H.B. Fuller Company — Q3 2013 Form 10-Q
Reporting period: Third quarter (13 weeks) and first nine months (39 weeks) ended August 31, 2013; comparisons are to the periods ended September 1, 2012. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2013 | Q3 2012 | First 9 months 2013 | First 9 months 2012 |
|---|---|---|---|---|
| Net revenue | $514.6 | $500.5 | $1,513.4 | $1,373.0 |
| Gross profit | $144.5 | $134.3 | $424.5 | $373.6 |
| Gross margin | 28.1% | 26.8% | 28.0% | 27.2% |
| Income from continuing operations | $27.2 | $24.6 | $74.0 | $43.3 |
| Net income attributable to H.B. Fuller | $28.3 | $83.3 | $74.9 | $100.5 |
| Diluted EPS | $0.55 | $1.64 | $1.47 | $1.99 |
| Special charges | $12.8 | $4.7 | $29.0 | $43.3 |
Q3 revenue rose 2.8%: pricing contributed 0.1%, volume 1.4%, and currency 1.3%. Nine-month revenue increased 10.2%, including 8.8% from the Forbo acquisition; organic growth was 0.9%. Gross-margin gains reflected integration synergies and other improvement initiatives. Q3 SG&A was $90.6 million, down 0.8%; nine-month SG&A increased 8.8% but declined as a share of revenue.
Reported net income and EPS comparisons are affected by the 2012 Central America Paints divestiture: prior-year results included $58.7 million of Q3 discontinued-operations income, including a $51.7 million after-tax sale gain, and $57.4 million for the first nine months. In 2013, discontinued-operations income was $1.2 million in both periods, reflecting a tax benefit related to the sale. Continuing-operations diluted EPS was $0.53 versus $0.48 for Q3 and $1.44 versus $0.85 for the first nine months.
Cash, debt and liquidity
- Continuing-operations operating cash flow was $89.2 million for the first nine months, versus $65.4 million a year earlier. Capital expenditures were $82.5 million; the company-reported free cash flow measure, after capital expenditures and dividends, was negative $7.7 million.
- Cash and equivalents were $160.3 million at August 31, down from $200.4 million at December 1, 2012; $145.9 million was held outside the United States.
- Total short- and long-term debt was $493.5 million, versus $520.2 million at December 1, 2012. Debt to total capital was 37.0%, compared with 40.1% at both December 2012 and September 2012. The company reported compliance with debt covenants; trailing-twelve-month interest coverage was 12.7x and indebtedness/EBITDA was 1.9x.
- Current assets were $781.5 million and current liabilities $324.9 million at quarter-end. Management said operating cash flows should meet ongoing liquidity and capital needs and that borrowing capacity was available.
Material changes and operating segments
- Segment operating income increased to $53.9 million from $43.0 million in Q3 and to $142.4 million from $114.2 million year to date. This measure excludes special charges.
- Q3 segment operating income improved in North America Adhesives ($32.2 million), Construction Products ($3.3 million) and EIMEA ($14.2 million). Latin America declined to $2.7 million, including a $1.1 million reduction from an Argentina customs-duty review; Asia Pacific was $1.5 million.
- EIMEA reported 3.8% lower sales volume in Q3, partly offset by stronger currency and pricing; management cited generally soft core-European markets. Construction Products revenue grew 8.7%, principally on volume and retail-partner market-share gains.
- In June 2013, Fuller acquired Brazilian adhesives and resin producer Plexbond for $10.2 million, funded with existing cash. The Central America Paints business had been sold in August 2012 and is reported as discontinued operations.
Outlook, commentary and risks
- The Business Integration Project targets $90 million of annual cash savings and other pretax profit improvements when initiatives are complete in 2014, and an EBITDA margin target of 15% by 2015, compared with just under 11% in 2011. Through August 31, $89 million of estimated total costs of $123 million had been expensed; management expected the remaining $34 million through 2014. Q3 EBITDA margin was 13.3%, described as consistent with plan.
- Management expected approximately $15.5 million of remaining project costs in fiscal Q4 2013 and $18.5 million in fiscal 2014. It forecast $110 million of capital expenditures in 2013 and $100 million in aggregate for 2014–2015. Raw-material costs were expected to remain near Q3 exit levels through year-end.
- Management said it reduced discretionary SG&A spending after concluding that its full-year 2013 revenue growth plans would not be achieved. It also noted persistent softness in parts of Europe and customer/share pressures in certain Latin American markets.
- Risks include economic weakness and reduced discretionary spending, foreign-exchange movements, interest rates, and raw-material supply and pricing. The filing estimates a 10% U.S. dollar change would affect net income by about $4.7 million, or $0.09 per diluted share; a one-percentage-point rate change on variable-rate debt would affect annual interest expense by about $1.2 million.
- Environmental proceedings and asbestos-related claims remain contingencies; management did not expect them to have a material adverse effect based on information available, while acknowledging that adverse developments or settlements could affect future periods. The filing also reports a $5.1 million gross unrecognized-tax-benefit liability and $0.7 million of accrued related interest.
Key facts for investors to verify
- Whether integration savings, margin improvement and the 2014–2015 project targets are being achieved, and how remaining restructuring costs and capital spending compare with plan.
- Underlying revenue and profit trends excluding acquisition, currency and discontinued-operation effects, particularly in EIMEA and Latin America.
- Cash generation after elevated capital expenditures, working-capital needs and dividends, alongside debt reduction and liquidity.
- Exposure to foreign exchange, raw-material availability and prices, and potential developments in environmental, asbestos and tax matters.