H.B. Fuller Company — Q1 2012 Form 10-Q
Business context and period: Adhesives and related products manufacturer. The quarter comprised 13 weeks ended March 3, 2012; comparisons are with the 13 weeks ended February 26, 2011. The filing is unaudited.
Financial results and liquidity
| Metric | Q1 2012 | Prior-year quarter |
|---|---|---|
| Revenue | $375.3 million | $339.5 million |
| Gross profit / margin | $114.1 million / 30.4% | $96.9 million / 28.5% |
| Income before taxes and equity-method income | $21.8 million | $18.6 million |
| Net income attributable to H.B. Fuller | $15.3 million | $14.4 million |
| Diluted EPS | $0.30 | $0.29 |
| Operating cash flow | $3.0 million | $1.5 million |
| Capital spending | $4.7 million | $6.1 million |
- Revenue rose 10.5%: pricing contributed 8.7 percentage points, volume 2.3 points, and currency reduced growth by 0.5 points. Gross profit increased 17.8%; gross margin expanded 190 basis points, primarily reflecting prior pricing actions and higher volume.
- SG&A increased 10.1% to $83.3 million, but edged down as a share of revenue to 22.2% from 22.3%. Reported net income increased 6.6%; net margin was 4.1%, versus 4.2%.
- Cash and equivalents were $149.9 million at March 3, 2012, including $145.3 million held outside the U.S. Total short- and long-term debt was $227.6 million; debt-to-total-capital was 23.8%, versus 26.4% a year earlier. The company reported compliance with debt covenants.
- Current assets were $627.2 million and current liabilities $269.8 million. Inventory rose to $163.5 million from $136.0 million at fiscal year-end. Working-capital changes used $7.4 million of cash. Defined free cash flow was negative $5.5 million, compared with negative $7.9 million.
- Operating cash flow was supported by $19.6 million of higher trade payables but offset by a $27.1 million inventory build and other working-capital movements. Cash declined $6.3 million during the quarter.
Material changes and segment performance
- Segment operating income increased to $30.8 million from $21.3 million. North America Adhesives earned $18.1 million (up 18.8%); EIMEA $7.0 million (up 260.4%); Latin America Adhesives $2.4 million (up 143.3%); Construction Products $0.6 million versus a loss; Latin America Paints $1.7 million (down 27.3%); and Asia Pacific $1.0 million (down 11.2%).
- Latin America Paints faced lower volume, higher raw-material costs, lower-margin sales, and increased promotional and employee costs. Asia Pacific revenue grew, but investment in sales and technical teams weighed on segment income.
- Q1 included $6.5 million of net special charges related to the Forbo acquisition and EIMEA transformation. The charges included $8.4 million of professional services, $4.3 million of financing availability costs, $0.8 million for a currency option, a $11.6 million gain on currency forwards, and restructuring costs.
Outlook, events, risks and contingencies
- The company said operating cash flows should meet ongoing liquidity and capital expenditure needs and that it expects no significant capacity additions or manufacturing upgrades. It provided no specific earnings or revenue guidance in this filing.
- On March 5, 2012, after quarter-end, H.B. Fuller completed the acquisition of Forbo Group’s global industrial adhesives business for 370,000 Swiss francs, reported as approximately $393.1 million. The acquired business’s results are expected to be included beginning in Q2; acquisition accounting was incomplete when this filing was prepared.
- To help fund the acquisition, the company issued $250 million of 4.12% senior notes due 2022 and drew a $150 million term loan at an initial 1.75% rate. A new $200 million multi-currency revolving facility was also established. These subsequent transactions materially change the company’s financing and debt profile from the March 3 balance sheet.
- The EIMEA facility closure and shared-services transfer plan is expected to incur approximately $22.4 million in total restructuring costs. Management estimated about $13.1 million would be incurred during the remainder of fiscal 2012 and $5.0 million in fiscal 2013. Additional termination benefits of $1.4 million were expected to be recorded in Q2.
- Key operating risks include raw-material inflation and availability, foreign-exchange movements, economic and consumer-demand weakness, and execution of the Forbo integration and EIMEA restructuring. A 10% hypothetical U.S. dollar movement was estimated to change net income by about $1.0 million; a one-percentage-point interest-rate change on variable-rate debt by about $1.5 million annually.
- Environmental liabilities were estimated at $2.1 million, with a high-end estimate of $2.7 million for known matters. The Sorocaba, Brazil remediation accrual was $1.1 million. Asbestos-related probable liabilities and insurance recoveries were $0.7 million and $0.6 million, respectively; the company noted uncertainty around other potential claims and insurer coverage.
- Management stated that it did not believe pending environmental or legal matters would materially affect long-term financial condition, while acknowledging that adverse developments or settlements could affect future-period results or cash flows.
Important facts for investors to verify
- Final Forbo purchase-price allocation, acquired-business performance, integration costs, and the ultimate funding and debt impact.
- Whether pricing continues to offset raw-material inflation and supply constraints, and whether inventory levels normalize.
- Progress and total costs of EIMEA restructuring, including the additional termination benefits disclosed after quarter-end.
- Performance in Latin America Paints and Asia Pacific, where segment income declined despite revenue growth.
- Developments in environmental remediation, asbestos claims, insurance recoveries, and compliance with financing covenants.