H.B. Fuller Company — Q1 2023 Form 10-Q
Business context and period: H.B. Fuller manufactures adhesives and operates through Hygiene, Health and Consumable Adhesives; Engineering Adhesives; and Construction Adhesives. This unaudited quarterly report covers the three months ended March 4, 2023, compared with the three months ended February 26, 2022. Amounts below are U.S. dollars.
Key financial results
| Metric | Q1 2023 | Prior-year quarter | Change |
|---|---|---|---|
| Net revenue | $809.2 million | $856.5 million | Down 5.5% |
| Gross profit | $214.8 million | $212.9 million | Up 0.9% |
| Gross margin | 26.5% | 24.9% | Up 1.6 percentage points |
| Operating income | $60.3 million | $57.0 million | Up 5.7% |
| Net income attributable to H.B. Fuller | $21.9 million | $38.3 million | Down 42.8% |
| Diluted EPS | $0.39 | $0.69 | Down $0.30 |
| Net cash from operating activities | $5.5 million | $(17.7) million | Improved |
| Free cash flow after dividends | $(52.3) million | $(75.5) million | Improved; remained negative |
Cost of sales fell 7.6%, to $594.4 million, and represented 73.5% of revenue versus 75.1%. SG&A was $154.5 million, or 19.1% of revenue, compared with $155.9 million, or 18.2%. Interest expense rose 81.9% to $33.1 million, primarily due to higher debt balances and rates. The reported effective tax rate was 31.9%; excluding discrete tax expense, it was 29.2%.
Liquidity, debt and cash flows
- Cash and cash equivalents were $125.5 million at March 4, 2023, up from $79.9 million at December 3, 2022; most cash was held outside the United States.
- Total short- and long-term debt was $1.874 billion, versus $1.765 billion at fiscal year-end. Debt to total capital was 53.4%, compared with 52.3% at year-end and 53.8% a year earlier.
- Current assets were $1.341 billion and current liabilities $643.2 million. Inventories increased to $526.0 million from $491.8 million at year-end.
- Operating cash flow benefited from a $30.6 million net working-capital cash source, but was constrained by lower earnings and cash uses including accrued compensation and other assets. Capital expenditures were $47.6 million and dividends paid were $10.2 million.
- A February refinancing established a $500 million Term Loan A, an $800 million Term Loan B and a $700 million revolving facility. No revolving balance was outstanding; letters of credit reduced availability by $9.9 million. The term loans carried stated rates of 6.47% and 7.12% at quarter-end. The company also had a $400 million cash-flow interest-rate swap.
- Credit agreement financial covenants begin to be measured for the quarter ending June 3, 2023. The filing states secured leverage and interest-coverage limits but does not report a measured covenant result for this quarter.
Material changes and segment performance
- Revenue fell 5.5%: volume reduced revenue by 10.8% and currency by 4.9%, partly offset by 8.3% higher pricing and 1.9% contribution from acquisitions. Management attributed currency pressure mainly to weaker European and other foreign currencies versus the U.S. dollar.
- Hygiene, Health and Consumable Adhesives revenue declined 1.5% to $383.5 million, while operating income rose to $45.1 million from $32.2 million; margin increased to 11.8% from 8.3%.
- Engineering Adhesives revenue declined 5.9% to $333.1 million. Operating income was nearly flat at $32.5 million, and margin rose to 9.8% from 9.2%.
- Construction Adhesives revenue declined 18.0% to $92.6 million, and the segment moved to a $9.6 million operating loss from $4.4 million income. Management cited lower volume and deleverage from lower revenue; acquisitions partly offset the sales decline.
- Corporate unallocated operating costs fell to $7.7 million from $12.2 million, reflecting lower acquisition project costs.
Outlook, commentary, risks and unusual items
- Management said it expects operating cash flows to meet ongoing liquidity and capital expenditure needs and believes it can access short- and long-term debt as needed. It also said it expects to meet contractual obligations in fiscal 2023. No specific revenue or earnings guidance was provided in the supplied filing text.
- After quarter-end, on March 27, the company approved a restructuring plan expected to cost $15 million to $20 million, or $12.4 million to $16.4 million after tax. Implementation begins in fiscal Q2 2023 and is expected to finish in fiscal 2025, with most charges and cash payments expected in fiscal 2023 and 2024.
- Q1 restructuring charges were $2.9 million. The quarter also included $2.7 million of debt issuance-cost write-offs associated with refinancing.
- Environmental remediation liabilities were $5.5 million. The company also disclosed asbestos-related litigation and other ordinary-course claims; management stated that currently available information did not indicate a material adverse effect, while noting outcomes and timing remain uncertain.
- Market risks include interest rates, foreign exchange and raw-material prices. The company reported no material change in market risk since its last annual report, and no material change in risk factors.
Important facts for investors to verify
- Whether pricing and cost actions can sustain gross-margin improvement as volume remains weak, particularly in Construction Adhesives.
- Whether operating cash flow improves enough to cover capital spending and dividends, given negative free cash flow after dividends and higher inventory.
- Debt-service cost, refinancing terms and compliance with leverage and interest-coverage covenants once measurement begins in the June 2023 quarter.
- Actual restructuring charges, cash payments, savings and completion timing relative to the announced $15 million to $20 million estimate.
- Acquisition integration and performance, and any changes in environmental, asbestos or other legal exposures.