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 ended November 27, 2021 for important
background information related to our business.
Net revenue in the first quarter of 2022 increased 18.0 percent from the first
quarter of 2021. Net revenue increased 14.7 percent due to price, 6.1 percent
due to sales volume and 0.9 percent due to the acquisition of Fourny and Apollo.
Negative currency effects of 3.7 percent compared to the first quarter of 2021
were primarily driven by a weaker Euro, Turkish lira and Argentinian peso,
partially offset by a stronger Chinese renminbi compared to the U.S. dollar.
Gross profit margin decreased 160 basis points primarily due to higher raw
material costs partially offset by higher sales volume.
Net income attributable to
Market Conditions OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of the novel coronavirus ("COVID-19") a pandemic. Throughout fiscal year 2021, the COVID-19 pandemic had a significant disruptive impact on global economies, supply chains and industrial production. Although government restrictions have been relaxed, it is currently not possible to estimate additional impacts this outbreak may have on our business. We continue to effectively manage our global operations focusing on the health and safety of our employees and ensuring business continuity across our supplier, manufacturing and distribution networks. See "Risk Factors" in Item 1A in our Annual Report on Form 10-K for the year endedNovember 27, 2021 as filed with theSecurities and Exchange Commission for further information of the effects of the COVID-19 pandemic on our business including raw material cost and availability. 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 global business units ("2020 Restructuring Plan"). We have incurred costs of$18.9 million under this plan as ofFebruary 26, 2022 . We expect to incur total costs of approximately$20.0 million ($15.8 million after-tax), which includes cash expenditures for severance and related employee costs globally, costs related to streamlining of processes, and other restructuring-related costs. The 2020 Restructuring Plan was implemented in the fourth quarter of 2019 and is currently expected to be completed in fiscal 2022. 23
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Results of Operations
Net revenue:
Three Months Ended
February 26, February 27, 2022 vs
($ in millions) 2022 2021 2021
Net revenue $ 856.5 $ 725.9 18.0 %
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 2022 compared to the same periods in
2021:
Three Months Ended
February 26, 2022 vs. February 27, 2021
Organic growth 20.8 %
M&A 0.9 %
Currency (3.7 )%
Total 18.0 %
Organic growth was 20.8 percent in the first quarter of 2022 compared to the
first quarter of 2021 driven by a 38.3 percent increase in Construction
Adhesives, a 20.7 percent increase in Hygiene, Health and Consumable Adhesives
and a 16.5 percent increase in Engineering Adhesives. The increase is
predominately driven by an increase in product pricing and sales volume. The 0.9
percent increase from M&A is due to the acquisition of Fourny and Apollo. The
negative 3.7 percent currency impact was primarily driven by a weaker Euro,
Turkish lira and Argentinian peso, partially offset by a stronger Chinese
renminbi compared to the U.S. dollar.
Cost of sales:
Three Months Ended
February 26, February 27, 2022 vs
($ in millions) 2022 2021 2021
Raw materials $ 491.0 $ 385.0 27.5 %
Other manufacturing costs 152.6 148.5 2.8 %
Cost of sales $ 643.6 $ 533.5 20.6 %
Percent of net revenue 75.1 % 73.5 %
Cost of sales in the first quarter of 2022 compared to the first quarter of
2021 increased 160 basis points as a percentage of net revenue. Raw material
cost as a percentage of net revenue increased 430 basis points in the first
quarter of 2022 compared to the first quarter of 2021 due to higher raw material
costs. Other manufacturing costs as a percentage of revenue decreased 270 basis
points in the first quarter of 2022 compared to the first quarter of 2021 due to
higher net revenue.
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Gross profit:
Three Months Ended
February 26, February 27, 2022 vs
($ in millions) 2022 2021 2021
Gross profit $ 212.9 $ 192.4 10.7 %
Percent of net revenue 24.9 % 26.5 %
Gross profit in the first quarter of 2022 increased 10.7 percent and gross
profit margin decreased 160 basis points compared to the first quarter of 2021.
The decrease in gross profit margin was primarily due to higher raw material
costs partially offset by higher sales volume.
Selling, general and administrative (SG&A) expenses:
Three Months Ended
February 26, February 27, 2022 vs
($ in millions) 2022 2021 2021
SG&A $ 155.9 $ 144.0 8.3 %
Percent of net revenue 18.2 % 19.8 %
SG&A expenses for the first quarter of 2022 increased $11.9 million , or
8.3 percent, compared to the first quarter of 2021. The increase is primarily
due to higher compensation and acquisition project costs and the impact of the
Fourny and Apollo acquisitions.
Other income, net:
Three Months Ended
February 26, February 27, 2022 vs
($ in millions) 2022 2021 2021
Other income, net $ 6.1 $ 7.9 (22.8 )%
Other income, net in the first quarter of 2022 included $7.4 million of net
defined benefit pension benefits and $0.2 million of other income, partially
offset by $1.5 million of currency transaction losses. Other income, net in the
first quarter of 2021 included $7.9 million of net defined benefit pension
benefits and $1.8 million of other income, offset by $1.8 million of currency
transaction losses.
Interest expense:
Three Months Ended
February 26, February 27, 2022 vs
($ in millions) 2022 2021 2021
Interest expense $ 18.2 $ 20.4 (10.8 )%
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Interest expense in the first quarter of 2022 was$18.2 million compared to$20.4 million in the first quarter of 2021. Interest expense in the first quarter of 2022 compared to the first quarter of 2021 was lower due to lower interest rates. Interest income: Three Months Ended February 26, February 27, 2022 vs ($ in millions) 2022 2021 2021 Interest income$ 1.9 $ 2.7 (29.6)%
Interest income in the first quarter of 2022 was
Income taxes:
Three Months Ended
February 26, February 27, 2022 vs
($ in millions) 2022 2021 2021Income taxes $ 10.1 $ 10.6 (4.7)% Effective tax rate 21.6 % 27.5 % Income tax expense of$10.1 million in the first quarter of 2022 includes$2.9 million of discrete tax benefit. Excluding the discrete tax benefit, the overall effective tax rate was 27.8 percent. The discrete tax benefit relates to impacts of legal entity mergers offset by various foreign tax matters. Income tax expense of$10.6 million in the first quarter of 2021 includes less than$0.1 million of discrete tax expense relating to the revaluation of cross-currency swap agreements due to appreciation of the Euro versus theU.S. Dollar and various foreign tax matters. Excluding the discrete tax expense, the overall effective tax rate was 27.4 percent.
Income from equity method investments:
Three Months Ended
February 26, February 27, 2022 vs
($ in millions) 2022 2021 2021Income from equity method investments $ 1.6 $ 1.9
(15.8 )% The income from equity method investments relates to our 50 percent ownership of theSekisui-Fuller joint venture inJapan . The lower income for the first quarter of 2022 compared to the same period of 2021 relates to lower net income in our joint venture.
Net income attributable to
Three Months Ended
February 26, February 27, 2022 vs
($ in millions) 2022 2021 2021
Net income attributable to
28.5 %
Percent of net revenue 4.5 % 4.1 %
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The net income attributable toH.B. Fuller for the first quarter of 2022 was$38.3 million compared to$29.8 million for the first quarter of 2021. The diluted earnings per share for the first quarter of 2022 was$0.69 per share as compared to$0.56 per share for the first quarter of 2021. Operating Segment Results We have three reportable segments: Hygiene, Health and Consumable Adhesives, Engineering Adhesives and Construction Adhesives. Operating results of each of these segments are regularly reviewed by our chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance.
The tables below provide certain information regarding the net revenue and operating income of each of our operating segments.
Corporate Unallocated amounts include business acquisition and integration costs, organizational restructuring charges and project costs associated with our implementation of SAP ONE.
Net Revenue by Segment:
Three Months Ended
February 26, 2022 February 27, 2021
Net % of Net % of
($ in millions) Revenue Total Revenue Total
Hygiene, Health and Consumable Adhesives $ 389.5 46 % $ 335.7 46 %
Engineering Adhesives 354.0 41 % 312.6 43 %
Construction Adhesives 113.0 13 % 77.6 11 %
Segment total $ 856.5 100 % $ 725.9 100 %
Corporate Unallocated - - - -
Total $ 856.5 100 % $ 725.9 100 %
Segment Operating Income (Loss):
Three Months Ended
February 26, 2022 February 27, 2021
Segment Segment
Operating Operating
Income % of Income % of
($ in millions) (Loss) Total (Loss) Total
Hygiene, Health and Consumable Adhesives $ 32.2 56 % $ 29.9 62 %
Engineering Adhesives 32.6 57 % 30.4 63 %
Construction Adhesives 4.4 8 % (4.7 ) (10 )%
Segment total $ 69.2 121 % $ 55.6 115 %
Corporate Unallocated (12.2 ) (21 )% (7.3 ) (15 )%
Total $ 57.0 100 % $ 48.3 100 %
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Hygiene, Health and Consumable Adhesives
Three Months Ended
February 26, February 27, 2022 vs
($ in millions) 2022 2021 2021
Net revenue $ 389.5 $ 335.7 16.0 %
Segment operating income $ 32.2 $ 29.9 7.7 %
Segment operating margin 8.3 % 8.9 %
The following table provides details of the Hygiene, Health and Consumable Adhesives net revenue variances:
Three Months Ended
February 26, 2022 vs. February 27, 2021
Organic growth 20.7 %
Currency (4.7 )%
Total 16.0 %
Net revenue increased 16.0 percent in the first quarter of 2022 compared to the
first quarter of 2021. The increase in organic growth was attributable primarily
to an increase in product pricing and sales volume. The negative currency effect
was due to a weaker Euro, Turkish lira and Argentinian peso, partially offset by
a stronger Chinese renminbi compared to the U.S. dollar. As a percentage of net
revenue, raw material costs increased 490 basis points due to higher raw
material costs partially offset by higher net revenue. Other manufacturing costs
as a percentage of net revenue decreased 240 basis points primarily due to
higher net revenue. SG&A expenses as a percentage of net revenue decreased
190 basis points due to higher net revenue. Segment operating income increased
7.7 percent and segment operating margin as a percentage of net revenue
decreased 60 basis points compared to the first quarter of 2021.
Engineering Adhesives
Three Months Ended
February 26, February 27, 2022 vs
($ in millions) 2022 2021 2021
Net revenue $ 354.0 $ 312.6 13.2 %
Segment operating income $ 32.6 $ 30.4 7.2 %
Segment operating margin 9.2 % 9.7 %
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The following tables provide details of the Engineering Adhesives net revenue
variances:
Three Months Ended
February 26, 2022 vs. February 27, 2021
Organic growth 16.5 %
Currency (3.3 )%
Total 13.2 %
Net revenue increased 13.2 percent in the first quarter of 2022 compared to the
first quarter of 2021. The increase in organic growth was attributable primarily
due to an increase in product pricing and sales volume. The negative currency
effect was due to a weaker Euro and Turkish lira, partially offset by a
stronger Chinese renminbi compared to the U.S. dollar. Raw material costs as a
percentage of net revenue increased 430 basis points due to higher raw material
costs partially offset by higher net revenue. Other manufacturing costs as a
percentage of net revenue decreased 250 basis points due to higher net
revenue. SG&A expenses as a percentage of net revenue decreased 130 basis
points due to higher net revenue. Segment operating income increased 7.2 percent
and segment operating margin decreased 50 basis points compared to the first
quarter of 2021.
Construction Adhesives
Three Months Ended
February 26, February 27, 2022 vs
($ in millions) 2022 2021 2021
Net revenue $ 113.0 $ 77.6 45.6 %
Segment operating income (loss) $ 4.4 $ (4.7 ) 193.6 %
Segment operating margin 3.9 % (6.1 )%
The following tables provide details of the Construction Adhesives net revenue
variances:
Three Months Ended
February 26, 2022 vs. February 27, 2021
Organic growth 38.3 %
M&A 8.1 %
Currency (0.8 )%
Total 45.6 %
Net revenue increased 45.6 percent in the first quarter of 2022 compared to the
first quarter of 2021. The increase in organic growth was attributable primarily
to an increase in product pricing and sales volume. The increase in net revenue
from M&A was due to the acquisition of Fourny and Apollo during the first
quarter of 2022. The negative currency effect was due to a weaker Euro
and Australian dollar compared to the U.S. dollar. Raw material costs as a
percentage of net revenue increased 280 basis points due to higher raw material
costs partially offset by higher net revenue. Other manufacturing costs as a
percentage of net revenue decreased 500 basis points due to higher net revenue
and the impact of acquisitions. SG&A expenses as a percentage of net revenue
decreased 780 basis points due to higher net revenue. Segment operating income
increased 193.6 percent and segment operating margin increased 1,000 basis
points compared to the first quarter of 2021.
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Corporate Unallocated
Three Months Ended
February 26, February 27, 2022 vs
($ in millions) 2022 2021 2021
Net revenue $ - $ - 0.0 %
Segment operating loss $ (12.2 ) $ (7.3 ) 67.1 %
Segment operating margin NMP NMP
NMP = Non-meaningful percentage
Segment operating loss in the first quarter of 2022 increased 67.1 percent compared to the first quarter of 2021 reflecting increased acquisition project costs.
Financial Condition, Liquidity and Capital Resources
Total cash and cash equivalents as ofFebruary 26, 2022 were$63.5 million compared to$61.8 million as ofNovember 27, 2021 and$81.2 million as ofFebruary 27, 2021 . The majority of the$63.5 million in cash and cash equivalents as ofFebruary 26, 2022 was held outsidethe United States . Total long and short-term debt was$1,914.1 million as ofFebruary 26, 2022 ,$1,616.5 million as ofNovember 27, 2021 and$1,758.2 million as ofFebruary 27, 2021 . The total debt to total capital ratio as measured by Total Debt divided by (Total Debt plus Total Stockholders' Equity) was 53.8 percent as ofFebruary 26, 2022 as compared to 50.2 percent as ofNovember 27, 2021 and 54.8 percent as ofFebruary 27, 2021 . 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 26, 2022 , we were in compliance with all covenants of our contractual obligations as shown in the following table: Result as of February 26, Covenant Debt Instrument Measurement 2022 Secured Indebtedness / Not greater TTM EBITDA Term Loan B Credit Agreement than 5.9
2.9
Secured Indebtedness / Not greater TTM EBITDA Revolving Credit Agreement than 5.9
2.9
TTM EBITDA /
Consolidated Interest Not less
Expense Revolving Credit Agreement than 2.0 6.0
? TTM = Trailing 12 months
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? EBITDA for Term Loan B 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
integration of Royal Adhesives during the fiscal years ending in 2017, 2018
and 2019 not exceeding
began prior to the Royal Adhesives acquisition incurred in fiscal years ending
in 2017 and 2018 not exceeding
charges relating to the SAP implementation during fiscal years ending in 2017
through 2021 not exceeding
extraordinary non-cash 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 can be found in the Company's Form 8-K filing
dated October 20, 2017 .
? EBITDA for Revolving Credit Facility covenant purposes is defined asconsolidated net income, plus interest expense, expense for taxes paid or
accrued, depreciation and amortization, non-cash impairment losses related to
long-lived assets, intangible assets or goodwill, nonrecurring or unusual
non-cash losses incurred other than in the ordinary course of business,
nonrecurring or unusual non-cash restructuring charges and the non-cash impact
of purchase accounting, fees, premiums, expenses and other transaction costs
incurred or paid by the borrower or any of its Subsidiaries on the effective
date in connection with the transactions, this agreement and the other loan
documents, the 2020 supplemental indenture and the transactions contemplated
hereby and thereby, one-time, non-capitalized charges and expenses relating to
the Company's SAP implementation during fiscal years ending in 2017
through 2024, in an amount not exceeding
year of the Company, charges and expenses relating to the ASP Royal
Acquisition, including but not limited to advisory and financing costs, during
the Company's fiscal years ending in 2020 and 2021, in an aggregate amount (as
to such years combined) not exceeding
related to the reorganization of the Company and its subsidiaries from five
business units to three business units to reduce costs during the Company's
fiscal years ending in 2020 and 2021 in an aggregate amount (as to such
years combined) not exceeding
to the Company's manufacturing and operations project to improve
delivery, implement cost savings and reduce inventory during the Company's
fiscal years ending in 2020, 2021 and 2022 in an aggregate amount (as to such
years combined) not exceeding $15.5 million .
? Consolidated Interest Expense for the Revolving Credit Facility is defined as
the interest expense (including without limitation the portion of capital
lease obligations that constitutes imputed interest in accordance with GAAP)
of the Company and its subsidiaries calculated on a consolidated basis for
such period with respect to all outstanding indebtedness of the Company and
its subsidiaries allocable to such period in accordance with GAAP.
We believe we have the ability to meet all of our contractual obligations and commitments in fiscal 2022.
Selected Metrics of Liquidity
Key metrics we monitor are net working capital as a percent of annualized net revenue, trade receivable days sales outstanding ("DSO"), inventory days on hand, free cash flow after dividends and debt capitalization ratio.
February 26 ,February 27, 2022 2021
Net working capital as a percentage of annualized net revenue1
18.5 % 17.9 %
Accounts receivable DSO (in days)2 65 63
Inventory days on hand (in days)3 81 70
Free cash flow after dividends4 $ (75.5 ) $ (8.0 )
Total debt to total capital ratio5 53.8 % 54.8 %
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 91 (13 weeks) and divided by the net revenue for the
quarter.
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3 Total inventory multiplied by 91 and divided by cost of sales (excluding delivery costs) for the quarter.
4 Year-to-date net cash provided by operating activities, less purchased property, plant and equipment and dividends paid. See reconciliation of net cash provided by operating activities to free cash flow after dividends 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 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 operating activities, 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 26, 2022 February 27, 2021 Net cash provided by operating activities $ (17.7 ) $ 35.8 Less: Purchased property, plant and equipment 48.9 35.3 Less: Dividends paid 8.9 8.5 Free cash flow after dividends $ (75.5 ) $ (8.0 )
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