H.B. Fuller Company — FY2023 Form 10-K
Business context and period. H.B. Fuller formulates and manufactures adhesives and specialty chemical products, operating in 35 countries. This annual report covers the fiscal year ended December 2, 2023 (52 weeks), compared with the year ended December 3, 2022 (53 weeks). Its reportable segments are Hygiene, Health and Consumable Adhesives; Engineering Adhesives; and Construction Adhesives.
Key financial results
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net revenue | $3,510.9 million | $3,749.2 million | -6.4% |
| Gross profit / margin | $1,008.9 million / 28.7% | $963.7 million / 25.7% | Margin +300 bps |
| Segment operating income | $355.1 million | $322.7 million | +10.0% |
| Net income attributable to H.B. Fuller | $144.9 million | $180.3 million | -19.6% |
| Diluted EPS | $2.59 | $3.26 | Down $0.67 |
| Cash from operating activities | $378.4 million | $256.5 million | +$121.9 million |
| Capital expenditures | $119.1 million | $130.0 million | -$10.9 million |
| Cash and cash equivalents | $179.5 million | $79.9 million | +$99.5 million |
| Total short- and long-term debt | $1,838.4 million | $1,765.1 million | +$73.3 million |
Free cash flow after dividends, a company-defined non-GAAP measure, was $215.9 million, up from $87.3 million. The company reports net working capital at 16.1% of annualized revenue, DSO of 58 days, inventory days of 67, and a debt capitalization ratio of 51.1%. The $700 million revolving facility had no borrowings outstanding; approximately $690 million was available after letters of credit. The company was in compliance with its stated debt covenants at year-end.
Material changes and segment performance
- Revenue fell 6.4%, reflecting an 8.4% decline in volume, a 2.4% adverse currency impact and the absence of the prior year’s extra week. Acquisitions added 3.3% and pricing added 2.9%.
- Lower raw-material costs and higher pricing lifted gross margin by 300 basis points, despite weaker volume. SG&A rose 2.0% to $653.8 million, including higher restructuring and acquisition-related costs.
- Interest expense increased to $134.6 million from $91.5 million, primarily due to higher debt balances and interest rates. The effective tax rate was 39.9%, including $26.1 million of discrete tax expense; excluding those items, it was 28.8%.
- Hygiene, Health and Consumable Adhesives revenue declined 5.6%, while segment operating income rose 29.7% to $215.1 million. Engineering Adhesives revenue fell 6.8%, while operating income increased 11.0% to $187.3 million. Construction Adhesives revenue fell 7.7%, and operating income dropped 73.9% to $6.0 million; its segment margin was 1.2%.
- Cash from operations improved partly due to working-capital movements, which provided $83.5 million versus using $103.2 million in FY2022. Investing cash outflow was $319.2 million, including $205.1 million for acquired businesses.
Outlook, management commentary and risks
- Management expects FY2024 capital expenditures of approximately $140 million and believes operating cash flow will meet short- and long-term liquidity and capital needs. The filing does not provide a specific FY2024 revenue or earnings forecast.
- FY2023 restructuring plans are expected to cost $39.1–$44.1 million pre-tax, with $27.0 million incurred by year-end. Implementation is expected to continue through FY2026; most charges and cash payments are expected in FY2023 and FY2024.
- Project ONE ERP implementation continues across North America, EIMEA, Brazil and Asia Pacific. Total project costs are estimated at $240–$260 million; management cautions that the final investment could exceed that estimate. SAP S/4HANA implementation is anticipated at the beginning of FY2025.
- Raw materials represented approximately 75% of cost of sales. Management estimates a hypothetical 1% change in raw-material costs would change net income by about $13.3 million, or $0.24 per diluted share. A 1-percentage-point change in rates on variable-rate debt, net of swaps, would change net income by about $5.3 million.
- Goodwill was $1.49 billion. No impairment was recorded, but Construction Adhesives goodwill of $432.8 million had only an 8% fair-value cushion over carrying value; the filing says a 10-basis-point increase in discount rate or a 10% decrease in long-term growth rates would push fair value below carrying value.
- Environmental remediation liabilities were $5.0 million; management says known matters are not expected to have a material adverse effect, while acknowledging uncertainty and possible future-period impacts. FY2023 asbestos settlements were $4.2 million, with $2.4 million of insurance payments received or expected. Management likewise does not expect pending litigation to have a material adverse effect based on currently available information.
- Other key risks include weak demand and competition, raw-material supply and price volatility, foreign exchange, cybersecurity, ERP execution, acquisitions and integration, leverage and interest costs, geopolitical disruption, regulation, product liability and tax uncertainty. Approximately 56% of FY2023 revenue was generated outside the United States.
Most important facts for investors to verify
- Whether sales volumes and organic revenue stabilize, especially in Construction Adhesives, and whether pricing continues to offset cost pressure.
- Whether Construction Adhesives recovers its low margin and whether its goodwill valuation assumptions remain supportable.
- How higher interest expense, debt levels and covenant headroom evolve; verify the effects of floating-rate exposure and mandatory excess-cash-flow repayments.
- Whether the projected restructuring savings justify remaining charges and cash costs, and whether ERP implementation stays within budget and avoids disruption.
- How much of the asbestos settlement costs are ultimately borne by H.B. Fuller versus insurers or indemnifying parties, and whether environmental or other legal exposures change.
- Whether cash generation, working-capital improvements and acquisition integration support the stated liquidity and capital-spending outlook.
Assurance: Ernst & Young LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The audit identified Construction Adhesives goodwill valuation as a critical audit matter.