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FUL > SEC Filings for FUL > Form 10-Q on 28-Mar-2014All Recent SEC Filings

Show all filings for FULLER H B CO

Form 10-Q for FULLER H B CO


28-Mar-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 30, 2013 for important background information related to our business.

Net revenue in the first quarter of 2014 increased 1.3 percent over the first quarter of 2013. Sales volume increased 2.0 percent and pricing was flat compared to last year. The weakening of the Australian dollar, Canadian dollar, Turkish lira and Indian rupee for the first quarter of 2014 compared to the first quarter of 2013 were the main drivers of the negative 0.7 percent currency effect compared to the U.S. dollar. Gross profit margin decreased 40 basis points primarily driven by $1.3 million of business integration costs that are not classified as special charges. We incurred special charges, net of $11.7 million for costs related to the Business Integration Project in the first quarter of 2014 and $5.3 million in the first quarter of 2013.

Net income attributable to H.B. Fuller in the first quarter of 2014 was $14.6 million as compared to $20.7 million in the first quarter of 2013. On a diluted earnings per share basis, the first quarter of 2014 was $0.28 per share as compared to $0.41 per share for the same period last year.

Results of Operations

Net revenue:



                                              13 Weeks Ended
                                   March 1,       March 2,       2014 vs
                ($ in millions)      2014           2013          2013
                Net revenue       $    486.0     $    479.8           1.3 %

We review variances in net revenue in terms of changes related to product pricing, sales volume and changes in foreign currency exchange rates. The pricing/sales volume variance is viewed as organic growth. The following table shows the net revenue variance analysis for the first quarter of 2014 compared to the same period in 2013:

                                   13 Weeks Ended March 1, 2014
                                         vs March 2, 2013
                Product pricing                              0.0 %
                Sales volume                                 2.0 %
                Currency                                    (0.7 %)

                                                             1.3 %

Organic growth was 2.0 percent in the first quarter of 2014 compared to the first quarter of 2013. Sales volume increased 2.0 percent and pricing was unchanged compared to last year. The 2.0 percent organic growth in 2014 was driven by 16.7 percent growth in Construction Products, 10.8 percent growth in Asia Pacific and 1.5 percent growth in Americas Adhesives. The majority of the currency impact was driven by the weakening of the Australian dollar, Canadian dollar, Indian rupee and Turkish lira compared to the U.S. dollar.

Cost of sales:

                                                   13 Weeks Ended
                                       March 1,        March 2,        2014 vs
          ($ in millions)                2014            2013           2013
          Raw materials               $    275.1      $    271.7            1.3 %
          Other manufacturing costs         77.8            74.8            4.0 %

          Cost of sales               $    352.9      $    346.5            1.8 %
          Percent of net revenue            72.6 %          72.2 %


Cost of sales in the first quarter of 2014 compared to first quarter of 2013 increased 1.8 percent. Raw material cost as a percentage of net revenue was 56.6 percent for both years. Other manufacturing costs as a percentage of revenue increased by 40 basis points compared to last year mainly due to $1.3 million business integration costs that are not classified as special charges. As a result, cost of sales as a percentage of net revenue increased 40 basis points in the first quarter of 2014 compared to the same period last year.

Gross profit:

                                                 13 Weeks Ended
                                     March 1,        March 2,        2014 vs
           ($ in millions)             2014            2013           2013
           Gross profit             $    133.0      $    133.4           (0.2 %)
           Percent of net revenue         27.4 %          27.8 %

Gross profit in the first quarter of 2014 decreased by $0.4 million and gross profit margin decreased by 40 basis points compared to the first quarter of 2013. Business integration costs that are not classified as special charges were the primary reason for the decrease in gross profit.

Selling, general and administrative (SG&A) expenses:

                                                 13 Weeks Ended
                                     March 1,        March 2,        2014 vs
           ($ in millions)             2014            2013           2013
           SG&A                     $     96.8      $     97.6           (0.9 %)
           Percent of net revenue         19.9 %          20.3 %

SG&A expenses for the first quarter of 2014 decreased $0.8 million or 0.9 percent compared to 2013. The 40 basis point decrease in SG&A expense as a percentage of net revenue was driven by effective cost controls and the ongoing benefits of the Business Integration Project.

We make SG&A expense plans at the beginning of each fiscal year and barring significant changes in business conditions or our outlook for the future, we maintain these spending plans for the entire year. Management routinely monitors our SG&A spending relative to these fiscal year plans for each operating segment and for the company overall. We feel it is important to maintain a consistent spending program in this area as many of the activities within the SG&A category such as the sales force, technology development, and customer service are critical elements of our business strategy. For the current year we planned SG&A expenses to increase relative to last year by an amount slightly less than our expected growth in net revenue.

Special charges, net:

                                                13 Weeks Ended
                                      March 1,      March 2,      2014 vs
              ($ in millions)           2014          2013          2013
              Special charges, net   $     11.7     $     5.3        120.0 %

The following table provides detail of special charges, net:

                                                           13 Weeks Ended
                                                       March 1,      March 2,
        ($ in millions)                                  2014          2013
        Acquisition and transformation related costs   $     1.7     $     2.2
        Workforce reduction costs                            2.1           0.5
        Facility exit costs                                  5.1           1.8
        Other related costs                                  2.8           0.8

        Special charges, net                           $    11.7     $     5.3


The integration of the industrial adhesives business we acquired in March 2012 involves a significant amount of restructuring and capital investment to optimize the new combined entity. In addition to this acquisition, we announced our intentions to take a series of actions in our existing EIMEA operating segment to improve the profitability and future growth prospects of this operating segment. We have combined these two initiatives into a single project which we refer to as the "Business Integration Project". During the 13 weeks ended March 1, 2014 and March 2, 2013, we incurred special charges, net of $11.7 million and $5.3 million respectively, for costs related to the Business Integration Project.

Acquisition and transformation related costs of $1.7 million for the first quarter of 2014 and $2.2 million for the first quarter of 2013 include costs related to organization consulting, financial advisory and legal services necessary to integrate the acquired business into our existing operating segments. During the 13 weeks ended March 1, 2014, we incurred workforce reduction costs of $2.1 million, cash facility exit costs of $3.6 million and non-cash facility exit costs of $1.5 million and other incremental transformation related costs of $2.8 million including the cost of personnel directly working on the integration. During the 13 weeks ended March 2, 2013, we incurred workforce reduction costs of $0.5 million, cash facility exit costs of $1.4 million and non-cash facility exit costs of $0.4 million and other incremental transformation related costs of $0.8 million including the cost of personnel directly working on the integration.

The benefits of the Business Integration Project are expected to be substantial. We have plans to create annual cash cost savings and other cash pre-tax profit improvement benefits aggregating to $90.0 million when the various integration activities are completed in 2014. By 2015, the Business Integration Project activities are expected to improve the EBITDA margin of the global business from just under 11 percent in 2011 to a target level of 15 percent. The project incorporates many different work streams each of which has a specific timeline for completion and delivery of benefits. Taking the expected impact of all initiatives into account, the profit improvement benefits should drive steady annual improvement in EBITDA margin until the target level is achieved in 2015.

We estimated the total costs of the Business Integration Project to be approximately $125.0 million. Primarily due to delays in completing the EIMEA portion of the project, we expect total project costs will exceed this estimate by an immaterial amount. The following table provides detail of costs incurred inception-to-date as of March 1, 2014 for the Business Integration Project:

                                                         Costs Incurred
                                                       Inception-to-Date
      ($ in millions)                                 as of March  1, 2014
      Acquisition and transformation related costs   $                 36.1
      Work force reduction costs                                       40.0
      Cash facility exit costs                                         16.4
      Non-cash facility exit costs                                     10.8
      Other related costs                                              13.5

      Business Integration Project                   $                116.8

The costs associated with the acquisition integration and the cash costs of the restructuring are incremental cash outlays that will be funded with existing cash and cash generated from operations. Non-cash costs are primarily related to accelerated depreciation of long-lived assets.

The capital expenditures related to the Business Integration Project are significant. In 2014, we expect to spend approximately $45.0 million to complete the Business Integration Project. This capital spending forecast, which is consistent with our original forecast, will be funded from the operating cash flows of the business and if necessary, from available cash and short-term borrowing.

When we report our progress on achieving our profit improvement initiatives each quarter we focus on three key metrics which capture the bulk of the Business Integration Project objectives: (1) cost savings achieved through workforce reductions, (2) cost reductions achieved through facility closures and consolidation and (3) the EBITDA margin of the business relative to our expected trend over the timeframe of the project.


For the quarter ended March 1, 2014, we achieved cost savings of $4.5 million related to workforce reductions and $0.9 million related to facility closures and consolidations. For the quarter ended March 2, 2013, we achieved cost savings of $3.6 million related to workforce reductions and $1.2 million related to facility closures and consolidations. The above cost savings represent benefits from selected activities included in the Business Integration Project. For the quarter ended March 1, 2014 and March 2, 2013, we achieved EBITDA margin of 10.5 percent and 10.6 percent, respectively.

Other income (expense), net:

                                                    13 Weeks Ended
                                         March 1,       March 2,       2014 vs
          ($ in millions)                  2014           2013          2013
          Other income (expense), net   $     (1.1 )    $     0.4           NMP

NMP = Non-meaningful percentage

Other income (expense), net in the first quarter of 2014 included $1.3 million of currency translation and re-measurement losses offset by $0.1 million of net financing income and $0.1 million of interest income. Other income (expense), net in the first quarter of 2013 included $0.2 million of interest income and $0.2 million of currency translation and re-measurement gains.

Interest expense:

                                              13 Weeks Ended
                                   March 1,      March 2,      2014 vs
                ($ in millions)      2014          2013          2013
                Interest expense   $     4.1     $     5.3        (22.5 %)

Interest expense in the first quarter of 2014 as compared to same period last year was lower due to higher capitalized interest related to the Business Integration Project and to lower average debt balances. We capitalized interest expense of $1.0 million in the first quarter of 2014 as compared to $0.1 million in the same period last year.

Income taxes:

                                               13 Weeks Ended
                                   March 1,        March 2,        2014 vs
             ($ in millions)         2014            2013           2013
             Income taxes         $      6.5      $      7.1           (8.1 %)
             Effective tax rate         33.8 %          28.0 %

Income tax expense of $6.5 million in the first quarter of 2014 includes $0.2 million of discrete tax benefits and $2.3 million of tax benefits relating to special charges for costs related to the Business Integration Project. Excluding the discrete tax benefits and the effects of items included in special charges, the overall effective tax rate was 29.0 percent. Without discrete tax benefits of $0.8 million and the impact of costs related to the Business Integration Project in the first quarter of 2013, the overall effective tax rate was 29.4 percent.

Income from equity method investments:

                                                         13 Weeks Ended
                                              March 1,      March 2,      2014 vs
      ($ in millions)                           2014          2013          2013
      Income from equity method investments   $     1.9     $     2.4        (24.0 %)


The income from equity method investments relates to our 50 percent ownership of the Sekisui-Fuller joint venture in Japan.

Net income attributable to non-controlling interests:

                                                                        13 Weeks Ended
                                                          March 1,          March 2,          2014 vs
($ in millions)                                             2014              2013             2013
Net income attributable to non-controlling interests     $     (0.1 )      $     (0.1 )            NMP

NMP = Non-meaningful percentage

Net income attributable to non-controlling interests relates to an 11 percent redeemable non-controlling interest in HBF Turkey.

Net income attributable to H.B. Fuller:

                                                         13 Weeks Ended
                                             March 1,        March 2,       2014 vs
   ($ in millions)                             2014            2013           2013
   Net income attributable to H.B. Fuller   $     14.6      $     20.7         (29.5 %)
   Percent of net revenue                          3.0 %           4.3 %

The net income attributable to H.B. Fuller for the first quarter of 2014 was $14.6 million compared to $20.7 million for the first quarter of 2013. The first quarter of 2014 included $11.7 million of special charges, net ($9.4 million after tax) for costs related to the Business Integration Project. The first quarter of 2013 included $5.3 million of special charges, net ($4.2 million after tax) for costs related to the Business Integration Project. The diluted earnings per share for the first quarter of 2014 was $0.28 per share as compared to $0.41 per share for the first quarter of 2013.

Operating Segment Results

Through the third quarter of 2013, our business was reported in five operating segments: North America Adhesives, EIMEA (Europe, India, Middle East and Africa), Latin America Adhesives, Asia Pacific and Construction Products. Changes in our management reporting structure during the fourth quarter of 2013 required us to conduct an operating segment assessment in accordance with ASC Topic 280 "Segment Reporting", to determine our reportable segments. As a result of this assessment, we now have four reportable segments: Americas Adhesives, EIMEA, Asia Pacific and Construction Products. Prior periods have been restated to reflect our new operating segments. 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 segment operating income of each of our operating segments. The pricing/sales volume variance is viewed as organic growth. For segment evaluation by the chief operating decision maker, segment operating income is defined as gross profit less SG&A expenses and excludes special charges, net.

Net Revenue by Segment:



                                                   13 Weeks Ended
                                       March 1, 2014            March 2, 2013
                                      Net         % of         Net         % of
            ($ in millions)         Revenue      Total       Revenue      Total
            Americas Adhesives      $  209.7         43 %    $  207.7         43 %
            EIMEA                      171.6         35 %       177.5         37 %
            Asia Pacific                65.0         14 %        60.6         13 %
            Construction Products       39.7          8 %        34.0          7 %

            Total                   $  486.0        100 %    $  479.8        100 %


Segment Operating Income:



                                                   13 Weeks Ended
                                     March 1, 2014               March 2, 2013
                                   Segment                     Segment
                                  Operating       % of        Operating       % of
         ($ in millions)           Income        Total         Income        Total
         Americas Adhesives      $      25.2         70 %    $      25.9         73 %
         EIMEA                           8.4         23 %            6.5         17 %
         Asia Pacific                    1.8          5 %            2.0          6 %
         Construction Products           0.8          2 %            1.3          4 %

         Total                   $      36.2        100 %    $      35.7        100 %

The following table provides a reconciliation of segment operating income to income before income taxes and income from equity method investments, as reported on the Condensed Consolidated Statements of Income.

                                                                  13 Weeks Ended
                                                            March 1,           March 2,
($ in millions)                                               2014               2013
Segment operating income                                   $     36.2         $     35.7
Special charges, net                                            (11.7 )             (5.3 )
Other income (expense), net                                      (1.1 )              0.4
Interest expense                                                 (4.1 )             (5.3 )

Income before income taxes and income from equity
method investments                                         $     19.3         $     25.5

Americas Adhesives



                                                  13 Weeks Ended
                                      March 1,        March 2,        2014 vs
          ($ in millions)               2014            2013           2013
          Net revenue                $    209.7      $    207.7            0.9 %
          Segment operating income   $     25.2      $     25.9           (2.8 %)
          Segment profit margin %          12.0 %          12.5 %

The following tables provide details of the Americas Adhesives net revenue variances:

                                  13 Weeks Ended March 1, 2014
                                        vs March 2, 2013
                Organic growth                              1.5 %
                Currency                                   (0.6 %)

                Total                                       0.9 %

Net revenue increased 0.9 percent in the first quarter of 2014 compared to the first quarter of 2013. The 1.5 percent increase in organic growth was attributable to a 2.1 percent increase in sales volume partially offset by a 0.6 percent decrease in pricing. The weaker Canadian dollar compared to the U.S. dollar resulted in a 0.6 percent decrease in net revenue. As a percentage of net revenue, raw material cost increased 60 basis points compared to last year, mainly due to the mix of products sold. All other costs as a percentage of net revenue were unchanged. Segment operating income decreased 2.8 percent and segment profit margin as a percentage of net revenue decreased 50 basis points in the first quarter compared to the first quarter last year.


EIMEA



                                                  13 Weeks Ended
                                      March 1,        March 2,        2014 vs
          ($ in millions)               2014            2013           2013
          Net revenue                $    171.6      $    177.5           (3.3 %)
          Segment operating income   $      8.4      $      6.5           30.4 %
          Segment profit margin%            4.9 %           3.6 %

The following table provides details of the EIMEA net revenue variances:

                                  13 Weeks Ended March 1, 2014
                                        vs March 2, 2013
                Organic growth                             (3.2 %)
                Currency                                   (0.1 %)

                Total                                      (3.3 %)

Net revenue decreased 3.3 percent in the first quarter of 2014 compared to the first quarter of 2013. The negative organic growth of 3.2 percent was attributable to a 4.0 percent decrease in sales volume partially offset by 0.8 percent increase in pricing. The negative currency effect of 0.1 percent was a result of a weaker Turkish lira, Indian rupee and Egyptian pound partially offset by a stronger Euro compared to the U.S. dollar. Sales volume was down in core Europe reflecting the generally soft end market conditions across most of the region, especially in the southern region. Sales volume growth was generated in the emerging markets, mainly in India. Raw material cost as a percentage of net revenue decreased 160 basis points in the first quarter compared to the same quarter last year reflecting the benefits of the Business Integration Project. Manufacturing cost as a percentage of net revenue was 50 basis points higher than last year mainly due to business integration costs that are not classified as special charges. SG&A expenses as a percentage of net revenue declined 20 basis points relative to the prior year. As a result of the above factors, segment operating income increased 30.4 percent and segment profit margin increased 130 basis points compared to the first quarter last year.

Asia Pacific



                                                  13 Weeks Ended
                                      March 1,        March 2,        2014 vs
          ($ in millions)               2014            2013           2013
          Net revenue                $     65.0      $     60.6            7.4 %
          Segment operating income   $      1.8      $      2.0           (9.4 %)
          Segment profit margin %           2.7 %           3.3 %

The following table provides details of Asia Pacific net revenue variances:

                                  13 Weeks Ended March 1, 2014
                                        vs March 2, 2013
                Organic growth                             10.8 %
                Currency                                   (3.4 %)

                Total                                       7.4 %

Net revenue in the first quarter of 2014 increased 7.4 percent compared to the first quarter last year. The 10.8 percent increase in organic growth was attributable to a 9.4 percent increase in sales volume and a 1.4 percent increase in pricing. Markets in China, Australia and Korea showed growth while Southeast Asia markets were down compared with first quarter last year. Negative currency effects of 3.4 percent compared to last year are mainly attributable to Australia and Southeast Asia markets. Raw material costs as a percentage of net revenue increased 190 basis points compared to the first quarter of last year mainly due to sales mix. All other costs as a percentage of net revenue decreased 130 basis points compared to the first quarter of last year driven by . . .

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