H.B. Fuller Company — Q1 FY2022 10-Q
Reporting period: Three months ended February 26, 2022; comparisons are to the three months ended February 27, 2021 unless otherwise noted. H.B. Fuller manufactures adhesives and reports three segments: Hygiene, Health and Consumable Adhesives; Engineering Adhesives; and Construction Adhesives. Figures below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2022 | Prior-year quarter | Change / context |
|---|---|---|---|
| Revenue | $856.5 million | $725.9 million | Up 18.0%; organic growth 20.8% (price +14.7%, volume +6.1%), acquisitions +0.9%, currency −3.7%. |
| Gross profit / margin | $212.9 million / 24.9% | $192.4 million / 26.5% | Profit up 10.7%; margin down 160 basis points, primarily from higher raw-material costs. |
| Operating income | $57.0 million | $48.4 million | Up approximately 17.9%. |
| Net income attributable to H.B. Fuller | $38.3 million | $29.8 million | Up 28.5%; net margin was 4.5%, versus 4.1%. |
| Diluted EPS | $0.69 | $0.56 | Up from prior year. |
| Operating cash flow | $(17.7) million | $35.8 million | Working-capital changes used $27.6 million, including an $87.4 million inventory cash outflow. |
| Capital expenditures / dividends paid | $48.9 million / $8.9 million | $35.3 million / $8.5 million | Free cash flow after dividends, a non-GAAP measure, was $(75.5) million versus $(8.0) million. |
| Cash and cash equivalents | $63.5 million | $61.8 million at Nov. 27, 2021 | Majority held outside the U.S. |
| Total debt | $1,914.1 million | $1,616.5 million at Nov. 27, 2021 | Debt-to-total-capital ratio was 53.8%, up from 50.2% at fiscal year-end. |
Segments and material changes
- Hygiene, Health and Consumable Adhesives: Revenue $389.5 million, up 16.0%; operating income $32.2 million, up 7.7%; margin 8.3%, down 60 basis points.
- Engineering Adhesives: Revenue $354.0 million, up 13.2%; operating income $32.6 million, up 7.2%; margin 9.2%, down 50 basis points.
- Construction Adhesives: Revenue $113.0 million, up 45.6%, including 8.1% from acquisitions; operating income was $4.4 million versus a $4.7 million loss; margin improved to 3.9% from −6.1%.
- Raw-material costs rose 27.5% year over year and increased as a share of revenue. SG&A rose 8.3% in dollars but declined to 18.2% of revenue from 19.8%. Interest expense fell 10.8%, which the company attributed to lower interest rates.
Acquisitions, outlook and risks
- During the quarter, the company acquired Apollo for a base price of approximately $203.6 million and Fourny for approximately $14.6 million. Both are in Construction Adhesives; purchase-price allocations were preliminary. The company said Apollo and Fourny are expected to strengthen positions in high-value, high-margin European markets. Apollo-related goodwill of $104.9 million was not tax deductible.
- Management gave no specific revenue or earnings guidance in the provided filing text. It said operating cash flows should be adequate for ongoing liquidity and capital needs and that debt financing should remain available. It expected the 2020 restructuring plan to be completed in fiscal 2022; estimated total plan costs were approximately $20 million.
- Management cited higher raw-material costs and ongoing uncertainty from COVID-19 and supply-chain disruption. The filing added that the Russia-Ukraine conflict and associated sanctions, logistics constraints, currency movements, and potential cyberattacks could adversely affect results; Russia was not a material part of the business at the time.
- Environmental remediation liabilities were $6.5 million. The company also disclosed asbestos-related litigation and other ordinary-course legal matters; management did not expect currently known matters to have a material adverse effect, while noting that developments could affect future-period results or cash flows.
- Credit covenants were met at quarter-end. Reported covenant results included secured debt/TTM EBITDA of 2.9 against a maximum of 5.9, and TTM EBITDA/consolidated interest expense of 6.0 against a minimum of 2.0.
Important facts for investors to verify
- Whether pricing can continue to offset raw-material inflation and recover the 160-basis-point gross-margin decline.
- Whether inventory growth and working-capital use ease, and how quickly operating cash flow and free cash flow recover.
- Acquisition integration, preliminary purchase-price valuations, expected synergies, and the resulting higher debt and goodwill.
- Debt levels, refinancing costs, covenant headroom, and the company’s ability to fund investment and dividends.
- Exposure to foreign exchange, geopolitical disruption, supply constraints, environmental remediation, and asbestos litigation.