Business context and reporting period
H.B. Fuller Company filed this Form 10-K for fiscal 2021, ended November 27, 2021; it is an annual report, not a standalone fourth-quarter report. The company formulates, manufactures and sells adhesives, sealants and specialty chemicals globally through Hygiene, Health and Consumable Adhesives; Engineering Adhesives; and Construction Adhesives.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net revenue | $3,278.0 million | $2,790.3 million |
| Gross profit / margin | $845.3 million / 25.8% | $756.7 million / 27.1% |
| Operating income, as reported for segments and corporate unallocated | $252.6 million | $218.3 million |
| Net income attributable to H.B. Fuller | $161.4 million | $123.7 million |
| Diluted earnings per share | $2.97 | $2.36 |
| Cash flow from operating activities | $213.3 million | $331.6 million |
| Capital expenditures | $96.1 million | $87.3 million |
| Cash and cash equivalents at year-end | $61.8 million | $100.5 million |
| Total debt, including notes payable | $1,616.5 million | $1,773.9 million |
Revenue grew 17.5%, comprising 15.2% organic growth (volume and pricing) and a 2.3% favorable currency effect. Raw material costs rose 22.6%, faster than revenue, and gross margin contracted 130 basis points. Operating cash flow fell primarily as working capital absorbed cash: receivables and inventory used $124.8 million and $135.4 million, respectively, partly offset by a $176.3 million source from payables. Free cash flow after capital expenditures and dividends, a non-GAAP measure, was $82.3 million versus $210.8 million.
Year-end long-term debt was $1,591.5 million; the $400 million revolving facility was undrawn, with approximately $391.3 million available after letters of credit. Net financial liabilities were $1,563.5 million, and the debt capitalization ratio was 50.2%, down from 56.1%. The company reported compliance with debt covenants; its leverage ratio for covenant purposes was 2.2 against a maximum of 5.9, and interest coverage was 5.8 against a minimum of 2.0.
Material changes versus the prior comparable period
- All three segments reported revenue growth: Engineering Adhesives +26.1%, Construction Adhesives +17.4%, and Hygiene, Health and Consumable Adhesives +10.5%. Engineering delivered the largest increase in segment operating income, up 30.7% to $135.9 million.
- Segment operating margins were mixed: Hygiene, Health and Consumable Adhesives declined to 9.4% from 9.8%; Engineering Adhesives rose to 9.9% from 9.6%; Construction Adhesives rose to 3.3% from 3.0%.
- Net income increased 30.5%, supported by higher revenue, higher other income and lower interest expense. Higher raw material and operating costs and higher income tax expense were partial offsets.
- Interest expense declined to $78.1 million from $86.8 million, reflecting lower U.S. debt balances and interest rates. The effective tax rate rose to 29.1% from 26.5%; excluding discrete tax items, it was 27.1% versus 25.8%.
- Year-end inventory days increased to 65 from 55 and receivables days sales outstanding increased to 62 from 60. Cash declined by $38.7 million during FY2021.
Outlook, commentary, risks and unusual items
- Management cited pandemic-related disruption, supply-chain constraints, labor shortages and raw material inflation as continuing uncertainties. Raw materials represented about 75% of cost of sales; management estimated a hypothetical 1% change in raw material costs would change net income by approximately $13.2 million, or $0.24 per diluted share.
- The filing provides no specific FY2022 revenue or earnings guidance. Management expected FY2022 capital expenditures of $100 million to $110 million and estimated no mandatory excess-cash-flow debt prepayment for FY2022. It stated operating cash flow should meet liquidity and capital needs.
- Project ONE, the enterprise systems implementation, had incurred about $133 million through FY2021; total estimated expenditure was $170 million to $185 million, and management cautioned that total costs could exceed the estimate. Implementation is expected to continue in FY2022 and beyond. The 2020 restructuring plan was expected to conclude in FY2022; total costs were estimated at approximately $20 million.
- Notable FY2021 items included a $32.1 million defined-benefit pension benefit within other income, gains related to legal-entity mergers and a Brazilian tax legal settlement, and $0.8 million of restructuring charges. These items affect comparability of reported results.
- Goodwill totaled $1.30 billion, including $311 million for Construction Adhesives. No impairment was recorded; the Construction Adhesives reporting unit was a critical audit matter, reflecting valuation sensitivity to forecasts and discount-rate assumptions.
- Environmental remediation liabilities were $6.6 million. The company also faces asbestos and other claims; management said currently known matters were not expected to have a material adverse effect, while acknowledging possible adverse developments or settlements. Other key risks include foreign exchange, cyber and ERP implementation risk, debt covenants and the LIBOR transition.
- Subsequent acquisitions included Tissue Seal assets, completed November 30, 2021, for a base purchase price of $24.75 million, and Fourny NV, completed January 11, 2022, for approximately $18.2 million.
Important facts for investors to verify
- Whether price increases and productivity can offset ongoing input-cost inflation without further gross-margin pressure.
- Whether working capital, especially inventory and receivables, converts back into cash and supports the planned capital spending and dividend.
- Debt maturities and refinancing plans: the Term Loan B matures in 2024; public notes mature in 2027 and 2028. Review floating-rate exposure and transition arrangements as LIBOR is phased out.
- Assumptions underlying goodwill valuation, especially Construction Adhesives forecasts, and the risk of impairment if results weaken.
- Integration and funding of Tissue Seal and Fourny, remaining restructuring costs, and Project ONE’s schedule and final cost.
- Environmental and asbestos exposures, tax uncertainties, and any changes in litigation or insurance recoveries. The filing reports unqualified audit opinions and effective internal controls as of year-end.