H.B. Fuller Company — Q1 2016 Form 10-Q
Reporting period: Quarter ended February 27, 2016; comparison is the quarter ended February 28, 2015. Amounts are U.S. dollars unless noted.
Business context and results
H.B. Fuller makes adhesives and operates globally. It reorganized reporting into five segments: Americas Adhesives, EIMEA, Asia Pacific, Construction Products and Engineering Adhesives. The quarter’s results reflect a full quarter of Tonsan, acquired in February 2015.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net revenue | $474.3 million | $470.7 million | +0.8% |
| Gross profit / margin | $137.6 million / 29.0% | $116.2 million / 24.7% | +18.4%; margin +430 bps |
| Operating income by segment, total | $37.8 million | $21.4 million | +77% |
| Income before tax and equity-method income | $26.0 million | $13.3 million | +96% |
| Net income attributable to H.B. Fuller | $18.9 million | $9.7 million | +94.8% |
| Diluted EPS | $0.37 | $0.19 | Nearly doubled |
| Operating cash flow | $42.6 million | $66.2 million | Down $23.7 million |
| Capital expenditures | $23.4 million | $28.4 million | Lower |
| Free cash flow, company-defined | $12.7 million | $31.8 million | Down $19.1 million |
Material changes and segment trends
- Revenue grew 5.3% excluding currency effects: volume rose 5.8%, pricing declined 0.5%, and currency reduced reported growth by 4.5%.
- Lower raw-material costs, improved mix and the absence of prior-year acquisition inventory fair-value charges lifted gross margin. SG&A rose 5.2% to $99.8 million, mainly reflecting a full quarter of Tonsan expenses.
- Other expense was $5.1 million versus $0.4 million of income, including $5.8 million of currency translation and remeasurement losses, mostly related to the Argentine peso.
- Engineering Adhesives revenue rose 84.1% and segment operating income improved to $0.9 million from a $5.1 million loss, primarily because of the full quarter of Tonsan. EIMEA segment income rose to $6.1 million from $0.7 million. Americas revenue declined 5.5%, while segment income increased to $26.3 million. Construction Products income fell 22.6% to $0.8 million despite revenue growth.
Financial position and liquidity
- Cash and cash equivalents were $126.8 million at February 27, 2016, including $102.8 million held outside the U.S.; total debt was $723.4 million. Debt-to-capital was 45.0%, compared with 46.8% a year earlier.
- Total assets were $2.02 billion, current assets $791.1 million and current liabilities $379.1 million. Current maturities of long-term debt increased to $75.5 million from $22.5 million at November 28, 2015.
- Operating cash flow fell year over year, in part because working-capital changes provided $8.7 million versus $35.6 million in the prior-year quarter. Cash increased $7.6 million during the quarter.
- The company reported compliance with debt covenants: trailing EBITDA/interest was 10.5 versus a minimum of 2.5; debt/EBITDA was 2.7 versus a maximum of 3.5.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management believes operating cash flow and available borrowing capacity will meet ongoing liquidity and capital needs, and says it expects to meet fiscal 2016 contractual obligations.
- The Business Integration Project had $161.7 million of cumulative costs against an expected total of approximately $164.0 million. Q1 special charges were $0.4 million, down from $2.4 million.
- Management identifies foreign exchange, interest rates, raw-material prices and economic conditions as risks. A 1% change in raw-material costs would affect net income by an estimated $1.7 million; a one-percentage-point change in rates on variable debt by about $2.6 million annually. Currency sensitivity estimates are also disclosed in the filing.
- Environmental matters, asbestos claims and other legal proceedings are not expected by management to have a material adverse effect, although adverse developments could affect future results or cash flows. Some insurers covering asbestos claims are insolvent.
- Disclosure controls and procedures were deemed ineffective because of a material weakness concerning accounting for business acquisitions. Management described remediation efforts, including additional resources and improved review and documentation controls.
- After quarter-end, the company agreed to acquire Australian and New Zealand adhesive businesses for A$12 million, approximately $9 million, subject to closing conditions.
Important facts for investors to verify
- Whether gross-margin gains from lower input costs and mix are sustainable, and how pricing and raw-material trends develop.
- Whether reported growth and segment performance remain strong after separating Tonsan’s acquisition contribution from underlying growth and currency effects.
- Cash conversion, working-capital needs, debt maturities and the company’s ability to sustain dividends and repurchases while funding capital spending.
- Progress in remediating the acquisition-accounting material weakness and the timing of any conclusion that controls are effective.
- Actual costs and completion status of the Business Integration Project, plus developments in foreign-exchange exposure, legal contingencies and the announced acquisition.