H.B. Fuller Company — Q2 2014 Form 10-Q
Reporting period: 13 weeks ended May 31, 2014; year-to-date figures cover 26 weeks. Dollar amounts are in millions unless noted. H.B. Fuller sells adhesives and related products through Americas Adhesives, EIMEA, Asia Pacific, and Construction Products.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $544.0 | $519.0 | $1,030.0 | $998.9 |
| Gross profit | $142.7 | $146.6 | $275.7 | $280.0 |
| Gross margin | 26.2% | 28.2% | 26.8% | 28.0% |
| Net income attributable to H.B. Fuller | $20.5 | $25.9 | $35.1 | $46.6 |
| Diluted EPS | $0.40 | $0.51 | $0.69 | $0.91 |
| Special charges | $13.5 | $10.8 | $25.3 | $16.2 |
- Quarterly revenue rose 4.8%; volume grew 4.8%, pricing declined 0.3%, and currency contributed 0.3%. First-half revenue rose 3.1%, with 3.6% volume growth, a 0.3% pricing decline, and a 0.2% negative currency effect.
- Management attributed weaker gross margin mainly to ERP implementation costs and business-integration costs not classified as special charges: $5.3 million in Q2 and $6.7 million in the first half combined. SG&A was $96.4 million in Q2, up 2.7%, and $193.2 million year to date, up 0.9%.
- Segment results were mixed. Q2 revenue grew 15.2% in Construction Products, 13.8% in Asia Pacific, and 4.1% in Americas Adhesives on an organic basis; EIMEA organic revenue declined 0.6%. Operating income fell in EIMEA, Asia Pacific, and Construction Products, while Americas Adhesives was roughly flat.
- First-half operating cash flow from continuing operations was negative $33.8 million, versus positive $40.7 million a year earlier. Capital expenditures were $82.1 million; free cash flow, as defined by the company, was negative $127.0 million.
Balance sheet, liquidity, and debt
- At May 31, cash was $95.0 million, down from $155.1 million at November 30, 2013; $91.6 million was held outside the United States.
- Total short- and long-term debt was $566.1 million, versus $492.9 million at fiscal year-end. The debt-to-total-capital ratio was 37.2%, compared with 34.6% at year-end. Total equity was $954.9 million.
- Current assets were $832.5 million and current liabilities $368.7 million. Inventory rose to $281.9 million from $221.5 million at year-end. DSO increased to 60 days from 55 a year earlier, and inventory days on hand rose to 69 from 57.
- The company reported compliance with debt covenants: trailing EBITDA to interest was 12.6x against a minimum of 2.5x; indebtedness to trailing EBITDA was 2.5x against a maximum of 3.5x. Management said operating cash flows and access to borrowing should meet ongoing needs.
Changes, outlook, and notable items
- Business Integration Project costs increased year over year. Inception-to-date costs reached $130.4 million by May 31, above the original approximately $125 million estimate; management expected the overrun to be immaterial, citing delays in EIMEA.
- Management projected $90 million of annual cash savings and other pretax profit improvements when integration activities are completed in 2014, and a target global EBITDA margin of 15% by 2015, from just under 11% in 2011. Q2 EBITDA margin was 11.5%, versus 12.9% a year earlier. Planned 2014 integration capital spending was approximately $45 million.
- No broader earnings or revenue guidance is provided in the supplied filing text. Management stated it expected cash flows from operations to support liquidity and capital needs.
- On June 25, 2014, after quarter-end, the company agreed to acquire 95% of Beijing-based Tonsan Adhesive for RMB 1.4 billion (approximately $230 million), subject to closing conditions; the agreement also provides for potential purchase of the remaining 5%.
- Risks include foreign-exchange and interest-rate exposure, raw-material price and supply pressures, soft EIMEA end markets, and execution and costs associated with integration and the ERP rollout. Environmental and asbestos-related matters were described as not expected to have a material adverse effect based on current information, though adverse developments could affect future results or cash flows. Four asbestos claims were settled in the first half for $178,000; $155,000 of insurance payments were received or expected.
- The filing reports effective disclosure controls. The global ERP rollout is ongoing and may affect processes and internal controls as implementation proceeds. The company reported no material changes to previously disclosed risk factors.
Investor verification points
- Track whether integration savings materialize, costs remain near management’s revised estimate, and EBITDA margin progresses toward the 2015 target.
- Assess whether working-capital needs—especially inventory—and elevated capital spending improve, and whether operating cash flow recovers from the first-half deficit.
- Verify the Tonsan transaction’s closing, final financing and purchase terms, and effect on debt and liquidity.
- Monitor segment profitability, particularly continued weakness in EIMEA, Asia Pacific, and Construction Products, alongside the costs and control implications of the ERP implementation.
- Follow foreign-exchange, raw-material, environmental, and asbestos exposures, including the outcome of the insurer-allocation appeal.