H.B. Fuller Company — FY2015 Form 10-K
Business context and reporting period. H.B. Fuller formulates and sells adhesives, sealants and specialty chemicals in 36 countries. This annual report covers the fiscal year ended November 28, 2015; comparisons are primarily with fiscal 2014. Its four segments are Americas Adhesives, EIMEA, Asia Pacific and Construction Products.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change / context |
|---|---|---|---|
| Net revenue | $2,083.7 million | $2,104.5 million | Down 1.0% reported; constant-currency growth was 5.0%, with currency reducing revenue by 6.0 percentage points. |
| Gross profit / margin | $568.0 million / 27.3% | $533.3 million / 25.3% | Margin improved 200 basis points, mainly on lower raw-material costs. |
| SG&A | $397.6 million | $383.4 million | Up 3.7%; included higher Tonsan-related expense. |
| Special charges, net | $4.7 million | $51.5 million | Primarily Business Integration Project costs. |
| Income from continuing operations | $88.4 million | $50.2 million | Diluted continuing-operations EPS was $1.71 versus $0.97. |
| Net income attributable to H.B. Fuller | $86.7 million | $49.8 million | FY2015 also included a $1.3 million discontinued-operations loss. |
| Operating cash flow, continuing operations | $210.5 million | $29.7 million | FY2014 cash generation was unusually low; 2015 working capital still used $10.8 million. |
| Cash and total debt | $119.2 million / $722.9 million | $77.6 million / $574.8 million | Net financial debt rose to $603.7 million from $497.2 million. |
FY2015 capital expenditures were $58.6 million, down from $139.8 million. Free cash flow, as defined by the company as operating cash flow less capital expenditures and dividends, was $126.2 million versus negative $133.1 million. The $300 million revolving facility was undrawn. Debt covenants were met; the reported trailing-twelve-month debt-to-EBITDA covenant ratio was 2.8 against a limit temporarily raised to 3.75. The debt capitalization ratio increased to 45.3% from 39.2%, and ROIC declined to 6.9% from 7.4%.
FY2015 fourth-quarter net revenue was $548.1 million, income from continuing operations was $25.1 million, and diluted EPS from continuing operations was $0.49.
Material changes and segment performance
- Revenue growth was led by acquisitions and expansion in Asia Pacific and Construction Products, but reported results were materially reduced by currency translation, especially weaker euro, Turkish lira, Canadian and Australian dollars.
- Americas Adhesives revenue fell 4.8% and segment operating income rose 22.2%; lower raw-material costs and manufacturing costs helped margins, while volume was hurt by market softness and ERP-related market-share losses.
- EIMEA revenue fell 15.9% and operating income fell 61.1%. Currency accounted for a 14.0% revenue reduction; soft core-European demand and Business Integration Project production inefficiencies also weighed on volume and profitability.
- Asia Pacific revenue grew 33.7% and operating income 84.3%, including Tonsan; Construction Products revenue grew 23.8% and operating income 127.5%, supported by retail-partner gains and the ProSpec acquisition.
- H.B. Fuller acquired 95% of China-based Tonsan Adhesive for approximately $215.9 million and Continental Products in Kenya for approximately $1.6 million. Tonsan added $125.1 million of goodwill; purchase accounting remained preliminary at year-end. The company agreed to acquire the remaining 5% of Tonsan for approximately $13.0 million beginning in 2019 and may owe up to approximately $66.8 million in contingent consideration.
Outlook, commentary and risks
- For 2016, management expected about 4% constant-currency revenue growth, primarily from Asia Pacific and Construction Products; U.S.-dollar strength could reduce reported growth by up to 3 percentage points. Management expected gross-margin improvement, SG&A growth broadly in line with revenue, and full-year EBITDA margin of approximately 14%.
- Management forecast approximately $60 million of 2016 capital expenditures. Project ONE’s total cost was expected to exceed its original approximately $60 million estimate; a revised cost and schedule were pending. Latin America implementation was planned to begin in the second half of 2016, with completion expected in early 2017.
- Raw materials represented over 75% of cost of sales. Management estimated that a hypothetical 1% change in raw-material costs would change net income by approximately $7.3 million, or $0.14 per diluted share. Foreign-exchange sensitivity and the ability to pass through cost changes are also significant risks.
- The company reported a material weakness in internal control over financial reporting related to acquisition accounting for Tonsan, including review of valuation assumptions, contingent consideration, specialist involvement and documentation. An immaterial prior-period misstatement was corrected before issuance. Management and the auditor concluded that ICFR was ineffective as of year-end; the auditor nevertheless issued an unqualified opinion on the financial statements. Controls at the two February 2015 acquisitions, representing about 16% of assets and 5% of revenue, were excluded from the assessment.
- Environmental investigations and remediation, asbestos claims, product and other litigation, pension funding, tax exposures, integration execution and information-technology security are among the disclosed risks. Management did not expect pending legal or environmental matters to have a material adverse effect based on current information, while noting that adverse developments could affect future-period results or cash flows. Estimated environmental compliance spending over the next two years was $9.9 million, including $1.9 million of capital expenditures.
Investor verification priorities
- Track remediation of the Tonsan acquisition-accounting material weakness and any further purchase-price or contingent-consideration adjustments.
- Assess whether EIMEA’s operating performance and production reliability improve, and whether Americas Adhesives recovers lost volume and market share.
- Compare realized 2016 constant-currency growth, currency headwinds, gross margin and EBITDA margin with management’s outlook.
- Monitor debt, interest expense, covenant headroom, working-capital trends and cash conversion following the Tonsan acquisition.
- Review Project ONE’s revised total cost, implementation timing and any renewed operational disruption; also follow environmental, asbestos and other contingency developments.