FULLER H B CO quarterly report, Q1 FY2020

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H.B. Fuller Company — Q1 2020 Form 10-Q

Reporting period: Three months ended February 29, 2020, compared with the three months ended March 2, 2019. Financial statements are unaudited; amounts below are in U.S. dollars. The company manufactures adhesives and reported three segments: Hygiene, Health and Consumable Adhesives (HHC), Engineering Adhesives, and Construction Adhesives. Segment structure was realigned at the start of fiscal 2020, and prior-period segment information was recast.

Financial performance and liquidity

  • Revenue: $646.6 million, down 3.9% year over year. The change comprised organic decline of 1.3% (volume down 0.2% and pricing down 1.1%, as described in the filing), a 0.9% impact from the surfactants and thickeners divestiture, and a 1.7% unfavorable currency effect.
  • Profit and margins: Gross profit was $170.3 million, down 5.3%; gross margin declined 40 basis points to 26.3%. Operating income was $28.8 million versus $34.2 million. Net income attributable to H.B. Fuller fell 19% to $9.9 million; diluted EPS was $0.19 versus $0.24. The effective tax rate was 40.4%, including $2.0 million of discrete tax expense; excluding it, the rate was 25.9%.
  • Cash flow: Operating cash flow was $34.4 million, versus $0.5 million. Capital expenditures were $32.1 million, and free cash flow after dividends, a non-GAAP measure, was negative $5.9 million versus negative $21.3 million. Working-capital changes provided $41.9 million of cash, while inventory growth used $46.9 million.
  • Cash, debt and liquidity: Cash and equivalents were $78.7 million at quarter-end, down from $112.2 million at November 30, 2019; most cash was held outside the U.S. Total short- and long-term debt was $1,973.5 million. The debt-to-total-capital ratio was 61.8%, unchanged from fiscal year-end and below 65.6% a year earlier. The company reported compliance with debt covenants; secured debt/TTM EBITDA was 3.8 against a maximum of 5.9.
  • Other balance-sheet measures: Current assets were $1,028.2 million and current liabilities were $543.3 million. Inventory increased to $381.0 million from $337.3 million at fiscal year-end. Lease adoption added approximately $28.3 million of right-of-use assets and lease liabilities at December 1, 2019.

Material changes and segment results

  • HHC revenue declined 2.3% to $312.5 million, while operating income rose 8.6% to $22.7 million and margin improved to 7.3% from 6.5%.
  • Engineering Adhesives revenue fell 5.9% to $248.9 million; operating income decreased 30.0% to $15.4 million, with margin down to 6.2% from 8.3%. The filing attributes the weakness to lower volume and pricing, unfavorable mix, and currency.
  • Construction Adhesives revenue increased 2.9% to $85.2 million. The operating loss narrowed to $1.4 million from $1.7 million.
  • SG&A decreased 2.9% to $141.5 million, reflecting savings from the business realignment. Interest expense declined 14.9% to $22.8 million, mainly due to lower U.S. debt balances.

Outlook, risks and unusual items

  • Management said operating cash flow should be adequate for ongoing liquidity and capital needs and that the company expects access to debt financing. It stated it could meet fiscal 2020 contractual obligations. No specific revenue or earnings guidance was provided in this filing.
  • The company warned that COVID-19 could disrupt raw-material supply, production, transportation, delivery, and demand. As of the filing, the effects could not be estimated and could materially adversely affect results and financial condition.
  • The 2020 restructuring plan is expected to cost $9.0–$11.0 million, all cash costs, and be completed by mid-fiscal 2021. The company reported $9.8 million of costs incurred under the plan as of February 29, 2020. The Royal Adhesives restructuring plan was substantially complete.
  • Potential OFAC penalties related to historical customer resales of hygiene products into Iran were estimated at zero to $10.0 million; the company had submitted its investigation findings and had not received an OFAC response. The sales ceased in fiscal 2018, and the company said it does not conduct business in Iran.
  • Environmental remediation reserves were $7.9 million, including $4.1 million for a CERCLA-designated South Carolina facility. The company also disclosed asbestos and other legal matters; it did not expect pending matters to have a material adverse effect based on information then available, while noting future developments could affect results or cash flow.
  • Other notable items included an acquisition of D.H.M. Adhesives for approximately $9.5 million, with up to approximately $8.1 million of contingent consideration, and the recognition of a $2.0 million discrete tax expense. The company adopted lease accounting in the quarter without a material income-statement effect.

Important facts for investors to verify

  • Whether COVID-19 materially affected subsequent demand, operations, supply chains, or the company’s outlook after the reporting date.
  • Engineering Adhesives’ sales and margin trends, and whether the reported price, volume, mix, and currency pressures persisted.
  • Cash conversion and working-capital movements, especially inventory growth, capital spending, and free cash flow after dividends.
  • Debt levels, covenant headroom, refinancing needs, and the availability of cash held outside the U.S.
  • Final D.H.M. purchase accounting and contingent consideration, restructuring costs, and the outcome of the OFAC inquiry and environmental matters.