FULLER H B CO quarterly report, Q2 FY2012

H.B. Fuller Company — Q2 2012 Form 10-Q

Reporting period: 13 weeks ended June 2, 2012; year-to-date figures cover 26 weeks. Comparisons are with the periods ended May 28, 2011 unless noted. Amounts below are in millions of U.S. dollars, except per-share data and percentages.

Business context

H.B. Fuller manufactures adhesives and related products. On March 5, 2012, it acquired Forbo Holding AG’s global industrial adhesives and synthetic polymers business for $404.7 million. The acquired operations were included in four segments from the acquisition date. The company also agreed to sell its Central America Paints business; the sale was expected to close in Q3 2012, and its results were classified as discontinued operations.

Financial performance

Metric13 weeks ended June 2, 201226 weeks ended June 2, 2012Comparable 2011 period
Net revenue$527.0; up 43.1%$872.4; up 28.4%$368.4 quarter; $679.5 year to date
Gross profit / margin$136.6 / 25.9%$239.2 / 27.4%$103.0 / 28.0%; $188.6 / 27.8%
Segment operating income$43.6$71.3$32.8; $50.4
Special charges, net$32.1$38.6None in 2011 comparable periods
Income from continuing operations$5.1$18.7$24.2; $35.9
Net income attributable to H.B. Fuller$1.9; diluted EPS $0.04$17.2; diluted EPS $0.34$25.1 / $0.50; $39.5 / $0.79

Q2 organic revenue growth was 6.1%: pricing contributed 6.8%, while volume declined 0.7%; acquisition added 39.4% and currency reduced growth by 2.4%. Year-to-date organic growth was 8.6% (pricing +8.2%, volume +0.4%); acquisition added 21.4% and currency reduced growth by 1.6%.

Q2 gross margin fell 210 basis points, principally because the acquired business had lower margins; legacy-business gross margin improved 140 basis points. Year-to-date gross margin declined 40 basis points, while legacy-business gross margin improved 170 basis points. SG&A was $93.0 million in Q2 and $168.0 million year to date; as a share of revenue it declined to 17.6% and 19.3%, respectively.

Interest expense rose to $5.7 million for Q2 and $8.4 million year to date, mainly reflecting acquisition financing. Q2 income included a $3.1 million after-tax loss from discontinued operations; year-to-date discontinued operations recorded a $1.3 million loss. These results included an expected $5.8 million tax expense from structural changes associated with the planned sale.

Cash flow, debt and liquidity

  • Cash from continuing operations was $34.8 million for the first 26 weeks, versus $22.0 million in 2011. Capital spending was $12.5 million and dividends paid were $8.0 million; reported year-to-date free cash flow was $14.3 million.
  • Investing activities used $416.9 million, including $404.7 million for the Forbo acquisition. Financing activities provided $380.9 million, including $490.0 million of long-term debt proceeds and $103.1 million of debt repayments.
  • Cash and cash equivalents were $154.3 million at June 2, 2012, of which $142.2 million was held outside the U.S. Total debt was $616.8 million, versus $232.3 million at December 3, 2011. The debt-to-total-capital ratio increased to 46.8% from 24.8% at year-end.
  • Net working capital was 17.5% of annualized revenue; DSO was 53 days and inventory days on hand were 53. The company reported compliance with debt covenants: trailing EBITDA/interest was 15.9 against a minimum of 2.5, and indebtedness/trailing EBITDA was 2.6 against a maximum of 3.5.
  • Management said operating cash flow should meet ongoing liquidity and capital needs and expected to use proceeds from the planned business sale to reduce debt. Scheduled term-loan payments of $7.5 million in June and $9.4 million in September 2012 were expected to be paid with existing cash.

Changes, outlook and notable items

  • The Forbo acquisition contributed $144.4 million of Q2 revenue and $1.4 million of segment operating income. Purchase-price allocation remained preliminary; the company expected to complete valuation in Q3 2012.
  • The Business Integration Project combines Forbo integration with EIMEA restructuring. Management estimated $121 million in total costs, including $46.1 million incurred since project inception, and projected $90 million in annual cash savings and other pre-tax profit improvements when initiatives are completed in 2014. It targeted raising global EBITDA margin from just under 11% in 2011 to 15% by 2015. These are estimates, not guaranteed outcomes.
  • Plans included closing three additional European production facilities and six North American facilities. Project costs and savings depend on restructuring and integration execution; expected capital spending was about $65 million annually in 2012–2014, above the approximately $50 million annual level described for the combined businesses.
  • Management expected raw-material inflation to abate for the rest of fiscal 2012 and costs to remain around Q2 levels. It cited ongoing supply-demand and feedstock risks, and noted weak end-market demand in some regions. Currency, interest-rate and raw-material exposures could affect results.
  • Q2 included a $0.7 million impairment of a cost-basis investment. Environmental remediation reserves were $1.9 million, with a stated high end of $2.5 million for known matters. Asbestos and other litigation remained subject to uncertainty; management did not expect pending matters to have a material adverse effect based on available information.
  • Disclosure controls were assessed as effective, but the recently acquired Forbo business—about 28% of total assets—was excluded from the internal-control assessment in this acquisition year.

Most important facts for investors to verify

  • Whether Forbo integration delivers the stated savings, margin targets and schedule, and how actual costs compare with the $121 million estimate.
  • Whether the acquired business’s lower margins improve and legacy-business pricing continues to offset raw-material costs.
  • Debt reduction, covenant headroom, interest costs and the use and timing of proceeds from the Central America Paints sale.
  • Completion of the Forbo purchase-price valuation and any resulting changes to goodwill, intangibles or reported earnings.
  • Final sale terms and tax effects, including the treatment and realizability of foreign tax credits.
  • Developments in environmental remediation, asbestos claims and insurance or indemnification recoveries.