H.B. Fuller Company — Q3 2015 Form 10-Q
Business context and period. H.B. Fuller manufactures adhesives and construction products. The quarter comprised 13 weeks ended August 29, 2015; year-to-date (YTD) covers 39 weeks. Comparisons are with the corresponding 2014 periods. Amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | YTD 2015 | YTD 2014 |
|---|---|---|---|---|
| Net revenue | $524.1 | $526.8 | $1,535.6 | $1,556.8 |
| Gross profit | $146.8 | $125.2 | $412.0 | $400.9 |
| Gross margin | 28.0% | 23.8% | 26.8% | 25.7% |
| Net income attributable to H.B. Fuller | $26.8 | $4.0 | $61.7 | $39.1 |
| Diluted EPS | $0.52 | $0.08 | $1.20 | $0.76 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $153.0 | $(12.6) |
| Free cash flow* | Not stated for quarter | Not stated for quarter | $85.2 | $(145.8) |
- Q3 revenue declined 0.5%; YTD revenue declined 1.4%. Pricing and volume growth were outweighed by currency effects: constant-currency growth was 6.7% in Q3 and 5.0% YTD, while currency reduced revenue by 7.2% and 6.4%, respectively.
- Q3 net margin was 5.1%, versus 0.8% a year earlier; YTD net margin was 4.0%, versus 2.5%. The improvement reflected lower raw-material and delivery costs and substantially lower Business Integration Project charges.
- YTD investing cash use was $264.7, including $217.6 for acquired businesses; financing cash provided was $131.7. Capital spending was $48.6. Dividends paid were $19.2.
- At August 29, cash was $85.8, total debt was $727.6, and total debt to total capital was 44.6% (37.2% at August 30, 2014). Cash held outside the U.S. was $68.0. Long-term debt included $20.6 of current maturities.
- Liquidity metrics: net working capital was 20.9% of annualized revenue (19.6% a year earlier); receivables DSO was 59 days; inventory days on hand were 68 (66 a year earlier). Management said operating cash flows and debt access should meet ongoing liquidity and capital needs.
*Company-defined YTD free cash flow: operating cash flow from continuing operations less capital expenditures and dividends.
Material changes and segment performance
- Q3 segment operating income rose to $48.5 from $28.4; YTD it increased to $118.3 from $110.9. Americas Adhesives improved profitability despite lower revenue; Asia Pacific and Construction Products grew strongly. EIMEA’s YTD segment operating income fell 74.8% to $5.5, reflecting currency, soft markets and first-half production inefficiencies.
- Q3 revenue growth by segment included Asia Pacific +50.2% and Construction Products +29.7%, offset by Americas Adhesives −7.9% and EIMEA −16.9%. Currency materially affected reported results.
- Special charges fell to $1.3 in Q3 and $4.6 YTD, from $12.3 and $37.6, respectively, primarily as Business Integration Project costs declined. Interest expense rose 21.8% in Q3 and 32.4% YTD, mainly due to higher debt balances and lower capitalized interest.
- Debt and goodwill increased following the February acquisition of 95% of Tonsan Adhesive, a China-based engineering adhesives business, for approximately $215.9. H.B. Fuller also acquired Continental Products in Kenya for approximately $1.6.
Outlook, commentary, and risks
- The Business Integration Project was expected to generate $90.0 of annual cash cost savings and other pretax profit improvements when complete. Management said delays and higher implementation costs pushed the 15% EBITDA-margin target from 2015 to 2016; Q3 EBITDA margin was 12.9% and YTD margin 11.3%. Estimated total project costs increased from approximately $125.0 to $164.0; $161.2 had been incurred through August 29.
- No broader revenue or earnings guidance is provided in the supplied filing text. Management stated the company was in compliance with debt covenants; its reported leverage covenant ratio was 3.1 against a 3.75 maximum, and the maximum was scheduled to return to 3.50 in fiscal Q1 2016.
- Tonsan’s acquisition accounting remained preliminary. The agreement includes a future purchase of the remaining 5% for approximately $13.0 and contingent consideration of up to approximately $66.8 tied to Tonsan’s 2018 gross profit; the recorded contingent-consideration fair value was about $37.2 at quarter-end.
- Risks include foreign-exchange movements, raw-material prices, interest rates, soft end markets, integration and production execution, and environmental and legal matters. Management judged pending environmental and legal matters, including asbestos litigation, not expected to have a material adverse effect based on available information, while noting outcomes remain uncertain. Certain insurers are insolvent, and the company bears a share of some asbestos-related costs.
- Other unusual item: the company paid $8.0 in Q3 to settle matters related to the divested Central America Paints business; a $1.3 after-tax discontinued-operations loss was recorded in Q2.
Important facts for investors to verify
- Whether currency and regional demand trends continue to offset underlying volume and pricing growth, particularly in Americas Adhesives and EIMEA.
- Progress toward the revised 2016 EBITDA-margin goal, $90.0 savings objective, and updated $164.0 project-cost estimate.
- Tonsan’s finalized purchase-price allocation, operating contribution, and eventual contingent-payment exposure.
- Debt reduction capacity, covenant headroom, and the scheduled leverage-limit step-down in fiscal Q1 2016.
- Cash-flow sustainability, including inventory investment, capital spending, dividends, and cash held outside the U.S.
- Potential exposure from foreign exchange, raw-material costs, and unresolved environmental or asbestos matters.