H.B. Fuller Company (NYSE: FUL) — Q1 2024 Form 10-Q
Reporting period: Three months ended March 2, 2024; comparable period ended March 4, 2023. The interim financial statements are unaudited. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net revenue | $810.4 | $809.2 | +0.2% |
| Gross profit | $239.2 | $214.8 | +11.4% |
| Gross margin | 29.5% | 26.5% | +3.0 percentage points |
| SG&A | $172.4 | $154.5 | +11.6% |
| Operating income | $66.9 | $60.3 | +11.0% |
| Net income attributable to H.B. Fuller | $31.0 | $21.9 | +41.6% |
| Diluted EPS | $0.55 | $0.39 | +$0.16 |
| Operating cash flow | $47.4 | $5.5 | +$41.8 |
| Free cash flow, company-defined non-GAAP | $4.1 | $(42.1) | Improved |
Revenue was nearly unchanged because 5.0% growth from acquisitions was offset by lower organic revenue (4.2% decline) and currency impact (0.6% decline). Organic weakness reflected lower pricing and volume. Lower raw-material costs primarily drove the gross-margin improvement; lower pricing and volume partly offset it. SG&A increased due to acquisitions, restructuring and higher variable compensation, rising to 21.3% of revenue from 19.1%.
Segments
- Hygiene, Health and Consumable Adhesives: Revenue $367.7 million, down 4.1%; operating income $46.9 million, up 4.0%; margin 12.8%, versus 11.8%.
- Engineering Adhesives: Revenue $328.8 million, down 1.3%; operating income $34.8 million, up 7.1%; margin 10.6%, versus 9.8%.
- Construction Adhesives: Revenue $114.0 million, up 23.1%, including 10.3% organic growth and 12.7% from acquisitions. Operating loss narrowed to $2.6 million from $9.6 million.
- Corporate Unallocated: Loss increased to $12.2 million from $7.7 million, attributed to higher restructuring and acquisition project costs.
Cash, debt and liquidity
- Cash and cash equivalents were $165.2 million at March 2, 2024, down from $179.5 million at December 2, 2023. The company said most cash was held outside the United States.
- Total short- and long-term debt was $1,830.8 million, compared with $1,838.4 million at December 2, 2023 and $1,873.5 million a year earlier. Debt-to-total-capital was 50.9%, versus 51.1% at December 2 and 53.4% a year earlier.
- Operating activities provided $47.4 million; capital expenditures were $43.3 million. Investing activities used $42.7 million and financing activities used $16.9 million. Working-capital changes provided $34.3 million overall, including a $50.2 million inventory cash use.
- Liquidity indicators included receivables DSO of 59 days, inventory days of 82 and payables DPO of 73. The company stated it expects operating cash flows and available borrowing capacity to meet liquidity and capital needs.
- Reported covenant measures were secured total indebtedness/TTM EBITDA of 2.0 against a maximum of 4.75, and TTM EBITDA/consolidated interest expense of 4.8 against a minimum of 2.0. The maximum leverage covenant steps down to 4.50 for quarters ending after June 1, 2024.
Subsequent event: On March 4, 2024, the company refinanced $794 million of existing Term B loans and added $200 million of Term B loans, bringing the amended facility principal to $994 million. The applicable SOFR margin decreased by 25 basis points to 200 basis points; the prime-rate margin became 100 basis points.
Outlook, commentary and risks
- The filing provides no specific revenue or earnings guidance. Management expects restructuring charges and related cash payments to continue, with the plans expected to run through fiscal 2026.
- Restructuring costs are estimated at $39.1–$44.1 million pretax, including $28.4–$29.6 million of cash severance and related employee costs. The company reported $32.2 million incurred through March 2, 2024; Q1 charges were $4.1 million.
- The reported Q1 effective tax rate was 20.7%, including $2.5 million of discrete tax benefits; excluding those benefits, the rate was 27.4%.
- Market exposures include interest rates, foreign exchange and raw-material prices. The company reported no material change in market risk since its prior fiscal year-end. It said existing risk factors were unchanged and disclosure controls were effective.
- Environmental remediation liabilities were $4.6 million. Asbestos-related claims remain subject to third-party indemnification and insurance arrangements, including exposure from insurer insolvencies. A grout-related property-damage lawsuit seeks class treatment; class certification had not been sought, and the company said it could not estimate a possible loss range.
Most important facts for investors to verify
- Whether organic pricing and volume trends improve, particularly in Hygiene, Health and Consumable Adhesives, and whether Construction Adhesives can reach profitability.
- Whether gross-margin gains from lower raw-material costs persist and offset ongoing pricing pressure and higher SG&A.
- Actual restructuring cash costs and remaining charges versus the $39.1–$44.1 million estimate, and progress on expected savings.
- Debt and interest-rate exposure following the March 4 refinancing, including covenant headroom as the leverage limit tightens after June 1, 2024.
- The filing reports $6.2 million of common-stock repurchases in its cash-flow and equity statements and MD&A, but says in Part II that no equity securities were repurchased during the quarter. Investors should verify the nature and reconciliation of these disclosures.
- Developments in asbestos claims, environmental matters and the grout lawsuit, for which the company had not recorded a loss contingency because the potential loss could not be estimated.