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| FUL > SEC Filings for FUL > Form 10-Q on 1-Oct-2009 | All Recent SEC Filings |
1-Oct-2009
Quarterly Report
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 November 29, 2008 for important background information related to the business.
The global economic conditions continued to have a negative impact on our year-over-year net revenue performance. In the third quarter of 2009, net revenue of $315.3 million was 12.9 percent less than the third quarter of 2008. We did however see positive signs in our sales volumes as compared to the second quarter of 2009. Whereas the second quarter and first six months of 2009 reflected sales volume declines in excess of 15.0 percent as compared to 2008, the third quarter volume decline year-over-year was 12.4 percent. New business wins contributed to the improved volume performance. The gross profit margin for the third quarter of 31.8 percent was 680 basis points above the 25.0 percent recorded in the third quarter of 2008. Decreases in raw material costs, product line reformulations and selling price discipline all contributed to the improved margin.
During the third quarter we settled a lawsuit with the former owners of the Roanoke Companies Group, a business we acquired in 2006. The settlement resulted in a pretax gain for the third quarter of $18.8 million, which was $11.8 million after tax or $0.24 per diluted share.
Net income for the third quarter of $35.4 million was $13.7 million, or 63.1 percent above the net income in the third quarter of 2008. On a diluted earnings per share (EPS) basis, the third quarter of 2009 was $0.72 as compared to $0.44 in the third quarter of 2008. Last year's third quarter included a one-time tax benefit of $4.3 million, or $0.09 per diluted share.
Certain changes as described below were made to the components of our operating segments during the first quarter of 2009. Prior year amounts were also reclassified to conform to the current year organization structure.
• The packaging solutions reporting unit that previously was reported entirely in the North America segment has been broken out into all four operating segments. The reporting unit has historically had international revenue and expenses however it was managed centrally in North America. The reporting unit is now managed on a regional basis and incorporated into the adhesives reporting units of each of the segments
• In the North America operating segment, in addition to the packaging solutions changes discussed above, the adhesives reporting unit also includes the insulating glass business activities that were previously reported as a separate reporting unit. The insulating glass activities are now integrated into the adhesives management structure and managed as a product line within the adhesives group. Therefore, the North America operating segment now consists of two components: adhesives and specialty construction.
• The Europe operating segment has been renamed to EMEA (Europe, Middle East and Africa). We believe this name is more representative of the business activities of the segment, especially after the 2008 Egymelt acquisition. No other changes to this segment other than the addition of the packaging solutions activities related to Europe.
• In Asia Pacific, the consumer reporting unit has been integrated into the adhesives management structure resulting in the Asia Pacific operating segment having only one reporting unit.
Results of Operations
Net Revenue:
We review variances in net revenue in terms of changes related to product pricing, sales volume, acquisitions and changes in foreign currency exchange rates. The following table shows the net revenue variance analysis for the third quarter and first nine months of 2009 compared to the same periods in 2008.
13 Weeks Ended 39 Weeks Ended
August 29, August 30,
( ) = Decrease 2009 2008
Product pricing 2.8 % 4.5 %
Sales volume (12.4 )% (14.1 )%
Currency (4.2 )% (5.3 )%
Acquisitions 0.9 % 0.7 %
(12.9 )% (14.2 )%
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Organic sales growth, which we define as the combined variances from product pricing and sales volume, was a negative 9.6 percent (negative 12.4 percent from sales volume and positive 2.8 percent from selling prices) in the third quarter of 2009 as compared to the same period last year. Organic sales growth was a negative 9.6 percent (negative 14.1 percent from sales volume and positive 4.5 percent from selling prices) in the first nine months of 2009 as compared to the same periods last year. The slow economy continued to have a negative impact on sales volume in the third quarter and first nine months of 2009. The volume trend improved in the third quarter however as both the first and second quarters of 2009 recorded sales volume decreases in excess of 15.0 percent as compared
Cost of Sales:
13 Weeks Ended 39 Weeks Ended
August 29, August 30, 2009 vs August 29, August 30, 2009 vs
($ in millions) 2009 2008 2008 2009 2008 2008
Cost of Sales: $ 214.9 $ 271.5 (20.9 )% $ 628.3 $ 764.2 (17.8 )%
Percent of net revenue 68.2 % 75.0 % 70.3 % 73.4 %
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The cost of sales decreased 20.9 percent from the third quarter of 2008 and 17.8 percent compared to the first nine months of 2008. The decrease was driven primarily by the 12.4 percent and 14.1 percent decline in sales volume for the third quarter and first nine months, respectively. Lower raw material prices and the effects of foreign currency fluctuations also contributed to the lower cost of sales in 2009 as compared to 2008. The deflation in raw material prices also resulted in a LIFO credit of $1.0 million in cost of sales in the third quarter of 2009 as compared to a LIFO expense of $2.2 million in the third quarter of 2008, when raw material prices were increasing. The third quarter of 2009 cost of sales included $1.1 million of charges related to the realignment of production capacity in the North America operating segment.
Gross Profit Margin:
13 Weeks Ended 39 Weeks Ended
August 29, August 30, 2009 vs August 29, August 30, 2009 vs
2009 2008 2008 2009 2008 2008
Gross Profit Margin: $ 100.4 $ 90.5 11.0 % $ 264.8 $ 277.2 (4.5 )%
Percent of net revenue 31.8 % 25.0 % 29.7 % 26.6 %
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The higher gross profit margin for both the third quarter and first nine months of 2009 as compared to the same periods in 2008 was driven primarily by the combination of lower raw material costs, product line reformulations and management of our selling prices. Average selling prices increased 2.8 percent and 4.5 percent for the third quarter and first nine months of 2009, respectively, as compared to the same periods in 2008.
Selling, General and Administrative (SG&A) Expenses:
13 Weeks Ended 39 Weeks Ended
August 29, August 30, 2009 vs August 29, August 30, 2009 vs
2009 2008 2008 2009 2008 2008
SG&A $ 68.3 $ 63.8 7.2 % $ 192.4 $ 191.5 0.5 %
Percent of net revenue 21.7 % 17.6 % 21.5 % 18.4 %
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SG&A expenses increased $4.5 million from the third quarter of 2008 and $0.9 million from the first nine months of 2008. The expenses increased compared to last year due to the magnitude and timing of variable compensation costs, the additional expenses related to businesses acquired and costs associated with investments made in the past several quarters to support future growth. The increase in SG&A expenses as a percent of net revenue for both the third quarter and first nine months of 2009 was also impacted by the lower net revenue levels. The SG&A expenses are generally fixed in nature over the short term and therefore do not fluctuate as rapidly as the net revenue figures.
13 Weeks Ended 39 Weeks Ended August 29, August 30, 2009 vs August 29, August 30, 2009 vs ($ in millions) 2009 2008 2008 2009 2008 2008 Goodwill and other impairment charges $ - $ 0.5 (100.0 )% $ 0.8 $ 0.5 50.5 %
In the fourth quarter of 2008 an $85.0 million impairment charge was taken as a reduction of the goodwill balance of the specialty construction reporting unit. This amount was considered an estimate as of November 29, 2008 with final valuation work to be completed in the first quarter of 2009. The additional charge of $0.8 million in the first quarter of 2009 was the result of the final valuation work. There were no additional charges in the third quarter of 2009.
Other Income, net:
NMP = Non-meaningful percentage
The $18.8 million gain from the Roanoke litigation settlement referred to in the 'Overview' section of this report was recorded as other income in the third quarter of 2009. Interest income was $0.2 million in the third quarter of 2009 and $1.6 million in the third quarter of 2008. Interest income was $0.9 million in the first nine months of 2009 and $5.0 million in the first nine months of 2008. The lower interest rates in the first nine months of 2009 as compared to 2008 was the primary reason for the lower interest income however lower average cash balance also contributed to the decrease. Currency transaction and re-measurement losses in the third quarter 2009 were $0.8 million as compared to losses of $0.5 million in the third quarter of 2008. Currency transaction and re-measurement losses in the first nine months of 2009 were $3.2 million as compared to losses of $1.5 million in the first nine months of 2008. Fluctuations in currency exchange rates during the first nine months of 2009 combined with changes in foreign currency exposures were the main reasons for the higher losses in 2009 as compared to last year.
Interest Expense:
The year-over-year decrease in the interest expense was due to the lower average debt balance and lower interest rates in 2009 as compared to 2008.
Income Taxes:
13 Weeks Ended 39 Weeks Ended
August 29, August 30, 2009 vs August 29, August 30, 2009 vs
($ in millions) 2009 2008 2008 2009 2008 2008
Income Taxes $ 15.1 $ 2.3 NMP $ 26.2 $ 17.8 46.9 %
Effective tax rate 30.9 % 9.8 % 32.1 % 23.1 %
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NMP = Non-meaningful percentage
Minority Interests in (Income) Loss of Subsidiaries:
13 Weeks Ended 39 Weeks Ended
August 29, August 30, 2009 vs August 29, August 30, 2009 vs
($ in millions) 2009 2008 2008 2009 2008 2008
Minority Interests in (Income) Loss
of Subsidiaries $ (0.05) $ 0.04 NMP $ 0.06 $ 0.15 (63.6) %
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NMP = Non-meaningful percentage
Improvements in the operating performance of our China entities resulted in minority interest expense of $49 thousand in the third quarter of 2009 as compared to a $43 thousand credit on this line in the third quarter of 2008. In the third quarter of 2008 the China entities recorded operating losses. The nine month year-to-date variance of additional minority interest expense of $98 thousand as compared to last year was nearly all accounted for by the improved third quarter performance in China.
Income from Equity Investments:
The income from equity investments relates to our 50 percent ownership of the Sekisui-Fuller joint venture in Japan. The third quarter and first nine months results reflected the higher net income recorded by the joint venture in 2009 compared to the same periods of 2008 due mainly to stronger gross profit margins.
Net Income:
13 Weeks Ended 39 Weeks Ended
August 29, August 30, 2009 vs August 29, August 30, 2009 vs
($ in millions) 2009 2008 2008 2009 2008 2008
Net Income $ 35.4 $ 21.7 63.1 % $ 59.1 $ 61.3 (3.6 )%
Percent of net revenue 11.2 % 6.0 % 6.6 % 5.9 %
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The net income for the third quarter of 2009 included $11.8 million or $0.24 per diluted share from the Roanoke litigation settlement while the net income in the third quarter of 2008 included $4.3 million or $0.09 per share of discrete tax benefits associated with our Brazilian subsidiary. Excluding these items, the net income improvement in the third quarter of 2009 was primarily the result of the 680 basis point improvement in the gross profit margin. Net income for the first nine months of 2009 was 3.6 percent below the net income generated in the first nine months of 2008; however the diluted EPS in 2009 was $1.21 per share as compared to $1.16 per share for the first nine months of 2008. The higher EPS was the direct result of our share repurchase programs that ended in the second quarter of 2008.
Our operations are managed through the four primary geographic regions: North America, EMEA, Latin America and Asia Pacific. Region Vice Presidents report directly to the Chief Executive Officer and are accountable for the financial results of their entire region. See the Overview section of this report for changes made in the first quarter of 2009 related to the reporting units within the operating segments.
The tables below set forth certain information regarding the net revenue and operating income of each of our operating segments. Operating income is defined as gross profit less SG&A expenses.
Net Revenue by Segment:
13 Weeks Ended 39 Weeks Ended
August 29, 2009 August 30, 2008 August 29, 2009 August 30, 2008
Net % of Net % of Net % of Net % of
($ in millions) Revenue Total Revenue Total Revenue Total Revenue Total
North America $ 139.4 44 % $ 159.2 44 % $ 393.9 44 % $ 448.2 43 %
EMEA 94.0 30 % 112.5 31 % 258.4 29 % 328.0 32 %
Latin America 49.6 16 % 55.7 15 % 155.5 17 % 167.3 16 %
Asia Pacific 32.3 10 % 34.6 10 % 85.3 10 % 97.9 9 %
Total $ 315.3 100 % $ 362.0 100 % $ 893.1 100 % $ 1,041.4 100 %
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Operating Income (loss) by Segment:
13 Weeks Ended 39 Weeks Ended
August 29, 2009 August 30, 2008 August 29, 2009 August 30, 2008
Operating % of Operating % of Operating % of Operating % of
($ in millions) Income Total Income Total Income Total Income Total
North America $ 21.4 67 % $ 14.3 54 % $ 51.3 71 % $ 44.6 52 %
EMEA 7.2 22 % 8.6 32 % 15.4 21 % 29.0 34 %
Latin America 1.5 5 % 1.9 7 % 4.3 6 % 5.6 7 %
Asia Pacific 2.0 6 % 1.9 7 % 1.4 2 % 6.4 7 %
Total $ 32.1 100 % $ 26.7 100 % $ 72.4 100 % $ 85.6 100 %
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The following table provides a reconciliation of operating income to income before income taxes, minority interests and income from equity investments, as reported on the Consolidated Statements of Income.
13 Weeks Ended 39 Weeks Ended
August 29, August 30, August 29, August 30,
($ in millions) 2009 2008 2009 2008
Operating income $ 32.1 $ 26.7 $ 72.4 $ 85.6
Goodwill and other impairment charges - (0.5 ) (0.8 ) (0.5 )
Other income, net 18.5 0.8 16.2 2.9
Interest expense (1.7 ) (3.9 ) (6.3 ) (10.7 )
Income before income taxes, minority
interests and income from equity
investments $ 48.9 $ 23.1 $ 81.5 $ 77.3
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North America
The following table shows the net revenue generated from the key components of
the North America operating segment.
13 Weeks Ended 39 Weeks Ended
August 29, August 30, 2009 vs August 29, August 30, 2009 vs
($ in millions) 2009 2008 2008 2009 2008 2008
Adhesives $ 108.3 $ 118.1 (8.4 )% $ 306.6 $ 337.2 (9.1 )%
Specialty Construction 31.1 41.1 (24.4 )% 87.3 111.0 (21.4 )%
Total $ 139.4 $ 159.2 (12.5 )% $ 393.9 $ 448.2 (12.1 )%
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The following tables provide details of North America net revenue variances by segment component. The Pricing/Sales Volume variance is viewed as organic growth.
13 Weeks Ended August 29, 2009 vs 39 Weeks Ended August 29, 2009 vs
August 30, 2008 August 30, 2008
Specialty Specialty
( ) = Decrease Adhesives Construction Total Adhesives Construction Total
Pricing/Sales Volume (7.6 )% (24.4 )% (12.0 )% (7.8 )% (21.4 )% (11.1 )%
Currency (0.7 )% - (0.5 )% (1.3 )% - (1.0 )%
Total (8.4 )% (24.4 )% (12.5 )% (9.1 )% (21.4 )% (12.1 )%
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The following table reflects the operating income by component of the North America operating segment.
13 Weeks Ended 39 Weeks Ended
August 29, August 30, 2009 vs August 29, August 30, 2009 vs
($ in millions) 2009 2008 2008 2009 2008 2008
Adhesives $ 19.9 $ 13.4 48.4 % $ 50.9 $ 42.3 20.5 %
Specialty Construction 1.5 0.9 83.9 % 0.4 2.3 (82.8 )%
Total $ 21.4 $ 14.3 50.5 % $ 51.3 $ 44.6 15.1 %
Segment profit margin % 15.4 % 9.0 % 13.0 % 9.9 %
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Note: Individual component results are subject to numerous allocations of segment-wide costs that may or may not have been focused on that particular component for a particular reporting period. The costs of these allocated resources are not tracked on a "where-used" basis as financial performance is managed to maximize the total operating segment performance. Therefore, the above financial information should only be used for directional indications of performance.
Total North America: The continued slowdown in the U.S. economy was the primary driver for net revenue declining 12.5 percent in the third quarter and 12.1 percent in the first nine months of 2009 as compared to the prior year. The economic slowdown impacted all markets with the construction-related markets still being hit the hardest. Sales volume for the third quarter decreased 16.1 percent while average selling prices were 4.1 percent above the third quarter of last year. For the first nine months, sales volume decreased 17.1 percent while average selling prices were 6.0 percent above the same period last year. The sales volume declines leveled off in the third quarter with a decrease from the third quarter of 2008 of 16.1 percent. The year-over-year volume decline in the second quarter of 2009 was 18.4 percent. The increase in average selling prices resulted from pricing actions taken in the second half of 2008 in response to the escalation in raw material costs. Raw material prices were approximately 15 percent lower in the third quarter of 2009 as compared to the third quarter of . . .
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