H.B. Fuller Company (NYSE: FUL) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 2, 2023; comparisons are to the periods ended August 27, 2022. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context and results
H.B. Fuller makes adhesives and reports three segments: Hygiene, Health and Consumable Adhesives; Engineering Adhesives; and Construction Adhesives. Quarterly sales declined despite acquisitions and improved gross margin, as weaker sales volume and currency effects more than offset pricing and acquired revenue.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $900.6 | $941.2 | $2,608.1 | $2,791.0 |
| Gross profit / margin | $263.5 / 29.3% | $249.2 / 26.5% | $735.1 / 28.2% | $715.6 / 25.6% |
| Operating income | $91.3 | $88.0 | $241.7 | $232.5 |
| Net income attributable to H.B. Fuller | $37.6 | $46.5 | $99.9 | $132.0 |
| Diluted earnings per share | $0.67 | $0.84 | $1.79 | $2.39 |
| Interest expense | $35.1 | $23.5 | $101.3 | $61.5 |
Quarterly revenue fell 4.3%: organic growth was down 7.4%, currency reduced sales 1.7%, and acquisitions added 4.8%. For the first nine months, revenue fell 6.6%, with organic growth down 6.4%, currency reducing sales 3.2%, and acquisitions adding 3.0%. Lower raw-material costs and pricing improved gross margin, but lower volume weighed on results. SG&A was $172.2 million in Q3, up 6.8%, and $493.3 million year to date, up 2.1%; as a share of sales it rose to 19.1% for Q3 and 18.9% year to date.
Segment performance was mixed. Q3 operating income increased to $52.7 million in Hygiene, Health and Consumable Adhesives and $52.9 million in Engineering Adhesives, while Construction Adhesives declined to $5.9 million. For the first nine months, Construction Adhesives operating income fell 90% to $2.2 million; the company cited lower volume, lower sales and acquisition-related SG&A pressure.
Cash flow and liquidity: Operating cash flow was $216.7 million for the first nine months, versus $48.7 million a year earlier. Capital spending was $109.5 million and dividends paid were $32.3 million, yielding reported free cash flow after dividends of $74.7 million, compared with negative $78.8 million. Cash was $94.9 million at September 2, 2023. Current assets were $1,241.4 million and current liabilities $618.3 million.
Debt: Total short- and long-term debt was $1,885.0 million, versus $1,765.1 million at December 3, 2022. Long-term debt was $1,872.5 million and notes payable were $12.6 million. Debt-to-total-capital was 52.2%. The company reported covenant secured leverage of 2.3 against a maximum of 4.75 and interest coverage of 4.5 against a minimum of 2.0. Term Loan A and the revolving facility bore a reported 7.15% rate and Term Loan B 7.55% at quarter-end; interest-rate swaps hedge portions of variable-rate debt.
Material changes and notable items
- Interest expense rose 49.4% in Q3 and 64.7% year to date, primarily due to higher debt balances and interest rates. The company refinanced its credit facilities in February 2023, establishing $500 million Term Loan A, $800 million Term Loan B and a $700 million revolving facility; no revolving balance was outstanding at quarter-end.
- Acquisitions during 2023 included Adhezion Biomedical, XChem International, Beardow Adams and Aspen Research, alongside the earlier Lemtapes acquisition. Cash paid for acquisitions, net of cash acquired, was $194.2 million year to date. Purchase-price allocations were preliminary for several acquisitions. On September 8, after quarter-end, the company acquired certain Sanglier Group assets for approximately $17.5 million.
- Restructuring plans to optimize operations and integrate acquisitions are expected to cost $39.1–$44.1 million before tax, including $28.4–$29.6 million of cash severance and related employee costs. The company had incurred $17.1 million by September 2; implementation is expected to continue through fiscal 2026, with most charges and cash payments in fiscal 2023 and 2024.
- Q3 diluted EPS and net income declined despite higher gross profit and operating income; higher interest expense, SG&A and discrete tax expense contributed to the lower net result. Q3 tax expense included $6.2 million of discrete expense.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management said it expects operating cash flows and access to borrowing to meet liquidity and capital needs, and believes it can meet fiscal 2023 contractual obligations. This outlook is subject to demand, sales volume, raw-material prices, foreign exchange, interest rates, acquisition integration and restructuring execution. The company disclosed no material change in market risks or previously reported risk factors.
Environmental remediation liabilities were $5.3 million. The company is also involved in asbestos-related and other ordinary-course litigation; it reported six asbestos-related settlements totaling $4.0 million during the first nine months, with $2.3 million of insurance payments received or expected. Management stated that it did not expect these matters to have a material adverse effect based on currently available information, while noting uncertainty and potential effects on future periods. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether volume declines persist or stabilize, particularly in Construction Adhesives, and how demand develops across end markets.
- Whether margin improvement from pricing and lower raw-material costs can offset weak volume and higher SG&A.
- Acquisition integration, realized synergies, preliminary purchase-price allocations and the effect of acquired businesses on debt and cash flow.
- Progress and cash costs of the restructuring plans, along with compliance with credit-facility covenants as interest costs remain elevated.
- Future cash conversion, capital spending and dividend coverage, as well as developments in environmental and asbestos-related matters.