H.B. Fuller Company — FY2013 Form 10-K
Business context and reporting period. H.B. Fuller manufactures and markets adhesives, sealants and specialty chemicals globally. This annual report covers the fiscal year ended November 30, 2013; the filing also presents unaudited fourth-quarter results. The company reorganized its reporting into four segments: Americas Adhesives, Construction Products, EIMEA and Asia Pacific. It acquired Brazilian adhesives maker Plexbond for $10.2 million in June 2013.
Key financial metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net revenue | $2,047.0 million | $1,886.2 million |
| Gross profit / margin | $570.2 million / 27.9% | $517.3 million / 27.4% |
| Income from continuing operations | $96.0 million | $68.3 million |
| Diluted EPS from continuing operations | $1.87 | $1.34 |
| Net income attributable to H.B. Fuller | $96.8 million | $125.6 million |
| Operating cash flow from continuing operations | $132.7 million | $108.6 million |
| Capital expenditures | $124.3 million | $35.9 million |
| Cash and cash equivalents at year-end | $155.1 million | $200.4 million |
| Total debt, including current maturities | $492.9 million | $520.2 million |
| Net financial debt | $337.8 million | $319.8 million |
FY2013 revenue rose 8.5%; acquisitions contributed 6.5 percentage points, while organic growth was 1.6% (pricing +0.1%, volume +1.5%). SG&A was $374.7 million, or 18.3% of revenue, versus 18.8% in 2012. The effective tax rate was 31.3%, versus 34.0%. Company-defined free cash flow, after capital spending and dividends, was negative $10.9 million, compared with positive $56.3 million.
Total net income fell from 2012 despite higher continuing-operations income, primarily because 2012 included $57.6 million of discontinued-operations income, including a $51.1 million after-tax gain on the sale of Central America Paints. FY2013 diluted EPS including discontinued operations was $1.89, versus $2.48.
Fourth quarter: Revenue was $533.5 million versus $513.3 million in Q4 2012. Gross profit was $145.7 million versus $143.7 million; continuing-operations income was $22.0 million versus $25.0 million; diluted continuing-operations EPS was $0.42 versus $0.49. Q4 special charges were $16.1 million, compared with $9.2 million.
Material changes and segment performance
- FY2013 gross margin increased 50 basis points, attributed mainly to acquisition synergies and Business Integration Project benefits. SG&A as a share of revenue declined 50 basis points through cost controls and integration savings.
- Segment operating income increased to $195.5 million from $162.5 million. Americas Adhesives revenue was $902.6 million and segment operating income $123.3 million; Construction Products was $158.6 million and $10.9 million; EIMEA was $733.2 million and $51.5 million; Asia Pacific was $252.6 million and $9.8 million.
- Construction Products and Asia Pacific posted organic growth of 7.8% and 6.5%, respectively. EIMEA organic revenue declined 1.5%, as soft European demand and integration-related volume disruption offset growth in emerging markets. North American demand was generally flat; Asian growth was strongest in China.
- FY2013 special charges were $45.1 million, primarily for restructuring and integration, versus $52.5 million in 2012. After tax, FY2013 charges reduced net income by $35.3 million and diluted EPS by $0.69.
Liquidity, debt and investment
Operating cash flow improved year over year, but capital expenditures rose substantially to $124.3 million, largely for the Business Integration Project and Project ONE ERP implementation. Working capital was 16.5% of annualized revenue versus 17.8%; receivables days were 55 versus 56, and inventory days remained 53. The company had $200 million available and undrawn on its revolving credit facility, expiring in 2017, and reported compliance with debt covenants. Covenant ratios were 13.1 times interest coverage against a 2.5 minimum and 2.0 times debt to trailing EBITDA against a 3.5 maximum.
Management said operating cash flow should be adequate for ongoing liquidity and capital needs. FY2014 capital expenditures were projected at approximately $105 million, including $45 million for ongoing operations, $20 million for Project ONE and about $40 million to complete the Business Integration Project.
Outlook, commentary and risks
- For FY2014, management expected revenue growth at the low end of its long-term 5%–8% target, raw-material costs similar to 2013, higher gross margin and SG&A growth below revenue growth. Full-year EBITDA margin was expected to be approximately 14%.
- Long-term objectives remained 5%–8% annual organic revenue growth, 15% EBITDA margin and 15% ROIC by 2015, and 15% annual EPS growth. FY2013 EBITDA margin was 12.4%, versus 11.5% in 2012. Management expected the integration project to deliver $90 million of annual cash savings and other pre-tax profit improvements when completed in 2014; total project costs were estimated at $125 million, with $105.1 million incurred through year-end 2013.
- Project ONE was expected to cost approximately $60 million in capital expenditures in total; $22.1 million had been spent through FY2013, with phased implementation targeted for completion by the end of FY2016.
- Key exposures include volatile petroleum- and natural-gas-based raw materials, foreign exchange, competitive pricing, economic weakness in end markets, and execution risks in the Forbo integration and ERP rollout. A 10% hypothetical U.S. dollar change was estimated to alter net income by about $6.4 million; a one-percentage-point rate change on variable-rate debt was estimated to affect annual interest expense by about $1.1 million.
- The company reported environmental remediation matters and asbestos litigation. Management did not expect pending matters to have a material adverse effect based on currently available information, but noted future settlements or adverse developments could affect results or cash flows. Estimated environmental compliance expenditures over the next two years were approximately $12.5 million, including $1.3 million of capital spending. In 2013, six asbestos cases were settled for $0.4 million; $0.3 million was received or expected from insurance.
Most important facts for investors to verify
- Whether the expected $90 million of integration benefits and the 2014 completion timeline are achieved, and how recurring savings compare with the $125 million total estimated project cost.
- Whether the approximately $105 million FY2014 capital plan, including Project ONE and integration spending, is funded without weakening liquidity or increasing debt materially.
- Whether organic growth improves as forecast, particularly in EIMEA, and whether 2013 revenue growth remains acquisition-dependent.
- How the negative company-defined free cash flow, lower cash balance and higher net financial debt trend after the elevated FY2013 investment program.
- Whether raw-material pricing, foreign currency changes, environmental obligations, asbestos coverage and the ERP implementation create costs or disruption beyond current estimates.