FULLER H B CO quarterly report, Q2 FY2024

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H.B. Fuller Company — Q2 2024 Form 10-Q

Reporting period: Three and six months ended June 1, 2024; comparative periods ended June 3, 2023. Amounts below are in U.S. dollars unless noted.

Business context and results

H.B. Fuller manufactures adhesives and related products, reported in Hygiene, Health and Consumable Adhesives; Engineering Adhesives; and Construction Adhesives. Q2 revenue growth included the contribution of recent acquisitions, including ND Industries, acquired May 20, 2024.

  • Q2: Revenue was $917.1 million, up 2.1%; organic revenue was down 0.1%. Net income attributable to H.B. Fuller was $51.3 million versus $40.4 million, and diluted EPS was $0.91 versus $0.73.
  • First six months: Revenue was $1,727.5 million, up 1.2%; organic revenue was down 2.0%. Net income attributable to H.B. Fuller was $82.3 million versus $62.3 million, and diluted EPS was $1.45 versus $1.12.

Financial position, cash flow and liquidity

  • Margins: Q2 gross margin was 30.8%, up 2.2 percentage points year over year; six-month gross margin was 30.2%, up 2.6 points. Lower raw-material costs supported improvement, partly offset by lower pricing. Q2 operating income was $100.6 million versus $90.2 million; six-month operating income was $167.5 million versus $150.4 million.
  • Cash flow: Six-month operating cash flow was $129.0 million versus $108.4 million. Capital expenditures were $90.2 million, and acquisitions used $254.3 million net of cash acquired. The filing reports free cash flow of $38.8 million in its reconciliation, but a separate selected-metrics table lists $38.8 million for 2024 and $4.5 million for 2023, while the reconciliation reports $25.8 million for 2023.
  • Debt and liquidity: Cash was $114.8 million, down from $179.5 million at fiscal year-end. Total short- and long-term debt was $2,024.9 million, up from $1,838.4 million; debt-to-total-capital was 53.0%, versus 51.1%. The current ratio was approximately 1.9. Management said operating cash flow and borrowing capacity should be adequate for liquidity and capital needs.
  • Credit metrics: The company reported covenant results of 2.3x secured debt to trailing-twelve-month EBITDA against a 4.75x maximum, and 5.0x EBITDA to interest expense against a 2.0x minimum. The secured leverage maximum steps down to 4.50x for quarters ending after June 1, 2024.

Material changes and management commentary

  • Revenue growth reflected acquisitions and volume, offset by lower pricing and adverse currency effects. Q2 price decreased 3.4%, volume increased 3.3%, acquisitions contributed 3.9%, and currency reduced revenue 1.7%.
  • Construction Adhesives revenue increased 16.1% in Q2 and segment operating income rose to $10.4 million from $6.0 million. Engineering Adhesives revenue increased 2.6% and operating income rose 16.7% to $51.8 million. Hygiene, Health and Consumable Adhesives revenue fell 2.8% and operating income declined 2.1% to $50.5 million.
  • ND Industries was acquired for a base purchase price of $255.7 million, funded with credit-facility borrowings and cash. Its preliminary purchase-price allocation includes $89.8 million of goodwill and $129.8 million of acquired intangibles.
  • On March 4, 2024, the company refinanced and increased its Term B loans to $994 million and reduced the SOFR margin by 25 basis points to 200 basis points. The Term B loan rate was 7.33% at June 1, 2024; maturity remains February 2030.
  • Restructuring plans are expected to cost $39.1–$44.1 million pre-tax and are expected to run through fiscal 2026. The company had incurred $37.1 million through June 1, 2024.

Risks, contingencies and unusual items

  • Key exposures include interest rates, foreign exchange, raw-material prices, integration of acquisitions, and the ability to realize planned restructuring and acquisition benefits. Management reported no material change in market risks or previously disclosed risk factors.
  • Environmental remediation liabilities were $4.4 million. The company also faces asbestos-related claims and other ordinary-course litigation. It reported that these matters were not expected to have a material adverse effect, but noted that adverse developments or settlements could affect future periods.
  • A property-damage lawsuit concerning alleged defects in grout remains pending; the company could not estimate a possible loss or range and recorded no loss contingency.
  • Foreign-currency translation reduced six-month other comprehensive income by $46.3 million. The company reported disclosure controls as effective and no material change in internal control over financial reporting.

Important facts for investors to verify

  1. Reconcile the 2023 free-cash-flow comparison: the filing’s selected-metrics table gives $4.5 million, whereas its free-cash-flow reconciliation gives $25.8 million.
  2. Review the final ND Industries purchase-price allocation, integration costs, and the acquisition’s contribution to future organic growth and margins.
  3. Monitor debt levels, variable-rate exposure, covenant headroom after the leverage-limit step-down, and cash generation relative to acquisition and capital-spending needs.
  4. Assess whether pricing pressure, segment-level revenue trends, and currency movements offset continued raw-material cost benefits.
  5. Track restructuring spending against the remaining expected cost range and monitor developments in the grout litigation, asbestos claims, and environmental matters.