H.B. Fuller Company — FY2018 Form 10-K
Business context and reporting period. Global adhesives, sealants and specialty chemicals manufacturer; fiscal 2018 ended December 1, 2018. The company operated in five reportable segments after integrating Royal Adhesives into the other segments. FY2018 included 52 weeks; FY2016 included 53 weeks.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net revenue | $3,041.0 million | $2,306.0 million |
| Gross profit / margin | $836.9 million / 27.5% | $605.1 million / 26.2% |
| Net income attributable to H.B. Fuller | $171.2 million | $59.4 million |
| Diluted EPS | $3.29 | $1.15 |
| Cash from operating activities | $253.3 million | $140.8 million |
| Capital expenditures | $68.3 million | $54.9 million |
| Cash and cash equivalents at year-end | $150.8 million | $194.4 million |
| Total debt, including current maturities and notes payable | $2,247.5 million | $2,451.9 million |
- Revenue increased 31.9%; 28.3 percentage points of growth came from acquisitions, while pricing added 3.4 points, favorable mix 0.6 points, volume declined 0.3 points and currency reduced growth by 0.1 points.
- Gross margin improved 130 basis points, reflecting pricing, Royal Adhesives and lower restructuring costs, partly offset by higher raw-material costs. Raw materials represented about 75% of cost of sales.
- FY2018 net income benefited from a $6.4 million income-tax benefit, including $49.0 million of discrete tax benefits. U.S. tax reform included a $79.5 million deferred-tax remeasurement benefit, partly offset by a $42.0 million transition-tax charge and an $8.5 million dividends-received deduction benefit.
- Segment operating income was $254.8 million, compared with $128.0 million. Interest expense rose to $111.0 million from $43.7 million, primarily due to acquisition-related debt and higher rates.
- Free cash flow after dividends, a company-defined non-GAAP measure, was $153.9 million, versus $56.3 million. Working capital consumed $31.1 million of cash in FY2018.
Fourth-quarter snapshot
FY2018 Q4 revenue was $768.4 million, compared with $678.2 million in FY2017 Q4. Net income including non-controlling interests was $41.4 million versus a $6.9 million loss; diluted EPS was $0.79 versus a loss of $0.13 per share.
Liquidity, debt and capital
- Year-end total assets were $4.18 billion and total equity was $1.15 billion. Current assets were $1.09 billion versus current liabilities of $546.1 million.
- Long-term debt comprised a $1.964 billion Term Loan B, floating at LIBOR plus 2.00% (4.30% at year-end; matures 2024), and $300 million of 4.00% Public Notes due 2027. The $400 million revolving facility was undrawn; $393.955 million remained available after letters of credit.
- The company reported compliance with its debt covenants; its stated total-debt-to-TTM-EBITDA covenant measure was 4.3 against a maximum of 5.9. Debt capitalization was 66.1%, down from 70.0%.
- Management said operating cash flow and access to debt should meet ongoing liquidity needs. It expected FY2019 capital expenditures of approximately $100 million and believed it could meet FY2019 contractual commitments.
Changes, outlook and material risks
- Royal Adhesives: The 2017 acquisition for approximately $1.62 billion materially increased revenue, goodwill and debt. Integration restructuring is expected to cost approximately $20 million in total; $6.7 million was incurred in FY2018, with completion expected by FY2020.
- Other restructuring: The 2017 plan was substantially complete. The company recorded $8.9 million of restructuring charges in FY2018, compared with $18.0 million in FY2017.
- Systems investment: Project ONE is estimated at $195–$210 million, with about $73 million spent to date. Implementation continues in 2019 and beyond; costs could exceed estimates and delays could disrupt operations.
- Accounting change: In FY2018 the company changed certain U.S. inventory costing from LIFO to weighted-average cost and retrospectively adjusted prior periods. The change increased adjusted FY2017 net income by $1.2 million and reduced adjusted FY2016 net income by $2.5 million.
- Key risks: Raw-material price or supply shocks, competition, economic and currency volatility, acquisition integration and leverage, LIBOR transition, goodwill impairment, ERP execution, cybersecurity, environmental exposure, and tax-law changes. Goodwill was $1.31 billion; Roofing and EIMEA had relatively limited impairment-test headroom of 18% and 16%, respectively.
- Contingencies: Environmental liabilities accrued were $10.7 million. The company disclosed a voluntary OFAC investigation into possible resale of products into Iran by customers; the sales had ceased, and potential penalties were estimated at $0–$10 million. Asbestos-related settlements were $0.4 million in FY2018, with $0.3 million received or expected from insurers. Management did not expect pending matters to materially affect results, but outcomes remain uncertain.
- No specific revenue or earnings guidance was provided in the supplied filing text. Management cited pricing, acquisitions and integration, raw-material costs, economic conditions and currencies as important performance drivers.
Investor verification points
- Separate acquisition-driven growth and tax benefits from recurring organic growth and earnings; assess the sustainability of margins and cash generation.
- Track Royal Adhesives integration, expected synergies, restructuring spending and progress reducing debt; confirm covenant headroom and floating-rate exposure.
- Monitor raw-material cost pass-through, working-capital trends, and planned FY2019 capital spending and Project ONE costs.
- Review the OFAC investigation outcome, environmental remediation exposure, asbestos recoveries and the impairment sensitivity of Roofing and EIMEA goodwill.
- Confirm the impact of the LIFO-to-weighted-average inventory change and the adoption of new accounting standards in subsequent periods.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded internal controls were effective as of December 1, 2018.