H.B. Fuller Company — FY2011 Form 10-K Summary
Business context and reporting period
H.B. Fuller manufactures and markets adhesives, sealants, paints and specialty chemicals, operating in 40 countries. The fiscal year ended December 3, 2011 and included 53 weeks; FY2010 included 52 weeks. The company reports six segments: North America Adhesives, Construction Products, EIMEA, Latin America Adhesives, Latin America Paints and Asia Pacific. Adhesives accounted for 84% of revenue.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net revenue | $1,557.6 million | $1,356.2 million |
| Gross profit / gross margin | $447.1 million / 28.7% | $397.2 million / 29.3% |
| Net income attributable to H.B. Fuller | $89.1 million | $70.9 million |
| Diluted EPS | $1.79 | $1.43 |
| Cash from operating activities | $102.5 million | $74.1 million |
| Capital expenditures | $36.0 million | $35.9 million |
| Cash and cash equivalents at year-end | $156.1 million | $133.3 million |
| Total debt | $232.3 million | $250.7 million |
| Net financial debt | $76.2 million | $117.4 million |
FY2011 free cash flow, as defined by the company (operating cash flow less capital expenditures and dividends), was $51.9 million, up from $24.3 million. The $200 million revolving credit facility was undrawn at year-end, and the company reported compliance with debt covenants. Net working capital was 16.3% of annualized revenue versus 16.7%; debt capitalization was 24.8% versus 28.4%. The declared and paid dividend was $0.295 per share for the year, compared with $0.278 in FY2010.
FY2011 fourth-quarter revenue was $436.5 million, gross profit $125.6 million, net income attributable to the company $26.4 million and diluted EPS $0.53. The quarter included $7.5 million of special charges, primarily related to the Forbo acquisition and EIMEA transformation, plus a $3.1 million foreign-exchange option expense.
Material changes versus FY2010
- Revenue increased 14.9%; management attributed 11.4 percentage points to organic growth (9.7 points from pricing and 1.7 from volume), 2.7 points to currency and 0.8 points to acquisitions. The extra fiscal week contributed about 2% to revenue.
- Higher raw-material costs outpaced pricing actions, reducing gross margin by 0.6 percentage points to 28.7%. Raw materials represented more than 75% of cost of sales, according to management.
- SG&A rose 8.6% to $318.0 million, but declined as a share of revenue to 20.4% from 21.6%, reflecting revenue growth partly offset by investment in sales and technical staff, currency effects and a full year of Revertex costs.
- Net income increased 25.7%. FY2011 included $5.8 million after-tax special charges; FY2010 included $8.4 million after-tax charges for exiting the European polysulfide insulating-glass product line. FY2009 included an $11.8 million after-tax litigation-settlement gain, affecting comparisons with that year.
- All six segments grew revenue. Asia Pacific revenue rose 28.3% and EIMEA 17.0%; Asia Pacific growth included acquisition and currency contributions. Segment operating income increased to $129.0 million from $104.3 million, excluding special and impairment charges.
- Operating cash flow improved, while working capital still used $21.5 million of cash. The filing attributes a fourth-quarter inventory reduction to stronger cash generation.
Outlook, risks and unusual items
- For 2012, management expected revenue to continue growing, raw-material costs to remain similar to FY2011, and gross margin to improve through pricing, reformulations and product substitutions. It also expected operating-expense leverage and higher capital spending; 2012 capital expenditures were estimated at about $40 million. Management cautioned that uncertain economic conditions could make coming quarters difficult.
- On December 21, 2011, the company agreed to acquire Forbo Group’s global industrial adhesives business for approximately $394 million, cash-free and debt-free. Closing was expected as soon as March 2012, subject to customary conditions and regulatory approvals. Bridge financing was committed; permanent financing was planned through private placement and syndicated bank-loan markets. The acquisition would increase indebtedness and carries financing, integration, regulatory and execution risks.
- After year-end, the board approved an EIMEA facility-closure plan covering Austria and Italy and consolidation of shared services in Portugal, expected to be completed in 2013. Further non-recurring costs were anticipated.
- Principal risks include volatile or constrained petroleum-based raw-material supplies and inability to pass cost increases through promptly; economic weakness and competitive pricing; foreign exchange and political exposure (61% of FY2011 revenue was outside the U.S.); litigation and environmental liabilities; pension funding and asset-market risks; and acquisition integration and financing risks.
- Environmental reserves were $2.1 million, including $1.1 million for remediation at the Sorocaba, Brazil site. Probable asbestos liabilities and related insurance recoveries were $0.4 million and $0.3 million, respectively. Management did not expect these matters to materially affect long-term financial condition, but noted possible effects on future-period earnings or cash flows.
- The independent auditor reported that the consolidated financial statements were fairly presented under U.S. GAAP and that internal control over financial reporting was effective. Management also reported effective disclosure controls.
Most important facts for investors to verify
- Whether the Forbo acquisition closed as expected, its final purchase price and financing terms, and the resulting debt, interest expense and covenant headroom.
- Whether pricing and reformulations offset raw-material inflation enough to deliver the forecast gross-margin improvement.
- Whether revenue growth persists after accounting for the extra fiscal week, foreign-exchange movements and acquisitions.
- Execution, costs and expected savings from the EIMEA transformation and facility closures.
- Cash conversion and working-capital trends, particularly inventory, alongside planned capital expenditures and dividend payments.
- Developments in Sorocaba remediation, asbestos claims and insurance recoveries, and the company’s underfunded pension and postretirement obligations.