H.B. Fuller Company — Q3 2012 Form 10-Q
Reporting period: 13 and 39 weeks ended September 1, 2012; comparisons are with the respective periods ended August 27, 2011. Amounts are in U.S. dollars unless noted.
Business context and material developments
- H.B. Fuller manufactures adhesives and related products, reporting five operating segments: North America Adhesives, Construction Products, EIMEA, Latin America Adhesives and Asia Pacific.
- Completed the $404.7 million acquisition of Forbo’s global industrial adhesives business on March 5, 2012. The acquired business contributed $138.0 million of Q3 revenue and $283.4 million for the first 39 weeks.
- Sold Central America Paints on August 6, 2012 for net cash proceeds of $118.6 million, including settlement of intercompany debt. The sale generated a $66.7 million pretax gain ($51.7 million after tax); $5.0 million of gain was deferred pending contingencies expected to be resolved in early 2014.
Financial performance
| Metric | 13 weeks ended Sep. 1, 2012 | 13 weeks ended Aug. 27, 2011 | 39 weeks ended Sep. 1, 2012 | 39 weeks ended Aug. 27, 2011 |
|---|---|---|---|---|
| Net revenue | $500.5 million | $363.1 million | $1,373.0 million | $1,042.5 million |
| Gross profit / margin | $134.3 million / 26.8% | $103.0 million / 28.4% | $373.6 million / 27.2% | $291.6 million / 28.0% |
| Income from continuing operations | $24.6 million | $22.2 million | $43.3 million | $58.0 million |
| Net income attributable to H.B. Fuller | $83.3 million | $23.2 million | $100.5 million | $62.7 million |
| Diluted EPS | $1.64 | $0.47 | $1.99 | $1.26 |
| Operating cash flow from continuing operations | Not separately reported | Not separately reported | $65.4 million | $51.1 million |
- Revenue rose 37.9% in Q3 and 31.7% year to date. Organic growth was 5.0% in Q3 (pricing +3.3%, volume +1.7%) and 7.3% year to date (pricing +6.6%, volume +0.7%). Currency reduced revenue by 5.1% and 2.8%, respectively; acquisitions contributed 38.0% and 27.2% to reported growth.
- Q3 gross margin declined 160 basis points and year-to-date margin declined 80 basis points, primarily because the acquired business had lower margins. SG&A increased in dollars but fell as a share of revenue: 18.3% versus 19.8% in Q3 and 18.9% versus 20.2% year to date.
- Q3 net income included $58.7 million from discontinued operations, including the $51.7 million after-tax sale gain. Year-to-date discontinued-operations income was $57.4 million. Continuing-operations diluted EPS was $0.48 in Q3 and $0.85 year to date, compared with $0.44 and $1.17, respectively.
- Special charges for the Business Integration Project were $4.7 million in Q3 and $43.3 million year to date. Year-to-date charges included a $11.6 million foreign-currency forward-contract gain that partly offset other costs.
Liquidity, debt and capital
- Cash was $207.7 million at September 1, 2012, versus $154.6 million at December 3, 2011; $175.3 million was held outside the U.S. Total short- and long-term debt was $532.5 million, versus $232.3 million at year-end.
- Total debt to total capital increased to 40.1% from 24.8% at year-end and 24.2% a year earlier. The company prepaid $80.0 million of long-term debt in Q3 using sale proceeds.
- For the first 39 weeks, continuing-operations investing cash use was $421.7 million, including the $404.7 million acquisition; financing cash provided was $289.5 million. Free cash flow, as defined by the company after capital expenditures and dividends, was $35.0 million, versus $17.9 million.
- Net working capital was 18.6% of annualized revenue versus 16.9% a year earlier; receivable days were 56 versus 55, and inventory days were 55 in both periods. The company said operating cash flows and borrowing capacity should meet ongoing liquidity and capital needs.
- The company reported compliance with debt covenants: trailing EBITDA/interest of 13.7 against a minimum of 2.5, and total indebtedness/trailing EBITDA of 2.2 against a maximum of 3.5.
Outlook, management commentary and risks
- Management expects raw-material costs to remain around Q3 exit levels through year-end. It cited improved supply-and-demand conditions for several feedstocks and continued pricing and reformulation efforts to support margins.
- The Business Integration Project targets $90.0 million of annual cash savings and other pretax profit improvements when completed in 2014, and an EBITDA margin target of 15% by 2015, from just under 11% in 2011. Estimated total project costs are $121.0 million, with $50.8 million incurred and $70.2 million remaining. Management expects annual capital spending to rise to about $65 million in 2013 and 2014.
- Management reported Q3 EBITDA margin of 11.5%, above plan, and Q3 savings of $2.1 million from workforce reductions and $0.2 million from facility actions. Results and targets remain dependent on executing planned integration, restructuring, facility closures and investments.
- Segment performance was mixed: year-to-date operating income increased in North America Adhesives, Construction Products, EIMEA and Latin America Adhesives, but declined in Asia Pacific. Asia Pacific Q3 organic revenue fell 4.3%, and its segment operating income declined 14.7%.
- Risks include economic weakness and end-market demand, raw-material cost and supply volatility, foreign exchange exposure, integration and restructuring execution, and debt-covenant compliance. The company disclosed environmental remediation and asbestos-related matters; it stated these were not expected to have a material adverse effect based on available information, while noting outcomes and costs remain uncertain. Total environmental reserves were $2.0 million, with a stated high end of the reasonably possible range of $2.7 million.
- Tax items affected results: Q3 included release of a $7.4 million valuation allowance on foreign tax credits and a $4.2 million valuation allowance against Brazil deferred tax assets. No full-year earnings guidance is provided in the filing.
- After quarter-end, the company acquired Engent, Inc. on September 10, 2012 for approximately $8.0 million.
Most important facts for investors to verify
- Underlying earnings and cash generation excluding the Central America Paints sale gain and other discontinued operations.
- Whether Forbo integration delivers the stated $90 million of annual benefits and 15% EBITDA-margin target, and whether total project costs remain within the $121 million estimate.
- Post-acquisition leverage, cash needs, debt maturities and continued compliance with covenant limits.
- Progress on margin recovery, especially the acquired business’s lower margins, raw-material costs and Asia Pacific performance.
- Resolution and collectability of the deferred $5.0 million sale consideration, and the effects of the disclosed tax, environmental and asbestos matters.