H.B. Fuller Company — Q2 2020 Form 10-Q
Reporting period: Three and six months ended May 30, 2020; comparisons are to the periods ended June 1, 2019. Amounts are in U.S. dollars unless stated otherwise. H.B. Fuller makes adhesives and reports three segments: Hygiene, Health and Consumable Adhesives (HHC), Engineering Adhesives, and Construction Adhesives.
Financial performance and condition
| Metric | Q2 2020 | Q2 2019 | First six months 2020 | First six months 2019 |
|---|---|---|---|---|
| Net revenue | $674.6 million | $759.6 million | $1,321.2 million | $1,432.5 million |
| Gross profit / margin | $184.9 million / 27.4% | $218.5 million / 28.8% | $355.2 million / 26.9% | $398.4 million / 27.8% |
| Operating income | $56.9 million | $72.4 million | $85.7 million | $106.6 million |
| Net income attributable to H.B. Fuller | $31.6 million | $36.6 million | $41.5 million | $48.9 million |
| Diluted EPS | $0.61 | $0.70 | $0.79 | $0.94 |
| Interest expense | $21.6 million | $26.9 million | $44.4 million | $53.7 million |
For Q2, revenue fell 11.2% and net income attributable to Fuller fell 13.7%; diluted EPS declined 12.9%. For the first six months, revenue fell 7.8%, net income fell 15.1%, and diluted EPS declined 16.0%. Management attributed weaker gross margin primarily to lower volume and unfavorable mix, partly offset by lower raw-material costs. Lower SG&A, reflecting segment realignment savings and reduced discretionary spending, and lower interest expense partly offset the earnings pressure.
- Revenue drivers: Q2 organic growth was down 7.3% (volume −6.8%, pricing −0.5%); divestiture impact was −0.8% and currency −3.1%. For the six months, organic growth was down 4.5%, divestiture impact −0.8%, and currency −2.5%.
- Segment trends, Q2: HHC revenue rose 2.0% to $344.7 million and operating income rose 9.4% to $35.0 million. Engineering Adhesives revenue fell 22.3% to $236.1 million and operating income fell 48.6% to $20.1 million. Construction Adhesives revenue fell 16.0% to $93.9 million and operating income fell 21.7% to $6.5 million.
- Cash flow, first six months: Operating cash flow was $108.4 million, up from $77.3 million. Capital expenditures were $54.5 million, dividends paid were $16.6 million, and company-defined free cash flow after dividends was $37.3 million, versus $29.1 million. Inventory growth used $59.2 million of cash; receivables and payables provided $33.9 million and $42.2 million, respectively.
- Liquidity and debt: Cash was $70.3 million at May 30, 2020, versus $112.2 million at November 30, 2019. Current assets were $1,007.9 million and current liabilities $491.8 million. Total short- and long-term debt was $1,928.1 million; total debt-to-capital was 61.3%, down from 61.8% at November 30, 2019. The company reported covenant compliance; secured debt/TTM EBITDA was 3.9 against a maximum of 5.9.
Material changes, outlook and risks
- The COVID-19 pandemic created substantial uncertainty around demand, supply chains and economic recovery. The company said it was deemed an essential business and kept global manufacturing operations open, while implementing safety measures. It could not estimate the pandemic’s financial impact.
- Performance diverged by segment: HHC grew organically, while Engineering and Construction Adhesives were affected by weaker volumes. Engineering was the largest Q2 revenue and operating-income decline.
- The company realigned from five reportable segments to three at the start of fiscal 2020; prior segment information was recast. It also adopted lease accounting in Q1, recording approximately $28.3 million of right-of-use assets and lease liabilities, with no material income-statement impact.
- The 2020 restructuring plan is expected to cost $9–$11 million pretax, with completion anticipated by mid-fiscal 2021; $10.2 million had been incurred by May 30, 2020. The Royal Adhesives restructuring was substantially complete.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management said operating cash flow should meet ongoing liquidity and capital-expenditure needs and that financing would remain available; it also stated it expected to meet fiscal 2020 contractual obligations.
- Contingencies: Environmental remediation reserves were $7.2 million, including $4.0 million for the Simpsonville, South Carolina site. Asbestos-related claims are partly covered by indemnification and insurance, although some insurers are insolvent. An unresolved OFAC inquiry concerning historical customer resale of products into Iran could result in penalties from zero to $10.0 million; the company said it no longer does business in Iran.
- Other unusual items: The company acquired D.H.M. Adhesives assets for a final purchase price of $14.5 million, including $5.0 million of contingent consideration. It terminated a fair-value interest-rate swap in May and received $15.8 million; the remaining swap liability will be amortized against interest expense over the notes’ remaining seven-year term.
Important facts for investors to verify
- How COVID-19 affected customer demand, operating volumes, raw-material supply and subsequent-quarter results, particularly in Engineering and Construction Adhesives.
- Whether higher inventory days (79 versus 67 a year earlier) and receivables days (64 versus 59) normalized, and whether operating cash flow remained strong without relying on working-capital timing.
- Debt maturities, interest-rate exposure, covenant headroom and the effects of the company’s swaps and debt-repayment plans.
- Actual restructuring costs and savings versus the stated estimates and completion timetable.
- Developments in the OFAC inquiry, environmental remediation and asbestos matters, including potential cash payments beyond recorded reserves.