H.B. Fuller Company — Q2 2012 Form 10-Q
Reporting period: 13 weeks ended June 2, 2012; year-to-date figures cover 26 weeks. Comparisons are with the periods ended May 28, 2011 unless noted. Amounts below are in millions of U.S. dollars, except per-share data and percentages.
Business context
H.B. Fuller manufactures adhesives and related products. On March 5, 2012, it acquired Forbo Holding AG’s global industrial adhesives and synthetic polymers business for $404.7 million. The acquired operations were included in four segments from the acquisition date. The company also agreed to sell its Central America Paints business; the sale was expected to close in Q3 2012, and its results were classified as discontinued operations.
Financial performance
| Metric | 13 weeks ended June 2, 2012 | 26 weeks ended June 2, 2012 | Comparable 2011 period |
|---|---|---|---|
| Net revenue | $527.0; up 43.1% | $872.4; up 28.4% | $368.4 quarter; $679.5 year to date |
| Gross profit / margin | $136.6 / 25.9% | $239.2 / 27.4% | $103.0 / 28.0%; $188.6 / 27.8% |
| Segment operating income | $43.6 | $71.3 | $32.8; $50.4 |
| Special charges, net | $32.1 | $38.6 | None in 2011 comparable periods |
| Income from continuing operations | $5.1 | $18.7 | $24.2; $35.9 |
| Net income attributable to H.B. Fuller | $1.9; diluted EPS $0.04 | $17.2; diluted EPS $0.34 | $25.1 / $0.50; $39.5 / $0.79 |
Q2 organic revenue growth was 6.1%: pricing contributed 6.8%, while volume declined 0.7%; acquisition added 39.4% and currency reduced growth by 2.4%. Year-to-date organic growth was 8.6% (pricing +8.2%, volume +0.4%); acquisition added 21.4% and currency reduced growth by 1.6%.
Q2 gross margin fell 210 basis points, principally because the acquired business had lower margins; legacy-business gross margin improved 140 basis points. Year-to-date gross margin declined 40 basis points, while legacy-business gross margin improved 170 basis points. SG&A was $93.0 million in Q2 and $168.0 million year to date; as a share of revenue it declined to 17.6% and 19.3%, respectively.
Interest expense rose to $5.7 million for Q2 and $8.4 million year to date, mainly reflecting acquisition financing. Q2 income included a $3.1 million after-tax loss from discontinued operations; year-to-date discontinued operations recorded a $1.3 million loss. These results included an expected $5.8 million tax expense from structural changes associated with the planned sale.
Cash flow, debt and liquidity
- Cash from continuing operations was $34.8 million for the first 26 weeks, versus $22.0 million in 2011. Capital spending was $12.5 million and dividends paid were $8.0 million; reported year-to-date free cash flow was $14.3 million.
- Investing activities used $416.9 million, including $404.7 million for the Forbo acquisition. Financing activities provided $380.9 million, including $490.0 million of long-term debt proceeds and $103.1 million of debt repayments.
- Cash and cash equivalents were $154.3 million at June 2, 2012, of which $142.2 million was held outside the U.S. Total debt was $616.8 million, versus $232.3 million at December 3, 2011. The debt-to-total-capital ratio increased to 46.8% from 24.8% at year-end.
- Net working capital was 17.5% of annualized revenue; DSO was 53 days and inventory days on hand were 53. The company reported compliance with debt covenants: trailing EBITDA/interest was 15.9 against a minimum of 2.5, and indebtedness/trailing EBITDA was 2.6 against a maximum of 3.5.
- Management said operating cash flow should meet ongoing liquidity and capital needs and expected to use proceeds from the planned business sale to reduce debt. Scheduled term-loan payments of $7.5 million in June and $9.4 million in September 2012 were expected to be paid with existing cash.
Changes, outlook and notable items
- The Forbo acquisition contributed $144.4 million of Q2 revenue and $1.4 million of segment operating income. Purchase-price allocation remained preliminary; the company expected to complete valuation in Q3 2012.
- The Business Integration Project combines Forbo integration with EIMEA restructuring. Management estimated $121 million in total costs, including $46.1 million incurred since project inception, and projected $90 million in annual cash savings and other pre-tax profit improvements when initiatives are completed in 2014. It targeted raising global EBITDA margin from just under 11% in 2011 to 15% by 2015. These are estimates, not guaranteed outcomes.
- Plans included closing three additional European production facilities and six North American facilities. Project costs and savings depend on restructuring and integration execution; expected capital spending was about $65 million annually in 2012–2014, above the approximately $50 million annual level described for the combined businesses.
- Management expected raw-material inflation to abate for the rest of fiscal 2012 and costs to remain around Q2 levels. It cited ongoing supply-demand and feedstock risks, and noted weak end-market demand in some regions. Currency, interest-rate and raw-material exposures could affect results.
- Q2 included a $0.7 million impairment of a cost-basis investment. Environmental remediation reserves were $1.9 million, with a stated high end of $2.5 million for known matters. Asbestos and other litigation remained subject to uncertainty; management did not expect pending matters to have a material adverse effect based on available information.
- Disclosure controls were assessed as effective, but the recently acquired Forbo business—about 28% of total assets—was excluded from the internal-control assessment in this acquisition year.
Most important facts for investors to verify
- Whether Forbo integration delivers the stated savings, margin targets and schedule, and how actual costs compare with the $121 million estimate.
- Whether the acquired business’s lower margins improve and legacy-business pricing continues to offset raw-material costs.
- Debt reduction, covenant headroom, interest costs and the use and timing of proceeds from the Central America Paints sale.
- Completion of the Forbo purchase-price valuation and any resulting changes to goodwill, intangibles or reported earnings.
- Final sale terms and tax effects, including the treatment and realizability of foreign tax credits.
- Developments in environmental remediation, asbestos claims and insurance or indemnification recoveries.