Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 1, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 001-09225

 

 

H.B. FULLER COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

Minnesota   41-0268370

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1200 Willow Lake Boulevard, St. Paul, Minnesota   55110-5101
(Address of principal executive offices)   (Zip Code)

(651) 236-5900

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The number of shares outstanding of the Registrant’s Common Stock, par value $1.00 per share, was 50,222,384 as of June 20, 2013.

 

 

 


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

 

     13 Weeks Ended     26 Weeks Ended  
     June 1,     June 2,     June 1,     June 2,  
     2013     2012     2013     2012  

Net revenue

   $ 519,016      $ 526,995      $ 998,858      $ 872,449   

Cost of sales

     (372,400     (390,444     (718,866     (633,211
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     146,616        136,551        279,992        239,238   

Selling, general and administrative expenses

     (93,806     (92,956     (191,446     (167,986

Special charges, net

     (10,843     (32,127     (16,176     (38,609

Asset impairment charges

     —          (671     —          (671

Other income (expense), net

     (1,814     231        (1,436     648   

Interest expense

     (4,884     (5,749     (10,211     (8,367
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes and income from equity method investments

     35,269        5,279        60,723        24,253   

Income taxes

     (10,864     (2,367     (17,984     (9,930

Income from equity method investments

     1,643        2,148        4,083        4,344   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     26,048        5,060        46,822        18,667   

Income (loss) from discontinued operations, net of tax

     —          (3,053     —          (1,330
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income including non-controlling interests

     26,048        2,007        46,822        17,337   

Net (income) loss attributable to non-controlling interests

     (119     (71     (216     (96
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to H.B. Fuller

   $ 25,929      $ 1,936      $ 46,606      $ 17,241   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to H.B. Fuller common stockholders:

        

Basic

        

Income from continuing operations

     0.52        0.10        0.93        0.38   

Income (loss) from discontinued operations

     —           (0.06     —           (0.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.52      $ 0.04      $ 0.93      $ 0.35   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

        

Income from continuing operations

     0.51        0.10        0.91        0.37   

Income (loss) from discontinued operations

     —           (0.06     —           (0.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.51      $ 0.04      $ 0.91      $ 0.34   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic

     49,935        49,652        49,876        49,509   

Diluted

     51,152        50,722        51,090        50,488   

Dividends declared per common share

   $ 0.100      $ 0.085      $ 0.185      $ 0.160   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

2


H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

     13 Weeks Ended     26 Weeks Ended  
     June 1,     June 2,     June 1,     June 2,  
     2013     2012     2013     2012  

Net income including non-controlling interests

   $ 26,048      $ 2,007      $ 46,822      $ 17,337   

Other comprehensive income

        

Foreign currency translation

     (5,647     (27,599     (9,109     (25,699

Defined benefit pension plans adjustment, net of tax

     1,965        1,046        3,941        2,176   

Interest rate swaps, net of tax

     10        10        20        20   

Cash-flow hedges, net of tax

     (21     (855     189        (855
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (3,693     (27,398     (4,959     (24,358
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     22,355        (25,391     41,863        (7,021

Less: Comprehensive income attributable to non-controlling interests

     73        65        177        96   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to H.B. Fuller

   $ 22,282      $ (25,456   $ 41,686      $ (7,117
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3


H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

     June 1,     December 1,  
     2013     2012  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 161,185      $ 200,436   

Trade receivables (net of allowances—$8,748 and $7,513, for June 1, 2013 and December 1, 2012, respectively)

     317,048        320,152   

Inventories

     222,381        208,531   

Other current assets

     83,557        70,225   

Current assets of discontinued operations

     1,865        —      
  

 

 

   

 

 

 

Total current assets

     786,036        799,344   
  

 

 

   

 

 

 

Property, plant and equipment

     942,995        907,720   

Accumulated depreciation

     (589,873     (578,704
  

 

 

   

 

 

 

Property, plant and equipment, net

     353,122        329,016   
  

 

 

   

 

 

 

Goodwill

     252,475        254,345   

Other intangibles, net

     223,630        233,355   

Other assets

     158,590        168,395   

Long-term assets of discontinued operations

     —          1,865   
  

 

 

   

 

 

 

Total assets

   $ 1,773,853      $ 1,786,320   
  

 

 

   

 

 

 

Liabilities, redeemable non-controlling interest and total equity

    

Current liabilities:

    

Notes payable

   $ 15,749      $ 22,613   

Current maturities of long-term debt

     7,500        22,500   

Trade payables

     166,664        163,062   

Accrued compensation

     59,317        71,400   

Income taxes payable

     17,928        24,865   

Other accrued expenses

     43,476        45,605   

Current liabilities of discontinued operations

     5,000        74   
  

 

 

   

 

 

 

Total current liabilities

     315,634        350,119   
  

 

 

   

 

 

 

Long-term debt, excluding current maturities

     473,159        475,112   

Accrued pension liabilities

     98,649        105,220   

Other liabilities

     65,664        68,190   

Long-term liabilities of discontinued operations

     —          5,000   
  

 

 

   

 

 

 

Total liabilities

     953,106        1,003,641   
  

 

 

   

 

 

 

Commitments and contingencies

     —          —     

Redeemable non-controlling interest

     3,948        3,981   

Equity:

    

H.B. Fuller stockholders’ equity:

    

Preferred stock (no shares outstanding) Shares authorized – 10,045,900

     —          —     

Common stock, par value $1.00 per share, Shares authorized – 160,000,000, Shares outstanding – 50,222,838 and 49,903,266, for June 1, 2013 and December 1, 2012, respectively

     50,223        49,903   

Additional paid-in capital

     43,461        37,965   

Retained earnings

     867,270        830,031   

Accumulated other comprehensive income (loss)

     (144,546     (139,626
  

 

 

   

 

 

 

Total H.B. Fuller stockholders’ equity

     816,408        778,273   
  

 

 

   

 

 

 

Non-controlling interests

     391        425   
  

 

 

   

 

 

 

Total equity

     816,799        778,698   
  

 

 

   

 

 

 

Total liabilities, redeemable non-controlling interest and total equity

   $ 1,773,853      $ 1,786,320   
  

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

4


H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Total Equity

(In thousands)

(Unaudited)

 

     H.B. Fuller Company Shareholders              
     Common
Stock
    Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Non-
Controlling
Interests
    Total  

Balance at December 3, 2011

   $ 49,450      $ 23,770      $ 720,989      $ (89,005   $ 373      $ 705,577   

Net income including non-controlling interests

         125,622          233        125,855   

Foreign currency translation

           (2,985     28        (2,957

Defined benefit pension plans adjustment, net of tax of $26,075

           (47,283       (47,283

Interest rate swap, net of tax

           41          41   

Cash-flow hedges, net of tax

           (394       (394
            

 

 

 

Comprehensive income

               75,262   

Dividends

         (16,580         (16,580

Stock option exercises

     426        6,975              7,401   

Share-based compensation plans other, net

     181        10,136              10,317   

Excess tax benefit on share-based compensation

       1,263              1,263   

Repurchases of common stock

     (154     (4,179           (4,333

Redeemable non-controlling interest

             (209     (209
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 1, 2012

     49,903        37,965        830,031        (139,626     425        778,698   

Net income including non-controlling interests

         46,606          216        46,822   

Foreign currency translation

           (9,070     (39     (9,109

Defined benefit pension plans adjustment, net of tax of $(2,126)

           3,941          3,941   

Interest rate swap, net of tax

           20          20   

Cash-flow hedges, net of tax

           189          189   
            

 

 

 

Comprehensive income

               41,863   

Dividends

         (9,367         (9,367

Stock option exercises

     236        4,135              4,371   

Share-based compensation plans other, net

     271        6,249              6,520   

Excess tax benefit on share-based compensation

       2,029              2,029   

Repurchases of common stock

     (187     (6,917           (7,104

Redeemable non-controlling interest

             (211     (211
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 1, 2013

   $ 50,223      $ 43,461      $ 867,270      $ (144,546   $ 391      $ 816,799   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5


H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     26 Weeks Ended  
     June 1, 2013     June 2, 2012  

Cash flows from operating activities from continuing operations:

    

Net income including non-controlling interests

   $ 46,822      $ 17,337   

(Income) loss from discontinued operations, net of tax

     —           1,330   

Adjustments to reconcile net income including non-controlling interests to net cash provided by operating activities from continuing operations:

    

Depreciation

     18,887        18,030   

Amortization

     11,101        7,969   

Deferred income taxes

     (428     1,393   

(Income) from equity method investments, net of dividends received

     4,984        (4,344

Share-based compensation

     6,215        5,012   

Excess tax benefit from share-based compensation

     (2,029     (1,039

Non-cash charge for the sale of inventories revalued at the date of acquisition

     —           3,314   

Asset impairment charges

     —           671   

Change in assets and liabilities, net of effects of acquisitions and discontinued operations:

    

Trade receivables, net

     1,152        (19,725

Inventories

     (16,950     (26,764

Other assets

     (8,959     15,944   

Trade payables

     1,046        11,780   

Accrued compensation

     (11,951     7,467   

Other accrued expenses

     (1,888     (721

Income taxes payable

     (8,231     362   

Accrued / prepaid pensions

     (1,499     (4,188

Other liabilities

     (4,280     4,180   

Other

     6,719        (3,198
  

 

 

   

 

 

 

Net cash provided by operating activities from continuing operations

     40,711        34,810   

Cash flows from investing activities from continuing operations:

    

Purchased property, plant and equipment

     (48,039     (12,504

Purchased businesses

     1,625        (404,725

Purchased technology

     (2,387     —      

Proceeds from sale of property, plant and equipment

     353        352   
  

 

 

   

 

 

 

Net cash used in investing activities from continuing operations

     (48,448     (416,877

Cash flows from financing activities from continuing operations:

    

Proceeds from long-term debt

     95,000        490,000   

Repayment of long-term debt

     (110,000     (103,125

Net proceeds (repayments) from notes payable

     (5,807     (3,774

Dividends paid

     (9,294     (7,968

Distribution to redeemable non-controlling interest

     (244     —      

Proceeds from stock options exercised

     4,371        6,031   

Excess tax benefit from share-based compensation

     2,029        1,039   

Repurchases of common stock

     (7,104     (1,295
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities from continuing operations

     (31,049     380,908   

Effect of exchange rate changes

     (391     (6,030
  

 

 

   

 

 

 

Net change in cash and cash equivalents from continuing operations

     (39,177     (7,189

Cash provided by (used in) operating activities of discontinued operations

     (74     6,047   

Cash provided by investing activities of discontinued operations

     —           792   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (39,251     (350

Cash and cash equivalents at beginning of period

     200,436        154,649   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 161,185      $ 154,299   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Dividends paid with company stock

   $ 73      $ 58   

Cash paid for interest, net of amount capitalized of $443 and $13 for the periods ended June 1, 2013 and June 2, 2012, respectively

   $ 11,999      $ 7,338   

Cash paid for income taxes, net of refunds

   $ 20,406      $ 2,953   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6


H.B. FULLER COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts)

(Unaudited)

Note 1: Accounting Policies

The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles 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 U.S. generally accepted accounting principles. In our opinion, the unaudited interim Condensed Consolidated Financial Statements reflect all adjustments of a normal recurring nature considered necessary for the 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 U.S. generally accepted accounting principles requires us 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 Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 1, 2012 as filed with the Securities and Exchange Commission.

Recently Adopted Accounting Pronouncements:

In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, “Presentation of Comprehensive Income.” These updates require entities to present items of net income and other comprehensive income either in a single continuous statement, or in separate, but consecutive, statements of net income and other comprehensive income. The new requirements do not change which components of comprehensive income are recognized in net income or other comprehensive income, or when an item of other comprehensive income must be reclassified to net income. The updates are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and are to be applied retroactively. We adopted the new requirements in the first quarter of our 2013 fiscal year. The adoption of these updates did not have an impact on our condensed consolidated results of operations or financial condition.

New Accounting Pronouncements:

In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income: Reporting of Amounts Reclassified out of AOCI” which further amended the disclosure requirements for comprehensive income. The update requires entities to disclose items reclassified out of accumulated other comprehensive income (AOCI) and into net income in a single location either in the notes to the condensed consolidated financial statements or parenthetically on the face of the condensed consolidated statements of income. The amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012 which is our fiscal year 2014 and is to be applied prospectively. Since this standard impacts disclosure requirements only, its adoption will not have a material impact on our condensed consolidated results of operations or financial condition.

Note 2: Acquisitions and Divestitures

Acquisitions

Engent, Inc.: On September 10, 2012 we acquired the outstanding shares of Engent, Inc., a provider of manufacturing, research and development services to the electronics industry. The purchase price of $7,881 was funded through existing cash and was recorded in our North America Adhesives operating segment.

In addition to the initial consideration, the former owners of the Engent, Inc. business are entitled to receive a series of annual cash payments based on certain financial performance criteria during the period September 10, 2012 through November 28, 2015 up to a maximum additional consideration of $2,000. We used a probability-weighted present value technique based on expected future cash flows to estimate the fair value of the contingent consideration. The resulting fair value of the contingent consideration was $1,200 which was recorded in other liabilities and increased goodwill. Each reporting period we determine the fair value of the contingent consideration liability and any changes in value are reflected in the Condensed Consolidated Statements of Income.

 

7


The following table summarizes the final fair value measurement of the assets acquired and liabilities assumed as of the date of acquisition:

 

     Preliminary
Valuation
December 1, 2012
    Fair Value
Adjustments
    Final
Valuation
 

Current assets

   $ 603      $ —         $ 603   

Property, plant and equipment

     1,471        —           1,471   

Goodwill

     5,434        247        5,681   

Other intangibles

      

Customer relationships

     2,300        —           2,300   

Noncompetition agreements

     400        —           400   

Trademarks/trade names

     300        —           300   

Other assets

     325        (305     20   

Current liabilities

     (84     (6     (90

Other liabilities

     (1,668     64        (1,604

Contingent consideration liabilities

     (1,200     —           (1,200
  

 

 

   

 

 

   

 

 

 

Total purchase price

   $ 7,881      $ —         $ 7,881   
  

 

 

   

 

 

   

 

 

 

The adjustments to the purchase price allocation primarily relate to non-current deferred tax assets and liabilities.

Forbo Industrial Adhesives. On March 5, 2012 we completed the acquisition of the global industrial adhesives and synthetic polymers business of Forbo Holding AG. The purchase price was 368,514 Swiss francs or $403,100 which we financed with the proceeds from our March 5, 2012 note purchase agreement and a term loan.

As of March 5, 2013, we completed our final purchase price allocation including final tax adjustments. The following table summarizes the fair value measurement of the assets acquired and liabilities assumed as of the date of acquisition:

 

     Preliminary
Valuation
December 1, 2012
    Purchase Price
and Fair Value
Adjustments
    Final
Valuation
 

Current assets

   $ 172,345      $ —         $ 172,345   

Property, plant and equipment

     92,443        —           92,443   

Goodwill

     136,658        343        137,001   

Other intangibles

      

Developed technology

     42,190        —           42,190   

Customer relationships

     58,910        —           58,910   

Trademarks/trade names

     21,880        —           21,880   

Other

     479        —           479   

Other assets

     4,605        —           4,605   

Current liabilities

     (84,251     (184     (84,435

Other liabilities

     (40,534     (1,784     (42,318
  

 

 

   

 

 

   

 

 

 

Total purchase price

   $ 404,725      $ (1,625   $ 403,100   
  

 

 

   

 

 

   

 

 

 

The adjustments to the purchase price allocation primarily relate to non-current deferred tax liabilities and purchase price adjustments.

 

8


Divestitures

Central America Paints. On August 6, 2012 we completed the sale of our Central America Paints business to Compania Global de Pinturas S.A., a company of Inversiones Mundial S.A for cash proceeds of $118,566. In accordance with ASC 205-20 “Discontinued Operations”, we have classified the results of this business as discontinued operations. The operational results of this business are presented in the “Income from discontinued operations, net of tax” line item on the Condensed Consolidated Statements of Income. Also in accordance with ASC 205-20, we have not allocated general corporate charges to this business. The assets and liabilities of this business are presented on the Condensed Consolidated Balance Sheets as assets and liabilities of discontinued operations.

Revenue and income (loss) from discontinued operations for the period ended June 2, 2012 were as follows:

 

     13 Weeks Ended     26 Weeks Ended  
     June 2, 2012     June 2, 2012  

Net revenue

   $ 26,321      $ 56,129   

Income from operations

     3,819        6,662   

Income taxes

     (6,872     (7,992
  

 

 

   

 

 

 

Net income (loss) from discontinued operations

   $ (3,053   $ (1,330
  

 

 

   

 

 

 

The major classes of assets and liabilities of discontinued operations as of June 1, 2013 and December 1, 2012 were as follows:

 

     June 1, 2013      December 1, 2012  

Other current assets

     1,865         —      
  

 

 

    

 

 

 

Current assets of discontinued operations

     1,865         —      

Other assets

     —            1,865   
  

 

 

    

 

 

 

Long-term assets of discontinued operations

     —            1,865   

Trade payables

     —            74   

Other accrued expenses

     5,000         —      
  

 

 

    

 

 

 

Current liabilities of discontinued operations

     5,000         74   

Other liabilities

     —            5,000   
  

 

 

    

 

 

 

Long-term liabilities of discontinued operations

     —            5,000   

Note 3: Accounting for Share-Based Compensation

Overview: We have various share-based compensation programs, which provide for equity awards including stock options, restricted stock shares, restricted stock units and deferred compensation. These equity awards fall under several plans and are described in detail in our Annual Report filed on Form 10-K as of December 1, 2012.

Grant-Date Fair Value: We use the Black-Scholes option-pricing model to calculate the grant-date fair value of an award. The fair value of options granted during the 13 weeks and 26 weeks ended June 1, 2013 and June 2, 2012 were calculated using the following weighted average assumptions:

 

     13 Weeks Ended    

26 Weeks Ended

     June 1, 2013     June 2, 2012    

June 1, 2013

  

June 2, 2012

Expected life (in years)

     4.75        4.75      4.75    4.75

Weighted-average expected volatility

     47.65     51.29   48.00%    51.76%

Expected volatility

     47.65     51.29   47.65% – 48.02%    51.29% – 51.76%

Risk-free interest rate

     0.69     0.84   0.73%    0.71%

Expected dividend yield

     1.04     1.02   0.87%    1.06%

Weighted-average fair value of grants

   $ 14.27      $ 12.97      $15.09    $11.43

 

9


Expected life – We use historical employee exercise and option expiration data to estimate the expected life assumption for the Black-Scholes grant-date valuation. We believe that this historical data is currently the best estimate of the expected term of a new option. We use a weighted-average expected life for all awards.

Expected volatility – Volatility is calculated using our historical volatility for the same period of time as the expected life. We have no reason to believe that our future volatility will differ materially from the past.

Risk-free interest rate – The rate is based on the U.S. Treasury yield curve in effect at the time of the grant for the same period of time as the expected life.

Expected dividend yield – The calculation is based on the total expected annual dividend payout divided by the average stock price.

Expense Recognition: We use the straight-line attribution method to recognize share-based compensation expense for option awards with graded vesting and restricted stock share and restricted stock units with graded and cliff vesting. The amount of share-based compensation expense recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest.

Total share-based compensation expense of $2,895 and $2,217 was included in our Condensed Consolidated Statements of Income for the 13 weeks ended June 1, 2013 and June 2, 2012, respectively. Total share-based compensation expense of $6,215 and $5,012 was included in our Condensed Consolidated Statements of Income for the 26 weeks ended June 1, 2013 and June 2, 2012, respectively. All share-based compensation expense was recorded as selling, general and administrative expense. For the 13 weeks ended June 1, 2013 and June 2, 2012 there was $225 and $158 of excess tax benefit recognized, respectively. For the 26 weeks ended June 1, 2013 and June 2, 2012 there was $2,029 and $1,039 of excess tax benefit recognized, respectively.

As of June 1, 2013, there was $9,794 of unrecognized compensation costs related to unvested stock option awards, which is expected to be recognized over a weighted-average period of 1.9 years. Unrecognized compensation costs related to unvested restricted stock shares was $9,364 and unvested restricted stock units was $2,914, both of which are expected to be recognized over a weighted-average period of 1.6 years.

Share-based Activity

A summary of option activity as of June 1, 2013 and changes during the 26 weeks then ended is presented below:

 

           Weighted-  
           Average  
     Options     Exercise Price  

Outstanding at December 1, 2012

     2,429,750      $ 21.63   

Granted

     452,229        39.58   

Exercised

     (236,277     18.50   

Forfeited or cancelled

     (11,902     24.43   
  

 

 

   

 

 

 

Outstanding at June 1, 2013

     2,633,800      $ 24.98   

The total fair values of options granted during the 13 weeks ended June 1, 2013 and June 2, 2012 were $277 and $61, respectively. Total intrinsic values of options exercised during the 13 weeks ended June 1, 2013 and June 2, 2012 were $533 and $549, respectively. Intrinsic value is the difference between our closing stock price on the respective trading day and the exercise price, multiplied by the number of options exercised. The total fair values of options granted during the 26 weeks ended June 1, 2013 and June 2, 2012 were $6,823 and $5,842, respectively. Total intrinsic values of options exercised during the 26 weeks ended June 1, 2013 and June 2, 2012 were $4,770 and $4,087, respectively. Proceeds received from option exercises during the 13 weeks ended June 1, 2013 and June 2, 2012 were $597 and $806, respectively and $4,371 and $6,031 during the 26 weeks ended June 1, 2013 and June 2, 2012, respectively.

 

10


A summary of nonvested restricted stock as of June 1, 2013 and changes during the 26 weeks then ended is presented below:

 

                              Weighted-  
                       Weighted-      Average  
                       Average      Remaining  
                       Grant      Contractual  
                       Date Fair      Life  
     Units     Shares     Total     Value      (in Years)  

Nonvested at December 1, 2012

     141,184        245,231        386,415      $ 25.41         0.9   

Granted

     62,701        183,752        246,453        39.60         2.1   

Vested

     (64,112     (109,424     (173,536     37.75         —     

Forfeited

     (357     (1,291     (1,648     28.76         1.5   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Nonvested at June 1, 2013

     139,416        318,268        457,684      $ 33.57         1.6   

Total fair values of restricted stock vested during the 13 weeks ended June 1, 2013 and June 2, 2012 were $278 and $228, respectively. Total fair values of restricted stock vested during the 26 weeks ended June 1, 2013 and June 2, 2012 were $6,550 and $4,439, respectively. The total fair value of nonvested restricted stock at June 1, 2013 was $12,278.

We repurchased 1,972 and 2,331 restricted stock shares during the 13 weeks ended June 1, 2013 and June 2, 2012, respectively and 61,624 and 52,975 restricted stock shares during the 26 weeks ended June 1, 2013 and June 2, 2012, respectively. The repurchases relate to statutory minimum tax withholding.

We have a Directors’ Deferred Compensation plan that allows non-employee directors to defer all or a portion of their retainer and meeting fees in a number of investment choices, including units representing shares of our common stock. We also have a Key Employee Deferred Compensation Plan that allows key employees to defer a portion of their eligible compensation in a number of investment choices, including units, representing shares of our common stock. We provide a 10 percent match on deferred compensation invested into units, representing shares of our common stock. A summary of deferred compensation units as of June 1, 2013, and changes during the 26 weeks then ended is presented below:

 

     Non-employee              
     Directors     Employees     Total  

Units outstanding December 1, 2012

     338,769        68,662        407,431   

Participant contributions

     7,258        1,468        8,726   

Company match contributions

     807        163        970   

Payouts

     (18,564     (4,647     (23,211
  

 

 

   

 

 

   

 

 

 

Units outstanding June 1, 2013

     328,270        65,646        393,916   

Deferred compensation units are fully vested at the date of contribution.

Note 4: Earnings Per Share

A reconciliation of the common share components for the basic and diluted earnings per share calculations follows:

 

     13 Weeks Ended      26 Weeks Ended  
     June 1,      June 2,      June 1,      June 2,  
(Shares in thousands)    2013      2012      2013      2012  

Weighted-average common shares—basic

     49,935         49,652         49,876         49,509   

Equivalent shares from share-based compensations plans

     1,217         1,070         1,214         979   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common and common equivalent shares—diluted

     51,152         50,722         51,090         50,488   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share is calculated by dividing net income attributable to H.B. Fuller by the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is based upon the weighted-average number of common and common equivalent shares outstanding during the applicable period. The difference between basic and diluted earnings per share is attributable to share-based compensation awards. We use the treasury stock method to calculate the effect of outstanding shares, which computes total employee proceeds as

 

11


the sum of (a) the amount the employee must pay upon exercise of the award, (b) the amount of unearned share-based compensation costs attributed to future services and (c) the amount of tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of the award. Share-based compensation awards for which total employee proceeds exceed the average market price over the applicable period have an antidilutive effect on earnings per share, and accordingly, are excluded from the calculation of diluted earnings per share.

Our June 1, 2013 and March 2, 2013 stock prices were higher than any of our stock option grant prices at that time, therefore no option shares were excluded from the diluted earnings per share calculations for the first two quarters of 2013. Options to purchase 4,652 shares of common stock at a weighted-average exercise price of $32.32 for the 13 weeks and 26 weeks ended June 2, 2012, were excluded from the diluted earnings per share calculations because they were antidilutive.

Note 5: Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) follow:

 

     June 1, 2013  
     Total     H.B. Fuller
Stockholders
    Non-controlling
Interests
 

Foreign currency translation adjustment

   $ 41,693      $ 41,684      $ 9   

Interest rate swap, net of taxes of $45

     (115     (115     —     

Cash-flow hedges, net of taxes of $129

     (205     (205     —     

Defined benefit pension plans adjustment, net of taxes of $101,535

     (185,910     (185,910     —     
  

 

 

   

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

   $ (144,537   $ (144,546   $ 9   
  

 

 

   

 

 

   

 

 

 

 

     December 1, 2012  
     Total     H.B. Fuller
Stockholders
    Non-controlling
Interests
 

Foreign currency translation adjustment

   $ 50,802      $ 50,754      $ 48   

Interest rate swap, net of taxes of $52

     (135     (135     —     

Cash-flow hedges, net of taxes of $248

     (394     (394     —     

Defined benefit pension plans adjustment, net of taxes of $103,661

     (189,851     (189,851     —     
  

 

 

   

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

   $ (139,578   $ (139,626   $ 48   
  

 

 

   

 

 

   

 

 

 

Note 6: Special Charges, net

The integration of the Forbo industrial adhesives business we acquired in March 2012 involves a significant amount of restructuring and capital investment to optimize the new combined entity. In addition, we are taking a series of actions in our existing EIMEA operating segment to improve the profitability and future growth prospects of this operating segment. We have combined these two initiatives into a single project which we refer to as the “Business Integration Project”. During the 13 weeks ended June 1, 2013 and June 2, 2012, we incurred special charges, net of $10,843 and $32,127, respectively and $16,176 and $38,609 for the 26 weeks ended June 1, 2013 and June 2, 2012, respectively, for costs related to the Business Integration Project.

 

 

12


The following table provides detail of special charges, net:

 

     13 Weeks Ended      26 Weeks Ended  
     June 1, 2013      June 2, 2012      June 1, 2013      June 2, 2012  

Acquisition and transformation related costs:

           

Professional services

   $ 1,884       $ 11,087       $ 4,166       $ 19,514   

Financing availability costs

     —           —           —           4,300   

Foreign currency option contract

     —           —           —           841   

Loss (gain) on foreign currency forward contracts

     —           4         —           (11,621

Other related costs

     1,995         316         2,773         557   

Restructuring costs:

           

Workforce reduction costs

     3,697         19,567         4,181         23,522   

Facility exit costs

     3,267         1,153         5,056         1,496   
  

 

 

    

 

 

    

 

 

    

 

 

 

Special charges, net

   $ 10,843       $ 32,127       $ 16,176       $ 38,609   
  

 

 

    

 

 

    

 

 

    

 

 

 

Professional services of $1,884 for the 13 weeks ended June 1, 2013 and $11,087 for the 13 weeks ended June 2, 2012, include costs related to organization consulting, investment advisory, financial advisory, legal and valuation services necessary to acquire and integrate the Forbo industrial adhesives business into our existing operating segments. For the 26 weeks ended June 1, 2013 and June 2, 2012 we incurred professional services costs of $4,166 and $19,514, respectively. For the 26 weeks ended 2012, we also incurred other costs related to the acquisition of the Forbo industrial adhesives business including an expense of $4,300 to make a bridge loan available if needed and an expense of $841 related to the purchase of a foreign currency option to hedge a portion of the acquisition purchase price. Also during the first quarter of 2012, we entered into forward currency contracts maturing on March 5, 2012 to purchase 370,000 Swiss francs. Our objective was to economically hedge the purchase price for the pending acquisition of the global industrial adhesives business of Forbo Group after the price was established. The currency contracts were not designated as hedges for accounting purposes. For the 26 weeks ended June 2, 2012, the net gain on the forward currency contracts was $11,621 which partially offset other acquisition and transformation related costs.

During the 13 weeks ended June 1, 2013, we incurred workforce reduction costs of $3,697, other related costs of $1,995, cash facility exit costs of $2,316 and non-cash facility exit costs of $951 related to the Business Integration Project. During the 26 weeks ended June 1, 2013, we incurred workforce reduction costs of $4,181, other related costs of $2,773, cash facility exit costs of $3,714 and non-cash facility exit costs of $1,342 related to the Business Integration Project. During the 13 weeks and 26 weeks ended June 2, 2012, we incurred workforce reduction costs of $19,567 and $23,522, respectively, other related costs of $316 and $557, respectively and non-cash facility exit costs of $1,153 and $1,496, respectively related to the Business Integration Project.

For the 26 weeks ended June 1, 2013, the activity in accrued compensation associated with the Business Integration Project, is as follows:

 

     Workforce
Reduction Costs
 

Balance at December 1, 2012

   $ 19,848   

Restructuring charges

     4,181   

Cash payments

     (5,994

Foreign currency translation adjustment

     (92
  

 

 

 

Balance at June 1, 2013

   $ 17,943   
  

 

 

 

Of the $17,943 in accrued restructuring costs at June 1, 2013, $17,380 was included in accrued compensation and $563 was included in other liabilities on our Condensed Consolidated Balance Sheets as this portion is not expected to be paid within the next year. In Europe, the accrued restructuring charges included statutory minimum amounts for one site for which final agreement has not been reached with the works council and communicated to the affected employees as well as amounts being accrued ratably for four sites in which works council agreements have been reached. At the communication date to employees, final termination benefits will be measured and will be recognized ratably over the service period employees are required to work to be eligible for termination benefits. In North America and Asia, the benefits were accrued based primarily on the formal severance plans in place for the various locations. The restructuring costs are not allocated to our operating segments.

 

 

13


Note 7: Components of Net Periodic Cost (Benefit) related to Pension and Other Postretirement Benefit Plans

 

     13 Weeks Ended June 1, 2013 and June 2, 2012  
           Other  
     Pension Benefits     Postretirement  
     U.S. Plans     Non-U.S. Plans     Benefits  
Net periodic cost (benefit):    2013     2012     2013     2012     2013     2012  

Service cost

   $ 27      $ 22      $ 416      $ 329      $ 156      $ 135   

Interest cost

     3,680        4,024        1,820        2,165        533        617   

Expected return on assets

     (5,680     (5,938     (2,318     (2,136     (931     (816

Amortization:

            

Prior service cost

     12        12        (1     (1     (1,034     (1,173

Actuarial (gain)/ loss

     1,685        964        935        634        1,429        1,283   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic cost (benefit)

   $ (276   $ (916   $ 852      $ 991      $ 153      $ 46   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     26 Weeks Ended June 1, 2013 and June 2, 2012  
           Other  
     Pension Benefits     Postretirement  
     U.S. Plans     Non-U.S. Plans     Benefits  
Net periodic cost (benefit):    2013     2012     2013     2012     2013     2012  

Service cost

   $ 54      $ 44      $ 839      $ 589      $ 312      $ 270   

Interest cost

     7,360        8,048        3,689        3,894        1,066        1,234   

Expected return on assets

     (11,360     (11,876     (4,700     (3,936     (1,862     (1,632

Amortization:

            

Prior service cost

     24        24        (2     (2     (2,068     (2,346

Actuarial (gain)/ loss

     3,370        1,928        1,886        1,263        2,858        2,578   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic cost (benefit)

   $ (552   $ (1,832   $ 1,712      $ 1,808      $ 306      $ 104   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note 8: Inventories

The composition of inventories follows:

 

     June 1,     December 1,  
     2013     2012  

Raw materials

   $ 117,932      $ 110,820   

Finished goods

     125,925        119,123   

LIFO reserve

     (21,476     (21,412
  

 

 

   

 

 

 

Total inventories

   $ 222,381      $ 208,531   
  

 

 

   

 

 

 

Note 9: Financial Instruments

As a result of being a global enterprise, our earnings, cash flows and financial position are exposed to foreign currency risk from foreign currency denominated receivables and payables. These items are denominated in various foreign currencies, including the Euro, British pound sterling, Canadian dollar, Chinese renminbi, Japanese yen, Australian dollar, Swiss franc, Argentine peso, Brazilian real, Colombian peso, Mexican peso, Turkish lira, Egyptian pound, Indian rupee and Malaysian ringgit.

Our 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. We take 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. We do not enter into any speculative positions with regard to derivative instruments.

We enter into derivative contracts with a group of investment grade multinational commercial banks. We evaluate the credit quality of each of these banks on a periodic basis as warranted.

 

14


Effective March 5, 2012, we entered into two cross-currency swap agreements to convert a notional amount of $151,598 of foreign currency denominated intercompany loans into US dollars. One of the cross-currency swaps matures in 2014 and the other swap matures in 2015. As of June 1, 2013, the combined fair value of the swaps were an asset of $1,769 and were included in other assets in the Condensed Consolidated Balance Sheets. The swaps were designated as cash-flow hedges for accounting treatment. The lesser amount between the cumulative change in the fair value of the actual swaps and the cumulative change in the fair value of hypothetical swaps is recorded in accumulated other comprehensive income (loss) in the Condensed Consolidated Balance Sheets. The difference between the cumulative change in the fair value of the actual swaps and the cumulative change in the fair value of hypothetical swaps are recorded as other income (expense), net in the Condensed Consolidated Statements of Income. In a perfectly effective hedge relationship, the two fair value calculations would exactly offset each other. Any difference in the calculation represents hedge ineffectiveness. The ineffectiveness calculations as of June 1, 2013 resulted in additional pre-tax gain of $6 year-to-date as the change in fair value of the cross-currency swaps was more than the change in the fair value of the hypothetical swaps. The amount in accumulated other comprehensive income (loss) related to cross-currency swaps was a loss of $205 at June 1, 2013. The estimated net amount of the existing loss that is reported in accumulated other comprehensive income (loss) at June 1, 2013 that is expected to be reclassified into earnings within the next twelve months is $163. At June 1, 2013, we believe the original forecasted transactions will occur, therefore, we do not believe any gains or losses will be reclassified into earnings as a result of the discontinuance of these cash flow hedges.

The following table summarizes the cross-currency swaps outstanding as of June 1, 2013:

 

     Fiscal Year of
Expiration
     Interest Rate     Notional Value      Fair Value  

Pay EUR

     2014         4.15   $ 52,860       $ 833   

Receive USD

        4.30     

Pay EUR

     2015         4.30   $ 98,738       $ 936   

Receive USD

        4.45     
       

 

 

    

 

 

 

Total

        $ 151,598       $ 1,769   
       

 

 

    

 

 

 

Except for the two cross currency swap agreements listed above, foreign currency derivative instruments outstanding are not designated as hedges for accounting purposes. The gains and losses related to mark-to-market adjustments are recognized as other income or expense in the income statement during the periods in which the derivative instruments are outstanding. See Note 14 to Condensed Consolidated Financial Statements for fair value amounts of these derivative instruments.

As of June 1, 2013, we had forward foreign currency contracts maturing between June 5, 2013 and November 1, 2013. The mark-to-market effect associated with these contracts, on a net basis, was a gain of $481 at June 1, 2013. These gains were largely offset by the underlying transaction gains and losses resulting from the foreign currency exposures for which these contracts relate.

We have interest rate swap agreements to convert $75,000 of our Senior Notes to variable interest rates. The change in fair value of the Senior Notes, attributable to the change in the risk being hedged, was a liability of $6,909 at June 1, 2013 and was included in long-term debt in the Condensed Consolidated Balance Sheets. The fair values of the swaps in total were an asset of $7,133 at June 1, 2013 and were included in other assets in the Condensed Consolidated Balance Sheets. The swaps were designated for hedge accounting treatment as fair value hedges. The changes in the fair value of the swap and the fair value of the Senior Notes attributable to the change in the risk being hedged are recorded as other income (expense), net in the Condensed Consolidated Statements of Income. In a perfectly effective hedge relationship, the two fair value calculations would exactly offset each other. Any difference in the calculation represents hedge ineffectiveness. The calculation as of June 1, 2013 resulted in additional pre-tax loss of $387 year-to-date as the fair value of the interest rate swaps decreased by more than the change in the fair value of the Senior Notes attributable to the change in the risk being hedged.

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 June 1, 2013, there were no significant concentrations of credit risk.

 

15


Note 10: Commitments and Contingencies

Environmental Matters. From time to time, we become aware of compliance matters relating to, or receive notices from, federal, state or local entities regarding possible or alleged violations of environmental, health or safety laws and regulations. We review the circumstances of each individual site, considering the number of parties involved, the level of potential liability or contribution of us relative to the other parties, the nature and magnitude of the hazardous substances 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. Also, from time to time, we are identified as a “potentially responsible party” (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and/or 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. We are also subject to similar laws in some of the countries where current and former facilities are located. Our environmental, health and safety department monitors compliance with applicable laws on a global basis. To the extent we can reasonably estimate the amount of our probable liabilities for environmental matters, we establish a financial provision.

Currently we are involved in various environmental investigations, clean up activities and administrative proceedings and lawsuits. In particular, we are currently deemed a PRP in conjunction with numerous other parties, in a number of government enforcement actions associated with hazardous waste sites. As a PRP, we may be required to pay a share of the costs of investigation and clean up of these sites. In addition, we are engaged in environmental remediation and monitoring efforts at a number of current and former operating facilities. While uncertainties exist with respect to the amounts and timing of the ultimate environmental liabilities, based on currently available information, we have concluded that these matters, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flow.

Other Legal Proceedings. From time to time and in the ordinary course of business, we are a party to, or a target of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, contract, patent and intellectual property, environmental, health and safety, tax and employment matters. While we are unable to predict the outcome of these matters, we have concluded, based upon currently available information, that the ultimate resolution of any pending matter, individually or in the aggregate, including the asbestos litigation described in the following paragraphs, will not have a material adverse effect on our results of operations, financial condition or cash flow.

We have been named as a defendant in lawsuits in which plaintiffs have alleged injury due to products containing asbestos manufactured more than 30 years ago. The plaintiffs generally bring these lawsuits against multiple defendants and seek damages (both actual and punitive) in very large amounts. In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable injuries or that the injuries suffered were the result of exposure to products manufactured by us. We are typically dismissed as a defendant in such cases without payment. If the plaintiff presents evidence indicating that compensable injury occurred as a result of exposure to our products, the case is generally settled for an amount that reflects the seriousness of the injury, the length, intensity and character of exposure to products containing asbestos, the number and solvency of other defendants in the case, and the jurisdiction in which the case has been brought.

A significant portion of the defense costs and settlements in asbestos-related litigation is paid by third parties, including indemnification pursuant to the provisions of a 1976 agreement under which we acquired a business from a third party. Currently, this third party is defending and paying settlement amounts, under a reservation of rights, in most of the asbestos cases tendered to the third party.

In addition to the indemnification arrangements with third parties, we have insurance policies that generally provide coverage for asbestos liabilities (including defense costs). Historically, insurers have paid a significant portion of our defense costs and settlements in asbestos-related litigation. However, certain of our insurers are insolvent. We have entered into cost-sharing agreements with our insurers that provide for the allocation of defense costs and, in some cases, settlements and judgments, in asbestos-related lawsuits. Under these agreements, we are required in some cases to fund a share of settlements and judgments allocable to years in which the responsible insurer is insolvent. In addition, to delineate our rights under certain insurance policies, in October 2009, we commenced a declaratory judgment action against one of our insurers in the United States District Court for the District of Minnesota. Additional insurers have been brought into the action to address issues related to the scope of their coverage.

 

16


A summary of the number of and settlement amounts for asbestos-related lawsuits and claims is as follows:

 

     26 Weeks Ended      3 Years Ended  
($ in thousands)    June 1, 2013      June 2, 2012      December 1, 2012  

Lawsuits and claims settled

     —           8            20   

Settlement amounts

   $ —         $ 490          $ 1,535   

Insurance payments received or expected to be received

   $ —         $ 350          $ 1,174   

We do not believe that it would be meaningful to disclose the aggregate number of asbestos-related lawsuits filed against us because relatively few of these lawsuits are known to involve exposure to asbestos-containing products that we manufactured. Rather, we believe it is more meaningful to disclose the number of lawsuits that are settled and result in a payment to the plaintiff. To the extent we can reasonably estimate the amount of our probable liabilities for pending asbestos-related claims, we establish a financial provision and a corresponding receivable for insurance recoveries.

Based on currently available information, we have concluded that the resolution of any pending matter, including asbestos-related litigation, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flow.

Note 11: Operating Segments

We are required to report segment information in the same way that we internally organize our business for assessing performance and making decisions regarding allocation of resources. We evaluate the performance of each of our operating segments based on segment operating income, which is defined as gross profit less selling, general and administrative (SG&A) expenses. Segment operating income excludes special charges, net. Corporate expenses are fully allocated to each operating segment. Corporate assets are not allocated to the segments. Inter-segment revenues are recorded at cost plus a markup for administrative costs. Operating results of each segment are regularly reviewed by our chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance.

The net revenue and segment operating income of the industrial adhesives business acquired in 2012 was recorded in our North America Adhesives, EIMEA, Latin America and Asia Pacific operating segments.

The tables below provide certain information regarding the net revenue and segment operating income of each of our operating segments:

 

     13 Weeks Ended  
     June 1, 2013      June 2, 2012  
            Inter-      Segment             Inter-      Segment  
     Trade      Segment      Operating      Trade      Segment      Operating  
     Revenue      Revenue      Income      Revenue      Revenue      Income  

North America Adhesives

   $ 190,641       $ 14,220       $ 28,448       $ 193,382       $ 15,615       $ 25,115   

Construction Products

     42,934         134         4,047         39,679         105         3,148   

EIMEA

     185,194         2,793         14,145         193,943         2,307         9,485   

Latin America

     38,132         141         3,377         38,555         289         3,729   

Asia Pacific

     62,115         3,788         2,793         61,436         4,596         2,118   
  

 

 

       

 

 

    

 

 

       

 

 

 

Total

   $ 519,016          $ 52,810       $ 526,995          $ 43,595   
  

 

 

       

 

 

    

 

 

       

 

 

 

 

     26 Weeks Ended  
     June 1, 2013      June 2, 2012  
            Inter-      Segment             Inter-      Segment  
     Trade      Segment      Operating      Trade      Segment      Operating  
     Revenue      Revenue      Income      Revenue      Revenue      Income  

North America Adhesives

   $ 362,903       $ 26,832       $ 51,922       $ 311,478       $ 29,386       $ 42,610   

Construction Products

     76,965         215         5,411         72,173         210         3,620   

EIMEA

     362,695         5,469         20,618         304,594         4,356         16,033   

Latin America

     73,601         214         5,828         74,152         676         6,116   

Asia Pacific

     122,694         7,279         4,767         110,052         8,050         2,873   
  

 

 

       

 

 

    

 

 

       

 

 

 

Total

   $ 998,858          $ 88,546       $ 872,449          $ 71,252   
  

 

 

       

 

 

    

 

 

       

 

 

 

 

17


Reconciliation of segment operating income to income from continuing operations before income taxes and income from equity method investments:

 

     13 Weeks Ended     26 Weeks Ended  
     June 1,     June 2,     June 1,     June 2,  
     2013     2012     2013     2012  

Segment operating income

   $ 52,810      $ 43,595      $ 88,546      $ 71,252   

Special charges, net

     (10,843     (32,127     (16,176     (38,609

Asset impairment charges

     —          (671     —          (671

Other income (expense), net

     (1,814     231        (1,436     648   

Interest expense

     (4,884     (5,749     (10,211     (8,367
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes and income from equity method investments

   $ 35,269      $ 5,279      $ 60,723      $ 24,253   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 12: Income Taxes

As of June 1, 2013, we had a $5,301 liability recorded under FASB ASC 740, “Income Taxes” for gross unrecognized tax benefits (excluding interest). As of June 1, 2013, we had accrued $801 of gross interest relating to unrecognized tax benefits. During the second quarter of 2013 our recorded liability for gross unrecognized tax benefits decreased by $95.

Note 13: Goodwill

A summary of goodwill activity for the first six months of 2013 is presented below:

 

Balance at December 1, 2012

   $ 254,345   

Forbo Industrial Adhesives acquisition (Note 2)

     343   

Engent, Inc. acquisition (Note 2)

     247   

Currency impact

     (2,460
  

 

 

 

Balance at June 1, 2013

   $ 252,475   
  

 

 

 

Note 14: Fair Value Measurements

The following tables present information about our financial assets and liabilities that are measured at fair value on a recurring basis as of June 1, 2013 and December 1, 2012, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include data points that are observable such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) such as interest rates and yield curves that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

 

     June 1,      Fair Value Measurements Using:  

Description

   2013      Level 1      Level 2      Level 3  

Assets:

           

Marketable securities

   $ 905       $ 905       $ —         $ —     

Derivative assets

     1,742         —           1,742         —     

Interest rate swaps

     7,133         —           7,133         —     

Cash-flow hedges

     1,769         —           1,769         —     

Liabilities:

           

Derivative liabilities

   $  1,261       $ —         $  1,261       $ —     

Contingent consideration liability, continuing operations

     1,638         —           —           1,638   

Contingent consideration liability, discontinued operations

     5,000         —           —           5,000   

 

18


     December 1,      Fair Value Measurements Using:  

Description

   2012      Level 1      Level 2      Level 3  

Assets:

           

Marketable securities

   $ 15,499       $ 15,499       $ —         $ —     

Derivative assets

     830         —           830         —     

Interest rate swaps

     9,473         —           9,473         —     

Cash-flow hedges

     1,610         —           1,610         —     

Liabilities:

           

Derivative liabilities

   $ 956       $ —         $ 956       $ —     

Contingent consideration liability, continuing operations

     1,649         —           —           1,649   

Contingent consideration liability, discontinued operations

     5,000         —           —           5,000   

Note 15: Share Repurchase Program

On September 30, 2010, the Board of Directors authorized a share repurchase program of up to $100,000 of our outstanding common shares. Under the program, we are authorized to repurchase shares for cash on the open market, from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases is dependent on price, market conditions and applicable regulatory requirements. Upon repurchase of the shares, we reduced our common stock for the par value of the shares with the excess being applied against additional paid-in capital.

During the second quarter of 2013 we repurchased shares under this program, with an aggregate value of $4,775. Of this amount, $125 reduced common stock and $4,650 reduced additional paid-in capital. There were no shares repurchased under this program during the first quarter of 2013 or the first six months of 2012.

Note 16: Impairment of Long-lived Asset

During the second quarter of 2012, we determined the fair value of one of our cost basis investments was lower than the investment value on our balance sheet based on investor approval of a buy-out offer from the majority shareholder. As a result, we recorded an impairment charge of $671.

Note 17: Redeemable Non-Controlling Interest

We account for the non-controlling interest in H.B. Fuller Kimya San. Tic A.S. (HBF Kimya) as a redeemable non-controlling interest because both the non-controlling shareholder and H.B. Fuller have an option, exercisable beginning August 1, 2018, to require the redemption of the shares owned by the non-controlling shareholder at a price determined by a formula based on 24 months trailing EBITDA. Since the option makes the redemption of the non-controlling ownership shares of HBF Kimya outside of our control, these shares are classified as a redeemable non-controlling interest in temporary equity in the Condensed Consolidated Balance Sheets. The option is subject to a minimum price of €3,500. The redemption value of the option, if it were currently redeemable, is estimated to be €3,500.

 

19


HBF Kimya’s results of operations are consolidated in our financial statements. Both the non-controlling interest and the accretion adjustment to redemption value are included in income or loss attributable to non-controlling interests in the Condensed Consolidated Statements of Income and in the carrying value of the redeemable non-controlling interest on the Condensed Consolidated Balance Sheets. HBF Kimya’s functional currency is the Turkish lira and changes in exchange rates will affect the reported amount of the redeemable non-controlling interest. As of June 1, 2013 the redeemable non-controlling interest was:

 

Balance at December 1, 2012

   $  3,981   

Net income attributed to redeemable non-controlling interest

     161   

Accretion adjustment to redemption value

     48   

Distributions to non-controlling shareholder

     (244

Foreign currency translation adjustment

     2   
  

 

 

 

Balance at June 1, 2013

   $ 3,948   
  

 

 

 

Note 18: Subsequent Event

On June 6, 2013 we completed the purchase of Plexbond Quimica, S.A., a provider of chemical polyurethane specialties and polyester resins, for approximately $12,000. Plexbond Quimica, S.A. operates a manufacturing facility in Curitiba, Brazil. The acquisition will be recorded in our Latin America operating segment.

 

20


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended December 1, 2012 for important background information related to our business.

We completed the acquisition of the Forbo industrial adhesives business on March 5, 2012. The Forbo industrial adhesives business acquired is referred to as the “acquired business” in the MD&A.

Net revenue in the second quarter of 2013 decreased 1.5 percent over the second quarter of 2012. Pricing increased 0.2 percent offset by 1.4 percent decrease in sales volume. The weakening of the Euro for the second quarter of 2013 compared to the second quarter of 2012 were the main drivers of the negative 0.3 percent currency effect compared to the U.S. dollar. Gross profit margin improved by 230 basis points driven by synergies from integrating the acquired business, other profit margin improvement initiatives over the past year and the recognition of the non-cash charge for the sale of inventories revalued at the date of the acquisition which reduced gross profit margin 60 basis points in the second quarter of 2012. We incurred special charges, net of $10.8 million for costs related to the Business Integration Project in the second quarter of 2013 and $32.1 million in the second quarter of 2012.

Net income attributable to H.B. Fuller in the second quarter of 2013 was $25.9 million as compared to $1.9 million in the second quarter of 2012. The 2012 net income attributable to H.B. Fuller includes a loss of $3.1 million from discontinued operations, net of tax or $0.06 diluted per share. On a diluted earnings per share basis, the second quarter of 2013 was $0.51 per share as compared to $0.04 per share for the same period last year.

Net revenue in the first six months of 2013 increased 14.5 percent over the first six months of 2012. Organic growth, which we define as revenue growth due to changes in sales volume and selling prices, was 0.5 percent as compared to the first six months of 2012. The organic growth consisted of 0.5 percent higher pricing with no percentage change in volume. Inclusion of the acquired business increased net revenue by approximately $121.8 million. Gross profit margin improved by 60 basis points driven by synergies from integrating the acquired business. Our SG&A expenses increased by 14.0 percent in the first six months of 2013 compared to the same period last year, however, SG&A expenses as a percentage of net revenue decreased by 10 basis points. The increase in SG&A expense was primarily due to the inclusion of the acquired business. We incurred special charges, net of $16.2 million for costs related to the Business Integration Project in the first six months of 2013 and $38.6 million in the first six months of 2012.

Net income attributable to H.B. Fuller in the first six months of 2013 was $46.6 million as compared to $17.2 million in the first six months of 2012. The 2012 net income attributable to H.B. Fuller includes a $1.3 million loss from discontinued operations, net of tax or $0.03 diluted per share. On a diluted earnings per share basis, the first six months of 2013 was $0.91 per share as compared to $0.34 per share for the same period last year.

Results of Operations

Net revenue:

 

     13 Weeks Ended     26 Weeks Ended  
     June 1,      June 2,      2013 vs     June 1,      June 2,      2013 vs  
($ in millions)    2013      2012      2012     2013      2012      2012  

Net revenue

   $ 519.0       $ 527.0         (1.5 %)    $ 998.9       $ 872.4         14.5

We review variances in net revenue in terms of changes related to product pricing, sales volume, changes in foreign currency exchange rates and acquisitions. The pricing/sales volume variance and small niche acquisitions including Engent which was acquired in the fourth quarter of 2012 are viewed as organic growth. The following table shows the net revenue variance analysis for the second quarter and six months compared to the same period in 2012:

 

     13 Weeks Ended     26 Weeks Ended  
     June 1, 2013     June 1, 2013  

Product pricing

     0.2     0.5

Sales volume

     (1.4 %)      0.0

Currency

     (0.3 %)      0.0

Acquisitions

     0.0     14.0
  

 

 

   

 

 

 
     (1.5 %)      14.5
  

 

 

   

 

 

 

 

21


Product pricing increased 0.2 percent offset by decreased sales volume of 1.4 percent for the second quarter of 2013 as compared to the same period last year. The negative currency effects in the quarter were primarily the result of the weakening of the Euro compared to the U.S dollar.

Year-to-date organic growth was 0.5 percent with increased product pricing of 0.5 percent with no percentage change in volume for the first six months of 2013 as compared to the same period last year. The organic growth was driven by growth in the North America Adhesives, Construction Products, and Asia Pacific operating segments. Currency changes had no year-to-date effects in 2013. The inclusion of the acquired business added $121.8 million to net revenue.

Cost of sales:

 

     13 Weeks Ended     26 Weeks Ended  
     June 1,     June 2,     2013 vs     June 1,     June 2,     2013 vs  
($ in millions)    2013     2012     2012     2013     2012     2012  

Raw materials

   $ 295.4      $ 308.5        (4.2 %)    $ 567.1      $ 501.5        13.1

Other manufacturing costs

     77.0        81.9        (6.0 %)      151.8        131.7        15.3
  

 

 

   

 

 

     

 

 

   

 

 

   

Cost of sales

   $ 372.4      $ 390.4        (4.6 %)    $ 718.9      $ 633.2        13.5

Percent of net revenue

     71.8     74.1       72.0     72.6  

The 4.6 percent decrease in cost of sales in the second quarter of 2013 compared to the second quarter of 2012 was driven by the integration of the acquired business. Cost of sales as a percentage of net revenue decreased 230 basis points primarily driven by synergies from integrating the acquired business and the recognition of the non-cash charge for the sale of inventories revalued at the date of the acquisition which increased cost of sales by 60 basis points in the second quarter of 2012. Raw material costs as a percentage of sales decreased 160 basis points relative to the prior year, reflecting material cost synergies, other profit improvement initiatives undertaken over the last twelve months and the recognition of the non-cash charge which increased raw material costs as a percentage of sales by 60 basis points in the second quarter of 2012. Other manufacturing costs as a percentage of revenue decreased by 70 basis points as benefits of the manufacturing network consolidation projects within the Business Integration Project were realized. We expect raw material costs to remain at or near second quarter exit levels through the end of this year.

The 13.5 percent increase in cost of sales for the first six months of 2013 compared to the first six months of 2012 was driven by the inclusion of the acquired business. Cost of sales as a percentage of net revenue decreased 60 basis points primarily driven by synergies from integrating the acquired business. Raw material costs as a percentage of sales decreased 70 basis points relative to the prior year, reflecting material cost synergies and other profit improvement initiatives undertaken over the last twelve months. Other manufacturing costs as a percentage of revenue increased by 10 basis points compared to last year; this ratio is expected to improve over the next three quarters as the benefits of the manufacturing network consolidation projects within the Business Integration Project are completed.

Gross profit:

 

     13 Weeks Ended     26 Weeks Ended  
     June 1,     June 2,     2013 vs     June 1,     June 2,     2013 vs  
($ in millions)    2013     2012     2012     2013     2012     2012  

Gross profit

   $ 146.6      $ 136.6        7.4   $ 280.0      $ 239.2        17.0

Percent of net revenue

     28.2     25.9       28.0     27.4  

 

22


Gross profit for the second quarter of 2013 increased by $10.0 million compared to the second quarter of 2012 and gross profit margin improved by 230 basis points driven by synergies from integrating the acquired business, other profit margin improvement initiatives over the past year and the recognition of the non-cash charge for the sale of inventories revalued at the date of the acquisition which reduced gross profit margin 60 basis points in the second quarter of 2012.

Gross profit for the first six months of 2013 increased by $40.8 million compared to the first six months of 2012 and gross profit margin improved by 60 basis points. The synergies from integrating the acquired business were the primary reason for the margin improvement.

Selling, general and administrative (SG&A) expenses:

 

     13 Weeks Ended     26 Weeks Ended  
     June 1,     June 2,     2013 vs     June 1,     June 2,     2013 vs  
($ in millions)    2013     2012     2012     2013     2012     2012  

SG&A

   $ 93.8      $ 93.0        0.9   $ 191.4      $ 168.0        14.0

Percent of net revenue

     18.1     17.6       19.2     19.3  

SG&A expenses increased $0.8 million or 0.9 percent compared to the second quarter of 2012. SG&A expense as a percentage of net revenue increased 50 basis points due to the slight decline in period over period revenue.

SG&A expenses increased $23.4 million or 14.0 percent compared to the first six months of 2012. The lower relative cost structure of the acquired business and the increased net revenue resulted in the 10 basis point decrease in SG&A expense as a percentage of net revenue.

We make SG&A expense plans at the beginning of each fiscal year and barring significant changes in business conditions or our outlook for the future, we maintain these spending plans for the entire year. Management routinely monitors our SG&A spending relative to these fiscal year plans for each operating segment and for the company overall. We feel it is important to maintain a consistent spending program in this area as many of the activities within the SG&A category such as the sales force, technology development, and customer service are critical elements of our business strategy. For the current year we have planned SG&A expenses to increase relative to last year by an amount slightly less than our expected growth in net revenue. Our analysis of the impact of our SG&A spending in the quarter is generally focused on spending variances that are significantly above or below this planned level.

Special charges, net:

 

     13 Weeks Ended     26 Weeks Ended  
     June 1,      June 2,      2013 vs     June 1,      June 2,      2013 vs  
($ in millions)    2013      2012      2012     2013      2012      2012  

Special charges, net

   $ 10.8       $ 32.1         (66.2 %)    $ 16.2       $ 38.6         (58.1 %) 

The following table provides detail of special charges, net:

 

     13 Weeks Ended      26 Weeks Ended  
($ in millions)    June 1, 2013      June 2, 2012      June 1, 2013      June 2, 2012  

Acquisition and transformation related costs

   $ 1.9       $ 11.1       $ 4.2       $ 13.0   

Workforce reduction costs

     3.7         19.6         4.2         23.5   

Facility exit costs

     3.2         1.1         5.0         1.5   

Other related costs

     2.0         0.3         2.8         0.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Special charges, net

   $ 10.8       $ 32.1       $ 16.2       $ 38.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

The integration of the acquired business involves a significant amount of restructuring and capital investment to optimize the new combined entity. In addition to this acquisition, we announced our intentions to take a series of actions in our existing EIMEA operating segment to improve the profitability and future growth prospects of this operating segment. We have combined these two initiatives into a single project which we refer to as the “Business Integration Project”. During the 13 weeks ended June 1, 2013 and June 2, 2012, we incurred special charges, net of $10.8 million and $32.1 million respectively, for costs related to the Business Integration Project. During the 26 weeks ended June 1, 2013 and June 2, 2012, we incurred special charges, net of $16.2 million and $38.6 million respectively, for costs related to the Business Integration Project.

 

23


Acquisition and transformation related costs of $1.9 million for the second quarter of 2013 and $11.1 million for the second quarter of 2012 include costs related to organization consulting, investment advisory, financial advisory, legal and valuation services necessary to acquire and integrate the acquired business into our existing operating segments. We incurred acquisition and transformation related costs of $4.2 million for the first six months of 2013 and $13.0 million for the same period last year. For the 26 weeks ended June 2, 2012, acquisition and transformation related costs included an expense to make a bridge loan available, an expense related to the purchase of a foreign currency option to hedge a portion of the acquisition purchase price and the net gain on the forward currency contracts used to economically hedge the purchase price for the pending acquisition of the global industrial adhesives business of Forbo Group after the price was established.

The Business Integration Project is a broad-based transformation plan involving all major processes in three of our existing operating segments. The integration strategy and execution plan is unique for each operating segment reflecting the differences within operating segments as well as differences within the acquired business in each geographic region. In the North America Adhesives operating segment, the integration work is essentially a consolidation of two similar businesses. The production capacity of the two organizations is being optimized mostly by transferring volume from the acquired business to existing facilities within the North America Adhesives operating segment. In the EIMEA operating segment, the Business Integration Project impacts more aspects of the business and is more complex. The two businesses being combined have similar inefficiencies and opportunities for improved productivity, generally due to excess complexity within the core processes of each of the businesses. This portion of the project will require more capital investment, higher restructuring and severance costs and a longer time frame when compared to the North America Adhesives portion of the project. In the Asia Pacific operating segment, the Business Integration Project is less complex because the acquired business in that region was relatively small. The focus of the integration work in this region is to build a solid foundation for growth in the commercial and technical areas and create a more efficient production network in China.

The benefits of the Business Integration Project are expected to be substantial. We have plans to create annual cash cost savings and other cash pre-tax profit improvement benefits aggregating to $90.0 million when the various integration activities are completed in 2014. By 2015, the Business Integration Project activities are expected to improve the EBITDA margin of the global business from just under 11 percent in 2011 to a target level of 15 percent. The project incorporates many different work streams each of which has a specific timeline for completion and delivery of benefits. Some of the initiatives, such as raw material cost reductions, have delivered immediate benefits while other initiatives, such as facility closures, will take longer to implement and the related cost savings will be achieved later in the project. Taking the expected impact of all initiatives into account, the profit improvement benefits should drive steady annual improvement in EBITDA margin until the target level is achieved in 2015.

The total costs, excluding capital expenditures, to achieve these benefits are expected to be approximately $121.0 million of which $76.2 million have been expensed since inception of the Business Integration Project in 2011. The remaining expected costs of approximately $44.8 million will occur over the next several quarters through the end of 2014. The following table provides detail of costs incurred and future expected costs of the Business Integration Project:

 

     As of June 1, 2013  
($ in millions)    Costs Incurred
Inception-to-
Date
     Expected Costs
Remaining
     Total Expected
Costs
 

Acquisition and transformation related costs

   $ 29.9       $ 5.1       $ 35.0   

Work force reduction costs

     32.3         20.7         53.0   

Cash facility exit costs

     4.7         12.3         17.0   

Non-cash facility exit costs

     4.5         1.5         6.0   

Other related costs

     4.8         5.2         10.0   
  

 

 

    

 

 

    

 

 

 

Business Integration Project

   $ 76.2       $ 44.8       $ 121.0   
  

 

 

    

 

 

    

 

 

 

 

24


The remaining expected Business Integration Project costs of $44.8 million will be incurred as the measures are implemented, and will total approximately $27.8 million in fiscal year 2013 and approximately $17.0 million in fiscal year 2014. The costs associated with the acquisition integration and the cash costs of the restructuring are incremental cash outlays that will be funded with existing cash and cash generated from operations. Non-cash costs are primarily related to accelerated depreciation of long-lived assets.

The capital expenditures related to the Business Integration Project will be significant. In 2012 we spent approximately $36.0 million in capital expenditures. As the project has progressed and the scope of the various projects are more fully defined, we expect capital expenditures to reach $110.0 million in 2013 and the aggregate of spending in the years 2014 and 2015 is expected to be $100.0 million. This capital spending forecast for all projects including the Business Integration Project is consistent with our original forecast. This capital spending program will be funded from the operating cash flows of the business and if necessary, from available cash and short-term borrowing.

Going forward, we plan to report our progress on achieving our profit improvement initiatives each quarter. We will focus on three key metrics which capture the bulk of the Business Integration Project objectives: (1) cost savings achieved through workforce reductions, (2) cost reductions achieved through facility closures and consolidation, and (3) the EBITDA margin of the business relative to our expected trend over the timeframe of the project. In addition, the costs to achieve these benefits will be reported in each reporting period, relative to the $121.0 million total expected cost estimate.

For the quarter ended June 1, 2013, we achieved cost savings of $3.6 million related to workforce reductions and $3.1 million related to facility closures and consolidations. The above cost savings represent benefits from selected activities included in the Business Integration Project. EBITDA margin for the second quarter of 12.9 percent is consistent with our plan.

Other income (expense), net:

 

     13 Weeks Ended      26 Weeks Ended  
     June 1,     June 2,      2013 vs      June 1,     June 2,      2013 vs  
($ in millions)    2013     2012      2012      2013     2012      2012  

Other income (expense), net

   $ (1.8   $ 0.2         NMP       $ (1.4   $ 0.6         NMP   

NMP = Non-meaningful percentage

Other income (expense), net in the second quarter of 2013 included $1.7 million of currency translation and re-measurement losses and $0.3 million of net financing costs offset by $0.2 million of interest income. Other income (expense), net in the second quarter of 2012 included $0.6 million of currency translation and re-measurement gains and $0.4 million of interest income offset by net financing costs of $0.8 million.

For the first six months of 2013, other income (expense), net included $1.5 million of currency translation and re-measurement losses and $0.3 million of net financing costs offset by $0.4 million of interest income. For the first six months of 2012, other income (expense), net included $0.9 million of interest income and $0.1 million of currency translation and re-measurement gains offset by net financing costs of $0.4 million.

Interest expense:

 

     13 Weeks Ended     26 Weeks Ended  
     June 1,      June 2,      2013 vs     June 1,      June 2,      2013 vs  
($ in millions)    2013      2012      2012     2013      2012      2012  

Interest expense

   $ 4.9       $ 5.7         (15.0 %)    $ 10.2       $ 8.4         22.0

Interest expense in the second quarter of 2013 as compared to same period last year was lower due to a prepayment of long-term debt with proceeds from the sale of our Central America Paints business in the third quarter of 2012.

Interest expense for first six months of 2013 as compared to same period last year was higher due to increased debt obtained to purchase the acquired business.

 

25


Income taxes:

 

     13 Weeks Ended     26 Weeks Ended  
     June 1,     June 2,     2013 vs     June 1,     June 2,     2013 vs  
($ in millions)    2013     2012     2012     2013     2012     2012  

Income taxes

   $ 10.9      $ 2.4        359.0   $ 18.0      $ 9.9        81.1

Effective tax rate

     30.8     44.8       29.6     40.9  

Income tax expense of $10.9 million in the second quarter of 2013 includes $0.7 million of discrete tax benefits and $2.5 million of tax benefits relating to the special charges for costs related to the Business Integration Project. Excluding the discrete benefits and the effects of items included in special charges, the overall effective tax rate was 30.4 percent. Without discrete tax benefits of $0.7 million and the impact of costs related to the Business Integration Project in the second quarter of 2012, the overall effective tax rate was 29.5 percent.

Income tax expense of $18.0 million year to date in 2013 includes $1.5 million of discrete tax benefits and $3.6 million of tax benefits relating to the special charges for costs related to the Business Integration Project. Excluding the discrete benefits and the effects of items included in special charges, the overall effective tax rate was 30.0 percent. Without discrete tax benefits of $0.8 million and the impact of costs related to the Business Integration Project, the overall effective tax rate was 29.1 percent year to date in 2012.

Income from equity method investments:

 

     13 Weeks Ended     26 Weeks Ended  
     June 1,      June 2,      2013 vs     June 1,      June 2,      2013 vs  
($ in millions)    2013      2012      2012     2013      2012      2012  

Income from equity method investments

   $ 1.6       $ 2.1         (23.5 %)    $ 4.1       $ 4.3         (6.0 %) 

The income from equity method investments relates to our 50 percent ownership of the Sekisui-Fuller joint venture in Japan.

Income (loss) from discontinued operations, net of tax:

 

     13 Weeks Ended      26 Weeks Ended  
     June 1,      June 2,     2013 vs      June 1,      June 2,     2013 vs  
($ in millions)    2013      2012     2012      2013      2012     2012  

Income (loss) from discontinued operations, net of tax

   $ —         $ (3.1     NMP       $ —         $ (1.3     NMP   

NMP = Non-meaningful percentage

The income (loss) from discontinued operations, net of tax, relates to the results of operations of the Central America Paints business, which we sold August 6, 2012. See Note 2 to the Condensed Consolidated Financial Statements.

Net (income) loss attributable to non-controlling interests:

 

     13 Weeks Ended      26 Weeks Ended  
     June 1,     June 2,     2013 vs      June 1,     June 2,     2013 vs  
($ in millions)    2013     2012     2012      2013     2012     2012  

Net (income) loss attributable to non-controlling interests

   $ (0.1   $ (0.1     NMP       $ (0.2   $ (0.1     NMP   

NMP = Non-meaningful percentage

 

26


Net (income) loss attributable to non-controlling interests relate to a 10 percent redeemable non-controlling interest in HBF Turkey.

Net income attributable to H.B. Fuller:

 

     13 Weeks Ended     26 Weeks Ended  
     June 1,     June 2,     2013 vs     June 1,     June 2,     2013 vs  
($ in millions)    2013     2012     2012     2013     2012     2012  

Net income attributable to H.B. Fuller

   $ 25.9      $ 1.9        1239.3   $ 46.6      $ 17.2        170.3

Percent of net revenue

     5.0     0.4       4.7     2.0  

The net income attributable to H.B. Fuller for the second quarter of 2013 was $25.9 million compared to $1.9 million for the second quarter of 2012. The second quarter of 2013 included $10.8 million of special charges, net ($8.4 million after tax) for costs related to the Business Integration Project. The second quarter of 2012 included $32.1 million of special charges, net ($24.2 million after tax) for costs related to the Business Integration Project. The diluted earnings per share for the second quarter of 2013 was $0.51 per share as compared to $0.04 per share for the second quarter of 2012.

The net income attributable to H.B. Fuller for the first six months of 2013 was $46.6 million compared to $17.2 million for the first six months of 2012. The first six months of 2013 included $16.2 million of special charges, net ($12.6 million after tax) for costs related to the Business Integration Project. The first six months of 2012 included $38.6 million of special charges, net ($31.0 million after tax) for costs related to the Business Integration Project. The diluted earnings per share for the first six months of 2013 was $0.91 per share as compared to $0.34 per share for the first six months of 2012.

Operating Segment Results

Our operations are managed through five reportable segments: North America Adhesives, Construction Products, EIMEA, Latin America and Asia Pacific. Operating results of each of these segments are regularly reviewed by our chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance.

The tables below provide certain information regarding the net revenue and segment operating income of each of our operating segments. The pricing/sales volume variance is viewed as organic growth. For segment evaluation by the chief operating decision maker, segment operating income is defined as gross profit less SG&A expenses and excludes special charges, net.

Net Revenue by Segment:

 

     13 Weeks Ended     26 Weeks Ended  
     June 1, 2013     June 2, 2012     June 1, 2013     June 2, 2012  
     Net      % of     Net      % of     Net      % of     Net      % of  

($ in millions)

   Revenue      Total     Revenue      Total     Revenue      Total     Revenue      Total  

North America Adhesives

   $ 190.7         37   $ 193.4         37   $ 362.9         36   $ 311.5         36

Construction Products

     42.9         8     39.7         7     77.0         8     72.2         8

EIMEA

     185.2         36     193.9         37     362.7         36     304.6         35

Latin America

     38.1         7     38.6         7     73.6         8     74.1         8

Asia Pacific

     62.1         12     61.4         12     122.7         12     110.0         13
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 519.0         100   $ 527.0         100   $ 998.9         100   $ 872.4         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

27


Segment Operating Income:

 

     13 Weeks Ended     26 Weeks Ended  
     June 1, 2013     June 2, 2012     June 1, 2013     June 2, 2012  

($ in millions)

   Segment
Operating
Income
     % of
Total
    Segment
Operating
Income
     % of
Total
    Segment
Operating
Income
     % of
Total
    Segment
Operating
Income
     % of
Total
 

North America Adhesives

   $ 28.5         54   $ 25.1         58   $ 51.9         59   $ 42.6         60

Construction Products

     4.0         8     3.2         7     5.4         6     3.7         5

EIMEA

     14.1         27     9.5         22     20.6         23     16.0         22

Latin America

     3.4         6     3.7         8     5.8         7     6.1         9

Asia Pacific

     2.8         5     2.1         5     4.8         5     2.9         4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 52.8         100   $ 43.6         100   $ 88.5         100   $ 71.3         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table provides a reconciliation of segment operating income to income from continuing operations before income taxes and income from equity method investments, as reported on the Condensed Consolidated Statements of Income.

 

     13 Weeks Ended     26 Weeks Ended  
     June 1,     June 2,     June 1,     June 2,  

($ in millions)

   2013     2012     2013     2012  

Segment operating income

   $ 52.8      $ 43.6      $ 88.5      $ 71.3   

Special charges, net

     (10.8     (32.1     (16.2     (38.6

Asset impairment charges

     —          (0.7     —          (0.7

Other income (expense), net

     (1.8     0.2        (1.4     0.6   

Interest expense

     (4.9     (5.7     (10.2     (8.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes and income from equity method investments

   $ 35.3      $ 5.3      $ 60.7      $ 24.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

North America Adhesives

 

     13 Weeks Ended     26 Weeks Ended  
     June 1,     June 2,     2013 vs     June 1,     June 2,     2013 vs  
($ in millions)    2013     2012     2012     2013     2012     2012  

Net revenue

   $ 190.7      $ 193.4        (1.4 %)    $ 362.9      $ 311.5        16.5

Segment operating income

   $ 28.5      $ 25.1        13.3   $ 51.9      $ 42.6        21.9

Segment profit margin %

     14.9     13.0       14.3     13.7  

The following tables provide details of the North America Adhesives net revenue variances:

 

     13 Weeks Ended June 1, 2013
vs June 2, 2012
    26 Weeks Ended June 1, 2013
vs June 2, 2012
 

Organic growth

     (1.3 %)      0.1

Currency

     (0.1 %)      0.0

Acquisition

     0.0     16.4
  

 

 

   

 

 

 

Total

     (1.4 %)      16.5
  

 

 

   

 

 

 

Net revenue decreased 1.4 percent in the second quarter of 2013 compared to the second quarter of 2012. Pricing increased 0.1 percent offset by a 1.4 percent decrease in sales volume and negative currency effects of 0.1 percent compared to last year. The sales volume decline was driven by changes in product mix combined with a generally sluggish end market demand environment. Segment operating income increased 13.3 percent and segment profit margin increased 190 basis points in the quarter. Raw material cost as a percentage of net revenue was 260 basis points lower driven by synergies from integrating the acquired business and other profit margin improvement initiatives over the past year. The second quarter of 2012 included the recognition of the non-cash charge for the sale of inventories revalued at the date of acquisition which increased cost of sales by 30 basis points. The higher gross margin was offset by higher SG&A expenses as a percentage of net revenue compared to the second quarter of 2012.

 

28


Net revenue increased 16.5 percent in the first six months of 2013 compared to the first six months of 2012. Pricing increased 0.5 percent offset by a 0.4 percent decrease in sales volume compared to last year. The acquired business added approximately $51.0 million to net revenue. The increase in pricing reflected the cumulative impact of price increases implemented over the past year to offset raw material cost inflation. The sales volume decline was the result of changes in product mix combined with a generally sluggish end market demand environment. Segment operating income increased 21.9 percent for the first six months and segment profit margin increased 60 basis points. Raw material cost as a percentage of net revenue decreased 170 basis points as a result of synergies from integrating the acquired business and other profit margin improvement initiatives over the past year. The higher gross margin was offset by slightly higher manufacturing costs and SG&A expenses as a percent of revenue compared to the prior year.

Construction Products

 

     13 Weeks Ended     26 Weeks Ended  
     June 1,     June 2,     2013 vs     June 1,     June 2,     2013 vs  
($ in millions)    2013     2012     2012     2013     2012     2012  

Net revenue

   $ 42.9      $ 39.7        8.2   $ 77.0      $ 72.2        6.6

Segment operating income

   $ 4.0      $ 3.2        28.6   $ 5.4      $ 3.7        49.5

Segment profit margin %

     9.4     7.9       7.0     5.0  

The following tables provide details of the Construction Products net revenue variances:

 

     13 Weeks Ended June 1, 2013
vs June 2, 2012
    26 Weeks Ended June 1, 2013
vs June 2, 2012
 

Organic growth

     8.2     6.6

Net revenue was up 8.2 percent in the second quarter of 2013 driven by an 8.5 percent increase in volume combined with a 0.3 percent decrease in pricing compared to the second quarter last year. The increase in sales volume was primarily attributed to continued market share gains with several key retail partners. The volume increase this year is an encouraging sign that the overall market is continuing to slowly improve. Segment operating income increased by 28.6 percent and segment profit margin increased by 150 basis points in the second quarter compared to the same period last year. Raw material costs as a percentage of net revenue was approximately 120 basis points lower in 2013 relative to the prior year primarily due to changes in the mix of products sold and reformulations. The improvement in segment profit margin was driven by improved gross margins offset by slightly higher manufacturing costs and administrative costs as a percentage of net revenue.

Net revenue was up 6.6 percent in the first six months of 2013 driven by a 6.6 percent increase in volume with no percentage change in pricing compared to last year. The increase in sales volume was primarily attributed to continued market share gains with several key retail partners. Segment operating income increased 49.5 percent and segment profit margin increased 200 basis points in the first six months compared to the same period last year. Raw material costs as a percentage of net revenue was approximately 40 basis points lower in 2013 relative to the prior year primarily due to changes in the mix of products sold. The improvement in segment profit margin was driven by improved gross margins and lower administrative costs as a percentage of net revenue.

EIMEA

 

     13 Weeks Ended     26 Weeks Ended  
     June 1,     June 2,     2013 vs     June 1,     June 2,     2013 vs  
($ in millions)    2013     2012     2012     2013     2012     2012  

Net revenue

   $ 185.2      $ 193.9        (4.5 %)    $ 362.7      $ 304.6        19.1

Segment operating income

   $ 14.1      $ 9.5        49.1   $ 20.6      $ 16.0        28.6

Segment profit margin %

     7.6     4.9       5.7     5.3  

 

29


The following table provides details of the EIMEA net revenue variances:

 

     13 Weeks Ended June 1, 2013     26 Weeks Ended June 1, 2013  
     vs June 2, 2012     vs June 2, 2012  

Organic growth

     (3.5 %)      (0.3 %) 

Currency

     (1.0 %)      (0.4 %) 

Acquisitions

     0.0     19.8
  

 

 

   

 

 

 

Total

     (4.5 %)      19.1
  

 

 

   

 

 

 

Net revenue decreased 4.5 percent in the second quarter of 2013 compared to the second quarter of 2012. Pricing increased 1.8 percent offset by a 5.3 percent decrease in sales volume. The weaker Euro compared to the U.S. dollar resulted in a 1.0 percent decrease in net revenue. Sales volume was down slightly in core Europe reflecting the generally soft end market conditions across most of the region, especially in the southern region and for durable assembly type products which are associated with more cyclical end markets. Significant volume growth was generated in the emerging markets of the region, especially Turkey and India. Segment operating income increased 49.1 percent and segment profit margin increased 270 basis points compared to the second quarter last year. Raw material cost as a percentage of net revenue decreased 160 basis points in the second quarter. The second quarter of 2012 included the recognition of the non-cash charge for the sale of inventories revalued at the date of acquisition which increased cost of sales by 120 basis points. SG&A expenses as a percentage of net revenue, which declined 70 basis points relative to the prior year, also contributed to the significant increase in segment profit margin.

Net revenue increased 19.1 percent in the first six months of 2013 compared to the first six months of 2012. Pricing increased 2.0 percent offset by a 2.3 percent decrease in sales volume. The weaker Euro compared to the U.S. dollar resulted in a 0.4 percent decrease in net revenue. The acquired business contributed $60.3 million of net revenue. Sales volume was down slightly in core Europe reflecting the generally soft end market conditions across most of the region, especially in the southern region and for durable assembly type products which are associated with more cyclical end markets. Significant volume growth was generated in the emerging markets of the region, especially Turkey and India. Segment operating income increased 28.6 percent and segment profit margin increased 40 basis points compared to the first six months last year. Raw material cost as a percentage of net revenue decreased 50 basis points in the first six months. SG&A expenses as a percentage of net revenue, which declined 30 basis points relative to the prior year, also contributed to the increase in segment profit margin.

Latin America

 

     13 Weeks Ended     26 Weeks Ended  
     June 1,     June 2,     2013 vs     June 1,     June 2,     2013 vs  
($ in millions)    2013     2012     2012     2013     2012     2012  

Net revenue

   $ 38.1      $ 38.6        (1.1 %)    $ 73.6      $ 74.1        (0.7 %) 

Segment operating income

   $ 3.4      $ 3.7        (9.4 %)    $ 5.8      $ 6.1        (4.7 %) 

Segment profit margin %

     8.9     9.7       7.9     8.2  

The following tables provide details of the Latin America net revenue variances:

 

     13 Weeks Ended June 1, 2013
vs June 2, 2012
    26 Weeks Ended June 1, 2013
vs June 2, 2012
 

Organic growth

     (1.1 %)      (1.7 %) 

Acquisition

     0.0     1.0
  

 

 

   

 

 

 

Total

     (1.1 %)      (0.7 %) 
  

 

 

   

 

 

 

Net revenue decreased 1.1 percent in the second quarter of 2013 compared to the second quarter of 2012. Sales volume increased 0.1 percent and product pricing decreased 1.2 percent compared to the same quarter last year. Price levels have declined as raw material costs have declined across the region. Raw material costs as a percentage of net revenue were essentially unchanged relative to the prior quarter and last year. Lower net revenue and a 60 basis points increase in SG&A expenses as a percentage of net revenue caused operating income margin to decrease relative to the prior year.

 

30


Net revenue decreased 0.7 percent in the first six months of 2013 compared to the first six months of 2012. Sales volume decreased 0.8 percent and product pricing decreased 0.9 percent compared to the same period last year. Net revenue increased $0.7 million from the acquired business. Volume declined in certain market segments and geographies, primarily due to erosion of share with certain customers. Raw material costs as a percentage of net revenue increased by 40 basis points relative to last year. SG&A expenses as a percentage of net revenue were flat compared to the first six months of 2012 which caused operating income margin to decrease slightly relative to the prior year.

Asia Pacific

 

     13 Weeks Ended     26 Weeks Ended  
     June 1,     June 2,     2013 vs     June 1,     June 2,     2013 vs  
($ in millions)    2013     2012     2012     2013     2012     2012  

Net revenue

   $ 62.1      $ 61.4        1.1   $ 122.7      $ 110.0        11.5

Segment operating income

   $ 2.8      $ 2.1        31.9   $ 4.8      $ 2.9        65.9

Segment profit margin %

     4.5     3.4       3.9     2.6  

The following table provides details of Asia Pacific net revenue variances:

 

     13 Weeks Ended June 1, 2013     26 Weeks Ended June 1, 2013  
     vs June 2, 2012     vs June 2, 2012  

Organic growth

     0.3     1.6

Currency

     0.8     1.0

Acquisition

     0.0     8.9
  

 

 

   

 

 

 

Total

     1.1     11.5
  

 

 

   

 

 

 

Net revenue in the second quarter of 2013 increased 1.1 percent compared to the second quarter last year. Organic growth was 0.3 percent in the quarter reflecting a 3.2 percent increase in sales volume offset by a 2.9 percent decrease in pricing. Price levels have declined as raw material costs have declined across the region. Volume growth patterns remain consistent with recent quarters with China and Southeast Asia showing growth while Australia markets are relatively flat. In terms of market segments, volume growth continues in consumer goods markets such as packaging while other more cyclical markets are down year over year. Segment operating income increased $0.7 million in the quarter and segment profit margin increased 110 basis points. Raw material costs as a percentage of net revenue were flat compared to both the second quarter of last year and the first quarter of 2013. The second quarter of 2012 included the recognition of the non-cash charge for the sale of inventories revalued at the date of acquisition which increased cost of sales by 30 basis points. Both manufacturing costs and SG&A expenses as a percentage of net revenue decreased compared to the second quarter of last year and the prior quarter.

Net revenue for the first six months of 2013 increased 11.5 percent compared to the first six months of last year. Organic growth was 1.6 percent in the first six months reflecting a 3.7 percent increase in sales volume offset by a 2.1 percent decrease in pricing. Price levels have declined as raw material costs have declined across the region. Volume growth patterns remain consistent with recent quarters with China and Southeast Asia showing growth while Australia markets are relatively flat. In terms of market segments, volume growth continues in consumer goods markets such as hygiene and packaging while other more cyclical markets are down year over year. Net revenue increased $9.8 million from the acquired business. Segment operating income increased $1.9 million and segment profit margin increased 130 basis points in the first six months of 2013 compared to the first six months of 2012. Raw material costs as a percentage of net revenue increased 40 basis points in the first six months relative to the prior year. The year over year change was primarily due to the dilutive effect of the lower margin acquired business. Both manufacturing costs as a percentage of net revenue and SG&A expenses as a percentage of net revenue declined compared to the first six months of last year.

Financial Condition, Liquidity and Capital Resources

Total cash and cash equivalents as of June 1, 2013 were $161.2 million as compared to $200.4 million as of December 1, 2012 and $154.3 million as of June 2, 2012. Of the $161.2 million in cash and cash equivalents as of June 1, 2013, $152.9 million was held outside the United States. Total long and short-term debt was $496.4 million as of June 1, 2013, $520.2 million as of December 1, 2012 and $616.8 million as of June 2, 2012. The total debt to total capital ratio as measured by Total Debt divided by (Total Debt plus Total Equity) was 37.8 percent as of June 1, 2013 as compared to 40.1 percent as of December 1, 2012 and 46.8 percent as of June 2, 2012. The lower ratio as of June 1, 2013 compared to December 1, 2012 and June 2, 2012 was due to lower quarter-end debt levels.

 

31


We believe that cash flows from operating activities will be adequate to meet our ongoing liquidity and capital expenditure needs. In addition, we believe we have the ability to obtain both short-term and long-term debt to meet our financing needs for the foreseeable future. Cash available in the United States has historically been sufficient and we expect it will continue to be sufficient to fund U.S. operations and U.S. capital spending and U.S. pension and other post retirement benefit contributions in addition to funding U.S. acquisitions, dividend payments, debt service and share repurchases as needed. For those international earnings considered to be reinvested indefinitely, we currently have no intention to, and plans do not indicate a need to, repatriate these funds for U.S. operations.

Our credit agreements and note purchase agreements include restrictive covenants that, if not met, could lead to a renegotiation of our credit lines and a significant increase in our cost of financing. At June 1, 2013, we were in compliance with all covenants of our contractual obligations as shown in the following table:

 

Covenant

   Debt Instrument    Measurement    Result as of
June 1, 2013
 

TTM EBITDA / TTM Interest Expense

   All Debt Instruments    Not less than 2.5      11.4   

Total Indebtedness / TTM EBITDA

   All Debt Instruments    Not greater than 3.5      2.0   

 

  TTM = Trailing 12 months

 

  EBITDA for covenant purposes is defined as consolidated net income, plus (i) interest expense, (ii) taxes, (iii) depreciation and amortization, (iv) non-cash impairment losses, (v) extraordinary non-cash losses incurred other than in the ordinary course of business, (vi) nonrecurring extraordinary non-cash restructuring charges, (vii) cash expenses for advisory services and for arranging financing for the Forbo Acquisition (including the non-cash write-off of deferred financing costs and any loss or expense on foreign exchange transactions intended to hedge the purchase price for the Forbo acquisition) with cash expenses not to exceed $25.0 million, and (viii) cash expenses incurred during fiscal years 2011 through 2014 in connection with facilities consolidation, restructuring and integration, discontinuance of operations, work force reduction, sale or abandonment of assets other than inventory, and professional and other fees incurred in connection with the Forbo acquisition or the restructuring of our EIMEA operations, not to exceed $85.0 million in the aggregate, and (x) not to exceed $65.0 million during fiscal year 2012 and (y) not to exceed $65.0 million during fiscal years 2013 and 2014 combined, minus extraordinary non-cash gains incurred other than in the ordinary course of business. For the Total Indebtedness / TTM EBITDA ratio, TTM EBITDA is adjusted for the pro forma results from Material Acquisitions and Material Divestitures as if the acquisition or divestiture occurred at the beginning of the calculation period. Additional detail is provided in the Current Report on Form 8-K dated March 5, 2012.

We believe we have the ability to meet all of our contractual obligations and commitments in fiscal 2013. Included in these obligations is the following scheduled debt payment:

 

  $7.5 million payment on term loans, due June 19, 2013, was paid using existing cash.

Selected Metrics of Liquidity

Key metrics we monitor are net working capital as a percent of annualized net revenue, trade account receivable days sales outstanding (DSO), inventory days on hand, free cash flow and debt capitalization ratio.

 

     June 1,   June 2,
     2013   2012

Net working capital as a percentage of annualized net revenue1

   18.0%   16.8%

Accounts receivable DSO2

   55 Days   52 Days

Inventory days on hand3

   57 Days   51 Days

Free cash flow4

   $(16.6) million   $14.3 million

Total debt to total capital ratio5

   37.8%   46.8%

 

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1

Current quarter net working capital (trade receivables, net of allowance for doubtful accounts plus inventory minus trade payables) divided by annualized net revenue (current quarter multiplied by four).

2

Trade receivables net of the allowance for doubtful accounts at the balance sheet date multiplied by 56 (8 weeks) and divided by the net revenue for the last 2 months of the quarter.

3

Total inventory multiplied by 56 and divided by cost of sales (excluding delivery costs) for the last 2 months of the quarter.

4 

Year-to-date net cash provided by (used in) operations from continuing operations, less purchased property, plant and equipment and dividends paid.

5 

Total debt divided by (total debt plus total stockholders’ equity).

Another key metric is the return on invested capital, or ROIC. The calculation is represented by total return divided by total invested capital.

 

  Total return is defined as: gross profit less SG&A expenses, less taxes at the effective tax rate plus income from equity method investments. Total return is calculated using trailing 12 month information.

 

  Total invested capital is defined as the sum of notes payable, current maturities of long-term debt, long-term debt, redeemable non-controlling interest and total equity.

We believe ROIC provides a true measure of return on capital invested and is focused on the long term. The following table shows the ROIC calculations based on the definition above:

 

     Trailing 12 months     Trailing 12 months  

($ in millions)

   as of June 1, 2013     as of June 2, 2012  

Gross profit

   $ 558.0      $ 457.8   

Selling, general and administrative expenses

     (378.2     (316.7

Income taxes at effective rate

     (53.2     (40.6

Income from equity method investments

     9.0        9.0   
  

 

 

   

 

 

 

Total return

   $ 135.6      $ 109.5   

Total invested capital

     1,317.0        1,322.0   

Return on invested capital

     10.3     8.3

Summary of Cash Flows

Cash Flows from Operating Activities from Continuing Operations:

 

     26 Weeks Ended  
     June 1,      June 2,  
($ in millions)    2013      2012  

Net cash provided by operating activities

   $ 40.7       $ 34.8   

Net income including non-controlling interests was $46.8 million in the first six months of 2013 compared to $17.3 million in the first six months of 2012. Depreciation and amortization expense totaled $30.0 million in the first six months of 2013 compared to $26.0 million in the first six months of 2012. The higher depreciation and amortization in 2013 is related to depreciation and amortization of assets related to the acquired business. Accrued compensation was a use of cash of $12.0 million in 2013 compared to a source of cash of $7.5 million last year. The use of cash in 2013 is related to the timing of payments of severance related costs for the Business Integration Project. The source of cash in 2012 is related to the accrual of severance related costs as part of our Business Integration Project that had not been paid at the end of the second quarter. Other assets was a use of cash in 2013 of $9.0 million compared to a source of cash of $15.9 million last year. The use of cash in 2013 was primarily related to the increase in prepaid taxes and expenses. The 2012 source of cash was primarily related to the decrease in prepaid taxes. Income taxes payable was a use of cash of $8.2 million in the first six months of 2013 related to income tax payments.

 

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Changes in net working capital (trade receivables, inventory and trade payables) accounted for a use of cash of $14.8 million compared to a use of cash of $34.7 million last year. The table below provides the cash flow impact due to changes in the components of net working capital:

 

     26 Weeks Ended  
     June 1,     June 2,  
($ in millions)    2013     2012  

Trade receivables, net

   $ 1.2      $ (19.7

Inventory

     (17.0     (26.8

Trade payables

     1.0        11.8   
  

 

 

   

 

 

 

Total cash flow impact

   $ (14.8   $ (34.7
  

 

 

   

 

 

 

 

  Trade Receivables, net – Trade Receivables, net was a source of cash of $1.2 million in 2013 compared to a use of cash of $19.7 million in 2012. The source of cash in 2013 compared to the use of cash in 2012 is related to lower sales activity in the second quarter of 2013 compared to 2012. The DSO was 55 days at June 1, 2013 and 52 days at June 2, 2012.

 

  Inventory – Inventory was a use of cash of $17.0 million in 2013 and $26.8 million in 2012. The 2013 use of cash is related to the normal seasonal building of inventory and increased inventory to support the manufacturing transitions as part of the Business Integration Project. The 2012 increase is related to the seasonal building of inventory in the first two quarters after the downward management of our inventory in the fourth quarter of 2011. Inventory days on hand were 57 days as of June 1, 2013 and 51 days as of June 2, 2012.

 

  Trade Payables – For the first six months of 2013 and 2012 trade payables was a source of cash of $1.0 million and $11.8 million, respectively. The lower source of cash in 2013 reflects lower inventory purchases compared to 2012. The source of cash in 2012 was due to the increase in inventory purchases in the first half of 2012.

Cash Flows from Investing Activities from Continuing Operations:

 

     26 Weeks Ended  
     June 1,     June 2,  
($ in millions)    2013     2012  

Net cash used in investing activities

   $ (48.4   $ (416.9

Purchases of property, plant and equipment were $48.0 million in the first six months of 2013 as compared to $12.5 million for the same period of 2012. The increase in 2013 compared to 2012 was primarily related to capital expenditures for the Business Integration Project. In the second quarter of 2013 we purchased technology for the use in electronics markets for $2.4 million. We acquired the global industrial adhesives business of Forbo Holding AG in 2012 for $404.7 million. In the first quarter of 2013, an adjustment of the purchase price for the Forbo industrial adhesives business acquisition reduced cash used in investing activities by $1.6 million. See Note 2 to Condensed Consolidated Financial Statements.

Cash Flows from Financing Activities from Continuing Operations:

 

     26 Weeks Ended  
     June 1,     June 2,  
($ in millions)    2013     2012  

Net cash used in financing activities

   $ (31.0   $ 380.9   

 

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Proceeds from long-term debt in the first six months of 2013 were $95.0 million. In the first six months of 2012 proceeds from long-term debt were $490.0 million of which $400.0 million was used for financing the acquisition. Repayments of long-term debt were $110.0 million in the first six months of 2013 compared to $103.1 million for the same period of 2012. Cash generated from the exercise of stock options was $4.4 million and $6.0 million for the first six months of 2013 and 2012, respectively. Repurchases of common stock were $7.1 million in the first six months of 2013 compared to $1.3 million in the same period of 2012. The higher 2013 repurchases of common stock were due to $4.8 million of repurchases from our 2010 share repurchase program and higher repurchases related to statutory minimum tax withholding in conjunction with the vesting of restricted stock.

Cash Flows from Discontinued Operations:

 

     26 Weeks Ended  
     June 1     June 2  
($ in millions)    2013     2012  

Cash provided by (used in) operating activities of discontinued operations

   $ (0.1   $ 6.0   

Cash provided by investing activities of discontinued operations

   $ —        $ 0.8   
  

 

 

   

 

 

 

Net cash provided by (used in) discontinued operations

   $ (0.1   $ 6.8   
  

 

 

   

 

 

 

Cash flows from discontinued operations includes cash generated from operations and investing activities of the Central America Paints business.

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, we discuss expectations regarding our future performance which include anticipated financial performance, savings from restructuring and process initiatives, global economic conditions, liquidity requirements, the impact of litigation and environmental matters, 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, our 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, Part II, Item 1A. Risk Factors in this report and Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 1, 2012, identify some of the important factors that could cause our actual results to differ materially from those in any such forward-looking statements. This list of important factors does not include all such factors nor necessarily present them in order of importance. In order to comply with the terms of the safe harbor, we have identified these important factors which could affect our financial performance and could cause our 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 us and the regions where we do 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 geographic and product mix and selling prices. Our best estimates of these changes as well as changes in other factors have been included. References to volume changes include volume, product mix and delivery charges, combined. These factors should 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.

We may refer to Part II, Item 1A. Risk Factors and 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.

 

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This disclosure, including that under “Forward-Looking Statements and Risk Factors,” and other forward-looking statements and related disclosures made by us in this report and elsewhere from time to time, represents our best judgment as of the date the information is given. We do 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: We are 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, foreign currency exchange rates and cost of raw materials.

Our financial performance may be negatively affected by the unfavorable economic conditions. Recessionary economic conditions may have an adverse impact on our sales volumes, pricing levels and profitability. As domestic and international economic conditions change, trends in discretionary consumer spending also become unpredictable and subject to reductions due to uncertainties about the future. A general reduction in consumer discretionary spending due to recession in the domestic and international economies, or uncertainties regarding future economic prospects, could have a material adverse effect on our results of operations.

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. We believe that probable near-term changes in interest rates would not materially affect financial condition, results of operations or cash flows. The annual impact on interest expense of a one-percentage point interest rate change on the outstanding balance of our variable rate debt as of June 1, 2013 would be approximately $1.2 million or $0.02 per diluted share.

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 condition. Approximately 58 percent of net revenue was generated outside of the United States for the first six months of 2013. Principal foreign currency exposures relate to the Euro, British pound sterling, Canadian dollar, Chinese renminbi, Japanese yen, Australian dollar, Swiss franc, Argentine peso, Brazilian real, Columbian peso, Mexican peso, Turkish lira, Egyptian pound, Indian rupee and Malaysian ringgit.

Our 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. We enter 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.

We take 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. We do not enter into any speculative positions with regard to derivative instruments.

From a sensitivity analysis viewpoint, based on the financial results of the first six months of 2013, and foreign currency balance sheet positions as of June 1, 2013, a hypothetical overall 10 percent change in the U.S. dollar would have resulted in a change in net income attributable to H.B. Fuller of approximately $3.0 million or $0.06 per diluted share.

Raw Materials: The principal raw materials used to manufacture products include resins, polymers, synthetic rubbers, vinyl acetate monomer and plasticizers. We generally avoid single source supplier arrangements for raw materials. While alternate supplies of most key raw materials are available, unplanned supplier production outages may lead to strained supply-demand situations for several key raw materials such as tackifyers and base polymers. There is also tightness in feed stream chemicals such as ethylene and propylene.

For the six months ended June 1, 2013, our single largest expenditure was the purchase of raw materials. Our objective is to purchase raw materials that meet both our 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 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 leverage of having substitute raw materials approved for use wherever possible is used to minimize the impact of possible price increases.

 

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Item 4. Controls and Procedures

(a) Controls and procedures

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our president and chief executive officer and senior vice president, chief financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)). Based on this evaluation, the president and chief executive officer and the senior vice president, chief financial officer concluded that, as of June 1, 2013, our disclosure controls and procedures were effective (1) to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to us, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

(b) Change in internal control over financial reporting

There were no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

Environmental Matters. From time to time, we become aware of compliance matters relating to, or receive notices from, federal, state or local entities regarding possible or alleged violations of environmental, health or safety laws and regulations. We review the circumstances of each individual site, considering the number of parties involved, the level of potential liability or contribution of us relative to the other parties, the nature and magnitude of the hazardous substances 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. Also, from time to time, we are identified as a “potentially responsible party” (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and/or 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. We are also subject to similar laws in some of the countries where current and former facilities are located. Our environmental, health and safety department monitors compliance with applicable laws on a global basis. To the extent we can reasonably estimate the amount of our probable liabilities for environmental matters, we establish a financial provision.

Currently we are involved in various environmental investigations, clean up activities and administrative proceedings and lawsuits. In particular, we are currently deemed a PRP in conjunction with numerous other parties, in a number of government enforcement actions associated with hazardous waste sites. As a PRP, we may be required to pay a share of the costs of investigation and clean up of these sites. In addition, we are engaged in environmental remediation and monitoring efforts at a number of current and former operating facilities. While uncertainties exist with respect to the amounts and timing of the ultimate environmental liabilities, based on currently available information, we have concluded that these matters, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flow. However, adverse developments and/or periodic settlements could negatively impact the results of operations or cash flows in one or more future periods.

Other Legal Proceedings. From time to time and in the ordinary course of business, we are a party to, or a target of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, contract, patent and intellectual property, environmental, health and safety, tax and employment matters. While we are unable to predict the outcome of these matters, we have concluded, based upon currently available information, that the ultimate resolution of any pending matter, individually or in the aggregate, including the asbestos litigation described in the following paragraphs, will not have a material adverse effect on our results of operations, financial condition or cash flow.

 

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We have been named as a defendant in lawsuits in which plaintiffs have alleged injury due to products containing asbestos manufactured more than 30 years ago. The plaintiffs generally bring these lawsuits against multiple defendants and seek damages (both actual and punitive) in very large amounts. In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable injuries or that the injuries suffered were the result of exposure to products manufactured by us. We are typically dismissed as a defendant in such cases without payment. If the plaintiff presents evidence indicating that compensable injury occurred as a result of exposure to our products, the case is generally settled for an amount that reflects the seriousness of the injury, the length, intensity and character of exposure to products containing asbestos, the number and solvency of other defendants in the case, and the jurisdiction in which the case has been brought.

A significant portion of the defense costs and settlements in asbestos-related litigation is paid by third parties, including indemnification pursuant to the provisions of a 1976 agreement under which we acquired a business from a third party. Currently, this third party is defending and paying settlement amounts, under a reservation of rights, in most of the asbestos cases tendered to the third party.

In addition to the indemnification arrangements with third parties, we have insurance policies that generally provide coverage for asbestos liabilities (including defense costs). Historically, insurers have paid a significant portion of our defense costs and settlements in asbestos-related litigation. However, certain of our insurers are insolvent. We have entered into cost-sharing agreements with our insurers that provide for the allocation of defense costs and, in some cases, settlements and judgments, in asbestos-related lawsuits. Under these agreements, we are required in some cases to fund a share of settlements and judgments allocable to years in which the responsible insurer is insolvent. In addition, to delineate our rights under certain insurance policies, in October 2009, we commenced a declaratory judgment action against one of our insurers in the United States District Court for the District of Minnesota. Additional insurers have been brought into the action to address issues related to the scope of their coverage.

A summary of the number of and settlement amounts for asbestos-related lawsuits and claims is as follows:

 

     26 Weeks Ended      3 Years Ended  

($ in millions)

   June 1, 2013      June 2, 2012      December 1, 2012  

Lawsuits and claims settled

     —           8         20   

Settlement amounts

   $ —         $ 0.5       $ 1.5   

Insurance payments received or expected to be received

   $ —         $ 0.4       $ 1.2   

We do not believe that it would be meaningful to disclose the aggregate number of asbestos-related lawsuits filed against us because relatively few of these lawsuits are known to involve exposure to asbestos-containing products that we manufactured. Rather, we believe it is more meaningful to disclose the number of lawsuits that are settled and result in a payment to the plaintiff. To the extent we can reasonably estimate the amount of our probable liabilities for pending asbestos-related claims, we establish a financial provision and a corresponding receivable for insurance recoveries.

Based on currently available information, we have concluded that the resolution of any pending matter, including asbestos-related litigation, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flow. However, adverse developments and/or periodic settlements could negatively impact the results of operations or cash flows in one or more future periods.

 

Item 1A. Risk Factors

This Form 10-Q contains forward-looking statements concerning our future programs, products, expenses, revenue, liquidity and cash needs as well as our plans and strategies. These forward-looking statements are based on current expectations and we assume no obligation to update this information. Numerous factors could cause actual results to differ significantly from the results described in these forward-looking statements, including the risk factors identified under Part I, Item 1A. Risk Factors contained in our Annual Report on Form 10-K for the fiscal year ended December 1, 2012. There have been no material changes in the risk factors disclosed by us under Part I, Item 1A. Risk Factors contained in the Annual Report on Form 10-K for the fiscal year ended December 1, 2012.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

Information on our purchases of equity securities during the second quarter follows:

 

Period

   (a)
Total
Number of
Shares
Purchased1
     (b)
Average
Price
Paid per
Share
     (c)
Total Number
of Shares
Purchased as
Part of a
Publicly
Announced
Plan or
Program
     (d)
Maximum
Approximate
Dollar Value of
Shares that may
yet be Purchased
Under the Plan
or Program
(millions)
 

March 3, 2013 – April 6, 2013

     52,346       $ 38.69         52,346       $ 87.5   

April 7, 2013 – May 4, 2013

     74,626       $ 37.85         72,654       $ 84.7   

May 5, 2013 – June 1, 2013

     —         $ —           —         $ 84.7   

 

1 

The total number of shares purchased includes: (i) shares purchased under the board’s authorization described below and (ii) shares withheld to satisfy the employees’ withholding taxes upon vesting of restricted stock.

Repurchases of common stock are made to support our stock-based employee compensation plans and for other corporate purposes. Upon vesting of restricted stock awarded to employees, shares are withheld to cover the employees’ minimum withholding taxes.

On September 30, 2010, the Board of Directors authorized a new share repurchase program of up to $100.0 million of our outstanding common shares. Under the program, we are authorized to repurchase shares for cash on the open market, from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases is dependent on price, market conditions and applicable regulatory requirements. Upon repurchase of the shares, we reduced our common stock for the par value of the shares with the excess being applied against additional paid-in capital.

 

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Item 6. Exhibits

 

31.1    Form of 302 Certification – James J. Owens
31.2    Form of 302 Certification – James R. Giertz
32.1    Form of 906 Certification – James J. Owens
32.2    Form of 906 Certification – James R. Giertz
101    The following materials from the H.B. Fuller Company Quarterly Report on Form 10-Q for the quarter ended June 1, 2013 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Total Equity, (v) the Condensed Consolidated Statement of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.

 

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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: June 28, 2013       /s/ James R. Giertz
      James R. Giertz
      Senior Vice President,
      Chief Financial Officer

 

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Exhibit Index

 

Exhibits     
31.1    Form of 302 Certification – James J. Owens
31.2    Form of 302 Certification – James R. Giertz
32.1    Form of 906 Certification – James J. Owens
32.2    Form of 906 Certification – James R. Giertz
101    The following materials from the H.B. Fuller Company Quarterly Report on Form 10-Q for the quarter ended June 1, 2013 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Total Equity, (v) the Condensed Consolidated Statement of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.

 

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