H.B. Fuller Company — FY2014 Form 10-K
Reporting period: Fiscal year ended November 29, 2014. The filing is an annual report; fourth-quarter figures are noted separately. H.B. Fuller formulates, manufactures and markets adhesives, sealants and specialty chemicals, operating through Americas Adhesives, EIMEA, Asia Pacific and Construction Products. Approximately 58% of FY2014 revenue was generated outside the United States.
Financial results and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net revenue | $2,104.5 million | $2,047.0 million |
| Gross profit / margin | $533.3 million / 25.3% | $570.2 million / 27.9% |
| Income from continuing operations | $50.2 million | $96.0 million |
| Diluted EPS from continuing operations | $0.97 | $1.87 |
| Operating cash flow from continuing operations | $29.7 million | $132.7 million |
| Capital expenditures | $139.8 million | $124.3 million |
| Cash and cash equivalents at year-end | $77.6 million | $155.1 million |
| Total debt | $574.8 million | $492.9 million |
| Net financial debt | $497.2 million | $337.8 million |
- Revenue rose 2.8%, principally on 3.5% higher sales volume; pricing reduced revenue by 0.4% and currency by 0.3%. Organic growth was 3.1%.
- Net income attributable to H.B. Fuller was $49.8 million, down from $96.8 million. FY2014 included $51.5 million of special charges, mainly for the Business Integration Project; the after-tax impact was $45.2 million, or $0.88 per diluted share.
- Free cash flow, defined by the company as operating cash flow less capital expenditures and dividends, was negative $133.1 million, versus negative $10.9 million in FY2013. Working capital changes used $69.6 million of cash.
- Year-end current assets were $765.1 million and current liabilities $317.2 million. The company reported $157 million of unused capacity on its $300 million revolving facility and compliance with debt covenants (leverage covenant result: 2.6 against a maximum of 3.5).
Fourth-quarter figures
FY2014 Q4 revenue was $547.7 million, gross profit $132.4 million, income from continuing operations $10.8 million and diluted continuing-operations EPS $0.21. Q4 special charges were $13.9 million.
Material changes and segment performance
- Segment revenue growth was strongest in Construction Products (+18.7%) and Asia Pacific (+9.2%); Americas Adhesives grew 2.0%. EIMEA revenue declined 1.8%.
- Segment operating income fell in every segment except none: Americas Adhesives declined 16.2%, EIMEA 40.8%, Asia Pacific 4.6% and Construction Products 39.1%. Companywide segment operating income decreased to $149.8 million from $195.5 million.
- Gross margin contracted 260 basis points. Management cited higher raw-material costs and manufacturing inefficiencies and costs associated with the ERP implementation and integration activity.
- Cash flow from operations declined sharply, with higher inventory and other working-capital uses contributing. Inventory days on hand increased to 58 from 53.
- The company acquired ProSpec, a U.S. tile and stone installation products business, for $26.2 million in September 2014. Its purchase accounting was preliminary at year-end.
Outlook, commentary and risks
- For FY2015, management expected organic revenue growth at the low end of its long-term 5%–8% target range and EBITDA margin of approximately 13%. It forecast capital expenditures of about $70 million and relatively flat raw-material costs, with potential input-cost benefit from lower crude oil prices.
- Management expected a stronger U.S. dollar versus the euro to reduce FY2015 revenue growth by 3 percentage points or more. It anticipated improved gross margin as EIMEA integration inefficiencies and North American ERP-related incremental costs abated.
- The long-term targets—5%–8% annual organic growth, 15% EBITDA margin, 15% annual EPS growth and 15% ROIC—were pushed to 2016 at the earliest. Business Integration Project costs had reached $156.6 million, exceeding the original $125 million estimate by approximately 30%; management’s target of $90 million in annual cash savings and profit improvements was delayed.
- Project ONE’s North American ERP launch in April 2014 caused manufacturing disruption, lower productivity and weaker customer service. Most issues were reported remediated by year-end; further regional launches were suspended pending optimization, with subsequent implementations expected to begin in 2016. The project’s final cost estimate and timetable were still being revised.
- Principal risks include petroleum- and natural-gas-based raw-material price or supply shocks, competition and demand weakness, foreign exchange exposure, ERP execution, acquisition integration, environmental and litigation contingencies, tax uncertainty, pensions, and information-technology disruption. Environmental compliance expenditures over the next two years were estimated at approximately $6 million, including $0.8 million of capital expenditures.
- The company reported asbestos-related settlements of $0.8 million in FY2014 and insurance payments received or expected of $0.7 million. Management did not expect pending environmental or other legal matters to have a material adverse effect based on information then available, while noting outcomes and timing were uncertain.
- Subsequent to year-end, H.B. Fuller signed an agreement to acquire Continental Products Limited for approximately €1.7 million. On January 28, 2015, it drew $300 million under the term loan, including approximately $230 million intended to finance the Tonsan Adhesive acquisition and $70 million to repay revolver borrowings.
Important facts for investors to verify
- Whether margin, earnings and operating cash flow recover as ERP costs and integration disruptions subside, and whether the 2015 growth and approximately 13% EBITDA-margin outlook is achieved.
- The revised total cost, completion schedule and realized savings of the Business Integration Project and Project ONE; the filing states the ERP project will exceed its original cost estimate but does not provide a revised total.
- Debt and liquidity following the post-year-end term-loan draw and planned Tonsan acquisition, including covenant headroom and interest-rate exposure.
- The sustainability of working-capital levels and capital spending, given negative FY2014 free cash flow and the year-over-year decline in cash.
- The effect of currency movements and raw-material costs on reported revenue and margins, and the completion of ProSpec’s preliminary acquisition valuation.
- The impact of two FY2014 corrections relating to the Sekisui-Fuller investment: $1.6 million affecting equity-method income and $6.1 million affecting the investment carrying value and accumulated translation adjustment. Management judged the errors immaterial to current and prior periods.
- KPMG issued an unqualified opinion on the financial statements and internal controls; ProSpec, representing approximately 1% of total assets, was excluded from the year-end internal-control assessment.