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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended February 28, 2004
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to __________________
Commission File Number 001-09225
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H.B. FULLER COMPANY
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(Exact name of Registrant as specified in its charter)
Minnesota 41-0268370
- --------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1200 Willow Lake Boulevard, Vadnais Heights, Minnesota 55110-5101
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(Address of principal executive offices) (Zip Code)
(651) 236-5900
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(Registrant's telephone number, including area code)
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). [X]
The number of shares outstanding of the Registrant's Common Stock, par value
$1.00 per share, was 28,494,834 as of March 31, 2004.
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1
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
- ----------------------------
H.B. FULLER COMPANY AND SUBSIDIARIES
Statement of Consolidated Income
(In thousands, except per share amounts)
(Unaudited)
13 Weeks Ended
---------------------------
February 28, March 1,
2004 2003
---------------------------
Net revenue $ 318,573 $ 294,588
Cost of sales (232,796) (212,440)
---------------------------
Gross profit 85,777 82,148
Selling, general and administrative expenses (75,409) (70,944)
Interest expense (3,564) (3,765)
Other expense, net (933) (2,680)
---------------------------
Income before income taxes, minority
interests, and income from equity investments 5,871 4,759
Income taxes (1,879) (1,634)
Minority interests in consolidated loss (income) 120 (258)
Income from equity investments 501 379
---------------------------
Net income $ 4,613 $ 3,246
===========================
Basic income per common share $ 0.16 $ 0.12
===========================
Diluted income per common share $ 0.16 $ 0.11
===========================
Weighted-average common shares outstanding:
Basic 28,347 28,201
Diluted 28,888 28,659
Dividends per share $ 0.1125 $ 0.1100
See accompanying notes to consolidated financial statements.
2
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheet
(In thousands, except share and per share amounts)
(Unaudited)
February 28, November 29,
2004 2003
---------------------------
Assets
Current assets:
Cash and cash equivalents $ 996 $ 3,260
Trade receivables 244,294 247,963
Allowance for doubtful accounts (9,161) (8,370)
Inventories 154,893 146,571
Other current assets 63,219 59,068
---------------------------
Total current assets 454,241 448,492
Property, plant and equipment, net 345,704 348,653
Other assets 117,165 114,117
Goodwill 82,066 79,414
Other intangibles, net 16,565 16,912
---------------------------
Total assets $ 1,015,741 $ 1,007,588
===========================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 23,420 $ 11,493
Current installments of long-term debt 937 1,383
Trade payables 105,862 117,001
Accrued payroll and employee benefits 25,286 25,042
Other accrued expenses 25,244 29,196
Restructuring liability 1,430 1,844
Income taxes payable 13,501 14,067
---------------------------
Total current liabilities 195,680 200,026
Long-term debt, excluding current installments 160,406 161,047
Accrued pensions 90,624 88,586
Other liabilities 37,272 34,239
Minority interests in consolidated subsidiaries 14,236 14,352
---------------------------
Total liabilities 498,218 498,250
---------------------------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $1.00 per share 28,496 28,435
Shares outstanding were 28,495,547 and
28,435,000, respectively
Additional paid-in capital 42,685 41,324
Retained earnings 438,959 437,575
Accumulated other comprehensive income 8,344 3,044
Unearned compensation - restricted stock (961) (1,040)
---------------------------
Total stockholders' equity 517,523 509,338
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Total liabilities and stockholders' equity $ 1,015,741 $ 1,007,588
===========================
See accompanying notes to consolidated financial statements.
3
H.B. FULLER COMPANY AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
13 Weeks Ended
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February 28, March 1,
2004 2003
---------------------------
Cash flows from operating activities:
Net income $ 4,613 $ 3,246
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 13,545 13,016
Change in assets and liabilities:
Accounts receivable, net 6,263 4,120
Inventories (6,357) (7,258)
Other assets (3,601) (1,744)
Accounts payables (11,898) (13,019)
Accrued payroll and employee
benefits and other accrued expenses (4,923) (15,010)
Restructuring liability (659) (1,283)
Income taxes payable (847) 715
Accrued pensions (986) 722
Other liabilities 1,212 (483)
Other (1,326) 550
---------------------------
Net cash used in operating activities (4,964) (16,428)
Cash flows from investing activities:
Purchased property, plant and equipment (6,285) (8,513)
Purchase of investment (1,000) --
Proceeds from sale of property, plant
and equipment 70 178
Proceeds from sale of investment 1,877 --
---------------------------
Net cash used in investing activities (5,338) (8,335)
Cash flows from financing activities:
Proceeds from long-term debt -- 31,189
Repayment of long-term debt (1,101) (14,833)
Net proceeds from notes payable 11,069 8,533
Dividends paid (3,206) (3,122)
Other 1,196 202
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Net cash provided by financing
activities 7,958 21,969
Effect of exchange rate changes 80 720
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Net change in cash and cash equivalents (2,264) (2,074)
Cash and cash equivalents at beginning of period 3,260 3,666
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Cash and cash equivalents at end of period $ 996 $ 1,592
===========================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 6,564 $ 3,602
Cash paid for income taxes $ 2,915 $ 1,865
See accompanying notes to consolidated financial statements.
4
H.B. FULLER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
1. Accounting Policies: The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information necessary for
a fair presentation of results of operations, financial position, and cash
flows in conformity with accounting principles generally accepted in the
United States of America. In the opinion of management, the interim
consolidated financial statements reflect all adjustments of a normal
recurring nature considered necessary for a fair presentation of the
results for the periods presented. Operating results for interim periods
are not necessarily indicative of results that may be expected for the
fiscal year as a whole. The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues,
expenses, and related disclosures at the date of the financial statements
and during the reporting period. Actual results could differ from these
estimates. These unaudited interim consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the company's Annual Report on Form 10-K for the year
ended November 29, 2003 as filed with the Securities and Exchange
Commission.
2. Accounting for Stock-Based Compensation: The intrinsic value method is used
to account for stock-based compensation plans. If compensation expense had
been determined based on the fair value method, net income and income per
share would have been adjusted to the pro forma amounts indicated below:
13 Weeks Ended
---------------------------
February 28, March 1,
2004 2003
---------------------------
Net income, as reported $ 4,613 $ 3,246
Add back: Stock-based employee compensation
expense 72 123
---------------------------
Net income excluding stock-based compensation 4,685 3,369
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (488) (600)
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Pro forma net income $ 4,197 $ 2,769
===========================
Basic income per share:
As reported $ 0.16 $ 0.12
Pro forma $ 0.15 $ 0.10
Diluted income per share:
As reported $ 0.16 $ 0.11
Pro forma $ 0.15 $ 0.10
Compensation expense for pro forma purposes is reflected on a straight-line
basis over the vesting period.
3. Net Income per Common Share: A reconciliation of the common share
components for the basic and diluted net income per common share
calculations follows:
13 Weeks Ended
---------------------------
February 28, March 1,
2004 2003
---------------------------
Weighted-average common shares - basic 28,346,524 28,200,530
Potential common shares - stock-based
compensation plans 541,202 458,938
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Weighted-average common shares - diluted 28,887,726 28,659,468
===========================
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 the common shares of 2,755 and 3,042 for the first
quarter of 2004 and 2003, respectively, as the results would have been
anti-dilutive.
5
4. Comprehensive Income: The components of total comprehensive income follows:
13 Weeks Ended
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February 28, March 1,
2004 2003
---------------------------
Net income $ 4,613 $ 3,246
Other comprehensive income:
Foreign currency translation 5,300 9,610
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Total comprehensive income $ 9,913 $ 12,856
===========================
Components of accumulated other comprehensive income follows:
Accumulated Other Comprehensive Income February 28, November 29,
- -------------------------------------- 2004 2003
---------------------------
Foreign currency translation adjustment $ 24,691 $ 19,391
Minimum pension liability (16,347) (16,347)
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Total accumulated other comprehensive income $ 8,344 $ 3,044
===========================
5. Inventories: The composition of inventories follows:
February 28, November 29,
2004 2003
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Raw materials $ 61,759 $ 58,743
Finished goods 103,239 97,943
LIFO reserve (10,105) (10,115)
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$ 154,893 $ 146,571
===========================
6. Restructuring and Other Related Costs: The restructuring plan, which was
contemplated in 2001, approved and implemented throughout 2002, was
completed in 2003. As a result, approximately 20 percent of the company's
fiscal 2001 global manufacturing capacity was eliminated and the Global
Adhesives operating segment sales force was realigned. The plan resulted in
the elimination of 14 manufacturing facilities and 556 positions. The
company recorded pre-tax charges of $31,781 and $8,428 in 2002 and 2003,
respectively, related to the plan, including 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. Of liabilities accrued as part of the plan, $4,557
remained as of November 29, 2003 and $4,059 remained as of February 28,
2004. Details of the restructuring activity for fiscal 2004 are as follows:
Employee
Severance
and
Benefits Other Total
-----------------------------------
Total liabilities at November 29, 2003 $ 1,009 $ 3,548 $ 4,557
Currency change effect -- 177 177
Cash payments (431) (244) (675)
-----------------------------------
Total liabilities at February 28, 2004 578 3,481 4,059
Long-term portion of liabilities -- (2,629) (2,629)
-----------------------------------
Current liabilities at February 28, 2004 $ 578 $ 852 $ 1,430
===================================
The long-term portion of the restructuring liability relates to adverse
lease commitments that are expected to be paid beyond one year. Over the
duration of the restructuring plan, aggregate charges were offset by $3,999
of gains on sales of impacted assets. As of February 28, 2004, three
facilities that were closed as part of the plan were recorded as assets
held for sale with a combined net book value of $7,761.
7. Derivatives: 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.
6
As of February 28, 2004, the company had forward foreign currency contracts
maturing between March 1, 2004 and December 15, 2004. The mark-to-market
effect associated with these contracts were net losses of $57 for the
quarter ended February 28, 2004 and net gains of $874 for the quarter ended
March 1, 2003.
8. Operating Segments: Segment data for the quarter follows:
13 Weeks Ended
---------------------------------------------------------------------------
February 28, 2004 March 1, 2003
------------------------------------ ------------------------------------
Inter- Inter-
Trade Segment Operating Trade Segment Operating
Revenue Revenue Income Revenue Revenue Income
------------------------------------ ------------------------------------
Global Adhesives $ 222,100 $ 340 $ 6,958 $ 202,205 $ 1,136 $ 10,933
Full-Valu/Specialty 96,473 202 3,410 92,383 104 4,733
Corporate and Unallocated -- (542) -- -- (1,240) --
------------------------------------ ------------------------------------
Total $ 318,573 $ -- $ 10,368 $ 294,588 $ -- $ 15,666
==================================== ====================================
Consistent with the company's internal management reporting, net charges
related to the restructuring plan are excluded from the segment operating
income results. In addition, other expense, net is excluded from the
segment operating income because it consists primarily of items that are
not subject to the control of management within the operating segments.
Reconciliation of Operating Income to Income before Income Taxes:
13 Weeks Ended
---------------------------
February 28, March 1,
2004 2003
---------------------------
Operating income $ 10,368 $ 15,666
Restructuring and other related costs -- (4,462)
Interest expense (3,564) (3,765)
Other expense, net (933) (2,680)
---------------------------
Income before income taxes $ 5,871 $ 4,759
===========================
9. Commitments and Contingencies
Environmental: The company is party to various lawsuits and governmental
proceedings. In particular, the company is currently deemed a potentially
responsible party (PRP) or defendant, generally in conjunction with
numerous other parties, in a number of government enforcement and private
actions associated with hazardous waste sites. As a PRP or defendant, the
company may be required to pay a share of the costs of investigation and
cleanup of these sites. As of February 28, 2004, and March 1, 2003, the
company had recorded $1,899 and $592, respectively, representing its best
probable estimates of aggregate liability of costs of environmental
remediation. These estimates are based primarily upon internal or third
party environmental studies, assessments as to the company's
responsibility, the extent of the contamination and the nature of required
remedial actions. The company's current assessment of the probable
liabilities and associated expenses related to environmental matters is
based on the facts and circumstances known at this time. Recorded
liabilities are adjusted as further information develops or circumstances
change. Based upon currently available information, management does not
believe the effect, in aggregate, of all such lawsuits and proceedings will
have a material adverse impact on the company's financial condition,
results of operations or cash flows.
Product Liability: 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. From
time to time and in the ordinary course of business, the company is a party
to, or a target of, lawsuits, claims, investigations and proceedings,
including product liability, contract, patent and intellectual property,
antitrust and employment matters. While the company is unable to predict
the outcome of these matters, it does not believe, based upon currently
available facts, that the ultimate resolution of any pending matter,
7
including the EIFS and asbestos litigation described in the following
paragraphs, will have a material adverse impact on its overall financial
condition, results of operations or cash flows. However, adverse
developments could negatively impact net income or cash flows in a
particular future period.
A subsidiary of the company is a defendant or co-defendant in numerous
exterior insulated finish systems ("EIFS") related lawsuits. As of February
28, 2004, the company's subsidiary was a defendant or co-defendant in
approximately 69 lawsuits and 18 claims related primarily to single-family
homes. 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. In addition, there was one class action purportedly involving 186
members, and six lawsuits involving EIFS in commercial or multi-family
structures. As of February 28, 2004, the company had recorded $3,021 for
the probable liabilities and $1,132 for insurance recoveries for all such
matters. The company only has insurance coverage for certain years with
respect to this product. 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. However,
projecting future events, such as the number of new claims to be filed each
year, the average cost of disposing of each such claim, as well as the
numerous uncertainties surrounding litigation in the United States, could
cause the actual costs to be higher or lower than the current estimated
reserves or insurance recoveries.
From time to time, the company or its subsidiaries are named in
asbestos-related lawsuits in various state courts involving alleged
exposure to products manufactured 20 to 30 years ago. These suits
frequently seek both actual and punitive damages, often in very large
amounts. In many cases, plaintiffs are unable to demonstrate that they have
suffered any compensable loss as a result of such exposure, or they are
unable to demonstrate that injuries incurred in fact resulted from exposure
to products manufactured by the company or its subsidiaries. In such cases,
the company is generally dismissed without payment. With respect to those
cases where compensable disease, exposure and causation are established
with respect to one of the company's products, the company generally
settles for amounts that reflect the confirmed disease, the seriousness of
the case, the particular jurisdiction and the number and solvency of other
parties in the case. Insurance and/or indemnification from solvent third
parties has paid substantially all of the indemnity and defense costs
associated with most of the asbestos litigation applicable to the company.
During 2003, the company's insurers replaced the cost sharing agreement
which had previously provided for the allocation of settlement payments
among the insurers with an interim allocation formula. Under this formula
the company has funded amounts allocable to years in which the responsible
insurer is insolvent. The company did not settle any asbestos related
lawsuits during the first quarter of 2004. To the extent the company can
reasonably estimate the amount of its probable liability the company
establishes a financial reserve and a corresponding amount for insurance
coverage.
In addition to product liability claims discussed above, the company and
its subsidiaries, in the ordinary course of business, are involved in
claims or legal proceedings related to its products.
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 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. The aggregate amount outstanding
was $8,421 and $8,950 at February 28, 2004 and November 29, 2003,
respectively.
8
10. Recently Issued Accounting Standards: In January 2003, the FASB issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN
46"). FIN 46 provides accounting requirements for business enterprises to
consolidate related entities in which they are determined to be the primary
beneficiary as a result of their variable economic interests. The
interpretation provides guidance in judging multiple economic interests in
an entity and in determining the primary beneficiary. The interpretation
outlines disclosure requirements for variable interest entities ("VIEs") in
existence prior to January 31, 2003, and provides consolidation
requirements for VIEs created after January 31, 2003. On October 9, 2003,
the FASB extended the effective date for FIN 46 until the first interim or
annual period ending after December 15, 2003 for special purpose entities
and ending after March 15, 2004 for non-special purpose entities. The
company has determined that it has no interests in any special purpose
entities.
The company's 70 percent owned automotive joint venture holds interests in
an entity that provides bonding, sealing and coating technology to the
automotive industry. This entity is currently accounted for under the
equity method of accounting and is considered a variable interest entity.
These variable interests relate to subordinated financial support.
Management has determined that the joint venture is the primary beneficiary
of the variable interest entity. The results of operations of this variable
interest entity will be included in the company's consolidated results in
the fiscal quarter ending May 29, 2004 and are not expected to have a
material impact. The joint venture's investment, plus receivables and loans
due from the variable interest entity totaled $5,532 as of February 28,
2004, in which the company has a 70 percent interest through its interest
in the joint venture. In addition, the joint venture has guaranteed $500 of
the variable interest entity's loans from a third party.
In December 2003, the FASB issued SFAS No. 132R, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". This Statement retains
the disclosure requirements contained in FASB Statement No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits",
which it replaces. It requires additional disclosures to those in the
original Statement 132 about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined
benefit postretirement plans. The provisions of Statement 132 remain in
effect until the provisions of this Statement are adopted. SFAS No. 132R is
effective for financial statements with fiscal years ending after December
15, 2003. The interim-period disclosures required by this Statement are
effective for interim periods beginning after December 15, 2003.
In January 2004, the FASB issued FASB Staff Position ("FSP") No. 106-1,
"Accounting and Disclosure Requirements Related to Medicare Prescription
Drug, Improvement and Modernization Act of 2003". FSP 106-1 permits
employers that sponsor postretirement benefit plans that provide
prescription drug benefits to retirees to make a one-time election to defer
accounting for any effects of the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (the "Act"). The company has elected to defer
accounting for any effect of the Act until specific authoritative
accounting guidance is issued. Therefore, the amounts included in the
financial statements do not reflect the effects of the Act. The effect of
the Act is not expected to have a material effect on the company's results
of operations, cash flows or financial position.
11. Subsequent Event: On March 4, 2004, the company purchased the adhesives and
resins businesses of Probos, S.A., based in Porto, Portugal. The businesses
serve primarily the Portuguese and Spanish markets, with combined annual
sales of approximately $30 million. Product lines include water-based, hot
melt, reactive and solvent-based adhesives for the assembly, woodworking,
footwear and converting industries, and emulsions for the paints, textiles
and food product industries. Management believes that adding the adhesives
and resins operations of Probos, S.A. to the company's existing business
provides a stronger base from which to grow the company's business in
Europe.
The results of operations of the purchased businesses will be included in
the company's consolidated financials beginning on February 29, 2004. Total
estimated consideration to be allocated to the purchased businesses is $28
million, which includes consideration paid and direct external costs
incurred. The company is currently allocating the cost to the purchased
businesses and has not yet determined if any goodwill will result from the
allocation process.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
Introduction
- ------------
In the first quarter of 2004 the company experienced sales volume increases that
contributed 3.9 percent to the net revenue growth over the first quarter of
2003, indicating that the economic upturn is gaining strength. The increased
volume was generated at lower average selling prices than in the first quarter
of 2003, as competition in the industry remains strong. The lower average
selling prices resulted in a decrease in net revenue of 1.0 percent in the first
quarter of 2004 as compared to last year. The relative weakness in the U.S.
dollar as compared to major foreign currencies, primarily the euro, continues to
have a positive impact on the company's year-over-year financial results. In the
first quarter of 2004, net revenue increased 5.2 percent from the first quarter
of 2003 due to the effects of foreign currency translation.
Net income in the first quarter of 2004 of $4.6 million increased 42 percent
from the net income of $3.2 million in the first quarter of 2003. Included in
the net income of the first quarter of 2003 was $3.1 million of net charges
related to the company's 2002-2003 restructuring initiative. In the first
quarter of 2004 the company incurred costs of approximately $2.6 million related
to specific initiatives for which savings over the last three quarters of 2004
are expected to exceed the first quarter costs. Included in these initiatives
were the deployment of Lean Six Sigma/SM/ and reductions in manufacturing
capacity in the Full-Valu/Specialty operating segment.
In looking forward for the remainder of 2004, management is closely monitoring
the movements of energy prices as these may impact the cost of the company's raw
materials. The combination of higher raw material costs and competitive
pressures on selling prices may result in a lower gross profit margin.
Management believes that the cost structures are in place to leverage the sales
volume growth that will come with economic recovery.
Results of Operations
- ---------------------
Net Revenue: Net revenue in the first quarter of 2004 of $318.6 million was 8.1
percent higher than the net revenue of $294.6 million in the first quarter of
2003. Favorable effects from foreign currency translation accounted for a net
revenue increase of 5.2 percent. The currency impact resulted primarily from the
euro, which was approximately 18 percent stronger versus the U.S. dollar in the
first quarter of 2004 as compared to the first quarter of 2003. Also
contributing to the positive currency impact on first quarter net revenue was
the stronger Japanese yen, Australian dollar and Canadian dollar as compared to
the U.S. dollar. Sales volume contributed to an increase in net revenue of 3.9
percent in the first quarter of 2004 as compared to last year. Volume growth was
realized in both the Global Adhesives and Full-Valu/Specialty operating
segments, as well as across all four geographic regions, i.e. North America,
Europe, Latin America and Asia Pacific. Decreases in average selling prices
contributed to a decrease in net revenue of 1.0 percent in the first quarter of
2004 as compared to the first quarter of 2003. Operating segment results
reflected an increase in net revenue in the Global Adhesives segment of 9.8
percent as compared to last year and in the Full-Valu/Specialty segment, net
revenue increased 4.4 percent as compared to last year's first quarter.
Cost of Sales: First quarter, 2004 cost of sales of $232.8 million was $20.4
million or 9.6 percent higher than the cost of sales in the first quarter of
2003. A significant driver of the cost of sales increase was the effect of
stronger foreign currencies, which added approximately $11.4 million to the 2004
cost as compared to the first quarter of 2003. Included in the first quarter,
2003 cost of sales was $1.8 million related to the company's 2002-2003
restructuring initiative. The first quarter of 2004 cost of sales included $1.5
million of costs related to a plant closure and other manufacturing capacity
reductions in the Full-Valu/Specialty operating segment. Cost savings resulting
from these reductions were $0.3 million in the first quarter and for the full
fiscal year of 2004, are expected to exceed the $1.5 million of costs. Although
energy prices have risen in recent months, the company's raw material costs did
not increase substantially in the first quarter of 2004. Delivery costs did
increase $1.5 million, or 16 percent in the first quarter of 2004 as compared to
the first quarter of 2003, a direct result of higher fuel costs.
Gross Profit Margin: The gross profit margin in the first quarter of 2004 was
26.9 percent as compared to 27.9 percent in the first quarter of 2003. The 1.0
percent reduction in average selling prices, mentioned above in the 'Net
Revenue' discussion, caused a reduction in the first quarter, 2004 gross profit
margin of 0.7 percentage points. The $1.5 million of costs related to the plant
closure and other capacity
10
reductions in the Full-Valu/Specialty operating segment reduced the consolidated
gross profit margin in the first quarter of 2004 by 0.5 percentage points. The
$1.8 million of restructuring-related costs incurred in the first quarter of
2003 reduced that quarter's gross profit margin by 0.6 percentage points.
Selling, General and Administrative (SG&A) Expenses: SG&A expenses of $75.4
million in the first quarter of 2004 were $4.5 million or 6.3 percent more than
the SG&A expenses incurred in the first quarter of 2003. Last year's expenses
included $2.6 million of costs related to the 2002-2003 restructuring
initiative. Also included in last year's expenses were $0.7 million of credits
related to insurance and other litigation settlements. The relative weakness of
the U.S. dollar against foreign currencies accounted for approximately $3.0
million of additional SG&A expenses in the first quarter of 2004 as compared to
the same period in 2003. Also contributing to the increase in SG&A expenses in
2004 were $1.7 million of costs related to specific growth initiatives. Included
in the $1.7 million was $0.8 million related to the deployment of Lean Six
Sigma/SM/, a tool management will use to execute growth strategies. Other growth
initiatives included the opening of new stores in 2003 in the paints business in
Central America and increasing sales coverage to support the sales growth being
realized in China. In addition, the company incurred approximately $0.6 million
more costs for legal and other product liability costs related to the exterior
insulated finish systems product line as discussed in Part II, Item 1 'Legal
Proceedings' later in this report.
As a percentage of net revenue SG&A expenses were 23.7 percent in the first
quarter of 2004 as compared to 24.1 percent in the first quarter of 2003.
Interest Expense: Interest expense was $3.6 million in the first quarter of 2004
as compared to $3.8 million in the first quarter of 2003. Lower average
outstanding debt levels were the primary reason for the lower interest expense.
Other Expense, Net: Other expense, net was $0.9 million in the first quarter of
2004 as compared to expense of $2.7 million in the first quarter of 2003. The
2003 expense included $2.4 million of foreign currency transaction and
translation losses, primarily related to fluctuations in the British pound as
compared to the euro. In the first quarter of 2004 the foreign currency losses
were $0.7 million.
Income Taxes: The effective income tax rate in the first quarter of 2004 was 32
percent as compared to 34.3 percent in the first quarter of 2003. In the 2003
rate, tax savings of $1.4 million related to the $4.5 million of pretax
restructuring-related charges increased the overall effective tax rate by 1.3
percentage points.
Net Income: Net income of $4.6 million in the first quarter of 2004 was $1.4
million or 42.1 percent more than the net income recorded in the first quarter
of 2003. Net charges of $3.1 million ($0.11 per share) related to the 2002-2003
restructuring initiative were included in the first quarter 2003 net income.
Income per diluted share was $0.16 in the first quarter of 2004 as compared to
$0.11 in the first quarter of 2003.
Operating Segment Results
- -------------------------
Note: Management evaluates the performance of its operating segments based on
operating income which is defined as gross profit less SG&A expenses.
Charges/(credits) attributed to the restructuring initiative are excluded from
the operating results, consistent with internal management reporting. Corporate
expenses are fully allocated to the operating segments.
Global Adhesives: Net revenue of $222.1 million in the first quarter of 2004 was
9.8 percent more than the net revenue of $202.2 million recorded in the first
quarter of 2003. Positive currency effects, primarily due to the stronger euro
as compared to the U.S. dollar, accounted for a 6.5 percent increase in net
revenue in the quarter. Sales volume accounted for a net revenue increase of 4.5
percent in the first quarter of 2004 as compared to the first quarter of 2003.
Improved economies, new product sales, new customers and recovery of previously
lost customers all contributed to the volume growth. Significant growth was
recorded in the automotive, footwear, assembly and packaging reporting units.
All four major geographic regions had growth in sales volume in the first
quarter of 2004 as compared to the same period last year. The Asia Pacific
region continues to be the company's leading growth area. Decreases in average
selling prices accounted for a 1.2 percent decrease in net revenue in the
quarter as the competitive bidding process continues to drive overall prices
lower than recent levels. The gross profit
11
margin in the first quarter of 2004 was 1.5 percentage points less than the
first quarter of 2003 primarily due to the lower average selling prices in 2004.
SG&A expenses in the first quarter of 2004 increased $5.9 million or 14.2
percent from the first quarter of 2003. Currency effects accounted for
approximately half of the expense increase. Other expense increases resulted
from growth-related initiatives such as Lean Six Sigma/SM/ and sales and
marketing expenses to support the rapid growth in the Asia Pacific region. The
Global Adhesives operating income for the first quarter of 2004 was $7.0 million
as compared to $10.9 million in the first quarter of 2003. As a percent of net
revenue the 2004 operating income was 3.1 percent and the 2003 operating income
was 5.4 percent.
Full-Valu/Specialty: Net revenue was $96.5 million in the first quarter of 2004
as compared to $92.4 million in the first quarter of 2003. This increase of
4.4 percent resulted from sales volume increases that contributed 2.7 percent,
foreign currency effects of a positive 2.3 percent and average selling price
decreases that accounted for a decrease in net revenue of 0.6 percent.
Significant growth was achieved in the windows market in North America, the
consumer market in Australia and the powder coatings market in both the U.S. and
Europe. The gross profit margin was 1.6 percentage points lower in the first
quarter of 2004 as compared to the first quarter of 2003. This was primarily due
to costs of $1.5 million related to a plant closure in Canada and capacity
reductions in one facility in the U.S. Cost of sales savings related to these
initiatives were $0.3 million in the first quarter and for the full year of 2004
are expected to exceed the costs incurred. SG&A expenses increased $1.2 million,
or 4.5 percent in the first quarter of 2004 as compared to the first quarter of
2003. Legal and other product liability costs associated with the company's
exterior insulated finish systems product line accounted for approximately $0.6
million of the year-over-year expense increase. Operating income in the
Full-Valu/Specialty segment was $3.4 million in the first quarter of 2004 as
compared to $4.7 million in the first quarter of 2003. As a percent of net
revenue, the operating income was 3.5 percent in 2004 as compared to 5.1 percent
in the first quarter of 2003.
Restructuring and other Related Costs
- -------------------------------------
The restructuring plan, which was contemplated in 2001, approved and implemented
throughout 2002, was completed in 2003. As a result, approximately 20 percent of
the company's fiscal 2001 global manufacturing capacity was eliminated and the
Global Adhesives operating segment sales force was realigned. The plan resulted
in the elimination of 14 manufacturing facilities and 556 positions. The company
recorded pre-tax charges of $31.8 million and $8.4 million in 2002 and 2003,
respectively, related to the plan, including 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.
Of liabilities accrued as part of the plan, $4.6 million remained as of
November 29, 2003 and $4.1 million remained as of February 28, 2004. Details of
the restructuring activity for fiscal 2004 are as follows:
(in thousands)
Employee
Severance
and Benefits Other Total
------------------------------------
Total liabilities at November 29, 2003 $ 1,009 $ 3,548 $ 4,557
Currency change effect -- 177 177
Cash payments (431) (244) (675)
------------------------------------
Total liabilities at February 28, 2004 578 3,481 4,059
Long-term portion of liabilities -- (2,629) (2,629)
------------------------------------
Current liabilities at February 28, 2004 $ 578 $ 852 $ 1,430
====================================
The long-term portion of the restructuring liability relates to adverse lease
commitments that are expected to be paid beyond one year. Over the duration of
the restructuring plan, aggregate charges were offset by $4.0 million of gains
on sales of impacted assets. As of February 28, 2004, three facilities that were
closed as part of the plan were recorded as assets held for sale with a combined
net book value of $7.8 million.
Liquidity and Capital Resources
- -------------------------------
Cash Flows from Operating Activities: Net cash used in operating activities was
$5.0 million in the first quarter of 2004 as compared to $16.4 million used in
the first quarter of 2003. It is not uncommon for the company to experience
negative cash flow from operating activities in the first quarter of each year,
as the first quarter is generally the lowest earnings quarter of the year.
Another reason cash flows may be
12
negative is that working capital investment tends to increase toward the end of
the first quarter to prepare for the increased volume of sales in the second
quarter. A key factor in the reduced use of cash of $11.4 million in the first
quarter of 2004 versus the first quarter of 2003 was that management incentive
compensation payments were approximately $8.0 million in the first quarter of
2003 as compared to zero in the first quarter of 2004. Changes in net working
capital (trade accounts receivable, inventory and accounts payable) accounted
for a use of cash of $12.0 million in the first quarter of 2004 as compared to a
use of cash of $16.2 million in the first quarter of 2003. Trade accounts
receivable days outstanding were 66 days as of February 28, 2004 as compared to
64 days as of March 1, 2003. Inventory days on hand were 60 days at the end of
the first quarter, 2004 and 62 days at the end of the first quarter, 2003. Net
working capital as a percent of annualized (current quarter x 4) net revenue was
22.3 percent at February 28, 2004 and 22.1 percent at March 1, 2003.
A key metric tracked by management is free cash flow, defined as cash from
operating activities, minus capital expenditures and cash dividends. Free cash
flow was negative $14.5 million in the first quarter of 2004 as compared to
negative $28.1 million in the first quarter of 2003.
Cash Flows from Investing Activities: Capital expenditures in the first quarter
of 2004 were $6.3 million as compared to $8.5 million in the first quarter of
2003. Approximately 40 percent of capital expenditures in the first quarter of
2004 were for information technology projects. The company sold its ten percent
ownership position in a biopolymer company in the first quarter of 2004 for $1.9
million, resulting in a pretax gain of $0.4 million. Also in the first quarter
of 2004, the company paid $1.0 million for a four- percent ownership position in
another technology company.
Cash Flows from Financing Activities: Net cash provided from financing
activities was $8.0 million in the first quarter of 2004 as compared to $22.0
million in the first quarter of 2003. Short-term borrowings increased $11.1
million in the first quarter of 2004 as compared to $8.5 million in the first
quarter of 2003. The financing activities in the first quarter of 2003 also
included proceeds from long-term debt of $31.2 million, partially offset by the
repayment of long-term debt of $14.8 million. The increased borrowings in the
first quarter of both 2004 and 2003 were primarily a result of negative free
cash flow. Cash dividends paid were $3.2 million in the first quarter of 2004
and $3.1 million in the first quarter of 2003.
Forward-Looking Statements and Risk Factors
- -------------------------------------------
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In this Quarterly Report on Form 10-Q, the company
discusses expectations regarding future performance of the company which include
anticipated financial performance, savings from restructuring and process
initiatives, global economic conditions, liquidity requirements, the effect of
new accounting pronouncements and one-time accounting charges and credits, and
similar matters. This Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements may be identified by the use of words like "plan,"
"expect," "aim," "believe," "project," "anticipate," "intend," "estimate,"
"will," "should," "could" (including the negative or variations thereof) and
other expressions that indicate future events and trends. These plans and
expectations are based upon certain underlying assumptions, including those
mentioned with the specific statements. Such assumptions are in turn based upon
internal estimates and analyses of current market conditions and trends,
management plans and strategies, economic conditions and other factors. These
plans and expectations and the assumptions underlying them are necessarily
subject to risks and uncertainties inherent in projecting future conditions and
results. Actual results could differ materially from expectations expressed in
the forward-looking statements if one or more of the underlying assumptions and
expectations proves to be inaccurate or is unrealized. In addition to the
factors described in this report, the following are some of the important
factors that could cause the company's actual results to differ materially from
those in any such forward-looking statements. 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 revenues 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
13
be considered, together with any similar risk factors or other cautionary
language which may be made elsewhere in this Quarterly Report on Form 10-Q.
Competition: A wide variety of products are sold in numerous markets, each of
which is highly competitive. The company's competitive position in the markets
in which it participates is, in part, subject to external factors. For example,
supply and demand for certain of the company's products is driven by end-use
markets and worldwide capacities which, in turn, impact demand for and pricing
of the company's products. Many of the company's direct 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 ability to grow or
even to maintain current levels of revenues and earnings. While the company has
an extensive customer base, loss of certain top customers could adversely affect
the company's financial condition and results of operations until such business
is replaced. No assurances can be made that the company would be able to regain
or replace lost customers.
Acquisitions: As part of its growth strategy, the company intends to pursue
acquisitions of complementary businesses or products and joint ventures. The
ability to grow through acquisitions or joint ventures depends upon the
company's ability to identify, negotiate and complete suitable acquisitions or
joint venture arrangements.
International: 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 earnings and may adversely
affect the value of the company's assets outside the United States. Although the
company utilizes risk management tools, including hedging, as appropriate, to
mitigate market fluctuations in foreign currencies, any changes in strategy in
regard to risk management tools can also affect sales revenue, expenses and
results of operations and there can be no assurance that such measures will
result in cost savings or that all market fluctuation exposure will be
eliminated.
Raw Materials: Raw materials needed to manufacture products are obtained 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 from a variety of
producers. From time to time, however, the prices and availability of these raw
materials fluctuate, which could impair the ability to procure necessary
materials, or increase the cost of manufacturing 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 Part
II Item 1. Legal Proceedings in this Quarterly Report on Form 10-Q for a
discussion of litigation matters related to exterior insulated finish systems
and asbestos.
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. To
date, the company's expenditures related to environmental matters have not had a
material adverse effect on the company's business, financial condition, results
of operations or cash flows. However, the company cannot predict that it will
not be required to make additional expenditures to remain in or to achieve
compliance with environmental laws in the future or that any such additional
expenditures will not have a material adverse effect on the company's business,
financial condition, results of operations or cash flows.
Other: Additional factors which could affect future results include: (i)
economic matters over which the company has no control, including changes in
inflation, tax rates, and interest rates; (ii) changes in fiscal, governmental
and other regulatory policies; (iii) the loss or insolvency of a major customer
or distributor, (iv) natural or manmade disasters (including material acts of
terrorism or hostilities which impact the
14
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-Q to identify risk factors
related to other forward looking statements made in oral presentations,
including investor conferences and/or webcasts open to the public.
The foregoing list of important factors does not include all such factors nor
necessarily present them in order of importance. This disclosure, including that
under "Forward-Looking Statements and Risk Factors," and other forward-looking
statements and related disclosures made by the company in this report and
elsewhere from time to time, represents management's best judgment as of the
date the information is given. The company does not undertake responsibility for
updating any of such information, whether as a result of new information, future
events, or otherwise, except as required by law. Investors are advised, however,
to consult any further public company disclosures (such as in filings with the
Securities and Exchange Commission or in company press releases) on related
subjects.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------------------------------------------------------------------
Market Risk: The company is exposed to various market risks, including changes
in interest rates, foreign currency rates and prices of raw materials. Market
risk is the potential loss arising from adverse changes in market rates and
prices, such as interest rates and foreign currency exchange rates.
Interest Rate Risk: Exposure to changes in interest rates result primarily from
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 consolidated financial position, results of operations or cash
flows. The annual impact on net income of a one-percentage point interest rate
change on the outstanding balance of its variable rate debt as of February 28,
2004 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 47
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, local currency denominated
assets to 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 takes steps to minimize risks from foreign currency exchange rate
fluctuations through normal operating and financing activities and, when deemed
appropriate, through the use of derivative instruments. Management does not
enter into any speculative positions with regard to derivative instruments.
From a sensitivity analysis viewpoint, based on first quarter 2004 financial
results, a hypothetical overall 10 percent change in the U.S. dollar would have
resulted in a change in net income of approximately $0.4 million.
Raw Materials: The principal raw materials used to manufacture products include
resins, polymers, synthetic rubbers, vinyl acetate monomer and plasticizers. The
company generally avoids sole source supplier arrangements for raw materials.
While alternate sources for most key raw materials are
15
available, if worldwide supplies were disrupted due to unforeseen events, or if
unusual demand causes products to be subject to allocation, shortages could
occur.
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 that limit the frequency but
rarely limit 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 leverage of having substitute raw
materials approved for use wherever possible is used to minimize the impact of
possible price increases.
Item 4. Controls and Procedures
- -------------------------------
As of the end of the period covered by this report, the company conducted an
evaluation, under the supervision and with the participation of the company's
chief executive officer and chief financial officer, of the company's disclosure
controls and procedures as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934. Based on this evaluation, the chief executive
officer and chief financial officer concluded that the company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the company in reports that it files or submits under the
Securities Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms. There was no change in the
company's internal control over financial reporting during its most recently
completed fiscal quarter that has materially affected or is reasonably likely to
materially affect, its internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Environmental Matters. From time to time, the company is identified as a
"potentially responsible party" under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") and similar state laws that impose
liability for costs relating to the cleanup of contamination resulting from past
spills, disposal or other release of hazardous substances. The company is also
subject to similar laws in some of the countries where current and former plants
are located. The company's environmental, health and safety department monitors
compliance with all applicable laws on a global basis.
Currently the company is involved in administrative proceedings or lawsuits
relating to 26 sites. This number includes contaminated sites where the
company's sole involvement to date has been responding to a formal request for
information. The estimated response costs for all potentially responsible
parties at these sites is in excess of $1.0 billion and the range of claims for
individual sites is from $1.5 to $600 million, but the amounts claimed against
the company at many of the sites are unknown. At 24 of these sites, the company
has entered into participation agreements and consent decrees, tolling
agreements exist, or the company has received no further communication after
submitting its response for a request for information and/or its' denial of
liability. The company's management reviews each individual site, considering
the number of parties involved, the level of potential liability or contribution
of the company relative to the other parties, the nature and magnitude of the
hazardous wastes involved, the method and extent of remediation, the estimated
legal and consulting expense with respect to each site and the time period over
which any costs would likely be incurred. The company accrues appropriate
reserves for potential environmental liabilities, which are continuously
reviewed and adjusted as additional information becomes available. As of
February 28, 2004, the company had reserved $1.9 million, which represents its
best estimate of probable liabilities with respect to environmental matters.
However, the full extent of the company's future liability for environmental
matters is difficult to predict because of uncertainty as to the cost of
investigation and cleanup of the sites, the company's responsibility for such
hazardous waste and the number of and financial condition of other potentially
responsible parties.
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
16
proceedings or lawsuits and may involve monetary sanctions of $0.1 million or
more (exclusive of interest and litigation costs).
While uncertainties exist with respect to the amounts and timing of the
company's ultimate environmental liabilities, based on currently available
information, management does not believe that these matters, individually or in
the aggregate, will have a material adverse effect on the company's consolidated
financial position, results of operations or cash flows.
Other Legal Proceedings. From time to time and in the ordinary course of
business, the company is a party to, or a target of, lawsuits, claims,
investigations and proceedings, including product liability, contract, patent
and intellectual property, antitrust and employment matters. While the company
is unable to predict the outcome of these matters, it does not believe, based
upon currently available facts, that the ultimate resolution of any pending
matter, including the EIFS and asbestos litigation described in the following
paragraphs, will have a material adverse effect on its overall financial
position, results of operations or cash flows. However, adverse developments
could negatively impact net income or cash flows in a particular future period.
As disclosed in prior filings, a subsidiary of the company is a defendant or
co-defendant in numerous exterior insulated finish systems ("EIFS") related
lawsuits. As of February 28, 2004, the company's subsidiary was a defendant or
co-defendant in approximately 69 lawsuits and 18 claims related primarily to
single-family homes. 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. In addition, there was one class action purportedly involving
186 members, and five lawsuits involving EIFS in commercial or multi-family
structures. As of February 28, 2004, the company had recorded $3.0 million for
the probable liabilities and $1.1 million for insurance recoveries for all such
matters. The company only has insurance coverage for certain years with respect
to this product. 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. However, projecting future events, such as the number
of new claims to be filed each year, the average cost of disposing of each such
claim, as well as the numerous uncertainties surrounding litigation in the
United States, could cause the actual costs to be higher or lower than the
current estimated reserves or insurance recoveries.
As previously reported, over the years, the company has been named as a
defendant, in lawsuits in various state courts in which plaintiffs alleged
injury due to exposure to products manufactured by the company 20 to 30 years
ago that contained asbestos. These cases generally seek unspecified damages for
asbestos-related diseases. These suits frequently seek both actual and punitive
damages, often in very large amounts. In many cases, plaintiffs are unable to
demonstrate that they have suffered any compensable loss as a result of such
exposure, or they are unable to demonstrate that injuries incurred in fact
resulted from exposure to products manufactured by the company or its
subsidiaries. In such cases, the company is generally dismissed without payment.
With respect to those cases where compensable disease, exposure and causation
are established with respect to one of the company's products, the company
generally settles for amounts that reflect the confirmed disease, the
seriousness of the case, the particular jurisdiction and the number and solvency
of other parties in the case. Substantially all of these cases have involved
multiple co-defendants and the company is typically a de minimis party.
During 2003, insurance or indemnification from solvent third parties in
accordance with applicable policies or contracts paid 100 percent of the defense
costs associated with the company's asbestos litigation. Prior to 2003,
insurance or indemnification had also paid all of the settlement costs
associated with these cases. As previously reported, during 2003, the company's
insurers replaced the cost sharing agreement which had previously provided for
the allocation of settlement payments among the insurers with an interim
allocation formula. Under this formula the company has funded amounts allocable
to years in which the responsible insurer is insolvent. The company is pursing
additional recovery from the liquidators for the insolvent insurers and claims
for coverage from solvent excess insurers. The company and its insurers have
also commenced negotiations with respect to the terms of a new cost sharing
arrangement which may result in a continuation or alteration of the interim
allocation formula. To the extent the company can reasonably estimate the amount
of its probable liability, the company will establish a
17
financial reserve in an amount which it deems to be adequate and a corresponding
amount for insurance coverage. The company did not settle any asbestos related
lawsuits during the first quarter of 2004.
Item 6.
Exhibits and Reports on Form 8-K
- --------------------------------
Exhibits
12 Computation of Ratios
31.1 Form of 302 Certification - Albert P.L. Stroucken
31.2 Form of 302 Certification - John A. Feenan
32.1 Form of 906 Certification - Albert P.L. Stroucken
32.2 Form of 906 Certification - John A. Feenan
(b) Reports on Form 8-K during the quarter ended February 28, 2004.
On January 15, 2004, a Form 8-K was filed to report the financial results
for the year ended November 29, 2003.
- --------------------------------------------------------------------------------
Lean Six Sigma/SM/ is a registered service mark of The George Group
Incorporated.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H.B. Fuller Company
Dated: April 6, 2004 /s/ John A. Feenan
----------------------------------------
John A. Feenan
Senior Vice President and
Chief Financial Officer
18
Exhibit Index
Exhibits
12 Computation of Ratios
31.1 Form of 302 Certification - Albert P.L. Stroucken
31.2 Form of 302 Certification - John A. Feenan
32.1 Form of 906 Certification - Albert P.L. Stroucken
32.2 Form of 906 Certification - John A. Feenan