<PAGE>
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 May 29, 1999
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)
Minnesota 41-0268370
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1200 Willow Lake Boulevard, St. Paul, Minnesota 55110-5101
(Address of principal executive officers) (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 14,019,591 as of June 30, 1999.
-1-
<PAGE>
H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES
Consolidated Condensed Statements of Earnings
(Unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
---------------------- ----------------------
May 29, May 30, % May 29, May 30, %
1999 1998 Change 1999 1998 Change
--------- --------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 348,198 $ 341,971 1.8% $ 675,408 $ 652,626 3.5%
Cost of sales (235,708) (233,278) 1.0% (458,344) (446,299) 2.7%
--------- --------- --------- ---------
Gross profit 112,490 108,693 3.5% 217,064 206,327 5.2%
Selling, administrative and other expenses (81,808) (83,973) -2.6% (163,757) (166,170) -1.5%
Non-recurring items (6,060) -- * (8,169) -- *
--------- --------- --------- ---------
Operating earnings 24,622 24,720 -0.4% 45,138 40,157 12.4%
Interest expense (6,587) (6,573) 0.2% (13,454) (11,782) 14.2%
Other income (expense), net (1,227) 38 * (2,231) (790) *
--------- --------- --------- ---------
Earnings before income taxes and minority interests 16,808 18,185 -7.6% 29,453 27,585 6.7%
Income taxes (7,339) (7,420) -1.1% (12,819) (11,254) 13.9%
Net earnings of consolidated subsidiaries
applicable to minority interests (267) (65) * (346) 14 *
Earnings from equity investments 824 561 46.9% 1,337 870 53.7%
--------- --------- --------- ---------
Net earnings 10,026 11,261 -11.0% 17,625 17,215 2.3%
Dividends on preferred stock (4) (4) (8) (8)
--------- --------- --------- ---------
Net earnings applicable to common stock $ 10,022 $ 11,257 -11.0% $ 17,617 $ 17,207 2.3%
========= ========= ========= =========
Average number of common and common
equivalent shares outstanding:
Basic 13,799 13,706 0.7% 13,785 13,691 0.7%
========= ========= ========= =========
Diluted 13,969 13,855 0.8% 13,910 13,833 0.6%
========= ========= ========= =========
Net earnings per common share:
Basic $ 0.73 $ 0.82 -11.0% $ 1.28 $ 1.26 1.6%
========= ========= ========= =========
Diluted $ 0.72 $ 0.81 -11.1% $ 1.27 $ 1.24 2.4%
========= ========= ========= =========
Cash dividend per common share $ 0.205 $ 0.200 2.5% $ 0.405 $ 0.385 5.2%
========= ========= ========= =========
</TABLE>
* Change of 100% or more.
-2-
<PAGE>
H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In thousands)
(Unaudited)
May 29, November 28,
1999 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 5,869 $ 4,605
Trade receivables 243,005 247,952
Allowance for doubtful accounts (4,860) (5,073)
Inventories 155,854 158,606
Other current assets 50,557 51,810
----------- -----------
Total current assets 450,425 457,900
Property, plant and equipment, net of
accumulated depreciation of $345,787
in 1999 and $343,514 in 1998 411,341 414,467
Deposits and miscellaneous assets 77,622 70,673
Other intangibles 32,605 34,717
Excess cost 67,535 68,412
----------- -----------
Total assets $ 1,039,528 $ 1,046,169
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 68,432 $ 59,282
Current installments of long-term debt 6,586 4,428
Accounts payable 120,648 129,694
Accrued expenses 76,504 71,725
Accrued non-recurring charges 5,822 13,215
Income taxes payable 6,271 6,816
----------- -----------
Total current liabilities 284,263 285,160
Long-term debt,
excluding current installments 280,401 300,074
Accrued pension cost 80,474 83,500
Deferred income taxes and other liabilities 28,052 19,833
Minority interest 16,806 16,198
Stockholders' equity:
Preferred stock 306 306
Common stock 14,018 13,983
Additional paid-in capital 32,330 31,140
Retained earnings 321,126 309,275
Accumulated other comprehensive income (11,195) (5,306)
Unearned compensation (7,053) (7,994)
----------- -----------
Total stockholders' equity 349,532 341,404
----------- -----------
Total liabilities and stockholders' equity $ 1,039,528 $ 1,046,169
=========== ===========
See accompanying Notes to Consolidated Condensed Financial Statements.
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<PAGE>
H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
----------------------
May 29, May 30,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 17,625 $ 17,215
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 25,754 23,158
Pension costs 3,580 3,257
Deferred income tax (852) 3,706
Non-recurring expenses (744) --
Gain on sale of businesses in the restructuring plan (2,371) --
Other items (1,810) (7,485)
Change in current assets and liabilities:
Accounts receivable (3,695) (7,032)
Inventory 1,939 (13,297)
Prepaid assets (2,356) 1,566
Accounts payable (4,747) (11,689)
Accrued expense 8,378 (1,362)
Accrued non-recurring charges (7,393) --
Income taxes payable 8,509 169
--------- ---------
Net cash provided by operating activities 41,817 8,206
Cash flows from investing activities:
Purchased property, plant and equipment (27,769) (29,740)
Purchased business, net of cash acquired (4,483) (87,701)
Proceeds from sale of assets -- 9,019
--------- ---------
Net cash used in investing activities (32,252) (108,422)
Cash flows from financing activities:
Increase in long-term debt 53,230 125,266
Current installments and payments of long-term debt (60,984) (25,283)
Notes payable 4,367 8,844
Dividends paid (5,680) (5,351)
Other 717 (468)
--------- ---------
Net cash (used)provided by financing activities (8,350) 103,008
Effect of exchange rate changes on cash 49 (228)
--------- ---------
Net change in cash and cash equivalents 1,264 2,564
Cash and cash equivalents at beginning of year 4,605 2,710
--------- ---------
Cash and cash equivalents at end of period $ 5,869 $ 5,274
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense (net of amount capitalized) $ 15,467 $ 13,468
Income taxes $ 3,568 $ 4,753
</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-
<PAGE>
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 May 29, 1999
and November 28, 1998, the results of its operations for the
twenty-six weeks ended May 29, 1999 and May 30, 1998 and its cash
flows for the twenty-six weeks ended May 29, 1999 and May 30, 1998.
2. The results of operations for the twenty-six week period ended May
29, 1999 are not necessarily indicative of the results to be expected
for the full year.
3. The composition of inventories is presented below:
May 29, 1999 November 28, 1998
------------ -----------------
Raw materials $ 70,890 $ 73,126
Finished goods 95,206 95,862
LIFO reserve (10,242) (10,382)
--------- ---------
$ 155,854 $ 158,606
========= =========
4. The difference between basic and diluted earnings per share data 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, or debt. Market value gains and losses are
recognized, and the resulting credit or debit offsets foreign
exchange gains or losses on the receivable, payable, or debt. At May
29, 1999, the aggregate contract value of instruments used to sell
4,219 pound sterling, 8,469 deutsche marks, $4,125 to buy foreign
currency (primarily 25,087 Dutch guilders, 8,050 deutsche marks and
18,000 Austrian shillings) was $17,771. The contracts mature between
June 22, 1999 and November 20, 2000.
6. The carrying amounts and estimated fair values of the Company's
significant other financial instruments at May 29, 1999, are as
follows:
Carrying Fair
Amount Value
------ -----
Cash and short-term investments $ 5,869 $ 5,869
Notes payable 68,432 68,432
Long-term debt 289,987 288,685
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.
-5-
<PAGE>
7. During the first quarter, the Company acquired an adhesive product line
in Australia for $4,483 in cash. Assets acquired include the excess of
cost over net assets acquired of $1,629. The acquisition was accounted
for as a purchase and the accompanying Consolidated Financial
Statements include the results of this product line since the purchase
date. The historical results of operations on a pro forma basis are not
presented as the effect of the acquisition was not material.
8. As required, the Company adopted Financial Accounting Standard No. 130
"Reporting Comprehensive Income" during the first quarter. Other
comprehensive income:
Foreign currency translation adjustment $(5,888)
-------
Other comprehensive income $(5,888)
=======
9. During the first half of 1999, the Company recorded the following
amounts in the income statement in connection with the restructuring
plan implemented in 1998 and discussed in the 1998 Form 10-K. The total
amount of the charge is now estimated to be from $37,000 to $43,000
(before tax) with approximately $10,000 to $16,000 to be incurred in
1999.
North Latin Asia/
America Europe America Pacific Total
------- ------- ------- ------- -------
Severance (net of
pension curtailment) $ 519 $ 5,086 $ 192 $ 25 $ 5,822
Impairment of
property, plant
and equipment -- 1,104 -- 7 1,111
Contracts/leases -- 178 36 84 298
Consulting 183 300 96 -- 579
Other 1,281 900 448 101 2,730
------- ------- ------ ------- -------
Subtotal 1,983 7,568 772 217 10,540
Less: Gain on the
sale of property and
plant -- -- -- (2,371) (2,371)
------- ------- ------ ------- -------
TOTAL $ 1,983 $ 7,568 $ 772 $(2,154) $ 8,169
======= ======= ====== ======= =======
Included in the $10,540 restructuring charge for the first half are
$11,283 of cash costs, $1,111 non-cash related costs and a $1,854
pension curtailment benefit.
North America charges relate to a manufacturing plant closing in the
first quarter and reduced layers of management. Latin America charges
relate to two manufacturing plants closed in the first quarter, two
manufacturing plants closed in the second quarter and one plant to be
closed in the balance of 1999. The European charges relate to plant
closures in three countries (in the second quarter of 1999) and to
severance cost associated with the reduction in layers in management.
In Asia/Pacific, the costs are related to a manufacturing plant
closure, sales offices and warehouses closed, the area office
relocation and layers of management which are being reduced. These
costs in Asia/Pacific were more than offset by a gain on the sale of
the property and the plant of closed plant.
There was a reduction of census of 461 employees in the first half of
1999 as a result of the restructuring plan. An additional 92 employees
have been notified of severance over the balance of 1999 with severance
costs accrued.
The following table is a detailed reconciliation of the restructuring
reserve balance from November 28, 1998 to May 29, 1999. The
reconciliation reflects the accruals recorded and payments applied
during the quarter.
-6-
<PAGE>
Non-recurring charge reserve:
<TABLE>
<CAPTION>
North Latin Asia/
America Europe America Pacific Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance:
November 28, 1998 $ 1,992 $ 7,994 $ 3,141 $ 88 $ 13,215
Accruals in first half
1999:
Severance 1,569 5,891 192 25 7,677
Contracts/leases -- 178 36 84 298
Consulting 183 300 96 -- 579
Other 1,281 900 448 101 2,730
Payments in first half 1999:
Severance (2,853) (9,546) (2,558) (113) (15,070)
Contracts/leases -- (178) (36) (84) (298)
Consulting (183) (300) (96) -- (579)
Other (1,281) (900) (448) (101) (2,730)
-------- -------- -------- -------- --------
Balance:
May 29, 1999 $ 708 $ 4,339 $ 775 $ -- $ 5,822
======== ======== ======== ======== ========
</TABLE>
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 second quarter of 1999 increased $6,227, or 1.8%, when
compared to the same quarter in 1998. The 1.8 percentage point sales
increase resulted from a 1.9 percentage point increase from volume and
changes in product mix, a 0.7 percentage point impact of acquisitions and
divestitures, a negative 0.6 percentage point decreased pricing and a
negative 0.2 percentage points from a strengthened U.S. dollar. Net sales
for the first half of 1999 increased $22,782, or 3.5%, when compared to the
first half in 1998. The 3.5 percentage point sales increase resulted from a
2.6 percentage point increase from volume and changes in product mix, 1.4
percentage points net impact of acquisitions and divestitures, a negative
0.8 percentage point decreased pricing and a positive 0.3 percentage point
from a weakening U.S. dollar.
A comparison of sales increases by operating area is as follows:
Thirteen Weeks Ended Twenty-six Weeks Ended
May 29, 1999 May 29, 1999
Operating Area May 30, 1998 May 30, 1998
-------------- ------------ ------------
North America $3,949 2% $ 7,009 2%
Latin America (2,321) (5%) (1,437) (1%)
Europe 984 1% 11,457 9%
Asia/Pacific 3,615 17% 5,753 14%
----- -------
TOTAL $6,227 2% $22,782 3%
====== =======
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<PAGE>
Net earnings for the second quarter decreased from $11,261 in 1998 to
$10,026 in 1999. The earnings in 1999 were impacted by $6,060 ($4,251
after tax) in non-recurring charges.
Net earnings for the first half increased from $17,215 in 1998 to
$17,625 in 1999. The earnings in 1999 were impacted by an $8,169
($5,940 after tax) non-recurring charge.
During the first half of 1999, the Company recorded the following
amounts in the income statement in connection with the restructuring
plan implemented in 1998 and discussed in the 1998 Form 10-K. The total
amount of the charge is now estimated to be from $37,000 to $43,000
(before tax) with approximately $10,000 to $16,000 to be incurred in
1999.
North Latin Asia/
America Europe America Pacific Total
------- ------- ------- ------- -------
Severance (net of
pension curtailment) $ 519 $ 5,086 $ 192 $ 25 $ 5,822
Impairment of
property, plant
and equipment -- 1,104 -- 7 1,111
Contracts/leases -- 178 36 84 298
Consulting 183 300 96 -- 579
Other 1,281 900 448 101 2,730
------- ------- ------ ------- -------
Subtotal 1,983 7,568 772 217 10,540
Less: Gain on the
sale of property and
plant -- -- -- (2,371) (2,371)
------- ------- ------ ------- -------
TOTAL $ 1,983 $ 7,568 $ 772 $(2,154) $ 8,169
======= ======= ====== ======= =======
Included in the $10,540 restructuring charge for the first half are
$11,283 of cash costs, $1,111 non-cash related costs and a $1,854
pension curtailment benefit.
North America charges relate to a manufacturing plant closing in the
first quarter and reduced layers of management. Latin America charges
relate to two manufacturing plants closed in the first quarter, two
manufacturing plants closed in the second quarter and one plant to be
closed in the balance of 1999. The European charges relate to plant
closures in three countries (in the second quarter of 1999) and to
severance cost associated with the reduction in layers in management.
In Asia/Pacific, the costs are related to a manufacturing plant
closure, sales offices and warehouses closed, the area office
relocation and layers of management which are being reduced. These
costs in Asia/Pacific were more than offset by a gain on the sale of
the property and the plant of closed plant.
There was a reduction of census of 461 employees in the first half of
1999 as a result of the restructuring plan. An additional 92 employees
have been notified of severance over the balance of 1999 with severance
costs accrued.
The following table is a detailed reconciliation of the restructuring
reserve balance from November 28, 1998 to May 29, 1999. The
reconciliation reflects the accruals recorded and payments applied
during the quarter.
-8-
<PAGE>
Non-recurring charge reserve:
<TABLE>
<CAPTION>
North Latin Asia/
America Europe America Pacific Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance:
November 28, 1998 $ 1,992 $ 7,994 $ 3,141 $ 88 $ 13,215
Accruals in first half
1999:
Severance 1,569 5,891 192 25 7,677
Contracts/leases -- 178 36 84 298
Consulting 183 300 96 -- 579
Other 1,281 900 448 101 2,730
Payments in first half 1999:
Severance (2,853) (9,546) (2,558) (113) (15,070)
Contracts/leases -- (178) (36) (84) (298)
Consulting (183) (300) (96) -- (579)
Other (1,281) (900) (448) (101) (2,730)
-------- -------- -------- -------- --------
Balance:
May 29, 1999 $ 708 $ 4,339 $ 775 $ -- $ 5,822
======== ======== ======== ======== ========
</TABLE>
In North America, the 2% second quarter sales increase was composed of
3 percentage points relating to increased volume and changes in product
mix and a negative one percentage point from pricing and currency. The
Adhesives, Sealants and Coatings Group had a 2 percentage point
increase in sales with a 4 percentage point increase from volume and
mix being partially offset by a combined negative 2 percentage point
decrease resulting from pricing, currency and divestiture of the gun
and stick business. Paper converting sales continue to be depressed
from the prior year due to reduced exports by the Company's customers
(primarily to Asia/Pacific area). In the Specialty Group, sales
increased 4% from the same period in the prior year. The primary growth
in sales occurred in TEC Specialty Products, Inc., where strong growth
occurred and Foster Products Corporation, with moderate sales growth.
Linear Products Inc. had sales that increased slightly from the sales
of 1998 and Global Coatings Division experienced a slight decrease in
sales from the prior year. The Automotive Group had a 1% decrease from
prior year sales. North American operating earnings, before the
non-recurring charge, grew at a rate of 6.5% increasing from $17,295 to
$18,425.
For the first half of 1999, North American sales increased 2% and was
composed of 3 percentage points resulting from increased volume and
changes in product mix and a combined negative one percentage point
resulting from pricing, currency and a business divestiture. The sales
of the Adhesives, Sealants and Coatings Group had a one percentage
point increase in sales with a 2 percentage point increase from volume
and mix being partially offset by a combined negative one percentage
point impact of pricing, currency and business divestiture. The
Automotive Group had sales that approximated the sales of 1998. A 4
percent sales growth in Specially Products Group occurred primarily in
TEC Specialty Products, Inc. and Foster Products Corporation. First
half North American operating income, before the non-recurring charge,
increased 10.7% from $27,694 to $30,655.
Latin American second quarter 1999 sales decreased 5% from 1998. The
decease in sales is the result of decreased volume and changes in
product mix. Currency devaluations and recessions in various countries,
particularly Brazil and Ecuador and the increased use of independent
distributors in the region contributed to the decline. Latin American
operating earnings, before the non-recurring charge, increased when
compared to 1998 from $3,164 to $4,124. The increase in operating
income was the result of reduced operating expenses from tight spending
controls and the restructuring efforts in the region.
-9-
<PAGE>
In Europe, the one percent second quarter 1999 sales increase was the
result of a combined impact of 2 percentage points resulting from a
second quarter 1998 United Kingdom acquisition and the divestiture of
the wax business in the fourth quarter of 1998, a positive one
percentage point impact of increased volume and mix and a negative 2
percentage point impact of the strengthening of the U.S. dollar and
pricing. Operating income, before the non-recurring charge, increased
from $4,362 in 1998 to $6,603 in 1999. The improvement was the result
of the restructuring, improved gross margins, operating expense control
and the acquisition.
Asia/Pacific sales increased 17% from the same period last year. The
increase was the result of an 8 percentage point increase in volume and
mix, a 2 percentage point increase from a weakening of the U.S. dollar,
and a combined positive 7 percentage point impact of a fourth quarter
1998 acquisition in New Zealand, a first quarter 1999 acquisition in
Australia, and a second quarter 1998 divestiture in New Zealand.
Operating results, before the non-recurring charges (benefit), improved
from an operating loss of ($101) in 1998 to operating income of $1,530
in 1999. The improvement is primarily the result of the restructuring
efforts in the area.
For the first half of 1999, Latin America sales decreased 1% from the
same period in 1998 with a one percentage point increase in volume and
product mix being offset by a negative 2 percentage points from
decreased pricing. Operating earnings increased from $7,498 in 1998 to
$8,371 in 1999. European sales increased 9% from first half 1998 sales
with the weakening of the U.S. dollar having a 2 percentage point
positive impact. The 7 percentage point increase in local currency
sales was primarily the combined result of two acquisitions in the U.K.
and the sale of the wax business in 1998. Operating earnings increased
from $5,711 in 1998 to $11,372 in 1999. Asia/Pacific sales increased
14% with a one percentage point increase resulting from a weakening
U.S. dollar. The 13 percentage point increase in local currency was the
result of a 10 percentage point increase from volume and product mix
and a combined 3 percentage point impact of two acquisitions and a
divestiture. Operating earnings increased from ($746) in 1998 to $2,909
in 1999. All comparisons of operating earnings are before the
non-recurring charges.
Cost of sales for the second quarter increased 1.0% ($2,430) over the
same quarter in 1998. Consolidated gross margins, as a percent of sales
increased from 31.8% in 1998 to 32.3% in 1999. Gross margins in 1998
benefited $1,368 ($350 reversal of accrual and $1,018 non-accrual) or
0.4% of sales as a result of a projected non-payment of profit sharing.
The improvement in gross profit was a result of lower raw material
costs and the restructuring effort. Improvement in gross profit was
particularly strong in the European and Asia/Pacific areas.
Selling, administrative, and other expenses for the quarter decreased
2.6% ($2,165) when compared to the prior year. This category of
expense, as a percent of sales, decreased from 24.6% in 1998 to 23.5%
in 1999. This category of expense benefited $1,367 ($350 reversal of
accrual and $1,017 non-accrual) or 0.4% of sales as a result of
projected non-payment of profit sharing. In 1999, this category of
expense benefited $1,260 as a result of remeasurement of pension and
postretirement benefits, due to the curtailment caused by the
restructuring in the United States. Based on current assumptions this
should be a continuing benefit into the year 2000. The restructuring
effort and tight expense control were the reason for the decrease in
expense.
Year-to-date cost of sales was up 2.7% ($12,045) when compared to the
same period in 1998. Consolidated gross margins, as a percent of sales,
improved from 31.6% in 1998 to 32.1% in 1999.
Year-to-date selling, administrative, and other expenses decreased 1.5%
($2,413) when compared to the prior year. This category of expense, as
a percent of sales, improved from 25.5% in 1998 to 24.2% in 1999.
Interest expense of $13,454 increased $1,672 from the expense of the
first half of 1998. This was mainly the result of higher overall debt
levels in the first quarter of 1999 to fund acquisitions.
-10-
<PAGE>
Year-to-date other income/(expense), net, increased from an expense of
$790 in 1998 to an expense of $2,231 in 1999. The primary reason for
the increase in expense was currency losses in Latin America.
Income taxes for the first half of 1999 increased $1,565 (13.9%) when
compared to the first half of 1998 primarily as a result of increased
earnings. The effective tax rate is expected to be reduced to 40.0
percent in 1999 compared to 40.8 percent in 1998, after the
consideration of the low tax benefit provided for a portion of the
non-recurring charges incurred in countries where no tax benefit is
available.
Liquidity and Capital Resources
-------------------------------
The cash flows as presented in this section have been calculated by
comparison of the Consolidated Condensed Balance Sheets at May 29, 1999
and November 28, 1998 and May 30, 1998 and November 29, 1997.
During the first half of 1999, the Company generated $41,817 of cash to
finance operations as compared to $8,206 in the first half of 1998. The
increased generation of cash was primarily the result of $32,280
decrease in cash required to fund working capital in the first half of
1999 compared to the same period in 1998.
Working capital was $166,162 at May 29, 1999 compared to $172,740 at
November 28, 1998. The current ratio at May 29, 1999 was 1.6 equal to
the ratio at November 28, 1998. The number of days sales in trade
accounts receivable was 62 days at May 29, 1999 compared to 57 days
sales at May 30, 1998. The average days sales in inventory on hand was
62 days at May 29, 1999 compared to 63 days at May 30, 1998. Trade
accounts payable increased from 44 days at May 30, 1998 to 46 days at
May 29, 1999.
The Company's long-term debt to total capitalization ratio was 44.5% at
May 29, 1999 compared to 46.8% at November 28, 1998.
Capital expenditures for property, plant and equipment of $27,769 in
first half 1999 were primarily for construction of manufacturing
capacity in Europe to support the restructuring effort, the investment
in Information Technology, for general improvements in manufacturing
productivity and operating efficiency and for environment projects.
Environmental capital expenditures, less than 10% of total
expenditures, are not a material portion of overall Company
expenditures.
Impact of the Year 2000 Issue
The Company's Year 2000 Project Office (consisting of information
technology ("IT") personnel) has established a three-phase program to
address the Year 2000 Issue. The three phases consist of (a) an
assessment phase, (b) an analysis and resolution strategy phase and (c)
a remediation and testing phase. The readiness program focuses on the
Company's IT as well as non-IT systems (which systems contain embedded
technology in manufacturing or process control equipment containing
microprocessors or similar circuitry.)
The assessment phase, during which the Year 2000 Project Office
attempted to identify all hardware and software that affect the
Company's operation, has been completed with respect to most of the
Company's operations. Based on the results of the assessment phase, the
Company has determined that its primary hardware and operating system
software used in North American operations is Year 2000 ready. In
addition, the Company's internal laboratory, regulatory, financial and
enterprise resource planning systems for North America are compliant.
The Company's Year 2000 Project Office has determined that the Company
will need to update or replace certain other hardware and software so
that its computer systems will properly utilize dates after December
31, 1999.
-11-
<PAGE>
Outside the United States, the Company is addressing readiness issues
on a region-by-region basis. The Company is in the analysis and
resolution strategy phase in certain locations and in the remediation
and testing phase in other locations. The Company currently anticipates
these projects will be completed by September, 1999.
The Company has also begun assessing Year 2000 readiness issues
relating to companies with which it has third-party outsourcing
relationships on a global basis, such as a financial institution
administering employee benefit plans, telecommunications providers and
health care providers. The Company has requested assurance from its
significant suppliers that they will be functioning properly in the
Year 2000. The Company will continue to assess supplier readiness
issues. In addition, the Company is communicating with its major
customers regarding the Company's Year 2000 readiness efforts. However,
it is impossible to fully assess the potential consequences in the
event service interruptions from suppliers occur or in the event that
there are disruptions in such infrastructure areas as utilities,
communication, transportation, banking and government.
In October of 1998, the Company formed a Year 2000 Task Force
(consisting of representatives from its financial, IT, legal and risk
management departments and from its key business units) to address the
internal and external Year 2000 Issues.
The Company incurred Year 2000 readiness costs of approximately $2,000
over the two-year period ending November 28, 1998. The current total
estimated costs to complete Year 2000 readiness efforts in 1999 is
$1,200 to $1,500. In recent years, the Company has replaced certain of
its financial and operating systems. These systems have not required
modification to address the Year 2000 Issue, and, as a result, the
Company's Year 2000 costs have been relatively low. Estimates of Year
2000 costs are based on numerous assumptions, and there can be no
assurance that the estimates are correct or that the actual costs will
not be greater than anticipated.
The Company's most reasonably likely worst case Year 2000 Issue
scenario is a potential inability to obtain raw materials from
suppliers in a timely manner, due either to a supplier's inability to
manufacture the product or ship it. In such event, the Company may
experience a delay in its ability to manufacture and deliver products
when ordered by customers. The Company is currently evaluating its
alternatives to mitigate the effect of such a scenario, if it occurs.
The Company is developing contingency plans to address other potential
failures or delays due to the Year 2000 Issue. The Company is in the
process of developing a plan for the "Y2K transition". This will be a
comprehensive plan for managing the actual transition over that last
week of December, 1999 and the first week of January, 2000.
Based on its assessments and current knowledge, the Company believes it
will not, as a result of the Year 2000 Issue, experience any material
disruptions in internal manufacturing processes, information processing
or interfacing with major customers, or with processing orders and
billing. However, if certain third-party providers, such as providers
of electricity, water or telephone service, experience difficulties
resulting in disruption of service to the Company, a shutdown of the
Company's operations at individual facilities could occur for the
duration of the disruption. Assuming no major disruption in service
from utility companies or other critical third-party providers, the
Company believes that it will be able to manage its total Year 2000
transition without any material effects on the Company's results of
operations or financial condition.
-12-
<PAGE>
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; change 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
German mark, the Japanese yen, the Brazilian real and the Ecuadorian
sucre); 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.
Item 4.
Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its Annual Meeting of Shareholders on April 15, 1999.
Proxies for such meeting were solicited pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended. A total of
17,672,698 common and preferred share votes ("Votes") were entitled to
be cast at the meeting. At such meeting, each of management's four
nominees for director in Class III were elected for a three-year term
(until the Company's 2002 Annual Meeting), and until the directors'
respective successors are duly elected and qualified. The number of
Votes cast for the election of each director and the number of Votes
withheld are as follows:
Combined Common & Combined Common &
Preferred Share Preferred Share
Director Name Votes in Favor Votes Withheld
------------- -------------- --------------
Edward L. Bronstien, Jr. 16,095,048 376,038
Walter Kissling 15,854,445 616,640
Lee R. Mitau 16,217,789 253,296
Lorne C. Webster 15,992,043 479,042
A proposal to ratify the appointment of PricewaterhouseCoopers L.L.P.
as independent auditors for the Company for the fiscal year ending
November 27, 1999 was approved by 16,320,641 Votes cast in favor,
103,135 Votes cast against, and 47,308 Votes abstaining. There were no
broker non-votes with respect to the ratification of the appointment of
PricewaterhouseCoopers L.L.P. as auditors.
In addition, a shareholder proposal requesting that the Board of
Directors adopt a policy not to sell its adhesives to any
tobacco-related company when they will use it for the production of
cigarettes or other tobacco products was defeated by 12,884,396 Votes
against the shareholder proposal, 1,972,231 Votes in favor of the
shareholder proposal and 624,351 Votes abstaining. There were 990,107
broker non-votes with respect to the shareholder proposal.
-13-
<PAGE>
PART II. OTHER INFORMATION
Item 6.
Exhibits and reports on Form 8-K
(a) Exhibits to Part I
27 Financial Data Schedule
Exhibits to Part II
(b) Reports on Form 8-K. No reports on Form 8-K were filed for the
thirteen weeks ended May 29, 1999.
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
Dates: July 12, 1999 /S/ David J. Maki
-----------------
David J. Maki
Vice President and
Controller
-14-
<PAGE>
EXHIBIT INDEX
Exhibit Number
27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET, INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-27-1999
<PERIOD-START> NOV-29-1998
<PERIOD-END> MAY-29-1999
<CASH> 5,869
<SECURITIES> 0
<RECEIVABLES> 243,005
<ALLOWANCES> 4,860
<INVENTORY> 155,854
<CURRENT-ASSETS> 450,425
<PP&E> 757,128
<DEPRECIATION> 345,787
<TOTAL-ASSETS> 1,039,528
<CURRENT-LIABILITIES> 284,263
<BONDS> 280,401
0
306
<COMMON> 14,018
<OTHER-SE> 335,208
<TOTAL-LIABILITY-AND-EQUITY> 1,039,528
<SALES> 675,408
<TOTAL-REVENUES> 675,408
<CGS> 458,344
<TOTAL-COSTS> 171,926
<OTHER-EXPENSES> 2,231
<LOSS-PROVISION> 1,325
<INTEREST-EXPENSE> 13,454
<INCOME-PRETAX> 29,453
<INCOME-TAX> 12,819
<INCOME-CONTINUING> 17,625
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,625
<EPS-BASIC> 1.28
<EPS-DILUTED> 1.27
</TABLE>
