UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED FEBRUARY 28, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ..................to..................... Commission File No. 0-3488 H.B. FULLER COMPANY (Exact name of registrant as specified in its charter) <TABLE> <CAPTION> <S> <C> MINNESOTA 41-0268370 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) </TABLE> 1200 WILLOW LAKE BOULEVARD, VADNAIS HEIGHTS, MINNESOTA 55110 (Address of principal executive offices) (Zip Code) (612) 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 13,899,621 as of March 31, 1998. -1-
<TABLE> <CAPTION> H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES Consolidated Condensed Statements of Earnings (Unaudited) (In Thousands Except Per Share Amounts) Thirteen Weeks Ended --------------------------------- February 28, March 1, % 1998 1997 Change --------------- --------------- ----------- <S> <C> <C> <C> Net sales $ 310,656 $ 304,091 2.2% Cost of sales (213,022) (209,363) 1.7% --------------- --------------- Gross profit 97,634 94,728 3.1% Selling, administrative and other expenses (82,197) (79,395) 3.5% --------------- --------------- Operating earnings 15,437 15,333 0.7% Interest expense (5,209) (4,980) 4.6% Other income (expense), net (829) (480) 72.7% --------------- --------------- Earnings before income taxes and minority interests 9,399 9,873 (4.8)% Income taxes (3,835) (4,028) (4.8)% Net earnings of consolidated subsidiaries applicable to minority interests 80 (24) * Earnings from equity investments 310 - * --------------- --------------- Net earnings 5,954 5,821 2.3% Dividends on preferred stock (4) (4) --------------- --------------- Net earnings applicable to common stock $5,950 $5,817 2.3% =============== =============== Average number of common and common equivalent shares outstanding: Basic 13,675 13,940 (1.9)% =============== =============== Diluted 13,812 14,080 (1.9)% =============== =============== Net earnings per common share: Basic $0.44 $0.42 4.8% =============== =============== Diluted $0.43 $0.41 4.9% =============== =============== Cash dividend per common share $0.185 $0.165 12.1% =============== =============== </TABLE> * Change of 100% or more. -2-
<TABLE> <CAPTION> H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES Consolidated Condensed Balance Sheets (In Thousands) (Unaudited) February 28, November 29, 1998 1997 ----------------- ----------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $3,546 $2,710 Trade receivables 209,330 211,469 Allowance for doubtful accounts (5,731) (5,879) Inventories 168,610 150,685 Other current assets 53,096 50,171 ----------------- ----------------- Total current assets 428,851 409,156 Property, plant and equipment, net of accumulated depreciation of $314,892 in 1998 and $299,356 in 1997 407,906 398,561 Deposits and miscellaneous assets 64,387 62,196 Other intangibles 19,126 13,830 Excess cost 46,485 33,903 ----------------- ----------------- Total assets $966,755 $917,646 ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $71,542 $39,675 Current installments of long-term debt 3,732 2,551 Accounts payable 118,788 121,883 Accrued expenses 52,612 68,952 Income taxes payable 3,396 4,488 ----------------- ----------------- Total current liabilities 250,070 237,549 Long-term debt, excluding current installments 264,720 229,996 Accrued pension cost 77,433 76,694 Deferred income taxes and other liabilities 18,867 18,477 Minority interest 15,561 15,816 Stockholders' equity: Preferred stock 306 306 Common stock 13,886 13,841 Additional paid-in capital 27,466 25,009 Retained earnings 308,364 304,975 Foreign currency translation adjustment (2,383) 366 Unearned compensation (7,535) (5,383) ----------------- ----------------- Total stockholders' equity 340,104 339,114 ----------------- ----------------- Total liabilities and stockholders' equity $966,755 $917,646 ================= ================= </TABLE> See accompanying Notes to Consolidated Condensed Financial Statements. -3-
<TABLE> <CAPTION> H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES Consolidated Condensed Statement of Cash Flows (Unaudited) (In Thousands) Thirteen Weeks Ended -------------------------------------- February 28, March 1, 1998 1997 ----------------- ----------------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 5,954 $ 5,821 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,070 11,203 Pension costs 2,238 2,764 Deferred income tax 2,997 (624) Other items (4,468) (1,473) Change in current assets and liabilities: Accounts receivable 5,202 (685) Inventory (12,198) (3,067) Prepaid assets (4,612) (5,101) Accounts payable (7,459) (4,825) Accrued expense (12,295) (4,330) Income taxes payable (1,841) 1,420 ----------------- ----------------- Net cash (used)provided by operating activities (15,412) 1,103 Cash flows from investing activities: Purchased property, plant and equipment (12,922) (12,395) Purchased business, net of cash acquired (35,139) - ----------------- ----------------- Net cash used in investing activities (48,061) (12,395) Cash flows from financing activities: Increase in long-term debt 50,338 16,977 Current installments and payments of long-term debt (14,861) (4,715) Notes payable 32,883 1,722 Dividends paid (2,564) (2,328) Other (1,417) (916) ----------------- ----------------- Net cash provided by financing activities 64,379 10,740 Effect of exchange rate changes on cash (70) (116) ----------------- ----------------- Net change in cash and cash equivalents 836 (668) Cash and cash equivalents at beginning of year 2,710 3,515 ----------------- ----------------- Cash and cash equivalents at end of period $ 3,546 $ 2,847 ================= ================= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest expense (net of amount capitalized) $ 9,218 $ 7,689 Income taxes $ 2,730 $ 3,182 </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. -4-
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 February 28, 1998 and November 29, 1997, the results of its operations for the thirteen weeks ended February 28, 1998 and March 1, 1997 and its cash flows for the thirteen weeks ended February 28, 1998 and March 1, 1997. All adjustments were of a normal recurring nature. 2. The results of operations for the thirteen week period ended February 28, 1998 are not necessarily indicative of the results to be expected for the full year. 3. The composition of inventories is presented below: <TABLE> <CAPTION> FEBRUARY 28, 1998 NOVEMBER 29, 1997 ------------------ ------------------ <S> <C> <C> Raw materials $ 75,214 $ 71,234 Finished goods 104,636 90,634 LIFO reserve (11,240) (11,183) -------- -------- $168,610 $150,685 ======== ======== </TABLE> 4. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128 is effective for financial statements for periods ending after December 15, 1997. Under SFAS No. 128, the previous presentation of earnings per share is replaced with dual presentation of basic earnings per share and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of stock options and restricted stock grants that could share in the earnings. The Company adopted SFAS No. 128 for the quarter ended February 28, 1998 and has restated last year net earnings per share data presented to conform to the provisions of this statement. The difference between basic and diluted earnings per share data as presented is due to the dilutive impact of stock options and restricted stock grants whose exercise price or grant price was below the average common stock price for the respective period presented. 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 February 28, 1998, the aggregate contract value of instruments used to sell 4,521 pound sterling, 5,400 deutsche marks, 2,975 French francs, and $4,262 to buy foreign currency (primarily 27,740 Dutch guilders) was $13,800. The contracts mature between May 27, 1998 and November 20, 2000. -5-
6. The carrying amounts and estimated fair values of the Company's significant other financial instruments at February 28, 1998, are as follows: <TABLE> <CAPTION> CARRYING FAIR AMOUNT VALUE -------- -------- <S> <C> <C> Cash and short-term investments $ 3,546 $ 3,546 Notes payable 71,542 71,542 Long-term debt 268,452 278,245 </TABLE> 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. -6-
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 1998 increased $6,565 or 2.2% when compared to the same quarter in 1997. A comparison of sales increases by operating area is as follows: <TABLE> <CAPTION> THIRTEEN WEEKS ENDED FEBRUARY 28, 1998 AND OPERATING AREA MARCH 1, 1997 -------------- ------------- <S> <C> <C> North America $ 8,851 5% Latin America 1,699 3% Europe (3,982) (6%) Asia/Pacific (3) -- ------- Total $ 6,565 2% ======= </TABLE> In North America, the 5% first quarter sales increase was composed of 4 percentage points relating to increased volume and changes in product mix, 2 percentage points resulting from a second quarter 1997 joint venture, and a negative one percentage point from pricing and currency. The Adhesives, Sealants and Coatings Group had a one percentage point decrease in sales, which was primarily the result of negative pricing and currency. Bad weather on the east and west coasts of the United States and in Canada contributed to the flat sales volume for first quarter 1998 compared to 1997. Additionally, sales incentives in the fourth quarter of 1997 had some impact on first quarter 1998 sales as did slower demand in some market segments, primarily in the paper/converting market. In the Specialty Group, sales increased 10%. The primary growth in sales occurred in Industrial Coatings Division where significant growth occurred and in Foster Products where sales were up substantially partially due to a weak 1997 first quarter to compare against. The Automotive Group increased sales 30% for the quarter. However, 20 percentage points of the increase came from the sales contribution of the joint venture partner EMS-Chemie. Volume increases of 12 percentage points were partially offset by 2 percentage points lower unit pricing during the quarter. North American operating earnings grew at a rate of 24.6% increasing from $8,368 to $10,428. The fiscal 1998 first quarter includes a $2,328 favorable earnings impact compared to the same period last year, due to refinements in inventory accounting in North America. With the design of new information systems, the company has refined its inventory accounting method to spread fixed manufacturing costs evenly over total annual production. While this refinement has no affect on annual earnings comparisons, there is a quarterly impact due to differences in production volume. The first quarter has the largest impact because of the seasonally low production volume in the quarter. -7-
Latin American first quarter 1998 sales increased 3% from 1997. The increase in sales is composed of 5 percentage points relating to increased volume and changes in product mix partially offset by a 2 percentage point decrease in pricing. Latin American operating earnings decreased 15% when compared to 1997, from $5,064 to $4,306. Operating earnings were below prior year due to bad weather in the region, pricing pressures, and slower economies in several countries, mainly Brazil and Argentina, two major markets. In Europe, the 6% first quarter 1998 sales decrease was composed of 8 percentage points resulting from unfavorable foreign currency translations due to the strengthening of the U.S. dollar, a negative 3 percentage points due to pricing and a positive 5 percentage points due to increased volume and changes in product mix. Operating earnings decreased from $2,049 in first quarter 1997 to $1,348 in 1998. Lower operating expenses during the quarter were not enough to offset the lower gross margins caused by the negative impact of raw material shortages, primarily for products sold to the nonwoven market, and competitive pricing pressures. 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 15 percentage point decrease. Local currency sales increased 9 percentage points due to increased volume and changes in product mix and 6 percentage points as a result of a fourth quarter 1997 acquisition. Operating results decreased from ($148) in 1997 to ($645) in 1998, primarily due to negative economic conditions in the region, caused by the continuing currency crisis. Cost of sales for the first quarter increased 1.7% ($3,659) over the same quarter in 1997. Consolidated gross margins, as a percent of sales, increased from 31.15% in 1997 to 31.43% in 1998. Gross margins were positively impacted by the $2,328 North American refinement in inventory reporting. Overall, raw materials costs were stable when compared to first quarter 1997. However, some of our formulas are based on Styrene, Isoprene, Styrene or SIS block co- polymers. Currently there is a shortage of SIS in the marketplace, which is expected to impact the Company the balance of the year. Strong demand and tight supply of Isoprene monomer, the feedstock for SIS, has caused the shortage. As a result prices are increasing in all geographic areas. Price increases to our customers are also being implemented where appropriate. Automotive gross margins as a percent of sales decreased as a result of the second quarter 1997 joint venture and due to pricing pressures within the industry. Our management continues in the process of rationalizing and merging the operations of the two automotive companies. Selling, administrative, and other expenses for the quarter were up 3.5% ($2,802) when compared to the prior year. This category of expense, as a percent of sales, increased from 26.11% in 1997 to 26.46% in 1998. Low volume sales growth in the quarter was the reason for the increase in this category of expense, as a percent of sales. Interest expense of $5,209 increased $229 from the expense of the first quarter of 1997. This was mainly the result of higher overall debt levels to fund acquisitions, repurchase Company stock and for funding of benefit plans. Income taxes for the first quarter of 1998 decreased $193 (4.8%) when compared to the first quarter of 1997 as a result of decreased earnings. The first quarter of 1998 reflects the 40.8% annual effective tax rate of 1997. Net earnings increased from $5,821 in the first quarter of 1997 to $5,954 in the first quarter of 1998. Basic earnings per share increased from $0.42 to $0.44. -8-
LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The cash flows as presented in this section have been calculated by comparison of the Consolidated Condensed Balance Sheets at February 28, 1998 and November 29, 1997 and March 1, 1997 and November 30, 1996. During the first quarter of 1998, the Company used $15,412 of cash to finance operations as compared to generating $1,103 of cash in the first quarter of 1997. Compared to last year, operating working capital increased as a result of increased inventory and reduced accrued expense, primarily due to profit-sharing paid in first quarter 1998. Working capital was $178,781 at February 28, 1998 compared to $171,607 at November 29, 1997. The current ratio at February 28, 1998 was 1.7, equal to the ratio at November 29, 1997. The number of days sales in trade accounts receivable was 59 days at February 28, 1998 compared to 56 days sales at March 1, 1997. The average days sales in inventory on hand was at 63 days compared to 62 days sales at March 1, 1997. The primary reason for the reduction in accrued expenses is the payment of year-end 1997 salary accruals in the first quarter of 1998. The Company's long-term debt to total capitalization ratio was 43.8% at February 28, 1998 compared to 40.4% at November 29, 1997. The primary reason for the increase in this ratio was the funding of a European first quarter acquisition. Capital expenditures for property, plant and equipment of $12,922 in first quarter 1998 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. 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: the Asian economic crisis and other 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; foreign exchange rate fluctuations (particularly with respect to the German mark and the Japanese yen); the regulatory and trade environment; the year 2000 computer issue; 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. -9-
PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - -------------------------------- (a) Exhibits to Part I 27 Financial Data Schedule 99(a) Report on Form 11-K of H.B. Fuller Company Thrift Plan 99(b) Report on Form 11-K of EFTEC Savings Plan (b) Reports on Form 8-K. No reports on Form 8-K were filed for the thirteen weeks ended February 28, 1998. 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 13, 1998 /S/ Jorge Walter Bolanos ------------------------ Jorge Walter Bolanos Senior Vice President, Treasurer and Chief Financial Officer Dated: April 13, 1998 /S/ David J. Maki ----------------------- David J. Maki Vice President and Controller -10-
EXHIBIT INDEX EXHIBIT NUMBER 27 Financial Data Schedule 99(a) Report on Form 11-K of H.B. Fuller Company Thrift Plan 99(b) Report on Form 11-K of EFTEC Savings Plan