H.B. Fuller Company — FY2012 Form 10-K
Business context and reporting period. H.B. Fuller manufactures and sells adhesives, sealants and specialty chemicals globally. This annual report covers the fiscal year ended December 1, 2012; fiscal 2011 had an additional 53rd week. The company operated through five segments: North America Adhesives, Construction Products, EIMEA, Latin America Adhesives and Asia Pacific.
Financial performance and position
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net revenue | $1,886.2 million | $1,444.1 million |
| Gross profit / margin | $517.3 million / 27.4% | $403.8 million / 28.0% |
| Income from continuing operations | $68.3 million | $80.2 million |
| Diluted EPS from continuing operations | $1.34 | $1.61 |
| Net income attributable to H.B. Fuller | $125.6 million | $89.1 million |
| Cash from continuing operating activities | $108.6 million | $88.1 million |
- Revenue rose 30.6%, primarily reflecting the Forbo industrial adhesives acquisition, which contributed $423.4 million. Organic growth, defined as price and volume together, was 4.2%; pricing contributed 4.8% while volume declined 0.6%. Currency reduced revenue by 2.9%.
- Gross margin fell 60 basis points, mainly because the acquired business had lower margins. SG&A increased in dollars but declined as a share of revenue, from 19.9% to 18.8%.
- Continuing-operations income and diluted EPS declined despite higher sales. FY2012 included $52.5 million in net special charges for integration and restructuring, with a $35.4 million after-tax impact, or $0.70 per diluted share.
- Reported net income includes $57.6 million from discontinued operations, including a $51.1 million after-tax gain on the Central America Paints sale. It is therefore not directly comparable with continuing-operations earnings.
- Cash and cash equivalents were $200.4 million at year-end; total debt was $520.2 million and net financial debt was $319.8 million. Total debt rose from $232.3 million in FY2011, mainly to fund Forbo. The company prepaid $80 million of debt with divestiture proceeds.
- Capital expenditures were $35.9 million; management’s free-cash-flow measure, after capital spending and dividends, was $56.3 million. Net working capital increased to 17.8% of annualized revenue from 14.3%; inventory days rose to 53 from 41.
- Total assets were $1.786 billion and stockholders’ equity was $778.3 million. The debt capitalization ratio increased to 40.1% from 24.8%. The current ratio was approximately 2.3, based on reported current assets and liabilities.
Fourth-quarter results
FY2012 Q4 revenue was $513.3 million, gross profit $143.7 million, income from continuing operations $25.0 million and diluted continuing-operations EPS $0.49. In Q4 FY2011, the corresponding figures were $401.5 million, $112.3 million, $22.0 million and $0.44. Q4 FY2012 included $9.2 million of special charges and $0.8 million of asset impairment charges.
Material changes and management commentary
- On March 5, 2012, Fuller acquired Forbo’s global industrial adhesives and synthetic polymers business for $404.7 million. On September 10, it acquired Engent for $7.9 million. On August 6, it sold Central America Paints for $118.5 million in cash proceeds.
- The Forbo acquisition drove much of the revenue, asset and debt increase. Acquired operations are being integrated across four adhesives segments; the company reported $60 million of Business Integration Project costs incurred through year-end and estimated $61 million more, for a total expected cost of $121 million.
- Management targeted $90 million in annual cash cost savings and other pretax profit improvements when integration activities are completed in 2014, and an EBITDA margin target of 15% by 2015. FY2012 savings reported were $5.1 million from workforce reductions and $1.6 million from facility closures and consolidations.
- For 2013, management expected modest organic revenue growth, some margin expansion from integration synergies, raw-material costs similar to FY2012, and operating-expense leverage. Planned capital expenditures were approximately $110 million in 2013, with additional spending expected in 2014–2015.
- Segment operating income improved in North America Adhesives, Construction Products, EIMEA and Latin America Adhesives; Asia Pacific declined 6.5% to $7.4 million. Asia Pacific organic revenue declined 1.3%, with lower volume in Australia and Southeast Asia and slower growth in China.
Risks, contingencies and unusual items
- Management cited weak global demand, intense competition, petroleum- and natural-gas-derived raw-material price or supply volatility, foreign-exchange movements, and successful execution of the Forbo integration as key risks. Foreign sales were approximately 57% of revenue; currency movements reduced FY2012 revenue by $41.4 million versus FY2011.
- Environmental matters carried a $1.9 million reserve; the disclosed high-end estimate for known matters was $2.5 million. Fuller reported asbestos-related claims and insurance/indemnification issues; it considered pending matters not likely to have a material adverse effect, but noted outcomes and future costs are uncertain.
- Goodwill was $254.3 million and other intangible assets were $233.4 million. No goodwill impairment was identified in the annual test; Construction Products had the narrowest disclosed fair-value cushion, approximately 26% above carrying value.
- Pension obligations are sensitive to actuarial assumptions. The U.S. pension discount rate declined to 3.83% at year-end, and pension-related accumulated other comprehensive loss increased materially.
- At year-end, Fuller reported compliance with debt covenants and $200 million of undrawn revolving credit capacity. KPMG gave an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.
Key facts investors should verify
- How much of future growth and profitability is organic versus attributable to Forbo, and whether integration milestones, the $90 million benefit target and 15% EBITDA-margin target are achieved.
- Whether gross margins recover as expected despite acquired-business mix and raw-material costs, and whether price increases keep pace with input-cost changes.
- Whether operating cash flow supports the elevated capital-spending plan, integration outlays, dividends and debt repayment without pressure on liquidity or covenants.
- The final Forbo purchase-price allocation, remaining restructuring costs, facility closures and realized savings; the filing described the acquisition valuation as preliminary.
- Developments in environmental remediation, asbestos claims and insurance recoveries, pension funding needs, and goodwill or intangible-asset impairment assumptions.