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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K405
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________ to ____________
Commission File No. 001-09225
H.B. FULLER COMPANY
(Exact name of registrant as specified in its charter)
Minnesota 41-0268370
(State or other
jurisdiction of
incorporation or (I.R.S. Employer
organization) Identification No.)
1200 Willow Lake
Boulevard, St. Paul,
Minnesota 55110-5101
(Address of principal
executive offices) (Zip Code)
(Registrant's telephone number, including area code)
(651) 236-5900
Securities registered pursuant to Section 12(b) of
the Act:
(Name of each exchange on
(Title of each class) which registered)
--------------------- -----------------
Common Stock, par
value $1.00 per share New York Stock Exchange
Common Stock
Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
- --------------------------------------------------------------------------------
(Title of class)
- --------------------------------------------------------------------------------
(Title of class)
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-K405 or any amendment to
this Form 10-K405. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [X]
The aggregate market value of the Common Stock, par value $1.00 per share, held
by non-affiliates of the registrant as of June 1, 2002 was approximately
$797,137,000 (based on the closing price of such stock as quoted on the NASDAQ
National Market ($28.85) on such date).
The number of shares outstanding of the registrant's Common Stock, par value
$1.00 per share, was 28,379,333 as of January 31, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Part II and Part III incorporates information by reference to portions of the
registrant's Proxy Statement for its Annual Meeting of Shareholders to be held
on April 17, 2003.
H.B. FULLER COMPANY
2002 Annual Report on Form 10-K405
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................................... 6
Executive Officers of the Registrant.................................................. 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 8
Item 6. Selected Financial Data............................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 9
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................ 21
Item 8. Financial Statements and Supplementary Data........................................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 48
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 49
Item 11. Executive Compensation................................................................ 49
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters............................................................................. 49
Item 13. Certain Relationships and Related Transactions........................................ 49
Item 14. Controls and Procedures............................................................... 49
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 50
Signatures............................................................................ 54
Certifications........................................................................ 55
2
PART I
Item 1. Business
H.B. Fuller Company (the "Company") is a worldwide manufacturer and marketer of
adhesives and specialty chemical products having sales operations in 36
countries in North America, Europe, Latin America and the Asia/Pacific region.
The largest business segment is comprised of industrial and performance
adhesives products for applications in various markets, including assembly
(woodworking, appliances, etc.), packaging, converting (corrugated, tape and
label, tissue and towel, etc.), nonwoven (disposable diapers, feminine care and
adult incontinence products), automotive, graphic arts (books, magazines, etc.)
and footwear. Adhesives represent nearly 70 percent of global net revenue and
are manufactured and distributed globally. This business is managed on a
worldwide basis and is reported as the Global Adhesives operating segment.
The Company is also a producer and supplier of specialty chemical products for
a variety of applications such as ceramic tile application, HVAC insulation,
powder coatings applied to metal surfaces for office furniture, appliances and
lawn and garden equipment, specialty hot melt products for packaging
applications, consumer products and windows market applications, as well as
liquid paint sold through retail outlets in Central America. These specialty
chemical products represent approximately 30 percent of global net revenue and
are reported as the Full-Valu/Specialty operating segment.
Segment Information. In fiscal 2002 and in connection with the current year
restructuring initiatives (See Note 3 to the Consolidated Financial Statements,
"Restructuring and Other Related Costs"), the management structure and
philosophy fundamentally changed how the global adhesives operations were
managed. The Company's perspective changed from autonomous geographic regions
to combined global operations, focused on managing adhesive products and
markets on a worldwide basis. Prior years' results were restated to reflect the
realigned organization. The primary markets include adhesives for packaging,
assembly, converting, nonwoven, automotive, graphic arts and footwear. In
addition, the management structure was reorganized to manage these adhesives
markets on a global basis. In this regard, the General Manager--Global
Adhesives is responsible for manufacturing, sales and product line management.
Management reporting has also been modified to report and measure results, as
well as reward performance of the adhesives operations on a global basis.
The specialty chemical product lines continue to be reported as a separate
segment named Full-Valu/Specialty. Certain product lines previously included in
the adhesives geographic business have been repositioned and are now included
in the Full-Valu/Specialty operating segment.
Management evaluates the performance of its operating segments based on
operating income which is defined as gross profit minus selling, administrative
and other 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 business practices of the
country. Operations overseas face varying degrees of economic and political
risk. At the end of 2002, there were manufacturing plants in 16 countries
outside the United States and satellite sales offices in another 19 countries.
Competition. The Company sells a wide variety of products in numerous markets,
each of which is highly competitive. Many of the Company's competitors are part
of large multi-national companies and may have more resources than the Company.
Any increase in competition may result in lost market share or reduced prices,
which could result in reduced gross profit. This may impair the Company's
ability to grow or even to maintain current levels of revenues and earnings.
3
The principal competitive factors in the sale of adhesives and other specialty
chemicals are product performance, customer service, technical service, quality
and price.
Customers. Of the $1,256.2 million net revenue to unaffiliated customers in
2002, $747.8 million was sold through 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, no significant backlog of unfilled orders existed at November 30,
2002, December 1, 2001, or December 2, 2000.
Raw Materials. The principal raw materials used to manufacture products
include resins, polymers, vinyl acetate monomer, starch, dextrines and natural
latex. The Company generally avoids sole source supplier arrangements for raw
materials. While alternate supplies of most key raw materials are available, if
worldwide supplies were disrupted due to unforeseen events, shortages of some
materials could occur.
Additionally for certain products produced, the substitution of key raw
materials may require the Company to reformulate, retest or seek re-approval
from customers using those products.
Many of the Company's raw materials are petroleum-based derivatives. Under
normal conditions, all of these raw materials are generally available on the
open market, although prices and availability are subject to fluctuation. In
general, higher oil and gas costs result in higher prices for the Company's raw
materials.
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 and other specialty chemicals is in the public domain. For technology
not in the public domain, the Company relies on trade secrets and patents when
appropriate to protect its know-how. The Company also licenses some patented
technology from other sources. Management does not believe its business is
materially dependent upon licenses or similar rights or on any single patent or
group of related patents.
There are agreements with many employees to protect rights to technology and
intellectual property. Confidentiality commitments also are routinely obtained
from customers, suppliers and others to safeguard proprietary information.
Trademarks, such as Advantra, Sesame and Plasticola, are important in marketing
products.
Research and Development. The Company continues to offer new and improved
products. The primary emphasis has been on developing adhesives with
applications across numerous markets. Research and development expenses were
$17.9 million, $19.0 million and $18.4 million in 2002, 2001 and 2000,
respectively. These costs are included in selling, administrative and other
expenses. While the Company makes efforts to improve its technology, unexpected
technological advances by new or existing competitors could materially affect
its business in one or more markets.
Environmental, Health and Safety. The Company undertakes to comply with
applicable regulations relating to protection of the environment and workers'
safety. Management regularly reviews and upgrades its environmental policies,
practices and procedures and seeks improved production methods that reduce
waste coming out of its facilities, particularly toxic waste, based on evolving
societal standards and increased environmental understanding.
Environmental expenditures, reasonably known to management, to comply with
environmental regulations over the next two years are estimated to be
approximately $11.0 million, including approximately $2.2 million of capital
expenditures.
- --See additional disclosure under Item 3, Legal Proceedings.
4
Employees. Approximately 4,600 individuals were employed on November 30, 2002,
of which approximately 1,900 individuals were employed in the United States.
Unions represent a small number of these employees.
Available Information. For more information about the Company, visit our
website at: http://www.hbfuller.com.
The Company files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission (SEC) via EDGAR.
The Company's SEC filings are available to the public at our website as soon as
reasonably practicable after they have been filed with the SEC. You may also
request a copy of these filings (other than an exhibit to a filing unless that
exhibit is specifically incorporated by reference into that filing) at no cost,
by writing to or telephoning the Company at the following address:
Office of the Corporate Secretary
H.B. Fuller Company
1200 Willow Lake Boulevard
P.O. Box 64683
St. Paul, Minnesota 55164-0683
(651) 236-5825
Item 2. Properties
The Company's principal executive offices and central research facilities are
located in the St. Paul, Minnesota area. Manufacturing operations are carried
out at 19 plants located throughout the United States and at 20 manufacturing
plants (two leased) located in 16 other countries. In addition, numerous sales
and service offices are located throughout the world. Management believes that
the properties owned or leased are suitable and adequate for its business.
Operating capacity varies by product, but additional production capacity is
available for most product lines by increasing the number of shifts worked.
The Global Adhesives and Full-Valu/Specialty segments operate 12 and 7 plants,
respectively in the United States and 14 and 6 plants, respectively outside the
United States.
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
13 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, management believes that any
liabilities allocated to it in these administrative proceedings or lawsuits,
individually or in the aggregate, will not have a material adverse effect on
the consolidated financial position, results of operations or cash flows of the
Company.
Requests for information have been received from federal, state or local
government entities regarding six other contaminated sites. The Company has not
been named as a party to any administrative proceedings or lawsuits relating to
the clean-up of these sites, therefore has no liability recorded for such items.
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 $0.1 million or
more (exclusive of interest and litigation 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 consolidated financial
position, results of operations or cash flows.
5
Other Legal Proceedings. The Company and certain of its subsidiaries are named
as defendants in a number of actions and claims, including product liability
claims involving products now or formerly manufactured and sold by the Company
or certain of its subsidiaries. In some actions, the claimants seek damages as
well as other relief, which, if granted, would require substantial
expenditures. Some of these matters raise difficult and complex factual and
legal issues, and are subject to many uncertainties, including, but not limited
to, the facts and circumstances of each particular action, the jurisdiction and
forum in which each action is proceeding and differences in applicable law.
Based on currently available information, management does not believe that an
adverse outcome in any pending legal proceedings individually or in aggregate
would have a material adverse effect on the Company's 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. Amounts recorded for other
legal proceedings are not significant at November 30, 2002.
A subsidiary of the Company is a defendant or co-defendant in a number of
exterior insulated finish systems ("EIFS") related lawsuits. The EIFS product
was used primarily in the residential construction market in the southeastern
United States. Claims and lawsuits related to this product seek monetary relief
for water intrusion related property damages. The Company has accrued $4.1
million for the probable liabilities and $2.3 million for insurance recoveries
in connection with all such claims. The Company continually reevaluates these
amounts. Management does not believe that the ultimate outcome of any pending
legal proceedings and claims related to this product line, individually or in
aggregate, will have a material adverse effect on its consolidated financial
position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
None in the quarter ended November 30, 2002.
Executive Officers of the Registrant
The following table shows the name, age and business experience of the
executive officers as of January 31, 2003 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 55 Chairman of the Board October 1999-Present
President and Chief Executive Officer April 1998-Present
General Manager, Inorganics Division, Bayer AG 1997-1998
Raymond A. Tucker 57 Senior Vice President October 1999-Present
Chief Financial Officer July 1999-Present
Treasurer July-October, 1999
Senior Vice President, Inorganic Products, 1997-1999
Industrial Chemicals Division, Bayer Corporation
James R. Conaty 55 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 63 Group President, H.B. Fuller Latin America December 2000-Present
Group Vice President, Division Manager October-December 2000
Consumer Products Division 1996-October 2000
Group Vice President, Division Manager
Paints Division
William L. Gacki 54 Vice President and Treasurer October 1999-Present
Director, Treasury 1995-October 1999
6
Name Age Positions Period Served
- ---- --- --------- -------------
Patricia L. Jones 40 Senior Vice President, Chief Administrative Officer, August 2002-Present
General Counsel and Corporate Secretary December 2000-December 2001
Senior Vice President, Administration, Star Tribune April 2000-December 2000
Company, a subsidiary of McClatchy Company 1999-April 2000
Vice President HR, Operations, Northwest Airlines 1996-1999
Acting Vice President HR, Northwest Airlines
Managing Director HR and Employment Counsel,
Northwest Airlines
Peter M. Koxholt 58 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 45 Vice President and Chief Process Improvement Officer December 2002-Present
Vice President, Operations/Supply Chain May 2001-December 2002
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 56 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
James C. McCreary, Jr. 46 Vice President, Corporate Controller November 2000-Present
Vice President, Administration and Controlling, 1997-November 2000
Industrial Chemicals Division, Bayer Corporation
William McNellis 60 Group President, General Manager Asia/Pacific April 2001-Present
General Manager, Global Coatings Division 1996-April 2001
Walter Nussbaumer 45 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
Linda J. Welty 47 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, Global 1997-1998
Superabsorbent Materials, Clariant International
The Board of Directors elect the executive officers annually.
7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock was traded on the NASDAQ exchange under the symbol
"FULL" until December 1, 2002 when trading of the Company's common stock moved
to the New York Stock Exchange under the symbol "FUL." As of November 30, 2002,
there were 3,420 common shareholders of record.
This table shows the high and low sales price per share of the common stock and
the dividends declared for the fiscal quarters indicated:
High and Low Sales Price
--------------------------- Dividends
2002 2001 (Per Share)
------------- ------------- -------------
High Low High Low 2002 2001
------ ------ ------ ------ ------ ------
First quarter. $30.91 $24.60 $22.00 $16.32 $0.108 $0.104
Second quarter 33.20 27.12 24.63 18.68 0.110 0.108
Third quarter. 31.00 24.15 27.34 23.19 0.110 0.108
Fourth quarter 30.50 25.01 31.18 17.18 0.110 0.108
Year.......... 33.20 24.15 31.18 16.32 0.438 0.428
On November 15, 2001, a 2-for-1 common stock split was issued 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.
The annual meeting of shareholders will be held on Thursday, April 17, 2003, at
2 p.m., central time, at the Science Museum of Minnesota, 120 West Kellogg
Boulevard, St. Paul, MN. All shareholders are cordially invited to attend.
The information on equity compensation plans under the heading "Proposal 3"
contained in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 17, 2003 is incorporated herein by reference.
Item 6. Selected Financial Data
(Dollars in thousands, except per share amounts) 2002 2001 2000* 1999 1998
- ------------------------------------------------ ---------- ---------- ---------- ---------- ----------
Net revenue.............................. $1,256,210 $1,274,059 $1,363,961 $1,375,855 $1,357,675
Income before cumulative effect of
accounting change...................... $ 28,176 $ 44,940 $ 49,163 $ 44,111 $ 15,990
Percent of net revenue................... 2.2 3.5 3.6 3.2 1.2
Total assets............................. $ 961,439 $ 966,173 $1,010,361 $1,025,615 $1,046,169
Long-term debt, excluding current
installments........................... $ 161,763 $ 203,001 $ 250,464 $ 263,714 $ 300,074
Stockholders' equity..................... $ 448,330 $ 434,026 $ 404,710 $ 376,380 $ 341,404
Per Common Share:
Income before cumulative effect of
accounting change:
Basic................................. $ 1.00 $ 1.61 $ 1.77 $ 1.60 $ 0.58
Diluted............................... $ 0.98 $ 1.59 $ 1.74 $ 1.58 $ 0.58
Dividends declared and paid.............. $ 0.438 $ 0.428 $ 0.418 $ 0.408 $ 0.393
Book value............................... $ 15.81 $ 15.34 $ 14.32 $ 13.39 $ 12.20
Number of employees...................... 4,611 4,891 5,182 5,407 5,953
- --------
* 53-week fiscal year.
8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Critical Accounting Policies and Estimates
Management's discussion and analysis of its results of operations and financial
condition are based upon 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 pension and
other postretirement plan assumptions, goodwill, product, environmental and
other litigation liabilities, management incentive compensation plans and
income tax accounting.
Pension and Other Postretirement Plan Assumptions: The Company sponsors
defined-benefit pension plans in both U.S. and foreign entities. Also in the
U.S. the Company sponsors other postretirement plans for health care and life
insurance costs. Expenses and liabilities for the pension plans and other
postretirement plans are actuarially calculated. These calculations are based
on management's assumptions related to the discount rate, expected return on
assets and projected salary increases. The annual measurement date for these
assumptions is August 31. Note 10 to the Consolidated Financial Statements
includes disclosure of these rates for both the foreign and domestic plans.
The discount rate assumption is tied to a long-term high quality bond index and
is therefore subject to annual fluctuations. A lower discount rate increases
the present value of the pension obligations, which results in higher pension
expense. The discount rate in the U.S. was 6.50 percent at August 31, 2002 as
compared to 7.00 percent at August 31, 2001 and 7.75 percent at August 31,
2000. The 7.0 percent at August 31, 2001 was used to calculate the 2002 pension
and other postretirement plans expense. A discount rate reduction of 0.5
percentage points increases pension and other postretirement plan expense by
approximately $0.8 million. Discount rates for the Company's Non-U.S. plans are
determined in a manner consistent with the U.S. plan.
The expected return on assets assumptions on the U.S. 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 portfolios.
Because the rate of return is a long-term assumption, it generally does not
change annually. Management uses historic return trends of the asset portfolio
combined with recent market conditions to estimate the rate of return. The
current investment mix in the portfolios is nearly 100 percent in U.S.
equities. Since 1999, the Company has been using an expected return on asset
assumption for the portfolio of 10.5 percent. This was consistent with the
long-term asset returns of the portfolio. At August 31, 2002, given the recent
poor performance of the U.S. equity markets, management lowered the expected
rate of return assumption to 9.75 percent on the U.S. pension plans and 8.75
percent on the postretirement plans. These rates will be used in calculating
the expenses for 2003. A change of 0.25 percentage points for the expected
return assumptions will impact net benefit plans expense by approximately $0.6
million.
The projected salary increase assumption is based on historic trends and
comparisons to the external market. Higher rates of increase result in higher
pension expenses. As this rate is also a long-term expected rate it is less
likely to change on an annual basis. In the U.S., management has used the rate
of 4.02 percent for the past three years.
Goodwill: Goodwill is the excess of cost of an acquired entity over the
amounts assigned to assets acquired and liabilities assumed in a purchase
business combination. As of November 30, 2002 the Company's balance sheet
included approximately $71 million of goodwill. The goodwill is primarily
included in the global adhesives operating segment.
On December 2, 2001 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, the new accounting standard for goodwill. This
standard requires that goodwill no longer is amortized on a recurring basis.
Instead, the goodwill is subject to annual impairment testing. SFAS No. 142
requires that the
9
Company, on an annual basis, calculate the fair value of the reporting units
that contain the goodwill and compare that to the carrying value of the
reporting unit to determine if impairment exists. Impairment testing must take
place more often if circumstances or events indicate a change in the impairment
status. The standard also required that, upon adoption, the Company make an
initial impairment calculation. Both the initial calculation and the subsequent
annual calculation confirmed that the fair value of the reporting units
exceeded the carrying values.
Management judgment is required in calculating the fair value of the reporting
units. The calculation uses a discounted cash flow analysis that requires
management to project financial performance. The projections are based on
management's best estimate given recent financial performance, market trends,
strategic plans and other available information. Future results will most
likely differ from the projected results. However, based on the margin that
fair value exceeded carrying value of the various reporting units, management
does not anticipate a material impact on the Company's financial results from
differences in these assumptions.
Product, Environmental and Other Litigation Liabilities: As stated in Item 3
of this Annual Report and in Note 1 and Note 12 to the Consolidated Financial
Statements, the Company is subject to various lawsuits and other legal
proceedings. Accruals for loss contingencies associated with these lawsuits and
other proceedings are made when it is determined that a liability has been
incurred and the amount can be reasonably estimated. The assessment of the
probable liabilities is based on the facts and circumstances known at the time
that the financial statements are being prepared. For cases in which it is
determined that a liability has been incurred but only a range for the
potential amount exists, the minimum amount of the range is recorded and
subsequently adjusted, as better information becomes available.
For cases in which insurance coverage is available, the Company accrues the
gross amount of the estimated liabilities, including legal costs and also
records a receivable for any probable estimated insurance recoveries. In the
EIFS litigation referred to in Note 12, the Company has accrued $4.1 million
for the potential liabilities and $2.3 million for potential insurance
recoveries.
Management does not believe that the ultimate outcome of any pending legal
proceedings, individually or in aggregate, will have a material adverse effect
on the Company's consolidated financial position, results of operations or cash
flows.
Management Incentive Compensation Plans: Management incentive plans are
subject to various financial performance metrics. These metrics relate to the
consolidated financial results of the Company as well as the performance of
individual operating units within the Company for which a particular manager
has responsibility. Accruals made throughout the year related to the various
incentive plans are based on management's best estimate of the achievement of
the specific annual financial metrics. Adjustments are made to the accruals on
a quarterly basis as forecasts of financial performance are updated. The
quarterly accruals are based on the percentage of the annual metric achieved in
that particular quarter. At year-end, the accruals are adjusted to reflect the
actual results achieved.
Income Tax Accounting: As part of the process of preparing the 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 temporary
differences result in deferred tax assets and liabilities, which are included
in the 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. At
November 30, 2002, the valuation allowance to reduce deferred tax assets
totaled $7.9 million.
10
Results of Operations: 2002 Compared to 2001 and 2000
(Note: Fiscal years 2002 and 2001 were 52-week years and fiscal year 2000 was a
53-week year.)
Net Revenue: Net revenue in 2002 of $1,256.2 million was $17.8 million or 1.4
percent less than the net revenue recorded in 2001. The net revenue in 2001 of
$1,274.1 million was 6.6 percent less than the $1,364.0 million recorded in
2000. In 2002, the 1.4 percent decrease in net revenue consisted of a decrease
in volume of 0.8 percent, a decrease in selling prices of 1.1 percent and an
increase due to the currency effects from a weaker U.S. dollar of 0.5 percent.
The 2002 decrease as compared to 2001 was consistent across the Company's
operating segments as both the Global Adhesives segment and the
Full-Valu/Specialty segment reported net revenue decreases of 1.4 percent. The
net revenue decrease of 6.6 percent in 2001 as compared to 2000 resulted from a
decrease in volume of 6.9 percent, an increase in selling prices of 1.9 percent
and a decrease due to the currency effects from a stronger U.S. dollar of 1.6
percent. Approximately 1.9 percentage points of the 6.9 percent volume decrease
in 2001 was attributed to having one less week in 2001 as compared to 2000. Net
revenue in the Global Adhesives segment decreased 7.3 percent in 2001 as
compared to 2000 and the 2001 net revenue in the Full-Valu/Specialty segment
decreased 4.9 percent as compared to 2000. There were no significant net
revenue increases or decreases attributed to acquisitions or divestitures in
2002 as compared to 2001, or in 2001 as compared to 2000.
Gross Profit Margin: The consolidated gross profit margin of 26.9 percent in
2002 was 0.2 percentage points less than the 27.1 percent recorded in 2001. The
consolidated gross profit margin in 2000 was 27.8 percent. The 2002 cost of
sales included $18.1 million of charges related to the Company's restructuring
plan which reduced the 2002 gross profit margin by 1.4 percentage points.
Nearly offsetting the cost increase due to restructuring were lower raw
material costs as a percentage of net revenue. The raw material cost decrease
in 2002 as compared to 2001 was not only due to lower prices paid for raw
materials, but also to product reformulations, product line consolidation and
other manufacturing process initiatives that improved our overall usage of raw
materials. The 2001 cost of sales included $1.6 million of asset impairment
charges related to the restructuring plan, which reduced the 2001 gross profit
margin by 0.1 percentage points. The 2001 gross margin was lower than the gross
margin recorded in 2000 mainly due to increases in raw material prices in 2001
as compared to 2000. Lower unit volume in 2001 as compared to 2000 also
contributed to the reduced gross profit margin in 2001, as the fixed component
of manufacturing costs became a higher percentage of net revenue.
Selling, Administrative and Other (SG&A) Expenses: SG&A expenses were $281.6
million in 2002, $257.4 million in 2001 and $276.9 million in 2000. Included in
the 2002 SG&A expenses were $13.7 million of one-time charges related to the
Company's restructuring plan. Also contributing to the increase in SG&A
expenses in 2002 as compared to 2001 was the effect of the Company's pension
and other postretirement benefit plans. In 2002, the Company recognized expense
of $0.8 million from the pension and other postretirement plans as compared to
income of $13.8 million in 2001. Of this $14.6 million adverse effect from the
benefit plans, over $12 million resulted from changes in the U.S. benefit
plans. These increases were due primarily to the poor performance of the
benefit plan asset portfolios in 2000 and 2001. Lower interest rates also
contributed to the higher expenses from the benefit plans because the benefit
obligation increases when there is a decrease in the interest rate used to
discount the liability. Another increase in SG&A expenses in 2002 as compared
to 2001 resulted from an increase in management incentive compensation expense
of approximately $5.0 million. Management incentives depend substantially upon
the Company's financial performance compared to targets set at the beginning of
the year. In 2002, financial results achieved as compared to targets were
significantly better than the comparable financial performance in 2001.
Mitigating the negative effects on SG&A expenses in 2002 from the restructuring
plan, benefit plans and management incentives were expense reductions resulting
from spending controls and reduced employee census. Total number of employees
was 4,611 at November 30, 2002 as compared to 4,891 at December 1, 2001. The
net decrease of 280 employees in 2002 as compared to 2001 consisted of 103
employees included in SG&A and 177 included in cost of sales.
The decrease of $19.4 million in SG&A expenses in 2001 as compared to 2000
resulted primarily from two items. One was an increase of $7.2 million in
income from the Company's pension and other postretirement
11
benefit plans. 2001 was the last year that the Company realized the benefits in
the pension and other postretirement benefit plans of the strong asset
portfolio performance of the late 1990's. The second key reason for reduced
SG&A expenses in 2001 as compared to 2000 was the fact that fiscal year 2000
was a 53-week year as compared to 52 weeks in 2001. The extra week resulted in
an approximate increase in 2000 SG&A expenses of $5 million. Other contributing
factors to the expense decrease in 2001 as compared to 2000 were the currency
effects from a stronger U.S. dollar and reduced payroll costs due to lower
employee census. The total number of employees at December 1, 2001 of 4,891 was
291 less than the 5,182 employees at December 2, 2000. Of the total decrease of
291 employees, 182 were included in SG&A expenses and 109 were included in cost
of sales.
Interest Expense: Interest expense was $17.3 million in 2002, $21.2 million in
2001 and $23.8 million in 2000. Lower average debt levels were the primary
reason for the reduced interest expense in 2002 as compared to both 2001 and
2000. Strong operating cash flow allowed the Company to reduce average debt
levels.
Gains from Sales of Assets: The Company recorded gains from sales of assets of
$4.2 million in 2002 as compared to $0.8 million in 2001 and $4.1 million in
2000. The 2002 results included gains of $2.0 million from sales of assets that
were included in the Company's restructuring initiative. Of the remaining 2002
gains of $2.2 million, the most significant was the sale of an office building
in Latin America that resulted in a gain of $1.4 million. The most significant
transaction in 2001 was the sale of a cost-basis equity investment in a
Japanese company, which resulted in a gain of $1.6 million, offset by losses
from disposals or sales of other non-productive assets. 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 expense of $3.0
million in 2002, $6.3 million in 2001 and $8.0 million in 2000. The adoption of
SFAS 142 in 2002, which resulted in the cessation of goodwill amortization
expense was the primary reason for the lower expense in 2002 as compared to
2001 and 2000. The other expense in both 2001 and 2000 included $4.1 million of
goodwill amortization expense. In 2002, $2.4 million of amortization expense
associated with investment properties specifically held to generate income tax
credits was reclassified to other expense from income tax expense.
Corresponding reclassifications were also made for 2001 and 2000 of $2.2
million and $2.1 million, respectively. Foreign currency transaction losses
were $1.0 million in 2002, $1.0 million in 2001 and $2.5 million in 2000. The
losses in each year were primarily the result of currency devaluations in Latin
American countries, which operate on a U.S. dollar functional currency. The
significant components of other income (expense), net are summarized in Note 4
to the Consolidated Financial Statements.
Income Taxes: The effective income tax rate was 32.2 percent in 2002, 28.8
percent in 2001 and 35.2 percent in 2000. In the fourth quarter of 2002 the
effective tax rate, excluding the effects of the restructuring initiative, was
reduced from 35.0 percent to 33.0 percent due solely to the reclassification of
amortization expense associated with investment properties specifically held to
generate income tax credits. The more appropriate presentation of this
amortization expense is to treat such amounts as other expense rather than as
an offset to the related income tax credits. Therefore, $2.4 million of
amortization expense in 2002 was reclassified from income tax expense to other
expense while corresponding adjustments were made to years 2001 and 2000 for
$2.2 million and $2.1 million, respectively. These reclassifications had no
effect on net income or earnings per share. In 2002, the impact of the
restructuring initiative lowered the effective rate by 0.8 percentage points
due to the tax deductibility of the restructuring expenses in countries with
tax rates higher than the overall Company average.
The 2001 income tax expense included a one-time tax benefit of $2.6 million
($.09 per diluted share) resulting from changes in the Company's business
structure in Europe. The changes in business structure allowed the Company to
take advantage of tax losses that were not previously recognizable under
accounting principles generally accepted in the United States. Excluding the
one-time tax benefit, the effective income tax rate in 2001 was 33.1 percent.
Net Income: Net income in 2002 was $28.2 million as compared to $44.4 million
in 2001 and $49.2 million in 2000. Charges related to the restructuring plan in
2002 reduced net income by $19.1 million. The 2001 net income included an
after-tax charge of $0.5 million ($.02 per diluted share) related to the
Company's adoption of
12
the SEC's Staff Accounting Bulletin (SAB) 101 "Revenue Recognition". The charge
was recorded as a cumulative effect of a change in accounting principle. Also
included in the 2001 net income were $1.6 million ($1.5 million after-tax) of
asset impairment charges as discussed previously under "Gross Profit Margin"
and the $2.6 million ($.09 per diluted share)` one-time tax benefit discussed
under "Income Taxes". There were no significant one-time charges or credits
that affected the 2000 net income.
The income per diluted share as reported was $0.98 in 2002, $1.57 in 2001 and
$1.74 in 2000.
Operating Segment Results (2002 Compared to 2001 and 2000)
Note: Management evaluates the performance of its operating segments based on
operating income which is defined as gross profit less SG&A expenses and
excluding the amortization of goodwill and gains on the sales of assets.
Charges, net of gains on the sales of assets in connection with the Company's
restructuring initiatives are excluded from its operating segment results,
consistent with internal management reporting. Corporate expenses are fully
allocated to the operating segments. (See further discussion in Note 13 to the
Consolidated Financial Statements.)
Global Adhesives: Net revenue of $865.8 million in 2002 was 1.4 percent less
than net revenue of $878.0 million in 2001. Sales volume decreased 0.8 percent
primarily due to the slower global economies in 2002 as compared to 2001.
Currency effects were positive 0.8 percent as a result of the weakening of the
U.S. dollar in the second half of 2002, especially as compared to the euro. The
year-over-year comparisons in the third and fourth quarters of 2002 as compared
to the same periods in 2001 reflected positive currency variances from Europe
of 11.9 percent and 8.7 percent, respectively. Selling prices decreased 1.4
percent in 2002 as compared to 2001 as reduced industry demand resulted in
significant pricing pressure in the competition for market share. The nonwoven
market reported sales in 2002 that were well ahead of 2001. Strong volume
growth in Europe was a key to the sales growth in nonwoven. The automotive
market also had strong growth in 2002 as compared to 2001 as dealer incentive
programs and low interest rates increased vehicle production in the U.S. The
graphic arts, converting and assembly markets recorded sales decreases in 2002
as compared to 2001. Each of these markets was impacted by the slow global
economies.
The net revenue in 2001 of $878.0 million was 7.3 percent less than the net
revenue of $947.6 million in 2000. The main reason for the decline in net
revenue in 2001 as compared to 2000 was reduced volume of approximately 7.6
percent. About 2 percent of the reduced volume can be attributed to 2001 having
one less week than 2000, however the primary reason was the slowdown in
economic activity in 2001 as compared to 2000. Currency effects negatively
impacted net revenue 2.0 percent in 2001 as compared to 2000 primarily due to
the relative strength of the U.S. dollar against major foreign currencies such
as the euro, British pound sterling, Japanese yen and Australian dollar.
Offsetting these declines were selling prices, which increased 2.3 percent in
2001 as compared to 2000.
Operating income in the Global Adhesives segment was $58.4 million in 2002 as
compared to $55.5 million in 2001 and $57.0 million in 2000. As a percentage of
net revenue the operating income was 6.8 percent in 2002 as compared to 6.3
percent in 2001 and 6.0 percent in 2000. The gross profit margin increased 1.5
percentage points in 2002 as compared to 2001 primarily due to lower raw
material costs as a percentage of net revenue. Manufacturing efficiencies
resulting from capacity reductions and product line consolidation also
contributed to the improved margin. SG&A expenses increased approximately $7.0
million or 4.5 percent in 2002 as compared to 2001. The reduced pension and
other postretirement benefit income of $9.8 million and the increase in
management incentive compensation expenses of $3.3 million drove the increase
in SG&A expenses. These increases in SG&A expenses were partially offset by
expense reductions due to reduced employee census and tight controls on
discretionary spending. In 2001, operating income was less than 2000 largely
due to lower net revenue in 2001 as compared to 2000. The lower net revenue in
2001 of $69.6 million resulted in an operating income decrease of only $1.5
million because of lower SG&A expenses. Expenses decreased in 2001 as compared
to 2000 primarily in the North American region of global adhesives because of
increased U.S. pension
13
and other postretirement benefit income of approximately $4.0 million and
reduced bad debt expenses of nearly $3.0 million. Offsetting these expense
reductions in 2001 as compared to 2000 was increased expenses of approximately
$4.0 million in Europe in connection with implementing a new business structure
for the region.
Full-Valu/Specialty: Net revenue of $390.4 million in 2002 was 1.4 percent
less than the $396.0 million of net revenue in 2001. Sales volume decreased 0.7
percent, selling prices decreased 0.6 percent and currency effects negatively
impacted net revenue by 0.1 percent. The powder coatings market, which is
primarily in North America, had the most significant sales decrease in 2002 as
compared to 2001. The powder coatings market was negatively impacted by the
overall slowdown in the U.S. economy and increased competition from larger
manufacturers in 2002 as compared to 2001. Partially offsetting the reduced
revenue from the powder coatings market were strong revenue growth in the
ceramic tile setting materials market and in the window market. These markets
were both impacted favorably by the strength of the U.S. housing market.
The net revenue in 2001 of $396.0 million was 4.9 percent below the net revenue
in 2000 of $416.4 million. The revenue decrease was driven by lower sales
volume, primarily in the powder coatings market, liquid paint market in Central
America and the ceramic tile setting materials market. The window and HVAC
markets reflected increases in net revenue in 2001 as compared to 2000.
Operating income in the Full-Valu/Specialty segment was $29.8 million in 2002
as compared to $34.2 million in 2001 and $45.2 million in 2000. The gross
profit margin in 2002 increased by 0.2 percentage points as compared to 2001.
The reduction in operating income in 2002 was driven by increases in SG&A
expenses. Similar to the Global Adhesives segment, SG&A expenses increased $4.7
million because of the reduced income attributed to the pension and other
postretirement benefit plans and $1.8 million due to the increased management
incentive compensation. Additional product liability costs of approximately
$1.4 million also contributed to the higher SG&A expenses in 2002 as compared
to 2001. Headcount reductions and discretionary spending controls partially
offset these expense increases. The 2001 decrease in operating income of $11.0
million as compared to 2000 was caused mainly by the $20.3 million reduction in
revenue.
Restructuring and Other Related Costs:
During 2002, net pretax charges of $29.7 million ($19.1 million after tax and
minority interests) were recorded in connection with the Company's
restructuring plan that was announced on January 15, 2002. The plan, which was
contemplated in 2001, but approved and implemented throughout 2002, will be
completed in the first half of 2003. Completion of the plan will result in the
elimination of approximately 20 percent of the Company's 2001 global
manufacturing capacity. Throughout 2002, the Company closed twelve
manufacturing facilities in the Global Adhesives operating segment - eight in
North America, three in Latin America and one in Europe. In the
Full-Valu/Specialty operating segment, one manufacturing facility was closed
and one production line was shut down in another facility, both in the United
States. In connection with the restructuring plan, the Company upgraded and
realigned its sales force in the Global Adhesives operating segment. By
reducing capacity and eliminating other cost structures management currently
estimates that upon completion of all restructuring related activities,
operating costs will be reduced approximately $10 to $12 million annually.
These savings, consisting primarily of reduced employee-related costs and
reduced depreciation expenses, were approximately $4.1 million in 2002. The
plan will result in the elimination of approximately 565 positions, of which
approximately 375 occurred in 2002. The principal employee group affected by
the restructuring plan was manufacturing employees. However, other employee
groups affected include certain corporate administrative positions and certain
sales positions in the Global Adhesives segment. Offsetting the reduction of
565 positions, will be approximately 115 newly hired employees (of which 80
were hired as of November 30, 2002), primarily in manufacturing facilities that
assumed additional volume which transferred from facilities that were closed as
part of the restructuring plan, and sales-related positions as part of the
upgrading and realignment of the sales force.
Upon completion of the 2002 restructuring plan (in the first half of 2003), the
Company expects to have recorded total cumulative net pretax charges in the
range of $30 to $35 million, inclusive of the $1.6 million of accelerated
14
depreciation charges recorded in the fourth quarter of 2001, and net of gains
associated with asset sales subject to the restructuring plan. These charges
include employee separation costs, accelerated depreciation on assets held and
used until disposal, lease/contract termination costs and other costs directly
related to the restructuring plan. The remaining net charges of approximately
$1.0 million to $4.0 million will be incurred in the first half of 2003. The
most significant of these remaining charges are expected to be employee
separation costs in the European adhesives operations. Cash costs of the plan
are expected to be $20 to $25 million, of which $12.6 million have been paid as
of November 30, 2002. The following table summarizes the restructuring charges
and the related restructuring liabilities:
Employee
Severance and Accelerated
(in thousands) Benefits Depreciation Other Total
- -------------- ------------- ------------ ------- --------
Balance at December 2, 2001............. $ 349 $ -- $ 176 $ 525
2002 charges:
First quarter........................ 4,784 1,637 1,254 7,675
Second quarter....................... 2,831 2,830 961 6,622
Third quarter........................ 1,572 1,501 3,253 6,326
Fourth quarter....................... 5,561 1,282 4,315 11,158
------- ------- ------- --------
Total charges........................ 14,748 7,250 9,783 31,781
Non-cash................................ (1,638) (7,250) -- (8,888)
Currency change effect.................. -- (170) (170)
Cash payments........................... (7,648) (4,986) (12,634)
------- ------- --------
Total liabilities at November 30, 2002.. 5,811 4,803 10,614
Long-term portion of liabilities........ -- (2,106) (2,106)
------- ------- --------
Current liabilities at November 30, 2002 $ 5,811 $ 2,697 $ 8,508
======= ======= ========
The net pretax charges of $29.7 million ($31.8 million offset by gains on sales
of assets of $2.0 million) in 2002 were included in the income statement as:
$18.1 million in cost of sales, $13.7 million in SG&A expense and gains on
sales of assets of $2.0 million. The $18.1 million in cost of sales consisted
of $4.4 million of employee severance and benefits, $6.8 million of accelerated
depreciation, $4.0 million of adverse lease termination costs and $2.9 million
of other costs directly attributed to the restructuring plan. The other costs
are primarily period costs associated with the closure of manufacturing
facilities such as: equipment tear down and decommissioning expenses, facility
maintenance and clean-up costs, equipment and inventory relocation and employee
relocation expenditures. The $13.7 million in SG&A expenses consisted of $10.3
million of employee severance and benefits, $0.5 million of accelerated
depreciation, $1.3 million of adverse lease termination costs and $1.5 million
of other costs directly attributed to the restructuring plan. The gains on
sales of assets resulted from the sales of two facilities and one product line
that were shut down or discontinued as part of the restructuring plan. Of the
total net pretax charges of $29.7 million incurred in 2002, $23.3 million was
attributed to the Global Adhesives operating segment, $1.5 million to the
Full-Valu/Specialty operating segment and corporate office cost centers
recorded $4.9 million. The gains on sales of assets were attributed to the
Global Adhesives operating segment.
Non-cash charges attributed to employee severance and benefits are related to
the granting of accelerated vesting on restricted stock held by certain
employees subject to the restructuring and to net losses resulting from
curtailment and other special termination benefits associated with the U.S
pension and other postretirement benefit plans. The long-term portion of the
restructuring liability relates to adverse lease commitments that are expected
to be paid beyond one year.
The beginning balance of $0.5 million in the restructuring liability relates to
a prior restructuring plan.
In January 2003, the Securities and Exchange Commission issued Regulation G,
"Conditions for Use of Non-GAAP Financial Measures" a rule directed by the
Sarbanes-Oxley Act of 2002. Regulation G requires public
15
companies that disclose or release non-GAAP financial measures to include the
most directly comparable GAAP financial measure, to provide a reconciliation of
the disclosed non-GAAP measure to the most comparable GAAP measure, and
requires companies to furnish earnings releases or similar announcements to the
Commission on Form 8-K. The requirements of this rule will be effective as of
March 28, 2003. Additional guidance in the rule also addresses what constitutes
"non-recurring, infrequent, or unusual" as applied to specific financial
transactions or events. The Company has provided a reconciliation of any
differences between non-GAAP financial reporting which is most comparable to
the accounting principles generally accepted in the United States for financial
reporting.
In addition to Regulation G, the SEC amended Item 10 of Regulation S-K to
provide additional guidance to registrants that include non-GAAP financial
measures in SEC filings. This guidance will prohibit the presentation of
certain non-GAAP financial measures that exclude from reported results
non-recurring, infrequent or unusual items when the nature of the charge or
gain is such that it is reasonably likely to recur within two years or there
was a similar charge or gain within the two prior years. Implementation of
these rules will result in a presentation different than that reflected in the
following table as it relates to the effects of the Company's ongoing
restructuring plan in 2003.
The following is supplemental consolidated statement of income information.
Financial results for the year ended November 30, 2002 include net charges
relating to the restructuring plan that was announced on January 15, 2002. It
is provided to assist an investor's understanding of the impact of the
aforementioned restructuring plan on the comparability of operations, and
should not be construed as an alternative to the reported results determined in
accordance with U.S. generally accepted accounting principles.
52 Weeks Ended - November 30, 2002
--------------------------------------
Excluding
(in thousands, except per share amounts) Reported Restructuring Restructuring
- ---------------------------------------- ---------- ------------- -------------
Net revenue................................................... $1,256,210 $ -- $1,256,210
Cost of sales................................................. (918,228) (18,122) (900,106)
---------- -------- ----------
Gross profit.................................................. 337,982 (18,122) 356,104
Selling, administrative and other expenses.................... (281,560) (13,659) (267,901)
Interest expense.............................................. (17,266) -- (17,266)
Gains on sales of assets...................................... 4,165 2,044 2,121
Other income (expense), net................................... (3,009) -- (3,009)
---------- -------- ----------
Income before tax, minority interests and earnings from equity
investments................................................. 40,312 (29,737) 70,049
Income taxes.................................................. (12,973) 10,146 (23,119)
Minority interests............................................ (989) 489 (1,478)
Income from equity investments................................ 1,826 -- 1,826
---------- -------- ----------
Net income.................................................... $ 28,176 $(19,102) $ 47,278
========== ======== ==========
Income per diluted share:..................................... $ 0.98
==========
16
52 Weeks Ended - December 1, 2001
--------------------------------------
Excluding
(in thousands, except per share amounts) Reported Restructuring Restructuring
- ---------------------------------------- ---------- ------------- -------------
Net revenue................................................... $1,274,059 $ -- $1,274,059
Cost of sales................................................. (928,506) (1,564) (926,942)
---------- ------- ----------
Gross profit.................................................. 345,553 (1,564) 347,117
Selling, administrative and other expenses.................... (257,446) -- (257,446)
Interest expense.............................................. (21,247) -- (21,247)
Gains on sales of assets...................................... 752 -- 752
Other income (expense), net................................... (6,310) -- (6,310)
---------- ------- ----------
Income before tax, minority interests and earnings from equity
investments................................................. 61,302 (1,564) 62,866
Income taxes.................................................. (17,665) 97 (17,762)
Minority interests............................................ (873) -- (873)
Income from equity investments................................ 2,176 -- 2,176
---------- ------- ----------
Income before cumulative effect of accounting change.......... 44,940 (1,467) 46,407
Cumulative effect of accounting change........................ (501) -- (501)
---------- ------- ----------
Net income.................................................... $ 44,439 $(1,467) $ 45,906
========== ======= ==========
Income per diluted share:
Before cumulative effect of accounting change................. $ 1.59
Cumulative effect of accounting change........................ (0.02)
----------
Net Income.................................................... $ 1.57
==========
Liquidity and Capital Resources
The Company's financial condition and liquidity remains strong. Net cash
provided by operating activities was $82.3 million in 2002 as compared to $89.7
million in 2001 and $66.9 million in 2000. Cash from operations in 2002 was
less than 2001 primarily due to the restructuring initiative. Cash used for
employee severance, contract terminations and other related costs resulting
from the restructuring initiative was $12.6 million in 2002. Operating working
capital, defined as current assets less cash minus current liabilities less
short-term debt, was $210.4 million at November 30, 2002 as compared to $219.3
million and $238.1 million at December 1, 2001 and December 2, 2000,
respectively. As a percentage of annualized net revenue (fourth quarter net
revenue multiplied by four), operating working capital was 16.0 percent, 17.0
percent and 16.3 percent at the end of fiscal years 2002, 2001 and 2000,
respectively. Trade accounts receivable days sales outstanding (DSO) was 58
days at November 30, 2002 as compared to 59 days at December 1, 2001 and 55
days at December 2, 2000. The DSO of 55 at December 2, 2000 was favorably
impacted by the extra week of sales in the fourth quarter of 2000 as the DSO is
calculated using the net revenue of the fourth quarter. Inventory days on hand,
which is calculated using a rolling five-quarter average of inventory dollars,
was 61 days at November 30, 2002, and at December 1, 2001 and 60 days at
December 2, 2000. Other current assets increased from $39.6 million at December
1, 2001 to $49.9 at November 30, 2002. This increase was primarily due to
increases in prepaid VAT taxes, resulting from the new business structure in
Europe implemented at the beginning of 2002. Another significant change in
working capital was the increase in accrued payroll and employee benefits from
$30.7 million at December 1, 2001 to $37.1 million at November 30, 2002. This
increase was a direct result of the increase in management incentive
compensation accruals in 2002 as compared to 2001.
Capital expenditures were $36.3 million in 2002 as compared to $30.7 million in
2001 and $49.0 million in 2000. Capital expenditures in 2002 were primarily for
information technology projects and manufacturing capacity expansions in
facilities that added volume due to plant closures related to the restructuring
initiative. Proceeds from sales of assets were $10.1 million in 2002, $7.3
million in 2001 and $11.8 million in 2000. The Company expects capital
expenditures will approximate $35 to $45 million in 2003.
17
The strong cash flow from operations allowed the Company to reduce its total
debt levels to $183.1 million at November 30, 2002, which compares to $234.1
million at December 1, 2001 and $290.7 million at December 2, 2000. The
Company's debt-to-equity ratio (long-term debt divided by long-term debt plus
equity) improved from 32.2 percent at December 1, 2001 to 26.7 percent at
November 30, 2002. The same ratio was 38.8 percent at December 2, 2000.
There are no contractual or regulatory restrictions on the ability of
consolidated and unconsolidated subsidiaries to transfer funds in the form of
cash dividends, loans or advances to the Company, except for typical statutory
restrictions, which prohibit distributions in excess of net capital or similar
tests. Currently the Company does not believe these restrictions will impact
its ability to meet its obligations.
On September 24, 2002, the Company registered with the Securities and Exchange
Commission to issue, at an indeterminate date, debt and equity securities with
an aggregate initial offering price not to exceed $500 million. Unless the
applicable prospectus supplement states otherwise, the net proceeds from the
sale of the offered securities will be added to general funds and may be used
to finance business combinations, real estate and other assets; meet working
capital requirements; fund capital expenditures; and refinance debt. As part of
the shelf registration process and as evidence of the Company's strong
financial position, the Company sought and obtained a triple B rating with a
stable outlook from Standard & Poor's.
Contractual Obligations
The following table shows the due dates and amounts of contractual obligations:
Payments Due by Period
-----------------------------------------
1 year 2-3 4-5 After
($ in thousands) Total or less years years 5 years
- ---------------- -------- ------- ------- ------- --------
Long-term debt................................ $163,001 $ 1,259 $23,744 $50,641 $ 87,357
Capital lease obligations..................... 124 103 21 -- --
Operating leases.............................. 41,702 12,559 16,916 4,081 8,146
Full recourse guaranteed bank loans to certain
executives.................................. 8,739 -- 8,739 -- --
Raw materials contracts....................... 29,042 5,371 10,742 7,142 5,787
-------- ------- ------- ------- --------
Total Contractual Obligations................. $242,608 $19,292 $60,162 $61,864 $101,290
======== ======= ======= ======= ========
At November 30, 2002 short-term and long-term lines of credit were $277.2
million of which $158.7 million was committed. The unused portion of these
lines of credit at November 30, 2002 was $267.6 million.
At November 30, 2002, 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 $80.0 million, $15.0
million, $25.0 million and $33.0 million, 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. Amounts
outstanding at November 30, 2002 and December 1, 2001 were $0 and $1.6 million.
At November 30, 2002, the Company was in compliance with all covenants of its
contractual obligations. Also, there are no rating triggers that would
accelerate the maturity dates of any debt. Management believes the Company has
the ability to meet all of its contractual obligations and commitments in 2003.
Off Balance Sheet Arrangements
There are no relationships with any unconsolidated, special-purpose entities or
financial partnerships 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 it
entered into these relationships.
18
Recently Issued Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" which must be adopted no later than December 1, 2002. This
statement establishes accounting standards for recognition and measurement of a
liability for an asset retirement obligation and the associated asset
retirement cost. The Company is currently reviewing the requirements of SFAS
143. Based on its preliminary assessment, management does not expect, upon
adoption of SFAS 143, there will be any material effect on its consolidated
financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
The Company does not expect the adoption of SFAS 145 will have any material
effect on its consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities. This standard
supersedes EITF No. 94-3 and will be adopted for exit and disposal activities
initiated after December 31, 2002. The principal difference between SFAS No.
146 and EITF No. 94-3 relates to when an entity can recognize a liability
related to exit or disposal activities. SFAS No. 146 requires that a liability
be recognized for a cost associated with an exit or disposal activity at the
time the liability is incurred. EITF No. 94-3 allowed a liability to be
recognized at the date an entity committed to an exit plan. Had SFAS No. 146
been in effect in fiscal year 2002, there would have been no material change to
the Company's financial position or results of operations as reported. As well,
the impact of adopting this accounting standard will not have a material effect
on the Company's future financial position and results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure (An amendment of FASB Statement No.
123)". The Company intends to continue its current accounting practice of
applying the recognition and measurement principles of APB No. 25, "Accounting
for Stock Issued to Employees", however, additional disclosure requirements of
SFAS No. 148 are included in Note 1 to the Consolidated Financial Statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 provides guidance on
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
The interpretation also clarifies (for guarantees issued after December 31,
2002) that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligations undertaken in
issuing the guarantee. The Company does not have any significant guarantees as
of November 30, 2002, other than those found in Note 12 to the Consolidated
Financial Statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 provides accounting requirements
for business enterprises to consolidate related entities in which they are
determined to be the primary beneficiary as a result of their variable economic
interests. The interpretation provides guidance in judging multiple economic
interests in an entity and in determining the primary beneficiary. The
interpretation outlines disclosure requirements for variable interest entities
("VIEs") in existence prior to January 31, 2003, and provides consolidation
requirements for VIEs created after January 31, 2003. The Company is in the
process of reviewing relationships in which it has an economic interest and
other relationships with related parties, toll manufacturing vendors, and other
suppliers to determine the extent of its economic interest in the underlying
operations. Although the assessment of FIN 46 is not yet complete, the Company
believes its accounting and disclosures attributed to its VIEs has been
appropriate.
Euro Currency Conversion:
As of December 2, 2001, the Company changed the functional currency to the euro
for its European adhesives operations, consistent with the new business
structure.
19
2003 Outlook
Worldwide political and economic conditions make it difficult to predict the
Company's 2003 financial results. Military action, instability in the world's
crude oil and natural gas markets, fluctuations of the U.S. dollar against
other major currencies and overall weakness in the global economies all could
impact the Company's 2003 consolidated financial results. Although the Company
attempts to mitigate the effects of raw material price increases, rising crude
oil and natural gas prices may eventually result in higher raw material prices
paid by the Company and decreases in the consolidated gross profit margin.
Management believes the Company is well positioned from a cost structure
perspective, to leverage sales growth into earnings growth. The current
restructuring initiative, which will be completed in the first half of 2003 is
expected to result in annual operating savings of $10-$12 million, of which
approximately $4.1 million were realized in 2002. Therefore, an incremental
$6-$8 million is expected in 2003.
Offsetting the restructuring savings will be increased expenses associated with
the Company's pension and other postretirement benefit plans. Based on the
recent performance of the Company's asset portfolios attributed to its defined
benefit plans, the Company reduced its assumption regarding the long-term
expected return on assets by 0.75 percentage points and reduced its discount
rate assumption by 0.5 percentage points. As a result of these changes along
with the historical underperformance of asset portfolios versus expected
returns, costs associated with the Company's pension and other postretirement
benefit plans are expected to increase approximately $10 million as compared to
2002.
Forward-Looking Statements and Risk Factors
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In this Annual Report on Form 10-K405, the Company
discusses expectations regarding future performance of the Company which
include anticipated financial performance, savings from restructuring
initiatives, global economic conditions, liquidity requirements, the effect of
new accounting pronouncements and one-time accounting charges and credits, and
similar matters. This Annual Report on Form 10-K405 contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements may be identified by the use of words like "plan,"
"expect," "aim," "believe," "project," "anticipate," "intend," "estimate,"
"will," "should," "could" (including the negative or variations thereof) and
other expressions that indicate future events and trends. Forward-looking
statements are based on certain assumptions and expectations of future events
that are subject to risks and uncertainties. Actual future results and trends
may differ materially from historical results or those projected in any such
forward-looking statements depending on a variety of factors. In order to
comply with the terms of the safe harbor, the Company hereby identifies
important factors which could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ
materially from the anticipated results or other expectations expressed in the
forward-looking statements. Additionally, the variety of products sold by the
Company and the regions where the Company does business makes it difficult to
determine with certainty the increases or decreases in 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. These factors should be
considered, together with any similar risk factors or other cautionary language
which may be made elsewhere in this Report on Form 10-K405.
.. Competition: The Company sells a wide variety of products in numerous
markets, each of which is highly competitive. Many of the Company's
competitors are part of large multi-national companies and may have more
resources than the Company. Any increase in competition may result in lost
market share or reduced prices, which could result in reduced gross margins.
This may impair the Company's ability to grow or even to maintain current
levels of revenues and earnings.
.. Acquisitions: As part of the Company's growth strategy, the Company intends
to pursue acquisitions of complementary businesses or products and joint
ventures. The ability to grow through acquisitions or joint
20
ventures depends upon the Company's ability to identify, negotiate and
complete suitable acquisitions or joint venture arrangements.
.. International: Foreign operations accounted for approximately 45% of the
Company's net revenues in 2002. International operations could be adversely
affected by changes in political and economic conditions, trade protection
measures, restrictions on repatriation of earnings, differing intellectual
property rights and changes in regulatory requirements that restrict the
sales of products or increase costs. Also, changes in exchange rates between
the U.S. dollar and other currencies could potentially result in increases
or decreases in the Company's earnings and may adversely affect the value of
the Company's assets outside the United States.
.. Raw Materials: The Company obtains the raw materials needed to manufacture
its products from a number of suppliers. Many of these raw materials are
petroleum-based derivatives, minerals and metals. Under normal market
conditions, these materials are generally available on the open market and
from a variety of producers. From time to time, however, the prices and
availability of these raw materials fluctuate, which could impair the
Company's ability to procure necessary materials, or increase the cost of
manufacturing its products. If the prices of raw materials increase, the
Company may be unable to pass these increases on to its customers and could
experience reductions to its profit margins.
.. Litigation: As a participant in the chemical and construction products
industries, the Company faces an inherent risk of exposure to claims in the
event that the failure, use or misuse of its products results in, or is
alleged to result in property damage and/or bodily injury. Claims could
result in significant legal expenditures and/or substantial damages. Please
refer to Item 3. Legal Proceedings for a discussion of current litigation.
There has also been increased publicity about asbestos liabilities faced by
manufacturing companies. As a result of the bankruptcy of most major
asbestos producers, plaintiffs' attorneys are increasing their focus on
peripheral defendants. The Company believes it has adequate insurance and/or
indemnification from other parties with respect to any such claims and does
not believe its asbestos exposure is material.
.. Environmental: The Company is subject to numerous environmental laws and
regulations that impose various environmental controls on the Company or
otherwise relate to environmental protection, the sale and export of certain
chemicals or hazardous materials, and various health and safety matters. The
Company's expenditures related to environmental matters have not had, and
are not currently expected to have, a material adverse effect on the
Company's business, financial condition, results of operations or cash
flows. However, the Company cannot predict that it will not be required to
make additional expenditures to remain in or to achieve compliance with
environmental laws in the future or that any such additional expenditures
will not have a material adverse effect on the Company's business, financial
condition, results of operations or cash flows.
.. Additional factors which could affect future results include: (i) economic
matters over which the Company has no control, including changes in
inflation, tax rates, and interest rates; (ii) changes in fiscal,
governmental and other regulatory policies; (iii) the loss or insolvency of
a major customer or distributor, (iv) natural or manmade disasters
(including material acts of terrorism or hostilities which impact the
Company's markets); (v) loss of, or changes in, executive management; and
(vi) changes in accounting standards which are adverse to the Company. In
addition, the Company notes that its stock price can be affected by
fluctuations in quarterly earnings.
The Company may refer to this section of the Form 10-K405 to identify risk
factors related to other forward looking statements made in oral presentations,
including telephone conferences and/or webcasts open to the public.
21
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, such as interest rates and foreign currency exchange rates.
Interest Rate Risk: There is exposure to changes in interest rates primarily
as a result of borrowing activities used to fund operations. Committed floating
rate credit facilities are used to fund a portion of operations.
Management believes that probable near-term changes in interest rates would not
materially affect its consolidated financial position, results of operations or
cash flows. The annual impact on the results of operations of a one-percentage
point interest rate change on the outstanding balance of its variable rate debt
as of November 30, 2002 would be approximately $0.2 million.
Foreign Exchange Risk: As a result of being a global enterprise, there is
exposure to market risks from changes in foreign currency exchange rates, which
may adversely affect operating results and financial position. Approximately 45
percent of net revenue is generated outside of the United States. Principal
foreign currency exposures relate to the euro, British pound sterling, Japanese
yen, Australian dollar, Canadian dollar, Argentine peso and Brazilian real.
Management's objective is to balance, where possible, the local currency
denominated assets to the local currency denominated liabilities to have a
natural hedge and minimize foreign exchange impacts. The Company enters into
cross border transactions through importing and exporting goods to and from
different countries and locations. These transactions generate foreign exchange
risk as they create assets, liabilities and cash flows in currencies other than
the local currency. This also applies to services provided and other cross
border agreements among subsidiaries.
Management minimizes risks from foreign currency exchange rate fluctuations
through normal operating and financing activities and, when deemed appropriate,
through the use of derivative instruments. Management does not enter into any
speculative positions with regard to derivative instruments. Note 1 and Note 11
to the Consolidated Financial Statements provides additional details regarding
the management of foreign exchange risk.
From a sensitivity analysis viewpoint, based on 2002 financial results a
hypothetical overall 10 percent change in the U.S. dollar would have resulted
in a change of approximately $0.05 per diluted share.
Raw Materials: The principal raw materials used to manufacture products
include resins, polymers, vinyl acetate monomer, starch, dextrines and natural
latex. The Company generally avoids sole source supplier arrangements for raw
materials. While alternate sources for most key raw materials are available, if
worldwide supplies were disrupted due to unforeseen events, or if unusual
demand causes products to be subject to allocation, shortages could occur.
In 2002, the single largest expenditure was the purchase of raw materials.
Management acknowledges that in the long-term, prices of most raw materials
will probably increase. Management's objective is to purchase raw materials
that meet both its quality standards and production needs at the lowest total
cost. Most raw materials are purchased on the open market or under contracts
which limit the frequency but not the magnitude of price increases. In some
cases, however, the risk of raw material price changes is managed by strategic
sourcing agreements which limit price increases to increases in supplier
feedstock costs, while requiring decreases as feedstock costs decline. The
Company also uses the leverage of having substitute raw materials approved for
use wherever possible to minimize the impact of possible price increases.
22
Item 8. Financial Statements and Supplementary Data
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 financial position of H.B. Fuller
Company and its subsidiaries at November 30, 2002 and December 1, 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended November 30, 2002 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.
As described in Note 5 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets".
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 21, 2003
23
STATEMENT OF CONSOLIDATED INCOME
H.B. Fuller Company and Subsidiaries
(In thousands, except per share amounts)
Fiscal Years
-----------------------------------
November 30, December 1, December 2,
2002 2001 2000
------------ ----------- -----------
Net revenue.................................................. $1,256,210 $1,274,059 $1,363,961
Cost of sales................................................ (918,228) (928,506) (984,599)
---------- ---------- ----------
Gross profit................................................. 337,982 345,553 379,362
Selling, administrative and other expenses................... (281,560) (257,446) (276,861)
Interest expense............................................. (17,266) (21,247) (23,814)
Gains from sales of assets................................... 4,165 752 4,131
Other income (expense), net.................................. (3,009) (6,310) (8,048)
---------- ---------- ----------
Income before income taxes, minority interests, earnings from
equity investments and accounting change................... 40,312 61,302 74,770
Income taxes................................................. (12,973) (17,665) (26,320)
Minority interests........................................... (989) (873) (1,826)
Income from equity investments............................... 1,826 2,176 2,539
---------- ---------- ----------
Income before cumulative effect of accounting change......... 28,176 44,940 49,163
Cumulative effect of accounting change....................... -- (501) --
---------- ---------- ----------
Net income................................................... $ 28,176 $ 44,439 $ 49,163
========== ========== ==========
Basic income (loss) per common share:
Income before accounting change.............................. $ 1.00 $ 1.61 $ 1.77
Accounting change............................................ -- (0.02) --
---------- ---------- ----------
Net income................................................... $ 1.00 $ 1.59 $ 1.77
========== ========== ==========
Diluted income (loss) per common share:
Income before accounting change.............................. $ 0.98 $ 1.59 $ 1.74
Accounting change............................................ -- (0.02) --
---------- ---------- ----------
Net income................................................... $ 0.98 $ 1.57 $ 1.74
========== ========== ==========
Weighted-average common shares outstanding:
Basic........................................................ 28,095 27,962 27,828
Diluted...................................................... 28,601 28,330 28,206
See accompanying notes to consolidated financial statements.
24
CONSOLIDATED BALANCE SHEET
H.B. Fuller Company and Subsidiaries
(In thousands, except share and per share amounts)
November 30, December 1,
2002 2001
------------ -----------
Assets
Current Assets:
Cash and cash equivalents................................................ $ 3,666 $ 11,454
Trade receivables, net................................................... 212,342 211,590
Inventories.............................................................. 143,012 141,210
Other current assets..................................................... 49,854 39,619
-------- --------
Total current assets........................................................ 408,874 403,873
Property, plant and equipment, net.......................................... 354,964 371,113
Other assets................................................................ 106,456 102,839
Goodwill, net............................................................... 71,020 66,630
Other intangible assets, net................................................ 20,125 21,718
-------- --------
Total assets................................................................ $961,439 $966,173
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable............................................................ $ 20,020 $ 27,601
Current installments of long-term debt................................... 1,362 3,479
Trade payables........................................................... 113,297 114,155
Accrued payroll and employee benefits.................................... 37,109 30,659
Other accrued expenses................................................... 25,070 19,189
Restructuring liabilities................................................ 8,508 525
Income taxes payable..................................................... 9,480 8,555
-------- --------
Total current liabilities................................................... 214,846 204,163
Long-term debt, excluding current installments.............................. 161,763 203,001
Accrued pensions............................................................ 87,393 66,012
Other liabilities........................................................... 34,532 39,413
Minority interests in consolidated subsidiaries............................. 14,575 19,558
-------- --------
Total liabilities........................................................... 513,109 532,147
-------- --------
Commitments and contingencies
Stockholders' Equity:
Series A preferred stock, $6.67 par value
Shares outstanding--2002 and 2001 were none and 45,900............... -- 306
Common stock, par value $1.00 per share
Shares outstanding--2002 and 2001 were 28,362,316 and 28,280,896..... 28,362 28,281
Additional paid-in capital............................................... 39,665 37,830
Retained earnings........................................................ 411,818 396,048
Accumulated other comprehensive income (loss)............................ (29,679) (25,150)
Unearned compensation--restricted stock.................................. (1,836) (3,289)
-------- --------
Total stockholders' equity.................................................. 448,330 434,026
-------- --------
Total liabilities and stockholders' equity.................................. $961,439 $966,173
======== ========
See accompanying notes to consolidated financial statements.
25
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
H.B. Fuller Company and Subsidiaries
(In thousands)
Fiscal Years
-----------------------------------
November 30, December 1, December 2,
2002 2001 2000
------------ ----------- -----------
Preferred Stock
Beginning balance..................................... $ 306 $ 306 $ 306
Retirement of preferred stock......................... (306) -- --
-------- -------- --------
Ending balance........................................ $ -- $ 306 $ 306
-------- -------- --------
Common Stock
Beginning balance..................................... $ 28,281 $ 14,116 $ 14,040
Stock split........................................... -- 14,142 --
Retirement of common stock............................ (42) (10) (21)
Stock compensation plans, net......................... 123 33 97
-------- -------- --------
Ending balance........................................ $ 28,362 $ 28,281 $ 14,116
-------- -------- --------
Additional Paid-in Capital
Beginning balance..................................... $ 37,830 $ 36,707 $ 34,071
Retirement of common stock............................ (1,182) (371) (53)
Stock compensation plans, net......................... 3,017 1,494 2,689
-------- -------- --------
Ending balance........................................ $ 39,665 $ 37,830 $ 36,707
-------- -------- --------
Retained Earnings
Beginning balance..................................... $396,048 $377,846 $341,356
Net income............................................ 28,176 44,439 49,163
Stock split........................................... -- (14,142) --
Dividends............................................. (12,406) (12,095) (11,786)
Retirement of common stock............................ -- -- (887)
-------- -------- --------
Ending balance........................................ $411,818 $396,048 $377,846
-------- -------- --------
Accumulated Other Comprehensive Income (Loss)
Beginning balance..................................... $(25,150) $(20,088) $ (7,522)
Foreign currency translation adjustment............... 11,489 (755) (12,630)
Minimum pension liability adjustment, net of tax...... (16,018) (4,307) 64
-------- -------- --------
Ending balance........................................ $(29,679) $(25,150) $(20,088)
-------- -------- --------
Unearned Compensation--Restricted Stock
Beginning balance..................................... $ (3,289) $ (4,177) $ (5,871)
Restricted stock grants............................... (358) (556) (304)
Amortization / other changes in unearned compensation. 1,811 1,444 1,998
-------- -------- --------
Ending balance........................................ $ (1,836) $ (3,289) $ (4,177)
-------- -------- --------
Total Stockholders' Equity............................... $448,330 $434,026 $404,710
======== ======== ========
See accompanying notes to consolidated financial statements.
26
CONSOLIDATED STATEMENT OF CASH FLOWS
H.B. Fuller Company and Subsidiaries
(In thousands)
Fiscal Years
-----------------------------------
November 30, December 1, December 2,
2002 2001 2000
------------ ----------- -----------
Cash flows from operating activities:
Net income............................................................ $ 28,176 $ 44,439 $ 49,163
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation....................................................... 54,783 47,200 44,371
Amortization....................................................... 2,761 7,201 7,794
Deferred income taxes.............................................. (217) 332 9,139
Gains from sales of assets......................................... (4,165) (752) (4,131)
Change in assets and liabilities:
Accounts receivables, net.......................................... 2,381 8,189 2,397
Inventories........................................................ 1,669 11,992 (11,142)
Other current assets............................................... (6,870) 3,495 (2,679)
Other assets....................................................... 2,198 (3,002) (3,332)
Trade payables..................................................... (3,504) (11,356) 3,794
Accrued payroll and employee benefits and other accrued
expenses......................................................... 7,138 (3,528) (19,614)
Restructuring liabilities.......................................... 9,762 (705) 1,556
Income taxes payable............................................... 537 5,731 3,070
Accrued pensions................................................... (5,694) (12,548) (3,008)
Other liabilities.................................................. (5,139) (6,313) (8,411)
Other items........................................................... (1,492) (707) (2,072)
-------- -------- --------
Net cash provided by operating activities...................... 82,324 89,668 66,895
-------- -------- --------
Cash flows from investing activities:
Purchased property, plant and equipment............................... (36,278) (30,725) (49,044)
Purchased businesses, net of cash acquired............................ -- -- (5,388)
Purchased investments................................................. -- (3,517) --
Proceeds from sale of property, plant and equipment................... 10,094 7,309 11,842
Proceeds from sale of investments..................................... -- 1,567 --
Proceeds from sale of business........................................ -- -- 3,852
-------- -------- --------
Net cash used in investing activities.......................... (26,184) (25,366) (38,738)
-------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt............................................. 21,685 4,602 69,690
Repayment of long-term debt.............................................. (63,105) (43,618) (84,876)
Proceeds (payments) from/on notes payable................................ (10,259) (12,143) 3,668
Dividends paid........................................................... (12,406) (12,095) (11,786)
Other.................................................................... 227 (258) 179
-------- -------- --------
Net cash used in financing activities.......................... (63,858) (63,512) (23,125)
-------- -------- --------
Net change in cash and cash equivalents........................ (7,718) 790 5,032
Effect of exchange rate changes.......................................... (70) 175 (364)
Cash and cash equivalents at beginning of year........................... 11,454 10,489 5,821
-------- -------- --------
Cash and cash equivalents at end of year....................... $ 3,666 $ 11,454 $ 10,489
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest................................................ $ 18,965 $ 22,008 $ 28,198
Cash paid for income taxes............................................ $ 11,906 $ 8,420 $ 16,569
See accompanying notes to consolidated financial statements.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H.B. Fuller Company and Subsidiaries
(In thousands, except share and per share amounts)
1/ Nature of Business and Summary of Significant Accounting Policies
Nature of Business: H.B. Fuller Company (the "Company") is a worldwide
manufacturer and marketer of adhesives and specialty chemical products having
sales operations in 36 countries.
The largest business segment is comprised of industrial and performance
adhesives products for applications in various markets, including assembly
(woodworking, appliances, etc.), packaging, converting (corrugated, tape and
label, tissue and towel, etc.), nonwoven (disposable diapers, feminine care and
adult incontinence products), automotive, graphic arts (books, magazines, etc.)
and footwear. Adhesives represent nearly 70 percent of global net revenue and
are manufactured and distributed globally. This business is managed on a
worldwide basis and is reported as the Global Adhesives operating segment.
The Company is also a producer and supplier of specialty chemical products for
a variety of applications such as ceramic tile application, HVAC insulation,
powder coatings applied to metal surfaces for office furniture, appliances and
lawn and garden equipment, specialty hot melt products for packaging
applications, consumer products and windows market applications, as well as
liquid paint sold through retail outlets in Central America. These specialty
chemical products represent approximately 30 percent of global net revenue and
are reported as the Full-Valu/Specialty operating segment.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly owned and majority-owned subsidiaries.
All significant intercompany transactions and accounts have been eliminated.
Investments in affiliated companies in which the Company exercises significant
influence, but which it does not control, are accounted for in the consolidated
financial statements under the equity method of accounting. As such,
consolidated net income includes the Company's equity portion in current
earnings of such companies, after elimination of intercompany profits.
Investments in which the Company does not exercise significant influence
(generally less than a 20 percent ownership interest) are accounted for under
the cost method.
The fiscal year ends on the Saturday closest to November 30. All fiscal years
represent 52-week years, except the year 2000, which was a 53-week year.
Certain prior years' amounts have been reclassified to conform to the 2002
presentation. These reclassifications had no impact on previously reported net
income or stockholders' equity.
Use of Estimates: Preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the United States
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: For shipments made to customers, title generally passes
to the customer when all requirements of the sales arrangement have been
completed, which is generally at the time of delivery. The Company records
revenue 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. Shipping terms include both FOB shipping point and FOB
destination, with the majority being FOB destination. Stated terms in sale
agreements also include payment terms, primarily net 30 days, and freight
terms. Net revenues include shipping revenues as appropriate.
Provisions for sales returns are recorded when known and estimated using
historical experience. Customer incentive programs (primarily rebates)
generally relate to volume purchase incentives. Rebates recorded in the
28
income statement were $11,041, $8,396 and $8,499 in 2002, 2001, and 2000,
respectively. Both were recorded as a reduction of net revenue.
For certain products, consigned inventory is maintained at customer locations.
For these products, revenue is recognized at the time that the Company is
notified the customer has used the inventory. Sales to distributors also
require a distribution agreement or purchase order. As a normal practice,
distributors do not have a right of return.
Cost of Sales: Cost of sales includes raw materials, container costs, direct
labor, manufacturing overhead, shipping and receiving costs, freight costs,
depreciation of manufacturing equipment and other less significant indirect
costs related to the production and distribution of products to customers.
Selling, Administrative and Other Expenses: Selling, administrative and other
expenses includes sales and marketing, research and development, technical and
customer service, finance, legal, human resources, general management and
similar expenses.
Income Taxes: The income tax provision is computed based on the pretax income
included in the consolidated statement of income. The asset and liability
approach is used to recognize deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. Enacted statutory tax
rates applicable to future years are applied 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. Valuation
allowances are recorded to reduce deferred tax assets when it is more likely
than not that a tax benefit will not be realized. See also Note 7.
Cash Equivalents: Cash equivalents are highly liquid instruments with an
original maturity of three months or less.
Restrictions on Cash: There are no contractual or regulatory restrictions on
the ability of consolidated and unconsolidated subsidiaries to transfer funds
in the form of cash dividends, loans or advances to the Company, except for
typical statutory restrictions, which prohibit distributions in excess of net
capital or similar tests.
Inventories: Inventories in the United States, representing approximately 36
percent 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 value.
Investments: The Company holds United States Treasury securities with a value
of $23,657 on November 30, 2002. These investments are considered trading
securities and are marked-to-market at the end of each reporting period. These
assets are held to primarily support the Company's supplemental pension plans
and are recorded in other assets in the balance sheet. The corresponding gain
or loss associated with this mark-to-market adjustment is reported in earnings
each period as a component of "Other income (expense), net".
Property, Plant and Equipment: Depreciation of property, plant and equipment
is generally computed on a straight-line based on estimated useful lives of the
assets, including assets acquired by capital leases. Estimated useful lives
range from 20 to 40 years for buildings and improvements and 3 to 15 years for
machinery and equipment. Fully depreciated assets are retained in property and
accumulated depreciation accounts until removed from service. Upon disposal,
assets and related accumulated depreciation are removed from the accounts and
the net amount less proceeds from disposal is charged or credited to gains from
sales of assets.
Effective August 2001, Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards ('SFAS') No. 144 "Accounting for
the Impairment or Disposal of Long-lived Assets." The
29
requirements of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" continue to be in effect
regarding the recognition of impairments on Property, Plant and Equipment, but
eliminates goodwill from the scope of the standard. The Company early adopted
SFAS No. 144 effective December 2, 2001. Such adoption did not have a material
impact on the Company's consolidated financial statements.
Consistent with the adoption of SFAS No. 144 property, plant, and equipment
amounts are reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset (asset group) may not be recoverable.
An impairment loss would be recognized when the carrying amount of an asset
exceeds the estimated undiscounted future cash flows expected to result from
the use of the asset and its eventual disposition. The impairment loss to be
recorded would be the excess of the asset's carrying value over its fair value.
Fair value would be determined based upon the best information available in the
circumstances including quoted prices or other valuation techniques.
Capitalized Interest Costs: Interest costs associated with major construction
of property, plant and equipment are capitalized. Capitalized interest costs
were $293, $431 and $482 in 2002, 2001 and 2000, respectively.
Goodwill: Goodwill is the excess of cost of an acquired entity over the
amounts assigned to assets acquired and liabilities assumed in a purchase
business combination. Prior to December 2, 2001, goodwill was amortized on a
straight-line basis, ranging from 15 to 25 years. On December 2, 2001 the
Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" (See Note
5). This standard requires that goodwill no longer is amortized on a recurring
basis. Instead, the goodwill is subject to annual impairment testing. SFAS No.
142 requires that the Company, on an annual basis, calculate the fair value of
the reporting units that contain the goodwill and compare that to the carrying
value of the reporting unit to determine if impairment exists. Impairment
testing must take place more often if circumstances or events indicate a change
in the impairment status. The standard also required that, upon adoption, the
Company make an initial impairment calculation. Both the initial calculation as
of December 2, 2001 and the subsequent annual calculation in 2002 confirmed
that the fair value of the reporting units exceeded the respective carrying
values.
Intangible Assets: Intangible assets include patents and other intangible
assets acquired from an independent party. Effective December 2, 2001, with the
adoption of SFAS No. 142, intangible assets with an indefinite life are not
amortized. Management determined the Company does not currently have intangible
assets with indefinite lives. Other intangible assets are amortized on a
straight-line basis with estimated useful lives ranging from 3 to 20 years. The
straight-line method of amortization of these assets reflects an appropriate
allocation of the costs of the intangible assets to earnings in proportion to
the amount of economic benefits obtained by the Company in each reporting
period. Intangible assets are tested for impairment whenever events or
circumstances indicate that a carrying amount of an asset (asset group) may not
be recoverable. An impairment loss is generally recognized when the carrying
amount of an asset exceeds the estimated fair value of the asset. Fair value is
generally determined using a discounted cash flow analysis or other valuation
technique. Costs related to internally developed intangible assets are expensed
as incurred.
Foreign Currency Translation: Assets and liabilities denominated in foreign
currencies are translated using the spot rate on the balance sheet date.
Revenues and expenses are translated using average exchange rates during the
year. The currency translation adjustment from functional currency to U.S.
dollars is recorded in accumulated other comprehensive income (loss) in
stockholders' equity. The translation adjustment of subsidiaries not using the
local currency as the functional currency is included in net income. As of
December 2, 2001, the Company changed the functional currency to the euro for
its European adhesive operations, consistent with the new business structure.
Postemployment Benefits: Postemployment benefits are provided 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.
30
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 environmental costs at November 30, 2002 and December 1, 2001 were $619 and
$1,055, respectively.
Accounting for Stock-Based Compensation: In December, 2002, the FASB issued
SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure (An amendment of FASB Statement No. 123). The Company intends to
continue its current accounting practice of applying the recognition and
measurement principles of APB No. 25, "Accounting for Stock Issued to
Employees", however, there are additional disclosure requirements.
The intrinsic value method is used to account for stock-based compensation
plans. If compensation expense had been determined based on the fair value
method, net income and income per share would have been adjusted to the pro
forma amounts indicated below:
2002 2001 2000
------- ------- -------
Net income, as reported.......................................... $28,176 $44,439 $49,163
Add back: Stock-based employee compensation expense recorded..... 1,582 1,305 1,261
------- ------- -------
Net income excluding stock-based compensation.................... 29,758 45,744 50,424
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects............................................ (3,278) (2,776) (2,207)
------- ------- -------
Pro forma net income............................................. $26,480 $42,968 $48,217
======= ======= =======
Basic income per share:
As reported................................................... $ 1.00 $ 1.59 $ 1.77
Pro forma..................................................... $ 0.94 $ 1.54 $ 1.73
Diluted income per share:
As reported................................................... $ 0.98 $ 1.57 $ 1.74
Pro forma..................................................... $ 0.93 $ 1.52 $ 1.71
Compensation expense for pro forma purposes is reflected over the vesting
period. Note 9 contains the significant assumptions used in determining the
underlying fair value of options.
Financial Instruments and Derivatives: Management's objective is to balance,
where possible, the local currency denominated assets to the local currency
denominated liabilities to have a natural hedge and minimize foreign exchange
impacts. Management minimizes risks from foreign currency exchange rate
fluctuations through normal operating and financing activities and, when deemed
appropriate, through the use of derivative instruments. Derivatives consisted
primarily of forward currency contracts used to manage foreign currency
denominated liabilities. Because derivative instruments outstanding were not
designated as hedges for accounting purposes, the gains and losses related to
mark-to-market adjustments were recognized in the income statement during the
periods the derivative instruments were outstanding. Management does not enter
into any speculative positions with regard to derivative instruments.
Purchase of Company Common Stock: Under the Minnesota Business Corporation
Act, repurchased stock is included in authorized shares, 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 41,649, 10,289 and 21,229 shares of common stock in 2002,
2001 and 2000, respectively, in connection with the vesting of restricted
shares relating to the statutory minimum for tax withholding.
31
Recently Issued Accounting Pronouncements: In June 2001, the FASB issued SFAS
No. 143, "Accounting for Asset Retirement Obligations", which must be adopted
no later than December 1, 2002. This statement establishes accounting standards
for recognition and measurement of a liability for an asset retirement
obligation and the associated asset retirement cost. The Company is currently
reviewing the requirements of SFAS 143. Based on the Company's preliminary
assessment, the Company does not expect any material effect on its consolidated
financial position or results of operations upon adoption of SFAS 143.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFASs No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections". The
Company does not expect the adoption of SFAS 145 to have a material affect on
consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities. This standard
supersedes EITF No. 94-3 and will be adopted for exit and disposal activities
initiated after December 31, 2002. The principle difference between SFAS No.
146 and EITF No. 94-3 relates to when an entity can recognize a liability
related to exit or disposal activities. SFAS No. 146 requires that a liability
be recognized for a cost associated with an exit or disposal activity at the
time the liability is incurred. EITF No. 94-3 allowed a liability to be
recognized at the date an entity committed to an exit plan. Had SFAS No. 146
been in effect in fiscal year 2002, there would have been no material change to
the Company's financial position or results of operations as reported. As well,
the impact of adopting this accounting standard will not have a material effect
on the Company's future financial position and results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 provides guidance on
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
The interpretation also clarifies (for guarantees issued after December 31,
2002) that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligations undertaken in
issuing the guarantee. The Company does not have any significant guarantees as
of November 30, 2002, other than those found in Note 12 to the Consolidated
Financial Statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities". FIN 46 provides accounting
requirements for business enterprises to consolidate related entities in which
they are determined to be the primary beneficiary as a result of their variable
economic interests. The interpretation provides guidance in judging multiple
economic interests in an entity and in determining the primary beneficiary. The
interpretation outlines disclosure requirements for variable interest entities
("VIEs") in existence prior to January 31, 2003, and provides consolidation
requirements for VIEs created after January 31, 2003. The Company is in the
process of reviewing its relationships in which it has an economic interest and
other relationships with related parties, toll manufacturing vendors, and other
suppliers to determine the extent of its economic interest in the underlying
operations. Although the assessment of FIN 46 is not yet complete, the Company
believes its accounting and disclosures attributed to its VIEs has been
appropriate.
2/ Income Per Common Share
Basic income per share 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 includes the potential dilution from
stock-based compensation plans. Net income used in the calculations of income
per share is reduced by the dividends paid to the preferred stockholders, if
any.
32
A reconciliation of the net income and share components for the basic and
diluted income per share calculations is as follows:
2002 2001 2000
----------- ----------- -----------
Net income..................................... $ 28,176 $ 44,439 $ 49,163
Dividends on preferred shares.................. (7) (15) (15)
----------- ----------- -----------
Income attributable to common shares........... $ 28,169 $ 44,424 $ 49,148
=========== =========== ===========
Weighted-average common shares--basic.......... 28,094,811 27,961,611 27,827,082
Equivalent shares from stock-based compensation
plans........................................ 506,491 368,636 378,982
----------- ----------- -----------
Weighted-average common shares--diluted........ 28,601,302 28,330,247 28,206,064
=========== =========== ===========
The computations of diluted income per common share do not include stock
options with exercise prices greater than the average market price for the
respective periods of 2,605, 44,512 and 87,534 shares for 2002, 2001 and 2000,
respectively, as the results would have been anti-dilutive.
3/ Restructuring and Other Related Costs
During 2002, net pretax charges of $29,737 ($19,102 after tax and minority
interests) were recorded in connection with the Company's restructuring plan
that was announced on January 15, 2002. The plan, which was contemplated in
2001, but approved and implemented throughout 2002, will be completed in the
first half of 2003. Completion of the plan will result in the elimination of
approximately 20 percent of the Company's 2001 global manufacturing capacity.
Throughout 2002, the Company closed twelve manufacturing facilities in the
Global Adhesives operating segment - eight in North America, three in Latin
America and one in Europe. In the Full-Valu/Specialty operating segment, one
manufacturing facility was closed and one production line was shut down in
another facility, both in the United States. In connection with the
restructuring plan, the Company upgraded and realigned its sales force in the
Global Adhesives operating segment. The plan will result in the elimination of
approximately 565 positions, of which approximately 375 occurred in 2002. The
principal employee group affected by the restructuring plan was manufacturing
employees. However, other employee groups affected include certain corporate
administrative positions and certain sales positions in the Global Adhesives
segment. Offsetting the reduction of 565 positions, will be approximately 115
newly hired employees (of which 80 were hired as of November 30, 2002),
primarily in manufacturing facilities that assumed additional volume which
transferred from facilities that were closed as part of the restructuring plan,
and sales-related positions as part of the upgrading and realignment of the
sales force.
33
Upon completion of the 2002 restructuring plan (in the first half of 2003), the
Company expects to have recorded total cumulative net pretax charges in the
range of $30,000 to $35,000, inclusive of the $1,564 of accelerated
depreciation charges recorded in the fourth quarter of 2001, and net of gains
associated with asset sales subject to the restructuring plan. These charges
include employee separation costs, accelerated depreciation on assets held and
used until disposal, lease/contract termination costs and other costs directly
related to the restructuring plan. The remaining net charges of approximately
$1,000 to $4,000 will be incurred in the first half of 2003. The most
significant of these remaining charges are expected to be employee separation
costs in the European adhesives operations. Cash costs of the plan are expected
to be $20,000 to $25,000, of which $12,634 have been paid as of November 30,
2002. The following table summarizes the restructuring charges and the related
restructuring liabilities:
Employee
Severance Accelerated
(in thousands) and Benefits Depreciation Other Total
- -------------- ------------ ------------ ------- --------
Balance at December 2, 2001............. $ 349 $ -- $ 176 $ 525
2002 charges:
First quarter........................ 4,784 1,637 1,254 7,675
Second quarter....................... 2,831 2,830 961 6,622
Third quarter........................ 1,572 1,501 3,253 6,326
Fourth quarter....................... 5,561 1,282 4,315 11,158
------- ------- ------- --------
Total charges........................ 14,748 7,250 9,783 31,781
Non-cash................................ (1,638) (7,250) -- (8,888)
Currency change effect.................. -- (170) (170)
Cash payments........................... (7,648) (4,986) (12,634)
------- ------- --------
Total liabilities at November 30, 2002.. 5,811 4,803 10,614
Long-term portion of liabilities........ -- (2,106) (2,106)
------- ------- --------
Current liabilities at November 30, 2002 $ 5,811 $ 2,697 $ 8,508
======= ======= ========
The net pretax charges of $29,737 ($31,781 offset by gains on sales of assets
of $2,044) in 2002 were included in the income statement as: $18,122 in cost of
sales, $13,659 in SG&A expense and gains on sales of assets of $2,044. The
$18,122 in cost of sales consisted of $4,422 of employee severance and
benefits, $6,778 of accelerated depreciation, $3,976 of adverse lease
termination costs and $2,946 of other costs directly attributed to the
restructuring plan. The other costs are primarily period costs associated with
the closure of manufacturing facilities such as: equipment tear down and
decommissioning expenses, facility maintenance and clean-up costs, equipment
and inventory relocation and employee relocation expenditures. The $13,659 in
SG&A expenses consisted of $10,326 of employee severance and benefits, $472 of
accelerated depreciation, $1,342 of adverse lease termination costs and $1,519
of other costs directly attributed to the restructuring plan. The gains on
sales of assets resulted from the sales of two facilities and one product line
that were shut down or discontinued as part of the restructuring plan. Of the
total net pretax charges of $29,737 incurred in 2002, $23,346 was attributed to
the Global Adhesives operating segment, $1,532 to the Full-Valu/Specialty
operating segment and corporate office cost centers recorded $4,859. The gains
on sales of assets were attributed to the Global Adhesives operating segment.
Non-cash charges attributed to employee severance and benefits are related to
the granting of accelerated vesting on restricted stock held by certain
employees subject to the restructuring and to net losses resulting from
curtailment and other special termination benefits associated with the U.S
pension and other post-retirement benefit plans. The long-term portion of the
restructuring liability relates to adverse lease commitments that are expected
to be paid beyond one year.
The beginning balance of $525 in the restructuring liability relates to a prior
restructuring plan.
34
4/ Supplemental Financial Statement Information
Statement of Income Information
The following provides additional details of income statement amounts for 2002,
2001 and 2000.
Other income (expense), net 2002 2001 2000
- --------------------------- ------- ------- -------
Foreign currency transaction losses, net............... $(1,023) $(1,041) $(2,478)
Gains on trading securities............................ 158 700 1,600
Amortization of goodwill............................... -- (4,054) (4,076)
Amortization of low income housing..................... (2,418) (2,168) (2,135)
Interest income........................................ 653 987 916
Other, net............................................. (379) (734) (1,772)
------- ------- -------
Total other income (expense), net................... $(3,009) $(6,310) $(7,945)
======= ======= =======
Research and development expenses (included in selling,
administrative and other expenses)................... $17,910 $19,038 $18,400
======= ======= =======
The Company recorded gains from sales of assets of $4,165 in 2002 as compared
to $752 in 2001 and $4,131 in 2000. The 2002 results included gains of $2,044
from sales of assets that were included in the Company's restructuring
initiative. Of the remaining 2002 gains of $2,121, the most significant was the
sale of an office building in Latin America that resulted in a gain of $1,406.
The most significant transaction in 2001 was the sale of a cost-basis equity
investment in a Japanese company, which resulted in a gain of $1,556 offset by
losses from disposals or sales of other non-productive assets. In 2000, the
Company actively sold non-productive assets. The sale of two facilities in
North America accounted for more than half of the $4,131 gain in 2000.
Balance Sheet Information
The following provides additional details of balance sheet amounts as of
November 30, 2002 and December 1, 2001.
Inventories: 2002 2001
- ------------ --------- ---------
Raw materials............................................. $ 57,041 $ 57,226
Finished goods............................................ 96,192 95,149
LIFO reserve.............................................. (10,221) (11,165)
--------- ---------
Total inventories...................................... $ 143,012 $ 141,210
========= =========
Other current assets:
- ---------------------
Employee and other receivables............................ $ 10,166 $ 9,119
Prepaid income taxes...................................... 4,358 4,713
Current deferred income tax asset......................... 16,742 14,431
Prepaid expenses.......................................... 18,588 11,356
--------- ---------
Total other current assets............................. $ 49,854 $ 39,619
========= =========
Property, plant and equipment:
- ------------------------------
Land...................................................... $ 43,925 $ 46,463
Buildings and improvements................................ 216,101 214,034
Machinery and equipment................................... 501,077 477,153
Construction in progress.................................. 15,894 21,724
--------- ---------
Total, at cost............................................ 776,997 759,374
Accumulated depreciation.................................. (422,033) (388,261)
--------- ---------
Net property, plant and equipment...................... $ 354,964 $ 371,113
========= =========
35
Other assets: 2002 2001
- ------------- -------- --------
Investment in trading securities.............................. $ 23,657 $ 24,187
Investment/advances to unconsolidated subsidiaries............ 31,699 31,887
Long-term deferred tax asset.................................. 13,660 8,774
Prepaid postretirement benefits............................... 24,064 23,691
Other long-term assets........................................ 13,376 14,300
-------- --------
Total other assets......................................... $106,456 $102,839
======== ========
Other accrued expenses:
- -----------------------
Taxes other than income taxes................................. $ 11,362 $ 3,646
Accrued expenses.............................................. 13,708 15,543
-------- --------
Total other accrued liabilities............................ $ 25,070 $ 19,189
======== ========
Other liabilities:
- ------------------
Long-term deferred tax liability.............................. $ 20,807 $ 23,555
Long-term deferred compensation............................... 8,176 10,416
Other long-term liabilities................................... 5,549 5,442
-------- --------
Total other liabilities.................................... $ 34,532 $ 39,413
======== ========
The following provides additional details on the allowance for doubtful
accounts for 2002, 2001, and 2000:
2002 2001 2000
------- ------- -------
Balance at beginning of year........................ $ 8,121 $ 6,913 $ 4,871
Charged to expenses.............................. 2,660 2,377 6,764
Write-offs....................................... (2,576) (1,050) (4,495)
Divested businesses.............................. -- -- (68)
Effect of exchange rates......................... (117) (119) (159)
------- ------- -------
Balance at end of year.............................. $ 8,088 $ 8,121 $ 6,913
======= ======= =======
Statement of Stockholders' Equity Information
Presented below is a summary of activity for each component of other
comprehensive income for 2002, 2001, and 2000.
Total Comprehensive Income 2002 2001 2000
- -------------------------- -------- ------- --------
Net income.......................................... $ 28,176 $44,439 $ 49,163
Other comprehensive income (loss):
Foreign currency translation adjustment.......... 11,489 (755) (12,630)
Minimum pension liability adjustment, net of tax. (16,018) (4,307) 64
-------- ------- --------
Total............................................... $ 23,647 $39,377 $ 36,597
======== ======= ========
Components of accumulated other comprehensive income for 2002, 2001 and 2000
follows:
Accumulated Other Comprehensive Income 2002 2001 2000
- -------------------------------------- -------- -------- --------
Foreign currency translation adjustment...................... $ (4,487) $(15,976) $(15,221)
Minimum pension liability adjustment net of taxes of $11,585,
$3,188 and $767 in 2002, 2001 and 2000, respectively....... (25,192) (9,174) (4,867)
-------- -------- --------
Total accumulated other comprehensive income................. $(29,679) $(25,150) $(20,088)
======== ======== ========
36
5/ Goodwill and Other Intangible Assets
Effective December 2, 2001, the Company early adopted SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 142 primarily addresses the accounting
for acquired goodwill and intangible assets (i.e., the post-acquisition
accounting). The most significant changes resulting from the issuance of SFAS
No. 142 are: 1) the cessation of amortization for goodwill and indefinite-lived
intangible assets; 2) annual (at least) impairment assessments of the carrying
values of goodwill and indefinite-lived intangible assets; and 3) the
amortization period of intangible assets with finite lives will no longer be
limited to 40 years.
The Company completed its annual impairment test of all goodwill and concluded
there was no impairment of goodwill. As a result of the early adoption of SFAS
No. 142, beginning December 2, 2001 the Company no longer amortizes goodwill.
The impact of SFAS No. 142 on previously reported results follows:
52 Weeks 53 Weeks
2001 2000
-------- --------
Net Income:
As reported.............................................. $44,439 $49,163
Effect of goodwill amortization (net of tax)............. 3,857 3,879
------- -------
As adjusted.............................................. $48,296 $53,042
======= =======
Basic income per common share:
As reported.............................................. $ 1.59 $ 1.77
Effect of goodwill amortization (net of tax)............. 0.14 0.14
------- -------
Pro forma income per share............................... $ 1.73 $ 1.91
======= =======
Diluted income per common share:
As reported.............................................. $ 1.57 $ 1.74
Effect of goodwill amortization (net of tax)............. 0.13 0.14
------- -------
Pro forma income per share............................... $ 1.70 $ 1.88
======= =======
The goodwill balance by operating segment as of November 30, 2002, and December
1, 2001, is as follows. Changes in the goodwill balance relate to changes in
foreign currency exchange rates.
2002 2001
------- -------
Global Adhesives............................................ $61,556 $57,587
Full-Valu/Specialty......................................... 9,464 9,043
------- -------
Total.................................................... $71,020 $66,630
======= =======
37
Balances of amortizable identifiable intangible assets, excluding goodwill and
other non-amortizable intangible assets were as follows:
Purchased
Technology All
Amortizable Intangible Assets & Patents Other Total
----------------------------- ---------- ------ --------
As of November 30, 2002:
Original cost............................ $ 27,890 $1,605 $ 29,495
Accumulated amortization................. (12,778) (985) (13,763)
-------- ------ --------
Carrying value........................... $ 15,112 $ 620 $ 15,732
======== ====== ========
Weighted average useful lives (in years). 12 17 13
======== ====== ========
As of December 1, 2001:
Original cost............................ $ 27,855 $1,506 $ 29,360
Accumulated amortization................. (10,085) (872) (10,956)
-------- ------ --------
Carrying value........................... $ 17,770 $ 634 $ 18,404
======== ====== ========
Weighted average useful lives (in years). 12 18 13
======== ====== ========
Estimated aggregate amortization expense based on the current carrying value of
amortizable intangible assets for the next five fiscal years is as follows:
Fiscal Year 2003 2004 2005 2006 2007 Thereafter
----------- ------ ------ ------ ------ ------ ----------
Amortization Expense $2,269 $2,058 $2,052 $2,046 $2,036 $5,271
The above amortization expense forecast is an estimate. Actual amounts may
change from such estimated amounts due to fluctuations in foreign currency
exchange rates, additional intangible asset acquisitions, potential impairment,
accelerated amortization, or other events.
Non-amortizable intangible assets at November 30, 2002 and December 1, 2001
totaling $4,393 and $3,314, respectively, related to the effect of the minimum
pension liability intangible asset as shown in the tables in Note 10.
6/ Notes Payable and Long-Term Debt
Notes payable were primarily short-term lines of credit with banks totaling
$20,020 at November 30, 2002. The amount of unused available borrowings under
these lines at November 30, 2002 was $110,062. The weighted-average interest
rates on short-term borrowings were 9.8%, 6.6% and 8.8% in 2002, 2001 and 2000,
respectively. Fair values of these short-term obligations approximate their
carrying values due to their short maturity.
Weighted-Average Maturity
Long-term Debt, Including Capital Lease Obligations Interest Rate Date 2002 2001
- --------------------------------------------------- ---------------- --------- -------- --------
U.S. dollar obligations:
Senior notes............................... 7.03% 2005-2010 $159,000 $190,000
Industrial and commercial development
bonds.................................... -- 7,100
Various other obligations.................. 7.28% 2003-2006 2,707 3,857
Foreign currency obligations:
Japanese yen note.......................... -- 1,620
Japanese yen............................... 4.2% 2009 1,294 3,509
Capital lease obligations..................... 2003 124 394
-------- --------
Total long-term debt 163,125 206,480
Less: current installments................. (1,362) (3,479)
-------- --------
Total......................................... $161,763 $203,001
======== ========
38
At November 30, 2002, the Company had 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 $80,000, $15,000,
$25,000 and $33,000, 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. Amounts outstanding at November 30, 2002
and December 1, 2001 were $0 and $1,620 (Japanese yen note), respectively.
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 November 30, 2002 all financial covenants exceeded the minimum
requirements of these debt agreements.
Maturities of long-term debt including capital leases, for the next five fiscal
years follows:
Fiscal Year Obligation
----------- ----------
2003........................................................ $ 1,362
2004........................................................ 1,006
2005........................................................ 22,759
2006........................................................ 25,440
2007........................................................ 25,201
The estimated fair value of long-term debt was $172,432 and $209,200 for
November 30, 2002 and December 1, 2001, 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 estimated aggregate fair value of these long-term obligations is not
necessarily indicative of the amount that would be realized in a current market
exchange.
Shelf Registration: On September 24, 2002, the Company registered with the
Securities and Exchange Commission to issue, at an indeterminate date, debt and
equity securities with an aggregate initial offering price not to exceed
$500,000.
7/ Income Taxes
Income Before Income Taxes, Minority Interests, Equity Investments
and Cumulative Effect of Accounting Change 2002 2001 2000
- ------------------------------------------ ------- ------- -------
United States......................................................... $30,263 $41,735 $46,159
Outside U.S........................................................... 10,049 19,567 28,611
------- ------- -------
Total................................................................. $40,312 $61,302 $74,770
======= ======= =======
Components of the Provision for Income Taxes
(excluding the cumulative effect of an accounting change)
- ---------------------------------------------------------
Current:
U.S. federal....................................................... $ 4,595 $ 5,753 $ 2,524
State.............................................................. 1,467 1,835 1,143
Outside U.S........................................................ 7,128 9,745 13,514
------- ------- -------
13,190 17,333 17,181
------- ------- -------
Deferred:
U.S. federal....................................................... (2,387) 3,963 8,585
State.............................................................. (15) (23) 620
Outside U.S........................................................ 2,185 (3,608) (66)
------- ------- -------
(217) 332 9,139
------- ------- -------
Total................................................................. $12,973 $17,665 $26,320
======= ======= =======
39
Reconciliation of Effective Income Tax Rate 2002 2001 2000
------------------------------------------- ---- ---- ----
Statutory U.S. federal income tax rate.............. 35.0% 35.0% 35.0%
State income taxes, net of federal benefit.......... 2.3 1.9 2.4
U.S. federal income taxes on dividends received from
non-U.S. subsidiaries, before foreign tax credits... 1.9 1.4 4.5
Foreign tax credits................................. (6.4) (6.5) (6.8)
Non-U.S. taxes...................................... 14.4 1.4 3.8
Interest income not taxable in the U.S.............. (3.6) (1.0) (0.2)
Other tax credits................................... (7.5) (4.8) (3.9)
Other............................................... (3.9) 1.4 0.4
---- ---- ----
Total............................................... 32.2% 28.8% 35.2%
==== ==== ====
The effective tax rate in 2002 and 2001 was impacted by costs related to the
restructuring plan. In 2002, the restructuring charges had a positive impact on
the effective tax rate because the majority of the charges were recorded in
countries in which the charges were tax deductible. In 2001, 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 $2,629.
Deferred Income Tax Balances at Each Year-end Related to 2002 2001
-------------------------------------------------------- -------- --------
Depreciation..................................... $(37,699) $(40,227)
Asset valuation allowances....................... 2,236 2,003
Accrued expenses currently not deductible:
Employee benefit costs........................ 22,826 17,174
Product and other claims...................... 2,733 1,293
Tax loss carryforwards........................... 15,756 19,316
Other............................................ 9,825 7,157
-------- --------
15,677 6,716
Valuation allowance.............................. (7,912) (8,523)
-------- --------
Net deferred tax assets (liabilities)............ $ 7,765 $ (1,807)
======== ========
The difference between the change in the deferred tax assets (liabilities) in
the balance sheet and the deferred tax provision is primarily due to the
Company's minimum pension liability adjustment.
Net Deferred Taxes as Presented on the Consolidated Balance Sheet 2002 2001
- ----------------------------------------------------------------- -------- --------
Deferred tax assets:
Current......................................... $ 16,742 $ 14,431
Non-current..................................... 13,660 8,774
Deferred tax liabilities:
Current......................................... (1,830) (1,457)
Non-current..................................... (20,807) (23,555)
-------- --------
Net deferred tax assets (liabilities).............. $ 7,765 $ (1,807)
======== ========
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 $91,243 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.
40
While non-U.S. operations have been profitable overall, cumulative tax losses
of $51,145 are carried as net operating losses in 13 different countries. These
losses can be carried forward to offset income tax liability on future income
in those countries. Cumulative losses of $40,376 can be carried forward
indefinitely, while the remaining $10,769 must be used during the 2003-2008
period.
The Company has reclassified certain amounts to other expense rather than as an
offset to the related income tax credits to better present the nature of the
amortization expense for the investment properties specifically held to
generate income tax credits. In 2002, $2,418 of amortization expense was
reclassified from income tax expense to other expense. Corresponding
adjustments were also made to 2001 and 2000 of $2,168 and $2,135, respectively.
These reclassifications had no effect on net income or earnings per share.
8/ Stockholders' Equity
Preferred Stock: The Board of Directors is authorized to issue up to
10,045,900 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. The terms of
the Series A preferred stock included the right 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. On April 18, 2002, shareholders authorized
the redemption of these shares and on May 20, 2002 all of the Series A
preferred shares were redeemed at par value and a pro rata dividend paid for
the second quarter on those shares for a total cost of $309. The holder of
Series A preferred stock was entitled to cumulative dividends at the rate of
$0.33 per share annually.
Common Stock: There were 80,000,000 shares of common stock with a par value of
$1.00 authorized and 28,362,316 and 28,280,896 shares issued and outstanding at
November 30, 2002 and December 1, 2001, respectively. On November 16, 2001, a
2-for-1 common stock split was effected which resulted in a transfer of $14,142
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.
Dividends of $0.438, $0.428 and $0.418 per share were declared and paid in
2002, 2001 and 2000, respectively.
Shareholder Rights Plan: The shareholder rights plan provides each holder of a
share of 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.
See Note 6 regarding the Company's shelf registration statement filed in
September 2002.
9/ Stock-Based Compensation
Directors' Deferred Compensation Plan: Directors, who are not employees, may
elect to defer all or a portion of the payment of their retainer and meeting
fees in a number of investment options including units representing shares of
Company common stock. At November 30, 2002, 9,816 shares remained available for
future issuance of the 150,000 shares originally allocated under this plan.
1998 Directors' Stock Incentive Plan: This plan reserves 400,000 shares of
common stock to offer non-employee directors incentives to put forth maximum
efforts for the success of the business and to afford non-employee directors an
opportunity to acquire a proprietary interest. In 2002, 2001 and 2000,
respectively,
41
11,700, 21,020 and 15,400 restricted shares were awarded under this plan. The
market value of these restricted shares totaling $358, $556 and $304 has been
recorded as unearned compensation--restricted stock and is shown in
stockholders' equity. Unearned compensation is being amortized to expense over
the vesting periods of generally four years and amounted to $269, $137 and $207
in 2002, 2001 and 2000, respectively. Commencing in 2003, shares may also be
issued under this plan in connection with amounts deferred by non-employee
directors under the Directors' Deferred Compensation Plan. At November 30,
2002, 321,046 shares remained available for future awards.
Year 2000 Stock Incentive Plan: This plan reserves 3,000,000 shares of common
stock for granting of awards during a period of up to ten years from October
14, 1999. The Year 2000 Stock Incentive Plan permits 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 based on the Company's common stock value.
A total of 384,152, 607,172 and 56,684 non-qualified stock options were granted
in 2002, 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 November 30, 2002, 2,107,338 shares remained available for
future grants or allocations under the plan.
1992 Stock Incentive Plan: This plan reserved 1,800,000 shares of common stock
for granting of awards. The plan permitted 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 based on the
Company's common stock value.
Shares of restricted stock had been the most common award issued from this
plan. Unearned compensation from these restricted stock awards is being
amortized to expense from the unearned compensation contra equity balance over
the vesting periods of generally ten years and amounted to $695, $1,060 and
$1,768 in 2002, 2001 and 2000, respectively.
A total of 288,150 non-qualified stock options were granted in 2000 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 November 30, 2002, no shares remained
available for future grants or allocations from the 1992 plan.
401(k) Plan: All U.S. employees have the option of contributing up to fifteen
percent of their pretax earnings to a 401(k) plan. The Company matches up to
the first four percent of each employee's contributions and the trustee
purchases Company shares on the open market. The costs of the Company match
were $3,106, $2,905 and $3,471 in 2002, 2001 and 2000, respectively.
Key Employee Deferred Compensation Plan: Key employees may elect to defer a
portion of their eligible compensation to be invested in a number of investment
choices, including units which are valued based on the then fair market value
of the Company's common stock. The Company provides a 10% match on deferred
compensation invested in these units. The Company also provides a match for
certain amounts specified in the plan related to and reduced by matching
contributions under the 401(k) plan. There were 5,868, 22,177 and 20,072 units
allocated to employees' deferrals in 2002, 2001 and 2000, respectively. There
were 2,676, 7,652 and 13,096 units allocated to Company matching in 2002, 2001
and 2000, respectively. The costs of the matching were $256, $221 and $266 in
2002, 2001 and 2000, respectively. Of the 600,000 shares reserved under this
plan, 517,094 remained available for this plan at November 30, 2002.
All deferred compensation invested in units of the Company's common stock is
paid with shares of the Company's common stock. All deferred compensation
invested in any of the other investment choices is paid with cash.
42
Stock Options:
The following table provides information about the Company's 1992 and 2000
Stock Incentive Plans:
Weighted-Average
Summary of Non-qualified Stock Option Activity Options Exercise Price
---------------------------------------------- --------- ----------------
Outstanding at November 28, 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
Cancelled.............................. (154,851) 22.35
Granted................................ 384,152 26.02
Exercised.............................. (79,088) 22.31
---------
Outstanding at November 30, 2002....... 1,329,261 $22.64
=========
Exercisable at November 30, 2002....... 404,279 $22.33
=========
Options Outstanding Options Exercisable
---------------------------------------- ----------------------
Weighted-Average Weighted-
Remaining Contractual Exercise Average
Range of Exercise Prices Shares Life (in years) Price Options Exercise Price
- ------------------------ --------- --------------------- -------- ------- --------------
$18.63 - 23.44..... 777,915 6.8 $19.72 312,072 $20.50
25.95 - 28.52..... 528,785 7.0 26.45 77,207 27.38
30.63 - 34.31..... 22,561 6.6 33.89 15,000 34.31
--------- -------
1,329,261 404,279
========= =======
The weighted-average fair value per stock options granted in 2002, 2001 and
2000 was $10.34, $7.66 and $10.15, respectively. The fair value was estimated
using the Black-Scholes option-pricing model using the following
weighted-average assumptions for 2002, 2001 and 2000:
2002 2001 2000
------- ------- -------
Risk-free interest rate................................ 4.68% 5.66% 6.31%
Expected dividend yield................................ 1.50% 1.50% 1.50%
Expected volatility factor............................. 37.58% 35.77% 30.60%
Expected option term................................... 7 years 7 years 7 years
10/ Pension and Postretirement Benefits
Noncontributory defined benefit plans cover 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 funding policy is consistent with the funding requirements of federal law
and regulations. Plan assets consist principally of listed equity securities.
U.S. postretirement benefits are funded through a Voluntary Employees'
Beneficiaries Association Trust.
Certain non-U.S. 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
43
specified period of service. Benefits for these plans are generally based on
years of service and annual compensation.
Health care and life insurance benefits are provided for eligible retired
employees and their eligible dependents. These benefits are provided through
various insurance companies and health care providers. Costs are accrued during
the years the employee renders the necessary service.
Pension Benefits
-------------------------------------- Other Postretirement
U.S. Plans Non-U.S. Plans Benefits
------------------ ------------------ ------------------
Change in benefit obligation: 2002 2001 2002 2001 2002 2001
- ----------------------------- -------- -------- -------- -------- -------- --------
Benefit obligation, September 1 of prior
year........................................ $211,450 $180,382 $ 77,894 $ 66,759 $ 49,417 $ 39,734
Service cost.................................. 5,640 4,735 2,600 2,491 1,660 1,360
Interest cost................................. 14,862 14,018 4,663 3,575 3,471 3,089
Participant contributions..................... -- -- 705 1,494 326 250
Plan amendments............................... 307 506 -- -- -- --
Actuarial (gain)/loss......................... 6,284 21,057 1,404 6,341 (1,357) 8,029
Curtailment (gain)/loss....................... (2,643) -- (372) -- 721 --
Benefits paid................................. (9,526) (9,248) (3,713) (2,767) (3,039) (3,045)
Currency change effect........................ -- -- 7,767 1 -- --
-------- -------- -------- -------- -------- --------
Benefit obligation, August 31................. $226,374 $211,450 $ 90,948 $ 77,894 $ 51,199 $ 49,417
======== ======== ======== ======== ======== ========
Change in plan assets:
- ----------------------
Fair value of plan assets, September 1 of
prior year.................................. $210,131 $290,329 $ 46,103 $ 50,963 $ 56,984 $ 78,185
Actual return on plan assets.................. (34,971) (72,332) (11,212) (5,921) (11,955) (18,663)
Employer contributions........................ 1,484 1,382 558 651 293 257
Participant contributions..................... -- -- 607 1,494 326 250
Other......................................... -- -- 224 -- -- --
Benefits paid................................. (9,526) (9,248) (1,209) (928) (3,039) (3,045)
Currency change effect........................ -- -- 3,400 (156) -- --
-------- -------- -------- -------- -------- --------
Fair value of plan assets, August 31.......... $167,118 $210,131 $ 38,471 $ 46,103 $ 42,609 $ 56,984
======== ======== ======== ======== ======== ========
Reconciliation of funded status as of November 30:
- --------------------------------------------------
Funded status................................. $(59,256) $ (1,319) $(56,784) $(31,791) $ (8,589) $ 7,567
Unrecognized actuarial loss (gain)............ 41,186 (22,422) 25,857 279 36,479 22,156
Unrecognized prior service cost (benefit)..... 4,417 5,202 (53) (41) (5,202) (7,707)
Unrecognized net transition obligation........ (42) (69) 576 583 -- --
Contributions between measurement date
and fiscal year-end......................... 278 270 226 251 69 75
-------- -------- -------- -------- -------- --------
Recognized amount............................. $(13,417) $(18,338) $(30,178) $(30,719) $ 22,757 $ 22,091
======== ======== ======== ======== ======== ========
Statement of financial position as of November 30:
- --------------------------------------------------
Prepaid benefit cost.......................... $ 355 $ 469 $ 870 $ 1,489
Accrued benefit liability..................... (13,772) (18,807) (31,048) (32,208)
Additional minimum liability.................. (18,899) (8,578) (17,878) (3,785)
Intangible asset.............................. 4,393 3,314 -- --
Accumulated other comprehensive
income--pretax.............................. 14,506 5,264 17,878 3,785
-------- -------- -------- --------
Recognized amount............................. $(13,417) $(18,338) $(30,178) $(30,719)
======== ======== ======== ========
The U.S. pension plans are underfunded as of year-end 2002. The accumulated
benefit obligations of these plans are $199,712, with assets of these plans
totaling $167,118. Certain non-U.S. pension plans were underfunded as
44
of year-end 2002 and 2001. The accumulated benefit obligations of these plans
were $76,158 in 2002 and $90,582 in 2001. The assets of these plans were
$28,452 in 2002 and $46,660 in 2001.
Pension Benefits
------------------------------------------------------- Other
U.S. Plans Non-U.S. Plans Postretirement Benefits
---------------------------- ------------------------- -------------------------
Net periodic cost (benefit): 2002 2001 2000 2002 2001 2000 2002 2001 2000
- ---------------------------- -------- -------- -------- ------- ------- ------- ------- ------- -------
Service cost....................... $ 5,640 $ 4,735 $ 5,613 $ 2,600 $ 2,491 $ 2,675 $ 1,660 $ 1,360 $ 1,027
Interest cost...................... 14,862 14,018 13,513 4,663 3,575 5,041 3,471 3,089 2,119
Expected return on assets.......... (23,258) (24,118) (20,582) (3,272) (3,303) (4,490) (5,281) (7,317) (6,387)
Prior service cost amortization.... 844 839 838 6 8 8 (2,309) (2,310) (2,310)
Actuarial (gain)/loss amortization. (1,737) (6,059) (2,637) 417 (406) (137) 1,522 (457) (942)
Transition amount amortization..... (27) (27) (27) 54 60 62 -- -- --
Curtailment gain................... 247 -- -- 124 -- -- 558 -- --
-------- -------- -------- ------- ------- ------- ------- ------- -------
Net periodic benefit cost (benefit) $ (3,429) $(10,612) $ (3,282) $ 4,592 $ 2,425 $ 3,159 $ (379) $(5,635) $(6,493)
======== ======== ======== ======= ======= ======= ======= ======= =======
Pension Benefits
------------------------------------- Other Postretirement
U.S. Plans Non-U.S. Plans Benefits
------------------- ---------------- -------------------
Weighted-Average Assumptions, August 2002 2001 2000 2002 2001 2000 2002 2001 2000
- ------------------------------------ ----- ----- ----- ---- ---- ---- ---- ---- ----
Discount rate.............................. 6.50% 7.00% 7.75% 6.96% 6.04% 6.53% 6.50% 7.00% 7.75%
Expected return on plan assets............. 10.50% 10.50% 10.50% 5.88% 7.93% 7.92% 9.50% 9.50% 9.50%
Rate of compensation increase.............. 4.02% 4.02% 4.02% 4.01% 3.16% 3.14%
Rate of increase in healthcare cost levels:
Employees under age 65.................. 4.85% 5.10% 5.10%
Employees age 65 and older.............. 4.85% 5.10% 5.10%
For calculation of 2003 expense the Company has reduced its assumptions for
expected return on plan assets for the U.S. pension plans and other
postretirement benefits to 9.75 percent and 8.75 percent, respectively. The
discount rate assumptions noted above were the rates used to calculate the
year-end pension obligations for each respective year.
The rate of increase in health care cost levels is expected to be 4.85% in the
years 2003 and later. Beginning in 2005, the dollar contribution by the Company
for retiree medical coverage will remain fixed at the 2004 level for employees
who retire in the year 2005 or later.
Sensitivity Information: The health care trend rate assumption has a
significant effect on the amounts reported. A one-percentage point change in
the health care cost trend rate would have the following effects on the
December 1, 2001 service and interest cost and the accumulated postretirement
benefit obligation at November 30, 2002:
One-Percentage Point
-------------------
Increase Decrease
-------- --------
Effect on service and interest cost components......... $ 495 $ (410)
Effect on accumulated postretirement benefit obligation $4,283 $(3,620)
11/ Financial Instruments
Forward foreign currency contracts as of November 30, 2002, matured between
December 3, 2002 and December 20, 2002. These contracts represent hedges of
intercompany transactions denominated in non-functional currencies (primarily
pound sterling and euro). The mark-to-market gains/(losses) associated with
these contracts were $41 and $(183) for 2002 and 2001, respectively. These
gains/(losses) were largely offset by the underlying foreign currency exposures
for which these contracts relate.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of entities in the customer base and their
dispersion across many different industries and countries. As of November 30,
2002 and December 1, 2001, there were no significant concentrations of credit
risk.
45
12/ Commitments and Contingencies
Leases:
Assets under capital leases 2002 2001
--------------------------- ------- -------
Land........................................................ $ 1,201 $ 1,168
Buildings and improvements.................................. 2,374 2,056
Machinery and equipment..................................... 572 653
------- -------
4,147 3,877
Accumulated depreciation.................................... (1,897) (1,669)
------- -------
Net assets under capital leases............................. $ 2,250 $ 2,208
======= =======
The minimum lease payments, related to equipment, that will have to be made in
each of the years indicated based on capital and operating leases in effect at
November 30, 2002 are:
Fiscal year Capital Operating
----------- ------- ---------
2003........................................................ $104 $12,559
2004........................................................ 21 10,253
2005........................................................ -- 6,663
2006........................................................ -- 2,383
2007........................................................ -- 1,698
Later years................................................. -- 8,146
---- -------
Total minimum lease payments................................ 125 $41,702
=======
Amount representing interest................................ (1)
----
Present value of minimum lease payments..................... $124
====
Rental expense for all operating leases was $21,270, $16,578 and $15,648 in
2002, 2001 and 2000, respectively.
Environmental: The Company is party to various lawsuits and governmental
proceedings. In particular, the Company is currently deemed a potentially
responsible party (PRP) or defendant, generally in conjunction with numerous
other parties, in a number of government enforcement and private actions
associated with hazardous waste sites. As a PRP or defendant, the Company may
be required to pay a share of the costs of investigation and cleanup of these
sites. The Company has recorded its best probable estimate of liabilities for
estimated costs of environmental remediation. These estimates are based
primarily upon internal or third-party environmental studies, and estimates as
to the Company's responsibility. Recorded liabilities are adjusted as
circumstances change.
Product Liability Claims: Product liability claims refers primarily to a
product line of a subsidiary used in the residential construction market in the
southeastern United States for a limited period of time. The number and amount
of all potential claims related to this product line are limited. The Company
has accrued $4,122 for the potential liability for claims settlement and legal
costs. Additionally the Company has recorded probable insurance recoveries of
$2,261 in connection with all such claims. The Company continually reevaluates
these amounts. The Company does not believe that the ultimate outcome of all of
its legal proceedings and claims related to this product line, individually and
in the aggregate, will have a material adverse effect on its consolidated
financial position, results of operations or cash flows.
Guarantees: In July 2000, the Board of Directors adopted the Executive Stock
Purchase Loan Program, designed to facilitate immediate and significant stock
ownership by executives, especially new management employees. During certain
designated periods between September 2000 and August 2001, eligible employees
were allowed to purchase shares of Company common stock in the open market.
Under the program, the
46
Company arranged for a bank to provide full-recourse, personal loans to
eligible employees electing to participate in the program. The loans bear
interest at the Applicable Federal Rate and mature in five years, with
principal and interest due at that time. The loans are guaranteed by the
Company only in the event of the participant's default. Of the original 30
employees receiving bank loans, 14 had loans outstanding at November 30, 2002
and the aggregate amount outstanding was $8,810.
13/ Operating Segment Information
In fiscal 2002 and in connection with the current year restructuring
initiatives (See Note 3 to the Consolidated Financial Statements,
"Restructuring and Other Related Costs"), the management structure and
philosophy fundamentally changed how global adhesives operations were to be
managed. The change from autonomous geographic regions for its adhesive
operations to combined global operations, focused on managing adhesive products
and markets on a worldwide basis. Prior year results were restated to reflect
the realigned organization for comparability. The primary markets include
adhesives for packaging, assembly, converting, nonwoven, automotive, graphic
arts and footwear. In addition, the existing management structure was
reorganized to manage these adhesives markets on a global basis. In this
regard, the adhesives operations has a General Manager--Global Adhesives, who
is responsible for manufacturing, sales and product line management. Management
reporting has also been modified to report and measure results, as well as
reward performance of the adhesives operations on a global basis.
Because of these fundamental changes, effective in 2002, segment reporting has
changed to present adhesives operations globally. The specialty chemical
product lines will continue to be reported as a separate segment entitled
Full-Valu/Specialty. Certain product lines previously included in the adhesives
geographic business have been repositioned and are now included in the
Full-Valu/Specialty operating segment.
Management evaluates the performance of its operating segments based on
operating income which is defined as gross profit less SG&A expenses and
excluding the amortization of goodwill and gains on the sales of assets.
Charges, net of gains on the sales of assets in connection with the Company's
restructuring initiatives are excluded from its 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.
Reportable operating segment financial information for all periods presented
follows:
Inter-
Trade Segment Operating Depreciation/ Total Capital
Operating Segments Revenue Revenue Income(Loss) Amortization Assets (a) Expenditures
- ------------------ ---------- ------- ------------ ------------- ---------- ------------
Global Adhesives... 2002 $ 865,782 $ 4,363 $ 58,444 $29,037 $ 601,547 $24,164
2001 878,034 7,624 55,481 32,723 614,308 16,361
2000 947,599 4,942 56,974 35,087 646,992 24,144
Full-Valu/Specialty 2002 $ 390,428 $ 649 $ 29,759 $ 8,443 $ 209,821 $ 2,456
2001 396,025 1,460 34,190 8,985 239,922 5,046
2000 416,362 909 45,227 8,672 243,031 5,649
Corporate and
Unallocated...... 2002 -- $(5,012) -- $12,814 $ 150,071 $ 9,658
2001 -- (9,084) -- 11,129 111,943 9,318
2000 -- (5,851) -- 8,406 120,338 19,251
Total Company...... 2002 $1,256,210 -- $ 88,203 $50,294 $ 961,439 $36,278
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
- --------
(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.
47
Reconciliation of Operating Income to Pretax Income 2002 2001 2000
- --------------------------------------------------- -------- -------- --------
Operating income............................. $ 88,203 $ 89,671 $102,201
Restructuring related (charges) credits...... (29,737) (1,564) 300
Interest expense............................. (17,266) (21,247) (23,814)
Gains from sales of assets................... 2,121 752 4,131
Other income (expense), net.................. (3,009) (6,310) (8,048)
-------- -------- --------
Pretax income................................ $ 40,312 $ 61,302 $ 74,770
======== ======== ========
Property,
Trade Plant and
Geographic Areas Revenue Equipment
---------------- ---------- ---------
North America..................................... 2002 $ 748,706 $219,894
2001 762,402 242,296
2000 817,855 258,230
Europe............................................ 2002 $ 243,989 $ 72,789
2001 245,271 64,623
2000 262,128 67,369
Latin America..................................... 2002 $ 164,195 $ 40,858
2001 169,649 42,853
2000 182,986 45,242
Asia/Pacific...................................... 2002 $ 99,320 $ 21,423
2001 96,737 21,341
2000 100,992 23,848
Total Company..................................... 2002 $1,256,210 $354,964
2001 1,274,059 371,113
2000 1,363,961 394,689
14/ Quarterly Data (unaudited)
Net Revenue Gross Profit Operating Income**
--------------------- ------------------- -----------------
2002 2001 2002 2001 2002 2001
---------- ---------- -------- -------- ------- -------
First quarter. $ 293,240 $ 306,934 $ 75,178 $ 82,576 $ 6,346 $14,284
Second quarter 319,402 328,507 87,437 88,212 16,055 23,612
Third quarter. 313,936 315,712 84,184 85,923 16,511 24,752
Fourth quarter 329,632 322,906 91,183 88,842 17,510 25,459
---------- ---------- -------- -------- ------- -------
Total year.... $1,256,210 $1,274,059 $337,982 $345,553 $56,422 $88,107
========== ========== ======== ======== ======= =======
Basic Net Income Per Diluted Net Income
Net Income Share Per Share
--------------------- ------------------- -----------------
2002 2001 2002 2001 2002 2001
---------- ---------- -------- -------- ------- -------
First quarter. $ 666 $ 5,049* $ 0.02 $ 0.18* $ 0.02 $ 0.18*
Second quarter 7,935 11,861 0.28 0.42 0.28 0.42
Third quarter. 9,199 14,587 0.33 0.52 0.32 0.51
Fourth quarter 10,376 12,942 0.37 0.46 0.36 0.46
---------- ----------
Total year.... $ 28,176 $ 44,439* $ 1.00 $ 1.59* $ .98 $ 1.57*
========== ==========
- --------
* Includes an accounting change of $501 charge or $0.02 loss per share.
** Includes charges related to the Company's restructuring initiatives.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
48
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 for the Annual
Meeting of Shareholders to be held on April 17, 2003 (the "2003 Proxy
Statement") are incorporated herein by reference.
The information contained at the end of Part I hereof under the heading
"Executive Officers of the Registrant" is incorporated herein 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 2003 Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information under the heading "Security Ownership of Certain Beneficial
Owners and Management" contained in the 2003 Proxy Statement is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
The section entitled "Executive Stock Purchase Loan Program" contained in the
2003 Proxy Statement is incorporated herein by reference.
Item 14. Controls and Procedures
With the participation of management, the Company's chief executive officer and
chief financial officer evaluated the Company's disclosure controls and
procedures within 90 days of the filing date of this quarterly report. Based
upon this evaluation, the chief executive officer and chief financial officer
concluded that the Company's disclosure controls and procedures are effective
in ensuring that material information required to be disclosed is included in
the reports that it files with the SEC.
There were no significant changes in the Company's internal controls or, to the
knowledge of management, in other factors that could significantly affect these
controls subsequent to the evaluation date.
49
Item 15. 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 November 30, 2002,
December 1, 2001 and December 2, 2000
Consolidated Balance Sheet as of November 30, 2002, and December 1, 2001
Consolidated Statement of Stockholders' Equity for the years ended
November 30, 2002, December 1, 2001 and December 2, 2000
Consolidated Statement of Cash Flows for the years ended November 30,
2002, December 1, 2001 and December 2, 2000
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. Fuller Exhibit 3(a) to the Report on Form 10-K405 for the
Company, October 30, 1998 year ended November 28, 1998.
3.2 Articles of Amendment of Articles of Exhibit 3.2 to the Report on Form 10-K for the
Incorporation of H.B. Fuller Company, year ended December 1, 2001.
October 27, 2001
3.3 By-Laws of H.B. Fuller Company as amended Exhibit 3(b) to the Report on Form 10-Q for the
through July 14, 1999 quarter ended August 28, 1999.
4.1 Rights Agreement, dated as of July 18, 1996, Exhibit 4 to the Form 8-A, dated July 24, 1996.
between H.B. Fuller Company and 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 February 2,
January 23, 2001, between H.B. Fuller Company 2001.
and Wells Fargo Bank Minnesota, National
Association, as Rights Agent
4.3 Agreement dated as of June 2, 1998 between H.B. Exhibit 4(a) to the Report on Form 10-Q for the
Fuller Company and a group of investors, quarter ended August 29, 1998.
primarily insurance companies, including the form
of Notes
4.4 H.B. Fuller Company Executive Stock Purchase Exhibit 4.7 to the Registration Statement on Form
Loan Program 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.
50
Item Incorporation by Reference
---- --------------------------
*10.1 H.B. Fuller Company 1992 Stock Incentive Plan Exhibit 10(a) to the Report on Form 10-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 Plan Exhibit 10(d) to the Report on Form 10-K for the
year ended November 30, 1993.
*10.4 H.B. Fuller Company Directors' Deferred Exhibit 10.4 to the Report on Form 10-K for the
Compensation Plan as Amended December 1, year ended December 1, 2001.
2001
*10.5 H.B. Fuller Company 2000 Stock Incentive Plan Registration Statement on Form S-8
(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-Q for the
Incentive Plan quarter ended May 30, 1998.
*10.7 H.B. Fuller Company Supplemental Executive Exhibit 10(j) to the Report on Form 10-K405 for
Retirement Plan--1998 Revision the year ended November 28, 1998.
*10.8 First Amendment to H.B. Fuller Company Exhibit 10(x) to the Report on Form 10-K405 for
Supplemental Executive Retirement Plan dated the year ended November 28, 1998.
November 4, 1998
*10.9 H.B. Fuller Company Executive Benefit Trust Exhibit 10(k) to the Report on Form 10-K for the
dated October 25, 1993 between H.B. Fuller year ended November 29, 1997.
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 Executive Exhibit 10(k) to the Report on Form 10-K405 for
Benefit Trust, dated October 1, 1997 and the year ended November 28, 1998.
March 2, 1998, between H.B. 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 Trust, Exhibit 10(w) to the Report on Form 10-K for
dated February 10, 1999, between H.B. Fuller the year ended November 27, 1999.
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 Statement on
Compensation Plan 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-K for the
Retirement Plan for Directors of H.B. Fuller year ended November 27, 1999.
Company dated February 10, 1999
*10.14 H.B. Fuller Company Annual and Long-Term
Incentive Plan
51
Item Incorporation by Reference
---- --------------------------
*10.15 Form of Employment Agreement signed by Exhibit 10(e) to the Report on Form 10-K for the
executive officers year ended November 30, 1990.
*10.16 Employment Agreement, dated April 16, 1998, Exhibit 10(a) to the Report on Form 10-Q for the
between H.B. Fuller Company and Albert quarter ended May 30, 1998.
Stroucken
*10.17 Restricted Stock Award Agreement, dated Exhibit 10(d) to the Report on Form 10-Q for the
April 23, 1998, between H.B. Fuller Company quarter ended May 30, 1998.
and Lee R. Mitau
*10.18 Managing Director Agreement with Peter Exhibit 10(p) to the Report on Form 10-K for the
Koxholt signed October 15, 1998 year ended November 27, 1999.
*10.19 International Service Agreement with Peter Exhibit 10(a) to the Report on Form 10-Q for the
Koxholt dated May 1, 2001 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-K405 for
April 8, 1998 between H.B. Fuller Company and the year ended November 28, 1998.
each of its executive officers, other than Peter
Koxholt and Albert Stroucken
*10.22 Change in Control Agreement dated October 15, Exhibit 10(q) to the Report on Form 10-K for the
1998 between H.B. Fuller Company and Peter year ended November 27, 1999.
Koxholt
*10.23 Employment Agreement dated May 6, 1999 Exhibit 10(a) to the Report on Form 10-Q for the
between H.B. Fuller Company and Raymond A. quarter ended August 28, 1999.
Tucker
*10.24 Third Declaration of Amendment to the Exhibit 10.1 to the Report on Form 10-Q for the
Retirement Plan for Directors of H.B. Fuller quarter ended August 31, 2002.
Company dated April 19, 2002
*10.25 Letter Agreement with Raymond A. Tucker Exhibit 10.2 to the Report on Form 10-Q for the
dated July 7, 2002 quarter ended August 31, 2002.
12 Computation of Ratios
21 List of Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
24 Powers of Attorney
99.1 Certification by Albert P.L. Stroucken,
Chairman, President and Chief Executive Officer
99.2 Certification by Raymond A. Tucker, Senior
Vice President and Chief Financial Officer
- --------
* Asterisked items are management contracts or compensatory plans or
arrangements required to be filed.
52
(b) Reports on Form 8-K
Two reports on Form 8-K were filed during the quarter ended November 30,
2002 to:
1) Report financial results for the third quarter of 2002 and filing of
shelf registration statement.
2) Report changes in the management structure and operating segments.
(c) See Exhibit Index and Exhibits attached to this Form 10-K405.
53
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
Dated: February 28, 2003 By /S/ ALBERT P.L. STROUCKEN
--------------------------------------
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
ALBERT P.L. STROUCKEN Chief Executive Officer and
Director
(Principal Executive Officer)
/S/ RAYMOND A. TUCKER Senior Vice President, and
- ------------------------------ Chief Financial Officer
RAYMOND A. TUCKER (Principal Financial Officer)
/S/ JAMES C. MCCREARY, JR. Vice President and Controller
- ------------------------------ (Principal Accounting Officer)
JAMES C. MCCREARY, JR.
* NORBERT R. BERG * FREEMAN A. FORD
- ------------------------------ ------------------------------
NORBERT R. BERG, Director FREEMAN A. FORD, Director
* GAIL D. FOSLER * REATHA CLARK KING
- ------------------------------ ------------------------------
GAIL D. FOSLER, Director REATHA CLARK KING, Director
* KNUT KLEEDEHN * J. MICHAEL LOSH
- ------------------------------ ------------------------------
KNUT KLEEDEHN, Director J. MICHAEL LOSH, Director
* JOHN J. MAURIEL, JR. * LEE R. MITAU
- ------------------------------ ------------------------------
JOHN J. MAURIEL, JR., Director LEE MITAU, Director
* ALFREDO L. ROVIRA * R. WILLIAM VAN SANT
- ------------------------------ ------------------------------
ALFREDO L. Rovira, Director R. WILLIAM VAN SANT, Director
*By /S/ PATRICIA L. JONES Dated: February 28, 2003
- ------------------------------
PATRICIA L. JONES, Attorney
in Fact
54
CERTIFICATIONS
I, Albert P.L. Stroucken, certify that:
1. I have reviewed this annual Report on Form 10-K405 of H.B. Fuller Company
("The Company");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 28, 2003
/s/ ALBERT P.L. STROUCKEN
- ---------------------------
Albert P.L. Stroucken
Chairman, President and Chief
Executive Officer
55
I, Raymond A. Tucker, certify that:
1. I have reviewed this annual Report on Form 10-K405 of H.B. Fuller Company
("The Company");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 28, 2003
/s/ RAYMOND A. TUCKER
- ---------------------------
Raymond A. Tucker
Senior Vice President and
Chief Financial Officer
56
EXHIBIT INDEX
Item Incorporation by Reference
---- --------------------------
3.1 Restated Articles of Incorporation of H.B. Fuller Exhibit 3(a) to the Report on Form 10-K405 for the
Company, October 30, 1998 year ended November 28, 1998.
3.2 Articles of Amendment of Articles of Exhibit 3.2 to the Report on Form 10-K for the
Incorporation of H.B. Fuller Company, year ended December 1, 2001.
October 27, 2001
3.3 By-Laws of H.B. Fuller Company as amended Exhibit 3(b) to the Report on Form 10-Q for the
through July 14, 1999 quarter ended August 28, 1999.
4.1 Rights Agreement, dated as of July 18, 1996, Exhibit 4 to the Form 8-A, dated July 24, 1996.
between H.B. Fuller Company and 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 February 2,
January 23, 2001, between H.B. Fuller Company 2001.
and Wells Fargo Bank Minnesota, National
Association, as Rights Agent
4.3 Agreement dated as of June 2, 1998 between H.B. Exhibit 4(a) to the Report on Form 10-Q for the
Fuller Company and a group of investors, quarter ended August 29, 1998.
primarily insurance companies, including the form
of Notes
4.4 H.B. Fuller Company Executive Stock Purchase Exhibit 4.7 to the Registration Statement on Form
Loan Program 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 Plan Exhibit 10(a) to the Report on Form 10-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 Plan Exhibit 10(d) to the Report on Form 10-K for the
year ended November 30, 1993.
*10.4 H.B. Fuller Company Directors' Deferred Exhibit 10.4 to the Report on Form 10-K for the
Compensation Plan as Amended December 1, 2001 year ended December 1, 2001.
*10.5 H.B. Fuller Company 2000 Stock Incentive Plan Registration Statement on Form S-8 (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-Q for the
Incentive Plan quarter ended May 30, 1998.
*10.7 H.B. Fuller Company Supplemental Executive Exhibit 10(j) to the Report on Form 10-K405 for
Retirement Plan--1998 Revision the year ended November 28, 1998.
*10.8 First Amendment to H.B. Fuller Company Exhibit 10(x) to the Report on Form 10-K405 for
Supplemental Executive Retirement Plan dated the year ended November 28, 1998.
November 4, 1998
Item Incorporation by Reference
---- --------------------------
*10.9 H.B. Fuller Company Executive Benefit Trust Exhibit 10(k) to the Report on Form 10-K for the
dated October 25, 1993 between H.B. Fuller year ended November 29, 1997.
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 Executive Exhibit 10(k) to the Report on Form 10-K405 for
Benefit Trust, dated October 1, 1997 and March 2, the year ended November 28, 1998.
1998, between H.B. 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 Trust, Exhibit 10(w) to the Report on Form 10-K for the
dated February 10, 1999, between H.B. Fuller year ended November 27, 1999.
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 Statement on Form
Compensation Plan S-8 (Commission File No. 333-89453) filed
October 21, 1999.
*10.13 First Declaration of Amendment to the Retirement Exhibit 10(v) to the Report on Form 10-K for the
Plan for Directors of H.B. Fuller Company dated year ended November 27, 1999.
February 10, 1999
*10.14 H.B. Fuller Company Annual and Long-Term
Incentive Plan
*10.15 Form of Employment Agreement signed by Exhibit 10(e) to the Report on Form 10-K for the
executive officers year ended November 30, 1990.
*10.16 Employment Agreement, dated April 16, 1998, Exhibit 10(a) to the Report on Form 10-Q for the
between H.B. Fuller Company and Albert quarter ended May 30, 1998.
Stroucken
*10.17 Restricted Stock Award Agreement, dated Exhibit 10(d) to the Report on Form 10-Q for the
April 23, 1998, between H.B. Fuller Company and quarter ended May 30, 1998.
Lee R. Mitau
*10.18 Managing Director Agreement with Peter Koxholt Exhibit 10(p) to the Report on Form 10-K for the
signed October 15, 1998 year ended November 27, 1999.
*10.19 International Service Agreement with Peter Exhibit 10(a) to the Report on Form 10-Q for the
Koxholt dated May 1, 2001 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-K405 for
April 8, 1998 between H.B. Fuller Company and the year ended November 28, 1998.
each of its executive officers, other than Peter
Koxholt and Albert Stroucken
*10.22 Change in Control Agreement dated October 15, Exhibit 10(q) to the Report on Form 10-K for the
1998 between H.B. Fuller Company and Peter year ended November 27, 1999.
Koxholt
Item Incorporation by Reference
---- --------------------------
*10.23 Employment Agreement dated May 6, 1999 Exhibit 10(a) to the Report on Form 10-Q for the
between H.B. Fuller Company and Raymond A. quarter ended August 28, 1999.
Tucker
*10.24 Third Declaration of Amendment to the Exhibit 10.1 to the Report on Form 10-Q for the
Retirement Plan for Directors of H.B. Fuller quarter ended August 31, 2002.
Company dated April 19, 2002
*10.25 Letter Agreement with Raymond A. Tucker dated Exhibit 10.2 to the Report on Form 10-Q for the
July 7, 2002 quarter ended August 31, 2002.
12 Computation of Ratios
21 List of Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
24 Powers of Attorney
99.1 Certification by Albert P.L. Stroucken, Chairman,
President and Chief Executive Officer
99.2 Certification by Raymond A. Tucker, Senior Vice
President and Chief Financial Officer
* Asterisked items are management contracts or compensatory plans or
arrangements required to be filed.