H.B. Fuller Company — FY2020 Form 10-K
Reporting period: Fiscal year ended November 28, 2020. H.B. Fuller is a global manufacturer and marketer of adhesives, sealants and specialty chemicals. The filing also reports fourth-quarter results. Fiscal 2020 operated amid COVID-19 disruption: demand rose in some essential-goods and packaging markets but weakened in other end markets.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net revenue | $2,790.3 million | $2,897.0 million |
| Gross profit / gross margin | $756.7 million / 27.1% | $806.9 million / 27.9% |
| Segment operating income | $218.3 million | $226.0 million |
| Net income attributable to H.B. Fuller | $123.7 million | $130.8 million |
| Diluted EPS | $2.36 | $2.52 |
| Operating cash flow | $331.6 million | $269.2 million |
| Free cash flow after dividends | $210.8 million | $174.8 million |
| Cash and cash equivalents at year-end | $100.5 million | $112.2 million |
| Total short- and long-term debt | $1,773.9 million | $1,979.1 million |
Annual revenue fell 3.7%: currency reduced revenue by 1.6%, organic sales (volume and price) by 1.6%, and divestitures by 0.5%. Gross margin declined 80 basis points, primarily from lower revenue and higher manufacturing costs. SG&A fell 7.3% to $538.3 million, reflecting savings from the business realignment and lower discretionary spending. The effective tax rate was 26.5%; reported net income also reflects lower interest expense and the absence of the prior-year surfactants-and-thickeners divestiture gain.
Fourth quarter: Revenue was $777.6 million versus $739.1 million in Q4 2019; net income attributable to H.B. Fuller was $40.6 million versus $32.2 million; diluted EPS was $0.77 versus $0.61.
Segments and changes versus prior year
- Hygiene, Health and Consumable Adhesives: Revenue $1,332.8 million, up 0.3%; operating income $130.8 million, up 12.8%; margin 9.8% versus 8.7%. Organic growth was 3.3%, partly offset by currency.
- Engineering Adhesives: Revenue $1,088.3 million, down 6.1%; operating income $104.0 million, down 23.7%; margin 9.6% versus 11.8%. Lower volume and pricing weighed on results.
- Construction Adhesives: Revenue $369.2 million, down 6.9%; operating income $11.1 million, down 33.1%; margin 3.0% versus 4.2%. Organic sales declined 6.7%.
At the start of FY2020, the company reorganized from five reportable segments to three; prior segment results were recast. The 2020 decline followed FY2019’s 4.7% revenue decline and FY2018’s 23.6% decline in attributable net income, though comparisons across years include currency effects and the 2019 divestiture gain.
Liquidity, debt and capital allocation
- Operating cash flow rose to $331.6 million. Capital expenditures were $87.3 million and dividends paid were $33.5 million; free cash flow after dividends, a non-GAAP measure, was $210.8 million.
- Year-end debt was $1,773.9 million, down from $1,979.1 million. The $400 million revolving facility was undrawn, with $391.0 million available after letters of credit. Management said operating cash flows should meet ongoing liquidity and capital needs.
- Debt covenants were met. Reported leverage ratios were 2.9x for Term Loan B and 2.8x for the revolving facility, against a maximum of 5.9x; interest coverage was 4.7x against a minimum of 2.0x.
- The company issued $300 million of 4.25% notes due 2028 and used the proceeds to prepay Term Loan B. The Term Loan B balance was $1,157.7 million, floating at LIBOR plus 2.00% (2.15% at year-end) and due in 2024; $1,125 million was covered by interest-rate swaps. No shares were bought under the repurchase program in 2020.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects FY2021 capital expenditures of approximately $95 million and believes cash flows and financing access will be adequate for foreseeable needs.
- COVID-19 impacts remain uncertain. Raw materials represented about 73% of cost of sales in the MD&A discussion (the risk-factor section separately states approximately 75%); a hypothetical 1% raw-material cost change was estimated to change net income by about $11 million, or $0.21 per diluted share. Foreign-exchange movements reduced FY2020 revenue by about $46 million.
- Other material risks include competition, economic and end-market weakness, supply availability and pricing, foreign exchange, cyber and ERP implementation risks, regulation and litigation, and debt covenants and LIBOR transition. Project ONE costs are estimated at $170–185 million, with implementation continuing in 2021 and beyond; management cautions total cost could exceed the estimate.
- Goodwill was $1.312 billion. No impairment was recorded, but Construction Adhesives had only 9% fair-value headroom; management identified sensitivity to discount rates and revenue growth assumptions.
- The company expects about $20 million total cost for its 2020 restructuring plan, with completion expected in 2022. Environmental remediation liabilities were $8.1 million; management did not expect known matters to have a material overall effect, while noting future settlements could affect results or cash flow.
- OFAC concluded its review of the historical Iran-related resale investigation with a Cautionary Letter in December 2020 and no civil monetary penalty; the company considers the matter closed. A January 2021 acquisition of certain STR Holdings assets for a $6.3 million base price was disclosed as a subsequent event.
Ernst & Young issued unqualified opinions on the FY2020 financial statements and internal control over financial reporting; management also concluded controls were effective.
Key facts for investors to verify
- Whether the revenue and margin trends in Engineering and Construction Adhesives stabilize, and whether Hygiene segment growth continues.
- Progress on debt reduction, liquidity, floating-rate exposure and the transition away from LIBOR, including the effect of hedges.
- Delivery and final cost of Project ONE, restructuring savings, and planned FY2021 capital expenditures.
- Assumptions supporting Construction Adhesives goodwill valuation and the outlook for that segment.
- Any changes in COVID-19 effects, raw-material costs, foreign exchange, environmental liabilities or tax exposures.