H.B. Fuller Company (FUL): Q3 2022 Form 10-Q
Business context and period. The quarter ended August 27, 2022; comparisons are with the quarter ended August 28, 2021. H.B. Fuller makes adhesives and reports three segments: Hygiene, Health and Consumable Adhesives; Engineering Adhesives; and Construction Adhesives. Unless stated otherwise, figures below are in millions of U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $941.2 | $826.8 | $2,791.0 | $2,380.6 |
| Gross profit / margin | $249.2 / 26.5% | $194.0 / 23.5% | $715.6 / 25.6% | $603.9 / 25.4% |
| Operating income | $88.0 | $59.5 | $232.5 | $176.9 |
| Net income attributable to H.B. Fuller | $46.5 | $31.6 | $132.0 | $110.5 |
| Diluted EPS | $0.84 | $0.58 | $2.39 | $2.04 |
| Interest expense | $23.5 | $19.4 | $61.5 | $59.7 |
- Q3 revenue rose 13.8%; price contributed 18.7%, acquisitions 2.0%, volume declined 0.3%, and currency reduced growth by 6.6%. Nine-month revenue rose 17.2%, reflecting price growth of 17.6%, volume growth of 2.8%, acquisition growth of 1.6%, and a 4.8% currency drag.
- Q3 gross margin expanded 300 basis points, mainly from pricing, partly offset by higher raw material costs. Nine-month gross margin increased 20 basis points; raw material costs remained a pressure.
- Q3 segment operating income increased in all three segments. Revenue and operating income were: Hygiene, Health and Consumable Adhesives $425.0 and $47.5; Engineering Adhesives $378.3 and $39.8; Construction Adhesives $138.0 and $6.4.
- Comprehensive loss attributable to H.B. Fuller was $39.6 in Q3, versus comprehensive income of $3.6 a year earlier, primarily reflecting foreign-currency translation losses. For the first nine months, comprehensive loss was $22.1 versus income of $169.3.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $48.7, down from $161.1. Capital expenditures were $98.4 and dividends paid were $29.1, resulting in negative free cash flow after dividends of $78.8, compared with positive $57.9 in the prior-year period.
- Working-capital changes used $146.6 of cash, principally receivables and inventory; trade payables provided $17.4. Inventory days on hand rose to 75 from 70, while receivables DSO remained 63 days.
- Cash was $60.7 at August 27, 2022, versus $61.8 at November 27, 2021. Total short- and long-term debt was $1,918.2, up from $1,616.5; debt to total capital rose to 54.9% from 50.2%. Interest expense increased, which management attributed to higher rates and higher debt balances.
- The company reported compliance with its debt covenants: secured debt to trailing-12-month EBITDA was 2.7 against a maximum of 5.9, and EBITDA to interest expense was 6.1 against a minimum of 2.0. Management said operating cash flow and access to short- and long-term borrowing should meet ongoing needs.
Material changes, outlook and risks
- Acquisitions included Apollo, Fourny and ZKLT, alongside TissueSeal. The company reported $242.9 of cash spent on business acquisitions in the nine-month period and borrowed $335.0, primarily to finance acquisitions and working capital. Apollo and Fourny contributed to Construction Adhesives; ZKLT was assigned to Engineering Adhesives.
- Q3 SG&A rose 19.9%, mainly from compensation and acquisition project costs. The nine-month period included a $3.3 non-cash settlement charge related to termination of the Canadian defined-benefit pension plan.
- No specific earnings or revenue guidance was provided in the supplied filing text. Management cited ongoing COVID-19 effects on global economies, supply chains and industrial production, with further effects difficult to estimate. It also identified Russia’s war in Ukraine and related restrictions, disruption, currency and cyber risks as potential adverse factors, although Russia was not a material part of the business.
- Other exposures include raw-material prices, foreign-exchange and interest-rate movements, and environmental and legal matters. Environmental remediation liabilities were $6.1; management said known matters were not expected to have a material adverse effect, but adverse developments could affect future results or cash flows. Q3 tax expense included $6.4 of discrete items, primarily related to cross-currency swap revaluation and other tax matters.
- The company stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether pricing continues to offset raw-material inflation and whether margin improvement is sustained as volume and foreign-exchange effects evolve.
- Whether working-capital investment and capital spending normalize enough to restore positive free cash flow after dividends.
- Debt growth, higher interest costs, covenant headroom and the integration and performance of recent acquisitions.
- Potential effects of currency movements, supply-chain conditions, geopolitical developments, and environmental or litigation matters.