-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KN2U2FrHBgyez5uh2YKs6fJM+tsHG5uZdI6lko3pTPzNAmv9spKxH97TwcC5AL5Y rgBqkPd/8qYPVWXLQpjqLg== 0001193125-03-061199.txt : 20031014 0001193125-03-061199.hdr.sgml : 20031013 20031014153238 ACCESSION NUMBER: 0001193125-03-061199 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030830 FILED AS OF DATE: 20031014 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FULLER H B CO CENTRAL INDEX KEY: 0000039368 STANDARD INDUSTRIAL CLASSIFICATION: ADHESIVES & SEALANTS [2891] IRS NUMBER: 410268370 STATE OF INCORPORATION: MN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09225 FILM NUMBER: 03939266 BUSINESS ADDRESS: STREET 1: 1200 WILLOW LAKE BLVD CITY: ST PAUL STATE: MN ZIP: 55110-5132 BUSINESS PHONE: 6126453401 10-Q 1 d10q.txt FORM 10-Q 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 quarterly period ended August 30, 2003 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 Number 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) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). [X] The number of shares outstanding of the Registrant's Common Stock, par value $1.00 per share, was 28,424,696 as of September 30, 2003. This document contains 35 pages. The exhibit index is set forth on page 22. 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) (Unaudited)
13 Weeks Ended 39 Weeks Ended ---------------------------- ---------------------------- August 30, August 31, August 30, August 31, 2003 2002 2003 2002 ---------------------------- ---------------------------- Net revenue $ 322,089 $ 313,936 $ 941,158 $ 926,578 Cost of sales (235,023) (229,752) (682,372) (679,779) ---------------------------- ---------------------------- Gross profit 87,066 84,184 258,786 246,799 Selling, general and administrative expenses (67,838) (67,673) (211,910) (207,887) Interest expense (3,662) (4,353) (11,029) (13,489) Other income (expense), net 993 1,089 (2,302) (375) ---------------------------- ---------------------------- Income before income taxes, minority interests, and income from equity investments 16,559 13,247 33,545 25,048 Income taxes (4,804) (4,223) (9,102) (7,734) Minority interests in consolidated income (30) (74) (580) (681) Income from equity investments 561 249 1,435 1,167 ---------------------------- ---------------------------- Net income $ 12,286 $ 9,199 $ 25,298 $ 17,800 ============================ ============================ Basic income per common share $ 0.43 $ 0.33 $ 0.90 $ 0.63 ============================ ============================ Diluted income per common share $ 0.43 $ 0.32 $ 0.88 $ 0.62 ============================ ============================ Weighted-average common shares outstanding: Basic 28,262 28,135 28,228 28,071 Diluted 28,709 28,632 28,672 28,571 Dividends per share $ 0.1125 $ 0.1100 $ 0.335 $ 0.328
See accompanying notes to consolidated financial statements. 2 H.B. FULLER COMPANY AND SUBSIDIARIES Consolidated Balance Sheet (In thousands, except share and per share amounts) (Unaudited) August 30, November 30, 2003 2002 ---------------------------- Assets Current assets: Cash and cash equivalents $ 1,863 $ 3,666 Trade receivables 226,163 220,430 Allowance for doubtful accounts (7,670) (8,088) Inventories 153,276 143,012 Other current assets 59,975 49,854 ---------------------------- Total current assets 433,607 408,874 Property, plant and equipment, net 346,558 354,964 Other assets 101,856 106,456 Goodwill 74,923 71,020 Other intangibles, net 19,577 20,125 ---------------------------- Total assets $ 976,521 $ 961,439 ============================ Liabilities and Stockholders' Equity Current liabilities: Notes payable $ 29,087 $ 20,020 Current installments of long-term debt 1,384 1,362 Trade payables 103,593 113,297 Accrued payroll / employee benefits 22,743 37,109 Other accrued expenses 26,704 25,070 Restructuring liability 2,949 8,508 Income taxes payable 10,896 9,480 ---------------------------- Total current liabilities 197,356 214,846 Long-term debt, excluding current installments 170,570 161,763 Accrued pensions 81,030 87,393 Other liabilities 34,125 34,532 Minority interests in consolidated subsidiaries 15,148 14,575 ---------------------------- Total liabilities 498,229 513,109 ---------------------------- Commitments and contingencies Stockholders' equity: Common stock, par value $1.00 per share 28,426 28,362 Shares outstanding were 28,426,464 and 28,362,316, respectively Additional paid-in capital 41,168 39,665 Retained earnings 427,555 411,818 Accumulated other comprehensive loss (17,676) (29,679) Unearned compensation - restricted stock (1,181) (1,836) ---------------------------- Total stockholders' equity 478,292 448,330 ---------------------------- Total liabilities and stockholders' equity $ 976,521 $ 961,439 ============================ See accompanying notes to consolidated financial statements. 3 H.B. FULLER COMPANY AND SUBSIDIARIES Consolidated Statement of Cash Flows (In thousands) (Unaudited) 39 Weeks Ended ---------------------------- August 30, August 31, 2003 2002 ---------------------------- Cash flows from operating activities: Net income $ 25,298 $ 17,800 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 40,281 43,753 Change in assets and liabilities: Accounts receivables, net (399) 4,664 Inventories (6,241) (4,137) Other assets 86 (2,743) Accounts payables (12,371) (4,244) Accrued payroll / employee benefits and other accrued expenses (16,043) 7,306 Short-term restructuring liability (5,894) 5,457 Income taxes payable 947 (1,995) Accrued pensions (11,095) (4,570) Other liabilities 6,963 725 Other (2,773) 799 ---------------------------- Net cash provided by operating activities 18,759 62,815 Cash flows from investing activities: Purchased property, plant and equipment (27,492) (25,270) Purchased investments (3,106) -- Proceeds from sales of property, plant and equipment 3,078 3,398 ---------------------------- Net cash used in investing activities (27,520) (21,872) Cash flows from financing activities: Proceeds from long-term debt 14,650 21,685 Repayment of long-term debt (6,106) (56,004) Net proceeds from (used by) notes payable 7,715 (6,573) Dividends paid (9,512) (9,287) Other, primarily proceeds from stock option exercises 789 410 ---------------------------- Net cash provided by (used in) financing activities 7,536 (49,769) Effect of exchange rate changes (578) 32 ---------------------------- Net change in cash and cash equivalents (1,803) (8,794) Cash and cash equivalents at beginning of period 3,666 11,454 ---------------------------- Cash and cash equivalents at end of period $ 1,863 $ 2,660 ============================ See accompanying notes to consolidated financial statements. 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 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 November 30, 2002 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 follows:
13 Weeks Ended 39 Weeks Ended ------------------------------------------------------------ August 30, August 31, August 30, August 31, 2003 2002 2003 2002 ------------------------------------------------------------ Net income $ 12,286 $ 9,199 $ 25,298 $ 17,800 Dividends on preferred shares -- -- -- (7) ------------------------------------------------------------ Income attributable to common shares $ 12,286 $ 9,199 $ 25,298 $ 17,793 ============================================================ Weighted-average common shares - basic 28,262 28,135 28,228 28,071 Equivalent shares - stock-based compensation plans 447 497 444 500 ------------------------------------------------------------ Weighted-average common shares - diluted 28,709 28,632 28,672 28,571 ============================================================
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 37 and 3 for the three-month periods ended August 30, 2003 and August 31, 2002 and 31 and 3 for the nine-month periods ended August 30, 2003 and August 31, 2002, respectively, as the results would have been anti-dilutive. 3. Comprehensive Income: The components of total comprehensive income follows:
13 Weeks Ended 39 Weeks Ended ------------------------------------------------- August 30, August 31, August 30, August 31, 2003 2002 2003 2002 ------------------------------------------------- Net income $ 12,286 $ 9,199 $ 25,298 $ 17,800 Other comprehensive income Foreign currency translation, net (6,464) 5,560 12,003 9,302 ------------------------------------------------- Total comprehensive income $ 5,822 $ 14,759 $ 37,301 $ 27,102 =================================================
5 Components of accumulated other comprehensive income follows: Accumulated Other Comprehensive Income -------------------------------------- August 30, November 30, 2003 2002 -------------------------- Foreign currency translation adjustment $ 7,516 $ (4,487) Minimum pension liability (25,192) (25,192) -------------------------- Total accumulated other comprehensive income $ (17,676) $ (29,679) ========================== 4. Inventories: The composition of inventories follows: August 30, November 30, 2003 2002 -------------------------- Raw materials $ 61,288 $ 57,041 Finished goods 102,527 96,192 LIFO reserve (10,539) (10,221) -------------------------- $ 153,276 $ 143,012 ========================== 5. Restructuring and Other Related Costs: During the third quarter of 2003, the company recorded a net pretax gain of $926 ($480 after tax) in connection with its restructuring plan that was announced on January 15, 2002. For the first nine months of 2003 net pretax charges recorded were $6,726 ($5,080 after tax). The plan, which was contemplated in 2001, approved and implemented throughout 2002, will be completed in 2003. The plan, which is essentially complete, except for certain asset sales, will result in the elimination of approximately 20 percent of the company's 2001 global manufacturing capacity. In 2002, the company closed 12 manufacturing facilities in the Global Adhesives operating segment - eight in North America, three in Latin America and one in Europe. In the Full-Valu/Specialty operating segment, two manufacturing facilities were closed - one in the United States and one in Latin America and one production line was shut down in another facility in the United States. In connection with the restructuring plan, the company also upgraded and realigned its Global Adhesives operating segment sales force. The plan will result in the elimination of approximately 545 positions, of which approximately 540 have occurred through the end of the third quarter of 2003. Of the total reductions of 545, 165 occurred in the first nine months of 2003 - 115 in the Global Adhesives operating segment and 50 in the Full-Valu/Specialty operating segment. Charges have been accrued for the elimination of the remaining 5 positions, which will occur in the fourth quarter of 2003. Offsetting the reduction of 545 positions will be approximately 110 newly hired employees (of which 107 were hired as of August 30, 2003), primarily in manufacturing facilities that assumed additional volume previously produced by facilities that were closed as part of the restructuring plan, and sales-related positions as part of the upgrading and realignment of the sales force. Upon completion of the restructuring plan in 2003, the company expects to have recorded total cumulative pretax charges of approximately $35,000, net of gains associated with asset sales subject to the restructuring plan. Since inception of the plan and through the first nine months of 2003, total pretax charges recorded have been $42,026. These charges were offset by $3,999 of gains on sales of assets subject to the plan. The charges 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. Cash costs of the plan, net of proceeds from sales of assets subject to the plan are expected to be approximately $15,000-$20,000. As of August 30, 2003 cash costs incurred were $25,371 offset by $6,936 of proceeds from sales of assets subject to the plan. The following table summarizes the restructuring charges and the related restructuring liabilities: 6
Employee Severance Accelerated and Benefits Depreciation Other Total ------------------------------------------------------------ Balance at December 2, 2001 $ 349 $ 176 $ 525 2002 Charges: First quarter 4,784 $ 1,637 1,254 7,675 Second quarter 2,831 2,830 961 6,622 Third quarter 1,572 1,501 3,253 6,326 Fourth quarter 5,561 1,282 4,315 11,158 ------------------------------------------------------------ Total charges 14,748 7,250 9,783 31,781 Non-cash (1,638) (7,250) -- (8,888) Currency change effect (170) (170) Cash payments (7,648) (4,986) (12,634) ------------------------------------------------------------ Total liabilities at November 30, 2002 5,811 4,803 10,614 Long-term portion of liabilities (2,106) (2,106) ------------------------------------------------------------ Current liabilities at November 30, 2002 $ 5,811 $ 2,697 $ 8,508 ============================================================ Total liabilities at November 30, 2002 $ 5,811 $ 4,803 $ 10,614 2003 Charges: First quarter 2,388 $ 190 1,884 4,462 Second quarter 1,107 184 1,899 3,190 Third quarter 570 3 456 1,029 ------------------------------------------------------------ Total charges 4,065 377 4,239 8,681 Non-cash (49) (377) (574) (1,000) Currency change effect 252 252 Cash payments (7,771) (4,966) (12,737) ------------------------------------------------------------ Total liabilities at August 30, 2003 2,056 3,754 5,810 Long-term portion of liabilities (2,861) (2,861) ------------------------------------------------------------ Current liabilities at August 30, 2003 $ 2,056 $ 893 $ 2,949 ============================================================
The net pretax gain of $926 in the third quarter of 2003 was included in the income statement as: gain on sale of asset of $1,955 (included as a component of other income (expense), net) partially offset by $358 in cost of sales and $671 in Selling, General and Administrative ("SG&A") expenses. The $1,955 gain on sale of asset relates to the sale of an adhesives manufacturing facility that was closed as part of the restructuring initiative. The $358 in cost of sales was the result of facility maintenance and clean-up costs relating to the closure of manufacturing facilities. The $671 in SG&A expenses consisted of $615 of employee severance and benefits and $56 of other period costs directly attributed to the restructuring plan. Of the total expenses included in cost of sales and SG&A of $1,029 incurred in the third quarter of 2003, $890 was attributed to the Global Adhesives operating segment and $139 to the Full-Valu/Specialty operating segment. Through the first nine months of 2003, the net pretax charges of $6,726 were recorded in the income statement as: $3,794 in cost of sales and $4,887 in SG&A expense partially offset by a gain on sale of asset of $1,955 in other income (expense), net. The $3,794 in cost of sales included $2,932 of costs associated with the closure of manufacturing facilities such as; equipment tear down and shutdown expenses, facility maintenance and clean-up costs and equipment and inventory relocation expenditures. The remaining $862 consisted of $582 of employee severance and benefits, $125 of accelerated depreciation, $107 of adverse lease termination costs and $48 of asset impairments. The $4,887 in SG&A expenses consisted of $3,527 of employee severance and benefits and $1,360 of other costs directly attributed to the restructuring plan, primarily relocation and recruiting costs. Of the total expenses included in cost of sales and SG&A of $8,681 incurred in the first nine months of 2003, 7 $7,543 was attributed to the Global Adhesives operating segment and $1,138 to the Full-Valu/Specialty operating segment. 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 and to charges resulting from curtailment and other special termination benefits associated with the U.S pension and other postretirement benefit plans. The long-term portion of the restructuring liability relates to adverse lease commitments that extend out to 2012. The beginning balance of $525 at December 2, 2001 in the restructuring liability relates to a prior restructuring plan. 6. Derivatives: Derivatives consist primarily of forward currency contracts used to manage foreign currency denominated assets and liabilities. The company currently has outstanding forward foreign currency contracts, primarily for buying and selling euros in exchange for British pound sterling, Canadian dollars and U.S. dollars. Because the derivative instruments outstanding were not designated as hedges, the gains and losses are recognized in the income statement as mark-to-market adjustments during the periods the derivative instrument is outstanding. As of August 30, 2003, the company had forward foreign currency contracts maturing between September 2, 2003 and November 28, 2003. Included in other income (expense), net, the mark-to-market impact associated with these contracts were net gains of $123 for the three-month and of $546 for the nine-month periods ended August 30, 2003. 7. Operating Segments: Segment data follows:
13 Weeks Ended ----------------------------------------------------------------------------- August 30, 2003 August 31, 2002 ------------------------------------- ------------------------------------- Inter- Inter- Trade Segment Operating Trade Segment Operating Revenue Revenue Income Revenue Revenue Income ------------------------------------- ------------------------------------- Global Adhesives $ 223,638 $ 1,247 $ 12,623 $ 217,032 $ 1,166 $ 14,702 Full-Valu/Specialty 98,451 267 7,633 96,904 94 8,135 Corporate and Unallocated -- (1,514) -- -- (1,260) -- ------------------------------------- ------------------------------------- Total $ 322,089 $ -- $ 20,256 $ 313,936 $ -- $ 22,837 ===================================== =====================================
39 Weeks Ended ----------------------------------------------------------------------------- August 30, 2003 August 31, 2002 ------------------------------------- ------------------------------------- Inter- Inter- Trade Segment Operating Trade Segment Operating Revenue Revenue Income Revenue Revenue Income ------------------------------------- ------------------------------------- Global Adhesives $ 653,042 $ 3,694 $ 37,690 $ 637,653 $ 3,421 $ 38,599 Full-Valu/Specialty 288,116 642 17,866 288,925 566 20,936 Corporate and Unallocated -- (4,336) -- -- (3,987) -- ------------------------------------- ------------------------------------- Total $ 941,158 $ -- $ 55,556 $ 926,578 $ -- $ 59,535 ===================================== =====================================
Consistent with the company's internal management reporting, net charges related to the restructuring plan are excluded from the segment operating income results. In addition, other income (expense), net is excluded from the segment operating income because it consists primarily of items that are not subject to the control of management within the operating segments. 8 Reconciliation of Operating Income to Income before Income Taxes:
13 Weeks Ended 39 Weeks Ended ------------------------------------------------------------ August 30, August 31, August 30, August 31, 2003 2002 2003 2002 ------------------------------------------------------------ Operating income $ 20,256 $ 22,837 $ 55,556 $ 59,535 Restructuring and other related costs 926 (6,326) (6,726) (20,623) Interest expense (3,662) (4,353) (11,029) (13,489) Gains (losses) from sales of assets (19) 582 92 518 Other income (expense), net (942) 507 (4,348) (893) ------------------------------------------------------------ Income before income taxes $ 16,559 $ 13,247 $ 33,545 $ 25,048 ============================================================
8. Accounting for Stock-Based Compensation: The intrinsic value method is used to account for stock-based compensation plans. If compensation expense had been determined based on the fair value method, net income and income per share would have been adjusted to the pro forma amounts indicated below:
13 Weeks Ended 39 Weeks Ended ---------------------------------------------------- August 30, August 31, August 30, August 31, 2003 2002 2003 2002 ---------------------------------------------------- Net income, as reported $ 12,286 $ 9,199 $ 25,298 $ 17,800 Add back: Stock-based employee compensation expense recorded 409 256 714 999 ---------------------------------------------------- Net income excluding stock-based compensation 12,695 9,455 26,012 18,799 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (887) (680) (2,150) (2,269) ---------------------------------------------------- Pro forma net income $ 11,808 $ 8,775 $ 23,862 $ 16,530 ==================================================== Basic income per share: As reported $ 0.43 $ 0.33 $ 0.90 $ 0.63 Pro forma $ 0.42 $ 0.31 $ 0.85 $ 0.59 Diluted income per share: As reported $ 0.43 $ 0.32 $ 0.88 $ 0.62 Pro forma $ 0.41 $ 0.31 $ 0.83 $ 0.58
Compensation expense for pro forma purposes is reflected over the vesting period. 9. Commitments and Contingencies Environmental: The company is party to various lawsuits and governmental proceedings. In particular, the company is currently deemed a potentially responsible party (PRP) or defendant, generally in conjunction with numerous other parties, in a number of government enforcement and private actions associated with hazardous waste sites. As a PRP or defendant, the company may be required to pay a share of the costs of investigation and cleanup of these sites. The company has recorded its best probable estimate of liabilities for estimated costs of environmental remediation. These estimates are based primarily upon internal or third-party environmental studies, and estimates as to the company's responsibility. Recorded liabilities are adjusted as circumstances change. Product Liability Claims: As a participant in the chemical and construction products industries, the company faces an inherent risk of exposure to claims in the event that the failure, use or misuse of its products results in, or is alleged to result in property damage and/or bodily injury. Please refer to Part II Item 1 Legal Proceedings in this Quarterly Report on Form 10-Q for a discussion of these claims. Many claims relate to exterior insulated finish systems (EIFS) sold by a subsidiary to the residential construction market principally in the southeastern United States. The number and amount of all potential claims related to this product line are expected to be limited. The company 9 continually reevaluates its reserves related to these claims. At August 30, 2003, the company's reserve for liability and costs for pending and future claims was $3.6 million. Associated with these claims is $0.8 million for estimated insurance recoveries. From time to time, the company or its subsidiaries are named in asbestos-related lawsuits in various state courts involving alleged exposure to products manufactured 20 to 30 years ago. Insurance from solvent third party insurers in accordance with applicable policies have historically paid substantially all of the indemnity and defense costs associated with most of the asbestos litigation applicable to the company. For certain claims the company has been indemnified by third parties. To the extent the company can reasonably estimate the amount of its probable liability the company establishes a financial reserve and a corresponding amount for insurance coverage. In addition to product liability claims discussed above, the company and its subsidiaries are involved in claims or legal proceedings which it believes are not out of the ordinary in a business of the type and size in which it is engaged. With respect to EIFS claims, as well as all other litigation, the company cannot always definitively estimate its potential liabilities. While the company believes that a material adverse impact on its consolidated financial position, results of operations, or cash flows from any such future charges for EIFS related product liability claims or other litigation is unlikely, given the inherent uncertainty of litigation, a possibility exists that a future adverse ruling or unfavorable development could result in future charges that could have a material adverse impact on the company. Guarantees: In July 2000, the Board of Directors adopted the Executive Stock Purchase Loan Program, designed to facilitate immediate and significant stock ownership by executives, especially new management employees. The loans are guaranteed by the company only in the event of the executive's default. Effective September 2001, the company discontinued issuing new loans under the program. 10. Recently Adopted Accounting Standards: In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations", ("SFAS 143"), which must be adopted no later than December 1, 2002. This statement establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. The company does not have any asset retirement obligations as of August 30, 2003. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities. This standard supersedes EITF No. 94-3 and has been adopted for exit and disposal activities initiated after December 31, 2002. The principal difference between SFAS No. 146 and EITF No. 94-3 relates to when an entity can recognize a liability related to exit or disposal activities. SFAS No. 146 requires that a liability be recognized for a cost associated with an exit or disposal activity at the time the liability is incurred. EITF No. 94-3 allowed a liability to be recognized at the date an entity committed to an exit plan. The restructuring charge described in Note 5 for the three and nine month periods ended August 30, 2003 have been accounted for in accordance with SFAS No. 146. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation --Transition and Disclosure (An amendment of FASB Statement No. 123)". The company intends to continue its current practice and accounting of applying the recognition and measurement principles of APB No. 25, "Accounting for Stock Issued to Employees", however, additional quarterly disclosure requirements of FAS No. 148 are included in Note 8 to the Consolidated Financial Statements. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 provides guidance on disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The interpretation also 10 clarifies (for guarantees issued after December 31, 2002) that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligations undertaken in issuing the guarantee. The company does not have any guarantees as of August 30, 2003, other than those disclosed in Note 9. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 provides accounting requirements for business enterprises to consolidate related entities in which they are determined to be the primary beneficiary as a result of their variable economic interests. The interpretation provides guidance in judging multiple economic interests in an entity and in determining the primary beneficiary. The interpretation outlines disclosure requirements for variable interest entities ("VIEs") in existence prior to January 31, 2003, and provides consolidation requirements for VIEs created after January 31, 2003. On October 9, 2003 the FASB extended the effective date for FIN 46 until the first interim or annual period ending after December 15, 2003. The company is continuing to evaluate the effect of this Interpretation on the Consolidated Financial Statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The adoption of FAS 149 had no effect on the company's financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period after June 15, 2003. The company does not have any financial instruments subject to SFAS No. 150 as of August 30, 2003. 11. Supplemental Financial Statement Information The following provides additional details of income statement amounts for the periods ending August 30, 2003 and August 31, 2002,
Other income (expense), net 13 Weeks Ended 39 Weeks Ended ------------------------------------------------- August 30, August 31, August 30, August 31, 2003 2002 2003 2002 ------------------------------------------------- Foreign currency transaction gains/(losses), net $ (518) $ 720 $ (2,665) $ 135 Gains on trading securities 46 47 126 88 Amortization of affordable housing investments (520) (505) (1,559) (1,514) Gains on sales of assets 1,936 518 2,047 423 Other, net 49 309 (251) 493 ------------------------------------------------- Total Other income (expense), net $ 993 $ 1,089 $ (2,302) $ (375) =================================================
Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - ------------- Results of Operations - --------------------- Net Revenue: Net revenue in the third quarter of 2003 of $322.1 million was 2.6 percent higher than the net revenue of $313.9 million in the third quarter of 2002. The 2.6 percent increase was attributable to favorable currency translation, which increased net revenue by 4.1 percent. The favorable currency effects resulted primarily from the euro, which was approximately 17 percent stronger versus the U.S. dollar in the third quarter of 2003 as compared to the third quarter of 2002. The strengthening of the Japanese yen and Australian dollar also contributed to the third quarter revenue increase as compared to last year. The favorable currency effects were offset by a 0.5 percent decrease in sales volume and a 1.0 percent reduction in average selling prices as compared to the third quarter of 2002. The lower sales volume was primarily a reflection of the slow economic activity - especially in Europe and North America. 11 Operating segment results reflected an increase in net revenue in the Global Adhesives segment of 3.0 percent as compared to the third quarter of 2002 and in the Full-Valu/Specialty segment, net revenue increased 1.6 percent as compared to last year's third quarter. Through nine months of 2003, net revenue was $941.2 million as compared to $926.6 million in the first nine months of 2002 - an increase of 1.6 percent. Similar to the third quarter results, favorable currency effects of 4.0 percent were partially offset by lower sales volume of 1.6 percent and lower average selling prices of 0.8 percent. Net revenue increased 2.4 percent in the Global Adhesives segment and decreased 0.3 percent in the Full-Valu/Specialty segment as compared to the first nine months of 2002. Gross Profit Margin: The consolidated gross profit margin of 27.0 percent in the third quarter of 2003 increased 0.2 percentage points from the third quarter of 2002. Currency fluctuations accounted for an increase in cost of sales in the third quarter of approximately $9.1 million as compared to the third quarter of 2002. Also included in the cost of sales in the third quarter of 2003 were expenses of $0.4 million associated with the company's restructuring initiatives as compared to $4.5 million in the third quarter of 2002. The third quarter of 2003 cost of sales also included approximately $2.6 million of savings related to the restructuring activities implemented in 2002. These savings resulted from lower payroll, depreciation and other facility operating costs due to the closure of 14 manufacturing facilities during 2002. Raw material and container costs as a percentage of net revenue increased by 1.5 percentage points in the third quarter of 2003 as compared to the third quarter of 2002. The raw material cost increase as a percentage of net revenue was mainly due to increases in ethylene-based materials such as vinyl acetate monomer (VAM) and vinyl acetate emulsion (VAE). These materials are used primarily in the Global Adhesives operating segment in the production of water-based adhesives. The prices of the ethylene-based materials, which are sensitive to the fluctuations in energy prices, increased between the periods primarily due to the higher cost of crude oil and natural gas. Also contributing to the higher raw material costs as a percentage of net revenue was lower average selling price levels as compared to the third quarter of 2002. For the first nine months of 2003, the consolidated gross profit margin of 27.5 percent was 0.9 percentage points higher than the 26.6 percent margin posted in the first nine months of 2002. The currency impact on cost of sales was an increase of $27.2 million as compared to the first nine months of 2002. The cost of sales in the first nine months of 2003 included $3.8 million of expenses resulting from the restructuring initiative as compared to $14.6 million in the first nine months of 2002. The cost of sales in the nine months of 2003 also included approximately $8.5 million of savings resulting from the 2002 restructuring activities. Raw material and container costs as a percentage of net revenue increased 1.2 percentage points as compared to the first nine months of 2002, primarily related to the price of VAM and VAE as discussed above. Selling, General and Administrative ("SG&A") Expenses: SG&A expenses in the third quarter of 2003 of $67.8 million were $0.1 million or 0.2 percent higher than the SG&A expenses of $67.7 million recorded in the third quarter of 2002. As a percentage of net revenue the SG&A expenses were 21.1 percent in the third quarter of 2003 and 21.6 percent in third quarter of 2002. The 2003 SG&A expenses included $0.7 million of restructuring-related costs as compared to $1.8 million of restructuring-related costs in the third quarter of 2002. SG&A savings associated with the restructuring initiative were approximately $1.9 million in the third quarter of 2003. Expenses attributed to the U.S. pension and other postretirement benefit plans in the third quarter of 2003 were $2.5 million more than in the third quarter of 2002. These pension and benefit plan expense increases were due primarily to the amortization of actuarial losses attributed to the diminished asset portfolio performance in recent years and the reduction in the discount rate used to calculate the projected benefit obligations from 7.0 percent for 2002 to 6.5 percent for 2003. The reduction in the expected return on assets assumption from 10.5 percent in 2002 to 9.75 percent in 2003 also increased pension and benefit plan expense. A one-percentage point change in the expected return on assets assumption has an annualized impact on net income of approximately $1.9 million or $.07 per share, based on the plan assets as of November 30, 2002. Stronger foreign currencies contributed to the higher SG&A expenses in 2003 as compared to 2002. This strengthening of primarily the euro, resulted in approximately $2.4 million of additional SG&A expenses in 2003 as compared to last year. SG&A expense reductions were realized in the third quarter of 2003 as compared to the third quarter of 2002 as a result of lower management incentive compensation expenses. These expenses are accrued according to the company's financial performance as compared to management's expectations for the fiscal year. The company's relative performance in 2003 as compared to 2002 has not been in line with management's expectations resulting in a $4.4 million reduction in management incentive compensation 12 expense in the third quarter of 2003 as compared to the third quarter of 2002. Included in this amount is the reversal of $1.8 million of bonus expense accrued in the first and second quarter of 2003. Through nine months of 2003, SG&A expenses of $211.9 million were $4.0 million or 1.9 percent more than the SG&A expenses in the first nine months of 2002. As a percentage of net revenue, the SG&A expenses were 22.5 percent in the first nine months of 2003 as compared to 22.4 percent in the first nine months of 2002. Restructuring-related expenses were $4.9 million in the first nine months of 2003 and $6.0 million for the same period in 2002. The SG&A savings attributed to the restructuring initiative were approximately $6.0 million through nine months of 2003. Expenses related to the U.S. pension and other postretirement benefit plans increased $7.5 million in the first nine months of 2003 as compared to the same period last year. The nine-month impact on SG&A expenses from stronger foreign currencies was an increase of $7.4 million in 2003 as compared to the first nine months of 2002. The management incentive compensation expense in the first nine months of 2003 was $6.9 million less than the first nine months of 2002. Interest Expense: Interest expense was $3.7 million in the third quarter of 2003 as compared to $4.4 million in the third quarter of 2002. For the first nine months of 2003 interest expense was $11.0 million as compared to $13.5 million for the same period in 2002. Lower average debt levels in 2003 versus 2002 was the primary reason for the reduced interest expense. Other Income (Expense), Net: Other income (expense), net was income of $1.0 million in the third quarter of 2003 and income of $1.1 million in the third quarter of 2002. The 2003 figure includes a gain of $2.0 million on the sale of a North American facility that was closed as part of the restructuring initiative. The 2002 other income includes a gain of $0.9 million on the sale of another nonproductive asset in North America that was outside of the restructuring initiative. Foreign currency transaction gains and losses were net losses of $0.5 million in the third quarter of 2003 as compared to net gains of $0.7 million in the third quarter of 2002. Through nine months of 2003 other income (expense), net was expense of $2.3 million as compared to expense of $0.4 million in the first nine months of 2002. The first nine months of 2003 included foreign currency transaction net losses of $2.7 million as compared to net gains of $0.1 million in the first nine months of 2002. The losses incurred in 2003 resulted primarily from exposures to the rate of exchange between the pound sterling and the euro combined with a significant weakening of the pound sterling against the euro during the first quarter. Hedging contracts were executed late in the first quarter of 2003 in an effort to neutralize future currency impacts. Income Taxes: The effective income tax rate in the third quarter of 2003 was 29.0 percent. The effective rate for the year was lowered during the third quarter because of a change in the regional mix from which the earnings are being generated and also an assessment of generally lower tax exposures. The impact of this rate change was to reduce third quarter income taxes by $0.6 million. Pretax income in the third quarter of $0.9 million related to the restructuring initiative resulted in tax expense of $0.4 million, or 48.2 percent of the restructuring-related income. The effective tax rate in the third quarter of 2002 was 31.9 percent. Included in the 2002 income taxes were $2.3 million of tax benefits related to $6.3 million of pretax charges associated with the restructuring initiative. The effective income tax rate for the first nine months of 2003 was 27.1 percent as compared to 30.9 percent in the first nine months of 2002. Included in the 2003 income taxes was a one-time tax benefit of $1.5 million related to the liquidation of an inactive European legal entity. This tax benefit reduced the effective rate for the first nine months of 2003 by 4.4 percentage points. Also included in the 2003 income tax expense was $1.6 million of tax benefit on $6.7 million of pretax restructuring charges. The 2002 income taxes included $7.3 million of tax benefit attributable to the $20.6 million of pretax restructuring-related charges. Net Income: Net income was $12.3 million in the third quarter of 2003 as compared to $9.2 million in the third quarter of 2002. The diluted earnings per share were $0.43 in the third quarter of 2003 and $0.32 in the third quarter of 2002. Included in the net income figures were net gains, net of tax, of $0.5 million ($0.02 per diluted share) in the third quarter of 2003 and net charges, net of tax of $3.9 million ($0.14 per diluted share) in the third quarter of 2002 related to the restructuring initiative. 13 Through the first nine months, net income was $25.3 million and $17.8 million in 2003 and 2002, respectively. The diluted earnings per share were $0.88 in 2003 and $0.62 in 2002. The after-tax restructuring charges were $5.1 million ($0.18 per diluted share) in 2003 and $12.9 million ($0.45 per diluted share) in 2002. Operating Segment Results - ------------------------- Note: Management evaluates the performance of its operating segments based on operating income which is defined as gross profit less SG&A expenses and excluding other income (expense), net. Charges attributed to the restructuring initiative, net of gains on the sales of assets in connection with the restructuring are excluded from the operating segment results, consistent with internal management reporting. Corporate expenses are fully allocated to the operating segments. Global Adhesives: Net revenue of $223.6 million in the third quarter of 2003 was $6.6 million or 3.0 percent more than the net revenue recorded in the third quarter of 2002. Favorable currency effects of 5.2 percent were the primary reason for the increase. These currency effects were offset by sales volume reductions of 1.6 percent and average price reductions of 0.6 percent. The slow economy, especially in Europe and North America, was the primary reason for the sales volume declines. The Asia Pacific and Latin American geographic regions experienced solid revenue growth in the third quarter of 2003. Higher raw material prices combined with the reduction in average selling prices resulted in a decrease of 1.3 percentage points in the gross profit margin in the third quarter of 2003 as compared to the third quarter of 2002. SG&A expenses increased $1.0 million in the third quarter of 2003 as compared to the same period last year. The expense increases related to the stronger foreign currencies and the U.S. pension and other postretirement benefit expenses were partially offset by expense savings resulting from the restructuring initiative and lower management incentive compensation expenses. The resulting operating income of $12.6 million in the third quarter of 2003 was $2.1 million less than the operating income in the third quarter of 2002. As a percentage of net revenue, operating income was 5.6 percent in the third quarter of 2003 and 6.8 percent in the third quarter of 2002. For the first nine months of 2003 net revenue of $653.0 million was 2.4 percent higher than the net revenue of $637.7 million in the first nine months of 2002. The positive currency effects were 5.2 percent with volume and pricing decreases of 1.9 percent and 0.9 percent, respectively. The slow economies in North America and Europe continued to drive the volume reductions. Operating income for the first nine months of 2003 was $37.7 million as compared to $38.6 million for the same period of 2002. As a percentage of net revenue, the operating income was 5.8 percent in the first nine months of 2003 as compared to 6.1 percent for the same period in 2002. Full-Valu/Specialty: Net revenue in the third quarter of 2003 of $98.5 million was 1.6 percent higher than the $96.9 million of net revenue recorded in the third quarter of 2002. Sales volume increased 1.7 percent, marking the first quarter of the year to record volume growth. Average selling prices decreased 1.8 percent and currency had a positive impact of 1.7 percent. The volume growth was due primarily to increased volume in the Specialty Construction Brands, liquid paint and window product lines. Volume growth was also realized in the third quarter in the consumer product line, especially in Australia. The powder coatings market continued to be impacted by the slow economies in North America and Europe as well as the overall decline in the powder coatings market in the United States. Many end users of the powder coatings products have moved their production outside the U.S. The gross profit margin in the third quarter of 2003 was 0.7 percentage points less than the gross profit margin in the third quarter of 2002. Gross profit margin increases in the Adalis, liquid paint and consumer product lines helped offset the margin decreases in the powder coatings and Specialty Construction Brands product lines. SG&A expenses were $25.2 million in the third quarter of 2003 and $24.9 million in the third quarter of 2002. Expense increases related to the U.S. pension and postretirement benefit plans were partially offset by lower management incentive compensation expenses. Operating income of $7.6 million in the third quarter of 2003 was $0.5 million or 6.2 percent less than the operating income recorded in the third quarter of 2002. Through nine months of 2003, the net revenue in the Full-Valu/Specialty operating segment of $288.1 million was $0.8 million or 0.3 percent less than the net revenue of $288.9 in the first nine months of 2002. Sales volume decreased 1.1 percent, average selling prices decreased 0.6 percent and currency fluctuations had a positive impact of 1.4 percent. Operating income of $17.9 million in the first nine 14 months of 2003 was $3.1 million or 14.7 percent less than the operating income in the first nine months of 2002. As a percentage of net revenue, operating income in the first nine months of 2003 was 6.2 percent as compared to 7.2 percent in the first nine months of 2002. Restructuring and other Related Costs - ------------------------------------- During the third quarter of 2003 net pretax gain of $0.9 million ($0.5 million after tax) was recorded in connection with the company's restructuring plan that was announced on January 15, 2002. In the first nine months of 2003 the company recorded net pretax charges of $6.7 million ($5.1 after tax). The plan, which was contemplated in 2001, approved and implemented throughout 2002, will be completed in 2003. The third quarter of 2003 was the final quarter in which charges related to this restructuring plan were expected to be incurred. As part of the plan the company has eliminated approximately 20 percent of its 2001 global manufacturing capacity. In 2002, the company closed 12 manufacturing facilities in the Global Adhesives operating segment - eight in North America, three in Latin America and one in Europe. In the Full-Valu/Specialty operating segment, two manufacturing facilities were closed - one in the United States and one in Latin America and one production line was shut down in another facility in the United States. In connection with the restructuring plan, the company also upgraded and realigned its Global Adhesives operating segment sales force. By reducing capacity and eliminating other cost structures management currently estimates that upon completion of all restructuring related activities, operating costs will be reduced at least $17 million annually. These savings, consisting primarily of reduced employee-related costs and reduced depreciation expenses, were approximately $14.5 million in the first nine months of 2003. The estimate of savings has increased from the $12 million previously reported primarily due to SG&A expense savings exceeding the original estimates. The plan will result in the elimination of approximately 545 positions, of which approximately 540 have occurred through the end of the third quarter of 2003. Charges have been accrued for the elimination of the remaining 5 positions, which will occur in the fourth quarter of 2003. Of the total reductions of 540, 165 occurred in the first nine months of 2003 - 115 in the Global Adhesives operating segment and 50 in the Full-Valu/Specialty operating segment. Offsetting the reduction of 545 positions will be approximately 110 newly hired employees (of which 107 were hired as of August 30, 2003), primarily in manufacturing facilities that assumed additional volume previously produced by facilities that were closed as part of the restructuring plan and sales-related positions as part of the upgrading and realignment of the sales force. Since inception of the plan, the company has recorded total pretax charges of $42.0 million. These charges were offset by $4.0 million of gains on sales of assets impacted by the restructuring plan. Additional sales of assets subject to the plan are expected to yield gains that will bring the total net pretax charges down to approximately $35 million. The charges related to the plan included 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. Cash costs of the plan, net of proceeds from sales of assets subject to the plan are expected to be approximately $15-$20 million. As of August 30, 2003 cash costs incurred were $25.4 million offset by $6.9 million of proceeds from sales of assets subject to the plan. The remaining restructuring liability as of August 30, 2003 was $5.8 million. The following table summarizes the restructuring charges and the related restructuring liabilities:
Employee Severance Accelerated and Benefits Depreciation Other Total ---------------------------------------------------------------- Balance at December 2, 2001 $ 349 $ 176 $ 525 2002 Charges: First quarter 4,784 $ 1,637 1,254 7,675 Second quarter 2,831 2,830 961 6,622 Third quarter 1,572 1,501 3,253 6,326 Fourth quarter 5,561 1,282 4,315 11,158 ---------------------------------------------------------------- Total charges 14,748 7,250 9,783 31,781 Non-cash (1,638) (7,250) -- (8,888) Currency change effect (170) (170) Cash payments (7,648) (4,986) (12,634) ---------------------------------------------------------------- Total liabilities at November 30, 2002 5,811 4,803 10,614 Long-term portion of liabilities (2,106) (2,106) ---------------------------------------------------------------- Current liabilities at November 30, 2002 $ 5,811 $ 2,697 $ 8,508 ================================================================ Balance at November 30, 2002 $ 5,811 $ 4,803 $ 10,614 2003 Charges: First quarter 2,388 190 1,884 4,462 Second quarter 1,107 184 1,899 3,190 Third quarter 570 3 456 1,029 ---------------------------------------------------------------- Total charges 4,065 377 4,239 8,681 Non-cash (49) (377) (574) (1,000) Currency change effect 252 252 Cash payments (7,771) (4,966) (12,737) ---------------------------------------------------------------- Total liabilities at August 30, 2003 2,056 3,754 5,810 Long-term portion of liabilities (2,861) (2,861) ---------------------------------------------------------------- Current liabilities at August 30, 2003 $ 2,056 $ 893 $ 2,949 ================================================================
15 The net pretax gain of $0.9 million in the third quarter of 2003 was included in the income statement as: gain on sale of asset of $2.0 million (included as a component of other income (expense), net) partially offset by $0.4 million in cost of sales and $0.7 million in SG&A expense. The $2.0 million gain on sale of asset relates to the sale of an adhesives manufacturing facility that was closed as part of the restructuring initiative. The $0.4 million in cost of sales was the result of facility maintenance and clean-up costs associated with the closure of manufacturing facilities. The $0.7 million in SG&A expenses consisted of $0.6 million of employee severance and benefits and $0.1 million of other period costs directly attributed to the restructuring plan. Of the total expense included in cost of sales and SG&A of $1.1 million incurred in the third quarter of 2003, $1.0 million was attributed to the Global Adhesives operating segment and $0.1 million to the Full-Valu/Specialty operating segment. The net pretax charges of $6.7 million in the first nine months of 2003 were included in the income statement as: $3.8 million in cost of sales and $4.9 million in SG&A expense partially offset by a gain on sale of asset of $2.0 million in other income (expense), net. The $3.8 million in cost of sales included $2.9 million of costs associated with the closure of manufacturing facilities such as; equipment tear down and shutdown expenses, facility maintenance and clean-up costs and equipment and inventory relocation expenditures. The remaining $0.9 million consisted of $0.6 million of employee severance and benefits, $0.1 million related to accelerated depreciation and $0.2 million for adverse lease termination and other related costs. The $4.9 million in SG&A expenses consisted of $3.5 million of employee severance and benefits and $1.4 million of other costs directly attributed to the restructuring plan, primarily relocation and recruiting costs. Of the total expenses included in cost of sales and SG&A of $8.7 million incurred in the first nine months of 2003, $7.6 million was attributed to the Global Adhesives operating segment and $1.1 million to the Full-Valu/Specialty operating segment. 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 and to charges resulting from curtailment and other special termination benefits associated with the U.S pension and other postretirement benefit plans. The long-term portion of the restructuring liability relates to adverse lease commitments that extend out to 2012. The beginning balance of $0.5 million at December 2, 2001 in the restructuring liability relates to a prior restructuring plan. 16 Liquidity and Capital Resources - ------------------------------- Net cash provided from operating activities in the first nine months of 2003 was $18.8 million as compared to $62.8 million in the first nine months of 2002. Increases in working capital were the primary cause of the decreased operating cash flows, accounting for approximately $42.0 million of the total decrease of $44.0 million in 2003 as compared to 2002. Changes in the short-term restructuring liability accounted for $11.4 million of the total working capital changes as the liability decreased in the first nine months of 2003 by $5.9 million as compared to an increase of $5.5 million for the same period in 2002. Changes in the accrued compensation liabilities were a decrease of $15.9 million in 2003 as compared to decreases of $4.9 million in 2002. Reductions in trade accounts payable resulted in operating cash outflows of $12.4 million in the first nine months of 2003 as compared to outflows of $4.2 million in the first nine months of 2002. Accounts receivable days sales outstanding (DSO) were 61 days at the end of the third quarter of 2003 and 60 days at the same time last year. Inventory days on hand of 62 days at August 30, 2003 were one day higher than the 61 days at August 31, 2002. Another significant operating cash flow transaction in the third quarter of 2003 was management's decision to contribute $20 million to the U.S. pension plan. This funding is expected to increase the U.S. pension plan assets to a level exceeding the plan's accumulated benefit obligation. Cash used in investing activities was $27.5 million in the first nine months of 2003 as compared to $21.9 million in the first nine months of 2002. Capital expenditures (primarily for information technology projects and manufacturing improvements) were $27.5 million in the first nine months of 2003 as compared to $25.3 million in the first nine months of 2002. Two other items included in the investing activities in 2003 were the purchase of certain assets of an adhesive company in the U.S. for $2.1 million and a $1.0 million investment for a minimal ownership percentage of a technology company. Both of those investments occurred in the second quarter. During the second quarter the company reclassified $6.1 million of property, plant and equipment to assets available for sale. This relates to properties that are expected to be sold in less than one year. On the consolidated balance sheet they are included in other current assets. Net cash provided by financing activities was $8.1 million in the first nine months of 2003 as compared to cash used in financing activities of $49.8 million in the first nine months of 2002. Proceeds from long-term debt were $14.7 million in the first nine months of 2003 and $21.7 million for the same period in 2002. Repayment of long-term debt was $6.1 million in the first nine months of 2003 as compared to $56.0 million in the first nine months of 2002. The company was able to pay off greater amounts of long-term debt in 2002 as compared to 2003 primarily due to the higher amount of cash provided from operating activities in 2002. Net proceeds from notes payable were $8.3 million in the first nine months of 2003 as compared to net cash used to pay notes payable of $6.6 million in the same period in 2002. The company's capitalization ratio, defined as total debt divided by total debt plus stockholders' equity, was 29.6 percent at August 30, 2003, 29.0 percent at November 30, 2002 and 29.9 percent at August 31, 2002. Forward-Looking Statements and Risk Factors - ------------------------------------------- The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In this Quarterly Report on Form 10-Q, the company discusses expectations regarding future performance of the company which include anticipated financial performance, savings from restructuring initiatives, global economic conditions, liquidity requirements, pension expenses and funding, the outcome of litigation or product liability claims, the effect of new accounting pronouncements and one-time accounting charges and credits, and similar matters. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words like "plan," "expect," "aim," "believe," "project," "anticipate," "intend," "estimate," "will," "should," "could" (including the negative or variations thereof) and other expressions that indicate future events and trends. Forward-looking statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Actual future results and trends may differ materially from historical results or those projected in any such forward-looking statements depending on a variety of factors. In order to comply with the terms of the safe harbor, the company identifies in this Quarterly Report on Form 10-Q important factors which could affect the company's financial performance and could cause the company's actual results for future periods to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. 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 net revenue resulting from 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. These factors should be considered, together with any similar risk factors or other cautionary language that may be made elsewhere in this Quarterly Report on Form 10-Q. 17 Competition: The company sells a wide variety of products in numerous markets, each of which is highly competitive. Many of the company's competitors are part of large multi-national companies and may have more resources than the company. The increasing frequency of "e-auctions" is also leading to increased price competition for both existing and new business. Competition may result in lost market share or reduced prices, which could result in reduced gross margins and may impair the company's ability to grow or even to maintain current levels of revenues and earnings. Acquisitions: As part of the company's growth strategy, the company intends to pursue acquisitions of complementary businesses or products and joint ventures. The ability to grow through acquisitions or joint ventures depends upon the company's ability to identify, negotiate and complete suitable acquisitions or joint venture arrangements. International: Operations outside the United States accounted for approximately 47 percent of the company's net revenue in the first nine months of 2003. International operations could be adversely affected by changes in political and economic conditions, conflicts, sanctions, trade protection measures, restrictions on repatriation of earnings, differing intellectual property rights and changes in regulatory requirements that restrict the sales of products or increase costs. Also, fluctuations in exchange rates between the U.S. dollar and other currencies could result in increases or decreases in the company's earnings and may adversely affect the value of the company's assets outside the United States. Raw Materials: The company obtains the raw materials needed to manufacture its products from a number of suppliers. Many of these raw materials are petroleum-based derivatives, minerals and metals. Under normal market conditions, these materials are generally available on the open market and from a variety of producers. From time to time, however, the prices and availability of these raw materials fluctuate, which could impair the company's ability to procure necessary materials, or increase the cost of manufacturing its products. The company generally attempts to increase its selling prices to address certain increases in its raw materials. However, the company's revenues may be negatively impacted by its customers' reaction to these increases, or the company may be unable to successfully pass the increases in raw materials on to its customers which could result in reduced profit margins. Environmental and Litigation: The company is subject to numerous environmental laws and regulations that impose various environmental controls on the company or otherwise relate to environmental protection, the sale and export of certain chemicals or hazardous materials, and various health and safety matters. To date, the company's expenditures related to environmental matters have not had a material adverse effect on the company's business, financial condition, results of operations or cash flows. However, the company cannot predict that it will not be required to make additional expenditures to remain in or to achieve compliance with environmental laws in the future or that any such additional expenditures will not have a material adverse effect on the company's business, financial condition, results of operations or cash flows. As a participant in the chemical and construction products industries, the company faces an inherent risk of exposure to claims in the event that the failure, use or misuse of its products results in, or is alleged to result in property damage and/or bodily injury. Claims could result in significant legal expenditures and/or substantial damages. Please refer to Part II Item 1. Legal Proceedings in this Quarterly Report on Form 10-Q. Given the unpredictability of litigation and the complexity of the issues presented the company carefully monitors and evaluates its ongoing litigation and claims. Other: Additional factors which could affect future results include: (i) economic matters over which the company has no control, including changes in inflation, tax rates, and interest rates; (ii) changes in fiscal, governmental and other regulatory policies; (iii) the loss or insolvency of a major customer or distributor, (iv) natural or manmade disasters (including material acts of terrorism or hostilities which impact the company's markets); (v) loss of, or changes in, executive management; (vi) pension expenses and funding requirements, and (vii) changes in accounting standards which are adverse to the company. In addition, the company notes that its stock price can be affected by fluctuations in quarterly earnings. The company may refer to this section of the Form 10-Q to identify risk factors related to other forward looking statements made in oral presentations, including telephone conferences and/or webcasts open to the public. 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk - ------------------------------------------------------------------- Market Risk: The company is exposed to various market risks, including changes in interest rates, foreign currency rates and prices of raw materials. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates. Interest Rate Risk: There is exposure to changes in interest rates primarily as a result of borrowing activities used to fund operations. Committed floating rate credit facilities are used to fund a portion of operations. Management believes that probable near-term changes in interest rates would not materially affect its consolidated financial position, results of operations or cash flows. The impact on the results of operations of a one-percentage point interest rate change on the outstanding balance of its variable rate debt as of August 30, 2003 would not be material. Foreign Exchange Risk: As a result of being a global enterprise, there is exposure to market risks from changes in foreign currency exchange rates, which may adversely affect operating results and financial position. For the first nine months of 2003, approximately 47 percent of net revenue was generated outside of the United States. Principal foreign currency exposures relate to the euro, British pound sterling, Japanese yen, Australian dollar, Canadian dollar, Argentine peso and Brazilian real. Management's objective is to balance, where possible, the local currency denominated assets to the local currency denominated liabilities to have a natural hedge and minimize foreign exchange impacts. The company enters into cross border transactions through importing and exporting goods to and from different countries and locations. These transactions generate foreign exchange risk as they create assets, liabilities and cash flows in currencies other than the local currency. This also applies to services provided and other cross border agreements among subsidiaries. Management minimizes risks from foreign currency exchange rate fluctuations through normal operating and financing activities and, when deemed appropriate, through the use of derivative instruments. Management does not enter into any speculative positions with regard to derivative instruments. From a sensitivity analysis viewpoint, based on the nine-month period ending August 30, 2003, financial results, a hypothetical overall 10 percent change in the U.S. dollar would have resulted in a change of approximately $0.05 per diluted share. Raw Materials: The principal raw materials used to manufacture products include resins, polymers, vinyl acetate monomer, starch, dextrines and natural latex. The company generally avoids sole source supplier arrangements for raw materials. While alternate sources for most key raw materials are available, if worldwide supplies were disrupted due to unforeseen events, or if unusual demand causes products to be subject to allocation, shortages could occur. The company's single largest expenditure is the purchase of raw materials. Management acknowledges that in the long-term, prices of most raw materials will probably increase. Management's objective is to purchase raw materials that meet both its quality standards and production needs at the lowest total cost. Most raw materials are purchased on the open market or under contracts which limit the frequency but not the magnitude of price increases. In some cases, however, the risk of raw material price changes is managed by strategic sourcing agreements which limit price increases to increases in supplier feedstock costs, while requiring decreases as feedstock costs decline. The company also uses the leverage of having substitute raw materials approved for use wherever possible to minimize the impact of possible price increases. Item 4. Controls and Procedures - -------------------------------- Under the supervision and with the participation of the company's management, including the Chief Executive Officer and Chief Financial Officer, the company conducted an evaluation of its "disclosure controls and procedures" (as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this report on Form 10-Q. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are effective in alerting them to material information relating to the company and required to be included in the company's periodic SEC filings. There was no significant change in the company's internal controls over financial reporting that occurred during the company's most recently completed fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings - ------------------------- As a participant in the chemical and construction products industries, the company faces an inherent risk of exposure to claims in the event that the failure, use or misuse of its products results in, or is alleged to result in property damage and/or bodily injury. A subsidiary of the company is a defendant in a number of lawsuits related to exterior insulated finish systems ("EIFS"). The EIFS product was used primarily in the residential construction market in the southeastern United States. The company is also defending EIFS lawsuits involving a handful of commercial structures or multifamily residences and one class action lawsuit. Claims and lawsuits seek monetary relief for damage to property from moisture intrusion. None of the claims have alleged any personal injury. Typically, the company's subsidiary, along with the builder, applicator and other parties pay to repair the damaged homes. The claims experienced by the company's subsidiary relate primarily to systems applied prior to 1999. The company's subsidiary has not had any material claims related to EIFS used in single family homes after the redesign of the system in 1998-1999. It is difficult to estimate the cost of resolving all pending and future EIFS related claims. At August 30, 2003, the company's reserve for liability and costs for pending and future single family residential claims was $3.6 million reflecting a decline of $0.2 million from the balance at May 31, 2003. Associated with these claims is $0.8 million for estimated insurance recoveries. The company only has insurance coverage for certain years. Projecting future events, such as the number of new claims to be filed each year, the average cost of disposing of each such claim, as well as the numerous uncertainties surrounding litigation in the United States, could cause the actual costs and related insurance recoveries to be higher or lower than those recorded. As a result of the bankruptcy of most major asbestos producers, plaintiffs' attorneys are increasing their focus on other defendants. From time to time, the company or its subsidiaries are named in asbestos-related lawsuits in various state courts involving alleged exposure to products manufactured 20 to 30 years ago. These lawsuits frequently seek both actual and punitive damages, often in very large amounts. In cases where plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to products manufactured by the company or its subsidiaries, the company is generally dismissed. With respect to those cases where compensable disease, exposure and causation are established with respect to one of the company's products, the company generally settles for amounts that reflect the confirmed disease, the seriousness of the case, the particular jurisdiction and the number and solvency of other parties in the case. Substantially all of these cases have involved multiple co-defendants, and the company is typically a de minimis party. During the third quarter of 2003, the company and its insurers did not settle any asbestos related lawsuits. Insurance from solvent third party insurers in accordance with applicable policies have historically paid substantially all of the indemnity and defense costs associated with most of the asbestos litigation applicable to the company. For certain claims the company has been indemnified by third parties. During the second quarter of 2003, the company did contribute towards the settlement of two cases. The company's contribution represented amounts allocable to years in which the responsible insurer was insolvent or amounts below the minimum retained deductibles under the applicable policies. The company is pursuing recovery for these amounts from the liquidators for the insolvent insurers and is asserting claims for coverage from solvent excess insurers and as a result had an insurance receivable of 20 $0.2 million as of August 30, 2003. The company and its insurers have also commenced negotiations with respect to the terms of a cost sharing arrangement. To the extent the company can reasonably estimate the amount of its probable liability the company establishes a financial reserve and a corresponding amount for insurance coverage. 21 Item 6. Exhibits and Reports on Form 8-K - -------------------------------- Exhibits 10.1 Separation from Employment Agreement - Peter Koxholt 10.2 Consulting Services Agreement - Raymond A. Tucker 12 Computation of Ratios 31.1 Form of 302 Certification - Albert P.L. Stroucken 31.2 Form of 302 Certification - John A. Feenan 32.1 Form of 906 Certification - Albert P.L. Stroucken 32.2 Form of 906 Certification - John A. Feenan (b) Reports on Form 8-K during the quarter ended August 30, 2003. On June 25, 2003, a Form 8-K was filed during the quarter ended August 30, 2003 to report the financial results for the quarter ended May 31, 2003. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. H.B. Fuller Company Dated: October 10, 2003 /s/ John A. Feenan ---------------------------------------- John A. Feenan Senior Vice President and Chief Financial Officer 22 Exhibit Index Exhibits 10.1 Separation from Employment Agreement - Peter Koxholt 10.2 Consulting Services Agreement - Raymond A. Tucker 12 Computation of Ratios 31.1 Form of 302 Certification - Albert P.L. Stroucken 31.2 Form of 302 Certification - John A. Feenan 32.1 Form of 906 Certification - Albert P.L. Stroucken 32.2 Form of 906 Certification - John A. Feenan EX-10.1 3 dex101.txt SEPARATION FROM EMPLOYMENT AGREEMENT - PETER KOXHOLT Exhibit 10.1 July 8, 2003 Mr. Peter Koxholt 1440 Donegal Drive Woodbury, MN 55125 Re: Separation from Employment Dear Peter: Your employment with H.B. Fuller Deutschland GmbH (the "Company") is governed by the terms of a Managing Director Agreement dated October 15, 1998, as amended by a letter agreement dated May 1, 2001 (together, as amended, the "MDA"). Further, you are currently assigned to H.B. Fuller Company ("Fuller"), in St. Paul, Minnesota, according to the terms and conditions of an International Service Agreement dated May 1, 2001 (the "ISA"). Under the applicable provisions of the MDA and the ISA, termination of employment by you or the Company prior to April 30, 2004 is restricted. Based upon our discussions and in consideration of the agreements set forth in this letter, the Company, Fuller and you agree as follows: Separation. - ---------- . By mutual agreement, (i) your assignment in the United States, (ii) the term of the MDA, and (iii) your employment with the Company are each ended as of July 15, 2003. . You will cease to be a Managing Director of the Company as of your separation date. . The Company and Fuller relieve you from all your duties and responsibilities as Group President and General Manager, Global Adhesives, as of the date of this letter agreement. Payments. - -------- . Upon separation, the Company agrees to pay to you six months base salary and car allowance, on a tax-equalized basis with hypothetical tax to be withheld. . Fuller will pay to you a pro rata portion of the annual incentive otherwise payable to you on a tax-equalized basis, hypothetical tax to be withheld, for your performance during fiscal year 2003. The amount of such annual incentive, if any, shall be determined in accordance with terms and conditions of Fuller's annual incentive program. This percentage is based upon the actual number of months you were actively employed by the Company during the fiscal year. Such amount will be payable in 2004 at the same time as the annual incentive, if any, is paid to other executives of Fuller. . Pursuant to the terms of the H.B. Fuller Long Term Incentive Plan, no payments will be made to you for any performance period ending after your separation date. Medical Benefits. All applicable medical benefits, as covered immediately prior to the termination of the MDA, shall continue through January 31, 2004, by means of the Company paying your COBRA premiums during this period. If you so elect, you may continue this coverage after January 31, 2004 for the time period and under the conditions set out in the COBRA notice that you will receive after your separation date. Pension Plan. As permitted by the applicable terms of the MDA, at any time after your separation date, you may apply for immediate disability benefits under the Company's Pension Plan and German Social Security provided you meet the requirements of the disability provision of those plans. Your separation from employment shall be treated as an "early retirement" (age 63) for purposes of the Company's Pension Plan. SERP Benefits. - ------------- . For the purpose of your participation in H.B. Fuller Company Supplemental Executive Retirement Plan ("SERP"), as of your separation date you shall be deemed to have achieved age 62 and granted full credit for 38.5 years of service. . Notwithstanding anything in the MDA or the SERP to the contrary, and subject to change based on actual payments of post-retirement benefits, your target annual benefit will be payable commencing on August 1, 2003. This target benefit will be offset by all sources of post-retirement benefits including German Social Security, United States Social Security, the company's pension plan, and pension plans of prior employers whether or not you are actually eligible to begin receiving these benefits as of August 1, 2003. Stock Options. Fuller agrees to seek the approval of the Compensation Committee of the Board of Directors to amend the terms of the Non-Qualified Stock Option Agreements dated as of January 4, 1999, December 1, 1999, December 7, 2000, January 17, 2002 and December 9, 2002 to vest as of July 15, 2003 your right to purchase shares of Fuller Common Stock at the prices and in accordance with the other terms of each respective Stock Option Agreement, and to provide that such rights will remain exercisable for the periods during which they would have been exercisable had your employment terminated by reason of your retirement as of January 1, 2004. Relocation. The Company will pay the reasonable expenses related to your relocation from Minnesota to Germany, including the transportation charges provided for in the ISA. Non-competition. Your non-competition obligations under the MDA are waived effective as of your separation date and therefore, the Company will not be obligated to make any payments under Section 8.4 of the MDA. Release. You on behalf of yourself, spouse, heirs, representatives, and agents hereby fully release and forever discharge the Company, Fuller and its affiliates from any and all liability or other claim of any kind or nature whatsoever occurring as of the date of this letter, whether known or unknown, which you may now have or hereafter have or claim to have against Company, Fuller and its affiliates for, upon, or by reason of any matter, event or thing occurring prior to the date of this letter agreement, including any claims arising under an alleged violation of the Civil Rights Act of 1991, Title VII of the Civil Rights Act of 1964, the Age Discrimination In Employment Act of 1967, as amended, the Employee Retirement Income Security Act, Title 42 U.S. Section 1985, the Americans With Disabilities Act, the Older Workers Benefit Protection Act, the Minnesota Human Rights Act, and/or any other federal, state or local statute, ordinance, or regulation dealing in any way with employment or employment discrimination. It is expressly understood and agreed, however, that nothing in this paragraph shall be construed to waive any rights or obligations set forth in the MDA, the ISA, the Company's Pension Plan, the SERP, any Stock Option Agreements, or policy of insurance, as each may be specifically amended by this letter agreement. You also agree that you have been advised to consult with any attorney before signing this Agreement and that the Company and Fuller has given you a full twenty-one (21) days within which to consider this Agreement, before signing below, if you so desire. You may rescind (that is, cancel) this Agreement within seven (7) calendar days of signing it to reinstate claims under the Age Discrimination In Employment Act of 1967 and within fifteen (15) calendar days to reinstate claims under the Minnesota Human Rights Act. To be effective, your rescission must be in writing and delivered to Fuller in care of the Chairman of the Board, President and Chief Executive Officer, 1200 Willow Lake Boulevard, P.O. Box 64683, St. Paul, Minnesota 55164-0683. If delivered by mail, such rescission may be postmarked within the seven (7) or fifteen (15) day period, respectively, and sent by Certified Mail, Return Receipt Requested to H.B. Fuller Company at 1200 Willow Lake Boulevard, P.O. Box 64683, St. Paul, Minnesota 55164-068, attention Chairman of the Board, President and Chief Executive Officer. No further amendments. Except as specifically modified by this letter agreement, all other terms and provisions of the MDA, the ISA, the Stock Option Agreements, the Company Pension Plan, the SERP and all other plans and agreements between you, the Company and Fuller remain in full force and effect with no further modification of amendment. Please acknowledge your agreement to the provisions of this letter agreement by executing the enclosed counterpart of this letter, and returning to Fuller. With kind regards, H.B. Fuller Deutschland GmbH H.B. Fuller Company /s/ Raymond A. Tucker /s/ Patricia Jones Patricia Jones Director of H.B. Fuller Senior Vice President, Deutschland Holding GmbH Chief Administrative Officer, General Counsel and Corporate Secretary Agreed: /s/ Peter Koxholt Peter Koxholt - ------------- Date: July 8, 2003 EX-10.2 4 dex102.txt CONSULTING SERVICES AGREEMENT - RAYMOND A. TUCKER Exhibit 10.2 CONSULTING SERVICES AGREEMENT This Agreement, made as of June 25, 2003 between Raymond A. Tucker, hereinafter referred to as the "Consultant," and H.B. Fuller Company, hereinafter referred to as the "Company." W I T N E S S E T H WHEREAS, Company and Consultant desire to enter into an agreement for the performance by Consultant of services for Company. NOW, THEREFORE, in consideration of the mutual promises contained herein, the parties agree as follows: 1. STATEMENT OF WORK Consultant shall perform the services listed below during the term of this Agreement for up to thirty (30) days per year. For purposes of this Section 1, one day will equal 10 hours. The Company will provide consultant reasonable notice of its desire to use his services. (a) Advise Company on general business matters, including potential acquisition candidates that may be identified, from time to time, by the Company. (b) Review materials on possible acquisition targets, and if requested by the Company, participate in management meetings and "due diligence" activities. (c) At Company's option, and at Company's pleasure, Consultant may serve on the Board of Directors of EFTEC North America, L.L.C., provided (i) Consultant shall advise Company, prior to taking any official action in such position, and (ii) in any official action, Consultant shall act in accordance with the Company's direction. (d) Perform such other consulting and or advisory functions as requested by the CEO of the Company. 2. CONSIDERATION In consideration of Consultant's services to Company, Company shall request and obtain a resolution by the Company's Board of Directors or by the Compensation Committee of the Board of Directors of Company, such that the stock options for the purchase of Common Stock pursuant to the H.B. Fuller Company 1992 and 2000 Stock Incentive Plans as amended by the Amendment to Non-Qualified Stock Option Agreements (the "Amendment") granted to Consultant while employed by the Company pursuant to written agreements, shall vest, and become exercisable pursuant to the terms of the Amendment. The Company shall reimburse Consultant for movement of household goods in accordance with the terms of the Company policy on relocation. In addition, Company shall reimburse Consultant for travel and other reasonable expenses in accordance with the H.B. Fuller Company policy, except that international travel shall be permitted in business class, with the understanding that no expenses will be incurred by the Consultant without the prior written authorization of a member of the Company's Executive Committee. 3. TERM AND TERMINATION This Agreement shall commence upon the date of Consultant's resignation from employment with the Company and shall terminate no later than the second anniversary of Consultant's resignation. Company may at its option release Consultant from his obligations hereunder at any time during the term of the Agreement. 4. STATUS OF CONSULTANT This Agreement is made with Consultant as an independent contractor and not as an employee of Company. Consultant understands and agrees that Company will not provide Consultant with Worker's Compensation, Unemployment Insurance, State Disability Insurance, public liability insurance or any other benefits or coverage that may be available to employees of Company, unless specifically provided herein. Consultant shall clearly represent himself as a consultant, and not an employee or agent and shall refrain from incurring liabilities or obligations of any kind in the name, or on behalf, of Company, except as Consultant may be so authorized in advance in writing by a member of the Company's Executive Committee. Consultant shall not direct the work of any employee of the Company, or make any management decisions, or undertake to commit the Company to any course of action in relation to third parties. Consultant shall indemnify Company for any out of pocket expenses incurred by Company due to Consultant's breach of this provision. 5. PROPRIETARY INFORMATION The work for which Consultant is engaged may include access to knowledge and information of a proprietary nature to Company. Consultant agrees to keep such knowledge and information in confidence and shall not, except as required in Consultant's performance under this Agreement, or as previously authorized in writing by Company, publish, disclose or make use of or authorize anyone else to publish, disclose or make use of such information or knowledge, unless and until such information or knowledge shall have ceased to be proprietary as evidenced by general public knowledge. This prohibition as to publication and disclosure shall not restrict Consultant in the exercise of his technical skill, providing that the exercise of such skill does not involve the disclosure to others of information considered proprietary to Company. Consultant shall, upon demand or upon termination of this Agreement, promptly surrender any such information which is in tangible form to Company. Any violation of this section will constitute irreparable injury for which damages are an inadequate remedy, and in the event of any such violation, Company will be entitled to injunctive relief and to such other remedies as may be available at law or equity. In addition, Consultant agrees that all information, facts or occurrences relating to all formulas, processes, customer lists, computer user identifiers and passwords, and all purchasing, engineering, accounting, marketing and other information, not generally known and proprietary to Company, including but not limited to, information relating to research, development, manufacturing, marketing or sale of Company's products shall be and are hereby deemed to be confidential information ("Confidential Information") of Company, and Consultant agrees not to use or disclose any Confidential Information except by written consent of Company. 6. NON-SOLICITATION Consultant agrees that during the term of this Agreement and for a period of one year following the termination of this Agreement, he will not induce, attempt to induce, or in any way assist or act in concert with any other person or organization in inducing or attempting to induce any employee or agent of Company to terminate such employee or agent's relationship with Company. During such period of time, Consultant agrees that he will not make any offers of employment or assist or act in concert with any other person or organization in making offers of employment to any person who, at the time of such offer, is currently in an employment or agency relationship with Company. 7. ACKNOWLEDGEMENT REGARDING SECURITIES LAWS Consultant acknowledges that he is aware that the applicable securities laws prohibit any person who has received from an issuer material non-public information, from purchasing or selling securities of such issuer or from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities. 8. RECORDS AND REPORTS Consultant shall cause to be kept complete memoranda, either in written or electronically recorded form, of all work done in connection with all projects hereunder, including notes or other materials used in the preparation of such memoranda. All such memoranda, electronic recordings, notes and other information shall belong to Company and shall be available to Company at all times. Upon completion of each task or project, Consultant shall furnish to Company a full and final report with respect thereto, together with all supporting records and notes. 9. CONFLICTING ASSIGNMENTS Consultant agrees to refrain from accepting assignments from any person, firm or corporation during the term of this Agreement which, in Company's sole opinion, would conflict with, or impair an unbiased performance of Consultant's duties under this Agreement, or would constitute a breach of any non-competition or non-solicitation obligation under any other agreement between Company and Consultant. Consultant is free to accept other work assignments or employment opportunities that do not violate the requirements of this paragraph. 10. RELEASE In consideration of the promises, agreements and covenants contained herein, Consultant, on behalf of himself, his heirs, assigns, spouses, representatives, and agents does hereby fully release and forever discharge Company, and its respective officers, employees and directors, both current and former from any and all liability, remedies, claims for relief, demands, actions, causes of action, suits, grievances, arbitrations and administrative proceedings under every local, state, or federal law, statute, ordinance or common law, and any and all other claims of any kind or nature whatsoever occurring as of the date of this Agreement, whether in law or in equity, contract or tort, known or unknown, asserted or unasserted, suspected or unsuspected, of any kind or nature whatsoever which Consultant may now have or hereafter have or claim to have against Company for, upon, or by reason of any matter, event, cause or thing occurring prior to the date of this Agreement, including without limitation, any and all claims of any kind arising out of or in anyway relating to Consultant's employment with Company, and further including without limitation: (a) Any claims, demands, or causes of action arising under, or any claim for relief on the basis of, an alleged violation of the Civil Rights Act of 1991, Title VII of the Civil Rights Act of 1964, the Age Discrimination In Employment Act of 1967, as amended, the Employee Retirement Income Security Act, Title 42 U.S. Section 1985, the Americans With Disabilities Act, the Older Workers Benefit Protection Act, the Minnesota Human Rights Act, and/or any other federal, state or local statute, ordinance, or regulation dealing in any way with employment or employment discrimination; (b) Any claims, demands, or causes of action on the basis of any breach of an express or implied employment contract under the common law of the State of Minnesota, or any other state, or on the basis of any claim of defamation, wrongful discharge and/or any other common law, statute or tort or any other claim whatsoever arising out of or in any way relating to Consultant's employment with Company or any other occurrence prior to the date of this Agreement, but excluding claims which Consultant cannot by law waive and claims for breach of this Agreement. It is specifically agreed and understood that Consultant is not waiving or releasing any right he may have under Company's corporate undertakings or pursuant to any applicable policy of insurance, to defense and/or indemnity for third party claims. Consultant warrants that he is legally competent to execute this Release and accepts full responsibility therefore. Consultant also agrees that he is signing this Release voluntarily and with full knowledge of its significance and legal consequence. Consultant also agrees that he has been advised to consult with any attorney before signing this Agreement and that Company has given Consultant a full twenty-one (21) days within which to consider this Agreement, before signing below, if Consultant so desires. Consultant understands that he may rescind (that is, cancel) this Agreement within seven (7) calendar days of signing it to reinstate claims under the Age Discrimination In Employment Act of 1967 and within fifteen (15) calendar days to reinstate claims under the Minnesota Human Rights Act. To be effective, Consultant's rescission must be in writing and delivered to Company in care of the Senior Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary, 1200 Willow Lake Boulevard, P.O. Box 64683, St. Paul, Minnesota 55164-0683. If delivered by mail, such rescission may be postmarked within the seven (7) or fifteen (15) day period, respectively, and sent by Certified Mail, Return Receipt Requested to H.B. Fuller Company at 1200 Willow Lake Boulevard, P.O. Box 64683, St. Paul, Minnesota 55164-068, attention Senior Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary. Consultant understands that timely rescission of any portion of this Agreement as provided herein, shall constitute a material breach of this Agreement resulting in immediate withdrawal and rescission of all promises, agreements and covenants contained herein, which shall then become immediately void and unenforceable. 11. WARRANTIES AND CONTROLLING LAWS Consultant warrants that: (a) Consultant will comply with the applicable law in the performance of its obligations under the terms of this Agreement, including without limitation the foregoing: (1) Consultant will comply fully with the export control laws and regulations of the United States Government with respect to work under this Agreement, and (2) In such performance, Consultant will not directly or indirectly pay, offer or authorize payment of anything of value (either in the form of compensation, gift, contribution or otherwise) to any person or organization contrary to applicable law, including the laws of the United States (such as the Foreign Corrupt Practices Act) and the laws of the country in which Consultant provides services under this Agreement. (b) With respect to any work performed under this Agreement, Consultant specifically understands and agrees that he shall not receive any payments in the nature of a rebate or similar benefit paid directly or indirectly by anyone, nor shall any employee or representative of the Company receive any such payment paid directly or indirectly by the Consultant or by anyone else on Consultant's behalf. 12. FEES OR TAXES, INDEMNITY AND LIABILITY It is agreed (a) that Consultant shall be responsible for any other applicable taxes (federal, state, local or foreign) which may be required in connection with this Agreement; (b) that Consultant, Consultant's heirs, or assigns, shall not be entitled, by virtue of any work done under this Agreement, to any benefits under any pension, sick leave, life insurance, vacation, or disability, or other employees' benefit plan or plans maintained by Company for its employees; and (c) that Consultant hereby indemnifies and holds Company, its agents, and employees harmless against any and all claims, actions, and demands and against any damages, liabilities or expenses of Company, its agents, and employees which may be asserted or arise out of the foregoing matters covered in this paragraph. 13. JURISDICTION AND VENUE This Agreement shall be governed by the laws of the State of Minnesota and Consultant hereby consents to the jurisdiction and venue of the courts of the State of Minnesota for the resolution of any disputes arising out of, or related to, this Agreement to the exclusion of the courts of any other state. 14. INTEGRATION AND SUPERSEDURE This Agreement contains all the representations and understandings between Company and Consultant pertaining to the consulting services to be provided herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. H.B. FULLER COMPANY CONSULTANT - ----------------------------- ---------- (Company) By: /s/ Patricia Jones By: /s/ Raymond A. Tucker Chief Administrative Officer Raymond A. Tucker EX-12 5 dex12.txt COMPUTATION OF RATIOS Exhibit 12 H.B. FULLER COMPANY Computations of Ratios of Earnings to Fixed Charges and Ratios of Earnings to Fixed Charges and Preferred Stock Dividends (Thousands of Dollars)
Nine Months Ended Fiscal Year August 30, ---------------------------------------------------------- 2003 2002 2001 2000 1999 1998 ---------------------------------------------------------------------- Ratio of Earnings to Fixed Charges: Earnings: Income before income taxes, minority interests, equity investments and accounting change $ 33,545 $ 40,312 $ 61,302 $ 74,770 $ 72,398 $ 31,562 Add: Interest expense 11,803 18,389 22,379 24,918 27,907 28,050 Interest portion of rental expense 1,030 1,702 1,326 1,252 1,096 1,154 Distributed earnings of 20-50% owned companies -- -- 1,240 734 -- -- ---------------------------------------------------------------------- Total Earnings Available for Fixed Charges $ 46,378 $ 60,403 $ 86,247 $ 101,674 $ 101,401 $ 60,766 ====================================================================== Fixed charges: Interest on debt $ 11,096 $ 17,559 $ 21,678 $ 24,296 $ 27,264 $ 27,811 Interest portion of rental expense 1,030 1,702 1,326 1,252 1,096 1,154 ---------------------------------------------------------------------- Total fixed charges $ 12,126 $ 19,261 $ 23,004 $ 25,548 $ 28,360 $ 28,965 ====================================================================== Ratio of earnings to fixed charges 3.8 3.1 3.7 4.0 3.6 2.1 Ratio of Earnings to Fixed Charges and Preferred Stock Dividends: Total fixed charges, as above $ 12,126 $ 19,261 $ 23,004 $ 25,548 $ 28,360 $ 28,965 Dividends on preferred stock (pre-tax basis) -- 11 23 24 25 26 ---------------------------------------------------------------------- Total fixed charges and preferred stock dividends $ 12,126 $ 19,272 $ 23,027 $ 25,572 $ 28,385 $ 28,991 ====================================================================== Earnings available for fixed charges and preferred stock dividends $ 46,378 $ 60,403 $ 86,247 $ 101,674 $ 101,401 $ 60,766 ====================================================================== Ratio of earnings to fixed charges and preferred stock dividends 3.8 3.1 3.7 4.0 3.6 2.1
EX-31.1 6 dex311.txt FORM OF 302 CERTIFICATION - ALBERT P.L. STROUCKEN Exhibit 31.1 CERTIFICATIONS I, Albert P.L. Stroucken, certify that: 1. I have reviewed this quarterly report on Form 10-Q of H.B. Fuller Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the Audit Committee of registrant's Board of Directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting; and Date: October 10, 2003 /s/ Albert P.L. Stroucken - ----------------------------------------------- Albert P.L. Stroucken Chairman, President and Chief Executive Officer EX-31.2 7 dex312.txt FORM OF 302 CERTIFICATION - JOHN A. FEENAN Exhibit 31.2 CERTIFICATIONS I, John A. Feenan, certify that: 1. I have reviewed this quarterly report on Form 10-Q of H.B. Fuller Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-115(e) and 15d-115(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the Audit Committee of registrant's Board of Directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting; and Date: October 10, 2003 /s/ John A. Feenan - ------------------------------------------------- John A. Feenan Senior Vice President and Chief Financial Officer EX-32.1 8 dex321.txt FORM OF 906 CERTIFICATION - ALBERT P.L. STROUCKEN Exhibit 32.1 CERTIFICATION I, Albert P.L. Stroucken, certify that this quarterly report on Form 10-Q of H.B. Fuller Company (a) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), and (b) that information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of H.B. Fuller Company. A signed original of this written statement has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request. Date: October 10, 2003 /s/ Albert P.L. Stroucken - ----------------------------------------------- Albert P.L. Stroucken Chairman, President and Chief Executive Officer EX-32.2 9 dex322.txt FORM OF 906 CERTIFICATION - JOHN A. FEENAN Exhibit 32.2 CERTIFICATION I, John A. Feenan, certify that this quarterly report on Form 10-Q of H.B. Fuller Company (a) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), and (b) that information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of H.B. Fuller Company. A signed original of this written statement has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request. Date: October 10, 2003 /s/ John A. Feenan - ------------------------------------------------- John A. Feenan Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----