H.B. Fuller Company — Q1 2013 Form 10-Q
Business context and reporting period
Quarter ended March 2, 2013 (13 weeks), compared with the 13 weeks ended March 3, 2012. H.B. Fuller manufactures adhesives and related products and reports five segments: North America Adhesives, Construction Products, EIMEA, Latin America Adhesives, and Asia Pacific. Results include the Forbo industrial adhesives business acquired in March 2012. The Central America Paints business, sold in August 2012, is reported as discontinued operations.
Financial performance and position
| Metric | Q1 2013 | Prior comparable period |
|---|---|---|
| Net revenue | $479.8 million | $345.5 million |
| Gross profit / margin | $133.4 million / 27.8% | $102.7 million / 29.7% |
| SG&A / revenue | $97.6 million / 20.3% | $75.0 million / 21.7% |
| Special charges | $5.3 million | $6.5 million |
| Income from continuing operations | $20.8 million | $13.6 million |
| Net income attributable to H.B. Fuller | $20.7 million | $15.3 million |
| Diluted EPS | $0.41 | $0.30 |
| Operating cash flow, continuing operations | $(11.5) million | $0.7 million |
Revenue rose 38.9%, comprising 35.3% acquisition contribution, 3.2% organic growth (1.1% pricing and 2.1% volume), and 0.4% favorable currency. Gross margin fell 190 basis points, primarily because the acquired business had lower margins. SG&A increased 30.1% in dollars but declined 140 basis points as a share of revenue. Interest expense increased 103.5% to $5.3 million, mainly due to acquisition-related borrowing. The effective tax rate was 28.0%, versus 39.9%; management cited discrete tax benefits and tax benefits related to integration charges. The 2012 period included $1.7 million of discontinued-operations income.
At March 2, 2013, cash was $163.1 million, down from $200.4 million at December 1, 2012; $148.0 million was held outside the United States. Total debt was approximately $511.0 million, and debt-to-total-capital was 39.0% (40.1% at December 1, 2012; 23.8% a year earlier). Current assets were $780.6 million and current liabilities $321.8 million. Capital spending was $19.6 million; free cash flow, as defined by the company, was negative $35.4 million. Inventory days on hand rose to 58 from 51 year over year; receivables DSO improved to 53 days from 54.
Material changes and segment trends
- Forbo added approximately $121.8 million to revenue and expanded the business materially, while weighing on consolidated and segment margins.
- North America Adhesives revenue grew 45.9% and operating income 33.4%; margin declined 130 basis points to 13.6%.
- EIMEA revenue grew 60.3%, largely from Forbo; operating income was nearly flat and margin declined 220 basis points to 3.6%. Management cited soft core European demand and acquired-business margin dilution.
- Construction Products revenue increased 4.8%; margin improved to 4.0% from 1.4%. Asia Pacific revenue increased 24.6% and margin improved to 3.3% from 1.5%. Latin America Adhesives revenue declined 0.3%, with temporary customer share losses cited.
- Cash from continuing operations shifted from $0.7 million provided to $11.5 million used. Inventory growth, incentive and severance payments, and income-tax payments contributed to the outflow.
Outlook, management commentary, risks and unusual items
Management expects approximately $90 million of annual cash cost savings and other pretax profit improvements when the Business Integration Project is complete in 2014. The project targets a 15% global EBITDA margin by 2015, compared with just under 11% in 2011; Q1 2013 EBITDA margin was 10.6%, described as consistent with plan. The company had incurred $65.3 million of estimated $121.0 million total project costs and expected another $55.7 million through 2014, including about $38.7 million in fiscal 2013. Forecast capital expenditures were $110 million in 2013 and $100 million in aggregate for 2014–2015. Management expects raw material costs to remain near Q1 exit levels through year-end and the 2013 effective tax rate to be about 30%.
Management said operating cash flows should meet liquidity and capital needs, and reported compliance with debt covenants (trailing EBITDA/interest of 10.9 against a 2.5 minimum; debt/EBITDA of 2.1 against a 3.5 maximum). Risks include integration execution, restructuring costs and capital requirements, soft or uncertain end markets, raw-material supply and price exposure, foreign-exchange and interest-rate movements, and environmental and asbestos-related claims. The company said existing environmental and legal matters were not expected to have a material adverse effect, while noting adverse developments could affect future-period results or cash flows. A 10% U.S. dollar movement was estimated to change net income by about $1.2 million; a one-percentage-point interest-rate change would affect annual interest expense by about $1.3 million.
Important facts for investors to verify
- Whether integration savings, the 2014 completion timetable, and the 15% EBITDA-margin target are achieved, and whether estimated costs and capital spending remain on plan.
- Whether acquired-business and legacy-business margins improve as manufacturing consolidation proceeds, particularly in EIMEA.
- Whether operating cash flow and working capital recover after the Q1 cash use, and how much cash held abroad is practically available for U.S. needs.
- Debt, covenant headroom, scheduled repayments, and the effect of higher interest costs on earnings and liquidity.
- Developments in environmental, asbestos, and other legal matters, including insurance and indemnification recoveries.