H.B. Fuller Company — FY2010 Form 10-K Summary
Business context and reporting period. H.B. Fuller formulates and sells adhesives, sealants, paints and specialty chemicals in 39 countries. Adhesives represented 84% of FY2010 revenue. The fiscal year ended November 27, 2010; comparisons are principally with the year ended November 28, 2009. FY2010 includes four fiscal quarters.
Financial performance and position
| Metric | FY2010 | FY2009 | Change / context |
|---|---|---|---|
| Net revenue | $1,356.2 million | $1,234.7 million | Up 9.8%; volume +7.4%, pricing +1.1%, currency +0.2%, acquisitions +1.1%. |
| Gross profit / margin | $397.2 million / 29.3% | $371.3 million / 30.1% | Profit rose 7.0%; margin fell 0.8 percentage points, mainly from higher raw-material costs. |
| Segment operating income | $104.3 million | $107.2 million | Down 2.6%. EIMEA weakness more than offset improvements in other regions. |
| Net income attributable to H.B. Fuller | $70.9 million | $83.7 million | Down 15.3%; net margin 5.2% versus 6.8%. |
| Diluted EPS | $1.43 | $1.70 | Down 15.9%. FY2010 included an $0.17-per-share after-tax product-line exit charge; FY2009 included a $0.24-per-share after-tax litigation gain. |
| Operating cash flow | $74.1 million | $71.4 million | Higher by $2.7 million; working capital used $31.4 million of cash in 2010. |
| Cash / total debt | $133.3 million / $250.7 million | $100.2 million / $214.0 million | Net financial debt was $117.4 million, versus $113.8 million. |
FY2010 capital expenditures were $35.9 million, compared with $22.7 million; management-defined free cash flow (operating cash flow less capital expenditures and dividends) was $24.3 million, versus $35.7 million. Total assets were $1.153 billion and H.B. Fuller stockholders’ equity was $631.9 million at year-end. The $200 million revolving facility was undrawn, and the company reported compliance with its debt covenants.
Regional results: North America revenue was $567.2 million and segment operating income $73.0 million; EIMEA $404.8 million and $14.0 million; Latin America $229.3 million and $11.3 million; Asia Pacific $154.9 million and $6.0 million. EIMEA operating income fell 39.1% amid raw-material inflation and exit costs. Asia Pacific revenue grew 29.3%, including currency and Revertex acquisition effects.
Material changes versus prior period
- Revenue recovered from FY2009’s 11.3% decline, with positive organic growth in every segment. Management reported that growth slowed in the second half after stronger first-half performance.
- Raw-material shortages and cost increases pressured gross margin and operating income despite higher sales volume and pricing.
- FY2010 included $11.4 million pretax ($8.4 million after-tax) of costs and impairment charges to exit the European polysulfide insulating-glass product line. FY2009 included an $18.8 million pretax gain from settlement of Roanoke litigation.
- H.B. Fuller acquired Malaysian adhesive supplier Revertex Finewaters for approximately $26.8 million. It also issued $150 million of senior notes, funded in early 2010.
- James Owens became CEO in November 2010. Pension contributions declined to $15.1 million from $143.9 million in 2009, when substantial U.S. and German plan contributions were made.
Fourth quarter: Revenue was $360.2 million versus $341.6 million in Q4 2009; net income was $21.9 million versus $24.6 million; diluted EPS was $0.44 versus $0.50.
Outlook, risks, contingencies and unusual items
- Outlook: Management expected FY2011 revenue growth, aided in part by a 53rd fiscal week. It forecast higher raw-material costs, but expected gross margin to improve through pricing actions and cost management, with operating-expense leverage also supporting margin. Planned capital expenditures were approximately $40 million.
- Key operating risks: Raw-material availability and pricing—over 75% of cost of sales was raw materials—could impair margins if price increases cannot be passed through promptly. Economic uncertainty, competition, foreign exchange and demand in construction and consumer-linked markets also pose risks.
- Legal and environmental matters: Environmental liabilities totaled approximately $2.9 million, including $1.2 million for remediation at Sorocaba, Brazil; further costs there may be required. Probable asbestos liabilities were $1.3 million, with $0.9 million of expected insurance recoveries. Some insurers are insolvent, and insurance coverage is disputed in ongoing litigation. Management did not expect these matters to materially affect long-term financial condition, but acknowledged possible adverse effects on future-period earnings or cash flow.
- Other sensitivities: A hypothetical 1-percentage-point change in interest rates would affect annual interest expense by about $1.8 million. A hypothetical 10% change in the U.S. dollar was estimated to change net income by about $2.9 million, or $0.06 per diluted share.
- Unusual accounting and estimates: No goodwill impairment was identified in FY2010, though management identified U.S. construction products as the reporting unit with the least valuation cushion. Pension assumptions, litigation reserves, tax assets and impairment valuations are significant estimates. The independent auditor issued an unqualified opinion on the financial statements and internal control; management also reported effective disclosure controls and financial reporting controls.
Important facts for investors to verify
- Whether pricing actions and cost controls offset ongoing raw-material inflation and supply constraints, and whether gross margin recovers as forecast.
- Whether the EIMEA segment’s operating performance improves after the product-line exit, and whether construction-market assumptions support the goodwill valuation.
- How much of Asia Pacific’s growth is organic versus acquisition- and currency-driven, and the returns achieved on the Revertex acquisition and planned capital spending.
- Whether operating cash flow converts into sustainable free cash flow as working-capital requirements change; note that $113.9 million of year-end cash was held outside the United States and most non-U.S. cash was described as permanently reinvested.
- Potential changes in environmental and asbestos obligations, insurance recoveries, pension funding needs, and tax exposures, including $6.3 million of unrecognized tax benefits.