H.B. Fuller Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 4, 2017; comparisons are with the three months ended February 27, 2016. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2017 | Prior-year period | Change |
|---|---|---|---|
| Revenue | $503.3 | $474.3 | +6.1% |
| Gross profit / margin | $139.0 / 27.6% | $137.6 / 29.0% | Profit +1.0%; margin down 1.4 percentage points |
| Segment operating income | $26.1 | $37.8 | Down 31.1% |
| Net income attributable to H.B. Fuller | $14.8 | $18.9 | Down 21.8% |
| Diluted EPS | $0.29 | $0.37 | Down $0.08 |
| Operating cash flow | $16.5 | $42.6 | Down $26.1 |
SG&A increased 13.2% to $112.9; as a share of revenue, it rose to 22.4% from 21.0%. Interest expense increased 32.8% to $8.4. The reported effective tax rate was 31.5%, versus 33.6%; excluding specified discrete and restructuring-related items, management reported an adjusted rate of 29.7%.
At March 4, 2017, cash was $116.5, total debt was $804.8, and total equity was $949.8. Total debt to total capital was 45.9%, compared with 42.8% at December 3, 2016 and 44.9% a year earlier. Current assets were $832.0 and current liabilities were $325.1. Free cash flow, as defined by the company, was negative $10.5, versus positive $12.7 in the prior-year quarter.
Material changes and business developments
- Revenue growth included 11.9% growth attributed to sales volume, including 3.2% from acquisitions; unfavorable mix reduced growth by 2.2%, pricing by 0.1%, and currency by 3.5%. Constant-currency growth was 9.6%.
- Revenue grew most in Engineering Adhesives (+25.9%) and Asia Pacific (+16.3%); Construction Products declined 5.0%. Segment operating income fell in Americas Adhesives, EIMEA, Asia Pacific and Construction Products, while Engineering Adhesives income increased 134.1% to $2.1.
- Gross margin declined primarily because of higher raw-material costs and the 2017 Restructuring Plan. Management attributed higher SG&A mainly to acquisitions, restructuring and variable compensation.
- On January 27, 2017, the company acquired substantially all assets of Wisdom Adhesives for $123.3, funded through revolving-credit borrowings. The preliminary allocation included $60.3 of goodwill; purchase accounting remained subject to completion.
- The company issued $300.0 of 4.000% notes due 2027. Proceeds were used to repay revolving-credit borrowings and prepay term debt. Interest-rate swaps convert $150.0 of the notes to a floating rate.
Cash, debt and liquidity
Investing activities used $144.3, including $123.3 for Wisdom Adhesives and $19.9 for capital expenditures. Financing activities provided $101.8, primarily reflecting debt issuance and borrowing, partly offset by debt repayments. Cash declined by $25.7 during the quarter. Inventory growth used $32.6 of operating cash, partly offset by a $24.0 source from trade payables.
Management said operating cash flows should be adequate for ongoing liquidity and capital spending and that the company expects access to short- and long-term debt. It reported compliance with debt covenants at quarter-end: trailing EBITDA to interest expense was 9.2 against a minimum of 2.5, and indebtedness to trailing EBITDA was 2.9 against a maximum of 3.5.
Outlook, risks and unusual items
- The company provided no specific revenue or earnings guidance in the supplied filing text. Its 2017 Restructuring Plan is expected to cost $17–$20 million pretax ($13–$16 million after tax) and be completed by mid-fiscal 2018. Approximately $15–$16 million is expected to be cash costs. Q1 included a $10.2 million pretax charge.
- Management cited raw-material price and availability exposure, foreign-exchange risk, interest-rate risk, and sensitivity to economic conditions and consumer spending. Approximately 59% of Q1 revenue was generated outside the United States. A hypothetical 1% raw-material cost change was estimated to affect net income by about $1.9 million; a one-percentage-point interest-rate change by about $2.3 million.
- A Latin American functional-currency change, effective December 4, 2016, contributed an $11.3 million cumulative translation adjustment to Q1 other comprehensive loss. Total other comprehensive loss was $8.8 million.
- The company reported environmental matters, ordinary-course legal claims and asbestos litigation. It said currently available information did not indicate a material adverse effect, while noting that adverse developments or settlements could affect results or cash flows in future periods. Q1 asbestos settlements totaled $0.8 million, with $0.7 million of insurance payments received or expected.
- Management stated that disclosure controls were effective. The assessment of internal controls excluded the recently acquired Wisdom Adhesives business, which represented approximately 6% of assets at quarter-end.
Important facts for investors to verify
- Whether the restructuring plan delivers its expected savings and stays within the $17–$20 million pretax cost estimate.
- Whether margin and segment profitability recover as raw-material costs, acquisition integration and restructuring effects evolve.
- How acquisition financing and the higher debt balance affect interest expense, leverage and covenant headroom.
- Whether working-capital needs, particularly inventory, continue to weigh on operating cash flow and free cash flow.
- The final Wisdom Adhesives purchase-price allocation and any material changes to reported goodwill or intangible assets.
- Developments in foreign-exchange exposure, environmental matters and asbestos claims, including insurance recoveries.