H.B. Fuller Company — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, the 13 weeks ended March 1, 2014. Comparisons are with the 13 weeks ended March 2, 2013, unless noted. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $486.0 | $479.8 | +1.3% |
| Gross profit / margin | $133.0 / 27.4% | $133.4 / 27.8% | Profit down 0.2%; margin down 40 bps |
| SG&A / revenue | $96.8 / 19.9% | $97.6 / 20.3% | Expense down 0.9% |
| Special charges | $11.7 | $5.3 | Up 120% |
| Income before taxes and equity-method income | $19.3 | $25.5 | Down 24.0% |
| Net income attributable to H.B. Fuller | $14.6 | $20.7 | Down 29.5% |
| Diluted EPS | $0.28 | $0.41 | Down $0.13 |
| Operating cash flow from continuing operations | $(17.1) | $(11.5) | Cash use increased |
Revenue growth comprised 2.0% higher volume, flat pricing and a 0.7% unfavorable currency effect. The company reported a 33.8% effective tax rate, compared with 28.0%; it cited discrete tax benefits and project-related tax effects in both periods. Interest expense declined to $4.1 million from $5.3 million, partly because more interest was capitalized and average debt was lower.
Segments and material changes
- Americas Adhesives: Revenue $209.7 million, up 0.9%; segment operating income $25.2 million, down 2.8%.
- EIMEA: Revenue $171.6 million, down 3.3%, reflecting a 4.0% volume decline partly offset by higher pricing. Segment operating income rose 30.4% to $8.4 million, with margin improving to 4.9% from 3.6%, including benefits from integration actions.
- Asia Pacific: Revenue $65.0 million, up 7.4%; segment operating income fell 9.4% to $1.8 million, principally reflecting higher raw-material costs and mix.
- Construction Products: Revenue $39.7 million, up 16.7%, driven by volume and retail-partner market-share gains. Segment operating income fell 40.5% to $0.8 million; margin declined to 2.0% from 4.0% amid higher raw-material and other costs.
Consolidated gross margin declined 40 basis points, primarily due to $1.3 million of integration costs recorded outside special charges. SG&A as a share of revenue improved 40 basis points, reflecting cost controls and integration benefits. Special charges rose substantially, mainly for facility exits, workforce reductions and other Business Integration Project costs.
Cash, debt and liquidity
- Cash and equivalents were $113.0 million at March 1, 2014, down from $155.1 million at November 30, 2013; $101.1 million was held outside the United States.
- Total short- and long-term debt was $533.7 million, versus $492.9 million at fiscal year-end. Total debt to total capital was 36.4%, compared with 34.6% at November 30, 2013.
- Operating cash use was $17.1 million; capital expenditures were $50.9 million and dividends paid were $5.0 million. The company’s stated free cash flow measure was negative $73.0 million, versus negative $35.4 million a year earlier.
- Inventory increased to $260.8 million from $221.5 million at fiscal year-end. Inventory days on hand rose to 65 from 58 a year earlier; receivable DSO increased to 56 days from 53.
- The company reported covenant compliance: trailing EBITDA to interest was 13.4 against a minimum of 2.5; indebtedness to trailing EBITDA was 2.2 against a maximum of 3.5. Management said operating cash flow and borrowing capacity should meet liquidity and capital needs.
Outlook, risks and unusual items
- Business Integration Project: Management expects $90 million of annual cash savings and other pretax profit improvements when activities are completed in 2014, and targets a 15% EBITDA margin by 2015, versus 10.5% in Q1 2014 and 10.6% in Q1 2013. Project costs incurred through March 1 were $116.8 million; the original estimate was approximately $125 million, which management expects to be exceeded by an immaterial amount. Approximately $45 million of project capital spending was expected in 2014. These are management expectations, not a general revenue or EPS forecast.
- Management attributed soft EIMEA volume to weak end-market conditions, particularly in southern Europe. Foreign currency movements, raw-material prices and economic conditions could affect results; the filing estimates a 10% U.S. dollar movement would change net income by approximately $1.4 million, based on the stated sensitivity assumptions.
- Environmental matters, ordinary-course claims and asbestos litigation remain contingencies. Management said current information did not indicate a material adverse effect, but noted adverse developments could affect future results or cash flows. Certain insurers are insolvent; allocation of future asbestos costs under a settlement agreement depends on an appeal.
- The Central America Paints divestiture remains subject to $5.0 million of contingent consideration recorded as a discontinued-operations liability. The company also reported a preliminary purchase-price allocation for its 2013 Plexbond acquisition.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing stated there had been no material changes to the risk factors in the 2013 Form 10-K.
Most important facts for investors to verify
- Whether the integration project delivers the targeted savings, margin improvement and 2014 completion despite cost overruns and execution delays.
- Whether negative operating cash flow, higher inventory and increased capital spending improve in subsequent quarters.
- Whether EIMEA’s volume weakness persists and whether growth in Asia Pacific and Construction Products converts into improved segment profitability.
- Debt levels, covenant headroom, access to cash held abroad and the funding of planned capital expenditures, dividends and repurchases.
- Developments in asbestos insurance coverage and appeals, environmental matters, and the Central America Paints contingent consideration.