H.B. Fuller Company — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended May 29, 2021; comparisons are to the periods ended May 30, 2020. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless noted.
Business context and results
H.B. Fuller makes adhesives and reports three segments: Hygiene, Health and Consumable Adhesives; Engineering Adhesives; and Construction Adhesives. All global manufacturing operations remained open during the COVID-19 pandemic, and the company characterized improving global COVID-19 trends as a positive outlook.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $827.9 million | $674.6 million | $1,553.8 million | $1,321.2 million |
| Gross profit | $217.6 million | $184.9 million | $409.9 million | $355.2 million |
| Gross margin | 26.3% | 27.4% | 26.4% | 26.9% |
| Operating income | $69.1 million | $56.9 million | $117.5 million | $85.7 million |
| Net income attributable to H.B. Fuller | $49.1 million | $31.6 million | $78.9 million | $41.5 million |
| Diluted EPS | $0.90 | $0.61 | $1.47 | $0.79 |
| Operating cash flow | Not separately stated | Not separately stated | $79.8 million | $108.4 million |
Revenue, margins and segment performance
- Q2 revenue increased 22.7%: organic growth of 18.8% (primarily volume), plus 3.9% from currency. Pricing contributed 1.4% and sales volume 17.4%, according to the MD&A. Six-month revenue rose 17.5%, including 14.7% organic growth and 2.8% currency benefit.
- Gross margin declined 110 basis points in Q2 and 50 basis points for the first half, primarily because of higher raw-material costs, partly offset by higher volume. Q2 raw materials rose 27.1% year over year.
- Engineering Adhesives led growth: Q2 revenue rose 46.3% and segment operating income 58.9%; first-half revenue rose 35.7% and operating income 76.1%.
- Construction Adhesives Q2 revenue rose 25.4%, but operating income fell 3.1% and margin declined 150 basis points. For the first half, revenue rose 9.1% while operating income fell 69.2%, with margin down 210 basis points; higher raw-material costs were a key pressure.
- Hygiene, Health and Consumable Adhesives Q2 revenue rose 5.8% and operating income rose 11.1%. First-half revenue rose 6.6% and operating income rose 19.4%.
Cash flow, debt and liquidity
- Six-month operating cash flow was $79.8 million, down from $108.4 million. Working capital changes used $28.1 million, versus a $16.9 million source in the prior-year period; inventory alone used $100.4 million of cash.
- Capital expenditures were $50.7 million and dividends paid were $17.2 million. Free cash flow after dividends, a company-defined non-GAAP measure, was $11.8 million versus $37.3 million. Investing activities used $56.5 million; financing activities used $57.9 million.
- Cash was $69.6 million at May 29, 2021, down from $100.5 million at November 28, 2020. Current assets were $1,166.9 million and current liabilities $651.7 million.
- Total short- and long-term debt was $1,712.4 million, compared with $1,773.9 million at November 28, 2020 and $1,928.0 million a year earlier. Debt-to-total-capital was 52.2%, versus 56.1% and 61.3%, respectively. The company repaid $68.0 million of long-term debt during the first half.
- Management said operating cash flow should cover ongoing liquidity and capital spending needs and that debt financing should remain available. The company reported compliance with its debt covenants; covenant ratios were within stated limits.
Outlook, commentary, risks and unusual items
- The filing provides no quantitative revenue or earnings guidance. Management cited improving COVID-19 trends but noted continued monitoring of the pandemic and supply continuity.
- Raw-material inflation is a material pressure on gross margin. The company is also exposed to foreign-exchange and interest-rate risk; it uses derivatives to hedge exposures and reported no material change in market risk since its prior annual report.
- The 2020 restructuring plan is expected to cost approximately $20.0 million pre-tax ($15.8 million after tax), with $16.3 million incurred through May 29, 2021; completion is expected in 2022. Corporate unallocated losses increased, reflecting organizational realignment costs.
- Q2 other income included net defined-benefit pension benefits, other income, currency transaction losses, and gains related to a legal-entity merger and a Brazilian transactional-tax legal settlement. A $378,000 cash payment for an ineffective portion of an interest-rate swap was charged to interest expense.
- The company acquired certain STR Holdings assets for a $5.4 million base price, plus $0.8 million due on the first anniversary and up to $1.7 million contingent consideration. The acquisition measurement was preliminary.
- Environmental remediation liabilities were $8.0 million. The company also disclosed asbestos-related claims and other ordinary-course legal matters, which it did not expect, based on available information, to have a material adverse effect; it cautioned that adverse developments could affect future results or cash flows.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether pricing actions and volume can offset continuing raw-material cost inflation, especially in Construction Adhesives.
- Whether the working-capital cash use—particularly the inventory build—normalizes and operating cash flow recovers.
- Debt reduction, covenant headroom, interest costs and the company’s ability to sustain dividends and capital spending.
- Final STR acquisition valuations and contingent consideration, as well as remaining restructuring costs and timing.
- Developments in environmental and asbestos matters, including potential costs beyond recorded reserves and insurance or third-party recoveries.