H.B. Fuller Company — Q2 2013 Form 10-Q
Reporting period: The 13 weeks ended June 1, 2013, with year-to-date comparisons for the 26 weeks ended June 1, 2013. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted. H.B. Fuller reports five segments: North America Adhesives, Construction Products, EIMEA, Latin America and Asia Pacific.
Financial results
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net revenue | $519.0 | $527.0 | $998.9 | $872.4 |
| Gross profit | $146.6 | $136.6 | $280.0 | $239.2 |
| Gross margin | 28.2% | 25.9% | 28.0% | 27.4% |
| SG&A | $93.8 | $93.0 | $191.4 | $168.0 |
| Special charges, net | $10.8 | $32.1 | $16.2 | $38.6 |
| Net income attributable to H.B. Fuller | $25.9 | $1.9 | $46.6 | $17.2 |
| Diluted EPS | $0.51 | $0.04 | $0.91 | $0.34 |
| Operating cash flow from continuing operations | Not presented by quarter | Not presented by quarter | $40.7 | $34.8 |
Q2 revenue decreased 1.5% year over year: pricing contributed 0.2%, while volume fell 1.4% and currency reduced revenue 0.3%. First-half revenue rose 14.5%, including approximately $121.8 million from the acquired Forbo business; organic growth was 0.5%. First-half reported growth should therefore be distinguished from organic performance.
Q2 earnings improved substantially, alongside higher gross margin and lower integration charges. The comparison is affected by Q2 2012 special charges of $32.1 million versus $10.8 million in Q2 2013, and by a $3.1 million after-tax loss from discontinued operations in 2012. First-half 2012 also included a $1.3 million discontinued-operations loss. Q2 2013 effective tax rate was 30.8%; the company cited a 30.4% rate excluding specified discrete benefits and special-charge effects.
Cash, debt and liquidity
- At June 1, 2013, cash and cash equivalents were $161.2 million, down from $200.4 million at December 1, 2012; $152.9 million was held outside the United States.
- Total short- and long-term debt was $496.4 million, versus $520.2 million at fiscal year-end and $616.8 million a year earlier. Debt to total capital was 37.8%, compared with 40.1% and 46.8%, respectively.
- Current assets were $786.0 million and current liabilities $315.6 million. First-half free cash flow, as defined by the company as operating cash flow less capital expenditures and dividends, was negative $16.6 million, compared with positive $14.3 million a year earlier.
- First-half capital expenditures were $48.0 million; cash dividends paid were $9.3 million. Cash decreased $39.3 million during the first half.
- The company reported compliance with its debt covenants at June 1: trailing EBITDA/interest expense was 11.4 against a minimum of 2.5; total indebtedness/trailing EBITDA was 2.0 against a maximum of 3.5. Management said operating cash flow and available borrowing capacity should meet foreseeable needs.
Material changes and operating trends
- Q2 gross margin rose 230 basis points; first-half gross margin improved 60 basis points. Management attributed improvement principally to Forbo integration synergies and other margin initiatives. Q2 2012 margin had also been reduced by a non-cash acquisition-inventory charge.
- Q2 segment operating income increased to $52.8 million from $43.6 million; first-half segment operating income was $88.5 million versus $71.3 million. North America Adhesives, Construction Products, EIMEA and Asia Pacific improved year to date; Latin America declined.
- Q2 revenue fell in North America Adhesives and EIMEA, with management citing weak or soft end-market demand and lower volume. Construction Products grew on market-share gains; Asia Pacific growth was concentrated in China and Southeast Asia. Latin America revenue and segment income weakened.
- Interest expense was lower in Q2 year over year, partly reflecting debt prepayment after the Central America Paints sale, but higher for the first half due to acquisition-related borrowing.
Outlook, commentary and risks
- No specific full-year revenue or EPS guidance is provided in the filing. Management expects raw-material costs to remain at or near Q2 exit levels through year-end and expects manufacturing-network consolidation benefits to improve over the following three quarters.
- The Business Integration Project targets $90 million of annual cash savings and other pre-tax profit improvements when activities are completed in 2014, and a 15% EBITDA margin target by 2015, versus just under 11% in 2011. The company reported Q2 EBITDA margin of 12.9%, consistent with its plan, and Q2 savings of $3.6 million from workforce reductions and $3.1 million from facility actions.
- Estimated total project costs are $121 million, of which $76.2 million had been expensed through June 1; approximately $44.8 million remained, expected to be incurred through 2014. Management estimated 2013 project-wide capital expenditures of $110 million and combined 2014–2015 capital spending of $100 million.
- Risks include economic weakness and reduced customer demand, foreign-exchange movements, raw-material availability and prices, and execution of restructuring and integration plans. A hypothetical 10% change in the U.S. dollar was estimated to change net income by approximately $3.0 million, or $0.06 per diluted share; a one-percentage-point interest-rate change was estimated to affect annual interest expense by approximately $1.2 million.
- The company is involved in environmental matters, ordinary-course legal proceedings and legacy asbestos litigation. Management did not expect these matters to have a material adverse effect based on currently available information, but noted adverse developments or settlements could affect future results or cash flows. Certain insurers are insolvent, and the company may bear allocated costs.
- After quarter-end, on June 6, 2013, the company completed the approximately $12 million acquisition of Plexbond Quimica, a Brazilian provider of polyurethane specialties and polyester resins. The filing reports no material changes to the risk factors in its latest annual report.
Most important facts for investors to verify
- How much of earnings and margin improvement is recurring integration benefit versus lower special charges and prior-year comparison effects.
- Progress against the $90 million savings target, the $121 million project-cost estimate and the 2014–2015 capital-spending plans.
- Whether organic volume trends and regional end-market conditions improve, particularly in EIMEA and North America Adhesives.
- Cash conversion, working-capital requirements and the ability to fund elevated capital spending while maintaining debt and covenant headroom.
- Updates on asbestos insurance recoveries, environmental contingencies, foreign-exchange exposure and the Plexbond acquisition.