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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 1, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 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
incorporation or organization) Identification No.)
1200 Willow Lake Boulevard, St. 55110-5101
Paul, Minnesota (Zip Code)
(Address of principal executive
offices)
(651) 236-5900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $1.00 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The aggregate market value of the Common Stock, par value $1.00 per share, held
by non-affiliates of the Registrant as of January 31, 2002 was approximately
$741,224,000 (based on the closing price of such stock as quoted on the NASDAQ
National Market ($27.08) on such date).
The number of shares outstanding of the Registrant's Common Stock, par value
$1.00 per share, was 28,291,511 as of January 31, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference to portions of the Registrant's
2002 Proxy Statement.
H.B. FULLER COMPANY
2001 Annual Report on Form 10-K
Table of Contents
PART I
------
Page
----
Item 1. Business............................................................................... 3
Item 2. Properties............................................................................. 5
Item 3. Legal Proceedings...................................................................... 5
Item 4. Submission of Matters to a Vote of Security Holders.................................... 5
Executive Officers of the Registrant................................................... 6
PART II
-------
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters................... 7
Item 6. Selected Financial Data................................................................ 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 8
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................. 18
Item 8. Financial Statements and Supplementary Data............................................ 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 45
PART III
--------
Item 10. Directors and Executive Officers of the Registrant..................................... 46
Item 11. Executive Compensation................................................................. 46
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 46
Item 13. Certain Relationships and Related Transactions......................................... 46
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 47
Signatures............................................................................. 50
2
PART I
Item 1. Business
Founded in 1887 and incorporated as a Minnesota corporation in 1915, H.B.
Fuller Company and its consolidated subsidiaries (the "Company") is a worldwide
manufacturer and marketer of adhesives, sealants, coatings, paints and other
specialty chemical products. The Company has sales operations in 43 countries
throughout North America, Europe, Latin America and the Asia/Pacific region.
The Company's largest worldwide business category is adhesives, sealants and
coatings, which generated approximately 92 percent of 2001 net revenue. These
products, in thousands of formulations, are sold to customers in a wide range
of industries. The Company also is a producer and supplier of specialty
chemical products. The Company generally markets its products through a direct
sales force, with independent distributors used in some markets.
Segment Information. The Company's segment reporting reflects operating
segments consistent with its method of internal reporting. Management organizes
its business in five reportable operating segments. The adhesives, sealants and
coatings (adhesives) business is broken down into four geographic segments:
North America Adhesives, Europe Adhesives, Latin America Adhesives and
Asia/Pacific Adhesives. The four geographic segments offer generally similar
products and services to industries such as packaging, graphic arts,
automotive, footwear, woodworking, window and nonwovens. The fifth reportable
segment is the Specialty Group, which consists of five separate operating
entities, namely, TEC Specialty Products, Inc. ("TEC"); Foster Products
Corporation ("Foster"); Linear Products, Inc. ("Linear"); Paints Division
("Paints") and the Global Coatings Division ("Global Coatings"). These entities
provide specialty chemical products for a variety of applications such as,
ceramic tile installation (TEC), HVAC insulation (Foster), powder coatings
applied to metal surfaces such as office furniture, appliances and lawn and
garden equipment (Global Coatings), specialty hot melt adhesives for packaging
applications (Linear), and liquid paint sold through retail outlets (Paints).
The Paints Division operates solely in Central America. The other four entities
in the Specialty Group operate primarily in North America.
Management evaluates the performance of its operating segments based on
operating income which is defined as gross profit minus operating expenses
("SG&A"). Expenses resulting from restructuring initiatives are excluded from
the operating segment results. Corporate expenses are fully allocated to the
operating segments. Corporate assets are not allocated to the segments. Inter-
segment sales are recorded at cost plus a minor markup for administrative
costs.
Non-U.S. Operations. The principal markets, products and methods of
distribution outside the United States vary with the country or business
practices of the country. The products sold include those developed by the
local manufacturing plants, within the United States and elsewhere in the
world.
Operations overseas face varying degrees of economic and political risk. At the
end of 2001, the Company had plants in 20 countries outside the United States
and satellite sales offices in another 22 countries. The Company also uses
license agreements to maintain a worldwide manufacturing network. In the
opinion of management, there are countries in Central and South America, where
the Company has operating facilities, that have a higher degree of political
risk than the United States.
Competition. The Company encounters a high degree of competition in marketing
its products. Because of the large number and variety of its products, the
Company does not compete directly with any one competitor in all of its
markets. In North America, the Company competes with a large number of both
multi-national companies and local firms. Throughout Latin America, the Company
experiences substantial competition in marketing its industrial adhesives. In
Central America, the Company competes with several large paint manufacturers.
In Europe, the Company competes with several large companies.
The principal competitive factors in the sale of adhesives, sealants, coatings
and paints are product performance, customer service, technical service,
quality and price.
3
Customers. Of the Company's $1,274.1 million net revenue to unaffiliated
customers in 2001, $763.0 million was sold through its North American
operations. No single customer accounted for more than 10% of consolidated net
revenue.
Backlog. Orders for products are generally processed within one week.
Therefore, the Company had no significant backlog of unfilled orders at
December 1, 2001, December 2, 2000 or November 27, 1999.
Raw Materials. The principal raw materials used by the Company to manufacture
its products include resins, polymers and vinyl acetate monomer. Natural raw
materials such as starch, dextrines and natural latex are also used in the
manufacturing processes. The Company attempts to find multiple sources for all
of its raw materials. While alternate supplies of most key raw materials are
available, if worldwide supplies were disrupted due to unforeseen events,
shortages of some materials could occur. In addition for certain products
produced by the Company, the substitution of key raw materials may require the
Company to reformulate, retest or seek re-approval from customers of those
products. The Latin American and Asia/Pacific operations import many of their
raw materials. Extended delivery schedules of these materials are common,
thereby requiring maintenance of higher inventory levels.
Patents, Trademarks and Licenses. Much of the technology used in manufacturing
adhesives, coatings and other specialty chemicals is in the public domain. To
the extent that it is not, the Company relies on trade secrets and patents to
protect its know-how. The Company has agreements with many of its employees to
protect its rights to technology and intellectual property. The Company also
routinely obtains confidentiality commitments from customers, suppliers and
others to safeguard its proprietary information. Company trademarks, such as
Advantra, Sesame and Plasticola, are important in marketing products.
Research and Development. Research and development expenses charged against
income were $19.0 million, $18.4 million and $21.3 million in 2001, 2000 and
1999, respectively. These costs are included as a component of selling,
administrative and other expenses.
Environmental Protection. Management regularly reviews and upgrades its
environmental policies, practices and procedures and seeks improved production
methods that reduce waste, particularly toxic waste, coming out of its
facilities, based upon evolving societal standards and increased environmental
understanding.
The Company's high standards of environmental consciousness are supported by an
organizational program supervised by environmental professionals and the
Worldwide Environment, Health and Safety Committee, a committee with management
membership from around the world, which proactively monitors practices at all
facilities.
Management believes that as a general matter its current policies, practices
and procedures, in the areas of environmental regulations and the handling of
hazardous waste, are designed to substantially reduce risks of environmental
and other damage that would result in litigation and financial liability. Some
risk of environmental and other damage is, however, inherent in particular
operations and products, as it is with other companies engaged in similar
businesses.
The Company is and has been engaged in the handling, manufacture, use, sale
and/or disposal of substances, some of which are considered by federal or state
environmental agencies to be hazardous. Management believes that its
manufacture, handling, use, sale and disposal of such substances are generally
in accordance with current applicable environmental regulations. However,
increasingly strict environmental laws, standards and enforcement policies may
increase the risk of liability and compliance costs associated with such
substances.
Environmental expenditures, reasonably known to management, to comply with
environmental regulations over the Company's next two years are estimated to be
approximately $12.0 million. See additional disclosure under Item 3, Legal
Proceedings.
4
Employees. The Company employed approximately 4,900 individuals on December 1,
2001, of which approximately 2,000 individuals were employed in the United
States.
Item 2. Properties
The Company's principal executive offices and central research facilities are
located in the St. Paul, Minnesota metropolitan area. Manufacturing operations
are carried out at 26 plants (2 leased) located throughout the United States
and at 26 manufacturing plants (1 leased) located in 20 other countries. In
addition, the Company has numerous sales and service offices throughout the
world. Management believes that the properties owned or leased are suitable and
adequate for its business.
North America Adhesives and the Specialty Group operate 17 and 9 plants,
respectively in the United States and 3 and 6 plants, respectively outside the
United States. Outside the United States, Europe Adhesives, Latin America
Adhesives, and Asia/Pacific Adhesives operates 6, 7 and 4 plants, respectively.
Item 3. Legal Proceedings
Environmental Remediation. The Company is subject to the federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") and similar
state laws that impose liability for costs relating to the clean-up of
contamination resulting from past spills, disposal or other release of
hazardous substances. The Company is currently involved in administrative
proceedings or lawsuits under CERCLA or such state laws relating to clean-up of
11 sites. The future costs in connection with all of these matters have not
been determined due to such factors as the unknown timing and extent of the
remedial actions which may be required, the full extent of clean-up costs and
the amount of the Company's liability in consideration of the liability and
financial resources of the other potentially responsible parties. However,
based on currently available information, the Company does not believe that any
liabilities allocated to it in these administrative proceedings or lawsuits,
individually or in the aggregate, will have a material adverse effect on the
Company's business or consolidated financial position, results of operations or
cash flows.
The Company has received requests for information from federal, state or local
government entities regarding nine other contaminated sites. The Company has
not been named a party to any administrative proceedings or lawsuits relating
to the clean-up of these sites.
From time to time management becomes aware of compliance matters relating to,
or receives notices from federal, state or local entities regarding possible or
alleged violations of environmental, health or safety laws and regulations. In
some instances, these matters may become the subject of administrative
proceedings or lawsuits and may involve monetary sanctions of $100,000 or more
(exclusive of interest and costs). Based on currently available information,
management does not believe that such compliance matters or alleged violations
of laws and regulations, individually or in the aggregate, will have a material
adverse effect on the Company's business or consolidated financial position,
results of operations or cash flows.
Other Legal Proceedings. The Company is subject to legal proceedings incidental
to its business, including product liability claims. In certain claims, the
claimants seek damages, which if granted, would require significant
expenditures. The Company has recorded estimated and reasonable liabilities for
these matters. The Company has also recorded receivables for the probable
amount of insurance recovery as it relates to these matters. Based on currently
available information, management does not believe that an adverse outcome in
any pending legal proceedings individually or in the aggregate would have a
material adverse effect on the Company's business or consolidated financial
position, results of operations or cash flows. Although management currently
believes a material impact on its consolidated financial position, results of
operations or cash flows is remote for these claims, due to the inherent nature
of litigation, there can be no absolute certainty the Company will not incur
charges above the presently recorded liabilities.
Item 4. Submission of Matters to a Vote of Security Holders
None in the quarter ended December 1, 2001.
5
Executive Officers of the Registrant
The following sets forth the name, age and business experience of the executive
officers as of January 31, 2002 for the past five years. Unless otherwise
noted, the positions described are positions with the Company or its
subsidiaries.
Name Age Positions Period Served
---- --- --------- -------------
Albert P.L. Stroucken 54 Chairman of the Board October, 1999-Present
President and Chief
Executive Officer April, 1998-Present
General Manager,
Inorganics Division,
Bayer AG 1997-1998
Executive Vice President
and President, 1992-1997
Industrial Chemicals
Division, Bayer
Corporation
Raymond A. Tucker 56 Senior Vice President October, 1999-Present
Chief Financial Officer July, 1999-Present
Treasurer July-October, 1999
Senior Vice President, 1997-1999
Inorganic Products,
Bayer Corporation
Vice President, Finance
and Administration, 1992-1997
Industrial Chemicals
Division, Bayer
Corporation
Richard C. Baker 49 Corporate Secretary 1995-Present
Vice President 1993-Present
General Counsel 1990-Present
James R. Conaty 54 President and CEO, EFTEC
North America L.L.C. April, 1997-Present
President and CEO, EFTEC
Latin America, S.A. April, 1997-Present
President and CEO, H.B.
Fuller Automotive 1994-Present
Jose Miguel Fuster 62 Group President, H.B.
Fuller Latin America December, 2000-Present
Commodity Division and
Consumer Products
Division
Group Vice President,
Division Manager October-December, 2000
Consumer Products
Group Vice President,
Division Manager 1996-October, 2000
Paints Division
William L. Gacki 53 Vice President and
Treasurer October, 1999-Present
Director, Treasury 1995-October, 1999
Peter M. Koxholt 57 Group President, General
Manager Global Adhesives May, 2001-Present
Group President, General
Manager Europe January, 1999-May, 2001
Head of Business Unit
Textile Chemicals & 1995-1998
Specialities, Bayer AG
Stephen J. Large 44 Vice President,
Operations/Supply Chain May, 2001-Present
Group President, General
Manager North America December, 1999-April, 2001
Sales and Operations,
Global Coatings Division April, 1998-November, 1999
General Manager,
Coatings Australia/NZ January, 1996-March, 1998
Alan R. Longstreet 55 Group President, General
Manager North America May, 2001-Present
Senior Vice President,
Performance Products December, 1999-April, 2001
Senior Vice President,
Global SBU's 1998-1999
Vice President,
Asia/Pacific Group
Manager 1996-1998
James C. McCreary, Jr. 45 Vice President,
Corporate Controller November, 2000-Present
Vice President,
Administration and
Controlling, 1997-November, 2000
Industrial Chemicals
Division, Bayer
Corporation
Director, Division
Controlling, 1995-1997
Industrial Chemicals
Division, Bayer
Corporation
6
Name Age Positions Period Served
- ---- --- --------- -------------
William McNellis 59 Group President, General Manager Asia/Pacific April, 2001-Present
General Manager, Global Coatings Division 1996-April 2001
James A. Metts 61 Vice President, Human Resources 1984-Present
Walter Nussbaumer 44 Group President, General Manager Europe May, 2001-Present
Vice President, Chief Technology Officer December, 1999-April, 2001
and Head of Full-Valu
Vice President, Chief Technology Officer January, 1999-April, 2001
Director, Research & Development 1997-1998
Group Leader, Research & Development 1992-1997
Linda J. Welty 46 Group President, General Manager, Full-Valu/ May, 2001-Present
Specialty Group
Group President, General Manager, Specialty Group September, 1998-April, 2001
Vice President, General Manager, Superabsorbent 1997-1998
Materials, Clariant International
The executive officers of the Company are elected annually by the Board of
Directors.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
H.B. Fuller Company common stock is traded on the NASDAQ exchange under the
symbol "FULL." As of December 1, 2001, there were 3,606 common shareholders of
record.
The high and low sales price for the Company's common stock and the dividends
declared for each of the quarterly periods for 2001 and 2000 were as follows:
High and Low Market Value
--------------------------- Dividends
2001 2000 (Per Share)
------------- ------------- -------------
High Low High Low 2001 2000
------ ------ ------ ------ ------ ------
First quarter...................... $22.00 $16.32 $34.28 $25.73 $0.104 $0.103
Second quarter..................... 24.63 18.68 31.58 17.81 0.108 0.105
Third quarter...................... 27.34 23.19 23.63 16.35 0.108 0.105
Fourth quarter..................... 31.18 17.18 19.50 13.98 0.108 0.105
Year............................... 31.18 16.32 34.28 13.98 0.428 0.418
On November 16, 2001, the Company issued a 2-for-1 common stock split to
shareholders of record on October 26, 2001. Share and per share data (except
par value) for all periods presented have been restated to reflect the stock
split. Cash dividends on common stock may not be paid unless provision has been
made for payment of Series A preferred dividends.
The annual meeting of shareholders will be held on Thursday, April 18, 2002, at
2 p.m. at the Science Museum of Minnesota, 120 West Kellogg Boulevard, St.
Paul, MN. All shareholders are cordially invited to attend.
7
Item 6. Selected Financial Data
(Dollars in thousands,
except per share amounts) 2001 2000* 1999 1998 1997
- ------------------------- ---------- ---------- ---------- ---------- ----------
Net revenue.............. $1,274,059 $1,363,961 $1,375,855 $1,357,675 $1,316,028
Income before cumulative
effect of accounting
change.................. $ 44,940 $ 49,163 $ 44,111 $ 15,990 $ 40,308
Percent of net revenue... 3.5 3.6 3.2 1.2 3.1
Net income............... $ 44,439 $ 49,163 $ 43,370 $ 15,990 $ 36,940
Percent of net revenue... 3.5 3.6 3.2 1.2 2.8
Total assets............. $ 966,173 $1,010,361 $1,025,615 $1,046,169 $ 917,646
Long-term debt, excluding
current installments.... $ 203,001 $ 250,464 $ 263,714 $ 300,074 $ 229,996
Stockholders' equity..... $ 434,026 $ 404,710 $ 376,380 $ 341,404 $ 339,114
Per Common Share:
Income before cumulative
effect of accounting
change:
Basic.................. $ 1.61 $ 1.77 $ 1.60 $ 0.58 $ 1.46
Diluted................ $ 1.59 $ 1.74 $ 1.58 $ 0.58 $ 1.44
Net income:
Basic.................. $ 1.59 $ 1.77 $ 1.57 $ 0.58 $ 1.33
Diluted................ $ 1.57 $ 1.74 $ 1.55 $ 0.58 $ 1.32
Dividends paid........... $ 0.428 $ 0.418 $ 0.408 $ 0.393 $ 0.36
Book value............... $ 15.34 $ 14.32 $ 13.39 $ 12.20 $ 12.24
Common stock price:
High.................... $ 31.18 $ 34.28 $ 36.44 $ 32.41 $ 30.13
Common stock price: Low.. $ 16.32 $ 13.98 $ 19.07 $ 17.00 $ 22.25
Number of employees...... 4,891 5,182 5,407 5,953 5,998
- --------
* 53-week year.
Certain reclassifications have been made to prior period net revenue amounts to
conform to the current period presentation, pursuant to Financial Accounting
Standards Board Emerging Issues Task Force No. 00-10, "Accounting for Shipping
and Handling Fees and Costs."
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Critical Accounting Policies and Estimates
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. Management believes the critical accounting
policies and areas that require the most significant judgments and estimates to
be used in the preparation of the consolidated financial statements are revenue
recognition, allowance for doubtful accounts, inventory valuation, pension and
other postretirement plan assumptions, management bonus accruals and income tax
accounting.
The Company recognizes revenue on product sales at the time title passes to the
customer. Reductions to revenue are recorded for various customer incentive
programs and for sales returns and allowances.
Allowances for doubtful accounts receivable are maintained based on historical
payment patterns, aging of accounts receivable and actual writeoff history.
Allowances are also maintained for future sales returns and allowances based on
an analysis of recent trends of product returns.
8
The Company writes down its inventory for estimated obsolescence equal to the
cost of the inventory. Product obsolescence may be caused by shelf-life
expiration, discontinuance of a product line, replacement products in the
marketplace or other competitive situations.
Pension and other postretirement costs and liabilities are actuarially
calculated. These calculations are based on assumptions related to the discount
rate, projected salary increases and expected return on assets. The discount
rate assumption is tied to long-term high quality bond rates. The projected
salary increase assumption is based on recent trends in wage and salary
increases. The expected return on assets assumptions on the investment
portfolios for the pension and other postretirement benefit plans are based on
the long-term expected returns for the investment mix of assets currently in
the portfolio. The current investment mix in the portfolios is primarily U.S.
equities. The return on asset assumptions are subject to change depending upon
the future asset mix in the portfolios.
Management incentive plans are tied to various financial performance metrics.
Bonus accruals made throughout the year related to the various incentive plans
are based on management's best estimate of the achievement of the specific
financial metrics. Adjustments to the accruals are made on a quarterly basis as
forecasts of financial performance are updated. At year-end, the accruals are
adjusted to reflect the actual results achieved.
As part of the process of preparing the Company's consolidated financial
statements, management is required to estimate income taxes in each of the
jurisdictions in which it operates. The process involves estimating actual
current tax expense along with assessing temporary differences resulting from
differing treatment of items for book and tax purposes. These timing
differences result in deferred tax assets and liabilities, which are included
in the Company's consolidated balance sheet. Management records a valuation
allowance to reduce its deferred tax assets to the amount that is more likely
than not to be realized. Management has considered future taxable income and
ongoing tax planning strategies in assessing the need for the valuation
allowance. Increases in the valuation allowance result in additional expense to
be reflected within the tax provision in the consolidated statement of income.
Results of Operations: 2001 Compared to 2000
(Note: Fiscal year 2001 was a 52-week year and fiscal year 2000 was a 53-week
year.)
Net Revenue: Net revenue in 2001 of $1,274.1 million was $89.9 million or 6.6
percent less than the 2000 net revenue of $1,364.0 million. The primary reason
for the sales decrease in 2001 was reduced demand due to the relative weakness
in the global economy. Unit volume decreased 6.9 percent in 2001 as compared to
2000. The strength of the U.S. dollar as compared to major foreign currencies
(euro, Japanese yen, Australian dollar, etc.) also contributed to the sales
decrease in 2001. The 2001 net revenue decrease due to currency was 1.6
percent. Offsetting the negative sales impact from volume and currency were
increases in selling prices of 1.9 percent. There were no significant sales
increases or decreases attributed to acquisitions or divestitures in 2001 as
compared to 2000.
Net Revenue Changes from 2000 to 2001 by Operating
Segment ($ in millions): Increase/(Decrease)
- -------------------------------------------------- --------------------
North America Adhesives.................................. $ (41.9) (7.0)%
Europe Adhesives......................................... (15.5) (6.6)%
Latin America Adhesives.................................. (3.5) (4.5)%
Asia/Pacific Adhesives................................... (4.2) (4.2)%
Specialty Group.......................................... (24.8) (7.0)%
---------
Total.................................................... $ (89.9) (6.6)%
=========
Gross Profit Margin: The gross profit margin in 2001 of 27.1 percent was 0.7
percentage points less than the 27.8 percent recorded in 2000. Lower production
volume combined with higher raw material prices resulted in the lower margin in
2001 as compared to 2000. In the first half of 2001, raw material costs as a
percentage of
9
sales were the primary factor contributing to the lower margin. In the second
half of the year, selling price increases reduced the negative impact from raw
material cost increases, however the lower unit volume combined with a high
fixed component of manufacturing costs, caused the margin to remain at levels
that were less than the margin recorded in 2000.
The 2001 cost of sales includes $1.6 million ($0.05 per share) of depreciation
expense for asset impairments related to the restructuring initiative
contemplated during 2001, but approved and implemented in 2002, which is
discussed further in the 2002 Outlook section of this report. (See Note 4 to
the consolidated financial statements.) The impairment charges related to three
manufacturing facilities in Latin America.
Selling, Administrative and Other (SG&A) Expenses: SG&A expenses of $257.4
million in 2001 were $19.4 million or 7.0 percent less than the expenses in
2000. The impact of having one less week in 2001 as compared to 2000 was a
reduction of SG&A expenses of approximately $5.0 million. SG&A expenses
decreased $7.2 million attributable to the Company's pension and other
postretirement benefit plans. The benefit to SG&A expenses was due to income of
$13.8 million for pension and other postretirement plans in 2001 as compared to
income of $6.6 million in 2000. Additionally, lower payroll costs associated
with reduced census contributed to the lower SG&A expenses. The total census at
December 1, 2001 was 4,891 as compared to 5,182 as of December 2, 2000. Of the
total decrease of 291 employees, 182 were included in SG&A expenses. One
initiative which resulted in increased SG&A expenses in 2001 was the
implementation of a new business structure for European operations. SG&A
expenses, primarily outside consultant fees, related to this initiative were
$4.1 million in 2001. The new structure allows for the European operations to
be managed on a true pan-European basis, which is expected to contribute to
lower operating costs in the future. As a percent of net revenue, SG&A expenses
were 20.2 percent in 2001 as compared to 20.3 percent in 2000.
Interest Expense: Interest expense in 2001 of $21.2 million was $2.6 million or
10.8 percent less than the interest expense recorded in 2000. Strong cash flow
in 2001 as compared to 2000, which allowed for lower average debt levels,
combined with lower interest rates in 2001 were the primary reasons for the
lower interest expense.
Gains from Sales of Assets: The Company recorded gains from sales of assets in
2001 of $0.8 million. This compared to gains of $4.1 million in 2000. The most
significant transaction in 2001 was the sale of an equity investment in a
Japanese company, which resulted in a gain of $1.6 million. This gain was
offset by losses from a number of smaller transactions. In 2000, the Company
actively sold non-productive assets. The sale of two facilities in North
America accounted for more than half of the $4.1 million gain in 2000.
Other Income/Expense, net: Other income/expense, net was an expense of $4.1
million in 2001 as compared to an expense of $5.9 million in 2000. The primary
factor in the lower expense in 2001 was currency translation losses of $1.0
million in 2001 as compared to $2.5 million in 2000. These losses resulted
primarily from currency devaluations in Latin American countries.
Income Taxes: The income tax rate for 2001 was 31.2 percent. Included in the
2001 income tax expense was a one-time tax benefit of $2.6 million ($0.09 per
share) resulting from changes in the Company's legal structure in Europe. The
change in legal structure allowed the Company to take advantage of tax losses
that were not previously recognizable under accounting principles generally
accepted in the United States. Another factor that affected the 2001 income tax
rate related to asset impairment charges of $1.6 million discussed in the gross
profit margin discussion. These charges were incurred, for the most part, in
Latin American countries for which tax benefits were not available. Therefore
there was only a $0.1 million tax benefit associated with these charges.
Excluding these two items, the effective income tax rate for 2001 was 34.7
percent. In 2000, the effective income tax rate was 37.0 percent.
Net Income: Net income in 2001 was $44.4 million as compared to $49.2 million
in 2000. Included in the 2001 net income was an after-tax charge of $0.5
million related to the Company's adoption of the Securities
10
and Exchange Commission's Staff Accounting Bulletin (SAB) 101, "Revenue
Recognition". The charge was recorded as a cumulative effect of a change in
accounting principle.
Income per diluted share, as reported, was $1.57 in 2001 as compared to $1.74
in 2000. Excluding the impact from special items in 2001 (one-time tax benefit,
adoption of SAB 101 and asset impairment charges), income per diluted share was
$1.54.
Operating Segment Results (2001 Compared to 2000)
Note: Management evaluates the performance of its operating segments based on
operating income which is defined as gross profit minus operating expenses
(SG&A). Expenses resulting from restructuring initiatives are excluded from the
operating segment results. Corporate expenses are fully allocated to the
operating segments. (See Note 22 to the consolidated financial statements.)
North America Adhesives: Net revenue in 2001 of $557.6 million was 7.0 percent
less than the net revenue in 2000 of $599.5 million. Unit volume decreased 9.0
percent in 2001, selling prices increased 2.2 percent and the impact from
currency (Canadian dollar vs. U.S. dollar) was a negative 0.2 percent. Sales to
the North American automotive market decreased 14.1 percent in 2001 as compared
to 2000. This was a direct result of the reduced number of vehicles the
automotive industry produced in 2001. Also contributing to the sales decrease
in 2001 were the assembly market (woodworking, appliances, etc.), which
recorded a decline of 16.0 percent from 2000, and the converting market which
decreased 8.0 percent. The slowdown in the U.S. economy negatively impacted
both of these markets in 2001. On the positive side, sales to the nonwoven and
window markets increased 6.6 and 5.3 percent, respectively. In spite of the
sales decline, operating income in North America Adhesives increased $11.1
million or 22.0 percent as compared to 2000. Operating expense reductions of
approximately 20 percent offset the negative effects of the lower sales volume
and a lower gross profit margin. Key factors in the expense reduction were
lower payroll costs due to reduced headcount and increased U.S. pension and
other postretirement benefit income as compared to 2000. The benefit plan
income increased by $3.9 million in 2001. Another expense reduction realized in
2001 was a decrease in bad debt expense of approximately $2.7 million.
Europe Adhesives: Net revenue in 2001 of $217.3 million was 6.6 percent less
than the net revenue in 2000 of $232.8 million. Unit volume decreased 7.1
percent, selling prices increased 4.2 percent and the negative impact from the
relative weakness of the euro and British pound as compared to the U.S. dollar,
was 3.7 percent. The reduced economic activity drove the unit volume decrease
in Europe in 2001 as compared to 2000. In addition to the sales decrease, raw
material costs increased in 2001 resulting in a gross profit margin that was
nearly 2.0 percentage points less than 2000. Operating expenses increased 2.9
percent in 2001 primarily due to the expenses of approximately $4.1 million
associated with the implementation of the new business structure in Europe. The
operating income for Europe Adhesives was $0.6 million in 2001 as compared to
$9.5 million in 2000.
Latin America Adhesives: Net revenue in 2001 of $73.6 million was 4.5 percent
less than the net revenue in 2000 of $77.1 million. Unit volume decreased 3.0
percent and selling prices decreased 1.5 percent. Economic weakness in
Argentina and Brazil were key factors in the sales decrease in 2001. Latin
America Adhesives recorded an operating loss of $3.1 million in 2001 as
compared to an operating loss of $1.4 million in 2000. Included in the 2000
results was a $1.5 million credit due to a settlement of a claim with a raw
material supplier.
Asia/Pacific Adhesives: Net revenue in 2001 of $96.7 million was 4.2 percent
less than the net revenue in 2000 of $101.0 million. Unit volume increased 3.7
percent, selling prices increased 1.7 percent and the weakness of foreign
currencies as compared to the U.S. dollar had a negative impact of 9.6 percent.
The negative currency impact was primarily the result of weakness in the
Japanese yen and the Australian dollar. Raw material price increases were the
main reason for a 0.6 percentage point decrease in the gross profit margin.
Operating income decreased $1.3 million or 53.7 percent in 2001 as compared to
2000.
11
Specialty Group: Net revenue in 2001 of $328.8 million was 7.0 percent less
than the net revenue in 2000 of $353.6 million. Decreases in unit volume
accounted for the entire sales decrease, as the variances from selling price
changes and currency were insignificant. The powder coatings market in North
America and the liquid paint market in Central America drove the 2001 sales
decrease with declines of 16.8 percent and 9.3 percent, respectively. Slowdowns
in the economy negatively impacted both of these markets. U.S. pension and
other postretirement plan income had a positive $2.6 million impact on 2001
results as compared to 2000. Primarily due to the lower sales, the Specialty
Group recorded an operating income decrease in 2001 of $11.6 million or 28.1
percent.
Results of Operations: 2000 Compared to 1999
(Note: Fiscal year 2000 was a 53-week year and fiscal year 1999 was a 52-week
year. Charges and credits related to the 1998-1999 restructuring initiative
which were previously reported in the aggregate, on a separate line of the
income statement, have been reclassified for 1999 to: cost of sales; SG&A
expenses; and gains from sales of assets in the amounts of $18.6 million, $4.4
million, and $5.8 million, respectively.)
Net Revenue: Net revenue in 2000 of $1,364.0 million was $11.9 million or 0.9
percent less than net revenue in 1999 of $1,375.9 million. Weakness in foreign
currencies, primarily the euro, versus the U.S. dollar had a negative impact of
$31.9 million or 2.3 percent. The negative currency impact offset the benefit
of having 53 weeks in 2000 compared to 52 weeks in 1999. Volume increased 1.5
percent while selling prices decreased 0.3 percent. Acquisitions, net of
divestitures, contributed 0.2 percent.
Net Revenue Changes from 1999 to 2000 by Operating
Segment ($ in millions) Increase/(Decrease)
- -------------------------------------------------- --------------------
North America Adhesives.................................. $ 7.9 1.3%
Europe Adhesives......................................... (24.5) (9.5%)
Latin America Adhesives.................................. (4.0) (4.9%)
Asia/Pacific Adhesives................................... 3.1 3.2%
Specialty Group.......................................... 5.6 1.6%
---------
Total.................................................... $ (11.9) (0.9%)
=========
Gross Profit Margin: Throughout 2000 the Company faced rapidly rising raw
material costs. The major contributors were petroleum-based materials such as
vinyl acetate monomers and vinyl acetate emulsions. The gross profit margin of
27.8 percent was 0.5 percentage points below the 28.3 percent recorded in 1999.
Excluding $18.6 million of cost of sales in 1999 related to the 1998-1999
restructuring initiative, the 1999 gross profit margin was 29.7 percent.
Selling, administrative and Other (SG&A) Expenses: SG&A expenses improved as a
percent of net revenue in 2000 to 20.3 percent from 21.2 percent in 1999.
Excluding $4.4 million of expenses related to the 1998-1999 restructuring plan,
the 1999 SG&A expenses were 20.9 percent. Census control and savings related to
the restructuring plan were the primary factors in the expense reduction. Total
census decreased 226 employees during 2000 with 154 of the decrease related to
SG&A expenses. The reduced census combined with good asset investment
performance and changes to the U.S. postretirement benefit plan resulted in
pension and other postretirement benefit plans income of $6.6 million in 2000
as compared to expense of $0.9 million in 1999. Other factors that contributed
to the reduced expenses in 2000 were lower management bonuses due to the lower
earnings in 2000 as compared to 1999 and the settlement of a claim with a raw
material supplier in Latin America which reduced SG&A expenses by $1.3 million.
Two initiatives, which increased expenses in 2000, included $3.3 million for
the Company's e-commerce investments and $2.0 million related to tax planning.
An additional expense in 2000 as compared to 1999 was bad debt expense,
primarily in North America which recorded an increase of approximately $2.7
million in bad debt expense.
Interest Expense: Interest expense of $23.8 million in 2000 was $3.0 million or
11.2 percent less than 1999. Total debt at December 2, 2000 was $290.7 million
as compared to $315.2 million at November 27, 1999.
12
Gains from Sales of Assets: In 2000, the Company recorded gains from sales of
assets of $4.1 million, as compared to $6.1 million in 1999. The 1999 figure
includes $5.8 million of gains which were associated with the 1998-1999
restructuring initiative.
Other Income/Expense, Net: Other income/expense, net, was an expense of $5.9
million in 2000 as compared to an expense of $2.9 million in 1999. A
significant factor in the expense increase in 2000 related to the portfolio of
assets held for the Supplemental Executive Retirement Plan, or SERP. Until
March of 2000, this portfolio was invested in a mutual fund based on the S&P
500 index. In 1999, the gains realized on this portfolio were $3.1 million. In
March of 2000 the Company converted these assets into fixed income securities
to avoid the unpredictable changes in the stock market. Through the time of
conversion, the Company had realized income of $1.0 million and for the
remainder of the year, realized another $0.6 million of income for a total year
investment income of $1.6 million.
Income Taxes: The effective income tax rate in 2000 was 37 percent as compared
to 42.7 percent in 1999. Excluding the impact of nonrecurring charges related
to the 1998-1999 restructuring initiative, the 1999 rate was 39.6 percent. The
reduced rate in 2000 was a direct result of the Company's tax planning
initiatives. The negative impact to the 1999 rate from the nonrecurring charges
was due to a portion of the charges being incurred in countries for which no
tax benefit was available.
Net Income: Net income in 2000 of $49.2 million was $5.8 million or 13.4
percent more than the 1999 net income of $43.4 million. Excluding the effects
of the 1998-1999 restructuring plan and also a charge related to an accounting
change in 1999, the net income in 2000 was $49.0 million as compared to $56.8
million in 1999. The 2000 net income of $49.2 million included a $0.2 million
after-tax credit adjustment related to the 1998-1999 restructuring plan due to
a change in estimate. The income per share, excluding the nonrecurring items
and the impact of the accounting change, was $1.74 per diluted share in 2000 as
compared to $2.03 per diluted share in 1999.
Operating Segment Results (2000 Compared to 1999)
Note: Management evaluates the performance of its operating segments based on
operating income which is defined as gross profit minus operating expenses
(SG&A). Expenses resulting from restructuring initiatives are excluded from the
operating segment results. Corporate expenses are fully allocated to the
operating segments. (See Note 22 to the consolidated financial statements.)
North America Adhesives: Net revenue of $599.5 million was 1.3 percent better
than 1999. The increase was primarily due to volume as selling price increases
were only 0.1 percent. Increases in the nonwoven and graphic arts markets were
offset by decreases in the window and automotive markets. Escalating raw
material costs combined with the difficulty in raising selling prices resulted
in a lower gross profit margin in 2000. SG&A expenses were below the 1999
levels, however not enough to neutralize the gross profit margin erosion. The
reduction in expenses in 2000 was largely due to lower census and income
attributed to the U.S. pension and postretirement benefit plans. The benefit
plan income increased $4.4 million in 2000 as compared to 1999. One factor that
had a negative impact on operating expenses was a significant increase in bad
debt expense of approximately $2.7 million. Operating income of $50.3 million
was 16.5 percent below 1999.
Europe Adhesives: Net revenue of $232.7 million decreased 9.5 percent in 2000
driven by a negative currency impact of 11.6 percent. Volume increased 1.5
percent and selling prices increased 0.6 percent. The business environment in
Europe was similar to North America in terms of raw material cost increases
combined with the difficulty in raising selling prices. Operating income
decreased $6.5 million or 40.6 percent in 2000. The decrease in operating
income attributed to the weakness of the euro was approximately $3.0 million.
Latin America Adhesives: Net revenue of $77.1 million decreased 4.9 percent in
2000 as compared to 1999. Several factors contributed to the decrease
including, economic recession in Argentina, economic slowdown in
13
Central America and exiting certain product lines in 1999. The raw material
increases were not as dramatic in Latin America as the gross profit margin
showed some improvement in 2000. SG&A expenses were reduced by $1.3 million due
to a settlement of a claim with a raw material supplier resulting in a decrease
in the operating loss in 2000 to $1.4 million as compared to a loss of $2.3
million in 1999.
Asia/Pacific Adhesives: Net revenue of $101.0 million increased 3.2 percent in
2000 from volume increases of 5.3 percent offset by decreases due to pricing
and currency of 1.3 percent and 0.8 percent, respectively. Operating income
improved 84 percent from $1.4 million in 1999 to $2.5 million in 2000. Reduced
SG&A expenses were the key factor in the improved results.
Specialty Group: Net revenue of $353.6 million was 1.6 percent higher than
1999. Volume increased 2.0 percent while the effect of an acquisition, net of a
divestiture, added another 0.9 percent, with negative pricing and currency
effects of 0.8 percent and 0.5 percent, respectively. Linear Products, Inc. and
TEC Specialty Products, Inc. had the strongest growth in 2000. The Specialty
Group was not impacted as much as the adhesives businesses by fluctuations in
petroleum-based raw materials. Therefore, the Specialty Group did not
experience the same magnitude of raw material cost increases in 2000. The gross
margin, however, was still slightly below last year and operating income
decreased 9.6 percent to $41.3 million. U.S. pension and other postretirement
benefit plan income had a positive impact on $2.9 million in 2000 as compared
to 1999.
Nonrecurring Charges/Restructuring:
1998-1999 Plan: Over the last two quarters of 1998 and throughout 1999, two
businesses were sold, several manufacturing facilities were closed or
considerably scaled back, sales offices and warehouses were consolidated and
layers of management were reduced. Total costs associated with this plan
totaled $43.7 million (before tax), net of gains recorded on assets disposed as
a result of the plan.
The following tables show details of the nonrecurring charges/(credits) for the
years 2000 and 1999 by geographic area ($ in thousands):
North Latin
Year 2000: America Europe America Asia/Pacific Total
- ---------- ------- ------- ------- ------------ -------
Adjustment for change in
estimate..................... $ (300) -- -- -- $ (300)
------- ------- ------ ------- -------
Total......................... $ (300) -- -- -- $ (300)
======= ======= ====== ======= =======
North Latin
Year 1999: America Europe America Asia/Pacific Total
- ---------- ------- ------- ------- ------------ -------
Severance, net of pension
curtailment.................. $ 1,943 $ 8,372 $1,114 $ 676 $12,105
Contracts/leases.............. -- 1,660 16 618 2,294
------- ------- ------ ------- -------
Total restructuring........... 1,943 10,032 1,130 1,294 14,399
Impairment of property, plant
and equipment................ 66 2,228 188 32 2,514
Consulting.................... 243 685 192 15 1,135
Integration and relocation
costs (1).................... 2,052 1,104 1,465 292 4,913
------- ------- ------ ------- -------
Subtotal...................... 4,304 14,049 2,975 1,633 22,961
Less: Gains from sales of
assets....................... (1,811) (1,497) -- (2,449) (5,757)
------- ------- ------ ------- -------
Total......................... $ 2,493 $12,552 $2,975 $ (816) $17,204
======= ======= ====== ======= =======
- --------
1. Integration and relocation costs consisted primarily of costs related to the
shutdown of facilities, relocation of employees and other related one-time
costs to carry out the restructuring/reorganization activities. Such costs
were expensed as incurred.
The 2000 credit of $0.3 million was due to a change in estimate of severance
payments in North America included in SG&A expenses. The 1999 charges, prior to
the gain on sale of assets of $5.8 million, included $22.3 million of costs
requiring cash outlays, $2.5 million of non-cash costs and a pension
curtailment benefit
14
of $1.9 million. Total costs requiring cash outlays, since inception of the
plan, were $42.4 million. The 1999 restructuring amounts are reflected in the
income statement as cost of sales ($18.6 million), SG&A expenses ($4.4 million)
and gains from sales of assets ($5.8 million).
Employee census reductions resulting from the restructuring plan were a total
of 820. Annual cost savings as a result of the plan were expected to exceed $30
million (before tax) upon full realization of the benefits of the enacted plan.
No additional charges related to the original restructuring/reorganization plan
were incurred in 2000.
In 1999, the North American charges related primarily to a plant shutdown, and
severance associated with closing sales offices and warehouses. These costs
were partially offset by the gains from sales of assets.
In Europe, the 1999 charges related primarily to severance and the impairment
of assets associated with the shutdown of three manufacturing facilities, the
reduction in the layers of management and the costs associated with the
relocation of the European area office.
Latin American charges in 1999 were mainly for the integration costs associated
with closing four facilities and for severance related to the closing of three
sales offices.
The Asia/Pacific charges in 1999 were mainly for severance and the buyout of
leases associated with closing warehouses and sales offices, relocation costs
related to moving the area office and severance due to reducing layers of
management. The charges were more than offset by the gain on sale of assets of
the one manufacturing facility that was closed in the region.
The following table is a detailed reconciliation of the restructuring reserve
balance from November 29, 1998 to December 1, 2001:
Nonrecurring Charge Reserve ($ North Latin Asia/
in thousands) America Europe America Pacific Total
- ------------------------------ ------- -------- ------- ------- -------
Balance November 29, 1998....... $ 1,992 $ 7,994 $ 3,141 $ 88 $13,215
Provisions in 1999:
Severance..................... 3,057 8,952 1,022 668 13,699
Contracts/leases.............. -- 1,660 16 618 2,294
------- -------- ------- ------- -------
3,057 10,612 1,038 1,286 15,993
------- -------- ------- ------- -------
Adjustments for change in
estimate....................... (65) 225 92 8 260
Payments in 1999:
Severance..................... (3,060) (13,482) (3,492) (82) (20,116)
Contracts/leases.............. -- (399) (16) (175) (590)
------- -------- ------- ------- -------
(3,060) (13,881) (3,508) (257) (20,706)
------- -------- ------- ------- -------
Balance November 27, 1999....... 1,924 4,950 763 1,125 8,762
Adjustment for change in
estimate....................... (300) -- -- -- (300)
Payments in 2000:
Severance..................... (1,577) (2,651) (763) (682) (5,673)
Contracts/leases.............. -- (1,136) -- (443) (1,579)
------- -------- ------- ------- -------
(1,577) (3,787) (763) (1,125) (7,252)
------- -------- ------- ------- -------
Balance December 2, 2000........ 47 1,163 -- -- 1,210
Payments in 2001:
Severance..................... (47) (152) -- -- (199)
Contracts/leases.............. -- (486) -- -- (486)
------- -------- ------- ------- -------
(47) (638) -- -- (685)
------- -------- ------- ------- -------
Balance December 1, 2001........ $ -- $ 525 $ -- $ -- $ 525
======= ======== ======= ======= =======
15
Liquidity and Capital Resources
Net cash provided from operations was $89.7 million in 2001, which was $22.8
million or 34.1 percent more than the $66.9 million provided in 2000. The cash
provided from operations in 1999 was $105.7. The increase in cash provided from
operations in 2001, as compared to 2000, was largely due to changes in working
capital. In 2001, changes in inventory levels resulted in positive cash flow of
$12.0 million. In 2000, changes in inventory levels accounted for negative cash
flow of $11.1 million. As an offset to the inventory changes, accounts payable
changes resulted in negative cash flow in 2001 of $11.4 million and in 2000 the
cash flow attributed to changes in accounts payable was positive $3.8 million.
Accrued compensation amounts were higher at the end of 2001 as compared to
2000. In 2001, increases in the accrued compensation levels accounted for
positive cash flow of $2.3 million. In 2000, the cash flow related to accrued
compensation was negative $7.8 million, primarily because of payments in 2000
of management bonuses accrued in 1999. Total working capital at December 1,
2001 was $199.7 million as compared to $208.3 million at December 2, 2000.
For management purposes, the Company measures working capital performance in
terms of operating working capital, which is defined as current assets less
cash, minus current liabilities less short-term debt. The operating working
capital at December 1, 2001 was $219.3 million as compared to $238.1 million at
December 2, 2000 and $219.9 million at November 27, 1999. The number of days
sales outstanding (DSO) in trade accounts receivables (net of allowance for
doubtful accounts) was 59 days at December 1, 2001 as compared to 55 at
December 2, 2000 and 62 days at November 27, 1999. The calculation of DSO is
determined by using net revenue for the fourth quarter and the net accounts
receivable balance at year-end. In 2000, the DSO calculation was favorably
impacted from the extra week of sales in the fourth quarter. On a comparable
basis, the DSO at December 2, 2000 approximated the 59 days recorded at
December 1, 2001.
The strong cash flow from operations allowed the Company to reduce its total
debt levels to $234.1 million at December 1, 2001. This compares to $290.7
million at December 2, 2000 and $315.2 million at November 27, 1999. The ratio
of long-term debt to long-term debt plus stockholders' equity improved from
38.2 percent at December 2, 2000 to 31.9 percent at December 1, 2001. At
November 27, 1999 the ratio was 41.2 percent. At December 1, 2001 short-term
and long-term lines of credit were $337.1 million of which $154.3 million was
committed. The unused portion of these lines of credit was $321.2 million.
The following table shows the due dates and amounts of contractual obligations:
Payments Due by Period
-----------------------------------------
Contractual Obligations ($ in 1 year 2-3 4-5 After
thousands) Total or less years years 5 years
- ----------------------------- -------- ------- ------- ------- --------
Long-term debt...................... $206,086 $ 3,181 $ 7,403 $27,330 $168,172
Capital lease obligations........... 394 298 96 -- --
Operating leases.................... 41,560 10,438 15,163 4,971 10,988
At December 1, 2001, the Company was in compliance with all covenants of its
contractual obligations. Also, the Company has no rating triggers that would
accelerate the maturity dates of its debt. Management believes that the Company
has the ability to meet all of its contractual obligations and commitments in
2002.
The Company does not have relationships with any unconsolidated, special-
purpose entities or financial partnerships, which would have been established
for the purpose of facilitating off-balance sheet financial arrangements.
Therefore, the Company is not materially exposed to any financing, liquidity,
market or credit risk that could arise had the Company entered into any such
relationships.
Cash used for capital expenditures was $30.7 million in 2001 as compared to
$49.0 million in 2000 and $56.3 million in 1999. Over 50 percent of the capital
expenditures in 2001 were for information systems projects. Management expects
capital expenditures to approximate $40-50 million in 2002.
16
Recently Issued Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144 (SFAS No. 144), "Accounting
for the Impairment or Disposal of Long-lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-
lived Assets and for Long-lived Assets to be Disposed Of", and the accounting
and reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations for a disposal of a segment of a business". SFAS No. 144 is
effective for years beginning after December 15, 2001, with earlier application
encouraged. The impact of adopting this accounting standard is not expected to
have a material effect on the Company's financial position and results of
operations.
In June 2001 the FASB issued Statements of Financial Accounting Standards
(SFAS) No. 141, "Business Combinations", and No. 142, "Goodwill and Other
Intangible Assets". These Statements eliminate the pooling-of-interests method
of accounting for business combinations and the systematic amortization of
goodwill. SFAS No. 141 applies to all business combinations with a closing date
after June 30, 2001, of which the Company has had no such activity. The Company
will adopt SFAS No. 142 during the first quarter of 2002. Under the new
standard, purchased goodwill is no longer amortized over its useful life.
Therefore, the Company will not incur the amortization of goodwill beginning
with year 2002. Amortization of goodwill recorded in 2001 was $4.1 million,
which had a negative impact on income per diluted share of $0.09 per share. The
Company is in the process of assessing any transitional impact of adopting SFAS
No. 142.
Euro Currency Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union (EU)
established fixed conversion rates through the European Central Bank (ECB)
between existing local currencies and the euro, the EU's new single currency.
During a transition period from January 1, 1999, through June 30, 2002, the
euro will replace the national currencies that exist in the participating
countries.
The Company converted to the euro as of December 2, 2001. Management does not
believe the transition to the euro will have a significant effect on
consolidated results of operations, financial position or liquidity.
2002 Outlook
Certain items will have a material impact on 2002 net income. In a continuing
effort to strengthen the organization and remove excess manufacturing capacity,
the Company announced, on January 15, 2002, a plan to eliminate approximately
20 percent of its current manufacturing capacity. The plan calls for
streamlining its facilities and operations in Latin America, Europe and in
particular, North America. By reducing the installed capacity and removing
other cost structures, management estimates that upon completion, costs will be
reduced approximately $10 to $12 million annually.
In connection with the restructuring initiative, the Company expects to record
special charges in the range of $30 to $35 million before tax, inclusive of the
$1.6 million ($1.5 million after-tax) incurred in the fourth quarter of 2001
for Latin America. Cash costs of the plan are expected to be $20 to $25
million. Proceeds from sales of assets affected by the plan however, are
expected to offset the cash costs by $10 to $15 million. The remaining charges
are expected to be recorded over the next four quarters and will include
severance, accelerated depreciation on assets held and used until disposal and
other plan-related costs.
The amounts associated with the pension and other postretirement benefit plans
are expected to reflect a reduction in income of approximately $12 million in
2002 as compared to 2001. This equates to approximately $.27 per share. These
amounts will be reflected in SG&A expenses. The reason for the reduction in
income is primarily attributed to the poor performance of the benefit plan
asset portfolios during 2001 and the decrease in interest rates recorded in
2001.
Currency devaluations in Argentina will have a negative impact on the Company's
first quarter of 2002 operating results however, the impact is not expected to
exceed $0.03 - $0.04 per share in the first quarter.
17
Management continually monitors the economic situation in Argentina, Brazil and
other Latin American countries and where appropriate, takes action to minimize
the Company's exposure to future currency devaluations.
Safe Harbor for Forward-Looking Statements
Certain statements in this document, including those under 2002 Outlook, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are subject to various risks
and uncertainties, including but not limited to the following: political and
economic conditions; product demand and industry capacity; competitive products
and pricing; manufacturing efficiencies; new product development; product mix;
availability and price of raw materials and critical manufacturing equipment;
new plant startups; accounts receivable collection; the Company's relationships
with its major customers and suppliers; changes in tax laws and tariffs; patent
rights that could provide significant advantage to a competitor; devaluations
and other foreign exchange rate fluctuations (particularly with respect to the
euro, the British pound, the Japanese yen, the Australian dollar, the Argentine
peso and the Brazilian real); the regulatory and trade environment; and other
risks as indicated from time to time in the Company's filings with the
Securities and Exchange Commission. All forward-looking information represents
management's best judgment as of this date based on information currently
available that in the future may prove to have been inaccurate. Additionally,
the variety of products sold by the Company and the regions where the Company
does business makes it difficult to determine with certainty the increases or
decreases in sales resulting from changes in the volume of products sold,
currency impact, changes in product mix and selling prices. However,
management's best estimates of these changes as well as changes in other
factors have been included. References to volume changes include volume and
product mix changes, combined.
Item 7A. 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.
Interest Rate Risk: The Company is exposed to changes in interest rates
primarily as a result of borrowing activities used to fund operations. The
Company uses committed floating rate credit facilities to fund a portion of its
operations.
Management believes that probable near-term changes in interest rates would not
materially affect the Company's 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 the
variable rate debt as of December 1, 2001 would be approximately $0.3 million.
Foreign Exchange Risk: As a result of being a global enterprise, the Company is
exposed to market risks from changes in foreign currency exchange rates, which
may adversely affect operating results and financial position. Approximately 44
percent of the Company's net revenue is generated outside of the United States.
The Company's principal foreign currency exposures relate to the euro, British
pound, Japanese yen, Australian dollar, Canadian dollar, Argentine peso and
Brazilian real.
Management's goal 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 the Company's risks from foreign currency exchange rate
fluctuations through normal operating and financing activities and, when deemed
appropriate, through the use of derivative instruments. The
18
Company does not enter into any speculative positions with regard to derivative
instruments. Note 17 to the consolidated financial statements provides
additional details regarding the Company's management of foreign exchange risk.
From a sensitivity analysis viewpoint, based on 2001 financial results a
hypothetical overall 10 percent strengthening of the U.S. dollar would have
resulted in a negative income per share impact of approximately $0.02 per
share.
Raw Materials: The principal raw materials used by the Company to manufacture
its products include resins, polymers and vinyl acetate monomer. Natural raw
materials such as starch, dextrines and natural latex are also used in the
manufacturing processes. Management attempts to find multiple sources for all
of its 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.
In 2001, the Company purchased more than $600 million of raw materials, its
single largest expenditure item. 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 to the Company. 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 created by
having substitute raw materials approved for use wherever possible to minimize
the impact of possible price increases.
19
Item 8. Financial Statements and Supplementary Data
MANAGEMENT'S REPORT
The management of H.B. Fuller Company is responsible for the integrity,
objectivity and accuracy of the financial statements of the Company and its
subsidiaries. The accompanying financial statements, including the notes, were
prepared in conformity with accounting principles generally accepted in the
United States of America appropriate in the circumstances and include amounts
based on the best judgment of management.
Management is also responsible for maintaining a system of internal accounting
controls to provide reasonable assurance that established policies and
procedures are followed, that the records properly reflect all transactions of
the Company and that assets are safeguarded against material loss from
unauthorized use or disposition. Management believes that the Company's
accounting controls provide reasonable assurance that errors or irregularities
that could be material to the financial statements are prevented or would be
detected within a timely period by employees in the normal course of performing
their assigned duties.
The Audit Committee of the Board of Directors, composed of directors from
outside the Company, meets regularly with management, the Company's internal
auditors, and its independent accountants to discuss audit scope and results,
internal control evaluations, and other accounting, reporting, and financial
matters. The independent accountants and internal auditors have access to the
Audit Committee without management's presence.
/s/ Raymond A. Tucker
/s/ Albert P. L. Stroucken
Raymond A. Tucker Albert P.L. Stroucken
Senior Vice President and Chairman of the Board,
Chief Financial Officer President and
Chief Executive Officer
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of H.B. Fuller Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the consolidated financial position
of H.B. Fuller Company and subsidiaries at December 1, 2001 and December 2,
2000, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 1, 2001, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 15, 2002
21
CONSOLIDATED STATEMENTS OF INCOME
H.B. Fuller Company and Subsidiaries
(In thousands, except per share amounts)
Fiscal Year Ended
------------------------------------
December December November 27,
1, 2001 2, 2000 1999
---------- ---------- ------------
Net revenue............................... $1,274,059 $1,363,961 $1,375,855
Cost of sales............................. (928,506) (984,599) (986,380)
---------- ---------- ----------
Gross profit.............................. 345,553 379,362 389,475
Selling, administrative and other
expenses................................. (257,446) (276,861) (291,485)
Interest expense.......................... (21,247) (23,814) (26,823)
Gains from sales of assets................ 752 4,131 6,123
Other income (expense), net............... (4,142) (5,913) (2,864)
---------- ---------- ----------
Income before income taxes, minority
interests, equity
investments and accounting change........ 63,470 76,905 74,426
Income taxes.............................. (19,833) (28,455) (31,807)
Minority interests in consolidated
income................................... (873) (1,826) (1,033)
Income from equity investments............ 2,176 2,539 2,525
---------- ---------- ----------
Income before cumulative effect of
accounting change........................ 44,940 49,163 44,111
Cumulative effect of accounting change.... (501) -- (741)
---------- ---------- ----------
Net income................................ $ 44,439 $ 49,163 $ 43,370
========== ========== ==========
Basic income (loss) per common share:
Income before accounting change........... $ 1.61 $ 1.77 $ 1.60
Accounting change......................... (0.02) -- (0.03)
---------- ---------- ----------
Net income................................ $ 1.59 $ 1.77 $ 1.57
========== ========== ==========
Diluted income (loss) per common share:
Income before accounting change........... $ 1.59 $ 1.74 $ 1.58
Accounting change......................... (0.02) -- (0.03)
---------- ---------- ----------
Net income................................ $ 1.57 $ 1.74 $ 1.55
========== ========== ==========
Weighted-average common shares
outstanding:
Basic..................................... 27,962 27,828 27,616
Diluted................................... 28,330 28,206 27,957
See accompanying notes to consolidated financial statements.
22
CONSOLIDATED BALANCE SHEET
H.B. Fuller Company and Subsidiaries
(In thousands)
December 1, December 2,
2001 2000
----------- -----------
Assets
Current Assets:
Cash and cash equivalents............................ $ 11,454 $ 10,489
Trade receivables, net............................... 211,590 220,796
Inventories.......................................... 141,210 153,785
Other current assets................................. 39,619 49,994
-------- ----------
Total current assets................................... 403,873 435,064
Net property, plant and equipment...................... 371,113 394,689
Other assets........................................... 107,432 88,903
Goodwill, net.......................................... 62,037 66,503
Other intangibles, net................................. 21,718 25,202
-------- ----------
Total assets........................................... $966,173 $1,010,361
======== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable........................................ $ 27,601 $ 34,543
Current installments of long-term debt............... 3,479 5,718
Trade payables....................................... 114,155 126,713
Accrued payroll and employee benefits................ 30,659 28,918
Other accrued expenses............................... 19,714 25,807
Income taxes payable................................. 8,555 5,026
-------- ----------
Total current liabilities.............................. 204,163 226,725
Long-term debt, excluding current installments......... 203,001 250,464
Accrued pensions....................................... 66,012 71,927
Other liabilities...................................... 39,413 37,452
Minority interests in consolidated subsidiaries........ 19,558 19,083
Commitments and contingencies
Stockholders' Equity:
Series A preferred stock, par value $6.67 per share.. 306 306
Common stock, par value $1.00 per share.............. 28,281 14,116
Shares outstanding--2001: 28,280,896
2000: 28,231,328 (see Note 19)
Additional paid-in capital........................... 37,830 36,707
Retained earnings.................................... 396,048 377,846
Accumulated other comprehensive income (loss)........ (25,150) (20,088)
Unearned compensation--restricted stock.............. (3,289) (4,177)
-------- ----------
Total stockholders' equity............................. 434,026 404,710
-------- ----------
Total liabilities and stockholders' equity............. $966,173 $1,010,361
======== ==========
See accompanying notes to consolidated financial statements.
23
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
H.B. Fuller Company and Subsidiaries
(In thousands, except shares)
Fiscal Years
----------------------------------
2001 2000 1999
---------- ---------- ----------
Shares Outstanding
Preferred................................ 45,900 45,900 45,900
Common................................... 28,280,896 28,231,328 28,080,310
Preferred Stock............................ $ 306 $ 306 $ 306
Common Stock
Beginning balance........................ $ 14,116 $ 14,040 $ 13,983
Stock split.............................. 14,142 -- --
Retirement of common stock............... (10) (21) (9)
Stock compensation plans, net............ 33 97 66
---------- ---------- ----------
Ending balance........................... $ 28,281 $ 14,116 $ 14,040
========== ========== ==========
Additional Paid-in Capital
Beginning balance........................ $ 36,707 $ 34,071 $ 31,140
Retirement of common stock............... (371) (53) (22)
Stock compensation plans, net............ 1,494 2,689 2,953
---------- ---------- ----------
Ending balance........................... $ 37,830 $ 36,707 $ 34,071
========== ========== ==========
Retained Earnings
Beginning balance........................ $ 377,846 $ 341,356 $ 309,966
Net income............................... 44,439 49,163 43,370
Stock split.............................. (14,142) -- --
Dividends................................ (12,095) (11,786) (11,440)
Retirement of common stock............... -- (887) (540)
---------- ---------- ----------
Ending balance........................... $ 396,048 $ 377,846 $ 341,356
========== ========== ==========
Accumulated Other Comprehensive Income
(Loss)
Beginning balance........................ $ (20,088) $ (7,522) $ (5,997)
Foreign currency translation adjustment.. (395) (12,034) (1,684)
Foreign currency translation adjustment
included in net income.................. -- -- 136
Minimum pension liability adjustment, net
of tax.................................. (4,667) (532) 23
---------- ---------- ----------
Ending balance........................... $ (25,150) $ (20,088) $ (7,522)
========== ========== ==========
Unearned Compensation--Restricted Stock
Beginning balance........................ $ (4,177) $ (5,871) $ (7,994)
Stock compensation plans, net............ 888 1,694 2,123
---------- ---------- ----------
Ending balance........................... $ (3,289) $ (4,177) $ (5,871)
========== ========== ==========
Total Stockholders' Equity................. $ 434,026 $ 404,710 $ 376,380
========== ========== ==========
See accompanying notes to consolidated financial statements.
24
STATEMENT OF CASH FLOWS
H.B. Fuller Company and Subsidiaries
(In thousands)
Fiscal Year Ended
------------------------------------
December 1, December 2, November 27,
2001 2000 1999
----------- ----------- ------------
Cash flows from operating activities:
Net income................................ $ 44,439 $ 49,163 $ 43,370
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 54,401 52,165 50,776
Gains from sales of assets................ (752) (4,131) (6,123)
Change in assets and liabilities (net of
effects of acquisitions/divestitures):
Trade receivables, net.................. 8,189 2,397 (10,949)
Inventories............................. 11,992 (11,142) 9,426
Other current assets.................... 3,495 (2,679) 1,739
Other assets............................ (3,002) (3,332) (2,376)
Trade payables.......................... (11,356) 3,794 6,145
Accrued payroll and employee benefits
and other accrued expenses............. (4,233) (18,058) (2,010)
Income taxes payable.................... 5,731 3,070 10,570
Accrued pensions........................ (12,548) (3,008) 2,317
Other liabilities....................... (6,313) (8,411) (3,796)
Other items............................... (375) 7,067 6,616
-------- -------- --------
Net cash provided by operating
activities............................. 89,668 66,895 105,705
Cash flows from investing activities:
Purchased property, plant and equipment... (30,725) (49,044) (56,253)
Purchased businesses, net of cash
acquired................................. -- (5,388) (4,483)
Purchased investments..................... (3,517) -- --
Proceeds from sale of property, plant and
equipment................................ 7,309 11,842 10,916
Proceeds from sale of investments......... 1,567 -- --
Proceeds from sale of business............ -- 3,852 --
-------- -------- --------
Net cash used in investing activities... (25,366) (38,738) (49,820)
Cash flows from financing activities:
Proceeds from long-term debt.............. 4,602 69,690 41,207
Repayment of long-term debt............... (43,618) (84,876) (79,949)
Proceeds (payments) from/on notes
payable.................................. (12,143) 3,668 (4,477)
Dividends paid............................ (12,095) (11,786) (11,440)
Other..................................... (258) 179 (21)
-------- -------- --------
Net cash used in financing activities... (63,512) (23,125) (54,680)
-------- -------- --------
Net change in cash and cash
equivalents............................ 790 5,032 1,205
Effect of exchange rate changes............. 175 (364) 11
Cash and cash equivalents at beginning of
year....................................... 10,489 5,821 4,605
-------- -------- --------
Cash and cash equivalents at end of year.... $ 11,454 $ 10,489 $ 5,821
======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid for interest...................... $ 22,008 $ 28,198 $ 28,962
Cash paid for income taxes.................. $ 8,420 $ 16,569 $ 11,194
See accompanying notes to consolidated financial statements.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H.B. Fuller Company and Subsidiaries
(Dollars in thousands, except per share amounts)
Note 1--Summary of Significant Accounting Policies
Nature of Operations: H.B. Fuller Company (the "Company") operates as one of
the world's leading manufacturers and marketers of adhesives, sealants,
coatings, paints and other specialty chemical products. The Company has
manufacturing operations in 21 countries in North America, Europe, Latin
America and the Asia/Pacific region. The Company's products, in thousands of
formulations, are sold to customers in a wide range of industries, including
packaging, woodworking, automotive, aerospace, graphic arts (books/magazines),
appliances, filtration, windows, sporting goods, nonwovens, shoes and ceramic
tile. The Company generally markets its products through a direct sales force,
with independent distributors used in some markets.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and all its subsidiaries. The Company's fiscal year
ends on the Saturday closest to November 30th. All fiscal years represent 52-
week years, except the year 2000, which was a 53-week year. All significant
intercompany amounts have been eliminated in consolidation. Certain prior
years' amounts have been reclassified to conform to the 2001 presentation.
Use of Estimates: The preparation of the consolidated 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 amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Revenue Recognition: The Company recognizes revenues from product sales when
title to the product transfers, no remaining performance obligations exist, the
terms of the sale are fixed and collection is probable, as required by the
Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 101 (SAB
101). For certain products, the Company maintains consigned inventory at
customer locations. For these products, revenue is recognized at the time that
the Company is notified the customer has used the inventory. The Company
records estimated discounts and rebates in the same period revenue is
recognized based on historical experience.
Sales to distributors are also recognized in accordance with SAB 101 providing
that there is evidence of the arrangement through a distribution agreement or
purchase order, and the Company has no remaining performance obligations, the
terms of the sale are fixed and collection is probable. As a normal practice,
distributors do not have a right of return.
Foreign Currency Translation: The financial statements of non-U.S. operations
are translated into U.S. dollars for inclusion in the consolidated financial
statements. Translation gains or losses resulting from the process of
translating foreign currency financial statements, where the local currency is
the functional currency, are recorded as a component of accumulated other
comprehensive income in stockholders' equity for businesses not considered to
be operating in highly inflationary economies. Translation effects of
subsidiaries using the U.S. dollar as the functional currency are included in
determining net income.
Cash and Cash Equivalents: Cash and cash equivalents consist of cash and all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
Capitalized Interest Costs: Interest costs associated with major construction
of property and equipment are capitalized. Capitalized interest costs were
$431, $482 and $441 in 2001, 2000 and 1999, respectively.
Environmental Costs: Environmental expenditures that relate to current
operations are expensed or capitalized as appropriate. Expenditures that relate
to an existing condition caused by past operations, and which do not contribute
to current or future revenue generation, are expensed. Liabilities are recorded
when environmental assessments are made or remedial efforts are probable and
the costs can be reasonably estimated. The timing of these accruals is
generally no later than the completion of feasibility studies. The liabilities
for
26
environmental costs at December 1, 2001 and December 2, 2000 were $1,055 and
$1,161, respectively. For further information on environmental matters, see
Item 3, Legal Proceedings.
Postemployment Benefits: The Company provides postemployment benefits to
inactive and former employees, employees' beneficiaries and covered dependents
after employment, but prior to retirement. The cost of providing these benefits
is accrued during the years the employee renders the necessary service.
Purchase of Company Common Stock: Under the Minnesota Business Corporation Act,
repurchased stock is included in the authorized shares of the Company, but is
not included in shares outstanding. The excess of the repurchase cost over par
value is charged to additional paid-in capital to the extent recorded on the
original issuance of the stock with any excess charged as a reduction of
retained earnings. The Company repurchased 10,289, 21,229 and 9,438 shares of
common stock in 2001, 2000 and 1999, respectively.
Recently Issued Accounting Pronouncements: In August 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-
lived Assets", which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of", and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations for a disposal of a
segment of a business". SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001, with earlier application encouraged. The impact of
adopting this accounting standard is not expected to have a material effect on
the Company's financial position and results of operations.
In June 2001 the FASB issued Statements of Financial Accounting Standards No.
141, "Business Combinations", and No. 142, "Goodwill and Other Intangible
Assets". These Statements eliminate the pooling-of-interests method of
accounting for business combinations and the systematic amortization of
goodwill. SFAS No. 141 applies to all business combinations with a closing date
after June 30, 2001, of which the Company has had no such activity. The Company
will adopt SFAS No. 142 during the first quarter of 2002. Under the new
standard, purchased goodwill is no longer amortized over its useful life.
Therefore, the Company will not incur the amortization of goodwill beginning
with 2002. Amortization of goodwill recorded in 2001 was $4.1 million, which
had a negative impact of $0.09 per share.
Note 2--Income Per Common Share (shares in thousands)
Basic income per share includes no dilution and is computed by dividing net
income available to common shareholders by the weighted-average number of
common shares outstanding for the period. Diluted income per share reflects the
potential dilution from the Company's stock-based compensation plans. The
difference between basic and diluted income per share data as presented is due
to the dilutive impact from stock-based compensation plans. Net income used in
the calculations of income per share is reduced by the dividends paid to the
preferred stockholder.
A reconciliation of the net income and share components for the basic and
diluted income per share calculations is as follows:
2001 2000 1999
------- ------- -------
Net income.............. $44,439 $49,163 $43,370
Dividends on preferred
shares................. (15) (15) (15)
------- ------- -------
Income attributable to
common shares.......... $44,424 $49,148 $43,355
======= ======= =======
Weighted-average common
shares--basic.......... 27,962 27,828 27,616
Equivalent shares from
stock compensation
plans.................. 368 378 341
------- ------- -------
Weighted-average common
shares--diluted........ 28,330 28,206 27,957
======= ======= =======
The computations of diluted income per common share do not include 45, 88 and 1
stock options with exercise prices greater than the average market price of the
common shares for 2001, 2000 and 1999, respectively, as the results would have
been anti-dilutive.
27
Note 3--Foreign Currency Gains/(Losses)
Foreign currency gains/(losses), included in
income before income taxes,
minority interests, and cumulative effect of
accounting change 2001 2000 1999
-------------------------------------------- ------- ------- -------
Currency translation gains, net................ $ 1,713 $ 182 $ 4,999
Flow-through effect of inventory valuation,
net........................................... (1,018) (611) (226)
------- ------- -------
695 (429) 4,773
Currency exchange transaction losses, net...... (2,754) (2,660) (7,855)
------- ------- -------
Total.......................................... $(2,059) $(3,089) $(3,082)
======= ======= =======
The net loss from the flow-through effects of inventory valuation results from
differences between translation of cost of sales at historic rates versus
average exchange rates. Latin American operations, whenever possible, raise
local selling prices on their products to offset this loss. The result of these
efforts to keep pace with inflation appears in net revenue for each operation.
The impact from currency translation effects, the flow-through effect of
inventory value attributed to foreign currency differences and currency
transaction gains and losses are included in other income (expense), net in the
consolidated statement of income.
Note 4--Restructuring Related Costs
The 2001 cost of sales includes $1.6 million of depreciation expense for asset
impairments related to the restructuring initiative contemplated during 2001,
but approved and implemented in 2002. The impairment charges were calculated by
comparing the net book value of the assets to the expected cash flows,
including proceeds from sales of assets, to be generated by those assets over
their shortened useful life. These charges related to three manufacturing
facilities in Latin America.
In a continuing effort to strengthen the organization and remove excess
manufacturing capacity, the Company announced, on January 15, 2002, a plan to
eliminate approximately 20 percent of its current manufacturing capacity. The
plan calls for streamlining its facilities and operations in Latin America,
Europe and in particular, North America. By reducing the installed capacity and
removing other cost structures, management estimates that upon completion,
costs will be reduced approximately $10 to $12 million annually.
In connection with the 2002 restructuring initiative, the Company expects to
record special charges in the range of $30 to $35 million before tax, inclusive
of the $1.6 million ($1.5 million after-tax) incurred in the fourth quarter of
2001 for Latin America. Cash costs of the plan are expected to be $20 to $25
million. Proceeds from sales of assets affected by the plan however, are
expected to offset the cash costs by $10 to $15 million. The remaining charges
are expected to be recorded over the next four quarters and will include
severance, accelerated depreciation on assets held and used until disposal and
other plan-related costs.
1998-1999 Plan: Over the last two quarters of 1998 and throughout 1999, two
businesses were sold, several manufacturing facilities were closed or
considerably scaled back, sales offices and warehouses were consolidated and
layers of management were reduced. Total costs associated with this plan
totaled $43.7 million (before tax), net of gains recorded on assets disposed as
a result of the plan.
28
The following tables show details of the nonrecurring charges/(credits) for the
years 2000 and 1999 by geographic area:
North Latin
Year 2000: America Europe America Asia/Pacific Total
---------- ------- ------- ------- ------------ -------
Adjustment for change in
estimate.................. $ (300) -- -- -- $ (300)
------- ------- ------ ------- -------
Total...................... $ (300) -- -- -- $ (300)
======= ======= ====== ======= =======
North Latin
Year 1999: America Europe America Asia/Pacific Total
---------- ------- ------- ------- ------------ -------
Severance, net of pension
curtailment............... $ 1,943 $ 8,372 $1,114 $ 676 $12,105
Contracts/leases........... -- 1,660 16 618 2,294
------- ------- ------ ------- -------
Total restructuring........ 1,943 10,032 1,130 1,294 14,399
Impairment of property,
plant and equipment....... 66 2,228 188 32 2,514
Consulting................. 243 685 192 15 1,135
Integration and relocation
costs (1)................. 2,052 1,104 1,465 292 4,913
------- ------- ------ ------- -------
Subtotal................... 4,304 14,049 2,975 1,633 22,961
Less: Gains from sales of
assets.................... (1,811) (1,497) -- (2,449) (5,757)
------- ------- ------ ------- -------
Total...................... $ 2,493 $12,552 $2,975 $ (816) $17,204
======= ======= ====== ======= =======
- --------
1. Integration and relocation costs consisted primarily of costs related to the
shutdown of facilities, relocation of employees and other related one-time
costs to carry out the restructuring/reorganization activities. Such costs
were expensed as incurred.
The 2000 credit of $0.3 million was due to a change in estimate of severance
payments in North America included in SG&A expenses. The 1999 charges, prior to
the gains from sales of assets of $5.8 million, included $22.3 million of costs
requiring cash outlays, $2.5 million of non-cash costs and a pension
curtailment benefit of $1.9 million. Total costs requiring cash outlays since
inception of the plan, were $42.4 million. The 1999 restructuring amounts are
reflected in the income statement as cost of sales ($18.6 million), SG&A
expenses ($4.4 million) and gains from sales of assets ($5.8 million).
Employee census reductions resulting from the restructuring plan were a total
of 820. Annual cost savings as a result of the plan were expected to exceed $30
million (before tax) upon full realization of the benefits of the enacted plan.
No additional charges related to the original restructuring/reorganization plan
were incurred in 2000.
In 1999, the North American charges related primarily to a plant shutdown, and
severance associated with closing sales offices and warehouses. These costs
were partially offset by the gains from sales of assets.
In Europe, the 1999 charges related primarily to severance and the impairment
of assets associated with the shutdown of three manufacturing facilities, the
reduction in the layers of management and the costs associated with the
relocation of the European area office.
Latin American charges in 1999 were mainly for the integration costs associated
with closing four facilities and for severance related to the closing of three
sales offices.
The Asia/Pacific charges in 1999 were mainly for severance and the buyout of
leases associated with closing warehouses and sales offices, relocation costs
related to moving the area office and severance due to reducing layers of
management. The charges were more than offset by the gains from sales of assets
of the one manufacturing facility that was closed in the region.
29
The following table is a detailed reconciliation of the restructuring reserve
balance from November 29, 1998 to December 1, 2001:
Nonrecurring Charge North Latin
Reserve America Europe America Asia/Pacific Total
------------------- ------- -------- ------- ------------ --------
Balance November 29,
1998................... $ 1,992 $ 7,994 $ 3,141 $ 88 $ 13,215
Provisions in 1999:
Severance............. 3,057 8,952 1,022 668 13,699
Contracts/leases...... -- 1,660 16 618 2,294
------- -------- ------- ------- --------
3,057 10,612 1,038 1,286 15,993
------- -------- ------- ------- --------
Adjustments for change
in estimate............ (65) 225 92 8 260
Payments in 1999:
Severance............. (3,060) (13,482) (3,492) (82) (20,116)
Contracts/leases...... -- (399) (16) (175) (590)
------- -------- ------- ------- --------
(3,060) (13,881) (3,508) (257) (20,706)
------- -------- ------- ------- --------
Balance November 27,
1999................... 1,924 4,950 763 1,125 8,762
Adjustment for change in
estimate............... (300) -- -- -- (300)
Payments in 2000:
Severance............. (1,577) (2,651) (763) (682) (5,673)
Contracts/leases...... -- (1,136) -- (443) (1,579)
------- -------- ------- ------- --------
(1,577) (3,787) (763) (1,125) (7,252)
------- -------- ------- ------- --------
Balance December 2,
2000................... 47 1,163 -- -- 1,210
Payments in 2001:
Severance............. (47) (152) -- -- (199)
Contracts/leases...... -- (486) -- -- (486)
------- -------- ------- ------- --------
(47) (638) -- -- (685)
------- -------- ------- ------- --------
Balance December 1,
2001................... $ -- $ 525 $ -- $ -- $ 525
======= ======== ======= ======= ========
Note 5--Acquisitions and Divestitures
In 2000, the Company purchased certain assets of a business in its Specialty
Group operating segment for $5,388. In 1999, the Company purchased a business
for $4,483 in its Asia/Pacific Adhesives operating segment. The acquisitions
were accounted for as purchases and the accompanying consolidated financial
statements include the results of these businesses since the purchase date.
The estimated fair values of assets and liabilities acquired at the dates of
their respective acquisition are shown below as supplemental disclosure for
cash flow purposes.
2000 1999
------ ------
Receivables................................................... $ -- $1,329
Inventories................................................... 1,020 828
Property, plant and equipment................................. 34 780
Goodwill and intangible assets................................ 5,056 1,629
Current liabilities........................................... (722) (83)
------ ------
Net assets acquired for cash, net of cash acquired.......... $5,388 $4,483
====== ======
The Company sold its liquid paint business in Ecuador for $3,465 cash in 2000.
The historical results of operations on a pro forma basis are not presented as
the effects of the acquisitions and divestiture were not material.
30
Note 6--Research and Development
Research and development expenses charged against income were $19.0 million,
$18.4 million and $21.3 million in 2001, 2000 and 1999, respectively. These
costs are included as a component of SG&A expenses.
Note 7--Accounting Changes
In December 1999, the SEC issued SAB 101, which summarizes certain of the SEC
staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company adopted this accounting
standard effective in the first quarter of 2001 which impacted income by a
negative $0.8 million pretax ($0.5 million after-tax) or $0.02 per share. Pro
forma presentation on results of prior years is not presented as the impact in
not considered significant.
Effective in 2001, the Company adopted the FASB Emerging Issues Task Force
(EITF) Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs."
Under its provisions, the EITF requires proceeds from shipping charges billed
to customers to be included as revenue. Beginning in 2001, the Company
classified revenues from shipping charges billed to customers and the costs
related thereto as net revenue and cost of sales, respectively. Shipping
revenue and costs have been reclassified for all periods presented.
In 1999, the Company, adopted early, an accounting principle which impacted
income by $1.2 million pretax ($0.7 million after-tax) or $0.03 per share. The
AICPA Statement of Position No. 98-5, "Reporting on the Costs of Start-up
Activities" issued April 3, 1998, requires the Company to expense as incurred
all costs related to start-up activities and organizational costs.
Note 8--Allowance for Doubtful Receivables
2001 2000 1999
------- ------- -------
Balance at beginning of year...................... $ 6,913 $ 4,871 $ 5,073
Charged to expenses............................. 2,377 6,764 3,034
Write-offs...................................... (1,050) (4,495) (2,984)
Divested businesses............................. -- (68) --
Effect of exchange rates........................ (119) (159) (252)
------- ------- -------
Balance at end of year............................ $ 8,121 $ 6,913 $ 4,871
======= ======= =======
Note 9--Inventories
Inventories in the United States, representing approximately 35% of
consolidated inventories, are recorded at cost (not in excess of market value)
as determined primarily by the last-in, first-out method (LIFO). Inventories of
non-U.S. operations are valued at the lower of cost (mainly average cost) or
market.
Inventories at Year-end are Summarized as Follows 2001 2000
------------------------------------------------- -------- --------
Raw materials............................................ $ 57,226 $ 59,986
Finished goods........................................... 95,149 104,836
LIFO reserve............................................. (11,165) (11,037)
-------- --------
Total.................................................... $141,210 $153,785
======== ========
31
Note 10--Property, Plant and Equipment
Depreciable
Major Classes Lives (in years) 2001 2000
------------- --------------- --------- ---------
Land................................. $ 46,463 $ 48,297
Buildings and improvements........... 20-40 214,034 218,053
Machinery and equipment.............. 3-15 477,153 459,142
Construction in progress............. 21,724 31,750
--------- ---------
Total, at cost....................... 759,374 757,242
Accumulated depreciation............. (388,261) (362,553)
--------- ---------
Net property, plant and equipment.... $ 371,113 $ 394,689
========= =========
Depreciation is generally computed on a straight-line basis over the useful
lives of the assets, including assets acquired by capital leases. Depreciation
expense on property, plant and equipment was $47,200, $44,371 and $43,079 in
2001, 2000 and 1999, respectively.
Note 11--Intangibles
Other intangible assets, primarily technology, are amortized over the estimated
lives of 3 to 20 years. Goodwill is charged against income over periods of 15
to 25 years. The recoverability of unamortized intangible assets is assessed on
an ongoing basis by comparing anticipated undiscounted future cash flows from
operations to net book value.
Other
Intangibles Goodwill
---------------- ----------------
2001 2000 2001 2000
------- ------- ------- -------
Gross Cost............................... $42,619 $44,883 $80,209 $82,483
Accumulated Amortization................. (20,901) (19,681) (18,172) (15,980)
------- ------- ------- -------
Net...................................... $21,718 $25,202 $62,037 $66,503
======= ======= ======= =======
Note 12--Income Taxes
The Company uses the liability method of accounting for income taxes. Under
this method, deferred income tax assets and liabilities are recognized for the
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. The
effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date.
Income Before Income Taxes, Minority Interests
and Cumulative Effect of Accounting Change 2001 2000 1999
---------------------------------------------- ------- ------- -------
United States (U.S.)............................... $43,903 $48,294 $55,943
Outside U.S........................................ 19,567 28,611 18,483
------- ------- -------
Total.............................................. $63,470 $76,905 $74,426
======= ======= =======
32
Components of the Provision for Income Taxes
(excluding the cumulative effect of an accounting
change) 2001 2000 1999
------------------------------------------------- ------- ------- -------
Current:
U.S. federal.................................... $ 5,753 $ 2,524 $12,392
State........................................... 1,835 1,143 1,269
Outside U.S..................................... 9,745 13,514 12,236
------- ------- -------
17,333 17,181 25,897
------- ------- -------
Deferred:
U.S. federal.................................... 6,131 10,720 5,171
State........................................... (23) 620 --
Outside U.S..................................... (3,608) (66) 739
------- ------- -------
2,500 11,274 5,910
------- ------- -------
Total............................................. $19,833 $28,455 $31,807
======= ======= =======
Difference Between the Statutory U.S. Federal Income Tax
Rate
and the Company's Effective Income Tax Rate 2001 2000 1999
-------------------------------------------------------- ---- ---- ----
Statutory U.S. federal income tax rate................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit............... 1.9 2.3 1.0
U.S. federal income taxes on dividends received from non-
U.S. subsidiaries, before foreign tax credits........... 1.4 4.3 6.9
Foreign tax credits...................................... (6.3) (6.6) (3.2)
Non-U.S. taxes........................................... 1.4 3.8 6.3
Other tax credits........................................ (2.6) (2.1) (2.3)
Other.................................................... 0.4 0.3 (1.0)
---- ---- ----
Total.................................................... 31.2% 37.0% 42.7%
==== ==== ====
The effective tax rate in 2001 and 1999 was impacted by costs related to the
restructuring plans. Some of these restructuring costs did not provide a tax
benefit in certain foreign countries resulting in an increase in the effective
tax rate associated with non-U.S. taxes. The effective rate in 2001 was also
impacted by a one-time tax benefit of $2.6 million.
Deferred Income Tax Balances at Each Year-end Related
to 2001 2000
----------------------------------------------------- -------- --------
Depreciation........................................... $(40,227) $(41,183)
Asset valuation reserves............................... 2,003 1,800
Accrued expenses currently not deductible:
Employee benefit costs............................... 17,174 21,261
Product and other claims............................. 1,293 1,512
Tax loss carryforwards................................. 19,316 17,307
Other.................................................. 7,157 7,280
-------- --------
6,716 7,977
Valuation allowance.................................... (8,523) (12,406)
-------- --------
Net deferred tax liabilities........................... $ (1,807) $ (4,429)
======== ========
33
Net Deferred Taxes as Presented on the Consolidated
Balance Sheet 2001 2000
--------------------------------------------------- -------- --------
Deferred tax assets:
Current............................................... $ 14,431 $ 15,945
Non-current........................................... 8,774 2,884
Deferred tax liabilities:
Current............................................... (1,457) (1,548)
Non-current........................................... (23,555) (21,710)
-------- --------
Net deferred tax liabilities............................ $ (1,807) $ (4,429)
======== ========
Valuation allowances relate to foreign tax credit carry overs, tax loss
carryforwards and other net deductible temporary differences in non-U.S.
operations where the future potential benefits do not meet the more likely than
not realization test.
U.S. income taxes have not been provided on approximately $78,292 of
undistributed earnings of non-U.S. subsidiaries. The Company plans to reinvest
these undistributed earnings. If any portion were to be distributed, the
related U.S. tax liability may be reduced by foreign income taxes paid on those
earnings plus any available foreign tax credit carry overs. Determination of
the unrecognized deferred tax liability related to these undistributed earnings
is not practicable.
While non-U.S. operations have been profitable overall, cumulative tax losses
of $56,244 are carried as net operating losses in 19 different countries. These
losses can be carried forward to offset income tax liability on future income
in those countries. Cumulative losses of $44,635 can be carried forward
indefinitely, while the remaining $11,609 must be used during the 2002-2007
period.
Note 13--Notes Payable
The primary component of notes payable relates to short-term lines of credit
with banks. This component totals $27,601. The amount of unused available
borrowings under these lines at December 1, 2001 was $166,851. The weighted-
average interest rates on short-term borrowings were 6.6%, 8.8% and 8.1% in
2001, 2000 and 1999, respectively. Fair values of short-term financial
instruments approximate their carrying values due to their short maturity.
34
Note 14--Long-Term Debt
Long-term Debt, Including
Obligations Weighted-Average
Under Capital Leases Interest Rate Maturity 2001 2000
------------------------- ---------------- --------- -------- --------
U.S. dollar obligations:
Notes (a)................. $ -- $ 6,365
Senior notes.............. 7.27% 2001-2012 190,000 190,000
Industrial and commercial
development bonds........ 5.60% 2004-2016 7,100 7,100
Various other
obligations.............. 7.23% 2004-2006 3,857 4,795
-------- --------
200,957 208,260
-------- --------
Foreign currency
obligations:
Pound sterling notes (a).. -- 31,746
Japanese yen note (a)..... 1,620 7,685
Japanese yen.............. 3.80% 2002-2009 3,509 6,536
Various other
obligations.............. -- 927
-------- --------
5,129 46,894
Capital lease obligations... 2002-2004 394 1,028
-------- --------
Total long-term debt........ 206,480 256,182
Less: current
installments............. (3,479) (5,718)
-------- --------
Total....................... $203,001 $250,464
======== ========
- --------
(a) The Company has revolving credit agreements with a group of major banks,
which provide committed long-term lines of credit through December 20 of
2007, 2006, 2005 and 2004 in amounts of $85,000, $15,000, $25,000 and
$28,000, respectively. At the Company's option, interest is payable at the
London Interbank Offered Rate plus 0.175%--0.375%, adjusted quarterly based
on the Company's capitalization ratio, or a bid rate. A facility fee of
0.075%--0.175% is payable quarterly.
The most restrictive debt agreements place limitations on secured and unsecured
borrowings, operating leases, and contain minimum interest coverage, current
assets and net worth requirements. In addition, the Company cannot be a member
of any "consolidated group" for income tax purposes other than with its
subsidiaries. At December 1, 2001 the Company exceeded minimum requirements for
all financial covenants.
Aggregate maturities of long-term debt, including obligations under capital
leases, amount to $3,479, $6,276, $1,222, $5,114 and $22,216 during the five
years 2002 through 2006, respectively. Senior notes of $26,000 due on December
15, 2001 are shown as long-term because they will be replaced with long-term
debt.
The estimated fair value of long-term debt was $209,200 and $249,052 for
December 1, 2001 and December 2, 2000, respectively. The fair value of long-
term debt is based on quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of similar maturities. The
estimates presented above on long-term financial instruments are not
necessarily indicative of the amounts that would be realized in a current
market exchange.
Note 15--Lease Commitments
Assets under capital leases 2001 2000
--------------------------- ------- -------
Land....................................................... $ 1,168 $ 1,146
Buildings and improvements................................. 2,056 4,758
Machinery and equipment.................................... 653 632
------- -------
3,877 6,536
Accumulated depreciation................................... (1,669) (3,729)
------- -------
Net assets under capital leases............................ $ 2,208 $ 2,807
======= =======
35
The minimum lease payments, related to equipment and buildings, that will have
to be made in each of the years indicated based on capital and operating leases
in effect at December 1, 2001 are:
Fiscal year Capital Operating
----------- ------- ---------
2002....................................................... $308 $10,438
2003....................................................... 84 8,776
2004....................................................... 12 6,387
2005....................................................... -- 2,962
2006....................................................... -- 2,009
Later years................................................ -- 10,988
---- -------
Total minimum lease payments............................... 404 $41,560
=======
Amount representing interest............................... (10)
----
Present value of minimum lease payments.................... $394
====
Rental expense for all operating leases charged against income amounted to
$16,578, $15,648 and $13,541 in 2001, 2000 and 1999, respectively.
Note 16--Contingencies
Legal: The Company and its subsidiaries are parties to various lawsuits and
governmental proceedings. For further information on certain legal proceedings,
see Item 3, Legal 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. In some cases the Company may have rights of
indemnification from other parties. The Company's liability in the future for
such claims is difficult to predict because of the uncertainty as to the cost
of the investigation and clean-up of the sites, the Company's responsibility
for such hazardous waste and the number or financial condition of other PRPs or
defendants. As is the case with other types of litigation and proceedings to
which the Company is a party, based upon currently available information, it is
management's opinion that none of these matters will result in material
liability to the Company.
Other: The Company has guaranteed bank loans to certain executives totaling
$11,081 for the purchase of the Company's common stock.
Note 17--Financial Instruments
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes standards for
recognition and measurement of derivatives and hedging activities. The Company
implemented this statement in the first quarter of 2001 as required. The
cumulative effect of adopting SFAS No. 133 as of December 3, 2000 was not
material to the Company's consolidated financial statements. The Company is
exposed to foreign currency exchange rate risk inherent in forecasted sales,
cost of sales, and assets and liabilities denominated in currencies other than
the U.S. dollar. The Company does not enter into any speculative positions with
regard to derivative instruments.
Derivatives consisted primarily of forward currency contracts (primarily to
receive euros) used to manage foreign currency denominated liabilities. Because
contracts outstanding were not designated as hedges, the gains and losses are
recognized in the income statement of the same period as the remeasurement of
the related foreign currency denominated liabilities.
Notional amounts of forward currency contracts outstanding were $108,737
however, notional amounts are not a measure of the Company's exposure. As of
December 1, 2001, the Company had forward currency contracts
36
maturing between December 3, 2001 and August 15, 2002. In the opinion of
management, changes in market value were not material. Counterparties to the
forward currency contracts are major financial institutions. Credit loss from
counterparty nonperformance is not anticipated.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of entities comprising the Company's customer
base and their dispersion across many different industries and countries. As of
December 1, 2001 and December 2, 2000, the Company had no significant
concentrations of credit risk.
Note 18--Retirement and Postretirement Benefits
The Company has noncontributory defined benefit plans covering all U.S.
employees. Benefits for these plans are based primarily on years of service and
employees' average compensation during their five highest out of the last ten
years of service. The Company's funding policy is consistent with the funding
requirements of federal law and regulations. Plan assets consist principally of
listed equity securities. The Company funds U.S. postretirement benefits
through a Voluntary Employees' Beneficiaries Association Trust.
Certain non-U.S. consolidated subsidiaries provide pension benefits for their
employees consistent with local practices and regulations. These plans are
defined benefit plans covering substantially all employees upon completion of a
specified period of service. Benefits for these plans are generally based on
years of service and annual compensation.
The Company and certain of its consolidated subsidiaries provide health care
and life insurance benefits for eligible retired employees and their eligible
dependents. These benefits are provided through various insurance companies and
health care providers. These costs are accrued during the years the employee
renders the necessary service.
Pension Benefits
------------------------------------
Other
Postretirement
U.S. Plans Non-U.S. Plans Benefits
------------------ ---------------- -----------------
2001 2000 2001 2000 2001 2000
-------- -------- ------- ------- -------- -------
Change in benefit
obligation:
Benefit obligation,
September 1 of prior
year................. $180,382 $178,021 $66,759 $72,095 $ 39,734 $28,216
Service cost.......... 4,735 5,613 2,491 2,675 1,360 1,027
Interest cost......... 14,018 13,513 3,575 5,041 3,089 2,119
Participant
contributions........ -- -- 1,494 779 250 124
Plan amendments....... 506 13 -- -- -- --
Actuarial
(gain)/loss.......... 21,057 (8,850) 6,341 (3,176) 8,029 10,935
Benefits paid......... (9,248) (7,928) (2,767) (2,689) (3,045) (2,687)
Currency change
effect............... -- -- 1 (7,966) -- --
-------- -------- ------- ------- -------- -------
Benefit obligation,
August 31............ $211,450 $180,382 $77,894 $66,759 $ 49,417 $39,734
======== ======== ======= ======= ======== =======
Change in plan assets:
Fair value of plan
assets, September 1
of prior year........ $290,329 $247,689 $50,963 $48,211 $ 78,185 $68,142
Actual return on plan
assets............... (72,332) 49,695 (5,921) 6,615 (18,663) 10,852
Employer
contributions........ 1,382 873 651 1,420 257 1,754
Participant
contributions........ -- -- 1,494 779 250 124
Benefits paid......... (9,248) (7,928) (928) (1,024) (3,045) (2,687)
Currency change
effect............... -- -- (156) (5,038) -- --
-------- -------- ------- ------- -------- -------
Fair value of plan
assets, August 31.... $210,131 $290,329 $46,103 $50,963 $ 56,984 $78,185
======== ======== ======= ======= ======== =======
37
Pension Benefits
---------------------------------------
Other
Postretirement
U.S. Plans Non-U.S. Plans Benefits
------------------- ------------------ -----------------
2001 2000 2001 2000 2001 2000
-------- --------- -------- -------- ------- --------
Reconciliation of funded
status as of
November:
Funded status........... $ (1,319) $ 109,947 $(31,791) $(15,796) $ 7,567 $ 38,451
Unrecognized actuarial
loss (gain)............ (22,422) (145,988) 279 (10,920) 22,156 (12,253)
Unrecognized prior
service cost
(benefit).............. 5,202 5,535 (41) (33) (7,707) (10,017)
Unrecognized net
transition obligation.. (69) (96) 583 628 -- --
Contributions between
measurement date and
fiscal year-end........ 270 190 251 -- 75 --
-------- --------- -------- -------- ------- --------
Recognized amount....... $(18,338) $ (30,412) $(30,719) $(26,121) $22,091 $ 16,181
======== ========= ======== ======== ======= ========
Statement of financial
position as of November:
Prepaid benefit cost.... $ 469 $ 283 $ 1,489 $ 2,291
Accrued benefit
liability.............. (18,807) (30,694) (32,208) (28,412)
Additional minimum
liability.............. (8,578) (5,634) (3,785) --
Intangible asset........ 3,314 3,666 -- --
Accumulated other
comprehensive income -
pretax................. 5,264 1,967 3,785 --
-------- --------- -------- --------
Recognized amount....... $(18,338) $ (30,412) $(30,719) $(26,121)
======== ========= ======== ========
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligation in
excess of plan assets were $100,166, $90,582, and $46,660, respectively as of
August 31, 2001 and $57,895, $53,552, and $24,397 as of August 31, 2000.
Pension Benefits
----------------------------------------------------
Other Postretirement
U.S. Plans Non-U.S. Plans Benefits
---------------------------- ---------------------- -------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
-------- -------- -------- ------ ------ ------ ------- ------- -------
Net periodic cost
(benefit):
Service cost............ $ 4,735 $ 5,613 $ 5,987 $2,491 $2,675 $2,547 $ 1,360 $ 1,027 $ 2,033
Interest cost........... 14,018 13,513 12,011 3,575 5,041 4,237 3,089 2,119 2,667
Expected return on
assets................. (24,118) (20,582) (16,538) (3,303) (4,490) (2,909) (7,317) (6,387) (5,294)
Prior service cost
amortization........... 839 838 724 8 8 9 (2,310) (2,310) (828)
Actuarial (gain)/loss
amortization........... (6,059) (2,637) (766) (406) (137) 24 (457) (942) (561)
Transition amount
amortization........... (27) (27) (27) 60 62 (281) -- -- --
Curtailment gain........ -- -- (1,780) -- -- (274) -- -- (74)
-------- -------- -------- ------ ------ ------ ------- ------- -------
Net periodic benefit
cost (benefit)......... $(10,612) $ (3,282) $ (389) $2,425 $3,159 $3,353 $(5,635) $(6,493) $(2,057)
======== ======== ======== ====== ====== ====== ======= ======= =======
38
Pension Benefits
--------------------------------------
Other
Postretirement
U.S. Plans Non-U.S. Plans Benefits
-------------------- ----------------- -----------------
Weighted-Average
Assumptions, August 2001 2000 1999 2001 2000 1999 2001 2000 1999
- ------------------- ------ ------ ------ ----- ----- ----- ----- ----- -----
Discount rate .......... 7.00% 7.75% 7.50% 6.04% 6.53% 6.18% 7.00% 7.75% 7.50%
Expected return on plan
assets................. 10.50% 10.50% 10.50% 7.93% 7.92% 6.18% 9.50% 9.50% 9.50%
Rate of compensation
increase............... 4.02% 4.02% 3.78% 3.16% 3.14% 3.07%
Rate of increase in
healthcare cost levels:
Employees under age
65................... 4.85% 5.10% 5.68%
Employees age 65 and
older................ 4.85% 5.10% 3.73%
The rate of increase in healthcare cost levels is expected to be 5.10% in the
years 2002 and later. Beginning in 2005, the Company's dollar contribution for
retiree medical coverage will remain fixed at the 2004 level for employees who
retire in the year 2005 or later.
Sensitivity Information: The healthcare trend rate assumption has a significant
effect on the amounts reported. A one percentage point change in the healthcare
cost trend rate would have the following effects on the December 2, 2000
service and interest cost and the accumulated postretirement benefit obligation
at December 1, 2001:
1-Percent 1-Percent
Increase Decrease
--------- ---------
Effect on service and interest cost components......... $ 408 $ (340)
Effect on accumulated postretirement benefit
obligation............................................ $4,168 $(3,544)
Note 19--Stockholders' Equity
Preferred Stock: The Board of Directors is authorized to issue up to 10,000,000
additional shares of preferred stock that may be issued in one or more series
and with such stated value and terms as the Board of Directors may determine.
Series A Preferred Stock: There were 45,900 Series A preferred shares with a
par value of $6.67 authorized and outstanding at December 1, 2001 and December
2, 2000. The holder of Series A preferred stock is entitled to cumulative
dividends at the rate of $0.33 per share per annum. Common stock cash dividends
may not be paid unless provision has been made for payment of Series A
preferred dividends. The Series A preferred stock has multiple voting rights
entitling the Series A preferred shareholder to 80 votes per share. The terms
of the Series A preferred stock include the right of the Company to purchase
the shares at specified times and the right of the Company to redeem all shares
at par value if authorized by the shareholders.
Series B Preferred Stock: In connection with the adoption of the shareholder
rights plan (see below), the Board of Directors authorized a new series of
preferred stock ("Series B preferred shares") that would be exchanged for the
existing Series A preferred shares, if and at such time as the rights issued
pursuant to the shareholder rights plan become exercisable. The Series B
preferred shares have the same terms as the Series A preferred shares, except
that the voting rights of the Series B preferred shares are increased
proportionately according to the number of shares issued upon the exercise or
exchange of rights. The Company entered into a Stock Exchange Agreement dated
July 18, 1996, with the holder of the Series A preferred shares by which the
Series B preferred shares would be exchanged for all Series A preferred shares
on the date the rights under the shareholder rights plan become exercisable.
The exchange of the Series A preferred shares for the new Series B
39
preferred shares is intended to preserve the holder's voting power, in the
event any rights are exercised. No event has occurred which would cause the
exchange to be effected.
Common Stock: There were 80,000,000 shares of common stock with a par value of
$1.00 authorized and 28,280,896 and 28,231,328 shares issued and outstanding at
December 1, 2001 and December 2, 2000, respectively. On November 16, 2001, the
Company issued a 2-for-1 common stock split to shareholders of record on
October 26, 2001 which resulted in a transfer of $14,142,068 from retained
earnings to common stock. Share and per share data (except par value) for all
periods presented have been restated to reflect the stock split.
Shareholder Rights Plan: The shareholder rights plan provides each holder of a
share of the Company's common stock a right to purchase one additional share of
common stock for $90, subject to adjustment. These rights are not currently
exercisable. Upon the occurrence of certain events, such as the public
announcement of a tender offer or the acquisition of 15 percent or more of the
Company's outstanding common stock by a person or group (an "acquiring
person"), each right entitles the holder to purchase $90 worth of common stock
(or in some circumstances common stock of the acquiring person) at one half of
its then market value. Rights held by an acquiring person are void. The Company
may redeem or exchange the rights in certain instances. Unless extended or
redeemed the rights expire on July 30, 2006.
Note 20--Stock-Based Compensation
Directors' Deferred Compensation Plan: The Directors' Deferred Compensation
Plan reserves 150,000 shares of common stock for allocation as payment of
retainer fees to its Board of Directors. Directors, who are not employees, can
choose to receive all or a portion of the payment of their retainer and meeting
fees in shares of Company common stock when they leave the Board rather than
cash payments each year. At December 1, 2001, 32,157 shares remained available
for future allocation.
1998 Directors' Stock Incentive Plan: The 1998 Directors' Stock Incentive Plan
reserves 400,000 shares of common stock to offer nonemployee directors
incentives to put forth maximum efforts for the success of the Company's
business and to afford nonemployee directors an opportunity to acquire a
proprietary interest in the Company. In 2001, 2000 and 1999, respectively,
21,020, 15,400 and 8,000 restricted shares were awarded. The market value of
$556, $304 and $281 has been recorded as unearned compensation--restricted
stock and is shown as a separate component of stockholders' equity. Unearned
compensation is being amortized to expense over the vesting periods of
generally four years and amounted to $137, $207 and $93 in 2001, 2000 and 1999,
respectively. At December 1, 2001, 332,746 shares remained available for future
award.
Year 2000 Stock Incentive Plan: Under the Year 2000 Stock Incentive Plan
3,000,000 shares of the common stock are available for the granting of awards
during a period of up to ten years from October 14, 1999. The Year 2000 Stock
Incentive Plan permits the granting of (a) stock options; (b) stock
appreciation rights; (c) restricted stock and restricted stock units; (d)
performance awards; (e) dividend equivalents; and (f) other awards valued in
whole or in part by reference to or otherwise based upon the Company's common
stock.
A total of 607,172 and 56,684 non-qualified stock options were granted in 2001
and 2000, respectively to officers and key employees at prices not less than
fair market value at the date of grant. These non-qualified options are
generally exercisable beginning one year from the date of grant in cumulative
yearly amounts of 25 percent and generally have a contractual term of 10 years.
At December 1, 2001, 2,396,752 shares remained available for future grants or
allocations under the plan.
1992 Stock Incentive Plan: Under the 1992 Stock Incentive Plan 1,800,000 shares
of common stock were available for the granting of awards during a period of up
to ten years from April 16, 1992. The Stock Incentive Plan permitted the
granting of (a) stock options; (b) stock appreciation rights; (c) restricted
stock and restricted stock units; (d) performance awards; (e) dividend
equivalents; and (f) other awards valued in whole or in part by reference to or
otherwise based upon the Company's common stock.
40
A total of 2,062 restricted shares of common stock were granted to certain
employees in 1999. The market value of shares awarded of $44 has been recorded
as unearned compensation--restricted stock in 1999 and is shown as a separate
component of stockholders' equity. Unearned compensation is being amortized to
expense over the vesting periods of generally ten years and amounted to $1,060,
$1,768 and $2,029 in 2001, 2000 and 1999, respectively.
A total of 2,000 restricted share units of common stock were allocated to
certain employees in 1999. The market value of units allocated of $43 in 1999
is generally being charged to expense over the ten-year vesting period.
A total of 288,150 and 487,898 non-qualified stock options were granted in 2000
and 1999, respectively to officers and key employees at prices no less than
fair market value at the date of grant. These non-qualified options are
generally exercisable beginning one year from the date of grant in cumulative
yearly amounts of 25 percent and generally have a contractual term of 10 years.
At December 1, 2001, no shares remained available for future grants or
allocations from the 1992 plan.
Exercise
Summary of Non-qualified Stock Option Transactions Number Price (1)
-------------------------------------------------- --------- --------
Outstanding at November 29, 1998........................ 221,982 $ 7.17
Cancelled............................................... (20,594) 20.98
Granted................................................. 487,898 22.08
Exercised............................................... (74,388) 7.17
---------
Outstanding at November 27, 1999........................ 614,898 18.54
Cancelled............................................... (81,454) 23.07
Granted................................................. 344,834 26.14
Exercised............................................... (150,248) 7.64
---------
Outstanding at December 2, 2000......................... 728,030 23.88
Cancelled............................................... (150,422) 21.62
Granted................................................. 607,172 18.63
Exercised............................................... (5,732) 21.50
---------
Outstanding at December 1, 2001......................... 1,179,048 $21.48
=========
Exercisable at December 1, 2001......................... 261,232 $23.36
Exercisable at December 2, 2000......................... 257,166 $23.50
- --------
(1) Weighted-Average
Options
Options Outstanding Exercisable
----------------------------------- ----------------
Remaining Life (1) Exercise Exercise
Range of Exercise Prices Shares (in years) Price (1) Shares Price (1)
------------------------ ------- ----------------- -------- ------- --------
$18.63 - 23.44.......... 929,064 8.3 $19.74 188,678 $21.45
27.38.................. 229,984 8.0 27.38 62,554 27.38
34.31.................. 20,000 7.9 34.31 10,000 34.31
- --------
(1) Weighted-Average
41
If compensation expense had been determined for the non-qualified stock option
plans based on the fair value at the grant dates consistent with the method of
SFAS No. 123, net income and income per share would have been adjusted to the
pro forma amounts indicated below:
2001 2000 1999
------- ------- -------
Net income:
As reported........................................ $44,439 $49,163 $43,370
Pro forma.......................................... $42,952 $48,202 $42,830
Basic income per share:
As reported........................................ $ 1.59 $ 1.77 $ 1.57
Pro forma.......................................... $ 1.54 $ 1.73 $ 1.55
Diluted income per share:
As reported........................................ $ 1.57 $ 1.74 $ 1.55
Pro forma.......................................... $ 1.52 $ 1.71 $ 1.53
Compensation expense for pro forma purposes is reflected over the options'
vesting period.
The weighted-average fair value per option at the grant date for options
granted in 2001, 2000 and 1999 was $7.66, $10.15 and $7.69, respectively. The
fair value was estimated using the Black-Scholes option pricing model with the
following weighted-average assumptions:
2001 2000 1999
------- ------- -------
Risk-free interest rate.............................. 5.66% 6.31% 4.57%
Expected dividend yield.............................. 1.50% 1.50% 1.50%
Expected volatility factor........................... 35.77% 30.60% 30.24%
Expected option term................................. 7 years 7 years 7 years
Note 21--Comprehensive Income Information
Total Comprehensive Income 2001 2000 1999
-------------------------- ------- ------- -------
Net income...................................... $44,439 $49,163 $43,370
Foreign currency translation adjustment......... (395) (12,034) (1,684)
Foreign currency translation adjustment included
in net income.................................. -- -- 136
Minimum pension liability adjustment, net of
tax............................................ (4,667) (532) 23
------- ------- -------
Total........................................... $39,377 $36,597 $41,845
======= ======= =======
The following table shows ending balances of the components of accumulated
other comprehensive income:
Accumulated Other Comprehensive Income 2001 2000 1999
-------------------------------------- -------- -------- -------
Foreign currency translation adjustment....... $(19,283) $(18,888) $(6,854)
Minimum pension liability adjustment net of
taxes of $3,182, $767 and $(15) in 2001, 2000
and 1999, respectively....................... (5,867) (1,200) (668)
-------- -------- -------
Total accumulated other comprehensive income.. $(25,150) $(20,088) $(7,522)
======== ======== =======
Note 22--Operating Segment Information
The Company's segment reporting reflects operating segments consistent with its
method of internal reporting. Management organizes its business in five
reportable operating segments. The adhesives, sealants and coatings (adhesives)
business is broken down into four geographic segments: North America Adhesives,
Europe Adhesives, Latin America Adhesives and Asia/Pacific Adhesives. The four
geographic segments offer generally similar products and services to industries
such as packaging, graphic arts, automotive, footwear, woodworking, window and
nonwovens. The fifth reportable segment is the Specialty Group, which consists
of five separate
42
operating entities, namely, TEC Specialty Products, Inc. ("TEC"); Foster
Products Corporation ("Foster"); Linear Products, Inc. ("Linear"); Paints
Division ("Paints") and the Global Coatings Division ("Global Coatings"). These
entities provide specialty chemical products for a variety of applications such
as, ceramic tile installation (TEC), HVAC insulation (Foster), powder coatings
applied to metal surfaces such as office furniture, appliances and lawn and
garden equipment (Global Coatings), specialty hot melt adhesives for packaging
applications (Linear), and liquid paint sold through retail outlets (Paints).
The Paints Division operates solely in Central America. The other four entities
in the Specialty Group operate primarily in North America.
Management evaluates the performance of its operating segments based on
operating income which is defined as gross profit minus operating expenses
("SG&A"). Expenses resulting from restructuring initiatives are excluded from
the operating segment results. Corporate expenses are fully allocated to the
operating segments. Corporate assets are not allocated to the segments. Inter-
segment sales are recorded at cost plus a minor markup for administrative
costs.
The following tables summarize the financial information about the reportable
operating segments for all periods presented:
Trade Inter-Segment Operating Depreciation/ Total Capital
Operating Segments Revenue Revenue Income(Loss) Amortization Assets (a) Expenditures
- ------------------ ---------- ------------- ----------- ------------- ---------- ------------
North America
Adhesives.............. 2001 $ 557,597 $ 18,088 $ 61,333 $18,449 $ 308,794 $ 7,086
2000 599,522 16,662 50,271 19,492 324,565 9,047
1999 591,603 26,466 60,174 20,398 344,220 17,403
Europe Adhesives........ 2001 $ 217,300 $ 5,718 $ 594 $ 9,616 $ 199,237 $ 5,577
2000 232,773 3,637 9,516 10,101 209,393 8,946
1999 257,273 3,419 16,029 11,308 237,493 18,976
Latin America
Adhesives.............. 2001 $ 73,581 $ 1,178 $ (3,117) $ 3,569 $ 59,993 $ 3,064
2000 77,060 1,307 (1,374) 4,042 65,049 4,493
1999 81,073 2,411 (2,298) 3,391 69,923 4,321
Asia/Pacific Adhesives.. 2001 $ 96,737 $ 90 $ 1,155 $ 2,088 $ 72,549 $ 1,645
2000 100,992 16 2,496 2,315 73,777 2,109
1999 97,896 75 1,354 1,944 80,294 2,896
Specialty Group......... 2001 $ 328,844 $ 1,525 $ 29,706 $ 7,986 $ 213,657 $ 4,035
2000 353,614 1,682 41,292 7,809 217,239 5,198
1999 348,010 2,084 45,692 7,582 204,317 8,751
Corporate and
Unallocated............ 2001 -- $(26,599) -- $11,129 $ 111,943 $ 9,318
2000 -- (23,304) -- 8,406 120,338 19,251
1999 -- (34,455) -- 6,153 89,368 3,906
Total Company........... 2001 $1,274,059 -- $ 89,671 $52,837 $ 966,173 $30,725
2000 1,363,961 -- 102,201 52,165 1,010,361 49,044
1999 1,375,855 -- 120,951 50,776 1,025,615 56,253
- --------
(a) Segment assets include primarily inventory, accounts receivables, property,
plant and equipment and other miscellaneous assets. Corporate and
unallocated assets include primarily corporate property, plant and
equipment, deferred tax assets, certain investments and other assets.
43
Reconciliation of Operating Income to Pretax
Income 2001 2000 1999
-------------------------------------------- -------- -------- --------
Operating income............................ $ 89,671 $102,201 $120,951
Restructuring related (charges) credits..... (1,564) 300 (22,961)
Interest expense............................ (21,247) (23,814) (26,823)
Gain from sale of assets.................... 752 4,131 6,123
Other income (expense), net................. (4,142) (5,913) (2,864)
-------- -------- --------
Pretax income............................... $ 63,470 $ 76,905 $ 74,426
======== ======== ========
Property, Plant
Geographic Areas Trade Revenue and Equipment
---------------- ------------- ---------------
North America............................. 2001 $ 762,402 $242,296
2000 817,855 258,230
1999 801,359 258,822
Europe.................................... 2001 $ 245,271 $ 64,623
2000 262,128 67,369
1999 287,681 79,732
Latin America............................. 2001 $ 169,649 $ 42,853
2000 182,986 45,242
1999 188,919 46,735
Asia/Pacific.............................. 2001 $ 96,737 $ 21,341
2000 100,992 23,848
1999 97,896 27,235
Total Company............................. 2001 $1,274,059 $371,113
2000 1,363,961 394,689
1999 1,375,855 412,524
Note 23--Quarterly Data (unaudited)
Net Revenue Gross Profit Operating Income
---------------------- ------------------ -----------------
2001 2000 2001 2000 2001 2000
---------- ---------- -------- -------- ------- --------
First quarter... $ 306,934 $ 323,630 $ 82,576 $ 93,122 $14,284 $ 23,805
Second quarter.. 328,507 350,174 88,212 99,726 23,612 31,917
Third quarter... 315,712 325,977 85,923 86,047 24,752 19,013
Fourth quarter.. 322,906 364,180 88,842 100,467 25,459 27,766
---------- ---------- -------- -------- ------- --------
Total year...... $1,274,059 $1,363,961 $345,553 $379,362 $88,107 $102,501
========== ========== ======== ======== ======= ========
Diluted Net
Basic Net Income Income
Net Revenue Per Share Per Share
---------------------- ------------------ -----------------
2001 2000 2001 2000 2001 2000
---------- ---------- -------- -------- ------- --------
First quarter... $ 5,049* $ 9,730 $ 0.18* $ 0.35 $ 0.18* $ 0.34
Second quarter.. 11,861 17,772 0.42 0.64 0.42 0.63
Third quarter... 14,587 7,394 0.52 0.27 0.51 0.26
Fourth quarter.. 12,942 14,267 0.46 0.51 0.46 0.51
---------- ----------
Total year...... $ 44,439* $ 49,163 $ 1.59* $ 1.77 $ 1.57* $ 1.74
========== ==========
- --------
* Includes an accounting change of $501 charge or $0.02 loss per share.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
44
PART III
Item 10. Directors and Executive Officers of the Registrant
The information under the heading "Election of Directors" (excluding the
sections entitled "Compensation of Directors" and "Board Meetings and
Committees") and the section entitled "Section 16(a) Beneficial Ownership
Reporting Compliance" contained in the Company's Proxy Statement (the "2002
Proxy Statement") are incorporated by reference.
The information contained at the end of Part I hereof under the heading
"Executive Officers of the Registrant" is incorporated by reference.
Item 11. Executive Compensation
The section under the heading "Executive Compensation" (excluding the section
entitled "Compensation Committee Report on Executive Compensation") contained
in the 2002 Proxy Statement is incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the heading "Security Ownership of Certain Beneficial
Owners and Management" contained in the 2002 Proxy Statement is incorporated by
reference.
Item 13. Certain Relationships and Related Transactions
The section entitled "Executive Stock Purchase Loan Program" contained in the
2002 Proxy Statement is incorporated by reference.
45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Consolidated Financial Statements
Documents filed as part of this report:
Statement of Consolidated Income for the years ended December 1, 2001,
December 2, 2000 and November 27, 1999
Consolidated Balance Sheet as of December 1, 2001, December 2, 2000
Consolidated Statement of Stockholders' Equity for the years ended
December 1, 2001, December 2, 2000 and November 27, 1999
Consolidated Statement of Cash Flows for the years ended December 1,
2001, December 2, 2000 and November 27, 1999
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All financial statement schedules are omitted as the required
information is inapplicable or the information is presented in the
consolidated financial statements or related notes.
3. Exhibits
Item Incorporation by Reference
---- --------------------------
3.1 Restated Articles of Incorporation of H.B. Exhibit 3(a) to the Report on Form 10-
Fuller Company, October 30, 1998 K405 for the year ended November 28,
1998.
3.2 Articles of Amendment of Articles of
Incorporation of H.B. Fuller Company,
October 27, 2001
3.3 By-Laws of H.B. Fuller Company as amended Exhibit 3(b) to the Report on Form 10-Q
through July 14, 1999 for the quarter ended August 28, 1999.
4.1 Rights Agreement, dated as of July 18, Exhibit 4 to the Form 8A, dated July
1996, between H.B. Fuller Company and 24, 1996.
Wells Fargo Bank Minnesota, National
Association, as Rights Agent, which
includes as an exhibit the form of Right
Certificate
4.2 Amendment to Rights Agreement, dated as of Exhibit 1 to the Form 8-A / A-1, dated
January 23, 2001, between H.B. Fuller February 2, 2001.
Company and Wells Fargo Bank Minnesota,
National Association, as Rights Agent
4.4 Stock Exchange Agreement, dated July 18, Exhibit 10 to the Form 8-K, dated July
1996, between H.B. Fuller Company and 24, 1996.
Elmer L. Andersen, including Designations
for Series B Preferred Stock
4.5 Agreement dated as of June 2, 1998 between Exhibit 4(a) to the Report on Form 10-Q
H.B. Fuller Company and a group of for the quarter ended August 29, 1998.
investors, primarily insurance companies,
including the form of Notes
46
Item Incorporation by Reference
---- --------------------------
4.6 H.B. Fuller Company Executive Stock Exhibit 4.7 to the Registration
Purchase Loan Program Statement on Form S-8 (Commission File
No. 333-44496) filed August 25, 2000
and the Registration Statement on Form
S-8 (Commission File No. 333-48418)
filed October 23, 2000.
*10.1 H.B. Fuller Company 1992 Stock Incentive Exhibit 10(a) to the Report on Form 10-
Plan K for the year ended November 30, 1992.
*10.2 H.B. Fuller Company Restricted Stock Plan Exhibit 10(c) to the Report on Form 10-
K for the year ended November 30, 1993.
*10.3 H.B. Fuller Company Restricted Stock Unit Exhibit 10(d) to the Report on Form 10-
Plan K for the year ended November 30, 1993.
*10.4 H.B. Fuller Company Directors' Deferred
Compensation Plan as Amended December 1,
2001
*10.5 H.B. Fuller Company 2000 Stock Incentive Registration Statement on Form S-8
Plan (Commission File No. 333-48420) filed
August 25, 2000.
*10.6 H.B. Fuller Company 1998 Directors' Stock Exhibit 10(c) to the Report on Form 10-
Incentive Plan Q for the quarter ended May 30, 1998.
*10.7 H.B. Fuller Company Supplemental Executive Exhibit 10(j) to the Report on Form 10-
Retirement Plan--1998 Revision K405 for the year ended November 28,
1998.
*10.8 First Amendment to H.B. Fuller Company Exhibit 10(x) to the Report on Form 10-
Supplemental Executive Retirement Plan K405 for the year ended November 28,
dated November 4, 1998 1998.
*10.9 H.B. Fuller Company Executive Benefit Exhibit 10(k) to the Report on Form 10-
Trust dated October 25, 1993 between H.B. K for the year ended November 29, 1997.
Fuller Company and First Trust National
Association, as Trustee, relating to the
H.B. Fuller Company Supplemental Executive
Retirement Plan
*10.10 Amendments to H.B. Fuller Company Exhibit 10(k) to the Report on Form 10-
Executive Benefit Trust, dated October 1, K405 for the year ended November 28,
1997 and March 2, 1998, between H.B. 1998.
Fuller Company and First Trust National
Association, as Trustee, relating to the
H.B. Fuller Company Supplemental Executive
Retirement Plan
*10.11 H.B. Fuller Company Directors Benefit Exhibit 10(w) to the Report on Form 10-
Trust, dated February 10, 1999, between K for the year ended November 27, 1999.
H.B. Fuller Company and U.S. Bank National
Association, as Trustee, relating to the
Retirement Plan for Directors
*10.12 H.B. Fuller Company Key Employee Deferred Exhibit 4.1 to the Registration
Compensation Plan Statement on Form S-8 (Commission File
No. 333-89453) filed October 21, 1999.
47
Item Incorporation by Reference
---- --------------------------
*10.13 First Declaration of Amendment to the Exhibit 10(v) to the Report on Form 10-
Retirement Plan for Directors of H.B. K for the year ended November 27, 1999.
Fuller Company dated February 10, 1999
*10.14 Performance Unit Plan Exhibit 10(a) to the Report on Form 10-
Q for the quarter ended February 27,
1999.
*10.15 Form of Employment Agreement signed by Exhibit 10(e) to the Report on Form 10-
executive officers K for the year ended November 30, 1990.
*10.16 Employment Agreement, dated April 16, Exhibit 10(a) to the Report on Form 10-
1998, between H.B. Fuller Company and Q for the quarter ended May 30, 1998.
Albert Stroucken
*10.17 Restricted Stock Award Agreement, dated Exhibit 10(d) to the Report on Form 10-
April 23, 1998, between H.B. Fuller Q for the quarter ended May 30, 1998.
Company and Lee R. Mitau
*10.18 Managing Director Agreement with Peter Exhibit 10(p) to the Report on Form 10-
Koxholt signed October 15, 1998 K for the year ended November 27, 1999.
*10.19 International Service Agreement with Peter Exhibit 10(a) to the Report on Form 10-
Koxholt dated May 1, 2001 Q for the quarter ended June 2, 2001.
*10.20 Letter to Peter Koxholt dated May 1, 2001 Exhibit 10(b) to the Report on Form 10-
Q for the quarter ended June 2, 2001.
*10.21 Form of Change in Control Agreement dated Exhibit 10(y) to the Report on Form 10-
April 8, 1998 between H.B. Fuller Company K405 for the year ended November 28,
and each of its executive officers, other 1998.
than Peter Koxholt and Albert Stroucken
*10.22 Change in Control Agreement dated October Exhibit 10(q) to the Report on Form 10-
15, 1998 between H.B. Fuller Company and K for the year ended November 27, 1999.
Peter Koxholt
*10.23 Employment Agreement dated May 6, 1999 Exhibit 10(a) to the Report on Form 10-
between H.B. Fuller Company and Raymond A. Q for the quarter ended August 28,
Tucker 1999.
21 List of Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
24 Powers of Attorney
* Asterisked items are management contracts or compensatory plans or
arrangements required to be filed.
(b) Reports on Form 8-K
One report on Form 8-K was filed during the quarter ended December 1, 2001
reporting the Company's financial results for the third quarter of 2001.
(c) See Exhibit Index and Exhibits attached to this Form 10-K.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ Albert P.L. Stroucken
Dated: March 1, 2002 By___________________________________
ALBERT P.L. STROUCKEN Chairman of
the Board, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title
/s/ Albert P.L. Stroucken Chairman of the Board, President and
_____________________________________ Chief Executive Officer and Director
ALBERT P.L. STROUCKEN (Principal Executive Officer)
/s/ Raymond A. Tucker Senior Vice President, and Chief
_____________________________________ Financial Officer (Principal
RAYMOND A. TUCKER Financial Officer)
/s/ James C. McCreary, Jr. Vice President and Controller
_____________________________________ (Principal Accounting Officer)
JAMES C. MCCREARY, JR.
* Edward L. Bronstien, Jr.
* Norbert R. Berg _____________________________________
_____________________________________ EDWARD L. BRONSTIEN JR., Director
NORBERT R. BERG, Director
* Gail D. Fosler
* Freeman A. Ford _____________________________________
_____________________________________ GAIL D. FOSLER, Director
FREEMAN A. FORD, Director
* Knut Kleedehn
* Reatha Clark King _____________________________________
_____________________________________ KNUT KLEEDEHN, Director,
REATHA CLARK KING, Director
* John J. Mauriel, Jr.
* J. Michael Losh _____________________________________
_____________________________________ JOHN J. MAURIEL, JR., Director
J. MICHAEL LOSH, Director
* R. William Van Sant
* Lee R. Mitau _____________________________________
_____________________________________ R. WILLIAM VAN SANT, Director
LEE MITAU, Director
/s/ Richard C. Baker Dated: March 1, 2002
*By__________________________________
RICHARD C. BAKER Attorney in Fact
49
EXHIBIT INDEX
Item Incorporation by Reference
---- --------------------------
3.1 Restated Articles of Incorporation of H.B. Exhibit 3(a) to the Report on Form 10-
Fuller Company, October 30, 1998 K405 for the year ended November 28,
1998.
3.2 Articles of Amendment of Articles of
Incorporation of H.B. Fuller Company,
October 27, 2001
3.3 By-Laws of H.B. Fuller Company as amended Exhibit 3(b) to the Report on Form 10-Q
through July 14, 1999 for the quarter ended August 28, 1999.
4.1 Rights Agreement, dated as of July 18, Exhibit 4 to the Form 8A, dated July
1996, between H.B. Fuller Company and 24, 1996.
Wells Fargo Bank Minnesota, National
Association, as Rights Agent, which
includes as an exhibit the form of Right
Certificate
4.2 Amendment to Rights Agreement, dated as of Exhibit 1 to the Form 8-A / A-1, dated
January 23, 2001, between H.B. Fuller February 2, 2001.
Company and Wells Fargo Bank Minnesota,
National Association, as Rights Agent
4.4 Stock Exchange Agreement, dated July 18, Exhibit 10 to the Form 8-K, dated July
1996, between H.B. Fuller Company and 24, 1996.
Elmer L. Andersen, including Designations
for Series B Preferred Stock
4.5 Agreement dated as of June 2, 1998 between Exhibit 4(a) to the Report on Form 10-Q
H.B. Fuller Company and a group of for the quarter ended August 29, 1998.
investors, primarily insurance companies,
including the form of Notes
4.6 H.B. Fuller Company Executive Stock Exhibit 4.7 to the Registration
Purchase Loan Program Statement on Form S-8 (Commission File
No. 333-44496) filed August 25, 2000
and the Registration Statement on Form
S-8 (Commission File No. 333-48418)
filed October 23, 2000.
*10.1 H.B. Fuller Company 1992 Stock Incentive Exhibit 10(a) to the Report on Form 10-
Plan K for the year ended November 30, 1992.
*10.2 H.B. Fuller Company Restricted Stock Plan Exhibit 10(c) to the Report on Form 10-
K for the year ended November 30, 1993.
*10.3 H.B. Fuller Company Restricted Stock Unit Exhibit 10(d) to the Report on Form 10-
Plan K for the year ended November 30, 1993.
*10.4 H.B. Fuller Company Directors' Deferred
Compensation Plan as Amended December 1,
2001
*10.5 H.B. Fuller Company 2000 Stock Incentive Registration Statement on Form S-8
Plan (Commission File No. 333-48420) filed
August 25, 2000.
*10.6 H.B. Fuller Company 1998 Directors' Stock Exhibit 10(c) to the Report on Form 10-
Incentive Plan Q for the quarter ended May 30, 1998.
*10.7 H.B. Fuller Company Supplemental Executive Exhibit 10(j) to the Report on Form 10-
Retirement Plan--1998 Revision K405 for the year ended November 28,
1998.
Item Incorporation by Reference
---- --------------------------
*10.8 First Amendment to H.B. Fuller Company Exhibit 10(x) to the Report on Form 10-
Supplemental Executive Retirement Plan K405 for the year ended November 28,
dated November 4, 1998 1998.
*10.9 H.B. Fuller Company Executive Benefit Exhibit 10(k) to the Report on Form 10-
Trust dated October 25, 1993 between H.B. K for the year ended November 29, 1997.
Fuller Company and First Trust National
Association, as Trustee, relating to the
H.B. Fuller Company Supplemental Executive
Retirement Plan
*10.10 Amendments to H.B. Fuller Company Exhibit 10(k) to the Report on Form 10-
Executive Benefit Trust, dated October 1, K405 for the year ended November 28,
1997 and March 2, 1998, between H.B. 1998.
Fuller Company and First Trust National
Association, as Trustee, relating to the
H.B. Fuller Company Supplemental Executive
Retirement Plan
*10.11 H.B. Fuller Company Directors Benefit Exhibit 10(w) to the Report on Form 10-
Trust, dated February 10, 1999, between K for the year ended November 27, 1999.
H.B. Fuller Company and U.S. Bank National
Association, as Trustee, relating to the
Retirement Plan for Directors
*10.12 H.B. Fuller Company Key Employee Deferred Exhibit 4.1 to the Registration
Compensation Plan Statement on Form S-8 (Commission File
No. 333-89453) filed October 21, 1999.
*10.13 First Declaration of Amendment to the Exhibit 10(v) to the Report on Form 10-
Retirement Plan for Directors of H.B. K for the year ended November 27, 1999.
Fuller Company dated February 10, 1999
*10.14 Performance Unit Plan Exhibit 10(a) to the Report on Form 10-
Q for the quarter ended February 27,
1999.
*10.15 Form of Employment Agreement signed by Exhibit 10(e) to the Report on Form 10-
executive officers K for the year ended November 30, 1990.
*10.16 Employment Agreement, dated April 16, Exhibit 10(a) to the Report on Form 10-
1998, between H.B. Fuller Company and Q for the quarter ended May 30, 1998.
Albert Stroucken
*10.17 Restricted Stock Award Agreement, dated Exhibit 10(d) to the Report on Form 10-
April 23, 1998, between H.B. Fuller Q for the quarter ended May 30, 1998.
Company and Lee R. Mitau
*10.18 Managing Director Agreement with Peter Exhibit 10(p) to the Report on Form 10-
Koxholt signed October 15, 1998 K for the year ended November 27, 1999.
*10.19 International Service Agreement with Peter Exhibit 10(a) to the Report on Form 10-
Koxholt dated May 1, 2001 Q for the quarter ended June 2, 2001.
*10.20 Letter to Peter Koxholt dated May 1, 2001 Exhibit 10(b) to the Report on Form 10-
Q for the quarter ended June 2, 2001.
*10.21 Form of Change in Control Agreement dated Exhibit 10(y) to the Report on Form 10-
April 8, 1998 between H.B. Fuller Company K405 for the year ended November 28,
and each of its executive officers, other 1998.
than Peter Koxholt and Albert Stroucken
Item Incorporation by Reference
---- --------------------------
*10.22 Change in Control Agreement dated October Exhibit 10(q) to the Report on Form 10-
15, 1998 between H.B. Fuller Company and K for the year ended November 27, 1999.
Peter Koxholt
*10.23 Employment Agreement dated May 6, 1999 Exhibit 10(a) to the Report on Form 10-
between H.B. Fuller Company and Raymond A. Q for the quarter ended August 28,
Tucker 1999.
21 List of Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
24 Powers of Attorney
* Asterisked items are management contracts or compensatory plans or
arrangements required to be filed.