H.B. Fuller Company — Q2 2022 Form 10-Q
Business context and reporting period. H.B. Fuller manufactures adhesives and related products. This unaudited quarterly report covers the three and six months ended May 28, 2022; comparisons are with periods ended May 29, 2021. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $993.3 | $827.9 | $1,849.7 | $1,553.8 |
| Gross profit / margin | $253.5 / 25.5% | $217.6 / 26.3% | $466.4 / 25.2% | $409.9 / 26.4% |
| Operating income | $87.5 | $69.1 | $144.5 | $117.5 |
| Net income attributable to H.B. Fuller | $47.2 | $49.1 | $85.5 | $78.9 |
| Diluted EPS | $0.86 | $0.90 | $1.55 | $1.47 |
- Revenue grew 20.0% in Q2 and 19.1% year to date. Management attributed growth mainly to pricing and volume, with acquisitions contributing 2.0% and 1.5%, respectively, and currency reducing growth by 3.9% and 3.8%.
- Q2 gross margin fell 80 basis points; the six-month margin fell 120 basis points. Higher raw-material costs were the principal pressure, partly offset by improved manufacturing-cost leverage from higher revenue.
- Q2 net income declined 3.9%, while six-month net income increased 8.4%. Q2 results included higher tax expense and less other income than the prior-year quarter. The Q2 2022 effective tax rate was 33.9%, including $4.1 million of discrete tax expense; excluding it, the rate was 27.9%.
- Q2 segment revenue and operating income increased across all three segments. Engineering Adhesives operating margin improved to 10.6% from 9.3%; Hygiene, Health and Consumable Adhesives declined to 9.9% from 10.7%; Construction Adhesives improved to 7.5% from 5.4%.
Cash flow, debt and liquidity
- Six-month operating cash flow was negative $9.1 million, versus positive $79.8 million a year earlier. Working capital used $103.7 million of cash, including a $95.4 million inventory outflow; trade payables provided $27.2 million.
- Capital expenditures were $69.1 million and dividends paid were $19.0 million. The company’s non-GAAP free cash flow after dividends was negative $97.2 million, compared with positive $11.9 million.
- Cash was $68.1 million at May 28, 2022. Total short- and long-term debt was $1,935.8 million, up from $1,616.5 million at November 27, 2021. Debt to total capital rose to 54.5% from 50.2% at fiscal year-end.
- Current assets were $1,409.0 million and current liabilities $722.0 million. Management said operating cash flow should meet ongoing liquidity and capital needs and that debt financing is available for foreseeable needs. The company reported compliance with its debt covenants; its secured-debt/TTM EBITDA covenant ratio was 2.9 against a maximum of 5.9.
Material changes, outlook and risks
- Acquisitions during the first half included Apollo and Fourny, both added to Construction Adhesives, and TissueSeal, added to Hygiene, Health and Consumable Adhesives. Apollo’s base price was approximately $203.6 million and was funded with credit-facility borrowings. Acquisitions contributed to higher goodwill and debt.
- Management reported no specific numerical revenue or earnings guidance in this filing. It expected cash flows to fund ongoing needs and said it believed contractual obligations and commitments could be met in fiscal 2022.
- Raw-material cost and availability, foreign exchange, interest rates, supply-chain disruption and the continuing potential effects of COVID-19 remain relevant uncertainties. The company added Russia-Ukraine conflict and related sanctions, logistics constraints and potential cyberattacks as risks; it said Russia was not a material portion of its business but escalation could have a material adverse effect.
- Foreign-currency translation drove a substantial other comprehensive loss: comprehensive loss attributable to H.B. Fuller was $32.0 million in Q2, despite net income of $47.2 million. Q2 also included a $3.3 million non-cash settlement charge for termination of the Canadian defined-benefit pension plan.
- Environmental remediation liabilities were $6.4 million. The company also disclosed asbestos-related claims and other litigation, stating that currently available information did not indicate a material adverse effect, while noting that future developments could affect results or cash flows.
- The 2020 restructuring plan had incurred $19.7 million of costs through May 28, 2022; total costs were expected to be approximately $20.0 million, with completion expected in fiscal 2022. On April 7, 2022, the board authorized a new share repurchase program of up to $300 million.
Most important facts for investors to verify
- Whether pricing continues to offset raw-material inflation and support gross margins.
- Whether working-capital investment, particularly inventory, converts into improved operating cash flow and free cash flow.
- Debt levels, interest-rate exposure, covenant headroom and funding needs following the acquisitions.
- Acquisition integration, purchase-price allocation and the expected contribution from Apollo, Fourny and TissueSeal.
- Developments in currency, geopolitical and supply-chain risks, and any changes in environmental or asbestos-related exposures.