H.B. Fuller Company (NYSE: FUL) — 2022 Form 10-K
Business context and reporting period
H.B. Fuller manufactures and sells adhesives, sealants and specialty chemicals across 34 countries. Its three reportable segments are Hygiene, Health and Consumable Adhesives; Engineering Adhesives; and Construction Adhesives. Fiscal 2022 ended December 3, 2022 and included 53 weeks, compared with 52 weeks in fiscal 2021.
Key financial results
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net revenue | $3,749.2 million | $3,278.0 million |
| Gross profit / margin | $963.7 million / 25.7% | $845.3 million / 25.8% |
| Segment operating income | $322.7 million | $252.6 million |
| Net income attributable to H.B. Fuller | $180.3 million | $161.4 million |
| Diluted EPS | $3.26 | $2.97 |
| Cash from operating activities | $256.5 million | $213.3 million |
| Capital expenditures | $130.0 million | $96.1 million |
| Free cash flow after dividends (non-GAAP) | $87.3 million | $82.3 million |
Revenue rose 14.4%: pricing contributed 15.4%, volume 1.2%, acquisitions 1.6% and the extra fiscal week approximately 2.0%, partly offset by a 5.8% currency headwind. Organic revenue growth, defined as pricing plus volume, was 16.6%. Raw material costs increased 19.0% to $2,154.1 million. SG&A rose 8.1% but declined as a share of revenue to 17.1% from 18.1%. Net margin was 4.8%, versus 4.9%.
Segment revenue and operating income were: Hygiene, Health and Consumable Adhesives, $1,695.9 million and $165.8 million; Engineering Adhesives, $1,532.7 million and $168.8 million; Construction Adhesives, $520.6 million and $23.0 million. Segment margins improved in all three segments, to 9.8%, 11.0% and 4.4%, respectively.
Liquidity, debt and material changes
Cash and cash equivalents were $79.9 million at year-end, compared with $61.8 million a year earlier. Total short- and long-term debt was $1,765.1 million, up from $1,616.5 million; the debt capitalization ratio increased to 52.3% from 50.2%. Net working capital as a percentage of annualized revenue rose to 16.7% from 15.7%, and inventory days increased to 71 from 65; receivables DSO was 62 days in both years.
The company had $175.5 million drawn on its $700 million revolving facility, with $515.2 million unused after letters of credit. The Term Loan B balance was $1,001.2 million, bears floating-rate interest (6.19% at year-end) and matures in 2024; the revolver also matures in 2024. Public notes include $300 million due 2027 at 4.00% and $300 million due 2028 at 4.25%. Interest expense increased to $91.5 million from $78.1 million, primarily due to higher rates and debt balances. The company reported compliance with its debt covenants: leverage was 2.3x against a 5.25x maximum, and interest coverage was 5.4x against a 2.0x minimum.
Cash from operations increased, but working capital used $103.2 million. Investing cash outflow was $375.3 million, including $250.8 million for acquisitions. Financing cash inflow was $160.3 million, reflecting debt issuance and repayments among other items. The company’s 2022 acquisitions included Apollo, Fourny, ZKLT, GSSI and TissueSeal. Foreign currency translation drove a $131.8 million comprehensive loss component, and total comprehensive income attributable to H.B. Fuller was a loss of $0.8 million despite positive net income.
Outlook, risks and unusual items
- Management said inflationary pressures, including higher raw material and operating costs, were expected to continue into fiscal 2023. It did not provide a clear numerical revenue or EPS outlook in the filing. Expected 2023 capital expenditures are approximately $120 million.
- Raw materials represented approximately 75% of cost of sales. Management estimated that a hypothetical 1% change in raw material costs would affect net income by about $15.7 million, or $0.28 per diluted share. A hypothetical 1% currency-driven change in cost of sales would affect net income by about $10.5 million, or $0.19 per diluted share.
- Foreign currency movements reduced 2022 revenue by approximately $191.7 million. Approximately 55% of revenue was generated outside the United States, exposing results to currency, economic, political and regulatory risks.
- Construction Adhesives goodwill had only 10% valuation headroom, with $425.8 million assigned to that reporting unit. Management stated a 70-basis-point increase in the discount rate or a 25% decrease in long-term growth rates would reduce estimated fair value below carrying value. No goodwill impairment was recorded.
- Environmental remediation liabilities were $5.8 million. The company also disclosed asbestos-related litigation; 2022 settlements totaled $296,000, with $195,000 of insurance payments received or expected. Management did not expect pending matters to have a material adverse effect, while noting outcomes and timing remain uncertain.
- Other notable matters include LIBOR transition exposure for term debt and swaps, ongoing Project ONE ERP implementation (estimated total cost $200–$210 million; approximately $163 million spent to date), and acquisition integration risks. The 2022 effective tax rate was 30.6%, including $9.3 million of discrete tax expense; excluding those items it was 26.9%.
Most important facts for investors to verify
- Whether pricing can continue to offset raw-material inflation and protect gross margins as pricing and input costs normalize.
- The company’s refinancing and interest-rate plans for the $1.0 billion Term Loan B and revolving facility due in 2024, including progress transitioning LIBOR-based obligations.
- Whether acquisitions, especially Apollo, deliver expected growth and returns, and whether Construction Adhesives achieves the assumptions supporting its limited goodwill headroom.
- Whether inventory and working-capital investment converts to cash, and whether projected 2023 capital spending remains near $120 million.
- Developments in environmental and asbestos claims, tax contingencies and implementation risks for Project ONE.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and financial reporting controls were effective as of December 3, 2022.