H.B. Fuller Company — Q2 2023 Form 10-Q
Business context and reporting period. H.B. Fuller is a global adhesives business with Hygiene, Health and Consumable Adhesives, Engineering Adhesives, and Construction Adhesives segments. This unaudited quarterly report covers the three and six months ended June 3, 2023; comparisons are with the periods ended May 28, 2022. Unless noted, figures below are in U.S. dollars.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $898.2m | $993.3m | $1,707.4m | $1,849.7m |
| Gross profit | $256.8m | $253.5m | $471.6m | $466.4m |
| Gross margin | 28.6% | 25.5% | 27.6% | 25.2% |
| Operating income | $90.2m | $87.5m | $150.4m | $144.5m |
| Net income attributable to H.B. Fuller | $40.4m | $47.2m | $62.3m | $85.5m |
| Diluted EPS | $0.73 | $0.86 | $1.12 | $1.55 |
| Interest expense | $33.1m | $19.8m | $66.2m | $38.0m |
Revenue fell 9.6% in Q2 and 7.7% in the first half. Management attributed the declines to lower sales volume and unfavorable currency effects, partly offset by higher pricing and acquisitions. Q2 revenue effects were volume -14.2%, currency -3.4%, pricing +5.9%, and acquisitions +2.1%; first-half effects were -12.6%, -4.1%, +7.0%, and +2.0%, respectively. Gross margin improved 310 basis points in Q2 and 240 basis points for the half, primarily from pricing, partly offset by raw-material costs and lower volume. Despite higher gross profit and operating income, net income and EPS declined, with higher interest expense a notable factor.
Segments: Q2 revenue and operating income were Hygiene, Health and Consumable Adhesives $404.5m and $51.6m; Engineering Adhesives $364.1m and $44.4m; Construction Adhesives $129.7m and $6.0m. For the first half, the respective operating results were $96.7m, $76.9m, and a $3.7m loss. Construction Adhesives was the weakest segment, with first-half revenue down 15.5% and a segment operating loss versus income of $15.6m in the prior period.
Cash flow, debt and liquidity
- Six-month operating cash flow was $108.4m, compared with cash used of $9.1m a year earlier. The improvement reflected a $54.9m cash source from receivables, inventory, and payables, versus a $103.7m use in the prior period.
- Capital expenditures were $82.6m and dividends paid were $21.3m, leaving free cash flow after dividends of $4.5m, a non-GAAP measure; the prior-year figure was negative $97.2m.
- Cash and equivalents were $103.2m at June 3, 2023, versus $79.9m at December 3, 2022. Current assets were $1,318.0m and current liabilities $660.8m.
- Total short- and long-term debt was $1,882.3m, versus $1,765.1m at fiscal year-end. The debt-to-total-capital ratio was 52.8%, compared with 52.3% at year-end and 54.5% a year earlier.
- The company refinanced its facilities in February 2023, establishing $500m Term Loan A, $800m Term Loan B, and a $700m revolving facility. No revolver borrowings were outstanding; letters of credit reduced availability by $10.0m. Term Loan A and the revolver generally bore 6.99% at quarter-end, and Term Loan B 7.64%. Interest-rate swaps fixed rates on $800m of variable-rate debt at approximately 3.7%–3.9%.
- At June 3, the company reported covenant results of 2.3x secured debt to trailing-12-month EBITDA against a maximum of 4.75x, and 4.7x EBITDA to consolidated interest expense against a minimum of 2.0x.
Material developments, outlook and risks
- Acquisitions: The company acquired Beardow Adams for approximately $99.4m on May 1, 2023, funded with credit-facility borrowings, and acquired Aspen Research for $9.9m in January. Management expects the acquisitions to support growth and expand capabilities. After quarter-end, it completed acquisitions of XChem for approximately $12.3m and Adhezion Biomedical for approximately $80.0m, with up to $15m of contingent consideration for Adhezion.
- Restructuring: A plan approved in March is expected to cost $15m–$20m pre-tax, including $13.8m–$15.0m in cash severance and related employee costs. The company had incurred $8.5m by June 3 and expects completion in fiscal 2025, with most charges and cash payments in 2023 and 2024.
- Outlook: The filing provides no quantified revenue or earnings guidance. Management stated it believes operating cash flows will meet ongoing liquidity and capital spending needs and that financing should remain available for the foreseeable future. These are expectations, not guarantees.
- Risks and contingencies: Key exposures include interest rates, foreign exchange and raw-material prices; debt covenants and higher financing costs; and lower sales volumes. The company recorded $5.5m for probable environmental remediation costs. Asbestos-related claims remain a contingency; third-party indemnification and insurance have historically covered a significant share, though some insurers are insolvent. Management did not expect these matters, based on information available, to have a material adverse effect, but adverse developments could affect future results or cash flows.
- The company reported effective disclosure controls and no material changes in internal control during the quarter. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether volume trends—particularly in Construction Adhesives—and pricing can stabilize revenue and sustain improved gross margins.
- Whether acquisition integration and expected synergies offset acquisition-related costs and added debt.
- Progress and cash costs of the restructuring plan against the $15m–$20m estimate and fiscal 2025 completion target.
- Debt balances, interest costs, covenant headroom, and the effect of variable rates despite hedges.
- Cash conversion and capital spending, including whether free cash flow after dividends remains positive.
- Developments in environmental and asbestos matters, including the extent of recoveries from insurers and indemnitors.