H.B. FULLER COMPANY Overview
The Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year endedNovember 30, 2019 for important background information related to our business. Net revenue in the first quarter of 2020 decreased 3.9 percent from the first quarter of 2019. Net revenue decreased 0.2 percent due to sales volume, 1.1 percent due to unfavorable product pricing and 0.9 percent due to the divestiture of our surfactants and thickeners business. Negative currency effects of 1.7 percent compared to the first quarter of 2019 were primarily driven by the weaker Brazilian real, Euro, Argentinian peso, Turkish lira, Chinese renminbi and Australian dollar compared to theU.S. dollar. Gross profit margin decreased 40 basis points primarily due to lower sales price and unfavorable mix partially offset by decreased raw material costs. Net income attributable toH.B. Fuller in the first quarter of 2020 was$9.9 million compared to$12.2 million in the first quarter of 2019. On a diluted earnings per share basis, the first quarter of 2020 was$0.19 per share compared to$0.24 per share for the first quarter of 2019. Restructuring Plan 2020 Restructuring Plan During the fourth quarter of 2019, we approved a restructuring plan related to organizational changes and other actions to optimize operations in connection with the realignment of the Company into three segments ("2020 Restructuring Plan"). In implementing the 2020 Restructuring Plan, we expect to incur costs of approximately$9.0 million to$11.0 million ($7.1 million to$8.7 million after-tax), which includes (i) cash expenditures of approximately$6.0 million to$8.0 million ($4.8 million to$6.4 million after tax) for severance and related employee costs globally and (ii)$3.0 million ($2.3 million after-tax) related to streamlining of processes and other restructuring-related costs. All restructuring costs are expected to be cash costs. We have incurred costs of$9.8 million under this plan as ofFebruary 29, 2020 . The 2020 Restructuring Plan was implemented in the fourth quarter of 2019 and is currently expected to be completed by mid-year of fiscal year 2021.
Royal Adhesives Restructuring Plan
During the first quarter of 2018, we approved a restructuring plan consisting of consolidation plans, organizational changes and other actions related to the integration of the operations of Royal Adhesives with the operations of the Company (the "Royal Adhesives Restructuring Plan"). In implementing the Royal Adhesives Restructuring Plan, we have incurred costs of approximately$10.5 million , which includes (i) cash expenditures of approximately$6.2 million for severance and related employee costs globally and (ii) other costs of approximately$4.3 million related to the optimization of production facilities, streamlining of processes and accelerated depreciation of long-lived assets. Approximately$8.0 million of the costs were cash costs. The Royal Adhesives Restructuring Plan was implemented in the first quarter of 2018 and is substantially complete. Results of Operations Net revenue: Three Months Ended February 29, March 2, 2020 vs ($ in millions) 2020 2019 2019 Net revenue$ 646.6 $ 672.9 (3.9% ) 25
--------------------------------------------------------------------------------
Table of Contents
We review variances in net revenue in terms of changes related to sales volume,
product pricing, business acquisitions and divestitures (M&A) and changes in
foreign currency exchange rates. The following table shows the net revenue
variance analysis for the first quarter of 2020 compared to the same period in
2019:
Three Months Ended February 29, 2020
vs March 2, 2019
Organic growth (1.3% )
M&A (0.9% )
Currency (1.7% )
Total (3.9% )
Organic growth was a negative 1.3 percent in the first quarter of 2020 compared
to the first quarter of 2019. The 1.3 percent negative organic growth in the
first quarter of 2020 was driven by a 4.4 percent decrease in Engineering
Adhesives, partially offset by 3.2 percent growth in Construction Adhesives. HHC
was flat. The decrease is predominately driven by a decrease in sales price. The
0.9 percent decrease related to M&A is due to the sale of our surfactants and
thickeners business. The negative 1.7 percent currency impact was primarily
driven by a weaker Brazilian real, Euro, Argentinian peso, Turkish lira, Chinese
renminbi and Australian dollar compared to the U.S. dollar.
Cost of sales:
Three Months Ended
February 29, March 2, 2020 vs
($ in millions) 2020 2019 2019
Raw materials $ 345.2 $ 361.1 (4.4% )
Other manufacturing costs 131.1 131.9 (0.6% )
Cost of sales $ 476.3 $ 493.0 (3.4% )
Percent of net revenue 73.7% 73.3%
Cost of sales in the first quarter of 2020 compared to the first quarter of 2019
increased 40 basis points as a percentage of net revenue. Raw material cost as a
percentage of net revenue decreased 30 basis points in the first quarter of 2020
compared to the first quarter of 2019 primarily due to decreased raw material
costs. Other manufacturing costs as a percentage of revenue increased 70 basis
points in the first quarter of 2020 compared to the first quarter of 2019
primarily due to the impact of lower net revenue.
Gross profit:
Three Months Ended
February 29, March 2, 2020 vs
($ in millions) 2020 2019 2019
Gross profit $ 170.3 $ 179.9 (5.3% )
Percent of net revenue 26.3% 26.7%
Gross profit in the first quarter of 2020 decreased 5.3 percent and gross profit margin decreased 40 basis points compared to the first quarter of 2019. The decrease in gross profit margin was primarily due to lower sales price and unfavorable mix partially offset by decreased raw material costs.
Selling, general and administrative (SG&A) expenses:
Three Months Ended
February 29, March 2, 2020 vs
($ in millions) 2020 2019 2019
SG&A $ 141.5 $ 145.7 (2.9% )
Percent of net revenue 21.9% 21.7%
SG&A expenses for the first quarter of 2020 decreased
26--------------------------------------------------------------------------------
Table of Contents
Other income (expense), net:
Three Months Ended
February 29, March 2, 2020 vs
($ in millions) 2020 2019 2019
Other income (expense), net $ 5.0 $ 3.4 47.1%
Other income, net in the first quarter of 2020 included
Interest expense:
Three Months Ended
February 29, March 2, 2020 vs
($ in millions) 2020 2019 2019
Interest expense $ 22.8 $ 26.8 (14.9% )
Interest expense in the first quarter of 2020 was $22.8 million compared to
$26.8 million in the first quarter of 2019. Interest expense in the first
quarter of 2020 compared to the first quarter of 2019 was lower due to lower
U.S. debt balances. We capitalized $0.1 million of interest expense in both the
first quarter of 2020 and 2019.
Interest income:
Three Months Ended
February 29, March 2, 2020 vs($ in millions) 2020 2019 2019 Interest income $ 2.9$ 3.1 (6.5% )
Interest income in the first quarter of 2020 was
Income taxes:
Three Months Ended
February 29, March 2, 2020 vs
($ in millions) 2020 2019 2019
Income taxes $ 5.6 $ 3.1 80.6%
Effective tax rate 40.4% 22.7%
27--------------------------------------------------------------------------------
Table of Contents
Income tax expense of$5.6 million in the first quarter of 2020 includes$2.0 million of discrete tax expense. Excluding the discrete tax expense of$2.0 million related to various foreign tax matters, the overall effective tax rate was 25.9 percent. Income tax expense of$3.1 million in the first quarter of 2019 included$0.8 million of discrete tax benefit. Excluding the discrete tax benefit, the overall effective tax rate was 28.2 percent. The reduction in rate without discrete taxes relates to changes in the geographic mix of earnings.
Income from equity method investments:
Three Months Ended
February 29, March 2, 2020 vs
($ in millions) 2020 2019 2019
Income from equity method investments $ 1.6
0.0%
The income from equity method investments relates to our 50 percent ownership of
the Sekisui-Fuller joint venture in
Net income attributable to
Three Months Ended
February 29, March 2, 2020 vs
($ in millions) 2020 2019 2019
Net income attributable to
(18.9% ) Percent of net revenue 1.5% 1.8% The net income attributable toH.B. Fuller for the first quarter of 2020 was$9.9 million compared to$12.2 million for the first quarter of 2019. The diluted earnings per share for the first quarter of 2020 was$0.19 per share as compared to$0.24 per share for the first quarter of 2019. Operating Segment Results As ofNovember 30, 2019 , we had five reportable segments: Americas Adhesives, EIMEA,Asia Pacific , Construction Adhesives and Engineering Adhesives. As of the beginning of fiscal 2020, we realigned our operating segment structure and now have three reportable segments: Hygiene, Health and Consumable Adhesives, Engineering Adhesives and Construction Adhesives. The change in operating segments is based on how we have organized the company to make operating decisions and assess business performance. Prior period segment information has been recast retrospectively to reflect the realignment.
The tables below provide certain information regarding the net revenue and segment operating income of each of our operating segments.
Corporate Unallocated includes acquisition and integration-related charges, restructuring-related charges and the results of business divestitures.
Net Revenue by Segment:
Three Months Ended
February 29, 2020 March 2, 2019
Net % of Net % of
($ in millions) Revenue Total Revenue Total
Hygiene, Health and Consumable Adhesives $ 312.5 48% $ 319.8 48%
Engineering Adhesives 248.9 39% 264.4 39%
Construction Adhesives 85.2 13% 82.8 12%
Segment total $ 646.6 100% $ 667.0 99%
Corporate Unallocated - - 5.9 1%
Total $ 646.6 100% $ 672.9 100%
28--------------------------------------------------------------------------------
Table of Contents
Segment Operating Income (Loss):
Three Months Ended
February 29, 2020 March 2, 2019
Segment Segment
Operating Operating
($ in millions) Income (Loss) % of Total Income (Loss) % of Total
Hygiene, Health and Consumable Adhesives $ 22.7 79% $ 20.9 61%
Engineering Adhesives 15.4 53% 22.0 64%
Construction Adhesives (1.4 ) (5% ) (1.7 ) (5% )
Segment total 36.7 127% 41.2 120%
Corporate Unallocated (7.9 ) (27% ) (7.0 ) (20% )
Total $ 28.8 100% $ 34.2 100%
Hygiene, Health and Consumable Adhesives
Three Months Ended
February 29, March 2, 2020 vs
($ in millions) 2020 2019 2019
Net revenue $ 312.5 $ 319.8 (2.3% )
Segment operating income $ 22.7 $ 20.9 8.6%
Segment operating margin 7.3% 6.5%
The following table provides details of the Hygiene, Health and Consumable Adhesives net revenue variances:
Three Months Ended February 29, 2020
vs March 2, 2019
Organic growth 0.0%
Currency (2.3% )
Total (2.3% )
Net revenue decreased 2.3 percent in the first quarter of 2020 compared to the
first quarter of 2019. Flat organic growth reflected increased sales volume
offset by a decrease in product pricing. The negative currency effect was due to
the weaker Brazilian real, Argentinian peso, Euro, Turkish lira, Chilean peso,
Chinese renminbi and Colombian peso compared to the U.S. dollar. As a percentage
of net revenue, raw material costs decreased 80 basis points due to lower raw
material costs. Other manufacturing costs as a percentage of net revenue
increased 20 basis points. SG&A expenses as a percentage of net revenue
decreased 20 basis points. Segment operating income increased 8.6 percent and
segment operating margin as a percentage of net revenue increased 80 basis
points compared to the first quarter of 2019.
29--------------------------------------------------------------------------------
Table of Contents
Engineering Adhesives
Three Months Ended
February 29, March 2, 2020 vs
($ in millions) 2020 2019 2019
Net revenue $ 248.9 $ 264.4 (5.9% )
Segment operating income $ 15.4 $ 22.0 (30.0% )
Segment operating margin 6.2% 8.3%
The following tables provide details of the Engineering Adhesives net revenue
variances:
Three Months Ended February 29, 2020
vs March 2, 2019
Organic growth (4.4% )
Currency (1.5% )
Total (5.9% )
Net revenue decreased 5.9 percent in the first quarter of 2020 compared to the
first quarter of 2019. The decrease in organic growth was attributable to a
decrease in sales volume and product pricing. The negative currency effect was
due to a weaker Euro, Chinese renminbi, Turkish lira, Brazilian real,
Argentinian peso and South Korean won compared to the U.S. dollar. Raw material
costs as a percentage of net revenue increased 20 basis points. Other
manufacturing costs as a percentage of net revenue increased 120 basis points
due to lower sales volume and unfavorable product mix. SG&A expenses as a
percentage of net revenue increased 70 basis points due to lower net revenue.
Segment operating income decreased 30.0 percent and segment operating margin
decreased 210 basis points compared to the first quarter of 2019.
Construction Adhesives
Three Months Ended
February 29, March 2, 2020 vs
($ in millions) 2020 2019 2019
Net revenue $ 85.2 $ 82.8 2.9%
Segment operating loss $ (1.4 ) $ (1.7 ) 17.6%
Segment operating margin (1.6% ) (2.1% )
The following tables provide details of the Construction Adhesives net revenue variances:
Three Months Ended February 29, 2020
vs March 2, 2019
Organic growth 3.2%
Currency (0.3% )
Total 2.9%
Net revenue increased 2.9 percent in the first quarter of 2020 compared to the
first quarter of 2019. The increase in organic growth was driven by higher sales
volume, partially offset by unfavorable product pricing. The negative currency
effect was due to the weaker Australian dollar and Euro compared to the U.S.
dollar. Raw material costs as a percentage of net revenue decreased 30 basis
points. Other manufacturing costs as a percentage of net revenue increased 90
basis points due to higher production costs. SG&A expenses as a percentage of
net revenue decreased 110 basis points due to cost savings realized from the
Company's business realignment. Segment operating loss decreased 17.6 percent
and segment operating margin increased 50 basis points compared to the first
quarter of 2019.
30--------------------------------------------------------------------------------
Table of Contents
Corporate Unallocated
Three Months Ended
February 29, March 2, 2020 vs
($ in millions) 2020 2019 2019
Net revenue $ - $ 5.9 (100.0% )
Segment operating income $ (7.9 ) $ (7.0 ) 12.9%
Segment operating margin NMP NMP
NMP = Non-meaningful percentage
Corporate Unallocated includes acquisition and integration-related charges, restructuring-related charges and the results of business divestitures.
Net revenue in Corporate Unallocated in the first quarter of 2019 included revenue from our surfactants and thickeners business that was divested during the third quarter of 2019. Segment operating loss increased 12.9 percent compared to the first quarter of 2019 reflecting increased organizational realignment costs.
Financial Condition, Liquidity and Capital Resources
Total cash and cash equivalents as ofFebruary 29, 2020 were$78.7 million compared to$112.2 million as ofNovember 30, 2019 and$113.5 million as ofMarch 2, 2019 . The majority of the$78.7 million in cash and cash equivalents as ofFebruary 29, 2020 was held outsidethe United States . Total long and short-term debt was$1,973.5 million as ofFebruary 29, 2020 ,$1,979.1 million as ofNovember 30, 2019 and$2,235.2 million as ofMarch 2, 2019 . The total debt to total capital ratio as measured by Total Debt divided by (Total Debt plus Total Stockholders' Equity) was 61.8 percent as ofFebruary 29, 2020 as compared to 61.8 percent as ofNovember 30, 2019 and 65.6 percent as ofMarch 2, 2019 . We believe that cash flows from operating activities will be adequate to meet our ongoing liquidity and capital expenditure needs. In addition, we believe we have the ability to obtain both short-term and long-term debt to meet our financing needs for the foreseeable future. Cash available inthe United States has historically been sufficient and we expect it will continue to be sufficient to fundU.S. operations,U.S. capital spending andU.S. pension and other postretirement benefit contributions in addition to fundingU.S. acquisitions, dividend payments, debt service and share repurchases as needed. For those international earnings considered to be reinvested indefinitely, we currently have no intention to, and plans do not indicate a need to, repatriate these funds forU.S. operations. Our credit agreements include restrictive covenants that, if not met, could lead to a renegotiation of our credit lines and a significant increase in our cost of financing. AtFebruary 29, 2020 , we were in compliance with all covenants of our contractual obligations as shown in the following table: Result as of Covenant Debt Instrument Measurement February 29, 2020 Secured Indebtedness / TTM Revolving Credit Not greater than 5.9 3.8 EBITDA Agreement and Term Loan B Credit Agreement ? TTM = Trailing 12 months
? EBITDA for covenant purposes is defined as consolidated net income, plus
interest expense, expense for taxes paid or accrued, depreciation and
amortization, certain non-cash impairment losses, extraordinary non-cash
losses incurred other than in the ordinary course of business, nonrecurring
extraordinary non-cash restructuring charges and the non-cash impact of
purchase accounting, expenses related to the Royal Adhesives acquisition not
to exceed
Adhesives during the fiscal years ending in 2017, 2018 and 2019 not exceeding
Adhesives acquisition incurred in fiscal years ending in 2017 and 2018 not
exceeding
the SAP implementation during fiscal years ending in 2017 through 2021 not
exceeding
gains. For the Total Indebtedness / TTM EBITDA ratio, TTM EBITDA is adjusted
for the pro forma results from Material Acquisitions and Material Divestitures
as if the acquisition or divestiture occurred at the beginning of the
calculation period. The full definition is set forth in the Term Loan B Credit
Agreement and the Amended Revolving Credit Agreement, and can be found in the
Company's 8-K filings dated
respectively.
31--------------------------------------------------------------------------------
Table of Contents
We believe we have the ability to meet all of our contractual obligations and commitments in fiscal 2020.
Selected Metrics of Liquidity
Key metrics we monitor are net working capital as a percent of annualized net
revenue, trade accounts receivable days sales outstanding ("DSO"), inventory
days on hand, free cash flow after dividends and debt capitalization ratio.
February 29 , March 2,
2020 2019Net working capital as a percentage of annualized net revenue1
19.7% 21.4%
Accounts receivable DSO (in days)2 58
57
Inventory days on hand (in days)3 70
68
Free cash flow after dividends4$ (5.9 ) $ (21.3 ) Total debt to total capital ratio5 61.8% 65.6% 1 Current quarter net working capital (trade receivables, net of allowance for doubtful accounts plus inventory minus trade payables) divided by annualized net revenue (current quarter multiplied by four). 2 Trade receivables net of the allowance for doubtful accounts at the balance sheet date multiplied by 56 (8 weeks) and divided by the net revenue for the last 2 months of the quarter.
3 Total inventory multiplied by 56 and divided by cost of sales (excluding delivery costs) for the last 2 months of the quarter.
4 Year-to-date net cash provided by operating activities, less purchased property, plant and equipment and dividends paid. See reconciliation to Net cash provided by operating activities from continuing operations below.
5 Total debt divided by (total debt plus total stockholders' equity).
Free cash flow after dividends, a non-GAAP financial measure, is defined as net cash provided by (used in) operations less purchased property, plant and equipment and dividends paid. Free cash flow after dividends is an integral financial measure used by the Company to assess its ability to generate cash in excess of its operating needs, therefore, the Company believes this financial measure provides useful information to investors. The following table reflects the manner in which free cash flow after dividends is determined and provides a reconciliation of free cash flow after dividends to net cash provided by (used in) operating activities from continuing operations, the most directly comparable financial measure calculated and reported in accordance withU.S. GAAP. Reconciliation of "Net cash provided by operating activities" to Free cash flow after dividends Three Months Ended ($ in millions) February 29, 2020 March 2, 2019 Net cash provided by operating activities $ 34.4 $ 0.5 Less: Purchased property, plant and equipment 32.1 13.9 Less: Dividends paid 8.2 7.9 Free cash flow after dividends (5.9 ) (21.3 ) 32
--------------------------------------------------------------------------------
Table of Contents Summary of Cash Flows
© Edgar Online, source
