H.B. Fuller Company — Q1 2021 Form 10-Q
Business context and period. Adhesives manufacturer H.B. Fuller reported its first fiscal quarter, the three months ended February 27, 2021; comparisons are with the three months ended February 29, 2020. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Revenue | $725.9 | $646.6 | Up 12.3%; organic growth 10.5%, currency 1.8%, no material M&A contribution |
| Gross profit / margin | $192.4 / 26.5% | $170.3 / 26.3% | Profit up 13.0%; margin expanded 20 basis points |
| Operating income | $48.4 | $28.8 | Up about 68% |
| Net income attributable to H.B. Fuller | $29.8 | $9.9 | Up 201%; net margin 4.1% vs. 1.5% |
| Diluted EPS | $0.56 | $0.19 | Up from prior-year quarter |
| Operating cash flow | $35.8 | $34.4 | Modest increase |
| Capital expenditures | $35.3 | $32.1 | Higher, partly reflecting timing and growth projects |
| Free cash flow after dividends | $(8.0) | $(5.9) | Non-GAAP; operating cash flow less capital expenditures and dividends |
Gross margin improvement was attributed mainly to lower raw material costs. SG&A rose 1.8% to $144.0 million, but declined to 19.8% of revenue from 21.9%. Interest expense fell 10.5% to $20.4 million, attributed to lower U.S. debt balances and interest rates. The effective tax rate was 27.5%, or 27.4% excluding discrete tax expense, compared with 40.4% and 25.9%, respectively, in the prior-year quarter.
Segments. Hygiene, Health and Consumable Adhesives revenue was $335.7 million, up 7.4%, with operating income of $29.9 million versus $22.7 million. Engineering Adhesives revenue was $312.7 million, up 25.6%, with operating income of $30.4 million versus $15.4 million. Construction Adhesives revenue declined 8.9% to $77.6 million; its operating loss widened to $4.7 million from $1.4 million, reflecting lower volume and pricing, and higher manufacturing waste and scrap costs.
Liquidity and debt. At February 27, 2021, cash and cash equivalents were $81.2 million, compared with $100.5 million at November 28, 2020 and $78.7 million a year earlier. Total short- and long-term debt was $1,758.2 million, down from $1,773.9 million at fiscal year-end and $1,973.5 million a year earlier. Debt-to-total-capital was 54.8%, versus 56.1% at fiscal year-end and 61.8% a year earlier. The company reported compliance with its debt covenants; covenant ratios were 2.7 against a maximum of 5.9 for secured debt/TTM EBITDA and 5.1 against a minimum of 2.0 for TTM EBITDA/consolidated interest expense.
Working capital metrics improved year over year: net working capital was 17.9% of annualized revenue versus 19.7%; receivables DSO was unchanged at 58 days; inventory days on hand fell to 63 from 70. Inventory nevertheless increased by $65.6 million from fiscal year-end and was a $63.6 million operating cash use in the quarter.
Material changes, outlook and risks
- Growth and mix: Revenue growth was driven primarily by volume, particularly in Engineering Adhesives; Construction Adhesives contracted. Currency contributed 1.8% to consolidated growth.
- Cash and investment: Operating cash flow was partly offset by capital spending, dividends and inventory build. The company spent $11.0 million repaying long-term debt and paid $8.5 million in dividends.
- Acquisition: On January 13, 2021, the company acquired certain assets of STR Holdings for a $5.445 million base price, with a further $0.8 million due on the first anniversary and up to $1.7 million in contingent consideration. Preliminary purchase accounting included $0.849 million of goodwill and $5.9 million of intangible assets.
- Restructuring: Q1 restructuring charges were $1.817 million, versus $0.043 million a year earlier. The 2020 plan is expected to cost approximately $20 million pre-tax; $15.6 million had been incurred by quarter-end. Completion is expected in 2022.
- Management outlook: No specific revenue or earnings guidance is provided in the supplied filing text. Management expects operating cash flows to cover ongoing liquidity and capital expenditure needs and believes financing remains available. It stated that all global manufacturing operations remained open during COVID-19, while the pandemic’s full financial impact remained uncertain.
- Risks and contingencies: Key exposures include COVID-19 and economic conditions, interest rates, foreign exchange and raw-material prices. Environmental remediation liabilities were $7.814 million; the company also disclosed asbestos-related litigation and other ordinary-course legal matters. Management did not expect pending matters to have a material adverse effect based on information then available, but noted that adverse developments could affect future-period results or cash flow. Reported risk factors were unchanged from the fiscal 2020 Form 10-K.
- Other notable items: Other income, net was $7.9 million and included $7.9 million of net defined-benefit pension benefits, $1.8 million of other income and $1.8 million of currency transaction losses. Non-designated foreign-exchange derivatives recorded pretax losses of $5.2 million, compared with gains of $3.2 million in Q1 2020. Foreign-currency translation and hedge movements contributed to $27.6 million of other comprehensive income.
Important facts for investors to verify
- Whether Engineering Adhesives’ rapid growth continues and Construction Adhesives’ revenue and operating losses improve.
- Whether raw-material inflation, manufacturing costs and pricing affect gross margins after the quarter’s 20-basis-point expansion.
- Whether inventory growth converts to cash and free cash flow after dividends improves from the quarter’s negative $8.0 million.
- Debt repayment, interest costs, covenant headroom and the cash available for planned spending and dividends.
- Final STR acquisition valuation and contingent consideration, restructuring spending and completion timing.
- Developments in COVID-19 conditions, environmental remediation and asbestos-related claims, including potential cash costs not reflected in current estimates.