H.B. Fuller Company — Q3 2021 Form 10-Q
Reporting period: Third quarter ended August 28, 2021; year-to-date figures cover the nine months ended that date. Comparatives are the three and nine months ended August 29, 2020. H.B. Fuller makes specialty adhesives and reports three segments: Hygiene, Health and Consumable Adhesives; Engineering Adhesives; and Construction Adhesives. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $826.8m | $691.5m | $2,380.6m | $2,012.6m |
| Gross profit | $194.0m | $187.8m | $603.9m | $543.0m |
| Gross margin | 23.5% | 27.2% | 25.4% | 27.0% |
| Operating income | $59.5m | $58.7m | $176.9m | $144.4m |
| Net income attributable to H.B. Fuller | $31.6m | $41.6m | $110.5m | $83.1m |
| Diluted EPS | $0.58 | $0.79 | $2.04 | $1.59 |
- Q3 revenue rose 19.6% year over year: 10.1% from volume, 6.3% from pricing and 3.2% from currency. Nine-month revenue rose 18.3%, reflecting 12.7% volume, 2.6% pricing and 3.0% currency.
- Q3 gross margin fell 370 basis points, chiefly due to higher raw-material costs; nine-month gross margin fell 160 basis points for the same principal reason. Raw-material costs increased 30.3% in Q3 and 23.2% year to date.
- Q3 net income declined 24.0%, despite higher revenue and operating income. The quarter included $5.6m of discrete tax expense; the reported effective tax rate was 39.2%, versus 11.3% a year earlier. Excluding discrete tax items, management reported effective rates of 27.6% and 27.1%, respectively. Year-to-date net income rose 33.0%.
- Segment trends were mixed. Q3 Engineering Adhesives revenue grew 24.0% and operating income 14.4%; Hygiene, Health and Consumable Adhesives revenue grew 15.4% while operating income declined 6.9%; Construction Adhesives revenue grew 20.9% while operating income declined 23.3%. Construction’s year-to-date operating income fell 47.9%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $161.1m, down from $193.0m. Capital spending was $77.2m and dividends paid were $26.0m, leaving reported free cash flow after dividends of $57.9m, compared with $96.1m a year earlier.
- Working capital absorbed $26.8m of cash. Inventory absorbed $141.1m; trade receivables absorbed $61.9m; trade payables provided $176.2m. Inventory was $462.6m at quarter-end, up from $323.2m at fiscal year-end.
- Cash was $68.1m, down from $100.5m at November 28, 2020. Total short- and long-term debt was $1,664.0m, down from $1,773.9m. The total debt-to-total-capital ratio improved to 51.4% from 56.1% at fiscal year-end and 58.7% a year earlier.
- Current assets were $1,204.5m and current liabilities $709.7m. Management said operating cash flows should meet ongoing liquidity and capital spending needs and that the company expects access to debt financing. The company reported compliance with its debt covenants; its secured-debt-to-TTM-EBITDA measure was 2.3 against a maximum of 5.9, and interest coverage was 5.6 against a minimum of 2.0.
Outlook, commentary and notable items
- The filing provides no specific revenue, earnings or margin guidance. Management described improving global COVID-19 trends as positive, while noting the company continued to monitor the pandemic; all global manufacturing operations had remained open.
- Management identified higher raw-material costs as the main source of margin pressure. Foreign exchange also affected results, and the company uses currency and interest-rate derivatives to manage exposures. It reported no material change in market risks from its prior annual report.
- The 2020 restructuring plan is expected to cost approximately $20.0m before tax; $16.9m had been incurred through August 28, 2021. Completion is expected in fiscal 2022. Nine-month restructuring charges were $1.4m.
- Other income for the first nine months included pension benefits and gains related to a Brazilian transactional tax legal settlement and a legal-entity merger. The STR solar-encapsulant asset acquisition closed in January 2021 for a $5.4m base price, with an additional $0.8m due after one year and up to $1.7m contingent consideration.
- Environmental remediation liabilities were $7.5m. The company also disclosed asbestos-related litigation and other ordinary-course legal matters; management said pending matters were not expected to have a material adverse effect, while acknowledging that adverse developments could affect future results or cash flows.
Important facts for investors to verify
- Whether pricing and other actions can offset continued raw-material inflation and restore gross margins.
- Whether inventory growth and weaker operating cash flow are temporary, and whether cash conversion improves from the reported $57.9m free cash flow after dividends.
- Segment recovery, especially Construction Adhesives’ declining operating income and Hygiene, Health and Consumable Adhesives’ Q3 margin compression.
- Debt reduction, refinancing and covenant headroom, including the effects of interest rates and foreign-exchange movements.
- Potential changes in environmental, asbestos and other legal liabilities, as well as remaining restructuring costs and acquisition-related contingent payments.