-- We are revising our outlook on St. Paul, Minn.-based chemical company
H.B Fuller Co. to stable from negative.
-- At the same time, we are affirming the 'BBB' corporate credit rating
on the company.
-- The stable outlook reflects our expectations for modest earnings
growth in 2013 and that management will remain supportive of maintaining
credit metrics appropriate for the current rating, including funds from
operations (FFO)-to-total debt of 35%.
On Dec. 13, 2012, Standard & Poor's Ratings Services revised its outlook on
H.B. Fuller Co. to stable from negative. At the same time, Standard & Poor's
affirmed its 'BBB' corporate credit rating on the company.
The outlook revision reflects our expectations that Fuller will continue to
make progress integrating the March 2012 acquisition of Forbo Group and
achieving the targeted synergies. We expect that EBITDA and margins over the
next two years to improve moderately as Fuller realizes the benefits from its
ongoing EIMEA (Europe, India, the Middle East, and Africa) restructuring
project, and continues to achieve the expected synergies from the acquisition.
In August 2012, the company completed the sale of its Central American paints
business for gross proceeds of approximately $120 million. The company used
the proceeds to reduce debt, and we believe this reflects management's
commitment to restoring its financial profile and improving credit metrics to
levels appropriate for the current rating, including FFO-to-total debt of 35%.
The ratings on H.B. Fuller Co. reflect the company's leading positions within
the large, albeit fragmented, global adhesives and sealants industry,
significant geographic diversity of sales and moderate financial policies.
However, Fuller's narrow scope of operations, its exposure to cyclical
construction end markets, and competitive pressures from large players
(Henkel, Bostik, and Dow Chemical) are key risks to its operating performance.
Standard & Poor's Ratings Services characterize the company's business risk as
"satisfactory" and financial risk as "intermediate".
Fuller's market segments include consumer goods (such as specialty packaging,
hygiene, and textile lamination), industrial (assembly, converting, window and
woodworking), and construction (tile setting). With annual revenues of about
$2 billion, the company ranks No. 2 in the $40 billion global adhesives and
sealants industry. Given the highly fragmented nature of the industry, we
expect that it will continue to experience significant consolidation and
larger players such as Fuller will continue to exploit the competitive
advantages of scale and global distribution channels.
In March 2012, Fuller completed the acquisition of Forbo Group's global
industrial adhesives business. The addition of complementary technologies and
access to new markets has strengthened Fuller's competitive position. We
believe the prospects of a successful integration are high because of Fuller's
decision to expand within its core competencies. Key credit strengths include
an increased percentage of revenues tied to recession-resistant end markets
and a healthy level of geographic diversification (Fuller now derives about
55% of its revenues outside of North America). During the recent recession,
the stability in the company's consumer goods end markets--which represent
greater than 45% of revenues--helped ease the effect of volume pressure in its
construction-related end markets.
The acquisition offers meaningful cost synergies, which we think Fuller should
be able to continue to capitalize on given its familiarity with Forbo's
businesses, experienced management team, and recent track record of pursuing
operational efficiencies in EIMEA. Additionally, in recent years, Fuller has
managed raw material price volatility more efficiently. We believe that the
company will be able to maintain EBITDA margins in the 11% to 13% range over
the next one to two years. We expect that stable operating results in the
company's consumer products end markets should help offset earnings
variability in Fuller's more cyclical segments. Return on capital is expected
to remain in the 12% to 14% range.
Key underpinnings to the ratings are our belief in the company's
cash-generating ability and management's track record of low debt usage and
moderate financial policies. Based on our scenario forecasts, we believe that
in fiscal 2013, the key ratio of FFO-to-total adjusted debt will improve to
about 35%, a level we consider appropriate for the current rating. We expect
that share repurchases and acquisitions will be limited over the next year.
Our assessment of the company's management and governance is "satisfactory".
We assess Fuller's liquidity as "strong". As of Sept. 1, 2012, the company had
$208 million in cash and full availability under the $200 million unsecured
revolving credit facility due in 2017. Satisfactory cash flow generation
should continue to support modest dividends and capital expenditures of about
$80 million in fiscal 2013. Debt maturities are manageable, with the next
meaningful maturity in 2017.
Our assessment of the company's liquidity profile includes the following:
-- We expect Fuller's sources of liquidity to exceed its uses by more
than 1.5x during the next 12 months and to remain much more than 1.0x
-- Net sources and covenant cushions would be positive even with a 30%
drop in EBITDA or a 25% increase in debt.
-- The company would likely absorb low-probability shocks, based on
positive cash flow from operations and available liquidity.
-- We expect no significant share repurchases because we believe Fuller
will direct its discretionary cash flow primarily to debt reduction.
The outlook is stable. The company's ongoing initiatives to improve EBITDA
margins, coupled with our expectation for modestly improving end market
demand, should support an improvement in operating results over the next two
years. We believe that management will focus on integrating the Forbo
acquisition, reducing costs in the EIMEA segment and using discretionary cash
flow primarily for debt reduction. We expect the company will pursue future
shareholder rewards and growth initiatives in a manner that preserves credit
We could lower the ratings if the company has difficulty integrating the
acquisition and fails to achieve the cost savings it has targeted. We would
also consider a modest downgrade if weakening global economic conditions
caused operating results to be significantly worse than we expect, without
near-term signs of recovery. Based on our downside scenario, we could lower
the ratings if EBITDA margins decrease by 200 basis points or more from
current levels, along with some weakness in volumes. In this scenario,
FFO-to-total adjusted debt would fall to below 30%.
We could raise the ratings by one-notch if discretionary cash flow is more
robust than projected, allowing the company to reduce debt and improve credit
metrics. We could also raise the ratings if the company adheres to financial
policies that support a permanent improvement in the financial profile, so
that Fuller is able to maintain its FFO-to-total adjusted debt at levels
consistently above 45%.
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
Sept. 18, 2012
-- Key Credit Factors: Business And Financial Risks In The Commodity And
Specialty Chemical Industry, Nov. 20, 2008
Ratings Affirmed; CreditWatch/Outlook Action
Fuller (H.B.) Co.
Corporate Credit Rating BBB/Stable/-- BBB/Negative/--