in the first half of 2002 as the Company changed its functional currency for its European adhesives operations to the euro effective December 2, 2001. Safe Harbor for Forward-Looking Statements 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 British pound, the Japanese yen, the Australian dollar, the Argentine peso 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 -14-
changes in the volume of products sold, currency impact, 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 consolidated financial statements. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The Registrant's annual meeting was held on April 18, 2002. There was a total of 31,965,038 combined Common and Series A Preferred share votes entitled to be cast at the meeting. (b) The following matters were submitted to a vote of security holders during the second quarter: Proposal 1 - Election of Directors for a term expiring at the 2005 annual meeting of shareholders: <TABLE> <CAPTION> Combined Common and Series A Preferred Share Votes -------------------------------------------------- Director Name in Favor Withheld ------------- -------- -------- <S> <C> <C> J. Michael Losh 26,891,088 1,962,912 Lee R. Mitau 27,467,254 1,386,746 R. William Van Sant 26,876,017 1,977,982 </TABLE> Norbert R. Berg, Freeman A. Ford, Gail D. Fosler, Reatha Clark King, Knut Kleedehn, John. J. Mauriel, Jr. and Albert P.L. Stroucken continued to serve as directors following the meeting. Proposal 2 - Proposal to Ratify the Appointment of PricewaterhouseCoopers LLP as the Registrant's independent auditors for the fiscal year ending November 30, 2002: <TABLE> <CAPTION> Combined Common and Series A Preferred Share Votes -------------------------------------------------- For Against Abstain --- ------- ------- <S> <C> <C> 27,205,081 1,507,015 141,903 </TABLE> Proposal 3 - Approve the redemption of all outstanding shares of Series A Preferred Stock: <TABLE> <CAPTION> Combined Common and Series A Preferred Share Votes -------------------------------------------------- For Against Abstain Broker non-vote --- ------- ------- --------------- <S> <C> <C> <C> 23,187,850 2,395,707 146,051 3,124,391 </TABLE> -15-
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 June 1, 2002 reporting the financial results for the first quarter of 2002. 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 16, 2002 /s/ Raymond A. Tucker -------------------------------- Raymond A. Tucker Senior Vice President and Chief Financial Officer -16-